<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1996 Commission File No. 0-3681
MERCURY GENERAL CORPORATION
(Exact name of registrant as specified in its charter)
California 95-221-1612
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
4484 Wilshire Boulevard, Los Angeles, California 90010
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (213)937-1060
Securities registered pursuant to Section 12(b) of the Act
NONE
Securities registered pursuant to Section 12(g) of the Act
Common Stock
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No _____
-----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the Registrant's voting stock held by non-
affiliates of the Registrant at March 18, 1997, was approximately $837,029,058
(based upon the closing sales price of such date, as reported by the Wall Street
Journal).
At March 18, 1997, the Registrant had issued and outstanding an aggregate of
27,531,425 shares of its Common Stock.
Documents Incorporated by Reference
Proxy statement for the Annual Meeting of Stockholders of Registrant to be held
on May 14, 1997 (only portions of which are incorporated by reference).
<PAGE>
Item 1. Business
--------
General
The Company is engaged primarily in writing all risk classifications of
automobile insurance in California, which in 1996 accounted for approximately
97% of the Company's direct premiums written. In 1990, the Company commenced
writing small amounts of automobile insurance in Georgia and Illinois. In
December 1996 the Company acquired American Fidelity Insurance Group (AFI),
which is headquartered in Oklahoma City, Oklahoma. AFI is licensed in 36 states
but writes predominantly in Texas, Oklahoma and Kansas. AFI's primary lines of
insurance are private passenger and commercial automobile and automobile
mechanical breakdown. One month of AFI's operations are included in the
Company's 1996 consolidated financial statements. During 1996, private
passenger automobile insurance and commercial automobile insurance accounted for
93.8% and 4.0%, respectively, of the Company's direct premiums written. The
Company also writes homeowners insurance, commercial and dwelling fire insurance
and commercial property insurance. The non-automobile lines of insurance
accounted for 2.3% of direct premiums written in 1996, of which approximately
51% was in commercial lines.
The Company offers automobile policyholders the following types of
coverage: bodily injury liability, underinsured and uninsured motorist,
property damage liability, comprehensive, collision and other hazards specified
in the policy. The Company's published maximum limits of liability for bodily
injury are $250,000 per person, $500,000 per accident and, for property damage,
$250,000 per accident. Subject to special underwriting approval, the combined
policy limits may be as high as $1,000,000 for vehicles written under the
Company's commercial automobile plan. Under the majority of the Company's
automobile policies, however, the limits of liability are less than $100,000 per
person, $300,000 per accident and $50,000 for property damage.
In 1996, A.M. Best & Co. rated Mercury Casualty Company and Mercury
Insurance Company, the Company's chief operating subsidiaries, A+ (Superior).
This is the second highest of the fifteen rating categories in the A.M. Best
rating system, which range from A++ (Superior) to F (In Liquidation). AFI was
rated A- (Excellent) in 1996 by A.M. Best.
The principal executive offices of Mercury General Corporation are located
in Los Angeles, California. The home office of its California insurance
subsidiaries and the Company's computer and operations center is located in
Brea, California. The Company maintains branch offices in a number of locations
in California. The non-California subsidiaries maintain offices in Vernon
Hills, Illinois, Atlanta, Georgia, Oklahoma City, Oklahoma and Cimarron, Kansas.
The Company has approximately 1800 employees.
Organization
Mercury General Corporation ("Mercury General"), an insurance holding
company, is the parent of Mercury Casualty Company, a California automobile
insurer founded in 1961 by George Joseph, its Chief Executive Officer. Its
<PAGE>
insurance operations in California are conducted through three California
insurance company subsidiaries, Mercury Casualty Company ("Mercury Casualty"),
Mercury Insurance Company ("Mercury Insurance"), and California Automobile
Insurance Company. Two subsidiaries, Mercury Insurance Company of Georgia and
Mercury Insurance Company of Illinois, received authority in late 1989 to write
automobile insurance in those two states. In 1992, Mercury Indemnity Company of
Georgia and Mercury Indemnity Company of Illinois were formed to write preferred
risk automobile insurance in those two states. Through the Company's first
acquisition in December 1996, three additional subsidiaries were added to the
group: American Fidelity Insurance Company, domiciled in Oklahoma; Cimarron
Insurance Company, domiciled in Kansas; and, AFI Management Company, Inc., a
Texas corporation which serves as the attorney-in-fact for American Fidelity
Lloyds Insurance Company (AFL), a Texas insurer. Accordingly, their operations
are included in the consolidated financial statements of the Company effective
December 1, 1996.
Mercury General furnishes management services to its California, Georgia
and Illinois subsidiaries. Mercury General, its subsidiaries, and AFL, are
referred to as the "Company" unless the context indicates otherwise, Mercury
General Corporation individually is referred to as "Mercury General." The term
California Companies refers to Mercury Casualty Company, Mercury Insurance
Company and California Automobile Insurance Company.
Underwriting
The Company sets its own automobile insurance premium rates, subject to
rating regulations issued by the Insurance Commissioners of the applicable
states. Automobile insurance rates on voluntary business in California have
been subject to approval by the DOI since November 1989. The Company uses its
own extensive data base to establish rates and classifications.
On February 25, 1994, the California Department of Insurance (DOI) approved
a revised rating plan and rates for the California Companies which became
effective on May 1, 1994. These rates were designed to improve the California
Companies' competitive position for new insureds and included a modest overall
rate reduction. Further rate modifications were approved and made effective on
October 15, 1995 and April 15, 1996. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Overview."
In September 1996 the DOI issued new rating factor regulations, replacing
expired emergency regulations issued in 1989. See "Regulation - Automobile
Insurance Rating Factor Regulations."
Approximately 80% of the Company's new applications for automobile
insurance in California during 1996 were placed in the lowest risk
classifications, known as "good drivers" (as defined by the California Insurance
Code), while approximately 20% of new applications were accepted in higher risk
classifications at increased rate levels. Policies are reclassified at the time
of renewal and may be changed to a higher or lower risk classification.
At December 31, 1996, "good drivers" accounted for approximately three
quarters of all voluntary private passenger automobile policies in force in
2
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California, while the higher risk categories accounted for approximately one
quarter. The renewal rate in California (the rate of acceptance of offers to
renew) averages approximately 95%.
AFI's private passenger automobile business in force is predominantly
standard and preferred type risks, although they plan to offer more non-standard
programs in the future.
Production and Servicing of Business
The Company sells its policies through more than 1500 independent agents,
of which approximately 800 are located in California and approximately 600
others represent AFI in Oklahoma, Kansas and Texas. Approximately half of the
agents in California have represented the Company for more than ten years. The
agents, most of whom also represent one or more competing insurance companies,
are independent contractors selected and appointed by the Company.
One agency produced direct premiums written of approximately 17%, 15% and
13% during 1996, 1995 and 1994, respectively, of the Company's total direct
premiums. No other agent accounted for more than 2% of direct premiums written.
The Company believes that its agents' compensation is higher than the
industry average. During 1996 total commissions and bonuses incurred averaged
16.0% of direct premiums written. The Company is not responsible for any of its
agents' expenses.
Traditionally, any advertising done has been handled by the individual
agents. During the fourth quarter of 1995, the Company began its first
advertising program in major newspapers in Southern California. While the
Company plans, coordinates and executes the program, the agents are responsible
for the cost of the advertisements. The program has been satisfactory and was
expanded to Northern California in early 1996. The program was temporarily
suspended during the first quarter of 1997 due to a large influx of new
business. See "Regulation- Financial Responsibility Law."
Claims
Claims operations are supervised by the Company. The claims staff in
California, Georgia, Illinois and Oklahoma administers all claims and directs
all legal and adjustment aspects of the claims process. The Company adjusts
most claims without the assistance of outside adjusters.
Loss and Loss Adjustment Expense Reserves
The Company maintains reserves for the payment of losses and loss
adjustment expenses for both reported and unreported claims. Loss reserves are
estimated based upon a case-by-case evaluation of the type of claim involved and
the expected development of such claim. The amount of loss reserves and loss
adjustment expense reserves for unreported claims are determined on the basis of
historical information by line of insurance. Inflation is reflected in the
reserving process through analysis of cost trends and reviews of historical
reserving results.
3
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Ultimate liability may be greater or lower than stated loss reserves.
Reserves are closely monitored and are analyzed quarterly by the Company's
actuarial consultants using new information on reported claims and a variety of
statistical techniques. The Company does not discount to a present value that
portion of its loss reserves expected to be paid in future periods. The Tax
Reform Act of 1986 does, however, require the Company to discount loss reserves
for Federal income tax purposes.
The following table sets forth a reconciliation of beginning and ending
reserves for losses and loss adjustment expenses, net of reinsurance deductions,
as shown on the Company's consolidated financial statements for the periods
indicated.
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------
1996 1995 1994
---- ---- ----
(Amounts in thousands)
<S> <C> <C> <C>
Net reserves for losses and loss adjustment
expenses, beginning of year....................................... $250,990 $223,392 $214,525
Reserves acquired from purchase of American
Fidelity Insurance Company......................................... 24,231 -- --
Incurred losses and loss adjustment expenses:
Provision for insured events of the
current year............................................... 505,726 423,264 370,631
Decrease in provision for insured events
of prior years............................................. (3,868) (6,708) (10,074)
-------- -------- --------
Total incurred losses and loss adjustment
expenses................................................. 501,858 416,556 360,557
-------- -------- --------
Payments:
Losses and loss adjustment expenses attribu-
table to insured events of the current
year........................................................ 298,099 243,294 208,418
Losses and loss adjustment expenses attribu-
table to insured events of prior years...................... 167,226 145,664 143,272
-------- -------- --------
Total payments.............................................. 465,325 388,958 351,690
-------- -------- --------
Net reserves for losses and loss adjustment
expenses at the end of the period.................................. 311,754 250,990 223,392
Reinsurance recoverable............................................. 24,931 2,556 4,107
-------- -------- --------
Gross liability at end of year...................................... $336,685 $253,546 $227,499
======== ======== ========
</TABLE>
The purchase agreement includes an indemnification by the seller on the
loss and loss adjustment expense reserves of AFI at the acquisition date,
excluding the mechanical breakdown line, to avoid any impact on the Company's
financial statements from any future adverse development on the acquisition date
loss reserves.
The difference between the reserves reported in the Company's consolidated
financial statements prepared in accordance with generally accepted accounting
principles (GAAP) and those reported in the statements filed with the DOI in
accordance with statutory accounting principles (SAP) is shown in the table on
the following page.
4
<PAGE>
<TABLE>
<CAPTION>
December 31,
------------------------------
1996 1995 1994
---- ---- ----
(Amounts in thousands)
<S> <C> <C> <C>
Reserves reported on a SAP basis...................... $311,754 $250,990 $223,392
Reinsurance recoverable............................... 24,931 2,556 $4,107
-------- -------- --------
Reserves reported on a GAAP basis..................... $336,685 253,546 $227,499
======== ======== ========
</TABLE>
The following table represents the development of loss reserves for the
period 1987 through 1996. The top line of the table shows the reserves at the
balance sheet date net of reinsurance recoverable for each of the indicated
years. This represents the estimated amount of losses and loss adjustment
expenses for claims arising in all prior years that are unpaid at the balance
sheet date, including losses that had been incurred but not yet reported to the
Company. The upper portion of the table shows the cumulative amounts paid as of
successive years with respect to that reserve liability. The lower portion of
the table shows the re-estimated amount of the previously recorded reserves
based on experience as of the end of each succeeding year, including cumulative
payments made since the end of the respective year. The estimate changes as
more information becomes known about the frequency and severity of claims for
individual years. A redundancy (deficiency) exists when the original reserve
estimate is greater (less) than the re-estimated reserves at December 31, 1996.
In evaluating the information in the table, it should be noted that each
amount includes the effects of all changes in amounts for prior periods. This
table does not present accident or policy year development data. Conditions and
trends that have affected development of the liability in the past may not
necessarily occur in the future. Accordingly, it may not be appropriate to
extrapolate future redundancies or deficiencies based on this table.
<TABLE>
<CAPTION>
As of December 31,
-----------------------------------------------------------------------------------------
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
------ ---- ---- ---- ---- ---- ---- ---- ---- --------
(Amounts in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net reserves for
losses and loss
adjustment expenses. $178,605 $241,037 $291,408 $301,354 $280,157 $239,203 $214,525 $223,392 $250,990 $311,754
Paid (cumulative)
as of:
One year later..... 112,099 139,874 167,850 181,781 151,866 135,188 143,272 145,664 167,226
Two years later.... 147,641 195,453 227,503 238,030 197,640 184,119 187,641 198,967
Three years later.. 166,477 218,335 249,371 254,884 213,824 197,371 204,606
Four years later... 175,232 226,384 256,659 261,058 218,067 201,365
Five years later... 177,328 229,168 259,147 263,011 220,057
Six years later.... 177,938 229,773 259,781 262,741
Seven years later.. 178,178 229,815 259,769
Eight years later.. 178,215 229,693
Nine years later... 178,103
Net reserves re-estimated as of:
One year later..... 173,325 230,249 269,934 285,212 230,991 204,479 204,451 216,684 247,122
Two years later.... 175,876 233,607 269,652 265,618 218,404 204,999 207,089 222,861
Three years later.. 179,157 234,757 259,635 259,624 220,620 203,452 210,838
Four years later... 180,084 228,909 256,694 264,259 221,118 204,603
Five years later... 177,591 228,326 260,365 264,127 221,264
Six years later.... 177,335 230,102 260,402 263,336
Seven years later.. 178,364 229,998 260,098
Eight years later.. 178,303 229,809
Nine years later... 178,145
Net Cumulative Redundancy
(deficiency)....... 460 11,228 31,310 38,018 58,893 34,600 3,687 531 3,868
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
As of December 31,
-----------------------------------------------------------------------------------
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
(Amounts in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Gross liability - end of year 240,183 215,301 227,499 253,546 336,685
Reinsurance recoverable (980) (776) (4,107) (2,556) (24,931)
------- ------- ------- ------- -------
Net liability - end of year 239,203 214,525 223,392 250,990 311,754
======= ======= ======= ======= =======
Gross re-estimated liability - latest 209,988 217,237 234,199 254,892
Re-estimated recoverable - latest (5,385) (6,399) (11,338) (7,770)
------- ------- ------- -------
Net re-estimated liability - latest 204,603 210,838 222,861 247,122
======= ======= ======= =======
Gross cumulative redundancy 39,005 9,310 7,762 9,082
======= ======= ======= =======
</TABLE>
For the calendar years 1987 through 1995, the Company's previously
estimated loss reserves produced redundancies. The Company attributes this
favorable loss development to several factors. First, the Company had completed
its development of a full complement of claims personnel early in this period.
Second, during 1988, the California Supreme Court reversed what was known as the
"Royal Globe" doctrine, which, since 1978, had permitted third party plaintiffs
to sue insurers for alleged "bad faith" in resolving claims, even when the
plaintiff had voluntarily agreed to a settlement. This doctrine had placed undue
pressures on claims representatives to settle legitimate disputes at unfairly
high settlement amounts. After the reversal of Royal Globe, the Company believes
that it has been able to achieve fairer settlements, because both parties are in
a more equal bargaining position. Third, during the years 1988 through 1990, the
volume of business written in the Assigned Risk Program expanded substantially
as rates were suppressed at grossly inadequate levels. Following the Insurance
Commissioner's approval of an 85% temporary rate increase in September 1990, the
volume of assigned risk business has declined by nearly 80%. Many of the claims
associated with the high volume of assigned risk business in the 1988-1990
period were later found to be fraudulent or grossly exaggerated and were settled
in subsequent periods for substantially less than had been initially reserved.
Fourth, a number of factors have combined to produce favorable frequency and
severity trends in recent years, and actuarial assumptions based on historical
trends have proved to be conservative.
Operating Ratios
Loss and Expense Ratios
-----------------------
Loss and underwriting expense ratios are used to interpret the underwriting
experience of property and casualty insurance companies. Losses and loss
adjustment expenses, on a statutory basis, are stated as a percentage of
premiums earned because losses occur over the life of a policy. Underwriting
expenses on a statutory basis are stated as a percentage of premiums written
rather than premiums earned because most underwriting expenses are incurred when
policies are written and are not spread over the policy period. The statutory
underwriting profit margin is the extent to which the combined loss and
underwriting expense ratios are less than 100%. The Company's loss ratio,
expense ratio and combined ratio, and the private passenger automobile industry
combined ratio, on a statutory basis, are shown in the following table. The 1992
ratios exclude the effect of a rate refund made pursuant to a settlement with
the
6
<PAGE>
California DOI related to the 1988 initiative, Proposition 103. The Company's
ratios include lines of insurance other than private passenger automobile
written by Mercury Casualty Company and AFI. Since these other lines represent
only a small percentage of premiums written, the Company believes its ratios can
be compared to the industry ratios included in the table.
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------------
1996 1995 1994 1993 1992
------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C>
Loss Ratio........................... 66.6% 67.8% 68.4% 61.3% 60.8%
Expense Ratio........................ 24.0 24.0 24.6 24.8 24.2
---- ---- ---- ---- ----
Combined Ratio....................... 90.6% 91.8% 93.0% 86.1% 85.0%
==== ==== ==== ==== ====
Industry combined ratio (all
writers) (1)....................... 101.9%(2) 102.3% 101.8% 101.8% 102.4%
Industry combined ratio (excluding
direct writers) (1)................ N.A. 103.5% 102.5% 103.2% 104.9%
- ------------------------------------
</TABLE>
(1) Source: A.M. Best, Aggregates & Averages (1996), for all property and
casualty insurance companies (private passenger automobile line only, after
policyholder dividends).
(2) Source: A.M. Best, "Best's Review, January 1997," "Review and Preview."
(N.A.) Not available.
Premiums to Surplus Ratio
-------------------------
The following table shows, for the periods indicated, the insurance
companies' statutory ratios of net premiums written to policyholders' surplus.
While there is no statutory requirement applicable to the Company which
establishes a permissible net premium writings to surplus ratio, widely
recognized guidelines established by the National Association of Insurance
Commissioners (NAIC) indicate that this ratio should be no greater than 3 to 1.
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(Amounts in thousands, except ratios)
<S> <C> <C> <C> <C> <C>
Net premiums written (1).. $795,873 $636,590 $550,838 $484,097 $455,685
Policyholders' surplus.... $594,799 479,114 $411,898 $314,136 $294,374
Ratio..................... 1.3 to 1 1.3 to 1 1.3 to 1 1.5 to 1 1.6 to 1
</TABLE>
(1) The 1992 amounts exclude the effect of the Proposition 103 settlement.
Risk-Based Capital Requirements
-------------------------------
In December 1993, the NAIC adopted a risk-based capital formula for
casualty insurance companies which establishes recommended minimum capital
requirements for casualty companies. The formula has been designed to capture
the widely varying elements of risks undertaken by writers of different lines of
insurance having differing risk characteristics, as well as writers of similar
lines where differences in risk may be related to corporate structure,
investment
7
<PAGE>
policies, reinsurance arrangements and a number of other factors. Based on the
formula adopted by the NAIC, the Company has estimated the Risk-Based Capital
Requirements of each of its insurance subsidiaries as of December 31, 1996.
Each of the companies exceeded the highest level of recommended capital
requirements.
Investments and Investment Results
The investments of the Company are made by the Company's Chief Financial
Officer under the supervision of the Company's Board of Directors. The Company
follows an investment policy which is regularly reviewed and revised. The
Company's policy emphasizes investment grade, fixed income securities and
maximization of after-tax yields. The Company does not invest with a view to
achieving realized gains, and does not maintain a trading account. However,
sales of securities are undertaken, with resulting gains or losses, in order to
enhance after-tax yield and keep its portfolio in line with current market
conditions. Tax considerations are important in portfolio management, and have
been made more so since 1986 when the alternative minimum tax was imposed on
casualty companies. Changes in loss experience, growth rates and profitability
produce significant changes in the Company's exposure to alternative minimum tax
liability, requiring appropriate shifts in the investment asset mix between
taxable bonds, tax-exempt bonds and equities in order to maximize after-tax
yield. The optimum asset mix is subject to continuous review. At year-end,
approximately 68% of the Company's portfolio, at market values, was invested in
medium to long term, investment grade tax-exempt revenue and municipal bonds.
The average Standard & Poor's rating of the Company's bond holdings was A at
December 31, 1996.
The nominal average maturity of the bond portfolio excluding AFI, was 16.8
years at December 31, 1996, but the call-adjusted average maturity of the
portfolio is shorter, approximately 8.7 years, because holdings are heavily
weighted with high coupon issues which are expected to be called prior to
maturity. The modified duration of the bond portfolio reflecting anticipated
early calls was 5.9 years at December 31, 1996 excluding AFI. Duration is a
measure of how long it takes, on average, to receive all the cash flows produced
by a bond, including reinvestment of interest. Because of its sensitivity to
interest rates, it is a proxy for a bond's price volatility. The longer the
duration, the greater the price volatility in relation to changes in interest
rates.
Holdings of lower than investment grade bonds constitute approximately 1.3%
of total investments. All but $1.5 million of such holdings were downgraded to
their current ratings subsequent to purchase. Equity holdings consist primarily
of perpetual preferred stocks and relatively high yielding electric utility
common stocks on which dividend income is partially tax-sheltered by the 70%
corporate dividend exclusion.
8
<PAGE>
The following table summarizes the investment results of the Company for
the five years ended December 31, 1996.
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------------------
1996(1) 1995 1994 1993 1992
---- ---- ---- ---- ----
(Amounts in thousands)
<S> <C> <C> <C> <C> <C>
Averaged invested assets (includes
short-term cash investments)..(2) $975,058 $827,861 $727,866 $683,874 $649,001
Net investment income:
Before income taxes......... 70,180 62,964 54,586 54,121 52,994
After income taxes.......... 63,371 57,035 49,787 48,223 46,376
Average annual return on investments:
Before income taxes.............. 7.2% 7.6% 7.5% 7.9% 8.2%
After income taxes............... 6.5% 6.9% 6.8% 7.1% 7.2%
Net realized investment gains
(losses) after income taxes...... $ (2,062) $ 681 $ (6,485) $ 1,954 $ 3,415
Net increase (decrease) in un-
realized gains on all invest-
ments after income taxes......... $ (6,271) $ 37,960 $(36,503) $ 556 $ (2,501)
</TABLE>
(1) Includes AFI for the month of December 1996.
(2) Fixed maturities at cost, equities at market.
The following table sets forth the composition of the investment portfolio
of the Company at the dates indicated, including AFI at December 31, 1996.
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------------
1996 1995 1994
------------------- ----------------- -------------------
Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value
---- ----- ---- ----- ---- -----
(Amounts in thousands)
<S> <C> <C> <C> <C> <C> <C>
Taxable Bonds........................... $ 76,494 $ 76,113 $ 21,518 $ 22,539 $ 18,332 $ 18,128
Tax-Exempt State and
Municipal Bonds........................ 781,586 808,761 630,811 663,163 529,592 520,748
Sinking Fund Preferred
Stocks................................. 66,713 69,234 90,080 94,081 108,858 105,421
---------- ---------- ------- -------- -------- --------
Total Fixed Maturity
Investments.......................... 924,793 954,108 742,409 779,783 656,782 644,297
Equity Investments incl.
Perpetual Preferred
Stocks................................. 148,264 148,112 113,478 114,915 91,726 84,622
Short-term Cash Invest-
ments.................................. 66,067 66,067 28,496 28,496 22,695 22,695
---------- ---------- -------- -------- -------- --------
Total Investments....... $1,139,124 $1,168,287 $884,383 $923,194 $771,203 $751,614
========== ========= ======== ======== ======== ========
</TABLE>
At December 31, 1996, the Company had a net unrealized gain on all investments
of $29,163,000 before income taxes.
9
<PAGE>
Competitive Conditions
The property and casualty insurance industry is highly competitive. The
insurance industry consists of a large number of companies, many of which
operate in more than one state, offering automobile, homeowners and commercial
property insurance, as well as insurance coverage in other lines. Many of the
Company's competitors have larger volumes of business and greater financial
resources than the Company. Based on regularly published statistical
compilations concerning insurance company operations, the Company in 1995 was
the seventh largest writer of private passenger automobile insurance in
California. All of the insurance companies having greater shares of the
California market sell insurance either directly or through exclusive agents,
rather than through independent agents.
The property and casualty insurance industry is highly cyclical, character-
ized by periods of high premium rates and shortages of underwriting capacity
followed by periods of severe price competition and excess capacity. In the
Company's view, competitive pressures have become more pronounced in the last
several years. The current level of profits makes the market attractive for new
companies, although some of the small companies who entered the California
private passenger automobile market in recent years have already experienced
unsatisfactory results.
Price and reputation for service are the principal means by which the
Company competes with other automobile insurers. The Company believes that it
has a good reputation for service, and it has, historically, been among the
lowest-priced insurers doing business in California according to surveys
conducted by the California Department of Insurance. In the most recent survey
conducted in 1996, the Company's rates for most classes of insureds were among
the lowest available in most territories throughout the state. In addition to
good service and competitive pricing, for those insurers dealing through
independent agents, as the Company does, the marketing efforts of agents is a
means of competition.
The current and future competitive climate for private passenger automobile
insurance in California remains uncertain. All rates charged by private
passenger automobile insurers are subject to the prior approval of the
California Insurance Commissioner. New rating factor regulations have recently
been issued but the filings required under those regulations have not yet been
approved. See "Regulation - Automobile Insurance Rating Factor Regulations."
AFI encounters similar competition in each state in which it principally
operates.
Reinsurance
The Company no longer maintains reinsurance for its liability coverages in
California. Effective January 1, 1994, the Company terminated its liability
reinsurance coverage with Employers Reinsurance Corporation (ERC) because of
rising premiums and underutilization of such coverage. The Company regularly
evaluates the need for liability reinsurance.
The Company maintains property reinsurance under a treaty which was
effective April 1, 1995 with National Reinsurance Corporation, which is rated A+
by A.M. Best & Co. The treaty provides $900,000 coverage in excess of $100,000
for each risk subject to a maximum of $2,700,000 for any one occurrence. A
10
<PAGE>
second layer of coverage provides an additional $1,000,000 in excess of the
first $1,000,000 per risk subject to a maximum of $2,000,000 for any one
occurrence.
Prior to February 1, 1995, ERC provided catastrophe reinsurance for
property and auto physical damage business. Under the treaty, ERC agreed to pay
95% of $9,000,000 in excess of $1,000,000 for any single occurrence and 95% of
$18,000,000 for all occurrences in one calendar year. Effective February 1,
1995, the treaty with ERC was amended to provide coverage for 95% of $7,500,000
in excess of $5,000,000 each occurrence subject to an aggregate limit of 95% of
$15,000,000 for all occurrences. Effective April 1, 1995 this treaty was
replaced with a new catastrophe treaty covering all physical damage and property
lines with several reinsurers arranged through E.W. Blanch Company, a
reinsurance intermediary. The main reinsurers are rated A or better by A.M.
Best. Under the new treaty, the first layer of protection is 95% of $7,500,000
in excess of $10,000,000, for a single occurrence, with a second layer providing
95% of $12,500,000 in excess of $17,500,000. Effective September 1, 1996 the
treaty was replaced to provide coverage under two new layers through the same
principal reinsurers. Under the new treaty coverage is provided for 95% of
$10,000,000 in excess of $15,000,000 per occurrence in the first layer and 95%
of $15,000,000 in excess of $25,000,000 in the second layer.
Employers Reinsurance Corporation reinsures AFI through working layer
treaties for property and casualty losses in excess of $150,000. For the years
1990 through 1996 the mechanical breakdown line of business was reinsured with
Constitution Reinsurance Corporation through a quota-share treaty covering 50%-
85% of the business written depending on the year the policy incepted. For
policies effective on or after January 1, 1997, AFI is retaining the full
exposure. AFI has other reinsurance treaties and facultative arrangements in
place for various smaller lines of business.
If the reinsurers were unable to perform their obligations under the
reinsurance treaty, the Company would be required, as primary insurer, to
discharge all obligations to its insureds in their entirety.
Regulation
The Company's business in California is subject to regulation and
supervision by the DOI, which has broad regulatory, supervisory and
administrative powers.
The powers of the DOI primarily include the prior approval of insurance
rates and rating factors and the establishment of standards of solvency which
must be met and maintained. The regulation and supervision by the DOI are
designed principally for the benefit of policyholders and not for insurance
company shareholders. The DOI conducts periodic examinations of the Company's
insurance subsidiaries. The DOI recently conducted an examination of the
California insurance subsidiaries as of December 31, 1994. The reports on the
results of that examination recommended no adjustments to the statutory
financial statements as filed by the Company.
11
<PAGE>
The insurance subsidiaries outside California, including AFI, are subject
to the regulatory powers of the insurance departments of those states. Those
powers are similar to the regulatory powers in California enumerated above.
Generally, the regulations relate primarily to standards of solvency and are
designed for the benefit of policyholders and not for insurance company
shareholders.
In California, insurance rates have required prior approval since November
1989. Georgia and Kansas are also prior approval states, while Illinois only
requires that rates be filed with the Department of Insurance prior to their
use. Texas and Oklahoma have a modified version of prior approval laws. In all
states, the insurance code provides that rates must not be "excessive,
inadequate or unfairly discriminatory."
The Georgia DOI recently conducted an examination of Mercury Insurance
Company of Georgia and Mercury Indemnity Company of Georgia as of December 31,
1994. The reports on that audit have recommended no changes to the statutory
financial statements as filed. The DOI of Illinois conducted an examination of
Mercury Insurance Company of Illinois and Mercury Indemnity Company of Illinois
as of December 31, 1995. The reports on that audit have not been issued but the
auditors have indicated there will be no changes recommended to the statutory
financial statements as filed. The states of Oklahoma, Kansas and Texas will
also conduct periodic examinations of AFI.
The operations of the Company are dependent on the laws of the state in
which it does business and changes in those laws can materially affect the
revenue and expenses of the Company. The Company retains its own legislative
advocates in California. The Company also makes financial contributions to
officeholders and candidates. In 1996 and 1995, those contributions amounted to
$548,000 and $209,000, respectively. The Company believes in supporting the
political process and intends to continue to make such contributions in amounts
which it determines are appropriate and lawful.
Insurance Guarantee Association
-------------------------------
In 1969, the California Insurance Guarantee Association (the "Association")
was created pursuant to California law to provide for payment of claims for
which insolvent insurers of most casualty lines are liable but which cannot be
paid out of such insurers' assets. The Company is subject to assessment by the
Association for its pro-rata share of such claims based on premiums written in
the particular line in the year preceding the assessment by insurers writing
that line of insurance in California. Such assessments are based upon estimates
of losses to be incurred in liquidating an insolvent insurer. In a particular
year, the Company cannot be assessed an amount greater than 1% of its premiums
written in the preceding year. The only assessment imposed during the past five
years was an immaterial amount in 1994. Assessments are recouped through a
mandated surcharge to policyholders the year after the assessment. Insurance
subsidiaries in the other states are subject to the provisions of similar
insurance guaranty associations. No material assessments were imposed in the
last 5 years in those states either.
12
<PAGE>
Holding Company Act
-------------------
The Company's California subsidiaries are subject to regulation by the DOI
pursuant to the provisions of the California Insurance Holding Company System
Regulatory Act (the "Holding Company Act"). Pursuant to the Holding Company
Act, the DOI may examine the affairs of each company at any time. The Holding
Company Act requires disclosure of any material transactions by or among the
companies. Certain transactions defined to be of an "extraordinary" type may
not be effected without the prior approval of the DOI. Such transactions
include, but are not limited to, sales, purchases, exchanges, loans and
extensions of credit, and investments made within the immediately preceding 12
months involving, in the net aggregate, more than the lesser of 5% of the
company's admitted assets or 25% of surplus as to policyholders, as of the
preceding December 31. Effective January 1, 1997 the threshold for a material
or extraordinary transaction was amended to a single measure of one half of one
percent of admitted assets as of the preceding December 31st. There will no
longer be any aggregation of transactions in the determination of the threshold
except in the case of dividends. An extraordinary dividend is a dividend which,
together with other dividends or distributions made within the preceding 12
months, exceeds the greater of 10% of the insurance company's policyholders'
surplus as of the preceding December 31 or the insurance company's net income
for the preceding calendar year. An insurance company is also required to
notify the DOI of any dividend after declaration, but prior to payment.
The Holding Company Act also provides that the acquisition or change of
"control" of a California domiciled insurance company or of any person who
controls such an insurance company cannot be consummated without the prior
approval of the Insurance Commissioner. In general, a presumption of "control"
arises from the ownership of voting securities and securities that are
convertible into voting securities, which in the aggregate constitute 10% or
more of the voting securities of a California insurance company or of a person
that controls a California insurance company, such as Mercury General. A person
seeking to acquire "control," directly or indirectly, of the Company must
generally file with the Commissioner an application for change of control
containing certain information required by statute and published regulations and
provide a copy of the application to the Company. The Holding Company Act also
effectively restricts the Company from consummating certain reorganizations or
mergers without prior regulatory approval.
The insurance subsidiaries in Georgia, Illinois, Oklahoma, Kansas and Texas
are subject to holding company acts in those states, the provisions of which are
substantially similar to those of California. Regulatory approval was obtained
from California, Oklahoma and Texas before the acquisition of AFI was completed.
Assigned Risks
--------------
Automobile liability insurers in California are required to sell bodily
injury liability, property damage liability, medical expense and uninsured
motorist coverage to a proportionate number (based on the insurer's share of the
California automobile casualty insurance market) of those drivers applying for
placement as "assigned risks." Drivers seek placement as assigned risks because
13
<PAGE>
their driving records or other relevant characteristics make them difficult to
insure in the voluntary market. During the last five years, approximately 0.9%
of the direct automobile insurance premium written was for assigned risk
business. In 1996, assigned risks represented 0.6% of total automobile direct
premiums written and 0.8% of total automobile direct premium earned. Premium
rates for assigned risk business are set by the DOI. In October, 1990 more
stringent rules for gaining entry into the plan were approved, resulting in a
substantial reduction in the number of assigned risks insured by the Company
since 1991. Effective January 1, 1994, the California Insurance Code requires
that rates established for the Plan be adequate to support the Plan's losses and
expenses. The last rate increase approved by the Commissioner approximated 4.8%
and became effective June 1, 1995.
Automobile Insurance Rating Factor Regulations
------------------------------------------------
Commencing November 8, 1989, Proposition 103 required that property and
casualty insurance rates must be approved by the Commissioner prior to their
use, and that no rate shall be approved which is excessive, inadequate, unfairly
discriminatory or otherwise in violation of the provisions of the initiative.
The proposition specified three statutory factors required to be applied in
"decreasing order of importance" in determining rates for private passenger
automobile insurance: (1) the insured's driving safety record, (2) the number
of miles the insured drives annually, and (3) the number of years of driving
experience of the insured. The new law also gave the Commissioner discretion to
adopt other factors by regulation that have a substantial relationship to risk
of loss. The new statute further provided that insurers are required to give at
least a 20% discount to "good drivers," as defined, from rates that would
otherwise be charged to such drivers and that no insurer may refuse to insure a
"good driver."
The Company, and most other insurers, historically charged different rates
for residents of different geographical areas within California. The rates for
urban areas, particularly in Los Angeles, have been generally substantially
higher than for suburban and rural areas. The Company's geographical rate
differentials have been derived by actuarial analysis of the claims costs in a
given area.
In September 1996, the California Insurance Commissioner issued new
permanent rating factor regulations which replaced the emergency regulations
which have been in use since their issuance in 1989. The new regulations
require all automobile insurers in California to submit new rating plans
complying with the regulations by February 18, 1997. The Company does not
expect the newly filed rating plan, if approved by the Commissioner, to have a
material effect on its competitive position or its profitability. However, the
Company has not been able to review the filings of its competitors. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Overview."
California Financial Responsibility Law
---------------------------------------
Effective January 1, 1997 California has a new law which requires proof of
insurance for the registration (new or renewal) of a motor vehicle. It also
provides for substantial penalties for failure to supply proof of insurance if
14
<PAGE>
one is stopped for a traffic violation. Media attention to the new law has
resulted in a surge of new business applications in January. Although the
initial demand has tapered off, it has produced a backlog of applications, which
are being processed. The persistence of this new business is uncertain, but the
new law could produce additional growth considering the large proportion of
uninsured motorists in California. The Company has suspended its advertising
program while it works to eliminate the backlog of new business.
In November 1996 an initiative sponsored by the California Insurance
Commissioner was overwhelmingly approved by the California voters. It provides
that uninsured drivers who are injured in an automobile accident are able to
recover only actual, out-of-pocket medical expenses and lost wages and are not
entitled to receive awards for general damages, i.e., "pain and suffering."
This restriction also applies to drunk drivers and fleeing felons. The law will
help in controlling loss costs, but its constitutionality is being challenged by
an association of attorneys.
Item 2. Properties
----------
The home office of the California insurance subsidiaries and the Company's
computer facilities are located in Brea, California in an 80,000 sq.ft. office
building owned by the Company.
Since December 1986, Mercury General's executive offices are located in a
36,000 sq. ft. office building, in Los Angeles, owned by Mercury Casualty
Company. The Company occupies approximately 95% of the building and leases the
remaining office space to others.
In October 1992 the Company purchased a 158,000 square foot office building
in Brea, California. The Company occupies approximately 43% of the facility and
leases the remaining office space to others.
The Company leases all of its other offices under short-term leases.
Office location is not material to the Company's operations, and the
Company anticipates no difficulty in extending these leases or obtaining
comparable office space.
Item 3. Legal Proceedings
-----------------
The Company is from time to time named as a defendant in various lawsuits
incidental to its insurance business. In most of these actions, plaintiffs
assert claims for punitive damages which are not insurable under California
judicial decisions. The Company vigorously defends these actions, unless a
reasonable settlement appears appropriate. The Company believes that adverse
results, if any, in the actions currently pending should not have a material
effect on the Company's operations or financial position.
15
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
No matters were submitted to a vote of security holders by the Company
during the fourth quarter of the fiscal year covered by this report.
EXECUTIVE OFFICERS OF THE COMPANY
The following table sets certain information concerning the executive
officers of the Company as of March 21, 1997:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
George Joseph 75 Chairman of the Board and Chief
Executive Officer
Michael D. Curtius 47 President and Chief Operating Officer
Cooper Blanton, Jr. 70 Executive Vice President
Keith L. Parker 69 Vice President and Chief Financial Officer
Bruce E. Norman 48 Vice President in charge of Marketing
Joanna Y. Moore 41 Vice President and Chief Claims Officer
Kenneth G. Kitzmiller 50 Vice President in charge of Underwriting
Donna J. Moore 41 Vice President and Controller
Judy A. Walters 50 Secretary
</TABLE>
Mr. Joseph, Chief Executive Officer of the Company and Chairman of its
Board of Directors, has served in those capacities since 1961. Mr. Joseph has
more than 45 years experience in the property and casualty insurance business.
Mr. Curtius, President and Chief Operating Officer, has been employed by
the Company since 1977. In October 1987, Mr. Curtius was named Vice President
and Chief Claims Officer, and in August 1991 he was appointed Executive Vice
President. He was elected President and Chief Operating Officer of Mercury
General and its four California insurance company subsidiaries in May 1995 and
elected to the Board of Directors of Mercury General and the California
Companies in 1996. In December of 1996 he was appointed Vice Chairman of
American Fidelity Insurance Company. Mr. Curtius has over 20 years of
experience in the insurance industry.
Mr. Blanton, Executive Vice President, joined the Company in 1966 and
supervised its underwriting activities from 1967 until September 1995. He was
appointed Executive Vice President of Mercury Casualty and Mercury Insurance in
1983 and was named Executive Vice President of Mercury General in 1985. In May
of 1995 he was named President of the Georgia and Illinois insurance company
subsidiaries and in February of 1996 he was elected to the Board of Directors of
those companies. Mr. Blanton has over 40 years of experience in underwriting
and other aspects of the property and casualty insurance business.
Mr. Parker, Vice President and Chief Financial Officer, has been employed
by the Company or its subsidiaries since 1970 and has held his present position
since October 1985. Mr. Parker has over 40 years of investment management
experience and has been primarily responsible for management of the Company's
investment portfolio since 1972.
16
<PAGE>
Mr. Norman, Vice President in charge of Marketing, has been employed by the
Company since 1971. Mr. Norman was named to this position in October 1985, and
has been a Vice President of Mercury Casualty since 1983. Mr. Norman has
supervised the selection and training of agents and managed relations between
agents and the Company since 1977. In February of 1996 he was elected to the
Board of Directors of the California Companies.
Ms. Joanna Moore, Vice President & Chief Claims Officer, joined the Company
in the claims department in March 1981. She was named Vice President of Claims
of Mercury General in August 1991 and has held her present position since July
1995.
Mr. Kitzmiller, Vice President in charge of Underwriting, has been employed
by the Company in the underwriting department since 1972. In August 1991 he
was appointed Vice President of Underwriting of Mercury General and has
supervised the underwriting activities of the Company since early 1996.
Ms. Donna Moore, Vice President and Controller, joined the Company in June
1983 as its Controller. She was appointed Vice President in October 1985. Ms.
Moore has over 15 years of experience in the insurance industry and is a
Certified Public Accountant in the state of California.
Ms. Walters has been employed by the Company since 1967, and has served as
its Secretary since 1982.
17
<PAGE>
PART II
Item 5. Market for the Registrant's Common Equity and Related Security
--------------------------------------------------------------
Holder Matters
--------------
Price Range of Common StocK
The following table shows the price range per share in each quarter as
reported on the Nasdaq National Market until October 9, 1996 and on the New York
Stock Exchange since that date. These quotations do not include adjustments for
retail mark-ups, mark-downs or commissions.
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
1995
1st Quarter............................... $34.250 $28.250
2nd Quarter............................... $35.000 $28.750
3rd Quarter............................... $39.000 $31.750
4th Quarter............................... $39.750 $37.750
1996 High Low
---- ---
1st Quarter............................... $52.000 $41.500
2nd Quarter............................... $47.750 $40.750
3rd Quarter............................... $47.750 $39.750
4th Quarter............................... $58.250 $47.000
1997
1st Quarter (January 1 - March 14)........ $65.000 $52.250
</TABLE>
Dividends
Following the public offering of its Common Stock in November 1985, the
Company has paid regular quarterly dividends on its common stock. On February
7, 1997, the Directors declared a $0.29 quarterly dividend ($1.16 annually)
payable on March 31, 1997 to stockholders of record on March 17, 1997. The
dividend rate has been increased thirteen times since dividends were initiated
in January, 1986, at an annual rate of $0.10, adjusted for the two-for-one stock
split in September 1992. For financial statement purposes, the Company records
dividends on the declaration date. The Company expects to continue the payment
of quarterly dividends. The continued payment and amount of cash dividends will
depend upon, among other factors, the Company's operating results, overall
financial condition, capital requirements and general business conditions.
As a holding company, Mercury General is largely dependent upon dividends
from its subsidiaries to pay dividends to its shareholders. These subsidiaries
are subject to state laws that restrict their ability to distribute dividends.
The state laws permit a casualty insurance company to pay dividends and advances
within any 12-month period, without any prior regulatory approval, in an amount
up to the greater of ten percent of statutory earned surplus at the preceding
December 31, or net income for the calendar year preceding the date the dividend
is paid. Under this test, the direct insurance subsidiaries of the Company are
18
<PAGE>
entitled to pay dividends to Mercury General during 1997 of up to approximately
$61.5 million. See Note 9 of Notes to Consolidated Financial Statements and
"Business -- Regulation -- Holding Company Act."
Shareholders of Record
The approximate number of holders of record of the Company's Common Stock
as of March 1, 1997 was 230. The approximate number of beneficial holders as of
March 17, 1997 was 5,231 according to the Bank of New York, the Company's
transfer agent.
19
<PAGE>
Item 6. Selected Consolidated Financial Data
------------------------------------
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------------------------------
1996 1995 1994 1993 1992
---------- -------- --------- -------- --------
(Amounts in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Income Data:
Premiums earned..................................... $754,724 $616,326 $529,390 $474,093 $455,508
Net investment income............................... 70,180 62,964 54,586 54,121 52,994
Realized investment gains(losses) (3,173) 1,048 (9,853) 3,006 5,174
Other............................................... 3,233 3,341 3,123 2,544 1,606
-------- -------- -------- -------- --------
Total Revenues................................... 824,964 683,679 577,246 533,764 515,282
-------- -------- -------- -------- --------
Losses and loss adjustment
expenses.......................................... 501,858 416,556 360,557 289,208 276,088
Policy acquisition costs............................ 160,019 128,743 112,682 99,738 94,672
Other operating expenses............................ 24,493 22,017 20,566 18,564 16,688
Impact of rate refund............................... -- -- -- -- 18,621
Interest............................................ 2,004 2,040 1,025 793 1,192
-------- -------- -------- -------- --------
Total Expenses................................... 688,374 569,356 494,830 408,303 407,261
-------- -------- -------- -------- --------
Income before income taxes.......................... 136,590 114,323 82,416 125,461 108,021
Income taxes........................................ 30,826 24,022 16,121 29,252 24,695
-------- -------- -------- -------- --------
Net Income....................................... $105,764 $ 90,301 $ 66,295 $ 96,209 $ 83,326
======== ======== ======== ======== ========
Per Share Data:
Net income per share................................ $ 3.86 3.31 $ 2.43 $ 3.52 $ 3.06
======== ======== ======== ======== ========
Dividends paid $ .96 .80 $ .70 $ .60 $ .50
======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(Amounts in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Total investments................................... $1,168,287 $923,194 $751,614 $740,480 $661,672
Premiums receivable................................. 83,748 58,902 48,741 38,227 35,454
Total assets........................................ 1,419,927 1,081,656 911,693 863,962 775,402
Unpaid losses and loss adjust-
ment expenses...................................... 336,685 253,546 227,499 215,301 240,183
Unearned premiums................................... 260,878 168,404 148,654 128,828 117,524
Notes payable....................................... 75,000 25,000 25,000 15,000 15,000
Deferred income tax liability
(asset)........................................... 6,349 10,158 (10,190) 8,758 466
Shareholders' equity................................ 641,222 565,188 457,161 450,275 353,704
Book value per share................................ 23.37 20.67 16.75 16.44 12.95
</TABLE>
__________________
20
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations
---------------------
Overview
- --------
The operating results of property and casualty insurance companies are
subject to significant fluctuations from quarter-to-quarter and from year-to-
year due to the effect of competition on pricing, the frequency and severity of
losses, including the effect of natural disasters on losses, general economic
conditions, the general regulatory environment in those states in which an
insurer operates, state regulation of premium rates and other factors such as
changes in tax laws. The property and casualty industry has been highly
cyclical, with periods of high premium rates and shortages of underwriting
capacity followed by periods of severe price competition and excess capacity.
The Company did business only in the state of California until 1990, when
it began operations in Georgia and Illinois. In December 1996, the American
Fidelity Insurance Group (AFI) was acquired for cash. The results of operations
of AFI for the month of December only are included in the Company's consolidated
statements of income. AFI writes automobile (approximately 54% of AFI's direct
premiums) and other casualty lines of insurance principally in Oklahoma, Texas
and Kansas, and is headquartered in Oklahoma City, Oklahoma. Total direct
premiums written by AFI in 1996 were $90.4 million; of that amount $5.5 million
of premiums were written in December. The Group is licensed in 36 states.
During 1996, approximately 98% of the Company's direct premiums written,
excluding AFI, were derived from California.
In California, as in various other states, all property and casualty rates
must be approved by the Insurance Commissioner before they can be used.
In February 1994, the Commissioner approved new rates which were designed
to improve the Company's competitive position for new insureds. These rate
changes, which became effective on May 1, 1994, provided for decreases in
premium rates for new insureds. Further rate modifications were approved and
made effective on October 15, 1995 and April 15, 1996. The rate changes made
over the last three years have been substantially revenue-neutral overall, with
physical damage rates being increased and bodily injury liability rates
decreased. The rate changes have resulted in a substantial increase in new
business being submitted to the Company. Since March 31, 1994, Private
Passenger Automobile (PPA) policies in force in California have increased by
approximately 190,000 to 494,000 at December 31, 1996, an annual rate of
increase of over 20%, compared with an annualized growth rate of 4.1% over the
prior fifteen month period.
In September 1996, the California Insurance Commissioner issued new
permanent rating factor regulations designed to implement the requirements that
automobile insurance rates be determined by (1) driving safety record, (2) years
of driving experience, (3) miles driven per year and (4) whatever optional
factors are determined by the Commissioner to have a substantial relationship to
the risk of loss and adopted by regulation. The law further requires that each
of the four factors be applied in decreasing order of importance.
21
<PAGE>
The new permanent regulations replace emergency regulations which have been
in use since their issuance in 1989. They require all automobile insurers in
California to submit new rating plans complying with the regulations in early
1997. In January 1997, in response to a court ruling on the issue of surcharges
imposed on drivers not complying with California's financial responsibility law,
the Commissioner amended the regulations to exclude such non-compliance as a
rating factor.
The statistical methodology prescribed by the regulations for determining
rating factor weightings are technical and complex. The January amendment
required the Company to rework its rate filing. The Company submitted its new
proposed rating plan on March 11, 1997.
The filings must be reviewed and approved by the Department, and the
companies will have ninety days following approval to place their new rates in
effect. The Company does not expect the newly filed rating plan, if approved by
the Commissioner, to have a material effect on its competitive position or its
profitability. However, the Company has not yet been able to review the filings
of its competitors.
Results of Operations
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
---------------------------------------------------------------------
Premiums earned in 1996 of $754.7 million (including $5.2 million
contributed by AFI in December 1996) increased 22.5%, primarily reflecting unit
growth. Average premium per policy for the year was substantially unchanged.
Net premiums written in 1996 of $795.9 million (including $4.5 million
contributed by AFI) increased 25.0% over a year earlier, continuing a growth
trend which began in the second quarter of 1993.
The loss ratio in 1996 (loss and loss adjustment expenses related to
premiums earned) was 66.5%, compared with 67.6% in 1995. The 1996 and 1995 loss
ratios reflect small contributions from favorable loss reserve development from
prior periods.
The expense ratio (policy acquisition costs and other operating expenses
related to premiums earned) was 24.4% in 1996 and 1995. The consolidation of
one month of operating results of AFI in 1996 had no material effect on either
the loss or expense ratios.
Total losses and expenses in 1996, excluding interest expense of $2.0
million, were $686.4 million, resulting in an underwriting gain for the period
of $68.4 million, compared with an underwriting gain of $49.0 million in 1995.
Investment income in 1996, including a contribution from AFI of $400,000
for the final month of the year, was $70.2 million, compared with $63.0 million
in 1995. The after-tax yield on average investments of $975.1 million,
including AFI, (fixed maturities at cost, equities at market) was 6.50%,
compared with 6.89% on average investments of $827.9 million in 1995. The
effective tax rate on investment income was 9.7% in 1996, compared with 9.4% in
1995. The effective tax rate was increased and the effective after-tax yield
was reduced slightly by
22
<PAGE>
the inclusion of AFI for the month of December 1996. The effective tax rate on
investment income in 1996, excluding AFI, was 9.6%, and the after-tax yield was
6.56%. The slightly higher tax rate on investment income in 1996 reflects an
increase in the proportion of investment income derived from dividends on
equities, principally perpetual preferred stocks. The redemption of bonds
acquired during higher interest periods has been a negative influence on
realized yields in each of the last several years and will continue in 1997.
Bonds matured and called in 1996 totaled $72.9 million, compared with $71.0
million in 1995, and approximately $48.6 million of calls and maturities are
expected in 1997. Average yields being obtained during the first quarter of
1997 on new investments are some 50 basis points lower than the average yield
realized in 1996.
Realized investment losses in 1996 were $3.2 million, compared with
realized gains of $1.0 million in 1995. The 1996 losses reflect principally
yield-enhancing swaps of both fixed maturities and equity securities, including
perpetual preferred stocks, designed to utilize expiring capital gains tax
benefits. The 1995 gains arose in part from the early redemption of fixed-
maturity investments.
The income tax provision of $30.8 million in 1996 represented an effective
tax rate of 22.6%, compared with an effective rate of 21.0%, in 1995. The
increase in the rate is attributable principally to the greater contribution
from underwriting gains, which are fully taxable and increased by $19.4 million
during 1996, whereas the predominantly tax-free investment income increased $7.2
million.
Net income in 1996 was $105.8 million, or $3.86 per share, compared with
$90.3 million, or $3.31 per share, in 1995. Per share results are based on 27.4
million average shares in 1996 and $27.3 million average shares in 1995.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
---------------------------------------------------------------------
Premiums earned in 1995 increased 16.4%, primarily reflecting unit growth.
Average premium per policy for the year was substantially unchanged. Net
premiums written in 1995 increased 15.6% over a year earlier, continuing a
growth trend which began in the second quarter of 1993.
The loss ratio in 1995 (loss and loss adjustment expenses related to
premiums earned) was 67.6%, compared with 68.1% in 1994. In contrast to the
previous several years, the 1995 and 1994 loss ratios reflect smaller
contributions from favorable loss reserve development from prior periods.
The expense ratio (policy acquisition costs and other operating expenses
related to premiums earned) was 24.4%, compared with 25.2% in 1994. The
improvement reflects both economies related to greater premium volume and
smaller provisions for agent and employee incentive bonuses in 1995.
Total losses and expenses, excluding interest expense of $2.0 million, were
$567.4 million, resulting in an underwriting gain for the period of $49.0
million, compared with an underwriting gain of $35.6 million in 1994.
23
<PAGE>
Investment income in 1995 was $63.0 million, compared with $54.6 million in
1994. The after-tax yield on average investments of $827.9 million (fixed
maturities at cost, equities at market) was 6.89%, compared with 6.84% on
average investments of $727.9 million in 1994. The effective tax rate on
investment income was 9.4% in 1995, compared with 8.8% in 1994. The slightly
higher tax rate reflects an increase in the proportion of investment income
derived from dividend income on equities, principally perpetual preferred
stocks, compared to tax-exempt income. The maintenance of above-average yields
during a period of declining interest rates is, in part, the result of the bond
restructuring program undertaken in 1994 when bonds acquired in lower interest
rate environments were sold with proceeds reinvested at significantly higher
rates. The redemption of bonds acquired during higher interest periods has been
a negative influence on realized yields which will continue in 1996 and 1997.
Bonds matured and called in 1995 totaled $71.0 million, compared with $53.4
million in 1994, and approximately $83.1 million of calls and maturities are
expected in 1996. Average yields being obtained during the first quarter of
1996 on new investments are some 50-75 basis points lower than the average 1995
portfolio yield.
Realized investment gains in 1995 were $1.0 million, compared with realized
losses of $9.9 million in 1994. The 1994 losses reflect principally yield-
enhancing swaps of both fixed maturities and equity securities, including
perpetual preferred stocks, undertaken to recapture capital gains taxes paid in
prior years. The 1995 gains arose in part from the early redemption of fixed-
maturity investments.
The income tax provision of $24.0 million in 1995 represented an effective
tax rate of 21.0%, compared with an effective rate of 19.6%, in 1994. The
increase in the rate is attributable principally to the realization of capital
gains in 1995, in contrast to the realization of losses in 1994.
Net income in 1995 was $90.3 million, or $3.31 per share, compared with
$66.3 million, or $2.43 per share, in 1994. Per share results are based on 27.3
million average shares in both years.
Year Ended December 31, 1994 Compared to Year Ended December 31, 1993
---------------------------------------------------------------------
Premiums earned in 1994 increased 11.7%, reflecting unit growth. Average
premium per policy was substantially unchanged by the May 1, 1994 rate
revisions. Direct premiums written in the first half of 1994 increased 10.7%
over a year earlier, continuing the growth trend which began in the second
quarter of 1993. During the last half of 1994, this increase accelerated to
14.1% over the prior year as a result of the May 1, 1994 rate revisions.
The loss ratio in 1994 was 68.1%, compared with 61.0% in 1993. The higher
loss ratio in 1994 reflects a much smaller contribution from favorable loss
reserve development from prior periods and a reduction in the estimate of
salvage and subrogation recoverable for prior accident years. The major
earthquake which struck Southern California on January 17, 1994 resulted in net
loss claims, after reinsurance recoveries, of approximately $1.2 million, which
added less than 0.25% to the 1994 loss ratio. Earthquake losses were immaterial
as the Company writes only a small amount of homeowners' insurance.
Approximately one half of
24
<PAGE>
the net earthquake losses incurred were related to the Company's principal line,
automobile insurance, while the other half was related to the homeowners' line.
The expense ratio (policy acquisition costs and other expenses related to
premiums earned) was 25.2%, compared with 25.0% in 1993.
Total losses and expenses, excluding interest expense of $1,025,000, were
$493.8 million, resulting in an underwriting gain for the period of $35.6
million, compared with an underwriting gain of $66.6 million in 1993.
Investment income in 1994 was $54.6 million, compared with $54.1 million in
1993. The after-tax yield on average investments of $727.9 million (fixed
maturities at cost, equities at market) was 6.84%, compared with 7.05% on
average investments of $683.9 million in 1993. The effective tax rate on
investment income was 8.8% in 1994, compared with 10.9% in 1993, reflecting an
increase in the proportion of tax-exempt interest income. The decline in
realized investment yields reflects principally the redemption and maturity of
bonds and preferred stocks acquired in higher interest rate environments.
Realized investment losses in 1994 were $9.9 million, compared with
realized gains of $3.0 million in 1993. The losses reflect principally yield-
enhancing swaps of both fixed maturities and equity securities, including
perpetual preferred stocks. The 1993 gains arose in significant part from the
redemption of fixed-maturity investments. The realized capital losses were
undertaken to recapture capital gains taxes paid in prior years.
The income tax provision of $16.1 million in 1994 represented an effective
tax rate of 19.6%, compared with an effective rate of 23.3%, in 1993. The
decrease in the rate is attributable principally to the decrease in fully
taxable underwriting income, and the resulting higher proportion of tax exempt
investment income.
Net income in 1994 was $66.3 million, or $2.43 per share, compared with
$96.2 million, or $3.52 per share, in 1993. Per share results are based on 27.3
million average shares in 1994 and 27.4 million average shares in 1993.
Liquidity and Capital Resources
Net cash provided from operating activities in 1996, including $9.7 million
from AFI, was $196.6 million, while funds derived from the sale, redemption or
maturity of investments was $531.5 million, of which approximately 75% was
represented by the sale of equity securities. The amortized cost of fixed-
maturity investments increased by $182.4 million during the year. Equity
investments, including perpetual preferred stocks, increased by $34.8 million at
cost, and short-term cash investments increased by $37.6 million. The amortized
cost of fixed-maturities available for sale that were sold, called or matured
during the year was $133.2 million.
The market value of all investments held at market as "Available for Sale"
exceeded the amortized cost of $1,139.1 million at December 31, 1996 by $29.2
million. That unrealized gain, reflected in shareholders' equity net of
applicable tax effects, was $19.0 million at December 31, 1996 compared with an
25
<PAGE>
unrealized gain of $25.2 million at December 31, 1995. The decrease in market
values since December 31, 1995 reflects principally the increase in intermediate
and long term interest rates during 1996.
The Company's cash and short term investments totaled $69.7 million at
December 31, 1996. Together with funds generated internally, such liquid assets
are more than adequate to pay claims without the sale of long term investments.
Traditionally, it has been the Company's policy not to invest in high yield
or "junk" bonds. In 1995, the Company adopted a policy to place a small
proportion of its investments in the taxable sector in bonds rated lower than
investment grade, but not lower than Ba by Moody's or BB by Standard & Poor's.
At December 31, 1996 bond holdings rated below investment grade totaled $15.2
million at market (cost $14.9 million), or 1.3% of total investments. All but
$1.5 million of such holdings were downgraded to their current ratings
subsequent to purchase. The average rating of the $789.6 million bond
portfolio, excluding AFI, (at amortized cost) was A, while the average effective
maturity, giving effect to anticipated early call, approximates 8.7 years. The
modified duration of the bond portfolio at year-end, excluding AFI, was 5.9
years, reflecting the heavy weighting of high coupon issues, including housing
issues subject to sinking funds, and other issues which are pre-refunded or are
expected to be called prior to their maturity. Duration measures the length of
time it takes to receive all the cash flows produced by a bond, including
reinvestment of interest. Because it measures four factors (maturity, coupon
rate, yield and call terms) which determine sensitivity to changes in interest
rates, modified duration is a much better indicator of price volatility than
simple maturity alone. Bond holdings are broadly diversified geographically,
and, within the tax-exempt sector, consist largely of high coupon revenue
issues, many of which have been pre-refunded and escrowed with U.S. Treasuries.
General obligation bonds of the large eastern cities have generally been
avoided.
Holdings in the taxable sector consist largely of senior public utility
issues. Fixed-maturity investments of $924.8 million, including $68.5 million
held by AFI, (at amortized cost) include $66.7 million of sinking fund
preferreds, principally utility issues. The market value of all fixed
maturities exceeded cost by $29.3 at December 31, 1996. The only securities
held which may be considered derivatives are a small amount of adjustable rate
preferred stocks.
Except for Company-occupied buildings, the Company has no direct
investments in real estate and no holdings of mortgages secured by commercial
real estate.
Equity holdings of $148.1 million at market (cost $148.3 million),
including perpetual preferred issues, are largely confined to the public utility
and banking sectors and represent about 23.1% of total shareholders' equity.
