FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
(x) QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended March 31, 1999
( ) TRANSITION REPORT, PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-7801
ORION CAPITAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 95-6069054
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
9 Farm Springs Road, Farmington, Connecticut 06032
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (860) 674-6600
Former name, former address and former fiscal year if changed since last report.
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 ( )
Approximately 27.2 million shares of Common Stock, $1.00 par value, of the
registrant were outstanding on May 1, 1999.
Page 1 of 33
Exhibit Index Appears at Page 33
1
<PAGE>
ORION CAPITAL CORPORATION
FORM 10-Q INDEX
For the Quarter Ended March 31, 1999
Page
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheet at March 31, 1999 (Unaudited)
and December 31, 1998 3 - 4
Consolidated Statement of Operations for the three months
ended March 31, 1999 and 1998 (Unaudited) 5
Consolidated Statement of Stockholders' Equity for the three
months ended March 31, 1999 and 1998 (Unaudited),
and for the year-ended December 31, 1998 6
Consolidated Statement of Cash Flows for the three months
ended March 31, 1999 and 1998 (Unaudited) 7 - 8
Notes to Consolidated Financial Statements (Unaudited) 9 - 14
Independent Accountants' Review Report 15
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 16 - 31
PART II. OTHER INFORMATION 31
2
<PAGE>
PART I. FINANCIAL INFORMATION
ORION CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
ASSETS
March 31, 1999 December 31,
(In millions) (Unaudited) 1998
- --------------------------------------------------------------------------------
Assets:
Investments: -
Fixed maturities, at amortized cost
(market $270.3 - 1999 and $272.7 - 1998) .......... $ 260.2 $ 260.6
Fixed maturities, at market (amortized cost
$1,391.7 - 1999 and $1,305.5 - 1998) .............. 1,429.8 1,349.9
Common stocks, at market (cost $164.0 -
1999 and $200.3 - 1998) ........................... 189.6 242.4
Non-redeemable preferred stocks, at market
(cost $248.1 - 1999 and $269.1 - 1998) ............ 245.5 268.5
Other long-term investments .......................... 95.7 116.2
Short-term investments ............................... 198.7 248.7
---------- ----------
Total investments .............................. 2,419.5 2,486.3
Cash ................................................. 35.4 18.0
Accrued investment income ............................ 26.8 27.0
Investment in affiliate .............................. 22.8 22.8
Accounts and notes receivable ........................ 154.8 217.2
Reinsurance recoverables and prepaid reinsurance ..... 910.4 801.5
Deferred policy acquisition costs .................... 147.4 155.6
Property and equipment ............................... 100.7 95.4
Excess of cost over fair value of net assets acquired 166.1 167.7
Federal income taxes receivable ...................... 49.8 22.4
Deferred federal income taxes ........................ 53.7 26.7
Other assets ......................................... 118.5 123.8
---------- ----------
Total assets ................................... $ 4,205.9 $ 4,164.4
========== ==========
[FN]
See Notes to Consolidated Financial Statements (Unaudited)
</FN>
3
<PAGE>
ORION CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
March 31, 1999 December 31,
(In millions, except for share data) (Unaudited) 1998
- ------------------------------------------------------------------------------------
Liabilities:
Policy liabilities: -
<S> <C> <C>
Losses ................................................ $ 1,680.1 $ 1,602.1
Loss adjustment expenses .............................. 472.4 415.6
Unearned premiums ..................................... 560.3 564.0
Policyholders' dividends .............................. 18.1 17.9
---------- ----------
Total policy liabilities ................................ 2,730.9 2,599.6
Notes payable ........................................... 209.4 217.4
Other liabilities ....................................... 400.0 370.1
---------- ----------
Total liabilities ....................................... 3,340.3 3,187.1
---------- ----------
Contingencies (Note 6)
Company-obligated mandatorily redeemable preferred
capital securities of subsidiary trusts holding solely
the junior subordinated debentures of the Company .... 250.0 250.0
Stockholders' equity:
Preferred stock, authorized 5,000,000 shares; issued
and outstanding - none
Common stock, $1 par value; authorized 50,000,000
shares; issued 30,675,300 shares ..................... 30.7 30.7
Capital surplus ......................................... 147.7 149.6
Retained earnings ....................................... 455.8 553.2
Accumulated other comprehensive income .................. 42.4 58.5
Treasury stock, at cost (3,396,817 shares -
1999 and 3,505,091 shares - 1998)..................... (53.7) (57.8)
Deferred compensation on restricted stock ............... (7.3) (6.9)
---------- ----------
Total stockholders' equity .......................... 615.6 727.3
---------- ----------
Total liabilities and stockholders' equity .......... $ 4,205.9 $ 4,164.4
========== ==========
</TABLE>
[FN]
See Notes to Consolidated Financial Statements (Unaudited)
</FN>
4
<PAGE>
ORION CAPITAL CORPORATON AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
Three Months Ended March 31,
----------------------------
(In millions, except for per share data) 1999 1998
- -------------------------------------------------------------------------------
Revenues:
Premiums earned ....................................... $ 299.1 $ 348.8
Net investment income ................................. 34.4 41.4
Realized investment gains ............................. 1.7 29.0
Other income .......................................... 1.1 5.6
--------- ---------
Total revenues ....................................... 336.3 424.8
--------- ---------
Expenses:
Losses incurred and loss adjustment expenses .......... 365.6 232.3
Amortization of deferred policy acquisition costs ..... 87.7 100.8
Other insurance expenses .............................. 1.8 6.9
Dividends to policyholders ............................ 6.0 6.4
Interest expense ...................................... 4.6 5.8
Other expenses ........................................ 7.3 11.1
--------- ---------
Total expenses ....................................... 473.0 363.3
--------- ---------
Earnings (loss) before equity in earnings (loss) of
affiliate, federal income
taxes, minority interest expense and cumulative
effect of adoption of new accounting principle ..... (136.7) 61.5
Equity in earnings (loss) of affiliate ................ -- (0.6)
--------- ---------
Earnings (loss) before federal income taxes, minority
interest expense and cumulative effect of
adoption of new accounting principle ................ (136.7) 60.9
Federal income tax expense (benefit) .................. (52.1) 16.0
Minority interest expense of subsidiary trust
preferred securities, net of federal income taxes .. 3.4 2.7
--------- ---------
Earnings (loss) before cumulative effect of adoption of
new accounting principle ........................... (88.0) 42.2
Cumulative effect of adoption of new accounting
principle, net of tax............................... (4.6) --
--------- ---------
Net earnings (loss) .................................. $ (92.6) $ 42.2
========= =========
Net earnings (loss) per common share:
Earnings (loss) before cumulative effect of adoption of
new accounting principle ........................... $ (3.26) $ 1.54
Cumulative effect of adoption of new accounting
principle .......................................... (0.17) --
--------- ---------
Basic ................................................ $ (3.43) $ 1.54
========= =========
Earnings (loss) before cumulative effect of adoption of
new accounting principle ........................... $ (3.26) $ 1.50
Cumulative effect of adoption of new accounting
principle .......................................... (0.17) --
--------- ---------
Diluted .............................................. $ (3.43) $ 1.50
========= =========
[FN]
See Notes to Consolidated Financial Statements (Unaudited)
</FN>
5
<PAGE>
ORION CAPITAL CORPORATON AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended Year Ended
March 31, 1999 March 31, 1998 December 31, 1998
(In millions) (Unaudited) (Unaudited)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Common Stock $ 30.7 $ 30.7 $ 30.7
======= ======= =======
Capital Surplus:
Balance, beginning of period $ 149.6 $ 152.1 $ 152.1
Exercise of stock options and net
issuance of restricted stock (1.9) 0.7 (2.5)
------- ------- -------
Balance, end of period $ 147.7 $ 152.8 $ 149.6
======= ======= =======
Retained Earnings:
Balance, beginning of period $ 553.2 $ 469.5 $ 469.5
Net earnings (loss) (92.6) $ (92.6) 42.2 $ 42.2 102.8 $ 102.8
------- ------- -------
Dividends declared (4.8) (4.4) (19.1)
------- ------- -------
Balance, end of period $ 455.8 $ 507.3 $ 553.2
======= ======= =======
Accumulated Other
Comprehensive Income:
Balance, beginning of period $ 58.5 $ 109.2 $ 109.2
Unrealized investment
gains (losses), net of taxes (16.5) 5.5 (52.4)
Unrealized foreign exchange
translation gains, net of taxes 0.4 - 1.7
------- ------- -------
Other comprehensive income (loss) (16.1) (16.1) 5.5 5.5 (50.7) (50.7)
------- ------- ------- ------- ------- -------
Comprehensive income (loss) $(108.7) $ 47.7 $ 52.1
======= ======= =======
Balance, end of period $ 42.4 $ 114.7 $ 58.5
======= ======= =======
Treasury Stock:
Balance, beginning of period $ (57.8) $ (34.3) $ (34.3)
Exercise of stock options and net
issuance of restricted stock 4.1 1.6 13.4
Common stock issued pursuant to
employee stock purchase plan - - 1.1
Acquisition of treasury stock - (6.7) (38.0)
------- ------- -------
Balance, end of period $ (53.7) $ (39.4) $ (57.8)
======= ======= =======
Deferred Compensation on
Restricted Stock:
Balance, beginning of period $ (6.9) $ (4.1) $ (4.1)
Net issuance of restricted stock (1.0) (1.6) (4.3)
Amortization of deferred
compensation on restricted stock 0.6 0.4 1.5
------- ------- -------
Balance, end of period $ (7.3) $ (5.3) $ (6.9)
======= ======= =======
</TABLE>
[FN]
See Notes to Consolidated Financial Statements (Unaudited)
</FN>
6
<PAGE>
ORION CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
Three Months Ended March 31,
----------------------------
(In millions) 1999 1998
- --------------------------------------------------------------------------------
Cash flows from operating activities:
Premiums collected $ 357.5 $ 386.1
Net investment income collected 31.0 40.1
Losses and loss adjustment expenses paid (288.9) (241.5)
Policy acquisition costs paid (90.5) (115.6)
Dividends paid to policyholders (5.8) (7.2)
Interest paid (8.7) (9.7)
Payments on trust preferred securities (5.5) (5.5)
Federal income tax refunds (payments) 20.0 (8.5)
Other payments (7.2) (15.4)
------- -------
Net cash provided by operating activities 1.9 22.8
------- -------
Cash flows from investing activities:
Maturities of fixed maturity investments 31.4 54.9
Sales of fixed maturity investments 156.8 198.8
Sales of equity securities 165.2 108.0
Investments in fixed maturities (292.1) (240.5)
Investments in equity securities (98.1) (104.1)
Net sales (purchases) of short-term investments 55.5 (39.0)
Acquisition and divestiture activities (4.3) (2.9)
Purchase of property and equipment, net (9.2) (4.5)
Other receipts (payments) 21.9 (12.7)
------- -------
Net cash provided by (used in) investing activities 27.1 (42.0)
------- -------
Cash flows from financing activities:
Net proceeds from issuance of trust preferred securities - 121.9
Proceeds from exercise of stock options 1.2 0.7
Repayment of notes payable (8.0) (100.2)
Dividends paid to stockholders (4.8) (4.4)
Purchases of common stock - (6.6)
Other payments - (0.4)
------- -------
Net cash (used in) provided by financing activities (11.6) 11.0
------- -------
Net increase (decrease) in cash 17.4 (8.2)
Cash balance, beginning of period 18.0 9.3
------- -------
Cash balance, end of period $ 35.4 $ 1.1
======= =======
[FN]
See Notes to Consolidated Financial Statements (Unaudited)
</FN>
7
<PAGE>
ORION CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS - (Continued)
(UNAUDITED)
Three Months Ended March 31,
----------------------------
(In millions) 1999 1998
- --------------------------------------------------------------------------------
Reconciliation of net earnings (loss) to net cash
provided by operating activities:
Net earnings (loss) $ (92.6) $ 42.2
------- -------
Adjustments:
Cumulative effect of adoption of new
accounting principle 4.6 -
Depreciation and amortization 4.7 3.6
Amortization of excess of cost over fair
value of net assets acquired 1.5 1.3
Deferred federal income taxes (15.6) (0.9)
Amortization of fixed maturity investments 1.0 (0.6)
Non-cash investment income (2.2) (5.4)
Realized investment gains (1.7) (29.0)
Equity in loss of affiliate - 0.6
Changes in assets and liabilities, net of acquisition
and divestiture activities:
Decrease in accrued investment income 0.2 2.3
Decrease in accounts and notes receivable 15.4 4.1
Increase in reinsurance recoverable
and prepaid reinsurance (116.1) (76.9)
Increase in deferred policy acquisition costs (4.4) (6.3)
Decrease (increase) in federal income
taxes receivable (29.3) 8.5
Increase in other assets (9.5) (0.8)
Increase in losses and loss adjustment expenses 171.4 5.0
Increase in unearned premiums 36.3 14.1
Increase in policyholders' dividends 0.2 0.2
Increase in other liabilities 38.0 60.8
------- -------
Total adjustments and changes 94.5 (19.4)
------- -------
Net cash provided by operating activities $ 1.9 $ 22.8
======= =======
[FN]
See Notes to Consolidated Financial Statements (Unaudited)
</FN>
8
<PAGE>
ORION CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Three Months Ended March 31, 1999 and 1998
Note 1 - Basis of Financial Statement Presentation
The consolidated financial statements and notes thereto are prepared in
accordance with generally accepted accounting principles for property and
casualty insurance companies. The consolidated financial statements include
Orion Capital Corporation ("Orion") and its wholly-owned subsidiaries
(collectively the "Company"). All material intercompany balances and
transactions have been eliminated.
As of January 1, 1999, the Company adopted Statement of Position ("SOP")
98-1, Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use, issued by the American Institute of Certified Public Accountants
("AICPA"). This Statement requires that certain costs incurred in developing
internal-use computer software be capitalized, and provides guidance for
determining whether computer software is considered to be for internal use. The
Company will amortize these costs over the software's useful life, which is
generally a period of 3 to 6 years. Previously, the Company expensed internal
cost of computer software as incurred. The adoption of this statement resulted
in an after-tax benefit of $0.9 million, or $0.03 per common share, for the
three months ended March 31, 1999.
On January 1, 1999, the Company adopted SOP 97-3, Accounting by Insurance
and Other Enterprises for Insurance-Related Assessments, which provides guidance
for determining when an insurance or other enterprise should recognize a
liability for guaranty-fund and other insurance-related assessments and guidance
for measuring the liability. This Statement requires recognition of a liability
when it is probable that an assessment will be imposed, the amount of the
assessment can be reasonably estimated, and the event obligating a company to
pay has occurred. Previously, the Company expensed guaranty-fund and other
insurance-related assessments as reported to the Company. The cumulative effect
recorded at January 1, 1999, as if this new accounting standard was applied
retroactively for all periods, resulted in an after-tax charge of $4.6 million,
or $0.17 per common share.
In the opinion of management, the accompanying consolidated financial
statements reflect all adjustments (consisting solely of normal recurring
adjustments) necessary to present fairly the Company's results of operations,
financial position and cash flows for all periods presented. Although these
consolidated financial statements are unaudited, they have been reviewed by the
Company's independent accountants, Deloitte & Touche LLP, for conformity with
accounting requirements for interim financial reporting. Their report on such
review is included herein. These consolidated financial statements should be
read in conjunction with the consolidated financial statements and notes thereto
included in the Company's 1998 Annual Report on Form 10-K.
Note 2 - Realignment Events
As part of the final steps in a two-year reshaping of Orion Capital, the
Company recently completed a detailed study of its loss and loss adjustment
expense reserve position as of March 31, 1999. The loss reserve study, performed
with the assistance of independent actuarial advisors, focused on the businesses
that the Company has exited or plans to exit. As a result of this study, the
Company recorded a net pre-tax charge of $164.5 million in the first quarter of
1999 primarily
9
<PAGE>
ORION CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
related to the Specialty Commercial and Workers Compensation segments. The net
charge primarily comprised a provision for loss and loss adjustment expenses of
$139.0 million relating to 1998 and prior accident years, which was net of
reinsurance, and included a $25.5 million net ceded premium adjustment based
upon the Company's loss experience. Approximately $123.4 million of the loss
reserve provision is attributed to exited businesses. The study also reviewed
the reserve position for the Company's ongoing business in light of current
industry conditions. The Company recorded loss reserve strengthening of
approximately $15.6 million relating to its ongoing businesses including $8.4
million for EBI, $4.2 million for DPIC and $3.0 million for OrionAuto. Further,
the Company has adjusted loss ratios for the 1999 accident year in consideration
of the reserve study findings.
As part of the Company's reshaping to focus its resources on more
profitable business, on April 9, 1999 the Company sold Wm. H. McGee & Co. for
$59.4 million in cash resulting in a pre-tax gain of $40.2 million and an
after-tax gain of $26.3 million, which will be reported in the second quarter of
1999. In connection with the sale, the Company entered into reinsurance
agreements with the buyer transferring the Company's participation in McGee's
United States and Canadian pools effective as of January 1, 1999, resulting in
negative net premiums written of $40.0 million in the first quarter of 1999.
These transfers have resulted in a $23.5 million cash payment to the buyer on
the sale date for the transfer of the Company's net liabilities and assets of
the McGee pools. Additionally, the buyer was designated as the clearing company
for McGee pools effective January 1, 1999 under McGee's Inter-Office Reinsurance
Agreements. At December 31, 1998 and for the year then ended, the Company
reflected net premiums written and total revenue of approximately $104.4 million
and $100.2 million, respectively, and total assets of approximately $112.0
million related to sold business of McGee.
In the third quarter of 1998, the Company established a restructuring
reserve in connection with a realignment of Orion Specialty resulting in exiting
of approximately $100 million of unprofitable commodity business, primarily
commercial automobile and transportation. This restructuring included the
reduction of approximately 90 employees related to exited business. Activity for
the three months ended March 31, 1999 within this restructuring reserve was as
follows:
(In millions)
- -----------------------------------------------------------
Balance at December 31, 1998 $ 5.1
Actions taken:
Severance and program termination costs (0.9)
--------
Balance at March 31, 1999 $ 4.2
========
The Company is performing a strategic review of the $150 million book of
specialty commercial program and binding authority business of Orion Specialty.
See "Recent Activities" on page 17.
Note 3 - Investment in Affiliate
As of March 31, 1999, the carrying value of the Company's 26% investment in
Intercargo Corporation ("Intercargo") was $22.8 million, representing the amount
that the Company agreed to
10
<PAGE>
ORION CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
sell Intercargo in cash pursuant to Intercargo's merger with a subsidiary of XL
Capital, Ltd. See note 9 "Subsequent Event."
In 1998, the Company recorded its share of Intercargo's operating
results on a quarterly lag basis, after Intercargo has reported its financial
results. For the three months ended March 31, 1998, Intercargo reported $18.8
million of revenues and $2.1 million of net loss. The Company's proportionate
share of Intercargo net loss including goodwill amortization was $0.6 million
for the first quarter of 1998.
Note 4 - Reinsurance
In the normal course of business, the Company's insurance subsidiaries
reinsure certain risks, generally on an excess-of-loss or pro rata basis, with
other companies to limit its exposure to losses. Reinsurance does not discharge
the primary liability of the original insurer. The table below summarizes
certain reinsurance information for the three months ended March 31:
(In millions) 1999 1998
- --------------------------------------------------------------------------
Direct premiums written ............................$ 480.8 $ 441.7
Reinsurance assumed ................................ 32.6 14.1
------ ------
Gross premiums written ............................. 513.4 455.8
Reinsurance ceded .................................. (238.5) (86.8)
------ ------
Net premiums written ...............................$ 274.9 $ 369.0
====== ======
Direct premiums earned .............................$ 494.4 $ 435.6
Reinsurance assumed ................................ 15.4 10.9
------ ------
Gross premiums earned .............................. 509.8 446.5
Reinsurance ceded .................................. (210.7) (97.7)
------ ------
Net premiums earned ................................$ 299.1 $ 348.8
====== ======
Loss and loss adjustment expenses incurred
recoverable from reinsurers .....................$ 158.5 $ 70.4
====== ======
Note 5 - Stockholders' Equity and Earnings Per Common Share
During the first quarter of 1999, the Company repurchased 6,414 shares at
an aggregate cost of $0.2 million related to its employee benefit plans. During
the first quarter of 1998, the Company repurchased 132,000 shares of its common
stock at an aggregate cost of $6.6 million under the stock repurchase program
authorized by the Board of Directors and repurchased 2,377 shares at an
aggregate cost of $0.1 million related to its employee benefit plans. The
remaining authorization from the Company's Board of Directors for the purchase
of common stock was $42.5 million as of March 31, 1999.
Orion declared dividends on its common stock of $4.8 million and $4.4
million or $0.18 and $0.16 per common share for the three months ended March 31,
1999 and 1998, respectively.
11
<PAGE>
ORION CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
A reconciliation of basic and diluted earnings (loss) per share ("EPS") for
the three months ended March 31, 1999 and 1998 was as follows:
<TABLE>
<CAPTION>
Net
Earnings Average Per Share
(In millions, except for per share amounts) (loss) shares Amount
- ----------------------------------------------------------------------------------
1999 -
Basic EPS:
Net earnings (loss) available to
<S> <C> <C> <C>
common stockholders .................... $ (92.6) 27.0 $ (3.43)
========
Stock options and awards .................. -- --
-------- --------
Diluted EPS:
Net earnings (loss) available to common
stockholders with assumed exercises .... $ (92.6 27.0 $ (3.43)
======== ======== ========
1998 -
Basic EPS:
Net earnings available to
common stockholders .................... $ 42.2 27.4 $ 1.54
========
Stock options and awards .................. -- 0.7
-------- --------
Diluted EPS:
Net earnings available to common
stockholders with assumed exercises .... $ 42.2 28.1 $ 1.50
======== ======== ========
</TABLE>
The average shares for 1999 excludes equivalent shares of 279,000 in the
computation of diluted earnings per common share because to include them would
have been antidilutive.
Note 6 - Contingencies
Orion and its subsidiaries are routinely engaged in litigation incidental
to their businesses. Management believes that there are no significant legal
proceedings pending against the Company which, net of reserves established
therefore, are likely to result in judgments for amounts that are material to
the financial condition, liquidity or results of operations of Orion and its
consolidated subsidiaries, taken as a whole.
12
<PAGE>
ORION CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 7 - Accumulated Other Comprehensive Income
Accumulated other comprehensive income balances, net of taxes, are as
follows:
<TABLE>
<CAPTION>
Unrealized Unrealized Foreign Accumulated Other
Investment Gains Translation Comprehensive
(In millions) (Losses) Gains (Losses) Income (Loss)
- -------------------------------------------------------------------------------------
Quarter ended March 31, 1999:
<S> <C> <C> <C>
Balance, beginning of period ..... $ 61.2 $ (2.7) $ 58.5
Current period change ..... (16.5) 0.4 (16.1)
--------- --------- ---------
Balance, end of period ..... $ 44.7 $ (2.3) $ 42.4
========= ========= =========
Quarter ended March 31, 1998:
Balance, beginning of period ..... $ 113.6 $ (4.4) $ 109.2
Current period change ..... 5.5 -- 5.5
--------- ---------- ---------
Balance, end of period ..... $ 119.1 $ (4.4) $ 114.7
========= ========= =========
Year ended December 31, 1998:
Balance, beginning of year ..... $ 113.6 $ (4.4) $ 109.2
Current year change ..... (52.4) 1.7 (50.7)
--------- --------- ---------
Balance, end of year ..... $ 61.2 $ (2.7) $ 58.5
========= ========= =========
</TABLE>
The pretax unrealized investment gains (losses) arising during the period
were $(25.4) million and $8.6 million for the three months ended March 31, 1999
and 1998, respectively, and $(80.4) million for the year ended December 31,
1998. The pretax unrealized foreign exchange translation gains arising during
the period were $0.6 million for the three months ended March 31, 1999 and $2.6
million for the year ended December 31, 1998.
