UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter ended September 30, 1997
Commission file number 1-10861
GUARANTY NATIONAL CORPORATION
.............................
(Exact name of registrant as specified in its charter)
Colorado 84-0445021
........ ..........
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9800 South Meridian Boulevard
Englewood, Colorado 80112
.............................
(Address of principal executive offices)
(Zip Code)
Registrant's telephone number, including area code (303) 754-8400
..............
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
As of November 3, 1997 there were 15,062,933 shares of
Registrant's $1.00 par value common stock issued and outstanding
exclusive of shares held by Registrant.
<PAGE>
GUARANTY NATIONAL CORPORATION
Form 10-Q Index
For the Quarter Ended September 30, 1997
Page
Number
PART 1. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets at
September 30, 1997 and December 31, 1996 3
Consolidated Statements of Earnings
for the nine months and three months
ended September 30, 1997 and 1996 4
Consolidated Statements of Cash Flows
for the nine months ended
September 30, 1997 and 1996 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
PART 2. OTHER INFORMATION 16
SIGNATURES 17
<PAGE>
PART I - FINANCIAL INFORMATION
GUARANTY NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
ASSETS
September 30, December 31,
1997 1996
------------- ------------
(Unaudited)
Investments:
Fixed maturities held to maturity, at cost $ 74,262 $ 80,271
Fixed maturities available for sale,
at market 426,259 390,290
---------- --------
500,521 470,561
Common stocks, at market 77,178 59,415
Non-redeemable preferred stocks, at market 46,372 28,687
Other long-term investments 16,894 13,585
Short-term investments 103,097 94,993
---------- --------
Total investments 744,062 667,241
Cash 2,849 3,988
Accrued investment income 7,658 7,971
Accounts receivable,
(less allowance of $171 - 1997 and 1996) 58,384 45,557
Reinsurance recoverables and prepaids,
(less allowance of $200 - 1997 and 1996) 92,565 90,781
Property and equipment, (less accumulated
depreciation of $16,209 - 1997; $13,508 - 1996) 28,753 29,833
Deferred policy acquisition costs 48,538 44,456
Goodwill, (less accumulated amortization of
$7,262 - 1997; $6,423 - 1996) 33,800 34,639
Other assets 2,806 4,626
---------- --------
Total assets $1,019,415 $929,092
========== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Unpaid losses $ 300,043 $303,266
Unpaid loss adjustment expenses 76,169 65,142
Unearned premiums 172,771 154,242
Notes payable 101,125 101,688
Reinsurance payables and deposits 11,506 7,268
Deferred income taxes 10,986 803
Other liabilities 68,165 58,644
---------- --------
Total liabilities 740,765 691,053
---------- --------
Commitments and contingencies
Shareholders' equity:
Preferred stock, $.10 par value;
authorized, 6,000,000 shares;
none issued and outstanding
Common stock, $1 par value;
authorized, 30,000,000 shares;
issued 15,054,433 shares - 1997
and 14,975,497 shares - 1996 15,054 14,975
Capital in excess of par 122,632 121,272
Retained earnings 109,075 84,685
Net unrealized investment gains 31,889 17,107
---------- --------
Total shareholders' equity 278,650 238,039
---------- --------
Total liabilities and shareholders' equity $1,019,415 $929,092
========== ========
See notes to consolidated financial statements.
<PAGE>
GUARANTY NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share amounts)
Nine Months Ended Three Months Ended
September 30, September 30,
1997 1996 1997 1996
-------- -------- -------- --------
(Unaudited) (Unaudited)
Revenue:
Premiums earned $403,354 $356,740 $140,082 $122,321
Net investment income 31,698 28,418 10,090 9,899
Realized investment gains 8,376 5,494 3,421 1,905
-------- -------- -------- --------
443,428 390,652 153,593 134,125
-------- -------- -------- --------
Expenses:
Losses and loss adjustment
expenses incurred 280,916 253,370 97,790 84,863
Policy acquisition costs 105,871 96,765 36,535 36,205
General and administrative 9,230 7,477 2,703 552
Interest 4,960 5,123 1,653 1,720
Other 1,046 1,166 357 383
Nonrecurring tender offer charge 2,163
-------- -------- -------- --------
402,023 366,064 139,038 123,723
-------- -------- -------- --------
Earnings before income taxes 41,405 24,588 14,555 10,402
Income taxes 11,385 6,055 3,995 2,881
-------- -------- -------- --------
Net earnings $ 30,020 $ 18,533 $ 10,560 $ 7,521
======== ======== ======== ========
Earnings per common share $ 1.98 $ 1.24 $ 0.69 $ 0.50
======== ======== ======== ========
Dividends per common share $ 0.375 $ 0.375 $ 0.125 $ 0.125
======== ======== ======== ========
See notes to consolidated financial statements.
<PAGE>
GUARANTY NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Nine Months Ended
September 30,
1997 1996
-------- --------
(Unaudited)
Operating Activities:
Premiums collected $413,082 $372,512
Net investment income collected 28,596 28,000
Losses and loss adjustment expenses paid (274,068) (252,435)
Policy acquisition costs and general and
administrative expenses paid (112,512) (109,456)
Interest paid (4,908) (5,036)
Federal income taxes paid (10,547) ( 7)
Nonrecurring tender offer charge (1,199)
Other receipts 412 3,681
-------- --------
Net cash provided by operating activities 40,055 36,060
-------- --------
Investing Activities:
Maturities of fixed maturities
held to maturity 4,131 7,635
Maturities of fixed maturities
available for sale 52,776 36,403
Sales of fixed maturities
available for sale 55,148 40,284
Sales of equity securities 33,419 29,758
Sales of property and equipment 256 290
Redemption of mortgage loans 681
Net change in short-term investments (8,048) (35,336)
Purchases of fixed maturities
held to maturity ( 20,780)
Purchases of fixed maturities
available for sale (126,724) (58,826)
Purchases of equity securities (43,575) (23,852)
Net change in other long-term investments (1,127) (668)
Purchases of property and equipment (2,557) (2,926)
-------- --------
Net cash used in investing activities (36,301) (27,337)
-------- --------
Financing Activities:
Repayment of notes payable (563) (1,125)
Dividends paid (5,630) (5,613)
Proceeds from exercise of stock options 1,300 54
-------- --------
Net cash used in financing activities (4,893) (6,684)
-------- --------
Net (Decrease) Increase in Cash (1,139) 2,039
Cash, Beginning of Period 3,988 6,794
-------- --------
Cash, End of Period $ 2,849 $ 8,833
======== ========
See notes to consolidated financial statements.
<PAGE>
GUARANTY NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the Nine and Three Months Ended September 30, 1997
NOTE 1 - GENERAL
The accompanying unaudited consolidated financial statements of
Guaranty National Corporation and subsidiaries (the "Company")
have been prepared in accordance with generally accepted
accounting principles applicable to interim reporting and do not
include all of the information and footnotes required for
complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating
results for the nine months ended September 30, 1997 are not
necessarily indicative of the results that may be expected for
the year ending December 31, 1997.
These financial statements should be read in conjunction with
the financial statements and related notes included in the
Company's Annual Report to Shareholders and Form 10-K for the
year ended December 31, 1996, for the more complete explanations
therein.
Certain reclassifications have been made to the 1996 financial
statements to conform with presentations used in 1997.
NOTE 2 - EARNINGS PER SHARE
Earnings per common share has been computed using the weighted
average number of shares and equivalent shares outstanding of
15,129,510 and 14,970,580 for the nine months ended September 30,
1997 and 1996, and 15,248,913 and 14,977,140 for the three months
ended September 30, 1997 and 1996, respectively. The common
stock equivalents are stock options which result in a dilutive
effect from assumed exercise of the options.
During the first quarter of 1997, Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings per Share" was
issued. This SFAS is effective for financial statements issued
for periods ending after December 15, 1997, including interim
periods; earlier application is not permitted. The SFAS replaces
primary earnings per share with basic earnings per share
(computed by dividing income available to common stockholders
(the numerator) by the weighted average number of common shares
outstanding (the denominator during the period)). Adoption of
SFAS No. 128 would have had no material effect on earnings per
share for September 30, 1997 and 1996.
NOTE 3 - INVESTMENTS
At September 30, 1997 and December 31, 1996, the estimated
aggregate fair value of fixed maturities held to maturity was
$75,814,000 and $81,430,000, respectively, the cost of fixed
maturities available for sale was $410,308,000 and $382,415,000,
respectively, and the cost of equity securities was $90,441,000
and $69,658,000, respectively. At September 30, 1997 and
December 31, 1996, the Company had investments in non-investment
grade securities with a cost of $58,714,000 and $55,205,000,
which are carried at fair values of $61,483,000 and $56,477,000,
respectively.
<PAGE>
GUARANTY NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the Nine and Three Months Ended September 30, 1997
Realized investment gains (losses), which include gains
(losses) on calls and maturities of fixed maturities, for the
nine and three months ended September 30, 1997 and 1996, and
write downs for other-than-temporary investment impairments of
approximately $160,000 for the nine months ended September 30,
1997, and approximately $434,000 for the nine months ended
September 30, 1996, are as follows (in thousands):
Nine Months Ended Three Months Ended
September 30, 1997 September 30, 1997
------------------ ------------------
Fixed maturities
available for sale:
Gains $1,675 $ 621
Losses (740) (128)
------ ------
935 493
------ ------
Equity securities:
Gains 9,044 3,350
Losses (1,603) (422)
------ ------
7,441 2,928
------ ------
Total $8,376 $3,421
====== ======
Nine Months Ended Three Months Ended
September 30, 1996 September 30, 1996
------------------ ------------------
Fixed maturities
available for sale:
Gains $1,485 $ 537
Losses (788) (585)
------ ------
697 (48)
------ ------
Equity securities:
Gains 6,415 2,367
Losses (1,618) (414)
------ ------
4,797 1,953
------ ------
Total $5,494 $1,905
====== ======
NOTE 4 - REINSURANCE
In the ordinary course of business, the Company reinsures
certain risks, generally on an excess of loss basis with other
insurance companies. The primary reinsurance contract for 1997
is with General Reinsurance Corporation ("GRC"), and serves to
limit the Company's maximum loss per occurrence on casualty
losses to $400,000, $300,000 on property losses and $600,000 for
catastrophe losses. Reinsurance does not discharge the primary
liability of the original insurer. Amounts recoverable from
reinsurers are recognized and estimated in a manner consistent
with the claim liabilities arising from the reinsured policies
and incurred but not reported losses.
The GRC contract will terminate December 31, 1997. The Company
has made a decision to replace GRC with American Re-Insurance
Company. The new agreement, which is subject to annual
renegotiation of terms, will give the Company more coverage at a
lower cost than the current treaty, though the Company will be
increasing certain retentions on both the individual and catastrophe
losses.
<PAGE>
GUARANTY NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the Nine and Three Months Ended September 30, 1997
Premiums, losses, and loss adjustment expenses, including the
effect of reinsurance, are comprised of (in thousands):
Nine Months Ended September 30, Three Months Ended September 30,
1997 1996 1997 1996
---------------- ---------------- ---------------- ----------------
Written Earned Written Earned Written Earned Written Earned
------- ------ ------- ------ ------- ------ ------- ------
Premiums:
Direct $421,690 $405,765 $373,079 $365,259 $145,577 $140,320 $125,687 $125,017
Assumed 31,981 29,129 32,905 27,546 10,164 9,802 9,915 8,270
Ceded (29,938) (31,540) (37,325) (36,065) (10,210) (10,040) (11,298) (10,966)
-------- -------- -------- -------- -------- -------- -------- --------
Net $423,733 $403,354 $368,659 $356,740 $145,531 $140,082 $124,304 $122,321
======== ======== ======== ======== ======== ======== ======== ========
% Assumed
to Net 7.55% 8.93% 6.98% 7.98%
======== ======== ======= ========
Incurred Incurred Incurred Incurred
-------- -------- -------- --------
Losses and loss
adjustment
expenses:
Direct $288,374 $257,403 $110,160 $ 94,128
Assumed 19,282 19,466 (86) (630)
Ceded (26,740) (23,499) (12,284) (8,635)
-------- -------- -------- --------
Net $280,916 $253,370 $ 97,790 $ 84,863
======== ======== ======== ========
NOTE 5 - COMMITMENTS AND CONTINGENCIES
On September 18, 1997, Orion Capital Corporation ("Orion")
commenced a tender offer (the "Offer") to purchase the approximately
2,900,000 outstanding shares of the Company's common stock not now
owned by Orion and its affiliates. The Offer contemplated a price
of $34.00 per share, consisting of $27.20 in cash and the balance
in Orion common stock. At the time the Offer was made, Orion owned
80.6 percent of the Company's outstanding common stock. On
October 31, 1997, Orion Capital Corporation and the
Company's Boards of Directors approved an agreement providing for
the merger of the Company into a wholly-owned subsidiary of
Orion. Under the agreement, the merger will take place following
the completion of the Offer for $36 per share in cash. The
Company's Board approved this transaction following a
recommendation by a committee consisting of its independent
directors. It is currently expected that the Offer will
expire during the first week of December 1997, unless extended.
The registration statement Orion filed with the U. S. Securities
and Exchange Commission on September 22, 1997, with
respect to an exchange offer to acquire the Company's outstanding
shares for $34 per share in cash and Orion common stock will be
withdrawn as a result of this agreement.
Additionally, on September 18, 1997, a complaint naming Orion,
the Company and the Company's Directors, as defendants, was
filed on behalf of the Company's shareholders in connection with
the Offer. The Company expects to respond to this
complaint promptly after the Offer commences.
During 1995, the Company acquired Viking Insurance Company of
Wisconsin ("Viking") in a business combination accounted for as a
purchase. As part of the 1995 Viking acquisition, and based upon
Viking's favorable loss development since the acquisition date,
the Company estimates that it will pay Talegen Holdings,
Inc. ("Seller") an additional purchase price in the maximum
amount agreed to in the purchase agreement. This amount, which
is approximately $4,333,000 plus interest at 6.28%, will be
payable to the Seller as of December 31, 1998. The Company has
accrued this amount and the related interest payable in the
accompanying consolidated balance sheet.
<PAGE>
GUARANTY NATIONAL CORPORATION AND SUBSIDIAIRES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the Nine and Three Months Ended September 30, 1997
In addition to the complaint described above, the Company is
subject to litigation in the normal course of operating its
insurance business. The Company is not engaged in any such
litigation which it believes would have a material adverse impact
on its financial condition or results of operations, taking into
account the reserves established therefore and giving effect to
insurance.
NOTE 6 - ACCOUNTING STANDARDS NOT YET ADOPTED
In June 1997 the Financial Accounting Standards Board ("FASB")
issued SFAS No. 130, "Reporting Comprehensive Income", which
requires that changes in comprehensive income be shown in a
financial statement that is displayed with the same prominence as
other financial statements. This statement is effective for
periods beginning after December 15, 1997. Management is
currently evaluating the effects of this change on the Company's
financial statements.
Additionally, in June 1997 the FASB issued SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related
Information", which changes the way public companies report
information about segments. This statement is effective for
periods beginning after December 15, 1997. Management is
currently evaluating the effects of this change on the Company's
financial statements.
NOTE 7 - SUBSEQUENT EVENTS
On October 20, 1997, the Company announced plans to purchase
Unisun Insurance Company ("Unisun") from Michigan Mutual Insurance
Company for $26 million. Unisun, which is primarily a personal
lines company, is headquartered in Charleston, South Carolina.
Unisun also writes commercial multi-lines, home owners protection
and flood insurance under the U. S. Government insured Write Your
Own program. The Company expects the transaction to be
completed by year-end following appropriate approvals by
regulatory authorities.
On October 31, 1997, the Company sold its office building in
Madison, Wisconsin for approximately $4,400,000 and will
temporarily lease back about 35,000 square feet. This leaseback
will expire on April 30, 1998, with three 30-day extensions
available, if needed. During 1998, management intends to relocate
to leased space in a building currently under construction for
five years at a rental of approximately $500,000 annually.
<PAGE>
GUARANTY NATIONAL CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results for the First Nine Months of 1997 Compared to the First
Nine Months of 1996
Guaranty National Corporation and its subsidiaries (the
"Company") manage their property and casualty business in three
operating units: personal lines, commercial lines and collateral
protection insurance. Gross premiums written and GAAP combined
ratios by operating unit, for the nine months ended September 30,
1997 and 1996 are summarized below:
Nine Months Ended
September 30,
1997 1996
-------- --------
(Dollars in thousands)
Personal Lines:
Gross premiums written $250,377 $192,629
GAAP combined ratio 95.1% 98.5%
Commercial Lines:
Gross premiums written $134,917 $156,254
GAAP combined ratio 105.0% 104.2%
Collateral Protection:
Gross premiums written $ 68,377 $ 57,101
GAAP combined ratio 98.0% 97.0%
Total:
Gross premiums written $453,671 $405,984
GAAP combined ratio 98.2% 100.2%
The personal lines gross premiums written increased 30% for the
first nine months of 1997 compared to the first nine months of
1996. The premium volume growth in the private passenger line of
business was due mainly to newly-enacted legislation in the state
of California which requires all drivers to maintain liability
insurance. This change in California law resulted in a
significant increase in the personal lines one-month product
business. The first nine months gross premiums written in the
state of California were $116.0 million compared to $63.0 million
for the same period in 1996, representing 46% of total personal
lines premiums for the nine months ended September 30, 1997. In
addition, 17 of the 27 other states in which personal lines
markets had growth in premium production for the first nine
months of 1997. Although the extent and duration of the
increase in California premium can not be predicted, the Company
believes it will continue to record significant premium increases
through the remainder of 1997. Usually with a legislative change
similar to California there is a rapid escalation followed by a
corresponding falloff in policies-in-force. However, the Company
is not experiencing this trend in California, but instead is
encountering above average retention rates on the new business.
In addition, any new business generally has a higher loss ratio
than seasoned business due to higher frequency of claims.
Accordingly, personal lines reserve estimates currently
anticipate an increase in frequency from the new California
business, but so far the higher frequency has not manifested
itself.
The personal lines unit loss ratio (incurred losses and loss
adjustment expense) for the first nine months of 1997 was 70.9%
compared to 72.8% for the first nine months of 1996. The
incurred loss component decreased 3.2 points and the loss
adjustment expense component increased 1.3 points from the prior
year. The lower incurred loss component resulted primarily from
lower claim frequency, as well as incurred but not reported
losses being lower than expected. The increase in the loss
adjustment expense component is due to this unit's continued
emphasis on improving claim handling and on reducing insurance
fraud, which resulted in higher legal expenses.
The personal lines expense ratio was 24.2% for the first nine
months of 1997 compared to 25.7% for the first nine months of
1996. The lower expense ratio is primarily due to the benefits
of integrating the Viking and Guaranty National personal lines
operations, spreading fixed costs over our increased premium
volume, and a greater concentration of one-month product business
in the state of California, which has a lower overall agent
commission rate.
<PAGE>
GUARANTY NATIONAL CORPORATION AND SUBSIDIARIES
For the first nine months of 1997, commercial lines gross
premiums written decreased 14%, compared to the first nine months
of 1996. The decrease was primarily the result of a 20%
decrease in premiums in the commercial nonstandard division,
partially offset by an 11% increase in the commercial standard
division. The majority of the decrease is due to the commercial
nonstandard division's maintenance of important underwriting standards
in an increasingly soft market, which has resulted from increased
competition from large standard carriers entering the nonstandard
marketplace. The remaining decrease is from agent and
program cancellations initiated in 1996. The commercial
nonstandard division plans to replace a portion of this premium
loss by appointing new agents, identifying new business
opportunities and more closely monitoring the production of
existing agents. The increase in gross premiums written for the
commercial standard division is primarily the result of an
overall increase in premium production for the first nine months
of 1997 in existing offices compared to the same period in 1996.
The commercial lines loss ratio for the first nine months of
1997 was 70.0% compared to 71.4% for the same period last year.
The incurred loss component decreased by 2.2 points, while the
loss adjustment expense component increased by 0.8 points. The
improvement in the incurred loss component was principally caused
by lower claim frequency and the underwriting actions mentioned
above. The increase in the loss adjustment expenses component is
due to higher estimates of loss adjustment expenses on
general liability claims, which are needed to cover high
litigation costs on this line of business.
The commercial lines expense ratio increased to 35.0% for the
first nine months of 1997, compared to 32.8% for the first nine
months of 1996, due mainly to a decrease in net premiums
written occurring faster than direct underwriting expenses, such
as salaries and related benefits, were reduced. This also reflects
the Company's investment in agency interface and product management.
The collateral protection unit's gross premiums written
increased 20% for the first nine months of 1997 compared to the
first nine months of 1996. The premium volume growth is
primarily due to continued increased writing in the mortgage fire
program as well as the addition of a new mechanical breakdown
program. Gross premiums written from the mortgage fire product
for the first nine months of 1997 were $9,995,000 as compared to
gross premiums in the first nine months of 1996 of $4,251,000.
The mechanical breakdown program's gross premiums written for the
first nine months of 1997 were $6,219,000.
The collateral protection unit's loss ratio increased 1.4
points to 63.8% for the first nine months of 1997 compared to the
first nine months of 1996. The incurred loss component increased
by 1.6 points, while the loss adjustment expense component
decreased by 0.2 points. This is primarily due to adverse
development related to the Northeast blanket vendor single
interest business written during 1996, offset by the mortgage
fire program having a lower loss ratio compared to other business
the unit writes.