The only significant debt of the Company at December 31, 1996 was a three
year, $75,000,000 revolving credit bank loan. The loan agreement requires the
Company to meet numerous affirmative and negative covenants. The proceeds of
the loan were used to repay a prior loan and to acquire American Fidelity
Insurance Company, with the balance contributed to the Company's new insurance
subsidiaries. The loan agreement may be extended annually for additional
periods
26
<PAGE>
of one year each to maintain the three year maturity date. The interest rate is
variable and is optionally related to the Federal Funds Rate, Bank of New York
Rate (prime rate) or the Eurodollar London Interbank Rate (LIBOR). Based on the
rates effective through June 25, 1997, LIBOR plus .50, the net interest cost on
the loan approximates 6.08%.
In March 1994, the Company's Employee Stock Ownership Plan (the Plan)
purchased 161,000 shares of Mercury's common stock in the open market at a price
of $29.75 per share. The purchases were funded by a $5.0 million bank loan to
the Plan which is guaranteed by the Company. The shares are being allocated to
employees over a five year period, with the initial allocation made in December
1994, and the debt is being retired by Company contributions to the Plan over
the same time period. Since dividends on unallocated shares held by the Plan
are tax deductible if they are used for debt service, as are Company
contributions to the Plan, the net, after-tax interest cost to the Company for
the borrowed funds used for the Plan stock purchase is less than the nominal
6.98% fixed rate of interest on the loan.
In December 1993, the NAIC adopted a risk-based capital formula for
casualty insurance companies which establishes recommended minimum capital
requirements for casualty companies. The formula has been designed to capture
the widely varying elements of risks undertaken by writers of different lines of
insurance having differing risk characteristics, as well as writers of similar
lines where differences in risk may be related to corporate structure,
investment policies, reinsurance arrangements and a number of other factors.
The Company has estimated the Risk-Based Capital Requirements of each of its
insurance subsidiaries as of December 31, 1996. Each of the companies'
policyholders' surplus exceeded the highest level of recommended capital
requirements.
As of December 31, 1996, the Company had no material commitments for
capital expenditures.
Industry and regulatory guidelines suggest that the ratio of a property and
casualty insurer's annual net premiums written to statutory policyholders'
surplus should not exceed 3.0 to 1. Based on the combined surplus of all of the
licensed insurance subsidiaries of $594.8 million at December 31, 1996, and net
written premiums for the twelve months ended on that date of $795.9 million, the
ratio of writings to surplus was approximately 1.3 to 1.
Forward-Looking statements
The foregoing discussion contains forward-looking statements regarding the
Company, its business, prospects and results of operations that are subject to
certain risks and uncertainties posed by factors and events that could cause the
Company's actual business, prospects and results of operations to differ
materially from the historical information contained herein and from those that
may be expressed or implied by such forward-looking statements. Factors that
could cause or contribute to such differences include, among others, the success
of the Company in integrating and profitably operating the business of AFI, the
impact of the permanent rating factor regulations recently adopted by the
California Insurance Commissioner for private passenger automobile policies
issued in California and the level of investment yields obtainable in the
27
<PAGE>
Company's investment portfolio in comparison to recent yields, as well as the
cyclical and competitive nature of the property and casualty insurance industry
and general uncertainties regarding loss reserve estimates and legislative and
regulatory changes. Such risks and uncertainties and other factors are
discussed above and in periodic filings with the Securities and Exchange
Commission.
Supplementary Data
Summarized quarterly financial data for 1996 and 1995 is as follows (in
thousands except per share data):
<TABLE>
<CAPTION>
Quarter Ended
----------------------------------------
March 31 June 30 Sept. 30 Dec. 31
-------- -------- -------- -------
<S> <C> <C> <C> <C>
1996
- ----
Earned premiums................................. $169,563 $181,254 $193,298 $210,609
Income before income taxes...................... $ 27,421 $ 34,185 $ 38,078 $ 36,906
Net income...................................... $ 21,911 $ 26,583 $ 28,993 $ 28,277
Earnings per share.............................. $ .80 $ .97 $ 1.06 $ 1.03
Dividends declared per share.................... $ .24 $ .24 $ .24 $ .24
1995
- ----
Earned premiums................................. $144,676 $151,732 $157,179 $162,739
Income before income taxes ..................... $ 22,449 $ 28,679 $ 32,305 $ 30,890
Net income...................................... $ 18,500 $ 22,407 $ 25,157 $ 24,237
Earnings per share.............................. $ .68 $ .82 $ .92 $ .89
Dividends declared per share.................... $ .20 $ .20 $ .20 $ .20
</TABLE>
28
<PAGE>
Item 8. Financial Statements
- ------------------------------
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Independent Auditors' Report............................................ 30
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 1996 and 1995........ 31
Consolidated Statements of Income for Each of the Years in the
Three-Year Period Ended December 31, 1996........................... 32
Consolidated Statements of Shareholders' Equity for Each of the
Years in the Three-Year Period Ended December 31, 1996............. 33
Consolidated Statements of Cash Flows for Each of the Years in
the Three-Year Period Ended December 31, 1996....................... 34
Notes to Consolidated Financial Statements.......................... 36
</TABLE>
29
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Mercury General Corporation:
We have audited the accompanying consolidated balance sheets of
Mercury General Corporation and subsidiaries as of December 31, 1996 and 1995,
and the related consolidated statements of income, shareholders' equity and cash
flows for each of the years in the three-year period ended December 31, 1996.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
Mercury General Corporation and subsidiaries as of December 31, 1996 and 1995,
and the results of their operations and their cash flows for each of the years
in the three-year period ended December 31, 1996, in conformity with generally
accepted accounting principles.
KPMG PEAT MARWICK LLP
Los Angeles, California
February 21, 1997
30
<PAGE>
MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT SHARE AMOUNTS
A S S E T S
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Investments:
Fixed maturities available for sale (amortized cost
$924,793 in 1996 and $742,409 in 1995)......................... $ 954,108 $ 779,783
Equity securities available for sale (cost $148,264 in
1996 and $113,478 in 1995)..................................... 148,112 114,915
Short-term cash investments, at cost, which approxi-
mates market................................................... 66,067 28,496
---------- ----------
Total investments..................................... 1,168,287 923,194
Cash............................................................... 3,605 2,872
Receivables:
Premiums receivable............................................. 83,748 58,902
Premium notes................................................... 12,395 11,728
Accrued investment income....................................... 18,410 15,870
Other........................................................... 29,655 6,108
---------- ----------
144,208 92,608
Deferred policy acquisition costs.................................. 46,783 33,809
Fixed assets, net.................................................. 30,060 27,464
Other assets....................................................... 26,984 1,709
---------- ----------
$1,419,927 $1,081,656
========== ==========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
Losses and loss adjustment expenses................................ $ 336,685 $ 253,546
Unearned premiums.................................................. 260,878 168,404
Notes payable...................................................... 75,000 25,000
Loss drafts payable................................................ 29,032 20,071
Accounts payable and accrued expenses.............................. 36,463 25,412
Current income taxes............................................... 1,590 388
Deferred income taxes.............................................. 6,349 10,158
Other liabilities.................................................. 32,708 13,489
---------- ----------
Total liabilities..................................... 778,705 516,468
---------- ----------
Shareholders' equity:
Common stock without par value or stated value.
Authorized 30,000,000 shares; issued and outstanding
27,503,925 shares in 1996 and 27,442,675 in 1995.............. 42,644 40,895
Net unrealized investment gains.................................... 18,956 25,227
Unearned ESOP compensation......................................... (2,000) (3,084)
Retained earnings.................................................. 581,622 502,150
---------- ----------
Total shareholders' equity............................ 641,222 565,188
---------- ----------
Commitments and contingencies......................................
$1,419,927 $1,081,656
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
31
<PAGE>
MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
THREE YEARS ENDED DECEMBER 31, 1996
AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA
<TABLE>
<CAPTION>
1996 1995 1994
-------- --------- -----
<S> <C> <C> <C>
Revenues:
Earned premiums............................................. $754,724 $616,326 $529,390
Net investment income ...................................... 70,180 62,964 54,586
Net realized investment gains (losses)(note 2).............. (3,173) 1,048 (9,853)
Other....................................................... 3,233 3,341 3,123
-------- -------- --------
Total revenues......................................... 824,964 683,679 577,246
-------- -------- --------
Expenses:
Losses and loss adjustment expenses......................... 501,858 416,556 360,557
Policy acquisition costs ................................... 160,019 128,743 112,682
Other operating expenses.................................... 24,493 22,017 20,566
Interest.................................................... 2,004 2,040 1,025
-------- -------- --------
Total expenses......................................... 688,374 569,356 494,830
-------- -------- --------
Income before income taxes.................................. 136,590 114,323 82,416
Income taxes ................................................. 30,826 24,022 16,121
-------- -------- --------
Net income.................................................. $105,764 $ 90,301 $ 66,295
======== ======== ========
Earnings per share ........................................... $ 3.86 $3.31 $2.43
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
32
<PAGE>
MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
THREE YEARS ENDED DECEMBER 31, 1996
AMOUNTS EXPRESSED IN THOUSANDS
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- --------
<S> <C> <C> <C>
Common stock, beginning of year.................................................. $ 40,895 $ 40,250 $ 40,014
Proceeds of stock options exercised.............................................. 1,104 384 206
Tax benefit on sales of incentive stock
options......................................................................... 220 74 69
Release of common stock by the ESOP.............................................. 425 187 (39)
-------- -------- -------
Common stock, end of year........................................................ 42,644 40,895 40,250
-------- -------- -------
Net unrealized investment gains (losses) on
securities, beginning of year................................................... 25,227 (12,733) 23,770
Net increase (decrease) in unrealized invest-
ment gains (losses) on securities............................................... (6,271) 37,960 (36,503)
-------- -------- -------
Net unrealized investment gains (losses) on
securities, end of year......................................................... 18,956 25,227 (12,733)
-------- -------- -------
Unearned ESOP compensation relating to common
stock purchases by ESOP......................................................... (3,084) (4,042) (5,000)
Amortization of unearned ESOP compensation....................................... 1,084 958 958
-------- -------- -------
Unearned ESOP compensation, end of year.......................................... (2,000) (3,084) (4,042)
-------- -------- -------
Retained earnings, beginning of year............................................. 502,150 433,686 386,491
Net income....................................................................... 105,764 90,301 66,295
Dividends paid to shareholders................................................... (26,292) (21,837) (19,100)
-------- -------- --------
Retained earnings, end of year................................................... 581,622 502,150 433,686
-------- -------- --------
Total shareholders' equity................................................ $641,222 $565,188 $457,161
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
33
<PAGE>
MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE YEARS ENDED DECEMBER 31, 1996
Amounts expressed in thousands
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 105,764 $ 90,301 $ 66,295
Adjustments to reconcile net income to net cash
provided from operating activities:
Increase in unpaid losses and loss adjustment
expenses 35,947 26,047 12,198
Increase in unearned premiums 42,276 19,750 19,826
Increase in premium notes receivable (667) (166) (1,618)
Increase in premiums receivable (15,460) (10,161) (10,514)
Increase in deferred policy acquisition costs (7,080) (3,741) (4,345)
Increase in loss drafts payable 5,179 2,292 3,018
Increase (decrease) in accrued income taxes,
excluding deferred tax on change in unrealized
gain 1,016 4,995 (3,260)
Increase (decrease) in accounts payable and accrued
expenses 8,385 3,487 (2,698)
Depreciation 4,067 3,736 3,486
Net realized investment (gains) losses 3,173 (1,048) 9,853
Bond amortization (accretion), net (1,112) (103) 1,466
Other, net 15,136 1,169 (1,523)
--------- --------- ----------
Net cash provided from operating activities 196,624 136,558 92,184
Cash flows from investing activities:
Fixed maturities available for sale:
Purchases (243,779) (204,360) (239,193)
Sales 41,353 47,824 111,773
Calls or maturities 91,834 70,954 53,351
Equity securities available for sale:
Purchases (437,128) (386,343) (120,537)
Sales 398,306 365,696 108,949
Purchase of AFI, less cash acquired (33,629) -- --
Decrease (increase) in short-term cash investments,
net (32,077) (5,801) 7,046
Purchase of fixed assets (5,971) (4,115) (3,711)
Sale of fixed assets 167 494 268
--------- --------- ---------
Net cash used in investing activities $(220,924) $(115,651) $ (82,054)
</TABLE>
(Continued)
34
<PAGE>
MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ----------
<S> <C> <C> <C>
Cash flows from financing activities:
Additions to notes payable $ 75,000 $ -- $ 25,000
Principal payments on notes payable (25,000) -- (15,000)
Dividends paid to shareholders (26,291) (21,837) (19,100)
Proceeds from stock options exercised 1,324 458 275
-------- -------- --------
Net cash provided by (used in)
financing activities 25,033 (21,379) (8,825)
-------- -------- --------
Net increase (decrease) in cash 733 (472) 1,305
Cash:
Beginning of the year 2,872 3,344 2,039
-------- -------- --------
End of the year $ 3,605 $ 2,872 $ 3,344
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
35
<PAGE>
MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
(1) Significant Accounting Policies
Principles of Consolidation and Presentation
The Company is primarily engaged in the underwriting of private passenger
automobile insurance in the state of California.
The consolidated financial statements include the accounts of Mercury
General Corporation (the Company) and its wholly-owned subsidiaries, Mercury
Casualty Company, Mercury Insurance Company, California Automobile Insurance
Company, California General Underwriters Insurance Company, Inc., Mercury
Insurance Company of Georgia, Mercury Insurance Company of Illinois, Mercury
Indemnity Company of Georgia and Mercury Indemnity Company of Illinois.
Effective December 1, 1996 the financial statements also include newly acquired
companies American Fidelity Insurance Company, Cimarron Insurance Company, Inc.,
AFI Management Company, Inc. (AFIMC), and American Fidelity Lloyds Insurance
Company (AFL). AFL is not owned by MGC, but is controlled by MGC through its
attorney-in-fact, AFIMC. The acquisition is discussed further in Note 8.
Collectively, the newly-acquired companies, including AFL, are referred to as
AFI. All of the subsidiaries as a group, including AFL, but excluding AFIMC,
are referred to as the Insurance Companies. The consolidated financial
statements have been prepared in conformity with generally accepted accounting
principles (GAAP) which differ in some respects from those filed in reports to
insurance regulatory authorities. All significant intercompany balances and
transactions have been eliminated.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
Investments
Fixed maturities available for sale include those securities that
management intends to hold for indefinite periods, but which may be sold in
response to changes in interest rates, tax planning considerations or other
aspects of asset/liability management. Fixed maturities available for sale,
which include bonds and sinking fund preferred stocks, are carried at market.
Short-term investments are carried at cost, which approximates market.
Investments in equity securities, which include common stocks and non-redeemable
preferred stocks, are carried at market.
36
<PAGE>
MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1996 and 1995
(1) Significant Accounting Policies (Continued)
In most cases, the market valuations were drawn from standard trade data
sources. In no case were any valuations made by the Company's management.
Equity holdings, including non sinking fund preferred stocks, are, with minor
exceptions, actively traded on national exchanges, and were valued at the last
transaction price.
Temporary unrealized investment gains and losses on securities available
for sale are credited or charged directly to shareholders' equity, net of
applicable tax effects. When a decline in value of fixed maturities or equity
securities is considered other than temporary, a loss is recognized in the
consolidated statement of income. Realized gains and losses are included in the
consolidated statements of income based upon the specific identification method.
Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial Instruments", and Statement of Financial Accounting
Standards No. 119, "Disclosure about Derivative Financial Instruments and Fair
Value of Financial Instruments", require disclosure of estimated fair value
information about financial instruments, for which it is practicable to estimate
that value. Under SFAS No. 115, the Company categorizes all of its investments
in debt and equity securities as available for sale. Accordingly, all
investments, including cash and short-term cash investments, are carried on the
balance sheet at their fair value. The carrying amounts and fair values for
investment securities are disclosed in Note 2 and were drawn from standard trade
data sources such as market and broker quotes. The estimated fair value is
equivalent to the carrying value of receivables, accounts payable and other
liabilities. The estimated fair value of notes payable equals their carrying
value, which was based on borrowing rates currently available to the Company for
bank loans with similar terms and maturities. The terms of the notes are
discussed in Note 5.
Premium Income Recognition
Insurance premiums are recognized as income ratably over the term of the
policies. Unearned premiums are computed on the monthly pro rata basis. The
liability is stated gross of reinsurance deductions, with the reinsurance
deduction recorded in other assets.
Net premiums written during 1996, 1995 and 1994 were $795,873,000,
$636,590,000 and $550,838,000, respectively.
37
<PAGE>
MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1996 and 1995
(1) Significant Accounting Policies (Continued)
One agent produced direct premiums written of approximately 17%, 15% and
13% of the Company's total direct premiums written during 1996, 1995 and 1994,
respectively.
Premium Notes
Premium notes receivable represent the balance due to the Company from
policyholders who elect to finance their premiums over the policy term. The
Company requires both a downpayment and monthly payments as part of its
financing program. Premium finance fees are charged to policyholders who elect
to finance premiums. The fees are charged at rates that vary with the amount
of premium financed. Premium finance fees are recognized over the term of the
premium note based upon the effective yield.
Deferred Policy Acquisition Costs
Acquisition costs related to unearned premiums, which consist of
commissions, premium taxes and certain other underwriting costs, which vary
directly with and are directly related to, the production of business, are
deferred and amortized to income ratably over the terms of the policies.
Deferred acquisition costs are limited to the amount which will remain after
deducting from unearned premiums and anticipated investment income, the
estimated losses and loss adjustment expenses and the servicing costs that will
be incurred as the premiums are earned.
Losses and Loss Adjustment Expenses
The liability for losses and loss adjustment expenses is based upon the
accumulation of individual case estimates for losses reported prior to the close
of the accounting period, plus estimates, based upon past experience, of
ultimate developed costs which may differ from case estimates and of unreported
claims. The liability is stated net of anticipated salvage and subrogation
recoveries. The amount of reinsurance recoverable is included in other
receivables.
Estimating loss reserves is a difficult process as there are many
factors that can ultimately affect the final settlement of a claim and,
therefore, the reserve that is needed. Changes in the law, results of
litigation, medical costs, the cost of repair materials and labor rates can all
impact ultimate claim costs. In addition, time can be a critical part of
reserving determinations since the longer the span between the incidence of a
loss and the payment or settlement of the claim, the more variable the ultimate
settlement amount can be. Accordingly, short-tail claims, such as property
damage claims, tend to be more reasonably predictable than long-tail liability
claims. Management believes that
38
<PAGE>
MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1996 and 1995
(1) Significant Accounting Policies (Continued)
the liability for losses and loss adjustment expenses is adequate to cover the
ultimate net cost of losses and loss adjustment expenses incurred to date.
Since the provisions are necessarily based upon estimates, the ultimate
liability may be more or less than such provisions.
Depreciation
Buildings and furniture and equipment are depreciated over 30-year and 5-
year to 10-year periods, respectively, on a combination of straight-line and
accelerated methods. Automobiles are depreciated over 5 years, using an
accelerated method.
Earnings per Share
Earnings per share are computed by dividing earnings by the weighted
average number of common shares outstanding of 27,397,173 for 1996, 27,311,707
for 1995, and 27,273,192 for 1994.
Income Taxes
Deferred income taxes result from temporary differences in the recognition
of income and expense for tax and financial reporting purposes.
Reinsurance
In accordance with SFAS No. 113, "Accounting and Reporting for Reinsurance
of Short-Duration and Long-Duration Contracts," the liabilities for unearned
premiums and unpaid losses are stated in the accompanying consolidated financial
statements before deductions for ceded reinsurance. The ceded amounts are
immaterial and are carried in other assets and other receivables. Earned
premiums are stated net of deductions for ceded reinsurance.
The Insurance Companies, as primary insurers, would be required to pay
losses in their entirety in the event that the reinsurers were unable to
discharge their obligations under the reinsurance agreements.
Statements of Cash Flows
Interest paid during 1996, 1995, and 1994 was $1,882,000, $1,970,000, and
$1,001,000, respectively. Income taxes paid were $30,550,000 in 1996,
$18,954,000 in 1995, and $19,315,000 in 1994.
39
<PAGE>
MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1996 and 1995
(1) Significant Accounting Policies (Continued)
The balance sheet of AFI at acquisition date included the following assets:
investments of $75,310,000, cash of $1,362,000, receivables of $44,418,000 and
other assets of $31,124,000. Liabilities assumed in the acquisition included
unearned premiums of $50,199,000, loss and loss adjustment expense reserves of
$47,039,000 and other liabilities of $19,985,000.
Stock-Based Compensation
During October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"), which is effective for fiscal years beginning
after December 15, 1995. The Company accounts for stock-based compensation
under the accounting methods prescribed by Accounting Principles Board (APB)
Opinion No. 25, as allowed by SFAS No. 123. Disclosure of stock-based
compensation determined in accordance with SFAS No. 123 is presented in Footnote
13. Accordingly, adoption of this pronouncement did not have a material effect
on the financial statements of the Company.
Reclassifications
Certain reclassifications have been made to the prior year balances to
conform to the current year presentation.
(2) Investments and Investment Income
A summary of net investment income is shown in the following table:
<TABLE>
<CAPTION>
Year ended December 31,
(Amounts in thousands)
---------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Interest and dividends on fixed maturities................... $55,132 $50,099 $46,636
Dividends on equity securities............................... 13,385 11,855 7,483
Interest on short-term cash investments...................... 2,126 1,456 894
------- ------- -------
Total investment income............................... 70,643 63,410 55,013
Investment expense........................................... 463 446 427
------- ------- -------
Net investment income................................. $70,180 $62,964 $54,586
======= ======= =======
</TABLE>
40
<PAGE>
MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1996 and 1995
(2) Investments and Investment Income (Continued)
A summary of net realized investment gains (losses) is as follows:
<TABLE>
<CAPTION>
Year ended December 31,
(Amounts in thousands)
1996 1995 1994
-------- ------- ---------
<S> <C> <C> <C>
Net realized investment gains (losses):
Fixed maturities.................................................................. $ 963 $ (57) $(4,574)
Equity securities................................................................. (4,136) 1,105 (5,279)
------- ------- -------
$(3,173) $ 1,048 $(9,853)
======= ======= =======
</TABLE>
Gross gains and losses realized on the sales of investments (excluding
calls) are shown below:
<TABLE>
<CAPTION>
Year ended December 31,
(Amounts in thousands)
-------------------------------
1996 1995 1994
-------- ------- --------
<S> <C> <C> <C>
Fixed maturities available for sale:
Gross realized gains.............................................................. $ 515 $ 346 $ 718
Gross realized losses............................................................. (1,237) (822) (5,633)
------- ------- -------
Net............................................................................. $ (722) $ (476) $(4,915)
======= ======= =======
Equity securities available for sale:
Gross realized gains.............................................................. $ 2,925 $ 5,154 $ 472
Gross realized losses............................................................. (7,115) (4,049) (5,751)
------- ------- -------
Net............................................................................. $(4,190) $ 1,105 $(5,279)
======= ======= =======
</TABLE>
A summary of the net increase (decrease) in unrealized investment gains
(losses) less applicable income tax expense (benefit), is as follows:
<TABLE>
<CAPTION>
Year ended December 31,
(Amounts in thousands)
-------------------------------
1996 1995 1994
-------- ------- --------
<S> <C> <C> <C>
Net increase (decrease) in net unrealized
investment gains (losses):
Fixed maturities available for sale.............................................. $(8,059) $49,859 $(48,873)
Income tax expense (benefit)..................................................... (2,821) 17,451 (17,106)
------- ------- --------
$(5,238) $32,408 $(31,767)
======= ======= ========
Equity securities................................................................ $(1,589) $ 8,541 $ (7,285)
Income tax expense (benefit)..................................................... (556) 2,989 $ (2,549)
------- ------- --------
$(1,033) $ 5,552 $ (4,736)
======= ======= ========
</TABLE>
41
<PAGE>
MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1996 and 1995
(2) Investments and Investment Income (Continued)
Accumulated unrealized gains and losses on securities available for sale
follows:
<TABLE>
<CAPTION>
December 31,
(Amounts in thousands)
----------------------
1996 1995
---- ----
<S> <C> <C>
Fixed maturities available for sale:
Unrealized gains................................................................... $ 34,555 $ 41,326
Unrealized losses.................................................................. (5,240) (3,952)
Tax effect......................................................................... (10,260) (13,081)
-------- --------
$ 19,055 $ 24,293
-------- --------
Equity securities available for sale:
Unrealized gains................................................................... $ 2,347 $ 3,135
Unrealized losses.................................................................. (2,499) (1,698)
Tax effect......................................................................... 53 (503)
-------- --------
$ (99) 934
-------- --------
Net unrealized investment gains................................................... $ 18,956 $ 25,227
======== ========
</TABLE>
The amortized cost and estimated market values of investments in fixed
maturities available for sale as of December 31, 1996 are as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------- --------- -------- ---------
(Amounts in thousands)
<S> <C> <C> <C> <C>
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies..................... $ 34,218 $ 33 $ 366 $ 33,885
Obligations of states and political
subdivisions.................................. 781,586 30,817 3,642 808,761
Public utilities................................ 12,908 229 87 13,050
Corporate securities............................ 29,368 114 304 29,178
Redeemable preferred stock...................... 66,713 3,362 841 69,234
-------- ------- ------- --------
Totals..................................... $924,793 $34,555 $ 5,240 $954,108
======== ======= ======= ========
</TABLE>
42
<PAGE>
MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1996 and 1995
(2) Investments and Investment Income (Continued)
The amortized cost and estimated market values of investments in fixed
maturities available for sale as of December 31, 1995 are as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------- ---------- ---------- ---------
(Amounts in thousands)
<S> <C> <C> <C> <C>
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies..................................... $ 3,659 $ 82 $ 3 $ 3,738
Obligations of states and political
subdivisions.................................................. 630,811 34,197 1,845 663,163
Public utilities................................................ 10,177 783 2 10,958
Corporate securities............................................ 7,682 242 81 7,843
Redeemable preferred stock...................................... 90,080 6,022 2,021 94,081
-------- ------- ------ --------
Totals..................................................... $742,409 $41,326 $3,952 $779,783
======== ======= ====== ========
</TABLE>
Traditionally, it has been the Company's policy not to invest in high yield or
non-investment grade bonds. In 1995, the Company adopted a policy allowing a
small percentage of its investments to be placed in bonds rated lower than
investment grade, but not lower than Ba by Moody's or BB by Standard & Poor's.
At December 31, 1996 bond holdings rated below investment grade totaled
approximately 1.3% of total investments. All but $1.5 million of such holdings
were downgraded subsequent to purchase. The average Standard and Poor's rating
of the bond portfolio is A.
The amortized cost and estimated market value of fixed maturities available for
sale at December 31, 1996, by contractual maturity, are shown below. Expected
maturities will differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without call or prepayment
penalties.
<TABLE>
<CAPTION>
Estimated
Amortized Market
Cost Value
---------- ---------
(Amounts in thousands)
----------------------
<S> <C> <C>
Fixed maturities available for sale:
Due in one year or less.................... $ 47,288 $ 48,583
Due after one year through five years...... 207,804 214,782
Due after five years through ten years..... 405,721 415,942
Due after ten years........................ 263,980 274,801
-------- --------
$924,793 $954,108
======== ========
</TABLE>
43
<PAGE>
MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1996 and 1995
(2) Investments and Investment Income (Continued)
The Company utilizes repurchase agreements for investing funds overnight. All
repurchase agreements utilized require U.S. Treasury securities or obligations
of U.S. government corporations or agencies as collateral.
(3) Fixed Assets
A summary of fixed assets follows:
<TABLE>
<CAPTION>
December 31,
(Amounts in thousands)
--------------------------
1996 1995
---- ----
<S> <C> <C>
Land................................ $ 6,128 $ 6,084
Buildings........................... 21,430 20,432
Furniture and equipment............. 23,287 18,410
Leasehold improvements.............. 1,238 1,128
-------- --------
52,083 46,054
Less accumulated depreciation....... (22,023) (18,590)
-------- --------
Net fixed assets................... $ 30,060 $ 27,464
======== ========
</TABLE>
(4) Deferred Policy Acquisition Costs
Policy acquisition costs incurred and amortized to income are as follows:
<TABLE>
<CAPTION>
Years ended December 31,
(Amounts in thousands)
----------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Balance, beginning of year................. $ 33,809 $ 30,068 $ 25,723
DAC acquired in purchase of AFI............ 5,850 -- --
Costs deferred during the year............. 167,143 132,484 117,027
Amortization charged to expense............ (160,019) (128,743) (112,682)
--------- -------- --------
Balance, end of year....................... $ 46,783 $ 33,809 $ 30,068
========= ======== ========
</TABLE>
(5) Notes Payable
Notes payable at December 31, 1996 consists of three unsecured notes payable
under a credit agreement dated November 21, 1996. The combined principal amount
on the notes of $75,000,000 is payable on November 21, 1999. The loan agreement
may be extended annually for additional periods of one year each to maintain the
three year maturity date. The interest rate is variable and is optionally
related to the Federal Funds rate, Bank of New York prime rate or the Eurodollar
London Interbank rate (LIBOR). Based on the rates effective through June 25,
1997, the net interest cost on the loan at December 31, 1996 is approximately
6.08%.
44
<PAGE>
MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1996 and 1995
(5) Notes Payable (Continued)
The terms of the loan agreement include certain affirmative and negative
covenants, all of which are met by the Company at December 31, 1996.
(6) Income Taxes
The Company and its subsidiaries file a consolidated Federal income tax
return.
The provision for income tax expense (benefit) consists of the following
components:
<TABLE>
<CAPTION>
Year ended December 31,
(Amounts in thousands)
-----------------------------
1996 1995 1994
-------- -------- -------
<S> <C> <C> <C>
Federal
Current.... $31,880 $24,016 $15,318
Deferred... (1,139) (92) 707
------- ------- -------
$30,741 $23,924 $16,025
======= ======= =======
State
Current.... $ 85 $ 98 $ 96
Deferred... -- -- --
------- ------- -------
$ 85 $ 98 $ 96
======= ======= =======
Total
Current.... $31,965 $24,114 $15,414
Deferred... (1,139) (92) 707
------- ------- -------
Total... $30,826 $24,022 $16,121
======= ======= =======
</TABLE>
The income tax provision reflected in the consolidated statements of income
is less than the expected federal income tax on income before income taxes as
shown in the table below:
<TABLE>
<CAPTION>
Year ended December 31,
(Amounts in thousands)
------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Computed tax expense at 35% .................................. $ 47,807 $40,013 $ 28,846
Tax-exempt interest income.................................... (15,626) (13,718) (12,216)
Dividends received deduction.................................. (4,949) (4,936) (4,253)
Reduction of losses incurred deduction for 15% of
income on securities purchased after August 7, 1986.......... 2,974 2,546 2,220
Other, net.................................................... 620 117 1,524
-------- -------- --------
Income tax expense....................................... $30,826 $24,022 $ 16,121
======= ======= ========
</TABLE>
45
<PAGE>
MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1996 and 1995
(6) Income Taxes (Continued)
The "temporary differences" that give rise to a significant portion of the
deferred tax asset (liability) relate to the following:
<TABLE>
<CAPTION>
December 31,
(Amounts in thousands)
------------------------------
1996 1995 1994
-------- -------- -------
<S> <C> <C> <C>
Deferred tax assets
Discounting of loss reserves and salvage
and subrogation recoverable for tax
purposes......................................................... $ 6,123 $ 5,030 $ 5,030
Tax benefit on net unrealized loss on
securities carried at market value............................... -- -- 6,856
Other deferred tax assets......................................... 1,358 638 534
-------- -------- -------
Total gross deferred tax assets................................. 7,481 5,668 12,420
Less valuation allowance....................................... -- -- --
-------- -------- -------
Net deferred tax assets........................................ 7,481 5,668 12,420
-------- -------- -------
Deferred tax liabilities
Tax liability on net unrealized gain on
securities carried at market value............................... (10,207) (13,584) --
Tax depreciation in excess of book
depreciation..................................................... (1,270) (1,184) (1,192)
Accretion on bonds................................................ (784) (742) (574)
Other deferred tax liabilities.................................... (1,569) (316) (464)
-------- -------- -------
-------- ------- -------
Total gross deferred tax liabilities........................... (13,830) (15,826) (2,230)
-------- -------- -------
Net deferred tax assets (liabilities).......................... $ (6,349) $(10,158) $10,190
======== ======== =======
</TABLE>
46
<PAGE>
MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1996 and 1995
(7) Reserves for Losses and Loss Adjustment Expenses
Activity in the reserves for losses and loss adjustment expenses is
summarized as follows:
<TABLE>
<CAPTION>
Year ended December 31,
(Amounts in thousands)
--------------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Gross reserves for losses and loss
adjustment expenses at beginning of year.......... $253,546 $227,499 $215,301
Less reinsurance recoverable..................... (2,556) (4,107) (776)
-------- -------- --------
Net reserves, beginning of year.................... 250,990 223,392 214,525
Reserves acquired in purchase of AFI............... 24,231 -- --
Incurred losses and loss adjustment expenses
related to:
Current year..................................... 505,726 423,264 370,631
Prior years...................................... (3,868) (6,708) (10,074)
-------- -------- --------
Total incurred losses and loss adjustment
expenses......................................... 501,858 416,556 360,557
-------- -------- --------
Loss and loss adjustment expense payments
related to:
Current year..................................... 298,099 243,294 208,418
Prior years...................................... 167,226 145,664 143,272
-------- -------- --------
Total payments..................................... 465,325 388,958 351,690
-------- -------- --------
Net reserves for losses and loss adjustment
expenses at end of year........................... 311,754 250,990 223,392
Reinsurance recoverable............................ 24,931 2,556 4,107
-------- -------- --------
Gross reserves, end of year........................ $336,685 $253,546 $227,499
======== ======== ========
</TABLE>
Decreases in incurred losses relating to prior years reflects the favorable loss
experience during these years attributable to a number of combined factors which
have produced favorable frequency and severity trends in recent years. In
addition, actuarial assumptions based on historical trends have proved to be
conservative.
47
<PAGE>
MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1996 and 1995
(8) Acquisition of American Fidelity Insurance Company
Effective November 30, 1996 the Company acquired all of the issued and
outstanding common stock of American Fidelity Insurance Company, including its
subsidiaries as described in Note 1, for $35.0 million. The acquisition was paid
for in cash with funds raised by increasing the Company's notes payable under
the bank credit agreement discussed in Note 5. On December 30, 1996 the Company
contributed an additional $15.0 million to AFI. The acquisition was accounted
for using the purchase method and resulted in a minimal amount of negative
goodwill. The purchase agreement includes an indemnification by the seller on
the loss and loss adjustment expense reserves of AFI at the acquisition date,
excluding the mechanical breakdown line, to avoid any impact on the Company's
financial statements from any future adverse development on the acquisition date
loss reserves.
AFI writes property and casualty insurance, primarily in Oklahoma, Kansas
and Texas, where the companies are domiciled. Its primary lines are automobile
and mechanical breakdown insurance. The results of operations for the month of
December are included in the consolidated financial statements of the Company.
The following unaudited proforma consolidated results of operations for
1996 and 1995 give effect to the acquisition as though it had occurred at the
beginning of each year presented:
<TABLE>
<CAPTION>
Pro Forma Results for the year ended
December 31,
(Amounts in thousands,
except per share data)
----------------------
1996 1995
---- ----
<S> <C> <C>
Revenues $891,243 $756,728
Pretax operating income $136,912 $117,092
Income before income taxes $133,691 $118,293
Net income per share $3.79 $3.39
</TABLE>
(9) Dividend Restrictions
The Insurance Companies are subject to the financial capacity guidelines
established by the Office of the Commissioner of Insurance of their domicile
states. The payment of dividends from statutory unassigned surplus of the
Insurance Companies is restricted, subject to certain statutory limitations.
For the year 1997, the direct insurance subsidiaries of the Company are
permitted to pay approximately $61,471,000 in dividends to the Company without
the prior approval of the Commissioner of Insurance of the state of domicile.
48
<PAGE>
MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1996 and 1995
(9) Dividend Restrictions (Continued)
The above statutory regulations may have the effect of indirectly limiting the
ability of the Company to pay dividends.
(10) Statutory Balances and Accounting Practices
The Insurance Companies prepare their statutory financial statements in
accordance with accounting practices prescribed or permitted by the various
state insurance departments. Prescribed statutory accounting practices include
a variety of publications of the National Association of Insurance Commissioners
(NAIC), as well as state laws, regulations, and general administrative rules.
Permitted statutory accounting practices encompass all accounting practices not
so prescribed. As of December 31, 1996, there were no material permitted
statutory accounting practices utilized by the Insurance Companies. The NAIC is
working on a project to codify statutory accounting practices, the result of
which is expected to constitute the only source of "prescribed" statutory
accounting practices. When complete, that project will most likely change the
definition of prescribed versus permitted statutory accounting practices and may
result in changes to the accounting policies that insurance enterprises use to
prepare their statutory financial statements.
The Insurance Companies' statutory net income, as reported to regulatory
authorities, was $97,979,000, $86,210,000, and $62,861,000 for the years ended
December 31, 1996, 1995 and 1994, respectively. The statutory policyholders'
surplus of the Insurance Companies, as reported to regulatory authorities, as of
December 31, 1996 and 1995 was $594,799,000 and $479,114,000, respectively.
The Company has estimated the Risk-Based Capital Requirements of each of its
insurance subsidiaries as of December 31, 1996 according to the formula issued
by the NAIC. Each of the companies' policyholders' surplus exceeded the highest
level of recommended capital requirements.
(11) Commitments and Contingencies
The Company is obligated under various noncancellable lease agreements
providing for office space and equipment rental that expire at various dates
through the year 2002. Total rent expense under these lease agreements, all of
which are operating leases, was $1,583,000, $1,461,000 and $1,492,000 for the
years ended December 31, 1996, 1995 and 1994, respectively. Mercury Casualty
49
<PAGE>
MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1996 and 1995
(11) Commitments and Contingencies (Continued)
Company will receive minimum future rentals on various noncancellable operating
leases on a building in Brea, California. The annual rental commitments,
expressed in thousands, are shown as follows:
<TABLE>
<CAPTION>
Rent Rent
Year Expense Income
---- ------- ------
<S> <C> <C>
1997................... $1,599 $(486)
1998................... $1,505 $(280)
1999................... $1,555 $(238)
2000................... $ 973 $ (91)
2001................... $ 525 $ --
Thereafter............. $ 15 $ --
</TABLE>
The Company and its subsidiaries are defendants in various lawsuits generally
incidental to their business. In most of these actions, plaintiffs assert
claims for exemplary and punitive damages which are not insurable under
California judicial decisions. The Company vigorously defends these actions,
unless a reasonable settlement appears appropriate. Management does not expect
the ultimate disposition of these lawsuits to have a material effect on the
Company's consolidated operations or financial position.
(12) Profit Sharing Plan
The Company, at the option of the Board of Directors, may make annual
contributions to an employee profit sharing plan. The contributions are not to
exceed the greater of the Company's net income for the plan year or its retained
earnings at that date. In addition, the annual contributions may not exceed an
amount equal to 15% of the compensation paid or accrued during the year to all
participants under the plan. The annual contribution was $1,000,000 for each of
the plan years ended December 31, 1996, 1995 and 1994.
The Profit Sharing Plan also includes an option for employees to make salary
deferrals under Section 401(k) of the Internal Revenue Code. Company matching
contributions, at a rate set by the Board of Directors, totaled $955,000,
$773,000, and $762,000 for the plan years ended December 31, 1996, 1995 and
1994.
Effective March 11, 1994 the Profit Sharing Plan also includes a leveraged
employee stock ownership plan (ESOP) that covers substantially all employees.
The Company makes annual contributions to the ESOP equal to the ESOP's debt
service less dividends received by the ESOP. Dividends received by the ESOP on
50
<PAGE>
MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1996 and 1995
(12) Profit Sharing Plan (Continued)
unallocated shares are used to pay debt service and the ESOP shares serve as
collateral for its debt. As the debt is repaid, shares are released from
collateral and allocated to employees, based on the proportion of debt service
paid in the year. The Company accounts for its ESOP in accordance with
Statement of Position 93-6. Accordingly, the debt of the ESOP, which was
$3,000,000, $4,000,000 and $5,000,000 at December 31, 1996, 1995 and 1994,
respectively, is recorded in the balance sheet as other liabilities. The shares
pledged as collateral are reported as unearned ESOP compensation in the
shareholders' equity section of the balance sheet. As shares are committed to
be released from collateral, the Company reports compensation expense equal to
the current market price of the shares, and reduces unearned ESOP compensation
by the original cost of the shares. The difference between the market price and
cost of the shares is charged to common stock. As shares are committed to be
released from collateral, the shares become outstanding for earnings-per-share
computations. Dividends on allocated ESOP shares are recorded as a reduction of
retained earnings; dividends on unallocated ESOP shares are recorded as a
reduction of accrued interest. ESOP compensation expense was $1,509,000,
$1,145,000 and $919,000 in 1996, 1995 and 1994, respectively. The ESOP shares
as of December 31 were as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Allocated shares 64,400 32,200
Shares committed-to-be released 32,200 32,200
Unreleased shares 64,400 96,600
---------- ----------
Total ESOP shares 161,000 161,000
========== ==========
Market value of unreleased shares at
December 31, $3,381,000 $4,613,000
========== ==========
</TABLE>
(13) Common Stock
The Company adopted a stock option plan in October 1985 (the "1985 Plan")
under which 2,700,000 shares were reserved for issuance. Options granted during
1985 were exercisable immediately. Subsequent options granted become
exercisable 20% per year beginning one year from the date granted. All options
were granted at the market price on the date of the grant and expire in 10
years.
In May 1995 the Company adopted The 1995 Equity Participation Plan (the "1995
Plan") which succeeds the Company's 1985 Plan. Under the 1995 Plan, 2,700,000
shares of Common Stock are authorized for issuance upon exercise of options,
stock appreciation rights and other awards, or upon vesting of restricted or
deferred stock awards. During 1995, the Company granted incentive stock options
under both the 1995 Plan and the 1985 Plan. The options granted during 1996,
1995 and 1994 become exercisable 20% per year beginning one year from the date
granted and were granted at the market price on the date of the grant. The
options expire in 10 years.
51
<PAGE>
MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1996 and 1995
(13) Common Stock (Continued)
As explained in Note 1, the Company applies APB Opinion No. 25 in accounting
for its stock option plan. Accordingly, no compensation cost has been
recognized in the Statements of Income. Had compensation cost for the Company's
Plans been determined based on the fair value at the grant dates consistent with
the method of SFAS No. 123, the Company's net income would have been reduced by
$295,000 and $116,000 in 1996 and 1995, respectively, and earnings per share
would have been reduced by $.01 in each year. Calculations of the fair value
under the method prescribed by SFAS No. 123 were made using the Black-Scholes
option-pricing model with the following weighted-average assumptions used for
grants in 1996 and 1995: dividend yield of 2.0 percent for both years, expected
volatility of 30 percent for both years and expected lives of 7 years for both
years. The risk-free interest rates used were 5.5 and 6.4 percent for the
options granted during 1996 and 7.4 and 6.4 percent for the options granted
during 1995.
A summary of the status of the Company's plans as of December 31, 1994, 1995
and 1996 and changes during the years ending on those dates is presented below:
<TABLE>
<CAPTION>
1996 1995 1994
---------------------- ------------------- ------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 365,325 $24.234 237,925 $18.602 264,740 $17.428
Granted during the year 60,000 46.156 155,000 31.09 4,000 27.000
Exercised during the year (61,250) 15.425 (27,600) 14.177 (27,815) 7.393
Canceled or expired (2,400) 27.000 -- -- (3,000) 30.125
------- ------- -------
Outstanding at end of year 361,675 28.904 365,325 24.234 237,925 18.602
======= ======= =======
Options exercisable at year-end 134,075 141,725 142,725
Weighted-average fair value of options
granted during the year $16.22 $11.50 N/A
</TABLE>
The following table summarizes information regarding the stock options
outstanding at December 31, 1996:
<TABLE>
<CAPTION>
Number Weighted Avg. Weighted Avg. Number Weighted Avg.
Range of Outstanding Remaining Exercise Exercisable Exercise
Exercise Prices at 12/31/96 Contractual Life Price at 12/31/96 Price
- --------------- ----------- ---------------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
$6.75 to 8.00 69,625 1.67 years $ 7.864 69,625 $ 7.864
$30.00 to 31.875 232,050 7.58 30.756 64,450 30.544
$43.50 to 48.8125 60,000 9.33 46.156 -- --
------- -------
$6.75 to 48.8125 361,675 6.73 28.904 134,075 18.766
======= =======
</TABLE>
52
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
---------------------------------------------------------------
Financial Disclosure
--------------------
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
--------------------------------------------------
Section 16(a) of the Securities Exchange Act of 1934 requires the
directors, officers and certain other employees of the registrant, and
persons who own more than ten percent of a registered class of the
registrant's equity securities, ("Reporting Persons") to file with the
Securities and Exchange Commission initial reports of ownership and
reports of changes in ownership of Common Stock of the registrant. Due
dates for these reports have been established and the registrant is
required to disclose any failure to file by these dates during 1996. To
the registrant's knowledge, all of these requirements were satisfied.
Item 11. Executive Compensation
----------------------
Item 12. Security ownership of Certain Beneficial Owners and Management
--------------------------------------------------------------
Item 13. Certain Relationships and Related Transactions
----------------------------------------------
Information regarding executive officers of the Company is included in Part
I. For this and other information called for by Items 10, 11, 12 and 13,
reference is made to the Company's definitive proxy statement for its Annual
Meeting of Shareholders, to be held on May 14, 1997, which will be filed with
the Securities and Exchange Commission within 120 days after December 31, 1996,
and which is incorporated herein by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
---------------------------------------------------------------
(a) The following documents are filed as a part of this report:
1. Financial Statements: The Consolidated Financial Statements for the
year ended December 31, 1996 are contained herein as listed in the Index to
Consolidated Financial Statements on page 29.
2. Financial Statement Schedules:
Title
-----
Auditors' Report on Financial Statement Schedules
Schedule I -- Summary of Investments -- Other than Investments in
Related Parties
Schedule II -- Condensed Financial Information of Registrant
53
<PAGE>
Schedule IV -- Reinsurance
All other schedules are omitted as the required information is inapplicable
or the information is presented in the Consolidated Financial Statements or
Notes thereto.
3. Exhibits:
3.1** Articles of Incorporation of the Company, as amended to date.
3.2@@ By-laws of the Company, as amended to date.
4.1* Shareholders' Agreement dated as of October 7, 1985 among the
Company, George Joseph and Gloria Joseph.
10.1* Form of Agency Contract.
10.2# Management Agreement, as amended, effective July 1, 1992, among
the Company, Mercury Casualty Company, Mercury Insurance Company
and California Automobile Insurance Company.
10.3## Profit Sharing Plan, as Amended and Restated as of March 11,
1994.
10.4## ESOP Feature Trust Agreement between the Company and Wells Fargo
Bank, N.A., as Trustee, effective March 1, 1994.
10.5## ESOP Loan Agreement between Union Bank and Wells Fargo Bank,
N.A., as Trustee, of the Mercury General Corporation ESOP
Feature Trust dated as of March 11, 1994.
10.6## Continuing Guaranty, dated as of March 11, 1994, executed by
Mercury General Corporation in favor of Union Bank.
10.7** Amendment 1994-I to the Mercury General Corporation Profit
Sharing Plan.
10.8** Amendment 1994-II to the Mercury General Corporation Profit
Sharing Plan.
10.9 Amendment 1996-I to the Mercury General Corporation Profit
Sharing Plan.
10.10 Amendment 1997-I to the Mercury General Corporation Profit
Sharing Plan.
10.11 Revolving Credit Agreement by and among Mercury General
Corporation, the Lenders Party Thereto and The Bank of New York,
as Agent dated as of November 21, 1996.
10.12** Property Per Risk Excess of Loss Reinsurance Agreement between
National Reinsurance Corporation and Mercury Casualty Company,
effective April 1, 1995.
10.13** Endorsement No. 1 to the Property Per Risk Excess of Loss
Agreement effective April 1, 1995.
10.14@@ Endorsement No. 2 to the Property Per Risk Excess of Loss
Agreement effective April 1, 1995.
10.15@@ Endorsement No. 3 to the Property Per Risk Excess of Loss
Agreement effective April 1, 1995.
10.16@@ Management Agreement effective January 1, 1995 between the
Company and Mercury Insurance Company of Illinois.
10.17@@ Management Agreement effective January 1, 1995 between the
Company and Mercury Indemnity Company of Illinois.
10.18@@ Management Agreement effective January 1, 1995 between the
Company and Mercury Insurance Company of Georgia.
10.19@@ Management Agreement effective January 1, 1995 between the
Company and Mercury Indemnity Company of Georgia.
54
<PAGE>
10.20@ The 1995 Equity Participation Plan.
10.21 Stock Purchase Agreement between Mercury General Corporation as
Purchaser and AFC as Seller dated November 15, 1996.
21.1 Subsidiaries of the Company.
23.1 Accountants' Consent.
27.1 Financial Data Schedule
* This document was filed as an exhibit to Registrant's Registration Statement
on Form S-1, File No. 33-899, and is incorporated herein by this reference.
# This document was filed as an exhibit to Registrant's Form 10-K for the
fiscal year ended December 31, 1992, and is incorporated herein by this
reference.
## This document was filed as an exhibit to Registrant's Form 10-K for the
fiscal year ended December 31, 1993, and is incorporated herein by this
reference.
** This document was filed as an exhibit to Registrant's Form 10-K for the
fiscal year ended December 31, 1994, and is incorporated herein by this
reference.
@ This document was filed as an exhibit to Registrant's Form S-8 filed on March
8, 1996 and is incorporated herein by this reference.
@@ This document was filed as an exhibit to Registrant's Form 10-K for the
fiscal year ended December 31, 1995, and is incorporated herein by this
reference.
(b) Reports on Form 8-K:
None
55
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
MERCURY GENERAL CORPORATION
By GEORGE JOSEPH
-------------------------------------
George Joseph
Chief Executive Officer and
Chairman of the Board
March 22, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
Chief Executive Officer
and
Chairman of the Board
GEORGE JOSEPH (Principal Executive Officer) March 18, 1997
- --------------------------
George Joseph
Chief Financial Officer
KEITH L. PARKER (Principal Financial Officer) March 18, 1997
- --------------------------
Keith L. Parker
Vice President and Controller
DONNA J. MOORE (Principal Accounting Officer) March 18, 1997
- --------------------------
Donna J. Moore
NATHAN BESSIN Director March 18, 1997
- --------------------------
Nathan Bessin
BRUCE A. BUNNER Director March 18, 1997
- --------------------------
Bruce A. Bunner
MICHAEL D. CURTIUS Director March 18, 1997
- --------------------------
Michael D. Curtius
</TABLE>
56
<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
RICHARD E. GRAYSON Director March 18, 1997
- --------------------------
Richard E. Grayson
GLORIA JOSEPH Director March 18, 1997
- ---------------------------
Gloria Joseph
CHARLES MCCLUNG Director March 18, 1997
- ---------------------------
Charles McClung
DONALD P. NEWELL Director March 18, 1997
- ---------------------------
Donald P. Newell
DONALD R. SPUEHLER Director March 18, 1997
- ---------------------------
Donald R. Spuehler
</TABLE>
57
<PAGE>
AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULES
The Board of Directors
Mercury General Corporation:
Under date of February 21, 1997, we reported on the consolidated balance
sheets of Mercury General Corporation and subsidiaries as of December 31, 1996
and 1995, and the related consolidated statements of income, shareholders'
equity and cash flows for each of the years in the three-year period ended
December 31, 1996, as contained in the annual report on Form 10-K for the year
1996. In connection with our audits of the aforementioned consolidated
financial statements, we also have audited the related financial statement
schedules as listed under Item 14(a)2. These financial statement schedules are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statement schedules based on our audits.
In our opinion, the related financial statement schedules, when considered in
relation to the basic consolidated financial statements taken as a whole,
present fairly, in all material respects, the information set forth therein.
KPMG PEAT MARWICK LLP
Los Angeles, California
February 21, 1997
S-1
<PAGE>
SCHEDULE I
MERCURY GENERAL CORPORATION
SUMMARY OF INVESTMENTS
OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 1996
AMOUNTS IN THOUSANDS
<TABLE>
<CAPTION>
Amount at
which shown
in the
Type of Investment Cost Value balance sheet
- ------------------ -------- ---------- -------------
<S> <C> <C> <C>
Fixed maturities available for sale
Bonds:
U.S. Government......................... $ 34,218 $ 33,885 $ 33,885
States, Municipalities.................. 781,586 808,761 808,761
Public utilities........................ 12,908 13,050 13,050
All other corporate bonds............... 29,368 29,178 29,178
Redeemable preferred stock................ 66,713 69,234 69,234
---------- -------- ----------
Total fixed maturities available for
sale.................................. 924,793 954,108 954,108
---------- -------- ----------
Equity securities:
Common stocks:
Public utilities........................ 20,726 21,360 21,360
Banks, trust and insurance companies.... 544 493 493
Industrial, Miscellaneous and
all other.............................. 1,535 2,209 2,209
Nonredeemable preferred stocks............ 125,459 124,050 124,050
---------- -------- ----------
Total equity securities available for
sale.................................. 148,264 148,112 148,112
---------- -------- ----------
Short-term investments........................ 66,067 66,067
---------- ----------
Total investments....................... $1,139,124 $1,168,287
========== ==========
</TABLE>
S-2
<PAGE>
SCHEDULE I, CONTINUED
MERCURY GENERAL CORPORATION
SUMMARY OF INVESTMENTS
OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 1995
AMOUNTS IN THOUSANDS
<TABLE>
<CAPTION>
Amount at
which shown
in the
Type of Investment Cost Value balance sheet
- ------------------ -------- -------- -------------
<S> <C> <C> <C>
Fixed maturities available for sale
Bonds:
U.S. Government.......................... $ 3,659 $ 3,738 $ 3,738
States, Municipalities................... 630,811 663,163 663,163
Public utilities......................... 10,177 10,958 10,958
All other corporate bonds................ 7,682 7,843 7,843
Redeemable preferred stock................ 90,080 94,081 94,081
-------- -------- --------
Total fixed maturities available for
sale.................................... 742,409 779,783 779,783
-------- -------- --------
Equity securities:
Common stocks:
Public utilities......................... 18,787 19,714 19,714
Banks, trust and insurance companies..... 535 469 469
Industrial, Miscellaneous and
all other............................... 1,133 1,524 1,524
Nonredeemable preferred stocks............ 93,023 93,208 93,208
-------- -------- --------
Total equity securities available for
sale.................................... 113,478 114,915 114,915
-------- -------- --------
Short-term investments......................... 28,496 28,496
-------- --------
Total investments........................ $884,383 $923,194
======== ========
</TABLE>
S-3
<PAGE>
SCHEDULE II
MERCURY GENERAL CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS
December 31, 1996 and 1995
Amounts in thousands
ASSETS
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Investments:
Fixed maturities available for sale (amortized
cost $3,003 in 1996 and $3,771 in 1995)...................... $ 3,012 $ 3,770
Equity securities, available for sale (cost
$17,169 in 1996 and $12,943 in 1995)......................... 16,877 12,841
Short-term cash investments.................................... 8,090 4,746
Investment in subsidiaries..................................... 697,059 574,224
-------- --------
Total investments...................................... 725,038 595,581
Amounts due from affiliates.......................................... 5,014 3,834
Income taxes......................................................... 1,988 2,615
Other assets......................................................... 2,303 2,110
-------- --------
$734,343 $604,140
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Notes payable........................................................ $ 75,000 $25,000
Accounts payable and accrued expenses................................ 12,311 8,611
Other liabilities.................................................... 5,807 5,341
-------- --------
Total liabilities............................................. 93,118 38,952
-------- --------
Shareholders' equity:
Common stock.................................................. 42,644 40,895
Net unrealized investment gains .............................. 18,959 25,227
Unearned ESOP compensation....................................... (2,000) (3,084)
Retained earnings................................................ 581,622 502,150
-------- --------
Total shareholders' equity................................... 641,225 565,188
-------- --------
$734,343 $604,140
======== ========
</TABLE>
See notes to condensed financial information
S-4
<PAGE>
SCHEDULE II, CONTINUED
MERCURY GENERAL CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF INCOME
Three years ended December 31, 1996
Amounts in thousands
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Net investment income...................................... $ 1,489 $ 1,824 $ 1,389
Management fee income from subsidiaries.................... 118,657 101,823 101,858
Other...................................................... 8 27 (704)
-------- -------- --------
Total revenues......................................... 120,154 103,674 102,543
-------- -------- --------
Expenses:
Loss adjustment expenses................................... 79,934 68,048 68,771
Policy acquisition costs................................... 20,345 17,087 17,953
Other operating expenses................................... 19,336 16,627 15,544
Interest................................................... 2,004 2,040 1,025
-------- -------- --------
Total expenses......................................... 121,619 103,802 103,293
-------- -------- --------
Loss before income taxes and equity in net
income of subsidiaries.................................... (1,465) (128) (750)
Income tax benefit........................................... (536) (386) (506)
-------- -------- --------
Income (loss) before equity in net income
of subsidiaries........................................... (929) 258 (244)
Equity in net income of subsidiaries......................... 106,693 90,043 66,539
-------- -------- --------
Net income................................................ $105,764 $ 90,301 $ 66,295
======== ======== ========
</TABLE>
See notes to condensed financial information.
S-5
<PAGE>
SCHEDULE II, CONTINUED
MERCURY GENERAL CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF CASH FLOWS
THREE YEARS ENDED DECEMBER 31, 1996
AMOUNTS IN THOUSANDS
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net cash provided from operating activities................... $ 32,510 $ 25,526 $ 20,367
Cash flows from investing activities:
Acquisition of American Fidelity Insurance
Company...................................................... (34,991) -- --
Capital contribution to subsidiaries.......................... (15,000) (500) (10,000)
Fixed maturities, at market:
Purchases................................................... (807) (1,051) (547)
Sales....................................................... 475 335 --
Calls or maturities......................................... 1,072 349 2,632
Equity securities:
Purchases................................................... (47,597) (49,390) (20,105)
Sales....................................................... 42,934 48,675 16,461
Increase in short term cash investments, net.................. (3,344) (2,708) (365)
Other, net.................................................... -- -- 31
-------- -------- --------
Net cash used in investing activities..................... (57,258) (4,290) (11,893)
Cash flows from financing activities:
Additions to notes payable.................................... 75,000 -- 25,000
Principal payments on notes payable........................... (25,000) -- (15,000)
Dividends paid to shareholders................................ (26,291) (21,837) (19,100)
Stock options exercised....................................... 1,324 458 275
-------- -------- --------
Net cash used in financing activities...................... 25,033 (21,379) (8,825)
Net increase (decrease) in cash................................ 284 (143) (351)
Cash:
Beginning of the year........................................ (1,340) (1,197) (846)
-------- -------- --------
End of the year.............................................. $ (1,056) $ (1,340) $ (1,197)
======== ======== ========
</TABLE>
See notes to condensed financial information.
S-6
<PAGE>
SCHEDULE II, Continued
MERCURY GENERAL CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTES TO CONDENSED FINANCIAL INFORMATION
December 31, 1996 and 1995
The accompanying condensed financial information should be read in
conjunction with the consolidated financial statements and notes included in
this statement.
Management Fee Income
Under a management agreement, the Company performs management services for
its subsidiaries which include all underwriting and claims servicing functions.
The Company is compensated by monthly reimbursement of expenses paid.
Dividends Received From Subsidiaries
Dividends of $27,700,000, $24,500,000, and $20,000,000 were received by the
Company from its wholly-owned subsidiaries in 1996, 1995 and 1994, respectively,
and are recorded as a reduction to Investment in Subsidiaries.
Cash Overdraft
At December 31, 1996 and 1995, the Company had cash overdrafts of $1,056,000
and $1,340,000, respectively which are classified in "other liabilities" in the
accompanying condensed balance sheet.
S-7
<PAGE>
SCHEDULE IV
MERCURY GENERAL CORPORATION
REINSURANCE
THREE YEARS ENDED DECEMBER 31, 1996
AMOUNTS IN THOUSANDS
<TABLE>
<CAPTION>
Ceded to
Gross other Net
amount companies Assumed amount
-------- --------- ------- --------
Property and Liability insurance
<S> <C> <C> <C> <C>
1996............................ $757,447 $3,138 $415 $754,724
1995............................ $619,404 $3,444 $366 $616,326
1994............................ $530,224 $1,321 $487 $529,390
</TABLE>
S-8
<PAGE>
EXHIBIT INDEX
3.1** Articles of Incorporation of the Company, as amended to date.
3.2@@ By-laws of the Company, as amended to date.
4.1* Shareholders' Agreement dated as of October 7, 1985 among the
Company, George Joseph and Gloria Joseph.
10.1* Form of Agency Contract.
10.2# Management Agreement, as amended, effective July 1, 1992, among
the Company, Mercury Casualty Company, Mercury Insurance Company
and California Automobile Insurance Company.
10.3## Profit Sharing Plan, as Amended and Restated as of March 11, 1994.
10.4## ESOP Feature Trust Agreement between the Company and Wells Fargo
Bank, N.A., as Trustee, effective March 1, 1994.
10.5## ESOP Loan Agreement between Union Bank and Wells Fargo Bank, N.A.,
as Trustee, of the Mercury General Corporation ESOP Feature Trust
dated as of March 11, 1994.
10.6## Continuing Guaranty, dated as of March 11, 1994, executed by
Mercury General Corporation in favor of Union Bank.
10.7** Amendment 1994-I to the Mercury General Corporation Profit Sharing
Plan.
