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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d)
of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): August 1, 1997
FREMONT GENERAL CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
Nevada
(State or Other Jurisdiction of Incorporation)
1-8007 95-2815260
(Commission File Number) (I.R.S. Employer Identification No.)
2020 Santa Monica Boulevard - Suite 600 Santa Monica, CA 90404
(Address of Principal Executive Offices)
(Zip Code)
(310) 315-5500
(Registrant's Telephone Number, Including Area Code)
N/A
(Former Name or Former Address, if Changes Since Last Report)
================================================================================
<PAGE>
Item 2. Acquisition or Disposition of Assets.
On August 1, 1997, Fremont General Corporation, a
Nevada corporation (the "Company"), completed the
acquisition of Industrial Indemnity Holdings, Inc. a
Delaware corporation ("Industrial Indemnity"), pursuant to a
Stock Purchase Agreement dated as of May 16, 1997 by and
among the Company, Fremont Indemnity Company, a California
corporation and wholly-owned subsidiary of the Company
("Fremont Indemnity") and Talegen Holdings, Inc., a Delaware
corporation and subsidiary of Xerox Corporation ("Talegen"),
whereby Fremont Indemnity purchased from Talegen all of the
issued and outstanding capital stock of Industrial
Indemnity. The purchase price paid by the Company consisted
of $365 million in cash and the pay-off of approximately $79
million of an outstanding debt obligation that Industrial
Indemnity owed to Talegen. Financing for the transaction was
provided by internal funds and bank borrowings. The
aggregate purchase price was determined pursuant to
arms-length negotiations among the constituent corporations
The acquisition will be treated as a purchase for accounting
purposes.
Industrial Indemnity, which specializes in
underwriting workers' compensation insurance and providing
risk management services, has a strong presence in the
western United States dating back over 70 years. In 1996,
Industrial Indemnity had gross premiums of $259 million,
with invested assets of approximately $1.1 billion.
There were, and are to date, no material
relationships between the Company, its subsidiaries,
officers, or directors, and Talegen or Xerox Corporation,
other than the previously described $79 million pay-off of
an outstanding debt obligation negotiated as part of the
purchase price.
Item 7. Financial Statements and Exhibits.
(a) Financial statements of business acquired.
Financial statements are not available at this time.
Such statements will be filed no later than October 15, 1997
as permitted by paragraph (a)(4) to Item 7 of Form 8-K.
(b) Pro forma financial information.
Pro forma financial information is not available at
this time. Such information will be filed no later than
October 15, 1997 as permitted by paragraph (b)(2) to item 7
of Form 8-K.
(c) Exhibits.
<TABLE>
Sequentially
Exhibit Numbered
Number Description Page
------- ------------------------------------------------------------ ------------
<C> <S>
2.1 Stock Purchase Agreement by and among Talegen Holdings,
Inc., Fremont Indemnity Company and Fremont General
Corporation dated as of May 16, 1997 including exhibits
thereto.
2.2 Tax Allocation and Indemnification Agreement, dated as of
May 16, 1997 by and among Xerox Financial Services, Inc.,
Talegen Holdings, Inc., Industrial Indemnity Holdings, Inc.,
Fremont General Corporation, and Fremont Indemnity
Company, a California corporation.
</TABLE>
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SIGNATURE
Pursuant to the requirements 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.
FREMONT GENERAL CORPORATION
Date: August 14, 1997 BY: /s/ JOHN A. DONALDSON
------------------------------
John A. Donaldson, Senior Vice
President, Controller and
Chief Accounting Officer
3
STOCK PURCHASE AGREEMENT
(Industrial Indemnity Holdings, Inc.)
By and Among
Talegen Holdings, Inc.,
Fremont Indemnity Company
and
Fremont General Corporation
Dated as of May 16, 1997
<PAGE>
TABLE OF CONTENTS
ARTICLE I
DEFINITIONS
Section 1.1 Definitions 2
ARTICLE II
PURCHASE OF SHARES
Section 2.1 Purchase of Shares 7
Section 2.2 Purchase Price Adjustment - Delay in Closing 7
Section 2.3 Purchase Price Adjustment - Closing Balance Sheet 8
ARTICLE III
THE CLOSING
Section 3.1 Closing 10
Section 3.2 Closing Deliveries; Payment of Purchase Price 10
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF SELLER
Section 4.1 Organization and Related Matters 12
Section 4.2 Subsidiaries 12
Section 4.3 Authority; No Violation 13
Section 4.4 Consents and Approvals 13
Section 4.5 Stock Ownership 14
Section 4.6 Financial Statements 14
Section 4.7 No Other Broker 14
Section 4.8 Legal Proceedings 14
Section 4.9 Undisclosed Liabilities 15
Section 4.10 Compliance with Applicable Law; Insurance Operations 15
Section 4.11 Absence of Certain Changes 15
Section 4.12 Technology and Intellectual Property 17
Section 4.13 Employee Benefit Plans; ERISA 18
Section 4.14 Taxes 19
Section 4.15 Contracts 20
Section 4.16 No Material Adverse Change 21
Section 4.17 Portfolio Investments 21
Section 4.18 Reserves 21
Section 4.19 Title to Assets, etc. 21
Section 4.20 Transactions with Certain Persons 22
Section 4.21 Reinsurance and Retrocessions 23
Section 4.22 Environmental Laws 23
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Section 4.23 Insurance Coverage 23
Section 4.24 Insurance Regulatory Matters 23
Section 4.25 Powers of Attorney 24
Section 4.26 KPMG Report 24
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF BUYER AND FREMONT GENERAL
Section 5.1 Organization and Related Matters 24
Section 5.2 Authority; No Violation 24
Section 5.3 Consents and Approvals 25
Section 5.4 Legal Proceedings 25
Section 5.5 Investment Intent of Buyer 26
Section 5.6 Investment Company 26
Section 5.7 No Other Broker 26
Section 5.8 Financing 26
ARTICLE VI
COVENANTS
Section 6.1 Conduct of Business 26
Section 6.2 Confidentiality and Announcements 26
Section 6.3 Expenses 27
Section 6.4 Access; Certain Communications 27
Section 6.5 Regulatory Matters; Third Party Consents 27
Section 6.6 Further Assurances 29
Section 6.7 Notification of Certain Matters 29
Section 6.8 Maintenance of Records 29
Section 6.9 Employees and Employee Plans 30
Section 6.10 Pre-Closing Dividends 31
Section 6.11 FIRPTA Certificate 31
Section 6.12 Exclusivity 32
Section 6.13 Tax Sharing Agreement Releases 32
Section 6.14 Non-Solicitation and Non-Competition 32
Section 6.15 Investment Policies and Guidelines 34
Section 6.16 Intercompany Note 34
Section 6.17 Litigation 34
Section 6.18 Capital Contribution 34
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ARTICLE VII
CONDITIONS TO CLOSING
Section 7.1 Conditions to Buyer's Obligations 34
Section 7.2 Conditions to Seller's Obligations 36
Section 7.3 Mutual Conditions 36
ARTICLE VIII
SURVIVAL OF REPRESENTATIONS, WARRANTIES,
COVENANTS AND AGREEMENTS; INDEMNIFICATION
Section 8.1 Survival 37
Section 8.2 Obligation of Seller to Indemnify, Reimburse, etc. 38
Section 8.3 Obligation of Buyer to Indemnify, Reimburse, etc. 38
Section 8.4 Notice and Opportunity to Defend Against
Third Party Claims 38
Section 8.5 Net Indemnity 39
Section 8.6 Tax Indemnification 39
Section 8.7 Limits on Indemnification 39
ARTICLE IX
TERMINATION
Section 9.1 Termination 40
Section 9.2 Obligations upon Termination 40
ARTICLE X
MISCELLANEOUS
Section 10.1 Amendments; Extension; Waiver 40
Section 10.2 Entire Agreement 40
Section 10.3 Interpretation 41
Section 10.4 Severability 41
Section 10.5 Notices 41
Section 10.6 Binding Effect; Persons Benefiting; No Assignment 43
Section 10.7 Counterparts 43
Section 10.8 No Prejudice 43
Section 10.9 Governing Law 43
Section 10.10 Service; Jurisdiction 43
Section 10.11 Specific Performance 43
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EXHIBITS
Exhibit A Guarantee Agreement
Exhibit B Ridge Re Amendment
Exhibit C Release of Tax Sharing Agreements
Exhibit D Form of Opinion of General Counsel of Seller
Exhibit E Form of Opinion of LeBoeuf, Lamb, Greene & MacRae, L.L.P.
Exhibit F Form of Opinion of Wilson, Sonsini, Goodrich & Rosati
SCHEDULES
Schedule 1.1(a) Active Company Employees
Schedule 1.1(b) Former Employees Receiving Long-Term Disability Benefits
Schedule 1.1(c) Former Employees Eligible for Medical and/or Life
Insurance Benefits
Schedule 2.3(a) Purchase Price Adjustment - Balance Sheet
Schedule 4.2 Subsidiaries
Schedule 4.4 Consents and Approvals
Schedule 4.8 Legal Proceedings
Schedule 4.9 Undisclosed Liabilities
Schedule 4.10 Compliance with Applicable Law; Insurance Operations
Schedule 4.11 Absence of Certain Changes
Schedule 4.12 Technology and Intellectual Property
Schedule 4.13 Employee Benefit Plans; ERISA
Schedule 4.14 Taxes
Schedule 4.15 Contracts
Schedule 4.16 No Material Adverse Change
Schedule 4.19 Title to Assets, etc.
Schedule 4.20 Transactions with Certain Persons
Schedule 4.21 Reinsurance and Retrocessions
Schedule 4.22 Environmental Laws
Schedule 4.25 Powers of Attorney
Schedule 5.3 Consents and Approvals
Schedule 6.15 Investment Policies and Guidelines
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<PAGE>
STOCK PURCHASE AGREEMENT
STOCK PURCHASE AGREEMENT, dated as of May 16, 1997, by and among
Talegen Holdings, Inc., a Delaware corporation ("Seller"), Fremont Indemnity
Company, a California corporation ("Buyer"), and Fremont General Corporation,
a Nevada corporation ("Fremont General").
RECITALS
WHEREAS, Seller is the owner of 1,000 shares, par value $1.00 per
share (the "Shares"), of common stock of Industrial Indemnity Holdings, Inc., a
Delaware corporation (the "Company"), which Shares constitute all of the issued
and outstanding shares of the Company's capital stock;
WHEREAS, certain of the Company's wholly-owned subsidiaries,
Industrial Indemnity Company, a California stock insurance company, Industrial
Insurance Company, a California stock insurance company, Industrial Indemnity
Company of Alaska, an Alaska stock insurance company, Industrial Indemnity
Company of Idaho, an Idaho stock insurance company, Industrial Indemnity Company
of the Northwest, a Washington stock insurance company and Employers First
Insurance Company, a California stock insurance company (collectively the
"Insurance Subsidiaries"), are engaged in the workers compensation insurance
business;
WHEREAS, Buyer, which is a wholly-owned subsidiary of Fremont
General, desires to purchase the Shares from Seller upon the terms and subject
to the conditions set forth herein; and
WHEREAS, Seller desires to sell the Shares to Buyer upon the terms
and subject to the conditions set forth herein; and
WHEREAS, Buyer and Seller have entered into the Tax Agreement
simultaneously with the execution of this Agreement; and
WHEREAS, Xerox Financial Services, Inc., a Delaware corporation
("Parent"), has agreed to enter into a guarantee of certain obligations of
Seller pursuant to this Agreement in the form attached as Exhibit A (the
"Guarantee").
NOW THEREFORE, in consideration of the mutual covenants,
representations, warranties and agreements contained herein, and of other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, and intending to be bound hereby, the parties agree as follows:
<PAGE>
ARTICLE I
DEFINITIONS
Section 1.1 Definitions. For all purposes of this Agreement, the
following terms shall have the respective meanings set forth in this Section 1.1
(such definitions to be equally applicable to both the singular and plural forms
of the terms herein defined):
"Acquisition Audit" has the meaning set forth in Section 2.3(b).
"Action" means any legal, administrative, arbitration or other
proceeding, claim, action or governmental or regulatory investigation of any
nature.
"Adjusted Shareholder's Equity" has the meaning set forth in
Section 2.3(b).
"Affiliate" means, with respect to any Person, any other Person who
directly or indirectly controls, is controlled by or is under common control
with such Person. The term "control," for the purposes of this definition, means
the power to direct or cause the direction of the management or policies of the
controlled Person.
"Agreement" means this Stock Purchase Agreement between Buyer and
Seller, as such may hereafter be amended from time to time.
"Applicable Law" means any domestic or foreign federal, state or
local statute, law, ordinance, rule, regulation, order, writ, injunction,
judgment or decree applicable to Seller, the Company, Buyer or any of their
respective Subsidiaries, properties, assets, officers, directors, employees or
agents.
"Asserted Liability" has the meaning set forth in Section 8.4.
"Business Day" means any day other than a Saturday, a Sunday or a
day on which banks in Seattle, Washington are required to be closed for regular
banking business.
"Buyer" has the meaning set forth in the first paragraph of this
Agreement.
"Camfex Note" shall mean that certain "Note Due December 1, 2009"
dated December 21, 1984 in the principal amount of $6,317,113 from Camfex
Associates Limited Partnership to Industrial Indemnity Company.
"Claims Notice" has the meaning set forth in Section 8.4.
"Closing" has the meaning set forth in Section 3.1.
"Closing Balance Sheet" has the meaning set forth in Section
2.3(a).
"Closing Balance Sheet Procedures" has the meaning set forth in
Section 2.3(a).
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"Closing Date" means the date of the Closing.
"Code" shall have the meaning ascribed in the Tax Agreement.
"Company" has the meaning set forth in the Recitals of this
Agreement.
"Company Employees" means those current or former employees of the
Company and its Subsidiaries who, on the Closing Date, are:
(1) actively employed by the Company or its Subsidiaries, including
those who are absent from employment due to illness, injury, military
service or other authorized absence (including those who are "disabled"
within the meaning of either the short-term or the long-term disability
plan currently applicable to the Company and its Subsidiaries
(collectively, the "Disability Plans")) (all such persons as of the date
hereof being identified on Schedule 1.1(a));
(2) former employees who, on the Closing Date, are receiving
long-term disability benefits under the Disability Plans (all such persons
as of the date hereof being identified on Schedule 1.1(b)) ; and
(3) former employees who have previously satisfied the requirements
for retiree medical and/or life insurance coverage under the Industrial
Indemnity Company Medical and Life Plan for Retirees and Disabled
Employees (all such persons as of the date hereof being identified on
Schedule 1.1(c)),
but excluding (i) other former employees, (ii) employees otherwise not actively
employed by the Company or its Subsidiaries (other than as specifically included
above), and (iii) those employees of the Company and its Subsidiaries whose
names are set forth on Schedule 1.1(d).
"Confidentiality Agreement" means that certain letter agreement
dated March 18, 1997, between Buyer and Seller with respect to the
confidentiality of information about Seller, the Company and their respective
Affiliates and other related Persons which was provided by or at the request of
Seller or the Company to Buyer, as such letter agreement may have been or may
hereafter be amended from time to time.
"Contracts" has the meaning set forth in Section 4.15.
"Designated Period" has the meaning set forth in Section 6.14(a).
"Disability Plans" has the meaning set forth in the definition of
"Company Employees."
"E&Y" has the meaning set forth in Section 2.3(b).
3
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"Encumbrance" means any lien, pledge, security interest, claim,
charge, easement, limitation, commitment, encroachment, restriction or
encumbrance of any kind or nature whatsoever.
"Environmental Laws" means any Applicable Law in effect on the date
hereof, and any rules or regulations promulgated thereunder, relating to the
environment, safety or hazardous materials.
"Environmental Permits" means all permits, approvals, identification
numbers, licenses and other authorizations required under any Environmental Law.
"ERISA" means the Employee Retirement Income Security Act of 1974,
as amended, and the regulations thereunder.
"ERISA Affiliate" means any entity which is under common control
with the Company within the meaning of Section 4001(b) of ERISA.
"Fremont General" has the meaning set forth in the first
paragraph of this Agreement.
"GAAP" means generally accepted accounting principles as used in the
United States of America as in effect at the time any applicable financial
statements were prepared or any act requiring the application of GAAP was
performed.
"GAAP Financial Statements" has the meaning set forth in
Section 4.6.
"Governmental Authority" means any nation or government, any state
or other political subdivision thereof, any entity exercising executive,
legislative, judicial, regulatory or administrative functions of or pertaining
to government.
"Guarantee" has the meaning set forth in the Recitals of this
Agreement.
"HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended, and the rules and regulations promulgated thereunder.
"Indemnifying Party" has the meaning set forth in Section 8.4.
"Indemnitee" has the meaning set forth in Section 8.4.
"Independent Accountants" means any "Big Six" accounting firm or its
successor, except for the respective independent public accountants of Seller,
Buyer or their respective Affiliates or Subsidiaries.
"Information Returns" shall have the meaning ascribed in the Tax
Agreement.
4
<PAGE>
"Insurance Arrangements" means insurance contracts (including runoff
contracts, reinsurance, retrocession agreements, surety agreements and financial
guaranties, and agent and broker agreements) entered into by the Company or its
Subsidiaries in the ordinary course of business.
"Insurance Subsidiaries" has the meaning set forth in the
Recitals of this Agreement.
"Intellectual Property Rights" has the meaning set forth in
Section 4.12.
"Intercompany Note" means that certain Promissory Note dated
November 27, 1996 in the principal amount of $78,750,000, issued by the Company
in favor of Seller.
"IRP" means The Individual Retirement Plan of Talegen Holdings,
Inc.
"IRS" means the Internal Revenue Service.
"Knowledge of Seller" or "Seller's knowledge" means the actual
knowledge of the individuals listed on Schedule 1.1(e) hereto.
"KPMG Report" has the meaning set forth in Section 4.26.
"Leesburg Training Facility" has the meaning set forth in Section
7.1(g).
"Loss" means any and all claims, losses, liabilities, damages, costs
and expenses (including attorney's, accountant's, consultant's and expert's fees
and expenses) that are imposed upon or otherwise incurred or suffered by the
relevant party.
"Material Adverse Effect" means (i) a material adverse effect on the
business, financial condition or results of operations of the Company and its
Subsidiaries, taken as a whole, or (ii) an event that would prevent or
materially delay the performance by Seller of its obligations under this
Agreement.
"Parent" has the meaning set forth in the Recitals of this
Agreement.
"Permits" has the meaning set forth in Section 4.10.
"Person" means any individual, corporation, company, partnership
(limited or general), joint venture, limited liability company, association,
trust or other entity.
"Plans" has the meaning set forth in Section 4.13.
"Portfolio Assets" means the cash and investments (which shall
consist exclusively of fixed maturity securities, equity securities, cash and
short-term investments, the Camfex Note and accrued interest receivable thereon)
held by the Company and its Subsidiaries.
5
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"Puccinelli Letter Agreement" means that certain letter agreement
dated as of June 1, 1995 between the Company and Robert A. Puccinelli.
"Purchase Price" has the meaning set forth in Section 2.1.
"Records" means all records and original documents which pertain to
or are utilized primarily by the Company or its Subsidiaries to administer,
reflect, monitor, evidence or record information relating to the business or
conduct of the Company or its Subsidiaries and all such records and original
documents, including all such records maintained on electronic or magnetic
media, or in any electronic database system of the Company or its Subsidiaries,
or necessary to comply with any Applicable Law with respect to the business of
the Company or its Subsidiaries.
"Restricted Business" has the meaning set forth in Section
6.14(c).
"Retirement Plan" means the Retirement Plan of Talegen Holdings,
Inc.
"Ridge Re Agreement" means that certain Springing First Aggregate
Excess of Loss Reinsurance Agreement by and between the Insurance Subsidiaries,
Ridge Reinsurance Limited and Parent, dated as of December 31, 1992, together
with all endorsements thereto.
"Ridge Re Amendment" means that certain Endorsement #2 to the
Springing First Aggregate Excess of Loss Reinsurance Agreement by and between
the Insurance Subsidiaries, Ridge Reinsurance Limited and Parent, in the form
attached hereto as Exhibit B.
"SAP Financial Statements" has the meaning set forth in
Section 4.6.
"Seller" has the meaning set forth in the first paragraph of this
Agreement.
"SERP" means the Talegen Holdings, Inc. Supplemental Executive
Retirement Plan.
"Shares" has the meaning set forth in the Recitals of this
Agreement.
"SIRP" means the Supplemental IRP of Talegen Holdings, Inc.
"Subsidiaries" means the Insurance Subsidiaries and any other
corporation or entity of which more than 50% of its outstanding securities or
other interests having voting power are owned or controlled, directly or
indirectly, by the Company.
"Tax Agreement" means the Tax Allocation and Indemnification
Agreement dated as of the date hereof among Parent, Seller, the Company and
Buyer.
"Tax Returns" shall have the meaning ascribed in the Tax
Agreement.
"Taxes" shall have the meaning ascribed in the Tax Agreement.
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"Wire Transfer" means a payment in immediately available funds by
wire transfer in lawful money of the United States of America to such account or
accounts as shall have been designated by notice to the paying party.
"Xerox" has the meaning set forth in Section 4.14.
"XFS Promissory Notes" means the promissory note held by Industrial
Indemnity Company in the principal amount of $18 million which was issued on
December 31, 1992 by Parent and which matures on December 31, 1997 and the
promissory note held by Industrial Indemnity Company in the principal amount of
$25 million which was issued on September 1, 1993 by Parent and which matures on
August 31, 1998.
ARTICLE II
PURCHASE OF SHARES
Section 2.1 Purchase of Shares. Upon the terms and subject to the
conditions set forth in this Agreement, at the Closing Seller shall sell to
Buyer, and Buyer shall purchase from Seller, the Shares for a purchase price of
Three Hundred Sixty-Five Million Dollars ($365,000,000), subject to adjustment
in accordance with Sections 2.2 and 2.3 (as adjusted, the "Purchase Price").
Section 2.2 Purchase Price Adjustment - Delay in Closing. (a)
Subject to Section 2.2(d) hereof, if the Closing shall take place at any time
after 150 days from the date hereof but on or prior to 180 days from the date
hereof, Buyer shall pay to Seller, as additional Purchase Price and in addition
to the amount set forth in Section 2.1, an amount equal to $80,000 multiplied by
the number of days subsequent to the 150th day from the date hereof to and
inclusive of the Closing Date.
(b) Subject to Section 2.2(d) hereof, if the Closing shall
take place at any time after 180 days from the date hereof but on or prior to
210 days from the date hereof, Buyer shall pay to Seller, as additional Purchase
Price and in addition to the amount set forth in Section 2.1, an amount equal to
the sum of (i) $2,400,000 plus (ii) an amount equal to $90,000 multiplied by the
number of days subsequent to the 180th day from the date hereof to and inclusive
of the Closing Date.
(c) Subject to Section 2.2(d) hereof, if the Closing shall
take place at any time after 210 days from the date hereof, Buyer shall pay to
Seller, as additional Purchase Price and in addition to the amount set forth in
Section 2.1, an amount equal to the sum of (i) $5,100,000 plus (ii) an amount
equal to $100,000 multiplied by the number of days subsequent to the 210th day
from the date hereof to and inclusive of the Closing Date.
(d) Notwithstanding any provision of this Section 2.2 to the
contrary, no adjustment to the Purchase Price shall be made pursuant to this
Section 2.2 if the failure of the
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Closing to take place within 150, 180 or 210 days (as the case may be) from the
date hereof has been caused by or resulted from the failure of Seller to comply
with its pre-Closing obligations under Article VI of this Agreement.