Note 8 - Segment Information
The Company reports its insurance operations in three segments at March 31,
1999. These reportable segments comprise operating units of the Company that
have different insurance products and services, market focus and operational
structure. The Company's reportable segments comprise:
Workers Compensation - this segment provides workers compensation insurance
products and services sold by the EBI Companies ("EBI")and includes package
commercial insurance policies that are no longer written by the Company.
Nonstandard Automobile - this segment specializes in nonstandard personal
automobile insurance sold by OrionAuto (formerly known as Guaranty National
Corporation).
13
<PAGE>
ORION CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Specialty Commercial - this segment markets various specialty commercial
products and services, primarily professional liability insurance through DPIC
Companies and client-focused specialty insurance programs through Orion
Specialty; and also includes the run-off operations of the Company's assumed
reinsurance business, SecurityRe, which was sold in late 1996. The Company
exited the marine business by selling its 26% interest in Intercargo (see Notes
3 and 9) and Wm. H. McGee (see Note 2).
Financial information for the Company's segments for the three months
ended March 31 is shown below and discussed in detail in "Results of Operations"
on page 18:
(In millions) 1999 1998
- ----------------------------------------------------------------------------
Revenues:
Workers Compensation ................................ $ 93.7 $ 119.8
Nonstandard Automobile .............................. 121.4 99.8
Specialty Commercial ................................ 118.4 203.1
Other ............................................... 2.8 2.1
-------- --------
Consolidated ..................................... $ 336.3 $ 424.8
======== ========
Pre-tax Earnings (Loss) before Minority Interest (a):
Workers Compensation ................................ $ (39.1) $ 28.4
Nonstandard Automobile .............................. 5.8 7.9
Specialty Commercial ................................ (98.9) 29.7
Other ............................................... (4.5) (5.1)
-------- --------
Consolidated ..................................... $ (136.7) $ 60.9
======== ========
(a) Excludes cumulative effect of adoption of new accounting principle in 1999
(see note 1).
The miscellaneous income and expenses (primarily interest, general and
administrative expenses and other consolidating elimination entries) of the
parent company are reported as "Other" in the above table.
Note 9 - Subsequent Event
In December 1998, the Company agreed to sell its 26% interest in Intercargo
in cash pursuant to Intercargo's merger with a subsidiary of XL Capital, Ltd.
Intercargo announced that its merger was consummated on May 7, 1999. The Company
will receive $22.8 million in cash from the sale in the near future. Also see
Note 2 regarding the sale of McGee.
14
<PAGE>
INDEPENDENT ACCOUNTANT'S REVIEW REPORT
Board of Directors and Stockholders
Orion Capital Corporation
Farmington, Connecticut
We have reviewed the accompanying consolidated balance sheet of Orion
Capital Corporation and subsidiaries (the "Company") as of March 31, 1999, and
the related consolidated statements of operations, stockholders' equity, and
cash flows for the three-month periods ended March 31, 1999 and 1998. These
financial statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and of making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to such consolidated financial statements for them to be in
conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Orion Capital Corporation and
subsidiaries as of December 31, 1998, and the related consolidated statements of
earnings, stockholders' equity and cash flows for the year then ended; and in
our report dated February 22, 1999 (except for Note 20, as to which the date is
March 11, 1999), we expressed an unqualified opinion on those consolidated
financial statements. The consolidated statements of earnings and cash flows for
the year ended December 31, 1998 are not presented herein. In our opinion, the
information set forth in the accompanying consolidated balance sheet as of
December 31, 1998 and related consolidated statement of stockholders' equity for
the year then ended is fairly stated, in all material respects, in relation to
the consolidated financial statements from which it has been derived.
DELOITTE & TOUCHE LLP
Hartford, Connecticut
May 7, 1999
15
<PAGE>
ORION CAPITAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
GENERAL
Orion Capital Corporation ("Orion") and its wholly-owned subsidiaries
(collectively the "Company") operate principally in the property and casualty
insurance business. The Company reports its insurance operations in three
segments as of March 31, 1999 as follows:
Workers Compensation - this segment markets the workers compensation insurance
products and services sold by the EBI Companies ("EBI")and includes package
commercial insurance policies that are no longer written by the Company.
Nonstandard Automobile - this segment specializes in nonstandard personal
automobile insurance sold by OrionAuto, formerly known as Guaranty National
Corporation.
Specialty Commercial - this segment presently markets various specialty
commercial products and services, primarily professional liability insurance
through DPIC Companies ("DPIC") and client-focused specialty insurance programs
through Orion Specialty; and also includes the run-off operations of the
Company's assumed reinsurance business, SecurityRe, which was sold in late 1996.
Over the past two years, Orion has been reshaping its business to focus its
resources on high potential lines of business. Business in Orion's workers
compensation segment is conducted through EBI, a specialty monoline workers
compensation operation. Orion has been reshaping EBI from a regional to a
national monoline workers compensation specialist.
In Orion's nonstandard personal automobile segment, Orion increased its
ownership in Guaranty National Corporation ("Guaranty National") to 100% in
December 1997 and then transformed Guaranty National (OrionAuto) into a focused
personal nonstandard automobile company. The commercial lines business of
Guaranty National was shifted to a newly-formed unit, Orion Specialty Group,
Inc. and integrated with Connecticut Specialty Insurance Group, Inc. Guaranty
National was recently renamed OrionAuto, Inc. The Company added scale to its
nonstandard automobile operation by acquiring two businesses, Unisun Insurance
Company in December 1997 and portions of Strickland Insurance Group in April
1998 expanding its geographic market to 35 states.
The Company continued the reshaping in its specialty commercial segment. As of
March 31, 1999, this segment included DPIC, Orion's professional liability
business, Wm. H. McGee & Co., Inc., the marine business, and Orion Specialty,
which includes ARTIS, our alternative risk business formed in June 1997, Orion
Financial (formerly Intercon), our collateral protection business and the
commercial lines business from Guaranty National and Connecticut Specialty. In
July 1998, the Company added a specialty insurance company serving the
independent grocery industry with the purchase of Grocers Insurance Group. The
Company sold a unit of Orion Specialty, Colorado Casualty Insurance Company, in
September 1998. Additionally, during the third quarter of 1998, the Company took
steps to exit a block of commercial automobile and transportation business,
representing approximately $100 million in net written premiums, that was highly
price-driven and was performing below our levels of expectations.
16
<PAGE>
In November 1996, the Company exited the assumed reinsurance business when it
sold the ongoing operations of our subsidiary, SecurityRe Companies, Inc. As a
result of the sale, SecurityRe ceased actively writing business and became an
inactive company.
RECENT ACTIVITIES
As part of its final reshaping initiatives, the Company in early May completed a
reserve study focused on business that has been or is in the process of being
exited. The reserve study was performed with the assistance of independent
actuarial advisors. In the first quarter of 1999, the Company strengthened its
loss and loss adjustment reserves by recording a net charge of $164.5 million on
a pre-tax basis and $106.9 million on an after-tax basis, or $3.96 per diluted
common share, in connection with the reserve study. The net charge is
substantially related to exited business. See section "Expense and Other -
Operating Ratios" on page 24.
Orion continues its reshaping of the specialty commercial segment to focus
resources on more profitable lines of business. As part of that effort, the
Company exited the marine business by selling our 26% interest in Intercargo
Corporation and Wm. H. McGee & Co., Inc. On April 9, 1999 the Company sold Wm.
H. McGee & Co. for $59.4 million in cash resulting in a pre-tax gain of $40.2
million and an after-tax gain of $26.3 million, which will be recorded in the
second quarter of 1999. In connection with the sale, the Company entered into
reinsurance agreements with the buyer transferring the Company's participation
in McGee's United States and Canadian pools effective January 1, 1999 resulting
in negative net premiums written of $40.0 million in the first quarter of 1999.
Additionally, the buyer was designated as the clearing company of the McGee
pools effective as of January 1, 1999 under McGee's Inter-Office Reinsurance
Agreements. The Company reflected net premiums written and total revenue of
approximately $104.4 million and $100.2 million, respectively, for the year
ended December 31, 1998 and total assets of approximately $112.0 million at
December 31, 1998 related to sold business of McGee.
In December 1998, the Company agreed to sell its investment in Intercargo for
$22.8 million (its current carrying value), or $12 per share, in cash pursuant
to the terms of Intercargo's merger with a subsidiary of XL Capital, Ltd.
Intercargo announced that its merger was consummated on May 7, 1999. The Company
will receive $22.8 million in cash from the sale in the near future.
In April 1999, the Company announced that it is working with financial advisors
on the final initiatives in its reshaping process, which includes a review of
strategic alternatives for the $150 million book of specialty commercial program
and binding authority business of Orion Specialty. The Company believes that the
specialty commercial program and binding authority business is the last piece of
Orion's operation that lacks market leadership or competitive advantage and will
explore a full range of options for it. Announcement of the results of that
review is anticipated during the third quarter of 1999.
Excluding the Orion Specialty business under strategic review, after all these
steps have been completed, the Specialty Commercial segment will include DPIC,
Orion Financial, Grocers Insurance, and ARTIS, and will have approximately $420
million of gross written premiums and approximately $298 million of net written
premiums based on 1998 volume.
17
<PAGE>
RESULTS OF OPERATIONS
OVERVIEW
Earnings (loss) by segment before federal income taxes, minority interest
expense and cumulative effect of adoption of new accounting principle for the
three months ended March 31 are summarized as follows:
(In millions) 1999 1998
- --------------------------------------------------------------
Workers Compensation $ (39.1) $ 28.4
Nonstandard Automobile 5.8 7.9
Specialty Commercial (98.9) 29.7
Other (4.5) (5.1)
----------- ------------
$ (136.7) $ 60.9
=========== ============
Miscellaneous income and expenses (primarily interest, general and
administrative expenses and other consolidating elimination entries) of the
parent company are reported as "Other" in the above table.
Operating earnings (loss), after-tax realized investment gains, net earnings
(loss) and per diluted common share amounts for the three months ended March 31
are summarized as follows:
(In millions, except for per share amounts and %) 1999 1998
- --------------------------------------------------------------------------------
Operating earnings (loss) .................. $ (89.1) $ 23.4
After-tax investment gains ................. 1.1 18.8
Cumulative effect of adoption of
new accounting principle ................ (4.6) --
------------ -----------
Net earnings (loss) ..................... $ (92.6) $ 42.2
============ ===========
Per diluted common share:
Operating earnings (loss) .................. $ (3.30) $ 0.83
After-tax investment gains ................. 0.04 0.67
Cumulative effect of adoption of
new accounting principle ................ (0.17) --
------------ -----------
Net earnings (loss) ..................... $ (3.43) $ 1.50
============ ===========
Operating earnings (loss) represents earnings (loss) after taxes, excluding net
realized investment gains and the cumulative effect of an accounting change. For
the first quarter of 1999, operating earnings were adversely effected by a
$106.9 million after-tax charge, or $3.96 per diluted share, related to an
increase in loss reserves in connection with a recently completed loss reserve
study. Excluding this charge, the Company's after-tax operating earnings would
be $17.8 million, or $0.66 per share.
The Company's results of operations for 1999 reflects a $4.6 million after-tax
charge, or $0.17 per diluted common share, for the cumulative effect of adoption
of a new accounting principle, AICPA Statement of Position 97-3 "Accounting by
Insurance and Other Enterprises for Insurance Related Assessments." See note 1
to the Company's condensed financial statements for discussion of new accounting
principles adopted by the Company in 1999.
18
<PAGE>
Weighted average common shares and diluted equivalents outstanding were
26,993,000 and 28,130,000 for the three months ended March 31, 1999 and 1998,
respectively. The average share for 1999 excludes equivalent shares of 279,000
in the computation of diluted earnings per common share because to include them
would have been antidilutive.
REVENUES
Revenues for the three months ended March 31 are summarized as follows:
Percentage
(In millions) 1999 1998 Change
- -----------------------------------------------------------------------------
Net Premiums written ........... $ 274.9 $ 369.0 (25.5)%
========= ========= =====
Premiums earned ................ $ 299.1 $ 348.8 (14.2)%
Net investment income .......... 34.4 41.4 (16.8)
Realized investment gains ...... 1.7 29.0 (94.0)
Other .......................... 1.1 5.6 (82.3)
--------- --------- -----
Total revenues .............. $ 336.3 $ 424.8 (20.8)%
========= ========= =====
PREMIUMS
The Company's gross premiums written by segment for the three months ended March
31 are as follows:
Percentage
(In millions) 1999 1998 Change
- ---------------------------------------------------------------------------
Workers Compensation $ 147.1 $ 115.6 27.2%
Nonstandard Automobile 152.4 127.6 19.4
Specialty Commercial 213.9 212.6 0.6
--------- --------- ----
Consolidated $ 513.4 $ 455.8 12.6%
========= ========= ====
The Company's net premiums written by segment for the three months ended March
31 are as follows:
Percentage
(In millions) 1999 1998 Change
- ---------------------------------------------------------------------------
Workers Compensation ..................$ 94.7 $ 110.7 (14.5)%
Nonstandard Automobile ................ 124.8 96.0 29.9
Specialty Commercial .................. 55.4 162.3 (65.8)
--------- --------- -----
Consolidated ....................$ 274.9 $ 369.0 (25.5)%
========= ========= =====
Consolidated, excluding McGee ...$ 314.9 $ 352.4 (10.7)%
========= ========= =====
In connection with the sale of McGee in April 1999, the Company transferred its
participation in McGee's United States and Canadian pools effective January 1,
19
<PAGE>
1999, resulting in a $40.0 million reduction to net written premiums and no
effect on premiums earned in the first quarter of 1999. In the first quarter of
1999, based on the Company's loss experience, the Company also ceded an
additional $35.2 million of premiums under a corporate-wide aggregate stop loss
reinsurance agreement entered into in 1998 related to the 1998 accident year.
The Company does not expect to use corporate-wide aggregate stop loss agreements
for the 1999 accident year.
Workers Compensation
Net premiums written for Workers Compensation decreased by 14.5% in the first
quarter of 1999 compared to the same 1998 period reflecting lower premium
retention of $46.7 million primarily from a change in EBI's reinsurance programs
effective October 1998. The effect of this change was partly offset by gross
premium growth of $30.7 million from new business written through EBI's
multi-state accounts program and continued geographic expansion and penetration.
In order to improve profitability, EBI has instituted rate increases, which is
expected to reduce the growth of EBI's gross premiums written for the remainder
of 1999.
NONSTANDARD AUTOMOBILE
Net premiums written for Nonstandard Automobile increased by 29.9% in the first
quarter of 1999 compared to the same 1998 period primarily due to increased
premiums of $12.1 million from the acquisition of Strickland in April 1998 and
higher net premiums in South Carolina of $9.0 million from transitioning to a
voluntary market environment in that state on March 1, 1999. OrionAuto generated
net premium growth in 25 of the 35 states where it writes business in the first
quarter of 1999 compared to the same 1998 period. Excluding the acquisitions of
Strickland and Unisun, Nonstandard Automobile's gross premiums written and net
premiums written growth was 5.6% and 7.6% in the first quarter of 1999 compared
to the same 1998 period.
SPECIALTY COMMERCIAL
Gross premiums written, excluding McGee, for the three months ended March 31 are
as follows:
Percentage
(In millions) 1999 1998 Change
- ---------------------------------------------------------------------------
Orion Specialty ......................... $ 135.1 $ 115.0 17.5%
DPIC .................................... 52.0 49.9 4.1
Assumed reinsurance and eliminations .... (1.5) (0.8)
------- ------- ----
$ 185.6 $ 164.1 13.1%
======= ======= ====
20
<PAGE>
Net premiums written for the three months ended March 31 are as follows:
Percentage
(In millions) 1999 1998 Change
- ---------------------------------------------------------------------------
Orion Specialty ........................ $ 57.0 $ 103.5 (44.9)%
DPIC ................................... 38.4 42.3 (9.1)
McGee .................................. (40.0) 16.6
-------- ------- -----
55.4 162.4 (65.9)
Assumed reinsurance .................... -- (0.1)
-------- ------- -----
Specialty Commercial ................ $ 55.4 $ 162.3 (65.8)%
======== ======= =====
Specialty Commercial, excluding McGee $ 95.4 $ 145.7 (34.5)%
======== ======= =====
Net premiums written by DPIC for professional liability insurance, the largest
special program, decreased 9.1% in the first quarter of 1999 compared to the
same 1998 period primarily as a result of increased use of reinsurance in its
lawyers and accountants programs, offset in part by continued high levels of
policy renewals.
Net premiums written by Orion Specialty decreased by 44.9% in the first quarter
of 1999 compared to the same 1998 period primarily due to the effect of exiting
unprofitable commodity business in connection with the third quarter 1998
realignment of this unit, $23.9 million of ceded premiums in 1999 under the
corporate-wide reinsurance agreement previously mentioned and lower premiums of
$13.6 million from the sale of Colorado Casualty Insurance Company in September
1998. The decreases were partly offset by increased net written premiums of
$13.7 million from the acquisition of Grocers Insurance Group in July 1998.
Orion Specialty's Financial Services Division, which primarily writes collateral
protection insurance, had gross premiums written of $31.7 million and $25.2
million for the three months ended March 31, 1999 and 1998, respectively, and
corresponding net premiums written of $20.4 million in 1999 and $21.4 million in
1998. ARTIS, our alternative risk business formed in June 1997, had gross and
net premiums written of $26.7 million and $0.7 million in the first quarter of
1999, respectively, as compared to $5.7 million of gross and no net premiums
written for the same 1998 period.
In the first quarter of 1999, McGee recorded negative net premiums written of
$40.0 million reflecting the unearned premium portfolio transferred as of
January 1, 1999 in connection with the sale of McGee.
PREMIUMS EARNED
The Company's premiums earned decreased 14.2% to $299.1 million in the first
quarter of 1999 from $348.8 million ($334.6 million excluding McGee) in the
corresponding 1998 period. Premiums earned reflect the recognition of income
from the changing levels of net premium writings.
OTHER INCOME
Other income is $1.1 million and $5.6 million for the first quarters of 1999 and
1998, respectively. The decrease is due to lower commission income resulting
from the sale of McGee. As part of the McGee sale, the buyer was designated as
the clearing company of the pools managed by McGee effective January 1, 1999.
21
<PAGE>
INVESTMENT PERFORMANCE
The Company manages its investment portfolio on a total return basis which
emphasizes both current net investment income and realized investment gains as
well as unrealized investment results. The pre-tax performance of the Company's
investments, including net investment income, net realized gains (losses) and
net unrealized appreciation (depreciation) for the three months ended March 31
is as follows:
(In millions, except for %) 1999 1998
- ------------------------------------------------------------------------------
Net investment income ............................$ 34.4 $ 41.4
Realized investment gains ........................ 1.7 29.0
Unrealized appreciation (depreciation) ........... (27.4) 8.1
------------ -----------
$ 8.7 $ 78.5
============ ===========
Investment yields on average portfolio:
Pre-tax ....................................... 5.7% 7.0%
After-tax ..................................... 4.5% 5.5%
Carrying value: ................................March 31, 1999 December 31, 1998
--------------------------------
Fixed maturities and short-term investments .$ 1,888.7 $ 1,859.2
Equity securities ........................... 435.1 510.9
Other long-term investments ................. 95.7 116.2
------------ -----------
$ 2,419.5 $ 2,486.3
============ ===========
NET INVESTMENT INCOME
Pre-tax net investment income decreased by $7.0 million in the first quarter of
1999 compared to the same 1998 period primarily due to lower earnings on limited
partnership investments accounted for on an equity basis, a continued shift in
the fixed income portfolio from taxable to tax-advantaged securities and the
impact of lower reinvestment rates in 1998 and in the first quarter of 1999
resulting in reduced investment yields of the Company's fixed income portfolio.
Net investment income includes equity earnings in limited partnership
investments of $2.0 million in the first quarter of 1999 and $5.2 million for
the same 1998 period, partially the result of planned reductions in these
investments. Earnings from limited partnership investments can vary considerably
from year-to-year. Although, the Company's long-term experience with limited
partnership investments has been quite favorable; they represent 3.8% and 4.5%
of total investments at March 31, 1999 and December 31, 1998, respectively.
Fixed maturity investments which the Company has both the positive intent and
the ability to hold to maturity are recorded at amortized cost. Fixed maturity
investments which may be sold in response to, among other things, changes in
interest rates, prepayment risk, income tax strategies or liquidity needs are
classified as available-for-sale and are carried at market value. The carrying
value of fixed maturity and short-term investments is $1,888.7 million at March
31, 1999 and $1,859.2 million at December 31, 1998, or approximately 76.9% and
74.2% of the Company's cash and investments, respectively.
The Company manages its total investments, so that at all times, there are fixed
income securities that are adequate in amount and duration to meet the cash
22
<PAGE>
requirements of current operations and longer term liabilities, as well as to
meet insurance regulatory requirements with respect to investments under
specific state insurance laws. The Company invests primarily in investment grade
securities and additionally invests a portion of its portfolio in a diversified
group of non-investment grade fixed maturity securities or securities that are
not rated to increase the portfolio average return. The risk of loss due to
default is generally considered greater for non-investment grade securities than
for investment grade securities because the former, among other things, are
often subordinated to other indebtedness of the issuer and are often issued by
highly leveraged companies. At March 31, 1999 and December 31, 1998, the
Company's investment in non-investment grade and non-rated fixed maturity
securities were as follows:
(In millions, except for %) March 31, 1999 December 31, 1998
- --------------------------------------------------------------------------------
Non-investment grade and
non-rated fixed maturity securities $ 156.9 $ 208.7
As percentage of total cash and investments 6.4% 8.3%
As percentage of total assets 3.7% 5.0%
REALIZED AND UNREALIZED INVESTMENT RESULTS
Net realized investment gains are $1.7 million and $29.0 million for the three
months ended March 31, 1999 and 1998, respectively. Approximately one-half of
the first quarter 1998 net realized investment gains resulted from the sale of
two investments in entities which were acquired or taken public during that
quarter. Realized investment gains may be reduced by provisions for losses on
securities deemed to be other-than-temporarily impaired. Any such provision is
based on available information at the time and is made in consideration of the
decline in the financial condition of the issuers of such securities. Realized
investment gains (losses) vary from period to period, depending on market
conditions relative to the Company's investment holdings, the timing of
investment sales generating gains and losses, the occurrence of events which
give rise to other-than-temporary impairment of investments, and other factors.
The Company has a new outside investment manager that is repositioning part of
the Company's investment portfolio and expects the repositioning to be complete
by June 30, 1999.
Net unrealized investment appreciation (depreciation) for equity securities and
fixed maturities classified as available-for-sale are recorded in stockholders'
equity, net of federal taxes, and included as a component of other comprehensive
income (see note 7 to condensed financial statements). Unrealized investment
appreciation (depreciation) can vary significantly depending upon fluctuations
in interest rates, changes in credit spreads and in equity prices.
23
<PAGE>
EXPENSES AND OTHER
OPERATING RATIOS
The following table sets forth certain ratios of insurance operating expenses to
premiums earned for the three months ended March 31:
1999 1998
- -------------------------------------------------------------------------------
Loss and loss adjustment expenses 122.2% 66.5%
Policy acquisition costs and other insurance expenses 29.9 31.0
-------- --------
Total before policyholders' dividends 152.1 97.5
Policyholders' dividends 2.0 1.8
-------- --------
Combined ratio 154.1% 99.3%
======== ========
Loss and loss adjustment expenses ratio by segment:
Workers Compensation 115.6% 56.6%
Nonstandard Automobile 72.9 72.0
Specialty Commercial 185.3 69.6
In the third quarter of 1998, the Company announced a realignment of Orion
Specialty to address lines of business that had not met growth and profitability
expectations. The realignment continued Orion Specialty's shift away from
commodity business. The Company's recent trends in the loss development of the
previously cancelled program business at Orion Specialty indicated a
deterioration of claims experience and prompted the recently completed loss
reserve study.
