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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission file number 1-8993
FUND AMERICAN ENTERPRISES HOLDINGS, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 94-2708455
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
80 SOUTH MAIN STREET, HANOVER, NEW HAMPSHIRE 03755-2053
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (603) 643-1567
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Common Stock, par value $1.00 New York Stock Exchange
per share
Securities registered pursuant to section 12(g) of the Act:
None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of voting shares (based on the closing price of
those shares listed on the New York Stock Exchange and the consideration
received for those shares not listed on a national or regional exchange) held by
non-affiliates of the Registrant as of March 22, 1999, was $720,239,846.
As of March 22, 1999, 5,843,731 shares of Common Stock, par value of $1.00
per share, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Notice of 1999 Annual Meeting of Shareholders and
Proxy Statement dated March 29, 1999 (Part III)
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FUND AMERICAN
TABLE OF CONTENTS
PART I
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ITEM 1. Business....................................................... 1
a. General................................................... 1
b. Insurance Operations...................................... 1
c. Mortgage Banking Operations............................... 15
d. Investment Portfolio Management........................... 19
e. Certain Business Conditions............................... 20
f. Regulation................................................ 20
g. Employees................................................. 21
h. Forward-Looking Statements................................ 21
ITEM 2. Properties .................................................... 22
ITEM 3. Legal Proceedings.............................................. 22
ITEM 4. Submission of Matters to a Vote of Security Holders............ 22
PART II
ITEM 5. Market for Registrant's Common Equity and Related
Stockholder Matters ......................................... 22
ITEM 6. Selected Financial Data........................................ 24
ITEM 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations ................................... 26
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk..... 52
ITEM 8. Financial Statements and Supplementary Data.................... 52
ITEM 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure ......................... 52
PART III
ITEM 10. Directors and Executive Officers............................... 53
ITEM 11. Executive Compensation......................................... 54
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FUND AMERICAN
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<S> <C> <C>
ITEM 12. Security Ownership of Certain Beneficial Owners and
Management .................................................. 54
ITEM 13. Certain Relationships and Related Transactions................. 54
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K ................................................ 65
</TABLE>
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PART I
ITEM 1. BUSINESS
GENERAL
Fund American Enterprises Holdings, Inc., (the "Company"), is a Delaware
corporation which was organized in 1980. Within this report, the consolidated
organization is referred to as "Fund American". Fund American's principal
businesses are conducted through White Mountains Holdings, Inc. and its
operating subsidiaries ("White Mountains"). White Mountains' consolidated and
unconsolidated insurance operations are conducted through its subsidiaries and
affiliates in the businesses of property and casualty insurance, property and
casualty reinsurance and financial guaranty insurance. White Mountains' mortgage
banking operations are conducted through Source One Mortgage Services
Corporation and its subsidiaries ("Source One"). The Company's principal office
is located at 80 South Main Street, Hanover, New Hampshire, 03755-2053, and its
telephone number is (603) 643-1567.
INSURANCE OPERATIONS
CONSOLIDATED REINSURANCE OPERATIONS
FOLKSAMERICA HOLDING COMPANY, INC. ("FOLKSAMERICA"). Folksamerica, through
its wholly-owned subsidiary, Folksamerica Reinsurance Company (a New York
corporation), is a multi-line broker-market reinsurance company which provides
reinsurance to insurers of property and casualty risks in the United States,
Canada, Latin America and the Carribean. Folksamerica is rated "A" (Excellent)
by A.M. Best Company. During 1998, 1997 and 1996, Folksamerica had net written
premiums of $212.6 million, $232.4 million and $171.9 million, respectively. At
December 31, 1998 and 1997, Folksamerica had total assets $1.2 billion and $1.2
billion, respectively, and shareholders' equity of $302.0 million and $255.0
million, respectively.
In June 1996 White Mountains purchased a 50.0% economic interest in
Folksamerica for $79.9 million from a group of European mutual insurance
companies (the "European Mutuals") who continued to own the remaining 50.0%
interest. White Mountains' initial investment in Folksamerica consisted of
6,920,000 shares of ten-year 6.5% voting preferred stock having a liquidation
preference of $79.4 million ("Folksamerica Preferred Stock") and ten-year
warrants ("Folksamerica Warrants") to purchase up to 6,920,000 shares of the
common stock of Folksamerica ("Folksamerica Common Stock") for $11.47 per share,
subject to certain adjustments. In November 1997 White Mountains and the
European Mutuals each purchased an additional 1,563,907 shares of Folksamerica
Common Stock for $20.8 million which maintained White Mountains 50% economic
ownership position.
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On August 18, 1998, White Mountains acquired all of the remaining
outstanding shares of the Folksamerica Common Stock from the European Mutuals
for $169.1 million which resulted in Folksamerica becoming a wholly-owned
consolidated subsidiary of Fund American as of that date. Following the August
18, 1998 transaction, Folksamerica retired the Folksamerica Preferred Stock and
issued White Mountains an equivalent amount of Folksamerica Common Stock. As of
December 31, 1998, White Mountains owned all of the outstanding shares of
Folksamerica Common Stock.
REINSURANCE OVERVIEW
Reinsurance is an arrangement in which a reinsurance company (the
"reinsurer") agrees to indemnify an insurance company (the "ceding company") for
all or a portion of the insurance risks underwritten by the ceding company under
one or more insurance policies. Reinsurance can benefit a ceding company in a
number of ways, including reducing net liability exposure on individual risks,
providing catastrophe protections from large or multiple losses, stabilizing
financial results and assisting in maintaining acceptable operating leverage
ratios. Reinsurance also provides a ceding company with additional underwriting
capacity by permitting it to accept larger risks and underwrite a greater number
of risks without a corresponding increase in its capital or surplus. Reinsurers
may also purchase reinsurance, known as retrocessional reinsurance, to cover
their own risks assumed from primary ceding companies. Reinsurance companies
enter into retrocessional agreements for many of the same reasons that ceding
companies enter into reinsurance agreements.
Folksamerica writes both treaty and facultative reinsurance. Treaty
reinsurance is an agreement whereby the ceding company is obligated to cede, and
the reinsurer is obligated to assume, a specified portion or category of risk
under all qualifying policies issued by the ceding company during the term of a
treaty. In the underwriting of treaty reinsurance, the reinsurer does not
evaluate each individual risk assumed and generally accepts the original
underwriting decisions made by the ceding insurer. Facultative reinsurance is
underwritten on a risk-by-risk basis whereby Folksamerica applies its own
pricing to an individual exposure. Facultative reinsurance is normally purchased
by insurance companies for individual risks not covered under reinsurance
treaties or for amounts in excess of limits on risks covered under reinsurance
treaties. The majority of Folksamerica's assumed premiums are derived from
treaty reinsurance contracts.
Folksamerica obtains virtually all of its business through brokers and
reinsurance intermediaries which seek its participation on reinsurance being
placed for their customers. Reinsurance is provided both on an excess of loss
and quota share basis, which in 1998 amounted to 30.2% and 69.8% of its
business, respectively. Folksamerica derives its business from a spectrum of
ceding insurers including national, regional, specialty and excess and surplus
lines writers. Folksamerica selects transactions based solely on
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anticipated underwriting results of the transaction which are evaluated on a
variety of factors including the quality of the reinsured, the attractiveness of
the reinsured's insurance rates, policy conditions and the adequacy of the
proposed reinsurance terms.
A significant period of time normally elapses between the receipt of
reinsurance premiums and the disbursement of reinsurance claims ("float"). The
claims process generally begins upon the occurrence of an event causing an
insured loss followed by: (i) the reporting of the loss to the ceding company;
(ii) the reporting of the loss by the ceding company to Folksamerica; (iii) the
ceding company's adjustment and payment of the loss; and (iv) the payment to the
ceding company by Folksamerica. During this time, Folksamerica earns investment
income on the float. Therefore, Folksamerica's combined ratio can generally be
higher than that of Fund American's consolidated property and casualty insurance
operations and yet may still earn an equivalent or superior return on equity.
LINES OF BUSINESS AND GEOGRAPHIC LOCATION
The following tables set forth information regarding Folksamerica's net
written premiums by lines of business and geographic location:
<TABLE>
<CAPTION>
Year Ended December 31,
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Millions 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Liability $122.0 $123.6 $ 79.6 $ 71.9 $ 63.0
Property 87.2 104.9 85.9 87.9 89.9
Marine 3.4 3.9 6.4 - -
-------------------------------------------------------
Total $212.6 $232.4 $171.9 $159.8 $152.9
- --------------------------------------------------------------------------------
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</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------
Millions 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
United States $190.9 $208.6 $155.2 $159.8 $152.9
Canada 13.9 10.1 4.2 - -
Latin America 7.8 13.7 12.5 - -
-------------------------------------------------------
Total $212.6 $232.4 $171.9 $159.8 $152.9
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</TABLE>
3
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UNDERWRITING
Folksamerica's primary underwriting objective is to carefully assess
reinsurance opportunities to determine the probability of a particular
transaction providing an underwriting profit. Those risks that do not provide a
reasonable likelihood of delivering an underwriting profit are rejected.
Underwriting opportunities presented to Folksamerica are evaluated based on a
number of factors including historical analysis of results, estimates of future
loss costs, a review of other programs displaying similar exposure
characteristics, the primary insurers underwriting and claims experience and the
primary insurer's financial condition. Folksamerica regularly conducts
underwriting and claims audits of ceding companies to assist it in evaluating
the information submitted by the ceding companies.
Folksamerica's most senior underwriters and executives are responsible for
its underwriting policy and quality standards and informing Folksamerica's board
of directors of current and anticipated market conditions and underwriting
results.
MARKETING
Folksamerica generally obtains all its reinsurance business through brokers
and reinsurance intermediaries which represent the ceding company in
negotiations for the purchase of reinsurance. The process of effecting a
brokered reinsurance placement typically begins when a ceding company enlists
the aid of a reinsurance broker in structuring a reinsurance program. Often the
ceding company and the broker will consult with one or more lead reinsurers as
to the pricing and contract terms for the reinsurance protection being sought.
Once the ceding company has approved the terms quoted by the lead reinsurer, the
broker will offer participations to qualified reinsurers until the program is
fully subscribed by reinsurers at terms agreed to by all parties.
Folksamerica pays its reinsurance brokers commissions representing
negotiated percentages of the premium it writes. These commissions, which
generally average 5% of premium, constitute part of Folksamerica's total
acquisition costs and are included in its underwriting expenses. During the year
ended December 31, 1998, Folksamerica received approximately 67% of its gross
reinsurance premiums written from three major reinsurance brokers as follows:
(i) E. W. Blanch - 25%; (ii) Guy Carpenter and affiliates - 23%; and (iii) AON
Re, Inc. - 19%. During the year ended December 31, 1998, Folksamerica received
no more than 10% of its gross reinsurance premiums from any individual ceding
company.
LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES
Insurers and reinsurers establish loss and loss adjustment expense reserves
representing estimates of future amounts needed to pay claims and related
expenses with respect to insured events that have occurred.
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Loss and loss adjustment expense reserves have two components: case reserves,
which are reserves for reported losses, and incurred but not reported ("IBNR")
reserves, which are reserves for losses not yet reported. Reserve estimates
reflect the judgement of both the ceding company and the reinsurer, based on the
experience and knowledge of its claims personnel, regarding the nature and value
of the claim. The ceding company may periodically adjust the amount of the case
reserves as additional information becomes known or partial payments are made.
Upon notification of a loss from a ceding company, Folksamerica establishes
case reserves, including loss adjustment expense reserves, based upon
Folksamerica's share of the amount of reserves established by the ceding company
and Folksamerica's independent evaluation of the loss. Where appropriate,
Folksamerica establishes case reserves in excess of its share of the reserves
established by the ceding company.
Folksamerica uses a combination of actuarial methods to determine its IBNR
reserves. These methods fall into two general categories: (1) methods by which
ultimate claims are estimated based upon historical patterns of reported claim
development experienced by Folksamerica, as supplemented by reported industry
data, and (2) methods in which the level of Folksamerica's IBNR claim reserves
are established based upon the IBNR claim reserves relative to earned premium
applied by accident year, line of business and type of reinsurance written by
Folksamerica. Due to the inherent uncertainties of estimating claim reserves,
actual losses and loss adjustment expenses may deviate, perhaps substantially,
from estimates of Folksamerica's reserves reflected in its consolidated
financial statements.
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During the claims settlement period, which may extend over a long period of
time, additional facts regarding claims and trends may become known which may
cause Folksamerica to adjust its estimates of the ultimate liability. The
revised estimates of ultimate liability may prove to be less than or greater
than the actual settlement or award amount for which the claim is finally
discharged.
REINSURANCE INDUSTRY AND COMPETITION
Folksamerica commenced writing business in 1980 as one of a host of newly
formed, foreign-owned reinsurers capitalized with minimum surplus. In 1991,
recognizing that surplus size and critical mass would become an increasingly
important business issue, Folksamerica launched an aggressive strategy to
increase its resources and capacity through the acquisition of select
broker-market companies. Since 1991, Folksamerica has acquired three such
reinsurers which has raised Folksamerica's surplus and contributed a number of
important business relationships.
In general, competition among primary companies has caused primary insurers
to reduce their own premium writings or restructure their reinsurance programs,
reducing the amount of reinsurance they purchase. As a result of consolidation
within the industry, many ceding companies are now larger and financially
stronger, enabling them to retain more risk. In addition, increasingly intense
competition in the reinsurance markets has driven reinsurance prices on a number
of accounts below pricing levels which Folksamerica will accept. Folksamerica's
management believes that the reinsurance industry, including the intermediary
market, will continue to undergo further consolidation. Management further
believes that, although size and financial strength will continue to be factors
in selecting reinsurance partners, product pricing has become the most telling
competitive factor.
CONSOLIDATED INSURANCE OPERATIONS
Since 1995 White Mountains has been acquiring and developing various
insurance operating interests. In December 1995 White Mountains acquired Valley
Group, Inc. ("VGI") of Albany, Oregon and Charter Group, Inc. ("CGI") of
Richardson, Texas for $41.7 million in cash less $3.0 million of purchase price
adjustments. In September 1995, White Mountains formed White Mountains Insurance
Company ("WMIC") which is a New Hampshire-based midsize commercial property and
casualty company. In December 1995 CGI and WMIC were contributed to VGI thereby
making them wholly-owned subsidiaries of VGI.
VALLEY INSURANCE COMPANIES. Valley Insurance Company ("VIC"), Valley
Property & Casualty Insurance Company ("Valley P&C"), Valley National Insurance
Company ("Valley National") and certain related non-insurance affiliates,
collectively ("Valley"), write personal and commercial lines as further
described below:
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VIC: A Northwest-based property and casualty company which writes personal
and commercial lines. In 1998, 1997 and 1996, VIC had $86.7 million, $77.7
million and $75.1 million of net written premiums, respectively, primarily in
Oregon, California and Washington. At December 31, 1998 and 1997, VIC had $158.2
million and $146.6 million of total admitted assets, respectively, and $56.5
million and $61.2 million of policyholders' surplus, respectively. VIC was
established in 1982 and began writing insurance policies in 1985. VIC is rated
"A" or "excellent" by A.M. Best.
VALLEY P&C: On December 5, 1996, VGI formed Valley P&C to specifically
write property and casualty insurance within Oregon. Valley P&C wrote its first
policies in February 1997 and had $6.2 million and $5.2 million in net written
premiums during 1998 and 1997, respectively. At December 31, 1998 and 1997,
Valley P&C had $13.0 million and $7.7 million of total admitted assets,
respectively, and $7.3 million and $3.7 million of policyholders' surplus,
respectively. Valley P&C is rated "A" or "excellent" by A.M. Best.
VALLEY NATIONAL: On January 19, 1996, Valley purchased an inactive
insurance company for $13.2 million, net of cash balances acquired. The newly
acquired insurance company, which was renamed Valley National, is licensed to
write property and casualty insurance in 48 states. Assets acquired pursuant to
the purchase of Valley National included an investment portfolio, consisting
principally of fixed maturity investments, totalling $6.7 million. Valley
National wrote its first policies in December 1996 and had $10.9 million and
$2.7 million in gross written premiums ($1.4 million and $.3 million of net
written premiums) during 1998 and 1997, respectively. In the future, Valley
National may further expand its operations to certain other states in which it
is currently licensed. At December 31, 1998 and 1997, Valley National had $13.2
million and $11.5 million of total admitted assets, respectively, and $11.9
million and $11.1 million of policyholders' surplus, respectively. Valley
National is a wholly-owned subsidiary of VIC and shares its A.M. Best's "A"
rating through a combination of a reinsurance arrangement with VIC and its
ownership structure.
Valley markets insurance products principally through independent agents.
Valley's primary business focus is to establish strong long-term relationships
with its agents and insured customers by focusing on providing quality insurance
products to families and family-owned businesses. This approach has resulted in
an established track record of growth:
<TABLE>
<CAPTION>
Year Ended December 31,
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Statutory Basis(a), in Millions 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Gross written premiums $ 95.8 $ 89.2 $ 81.9 $ 73.1 $ 64.8
Ending total assets 171.2 154.3 138.2 126.8 80.4
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Ending policyholders' surplus 63.8 64.9 57.8 58.5 23.5
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</TABLE>
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(a) The term "statutory" as contained herein refers to a basis of accounting
other than generally accepted accounting principles ("GAAP") that is
prescribed by the individual states that an insurance company transacts
business in.
In 1998, 1997 and 1996 Valley wrote $95.8, $89.2 million and $81.9 million,
respectively, of gross premiums within the following states, through
approximately 317 independent agents:
<TABLE>
<CAPTION>
Year Ended December 31, 1998
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Gross Written Policies
Dollars in millions Premiums In Force* Agents*
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Oregon $ 44.5 30,876 99
California 27.7 12,084 90
Washington 16.6 6,983 62
Arizona, Idaho, Utah and other 7.0 5,372 66
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Totals $ 95.8 55,315 317
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</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31, 1997
----------------------------------------
Gross Written Policies
Dollars in millions Premiums In Force* Agents*
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<S> <C> <C> <C>
Oregon $ 43.1 30,789 98
California 26.2 12,333 80
Washington 17.2 6,960 69
Arizona, Idaho, Utah and other 2.7 2,180 38
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Totals $ 89.2 52,262 285
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</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31, 1996
----------------------------------------
Gross Written Policies
Dollars in millions Premiums In Force* Agents*
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Oregon $ 40.9 31,118 99
California 27.5 12,910 74
Washington 13.2 4,554 63
Arizona, Idaho, Utah and other .3 222 9
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Totals $ 81.9 48,804 245
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</TABLE>
* Determined at year end.
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Valley's focus on delivering insurance products to families and
family-owned businesses has resulted in a book of business which is balanced
between personal lines and commercial lines. Gross written premiums for Valley's
primary lines of business are shown below:
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<CAPTION>
Year Ended December 31,
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Millions 1998 1997 1996 1995 1994
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<S> <C> <C> <C> <C> <C>
Personal lines:
Automobile $ 33.1 $ 29.3 $ 25.9 $ 23.9 $ 22.5
Homeowners 14.0 13.4 12.0 10.4 8.3
Other 1.0 1.5 1.3 1.1 .8
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Total personal lines 48.1 44.2 39.2 35.4 31.6
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Commercial lines:
Multiple peril 45.2 42.2 39.1 34.3 30.2
Other 2.5 2.8 3.6 3.4 3.0
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Total commercial lines 47.7 45.0 42.7 37.7 33.2
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Total gross written premiums $ 95.8 $ 89.2 $ 81.9 $ 73.1 $ 64.8
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</TABLE>
The long-term relationships cultivated by Valley with its agents and
insured customers, along with superior customer service and convenient premium
billing and payment systems, have produced a relatively high level of
persistency in Valley's "package" book of business. In 1998, 1997 and 1996,
package business represented approximately 73.6%, 79.1% and 80.0% of Valley's
premium writings, respectively, for both personal and commercial lines:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------
Renewal retention ratios 1998 1997 1996 1995 1994
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<S> <C> <C> <C> <C> <C>
Personal automobile/homeowners packages 91.0% 91.4% 89.4% 88.2% 87.8%
Commercial multiple peril packages 74.6% 78.9% 75.5% 76.5% 84.5%
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</TABLE>
Renewal persistency can be a significant indicator of an insurance
company's long-term prospects for successful underwriting. An insurance company
typically incurs more marketing and underwriting costs to write new business
(e.g., policies written for new customers)
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than it does to write "seasoned" business (e.g., policy renewals). Additionally,
losses and loss adjustment expenses are typically higher and less predictable
for new business than for seasoned business.
CHARTER INSURANCE COMPANIES. CGI, through its wholly-owned subsidiary
Charter Indemnity Company, its controlled affiliate Charter County Mutual
Insurance Company and certain related non-insurance subsidiaries (collectively
"Charter"), markets and underwrites nonstandard automobile insurance to
individuals primarily in the states of Texas and Oklahoma. For the years ended
December 31, 1998, 1997 and 1996, Charter's net written premiums totalled $64.3
million, $62.9 million and $69.9 million, respectively, and its earned premiums
totalled $64.2 million, $62.4 million and $37.7 million, respectively. Written
premiums (and related expenses and losses) for Charter's policies written prior
to January 1, 1996, were entirely ceded to Charter's former parent and are now
fully retained, therefore, Charter's 1996 earned premiums are not directly
comparable to its 1998 and 1997 earned premiums.
Charter writes all its business through independent agents. At December
31, 1998 Charter had approximately 1,600 agents. During 1998 Charter began to
write policies in California and Missouri and is expected to expand its
operations to other states. Charter is rated "A-" or "excellent" by A.M. Best.
The nonstandard automobile insurance market consists of drivers who are
unable to obtain coverage from standard carriers due to their prior driving
records, other underwriting criteria or market conditions. Management believes
that opportunities in the nonstandard automobile insurance market are influenced
by many factors including the market conditions for standard automobile
insurance, residual market plans, and the extent to which state motor vehicle
laws are enforced. The nonstandard automobile insurance market has grown in
recent years as the result of tightening of underwriting standards by
underwriters of standard and preferred automobile insurance, and increased
enforcement of motor vehicle laws including driving while intoxicated and
uninsured motorist laws.
Charter offers both liability and physical damage coverage in its
nonstandard automobile insurance markets, generally with policies having terms
of 6 months or 12 months. Most of Charter's policyholders choose basic limits of
liability coverage, typically $20,000 per person and $40,000 per accident for
bodily injury, and $15,000 for property damage. For the year ended December 31,
1998, Charter's net written premiums totalled $43.1 million for liability
coverages and $21.2 million for physical damage coverages.
Management pursues a strategy of establishing Charter as a low cost
provider of nonstandard automobile insurance while maintaining a commitment to
provide "service beyond expectation" to both agents and the insured. Management
believes that Charter has become a low cost provider of nonstandard automobile
insurance. Increased automation of certain marketing, underwriting, claims and
administrative functions has provided Charter with the ability to process more
business without a corresponding increase in costs, while maintaining a high
level of service to its agents and insured customers.
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Management believes that most classes of nonstandard automobile insurance
can be underwritten profitably if they are priced adequately. Charter seeks to
classify risks into narrowly defined segments through the utilization of
available underwriting criteria and internal performance statistical data.
Charter maintains a proprietary database which contains statistical records with
respect to its agents and the insured. Management believes this database
enhances Charter's ability to analyze loss experience, and to underwrite and
price its products based on a number of variables. Charter utilizes many factors
and analyses to determine its rates including: type, age and location of the
vehicle; number of vehicles per policyholder; number and type of traffic
violations or accidents; limits of liability; deductibles; and age, sex and
marital status of the insured.
Automobile damage claims are normally settled in a timely manner which
limits the amount of investment income that can be generated on the earned and
unearned insurance premiums that it has received from its policyholders.