Section 2.3 Purchase Price Adjustment - Closing Balance Sheet. (a)
As soon as reasonably practicable following the Closing Date, and in no event
later than 30 days after the Closing Date, Seller shall deliver to Buyer a draft
of the Company's consolidated closing balance sheet immediately prior to the
Closing (the "Closing Balance Sheet"). The Closing Balance Sheet shall be
prepared by Seller in accordance with the following procedures (the "Closing
Balance Sheet Procedures"):
(i) subject to the other provisions of this Section 2.3, it shall be
prepared in accordance with GAAP applied consistently with prior
practices;
(ii) it shall set forth as the liability of the Company and its
Subsidiaries for unpaid loss and loss expenses net of reinsurance
recoveries and salvage and subrogation with respect to 1996 and prior
accident years and set forth the related receivable or payable amounts for
accrued retrospective premiums, policyholder dividends and other loss
sensitive amounts as set forth on Schedule 2.3(a), reduced by payments or
recoveries associated with the settlement of insurance claims, reinsurance
recoverables or salvage and subrogation rights, and increased by the
portion of the incurred loss expense amount recorded from January 1, 1997
through the Closing Date for 1996 and prior accident years pertaining to
the run-off operations of the Company's Special Risk Unit as set forth on
Schedule 2.3(a), determined in a manner consistent with past practice;
(iii) it shall set forth as the liability of the Company and its
Subsidiaries for unpaid loss and loss expenses net of reinsurance
recoveries and salvage and subrogation with respect to the 1997 accident
year and set forth the related payables for retrospective premiums and
policyholder dividends amounts equal for each of the business units set
forth on Schedule 2.3(a) to the product of (A) the voluntary premium
earned (net of ceded reinsurance premium) by such business unit for the
period January 1, 1997 through the Closing Date, and (B) the applicable
funding rate during 1997 for losses, allocated loss expenses, unallocated
loss expenses, retrospective return premiums and policyholder dividends
for such business unit as set forth in Schedule 2.3(a), reduced by the
payments or recoveries associated with the settlement of insurance claims,
reinsurance recoverables or salvage and subrogation rights and it shall
set forth non-voluntary loss and loss expense reserves pertaining to the
1997 accident year on a basis which reflects a 100% combined ratio;
(iv) it shall include as a reduction to retained earnings an amount
equal to $31,000,000 less any after-tax amount for depreciation of either
the Claims Management System or the Integrated Production System for the
period January 1, 1997 through the Closing Date;
(v) the amount otherwise shown on the Closing Balance Sheet for
paid-in capital shall be increased by an amount equal to the excess of (A)
$23,000,000 (representing the
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<PAGE>
capital contribution associated with the monetization of Industrial
Indemnity Company's interest in the Leesburg Training Facility, as
described in Section 7.1(g)), over (B) the amount of such capital
contribution (if any) that has been actually recorded by the Company on or
prior to the Closing Date;
(vi) the amount otherwise shown on the Closing Balance Sheet for the
deferred income tax asset related to the premium associated with the Ridge
Re Agreement shall be reduced by $6,804,000 (representing the write-off of
the entire amount of such asset);
(vii) the amount otherwise shown on the Closing Balance Sheet for
the deferred income tax asset associated with the 1990 through 1994
uncollectible reinsurance expense as set forth on Schedule 5(f) to the Tax
Agreement shall be reduced by $3,533,336 (representing the write-off of
the entire amount of such asset);
(viii) the amount otherwise shown in the shareholder's equity
section of the Closing Balance Sheet for net unrealized loss or gain on
investment securities shall be decreased by the after-tax amount of the
unrealized gain or increased by the amount of unrealized loss with respect
to the Portfolio Assets; and
(ix) the amount otherwise shown on the Closing Balance Sheet for
retained earnings shall be decreased by the after-tax amount of any
realized investment gains and increased by the after-tax amount of any
realized investment losses recorded during the period January 1, 1997
through the Closing Date.
(b) Subsequent to the Closing Date, Buyer may in its discretion
engage Ernst & Young ("E&Y") to perform an audit (the "Acquisition Audit") of
the Closing Balance Sheet consistent with the Closing Balance Sheet Procedures.
Promptly after receipt of notice from Buyer that E&Y will be performing the
Acquisition Audit, Seller shall make available to Buyer and E&Y all work papers
prepared or used in connection with the preparation of the Closing Balance
Sheet. If, within 30 days following completion of the Acquisition Audit, and in
any event not later than 75 days after the delivery of the Closing Balance Sheet
to Buyer, Buyer provides written notice to Seller that the Acquisition Audit
indicates that the shareholder's equity at the Closing Date, calculated in
accordance with the Closing Balance Sheet Procedures (the "Adjusted
Shareholder's Equity"), was less than $323,500,000, then, subject to Section
2.3(c), a post-Closing adjustment to the Purchase Price will be made pursuant to
Section 2.3(d). Contemporaneously with the delivery of such notice to Seller,
Buyer shall make available to Seller the Acquisition Audit and all work papers
prepared or used by E&Y in connection therewith, except for the summary
memorandum, audit strategy memoranda, audit programs, time budgets and internal
control workpapers utilized in the preparation of the Acquisition Audit, all of
which E&Y considers proprietary. Such work papers shall describe with reasonable
specificity the bases for any variances between the Acquisition Audit and the
Closing Balance Sheet.
(c) If Seller disagrees with the Acquisition Audit, the parties
shall confer in good faith to attempt to agree as to such matters. If the
parties fail to agree on such matters within 30 days following the receipt by
Seller of Buyer's notice of disagreement, then, at the
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request of Seller or Buyer, the Independent Accountants shall make the
determination of what, if any, changes are required in the Closing Balance Sheet
consistent with the Closing Balance Sheet Procedures. The fees and expenses of
the Independent Accountants shall be borne 50% by Seller and 50% by Buyer. The
revision of the Closing Balance Sheet as agreed to by the parties or made by the
Independent Accountants in accordance with this Section 2.3(c) shall be final
and binding upon all parties for purposes of this Agreement.
(d) If the Adjusted Shareholder's Equity as finally determined
pursuant to this Section 2.3, whether pursuant to the agreement of the parties,
pursuant to the Acquisition Audit or as determined by the Independent
Accountants, as the case may be, shows that the Adjusted Shareholder's Equity
was less than $323,500,000, then Seller shall pay Buyer the amount of such
difference as an adjustment to the Purchase Price. Such amount shall be paid by
Seller to Buyer within two (2) Business Days after the final agreement of the
parties or the final determination of the Independent Accountants. Any such
payment will be made by wire transfer of immediately available funds to such
account as shall have been designated by Buyer.
(e) Without limiting the generality of the foregoing, the parties
hereto acknowledge and agree that Buyer, E&Y and the Independent Accountants
shall accept in all respects the amounts with respect to the liability of the
Company and its Subsidiaries for loss and loss expenses net of reinsurance
recoveries and salvage and subrogation set forth in the Closing Balance Sheet
and in no event shall challenge the adequacy or sufficiency of the reserves of
the Company and its Subsidiaries with respect to losses, loss expenses and
reinsurance recoveries.
ARTICLE III
THE CLOSING
Section 3.1 Closing. Upon the terms and subject to the conditions of
this Agreement, the closing of the purchase and sale of the Shares (the
"Closing") shall be at 10:00 A.M. at the offices of Seller at 1011 Western
Avenue, Suite 1000, Seattle, Washington, or at any other location designated by
Seller, on the third Business Day following the date on which all of the
conditions set forth in Article VII (other than those conditions designating
instruments, certificates or other documents to be delivered at the Closing)
shall have been satisfied or waived, or such other date and time as Buyer and
Seller shall agree upon in writing.
Section 3.2 Closing Deliveries; Payment of Purchase Price.
(a) At the Closing, Seller shall deliver, or shall cause to be
delivered, to Buyer the following:
(1) one or more certificates representing all of the Shares duly
executed in blank or accompanied by stock powers duly executed in blank,
in proper form for transfer, with all appropriate stock transfer tax
stamps affixed;
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(2) material Records of the Company and its Subsidiaries, to the
extent not located at offices of the Company or its Subsidiaries (unless
such Records have been previously delivered to such offices prior to the
Closing);
(3) certificates as to the good standing of the Company and its
Subsidiaries in the respective jurisdictions of their incorporation, dated
as of a date not earlier than 10 days prior to the Closing Date, together
with copies of the Certificates of Incorporation of the Company and its
Subsidiaries certified by the respective Secretary or Assistant Secretary
of the Company and each of its Subsidiaries;
(4) resolutions of the board of directors of Seller, certified by
the Secretary or Assistant Secretary of Seller, approving the transactions
contemplated by this Agreement, and the By-laws of the Company and each of
its Subsidiaries, certified by the respective Secretary or Assistant
Secretary of the Company and each of its Subsidiaries as of the Closing
Date;
(5) a certificate executed by a duly authorized officer of Seller
certifying that the conditions set forth in Section 7.1 have been
satisfied;
(6) the Tax Agreement duly executed by Seller and Parent;
(7) the Guarantee duly executed by Parent;
(8) the legal opinions described in Section 7.1(i); and
(9) a receipt evidencing payment by Buyer of the Purchase Price.
(b) At the Closing, Buyer and Fremont General shall deliver,
or shall cause to be delivered, to Seller the following:
(1) an amount equal to $365,000,000, subject to increase to the
extent provided in Section 2.2, by Wire Transfer;
(2) a certificate executed by a duly authorized officer of Buyer
certifying that the conditions set forth in Section 7.2 have been
satisfied;
(3) resolutions of the boards of directors of Buyer and Fremont
General, certified by the respective Secretaries of Buyer and Fremont
General, approving the transactions contemplated by this Agreement;
(4) the Tax Agreement duly executed by Buyer;
(5) the Guarantee duly executed by Buyer;
(6) a receipt evidencing receipt by Buyer of the Shares;
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(7) certificates as to good standing of Buyer and Fremont General
in the respective jurisdictions of their incorporation, dated as of a date
not earlier than 10 days prior to the Closing Date, together with copies
of the Certificates of Incorporation of Buyer and Fremont General,
certified by the respective Secretaries of Buyer and Fremont General; and
(8) the legal opinion described in Section 7.2(f).
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF SELLER
Seller hereby represents and warrants to Buyer as follows:
Section 4.1 Organization and Related Matters. (a) The Company is a
corporation duly incorporated, validly existing and in good standing under the
laws of the State of Delaware. The Company has the corporate power and authority
to carry on its business as it is now being conducted and to own, lease or
operate all of its properties and assets, and is duly licensed or qualified to
do business in each jurisdiction in which the nature of the business conducted
by it or the character of the assets owned by it makes such qualification or
licensing necessary, except where the failure to be so qualified or licensed
would not, individually or in the aggregate, have a Material Adverse Effect.
(b) Seller is a corporation duly incorporated, validly existing and
in good standing under the laws of the State of Delaware. Seller has the
corporate power and authority to carry on its business as it is now being
conducted and to own, lease or operate all of its properties and assets.
Section 4.2 Subsidiaries. (a) Except as set forth on Schedule 4.2,
all of the outstanding shares of capital stock of the Company's Subsidiaries are
owned beneficially and of record by the Company, free and clear of any
Encumbrances. The Company's Subsidiaries are each corporations duly organized,
validly existing and in good standing under the laws of their respective states
of incorporation or domicile, and have the corporate power and authority to
carry on their respective businesses as now being conducted and to own, lease
and operate all of their respective properties and assets. Each of the Company's
Insurance Subsidiaries is duly licensed or qualified to do business and has all
insurance licenses in each jurisdiction in which the nature of the business
conducted by it or the character of the assets owned by it makes such
qualification or licensing necessary, except where the failure to be so
qualified or licensed, individually or in the aggregate, would not have a
Material Adverse Effect.
(b) Except as set forth on Schedule 4.2, and except for the stock of
its Subsidiaries and portfolio investments made in the ordinary course of
business, there are no corporations, partnerships or other entities in which the
Company owns, of record or beneficially, any direct or indirect equity interest
or any right (contingent or otherwise) to acquire the same.
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Section 4.3 Authority; No Violation. (a) Seller has full corporate
power and authority to execute and deliver this Agreement and the Tax Agreement
and to consummate the transactions contemplated hereby and thereby. The
execution and delivery of this Agreement and the Tax Agreement and the
consummation of the transactions contemplated hereby and thereby have been duly
and validly approved by all requisite corporate action on the part of Seller,
and no other corporate proceedings on the part of Seller are necessary to
approve this Agreement or the Tax Agreement or to consummate the transactions
contemplated hereby or thereby. This Agreement and the Tax Agreement have been
duly and validly executed and delivered by Seller and (assuming the due
authorization, execution and delivery of this Agreement and the Tax Agreement by
Buyer) constitute valid and binding obligations of Seller, enforceable against
Seller in accordance with their respective terms, except as enforcement may be
limited by general principles of equity, whether applied in a court of law or a
court of equity, and by bankruptcy, insolvency, moratorium and similar laws
affecting creditors' rights and remedies generally.
(b) Neither the execution and delivery of this Agreement or the Tax
Agreement by Seller, nor the consummation by Seller of the transactions
contemplated hereby and thereby to be performed by it, nor compliance by Seller
with any of the terms or provisions hereof or thereof, will (i) violate any
provision of the Certificate of Incorporation or By-Laws of Seller, or (ii)
assuming that the consents and approvals referred to in Section 4.4 are duly
obtained, (A) violate in any material respect any Applicable Law with respect to
Seller, the Company or the Company's Subsidiaries, or any of their respective
material properties or assets, (B) result in the creation of any Encumbrance
upon any of the Shares, (C) violate, conflict with, result in a breach of any
provision of, or constitute a default under any note, bond, mortgage, indenture,
deed of trust, license, lease, agreement or other instrument or obligation to
which Seller, the Company or the Company's Subsidiaries is a party, or by which
Seller, the Company or the Company's Subsidiaries, or any of their respective
properties or assets, may be bound or affected, or (D) violate or result in the
revocation or suspension of any Permit or cause the Company or any of the
Company's Subsidiaries to require any additional Permits in order to continue to
conduct their respective businesses substantially as heretofore conducted,
except for such Encumbrances, violations, conflicts, breaches, revocations,
suspensions or defaults which would not, individually or in the aggregate, have
a Material Adverse Effect.
Section 4.4 Consents and Approvals. Except for (a) approvals or
consents of Governmental Authorities under the insurance holding company laws of
the states in which the Insurance Subsidiaries are domiciled, (b) the applicable
filings under the HSR Act, (c) the matters set forth on Schedule 4.4, and (d)
such other filings, authorizations, consents or approvals the failure to make or
obtain which would not, individually or in the aggregate, have a Material
Adverse Effect, no consents or approvals of or filings or registrations with any
Governmental Authority or third party are necessary in connection with (i) the
execution and delivery by Seller of this Agreement, and (ii) the consummation by
Seller of the transactions contemplated hereby.
Section 4.5 Stock Ownership. Seller owns beneficially and of record
all of the Shares to be sold to Buyer by Seller, and Seller has the full and
unrestricted power to sell, assign, transfer and deliver the Shares to Buyer
upon the terms and subject to the conditions of this Agreement free and clear of
Encumbrances. There are no shares of capital stock of the Company
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issued or outstanding other than the Shares. All of the Shares are duly
authorized, validly issued, fully paid, nonassessable and free of any preemptive
rights. There is no outstanding option, warrant, right, subscription, call,
unsatisfied preemptive right or other agreement or right of any kind to purchase
or otherwise acquire from the Company or Seller any capital stock of the
Company. Upon the delivery of and payment for the Shares at the Closing as
provided for in this Agreement, Buyer will acquire good and valid title to the
Shares, free and clear of any Encumbrances other than Encumbrances created by
virtue of Buyer's status or by an action or omission of Buyer.
Section 4.6 Financial Statements. (a) Seller has previously
furnished Buyer with copies of audited consolidated financial statements of the
Company as of December 31, 1996, 1995 and 1994 (collectively, the "GAAP
Financial Statements"). Each of the balance sheets included in the GAAP
Financial Statements fairly presents in all material respects the financial
position of the Company as of its date and each of the statements of operations
included in the GAAP Financial Statements fairly presents in all material
respects the results of operations of the Company for the period therein set
forth, in each case in accordance with GAAP.
(b) Seller has previously furnished Buyer with copies of audited
statutory financial statements of each of the Insurance Subsidiaries as of
December 31, 1996, 1995 and 1994, prepared in conformity with accounting
practices prescribed or permitted by the respective state of domicile for each
Insurance Subsidiary (collectively, the "SAP Financial Statements"). Each of the
balance sheets included in the SAP Financial Statements fairly presents in all
material respects the financial position of the applicable Insurance Subsidiary
as of its date and each of the statements of operations included in the SAP
Financial Statements fairly presents in all material respects the results of
operations of the applicable Insurance Subsidiary for the period therein set
forth, in each case in accordance with statutory accounting practices of the
respective state of domicile.
Section 4.7 No Other Broker. Other than Morgan Stanley & Co.
Incorporated, the fees and expenses of which will be paid by Seller, no broker,
finder or similar intermediary has acted for or on behalf of Seller or the
Company or its Subsidiaries, or is entitled to any broker's, finder's or similar
fee or other commission from Seller, the Company or the Company's Subsidiaries
in connection with this Agreement or the transactions contemplated hereby.
Section 4.8 Legal Proceedings. As of the date hereof, other than
Actions arising from or related to the obligations of any Subsidiary under any
insurance policy or similar instrument written, assumed or reinsured by such
Subsidiary, neither the Company nor any of its Subsidiaries is a party to any,
and there are no pending or, to Seller's knowledge, threatened, Actions against
or otherwise affecting the Company, any of its Subsidiaries or any of their
respective properties or assets or challenging the validity or propriety of the
transactions contemplated by this Agreement which, if adversely determined,
would, individually or in the aggregate, have a Material Adverse Effect, and
there is no injunction, order, judgment, decree or regulatory restriction
imposed upon the Company, any of its Subsidiaries or any of their respective
properties or assets which has had or could reasonably be expected to,
individually or in the aggregate, have a Material Adverse Effect. Schedule 4.8
sets forth a true and complete list
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of all pending or, to the knowledge of Seller, threatened litigation against the
Company or any of its Subsidiaries in which the Company or any of its
Subsidiaries is a named party.
Section 4.9 Undisclosed Liabilities. To Seller's knowledge, except
for (a) those liabilities or items set forth on Schedule 4.9, (b) those
liabilities that are reflected or reserved against on the audited balance sheet
of the Company as of December 31, 1996, and (c) liabilities incurred in the
ordinary course of business consistent with past practice since the date of such
balance sheet, no liabilities have been incurred by the Company or the
Subsidiaries other than those that would not, individually or in the aggregate,
have a Material Adverse Effect.
Section 4.10 Compliance with Applicable Law; Insurance Operations.
(a) Each of the Company and its Subsidiaries holds in full force and effect all
material licenses, franchises, permits and authorizations ("Permits") necessary
for the lawful ownership and use of their respective properties and assets and
the conduct of their respective businesses under and pursuant to Applicable Laws
relating to the Company and its Subsidiaries, and Seller has knowledge of no
violation of any Permit nor has it received written notice asserting any such
violation, except for such failures to be in full force and effect and for such
violations, if any, which would not, individually or in the aggregate, have a
Material Adverse Effect.
(b) Except as set forth in Schedule 4.10, each of the Company and
its Subsidiaries is in compliance with each Applicable Law relating to it or any
of its material assets, properties or operations, except where noncompliance
with any such Applicable Law would not, individually or in the aggregate, have a
Material Adverse Affect.
(c) Each of the Insurance Subsidiaries (i) is an authorized insurer
(on either an admitted or a nonadmitted basis) in each state in which it
presently writes insurance for the type of insurance it presently writes in such
states and (ii) meets in all material respects all statutory and regulatory
requirements of all Governmental Authorities which have jurisdiction over it to
be an authorized insurer on either an admitted or a nonadmitted basis.
Section 4.11 Absence of Certain Changes. Since December 31, 1996,
except as set forth on Schedule 4.11 or as would not, individually or in the
aggregate, have a Material Adverse Effect, the Company has conducted its
business in the ordinary course of business, consistent with past practice and
has not:
(a) made, or permitted any Subsidiary to make, any change in the
financial or accounting practices or policies or any material change in
the underwriting, reinsurance, marketing, claim processing and payment or
reserving practices or policies of the Company or any of its Subsidiaries,
except as required by law, GAAP or statutory accounting practices of the
respective state of domicile of any such entity;
(b) made any, or permitted any Subsidiary to make, any (i) entry
into or modification of any reinsurance or retrocession agreement by the
Company or any of its Subsidiaries other than in the ordinary course of
business consistent with past practice, or (ii) termination or commutation
of any reinsurance or retrocession agreement legally
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carried on the books of the Company's Subsidiaries at the time of such
termination or commutation at $100,000 or more;
(c) issued or sold, or permitted any Subsidiary to issue or sell,
any capital stock, notes, bonds or other securities, or any option,
warrant or other right to acquire the same;
(d) redeemed any capital stock or declared, made or paid any
dividends or distributions (whether in cash, securities or other property)
to the holders of capital stock;
(e) merged with, entered into a consolidation with or acquired an
interest of 5% or more in any Person or acquired a substantial portion of
the assets or business of any Person or any division or line of business
thereof, or otherwise acquired any assets (other than Portfolio Assets)
with an aggregate value in excess of $100,000 other than in the ordinary
course of the business consistent with past practice, or permitted any
Subsidiary to do any of the foregoing;
(f) made, or permitted any Subsidiary to make, any capital
expenditure or commitment for any capital expenditure in excess of
$500,000 in the aggregate;
(g) incurred, or permitted any Subsidiary to incur,
indebtedness for money borrowed in excess of $100,000 in the aggregate;
(h) made any loan to, guaranteed any indebtedness for money borrowed
of, or otherwise incurred such indebtedness on behalf of, any Person in
excess of $100,000 in the aggregate other than investments made in the
ordinary course of business, or permitted any Subsidiary to do any of the
foregoing;
(i) (i) granted any increase, or announced any increase, in the
wages, salaries, compensation, bonuses, incentives, pension or other
benefits payable to any of its employees who in the preceding 12 months
received compensation in excess of $100,000, including, without
limitation, any increase or change pursuant to any Plan, (ii) established,
or increased or promised to increase any benefits under, or otherwise
amended, any Plan, in either case except as required by law, rule or
regulation or any collective bargaining agreement or involving ordinary
increases consistent with past practice, or (iii) permitted any Subsidiary
to do any of the foregoing;
(j) amended or restated, or permitted any Subsidiary to amend
or restate, its charter or by-laws (or other organizational documents);
(k) mortgaged, pledged or otherwise subjected to any Encumbrance, or
permitted any Subsidiary to mortgage, pledge or otherwise subject to any
Encumbrance, any of its properties or assets, tangible or intangible,
except in the ordinary course of business consistent with prior practice;
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(l) forgiven, canceled, compromised, waived or released, or
permitted any Subsidiary to forgive, cancel, compromise, waive or release,
any debts, claims (excluding claims under insurance policies written by
the Company and its Subsidiaries) or rights, except for debts, claims and
rights against Persons forgiven, canceled, compromised, waived or released
in the ordinary course of business consistent with prior practice;
(m) disposed of, or permitted any Subsidiary to dispose of, any
material assets or properties (other than Portfolio Assets), or entered
into, or permitted any Subsidiary to enter into, any agreement or other
arrangements for any such disposition, except in the ordinary course of
business consistent with prior practice and not, in any individual case,
for an amount greater than $50,000 or, in the aggregate, for an amount
greater than $100,000;
(n) instituted or permitted any Subsidiary to institute any
litigation, action or proceeding before any court or governmental body,
other than in the ordinary course of business consistent with prior
practice, or settled or agreed to settle, or permitted any Subsidiary to
settle or agree to settle, any litigation, action or proceeding against
the Company or any of its Subsidiaries in which the Company or any of its
Subsidiaries is a named party, other than in the ordinary course of
business consistent with prior practice;
(o) received (including the receipt by any Subsidiary) any notice of
termination of (i) any contract, lease or other agreement (other than in
connection with or arising out of policies of insurance), in each case
with respect to which the aggregate amount that would have been prior to
such termination reasonably expected to be received or paid thereunder in
the future exceeds $100,000 or (ii) any insurance agency agreements; or
(p) agreed, whether in writing or otherwise, to take any of the
actions specified in this Section 4.11 or granted any options to purchase,
rights of first refusal, rights of first offer or any other similar rights
with respect to any of the actions specified in this Section 4.11, except
as expressly contemplated by this Agreement.
For purposes of each subsection of this Section 4.11, the phrase "in the
aggregate" shall be deemed to aggregate all applicable amounts of the Company
and its Subsidiaries covered by the terms of such subsection.
Section 4.12 Technology and Intellectual Property. Except as set
forth on Schedule 4.12, the Company and its Subsidiaries own or possess, or have
legally enforceable licenses to use, the patents, patent licenses, trademarks,
service marks, trade names, copyrights, know-how and technology (each, an
"Intellectual Property Right") which are necessary to carry on their respective
businesses as presently conducted, and neither the Company nor its Subsidiaries
has received any written notice of any infringement of, or conflict with, the
rights of others with respect to any such patents, patent licenses, trademarks,
service marks or trade names that, if such infringement or conflict is
determined to be correct, would, individually or in the aggregate, have a
Material Adverse Effect. The execution and delivery of this Agreement by Seller,
and the consummation of the transactions contemplated hereby, will neither cause
the
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Company or any of its Subsidiaries to be in violation or default under any
licenses, sublicenses or other agreements to which the Company or any of its
Subsidiaries is a party and pursuant to which the Company or any of its
Subsidiaries is authorized to use any Intellectual Property Right, nor entitle
any other party to any such license, sublicense or agreement to terminate or
modify such license, sublicense or agreement, except where any such violation,
default, termination or modification would not result in a Material Adverse
Effect.