In the first quarter of 1999, the ratio of loss and loss adjustment expenses to
premiums earned (the "loss ratio") of 122.2% reflects significant strengthening
of the Company's reserve position as of March 31, 1999 based upon a recently
completed loss reserve study.
Excluding the provision for loss and loss adjustment expenses recorded in
connection with the loss reserve study, the loss and loss adjustment expenses
ratio by segment for the three months ended March 31, 1999 would have been 62.3%
for Workers Compensation, 70.3% for Nonstandard Automobile, and 69.6% for
Specialty Commercial.
The Company made the decision to conduct a review of its loss reserves for
exited business and to review strategic alternatives for Orion Specialty's
remaining program and binding authority business in the first quarter of 1999 as
part of the final steps in an aggressive two-year reshaping of the Company's
business. The Company expanded the analysis to a full-scale review of all
reserves and elected to add the perspective of an independent actuarial review.
As a result of this study, in the first quarter of 1999, the Company recorded a
provision for loss and loss adjustment expenses of $139.0 million related to the
1998 and prior accident years, which was net of reinsurance, and included a
$25.5 million net ceded premium adjustment based upon the Company's loss
experience. The loss reserve study focused on the business that the Company has
exited or plans to exit and the provision included costs of settling outstanding
claims for exited business. Approximately 89% of the net provision were
attributed to businesses that the Company has exited and will be exiting.
The loss reserve study also reviewed the reserve positions for the Company's
ongoing business in light of current market conditions and industry trends.
Approximately 11% of the loss reserve strengthening is related to ongoing
business, including $8.4 million for EBI, $4.2 million for DPIC and $3.0 million
for OrionAuto. Further, the Company has adjusted loss ratios for the 1999
accident year in consideration of the reserve study findings.
24
<PAGE>
The 1999 first-quarter loss ratio for Workers Compensation reflects $31.9
million of reserve strengthening related to non-workers compensation lines that
originated in this segment, but are no longer written by the Company.
Additionally, EBI strengthened its net reserves in the first quarter 1999 by
recording a loss and loss adjustment expense provision of $8.4 million primarily
relating to the 1998 accident year as a result of the loss reserve study. The
benefit of EBI's service-oriented approach, working with its customers to
prevent losses and reduce claim costs, has allowed EBI to report better than
industry results.
The 1999 loss ratio for Nonstandard Automobile reflects an increase in loss
costs resulting from the loss reserve study substantially offset by a decrease
in loss adjustment expenses from continued improvements in efficiencies.
In connection with the loss reserve study, in the first quarter of 1999,
Specialty Commercial strengthened its loss reserve positions by recording a net
provision for loss and loss adjustment expenses of $95.7 million related to 1998
and prior accident years. Approximately $47.1 million of this net charge is
related to the assumed reinsurance business that the Company exited in late
1996, $44.4 million is related to the exited program and binding authority
business at Orion Specialty, and $4.2 million is related to the ongoing business
at DPIC.
The ratio of policy acquisition costs and other insurance expenses to premiums
earned (the "expense ratio") improved to 29.9% from 31.0% for the three months
ended March 31, 1999 and 1998, respectively. The lower expense ratio is
primarily due to a favorable change in the Company's total business mix with an
increasing percentage of business in Nonstandard Automobile and a declining
percentage in Specialty Commercial, as well as the Company's actions to decrease
operating expenses. Policy acquisition costs include direct costs, such as
commissions, premium taxes, and salaries that relate to and vary with the
production of new business. These costs are deferred and amortized as the
related premiums are earned, subject to a periodic test for recoverability.
The Company regularly evaluates its reserves for loss and loss adjustment
expenses. Loss reserve amounts are based on management's informed estimates and
judgements, using data currently available. As part of the evaluation of its
first quarter loss reserve position, the Company took the additional action of
having an independent actuarial review of its loss reserves. The results of
which were considered in the increases in loss reserves during the first quarter
of 1999. Management believes that the Company's reserves for loss and loss
adjustment expenses make reasonable and sufficient provision for the ultimate
cost of all losses on claims incurred. Although there can be no assurance that
changes in loss trends will not result in additional development of prior years'
reserves in the future, the Company believes that the current and prospective
loss reserving reflects an increased level of conservatism. Variability in claim
emergence and settlement patterns and other trends in loss experience can result
in future development patterns different than expected. The Company believes
that any such variability or development will generally be at low levels,
considering actions that have been taken to increase loss reserving levels,
improve underwriting standards and emphasize loss prevention and control.
The Company limits both current losses and future development of losses by
ceding business to reinsurers. The Company continually monitors the financial
strength of its reinsurers and, to the Company's knowledge, has no material
exposure with regard to potential unrecognized losses due to reinsurers having
known financial difficulties.
25
<PAGE>
INTEREST EXPENSE
Interest expense is $4.6 million and $5.8 million for the first quarters of 1999
and 1998, respectively. Interest expense declined as a result of the repayment
of the $100 million bank indebtedness of Guaranty National in February 1998 with
proceeds from the issuance of the Company's 7.701% trust preferred securities.
OTHER EXPENSES
Other expenses are $7.3 million and $11.1 million for the first quarters of 1999
and 1998, respectively. The decrease is primarily due to the elimination of
McGee agency expense resulting from the sale of this unit.
EQUITY IN EARNINGS (LOSS) OF AFFILIATE
Equity in loss of affiliate consists of a loss of $0.6 million in the first
quarter of 1998 from the Company's 26% investment in Intercargo. In December
1998, the Company has agreed to sell its investment in Intercargo pursuant to
the terms of a merger agreement between Intercargo and a subsidiary of XL
Capital, Ltd., and reduced its carrying value of Intercargo to the sale price of
$22.8 million. The Company continued to carry its investment in Intercargo at
$22.8 million in the first quarter of 1999. Intercargo announced that its merger
was consummated on May 7, 1999. The Company will receive $22.8 million in cash
from the sale in the near future.
FEDERAL INCOME TAXES (BENEFITS)
Federal income taxes (benefits), including tax benefits from trust preferred
securities and excluding tax benefits from an accounting change, and the related
effective tax rates are $(53.9) million (-38.0%) and $14.5 million (25.6%) for
the first quarters of 1999 and 1998, respectively. The Company's effective tax
rates for 1999 and 1998 are different than the statutory tax rate of 35%
primarily because of income derived from tax-advantaged securities. The 1999
first quarter effective tax rate has been calculated on a discrete period basis
giving effect of expected tax benefits to be realized during the year.
MINORITY INTEREST EXPENSE
Minority interest expense in subsidiary trust preferred securities of $3.4
million and $2.7 million for the first quarters of 1999 and 1998, respectively,
represents the financing cost, after the federal income tax deduction, on
Orion's 8.73% and 7.701% trust preferred securities. The increase in 1999
reflects minority interest expense associated with the issuance of $125 million
7.701% trust preferred securities in February 1998.
26
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash flows for the three months ended March 31 is as follows:
(In millions) 1999 1998
- --------------------------------------------------------------
Cash flows:
Operating activities $ 1.9 $ 22.8
Investing activities 27.1 (42.0)
Financing activities (11.6) 11.0
----------- -----------
$ 17.4 $ (8.2)
=========== ===========
Cash provided by operating activities decreased by $20.9 million to $1.9 million
in the first quarter of 1999 from $22.8 million in the first quarter of 1998.
The decrease in operating cash flow in 1999 is primarily the result of higher
payments for losses and loss adjustment expenses, largely influenced by the
runoff of exited business, and reductions in premium and investment income
collections as well as certain timing differences related to reinsurance.
Partially offsetting these cash flow changes were declines in policy acquisition
costs and federal income tax payments, as well as a $20.0 million federal tax
refund received by the Company. The sale of McGee did not result in a
significant change to operating cash flow in the first quarter of 1999 as
compared to the same 1998 period. However, McGee generated $15.6 million of
operating cash for the 1998 year. Due to the anticipated level of claim payments
from exited business, operating cash flow for 1999 is expected to be less than
1998. The Company's existing cash and expected investment maturities are
anticipated to be adequate to cover any additional operating cash flow needs in
1999.
Cash provided by investment activities increased by $69.1 million in the first
quarter of 1999 to $27.1 million from cash used in investment activities of
$42.0 million in the first quarter of 1998. Cash is used in or provided by
investment activities primarily for purchases or sales and maturities of
investments, and for acquisition and from divestiture activities, and for
purchases of property and equipment. Investment purchases are funded by
maturities and sales of investments, as well as by the net cash from operating
cash flows after cash provided by or used in financing activities. In April
1999, the Company received approximately $33.9 million of net cash in connection
with the sale of McGee. Additionally, the Company will receive $22.8 million of
cash related to the sale of Intercargo in the second quarter of 1999.
Cash (used in) provided by financing activities were $(11.6) million and $11.0
million for the three months ended March 31, 1999 and 1998, respectively. The
Company repaid the outstanding balance of $8.0 million under its bank credit
agreement in the first quarter of 1999. The issuance of 7.701% trust preferred
securities by the Company provided $121.9 million of cash in the first quarter
of 1998. Net proceeds from that issuance were used to repay the $100 million
bank indebtedness of Guaranty National in February 1998.
Orion's uses of cash consist of debt service, dividends to stockholders and
overhead expenses. These cash uses are funded from existing available cash,
financing transactions and receipt of dividends, reimbursement of overhead
expenses, debt service costs from loans due from subsidiaries, and amounts in
lieu of federal income taxes from Orion's insurance subsidiaries. Payments of
dividends by Orion's insurance subsidiaries must comply with insurance
regulatory limitations concerning stockholder dividends and capital adequacy.
State insurance regulators have broad discretionary authority with respect to
limitations on the payment of dividends by insurance companies. Limitations
under current regulations are well in excess of Orion's cash requirements.
27
<PAGE>
Orion's insurance subsidiaries maintain liquidity in their investment portfolios
substantially in excess of that required to pay claims and expenses. The
insurance subsidiaries held cash and short-term investments of $204.2 million
and $242.4 million at March 31, 1999 and December 31, 1998, respectively. The
consolidated policyholders' surplus of Orion's insurance subsidiaries is $637.7
million and $732.1 million at March 31, 1999 and December 31, 1998,
respectively. The Company's statutory operating leverage ratios of trailing
twelve months net premiums written to policyholders' surplus is 2.2:1 and 2.1:1
at March 31, 1999 and December 31, 1998, respectively.
In July 1998, the Company entered into a five year credit agreement with a group
of banks which provides for unsecured borrowings up to $150 million. No
borrowings are outstanding at March 31, 1999. The Company intends to use the
credit facility for general corporate purposes, which may include acquisitions.
Borrowings under the credit agreement bear interest at LIBOR (London Interbank
Offered Rate) plus a margin based upon the Company's credit ratings. The credit
agreement, as amended, requires the Company to maintain certain defined
financial covenants and may limit the Company's ability to incur secured
indebtedness or certain contingent obligations. The Company is in compliance
with the terms of this credit agreement. Management does not believe that the
credit agreement's covenants or limitations unduly restrict the Company's
operations or limit Orion's ability to acquire additional indebtedness.
The terms of Orion's indentures for its $100 million of 7.25% Senior Notes due
2005 and its $110 million of 9.125% Senior Notes due 2002 limit the amount of
liens and guarantees by the Company, and the Company's ability to incur secured
indebtedness without equally and ratably securing the senior notes. Management
does not believe that these limitations unduly restrict the Company's operations
or limit Orion's ability to pay dividends on its stock. At March 31, 1999 the
Company is in compliance with the terms of its senior note indentures.
In February 1998, Orion issued $125 million of 7.701% Trust Preferred Securities
due April 15, 2028. In January 1997, Orion also issued $125 million of 8.73%
Trust Preferred Securities due January 1, 2037. The 8.73% and 7.701% Trust
Preferred Securities are subordinated to all liabilities of the Company. The
Company may defer interest distributions on these Trust Preferred Securities;
however, during any period when such cumulative distributions have been
deferred, Orion may not declare or pay any dividends or distributions on its
common stock.
Management believes that the Company continues to have substantial sources of
capital and liquidity from the capital markets and bank borrowings.
The Company has repurchased 132,000 shares of its common stock at an aggregate
cost of $6.6 million under the stock repurchase program in the first quarter of
1998. No repurchases under this program were made in 1999. At March 31, 1999 the
Company's remaining stock purchase authorization from its Board of Directors
amounted to $42.5 million.
LEGAL PROCEEDINGS
Orion and its subsidiaries are routinely engaged in litigation incidental to
their businesses. Management believes that there are no significant legal
proceedings pending against the Company which, net of reserves established
therefor, are likely to result in judgments for amounts that are material to the
financial condition, liquidity or results of operations of Orion and its
consolidated subsidiaries, taken as a whole.
28
<PAGE>
YEAR 2000 COMPLIANCE
The "Year 2000 problem" exists because many computer programs which companies
use rely on only the last two digits to refer to a particular year. As a result,
these computer programs may interpret the Year 2000 as 1900. If not corrected,
computer software may fail or create erroneous results. The potential impact of
the Year 2000 problem on business, financial and governmental entities
throughout the world is not known and, if not timely corrected, may broadly
affect the national economy in which we operate.
The Company concluded that as an extensive user of technology, it has a material
exposure to the Year 2000 problem and has taken steps to assess and address that
exposure. In response to this issue, the Company has inventoried and assessed,
for all its operations and locations, its insurance policy issuance, billing and
collection, claims paying, and other operational systems, along with the
hardware and software used in its computing facilities, embedded chips used in
its physical structures, third party data-exchanges, and reliance on external
business relations. This work has been carried out by the Company through
central coordination supported by dedicated teams working at each Company site.
Progress has been reviewed regularly by senior management. The process by which
the Company is managing its Year 2000 efforts has also been reviewed by
independent consultants.
The Company began addressing its computer programs in 1996 at the locations
where its most significant technology concentration exists. Similar work
commenced shortly thereafter at other locations. As of March 31, 1999, the
Company had completed approximately 97% of its scheduled remediation of critical
production systems for processing Year 2000 dates. This places the Company on or
ahead of its plan for meeting Year 2000 processing needs. Non-critical systems
will be tested and critical systems will be re-tested during 1999. The total
costs to test or modify these existing systems, which include both internal and
external costs of programming and testing, is estimated to be approximately
$20.0 million, of which $0.5 million has been expensed in the first quarter of
1999 and $15.8 million in 1998 and prior periods.
With a timely start on correcting the Year 2000 problem, the Company has been
able to address this potential exposure while continuing to replace outdated
systems with newer versions offering greater functionality and cost
efficiencies. The Company completed replacing its financial, personnel, and
payroll systems in 1998 and began phasing in new integrated processing systems
for certain other operations in 1999. Those major technology improvement
projects, which were substantially completed in 1998, totaled approximately
$13.0 million and have been or will be capitalized as fixed assets. The Company
does not expect to incur any significant Year 2000 capital expenditures in 1999.
In addition to addressing its own hardware, software and processing exposure,
the Company has been engaged since 1996 in a process of identifying and
prioritizing critical suppliers and customers at the direct interface level, and
communicating with them about their plans and progress in addressing the Year
2000 problem.
The Company has mailed letters to significant vendors and service providers and
has verbally communicated with many strategic customers to determine the extent
to which interfaces with such entities are vulnerable to Year 2000 problems and
whether the products and services purchased from or by such entities are Year
2000 compliant. As of March 31, 1999, the Company had received responses from
approximately 89% of the third parties of whom it has inquired and 97% of the
companies that have responded have provided written assurances that they expect
to address all their significant Year 2000 problems on a timely basis.
29
<PAGE>
Evaluations of the most critical third parties have been initiated. These
evaluations will be followed by the development of contingency plans, which have
already been prepared for third parties having near term Year 2000 impact.
During the first quarter of 1999, contingency plans were finalized for all
critical production systems. Focus has been shifting to third parties and
non-technical functions. During the third quarter of 1999, appropriate
contingency plans will be completed for all critical third party relationships
and business functions. The Company believes that this aspect of its Year 2000
effort was on schedule at March 31, 1999.
A follow-up mailing to significant vendors and service providers that did not
initially respond, or whose responses were deemed unsatisfactory by the Company,
was completed by March 31,1999. The Company also expanded its survey to vendors
and service providers who do not directly interface with the Company's systems.
In the third quarter of 1999, the Company plans to re-survey all critical third
parties.
The Company presently believes that the Year 2000 problems will not pose
significant operational problems for the Company. However, if a Year 2000
problem is not properly identified so that assessment, remediation and testing
can be effected timely, there can be no assurance that the Year 2000 issue will
not materially adversely impact the Company's results of operations or adversely
affect the Company's relationships with customers, vendors, or others.
The Company is unable to determine at this time whether the consequences of
counter-parties' Year 2000 failures will have a material impact on the Company's
results of operations, liquidity or financial condition. The possibility exists
that a portion of its third-party distribution channels may not be ready, that
communications with its agents could be disrupted, that underwriting data, such
as motor vehicle reports, could be unobtainable, that the claim settling process
could be delayed or that the frequency and severity of losses may increase due
to external factors. Where concern appears justified about an aspect of
readiness, contingency plans have been and will be prepared. However, there can
be no assurance that unanticipated Year 2000 issues of other entities will not
have a material adverse impact on the Company's systems or results of
operations.
This is a Year 2000 Readiness Disclosure statement. Readers are cautioned that
forward-looking statements contained in "Year 2000 Compliance" should be read in
conjunction with the Company's disclosures under the heading: "Forward-Looking
Statements."
ACCOUNTING PRONOUNCEMENTS TO BE ADOPTED
In June 1998, the Financial Accounting Standards Board issued FAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. This standard
requires companies to record all derivatives on the balance sheet as either
assets or liabilities and measure those instruments at fair value. The manner in
which companies are to record gains or losses resulting from changes in the
values of those derivatives depends on the use of the derivative and whether it
qualifies for hedge accounting. This standard is effective for the Company's
financial statements beginning January 1, 2000, with early adoption permitted.
The Company is currently evaluating the impact of the adoption of this statement
and the potential effect on its financial position or results of operations.
30
<PAGE>
FORWARD-LOOKING STATEMENTS
All statements made in this quarterly report that do not reflect historical
information are forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Such forward-looking statements
involve known and unknown risks, uncertainties and other factors that may cause
the actual results, performance or achievements of the Company to be materially
different from any future results, performance or achievements expressed or
implied by the forward-looking statements. Such factors include, among other
things, (i) general economic and business conditions; (ii) interest rate
changes; (iii) competition and regulatory environment in which the Company
operates; (iv) claims frequency; (v) claims severity; (vi) medical cost
inflation; (vii) increases in the cost of property repair; (viii) the number of
new and renewal policy applications submitted to the Company; (ix) Year 2000
problems and (x) other factors over which the Company has little or no control.
The Company's expectation that its plan for Year 2000 Compliance will be
completed on schedule depends, in large part, on the Company's own efforts and
expenditures on hardware, software and systems, which is on schedule as to those
exposures which the Company has been able to identify. However, Year 2000
problems could also arise because of unanticipated non-compliance on the part of
vendors, agents, customers and other third parties including governmental
entities. Significant Year 2000 problems could materially and adversely affect
future performance and results of operations. The Company disclaims any
obligation to update or to publicly announce the impact of any such factors or
any revisions to any forward-looking statements to reflect future events or
developments.
PART II. OTHER INFORMATION
Items 1 - 5.
None.
Item 6. Exhibits and reports on Form 8-K
Exhibits
Exhibit 4(i): First Amendment to Credit Agreement, dated May
4, 1999 between Orion Capital Corporation and the lenders
named therein, First Union National Bank, as Administrative
Agent.
Exhibit 10(i) Stock Purchase Agreement by and between Fireman's
Fund Insurance Company, and Orion Capital Corporation
regarding the Sale of the Shares of Wm. H. McGee & Co.,
Inc. dated March 9, 1999.
Exhibit 15: Deloitte & Touche LLP Letter re: unaudited
interim financial information.
Exhibit 27: Financial Data Schedule.
(b) Report on Form 8-K
None.
31
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ORION CAPITAL CORPORATION
Date: May 14, 1999 By: /s/ W. Marston Becker
-------------------------
Chairman of the Board and
Chief Executive Officer
Date: May 14, 1999 By: /s/ Michael L. Pautler
--------------------------
Senior Vice President and
Chief Financial Officer
32
<PAGE>
EXHIBIT INDEX
Exhibit 4(i): First Amendment to Credit Agreement, dated May 4, 1999
between Orion Capital Corporation and the lenders named
therein, First Union National Bank, as Administrative Agent.
Exhibit 10(i) Stock Purchase Agreement by and between Fireman's
Fund Insurance Company, and Orion Capital Corporation
regarding the Sale of the Shares of Wm. H. McGee & Co.,
Inc. dated March 9, 1999.
Exhibit 15: Deloitte & Touche LLP Letter
Re: unaudited interim financial information
Exhibit 27: Financial Data Schedule
33
FIRST AMENDMENT TO CREDIT AGREEMENT
THIS FIRST AMENDMENT TO CREDIT AGREEMENT, dated as of the 4th day of May,
1999 (this "Amendment"), is made among ORION CAPITAL CORPORATION, a Delaware
corporation (the "Borrower"), the banks and financial institutions from time to
time party to the Credit Agreement (as defined herein) (collectively, the
"Lenders"), and FIRST UNION NATIONAL BANK ("First Union"), as administrative
agent for the Lenders (in such capacity, the "Administrative Agent").
RECITALS
The Borrower, the Lenders and the Administrative Agent are parties to a
Credit Agreement, dated as of July 8, 1998 (as amended, the "Credit Agreement"),
providing for the availability of certain credit facilities to the Borrower upon
the terms and conditions set forth therein. Capitalized terms used herein
without definition shall have the meanings given to them in the Credit
Agreement.
The Borrower has requested certain amendments to the Credit Agreement, and
the Lenders have agreed to effect such amendments and waivers upon the terms and
conditions set forth herein.
STATEMENT OF AGREEMENT
NOW, THEREFORE, in consideration of the foregoing and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
ARTICLE I
AMENDMENTS
1.1 No Material Adverse Change. Section 4.10 of the Credit Agreement is
hereby amended and restated in its entirety as follows:
4.10 Material Adverse Change. There has been no Material Adverse Change
since December 31, 1998, and there exists no event, condition or state of facts
that could reasonably be expected to result in a Material Adverse Change;
provided, however, that an increase to the Borrower's reserves and the resultant
pre-tax charge as of March 31, 1999 in an amount not to exceed $170,000,000
shall not, in and of itself, be deemed to be a Material Adverse Change.
1.2 Capitalization Ratio. Section 6.1 of the Credit Agreement is hereby
amended and restated in its entirety as follows:
1
<PAGE>
6.1 Capitalization Ratio. The Borrower will not permit the Capitalization
Ratio to be greater than 0.35 to 1.0 as of the last day of any fiscal quarter,
beginning with the fiscal quarter ending December 31, 1998.
1.3 Combined Statutory Surplus. Section 6.2 of the Credit Agreement is
hereby amended by (a) deleting the reference to "$650,000,000" and replacing it
with "$600,000,000" (b) deleting the reference to "December 31, 1998" and
replacing it with "December 31, 1999".
ARTICLE II
REPRESENTATIONS AND WARRANTIES
The Borrower hereby represents and warrants to the Administrative Agent and
each Lender as follows:
2.1 Representations and Warranties. After giving effect to this Amendment,
each of the representations and warranties of the Borrower contained in the
Credit Agreement and in the other Credit Documents is true and correct on and as
of the date hereof with the same effect as if made on and as of the date hereof
(except to the extent any such representation or warranty is expressly stated to
have been made as of a specific date, in which case such representation or
warranty is true and correct as of such date).
2.2 No Default. After giving effect to this Amendment, no Default or Event
of Default has occurred and is continuing.