Therefore, Charter's combined ratio must generally be lower than that of Fund
American's other consolidated property and casualty insurance operations in
order to earn an equivalent return on equity.
WHITE MOUNTAINS INSURANCE COMPANY. WMIC is currently licensed to write
insurance in Maine, New Hampshire, Vermont, Massachusetts, New York, Rhode
Island and Texas and is expected to expand its operations to other states as
additional regulatory approvals are obtained. WMIC markets its products
principally through independent agents and had gross written premiums during
1998, 1997 and 1996 of $7.5 million, $5.2 million and $2.4 million ($6.3
million, $4.7 million and $2.0 million of net written premiums), respectively.
At December 31, 1998 and 1997, WMIC had $33.3 million and $31.4 million of total
admitted assets, respectively, and $30.3 million and $29.1 million of
policyholders' surplus, respectively. WMIC is a wholly-owned subsidiary of VIC
and shares its A.M. Best's "A" rating through a combination of a reinsurance
arrangement with VIC and its ownership structure.
UNDERWRITING
Valley, Charter and WMIC's primary underwriting objective is to carefully
assess insurance risks to determine the likelihood of a particular risk
providing an underwriting profit. Those risks that do not provide a reasonable
likelihood of delivering an underwriting profit are rejected.
Valley, Charter and WMIC's Underwriting Committee, composed of its most
senior underwriters and executives, is responsible for its underwriting policy,
quality standards and for informing their boards of directors of current and
anticipated market conditions and its actual underwriting results.
MARKETING
In the United States, property and casualty insurance can be obtained
through national and regional companies that use an agency distribution system,
direct writers, brokers or through self-insurance including the use by
corporations of subsidiary captive insurers. Valley, Charter and WMIC market
their products principally through independent agents.
11
<PAGE>
Valley, Charter and WMIC pay their independent agents commissions
representing negotiated percentages of the premium they write. These
commissions, which currently range from 10.0% to 17.5% of premium, depending on
the line of business, constitute part of total acquisition costs and are
included in underwriting expenses.
COMPETITION
The principal competitive factors that affect Valley, Charter and WMIC
are: (i) pricing; (ii) underwriting; (iii) quality of claims and policyholder
services; (iv) appointing and retaining high quality independent agents; (v)
operating efficiencies; and (vi) product differentiation and availability. No
single company or group of affiliated companies dominates the insurance
industry. The highly competitive environment in the property and casualty
insurance market during the past several years has intensified due to increased
capacity resulting from growing capital supporting the industry and robust
investment returns achieved in recent years. Valley, Charter and WMIC strive to
be low cost operators within their sectors of the insurance industry while
maintaining superior levels of customer service. Valley, Charter and WMIC each
maintain a disciplined approach to pricing and underwriting of insurance risks.
Application of this disciplined approach in a highly competitive environment
results in a lower volume of insurance premiums than would result from a less
disciplined approach, but should produce better overall financial returns from
the business over long periods of time.
Perception of financial strength, as reflected in the ratings assigned to
an insurance company, especially by A.M. Best, is also a factor in determining
an insurance company's competitive position. Valley, Charter and WMIC have
consistently maintained adequate capitalization and claims payment ratings to
effectively conduct its business and management believes that such strength will
continue to be maintained in the future.
INVESTMENTS IN UNCONSOLIDATED INSURANCE AFFILIATES
White Mountains' investments in unconsolidated insurance affiliates
represent strategic operating investments in other insurers in which White
Mountains has a significant voting and economic interest but does not own
greater than 50% of the entity. Since 1994, Fund American has been active in
accumulating its investments in unconsolidated affiliates which are further
described below:
FINANCIAL SECURITY ASSURANCE HOLDINGS LTD. ("FSA"). FSA, through its
wholly-owned subsidiary, Financial Security Assurance Inc., guarantees scheduled
payments of principal and interest on municipal bonds and asset-backed
securities, including residential mortgage-backed securities. FSA's guaranty on
investment-grade securities helps issuers lower their funding costs and provides
bondholders with the highest-quality investments. FSA's claims-paying ability is
rated Triple-A by Fitch IBCA, Inc., Moody's Investors Service, Inc., Standard &
Poor's Rating Services and Nippon Investors Service Inc. For 1998, 1997 and 1996
FSA's gross premiums written totalled $319.3 million, $236.4 million and $177.0
million, respectively, and its net income was $117.0 million, $100.5 million and
$80.8 million, respectively. As of December 31, 1998 and 1997, FSA's total
assets were $2.4 billion and
12
<PAGE>
$1.9 billion, respectively, and its shareholders' equity was $1,073.4 million
and $882.4 million, respectively.
In May 1994 Fund American purchased 2,000,000 shares of the common stock of
FSA ("FSA Common Stock") from MediaOne Capital Corp. ("MediaOne", formerly U S
WEST Capital Corp.), a wholly-owned subsidiary of MediaOne Group, Inc. (formerly
U S WEST, Inc.). The purchase was part of an initial public offering of
8,082,385 shares of FSA Common Stock at the offering price of $20.00 per share.
In September 1994 Fund American acquired various fixed price options and
shares of convertible preferred stock ("FSA Options and Preferred Stock") which,
in total, give Fund American the right to acquire up to 4,560,607 additional
shares of FSA Common Stock for aggregate consideration of $125.7 million.
In 1995 and 1996, respectively, Fund American purchased an additional
460,200 shares of FSA Common Stock on the open market for $8.8 million and an
additional 1,000,000 shares of FSA Common Stock in a private transaction for
$26.5 million.
All shares of and rights to FSA Common Stock owned or acquired by Fund
American as described above (other than those acquired on the open market) are
subject to certain restrictions on transfer, voting provisions and other
limitations and requirements set forth in a Registration Rights Agreement and a
Voting Trust Agreement. As of December 31, 1998, 1997 and 1996 Fund American's
economic interest in FSA was approximately 25.1%, 26.2% and 25.1%, respectively,
and Fund American's voting interest in FSA was approximately 23.1%, 24.0% and
23.0%, respectively. During 1997 Fund American transferred all of its interests
in FSA to Source One.
Mr. John J. ("Jack") Byrne (Chairman of the Company) is Vice Chairman of
FSA and Mr. K. Thomas Kemp (President and CEO of the Company) and Mr. James H.
Ozanne (President of Fund American Enterprises, Inc. ("FAE"), a wholly-owned
subsidiary of White Mountains) are directors of FSA. In addition to being FSA
directors, Mr. Kemp is Chairman of FSA's Human Resources Committee and Mr.
Ozanne is Chairman of FSA's Underwriting Committee.
Fund American's investment in FSA Common Stock is accounted for using the
equity method. FSA Common Stock is publicly traded on the New York Stock
Exchange ("NYSE"). The market value of the FSA Common Stock as of December 31,
1998 and 1997, as quoted on the NYSE, exceeded Fund American's carrying value of
the FSA Common Stock under the equity method. Fund American's investments in FSA
Options and Preferred Stock are accounted for under the provisions of Statement
of Financial Accounting Standards ("SFAS") No. 115 whereby the investments are
reported at fair value as of the balance sheet date, with related unrealized
investment gains and losses, after tax, reported as a net amount in a separate
component of shareholders' equity and reported on the income statement as a
component of comprehensive net income.
MAIN STREET AMERICA HOLDINGS, INC. ("MSA"). MSA is a subsidiary of National
Grange Mutual Insurance Company of Keene, New Hampshire ("NGM"). NGM insures
property and casualty risks located primarily in New York, Massachusetts,
Connecticut, Pennsylvania, New Hampshire, Virginia and Florida. NGM's principal
lines of business and approximate percentage of total written premiums are
personal
13
<PAGE>
automobile (45%), homeowners (15%), commercial multi-peril (15%), commercial
automobile (10%) and all other (15%). MSA participates in NGM's property and
casualty business through a reinsurance agreement. MSA's net written premiums
totalled $258.5 million, $156.6 million and $147.2 million in 1998, 1997 and
1996, respectively, and its net income was $13.4 million, $11.9 million and $9.7
million, respectively. MSA's total assets as of December 31, 1998 and 1997 were
$588.6 million and $337.2 million, respectively, and its shareholders' equity
was $232.5 million and $120.6 million, respectively.
In December 1994 the Company (who subsequently transferred the MSA
investment to White Mountains) acquired 90,606 shares of the common stock of MSA
("MSA Common Stock") for $25.0 million in cash plus $1.2 million in subsequent
purchase price adjustments. White Mountains initial investment in MSA
represented approximately 33.1% of the MSA Common Stock outstanding at that
time. From 1994 to 1997 MSA participated in 40% NGM's property and casualty
business through a reinsurance agreement.
In March 1998 White Mountains acquired an additional 131,487 shares of MSA
Common Stock for $70.3 million (subject to certain purchase price adjustments
which are not expected to exceed $3.5 million) which raised White Mountains
ownership of MSA to 50.0%. As a result of White Mountains' additional investment
in MSA during 1998, MSA's reinsurance pooling agreement was increased from 40%
to 60% and NGM contributed certain of its insurance, reinsurance and financial
services subsidiaries to MSA. Fund American's investment in MSA Common Stock is
accounted for using the equity method.
Messrs. Raymond Barrette (Executive Vice President and Chief Financial
Officer of the Company), Terry L. Baxter (President of White Mountains), Morgan
W. Davis (Executive Vice President of White Mountains) and Kemp are directors of
MSA.
AMLIN PLC ("AMLIN") FORMERLY ML (BERMUDA) LIMITED ("MURRAY LAWRENCE").
Amlin is a managing agency group in the Lloyd's insurance market. On December 8,
1997, White Mountains purchased approximately 15.8% of the common stock of
Murray Lawrence for $23.6 million. At December 31, 1997 White Mountains carried
this investment as an "investment in unconsolidated insurance affiliate" and
valued it at its original cost of $23.6 million which approximated its fair
value at that date.
During 1998 Murray Lawrence merged with Angerstein Underwriting and the
combined entity was named Amlin. Amlin is publicly traded on the London Stock
Exchange. White Mountains owns 13,980,861 shares of the common stock of Amlin,
which represents an approximate 6.5% ownership stake as of December 31, 1998. As
a result of White Mountains' decreased ownership percentage of this investment
resulting from the merger, White Mountains recharacterized its investment in
Amlin as an "other investment" and carried the investment at its fair value of
$25.1 million at December 31, 1998. Mr. Kemp is a director of Amlin.
14
<PAGE>
MORTGAGE BANKING OPERATIONS
Source One was incorporated in 1972 and is the successor to Citizens
Mortgage Corporation which was organized in 1946. As a mortgage banker, Source
One engages primarily in the business of producing and selling residential
mortgage loans and servicing and subservicing residential mortgage loans for
third parties. Through subsidiaries, Source One also markets credit-related
insurance products (such as life, disability, health, accidental death and
property and casualty insurance).
Source One's principal office is located in Farmington Hills, Michigan.
Source One is a wholly-owned subsidiary of Fund American whereby the Company
currently owns 3% of the outstanding common stock of Source One and White
Mountains owns the remaining 97% of the outstanding common stock of Source One.
MORTGAGE BANKING OVERVIEW
Mortgage banking is the business of serving as a financial intermediary in
the origination and purchase of mortgage loans, the holding of such loans while
aggregating sufficient loans to form appropriate mortgage-backed security pools,
selling such loans through pools or directly to investors and servicing or
subservicing such loans during the repayment period.
The origination process involves providing competitive mortgage loan rates,
soliciting loan applications, reviewing title and credit matters, and funding
loans at closing. Mortgage loans can also be purchased from other originating
mortgage bankers.
Marketing or selling mortgage loans requires matching the needs of the
production market (homebuyers and homeowners seeking new mortgages) with the
needs of the secondary market for mortgage loans (securities broker-dealers,
depository institutions, insurance companies, pension funds and other
investors). Conventional mortgage loans (e.g., those not guaranteed or insured
by agencies of the Federal government) which are secured by residential
properties, and which comply with applicable requirements, are packaged for
direct sale or conversion to a mortgage-backed security. Such mortgage-backed
securities are guaranteed by the Federal Home Loan Mortgage Corporation
("FHLMC") or the Federal National Mortgage Association ("FNMA"). Mortgage loans
insured by the Federal Housing Administration ("FHA") and the Veterans
Administration ("VA") are packaged in the form of modified pass-through
mortgage-backed securities guaranteed by the Government National Mortgage
Association ("GNMA") for sale primarily to securities broker-dealers. In
addition, private entities may pool mortgage loans in various forms and offer
the resulting mortgage-backed securities to the public through securities
broker-dealers.
Servicing involves collecting principal, interest and funds to be escrowed
for tax and insurance payments from mortgage loan borrowers, remitting principal
and interest collections to mortgage loan investors, paying property taxes and
insurance premiums on mortgaged property and performing all related accounting
and reporting
15
<PAGE>
activities. Servicing may also involve advancing uncollected payments to
mortgage loan investors, administering delinquent loans and supervising
foreclosures in the event of unremedied defaults. Servicing generates cash
income in the form of fees, which represent a percentage of the declining
outstanding principal amount of the loans serviced and are collected from each
mortgage loan payment received plus any late charges. Subservicing involves the
administrative servicing of loans owned by others for a fee.
MORTGAGE LOAN PRODUCTION
Source One produces residential mortgage loans through: (i) a correspondent
network of more than 200 banks, thrift institutions and other mortgage lenders;
(ii) 163 retail branch offices in 31 states and Puerto Rico; (iii) approximately
425 mortgage brokers; and (iv) a specialized marketing and affinity program.
Source One primarily produces fixed rate mortgage loans. Generally speaking,
fixed rate mortgages tend to capture a large share of origination volumes in a
declining interest rate environment. Additionally, fixed rate mortgage loans are
inherently less susceptible to prepayment risk than adjustable rate mortgages.
During periods of increasing interest rates, the likely adverse effects of lower
fixed rate mortgage loan originations are mitigated by a reduction in the
prepayment risk on the fixed rate mortgage loans Source One services. During
1998 and 1997, fixed rate mortgage loan production accounted for approximately
98% and 88%, respectively, of Source One's total mortgage loan production.
The following table sets forth selected information regarding Source
One's mortgage loan production:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------
Millions 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Loan production by type of loan:
FHA insured and VA guaranteed $ 3,009 $ 2,985 $ 2,035 $ 1,565 $ 2,065
Conventional 7,857 1,418 1,796 1,287 2,521
-----------------------------------------------------------
Total $10,866 $ 4,403 $ 3,831 $ 2,852 $ 4,586
-----------------------------------------------------------
-----------------------------------------------------------
Loan production by origination source:
Correspondent network acquisitions $ 6,880 $ 2,552 $ 1,640 $ 1,157 $ 1,081
Retail branch office originations 2,692 1,339 1,590 1,347 2,005
Mortgage broker originations 872 390 369 196 696
Specialized marketing program originations 290 122 232 152 804
Subprime and other 132 -- -- -- --
-----------------------------------------------------------
Total $10,866 $ 4,403 $ 3,831 $ 2,852 $ 4,586
-----------------------------------------------------------
-----------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
</TABLE>
16
<PAGE>
During 1997 Source One broadened its product line by offering higher profit
margin products such as FHA home improvement ("203(k)") loans, manufactured
housing loans, subprime loans and 125% loan to value second mortgage ("125%
LTV") loans. The 203(k) loans and manufactured housing loans produced by Source
One are sold to third parties with servicing retained whereby the subprime loans
and 125% LTV loans produced by Source One are sold to third parties on a
servicing released basis. Source One is currently expanding its capability to
service and subservice subprime loans and to subservice 125% LTV loans. These
new products did not account for a significant portion of Source One's total
mortgage loan production during 1998 or 1997.
SALES OF LOANS
Source One sells mortgage loans either through mortgage-backed securities
issued pursuant to programs of GNMA, FNMA and FHLMC, or to institutional
investors. Most mortgage loans are aggregated in pools of $1.0 million or more,
which are purchased by institutional investors after having been guaranteed by
GNMA, FNMA or FHLMC. During 1998 approximately 71.1%, 20.6% and 5.3% of the
principal amount of Source One's loans were sold in pools through GNMA, FNMA and
FHLMC, respectively. During 1997 approximately 65.5%, 23.3% and 6.7% of the
principal amount of Source One's loans were sold in pools through GNMA, FNMA and
FHLMC, respectively. During 1996 approximately 42.8%, 35.3% and 11.6% of the
principal amount of Source One's loans were sold in pools through GNMA, FNMA and
FHLMC, respectively. Since 1993, substantially all GNMA securities have been
sold without recourse to Source One for loss of principal in the event of a
subsequent default by the mortgage borrower.
Servicing agreements relating to mortgage-backed securities issued pursuant
to the programs of GNMA, FNMA or FHLMC require Source One to advance funds to
make the required payments to investors in the event of a delinquency by the
borrower. Source One expects that it would recover most funds advanced upon cure
of default by the borrower or at foreclosure. However, in connection with VA
partially guaranteed loans and certain conventional loans (which may be
partially insured by private mortgage insurers), funds advanced may not cover
losses due to potential declines in collateral value.
To minimize interest rate risk associated with mortgage loans whose
interest rate is "locked" but has not yet been sold, Source One obtains
mandatory forward commitments of up to 120 days to sell mortgage-backed
securities with respect to all loans which have been funded and a substantial
portion of loans in process (the "Pipeline") which it believes will close.
Source One's risk management function closely monitors the Pipeline to determine
appropriate forward commitment coverage on a daily basis.
17
<PAGE>
LOAN SERVICING
Source One generally retains the rights to service the mortgage loans it
produces. In addition, Source One may purchase servicing rights from banks,
thrift institutions and other mortgage lenders. There were no significant
purchases of mortgage servicing rights by Source One during 1998 and 1997.
Source One also sells servicing rights when management deems it
economically advantageous. During 1998 Source One sold the rights to service
$10.6 billion of nonrecourse mortgage loans and continues to subservice a large
portion of these loans pursuant to a subservicing agreement. During 1997 Source
One sold the rights to service a $17.0 billion portfolio of nonrecourse mortgage
loans and continues to subservice a portion of these loans pursuant to a
subservicing agreement.
The following table summarizes the changes in Source One's mortgage loan
servicing portfolio, excluding loans sold but not transferred:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------
Billions 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Servicing portfolio owned at beginning of year $ 11.6 $ 26.4 $ 27.8 $ 35.3 $ 38.4
---------------------------------------------------
Mortgage loan production 10.9 4.4 3.8 2.9 4.6
Servicing acquisitions and other -- -- 2.8 4.7 3.7
Total servicing in 10.9 4.4 6.6 7.6 8.3
Regular payoffs 1.6 1.2 3.0 2.3 4.7
Sales of servicing 10.6 17.0 3.3 11.0 3.9
Principal amortization, foreclosures and other 1.1 1.0 1.7 1.8 2.8
Total servicing out 13.3 19.2 8.0 15.1 11.4
Servicing portfolio owned 9.2 11.6 26.4 27.8 35.3
Subservicing portfolio 15.9 14.9 2.8 4.0 4.3
Balance at end of year $ 25.1 $ 26.5 $ 29.2 $ 31.8 $ 39.6
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
</TABLE>
COMPETITION
18
<PAGE>
Source One competes nationally and locally for loan production with other
mortgage banks, state and national banks, thrift institutions and insurance
companies. National banks and thrift institutions have substantially more
flexibility in their loan origination programs than Source One, which generally
originates loans meeting the standards of the secondary market. Mortgage lenders
compete primarily with respect to price and service. Competition may also occur
on mortgage terms and closing costs. Source One competes, in part, by using its
commissioned sales force to maintain close relationships with real estate
brokers, builders and developers and members of its correspondent and broker
network. It is the opinion of the management of Source One that no single
mortgage lender dominates the industry.
INVESTMENT PORTFOLIO MANAGEMENT
Fund American's philosophy is to invest all assets to maximize their after
tax total return over extended periods of time. Under this approach, each dollar
of after tax investment income, realized capital gains and unrealized
appreciation is valued equally. Management further believes that insurance
company float generated should be invested in a "balanced portfolio" consisting
of a mixture of fixed income investments, equity securities and occasionally
other investments in order to maximize returns over extended periods of time.
This investment philosophy of Fund American is established and administered by
the Fund American and White Mountains Finance Committees. The Finance Committees
also regularly monitor the overall investment results of Fund American, review
the results of each of Fund American's various investment managers, review
compliance with established investment guidelines, approve all purchases and
sales of investment securities and ultimately report the overall investment
results to the Company's Board of Directors (the "Board").
The fixed income portfolios of Valley, Charter and WMIC are actively
managed by an affiliate of MSA pursuant to discretionary management agreements.
The fixed income and equity investment portfolio and other investments of
Folksamerica are managed internally by employees of Folksamerica.
The equity investment portfolios and other investments of the Company,
White Mountains, Valley, Charter and WMIC are managed by a small group of
employees located in Hanover, New Hampshire and various internal and external
portfolio managers pursuant to discretionary management agreements. FAE's
investment portfolio is primarily managed by a small group of employees located
in White River Junction, Vermont.
As previously stated, the investment portfolios of Fund American's
insurance operations consist, in part, of common equity securities and related
investments as follows: (i) $143.0 million at Folksamerica or approximately 15%
of Folksamerica's total investment portfolio at December 31, 1998; (ii) $48.5
million at Valley and Charter or approximately 28% of Valley and Charter's total
investment portfolio at
19
<PAGE>
December 31, 1998; and (iii) $26.7 million at WMIC or approximately 83% of
WMIC's total investment portfolio at December 31, 1998. Management believes that
modest investments of equity securities within the investment portfolios of its
insurance operations will enhance their after tax returns without significantly
increasing the risk profile of the portfolio when considered over long periods
of time.
CERTAIN BUSINESS CONDITIONS
Inflation and changes in market interest rates can have significant effects
on White Mountains' insurance operations. Inflation increases the costs of
settling insurance claims over time. Increases in market interest rates, which
often occur during periods of high inflation, reduce the market value of the
insurance operations' fixed-income investments. Conversely, reductions in market
interest rates increase the market value of White Mountains' fixed-income
investments.
Changes in the economy or prevailing interest rates can also have
significant effects, including material adverse effects, on the mortgage banking
industry including Source One. Inflation and changes in interest rates can have
differing effects on various aspects of Source One's business, particularly with
respect to marketing gains and losses from the sale of mortgage loans, mortgage
loan production, the value of Source One's servicing portfolio and net interest
revenue. Historically, Source One's loan originations and loan production income
have increased in response to falling interest rates and have decreased during
periods of rising interest rates. Periods of low inflation and falling interest
rates tend to reduce loan servicing income and the value of Source One's
mortgage loan servicing portfolio because prepayments of mortgages increase and
the average life of mortgage servicing rights is shortened. Conversely, periods
of increasing inflation and rising interest rates tend to increase loan
servicing income and the value of Source One's mortgage servicing rights because
prepayments of mortgages decline and the average life of loan servicing rights
is lengthened. In an attempt to mitigate Source One's exposure to changes in
market interest rates, Source One utilizes various derivative financial
instruments. See "Management's Discussion and Analysis".
REGULATION
Folksamerica, Valley, Charter and WMIC are subject to regulation and
supervision of their operations in each of the jurisdictions where they conduct
business. Regulations vary between jurisdictions but, generally, they provide
regulatory authorities with broad supervisory, regulatory and administrative
powers over such matters as licenses, standards of solvency, premium rates,
policy forms, investments, security deposits, methods of accounting, form and
content of financial
20
<PAGE>
statements, reserves for unpaid losses and loss adjustment expenses,
reinsurance, minimum capital and surplus requirements, dividends and other
distributions to shareholders, periodic examinations and annual and other report
filings. Over the last several years most states have, and continue to
implement, laws which establish standards for current, as well as continued,
state accreditation. In addition, the National Association of Insurance
Commissioners has adopted risk-based capital ("RBC") standards for property and
casualty companies. The RBC ratios for Folksamerica, Valley, Charter and WMIC,
as of December 31, 1998 and 1997, were above the levels which would require
regulatory action.