The unit's expense ratio decreased to 34.2% for the first nine
months of 1997 compared to 34.6% for the first nine months of
1996. The improved expense ratio primarily relates to lower
agency contingent commissions, which have been proportionately
reduced by the increased loss ratio, discussed above. In
addition, during the third quarter mechanical breakdown had a one-
time charge for settlement of a lawsuit and related legal fees.
The Company operates under a reinsurance contract that provides
both excess of loss and property catastrophe coverage up to
$6,000,000 per occurrence for all major lines of business. This
primary reinsurance contract for 1997 is with General Reinsurance
Corporation ("GRC"), and serves to limit the Company's maximum
loss per occurrence on casualty losses to $400,000, $300,000 on
property losses and $600,000 for catastrophe losses. The Company
also has an additional layer of catastrophe coverage up to 95% of
$14,000,000 per loss occurrence, for total catastrophe protection
of $20,000,000. The Company continues to utilize facultative
reinsurance for certain risks, primarily umbrella and property
coverages.
The GRC contract will terminate December 31, 1997. The Company
has made a decision to replace GRC with American Re-Insurance
Company. The new agreement, which is subject to annual renegotiation
of terms, will give the Company more coverage at a lower cost than
the current treaty, though the Company will be increasing certain
retentions on both the individual and catastrophe losses. On a
comparable basis, the Company estimates that the savings will be
approximately 25%, or 30 cents per share, net of tax, from the
reinsurance treaty charge incurred in 1997.
<PAGE>
GUARANTY NATIONAL CORPORATION AND SUBSIDIARIES
The Company's insurance operating units in total showed
$2,810,000 of adverse development on 1996 and prior loss
reserves, net of reinsurance, in the first nine months of 1997.
This compares to $789,000 of adverse development in the first
nine months of 1996 on 1995 and prior loss reserves, net of
reinsurance. The development equates to 1.0% and 0.3% of net
loss reserves at December 31, 1996 and 1995, respectively. The
commercial lines unit had adverse development of $2,597,000 due
primarily to allocated loss adjustment expense costs emerging
higher than expected and more significantly a strengthening of
reserves intended to reduce future adverse development. The
collateral protection unit had adverse development of $2,525,000
principally related to unexpectedly high paid losses on the
Northeast blanket vendor single interest business written during
1996. The personal lines unit had favorable development of
$2,312,000, which is mainly attributable to lower estimates of
future claim payments on prior accident year losses.
During the first nine months of 1997, the Company's known
exposure to environmental losses remained consistent with the
activity reported as of December 31, 1996. Considering the
minimal claim activity to date and the nature of the business
written, primarily automobile coverage, the Company continues
to believe that it does not have a material exposure to
environmental losses. For the nine month period ended
September 30, 1997, the Company's catastrophe losses
amounted to approximately $851,000, or six cents per share, net
of tax and reinsurance recoveries. This compares to catastrophe
losses of $1,286,000, or nine cents per share, net of tax and
reinsurance recoveries, during the nine month period ended
September 30, 1996. Company management believes that its
exposure to such catastrophic losses is limited due to the spread
of geographic coverage and the prudent level of reinsurance
retention in the event of a single loss.
On September 18, 1997, Orion Capital Corporation ("Orion")
commenced a tender offer (the "Offer") to purchase the
approximately 2,900,000 outstanding shares of the Company's
common stock not now owned by Orion and its affiliates. The
Offer contemplated a price of $34.00 per share, consisting $27.20
in cash and the balance in Orion common stock. On October 31,
1997, Orion Capital Corporation and the Company's Boards of
Directors approved an agreement providing for the merger of the
Company into a wholly-owned subsidiary of Orion, following the
completion of the Offer, which has been increased to $36 per share
in cash. The Company's Board approved this transaction following
a recommendation by a committee consisting of its independent
directors. It is currently expected that the Offer will
expire during the first week of December 1997, unless extended.
The registration statement Orion filed with the U. S. Securities
and Exchange Commission on September 22, 1997, with
respect to an exchange offer to acquire the Company's outstanding
shares for $34 per share in cash and Orion common stock will be
withdrawn as a result of this agreement.
On September 18, 1997, a complaint naming Orion, the Company
and the Company's Directors, as defendants, was filed on behalf
of the Company's shareholders in connection with the Offer. See
Note 5 to the Consolidated Financial Statements for
more discussion related to this complaint.
Overall, the Company's net earnings increased $11,487,000, to
$30,020,000 during the first nine months of 1997 when compared to
the first nine months of 1996. Net earnings per common share
were $1.98 as of September 30, 1997, versus $1.24 per common
share as of September 30, 1996. Net earnings increased 62%
primarily as a result of the lower loss ratio and the growth of
the personal lines unit, as discussed above.
Pretax net investment income increased $3,280,000 in the first
nine months of 1997 compared to 1996, while after-tax net
investment income increased to $23,950,000 from $22,006,000 for
the same periods. These increases are due mainly to continuing
positive cash flow and increased earnings from limited
partnership equity interests.
The investment yield, on an after-tax basis, for the first nine
months of 1997 remained constant at approximately five percent.
After-tax realized investment gains in the first nine months of
1997 and 1996 were $5,444,000 and $3,571,000, respectively. The
after-tax realized investment gains for the first nine months of
1997 and 1996 include the effects of a $104,000 and $282,000,
respectively, after-tax, permanent investment impairment recorded
by the Company. The increase in after-tax realized investment
gains was attributable primarily to sales from the Company's
equity portfolio. During the first nine months of 1997, the
strong equity market has enabled the Company to take the realized
gains without reducing its total investments in equities. The
Company's overall investment portfolio continues to be invested
primarily in fixed maturities and short-term investments, which
represented 81% and 85% of the portfolio as of September 30, 1997
and December 31, 1996, respectively.
<PAGE>
GUARANTY NATIONAL CORPORATION AND SUBSIDIARIES
Securities are classified as available for sale and recorded at
fair value, unless they meet the Company's criteria for
classification as held to maturity. Such criteria include
investment grade bonds with stated maturities of less than ten
years. The unrealized investment gains on fixed maturities
available for sale and on equity securities as of September 30,
1997, were $15,951,000 and $33,109,000, respectively. The
unrealized investment gains on fixed maturities available for
sale and on equity securities as of December 31, 1996 were
$7,875,000 and $18,444,000, respectively. The increase in
unrealized gains on the fixed portfolio was due mostly to the
rise in value of our investment grade securities. Stable
interest rates have increased the value of our investment grade
fixed portfolio. The market value of the Company's fixed
maturity investments generally varies inversely with changes in
the general level of interest rates. The market value of federal
agency and other mortgage pool securities of $60,442,000 as of
September 30, 1997, is subject to additional market value
volatility due to the impact of changes in prepayment rates on
the mortgages which underlie such securities.
The Company's holdings in noninvestment grade bonds as of
September 30, 1997 and December 31, 1996 were approximately eight
percent of total invested assets. Total investments held by the
Company include highly rated fixed maturities (rated AAA or AA)
of 44% at September 30, 1997 and 50% at December 31, 1996. The
Company continues to maintain a low level of real estate related
investments, consisting primarily of federal agency mortgage
pools.
Results for the Quarters Ended September 30, 1997 and September 30, 1996
Gross premiums written and GAAP combined ratios by operating
unit, for the quarters ended September 30, 1997 and 1996, are
summarized below:
Three Months Ended
September 30,
1997 1996
-------- --------
(Dollars in thousands)
Personal Lines:
Gross premiums written $ 84,693 $ 65,385
GAAP combined ratio 94.1% 96.0%
Commercial Lines:
Gross premiums written $ 46,805 $ 51,111
GAAP combined ratio 105.6% 105.8%
Collateral Protection:
Gross premiums written $ 24,243 $ 19,106
GAAP combined ratio 99.1% 97.1%
Total:
Gross premiums written $155,741 $135,602
GAAP combined ratio 97.9% 99.4%
The personal lines unit gross premiums written increased 30%
for the third quarter of 1997, compared to the third quarter of
1996. The increase in gross premiums written was due principally
to premium generated from the state of California, an increase of
71%, as discussed above, as well as from the states of Colorado
and Oregon, an increase of 15% and 26%, respectively. The 1.9
point decrease in the GAAP combined ratio was caused by the
improved loss and expense ratios, which were impacted by the
growth in premium production, and the operating efficiencies of
the recently combined personal lines operations, as discussed
above.
The commercial lines unit gross premiums written decreased by
eight percent during the third quarter of 1997, compared to the
third quarter of 1996. The decrease was primarily as a result of
a 13% decrease in premiums in the commercial nonstandard
division, partially offset by a 10% increase in the commercial
standard division. The commercial lines GAAP combined ratio
improved slightly for the third quarter of 1997, compared to the
third quarter of 1996, which is the result of a lower loss ratio
partially offset by a higher expense ratio.
The collateral protection unit's gross premiums written
increased 27% for the third quarter of 1997, compared to the
third quarter of 1996 due to its mortgage fire, physical damage
and new mechanical breakdown programs. The
<PAGE>
GUARANTY NATIONAL CORPORATION AND SUBSIDIARIES
mortgage fire program's gross premiums written increased 230% for
the third quarter of 1997, compared to the same period in 1996,
while the mechanical breakdown program's gross premiums written
for the third quarter of 1997 were $2,511,000. In addition, the
unit's physical damage program's gross premiums written increased
125% for the third quarter of 1997, compared to the same period
in 1996. The unit's GAAP combined ratio increased 2.0 points for
the three month period ended September 30, 1997, compared to the
same period in the prior year. The increase in the GAAP combined
ratio resulted from a 7.0 point increase in the loss ratio, which
was offset proportionately by a 5.0 point decrease in the expense
ratio. The higher loss ratio and lower expense ratio for the
third quarter of 1997 is primarily due to adverse development
related to the Northeast blanket vendor single interest program,
which is partially offset by lower agency contingent commissions,
and a one-time charge for settlement of a lawsuit and related
legal fees for mechanical breakdown.
Liquidity and Capital Resources
Positive cash flow from operations of $40,055,000 was generated
for the first nine months of 1997 compared to $36,060,000 for the
first nine months of 1996. The $3,995,000 increase in operating
cash flow was primarily the result of higher premiums written,
mainly from the personal lines, and net investment income
collected. This was offset mainly by commercial lines
loss and loss adjustment expenses payments which did not decline
in proportion to the decline in commercial premium and higher
acquisition expenses related to premium production. In addition,
1997 cash flow from operations was adversely impacted by the
higher level of federal incomes taxes paid in the
first nine months of 1997 as compared to the same period in 1996.
An overpayment in 1995 reduced taxes paid in 1996 to nearly zero.
Net cash used in investing activities was $36,301,000 and
$27,337,000 for the first nine months of 1997 and 1996,
respectively. The increase in funds used in investing activities
in 1997 was related primarily to increases in fixed maturities
and equity securities. These increased investment acquisitions
were partially offset by cash proceeds received from maturities
of short term investments and fixed maturity securities, as well
as sales of equity and fixed maturity securities.
Net cash used in financing was $4,893,000 for the first nine
months of 1997, compared to $6,684,000 for the first nine months
of 1996. During the first nine months of 1997, the Company made
$563,000 in principal payments on its 6.5% term loan compared to
$1,125,000 in the same period last year. As of September 30,
1997, the Company had $10,000,000 of funds available under its
reducing, revolving credit facility. For the first
nine months of 1997 the Company received proceeds of $1,300,000
from the exercise of stock options as compared to $54,000 for the
same period in 1996. The Company declared and paid a regular
quarterly dividend of $.125 a share in the first three quarters
of 1997 and 1996.
The Company's level of short-term investments at September 30,
1997 and December 31, 1996 was 13.9% and 14.2% of total invested
assets, respectively. Overall, the Company maintains sufficient
liquidity in its investment portfolio through its short-term
investment holdings to meet operating cash requirements.
In the second quarter of 1997, Fred T. Roberts, Senior Vice
President and President of the Commercial Lines Unit since
November 1995, announced his retirement at the end of 1997.
During the third quarter, the Company announced that John W.
Mahoney will join the Company in the fourth quarter as senior
vice president/president-elect of nonstandard commercial lines to
replace Mr. Roberts. Mr. Mahoney comes to the Company from ERC
Specialty/Coregis Insurance Group, a subsidiary of GE Capital,
where he was a director of programs. Mr. Mahoney will be
responsible for all nonstandard commercial business, while Jim
Morey, President of Colorado Casualty Insurance Company will
continue to be responsible for all standard commercial business.
On October 20, 1997, the Company announced plans to purchase
Unisun Insurance Company ("Unisun") from Michigan Mutual Insurance
Company for $26 million. Unisun, which is primarily a personal
lines company, is headquartered in Charleston, South Carolina.
Unisun also writes commercial multi-lines, home owners protection
and flood insurance under the U. S. Government insured Write Your
Own program. The Company expects the transaction to be
completed by year-end following appropriate approvals by
regulatory authorities.
<PAGE>
GUARANTY NATIONAL CORPORATION AND SUBSIDIARIES
The Company continues to actively seek other acquisition
candidates and is currently having discussions with several
companies concerning their nonstandard automobile insurance
operations. The Company can not predict whether any of these
discussions will result in a transaction.
On October 31, 1997, the Company sold its office building in
Madison, Wisconsin for approximately $4,400,000 and will
temporarily lease back about 35,000 square feet. During 1998,
management intends to relocate to leased space in a building
currently under construction for five years at a rental of
approximately $500,000 annually.
Forward Looking Statements
Some of the statements made in the Form 10-Q Report, as well as
statements made by the Company in periodic press releases, and
statements made by the Company's officials to analysts and
shareholders in the course of presentations about the Company and
conference calls following earnings releases, constitute "forward-
looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995 (the "Reform Act"). Such forward-
looking statements involve known and unknown risks, uncertainties
and other factors that may cause the actual results, performance
or achievements of the Company to be materially different from
any future results, performance of achievements expressed or
implied by the forward-looking statements. Such factors include,
among the other things (i) general economic and business
conditions (ii) interest rate changes; (iii) competition and
regulatory environment in which the Company operates; (iv) claims
frequency; (v) claims severity; (vi) severe adverse weather
conditions; (vii) the cost of automobile repair; (viii) the
number of new and renewal policy application submitted by the
Company's agents; (ix) changes in the renewal rate on policies
written in the state of California; (x) whether the Company will
be successful in receiving approval of its purchase of Unisun
Insurance Company and if approved whether the transaction will be
accretive to earnings; (xi) whether future acquisitions will be
made and their effect on the Company's financial results; and
(xii) other factors over which the Company has little or no
control.
<PAGE>
GUARANTY NATIONAL CORPORATION AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is routinely engaged in litigation incidental to
its business. At September 30, 1997, there was one lawsuit
outstanding, which was related to the 1997 Orion Offer. In the
judgment of the Company's management, at September 30, 1997, the
Company is not engaged in any such litigation which it
believes would have a material adverse impact on its financial
condition or results of operation, taking into account the
reserves established therefore and giving effect to insurance.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.4 Stock Purchase Agreement by and between Guaranty
National Insurance Company, Guaranty National Corporation
and Michigan Mutual Insurance Company, signed
October 20, 1997.
(b) Reports on Form 8-K
No reports on Form 8-K have been filed by the
Registrant during the quarter.
<PAGE>
GUARANTY NATIONAL CORPORATION AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Guaranty National Corporation
By: s/James R. Pouliot
James R. Pouliot, President and
Chief Executive Officer
(Principal Executive Officer)
By: s/Michael L. Pautler
Michael L. Pautler, Senior Vice
President-Finance and Treasurer
(Principal Financial Officer)
By: s/Shelly J. Hengsteler
Shelly J. Hengsteler
Controller and Assistant Treasurer
(Principal Accounting Officer)
DATE: November 3, 1997
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS FINANCIAL SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM GUARANTY NATIONAL CORPORATION'S FINANCIAL STATEMENTS FOR THE NINE
MONTHS ENDED SEPTEMBER 30, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<DEBT-HELD-FOR-SALE> 426,259
<DEBT-CARRYING-VALUE> 74,262
<DEBT-MARKET-VALUE> 75,814
<EQUITIES> 123,550
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 744,062
<CASH> 2,849
<RECOVER-REINSURE> 90,326
<DEFERRED-ACQUISITION> 48,538
<TOTAL-ASSETS> 1,019,415
<POLICY-LOSSES> 376,212
<UNEARNED-PREMIUMS> 172,771
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 101,125
0
0
<COMMON> 137,686
<OTHER-SE> 140,964
<TOTAL-LIABILITY-AND-EQUITY> 1,019,415
403,354
<INVESTMENT-INCOME> 31,698
<INVESTMENT-GAINS> 8,376
<OTHER-INCOME> 0
<BENEFITS> 280,916
<UNDERWRITING-AMORTIZATION> 105,871
<UNDERWRITING-OTHER> 9,230
<INCOME-PRETAX> 41,405
<INCOME-TAX> 11,385
<INCOME-CONTINUING> 30,020
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 30,020
<EPS-PRIMARY> 1.98
<EPS-DILUTED> 1.98
<RESERVE-OPEN> 284,681
<PROVISION-CURRENT> 278,106
<PROVISION-PRIOR> 2,810
<PAYMENTS-CURRENT> 132,581
<PAYMENTS-PRIOR> 141,487
<RESERVE-CLOSE> 291,529
<CUMULATIVE-DEFICIENCY> 2,810
</TABLE>
AGT-PUR\83691.11\7554.0200
Execution Copy
Stock Purchase Agreement
By And Between
Guaranty National Insurance Company,
Guaranty National Corporation
and
Michigan Mutual Insurance Company
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE I - PURCHASE AND SALE OF SHARES 2
1.1 Purchase and Sale 2
1.2 Consideration for Shares; Closing Transfers 2
1.3 Closing 3
ARTICLE II - REPRESENTATIONS AND WARRANTIES OF SELLER 3
2.1 Organization, Existence, Standing and
Authority of Seller 3
2.2 Execution and Delivery 3
2.3 Consents, Waivers and Approvals 4
2.4 Organization, Existence, Standing, Authority and
Qualifications ofthe Company and its Subsidiaries 4
2.5 Title to Shares 5
2.6 Conflicting Agreements 5
2.7 Financial Statements 6
2.8 Undisclosed Liabilities 8
2.9 Regulatory Deposits 8
2.10 Brokers 9
[2.11 Intentionally Deleted] 9
2.12 Corporate Books and Records 9
2.13 Assets 9
2.14 Tangible Property 10
2.15 Employee Benefit Plans 10
2.16 Employment and Agency Contracts 14
2.17 No Changes 15
2.18 Tax and Other Returns and Reports 17
2.19 Intellectual Property 20
2.20 Agreements, Contracts and Commitments 20
2.21 Litigation 22
2.22 Environmental 23
2.23 Labor Matters; OSHA 24
2.24 Insurance 25
2.25 Compliance with Laws 25
2.26 Binding Agreements; No Default 26
2.27 FIRPTA 27
2.28 Reserves 27
2.29 Portfolio Investments 27
2.30 Officers and Directors 27
2.31 Representations Complete 28
<PAGE>
ARTICLE III - REPRESENTATIONS AND WARRANTIES OF BUYER AND GNC 28
A. Buyer Representations and Warranties 28
3.1 Organization, Existence, Standing and Authority
of Buyer 28
3.2 Execution and Delivery 28
3.3 Consents, Waivers and Approvals 29
3.4 Investment Purpose 29
3.5 Brokers and Consultants 29
3.6 No Violation 29
3.7 Investment Company 30
3.8 Pending Suits and Proceedings 30
3.9 Payment of Purchase Price 30
3.10 Financial Statements 30
3.11 Conduct of Business 31
3.12 Disclosure 31
B. GNC Representations and Warranties 31
3.13 Organization, Existence, Standing and
Authority of GNC 31
3.14 Execution and Delivery 32
3.15 Consents, Waivers and Approvals 32
3.16 No Violation 32
3.17 Disclosure 33
ARTICLE IV - INTERIM PERIOD CONDUCT 33
4.1 Regular Course of Business of the Company 33
4.2 Pre-Closing Activities of the Company 33
4.3 List of Depositories and Bank Balances 36
4.4 Investigation by Buyer 36
4.5 Employee and Agent Communications or Meetings 37
ARTICLE V - COVENANTS OF SELLER 37
5.1 Interference with Business 38
5.2 Employee Matters 38
5.3 Leases 38
5.4 Severance Payments 39
ARTICLE VI - COVENANTS OF BUYER AND SELLER 40
6.1 Regulatory Approvals; Third Party Consents 40
6.2 Further Assurances 42
6.3 Notification of Certain Matters 42
6.4 Employees and Employee Plans 43
6.5 Tax Matters 46
(a) Section 338(h)(10) Election 46
(b) Tax Returns 48
(c) Tax Allocation Agreement;
Code Section 338(h)(10) Elections 50
<PAGE>
(d) Participation in Tax Examinations 51
6.6 Preparation of GAAP Financial Statements 51
6.7 Updating Schedules 52
6.8 Access to Records 52
ARTICLE VII - CONDITIONS TO OBLIGATIONS OF BUYER 53
7.1 General 53
7.2 Performance 53
7.3 Representations and Warranties True
as of Closing Date 53
7.4 Orders and Consents 54
7.5 Corporate Action 54
7.6 Opinions of Seller's Counsel 55
7.7 Certificates of Authority 55
7.8 No Adverse Changes 56
7.9 Other Agreements 56
7.10 Delivery of Stock 56
7.11 Resignations 56
7.12 General Reinsurance Agreement 56
7.13 Tax Allocation Agreement 57
ARTICLE VIII - CONDITIONS TO OBLIGATIONS OF SELLER 57
8.1 General 57
8.2 Performance 57
8.3 Representations and Warranties True
as of Closing Date 58
8.4 Orders and Consents 58
8.5 Corporate Action 59
8.6 Payment of Purchase Price 59
8.7 Other Agreements 59
8.8 Opinion of Counsel for Buyer and GNC 59
ARTICLE IX - MODIFICATION, WAIVERS AND TERMINATION 60
9.1 Modification 60
9.2 Waivers 60
9.3 Termination 60
9.4 Effect of Termination 62
ARTICLE X - CERTAIN DEFINITIONS 62
ARTICLE XI - INDEMNIFICATION 68
11.1 Survival 68
11.2 Obligation of Seller to Indemnify 70
11.3 Obligations of Buyer to Indemnify 71
11.4 Limitations on Indemnification Obligations 71
<PAGE>
11.5 Notice and Opportunity to Defend 74
11.5.1 Notice of Asserted Liability 75
11.5.2 Opportunity to Defend 75
11.6 Payments 76
ARTICLE XII - MISCELLANEOUS 76
12.1 Notices 76
12.2 Gender and Number 77
12.3 Expenses 77
12.4 Confidential Information 77
12.5 Announcements 78
12.6 Successors and Assigns 79
12.7 Waiver 79
12.8 Attorneys' Fees 79
12.9 Counterparts 80
12.10 Entire Agreement 80
12.11 Governing Law 80
12.12 Venue and Jurisdiction 80
12.13 Mediation; Litigation 81
12.14 Third Parties 81
12.15 Performance Following Closing 81
12.16 No Prejudice 81
<PAGE>
INDEX OF EXHIBITS
Exhibit Description
Exhibit A Reserve Adjustments
Exhibit B Form of Assignment of Leases and Assumption
Agreement
Exhibit C Form of Opinion of Lord, Bissell & Brook
Exhibit D Form of Opinion of Susan G. Vincent, Esq.