ARTICLE III
MISCELLANEOUS
3.1 Effect of Amendment. From and after the effective date of the
amendments to the Credit Agreement set forth herein, all references to the
Credit Agreement set forth in any other Credit Document or other agreement or
instrument shall, unless otherwise specifically provided, be references to the
Credit Agreement as amended by this Amendment and as may be further amended,
modified, restated or supplemented from time to time. This Amendment is limited
as specified and shall not constitute or be deemed to constitute an amendment,
modification or waiver of any provision of the Credit Agreement except as
expressly set forth herein. Except as expressly amended hereby, the Credit
Agreement shall remain in full force and effect in accordance with its terms.
3.2 Governing Law. This Amendment shall be governed by and construed and
enforced in accordance with the laws of the State of North Carolina (without
regard to the conflicts of law provisions thereof).
3.3 Expenses. The Borrower agrees to pay upon demand all reasonable
out-of-pocket costs and expenses of the Administrative Agent and each Lender
(including, without limitation, the reasonable fees and expenses of counsel to
the Administrative Agent and each Lender) in connection with the preparation,
negotiation, execution and delivery of this Amendment and the other Credit
Documents delivered in connection herewith.
2
<PAGE>
3.4 Severability. To the extent any provision of this Amendment is
prohibited by or invalid under the applicable law of any jurisdiction, such
provision shall be ineffective only to the extent of such prohibition or
invalidity and only in any such jurisdiction, without prohibiting or
invalidating such provision in any other jurisdiction or the remaining
provisions of this Amendment in any jurisdiction.
3.5 Successors and Assigns. This Amendment shall be binding upon, inure to
the benefit of and be enforceable by the respective successors and assigns of
the parties hereto.
3.6 Construction. The headings of the various sections and subsections of
this Amendment have been inserted for convenience only and shall not in any way
affect the meaning or construction of any of the provisions hereof.
3.7 Counterparts; Effectiveness. This Amendment may be executed in any
number of counterparts and by different parties hereto on separate counterparts,
each of which when so executed and delivered shall be an original, but all of
which shall together constitute one and the same instrument. After execution and
delivery by the parties hereto, this Amendment shall be deemed to be effective
as of January 1, 1999.
[the remainder of this page intentionally left blank]
3
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed by their duly authorized officers as of the date first above written.
FIRST UNION NATIONAL BANK,
as Administrative Agent and as Lender
By: _______________________________
Title: _______________________________
[Signatures Continued]
4
<PAGE>
ORION CAPITAL CORPORATION
By: _______________________________
Title: _______________________________
[Signatures Continued]
5
<PAGE>
BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION
By: _______________________________
Title: _______________________________
[Signatures Continued]
6
<PAGE>
FLEET NATIONAL BANK
By: _______________________________
Title: _______________________________
[Signatures Continued]
7
<PAGE>
FIRST NATIONAL BANK OF CHICAGO
By: _______________________________
Title: _______________________________
[Signatures Continued]
8
<PAGE>
MELLON BANK, N.A.
By: _______________________________
Title: _______________________________
[Signatures Continued]
9
<PAGE>
STATE STREET BANK AND TRUST COMPANY
By: _______________________________
Title: _______________________________
10
STOCK PURCHASE AGREEMENT
by and between
FIREMAN'S FUND INSURANCE COMPANY,
and
ORION CAPITAL CORPORATION
REGARDING THE SALE OF THE SHARES OF
WM. H. MCGEE & CO., INC
Dated: March 9, 1999
1
<PAGE>
STOCK PURCHASE AGREEMENT
AGREEMENT (the "Agreement"), dated March 9, 1999, by and between ORION
CAPITAL CORPORATION, a Delaware corporation ("Seller"), as Seller, and FIREMAN'S
FUND INSURANCE COMPANY, a California corporation ("Buyer"), as Buyer,
W I T N E S S E T H:
WHEREAS, Wm. H. McGee & Co., Inc. ("McGee") is a corporation duly organized
and validly existing under the laws of the State of New York, having outstanding
capital stock consisting of 4,400 shares of common stock, without par value (the
"Common Stock"); and
WHEREAS, Seller owns 100% of the Common Stock, all of which is to be sold
to and purchased by Buyer pursuant hereto;
NOW, THEREFORE, the parties hereto agree as follows, intending that defined
terms used herein shall have the meanings set forth in Article XII: I.
THE TRANSACTION
Section 1.1. Purchase of Common Stock. Upon the terms and subject to all of
the conditions set forth herein, Seller agrees to sell to Buyer and Buyer agrees
to acquire from Seller on the Closing Date 100% of the Common Stock.
Section 1.2. Consideration. In full consideration for the sale of the
Common Stock by Seller to Buyer provided for herein, together with the other
undertakings and commitments made and delivered by Seller to Buyer herein, at
the Closing Buyer shall deliver to Seller the sum of Fifty-Nine Million Four
Hundred Thousand and 00/100 ($59,400,000.00) Dollars in immediately available
funds by wire transfer to the account designated by Seller.
Section 1.3. Management Fee. In full consideration for the provision of
management services by SICH to McGee and its Subsidiaries for the period from
January 1, 1999 until Closing, at the Closing Buyer shall pay to SICH, in
immediately available funds by wire transfer to the account designated by SICH,
an aggregate amount equal to (a) if the Closing occurs on or prior to April 30,
1999, Eight Hundred Thousand and 00/100 Dollars ($800,000.00), or (b) if the
Closing occurs after April 30, 1999, the sum of (i) Eight Hundred Thousand and
00/100 Dollars ($800,000.00), plus (ii) Two Hundred Thousand and 00/100 Dollars
($200,000.00) for each full or partial calendar month during the period from
April 30, 1999 through and including the Closing Date.
II.
2
<PAGE>
THE CLOSING
Section 2.1. Closing.
(a) The closing of the transactions provided for herein (the "Closing")
shall occur at the offices of Cummings & Lockwood at CityPlace I, 185 Asylum
Street, 36th Floor, Hartford, Connecticut or at such other place as shall be
determined by Buyer and Seller, on April 30, 1999; provided, however, that if
any of the conditions provided for in Articles VII and VIII hereof shall not
have been met or waived by Seller or by Buyer, as the case may be, by the
scheduled Closing Date, then the party which is unable to meet such condition or
conditions shall be entitled to postpone the Closing by notice to the other
party to such effect until such condition or conditions shall have been met
(which such party will seek to cause to happen at the earliest practicable date)
or waived (such postponed Closing to be held on five business days notice from
the postponing party to the other party), but in no event shall such
postponements extend past June 30, 1999. At the Closing, Seller and Buyer shall
deliver, or cause to be delivered, to the other such certificates, receipts or
other documents or instruments, in addition to those specifically provided for
herein, as may reasonably be requested by the other and as are customary for
transactions of the type contemplated hereunder. The date on which the Closing
occurs is hereinafter referred to as the "Closing Date."
(b) At the Closing, Seller shall deliver to Buyer: (i) stock certificates
representing all of the Common Stock, (ii) a mutual release between Seller and
its affiliates (other than SICH) and McGee in the form of Exhibit A-1; (iii) a
mutual release between SICH and McGee in the form of Exhibit A-2; (iv) a mutual
release between CI and McGee in the form of Exhibit A-3 (collectively, the
"Releases"); and (v) a noncompetition agreement in the form attached hereto as
Exhibit B (the "Noncompetition Agreement").
III.
3
<PAGE>
REPRESENTATIONS AND WARRANTIES OF SELLER
Seller represents and warrants to Buyer that:
Section 3.1. Organization and Good Standing. McGee is a
corporation duly organized and existing and in good standing under the laws of
the State of New York, has the corporate power to carry on its business as it is
now being conducted and is duly qualified to do business as a foreign
corporation in each jurisdiction in which such qualification is required, except
where the failure so to qualify would not have a material adverse effect on the
business, properties, financial condition or results of operations of McGee and
its Subsidiaries taken as a whole or the ability of any of them to carry on the
business of the Pool as it is carried on by McGee and its Subsidiaries taken as
a whole (a "Material Adverse Effect"). Each Subsidiary of McGee is a corporation
duly organized and existing and in good standing under the laws of its
jurisdiction of incorporation and has the corporate power to carry on its
business as it is now being conducted and is duly qualified to do business as a
foreign corporation in each jurisdiction in which such qualification is
required, except where the failure so to qualify would not have a Material
Adverse Effect. Seller has heretofore made available to Buyer true and complete
copies of (a) the Certificate of Incorporation and By-laws of McGee and each of
its Subsidiaries, (b) (i) all minutes of the meetings and copies of resolutions
of stockholders, the board of directors and each committee of the board of
directors of McGee since June 30, 1995, and (ii) to the Seller's Knowledge, all
minutes of the meetings and copies of resolutions of stockholders, the board of
directors and each committee of the board of directors of McGee and each of its
Subsidiaries held since the date of its incorporation and organization and prior
to June 30, 1995 and all powers of attorney, if any, issued by McGee or any of
its Subsidiaries which are presently outstanding and in effect.
Section 3.2. Capitalization. McGee has an authorized capital
stock consisting of 11,000 shares of common stock, without par value, of which,
4,400 shares are issued and outstanding. No shares of McGee Common Stock are
held in treasury. All of the Common Stock is duly authorized, validly issued,
fully paid and non-assessable and is owned by Seller as set forth in Schedule
3.2 hereto, free and clear (except as otherwise shown on Schedule 3.2) of any
and all claims, liens, restrictions, pledges, charges, rights of third parties
or other encumbrances. Neither Seller nor McGee (a) is a party to or is bound by
any agreement, or has since June 30, 1995 made any commitment, to sell or issue
any securities of McGee other than the Common Stock which is the subject of this
Agreement, or (b) has taken any corporate action to approve any of the foregoing
except for the approval of this Agreement. The Common Stock is not subject to
preemptive rights or to any voting trust, proxy or similar agreement. Schedule
3.2 correctly identifies each of McGee's Subsidiaries, its jurisdiction of
incorporation and the percentage of its voting stock owned by McGee and each
other Subsidiary. McGee is the legal and beneficial owner of all of the shares
of voting stock of each Subsidiary of McGee (other than directors' qualifying
shares, in the case of Wm. H. McGee & Company of Puerto Rico, Inc.) as set forth
on Schedule 3.2, and such ownership is free and clear (except as otherwise shown
on Schedule 3.2) of any and all claims, liens, restrictions, pledges, charges,
rights of third parties or other encumbrances. All such shares have been duly
authorized and validly issued and are fully paid and non-assessable. No
Subsidiary of McGee has any common or preferred stock authorized or outstanding
other than as set forth on Schedule 3.2 and none of McGee nor Seller nor any
such Subsidiary is a party to or is bound by any agreement or commitment to sell
or issue any securities of any Subsidiary of McGee or has taken any corporate
action to approve, or in contemplation of, any of the foregoing.
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Section 3.3. Regulatory Status. To Seller's Knowledge, McGee, and each of
its Subsidiaries, has all requisite power and authority, and all necessary
licenses, permits, franchises and other governmental authorizations necessary to
own and operate its properties and to carry on its business as now conducted,
except where the failure to have the same could not reasonably be expected to
have a Material Adverse Effect. All material licenses, permits and other
governmental authorizations held by McGee are set forth on Schedule 3.3.
Section 3.4. Compliance with Law. To Seller's Knowledge, except as set
forth on Schedule 3.4, McGee, and each of its Subsidiaries, has conducted, and
is now conducting, its business and operations in material compliance with all
existing laws, rules, regulations, ordinances, orders, judgments and decrees
(including, without limitation, those of state insurance departments) applicable
to its business, properties or operations as presently conducted.
Section 3.5. Authorization.
(a) This Agreement has been duly authorized by all necessary corporate
action of Seller. This Agreement will, when duly executed and delivered, be a
valid and binding agreement of Seller, enforceable against Seller in accordance
with its terms, except as limited by bankruptcy, insolvency, reorganization,
moratorium or other similar laws now or hereafter in effect relating to or
affecting creditors' rights generally, and except that the remedy of specific
performance and injunctive and other forms of equitable relief may be subject to
equitable defenses and to the equitable discretion of the court before which any
proceeding therefor may be brought.
(b) Each of the Ancillary Agreements to which Seller or a Subsidiary of
Seller is a party, has been, or prior to the Closing will be, duly authorized by
all necessary corporate action of Seller or such Subsidiary, does not violate
any provision of the Certificate of Incorporation, or similar charter document,
or By-Laws of any of them or any agreement by which any of them or the
properties of any of them is bound and will, when duly executed and delivered,
be a valid and binding agreement of such entity enforceable against it in
accordance with the terms thereof, except as limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws now or hereafter in effect
relating to or affecting creditors' rights generally, and except that the remedy
of specific performance and injunctive and other forms of equitable relief may
be subject to equitable defenses and to the equitable discretion of the court
before which any proceeding therefor may be brought.
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Section 3.6. Books and Records. The consolidated and consolidating
unaudited balance sheets of McGee and its Subsidiaries as of December 31, 1998,
1997 and 1996 and the related consolidated and consolidating unaudited
statements of income and stockholders' equity for the fiscal year ended on such
date and, in each case, the related schedules, have been delivered by Seller to
Buyer. The unaudited consolidated and consolidating financial statements have
been prepared in accordance with generally accepted accounting principles
consistently applied (except that such unaudited financial statements lack or do
not reflect footnote disclosures, deferred federal income taxes, goodwill, any
obligations to settle claims of Pool Participants, tax valuation, and allowances
on a stand-alone basis) and present fairly the financial position of McGee and
its Subsidiaries as of such date and the results of their operations for such
periods.
Section 3.7. Litigation and Other Proceedings.
(a) Except as set forth in Schedule 3.7(a), there are no actions, suits,
investigations or proceedings pending against, or to Seller's Knowledge
threatened against, McGee or its Subsidiaries or any of their respective
officers or employees or their respective businesses, properties or assets, by
any person, governmental body or agency or by any securities exchange or
national securities association. To Seller's Knowledge, neither Seller nor McGee
nor any Subsidiary of McGee is in default with respect to any order of any
court, governmental authority or agency or arbitration board or tribunal or in
violation of any laws or governmental rules or regulations, nor has any of them
received written notice of any assertion of a default where such default or
violation has had or is reasonably likely to have a Material Adverse Effect. To
Seller's knowledge, neither McGee nor any of its Subsidiaries is in default
under any contract or commitment, nor has any of them received written notice of
any assertion of a default which default has had or is reasonably likely to have
a Material Adverse Effect.
(b) Except as set forth in Schedule 3.7(b), there are no actions, suits,
investigations or proceedings pending against, or to Seller's knowledge
threatened against, Pool Participants arising out of participation in the Pool
relating to extra-contractual, asbestos or environmental claims.
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Section 3.8. Title to Properties.
(a) All real property owned or leased by McGee or any Subsidiary of McGee
and, in the case of leased property, the lease pursuant to which it is leased,
is listed and described on Schedule 3.8(a). Except as set forth in Schedule
3.8(a), McGee has good and marketable fee title to all owned real property
reflected on Schedule 3.8(a), free and clear of all liens, charges and
encumbrances, other than rights of way and easements of record, and subject only
to liens of current real and personal property taxes, and such minor defects of
title of a nature generally found in properties of similar character which do
not in any material way affect the marketability of such real properties or
interfere with the ownership and use of such real properties. To Seller's
Knowledge, each lease reflected on Schedule 3.8(a) is valid and subsisting in
accordance with its terms, no default by any party thereto has occurred, no
event, act or omission has occurred which constitutes or with notice or passage
of time or both would constitute a default and all such leases are free and
clear of any and all charges, liens, claims, rights of third parties and other
encumbrances. To Seller's Knowledge, neither McGee nor any of its Subsidiaries
leases any real property to or from any, parent, affiliate, officer or director
or any person related to or owned or controlled by any parent, affiliate,
officer or director of McGee or any of its Subsidiaries.
(b) Schedule 3.8(b) contains a true and complete summary, by
office location and type of property, of each item of personal property (other
than investments reflected in Schedule 3.11) having a value on the books of
McGee in excess of $10,000 which is used by McGee or any Subsidiary of McGee in
its business and a list of all equipment leases and capital leases under which
McGee holds any property with rental payments exceeding $10,000 per year. Except
as set forth in Schedule 3.8(b), all such personal property is owned or leased
by McGee or a Subsidiary free and clear of any and all liens, charges or
encumbrances, except for liens for current taxes not yet due and payable and
except for those liens which do not materially detract from the value of the
property subject thereto or interfere with the ownership and use of such
property. All such personal property is in good operating condition and repair,
ordinary wear and tear excepted, and capable of performing the functions for
which it is now used.
(c) To Seller's Knowledge, Schedule 3.8(c) contains a true and
complete description of all copyrights, patents, trademarks, service marks,
trade names, franchises, computer programs (other than computer programs subject
to "shrink-wrap" licenses), processes and applications, and other intellectual
property (in each case, whether or not registered) owned or licensed by, and
applications for any of the foregoing made by, McGee and each Subsidiary of
McGee ("Intellectual Property"). To Seller's Knowledge, no Intellectual Property
is subject to any lien, charge, encumbrance or adverse claim of any kind. To
Seller's Knowledge, and except as set forth in Schedule 3.8(c), all rights in
such Intellectual Property are valid, subsisting and in full force and effect in
accordance with their terms without interference with, or infringement on or by,
the rights of any other person (in each case which are material to the business
and operations of McGee and its Subsidiaries, taken as a whole). To Seller's
Knowledge, neither McGee nor any Subsidiary of McGee is engaged in any
infringement or unlawful use of any trademark, service mark, trade name,
copyright, program, process or application or other intellectual intangible
property right owned or alleged to be owned by others, nor has any written
notice of any claim been received from any third party alleging infringement or
unlawful use, nor, except as set forth in Schedule 3.8(c), has any Intellectual
Property been licensed to any other person.
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Section 3.9. No Conflicts.
(a) Neither the execution nor the delivery by Seller of this Agreement and
the Ancillary Agreements, nor the consummation of the transactions contemplated
hereby or thereby, nor the compliance with or fulfillment of the terms and
provisions hereof or thereof by Seller, will: (i) conflict with or result in a
breach or violation of any of the terms, conditions or provisions of the
Certificate of Incorporation or By-Laws of Seller or McGee or any of McGee's
Subsidiaries; or (ii) conflict with or result in a breach or violation of, or
default or loss of a material benefit under, or permit the acceleration of any
obligation under any provision of, any agreement, indenture, mortgage, lien,
lease or other instrument or restriction of any kind to which Seller, McGee or
any Subsidiary of McGee is a party or by which it or any of its assets or
properties is otherwise bound; or (iii) violate any order, writ, injunction,
decree, statute, rule or regulation applicable to Seller or McGee or any of the
Subsidiaries of McGee or any of the assets or properties of any of them; which
conflict, breach, violation, default, loss or other result, in the case of each
of clauses (ii) and (iii), is reasonably likely to have a Material Adverse
Effect or a material adverse effect on the ability of Seller to perform its
obligations hereunder. Except as set forth in Schedule 3.9(a) hereto, no
consent, approval or authorization of, or filing, registration or qualification
with, any governmental authority on the part of Seller or McGee or any
Subsidiary of McGee is required in connection with the execution, delivery and
performance of this Agreement and the Ancillary Agreements or the offer, sale or
delivery of the Common Stock as provided herein.
(b) Neither the execution nor the delivery by any Subsidiary of Seller of
any of the Ancillary Agreements to which such Subsidiary is a party, nor the
consummation by any such Subsidiary of the transactions contemplated by any
Ancillary Agreement to which it is a party, nor the compliance with or
fulfillment by any such Subsidiary of the terms and provisions of any Ancillary
Agreement to which it is a party, will: (i) conflict with or result in a breach
or violation of any of the terms, conditions or provisions of the Certificate of
Incorporation or By-Laws of such Subsidiary; or (ii) conflict with or result in
a breach or violation of, or default or loss of a material benefit under, or
permit the acceleration of any obligation under any provision of any agreement,
indenture, mortgage, lien, lease or other instrument or restriction of any kind
to which such Subsidiary is a party or by which it or any of its assets is
otherwise bound; or (iii) result in a violation of or the acceleration of any
obligation under any agreement, indenture, mortgage, lien, instrument, writ,
injunction, decree, statute, rule or regulation applicable to such Subsidiary or
any of its assets or properties; which conflict, breach, violation, default,
loss or other result, in the case of each of clauses (ii) and (iii), is
reasonably likely to have a Material Adverse Effect or a Material Adverse Effect
on the ability of such Subsidiary to perform its obligations under any of the
Ancillary Agreements to which it is a party.
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Section 3.10. Taxes. Except as disclosed in Schedule 3.10:
(a) Since June 30, 1995, each of McGee and its Subsidiaries (and with
respect to federal income Taxes, every other entity included in a consolidated
federal Tax Return including McGee and its Subsidiaries (collectively, the
"Consolidated Group")) has duly and timely filed (either separately or as part
of a consolidated group) with the appropriate government agencies, all material
federal, state, local and foreign returns, filings and reports with respect to
Taxes and any required material information returns or reports of any kind (the
"Tax Returns") which were required by applicable law to be filed on or before
the Closing Date, and all Tax Returns are true, correct and complete. The term
"Taxes," as used in this Agreement, shall mean all federal, state, local and
foreign gross receipts, franchise, premium, income and capital taxes, value
added taxes, sales, use and consumption taxes, employment, payroll, withholding,
ad valorem and property taxes, and all other taxes, assessments, withholdings,
duties, levies, fees and other governmental charges or impositions of each and
every kind, and interest, penalties and additions to tax with respect thereto
payable by or in respect of the business or operations of McGee.
(b) Neither McGee nor any of its Subsidiaries is delinquent in any material
respect in the payment of any Taxes nor has any of them requested any extension
of time within which to pay any such Taxes or file any Tax Return with respect
thereto except to the extent that such Taxes have since been paid or such Tax
Return has since been filed.
(c) There is no agreement, waiver or consent providing for an extension of
time with respect to (i) the filing of any Tax Return, election or designation
by McGee or any of its Subsidiaries, (ii) the payment or issuance of any
assessment of any Tax by or against McGee or any of its Subsidiaries or (iii)
the issuance of any deficiency against McGee or any of its Subsidiaries with
respect to Taxes. In addition, (except as disclosed to Buyer pursuant to this
Agreement) there is not currently in force any power of attorney granted by
McGee or any of its Subsidiaries with respect to any Tax matter.
(d) There is no (i) claim or deficiency for any Taxes which has been
asserted or, to Seller's Knowledge, threatened against McGee or any of its
Subsidiaries or the Consolidated Group, (ii) action, suit, proceeding,
investigation, audit or claim now pending or, to Seller's Knowledge, threatened
against, or with respect to, McGee or any of its Subsidiaries or the
Consolidated Group with regard to any Taxes, or (iii) claim for additional
amounts or assessments of such Taxes asserted by any such authority.
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(e) The federal income Tax Returns of McGee and its
Subsidiaries (including any consolidated federal income Tax Return filed by the
Consolidated Group) have been examined by the Internal Revenue Service for all
periods to and including 1989 and all deficiencies asserted as a result of such
examinations have been paid or finally settled and Seller has received no
written notice of any issue having been raised by the Internal Revenue Service
in any such examination which, by application of the same or similar principles,
reasonably could be expected to result in a proposed deficiency for any other
period not so examined. Revenue Canada, Taxation has mailed a notice of an
original assessment in respect of the Canadian federal income tax liability of
McGee Canada for all fiscal years up to and including the fiscal year ended
1997. Seller has received no written notice of any issue having been raised by
any Canadian federal or provincial taxation authority in any examination which,
by application of the same or similar principles, reasonably could be expected
to result in a proposed deficiency for any other period not so examined.