Source One is subject to the rules and regulations of, and examinations by,
investors and insurers including FNMA, FHLMC, GNMA, FHA and VA with respect to
the origination and selling and servicing of mortgage loans. Lenders are
required to submit audited financial statements annually and to maintain
specified net worth levels which vary depending on the amount of loans serviced
and annual production. Mortgage loan origination activities are also subject to
fair housing laws, the Equal Credit Opportunity Act, the Federal
Truth-in-Lending Act, the Real Estate Settlement Procedures Act, the Fair Credit
Reporting Act, licensing laws, usury laws, the Home Mortgage Disclosure Act, and
other regulations which, among other things, prohibit discrimination in
residential lending and require disclosure of certain information to borrowers.
There are various other state laws and regulations affecting Source One's
mortgage banking operations. Source One's internal audit function (which is
managed by Source One but is outsourced to a third party) and quality control
departments monitor compliance with all these laws and regulations.
Fund American is not aware of any current recommendations by regulatory
authorities that would be expected to have a material effect on its results of
operations or liquidity or any other matters that would require disclosure
herein.
EMPLOYEES
As of December 31, 1998, the Company employed 11 persons and White
Mountains employed 2,825 persons (including 261 persons at Valley, 186 persons
at Charter, 34 persons at WMIC, 2,212 persons at Source One, 125 persons at
Folksamerica and 3 persons at FAE). None of Fund American's employees are
covered by a collective bargaining agreement. Management believes that Fund
American's employee relations are good.
FORWARD-LOOKING STATEMENTS
From time to time, the Company may publish forward-looking statements
relating to such matters as anticipated financial
21
<PAGE>
performance, business prospects, new products and similar matters. This
information is often subject to various risks and uncertainties. The Private
Securities Litigation Reform Act of 1995 provides a safe harbor for
forward-looking statements. In order to comply with the terms of the safe
harbor, the Company notes that numerous factors could cause actual results and
experience to differ materially from anticipated results or other expectations
expressed in its forward-looking statements. The risks and uncertainties that
may affect the operations, performance, development and results of the Company's
business include those discussed elsewhere herein (such as those involving
competition, regulation and certain business conditions).
ITEM 2. PROPERTIES
The Company leases 8,600 square feet of space at 80 South Main Street,
Hanover, New Hampshire, under a lease expiring in 2006, which serves as its
corporate office. Folksamerica leases 40,000 square feet of office space in New
York, New York, under a lease expiring 2004, which serves as its principal
office. Charter leases 56,000 square feet of office space in Richardson, Texas
under a lease expiring in 2007, which serves as its principal office. Valley and
Source One own their principal offices in Albany, Oregon and Farmington Hills,
Michigan, respectively. Fund American leases several other office facilities and
operating equipment under cancelable and noncancelable agreements. Most leases
contain renewal clauses.
ITEM 3. LEGAL PROCEEDINGS
Various claims have been made against Fund American in the normal course of
its business. In management's opinion, the outcome of such claims will not, in
the aggregate, have a material effect on Fund American's financial position or
results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of Fund American's shareholders
during the fourth quarter of 1998.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
As of March 22, 1999, there were 470 registered holders of shares of the
Company's Common Stock, par value $1.00 per share ("Shares").
During 1998 and 1997 the Company declared and paid quarterly cash dividends
of $.40 per Share and $.20 per Share, respectively. The Board currently intends
to reconsider from time to time the declaration of regular periodic dividends on
Shares with due consideration given to the financial characteristics of Fund
American's remaining invested
22
<PAGE>
assets and operations and the amount and regularity of its cash flows at the
time. The Company's Common Stock (symbol FFC) is listed on the NYSE. The
quarterly trading range for Shares during 1998 and 1997 is presented below:
<TABLE>
<CAPTION>
1998 1997
----------------------- -----------------------
High Low High Low
- ---------------------------------------------------------------------
<S> <C> <C> <C> <C>
Quarter ended:
December 31 $144 3/8 $117 $124 $105 1/4
September 30 153 1/4 119 108 99 1/2
June 30 150 1/4 135 9/16 110 1/2 98
March 31 137 5/16 120 1/8 109 3/4 94
- ---------------------------------------------------------------------
- ---------------------------------------------------------------------
</TABLE>
23
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
Selected consolidated income statement data and ending balance sheet data
for each of the five years ended December 31, 1998, follows:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------------------
Millions, except per share amounts 1998(a) 1997 1996 1995 1994
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues $ 578 $ 310 $ 325 $ 222 $ 228
Expenses 519 329 336 234 219
Pretax operating earnings (loss) 59 (19) (11) 4 9
Net realized investment gains 71 97 39 39 39
Pretax earnings 130 78 28 43 48
Income tax provision 48 29 19 17 21
After tax earnings 82 49 9 26 27
Loss on early extinguishment of
debt, after tax -- (6) -- -- --
Gain from sale of discontinued
operations, after tax -- -- -- 66(b) --
Cumulative effect of accounting
change - purchased mortgage
servicing, after tax -- -- -- -- (44)(c)
Net income (loss) 82 43 9 92 (17)
Other comprehensive income (loss),
after tax (9) 42(d) 54 18 (55)
Comprehensive net income (loss) $ 73 $ 85 $ 63 $ 110 $ (72)
Basic earnings per share:
After tax earnings $ 13.38 $ 6.89 $ .66 $ 1.88 $ 1.27
Net income (loss) 13.38 5.98 .66 10.30 (3.72)
Comprehensive net income (loss) 11.87 12.33(d) 8.01 12.64 (9.89)
Diluted earnings per share:
After tax earnings 11.94 6.22 .60 1.71 1.20
Net income (loss) 11.94 5.40 .60 9.36 (3.51)
Comprehensive net income (loss) 10.58 11.15(d) 7.33 11.48 (9.34)
Cash dividends paid per share of
common stock 1.60 .80 .80 .20 --
ENDING BALANCE SHEET DATA:
Total assets $ 3,281 $ 2,010(d) $ 1,981 $ 1,872 $ 1,807
Short-term debt 749 571 408 445 254
Long-term debt 360 304 424 407 547
Minority interest - preferred stock of
subsidiary 44 44 44 44 100
Shareholders' equity 703 659(d) 687(e) 700(e) 661(e)
Book value per common and equivalent
share (f) 109.68(g) 100.08(d) 90.81 83.28 68.95
</TABLE>
24
<PAGE>
(a) Includes the ending balance sheet and the interim period results of
operations of Folksamerica which was acquired by Fund American on August
18, 1998.
(b) Reflects the settlement of certain tax liabilities relating to the sale of
Fireman's Fund Insurance Company ("Fireman's Fund") for less than the
previously accrued amount.
(c) Reflects the prior years' cumulative effect of a change in Source One's
methodology used to measure impairment of its purchased mortgage servicing
rights asset.
(d) Restated as a result of Fund American's acquisition of Folksamerica during
1998. See Note 2.
(e) Reflects significant redemptions of the Company's Voting Preferred Stock
Series D, par value $1.00 per share and repurchases of Shares.
(f) Book value per common share as adjusted for the after tax dilutive effects
of outstanding options and warrants to acquire Shares.
(g) Excludes a $37.1 million unamortized deferred credit associated with Fund
American's purchase of Folksamerica which will serve to increase the
Company's future book value per common and equivalent share by $5.43 over
an approximate five year period. See Note 2.
25
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS: YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
CONSOLIDATED RESULTS
Fund American reported comprehensive net income of $73.3 million for the
year ended December 31, 1998, which compares to comprehensive net income of
$84.7 million and $63.2 million for 1997 and 1996, respectively. Comprehensive
net income for 1998 includes after tax unrealized investment holding gains of
$37.2 million versus $104.6 million and $79.6 million for 1997 and 1996,
respectively.
Net income, which does not include comprehensive income items (primarily
unrealized investment holding gains and losses), for 1998 was $82.2 million
versus $43.0 million and $8.6 million for 1997 and 1996, respectively. Net
income for 1998 includes after tax realized investment gains of $46.1 million
versus $62.9 million and $25.0 million for 1997 and 1996, respectively.
Net income applicable to common stock (which is net of preferred stock
dividends) for 1998, 1997 and 1996 was $78.5 million, $39.3 million and $4.9
million, respectively.
Book value per common and common equivalent share was $109.68 at December
31, 1998 ($115.11 including the after tax unamortized deferred credit associated
with Fund American's purchase of Folksamerica in August 1998), which compares to
$100.08 at December 31, 1997. Strong operating results at the Company's
reinsurance and mortgage banking subsidiaries and favorable investment portfolio
results produced most of the increase in book value per share from 1997 to 1998.
INSURANCE OPERATIONS
REINSURANCE OPERATIONS
Folksamerica contributed $10.0 million to net income during 1998, which
includes $4.5 million of net income from January 1, 1998 to August 18, 1998
during which Folksamerica was an unconsolidated affiliate and $5.5 million of
net income during which Folksamerica was consolidated. Folksamerica contributed
$5.2 million and $2.4 million to net income as an unconsolidated insurance
affiliate during 1997 and 1996, respectively.
Folksamerica's results for the three years ended December 31, 1998, 1997
and 1996 included $238.1 million, $238.0 million and $181.4 million of earned
reinsurance premiums, respectively, and $170.3 million, $165.6 million and
$138.6 million of losses and loss adjustment expenses, respectively. For 1998
Folksamerica's combined ratio was 108.0% versus a combined ratio of 102.9% and
108.9% for the comparable 1997 and 1996 periods.
26
<PAGE>
A summary of Folksamerica's 1998, 1997 and 1996 underwriting results
follows:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------
Dollars in millions 1998 1997 1996
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Net written premiums $ 212.6 $ 232.4 $ 171.9
--------------------------------------
Earned premiums 238.1 238.0 181.4
Losses and loss adjustment expenses 170.3 165.6 138.6
Underwriting expenses 92.6 81.6 54.8
Underwriting loss $ (24.8) $ (9.2) $ (12.0)
Combined ratios:
Loss and loss adjustment expense 71.5% 69.6% 76.4%
Underwriting expense 36.5 33.3 32.5
--------------------------------------
Combined 108.0% 102.9% 108.9%
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
</TABLE>
27
<PAGE>
During 1998, Folksamerica's written premium volume decreased approximately
9% versus 1997 premium levels reflecting an increase in non-renewed business due
to deteriorating terms and conditions. Folksamerica's combined ratio for 1998
was higher than that of 1997 due primarily to two property events experienced
during the year (Canadian ice storms and Hurricane Georges) and higher asbestos
and environmental losses. During 1997, Folksamerica's premium volume increased
approximately 35% versus 1996 premium levels reflecting its acquisition of
Christiania General Insurance Corporation in June 1996.
As previously mentioned, Folksamerica underwrites each reinsurance contract
anticipating an element of underwriting profit. The anticipated degree of
underwriting profit varies by contract and is based on a variety of factors
which can include some degree of float. Despite this expectation on an
individual contract basis, Folksamerica's reported results for the years ended
December 31, 1998, 1997 and 1996 included overall underwriting losses due to the
following: (i) actual results on some accounts or classes have produced higher
than anticipated loss costs. Considering the highly competitive market
conditions, there has been insufficient margin in profitable accounts to absorb
higher loss costs produced by other accounts; (ii) higher than anticipated
property catastrophe losses, particularly during 1998; and (iii) continued
strengthening of reserve portfolios relating to acquired companies, particularly
for claims related to mass torts. In this regard, Folksamerica has built ample
protections into its prior acquisition structures which partially mitigate the
underwriting losses. The financial benefits of those protections are generally
not reflected in the underwriting results, rather, such benefit is included in
"other insurance operations revenue" in the income statement.
Since Folksamerica's claims settlement period generally extends over a long
period of time, Folksamerica earns significant amounts of investment income on
the float generated by its reinsurance operations. When considering investment
income and certain other items at the Folksamerica holding company level
(primarily interest expense and income taxes), Folksamerica reported net income
of $27.3 million, $35.9 million and $17.1 million for the three years ended
December 31, 1998, 1997 and 1996, respectively, and reported comprehensive net
income of $53.3 million, $50.9 million and $18.4 million during those periods,
respectively. This resulted in Folksamerica attaining an after tax return on its
beginning equity of 20.9%, 29.9% and 16.0% for 1998, 1997 and 1996,
respectively.
The following table presents the subsequent development of the year-end
reinsurance losses for the ten year period from 1988 to 1998. Section I of the
table shows the estimated liabilities that were recorded at the end of each of
the indicated years for all current and prior year unpaid losses and loss
adjustment expenses ("lae"). Section II shows the re-estimate of the liabilities
made in each succeeding year. Section III shows the cumulative liabilities paid
of such previously recorded liabilities. Section IV shows the cumulative
deficiency representing the aggregate change in the liability from the original
balance sheet dates:
28
<PAGE>
<TABLE>
<CAPTION>
Reinsurance Losses and Loss Adjustment Expenses (a)
Year Ended December 31,
----------------------------------------------------------------------------------------------------
Dollars in Millions 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
I. Liability for unpaid
losses and lae $267.7 $312.7 $355.2 $425.2 $647.1 $670.6 $709.7 $760.8 $740.8 $739.1 $723.2
II. Liability re-estimated
as of:
1 year later 276.7 321.5 388.8 456.3 695.4 701.1 768.7 786.4 765.2 755.8 -
2 years later 279.0 353.1 413.3 462.2 717.0 757.3 797.8 810.4 785.4
3 years later 301.4 376.1 415.4 476.9 759.2 779.2 818.6 833.0
4 years later 326.5 378.0 424.9 496.6 770.4 800.1 837.5
5 years later 328.7 391.0 438.2 499.2 795.0 817.1
6 years later 344.2 400.5 441.7 509.6 808.9
7 years later 351.4 403.7 450.4 516.0
8 years later 354.5 410.4 456.8
9 years later 364.6 415.7
10 years later 370.3
III. Cumulative amount of
liability paid through:
1 year later 66.0 84.5 93.8 119.4 220.8 201.5 203.1 214.1 183.1 175.0 -
2 years later 103.5 135.4 154.7 179.1 338.1 324.9 341.4 339.5 305.6
3 years later 131.7 171.5 191.7 233.9 416.5 422.6 432.4 424.5
4 years later 156.1 195.5 226.8 278.3 487.2 487.7 494.5
5 years later 172.1 221.6 258.3 312.4 534.0 529.4
6 years later 193.5 243.7 285.0 339.1 563.1
7 years later 211.4 265.5 304.7 353.0
8 years later 229.2 278.6 314.4
9 years later 242.8 286.4
10 years later 250.2
IV. Cumulative deficiency $102.6 $103.0 $101.6 $ 90.8 $161.8 $146.4 $127.9 $72.2 $44.6 $16.8 -
Percent deficient 38% 33% 29% 21% 25% 22% 18% 9% 6% 2% -
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) For the years 1988 through 1991 liabilities are shown net of reinsurance
recoverable. For the years 1992 through 1998 liabilities are shown without
regard to reinsurance recoverable in accordance with SFAS No. 113. The
table excludes
29
<PAGE>
the insurance operations of VGI whose liability for unpaid losses and lae
totalled $88.5 million, $71.9 million and $65.4 million as of December 31,
1998, 1997 and 1996, respectively. Historic data for VGI is not considered
to be meaningful due to Charter reinsuring all of its business to its
former owner for periods prior to 1996. During 1998 and 1996, VGI's losses
and loss adjustment expenses relating to prior years developed unfavorably
by $6.7 million and $3.5 million, respectively. During 1997, VGI's losses
and loss adjustment expenses relating to prior years developed favorably by
$2.5 million pretax.
The table above has been prepared in accordance with prescribed
instructions, however, management believes that this information is not
indicative of Folksamerica's actual loss development history for the following
reasons: (i) with respect to 1992 through 1998, the information is presented
prior to considering the benefit of significant amounts of ceded reinsurance
recovered (and recoverable) from Folksamerica's reinsurers; (ii) the information
includes the complete loss development history for companies acquired by
Folksamerica for all periods presented, including periods prior to
Folksamerica's acquisition of such companies; and (iii) the structure of each of
Folksamerica's acquisitions has provided effective economic protections to
offset potential post-acquisition loss development. The form of these
protections has included deferred and adjustable purchase consideration and
favorable purchase prices. In consideration of such factors, the table presented
below is management's attempt to adjust the deficiencies presented above for the
most recent five years:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------
Percent of deficit to carried 1994 1995 1996 1997 1998
reserves:
- ----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Deficiency as reported 18% 9% 6% 2% -%
Deficiency as adjusted for
the effects described above 3% 2% 1% -% -%
- ----------------------------------------------------------------------
- ----------------------------------------------------------------------
</TABLE>
INSURANCE OPERATIONS
Valley, Charter and WMIC represent Fund American's consolidated insurance
subsidiaries. Valley, Charter and WMIC's results for the years ended December
31, 1998, 1997 and 1996, included $160.6 million, $145.3 million and $109.7
million of property and casualty insurance premiums earned, respectively, and
$115.1, $97.1 million and $85.9 million of losses and loss adjustment expenses,
respectively.
A summary of 1998, 1997 and 1996 underwriting results for Valley, Charter
and WMIC follows:
<TABLE>
<CAPTION>
Year Ended December 31, 1998
-------------------------------------
Dollars in millions Valley Charter WMIC
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Net written premiums $ 94.3 $ 64.3 $ 6.3
-------------------------------------
Earned premiums 91.1 64.2 5.3
Losses and loss adjustment expenses 67.8 43.7 3.6
Underwriting expenses 31.3 15.5 3.5
Underwriting profit (loss) $ (7.9) $ 5.0 $ (1.8)
Combined ratios:
Loss and loss adjustment expense 74.4% 68.0% 67.3%
Underwriting expense 33.5 23.8 61.1
-------------------------------------
Combined 107.9% 91.8% 128.4%
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31, 1997
-------------------------------------
Dollars in millions Valley Charter WMIC
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Net written premiums $ 83.2 $ 62.9 $ 4.7
-------------------------------------
Earned premiums 79.6 62.4 3.3
Losses and loss adjustment expenses 51.8 41.8 3.5
Underwriting expenses 28.3 17.1 2.0
Underwriting profit (loss) $ (.5) $ 3.5 $ (2.2)
Combined ratios:
Loss and loss adjustment expense 65.0% 66.9% 107.8%
Underwriting expense 34.8 27.3 53.1
-------------------------------------
Combined 99.8% 94.2% 160.9%
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31, 1996
-------------------------------------
Dollars in millions Valley Charter WMIC
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Net written premiums $ 75.1 $ 69.9 $ 2.0
-------------------------------------
Earned premiums 70.7 37.7 1.3
Losses and loss adjustment expenses 54.4 30.3 1.2
Underwriting expenses 24.8 8.0 .9
Underwriting loss $ (8.5) $ (.6) $ (.8)
Combined ratios:
Loss and loss adjustment expense 76.8% 80.4% 95.8%
Underwriting expense 34.9 18.9 50.4
-------------------------------------
Combined 111.7% 99.3% 146.2%
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
</TABLE>
31
<PAGE>
Valley's 1998 underwriting results suffered from losses in certain of its
commercial lines business (primarily within Washington) which resulted in an
underwriting ratio of 107.9% for the year and an underwriting loss of $7.9
million. Charter's 1998 underwriting results produced a satisfactory 91.8%
combined ratio and a $5.0 million underwriting profit. For 1998, Charter's
policy counts increased strongly but total premiums were down due to price
reductions, a shift towards liability-only policies and a shift towards
six-month policies. WMIC's loss and loss adjustment expense ratio for 1998 of
67.3% shows significant improvement over prior year results but its expense
ratio for 1998 of 61.1% will not be meaningful for some time. WMIC's premium
volumes must grow significantly from current levels to provide sufficient
expense ratio economies of scale.
Valley and Charter's 1997 underwriting results produced satisfactory
combined ratios and an overall underwriting profit. However, premium growth at
both Valley and Charter suffered during 1997 as a result of increased
competition in the marketplace which illustrates Fund American's underwriting
discipline in a highly competitive market. WMIC's 1997 results were adversely
impacted by several large workers' compensation claims although underwriting
results on this small and growing book of business are not yet considered to be
meaningful.
Valley's 1996 underwriting results were adversely impacted by severe fourth
quarter storm-related losses and by $3.5 million in reserve strengthening for
losses and loss adjustment expenses incurred in prior years. Charter's earned
premiums trailed net written premiums during 1996 because Charter began to
retain virtually all its written premiums. Charter's policies written prior to
1996 were fully ceded to a former affiliate of Charter.
Valley, Charter and WMIC's claims are normally settled in a more timely
manner than those of Folksamerica which limits the amount of investment income
that can be generated on the earned and unearned insurance premiums that it has
received from its policyholders. When considering investment income and certain
other items of VGI (primarily interest expense, income taxes and goodwill
amortization), VGI reported net income (loss) of $5.0 million, $7.2 million and
$(2.6) million for the three years ended December 31, 1998, 1997 and 1996,
respectively, and reported comprehensive net income (loss) of $11.4 million,
$13.6 million and $(1.8) million during those periods, respectively. This
resulted in VGI attaining an after tax return (loss) on equity of 11.0%, 14.8%
and (1.9)% for 1998, 1997 and 1996, respectively.
INVESTMENTS IN UNCONSOLIDATED INSURANCE AFFILIATES
FSA and MSA represented Fund American's investments in unconsolidated
insurance affiliates at December 31, 1998. Fund American's investment in FSA
increased $42.0 million during 1998 which consisted of $13.8 million of pretax
earnings from FSA Common Stock, $26.6 million of pretax unrealized investment
gains from FSA Options and Preferred Stock, $3.1 million of pretax unrealized
investment gains
32
<PAGE>
from FSA's investment portfolio, less $1.5 million of dividends received from
FSA Common Stock. White Mountains' investment in MSA increased $9.0 million
during 1998 (excluding White Mountains' additional purchase of MSA Common Stock
for $70.3 million in February 1998) which consisted of $4.9 million of pretax
earnings from MSA Common Stock and $4.1 million of pretax unrealized investment
gains from MSA's investment portfolio.
FSA, MSA, Folksamerica and Murray Lawrence represented Fund American's
investments in unconsolidated insurance affiliates as of December 31, 1997. Fund
American's investment in FSA increased $80.0 million during 1997 which consisted
of $11.4 million of pretax earnings from FSA Common Stock, $68.0 million of
pretax unrealized investment gains from FSA Options and Preferred Stock, $2.1
million of pretax unrealized investment gains from FSA's investment portfolio,
less $1.5 million of dividends received from FSA Common Stock. White Mountains'
investment in MSA increased $6.2 million during 1997 which consisted of $3.8
million of pretax earnings from MSA Common Stock and $2.4 million of pretax
unrealized investment gains from MSA's investment portfolio. White Mountains'
investment in Folksamerica increased $2.7 million during 1997 (excluding White
Mountains' purchase of Folksamerica Common Stock for $20.8 million during
December 1997) which consisted of $.9 million of pretax earnings from
Folksamerica Common Stock and $1.8 million of pretax unrealized investment gains
from Folksamerica's investment portfolio. White Mountains investment in Murray
Lawrence, which was acquired on December 8, 1997, remained at its cost of $23.6
million during 1997.