Exhibit E Form of Opinion of Ireland, Stapleton, Pryor & Pascoe, P.C.
<PAGE>
INDEX OF SCHEDULES
Schedule Description
1.2 Schedule of Certain Company Securities
2.3 Schedule of Seller's and Buyer's Consents, Waivers
and Approvals
2.4 Schedule of Subsidiaries
2.7 Schedule of Certain Accountants' Letters
2.9 Schedule of Regulatory Deposits
2.13 Schedule of Real Property
2.15 Schedule of Employee Benefit Plans
2.16(a) Schedule of Employee Agreements
2.16(b) Schedule of Employees
2.18 Schedule of Tax Agreements
2.19 Schedule of Company Intellectual Property Rights
2.20 Schedule of Contracts
2.21 Schedule of Litigation
2.24 Schedule of Insurance
2.25 Schedule of States Where Admitted
2.26 Schedule of Binding Agreements
2.28 Schedule of Reserves
2.30 Schedule of Officers and Directors
4.2 Schedule of Pre-Activities of the Company
4.2(xi) Schedule of Policy Form and Rate Filings
4.2(xii) Schedule of New Licenses
7.8 Schedule of No Adverse Changes
7.11 Schedule of Resignations
11.2(4) Schedule of Certain Contingent Liabilities
<PAGE>
STOCK PURCHASE AGREEMENT
STOCK PURCHASE AGREEMENT ("Agreement"), dated this 20th day
of October, 1997, by and among GUARANTY NATIONAL INSURANCE
COMPANY, a stock insurance company organized under the laws of
the State of Colorado ("Buyer"), MICHIGAN MUTUAL INSURANCE
COMPANY, a mutual insurance company organized under the laws of
the State of Michigan ("Seller"), and with respect to Article
IIIB, Sections 5.3, 8.2, 8.3, 8.5.1, 8.5.2 and 8.7, and Articles
X and XII, GUARANTY NATIONAL CORPORATION, a Colorado corporation
("GNC").
WITNESSETH
WHEREAS, Seller owns of record and beneficially all 200,000
of the issued and outstanding shares (the "Shares") of the common
stock, $10.00 par value (the "Common Stock"), of UNISUN INSURANCE
COMPANY, a stock insurance company organized under the laws of
the State of South Carolina (which, unless the context indicates
otherwise, together with its Subsidiaries is referred to herein
as the "Company"); and
WHEREAS, Seller desires to sell the Shares to Buyer and
Buyer desires to purchase the Shares from Seller.
NOW, THEREFORE, in consideration of the mutual covenants and
agreements set forth herein and in reliance upon the
representations and warranties contained herein, Buyer and Seller
agree as follows:
<PAGE>
ARTICLE I
PURCHASE AND SALE OF SHARES
1.1 Purchase and Sale. Seller agrees to sell to Buyer,
and Buyer agrees to purchase from Seller, all of the Shares upon
the terms and conditions herein set forth.
1.2 Consideration for Shares; Closing Transfers. The
consideration to be paid by Buyer for the Shares (the "Purchase
Price") shall be Twelve Million Dollars ($12,000,000), subject to
adjustment as provided in Exhibit A attached hereto and
incorporated herein by this reference, and assuming the payment
to Seller by the Company of an extraordinary dividend on or prior
to the Closing Date equal to Fourteen Million Dollars
($14,000,000) in cash (to the extent available) and, to the
extent necessary, non-cash assets. In the event the dollar
amount of such extraordinary dividend is greater or less than
$14,000,000, the Purchase Price shall be reduced or increased,
respectively, on a dollar-for-dollar basis. Buyer and Seller
agree that (i) the allocation of non-cash assets comprising the
extraordinary dividend shall be mutually agreed upon in good
faith, (ii) the extraordinary dividend shall include as part of
such assets the securities listed on Schedule 1.2 to this
Agreement, which is attached hereto and incorporated herein by
this reference, and (iii) any non-cash assets distributed as part
of the extraordinary dividend shall be valued based upon the
average of quotations received from Bear Stearns & Co., Morgan
Stanley & Co. and Smith Barney or their successors on the date
which is three (3) business days preceding the Closing Date;
provided, however, that the securities listed on Schedule 1.2
shall be valued at market value on July 31, 1997 as set forth on
Schedule 1.2. Buyer shall pay at the Closing, in cash or cleared
federal funds, the Purchase Price less the amount of the Fifty
Thousand Dollar ($50,000) deposit previously delivered to Seller.
<PAGE>
1.3 Closing. Subject to the satisfaction or waiver of
the terms and conditions hereof, the consummation of the sale and
purchase of the Shares provided for herein shall be effective as
of 11:59 p.m. on the date which is the fifth Business Day
following the date on which all of the conditions set forth in
Articles VII and VIII (other than those conditions, designations,
instruments, certificates or other documents to be delivered at
the Closing) shall have been satisfied or waived (the "Closing
Date") and shall take place at the offices of Ireland, Stapleton,
Pryor & Pascoe, P.C., 1675 Broadway, 26th Floor, Denver, Colorado
80202 at 10:00 a.m., Mountain Time, on the Closing Date (the
"Closing"), or at such other
place, date or time as Buyer and Seller shall mutually agree upon
in writing.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF SELLER
Seller has prepared certain schedules with respect to this
Article II, and such schedules are attached hereto and
incorporated herein by this reference (the "Company Schedules").
Seller represents and warrants to Buyer that:
2.1 Organization, Existence, Standing and Authority of
Seller. Seller has been duly organized and is validly existing
and in good standing under the laws of the State of Michigan, and
has all requisite corporate power and authority to execute and
deliver this Agreement and the Assignment of Leases (sometimes
collectively referred to as the "Documents"), to perform its
obligations hereunder and thereunder, and to consummate the
transactions contemplated hereby and thereby.
2.2 Execution and Delivery. This Agreement has been
duly executed and delivered by Seller. Subject to the
satisfaction or waiver of the conditions specified in
<PAGE>
Article VIII hereof, the execution, delivery and performance of
the Documents have been duly and validly authorized by all
requisite corporate action on the part of Seller and its
Affiliates, and the agreements of Seller and its Affiliates
contained therein constitute or, upon execution and delivery
thereof, shall constitute the valid and binding obligations of
the Seller and its Affiliates, enforceable against Seller and its
Affiliates in accordance with their terms.
2.3 Consents, Waivers and Approvals. The execution and
delivery of the Documents, the performance by Seller and its
Affiliates of their respective obligations thereunder and the
consummation of the transactions contemplated thereby, do not
require Seller or any Affiliate of Seller to obtain any consent,
waiver, approval or action of, or make any filing with or give
notice to, any corporation, person or firm or any public,
governmental or judicial authority except for: (i) those listed
in Schedule 2.3 hereto, (ii) such filings as may be required
under the Hart-Scott-Rodino Antitrust Improvements Act of 1976,
and the rules and regulations promulgated thereunder (the "HSR
Act"), and (iii) Form A filings with, notices to, or orders from
the insurance regulatory departments of the State of South
Carolina and such other jurisdictions as may be required by law.
2.4 Organization, Existence, Standing, Authority and
Qualifications of the Company and its Subsidiaries. The Company
and each of its Subsidiaries have been duly organized and are
validly existing and in good standing under the laws of the State
of South Carolina. The Company's Subsidiaries are listed on
Schedule 2.4. The Company and each of its Subsidiaries have all
requisite corporate power and authority to carry on its and their
business as now being conducted by them. The Company and its
Subsidiaries are in good standing as a foreign corporation in
each of such states and jurisdictions in which they are
transacting insurance or other business. There are no other
states or jurisdictions in which
<PAGE>
the nature or extent of the Company's or its Subsidiaries'
business as currently conducted, or its properties, requires it
or them to be qualified as a foreign corporation or to possess a
certificate of authority to transact insurance business therein,
except for qualifications or certificates of authority the
failure of which to hold, does not and is reasonably likely to
not have (including by passage of time), individually or in the
aggregate, a material adverse effect on the business, properties,
assets, financial condition, results of operations or current
prospects of the Company and its Subsidiaries, taken as a whole
(a "Material Adverse Effect").
2.5 Title to Shares. The authorized capital stock of the
Company consists of 2,000,000 shares of Common Stock, 200,000 of
which shares are issued and outstanding, owned of record and
beneficially by Seller, and are not subject to any liens,
security interests, claims, charges or other Encumbrances or
restrictions. The Shares have been duly authorized and validly
issued and are fully paid and nonassessable. The Company owns of
record and beneficially all of the issued and outstanding shares
of each of its Subsidiaries, and such shares have been duly
authorized and validly issued, and are fully paid and
nonassessable. There are no outstanding subscriptions,
preemptive rights, warrants, options or, except for this
Agreement, other agreements or rights of any kind to purchase or
otherwise receive or be issued, or securities or obligations of
any kind convertible into, any shares of capital stock of the
Company or its Subsidiaries.
2.6 Conflicting Agreements. The execution and delivery
of the Documents do not or will not as of Closing, and the
performance by Seller and its Affiliates of their obligations
under the Documents and the consummation of the transactions
contemplated thereby (subject to obtaining the consents and
approvals contemplated by Section 2.3) will
<PAGE>
not (a) conflict with or violate any existing term or provision
of any franchise, license, permit, order, writ, concession,
judgment, injunction, decree, statute, law, ordinance, rule or
regulation applicable to Seller or the Company or any of their
properties or assets; (b) conflict with or result in a breach or
violation of any of the terms, conditions or provisions of, or
constitute a default under (or an event which with notice or
lapse of time or both would constitute a default under), (i) the
Articles of Incorporation or By-Laws of Seller or the Company, or
(ii) any indenture, mortgage, note, agreement, lease or other
instrument or obligation to which Seller or the Company is a
party or by which Seller or the Company, or any of their
respective assets or properties is bound or subject, or (iii) any
federal, state or local statutes, ordinances or codes, or any
rules and regulations issued by any Governmental Entity pursuant
to any of the foregoing, and all decisions, judgments, orders or
decrees of a court of applicable jurisdiction ("Laws") to which
Seller or the Company is subject except, in the case of
clauses (a), (b)(ii) and (b)(iii) above, for such conflicts,
violations, breaches or defaults which would not have a Material
Adverse Effect or which would not adversely affect the
performance by Seller of its obligations under the Documents.
2.7 Financial Statements.
(a) Seller has delivered to Buyer or, with respect
to the September 30, 1997 or December 31, 1997 SAP Financial
Statements (as defined below), will deliver to Buyer prior to
Closing, (i) audited statutory financial statements (balance
sheets, income statements and statements of cash flows) of the
Company as of and for the fiscal years ending December 31, 1994,
1995 and 1996 (the "Audited SAP Financial Statements") and
unaudited statutory financial statements of Carolina American
Insurance Company (the "Insurance Subsidiary") as of and for the
fiscal years ending December 31, 1994, 1995 and
<PAGE>
1996 (the "Unaudited Subsidiary Financial Statements"), (ii) the
Company's and Insurance Subsidiary's unaudited statutory
financial statements (the "Unaudited SAP Financial Statements")
as of and for the calendar quarters ending March 31, June 30, and
September 30, 1997, and (iii) to the extent that the Closing
occurs after December 31, 1997, the statutory financial
statements (balance sheets, income statements and statements of
cash flows) of the Company and Insurance Subsidiary as of and for
the fiscal year ending December 31, 1997, if reasonably able to
be prepared prior to Closing, which December 31, 1997 statutory
financial statements of the Company shall be audited, if
reasonably practicable (collectively, the "SAP Financial
Statements"). The SAP Financial Statements are and will be true
and correct in all material respects as of the dates thereof and
for the annual or quarterly periods then ended. The SAP
Financial Statements (i) conform and will conform as of the dates
thereof and for the annual or quarterly periods then ended, in
all material respects, to the books and records of the Company,
and (ii) present fairly, in all material respects, the statutory
financial condition of the Company and Insurance Subsidiary at
the respective dates thereof, and the statutory results of
operations for the periods then ended in accordance with SAP,
applied on a consistent basis throughout the periods indicated
and consistent with each other, except as otherwise specifically
noted therein.
(b) Seller has delivered to Buyer the unaudited
financial statements of AMCA Incorporated ("AMCA") as of and for
the fiscal years ending December 31, 1994, 1995 and 1996, and the
unaudited financial statements of AMCA as of and for the calendar
quarters ending March 31, June 30 and September 30, 1997
(collectively, the "AMCA Financial Statements"). The AMCA
Financial Statements are true and correct in all material
respects, as of the dates thereof and for the annual or quarterly
periods then ended. The
<PAGE>
AMCA Financial Statements (i) conform, in all material respects,
to the books and records of AMCA, as of the dates thereof and for
the annual or quarterly periods then ended and (ii) present
fairly, in all material respects, the financial condition of AMCA
at the respective dates thereof, and the results of operations
for the periods then ended in accordance with GAAP, applied on a
consistent basis throughout the periods indicated and consistent
with each other, except as otherwise specifically noted therein.
(c) Except for reports or letters contained in the
SAP Financial Statements or listed on Schedule 2.7, no reports,
comment letters or comfort letters have been received from
Seller's, the Company's or Insurance Subsidiary's independent
certified public accountants by Seller, the Company, the
Insurance Subsidiary or any Affiliate of the Company relating to
any of the SAP Financial Statements or AMCA Financial Statements.
2.8 Undisclosed Liabilities. There are no debts,
liabilities or obligations of the Company of any nature (whether
known or unknown, contingent and whether due or to become due)
other than debts, liabilities or obligations that (i) were
required to be reflected or reserved against in the most recent
SAP Financial Statements or AMCA financial Statements delivered
to Buyer, (ii) have been incurred in the ordinary course of
business since the date of such SAP Financial Statement or AMCA
Financial Statement, none of which individually or in the
aggregate, would have a Material Adverse Effect, or (iii) are
specifically disclosed or described on the Company Schedules.
2.9 Regulatory Deposits. Schedule 2.9 hereto identifies
as of the date hereof the jurisdictions in which the Company has
been required by any regulatory authority to make a deposit in
order to transact insurance business, the principal amount of
each such deposit and a complete description of securities
comprising each such deposit.
<PAGE>
2.10 Brokers. All negotiations relative to this Agreement
and the transactions contemplated hereby have been carried out by
Seller directly with Buyer without the intervention of any person
on behalf of Seller in such manner as to give rise to any claim
by any person against Buyer, Seller or the Company for a finder's
fee, brokerage commission or similar payment.
[2.11 Intentionally Deleted].
2.12 Corporate Books and Records. The minute books of the
Company heretofore furnished Buyer for inspection contained
complete and accurate records of all actions taken at all
meetings or pursuant to consents in lieu of meetings of its
shareholders, Board of Directors and committees thereof through
the date of this Agreement; provided that Seller is making this
representation as to any such records dating prior to January 1,
1991, as to its Knowledge. The stock books and ledgers of the
Company heretofore furnished Buyer for inspection contained
complete and accurate records of all issuances and transfers of
its capital stock through the date of this Agreement.
2.13 Assets. Attached hereto as Schedule 2.13 is a list
and description of all real property owned or leased by the
Company. The Company holds good and valid title to, or in the
case of leased properties and assets, valid leasehold interests
in, all of its tangible properties, real, personal and mixed,
used in its business, free and clear of any mortgages, security
interests, conditional sales agreements, liens, claims, charges,
preferential rights of purchase, or encumbrances
("Encumbrances"), except as reflected in the SAP Financial
Statements and except for such imperfections of title and
Encumbrances, if any, which are not substantial in character,
amount or extent, and which do not materially detract from the
value, or interfere with the present use, of the property subject
thereto or affected thereby.
<PAGE>
2.14 Tangible Property. All material equipment,
furniture, leasehold improvements, fixtures, vehicles,
structures, any related capitalized items and other tangible
property owned or leased by the Company ("Tangible Property") are
in good operating condition and repair, ordinary wear and tear
excepted, and neither the Company nor Seller has received notice
that any of the Company's Tangible Property is in violation of
any existing law, code or regulation. The Tangible Property is,
taken as a whole, (i) adequate for the conduct of the business of
the Company consistent with its past practices, (ii) suitable for
the uses to which it is currently employed, and (iii) not
obsolete, dangerous or in need of renewal or replacement, except
for renewal or replacement in the ordinary course of business.
2.15 Employee Benefit Plans.
(a) Except as set forth on Schedule 2.15, the
Company does not contribute to, maintain, or sponsor, and has not
contributed to, maintained or sponsored during the last five
years, any pension, profit sharing, retirement, deferred
compensation, stock purchase, stock option, incentive, bonus,
sales commission, vacation, severance, disability, life
insurance, medical or other employee benefit plans, programs or
arrangements, in respect of, or which otherwise cover, any of the
current or former officers, employees or agents of the Company or
any entity under common control with the Company ("ERISA
Affiliate") under Section 414(b), (c), (m) or (o) of the Internal
Revenue Code, as amended (the "Code") or Section 4001 of the
Employee Retirement Income Security Act, as amended ("ERISA") or
their heirs or beneficiaries, whether or not such plans, programs
or arrangements are subject to ERISA (the "Employee Plans"). No
individual treated by the Company as a leased employee or an
independent contractor is entitled to any benefit under
<PAGE>
any Employee Plan. The Company has delivered to Buyer true and
complete copies of all Employee Plans, as they may have been
amended to the date hereof, together with all documents,
correspondence and filings relating thereto, including but not
limited to any statements, filings, reports or returns filed with
any Governmental Entity with respect to the Employee Plans at any
time within the three-year period ending on the date hereof.
Except as set forth on Schedule 2.15, the Company has no
"employee benefit plan," within the meaning of Section 3(3) of
ERISA or intended to be qualified under Section 401(a) of the
Code.
(b) Neither the Company nor any ERISA Affiliate
has, nor at any time has had, any obligation to contribute to any
"multiemployer plan," as defined in Section 3(37) of ERISA, nor
has the Company nor any ERISA Affiliate withdrawn in any complete
or partial withdrawal from any multiemployer plan. No Employee
Plan is a "multiple employer plan" within the meaning of Section
413 of the Code.
(c) Each Employee Plan is in compliance in all
material respects with the requirements prescribed by any and all
applicable statutes (including ERISA and the Code with respect to
each Employee Plan intended to quality under Section 401(a) of
the Code), orders, or governmental rules and regulations
currently in effect with respect thereto (including all
applicable requirements for notification to participants or the
Department of Labor, Internal Revenue Service (the "IRS") or
Secretary of the Treasury), and the Company or its ERISA
Affiliates have performed all obligations required to be
performed by them under, are not in default under or violation
of, and Seller has no Knowledge of any default or violation by
any other party to, any of the Employee Plans. Each Employee
Plan intended to qualify under Section 401(a) of the Code has
received a favorable unrevoked
<PAGE>
determination letter with respect to each such Employee Plan from
the IRS and no circumstances have occurred that could adversely
affect the tax-qualified status of any such Employee Plan. No
event has occurred and no condition exists with respect to any
Employee Plan that has subjected or could subject Buyer or any of
its Affiliates to any tax, fine, penalty or other liability
(other than a liability arising in the normal course to make
contributions or payments when ordinarily due) which are material
in the aggregate.