10.8** Amendment 1994-II to the Mercury General Corporation Profit
Sharing Plan.
10.9 Amendment 1996-I to the Mercury General Corporation Profit Sharing
Plan.
10.10 Amendment 1997-I to the Mercury General Corporation Profit Sharing
Plan.
10.11 Revolving Credit Agreement by and among Mercury General
Corporation, the Lenders Party Thereto and The Bank of New York,
as Agent dated as of November 21, 1996.
10.12** Property Per Risk Excess of Loss Reinsurance Agreement between
National Reinsurance Corporation and Mercury Casualty Company,
effective April 1, 1995.
10.13** Endorsement No. 1 to the Property Per Risk Excess of Loss
Agreement effective April 1, 1995.
10.14@@ Endorsement No. 2 to the Property Per Risk Excess of Loss
Agreement effective April 1, 1995.
10.15@@ Endorsement No. 3 to the Property Per Risk Excess of Loss
Agreement effective April 1, 1995.
10.16@@ Management Agreement effective January 1, 1995 between the
Company and Mercury Insurance Company of Illinois.
10.17@@ Management Agreement effective January 1, 1995 between the
Company and Mercury Indemnity Company of Illinois.
10.18@@ Management Agreement effective January 1, 1995 between the
Company and Mercury Insurance Company of Georgia.
10.19@@ Management Agreement effective January 1, 1995 between the
Company and Mercury Indemnity Company of Georgia.
10.20@ The 1995 Equity Participation Plan.
10.21 Stock Purchase Agreement between Mercury General Corporation as
Purchaser and AFC as Seller dated November 15, 1996.
21.1 Subsidiaries of the Company.
23.1 Accountants' Consent.
27.1 Financial Data Schedule
<PAGE>
* This document was filed as an exhibit to Registrant's Registration
Statement on Form S-1, File No. 33-899, and is incorporated herein
by this reference.
# This document was filed as an exhibit to Registrant's Form 10-K for
the fiscal year ended December 31, 1992, and is incorporated herein
by this reference.
## This document was filed as an exhibit to Registrant's Form 10-K for
the fiscal year ended December 31, 1993, and is incorporated herein
by this reference.
** This document was filed as an exhibit to Registrant's Form 10-K for
the fiscal year ended December 31, 1994, and is incorporated herein
by this reference.
@ This document was filed as an exhibit to Registrant's Form S-8 filed
on March 8, 1996 and is incorporated herein by this reference.
@@ This document was filed as an exhibit to Registrant's Form 10-K for
the fiscal year ended December 31, 1995, and is incorporated herein
by this reference.
(b) Reports on Form 8-K:
None
<PAGE>
EXHIBIT 10.9
AMENDMENT 1996-I TO
MERCURY GENERAL CORPORATION
PROFIT SHARING PLAN
WHEREAS, Mercury General Corporation (the "Company") maintains the
Mercury General Corporation Profit Sharing Plan (the "Plan"); and
WHEREAS, pursuant to Section 9.1 of the Plan, the Company has the
right to amend the Plan; and
WHEREAS, the Internal Revenue Service has requested certain changes in
the Plan as a condition for issuing a favorable determination letter with
respect to the Plan.
NOW, THEREFORE, the Plan is hereby amended as follows, effective as of
January 1, 1987:
1. Section 3.6(a) of the Plan is amended by changing the period at
the end of the last sentence thereunder to a comma, and inserting the following
immediately thereafter:
"which percentage of Compensation may be expressed in increments of
1/4 of 1%."
2. The second sentence of Section 3.6(b) of the Plan is amended to
read as follows:
1
<PAGE>
"For purposes of the preceding sentence, the Company, in its sole
discretion, may treat all or any part of its Company Contributions and
Employer Matching Contributions as Compensation Deferrals if the
conditions of Treasury Regulations Section 1.401(k)-1(b)(5) are
satisfied."
3. Section 3.6(b) of the Plan is further amended by adding the
following at the end thereof:
"For purposes of this Section 3.6, (1) all elective contributions that
are made under two or more plans that are aggregated for purposes of
Code Section 401(a)(4) or 410(b) (other than Code Section
410(b)(2)(A)(ii)) shall be treated as made under a single plan which
must satisfy Code Sections 401(a)(4) and 410(b) as though they were a
single plan; (2) if this Plan and one or more other plans are
permissively aggregated for purposes of Section 401(k) of the Code,
such aggregated plans must also satisfy Section 401(a)(4) and 410(b)
of the Code as though they were a single plan; and (3) the actual
deferral percentage of a Highly Compensated Employee shall be
determined by treating all cash or deferred arrangements under which
the Highly Compensated Employee is eligible (other than those that may
not be permissively aggregated) as a single arrangement."
2
<PAGE>
4. Section 3.6(d)(l) of the Plan is amended by deleting the last
sentence thereunder and by inserting the following in lieu thereof:
"The amount of excess Compensation Deferrals to be distributed or
recharacterized shall be reduced by excess Compensation Deferrals
previously distributed under Section 3.5(b) for the taxable year
ending with or within such Plan Year and by excess Employer Matching
Contributions distributed or recharacterized for the Plan Year
beginning in such taxable year. Recharacterized excess Compensation
Deferrals shall remain subject to the nonforfeitability requirements
and distribution limitations that apply to Compensation Deferrals."
5. Section 3.7(b) of the Plan is amended by adding the following at
the end thereof:
"For purposes of this Section 3.7, the test for multiple use of the
alternative limitation provided under Treasury Regulation Section
1.401(m)-2(b) shall be applied. An excess Contribution Deferral that
is recharacterized shall be taken into account in the Plan Year in
which the contribution would have been received in cash by the
Participant had the Participant not elected to defer the amounts; an
Employer Matching
3
<PAGE>
Contribution shall be taken into account for a Plan Year only if it is
paid to the Trust Fund by the end of the 12th month following the
close of that year; and Employer Matching Contributions or Company
Contributions which are used to meet the requirements of Section
401(k)(3)(A) of the Code shall not be taken into account. All
contributions that are made under two or more plans that are
aggregated for purposes of Sections 401(a)(4) and 410(b) of the Code
(other than Section 410(b)(2)(A) of the Code) shall be treated as made
under a single plan. Further, if this Plan and one or more other
plans are permissively aggregated for purposes of Section 401(m) of
the Code, such aggregated plans must also satisfy Sections 401(a)(4)
and 410(b) of the Code as though they were a single plan. The
contribution percentage of a Highly Compensated Employee who is
eligible to participate in more than one plan maintained by the
Company or Related Company to which the Employer Matching
Contributions are made shall be calculated by treating all plans
subject to Section 401(m) of the Code under which the Highly
Compensated Employee is eligible to participate (other than those that
may not be permissively aggregated) as a single plan. The method of
correction for multiple use, if any, shall be made by reducing the
actual deferral percentage, the actual contribution percentage of
Highly Compensated Employees, or a combination of
4
<PAGE>
the two, in the manner described in Treasury Regulation Section
1.401(m)-(2)(c)(3)."
6. Section 3.7(c)(1) of the Plan is amended by inserting the
following immediately after the penultimate sentence thereunder:
"The vested portion of any excess contributions, together with any
earnings attributable thereto through the date of distribution, shall
be distributed to the Participant within the 2-1/2 month period
following the close of the Plan Year to the extent feasible, and in
all events no later than 12 months after the close of the Plan Year.
Failure to correct any excess contributions within the 2-1/2 month
period following the close of the Plan Year shall result in the excise
tax described in Section 1.401(m)-1(e)(5) of the Treasury Regulations.
The earnings attributable to the vested portion of any excess
contributions shall be determined in accordance with Treasury
Regulations."
7. Section 4.2 of the Plan is amended by inserting the following
immediately after the penultimate sentence thereunder:
"The terms of any Acquisition Loan, and the repayment of principal and
interest thereon, shall in all events
5
<PAGE>
comply with Section 54.4975-7(b)(5) of the Treasury Regulations.
Furthermore, any assets of the ESOP Fund attributable to Leveraged
Shares acquired by the ESOP Trustee in a transaction to which Section
1042 of the Code applies cannot accrue for the benefit of any person
described in Section 409(n)(1) of the Code during the nonallocation
period described in Section 409(n)(2)(C) of the Code."
8. Section 4.4(g) of the Plan is amended in its entirety to read as
follows:
"(g) Except as otherwise required or permitted by the Code, the
put options under this Section 4.4 shall satisfy the requirements of
Sections 54.4975-7(b) and 54.4975-11(a)(7)(i) of the Treasury
Regulations to the extent, if any, that such requirements apply to
such put options."
9. Section 7.1(d)(1) is amended by adding the following at the end
thereof:
"Distribution of a Participant's ESOP Account under this Section
7.1(d)(1) shall, subject to Section 4.5, be made in shares of Stock,
cash, or a combination of both, as determined by the Committee;
provided, however, that if the nonforfeitable balance in the
6
<PAGE>
Participant's Accounts as adjusted, if required, under Section 3.9
plus any contributions to the Participant's Accounts during the Plan
Year exceeds $3,500, the Committee shall notify the Participant of his
right to demand distribution of his ESOP Account entirely in whole
shares of Stock (with the value of any fractional share paid in
cash)."
10. Section 7.1(e) of the Plan is amended by adding the following at
the end thereof:
"An explanation of the Participant's right to defer distribution of
the nonforfeitable balance of his Accounts shall be provided to the
Participant no less than 30 days and no more than 90 days before the
date such distribution is to be made (consistent with such regulations
as the Secretary of the Treasury may prescribe). If the Participant
does not so consent, the distribution of the amounts payable shall be
delayed pursuant to the first sentence of this subsection (e).
However, to the extent that the nonforfeitable balance of a
terminating Participant's Accounts is a distribution to which Sections
401(a)(11) and 417 of the Code do not apply, such distribution may
commence less than 30 days after the notice described in the preceding
sentence is given, provided that: (1) the Committee clearly informs
the Participant that the
7
<PAGE>
Participant has the right to a period of at least 30 days after
receiving the notice to consider the decision of whether or not to
elect a distribution (and, if applicable, a particular distribution
option), and (2) the Participant, after receiving the notice,
affirmatively elects an immediate distribution."
11. Section 7.2(c) of the Plan is amended by adding the following at
the end thereof:
"In either event, such benefit payable to the surviving Spouse shall
commence immediately. Notwithstanding the foregoing, if the single-
sum value of the benefit payable to the surviving Spouse is $3,500 or
less, such benefit shall be paid to the surviving Spouse in a single-
sum."
12. Section 7.2(d) of the Plan is amended in its entirety to read as
follows:
"(d) For purposes of this Section 7.2, the following terms shall have
the meaning specified below:
(1) Election Period: For a Participant who separates from service
before attaining age 35, the Election Period commences one year before his
Break in Employment and ends one year after his Break in Employment. For
any other Participant, the Election Period is whichever of the
8
<PAGE>
following periods ends last: (1) the period beginning with the first day of
the Plan Year in which the Participant reaches age 32, and ending with the
day before the first day of the Plan Year in which the Participant reaches
age 35, or (2) the period ending 1 year after the individual becomes a
Participant. A Participant may elect to waive the Qualified Joint and
Survivor Annuity or Qualified Preretirement Survivor Annuity commencing the
first day of the Plan Year in which he attains age 35. Prior to such time
a Participant shall not be allowed to waive the Qualified Joint and
Survivor Annuity or Qualified Preretirement Survivor Annuity unless the
Participant incurs a Break in Employment, in which case the period during
which an election to waive may be made shall commence on the date of his
Break in Employment. A Participant may revoke his waiver at any time.
(2) Qualified Election: A waiver of a Qualified Joint and Survivor
Annuity or a Qualified Preretirement Survivor Annuity. The waiver must be
in writing and must be consented to by the Participant's Spouse. The
Spouse's consent to a waiver must be witnessed by a Plan representative or
notary public. Notwithstanding this consent requirement, if the
Participant establishes to the satisfaction of a Plan representative that
such written consent may not be obtained because there is no Spouse or the
Spouse cannot be located, a waiver will be deemed a Qualified Election.
The Participant's waiver and the
9
<PAGE>
Spouse's consent shall state the specific nonspouse Beneficiary or
Beneficiaries, which may not be modified without subsequent consent from
the Spouse (unless the Spouse's initial consent expressly provides
otherwise), and the Spouse's consent shall acknowledge the effect of the
Participant's election. A revocation of a prior waiver may be made by a
Participant without the consent of the Spouse at any time before the
commencement of benefits. The number of revocations shall not be limited.
(3) Qualified Joint and Survivor Annuity: An annuity that commences
immediately for the life of the Participant with a survivor annuity for the
life of the Spouse which is not less than 50 percent and not more than 100
percent of the amount of the annuity which is payable during the joint
lives of the Participant and the Spouse and which is the amount of benefit
that can be purchased with the Participant's vested Account. For a
Participant who is not married, Qualified Joint and Survivor Annuity means
a straight life annuity.
(4) Qualified Preretirement Survivor Annuity: The benefit described
in Section 7.2(c).
(5) Spouse (surviving Spouse): The spouse or surviving spouse of the
Participant, provided that a former spouse will be treated as the spouse of
surviving spouse to the extent provided under a qualified domestic
relations order as described in Section 414(p) of the Code."
10
<PAGE>
13. Section 7.2(e) of the Plan is amended in its entirety to read as
follows:
"(e)(1) In the case of a Qualified Joint and Survivor annuity as
described in Section 7.2(d)(3), the Committee shall provide each Participant
within a reasonable period prior to the commencement of benefits a written
explanation of: (i) the terms and conditions of a Qualified Joint and Survivor
Annuity; (ii) the Participant's right to make and the effect of an election to
waive the Qualified Joint and Survivor Annuity form of benefit; (iii) the rights
of the Participant's Spouse with regard to such Spouse's required consent to the
Participant's waiver; and (iv) the Participant's right to make, and the effect
of, a revocation of a previous election to waive the Qualified Joint and
Survivor Annuity. This explanation shall be provided to the Participant no less
than 30 days and no more than 90 days before the date benefit payments would
commence (and consistent with such regulations as the Secretary of the Treasury
may prescribe). The written explanation shall include an explanation of the
eligibility conditions, other material features, and relative values of the
optional forms of benefits under the Plan, as well as a general explanation of
the relative financial effect on a Participant's benefit of the waiver of the
Qualified Joint and Survivor Annuity.
(2) In the case of a Qualified Preretirement Survivor Annuity as
described in Section 7.2(c), the Committee shall
11
<PAGE>
provide each Participant within the Election Period a written explanation of the
Qualified Preretirement Survivor Annuity in such terms and in such manner as
would be comparable to the explanation provided for meeting the requirements of
Section 7.2(e)(1) applicable to a Qualified Joint and Survivor Annuity."
14. Section B.5(b) of Appendix B to the Plan is amended by adding the
following at the end thereof:
"With respect to Plan Years commencing on or after January 1, 1989,
the $200,000 limitation in the foregoing sentence shall not apply;
instead, the limitations described in the Plan's definition of
`Compensation' under Section 1.2 shall apply with respect to such Plan
Years."
IN WITNESS WHEREOF, the Company has caused this document to be
executed by its duly authorized officer this ________ day of ________________,
19___.
MERCURY GENERAL CORPORATION
By_________________________
Its________________________
12
<PAGE>
EXHIBIT 10.10
AMENDMENT 1997-1
MERCURY GENERAL CORPORATION
PROFIT SHARING PLAN
WHEREAS, Mercury General Corporation (the "Company") maintains the
Mercury General Corporation Profit Sharing Plan (the "Plan"); and
WHEREAS, pursuant to Section 9.1 of the Plan, the Company has the
right to amend the Plan; and
WHEREAS, the Company recently acquired American Fidelity Insurance
Company ("AFI"), employees of which were Participants in the American Fidelity
Companies Employees Savings Plan ("American Fidelity Plan"); and
WHEREAS, this Company agreed to accept to accept a direct transfer of
assets and liabilities from the American Fidelity Plan to this Plan on behalf of
those employees of AFI who did not have outstanding loan balances from the
American Fidelity Plan at the time of such transfer;
NOW, THEREFORE, the Plan is hereby amended to add the following
"American Fidelity Appendix," which sets forth Plan provisions applicable to the
transfer of assets and liabilities from the American Fidelity Plan, effective as
of the date of such transfer of assets and liabilities:
<PAGE>
"AMERICAN FIDELITY APPENDIX
1. TRANSFER OF ASSETS AND LIABILITIES. This Plan hereby accepts a
transfer of assets and liabilities from the American Fidelity Companies
Employees Savings Plan ("American Fidelity Plan"). The assets and liabilities
transferred shall be the assets and liabilities attributable as of the date of
transfer to the Participants in the American Fidelity Plan who were employees of
American Fidelity Insurance Company ("AFI") as of the date of the acquisition by
the Company of AFI, excluding, however, all assets and liabilities attributable
to employees of AFI who, as of the date of the transfer of assets and
liabilities, had any outstanding loan balance under the American Fidelity Plan.
2. ACCOUNTS. The Committee under this Plan shall credit the amounts
transferred from the American Fidelity Plan to appropriate accounts established
for the employees involved in the transfer. In the discretion of the Committee,
the amounts transferred from the American Fidelity Plan may be commingled with
the corresponding accounts under this Plan, or may be kept as separate, non-
commingled accounts. The accounts under the American Fidelity Plan and the
corresponding accounts under this Plan (if any) are set forth below:
2
<PAGE>
<TABLE>
<CAPTION>
AMERICAN FIDELITY MERCURY GENERAL
PLAN ACCOUNTS PLAN ACCOUNTS
----------------- ---------------
<S> <C>
Employer Company Contribution
Contributions and/or Employer Matching
Employee Contribution (None)
Rollover Rollover
Contribution Deferral 401(k)
</TABLE>
3. INVESTMENTS. Initially upon the transfer of assets and
liabilities to this Plan, the Committee shall determine which of the investment
funds under this Plan the transferred amounts should be invested. Following
such initial investment, each Participant shall be allowed to reallocate the
amounts credited to the Participants' accounts among the various investment
funds permitted under this Plan, according to this Plan's generally-applicable
rules concerning such elections, including but not limited to the dates on which
changes in investment funds are generally permitted under this Plan, and the
generally-applicable rules concerning the timing and form of employee
notifications concerning investment changes.
4. DISTRIBUTION. As required by Internal Revenue Code Section
411(d)(6), the distribution options available to the former Participants in the
American Fidelity Plan shall remain available to such Participants under this
Plan. Accordingly, the following rules shall apply to such Participants:
3
<PAGE>
a. Accounts with an aggregate vested balance of $3,500 or less
shall be paid in a lump sum.
b. If such a Participant has an aggregate vested account balance
in excess of $3,500, then the Participant may elect among the following
distribution options:
(1) lump sum distribution;
(2) substantially equal payments in monthly, quarterly,
semi-annual or annual installments;
(3) purchase of an annuity contract issued by an insurance
company selected by the Committee.
Notwithstanding the foregoing, the automatic form of distribution to
such a Participant shall be the qualified joint and survivor annuity form of
distribution. The rules concerning the qualified joint and survivor annuity
shall be the same rules as set forth in the Plan for pre-1991 account balances,
including but not limited to the rules concerning waiver of the qualified joint
and survivor annuity, and the required consent to such waiver by the spouse of
the Participant, if any.
If the Committee does not create commingled Accounts for the amounts
transferred from the American Fidelity Plan, then the distribution options set
forth above with respect to former
4
<PAGE>
American Fidelity Participants shall only apply to the non-commingled Accounts
which represent the amounts transferred from the American Fidelity Plan. If the
Committee creates commingled Accounts, then the above distribution options shall
apply to all distributions made to former American Fidelity Plan Participants.
5. WITHDRAWAL OF AFTER-TAX CONTRIBUTIONS. Subject to the
requirement of a waiver of the qualified joint and survivor annuity (and the
spousal consent required for such waiver) former American Fidelity Plan
Participants with amounts credited as employee contributions may withdraw all or
part of the benefit represented by such employee contributions."
IN WITNESS WHEREOF, this Amendment 1997-1 is hereby adopted this ____
day of ____________, 1997
MERCURY GENERAL CORPORATION
By________________________________________
Its_______________________________________
5
<PAGE>
EXHIBIT 10.11
================================================================================
================================================================================
REVOLVING CREDIT AGREEMENT
BY AND AMONG
MERCURY GENERAL CORPORATION,
THE LENDERS PARTY HERETO,
AND
THE BANK OF NEW YORK, AS AGENT
________________
$75,000,000
________________
DATED AS OF NOVEMBER 21, 1996
<PAGE>
REVOLVING CREDIT AGREEMENT, dated as of November 21, 1996, by and among
MERCURY GENERAL CORPORATION, a California corporation (the "BORROWER"), the
lenders party hereto (collectively, together with their respective assigns, the
"LENDERS", and each a "LENDER") and THE BANK OF NEW YORK, as agent for the
Lenders (in such capacity, the "AGENT").
1. DEFINITIONS AND PRINCIPLES OF CONSTRUCTION
------------------------------------------
1.1. Definitions
-----------
As used in this Agreement, terms defined in the preamble have the
meanings therein indicated, and the following terms have the following meanings:
"ABR Advances": the Loans (or any portions thereof) at such time as
they (or such portions) are made and/or being maintained at a rate of interest
based upon the Alternate Base Rate.
"Accountants": KPMG Peat Marwick (or any successor thereto), or such
other firm of certified public accountants of recognized national standing
selected by the Borrower and reasonably satisfactory to the Agent.
"Acquisition": with respect to any Person, the purchase or other
acquisition by such Person, by any means whatsoever (including by devise,
bequest, gift, through a dividend or otherwise and whether in a single
transaction or in a series of related transactions), of (i) the Capital Stock
of, or other equity securities of, any other Person if, immediately thereafter,
such other Person would be either a Subsidiary of such Person or otherwise under
the control of such Person, (ii) any business, going concern or division or
segment thereof, or (iii) the Property of any other Person other than in the
ordinary course of business, provided, however, that no acquisition of all or
substantially all of the assets of such other Person shall be deemed to be in
the ordinary course of business.
"Adjusted Net Worth": at any date of determination, the sum of all
amounts which would be included under shareholders' equity on a Consolidated
balance sheet of the Borrower determined in accordance with GAAP (without
adjusting the value of securities held by the Borrower or its Subsidiaries to
market value as contemplated under FASB 115 for securities designated as
"available for sale").
1
<PAGE>
"Advance": an ABR Advance or a Eurodollar Advance, as the case may be.
"Affected Advance": defined in Section 2.9.
"Affected Principal Amount": in the event that (i) the Borrower shall
fail for any reason to borrow, convert or continue after it shall have notified
the Agent of its intent to do so in any instance in which it shall have
requested a Eurodollar Advance, an amount equal to the principal amount of such
Eurodollar Advance; (ii) a Eurodollar Advance shall terminate pursuant to the
provisions hereof prior to the last day of the Interest Period applicable
thereto, an amount equal to the principal amount of such Eurodollar Advance; and
(iii) the Borrower shall prepay or repay all or any part of the principal amount
of a Eurodollar Advance prior to the last day of the Interest Period applicable
thereto, an amount equal to the principal amount of such Eurodollar Advance so
prepaid or repaid.
"Affiliate": as to any Person, any other Person which, directly or
indirectly, is in control of, is controlled by, or is under common control with,
such Person. For purposes of this definition, control of a Person shall mean
the power, direct or indirect, (i) to vote 5% or more of the securities or other
interests having ordinary voting power for the election of directors or other
managing Persons thereof or (ii) to direct or cause the direction of the
management and policies of such Person, whether by contract or otherwise.
"Aggregate Commitments": on any date, the sum of all Commitments on
such date.
"Agreement": this Revolving Credit Agreement, as the same may be
amended, supplemented or otherwise modified from time to time.
"Alternate Base Rate": on any date, a rate of interest per annum equal
to the higher of (i) the Federal Funds Rate in effect on such date plus 1/2 of
1% or (ii) the BNY Rate in effect on such date.
"Annual Statement": defined in Section 4.13(b).
"Applicable Insurance Code": with respect to any Insurance Subsidiary,
the insurance code of any jurisdiction where such Insurance Subsidiary is
domiciled or is conducting an insurance business, as in effect from time to time
and including any successor code or statute thereto, together with the
regulations issued thereunder.
"Applicable Insurance Regulatory Authority": with respect to any
Insurance Subsidiary, the insurance department or similar Governmental Authority
located in the jurisdiction in which such Insurance Subsidiary is domiciled and,
to the extent that it has any regulatory authority over such Insurance
Subsidiary, in each other jurisdiction in which such In surance Subsidiary is
licensed.
"Applicable Lending Office": in respect of any Lender, (i) in the case
of such Lender's ABR Advances, its Domestic Lending Office and (ii) in the case
of such Lender's Eurodollar Advances, its Eurodollar Lending Office.
2
<PAGE>
"Applicable Margin": (i) with respect to the unpaid principal balance
of ABR Advances, the applicable percentage set forth below in the column
entitled "ABR Advances", (ii) with respect to the unpaid principal balance of
Eurodollar Advances, the applicable percentage set forth below in the column
entitled "Eurodollar Advances", and (iii) with respect to the Commitment Fee,
the applicable percentage set forth below in the column entitled "Commitment
Fee"; in each case opposite the applicable Pricing Level:
3
<PAGE>
<TABLE>
<CAPTION>
ABR Eurodollar Commitment
Pricing Level Advances Advances Fee
- ------------------- -------- ---------- -----------
<S> <C> <C> <C>
Pricing Level I 0% 0.5000% .1875%
Pricing Level II 0% 0.6250% .2500%
</TABLE>
Changes in the Applicable Margin resulting from a change in Pricing Level shall
become effective upon the earlier of the delivery by the Borrower to the Agent
of a certificate pursuant to Section 7.1(d) and the date such certificate is
required to be delivered pursuant to such Section.
"Assignment and Acceptance Agreement": an assignment and acceptance
agreement executed by an assignor and an assignee pursuant to which the assignor
assigns to the assignee all or any portion of such assignor's Notes and
Commitment, substantially in the form of Exhibit D.
"Assignment Fee": defined in Section 11.6(b).
"Authorized Signatory": as to (i) any Person which is a corporation,
the chairman of the board, the president, any vice president, the chief
financial officer or any other duly authorized officer (acceptable to the
Agent) of such Person and (ii) any Person which is not a corporation, the
general partner or other managing Person thereof.
"Benefited Lender": defined in Section 11.8.
"BNY": The Bank of New York.
"BNY Rate": a rate of interest per annum equal to the rate of interest
publicly announced in New York City by BNY from time to time as its prime
commercial lending rate, such rate to be adjusted automatically (without notice)
on the effective date of any change in such publicly announced rate.
"Borrowing Date": any Business Day specified in (i) a Borrowing
Request as a date on which the Borrower requests the Lenders to make Loans.
"Borrowing Request": a request for Loans in the form of Exhibit C.
"Business Day": for all purposes other than as set forth in clause
(ii) below, (i) any day other than a Saturday, Sunday or a day on which
commercial banks located in New York City and Los Angeles are authorized or
required by law or other governmental action to close and (ii) with respect to
all notices and determinations in connection with, and payments of principal and
interest on, Eurodollar Advances, any day which is a Business Day described in
clause (i) above and which is also a day on which dealings in foreign currency
and exchange and Eurodollar funding between banks may be carried on in London,
England.
4
<PAGE>
"Capital Lease Obligations": with respect to any Person, the
obligations of such Person with respect to leases which, in accordance with
GAAP, are required to be capitalized on the financial statements of such Person.
"Code": the Internal Revenue Code of 1986, as amended from time to
time, or any successor thereto, and the rules and regulations issued thereunder,
as from time to time in effect.
"Commitment": in respect of any Lender, such Lender's under taking
during the Commitment Period to make Loans, subject to the terms and conditions
hereof, in an aggregate outstanding principal amount not exceeding the amount
set forth next to the name of such Lender in Exhibit A under the heading
"Commitments", as such amount may be reduced pursuant to Section 2.4.
"Commitment Fee": defined in Section 3.1.
"Commitment Period": the period from the Effective Date until the
Business Day immediately preceding the Maturity Date.
"Commitment Percentage": as to any Lender, the percentage set forth
opposite the name of such Lender in Exhibit A under the heading "Commitment
Percentage".
"Compensatory Interest Payment": defined in Section 2.7(c).
"Consolidated": the Borrower and its Subsidiaries which are
consolidated for financial reporting purposes.
"Consolidated Statutory Capital and Surplus": at any date the
consolidated statutory capital and surplus of the Borrower and its Subsidiaries
determined as of such date in accordance with SAP.
"Consolidating": the Borrower and its Subsidiaries taken separately.
"Contingent Obligation": as to any Person (the "secondary obligor"),
-----------------
any obligation, without duplication, of such secondary obligor (i) guaranteeing
or in effect guaranteeing any return on any investment made by another Person,
or (ii) guaranteeing or in effect guaranteeing any indebtedness, lease,
dividend or other obligation ("primary obligation") of any other Person (the
------------------
"primary obligor") in any manner, whether directly or indirectly, including,
- ----------------
without limitation, any obligation of such secondary obligor, whether
contingent, (A) to purchase any such primary obligation or any Property
constituting direct or indirect security therefor, (B) to advance or supply
funds (x) for the purchase or payment of any such primary
5
<PAGE>
obligation or (y) to maintain working capital or equity capital of the primary
obligor or otherwise to maintain the net worth or solvency of the primary
obligor, (C) to purchase Property, securities or services primarily for the
purpose of assuring the beneficiary of any such primary obligation of the
ability of the primary obligor to make payment of such primary obligation, (D)
otherwise to assure or hold harmless the beneficiary of such primary obligation
against loss in respect thereof, and (E) in respect of the liabilities of any
partnership in which such secondary obligor is a general partner, except to the
extent that such liabilities of such partnership are nonrecourse to such
secondary obligor and its separate Property, provided, however, that the term
"Contingent Obligation" shall not include (1) amounts potentially owed on or
with respect to insurance policies issued or sold in the ordinary course of
business, (2) premiums for any such policies, to the extent attributable to a
period after a particular date upon which Contingent Obligations are being
determined or (3) the indorsement of instruments for deposit or collection in
the ordinary course of business. The amount of any Contingent Obligation of a
Person shall be deemed to be an amount equal to the stated or determinable
amount of the primary obligation in respect of which such Contingent Obligation
is made or, if not stated or determinable, the maximum reasonably anticipated
liability in respect thereof as determined by such Person in good faith.
"Control Person": defined in Section 2.12.
"Conversion/Continuation Date": the date on which (i) a Eurodollar
Advance is converted to an ABR Advance, (ii) the date on which an ABR Advance is
converted to a Eurodollar Advance or (iii) the date on which a Eurodollar
Advance is continued as a new Eurodollar Advance.
"Default": any event or condition which constitutes an Event of
Default or which, with the giving of notice, the lapse of time, or any other
condition, would, unless cured or waived, become an Event of Default.
"Disposition": with respect to any Person, any sale, ceding,
assignment, transfer or other disposition by such Person, by any means, of (a)
any Operating Entity, or (b) any other Property of such Person, provided,
however, that the term "Disposition" shall not include any sale, ceding,
assignment, transfer or other disposition by a Person that is a corporation (i)
to a wholly-owned Subsidiary of that Person or (2) as a dividend to that
Person's shareholders.
"Dollars" and "$": lawful currency of the United States of America.
"Domestic Lending Office": in respect of any Lender, initially, the
office or offices of such Lender designated as such on Schedule 1.1; thereafter,
such other office of such Lender through which it shall be making or maintaining
ABR Advances, as reported by such Lender to the Agent and the Borrower.
"EBITDA": for any period, net income of the Borrower and its Non-
Insurance Subsidiaries for such period, determined on a Consolidated basis in
accordance with GAAP, plus the sum of, without duplication, (i) Interest
Expense, (ii) provision for income taxes of the Borrower and its Non-Insurance
Subsidiaries and (iii) depreciation, amortization and other non-cash charges of
the Borrower and its Non-Insurance Subsidiaries, each to the extent
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deducted in determining such net income for such period.
"Effective Date": November 21, 1996.
"Employee Benefit Plan": an employee benefit plan within the meaning
of Section 3(3) of ERISA maintained, sponsored or contributed to by the
Borrower, any of its Subsidiaries or any ERISA Affiliate.
"Environmental Laws": any and all federal, state and local laws
relating to the environment, the use, storage, transporting, manufacturing,
handling, discharge, disposal or recycling of hazardous substances, materials or
pollutants or industrial hygiene, and including, without limitation, (i) the
Comprehensive Environmental Response, Compensation and Liability Act, as
amended, 42 USCA (S)9601 et seq.; (ii) the Resource Conservation and Recovery
-- ---
Act of 1976, as amended, 42 USCA (S)6901 et seq.; (iii) the Toxic Substance
-- ---
Control Act, as amended, 15 USCA (S)2601 et. seq.; (iv) the Water Pollution
-- ---
Control Act, as amended, 33 USCA (S)1251 et. seq.; (v) the Clean Air Act, as
-- ---
amended, 42 USCA (S)7401 et seq.; (vi) the Hazardous Material Transportation
Act, as amended, 49 USCA (S)1801 et seq. and (viii) all rules, regulations,
-- ---
judgments, decrees, injunctions and restrictions thereunder and any analogous
state law.
"ERISA": the Employee Retirement Income Security Act of 1974, as
amended from time to time, and the rules and regulations issued thereunder, as
from time to time in effect.
"ERISA Affiliate": when used with respect to an Employee Benefit Plan,
ERISA, the PBGC or a provision of the Code pertaining to employee benefit plans,
any Person that is a member of any group of organizations within the meaning of
Sections 414(b), (c), (m) or (o) of the Code of which the Borrower or any of its
Subsidiaries is a member.
"Eurodollar Advances": collectively, the Loans (or any portions
thereof) at such time as they (or such portions) are made and/or being
maintained at a rate of interest based upon the Eurodollar Rate.
"Eurodollar Lending Office": in respect of any Lender, initially the
office, branch or affiliate of such Lender designated as such on Schedule 1.1
(or, if no such office branch or affiliate is specified, its Domestic Lending
Office); thereafter, such other office, branch or affiliate of such Lender
through which it shall be making or maintaining Eurodollar Advances, as reported
by such Lender to the Agent and the Borrower.
"Eurodollar Rate": with respect to the Interest Period applicable to
any Eurodollar Advance, a rate of interest per annum, as determined by the
Agent, obtained by
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dividing (and then rounding to the nearest 1/16 of 1% or, if there is no nearest
1/16 of 1%, then to the next higher 1/16 of 1%):
(a) the rate, as reported by BNY to the Agent, quoted by BNY to
leading banks in the interbank eurodollar market as the rate at which BNY is
offering Dollar deposits in an amount equal approximately to the Eurodollar
Advance of BNY to which such Interest Period shall apply for a period equal to
such Interest Period, as quoted at approximately 11:00 A.M. two Business Days
prior to the first day of such Interest Period, by
(b) a number equal to 1.00 minus the aggregate of the then stated
maximum rates during such Interest Period of all reserve requirements
(including, without limitation, marginal, emergency, supplemental and special
reserves), expressed as a decimal, established by the Board of Governors of the
Federal Reserve System and any other banking authority to which BNY and other
major United States money center banks are subject, in respect of eurocurrency
funding (currently referred to as "Eurocurrency liabilities" in Regulation D of
the Board of Governors of the Federal Reserve System) or in respect of any other
category of liabilities including deposits by reference to which the interest
rate on Eurodollar Advances is determined or any category of extensions of
credit or other assets which includes loans by non-domestic offices of any
Lender to United States Residents. Such reserve requirements shall include,
without limitation, those imposed under such Regulation D. Eurodollar Advances
shall be deemed to constitute Eurocurrency liabilities and as such shall be
deemed to be subject to such reserve requirements without benefit of credits for
proration, exceptions or offsets which may be available from time to time to any
Lender under such Regulation D. The Eurodollar Rate shall be adjusted
automatically on and as of the effective date of any change in any such reserve
requirement.
"Event of Default": any of the events specified in Section 9.1,
provided that any requirement for the giving of notice, the lapse of time, or
any other condition has been satisfied.
"Existing Agreement": the Revolving Credit Agreement, dated as of
December 20, 1994, among the Borrower, the Lenders party thereto and The Bank of
New York, as Agent.
"Existing Indebtedness": all amounts due and owning under the Existing
Agreement.
"Extension Request": defined in Section 2.17.
"Federal Funds Rate": for any day, a rate per annum (expressed as a
decimal, rounded upwards, if necessary, to the next higher 1/100 of 1%), equal
to the weighted average of the rates on overnight federal funds transactions
with members of the Federal Reserve System arranged by federal funds brokers on
such day, as published by the Federal Reserve Bank of New York on the Business
Day next succeeding such day, provided that (i) if the day for which such rate
is to be determined is not a Business Day, the Federal Funds Rate for such day
shall be such rate on such transactions on the next preceding Business Day as so
published on the next succeeding Business Day, and (ii) if such rate is not so
published for any day, the Federal Funds Rate for such day shall be the average
of the quotations for such day on such transactions received by BNY as
determined by BNY and reported to the Agent.
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"Financial Statements": defined in Section 4.13(a).
"GAAP": generally accepted accounting principles as from time to time
in effect in the United States.
"GAAP Net Worth": at any date of determination, the sum of all amounts
which would be included under shareholders' equity on a Consolidated balance
sheet of the Borrower determined in accordance with GAAP.
"Governmental Authority": any nation or government, any state or other
political subdivision thereof, any entity exercising executive, legislative,
judicial, regulatory or administrative functions of or pertaining to government
and any court or arbitrator (including, without limitation, any Applicable
Insurance Regulatory Authority).
"Hazardous Substance": any hazardous or toxic substance, material or
waste, including, but not limited to, (i) those substances, materials, and
wastes listed in the United States Department of Transportation Hazardous
Materials Table (49 CFR 172.101) or by the Environmental Protection Agency as
hazardous substances (40 CFR Part 302) and amendments thereto and replacements
therefor and (ii) any substance, pollutant or material defined as, or designated
in, any Environmental Law as a "hazardous substance," "toxic substance,"
"hazardous material," "hazardous waste," "restricted hazardous waste,"
"pollutant," "toxic pollutant" or words of similar import.
"Highest Lawful Rate": as to any Lender, the maximum rate of interest,
if any, that at any time or from time to time may be contracted for, taken,
charged or received by such Lender on the Notes held thereby or which may be
owing to such Lender pursuant to this Agreement and the other Loan Documents
under the laws applicable to such Lender and this transaction.
"Indebtedness": as to any Person, at a particular time, all items
which constitute, without duplication, (i) indebtedness for borrowed money or
the deferred purchase price of Property (other than trade payables and accrued
expenses incurred in the ordinary course of business), (ii) indebtedness
evidenced by notes, bonds, debentures or similar instruments, (iii) obligations
with respect to any conditional sale or title retention agreement, (iv)
indebtedness arising under acceptance facilities and the amount available to be
drawn under all letters of credit issued for the account of such Person and,
without duplication, all drafts drawn thereunder to the extent such Person
shall not have reimbursed the issuer in respect of the issuer's payment of such
drafts, (v) all liabilities secured by any Lien on any Property owned by such
Person even though such Person has not assumed or otherwise become liable for
the payment thereof (other than carriers', warehousemen's, mechanics',
repairmen's or other like non-consensual statutory Liens arising in the
ordinary course of business), (vi) obligations
9
<PAGE>
under Capital Lease Obligations and (vii) Contingent Obligations; provided that,
for purposes of this definition, (a) "Indebtedness" shall not include
obligations in respect of interest rate caps, collars, swaps or other similar
agreements, and (b) Indebtedness under clauses (iii) or (v) shall be taken at
the lesser of the principal amount of such Indebtedness and the value of the
property subject to the Lien referred to therein.
"Indemnified Person": defined in Section 11.10.
"Insurance Subsidiary": each Subsidiary of the Borrower set forth on
Schedule 4.1 under the heading "Engaged in an Insurance Business."
"Intellectual Property": all copyrights, trademarks, servicemarks,
patents, trade names and service names.
"Interest Coverage Ratio": at any date of determination, the ratio of
(i) the sum of (x) EBITDA of the Borrower and its Non-Insurance Subsidiaries for
the immediately preceding four fiscal quarters of the Borrower plus (y) the
----
greater of (1) 10% of Statutory Surplus of the Insurance Subsidiaries at such
date of determination and (2) Statutory Net Income of the Insurance Subsidiaries
for the immediately preceding four fiscal quarters of the Borrower to (ii)
Interest Expense for the immediately preceding four fiscal quarters of the
Borrower.
"Interest Expense": for any period, the sum of, without duplication,
all interest and commitment fees (adjusted to give effect to all interest rate
swap, cap or other interest rate hedging arrangements and fees and expenses
paid in connection with the same, all as determined in accordance with GAAP),
paid or accrued in respect of all Indebtedness of the Borrower and its
Subsidiaries determined on a Consolidated basis in accordance with GAAP during
such period.
"Interest Payment Date": (i) as to any ABR Advance, the last day of
each March, June, September and December commencing on the first of such days to
occur after such ABR Advance is made or any Eurodollar Advance is converted to
an ABR Advance, (ii) as to any Eurodollar Advance in respect of which the
Borrower has selected an Interest Period of one, two or three months, the last
day of such Interest Period, and (iii) as to any Eurodollar Advance in respect
of which the Borrower has selected an Interest Period of six months, the day
which is three months after the first day of such Interest Period and the last
day of such Interest Period.
"Interest Period": with respect to any Eurodollar Advance requested by
the Borrower, the period commencing on, as the case may be, the Borrowing Date
or Conversion/Continuation Date with respect to such Eurodollar Advance and
ending one, two, three or six months thereafter, as selected by the Borrower in
its irrevocable Borrowing Request or its irrevocable Notice of
Conversion/Continuation, provided, however, that (i) if any Interest Period
would otherwise end on a day which is not a Business Day, such Interest Period
shall be extended to the next succeeding Business Day unless the result of such
extension would be to carry such Interest Period into another calendar month, in
which event such Interest Period shall end on the immediately preceding Business
Day, (ii) any Interest Period pertaining that begins on the last Business Day of
a calendar month (or on a day for which there is no
10
<PAGE>
numerically corresponding day in the calendar month at the end of such Interest
Period) shall end on the last Business Day of a calendar month and (iii) the
Borrower shall select Interest Periods so as not to have more than five
different Interest Periods outstanding at any one time for all Loans.
"Leverage Ratio": as of any date, the ratio of (a) Consolidated
Indebtedness of the Borrower on such date, to (b) the sum of (i) Consolidated
Indebtedness of the Borrower on such date, plus (ii) Adjusted Net Worth on such
date.
"Lien": any mortgage, pledge, hypothecation, assignment, deposit or
preferential arrangement, encumbrance, lien (statutory or other), or other
security agreement or security interest of any kind or nature whatsoever,
including, without limitation, any conditional sale or other title retention
agreement and any capital or financing lease having substantially the same
economic effect as any of the foregoing.
"Loan Documents": collectively, this Agreement and the Notes.
"Loan" and "Loans": defined in Section 2.1.
"Margin Stock": any "margin stock", as defined in Regulation U of the
Board of Governors of the Federal Reserve System, as the same may be amended or
supplemented from time to time.
"Material Adverse Change": a material adverse change in (i) the
financial condition, operations, business, prospects or Property of the Borrower
and its Subsidiaries taken as a whole, (ii) the ability of the Borrower to
perform its obligations under the Loan Documents or (iii) the ability of the
Agent and the Lenders to enforce the Loan Documents, including, without
limitation, as a result of a change of law since December 31, 1995.
"Material Adverse Effect": a material adverse effect on (i) the
financial condition, operations, business, prospects or Property of the Borrower
and its Subsidiaries taken as a whole, (ii) the ability of the Borrower to
perform its obligations under the Loan Documents or (iii) the ability of the
Agent and the Lenders to enforce the Loan Documents, including, without
limitation, as a result of a change of law since December 31, 1995.
"Maturity Date": November 21, 1999 (or any date subsequent thereto
resulting from an extension of the Maturity Date pursuant to Section 2.17), or
such earlier date on which the Notes shall become due and payable, whether by
acceleration or otherwise.
"Multiemployer Plan": a Pension Plan which is a multiemployer plan as
defined in Section 4001(a)(3) of ERISA.
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<PAGE>
"NAIC": the National Association of Insurance Commissioners, or any
association or Governmental Authority successor to the functions thereof.
"Non-Insurance Subsidiary": each Subsidiary of the Borrower set forth
on Schedule 4.1 under the heading "Not Engaged in an Insurance Business."
"Note" and "Notes": defined in Section 2.2.
"Notice of Conversion/Continuation": a notice substantially in the
form of Exhibit G.
"Operating Entity": (a) any Person, (b) any business or operating unit
of a Person which is, or could be, operated separate and apart from the other
businesses and operations of such Person, or (c) any other line of business or
business segment.
"Pension Plan": at any date of determination, any Employee Benefit
Plan (including a Multiemployer Plan), the funding requirements of which (under
Section 302 of ERISA or Section 412 of the Code) are, or at any time within the
six years immediately preceding such date, were in whole or in part, the
responsibility of the Borrower, any of its Subsidiaries or any ERISA Affiliate.
"Permitted Liens": Liens permitted to exist under Section 8.2.
"Person": any individual, firm, partnership, joint venture,
corporation, limited liability company, association, business enterprise, joint
stock company, unincorporated association, trust, Governmental Authority or any
other entity, whether acting in an individual, fiduciary, or other capacity,
and for the purpose of the definition of "ERISA Affiliate", a trade or business.
"Pricing Level I": any time when the Leverage Ratio is less than or
equal to .15:1.00.
"Pricing Level II": any time when the Leverage Ratio is greater than
.15:1.00.
"Property": all types of real, personal, tangible, intangible or
mixed property.
"Real Property": all real property owned or leased by the Borrower or
any of its Subsidiaries.
"Reinsurance Agreement": any agreement, contract, treaty, certificate
or other arrangement under which any Insurance Subsidiary agrees to transfer or
cede to another insurer all or part of the liabilities assumed, or the assets
held, by such Insurance Subsidiary under one or more policies of insurance
(including, without limitation, any agreement, contract, treaty, certificate or
other arrangement that is treated as such by any Applicable Insurance Regulatory
Authority of such Insurance Subsidiary).
"Remaining Interest Period": (i) in the event that the Borrower shall
fail for any
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reason to borrow a Loan in respect of which it shall have requested a Eurodollar
Advance or convert an Advance to, or continue an Advance as, a Eurodollar
Advance after it shall have notified the Agent of its intent to do so, a period
equal to the Interest Period that the Borrower elected in respect of such
Eurodollar Advance; or (ii) in the event that a Eurodollar Advance shall
terminate pursuant to the provisions hereof prior to the last day of the
Interest Period applicable thereto, a period equal to the remaining portion of
such Interest Period if such Interest Period had not been so terminated; or
(iii) in the event that the Borrower shall prepay or repay all or any part of
the principal amount of a Eurodollar Advance prior to the last day of the
Interest Period applicable thereto, a period equal to the period from and
including the date of such prepayment or repayment to but excluding the last
day of such Interest Period.
"Required Lenders": at any time when no Loans are out standing,
Lenders having Commitments (or if no Commitments then exist, Lenders having
Commitments on the last day on which Commitments did exist) equal to at least 66
2/3% of the aggregate Commitments of all the Lenders, and at any time when Loans
are outstanding, Lenders holding Notes having an unpaid principal balance equal
to at least 66 2/3% of the aggregate Loans outstanding.
"Restricted Payment": as to any Person (i) any dividend or other
distribution, direct or indirect, on account of any shares of any class of Stock
or other equity interest in such Person now or hereafter outstanding (other than
a dividend payable solely in shares of such Stock to the holders of such shares)
and (ii) any redemption, retirement, sinking fund or similar payment, purchase
or other acquisition, direct or indirect, of any shares of any class of Stock or
other equity interest in such Person now or hereafter outstanding.
"SAP": with respect to each Insurance Subsidiary, statutory accounting
principles in effect from time to time prescribed or permitted by the Applicable
Insurance Regulatory Authority in the preparation of the financial statements of
such Subsidiary.
"SEC": the Securities and Exchange Commission or any Governmental
Authority succeeding to the functions thereof.
"Special Counsel": Emmet, Marvin & Martin, LLP, special counsel to the
Agent.
"Statutory Net Income": with respect to the Insurance Subsidiaries for
any period, the consolidated statutory net income of the Insurance Subsidiaries
for such period computed in accordance with SAP and consistent with that
reported on line 16, page 4, column 1 of the Summary of Operations Statement in
the Annual Statement.
"Statutory Surplus": with respect to the Insurance Subsidiaries at any
date of determination, the consolidated statutory surplus of the Insurance
Subsidiaries on such date computed in accordance with SAP and consistent with
that reported on line 25, page 3, column
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1 of the Liabilities, Surplus and Other Funds Statement in the Annual Statement.
"Stock": as to any Person, all shares, interests, partnership
interests, limited liability company interests, participations, rights in or
other equivalents (however designated) of such Person's equity (however
designated) and any rights, warrants or options exchangeable for or convertible
into such shares, interests, participations, rights or other equity.
"Subsidiary": as to any Person, any corporation, association,
partnership, limited liability company, joint venture or other business entity
of which such Person or any Subsidiary of such Person, directly or indirectly,
either (i) in respect of a corporation, owns or controls more than 50% of the
outstanding Stock having ordinary voting power to elect a majority of the board
of directors or similar managing body, irrespective of whether a class or
classes shall or might have voting power by reason of the happening of any
contingency, or (ii) in respect of an association, partnership, limited
liability company, joint venture or other business entity, is entitled to share
in more than 50% of the profits and losses, however determined.
"Tax": any present or future tax, levy, impost, duty, charge, fee,
deduction or withholding of any nature and whatever called, by a Governmental
Authority, on whomsoever and wherever imposed, levied, collected, withheld or
assessed.
"Tax on the Overall Net Income": as to any Person, a Tax imposed by
the jurisdiction in which that Person's principal office (and/or, in the case of
a Lender, its Domestic Lending Office) is located or by any political
subdivision or taxing authority thereof or in which that Person is deemed to be
doing business on all or part of the net income, profits or gains of that Person
(whether worldwide, or only insofar as such income, profits or gains are
considered to arise in or to relate to a particular jurisdiction, or otherwise).
"United States": the United States of America (including the States
thereof and the District of Columbia).
"Unqualified Amount": defined in Section 2.7(c).
1.2. Principles of Construction
(a) All terms defined in a Loan Document shall have the meanings given
such terms therein when used in the other Loan Documents or any certificate,
opinion or other document made or delivered pursuant thereto, unless otherwise
defined therein.
(b) As used in the Loan Documents and in any certificate, opinion or
other document made or delivered pursuant thereto, accounting terms not defined
in Section 1.1, and accounting terms partly defined in Section 1.1, to the
extent not defined, shall have the respective meanings given to them under GAAP,
or, to the extent that such terms apply solely to one or more Insurance
Subsidiaries, given to them under SAP.
(c) The words "hereof", "herein", "hereto" and "hereunder" and similar
words when used in a Loan Document shall refer to such Loan Document as a whole
and not to any particular provision thereof, and Section, schedule and exhibit
references contained
14
<PAGE>
therein shall refer to Sections thereof or schedules or exhibits thereto unless
otherwise expressly provided therein.
(d) The phrase "may not" is prohibitive and not permissive.
(e) Unless the context otherwise requires, words in the singular
number include the plural, and words in the plural include the singular.
(f) Unless specifically provided in a Loan Document to the contrary,
references to a time shall refer to New York City time.
(g) Unless specifically provided in a Loan Document to the contrary,
in the computation of periods of time from a specified date to a later specified
date, the word "from" means "from and including" and the words "to" and "until"
each means "to but excluding".
(h) References in any Loan Document to a fiscal period shall refer to
that fiscal period of the Borrower.
2. AMOUNT AND TERMS OF LOANS
2.1. Loans
Subject to the terms and conditions hereof, each Lender severally
agrees to make revolving credit loans (each a "Loan" and, as the context may
----
require, collectively with all other Loans of such Lender and with the Loans of
all other Lenders, the "Loans") to the Borrower from time to time during the
Commitment Period, provided, however, that immediately after giving effect
thereto (i) the outstanding principal balance of such Lender's Loans would not
exceed such Lender's Commitment, and (b) the aggregate outstanding principal
balance of all Lenders' Loans would not exceed the Aggregate Commitments. During
the Commitment Period, the Borrower may borrow, prepay in whole or in part and
reborrow under the Aggregate Commitments, all in accordance with the terms and
conditions of this Agreement.
2.2. Notes
The Loans made by a Lender shall be evidenced by a promissory note of
the Borrower, substantially in the form of Exhibit B, with appropriate
insertions therein as to date and principal amount (each, as indorsed or
modified from time to time, a "Note" and, collectively with the Notes of all
other Lenders, the "Notes"), payable to the order of such Lender for the account
of its Applicable Lending Office and representing the obligation of the
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Borrower to pay the lesser of (a) the original amount of the Commitment of such
Lender and (b) the aggregate unpaid principal balance of all Loans made by such
Lender, with interest thereon as prescribed in Section 2.7. Each Note shall (i)
be dated the first Borrowing Date, (ii) be stated to mature on the Maturity Date
and (iii) bear interest from the date thereof on the unpaid principal balance
thereof at the applicable interest rate or rates per annum determined as
provided in Section 2.7. Interest on each Note shall be pay able as specified in
Section 2.7.
2.3. Procedure for Borrowing
(a) The Borrower may borrow under the Aggregate Commitments on any
Business Day during the Commitment Period, provided, however, that the Borrower
shall notify the Agent (by telephone or fax) no later than: 12:00 Noon three
Business Days prior to the requested Borrowing Date, in the case of Eurodollar
Advances, and 12:00 Noon, one Business Day prior to the requested Borrowing
Date, in the case of ABR Advances, specifying in each case (i) the aggregate
principal amount to be borrowed under the Aggregate Commitments, (ii) the
requested Borrowing Date, (iii) whether such borrowing is to consist of one or
more Eurodollar Advances, ABR Advances, or a combination thereof and (iv) if the
borrowing is to consist of one or more Eurodollar Advances, the length of the
Interest Period for each such Eurodollar Advance, provided, however, that no
Interest Period selected in respect of any Loan shall end after the Maturity
Date. If the Borrower fails to give timely notice in connection with a request
for a Eurodollar Advance, the Borrower shall be deemed to have elected that such
Advance shall be made as an ABR Advance. Each such notice shall be irrevocable
and confirmed immediately by delivery to the Agent of a Borrowing Request. Each
Advance shall be in an aggregate principal amount equal to $3,000,000 or such
amount plus a whole multiple of $1,000,000 in excess thereof, or, if less, the
unused amount of the Aggregate Commitments.
(b) Upon receipt of each notice of borrowing from the Borrower, the
Agent shall promptly notify each Lender thereof. Subject to its receipt of the
notice referred to in the preceding sentence, (i) each Lender will make the
amount of its Commitment Percentage of each borrowing available to the Agent
for the account of the Borrower at the office of the Agent set forth in Section
11.2 not later than 2:00 PM on the relevant Borrowing Date requested by the
Borrower, in funds immediately available to the Agent at such office. The
amounts so made available to the Agent on such Borrowing Date will then, subject
to the satisfaction of the terms and conditions of this Agreement, as determined
by the Agent, be made available on such date to the Borrower by the Agent at the
office of the Agent specified in Section 11.2 by crediting the account of the
Borrower on the books of such office with the aggregate of said amounts received
by the Agent.
(c) Unless the Agent shall have received prior notice from a Lender
(by telephone or otherwise, such notice to be promptly confirmed by fax or other
writing) that such Lender will not make available to the Agent such Lender's
Commitment Percentage of the Loans requested by the Borrower, the Agent may
assume that such Lender has made such share available to the Agent on the
Borrowing Date in accordance with this Section, provided that such Lender
received notice of the proposed borrowing from the Agent, and the Agent may, in
reliance upon such assumption, make available to the Borrower on the Borrowing
Date a corresponding amount. If and to the extent such Lender shall not have so
made its Commitment Percentage of such Loans available to the Agent, such Lender
and the Borrower severally agree
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to pay to the Agent forthwith on demand such corresponding amount (to the extent
not previously paid by the other), together with interest thereon for each day
from the date such amount is made available to the Borrower to the date such
amount is paid to the Agent, at a rate per annum equal to, in the case of the
Borrower, the applicable interest rate set forth in Section 2.7 for ABR
Advances, and, in the case of such Lender, the Federal Funds Rate in effect on
each such day (as determined by the Agent). Such payment by the Borrower,
however, shall be without prejudice to its rights against such Lender. If such
Lender shall pay to the Agent such corresponding amount, such amount so paid
shall constitute such Lender's Loan as part of the Loans for purposes of this
Agreement, which Loan shall be deemed to have been made by such Lender on the
Borrowing Date applicable to such Loans.
(d) If a Lender makes a new Loan on a Borrowing Date on which the
Borrower is to repay a Loan from such Lender, such Lender shall apply the
proceeds of such new Loan to make such repayment, and only the excess of the
proceeds of such new Loan over the Loan being repaid need be made available to
the Agent.
(e) Notices of borrowing given by telephone shall be deemed given when
made by telephone and the Agent and the Lenders may rely thereon whether such
notice is confirmed by the delivery of a Borrowing Request.
2.4. Termination or Reduction of Aggregate Commitments
(a) Voluntary Reductions. The Borrower shall have the right, upon at
least three Business Days' prior written notice to the Agent, at any time to
terminate the Aggregate Commitments or from time to time to permanently reduce
the Aggregate Commitments, provided, however, that any such reduction shall be
in the amount of $3,000,000 (or such lesser available amount of the Facility) or
$3,000,000 plus a whole multiple of $1,000,000 in excess thereof.
(b) In General. Reductions of the Aggregate Commitments shall be
applied pro rata according to the Commitment of each Lender. Simultaneously with
each reduction of the Aggregate Commitments under this Section, the Borrower
shall pay the Commitment Fee accrued on the amount by which the Aggregate
Commitments have been reduced and prepay the Loans as required by Section
2.5(b).
2.5. Prepayments of the Loans
(a) Voluntary Prepayments. The Borrower may, at its option, prepay the
Loans without premium or penalty, in full at any time or in part from time to
time by notifying the Agent in writing at least one Business Day prior to the
proposed prepayment date, in the case of Loans consisting of ABR Advances and at
least three Business Days prior to the pro-
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posed prepayment date, in the case of Loans consisting of Eurodollar Advances,
in each case specifying whether the Loans to be prepaid consist of ABR Advances,
Eurodollar Advances, or a combination thereof, the amount to be prepaid and the
date of prepayment. Such notice shall be irrevocable and the amount specified in
such notice shall be due and payable on the date specified, together with
accrued interest to the date of such payment on the amount prepaid. Upon receipt
of such notice, the Agent shall promptly notify each Lender thereof. Each
partial prepayment of the Loans pursuant to this subsection shall be in an
aggregate principal amount of $3,000,000 (or any smaller outstanding balance of
the Loans) or $3,000,000 plus a whole multiple of $1,000,000 in excess thereof.
After giving effect to any partial prepayment with respect to Eurodollar
Advances which were made (whether as the result of a borrowing or a conversion)
on the same date and which had the same Interest Period, the outstanding
principal amount of such Eurodollar Advances shall exceed (subject to Section
2.6) $3,000,000 or such amount plus a whole multiple of $1,000,000 in excess
thereof.
(b) Mandatory Prepayments of Loans Relating to Reductions of the
Aggregate Commitments. Simultaneously with each reduction of the Aggregate
Commitments under Section 2.4, the Borrower shall prepay the Loans by the
amount, if any, by which the aggregate unpaid principal balance of the Loans
exceeds the amount of the Aggregate Commitments as so reduced.
(c) In General. If any prepayment is made in respect of any Eurodollar
Advance, in whole or in part, prior to the last day of the applicable Interest
Period, the Borrower agrees to indemnify the Lenders in accordance with Section
2.14.
2.6. Conversions and Continuations
(a) The Borrower may elect from time to time to convert Eurodollar
Advances to ABR Advances by giving the Agent at least one Business Day's prior
irrevocable notice of such election (confirmed by the delivery of a Notice of
Conversion/Continuation), specifying the amount to be so converted, provided,
that any such conversion of Eurodollar Advances shall only be made on the last
day of the Interest Period applicable thereto. In addition, the Borrower may
elect from time to time to (i) convert ABR Advances to Eurodollar Advances and
(ii) to continue Eurodollar Advances by selecting a new Interest Period
therefor, in each case by giving the Agent at least three Business Days' prior
irrevocable notice of such election (confirmed by the delivery of a Notice of
Conversion/Continuation), in the case of a conversion to, or continuation of,
Eurodollar Advances, specifying the amount to be so converted and the initial
Interest Period relating thereto, provided that any such conversion of ABR
Advances to Eurodollar Advances shall only be made on a Business Day and any
such continuation of Eurodollar Advances shall only be made on the last day of
the Interest Period applicable to the Eurodollar Advances which are to be
continued as such new Eurodollar Advances. The Agent shall promptly provide the
Lenders with a copy of each such Notice of Conversion/Continuation. ABR
Advances and Eurodollar Advances may be converted or continued pursuant to this
Section in whole or in part, provided that conversions of ABR Advances to
Eurodollar Advances, or continuations of Eurodollar Advances shall be in an
aggregate principal amount of $3,000,000 or such amount plus a whole multiple of
$1,000,000 in excess thereof.