FSA, MSA and Folksamerica represented Fund American's investments in
unconsolidated insurance affiliates as of December 31, 1996. Fund American's
investment in FSA increased $23.1 million during 1996 (excluding Fund American's
purchase of 1,000,000 additional shares of FSA Common Stock for $26.5 million
during 1996) which consisted of $7.8 million of pretax earnings from FSA Common
Stock, $17.3 million of pretax unrealized investment gains from FSA Options and
Preferred Stock, less $1.0 million of pretax unrealized investment losses from
FSA's investment portfolio, less $1.0 million of dividends received from FSA
Common Stock. White Mountains' investment in MSA increased $1.0 million during
1996 which consisted of $1.5 million of pretax earnings from MSA Common Stock
offset by $.5 million of pretax unrealized investment losses from MSA's
investment portfolio. White Mountains' investment in Folksamerica increased $.2
million from June 1996 to December 31, 1996.
MORTGAGE BANKING OPERATIONS
For the year ended December 31, 1998, Source One's mortgage banking
operations contributed $33.2 million of net income to Fund American versus net
losses of $22.1 million and $8.0 million for during 1997 and 1996, respectively.
Source One's 1998 results include a $15.2 million
33
<PAGE>
pretax, $9.9 million after tax, gain on sales of mortgage servicing rights.
Source One's 1997 results included the following charges: (i) a $6.0 million
after tax extraordinary loss on early extinguishment of debt, (ii) restructuring
and compensation charges of $3.1 million pretax, $2.0 after tax, associated with
Source One's plan to reduce its operating costs and improve its financial
performance, (iii) an $8.0 million pretax, $5.2 million after tax, loss on sales
of mortgage servicing rights and assumption of subservicing and (iv) a $17.7
million pretax, $11.5 million after tax, charge to Source One's valuation
allowance for impairment of their capitalized mortgage loan servicing portfolio.
Source One's 1996 results include a $29.1 million pretax ($25.9 after tax)
write-off of goodwill and certain other intangible assets which was partially
offset by a $10.1 million pretax, $6.6 million after tax, gain on sales of
mortgage servicing rights.
Gross mortgage servicing revenue was $78.1 million for the year ended
December 31, 1998 which compares to $94.9 million in 1997 and $139.6 million in
1996. The decrease in gross mortgage servicing revenue from 1996 to 1998 is
primarily the result of sales of mortgage servicing rights with respect to $10.6
billion and $17.0 billion of mortgage loans during 1998 and 1997, respectively.
Source One's net mortgage servicing revenue was $43.3 million for the year
ended December 31, 1998 which compares to $38.2 million in 1997 and $70.3
million in 1996. Net mortgage servicing revenue for the year ended December 31,
1998 was enhanced by $20.4 million of pretax net gains on financial instruments
versus gains of $11.3 million for 1997 and $9.9 million for 1996.
Source One utilizes interest rate floor contracts, interest rate swap
agreements and principal only swap agreements to mitigate the effect on earnings
of higher amortization and impairment of the capitalized servicing asset caused
by changes in market interest rates. These financial instruments are carried at
fair value on the balance sheet with unrealized and realized gains reported as
net gains on financial instruments on the income statement. Source One's
management believes that these financial instruments have proven to be an
effective means to substantially offset fluctuations in the value of Source
One's mortgage servicing asset caused by changes in market interest rates.
Net gains on sales of mortgages were $86.8 million for the year ended
December 31, 1998, versus $21.5 million in 1997 and $38.3 million in 1996. The
increase in gains from 1997 to 1998 reflects significant increases in Source
One's correspondent production and related mortgage sales volumes during the
period. The decrease in gains from 1996 to 1997 are due primarily to a change in
Source One's loan production mix which included a proportionately higher volume
of correspondent production during 1997 versus 1996 (which generates lower
originated mortgage servicing rights income).
During 1998 Source One sold the rights to service $10.6 billion of
nonrecourse mortgage loans for cash proceeds of $227.9 million, resulting in a
pretax gain of $15.2 million. During 1997 Source One
34
<PAGE>
sold the rights to service $17.0 billion of nonrecourse mortgage loans for cash
proceeds of $266.9 million, resulting in a pretax loss of $8.0 million. As part
of the 1998 and 1997 servicing sales, Source One retained the right to
subservice $4.1 billion and $17.0 billion of these loans, respectively, for a
contracted fee through 2001. During 1996 Source One sold the rights to service
$3.3 billion of mortgage loans for net proceeds of $55.9 million, resulting in a
pretax gain of $10.1 million.
Total mortgage loan production for the years ended December 31, 1998, 1997
and 1996, was $10.9 billion, $4.4 billion and $3.8 billion, respectively. The
increase in production from 1996 to 1998 is reflective of overall lower market
interest rates and a corresponding increase in refinancing activities during the
period. Production related to refinancing activities made up 61%, 40% and 33% of
total production during 1998, 1997 and 1996, respectively.
INVESTMENT OPERATIONS
The total return from Fund American's investment activities (excluding net
unrealized investment holding gains and losses from Fund American's investments
in unconsolidated insurance affiliates) is shown below:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
Millions 1998 1997 1996
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Net investment income:
Mortgage banking operations $ 81.6 $ 43.5 $ 40.8
Insurance operations, reinsurance
operations and other 36.8 21.6 16.5
----------------------------------
Total net investment income 118.4 65.1 57.3
Net unrealized investment holding
gains arising during the period 26.8 86.6 106.5
----------------------------------
Total net investment return, before tax $ 145.2 $ 151.7 $ 163.8
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
</TABLE>
Fund American's investment income is comprised primarily of interest income
earned on mortgage loans originated by Source One, interest income associated
with the fixed maturity investments of its consolidated insurance and
reinsurance operations and dividend income from its equity investments. The
increase in net investment income from mortgage banking operations from 1996 to
1998 is mainly attributable to an increase in interest income from mortgage
loans held for sale due to higher mortgage loan production experienced during
35
<PAGE>
those periods, particularly during 1998. The increase in net investment income
from insurance, reinsurance and other from 1997 to 1998 is primarily the result
of the addition of Folksamerica's sizable fixed income portfolio in August 1998.
The increase in net investment income from insurance, reinsurance and other from
1996 to 1997 is a result of increases in investment income from White Mountains'
growing portfolio of fixed maturity investments.
Net realized investment gains of $71.0 million recorded during 1998
resulted principally from the sale of all Fund American's holdings (1,014,250
common shares) of White River Corporation for net proceeds of $92.1 million. The
total cash received by Fund American included the sales proceeds associated with
shares which were being held for delivery upon the exercise of existing employee
stock options (295,432 common shares or $17.8 million) and is payable to the
recipient at a future date pursuant to the Company's nonqualified retirement
plan.
Net realized investment gains of $96.7 million recorded during 1997
included $37.2 million of pretax gains from the sale of 1,980,982 shares of the
common stock of Travelers Property Casualty Corp. for net proceeds of $69.2
million, $24.3 million of pretax gains from the sale of 5,000,000 units of
beneficial interest of San Juan Basin Royalty Trust for net proceeds of $45.7
million, $10.3 million of pretax gains from the sale of 388,140 shares of the
common stock of Mid Ocean Limited ("Mid Ocean") for net proceeds of $22.6
million and $15.5 million of pretax gains from the sale of 834,895 shares of the
common stock of Veritas DGC Inc. for net proceeds of $20.9 million.
Net realized investment gains of $38.5 million recorded during 1996,
before tax, included $27.2 million of pretax gains from the sale of 2,928,100
shares of the common stock of The Louisiana Land & Exploration Company common
stock for net proceeds of $125.1 million, $1.4 million of pretax gains from the
sale of 2,042,572 shares of the common stock of Zurich Reinsurance Centre
Holdings, Inc. for net proceeds of $61.8 million and $9.3 million of pretax
gains from the sale of 600,000 of the shares of common stock of Mid Ocean for
net proceeds of $28.2 million.
EXPENSES
Insurance losses and loss adjustment expenses totalled $174.8 million for
1998 versus $97.1 million for 1997 and $85.9 million for 1996. Insurance and
reinsurance acquisition expenses totalled $54.8 million for 1998 versus $23.2
million for 1997 and $15.2 million for 1996. The increase in these insurance
expenses from 1997 to 1998 is primarily attributable to the inclusion of
Folksamerica in the Company's consolidated results during the 1998 third
quarter. The
36
<PAGE>
increase in these insurance expenses from 1996 to 1997 is due to an increase in
insurance premium volumes at Valley, Charter and WMIC. During 1998 and 1996,
losses and loss adjustment expenses relating to prior years developed
unfavorably by $6.7 million and $3.5 million, respectively. During 1997, losses
and loss adjustment expenses relating to prior years developed favorably by $2.5
million pretax.
Compensation and benefits expenses totalled $130.2 million for 1998 versus
$101.8 million for 1997 and $91.3 million for 1996. The increase in compensation
and benefits expense from 1997 to 1998 is due to an increase in
production-related compensation at Source One and the inclusion of $7.1 million
of Folksamerica's compensation and benefits expenses for 1998. The increase in
compensation and benefits expense from 1996 to 1997 is primarily due to an
increase in stock-based compensation accruals associated with certain of the
Company's long-term compensation plans and its qualified and nonqualified
retirement plans. During 1997 the market value of the Company's common stock
rose 26%.
Interest expense of $83.9 million for 1998 compares to $46.0 million for
1997 and $46.3 million for 1996. The increase in interest expense from 1997 to
1998 reflects: (i) an increase in average indebtedness outstanding during 1998
at Source One as a result of significantly higher mortgage loan production
volumes; (ii) the inclusion of $1.4 million of Folksamerica's interest expense
for 1998; and (iii) an increase in average indebtedness under White Mountains'
$50.0 million revolving credit facility associated with its 1998 acquisition of
Folksamerica and its 1998 increase in its investment in MSA.
General expenses of $75.4 million for 1998 compares to $60.5 million for
1997 and $64.9 million for 1996. The increase in compensation and benefits
expense from 1997 to 1998 is due to an increase in production-related general
expenses at Source One and the inclusion of $1.3 million of Folksamerica's
general expenses for 1998.
Source One's provision for mortgage loan losses, included in general
expenses, was $3.8 million in 1998 which compares to $4.7 million for 1997 and
$3.0 million for 1996. The decrease in provision for loan losses from 1996 to
1998 primarily reflects significant reductions in the size of Source One's owned
mortgage servicing portfolio during the period. Source One has established an
allowance for mortgage loan losses which totalled $11.5 million and $12.8
million as of December 31, 1998 and 1997, respectively. In addition, Source One
has established a $5.2 million and $8.2 million pretax reserve for estimated
losses on its principal recourse portfolio as of December 31, 1998 and 1997,
respectively. Source One believes that its total allowances are adequate to
provide for estimated uninsured losses on the mortgage servicing portfolio.
INCOME TAXES
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<PAGE>
The income tax provision related to pretax earnings for 1998, 1997 and 1996
represents an effective tax rate of 36.8%, 37.5% and 68.7%, respectively. The
primary reason for the high effective tax rate experienced in 1996 was the
write-off of goodwill and certain other intangible assets related to Source One.
The total pretax write-off of these assets was $32.6 million and the related tax
benefit was $3.2 million.
Fund American recorded a net deferred Federal income tax asset of $7.8
million as of December 31, 1998. The 1998 net deferred tax asset includes $142.9
million of deferred tax assets (relating primarily to various operating items)
partially offset by $135.1 million of deferred tax liabilities (relating
primarily to net unrealized investment holding gains). Fund American recorded a
net deferred Federal income tax liability of $19.6 million as of December 31,
1997. The 1997 net deferred tax liability includes $108.0 million of deferred
tax liabilities (relating primarily to net unrealized investment holding gains)
partially offset by $88.4 million in net deferred tax assets (relating primarily
to various operating items).
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<PAGE>
On January 2, 1991, the Company sold Fireman's Fund to Allianz of America,
Inc. The $1.3 billion gain from the sale as reported in 1991 included a $75.0
million tax benefit related to the Company's estimated tax loss from the sale.
Since 1991 the Company has carried an estimated reserve related to tax matters
affecting the amount of the deductible tax loss from the sale and other tax
matters. The amount of tax benefit from the sale of Fireman's Fund ultimately
realized by the Company may be significantly more or less than the Company's
current estimate due to possible changes in or new interpretations of tax rules,
possible amendments to Fund American's 1991 or prior years' Federal income tax
returns, the results of further IRS audits and other matters affecting the
amount of the deductible tax loss from the sale.
LIQUIDITY AND CAPITAL RESOURCES
PARENT COMPANY
The primary sources of cash inflows for the Company are investment income,
sales of investment securities and dividends received from its operating
subsidiaries.
In August 1998 the Company entered into a $35.0 million revolving credit
agreement with a syndicate of banks which served to replace an expiring
arrangement in the same amount. Under the agreement, through August 12, 1999,
the Company may borrow up to $35.0 million at short-term market interest rates.
The credit agreement contains certain customary covenants and conditions. At
December 31, 1998 the Company was in compliance with all covenants under the
facility and had no borrowings outstanding under the agreement. At December 31,
1997 the Company had no outstanding borrowings under the former facility.
During 1993 the Company issued $150.0 million in principal amount of
medium-term notes for net cash proceeds of $148.0 million after related costs.
During 1995 and 1994 the Company repurchased $8.8 million and $24.9 million,
respectively, in principal amount of the notes due in February 2003. At December
31, 1998 the $116.3 million of remaining outstanding notes had an average
maturity of 4.4 years and a yield to maturity of 7.82%.
During 1998 and 1997 the Company repurchased 151,916 Shares for $19.8
million and 924,739 Shares for $103.5 million, respectively. All Shares
repurchased during 1998 and 1997 have been retired. During 1998 and 1997 the
Company declared and paid quarterly cash dividends of $.40 per Share and $.20
per share, respectively. The Company's repurchases of Shares and dividends paid
during 1998 and 1997 represent returns of excess capital to its shareholders.
In connection with Source One's 1997 sale of approximately $17.0 billion of
mortgage servicing rights to a third party, the Company has made a collection,
payment and performance guaranty to the buyer for a
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<PAGE>
period of no more than ten years. The aggregate amount of the Company's guaranty
is initially limited to $20.0 million and amortizes down to $15.0 million as
mortgage loans serviced under agreement are repaid. During 1998, the Company
permitted the third party to include an additional $2.9 billion of mortgage
servicing rights that it purchased from Source One during 1998 to be included in
the guaranty, however, the inclusion of the 1998 servicing rights sold did not
serve to change the maximum amount of the guaranty or the original term of the
agreement. The Company estimates that its aggregate guaranty under this
arrangement is currently approximately $15.0 million.
WHITE MOUNTAINS, FOLKSAMERICA, VALLEY AND CHARTER
In November 1996 White Mountains and Valley entered into a five year credit
facility under which they may borrow up to $50.0 million and $15.0 million,
respectively, at market interest rates. The facility contains certain customary
covenants and conditions but does limit White Mountains' ability to pay
dividends to its shareholders. As of December 31, 1998 and 1997, White Mountains
and Valley were in compliance with all covenants under the facility. At December
31, 1998 White Mountains had $50.0 million of borrowings outstanding under the
facility which were used to partially fund White Mountains additional investment
in MSA and its acquisition of Folksamerica during 1998. White Mountains 1998
borrowings had a weighted average interest rate of 6.20%. White Mountains had no
borrowings outstanding at December 31, 1997 under the facility. During 1998 and
1997 Valley had $15.0 million of borrowings outstanding under the facility with
a weighted average interest rate of 6.14% and 6.09%, respectively.
In November 1995 Charter issued two notes totalling $20.2 million. Certain
of the notes were due in 1996 and $3.2 million of notes were extended to be
payable in three equal installments in 1997, 1998 and 1999. As of December 31,
1998 $1.1 million of the notes remained outstanding. The notes are
collateralized by certain assets of Charter.
During 1997 the Company reorganized its structure in order to strengthen
Source One and make it a part of Fund American's operating group under White
Mountains. Pursuant to this reorganization plan, White Mountains was merged into
FAE and the combined entity was immediately renamed White Mountains. In
addition, Source One received $139 million of capital infusions, consisting
primarily of Fund American's investments in FSA, in order to improve Source
One's debt ratings and reduce its borrowing costs. As a result of the
reorganization plan, the Company currently owns 3% of the outstanding common
stock of Source One and White Mountains owns the remaining 97% of the
outstanding common stock of Source One.
As part of the August 18, 1998 Folksamerica acquisition, Fund American
agreed to repay or refinance Folksamerica's $55.6 million of outstanding
long-term indebtedness during February 1999. On February 24, 1999, White
Mountains repayed and replaced its $50.0 million five
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<PAGE>
year credit facility with a new $100 million facility at Folksamerica. The new
credit agreement contains certain customary covenants and conditions.
On February 11, 1999, White Mountains entered into a definitive agreement
to sell VGI (which includes Valley, Charter and WMIC but excludes Valley
National) to Unitrin, Inc. for total proceeds of approximately $215 million
(consisting of approximately $130 million in cash upon closing and a special
dividend consisting primarily of investment securities of approximately $85
million prior to close). The transaction is subject to certain Federal and state
approvals and is expected to close during the 1999 second quarter. White
Mountains expects to record an approximate $90 million pretax gain on the sale
of VGI.
In a separate transaction, White Mountains has entered a definitive
contract to sell Valley National to Executive Risk Indemnity for an amount to be
determined upon closing. The transaction is subject to certain Federal and state
approvals and is expected to close during the 1999 second quarter. White
Mountains expects to record an approximate $8 million pretax gain on the sale of
Valley National.
On March 25, 1999, Fund American and Citicorp Mortgage, Inc. ("Citicorp")
reached a definitive agreement (the "Citicorp Agreement") under which Citicorp
will acquire a substantial amount of Fund American's mortgage-banking related
assets and certain of its mortgage banking liabilities. Fund American will
retain the Source One legal entity which will continue to own all of Fund
American's investments in FSA and certain other mortgage-related and other
assets and liabilities. Fund American will likely sell or run-off the residual
mortgage-banking assets remaining after the sale and extinguish the remaining
liabilities. Fund American expects to record an after tax gain of approximate
$15.0 million gain on the Citicorp Agreement. The amount of prospective gain on
the sale of Source One's residual net mortgage-banking assets cannot be
accurately determined at this time.
Under the insurance laws of the various states under which Folksamerica,
Valley, Charter and WMIC are incorporated or licensed to write business, an
insurer is restricted with respect to the amount of dividends it may pay without
prior approval by state regulatory authorities. Accordingly, there is no
assurance that dividends may be paid by Folksamerica, Valley, Charter and WMIC
in the future.
SOURCE ONE
Source One's primary cash flow requirements relate to funding mortgage loan
production and investments in mortgage servicing rights. To meet these financing
needs, Source One relies on various short-term and long-term credit facilities,
early funding programs and cash flow from operations. Source One's investments,
mortgage loans held for sale and mortgage loan servicing portfolio provide a
liquidity reserve since these assets may be sold to meet cash needs.
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<PAGE>
During 1998 Source One sold the rights to service $10.6 billion of
nonrecourse mortgage loans for cash proceeds of $227.9 million. During 1997
Source One sold the rights to service $17.0 billion of nonrecourse mortgage
loans for cash proceeds of $266.9 million. As part of the 1998 and 1997
servicing sales, Source One retained the right to subservice $4.1 billion and
$17.0 billion, respectively, of these loans for a contracted fee through 2001.
The proceeds of the 1997 and 1998 servicing sales were used by Source One to
retire debt and to distribute its excess capital to common shareholders. During
1996 Source One sold the rights to service $3.3 billion of mortgage loans for
cash proceeds of $55.9 million.
In July 1998 Source One amended and restated its $600.0 million secured
revolving credit agreement to increase its borrowing capacity and flexibility.
The provisions of the amended agreement increased Source One's borrowing
capacity to $800.0 million. The facility expires on July 9, 1999. At December
31, 1998, Source One had $650.5 million of borrowings outstanding under this
facility.
In July 1997 Source One amended and restated its secured revolving credit
agreement to decrease its borrowing capacity from $750.0 million to $600.0
million and to reduce its borrowing costs by lowering the facility fee. At
December 31, 1997, Source One had $559.0 million of borrowings outstanding under
this facility.
During the second quarter of 1998 Source One entered into two additional
secured credit agreements whereby it may borrow up to $35.0 million and $175.0
million through July 1999 and April 1999, respectively. At December 31, 1998,
Source One had a total of $21.6 million in borrowings outstanding under these
agreements.
In April 1998 Source One replaced its existing $15.0 million unsecured
revolving credit agreement under which it can borrow up to $40.0 million through
April 15, 1999. As of December 31, 1998, there was $25.2 million outstanding
under the revolving credit agreement.
In May 1997 Source One entered into a unsecured revolving credit agreement
under which it can borrow up to $15.0 million through June 1, 1998. As of
December 31, 1997, there was $10.5 million outstanding under the revolving
credit agreement.
In December 1995, Source One exchanged and retired 2,239,061 shares of
preferred stock (the "Source One Preferred Stock") for $56.0 million in
principal amount of 9.375% subordinated debentures. The subordinated debentures
are due in 2025 but are redeemable at the option of Source One, in whole or
part, at any time on or after May 1, 1999.
Dividends paid on the Source One Preferred Stock were $3.7 million for
1998, 1997 and 1996. Dividends on the Source One Preferred Stock accrue at an
annual rate of 8.42% or $2.105 per share of Source One Preferred Stock
outstanding.
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<PAGE>
In 1991 Source One issued $160.0 million of 8.875% medium-term notes due in
2001 of which $138.4 million remained outstanding at December 31, 1996. During
1997 Source One repurchased and retired in principal amount $119.7 million of
these notes leaving $18.7 million outstanding at December 31, 1997 and 1998.
In 1992 Source One issued $100.0 million of 9% debentures due in 2012
pursuant to a $250.0 million shelf registration statement. The debentures may
not be redeemed by Source One prior to maturity. The proceeds from issuance were
used for general corporate purposes.
Source One must comply with certain financial covenants provided in its
secured and unsecured revolving credit facilities, including restrictions
relating to tangible net worth and leverage. In addition, the secured facility
contains certain covenants which limit Source One's ability to pay dividends or
make distributions of its capital in excess of preferred stock dividends and
subordinated debt interest requirements each year. Source One is currently in
compliance with all such covenants.
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<PAGE>
MARKET RISK
Fund American's consolidated balance sheet includes a substantial amount of
assets and liabilities whose fair values are subject to market risk. The term
market risk refers to the risk of loss arising from adverse changes in: interest
rates, foreign currency exchange rates, commodity prices, and other relevant
market rates and prices such as prices for common equity securities. Due to Fund
American's sizable investments in fixed maturity investments and common equity
securities at its insurance and reinsurance subsidiaries, derivative securities
and mortgage-related assets and liabilities at its mortgage banking subsidiary
and its use of medium and long-term debt financing at the Company and certain of
its operating companies, market risk can have a significant affect on Fund
American's consolidated financial position.
INTEREST RATE RISK
FIXED MATURITY PORTFOLIO. In connection with the Company's consolidated
insurance and reinsurance subsidiaries, Fund American invests in interest rate
sensitive securities, primarily debt securities. Fund American's strategy is to
purchase fixed maturity investments that are attractively priced in relation to
perceived credit risks. Fund American's investments in fixed maturity
investments are held as available for sale and, accordingly, Fund American
accepts that realized and unrealized losses on these instruments may occur. Fund
American does not use derivative securities to manage its interest rate risk
associated with its fixed maturity investments, rather it manages the average
duration of the fixed maturity portfolio in the anticipation of achieving an
adequate yield without subjecting the portfolio to an unreasonable level of
interest rate risk.