(f) Since June 30, 1995 (i) neither McGee nor any of its
Subsidiaries has filed an election, consent or agreement under Section 341(f) of
the Code; (ii) no indebtedness of McGee or any of its Subsidiaries consists of
"corporate acquisition indebtedness" within the meaning of Section 279 of the
Code; (iii) since January 1, 1996, there has not been an "ownership change,"
"owner shift involving a five percent shareholder" or an "equity structure
shift" relating to McGee or any of its Subsidiaries within the meaning of
Section 382(g) of the Code and since January 1, 1996, there has not been an
acquisition of control of McGee or any of its Subsidiaries within the meaning of
the Income Tax Act (Canada); (iv) no property of McGee or any of its
Subsidiaries is "tax-exempt use property" within the meaning of Section 168(h)
of the Code nor property that Buyer will be required to treat as being owned by
another person pursuant to section 168(f)(8) of the Internal Revenue Code of
1954, as amended and in effect immediately prior to the enactment of the Tax
Reform Act of 1986; (v) neither McGee nor any of its Subsidiaries nor Seller nor
any of its Subsidiaries, with respect to any person in his or her capacity as an
officer or employee of McGee, is a party to any agreement pursuant to which it
has committed, by reason of the transactions contemplated in this Agreement or
other related agreements executed on the Closing Date, to make any payment to
such person which (exclusive of such payments as may be made by or at the
direction of Buyer) would constitute a "parachute payment" for purposes of
Sections 280G and 4999 of the Code; (vi) neither McGee nor any of its
Subsidiaries has made any election pursuant to state or foreign Tax laws that is
currently binding on Seller or McGee; (vii) neither McGee nor any of its
Subsidiaries is a "gain corporation" within the meaning of Section 384(c)(4) of
the Code; (viii) neither Seller nor SICH is a "foreign person" within the
meaning of Section 1445 of the Code; (ix) no deferred intercompany transactions
within the meaning of Section 1.1502-13 of the Treasury Regulations have
occurred between the members of the Consolidated Group and McGee and its
Subsidiaries; (x) McGee does not have an excess loss account as defined in
Section 1.1502-19 of the Treasury Regulations with respect to any of its
Subsidiaries; (xi) neither McGee nor any of its Subsidiaries is a party to any
agreement relating to the sharing of any liability for, or payment of, Taxes
with any other person or entity, except for the Tax Sharing Agreement dated July
1, 1995 between Seller and McGee; and (xii) neither McGee nor any of its
Subsidiaries has any liability for Taxes of any other person as a transferee,
successor or otherwise, by law or contract, except for the Tax Sharing Agreement
dated July 1, 1995 between Seller and McGee.
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(g) Since June 30, 1995:
(i) Each of Seller and its Subsidiary, Orion Capital Companies, Inc., and
each of McGee and its Subsidiaries, in the case of any person in his or her
capacity as an officer or employee of McGee and its Subsidiaries, has, in all
material respects, withheld from each payment made to any of its officers,
directors and employees the amount of all Taxes and other deductions (including
without limitation, income taxes, unemployment, disability, and other required
Taxes and contributions) required to be withheld and has timely paid such
withholding (together with its required employer's amount, if any) and has
timely and properly filed all required Tax Returns with respect thereto.
(ii) Neither McGee nor McGee Canada has, prior to the date hereof, made or
filed any elections or designations for purposes of the Income Tax Act (Canada)
or any relevant provincial taxing statute.
(iii) Neither McGee nor McGee Canada has, prior to the date hereof,
acquired property from or disposed of property for proceeds less than the fair
market value thereof to, any person, firm or corporation with whom it does not
deal at arm's length as the term is construed under the Income Tax Act (Canada).
(iv) McGee Canada has no outstanding loans to or indebtedness incurred by
directors, officers or shareholders of that company or to any person or
corporation not dealing at arm's length (as the term is construed under the
Income Tax Act (Canada)) with any of the foregoing.
(v) The taxation year end of McGee Canada for income tax purposes is, and
since June 30, 1995 has been, December 31.
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(vi) McGee does not carry on business in Canada through a permanent
establishment within the meaning of that term in the Canada-Income Tax
Convention.
(h) All representations and warranties of Seller as to Taxes or matters
with respect thereto are provided for in this Section 3.10, and no other section
of this Article III shall be construed or interpreted as a representation or
warranty of Seller as to Taxes or matters with respect thereto.
Section 3.11. Investments. Schedule 3.11 lists (and shows the custodial
location of) all investments in cash, cash equivalents, bonds, stocks and other
securities owned by McGee and each of its Subsidiaries, or held by McGee or any
of its Subsidiaries on behalf of the Pool, as at February 28, 1999, all of which
comply in all material respects with laws and regulations applicable to the
ownership of the same by McGee and its respective Subsidiaries. McGee and each
of its Subsidiaries has good and marketable title to all its investments, free
and clear of any and all liens, charges, claims, restrictions, pledges, rights
of third parties and other encumbrances, except for investments held on behalf
of the Pool.
Section 3.12. Employment Matters. Except as set forth on Schedule 3.12 or
as disclosed to Buyer in writing, McGee has no employment or labor contracts
relating to any officers, directors or employees of McGee or any of its
Subsidiaries and no employee of McGee or any of its Subsidiaries is represented
by a labor organization of any type. To Seller's Knowledge, there is not, and
has not since January 1, 1996 been, any effort to unionize or organize any
employees of McGee or any of its ------------------ Subsidiaries. No claim under
any federal, state, provincial or local employment-related law, order, ordinance
or regulation, or any unfair labor practice, discrimination, wage-and-hour or
employment equity claim to which McGee or any of its Subsidiaries is subject is
pending and, to Seller's Knowledge, no threat of such has been asserted in
writing against or with respect to McGee or any of its Subsidiaries.
Section 3.13. Employee Benefit Plans; ERISA.
(a) Schedule 3.13(a) sets forth a true and complete list of all employee
benefit plans, agreements, commitments, practices or arrangements of any type
(including, but not limited to, plans described in Section 3(3) of ERISA)
maintained by McGee or any of its Subsidiaries for the benefit of current or
former employees or directors, or with respect to which McGee or any of its
Subsidiaries has a liability, whether direct or indirect, actual or contingent
(including, but not limited to, liabilities arising from affiliation under
Section 414(b), (c), (m) or (o) of the Code or Section 4001 of ERISA) (the
"Benefit Plans").
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(b) No Benefit Plan is a "multiemployer plan" (within the meaning of
Section 3(37) or Section 4001(a)(3) of ERISA) or a "multiple employer plan"
(within the meaning of Section 4064 of ERISA or Section 413(c) of the Code).
Neither McGee nor any of its Subsidiaries has a current or potential liability
or obligation, whether direct or indirect, with respect to any multiemployer
plan or multiple employer plan.
(c) Seller has delivered or made available to Buyer, true and complete
copies of the following documents, as they may have been amended to the date
hereof, embodying or relating to the Benefit Plans:
(i) each of the Benefit Plans listed in Schedule 3.13(a), including all
amendments thereto, any related trust agreements, group annuity contracts,
insurance policies or other funding agreements or arrangements;
(ii) the most recent determination letter, if any, as to qualification
under Section 401(a) or 403(a) of the Code, received from the Internal Revenue
Service ("IRS") with respect to each of the Benefit Plans;
(iii) the actuarial valuation, if any, prepared with respect to each of the
Benefit Plans for the two most recent plan years and the most recent annual and
periodic accountings of Benefit Plan assets, if applicable;
(iv) the current summary plan description, if any, for each of the Benefit
Plans and any material modifications thereto; and
(v) the two (2) most recent annual returns/reports on IRS Form 5500,
5500-C/R, 5500-C or 5500-R filed for each of the Benefit Plans.
(d) Except as set forth in Schedule 3.13(d), with respect to
each Benefit Plan which is a welfare plan described in Section 3(1) of ERISA:
(i) no such plan provides medical or death benefits with respect to current or
former employees or directors of McGee beyond their termination of employment,
other than coverage mandated by Sections 601-608 of ERISA and 4980B(f) of the
Code, (ii) each such plan has been administered in compliance with Sections
601-608 of ERISA and 498OB(f) of the Code; (iii) no such plan has undisclosed
reserves, assets, surpluses or prepaid premiums; and (iv) there is no material
claim pending or, to Seller's Knowledge, threatened involving the Benefit Plan.
(e) Except as disclosed in Schedule 3.13(e), none of the
Benefit Plans has participated in, engaged in or been a party to any prohibited
transaction as defined in ERISA or the Code, and, except for routine claims for
covered benefits, there are no material claims pending or overtly threatened,
involving any Benefit Plan listed in Schedule 3.13(a). Except as disclosed in
the Special Note to Schedule 3.13(a), there have been no material violations of
any reporting or disclosure requirements with respect to any Benefit Plan.
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(f) To Seller's Knowledge, neither McGee, nor any of its Subsidiaries, nor
any fiduciary or disqualified person with respect to any Benefit Plan has any
liability for any excise tax imposed by Sections 4971 through 4980B of the Code.
Section 3.14. Contracts.
(a) Schedule 3.14(a) contains a list of each contract, agreement and
undertaking, written or oral, (other than those listed in Schedule 3.8 or
Schedule 3.14(b)) to which McGee or any Subsidiary of McGee is a party or by
which it or its property is bound and which involves indebtedness, or a
commitment, of $50,000 or more or has a remaining term of more than one year and
which cannot be terminated on not more than ninety (90) days notice.
(b) Except as disclosed to the Buyer in writing, Schedule 3.14(b) contains
a list of each contract, agreement and undertaking, written or oral, to which
McGee or any Subsidiary of McGee is a party or by which it or its property is
bound and which relates to McGee's operation of the Pool (but excluding
contracts of insurance and reinsurance (other than contracts of reinsurance
among participants of the Pool) by or on behalf of the Pool.
(c) To Seller's Knowledge, all of the contracts, agreements and
undertakings listed in Schedules 3.14(a) and (b) are free of any default or
breach or any alleged default or breach by McGee, any Subsidiary of McGee or any
other party thereto and no event, act or omission has occurred which, with the
giving of notice or the passage of time or both, would constitute a breach or
default by McGee or any Subsidiary of McGee or any other party thereto of any
such contract, lease, agreement or undertaking, other than, in each of the
foregoing cases, a breach which is not likely to have a Material Adverse Effect.
To Seller's Knowledge, and except as listed and described in Schedules 3.14(a)
and (b), neither McGee nor any Subsidiary of McGee is a party to or is bound by
any contract with, or is indebted to, any parent, affiliate, officer or director
of (or to any person related to or owned or controlled by any parent, affiliate,
officer or director of) McGee or any Subsidiary of McGee in any amount
whatsoever other than in respect of salaries (and other compensation and
benefits disclosed in Schedules 3.12 and 3.13) of officers and directors of
McGee and the Subsidiaries of McGee. Except as listed and described in Schedules
3.14(a) and (b), none of such parents, affiliates, officers or directors is
indebted to McGee or any Subsidiary of McGee.
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Section 3.15. Capital Expenditures. Except as disclosed in Schedule 3.15
and Schedule 3.14(a), neither McGee nor any Subsidiary of McGee has an
outstanding commitment to any person for capital expenditures (including but not
limited to expenditures for data processing hardware, software and systems) in
excess of $50,000 other than for ordinary repairs and maintenance.
Section 3.16. Banks. Schedule 3.16 contains a true and complete list of all
banks or other financial institutions in which either McGee or any Subsidiary of
McGee has an account, line of credit or safe deposit box, showing a description
of each such account and line of credit. -----
Section 3.17. Agents and Brokers. Schedule 3.17 contains a list of the
names and addresses of each agent or broker who has authority to bind either
SICH or the Connecticut Indemnity Company in its capacity as an issuer of
policies of insurance or reinsurance for the Pool, in each case with a
description of the type of agency or binding authority granted, and the
geographical or other limits of each such authority or agency.
Section 3.18. Insurance. Schedule 3.18 contains a true and complete list of
all policies of insurance issued to McGee or to any Subsidiary of McGee and
naming any of them as insureds or covering any of their businesses, assets or
liabilities, showing policy limits, type of coverage, annual premium, premium
payment dates, expiration dates, cash surrender value, and the amount of loans,
if any, secured. No policy listed has been canceled and each policy listed will
continue in effect after the Closing Date on the terms indicated in Schedule
3.18 unless canceled by the insured after the Closing Date.
Section 3.19. Absence of Material Changes and Adverse Factors. Since
December 31, 1998, and except for the transactions provided for herein or as
otherwise disclosed to Buyer in writing, there has not been, in respect of McGee
or any Subsidiary of McGee:
(a) any loss or destruction of, or damage (whether or not covered by
insurance) to, any of its assets or properties which affects or impairs its
ability to conduct its business as now conducted or proposed to be conducted
such that a Material Adverse Effect is reasonably likely to result therefrom;
(b) any other event or condition of any character which has had or is
reasonably likely to have a Material Adverse Effect;
(c) any declaration, setting aside or payment of any dividend or other
distribution in respect of the capital stock of McGee or any Subsidiary of McGee
or any direct or indirect redemption, purchase or other acquisition by McGee or
any Subsidiary of McGee of any such stock;
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(d) any indebtedness or other liability or obligation (whether absolute,
accrued, contingent or otherwise) incurred or other transaction (except as
reflected in this Agreement) incurred by it other than in the ordinary course of
business;
(e) any increase in the salary or benefits of any employee except in the
ordinary course of business;
(f) any sale of any material asset or any acquisition of any material
property, securities, or other asset except, in each case, in the ordinary
course of business;
(g) any material adverse change in the operations or results of operations
of McGee or in its or its Subsidiary's relationships with and goodwill of its
Pool Participants, customers, suppliers, agents, general agents, other insurers
and reinsurers and other persons having business dealings with such company;
(h) any failure to maintain in force all existing casualty and liability
insurance and reinsurance policies and fidelity bonds or policies or bonds
providing substantially the same coverage; or
(i) any material adverse change in the operations or operating results of
the Pool, the participation levels of the respective Pool Participants or, to
the Knowledge of Seller, the financial and actuarial information provided to
Buyer as reflected in Section 3.21.
Section 3.20. Environmental Matters. To Seller's Knowledge, McGee and each
of McGee's Subsidiaries is in compliance with all applicable environmental laws
governing its business failure to comply with which is reasonably likely to have
a Material Adverse Effect. All licenses, permits, registrations or approvals
required for the business of McGee and each of McGee's Subsidiaries under any
environmental law have, to Seller's Knowledge, been secured and McGee and each
of its Subsidiaries is in substantial compliance therewith, except such
licenses, permits, registrations or approvals the failure to secure, or to
comply with which, is not reasonably likely to have a Material Adverse Effect.
There are no environmental claims or proceedings to which McGee is a party
pending or, to Seller's Knowledge, threatened, which (a) question the validity
or term of, or entitlement of McGee or any of McGee's Subsidiaries to, any
permit, license, order or registration required for the operation of any
facility which McGee or any of McGee's Subsidiaries currently operates and (b)
wherein an unfavorable decision, ruling or finding would be reasonably likely to
have a Material Adverse Effect. To Seller's Knowledge, there are no facts,
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circumstances, conditions or occurrences on any real property owned or leased by
McGee or any of McGee's Subsidiaries, that could reasonably be expected (i) to
form the basis of an environmental claim against McGee or any of its
Subsidiaries or any real property owned or leased by McGee or any of its
Subsidiaries or (ii) to cause such real property to be subject to any
restrictions on the ownership, occupancy, use or transferability of such real
property under any environmental law, except in each such case, such
environmental claims or restrictions that individually or in the aggregate are
not reasonably likely to have a Material Adverse Effect. To Seller's Knowledge,
hazardous toxic materials have not at any time been (i) generated, used, treated
or stored on, or transported by McGee or any of McGee's Subsidiaries to or from,
any real property owned or leased by McGee or any of McGee's Subsidiaries except
in compliance with applicable environmental laws or (ii) released by McGee or
any of McGee's Subsidiaries on any such real property, in each case where such
occurrence or event is reasonably likely to have a Material Adverse Effect. None
of McGee or any Subsidiary of McGee is party to any agreement regarding
remediation or cleanup relating to any environmental claim or environmental law.
Section 3.21. Calculation of Liability with respect to Pool Participation.
(a) The financial statements of the Pool at December 31, 1996 and 1997 and
the years then ended, prepared by Deloitte & Touche LLP, and copies of which
have been delivered to Buyer, fairly present the financial condition of the Pool
at such dates and the results of the Pool's operations for the years then ended
in accordance with New York statutory accounting principles consistently
applied.
(b) The unaudited December 31, 1998 operating statement and balance sheet
of the Pool and the unaudited December 31, 1998 balance sheet of the SICH
participation in the Pool, copies of which have been delivered to Buyer, were
prepared in accordance with generally accepted accounting principles (except
that such balance sheets lack footnote disclosures) and in accordance with the
relevant terms of the respective Pool Agreements.
(c) Without derogation from the representations and warranties of Seller in
Sections 3.21(a) and 3.21(b) as to preparation in accordance with statutory
accounting principles and generally accepted accounting principles of the
financial statements referred to therein, Seller notes that such principles do
not necessarily result in adequacy of reserves and Seller makes no
representation or warranty that the reserves of the Pool set forth on the
foregoing balance sheets described in Section 3.21(a) and 3.21(b) above are
adequate or sufficient.
Section 3.22. Finders and Brokers. Neither Seller nor any Subsidiary nor
any officer or director of Seller nor any of its Subsidiaries has engaged or
authorized any broker, finder, investment banker or other third party, other
than Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ"), to act on
behalf of Seller, directly or indirectly, as a broker, finder, investment banker
or in any other like capacity in connection with this Agreement or the
transactions contemplated hereby, or has consented to or acquiesced in anyone so
acting. Seller has no Knowledge of any claim by any person against Seller or any
of its Subsidiaries or Buyer for compensation for so acting or of any basis for
such a claim and Seller shall hold Buyer totally harmless against any costs or
expenses to Buyer arising out of any such claim on Seller's behalf.
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Section 3.23. Disclosure. No representation or warranty of Seller contained
herein or in any Schedule hereto contains or will on the Closing Date contain
any untrue statement of a material fact or omits or will on the Closing Date
omit to state any material fact necessary to make the statements herein or
therein not false or misleading.
Section 3.24. Relationship between Seller and McGee.
(a) Except as set forth on Schedule 3.24, McGee does not currently make use
of any property or services of Seller in the conduct of its business.
(b) Except as set forth on Schedule 3.24, since December 31, 1998, there
has not been any transfer of funds or other property between McGee or any of its
Subsidiaries and Seller.
Section 3.25. Agreements regarding Pool. Schedule 3.25 contains a list of
each material agreement and undertaking, written or oral, to which McGee is a
party relating to the Pool.
Section 3.26. Participation of SICH in Pool. As of January 1, 1999, SICH's
net percentage participation in the Pool was 75 percent in the United States
Pool and 85.5 percent in the Canadian Pool. -----------------------------
Section 3.27. No Undisclosed Liabilities. To Seller's Knowledge, there are
no debts, liabilities or obligations or claimed debts, liabilities or
obligations of McGee, contingent or absolute, other than liabilities reflected
in the balance sheet as of December 31, 1998 delivered in accordance with
Section 3.6, that are reasonably likely to be asserted and, if asserted, would
be reasonably likely to result in a material liability of McGee.
IV.
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REPRESENTATIONS, WARRANTIES AND
AGREEMENTS OF BUYER
Buyer represents, warrants and agrees as follows:
Section 4.1. Organization and Standing. Buyer is a corporation duly
organized, validly existing and in good standing under the laws of the State of
California. Buyer has all requisite corporate power and authority to own its
properties and to carry on its business as now being conducted.
Section 4.2. Certificate of Incorporation and By-Laws. The copies of the
Certificate of Incorporation and By-Laws of Buyer which have heretofore been
delivered to Seller are true, accurate and complete and reflect all amendments
or changes in effect as of the date hereof.
Section 4.3. Authorization.
(a) This Agreement has been duly authorized by all necessary corporate
action of Buyer. This Agreement will, when duly executed and delivered, be a
valid and binding agreement of Buyer, enforceable against Buyer in accordance
with its terms, except as limited by bankruptcy, insolvency, reorganization,
moratorium or other similar laws now or hereafter in effect relating to or
affecting creditors' rights generally, and except that the remedy of specific
performance and injunctive and other forms of equitable relief may be subject to
equitable defenses and to the equitable discretion of the court before which any
proceeding therefor may be brought.
(b) Each of the Ancillary Agreements to which Buyer is a party has been or,
prior to the Closing will be, duly authorized by all necessary corporate action
of Buyer. Each of the Ancillary Agreements to which Buyer is a party will, when
duly executed and delivered, be a valid and binding agreement of Buyer
enforceable against it in accordance with the terms thereof, except as limited
by bankruptcy, insolvency, reorganization, moratorium or other similar laws now
or hereafter in effect relating to or affecting creditors' rights generally, and
except that the remedy of specific performance and injunctive and other forms of
equitable relief may be subject to equitable defenses and to the equitable
discretion of the court before which any proceeding therefor may be brought.
Section 4.4. No Conflicts.
(a) Neither the execution nor the delivery by Buyer of this Agreement or
any Ancillary Agreement, nor the consummation of the transactions contemplated
hereby or thereby, nor the compliance with or fulfillment of the terms and
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provisions hereof or thereof by Buyer, will: (i) conflict with or result in a
breach or violation of any of the terms, conditions or provisions of the
Certificate of Incorporation or By-Laws of Buyer or any of Buyer's Subsidiaries;
or (ii) conflict with or result in a breach or violation of, or default or loss
of a material benefit under, or permit the acceleration of any obligation under
any provision of any agreement, indenture, mortgage, lien, lease or other
instrument or restriction of any kind to which Buyer or any Subsidiary of Buyer
is a party or by which it or any of its assets or properties is otherwise bound;
or (iii) violate any order, writ, injunction, decree, statute, rule or
regulation applicable to Buyer or any of the Subsidiaries of Buyer or any of the
assets or properties of any of them; which conflict, breach, violation, default,
loss or other result, in the case of each of clauses (ii) and (iii), is
reasonably likely to have a Material Adverse Effect or a material adverse effect
on the ability of Buyer to perform its obligations hereunder. Except as set
forth in Schedule 4.4 hereto, no consent, approval or authorization of, or
filing, registration or qualification with, any governmental authority on the
part of Buyer or any Subsidiary of Buyer is required in connection with the
execution, delivery and performance of this Agreement or the offer, sale or
delivery of the Common Stock as provided herein.
(b) Neither the execution nor the delivery by any Subsidiary
of Buyer of any of the Ancillary Agreements to which such Subsidiary is a party,
nor the consummation by any such Subsidiary of the transactions contemplated by
any Ancillary Agreement to which it is a party, nor the compliance with or
fulfillment by any such Subsidiary of the terms and provisions of any Ancillary
Agreement to which it is a party, will: (i) conflict with or result in a breach
or violation of any of the terms, conditions or provisions of the Certificate of
Incorporation or By-Laws of such Subsidiary; or (ii) conflict with or result in
a breach or violation of, or default or loss of a material benefit under, or
permit the acceleration of any provision of any lease or other or restriction of
any kind to which such Subsidiary is a party or by which it or any of its assets
is otherwise bound; or (iii) violate any order, acceleration of any obligation
under any agreement, indenture, mortgage, lien, instrument, writ, injunction,
decree, statute, rule or regulation applicable to such Subsidiary or any of its
assets or properties; which conflict, breach, violation, default, loss or other
result, in the case of each of clauses (ii) and (iii), is reasonably likely to
have a Material Adverse Effect or a material adverse effect on the ability of
such Subsidiary to perform its obligations under any of the Ancillary Agreements
to which it is a party.