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<PAGE>
(b) Notwithstanding anything in this Section to the contrary, no ABR
Advance may be converted to a Eurodollar Advance and no Eurodollar Advance may
be continued, if the Borrower or the Agent has knowledge that an Event of
Default has occurred and is continuing either (i) at the time the Borrower
shall notify the Agent of its election to convert or continue or (ii) on the
requested Conversion/Continuation Date. In such event, such ABR Advance shall be
automatically continued as an ABR Advance, or such Eurodollar Advance shall be
automatically converted to an ABR Advance on the last day of the Interest Period
applicable to such Eurodollar Advance. If an Event of Default shall have
occurred and be continuing, the Agent shall, at the request of the Required
Lenders, notify the Borrower (by telephone or otherwise) that all, or such
lesser amount as the Required Lenders shall designate, of the outstanding
Eurodollar Advances shall be automatically converted to ABR Advances, in which
event such Eurodollar Advances shall be automatically converted to ABR Advances
on the date such notice is given.
(c) No Interest Period selected in respect of conversion or
continuation of any Eurodollar Advance shall end after the Maturity Date.
(d) Each conversion or continuation of a Eurodollar Advance shall be
effected by each Lender by applying the proceeds of its new Eurodollar Advance
to its Eurodollar Advances (or portion thereof) being converted or continued (it
being understood that such conversion or continuation shall not constitute a
borrowing for purposes of Sections 4, 5 or 6).
(e) Notices in respect of a conversion or continuation given by
telephone shall be deemed given when made by telephone and the Agent and the
Lenders may rely thereon whether such notice is confirmed by the delivery of a
Notice of Conversion/Continuation.
2.7. Interest Rate and Payment Dates
(a) Prior to Maturity. Except as otherwise provided in Section 2.7(b),
prior to maturity, the Loans shall bear interest on the outstanding principal
balance thereof at the applicable interest rate or rates per annum set forth
below:
<TABLE>
<CAPTION>
LOANS RATE
----- ----
<S> <C>
Made as ABR Alternate Base Rate plus the
Advances Applicable Margin.
Made as Eurodollar Eurodollar Rate for the
Advances applicable Interest Period
plus the Applicable Margin.
</TABLE>
19
<PAGE>
(b) Event of Default. After the occurrence and during the continuance
of a Default or an Event of Default under Section 9.1(a) or (b), the outstanding
principal balance of the Loans shall bear interest at a rate per annum equal to
2% plus the rate which would otherwise be applicable under Section 2.7(a), and
any overdue interest or other amount payable under the Loan Documents shall bear
interest at a rate per annum equal to the Alternate Base Rate plus the
Applicable Margin plus 2%. All such interest shall be payable on demand.
(c) In General. Interest on (i) ABR Advances to the extent based on
the BNY Rate shall be calculated on the basis of a 365 or 366-day year (as the
case may be), and (ii) ABR Advances to the extent based on the Federal Funds
Rate and on Eurodollar Advances shall be calculated on the basis of a 360-day
year, in each case, for the actual number of days elapsed, including the first
day but excluding the last. Except as otherwise provided in Section 2.7(b),
interest shall be payable in arrears on each Interest Payment Date and upon each
payment (including prepayment) of the Loans. Any change in the interest rate on
the Loans resulting from a change in the Alternate Base Rate or reserve
requirements shall become effective as of the opening of business on the day on
which such change shall become effective. The Agent shall, as soon as
practicable, notify the Borrower and the Lenders of the effective date and the
amount of each such change in the BNY Rate, but any failure to so notify shall
not in any manner affect the obligation of the Borrower to pay interest on the
Loans in the amounts and on the dates required. Each determination of the
Alternate Base Rate or a Eurodollar Rate by the Agent pursuant to this Agreement
shall be conclusive and binding on the Borrower absent manifest error. At no
time shall the interest rate payable on the Loans, together with the Commitment
Fee and all other amounts payable under the Loan Documents, to the extent the
same are construed to constitute interest, exceed the Highest Lawful Rate. If
in respect of any period during the term of this Agreement, any amount paid
hereunder, to the extent the same shall (but for the provisions of this Section)
constitute or be deemed to constitute interest, would exceed the maximum amount
of interest permitted by the Highest Lawful Rate during such period (such amount
being hereinafter referred to as an "Un qualified Amount"), then (i) such
Unqualified Amount shall be applied or shall be deemed to have been applied as a
prepayment of the Loans, and (ii) if in any subsequent period during the term of
this Agreement, all amounts payable hereunder in respect of such period which
constitute or shall be deemed to constitute interest shall be less than the
maximum amount of interest permitted by the Highest Lawful Rate during such
period, then the Borrower shall pay to the Lenders in respect of such period an
amount (each a "Compensatory Interest Payment") equal to the lesser of (x) a sum
which, when added to all such amounts, would equal the maximum amount of
interest permitted by the Highest Lawful Rate during such period, and (y) an
amount equal to the Unqualified Amount less all other Compensatory Interest
Payments made in respect thereof. The Borrower acknowledges that to the extent
interest payable on ABR Advances is based on the BNY Rate, such Rate is only one
of the bases for computing interest on loans made by the Lenders, and by basing
interest payable on ABR Advances on the BNY Rate, the Lenders have not committed
to charge, and the Borrower has not in any way bargained for, interest based on
a lower or the lowest rate at which the Lenders may now or in the future make
loans to other borrowers.
2.8. Taxes
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<PAGE>
(a) Payments to Be Free and Clear. Provided that all documentation, if
any, then required to be delivered by any Lender or the Agent pursuant to
subsection (c) below has been delivered, all sums payable by the Borrower under
the Loan Documents shall be paid free and clear of and (except to the extent
required by law) without any deduction or withholding on account of any Tax
(other than a Tax on the Overall Net Income of any Lender (for which payment
need not be free and clear but no deduction or withholding shall be made unless
then required by applicable law)) imposed, levied, collected, withheld or
assessed by or within the United States or any political subdivision in or of
the United States or any other jurisdiction from or to which a payment is made
by or on behalf of the Borrower or by any federation or organization of which
the United States or any such jurisdiction is a member at the time of payment.
(b) Grossing-up of Payments. If the Borrower or any other Person is
required by law to make any deduction or withholding on account of any such Tax
from any sum paid or payable by the Borrower to the Agent or any Lender under
any of the Loan Documents:
(i) The Borrower shall notify the Agent and such Lender of any
such requirement or any change in any such requirement as soon as the Borrower
becomes aware of it;
(ii) The Borrower shall pay any such Tax before the date on which
penalties attach thereto, such payment to be made (if the liability to pay is
imposed on the Borrower) for its own account or (if that liability is imposed on
the Agent or such Lender, as the case may be) on behalf of and in the name of
the Agent or such Lender;
(iii) the sum payable by the Borrower to the Agent or a Lender in
respect of which the relevant deduction, withholding or payment is required
shall be increased to the extent necessary to ensure that, after the making of
that deduction, withholding or payment, the Agent or such Lender, as the case
may be, receives on the due date therefor a net sum equal to what it would have
received had no such deduction, withholding or payment been required or made;
and
(iv) within 30 days after paying any sum from which it is required
by law to make any deduction or withholding, and within 30 days after the due
date of payment of any Tax which it is required by clause (b) above to pay, the
Borrower shall deliver to the Agent and the applicable Lender evidence
satisfactory to the other affected parties of such deduction, withholding or
payment and of the remittance thereof to the relevant Governmental Authority;
provided that no such additional amount shall be required to be paid to any
Lender under clause (iii) above except to the extent that any change after the
date hereof (in the case of each
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<PAGE>
Lender listed on the signature pages hereof) or after the date of the Assignment
and Acceptance Agreement pursuant to which such Lender became a Lender (in the
case of each other Lender) in any such requirement for a deduction, withholding
or payment as is specified therein shall result in an increase in the rate of
such deduction, withholding or payment from that in effect at the date of this
Agreement or at the date of such Assignment and Acceptance, as the case may be,
in respect of payments to such Lender.
(c) U.S. Tax Certificates. Each Lender that is organized under the
laws of any jurisdiction other than the United States shall deliver to the Agent
for transmission to the Borrower, on or prior to the Effective Date (in the case
of each Lender listed on the signature pages hereof) or on the effective date of
the Assignment and Acceptance Agreement pursuant to which it becomes a Lender
(in the case of each other Lender), and at such other times as may be necessary
in the determination of the Borrower or the Agent (each in the reasonable
exercise of its discretion), such certificates, documents or other evidence,
properly completed and duly executed by such Lender (including, without
limitation, Internal Revenue Service Form 1001 or Form 4224 or any other
certificate or statement of exemption required by Treasury Regulations Section
1.1441-4(a) or Section 1.1441-6(c) or any successor thereto) to establish that
such Lender is not subject to deduction or withholding of United States federal
income tax under Section 1441 or 1442 of the Code or otherwise (or under any
comparable provisions of any successor statute) with respect to any payments to
such Lender of principal, interest, fees or other amounts payable under any of
the Loan Documents. The Borrower shall not be required to pay any additional
amount to any such Lender under subsection (b)(iii) above if such Lender shall
have failed to satisfy the requirements of the immediately preceding sentence;
provided that if such Lender shall have satisfied such requirements on the
Effective Date (in the case of each Lender listed on the signature pages hereof)
or on the effective date of the Assignment and Acceptance Agreement pursuant to
which it became a Lender (in the case of each other Lender), nothing in this
subsection shall relieve the Borrower of its obligation to pay any additional
amounts pursuant to subsection (b)(iii) above in the event that, as a result of
any change in applicable law, such Lender is no longer properly entitled to
deliver certificates, documents or other evidence at a subsequent date
establishing the fact that such Lender is not subject to withholding as
described in the immediately preceding sentence.
(d) Tax Refund. If any Lender or the Agent, as applicable, receives a
refund (whether by way of direct payment or by offset) of any Tax for which a
payment has been made pursuant to subsection 2.8(b)(ii) which, in the reasonable
good faith judgment of such Lender or Agent, as the case may be, is allocable to
such payment made under subsection 2.8(B)(ii), the amount of such refund
(together with any interest received thereon) shall be paid to the Borrower to
the extent payment has been made in full pursuant to subsection 2.8(b)(ii).
2.9. Substituted Interest Rate
In the event that (i) the Agent shall have determined (which
determination shall be conclusive and binding upon the Borrower) that by reason
of circumstances affecting the interbank eurodollar market either adequate and
reasonable means do not exist for ascertaining the Eurodollar Rate applicable
pursuant to Section 2.7 or (ii) the Required Lenders shall have notified the
Agent that they have determined (which determination shall be conclusive and
binding on the Borrower) that the applicable Eurodollar Rate will not
22
<PAGE>
adequately and fairly reflect the cost to such Lenders of maintaining or funding
loans bearing interest based on such Eurodollar Rate, with respect to any
portion of the Loans that the Borrower has requested be made as Eurodollar
Advances or Eurodollar Advances that will result from the requested conversion
or continuation of any portion of the Advances into or of Eurodollar Advances
(each, an "Affected Advance"), the Agent shall promptly notify the Borrower and
the Lenders (by telephone or otherwise, to be promptly confirmed in writing) of
such determination, on or, to the extent practicable, prior to the requested
Borrowing Date or Conversion/Continuation Date for such Affected Advances. If
the Agent shall give such notice, (d) any Affected Advances shall be made as ABR
Advances, (e) the Advances (or any portion thereof) that were to have been
converted to or continued as Affected Advances shall be converted to or
continued as ABR Advances and (f) any outstanding Affected Advances shall be
converted, on the last day of the then current Interest Period with respect
thereto, to ABR Advances. Until any notice under clauses (i) or (ii), as the
case may be, of this Section has been withdrawn by the Agent (by notice to the
Borrower promptly upon either (x) the Agent having determined that such
circumstances affecting the interbank eurodollar market no longer exist and that
adequate and reasonable means do exist for determining the Eurodollar Rate
pursuant to Section 2.7 or (y) the Agent having been notified by such Required
Lenders that circumstances no longer render the Advances (or any portion
thereof) Affected Advances, no further Eurodollar Advances shall be required to
be made by the Lenders, nor shall the Borrower have the right to convert or
continue all or any portion of the Loans to Eurodollar Advances.
2.10. Illegality
Notwithstanding any other provisions herein, if any law, regulation,
treaty or directive, or any change therein or in the interpretation or
application thereof, shall make it unlawful for any Lender to make or maintain
its Eurodollar Advances as contemplated by this Agreement, (i) the commitment of
such Lender hereunder to make Eurodollar Advances or convert ABR Advances to
Eurodollar Advances shall forthwith be suspended and (ii) such Lender's Loans
then outstanding as Eurodollar Advances affected hereby, if any, shall be
converted automatically to ABR Advances on the last day of the then current
Interest Period applicable thereto or within such earlier period as required by
law. If the commitment of any Lender with respect to Eurodollar Advances is
suspended pursuant to this Section and such Lender shall notify the Agent and
the Borrower that it is once again legal for such Lender to make or maintain
Eurodollar Advances, such Lender's commitment to make or maintain Eurodollar
Advances shall be reinstated.
2.11. Increased Costs
In the event that any law, regulation, treaty or directive hereafter
enacted, promulgated, approved or issued or any change in any presently existing
law, regulation, treaty or directive therein or in the interpretation or
application thereof by any Governmental Au-
23
<PAGE>
thority charged with the administration thereof or compliance by any Lender (or
any corporation directly or indirectly owning or controlling such Lender) with
any request or directive from any central bank or other Governmental Authority:
(a) does or shall subject any Lender to any Taxes of any kind
whatsoever with respect to any Eurodollar Advances or its obligations under this
Agreement to make Eurodollar Advances, or change the basis of taxation of
payments to any Lender of principal, interest or any other amount payable
hereunder in respect of its Eurodollar Advances, including any Taxes required to
be withheld from any amounts payable under the Loan Documents (except for
imposition of, or change in the rate of, Tax on the Overall Net Income of such
Lender or its Applicable Lending Office for any of such Advances by the
jurisdiction in which such Lender is incorporated or has its principal office or
such Applicable Lending Office, including, in the case of Lenders incorporated
in any State of the United States, such tax imposed by the United States); or
(b) does or shall impose, modify or make applicable any reserve,
special deposit, compulsory loan, assessment, increased cost or similar
requirement against assets held by, or deposits of, or advances or loans by, or
other credit extended by, or any other acquisition of funds by, any office of
such Lender in respect of its Eurodollar Advances which is not otherwise
included in the determination of a Eurodollar Rate;
and the result of any of the foregoing is to increase the cost to such Lender of
making, renewing, converting, continuing or maintaining its Eurodollar Advances
or its commitment to make such Eurodollar Advances, or to reduce any amount
receivable hereunder in respect of its Eurodollar Advances, then, in any such
case, the Borrower shall pay such Lender, upon its demand, any additional
amounts necessary to compensate such Lender for such additional cost or
reduction in such amount receivable which such Lender deems to be material as
determined by such Lender; provided, however, that nothing in this Section shall
require the Borrower to indemnify the Lenders with respect to withholding Taxes
for which the Borrower has no obligation under Section 2.8 or any other
increased costs, expenses, Taxes or other matters incurred by a Lender more than
90 days prior to the date that such Lender delivers notice to the Borrower of
such increased cost, expense, tax or matter. A statement setting forth the
calculations of any additional amounts payable pursuant to the foregoing
sentence submitted by a Lender to the Borrower shall be conclusive absent
manifest error.
2.12. Capital Adequacy
If the amount of capital required or expected to be maintained by any
Lender or any Person directly or indirectly owning or controlling such Lender
(each a "Control Person"), shall be affected by (i) the introduction or phasing
in of any law, rule or regulation after the Effective Date, (ii) any change
after the Effective Date in the interpretation of any existing law, rule or
regulation by any central bank or United States or foreign Governmental
Authority charged with the administration thereof, or (iii) compliance by such
Lender or such Control Per son with any directive, guideline or request from any
central bank or United States or foreign Governmental Authority (whether or not
having the force of law) promulgated or made after the Effective Date, and such
Lender shall have determined that such introduction, phasing in, change or
compliance shall have had or will thereafter have the effect of reducing
24
<PAGE>
(A) the rate of return on such Lender's or such Control Person's capital, or (B)
the asset value to such Lender or such Control Person of the Loans made or
maintained by such Lender, in either case to a level below that which such
Lender or such Control Person could have achieved or would thereafter be able to
achieve but for such introduction, phasing in, change or compliance (after
taking into account such Lender's or such Control Person's policies regarding
capital adequacy) by an amount deemed by such Lender to be material to such
Lender or Control Person, then, within ten days after demand by such Lender,
accompanied by a statement setting forth the calculations of any additional
amount payable under this Section, which statement shall be conclusive absent
manifest error, the Borrower shall pay to such Lender or such Control Person
such additional amount or amounts as shall be sufficient to compensate such
Lender or such Control Person, as the case may be, for such reduction, provided,
however, that nothing in this Section shall require the Borrower to compensate
any Lender for any such reduction arising more than 90 days prior to the date
that such Lender delivers notice thereof to the Borrower.
2.13. Lending Offices
Each Lender shall have the right at any time and from time to time to
transfer its Loans to a different office, provided that such Lender shall
promptly notify the Agent and the Borrower of any such change of office. Such
office shall thereupon become such Lender's Domestic Lending Office or
Eurodollar Lending Office, as the case may be, pro vided, however, that no such
Lender shall be entitled to receive any greater amount under Sections 2.9, 2.11
and 2.12 as a result of a transfer of any such Loans to a different office of
such Lender than it would be entitled to immediately prior thereto unless such
claim would have arisen even if such transfer had not occurred.
2.14. Indemnification for Loss
Notwithstanding anything contained herein to the contrary, if the
Borrower shall fail to borrow or convert or continue on a Borrowing Date or
Conversion/Continuation Date after it shall have given notice to do so in which
it shall have requested a Eurodollar Advance, or if a Eurodollar Advance shall
be terminated or suspended pursuant to the provisions hereof prior to the last
day of the Interest Period applicable thereto, or if, while a Eurodollar
Advance is outstanding, any repayment or prepayment of such Eurodollar Advance
is made for any reason (including, without limitation, as a result of
acceleration or illegality) on a date which is prior to the last day of the
Interest Period applicable thereto, the Borrower agrees to indemnify each
Lender against, and to pay on demand directly to such Lender, any loss or
expense suffered by such Lender as a result of such failure to borrow, convert
or continue, termination, repayment or prepayment, including, without
limitation, an amount, if greater than zero, equal to:
25
<PAGE>
A x (B-C) x D
---
360
where:
"A" equals such Lender's Commitment Percentage of the Affected Principal Amount;
"B" equals the Eurodollar Rate (expressed as a decimal) applicable to such
Eurodollar Advances;
"C" equals the applicable Eurodollar Rate (ex pressed as a decimal) in effect on
or about the first day of the applicable Remaining Interest Period, based on the
applicable rates offered or bid, as the case may be, on or about such date, for
deposits in an amount equal approximately to such Lender's Commitment Percentage
of the Affected Principal Amount with an Interest Period equal approximately to
the applicable Remaining Interest Period, as determined by such Lender;
"D" equals the number of days from and including the first day of the applicable
Remaining Interest Period to but excluding the last day of such Remaining
Interest Period;
and any other out-of-pocket loss or expense (including any internal processing
charge customarily charged by such Lender) suffered by such Lender in connection
with such Eurodollar Advance, including, without limitation, in liquidating or
employing deposits acquired to fund or maintain the funding of its Commitment
Percentage of the Affected Principal Amount, or redeploying funds prepaid or
repaid, in amounts which correspond to its Commitment Percentage of the Affected
Principal Amount. Each determination by the Agent or a Lender pursuant to this
Section shall be conclusive and binding on the Borrower absent manifest error.
2.15. Option to Fund
Each Lender has indicated that, if the Borrower elects to borrow or
convert or continue to Eurodollar Advances, such Lender may wish to purchase
one or more deposits in order to fund or maintain its funding of its Eurodollar
Advances during the Interest Period in question; it being understood that the
provisions of this Agreement relating to such funding are included only for the
purpose of determining the rate of interest to be paid on such Eurodollar
Advances and for purposes of determining amounts owning under Sections 2.11,
2.12 and 2.14. Each Lender shall be entitled to fund and maintain its funding of
all or any part of each Eurodollar Advance made by it in any manner it sees fit,
but all such determinations shall be made as if such Lender had actually funded
and maintained its funding of such Eurodollar Advance during the applicable
Interest Period through the purchase of deposits in an amount equal to such
Eurodollar Advance and having a maturity corresponding to such Interest Period.
The obligations of the Borrower under Sections 2.8, 2.9, 2.10, 2.11 and 2.12
shall survive the termination of the Aggregate Commitments, the payment of the
Notes and all other amounts payable under the Loan Documents.
2.16. Use of Proceeds
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<PAGE>
The Borrower agrees that the proceeds of the Loans shall be used
solely for its general corporate purposes not inconsistent with the provisions
hereof, including, without limitation, the provision by Borrower to its
Subsidiaries of funds for use in connection with the business, operations and
general corporate purposes of such Subsidiaries. Notwithstanding anything to the
contrary contained herein, the Borrower further agrees that no part of the
proceeds of any Loan will be used, directly or indirectly, for a purpose which
violates any law, rule or regulation of any Governmental Authority, including
the provisions of Regulations G, U or X of the Board of Governors of the
Federal Reserve System, as amended.
2.17. Extension of Maturity Date
Provided that no Default or Event of Default shall exist, the Borrower
may request that the Maturity Date be extended for additional periods of one
year each by giving written notice thereof (each an "Extension Request") to the
Agent at any time during the period which is not more than 90 days nor less than
60 days prior to any anniversary of the Effective Date and, upon receipt of each
such notice, the Agent shall promptly notify each Lender thereof. The then
current Maturity Date shall not be extended unless and until each Lender, in its
sole and absolute discretion, shall have consented, in writing, to such request,
in which event such then existing Maturity Date shall be extended to the date
occurring one year from the date of the last such consent, provided, however,
that if such date is not a Business Day, such extended Maturity Date shall be
the immediately preceding Business Day. In the event that any Lender shall not
have granted its consent to an Extension Request, the then current Maturity Date
shall remain in effect. Each Lender shall endeavor to respond to each Extension
Request by no later than 45 days following the receipt by such Lender from the
Agent of notice of such Extension Request, provided that each Lender which shall
have failed so to respond by such time shall be deemed not to have consented
thereto.
2.18. Agent's Records
The Agent's records regarding the amount of each Loan, each payment by
the Borrower of principal and interest on the Loans and other information
relating to the Loans shall be presumptively correct absent manifest error.
2.19. Mitigation of Taxes and Costs
(a) Each Lender agrees that, if requested by the Borrower after the
occurrence of an event or the existence of a condition that would require the
Borrower to make payments to such Lender under Section 2.8, 2.11 or or 2.12, it
will, to the extent not inconsistent with such Lender's internal policies, use
reasonable efforts (subject to overall policy considerations of such Lender) (i)
to make, fund or maintain the Commitments or Loans of such lender through
another lending office of such Lender, or (ii) take such other reasonable
measures, if as a result
27
<PAGE>
the additional amounts that would otherwise be required to be paid by the
Borrower with respect to such Lender pursuant to said Sections would be
materially reduced and if, as determined by such Lender in its sole discretion,
the making, funding or maintaining of such Commitments or Loans through such
other lending office or in accordance with such other measures, as the case may
be, would not otherwise adversely affect such Commitments or Loans or the
interests or such Lender.
(b) If the Borrower becomes obligated to pay additional amounts
described in Section 2.8, 2.11 or 2.12 as a result of any condition described in
such Sections and payment of such amount is demanded by any Lender, then,
provided that no Default or Event of Default shall exist, the Borrower may, on
ten Business Days' prior written notice to the Agent and such Lender, cause such
Lender to (and such Lender shall) assign all of its rights and obligations under
this Agreement to a Lender or other bank selected by the Borrower and acceptable
to the Agent for a purchase price equal to the outstanding principal amount of
such Lender's Loans and all accrued interest and fees thereon, provided that in
no event shall the assigning Lender be required to pay or surrender to such
purchasing Lender or other bank any of the fees received by such assigning
Lender pursuant to this Agreement. The Borrower shall remain obligated to pay to
such assigning Lender all additional amounts required to be paid by the Borrower
pursuant to such Sections had there been no such assignment.
3. FEES; PAYMENTS
3.1. Commitment Fee
The Borrower agrees to pay to the Agent, for the account of the
Lenders in accordance with each Lender's Commitment Percentage, a fee (the
"Commitment Fee"), during the Commitment Period, equal to the Applicable Margin
times the excess of (a) the Aggregate Commitments (excluding the amount of any
cancelled or reduced portion of the Aggregate Commitments for which the
Commitment Fee was paid upon each such cancellation or reduction under Section
2.4(b)) over (b) the average daily sum of the outstanding principal balance of
the Loans. The Commitment Fee shall be payable quarterly in arrears on the last
day of each March, June, September and December of each year, commencing on the
first such day following the Effective Date, and ending on the date that the
Aggregate Commitments shall expire or otherwise terminate. The Commitment Fee
shall be calculated on the basis of a 360-day year for the actual number of days
elapsed.
3.2. Pro Rata Treatment and Application of Principal Payments
Each payment, including each prepayment, of principal and interest on
the Loans and of the Commitment Fee shall be made by the Borrower to the Agent
at its office set forth in Section 11.2 in funds immediately available to the
Agent at such office by 2:00 P.M. on the due date for such payment, and,
promptly upon receipt thereof by the Agent, shall be remitted by the Agent in
like funds as received, to the Lenders according to the Commitment Percentage of
each Lender, in the case of the Commitment Fee, and pro rata according to the
aggregate outstanding principal balance of the Loans, in the case of principal
and interest due
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thereon. The failure of the Borrower to make any such payment by such time shall
not constitute a default hereunder, provided that such payment is made on such
due date, but any such payment made after 12:00 Noon on such due date shall be
deemed to have been made on the next Business Day for the purpose of
calculating interest on amounts outstanding on the Loans. If any payment
hereunder or under the Notes shall be due and payable on a day which is not a
Business Day, the due date thereof (except as otherwise provided in the
definition of Interest Period) shall be extended to the next Business Day and
(except with respect to payments in respect of the Commitment Fee) interest
shall be payable at the applicable rate specified herein during such extension.
If any payment is made with respect to any Eurodollar Advance prior to the last
day of the applicable Interest Period, the Borrower shall indemnify each Lender
in accordance with Section 2.14.
4. REPRESENTATIONS AND WARRANTIES
In order to induce the Agent and the Lenders to enter into this Agreement
and to make the Loans, the Borrower makes the following representations and
warranties to the Agent and each Lender:
4.1. Subsidiaries
The Borrower has only the Insurance Subsidiaries and Non-Insurance
Subsidiaries set forth on Schedule 4.1.
4.2. Existence and Power
Each of the Borrower and its Subsidiaries is duly organized or formed
and validly existing in good standing under the laws of the jurisdiction of its
incorporation or formation, has all requisite power and authority to own its
Property and to carry on its business as now conducted, and is in good standing
and authorized to do business as a foreign corporation in each jurisdiction in
which the nature of the business conducted therein or the Property owned therein
makes such qualification necessary, except where such failure to qualify could
not reasonably be expected to have a Material Adverse Effect.
4.3. Authority
The Borrower has full corporate power and authority to enter into,
execute, deliver and perform the terms of the Loan Documents and to make the
borrowings contemplated thereby all of which have been duly authorized by all
proper and necessary corporate or other applicable action and are in full
compliance with its Articles of Incorporation and By-Laws.
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4.4. Binding Agreement
The Loan Documents constitute the valid and legally binding
obligations of the Borrower, enforceable in accordance with their respective
terms, except as such enforceability may be limited by applicable bankruptcy,
insolvency, reorganization or other similar laws now or hereafter in effect
relating to or affecting the rights and remedies of creditors' generally and by
general principles of equity, regardless of whether enforcement is sought in an
action at law or a proceeding in equity, and the discretion of the court before
which any action or proceeding therefor may be brought.
4.5. Litigation
Except as set forth on Schedule 4.5, there are no actions, suits or
proceedings at law or in equity or by or before any Governmental Authority
(whether purportedly on behalf of the Borrower or any its Subsidiaries) pending
or, to the knowledge of the Borrower, threatened against the Borrower or any of
its Subsidiaries or any of their respective Properties or rights, which (i)
could reasonably be expected to have a Material Adverse Effect, (ii) call into
question the validity or enforceability of any of the Loan Documents, or (iii)
could reasonably be expected to result in the rescission, termination or
cancellation of any material license, franchise, right, permit or similar
authorization held by the Borrower or any of its Subsidiaries.
4.6. Required Consents
Except for information filings required to be made in the ordinary
course of business which are not a condition to the Borrower's performance under
the Loan Documents, no consent, authorization or approval of, filing with,
notice to, or exemption by, stockholders, any Governmental Authority or any
other Person is required to authorize, or is required in connection with the
execution, delivery and performance of the Loan Documents or is required as a
condition to the validity or enforceability of the Loan Documents.
4.7. No Conflicting Agreements
Neither the Borrower nor any of its Subsidiaries is in de fault under
any mortgage, indenture, contract or agreement to which it is a party or by
which it or any of its Property is bound, the effect of which default could
reasonably be expected to have a Material Adverse Effect. The execution,
delivery or carrying out of the terms of the Loan Documents will not constitute
a default under, or result in the creation or imposition of, or obligation to
create, any Lien upon any Property of the Borrower or any of its Subsidiaries or
result in a breach of or require the mandatory repayment of or other
acceleration of payment under or pursuant to the terms of any such mortgage,
indenture, contract or agreement.
4.8. Compliance with Applicable Laws
Neither the Borrower nor any of its Subsidiaries is in de fault with
respect to any judgment, order, writ, injunction, decree or decision of any
Governmental Authority which default could reasonably be expected to have a
Material Adverse Effect. Each of the Borrower and its Subsidiaries is complying
in all material respects with all statutes, regulations, rules and
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orders applicable to the Borrower or such Subsidiary of all Governmental
Authorities, including, without limitation, all Applicable Insurance Codes and
Environmental Laws, a violation of which could reasonably be expected to have a
Material Adverse Effect.
4.9. Taxes
Each of the Borrower and its Subsidiaries has filed or caused to be
filed all tax returns required to be filed and has paid, or has made adequate
provision for the payment of, all taxes shown to be due and payable on said
returns or in any assessments made against it (other than those being contested
as required under Section 7.4) which would be material to the Borrower or any of
its Subsidiaries, and no tax Liens have been filed with respect thereto. The
charges, accruals and reserves on the books of the Borrower and each of its
Subsidiaries with respect to all federal, state, local and other taxes are, to
the best knowledge of the Borrower, adequate for the payment of all such taxes,
and the Borrower knows of no unpaid assessment which is due and payable against
it or any of its Subsidiaries or any claims being asserted which could
reasonably be expected to have a Material Adverse Effect, except such thereof as
are being contested as required under Section 7.4, and for which adequate
reserves have been set aside in accordance with GAAP.
4.10. Governmental Regulations
Neither the Borrower nor any of its Subsidiaries is subject to
regulation under the Investment Company Act of 1940, as amended, the Public
Utility Holding Company Act of 1935, as amended, or the Federal Power Act, and
neither the Borrower nor any of its Subsidiaries is subject to any statute or
regulation which prohibits or restricts the incurrence of Indebtedness under the
Loan Documents, including, without limitation, statutes or regulations relative
to common or contract carriers or to the sale of electricity, gas, steam, water,
telephone, telegraph or other public utility services.
4.11. Federal Reserve Regulations; Use of Loan Proceeds
Neither the Borrower nor any of its Subsidiaries is engaged
principally, or as one of its important activities, in the business of extending
credit for the purpose of purchasing or carrying any Margin Stock. No part of
the proceeds of the Loans will be used, directly or indirectly, for a purpose
which violates any law, rule or regulation of any Governmental Authority,
including, without limitation, the provisions of Regulations G, T, U or X of the
Board of Governors of the Federal Reserve System, as amended. No part of the
proceeds of the Loans will be used, directly or indirectly, to purchase or carry
Margin Stock or to extend credit to others for the purpose of purchasing or
carrying Margin Stock.
4.12. Plans
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Neither the Borrower nor any Subsidiary has a Pension Plan on the
Effective Date.
4.13. Financial Statements
(a) The Borrower has heretofore delivered to the Agent and the Lenders
copies of its Form 10-K for the fiscal year ending December 31, 1995, containing
the audited Consolidated Balance Sheets of the Borrower and its Subsidiaries as
of December 31, 1995 and December 31, 1994, and the related Consolidated
Statements of Income, Retained Earnings and Cash Flows for the three year
periods ending December 31, 1995, and its Form 10-Q for the fiscal quarter ended
September 30, 1996, containing the unaudited Consolidated Balance Sheet of the
Borrower and its Subsidiaries for such fiscal quarter, together with the related
Consolidated Statements of Income, Retained Earnings and Cash Flows for the
fiscal quarter then ended (with the applicable related notes and schedules, the
"Financial Statements"). The Financial Statements fairly present the
Consolidated financial condition and results of the operations of the Borrower
and its Subsidiaries as of the dates and for the periods indicated therein and
have been prepared in conformity with GAAP. Except as reflected in the Financial
Statements or in the foot notes thereto, neither the Borrower nor any of its
Subsidiaries has any obligation or liability of any kind (whether fixed,
accrued, Contingent, unmatured or otherwise) which, in accordance with GAAP,
should have been shown in the Financial Statements and was not. Since December
31, 1995, the Borrower and each of its Subsidiaries has conducted its business
only in the ordinary course and there has been no Material Adverse Change.
(b) The Borrower has heretofore delivered to the Lenders copies of the
consolidated Annual Statement, as of December 31, 1995, of Mercury Casualty
Company (together with the related notes and schedules thereto, the "Annual
Statement"). The Annual Statement fairly presents, the financial condition and
results of operations of the Insurance Subsidiaries as of the dates and for the
periods indicated therein and has been prepared in accordance with SAP.
4.14. Property
Each of the Borrower and its Subsidiaries has good and marketable
title to all of its Property, title to which is material to the Borrower or such
Subsidiary, subject to no Liens except Permitted Liens.
4.15. Licences, Franchises, Etc.
Each of the Borrower and its Subsidiaries possesses or has the right
to use all licenses, franchises, Intellectual Property, and other rights as are
material and necessary for the conduct of its business, and with respect to
which it is in compliance, with no known conflict with the valid rights of
others which could reasonably be expected to have a Material Adverse Effect. No
event has occurred which permits or, to the best knowledge of the Borrower,
after notice or the lapse of time or both, or any other condition, could
reasonably be expected to permit, the revocation or termination of any such
license, franchise, Intellectual Property, or other right which revocation or
termination could reasonably be expected to have a Material Adverse Effect.
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4.16. Environmental Matters
(a) The Borrower and each of its Subsidiaries is in compliance in all
material respects with the requirements of all applicable Environmental Laws, a
violation of which could reasonably be expected to have a Material Adverse
Effect.
(b) No Hazardous Substances have been generated or manufactured on,
transported to or from, treated at, stored at or discharged from any Real
Property in violation of any Environmental Laws which violation could reasonably
be expected to have a Material Adverse Effect; no Hazardous Substances have been
discharged into subsurface waters under any Real Property in violation of any
Environmental Laws which violation could reasonably be expected to have a
Material Adverse Effect; no Hazardous Substances have been discharged from any
Real Property on or into Property or waters (including subsurface waters)
adjacent to any Real Property in violation of any Environmental Laws which
violation could reasonably be expected to have a Material Adverse Effect; and
there are not now, nor ever have been, on any Real Property any underground or
above ground storage tanks containing Hazardous Substances.
(c) Neither the Borrower nor any of its Subsidiaries (i) has received
notice (written or oral) or otherwise learned of any claim, demand, suit,
action, proceeding, event, condition, report, directive, Lien, violation, non-
compliance or investigation indicating or concerning any potential or actual
liability (including, without limitation, potential liability for enforcement,
investigatory costs, cleanup costs, government response costs, removal costs,
remedial costs, natural resources damages, Property damages, personal injuries
or penalties) arising in connection with: (x) any non-compliance with or
violation of the requirements of any applicable Environmental Laws, or (y) the
presence of any Hazardous Substance on any Real Property (or any Real Property
previously owned by the Borrower or any of its Subsidiaries) or the release or
threatened release of any Hazardous Substance into the environment, (ii) to the
knowledge of the Borrower has any threatened or actual liability in connection
with the presence of any Hazardous Sub stance on any Real Property (or any Real
Property previously owned by the Borrower or any of its Subsidiaries) or the
release or threatened re lease of any Hazardous Substance into the environment,
(iii) has received notice of any federal or state investigation evaluating
whether any remedial action is needed to respond to the presence of any
Hazardous Substance on any Real Property (or any Real Property previously owned
by the Borrower or any of its Subsidiaries) or a release or threatened release
of any Hazardous Substance into the environment for which the Borrower or any of
its Subsidiaries is or may be liable, or (iv) has received notice that the
Borrower or any of its Subsidiaries is or may be liable to any Person under any
Environmental Law.
(d) To the knowledge of the Borrower no Real Property is located in an
area identified by the Secretary of Housing and Urban Development as an area
having special flood
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hazards.
4.17. Labor Relations
There are no material controversies pending between the Borrower or
any of its Subsidiaries and any of their respective employees, which could
reasonably be expected to have a Material Adverse Effect.
4.18. Burdensome Obligations
Neither the Borrower nor any of its Subsidiaries is a party to or
bound by any license, franchise, agreement, deed, lease or other instrument, or
subject to any restriction which, in the opinion of the management of the
Borrower or such Subsidiary is so unusual or burdensome, in the context of its
business, as in the foreseeable future might materially and adversely affect or
impair the revenue or cash flows of the Borrower or such Subsidiary or the
ability of the Borrower to perform its obligations under the Loan Documents. The
Borrower does not presently anticipate that future expenditures by the Borrower
or any of its Subsidiaries needed to meet the provisions of federal or state
statutes, orders, rules or regulations will be so burdensome as to result in a
Material Adverse Effect or Material Adverse Change.
4.19. No Misrepresentation
No representation or warranty contained in any Loan Document and no
certificate or report furnished or to be furnished by the Borrower or any of its
Subsidiaries in connection with the transactions contemplated thereby, contains
or will contain a misstatement of material fact, or, to the best knowledge of
the Borrower, omits or will omit to state a material fact required to be stated
in order to make the statements therein contained not misleading in the light of
the circumstances under which made.
5. CONDITIONS TO FIRST LOANS
In addition to the conditions precedent set forth in Section 6, the
obligation of each Lender to make its first Loan shall be subject to the
fulfillment of the following conditions precedent:
5.1. Evidence of Action
The Agent shall have received a certificate, dated the first Borrowing
Date, of the Secretary or Assistant Secretary of the Borrower (i) attaching a
true and complete copy of the resolutions of its Board of Directors and of all
documents evidencing other necessary corporate action (in form and substance
satisfactory to the Agent) taken by it to authorize the Loan Documents and the
transactions contemplated thereby, (ii) attaching a true and complete copy of
its Articles of Incorporation and By-Laws, (iii) setting forth the incumbency
of its officer or officers who may sign the Loan Documents, including therein a
signature specimen of such officer or officers and (iv) attaching a certificate
of good standing of the Secretary of State of the State of California and of
each other jurisdiction in which it is qualified to do business.
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5.2. This Agreement
The Agent shall have received counterparts of this Agreement signed by
each of the parties hereto (or receipt by the Agent from a party hereto of a fax
signature page signed by such party which shall have agreed to promptly provide
the Agent with originally executed counterparts hereof).
5.3. Notes
The Agent shall have received the Notes, duly executed by an
Authorized Signatory of the Borrower.
5.4. Existing Indebtedness
The Existing Indebtedness shall have been, or simultaneously with the
making of the first Loans will be, paid in full, whereupon the Existing
Agreement shall be deemed to have been terminated and of no further force and
effect, except with respect to the provisions thereof which expressly survive
the payment of the Existing Indebtedness.
5.5. Approvals
The Agent shall have received a certificate of an Authorized Signatory
of the Borrower to the effect that all approvals and consents of all Persons
required to be obtained in connection with the consummation of the transactions
contemplated by the Loan Documents have been duly obtained and are in full force
and effect, and that all required notices have been given and all required
waiting periods have expired.
5.6. Opinion of Counsel to the Borrower
The Agent shall have received an opinion of Latham & Watkins, counsel
to the Borrower, addressed to the Agent, the Lenders and Special Counsel, and
dated the first Borrowing Date, substantially in the form of Exhibit E, and
covering such additional matters as the Required Lenders may reasonably request.
It is understood that such opinion is being delivered to the Agent and the
Lenders upon the direction of the Borrower and that the Agent and the Lenders
may and will rely upon such opinion.
5.7. Opinion of Special Counsel
The Agent shall have received an opinion of Special Counsel, addressed
to the Agent and the Lenders and dated the first Borrowing Date substantially in
the form of Exhibit F.
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5.8. Payment of Fees
The Borrower shall have paid to the Agent and the Lenders all fees and
expenses which it shall have agreed to pay, to the extent such fees and expenses
shall have become payable on or prior to the Effective Date, and shall have paid
the reasonable fees and disbursements of Special Counsel which the Borrower is
obligated to pay in accordance with Section 11.5 and which shall have accrued up
to the Effective Date.
5.9. Other Documents
The Agent shall have received such other documents (including
financial statements and projections), each in form and substance reasonably
satisfactory to the Agent, as the Agent shall reasonably require in connection
with the making of the first Loans.
6. CONDITIONS OF LENDING - ALL LOANS
The obligation of each Lender to make any Loan is subject to the
satisfaction of the following conditions precedent as of the date of such Loan:
6.1. Compliance
On each Borrowing Date and after giving effect to the Loans to be made
thereon, (i) the Borrower shall be in compliance with all of the terms,
covenants and conditions thereof, (ii) there shall exist no Default or Event of
Default, (iii) the representations and warranties contained in the Loan
Documents shall be true and correct with the same effect as though such
representations and warranties had been made on such Borrowing Date (except that
Schedules 4.1 and 4.5 shall have been updated, as appropriate, in order to make
the representations and warranties expressed in Sections 4.1 and 4.5 true and
correct as of such Borrowing Date) and (iv) the aggregate outstanding principal
balance of the Loans will not exceed the Aggregate Commitments. Each borrowing
by the Borrower shall constitute a certification by the Borrower as of such
Borrowing Date that each of the foregoing matters is true and correct in all
respects.
6.2. Loan Closings
All documents required by the provisions of this Agreement to be
executed or delivered to the Agent on or before the applicable Borrowing Date
shall have been executed and shall have been delivered at the office of the
Agent set forth in Section 11.2 on or before such Borrowing Date.
6.3. Borrowing Request
The Agent shall have received a Borrowing Request duly executed by an
Authorized Signatory of the Borrower.
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6.4. Other Documents
The Agent shall have received such other documents as the Agent or the
Lenders shall reasonably request.
7. AFFIRMATIVE COVENANTS
The Borrower agrees that, so long as this Agreement is in effect, any Loan
remains outstanding and unpaid, or any other amount is owing under any Loan
Document to any Lender or the Agent, the Borrower shall:
7.1. Financial Statements
Maintain, and cause each Subsidiary to maintain, a standard system of
accounting in accordance with GAAP and, with respect to each Insurance
Subsidiary, SAP, and furnish to the Agent and each Lender:
(a) As soon as available and, in any event, within 105 days after the
close of each fiscal year, a copy of (x) the Borrower's 10-K in respect of such
fiscal year, and (y) (i) the Borrower's Consolidated Balance Sheet as of the
end of such fiscal year, and (ii) the related Consolidated Statements of Income
and Shareholders' Equity and Cash Flows, as of and through the end of such
fiscal year, setting forth in each case in comparative form the corresponding
figures in respect of the previous fiscal year, all in reasonable detail, and ac
companied by a report of the Borrower's auditors, which report shall be
unqualified as to scope of audit and going concern or similar or other
qualification and shall state that (A) such auditors audited such financial
statements, (B) such audit was made in accordance with generally accepted
auditing standards in effect at the time and provides a reasonable basis for
such opinion, and (C) said financial statements have been prepared in accordance
with GAAP;
(b) After request by the Agent therefor, simultaneously with the
delivery of the certified statements required by clause (a) above, copies of a
statement of the Borrower's auditors (i) confirming the computations by the
Borrower (which computations shall accompany such statement and shall be in
reasonable detail) with respect to the Borrower's compliance with Sections 7.11,
7.12, 7.13, and 7.14, and (ii) stating that, in making the examination necessary
for their audit of the financial statements of the Borrower for such fiscal
year, nothing came to their attention that caused them to believe that any
Default or an Event of Default existed on the date of such statements;
(c) As soon as available, and in any event within 60 days after the
end of each of the first three fiscal quarters of each fiscal year, a copy of
(x) the Borrower's 10-Q in
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respect of such fiscal quarter, and (y) (i) the Borrower's Consolidated Balance
Sheet as of the end of such quarter, and (ii) the related Consolidated
Statements of Income Shareholders' Equity and Cash Flows for (A) such quarter,
and (B) the period from the beginning of the then current fiscal year to the end
of such quarter, in each case in comparable form with the prior fiscal year, all
in reasonable detail and prepared in accordance with GAAP (without footnotes and
subject to year-end audit adjustments);
(d) Simultaneously with the delivery of the financial statements
required by clauses (a) and (c) above, a certificate of the chief financial
officer of the Borrower certifying that no Default or Event of Default shall
have occurred or be continuing or, if so, specifying in such certificate all
such Defaults and Events of Default, and setting forth computations in
reasonable detail demonstrating compliance with Sections 7.11, 7.12, 7.13, and
7.14;
(e) As soon as practicable after the filing thereof but in any case no
later than 105 days after the close of each fiscal year of the Borrower and 60
days after the close of each fiscal quarter of the Borrower, copies of each
annual and quarterly statutory statement filed by the Borrower or any Insurance
Subsidiary with the California Department of Insurance or any other Governmental
Authority;
(f) Promptly upon receipt thereof, copies of any audit reports and
management letters delivered in connection with the statements referred to in
Section 7.1(a); and
(g) From time to time, such other information regarding the financial
position or business of the Borrower and the Subsidiaries, as either Agent, at
the request of any Lender, may reasonably request.
7.2. Certificates; Other Information
Furnish to the Agent and each Lender:
(a) Prompt written notice if: (i) the Borrower becomes aware that any
Indebtedness of the Borrower or any of its Subsidiaries is declared or shall
become due and payable prior to its stated maturity, or is called and not paid
when due, (ii) the Borrower becomes aware that a default shall have occurred
under any note (other than the Notes), or the holder of any such note, or other
evidence of Indebtedness, certificate or security evidencing any such
Indebtedness or any obligee with respect to any other Indebtedness of the
Borrower or any of its Subsidiaries has the right to declare any such
Indebtedness due and payable prior to its stated maturity, or (iii) the Borrower
becomes aware that there shall occur and be continuing a Default or an Event of
Default or a Material Adverse Change;
(b) Promptly following the Borrower becoming aware of the same,
written notice of: (i) any citation, summons, subpoena, order to show cause or
other document naming the Borrower or any of its Subsidiaries a party to any
proceeding before any Governmental Authority which could reasonably be expected
to have a Material Adverse Effect or which calls into question the validity or
enforceability of any of the Loan Documents, and include with such
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notice a copy of such citation, summons, subpoena, order to show cause or other
document, (ii) any lapse or other termination of any material license,
Intellectual Property, permit, franchise or other authorization issued to the
Borrower or any of its Subsidiaries by any Person or Governmental Authority, and
(iii) any refusal by any Person or Governmental Authority to renew or extend any
such material license, Intellectual Property, permit, franchise or other
authorization, which lapse, termination, refusal or dispute could reasonably be
expected to have a Material Adverse Effect;
(c) Promptly upon becoming available, copies of all regular or
periodic reports (including, without limitation, current reports on Form 8-K)
which the Borrower or any Subsidiary may now or hereafter be required to file
with or deliver to the SEC, and copies of all material news releases sent to
stockholders;
(d) Prompt written notice of any order, notice, claim or proceeding
received by, or brought against, the Borrower or any of its Subsidiaries, or
with respect to any of the Real Property, under any Environmental Law.
(e) Such other information as the Agent or any Lender shall reasonably
request from time to time.
7.3. Legal Existence
Maintain, and cause each of its Subsidiaries so to maintain, its
corporate existence, in good standing in the jurisdiction of its in corporation
and in each other jurisdiction in which the failure so to do could reasonably be
expected to have a Material Adverse Effect.
7.4. Taxes
Pay and discharge when due, and cause each of its Subsidiaries so to
do, all Taxes, assessments and governmental charges, license fees and levies
upon, or with respect to the Borrower or such Subsidiary and all Taxes upon the
income, profits and Property of the Borrower and its Subsidiaries, which if
unpaid, could reasonably be expected to have a Material Adverse Effect or become
a Lien on the Property of the Borrower or such Subsidiary (other than a Lien
described in Section 8.2(i)), unless and to the extent only that such Taxes,
assessments, charges, license fees and levies shall be contested in good faith
and by appropriate proceedings diligently conducted by the Borrower or such
Subsidiary and, provided, that the Borrower shall give the Agent prompt notice
of such contest and that such reserve or other appropriate provision as shall
be required by the Accountants in accordance with GAAP shall have been made
therefor.
7.5. Insurance
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Maintain, and cause each of its Subsidiaries to maintain, with
financially sound and reputable insurance companies insurance on all its
Property in at least such amounts and against at least such risks (but including
in any event public liability, property damage, workers' compensation and
business interruption coverage) as are usually insured against in the same
general area by companies engaged in the same or a similar business; and furnish
to the Agent, upon written request, full information as to the insurance
carried.
7.6. Payment of Indebtedness and Performance of Obligations
Pay and discharge when due, and cause each of its Subsidiaries to pay
and discharge, all lawful Indebtedness, obligations and claims for labor,
materials and supplies or otherwise which, if unpaid, might (i) have a Material
Adverse Effect, or (ii) become a Lien upon Property of the Borrower or any of
its Subsidiaries other than a Permitted Lien, unless and to the extent only that
the validity of such Indebtedness, obligation or claim shall be contested in
good faith and by appropriate proceedings diligently conducted by the Borrower
or such Subsidiary, provided that the Borrower shall give the Agent prompt
notice of any such contest and that such reserve or other appropriate provision
as shall be required by the Accountants in accordance with GAAP shall have been
made therefor.
7.7. Condition of Property
At all times, maintain, protect and keep in good repair, working order
and condition (ordinary wear and tear excepted), and cause each of its
Subsidiaries so to do, all Property necessary to the operation of the Borrower's
or such Subsidiary's business.
7.8. Observance of Legal Requirements
Observe and comply in all respects, and cause each of its Subsidiaries
so to do, with all laws, ordinances, orders, judgments, rules, regulations,
licenses, certifications, franchises, permits, directions and requirements of
all Governmental Authorities, which now or at any time hereafter may be
applicable to it, a violation of which could reasonably be expected to have a
Material Adverse Effect, except such thereof as shall be contested in good faith
and by appropriate proceedings diligently conducted by the Borrower or such
Subsidiary, provided that the Borrower shall give the Agent prompt notice of
such contest and that such reserve or other appropriate provision as shall be
required by the Accountants in accordance with GAAP shall have been made
therefor.
7.9. Inspection of Property; Books and Records; Discussions
Keep proper books of record and account in which full, true and
correct entries in conformity with GAAP and all requirements of law shall be
made of all dealings and transactions in relation to its business and activities
and permit representatives of the Agent and any Lender to visit its offices, to
inspect any of its Property and examine and make copies or abstracts from any of
its books and records at any reasonable time and as often as may reasonably be
desired, and to discuss the business, operations, prospects, licenses, Property
and financial condition of the Borrower and its Subsidiaries with the officers
thereof and the Accountants.
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7.10. Authorizations
Maintain and cause each of its Subsidiaries to maintain, in full force
and effect, all licenses, copyrights, patents, trademarks, trade names,
franchises, permits, applications, reports, and other authorizations and rights,
which, if not so maintained, would individually or in the aggregate have a
Material Adverse Effect.
7.11. Adjusted Net Worth
As of any date of determination, have Adjusted Net Worth of not less
than the sum of (a) $380,000,000, plus (b) 50% of the Consolidated net income
(but not less than zero) for each full fiscal quarter ended during the period
commencing on January 1, 1995 and ending on such date of determination.
7.12. GAAP Net Worth
As of any date of determination, have GAAP Net Worth of not less than
the sum of (a) $330,000,000, plus (b) 50% of the Consolidated net income (but
not less than zero) for each full fiscal quarter ended during the period
commencing on January 1, 1995 and ending on such date of determination.
7.13. Leverage Ratio
Maintain at all times a Leverage Ratio of not more than 0.25:1.00.
7.14. Interest Coverage Ratio
Maintain at all times an Interest Coverage Ratio greater than
2.50:1.00.
8. NEGATIVE COVENANTS
The Borrower agrees that, so long as this Agreement is in effect, any Loan
remains outstanding and unpaid, or any other amount is owing under any Loan
Document to any Lender or the Agent, the Borrower shall not, directly or
indirectly:
8.1. Indebtedness of Subsidiaries
Permit any Subsidiary of the Borrower to create, incur, assume or
suffer to exist any liability for Indebtedness, except (i) Indebtedness existing
on the date hereof as set forth on Schedule 8.1, but not any increases in the
amount thereof, (ii) Indebtedness secured by Liens
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on Real Property acquired by such Subsidiary after the Effective Date and (iii)
Indebtedness (not in excess of $25,000,000 aggregate principal amount at any
time outstanding) secured by Liens permitted under Section 8.2(xi), provided
that after giving effect to any Indebtedness permitted under clauses (ii) and
(iii) above, the Borrower is in compliance with the provisions of Sections 7.13,
7.14 and 8.2(vii).
8.2. Liens
Create, incur, assume or suffer to exist any Lien upon any of its
Property, whether now owned or hereafter acquired, or permit any of its
Subsidiaries so to do, except (i) Liens for Taxes, assessments or similar
charges incurred in the ordinary course of business which are not delinquent or
which are being contested in accordance with Section 7.4, provided that
enforcement of such Liens is stayed pending such contest, (ii) Liens in
connection with workers' compensation, unemployment insurance or other social
security obligations (but not ERISA), (iii) deposits or pledges to secure bids,
tenders, contracts (other than con tracts for the payment of money), leases,
statutory obligations, surety and appeal bonds and other obligations of like
nature arising in the ordinary course of business, (iv) zoning ordinances,
easements, rights of way, minor defects, irregularities, and other similar
restrictions affecting real Property which do not materially adversely affect
the value of such real Property or the financial condition of the Borrower or
such Subsidiary or impair its use for the operation of the business of the
Borrower or such Subsidiary, (v) Liens arising by operation of law such as
mechanics', materialmen's, carriers', warehousemen's liens incurred in the
ordinary course of business which are not delinquent or which are being
contested in accordance with Section 7.6, provided that enforcement of such
Liens is stayed pending such contest, (vi) Liens arising out of judgments or
decrees aggregating $5,000,000 or less in existence less than 30 days after the
entry thereof or which are being contested in accordance with Section 7.6,
provided that enforcement of such Liens is stayed pending such contest or the
payment of which is covered by insurance as to which the carrier has
acknowledged liability in writing, (vii) Liens on Real Property of any
Subsidiary of the Borrower acquired after the Effective Date to secure
Indebtedness permitted by Section 8.1(ii), incurred in connection with the
acquisition of such Property, provided that each such Lien is limited to such
Property so acquired, (viii) Liens on Property of the Borrower and its
Subsidiaries existing on the Effective Date as set forth on Schedule 8.2 as
renewed from time to time, but not any increases in the amounts secured thereby,
(ix) purchase money security interests in personal property, provided that each
such Lien is limited to such Property so purchased, (x) banker's liens arising
in the ordinary course of business and (xi) Liens on real property owned by
Subsidiaries of the Borrower securing Indebtedness permitted under Section
8.1(iii), provided that such Liens are limited to the real property so owned.
8.3. Mergers, Acquisitions and Dispositions
Consolidate or merge into or with any Person, or make any Acquisition
or Disposition, or enter into any binding agreement to do any of the foregoing
which is not contingent on obtaining the consent of the Required Lenders, or
permit any Subsidiary of the Borrower to do any of the foregoing, except that
(a) a Subsidiary of the Borrower may consolidate and merge with another wholly-
owned Subsidiary of the Borrower, if (i) immediately before and after giving
effect thereto no Default or Event of Default shall or would exist and (ii) any
such consolidation or merger would not cause any Applicable Insurance Regulatory
Authority to restrict the ability of any Insurance Subsidiary to pay dividends
or
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otherwise made distributions to the Borrower or any of its Subsidiaries in any
manner, and (b) the Borrower may make Acquisitions and Dispositions, if (i) the
aggregate consolidated amount of any Capital Stock or Property so acquired in
any calendar year (determined on the basis of the fair market value of any
Capital Stock or Property acquired), or the aggregate Consolidated amount of any
assets sold, leased or otherwise disposed of in any calendar year (determined on
the basis of the fair market value of any assets so sold, leased or disposed of)
would not exceed 15% of the Borrower's Consolidated Statutory Capital and
Surplus as of the end of the immediately preceding calendar year, (ii) an Event
of Default would not exist before or after giving effect thereto and (iii) any
such Acquisition or Disposition would not cause any Applicable Insurance
Regulatory Authority to restrict the ability of any Insurance Subsidiary to pay
dividends or otherwise make distributions to the Borrower or any of its
Subsidiaries in any manner, provided, however, that the foregoing shall not
limit Dispositions of investment securities as part of the management of a
securities portfolio of the Borrower or any of its Subsidiaries.
8.4. Line of Business
Engage, or permit any Subsidiary of the Borrower to engage, in any
material respect in any business other than a business in which the Borrower or
any Subsidiary is engaged in on the Effective Date and any other business
reasonably related thereto.
8.5. Articles of Incorporation and By-laws
Amend or otherwise modify its Articles of Incorporation or By-Laws in
any way which would adversely affect the interests of the Agent and the Lenders
under any of the Loan Documents, or permit any of its Subsidiaries so to do.
8.6. Fiscal Year
Change its fiscal year from that in effect on the Effective Date, or
permit any of its Subsidiaries so to do.
8.7. Transactions with Affiliates
Become, or permit any Subsidiary to become, a party to any transaction
with any Affiliate of the Borrower on a basis less favorable to the Borrower or
such Subsidiary in any material respect than if such transaction were not with
an Affiliate of the Borrower other than (A) advances made to employees of the
Borrower or any Subsidiary in the ordinary course of business in connection with
their employment, (B) transactions in which the aggregate rental value,
remuneration or other consideration (including the value of a loan) together
with the aggregate rental value, remuneration or other consideration (including
the value of a loan) of
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all such other transactions consummated in the year during which such
transaction is proposed to be consummated, does not exceed $5,000,000, (C)
management or similar agreements entered among the Borrower and any Subsidiaries
in the ordinary course of business, (D) transactions effected pursuant to the
agreement, date October 7, 1985, by and among the Borrower, George Joseph and
Gloria Joseph with respect to the ownership by George Joseph and Gloria Joseph
of the Borrower's Common Stock, (E) payments to officers or directors of the
Borrower or any Subsidiaries in the ordinary course of their employment, (F)
dividends otherwise permitted by this Agreement or (G) the provision by the
Borrower to its Subsidiaries of funds as contemplated by Section 2.16.
8.8. Issuance of Additional Stock by Subsidiaries
Permit any of its Subsidiaries to issue, directly or indirectly, any
additional Stock or other equity interests of such Subsidiary, other than to the
Borrower or to a wholly-owned Subsidiary of the Borrower.
8.9. Reinsurance Agreements
Permit any Insurance Subsidiary to enter into a treaty to cede any of
its obligations to any reinsurer that could reasonably be expected to have a
Material Adverse Effect.
8.10. Adoption of Pension Plans
Adopt a Pension Plan, or permit any Subsidiary so to do, unless this
Agreement is amended, in form and substance satisfactory to the Required
Lenders, to insert the customary provisions with respect thereto.