Increases and decreases in prevailing interest rates generally translate
into decreases and increases in fair values of fixed maturity investments,
respectively. Additionally, fair values of interest rate sensitive instruments
may be affected by the credit worthiness of the issuer, prepayment options,
relative values of alternative investments, the liquidity of the instrument and
other general market conditions. These investments are carried at fair value on
the balance sheet with unrealized gains reported net of tax in a separate
component of shareholders equity.
DERIVATIVE SECURITIES. In connection with its mortgage banking operations,
Source One utilizes derivative contracts, consisting of interest rate floor
contracts, interest rate swap agreements and principal-only swap agreements, in
an attempt to offset the effect on earnings of impairment of its capitalized
servicing asset caused by changes in market interest rates. Increases and
decreases in prevailing interest rates generally translate into increases and
decreases in fair values of these financial instruments, respectively. These
financial instruments are carried at fair value on the balance
44
<PAGE>
sheet (as other investments) with unrealized and realized gains reported as net
gains on financial instruments on the income statement.
INDEBTEDNESS. Fund American utilizes debt financing at all levels of its
businesses, particularly at Source One. Increases and decreases in prevailing
interest rates generally translate into decreases and increases in fair values
of fixed rate indebtedness, respectively, particularly long-term debt.
Additionally, fair values of interest rate sensitive instruments may be affected
by the credit worthiness of the issuer, prepayment options, relative values of
alternative investments, the liquidity of the instrument and other general
market conditions.
The table below summarizes the estimated effects of hypothetical increases
and decreases in market interest rates on Fund American's fixed maturity
portfolio, derivative securities and long-term fixed rate indebtedness
outstanding. Significant variations in market interest rates could produce
changes in the timing of repayments due to prepayment options available to the
issuer or the holder which are not reflected herein. It is assumed that the
changes occur immediately and uniformly to each category of instrument
containing interest rate risk.
45
<PAGE>
<TABLE>
<CAPTION>
Estimated Fair Percentage Increase
Fair Value at Assumed Change Value after Change (Decrease) to
Dollars in Millions December 31, 1998 in Interest Rate in Interest Rate Shareholders' Equity
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fixed maturity investments $929.6 50 bp decrease $946.4 1.6%
50 bp increase $913.2 (1.5)%
100 bp increase $897.1 (3.0)%
200 bp increase $866.2 (5.9)%
- -------------------------------------------------------------------------------------------------------------
Derivative securities $ 17.5 50 bp decrease $31.5 1.3%
50 bp increase $5.4 (1.1)%
100 bp increase $(4.7) (2.1)%
200 bp increase $(20.7) (3.5)%
- -------------------------------------------------------------------------------------------------------------
Fixed rate indebtedness (a) $233.1 50 bp decrease $239.4 (.6)%
50 bp increase $227.0 .6%
100 bp increase $221.2 1.1%
200 bp increase $210.1 2.1%
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Excludes short-term indebtedness, long-term indebtedness refinanced or
callable by Fund American during 1999 and variable rate obligations.
MORTGAGE-RELATED ASSETS. Source One's mortgage loan production and
servicing activities are subject to interest rate risk and are generally counter
cyclical in nature. In addition, Source One utilizes various financial
instruments, including derivatives, to manage the interest rate risk related
specifically to its mortgage loan pipeline, mortgage loans held for sale and
gain or loss on sales of mortgage servicing rights. The overall objective of
Source One's interest rate risk management policies is to offset changes in the
values of these items resulting from changes in interest rates.
As part of the interest rate risk management process, Source One performs
various sensitivity analyses that quantify the net financial impact of changes
in interest rate-sensitive assets and commitments. These analyses incorporate
scenarios including assumed shifts in the yield curve. Various modeling
techniques are employed to forecast the value of these assets and commitments.
For pipeline commitments, an option-adjusted spread model is used which
incorporates implied market volatilities and prepayment speeds. For mortgage
servicing rights, a
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<PAGE>
discounted cash flow model is used which incorporates prepayment speeds,
discount rates and credit losses.
Utilizing the sensitivity analyses described above, the table below
summarizes the estimated effects of hypothetical increases and decreases in
market interest rates on Source One's mortgage servicing values:
<TABLE>
<CAPTION>
Estimated Fair Percentage Increase
Carrying Value at Assumed Change Value after Change (Decrease) to
Dollars in Millions December 31, 1998 in Interest Rate in Interest Rate Shareholders' Equity
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Mortgage servicing rights (a) $171.3 50 bp decrease $156.0 (1.4)%
50 bp increase $183.9 1.2%
Mortgage forward contracts $ - 50 bp decrease $ 11.6 1.1%
50 bp increase $(11.6) (1.1)%
Mortgage loan pipeline $ - 50 bp decrease $(11.7) (1.1)%
50 bp increase $ 11.4 1.1%
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Represents the carrying value of capitalized mortgage servicing
excluding $1.6 million of capitalized subservicing.
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<PAGE>
As shown above, the projected increase or decrease in the value of the
mortgage loan pipeline would be expected to be substantially offset by a
decrease or increase in the related mortgage loan forward contracts. In
addition, the projected increase or decrease in the value of the mortgage
servicing rights would be expected to be substantially offset by a decrease or
increase in the value of the related financial instruments as previously
described herein. This analysis is limited by the fact that it was performed at
a specific point in time and does not incorporate other factors that would
impact Source One's financial performance. Actual results would likely vary.
FOREIGN CURRENCY EXCHANGE RATES
Folksamerica operates a branch office in Toronto, Canada to service its
Canadian customers. Net unrealized foreign currency translation gains and
losses, after tax, associated with Folksamerica's Canadian operations are
reported as a net amount in a separate component of shareholders' equity.
Changes in the values of these operations due to currency fluctuations, after
tax, are reported on the income statement as a component of comprehensive net
income. At December 31, 1998, Folksamerica's net assets denominated in Canadian
dollars represented approximately one percent of Fund American's consolidated
shareholders' equity, therefore, any significant change in foreign currency
rates would not have a material impact on Fund American's financial position.
EQUITY PRICE RISK
The carrying values of Fund American's common equity securities, a
significant portion of its other investments (primarily restricted common equity
securities and partnership interests invested in common equity securities) and
its investments in FSA Options and Preferred Stock are based on quoted market
prices or management's estimates of fair value (which is based, in part, on
quoted market prices) as of the balance sheet date. Market prices of common
equity securities are subject to fluctuations which could cause the amount to be
realized upon sale of the investment to differ significantly from the current
reported value. The fluctuations may result from perceived changes in the
underlying economic characteristics of the investee, the relative price of
alternative investments, general market conditions and supply and demand
imbalances for a particular security.
The table below summarizes Fund American's equity price risks as of
December 31, 1998 and shows the effects of a hypothetical 20% increase and a 20%
decrease in market prices as of that date.
48
<PAGE>
<TABLE>
<CAPTION>
Estimated Fair Percentage Increase
Fair Value at Assumed Value after Assumed (Decrease) to
Dollars in Millions December 31, 1998 Price Change Price Change Shareholders' Equity
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common equity securities $241.7 20% increase $290.0 4.5%
20% decrease $193.4 (4.5)%
Other investments (a) $ 77.3 20% increase $ 92.8 1.4%
20% decrease $ 61.8 (1.4)%
FSA Options and $114.4 20% increase $136.6 2.1%
Preferred Stock 20% decrease $ 91.5 (2.1)%
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Excludes $17.5 million of derivative securities (see "Interest Rate Risk")
and $2.1 million of other investments which would not be directly affected
by the assumed changes in equity prices.
49
<PAGE>
OTHER MATTERS
ACCOUNTING FOR FSA OPTIONS AND CONVERTIBLE PREFERRED STOCK
Fund American currently owns 3,460,200 shares of the common stock of FSA
("FSA Shares") and various fixed price options and shares of convertible
preferred stock of FSA (the "FSA Options and FSA Preferred Stock") which, in
total, give Fund American the right to acquire up to 4,560,607 additional FSA
Shares. Fund American's investment in FSA Shares is accounted for using the
equity method of accounting pursuant to which the investment is reported at
FSA's book value ($35.87 per FSA Share at December 31, 1998). Fund American's
investments in FSA Options and FSA Preferred Stock are currently accounted for
under the provisions of SFAS No. 115 pursuant to which the investments are
reported at fair value ($52.62 per underlying FSA Share at December 31, 1998).
Fund American currently expects to exercise the FSA Options during 1999 and
convert the FSA Preferred Stock during 2004. Assuming that equity accounting
continues to be the proper accounting method for valuing Fund American's
investment in FSA Shares, upon exercise of the FSA Options and conversion of the
FSA Preferred Stock, Fund American expects that it would be required to restate
its historic balance sheets to account for its investments in FSA Options and
FSA Preferred Stock from fair value to their original cost. Upon exercise, Fund
American's original cost basis in the FSA Shares acquired will be increased by
the exercise price paid. Because the new cost basis of Fund American's
investment in FSA Shares is expected to be considerably less than its portion of
the fair value of FSA's net identifiable assets at the date of exercise, Fund
American would be required to record a deferred credit that would be amortized
to income over an anticipated five year period. Assuming the FSA Options were
exercised and the FSA Preferred Stock converted as of December 31, 1998, Fund
American would be required to reduce its book value by $72.9 million ($10.67 per
share) and would record a deferred credit of $35.7 million ($5.23 per share).
This net difference in carrying value of $37.2 million (which represents the
effective write-down of the FSA Options and FSA Preferred Stock from fair value
to FSA's book value) would continue to exist until such time as equity
accounting is no longer appropriate for Fund American's investment in FSA
Shares.
This analysis is based solely on Fund American's current circumstances
concerning its investments in FSA Options and FSA Preferred Stock. Fund
American's actual accounting valuation will be determined at the point of
exercise for the FSA Options and upon the conversion of the FSA Preferred Stock
and will be based on the circumstances concerning such investments existing at
that time.
YEAR 2000
STATUS. Since 1996 Fund American has been identifying, modifying and
testing its internal systems and controls to ensure that these systems can
accurately process transactions involving the Year 2000 and beyond with no
material adverse effects to its customers or disruption to its business
operations. As of December 31, 1998, the Company has substantially completed its
testing phase (the final phase of its Year 2000 remediation plan). Fund American
estimates that its total pretax cost of Year 2000 remediation, excluding its
unconsolidated insurance
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<PAGE>
affiliates, is approximately $3.0 million of which the majority of this amount
has been expensed as of December 31, 1998. This estimate does not include the
cost of hardware and software replacements and upgrades made in the normal
course of business and represents less than 20% of Fund American's total
Information Technology budget.
Fund American has also been closely monitoring the year 2000 issues of its
third party constituents that it voluntarily interacts with (e.g. customers,
suppliers, reinsurers, creditors, borrowers...). Fund American's third party
constituents have been requested to provide Fund American with information
concerning their Year 2000 remediation plans and the status of such plans. For
those constituents who either fail to respond to this inquiry or are deemed to
be unlikely to remedy their own Year 2000 issues in a timely manner, Fund
American is in the process of either replacing that constituent or establishing
similar relationships with new parties that are currently Year 2000 compliant.
As of December 31, 1998, FSA and MSA had also substantially completed the
testing phase of their Year remediation plans and are in the process of
determining their third party exposures in a similar manner to that of Fund
American. Fund American's nominees to the Boards of Directors of FSA and MSA
have received detailed briefings concerning their respective Year 2000 plans and
have determined that these plans appear to be on schedule for a timely
completion and should reduce the risk of Year 2000 issues. Fund American's
portion of the total estimated costs of the Year 2000 issue for its
unconsolidated insurance affiliates are not material and the majority of such
expenses have already been incurred.
RISKS. The failure to identify or correct significant Year 2000 issues
could result in an interruption in, or a failure of, certain normal business
activities or operations concerning the Company, its consolidated insurance and
mortgage banking subsidiaries and its unconsolidated insurance affiliates. Such
failures could adversely affect Fund American's results of operations, liquidity
and financial condition. Due to the general uncertainty inherent in the Year
2000 problem, resulting in part from the uncertainty of potential business
interruptions caused by third party constituents in which Fund American must
interact (including but not limited to suppliers of electrical power, various
private and public markets for equity and debt securities, certain agencies of
the Federal government and the states in which Fund American conducts business),
Fund American is unable to determine at this time whether the consequences of
any Year 2000 failures will have a material impact on its results of operation,
liquidity or financial condition. However, Fund American currently believes
that, with the implementation of its Year 2000 plan (which is in the final
stages of completion), the possibility of significant interruptions of normal
business activities due to the Year 2000 issue should be reduced.
Folksamerica's approach towards underwriting against potential Year 2000
exposures is to seek coverages which contain Year 2000 event exclusions. In
instances where exclusions are not provided, Folksamerica attempts to determine
whether the risk is acceptable based on a variety of factors (a description of
such factors is not provided herein as each situation is unique). Folksamerica
has estimated that less that 9% of its property reinsurance coverage in force
could be subject to Year 2000 exposures. However, these risks generally lie
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<PAGE>
with large corporations who have been aware of the issue for some time and have
invested significant time and resources towards Year 2000 remediation.
Additionally, Folksamerica does not anticipate significant Year 2000 exposures
from its casualty reinsurance coverage in force due to the nature of such
exposures. Further, Folksamerica generally writes such exposures on an excess of
loss basis which provides Folksamerica with additional protections against
potential losses of this nature.
The Company is currently in the process of developing a Year 2000
contingency plan (the "Y2K Plan") which is designed to mitigate, to the extent
possible, any adverse affects the Company may suffer due to any potential
business interruptions caused by third party constituents in which Fund American
must interact (as further explained above). It is expected that the Y2K Plan
will be finalized during the third quarter of 1999.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See "Market Risk Disclosures" contained in Item 7. Management's Discussion
and Analysis of Financial Condition and Results of Operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data have been filed as a part
of this Annual Report on Form 10-K as indicated in the Index to Financial
Statements and Financial Statement Schedule appearing on page 38 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On March 10, 1999, the Audit Committee of the Board appointed
PricewaterhouseCoopers LLP ("PWC") as its independent auditors for the fiscal
year ending December 31, 1999, to succeed KPMG LLP ("KPMG") effective upon the
date of their reports on such consolidated financial statements for the year
ended December 31, 1998.
PWC has served as Folksamerica's independent auditors since 1981 and has
served as FSA's independent auditors since 1989. The Audit Committee has
recommended that PWC succeed KPMG as the Company's independent auditors for 1999
due to the growing significance of Folksamerica and FSA to the Company's 1999
financial position and results of operations and the pending disposition of VGI.
In connection with the audits of the years ended December 31, 1998 and
1997, there were no disagreements with KPMG on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope and
procedures which, if not resolved to their satisfaction, would have caused them
to make reference in connection with their opinion to the subject matter of the
disagreement.
The Company has requested KPMG furnish a letter addressed to the Commission
stating whether it agrees with the above statements. A copy of this letter,
dated March 25, 1999, is contained herein as Exhibit 16(a).
52
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
A. DIRECTORS (AS OF MARCH 22, 1999)
Reported under the caption "Election of Directors" on pages 3 through 6 of
the Company's 1999 Proxy Statement, herein incorporated by reference.
B. EXECUTIVE OFFICERS (AS OF MARCH 22, 1999)
<TABLE>
<CAPTION>
Executive officer
Name Position Age since
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Raymond Barrette Executive Vice President and 48 1997
Chief Financial Officer
Terry L. Baxter President of White Mountains 53 1994
Reid T. Campbell Vice President and Director 31 1996
of Finance
Morgan W. Davis Executive Vice President of 48 1994
White Mountains
K. Thomas Kemp President and CEO 58 1991
Michael S. Paquette Senior Vice President and 35 1993
Controller
David G. Staples Vice President and Director 38 1997
of Taxation
- ---------------------------------------------------------------------------------------
</TABLE>
All executive officers are elected by the Board for a term of one year or
until their successors have been elected and have duly qualified.
MR. BARRETTE joined Fund American in 1997 as the Company's Executive Vice
President and Chief Financial Officer. Mr. Barrette is also Executive Vice
President and Chief Financial Officer of White Mountains. He was formerly a
consultant with Tillinghast-Towers Perrin from 1994 to 1996 and was President of
the Personal Insurance Division of Fireman's Fund from 1991 to 1993. Mr.
Barrette is a director of FAE, MSA, Source One, Folksamerica, White Mountains,
Valley, Charter and WMIC.
MR. BAXTER was elected President of White Mountains in 1997. Mr. Baxter
previously served as Chairman of Source One from 1996 to 1997 and as President
and Secretary of FAE from 1994 to 1997. Prior to joining Fund American in 1994,
Mr. Baxter was Managing Director of the National Transportation Safety Board
from 1990. Prior to that, he was the Assistant Director of OMB during the Reagan
Administration. Mr. Baxter is a director of FAE, MSA, Source One, Folksamerica,
White Mountains, Valley, Charter, WMIC and Sextant Underwriting Plc.
MR. CAMPBELL was elected Vice President and Director of Finance in February
1998 and previously served as Assistant Controller from 1996 to 1998 and
Director of Accounting from 1995 to 1996. Mr. Campbell has been with Fund
American since 1994. Mr. Campbell is also
53
<PAGE>
Vice President and Director of Finance of White Mountains. Prior to joining Fund
American, Mr. Campbell was with KPMG Peat Marwick from 1990 to 1994.
MR. DAVIS has served as White Mountains' Executive Vice President since
1997 and served as Senior Vice President since 1994. Mr. Davis is also President
and Chief Executive Officer of WMIC and Chairman and President of VGI. Prior to
joining Fund American in 1994, Mr. Davis was an independent consultant. Mr.
Davis is a director of MSA, White Mountains, Valley, Charter, WMIC, ABRA, Inc.
and CCC Information Services Group Inc. and is a trustee of Azusa Pacific
University.
MR. KEMP was appointed President and Chief Executive Officer in 1997. Mr.
Kemp previously served as Executive Vice President since 1993 and as Vice
President, Treasurer and Secretary from 1991 to 1993. Mr. Kemp also serves as a
director of the Company, Chairman and Chief Executive Officer of White Mountains
and Chairman of WMIC. He is also a director of Folksamerica, FSA, FAE, MSA and
AMLIN Plc.
MR. PAQUETTE was appointed Senior Vice President and Controller in 1997.
Mr. Paquette previously served as Vice President and Controller since 1995 and
as Vice President and Chief Accounting Officer from 1993 to 1995. Mr. Paquette
is also Senior Vice President and Controller of White Mountains and WMIC. Mr.
Paquette has been a member of the Fund American organization since 1989.
MR. STAPLES was elected Vice President and Director of Taxation in 1997 and
has been with Fund American since 1996. Prior to joining Fund American, Mr.
Staples served as Vice President and Director of Taxation for Crum & Forster
Holdings, Inc. from 1993 to 1996, and was with KPMG Peat Marwick from 1983 to
1993.
ITEM 11. EXECUTIVE COMPENSATION
Reported under the captions "Compensation of Executive Officers" on pages 9
through 11, "Reports of the Compensation Committees on Executive Compensation"
on pages 11 though 13, "Shareholder Return Graph" on page 14, and "Compensation
Plans" on page 15 of the Company's 1999 Proxy Statement, herein incorporated by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Reported under the caption "Voting Securities and Principal Holders
Thereof" on pages 7 through 8 of the Company's 1999 Proxy Statement, herein
incorporated by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Reported under the captions "Certain Relationships and Related
Transactions" on page 11 and "Compensation Committee Interlocks and Insider
Participation in Compensation Decisions" on page 16 of the Company's 1999 Proxy
Statement, herein incorporated by reference.
54
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
A. DOCUMENTS FILED AS PART OF THE REPORT
The financial statements and financial statement schedules and reports of
independent auditors have been filed as part of this Annual Report on Form 10-K
as indicated in the Index to Financial Statements and Financial Statement
Schedules appearing on page 38 of this report. A listing of exhibits filed as
part of the report appear on pages 56 through 58 of this report.
B. REPORTS ON FORM 8-K
During the fourth quarter of 1998 the Company filed two amendments to its
Current Report on Form 8-K dated August 18, 1998 which was filed in connection
with its acquisition of Folksamerica on that date. The amendments served to
provide the requisite pro forma financial information concerning the
Folksamerica transaction and were filed on October 16, 1998 and November 13,
1998.
55
<PAGE>
C. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER NAME
- --------------------------------------------------------------------------------
<S> <C> <C>
3(i) -- Amended and Restated Certificate of Incorporation of the
Company (incorporated by reference herein to Exhibit
3(a) of the Company's 1993 Annual Report on Form 10-K)
(ii) -- Amended and Restated By-Laws of the Company
(incorporated by reference herein to Exhibit 3(b) of the
Company's 1993 Annual Report on Form 10-K)
4 -- Indenture dated January 1, 1993, with The First National
Bank of Chicago, as trustee, pursuant to the Company's
offering of $150 million of medium-term notes
(incorporated by reference herein to Exhibit (4) of the
Company's Report on Form 8-K dated January 15, 1993)
9 -- Voting Trust Agreement dated September 2, 1994 between
the Company, U S WEST Capital Corporation and First
Chicago Trust Company of New York (incorporated by
reference herein to Exhibit 10(a) of the Company's
Report on Form 8-K dated April 10, 1994)
10(a) -- Second Amended and Restated Credit Agreement dated
August 14, 1998 among the Company, the Lenders (as named
therein) and The First National Bank of Chicago (*)
(b) -- Second Amended and Restated Credit Agreement dated
August 14, 1998 among White Mountains, the Lenders (as
named therein) and The First National Bank of Chicago
(*)
(c) -- Second Amended and Restated Credit Agreement dated
August 14, 1998 among VGI, the Lenders (as named
therein) and The First National Bank of Chicago (*)
(d) -- Amendment No. 1 dated November 20, 1998 to the Second
Amended and Restated Credit Agreement dated August 14,
1998 among the Company, the Lenders (as named therein)
and The First National Bank of Chicago (*)
(e) -- Amendment No. 1 dated November 20, 1998 to the Second
Amended and Restated Credit Agreement dated August 14,
1998 among White Mountains, the Lenders (as named
therein) and The First National Bank of Chicago (*)
(f) -- Amendment No. 1 dated November 20, 1998 to the Second
Amended and Restated Credit Agreement dated August 14,
1998 among VGI, the Lenders (as named therein) and The
First National Bank of Chicago (*)
(g) -- Securities Purchase Agreement dated April 10, 1994
between the Company, U S WEST, Inc., U S WEST Capital
Corporation and FSA (incorporated by reference herein to
Exhibit 10(a) of the Company's Report on Form 8-K dated
April 10, 1994)
(h) -- Folksamerica Stock Purchase Agreement dated as of July
1, 1998 by and among the Company, White Mountains,
Folksam Mutual General Insurance Company, Folksam
International Insurance Co. Ltd, Weiner Staedtische
Allgemeine Versicherung AG, P&V Assurances S.C. and
Samvirke Skadeforsikring AS (incorporated by reference
herein to Exhibit 10(a) of the Company's Report on Form
8-K dated August 18, 1998)
</TABLE>
56
<PAGE>
<TABLE>
<S> <C> <C>
(i) -- Assignment and Assumption Agreement dated as of August
18, 1998 by and among Folksam Omsesidig Sakforsakring,
Samvirke Skadeforsikring AS and the Company
(incorporated by reference herein to Exhibit 10(b) of
the Company's Report on Form 8-K dated August 18, 1998)
(j) -- Subscription Agreement dated November 6, 1997 between
Folksamerica, the Company, White Mountains, Folksam
Mutual General Insurance Company, Folksam International
Insurance Co. Ltd, Weiner Staedtische Allgemeine
Versicherung AG, P&V Assurances S.C. and Samvirke
Skadeforsikring AS (incorporated by reference herein to
Exhibit 10(l) of the Company's 1997 Annual Report on
Form 10-K)
(k) -- Securities Purchase Agreement dated March 6, 1996
between the Company and Folksamerica (incorporated by
reference herein to Exhibit 10(a) of the Company's
Report on Form 8-K dated June 19, 1996)
(l) -- Folksamerica Stock Purchase Agreement dated August 8,
1995 between the Company, Skandia U.S. Holding
Corporation, and Skandia America Corporation
(incorporated by reference herein to Exhibit 10(e) of
the Company's 1995 Annual Report on Form 10-K)
(m) -- Guaranty, dated February 28, 1997, by the Company to and
for the benefit of Chemical Mortgage Company
(incorporated by reference herein to Exhibit 10(y) of
the Company's 1996 Annual Report on Form 10-K)
(n) -- VGI Stock Acquisition Agreement dated February 10, 1999
between Unitrin, Inc. and the Company (*)
(o) -- Transition Services Agreement dated March 25, 1999
between the Company and Citicorp Mortgage, Inc. (*)
(p) -- Source One Asset Purchase Agreement dated March 25, 1999
between the Company, Source One and Citicorp Mortgage
Inc.(*)
(q) -- Common Stock Warrant Agreement with respect to shares of
the Company's Common stock between the Company and John
J. Byrne (incorporated by reference herein to Exhibit
10(v) of the Company's Registration Statement on Form
S-1 (No. 33-0199)) (**)
(r) -- The Company's Retirement Plan for Non-Employee Directors
(incorporated by reference herein to Exhibit 10(aa) of
the Company's 1992 Annual Report on Form 10-K) (**)
(s) -- The Company's Voluntary Deferred Compensation Plan, as
amended on November 15, 1996 (incorporated by reference
herein to Exhibit 10(o) of the Company's 1996 Annual
Report on Form 10-K) (**)
(t) -- The Company's Deferred Benefit Plan, as amended on
November 15, 1996 (incorporated by reference herein to
Exhibit 10(p) of the Company's 1996 Annual Report on
Form 10-K) (**)
(u) -- The Company's Long-Term Incentive Plan, as amended
February 15, 1995 (incorporated by reference to Appendix
I of the Company's Notice of 1995 Annual Meeting of
Shareholders and Proxy Statement) (**)
(v) -- Valley Group Employees' 401(k) Savings Plan
(incorporated by reference herein to Exhibit 4(c) of the
Company's Registration Statement on Form S-8 (No.