Section 4.5. Finders and Brokers. All negotiations on behalf
of Buyer relative to this Agreement and the transactions contemplated hereby
have been carried on directly by Buyer without the intervention of any broker,
finder, investment banker or other third party representing Buyer. Neither Buyer
nor any Subsidiary nor any officer or director of Buyer or any of its
Subsidiaries, has engaged or authorized any broker, finder, investment banker or
other third party to act on Buyer's behalf, directly or indirectly, as a broker,
finder, investment banker or in any other like capacity in connection with this
Agreement or the transactions contemplated hereby, or has consented to or
acquiesced in anyone so acting. Buyer knows of no claim by any person against
Buyer or any of its Subsidiaries for compensation for so acting or of any basis
for such a claim and Buyer shall hold Seller totally harmless against any costs
or expenses to Seller arising out of any such claim.
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Section 4.6. Investor Status. Buyer is an "Accredited Investor" within the
meaning of SEC Rule 501(a). Buyer is purchasing the Common Stock for its own
account and not with a view to distribution within the meaning of Section 2(11)
of the Securities Act of 1933.
V.
COVENANTS OF BUYER AND SELLER
Section 5.1. Access to Properties, Books and Records. Prior to
the Closing Date, Seller shall afford or cause McGee to afford to the officers,
attorneys, accountants and other authorized representatives of Buyer, reasonable
access to McGee and to each Subsidiary of McGee and to the officers, properties,
books and records (electronic and other) of all of the foregoing during regular
business hours and upon prior notice to Seller in order to afford Buyer the
opportunity to make such investigations of the affairs of McGee and its
Subsidiaries as they may reasonably deem necessary. Seller shall also furnish,
or cause McGee and its Subsidiaries to furnish, to Buyer such information
relating to their respective businesses and affairs as Buyer shall from time to
time reasonably request. All information made available to Buyer and its
representatives pursuant to this Section 5.1 shall be subject to the terms of
the confidentiality letter agreement dated December 28, 1998 between Seller and
Buyer (which is incorporated herein by reference thereto).
Section 5.2. Conduct of Business.
(a) Except as otherwise permitted by this Agreement, or with the prior
written consent of Buyer, after the date hereof and prior to the Closing Date
Seller shall not cause, suffer or permit McGee or any of its Subsidiaries,
either on its own behalf or on behalf of or for the account of the Pool to:
(i) create, issue or sell any of its own stocks, bonds, or other of its
corporate securities, or grant or otherwise issue any options, warrants or other
purchase rights with respect thereto, or enter into any contract or commitment
to do any of the foregoing;
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(ii) create, incur, assume, guarantee or otherwise become liable with
respect to any obligation or liability to any person, fixed or contingent, in
excess of $50,000;
(iii) declare or make any payment or distribution with respect to its
capital stock to its stockholders or purchase or redeem any shares of the
capital stock of McGee;
(iv) sell or transfer any properties or assets (including cash held in bank
accounts or otherwise) or cancel, release or assign any indebtedness owed to it
or any claims held by it, other than in the ordinary course of business;
(v) mortgage, pledge or subject to lien, or any other encumbrance, any
assets, tangible or intangible except for liens (A) with respect to deposits
with State insurance departments and (B) letters of credit, trust funds and
funds withheld arrangements, in each case relating to credit for reinsurance;
provided that such liens shall have been in the ordinary course of business;
(vi) sell, assign, transfer or otherwise dispose of any tangible assets or
cancel any debt or claim, except in each case in the ordinary course of
business;
(vii) sell, assign or transfer any intangible right or asset;
(viii) amend, terminate or waive any right of any substantial value, other
than in connection with the settlement of claims, including reinsurance claims,
or otherwise in the ordinary course of business;
(ix) make any material change in the methods of valuation or accounting or
of determining reserves for McGee or any Subsidiary of McGee or for the Pool
from the methods applied during and for the period ended December 31, 1998;
(x) make any substantial change in the standard form of contract currently
in force between McGee or any of its Subsidiaries and brokers and agents
representing McGee or any of its Subsidiaries or in the compensation
arrangements in connection therewith or enter into any contract with any agent
or broker other than in substantially the form now used;
(xi) except as disclosed at the time to the Buyer, and with Buyer's consent
in writing, amend the Pool Agreements;
(xii) change risk retention levels net of reinsurance in connection with
the Pool business;
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(xiii) except as disclosed at the time to the Buyer, and with Buyer's
consent in writing, revise current percentage participations in the Pool;
(xiv) grant any salary increase to any officer or any general salary
increase to its employees other than, in each case, normal merit increases, or
enter into any new, or amend or alter in any material respect any existing,
employment or consulting agreement or any bonus, incentive compensation, profit
sharing, retirement, pension, group insurance, death benefit or other fringe
benefit plan, trust agreement or similar arrangement adopted by it with respect
to its own employees or its agents, general agents or underwriting managers;
(xv) amend its Certificate of Incorporation or By-Laws or merge or
consolidate with any other corporation;
(xvi) acquire or increase its beneficial ownership of stock or assets of
any other person, firm, association, corporation or other business organization,
except for investments made in the ordinary course and consistent with prior
investment practice;
(xvii) except in the ordinary course of business or as required by this
Agreement, enter into or assume any contract, agreement, obligation, lease,
license or commitment having a term in excess of one year or involving an
aggregate monetary commitment or exposure in excess of $50,000;
(xviii) arrange for or solicit the issuance or renewal of insurance of any
risk other than those insurance risks which are undertaken in the ordinary
course of business;
(xix) knowingly do or omit to do any act which could reasonably be expected
to cause a breach of any contract, commitment or obligation, which breach is
reasonably likely to have a Material Adverse Effect;
(xx) make any capital expenditure, capital addition or capital improvement,
or any commitment for any of the foregoing, in excess of $50,000, except for
commitments in effect on the date hereof as reflected on Schedule 3.15;
(xxi) amend any Tax Return, settle any tax audit or tax controversy, make
any tax election or change any tax accounting method; or
(xxii) make intercompany advances and settlement thereof other than in the
ordinary course of business and consistent with past business practice except
that reimbursement from McGee to the Seller and/or affiliates of the Seller will
be limited as it relates to:
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a) 1998 bonuses paid in 1999, to the amount accrued in McGee's December 31,
1998 balance sheet;
b) 1998 pension contribution paid in 1999, to the amount accrued in McGee's
December 31, 1998 balance sheet;
c) amounts paid pursuant to transaction related incentive programs of
Seller described in writing to Buyer, to zero;
d) amounts representing the administrative expense of participation by
McGee employees in the Orion Capital Corporation Stock Purchase Plan, by
excluding the amount of discounts from fair market value of shares purchased
under the program;
e) overhead expenses of Seller, capital charges and other similar charges
of Seller, to zero.
Advances and settlements made as described in this subparagraph (xxii)
shall be reported periodically by Seller to Buyer before and on the Closing Date
and Buyer shall have the right to question the ordinary course nature of any
transaction and its consistency with prior practice and this Section
5.2(a)(xxii).
(b) Except as otherwise permitted by this Agreement or with the prior
written consent of Buyer, prior to the Closing Date, Seller shall cause McGee
and each of its Subsidiaries to use commercially reasonable best efforts to:
(i) maintain at all times its status as a corporation, duly organized,
validly existing, in good standing and duly qualified and licensed to conduct
its business as now being conducted in compliance with applicable law in the
jurisdiction of its incorporation and each of the other jurisdictions in which
it is so conducting its business;
(ii) at all times do or cause to be done, and cause each of its officers
and employees to do, all things necessary to maintain, preserve and renew the
corporate existence of McGee and the corporate existence of the Subsidiaries of
McGee and all material federal, provincial, state and local and other licenses,
permits, franchises and other governmental authorizations necessary to own and
operate their respective properties and carry on their respective businesses,
and comply in all material respects with all federal, provincial, state and
local laws applicable to McGee or any of its Subsidiaries or the Pool;
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(iii) operate its business substantially as presently operated and only in
the ordinary course and (A) preserve substantially intact the present business
organization, (B) collect all premiums, balances due from reinsurers and Pool
Participants and accounts receivable and (C) preserve its relationships with and
the goodwill of its Pool Participants, customers, suppliers, agents, general
agents, other insurers and reinsurers and other persons having business dealings
with it, except where the failure to do so is not reasonably likely to have a
Material Adverse Effect;
(iv) with respect to the properties of McGee and each of its Subsidiaries,
maintain in force all existing casualty and liability insurance and reinsurance
policies and fidelity bonds or policies or bonds providing substantially the
same coverage;
(v) maintain proper business and accounting records for itself in
accordance with generally accepted accounting principles and for the Pool in
accordance with accounting practices required or permitted by applicable
federal, provincial, state and local regulation;
(vi) advise Buyer in writing of any event, occurrence or circumstance of
which it is aware which is reasonably likely to have a Material Adverse Effect;
(vii) comply in all material respects with all laws applicable to it and to
the conduct of its business;
(viii) maintain all of the properties which are material to its business
operations or financial condition in good operating condition and repair,
ordinary wear and tear excepted, and take all steps reasonably necessary to
maintain its intangible assets.
Section 5.3. Regulatory and Other Filings and Approvals. Each of Buyer and
Seller shall duly make (and Seller shall cause its Subsidiaries, including McGee
and its Subsidiaries, to make) all regulatory filings required to be made by
each in respect of this Agreement or the transactions contemplated hereby as
reflected on Schedule 5.3 to the Agreement. Each of Buyer and Seller shall use
its commercially reasonable best efforts at all times prior to January 1, 2001
to obtain (and cause ------------------------------------------ its Subsidiaries
to obtain) all regulatory approvals necessary to carry out the transactions
contemplated by this Agreement, including, without limitation, the obtaining by
Buyer and Buyer's Subsidiaries of any necessary approvals by insurance
commissioners or superintendents of insurance of policy forms to be used
following the Closing.
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Section 5.4. Premerger Notification and Clearance. Pursuant to the
Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the "Hart-Scott-Rodino
Act"), the Investment Canada Act and the Competition Act of Canada, each of
Buyer and Seller will file, or cause to be filed, any application, notification
or report form which is required to be filed with the Premerger Notification
Office of the U.S. Federal Trade Commission or with the Antitrust Division of
the U.S. Department of Justice or with Industry Canada or the Competition Bureau
(Canada), if applicable (collectively referred to herein as the "Premerger
Notification Agencies") in respect of the transactions contemplated hereby, each
of which filings shall comply as to form with all requirements applicable
thereto and all of the data and information reported in which shall be true,
correct and complete in all material respects. Each of Buyer and Seller will
promptly comply with all requests, if any, of any of the Premerger Notification
Agencies for additional information or documentation in connection with each
notification, report and application filed by or on behalf of either Buyer or
Seller with any of the Premerger Notification Agencies, unless in the opinion of
both McCutchen, Doyle, Brown & Enersen, LLP and Cummings & Lockwood (or of
Canadian Counsel for the Buyer and Seller, respectively in the case of filings
made under the Investment Canada Act or the Competition Act, if applicable) such
compliance is not necessary in order to obtain clearance from the relevant
Premerger Notification Agencies. Such additional information and documentation
will comply with all requirements applicable thereto and will be true, correct
and complete in all material respects.
Section 5.5. Further Assurances.
(a) Each of Buyer and Seller agrees to use commercially reasonable best
efforts to take such reasonable action as may be necessary or appropriate in
order to effectuate the transactions contemplated hereby. In case at any time
after the Closing Date any further action by Seller is necessary to vest Buyer
with Seller's full title to the Common Stock, Seller shall take all such action.
(b) In furtherance of and in addition to other obligations of Seller
pursuant to this Agreement and the transactions entered into pursuant hereto,
from and after the Closing Date, Seller shall not (i) use or purport to license
or allow any other person to license any mark, trade name or trade dress of
McGee or any Subsidiary of McGee so long as McGee, any of its Subsidiaries, or
any successor thereto has valid rights therein or (ii) from and after the date
hereof and until June 30, 2000, in any way damage or disparage, and shall
undertake and ensure that no Subsidiary of Seller so damages or disparages, the
name, business or reputation of McGee or any of McGee's Subsidiaries, or of the
Pool or any mark, trade name or trade dress of McGee or any Subsidiary of McGee
or of the Pool.
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(c) Buyer agrees, following the Closing, to not use, advertise or promote,
or license any use, advertisement or promotion, and shall cause its Subsidiaries
not to use, advertise or promote, or license any use, advertisement or
promotion, of the "Seahorse Service Mark In the Orion Ring" of U.S. Trademark
Registration No. 2,180,334 identified on Schedule 3.8(c) (hereinafter the
"Seahorse/Orion Ring" mark), and agrees to cause McGee to surrender for
cancellation, with prejudice, and to abandon all use of, the Seahorse/Orion Ring
mark and any registrations thereof in a form acceptable to counsel for the
Seller within ninety (90) days of the Closing Date. Buyer agrees, following the
Closing, that Seller shall retain ownership of its entire right, title and
interest in and to the "Orion Ring" component of the Seahorse/Orion Ring mark,
and that Buyer shall not use, advertise or promote the "Orion Ring" component,
or any mark confusingly or deceptively similar to the "Orion Ring" component for
so long as Seller continues to use, or does not abandon use of the "Orion Ring"
as a mark or component of a mark. Seller agrees, following the Closing, that
McGee shall receive Seller's entire right, title and interest in and to the
"Seahorse" and "Wm. H. McGee" components of the Seahorse/Orion Ring mark
together with all goodwill of McGee's business symbolized by those components,
and that Seller shall not use, advertise or promote these components together or
separately, or any mark confusingly or deceptively similar to these components,
for so long as Buyer continues to use, or does not abandon use of either
component as a mark or component of a mark. Seller agrees, for a period of
twenty-four (24) months following the Closing, so long as McGee or any
Subsidiary of McGee or any successor to either has valid rights therein, that
neither Seller nor any Subsidiary of Seller will use any customer list that is
the property of McGee or was received from McGee.
Section 5.6. Tax Matters. Each of Buyer and Seller covenants that:
(a) (i) Seller shall have the right and obligation timely to prepare and
file, or cause timely to be prepared and filed, when due (giving effect to any
extension of time), all Tax Returns with respect to McGee or its Subsidiaries
for any Tax periods ending on or before the Closing Date.
(ii) Buyer shall have the right and obligation timely to prepare and file,
or cause timely to be prepared and filed, when due (giving effect to any
extension of time), all Tax Returns with respect to McGee or its Subsidiaries
for any Tax periods ending after the Closing Date and any Tax period that begins
before the Closing Date and ends after the Closing Date (a "Straddle Period")).
(iii) Any Tax Return which includes McGee or its Subsidiaries for any tax
period ending on or before December 31, 1998 (a "Pre-Year End Period"), and any
Tax Return which includes McGee or its Subsidiaries for any tax period beginning
on or after January 1, 1999 (a "Post-Year End Period") to the extent the items
reported on such Tax Return might increase any Tax liability of Seller for any
Pre-Year End Period or any Straddle Period, shall be prepared in accordance with
past Tax accounting practices used with respect to the Tax Returns in question
as determined by Seller in Seller's discretion, and to the extent any items are
not covered by past practices, in accordance with reasonable Tax accounting
practices selected by the filing party with respect to such Tax Return under
this subsection 5.6(a) with the consent (not to be unreasonably withheld or
delayed) of the non-filing party.
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(iv) In the case of any Tax Return for any Straddle Period, Buyer shall
provide Seller with copies of the completed Tax Return for such Tax period,
together with such related work papers and other documents as Seller shall
reasonably request, no later than sixty (60) days before the due date (including
any extensions) for the filing of such Tax Return and materials. Seller and its
authorized representatives shall have the right to review such Tax Return.
Seller and Buyer agree to consult each other and resolve in good faith any
issues arising under the terms of this subsection 5.6(a)(iv) as a result of the
review of any such Tax Returns and/or materials for any Straddle Period. If the
parties are unable to resolve any dispute within thirty (30) days after such Tax
Returns are provided to Seller, the parties shall resort to the method of
dispute resolution provided in Section 13.11 hereof. If such disputes have not
been resolved prior to the due date for filing of such Tax Return, the Tax
Return in question, to the extent any issues thereon remain unresolved, shall be
timely filed in accordance with the positions taken by Seller. If a
determination is made through the dispute resolution process after a Tax Return
is filed that Seller's position was inappropriate, Buyer shall promptly file an
amended Tax Return (to the extent permitted by applicable law) reflecting the
final decision of the Arbitrator and Seller shall pay to Buyer any appropriate
additional Tax amounts resulting from such amended return provided that such
payment shall be made only to the extent the provision for Taxes as of December
31, 1998 shall have been exceeded.
(v) In the case of the Tax period of McGee or its Subsidiaries which began
on January 1, 1999 and shall end on the Closing Date, Seller shall provide Buyer
with copies of the completed Tax Return for such Tax period, together with such
related work papers and other documents as Buyer shall reasonably request, no
later than sixty (60) days before the due date (including any extensions) for
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the filing of such Tax Return and materials. Buyer and its authorized
representatives shall have the right to review such Tax Return. Seller and Buyer
agree to consult each other and resolve in good faith any issues arising under
the terms of this subsection 5.6(a)(v) as a result of the review of any such Tax
Returns and/or materials for any such Tax period. If the parties are unable to
resolve any dispute within thirty (30) days after such Tax Returns are provided
to Buyer, the parties shall resort to the method of dispute resolution provided
in Section 13.11 hereof. If such disputes have not been resolved prior to the
due date for filing of such Tax Return, the Tax Return in question, to the
extent any issues thereon remain unresolved, shall be timely filed in accordance
with the positions taken by Seller. If a determination is made through the
dispute resolution process after a Tax Return is filed that Seller's position
was inappropriate, Seller shall promptly file an amended Tax Return (to the
extent permitted by applicable law) reflecting the final decision of the
Arbitrator and Buyer shall pay to Seller, within thirty (30) days after payment
of such Tax amounts and filing of such amended Tax Return, any appropriate
additional Tax amounts, or Seller shall pay to Buyer, within thirty (30) days
following the receipt of such Tax refund amounts, any appropriate Tax refund
amounts, resulting from such amended return.
(b) (i) Seller shall be liable for, and shall indemnify and hold Buyer
harmless from and against, any and all Taxes imposed on or with respect to McGee
or its Subsidiaries for Pre-Year End Periods; provided that Buyer shall be
liable for and shall hold Seller harmless from and against any and all such
Taxes which result from an amendment, restatement, or recalculation of any Tax
Return with respect to such Taxes occasioned by any action taken by Buyer after
December 31, 1998 or by McGee after the Closing Date.
(ii) Buyer shall be liable for, and shall indemnify and hold Seller
harmless from and against, any and all Taxes imposed on or with respect to McGee
or its Subsidiaries for Post-Year End Periods.
(iii) In the case of a Straddle Period, Seller shall be solely responsible
for all Taxes attributable to any Pre-Year End Period, and Buyer shall be solely
responsible for all Taxes attributable to Post-Year End Periods. Tax items shall
be apportioned between Pre-Year End Periods and Post-Year End Periods based on a
closing of the books and records of McGee or its Subsidiaries as of December 31,
1998 (provided that (A) any Tax item incurred by reason of the transactions
occurring on or before the Closing Date as contemplated by this Agreement shall
be treated as occurring in a Pre-Year End Period and (B) exemptions, allowances,
deductions or credits that are calculated on an annual basis shall be
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apportioned on a daily pro rata basis). Notwithstanding anything to the contrary
in the preceding sentence, the parties agree that for U.S. federal income tax
purposes, Tax items for any Straddle Period shall be apportioned between
Pre-Year End Periods and Pos Year End Periods in accordance with U.S. Treasury
Regulations Section 1.1502-76(b), which regulations shall be reasonably
interpreted by the parties in a manner intended to achieve the method of
apportionment described in the preceding sentence. Seller and Buyer will not
exercise any option or election (including any election ratably to allocate a
Tax year's items under Treasury Regulations Section 1.1502-76(b)(2)(ii)) to
allocate Tax items in a manner inconsistent with this subsection 5.6(b).
(iv) Notwithstanding paragraphs (i), (ii) and (iii) of this subsection
5.6(b) and paragraph (iv) of subsection 5.6(a) hereof, Seller shall have no
obligation to pay, or indemnify Buyer in respect of any unpaid Taxes due to be
paid by Seller unless, and then only to the extent that, the amount of such
unpaid Taxes exceeds the provision for Taxes on the financial statements of
McGee and its Subsidiaries as of December 31, 1998 (with the exclusion of any
deferred Taxes). Seller shall determine, from time to time when reasonably
necessary, whether such provision for Taxes has been exceeded. Buyer shall
cooperate with Seller with regard to such determination, including as provided
in Section 5.6(h) below. Seller and Buyer agree to consult each other and
resolve in good faith any issues arising under the terms of this subsection
5.6(b)(iv). If the parties are unable to resolve any dispute within twenty (20)
days after such determination by Seller, the parties shall resort to the method
of dispute resolution provided in Section 13.11 hereof.
(c) (i) If Buyer receives a Tax refund with respect to Taxes arising in a
Pre-Year End Period, Buyer shall pay, within thirty (30) days following the
receipt of such Tax refund, the amount of such Tax refund to Seller. If Seller
receives a Tax refund with respect to Taxes arising in any Post-Year End Period,
within thirty (30) days following the receipt of such Tax refund, Seller will
pay the amount of such Tax refund to Buyer. Additionally, if Seller pays any
Taxes imposed on or with respect to McGee or its Subsidiaries for the Tax period
which began on January 1, 1999 and shall end on the Closing Date, Buyer shall
pay, within thirty (30) days following the filing of any Tax Return giving rise
to such Tax and the payment thereof, the amount of such Tax to Seller. If Seller
receives any Tax benefit with respect to McGee or its Subsidiaries for the Tax
period which began on January 1, 1999 and shall end on the Closing Date, Seller
shall pay, within thirty (30) days following the filing of any Tax Return giving
rise to such Tax benefit, the amount of such Tax benefit to Buyer.
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(ii) Buyer agrees that, to the extent permitted by applicable law, it shall
not carry back, and shall not cause or permit McGee or its Subsidiaries or any
other affiliate of Buyer to carry back, any net operating loss, loss from
operations or other Tax attributed to any Tax year or period of McGee or its
Subsidiaries or any affiliate thereof (including, but not limited to, any member
of any affiliated, combined or unitary group of which McGee is or was a member)
ending on or before the Closing Date, or to any Tax period beginning before and
ending after the Closing Date to the extent of the portion of such period ending
on the Closing Date. Buyer agrees that Seller shall not have any obligation
under this Agreement to return or remit any refund or other Tax benefit
attributable to a breach by Buyer of the foregoing undertaking.
(iii) Any amended Tax Return or claim for Tax refund for any period ending
on or before the Closing Date other than a Straddle Period shall be filed, or
caused to be filed, only by Seller. Seller shall not, without the prior written
consent of Buyer (which consent shall not be unreasonably withheld or delayed)
make or cause to be made, any such filing, to the extent such filing, if
accepted, reasonably might change the Tax liability of Buyer for any Tax period.
(iv) An amended Tax Return or claim for Tax refund for any Straddle Period
shall be filed by the party responsible for filing the original Tax Return
hereunder if either Buyer or Seller so requests, except that such filing shall
not be done without the consent (which shall not be unreasonably withheld or
delayed) of Buyer (if the request is made by Seller) or of Seller (if the
request is made by Buyer).
(v) Any amended Tax Return or claim for Tax refund for any period beginning
after the Closing Date other than a Straddle Period shall be filed, or caused to
be filed, only by Buyer, who shall not be obligated to make (or cause to be
made) such filing. Buyer shall not, without the prior written consent of Seller
(which consent may be withheld by Seller in Seller's sole and absolute
discretion) file, or cause to be filed, any amended Tax Return or claim for Tax
refund for any Post-Year End Period to the extent that such filing, if accepted,
might change the Tax liability of Seller for any Tax periods ending on or before
the Closing Date as determined by Seller.
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(d) Buyer shall be liable for and shall pay, and shall hold Seller and its
Subsidiaries harmless against, any Taxes attributable to any election under
Section 338 of the Internal Revenue Code of 1986, as amended, (the "Code") or
any comparable or resulting election under state, local or foreign law (a
"Section 338 Election"), with respect to the transactions contemplated
hereunder. Notwithstanding the prior sentence, Buyer shall not make any Section
338 Election without the prior written consent of Seller which consent Seller
may withhold in its sole and absolute discretion.