Section 4.13 Employee Benefit Plans; ERISA. (a) Employee Benefit
Plans. Schedule 4.13(a) contains a true and complete list of each "employee
benefit plan" within the meaning of Section 3(3) of ERISA and all other employee
benefit plans, policies and practices (other than payroll practices as defined
under 29 C.F.R. Section 2510.3-1(b)) whether or not subject to ERISA, which
Seller, the Company or the Company's Subsidiaries, maintains, contributes to, is
a party to or otherwise has any obligation under, with respect to any current or
former Company Employees as of the Closing Date (collectively the "Plans").
(b) Plans in Compliance with Applicable Law. Each Plan has been
maintained and administered at all times in compliance with its terms and
Applicable Law, except where any such noncompliance could not reasonably be
expected to have a Material Adverse Effect.
(c) Limitation of Liability. Except as provided in Schedule 4.13(c),
neither Seller, the Company nor its Subsidiaries has any commitment, intention
or understanding to create, modify, terminate or adopt any Plan that would
result in any additional material liability to Buyer, the Company or its
Subsidiaries.
(d) Multiemployer Plans. Neither Seller, the Company, nor the
Company's Subsidiaries maintain, have any obligation to contribute to or
otherwise have any obligation with respect to any multiemployer plan (as defined
in Section 3(37) of ERISA).
(e) Agreement Not to Trigger Payments. Except with respect to the
Puccinelli Letter Agreement or as otherwise provided in Schedule 4.13(e), the
execution and performance of the transactions contemplated by this Agreement
will not (either alone or upon the occurrence of any additional or subsequent
events) constitute an event under any Plan or agreement that will or may
reasonably be expected to result in any payment (whether of severance pay or
otherwise), acceleration, vesting or increase in benefits with respect to any
Company Employee, whether or not any such payment would be an "excess parachute
payment" (within the meaning of Section 280G of the Code).
(f) Nonqualified Plans. Except as provided in Schedule 4.13(f),
Seller shall remain solely liable for all liabilities, benefits or claims
accrued pursuant to any Plan which is a pension plan under Section 3(2)(A) of
ERISA and which is not intended to be qualified under Section 401(a) of the
Code.
(g) Termination of Plans. Buyer, the Company and its Subsidiaries
may terminate or amend any Plan maintained solely by the Company or its
Subsidiaries or may cease contributions to any Plans to the extent permitted by
Applicable Law; provided, however, that
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Buyer shall pay or cause the Company or its Subsidiaries to pay, benefits in
accordance with the terms of the Enhanced Severance Benefit Plan of Industrial
Indemnity Company, as in effect on the day before the Closing Date.
(h) Group Health Plans. To the knowledge of Seller, each Plan which
is a "group health plan" (as such term is defined in Section 5000(b)(1) of the
Code) has been administered and operated in all respects in compliance with the
applicable requirements of Section 601 of ERISA and Section 4980(b) of the Code,
except where any such noncompliance could not reasonably be expected to have a
Material Adverse Effect.
Section 4.14 Taxes.
(a) Filing of Tax Returns and Information Returns. Seller and the
Company (and any affiliated group of which the Company is a member) have timely
filed with the appropriate taxing authorities all Federal and state and local
Tax Returns and Information Returns required to be filed through the date hereof
(taking into account all valid extensions). All such Federal state and local Tax
Returns and Information Returns are complete and accurate in all material
respects. The Company is a member of an affiliated group of corporations, within
the meaning of Section 1504 of the Code, that includes Seller, Parent and Xerox
Corporation ("Xerox"), which is the common parent of the affiliated group.
(b) Payment of Taxes. All Taxes shown in the Tax Returns referred to
in Section 4.14(a) that are due and payable by the Company and its Subsidiaries
before the date hereof have been timely paid.
(c) Encumbrances for Taxes. Except as set forth in Schedule 4.14(c),
there are no Encumbrances on any of the assets of the Company or any of its
Subsidiaries that arose in connection with any failure (or alleged failure) to
pay any Taxes (other than Taxes that are not due as of the date hereof).
(d) Audit History. Except as set forth in Schedule 4.14(d), there is
no action, suit, proceeding, investigation, audit, extensions of the statute of
limitations or claim now pending that relates to Tax liabilities attributable to
items of income, gain, deduction, loss or credits of the Company or any of its
Subsidiaries.
(e) Withholding. The Company and the Subsidiaries have withheld and
paid all Federal and state and local Taxes required to have been withheld and
paid in connection with amounts paid or owing to any employee, independent
contractor, creditor, stockholder or other third party.
(f) Tax Deficiencies. Except as set forth in Schedules 4.14(d) and
4.14(f), all Tax deficiencies asserted or Tax assessments made against the
Company or its Subsidiaries as a result of the audit or examination of Tax
Returns referred to in Section 4.14(a) by any Taxing Authority have been paid in
full. All Taxes imposed on the Company and its Subsidiaries for all Taxable
Periods (or portions thereof) ending on or before the Closing Date have been, or
prior to
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the Closing Date will be, paid, or adequate reserves established for payment
thereof in the Closing Balance Sheet.
(g) Material Adverse Effect. A representation with respect to Taxes
contained in this Section 4.14 shall be deemed to be accurate unless an
inaccuracy contained therein, individually or in the aggregate, would have a
Material Adverse Effect.
Section 4.15 Contracts. Schedule 4.15 sets forth a complete and
accurate list of all of the contracts in the categories set forth below to which
the Company or any of its Subsidiaries is a party or by which any of their
respective assets are bound, and which contain obligations of the Company or its
Subsidiaries in excess of $100,000 or which are otherwise material to the
business of the Company and its Subsidiaries taken as a whole (collectively, the
"Contracts"). Each Contract is in full force and effect and enforceable against
the parties thereto. Neither Seller, the Company, nor any of its Subsidiaries
has received written notice of a cancellation of or an intent to cancel any
Contract whose cancellation, individually or in the aggregate, would have a
Material Adverse Effect. To Seller's knowledge, there exists no breach or event
of default on the part of the Company or its Subsidiaries with respect to such
Contracts which would, individually or in the aggregate, have a Material Adverse
Effect. The following are the categories of Contracts covered by this Section
4.15:
(i) all contracts and agreements (other than (A) Insurance
Arrangements, (B) open trade accounts with respect to the purchase or sale
by the Company or its Subsidiaries of supplies or products in the ordinary
course of business, or (C) leases of real property listed in Schedule 4.19
or not required to be listed thereon) with respect to which the aggregate
amount reasonably expected to be paid or received thereunder in the future
exceeds $100,000 per annum;
(ii) all contracts and agreements with officers, full-time
employees or directors;
(iii) investment management agreements, investment custody
agreements and similar contracts and agreements (including agreements
pursuant to which the Company or its Subsidiaries has (A) deposited funds
in order to qualify as an approved or eligible insurer or (B) pledged
funds to secure obligations under reinsurance contracts);
(iv) all mortgages, indentures, security agreements, notes, loan
agreements, other debt obligations for borrowed money, guarantees of debt
obligations for borrowed money (including guarantees by way of acting as
guarantor, surety, cosigner, endorser, comaker, indemnitor or otherwise,
but excluding guarantees in respect of Insurance Arrangements entered into
in the ordinary course of business) or agreements to acquire any debt
obligations for borrowed money of others (other than debt securities
acquired for investment);
(v) all contracts and agreements prohibiting or materially
limiting the ability of the Company or its Subsidiaries to engage in
any business or compete with any person;
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(vi) any contract (other than Insurance Arrangements) with
respect to a joint venture or partnership arrangement;
(vii) all licenses granted by or to the Company or its
Subsidiaries which relate in whole or in part to Intellectual Property
Rights;
(viii) the name of each bank or other financial institution from
which credit commitments (other than repurchase agreements, reverse
repurchase agreements or dollar reverse repurchase transactions) to the
Company and its Subsidiaries are outstanding, and a brief description of
such commitments;
(ix) any other contracts, agreements or commitments (other than
Insurance Arrangements) that are material to the business of the Company
and its Subsidiaries taken as a whole; and
(x) all letters of credit, trust arrangements and structured
settlements entered into by the Company or its Subsidiaries in the
ordinary course of business or otherwise.
Section 4.16 No Material Adverse Change. Except as set forth on
Schedule 4.16, since December 31, 1996, there has been no change in the assets,
liabilities, results of operations or shareholder's equity of the Company and
its Subsidiaries which has had, individually or in the aggregate, a Material
Adverse Effect; provided, however, to the extent such effect results from any of
the following, such effect shall not be considered a Material Adverse Effect for
purposes of this Section 4.16: (i) general conditions applicable to the economy
of the United States, including changes in interest rates; (ii) conditions
affecting the property and casualty insurance or reinsurance business as a whole
which have not had a disproportionate effect on the Company or its Subsidiaries
taken as a whole in comparison to all other comparably sized and positioned
property and casualty insurance companies; or (iii) conditions or effects
resulting from the announcement of the existence and terms of this Agreement.
Section 4.17 Portfolio Investments. Seller has previously delivered
to Buyer true and complete lists as of March 31, 1997 of all assets held in the
investment portfolios of the Company and its Subsidiaries as of such date.
Section 4.18 Reserves. The Ridge Re Agreement is in full force and
effect. Notwithstanding any other provision of this Agreement (including
Sections 4.6, 4.9 and 4.26), Seller makes no representation or warranty that the
reserves of the Company or any of its Subsidiaries for losses, loss expenses or
uncollectible reinsurance are adequate or sufficient. The sole provisions of
this Agreement with respect to the adequacy or sufficiency of the reserves of
the Company and its Subsidiaries are set forth in this Section 4.18.
Section 4.19 Title to Assets, etc. The Company and its Subsidiaries
have good title to, or valid and subsisting leasehold interests in, all real and
material personal property and other material assets on their books and
reflected on the Company's balance sheet at December 31, 1996 or acquired in the
ordinary course of business since December 31, 1996 which would have been
required to be reflected on such balance sheet if acquired on or prior to
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December 31, 1996, other than assets which have been disposed of in the ordinary
course of business. All such real and material personal property is in good
working order and condition, reasonable wear and tear excepted, and to the
knowledge of Seller is free from material defects and is in compliance with
Applicable Law, except for such defects and violations of Applicable Law as
would not have a Material Adverse Effect. The Company and its Subsidiaries do
not own any real estate, other than the real estate located at 3255 Camino Del
Rio South, San Diego California. Schedule 4.19 sets forth a true and complete
listing of all real estate leases or subleases to which the Company or any of
its Subsidiaries is a party. None of such assets is subject to any Encumbrance,
except for Encumbrances reflected in the financial statements of the Company as
of December 31, 1996 or which in the aggregate are not substantial in amount or
do not materially interfere with the present use of such property or assets.
Except as would not, individually or in the aggregate, have a Material Adverse
Effect, the Company and its Subsidiaries have the right to quiet enjoyment of
all property leased by any of them for the full term of each such lease or
sublease or similar agreement (or any renewal option) relating thereto and such
leased property is not subject to any failure to have the right to quiet
enjoyment. There has been provided to the lessor of the building at 255
California Street, San Francisco, California, one or more notices reflecting or
evidencing Industrial Indemnity Company's earthquake insurance coverage for such
premises, and to Seller's knowledge such lessor has not objected to such
coverage.
Section 4.20 Transactions with Certain Persons. (a) Except as set
forth on Schedule 4.20(a), to the knowledge of Seller, neither any officer,
director or employee of Parent, Seller, the Company, any Subsidiary or any
Affiliate nor any member of any such Person's immediate family is presently a
party to any material transaction with the Company or any of its Subsidiaries,
including any contract or other binding arrangement (i) providing for the
furnishing of material services by such Person (except in such Person's capacity
as an officer, director, employee or consultant), (ii) providing for the rental
of material real or personal property from such Person, or (iii) otherwise
requiring material payments to (other than for services as officers, directors
or employees of Xerox, Parent, Seller, the Company or any Subsidiary) such
Person.
(b) Except as set forth on Schedule 4.20(b) or in the ordinary
course of business consistent with past practice, since December 31, 1996 no
intercompany trade receivables and payables have been settled between Seller or
any Affiliate (other than the Company and its Subsidiaries) on the one hand and
the Company and/or any Subsidiary on the other hand.
(c) Schedule 4.20(c) sets forth a true and complete list of all
written contracts, agreements or commitments between the Company or any of its
Subsidiaries and Xerox or any Affiliate (other than the Company and its
Subsidiaries) thereof as of the date of this Agreement which (i) cannot be
terminated upon less than 30 days' notice, and (ii) require payments annually of
more than $100,000.
(d) Except as set forth on Schedule 4.20(d), no indebtedness for
money borrowed is owed by the Company or any of its Subsidiaries to Seller or
any of its Affiliates (except for the Company and its Subsidiaries).
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Section 4.21 Reinsurance and Retrocessions. Schedule 4.21 contains a
true and complete list of all reinsurance and retrocession treaties and
agreements in force as of the date of this Agreement to which any Subsidiary is
a party (including any terminated or expired treaty or agreement under which as
of December 31, 1996 there remains an outstanding liability with respect to paid
or unpaid case reserves in excess of $100,000), any terminated or expired treaty
or agreement under which there remains any outstanding liability from one
reinsurer with respect to paid or unpaid case reserves in excess of $50,000 and
any treaty or agreement with any Affiliate of such Subsidiary, the effective
date of each such treaty or agreement, and the termination date of any treaty or
agreement which has a definite termination date. No Subsidiary is in default in
any respect as to any provision of any reinsurance or retrocession treaty or
agreement or has failed to meet the underwriting standards required for any
business reinsurance thereunder except for defaults, which would not,
individually or in the aggregate, have a Material Adverse Effect.
Section 4.22 Environmental Laws. (a) To knowledge of the Seller,
except as set forth on Schedule 4.22 and as would not, individually or in the
aggregate, have a Material Adverse Effect: (i) the Company and each of its
Subsidiaries is in compliance with all applicable Environmental Laws, and
possesses and is in compliance with all Environmental Permits required under
such laws, (ii) there are no past or present events, conditions, circumstances,
practices, plans or legal requirements that would reasonably be expected to
prevent, or materially increase the burden on the Company or any of its
Subsidiaries of complying with applicable Environmental Laws or of their
obtaining, renewing, or complying with all Environmental Permits required under
such laws; and (iii) there are and have been no conditions at any property
owned, operated or otherwise used by the Company or any Subsidiary now or in the
past, or at any other location, that would reasonably be expected to give rise
to liability of the Company or any of its Subsidiaries under any Environmental
Law.
(b) Notwithstanding the representations contained in this Section,
Buyer acknowledges that Seller is not making any representations (express or
implied in or pursuant to this Agreement) with respect to any violation of or
noncompliance with Environmental Law or Environmental Permits, or failure to
obtain Environmental Permits, in each case by reason of any insurance,
reinsurance, indemnity, guaranty or assumption of liability policy of any party,
entered into by the Company or any Insurance Subsidiary.
Section 4.23 Insurance Coverage. The Company has furnished to Buyer
a list of all policies of insurance relating to the assets, properties,
business, operations, employees, officers or directors of the Company and each
of its Subsidiaries. Each such policy is in full force and effect and no notice
of termination of such policy has been received by the Company or any of its
Subsidiaries. The Company maintains insurance relating to such assets,
properties, business, operations, employees, officers and directors which is
reasonable for a company of its size engaged in the property and casualty
insurance business.
Section 4.24 Insurance Regulatory Matters. To the knowledge of
Seller, except for routine complaints made by policyholders that relate solely
to their individual insurance contracts, there is no material proceeding with
respect to the Company or its Insurance
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Subsidiaries which has been commenced by the insurance regulatory body of any
state and is currently pending.
Section 4.25 Powers of Attorney. Except as set forth in Schedule
4.25, neither the Company nor any Subsidiary has any power of attorney
outstanding in favor of any other party.
Section 4.26 KPMG Report. Seller has delivered to Buyer a true and
complete copy of that certain report entitled "Industrial Indemnity Holdings,
Inc. Review of Loss and Loss Adjustment Expense Reserves as of December 31,
1996" (the "KPMG Report"). The information and data furnished to KPMG Peat
Marwick in connection with its preparation of the KPMG Report were accurate in
all material respects, provided that the foregoing representation does not and
is not intended to constitute in any way a representation as to the completeness
or accuracy of the KPMG Report itself.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF BUYER AND FREMONT GENERAL
Buyer and Fremont General hereby jointly and severally represent and
warrant to Seller as follows:
Section 5.1 Organization and Related Matters. (a) Buyer is a
corporation, duly organized, validly existing and in good standing under the
laws of the State of California. Buyer has the corporate power and authority to
carry on its business as it is now being conducted and to own, lease or operate
all of its properties and assets. The copies of the Certificate of Incorporation
and By-Laws and any amendments thereto of Buyer previously delivered to the
Company are complete and correct copies of such instruments as in effect as of
the date of this Agreement.
(b) Fremont General is a corporation duly incorporated, validly
existing and in good standing under the laws of the State of Nevada. Fremont
General has the corporate power and authority to carry on its business as it is
now being conducted and to own, lease or operate all of its properties and
assets. The copies of the Certificate of Incorporation and By-laws and any
amendments thereto of Fremont General heretofore delivered to Seller are
complete and correct copies of such instruments as in effect as of the date of
this Agreement.
Section 5.2 Authority; No Violation. (a) Each of Buyer and Fremont
General has full corporate power and authority to execute and deliver this
Agreement and to consummate the transactions contemplated hereby. The execution
and delivery of this Agreement and the consummation of the transactions
contemplated hereby have been duly and validly approved by all requisite
corporate action on the part of Buyer and Fremont General, and no other
proceedings on the part of Buyer or Fremont General are necessary to approve
this Agreement and to consummate the transactions contemplated hereby. This
Agreement has been duly and validly
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executed and delivered by Buyer and Fremont General and (assuming the due
authorization, execution and delivery of this Agreement by Seller) constitutes a
valid and binding obligation of each of Buyer and Fremont General, enforceable
against them in accordance with its terms, except as enforcement may be limited
by general principles of equity, whether applied in a court of law or a court of
equity, and by bankruptcy, insolvency, moratorium and similar laws affecting
creditors' rights and remedies generally.
(b) Neither the execution and delivery of this Agreement by Buyer
and Fremont General, nor the consummation by Buyer and Fremont General of the
transactions contemplated hereby to be performed by it, nor compliance by Buyer
or Fremont General with any of the terms or provisions hereof, will (i) violate
any provision of the Certificate of Incorporation or By-Laws of Buyer or Fremont
General, or (ii) assuming that the consents and approvals referred to in Section
5.3 are duly obtained, (x) violate in any material respect any Applicable Law
with respect to Buyer or Fremont General, or any of their respective properties
or assets or (y) violate, conflict with, result in a breach of any provision of,
or constitute a default under any note, bond, mortgage, indenture, deed of
trust, license, lease, agreement or other instrument or obligation to which
Buyer or Fremont General is a party, or by which Buyer or Fremont General or any
of their respective properties or assets may be bound or affected, except for
such violations, conflicts, breaches or defaults which, would not, individually
or in the aggregate, prevent or materially delay the performance by Buyer or
Fremont General of any of their respective obligations hereunder.
Section 5.3 Consents and Approvals. Except for (a) approvals or
consents of Governmental Authorities under the insurance holding company laws of
the states in which the Insurance Subsidiaries are domiciled or are otherwise
required to be obtained in connection with such approvals, (b) the applicable
filings under the HSR Act, (c) the matters set forth on Schedule 5.3, and (d)
such other filings, authorizations, consents or approvals the failure to make or
obtain which would not, individually or in the aggregate, prevent or materially
delay the performance by the Buyer or Fremont General of any of their respective
obligations pursuant to this Agreement, no consents or approvals of or filings
or registrations with any Governmental Authority or any third party are
necessary in connection with (i) the execution and delivery by Buyer and Fremont
General of this Agreement, and (ii) the consummation by Buyer and Fremont
General of the transactions contemplated hereby.
Section 5.4 Legal Proceedings. Neither Buyer nor Fremont General is
a party to any, and there are no pending or, to Buyer's and Fremont General's
knowledge, threatened Actions against or otherwise affecting Buyer or Fremont
General or their respective properties or assets or challenging the validity or
propriety of the transactions contemplated by this Agreement which, if adversely
determined, would, individually or in the aggregate, prevent or materially delay
the performance by Buyer or Fremont General of any of their respective
obligations pursuant to this Agreement, and there is no injunction, order,
judgment, decree or regulatory restriction imposed upon Buyer or Fremont General
or their respective properties or assets which would, individually or in the
aggregate, prevent or materially delay the performance by the Buyer or Fremont
General of any of their respective obligations pursuant to this Agreement.
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Section 5.5 Investment Intent of Buyer. The Shares to be acquired
under this Agreement will be acquired by Buyer for its own account and not for
the purpose of a distribution. Buyer will refrain from transferring or otherwise
disposing of any of the Shares acquired by it, or any interest therein, in such
manner as to violate any registration provision of the Securities Act of 1933,
as amended, or any applicable state securities law regulating the disposition
thereof. Buyer agrees that the certificates representing the Shares may bear
legends to the effect that the Shares have not been registered under the
Securities Act of 1933, as amended, or such other state securities laws, and
that no interest therein may be transferred or otherwise disposed of in
violation of the provisions thereof.
Section 5.6 Investment Company. Buyer is not an investment company
subject to registration and regulation under the Investment Company Act of 1940,
as amended.
Section 5.7 No Other Broker. Other than Goldman, Sachs & Co., the
fees and expenses of which will be paid by Buyer, no broker, finder or similar
intermediary has acted for or on behalf of Buyer or any Affiliate of Buyer, or
is entitled to any broker's, finder's or similar fee or other commission from
Buyer, or any Affiliate of Buyer, in connection with this Agreement or the
transactions contemplated hereby.
Section 5.8 Financing. At the Closing, Buyer will have sufficient
cash to consummate the transactions contemplated hereby and to pay all related
fees and expenses.
ARTICLE VI
COVENANTS
Section 6.1 Conduct of Business. During the period from the date of
this Agreement through the Closing Date, except as contemplated or permitted by
this Agreement or with the written consent of Buyer, Seller shall cause the
Company and its Subsidiaries to use their reasonable best efforts to (a) carry
on their business in the ordinary course consistent with past practice, (b)
preserve their present business organization and relationships, (c) keep
available the present services of their employees, (d) preserve the rights,
franchises, goodwill and relations of their customers and others with whom
business relationships exist, (e) perform in all material respects all of their
obligations under all Contracts, where the failure to so perform such
obligations would have a Material Adverse Effect, and (f) comply in all material
respects with all Applicable Laws relating to the Company and its Subsidiaries.
Without limiting the generality of the foregoing, except as contemplated or
permitted by this Agreement or consented to by Buyer in writing, and whether or
not any such actions would (individually or in the aggregate) constitute a
Material Adverse Effect, Seller shall not (and shall cause the Company and the
Company's Subsidiaries to not) take any of the actions referred to in paragraphs
(a) through (p) of Section 4.11 (excluding paragraph (o) thereof) between the
date of this Agreement and the Closing Date.
Section 6.2 Confidentiality and Announcements. (a) Except as
provided in Section 6.2(b), neither Seller, nor Buyer, nor any of their
respective Affiliates, shall publicly
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disclose the execution, delivery or contents of this Agreement, other than (i)
with the prior written consent of the other party hereto, (ii) to ratings
agencies upon prior written notice to the other party, provided that all
schedules to this Agreement are omitted, or (iii) as required by any Applicable
Law or the rules of any stock exchange upon prior notice to the other party
hereto.
(b) Buyer and Seller shall agree with each other as to the form and
substance of any press release related to this Agreement or the transactions
contemplated hereby, and shall consult each other as to the form and substance
of other public disclosures related thereto, provided, however, that nothing
contained herein shall prohibit either party, following notification to the
other party if practicable, from making any disclosure which its counsel
determines to be required by any Applicable Law or the rules of any stock
exchange.
Section 6.3 Expenses. Regardless of whether any or all of the
transactions contemplated by this Agreement are consummated, and except as
otherwise expressly provided herein, Buyer and Seller shall each bear their
respective direct and indirect expenses incurred in connection with the
negotiation and preparation of this Agreement and the consummation of the
transactions contemplated hereby.
Section 6.4 Access; Certain Communications. Between the date of this
Agreement and the Closing Date, subject to Applicable Laws relating to the
exchange of information, Seller shall (and shall cause the Company and its
Subsidiaries to) afford to Buyer and its authorized agents and representatives
complete access, upon reasonable notice and during normal business hours, to (A)
all properties, contracts, documents and information of or relating to the
assets, liabilities, business, operations and other aspects of the business of
the Company and its Subsidiaries, and (B) the employees, agents, customers,
accountants and actuaries of the Company and its Subsidiaries; provided,
however, that (i) Buyer shall have informed Seller of the general substance of
any communication prior to communicating with any such employees, agents,
customers, accountants or actuaries, and (ii) when communicating with any such
persons, such representative of Buyer shall be accompanied, if Seller so elects,
by a representative of Seller. Seller shall cause the Company Employees to
provide reasonable assistance to Buyer in Buyer's investigation of matters
relating to the purchase of the Shares, provided, however, that Buyer's
investigation shall be conducted in a manner which does not interfere with the
Company's or its Subsidiaries' normal operations, customers and employee
relations. Subject to the foregoing, the terms of the Confidentiality Agreement
shall govern Buyer's and its agents' and representatives' obligations with
respect to all confidential information with respect to the Company or its
Subsidiaries which has been provided or made available to them at any time,
including during the period between the date of this Agreement and the Closing
Date.