9. DEFAULT
9.1. Events of Default
The following shall each constitute an "Event of Default" hereunder:
(a) The failure of the Borrower to pay any installment of principal on
any Note on the date when due and payable; or
(b) The failure of the Borrower to pay any installment of interest or
any other fees or expenses payable under any Loan Document or otherwise to the
Agent with respect to the loan facilities established hereunder within three
Business Days after the date when due and payable; or
(c) The use of the proceeds of any Loan in a manner inconsistent with
or in violation of Section 2.16; or
(d) The failure of the Borrower to observe or perform any covenant or
agreement contained in Sections 7.11, 7.12, 7.13, 7.14 or Section 8; or
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(e) The failure to observe or perform any other term, covenant, or
agreement contained in any Loan Document and such failure shall have continued
unremedied for a period of 30 days after the earlier of the Borrower becoming
aware of such failure and the receipt by the Borrower of notice of such failure
from the Agent; or
(f) Any representation or warranty made in any Loan Document or in any
certificate, report, opinion (other than an opinion of counsel) or other
document delivered or to be delivered pursuant thereto, shall prove to have been
incorrect or misleading (whether be cause of misstatement or omission) in any
material respect when made; or
(g) Obligations of the Borrower (other than its obligations under the
Notes) or any of its Subsidiaries, whether as principal, guarantor, surety or
other obligor, for the payment of any Indebtedness or operating leases in excess
of $5,000,000 in the aggregate (i) shall become or shall be declared to be due
and payable prior to the expressed maturity thereof, or (ii) shall not be paid
when due or within any grace period for the payment thereof, or (iii) any holder
of any such obligation shall have the right to declare such obligation due and
pay able prior to the expressed maturity thereof; or
(h) The Borrower or any of its Subsidiaries shall (i) suspend or
discontinue its business, (ii) make an assignment for the benefit of creditors,
(iii) generally not be paying its debts as such debts become due, (iv) admit in
writing its inability to pay its debts as they become due, (v) file a voluntary
petition in bankruptcy, (vi) become insolvent (however such insolvency shall be
evidenced), (vii) file any petition or answer seeking for itself any
reorganization, arrangement, composition, readjustment of debt, liquidation or
dissolution or similar relief under any present or future statute, law or
regulation of any jurisdiction, (viii) petition or apply to any tribunal for any
receiver, custodian or any trustee for any substantial part of its Property,
(ix) be the subject of any such proceeding filed against it which remains
undismissed for a period of 45 days, (x) file any answer admitting or not
contesting the material allegations of any such petition filed against it or any
order, judgment or decree approving such petition in any such proceeding, (xi)
seek, approve, consent to, or acquiesce in any such proceeding, or in the
appointment of any trustee, receiver, sequestrator, custodian, liquidator, or
fiscal agent for it, or any substantial part of its Property, or an order is
entered appointing any such trustee, receiver, sequestrator, custodian,
liquidator or fiscal agent and such order remains in effect for 45 days, (xii)
any conservatorship or similar proceeding is commenced by or on behalf of the
California Department of Insurance in respect of the Borrower or any Subsidiary
or (xiii) take any formal action for the purpose of effecting any of the
foregoing or looking to the liquidation or dissolution of the Borrower or such
Subsidiary; or
(i) An order for relief is entered under the United States bankruptcy
laws or any other decree or order is entered by a court having jurisdiction (i)
adjudging the Borrower or any of its Subsidiaries bankrupt or insolvent, (ii)
approving as properly filed a petition
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seeking reorganization, liquidation, arrangement, adjustment or composition of
or in respect of the Borrower or any of its Subsidiaries under the United States
bankruptcy laws or any other applicable Federal or state law, (iii) appointing a
receiver, liquidator, assignee, trustee, custodian, sequestrator (or other
similar official) of the Borrower or any of its Subsidiaries or of any
substantial part of the Property thereof, or (iv) ordering the winding up or
liquidation of the affairs of the Borrower or any of its Subsidiaries, and any
such decree or order continues unstayed and in effect for a period of 45 days;
or
(j) Judgments or decrees against the Borrower or any of its
Subsidiaries aggregating in excess of $5,000,000 shall remain unpaid, unstayed,
undischarged, unbonded and undismissed for a period of 30 days unless the
payment thereof is covered in full by insurance as to which the carrier has
acknowledged liability in writing; or
(k) After the Effective Date (1) Any Person (other than George Joseph
or Gloria Joseph), acting alone or with a group of Persons acting in concert,
(i) shall have or acquire beneficial ownership of securities (or options
therefor) having 20% or more of the ordinary voting power of the Borrower, or
(ii) shall possess, directly or indirectly, the power to direct or cause the
direction of the management and policies of the Borrower, whether through the
ownership of voting securities, by contract or otherwise, or (2) directors of
the Borrower constituting that percentage necessary to approve corporate action
shall not have been directors on the date hereof or directors designated or
approved by directors on the date hereof; or
(l) Any license, franchise, permit, right, approval or agreement of
the Borrower or any Subsidiary to own or operate any Operating Entity owned or
operated by the Borrower or such Subsidiary (i) is not renewed, or is suspended
or revoked and (ii) the non-renewal, suspension or revocation thereof would have
a Material Adverse Effect; or
(m) Any Loan Document shall cease, for any reason, to be in full force
and effect or the Borrower shall so assert in writing or shall disavow any of
its obligations thereunder.
Upon the occurrence of an Event of Default or at any time thereafter
during the continuance thereof, (a) if such event is an Event of Default
specified in clause (h) or (i) above, the Aggregate Commitments shall
immediately and automatically terminate and the Loans, all accrued and unpaid
interest thereon and all other amounts owing under the Loan Documents shall
immediately become due and payable and the Agent may, and, upon the direction of
the Required Lenders shall, exercise any and all remedies and other rights
provided in the Loan Documents, and (b) if such event is any other Event of
Default, any or all of the following actions may be taken: (i) with the consent
of the Required Lenders, the Agent may, and upon the direction of the Required
Lenders shall, by notice to the Borrower, declare the Aggregate Commitments to
be terminated forthwith, whereupon the Aggregate Commitments shall immediately
terminate, and (ii) with the consent of the Required Lenders, the Agent may, and
upon the direction of the Required Lenders shall, by notice of default to the
Borrower, declare the Loans, all accrued and unpaid interest thereon, and all
other amounts owing under the Loan Documents to be due and payable forthwith,
whereupon the same shall immediately become due and payable, and the Agent may,
and upon the direction of the Required Lenders shall, exercise
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any and all remedies and other rights provided pursuant to the Loan Documents.
Except as otherwise provided in this Section, presentment, demand, protest and
all other notices of any kind are hereby expressly waived. To the fullest extent
not prohibited by applicable law, the Borrower hereby further expressly waives
and covenants not to assert any appraisement, valuation, stay, extension,
redemption or similar laws, now or at any time hereafter in force which might
delay, prevent or otherwise impede the performance or enforcement of any Loan
Document.
In the event that the Aggregate Commitments shall have been terminated
or the Notes shall have been declared due and payable pursuant to the provisions
of this Section, any funds received by the Agent and the Lenders from or on
behalf of the Borrower shall be applied by the Agent and the Lenders in
liquidation of the Loans and the obligations of the Borrower under the Loan
Documents in the following manner and order: (i) first, to the payment of
interest on, and then the principal portion of, any Loans which the Agent may
have advanced on behalf of any Lender for which the Agent has not then been
reimbursed by such Lender or the Borrower; (ii) second, to the payment of any
fees or expenses due the Agent from the Borrower, (iii) third, to reimburse the
Agent and the Lenders for any expenses (to the extent not paid pursuant to
clause (ii) above) due from the Borrower pursuant to the provisions of Section
11.5; (iv) fourth, to the payment of accrued Commitment Fees and all other fees,
expenses and amounts due under the Loan Documents (other than principal and
interest on the Notes); (v) fifth, to the payment of interest due on the Notes;
(vi) sixth, to the payment of principal out standing on the Notes; and (vii)
seventh, to the payment of any other amounts owing to the Agent and the Lenders
under any Loan Document.
10. THE AGENT
10.1. Appointment
Each Lender hereby irrevocably designates and appoints BNY as the
Agent of such Lender under the Loan Documents and each such Lender hereby
irrevocably authorizes BNY, as the Agent for such Lender, to take such action on
its behalf under the provisions of the Loan Documents and to exercise such
powers and perform such duties as are expressly delegated to the Agent by the
terms of the Loan Documents, together with such other powers as are reasonably
incidental thereto. Notwithstanding any provision to the contrary elsewhere in
any Loan Document, the Agent shall not have any duties or responsibilities other
than those expressly set forth therein, or any fiduciary relationship with any
Lender, and no implied covenants, functions, responsibilities, duties,
obligations or liabilities shall be read into the Loan Documents or otherwise
exist against the Agent.
10.2. Delegation of Duties
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The Agent may execute any of its duties under the Loan Documents by or
through agents or attorneys-in-fact and shall be entitled to rely upon the
advice of counsel concerning all matters pertaining to such duties.
10.3. Exculpatory Provisions
Neither the Agent nor any of its officers, directors, employees,
agents, attorneys-in-fact or affiliates shall be (i) liable for any action
lawfully taken or omitted to be taken by it or such Person under or in
connection with the Loan Documents (except the Agent for its own gross
negligence or willful misconduct), or (ii) responsible in any manner to any of
the Lenders for any recitals, statements, representations or warranties made by
the Borrower or any officer thereof contained in the Loan Documents or in any
certificate, report, statement or other document referred to or provided for in,
or received by the Agent under or in connection with, the Loan Documents or for
the value, validity, effectiveness, genuineness, perfection, enforce ability or
sufficiency of any of the Loan Documents or for any failure of the Borrower or
any other Person to perform its obligations thereunder. The Agent shall not be
under any obligation to any Lender to ascertain or to inquire as to the
observance or performance of any of the agreements contained in, or conditions
of, the Loan Documents, or to inspect the properties, books or records of the
Borrower. The Agent shall not be under any liability or responsibility
whatsoever, as Agent, to the Borrower or any other Person as a consequence of
any failure or delay in performance, or any breach, by any Lender of any of its
obligations under any of the Loan Documents.
10.4. Reliance by Agent
The Agent shall be entitled to rely, and shall be fully protected in
relying, upon any writing, resolution, notice, consent, certificate, affidavit,
opinion, letter, cablegram, telegram, fax, telex or teletype message, statement,
order or other document or conversation believed by it to be genuine and correct
and to have been signed, sent or made by the proper Person or Persons and upon
advice and statements of legal counsel (including, without limitation, counsel
to the Borrower), in dependent accountants and other experts selected by the
Agent. The Agent may treat each Lender, or the Person designated in the last
notice filed with it under this Section, as the holder of all of the interests
of such Lender in its Loans and in its Note until written notice of transfer,
signed by such Lender (or the Person designated in the last notice filed with
the Agent) and by the Person designated in such written notice of transfer, in
form and substance satisfactory to the Agent, shall have been filed with the
Agent. The Agent shall not be under any duty to examine or pass upon the
validity, effectiveness, enforceability, perfection or genuineness of the Loan
Documents or any instrument, document or communication furnished pursuant
thereto or in connection therewith, and the Agent shall be entitled to assume
that the same are valid, effective and genuine, have been signed or sent by the
proper parties and are what they purport to be. The Agent shall be fully
justified in failing or refusing to take any action under the Loan Documents
unless it shall first receive such advice or concurrence of the Required Lenders
as it deems appropriate. The Agent shall in all cases be fully protected in
acting, or in refraining from acting, under the Loan Documents in accordance
with a request or direction of the Required Lenders, and such request or
direction and any action taken or failure to act pursuant thereto shall be
binding upon all the Lenders and all future holders of the Notes.
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10.5. Notice of Default
The Agent shall not be deemed to have knowledge or notice of the
occurrence of any Default or Event of Default unless the Agent has received
written notice thereof from a Lender or the Borrower. In the event that the
Agent receives such a notice, the Agent shall promptly give notice thereof to
the Lenders and the Borrower. The Agent shall take such action with respect to
such Default or Event of Default as shall be directed by the Required Lenders,
provided, however, that unless and until the Agent shall have received such
directions, the Agent may (but shall not be obligated to) take such action, or
refrain from taking such action, with respect to such Default or Event of
Default as it shall deem to be in the best interests of the Lenders.
10.6. Non-Reliance on Agent and Other Lenders
Each Lender expressly acknowledges that neither the Agent nor any of
its respective officers, directors, employees, agents, attorneys-in-fact or
affiliates has made any representations or warranties to it and that no act by
the Agent hereinafter, including any review of the affairs of the Borrower,
shall be deemed to constitute any representation or warranty by the Agent to any
Lender. Each Lender represents to the Agent that it has, independently and
without reliance upon the Agent or any other Lender, and based on such documents
and information as it has deemed appropriate, made its own evaluation of and
investigation into the business, operations, Property, financial and other
condition and creditworthiness of the Borrower and made its own decision to
enter into this Agreement. Each Lender also represents that it will,
independently and without reliance upon the Agent or any other Lender, and based
on such documents and information as it shall deem appropriate at the time,
continue to make its own credit analysis, evaluations and decisions in taking
or not taking action under any Loan Document, and to make such investigation as
it deems necessary to inform itself as to the business, operations, Property,
financial and other condition and creditworthiness of the Borrower. Except for
notices, reports and other documents expressly required to be furnished to the
Lenders by the Agent hereunder, the Agent shall not have any duty or
responsibility to provide any Lender with any credit or other information
concerning the business, operations, Property, financial and other condition or
creditworthiness of the Borrower which may come into the possession of the
Agent or any of its officers, directors, employees, agents, attorneys-in-fact or
affiliates.
10.7. Indemnification
Each Lender agrees to indemnify and reimburse the Agent in its
capacity as such (to the extent not promptly reimbursed by the Borrower and
without limiting the obligation of the Borrower to do so), pro rata according to
the outstanding principal balance of the Loans (or at any time when no Loans are
outstanding, according to its Commitment Percentage), from
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and against any and all liabilities, obligations, losses, damages, penalties,
actions, judgments, suits, costs, expenses or disbursements of any kind
whatsoever including, without limitation, any amounts paid to the Lenders
(through the Agent) by the Borrower pursuant to the terms of the Loan Documents,
that are subsequently rescinded or avoided, or must otherwise be restored or
returned) which may at any time (including, without limitation, at any time
following the payment of the Notes) be imposed on, incurred by or asserted
against the Agent in any way relating to or arising out of the Loan Documents or
any other documents contemplated by or referred to therein or the transactions
contemplated thereby or any action taken or omitted to be taken by the Agent
under or in connection with any of the foregoing; provided, however, that no
Lender shall be liable for the payment of any portion of such liabilities,
obligations, losses, damages, penalties, actions, judgments, suits, costs,
expenses or disbursements to the extent resulting solely from the finally
adjudicated gross negligence or willful misconduct of the Agent. Without
limitation of the foregoing, each Lender agrees to reimburse the Agent promptly
upon demand for its pro rata share of any unpaid fees owing to the Agent, and
any costs and expenses (including, without limitation, reasonable fees and
expenses of counsel) payable by the Borrower under Section 11.5, to the extent
that the Agent has not been paid such fees or has not be reimbursed for such
costs and expenses by the Borrower. The failure of any Lender to reimburse the
Agent promptly upon demand for its pro rata share of any amount required to be
by the Lenders to the Agent as provided in this Section shall not relieve any
other Lender of its obligation hereunder to reimburse the Agent for its pro rata
share of such amount, but no Lender shall be responsible for the failure of
other Lender to reimburse the Agent for such other Lender's pro rata share of
such amount. The agreements in this Section shall survive the payment of all
amounts payable under the Loan Documents.
10.8. Agent in Its Individual Capacity
BNY and its respective affiliates may make loans to, accept deposits
from, issue letters of credit for the account of, and generally engage in any
kind of business with, the Borrower as though BNY were not Agent hereunder. With
respect to the Commitment made or renewed by BNY and the Notes issued to BNY,
BNY shall have the same rights and powers under the Loan Documents as any Lender
and may exercise the same as though it were not the Agent, and the terms
"Lender" and "Lenders" shall in each case include BNY.
10.9. Successor Agent
If at any time the Agent deems it advisable, in its sole discretion,
it may submit to each of the Lenders a written notice of its resignation as
Agent under the Loan Documents, such resignation to be effective upon the
earlier of (i) the written acceptance of the duties of the Agent under the Loan
Documents by a successor Agent and (ii) on the 30th day after the date of such
notice. Upon any such resignation, the Required Lenders shall have the right to
appoint from among the Lenders a successor Agent. If no successor Agent shall
have been so appointed by the Required Lenders and accepted such appointment in
writing within 30 days after the retiring Agent's giving of notice of
resignation, then the retiring Agent may, on behalf of the Lenders, appoint a
successor Agent, which successor Agent shall be a commercial bank organized
under the laws of the United States of America or any State thereof and having a
combined capital, surplus, and undivided profits of at least $100,000,000. Upon
the acceptance of any appointment as Agent hereunder by a successor Agent, such
successor Agent shall
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thereupon succeed to and become vested with all the rights, powers, privileges
and duties of the retiring Agent, and the retiring Agent's rights, powers,
privileges and duties as Agent under the Loan Documents shall be terminated. The
Borrower and the Lenders shall execute such documents as shall be necessary to
effect such appointment. After any retiring Agent's resignation as Agent, the
provisions of the Loan Documents shall inure to its benefit as to any actions
taken or omitted to be taken by it while it was Agent under the Loan Documents.
If at any time there shall not be a duly appointed and acting Agent, the
Borrower agrees to make each payment due under the Loan Documents directly to
the Lenders entitled thereto during such time.
11. OTHER PROVISIONS
11.1. Amendments and Waivers
With the written consent of the Required Lenders, the Agent and the
Borrower may, from time to time, enter into written amendments, supplements or
modifications of the Loan Documents and, with the consent of the Required
Lenders, the Agent on behalf of the Lenders may execute and deliver to any such
parties a written instrument waiving or a consent to a departure from, on such
terms and conditions as the Agent may specify in such instrument, any of the
requirements of the Loan Documents or any Default or Event of Default and its
consequences; provided, however, that:
(a) no such amendment, supplement, modification, waiver or consent
shall, without the consent of all of the Lenders, (i) increase the Commitments
of any Lender or the Aggregate Commitments, (ii) extend the Maturity Date; (iii)
decrease the rate, or extend the time of payment, of interest of, or change or
forgive the principal amount of, or change the pro rata allocation of payments
under, any Note or change or forgive the payment of any fees, (iv) change the
provisions of Sections 2.11, 2.12, 2.13, 2.14, 2.15, 5, 6, 11.1 or 11.6(a), or
release any security interest or collateral, except to the extent that such
release is specifically provided for in any Loan Document, or release any
guarantor under any guarantee or (v) change the definition of Required Lenders;
and
(b) without the written consent of the Agent, no such amendment,
supplement, modification or waiver shall amend, modify or waive any provision of
Section 10 or otherwise change any of the rights or obligations of the Agent
hereunder or under the Loan Documents.
Any such amendment, supplement, modification or waiver shall apply
equally to each of the Lenders and shall be binding upon the parties to the
applicable Loan Document, the Lenders, the Agent and all future holders of the
Notes. In the case of any waiver, the parties
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<PAGE>
to the applicable Loan Document, the Lenders and the Agent shall be restored to
their former position and rights hereunder and under the outstanding Notes and
other Loan Documents to the extent provided for in such waiver, and any Default
or Event of Default waived shall not extend to any subsequent or other Default
or Event of Default, or impair any right consequent thereon. The Loan Documents
may not be amended orally or by any course of conduct.
11.2. Notices
All notices, requests and demands to or upon the respective parties to
the Loan Documents to be effective shall be in writing and, unless otherwise
expressly provided therein, shall be deemed to have been duly given or made when
delivered by hand, or when deposited in the mail, first-class postage prepaid,
or, in the case of notice by fax, when sent, addressed as follows in the case of
the Borrower or the Agent, at the Domestic Lending Office, in the case of each
Lender, or to such other addresses as to which the Agent may be hereafter
notified by the respective parties thereto or any future holders of the Notes:
The Borrower:
Mercury General Corporation
4484 Wilshire Boulevard
Los Angeles, California 90010
Attention: Keith L. Parker,
Chief Financial/Investment Officer
Telephone: (213) 935-3793
Fax: (213) 857-7116
with a copy to: Donna Moore, Controller, at the same
address.
The Agent:
The Bank of New York
One Wall Street
Agency Function Administration
18th Floor
New York, New York 10286
Attention: Frances Ryan
Telephone: (212) 635-4698
Fax: (212) 635-6365 or 6366 or 6367
with a copy to:
The Bank of New York
One Wall Street
17th Floor
New York, New York 10286
Attention: Christine M. Herrick,
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Vice President
Telephone: (212) 635-7853
Fax: (212) 809-9520,
except that any notice, request or demand by the Borrower to or upon the Agent
or the Lenders pursuant to Sections 2.3 or 2.6 shall not be effective until
received. Any party to a Loan Document may rely on signatures of the parties
thereto which are transmitted by fax or other electronic means as fully as if
originally signed.
11.3. No Waiver; Cumulative Remedies
No failure to exercise and no delay in exercising, on the part of the
Agent or any Lender, any right, remedy, power or privilege under any Loan
Document shall operate as a waiver thereof; nor shall any single or partial
exercise of any right, remedy, power or privilege under any Loan Document
preclude any other or further exercise thereof or the exercise of any other
right, remedy, power or privilege. The rights, remedies, powers and privileges
under the Loan Documents are cumulative and not exclusive of any rights,
remedies, powers and privileges provided by law.
11.4. Survival of Representations and Warranties
All representations and warranties made under the Loan Documents and
in any document, certificate or statement delivered pursuant thereto or in
connection therewith shall survive the execution and delivery of the Loan
Documents.
11.5. Payment of Expenses and Taxes
The Borrower agrees, promptly upon presentation of a statement or
invoice therefor, and whether any Loan is made (i) to pay or reimburse the Agent
for all its out-of-pocket costs and expenses reasonably incurred in connection
with the development, preparation and execution of, the Loan Documents and the
syndication thereof and any amendment, supplement or modification thereto
(whether or not executed), any documents prepared in connection therewith and
the consummation of the transactions contemplated thereby, including, without
limitation, the reasonable fees and disbursements of Special Counsel, (ii) to
pay or reimburse the Agent and the Lenders for all of their respective costs and
expenses, including, without limitation, reasonable fees and disbursements of
counsel, reasonably incurred in connection with (A) any Default or Event of
Default and any enforcement or collection proceedings resulting therefrom or in
connection with the negotiation of any restructuring or "work-out" (whether
consummated or not) of the obigations of the Borrower under any of the Loan
Documents, (B) the enforcement of this Section and (C) any appraisal required in
connection with any real Property at any time in the future taken as collateral
security for any
53
<PAGE>
obligations under the Loan Documents, (iii) to pay, indemnify, and hold each
Lender and the Agent harmless from and against, any and all recording and filing
fees and any and all liabilities with respect to, or resulting from any delay in
paying, stamp, excise and other similar taxes, if any, which may be payable or
determined to be pay able in connection with the execution and delivery of, or
consummation of any of the transactions contemplated by, or any amendment,
supplement or modification of, or any waiver or consent under or in respect of,
the Loan Documents and any such other documents, and (iv) to pay, indemnify and
hold each Lender and the Agent and each of their respective officers, directors
and employees harmless from and against any and all other liabilities,
obligations, claims, losses, damages, penalties, actions, judgments, suits,
costs, expenses or disbursements of any kind or nature whatsoever (including,
without limitation, reasonable counsel fees and disbursements) with respect to
the enforcement and performance of the Loan Documents, the use of the proceeds
of the Loans and the enforcement and performance of the provisions of any
subordination agreement in favor of the Agent and the Lenders (all the
foregoing, collectively, the "indemnified liabilities") and, if and to the
extent that the foregoing indemnity may be unenforceable for any reason, the
Borrower agrees to make the maximum payment permitted or not prohibited under
applicable law; provided, however, that the Borrower shall have no obligation
hereunder to pay indemnified liabilities to the Agent or any Lender arising from
the finally adjudicated gross negligence or willful misconduct of the Agent or
such Lender or claims between one indemnified party and another indemnified
party. The agreements in this Section shall survive the termination of the
Aggregate Commitments and the payment of all amounts payable under the Loan
Documents.
11.6. Assignments and Participations
(a) The Loan Documents shall be binding upon and inure to the benefit
of the Borrower, the Lenders, the Agent, all future holders of the Notes and
their respective successors and assigns, except that the Borrower may not
assign, delegate or transfer any of its rights or obligations under the Loan
Documents without the prior written consent of the Agent and each Lender.
(b) Each Lender shall have the right at any time, upon written notice
to the Agent of its intent to do so, to sell, assign, transfer or negotiate all
or any part of such Lender's rights and obligations under the Loan Documents to
one or more of its affiliates, to one or more of the other Lenders (or to
affiliates of such other Lenders) or, with the prior written consent of the
Borrower (which consent shall not be unreasonably withheld or delayed and shall
not be required upon the occurrence and during the continuance of an Event of
Default), to sell, assign, transfer or negotiate all or any part of such
Lender's rights and obligations under the Loan Documents to any other bank,
insurance company, pension fund, mutual fund or other financial institution,
provided that (i) each such sale, assignment, transfer or negotiation (other
than sales, assignments, transfers or negotiations (x) to affiliates of such
Lender or (y) of a Lender's entire interest) shall be in a minimum amount of
$5,000,000 and (ii) there shall be paid to the Agent by the assigning Lender a
fee (the "Assignment Fee") of $3,000, and provided, further, that any sale,
assignment, transfer or negotiation by the Agent in its capacity as a Lender
(other than to affiliates of such Lender) shall not result in such Lender (or
any successor or affiliates thereof) retaining less than 30% of the Aggregate
Commitments or Loans or in the total number of Lenders exceeding five. For each
assignment, the parties to such assignment shall execute and deliver to the
Agent for its acceptance and recording an
54
<PAGE>
Assignment and Acceptance Agreement. Upon such execution, delivery, acceptance
and recording by the Agent, from and after the effective date specified in such
Assignment and Acceptance Agreement, the assignee thereunder shall be a party
hereto and, to the extent provided in such Assignment and Acceptance Agreement,
the assignor Lender thereunder shall be released from its obligations under the
Loan Documents. Subject to Borrower's right to consent or not to consent to such
an assignment as set forth above, the Borrower agrees upon written request of
the Agent and at the Borrower's expense to execute and deliver (1) to such
assignee, Notes, dated the effective date of such Assignment and Acceptance
Agreement, in an aggregate principal amount equal to the Loans assigned to, and
Commitments assumed by, such assignee and (2) to such assignor Lender, Notes,
dated the effective date of such Assignment and Acceptance Agreement, in an
aggregate principal amount equal to the balance of such assignor Lender's Loans
and Commitments, if any, and each assignor Lender shall cancel and return to the
Borrower its existing Notes. Upon any such sale, assignment or other transfer,
the Commitments and the Commitment Percentages set forth in Exhibit A shall be
adjusted accordingly by the Agent and a new Exhibit A shall be distributed by
the Agent to the Borrower and each Lender.
(c) Each Lender may grant participations in all or any part of its
Loans, its Note and its Commitment to one or more banks, insurance companies,
financial institutions, pension funds or mutual funds, provided that (i) such
Lender's obligations under the Loan Documents shall remain unchanged, (ii) such
Lender shall remain solely responsible to the other parties to the Loan
Documents for the performance of such obligations, (iii) the Borrower, the
Agent and the other Lenders shall continue to deal solely and directly with such
Lender in connection with such Lender's rights and obligations under the Loan
Documents, (iv) such Lender shall continue at all times to hold at least a 50%
beneficial interest in its Loans, its Note and its Commitment (unless such
participations are granted to affiliates of such Lender or to other Lenders or
affiliates of such other Lenders), (v) no sub-participations shall be permitted
and (vi) the voting rights of any holder of any participation shall be limited
to decisions that only do any of the following: (A) subject the participant to
any additional obligation, (B) reduce the principal of, or interest on the Notes
or any fees or other amounts payable hereunder, (C) postpone any date fixed for
the payment of principal of, or interest on the Notes or any fees or other
amounts payable hereunder, (D) release any security interest or collateral,
except to the extent that such release is specifically provided for in any Loan
Document or (E) release any guarantor under any guarantee. The Borrower
acknowledges and agrees that any such participant shall for purposes of Sections
2.9, 2.11, 2.12 and 2.15 be deemed to be a "Lender"; provided, however, the
Borrower shall not, at any time, be obligated to pay any participant in any
interest of any Lender hereunder any sum in excess of the sum which the Borrower
would have been obligated to pay to such Lender in respect of such interest had
such Lender not sold such participation.
(d) If any (i) assignment is made pursuant to subsection (b) above or
(ii) any
55
<PAGE>
participation is granted pursuant to subsection (c) above, shall be made to any
Person that is not a U.S. Person, such Person shall furnish such certificates,
documents or other evidence to the Borrower and the Agent, in the case of clause
(i) and to the Borrower and the Lender which sold such participation in the case
of clause (ii), as shall be required by Section 2.9(c).
(e) No Lender shall, as between and among the Borrower, the Agent and
such Lender, be relieved of any of its obligations under the Loan Documents as a
result of any sale, assignment, transfer or negotiation of, or granting of
participations in, all or any part of its Loans, its Commitment or its Note,
except that a Lender shall be relieved of its obligations to the extent of any
such sale, assignment, transfer, or negotiation of all or any part of its Loans,
its Commitment or its Note pursuant to subsection (b) above.
(f) Notwithstanding anything to the contrary contained in this
Section, any Lender may at any time or from time to time assign all or any
portion of its rights under the Loan Documents to a Federal Reserve Bank,
provided that any such assignment shall not release such assignor from its
obligations thereunder.
11.7. Counterparts
Each Loan Document (other than the Notes) may be executed by one or
more of the parties thereto on any number of separate counterparts and all of
said counterparts taken together shall be deemed to constitute one and the same
document. It shall not be necessary in making proof of any Loan Document to
produce or account for more than one counterpart signed by the party to be
charged. A counterpart of any Loan Document or to any document evidencing, and
of any an amendment, modification, consent or waiver to or of any Loan Document
transmitted by fax shall be deemed to be an originally executed counterpart. A
set of the copies of the Loan Documents signed by all the parties thereto shall
be deposited with each of the Borrower and the Agent. Any party to a Loan
Document may rely upon the signatures of any other party thereto which are
transmitted by fax or other electronic means to the same extent as if originally
signed.
11.8. Adjustments; Set-off
(a) If any Lender (a "Benefited Lender") shall at any time receive any
payment of all or any part of its Loans, or interest thereon, or receive any
collateral in respect thereof (whether voluntarily or in voluntarily, by set-
off, pursuant to events or proceedings of the nature referred to in Section 9.1
(h) or (i), or otherwise) in a greater proportion than any such payment to and
collateral received by any other Lender in respect of such other Lender's Loans,
or interest thereon, such Benefited Lender shall purchase for cash from each of
the other Lenders such portion of each such other Lender's Loans, and shall
provide each of such other Lenders with the benefits of any such collateral, or
the proceeds thereof, as shall be necessary to cause such Benefited Lender to
share the excess payment or benefits of such collateral or proceeds ratably with
each of the Lenders, provided, however, that if all or any portion of such
excess payment or benefits is thereafter recovered from such Benefited Lender,
such purchase shall be rescinded, and the purchase price and benefits returned,
to the extent of such recovery, but without interest. The Borrower agrees that
each Lender so purchasing a portion of another Lender's Loans may exercise all
rights of payment (including, without limita-
56
<PAGE>
tion, rights of set-off, to the extent not prohibited by law) with respect to
such portion as fully as if such Lender were the direct holder of such portion.
(b) In addition to any rights and remedies of the Lenders provided by
law, upon the occurrence of an Event of Default and the acceleration of the
obligations owing in connection with the Loan Documents, or at any time upon the
occurrence and during the continuance of an Event of Default, under Section
9.1(a) or (b), each Lender shall have the right, without prior notice to the
Borrower, any such notice being expressly waived by the Borrower to the extent
not prohibited by applicable law, to set-off and apply against any indebtedness,
whether matured or unmatured, of the Borrower to such Lender, any amount owing
from such Lender to the Borrower, at, or at any time after, the happening of any
of the above-mentioned events. To the extent not prohibited by applicable law,
the aforesaid right of set-off may be exercised by such Lender against the
Borrower or against any trustee in bankruptcy, custodian, debtor in possession,
assignee for the benefit of creditors, receiver, or execution, judgment or
attachment creditor of the Borrower, or against anyone else claiming through or
against the Borrower or such trustee in bankruptcy, custodian, debtor in
possession, assignee for the benefit of creditors, receiver, or execution,
judgment or attachment creditor, notwithstanding the fact that such right of
set-off shall not have been exercised by such Lender prior to the making,
filing or issuance, or service upon such Lender of, or of notice of, any such
petition, assignment for the benefit of creditors, appointment or application
for the appointment of a receiver, or issuance of execution, subpoena, order or
warrant. Each Lender agrees promptly to notify the Borrower and the Agent after
any such set-off and application made by such Lender, provided that the failure
to give such notice shall not affect the validity of such set-off and
application.
11.9. Construction
The Borrower represents that it has been represented by counsel in
connection with the Loan Documents and the transactions contemplated thereby and
that the principle that agreements are to be construed against the draftsman
shall be inapplicable.
11.10. Indemnity
The Borrower agrees to indemnify and hold harmless the Agent and each
Lender and their respective affiliates, directors, officers, employees,
attorneys and agents (each an "Indemnified Person") from and against any loss,
cost, liability, damage or expense (including the reasonable fees and
disbursements of counsel of such Indemnified Person, including all local counsel
hired by any such counsel) incurred by such Indemnified Person in investigating,
preparing for, defending against, or providing evidence, producing documents or
taking any other action in respect of, any commenced or threatened litigation,
administrative proceeding or investigation under any federal securities law or
any other statute of any jurisdiction, or any
57
<PAGE>
regulation, or at common law or otherwise, which is alleged to arise out of or
is based upon (i) any un true statement or alleged untrue statement of any
material fact by the Borrower in any document or schedule executed or filed with
any Governmental Authority by or on behalf of the Borrower; (ii) any omission or
alleged omission to state any material fact required to be stated in such
document or schedule, or necessary to make the statements made therein, in light
of the circumstances under which made, not misleading; (iii) any acts, practices
or omissions or alleged acts, practices or omissions of the Borrower or its
agents relating to the use of the proceeds of any or all borrowings made by the
Borrower which are alleged to be in violation of Section 2.14, or in violation
of any federal securities law or of any other statute, regulation or other law
of any jurisdiction applicable thereto; or (iv) any acquisition or proposed
acquisition by the Borrower of all or a portion of the Stock, or all or a
portion of the as sets, of any Person whether such Indemnified Person is a party
thereto. The indemnity set forth herein shall be in addition to any other
obligations or liabilities of the Borrower to each Indemnified Person under the
Loan Documents or at common law or otherwise, and shall survive any termination
of the Loan Documents, the expiration of the Commitments and the payment of all
indebtedness of the Borrower under the Loan Documents, provided that the
Borrower shall have no obligation under this Section to an Indemnified Person
with respect to any of the foregoing to the extent found in a final judgment of
a court having jurisdiction to have resulted primarily out of the gross
negligence or wilful misconduct of such Indemnified Person or arising solely
from claims between one such Indemnified Person and another such Indemnified
Person.
11.11. Governing Law
The Loan Documents and the rights and obligations of the parties
thereunder shall be governed by, and construed and interpreted in accordance
with, the internal laws of the State of New York, without regard to principles
of conflict of laws.
11.12. Headings Descriptive
Section headings have been inserted in the Loan Documents for
convenience only and shall not be construed to be a part thereof.
11.13. Severability
Every provision of the Loan Documents is intended to be sever able,
and if any term or provision thereof shall be invalid, illegal or unenforceable
for any reason, the validity, legality and enforceability of the remaining
provisions thereof shall not be affected or impaired thereby, and any
invalidity, illegality or unenforceability in any jurisdiction shall not affect
the validity, legality or enforceability of any such term or provision in any
other jurisdiction.
11.14. Integration
All exhibits to a Loan Document shall be deemed to be a part thereof.
Except for agreements between the Agent and the Borrower with respect to certain
fees, the Loan Documents embody the entire agreement and understanding among the
Borrower, the Agent and the Lenders with respect to the subject matter thereof
and supersede all prior agreements and understandings among the Borrower , the
Agent and the Lenders with respect to the subject
<PAGE>
matter thereof.
11.15. Consent to Jurisdiction
The Borrower hereby irrevocably submits to the jurisdiction of any New
York State or Federal court sitting in the City of New York over any suit,
action or proceeding arising out of or relating to the Loan Documents. The
Borrower hereby irrevocably waives, to the fullest extent permitted or not
prohibited by law, any objection which it may now or hereafter have to the
laying of the venue of any such suit, action or proceeding brought in such a
court and any claim that any such suit, action or proceeding brought in such a
court has been brought in an inconvenient forum. The Borrower hereby agrees that
a final judgment in any such suit, action or proceeding brought in such a court,
after all appropriate appeals, shall be conclusive and binding upon it.
11.16. Service of Process
The Borrower hereby irrevocably consents to the service of process in
any suit, action or proceeding by sending the same by first class mail, return
receipt requested or by overnight courier service, to the address of the
Borrower set forth in Section 11.2. The Borrower hereby agrees that any such
service (i) shall be deemed in every respect effective service of process upon
it in any such suit, action, or proceeding, and (ii) shall to the fullest
extent enforceable by law, be taken and held to be valid personal service upon
and personal delivery to it.
11.17. No Limitation on Service or Suit
Nothing in the Loan Documents or any modification, waiver, consent or
amendment thereto shall affect the right of the Agent or any Lender to serve
process in any manner permitted by law or limit the right of the Agent or any
Lender to bring proceedings against the Borrower in the courts of any
jurisdiction or jurisdictions in which the Borrower may be served.
11.18. WAIVER OF TRIAL BY JURY
THE AGENT, THE LENDERS AND THE BORROWER HEREBY KNOWINGLY, VOLUNTARILY
AND INTENTIONALLY WAIVE ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF
ANY LITIGATION ARISING OUT OF, UNDER OR IN CONNECTION WITH THE LOAN DOCUMENTS
OR THE TRANSACTIONS CONTEMPLATED THEREIN. FURTHER, THE BORROWER HEREBY CERTIFIES
THAT NO REPRESENTATIVE OR AGENT OF THE AGENT, OR THE LENDERS, OR COUNSEL TO THE
AGENT OR THE LENDERS, HAS REPRESENTED, EXPRESSLY
59
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OR OTHERWISE, THAT THE AGENT OR THE LENDERS WOULD NOT, IN THE EVENT OF SUCH
LITIGATION, SEEK TO ENFORCE THIS WAIVER OF RIGHT TO JURY TRIAL PROVISION. THE
BORROWER ACKNOWLEDGES THAT THE AGENT AND THE LENDERS HAVE BEEN INDUCED TO ENTER
INTO THIS AGREEMENT BY, INTER ALIA, THE PROVISIONS OF THIS SECTION.
<PAGE>
TO EVIDENCE THE FOREGOING, the parties hereto have caused this
Agreement to be duly executed and delivered by their proper and duly authorized
officers as of the day and year first above written.
MERCURY GENERAL CORPORATION
By: ________________________
Name: ______________________
Title: _____________________
THE BANK OF NEW YORK,
Individually and as Agent
By: ________________________
Name: ______________________
Title: _____________________
UNION BANK OF CALIFORNIA, N.A.
By: ________________________
Name: ______________________
Title: _____________________
THE FIRST NATIONAL BANK OF
CHICAGO
By: ________________________
Name: ______________________
Title: _____________________
- 1 -
<PAGE>
EXHIBIT 10.21
STOCK PURCHASE AGREEMENT
MERCURY GENERAL CORPORATION
as Purchaser
and
AMERICAN FIDELITY CORPORATION
as Seller
Dated
November 15, 1996
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
ARTICLE I................................................................................... 1
DEFINITIONS................................................................................. 1
1.1 Defined Terms...................................................................... 1
Accounting Firm................................................................... 1
Actuarial Firm.................................................................... 1
Action............................................................................ 2
AFA............................................................................... 2
Affiliate......................................................................... 2
Agreement......................................................................... 2
Agreement Not to Compete.......................................................... 2
Ancillary Agreements.............................................................. 2
Assets............................................................................ 2
Auditor........................................................................... 2
Balance Sheet..................................................................... 2
Bankruptcy Exception.............................................................. 2
Bills of Sale..................................................................... 2
Books and Records................................................................. 2
Bulk IBNR Reserves................................................................ 3
Business.......................................................................... 3
Cameron Enterprises............................................................... 3
Case Reserves..................................................................... 3
Claim............................................................................. 3
Claim Payment..................................................................... 3
Closing........................................................................... 3
Closing Date...................................................................... 3
Code.............................................................................. 4
Company........................................................................... 4
Continental Agreement............................................................. 4
Contract.......................................................................... 4
Contract Rights................................................................... 4
Copyrights........................................................................ 4
Court Order....................................................................... 4
Covenant Agreement................................................................ 4
Date of Loss...................................................................... 4
Default........................................................................... 4
Disclosure Schedule............................................................... 5
Effective Date.................................................................... 5
Effective Date Balance Sheet...................................................... 5
Effective Date Case Reserves...................................................... 5
Effective Date IBNR Reserves...................................................... 5
Effective Date Insurance Reserves................................................. 5
Effective Date Financial Statements............................................... 5
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
Encumbrance....................................................................... 5
Environmental Laws................................................................ 5
Expenses.......................................................................... 6
Facilities........................................................................ 6
Financial Statements.............................................................. 6
Fixtures and Equipment............................................................ 6
GAAP.............................................................................. 6
HSR Act........................................................................... 6
IBNR Reserves..................................................................... 6
Insurance License................................................................. 6
Insurance Policies................................................................ 6
Insurance Reserves................................................................ 6
Interim Balance Sheet............................................................. 7
Interim Balance Sheet Date........................................................ 7
Interim Balance Sheet Date Insurance Reserves..................................... 7
Interim Financial Statements...................................................... 7
KPMG.............................................................................. 7
Late Claim........................................................................ 7
Leases............................................................................ 7
Liabilities....................................................................... 7
Loss.............................................................................. 7
Loss Event........................................................................ 7
material adverse effect or material adverse change................................ 7
Mechanical Breakdown Products..................................................... 7
Mortgages......................................................................... 8
Ocean Marine Bulk IBNR Reserves................................................... 8
Ocean Marine Case Reserves........................................................ 8
Ocean Marine Claim................................................................ 8
Ocean Marine Claim Payment........................................................ 8
Ocean Marine IBNR Reserves........................................................ 8
Ocean Marine Insurance Reserves................................................... 8
Ocean Marine Program.............................................................. 9
Ocean Marine Pure IBNR Reserves................................................... 9
Office Lease...................................................................... 9
ordinary course of business or ordinary course.................................... 9
Patents........................................................................... 9
Permits........................................................................... 9
Permitted Encumbrances............................................................ 9
Pro Forma Interim Balance Sheet................................................... 9
Pro Forma Interim Financial Statements............................................ 9
Property.......................................................................... 10
Proprietary Rights................................................................ 10
Purchaser......................................................................... 10
Purchase Price.................................................................... 10
Purchaser's Knowledge............................................................. 10
Pure IBNR Reserves................................................................ 10
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C>
Regulations....................................................................... 10
Representative.................................................................... 10
Reserve Determination Date........................................................ 10
Seller............................................................................ 10
Seller's Knowledge................................................................ 10
Services Agreement................................................................ 11
Shares............................................................................ 11
Statutory Statement............................................................... 11
Subsidiary........................................................................ 11
Tax............................................................................... 11
Trademark License Agreements...................................................... 11
Trademarks........................................................................ 11
Warrants.......................................................................... 11
Wire Transfer..................................................................... 12
Year-End Financial Statement...................................................... 12
1.2 Other Defined Terms................................................................ 12
ARTICLE II.................................................................................. 13
PURCHASE AND SALE OF SHARES................................................................. 13
2.1 Transfer of Shares................................................................. 13
2.2 Purchase Price and Payment......................................................... 13
2.3 Closing Costs; Transfer Taxes...................................................... 14
2.4 Insurance Reserves................................................................. 14
ARTICLE III................................................................................. 17
CLOSING..................................................................................... 17
3.1 Closing............................................................................ 17
3.2 Deliveries at Closing.............................................................. 17
3.3 Other Closing Transactions......................................................... 17
ARTICLE IV.................................................................................. 18
REPRESENTATIONS AND WARRANTIES OF SELLER.................................................... 18
4.1 Organization, Authorization and Execution of Seller................................ 18
4.2 Organization of the Company........................................................ 18
4.3 Capitalization of the Company...................................................... 18
4.4 Subsidiaries....................................................................... 19
4.5 Lloyd's Plan....................................................................... 19
4.6 Insurance Licenses and Other Permits............................................... 19
4.7 Financial Statements............................................................... 20
4.8 Liabilities........................................................................ 21
4.9 Accounts Receivable; Notes Receivable; Mortgages; Other Amounts.................... 21
4.10 Books and Records................................................................. 23
4.11 Absence of Certain Changes or Events.............................................. 23
4.12 Assets............................................................................ 25
4.13 Contracts and Commitments......................................................... 26
4.14 No Conflict or Violation.......................................................... 28
4.15 Consents and Approvals............................................................ 28
4.16 Litigation........................................................................ 28
4.17 Labor Matters..................................................................... 28
</TABLE>
iii
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<TABLE>
<S> <C>
4.18 Compliance with Law............................................................... 29
4.19 Propretiary Rights................................................................ 20
4.20 Employee Benefit Plans............................................................ 30
4.21 Tax Matters....................................................................... 35
4.22 Insurance......................................................................... 37
4.23 Environmental Matters............................................................. 37
4.24 Officers.......................................................................... 38
4.25 Severance Arrangements............................................................ 38
4.26 Bank Accounts..................................................................... 38
4.27 Ocean Marine Program.............................................................. 38
4.28 Service Agreements with Seller.................................................... 38
4.29 No Brokers........................................................................ 38
4.30 No Other Agreements to Sell the Shares or the Company............................. 39
4.31 Material Misstatements Or Omissions............................................... 39
4.32 No Other Representations or Warranties............................................ 39
ARTICLE V................................................................................... 39
REPRESENTATIONS AND WARRANTIES OF PURCHASER................................................. 39
5.1 Organization of Purchaser.......................................................... 39
5.2 Authorization...................................................................... 39
5.3 No Conflict or Violation........................................................... 40
5.4 Consents and Approvals............................................................. 40
5.5 Investment Intent.................................................................. 40
5.6 No Brokers......................................................................... 40
ARTICLE VI.................................................................................. 40
COVENANTS OF SELLER AND PURCHASER........................................................... 40
6.1 Further Assurances................................................................. 40
6.2 Certain Filings and Consents....................................................... 41
6.3 Access............................................................................. 41
6.4 No Solicitation.................................................................... 41
6.5 Notification of Certain Matters.................................................... 42
6.6 Conduct of Business................................................................ 42
6.7 Public Statements and Press Releases............................................... 44
6.8 Financial Information.............................................................. 44
6.9 Employee Matters................................................................... 44
6.10 Employee Benefits................................................................. 45
6.11 Modification of ERC Arrangements and Release...................................... 46
6.12 Sale of AFCC Capital Stock........................................................ 47
6.13 Transfer of Mortgage Loans........................................................ 47
6.14 Intercompany Accounts............................................................. 47
6.15 Ocean Marine...................................................................... 48
ARTICLE VII................................................................................. 48
CONDITIONS TO SELLER'S OBLIGATIONS.......................................................... 48
7.1 Representations, Warranties and Covenants.......................................... 48
7.2 Consents; Regulatory Compliance and Approval....................................... 48
7.3 No Actions or Court Orders......................................................... 49
7.4 Opinion of Counsel................................................................. 49
</TABLE>
iv
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<TABLE>
<S> <C>
7.5 Certificates....................................................................... 50
7.6 Corporate Documents................................................................ 50
7.7 Ancillary Agreements............................................................... 50
7.8 Investment Representation.......................................................... 50
7.9 Mitsubishi Consent................................................................. 50
ARTICLE VIII................................................................................ 50
CONDITIONS TO PURCHASER'S OBLIGATIONS....................................................... 50
8.1 Representations, Warranties and Covenants.......................................... 50
8.2 Consents; Regulatory Compliance and Approval....................................... 50
8.3 No Actions or Court Orders......................................................... 51
8.4 Opinion of Counsel................................................................. 51
8.5 Certificates....................................................................... 52
8.6 Material Changes................................................................... 52
8.7 Corporate Documents................................................................ 52
8.8 Conveyancing Documents; Release of Encumbrances.................................... 53
8.9 Ancillary Agreements............................................................... 53
8.10 Consents.......................................................................... 53
8.11 ERC Release....................................................................... 53
8.12 Intercompany Transfer............................................................. 53
8.13 Mitsubishi Consent................................................................ 53
8.14 Ocean Marine...................................................................... 53
ARTICLE IX.................................................................................. 54
ACTIONS AFTER THE CLOSING................................................................... 54
9.1 Books and Records; Tax Matters..................................................... 54
9.2 Survival of Representations, Etc................................................... 54
9.3 Indemnification.................................................................... 55
9.4 Payment of Holdback Amount......................................................... 58
9.5 Post-Closing Claims Administration................................................. 59
9.6 Post-Closing Inspection of Records................................................. 60
9.7 Change of Name..................................................................... 61
9.8 Ocean Marine Program............................................................... 61
9.9 Effective Date Financial Statements................................................ 63
ARTICLE X................................................................................... 65
MISCELLANEOUS............................................................................... 65
10.1 Termination....................................................................... 65
10.2 Assignment........................................................................ 66
10.3 Notices........................................................................... 66
10.4 Choice of Law..................................................................... 67
10.5 Entire Agreement; Amendments and Waivers.......................................... 68
10.6 Multiple Counterparts............................................................. 68
10.7 Expenses.......................................................................... 68
10.8 Invalidity........................................................................ 68
10.9 Titles; Gender.................................................................... 68
10.10 Confidential Information......................................................... 68
10.11 Cumulative Remedies.............................................................. 69
10.12 Attorneys' Fees.................................................................. 69
</TABLE>
v
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<TABLE>
<S> <C>
10.13 Waivers of Punitive Damages...................................................... 71
</TABLE>
vi
<PAGE>
LIST OF EXHIBITS
EXHIBIT A AGREEMENT NOT TO COMPETE
EXHIBIT B FORM OF BILLS OF SALE
EXHIBIT C FORM OF OFFICE LEASE
EXHIBIT D FORM OF SERVICES AGREEMENT
EXHIBIT E FORM OF TRADEMARK LICENSE AGREEMENT
EXHIBIT F ACCOUNTING PROCEDURES
EXHIBIT G CALCULATION OF OCEAN MARINE PROGRAM
NET INCOME AND NET LOSS
vii
<PAGE>
STOCK PURCHASE AGREEMENT
------------------------
This Stock Purchase Agreement is made and entered into as of November
15, 1996, by and between AMERICAN FIDELITY CORPORATION, a Nevada corporation
("Seller"), and MERCURY GENERAL CORPORATION, a California corporation
------
("Purchaser").
---------
RECITALS
--------
A. Seller owns all of the outstanding common stock of American Fidelity
Insurance Company, an Oklahoma corporation (the "Company"). The Company is
-------
principally engaged in the property and casualty insurance business, both
directly and through its wholly-owned subsidiary, Cimarron Insurance Company,
Inc., a Kansas corporation ("Cimarron"), and its affiliate AFI Management
--------
Company, a Texas corporation ("AMC"). The Company is also engaged in the premium
---
finance business through its wholly-owned subsidiary American Fidelity Credit
Corporation, a Kansas corporation ("AFCC"), which will not be part of the
----
transaction subject to this Agreement.
B. Purchaser, a publicly held property and casualty insurance holding
company headquartered in California, desires to purchase all of the outstanding
shares of common stock of the Company (the "Shares"), and Seller is willing to
------
sell the Shares to Purchaser, all on the terms and conditions hereinafter set
forth.
AGREEMENT
---------
NOW, THEREFORE, in consideration of the respective covenants and promises
contained herein and for other good and valuable consideration, the receipt and
adequacy of which is hereby acknowledged, the parties hereto agree as follows:
ARTICLE I
---------
DEFINITIONS
-----------
1.1 Defined Terms. As used herein, the terms below shall have the
-------------
following meanings. Any of such terms, unless the context otherwise requires,
may be used in the singular or plural, depending upon the reference.
"Accounting Firm" shall mean Ernst & Young LLP or any successor
---------------
organization.
"Actuarial Firm" shall mean any of KPMG, Milliman & Robertson or
--------------
Tillinghast-Towers Perrin, as selected by Purchaser.
1
<PAGE>
"Action" shall mean any action, claim, suit, litigation,
------
proceeding, labor dispute, arbitral action, governmental audit, inquiry,
criminal prosecution, investigation or unfair labor practice charge or
complaint.
"AFA" shall mean American Fidelity Assurance Company, a wholly-
---
owned subsidiary of Seller.
"Affiliate" shall mean, with respect to any party, any individual
---------
corporation, partnership or other entity that directly, or indirectly through
one or more intermediaries, controls, or is controlled by, or is under common
control with, such party.
"Agreement" shall refer to this Stock Purchase Agreement
---------
including all Exhibits and Schedules hereto, as the same may be amended from
time to time.
"Agreement Not to Compete" shall mean an agreement not to compete
------------------------
entered into between Purchaser and Seller substantially in the form of Exhibit A
attached hereto.
"Ancillary Agreements" shall mean the Agreement Not to Compete,
--------------------
the Bills of Sale, the Office Lease, the Services Agreement and the Trademark
License Agreements.
"Assets" shall mean all accounts and notes receivable, refunds,
------
deposits, prepaid expenses, cash and cash equivalents, securities, land,
buildings, improvements, leasehold improvements, Books and Records, Fixtures and
Equipment, Permits, Proprietary Rights, Contract Rights, and all other assets
(tangible or intangible) owned or leased by the Company or any of its
Subsidiaries.
"Auditor" shall mean KPMG.
-------
"Balance Sheet" shall mean the consolidated balance sheet of the
-------------
Company and its Subsidiaries at the date indicated thereon, prepared in
accordance with GAAP.
"Bankruptcy Exception" shall refer, in respect of any agreement,
--------------------
contract or commitment, and to the enforceability thereof, to any limitation
thereon imposed by any bankruptcy, insolvency, fraudulent conveyance,
reorganization, moratorium or similar law affecting creditors' rights and
remedies generally and by general principles of equity, including principles of
commercial reasonableness, good faith and fair dealing (regardless of whether
enforcement is sought in a proceeding at law or in equity).
"Bills of Sale" shall mean the instruments of transfer, each
-------------
substantially in the form of Exhibit B attached hereto, pursuant to which each
of Cameron Enterprises and Seller shall sell the personal property specified
therein to the Company and its Subsidiaries.
"Books and Records" shall mean (a) all records and lists of the
-----------------
Company and each of its Subsidiaries pertaining to the Assets and Liabilities,
(b) all records and lists pertaining to the Business, customers, agents,
suppliers or personnel of the Company and each of its Subsidiaries, (c) all
product, business and marketing plans of the Company and each of its
Subsidiaries, (d) correspondence with regulatory authorities and regulatory
accounting records,
2
<PAGE>
and (e) all books, ledgers, files, reports, plans, drawings and operating
records of every kind maintained by the Company and each of its Subsidiaries, or
by the Seller on behalf of the Company and its Subsidiaries, including the
originals of minute books, stock books, copies of tax work papers and tax
returns of the Company and each of its Subsidiaries.
"Bulk IBNR Reserves" shall mean Insurance Reserves which have
------------------
been established with respect to Claims which arise out of policies for which
the Company or any of its Subsidiaries is the insurer or reinsurer as a result
of the occurrence of a Loss-Event and which equal, on an actuarial basis, the
indicated deficiency in Case Reserves.
"Business" shall mean the business of the Company and its
--------
Subsidiaries as presently conducted.
"Cameron Enterprises" shall mean Cameron Enterprises, A Limited
-------------------
Partnership, an Oklahoma limited partnership.
"Case Reserves" shall mean Insurance Reserves which have been
-------------
established with respect to Claims received by the Company and its Subsidiaries
or an authorized agent of the Company or any of its Subsidiaries.
"Claim" shall mean a claim made by or on behalf of the insured
-----
under policies or agreements of insurance for which the Company or any of its
Subsidiaries is an insurer or reinsurer or otherwise obligated (exclusive of
claims made with respect to Mechanical Breakdown Products and the Ocean Marine
Program), or under agreements of insurance under the Company's retrocession
agreements with reinsurers, to recover insurance proceeds under such policy or
agreement based upon or arising out of a Loss-Event. "Claim" shall also include
any other claim by an insured, third-party claimant or otherwise arising out of
such policy or agreement, including, but not limited to, amounts that are due or
may become due for extra-contractual obligations, judgments in excess of policy
limits, bad faith and exemplary or punitive damages. The term "Claim" shall
include a "Late Claim."
"Claim Payment" shall mean, with respect to any Claim or Late
-------------
Claim, the moneys paid by or on behalf of the Company and its Subsidiaries (net
of any reinsurance recoveries, subrogation recoveries and salvage value
realized) to satisfy such Claim or Late Claim and to pay the costs and expenses
(including reasonable attorneys' fees) incurred to administer, process, defend
against and settle or otherwise satisfy such Claim or Late Claim.
"Closing" shall refer to the time of the sale of the Shares on
-------
the day on which the Seller transfers, or causes the transfer of, the Shares to
Purchaser pursuant to the terms of this Agreement, and "day of the Closing"
shall be deemed to refer to such day.
"Closing Date" shall mean the later of December 17, 1996, or
------------
such date as is five (5) business days following the receipt by Purchaser from
the Departments of Insurance of Oklahoma, Kansas and Texas of approval for the
transactions contemplated hereby, provided the conditions in Articles VII and
VIII are satisfied; provided, however, that such date shall be subject to
-------- -------
extension from time to time as may be agreed by Purchaser and Seller.
3
<PAGE>
"Code" shall mean the Internal Revenue Code of 1986, as amended,
----
and the rules and regulations thereunder.
"Company" shall shall mean American Fidelity Insurance Company,
-------
an Oklahoma corporation.
"Continental Agreement" shall mean that certain Agreement dated
---------------------
March 1, 1990, as amended by Addendum No. 1 effective January 1, 1995, between
the Company and Continental Underwriters, Ltd., a Louisiana corporation.
"Contract" shall mean any agreement, contract, policy, vehicle
--------
warranty, indemnity, reinsurance treaty or agreement, note, loan, evidence of
indebtedness, purchase, order, letter of credit, indenture, security or pledge
agreement, franchise agreement, undertaking, practice, covenant not to compete,
employment agreement, license (which is neither an Insurance License nor a
Permit), instrument, obligation or commitment to which the Company or a
Subsidiary is a party or is bound and which relates to and is material to the
Business or the Assets of the Company or such Subsidiary, whether oral or
written, but excluding all Leases.
"Contract Rights" shall mean all of the Company's or any of its
---------------
Subsidiaries' rights and obligations under the Contracts listed on Schedule
4.13.
"Copyrights" shall mean registered copyrights, copyright
----------
applications and unregistered copyrights.
"Court Order" shall mean any judgment, decision, consent decree,
-----------
injunction, ruling or order of any federal, state or local court or governmental
agency, department or authority that is binding on any person or its property
under applicable law.
"Covenant Agreement" shall mean that certain Underwriting
------------------
Administration Agreement dated August 1, 1993, by and between the Company and
Covenant Underwriters, Ltd., a Louisiana corporation, as amended by Addendum No.
1 effective August 1, 1993, Addendum No. 2 effective August 1, 1994, and
Addendum No. 3, effective April 1, 1995.
"Date of Loss" shall mean the first date of occurrence, claim,
------------
loss or other event giving rise to a Claim or an Ocean Marine Claim; provided
--------
that with respect to environmental Claims, toxic Claims, or bodily injury or
property damage Claims or Ocean Marine Claims arising from continuous or
repeated exposure to conditions, where it is not possible to determine a
specific date of loss, Date of Loss shall mean the policy inception date of the
first policy applicable to such loss; and provided, further, that with respect
-------- -------
to Claims under the Company's or any of its Subsidiaries' insurance policy
issued to the National Education Association, the Date of Loss shall be the date
a Claim is first made against the Company's insured. With respect to Claims or
Ocean Marine Claims in existence on or prior to the Effective Date, the Date of
Loss shall be as determined by the Company prior to the Effective Date.
"Default" shall mean (a) a breach of or default under any
-------
Contract, Lease or Permit, (b) the occurrence of an event that with the passage
of time or the giving of notice or both would constitute a breach of or default
under any Contract, Lease or Permit, or (c) the
4
<PAGE>
occurrence of an event that with or without the passage of time or the giving of
notice or both would give rise to a right of termination, renegotiation or
acceleration under any Contract, Lease, or Permit.
"Disclosure Schedule" shall mean the schedules delivered by
-------------------
Seller to Purchaser which set forth the exceptions to the representations and
warranties contained in Article IV hereof and certain other information called
for by this Agreement. Unless otherwise specified, each reference in this
Agreement to any numbered schedule is a reference to that numbered schedule
which is included in the Disclosure Schedule.
"Effective Date" shall mean the last day of the calendar month
--------------
next preceding the Closing Date.
"Effective Date Balance Sheet" shall mean the unaudited
----------------------------
consolidated Balance Sheet of the Company and its Subsidiaries as of the close
of business on the Effective Date, prepared in accordance with GAAP and with the
accounting procedures set forth on Exhibit F attached hereto.
"Effective Date Case Reserves" shall mean the Case Reserves as
----------------------------
recorded in the Effective Date Balance Sheet.
"Effective Date IBNR Reserves" shall mean the IBNR Reserves as
----------------------------
recorded in the Effective Date Balance Sheet.
"Effective Date Insurance Reserves" shall mean the Insurance
---------------------------------
Reserves as recorded in the Effective Date Balance Sheet, as determined in
accordance with Section 9.9.
"Effective Date Financial Statements" shall mean the unaudited
-----------------------------------
Effective Date Balance Sheet and consolidated statements of operations,
stockholder's equity and cash flows of the Company and its Subsidiaries for the
period ended on the Effective Date.