(e) Buyer shall be liable for and shall pay, and shall hold Seller and its
Subsidiaries harmless against any transfer, recordation, stamp, or similar Taxes
of any kind required in the applicable jurisdiction in connection with the
effectuation of the transactions contemplated hereunder and imposed upon Seller
and its Subsidiaries.
(f) Seller and Buyer agree that for all federal income tax purposes the Tax
period of McGee or its Subsidiaries which began on January 1, 1999 shall be
terminated as of the close of business on the Closing Date in accordance with
Treasury Regulations Section 1.1502-76(b)(1) and subsection 256(9) of the Income
Tax Act (Canada).
(g) Seller and Buyer shall provide to each other notice within ten (10)
days of receipt of any audit or similar investigation or proceeding in which the
IRS or any other governmental entity makes or proposes to make a Tax adjustment
to any Tax period which includes any period up to the Closing Date. Seller shall
control any such proceeding as to Tax periods ending on or prior to the Closing
Date, and Buyer shall control any such proceeding as to Tax periods beginning
after the Closing Date, provided that, with respect to any such audit, the other
party or its representative shall have the right, at its expense, to participate
in any such audit or similar investigation. The parties agree that they will not
settle, compromise or agree to any Tax adjustment which affects or could affect
the other party's Tax liability without the prior written consent of the other
party, which consent shall not be unreasonably withheld. The parties agree to
cooperate with each other for the purposes of any audit or similar
investigation, which cooperation shall include, but not be limited to (i)
providing all relevant information that is available to Buyer, Seller and/or
McGee, as the case may be, with respect to such audit or investigation, (ii)
making personnel available at reasonable times, and (iii) preparation and
responses to requests for information, provided that the foregoing shall be done
in a manner so as to not interfere unreasonably with the conduct of business by
Buyer, Seller or McGee, as the case may be.
(h) Seller on the one hand, and Buyer and McGee, on the other, shall
cooperate (and cause their affiliates to cooperate) with each other and with
each other's agents, including accounting firms and legal counsel, in connection
with Tax matters relating to McGee or its Subsidiaries, including (i)
preparation and filing of Tax Returns, (ii) determining the liability for, and
amount of, any Taxes due or the right to, and amount of, any refund of Taxes,
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(iii) examinations of Tax Returns, and (iv) any administrative or judicial
proceeding in respect of Taxes assessed or proposed to be assessed. Such
cooperation shall include each party making all information and documents in its
possession relating to McGee or its Subsidiaries available to the other party.
The parties shall retain all Tax Returns, schedules and work papers, and all
material records and other documents relating thereto, until at least one year
after the expiration of the applicable statute of limitations (including, to the
extent notified by any party, any extension thereof) of the Tax period to which
such Tax Returns and other documents and information relate. Each of the parties
shall also make available to the other party, as reasonably requested and
available, personnel (including officers, directors, employees and agents)
responsible for preparing, maintaining, and interpreting information and
documents relevant to Taxes, and personnel reasonably required for purposes of
providing information or documents in connection with any administrative or
judicial proceedings relating to Taxes.
(i) The Tax Sharing Agreement dated July 1, 1995 by and between Seller and
McGee shall be terminated effective as of the close of business on December 31,
1998. Any resulting unsettled accruals or adjustments in respect of the Taxes of
McGee or its subsidiaries shall be settled as of the Closing Date.
(j) Seller and Buyer agree that any payment made under this Section 5.6
shall be treated by the parties for all purposes (to the extent permitted under
applicable tax law), as an adjustment to the consideration being provided for
the Common Stock hereunder.
(k) Notwithstanding any other provision in this Agreement to
the contrary (including without limitation Article 13), the obligations of
Seller and Buyer under this Section 5.6 relating to any Taxes or matters with
respect thereto shall survive until the lapse of the statute of limitations for
the assessment of such Tax or sixty (60) days after the final administrative or
judicial determination of such Tax and, for a Tax for which McGee or its
Subsidiaries are not primarily liable, the later to occur of (i) the lapse of
the statute of limitations for the collection of such Tax or (ii) sixty (60)
days after the final administrative or judicial determination that such Tax is
collectable against Seller or its Subsidiaries; provided, however, that any
claim in respect of an obligation under this Section 5.6 asserted in writing
prior to the lapse of the statute of limitations or sixty (60) days after the
final administrative or judicial determination shall continue to survive.
(l) After the Closing, neither party shall have any liability or obligation
with respect to the matters set forth in this Section 5.6, except pursuant to
this Section 5.6.
5.7. Pool Financial Statements. Within five (5) days of the delivery to
Seller of the audited statutory financial statements of the Pool at December 31,
1998, accompanied by the report of Deloitte & Touche, LLP, Seller will delivery
a copy of such financial statements to Buyer.
VI. -
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AGREEMENTS WITH RESPECT -
TO POOL OPERATION -
Section 6.1. Pool Participations; Reinsurance.
(a) At or prior to the Closing, Seller shall cause SICH and CI to enter
into Reinsurance Agreements with Buyer substantially in the form of Exhibit C.
(b) At the Closing Buyer shall cause McGee, subject to applicable
regulatory requirements, to designate Buyer as the Clearing Company, as that
term is defined in the Inter-Office Reinsurance Agreements, pursuant to McGee's
authority under the Inter-Office Reinsurance Agreements effective 12:00:01 a.m.
New York Time on January 1, 1999.
(c) At the Closing Buyer shall cause McGee, subject to applicable
regulatory requirements, to amend the 1999 Schedule of Participation of the
Inter-Office Reinsurance Agreements to transfer to Buyer, and Buyer shall assume
(i) SICH's Pool Participation in the United States Pool and (ii) SICH's Pool
Participation in the Canadian Pool, effective 12:00:01 a.m. New York Time on
January 1, 1999, thereby assuming all of SICH's rights, liabilities and
obligations as a Pool Participant on and after January 1, 1999.
Section 6.2. Underwriting Operations of the Pool.
(a) From the date hereof through the Closing Date:
(i) Seller will cause McGee to use commercially reasonable best efforts to
conduct the underwriting operations of the Pool in the ordinary course and in a
manner consistent with prior practice and otherwise in accordance with this
Agreement; and
(ii) Seller will not, and will not cause or permit McGee to, introduce or
commence on behalf of the Pool or for its account the offering of any new
product or service or the underwriting of any type of risk or any line of
insurance not currently written by or through the Pool.
(b) From and after the Closing and through 12:00 a.m. New York Time on
December 31, 2000, McGee shall, and Buyer shall use commercially reasonable best
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efforts to cause McGee to, manage the affairs of the Pool on behalf of the Pool
Participants and undertake on behalf of the Pool only such insurance risks as
shall in the judgment of McGee be appropriate and consistent with prior
practices of the Pool and otherwise be in accordance with this Agreement and the
Ancillary Agreements. From and after the Closing and until December 31, 2000,
SICH and CI will, as requested by McGee, issue, pursuant to and in accordance
with, the terms of an underwriting management agreement to be entered into by
each of them with McGee, such policies of insurance as are placed by McGee on
behalf of the Pool; provided that Buyer shall not cause or permit McGee, on
behalf of or for the account of SICH or CI, to introduce or commence the
offering of any new product or service or the underwriting of any type of risk
or any line of insurance not written by SICH or CI on behalf of or through the
Pool prior to the Closing Date and; provided further that except as may be
necessary to update and maintain existing policy forms and filings, neither CI
nor SICH shall be obliged to file or qualify any new form of policy. In
consideration of the issuance by SICH and CI of such policies, Buyer shall pay
to SICH and CI, as their interests may appear, on the fifteenth day of the month
following the month in which such policies shall have been issued, a fee equal
to one percent (1%) of the gross direct written premiums in respect of all such
policies issued on or after January 1, 1999 and through December 31, 1999, and,
in respect of all such policies issued on or after January 1, 2000 and through
December 31, 2000, to a fee equal to two percent (2%) of the gross direct
written premiums.
(c) Buyer shall furnish, or shall cause McGee to furnish, to SICH, not
later than April 1 of each year, inter-office reinsurance financial statements
for the Pool which shall be audited for each year through December 31, 2001 and
thereafter, through December 31, 2008, shall either be audited or certified by
the Chief Financial Officer of Buyer. At all times prior to December 31, 2008,
Seller shall have the right, at its own expense, to visit the headquarters
office of McGee at reasonable times and on a reasonable number of occasions
during normal business hours to discuss the business and affairs of McGee with
officers of McGee reasonably designated by McGee for such purpose and to make
copies of relevant corporate records requested by Seller; provided that each of
Buyer and McGee shall have received at least ten days' notice of each such
visit.
(d) From and after the Closing Date, Buyer shall take, and shall use
commercially reasonable best efforts to cause McGee and the insurance
Subsidiaries of Buyer to take, all steps necessary (a) to enable McGee to make
with all necessary insurance regulatory authorities such policy-form and rate
filings as shall be necessary so that Buyer or one or more insurance
Subsidiaries of Buyer is able to issue all forms of policies now being issued on
behalf of the Pool by SICH and CI and (b) to enable Seller to make such
statutory reports as Seller shall be required to make in respect of or arising
out of the operations of the Pool and the Reinsurance Agreement.
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(e) At all times prior to December 31, 2001 McGee shall
maintain errors and omissions coverage in an amount not less than $6,500,000 per
occurrence and a deductible of not more than $1,000,000 per occurrence with one
or more insurers rated "A" or better by A.M. Best Company; and reasonably
satisfactory to Seller; provided that Buyer or any insurance Subsidiary of Buyer
which is so rated shall be presumed to be approved by Seller and; provided
further that if the annual premiums for such coverage shall exceed in the year
beginning January 1, 2000, 103% of such premiums in the year beginning January
1, 1998 or in the year beginning January 1, 2001 shall be more than 106% of such
1998 premiums then McGee shall maintain coverage in such amount and with such
deductibles as may be obtained by McGee within the premium-amount limits set
forth above.
(f) None of Seller, SICH or CI shall have any liability for the payment to
McGee of any commission, "overriding" commission, "contingent" or "profit"
commission as defined in the Pool Agreements in respect of operations of the
Pool incurred either prior to the Closing Date or during the period defined in
Section 6.2(b). VII. -
CONDITIONS TO OBLIGATIONS OF BUYER -
The obligations of Buyer under this Agreement are, at its option, subject
to the fulfillment, on or before the Closing Date, of each of the following
conditions precedent:
Section 7.1. Covenants. Seller and each Subsidiary of Seller shall have
performed and complied with all the terms, covenants and conditions required by
this Agreement to be performed or complied with by Seller on or before the
Closing Date, and Buyer shall have received from Seller, at the Closing, a
certificate executed by an officer of Seller to that effect, dated the Closing
Date.
Section 7.2. Representations and Warranties. The representations and
warranties made by Seller in this Agreement shall be true and correct as of the
Closing Date as though such representations and warranties were made at and as
of such time, and Buyer shall have received from Seller one or more
certificates, dated the Closing Date, to that effect executed by one or more
officers of Seller.
Section 7.3. Absence of Litigation and Required Regulatory Approvals. Every
consent of or approval by any governmental authority which is required in
connection with the transactions contemplated by this Agreement shall have been
obtained and be in full force and effect and there shall not be in effect any
injunction, writ, preliminary restraining order or any order, ruling or request
of any nature issued by a court or governmental agency of competent jurisdiction
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directing that any transactions provided for herein not be consummated as so
provided and no suit, action, proceeding or investigation shall be pending or
threatened before any court or governmental agency, which relates to or asserts
(i) the illegality of any of the transactions contemplated by this Agreement, or
which seeks the restraint or prohibition of the consummation of any of the
transactions contemplated by this Agreement or (ii) that material misleading
statements or omissions have been made in connection with the consummation of
any of the transactions contemplated by this Agreement or (iii) a claim for
damages in a material amount, or other material relief against McGee or any of
McGee's Subsidiaries, or against Buyer, if such claim shall arise from or relate
to the consummation of this Agreement or the transactions contemplated hereby.
Section 7.4. Premerger Notification. Any applicable period of time
necessary before the transactions contemplated hereby can be consummated, as
provided by the Hart-Scott-Rodino Act, the Investment Canada Act or the
Competition Act (Canada), if applicable, shall have expired, all required
clearances thereunder shall have been obtained and no action or proceeding shall
have been instituted by any of the Premerger Notification Agencies or any
similar agency claiming to have jurisdiction for the purpose of enjoining or
delaying the consummation of the transactions contemplated hereby.
Section 7.5. No Material Adverse Effect. Seller shall have furnished to
Buyer a certificate of an officer of Seller to the effect that no act, omission
or event has occurred between the date hereof and the Closing Date which could
reasonably be expected to have a Material Adverse Effect.
Section 7.6. Additional Agreements. Reinsurance Agreements substantially in
the form of Exhibit C shall have been entered into and shall be in full force
and effect, and the Releases in the form of Exhibits A-1, A-2 and A-3 and the
Noncompetition Agreement in the form of Exhibit B shall have been entered into
and shall be in full force and effect.
Section 7.7. Opinion of Counsel for Seller and McGee. Buyer shall have
received an opinion from John J. McCann, Esq., Executive Vice President and
Chief Legal Officer of Seller, with respect to matters relating to Seller, its
Subsidiaries and its and their obligations under this Agreement, and (ii) an
opinion of John P. Iacono, Esq., Senior Vice President and General Counsel of
McGee, with respect to matters relating to McGee and its Subsidiaries and their
obligations under this Agreement, each dated the Closing Date, and each such
opinion shall be in form and substance reasonably satisfactory to Buyer and its
counsel.
VIII. -
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CONDITIONS TO OBLIGATIONS OF SELLER -
The obligations of Seller under this Agreement are, at its
option, subject to the fulfillment, on or before the Closing Date of each of the
following conditions precedent:
Section 8.1. Covenants. Buyer shall have performed or complied with all the
terms, covenants and conditions required by this Agreement to be performed or
complied with by it on or before the Closing Date, and Seller shall have
received from Buyer, at the Closing, a certificate executed by an officer of
Buyer to that effect, dated the Closing Date.
Section 8.2. Representations and Warranties. The representations and
warranties made by Buyer in this Agreement shall be true and correct as of the
Closing Date as though such representations and warranties were made at and as
of such time and Seller shall have received from Buyer a certificate, dated the
Closing Date, to that effect executed by an officer of Buyer.
Section 8.3. Absence of Litigation and Required Regulatory Approvals. Every
consent of or approval by any governmental authority which is required in
connection with the transactions contemplated by this Agreement shall have been
obtained and be in full force and effect and there shall not be in effect any
injunction, writ, preliminary restraining order or any order, ruling or request
of any nature issued by a court or governmental agency of competent jurisdiction
directing that any transactions provided for herein not be consummated as so
provided and no suit, action, proceeding or investigation shall be pending or
threatened before any court or governmental agency, which relates to or asserts
(i) the illegality of any of the transactions contemplated by this Agreement, or
which seeks the restraint or prohibition of the consummation of any of the
transactions contemplated by this Agreement or (ii) that material misleading
statements or omissions have been made in connection with the consummation of
any of the transactions contemplated by this Agreement or (iii) a claim for
damages in a material amount, or other material relief against McGee or any of
McGee's Subsidiaries, or against Seller or any of its Subsidiaries, if such
claim shall arise from or relate to the consummation of this Agreement or the
transactions contemplated hereby.
Section 8.4. Premerger Notification. Any applicable period of time
necessary before the transactions contemplated hereby can be consummated, as
provided by the Hart-Scott-Rodino Act, the Investment Canada Act or the
Competition Act (Canada), if applicable, shall have expired, all required
clearances thereunder shall have been obtained and no action or proceeding shall
have been instituted by any of the Premerger Notification Agencies or any
similar agency claiming to have jurisdiction for the purpose of enjoining or
delaying the consummation of the transactions contemplated hereby.
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Section 8.5. Additional Agreements. Reinsurance Agreements substantially in
the form of Exhibit C shall have been entered into and shall be in full force
and effect and the Releases in the form of Exhibits A-1, A-2 and A-3 and the
Noncompetition Agreement in the form of Exhibit B shall have been entered into
and shall be in full force and effect.
Section 8.6. Opinion of Counsel for Buyer. Seller shall have received an
opinion of the general counsel of Buyer, dated the Closing Date, in form and
substance reasonably satisfactory to Seller and its counsel.
IX. -
TERMINATION -
Section 9.1. Termination. At any time prior to the Closing Date, this
Agreement may be terminated and the transactions provided for herein abandoned,
whether before or after adoption and approval thereof by Seller and Buyer:
-----------
(a) by mutual written consent of the parties hereto; or
(b) by Seller or Buyer, if the Closing shall not have occurred on or before
June 30, 1999.
Section 9.2. Effect of Termination. In the event of any termination
pursuant to this Article IX, the parties hereto shall be released from all
liabilities and obligations arising under this Agreement with respect to matters
contemplated by this Agreement, other than for damages to the extent arising
from a prior breach of this Agreement and other than as provided in Sections 5.1
(last sentence only), 13.1 and 13.6.
X. -
EMPLOYMENT AND BENEFIT MATTERS -
Section 10.1. Employees. Buyer will cause McGee and its Subsidiaries to
continue to employ all persons who are currently employees of McGee or become
such prior to the Closing (the "Affected Employees") at their current rate of
base compensation and on the same terms and conditions of employment (including
those relating to termination and severance benefits) that they now enjoy,
subject to the provisions of Section 10.2, for a period following the Closing
Date at least equal to the notice period (without exceptions to such notice
period) for the Worker Adjustment and Retraining Notification Act. For purposes
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of this Article X, all former employees of McGee who have retired, separated
from service with a terminated vested interest or are otherwise terminated or
separated and entitled, presently or upon the passage of time, to retirement or
other benefits, shall be considered to be "Affected Employees." In addition,
Buyer has informed Seller that it intends to cause McGee to offer to senior
executive and other key employees of McGee employment and Seller will use its
best efforts (which, except as set forth below, shall not include the making of
payments or financial commitments by Seller) to assist Buyer in obtaining
acceptance of such offer by such executives and key employees. Seller agrees to
reimburse Buyer, within thirty (30) days after Buyer's payment or Seller's
receipt of Buyer's invoice, whichever is later, for one-half of retention
payments paid by Buyer or McGee within 13 months after the Closing to senior
executives and other key employees of McGee, up to a maximum liability to Seller
under this sentence of $400,000, and prior to Closing, Buyer shall provide
Seller a list of such intended payments and the recipients thereof.
Section 10.2. Participation in Benefit Plans. Buyer shall make
provision such that, effective as of the Closing Date, the Affected Employees
will commence participation immediately in welfare benefit plans which will have
been adopted by McGee and which, taken as a whole, are comparable to the plans
presently in effect for the Affected Employees. The Affected Employees will
either continue participation in McGee's pension plans or commence participation
in Buyer's pension plans, which, taken as a whole, are comparable to the plans
presently available to or in effect for the Affected Employees. Buyer will, and
will cause McGee to, recognize each Affected Employee's service prior to the
Closing Date with respect to McGee and its Subsidiaries as service with McGee
(or the Buyer or any Subsidiary of the Buyer which may become the employer of
any Affected Employees, as the case may be) in connection with (i) any waiting
period, eligibility requirements or any elimination period under any welfare
benefit plan available to any Affected Employees, (ii) any waiting period,
eligibility requirements and benefit accrual with regard to participation in any
sick, holiday, vacation, personal time off, or other similar service-based plan
or program available to any Affected Employees, and (iii) any eligibility or
vesting requirements under any qualified or non-qualified plan available to any
Affected Employees. Should the Affected Employees commence participation in the
defined benefit plan of the Buyer, then in no event shall an Affected Employee's
benefit under the defined benefit plan of the Buyer be reduced (in any manner)
by any benefits accrued by the Affected Employee under the pension plans
maintained by McGee.
45
<PAGE>
Section 10.3. Severance Pay. Buyer shall, or shall cause McGee to, pay to
the Affected Employees whose employment is terminated within one hundred eighty
(180) days after the Closing Date severance benefits not less favorable than
those now available to employees of McGee.
Section 10.4. Non-Solicitation. Seller agrees that, from and after the
Closing Date until June 30, 2002, neither it nor any of its Subsidiaries will
solicit, nor cause any other person to solicit, any person named on Schedule
10.4 so long as such person is an employee of McGee or Buyer or any affiliate of
Buyer; provided, however, that nothing in this Section shall be deemed to
prohibit any solicitation not specifically targeted at such employees or
Affected Employees, including general advertisement by means of newspaper or
other advertisements. XI. -
AMENDMENT; WAIVERS -
Section 11.1. Amendments, Modifications, Etc. At any time prior to the
Closing, this Agreement and the Exhibits hereto may be amended, modified,
superseded or supplemented to the extent permitted by applicable law only by an
instrument in writing executed and delivered on behalf of each of the parties
hereto, which instrument when so executed and delivered shall thereupon become a
part of this Agreement and the provisions thereof shall be given effect as if
contained in this Agreement as of the date hereof.
Section 11.2. Waivers. The representations, warranties, covenants and
conditions of this Agreement may be waived only by a written instrument executed
by the party so waiving. The failure of any party at any time or times to
require performance of any provision hereof shall not affect the right of such
party at a later time to enforce the same. No waiver by any party of any
condition, or breach of any term, covenant, agreement, representation or
warranty contained in this Agreement, ------- in any one or more instances,
shall be deemed to be or construed as a waiver of any other condition or of the
breach of any other term, covenant, agreement, representation or warranty
contained in this Agreement. XII. -
DEFINED TERMS -
When used as defined terms in this Agreement, the following terms shall
have the meanings set forth herein:
"Accredited Investor" shall have the meaning set forth in Section 4.6.
46
<PAGE>
"Affected Employees" shall have the meaning set forth in Section 10.1.
"Ancillary Agreements" shall mean the Reinsurance Agreement, the Releases
and the Noncompetition Agreement in the respective forms attached as Exhibits
hereto.
"Benefit Plans" shall have the meaning set forth in Section 3.13.
"Buyer" shall mean Fireman's Fund Insurance Company, a California
corporation.
"Canadian Pool" shall have the meaning ascribed in the definition of
"Pool."
"CI" shall mean The Connecticut Indemnity Company, a Connecticut
corporation and a wholly-owned Subsidiary of Seller.
"Common Stock" shall have the meaning set forth in the first recital
paragraph.
"Closing" shall each have the meaning set forth in Section 2.1.
"Closing Date" shall have the meaning set forth in Section 2.1.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Consolidated Group" shall have the meaning set forth in Section 3.10(a).
"Damages" shall have the meaning set forth in Section 13.6.
"DLJ" shall have the meaning set forth in Section 3.22.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974, as
amended.
"ERISA Affiliate" shall have the meaning set forth in Section 3.13.
"Hart-Scott-Rodino Act" shall have the meaning set forth in Section 5.4.
"IRS" shall mean the Internal Revenue Service.
"Indemnitee(s)" shall have the meaning set forth in Section 13.6.
<PAGE>
"Indemnitor" shall have the meaning set forth in Section 13.6.
"Intellectual Property" shall have the meaning set forth in Section 3.8(c).
"Material Adverse Effect" shall have the meaning set forth in Section 3.1.
"McGee" shall mean Wm. H. McGee & Co., Inc., a New York corporation.
"McGee Bermuda" shall mean Wm. H. McGee & Co. (Bermuda) Ltd., a Bermuda
corporation.
"McGee Canada" shall mean Wm. H. McGee & Co. of Canada Ltd., a corporation
formed under the laws of Ontario.
"New York Time" shall mean time, whether Eastern Standard or Daylight
Saving as may be the case, as determined in the City of New York.
"Noncompetition Agreement" shall have the meaning set forth in Section
2.1(b).