Section 6.5 Regulatory Matters; Third Party Consents. (a) Buyer and
Seller shall cooperate with each other and use reasonable best efforts promptly
to prepare and file all necessary documentation, to effect all applications,
notices, petitions and filings, and to obtain as promptly as practicable all
permits, consents, approvals, waivers and authorizations of all third parties
and Governmental Authorities which are necessary or advisable to consummate the
transactions contemplated by this Agreement. Buyer and Seller shall have the
right to review in advance, and shall consult with the other on, in each case
subject to Applicable Laws relating to the exchange of information, all the
information relating to Seller, the Company and its
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Subsidiaries or Buyer, as the case may be, and any of their respective
Affiliates, which appear in any filing made with, or written materials submitted
to, any third party or any Governmental Authority in connection with the
transactions contemplated by this Agreement, provided, however, that nothing
contained herein shall be deemed to provide either party with a right to review
any information provided to any Governmental Authority on a confidential basis
in connection with the transactions contemplated hereby. The parties hereto
agree that they will consult with each other with respect to the obtaining of
all permits, consents, approvals and authorizations of all third parties and
Governmental Authorities necessary or advisable to consummate the transactions
contemplated by this Agreement and each party shall keep the other apprised of
the status of matters relating to completion of the transactions contemplated
herein. The party responsible for any such filing shall promptly deliver to the
other party evidence of the filing of all applications, filings, registrations
and notifications relating thereto (except for any confidential portions
thereof), and any supplement, amendment or item of additional information in
connection therewith (except for any confidential portions thereof). The party
responsible for a filing shall also promptly deliver to the other party a copy
of each material notice, order, opinion and other item of correspondence
received by such filing party from any Governmental Authority in respect of any
such application (except for any confidential portions thereof). In exercising
the foregoing rights and obligations, Buyer and Seller shall act reasonably and
as promptly as practicable.
(b) Without limiting the generality of the foregoing, within 20
Business Days after the date hereof, Buyer shall make Form A filings with the
insurance departments of the States of California, Alaska, Idaho, Utah and
Washington with respect to the transactions contemplated hereby. Buyer shall
promptly make any and all other filings and submissions of information with such
insurance departments which are required or requested by such insurance
departments in order to obtain the approvals required by such insurance
departments to consummate the transactions contemplated hereby. Seller agrees to
furnish Buyer with such information and reasonable assistance as Buyer may
reasonably request in connection with its preparation of such Form A filings and
other filings or submissions. Buyer shall keep Seller fully apprised of its
actions with respect to all such filings and submissions and shall provide
Seller with copies of such Form A filings and other filings or submissions in
connection with the transactions contemplated by this Agreement, provided that
Seller shall keep confidential any portions of such filings indicated by Buyer
as confidential.
(c) Buyer and Seller shall, upon request, furnish each other with
all information concerning themselves, their subsidiaries, directors, officers
and stockholders and such other matters as may be reasonably necessary in
connection with any statement, filing, notice or application made by or on
behalf of Buyer, the Company or any of their respective Affiliates to any
Governmental Authority in connection with the transactions contemplated by this
Agreement (except to the extent that such information would be, or relates to
information that would be, filed under a claim of confidentiality).
(d) Buyer and Seller shall promptly advise each other upon receiving
any communication from any Governmental Authority whose consent or approval is
required for consummation of the transactions contemplated by this Agreement
which causes such party to
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believe that there is a reasonable likelihood that any requisite regulatory
approval will not be obtained or that the receipt of any such approval will be
materially delayed.
Section 6.6 Further Assurances. Each of the parties hereto shall
execute such documents and other papers and perform such further acts as may be
reasonably required to carry out the provisions hereof and the transactions
contemplated hereby. Each such party shall, on or prior to the Closing Date, use
reasonable best efforts to fulfill or obtain the fulfillment of the conditions
precedent to the consummation of the transactions contemplated hereby, including
the execution and delivery of any documents, certificates, instruments or other
papers that are reasonably required for the consummation of the transactions
contemplated hereby.
Section 6.7 Notification of Certain Matters. Each party shall give
prompt notice to the other party of (i) the occurrence, or failure to occur, of
any event or existence of any condition that has caused or could reasonably be
expected to cause any of its representations or warranties contained in this
Agreement to be untrue or inaccurate in any material respect at any time after
the date of this Agreement, up to and including the Closing Date (except to the
extent such representations and warranties speak as of a particular date), and
(ii) any failure on its part to comply with or satisfy, in any material respect,
any covenant, condition or agreement to be complied with or satisfied by it
under this Agreement. Seller may, prior to the Closing, by written notice to
Buyer, supplement any Schedule to reflect any change or event that occurs after
the date of this Agreement or to otherwise correct or amend any such Schedule.
Such supplemental Schedules shall be deemed to cure any breach of any of
Seller's representations or warranties for purposes of Section 7.1(a) unless the
cumulative impact of all matters disclosed on such supplemental Schedules
constitutes a Material Adverse Effect. If the Closing has occurred, and such
cumulative impact constituted a Material Adverse Effect, any such supplemental
Schedule will be effective to cure and correct any breach (which would have
existed if Seller had not made such supplement) of any such representation or
warranty for all purposes (including without limitation Articles IV and VIII
hereof). If the Closing has occurred, and such cumulative impact did not
constitute a Material Adverse Effect, any such supplemental Schedule will be
effective to cure and correct any breach (which would have existed if Seller had
not made such supplement) of any such representation or warranty for all
purposes (including without limitation Articles IV and VIII hereof), except to
the extent that the matters disclosed on any such Schedule (i) have the effect
of correcting an inaccuracy as of the date hereof of a representation or
warranty included in Article IV or (ii) occurred out of the ordinary course of
the Company's workers compensation business after the date hereof and prior to
the Closing.
Section 6.8 Maintenance of Records. Through the Closing Date, Seller
shall cause the Company and its Subsidiaries to maintain the Records in all
material respects in the same manner and with the same care that the Records
have been maintained prior to the execution of this Agreement. From and after
the Closing Date, each of the parties shall permit the other party reasonable
access on reasonable prior notice to any applicable Records in its possession or
in the possession of its Affiliates, and the right to duplicate such Records, to
the extent that the requesting party has a reasonable business purpose for
requesting such access or duplication. Without limiting the generality of the
foregoing, Buyer agrees and acknowledges that following the Closing it will
provide Seller with full access to any Records reasonably deemed necessary by
Seller to enable Seller to prepare the Closing Balance Sheet. Each party
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hereto shall notify the other party of any extension of any applicable statute
of limitations related to the Records retained pursuant to this Section, and
Buyer shall obtain the consent of Seller before destroying any of such Records.
Section 6.9 Employees and Employee Plans. (a) General. (i) Except as
provided otherwise in Section 4.13(g), no provision of this Agreement shall be
construed to prohibit the Company or its Subsidiaries from having the right to
terminate the employment of any Company Employee, with or without cause, or to
amend or to terminate after the Closing any employee benefit plan established,
maintained or contributed to by the Company or its Subsidiaries.
(ii) Service by the Company Employees with the Company, Seller or
any of their Affiliates shall be recognized under each benefit plan, program or
arrangement established, maintained or contributed to by Buyer, the Company or
any of their Affiliates after the Closing for the benefit of any Company
Employee for purposes of eligibility to participate and vesting, but in no event
shall such service prior to the Closing Date be taken into account in
determining the accrual of benefits under any such benefit plan or arrangement,
including, without limitation, a defined benefit plan. Seller shall provide
Buyer no later than 30 days prior to the Closing with evidence of full vesting
of Company Employees under the Retirement Plan, the SERP and the IRP, and Buyer
and Seller each acknowledge that the IRP vesting rules also govern participating
Company Employees' vesting under the SIRP.
(iii) The parties acknowledge that any former employees included
within the definition of Company Employees shall have, after the Closing, such
re-employment rights, if any, as may be available to them under Applicable Law
with respect to the Company and its Subsidiaries and not with respect to Seller
or any of its other Affiliates.
(iv) Buyer shall, or shall cause the Company to notify Seller in the
event that the employment of any Company Employee who also is a "Covered
Employee" under the Talegen Holdings, Inc. Retention Incentive Plan terminates
within the 12-month period beginning on the Closing Date and provide to Seller
such information as Seller may reasonably request to enable Seller to determine
such Company Employee's eligibility for a retention benefit under such Plan.
Seller hereby acknowledges and agrees that it shall remain solely liable and
retain all liability for all obligations arising under and benefits payable from
the Talegen Holdings, Inc. Retention Incentive Plan. Buyer shall not be
responsible for any obligations arising thereunder and shall not be liable for
any payments required to be made thereunder. Buyer hereby acknowledges and
agrees that the Company will remain, after the Closing Date, subject to the
obligations imposed on the "Company" under the Enhanced Severance Benefit Plan
of Industrial Indemnity Company.
(b) Welfare Plans. Prior to the Closing Date, Seller shall take
whatever corporate action is necessary to ensure that the Company and its
Subsidiaries shall cease being "participating employers" and shall cease
co-sponsorship of any Plans that are welfare plans (as defined in Section 3(1)
of ERISA) and that are jointly adopted, sponsored or maintained by Seller and
the Company or its Subsidiaries as of the Closing Date. The participation of
Company Employees in any welfare plans sponsored by Seller shall be terminated
as of the Closing Date, and neither Buyer nor the Company or its Subsidiaries
shall have any liability or obligations with respect to such welfare plans after
the Closing Date. The Company shall retain responsibility for providing medical
benefits to all Company Employees including Company Employees receiving or
eligible to receive benefits under the Talegen Holdings, Inc. Long Term
Disability Plan.
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(c) Defined Benefit Plan. The Retirement Plan shall retain liability
for all benefits accrued through the Closing Date with respect to the Company
Employees. Effective as of the Closing Date, all Company Employees shall be
deemed, for all purposes in applying the Retirement Plan, to have terminated
their service on that date.
(d) Defined Contribution Plan. As soon as practicable following the
Closing Date, Seller shall take whatever action is necessary (i) to permit
Company Employees to elect a distribution of their benefit from the IRP in
accordance with Applicable Law, and (ii) in accordance with Seller's current
practice and Applicable Law, to permit Company Employees who do not elect a
distribution of their benefit from the IRP to continue to repay any outstanding
loan balances existing under the IRP as of the Closing Date.
(e) Severance and Retention Plans. (i) The Company and its
Subsidiaries shall retain in place and be responsible for all payments required
under the Enhanced Severance Plan of Industrial Indemnity Company. Seller shall
have no liability for any payments made or owing under such plan with respect to
terminations of employment which occur subsequent to the Closing Date.
(ii) The Company or one of its Subsidiaries shall make all payments
required to be made to any current or former Company or Subsidiary employee
under the Retention Incentive Plan of Talegen Holdings, Inc. Seller shall
promptly reimburse, on an after-tax basis (determined at the maximum applicable
corporate tax rate), the Company and its Subsidiaries, as appropriate, for any
such payments.
(f) Puccinelli Letter Agreement. The Company shall make all payments
required to be made under the Puccinelli Letter Agreement. Seller shall promptly
reimburse, on an after-tax basis (determined at the maximum applicable corporate
tax rate) the Company for an amount equal to the excess (if any) of (A) the
amount for which the Company is obligated under Section 5.b of the Puccinelli
Letter Agreement, as determined by Seller in its sole discretion in accordance
with the terms of such section, over (B) the sum of $750,000.
(g) Further Assurances. Buyer and Seller agree to cooperate to carry
out the duties and responsibilities set forth in this Section 6.9. In addition,
Seller agrees to make available to Buyer such information as Buyer may
reasonably request to carry out the provisions of this Section 6.9.
Section 6.10 Pre-Closing Dividends. Between the date hereof and
the Closing, Seller shall not permit the Company to pay dividends to Seller.
Section 6.11. FIRPTA Certificate. At or prior to the Closing, Seller
shall provide Buyer with a certificate described in Treasury Regulations Section
1.1445-5(b)(3) to the effect
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that, as contemplated by such certificate, Seller is not a foreign corporation,
foreign partnership, foreign trust or foreign estate (as those terms are defined
in the Code and regulations thereunder).
Section 6.12. Exclusivity. Unless and until this Agreement shall
have been terminated by either party pursuant to Section 9.1 hereof, Seller
shall not, and shall cause its Affiliates to not, directly or indirectly,
through any officer, director, agent or otherwise, (i) solicit, initiate or
knowingly encourage submission of proposals or offers from any person relating
to any acquisition or purchase of all or substantially all of the assets of, or
any equity interest in, the Company or any of its Subsidiaries, or any merger,
consolidation, business combination or substantially similar transaction with
the Company or any of its Subsidiaries, or (ii) knowingly participate in any
discussions or negotiations regarding, furnish to any other person any
confidential information with respect to, or otherwise knowingly cooperate in
any way with, or participate in, facilitate or knowingly encourage, any effort
or attempt by any other person to do or seek any of the foregoing. In the event
Seller or any of its Affiliates prior to termination of this Agreement receives
from any third party any offer or indication of interest regarding any of the
transactions referred to in the foregoing sentence, or any request for
information about the Company or any of its Subsidiaries with respect to any of
the foregoing, then the material terms of each such offer, indication of
interest, or request, including the identity of the third party, shall be
communicated promptly to Buyer.
Section 6.13. Tax Sharing Agreement Releases. At or prior to
Closing, Seller shall cause the Company and each of its Subsidiaries to execute
and deliver to Seller, and Seller shall execute and deliver to the Company and
each of its Subsidiaries, releases with respect to any prior tax sharing
agreements in the form attached as Exhibit C.
Section 6.14. Non-Solicitation and Non-Competition.
(a) Non-Solicitation by Seller. Subject to Section 6.14(d), Seller
covenants and agrees that, for a period commencing on the date of this Agreement
and ending on the fifth anniversary of the Closing Date (the "Designated
Period"), neither Seller nor any of its subsidiaries shall:
(i) solicit, encourage, or take any other action which is
intended to induce any existing employee or consultant of Buyer, the
Company or any of Buyer's Affiliates to terminate employment with Buyer,
the Company or any of Buyer's Affiliates; or
(ii) interfere in any manner with the contractual or
employment relationship between Buyer, the Company or any of Buyer's
Affiliates and any employee, consultant or policyholder of Buyer, the
Company or any of Buyer's Affiliates.
(b) Non-Solicitation by Buyer. Subject to Section 6.14(d), Buyer
covenants and agrees that, during the Designated Period, neither Buyer nor any
of its subsidiaries shall:
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(i) solicit, encourage, or take any other action which is
intended to induce any existing employee or consultant of Seller or any of
Seller's Affiliates to terminate employment with Seller or any of Seller's
Affiliates; or
(ii) interfere in any manner with the contractual or
employment relationship between Seller or any of Seller's Affiliates and
any employee, consultant or policyholder of Seller or any of Seller's
Affiliates.
(c) Non-Competition. Subject to Section 6.14(d), Seller covenants
and agrees that, during the Designated Period, neither Parent nor any of its
subsidiaries shall engage in the business of underwriting workers compensation
insurance policies (the "Restricted Business"); provided, however, that the
foregoing prohibition shall not prohibit or otherwise limit any of the insurance
company subsidiaries of Crum & Forster Holdings, Inc. (which is a direct
subsidiary of Seller) from engaging in the Restricted Business consistent in all
material respects with their past business practices. To Seller's knowledge,
between January 1, 1997 and the date of this Agreement, neither Seller nor the
Company nor any of its Subsidiaries has provided to Crum & Forster Holdings,
Inc. or any of its subsidiaries any written listing of the customers of the
Company and its Subsidiaries. Seller agrees that it shall not (and it shall not
prior to the Closing Date permit the Company or any of its Subsidiaries to)
provide any such listing to Crum & Forster Holdings, Inc. or any of its
subsidiaries.
(d) Cessation to be Affiliate. The provisions of Sections 6.14(a),
6.14(b) and 6.14(c) shall automatically cease to apply as between Buyer and any
subsidiary of Parent at the time that such subsidiary is sold to a purchaser
that is not an Affiliate of Parent, or such subsidiary otherwise ceases to be an
Affiliate of Parent.
(e) Specific Performance. Seller and Buyer each acknowledges that
pursuant to this Agreement Seller is transferring all the Shares of the Company,
and that Seller and Buyer each will be irreparably injured if the provisions of
this Section 6.14 are not specifically enforced against the other party. If
Seller commits or, in the reasonable belief of Buyer threatens to commit, a
breach of any of the provisions of this Section 6.14, Buyer shall have the right
and remedy, in addition to any other remedy that may be available at law or in
equity, to have the provisions of this Section 6.14 specifically enforced by any
court having equity jurisdiction, it being acknowledged and agreed that any such
breach or threatened breach will cause irreparable injury to Buyer and that
money damages will not provide an adequate remedy therefor. If Buyer commits or,
in the reasonable belief of Seller threatens to commit, a breach of any of the
provisions of this Section 6.14, Seller shall have the right and remedy, in
addition to any other remedy that may be available at law or in equity, to have
the provisions of this Section 6.14 specifically enforced by any court having
equity jurisdiction, it being acknowledged and agreed that any such breach or
threatened breach will cause irreparable injury to Seller and that money damages
will not provide an adequate remedy therefor.
(f) Severability. The parties intend that the covenants contained in
the preceding paragraphs of this Section 6.14 shall be construed as a series of
separate covenants,
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one for each state of the United States and the United States as a whole. Except
for geographic coverage, each such separate covenant shall be deemed identical
in terms to the covenant contained in the preceding paragraphs. If, in any
judicial proceeding, a court shall refuse to enforce any of the separate
covenants (or any part thereof) included or deemed included in any of the
preceding paragraphs, then such unenforceable covenant (or such part) shall be
deemed eliminated from this Agreement for the purpose of those proceedings to
the extent necessary to permit the remaining separate covenants (or portions
thereof) to be enforced. In the event that the provisions of this Section 6.14
should ever be deemed to exceed the time or geographic limitations, or the scope
of the covenants contained therein, permitted by Applicable Law, then such
provisions shall be reformed to the maximum time or geographic limitations, as
the case may be, permitted by Applicable Law.
Section 6.15 Investment Policies and Guidelines. Seller shall cause
the Company and its Subsidiaries to manage their investment portfolios in all
material respects in accordance with the investment policies and guidelines set
forth on Schedule 6.15, except as otherwise agreed by Buyer in writing.
Section 6.16 Intercompany Note. On the Closing Date,
contemporaneously with the Closing of the other transactions contemplated by
this Agreement, Seller shall sell to Fremont General, and Fremont General shall
purchase from Seller, the Intercompany Note for a purchase price of $78,750,000
plus all accrued and unpaid interest thereon, payable in cash by Wire Transfer.
Section 6.17 Litigation. Between the date hereof and the Closing
Date, Seller will not permit the Company or its Subsidiaries to settle or agree
to settle any litigation, action or proceeding against the Company or any of its
Subsidiaries in which the Company or any of its Subsidiaries is a named party,
without first consulting with Buyer concerning the terms of such settlement.
Without limiting the foregoing, the Company and its Subsidiaries shall not be
required to obtain the consent of Buyer with respect to any such settlement.
Section 6.18 Capital Contribution. Prior to the Closing, Seller
shall make a capital contribution to the Company in the amount of $2,270,000.
ARTICLE VII
CONDITIONS TO CLOSING
Section 7.1 Conditions to Buyer's Obligations. In addition to the
conditions set forth in Section 7.3, the obligations of Buyer to effect the
Closing shall be subject to the following conditions, any one or more of which
may be waived in writing by Buyer:
(a) The representations and warranties of Seller set forth in this
Agreement shall be true and correct in all material respects (except that
representations and warranties qualified by materiality or Material
Adverse Effect shall be true and correct in all respects) as of the date
of this Agreement and (except to the extent such
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representations and warranties speak as of an earlier date) as of the
Closing Date as though made on and as of the Closing Date;
(b) Seller shall (and shall cause the Company to) have performed and
complied in all material respects with all agreements, covenants,
obligations and conditions required by this Agreement to be performed or
complied with by Seller or the Company, as the case may be, on or prior to
the Closing Date;
(c) The aggregate principal amount outstanding under the XFS
Promissory Notes shall have been repaid in full and the XFS Promissory
Notes shall have been canceled;
(d) Seller shall have caused all appropriate stock transfer tax
stamps to be affixed to the certificate or certificates representing
the Shares;
(e) Article XIII of the Ridge Re Agreement shall be amended through
the entering into of the Ridge Re Amendment (and such amendment shall have
the effect of eliminating any profit commission payment upon the
expiration of the term of such agreement and any commutation payment upon
the commutation of such agreement);
(f) On or prior to the Closing Date, the General Services Agreements
between Seller and each of the Insurance Subsidiaries, each dated January
1, 1993, as amended, shall have been terminated;
(g) Seller or Parent shall have paid (or caused an Affiliate of
Seller or Parent to pay) to Industrial Indemnity Company in respect of the
interest of Industrial Indemnity Company in the ground lease agreement
among Xerox, Industrial Indemnity Company and certain other subsidiaries
of Seller or the lease agreement among Parent, Industrial Indemnity
Company and such other subsidiaries, each dated as of December 1, 1985 and
each relating to approximately six acres of land in Loudoun County,
Virginia and a training facility thereon or its fee interest in such
facility (the "Leesburg Training Facility"), an amount equal to the
statutory carrying value of Industrial Indemnity Company's interest in the
Leesburg Training Facility at the time of such payment, and in
consideration for such payment, Industrial Indemnity Company shall have
transferred to Parent or an Affiliate of Parent any interests Industrial
Indemnity Company has in the Leesburg Training Facility at the time of
such payment by Seller or Parent. Upon any transfer of the Leesburg
Training Facility in accordance with this Section 7.1(g), Industrial
Indemnity Company shall have no further rights or obligations relating to
the Leesburg Training Facility;
(h) Seller shall have caused to be delivered to Buyer the Guarantee,
duly executed on behalf of Parent, and such Guarantee shall be in full
force and effect;
(i) Seller shall have made the capital contribution
described in Section 6.18; and
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(j) Buyer shall have received opinions, addressed to it and dated
the Closing Date, from the General Counsel of Seller and LeBoeuf, Lamb,
Greene & MacRae, L.L.P., counsel to Seller, substantially in the forms of
Exhibits D and E, respectively.
Section 7.2 Conditions to Seller's Obligations. In addition to the
conditions set forth in Section 7.3, the obligations of Seller to effect the
Closing shall be subject to the following conditions, any one or more of which
may be waived in writing by Seller:
(a) The representations and warranties of Buyer and Fremont General
contained in this Agreement shall be true in all material respects (except
representations and warranties qualified by materiality shall be true and
correct in all respects) as of the date of this Agreement and (except to
the extent such representations and warranties speak as of an earlier
date) on the Closing Date as though made on and as of the Closing Date;
(b) Buyer shall have paid all transfer taxes required to be paid in
connection with the sale and delivery to Buyer of the Shares, other than
transfer taxes paid by Seller pursuant to Section 7.1(d);
(c) Buyer shall have performed and complied in all material respects
with all agreements, covenants, obligations and conditions required by
this Agreement to be performed or complied with by Buyer on or prior to
the Closing Date;
(d) the purchase and sale of the Intercompany Note as described
in Section 6.16 shall have been consummated;
(e) The Company and each of its Subsidiaries shall have executed and
delivered to Seller releases with respect to any prior tax sharing
agreements in the form attached as Exhibit C; and
(f) Seller shall have received an opinion, addressed to it and dated
the Closing Date, from Wilson, Sonsini, Goodrich & Rosati, counsel to
Buyer and Fremont General, substantially in the form of Exhibit F.
Section 7.3 Mutual Conditions. The obligations of each of Buyer and
Seller to effect the Closing shall be subject to the following conditions, any
one or more of which may be waived in writing, as to itself, by either party:
(a) No order, injunction or decree issued by any Governmental
Authority of competent jurisdiction or other legal restraint or
prohibition preventing the consummation of the transactions contemplated
by this Agreement shall be in effect. No proceeding initiated by any
Governmental Authority seeking an injunction against the transactions
contemplated by this Agreement shall be pending. No statute, rule,
regulation, order, injunction or decree shall have been enacted, entered,
promulgated or enforced by any
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Governmental Authority which prohibits, restricts or makes illegal
consummation of the transactions contemplated hereby.