"Encumbrance" shall mean any claim, lien, pledge, option, charge,
-----------
easement, security interest, deed of trust, mortgage, right-of-way,
encroachment, building or use restriction, conditional sales agreement,
encumbrance or other right of third parties, whether voluntarily incurred or
arising by operation of law, and includes, without limitation, any agreement to
give any of the foregoing in the future, and any contingent sale or other title
retention agreement or lease in the nature thereof.
"Environmental Laws" means all federal, state and local laws,
------------------
rules and regulations and other requirements which in any way are related to
protection of health, safety, or the environment (including, without limitation,
ambient air, surface water, groundwater, land surface or subsurface strata),
including, without limitation, laws and regulations relating to emissions,
discharges, releases or threatened releases of hazardous substances, or
otherwise relating to the manufacture, processing, distribution, use, treatment,
storage, disposal, transport or handling of hazardous substances, including but
not limited to the Federal Water Pollution Control Act (33 U.S.C. Section 1251
et. seq.), Resource Conservation & Recovery Act (42 U.S.C. Section 6901 et
- -- --- --
seq.), Safe Drinking Water Act (21 U.S.C. Section 349, 42 U.S.C.
- ---
5
<PAGE>
Sections 201, 300f), Toxic Substances Control Act (15 U.S.C. Section 2601 et
--
seq.), Clean Air Act (42 U.S.C. Section 7401 et seq.), and Comprehensive
- --- -- ---
Environmental Response, Compensation and Liability Act (42 U.S.C. Section 9601
et seq.).
- -- ---
"Expenses" shall mean all reasonable expenses incurred in
--------
connection with investigating, defending or asserting any claim, action, suit or
proceeding incident to any matter indemnified against under the terms of this
Agreement (including court costs, court filing fees, arbitration fees or costs,
witness fees, and reasonable fees and disbursements of legal counsel,
investigators, expert witnesses, accountants and other professionals).
"Expenses" do not include unallocated loss adjustment expenses of the Company
and its Subsidiaries and Purchaser, including, without limitation, salaries of
employees, rent and other internal overhead expenses.
"Facilities" shall mean all offices, warehouses, improvements,
----------
administration buildings, and all real property and related facilities which are
identified or listed on Schedule 4.12.
"Financial Statements" shall mean the Year-End Financial
--------------------
Statements and the Interim Financial Statements, prepared in accordance with
GAAP.
"Fixtures and Equipment" shall mean all of the furniture,
----------------------
fixtures, furnishings, machinery, automobiles, trucks, spare parts, supplies,
equipment, tooling, molds, patterns, dies and other tangible personal property
owned by the Company or any of its Subsidiaries and used in connection with the
Business, wherever located and including any such Fixtures and Equipment in the
possession of any of agents or suppliers of the Company or any of its
Subsidiaries.
"GAAP" shall mean generally accepted accounting principles in the
----
United States of America, as in effect from time to time, consistently applied.
"HSR Act" shall mean the Hart-Scott-Rodino Antitrust
-------
Improvements Act of 1976, as amended, and the rules and regulations thereunder.
"IBNR Reserves" shall mean both Pure IBNR Reserves and Bulk IBNR
-------------
Reserves.
"Insurance License" shall refer to any state or other
-----------------
governmental license, permit or other authorization which is currently held by
the Company or any of its Subsidiaries in a particular jurisdiction to transact
one or more classes or lines of insurance in that jurisdiction.
"Insurance Policies" shall mean the insurance policies related to
------------------
the Assets or Business listed on Schedule 4.22.
"Insurance serves" shall mean the undiscounted dollar amounts
------------------
(net of reinsurance and estimated subrogation recoveries and salvage value
realized) reserved for the payment of losses and loss adjustment expenses as
established by the Company and which are reasonably adequate to cover the unpaid
loss and loss adjustment expense obligations of the Company and each of its
Subsidiaries for Claims under the policies or agreements which are in effect on
or prior to the
6
<PAGE>
Effective Date for which the Company or any of its Subsidiaries is an insurer or
reinsurer, excluding those in connection with Mechanical Breakdown Products and
the Ocean Marine Program. Insurance Reserves shall include Case Reserves and
IBNR Reserves, and shall be determined using generally accepted actuarial
methods and in accordance with the accounting principles set forth in paragraph
4 of Exhibit F attached hereto. Insurance Reserves at December 31, 2001 shall
not be reduced by any estimates for subrogation recoveries or salvage value.
"Interim Balance Sheet" shall mean the unaudited Balance Sheet
---------------------
dated the Interim Balance Sheet Date, prepared in accordance with GAAP. The
Interim Balance Sheet shall include AFCC as a Subsidiary.
"Interim Balance Sheet Date" shall mean June 30, 1996.
--------------------------
"Interim Balance Sheet Date Insurance Reserves" shall mean the
---------------------------------------------
Insurance Reserves recorded in the Interim Balance Sheet.
"Interim Financial Statements" shall mean the Interim Balance
----------------------------
Sheet and the unaudited consolidated statement of income for the period ended on
the Interim Balance Sheet Date, prepared in accordance with GAAP. The Interim
Financial Statements shall include AFCC as a Subsidiary.
"KPMG" shall refer to the public accounting firm of KPMG Peat
----
Marwick or any successor organization.
"Late Claim" shall mean a Claim reported to the Company or any
----------
of its Subsidiaries more than three (3) years after the Closing Date and prior
to December 31, 2004.
"Leases" shall mean all of the existing leases with respect to
------
the personal or real property of the Company and each of its Subsidiaries listed
on Schedule 4.12.
"Liabilities" shall mean any direct or indirect liability, loss
-----------
reserves, indebtedness, obligation, commitment, expense, claim, deficiency,
guaranty or endorsement of or by any person of any type, whether accrued,
absolute, contingent, matured, unmatured or other.
"Loss" or "Losses" shall mean any and all losses, costs, claims,
---- ------
demands, obligations, Liabilities, settlement payments, damages, lawsuits,
awards, judgments, fines, penalties, expenses, deficiencies or other similar
charges (whether or not arising out of third-party claims).
"Loss-Event" shall mean an event, with a Date of Loss on or
----------
prior to the Effective Date, the occurrence of which is the basis for a Claim or
an Ocean Marine Claim.
"material adverse effect" or "material adverse change" shall mean
----------------------- -----------------------
with respect to any person or entity, a material adverse effect on the Business,
Assets, liabilities, results of operations or financial condition of such person
or entity.
"Mechanical Breakdown Products" shall mean any policy, contract,
-----------------------------
agreement, service contract, or warranty, pursuant to which the Company or its
Subsidiaries
7
<PAGE>
provide benefits, coverage, service or warranties with respect to mechanical
breakdown related services and products.
"Mortgages" shall mean all deeds of trust, mortgages or other
---------
debt encumbrances on owned real property.
"Ocean Marine Bulk IBNR Reserves" shall mean Ocean Marine
-------------------------------
Insurance Reserves which have been established with respect to Ocean Marine
Claims which arise out of policies for which the Company or any of its
Subsidiaries is the insurer or reinsurer as a result of the occurrence of a
Loss-Event and which equal, on an actuarial basis, the indicated deficiency in
Ocean Marine Case Reserves.
"Ocean Marine Case Reserves" shall mean Ocean Marine Insurance
--------------------------
Reserves which have been established with respect to Ocean Marine Claims
received by the Company and its Subsidiaries or an authorized agent of the
Company or any of its Subsidiaries.
"Ocean Marine Claim" shall mean a claim made by or on behalf of
------------------
the insured under policies or agreements of insurance for which the Company or
any of its Subsidiaries is an insurer or reinsurer or otherwise obligated under
the Ocean Marine Program, or under agreements of insurance under the Company's
retrocession agreements with reinsurers, to recover insurance proceeds under any
such policy or agreement based upon or arising out of a Loss-Event. "Ocean
Marine Claim" shall also include any other claim by an insured, a third-party
claimant or otherwise arising out of such policy or agreement, including, but
not limited to, amounts that are due or may become due for extra-contractual
obligations, judgments in excess of policy limits, bad faith and exemplary or
punitive damages.
"Ocean Marine Claim Payment" shall mean, with respect to
--------------------------
any Ocean Marine Claim, the moneys paid by or on behalf of the Company and its
Subsidiaries (net of any reinsurance recoveries, subrogation recoveries and
salvage value realized) to satisfy such Ocean Marine Claim and to pay the costs
and expenses (including reasonable attorneys' fees) incurred to administer,
process, defend against and settle or otherwise satisfy such Ocean Marine Claim.
"Ocean Marine IBNR Reserves" shall mean both Ocean Marine Pure
--------------------------
IBNR Reserves and Ocean Marine Bulk IBNR Reserves.
"Ocean Marine Insurance Reserves" shall mean the undiscounted
-------------------------------
dollar amounts (net of reinsurance recoveries, estimated subrogation recoveries
and salvage value realized) reserved for the payment of losses and loss
adjustment expenses, as established by the Company and which are reasonably
adequate to cover the unpaid loss and loss adjustment expense obligations of the
Company and each of its Subsidiaries for Ocean Marine Claims under the policies
or agreements for which the Company or any of its Subsidiaries is an insurer or
reinsurer in connection with the Ocean Marine Program. Ocean Marine Insurance
Reserves shall include Ocean Marine Case Reserves and Ocean Marine IBNR
Reserves, and shall be determined using generally accepted actuarial methods and
in accordance with the accounting principles set forth in paragraph 4 of Exhibit
F attached hereto.
8
<PAGE>
"Ocean Marine Program" shall mean the ocean marine insurance
--------------------
program operated by the Company under the management of Covenant Underwriters,
Ltd., the Company's managing general agent for ocean marine insurance offered
and issued by the Company pursuant to the Covenant Agreement, and administered
by Continental Underwriters, Ltd. pursuant to the Continental Agreement,
including all policies or agreements for ocean marine insurance in connection
therewith for which the Company or any of its Subsidiaries is an insurer,
reinsured or reinsurer.
"Ocean Marine Pure IBNR Reserves" shall mean Ocean Marine
-------------------------------
Insurance Reserves which have been established under the Ocean Marine Program
with respect to losses which have been incurred by insureds of the Company or
any of its subsidiaries as a result of the occurrence of a Loss-Event which has
not been reported to the Company or any of its subsidiaries.
"Office Lease" shall mean an office lease in the form of
------------
Exhibit C attached hereto, pursuant to which AFA shall lease office space to the
Company and its Subsidiaries.
"ordinary course of business" or "ordinary course" or any similar
--------------------------- ---------------
phrase shall mean the ordinary course of the Business and consistent with the
past practice of the Company and its Subsidiaries.
"Patents" shall mean all patents and patent applications and
-------
registered design and registered design applications.
"Permits" shall mean all Insurance Licenses, other licenses,
-------
permits, franchises, approvals, authorizations, consents or orders of, or
filings with, any governmental authority, whether foreign, federal, state or
local, or any other person, necessary for the past, present or Seller's
anticipated conduct of, or relating to the operation of the Business.
"Permitted Encumbrances" shall mean (a) all statutory or other
----------------------
liens for Taxes or assets which are not yet due or delinquent or the validity of
which are being contested in good faith by appropriate proceedings; (b) all
mechanic's and materialmen's liens, and other similar liens imposed by law,
incurred in the ordinary course of business; (c) all laws and governmental
rules, regulations, ordinances and restrictions; (d) all leases, subleases,
licenses, concessions or service contracts to which the Company or any of its
Subsidiaries is a party; (e) all other liens, mortgages, covenants,
imperfections in title, charges, easements, restrictions and other Encumbrances
which do not materially detract from or materially interfere with the value or
present use of the assets subject thereto or affected thereby.
"Pro Forma Interim Balance Sheet" shall mean the Balance Sheet
-------------------------------
included in the Pro Forma Interim Financial Statements.
"Pro Forma Interim Financial Statements" shall mean the Interim
--------------------------------------
Financial Statements, as adjusted to take into account an assumed sale by the
Company to Seller, on January 1, 1996, for book value, of all of the outstanding
capital stock of AFCC as provided in Section 6.12, and the application of the
accounting principles set forth on Exhibit F attached hereto.
9
<PAGE>
"Property" shall include all property and all other assets of any
--------
nature including, without limitation, real and personal property, whether
tangible or intangible, and claims, rights and choses in action.
"Proprietary Rights" shall mean all of the Copyrights, Patents,
------------------
Trademarks, technology rights and licenses, computer software (including without
limitation any source or object codes therefor or documentation relating
thereto), trade secrets, franchises, know-how, inventions, designs,
specifications, plans, drawings, and intellectual property rights of the Company
and each of its Subsidiaries.
"Purchaser" shall refer to Mercury General Corporation, a
---------
California corporation having its principal executive office at 4484 Wilshire
Boulevard, Los Angeles, California.
"Purchase Price" shall mean the aggregate purchase price for
--------------
the Shares set forth in Section 2.2, subject to adjustment as provided in
Section 2.4.
"Purchaser's Knowledge" shall refer to the actual knowledge of
---------------------
individuals who, at the time of execution of this Agreement, are officers
holding the position of Vice President or higher or directors of Purchaser.
"Pure IBNR Reserves" shall mean Insurance Reserves which have
------------------
been established with respect to losses which have been incurred by insureds of
the Company or any of its Subsidiaries as a result of the occurrence of a Loss-
Event which has not been reported to the Company or any of its Subsidiaries.
"Regulation(s)" shall mean any laws, statutes, ordinances,
-------------
regulations, rules, notice requirements, court decisions, agency guidelines,
principles of law and orders of any foreign, federal, state or local government
and any other governmental department or agency, including without limitation
Environmental Laws, energy, motor vehicle safety, public utility, zoning,
building and health codes, occupational safety and health and laws respecting
employment practices, employee documentation, terms and conditions of employment
and wages and hours.
"Representative" shall mean any officer, director, principal,
--------------
attorney, agent, employee, accountant or other representative.
"Reserve Determination Date" shall mean December 31 of each year
--------------------------
commencing December 31, 1996 and ending December 31, 2001.
"Seller" shall refer to American Fidelity Corporation, a Nevada
------
corporation having its principal place of business at 2000 Classen Boulevard,
Oklahoma City, Oklahoma.
"Seller's Knowledge" shall refer to the actual knowledge of
------------------
individuals who, at the time of execution of this Agreement, are officers
holding the position of Senior Vice President or higher or directors of Seller,
the Company or any of its Subsidiaries, or Donna
10
<PAGE>
DiBiaso (Actuary of the Company), Judy Garrison (Director Information Services),
Tom Kordic (Director of Claims), Patricia Mullendore (Assistant Vice-President-
Law of the Company), Dwight P. Tully (Director of Underwriting Services), Edward
E. Young (Chief Financial Officer/Treasurer of the Company) and Doran G. Merkley
(former Director of Marketing).
"Services Agreement" shall mean a services agreement between
------------------
Seller, AFA and the Company substantially in the form of Exhibit D attached
hereto, pursuant to which Seller and AFA shall provide services to the Company
and its Subsidiaries.
"Shares" shall mean all of the outstanding shares of common stock
------
of the Company.
"Statutory Statement" shall mean, with respect to any period, the
-------------------
N.A.I.C. form of Statement of the Condition and Affairs for fire and casualty
insurers prepared and filed by the Company or any of its Subsidiaries with the
insurance department of the state of its domicile.
"Subsidiary" shall mean (a) any corporation in an unbroken
----------
chain of corporations beginning with the Company if each of the corporations
other than the last corporation in the unbroken chain then owns stock possessing
fifty percent (50%) or more of the total combined voting power of all classes of
stock in one of the other corporations in such chain, (b) any partnership in
which the Company is a general partner, or (c) any partnership in which the
Company possesses a fifty percent (50%) or greater interest in the total capital
or total income of such partnership; provided, however, that the term
-------- -------
"Subsidiary" shall not include AFCC unless specifically referred to as included.
"Tax" shall mean any federal, state, local, foreign or other tax,
---
levy, fee, assessment or other government charge, including without limitation
income, estimated income, business, occupation, franchise, property, payroll,
personal property, premium, sales, transfer, use, employment, commercial rent,
occupancy, franchise or withholding taxes, including interest, penalties and any
other additions in connection therewith.
"Trademark License Agreements" shall mean the agreements, each
----------------------------
substantially in the form of Exhibit E attached hereto, pursuant to which Seller
shall grant each of the Company, AMC and the Lloyd's Plan certain rights to use
the name "American Fidelity."
"Trademarks" shall mean registered trademarks, registered service
----------
marks, trademark and service mark applications and unregistered trademarks and
service marks.
"Warrants" shall mean (a) agreements, rights to subscribe
--------
(including any preemptive rights), options, warrants, calls, commitments or
rights of any character to purchase or otherwise acquire any common stock or
other equity securities of the Company or any of its Subsidiaries, and (b)
outstanding securities of the Company or any of its Subsidiaries that are
convertible into or exchangeable for capital shares or other equity securities
of the Company or any of its Subsidiaries.
11
<PAGE>
"Wire Transfer" shall mean the transfer by bank wire of
-------------
immediately available funds to such bank account or accounts of the payee as the
payee shall designate in writing to the payor.
"Year-End Financial Statements" shall mean the audited
-----------------------------
consolidated Balance Sheet of the Company dated December 31, 1995, and the
related audited consolidated statements of income, stockholder's equity and cash
flows for the year ended December 31, 1995, together with the notes thereto,
each prepared in accordance with GAAP. The Year-End Financial Statements shall
include AFCC as a Subsidiary.
1.2 Other Defined Terms. The following terms shall have the
-------------------
meanings defined for such terms in the Sections set forth below:
<TABLE>
<CAPTION>
Term Section
---- -------
<S> <C>
AAA 10.12
Accounts Receivable 4.9(b)
AFCC Recital A
Agreed Adjustments 9.9(b)
Agreed Changes 2.4(c)(ii)
Agreed Holdback Adjustment 9.4(c)
AMC Recital A
Benefit Arrangement 4.20(a)
Cimarron Recital A
Claims-Processing Standards 9.5
Closing 3.1
COBRA 6.10(e)
Company Recital A
Company Employees 6.10
Confidential Information 10.10
Disputes 10.12
Employee Plans 4.20(a)
ERC 6.11
ERISA 4.20(a)
ERISA Affiliate 4.20(a)
Final Holdback Accounting Report 9.4(b)
Flexible Benefit Plan 6.10(e)
Hazardous Materials 4.23
Holdback Amount 2.2(c)
Indemnification Claim 9.3(f)
Indemnification Claim Notice 9.3(f)
Insurance Claim Payments 2.4(a)(1)(A)
Lloyd's Plan 4.5
Mitsubishi 7.9
Multiemployer Plan 4.20(a)
Multiemployer Welfare Plan 4.20(a)
Ocean Marine Agreed Changes 9.8(c)
Ocean Marine Settlement Report 9.8(b)
</TABLE>
12
<PAGE>
<TABLE>
<S> <C>
PBGC 4.20(a)
Pension Plan 4.20(a)
Preliminary Accounting Report 9.10
Preliminary Effective Date Balance Sheet 9.10
Preliminary Holdback Accounting Report 9.4(a)
Preliminary Report 2.4(b)
Purchase Price 2.4(b)
Purchaser Indemnitees 9.3(a)
Purchaser's 401(k) Plan 6.10(c)
Remaining Reserve Amount 2.4(a)(i)(B)
Reserve Deficiency 2.4(a)(ii)
Reserve Redundancy 2.4(a)(i)
Retirement Plan 6.10
Savings Plan 6.10
Seller Indemnitees 9.3(c)
Seller's Report 9.6
Shares 4.3
Welfare Plan 4.20(a)
</TABLE>
ARTICLE II
PURCHASE AND SALE OF SHARES
2.1 Transfer of Shares.
------------------
Upon the terms and subject to the conditions of this Agreement, at the
Closing, Purchaser shall purchase from Seller, and Seller shall sell to
Purchaser, the Shares, and Seller shall deliver to Purchaser certificates
representing the Shares duly endorsed to Purchaser or accompanied by duly
executed stock powers so as to transfer and assign to Purchaser good and valid
title to the Shares and to constitute Purchaser the sole beneficial and record
shareholder of the Company.
2.2 Purchase Price and Payment.
--------------------------
(a) The aggregate purchase price for the Shares shall be Thirty Four
Million Seven Hundred Seventy Thousand Dollars ($34,770,000) (the "Purchase
--------
Price").
- -----
(b) At the Closing, Purchaser shall pay to Seller by Wire Transfer a
cash amount of Thirty Three Million Twenty Thousand Dollars ($33,020,000) and an
additional amount equal to interest on the Purchase Price at a rate of five
percent (5%) simple interest per annum calculated from the Effective Date to the
Closing Date. The Purchase Price shall be subject to adjustment as provided in
Section 2.4.
(c) The "Holdback Amount" shall be an amount equal to One Million
---------------
Seven Hundred Fifty Thousand Dollars ($1,750,000) which Purchaser, at the
Closing, shall retain pursuant to the provisions of Section 9.4 pending the
determination of Seller's indemnification obligations, if any, as set forth in
Sections 9.3(a) and (b).
13
<PAGE>
2.3 Closing Costs; Transfer Taxes. Seller shall be responsible for
-----------------------------
any documentary and transfer taxes and any sales, use or other taxes imposed by
reason of the transfer of the Shares to Purchaser and any deficiency, interest
or penalty asserted with respect thereto.
2.4 Insurance Reserves. Seller makes no representation or
------------------
warranty to Purchaser with respect to the adequacy of the Insurance Reserves
because Seller and Purchaser agree to adjust the Purchase Price set forth in
Section 2.2 and, as provided in this Section 2.4, Purchaser and Seller agree
that, regardless of whether there is any event requiring indemnification
pursuant to Sections 9.3(a) or (b), Seller shall pay to Purchaser the amount of
any and all deficiencies in the Effective Date Insurance Reserves, and Purchaser
shall pay to Seller the amount of any redundancies in the Effective Date
Insurance Reserves, as hereinafter provided. The determination of whether a
deficiency or redundancy existed in the Effective Date Insurance Reserves shall
be made initially as of December 31, 1996, and shall be determined annually
thereafter in the same manner on each Reserve Determination Date.
(a) Insurance Reserves.
------------------
(i) With respect to each Reserve Determination Date, in the
event that the amount of the Company's Effective Date Insurance Reserves exceeds
the sum of:
(A) the Claim Payments made by the Company and its
Subsidiaries between the Effective Date and such Reserve Determination Date
("Insurance Claim Payments"), plus
------------------------ ----
(B) the amount of the Company's remaining Insurance
Reserves as of such Reserve Determination Date, as determined by Purchaser (the
"Remaining Reserve Amount"), plus or minus
------------------------ ---- -----
(C) any adjustments to the total amount of Insurance
Claim Payments pursuant to Section 9.6, plus
----
(D) the amount of any redundancy as of a prior Reserve
Determination Date with respect to which a payment was made by Purchaser
pursuant to this Section 2.4(a)(i), minus
-----
(E) the amount of any deficiency as of a prior Reserve
Determination Date with respect to which a payment was made by Seller pursuant
to Section 2.4(a)(ii),
the amount of such excess shall be deemed a "Reserve Redundancy." Purchaser
shall pay to Seller, on or prior to the April 30 following each such Reserve
Determination Date, the amount of the Reserve Redundancy calculated as of such
Reserve Determination Date. In the event there exists on any such April 30 a
dispute which has not been resolved pursuant to Section 2.4(c), payment shall be
made promptly, but in no event more than two (2) business days, after the
dispute has been resolved.
14
<PAGE>
(ii) In the event that, with respect to each Reserve
Determination Date, the amount of the Effective Date Insurance Reserves is less
than the sum of:
(A) the Insurance Claim Payments, plus
----
(B) the Remaining Reserve Amount, plus or minus
-------------
(C) any adjustments to the total amount of Insurance
Claim Payments pursuant to Section 9.6, plus
----
(D) the amount of any redundancy as of a prior Reserve
Determination Date with respect to which a payment was made by Purchaser
pursuant to Section 2.4(a)(i), minus
-----
(E) the amount of any deficiency as of a prior Reserve
Determination Date with respect to which a payment was made by Seller pursuant
to this Section 2.4(a)(ii),
the amount of such deficiency shall be deemed a "Reserve Deficiency." Seller
shall pay to Purchaser, on or prior to the April 30 following each such Reserve
Determination Date, the amount of the Reserve Deficiency calculated as of such
Reserve Determination Date. In the event there exists on any such April 30 a
dispute which has not been resolved pursuant to Section 2.4(c), payment shall be
made promptly, but in no event more than two (2) business days, after the
dispute has been resolved.
(iii) Prior to each Reserve Determination Date, Purchaser
shall direct the Actuarial Firm selected by Purchaser to determine the Remaining
Reserve Amount as of such next succeeding Reserve Determination Date, which
determination shall be subject to dispute and redetermination as provided in
Section 2.4(c). The fees of the Actuarial Firm selected by Purchaser for this
determination shall be paid by Purchaser.
(iv) After December 31, 2001, with respect to Late Claims
reported to the Company or any of its Subsidiaries more than three (3) years
after the Closing Date but prior to December 31, 2001, Seller shall reimburse
Purchaser for the amount by which (i) any Claim Payments made with respect to
any such Late Claim is greater than (ii) the Insurance Reserves for such Late
Claim as of December 31, 2001, up to a maximum of One-Hundred Fifty Thousand
Dollars ($150,000) for each such Late Claim; provided, however, Seller shall not
-------- -------
be obligated to make any reimbursement for a Late Claim that remains outstanding
at December 31, 2004. With respect to Late Claims reported after December 31,
2001, Seller shall reimburse Purchaser for the amount of any Claim Payments with
respect to such Late Claim, up to a maximum of One-Hundred Fifty Thousand
Dollars ($150,000) for each such Late Claim; provided, however, Seller shall not
be obligated to make any reimbursement for a Late Claim that remains outstanding
at December 31, 2004.
(b) Preliminary Report. Not later than the February 15
------------------
following each Reserve Determination Date, Purchaser shall deliver to Seller a
certificate (each such certificate being referred to as a "Preliminary Report")
------------------
setting forth the determination of the Remaining
15
<PAGE>
Reserve Amount by the Actuarial Firm selected by Purchaser pursuant to Section
2.4(a)(iii) and the Purchaser's determination of the Reserve Redundancy or
Reserve Deficiency, as the case may be, determined in accordance with this
Section 2.4(b).
(c) Resolution of Disputes. If, with respect to each Reserve
----------------------
Determination Date, the amount of such Reserve Redundancy or such Reserve
Deficiency, as the case may be, exceeds Ten Thousand Dollars ($10,000), then:
(i) Following receipt of each Preliminary Report, Seller may
review the same and, within thirty (30) days after the date of such receipt, may
deliver to Purchaser a certificate setting forth any objections to the
determination of any amounts set forth in the Preliminary Report, together with
a summary of the reasons therefor and calculations which, in Seller's view, are
necessary to eliminate such objections, to the extent the information necessary
to make such calculations is reasonably available to Seller. If Seller does not
object within such 30-day period, the determinations set forth in the
Preliminary Report shall be final and binding on Purchaser and Seller. In
preparing its objections, Seller may, but is not required to, consult with one
of the two (2) remaining Actuarial Firms. The fees of the Actuarial Firm
selected by Seller for this consultation and the preparation of Seller's
objections to the Preliminary Report shall be paid by Seller.
(ii) If Seller timely objects within such 30-day period,
Purchaser and Seller shall use their respective reasonable best efforts to
resolve within thirty (30) days after such timely objection by written agreement
(the "Agreed Changes") any differences as to the determinations set forth in
--------------
the Preliminary Report. If Seller and Purchaser so resolve any such differences,
the determinations set forth in the Preliminary Report, as adjusted by the
Agreed Changes, shall be final and binding on Purchaser and Seller.
(iii) If any objections timely raised by Seller are not
resolved by the Agreed Changes within the 30-day period contemplated in this
Subsection 2.4(c), then Purchaser and Seller shall submit the objections that
are then unresolved to the remaining Actuarial Firm, or one of the two (2)
remaining Actuarial Firms in the event Seller does not consult with an Actuarial
Firm pursuant to Section 2.4(c)(i). Such remaining Actuarial Firm shall be
directed by Purchaser and Seller to seek to resolve the unresolved objections as
promptly as reasonably practicable and to deliver written notice to each of
Purchaser and Seller setting forth its resolution of the disputed matters. The
determinations set forth in the Preliminary Report as adjusted by the Agreed
Changes and by the resolution of such objections by the remaining Actuarial Firm
selected pursuant to this Section 2.4(c)(iii) shall be final and binding on the
parties.
(iv) Upon request by Seller, Purchaser shall promptly provide
to Seller verification of the amount of the Claim Payments. Seller may raise
objections to the propriety of such Claim Payments only in accordance with
Section 9.6.
(d) No Further Discussion of Disputes. If, with respect to each
---------------------------------
Reserve Determination Date, the amount of such Reserve Redundancy or such
Reserve Deficiency, as the case may be, set forth in the Preliminary Report is
equal to or less than Ten Thousand Dollars ($10,000), then the Reserve
Deficiency or the Reserve Redundancy, as the case may be, set forth in the
Preliminary Report shall be final, binding and conclusive on the parties.
16
<PAGE>
(e) Books and Records. The parties hereto shall make available to
-----------------
Purchaser, Seller (and their respective Representatives) and, if applicable, the
Actuarial Firm, such books, records and other information (including work
papers) as any of the foregoing may reasonably request to prepare to review any
Preliminary Report or any matters submitted to the Actuarial Firm.
(f) Costs and Fees. The reasonable fees and expenses of the Actuarial
--------------
Firm utilized to resolve disputes under Section 2.4(c)(iii) shall be paid fifty
percent (50%) by Purchaser and fifty percent (50%) by Seller. Any fees and
expenses payable by Seller pursuant to this Section 2.4(f), at the election of
Purchaser, to the extent available, may be paid and set-off from any amounts
otherwise payable to Seller pursuant to this Section 2.4.
ARTICLE III
CLOSING
-------
3.1 Closing. Upon the terms and subject to the conditions set forth
-------
herein, and subject to Section 10.1(a), the Closing of the transactions
contemplated herein (the "Closing") shall be held at 10:00 a.m. local time on
-------
the Closing Date at the offices of McAfee & Taft A Professional Corporation,
211 North Robinson, Suite 1000, Oklahoma City, Oklahoma, unless the parties
hereto otherwise agree.
3.2 Deliveries at Closing.
---------------------
(a) Stock Certificates. To effect the purchase of the Shares, Selle
------------------
shall, on the Closing Date, deliver to Purchaser certificates(s) evidencing all
of the issued and outstanding shares of common stock of the Company, free and
clear of any Encumbrances of any nature whatsoever, duly endorsed in blank for
transfer or accompanied by stock powers duly executed in blank, together with
evidence of the payment of any applicable stock transfer taxes.
(b) Certificates; Opinions. At the Closing, Seller and Purchaser
----------------------
shall deliver the certificates, opinions of counsel and other items described in
Articles VII and VIII.
(c) Ancillary Agreements. At the Closing, and upon the terms and
--------------------
subject to the conditions contained herein, Purchaser and Seller shall, and
Seller shall cause the Company, each of its Subsidiaries and Cameron Enterprises
to, execute and deliver each of the Ancillary Agreements to which it is a party.
3.3 Other Closing Transactions.
--------------------------
(a) Payment of Purchase Price. At the Closing, Purchaser shall
-------------------------
deliver to Seller the Purchase Price as provided in Section 2.2.
(b) Section 338(h)(10) Election. Seller and Purchaser shall each
---------------------------
execute and Purchaser shall deliver to Seller an election pursuant to Section
338(h)(10) of the Code with respect to the Company and its Subsidiaries so that
the Company shall be treated as a
17
<PAGE>
member of the selling consolidated group. Seller shall be authorized to cause
such election to be filed with the Internal Revenue Service.
(c) Payment for Personal Property. At the Closing, Purchaser shall,
-----------------------------
or shall cause the Company to, deliver to Seller an amount in cash equal to the
price of the personal property conveyed to the Company pursuant to the Bills of
Sale.
(d) Other Closing Transactions. At the Closing, each of the parties
--------------------------
shall take such other actions required hereby to be performed by it prior to or
on the Closing Date, including, without limitation, satisfying the conditions
set forth in Articles VII and VIII.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF SELLER
----------------------------------------
Seller hereby represents and warrants to Purchaser as follows, except
as otherwise set forth on the Disclosure Schedule, which representations and
warranties are, as of the date hereof, and will be, as of the Closing Date, true
and correct:
4.1 Organization, Authorization and Execution of Seller. Seller is
---------------------------------------------------
a corporation duly organized, validly existing and in good standing under the
laws of the State of Nevada. Seller has all necessary corporate power and
authority and, prior to the Closing, will have taken all corporate action
necessary to execute and deliver this Agreement and the Ancillary Agreements, to
consummate the transactions contemplated hereby and to perform its obligations
hereunder and thereunder, and no other proceedings on the part of Seller are
necessary to authorize this Agreement and the Ancillary Agreements and the
transactions contemplated hereby and thereby. This Agreement has been duly
executed and delivered by Seller and is a legal, valid and binding obligation of
Seller enforceable against Seller in accordance with its terms, except as such
enforceability may be limited by the Bankruptcy Exception. Copies of the
Articles of Incorporation and Bylaws of Seller, and all amendments thereto,
heretofore delivered to Purchaser are accurate and complete as of the date
hereof.
4.2 Organization of the Company. The Company is a corporation duly
---------------------------
organized, validly existing and in good standing under the laws of the State of
Oklahoma, has full corporate power and authority to conduct its business as it
is presently being conducted and to own and lease its properties and Assets.
Except as set forth on Schedule 4.2, the Company has duly qualified to do
business as a foreign corporation and is in good standing in each jurisdiction
where the character of its properties owned or leased or the nature of its
activities makes such qualification necessary, and the failure to so qualify in
any such jurisdiction so listed on Schedule 4.2 will not result in any liability
to the Company. Copies of the Certificate of Incorporation and Bylaws of the
Company, and all amendments thereto, heretofore delivered to Purchaser are
accurate and complete as of the date hereof. Schedule 4.2 contains a true,
correct and complete list of all jurisdictions in which the Company is qualified
to do business as a foreign corporation.
4.3 Capitalization of the Company. The authorized capital stock of
-----------------------------
the Company consists of three-hundred thousand (300,000) shares of common stock,
$15 par value per share, of which two-hundred fifty thousand (250,000) shares
(the "Shares") are issued and
------
18
<PAGE>
outstanding and none of which are held in the Company's treasury. All of the
Shares are validly issued, fully paid and non-assessable, and are owned by
Seller free and clear of all Encumbrances. There are no Warrants with respect to
the equity securities of the Company. The Company has no commitments or
obligations to purchase or redeem any of the Shares.
4.4 Subsidiaries. The only Subsidiaries of the Company are those set
------------
forth in Schedule 4.4. Other than the Subsidiaries and the Company's interest
in the Lloyd's Plan (as defined below), the Company has no direct or indirect
stock or other equity or ownership interest (whether controlling or not) in any
corporation, association, partnership, joint venture or other entity. Each of
the Subsidiaries listed on Schedule 4.4 is a corporation duly organized, validly
existing and in good standing under the laws of the jurisdiction identified on
Schedule 4.4, has the requisite corporate power and authority to conduct its
business as it is presently being conducted and to own and lease its properties
and Assets. No corporate proceedings on the part of any Subsidiary are
necessary to authorize this Agreement or the transactions contemplated hereby,
or to permit Seller to enter into this Agreement, to consummate the transactions
contemplated hereby and to perform its obligations hereunder. Schedule 4.4
contains a true, correct and complete list of all jurisdictions in which each
Subsidiary is qualified to do business as a foreign corporation. Except as set
forth on Schedule 4.4, each of the Subsidiaries is duly qualified to do business
as a foreign corporation and is in good standing in each jurisdiction where the
character of its properties owned or leased or the nature of its activities
makes such qualification necessary, and the failure to so qualify in any such
jurisdiction so listed on Schedule 4.4 will not result in any liability to such
Subsidiary. Copies of the Certificate or Articles of Incorporation and Bylaws of
each Subsidiary heretofore delivered to Purchaser are accurate and complete.
Schedule 4.4 sets forth a description of all of the issued and outstanding
equity securities of each of the Subsidiaries. Except as set forth in Schedule
4.4, the Company owns of record and beneficially all of the issued and
outstanding capital stock of each Subsidiary free and clear of any Encumbrances.
There are no Warrants with respect to the equity securities of any Subsidiary.
4.5 Lloyd's Plan. American Fidelity Lloyd's Insurance Company (the
------------
"Lloyd's Plan") is a "Lloyd's" plan insurer duly organized, validly existing and
- -------------
in good standing as an entity under the insurance laws of the State of Texas,
has full power and authority to conduct its business by and through its
attorney-in-fact as it is presently being conducted and to own and lease its
properties and Assets. AMC has been duly designated and appointed attorney-in-
fact by and for each of the underwriters of the Lloyd's Plan under a power of
attorney duly executed by each of such underwriters. Copies of the Articles of
Agreement of the Lloyd's Plan, and all amendments thereto, together with the
powers of attorney, heretofore delivered to Purchaser, are accurate and complete
as of the date hereof. The Lloyd's Plan and AMC, as attorney-in-fact, hold a
valid certificate of authority issued pursuant to Article 18.04 of the Texas
Insurance Code to transact those lines of insurance business set forth on
Schedule 4.6. AMC has filed with the appropriate regulatory authorities all
bonds and other documents required for the safekeeping of assets of a Lloyd's
plan.
4.6 Insurance Licenses and Other Permits. (a) Schedule 4.6 sets forth
------------------------------------
separately with respect to the Company and each Subsidiary (i) each jurisdiction
in which the Company or any of its Subsidiaries holds an outstanding Insurance
License to transact one or more lines or classes of property and casualty
insurance, (ii) the date of issuance and the scheduled expiration date of each
such license, and (iii) a description of the scope and lines of
19
<PAGE>
insurance covered by each such license. Except as set forth on Schedule 4.6, (i)
each such license is valid and in full force and effect, (ii) the authority of
the Company or any of its Subsidiaries to write the lines and classes of
insurance set forth under each such license is unrestricted (except as limited
by law or regulation), (iii) neither the Company nor any of its Subsidiaries is
a party to any agreement or arrangement with any governmental regulatory
official limiting the Company's or any of its Subsidiaries' ability to make full
use of any such license, (iv) there is no pending application or other document
that would modify or amend any such license, and (v) to Seller's Knowledge, each
such Insurance License is renewable at its expiration in the ordinary course of
business by the payment of the standard fee. Except as set forth on Schedule
4.6, neither the Company nor any of its Subsidiaries has received any notice of
any event, inquiry, investigation or proceeding that would reasonably be
expected to result in the suspension, revocation or limitation of any Insurance
License or otherwise impose any limitation on the conduct of the business of the
Company or any of its Subsidiaries, and to Seller's Knowledge, there is no
sustainable basis for any such suspension, revocation or limitation. Schedule
4.6 also sets forth each jurisdiction in which the Company or any of its
Subsidiaries has an application for an Insurance License pending and the nature
of the license requested, and no such application has been denied, refused or
withdrawn by the Company or any of its Subsidiaries since January 1, 1995.
Schedule 4.6 sets forth all pending examinations by any governmental authority
having jurisdiction to regulate the insurance operations of the Company or any
of its Subsidiaries and all such examinations completed since 1991 with respect
to the Company and each of such Subsidiaries subject to such examinations.
(a) Schedule 4.6 sets forth a complete list of all Permits, other than
Insurance Licenses, used in the operation of the Business or otherwise held by
the Company or any of its Subsidiaries.
(b) The Company and each of its Subsidiaries currently has all Permits
reasonably required under any Regulation in the operation of its Business or in
the ownership of the Assets, and owns or possesses such Permits free and clear
of all Encumbrances. Neither the Company nor any of its Subsidiaries is in
Default with respect to any such Permit, nor has it received any notice of any
claim of Default. Except as otherwise governed by law, all such Permits are
renewable by their terms or in the ordinary course of business without the need
to comply with any special qualification procedures or to pay any amounts other
than routine filing fees. No present or former shareholder, director, officer
or employee of the Company or any of its Subsidiaries or any Affiliate thereof,
or any other person, firm, corporation or other entity, owns or has any
proprietary, financial or other interest (direct or indirect) in any Permit
which the Company or any of its Subsidiaries owns, possesses or uses.
4.7 Financial Statements.
--------------------
(a) Seller has heretofore delivered to Purchaser the Financial
Statements identified as Schedule 4.7. The Financial Statements (i) are in
accordance with the Books and Records of the Company and each of its
Subsidiaries, (ii) have been prepared in accordance with GAAP, and (iii) fairly
and accurately present the consolidated assets, liabilities (including all
reserves) and financial position of the Company as of the respective dates
thereof and the consolidated results of operations and, in the case of the Year-
End Financial Statements, changes in cash flows for the periods then ended. The
Year-End Financial Statements have been
20
<PAGE>
examined by KPMG, independent certified public accountants, whose report thereon
is included with such Year-End Financial Statements.
(b) Seller has heretofore delivered to Purchaser the Pro Forma Interim
Financial Statements, showing all consolidating adjustments made to the Interim
Financial Statements to reflect the sale of the stock of AFCC to Seller at
January 1, 1996, and the application of the accounting principles set forth in
Exhibit F attached hereto. The Pro Forma Interim Financial Statements (i) set
forth all consolidating adjustments made from the Interim Financial Statements
and the assumptions used with respect to such adjustments, and (ii) fairly and
accurately present, in all material respects, the consolidated assets,
liabilities (including all reserves) and financial position of the Company and
its Subsidiaries as of the respective dates theretofore and the consolidated
results of operations for the period ended June 30, 1996.
(c) Seller has heretofore delivered to Purchaser true and complete
copies of the consolidated Statutory Statements of the Company, Cimarron and
the Lloyd's Plan for the years ended December 31, 1993, 1994, and 1995, together
with notes thereto and the reports of KPMG thereon, which have been examined by
KPMG under statutory accounting principles and are true and correct in
accordance with such accounting principles, and individual Statutory Statements
for each of the Company, Cimarron and the Lloyd's Plan for the quarterly period
ended June 30, 1996. Such Statutory Statements have been prepared in accordance
with accounting practices prescribed or permitted by insurance regulatory
authority of the state of domicile of each such company on a consistent basis or
in accordance with all applicable N.A.I.C. guidelines.
(d) Seller has heretofore delivered to Purchaser true and complete
copies of (i) all actuarial certifications relating to loss reserves of the
Company and each of its Subsidiaries since January 1, 1993, and (ii) all reports
prepared by actuaries of the Company and each of its Subsidiaries and
independent actuaries relating to loss reserves and other financial reserves of
the Company or any of its Subsidiaries since January 1, 1993.
4.8 Liabilities. Except as set forth on Schedule 4.8, neither the
-----------
Company nor any of its Subsidiaries has any Liabilities due or to become due,
except (a) Liabilities which are set forth or reserved for on the Pro Forma
Interim Balance Sheet or described in the notes thereto which have not been paid
or discharged since the Pro Forma Interim Balance Sheet Date, (b) Liabilities
arising in the ordinary course of business under Contracts, Leases, Permits and
other business arrangements described in the Disclosure Schedule (and under
those Contracts, Leases and Permits which are not required to be disclosed on
the Disclosure Schedule), and (c) Liabilities incurred since the Pro Forma
Interim Balance Sheet Date in the ordinary course of business and in accordance
with this Agreement, and none of which, individually or in the aggregate, has or
would have a material adverse effect on the Business or the consolidated
stockholder's equity of the Company or any of its Subsidiaries under GAAP.
4.9 Accounts Receivable; Notes Receivable; Mortgages; Other Amounts
---------------------------------------------------------------
Receivable
- ----------
(a) Except as set forth on Schedule 4.9, the accounts receivable of
the Company and each of its Subsidiaries reflected on the Interim Balance Sheet
and receivables
21
<PAGE>
arising since the Interim Balance Sheet Date and on or prior to the date hereof,
represent bona fide claims against the respective account debtors and, to
Seller's Knowledge, all the products delivered and services performed that gave
rise to said accounts were delivered or performed in accordance with the
applicable orders, Contracts or customer requirements. All accounts receivable
(including accrued investment income reflected on the Interim Balance Sheet),
notes receivable, mortgage loans (for which the Company or its Subsidiaries is
the lender) and other amounts receivable of the Company and each of its
Subsidiaries reflected on the Interim Balance Sheet, shall be subject to no
defenses, counterclaims or rights of setoff. Schedule 4.9 sets forth a complete
and accurate list of all such notes receivable and mortgage loans (for which the
Company or any of its Subsidiaries is the lender), together with the balances
outstanding as of the Interim Balance Sheet Date.
(b) At least eighty-five percent (85%) of the aggregate unpaid
principal amount of the accounts receivable (including accrued investment
income) of the Company and its Subsidiaries to be reflected on the Effective
Date Balance Sheet (the "Accounts Receivable") shall be fully collectible in the
-------------------
ordinary course of business without cost to the Company, its Subsidiaries or the
Purchaser in connection with such efforts. For purposes of this Section 4.9(b),
the term "Accounts Receivable" does not include, and no representation or
warranty is made with respect to the collectibility, with or without cost, of
the following:
(i) Accounts receivable attributable to billings for premiums due
directly from insureds, including assigned risk premiums, which involve policy
cancellation rather than collection if not paid when due, but only to the extent
that the amount of any such account receivable is offset upon cancellation by
the unearned premium established for such account;
(ii) Accounts receivable owed to the Company or any of its
subsidiaries by account debtors, the collection of which has been classified by
the Company prior to the Effective Date as doubtful and which accounts
receivable shall be included in the Company's allowance for doubtful accounts
included in the Effective Date Balance Sheet; provided, however, that the
-------- -------
aggregate amount of such allowance for doubtful accounts on the Effective Date
Balance Sheet may not exceed the amount of the provision for those doubtful
accounts included in the Interim Balance Sheet which remain outstanding at the
date of the Effective Date Balance Sheet, plus any account that subsequent to
the date of the Interim Balance Sheet becomes more than ninety (90) days past
due from the payment date for such account;
(iii) Accounts receivable and other amounts owed to the Company and
its Subsidiaries by reinsurers under reinsurance policies, treaties and
agreements to which any of the Company and its Subsidiaries is a party and which
are classified as "reinsurance receivables on unpaid losses" and included in the
Insurance Reserves in the Pro Forma Interim Balance Sheet; and
(iv) Accounts receivable, to the extent the collectibility of which is
secured by one or more letters of credit issued by banks and other financial
institutions for the benefit of the Company or any of its Subsidiaries; unless,
and to the extent, the issuer of such letter of credit fails or refuses to honor
a draw thereunder.
22
<PAGE>
4.10 Books and Records. The Company and each of its Subsidiaries have
-----------------
made and kept (and given Purchaser access to) Books and Records and accounts,
which, in reasonable detail, accurately and fairly reflect the activities of the
Company and such Subsidiary. The minute books of the Company and each of its
Subsidiaries previously delivered to Purchaser accurately and adequately reflect
all action previously taken by the shareholders, board of directors and
committees of the board of directors of the Company and each such Subsidiary.
The copies of the stock book records of the Company and each of its Subsidiaries
previously delivered to Purchaser are true, correct and complete, and accurately
reflect changes in record ownership effected in the Company's and each such
Subsidiary's stock through and including the date hereof. Neither the Company
nor any of its Subsidiaries has engaged in any transaction, maintained any bank
account or used any corporate funds except for transactions, bank accounts and
funds which have been and are reflected in the normally maintained books and
records of the Company or such Subsidiary.
4.11 Absence of Certain Changes or Events. Except as set forth on
------------------------------------
Schedule 4.11, since the Interim Balance Sheet Date, there has not been any:
(a) actual or, to Seller's Knowledge, threatened adverse change in the
financial condition, working capital, shareholders' equity, Assets, Liabilities,
reserves, revenues, earnings or Business of the Company or any of its
Subsidiaries, as determined under either GAAP or statutory accounting
principles;
(b) change in accounting methods, principles or practices by the
Company or any of its Subsidiaries;
(c) revaluation by the Company or any of its Subsidiaries of any
material amount of the Assets, including, without limitation, writing off notes
or accounts receivable;
(d) damage, destruction or loss (whether or not covered by insurance)
materially and adversely affecting the Assets or the Business;
(e) cancellation of any indebtedness or waiver or release of any right
or claim of the Company or any of its Subsidiaries relating to its activities or
properties which had or will have an adverse effect on the Assets or the
Business;
(f) declaration, setting aside, or payment of dividends or
distributions by the Company in respect of the Shares or any redemption,
purchase or other acquisition of any of the Company's securities;
(g) increase in the rate of compensation payable or to become payable
by the Company or any of its Subsidiaries to any director, officer or other
employee of the Company or any of its Subsidiaries, including, without
limitation, the making of any loan to, or the payment, grant or accrual of any
bonus, incentive compensation, service award or other similar benefit to, any
such person, or the addition to, modification of, or contribution to any
Employee Plan, arrangement, or practice described in the Disclosure Schedule
other than (i) increases in rates of compensation and contributions made in
accordance with the normal
23
<PAGE>
practices of the Company or any of its Subsidiaries or (ii) the extension of
coverage to others who become eligible after the Interim Balance Sheet Date;
(h) adverse change in employee relations which has or is reasonably
likely to have a material adverse effect on the productivity, the financial
condition, results of operations or Business of the Company or any of its
Subsidiaries, or the relationships between the employees of the Company or any
of its Subsidiaries and the management of the Company or such Subsidiary,
respectively;
(i) amendment, cancellation or termination of any Contract,
commitment, agreement, Lease, transaction or Permit relating to the Assets or
the Business or entry into any Contract, commitment, agreement, Lease,
transaction or Permit which is not in the ordinary course of business,
including, without limitation, any employment or consulting agreements;
(j) mortgage, pledge or other encumbrance of any Assets, except
purchase money mortgages arising in the ordinary course of business;
(k) sale, assignment or transfer of any of the Assets of the Company
or any of its Subsidiaries, other than in the ordinary course of business;
(l) incurrence of indebtedness by the Company or any of its
Subsidiaries for borrowed money or commitment to borrow money entered into by
the Company or any of its Subsidiaries, or loans made or agreed to be made by
the Company or any of its Subsidiaries, or indebtedness guaranteed by the
Company or any of its Subsidiaries;
(m) incurrence by the Company or any of its Subsidiaries of
Liabilities, except Liabilities incurred in the ordinary course of business, or
any change in any assumption underlying methods of calculating any reserves of
the Company or any of its Subsidiaries, except as provided in Exhibit F and any
of the Schedules to this Agreement;
(n) payment, discharge or satisfaction of any Liabilities of the
Company or any of its Subsidiaries, other than payment, discharge or
satisfaction in the ordinary course of business, of Liabilities set forth or
reserved for on the Interim Financial Statements or incurred in the ordinary
course of business;
(o) capital expenditure, the execution of any Lease or the incurring
of any obligation by the Company or any of its Subsidiaries to make any capital
expenditure or execute any Lease;
(p) failure to pay or satisfy when due any Liability of the Company or
any of its Subsidiaries, except where the failure would not have a material
adverse effect on the Business;
(q) failure of the Company or any of its Subsidiaries to carry on
diligently the Business in the ordinary course so as to keep available to
Purchaser the services of the Company's or any of its Subsidiaries' employees,
and to preserve for Purchaser the Assets and
24
<PAGE>
the Business and the goodwill of the Company's and each of its Subsidiaries'
suppliers, customers, distributors and others having business relations with it;
(r) disposition or lapsing of any Proprietary Rights or any
disposition or disclosure to any person of any Proprietary Rights not
theretofore a matter of public knowledge;
(s) existence of any other event or condition which in any one case or
in the aggregate has or might reasonably be expected to have a material adverse
effect on the Business; or
(t) agreement (written or oral) by the Company or a Subsidiary to do
any of the things described in the preceding clauses (a) through (s) other than
as expressly provided for herein.
4.12 Assets. Except as set forth on Schedule 4.12, the Company and
------
each of its Subsidiaries have, and, upon the consummation of the transactions
contemplated hereby, will continue to have, good title to or a valid leasehold
interest in, all Assets reflected on the Interim Balance Sheet, and with respect
to any real property constituting a portion of such Assets, good and marketable
fee simple title to such real property, in each case free and clear of all
Encumbrances (other than Permitted Encumbrances in the case of personal
property). Schedule 4.12 contains a complete and accurate list of all improved
or unimproved real property owned or leased by the Company or any of its
Subsidiaries showing the location and use thereof and a list of each office or
other facility maintained by the Company or any of its Subsidiaries showing the
location and use thereof. The Company and each of its Subsidiaries enjoy
peaceful and undisturbed possession of all Facilities, and except as set forth
on Schedule 4.12, such Facilities are not subject to any Encumbrances, including
any encroachments, building or use restrictions, exceptions, reservations or
limitations. There are no pending or, to Seller's Knowledge, threatened
condemnation proceedings relating to any of the Facilities. The Facilities,
Fixtures and Equipment and other tangible Assets owned, leased or used by the
Company and each of its Subsidiaries in the conduct of their respective
businesses are structurally sound with no known material defects, are in good
operating condition and repair, subject to ordinary wear and tear, are adequate
for the uses to which they are being put and, together with all other Assets
owned, leased or used by the Company and each of its Subsidiaries, are adequate
for the operation of the Business as it has been conducted by the Company and
its Subsidiaries prior to the Closing Date. None of such Facilities, Fixtures
and Equipment or Assets is in need of maintenance or repairs except for
ordinary, routine maintenance and repairs. Except as set forth on Schedule
4.12, each of the Company and its Subsidiaries have a valid leasehold interest
in all of the Assets that are leased by it, free and clear of all Encumbrances.
Schedule 4.12 sets forth a list of Leases (including subleases) of personal
property and all Leases (including subleases) of real property, in each case to
which the Company or any of its Subsidiaries is a party, whether as lessor,
lessee, guarantor or otherwise, or by which any of them or their respective
properties or Assets are bound, or which otherwise relate to the operation of
their respective businesses. Schedule 4.12 indicates with respect to each Lease
listed thereon (i) the date of each amendment, if any, and (ii) the term, rent
for each remaining year of the lease term, and renewal options (and rent during
renewal options), options to purchase, termination rights and puts, a general
description of the leased items, and with respect to Leases of real property,
the number of square feet leased. Each
25
<PAGE>
of the Company and its Subsidiaries has in all material respects performed all
obligations required to be performed by it with respect to (y) all Assets leased
by it (whether as lessor or lessee) and (z) all Leases of the Facilities. Except
as set forth on Schedule 4.12, there exists no Default on the part of the
Company or any of its Subsidiaries under any Lease. To Seller's Knowledge, there
is no Default on the part of any other party to any Lease. Subject to the
Bankruptcy Exception, and except as set forth on Schedule 4.12, the Leases are
valid, binding and enforceable in accordance with their respective terms and are
in full force and effect, and assuming all consents required by the terms
thereof or applicable law have been obtained, the Leases will continue to be
valid, binding and enforceable in accordance with their respective terms and in
full force and effect immediately following the consummation of the transactions
contemplated hereby. Seller has delivered to Purchaser, or otherwise made
available to Purchaser, originals or true copies of all Leases, as amended, and
has made available for review all related files.
4.13 Contracts and Commitments.
-------------------------
(a) Contracts. Schedule 4.13 sets forth a complete and accurate list
---------
of all material Contracts of the following categories:
(i) Contracts not made in the ordinary course of business;
(ii) Forms of contracts with insurance agents;
(iii) Reinsurance treaties, contracts or arrangements, either as the
ceding company or the assuming company, covering current policy years or prior
policy years for which some obligation remains outstanding on the part of the
Company or any of its Subsidiaries;
(iv) Structured settlement annuities, and related settlement
agreements, for which the Company or any of its Subsidiaries that is a party to
the transaction does not have a full release from further liability or
obligation;
(v) Insurance policy and service contract forms on a group or
individual basis for each line of insurance offered by the Company or any of its
Subsidiaries;
(vi) Premium finance contract forms used by the Company or any of its
Subsidiaries;
(vii) Contracts with third parties to provide insurance products or
services to any group or classifications of insureds;
(viii) Contracts with third parties to provide management,
administration, underwriting, risk management, claims, repair or other insurance
services to the Company or any of its Subsidiaries or for the Company or any of
its Subsidiaries to provide any such services to others;
(ix) Contracts to which AMC is a party relating to organization,
ownership or operation of the Lloyd's Plan;
26
<PAGE>
(x) Employment contracts and severance agreements, including without
limitation Contracts (A) to employ or terminate executive officers or other
personnel and other contracts with present officers or directors of the Company
or any of its Subsidiaries or (B) that will result in the payment by, or the
creation of any Liability to pay on behalf of the Company or any of its
Subsidiaries or Purchaser any severance, termination, "golden parachute," or
other similar payments to any present or former personnel following termination
of employment or otherwise as a result of the consummation of the transactions
contemplated by this Agreement;
(xi) Labor or union contracts;
(xii) Distribution, franchise, license, technical assistance, sales,
commission, consulting, agency or advertising contracts related to the Assets or
the Business and which are not cancelable (without Liability) on thirty (30)
calendar days' notice;
(xiii) Options with respect to any property, real or personal, whether
the Company or any of its Subsidiaries shall be the grantor or grantee
thereunder;
(xiv) Contracts involving future expenditures or Liabilities, actual
or potential, except those Contracts which in the aggregate involve future
expenditures or Liabilities of less than Fifty Thousand Dollars ($50,000), or
that are otherwise material to the Business or the Assets, and which are not
cancelable (without Liability) on thirty (30) calendar days' notice;
(xv) Contracts or commitments relating to commission arrangements with
others, other than agreements with insurance agents;
(xvi) Promissory notes, loans, agreements, indentures, evidences of
indebtedness, letters of credit, guarantees, or other instruments relating to an
obligation to pay money (except those which in the aggregate relate to an
obligation to pay Fifty Thousand Dollars ($50,000) or less, whether the Company
or any of its Subsidiaries shall be the borrower, lender or guarantor thereunder
or whereby any Assets are pledged (excluding credit provided by the Company or
any of its Subsidiaries in the ordinary course of business to purchasers of its
insurance products);
(xvii) Contracts containing covenants limiting the freedom of the
Company or any of its Subsidiaries, or any officer, director, shareholder or
Affiliate of the Company or any of its Subsidiaries, to engage in any line of
business or compete with any person;
(xviii) Any Contract with an Affiliate not otherwise disclosed on
Schedule 4.13.
Seller has delivered to Purchaser true, correct and complete copies of all of
the Contracts or forms listed on Schedule 4.13, including all amendments and
supplements thereto.
(b) Absence of Breaches and Defaults. Subject to the Bankruptcy
--------------------------------
Exception, all of the Contracts and material Leases to which the Company or any
of its
27
<PAGE>
Subsidiaries is a party or by which it or any of the material Assets is bound or
affected are valid, binding and enforceable in accordance with their terms. The
Company and each of its Subsidiaries has fulfilled, or taken all action
necessary to enable it to fulfill when due, all of its material obligations
under each of such Contracts and material Leases to which it is a party. To
Seller's Knowledge, or except as set forth on Schedule 4.12, all parties to such
Contracts and Leases have complied in all material respects with the provisions
thereof, no party is in Default thereunder and no notice of any claim of Default
has been given to the Company or any of its Subsidiaries or to Seller. With
respect to any material Lease, neither the Company or any of its Subsidiaries or
Seller has received any notice of cancellation or termination under any option
or right reserved to the lessor, or any notice of Default.
4.14 No Conflict or Violation. Except as set forth on Schedule 4.14,
------------------------
neither the execution, delivery and performance of this Agreement nor the
consummation of the transactions contemplated hereby will result in (a) a
violation of or a conflict with any provision of the Certificate or Articles of
Incorporation or Bylaws of the Company or any of its Subsidiaries, (b) a breach
of, or a Default under, or the creation of any right of any party to accelerate,
terminate or cancel, any Contract, Permit, authorization or concession to which
the Company or any of its Subsidiaries is a party or by which any of the Assets
of the Company or any of its Subsidiaries are bound, (c) a violation by the
Company or any of its Subsidiaries of any Regulation or Court Order which would
have a material adverse effect on the Company or any of its Subsidiaries, or (d)
an imposition of any material Encumbrance, restriction or charge on the Business
of the Company or any of its Subsidiaries or on any of the Assets of the Company
or any of its Subsidiaries.
4.15 Consents and Approvals. Except pursuant to applicable
----------------------
requirements of the HSR Act or with respect to matters set forth on Schedule
4.15, no consent, approval or authorization of, permit from, or declaration,
filing or registration with, any governmental or regulatory authority, or any
other person or entity, is required to be made or obtained by Seller, the
Company or any of its Subsidiaries in connection with the execution, delivery
and performance of this Agreement and the consummation of the transactions
contemplated hereby.
4.16 Litigation. Except as set forth on Schedule 4.16, there are no
----------
Actions pending, or to Seller's Knowledge, threatened or anticipated which, if
adversely decided, would, individually or in the aggregate, directly or
indirectly have a material adverse effect on the Company or any of its
Subsidiaries, or would prevent or delay the transactions contemplated by this
Agreement or otherwise prevent Seller from performing its obligations under this
Agreement, nor is there any outstanding judgment, decree, or injunction or, to
Seller's Knowledge, any statute, rule or order of any domestic or foreign court,
governmental department, commission or agency which has or will have,
individually or in the aggregate, any such material adverse effect.