(d) Except as set forth in Schedule 2.15(d), no
Employee Plan is or within the prior six (6) years has been
subject to, and the Company has not violated and no condition
exists that could cause the Company to violate the minimum
funding standards of Section 412 of the Code or Part 3 of
Subtitle B of Title I of ERISA. No Employee Plan is or within
the prior six (6) years has been subject to, and the Company has
not incurred and no condition exists that could cause the Company
to incur any liability under Title IV of ERISA other than for
PBGC premiums. No "reportable event" within the meaning of ERISA
Sections 4043(c)(1), (2), (3), (4), (5), (6), (7), (8), (10),
(12) or (13) has occurred with respect to any Employee Plan
subject to Title IV of ERISA. No condition exists on Seller's
part with respect to any Employee Plan that would result in
liability to Buyer under Sections 4069 or 4212(c) of ERISA.
Subject to applicable Laws, no provision in any Employee Plan
would prevent Buyer from causing the Company to amend, freeze,
terminate or consolidate, at Buyer's option, any Employee Plan
after the Closing, in a manner that would not reasonably be
expected to result in a Material Adverse Effect.
(e) None of the following now exists or has existed
within the six (6) year period ending on the date hereof with
respect to any Employee Plan: (i) any act or omission by the
Company constituting a violation of Sections 402, 403, 404, 405
or 412 of
<PAGE>
ERISA, (ii) any act or omission by the Company which constitutes
a violation of Sections 406 and 407 of ERISA and is not exempted
by Section 408 of ERISA, or which constitutes a violation of
Section 4975(c) of the Code and is not exempted by Section
4975(d) of the Code, (iii) any act or omission by the Company
constituting a violation of Sections 503, 510 or 511 of ERISA, or
(iv) any act or omission of the Company which could give rise to
liability under Section 502 of ERISA or under Section 4972 or
Sections 4975 through 4980 of the Code.
(f) No Employee Plan that is an "employee welfare
benefit plan" as defined in Section 3(1) of ERISA is a "multiple
employer welfare arrangement" as defined in Section 3(40) of
ERISA, nor is any such Plan funded by a "voluntary employees'
beneficiary association" pursuant to Section 501(c)(9) of the
Code or by any other welfare benefit trust. With respect to any
Employee Plans that are self-insured, no claims have been made
pursuant to any such Plan that have not yet been paid (other than
claims that are in the normal course of processing) and to the
Knowledge of Seller, no individual has incurred injury, sickness
or other medical condition with respect to which claims may be
made pursuant to such Plan where the liability to Company could
in the aggregate with respect to each individual reasonably
expect to exceed $25,000 per year (disclosure to include the
amount thereof). There are no former employees or other persons
to whom the Company is providing benefits for any reason, except
for coverage under Section 4980B of the Code or Sections 601
through 608 of ERISA ("COBRA" coverage), and the Company has
complied with the requirements of such Sections in the past.
(g) Each Employee Plan has been maintained in
compliance with its terms in all material respects, and all
contributions, premiums or other payments due from
<PAGE>
the Company or any of its ERISA Affiliates to (or under) any such
Employee Plan have been fully paid or adequately provided for on
the audited SAP Financial Statements for the most recently-ended
fiscal year and all contributions, premiums or other payments due
from the Company or any of its ERISA Affiliates to (or under) any
such Employee Plans for periods ending after the most recently-
ended fiscal year but before the Closing Date have been paid or
accrued in accordance with past custom and practices of the
Company. All accruals thereon (including, where appropriate,
accruals for partial periods) have been made in accordance with
SAP. There have been no oral or written communications to
employees or former employees of the Company, other than Employee
Plan amendments, summary plan descriptions and summaries of
material modifications previously provided to Buyer, that could
materially increase the expense of maintaining the Employee
Plans, either individually or in the aggregate, above the level
of expense incurred with respect thereto for fiscal 1996.
(h) There is no suit, action, dispute, claim,
arbitration or legal, administrative or other proceeding or
governmental investigation pending, or to the Knowledge of
Seller, threatened, alleging any breach of the terms of any
Employee Plan or of any fiduciary duties thereunder, or any
violation of applicable law with respect to any such Employee
Plan.
2.16 Employment and Agency Contracts. Schedule 2.16(a)
lists any contracts, agreements, arrangements (including but not
limited to commission structures, vacation policies, change in
control agreements, disability benefits, and severance policies)
of the Company and its Subsidiaries which relate in any manner to
employment, independent contractor, agency or similar
relationships. Schedule 2.16(b) separately lists all Company
Employees who are: (i) actively employed, (ii) actively employed
but absent due to illness,
<PAGE>
injury, maternity leave, military service, family or medical
leave, short-term disability or long-term disability (in each
case specifying the reason for such absence); (iii) former
employees who are receiving long-term disability benefits under
any Disability Plan, (iv) former employees who are subject to
COBRA; and (v) former employees who have previously satisfied the
requirements for retiree, medical, life insurance and/or other
benefit coverage under any Employee Plan (in each case specifying
the nature of coverage provided to each such former employee).
2.17 No Changes. Except as set forth in Schedule 2.17,
since December 31, 1996, there has not been, occurred or arisen
any:
(a) transaction by the Company except in the
ordinary course of business as conducted during 1996;
(b) capital expenditure by the Company, either
individually or in the aggregate, exceeding $50,000;
(c) destruction, damage to, or loss of any assets
(including, without limitation, intangible assets) of the Company
(whether or not covered by insurance) which may have a Material
Adverse Effect;
(d) labor trouble or claim of wrongful discharge or
other unlawful labor practice or action;
(e) change in accounting methods or practices
(including any change in depreciation or amortization policies or
rates or any change in capitalization of software development
costs) by the Company;
<PAGE>
(f) revaluation by the Company of any of its assets
other than with respect to its investment portfolio in the
ordinary course of business, consistent with past practices;
(g) declaration, setting aside, or payment of a
dividend or other distribution in respect to the shares of the
Company, or any direct or indirect redemption, purchase or other
acquisition by the Company of any of its shares;
(h) increase in the salary or other compensation
payable or to become payable by the Company to any of its
officers, directors or employees, or the declaration, payment, or
commitment or obligation of any kind for the payment, by the
Company, of a bonus or other additional salary or compensation to
any such person, other than increases, declarations or
commitments in the ordinary course of business to employees who
are not officers;
(i) acquisition, sale or transfer of any asset of
the Company except in the ordinary course of business;
(j) amendment or termination of any contract,
agreement, plan or license described in the Company Schedules to
which the Company is a party;
(k) loan by the Company to any person or entity, or
guaranty by the Company of any loan;
(l) waiver or release of any material right or
claim of the Company, including any write-off or other compromise
of any account receivable of the Company, except for the
settlement, waiver or release of rights or claims under the
Company's insurance policies or reinsurance agreements in the
ordinary course of business, consistent with past practices, and
not in excess of policy limits;
<PAGE>
(m) the commencement or notice or, to Seller's
Knowledge, threat of commencement of any governmental proceeding
against or investigation of the Company or its affairs;
(n) to the Knowledge of Seller, other event or
condition of any character that has or might reasonably be
expected to have a Material Adverse Effect on the Company;
(o) issuance, sale or redemption by the Company of
any of its shares or of any other of its securities;
(p) made any policy form or rate filings;
(q) (i) cancellation or appointment of any agent
except in the ordinary course of business or (ii) termination of
any line of business reflected in the most recent SAP Financial
Statements;
(r) any borrowing, assumption, guarantee, or other
liability for debt;
(s) any sale, assignment, transfer, pledge,
mortgage or encumbrance of any material part of the Company's
assets, properties or rights except in the ordinary course of its
business; or
(t) agreement by the Company to do any of the
things described in the preceding clauses (a) through (s) (other
than the transactions contemplated by this Agreement).
2.18 Tax and Other Returns and Reports.
(a) Tax Returns and Audits. The Company has
accurately prepared and timely filed all required federal, state,
local and foreign returns, estimates, information statements and
reports (including extensions thereof) ("Returns") relating to
any and all
<PAGE>
Taxes relating or attributable to the Company or its operations
and such Returns are true and correct and have been completed in
accordance with applicable law. The Company has timely paid all
Taxes required to be paid with respect to such Returns and has
withheld with respect to its employees all federal and state
income taxes, FICA, FUTA and other Taxes the Company is required
to withhold. Schedule 2.18 discloses the accrual for certain of
the Company's Taxes as of September 30, 1997. Within a
reasonable time after Closing, Seller will provide Buyer an
estimate of the amounts necessary to discharge all Taxes due and
payable on Returns required to be filed under (i) the Code for
periods beginning after January 1, 1997 or (ii) any state or
local Law, in both cases for all periods (or the portion of any
period) ending on or prior to the Closing Date (the "Closing Tax
Reserve"), which amounts shall be calculated in the ordinary
course of business consistent with past practices. Except as
specifically set forth on Schedule 2.18, the Company has not
been delinquent in the payment of any Tax nor is there any Tax
deficiency outstanding, proposed or assessed against the Company,
nor has the Company executed any waiver of any statute of
limitations on or extending the period for the assessment or
collection of any the Tax relating to the Company. No audit or
other examination of any Tax Return of the Company is presently
in progress. Except as specifically set forth in Schedule 2.18,
the Company and Insurance Subsidiary do not have any liabilities
for unpaid federal, state, local and foreign Taxes, whether
asserted or unasserted, known or unknown, contingent or otherwise
for which adequate provision has not been made in the SAP
Financial Statements or will not be made in the Closing Tax
Reserve and AMCA does not have any liabilities for unpaid
federal, state, local and foreign Taxes, whether asserted or
unasserted, known or unknown, contingent or otherwise (including
as a result of the inaccuracy of any Return) for which adequate
<PAGE>
provision has not been made in the SAP Financial Statements or
the AMCA Financial Statements, or will not be made in the Closing
Tax Reserve, and Seller has no Knowledge of any basis for the
assertion of any such liability attributable to the Company, or
any of its assets or operations. Except as set forth on
Schedule 2.18, the Company is not (and has never been) required
to join with any other entity in the filing of a consolidated tax
return for federal tax purposes or a consolidated or combined
return or report for state tax purposes. Except as set forth on
Schedule 2.18, the Company is not a party to or bound by any tax
indemnity, tax sharing or tax allocation agreement. The Company
has provided to Buyer copies of all federal and state income and
all state sales, franchise and use Returns for the fiscal years
ending December 31, 1994, 1995 and 1996. There are (and as of
the date immediately following the Closing Date there will be) no
Encumbrances on the assets of the Company relating to or
attributable to Taxes. The Company has no property which is
being sold, conveyed or transferred pursuant to this Agreement
which in the hands of Buyer would be treated as being owned by
persons other than Buyer pursuant to Section 168(f)(8) of the
Internal Revenue Code of 1954 as in effect immediately prior to
the enactment of the Tax Reform Act of 1986, or any analogous
provisions of any state law. None of the Company's assets are
treated as "tax-exempt use property" within the meaning of
Section 168(h) of the Code.
(b) No Penalty. The Company is not subject to any
penalty by reason of a violation of any order, rule or regulation
of, or a default with respect to any Return, report or
declaration required to be filed with, any Governmental Entity to
which it is subject, which violations or defaults, individually
or in the aggregate, could have a Material Adverse Effect.
<PAGE>
2.19 Intellectual Property. The Company owns, is licensed
to use, or has the legal right to use, all patents, trademarks,
trade names, service marks, copyrights, and any applications
therefor, technology, know-how, computer software programs or
applications and tangible or intangible proprietary information
or material that are used or currently proposed by the Company to
be used in its business as currently conducted or as currently
proposed by the Company to be conducted (the "Company
Intellectual Property Rights"). Schedule 2.19 lists all Company
Intellectual Property Rights. No claims with respect to the
Company Intellectual Property Rights have been asserted or to the
Knowledge of Seller, are threatened by any person, nor are there
any valid grounds for any bona fide claim that the Company
infringes on any copyright, patent, trade mark, service mark or
trade secret of a third party or against the use by the Company
of the Company Intellectual Property Rights. The Company
Intellectual Property Rights are adequate for the conduct of the
Company's business consistent with past practice.
2.20 Agreements, Contracts and Commitments. Except as set
forth on Schedule 2.20, the Company does not have, is not a party
to, nor is it bound by:
(a) any collective bargaining agreements,
(b) any agreements that contain any unpaid
severance liabilities or obligations,
(c) any Employee Plan,
(d) any employment or consulting agreement,
contract or commitment with an employee or individual consultant
or salesperson or consulting or sales agreement, contract or
commitment with a firm or other organization, not terminable by
the Company on thirty days notice without liability,
<PAGE>
(e) agreement or plan, including, without
limitation, any stock option plan, stock appreciation right plan
or stock purchase plan, any of the benefits of which will be
increased, or the vesting of benefits of which will be
accelerated, by the occurrence of any of the transactions
contemplated by this Agreement or the value of any of the
benefits of which will be calculated on the basis of any of the
transactions contemplated by this Agreement,
(f) any fidelity or surety bond or completion bond,
(g) any lease of personal property having a value
individually in excess of $25,000,
(h) any agreement of indemnification or guaranty
not entered into in the ordinary course of business,
(i) any agreement, contract or commitment
containing any covenant limiting the freedom of the Company to
engage in any line of business or compete with any person,
(j) any agreement, contract or commitment relating
to capital expenditures and involving future obligations in
excess of $50,000,
(k) any agreement, contract or commitment relating
to the disposition or acquisition of assets not in the ordinary
course of business, or any ownership interest in any corporation,
partnership, joint venture or other business enterprise,
(l) any mortgages, indentures, loans or credit
agreements, security agreements or other agreements or
instruments relating to the borrowing of money or extension of
credit, including guaranties referred to in clause (h) hereof,
(m) any distribution, joint marketing or
development agreement, or
<PAGE>
(n) any other agreement, contract or commitment
which requires an annual payment by any party thereto of $25,000
or more and is not cancelable without penalty within thirty (30)
days.
The Company has not breached, or received any claim or, to
the Knowledge of Seller, threat that it has breached, any of the
terms or conditions of any agreement, contract, plan or
commitment described in the Company Schedules to which it is
bound in such manner as would permit any other party to cancel or
terminate the same. Each agreement, contract, plan or commitment
required to be set forth in any of the Company Schedules is in
full force and effect and, except as otherwise specifically
disclosed, is not subject to any material default thereunder of
which Seller has Knowledge by any party obligated to the Company
pursuant thereto.
2.21 Litigation. Schedule 2.21 attached hereto accurately
lists all suits, actions and legal, administrative, arbitration
or other proceedings and governmental investigations and all
other claims, pending or as to which the Company has received any
notice of assertion, and which, individually or in the aggregate,
if adversely determined, could have a Material Adverse Effect;
provided, however, that any claims filed by policy holders in the
ordinary course of business and which do not exceed policy limits
or assert claims against parties other than the insured, need not
be listed. There is no judgment, decree or order enjoining the
Company in respect of, or the effect of which is to prohibit, any
business practice or the acquisition of any property or the
conduct of business of the Company which has had or could
reasonably be expected to have a Material Adverse Effect. Except
for collection, subrogation and salvage proceedings conducted in
the ordinary course of business, Schedule 2.21 also lists all
suits and legal actions initiated by the Company.
<PAGE>
2.22 Environmental.
(a) Hazardous Material. As of the Closing, no
amount of any substance that is regulated by any Governmental
Entity (including but not limited to the United States, the State
of South Carolina and any other state in which the Company has at
any time owned, operated, occupied or leased real property) or
that has been designated by any Governmental Entity to be or that
is radioactive, toxic, hazardous or otherwise a danger to health
or the environment, including, without limitation, PCBs,
asbestos, petroleum products, urea-formaldehyde and all
substances listed pursuant to the United States Comprehensive
Environmental Response, Compensation, and Liability Act of 1980,
as amended from time to time, and the United States Resource
Recovery and Conservation Act of 1976, as amended from time to
time, the environmental laws of the State of South Carolina and
any other state in which the Company has at any time owned,
operated, occupied or leased real property, and any other
applicable laws, as well as the regulations and publications
promulgated pursuant to said laws (a "Hazardous Material"), is
present in violation of any law in effect on or before the
Closing Date, in, over, on or under any property, including the
land and the improvements, air, ground water and surface water
thereof, that the Company currently or has at any time owned,
operated, occupied or leased.
(b) Hazardous Materials Activities. At no time
prior to the Closing has the Company handled, transported,
treated, stored, used, manufactured, released or exposed its
employees or others to any Hazardous Material in violation of any
law in effect on or before the Closing Date, nor has the Company
disposed of, transferred, sold, or manufactured any product
containing a Hazardous Material (collectively "Hazardous
Materials Activities") in violation of the Comprehensive
Environmental Response,
<PAGE>
Compensation and Liability Act of 1980, as amended, the Resource
Conservation and Recovery Act of 1976, the Toxic Substances
Control Act of 1976, or any other applicable local, state or
federal acts (including the rules and regulations thereunder) as
in effect on or before the Closing Date.
(c) Permits. The Company currently holds no
environmental approvals, permits, licenses, clearances and
consents, and none are necessary for the conduct of the Company's
Hazardous Material Activities and other businesses of the Company
as such activities and businesses are currently being conducted.
2.23 Labor Matters; OSHA. The Company is in compliance in
all material respects with all currently applicable laws and
regulations respecting employment, discrimination in employment,
terms and conditions of employment and wages and hours and
occupational safety and health and employment practices, and is
not engaged in any unfair labor practice. Neither the Seller nor
the Company has received notice from any Governmental Entity, or
notice of assertion before any Governmental Entity, of any claim,
action or proceeding to which the Company is a party or involving
the Company, and there is neither pending nor, to the Knowledge
of Seller, threatened any investigation or hearing concerning the
Company arising out of or based upon any such laws, regulations
or practices. There are no pending claims against the Company
under any workers compensation plan or policy or for long term
disability. The Company has fully complied with all applicable
provisions of Consolidated Omnibus Budget Reconciliation Act of
1985 and has no obligations with respect to any former employees
or qualifying beneficiaries thereunder.
<PAGE>
2.24 Insurance. Schedule 2.24 lists all insurance
policies and fidelity bonds covering the assets, business,
equipment, properties, operations, employees, officers and
directors of the Company as well as all claims made under any
insurance policy by the Company since December 31, 1994. There
is no claim by the Company pending under any of such policies or
bonds as to which coverage has been questioned, denied or
disputed by the issuers of such policies or bonds. All premiums
payable under all such policies and bonds have been paid and the
Company is otherwise in full compliance with the terms of such
policies and bonds. Such policies of insurance and bonds are of
the type and in amounts customarily carried by persons conducting
businesses similar to those of the Company. Since January 1,
1991, the Company has never been denied insurance coverage nor
has any insurance policy of the Company ever been cancelled for
any reason.
2.25 Compliance with Laws. (a) The Company holds all
material licenses, franchises, permits and authorizations
("Permits") necessary for the lawful ownership and use of its
properties and assets and the conduct of its businesses as they
are now being conducted and as currently proposed by the Company
to be conducted under and pursuant to Laws relating to the
Company, except for Permits the failure of which to hold would
not, individually or in the aggregate, have a Material Adverse
Effect, and the Company is not in violation of any of the above
nor has Seller or the Company received notice asserting any such
violation, which in either case would have a Material Adverse
Effect. All such Permits are valid and in good standing and are
not subject to any suspension, modification, limitation or
revocation or proceedings relating thereto. Schedule 2.25 sets
forth a complete and accurate list of all states in which the
Company is admitted to write insurance, including the
<PAGE>
type of each such license (including all limitations and
restrictions thereon) and the issuance date and expiration date
for each such license.
(b) The Company is in compliance with each Law
relating to it or any of its material assets, properties or
operations, except where noncompliance with any such Law would
not, individually or in the aggregate, have a Material Adverse
Effect.
(c) Except for normal examinations conducted by any
Governmental Entity in the regular course of the business of the
Company, no Governmental Entity has, to the Knowledge of Seller,
initiated any proceeding with respect to or investigation into
the business or operations of the Company.
(d) The Company (i) is an authorized insurer (on
either an admitted or non-admitted basis) in each state in which
it presently writes insurance for the type of insurance it
presently writes in such states and (ii) meets all statutory and
regulatory requirements of all Governmental Entities which have
jurisdiction over it to be an authorized insurer on either an
admitted or non-admitted basis, except where the failure to meet
such requirements would not have a Material Adverse Effect. All
policy form and rate filings required to be made by the Company
have been made and are up to date and all policies which have
been written or are currently being written as of the date
hereof, to the extent required by applicable laws, are on forms
approved by the insurance regulatory authority of the
jurisdiction where issued or have been filed with and not
objected to by such authority within the period provided for
objection, except where the failure to make such filing or obtain
such approval would not have a Material Adverse Effect.
2.26 Binding Agreements; No Default. Each of the
contracts, agreements and other instruments listed on the Company
Schedules to which the Company is a party is a
<PAGE>
legal, binding, and enforceable obligation by or against the
Company (subject to all applicable bankruptcy, insolvency,
reorganization and other laws applicable to creditors' rights and
remedies and to the exercise of judicial discretion in accordance
with general principles of equity).