(b) All approvals of Governmental Authorities required to consummate
the transactions contemplated hereby (including, without limitation,
required approvals from the insurance regulatory authorities of the States
of California, Alaska, Idaho, Utah, Washington and the approvals listed on
Schedules 4.4 and 5.3) shall have been obtained without any conditions,
restrictions or limitations which would, in the reasonable opinion of
Buyer or Seller, have a Material Adverse Effect, or a material adverse
effect on the business, financial condition or results of operations of
Buyer and its Subsidiaries, taken as a whole, or the business, financial
condition or results of operations of Seller and its Subsidiaries, taken
as a whole, respectively, and such approvals shall remain in full force
and effect and all statutory waiting periods in respect thereof shall have
expired.
(c) In respect of the notifications of Buyer and Seller pursuant to
the HSR Act, the applicable waiting period and any extensions thereof
shall have expired or been terminated.
ARTICLE VIII
SURVIVAL OF REPRESENTATIONS, WARRANTIES,
COVENANTS AND AGREEMENTS; INDEMNIFICATION
Section 8.1 Survival. (a) Notwithstanding any right of Buyer to
investigate the affairs of the Company and its Subsidiaries, and notwithstanding
any knowledge of facts determined or determinable by Buyer pursuant to such
investigation or right of investigation, Buyer has the right to rely upon the
representations, warranties, covenants and agreements of Seller contained in
this Agreement. The representations and warranties of the parties set forth in
Sections 4.1, 4.2, 4.3, 4.5, 4.7, 5.1, 5.2, 5.5 and 5.7 shall survive the
Closing without limitation as to time. All other representations and warranties
of the parties set forth in this Agreement shall terminate and expire on March
31, 1999, except that the representations and warranties of Seller in Sections
4.13 and 4.14 shall survive until the expiration of the applicable statute of
limitations or extensions thereof with respect to the subject matter thereof.
Notice with respect to any claim in respect of any inaccuracy in or breach of
any representation or warranty shall be in writing and shall be given to the
party against which such claim is asserted. Any representation or warranty shall
survive the time it would otherwise terminate pursuant to this Section 8.1 to
the extent that the party claiming indemnification for such breach shall have
delivered to the other party written notice setting forth with reasonable
specificity the basis of such claim prior to the expiration of such time
pursuant to this Section 8.1.
(b) All covenants and agreements made by the parties to this
Agreement which contemplate performance following the Closing Date shall survive
the Closing. All unwaived covenants and agreements made by the parties to this
Agreement which contemplate performance prior to the Closing Date, and which are
not performed by such date, shall also survive the Closing, but a covenant or
agreement (excluding the covenants set forth in
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Section 6.1(e)) the non-performance of which has been disclosed to Buyer with
reasonable specificity prior to the Closing Date shall not survive the Closing.
All other covenants and agreements shall not survive the Closing and shall
terminate as of the Closing.
Section 8.2 Obligation of Seller to Indemnify, Reimburse, etc.
Subject to the limitations set forth in Sections 6.7, 8.1, 8.5, 8.6 and 8.7,
Seller shall indemnify, reimburse, defend and hold harmless Buyer and its
directors, officers, employees, Affiliates, and their respective successors and
assigns from and against any Loss incurred by any of them based upon, arising
out of or otherwise in respect of (i) any inaccuracy in or any breach of any
representation or warranty of Seller (after taking into account the exceptions
to such representations and warranties which are set forth on the Schedules, as
supplemented in accordance with Section 6.7, related to such representations and
warranties, and also assuming that each representation and warranty qualified by
the terms "material" or "Material Adverse Effect" were not so qualified), (ii)
the nonfulfillment on the part of Seller of any unwaived covenant or agreement
set forth in this Agreement which survives the Closing Date in accordance with
Section 8.1 (assuming that each covenant or agreement qualified by the term
"Material Adverse Effect" were not so qualified), and (iii) the failure of
Seller or any ERISA Affiliate on or before the Closing Date to operate any
employee benefit plan (as defined in Section 3(3) of ERISA) established,
maintained or sponsored by Seller or any ERISA Affiliate in accordance with the
terms of any such plan or Applicable Law.
Section 8.3 Obligation of Buyer and Fremont General to Indemnify,
Reimburse, etc. Subject to the limitations set forth in Sections 8.1, 8.5 and
8.7, Buyer and Fremont General shall jointly and severally indemnify, defend and
hold harmless Seller and its directors, officers, employees, Affiliates, and
their respective successors and assigns from and against any Loss incurred by
any of them based upon, arising out of or otherwise in respect of (i) any
inaccuracy in or breach of any representation or warranty of Buyer or Fremont
General (after taking into account the exceptions to such representations and
warranties which are set forth on the Schedules related to such representations
and warranties, and also assuming that each representation and warranty
qualified by the terms "material" or "Material Adverse Effect" were not so
qualified), and (ii) the nonfulfillment on the part of Buyer or Fremont General
of any unwaived covenant or agreement set forth in this Agreement which survives
the Closing Date in accordance with Section 8.1 (assuming that each covenant or
agreement qualified by the term "Material Adverse Effect" were not so
qualified).
Section 8.4 Notice and Opportunity to Defend Against Third Party
Claims. (a) Notice of Asserted Liability. Promptly after receipt from any third
party by either party hereto (the "Indemnitee") of a notice of any demand, claim
or circumstance that, immediately or with the lapse of time, would give rise to
a claim or the commencement (or threatened commencement) of any action,
proceeding or investigation (an "Asserted Liability") that may result in a Loss
for which indemnification may be sought hereunder, the Indemnitee shall give
written notice thereof (the "Claims Notice") to the party obligated to provide
indemnification pursuant to Section 8.2 or 8.3 (the "Indemnifying Party"),
provided, however, that a failure to give such notice shall not prejudice the
Indemnitee's right to indemnification hereunder except to the extent that the
Indemnifying Party is actually prejudiced thereby. The Claims Notice shall
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describe the Asserted Liability in reasonable detail, and shall indicate the
amount (estimated, if necessary) of the Loss that has been or may be suffered by
the Indemnitee.
(b) Opportunity to Defend. The Indemnifying Party may elect to
compromise or defend, at its own expense and by its own counsel, any Asserted
Liability. If the Indemnifying Party elects to compromise or defend such
Asserted Liability, it shall, within 20 Business Days following its receipt of
the Claims Notice (or sooner, if the nature of the Asserted Liability so
requires) notify the Indemnitee of its intent to do so, and the Indemnitee shall
cooperate, at the expense of the Indemnifying Party, in the compromise of, or
defense against, such Asserted Liability. If the Indemnifying Party elects not
to compromise or defend the Asserted Liability, fails to notify the Indemnitee
of its election as herein provided or contests its obligation to provide
indemnification under this Agreement, the Indemnitee may pay, compromise or
defend such Asserted Liability. Notwithstanding the foregoing, neither the
Indemnifying Party nor the Indemnitee may settle or compromise any claim without
the consent of the other party, provided, however, that such consent to
settlement or compromise shall not be unreasonably withheld. In any event, the
Indemnitee and the Indemnifying Party may participate, at their own expense, in
the defense of such Asserted Liability. If the Indemnifying Party chooses to
defend any claim, the Indemnitee shall make available to the Indemnifying Party
any books, records or other documents within its control that are necessary or
appropriate for such defense.
Section 8.5 Net Indemnity. The amount of any Loss from and against
which either party is liable to indemnify, reimburse, defend and hold harmless
the other party or any other Person pursuant to Section 8.2 or Section 8.3 shall
be reduced by any insurance or other recoveries or any Tax benefit that such
indemnified Person realizes or may realize as a result of or in connection with
such Loss and increased by any Taxes such indemnified Person realizes or may
realize in respect of indemnification for such Loss.
Section 8.6 Tax Indemnification. Section 8.2 hereof shall provide
indemnification to Buyer for Taxes only to the extent that such Taxes are not
addressed by the Tax Agreement. To the extent that Taxes are addressed by the
Tax Agreement, the provisions of the Tax Agreement shall govern the liabilities
and the indemnification rights and obligations of the parties without regard to
the limitations provided in this Article VIII.
Section 8.7 Limits on Indemnification. No party shall have any right
to seek indemnification under this Agreement (i) until Losses which would
otherwise be indemnifiable hereunder have been incurred by such party (including
by all other indemnitees affiliated with or related to such party), exceed
$10,000,000 in the aggregate, after insurance or other recoveries and on an
after-tax basis, and such party (including such affiliated or related persons)
shall only be entitled to be indemnified for Losses in excess of such aggregate
amount; (ii) for an aggregate amount of Losses which would otherwise be
indemnifiable hereunder in excess of $150,000,000; (iii) for punitive, special
or consequential damages incurred or suffered by such party (excluding amounts
which such party actually becomes obligated to pay to an unaffiliated third
party on account of punitive, special or consequential damages awarded to such
unaffiliated third party); or (iv) in respect of Losses to the extent such
Losses result from actions taken by such party or an Affiliate, employee,
representative or agent thereof after the Closing.
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ARTICLE IX
TERMINATION
Section 9.1 Termination. (a) This Agreement may be terminated
on or prior to the Closing Date only as follows:
(i) by written consent of Buyer and Seller;
(ii) at the election of either Buyer or Seller, if the Closing Date
shall not have occurred on or before December 31, 1997, provided that no
party shall be entitled to terminate this Agreement pursuant to this
Section 9.1(a)(ii) if such party's failure to fulfill any obligation under
this Agreement has been the cause of, or resulted in, the failure of the
Closing to occur on or before such date;
(iii) by either Buyer or Seller if a court of competent jurisdiction
shall have issued an order, decree or ruling permanently restraining,
enjoining or otherwise prohibiting the transactions contemplated by this
Agreement, and such order, decree, ruling or other action shall have
become final and nonappealable; or
(iv) by either Buyer or Seller if a condition to its obligation to
perform becomes incapable of fulfillment. Notwithstanding the foregoing,
the right to terminate this Agreement pursuant to this Section 9.1(a)(iv)
shall not be available to any party if its condition to perform became
incapable of fulfillment due to its failure to fulfill any obligation
under this Agreement.
(b) The termination of this Agreement shall be effectuated by the
delivery of a written notice of such termination from the party terminating this
Agreement to the other party.
Section 9.2 Obligations upon Termination. In the event that this
Agreement shall be terminated pursuant to Section 9.1, all obligations of the
parties hereto under this Agreement shall terminate and there shall be no
liability of any party hereto to any other party except (i) as set forth in
Section 6.2 and Section 6.3, and (ii) that nothing herein will relieve any party
from liability for any breach of this Agreement.
ARTICLE X
MISCELLANEOUS
Section 10.1 Amendments; Extension; Waiver. This Agreement may not
be amended, altered or modified except by written instrument executed by Buyer
and Seller.
Section 10.2 Entire Agreement. (a) This Agreement, the Tax Agreement
and the Confidentiality Agreement constitute the entire understanding of the
parties hereto with respect
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to the transactions contemplated hereby, and supersede all prior agreements and
understandings, written and oral, among the parties with respect to the subject
matter hereof. Buyer acknowledges that neither Seller or any of its Affiliates,
nor any representative or advisor of any of them, has made any representation or
warranty to Buyer except as specifically made in this Agreement. Except as
specifically provided for in this Agreement, all Tax matters among the parties
shall be governed by the Tax Agreement.
(b) Without limiting the provisions of clause (a) above, Buyer
acknowledges that neither Seller or any of its Affiliates, nor any
representative or advisor of any of them, has made any representation or
warranty to Buyer except as specifically made in this Agreement. In particular,
no such Person has made any representation or warranty to Buyer with respect to:
(i) any information set forth in the Confidential Offering Memorandum
distributed by Morgan Stanley & Co. Incorporated in connection with the proposed
sale of the Company and its Subsidiaries; or (ii) any financial projection or
forecast relating to the Company or its Subsidiaries. With respect to any such
projection or forecast delivered by or on behalf of Seller to Buyer, Buyer
acknowledges that: (A) there are uncertainties inherent in attempting to make
such projections and forecasts; (B) it is familiar with such uncertainties; (C)
it is taking full responsibility for making its own evaluation of the adequacy
and accuracy of all such projections and forecasts so furnished to it; (D) it is
not acting in reliance on any such projection or forecast so furnished to it;
and (E) it shall have no claim against any such Person with respect to any such
projection or forecast.
Section 10.3 Interpretation. When reference is made in this
Agreement to Sections, Exhibits or Schedules, such reference is to the Sections,
Exhibits or Schedules of this Agreement unless otherwise indicated. The table of
contents and headings contained in this Agreement are for reference purposes
only and shall not affect in any way the meaning or interpretation of this
Agreement. Whenever the words "include," "includes" or "including" are used in
this Agreement, they shall be deemed to be followed by the words "without
limitation." The phrases "the date of this Agreement," "the date hereof" and
terms of similar import, unless the context otherwise requires, shall be deemed
to refer to the date set forth in the first paragraph of this Agreement. The
words "hereof", "herein", "hereby" and other words of similar import refer to
this Agreement as a whole unless otherwise indicated. Whenever the singular is
used herein, the same shall include the plural, and whenever the plural is used
herein, the same shall include the singular, where appropriate.
Section 10.4 Severability. Any term or provision of this Agreement
which is invalid or unenforceable in any jurisdiction shall, as to that
jurisdiction, be ineffective to the extent of such invalidity or
unenforceability without rendering invalid or unenforceable the remaining terms
and provisions of this Agreement or affecting the validity or enforceability of
any of the terms or provisions of this Agreement in any other jurisdiction. If
any provision of this Agreement is so broad as to be unenforceable, that
provision shall be interpreted to be only so broad as is enforceable.
Section 10.5 Notices. All notices and other communications hereunder
shall be in writing and shall be deemed given if they are: (a) delivered in
person, (b) transmitted by facsimile (with confirmation), (c) mailed by
certified or registered mail
41
<PAGE>
(return receipt requested), or (d) delivered by an express courier (with
confirmation) to a party at its address listed below (or at such other address
as such party shall deliver to the other party by like notice):
To Seller: Talegen Holdings, Inc.
1011 Western Avenue, Suite 1000
Seattle, Washington 98104
Facsimile: (206) 654-2601
Attention: Richard N. Frasch, Esq.
General Counsel
With a copy to: LeBoeuf, Lamb, Greene & MacRae, L.L.P.
125 West 55th Street
New York, NY 10019-4513
Facsimile: (212) 424-8500
Attention: Peter R. O'Flinn
To Buyer: Fremont Indemnity Company
500 North Brand Boulevard
Glendale, CA 91203
Facsimile: (818) 549-4628
Attention: James E. Little
President and Chief Executive Officer
with copies to:
Fremont General Corporation
2020 Santa Monica Boulevard
Santa Monica, CA 90404
Facsimile: (310) 315-5594
Attention: Louis J. Rampino
President and Chief Operating Officer
and:
Wilson Sonsini Goodrich & Rosati
650 Page Mill Road
Palo Alto, CA 94304
Facsimile: (415) 493-6811
Attention: Alan K. Austin, Esq.
To Fremont General: Fremont General Corporation
2020 Santa Monica Boulevard
Santa Monica, CA 90404
Facsimile: (310) 315-5594
Attention: Louis J. Rampino
President and Chief Operating Officer
42
<PAGE>
with a copy to:
Wilson Sonsini Goodrich & Rosati
650 Page Mill Road
Palo Alto, CA 94304
Facsimile: (415) 493-6811
Attention: Alan K. Austin, Esq.
Section 10.6 Binding Effect; Persons Benefiting; No Assignment. This
Agreement shall inure to the benefit of and be binding upon the parties hereto
and the respective successors and permitted assigns of the parties and such
persons. Nothing in this Agreement is intended or shall be construed to confer
upon any entity or person other than the parties hereto and their respective
successors and permitted assigns any right, remedy or claim under or by reason
of this Agreement or any part hereof. Without the prior written consent of the
parties hereto, this Agreement may not be assigned by any of the parties hereto.
Section 10.7 Counterparts. This Agreement may be executed in two or
more counterparts, each of which shall be deemed an original, but all of which
taken together shall constitute one and the same agreement, it being understood
that all of the parties need not sign the same counterpart.
Section 10.8 No Prejudice. This Agreement has been jointly prepared
by the parties hereto and the terms hereof shall not be construed in favor of or
against any party on account of its participation in such preparation.
Section 10.9 Governing Law. THIS AGREEMENT, THE LEGAL RELATIONS
BETWEEN THE PARTIES AND THE ADJUDICATION AND THE ENFORCEMENT THEREOF SHALL BE
GOVERNED BY AND INTERPRETED AND CONSTRUED IN ACCORDANCE WITH THE SUBSTANTIVE
LAWS OF THE STATE OF NEW YORK.
Section 10.10 Service; Jurisdiction. Each of the parties hereto
agrees to personal jurisdiction in any action brought in any court, federal or
state, within the State of New York having subject matter jurisdiction over
matters arising under this Agreement.
Section 10.11 Specific Performance. Each of the parties hereto
acknowledges and agrees that the other parties hereto would be irreparably
damaged in the event any of the provisions of this Agreement were not performed
in accordance with their specific terms or were otherwise breached. Accordingly,
each of the parties hereto agrees that they each shall be entitled to an
injunction or injunctions to prevent breaches of the provisions of this
Agreement and to enforce specifically this Agreement and the terms and
provisions hereof in any action instituted in any court of the United States or
any state thereof having subject matter jurisdiction, in addition to any other
remedy to which any of the parties may be entitled, at law or in equity.
43
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed as of the date first set forth above.
TALEGEN HOLDINGS, INC.
By: /s/ GARY C. TOLMAN
----------------------
Name: Gary C. Tolman
Title: President
FREMONT INDEMNITY COMPANY
By: /s/ JAMES E. LITTLE
----------------------
Name: James E. Little
Title: President & CEO
FREMONT GENERAL CORPORATION
By: /s/ LOUIS J. RAMPINO
----------------------
Name: Louis J. Rampino
Title: President
<PAGE>
EXHIBIT A
GUARANTEE AGREEMENT
This GUARANTEE AGREEMENT (this "Guarantee") is made and entered into
as of _________, 1997 by and between Xerox Financial Services, Inc. (the
"Guarantor"), a Delaware corporation, and Fremont Indemnity Company, a
California corporation ("Buyer").
WHEREAS, Buyer, Fremont General Corporation, a Nevada corporation,
and Talegen Holdings, Inc., a Delaware corporation ("Talegen") and a
wholly-owned subsidiary of Guarantor, have entered into a Stock Purchase
Agreement dated as of May 16, 1997 (the "Purchase Agreement"), which provides
for the acquisition by Buyer of Industrial Indemnity Holdings, Inc., a Delaware
corporation ("II"), a wholly-owned subsidiary of Talegen;
WHEREAS, Ridge Reinsurance Limited, a Bermuda corporation ("Ridge
Re"), the Insurance Subsidiaries (as defined in the Purchase Agreement) and the
Guarantor have entered into a Springing First Aggregate Excess of Loss
Reinsurance Agreement dated as of December 31, 1992 (the "Ridge Re Agreement");
and
WHEREAS, as an inducement to Buyer to enter into and consummate the
transactions contemplated by the Purchase Agreement, Guarantor has agreed to
enter into this Guarantee;
NOW THEREFORE, in consideration of the foregoing and for other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto, intending to be legally bound, agree as
follows:
1. The Guarantor hereby unconditionally and irrevocably guarantees
to Buyer and to the other Protected Parties (as defined below) the due, punctual
and full payment of (a) all amounts payable by Talegen under Article VIII of the
Purchase Agreement and (b) all amounts payable by Ridge Re under the Ridge Re
Agreement, in each case as and when the same shall become due and payable in
accordance with the terms thereof. As used in this Agreement, the term
"Protected Parties" shall mean Buyer and its directors, officers, employees,
Affiliates (as defined in the Purchase Agreement) and their respective
successors and assigns, including II and its subsidiaries.
2. This guarantee is a guarantee of payment, performance and
compliance when due, and not a guarantee of collection, and is in no way
conditional or contingent upon any other event, contingency or circumstance
whatsoever (other than the condition that Talegen or Ridge Re, as the case may
be, fails to pay or perform its respective obligations when due or when required
to be performed).
3. The covenants and agreements of the Guarantor set forth in this
Guarantee and the Guarantor's obligations under this Agreement shall be
absolute, continuing, irrevocable and unconditional, shall not be subject to any
counterclaim, setoff, deduction, diminution,
<PAGE>
abatement, recoupment, suspension, deferment, reduction or defense (other than
full and strict compliance by the Guarantor with its obligations hereunder)
based upon any claim that the Guarantor or any other person or entity have
against Talegen, Ridge Re or any other person or entity (other than a Protected
Party), and shall remain in full force and effect without regard to, and shall
not be released, discharged or in any way affected by, any circumstance or
condition whatsoever (whether or not the Guarantor shall have any knowledge or
notice thereof). The obligations of the Guarantor set forth in this Guarantee
constitute the full recourse obligations of the Guarantor enforceable against it
to the full extent of all of the Guarantor's assets and properties,
notwithstanding any provision in any agreement limiting the liability of any
other person or entity.
4. The Guarantor hereby waives notice of, and consents to, any
change in the time, manner or place of payment or performance, and any other
amendment or waiver, or any consent to departure or other indulgence, from time
to time granted to Talegen or Ridge Re by Buyer or any other Protected Party
with respect to the matters guaranteed hereunder, and the Guarantor hereby
waives notice of nonperformance or nonpayment and, except as provided herein,
all other notices and demands whatsoever and any requirement that Buyer or any
other Protected Party protect, secure, perfect or insure any security interest
or lien or any property subject thereto or exhaust any right.
5. No amendment or waiver of any provision of this Guarantee nor any
consent to any departure by the Guarantor herefrom shall in any event be
effective unless the same shall be in writing and signed by the party or parties
against whom such amendment or waiver is sought to be enforced, and then such
waiver or consent shall be effective only in the specific instance and for the
specific purpose for which given. No failure on the part of any party to
exercise or delay in exercising any right hereunder shall operate as a waiver of
any of, nor shall any single or partial exercise of any right hereunder preclude
any other or further exercise thereof or the exercise of, any other right. The
remedies herein provided are cumulative and not exclusive of any remedies
provided by law.
6. The Guarantor represents and warrants to Buyer and to the
other Protected Parties as follows:
(a) The Guarantor is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware. The
Guarantor is duly qualified to do business in each jurisdiction in which the
ownership of properties by the Guarantor and the business and activities of the
Guarantor require such qualification, except where the failure to be so
qualified would not have a material adverse effect on the financial condition,
business or results of operation of the Guarantor or on the ability of the
Guarantor to perform its obligations under this Guarantee;
(b) The Guarantor has full power, authority and legal right to
own its properties and to carry on its business as now conducted and is duly
authorized and empowered to execute, deliver and perform its obligations under
this Guarantee; and
<PAGE>
(c) This Guarantee has been duly authorized, executed and
delivered by the Guarantor and constitutes a legal, valid and binding
instrument, enforceable against the Guarantor in accordance with its terms,
subject in the case of the enforcement of remedies to applicable bankruptcy,
insolvency, reorganization, moratorium and other similar laws affecting the
enforceability of creditor's rights generally.
(d) The execution, delivery, and performance by Guarantor of
this Guarantee do not and will not violate or conflict with any law, rule, or
regulation or any order, writ, injunction or decree of any court, governmental
authority or agency, or arbitrator and do not and will not conflict with, result
in a breach of, or constitute a default under, or result in the imposition of
any lien upon any assets of Guarantor pursuant to the provisions of any
indenture, mortgage, deed of trust, security agreement, franchise, permit,
license, or other instrument or agreement to which Guarantor or its properties
is bound, except for such conflicts, breaches, defaults or impositions which
would not be reasonably likely to have a material adverse effect on the
business, financial condition or results of operations of Guarantor and its
subsidiaries, taken as a whole.
(e) No authorization, approval, or consent of, and no filing
or registration with, any court, governmental authority, or third party is
necessary for the execution, delivery or performance by Guarantor of this
Guarantee or the validity or enforceability thereof.
7. This Guarantee is a continuing guarantee and shall remain in full
force and effect until payment in full of the obligations and all other amounts
payable under this Guarantee, and shall (a) be binding upon the Guarantor, its
successors and assigns, and (b) inure to the benefit of and be enforceable by
(i) any successors of Buyer, or any transferee of all or substantially all of
the assets of Buyer, and (ii) any successors, heirs, executors or beneficiaries
of any of the other Protected Parties. Neither the terms nor execution of this
Guarantee shall prohibit Guarantor's sale, assignment or transfer of all or a
part of its interest in Talegen or Ridge Re; provided, however, that in the
event of any such sale, assignment or transfer, this Guarantee shall remain in
full force and effect.