333-30233) (**)
11 -- Statement Re Computation of Per Share Earnings (***)
16 -- Letter of KPMG LLP dated March 25, 1999 (*)
21 -- Subsidiaries of the Registrant (*)
</TABLE>
57
<PAGE>
<TABLE>
<S> <C> <C>
23(a) -- Consent of KPMG LLP dated March 25, 1999 (*)
(b) -- Consent of Ernst & Young LLP dated March 25, 1999 (*)
(c) -- Consent of PricewaterhouseCoopers LLP dated March 25,
1999 relating to Valley, Folksamerica and FSA (*)
24 -- Powers of Attorney (*)
27 -- 1998 Financial Data Schedule (*)
99(a) -- Report of PricewaterhouseCoopers LLP dated February 2,
1999 relating to Folksamerica(*)
(b) -- The Consolidated Financial Statements of FSA and the
related Report of Independent Accountants as of December
31, 1998 and 1997 and for each of the three years in the
period ended December 31, 1998 (*)
(c) -- Report of Coopers & Lybrand L.L.P. dated February 14,
1997 relating to VGI (*)
</TABLE>
(*) Included herein.
(**) Management contracts or compensation plans/arrangements required to be
filed as an exhibit pursuant to Item 14(a)3 of Form 10-K.
(***) Not included herein as the information is contained elsewhere within
report. See Note 1 of the Notes to Consolidated Financial Statements.
D. FINANCIAL STATEMENT SCHEDULE
The financial statement schedule and report of independent auditors have
been filed as part of this Annual Report on Form 10-K as indicated in the
Index to Financial Statements and Financial Statement Schedule appearing on
page 61 of this report.
58
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
FUND AMERICAN ENTERPRISES HOLDINGS, INC.
Date: March 26, 1999 By: /s/ MICHAEL S. PAQUETTE
--------------------------------
Senior Vice President and Controller
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
RAYMOND BARRETTE* Executive Vice President and March 26, 1999
- -------------------------- Chief Financial Officer
Raymond Barrette
JOHN J. BYRNE* Chairman March 26, 1999
- --------------------------
John J. Byrne
PATRICK M. BYRNE* Director March 26, 1999
- --------------------------
Patrick M. Byrne
HOWARD L. CLARK, JR.* Director March 26, 1999
- --------------------------
Howard L. Clark, Jr.
ROBERT P. COCHRAN* Director March 26, 1999
- --------------------------
Robert P. Cochran
GEORGE J. GILLESPIE, III* Director March 26, 1999
- --------------------------
George J. Gillespie, III
/s/ K. THOMAS KEMP President, Chief Executive March 26, 1999
- -------------------------- Officer and Director
K. Thomas Kemp
GORDON S. MACKLIN* Director March 26, 1999
- --------------------------
Gordon S. Macklin
</TABLE>
59
<PAGE>
<TABLE>
<S> <C> <C>
FRANK A. OLSON* Director March 26, 1999
- --------------------------
Frank A. Olson
MICHAEL S. PAQUETTE* Senior Vice President March 26, 1999
- -------------------------- and Controller
Michael S. Paquette
</TABLE>
*By: /s/ K. THOMAS KEMP
--------------------------------
K. Thomas Kemp, Attorney-in-Fact
60
<PAGE>
FUND AMERICAN ENTERPRISES HOLDINGS, INC.
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
Form
10-K
page(s)
- -----------------------------------------------------------------------------------------------
<S> <C>
FINANCIAL STATEMENTS:
Consolidated balance sheets as of December 31, 1998 and 1997.................... F-1
Consolidated income statements for each of the years ended
December 31, 1998, 1997 and 1996........................................... F-2
Consolidated statements of shareholders' equity for each of the years ended
December 31, 1998, 1997 and 1996........................................... F-3
Consolidated statements of cash flows for each of the years ended
December 31, 1998, 1997 and 1996........................................... F-4
Notes to consolidated financial statements...................................... F-5
OTHER FINANCIAL INFORMATION:
Report on management's responsibilities......................................... F-48
Independent auditors' reports................................................... F-49
Selected quarterly financial data (unaudited)................................... F-52
FINANCIAL STATEMENT SCHEDULES:
I. Summary of investments other than investments in related parties......... FS-1
II. Condensed financial information of the Registrant........................ FS-2
III. Reinsurance.............................................................. FS-4
IV. Valuation and qualifying accounts......................................... FS-5
VI. Supplementary insurance information....................................... FS-6
- -----------------------------------------------------------------------------------------------
</TABLE>
All other schedules are omitted as they are not applicable or the
information required is included in the financial statements or notes thereto.
61
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
December 31,
---------------------------
Dollars in millions 1998 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Fixed maturity investments, at fair value (cost $916.1 and $165.4) $ 929.6 $ 168.3
Common equity securities, at fair value (cost $195.4 and $64.7) 241.7 104.2
Other investments (cost $88.5 and $103.1) 96.9 167.9
Short-term investments, at amortized cost (which approximated fair value) 79.0 62.8
---------------------------
Total investments 1,347.2 503.2
Cash 22.4 7.0
Mortgage loans held for sale 676.3 519.3
Capitalized mortgage servicing, net of accumulated amortization 169.7 181.0
Pool loan purchases 165.0 149.8
Mortgage claims receivable and real estate acquired 33.1 41.2
Receivable from sale of mortgage servicing 73.8 27.3
Investments in unconsolidated insurance affiliates 354.3 360.1
Insurance and reinsurance balances receivable 124.7 56.1
Reinsurance recoverable on paid and unpaid losses 137.3 9.6
Other assets 176.9 155.7
---------------------------
Total assets $ 3,280.7 $ 2,010.3
LIABILITIES
Short-term debt $ 748.5 $ 571.4
Long-term debt 359.7 304.3
Loss and loss adjustment expense reserves 811.7 71.9
Unearned insurance and reinsurance premiums 153.1 78.0
Deferred credit 37.1 -
Accounts payable and other liabilities 424.1 281.8
---------------------------
Total liabilities 2,534.2 1,307.4
- -------------------------------------------------------------------------------------------------------------------
MINORITY INTEREST - PREFERRED STOCK OF SUBSIDIARY 44.0 44.0
- -------------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Common stock - authorized 125,000,000 shares,
issued 30,863,547 and 31,015,463 shares 30.9 31.0
Paid-in surplus 354.2 355.9
Retained earnings 1,063.2 1,008.9
Common stock in treasury, at cost: 25,034,939 shares (871.0) (871.0)
Accumulated other comprehensive net income, after tax 125.2 134.1
---------------------------
Total shareholders' equity 702.5 658.9
- -------------------------------------------------------------------------------------------------------------------
Total liabilities, minority interest and shareholders' equity $ 3,280.7 $ 2,010.3
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
F-1
<PAGE>
CONSOLIDATED INCOME STATEMENTS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
---------------------------------------
Millions, except per share amounts 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES:
Earned property and casualty insurance premiums $246.0 $145.3 $ 109.7
Earnings from unconsolidated insurance affiliates 24.3 21.3 12.0
Other insurance operations revenue 12.2 7.8 9.4
Net investment income 118.4 65.1 57.3
Gross mortgage servicing revenue 78.1 94.9 139.6
Amortization and impairment of capitalized mortgage servicing (55.2) (68.0) (79.2)
Net gain on financial instruments 20.4 11.3 9.9
---------------------------------------
Net mortgage servicing revenue 43.3 38.2 70.3
Net gain on sales of mortgages 86.8 21.5 38.3
Gain (loss) on sales of mortgage servicing rights and assumption of subservicing 15.2 (8.0) 10.1
Other mortgage operations revenue 31.9 19.1 18.1
---------------------------------------
Total revenues 578.1 310.3 325.2
- --------------------------------------------------------------------------------------------------------------------------------
EXPENSES:
Insurance losses and loss adjustment expenses 174.8 97.1 85.9
Compensation and benefits 130.2 101.8 91.3
Interest expense 83.9 46.0 46.3
General expenses 75.4 60.5 64.9
Insurance and reinsurance acquisition expenses 54.8 23.2 15.2
Write-off of goodwill and other intangible assets - - 32.6
---------------------------------------
Total expenses 519.1 328.6 336.2
- --------------------------------------------------------------------------------------------------------------------------------
Pretax operating earnings (loss) 59.0 (18.3) (11.0)
Net realized investment gains 71.0 96.7 38.5
---------------------------------------
Pretax earnings 130.0 78.4 27.5
Income tax provision 47.8 29.4 18.9
---------------------------------------
AFTER TAX EARNINGS 82.2 49.0 8.6
Loss on early extinguishment of debt, after tax - (6.0) -
---------------------------------------
NET INCOME 82.2 43.0 8.6
Net unrealized investment holdings gains and other, after tax 37.2 104.6 79.6
Reclasses of realized gains included in net income, after tax (46.1) (62.9) (25.0)
---------------------------------------
COMPREHENSIVE NET INCOME 73.3 84.7 63.2
Preferred stock dividends of subsidiary (3.7) (3.7) (3.7)
---------------------------------------
Comprehensive net income applicable to common stock $ 69.6 $ 81.0 $ 59.5
---------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
BASIC EARNINGS PER COMMON SHARE:
After tax earnings $13.38 $ 6.89 $ .66
Loss on early extinguishment of debt, after tax - (.91) -
---------------------------------------
Net income $13.38 $ 5.98 $ .66
---------------------------------------
---------------------------------------
Comprehensive net income $11.87 $12.33 $ 8.01
---------------------------------------
---------------------------------------
DILUTED EARNINGS PER COMMON SHARE:
After tax earnings $11.94 $ 6.22 $ .60
Loss on early extinguishment of debt, after tax - (.82) -
---------------------------------------
Net income $11.94 $ 5.40 $ .60
---------------------------------------
---------------------------------------
Comprehensive net income $10.58 $11.15 $ 7.33
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
F-2
<PAGE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Net Foreign
stock and Common unrealized currency
paid-in Retained stock in investment translation
Millions Total surplus earnings treasury gains adjustment
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at January 1, 1996 $699.7 $408.2 $1,124.6 $(871.0) $ 37.9 $ -
- -------------------------------------------------------------------------------------------------------------------
Net income 8.6 - 8.6 - - -
Dividends to shareholders (9.6) - (9.6) - - -
Purchases of common stock retired (66.3) (9.8) (56.5) - - -
Change in net unrealized investment
gains and losses, after tax 54.6 - - - 54.6 -
- -------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1996 687.0 398.4 1,067.1 (871.0) 92.5 -
- -------------------------------------------------------------------------------------------------------------------
Net income 43.0 - 43.0 - - -
Dividends to shareholders (9.0) - (9.0) - - -
Purchases of common stock retired (103.7) (11.5) (92.2) - - -
Change in net unrealized investment
gains and losses, after tax 41.6 - - - 41.6 -
- -------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1997 658.9 386.9 1,008.9 (871.0) 134.1 -
- -------------------------------------------------------------------------------------------------------------------
Net income 82.2 - 82.2 - - -
Dividends to shareholders (13.1) - (13.1) - - -
Purchases of common stock retired (19.8) (1.8) (18.0) - - -
Change in net unrealized investment
gains and losses and other, after tax (8.9) - - - (8.0) (.9)
Other 3.2 - 3.2 - - -
- -------------------------------------------------------------------------------------------------------------------
BALANCES AT DECEMBER 31, 1998 $702.5 $385.1 $1,063.2 $(871.0) $126.1 $(.9)
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
F-3
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------
Millions 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income $ 82.2 $ 43.0 $ 8.6
Reconciliation of net income to cash flows from operating activities:
Undistributed earnings from unconsolidated insurance affiliates (19.1) (14.7) (8.2)
Net realized investment gains (71.0) (96.7) (38.5)
Net unrealized gains on financial instruments (12.1) (11.1) (1.7)
Depreciation and amortization of servicing assets, goodwill and other 63.1 71.0 92.8
Amortization of deferred credit (2.7) - -
Write-off of goodwill and other intangible assets - - 32.6
Mortgage loan production (10,866.3) (4,403.3) (3,831.6)
Mortgage loan sales and amortization 10,709.2 4,198.9 3,897.7
(Gain) loss on sales of mortgage servicing rights (15.2) 8.0 (10.1)
(Decrease) increase in unearned insurance premiums (7.0) 5.4 37.6
Increase in insurance premiums receivable (2.4) (3.9) (6.9)
Decrease (increase) in deferred insurance policy acquisition costs 2.5 (1.1) (6.5)
Increase in insurance loss reserves 13.7 6.5 21.2
Net change in current and deferred income taxes receivable and payable 12.0 4.5 11.8
Change in other assets 26.4 55.9 (29.3)
Change in accounts payable and other liabilities 120.5 11.1 33.7
Other, net (5.0) 17.4 (1.4)
---------------------------------------
Net cash provided from (used for) operating activities 28.8 (109.1) 201.8
- -------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Net decrease in short-term investments 47.0 4.7 36.1
Sales of common stocks and other investments 168.5 207.9 231.6
Sales of fixed maturity investments 132.8 92.5 131.7
Purchases of common stocks and other investments (61.1) (54.8) (85.0)
Purchases of fixed maturity investments (122.7) (102.6) (180.8)
Acquisitions of consolidated insurance affiliates, net of cash balances acq(167.5) - (13.2)
Investments in unconsolidated insurance affiliates (70.3) (44.4) (107.6)
Collections on other mortgage origination and servicing assets 278.4 274.2 175.3
Additions to capitalized mortgage servicing rights (249.1) (139.5) (88.6)
Proceeds from sales of mortgage servicing rights 182.8 242.6 11.7
Additions to other mortgage origination and servicing assets (296.9) (285.1) (205.7)
Collections on notes receivable 7.0 - -
Net purchases of fixed assets (5.4) (2.9) (7.3)
---------------------------------------
Net cash (used for) provided from investing activities (156.5) 192.6 (101.8)
- -------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net issuances (repayments) of short-term debt 176.8 162.4 (36.2)
Issuances of long-term debt - - 15.0
Repayments of long-term debt (1.1) (131.0) -
Purchases of common stock retired (19.5) (103.7) (66.3)
Cash dividends paid to common and preferred shareholders (13.1) (9.0) (9.6)
Other - - (.8)
---------------------------------------
Net cash provided from (used for) financing activities 143.1 (81.3) (97.9)
- -------------------------------------------------------------------------------------------------------------------
Net increase in cash during year 15.4 2.2 2.1
Cash balance at beginning of year 7.0 4.8 2.7
---------------------------------------
Cash balance at end of year $ 22.4 $ 7.0 $ 4.8
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
the Company and its subsidiaries and have been prepared in accordance with
Generally Accepted Accounting Principles ("GAAP"). All significant intercompany
transactions have been eliminated in consolidation. The financial statements
include all adjustments considered necessary by management to fairly present the
financial position, results of operations and cash flows of Fund American. The
preparation of financial statements in conformity with GAAP requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities as of the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates. Certain amounts in the prior year financial
statements have been restated to conform with the current year presentation.
INVESTMENT SECURITIES
Fund American's portfolio of fixed maturity investments, common equity
securities and other investments are mainly classified as available for sale and
are reported at fair value as of the balance sheet date. Net unrealized
investment gains and losses, after tax, associated with such investments are
reported as a net amount in a separate component of shareholders' equity.
Changes in net unrealized investment gains and losses, after tax, are reported
on the income statement as a component of comprehensive net income.
Premiums and discounts on fixed maturity investments are accreted to income
over the anticipated life of the investment.
Other investments include: (i) equity securities having no established
public market value which are recorded at an internally appraised fair value;
(ii) securities which, due to restrictions regarding resale, are recorded at a
discount to the quoted market value for similar unrestricted securities; (iii)
investment limited partnership interests which are recorded using the equity
method of accounting; (iv) mortgage loans held for investment which are recorded
at the lower of cost or fair value, determined on an individual loan basis; and
(v) financial instruments which are classified as trading securities and are
recorded at fair value with realized and unrealized gains and losses reported on
the income statement as gains or losses on financial instruments.
Realized gains and losses resulting from sales of investment securities or
from other than temporary impairments of value are accounted for using the
specific identification method.
Short-term investments are carried at amortized cost, which approximated
fair value as of December 31, 1998 and 1997, and comprise securities which
mature or become available for use within one year.
Fund American's consolidated insurance operations are required to maintain
deposits with insurance regulators of certain states in order to maintain their
insurance licenses. The total fair value of such
F-5
<PAGE>
deposits totalled $12.0 million and $11.3 million as of December 31, 1998 and
1997, respectively.
INSURANCE AND REINSURANCE OPERATIONS
Premiums written are recognized as revenues as earned ratably over the
terms of the related policies or reinsurance treaties. Unearned premiums
represent the portion of premiums applicable to future insurance or reinsurance
coverage provided by policies or treaties in force.
Deferred policy acquisition costs represent commissions, premium taxes,
brokerage expenses and other costs which are directly attributable to and vary
with the production of new business and are deferred and amortized over the
applicable premium recognition period. Deferred acquisition costs are limited to
the amount expected to be recovered from future earned premiums and anticipated
investment income.
F-6
<PAGE>
Losses and loss adjustment expenses are charged against income as incurred.
Unpaid insurance losses and loss adjustment expenses are based on estimates by
claims adjusters, legal counsel and actuarial staff of the ultimate costs of
settling claims, including the effects of inflation and other societal and
economic factors. Unpaid reinsurance losses and loss adjustment expenses are
based on reports received from ceding companies. Unpaid loss and loss adjustment
expense reserves represent management's best estimate of ultimate losses and
loss adjustment expenses net of estimated salvage and subrogation recoveries, if
applicable. Such estimates are regularly reviewed and updated and any
adjustments resulting therefrom are reflected in current operations. The process
of estimating loss and loss adjustment expenses involves a considerable degree
of judgement by management and the ultimate amount of expense to be incurred
could be considerably greater than or less than the amounts currently reflected
in the financial statements.
In the normal course of business, Fund American's insurance subsidiaries
seek to limit losses that may arise from catastrophes or other events that may
cause unfavorable underwriting results by reinsuring certain levels of risk in
various areas of exposure with other insurance enterprises or reinsurers. Fund
American remains contingently liable for risks reinsured with third parties to
the extent that the reinsurer is unable to honor its obligations under
reinsurance contracts at the time of loss.
Amounts recoverable from reinsurers are estimated in a manner consistent
with the claim liability associated with the reinsured policy. Reinsurance
premiums, commissions, expense reimbursements and reserves related to reinsured
business are accounted for on a basis consistent with those used in accounting
for the original policies issued and the terms of the reinsurance contracts.
Premiums ceded to other companies have been reported as a reduction of premiums
written. Amounts applicable to reinsurance ceded for unearned premium reserves
and loss and loss adjustment expense reserves (e.g., prepaid reinsurance
premiums and reinsurance recoverable on unpaid losses, respectively) are not
material and have been included as a component of other assets. Expense
allowances received in connection with reinsurance ceded have been accounted for
as a reduction of the related policy acquisition costs and are deferred and
amortized accordingly.
MORTGAGE BANKING OPERATIONS
Fund American acquired Source One in 1986. The purchase price paid for
Source One in 1986 was in excess of the estimated fair value of the net assets
acquired on that date and was allocated to goodwill. Prior to December 1996
Source One's goodwill was being amortized over 20 years. During 1996 Fund
American re-assessed the recoverability of goodwill and certain other intangible
assets related to Source One and determined that it should write-off all such
assets related to Source One. This resulted in a $32.6 million pretax write-off
of goodwill and other intangible assets. Factors considered in the determination
to write-off all Source One's goodwill and other assets were (i) increased
competition and industry consolidation during 1996 which had adversely impacted
the value of both the mortgage loan production and servicing operations of
Source One and (ii) the attainment of a definitive agreement in the fourth
quarter of 1996 to sell the majority of Source One's mortgage servicing
portfolio at essentially book value.
F-7
<PAGE>
Mortgage loans held for sale are stated at the lower of aggregate cost or
fair value, including the fair value of commitments to originate and sell
mortgage loans. Conventional mortgage loans are placed on a non-accrual basis
when delinquent 90 days or more as to interest or principal. Interest on
delinquent FHA insured loans is accrued at the insured rate beginning on the
sixty-first day of delinquency. Interest on delinquent VA guaranteed loans is
accrued at the loan rate during the period of delinquency.
Gains and losses from sales of mortgage loans are recognized when the
proceeds are received. Loan origination fees, net of certain direct costs, are
deferred and recognized as income when the related mortgage loans are sold.
Discounts from the origination of mortgage loans held for sale are deferred and
recognized as adjustments to gains or losses on sales.
F-8
<PAGE>
Capitalized mortgage servicing includes certain costs incurred in the
origination and acquisition of mortgage servicing rights which are deferred and
amortized over the expected life of the loan. The total cost of acquiring
mortgage loans, either through origination activities or purchase transactions,
is allocated between the mortgage servicing rights and the loans based on their
relative fair values. The fair values of mortgage servicing rights are estimated
by calculating the present value of the expected future net cash flows
associated with such rights, incorporating assumptions that market participants
would use in their estimates of future servicing income and expense. A current
market rate is used to discount estimated future cash flows. Impairment of
capitalized mortgage servicing rights is measured on a disaggregated basis by
stratifying the mortgage servicing rights based on one or more predominant risk
characteristics of the underlying loans. Impairment is recognized through a
valuation allowance for each individual stratum. The valuation allowance for
Source One's principal recourse portfolio includes a reserve for estimated
losses on the corresponding loans.