2.27 FIRPTA. The Company is not, and has not been at any
time, a "United States real property holding corporation" within
the meaning of Section 897(c)(2) of the Code.
2.28 Reserves. Except as set forth on Schedule 2.28, all
statutory reserves reflected in the Audited SAP Financial
Statements for the year ended December 31, 1996 were determined
in accordance with SAP and generally accepted actuarial
assumptions and meet the requirements of the insurance laws of
the State of South Carolina and each other applicable
jurisdiction, except where the failure to meet such requirements
would not have a Material Adverse Effect. Subject to the terms,
conditions and limitations of this Agreement, Seller and Buyer
agree that the sole remedy of Buyer with respect to the adequacy
or sufficiency of such statutory reserves after the Closing Date
(but not with respect to any breach of the representations and
warranties in this paragraph) shall be the reserve adjustment
provided for in Exhibit A hereto.
2.29 Portfolio Investments. Seller has previously
delivered to Buyer true and complete lists as of June 30, 1997,
of all assets held in the investment portfolios of the Company
and its Subsidiaries.
2.30 Officers and Directors. Schedule 2.30 contains a
complete and accurate list of all officers and directors of the
Company and its Subsidiaries.
<PAGE>
2.31 Representations Complete. None of the
representations or warranties made by Seller, nor any statement
made in any Schedule, Exhibit or certificate furnished by the
Company or Seller pursuant to this Agreement, contains or will
contain any untrue statement of a material fact at the Closing
Date, or omits or will omit at the Closing Date to state any
material fact necessary in order to make the statements contained
herein or therein, in the light of the circumstances under which
made, not misleading.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF BUYER AND GNC
A. Buyer Representations and Warranties: Buyer has
prepared certain schedules which are attached hereto and
incorporated by reference herein (the "Buyer Schedules"). Buyer
represents and warrants to Seller that:
3.1 Organization, Existence, Standing and Authority of
Buyer. Buyer has been duly organized and is validly existing and
in good standing under the laws of the State of Colorado and has
all requisite corporate power and authority to execute and
deliver this Agreement, and to perform its obligations hereunder
and to consummate the transactions contemplated hereby.
3.2 Execution and Delivery. This Agreement has been duly
executed and delivered by Buyer. Subject to the satisfaction or
waiver of the conditions specified in Article VII hereof, the
execution, delivery and performance of this Agreement by Buyer
has been duly and validly authorized by all requisite corporate
action on the part of Buyer. The agreements of Buyer contained
herein constitute the valid and binding obligations of Buyer,
enforceable against Buyer in accordance with its terms.
<PAGE>
3.3 Consents, Waivers and Approvals. The execution and
delivery of this Agreement by Buyer, the performance by Buyer of
its obligations hereunder and the consummation of the
transactions contemplated hereby do not require Buyer or any
Affiliate of Buyer to obtain any consent, waiver, approval or
action of, or make any filing with or give any notice to, any
corporation, person or firm or any public, governmental or
judicial authority except for: (i) those listed in Schedule 2.3
hereto, (ii) such filings as may be required under the HSR Act,
and (iii) Form A filings with, notices to or orders from the
insurance regulatory departments of the State of South Carolina
and such other jurisdictions as may be required by law.
3.4 Investment Purpose. The Shares to be acquired by
Buyer under the terms of this Agreement will be acquired for its
own account for the purpose of investment only and not with a
view to the public resale or public distribution of all or any
part of the Shares. Buyer agrees that it will refrain from
transferring or otherwise disposing of any of the Shares, or any
interest therein, in such manner as to violate the Securities Act
of 1933, as amended, or of any applicable state securities law
regulating the disposition thereof.
3.5 Brokers and Consultants. All negotiations relative
to this Agreement and the transactions contemplated hereby have
been carried out by Buyer directly with Seller, without the
intervention of any person on behalf of Buyer in such manner as
to give rise to any claim by any person against Buyer, Seller or
the Company for a finder's fee, brokerage fee, commission or
similar payment.
3.6 No Violation. Neither the execution and delivery of
this Agreement nor the consummation of the transactions
contemplated hereby will (a) violate any provision of the
Articles of Incorporation or By-Laws of Buyer; (b) violate,
conflict with, constitute a
<PAGE>
default (or an event which, with or without notice, lapse of time
or both, or the occurrence of any other event, would constitute a
default) under, result in the termination of, accelerate the
performance required by, cause the acceleration of the maturity
of any debt or obligation pursuant to any contract, agreement or
commitment to which Buyer is a party or by which Buyer is bound,
or to which the property of Buyer is subject, or (c) violate any
Law except, in the case of clauses (b) and (c) above, for such
violations, conflicts, defaults, terminations or accelerations
which would not adversely affect the validity or enforcement of
this Agreement, consummation by Buyer of the transactions
contemplated hereby, or compliance with the terms hereof by
Buyer.
3.7 Investment Company. Buyer is not an investment
company subject to registration and regulation under the
Investment Company Act of 1940, as amended.
3.8 Pending Suits and Proceedings. There are no actions,
suits, claims or investigations pending or, to the Knowledge of
Buyer, threatened, nor any legal, administrative or arbitration
proceedings pending or, to the Knowledge of Buyer, threatened,
nor is there any outstanding order, writ, injunction or decree of
any court, governmental agency or arbitration tribunal, against
or affecting Buyer which would adversely affect the validity or
enforcement of this Agreement, consummation by Buyer of the
transactions contemplated hereby, or compliance with the terms
hereof by Buyer.
3.9 Payment of Purchase Price. Buyer has, and will have
on the Closing Date, unrestricted cash funds or available funds
under its lines of credit sufficient to pay the Purchase Price.
3.10 Financial Statements. A true and complete copy of
Buyer's annual audited financial statement for the year ended
December 31, 1996 (the "Buyer's Financial
<PAGE>
Statement") has been provided by Buyer to Seller. Buyer's
Financial Statement was prepared in accordance with SAP applied
on a basis and in a manner consistent with prior periods except
as disclosed in the footnotes thereto, and fairly presents, in
all material respects, the financial position, results of
operations and cash flows of Buyer as of the date and for the
period therein indicated in conformity with SAP.
3.11 Conduct of Business. Since December 31, 1996, there
has not been any change or changes in the business, properties,
results of operation or financial condition of Buyer which,
individually or in the aggregate, could adversely affect the
validity or enforceability of the Agreement, consummation of the
transactions contemplated hereby, or compliance with the terms
hereof by Buyer.
3.12 Disclosure. None of the representations or
warranties made by Buyer nor any statement made in any Schedule,
Exhibit or certificate furnished by Buyer pursuant to this
Agreement, contains or will contain any untrue statement of a
material fact at the Closing Date, or omits or will omit at the
Closing Date to state any material fact necessary in order to
make the statements contained therein, in the light of the
circumstances under which made, not misleading.
B. GNC Representations and Warranties: GNC represents
and warrants to Seller that:
3.13 Organization, Existence, Standing and Authority of
GNC. GNC has been duly organized and is validly existing and in
good standing under the laws of the State of Colorado and has all
requisite corporate power and authority to execute and deliver
the Documents and to perform its obligations thereunder and to
consummate the transactions contemplated thereby.
<PAGE>
3.14 Execution and Delivery. This Agreement has been duly
executed and delivered by GNC. Subject to the satisfaction or
waiver of the conditions specified in Article VII hereof, the
execution, delivery and performance of the Documents by GNC has
been duly and validly authorized by all requisite corporate
action on the part of GNC. The agreements of GNC contained in
the Documents constitute, or upon execution and delivery thereof,
shall constitute the valid and binding obligations of GNC,
enforceable against GNC in accordance with their terms.
3.15 Consents, Waivers and Approvals. The execution and
delivery of the Documents by GNC, the performance by GNC of its
obligations thereunder and the consummation of the transactions
contemplated thereby do not require GNC to obtain any consent,
waiver, approval or action of, or make any filing with or give
any notice to, any corporation, person or firm, or any public,
governmental or judicial authority except those listed on
Schedule 2.3 hereto.
3.16 No Violation. Neither the execution and delivery of
the Documents nor the consummation of the transactions
contemplated thereby will (a) violate any provision of the
Articles of Incorporation or By-Laws of GNC; (b) violate,
conflict with, constitute a default (or an event which, with or
without notice, lapse of time or both, or the occurrence of any
other event, would constitute a default) under, result in the
termination of, accelerate the performance required by, cause the
acceleration of the maturity of any debt or obligation pursuant
to any contract, agreement or commitment to which GNC is a party
or by which GNC is bound, or to which the property of GNC is
subject, or (c) violate any Law except, in the case of clauses
(b) and (c) above, for such violations, conflicts, defaults,
terminations or accelerations which would not adversely affect
the validity or enforcement of the Documents,
<PAGE>
consummation by GNC of the transactions contemplated thereby, or
compliance with the terms thereof by GNC.
3.17 Disclosure. None of the representations or
warranties made by GNC nor any statement made in any Schedule,
Exhibit or certificate furnished by GNC pursuant to the
Documents, contains or will contain any untrue statement of a
material fact at the Closing Date, or omits or will omit at the
Closing Date to state any material fact necessary in order to
make the statements contained therein, in the light of the
circumstances under which made, not misleading.
ARTICLE IV
INTERIM PERIOD CONDUCT
Seller agrees to cause the Company and its officers,
directors and employees, except as otherwise consented to in
writing by Buyer prior to the Closing Date, to comply with the
following provisions:
4.1 Regular Course of Business of the Company. Except as
otherwise permitted or restricted by this Agreement, Seller shall
cause the Company to use its best efforts to maintain in effect
all regulatory approvals and authorizations which are required to
carry on the Company's business as now being conducted.
4.2 Pre-Closing Activities of the Company. Except as (a)
required by the Documents, (b) as permitted in writing by Buyer,
or (c) as set forth on Schedule 4.2, which is attached hereto and
incorporated herein by this reference, the Company will not:
(i) create, authorize, issue, sell or deliver any
of its capital stock, bonds or other of its securities or grant
or otherwise issue any options, warrants or other
<PAGE>
rights with respect thereto, or split, combine or reclassify any
of its capital stock, or enter into any contract or commitment to
do any of the foregoing;
(ii) incur, assume, guarantee or otherwise become
liable with respect to any indebtedness for money borrowed,
except indebtedness in the ordinary course of its business, or
make any payment or prepayment with respect to any obligation for
money borrowed, except as required by the terms thereof;
(iii) declare, set aside or make any payment of any
dividend or other distribution in respect of the capital stock of
the Company or any direct or indirect redemption, purchase or
other acquisition of any such stock by the Company;
(iv) sell, assign, transfer or otherwise dispose of,
or pledge, mortgage or otherwise encumber, any material part of
its assets, properties or rights except in the ordinary course of
its business;
(v) amend its Articles of Incorporation or By-Laws
or take any action with respect to any such amendment;
(vi) make any capital expenditures, capital
additions or capital improvements in excess of $25,000;
(vii) enter into or amend, or cause or permit any
Affiliate to enter into or amend, any compensation arrangements,
including for the issuance of equity securities, with any key
employees, officers, directors, agents or independent contractors
of the Company outside of the ordinary course of business;
(viii) hire or terminate any employee with
annual compensation in excess of $60,000 per year or any
independent contractor or terminate the services of any
independent agent;
<PAGE>
(ix) solicit, encourage or negotiate any Acquisition
Proposal or supply any non-public information concerning the
Company's business, properties or assets to anyone other than as
required in the ordinary course of its business, or permit any
Affiliate to do the same;
(x) increase the salary or wages of any Company
Employees except in the ordinary course of its business
consistent with past practices, or increase the salary or wages
of any Company Employee with annual compensation in excess of
$60,000 per year;
(xi) make any policy form or rate filings other than
(x) those set forth on Schedule 4.2(xi), which is attached hereto
and incorporated by reference herein, (y) form filings in the
ordinary course of business and (z) rate filings in any state
which if approved and implemented would not increase or decrease
rates in such state by more than 5%, and which, to the extent
such filings represent rate decreases, have been presented along
with supporting documentation to Buyer at least 20 days prior to
filing;
(xii) seek to obtain a new license to conduct
business in any state, except as set forth on Schedule 4.2(xii),
which is attached hereto and incorporated by reference herein;
(xiii) except with regard to claims disputes
and subrogation, salvage and other recovery actions in the
ordinary course of its business, commence any material litigation
or arbitration;
(xiv) except as required by Law or SAP, make any
changes in its accounting principles, methods or practices;
<PAGE>
(xv) grant any increase in or otherwise modify in
any material manner the compensation of senior officers or
terminate any senior officer, except for dismissal for cause;
(xvi) purchase or acquire any assets in or for the
Company's investment portfolios other than securities with short-
term maturities or as may be necessary to conduct its business in
the ordinary course consistent with the Company's current
investment practices;
(xvii) amend any Employee Plan to materially
increase the expense of maintaining such Plans or arrangements,
individually or in the aggregate;
(xviii) take any action outside the ordinary
course of business and/or inconsistent with past practices of the
Company that might reasonably be expected to have a Material
Adverse Effect.
4.3 List of Depositories and Bank Balances. The Company
shall furnish to Buyer at Closing a list, certified by its
treasurer, which contains the names of all banks and other
institutions which are depositories of its funds and securities,
the names of all persons authorized to draw or sign checks or
drafts upon, or to give instructions with respect to, the
accounts established in said banks and other institutions, and
the names and locations of any institutions in which the Company
has safe deposit boxes, the names of the persons having access
thereto and the contents thereof.
4.4 Investigation by Buyer. Buyer may, prior to the
Closing Date, make or cause to be made such reasonable
investigation of the business, operations, assets, properties and
legal and financial condition of the Company as Buyer deems
necessary or advisable; provided, however, that no such
investigation shall unduly interfere with the normal
<PAGE>
operations of the Company. Seller agrees to cause the Company to
permit Buyer or its authorized representatives to have, after the
date hereof and until the Closing Date, full access to the books
and records of the Company during customary business hours.
Seller and the Company and their respective officers will furnish
Buyer with such financial and operating data and other
information with respect to the business, operations, assets,
properties and legal and financial condition of the Company as
Buyer shall reasonably request.
4.5 Employee and Agent Communications or Meetings.
Seller shall not permit the Company (or its officers, directors
and employees) to communicate with its employees, whether in
writing or in person, regarding the transactions contemplated by
this Agreement and any ramifications thereof, without first
consulting with Buyer regarding any proposed communication or
meeting, obtaining Buyer's prior written approval of any written
communication (including intra- or internet communications), and
ensuring that representatives of Buyer are present at any meeting
or on any teleconference relating to the transaction. Seller
shall cause the Company (and its officers, directors and
employees) to notify and consult with Buyer in advance of any
communications or meeting with the Company's agents regarding the
transactions contemplated by this Agreement and any ramifications
thereof, and Buyer shall have the opportunity to attend or
approve of any such meeting or communications in advance.
ARTICLE V
COVENANTS OF SELLER
Seller covenants and agrees that:
<PAGE>
5.1 Interference with Business. Except as specifically
approved in writing by Buyer, Seller will not, at any time before
or after the Closing seek to, or, except as required by Law,
assist anyone else, including the Company and its officers,
directors, employees and agents, to (i) replace or rewrite any
policies of the Company with policies of any other insurer, or
(ii) induce or encourage any policyholder of the Company to
cancel or not renew a policy with the Company. Seller will take
all reasonable actions to assist or otherwise enable Buyer and
the Company to obtain the full benefit of any renewal of all
insurance policies in effect on the Closing Date.
5.2 Employee Matters. Seller agrees that, without
Buyer's prior written consent, neither it, nor any of its
Affiliates will solicit, initiate any attempt to hire, or
otherwise encourage the resignation of any employee, agent or
independent contractor of the Company from the date of execution
of this Agreement until two (2) years following the Closing.
5.3 Leases. Seller's rights and obligations as
(i) lessee under the lease of the Company's facilities and real
estate dated December 15, 1992, and all amendments and addendums
thereto, by and between MMI (SC) QRS II-II, Inc., as lessor (the
"Landlord"), and Seller, as lessee, will be assigned to GNC by
Seller effective as of the Closing Date, and (ii) sublessor under
the sublease of Company's facilities and real estate, dated
December 15, 1992, and all amendments and addendums thereto, by
and between Seller, as sublessor, and the Company, as sublessee,
will be assigned to GNC by Seller effective as of the Closing
Date, all pursuant to that certain Assignment of Leases and
Assumption Agreement attached hereto as Exhibit B and
incorporated herein by this reference ("Assignment of Leases").
GNC and Buyer agree to use good faith efforts to cooperate with
Seller in any negotiations
<PAGE>
between Seller and the Landlord if Seller desires to be relieved
from its obligations and liabilities to Landlord under the Lease
or Sublease; provided that neither Buyer nor GNC shall be
required to assume or undertake any additional obligations or
liabilities under the Lease or Sublease as a result of this
provision.
5.4 Severance Payments. Seller shall indemnify and hold
the Company harmless from: (i) all payments made by the Company
under any change of control agreements with Company Employees
(other than any employee who has received notice of termination,
whether oral or written, prior to the date of this Agreement),
and (ii) all payments made by the Company under any severance
policy or arrangement of Seller or the Company with respect to
Company Employees who are subject to change of control agreements
referenced in paragraph (i) (other than any employee who has
received notice of termination, whether oral or written, prior to
the date of this Agreement), whether or not in writing, in either
case which are due or may become payable as a result of the
transactions contemplated by this Agreement or at any time prior
to expiration of any such agreement or arrangement; provided that
Seller shall not be liable for any bonus payments that may be due
under the change of control agreements to the extent such bonus
amounts were declared by the Company after the Closing Date; and
further provided, all amounts owed by Seller to the Company under
this Section 5.4 shall be adjusted to take into account any net
Tax cost or benefit (including as a result of any deductions
permitted or required by Section 280(G) of the Code) realized by
Buyer and/or the Company arising from any payments made by the
Company to Company Employees or former Company Employees under
this Section 5.4.
<PAGE>
ARTICLE VI
COVENANTS OF BUYER AND SELLER
6.1 Regulatory Approvals; Third Party Consents. (a)
Seller and Buyer shall cooperate with each other and use all
reasonable 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 Entities which are necessary or
advisable to consummate the transactions contemplated by this
Agreement. Seller and Buyer will have the right to review in
advance, and will consult with the other on (in each case subject
to Laws relating to the exchange of information) all the
information relating to Seller, the Company 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 Entity 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 which does not
pertain to the Company and which is provided to any Governmental
Entity 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 Entities necessary or advisable to
consummate the transactions contemplated by this Agreement and
each party will keep the other apprised of the status of matters
relating to completion of the transactions contemplated herein.
The party responsible for a filing as set forth above shall
promptly deliver to the other party evidence of the filing of all
applications, filings, registrations and notifications relating
<PAGE>
thereto and any supplement, amendment or item of additional
information in connection therewith. 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 Entity in respect of any such application. In
exercising the foregoing rights and obligations, Seller and Buyer
shall act reasonably and as promptly as practicable.
Without limiting the generality of the foregoing, Buyer
shall use its best efforts to cause Form A filings to be made
with the insurance departments of the State of South Carolina and
such other states as may be required by law, with respect to the
transactions contemplated hereby not later than fifteen (15)
calendar days after the execution of this Agreement. Buyer and
Seller, as the case may be, shall promptly make any and all other
filings, notices 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 and Buyer agree to furnish the other
with such necessary information and reasonable assistance as the
other may reasonably request in connection with its preparation
of such filings or submissions. Buyer and Seller shall keep each
other fully apprised of its actions with respect to all filings
and submissions and shall provide the other with copies of such
filings and submissions.
(b) Seller and Buyer shall, upon request, furnish
each other with all information concerning themselves, their
Affiliates, directors, officers and stockholders and such other
matters as may reasonably be necessary in connection with any
statement, filing, notice or application made by or on behalf of
Buyer, Seller, the Company or any of their
<PAGE>
respective Affiliates to any Governmental Entity 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).
(c) Seller and Buyer shall promptly advise each
other upon receiving any communication from any Governmental
Entity whose consent or approval is required for consummation of
the transactions contemplated by this Agreement which causes such
party to 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.
6.2 Further Assurances. Each of the parties hereto
shall, and shall use its best efforts to cause their respective
employees, professionals and representatives to, execute such
documents and other papers and perform such further acts as may
reasonably be required to carry out the provisions hereof and the
transactions contemplated hereby. Each such party shall, on or
prior to the Closing Date, use all reasonable 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. From time
to time following the Closing, each of the parties hereto shall,
without additional consideration, execute and deliver such
further instruments and take such further actions as may
reasonably be requested by the other to make effective the
transactions contemplated by this Agreement.
6.3 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 fact or
condition that has caused or could reasonably be expected to
cause any of its
<PAGE>
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,
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.
6.4 Employees and Employee Plans.
(a) General.
(i) No provision of this Agreement shall be
construed to prohibit the Company from having the right, at
any time before or after the Closing, to terminate the
employment of any Company Employee, with or without cause,
or to prohibit Buyer or the Company from electing to amend,
modify, consolidate or terminate any Employee Plan after
the Closing; provided that Seller shall have no liability
on account of such actions by Buyer or the Company; and
further provided, that Buyer is not assuming and shall have
no liability as a result of Seller's breach of any
representation, warranty or covenant in this Agreement
relating to such matters.