8. Any provision of this Guarantee which is prohibited or
unenforceable in any jurisdiction shall be, as to such jurisdiction, ineffective
to the extent of such prohibition or unenforceability without invalidating the
remaining provisions hereof, and any such prohibition on unenforceability in any
jurisdiction shall not invalidate or render unenforceable such provision in any
other jurisdiction.
9. This Guarantee shall be governed, construed, applied and enforced
in accordance with the laws of the State of New York, and no defense given or
allowed by the laws of any other state or country shall be interposed in any
action hereon unless such defense is also given or allowed by the laws of the
State of New York.
10. Guarantor shall pay on demand all attorneys' fees and all other
costs and expenses incurred by Buyer in connection with the enforcement or
collection of this Guarantee.
<PAGE>
11. Guarantor agrees that Buyer may exercise any and all of the
rights and remedies granted to it under the Purchase Agreement without affecting
the validity or enforceability of this Guarantee.
12. This Agreement is not intended to confer upon any person other
than the parties hereto and the other Protected Parties any rights or remedies
hereunder.
13. This Guarantee may be executed in any number of counterparts,
and each such counterpart shall be deemed to be an original instrument, but all
such counterparts together shall constitute but one agreement. This Guarantee
shall become effective when one or more counterparts have been signed by each of
the parties and delivered to the other parties, it being understood that the
parties need not sign the same counterpart.
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused this
Guarantee to be executed on its behalf by its duly authorized officer.
XEROX FINANCIAL SERVICES, INC.
By:___________________________
Name:
Title:
FREMONT INDEMNITY COMPANY
By:___________________________
Name:
Title:z`
<PAGE>
EXHIBIT B
ENDORSEMENT #2
TO THE
SPRINGING FIRST
AGGREGATE EXCESS OF LOSS
REINSURANCE AGREEMENT
By and between
INDUSTRIAL INDEMNITY COMPANY
INDUSTRIAL INSURANCE COMPANY
INDUSTRIAL INDEMNITY COMPANY OF ALASKA
INDUSTRIAL INDEMNITY COMPANY OF IDAHO
INDUSTRIAL INDEMNITY COMPANY OF THE NORTHWEST
and
EMPLOYERS FIRST INSURANCE COMPANY
formerly All West Insurance Company)
and
RIDGE REINSURANCE LIMITED
and
XEROX FINANCIAL SERVICES, INC.
<PAGE>
I. Article I of the Agreement and Endorsement #1 thereto shall be
amended to provide that the "Retention Amount" under this agreement shall
mean U.S. One Billion One Hundred Fifty Seven Million Thirty Six Thousand
Dollars (U.S.$1,157,036,000)
II. Article II entitled "Reinsurance Coverage" and Article I of
Endorsement #1 are hereby amended by deleting them in their entireties and
inserting the following new Article II entitled "Reinsurance Coverage":
ARTICLE II
REINSURANCE COVERAGE
The Reinsurer hereby agrees to reimburse the Company for eighty-five
percent (85%) of any and all Ultimate Net Losses, if any, in excess of the
Retention Amount up to a maximum of eighty-five percent (85%) of U.S. One
Hundred Fifty Million Dollars (U.S.$ 150,000,000). It being understood that any
other reinsurance with both affiliated and unaffiliated reinsurance companies of
the Company (defined for purposes of this Agreement to be companies which are
not subsidiaries of Crum and Forster, Inc., a New Jersey corporation, as of the
Effective Date) which protects or covers the Subject Business will attach and
will provide coverage prior to the reinsurance provided by this Agreement.
III. Article XIII entitled "Term, Termination and Commutation" is hereby
amended by deleting it in its entirety and inserting the following new Article
XIII entitled "Term, Termination and Commutation":
ARTICLE XIII
TERM, TERMINATION AND COMMUTATION
(a) Term. This Agreement shall be effective as of the date hereof
and shall remain in effect until the natural expiry of all liabilities on the
Subject Business, or until termination or commutation in accordance with
Sections (b) and (c) of this Article XIII.
(b) Termination. Except as provided for in Section (c) of this
Article, this Agreement shall be noncancelable, except at the discretion of the
Commissioner acting as rehabilitator, liquidator or receiver of the Company or
the Reinsurer.
(c) Commutation. At the end of each full calendar year from and
including 2002 to and including 2007, the Company and the Reinsurer shall
attempt to commute this Agreement by mutual consent. If no commutation or other
termination of this Agreement occurs prior to the end of the calendar year 2007,
the Company and the Reinsurer shall commute this Agreement either by mutual
consent at a price to be agreed or, if no agreement is reached by June 30, 2008,
the Company and the Reinsurer shall submit to binding arbitration by a
nationally recognized actuarial firm, reasonably acceptable to both parties,
whose decision as to price shall
<PAGE>
be final and binding on the Company and the Reinsurer. Notwithstanding anything
in the foregoing to the contrary, until June 30, 2008 the parties may
arbitrarily refuse to agree to a commutation.
(d) Due and Unpaid Obligations. Notwithstanding anything herein to
the contrary, any unpaid or outstanding obligations of the Reinsurer due or
overdue the Company at the time of the termination, commutation or expiration of
this Agreement shall survive the termination, commutation or expiration of this
Agreement.
IV. Article XVIII entitled "Miscellaneous" is hereby amended by
inserting at the end thereof a Section (g) to read as follows:
"(g) Waiver of Offset Rights by Reinsurer. The Reinsurer shall pay
to the Company any and all amounts payable hereunder without regard to any
rights of offset that the Reinsurer may have against the Company or XFS, any
such rights of offset hereby being waived."
<PAGE>
IN WITNESS WHEREOF the parties hereto have caused this Endorsement
to be executed on their behalf by their respective officers thereunto duly
authorized as of the date first written in the Agreement to which this
Endorsement applies.
RIDGE REINSURANCE LIMITED
By:___________________________
Name:
Title:
Attest:
By:_______________________
Name:
Title:
INDUSTRIAL INDEMNITY COMPANY
By:___________________________
Name:
Title:
Attest:
By:_______________________
Name:
Title:
<PAGE>
INDUSTRIAL INSURANCE COMPANY
By:___________________________
Name:
Title:
Attest:
By:_______________________
Name:
Title:
INDUSTRIAL INDEMNITY COMPANY
OF ALASKA
By:___________________________
Name:
Title:
Attest:
By:_______________________
Name:
Title:
<PAGE>
INDUSTRIAL INDEMNITY COMPANY
OF IDAHO
By:___________________________
Name:
Title:
Attest:
By:_______________________
Name:
Title:
INDUSTRIAL INDEMNITY COMPANY
OF THE NORTHWEST
By:___________________________
Name:
Title:
Attest:
By:_______________________
Name:
Title:
<PAGE>
EMPLOYERS FIRST INSURANCE
COMPANY
By:___________________________
Name:
Title:
Attest:
By:_______________________
Name:
Title:
XEROX FINANCIAL SERVICES, INC.
By:___________________________
Name:
Title:
Attest:
By:_______________________
Name:
Title:
<PAGE>
EXHIBIT C
RELEASE OF TAX SHARING AGREEMENTS
This Release of obligations under the Xerox Corporation/Crum and
Forster, Inc. Federal Income Tax Allocation Agreement ("Xerox/C&F Tax Sharing
Agreement") and obligations under the Crum and Forster, Inc. Federal Income Tax
Allocation Agreement ("C&F Tax Sharing Agreement") is made and entered into by
and among Xerox Corporation, a New York corporation ("Xerox"); Xerox Financial
Services, Inc., a Delaware corporation ("XFS"); Talegen Holdings, Inc., a
Delaware corporation ("Talegen"); and Industrial Indemnity Holdings, Inc., a
Delaware corporation (the "Company"), Industrial Indemnity Company, a California
corporation, Industrial Indemnity Kihei Bay Surf Corporation, a California
corporation, Industrial Indemnity Company of Alaska, an Alaska corporation,
Industrial Indemnity Company of Idaho, an Idaho corporation, Industrial
Indemnity Company of the Northwest, a Washington corporation, Industrial
Insurance Company, a California corporation, Employers First Insurance Company,
a California corporation, 255 California Corporation, a California corporation,
and Industrial Indemnity Insurance Services, Inc., a California corporation
(collectively referred to herein as the "Company Subsidiaries"), dated as of
____________ __, 1997.
WHEREAS, XFS, Talegen, and the Company are among the parties to the
Purchase Agreement and the Tax Agreement, as defined herein;
WHEREAS, as of the Closing Date, Section 11(d) of the Tax Agreement
terminates, with respect to the Company and the Company Subsidiaries, any and
all agreements with respect to Taxes (other than the Purchase Agreement and the
Tax Agreement) to which the Company or any of the Company Subsidiaries, on the
one hand, and Talegen or any of its subsidiaries (other than the Company and the
Company Subsidiaries), on the other hand, are or were parties at any time at or
before the Closing Date;
WHEREAS, as of the Closing Date, Section 11(d) of the Tax Agreement
extinguishes, with respect to the Company and the Company Subsidiaries, any and
all liabilities with respect to Taxes (other than under the Purchase Agreement
and the Tax Agreement) between the Company or any of the Company Subsidiaries,
on the one hand, and Talegen or any of its subsidiaries (other than the Company
and the Company Subsidiaries), on the other hand, that exist on the Closing
Date; and
WHEREAS, pursuant to Section 6.13 of the Purchase Agreement, it has
been agreed that the Company and each of the Company Subsidiaries shall execute
and deliver to Xerox, XFS, and Talegen, and Xerox, XFS, and Talegen shall
execute and deliver to the Company and each of the Company Subsidiaries,
releases of any and all obligations under tax sharing agreements (other than
under the Tax Agreement) existing as of the Closing Date;
<PAGE>
NOW THEREFORE, in consideration of the mutual promises contained
herein and for good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties agree as follows:
1. Definitions.
a. "C&F Tax Sharing Agreement" -- the Federal Income Tax
Allocation Agreement by and between Crum and Forster, Inc., a New Jersey
Corporation ("C&F") (now Talegen), and each of its subsidiaries incorporated in
the United States, effective January 11, 1983 and amended April 15, 1992,
referenced in and made part of the Xerox/C&F Tax Sharing Agreement.
b. "Closing Date" -- the Closing Date as defined in the
Purchase Agreement.
c. "Purchase Agreement" -- the stock purchase agreement, dated
as of May 16, 1997, pursuant to which Fremont Indemnity Company, a California
corporation (the "Buyer"), will purchase from Talegen, and Talegen will sell to
Buyer, all of the issued and outstanding capital stock of the Company.
d. "Tax Agreement" -- the Tax Allocation and
Indemnification Agreement dated as of the date of the Purchase Agreement and
made and entered into among XFS, Talegen, Company, and Buyer.
e. "Taxes" -- Taxes as defined in the Tax Agreement.
f. "Xerox/C&F Tax Sharing Agreement" -- the Federal Income Tax
Allocation Agreement by and between Xerox and C&F on behalf of C&F and its
subsidiaries incorporated in the United States, effective January 11, 1983, and
amended April 15, 1992.
2. As of the Closing Date, the Company and each of the Company
Subsidiaries hereby fully and completely release Xerox, XFS, and Talegen, and
each of them, and Xerox, XFS, and Talegen hereby fully and completely release
the Company and each of the Company Subsidiaries, from any and all obligations
contained in or derived from either the Xerox/C&F Tax Sharing Agreement or the
C&F Tax Sharing Agreement. There shall be no continuing obligations pursuant to
the termination provisions of either the Xerox/C&F Tax Sharing Agreement or the
C&F Tax Sharing Agreement.
3. The Company and each of the Company Subsidiaries understands that
neither Xerox, XFS, nor Talegen shall make any payments on or after the Closing
Date to the Company or any of the Company Subsidiaries under either the
Xerox/C&F Tax Sharing Agreement or the C&F Tax Sharing Agreement, and that
payments, if any, to the Company and the Company Subsidiaries from Xerox, XFS,
or Talegen on and after the Closing Date with respect to Taxes shall be made
pursuant only to the Tax Agreement.
<PAGE>
4. Xerox, XFS, and Talegen understand that the Company and the
Company Subsidiaries shall not make any payments on or after the Closing Date
under either the Xerox/C&F Tax Sharing Agreement or the C&F Tax Sharing
Agreement and that any payments to Xerox, XFS, or Talegen on and after the
Closing Date with respect to Taxes shall be made pursuant only to the Tax
Agreement.
5. This Release shall be binding on and inure to the benefit of any
successor, by merger, acquisition of assets, or otherwise, to any of the parties
hereto to the same extent as if such successor had been an original party to
this Release.
6. Except as provided in paragraph 5, above, this Release shall be
neither assignable nor transferable by any party hereto, whether by operation of
law or otherwise, without the prior consent of the other parties hereto.
7. This Release shall be governed by and construed in
accordance with the laws of the State of New York.
<PAGE>
XEROX CORPORATION
By:__________________________
Title:_______________________
XEROX FINANCIAL SERVICES, INC.
By:__________________________
Title:_______________________
TALEGEN HOLDINGS, INC.
By:__________________________
Title:_______________________
INDUSTRIAL INDEMNITY HOLDINGS, INC.
By:__________________________
Title:_______________________
INDUSTRIAL INDEMNITY KIHEI BAY SURF CORPORATION
By:__________________________
Title:_______________________
INDUSTRIAL INDEMNITY COMPANY OF IDAHO
By:__________________________
Title:_______________________
INDUSTRIAL INDEMNITY COMPANY
By:__________________________
Title:_______________________
<PAGE>
INDUSTRIAL INDEMNITY COMPANY OF ALASKA
By:__________________________
Title:_______________________
INDUSTRIAL INDEMNITY COMPANY OF THE NORTHWEST
By:__________________________
Title:_______________________
INDUSTRIAL INSURANCE COMPANY
By:__________________________
Title:_______________________
255 CALIFORNIA CORPORATION
By:__________________________
Title:_______________________
EMPLOYERS FIRST INSURANCE COMPANY
By:__________________________
Title:_______________________
<PAGE>
INDUSTRIAL INDEMNITY INSURANCE
SERVICES, INC.
By:__________________________
Title:_______________________
TAX ALLOCATION AND INDEMNIFICATION AGREEMENT
This Tax Allocation and Indemnification Agreement ("Agreement"), dated
as of May 16, 1997, is made and entered into by and among Xerox Financial
Services, Inc., a Delaware corporation ("Parent"), Talegen Holdings, Inc., a
Delaware corporation ("Seller"), Industrial Indemnity Holdings, Inc., a Delaware
corporation ("Company"), Fremont General Corporation, a Nevada corporation
("Buyer Parent"), and Fremont Indemnity Company, a California corporation
("Buyer").
A. Seller and Buyer are parties to a Stock Purchase Agreement dated as
of May __, 1997 ("Purchase Agreement"), pursuant to which Buyer will purchase
from Seller, and Seller will sell to Buyer, all of the issued and outstanding
capital stock of the Company.
B. The parties hereto wish to provide for indemnification against
certain liabilities for Taxes and for payments relating to certain Tax benefits,
as set forth herein. The parties also desire to allocate responsibility for the
preparation and filing of Tax Returns and the payment of Taxes, and provide for
related matters.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
contained herein and in the Purchase Agreement, the parties hereby agree as
follows:
1. DEFINITIONS. When used herein, the following terms shall have the
following meanings:
"AFFILIATE" -- as defined in the Purchase Agreement.
"BUYER GROUP" -- Buyer and each other includable corporation that joins
with Buyer in filing a consolidated federal Income Tax Return for the applicable
Taxable Year, and every other corporation that is, at any time after the Closing
Date, a direct or indirect Subsidiary of Buyer or any such includable
corporation.
"CLOSING" -- as defined in the Purchase Agreement.
"CLOSING DATE" -- as defined in the Purchase Agreement.
"CODE" -- the Internal Revenue Code of 1986, as amended.
"COMPANY FEDERAL TAX SETTLEMENT PAYMENT SCHEDULE" -- as defined in
Section 3(d)(i) hereof.
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"COMPANY PRO FORMA ALTERNATIVE MINIMUM TAXABLE INCOME OR LOSS" --
Company Pro Forma Taxable Income or Loss modified as required under the
provisions the Code to determine alternative minimum taxable income.
"COMPANY PRO FORMA TAXABLE INCOME OR LOSS" -- as defined in Section
3(c)(i) hereof.
"FEDERAL TAX SETTLEMENT PAYMENT" -- as defined in Section 3(b) hereof.
"FINAL COMPANY FEDERAL TAX SETTLEMENT PAYMENT SCHEDULE" -- as defined in
Section 3(d)(iii)(B) hereof.
"FINAL PARENT FEDERAL TAX SETTLEMENT PAYMENT SCHEDULE" -- as defined in
Section 3(d)(iii)(B) hereof.
"FINAL DETERMINATION" -- (i) a decision, judgment, decree or other order
by the United States Tax Court or any other court of competent jurisdiction,
that has become final and unappealable, (ii) a closing agreement under Section
7121 of the Code or a comparable provision of any state, local or foreign tax
law that is binding against the Internal Revenue Service or other Taxing
Authority, (iii) any other final settlement with the Internal Revenue Service or
other Taxing Authority, or (iv) the expiration of an applicable statute of
limitations.
"GAAP FINANCIAL STATEMENTS" -- as defined in the Purchase Agreement.
"INCOME TAX" -- with respect to any corporation or group of
corporations, any and all Taxes based upon or measured by net income, including,
but not limited to any alternative or add-on minimum taxes, and any "special
estimated tax payment" made pursuant to Section 847 of the Code, imposed by the
Internal Revenue Service or any other Taxing Authority, together with interest,
penalties and other additions.
"INCOME TAX RETURN" -- with respect to any corporation or group of
corporations, any Tax Return with respect to Income Tax.
"INDEPENDENT ACCOUNTING FIRM" -- means any "Big Six" accounting firm or
its successor, except for the respective independent public accountants of
Seller, Buyer or their respective Affiliates or Subsidiaries.
"INFORMATION RETURN" -- with respect to any corporation or group of
corporations, any and all reports, returns, declarations or other filings (other
than Tax Returns), including but not limited to federal and state wage
reporting, employment, and unemployment Tax returns (e.g., IRS Forms 940, 941,
W-2, W-3 and their state and local equivalents) as well as reports of payments
made (e.g., IRS Forms 1099 and 1042), that are required under applicable law to
be supplied to any Taxing Authority.
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"LEESBURG TRAINING FACILITY" -- as defined in Section 7.1(g) of the
Purchase Agreement
"1990 THROUGH 1994 UNCOLLECTIBLE REINSURANCE DEDUCTIONS" -- the net
incremental deductions to which Company and its Subsidiaries are entitled for
uncollectible reinsurance recoverables for the 1990 through 1994 Taxable Years
applying the method for writing off uncollectible reinsurance recoverables
agreed to during the 1987 through 1989 Tax audit as set forth in Schedule 5(f)
hereto, whether such incremental deductions or the benefits arising from the
utilization thereof are secured or realized by the Company and its Subsidiaries
during the 1990 through 1994 Taxable Years or in subsequent Taxable Years.
"OVERDUE RATE" -- the prime rate of interest as reported in the "Money
Rates" column of the Wall Street Journal (or the generally prevailing "prime
rate" as charged by major New York banks, if a prime rate is not so published in
the Wall Street Journal) on the first business day of the month for which
interest is computed.
"PARENT FEDERAL TAX SETTLEMENT PAYMENT SCHEDULE" -- as defined in
Section 3(d)(ii) of this Agreement.
"POST-1996 STRADDLE PERIOD" -- the portion of a Straddle Period
beginning on January 1, 1997.
"POST-CLOSING TAXABLE YEAR" -- a Taxable Year that begins after the
Closing Date.
"PRE-1997 STRADDLE PERIOD" -- the portion of a Straddle Period ending on
and including December 31, 1996.
"PRE-CLOSING TAXABLE YEAR" -- a Taxable Year that begins before the
Closing Date.
"PRO FORMA ADJUSTMENTS" -- (i) the "additional deduction" allowable
under Section 847(1) of the Code; (ii) the amount includable in gross income
under Section 847(5) of the Code; (iii) any income, deduction, gain, or loss
attributable to (1) the payment for the leases and transfer of the fee interests
in the Leesburg Training Facility pursuant to Section 7.1(g) of the Purchase
Agreement; (2) any deferred intercompany transaction (as determined under Reg.
ss.ss. 1.1502-13 and -13T) occurring on or prior to Closing that is recognized
as a result of the sale of Company stock under the Purchase Agreement, or (3)
any excess loss account under Reg. ss. 1.1502-19 that is recognized as a result
of the sale of Company stock under the Purchase Agreement; (iv) any employee
compensation that Seller is required to pay under the Purchase Agreement; (v)
any Ridge Re Premium Expense; and (iv) any 1990 through 1994 Uncollectible
Reinsurance Deductions.
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"PURCHASE AGREEMENT" -- as defined in Paragraph A of the Preamble to
this Agreement.
"REG. ss." -- a provision of the Regulations promulgated under the Code.
"RIDGE RE PREMIUM EXPENSE" -- the Tax deduction for premiums under the
"Aggregate Excess of Loss Reinsurance Agreements" entered into as of December
31, 1992 with Ridge Reinsurance Limited, as amended through the date hereof.
"SAP Financial Statements" -- as defined in the Purchase Agreement.
"SELLER NOTES" -- the "XFS Promissory Notes" as defined in the Purchase
Agreement.
"STRADDLE PERIOD" -- any Taxable Year of Company or of any of its
Subsidiaries that begins before, and ends after, December 31, 1996.
"SUBSIDIARY" -- as defined in the Purchase Agreement.
"STUB PERIOD" -- the Taxable Year of Company and its Subsidiaries
beginning on January 1, 1997 and ending on and including the Closing Date.
"TAX" -- all taxes, charges, fees, and levies based upon gross income,
gross receipts, premiums, profits, sales, use, value added, transfer, employment
or payroll, including, without limitation, any ad valorem, environmental,
excise, license, occupation, property, severance, stamp, withholding, or
windfall profit tax, any custom duty or other tax, and any Income Tax, together
with any interest credit or charge, penalty, addition to tax or additional
amount imposed by any Taxing Authority.
"TAX RETURN" -- with respect to any corporation or group of
corporations, all reports, estimates, extension requests, information statements
and returns (other than Information Returns) relating to, or required to be
filed in connection with, any payment of any Tax.
"Taxable Year" -- with respect to any Tax of any corporation, or any
group of corporations filing a consolidated, combined or unitary return for
federal, state, local or foreign Tax purposes, the period for which the Tax is
computed.
"Taxing Authority" -- the Internal Revenue Service and any other
domestic or foreign governmental authority responsible for the administration of
any Tax.
"Xerox Affiliated Group" -- Xerox Corporation and each corporation (an
includable corporation) that joins with Parent in filing a consolidated federal
Income Tax Return for the applicable Taxable Year.
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"Xerox Group" -- the Xerox Affiliated Group and every other corporation
that is, at any time after the Closing Date, a direct or indirect Subsidiary of
any member of the Xerox Affiliated Group.
2. Filing of Tax Returns; Payment of Taxes.
(a) Filing of Tax Returns; Copies of Tax Returns.
(i) Federal Income Tax Returns. Parent shall cause to
be prepared and filed on a timely basis a consolidated federal Income Tax Return
for the Xerox Affiliated Group for the 1996 and 1997 Taxable Years and shall
include therein the income, gain, loss, deduction, expense and credits of
Company and its Subsidiaries, which items shall be determined on the basis of an
interim closing of the books for the portion of the 1997 Taxable Year during
which the Company and its Subsidiaries were members of the Xerox Affiliated
Group.
(A) A deduction for the Ridge Re Premium Expense
not deducted prior to the 1997 Taxable Year shall be claimed in the consolidated
federal Income Tax Return for the Xerox Affiliated Group for the 1997 Taxable
Year, provided, however, that if a change in law or regulation prevents such
deduction from being claimed in such Income Tax Return but permits Company to
claim such deduction, then Company shall claim such deduction in its federal
Income Tax Return for the first Taxable Year in which such deduction is
allowable to it, and within twenty (20) days after filing such federal Income
Tax Return, Company shall pay (or cause to be paid) to Parent an amount equal to
the Tax benefit attributable to such deduction. For purposes of the preceding
sentence, the amount of such Tax benefit shall be equal to the excess of the
amount of Company's federal Income Tax liability for all Taxable Years affected
computed without regard to such deduction over the amount of Company's actual
federal Income Tax liability for all Taxable Years affected after considering
such deduction. Within ten (10) business days after Parent's receipt of any
notice from Company or Buyer of a Final Determination that deductions claimed by
Company on any Tax Return for any Taxable Year beginning on or after January 1,
1997 or any Post-1996 Straddle Period in respect of the Ridge Re Premium Expense
are not allowable, Parent shall repay to Buyer or Company, to the extent of the
disallowed deductions, the Tax benefit amount Parent received from the Company.