Pool loan purchases, which are carried at cost, represent FHA insured, VA
guaranteed and conventional loans which were either delinquent or in the process
of foreclosure at the time they were purchased from GNMA, FNMA or FHLMC
mortgage-backed security pools which Source One services. Interest is accrued on
these purchased loans at a rate based on expected recoveries.
Mortgage claims receivable represent claims filed primarily with FHA and
VA. These receivables are carried at cost less an estimated allowance for
amounts that are not fully recoverable from the claims filed with the underlying
mortgage insuring agencies.
Real estate acquired is stated at the lower of fair value less estimated
selling costs or the recorded balance satisfied at the date of acquisition, as
determined on an individual property basis. Costs related to maintaining the
properties are charged to expense as incurred.
Mortgage servicing revenue represents fees earned for servicing real estate
mortgage loans owned by investors and late charge income. The servicing fees are
calculated based on the outstanding principal balances of the loans serviced and
are recognized together with late charge income when received.
FOREIGN CURRENCY TRANSLATION
Folksamerica operates a branch office in Toronto, Canada to service its
Canadian customers. Net unrealized foreign currency translation gains and
losses, after tax, associated with Folksamerica's Canadian operation are
reported as a net amount in a separate component of shareholders' equity.
Changes in the values of these operations due to currency fluctuations, after
tax, are reported on the income statement as a component of comprehensive net
income.
EARNINGS PER SHARE
Basic earnings per share amounts are based on the weighted average number
of Shares outstanding. In the basic earnings per share calculation, net income
is reduced by preferred stock dividends to arrive at earnings applicable to
common stock.
Diluted earnings per share amounts are based on the weighted average number
of Shares and potential dilutive Shares outstanding. Potential
F-9
<PAGE>
dilutive Shares include stock options, warrants and preferred stock redeemable
for Shares. In the diluted earnings per share calculation, net income is reduced
by preferred stock dividends to arrive at earnings applicable to common stock.
F-10
<PAGE>
The following table outlines the Company's computation of earnings per
share for the years ended December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
-----------------------------------
1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BASIC EARNINGS PER SHARE NUMERATORS (IN MILLIONS):
After tax earnings $ 82.2 $ 49.0 $ 8.6
Preferred stock dividends of subsidiary (3.7) (3.7) (3.7)
-----------------------------------
After tax earnings applicable to common stock 78.5 45.3 4.9
Loss on early extinguishment of debt, after tax - (6.0) -
-----------------------------------
Net income available applicable to common stock $ 78.5 $ 39.3 $ 4.9
-----------------------------------
-----------------------------------
Comprehensive net income applicable to common stock $ 69.6 $ 81.0 $ 59.5
- -------------------------------------------------------------------------------------------------------------------
DILUTED EARNINGS PER SHARE NUMERATORS (IN MILLION):
After tax earnings applicable to common stock $ 78.5 $ 45.3 $ 4.9
After tax dilution to earnings from unconsolidated insurance affiliates (.4) (.2) -
-----------------------------------
Diluted after tax earnings available applicable to common stock 78.1 45.1 4.9
Loss on early extinguishment of debt, after tax - (6.0) -
-----------------------------------
Diluted net income available applicable to common stock $ 78.1 $ 39.1 $ 4.9
-----------------------------------
-----------------------------------
Diluted comprehensive net income applicable to common stock $ 69.2 $ 80.8 $ 59.5
-----------------------------------
- -------------------------------------------------------------------------------------------------------------------
EARNINGS PER SHARE DENOMINATORS (IN THOUSANDS):
Basic earnings per share numerator (average common shares outstanding) 5,866 6,570 7,429
Dilutive stock options and warrants to acquire common stock (a) 669 674 681
-----------------------------------
Diluted earnings per share denominator 6,535 7,244 8,110
-----------------------------------
- -------------------------------------------------------------------------------------------------------------------
BASIC EARNINGS PER SHARE (IN DOLLARS):
After tax earnings $13.38 $ 6.89 $ .66
Loss on early extinguishment of debt, after tax - (.91) -
-----------------------------------
Net income applicable to common stock $13.38 $ 5.98 $ .66
-----------------------------------
-----------------------------------
Comprehensive net income $11.87 $12.33 $ 8.01
-----------------------------------
- -------------------------------------------------------------------------------------------------------------------
DILUTED EARNINGS PER SHARE (IN DOLLARS):
After tax earnings $11.94 $ 6.22 $ .60
Loss on early extinguishment of debt, after tax - (.82) -
-----------------------------------
Net income applicable to common stock and assumed conversions $11.94 $ 5.40 $ .60
-----------------------------------
-----------------------------------
Comprehensive net income $10.58 $11.15 $ 7.33
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) See Note 11 for detailed information concerning the Company's outstanding
dilutive stock options and warrants to acquire common stock.
F-11
<PAGE>
ACCOUNTING STANDARDS RECENTLY ADOPTED AND ISSUED
In December 1996 the Financial Accounting Standards Board (the "FASB")
issued SFAS No. 127, "Deferral of the Effective Date of Certain Provisions of
SFAS No. 125" which deferred the adoption of certain transfer and collateral
provisions of SFAS No. 125 to periods beginning after December 31, 1997. The
adoption of SFAS No. 127, did not have a material effect on Fund American's
current financial position or results of operations.
In June 1997 the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprises and Related Information" which establishes new standards for
reporting information about operating segments. The required information under
SFAS No. 131 is contained in Note 14.
In March 1998, the American Institute of Certified Public Accountants (the
"AICPA") issued Statement of Position ("SOP") 98-1 entitled "Accounting For the
Cost of Computer Software Developed or Obtained for Internal Use" which requires
the capitalization of certain prospective costs in connection with developing or
obtaining software for current use. The adoption of SOP 98-1 is not expected to
have a material impact on Fund American's financial position or results of
operations.
In June 1998 the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" which 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 and losses resulting from changes in the values of those derivatives
depends on the use of the derivative and whether it qualifies for hedge
accounting. SFAS No. 133 is effective beginning in 2000 with earlier adoption
permitted. The adoption of SFAS No. 133, is not expected to have a material
effect on Fund American's financial position or results of operations.
In October 1998, the AICPA issued SOP 98-7 entitled "Deposit Accounting:
Accounting for Insurance and Reinsurance Contracts That Do Not Transfer Risk".
SOP 98-7 provides guidance on how to account for all insurance and reinsurance
contracts that do not transfer insurance risk, except for long-duration life and
health insurance contracts. SOP 98-7 is effective for periods beginning January
1, 2000, with early adoption permitted. Fund American is currently evaluating
the impact of the adoption of SOP 98-7 and the potential effects on its
financial position and results of operations.
NOTE 2. REINSURANCE OPERATIONS
On August 18, 1998, Fund American acquired all of the remaining outstanding
shares of Folksamerica Common Stock for $169.1 million thereby causing
Folksamerica to become a consolidated subsidiary of the
F-12
<PAGE>
Company as of that date. Before the August 18th transaction, Fund American owned
a 50% non-consolidated interest in Folksamerica, primarily through the
Folksamerica Preferred Stock with fixed price warrants to acquire common stock.
As a result of the Folksamerica transaction, Fund American has restated its
December 31, 1997 balance sheet and its income statement for the year ended
December 31, 1997 to account for the portion of its investment in Folksamerica
that was reported at fair value in accordance with SFAS No. 115 entitled
"Accounting for Certain Investments in Debt and Equity Securities" to its
original cost in accordance with the purchase accounting principles of
Accounting Principles Board Opinion ("APB") No. 18 entitled "The Equity Method
of Accounting for Investments in Common Stock". Because the cost of Fund
American's investment in Folksamerica was less than the fair value of
Folksamerica's net identifiable assets at August 18, 1998, Fund American
recorded a $39.8 million deferred credit ($37.1 million as of December 31, 1998)
that will be amortized to income over 5 years.
Supplemental condensed pro forma financial information for the year ended
December 31, 1998, which assumes that Fund American's acquisition of all the
outstanding Folksamerica Common Stock had occurred as of January 1, 1998,
follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
PRO FORMA
YEAR ENDED
Millions, except per share amounts DECEMBER 31, 1998
- ---------------------------------------------------------------------------------------------------------------------
<S> <C>
Total revenues $756.0
Net income $ 98.7
Comprehensive net income $ 99.5
BASIC EARNINGS PER SHARE:
Net income $16.19
Comprehensive net income $16.33
DILUTED EARNINGS PER SHARE:
Net income $14.46
Comprehensive net income $14.59
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
The pro forma information presented does not purport to represent what Fund
American's results of operations actually would have been had Fund American
acquired all the outstanding common stock of Folksamerica as of January 1, 1998,
or to project Fund American's results of operations for any future date or
period.
LOSS AND LOSS ADJUSTMENT EXPENSE RESERVE ACTIVITY
The following table summarizes Fund American's loss and loss adjustment
expense reserve activity relating to Folksamerica for the interim period from
August 18, 1998 to December 31, 1998:
F-13
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Millions YEAR ENDED
DECEMBER 31, 1998
- -------------------------------------------------------------------------------------------------------------------
<S> <C>
Beginning balance $ -
Gross loss and loss adjustment expenses acquired 726.1
Less beginning reinsurance recoverable (124.1)
-----------------
Net loss and loss adjustment expenses acquired 602.0 Losses and loss adjustment
expenses incurred relating to:
Current year losses 58.6
Prior year losses 1.1
Loss and loss adjustment expenses paid relating to:
Current year losses (13.0)
Prior year losses (54.5)
-----------------
Net ending balance 594.2
Plus ending reinsurance recoverable 129.0
-----------------
Gross ending balance $ 723.2
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
As of December 31, 1998, Folksamerica carried reported case reserves for
environmental and asbestos exposures of $14.9 million ($10.9 million net of
reinsurance) and $29.5 million ($17.9 million net of reinsurance), respectively.
Folksamerica also holds IBNR for these exposures of $25.2 million ($19.2 million
net of reinsurance).
ADDITIONAL REINSURANCE OPERATIONS INFORMATION
For the period from August 18, 1998 to December 31, 1998, Fund American
recorded $73.7 million of premiums written, $85.4 million of premiums earned,
$29.1 million of reinsurance acquisition costs and $59.7 million of loss and
loss adjustment expenses relating to Folksamerica. These amounts are shown net
of reinsurance ceded by Folksamerica of $9.4 million of premiums written, $8.7
million of premiums earned, $.9 million of reinsurance acquisition costs and
$18.9 million of loss and loss adjustment expenses.
Folksamerica's policyholders' surplus, as reported to various regulatory
authorities as of December 31, 1998 was $328.5 million and its statutory net
income for the period from August 18, 1998 to December 31, 1998 was $9.0
million. The principal differences between Folksamerica's statutory amounts and
the amounts reported in accordance with GAAP (Folksamerica's stand-alone
shareholders' equity was $302.0 million at December 31, 1998 and its net income
was $5.5 million for the year then ended) include deferred taxes, deferred
acquisition costs and market value adjustments for debt securities.
Folksamerica's statutory policyholders' surplus at December 31, 1998 was in
excess of the minimum requirements of relevant state insurance regulations.
Under the insurance laws of the states under which Folksamerica is
incorporated or licensed to write business, an insurer is restricted with
respect to the amount of dividends it may pay without prior
approval by state regulatory authorities. Accordingly, there is no assurance
that dividends may be paid by Folksamerica in the future. At December 31, 1998,
Folksamerica had the ability to pay dividends to its shareholders of $32.9
million without prior approval of regulatory authorities.
F-14
<PAGE>
NOTE 3. INSURANCE OPERATIONS
CONSOLIDATED INSURANCE OPERATIONS
In 1995 White Mountains created WMIC and commenced its operations. On
December 1, 1995, White Mountains acquired Valley and Charter for $41.7 million
in cash less $3.0 million of purchase price adjustments. The purchase price paid
for Valley and Charter was $.9 million less than the aggregate book value and
estimated fair value of the net assets of the companies on the date of
acquisition. The resulting negative goodwill is being amortized to income on a
straight-line basis over five years. On January 19, 1996, VIC purchased Valley
National for $13.2 million, net of cash balances acquired. Assets acquired
pursuant to the Valley National acquisition included an investment portfolio,
consisting principally of fixed maturity investments, totalling $6.7 million.
The excess purchase price of $6.4 million is being amortized over a five year
period.
In 1998, 1997 and 1996, Valley, Charter and WMIC had $167.8 million, $157.5
million and $154.3 million of gross written premiums, respectively, primarily in
California, Oregon, Texas and Washington. In 1998, 1997 and 1996 Valley, Charter
and WMIC had $160.6 million, $145.3 million and $109.7 million of earned
premiums.
LOSS AND LOSS ADJUSTMENT EXPENSE RESERVE ACTIVITY
The following table summarizes Valley, Charter and WMIC's loss and loss
adjustment expense reserve activity for the years ended December 31, 1998, 1997
and 1996:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Year Ended
Millions December 31,
---------------------------
1998 1997 1996
---------------------------
<S> <C> <C> <C>
Beginning balance $ 71.9 $ 65.4 $ 44.1
Less beginning reinsurance recoverable (8.7) (9.2) (7.3)
---------------------------
Net loss and loss adjustment reserve 63.2 56.2 36.8
Losses and loss adjustment expenses incurred relating to:
Current year losses 108.4 99.6 82.1
Prior year losses 6.7 (2.5) 3.5
Loss and loss adjustment expenses paid relating to:
Current year losses (65.5) (59.7) (47.8)
Prior year losses (33.2) (30.4) (18.4)
---------------------------
Net ending balance 79.6 63.2 56.2
Plus ending reinsurance recoverable 8.9 8.7 9.2
---------------------------
Ending balance $ 88.5 $ 71.9 $ 65.4
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
F-15
<PAGE>
ADDITIONAL INSURANCE OPERATIONS INFORMATION
Total policyholders' surplus of Valley, Charter and WMIC, as reported to
various regulatory authorities, as of December 31, 1998 and 1997, was $105.7
million and $97.7 million, respectively. Statutory net income for the years
ended December 31, 1998 and 1997 for Valley, Charter and WMIC totalled $8.4
million and $11.0 million, respectively. For the year ended December 31, 1996,
Valley had a statutory net loss of $6.4 million. The principal differences
between Valley, Charter and WMIC's statutory amounts and the amounts reported in
accordance with GAAP (VGI's stand-alone shareholders' equity was $109.4 million
at December 31, 1998 and its net income was $4.8 million for the year then
ended) include deferred taxes, surplus debentures and deferred acquisition
costs. Valley, Charter and WMIC's statutory policyholders' surplus at December
31, 1998 and 1997, was in excess of the minimum requirements of relevant state
insurance regulations.
Under the insurance laws of the various states under which Valley, Charter
and WMIC are incorporated or licensed to write business, an insurer is
restricted with respect to the amount of dividends it may pay without prior
approval by state regulatory authorities. Accordingly, there is no assurance
that dividends may be paid by Valley, Charter and WMIC in the future. At
December 31, 1998 and 1997, $1.1 million and $9.8 million, respectively, of
Valley, Charter and WMIC's statutory surplus was available for the payment of
dividends to its shareholders without prior approval of regulatory authorities.
NOTE 4. INVESTMENT SECURITIES
Fund American's net investment income is comprised primarily of interest
income earned on mortgage loans held for sale (gross of related interest expense
on short-term borrowings used to finance such loans), interest income from its
fixed maturity investments, dividend income from its equity investments and
interest income from its short-term investments. Net investment income consisted
of the following:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
-------------------------------------
Millions 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Investment income:
Mortgage loans held for sale $ 81.4 $ 43.1 $ 39.3
Fixed maturity investments 28.4 11.3 10.4
Common equity securities 3.6 7.3 4.3
Short-term investments 3.5 3.9 6.6
Other 2.3 - (2.3)
-------------------------------------
Total investment income 119.2 65.6 58.3
Less investment expenses and other charges (.8) (.5) (1.0)
-------------------------------------
Net investment income, before tax $118.4 $ 65.1 $ 57.3
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
F-16
<PAGE>
Total net investment gains, before tax, associated with Fund American's
investment portfolio consisted of the following:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
-------------------------------------
Millions 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Gross realized investment gains $ 74.0 $ 98.6 $ 43.3
Gross realized investment losses (3.0) (1.9) (4.8)
-------------------------------------
Net realized investment gains 71.0 96.7 38.5
Change in net unrealized investment holding gains (a) (44.2) (10.1) 68.0
-------------------------------------
Total net investment gains, before tax $ 26.8 $ 86.6 $ 106.5
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Excludes net unrealized investment gains and losses recorded from Fund
American's investments in unconsolidated insurance affiliates.
The components of Fund American's ending net unrealized investment gains
and losses on its investment portfolio and its investments in unconsolidated
insurance affiliates were as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
December 31,
------------------------
Millions 1998 1997
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Investment securities:
Gross unrealized investment gains $ 68.4 $ 112.1
Gross unrealized investment losses (2.5) (2.0)
------------------------
Net unrealized gains from investment securities 65.9 110.1
Net unrealized gains from investments in unconsolidated insurance affiliates 128.1 96.2
------------------------
Total net unrealized investment gains, before tax $ 194.0 $ 206.3
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
F-17
<PAGE>
The cost or amortized cost, gross unrealized investment gains and losses,
and carrying values of Fund American's fixed maturity investments as of December
31, 1998 and 1997, were as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
December 31, 1998
---------------------------------------------------------
Cost or Gross Gross
amortized unrealized unrealized Carrying
Millions cost gains losses value
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Debt securities issued by industrial corporations $351.9 $ 7.0 $(1.0) $357.9
U. S. Government and agency obligations 217.6 4.7 (.3) 222.0
Municipal obligations 189.1 2.8 (.1) 191.8
GNMA Mortgage-backed securities 79.0 .9 (.7) 79.2
MediaOne redeemable preferred stock 49.8 - - 49.8
Foreign government obligations 26.7 .3 (.1) 26.9
Aggregate of holdings less than $10 million 2.0 - - 2.0
---------------------------------------------------------
Total fixed maturity investments $916.1 $15.7 $(2.2) $929.6
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
December 31, 1997
---------------------------------------------------------
Cost or Gross Gross
amortized unrealized unrealized Carrying
Millions cost gains losses value
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MediaOne redeemable preferred stock $ 49.4 $ - $ - $ 49.4
Municipal obligations 33.3 .6 - 33.9
Debt securities issued by industrial corporations 32.4 1.0 (.7) 32.7
U. S. Government and agency obligations 32.3 .9 - 33.2
GNMA Mortgage-backed securities 15.4 1.0 - 16.4
Aggregate of holdings less than $10 million 2.6 .1 - 2.7
---------------------------------------------------------
Total fixed maturity investments $165.4 $3.6 $(.7) $168.3
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
The cost or amortized cost and carrying value of Fund American's fixed
maturity investments at December 31, 1998 and 1997, are presented below by
contractual maturity. Actual maturities could differ from contractual maturities
because borrowers have the right to call or prepay certain obligations with or
without call or prepayment penalties.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
December 31, 1998
--------------------------
Cost or
Amortized Carrying
Millions Cost Value
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Due in one year or less $109.4 $108.1
Due after one year through five years 278.9 279.9
Due after five years through ten years 352.8 365.9
Due after ten years 98.0 99.1
GNMA Mortgage-backed securities 77.0 76.6
----------------------------
Total $916.1 $929.6
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
F-18
<PAGE>
Sales of investments, excluding short-term investments, totalled $301.3
million, $300.4 million and $363.3 million for the years ended December 31,
1998, 1997 and 1996, respectively. A non-cash exchange of investment securities
totalling $2.3 million is not reflected in the 1996 Consolidated Statement of
Cash Flows. There were no non-cash exchanges of investment securities during
1998 or 1997.
Fund American adopted the provisions of SFAS No. 130 during 1997 and now
reports the change in net unrealized investment gains, after tax, on its income
statement to arrive at comprehensive net income. All prior period income
statements have been restated to reflect application of this statement. The
components of the change in net unrealized investment gains, after tax, are as
follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
Millions 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net realized investment gains $ 71.0 $ 96.7 $ 38.5
Income tax expense applicable to net realized investment gains (24.9) (33.8) (13.5)
--------------------------------------
Net realized investment gains, after tax $ 46.1 $ 62.9 $ 25.0
--------------------------------------
--------------------------------------
Net unrealized investment holding gains arising during the year $ 58.6 $ 160.9 $ 122.5
Income tax expense applicable to net unrealized investment holding gains (20.5) (56.3) (42.9)
--------------------------------------
Net unrealized investment holding gains arising during the year, after tax 38.1 104.6 79.6
Net unrealized gains reclassed to realized gains for investments sold, after tax(46.1) (62.9) (25.0)
--------------------------------------
Change in net unrealized investment gains, after tax $(8.0)(a) $ 41.7 $ 54.6
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Excludes a $.9 million after tax unrealized loss associated with foreign
currency translation adjustments
NOTE 5. CAPITALIZED MORTGAGE SERVICING
Source One estimates the fair values of its mortgage servicing rights by
calculating the present value of the expected future net cash flows associated
with such rights. In making those estimates, Source One incorporates assumptions
that market participants would use in their estimates of future servicing income
and expense.
To measure impairment of its owned mortgage servicing rights, Source One
has determined that the predominant risk characteristics inherent in the
portfolio are prepayment risk, risk of default and operational risk. As a
result, Source One has stratified its owned mortgage loan servicing portfolio by
interest rate, loan type (investor), original term to maturity and principal
recourse.
In estimating the fair value of its owned mortgage loan servicing
portfolio, Source One uses market consensus prepayment rates and discounts
future net cash flows using representative market interest rates which were
10.5% for conventional loans, 12.0% for insured loans, and 21.0% for recourse
loans. The fair value of each stratum is computed and compared to its recorded
book value to determine if an
F-19
<PAGE>
impairment valuation allowance, or recovery of a previously established
valuation allowance, is required.
As a result of the 1997 servicing sale, Source One's recourse portfolio has
become a significant component of its total remaining owned servicing portfolio.
Included in Source One's calculation for measuring impairment of its capitalized
servicing asset is an $5.2 million and $8.2 million pretax reserve for estimated
recourse losses on the corresponding loans in determining the fair value of its
principal recourse portfolio as of December 31, 1998 and 1997, respectively.
The discount rate and prepayment assumptions are significant factors used
in estimating the fair value of Source One's mortgage servicing rights.
Accordingly, the value of mortgage servicing rights can be significantly
impacted by changes in interest rates.
Source One adopted certain provisions of SFAS No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of Liabilities"
in the 1997 first quarter. SFAS No. 125 served to eliminate the distinction
between "normal" servicing rights and excess servicing receivables. Source One
estimated the fair value of its portfolio during 1997 in accordance with SFAS
No. 125 which did not materially effect Source One's 1997 results.
Prior to the adoption of SFAS No. 125, Source One estimated the fair value
of its capitalized excess servicing asset by discounting the anticipated future
cash flows over the estimated life of the related loans. Source One uses
"interest only strip" interest rates to determine the appropriate discount rates
and prepayment speed assumption rates that are based on interest rates, loan
types (investor) and original term to maturity. The discount rate used to
capitalize excess servicing for the year ended December 31, 1996, ranged from
12.0% to 12.6%. For the year ended December 31, 1996, the weighted average
discount rate inherent in the carrying amount of the capitalized excess
servicing asset was 10.4%.
The following table summarizes the fair value of mortgage servicing rights
and certain characteristics of Source One's servicing portfolio related to such
mortgage servicing rights by loan type as of December 31, 1998:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Fair value Principal Weighted Weighted Weighted
of mortgage balance average average average
servicing rights serviced(a) interest maturity service
(millions) (millions) rate (months) fee
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Loan Type:
Insured $117.4 $4,901 7.47% 334 .50%
Conventional 33.0 1,573 7.78 271 .39
Recourse 25.9 1,787 8.43 202 .47
Adjustable 1.7 106 7.89 256 .41
--------------------------------
Total servicing portfolio $178.0 $8,367 7.74% 293 .47%
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
F-20
<PAGE>
(a) Excludes $635 million of principal balance of mortgage servicing rights not
capitalized prior to the adoption of an accounting standard implemented by
Source One in 1995 and $195 million of originations funded but not yet
capitalized.