(ii) Service by Company Employees with the
Company, Seller or any of their Affiliates shall be
recognized under each employee benefit plan (within the
meaning of Section 3(3) of ERISA) 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 (1) eligibility to participate and
(2) vesting, but in no event shall such service be taken
into account in determining the accrual of benefits under
any such employee plan.
<PAGE>
(b) Defined Benefit Plan. The defined benefit plan
maintained by the Company ("Defined Benefit Plan") shall be
terminated or frozen, at Buyer's election, effective as of the
date requested by Buyer. Seller shall cause the Company to
provide all required notices to and filings with Company
Employees, the IRS and the Pension Benefit Guaranty Corporation
("PBGC") within the required statutory period to effect the
termination or freezing of the Defined Benefit Plan, and to take
all other actions, including amendments to such Plan, required to
effect such termination or freezing which can be accomplished
prior to Closing. Buyer shall have the opportunity to review and
approve all notices, amendments and filings within a reasonable
time prior to the Company's filing or giving of such notices,
amendments or filings. Seller shall have prepared and deliver to
Buyer prior to Closing an opinion of Seller's actuarial
consultant (who shall be reasonably acceptable to Buyer) as to
whether or not the Defined Benefit Plan is or will be fully
funded in the event that (i) the plan is terminated, (ii) the
plan is frozen, and (iii) the plan is continued in effect. Such
opinion shall also estimate the dollar amount of any liability
under the plan for each such assumption, and shall be dated as of
a date no more than fifteen (15) days prior to the Closing Date.
Seller shall have no liability for terminating or freezing the
Defined Benefit Plan pursuant to Buyer's election, and Buyer
shall have no liability for any breach of the representations and
warranties set forth in Section 2.15 or Seller's covenants in
this Section 6.4.
(c) Accrued Vacation and Sick Leave; Severance
Policy. Each Company Employee shall be entitled to carry over a
total of 112.5 hours of combined accrued vacation and sick leave
from calendar year 1997 to calendar year 1998. Any additional
accrued sick leave shall be forfeited by the Company Employees.
Any additional
<PAGE>
accrued vacation shall be paid by the Company to Company
Employees by December 31, 1997. The Company's severance policy,
as described in Schedule 2.15 of this Agreement, shall be
retained by Buyer until December 31, 1998, at which time all
rights under the Company's policy shall terminate, and all
Company Employees thereafter shall become subject to Buyer's
severance policy, as it may be in effect from time to time.
Buyer agrees that Seller shall have no liability for any claims
raised by any Company Employee or former Company Employee which
relate to the forfeiture or termination of the rights or benefits
described herein or which otherwise are based on the actions of
the Company or Buyer after the Closing Date; provided that Buyer
is not assuming and shall have no liability as a result of
Seller's breach of any representation, warranty or covenant in
this Agreement relating to such matters.
(d) Maintenance of Other Employee Plans. In
Buyer's sole discretion, Buyer may elect to maintain the
Company's existing defined contribution plan, cafeteria plan,
medical plan, dental plan, dependent care plan, medical expense
reimbursement plan or other plans in which Company Employees
participate for such period of time as Buyer deems necessary or
desirable, so long as the Buyer's maintenance of such plans
complies with applicable Law.
(e) Further Assurances. Seller and Buyer agree to
cooperate to carry out the duties and responsibilities contained
in this Section 6.4. In addition, Seller agrees to make
available to Buyer such information as Buyer may reasonably
request to facilitate the determination of (i) the period of
service of any Company Employee with the Company, the Seller or
any of their Affiliates prior to the Closing Date,
(ii) individual service accruals and salary histories of Company
Employees, and (iii) such other information as Buyer may
<PAGE>
reasonably request to carry out the provisions of this Section
6.4. Buyer agrees that it shall treat Company Employees in
substantially the same manner (in Buyer's reasonable judgment) as
it treats its other employees with respect to matters relating to
employee benefits, except to the extent specifically provided
otherwise in this Section 6.4.
6.5 Tax Matters.
(a) Section 338(h)(10) Election.
(i) Seller and Buyer covenant and agree to,
and agree to cause the Company to, make the election pursuant to
Section 338(h)(10) of the Code and the regulations promulgated
thereunder, and to take all necessary and appropriate actions to
effectuate the foregoing and to accurately report to applicable
Governmental Entities consistent therewith. In particular, and
not by way of limitation, in order to effect such election,
Seller, the Company and Buyer shall jointly execute necessary
copies of Internal Revenue Service Form 8023 and all attachments
reasonably determined by the parties to be required to be filed
therewith pursuant to the Code on the earlier of: (i) twenty
(20) days after the date Seller and Buyer agree on the allocation
of Purchase Price under paragraph (ii), below, (ii) twenty (20)
days after the date the Independent Accounting Firm makes its
determination of such allocation under paragraph (ii), below, or
(iii) the date which is eight and one-half (8-1/2) months after
the Closing Date. In connection therewith, Seller and Buyer
covenant and agree that the allocation among the assets of the
Company shall be determined within such period as follows:
(ii) Buyer and Seller will cooperate with
each other and jointly allocate the Purchase Price and any post-
closing adjustments thereto among the assets of the Company.
Such allocation shall be made in good faith and in accordance
with Section
<PAGE>
338(h)(10) of the Code. Seller, the Company and Buyer shall be
bound by the allocation determined in accordance with this
Section and shall prepare and file all Returns in accordance with
Section 6.5(b) below. In the event Seller and Buyer cannot,
despite good faith efforts, agree on such allocation within one
hundred twenty (120) calendar days after Closing, the matter
shall be referred to KPMG Peat Marwick (the "Independent
Accounting Firm") by either Buyer and Seller within five (5)
Business Days after the end of such one hundred twenty day
period. Buyer and Seller agree to execute, if requested by the
Independent Accounting Firm, a reasonable engagement letter, and
the fees and expenses of the Independent Accounting Firm retained
pursuant to this Section 6.5 shall be paid one-half by Buyer and
one-half by Seller. The Independent Accounting Firm shall,
acting as an arbitrator, determine an appropriate allocation of
the Purchase Price and any post-closing adjustment thereto among
the assets of the Company pursuant to Section 338(h)(10) of the
Code. Buyer and Seller shall use their best efforts to cause the
Independent Accounting Firm to render its determination as soon
as practicable, and each shall cooperate with such firm and
provide such firm with reasonable access to its books and records
and such other information as such firm may require in order to
render its determination. Such determination shall be made by
the Independent Accounting Firm within thirty (30) calendar days
of its selection, shall be set forth in a written statement
delivered to Buyer and Seller, and shall be final, binding and
conclusive.
(iii) Seller and Buyer covenant and agree to
report this transaction for all domestic tax purposes in each and
every respect in a fashion consistent with the allocation
determined pursuant to Section 6.5(b). If the allocation is
disputed by any taxing authority, the party receiving notice of
such dispute shall promptly notify and consult
<PAGE>
with the other party. Seller and Buyer shall cooperate with each
other in resolving such dispute and shall not settle such dispute
or make filings or other submissions with such taxing authority
without obtaining the other party's consent to the terms of such
filings, submissions or settlement, which consent shall not be
unreasonably withheld.
(b) Tax Returns.
(i) Seller and Buyer shall (i) each provide
the other, and Buyer shall cause the Company to provide Seller,
with such assistance as may reasonably be requested by any of
them in connection with the preparation of any Return, or the
conduct of any audit or other examination by any taxing authority
or judicial or administrative proceedings relating to liability
for Taxes; (ii) each retain and provide the other, and Buyer
shall cause the Company to retain and provide Seller with, any
records or other information that may be relevant to such Return,
audit or examination, proceeding or determination; and (iii) each
provide the other with any final determination of any such audit
or examination, proceeding or determination that affects any
amount required to be shown on any Return of the other for any
period. Without limiting the generality of the foregoing, Buyer
shall retain, and shall cause the Company to retain, and Seller
shall retain, until the applicable statute of limitations
(including any extensions) have expired, copies of all Returns,
supporting work schedules, and other records or information that
may be relevant to such Returns for all Tax periods or portions
thereof ending before or including the Closing Date and shall not
destroy or otherwise dispose of any such records without first
providing the other party with a reasonable opportunity to review
and copy the same at the cost of such other party.
(ii) Except to the extent reflected in
reserves established in the most recent SAP Financial Statements
or in the Closing Tax Reserve, Seller is
<PAGE>
responsible for all Taxes due and payable on Returns required to
be filed under the Code or any state or local Law for all periods
ending on or before the Closing Date. Buyer shall prepare all
Tax returns with respect to the Company, for all periods
commencing on or after January 1, 1997, prior to and ending on
the Closing Date and shall deliver to Seller, no later than July
1, 1998, a copy of such Returns for Seller's review and for
filing with the appropriate Governmental Entities. Seller shall
provide notice to Buyer within ten (10) business days after
receipt thereof of any dispute regarding such Return and the
parties shall cooperate in good faith to resolve any such
dispute. In the event of any dispute regarding any item shown on
any such Return, Seller shall not, without Buyer's consent (which
shall not be unreasonably withheld) prepare such Return in a
manner which is not reasonably satisfactory to Buyer. Seller
shall reimburse Buyer for fifty percent (50%) of Buyer's
reasonable out-of-pocket expenses (which aggregate expenses of
Buyer may not exceed $10,000), incurred in preparing any such
Return for periods ending on or before the Closing Date. Buyer
is responsible for all Taxes, and for preparing and filing all
Returns with respect to the Company (and expenses related
thereto), for all periods commencing on or after the Closing
Date. Any refunds, credits or overpayments of Taxes in respect
of Returns with respect to the Company filed for all periods
ending on or before the Closing Date shall be for the account of
Seller. Any refunds, credits or overpayments of Taxes in respect
of such Returns filed for all periods commencing on or after the
Closing Date and ending thereafter shall be for the account of
the Company. To the extent either the Company or Seller is
obligated to pay to the other any amounts received as a result of
adjustments to estimated reserves or accruals for Taxes, or as a
result of refunds, credits or overpayments
<PAGE>
as described above, such payments shall be made pursuant to
procedures set forth in the Termination Amendment to the Tax
Allocation Agreement between Seller and the Company.
(iii) For any Tax period that begins on or
before and ends after the Closing Date (a "Straddle Period"), for
purposes of apportioning a Tax to the portion of such Tax period
that ends on the Closing Date, the parties shall treat the
Closing Date as the last day of such period; and the Tax for the
Tax period that is allocated to the portion of the Tax period
ending on the Closing Date shall be (i) in the case of a Tax that
is based on income or gross receipts, the Tax that would be due
with respect to the period ending on (and including) the Closing
Date, based on actual operations of the Company during such
period as shown on its records, and (ii) in the case of a Tax
that is not based on income or gross receipts (e.g., real estate
or franchise tax), the total Tax for the Straddle period
multiplied by a fraction, the numerator of which is the number of
days in the Tax period ending on (and including) the Closing Date
and the denominator of which is the total number of days in the
Straddle Period.
(c) Tax Allocation Agreement; Code Section
338(h)(10) Elections. The Tax Allocation Agreement dated May 29,
1991, by and between Seller and, among others, the Company, shall
be terminated pursuant to the Termination Amendment to the Tax
Allocation Agreement, effective as of the Closing, subject to
Buyer's consent to the terms of such termination, which consent
shall not be unreasonably withheld. Any resulting accruals or
adjustments in respect of the Taxes of the Company shall be
settled as of the Closing Date. No new elections with respect to
taxes or any changes in current elections with respect to Taxes
affecting the Company shall be made after the date of this
Agreement without prior written consent of Buyer, which consent
shall not be unreasonably withheld.
<PAGE>
Seller shall not take any action, or cause or permit the Company
to take any action, which could prohibit the making of a valid
Section 338(h)(10) election with respect to the transaction
contemplated herein.
(d) Participation in Tax Examinations. Seller and
Buyer shall provide to each other notice within ten (10) days of
receipt of any audit or similar investigation or proceeding in
which the IRS or any other Governmental Entity makes or proposes
to make a Tax adjustment to any Tax period which includes any
period up to the Closing Date. Seller shall control any such
proceeding as to the pre-Closing Date periods, and Buyer shall
control any such proceeding as to periods commencing on or after
the Closing Date; provided that, with respect to any such audit,
the other party or its representative shall have the right, at
its expense, to participate in any such audit or similar
investigation. The parties agree that they will not settle,
compromise or agree to any Tax adjustment which affects or could
affect the other party's tax liability without the prior written
consent of the other party, which consent shall not be
unreasonably withheld. The parties agree to cooperate with each
other for the purposes of any audit or similar investigation,
which cooperation shall include, but not be limited to (i)
providing all relevant information that is available to Buyer,
Seller and/or the Company, as the case may be, with respect to
such audit or investigation, (ii) making personnel available at
reasonable times, and (iii) preparation of responses to requests
for information, provided that the foregoing shall be done in a
manner so as to not interfere unreasonably with the conduct of
business by Buyer, Seller or the Company, as the case may be.
6.6 Preparation of GAAP Financial Statements. Seller
agrees to (i) cause the Company to use its best efforts to
prepare consolidated financial statements (balance sheets,
<PAGE>
income statements and statements of cash flows) of the Company
(the "GAAP Financial Statements") as of and for the fiscal years
ending December 31, 1994, 1995 and 1996, and as of and for the
fiscal quarters ending March 31, June 30 and September 30, 1997,
and (ii) permit the GAAP Financial Statements to be audited by
Buyer's independent auditors, if requested by Buyer. Buyer
agrees to use its best efforts to assist the Company in its
preparation of the GAAP Financial Statements.
6.7 Updating Schedules. In connection with the Closing,
Seller and Buyer will promptly supplement or amend the various
Schedules to this Agreement to reflect any matter which, if
existing, occurring or known on the date set forth or discussed
in such Schedules should have been so disclosed, or which is
necessary to correct any information in such Schedules which was
or has been rendered inaccurate thereby; provided, however, that
for the purpose of determining the rights and obligations of the
parties under this Agreement, any such supplemental or amended
disclosure by any party shall not be deemed to have been
disclosed as of the date hereof, to constitute part of, or an
amendment or supplement to, such party's Schedules or to cure any
breach or inaccuracy of a representation or warranty unless so
agreed to in writing by the other party, which agreement shall
not be unreasonably withheld if such supplemental or amended
disclosure is not reasonably likely, individually or in the
aggregate, to result in a Material Adverse Effect.
6.8 Access to Records. From and after the Closing Date,
Buyer shall provide and shall cause the Company and each
Subsidiary to provide to Seller and its representatives, counsel,
accountants, agents and employees reasonable access (including
the right to make copies at Seller's expense) during customary
business hours to all books, files, records, documents and
personnel relating to the operations of the Company and each
Subsidiary prior
<PAGE>
to the Closing, including any matter for which Seller may have an
indemnification obligation under Article XI hereof, and Buyer
shall and shall cause the Company to reasonably assist Seller and
its representatives, counsel, accountants, agents and employees
in performing all appropriate investigations, inspections or
other examinations with respect to such books, files, records,
documents and personnel of the Company and each Subsidiary as may
reasonably be requested by Seller.
ARTICLE VII
CONDITIONS TO OBLIGATIONS OF BUYER
7.1 General. Except as may be waived in writing by
Buyer, the obligation of Buyer to consummate the transactions
contemplated hereby on the Closing Date shall be subject to the
satisfaction, prior to or concurrently with the Closing, of each
of the conditions set forth in this Article VII.
7.2 Performance. Seller shall have complied with and
performed in all material respects the terms, conditions, acts,
undertakings, covenants and obligations required by the Documents
to be complied with and performed by Seller on or before the
Closing Date, and Buyer shall have received from Seller at the
Closing a currently dated certificate signed by the President or
an authorized Vice President of Seller to the foregoing effect.
7.3 Representations and Warranties True as of Closing
Date. All representations and warranties of Seller set forth in
this Agreement shall be true and correct on and as of the Closing
Date with the same effect as though such representations and
warranties had been made on and as of the Closing Date; provided
that (a) any
<PAGE>
representations and warranties which specifically relate to a
particular date or period shall be true and correct as of such
date and for such period, and (b) if the failure of any such
representations and warranties to be true and correct on and as
of the Closing Date (without considering any materiality
qualifications provided for in such representation or warranty),
individually or in the aggregate, has not and is not reasonably
likely to result in a Material Adverse Effect, the foregoing
condition shall be deemed to have been fulfilled. Buyer shall
have received from Seller and the Company at the Closing
currently dated certificates (in form and substance reasonably
satisfactory to Buyer) signed by the President and the Secretary
of Seller and by the President and the Chief Financial Officer of
the Company to the foregoing effect.
7.4 Orders and Consents.
7.4.1 There shall not be outstanding and in effect on
the Closing Date any order entered by any Governmental Entity
prohibiting or making illegal the transactions contemplated by
this Agreement or the Documents.
7.4.2 All consents, waivers and approvals listed in
Schedule 2.3 hereto shall have been obtained, and Buyer shall
have been furnished with appropriate evidence, reasonably
satisfactory to it and its counsel, of the granting of such
consents, waivers and approvals.
7.5 Corporate Action. Buyer shall have received:
7.5.1 A copy of the resolutions (in form and
substance reasonably satisfactory to Buyer) duly adopted by the
Boards of Directors of Seller and the Company, respectively,
authorizing the execution, delivery and performance of the
Documents by Seller and the Company, as necessary and
appropriate, certified (in form and substance reasonably
<PAGE>
satisfactory to Buyer) by the Secretary or an Assistant Secretary
of Seller and the Company, respectively.
7.5.2 Certificates (in form and substance reasonably
satisfactory to Buyer) of the Secretary or an Assistant Secretary
of each of Seller and the Company as to the incumbency and
signatures of the officers of Seller and the Company executing
the Documents.
7.5.3 Copies of the Articles of Incorporation,
By-Laws, minutes of the board of directors (and any committees
thereof), and stock transfer records or ledger of the Company and
each of its Subsidiaries, respectively, certified as true,
correct and complete as of the Closing Date by the Secretary of
the Company and its Subsidiaries, respectively.
7.6 Opinions of Seller's Counsel. Buyer shall have
received the opinion of (i) Lord, Bissell & Brook, outside
counsel for Seller, dated the Closing Date, substantially in the
form of Exhibit C which is attached hereto and incorporated
herein by reference, and (ii) Susan G. Vincent, counsel for
Seller, dated the Closing Date, substantially in the form of
Exhibit D which is attached hereto and incorporated herein by
reference.
7.7 Certificates of Authority. All of the Certificates
of Authority listed in Schedule 2.4 hereto authorizing the
Company to transact insurance business shall be in full force and
effect, without any material amendments after the date of this
Agreement; no notification shall have been received from any
insurance commissioner or other Governmental Entity which
revokes, suspends, impairs, restricts, reduces or in any other
manner materially and adversely affects the right or ability of
the Company to transact insurance business in the States of South
Carolina, North Carolina, Georgia or Alabama, or which seeks or
purports to have such affect; and Seller shall provide to Buyer
at Closing
<PAGE>
certificates of the insurance commissioners or directors of
insurance of the States of South Carolina and North Carolina as
to the good standing of the Company.
7.8 No Adverse Changes. Except as disclosed in Schedule
7.8 attached hereto and incorporated herein by reference and
except for (i) the effect of any legislative, regulatory or
judicial actions affecting the insurance industry in general, and
(ii) the effect of general market conditions, between the date of
this Agreement and the Closing Date there shall not have occurred
any event or occurrence that, individually or in the aggregate,
is reasonably likely to result in a Material Adverse Effect.
7.9 Other Agreements. Seller shall have delivered to
Buyer the Assignment of Leases, duly executed by each party
thereto (other than Buyer).
7.10 Delivery of Stock. Seller shall have delivered to
Buyer duly executed stock certificates and stock powers,
sufficient to transfer to Buyer good and marketable title to the
Shares, free and clear of all Encumbrances and adverse claims.
Such certificates shall represent all of the issued and
outstanding capital stock of the Company.
7.11 Resignations. Seller shall have delivered to Buyer
the resignations as officers and directors (but not as employees)
of all persons listed on Schedule 7.11 attached hereto and
incorporated herein by reference.
7.12 General Reinsurance Agreement. Seller shall have
provided to Buyer such documents as Buyer may reasonably request,
indicating that all of the Company's rights and obligations under
the General Reinsurance Corporation Agreement of Reinsurance
No. 7463, as well as the General Reinsurance Corporation
Agreement of Reinsurance No. 7466, have expired or been
terminated and/or assumed in their entirety by Seller effective
as of November 30, 1997 (together, the "Retained Reinsurance
Agreements"). Seller shall pay
<PAGE>
any amounts due or payable to General Reinsurance Corporation as
a result of such termination. Seller agrees that the Excess of
Loss Reinsurance Agreement between the Company and General
Reinsurance Corporation shall remain in full force and effect
through the Closing Date.
7.13 Tax Allocation Agreement. Seller shall have
delivered to Buyer the Termination Amendment to the Tax
Allocation Agreement, duly executed by each party thereto, which
Termination Amendment provides, among other things, for: (i) the
termination of the Tax Allocation Agreement between Seller and
the Company and (ii) the time periods in which and procedures by
which any post-Closing payments shall be made.