(B) The amount of the discount under Section 846
of the Code with respect to the unpaid losses, loss adjustment expenses, and
salvage and subrogation of Company and its Subsidiaries, as of the Closing Date,
shall be determined for the Stub Period according to the interpolation
methodology set forth in Schedule 2(a) hereto and by allocating such unpaid
losses, loss adjustment expenses, and salvage and subrogation to the lines of
business and accident years in accordance with a Seller report provided to
Buyer. In determining the amounts and information included in such report,
Seller shall apply actuarial methods and assumptions which are consistent with
those applied by the Insurance Subsidiaries to estimate
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their liability for loss and loss adjustment expenses net of reinsurance and
retrocessional recoverables and salvage and subrogation as of December 31, 1996
in the SAP Financial Statements, taking into account the loss experience and
operations of the Insurance Subsidiaries through the Closing Date.
(ii) Tax Returns Other Than Federal Income Tax Returns.
Company shall prepare and, subject to Section 2(d)(ii) hereof, shall file (or
caused to be filed) on a timely basis all federal, state, local, and foreign Tax
Returns that (A) include Company or any of its Subsidiaries, or all of them, for
all Pre-Closing Taxable Years but (B) exclude all other members of the Xerox
Group.
(iii) Parent Review of Tax Returns Prior to Filing. At
least fifteen (15) days before each due date for the filing of Tax Returns
required to be filed in respect of the Company or its Subsidiaries, or any of
them, pursuant to Section 2(a)(ii) hereof, Company shall provide Parent a
schedule listing all Tax Returns due as of such date (showing for each such Tax
Return the taxpayer, type of Tax, the Taxing Authority, the total amount of Tax
shown on the Tax Return, and the amount of Tax due or overpaid). The Company
shall, within two (2) business days after Parent's request, provide to Parent a
copy of any listed Tax Return. Within ten (10) business days after each due date
for the filing of any Tax Return required to be filed pursuant to Section
2(a)(ii) hereof, Company shall provide to Parent a statement signed by Company's
Chief Financial Officer affirming that, except as otherwise disclosed in detail
in such affirmation statement -- (A) all Tax Returns required to be filed as of
such date were included on the respective schedule of Tax Returns provided to
Parent pursuant to this Section 2(a)(iii), (B) each Tax Return copy provided to
Parent is an exact copy of the Tax Return as filed with the Taxing Authority,
and (C) each Tax Return for which no copy was provided to Parent reported the
same amounts of total Tax and Tax due or overpaid as shown on the schedule for
such Tax Return.
(b) Extensions Taken Into Account. For purposes of this Section
2, any Tax Return shall be considered to have been filed on a timely basis if it
is filed on or before the due date for such filing, and the due date for filing
any Tax Return shall take into account all valid extensions.
(c) Filing Information; Closing of Taxable Years.
(i) Filing Information. Pursuant to Section 9(a)(i)
hereof, Company shall (and shall cause its Subsidiaries, or any of them, to)
submit to Parent in a timely fashion in accordance with past practice all filing
information necessary for the preparation and filing of the Income Tax Returns
for the 1996 Taxable Year and the Stub Period other than those Tax Returns that
are the responsibility of Company under Section 2(a)(ii) hereof, provided that
the filing information for the federal Income Tax Returns referred to in Section
2(a)(i) hereof shall be
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submitted to Parent no later than July 15, 1997 for the 1996 Taxable Year and no
later than July 15, 1998 for the Stub Period.
(ii) Closing of Taxable Years. Unless prohibited by
applicable law, for state, local and foreign Income Tax purposes, the Taxable
Year of Company and those of its Subsidiaries that (A) are members of the Xerox
Affiliated Group or (B) are included in any state, local or foreign
consolidated, combined or unitary Income Tax Return with one or more members of
the Xerox Affiliated Group shall end on and include the Closing Date, and
Company and its Subsidiaries shall begin a new Taxable Year on the day after the
Closing Date. All Tax Returns referred to in Section 2(a) hereof shall be
prepared and filed consistent with this Section 2(c)(ii).
(d) Consistent Preparation.
(i) Preparation of Tax Returns. Company shall prepare
(or cause to be prepared) all Tax Returns required to be prepared pursuant to
Section 2(a)(ii) hereof and all information required to be submitted to Parent
pursuant to Section 2(c)(i) hereof, using the methods used in reporting items of
income, gain, loss, deduction, expense and credit of Company and its
Subsidiaries, as reflected on Tax Returns filed prior to the date hereof, taking
into account any adjustments resulting from any audit or other examination of
such Tax Returns and applicable law as then in effect.
(ii) Disputes Over Treatment of Items. In the event
that Parent disputes any item shown on any Tax Return prepared (or caused to be
prepared) by Company pursuant to Section 2(a)(ii) hereof, neither Company nor
any of its Subsidiaries shall file such Tax Return except as in accordance with
the provisions of this Section 2(d)(ii). If Parent and Company are unable to
resolve such dispute between themselves no later than ten (10) business days
before the due date of such Tax Return, then they shall jointly retain an
Independent Accounting Firm to resolve such dispute, and they shall each take
all reasonable and appropriate steps necessary to assist the Independent
Accounting Firm in resolving such dispute prior to such due date; provided,
however, that the filing of such Tax Return shall not be delayed beyond its due
date. If for any reason such dispute is not resolved by the Tax Return due date,
the Tax Return shall be filed as though the Parent prevailed in the dispute and
shall be amended, if necessary, after the dispute is resolved by the Independent
Accounting Firm. The fees of the Independent Accounting Firm shall be borne
equally by the parties. The resolution of the Independent Accounting Firm under
this Section 2(d)(ii) shall be binding on both Parent and Company.
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3. Payment of Taxes and Federal Tax Settlement Payment.
(a) Payment of Taxes.
(i) Parent shall pay (or cause to be paid) to the
appropriate Taxing Authority all Income Taxes shown to be due and payable on
Income Tax Returns that it is responsible for filing pursuant to Sections
2(a)(i).
(ii) Company shall pay (or cause to be paid) to the
appropriate Taxing Authority all Taxes shown to be due on all state, local,
foreign and other federal Tax Returns that it is responsible for filing pursuant
to Section 2(a)(ii) hereof.
(b) Liability for Federal Tax Settlement Payments. Federal Tax
settlement payments shall be computed and made for the 1996 Taxable Year and the
Stub Period (the "Federal Tax Settlement Payments") in accordance with the terms
of this Agreement. There shall be no Tax settlement payments during and
attributable to the 1996 Taxable Year and the Stub Period other than the Federal
Tax Settlement Payments determined under this Agreement and any Tax settlement
payments made prior to the date of this Agreement; provided, however, that if a
Tax settlement payment must be made prior to the Closing Date under another
agreement between the Company or any of its Subsidiaries, on the one hand, and
Seller or any of its Subsidiaries (other than the Company and its Subsidiaries),
on the other hand, then the required payment shall be made under such other
agreement. Appropriate credit shall be given in making Federal Tax Settlement
Payments hereunder for any Tax settlement payments, under any agreement other
than this Agreement, made prior to the Closing Date relating to either the 1996
Taxable Year or the Stub Period (including repayments of any prior Tax
settlement payments for the 1996 Taxable Year or the Stub Period in excess of
the required Federal Tax Settlement Payments hereunder).
(c) Amount of the Federal Tax Settlement Payments.
(i) Company Pro Forma Taxable Income or Loss. For
purposes of determining the amount of the Federal Tax Settlement Payments due
under Section 3(b) for the 1996 Taxable Year and the Stub Period, the income or
loss of Company and its Subsidiaries shall be adjusted by excluding therefrom
the Pro Forma Adjustments and shall be determined on a pro forma basis as if
Company and its eligible Subsidiaries filed a consolidated federal Income Tax
Return separate from the Xerox Affiliated Group ("Company Pro Forma Taxable
Income or Loss").
(ii) Amount of Federal Tax Settlement Payments.
(A) Where the calculation of either Company Pro
Forma Taxable Income or Loss or Company Pro Forma Alternative Minimum Taxable
Income or Loss
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results in income for Company and Its Subsidiaries for a Taxable Year, Company
shall make a Federal Tax Settlement Payment to Parent, in accordance with
Section 3(e), which is equal to greater of (I) the amount determined by
multiplying Company Pro Forma Taxable Income or Loss for such Taxable Year by
the maximum corporate Income Tax rate applicable under the Code for such Taxable
Year to ordinary income or loss and capital gain or loss, as the case may be,
and (II) the amount determined by multiplying Company Pro Forma Alternative
Minimum Taxable Income or Loss for such Taxable Year by the maximum alternative
minimum Tax rate applicable under the Code for such Taxable Year.
(B) Where the calculation of both Company Pro
Forma Taxable Income or Loss and Company Pro Forma Alternative Minimum Taxable
Income or Loss result in losses for Company And Its Subsidiaries for a Taxable
Year, Parent shall make a Federal Tax Settlement Payment to Company, in
accordance with Section 3(e), equal to the Tax benefit actually realized by the
Xerox Affiliated Group from such loss. Such Tax benefit shall be calculated as
the difference in Tax liability resulting when such loss is included in the
calculation of the Xerox Affiliated Group Tax liability for the Taxable Year and
excluded from the calculation of the Xerox Affiliated Group Tax liability for
the Taxable Year.
(d) Federal Tax Settlement Payment Reporting
(i) Company Federal Tax Payment Schedules. Not later
than July 15, 1997, Company shall deliver to Parent a schedule showing the
amount of Company Pro Forma Taxable Income or Loss and the amount of Company Pro
Forma Alternative Minimum Taxable Income or Loss for the 1996 Taxable Year and,
if either amount is positive, such schedule shall show the Federal Tax
Settlement Payment for the 1996 Taxable Year. Not later than sixty (60) days
after the Closing Date, Company shall deliver to Parent a schedule showing the
amount of Company Pro Forma Taxable Income or Loss and the amount of Company Pro
Forma Alternative Minimum Taxable Income or Loss for the Stub Period and, if
either amount is positive, the Federal Tax Settlement Payment for the Stub
Period. Each such schedule (a "Company Federal Tax Settlement Payment Schedule")
shall be based on the Tax Return filing information provided pursuant to Section
2(c)(i) (to the extent available) and shall include all supporting workpapers
and a brief explanation of the basis on which Company Pro Forma Taxable Income
or Loss and Company Pro Forma Alternative Minimum Taxable Income or Loss were
computed. Except as otherwise expressly provided in this Agreement, the amount
of Company Pro Forma Taxable Income or Loss and Company Pro Forma Alternative
Minimum Taxable Income or Loss shall be determined, for all purposes of this
Agreement, in conformity with the information provided in Section 2(c)(i)
hereof.
(ii) Parent Federal Tax Settlement Payment Schedule.
Within thirty (30) days after Parent receives a Company Federal Tax Settlement
Payment Schedule for a Taxable Year that reflects losses in the computations of
both Company Pro Forma Taxable
9
Income or Loss and Company Pro Forma Alternative Minimum Taxable Income or Loss,
Parent shall deliver to Company a revised schedule (a "Parent Federal Tax
Settlement Payment Schedule") showing the amount of the Federal Tax Settlement
Payment for the Taxable Year, taking into account any Tax benefit actually
realized by the Xerox Affiliated Group from such losses.
(iii) Preliminary and Final Federal Tax Settlement Payment
Schedules.
(A) To the extent that any Federal Tax Settlement
Payment cannot be determined with finality due to a lack of information and/or
the fact that the Xerox Affiliated Group's consolidated federal Income Tax
Return will not have been filed, Company or Parent, as the case may be, shall
estimate the amount of the Federal Tax Settlement Payment as nearly as possible
and shall timely deliver either the Company Federal Tax Settlement Payment
Schedule or the Parent Federal Tax Settlement Payment Schedule, as the case may
be, indicating the amount of the Federal Tax Settlement Payment estimated in
accordance with this Section 3(d)(iii)(A). In the case of a Company estimate,
Company shall cause its independent public accountant to certify to the Parent
that each such Company Federal Tax Settlement Payment Schedule provides a
reasonable estimate of the amount of Company Pro Forma Taxable Income or Loss
and the amount of Company Pro Forma Alternative Minimum Taxable Income or Loss
for the applicable Taxable Year determined in conformity with Section 2(c)(i)
hereof. In the case of a Parent estimate, Parent shall cause its independent
public accountant to certify to Buyer that each such Parent Federal Tax
Settlement Payment Schedule provides a reasonable estimate of the Federal Tax
Settlement Payment determined in conformity with Section 2(c)(i) hereof..
(B) If a Company Federal Tax Settlement Payment
Schedule provided for a Taxable Year in accordance with Section 3(d)(i) is based
on an estimate or is due on a date that is earlier than thirty (30) days after
the Closing Date, the Company shall prepare and provide a final schedule (a
"Final Company Federal Tax Settlement Payment Schedule") for such year in
accordance with the following deadlines: for the 1996 Taxable Year no later than
sixty days after the Closing Date, and for the Stub Period no later than July
15, 1998. If a Parent Federal Tax Settlement Payment Schedule provided for a
Taxable Year in accordance with Section 3(d)(ii) is based on an estimate or on a
Company Federal Tax Settlement Payment Schedule due on a date that is earlier
than thirty (30) days after the Closing Date, the Parent shall prepare and
provide a final schedule (a "Final Parent Federal Tax Settlement Payment
Schedule") for such year in accordance with the following deadlines: for the
1996 Taxable Year no later than ninety (90) days after the Closing Date and for
the Stub Period no later than October 15, 1998. Notwithstanding the provisions
of Section 3(d)(i) requiring the amount of Company Pro Forma Taxable Income or
Loss and Company Pro Forma Alternative Minimum Taxable Income or Loss to be
determined in conformity with the information provided in Section 2(c)(i)
hereof, where the Company Federal Tax Settlement Payment Schedule is due on a
date that is earlier than thirty (30) days after the Closing Date, the Company
shall have the right in preparing
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the Final Company Federal Tax Settlement Payment Schedule to change the
treatment of an item previously reflected in the Company Federal Tax Settlement
Payment Schedule on the ground that such change is necessary in order to conform
the treatment of the item to the method used in reporting such item as reflected
on Tax Returns filed prior to the date hereof, taking into account any
adjustments resulting from any audit or examination for such Tax Returns and
applicable law. In such event, Parent shall have the right pursuant to Section
3(d)(iv) hereof to dispute the Company's change in treatment of any item. (iv)
Disputes. Within fifteen (15) days after receiving a Company Federal Tax
Settlement Payment Schedule or a Final Company Federal Tax Settlement Payment
Schedule, Parent will notify Company of any disagreement with any element of
Company Pro Forma Taxable Income or Loss or Company Pro Forma Alternative
Minimum Taxable Income or Loss, or both, reflected therein. Within fifteen (15)
days after receiving a Parent Federal Tax Settlement Payment Schedule or a Final
Parent Federal Tax Settlement Payment Schedule, Company will notify Parent of
any disagreement with the Tax benefit calculation reflected thereon. Company and
Parent will promptly attempt to resolve any such disagreement. If Company and
Parent are unable to resolve any such disagreement within forty-five (45) days
after receipt of such notice, then the issues remaining unresolved with respect
to the amount of Company Pro Forma Taxable Income or Loss or Company Pro Forma
Alternative Minimum Taxable Income or Loss, or both, or with respect to the
Parent Federal Tax Settlement Payment Schedule or a Final Parent Federal Tax
Settlement Payment Schedule, or both, shall be resolved as follows:
(A) Company and Parent shall jointly retain an
Independent Accounting Firm and, within fifteen (15) days following retention of
the Independent Accounting Firm, Company and Parent shall present or cause to be
presented to the Independent Accounting Firm the issue or issues that must be
resolved.
(B) Company and Parent shall encourage the
Independent Accounting Firm to render its decision as soon as is reasonably
practicable, including, without limitation, prompt compliance with all
reasonable requests by the Independent Accounting Firm for information, papers,
books, records and the like. All decisions of the Independent Accounting Firm
with respect to the issues presented by the parties shall be final and binding
on the parties hereto.
(C) The fees of such Independent Accounting
Firm shall be borne equally by the parties.
(D) Within thirty (30) days after a disputed
Federal Tax Settlement Payment is agreed to by Company and Parent or determined
by the Independent Accounting Firm, Company or Parent, as the case may be, shall
pay to Parent or Company, as the case may be, the amount of the Federal Tax
Settlement Payment for the Taxable Year less any
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Federal Tax Settlement Payment amount previously paid in respect of such Taxable
Year.
(e) Timing of Federal Tax Settlement Payments.
(i) Payment by Company. Any Federal Tax Settlement
Payment due from Company to Parent shall be due and payable to Parent as of the
date the Company Federal Tax Settlement Payment Schedule or the Final Company
Federal Tax Settlement Payment Schedule, as the case may be, is required to be
delivered to the Parent in accordance with this Agreement, except to the extent
that a dispute with respect to any such Company Federal Tax Settlement Payment
Schedule or such Final Company Federal Tax Settlement Payment Schedule has
occurred and is continuing under Section 3(d)(iv) hereof. If such a dispute has
occurred, then the Federal Tax Settlement Payment shall become payable as
provided in Section 3(d)(iv)(D) hereof.
(ii) Payment by Parent. Any Federal Tax Settlement
Payment due from Parent to Company shall be due to Company as of the date the
Parent Federal Tax Settlement Payment Schedule or the Final Parent Federal Tax
Settlement Payment Schedule, as the case may be, is required to be delivered to
Company in accordance with this Agreement, except to the extent that a dispute
with respect to any such Parent Federal Tax Settlement Payment Schedule or such
Final Parent Federal Tax Settlement Payment Schedule has occurred and is
continuing under Section 3(d)(iv) hereof. If such a dispute has occurred, then
the Federal Tax Settlement Payment shall become payable as provided in Section
3(d)(iv)(D) hereof.
(iii) Interest on Additional Federal Tax Settlement
Payments. Any additional Federal Tax Settlement Payment arising from adjustments
shown on a Company Federal Tax Settlement Payment Schedule, a Final Company
Federal Tax Settlement Payment Schedule, a Parent Federal Tax Settlement Payment
Schedule, or a Final Parent Federal Tax Settlement Payment Schedule, as the case
may be, including adjustments arising from any dispute, shall include interest
from the due date of the Company Federal Tax Settlement Payment Schedule as
provided in Section 3(d)(i) hereof, or the due date of the Parent Federal Tax
Settlement Payment Schedule as provided in Section 3(d)(ii), as the case may be,
computed at the Overdue Rate.
4. Information Returns.
(a) Preparation of Information Returns. Parent shall prepare and
file (or cause to be prepared and filed) all Information Returns which are
required under applicable law to be filed by Parent or Seller in respect of the
Company and its Subsidiaries, provided, however, that Company shall provide to
Parent any and all information necessary or useful for the filing of such
Information Returns in an accurate and timely manner. Company shall prepare and
file (or cause to be prepared and filed), in a manner consistent with the prior
practices of Company and
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its Subsidiaries, as applicable, all Information Returns required to be filed by
Company and its Subsidiaries, or any of them.
(b) Extensions Taken Into Account. For purposes of this Section
4, any Information Return shall be considered to have been filed on a timely
basis if it is filed on or before the due date for such filing, and the due date
for filing any Information Return shall take into account all valid extensions.
(c) Payment of Charges and Fees; Indemnification. Any party
required to file any Information Return pursuant to this Section 4 shall pay any
related fees or charges (including any such fees or charges that shall
thereafter become due and payable with respect to such Information Returns due
to a Final Determination) and shall indemnify and hold the other party harmless
against any related interest and penalties, as well as any such fees or charges
which are assessed against such party as the result of a failure by the party
responsible for such filing to file any Information Return in a timely and
accurate manner.
5. Indemnification Relating to Taxes; Payment of Refunds; Other
Payments.
(a) Indemnification by Parent. Parent shall indemnify Buyer
against, and hold it harmless (on an after-tax basis) from:
(i) all liability for Taxes with respect to Company and
its Subsidiaries assessed after the Closing Date for all Pre-Closing Taxable
Years ending on or before December 31, 1996 and any Pre-1997 Straddle Period,
except
(A) to the extent of an amount equal to the Taxes
accrued in the GAAP Financial Statements as of December 31, 1996 of the Company
and its Subsidiaries, as reduced by an amount equal to any federal Income Taxes
accrued in such financial statements up to the amount of any Federal Tax
Settlement Payments that the Company ultimately is required to make in respect
of the 1996 Taxable Year pursuant to Section 3(c)(ii)(A), and
(B) to the extent that any such Tax is
attributable to an adjustment that results in an increase in the taxable income
of Company or its Subsidiaries for any Pre-Closing Taxable Years ending on or
before December 31, 1996 or any Pre-1997 Straddle Period and a related decrease
in the taxable income of Company or its Subsidiaries in a Post-Closing Taxable
Year beginning on or after January 1, 1997 or any Post-1996 Straddle Period; and
(ii) all liability for Taxes of any other member of the
Xerox Affiliated Group pursuant to any provision of joint and several liability
including, without limitation, Reg ss. 1.1502-6 and any corresponding provisions
of state, local or foreign law.
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(iii) liability for federal Income Taxes with respect to
Company and its Subsidiaries assessed after the Closing Date for the Stub
Period, but only to the extent such liability is attributable to an adjustment
of an item of income or deduction included in the Pro Forma Adjustments which
adjustment does not result in a decrease in the taxable income of Company or its
Subsidiaries in a Post-Closing Taxable Year.
Notwithstanding anything in the foregoing that might otherwise be
read to the contrary, it is hereby understood and agreed that Parent shall have
no liability to indemnify Buyer against, or hold it harmless from: any Federal
Tax Settlement Payment the Company is required to make to Parent pursuant to
Section 3(c)(ii)(A), or any Tax the Company is required to pay (or cause to be
paid) pursuant to Section 3(a)(ii) hereof to the extent that such Tax does not
exceed an amount equal to the Taxes accrued in the GAAP Financial Statements as
of December 31, 1996 of the Company and its Subsidiaries, as reduced by an
amount equal to any federal Income Taxes accrued in such financial statements up
to the amount of any Federal Tax Settlement Payments that the Company ultimately
is required to make in respect of the 1996 Taxable Year pursuant to Section
3(c)(ii)(A).
(b) Obligation of the Buyer and Company to Indemnify. Buyer and
Company shall indemnify (on an after tax basis) the Parent and Seller against
all liability for Taxes with respect to Company and its Subsidiaries for which
the Parent is not required to indemnify the Buyer pursuant to Section 5(a)
hereof.
(c) Tax Obligations for Straddle Periods. Taxes relating to the
Company and its Subsidiaries for any Straddle Period shall be the joint
responsibility of Buyer and Company, on the one hand, and Parent and Seller, on
the other hand, and shall be apportioned (based on an interim closing of the
books) between the Pre-1997 Straddle Period and the Post-1996 Straddle Period in
a fair and equitable manner consistent with past accounting practices as
properly adjusted to reflect applicable Tax principles, or in the case of real,
personal, and intangible property taxes or any similar Tax, in accordance with
the principles of Section 164(d) of the Code.
(d) Notice and Payment of Indemnified Amounts.
(i) Duty to Notify. Buyer shall notify Parent of any
Taxes paid or incurred by Buyer, Company or its Subsidiaries which are subject
to indemnification by Parent under Section 5(a) hereof. Parent shall notify
Buyer of any Taxes paid or incurred by Parent or any other member of the Xerox
Group which are subject to indemnification by Buyer and Company under Section
5(b) hereof.
(ii) Explanation of Claim. Any notice contemplated by
this Section
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5(d) shall include a detailed calculation (including, if
applicable, separate allocations of such Taxes between Pre-1997 and Post-1996
Straddle Periods and supporting work papers) and a brief explanation of the
basis for such indemnification.
(iii) Time for Payment. Within twenty (20) days after the
receipt of a notice described in this Section 5(d), the notified party shall pay
to the notifying party the amount requested in such notice, but only to the
extent that the notified party agrees with such request. To the extent that the
notified party disagrees with such request, it shall, within the applicable
twenty (20) day period, so notify the notifying party. If the parties are unable
to settle such disagreement between themselves no later than fifteen (15) days
after notice of the disagreement in accordance with this Section 5(d), then they
shall jointly retain an Independent Accounting Firm to resolve such dispute. The
fees of the Independent Accounting Firm shall be borne equally by the parties.
The resolution of the Independent Accounting Firm under this Section 5(d)(iii)
shall be binding on Parent on the one hand and Buyer and Company on the other
hand. Within ten (10) days after resolution of such dispute, Buyer or Company on
the one hand or Parent on the other hand, as the case may be, shall pay to
Parent on the one hand, or Buyer or Company on the other hand, as the case may
be, the amount determined by such Independent Accounting Firm to be due pursuant
to this Section 5 (d) together with interest at the Overdue Rate from the date
the payment was originally due.