"PBGC" shall mean the Pension Benefit Guaranty Corporation.
"Pool" shall mean those insurance underwriting and management arrangements
which have been in effect from time to time between and among one or more of
McGee, McGee Canada. and McGee Bermuda and the insurers participating in such
arrangements as set forth in the Pool Agreements and among them, the present
participants' gross participations in the Canadian Pool and United States Pool
being as follows:
<PAGE>
United States Pool Canadian Pool
Pool Participants % Pool Participants %
The Baloise Insurance
Company of America 1 Providence Washington 1
Insurance Company
Providence Washington
Insurance Company 1
SICH 75 SICH 94
LG Insurance Company,
Ltd. (United States Branch) 8 Mitsui Marine & Fire 5
Mitsui Marine & Fire 15 Insurance Company of Ltd.
Insurance Company
America
Each reference to the "Pool" shall, unless the context otherwise requires, be
deemed to include both the Canadian Pool and the United States Pool and each
annual renewal of the Pool so long as there shall be outstanding assets or
liabilities of the Pool in respect of that year and shall further be deemed to
include the participation of the Pool Participants.
"Pool Agreements" means (i) the Inter-Office Reinsurance
Agreement dated as of January 1, 1975, as amended by the related Addenda Nos.
1-4 and supplemented by annual Schedules of Participations thereto, among McGee
and the Pool Participants and the Inter-Office Reinsurance Agreement dated as of
January 1, 1975, as amended by and supplemented by annual Schedules of
Participations thereto among McGee Canada and the Pool Participants (the
"Inter-Office Reinsurance Agreements"), and (ii) the Underwriting Management
Agreements, General Agency & Management Agreements and Management Agreements and
related agreements referred to therein, each as amended, between or among McGee
and the Pool Participants, which are listed in Schedule 3.14(b) as being entered
into in connection with the Pool.
"Pool Participants" shall mean those insurers and reinsurers
who, from time to time, have participated or may participate in the Pool in
respect of any year.
"Post-Year End Periods" shall have the meaning set forth in Section
5.6(a)(iii).
"Premerger Notification Agencies" shall have the meaning set forth in
Section 5.4.
<PAGE>
"Pre-Year End Periods" shall have the meaning set forth in Section
5.6(a)(iii).
"Reinsurance Agreements" shall mean the quota share reinsurance agreement
referred to in Section 6(1)(a).
"Releases" shall have the meaning set forth in Section 2.1(b).
"Section 338 Election" shall have the meaning set forth in Section 5.6(d).
"Seller" shall mean Orion Capital Corporation, a Delaware corporation.
"Seller's Knowledge" shall mean, when used to qualify a representation or
warranty of Seller, that such is being made or given only on the basis of and to
the extent of the knowledge of Seller's senior executive officers, reasonable
inquiry having been made of the senior officers of McGee by them or on their
behalf in respect of the subject matter of the representation or warranty.
"SICH" shall mean Security Insurance Company of Hartford, a Connecticut
corporation and a wholly owned Subsidiary of Seller.
"Straddle Period" shall have the meaning set forth in Section 5.6(a)(ii).
"Subsidiary" means any corporation of which a corporation or one or more
Subsidiaries of such corporation owns or controls, directly or indirectly, more
than fifty percent (50%) of the outstanding stock having by its terms ordinary
voting power to elect a majority of the Board of Directors of such corporation,
irrespective of whether or not at the time stock of any one class or classes of
such corporation shall have or might have voting power by reason of the
happening of any contingency
"Taxes" shall have the meaning set forth in Section 3.10(a).
"Tax Return" shall have the meaning set forth in Section 3.10(a).
"Underwriting Management Agreement" shall mean the General Agency Agreement
dated January 1, 1964 between and among The Security Insurance Company, United
States Casualty Company, New Amsterdam Casualty Company, The Connecticut
Indemnity Company and Wm. H. McGee & Co., Inc. as amended to the date hereof.
"United States Pool" shall have the meaning ascribed in the definition of
"Pool." XIII. .
<PAGE>
MISCELLANEOUS PROVISIONS .
Section 13.1. Expenses. Whether or not the Closing shall have
occurred and regardless of whether this Agreement is terminated, each party
hereto shall pay all of the costs and expenses incurred by it in connection with
this Agreement and the other transactions contemplated hereby (including,
without limitation, disbursements and expenses of its attorneys, accountants and
advisors (including financial advisors), and printing and filing costs and
fees). Seller shall be solely responsible for the fees of DLJ and Buyer shall be
solely responsible for the fees of Stamford Financial Group.
Section 13.2. Notices. All notices or other communications required or
permitted under this Agreement shall be in writing and sufficient if delivered
personally or by recognized overnight delivery service or by registered or
certified mail, postage prepaid, addressed as follows: -------
If to Seller, to
Orion Capital Corporation
9 Farm Springs Road
Farmington, CT 06032
Attn: Treasurer
with a copy to
Cummings & Lockwood
CityPlace I
185 Asylum Street, 36th Floor
<PAGE>
Any party may change the person and addresses to which notices or other
communications are to be sent to it by giving written notice of any such change
in the manner provided herein for giving notice and such change will be
effective upon receipt.
Section 13.3. Entire Agreement. This Agreement, together with the schedules
and exhibits hereto and the documents and instruments referred to herein, sets
forth the entire agreement and understanding of the parties hereto in respect of
the transactions contemplated hereby, and supersedes all prior agreements,
arrangements and understandings relating to the subject matter hereof. No party
hereto has relied upon any oral or written statement, representation, warranty,
covenant, ---------------- condition, understanding or agreement made by any
other party or any representative, agent or employee thereof, except for those
expressly set forth in this Agreement or in the schedules or exhibits hereto or
the documents or instruments referred to herein.
Section 13.4. No Assignment. This Agreement shall inure to the benefit of,
and be binding upon, the respective successors and assigns of the parties
hereto. No assignment of any rights or delegation of any obligations provided
for herein shall be made by any party hereto without the express prior written
consent of each other party except that Buyer may assign its rights (but not
delegate its duties except as permitted herein) hereunder to any wholly-owned
Subsidiary of Buyer.
Section 13.5. Survival of Representations and Warranties and Covenants.
(a) All representations and warranties of the parties hereto which are
contained in this Agreement or in confirming certificates delivered at the
Closing (other than those representations and warranties relating to the due
authorization, execution and delivery of this Agreement and the Ancillary
Agreement and those relating to Seller's title to the Common Stock which is the
subject of this Agreement which shall survive for the applicable statutory
period of limitation), shall remain operative and in full force and effect until
June 30, 2000, regardless of any investigation made by or on behalf of any of
the parties hereto, following the Closing.
(b) All covenants made by Buyer or Seller in Article V of this Agreement to
be performed after the date hereof will survive the Closing, and will remain in
full force and effect thereafter: (i) in the case of all covenants that have
specified terms or periods until the later of (x) expiration of the terms or
periods respectively specified therein, or (y) June 30, 2000; or (ii) June 30,
2000 for all other covenants.
(c) If within the survival periods specified in Sections 13.5(a) and
13.5(b) above, a claim for indemnification shall be made in respect of the
breach of any representation, warranty or covenant, the expiration of such
period of survival shall not affect the right of indemnified party to
indemnification if the party claiming indemnification for such breach shall have
delivered to the other party written notice setting forth with reasonable
specificity the basis of such claim prior to the expiration of such time
pursuant to this Section 13.5.
<PAGE>
Section 13.6. Indemnification and Payments. Each of Buyer on the one hand
and Seller on the other hand (each an "Indemnitor") agrees to indemnify and hold
harmless the other and its respective related persons (collectively, the
"Indemnitees") for, and will pay to the Indemnitees the amount of, any loss,
liability, claim, damage (excluding incidental and consequential damages), and
expenses (including reasonable costs of investigation and defense and reasonable
attorneys' fees), whether or not involving a third-party claim (collectively,
"Damages"), arising from any breach of any representation or warranty made by
the Indemnitor in this Agreement or any certificate delivered by the Indemnitor
pursuant to this Agreement or any covenant or obligation of such Indemnitor in
this Agreement. All damages and other amounts sought by any Indemnitee hereunder
shall be net of all insurance proceeds received or collectible by any such
Indemnitee with respect to such claim, including, with respect to Buyer, all
insurance proceeds received or receivable by McGee.
Section 13.7. Limitations on Amount.
(a) An Indemnitor will have no liability (for indemnification or otherwise)
with respect to Damages arising from a breach of any representation or warranty
made by the Indemnitor in this Agreement on the date of this Agreement and on
the Closing Date (other than those representations and warranties relating to
the due authorization, execution and delivery of this Agreement and the
Ancillary Agreement and those relating to Seller's title to the Common Stock
which is the subject of this Agreement) until the total of all such Damages with
respect to Buyer and its related persons or with respect to Seller and its
related persons, as the case may be, exceeds $500,000, and then only for the
amount by which such Damages exceed $500,000.
(b) In no event shall the aggregate liability of Buyer on the one hand or
Seller on the other hand with respect to indemnified Damages under this
Agreement (including Section 5.6 hereof) arising from a breach of any
representation, warranty or covenant made by the Indemnitor in this Agreement,
exceed the Purchase Price.
Section 13.8. Procedure for Indemnification.
(a) Promptly after receipt by an Indemnitee of notice of the commencement
of any proceeding or of any threatened proceeding or claim, or other
notification thereof against it, or after otherwise becoming aware that an
indemnifiable event has occurred, such Indemnitee will give notice to the
Indemnitor of such claim and the estimated dollar amount thereof, but the
failure to notify the Indemnitor will not relieve the Indemnitor of liability
that it may have to any Indemnitee, except to the extent that the Indemnitor is
prejudiced by the Indemnitee's failure to give such notice.
<PAGE>
(b) The Indemnitor will be entitled to participate in such
proceeding and, to the extent that it wishes, to assume the defense of such
proceeding with counsel reasonably satisfactory to the Indemnitee and, after
notice from the Indemnitor to the Indemnitee of its election to assume the
defense of such proceeding, the Indemnitor will not, as long as it diligently
conducts such defense, be liable to the Indemnitee for any fees of other counsel
or any other expenses with respect to the defense of such proceeding
subsequently incurred by the Indemnitee. If the Indemnitor assumes the defense
of a proceeding, the Indemnitee will have no liability with respect to any
compromise or settlement of such claims effected without its consent
Section 13.9. Procedure for Indemnification - Other Claims. The parties
acknowledge and agree that the remedies and procedures provided in this
Agreement for breach of any representations, warranties, or covenants are
exclusive of all other remedies which would otherwise be available, at law or
equity.
Section 13.10. Governing Law. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of Connecticut applicable to
agreements made and to be performed entirely within such State, except (i)
matters related to the validity of corporate action, which shall be governed by
the laws of the state or other jurisdiction of incorporation of the relevant
corporation and (ii) matters related to compliance of the transactions
contemplated by the Agreement with ------------- applicable insurance regulatory
statutes.
Section 13.11. Dispute Resolution. If a dispute arises out of or relates to
this Agreement, or the performance or an asserted breach thereof, the parties
agree first to try in good faith to settle the dispute and further agree that,
to that end:
(a) A meeting shall be held promptly between Buyer and Seller attended by
individuals with decision-making authority regarding the dispute, to attempt in
good faith to negotiate a resolution of the dispute.
(b) If within fifteen (15) days of the first meeting of such individuals
they have not succeeded in negotiating a resolution of the dispute or agreed to
extend the time within which to do so, the parties agree to submit the dispute
to mediation in accordance with the Commercial Mediation Rules of the American
Arbitration Association. Buyer and Seller shall bear their own costs and share
equally the costs of the mediation. The mediation shall take place in Chicago,
Illinois unless otherwise agreed by the parties.
<PAGE>
(c) Buyer and Seller will jointly appoint a mutually-acceptable mediator,
seeking assistance in such regard from the American Arbitration Association if
they have been unable to agree on such appointment within a period of twenty
(20) days from the conclusion of the negotiation period.
(d) The parties agree to participate in good faith in the mediation, and
negotiations related thereto or arising therefrom, for a period of thirty (30)
days after appointment of a mediator. If the parties are not successful in
solving the dispute through mediation within that period of time (or, if sooner,
within sixty (60) days from the conclusion of the negotiation period), then the
dispute shall be resolved by arbitration in accordance with the Commercial
Arbitration Rules of the American Arbitration Association, with each of Buyer
and Seller selecting one arbitrator of a panel of three (3) and the two (2)
arbitrators so selected designating the third member of the panel of
arbitrators. In the event that such two arbitrators cannot agree on a third
arbitrator within thirty (30) days, one shall be designated by the American
Arbitration Association upon application by either of the two arbitrators. The
arbitrators shall render their decision within ninety (90) days after the
appointment of the third arbitrator and the decision of the arbitrators shall be
final and binding upon the parties and judgment upon the award entered by the
arbitrators may be entered in any court having jurisdiction thereof. Buyer and
Seller shall each bear its own costs and the costs of the arbitrator appointed
by each of them and they shall share equally the costs of the third arbitrator
and the administrative costs of the arbitration. The arbitration shall take
place in San Francisco, California if initiated by Seller and in Hartford,
Connecticut if initiated by Buyer.
Section 13.12. Press Releases. Buyer and Seller will each consult with the
other in advance of making any public announcement or press release, releasing
any publicity or otherwise disclosing any information related to the execution
of this Agreement or any transactions contemplated hereby, and each of Buyer and
Seller will, except in the case of such disclosure as may be required by
applicable law or securities exchange requirements, obtain the consent of the
other with respect to the form, content and timing thereof, which consent shall
not unreasonably be withheld.
Section 13.13. Counterparts. This Agreement may be executed in any number
of separate counterparts, each of which shall be deemed to be an original, but
which together shall constitute one and the same instrument.
Section 13.14. Headings. The section and article headings contained in this
Agreement are inserted for convenience of reference only and shall not affect
the meaning or interpretation of this Agreement. --------
<PAGE>
Section 13.15. Severability. If any provision of this Agreement is held
invalid or unenforceable by any court of competent jurisdiction, the other
provisions of this Agreement will remain in full force and effect. Any provision
of this Agreement held invalid or unenforceable only in part or degree will
remain in full force and effect to the extent not held invalid or unenforceable.
Section 13.16. Further Assurances. The parties agree (a) to furnish upon
request to each other such further information, (b) to execute and deliver to
each other such other documents, and (c) to do such other acts and things, all
as the other party may reasonably request for the purpose of carrying out the
intent of this Agreement.
[The remainder of this page is intentionally left blank]
<PAGE>
IN WITNESS WHEREOF, each party hereto has caused this
Agreement to be duly executed on the date first above written.
ORION CAPITAL CORPORATION
By: .......................................
Name: Craig A. Nyman
Title: Vice President and Treasurer
Attest:
By: ..........................................
Secretary
FIREMAN'S FUND INSURANCE COMPANY
By: .............................
Name: Bruce F. Friedberg
Title: Senior Vice President
Attest:
By: ..........................................
Secretary
<PAGE>
SCHEDULES
Disclosure Letter
Schedule 3.2 - Capitalization
Schedule 3.3 - Regulatory Status
Schedule 3.4 - Compliance with Law
Schedule 3.7 - Litigation and Other Proceedings
Schedule 3.8 - Title to Properties
Schedule 3.9 - No Conflicts (Seller)
Schedule 3.10 - Taxes
Schedule 3.11 - Investments
Schedule 3.12 - Employment Matters
Schedule 3.13 - Employee Benefit Plans; ERISA
Schedule 3.14 - Contracts
Schedule 3.15 - Capital Expenditures
Schedule 3.16 - Banks
Schedule 3.17 - Agents and Brokers
Schedule 3.18 - Insurance
Schedule 3.24 - Relationship between Seller and McGee
Schedule 3.25 - Agreement Regarding Pool
Schedule 4.4 - No Conflicts (Buyer)
Schedule 5.3 - Regulatory and Other Filings and Approvals
Schedule 10.4 - Executives and Key Employees
-i-
<PAGE>
EXHIBITS
Exhibit A-1 - Mutual Release (Seller and McGee)
Exhibit A-2 - Mutual Release (SICH and McGee)
Exhibit A-3 - Mutual Release (CI and McGee)
Exhibit B - Noncompetition Agreement
Exhibit C - Reinsurance Agreement
-ii-
<PAGE>
TABLE OF CONTENTS
I. THE TRANSACTION
1.1. Purchase of Common Stock.....................................1
1.2. Consideration................................................1
1.3. Management Fee...............................................1
II. THE CLOSING 2
2.1. Closing......................................................2
III. REPRESENTATIONS AND WARRANTIES OF SELLER 3
3.1. Organization and Good Standing...............................3
3.2. Capitalization...............................................3
3.3. Regulatory Status............................................4
3.4. Compliance with Law..........................................4
3.5. Authorization................................................4
3.6. Books and Records............................................5
3.7. Litigation and Other Proceedings.............................5
3.8. Title to Properties..........................................6
3.9. No Conflicts.................................................7
3.10. Taxes........................................................8
3.11 Investments.................................................11
3.12. Employment Matters..........................................11
3.13. Employee Benefit Plans; ERISA...............................11
3.14. Contracts...................................................13
3.15. Capital Expenditures........................................14
3.16. Banks.......................................................14
3.17. Agents and Brokers..........................................14
3.18. Insurance...................................................14
3.19. Absence of Material Changes and Adverse Factors.............14
3.20. Environmental Matters.......................................15
3.21. Calculation of Liability with respect to Pool Participation 16
3.22. Finders and Brokers.........................................16
3.23. Disclosure 17
3.24. Relationship between Seller and McGee 17
3.25. Agreements regarding Pool 17
3.26. Participation of SICH in Pool 17
3.27 No Undisclosed Liabilities..................................17
<PAGE>
IV. REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF BUYER 18
4.1. Organization and Standing...................................18
4.2. Certificate of Incorporation and By-Laws....................18
4.3. Authorization...............................................18
4.4. No Conflicts................................................18
4.5. Finders and Brokers.........................................19
4.6. Investor Status.............................................20
V. COVENANTS OF BUYER AND SELLER 20
5.1. Access to Properties, Books and Records.....................20
5.2. Conduct of Business.........................................20
5.3. Regulatory and Other Filings and Approvals..................24
5.4. Premerger Notification and Clearance........................25
5.5. Further Assurances..........................................25
5.6. Tax Matters.................................................26
5.7 Pool Financial Statements...................................32
VI. AGREEMENTS WITH RESPECT TO POOL OPERATION 33
6.1. Pool Participations; Reinsurance............................33
6.2. Underwriting Operations of the Pool.........................33
VII. CONDITIONS TO OBLIGATIONS OF BUYER 35
7.1. Covenants...................................................35
7.2. Representations and Warranties..............................35
7.3. Absence of Litigation and Required Regulatory Approvals 35
7.4. Premerger Notification......................................36
7.5. No Material Adverse Effect..................................36
7.6. Additional Agreements.......................................36
7.7. Opinion of Counsel for Seller and McGee.....................36
VIII. CONDITIONS TO OBLIGATIONS OF SELLER 37
8.1. Covenants...................................................37
8.2. Representations and Warranties..............................37
8.3. Absence of Litigation and Required Regulatory Approvals 37
8.4. Premerger Notification......................................37
8.5. Additional Agreements.......................................38
8.7. Opinion of Counsel for Buyer................................38
IX. TERMINATION 38
9.1. Termination.................................................38
9.2. Effect of Termination.......................................38
<PAGE>
X. EMPLOYMENT AND BENEFIT MATTERS 38
10.1. Employees 38
10.2. Participation in Benefit Plans 39
10.3. Severance Pay 40
10.4. Non-Solicitation 40
XI. AMENDMENT; WAIVERS 40
11.1. Amendments, Modifications, Etc. 40
11.2. Waivers 40
XII. DEFINED TERMS 40
XIII. MISCELLANEOUS PROVISIONS 45
13.1. Expenses 45
13.2. Notices 45
13.3. Entire Agreement 46
13.4. No Assignment 46
13.5. Survival of Representations and Warranties and Covenants 46
13.6. Indemnification and Payments 47
13.7. Limitations on Amount 47
13.8. Procedure for Indemnification 47
13.9. Procedure for Indemnification - Other Claims 48
13.10. Governing Law 48
13.11. Dispute Resolution 49
13.12. Press Releases 49
13.13. Counterparts 49
13.14. Headings 49
13.15. Severability 50
13.16. Further Assurances 50
S5071611.DOC
-i-
Exhibit 15
May 14, 1999
Orion Capital Corporation
Farmington, Connecticut
We have made a review, in accordance with standards established by the American
Institute of Certified Public Accountants, of the unaudited interim financial
information of Orion Capital Corporation and subsidiaries for the periods ended
March 31, 1999 and 1998, as indicated in our report dated May 7, 1999; because
we did not perform an audit, we expressed no opinion on that information.
We consent to the incorporation by reference in Registration Statements No.
2-80636 and No. 333-58941 on Form S-8 relating to the Orion Capital Corporation
1982 Long-Term Performance Incentive Plan, No. 333-58905 on Form S-8 relating to
Orion Capital Corporation Equity Incentive Plan, No. 2-63344 and No. 333-58889
on Form S-8 relating to the Orion Capital 401(K) and Profit Sharing Plan, No.
33-59847 and No. 333-58939 on Form S-8 relating to the Orion Capital Corporation
1994 Stock Option Plan for Non- Employee Directors, No. 333-44901 on Form S-8
relating to the Wm. H. McGee & Co., Inc. 401(K) and Profit Sharing Plan, No.
333-55671 on Form S-8 relating to Orion Capital Corporation Employees' Stock
Purchase Plan, and No.333-62951 on Form S-8 relating to Retirement Savings Plan
for Employees of Guaranty National Insurance Company, of our report dated May 7,
1999, appearing in this quarterly report on Form10-Q of Orion Capital
Corporation for the quarter ended March 31, 1999.
We also are aware that the aforementioned report, pursuant to Rule 436(c) under
the Securities Act, is not considered a part of the Registration Statement
prepared or certified by an accountant or a report prepared or certified by an
accountant within the meaning of Sections 7 and 11 of that Act.
DELOITTE & TOUCHE LLP
Hartford, Connecticut
<TABLE> <S> <C>
<ARTICLE>7
<LEGEND>
THIS FINANCIAL SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
ORION CAPITAL CORPORATION'S FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED
MARCH 31, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-1-1999
<PERIOD-END> MAR-31-1999
<DEBT-HELD-FOR-SALE> 1,430
<DEBT-CARRYING-VALUE> 260
<DEBT-MARKET-VALUE> 270
<EQUITIES> 435
<MORTGAGE> 2
<REAL-ESTATE> 0
<TOTAL-INVEST> 2,420
<CASH> 35
<RECOVER-REINSURE> 760
<DEFERRED-ACQUISITION> 147
<TOTAL-ASSETS> 4,206
<POLICY-LOSSES> 2,153
<UNEARNED-PREMIUMS> 560
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 18
<NOTES-PAYABLE> 209
<COMMON> 178
0
0
<OTHER-SE> 437
<TOTAL-LIABILITY-AND-EQUITY> 4,206
299
<INVESTMENT-INCOME> 34
<INVESTMENT-GAINS> 2
<OTHER-INCOME> 1
<BENEFITS> 366
<UNDERWRITING-AMORTIZATION> 88
<UNDERWRITING-OTHER> 8
<INCOME-PRETAX> (137)
<INCOME-TAX> (52)
<INCOME-CONTINUING> (88)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (5)
<NET-INCOME> (93)
<EPS-PRIMARY> (3.43)
<EPS-DILUTED> (3.43)
<RESERVE-OPEN> 1,418
<PROVISION-CURRENT> 227
<PROVISION-PRIOR> 139
<PAYMENTS-CURRENT> 64
<PAYMENTS-PRIOR> 225
<RESERVE-CLOSE> 1,458
<CUMULATIVE-DEFICIENCY> 139