4.17 Labor Matters. No employees of the Company or any of its
-------------
Subsidiaries are represented by any labor organization, and, as of the date
hereof, no labor organization or group of employees of the Company or any of its
Subsidiaries has made a demand for recognition, has filed a petition seeking a
representation proceeding or given the Company notice of any intention to hold
an election of a collective bargaining representative. There is no strike, work
stoppage or labor disturbance pending or, to the best knowledge of the Company,
threatened, which involves any employees of the Company or any of its
Subsidiaries. No material claims are presently pending or, to Seller's
Knowledge, threatened against the Company or any of its
28
<PAGE>
Subsidiaries no material claims by any governmental authority, labor
organization, or employee alleging that the Company or any such Subsidiary has
violated any applicable laws respecting employment practices. Seller has no
reason to believe that the Company or any of its Subsidiaries is not in
compliance in all material respects with their obligations under all statutes,
executive orders and other governmental regulations or judicial decrees
governing their employment practices, including without limitation, provisions
relating to wages, hours, equal opportunity and payment of social security and
other taxes.
4.18 Compliance with Law. Each of the Company and its Subsidiaries is
-------------------
in compliance with all foreign, federal, state and local laws and regulations
applicable to its operations or with respect to which compliance is a condition
of engaging in the business thereof (including, without limitation, all
Environmental Laws), except to the extent that failure to comply would not have
a material adverse affect on the Company or any of its Subsidiaries. Except as
set forth on Schedule 4.18, to the best of Seller's Knowledge, neither the
Company nor any of its Subsidiaries has received any notice asserting a failure,
or possible failure, to comply with any such law, regulation or requirement the
subject of which notice has not been resolved as required thereby or otherwise
to the satisfaction of the party sending the notice.
4.19 Proprietary Rights.
------------------
(a) Proprietary Rights. Schedule 4.19 lists all of the Proprietary
------------------
Rights of each of the Company and its Subsidiaries. Schedule 4.19 also sets
forth: (i) for each Trademark, the application serial number or registration
number, the class of goods covered and the expiration date for each country in
which a Trademark has been registered and (ii) for each Copyright, the number
and date of filing for each country in which a Copyright has been filed.
Neither the Company nor any of its Subsidiaries owns or has any interest in any
Patent. The Proprietary Rights listed in Schedule 4.19 are all those used by
the Company or any of its Subsidiaries in connection with the Business.
(b) Royalties and Licenses. Except as set forth on Schedule 4.19,
----------------------
neither the Company nor any of its Subsidiaries has any obligation to compensate
any person for the use of any such Proprietary Rights nor has the Company or any
of its Subsidiaries granted to any person any license, option or other rights to
use in any manner any of its Proprietary Rights, whether requiring the payment
of royalties or not.
(c) Ownership and Protection of Proprietary Rights. The Company or
----------------------------------------------
one of its Subsidiaries owns or has a valid right to use each of the Proprietary
Rights, and (except as provided in Section 9.7) the Proprietary Rights will not
cease to be valid rights of the Company or such Subsidiary by reason of the
execution, delivery and performance of this Agreement or the consummation of the
transactions contemplated hereby. Neither the Company, any of its Subsidiaries
nor Seller has received any notice of invalidity or infringement of any rights
of others with respect to such Trademarks. The Company, one of its Subsidiaries
or Seller has taken all reasonable and prudent steps to protect the Proprietary
Rights from infringement by any other person. No other person (i) has the right
to use any of the Trademarks of the Company or any of its Subsidiaries on the
goods on which they are now being used either in identical form or in such near
resemblance thereto as to be likely, when applied to the goods of any such
person, to cause confusion with such Trademarks or to cause a mistake or to
deceive, (ii) has notified the
29
<PAGE>
Company, any of its Subsidiaries or Seller that it is claiming any ownership of
or right to use such Proprietary Rights, or (iii) to Seller's Knowledge, is
infringing upon any such Proprietary Rights in any way. The Company or any of
its Subsidiaries' use of the Proprietary Rights does not and will not conflict
with, infringe upon or otherwise violate the valid rights of any third party in
or to such Proprietary Rights, and no Action has been instituted against or
notices received by the Company, any of its Subsidiaries or Seller that are
presently outstanding alleging that the use of the Proprietary Rights by the
Company or any of its Subsidiaries infringes upon or otherwise violates any
rights of a third party in or to such Proprietary Rights.
4.20 Employee Benefit Plans.
----------------------
(a) Definitions. The following terms, when used in this Section 4.20,
-----------
shall have the following meanings:
(i) Benefit Arrangement. "Benefit Arrangement" shall mean any
-------------------
employment, consulting, severance or other similar contract, arrangement or
policy and each plan, arrangement (written or oral), program, agreement or
commitment providing for insurance coverage (including without limitation any
self-insured arrangements), workers' compensation, disability benefits,
supplemental unemployment benefits, vacation benefits, retirement benefits,
life, health, disability or accident benefits (including without limitation any
"voluntary employees' beneficiary association" as defined in Section 501(c)(9)
of the Code providing for the same or other benefits) or for deferred
compensation, profit-sharing bonuses, stock options, stock appreciation rights,
stock purchases or other forms of incentive compensation or post-retirement
insurance, compensation or benefits which (A) is not a Welfare Plan, Pension
Plan or Multiemployer Plan, (B) is entered into, maintained, contributed to or
required to be contributed to, as the case may be, by the Company or an ERISA
Affiliate or under which the Company or any ERISA Affiliate may incur any
liability, and (C) covers any employee or former employee of the Company or any
ERISA Affiliate (with respect to their relationship with such entities).
(ii) Employee Plans. "Employee Plans" shall mean all Benefit
--------------
Arrangements, Multiemployer Plans, Pension Plans and Welfare Plans.
(iii) ERISA. "ERISA" shall mean the Employee Retirement
-----
Income Security Act of 1974, as amended from time to time.
(iv) ERISA Affiliate. "ERISA Affiliate" shall mean any entity which
---------------
is (or at any relevant time was) a member of a "controlled group of
corporations" with, under "common control" with, or a member of an "affiliated
service group" with, the Company (including any of its Subsidiaries) as defined
in Section 414(b), (c), (m) or (o) of the Code.
(v) Multiemployer Plan. "Multiemployer Plan" shall mean any
------------------
"multiemployer plan," as defined in Section 4001(a)(3) of ERISA, (A) which the
Company or any ERISA Affiliate maintains, administers, contributes to or is
required to contribute to, or, after September 25, 1980, maintained,
administered, contributed to or was required to contribute to, or under which
the Company or any ERISA Affiliate may incur any liability and (B) which covers
any employee or former employee of the Company or any ERISA Affiliate (with
respect to their relationship with such entities).
30
<PAGE>
(vi) Multiemployer Welfare Plan. "Multiemployer Welfare Plan" shall
--------------------------
mean a Welfare Plan that is a "multiemployer plan," as defined in Section 3(37)
of ERISA.
(vii) PBGC. "PBGC" shall mean the Pension Benefit Guaranty
----
Corporation.
(viii) Pension Plan. "Pension Plan" shall mean any "employee pension
------------
benefit plan" as defined in Section 3(2) of ERISA (other than a
Multiemployer Plan) (A) which the Company or any ERISA Affiliate maintains,
administers, contributes to or is required to contribute to, or, within the six
(6) years prior to the Closing Date, maintained, administered, contributed to or
was required to contribute to, or under which the Company or any ERISA Affiliate
may incur any liability and (B) which covers any employee or former employee of
the Company or any ERISA Affiliate (with respect to their relationship with such
entities).
(ix) Welfare Plan. "Welfare Plan" shall mean any "employee welfare
------------
benefit plan" as defined in Section 3(1) of ERISA, (A) which the Company or any
ERISA Affiliate maintains, administers, contributes to or is required to
contribute to, or under which the Company or any ERISA Affiliate may incur any
liability and (B) which covers any employee or former employee of the Company or
any ERISA Affiliate (with respect to their relationship with such entities).
(b) Disclosure; Delivery of Copies of Relevant Documents and Other
--------------------------------------------------------------
Information. Schedule 4.20 contains a complete list of Employee Plans which
- -----------
cover or have covered employees of the Company or any of its Subsidiaries. True
and complete copies of each of the following documents have been delivered by
Seller to Purchaser: (i) each Welfare Plan, Pension Plan and Multiemployer Plan
(and, if applicable, related trust agreements) and all amendments thereto, all
written interpretations thereof and written descriptions thereof which have been
distributed by the Company or any ERISA Affiliate to the employees of the
Company or any ERISA Affiliate and all annuity contracts or other funding
instruments, (ii) each Benefit Arrangement including written interpretations
thereof and written descriptions thereof which have been distributed to the
employees of the Company or any ERISA Affiliate and a complete description of
any Employee Plan which is not in writing, (iii) the most recent determination
or opinion letter, if any, issued by the Internal Revenue Service with respect
to each Pension Plan and each Welfare Plan (other than a "multiemployer plan",
as defined in Section 3(37) of ERISA), (iv) for the three most recent plan
years, Annual Reports on Form 5500 Series required to be filed with any
governmental agency for each Pension Plan, (v) all actuarial reports prepared
for the last three plan years for each Pension Plan, (vi) a description of
complete age, salary, service and related data as of the last plan year for
employees and former employees of the Company, and (vii) a description setting
forth the amount of any liability of the Company or any ERISA Affiliate as of
the Closing Date for payments more than (30) days past due with respect to each
Welfare Plan.
(c) Representations. Except as set forth in Schedule 4.20,
---------------
Seller represents and warrants as follows:
31
<PAGE>
(i) Pension Plans
-------------
(A) Seller has no reason to believe that the funding method used in
connection with each Pension Plan which is subject to the minimum funding
requirements of ERISA is not acceptable and the actuarial assumptions used in
connection with funding each such plan are unreasonable. No "accumulated
funding deficiency" (for which an excise tax is due or would be due in the
absence of a waiver) as defined in Section 12 or the Code or as defined in
Section 302(a)(2) of ERISA, whichever may apply, has been incurred with respect
to any Pension Plan with respect to any plan year, whether or not waived.
Neither the Company nor any ERISA Affiliate has failed to pay when due any
"required installment," within the meaning of Section 412(m) of the Code and
Section 302(e) of ERISA, whichever may apply, with respect to any Pension Plan.
Neither Seller nor any ERISA Affiliate is subject to any lien imposed under
Section 412(n) of the Code or Section 302f) of ERISA, whichever may apply, with
respect to any Pension Plan. Neither the Company nor any ERISA Affiliate has
any liability for unpaid contributions which are required to have been made with
respect to any Pension Plan.
(B) Neither the Company nor any ERISA Affiliate is required to provide
security to a Pension Plan under Section 401(a)(29) of the Code.
(C) Each Pension Plan and each related trust agreement, annuity
contract or other funding instrument is qualified and tax-exempt under the
provisions of Code Sections 401(a) (or 403(a), as appropriate) and 501(a) and
has been so qualified during the period from its adoption to date.
(D) Each Pension Plan, each related trust agreement, annuity contract
or other funding instrument presently complies and has been maintained in
compliance with its terms in all material respects and, both as to form and in
operation, in all material respects with the requirements prescribed by any and
all statutes, orders, rules and regulations which are applicable to such plans,
including without limitation ERISA and the Code.
(E) The Company and each ERISA Affiliate has paid all premiums (and
interest charges and penalties for late payment, if applicable) due the PBGC
with respect to each Pension Plan for each plan year thereof for which such
premiums are required. Neither the Company nor any ERISA Affiliate has engaged
in, or is a successor or parent corporation to an entity that has engaged in, a
transaction described in Section 4069 of ERISA. There has been no "reportable
event" (as defined in Section 4043(b) of ERISA and the PBGC regulations under
such Section) with respect to any Pension Plan subject to Title IV of ERISA. No
filing has been made by the Company or any ERISA Affiliate with the PBGC, and no
proceeding has been commenced by the PBGC, to terminate any Pension Plan. No
condition exists and no event has occurred that could constitute grounds for the
termination of any Pension Plan by the PBGC. Neither the Company nor any ERISA
Affiliate has, at any time, (1) ceased operations at a facility so as to become
subject to the provisions of Section 4062(e) of ERISA, (2) withdrawn as a
substantial employer so as to become subject to the provisions of Section 4063
of ERISA, or (3) ceased making contributions on or before the Closing Date to
any Pension Plan subject to Section 4064(a) of ERISA to which the Company or any
ERISA Affiliate made contributions during the six years prior to the Closing
Date.
32
<PAGE>
(F) As of the Closing Date, neither the Company nor Purchaser shall
have any liability with respect to any Pension Plan, including but not limited
to the Retirement Plan of American Fidelity Group ("Plan"), the American
Fidelity Companies Employee Savings Plan, and the Supplemental Retirement Income
Plan for Employees of the American Fidelity Group.
(ii) Multiemployer Plans Neither the Company nor any ERISA Affiliate
-------------------
has, at any time, contributed to or had an obligation to contribute to either a
Multiemployer Plan or a Multiemployer Welfare Plan.
(iii) Welfare Plans
-------------
(A) Each Welfare Plan, to the best of the Company's knowledge, has
been maintained in compliance with its terms and, both as to form and operation,
in all material respects, with the requirements prescribed by any and all
statutes, orders, rules and regulations which are applicable to such Welfare
Plan, including without limitation ERISA and the Code.
(B) Except as set forth on Schedule 4.13, none of the Company, any
ERISA Affiliate or any Welfare Plan has any present or future obligation to make
any payment to, or with respect to any present or former employee of the Company
or any ERISA Affiliate pursuant to, any retiree medical benefit plan, or other
retiree Welfare Plan, and no condition exists which would prevent the Company
from amending or terminating any such benefit plan or Welfare Plan.
(C) Each Welfare Plan which is a "group health plan," as defined in
Section 607(1) of ERISA, to the best of the Company's knowledge, has been
operated in compliance in all material respects with provisions of Part 6 of
Title I, Subtitle B of ERISA and Sections 162(k) and 4980B of the Code at all
times.
(iv) Benefit Arrangements. Each Benefit Arrangement has been
--------------------
maintained in compliance with its terms in all materials respects and with the
requirements prescribed by any and all statutes, orders, rules and regulations
which are applicable to such Benefit Arrangement, including without limitation
the Code. Subject to Section 6.10(e) hereof, as of the Closing Date, neither
the Company nor the Purchaser shall have any liability with respect to any
Benefit Arrangement (other than vacation and sick leave benefits), including but
not limited to the American Fidelity Corporation Amended and Restated 1984 Stock
Appreciation Plan, the American Fidelity Corporation 1988 Stock Units Plan, and
the American Fidelity Insurance Companies, AFI Management Co., American Fidelity
Credit Corp. Colleague Incentive Compensation Plan.
(v) At-Will Employment. Except as set forth on Schedule 4.13, and
------------------
except as provided by applicable law, the employment of all persons presently
employed or retained by the Company or any of its Subsidiaries is terminable at
will.
(vi) Unrelated Business Taxable Income. No Employee Plan (or trust or
---------------------------------
other funding vehicle pursuant thereto) is subject to any tax under Code Section
511.
33
<PAGE>
(vii) Deductibility of Payments. Except as set forth in Schedule 4.13,
-------------------------
there is no contract, agreement, plan or arrangement covering any employee or
former employee of the Company or any of its Subsidiaries (with respect to their
relationship with such entities) that, individually or collectively, provides
for the payment by the Company of any amount (i) that is not deductible under
Section 162(a)(1) or 404 of the Code or (ii) that is an "excess parachute
payment" pursuant to Section 280G of the Code.
(viii) Fiduciary Duties and Prohibited Transactions. Neither the
--------------------------------------------
Company nor any plan fiduciary of any Welfare Plan or Pension Plan has engaged
in any transaction in violation of Sections 404 or 406 of ERISA or any
"prohibited transaction," as defined in Section 4975(c)(1) of the Code, for
which no exemption exists under Section 408 of ERISA or Section 4975(c)(2) or
(d) of the Code, or has otherwise violated the provisions of Part 4 of Title I,
Subtitle B of ERISA. The Company has not knowingly participated in a violation
of Part 4 of Title I, Subtitle B of ERISA by any plan fiduciary of any Welfare
Plan or Pension Plan and has not been assessed any civil penalty under Section
502(l) of ERISA.
(ix) Validity and Enforceability. Each Welfare Plan, Pension Plan,
---------------------------
related trust agreement, annuity contract or other funding instrument and
Benefit Arrangement is legally valid and binding and in full force and effect.
(x) Litigation. There is no action, order, writ, injunction, judgment
----------
or decree outstanding or claim, suit, litigation, proceeding, arbitral action,
governmental audit or investigation relating to or seeking benefits under any
Employee Plan that is pending, or to the best of the Company's knowledge,
threatened or anticipated against the Company, any ERISA Affiliate or any
Employee Plan that could result in material liability to the Company, any ERISA
Affiliate or any Employee Plan.
(xi) No Amendments. Neither the Company nor any ERISA Affiliate has
-------------
any announced plan or legally binding commitment to create any additional
Employee Plans or to amend or modify any existing Employee Plan.
(xii) No Other Material Liability. No event has occurred in
---------------------------
connection with which the Company or any ERISA Affiliate or any Employee Plan,
directly or indirectly, could be subject to any material liability (A) under any
statute, regulation or governmental order relating to any Employee Plans or (B)
pursuant to any obligation of the Company or any ERISA Affiliate to indemnify
any person against liability incurred under any such statute, regulation or
order as they relate to the Employee Plans.
(xiii) Unpaid Contributions. Neither the Company nor any ERISA
--------------------
Affiliate has any liability for unpaid contributions under Section 515 of ERISA
with respect to any Pension Plan, Multiemployer Plan or Welfare Plan.
(xiv) Insurance Contracts. Neither the Company nor any
-------------------
Employee Plan holds as an asset of any Employee Plan any interest in any annuity
contract, guaranteed investment contract or any other investment or insurance
contract issued by an
34
<PAGE>
insurance company that is the subject of bankruptcy, conservatorship or
rehabilitation proceedings.
(xv) No Acceleration or Creation of Rights. Neither the execution and
-------------------------------------
delivery of this Agreement by Purchaser nor the consummation of the transactions
contemplated hereby will result in the acceleration or creation of any rights of
any person to benefits under any Employee Plan, except as specified in Section
6.12.
4.21 Tax Matters.
-----------
(a) Filing of Tax Returns. The Company and each of its Subsidiaries
---------------------
(and any affiliated group of which the Company or a Subsidiary is now or has
been a member) has timely filed with the appropriate taxing authorities all
returns (including without limitation information returns and other material
information) in respect of Taxes required to be filed through the date hereof
and will timely file any such returns required to be filed on or prior to the
Closing Date. The returns and other information filed are complete and accurate
in all respects. Except as specified in Schedule 4.21, neither the Company nor
any of its Subsidiaries, nor any group of which the Company or any of its
Subsidiaries now or was a member, has requested any extension of time within
which to file returns (including without limitation information returns) in
respect of any taxes. Seller has delivered to Purchaser complete and accurate
copies of the federal tax returns of the Company and each of its Subsidiaries
for the years 1995, 1994, 1993 and 1992.
(b) Payment of Taxes. Except as set forth on Schedule 4.21, all
----------------
Taxes, in respect of periods ended before the Closing Date have been timely paid
or will be timely paid, or an adequate reserve has been established therefor in
the Financial Statements, and the Company and each of its Subsidiaries do not
have any liabilities for Taxes in excess of the amounts so paid or reserves so
established. With respect to the items set forth on Schedule 4.21, the Company
and each of its Subsidiaries do not have any Liability for Taxes in excess of
the amounts already paid or reserves so established except that any Losses and
Expenses arising from the Texas premium tax audit shall be subject only to the
provisions of Section 9.3(b)(ii). No deferred Taxes of any kind will be
considered a reserve for these purposes. No reserves for Taxes are included in
the Financial Statements other than estimates for 1996 Taxes.
(c) Audits, Investigations or Claims. The consolidated federal income
--------------------------------
tax returns of the Company and its Subsidiaries (or the affiliated group of
which the Company and its Subsidiaries are members) for the tax years 1986
through 1993 have been examined by the Internal Revenue Service, and, except as
set forth on Schedule 4.21, no deficiencies for Taxes have been claimed,
proposed or assessed with respect to such years by any taxing or other
governmental authority against the Company or any of its Subsidiaries. Except
as set forth on Schedule 4.21, there are no pending or, to Seller's Knowledge,
threatened audits, investigations or claims for or relating to any additional
Liability in respect of Taxes, and, with respect to pending audits, there are no
matters under discussion with any governmental authorities with respect to Taxes
that in the reasonable judgment of Seller, or its counsel, is likely to result
in an additional Liability for Taxes. Except as set forth on Schedule 4.21, no
extension of a statute of limitations relating to Taxes is in effect with
respect to the Company or any of its Subsidiaries.
35
<PAGE>
(d) Tax Elections
-------------
(i) All elections with respect to Taxes affecting the Company or any
of its Subsidiaries as of the date hereof are set forth on Schedule 4.21.
(ii) Neither the Company nor any of its Subsidiaries has made an
election or is required to treat any Asset of such company as owned by another
person or as tax-exempt bond financed property or tax-exempt use property within
the meaning of Section 168 of the Code or under any comparable state or local
income tax or other tax provision.
(iii) Neither the Company nor any of its Subsidiaries is a party to or
bound by any binding tax sharing, tax indemnity or tax allocation agreement or
other similar arrangement with any other party, except as set forth on Schedule
4.21.
(iv) Neither the Company nor any of its Subsidiaries has filed a
consent pursuant to the collapsible corporation provisions of Section 341(f) of
the Code (or any corresponding provision of state or local law) or agreed to
have Section 341(f)(2) of the Code (or any corresponding provision of state or
local law) apply to any disposition of any asset owned by it.
(e) Additional Representations. Except as otherwise set forth on
--------------------------
Schedule 4.21:
(i) There are no liens for Taxes (other than for current Taxes not yet
due and payable) upon the Assets of the Company or any of its Subsidiaries.
(ii) Each of the Company and its Subsidiaries are members of an
affiliated group of corporations, within the meaning of Section 1504 of the
Code.
(iii) Neither the Company nor any of its Subsidiaries has agreed to
make, or is required to make, any adjustment under Section 481(a) of the Code by
reason of a change in accounting method or otherwise.
(iv) Neither the Company nor any of its Subsidiaries is a party to any
agreement, contract, arrangement or plan that has resulted or would result,
separately or in the aggregate, in the payment of any "excess parachute
payments" within the meaning of Section 280G of the Code.
(v) Neither the Company nor any of its Subsidiaries is a party to any
joint venture, partnership, or other arrangement or contract which could be
treated as a partnership for federal income tax purposes.
(vi) The Company and each of its Subsidiaries has prepared and made
available (or, in the case of a portion of a period ending on the Closing Date,
will prepare and make available before the Closing) to Purchaser copies of books
and working papers which demonstrate the income and activities of such
corporation for any period or any portion of a period ending on the Closing
Date.
36
<PAGE>
(vii) The Company and each of its Subsidiaries have timely provided
copies of all information returns to all persons required to receive such
returns, and such copies are complete and accurate in all respects. The Company
and each of its Subsidiaries have complied in all respects with all applicable
federal, state, and local requirements regarding information reporting and
withholding, with respect to all lines and classes of insurance written by any
of them.
(f) No Withholding. The transaction contemplated herein is not
--------------
subject to the tax withholding provisions of Section 3406 of the Code, or of
Subchapter A of Chapter 3 of the Code or of any other provision of law.
4.22 Insurance. Schedule 4.22 contains a materially complete and
---------
accurate list of all policies or binders of fire, liability, property, title,
workers' compensation, business interruption, errors or omissions and other
forms of insurance (showing as to each policy or binder the carrier, policy
number, coverage limits, including without limitation, retentions and
deductibles, expiration dates, annual premiums and a general description of the
type of coverage provided) maintained by the Company or any of its Subsidiaries
on its business, property or personnel. All of such policies are sufficient for
compliance with all requirements of law and of all Contracts to which the
Company or any of its Subsidiaries is a party. To Seller's Knowledge, neither
the Company nor any Subsidiary has failed to give any notice or to present any
claim under any such policy or binder in a due and timely fashion. There are no
outstanding unpaid claims under any such policies or binders for which adequate
reserves have not been established. Such policies and binders are in full force
and effect on the date hereof and shall be kept in full force and effect by the
Company through the Closing Date. All liability and workers' compensation
insurance policies maintained by the Company or any of its Subsidiaries are
occurrence policies and not claims-made policies.
4.23 Environmental Matters. Except as set forth on Schedule 4.23, all
---------------------
real property heretofore or currently owned or leased by the Company or any of
its Subsidiaries and each office or other facility heretofore or currently
maintained by the Company or any of its Subsidiaries has been maintained in
compliance with all Environmental Laws, except where the failure to so comply
would not have a material adverse effect on the Company or one of its
Subsidiaries. No conditions exist with respect to the soil, surface waters,
groundwaters, land, stream sediments, surface or subsurface strata, ambient air,
and any environmental medium on or off the Properties, which could result in any
damage, claim, or liability to or against the Company or any of its Subsidiaries
by any third party (including without limitation, any government entity),
including, without limitation, any condition resulting from the operation of the
Company's or such Subsidiary's business and/or operation in the vicinity of any
of the Properties and/or any activity or operation formerly conducted by any
person or entity on the Properties. Neither the Company nor any of its
Subsidiaries nor any other person or entity for whose conduct the Company or any
of its Subsidiaries is or may be held responsible, has generated, manufactured,
refined, transported, treated, stored, handled, disposed, transferred, produced,
or processed any pollutant, hydrocarbon, or petroleum substances or petroleum
products, including, without limitation, existing and future asbestos,
polychlorinated biphenyls, radioactive or flammable materials, or any other
hazardous or toxic waste, substance or material, as those terms may be defined
in any and all Environmental Laws (collectively, "Hazardous Materials"). There
-------------------
are no existing notices of
37
<PAGE>
violation, administrative actions, or lawsuits against the Company or any of its
Subsidiaries arising under Environmental Laws or relating to the use, handling,
storage, treatment, recycling, generation, or release of Hazardous Materials by
the Company at any of the Properties, nor has the Company received any
notification of any allegation of any responsibility for any disposal, release,
or threatened release at any location of any Hazardous Materials; there have
been no spills or releases of Hazardous Materials at any of the Properties in
excess of quantities reportable under Environmental Laws; and there are no
consent decrees, consent orders, judgments, judicial or administrative orders,
or liens by any governmental authority relating to any Environmental Law which
regulate, obligate, or bind the Company or any of its Subsidiaries.
4.24 Officers. Schedule 4.24 contains a list of all officers, other
--------
employees and consultants under contract to the Company or any of its
Subsidiaries whose current total annual compensation from the Company and its
Subsidiaries is at the rate of Seventy-Five Thousand Dollars ($75,000) or more,
together in each case with the current job title or relationship to the Company
or the relevant Subsidiary and the aggregate remuneration rate for each such
person.
4.25 Severance Arrangements. Neither the Company nor any of its
----------------------
Subsidiaries has entered into any severance or similar arrangement in respect of
any present or former employees that will result in any obligation (absolute or
contingent) of Purchaser, the Company or any of its Subsidiaries to make any
payment to any present or former employee following termination of employment.
4.26 Bank Accounts. Schedule 4.26 contains a true and complete
-------------
listing of all bank accounts or other depository accounts maintained by the
Company or any of its Subsidiaries and the authorized signatories thereto.
4.27 Ocean Marine Program. The rights and obligations of the Company
--------------------
and its Subsidiaries under the Ocean Marine Program are contained in the
Covenant Agreement, the Continental Agreement and those quota share and excess
of loss reinsurance agreements identified on Schedule 4.13(a)(iii) under "AFI
Program -- wet marine." Neither the Company nor any Subsidiary has any
liability, obligation, commitment or arrangement, legal or otherwise, relating
to the Ocean Marine Program, except as set forth in these agreements. All
assets and liabilities existing on June 30, 1996, together with the revenues and
expenses for the six months then ended, relating to the Ocean Marine Program
have been recorded and separately identified in the Interim Financial
Statements.
4.28 Services Agreements with Seller . Seller and its Affiliates
--------------------------------
provide services to the Company and its Subsidiaries only under (i) that
Services Agreement dated September 11, 1992 between Seller and the Company and
(ii) that Services Agreement dated December 31, 1990 between Seller and
Cimarron. Seller has waived and released the Company and its Subsidiaries from
any amounts payable under these two (2) Services Agreements. Prior to the
Closing, Seller shall pay to the Company all amounts paid to Seller and its
Affiliates under such agreements since the Interim Balance Sheet Date, and no
amounts will be payable under these agreements by the Company and its
Subsidiaries to Seller or its Affiliates after the Closing Date.
4.29 No Brokers. Neither Seller, the Company nor any of its
----------
Subsidiaries nor any of their respective officers, directors, employees,
shareholders or Affiliates has employed or
38
<PAGE>
made any agreement with any broker, finder or similar agent or any person or
firm which will result in the obligation of the Company, any of its Subsidiaries
or Purchaser or any of its Affiliates to pay any finder's fee, brokerage fees or
commission or similar payment in connection with the transactions contemplated
hereby, except Stephens, Inc., which is to be paid by Seller.
4.30 No Other Agreements to Sell the Shares or the Company. Neither
-----------------------------------------------------
Seller nor the Company has any legal obligation, absolute or contingent, to any
other person or firm to sell any material portion of the Assets of the Company
or any of its Subsidiaries, to sell the capital stock of the Company or any of
its Subsidiaries, or to effect any merger, consolidation or other reorganization
of the Company or any of its Subsidiaries or to enter into any agreement with
respect thereto.
4.31 Material Misstatements Or Omissions. No representations or
-----------------------------------
warranties by Seller in this Agreement, nor any document, exhibit, statement,
certificate or schedule furnished to Purchaser by Seller pursuant hereto
contains or will contain any untrue statement of a material fact, or omits or
will omit to state any material fact necessary to make the statements or facts
contained therein not misleading.
4.32 No Other Representations or Warranties. Seller shall not be
--------------------------------------
deemed to have made to Purchaser any representation or warranty other than as
made by the Seller in Sections 4.1 through 4.31 hereof. Seller expressly makes
no representation or warranty regarding any projections, estimates or budgets
heretofore delivered to or made available to Purchaser of future revenues,
expenses or expenditures or future results of operations, or any other
information or documents made available to Purchaser, or its Representatives
with respect to the Company and its Subsidiaries, except as expressly covered by
a representation and warranty contained in Sections 4.1 through 4.31 of this
Agreement.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF PURCHASER
-------------------------------------------
Purchaser hereby represents and warrants to Seller, which
representations and warranties are, as of the date hereof, and will be, as of
the Closing Date, true and correct, as follows:
5.1 Organization of Purchaser. Purchaser is a corporation duly
-------------------------
organized, validly existing and in good standing under the laws of the State of
California.
5.2 Authorization. Purchaser has all necessary corporate power and
-------------
authority, and has taken all corporate action necessary, to execute and deliver
this Agreement and the Ancillary Agreements, to consummate the transactions
contemplated hereby and thereby and to perform its obligations hereunder and
thereunder. The execution and delivery of this Agreement and the Ancillary
Agreements by Purchaser and the consummation by Purchaser of the transactions
contemplated hereby and thereby have been duly approved by the board of
directors of Purchaser . No other corporate proceedings on the part of
Purchaser are necessary to authorize this Agreement and the Ancillary Agreements
and the transactions contemplated hereby and thereby. This Agreement has been
duly executed and delivered by Purchaser and is a legal,
39
<PAGE>
valid and binding obligation of Purchaser, enforceable against Purchaser in
accordance with its terms, except as such enforceability may be limited by the
Bankruptcy Exception.
5.3 No Conflict or Violation. Neither the execution, delivery or
------------------------
performance of this Agreement nor the consummation of the transactions
contemplated hereby, will (a) violate or conflict with any provision of the
Articles of Incorporation or Bylaws of Purchaser, (b) violate, conflict with, or
result in or constitute a Default under, or result in the termination of, or
accelerate the performance required by, or result in a right of termination or
acceleration under, or result in the creation of any Encumbrance upon any of
Purchaser's Assets under any of the terms, conditions or provisions of any
Contract, Permit, authorization, concession, or other instrument or obligation
to which Purchaser is a party or by which Purchaser or its Assets or properties
is bound, or (c) violate any Regulation or Court Order.
5.4 Consents and Approvals. Except as set forth on Schedule 5.4, and
----------------------
other than in connection with or in compliance with the provisions of the HSR
Act, no notice to, declaration, filing or registration with, or authorization,
consent or approval of, or permit from, any domestic or foreign governmental or
regulatory body or authority, or any other person or entity, is required to be
made or obtained by Purchaser in connection with the execution, delivery and
performance of this Agreement and the consummation of the transactions
contemplated hereby.
5.5 Investment Intent. Purchaser hereby represents and warrants to
-----------------
Seller that Purchaser is entering into this Agreement and acquiring the Shares
pursuant to the terms hereof for investment purposes for its own account, and
not with a view to the distribution thereof.
5.6 No Brokers.. Neither Purchaser nor any of its officers,
----------
directors, employees, shareholders or Affiliates has employed or made any
agreement with any broker, finder or similar agent or any person or firm which
will result in the obligation of Seller or any of its Affiliates to pay any
finder's fee, brokerage fees or commission or similar payment in connection with
the transactions contemplated hereby.
ARTICLE VI
COVENANTS OF SELLER AND PURCHASER
---------------------------------
Seller and Purchaser covenant and agree with each other as follows:
6.1 Further Assurances. Upon the terms and subject to the conditions
------------------
contained herein, the parties agree, both before and after the Closing, (i) to
use all reasonable efforts to take, or cause to be taken, all actions and to do,
or cause to be done, all things necessary, proper or advisable to consummate and
make effective the transactions contemplated by this Agreement, (ii) to execute
any documents, instruments or conveyances of any kind which may be reasonably
necessary or advisable to carry out any of the transactions contemplated
hereunder, and (iii) to cooperate with each other in connection with the
foregoing. Without limiting the foregoing, the parties agree to use their
respective best efforts to obtain all necessary waivers, consents and approvals
from other parties to the Contracts and Leases; provided, however, that
-------- -------
Purchaser shall not be required to make any payments, commence litigation or
40
<PAGE>
agree to modifications of the terms thereof in order to obtain any such waivers,
consents or approvals, to obtain all necessary Permits as are required to be
obtained under any Regulations, to give all notices to, and make all
registrations and filings with third parties, including, without limitation,
submissions of information requested by governmental authorities, and to fulfill
all conditions to this Agreement.
6.2 Certain Filings and Consents. Seller, the Company and Purchaser
----------------------------
shall (i) as promptly as practicable make any required filings and submissions
under the HSR Act and state insurance Regulations with respect to the purchase
and sale of the Shares, (ii) cooperate with each other in determining whether
any other filings are required to be made or consents, approvals, permits or
authorizations are required to be obtained under any other federal, state, local
or foreign Regulation or whether any consents, approvals or waivers are required
to be obtained from other parties to Leases or other contracts in connection
with the consummation of the purchase and sale of the Shares or the other
transactions contemplated hereby, and (iii) actively assist each other in
obtaining any consents, permits, authorizations, approvals or waivers which are
required. Each party hereto shall promptly inform the other of any material
communication between such party and the Federal Trade Commission, the
Department of Justice or any other government or governmental authority
regarding the transactions contemplated hereby. If any party receives a request
for additional information or documentary material from any such government or
governmental authority, then such party shall endeavor in good faith to make, or
cause to be made, as soon as reasonably practicable and after consultation with
the other party, an appropriate response to such request.
6.3 Access. Upon reasonable notice, Seller shall cause the Company
------
and each of its Subsidiaries to afford Purchaser and its Representatives full
access during normal business hours to all of the Company's and each of its
Subsidiaries' officers, agents, Property, Contracts, Permits, Books and Records
(including, but not limited to, separate tax returns, if any, of the Company and
each of its Subsidiaries) and, during such period, the Company and each of its
Subsidiaries shall furnish promptly to Purchaser and its Representatives all
information concerning its Business and Property as Purchaser or its
Representatives may reasonably request. In addition, upon reasonable notice,
Seller shall cause the Company and each of its Subsidiaries to furnish to
Purchaser and its Representatives the following information with respect to
personnel of the Company and each of its Subsidiaries: name, address, positions
held, date of hire and salary history. Purchaser shall (and shall use its best
efforts to cause its Representatives to) hold all such nonpublic documents, work
papers and other materials in confidence. In the event of the termination of
this Agreement, Purchaser shall return promptly every confidential document
furnished to Purchaser by Seller, the Company or any of its Subsidiaries in
connection with the transactions contemplated hereby, and shall use its best
efforts to cause its Representatives to return the same. No investigation
pursuant to this Section 6.3 or otherwise shall affect the representations and
warranties or indemnities of Seller herein or the conditions to Purchaser's
obligation to consummate the transactions contemplated hereby or any
indemnification obligation hereunder.
6.4 No Solicitation. From the date hereof through the Closing or the
---------------
earlier termination of this Agreement, Seller shall not, and shall cause the
Company and each of its Subsidiaries not to, directly or indirectly, enter into,
solicit, initiate or continue any discussions or negotiations with, or encourage
or respond to any inquiries or proposals by, or participate in any
41
<PAGE>
negotiations with, or provide any information to, or otherwise cooperate in any
other way with, any corporation, partnership, person or other entity or group,
other than Purchaser and its Representatives, concerning any sale of all or a
portion of the Shares or any merger, consolidation, liquidation, dissolution or
similar transaction involving the Company or any of its Subsidiaries. Seller
shall not, directly or indirectly, through any officer, director or employee,
solicit, initiate or encourage the submission of any proposal or offer from any
person or entity or group relating to any such transaction or participate in any
negotiations regarding, or furnish to any other person any information with
respect to the Company or any of its Subsidiaries for the purposes of, or
otherwise cooperate in any way with, or assist or participate in, facilitate or
encourage, any effort or attempt by any other person to seek or effect a such a
transaction.
6.5 Notification of Certain Matters. From the date hereof through
-------------------------------
the Closing, each party shall give prompt notice to the other party of the
occurrence, or failure to occur, of any event which occurrence or failure would
be likely to cause any representation or warranty contained in this Agreement or
in any exhibit or schedule hereto to be untrue or inaccurate in any respect, and
any failure of such party, or any of its Affiliates or Representatives, to
comply with or satisfy any covenant, condition or agreement to be complied with
or satisfied by it under this Agreement or any exhibit or schedule hereto;
provided, however, that such disclosure shall not be deemed to cure any breach
- -------- -------
of a representation, warranty, covenant or agreement or to satisfy any
condition. Seller shall promptly notify Purchaser of any Default, the threat or
commencement of any Action, or any development that occurs before the Closing
that could in any way materially affect the Company or any of its Subsidiaries.
6.6 Conduct of Business. From the date hereof through the Closing,
-------------------
the Company shall, except as contemplated by this Agreement, or as consented to
by Purchaser in writing, which consent shall not be unreasonably withheld,
operate the Business in the ordinary course of business and in accordance with
past practice and will not take any action inconsistent with this Agreement or
with the consummation of the Closing. Without limiting the generality of the
foregoing, the Company shall not, and the Company and Seller shall cause each of
the Company's Subsidiaries not to, except as specifically contemplated by this
Agreement or as consented to by Purchaser in writing, which consent shall not be
unreasonably withheld:
(a) change or amend the Articles or Certificate of Incorporation or
Bylaws of the Company or any of its Subsidiaries;
(b) enter into, extend, materially modify, terminate or renew any
Contract or Lease, except in the ordinary course of business;
(c) sell, assign, transfer, convey, lease, mortgage, pledge or
otherwise dispose of or encumber any of the Assets, or any interests therein,
except in the ordinary course of business;
(d) incur any Liability for long-term interest bearing indebtedness,
guarantee the obligations of others, indemnify others or, except in the ordinary
course of business, incur any other Liability;
42
<PAGE>
(e) (i) take any action with respect to the grant of any bonus,
severance or termination pay (otherwise than pursuant to policies or agreements
of the Company or any of its Subsidiaries in effect on the date hereof) or with
respect to any increase of benefits payable under its severance or termination
pay policies or agreements in effect on the date hereof or increase in any
manner the compensation or fringe benefits of any employee or pay any benefit
not required by any existing Employee Plan or policy, except in the ordinary
course of business;
(ii) make any change in the key management structure of the Company or
any of its Subsidiaries, including, without limitation, the hiring of additional
officers or the termination of existing officers, except for cause;
(iii) adopt, enter into or amend any Employee Plan, agreement
(including, without limitation, any collective bargaining or employment
agreement), trust, fund or other arrangement for the benefit or welfare of any
employee, except for any such amendment as may be required to comply with
applicable Regulations; or
(iv) fail to maintain all Employee Plans in accordance with applicable
Regulations in all material respects;
(f) acquire by merger or consolidation with, or merge or consolidate
with, or purchase substantially all of the assets of, or otherwise acquire any
material assets or business of any corporation, partnership, association or
other business organization or division thereof;
(g) declare, set aside, make or pay any dividend or other distribution
in respect of the Company's capital stock;
(h) fail to expend funds for any budgeted capital expenditures or
commitments disclosed on Schedule 4.11;
(i) willingly allow or permit to be done any act by which any of the
Insurance Policies in which the Company or any of its Subsidiaries is the
insured may be suspended, impaired or canceled;
(j) (i) fail to pay its accounts payable and any debts owed or
obligations due by it, or pay or discharge when due any Liabilities, in the
ordinary course of business; or
(ii) fail to use its best efforts to collect its premiums or other
accounts receivable in the ordinary course of business;
(k) enter into, renew, modify or revise any agreement or transaction
with Seller or any of its Affiliates;
(l) fail to maintain the Assets in substantially their current state
of repair, excepting normal wear and tear, or fail to replace, consistent with
Seller's past practice, inoperable, worn-out, obsolete or destroyed Assets;
43
<PAGE>
(m) make any loans or advances to any partnership, firm or
corporation, or, except for expenses incurred in the ordinary course of
business, any individual;
(n) make any income tax election or settlement or compromise with tax
authorities;
(o) fail to comply in any material respect with all Regulations
applicable to it, the Assets and the Business;
(p) intentionally do any other act which would cause any
representation or warranty of Seller in this Agreement to be or become untrue in
any material respect;
(q) issue, repurchase or redeem or commit to issue, repurchase or
redeem, any shares of the Company's capital stock, any options or other rights
to acquire such stock or any securities convertible into or exchangeable for
such stock;
(r) fail to use its best efforts to (i) retain the employees of the
Company and each of its Subsidiaries, (ii) maintain the Business so that such
employees will remain available to Purchaser on and after the Closing Date,
(iii) maintain existing relationships with suppliers, customers and others
having business dealings with the Company and any of its Subsidiaries, and (iv)
otherwise to preserve the goodwill of the Business so that such relationships
and goodwill will be preserved on and after the Closing Date; or
(s) enter into any agreement, or otherwise become obligated, to do any
action prohibited hereunder.
6.7 Public Statements and Press Releases. Seller and Purchaser and
------------------------------------
any of their respective Affiliates shall not, and Seller shall cause the Company
and each of its Subsidiaries not to, from and after the date hereof, make, issue
or release any public announcement, press release, statement or acknowledgment
of the existence of, or reveal publicly the terms, conditions and status of, the
transactions provided for herein, without the prior written consent of the other
parties as to the content and time of release of and the media in which such
statement or announcement is to be made. Each party hereto agrees that it will
not unreasonably withhold any such consent.
6.8 Financial Information. Seller shall deliver to Purchaser as soon
---------------------
as available all interim financial statements and other management reports
generated in the ordinary course of business prepared by or for the Company
and/or its Subsidiaries prior to the Closing. Seller has previously prepared
and delivered to Purchaser the Financial Statements.
6.9 Employee Matters. Purchaser shall employ employees of the
----------------
Company and each Subsidiary for such periods and with such compensation and
employee benefits as Purchaser in its sole discretion shall determine. During
the period between the date hereof and the Closing Date, Seller shall, and shall
cause the Company and each of its Subsidiaries to, use its best efforts to keep
available its current employees now employed with respect to the Business of the
Company and its Subsidiaries.
44
<PAGE>
6.10 Employee Benefits
------------------
(a) Subject to prior approval by the Internal Revenue Service, Seller
shall cause the employees of the Company and its Subsidiaries ("Company
-------
Employees") to become fully vested in the American Fidelity Companies Employee
- ---------
Savings Plan ("Savings Plan") and the Retirement Plan of American Fidelity Group
------------
("Retirement Plan") as of the Closing Date.
---------------
(b) Subject to approval by the Internal Revenue Service and any other
governmental agency whose approval may be required, Seller and the Company shall
cause the Company's participation in the Retirement Plan to terminate as of the
Closing Date and each Company Employee who is a participant therein shall be
deemed to be one-hundred percent (100%) vested and hold a nonforfeitable
interest in his benefits accrued as of the Closing Date. Following approval by
the Internal Revenue Service with respect to any Plan amendment with respect to
termination of the Company's participation in the Retirement Plan and the
distribution for accrued benefits therefrom to Company Employees, and Seller's
receipt of any other required governmental approvals, Seller shall make
distributions to Company Employees who are participants in the Retirement Plan
in accordance with the terms and provisions of the Retirement Plan.
(c) Subject to prior approval by the Internal Revenue Service and as
soon as administratively practicable after the Closing Date (or, in the Seller's
discretion, as soon as administratively practicable following Internal Revenue
Service approval of such Plan amendment), Seller shall amend the Savings Plan to
the extent necessary to permit a direct transfer of the accrued benefits for
each Company Employee who does not have an outstanding loan under the Savings
Plan as of the date of the direct transfer in the Savings Plan (including
outstanding loan balances) to Purchaser's 401(k) Plan ("Purchaser's 401(k)
------------------
Plan") and such benefits shall be thereafter held, administered and distributed
- ----
pursuant to the Purchaser's 401(k) Plan. Following such date of transfer,
accrued benefits for any Company Employee, including loan balances, which are
not transferred to Purchaser's 401(k) Plan shall be held and administered
pursuant to the terms of the Savings Plan. Purchaser shall (a) provide to
Seller current addresses, telephone numbers, date of termination of employment
of Company Employees and all other information reasonably necessary to permit
Seller to make all required distributions, provide necessary notices to Company
Employees and otherwise administer the Savings Plan for the benefit of such
employees.
(d) Seller shall apply for Internal Revenue Service and other
necessary governmental approvals referred to above as promptly practicable
following the execution of this Agreement. The request for approval by the
Internal Revenue Service shall include submissions of appropriate amendments and
a request for a determination letter.
(e) Seller shall comply with the applicable provisions of the
Consolidated Omnibus Budget Reconciliation Act of 1984 ("COBRA") and Sections
-----
601 through 608 of ERISA, and shall permit Company Employees (and their
dependents) to continue their participation in the Company's health care
coverage as available immediately prior to Closing for the applicable period of
time in accordance with and as required under COBRA. Until
45
<PAGE>
Company Employees are eligible to participate under Purchaser's medical plan,
Purchaser shall pay to Seller all COBRA premiums for providing health care
coverage for Company Employees. COBRA premiums charged by Seller for Company
Employees shall not exceed one-hundred percent (100%) of the Seller's cost of
coverage, calculated on the aggregate basis of Seller and all of its
Subsidiaries. The rights of any Company Employee (and his or her eligible
dependents) under the American Fidelity Group Flexible Benefit Plan ("Flexible
--------
Benefit Plan") maintained pursuant to Section 125 of the Code by the Seller
- ------------
shall be determined under the terms of the Flexible Benefit Plan and applicable
law, including Section 601 et seq. of ERISA. Company Employees and their
-- ---
dependents shall continue to be covered under Seller's welfare plans which
provide, on a fully insured basis, life insurance, disabilities benefits and
accidental death and dismemberment benefits (other than the welfare plans set
forth above in this clause (e)) through the last day of the month in which the
Closing Date occurs.
(f) Company Employees shall be credited with employment service with
the Company and any of its Subsidiaries for purposes of determining any period
of eligibility to participate or to vest in benefits provided under Purchaser's
401(k) Plan, Purchaser's medical, disability and life insurance plan, and any
other of Purchaser's employee benefit plans, programs or arrangements sponsored
by Purchaser as of the Closing Date; provided, however, unless otherwise
-------- -------
required by applicable law, Purchaser shall not be required to provide employee
benefit plan coverage prior to the later of (i) January 1, 1997, or (ii) the
date Purchaser can reasonably arrange for coverage. In any event, such employee
benefit plan coverage shall be provided no later than March 1, 1997. Further,
Purchaser shall also recognize employment service of each Company Employee with
the Company and any of its Subsidiaries for purposes of accruing benefits
pursuant to Purchaser's vacation and sick day policies.
(g) With respect to each Company Employee (and his or her eligible
dependents) to be covered under Purchaser's medical plan from and after the
Closing Date, Purchaser's medical plan shall, to the extent agreed to by the
insurance carrier under Purchaser's medical plan, waive any preexisting
conditions, exclusions or limitations. Purchaser shall use commercially
reasonable efforts to attempt to obtain such waiver.
6.11 Modification of ERC Arrangements and Release. Seller shall cause
--------------------------------------------
the Company and its Subsidiaries to use their best efforts to renegotiate and
amend that Liability Excess Reinsurance Agreement between Employers Reinsurance
Corporation ("ERC") and the Company and certain of its Subsidiaries dated March
---
1, 1991, to (i) eliminate any requirement on the part of the Company and its
Subsidiaries to make an annual cash payment of Thirty Two Thousand Nine Hundred
Three Dollars ($32,903) for any year subsequent to the year ended December 31,
1995; and (ii) eliminate the Thirty Two Thousand Nine Hundred Three Dollars
($32,903) charge to annual profits, for purposes of determining the Company's
contingent commission, for any accounting period subsequent to December 31,
1995. Seller shall also, at its sole cost and expense, obtain a release from
ERC, in a form satisfactory to Purchaser, acknowledging and agreeing there are
no liabilities, obligations, commitments, arrangements, legal or otherwise, on
the part of the Company or any of its Subsidiaries to ERC, except under the
written reinsurance treaties set forth on Schedule 4.13(a)(iii), as amended
pursuant to the provisions of this Section 6.11, and that ERC will not allege or
assert any such liability, obligation, commitment or arrangement, legal or
otherwise, in connection with the negotiation of additional reinsurance
agreements with the Company and its Subsidiaries, or otherwise. The
46
<PAGE>
release shall specifically acknowledge that Article XII of the Property
Aggregate Excess of Loss Reinsurance Agreement dated January 1, 1995 between the
Company and ERC was eliminated by amendment and that there is no liability,
commitment, arrangement, legal or otherwise, on the part of the Company or any
of its Subsidiaries, with respect to the provisions of Article XII.
6.12. Sale of AFCC Capital Stock. Seller shall cause the Company,
--------------------------
prior to the Effective Date, to (i) sell and transfer to Seller, in exchange for
cash consideration equal to the book value thereof as of October 31, 1996, all
of the issued and outstanding shares of capital stock of AFCC, and (ii)
terminate, upon terms reasonably satisfactory to Purchaser, all contractual and
other business relationships between AFCC and the Company or one of its
Subsidiaries and neither the Company nor any of its Subsidiaries shall have any
liability or obligation to AFCC or with respect to the liabilities or
obligations of AFCC. The sale of the AFCC capital stock and the termination of
such relationships shall be on terms consistent with the adjustments set forth
in the Pro Forma Interim Financial Statements.
6.13. Transfer of Mortgage Loans.. Seller shall cause the Company
--------------------------
and its Subsidiaries to sell and transfer, prior to the Effective Date, all
mortgage loans identified on Schedule 4.9. The sale shall be to Seller or one
of its Affiliates and shall be in exchange for cash consideration equal to the
book value of such mortgage loans as of October 31, 1996. Purchaser agrees to
establish, as of the Closing Date, a payroll deduction arrangement, under which
the monthly or other periodic payments due from employees, with respect to those
mortgage loans under which an employee of the Company or a Subsidiary is
obligor, so that payments required under such mortgage loans may be made
directly by the Company or a Subsidiary to Seller or one of its Affiliates.
Purchaser shall be obligated to establish such payroll deduction arrangements
only for those employees who have entered into an agreement with the Company or
a Subsidiary as of the Closing Date authorizing such deductions and payments to
be made to Seller or one of its Affiliates.
6.14 Intercompany Accounts and Services Agreements. Seller and its
----------------------------------------------
Affiliates shall pay prior to the Closing all net amounts known to be due to
the Company or any of its Subsidiaries so that no amounts are payable by Seller
or any of its Affiliates to the Company or any of its Subsidiaries at the
Closing Date. Any amounts that become payable by or to Seller or its Affiliates
to or by the Company or its Subsidiaries after the Closing Date shall be
promptly paid. Seller shall cause the Company and Cimarron, respectively, to
terminate and cancel those Services Agreements with Seller identified in Section
4.28, without payment or other charge to the Company or its Subsidiaries, with
such termination effective as of the Closing Date.
6.15 Section 338(h)(10) Election. Seller shall prepare and Seller and
---------------------------
Purchaser shall each execute and Purchaser shall deliver to Seller an election
pursuant to Section 338(h)(10) of the Code with respect to the Company and its
Subsidiaries so that the Company shall be treated as a member of the selling
consolidated group. Seller shall, and Purchaser shall authorize Seller to,
cause such election to be filed with the Internal Revenue Service. For federal
income tax purposes, all gains or losses attributable to the election pursuant
to Section 338(h)(10) of the Code and resulting from the deemed sale of assets
of the Company and its Subsidiaries by Seller shall be allocated to Seller.
47
<PAGE>
6.16 Ocean Marine. Seller shall cause the Company, prior to and
------------
conditioned on the Closing, to provide appropriate notice of termination with
respect to each of the Covenant Agreement and the Continental Agreement, such
termination to be effective August 31, 1998, and Seller shall obtain the
acknowledgment and confirmation of Covenant Underwriters Ltd. and Continental
Underwriters Ltd. to such termination date. Seller shall also obtain the
agreement of Covenant Underwriters, Ltd. and Continental Underwriters, Ltd. that
there shall be no more than a five percent (5%) increase in premiums written in
the Ocean Marine Program in 1997, compared to 1996, and in 1998, compared to
1997, and that no policies will be issued under the Ocean Marine Program after
August 31, 1998.
6.17 Pledged Securities. Seller shall, on or prior to the Closing
------------------
Date, cause that Pledge and Security Agreement dated June 26, 1995 among First
Fidelity Bank, N.A., Seller, the Company and American Fidelity Assurance Company
to be amended without payment by the Company or its Subsidiaries, so that all
obligations of the Company and its Subsidiaries are released and terminated, and
shall cause the securities pledged by the Company pursuant to the terms of such
agreement, to be released from the Security Agreement and returned to the
Company free of restrictions.
6.18 Pennsylvania Fronting Arrangement. Seller shall cause the
---------------------------------
arrangement whereby the Company is issuing accident and health insurance in the
state of Pennsylvania under a "fronting" arrangement with an Affiliate of Seller
to be discontinued on or prior to the Closing Date, and all liabilities and
obligations of the Company and its Subsidiaries shall be transferred to and
assumed by Seller or an Affiliate of Seller on or prior to the Closing Date, or
shall be reinsured by Seller or an Affiliate.
6.19 Bills of Sale. At the Closing, Seller shall cause Seller and
-------------
Cameron Enterprises to sell the personal property listed in the Bills of Sale to
the Company at the prices set forth therein.
ARTICLE VII
CONDITIONS TO SELLER'S OBLIGATIONS
----------------------------------
The obligations of Seller to consummate the transactions provided for
hereby are subject, in the discretion of Seller, to the satisfaction, on or
prior to the Closing Date, of each of the following conditions, any of which may
be waived by Seller:
7.1 Representations, Warranties and Covenants. All representations
-----------------------------------------
and warranties of Purchaser contained in this Agreement shall be true and
correct at and as of the date of this Agreement and at and as of the Closing
Date, except as and to the extent that the facts and conditions upon which such
representations and warranties are based are expressly required or permitted to
be changed by the terms hereof, and Purchaser shall have performed and satisfied
all agreements and covenants required hereby to be performed by it prior to or
on the Closing Date.
7.2 Consents; Regulatory Compliance and Approval. All consents,
--------------------------------------------
approvals and waivers from governmental authorities and other parties necessary
to permit Seller to transfer the Shares to Purchaser as contemplated hereby
shall have been obtained. Seller shall be satisfied
48
<PAGE>
that all approvals required under any Regulations to carry out the transactions
contemplated by this Agreement shall have been obtained. The applicable waiting
period, including any extension thereof, under the HSR Act shall have expired.
7.3 No Actions or Court Orders. No Action by any governmental
--------------------------
authority or other person shall have been instituted or threatened for the
purpose of enjoining or preventing the transactions contemplated by this
Agreement or that questions the validity or legality of the transactions
contemplated hereby.
7.4 Opinion of Counsel. Purchaser shall have delivered to Seller an
------------------
opinion of Latham & Watkins, counsel to Purchaser, dated as of the Closing Date,
in form and substance reasonably satisfactory to Seller, to the effect that:
(a) Incorporation. Purchaser is a corporation duly incorporated,
-------------
validly existing and in good standing under the laws of the State of
California;
(b) Corporate Power and Authority. Purchaser has the necessary
-----------------------------
corporate power and authority to enter into this Agreement and the Ancillary
Agreements and to consummate the transactions contemplated hereby and thereby;
(c) Corporate Action and Enforceability. The execution, delivery and
-----------------------------------
performance of this Agreement and the Ancillary Agreements by Purchaser have
been duly authorized by all requisite corporate action of Purchaser, and this
Agreement and the Ancillary Agreements have been duly executed and delivered by
Purchaser and constitute legally valid and binding obligations of Purchaser,
enforceable against Purchaser in accordance with their terms, except as limited
by the Bankruptcy Exception.
(d) No Breach of Contracts. Neither the execution and delivery of
----------------------
this Agreement or the Ancillary Agreements by Purchaser nor the consummation of
the transactions contemplated hereby or thereby will (i) violate the Articles of
Incorporation or Bylaws of Purchaser, or (ii) cause a Default under any term or
provision of any Contract known to such counsel to which Purchaser is a party or
by which Purchaser or its Property is bound; and
(e) No Violation of Law. Neither the execution and performance of
-------------------
this Agreement or the Ancillary Agreements by Purchaser nor the consummation of
the transactions contemplated hereby or thereby will violate or result in a
failure to comply with any Regulation or Court Order applicable to Purchaser.
No Permit of or filing with, any governmental authority or, to the knowledge of
such counsel, any other person, is required for the execution and delivery of
this Agreement or the Ancillary Agreements by Purchaser, or the consummation by
Purchaser of the transactions contemplated hereby and thereby, except as set
forth in this Agreement, the Ancillary Agreements or the Disclosure Schedule.
In rendering such opinions, such counsel may rely as it deems
advisable (a) as to matters governed by the laws of jurisdictions other than
states in which it maintains offices, upon opinions of local counsel
satisfactory to counsel to Seller, and (b) as to factual matters, upon
certificates and assurances of public officials and officers of Purchaser. In
addition, such opinions
49
<PAGE>
may be subject to such additional qualifications and exceptions as are
reasonably acceptable to counsel to Seller.
7.5 Certificates. Purchaser shall furnish Seller with such
------------
certificates of its officers and others to evidence compliance with the
conditions set forth in this Article VII as may be reasonably requested by
Seller.
7.6 Corporate Documents. Seller shall have received from Purchaser
-------------------
resolutions adopted by the board of directors of Purchaser approving this
Agreement, the Ancillary Agreements and the transactions contemplated hereby or
thereby, certified by Purchaser's corporate secretary.
7.7 Ancillary Agreements. Purchaser shall have executed and
--------------------
delivered the Ancillary Agreements to which Purchaser is a party.
7.8 Investment Representation. Purchaser shall provide to Seller a
-------------------------
written document, executed by Purchaser, in form and substance satisfactory to
Seller, that Purchaser is acquiring the Shares for investment for its own
account and not with a view to the distribution thereof.
7.9 Mitsubishi Consent. Mitsubishi Motor Sales of America, Inc.
-------------------
("Mitsubishi") shall have either given its consent to the sale of the Shares to
----------
Purchaser or shall have waived any right to approve such sale of Shares provided
to it in the provision relating to the same contained in its agreement with the
Company.
7.10 338(h)(10) Election. Purchaser shall have delivered to Seller
-------------------
the election pursuant to Section 338(h)(10) of the Code described in Section
6.15.
ARTICLE VIII
CONDITIONS TO PURCHASER'S OBLIGATIONS
-------------------------------------
The obligations of Purchaser to consummate the transactions provided
for hereby are subject, in the discretion of Purchaser, to the satisfaction, on
or prior to the Closing Date, of each of the following conditions, any of which
may be waived by Purchaser:
8.1 Representations, Warranties and Covenants. All representations
-----------------------------------------
and warranties of Seller contained in this Agreement shall be true and correct
in all material respects at and as of the date of this Agreement and at and as
of the Closing Date, except as and to the extent that the facts and conditions
upon which such representations and warranties are based are expressly required
or permitted to be changed by the terms hereof, and Seller shall have performed
and satisfied all agreements and covenants required hereby to be performed by it
prior to or on the Closing Date.
8.2 Consents; Regulatory Compliance and Approval. All consents,
--------------------------------------------
approvals and waivers from governmental authorities and other parties necessary
to the consummation of the transactions contemplated hereby and for the
operation of the Business by Purchaser shall
50
<PAGE>
have been obtained. Purchaser shall be satisfied that all approvals required
under any Regulations to carry out the transactions contemplated by this
Agreement shall have been obtained. The applicable waiting period, including any
extension thereof, under the HSR Act shall have expired.