(e) Parent's Right to Pursue and Retain Refunds. Parent and
Seller shall have the right to pursue and shall be entitled to retain, or to
receive prompt payment from Buyer, Company or its Subsidiaries to the extent
secured by any of them, any overpayment, refund or credit of Taxes (including,
without limitation, refunds and credits arising by reason of Tax Returns as
originally filed or amended Tax Returns) relating to Company and its
Subsidiaries for any and all Pre-Closing Taxable Years ending on or before
December 31, 1996 or any Pre-1997 Straddle Period, including without limitation
any refunds in respect of the 1990 through 1994 Uncollectible Reinsurance
Deductions; provided, however, that such right shall not extend to any
overpayment, refund, or credit of Taxes (other than with respect to the 1990
through 1994 Uncollectible Reinsurance Deductions) accrued as a receivable in
the GAAP Financial Statements as of December 31, 1996 of the Company and its
Subsidiaries. Buyer (or Company and its Subsidiaries) shall have the right to
pursue and shall be entitled to retain, or to receive prompt payment from Parent
or Seller to the extent secured by them, any overpayment, refund or credit of
Taxes relating to Company and its Subsidiaries to which Parent and Seller are
not entitled pursuant to the preceding sentence. If Buyer (or any of its
Subsidiaries) or Parent (or any of its Subsidiaries) receives a Tax refund to
which the other party is entitled pursuant to this Agreement, the Buyer or
Parent, as the case may be, shall pay or cause the recipient to pay the amount
of such refund (including any interest received thereon) to such other party
within ten (10) days after receipt thereof. Within ninety (90) days after the
end of each Taxable Year following the Closing Date, Buyer and Parent shall have
their respective Chief Financial Officers tender to the other party a statement
showing the aggregate amount of all Tax refunds received to
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which Parent (or any of its Subsidiaries) or Buyer (or any of its Subsidiaries)
is entitled.
(f) Other Payments. Any Tax benefit realized by the Buyer Group
(or any member thereof) for any Post-Closing Taxable Year with respect to the
1990 through 1994 Uncollectible Reinsurance Deductions shall be paid to the
Parent in accordance with the terms hereof whether such Tax benefit results from
(i) an originally filed or amended Tax Return of the Buyer Group (or any member
thereof), (ii) an audit or other examination of, or claim for refund or amended
Tax Return with respect to, any Tax Return of (or including) any member of the
Xerox Group for any Pre-Closing Taxable Year or Pre-1997 Straddle Period, or
(iii) otherwise. A deduction or deductions for the 1990 through 1994
Uncollectible Reinsurance Deductions not allowed as deductions for any
Pre-Closing Taxable Year or Pre-1997 Straddle Period shall be claimed by the
Company and its Subsidiaries in the federal Income Tax Return(s) for the first
Taxable Year(s) in which such deduction(s) become allowable to Company or its
Subsidiaries, and within twenty (20) days after the filing of a Tax Return in
which such deductions are claimed, Buyer shall pay (or cause to be paid) to
Parent an amount equal to the Tax benefit attributable to such deductions. For
purposes of this provision, the amount of such Tax benefit shall be equal to the
excess of the amount of the federal Income Tax liability of the Buyer Group (or
any member thereof, as the case may be) for all Taxable Years affected computed
without regard to the 1990 through 1994 Uncollectible Reinsurance Deductions
over the amount of the actual federal Income Tax liability of the Buyer Group
(or any member thereof, as the case may be) for all Taxable Years affected after
considering the 1990 through 1994 Uncollectible Reinsurance Deductions. Within
ten (10) business days after Parent's receipt of any notice from Company or
Buyer of a Final Determination that deductions claimed by Company on any Tax
Return for any Taxable Year beginning on or after January 1, 1997 or any
Post-1996 Straddle Period in respect of the 1990 through 1994 Uncollectible
Reinsurance Deductions are not allowable, Parent shall repay to Buyer or
Company, to the extent of the disallowed deductions, the Tax benefit amount
Parent received from the Company.
(g) Changes Concerning Timing Differences Only. If, as a result
of the filing of an amended return or any Final Determination, there is any
change after the Closing Date in an item of income, gain, loss, deduction or
credit that results in an increase in a liability for Taxes for which Buyer
would otherwise be liable pursuant to this Agreement, and such change results in
a decrease in the liability for Taxes of Parent for any Pre-Closing Taxable Year
ending on or before December 31, 1996 or any Pre-1997 Straddle Period (other
than by reason of a carryback of losses, deductions or credits), Buyer shall not
be liable pursuant to this Agreement with respect to such increase to the extent
of such decrease. In no event shall any decrease in the liability for Taxes of
Parent for any Pre-Closing Taxable Year ending on or before December 31, 1996 or
any Pre-1997 Straddle Period attributable to the 1990 through 1994 Uncollectible
Reinsurance Deductions be treated as an item subject to the provisions of this
Section 5(g).
6. Capital Loss, Net Operating Loss, and Credit Carrybacks.
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(a) Payments With Respect to Refund Claims.
(i) Filing of Claim for Refund; Payment of Tax Benefit.
If Company or any of its Subsidiaries realizes a capital loss or a credit in a
Post-Closing Taxable Year that is required, after application of paragraph (b),
below, to be carried back to a Taxable Year of the Xerox Affiliated Group (or
any member thereof), Parent shall promptly file (or shall cause promptly to be
filed) a claim for refund and shall pay (or cause to be paid) to Company the
full amount of any Tax benefit, net of any Tax due by the Xerox Affiliated Group
on account of such refund, within twenty (20) days of the date such Tax benefit
is realized. For purposes of this Section 6(a), the Tax benefit in any Taxable
Year shall be equal to the excess of (A) the Tax liability of the Xerox
Affiliated Group for such Taxable Year, computed without regard to the capital
loss or credit referred to above, over (B) the actual Tax liability of the Xerox
Affiliated Group for such Taxable Year after considering such capital loss or
credit.
(ii) Repayment of Tax Benefit. If Parent has paid an
amount in respect of any refund pursuant to Section 6(a)(i) hereof, that amount
shall be repaid to Parent (with interest at the Overdue Rate from the original
date of payment until the date repaid to Parent) within twenty (20) days after
demand therefor by Parent (A) to the extent that the Xerox Affiliated Group
subsequently realizes capital losses, credits, or net operating losses that
could have been carried back but for the carryback of capital losses or credits
of the Buyer Group (or its members) pursuant to this Section 6(a) or (B) to the
extent that the Tax benefit to the Xerox Affiliated Group is subsequently
reduced pursuant to a Final Determination.
(b) Election to Forgo Carrybacks of Losses, Etc. Company and its
Subsidiaries shall elect, where permitted by law, to carry forward any net
operating loss, net capital loss, credit or other item arising after the Closing
Date that would, absent such election, be carried back to a Pre-Closing Taxable
Year of Company or any of its Subsidiaries that file a consolidated, combined,
or unitary Tax Return with any member of the Xerox Affiliated Group. Buyer and
Seller agree that neither Xerox, Parent or Seller shall make any election
pursuant to Reg. ss. 1.1502-20(g) to reattribute to itself any net operating
loss or net capital loss carryover of the Company or any of its Subsidiaries
unless Buyer and Seller otherwise agree.
7. Payments.
(a) Time and Manner of Payments. All payments made pursuant to
Sections 3, 4, 5 or 6 hereof shall be made in immediately available funds.
Except as otherwise provided herein, any payment not made when due hereunder
shall bear interest at the Overdue Rate from the due date until the date of
actual payment. In the absence of a specified date, a payment shall be due
twenty (20) days after the later of (i) the date on which the notifying party
actually realizes the expense, by incurring an economic detriment, with respect
to which such notice
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relates, or (ii) the date such notice is delivered.
(b) Nature of Payments. Any payment (other than interest on a
payment) owing to the Buyer pursuant to this Agreement shall be made to Company
and treated by all parties for all purposes as a payment to the Buyer made as a
reduction of purchase price for Company's stock followed by a contribution to
Company's capital by the Buyer. Any payment (other than interest on a payment)
owing to the Parent (or any member of the Xerox Group) shall be made to Parent
and treated by all parties for all purposes as a net adjustment to the purchase
price for Company's stock. Any liability or obligation with respect to such
payment shall be extinguished through payment to Company or Parent respectively.
(c) Deferral of Payments Until Closing. Notwithstanding anything
else to the contrary in this Agreement, any payment otherwise due hereunder
prior to the Closing Date shall become payable within thirty (30) days after the
Closing Date, and any such deferred payments shall bear interest at the Overdue
Rate from the date such payments would have been due under this Agreement absent
the provisions of this Section 7(c) through the date of actual payment.
8. Audits and Other Contests.
(a) Notice of Audits or Assessments. Buyer (and any member of the
Buyer Group) shall promptly notify Parent, and Parent shall promptly notify
Buyer, in writing within ten (10) business days from the receipt of notice of
any pending or threatened Tax audits or assessments of Company or its
Subsidiaries for any Pre-Closing Taxable Year.
(b) Federal Income Taxes. Parent shall have the sole right to
represent the interests of Company and its Subsidiaries and settle all issues,
and to employ counsel of its choice at its expense, in any audit or other
examination or administrative or court proceeding relating to federal Income
Taxes for any Pre-Closing Taxable Year, provided that Parent shall keep Buyer
reasonably informed on an ongoing basis with respect to issues affecting the
Company and its Subsidiaries, and further provided that Parent shall not settle
any Tax claim which may be subject to indemnification by Buyer hereunder, or
which may increase the Tax Liabilities of Buyer and its Subsidiaries for any
Post-Closing Taxable Year without the consent of Buyer (which shall not be
unreasonably withheld). For purposes of this Section 8(b), Buyer's consent shall
be considered to be unreasonably withheld unless, within forty-five (45) days
after request by Parent, Buyer (i) provides Parent with the terms of an
alternative proposed settlement of the issue that Parent seeks to settle and
(ii) delivers to Parent an opinion of a law firm agreed upon by Parent and Buyer
stating that it is more likely than not that Buyer's alternative proposed
settlement of such issue will be accepted in the audit or other examination or
administrative or court proceeding in which Parent seeks to settle such issue.
(c) Other Taxes. Parent shall have the sole right to represent
the interests of
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Company and its Subsidiaries and settle all issues, and to employ counsel of its
choice at its expense, in any audit or administrative or court proceeding
relating to Taxes other than federal Income Taxes for any Pre-Closing Taxable
Year ending on or before December 31, 1996. Notwithstanding the foregoing and
subject to Parent's rights set forth in the preceding sentence, Buyer shall be
entitled, at its expense, to participate in the conduct of any Tax audit and any
judicial or administrative proceeding relating to any Tax audit described in
this Section 8(c); provided that Parent shall keep Buyer reasonably informed on
an ongoing basis with respect to issues affecting the Company and its
Subsidiaries, and further provided that Parent shall not settle any Tax claim
which may be subject to indemnification by Buyer hereunder, or which may
increase the Tax Liabilities of Buyer and its Subsidiaries for any Post-Closing
Taxable Year without the consent of Buyer (which shall not be unreasonably
withheld). For purposes of this Section 8(c), Buyer's consent shall be
considered to be unreasonably withheld unless, within forty-five (45) days after
request by Parent, Buyer (i) provides Parent with the terms of an alternative
proposed settlement of the issue that Parent seeks to settle and (ii) delivers
to Parent an opinion of a law firm agreed upon by Parent and Buyer stating that
it is more likely than not that Buyer's alternative proposed settlement of such
issue will be accepted in the audit or other examination or administrative or
court proceeding in which Parent seeks to settle such issue.
(d) Straddle Periods. All audits or administrative or court
proceedings relating to any Straddle Period shall be controlled jointly by
Parent and Buyer, each to employ counsel of its choice at its expense, provided,
however, that settlement (at the administrative level or during the course of
judicial proceedings) may only be entered into with the consents of both Parent
and Buyer (which, in either case, shall not be unreasonably withheld). In the
event of an issue arising pursuant to any contest referred to in this Sections
8(d), if Parent or Buyer proposes to settle on terms acceptable to a Taxing
Authority, but the other party, Parent or Buyer as the case may be, disagrees
with the proposed settlement, then the party proposing to settle may pay the
other party its share of the amount of Taxes attributable to the settlement
proposed and, in that event, the other party shall have sole responsibility for
the settlement of such issue.
9. Cooperation, Record Retention, and Confidentiality.
(a) Cooperation.
(i) Buyer, Company and Subsidiaries to Cooperate. Upon
Parent's request, Buyer shall promptly provide (and cause Company and its
Subsidiaries, and the other members of the Buyer Group to promptly provide)
Parent with such cooperation and assistance, documents and other information,
without charge, as Seller may reasonably request in connection with (A) the
preparation of any Tax Return or Information Return, (B) the conduct of any
audit or other examination or any judicial or administrative or court proceeding
referred to in Section 8 hereof relating to liability for, refunds of or
adjustments with respect to (or any other matter relating to) Taxes or Tax
Returns or Information Returns of the Xerox Group or any member of
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such Group, or (C) the verification of an amount payable or receivable
hereunder.
(ii) Parent and Seller to Cooperate. Likewise, upon
Buyer's request, Seller shall promptly provide (and cause its Subsidiaries to
promptly provide) such cooperation and assistance, documents and other
information referred to in the preceding sentence, as Buyer may reasonably
request in the circumstances described in Section 9(a)(i) hereof.
(iii) Cooperation Defined. For purposes of this
Agreement, cooperation and assistance shall include, without limitation: (A)
providing all relevant information that is available to Buyer, Company and its
Subsidiaries, as the case may be, with respect to any audit or proceeding
referred to in Section 8(a) hereof; (B) executing and delivering any power of
attorney necessary or other documents or instruments to carry out the intent of
this Agreement; (C) promptly and timely filing appropriate claims for any
refund; preparation of responses to requests for information within the time
frame given by the Taxing Authority for responding to such requests for
information, and (D) making available to any party, during normal business hours
(1) all books, records, returns of Company and its Subsidiaries, relevant
extracts from revenue agent reports that are applicable to Company and its
Subsidiaries, and (2) the services of officers and employees (without
substantial interruption of employment), necessary or useful in connection with
the matters referred to in this Section 9(a), provided that the foregoing shall
be done in a manner so as not to interfere unreasonably with the conduct of the
business of Buyer and Company and its Subsidiaries.
(b) Record Retention.
(i) Records to Be Retained; Time Periods. Parent,
Seller, and Buyer shall each retain or cause to be retained all Tax Returns and
Information Returns and all books, records, schedules, workpapers, and other
documents relating thereto, including, without limitation, documents described
in the Record Retention Agreement to which Company is a party (a copy of which
is attached as Exhibit A), until the expiration of the later of (A) all
applicable statutes of limitations (taking into account any waivers or
extensions thereof), and (B) any retention period required by law or pursuant to
any record retention agreement with any Taxing Authority.
(ii) Prior Notices Required. Parent and Buyer shall
notify each other in writing of (A) any waivers, extension or expirations of
applicable statutes of limitations as referred to in Section 9(b)(i) hereof, and
(B) of any intended destruction, at least thirty (30) days prior thereto, of any
of the documents referred to in Section 9(b)(i) hereof. A party giving such a
notice under this Section 9(b)(ii) shall nonetheless refrain from disposing of
any of the materials referred to in Section 9(b)(i) hereof without first having
offered to transfer possession thereof to the notified party.
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(c) Confidentiality. Except as required by law or with the prior
express written consent of all other parties to this Agreement, all Tax Returns
and Information Returns, documents, schedules, workpapers and other documents
relating thereto, as well as all information contained therein, shall be kept
confidential to the parties to this Agreement and their officers, employees,
agents and representatives, shall not be disclosed to any other Person, and
shall be used only for the purposes provided herein.
10. Subsequent Transferees. Except as provided in this Section 10, Buyer
shall not sell, transfer, assign, or otherwise dispose of, whether directly or
indirectly, either the stock of Company and/or its Subsidiaries or substantially
all of Buyer's assets, or both, and Buyer shall prevent Company and its
Subsidiaries (determined as of the Closing Date) from selling, transferring,
assigning, or otherwise disposing of all or substantially all of their assets,
unless the purchaser, transferee, or assignee thereof expressly assumes all of
the obligations of the transferor under this Agreement or unless prior to any
such transfer, the transferor has made such other provisions for the
satisfaction of its obligations under this Agreement as shall be agreed to by
the other parties to this Agreement in their reasonable discretion. Provided
that the terms of this Section 10 are complied with, any transferee of all or
substantially all of the stock of Company shall succeed to its transferor's
rights under this Agreement.
11. Miscellaneous.
(a) Effectiveness. This Agreement shall be effective from and
after the date hereof, provided, however, that this Agreement shall terminate
immediately upon a termination of the Purchase Agreement in accordance with its
terms and thereafter this Agreement shall be of no further force and effect.
(b) Entire Agreement. This Agreement and the Purchase
Agreement contain the entire agreement among the parties hereto with respect to
the subject matter hereof.
(c) Binding Effect; No Third Party Beneficiary. This Agreement
shall be binding upon and inure to the benefit of the parties and their
respective successors, legal representatives and permitted assigns. Nothing
expressed or implied in this Agreement is intended or shall be construed to
confer upon or give any Person other than the Parent, Seller, Company, or the
Buyer any rights or remedies or by reason of this Agreement or any transaction
contemplated hereby.
(d) Termination of Prior Agreements. With respect to Company and
its Subsidiaries, this Agreement terminates, as of the Closing Date, any and all
other agreements with respect to Taxes (other than the Purchase Agreement) to
which Company or any of its Subsidiaries, on the one hand, and Seller or any of
its Subsidiaries (other than Company and its Subsidiaries), on the other hand,
are or were parties at any time at or before the Closing Date.
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This Agreement also extinguishes, as of the Closing Date, any and all
intercompany liabilities with respect to Taxes between Company or any of its
Subsidiaries, on the one hand, and Seller or any of its Subsidiaries (other than
Company and its Subsidiaries), on the other hand, that exist on the Closing
Date. Subject to the provisions of Section 3(b) hereof, the parties to this
Agreement intend (i) that there not be any payments by Parent or Seller to
Company or any of its Subsidiaries or by Company or any of its Subsidiaries to
Parent, Seller, or any of their Subsidiaries after the date of this Agreement
under any existing agreement with respect to Taxes (other than the Purchase
Agreement) and (ii) that payments with respect to Taxes on and after the date of
this Agreement be made only pursuant to this Agreement.
(e) No Double Recovery. Should it be necessary, equitable
adjustments will be made to prevent duplicate recovery for indemnification with
respect to the same item.
(f) Section 338(h)(10) Election. The parties hereto shall not
make a joint election under Section 338(h)(10) of the Code unless Buyer and
Seller agree otherwise.
(g) Guarantee of Performance. Parent hereby guarantees the
complete and prompt performance by the members of the Xerox Affiliated Group and
Buyer Parent, Buyer, and Company hereby guarantee the complete and prompt
performance by members of the Buyer Group, of all of their respective
obligations and undertakings pursuant to this Agreement.
(h) Severability. In case any one or more of the provisions
contained in this Agreement should be invalid, illegal or unenforceable, the
enforceability of the remaining provisions hereof shall not in any way be
affected or impaired thereby.
(i) Indulgences, etc. Neither the failure nor any delay on the
part of any party hereto to exercise any right under this Agreement shall
operate as a waiver thereof, nor shall any single or partial exercise of any
right preclude any other further exercise of the same or any other right, nor
shall any waiver of any right with respect to any occurrence be construed as a
waiver of such right with respect to any other occurrence.
(j) Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF NEW YORK WITHOUT
REGARD TO THE CONFLICT OF LAW PRINCIPLES THEREOF, EXCEPT WITH RESPECT TO MATTERS
OF LAW CONCERNING THE INTERNAL CORPORATE AFFAIRS OF ANY CORPORATE ENTITY WHICH
IS A PARTY TO OR SUBJECT OF THIS AGREEMENT, AND AS TO THOSE MATTERS THE LAW OF
THE JURISDICTION UNDER WHICH THE RESPECTIVE ENTITY DERIVES ITS POWERS SHALL
GOVERN.
(k) Notices. All notices, requests, demands and other
communications
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required or permitted under this Agreement shall be made to:
To Parent:
Xerox Financial Services, Inc.
100 First Stamford Place
Stamford, Connecticut 06904
Facsimile: (203) 325-6729
Attn: Mark Sheivachman
Vice President, Taxes
To Seller:
Talegen Holdings, Inc.
1011 Western Avenue
Suite 1000
Seattle, Washington 98104
Facsimile: (206) 654-2631
Attn: Richard N. Frasch, Esq.
General Counsel
With copies to:
LeBoeuf, Lamb, Greene & MacRae, L.L.P.
1875 Connecticut Avenue, N.W.
Washington, D.C. 20009-5728
Facsimile: (202) 986-8102
Attn: George R. Abramowitz
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To Buyer:
Fremont General Corporation
2020 Santa Monica Boulevard
Santa Monica, CA 90404
Facsimile: (310) 315-3998
Attn: William Hillstrom
Director of Taxes
with a copy to the appropriate persons designated in Section 10.5 of the
Purchase Agreement for receiving notice on behalf of Parent and Seller and
Buyer, respectively.
(l) Waivers and Amendments; Non-Contractual Remedies;
Preservation of Remedies. This Agreement may be amended, superseded, canceled,
renewed or extended, and the terms hereof may be waived, only by a written
instrument executed and delivered by duly authorized officers of Buyer and
Parent, or, in the case of waiver, by the party waiving compliance. 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 such right, power or privilege. The rights and remedies herein
provided are cumulative and are not exclusive of any rights or remedies that any
party may otherwise 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 covenant contained in this Agreement shall in no way be limited by
the fact that the act, omission, 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) as to which there
is no inaccuracy or breach.
(m) Survival of Obligations. The agreements, covenants and
obligations contained in this Agreement shall survive the consummation of the
transactions contemplated by the Purchase Agreement, and shall expire only when
claims arising therefrom are barred by all applicable statutes of limitation (as
may be extended from time to time).
(n) Variations in Number and Gender. All terms used in this
Agreement, and any variations of such terms, refer to the masculine, feminine or
neuter, singular or plural, as the context may require.
(o) Counterparts. This Agreement may be executed in any number of
counterparts, each such counterpart being deemed to be an original instrument,
and all of such counterparts shall together constitute one and the same
instrument.
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(p) Headings. The Section and paragraph captions herein are for
convenience or reference only, do not constitute part of this Agreement and
shall not be deemed to limit or otherwise affect any of the provisions hereof.
IN WITNESS WHEREOF, this Agreement has been duly executed and delivered
by the duly authorized officers of the parties hereto on the date first
hereinabove written.
Xerox Financial Services, Inc.
By:___________________________
Talegen Holdings, Inc.
By:___________________________
Industrial Indemnity Holdings, Inc.
By:___________________________
Fremont General Corporation
By:___________________________
Fremont Indemnity Company
By:___________________________
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Exhibit A
RECORD RETENTION AGREEMENT
26
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Schedule 2(a)
INTERPOLATION METHODOLOGY PURSUANT TO SECTION 2(a)(1)(B)
For purposes of this Agreement, any discounting of unpaid losses (within the
meaning of Section 846 of the Code) and of salvage and subrogation required for
the Stub Period shall be done in accordance with the following interpolation
method:
The discount factor for AY + 0 shall be determined (with reference to
the development of losses for the portion of 1996 up to and including
the Closing Date) by adding to the industry discount factor (published
by the IRS for 1996) for AY + 0, a percentage of the excess (whether
positive or negative) of the industry factor for AY + 0 over the
industry factor for AY + 1 equal to the number of full months in 1996
following the Closing Date divided by 12, provided that the resulting
discount factor shall not be greater than one nor less than zero.
The discount factor for AY + 1 shall be determined by subtracting from
the industry discount factor for AY + 0, a percentage of the excess
(whether positive or negative) of the industry factor for AY + 0 over
the industry factor AY + 1 equal to 1 minus the percentage determined
pursuant to the preceding sentence.
Similar interpolative adjustments should be made for AY + 2, AY + 3, and
each succeeding accident year, in turn, with the resulting factors
applied to unpaid losses reflected in the books and records of the
Company for each accident year.
It is understood and agreed that the source of the above method of computing
discount factors for unpaid losses is the letter submitted by the American
Insurance Association on April 24, 1989 to the Internal Revenue Service, and
that the method of computing part year discount factors for unpaid losses
reflected in that letter is intended to be applied for purposes of this
Agreement.
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Schedule 5(f)
1990 through 1994 Uncollectible Reinsurance (Income) Deductions
1990 $4,690,323
1991 (297,973)
1992 8,057,076
1993 (4,410,816)
1994 2,412,334
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Total $10,450,944
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