ARTICLE VIII
CONDITIONS TO OBLIGATIONS OF SELLER
8.1 General. Except as may be waived in writing by
Seller, the obligation of Seller to consummate the transactions
contemplated hereby on the Closing Date shall be subject to the
satisfaction, prior to or concurrently with the Closing, of each
of the conditions set forth in this Article VIII.
8.2 Performance. Buyer and GNC, as appropriate, shall
have complied with and performed in all material respects the
terms, conditions, acts, undertakings, covenants and obligations
required by the Documents to be complied with and performed by
Buyer or GNC, as appropriate, on or before the Closing Date, and
Seller shall have received from each of Buyer and GNC at the
Closing a currently dated certificate signed by the President or
an authorized Vice President of each of Buyer and GNC to the
foregoing effect.
<PAGE>
8.3 Representations and Warranties True as of Closing
Date. All representations and warranties of Buyer and GNC set
forth in this Agreement shall be true and correct on and as of
the Closing Date with the same effect as though such
representations and warranties had been made on and as of the
Closing Date; provided that (a) any representations and
warranties which specifically relate to a particular date or
period shall be true and correct as of such date and for such
period, and (b) if the failure of any such representations and
warranties to be true and correct on and as of the Closing Date
(without considering any materiality qualifications provided for
in such representation or warranty), individually or in the
aggregate, has not and is not reasonably likely to result in a
material adverse effect on the business, properties, assets,
financial condition, results of operations or current prospects
of GNC, Buyer and their respective Subsidiaries, taken as a
whole, the foregoing condition shall be deemed to have been
fulfilled. Seller shall have received from each of Buyer and
GNC at the Closing a currently dated certificate (in form and
substance reasonably satisfactory to Seller) signed by the
President or an authorized Vice President of each of Buyer and
GNC to the foregoing effect.
8.4 Orders and Consents.
8.4.1 There shall not be outstanding and in effect on
the Closing Date any order entered by any Governmental Entity
prohibiting or making illegal the transactions contemplated by
this Agreement or the Documents.
8.4.2 All consents, waivers and approvals listed in
Schedule 2.3 hereto shall have been obtained, and Seller shall
have been furnished with appropriate evidence, reasonably
satisfactory to it and its counsel, of the granting of such
consents, waivers and approvals.
<PAGE>
8.5 Corporate Action. Seller shall have received:
8.5.1 A copy of the resolution or resolutions (in
form and substance reasonably satisfactory to Seller) duly
adopted by the Board of Directors of each of Buyer and GNC
authorizing the execution, delivery and performance of the
Agreement and the Documents by Buyer and GNC, as the case may be,
certified (in form and substance reasonably satisfactory to
Seller) by the Secretary or an Assistant Secretary of each of
Buyer and GNC.
8.5.2 Certificates (in form and substance reasonably
satisfactory to Seller) of the Secretary or an Assistant
Secretary of each of Buyer and GNC, respectively, as to the
incumbency and signatures of the officers of Buyer and GNC,
respectively, executing the Documents.
8.6 Payment of Purchase Price. Buyer shall have paid and
delivered to Seller the Purchase Price, less the $50,000 deposit
previously paid to Seller by Buyer.
8.7 Other Agreements. GNC shall have delivered to Seller
the Assignment of Leases, duly executed by GNC.
8.8 Opinion of Counsel for Buyer and GNC. Seller shall
have received the opinion of Ireland, Stapleton, Pryor & Pascoe,
P.C., counsel for Buyer and GNC, dated the Closing Date,
substantially in the form of Exhibit E which is attached hereto
and incorporated by reference herein.
<PAGE>
ARTICLE IX
MODIFICATION, WAIVERS AND TERMINATION
9.1 Modification. Buyer and Seller may, by mutual
consent of their duly and properly authorized representatives,
amend, modify or supplement this Agreement in such manner as may
be agreed upon by them in writing at any time.
9.2 Waivers. Each of Buyer or Seller may, pursuant to
action by its duly and properly authorized representative and by
an instrument in writing, extend the time for or waive the
performance of any of the obligations of the other parties or
waive compliance by the other parties with any of the covenants
or conditions contained herein.
9.3 Termination.
(a) This Agreement may be terminated, and the
transactions contemplated hereby abandoned, prior to Closing:
(1) By mutual written consent of Buyer and
Seller;
(2) By Buyer: (i) if there has been a
material misrepresentation on the part of Seller in any
representation or warranty of Seller contained herein or in
any certificate or other instrument delivered or furnished
to Buyer pursuant hereto; or (ii) if there has been any
failure on the part of Seller to comply with or perform any
of its agreements, covenants or obligations hereunder in
any material respect, and such noncompliance or
nonperformance shall not have been (x) cured or eliminated
by Seller within ten (10) business days following receipt
by Seller of written notice thereof from Buyer, or
(y) waived by Buyer on or before the Closing Date.
<PAGE>
(3) By Seller: (i) if there has been a
material misrepresentation on the part of Buyer in any
representation or warranty of Buyer contained herein or in
any certificate or other instrument delivered or furnished
to Seller pursuant hereto; or (ii) if there has been any
failure on the part of Buyer to comply with or perform any
of its agreements, covenants or obligations hereunder in
any material respect and such noncompliance or
nonperformance shall not have been (x) cured or eliminated
by Buyer within ten (10) business days following receipt by
Buyer of written notice thereof from Seller or (y) waived
by Seller on or before the Closing Date.
(4) By Buyer or Seller if (i) the
transaction contemplated hereby has not closed by the date
which is five (5) months from the date of this Agreement;
provided, however, a party shall not be entitled to
terminate this Agreement pursuant to this
subparagraph (4)(i) based on its own breach of any
representation, warranty or covenant contained in the
Documents, (ii) there shall be a final nonappealable order
of a federal or state court in effect preventing
consummation of the transactions contemplated in the
Documents; (iii) there shall be any action taken, or any
statute, rule, regulation or order enacted, promulgated or
issued or deemed applicable to the Documents or the
transactions contemplated therein by any Governmental
Entity which would make consummation of such transactions
illegal; or (iv) there shall be any action taken, or any
statute, rule, regulation or order enacted, promulgated or
issued or deemed applicable to the Documents or the
transactions contemplated therein by any Governmental
Entity, which would (A) prohibit Buyer's or the Company's
ownership or operation of all or
<PAGE>
a material portion of the business of the Company, or
compel Buyer or the Company to dispose of or hold separate
all or a material portion of the business or assets of the
Company or Buyer as a result of the Documents or the
transactions contemplated therein or (B) render Buyer or
the Company unable to consummate the transactions
contemplated in the Documents, except for any waiting
period provisions.
9.4 Effect of Termination. In the event of a termination
pursuant to Section 9.3 hereof, this Agreement shall become void
and of no effect, except that, in the event of such a termination
because of any breach, (a) the breaching party shall be liable to
the other party for all actual damages arising directly from or
relating to such breach, including but not limited to, reasonable
attorneys' fees and expenses, and (b) the obligations arising
under Section 12.4 shall remain in full force and effect. In no
event shall any party be entitled to consequential damages
including, but not limited to, damages for lost profits,
following a termination of this Agreement.
ARTICLE X
CERTAIN DEFINITIONS
For purposes of this Agreement, the following terms shall
have the meanings hereinafter set forth:
(a) "Acquisition Proposal" is any proposal, other than
the transactions contemplated herein, for (i) any merger or other
business combination involving the Company, (ii) the acquisition
of the Company or a material equity interest therein, (iii) the
acquisition of a material portion of the assets of the Company,
or (iv) the acquisition by the
<PAGE>
Company of a material equity interest in, or a material portion
of the assets of, another entity.
(b) "Affiliate" with respect to any corporation shall
mean a corporation which directly, or indirectly through one or
more intermediaries, controls or is controlled by, or is under
common control with, such corporation. The term "control"
(including the related terms "controlled by" and "under common
control with") shall mean the ownership, directly or indirectly,
of more than fifty percent (50%) of the voting stock of a
corporation.
(c) "Agreement" has the meaning set forth in the first
paragraph of this Agreement.
(d) "AMCA Financial Statements" has the meaning set forth
in Section 2.7(b).
(e) "Asserted Liability" has the meaning set forth in
Section 11.5.1.
(f) "Assignment of Leases" has the meaning set forth in
Section 5.3.
(g) "Audited SAP Financial Statements" has the meaning
set forth in Section 2.7(a).
(h) "Business Day" means any day on which banks in
Denver, Colorado and Detroit, Michigan are open (other than
Saturdays).
(i) "Buyer" has the meaning set forth in the first
paragraph of this Agreement.
(j) "Buyer Schedules" has the meaning set forth in the
first paragraph of Article III.
(k) "Claims Notice" has the meaning set forth in Section
11.5.1.
(l) "Closing" shall have the meaning set forth in
Section 1.3.
(m) "Closing Date" shall have the meaning set forth in
Section 1.3.
<PAGE>
(n) "Closing Tax Reserve" shall have the meaning set
forth in Section 2.18.
(o) "COBRA" has the meaning set forth in Section 2.15(f).
(p) "Code" has the meaning set forth in Section 2.15(a).
(q) "Common Stock" has the meaning set forth in the first
paragraph of the Recitals.
(r) "Company" has the meaning set forth in the first
paragraph of the Recitals.
(s) "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, including
those who are absent from employment due to illness,
injury, maternity leave, military service, family or
medical leave, 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 (collectively, the "Disability Plans"));
(2) former employees who, on the Closing Date, are
receiving long-term disability benefits under any
Disability Plan; and
(3) former employees who have previously satisfied
the requirements for retiree medical and/or life insurance
coverage under any of the Employee Plans disclosed pursuant
to Section 2.15; but "Company Employees" shall not include:
(i) other former employees,and (ii) employees otherwise not
actively employed by the Company (other than as
specifically included above).
(t) "Company Schedules" has the meaning set forth in the
first paragraph of Article II.
<PAGE>
(u) "Deductible Claim" has the meaning set forth in
Section 11.4(a)(i).
(v) "Defined Benefit Plan" has the meaning set forth in
Section 6.4(b).
(w) "Disability Plans" has the meaning set forth in the
definition of "Company Employees."
(x) "Disagreement" has the meaning set forth in
Exhibit A.
(y) "Documents" has the meaning set forth in Section 2.1.
(z) "ECO Judgments" has the meaning set forth in Exhibit
A.
(aa) "Employee Plans" has the meaning set forth in
Section 2.15.
(ab) "Encumbrances" has the meaning set forth in
Section 2.13.
(ac) "Environmental Claim" has the meaning set forth in
Section 11.1(b)(3).
(ad) "ERISA" has the meaning set forth in Section 2.15(a).
(ae) "ERISA Affiliate" has the meaning set forth in
Section 2.15(a).
(af) "GAAP" means generally accepted accounting
principles, consistently applied, as used in the United States as
in effect at the time the applicable AMCA Financial Statements or
GAAP Financial Statements were prepared or any act requiring the
application of GAAP was performed.
(ag) "GAAP Financial Statements" has the meaning set forth
in Section 6.6.
(ah) "General Claim" has the meaning set forth in
Section 11.1(b)(1).
(ai) "GNC" has the meaning set forth in the first
paragraph of this Agreement.
(aj) "Governmental Entity" means any court, administrative
agency or commission, or other federal, state or local
governmental authority or instrumentality.
(ak) "Hazardous Materials" has the meaning set forth in
Section 2.22(a).
<PAGE>
(al) "Hazardous Materials Activities" has the meaning set
forth in Section 2.22(b).
(am) "HSR Act" has the meaning set forth in Section 2.3.
(an) "Indemnified Buyer Parties" has the meaning set forth
in Section 11.2.
(ao) "Indemnified Seller Parties" has the meaning set
forth in Section 11.3.
(ap) "Independent Accounting Firm" has the meaning set
forth in Section 6.5(a)(ii).
(aq) "Insurance Subsidiary" has the meaning set forth in
Section 2.7(a).
(ar) "IRS" has the meaning set forth in Section 2.15(c).
(as) "Knowledge of Buyer" means the actual knowledge of
Michael L. Pautler, after reasonable investigation.
(at) "Knowledge of Seller" means the actual knowledge of
each of Reba Rogers, Susan G. Vincent, Jack Natili and Richard
Russell, after reasonable investigation.
(au) "Law" or "Laws" has the meaning set forth in
Section 2.6.
(av) "Landlord" has the meaning set forth in Section 5.3.
(aw) "Loss Development" has the meaning set forth in
Exhibit A.
(ax) "Losses" has the meaning set forth in Section 11.2.
(ay) "Material Adverse Effect" has the meaning set forth
in Section 2.4.
(az) "Measurement Date" has the meaning set forth in
Exhibit A.
(ba) "PBGC" has the meaning set forth in Section 6.4(b).
(bb) "Permits" has the meaning set forth in Section 2.25.
(bc) "Purchase Price" has the meaning set forth in Section
1.2.
(bd) "Remaining Deductible Amount" has the meaning set
forth in Exhibit A.
<PAGE>
(be) "Retained Reinsurance Agreements" has the meaning set
forth in Section 7.12.
(bf) "Returns" has the meaning set forth in Section
2.18(a).
(bg) "SAP Financial Statements" has the meaning set forth
in Section 2.7(a).
(bh) "Seller" has the meaning set forth in the first
paragraph of this Agreement.
(bi) "Shares" has the meaning set forth in the first
paragraph of the Recitals.
(bj) "Statutory Accounting Practice" or "SAP" shall mean
the accounting practices prescribed or permitted by (i) with
respect to the Company, the Director of Insurance of the State of
South Carolina, and (ii) with respect to the Buyer, the Insurance
Commissioner of the State of Colorado.
(bk) "Straddle Period" has the meaning set forth in
Section 6.5(b)(iii).
(bl) "Subsidiaries," with respect to the Company, means
Carolina American Insurance Company and AMCA Incorporated and,
with respect to any entity other than the Company, means any
corporation or entity, more than 50% of the outstanding
securities or other interests having voting power of which shall
be owned or controlled, directly or indirectly, by such other
entity.
(bm) "Tangible Property" has the meaning set forth in
Section 2.14.
(bn) "Tax Allocation Agreement" has the meaning set forth
in Section 6.5(c).
(bo) "Tax Claim" has the meaning set forth in
Section 11.1(b)(2).
(bp) "Taxes" (or "Tax" where the context requires) means
all federal, state, county, local, foreign and other taxes
(including, without limitation, income, profits, premium,
estimated, excise, sales, use, occupancy, gross receipts,
franchise, ad valorem, severance, capital levy, production,
transfer, withholding, employment and payroll related,
<PAGE>
and property taxes, import duties, insolvency assessments from
guaranty associations, and other governmental or other charges
and assessments), whether attributable to statutory or non-
statutory rules and whether or not measured in whole or in part
by net income, and including interest, additions to tax or
interest, and penalties with respect thereto, and including
expenses associated with contesting any proposed adjustment
related to any of the foregoing.
(bq) "Termination Amendment to Tax Allocation Agreement"
has the meaning set forth in Section 6.5(c).
(br) "Unaudited SAP Financial Statements" has the meaning
set forth in Section 2.7(a).
(bs) "Unaudited Subsidiary Financial Statements" has the
meaning set forth in Section 2.7(a).
ARTICLE XI
INDEMNIFICATION
11.1 Survival.
(a) Notwithstanding any right of Buyer to
investigate fully the affairs of the Company 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 fully upon the representations, warranties,
covenants and agreements of Seller in this Agreement or in any
certificate, Schedule or Exhibit (including all attachments
thereto), furnished by Seller or the Company hereunder or
thereunder. All such representations, warranties, covenants and
agreements shall survive the Closing and shall:
<PAGE>
(1) With respect to General Claims,
terminate and expire on the second anniversary of the
Closing Date except with respect to any General Claim based
upon, arising out of or otherwise in respect of any fact,
circumstance, action or proceeding of which the party
asserting the General Claim shall have given written notice
to the other party on or before the second anniversary of
the Closing Date;
(2) Except with respect to any Tax Claim
based upon, arising out of or otherwise in respect of any
fact, circumstance, action or proceeding of which the party
asserting the Tax Claim shall have given written notice to
the other party prior to the termination dates set forth in
subparagraphs (a) or (b) herein, shall terminate and expire
with respect to Tax Claims on the later of (a) ninety days
following the date upon which the assessment and collection
of any Taxes to which any such Tax Claim may relate is
barred by all applicable statutes of limitations or
(b) ninety days following the date upon which any claim for
refund or credit related to such Tax Claim is barred by all
applicable statutes of limitations; provided, however, that
if a waiver has been or is given by or with the consent of
Seller with respect to any applicable statute of limitation
in connection with any Tax Claim, the representations,
warranties, covenants and agreements relating to such Tax
Claim shall survive until such waiver is of no force or
effect;
(3) With respect to Environmental Claims,
terminate and expire on the third anniversary of the
Closing Date, except with respect to any Environmental
Claim based upon, arising out of or otherwise in respect of
any fact,
<PAGE>
circumstance, action or proceeding of which Buyer shall
have been given written notice to Seller on or before the
third anniversary of the Closing Date; and
(4) Shall not expire with respect to any
matters listed on Schedule 11.2(4).
(b) As used in this Article XI, the following terms
have the following meanings:
(1) "General Claim" means any inaccuracy in
or any breach of any representation, warranty, covenant or
agreement of Seller contained in this Agreement, or in any
Schedule, Exhibit or certificate (including all attachments
thereto) delivered by Seller or the Company in connection
with this Agreement.
(2) "Tax Claim" means any claim for which
Seller has incurred an obligation to Buyer under the terms
of this Agreement arising out of (A) issues raised on audit
by taxing authorities with respect to any period ending on
or before the Closing Date, (B) any inaccuracy in or any
breach of any representation, warranty, covenant or
agreement of Seller contained in this Agreement related to
Taxes or (C) any other Tax liabilities of the Company or
Seller (and relating to the Company) with respect to any
period beginning on or before the Closing Date, other than
Tax liabilities of the Company that are properly allocable
to periods of time beginning on the Closing Date.
(3) "Environmental Claim" means any
inaccuracy in or breach of Section 2.22 of this Agreement.
11.2 Obligation of Seller to Indemnify. Subject to the
limitations set forth below and to the survival and termination
provisions set forth in Section 11.1, Seller agrees
<PAGE>
to indemnify, defend and hold harmless Buyer and its directors,
officers, employees, Affiliates, representatives and assigns
(collectively, the "Indemnified Buyer Parties") from and against
all actual losses, liabilities, judgments, damages, deficiencies,
citations, fines, costs or expenses (including interest and
penalties imposed or assessed by any judicial or administrative
body and reasonable attorneys' fees) (collectively "Losses")
arising out of:
(1) any General Claim;
(2) any Environmental Claim;
(3) any Tax Claim; and
(4) any Losses arising out of the known contingent
claims listed on Schedule 11.2(4) which is attached hereto and
incorporated herein by reference, subject to any limitations
contained therein.
11.3 Obligations of Buyer to Indemnify. Buyer agrees to
indemnify, defend and hold harmless Seller and its directors,
officers, employees, Affiliates, representatives and assigns
(collectively, the "Indemnified Seller Parties") from and against
all Losses based upon, arising out of or otherwise in respect of
any inaccuracy in or any breach of any representation, warranty,
covenant or agreement of Buyer or GNC contained in the Documents.
11.4 Limitations on Indemnification Obligations.
(a) Seller's obligations to indemnify any
Indemnified Buyer Party under this Article XI is subject to, and
limited by, the following:
(i) Seller shall not be liable for any
General Claims, Environmental Claims, and claims listed as Items
1, 2, 3 and 5(a) on Schedule 11.2(4) (collectively, "Deductible
Claims") hereunder or for any reserve adjustment calculated
<PAGE>
pursuant to Exhibit A ("Reserve Adjustment") until the aggregate
dollar amount of Losses relating to such Deductible Claims or
Reserve Adjustment equals $1,000,000, after which time Seller
will be liable for, and shall indemnify Indemnified Buyer Parties
with respect to, only such Losses for Deductible Claims or
Reserve Adjustments that exceed such $1,000,000 minimum;
provided, however, that Seller shall be liable and shall
indemnify the Indemnified Buyer Parties for any Tax Claims and
for any claims relating to Item 5(b) on the attached
Schedule 11.2(4) hereto without regard to the $1,000,000 minimum;
and
(ii) The maximum aggregate liability of
Seller for indemnification for all Losses and Reserve Adjustments
subject to indemnification under this Article XI shall be
$13,000,000.
(b) Buyer's obligations to indemnify any
Indemnified Seller Party under this Article XI is subject to, and
limited by, the following:
(i) Buyer shall not be liable for any
inaccuracy in or any breach of any representation, warranty,
covenant or agreement of Buyer or GNC contained in this Agreement
or in any Schedule, Exhibit or certificate (including any
attachments thereto), delivered by Buyer or GNC pursuant hereto
or thereto, until the aggregate dollar amount of Losses relating
to such claims equals $1,000,000, after which time Buyer will be
liable for, and shall indemnify Indemnified Seller Parties with
respect to, only such Losses that exceed such $1,000,000 minimum;
provided that, notwithstanding the foregoing limitation, Buyer
shall be liable and shall indemnify the Indemnified Seller
Parties for any Losses relating to GNC's breach of the terms and
conditions of the Assignment of Leases; and provided further that
nothing contained herein is intended or shall be construed to
<PAGE>
prevent Seller from exercising any remedy arising under the
Assignment of Leases directly against GNC in the event of such
breach.