8.3 No Actions or Court Orders. No Action by any governmental
--------------------------
authority or other person shall have been instituted or threatened for the
purpose of enjoining or preventing the transactions contemplated by this
Agreement or that questions the validity or legality of the transactions
contemplated hereby.
8.4 Opinion of Counsel. Seller shall have delivered to Purchaser an
------------------
opinion of McAfee & Taft A Professional Corporation, counsel to Seller, dated as
of the Closing Date, in form and substance reasonably satisfactory to Purchaser,
to the effect that:
(a) The Company. The Company is a corporation duly incorporated,
-----------
validly existing and in good standing under the laws of the State of Oklahoma.
The Company is duly qualified to do business as a foreign corporation and is in
good standing in each jurisdiction set forth on Schedule 4.2. The Company has
the necessary corporate power and authority to enter into this Agreement and to
consummate the transactions contemplated hereby;
(b) Corporate Power and Authority. Seller is a corporation duly
-----------------------------
incorporated, validly existing and in good standing under the laws of the State
of Nevada and has the necessary corporate power and authority to enter into this
Agreement and the Ancillary Agreements and to consummate the transactions
contemplated hereby and thereby;
(c) Subsidiaries. Each of the Subsidiaries is a corporation duly
------------
organized, validly existing and in good standing under the laws of the state of
its incorporation, and has all requisite corporate power and authority to
transact its business and to own its properties; each Subsidiary is qualified in
each jurisdiction set forth on Schedule 4.4. The capitalization of each
Subsidiary is as set forth on Schedule 4.4. All of the outstanding shares of
capital stock of each of the Subsidiaries have been duly authorized, validly
issued, fully paid and (except for director's qualifying shares of Cimarron)
are nonassessable and are owned of record and, to the knowledge of such counsel,
beneficially by the Company, free of any Encumbrance. To the knowledge of such
counsel, there are no outstanding Warrants with respect to the capital stock of
any Subsidiary;
(d) Corporate Action and Enforceability. The execution, delivery and
-----------------------------------
performance of this Agreement and the Ancillary Agreements by Seller have been
duly authorized by all necessary corporate action of Seller and this Agreement
has been duly executed and delivered by Seller. The Ancillary Agreements have
been duly executed and delivered by Seller. This Agreement and each Ancillary
Agreement (other than the Agreement Not to Compete) constitutes a legally valid
and binding obligation of Seller, enforceable against Seller in accordance with
their terms, except as limited by (i) the Bankruptcy Exception, or (ii) other
customary limitations reasonably satisfactory to counsel for Purchaser;
(e) Capitalization. The capitalization of the Company is as set forth
--------------
in Section 4.3 of this Agreement. All of the Shares are duly authorized,
validly issued, fully paid and are nonassessable. To the knowledge of such
counsel, there are no outstanding Warrants with
51
<PAGE>
respect to any capital stock of the Company; Seller is the record owner and, to
the knowledge of such counsel, the beneficial owner of such Shares. The Shares
constitute all of the issued and outstanding capital stock of the Company.
Seller has the full power to transfer the Shares to Purchaser without obtaining
the consent or approval of any governmental authority or, to such counsel's
knowledge, of any other person, except for those consents that have been
obtained or waived. The certificates evidencing the Shares and the instruments
of transfer relating thereto delivered to Purchaser at the Closing are
sufficient to transfer to and vest in Purchaser title to the Shares, free and
clear of all Encumbrances and, assuming Purchaser is acquiring the Shares in
good faith without notice of any adverse claim, Purchaser will become the owner
of the Shares, free and clear of any Encumbrances;
(f) No Breach of Contracts. Neither the execution and delivery of
----------------------
this Agreement nor the Ancillary Agreements by Seller nor the consummation of
the transactions contemplated hereby or thereby will (i) violate the Certificate
or Articles of Incorporation or Bylaws of Seller or the Company, or (ii) cause
a Default under any term or provision of any Contract or material Lease
disclosed in the Schedules to this Agreement to which the Company or any
Subsidiary is a party or by which it is bound; and
(g) No Violation of Law. Neither the execution and performance of
-------------------
this Agreement by Seller or the Ancillary Agreements by Seller nor the
consummation of the transactions contemplated hereby or thereby will violate or
result in a failure to comply with any Regulation or Court Order known to such
counsel applicable to the Business or operations of the Company or any of its
Subsidiaries. No Permit of, or filing with, any governmental authority or, to
the knowledge of such counsel, any other person, is required for the execution
and delivery of this Agreement or the Ancillary Agreements by Seller or the
consummation by Seller of the transactions contemplated hereby and thereby,
except as set forth in this Agreement, the Disclosure Schedule, the exhibits
hereto or the Ancillary Agreements.
In rendering such opinions, such counsel may rely as it deems
advisable (a) as to matters governed by the laws of jurisdictions other than
states in which it maintains offices, upon opinions of local counsel
satisfactory to such counsel, and (b) as to factual matters, upon certificates
and assurances of public officials and officers of Seller, the Company or any of
its Subsidiaries. In addition, such opinions may be subject to such additional
qualifications and exceptions as are reasonably acceptable to counsel to
Purchaser. Such opinions with respect to the authorization, execution and
delivery of the Agreement Not to Compete shall include Cameron Enterprises, as
well as Seller, within the coverage of the opinion.
8.5 Certificates. Seller shall furnish Purchaser with such
------------
certificates of its officers and others to evidence compliance with the
conditions set forth in this Article VIII as may be reasonably requested by
Purchaser.
8.6 Material Changes. Since the Interim Balance Sheet Date, there
----------------
shall not have been any material adverse change with respect to the Business of
the Company or any of its Subsidiaries.
8.7 Corporate Documents. Purchaser shall have received from Seller
-------------------
resolutions adopted by the boards of directors of Seller approving this
Agreement and the
52
<PAGE>
Ancillary Agreements, as the case may be, and the transactions contemplated
hereby and thereby, certified by Seller's corporate secretary.
8.8 Conveyancing Documents; Release of Encumbrances. Seller shall
-----------------------------------------------
have endorsed the Shares, or executed such other assignment documents, and
delivered the Shares as described in Section 2.1 hereof so as to effect the
transfer and assignment to Purchaser of all right, title and interest in and to
the Shares, which documents shall be in a form reasonably satisfactory to
Purchaser's counsel.
8.9 Ancillary Agreements. Seller shall have, and shall have caused
--------------------
each of the Company, its Subsidiaries and Cameron Enterprises to, deliver to
Purchaser all of the Ancillary Agreements to which it is a party.
8.10 Consents. Any consents required as a consequence of the
---------
transactions contemplated by this Agreement with respect to all of the Permits
and all of the Contracts shall have been obtained or granted, which consents
shall not in any manner restrict the ability of Purchaser to conduct the
Business of the Company and each of its Subsidiaries as previously conducted.
8.11 ERC Release. Purchaser shall have received the release from ERC
-----------
specified in Section 6.11 and the reinsurance agreements with ERC specified in
Section 6.11 shall have been amended as set forth therein.
8.12 Intercompany Transfer. The transfers of capital stock of AFCC
---------------------
and the mortgage loans specified in Sections 6.12 and 6.13, respectively, shall
have been completed.
8.13 Mitsubishi Consent. Mitsubishi Motor Sales of America, Inc.
------------------
shall have given its consent to the sale of the Shares to Purchaser or shall
have waived any right to approve such sale of Shares, upon such terms as may
reasonably be acceptable to Purchaser.
8.14 Ocean Marine. Seller shall have caused the Company to deliver
------------
the notices of termination with respect to the Covenant Agreement and the
Continental Agreement specified in Section 6.16.
8.15 Section 338(h)(10) Election. Seller shall have executed the
---------------------------
election pursuant to Section 338(h)(10) of the Code described in Section 6.15.
8.16 Pledged Securities. The Pledge and Security Agreement identified
------------------
in Section 6.17 shall have been amended as provided in Section 6.17, and the
pledged securities shall have been released from the security interest under
such agreement and delivered to the Company free of restrictions.
8.17 Pennsylvania Fronting Arrangement. The "fronting" arrangement
---------------------------------
whereby the Company has issued accident and health insurance in the state of
Pennsylvania has been discontinued, and all liabilities and obligations of the
Company and its Subsidiaries under such arrangement shall (i) have been
transferred and assumed by Seller or an Affiliate of Seller and
53
<PAGE>
terminated on or prior to the Closing Date, or (ii) reinsured in their entirety
by Seller or an Affiliate of Seller.
8.18 Certificate Regarding Reinsurance. Seller shall have delivered
---------------------------------
to Purchaser a certificate, signed by both the chief executive officer and the
chief financial officer of the Company, to the effect that there are no
liabilities, obligations, commitments or arrangements, relating to reinsurance
treaties or agreements to which the Company or one of its Subsidiaries is a
party, whether as reinsured or reinsurer, legal or otherwise, except as
contained in the written agreements identified on Schedule 4.13(a)(iii), or
entered into after the date of this Agreement and identified on a schedule
attached thereto.
ARTICLE IX
ACTIONS AFTER THE CLOSING
-------------------------
9.1 Books and Records; Tax Matters.
------------------------------
(a) Books and Records. Each party agrees that it will cooperate with
-----------------
and make available to the other party, during normal business hours, all Books
and Records, information and employees (without substantial disruption of
employment) retained and remaining in existence after the Closing which are
necessary or useful in connection with any tax inquiry, audit, investigation or
dispute, any litigation or investigation or any other matter requiring any such
Books and Records, information or employees for any reasonable business purpose.
The party requesting any such Books and Records, information or employees shall
bear all of the out-of-pocket costs and expenses (including without limitation
attorneys' fees, but excluding reimbursement for salaries and employee benefits)
reasonably incurred in connection with providing such Books and Records,
information or employees.
(b) Cooperation and Records Retention. Seller and Purchaser shall (i)
---------------------------------
each provide the other with such assistance as may reasonably be requested by
either of them in connection with the preparation of any return, 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 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 tax return of
the other for any period. Without limiting the generality of the foregoing,
Purchaser and Seller shall each retain, until the applicable statutes of
limitations (including any extensions) have expired, copies of all tax returns,
supporting work schedules, and other records or information that may be relevant
to such returns for all tax periods or portions thereof ending on or before 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.
9.2 Survival of Representations, Etc. All of the representations,
--------------------------------
warranties, covenants and agreements made by each party in this Agreement or in
any attachment, exhibit, the Disclosure Schedule, certificate, document or list
delivered by any such party pursuant hereto shall survive the Closing for a
period of (and claims based upon or arising out of such
54
<PAGE>
representations, warranties, covenants and agreements may be asserted at any
time before the date which shall be) two (2) years following the Closing (except
with respect to those matters subject to the special indemnification provisions
of Section 9.3(b) and those representations and warranties set forth in Sections
4.20 (Employee Benefit Plans), 4.21 (Tax Matters) and 4.23 (Environmental
Matters), which shall survive until the expiration of the applicable statute of
limitations (with permitted extensions) with respect to the matters addressed in
such sections. Each party hereto shall be entitled to rely upon the
representations and warranties of the other party set forth in this Agreement.
The termination of the representations and warranties provided herein shall not
affect the rights of a party in respect of any Indemnification Claim (as defined
below) made by such party in a writing received by the other party prior to the
expiration of the applicable survival period provided herein.
9.3 Indemnification.
---------------
(a) By Seller - General. Seller shall indemnify, save and hold
-------------------
harmless Purchaser and its Affiliates, including the Company and each of its
Subsidiaries (collectively, the "Purchaser Indemnitees") from and against any
---------------------
and all Losses and Expenses arising out of, based upon or resulting from:
(i) the inaccuracy of any representation or warranty of Seller which
is contained in or made pursuant to this Agreement; or
(ii) any breach by Seller of any of its agreements, covenants or
obligations contained in or made pursuant to this Agreement;
subject to the terms and provisions of, and except as otherwise expressly
provided for in, this Agreement. Except as set forth in Section 9.3(b), Seller
shall be required to indemnify the Purchaser Indemnitees under this Section 9.3
only if and to the extent that the Losses and Expenses realized or incurred by
the Purchaser Indemnitees and which are indemnified against under this Section
9.3 exceed an aggregate of Three Hundred Fifty Thousand Dollars ($350,000), and
are less than Three Million Eight Hundred Fifty Thousand Dollars ($3,850,000) in
the aggregate.
(b) By Seller -- Special Items. The following items of potential
--------------------------
indemnification of the Purchaser Indemnitees by Seller shall not be subject to
the dollar amount limitations set forth in Section 9.3(a), and shall not be
included in the aggregate limits set forth in Section 9.3(a), and shall be
indemnified as follows:
(i) In the event of a default in the payment of principal or interest
relating to (x) the promissory note dated December 31, 1993 of Cimarron Crop
Insurance Services, Inc. in favor of Cimarron, in the original principal amount
of Six-Hundred Thirty-Five Thousand Dollars ($635,000), and (y) the promissory
note dated December 31, 1993 of Cimarron Crop Insurance Services, Inc. in favor
of the Company, in the original principal amount of Four-Hundred Eighty-Three
Thousand Nine-Hundred Eighty-Two Dollars ($483,982), and if such default in the
payment of principal or interest has not been cured after reasonable notice to
the maker, endorsers and guarantors of the promissory note as to which such
default exists, Seller, promptly and within thirty (30) days following written
demand by Purchaser, will purchase such promissory note from the Company for a
cash purchase price equal to the unpaid principal balance
55
<PAGE>
thereof plus interest upon such unpaid principal balance at the non-default rate
stated in such promissory note which is accrued but unpaid at the date of
purchase. Such promissory note and all collateral securing the payment thereof
shall be assigned by the Company without recourse to the Seller; and
(ii) Seller shall indemnify, save and hold harmless the Purchaser
Indemnitees from and against any and all Losses and Expenses relating to the
premium tax audit by the Texas Comptroller of Public Accounts identified on
Schedule 4.21; and
(iii) Seller shall indemnify, save and hold harmless the Purchaser
Indemnitees with respect to those Accounts Receivable identified in Section
4.9(b) for eighty-five percent (85%) of the aggregate unpaid principal amount of
such Accounts Receivable as set forth in Section 4.9(b); and
(iv) Seller shall indemnify, save and hold harmless the Purchaser
Indemnitees from and against any and all Losses and Expenses arising out of,
based upon or resulting from the Ocean Marine Program, including, without
limitation, all Losses and Expenses relating to claims by or against Continental
or Covenant in which the Company or one of its Subsidiaries becomes subject to
such claims.
(v) Seller shall indemnify, save and hold harmless the Purchaser
Indemnitees from and against any and all Losses and Expenses, in excess of any
reinsurance recoverable from Seller or an Affiliate of Seller, relating to the
arrangement whereby the Company is issuing accident and health insurance in the
State of Pennsylvania under a "fronting arrangement" with an Affiliate of Seller
described in Section 6.17.
(c) By Purchaser. Purchaser shall indemnify and save and hold
------------
harmless Seller and its respective Affiliates (collectively, the "Seller
------
Indemnitees") from and against any and all Losses and Expenses incurred in
- -----------
connection with, arising out of, resulting from or incident to (i) any breach of
any representation or warranty made by Purchaser in or pursuant to this
Agreement, or (ii) any breach of any covenant or agreement made by Purchaser in
or pursuant to this Agreement.
(d) Losses and Expenses. The terms "Losses" and "Expenses" as used in
-------------------
this Article IX are not limited to matters asserted by third parties against
Seller or Purchaser, but include Losses and Expenses incurred or sustained by a
Seller Indemnitee or a Purchaser Indemnitee in the absence of third party
claims. Payments by a Purchaser Indemnitee of amounts for which such Purchaser
Indemnitee is indemnified hereunder, and payments by a Seller Indemnitee of
amounts for which such Seller Indemnitee is indemnified, shall not be a
condition precedent to recovery. Seller's obligation to a indemnify a Purchaser
Indemnitee, and Purchaser's obligation to indemnify a Seller Indemnitee, shall
not limit any other rights, including, without limitation, rights of
contribution which either party may have under statute or common law.
(e) Cooperation. The indemnified party shall cooperate in all
-----------
reasonable respects with the indemnifying party and its attorneys in the
investigation, trial and defense of such lawsuit or
56
<PAGE>
action and any appeal arising therefrom; provided, however, that the indemnified
-------- -------
party may, at its own cost, participate in the investigation, trial and defense
of such lawsuit or action and any appeal arising therefrom. The parties shall
cooperate with each other in any notifications to insurers.
(f) Defense of Claims. If a claim for Losses and Expenses (an
-----------------
"Indemnification Claim") is to be made by a party entitled to indemnification
---------------------
hereunder against the indemnifying party, the party claiming such
indemnification shall give written notice (an "Indemnification Claim Notice") to
----------------------------
the indemnifying party as soon as practicable after the party entitled to
indemnification becomes aware of any fact, condition or event which may give
rise to Losses and Expenses for which indemnification may be sought under this
Section 9.3. If any lawsuit or enforcement action is filed against any party
entitled to the benefit of indemnity hereunder, written notice thereof shall be
given to the indemnifying party as promptly as practicable (and in any event
within fifteen (15) calendar days after the service of the citation or summons).
The failure of any indemnified party to give timely notice hereunder shall not
affect rights to indemnification hereunder, except to the extent that the
indemnifying party demonstrates actual damage caused by such failure. After
such Indemnification Claim Notice, if the indemnifying party shall acknowledge
in writing to the indemnified party that the indemnifying party shall be
obligated under the terms of its indemnity hereunder in connection with such
lawsuit or action, then the indemnifying party shall be entitled, if it so
elects at its own cost, risk and expense, (i) to take control of the defense and
investigation of such lawsuit or action, (ii) to employ and engage attorneys of
its own choice to handle and defend the same unless the named parties to such
action or proceeding include both the indemnifying party and the indemnified
party and the indemnified party has been advised in writing by counsel that
there may be one or more legal defenses available to such indemnified party that
are different from or additional to those available to the indemnifying party,
in which event the indemnified party shall be entitled, at the indemnifying
party's cost, risk and expense, to separate counsel of its own choosing, and
(iii) to compromise or settle such claim, which compromise or settlement shall
be made only with the written consent of the indemnified party, such consent not
to be unreasonably withheld. If the indemnifying party fails to assume the
defense of such claim within fifteen (15) calendar days after receipt of the
Indemnification Claim Notice, the indemnified party against which such claim has
been asserted will (upon delivering notice to such effect to the indemnifying
party) have the right to undertake, at the indemnifying party's cost and
expense, the defense, compromise or settlement of such claim on behalf of and
for the account and risk of the indemnifying party. In the event the
indemnified party assumes the defense of the claim, the indemnified party will
keep the indemnifying party reasonably informed of the progress of any such
defense, compromise or settlement. The indemnifying party shall be liable for
any settlement of any action effected pursuant to and in accordance with this
Section 9.3 and for any final judgment (subject to any right of appeal), and the
indemnifying party agrees to indemnify and hold harmless an indemnified party
from and against any Losses and Expenses by reason of such settlement or
judgment.
(g) Purchaser's Right of Offset. Anything in this Agreement to the
---------------------------
contrary notwithstanding, Purchaser may withhold and set off against the
Holdback Amount any amount as to which Seller is obligated to indemnify
Purchaser pursuant to any provision of this Section 9.3.
(h) Brokers and Finders. Pursuant to the provisions of this Section
-------------------
9.3, each of Purchaser and Seller shall indemnify, hold harmless and defend the
other party from the payment of any and all broker's and finder's expenses,
commissions, fees or other forms of compensation which may be due or payable
from or by the indemnifying party, or may have been
57
<PAGE>
earned by any third party acting on behalf of the indemnifying party in
connection with the negotiation and execution hereof and the consummation of the
transactions contemplated hereby.
(i) Representatives. No individual Representative of any party shall
---------------
be personally liable for any Losses and Expenses under the provisions contained
in this Section 9.3. Nothing herein shall relieve either party of any Liability
to make any payment expressly required to be made by such party pursuant to this
Agreement.
9.4 Payment of Holdback Amount. Purchaser shall hold and pay the
--------------------------
Holdback Amount pursuant to Article IX and this Section 9.4. If Purchaser has
not delivered an Indemnification Claim Notice to Seller on or before the first
anniversary of the Closing Date, all of the Holdback Amount shall be paid
promptly to Seller with interest thereon at the rate of five percent (5%) per
annum from the Closing Date through the date of payment of the Holdback Amount.
If Purchaser has delivered one or more Indemnification Claim Notices to Seller
on or before the first anniversary of the Closing Date and has exercised its
right of offset pursuant to Section 9.3(g), or has not then determined the
appropriate amount to be offset, the following shall apply:
(a) As promptly as practicable, but not later than ten (10) days
following the first anniversary of the Closing Date, Purchaser shall prepare and
deliver to Seller a written statement (the "Preliminary Holdback Accounting
-------------------------------
Report") in reasonable detail which reflects and identifies, on an item-by-item
- ------
basis, (i) each Indemnification Claim paid by Purchaser and with respect to
which Purchaser has exercised a right of offset against the Holdback Amount, and
(ii) each unresolved Indemnification Claim and the portion of the Holdback
Amount reasonably estimated by Purchaser to be required to cover each such
unresolved Indemnification Claim, and the calculation reflecting how such amount
was determined.
(b) Seller may, within twenty (20) days after the date of its receipt
of the Preliminary Holdback Accounting Report, deliver to Purchaser a
certificate (signed by Seller) setting forth any objections to the portion(s) of
the Holdback Amount which Purchaser estimates is required to cover any
unresolved Indemnification Claim as set forth in the Preliminary Holdback
Accounting Report, together with a summary of the reasons therefor and
calculations which, in Seller's view, are necessary to eliminate such
objections. With respect to any item included in the Preliminary Holdback
Accounting Report to which Seller does not so object within such 20-day period,
the Preliminary Holdback Accounting Report shall be final and binding as the
"Final Holdback Accounting Report" with respect to such item(s) for purposes of
- ---------------------------------
this Agreement.
(c) With respect to any item included in the Preliminary Holdback
Account Report to which Seller does object within such 20-day period, Purchaser
and Seller shall use their respective reasonable best efforts to resolve within
thirty (30) days by written agreement (the "Agreed Holdback Adjustment") any
--------------------------
differences with respect to such item and, in the event Purchaser and Seller so
resolve any such differences, the Preliminary Holdback Accounting Report with
respect to such item, as further adjusted by the Agreed Holdback Adjustment,
shall become the Final Holdback Accounting Report and shall be final and binding
as to such items for purposes of this Agreement.
58
<PAGE>
(d) In the event any objection raised by Seller is not resolved by the
Agreed Holdback Adjustment within the 30-day period referred to in subsection
(c), then Seller and Purchaser shall submit the unresolved objection to
arbitration pursuant to Section 10.12, and the Preliminary Holdback Accounting
Report, as adjusted to give effect to the resolution of such objections, shall
be deemed the Final Holdback Accounting Report.
(e) The parties hereto shall make available to each other such books,
records and other information (including work papers) as any of the foregoing
may reasonably request to prepare or review the Preliminary Holdback Accounting
Report.
Purchaser shall pay to Seller promptly after the first anniversary of
the Closing Date an amount equal to the Holdback Amount as reflected in the
Final Holdback Accounting Report. The parties agree that offset against the
Holdback Amount shall not be Purchaser's exclusive method of receiving
indemnification from Seller pursuant to this Article IX.
9.5. Post-Closing Claims Administration. From the Closing Date until
----------------------------------
and including December 31, 2004, Purchaser will or will cause the Company and
each of its Subsidiaries to (i) administer, process, compromise and defend
Claims (which include Late Claims) on a basis consistent with the practices,
processes and procedures generally followed in the property and casualty
insurance industry and (ii) use all reasonable efforts to settle and compromise
Claims and Late Claims at their true value and make appropriate payments with
respect to such Claims and Late Claims, consistent with customary practices in
the property and casualty insurance industry in the geographic area in which the
related Loss-Event occurred (the standards set forth in clauses (i) and (ii),
collectively, the "Claims-Processing Standards"). If the Company or any of its
---------------------------
Subsidiaries propose to make a Claim Payment prior to December 31, 2001, with
respect to a Claim which is included in the Effective Date Insurance Reserves,
and if the aggregate Claim Payments made and proposed to be made with respect to
any such Claim exceed or, after giving effect to the proposed Claim Payment,
will exceed, the sum of (i) the Company's retention amounts under all
reinsurance treaties or agreements applicable to such Claim, plus (ii) the
amount of reinsurance recoverable with respect to such Claim, up to the
Company's reinsurance limit under all reinsurance treaties and agreements
applicable to such Claim (whether or not such reinsurance is actually
collectible), Purchaser shall, or shall cause the Company to, give Seller notice
of such proposed Claim Payment, which notice shall, in reasonable detail,
identify the insurance policy, the claimant, the Date of Loss, the amount of the
Claim, the Company's analysis of the coverage and risk of loss with respect to
such Claim and the basis for such Claim, and shall request Seller to approve
such proposed Claim Payment within ten (10) days of Seller's receipt of such
notice. If Seller shall not affirmatively approve the proposed Claim Payment
within such ten-day period, then Purchaser and the Company or a Subsidiary, as
the case may be, may elect to either settle such Claim and make the Claim
Payment or continue to defend the Claim. If Purchaser (or the Company or such
Subsidiary) shall elect to make such Claim Payment, such Claim Payment shall not
be taken into account in the calculation of the Reserve Redundancy or Reserve
Deficiency as provided in Section 2.4 to the extent that such Claim Payment is
in excess of the Case Reserve for such Claim. If Purchaser (or the Company or a
Subsidiary, as the case may be) shall elect to continue to defend such Claim,
then (a) the entire amount of the ultimate Claim Payment, together with all
costs and expenses of defense with respect to such Claim, and plus the amount of
any extra-contractual judgment in excess of policy limits and exemplary or
punitive damages with respect to such Claim shall be taken into account
59
<PAGE>
in the calculation of the Reserve Redundancy or Reserve Deficiency as provided
in Section 2.4, and (b) Seller shall have the right to assume the defense of the
Claim at Seller's expense, and (c) Seller shall be obligated to make
reimbursement even though such Claim may be finally resolved after December 31,
2001 (or with respect to a Late Claim, finally resolved after December 31, 2004)
and Seller shall pay to Purchaser (or the Company or a Subsidiary, as the case
may be) all amounts due under clause (a) above to the extent such amounts are in
excess of the Case Reserve for such Claim at December 31, 2001.
9.6. Post-Closing Inspection of Records. From the Closing Date until
----------------------------------
December 31, 2004, Seller or its Representatives shall have the right to review,
on a basis no more frequently than quarterly with respect to each calendar year
after the Closing Date, all books, records and files of the Company and its
Subsidiaries with respect to Claims and Late Claims and Claim Payments actually
made or agreed to be made by the Company and its Subsidiaries for such calendar
year, and, with respect to the Company's Insurance Reserves, to determine that
the Company's books and records properly reflect the Date of Loss, whether there
has occurred a pattern of material departures from the Claims-Processing
Standards set forth in Section 9.5, and, if so, whether, in Seller's opinion,
there have been overpayments with respect to specific Claims and Late Claims.
Such review shall be conducted at the offices of the Company and its
Subsidiaries and shall be subject to the provisions of Section 10.10 hereof with
respect to any Confidential Information received during such review by Seller
and/or its Representatives. In addition, prior to the commencement of each such
review, Seller shall familiarize all of its Representatives who will be involved
in such review with the insider trading laws applicable to Purchaser, the
Company and its Subsidiaries.
Within thirty (30) days following the completion of each review,
Seller shall provide Purchaser with a written report of such review (each such
report, a "Seller's Report") which shall reflect, among other things, a list of
---------------
the books, records and files reviewed by Seller, and the conclusions reached by
Seller. The Seller's Report shall specifically set forth the grounds, if any,
for Seller's determination that the conduct of the Company and its Subsidiaries
has shown a pattern of material departures from the Claims-Processing Standards,
including, without limitation, a list of each of the Claims or Late Claims
Seller believes were overpaid.
In the event Seller has reasonably determined that the Company or any
of its Subsidiaries has shown a pattern of material departures from the Claims-
Processing Standards, then, within thirty (30) days following receipt of
Seller's Report, Purchaser shall give written notice to Seller which shall
identify any of Seller's conclusions contained in Seller's Report which
Purchaser disputes. The failure of Purchaser to give notice of dispute of any
conclusion stated in a Seller's Report shall be deemed an irrevocable
concurrence by Purchaser in any disputed conclusions. Such disputes shall be
resolved in accordance with the procedures set forth in Section 10.12 of this
Agreement. The arbitrator appointed to resolve such disputes shall make a
preliminary determination whether, during the period of review covered by such
Seller's Report, the Company or any of its Subsidiaries engaged in a pattern of
material departures from the Claims-Processing Standards. If the arbitrator
finds that no such pattern exists, there shall be no further inquiry by such
arbitrator into the Claim Payments made by the Company and its Subsidiaries on
or prior to the date of the Seller's Report in dispute, and such Claim Payments
shall be deemed final, binding and conclusive upon the parties. In the event
the arbitrator finds that such a pattern does exist, the arbitrator shall
resolve the disputes between Purchaser and Seller outlined in the Seller's
Report and Purchaser's response thereto on a Claim-by-
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Claim or Late Claim-by-Late Claim basis and shall issue a decision with respect
to each disputed Claim or Late Claim. Under no circumstances shall the
arbitrator use any method of extrapolation in determining the number of Claims
or Late Claims overpaid by the Company and its Subsidiaries or the total amount
overpaid by the Company and or any of its Subsidiaries with respect to Claim
Payments. The final determination of such disputed items shall be considered in
the determination of the Reserve Redundancy or Reserve Deficiency as provided in
Section 2.4.
9.7 Change of Name Promptly after the Closing, Purchaser shall
--------------
cause the Company to commence proceedings to change its corporate name, the
assumed name of AMC in Texas, and the name of the Lloyd's Plan, to eliminate the
words "American Fidelity" and shall use its best efforts to expeditiously obtain
all regulatory and other approvals necessary or appropriate to cease conducting
business under the name "American Fidelity." The Company may continue to use
the words "American Fidelity" in its name and advertising literature until such
approvals are obtained and a new name is adopted. The Company shall cease
conducting business under the "American Fidelity" name no later than one (1)
year after the Closing Date. Immediately upon and following the Closing, the
Company and each of its Subsidiaries and affiliates shall cease to identify
themselves as members of the "American Fidelity Group." In addition, any
insurance contracts entered into in the name of "American Fidelity Insurance
Company" in effect on the Closing Date or entered into by the Company within one
(1) year following the Closing Date may refer to the Company as "American
Fidelity Insurance Company" and such reference may continue for the remaining
term of such insurance contract. AMC may continue to use "AFI" in its corporate
name and in the conduct of its Business.
9.8 Ocean Marine Program.
--------------------
(a) Maintenance of Ocean Marine Program. Purchaser agrees to maintain
-----------------------------------
the Ocean Marine Program in effect until August 31, 1998, except that Purchaser
may, at any time, terminate (i) the Covenant Agreement pursuant to Sections 6.2,
6.3 or 6.4 of such agreement, and (ii) the Continental Agreement pursuant to
Sections 7.2, 7.3 or 7.4 of such agreement. Purchaser shall cause the Company
to maintain separate accounts with respect to the operation of the Ocean Marine
Program in such detail so that underwriting profits and losses are separately
identified with respect to this operation. Purchaser shall not permit the
Company to amend or otherwise modify the Covenant Agreement, Continental
Agreement or any of the reinsurance agreements identified in Section 4.27,
without the consent of Seller, which will not be unreasonably withheld.
Purchaser and Seller shall use their respective best efforts to enter into the
quota share and excess of loss reinsurance agreements through August 31, 1998,
on substantially the same terms as presently in effect. Purchaser shall not be
obligated to maintain the Ocean Marine Program in effect, unless such
reinsurance arrangements can be consummated on substantially the same terms as
presently in effect. Subject to the notices of termination sent by the Company
pursuant to Section 6.16, following the Closing, Purchaser shall cause the
Company to maintain its Ocean Marine Program consistent with the practices,
processes and procedures generally followed by Covenant Underwriters, Ltd.,
Continental Underwriters, Ltd., and the Company prior to the Closing; provided,
--------
however, nothing in this Agreement shall be construed to restrict the Company's
- -------
right to terminate the Covenant Agreement or the Continental Agreement for
"cause" as such term is defined in such agreements.
(b) Ocean Marine Settlement Reports.
-------------------------------
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<PAGE>
(i) Not later than February 28, 1997, Purchaser shall deliver to
Seller a certificate (each such certificate being referred to as an "Ocean
-----
Marine Settlement Report") setting forth Purchaser's determination of the "net
- ------------------------
program income" realized or the "net program loss" incurred by the Company and
its Subsidiaries and attributable to the Ocean Marine Program between November
1, 1996, and January 31, 1997, and shall include Ocean Marine Case Reserves and
Ocean Marine IBNR Reserves for all outstanding losses incurred under the
program. Seller shall be entitled to receive, on or prior to March 31, 1997, an
amount equal to the "net program income" realized by the Company and its
Subsidiaries and attributable to the Ocean Marine Program, if any, set forth in
such Ocean Marine Settlement Report. Purchaser, on the other hand, shall be
entitled to receive from Seller, on or prior to March 31, 1997, an amount equal
to the "net program loss" incurred by the Company and its Subsidiaries and
attributable to the Ocean Marine Program, if any, set forth in such Ocean Marine
Settlement Report. In the event there exists on March 31, 1997 a dispute which
has not been resolved pursuant to Section 9.8(c), payment shall be made
promptly, but in no event more than two (2) business days after the dispute has
been resolved.
(ii) Not later than May 31, 1997, August 31, 1997, and November 30,
1997, and on February 28, May 31, August 31 and November 30 of each year
thereafter (until there are no longer any outstanding losses incurred under the
Ocean Marine Program that have not been finally resolved) Purchaser shall
deliver to Seller an Ocean Marine Settlement Report setting forth Purchaser's
determination of the "net program income" realized or the "net program loss"
incurred by the Company and its Subsidiaries and attributable to the Ocean
Marine Program for the preceding three (3) month periods ended January 31, April
30, July 31 and October 31, respectively, and shall include Ocean Marine Case
Reserves and Ocean Marine IBNR Reserves as of the end of such three (3) month
periods ended January 31, April 30, July 31 and October 31, respectively, for
all outstanding losses incurred under the program. Seller shall be entitled to
receive, on or prior to the date that is sixty (60) days after the end of each
three (3) month period ended January 31, April 30, July 31 and October 31,
respectively, an amount equal to the "net program income" realized by the
Company and its Subsidiaries attributable to the Ocean Marine Program, if any,
set forth in such Ocean Marine Settlement Report. Purchaser, on the other hand,
shall be entitled to receive from Seller, on or prior to the date that is sixty
(60) days after the end of each three (3) month period ended January 31, April
30, July 31 and October 31, respectively, an amount equal to the "net program
loss" incurred by the Company and its Subsidiaries and attributable to the Ocean
Marine Program, if any, set forth in such Ocean Marine Settlement Report.
(iii) For purposes of this Section 9.8(b), the "net program income"
realized or the "net program loss" incurred by the Company and its Subsidiaries
and attributable to the Ocean Marine Program shall be determined in accordance
with Exhibit G attached hereto. Net program income or loss shall be determined
pursuant to the Covenant Agreement, the Continental Agreement and the
reinsurance agreements that are part of the Ocean Marine Program pursuant to
Section 4.27 or 9.8(a), and shall also include as an expense of the program
reasonable administrative and other costs incurred by the Company with respect
to such program.
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(iv) In the event there exists on any date that is sixty (60) days
after the end of each such three (3) month period described in Section
9.8(b)(ii) a dispute which has not been resolved pursuant to Section 9.8(c),
payment shall be made promptly, but in no event more than two (2) business days,
after the dispute has been resolved.
(c) Resolution of Disputes.
----------------------
(i) Following receipt of each Ocean Marine Settlement Report, Seller
may review the same and, within thirty (30) days after the date of such receipt,
may deliver to Purchaser a certificate setting forth any objections to the
determinations set forth in such Ocean Marine Settlement Report, together with a
summary of the reasons therefor and calculations which, in Seller's view, are
necessary to eliminate such objections, to the extent the information necessary
to made such calculations is reasonably available to Seller. If Seller does not
object within such 30-day period, the determinations set forth in the Ocean
Marine Settlement Report shall be final and binding on Purchaser and Seller.
(ii) If Seller timely objects within such 30-day period, Purchaser and
Seller shall use their respective reasonable best efforts to resolve within
thirty (30) days after such timely objection by written agreement (the "Ocean
-----
Marine Agreed Changes") any differences as to the determinations set forth in
- ---------------------
the Ocean Marine Settlement Report. If Seller and Purchaser so resolve any such
differences, the determinations set forth in the Ocean Marine Settlement Report
shall be final and binding on Purchaser and Seller.
(iii) If any objections timely raised by Seller are not resolved by
the Ocean Marine Agreed Changes within the 30-day period contemplated in this
Subsection 9.8(c), then Purchaser and Seller shall submit the objections that
are then unresolved to the Accounting Firm. The Accounting Firm shall be
directed by Purchaser and Seller to seek to resolve the unresolved objections as
promptly as reasonably practicable and to deliver written notice to each of
Purchaser and Seller setting forth its resolution of the disputed matters. The
determinations set forth in the Ocean Marine Settlement Report as adjusted by
the Ocean Marine Agreed Changes and by the Accounting Firm's resolution of such
objections shall be final and binding on the parties.
(iv) The parties hereto shall make available to Purchaser, Seller (and
their respective Representatives) and, if applicable, the Accounting Firm, such
books, records and other information (including work papers) as any of the
foregoing may reasonably request to prepare to review any Ocean Marine
Settlement Report or any matters submitted to the Accounting Firm pursuant to
this Section 9.8.
(v) The reasonable fees and expenses of the Accounting Firm shall be
paid fifty percent (50%) by Purchaser and fifty percent (50%) by Seller. Any
fees and expenses payable by Seller pursuant to this Section 9.8(c), at the
election of Purchaser, to the extent available, may be set-off from any amounts
otherwise payable to Seller pursuant to this Section 9.8.
9.9 Effective Date Financial Statements. As promptly as practicable
-----------------------------------
(but not later than thirty (30) days following the Closing Date), the accounting
personnel of the
63
<PAGE>
Company, under the direction of Purchaser, shall prepare and deliver to Seller a
balance sheet of the Company as of the Effective Date (the "Preliminary
-----------
Effective Date Balance Sheet"), accompanied by the other statements contained in
- ----------------------------
the Effective Date Financial Statements (collectively, the "Preliminary
-----------
Accounting Report"). The Preliminary Effective Date Balance Sheet and the
- -----------------
Effective Date Financial Statements shall fairly and accurately present the
consolidated assets, liabilities (including reserves) and stockholder's equity
of the Company and its Subsidiaries as of the Effective Date; provided, however,
-------- -------
that in no event may the aggregate amount of the Effective Date Insurance
Reserves exceed the aggregate amount of the Interim Balance Sheet Date Insurance
Reserves, and in the event such excess might otherwise exist, the Effective Date
Insurance Reserves shall be adjusted downward to the amount of the Interim
Balance Sheet Date Insurance Reserves, and such adjusted amount shall constitute
the amount of the Effective Date Insurance Reserves for purposes of Section 2.4.
During the course of such preparation, Purchaser shall make available the books
and records of the Company and its Subsidiaries and shall otherwise cooperate
with Seller in the preparation of the Preliminary Effective Date Balance Sheet
and the Effective Date Financial Statements.
(a) Seller may, within thirty (30) days after the date of the receipt
of the Preliminary Accounting Report, deliver to Purchaser a certificate (signed
by Seller) setting forth any objections to any of the matters included in the
Preliminary Accounting Report, together with a summary of the reasons therefor
and calculations which, in Seller's view, are necessary to eliminate such
objections. In the event Seller does not so object within such 30-day period,
the Preliminary Effective Date Balance Sheet set forth in the Preliminary
Account Report shall be final and binding as the "Effective Date Balance Sheet"
----------------------------
for purposes of this Agreement.
(b) In the event Seller so objects to the Preliminary Accounting
Report within such 30-day period, Purchaser and Seller shall use their
respective reasonable best efforts to resolve within thirty (30) days by written
agreement (the "Agreed Adjustments") any differences with respect to any matters
------------------
included in the Preliminary Accounting Report and, in the event Purchaser and
Seller so resolve any such differences, the Preliminary Effective Date Balance
Sheet set forth in the Preliminary Accounting Report, as further adjusted by the
Agreed Adjustments, shall be final and binding as the Effective Date Balance
Sheet for purposes of this Agreement.
(c) In the event any objections raised by Seller are not resolved by
the Agreed Adjustments within the 30-day period referred to in subsection (c),
then Seller and Purchaser shall (i) if the total amount in controversy is less
than Fifteen Thousand Dollars ($15,000), submit the objections that are then
unresolved to the Auditor, or (ii) if the total amount in controversy is equal
to or greater than Fifteen Thousand Dollars ($15,000), the Accounting Firm shall
resolve any remaining disagreements. The determination by the Auditor or the
Accounting Firm, as the case may be, shall be final, binding and conclusive on
the parties. Purchaser and Seller shall use their best efforts to cause the
Auditor or the Accounting Firm, as the case may be, to make its determination
within thirty (30) calendar days of submission of the items in controversy. The
Preliminary Effective Date Balance Sheet, after giving effect to any Agreed
Adjustments and to the resolution of disputed matters by the Auditor or the
Accounting Firm, as the case may be, shall be final and binding as the Effective
Date Balance Sheet for purposes of this Agreement. Unresolved objections not
involving accounting issues shall be resolved by arbitration pursuant to Section
10.12.
64
<PAGE>
(d) The parties hereto shall make available to each other, the Auditor
or the Accounting Firm, as the case may be, such books, records and other
information (including work papers) as any of the foregoing may reasonably
request to prepare or review the Preliminary Accounting Report or any matters
submitted to the Auditor or the Accounting Firm, as the case may be. The
reasonable fees and expenses of the Auditor or the Accounting Firm, as the case
may be, hereunder shall be paid fifty percent (50%) by Purchaser and fifty
percent (50%) by Seller.
(e) No determination or agreement with respect to the Effective Date
Balance Sheet contemplated by this Section 9.9 shall limit the representations,
warranties, covenants and agreements of the parties set forth elsewhere in this
Agreement.
ARTICLE X
MISCELLANEOUS
-------------
10.1 Termination.
-----------
(a) Termination. This Agreement may be terminated at any time prior
-----------
to Closing:
(i) By mutual written consent of Purchaser and Seller;
(ii) By Purchaser or Seller if the Closing shall not have occurred on
or before January 31, 1997; provided, however, that this provision shall not be
-------- -------
available to Purchaser if Seller has the right to terminate this Agreement under
clause (iv) of this Section 10.1, and this provision shall not be available to
Seller if Purchaser has the right to terminate this Agreement under clause (iii)
of this Section 10.1;
(iii) By Purchaser if there is a material breach of any representation
or warranty set forth in Article IV hereof or any covenant or agreement to be
complied with or performed by Seller or the Company pursuant to the terms of
this Agreement or the failure of a condition set forth in Article VIII to be
satisfied (and such condition is not waived in writing by Purchaser) on or prior
to the Closing Date, or the occurrence of any event which results or would
result in the failure of a condition set forth in Article VIII to be satisfied
on or prior to the Closing Date; provided that Purchaser may not terminate this
--------
Agreement prior to the Closing if Seller has not had an adequate opportunity to
cure such failure; or
(iv) By Seller if there is a material breach of any representation or
warranty set forth in Article V hereof or of any covenant or agreement to be
complied with or performed by Purchaser pursuant to the terms of this Agreement
or the failure of a condition set forth in Article VII to be satisfied (and such
condition is not waived in writing by Seller) on or prior to the Closing Date,
or the occurrence of any event which results or would result in the failure of a
condition set forth in Article VII to be satisfied on or prior to the Closing
Date; provided that Seller may not terminate this Agreement prior to the Closing
--------
Date if Purchaser has not has an adequate opportunity to cure such failure.
65
<PAGE>
(b) In the Event of Termination. In the event of termination of this
---------------------------
Agreement:
(i) Each party will redeliver all documents, work papers and other
material of any other party relating to the transactions contemplated hereby,
whether so obtained before or after the execution hereof, to the party
furnishing the same;
(ii) The provisions of Section 10.10 shall continue in full
force and effect; and
(iii) No party hereto shall have any Liability to any other party to
this Agreement, except as stated in subsections (i), (ii) and (iii) of this
Section 10.1(b), except for any willful breach of this Agreement occurring prior
to the proper termination of this Agreement. The foregoing provisions shall not
limit or restrict the availability of specific performance or other injunctive
relief to the extent that specific performance or such other relief would
otherwise be available to a party hereunder.
10.2 Assignment. Neither this Agreement nor any of the rights or
----------
obligations hereunder may be assigned by any party without the prior written
consent of the other party; except that Purchaser may, without such consent,
assign all such rights and obligations to a wholly-owned subsidiary or
subsidiaries of Purchaser which shall assume all obligations and Liabilities of
Purchaser under this Agreement, but such assignment and assumption shall not
release or relieve Purchaser of its obligations and Liabilities to Seller under
this Agreement. Subject to the foregoing, this Agreement shall be binding upon
and inure to the benefit of the parties hereto and their respective successors
and permitted assigns, and no other person shall have any right, benefit or
obligation under this Agreement as a third party beneficiary or otherwise.
10.3 Notices. All notices, requests, demands and other communications
-------
which are required or may be given under this Agreement shall be in writing and
shall be deemed to have been duly given when received if personally delivered;
when transmitted if transmitted by telecopy, electronic or digital transmission
method; the day after it is sent, if sent for next day delivery to a domestic
address by recognized overnight delivery service (e.g., Federal Express); and
----
upon receipt, if sent by certified or registered mail, return receipt requested.
In each case notice shall be sent to:
If to Seller, addressed to:
American Fidelity Corporation
2000 Classen Boulevard
Suite 700-North
Oklahoma City, OK 73106
Attention: Kenneth D. Klehm
Fax: (405) 523-5411
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<PAGE>
With a copy to:
McAfee & Taft
Two Leadership Square
211 North Robinson
Suite 1000
Oklahoma City, OK 73102
Attention: Theodore M. Elam, Esq.
Fax: (405) 235-0439
If to Purchaser, addressed to:
Mercury General Corporation
4484 Wilshire Boulevard
Los Angeles, CA 90010
Attention: George Joseph
Fax: (213) 857-7116
and
Mercury General Corporation
555 W. Imperial Hwy.
Brea, CA 92621
Attention: Michael D. Curtius
Fax: (714) 671-7464
With a copy to:
Latham & Watkins
701 B Street, Ste. 2100
San Diego, CA 92101
Attention: Donald P. Newell, Esq.
Fax: (619) 696-7419
or to such other place and with such other copies as either party may designate
as to itself by written notice to the others.
10.4 Choice of Law. This Agreement and the Escrow Agreement shall be
-------------
construed, interpreted and the rights of the parties determined in accordance
with the laws of the State of Oklahoma (without reference to the choice of law
provisions of Oklahoma law), except with respect to matters of law concerning
the internal corporate affairs of any corporate entity which is a party to or
the subject of this Agreement, and as to those matters the law of the
jurisdiction under which the respective entity derives its powers shall govern.
The Agreement Not to Compete shall be construed, interpreted and the rights of
the parties determined in accordance with the laws of the State of Oklahoma.
67
<PAGE>
10.5 Entire Agreement; Amendments and Waivers. This Agreement and the
----------------------------------------
Ancillary Agreements, together with all schedules hereto and thereto (including
the Disclosure Schedule), constitute the entire agreement among the parties
pertaining to the subject matter hereof and supersede all prior agreements,
understandings, negotiations and discussions, whether oral or written, of the
parties. This Agreement may not be amended except by an instrument in writing
signed on behalf of each of the parties hereto. No amendment, supplement,
modification or waiver of this Agreement shall be binding unless executed in
writing by the party to be bound thereby. No waiver of any of the provisions of
this Agreement shall be deemed or shall constitute a waiver of any other
provision hereof (whether or not similar), nor shall such waiver constitute a
continuing waiver unless otherwise expressly provided.
10.6 Multiple Counterparts. This Agreement may be executed in one or
---------------------
more counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
10.7 Expenses. Except as otherwise specified in this Agreement, each
--------
party hereto shall pay its own legal, accounting, out-of-pocket and other
expenses incident to this Agreement and to any action taken by such party in
preparation for carrying this Agreement into effect, except that Purchaser shall
pay one-half (1/2) of the cost of the audit for the Year-End Financial
Statements.
10.8 Invalidity. In the event that any one or more of the provisions
----------
contained in this Agreement or in any other instrument referred to herein,
shall, for any reason, be held to be invalid, illegal or unenforceable in any
respect, then to the maximum extent permitted by law, such invalidity,
illegality or unenforceability shall not affect any other provision of this
Agreement or any other such instrument.
10.9 Titles; Gender. The titles, captions or headings of the Articles
--------------
and Sections herein, and the use of a particular gender, are for convenience of
reference only and are not intended to be a part of or to affect or restrict the
meaning or interpretation of this Agreement.
10.10 Confidential Information.
------------------------
(a) Confidentiality. In connection with the negotiation of this
---------------
Agreement, the preparation for the consummation of the transactions contemplated
hereby, and the performance of obligations hereunder (including the conduct of
quarterly reviews by Seller pursuant to Section 9.6 hereof), each of Purchaser
and Seller acknowledges that it will have access to confidential information
relating to the other party, including technical, financial or marketing
information, ideas, methods, developments, inventions, improvements, business
plans, trade secrets, scientific or statistical data, diagrams, drawings,
specifications or other proprietary information relating thereto, together with
all analyses, compilations, studies or other documents, records or data prepared
by Seller or Purchaser which contain or otherwise reflect or are generated from
such information ("Confidential Information"). The term "Confidential
------------------------
Information" does not include information received by Purchaser or Seller in
connection with the transactions contemplated hereby which (i) is or becomes
generally available to the public other than as a result of a disclosure by the
party to this Agreement which received the Confidential Information in
connection herewith or its Representatives, (ii) was within such receiving
party's
68
<PAGE>
possession prior to its being furnished to such party by or on behalf of the
other party to this Agreement in connection with the transactions contemplated
hereby, provided that the source of such information was not known by the
receiving party, to be bound by a confidentiality agreement with or other
contractual, legal or fiduciary obligation of confidentiality to the other party
to this Agreement or any other person with respect to such information, or (iii)
becomes available to Purchaser or Seller on a non-confidential basis from a
source other than the other party to this Agreement or any of its
Representatives, provided that such source is not bound by a confidentiality
agreement with or other contractual, legal or fiduciary obligation of
confidentiality to the other party to this Agreement or any other person with
respect to such information.
(b) Preservation of Confidentiality. Each of Seller and Purchaser
-------------------------------
shall treat all Confidential Information as confidential, preserve the
confidentiality thereof and not disclose any Confidential Information, except to
its Representatives and Affiliates who need to know such Confidential
Information in connection with the transactions contemplated hereby. Each of
Seller and Purchaser shall use all reasonable efforts to cause its
Representatives to treat all Confidential Information as confidential, preserve
the confidentiality thereof and not disclose any Confidential Information. Each
of Seller and Purchaser shall be responsible for any breach of this Agreement by
any of its Representatives. If, however, Confidential Information is disclosed,
Seller or Purchaser, as the case may be, shall immediately notify the other
party in writing and take all reasonable steps required to prevent further
disclosure.
(c) Ownership of Information. Until the Closing or the termination of
------------------------
this Agreement, all Confidential Information shall remain the property of the
party who originally possessed such information. In the event of the
termination of this Agreement for any reason whatsoever, Seller or Purchaser, as
the case may be, shall, and shall cause its Representatives to, return to the
other party all Confidential Information (including all copies, summaries and
extracts thereof) furnished to it by such other party in connection with the
transactions contemplated hereby.
10.11 Cumulative Remedies. All rights and remedies of either party
-------------------
hereto are cumulative of each other and of every other right or remedy such
party may otherwise have at law or in equity, and the exercise of one or more
rights or remedies shall not prejudice or impair the concurrent or subsequent
exercise of other rights or remedies.
10.12 Dispute Resolution; Arbitration. It is understood and agreed
-------------------------------
between the parties hereto that, except as otherwise provided in Sections 2.4,
9.8 and 9.9, any and all claims, grievances, demands, controversies, causes of
action or disputes of any nature whatsoever (including, but not limited to, tort
and contract claims, and claims upon any law, statute, order or regulation)
(hereinafter "Disputes"), arising out of, in connection with, or in relation to
--------
(i) the interpretation, performance or breach of this Agreement, (ii) the
arbitrability of any Disputes under this Agreement, or (iii) any relationship
before, at the time of entering, during the term of, upon or after the
expiration or termination of this Agreement, by and among the parties, shall be
resolved in accordance with a two-step dispute resolution process administered
by the American Arbitration Association ("AAA") involving, first, mediation
---
before a retired judge from the AAA panel, followed, if necessary, by final and
binding arbitration before the same, or if requested by either party, another
AAA panelist. The parties confirm that by agreeing to this dispute resolution
69
<PAGE>
process, they intend to and do waive their right to have any dispute decided in
court by a judge or jury.
(a) Mediation. In the event any Dispute is not resolved by an
---------
informal negotiation between the parties within thirty (30) days after either
party receives written notice from the other party that a Dispute exists, the
matter shall be referred to the Dallas, Texas, offices of AAA for an informal,
non-binding mediation consisting of one or more conferences between the parties
in which a retired judge will seek to guide the parties to a resolution of the
Disputes. The parties shall select a mutually acceptable neutral from among the
AAA panel of mediators. In the event the parties cannot agree on a mediator,
the Administrator of AAA will appoint a mediator. The mediation process shall
begin on a date mutually agreed upon by the parties and mediator or, in the
event the parties cannot agree on a date, the mediator shall select a date. The
mediation process shall continue until the earliest to occur of the following:
(i) the Disputes are resolved; (ii) the mediator makes a finding that there is
no possibility of resolution through mediation; or (iii) thirty (30) days have
elapsed since the Dispute was first scheduled for mediation.
(b) Arbitration. Should any Disputes remain after the completion of
-----------
the mediation process described above, the parties agree to submit all remaining
Disputes to final and binding arbitration in Dallas, Texas, administered by the
AAA in accordance with the then-existing AAA Commercial Arbitration Rules.
Neither party nor the arbitrator shall disclose the existence, content, or
results of any arbitration hereunder without the prior written consent of all
parties.
(i) Designation of Arbitrator. The arbitration shall be conducted
-------------------------
before and by a single arbitrator who may be the same person who conducted the
mediation, unless either party objects. If either party objects to the mediator
conducting the arbitration, the arbitrator shall be selected by the AAA pursuant
to the then current rules of that association.
(ii) Federal Arbitration Act to Apply. Except as provided herein, the
--------------------------------
Federal Arbitration Act shall govern the interpretation, enforcement and all
proceedings pursuant to this subparagraph (b). All contractual and statutory
periods of limitations which would otherwise be applicable shall apply to any
arbitration proceeding hereunder. The parties agree that contractual
indemnification periods shall supersede statutory periods of limitation.
(iii) Timing. The arbitrator shall take such steps as may be
------
necessary to hold a private hearing within one-hundred twenty (120) days of the
submission of the Disputes to arbitration and to conclude such hearing within
three (3) days. The arbitrator shall render an award and a written, reasoned
opinion in support thereof not later than fourteen (14) calendar days after the
hearing. The parties have included these time limits in order to expedite the
proceeding, but they are not jurisdictional, and the arbitrator may for good
cause afford or permit reasonable extensions or delays, which shall not affect
the validity of the award. The award shall be final and binding upon the
parties, and judgment upon the award may be entered and enforced in any court
having jurisdiction thereof.
70
<PAGE>
(iv) Discovery. The arbitrator shall authorize such discovery as may
---------
be shown to be necessary to ensure a fair hearing; provided that, except as
--------
needed for presentation in lieu of a live appearance, each party shall be
limited to three (3) business days (9:00 a.m. to 5:00 p.m.) of depositions.
This limitation shall apply to each separate arbitration that may be conducted
pursuant to this Agreement. The parties shall be entitled to engage in document
discovery by requesting production of documents. Responses or objections to
such requests shall be served twenty (20) days after receipt of such a request.
The arbitrator shall resolve any discovery disputes by such prehearing
conference(s) as such arbitrator may deem necessary. The parties agree that the
arbitrator and any counsel of record to the proceeding shall have the power of
subpoena process as provided by law. The arbitrator shall not be bound by the
rules of evidence or of civil procedure, but rather may consider such writings
and oral presentations as such arbitrator or the parties may deem desirable or
necessary. The parties intend to limit live testimony and cross examination to
the extent necessary to ensure a fair hearing on material issues. Exhibit and
witness lists shall be exchanged ten (10) days before the hearing.
(v) Dispositive Motions. There shall be no dispositive motion
-------------------
practice.
(c) Provisional Remedies. The arbitrator appointed pursuant to
--------------------
subparagraph 10.12(b) may award injunctive relief or any other remedy available
from a judge, including the joinder of parties or consolidation of this
arbitration with any other involving common issues of law or fact which may
promote judicial economy. Adherence to this dispute resolution process shall
not limit the parties' right to obtain any provisional remedy, including without
limitation, injunctive or similar relief, from any court of competent
jurisdiction as may be necessary to protect their rights and interests.
Notwithstanding the foregoing sentence, this dispute resolution procedure is
intended to be the exclusive method of resolving any Disputes arising out of, in
connection with, or relating to this Agreement.
(d) Survival. The dispute resolution process set forth in this
--------
Section 10.12 shall survive the termination of this Agreement.
(e) Costs and Expenses. The cost of the mediator and arbitrator and
------------------
all AAA-related fees shall be borne equally by the parties. Reasonable
attorneys' fees shall be allocated and awarded by the arbitrator to the
prevailing party on each dispute submitted.
(f) Confidentiality. Any and all matters related to the arbitration,
---------------
including all discovery and all evidence presented at the arbitration hearing,
shall be treated as strictly confidential by the parties and arbitrator. The
award or decision of the arbitrator shall not be disclosed to any other party,
except as may be required by law or as may be needed to confirm or enforce this
award, or upon the written consent of all parties.
10.13 Waiver of Punitive Damages. Each of the parties hereto
--------------------------
expressly and unequivocally agrees to waive its right to recover punitive or
exemplary damages in connection with any claim arising out of, in connection
with, or in relation to this Agreement, except that this waiver shall not apply
to punitive or exemplary damages that may be awarded to a third party and
subject to indemnification under, or other provision of, Article IX.
71
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed on their respective behalf, by their respective officers
thereunto duly authorized, all as of the day and year first above written.
AMERICAN FIDELITY CORPORATION
By: _____________________________
William E. Durrett
Chairman of the Board
MERCURY GENERAL CORPORATION
By: ____________________________
Michael D. Curtius
Chief Operating Officer
72
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES - MERCURY GENERAL CORPORATION
Mercury Casualty Company (100% owned)
Mercury Insurance Company (100% owned by Mercury Casualty Company)
California General Underwriters Insurance Company, Inc. (100% owned by Mercury
Casualty Company)
California Automobile Insurance Company (100% owned)
Mercury Insurance Company of Georgia (100% owned by California Automobile
Insurance Company)
Mercury Indemnity Company of Georgia (100% owned)
Mercury Insurance Company of Illinois (100% owned)
Mercury Indemnity Company of Illinois (100% owned by Mercury Insurance Company
of Illinois)
American Fidelity Insurance Company (100% owned)
Cimarron Insurance Company (100% owned by American Fidelity Ins. Company)
AFI Management Company, Inc. (100% owned by American Fidelity Ins. Company) **
** Attorney-in-fact for American Fidelity Lloyds Insurance Co., whose results
are consolidated with Mercury General Corporation
<PAGE>
EXHIBIT 23.1
The Board of Directors
Mercury General Corporation
We consent to incorporation by reference in the registration statement No.
333-01583 on Form S-8 of Mercury General Corporation of our report dated
February 21, 1997, relating to the consolidated balance sheets of Mercury
General Corporation and subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of income, shareholders' equity, and cash flows
and related schedules for each of the years in the three-year period ended
December 31, 1996, which reports appear in the December 31, 1996 annual report
on Form 10-K of Mercury General Corporation
KPMG PEAT MARWICK LLP
Los Angeles, California
March 17, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<DEBT-HELD-FOR-SALE> 954,108
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 148,112
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 1,168,287
<CASH> 3,605
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 46,783
<TOTAL-ASSETS> 1,419,927
<POLICY-LOSSES> 336,685
<UNEARNED-PREMIUMS> 260,878
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0
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754,724
<INVESTMENT-INCOME> 70,180
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<UNDERWRITING-AMORTIZATION> 160,019
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<INCOME-PRETAX> 136,590
<INCOME-TAX> 30,826
<INCOME-CONTINUING> 105,764
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 105,764
<EPS-PRIMARY> 3.86
<EPS-DILUTED> 0
<RESERVE-OPEN> 250,990
<PROVISION-CURRENT> 529,952
<PROVISION-PRIOR> (3,868)
<PAYMENTS-CURRENT> 298,099
<PAYMENTS-PRIOR> 167,226
<RESERVE-CLOSE> 311,754
<CUMULATIVE-DEFICIENCY> 3,868
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