(ii) The maximum aggregate liability of Buyer
for indemnification for all Losses subject to indemnification
under this Article XI shall be $13,000,000.
(c) Buyer and Seller agree that any payments
required to be made by either Buyer or Seller, respectively, in
respect of such party's indemnification of any Indemnified Seller
Party or Indemnified Buyer Party, respectively, shall be made,
without duplication or double-counting, only to Seller or Buyer,
respectively;
(d) The indemnification provided under this
Article XI shall be the sole remedy of any party to this
Agreement against any other party for any claim covered by such
indemnification other than claims for specific performance or
injunctive relief. In no event shall either party seek or be
entitled to a rescission of this Agreement;
(e) Except to the extent not permitted by the Code,
Seller and Buyer agree that any indemnification payments pursuant
to this Article XI and Exhibit A will constitute an adjustment to
the Purchase Price; and
(f) Subject to the provisions of Exhibit A
governing the calculation of the Reserve Adjustment, the amount
of any Loss for which indemnification is owed under this Article
XI shall be net of any amounts actually recovered by the
indemnified party under insurance policies or reinsurance
agreements of the Company in effect prior to or as of the Closing
with respect to such Loss (including any tail coverage purchased
by Seller as described on Schedule 2.24) and shall be
(x) increased to take into account any net Tax cost incurred by
the indemnified party (or any Affiliate of the indemnified party)
arising from the
<PAGE>
receipt of indemnity payments hereunder (grossed up for any Tax
incurred on such increase); and (y) reduced to take into account
any net Tax benefit arising from incurrence or payment of any
such Loss by the indemnified party or any Affiliate of the
indemnified party. Buyer and Seller shall cooperate with each
other in seeking recovery against or under such policies and
agreements.
(g) Buyer acknowledges and agrees that,
notwithstanding anything to the contrary contained in this
Agreement, Seller makes no representation, warranty, guaranty or
covenant regarding, and shall have no obligation to indemnify the
Indemnified Buyer Parties with respect to, the ultimate
collectability of any reinsurance recoverable reported as an
asset or contra-liability in any financial statement, book,
record or account of the Company or the Insurance Subsidiary,
including but not limited to, the SAP Financial Statements.
(h) Except as otherwise provided in Schedule
11.2(4), Seller shall not be obligated to indemnify the
Indemnified Buyer Parties to the extent that the matter in
question is included within the amount of any reserve or accrual
for such matter which is reflected in the SAP Financial
Statements or the AMCA Financial Statements, the Closing Tax
Reserve or other reserve or accrual established on the books,
accounts and records of the Company only in the ordinary course
of business consistent with its past practices from July 31,
1997, through the Closing Date; provided, however, that the
Company shall provide Buyer with such information regarding such
reserves or accruals as Buyer may reasonably request.
11.5 Notice and Opportunity to Defend.
<PAGE>
11.5.1 Notice of Asserted Liability. Promptly
after receipt by Buyer or Seller of notice of any demand, claim
or circumstances that, with the lapse of time, would give rise to
a claim or the commencement (or threatened commencement) of any
action, proceeding or investigation that may result in a Loss for
which indemnification is or may be available under this Article
XI (an "Asserted Liability"), the indemnified party shall give
notice thereof (the "Claims Notice") to the other party. The
Claims Notice shall 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 indemnified
party.
11.5.2 Opportunity to Defend. The indemnifying
party may elect to compromise or defend, and control the defense
of, at its own expense (and not subject to the $1,000,000
limitation set forth in Section 11.4(a)(i), except for such
expenses related to those matters listed as Items 1 and 2 on
Schedule 11.2(4) to this Agreement) and by counsel reasonably
satisfactory to the indemnified party, any Asserted Liability,
provided that the indemnified party shall have no liability under
any compromise or settlement agreed to by the indemnifying party
that indemnified party has not approved in writing, which
approval shall not be unreasonably withheld. If the indemnifying
party elects to compromise or defend such Asserted Liability, it
shall within 30 days (or sooner, if the nature of the Asserted
Liability reasonably so requires) notify the indemnified party of
its intent to do so, and the indemnified party shall cooperate
upon the request and at the expense of the indemnifying party
(and, with respect to such expenses related to Items 1 and 2 on
Schedule 11.2(4), subject to the $1,000,000 limitation in Section
11.4(a)(i)), in the compromise of, or defense against, such
Asserted Liability. If the indemnifying party elects not to
compromise or defend the Asserted Liability, or fails to notify
the indemnified party of its election as herein
<PAGE>
provided, the indemnified party may pay, compromise or defend
such Asserted Liability and receive full indemnification for any
Losses for which it is determined that the indemnifying party has
an indemnity obligation under this Article XI. In any event, the
indemnified party and the indemnifying party may at its own
expense (and, with respect to such expenses related to Items 1
and 2 on Schedule 11.2(4), subject to the $1,000,000 limitation
in Section 11.4(a)(i)), participate in, but not control, the
defense of such Asserted Liability by the other party,
respectively. If the indemnifying party chooses to defend any
claim, the indemnified party shall make available to the
indemnifying party any books, records or other documents within
its control that are reasonably requested for such defense and
shall otherwise cooperate with the indemnifying party, in which
event the indemnified party shall be reimbursed for its
reasonable out-of-pocket expenses (which shall not include
salary, wages, overhead and the like).
11.6 Payments. Any payments required to be made
under this Article XI to any indemnified party shall be made
within ten (10) days after the indemnity obligation for which
such payments are so required has been incurred by the
indemnified party.
ARTICLE XII
MISCELLANEOUS
12.1 Notices. Any notices or other communications
required or permitted hereunder shall be provided in writing and
shall be deemed to have been duly given only when received by the
party to whom such notice or communication is addressed at the
following addresses (or at such other address for a party as
shall be specified by like notice),
<PAGE>
having been sent by certified mail, return receipt requested, by
hand delivery (including express courier) or by telefacsimile
(with confirmation by telefacsimile answerback):
To Seller: Susan Gailey Vincent, Esq.
Vice President and Corporate Secretary
Michigan Mutual Insurance Company
26777 Halsted Road
Farmington Hills, Michigan 48777
Facsimile No: 248-615-8458
With Copy To: James R. Dwyer, Esq.
Lord, Bissell & Brook
115 South LaSalle Street
Chicago, Illinois 60603
Facsimile No: 312-443-0336
To Buyer and GNC: Eric P. Witte, Esq.
Vice President-General Counsel
Guaranty National Insurance Company
9800 South Meridian Boulevard
Englewood, Colorado 80112
Facsimile No: 303-754-8414
With Copy To: Hardin Holmes, Esq.
Ireland, Stapleton, Pryor & Pascoe, P.C.
1675 Broadway, 26th Floor
Denver, Colorado 80202
Facsimile No: 303-623-2062
12.2 Gender and Number. All words or terms used in this
Agreement, regardless of the number or gender in which they are
used, shall be deemed to include any other number and any other
gender as the context may require.
12.3 Expenses. Unless otherwise expressly contemplated by
this Agreement, all legal, accounting and other costs and
expenses incurred in connection with this Agreement and the
transactions contemplated hereby shall be paid by the party
incurring such expenses.
12.4 Confidential Information. Seller, Buyer and GNC, for
themselves, their directors, officers, employees, agents,
representatives and partners, if any, covenant with
<PAGE>
each other that they will use all information relating to any
other party or the Company acquired by any of them pursuant to
the provisions of this Agreement or in the course of negotiations
with or examination of any other party only in connection with
the transactions contemplated hereby and shall cause all
information obtained by them pursuant to this Agreement and such
negotiations and examinations and which is not publicly
available, to be treated as confidential except as may otherwise
be required by law or as may be necessary or appropriate in
connection with the enforcement of this Agreement or any
instrument or document referred to herein or contemplated hereby.
In the event of termination of this Agreement, each party will
cause to be delivered to the other all documents, work papers and
other material obtained by it from the other, whether so obtained
before or after the execution of this Agreement; and each party
agrees that it shall not itself use or disclose, directly or
indirectly, any information so obtained, or otherwise obtained
from the other party hereunder or in connection herewith, and
will have all such information kept confidential and will not use
such information in any way which is detrimental to any other
party provided that (a) any party may use and disclose any such
information which has been disclosed publicly (other than by such
party in breach of its obligations under this Section 12.4) and
(b) to the extent that any party may become legally compelled to
disclose any such information, such party may disclose such
information if it shall have used its best efforts, and shall
have afforded the other party that opportunity, to obtain an
appropriate protective order, or other satisfactory assurance of
confidential treatment, for the information required to be
disclosed.
12.5 Announcements. No announcement or circular relating
to any matter referred to in this Agreement shall be made or
issued by or on behalf of Seller on the one
<PAGE>
hand, or Buyer and GNC, on the other, without the prior written
approval of the other party, which approval shall not be
unreasonably withheld or delayed; provided, however, that this
provision shall not apply to any announcement which Seller, Buyer
or GNC is required to make by any applicable law or regulation.
Seller, Buyer and GNC agree to provide each other with a copy of
any announcement which they are required to make by any such
applicable law or regulation and, insofar as reasonable possible,
to consult with each other prior to the making of any such
announcement.
12.6 Successors and Assigns. This Agreement shall be
binding upon and shall inure to the benefit of the respective
successors and assigns of the parties hereto but shall not be
assigned by either of the parties without the prior written
consent of the other; provided that Buyer may assign this
Agreement to any Affiliate of Buyer with Seller's prior written
consent, which consent shall not be unreasonably withheld.
12.7 Waiver. The failure of any party at any time or
times to require performance of any provisions hereof shall in no
manner affect such party's right at a later date to enforce the
same. No waiver by either party of a condition or a breach of
any term, covenant, representation or warranty contained in this
Agreement, whether by conduct or otherwise, in any one or more
instances shall be deemed to be construed as a further or
continuing waiver of such condition, breach or waiver of any
condition or of the breach of any other term, covenant,
representation or warranty of this Agreement.
12.8 Attorneys' Fees. If either party hereto commences
litigation or any other proceeding in connection with or related
to this Agreement against the other party and prevails in such
litigation or proceeding, the other party will pay the reasonable
costs and
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expenses relating to such litigation or other proceeding
including, without limitation, the reasonable attorneys' fees and
expenses of investigation of the prevailing party.
12.9 Counterparts. This Agreement may be executed in any
number of counterparts with the same effect as if the signatures
to each counterpart were upon the same instrument.
12.10 Entire Agreement. This Agreement, the Schedules,
Exhibits and the attachments to it, and the other documents and
certificates delivered pursuant hereto, set forth the entire
understanding of Buyer, GNC and Seller and supersede all prior
agreements, arrangements and communications, whether oral or
written, between Buyer, GNC and Seller with respect to the
subject matter hereof. Without limiting the generality of the
foregoing sentence, the only representations and warranties made
by the parties hereto with respect to the subject matter hereof
are the representations and warranties contained in this
Agreement and the Schedules hereto. Any matter which is
disclosed in any Schedule or Exhibit is deemed to have been
disclosed for the purposes of all relevant provisions of this
Agreement. The inclusion of any item in the Schedules is not
evidence of the materiality of such item for the purposes of this
Agreement or evidence that such item was required to be disclosed
therein. This Agreement shall not be modified or amended other
than by written agreement of Buyer, GNC and Seller. Captions
appearing in this Agreement are for convenience of reference only
and shall not be deemed to explain, limit or amplify the
provisions hereof.
12.11 Governing Law. This Agreement shall be governed by,
and construed in accordance with, the laws of the State of South
Carolina.
12.12 Venue and Jurisdiction. Seller, Buyer and GNC hereby
irrevocably submit to the non-exclusive jurisdiction of any
county, state or federal court of general and
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competent jurisdiction located within the City and County of
Denver, State of Colorado, with respect to any legal action or
proceeding arising out of or connected with this Agreement or the
Documents.
12.13 Mediation; Litigation. If a dispute arises from or
relates to this Agreement or the breach thereof (other than a
dispute related to Exhibit A), whether of law or fact, of any
nature whatsoever, and such dispute cannot be settled through
direct discussions between the parties, the parties agree to
endeavor first to settle the dispute in an amicable manner by
mediation administered by the American Arbitration Association
under its Commercial Mediation Rules before resorting to
litigation. The parties agree that the mediator shall be a
person who is, or has served as, a senior vice president of an
insurance company for at least five (5) years. Mediation shall
take place in the Denver, Colorado metropolitan area. If the
dispute cannot be resolved within ninety (90) days of the
initiation thereof by either party, either party may initiate
litigation in accordance with the jurisdiction and venue
provisions of Section 12.12 of this Agreement.
12.14 Third Parties. Except as specifically set forth or
referred to herein, nothing expressed or implied herein is
intended or shall be construed to confer upon or give to any
person or entity other than the parties hereto, and their
successors or assigns, any rights or remedies under or by reason
of this Agreement.
12.15 Performance Following Closing. Nothing in this
Agreement shall be construed to limit any covenant or agreement
of the parties hereto which by its terms contemplates performance
after the Closing.
12.16 No Prejudice. The parties agree that this Agreement
has been jointly negotiated and drafted by the parties hereto and
that the terms hereof shall not be construed
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in favor of or against any party on account of its participation
in such negotiations and drafting.
* * * * *
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed on the day and year first above
written.
BUYER: Guaranty National Insurance Company
By: /s/ Michael L. Pautler
Its: Senior Vice President
SELLER: Michigan Mutual
Insurance Company
By: /s/ Richard F. Russell
Its: President and Chief Ececutive
Officer
GNC: Guaranty
National Corporation
By: /s/ Michael L. Pautler
Its: Senior Vice President
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Exhibit A
Reserve Adjustments
(a) Within fifteen (15) business days following the
filing of statutory annual statement of the Company for the year
ended December 31, 2002, Buyer agrees to provide a certificate to
Seller setting forth (i) the aggregate losses and allocated loss
expenses incurred by the Company between the last day of the
calendar month ending on or immediately prior to the Closing Date
(the "Measurement Date"), and December 31, 2002, pertaining to
accident periods prior to the Measurement Date (the "Loss
Development") as calculated by subtracting (a) the sum of (x) the
reported gross loss and allocated loss expense reserves for
accident periods prior to the Measurement Date as of December 31,
2002, and (y) the loss and allocated loss expense payments made
between the Measurement Date and December 31, 2002, on accident
periods prior to the Measurement Date (including payments on
extra-contractual obligations pertaining to those accident years,
if any, which arise or result from activities of Seller or the
Company on or prior to the Closing Date (but excluding payments
on ECO Judgments and related legal fees, disbursements, expenses
and costs which are paid or payable by Seller under Schedule
11.2(4) of the Agreement), and further excluding any extra-
contractual obligations which arise or result from activities of
Buyer or the Company after the Closing Date), minus (z)
reinsurance in effect at the accident date (whether or not
subsequently collected) and subrogation and salvage collected,
between the Measurement Date and December 31, 2002, on accident
periods prior to the Measurement Date from (b) the dollar amount,
at the Measurement Date, of gross losses and allocated loss
reserves (net of reinsurance, as calculated pursuant to SAP,
whether or not subsequently
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collected, and net of salvage and subrogation, as calculated and
recorded on the Company's books and records for tax purposes) for
accident periods prior to the Measurement Date, consistent with
past practices and reasonably acceptable to Buyer, it being
understood that reserves for periods following September 30, 1997
through the Closing Date may be estimated by the Company; and
(ii) the calculation of any payment owing pursuant to this
paragraph. The certificate shall be certified by the Chief
Financial Officers of Buyer and the Company. Buyer agrees to pay
to Seller an amount equal to (i) 80% of the positive Loss
Development up to but not exceeding $2,000,000, plus (ii) 75% of
the positive Loss Development greater than $2,000,000 but less
than $5,000,000, plus (iii) 50% of the positive Loss Development
equal to or greater than $5,000,000. Seller agrees to pay to
Buyer an amount equal to (i) 80% of the negative Loss Development
up to but not exceeding $2,000,000, plus (ii) 75% of the negative
Loss Development greater than $2,000,000 but less than
$5,000,000, plus (iii) 50% of the negative Loss Development
greater than or equal to $5,000,000.
(b) Within 35 days after the end of each calendar
year, Buyer shall provide to Seller a certificate setting forth
the aggregate Loss Development as of the last day of such year.
Such certificate shall be certified by the Chief Financial
Officers of Buyer and Company. Seller shall have the right to
consult with Buyer as to the aggregate Loss Development reported
on any such certificate.
(c) Following delivery of the certificate described
in paragraph (a) (but not paragraph (b)) to Seller by Buyer,
Buyer shall grant Seller and its representatives access to all
records of Buyer, the Company and the Company's Subsidiaries that
relate to the Loss Development set forth on such certificate.
Within fifteen (15) Business Days after
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Seller's receipt of such certificate, Seller may dispute the
amount of the Loss Development or the adjustment calculation by
giving written notice to Buyer setting forth in reasonable detail
the basis for any such dispute (any such dispute being
hereinafter called a "Disagreement"). The parties shall promptly
commence good faith negotiations with a view to resolving any
such Disagreement. If Seller does not give such notice with the
period set forth, Seller shall be deemed to have irrevocably
accepted the calculation set forth on such certificate.
(d) If within thirty (30) days following the
delivery to Buyer of the notice of such Disagreement pursuant to
paragraph (c), Buyer and Seller do not resolve the Disagreement
(as evidenced by a written agreement among the parties hereto),
such Disagreement shall be referred to the Independent Accounting
Firm (as described in Section 6.5(b)(ii) of the Agreement) for a
resolution of such Disagreement. The determinations of the
Independent Accounting Firm with respect to any Disagreement
shall be final and binding upon the parties. Buyer and Seller
shall use their best efforts to cause such Independent Accounting
Firm to render its determination as soon as practicable after
referral of the Disagreement to such firm, and each shall
cooperate with such firm and provide such firm with reasonable
access to its books and records and such other information as
such firm may require in order to render its determination. All
of the fees and expenses of the Independent Accounting Firm shall
be paid by that party against whom the Disagreement is finally
determined hereunder, or as the Independent Accounting Firm deems
equitable.
(e) Buyer agrees to cause the Company to administer
all claims subject to this Exhibit A consistent with Buyer's
and/or the Company's then current claims practices (subject to
Buyer's reasonable discretion), and in accordance with applicable
Law.
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(f) Subject to the limitations contained in Section
11.4(a)(i) of the Agreement, any payments required to be made
hereunder shall be made within ten (10) business days after
acceptance by Seller of the calculation set forth on the
certificate delivered under paragraph (a), or in the case of a
Disagreement, within ten (10) business days after a determination
is made under paragraph (d) of this Exhibit A.
(g) To the extent (i) Seller is required to make
any payment to Buyer under paragraph (a), and (ii) the dollar
amount of all Losses relating to Deductible Claims which have
been incurred by Seller are less than $1,000,000, Seller may
offset the payment owed to Buyer under paragraph (a) of this
Exhibit A against the amount of such difference ("Remaining
Deductible Amount"). Notwithstanding such offset, if the amount
of Losses relating to Deductible Claims (including any Deductible
Claims which have been asserted but not liquidated at the time of
any payment pursuant to this Exhibit A) are ultimately determined
to exceed the Remaining Deductible Amount plus the payment made
hereunder, Seller shall be fully liable for the amount by which
Losses relating to such Deductible Claims exceeds the Remaining
Deductible Amount plus such payments (subject to the limitations
set forth in Section 11.4(a)(ii)).
(h) To the extent Buyer is required to make any
payment to Seller under paragraph (a), the following provisions
apply. If the dollar amount of all Losses relating to Deductible
Claims which have been incurred by Seller are less than
$1,000,000, Seller may add the dollar amount of the payment owed
to it by Buyer under paragraph (a) of this Exhibit A to the
Remaining Deductible Amount (so as to increase the dollar amount
of the Remaining Deductible Amount by such amount), and Buyer
shall not be obligated to make such payment in cash. If the
dollar amount of all Losses relating to Deductible Claims
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which have been incurred by Seller are greater than $1,000,000,
inclusive of the $1,000,000 deductible amount ("Paid Losses"),
Seller may subtract the dollar amount of the payment owed to it
by Buyer under paragraph (a) from the total dollar amount of Paid
Losses, and:
(i) if the resulting dollar amount is greater than
Seller's $1,000,000 deductible, Buyer shall pay in cash, pursuant
to paragraph (f), above, an amount equal to the payment due under
paragraph (a); or
(ii) if the resulting dollar amount is less than
Seller's $1,000,000 deductible, then the dollar amount of the
payment owed to Seller by Buyer under paragraph (a) shall be
subtracted from Paid Losses (with the resulting dollar amount
being referred to as the "Adjusted Amount"), and (x) Seller shall
have a Remaining Deductible Amount equal to the dollar amount by
which the Adjusted Amount is less than $1,000,000 (and Buyer
shall not be obligated to make any cash payment to Seller with
respect to such amount) and (y) Buyer shall pay to Seller in
cash, pursuant to paragraph (f), the amount by which the Adjusted
Amount plus the dollar amount of the payment under paragraph (a)
is greater than $1,000,000.
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