The following table summarizes changes in Source One's capitalized servicing
asset:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Deferred
gain on Total
Mortgage Valuation sale of capitalized
Millions servicing allowance Subservicing servicing servicing
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balances at January 1, 1996 $438.1 $(28.0) $ - $(13.0) $397.1
Additions 125.5 - - - 125.5
Scheduled amortization (69.9) - - - (69.9)
Impairment/unscheduled amortization (1.1) (8.2) - - (9.3)
Amortization of deferred gain - - - 6.1 6.1
Recourse loan losses - 7.3 - - 7.3
Sales (45.9) - - - (45.9)
- ---------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1996 446.7 (28.9) - (6.9) 410.9
Additions 90.4 (1.2) - - 89.2
Scheduled amortization (37.5) - (8.9) - (46.4)
Impairment/unscheduled amortization - (21.2) (.5) - (21.7)
Amortization of deferred gain - - - 6.9 6.9
Recourse loan losses - 3.9 - - 3.9
Sales (273.7) 2.3 9.6 - (261.8)
- ---------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1997 225.9 (45.1) .2 - 181.0
Additions 240.8 - - - 240.8
Scheduled amortization (38.6) - (1.8) - (40.4)
Impairment/unscheduled amortization - (14.7) - - (14.7)
Recourse loan losses - 2.7 - - 2.7
Sales (221.2) 21.5 - - (199.7)
- ---------------------------------------------------------------------------------------------------------------------
BALANCES AT DECEMBER 31, 1998 $206.9 $(35.6) $(1.6) $ - $169.7
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
F-21
<PAGE>
During 1998 Source One sold the rights to service $10.6 billion of
nonrecourse mortgage loans for cash proceeds of $227.9 million resulting in a
pretax gain on sale of $15.2 million. During 1997 Source One sold the rights to
service $17.0 billion of nonrecourse mortgage loans for cash proceeds of $266.9
million resulting in a pretax loss on sale of $8.0 million including a related
loss on the assumption of subservicing. During 1996 Source One sold the rights
to service $3.3 billion of mortgage loans for net proceeds of $55.9 million,
resulting in a pretax gain of $10.1 million. As part of the 1998 and 1997
servicing sales, Source One retained the right to subservice $4.1 billion and
$17.0 billion of these loans, respectively, for a contracted fee through 2001.
Subservicing assets are amortized on a straight-line basis over the subservicing
period and are tested for impairment.
During 1994 Source One sold the rights to service $3.9 billion of mortgage
loans to a third party and retained the rights to subservice those loans
pursuant to a subservicing agreement. In connection with the servicing sale, a
pretax gain of $19.9 million was deferred in 1994 and was to be recognized as
income over the five-year life of the subservicing agreement. In 1996, the third
party sold the rights to service approximately $1.0 billion of these loans
subserviced by Source One which resulted in Source One recognizing $2.4 million
of the deferred gain on an accelerated basis. In 1997, the third party sold the
remainder of the loans subserviced by Source One which resulted in Source One
recognizing the remaining balance of the deferred gain during 1997.
NOTE 6. MORTGAGE SERVICING
Source One services loans throughout the United States. Source One's
portfolio of mortgage loans serviced (including loans subserviced, interim
servicing contracts and portfolios under contract to acquire but excluding loans
sold but not transferred) totalled $25.1 billion and $26.5 billion as of
December 31, 1998 and 1997, respectively. The following table summarizes the
mortgage loan servicing portfolio as of December 31, 1998:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Weighted average
---------------------------------------------------------------
Principal Remaining
balance Loan contractual
serviced balance Interest Net servicing life
Loan type (millions) (thousands) rate fee rate (months)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Residential
Conventional $ 3,929 $ 64 8.14% .396% 237
FHA 2,486 75 7.74 .398 334
VA 2,736 81 7.26 .400 331
Commercial 46 927 7.16 .189 173
-------------
Owned servicing portfolio $ 9,197 $ 72 7.76% .397% 291
Subservicing portfolio 15,915
-------------
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
Total mortgage servicing portfolio $25,112
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
The servicing fee rates in the preceding table are shown after deducting
applicable guarantee fees. Guarantee fees, when applicable, range from 6 basis
points for governmental loans to approximately 30 basis points for certain
conventional loans. Certain loans sold to private investors have no guarantee
fees.
F-22
<PAGE>
The following tables summarize Source One's owned mortgage loan servicing
portfolio by interest rate range and by location of property:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
December 31, 1998 December 31, 1997
------------------------------------------- --------------------------------------------
Aggregate Weighted Aggregate Weighted
Number principal average Number principal average
Interest rate of balance interest of balance interest
range loans (millions) rate loans (millions) rate
- --------------------- ------------------------------------------- --------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
5.99% and lower 438 35 5.17% 843 $ 66 5.41%
6.00% - 6.49% 1,193 127 6.22 1,823 159 6.13
6.50% - 6.99% 10,870 1,111 6.64 4,166 319 6.66
7.00% - 7.49% 28,036 2,337 7.08 12,968 729 7.17
7.50% - 7.99% 30,928 2,550 7.58 29,240 2,455 7.63
8.00% - 8.49% 15,778 1,155 8.12 27,989 2,280 8.13
8.50% - 8.99% 17,999 809 8.62 32,178 1,867 8.59
9.00% - 9.49% 5,934 275 9.12 13,452 722 9.07
9.50% - 9.99% 7,580 339 9.64 29,142 1,420 9.55
10% and above 9,574 459 10.73 32,488 1,610 10.49
------------------------------------------- --------------------------------------------
Total 128,330 $9,197 7.76% 184,289 $11,627 8.52%
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
December 31, 1998 December 31, 1997
------------------------------------------- ---------------------------------------------
Aggregate Aggregate
Number principal Percentage Number principal Percentage
of balance of servicing of balance of servicing
State loans (millions) portfolio loans (millions) portfolio
- --------------------- ------------------------------------------- ---------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
California 17,617 $1,795 19.5% 20,459 $ 1,889 16.3%
New York 17,572 935 10.2 22,118 1,162 10.0
Texas 11,448 676 7.4 15,655 736 6.3
Washington 5,033 486 5.3 7,889 690 5.9
Florida 7,849 471 5.1 12,894 663 5.7
Michigan 7,810 393 4.3 10,773 520 4.5
Maryland 4,159 377 4.1 5,020 362 3.1
New Jersey 5,145 364 4.0 7,088 503 4.3
Ohio 4,461 298 3.2 6,658 357 3.1
Illinois 3,441 260 2.8 6,335 420 3.6
Other 43,795 3,142 34.1 69,400 4,325 37.2
------------------------------------------- ---------------------------------------------
Total 128,330 $9,197 100.0% 184,289 $11,627 100.0%
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
Escrow funds of approximately $207.9 million and $196.8 million as of
December 31, 1998 and 1997, respectively, relating to mortgages serviced and
subserviced, were held in non-interest bearing accounts at non-affiliated banks
and are not included in the consolidated financial statements.
F-23
<PAGE>
NOTE 7. MORTGAGE LOANS HELD FOR SALE AND POOL LOAN PURCHASES
The following tables summarize Source One's mortgage loans held for sale
and pool loan purchases:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
December 31,
---------------------------
Millions 1998 1997
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Adjustable rate mortgage loans, weighted average
interest rates of 6.39% and 6.36% $ 15.1 $ 51.6
Fixed rate 5 year through 25 year mortgage loans,
weighted average interest rates of 7.10 and 7.68% 240.0 60.4
Fixed rate 30 year mortgage loans, weighted average
interest rates of 7.33% and 7.76% 420.3 405.0
---------------------------
Total principal amount 675.4 517.0
Net premiums .9 2.3
---------------------------
Total mortgage loans held for sale $676.3 $ 519.3
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
December 31,
----------------------------------------------------
Principal balance Number of loans
---------------------- ---------------------
Dollars in Millions 1998 1997 1998 1997
- --------------------------------------------------------------------------------------- ---------------------
<S> <C> <C> <C> <C>
Loan type: FHA $119.6 $103.1 1,640 1,781
VA 45.3 43.3 550 669
Conventional .1 3.4 4 45
---------------------- ---------------------
Total pool loan purchases $165.0 $149.8 2,194 2,495
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
F-24
<PAGE>
NOTE 8. DEBT
SHORT-TERM DEBT
Short-term debt outstanding consisted of the following:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
December 31,
----------------------------
Millions 1998 1997
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
White Mountains: Credit facility $ 50.0 $ -
Charter: Notes payable and lease obligations 1.5 2.0
Source One:
Credit agreement borrowings 697.3 569.5
Less net discounts (.3) (.1)
----------------------------
Total Source One 697.0 569.4
----------------------------
Total short-term debt $748.5 $ 571.4
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
The weighted average interest rates of short-term debt outstanding during
the year ended December 31, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
-------------------------
1998 1997
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
White Mountains: Credit facility 6.20% 6.04%
Charter: Notes payable 6.50% 6.50%
Source One:
Credit agreement borrowings 5.79% 6.34%
Commercial paper and short-term borrowings - % 5.81%
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
In August 1998 the Company entered into a $35.0 million revolving credit
agreement with a syndicate of banks which served to replace an expiring
arrangement in the same amount. Under the agreement, through August 12, 1999 the
Company may borrow up to $35.0 million at short-term market interest rates. The
credit agreement contains certain customary covenants and conditions. At
December 31, 1998 the Company was in compliance with all covenants under the
facility and had no borrowings outstanding under the agreement. At December 31,
1997 the Company had no outstanding borrowings under the former facility.
In November 1996 White Mountains entered into a five year revolving credit
facility under which it may borrow up to $50.0 million at market interest rates.
At December 31, 1998 White Mountains had $50.0 million of borrowings outstanding
under the facility which was used to partially fund White Mountains additional
investment in MSA and its acquisition of Folksamerica during 1998. White
Mountains had no borrowings outstanding at December 31, 1997 under the facility.
During 1996 Charter extended $3.2 million of notes payable to be repaid in
three equal installments in 1997, 1998 and 1999. As of December 31, 1998 $1.1
million of the notes remained outstanding. The notes are collateralized by
certain assets of Charter.
F-25
<PAGE>
In July 1998 Source One amended and restated its $600.0 million secured
revolving credit agreement to increase its borrowing capacity and flexibility.
The provisions of the amended agreement increased Source One's borrowing
capacity to $800.0 million. The facility expires on July 9, 1999. At December
31, 1998, Source One was in compliance with all covenants under the agreement
and had $650.5 million of borrowings outstanding under this agreement.
During the second quarter of 1998 Source One entered into two additional
secured credit agreements whereby it may borrow up to $35.0 million and $175.0
million through July 1999 and April 1999, respectively. At December 31, 1998,
Source One had a total of $21.6 million in borrowings outstanding under these
agreements.
In April 1998 Source One replaced its existing $15.0 million unsecured
revolving credit agreement under which it can borrow up to $40.0 million through
April 15, 1999. As of December 31, 1998, there was $25.2 million outstanding
under the revolving credit agreement.
In July 1997 Source One amended and restated its secured revolving credit
agreement to reflect a reduction in its borrowing requirements resulting from
the 1997 servicing sale. The provisions of the amended agreement decreased
Source One's revolving credit facility from $750.0 million to $600.0 million and
reduced Source One's borrowing costs by lowering the facility fee. At December
31, 1997, Source One was in compliance with all covenants and had $559.0 million
of borrowing outstanding under this facility.
In May 1997 Source One entered a unsecured revolving credit agreement under
which it can borrow up to $15.0 million through June 1, 1998. As of December 31,
1997, there was $10.5 million outstanding under the revolving credit agreement.
Source One must comply with certain financial covenants provided in its
secured and unsecured revolving credit facilities, including restrictions
relating to tangible net worth and leverage. In addition, the secured facility
contains certain covenants which limit Source One's ability to pay dividends or
make distributions of its capital in excess of preferred stock dividends and
subordinated debt interest requirements each year. Source One is currently in
compliance with all such covenants.
F-26
<PAGE>
LONG-TERM DEBT
Long-term debt outstanding consisted of the following:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
December 31,
----------------------------
Millions 1998 1997
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Parent Company:
Medium-term notes $116.3 $116.3
Less net discounts (.6) (.7)
----------------------------
Total Parent Company 115.7 115.6
----------------------------
Folksamerica: Medium-term notes 55.6 -
Valley: Medium-term notes 15.0 15.0
Charter: Notes payable in 1999 - 1.1
Source One:
Medium-term notes, 8.875% due in 2001 18.7 18.7
Debentures, 9.0% due in 2012 100.0 100.0
Subordinate debentures, 9.375% due in 2025 56.0 56.0
Less net discounts (1.3) (2.1)
----------------------------
Total Source One 173.4 172.6
----------------------------
Total long-term debt $359.7 $304.3
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
At December 31, 1998, the Parent Company had $116.3 million of outstanding
medium-term notes with an average maturity of 4.4 years and a yield to maturity
of 7.82%.
Folksamerica has $55.6 million of medium-term notes outstanding which are
guaranteed by one of the European Mutuals. As part of the August 18, 1998
Folksamerica acquisition, Fund American guaranteed Folksamerica's debt to the
former owner and agreed to repay or refinance the obligation during the 1999
first quarter. The Folksamerica medium-term notes had scheduled maturities from
2001 to 2005 and had a weighted average interest rate of approximately 5.65%
from August 18, 1998 to December 31, 1998.
Valley has a five year credit facility under which it may borrow up to
$15.0 million at market interest rates. During 1998 and 1997 Valley had $15.0
million of borrowings outstanding under the facility with a weighted average
interest rate of 6.14% and 6.09%, respectively.
In 1991 Source One issued $160.0 million of 8.875% medium-term notes due in
2001 of which $138.4 million remained outstanding at December 31, 1996. During
1997 Source One repurchased and retired in principal amount $119.7 million of
these notes leaving $18.7 million outstanding at December 31, 1997 and 1998.
In 1992 Source One issued $100.0 million of 9% debentures due in 2012
pursuant to a $250.0 million shelf registration statement. The debentures may
not be redeemed by Source One prior to maturity. The proceeds from issuance were
used for general corporate purposes.
In December 1995, Source One exchanged and retired 2,239,061 shares Source
One Preferred Stock for $56.0 million in principal amount of 9.375% subordinated
debentures. The subordinated debentures are due in
F-27
<PAGE>
2025 but are redeemable at the option of Source One, in whole or part, at any
time on or after May 1, 1999.
In connection with Source One's February 28, 1997 sale of approximately
$17.0 billion of mortgage servicing rights to a third party, the Company has
made certain collection, payment and performance guarantees to the buyer for a
period of no more than ten years. The aggregate amount of the Company's guaranty
is initially limited to $20.0 million and amortizes down to $15.0 million as
mortgage loans serviced under agreement are repaid. During 1998, the Company
permitted the third party to include an additional $2.9 billion of mortgage
servicing rights that it purchased from Source One during 1998 to be included in
the guaranty, however, the inclusion of the 1998 servicing rights sold did not
serve to change the maximum amount of the guarantee or the original term of the
agreement.
Total interest paid by Fund American for both short-term and long-term debt
was $83.5 million, $51.9 million and $51.5 million in 1998, 1997 and 1996,
respectively.
Fund American's long-term debt maturities, including the current portion of
long-term debt, for 1999, 2000, 2001, 2002, 2003 and beyond are $57.7 million,
$6.0 million, $20.7 million, $10.0 million, $102.3 million and $166.0 million,
respectively.
NOTE 9. INCOME TAXES
The Company and its subsidiaries file a consolidated Federal income tax
return. The Federal income tax provision is computed on the consolidated taxable
income of the Company and those subsidiaries.
The total income tax provision consisted of the following:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
Millions 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Tax on pretax earnings:
Federal $ 45.2 $26.7 $ 18.1
State and local 2.6 2.7 .8
---------------------------------------------
Income tax provision on pretax earnings 47.8 29.4 18.9
Tax benefit from loss on early extinguishment of debt - 3.2 -
---------------------------------------------
Total income tax provision $ 47.8 $32.6 $ 18.9
---------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
Net income tax payments $ 35.7 $24.9 $ 7.0
---------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
Tax provision recorded directly to shareholders' equity related to:
Changes in net unrealized investment gains and losses $(4.3) $22.5 $ 29.4
Changes in net foreign currency translation gains and losses $ (.5) $ - $ -
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
F-28
<PAGE>
The components of the income tax provision (benefit) on pretax earnings
follow:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
---------------------------------------------
Millions 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current provision $ 49.0 $33.5 $ 22.5
Deferred benefit (1.2) (4.1) (3.6)
---------------------------------------------
Total income tax provision on pretax earnings $ 47.8 $29.4 $ 18.9
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax return purposes. Fund American
recorded a net deferred Federal income tax asset of $7.8 million as of December
31, 1998 and a net deferred Federal income tax liability of $19.6 million as of
December 31, 1997. Significant components of Fund American's net deferred
Federal income tax asset and liability follow:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
December 31,
Millions 1998 1997
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets related to:
Employee compensation and benefit accruals $ 51.1 $ 39.1
Discounting of loss reserves 40.1 2.9
Capitalized mortgage servicing 21.1 26.2
Unearned insurance premiums 10.5 5.3
Allowance for mortgage loan losses 4.3 4.8
Other items 15.8 10.1
--------------------------
Total deferred tax assets $ 142.9 $ 88.4
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
F-29
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
December 31,
--------------------------
Millions 1998 1997
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax liabilities related to:
Net unrealized investment holding gains $ 83.0 $ 71.4
Earnings from insurance affiliates 17.5 11.8
Deferred acquisition costs 12.4 5.0
Purchase accounting adjustments 4.8 5.5
Unrealized gains on financial instruments 4.3 4.6
Other items 13.1 9.7
--------------------------
Total deferred tax liabilities $135.1 $108.0
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
A reconciliation of taxes calculated using the 35% Federal statutory rate
to the income tax provision on pretax earnings follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
---------------------------------------
Millions 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Tax provision at Federal statutory rate $45.4 $27.4 $ 9.6
Differences in taxes resulting from:
Dividends received deduction (2.6) (3.1) (2.3)
Nonconventional fuel source tax credits (1.1) (2.4) -
Tax reserve adjustments 5.4 5.1 4.2
State income taxes 1.7 1.8 .5
Write-off of goodwill and other intangible assets - - 8.1
Other, net (1.0) .6 (1.2)
---------------------------------------
Total income tax provision on pretax earnings $47.8 $29.4 $18.9
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
The Company believes that it is more likely than not that results of future
operations will generate sufficient taxable income to realize the deferred tax
asset balances carried as of December 31, 1998 and 1997.
NOTE 10. RETIREMENT AND POST-RETIREMENT PLANS
The Company has an unfunded, nonqualified defined contribution plan for a
select group of management employees for the purpose of providing retirement
benefits (the "Deferred Benefit Plan"). The amount of annual contribution to the
Deferred Benefit Plan is determined using actuarial assumptions. At December 31,
1998 and 1997, Fund American's liability to participants pursuant to the
Deferred Benefit Plan was $4.8 million and $3.9 million, respectively.
The Company also has an unfunded, nonqualified plan for a select group
of management employees for the purpose of deferring current compensation for
retirement savings (the "Deferred Compensation Plan"). Pursuant to the
Deferred Compensation Plan, participants may voluntarily defer all or a
portion of qualifying remuneration payable by Fund American. At December 31,
1998 and 1997, Fund American's liability to participants pursuant to the
Deferred Compensation Plan was $65.1 million and $37.6 million, respectively.
Source One, Folksamerica and Valley have defined contribution employee
savings plans for the benefit of substantially all their employees. The costs of
these plans are not material to Fund American's financial statements.
F-30
<PAGE>
Fund American also has various defined benefit pension plans for the
benefit of the majority of its employees. Benefits under these plans are based
on years of service and each employee's highest average eligible compensation
over five consecutive years in his or her last ten years of employment. Cash
contributions made by Fund American totalled less than $1.0 million for the
years ended December 31, 1998 and 1997 and the projected benefit obligation of
such plans totalled $11.0 million and $11.3 million, respectively, as of those
dates.
Fund American's postretirement benefit costs, included in accounts payable
and other liabilities, were $3.8 million and $3.7 million at December 31, 1998
and 1997, respectively.
NOTE 11. EMPLOYEE STOCK PLANS
Fund American's Long-Term Incentive Plan (the "Incentive Plan") provides
for granting to executive officers and other key employees of the Company (and
certain of its subsidiaries) various types of stock-based incentive awards
including stock options and performance shares. At December 31, 1998, 329,200
Shares remained available for grants under the Incentive Plan.
Performance shares are conditional grants of a specified maximum number of
Shares or an equivalent amount of cash. The grants are generally payable,
subject to the attainment of a specified after tax return on equity at the end
of a three year period or as otherwise determined by the Compensation Committee
of the Board. The Compensation Committee consists solely of disinterested,
non-management directors.
Pursuant to the Incentive Plan 47,800, 50,000 and 73,000 performance shares
were granted in 1998, 1997 and 1996, respectively, of which 5,150, 4,300 and
14,000 of the performance shares granted, respectively, remain unallocated to
participants as of December 31, 1998 and are not deemed to be outstanding.
During 1998, 1997 and 1996, 47,129, 22,944 and 0 performance shares were paid in
cash, respectively. At December 31, 1998, 147,350 performance shares were
outstanding. The financial goal for full payment of the performance shares is
the achievement of a 13% annual after tax return on equity as measured over the
applicable performance periods.
As of December 31, 1998, 1997 and 1996 there were 2,000, 2,000 and 3,000
stock options outstanding, respectively, which had exercise prices ranging from
$24.82 to $32.60 per Share. All Fund American stock options outstanding during
the three year period ended December 31, 1998, were fully vested and
exercisable. No new stock options have been issued to Fund American employees
since 1990.
In 1985 the Company's Chairman purchased warrants (the "Warrants") from
American Express Company ("American Express") entitling him to buy 1,700,000
Shares for $25.75 per Share. Warrants to purchase 420,000 Shares, 130,000 Shares
and 150,000 Shares were exercised by the Chairman during 1992, 1994 and 1995,
respectively, leaving Warrants to purchase 1,000,000 Shares outstanding at
December 31, 1995. Pursuant to a proposal approved by shareholders at the
Company's 1995 Annual Meeting, the expiration date with respect to the Warrants
was extended from January 2, 1996, to January 2, 2002. In accordance with APB
No. 25, the
F-31
<PAGE>
extension of the Warrants resulted in a $46.2 million pretax charge to
compensation expense which was recorded in the second quarter of 1995. No
Warrants were exercised by the Chairman during 1998 and 1997. Pursuant to
certain anti-dilution adjustments related to the distribution of White River
Shares to the Company's shareholders, the exercise price for the Warrants to
purchase Fund American Shares was reduced to $21.66 per Share.
All employees (other than employees of Source One, FAE and Folksamerica are
eligible to participate in an employee savings plan qualified under Section
401(k) of the Internal Revenue Code ("IRC") (the "Valley 401(k) Plan").
Contributions to the Valley 401(k) Plan can be invested in various investment
options including Shares. There is an employer match provision to the Valley
401(k) Plan which is equal to 50% of the first 6% of employee compensation
contributed to the plan, subject to IRC limits. Fund American added Shares to
the investment options offered under the Valley 401(k) Plan as of July 1, 1997.
As of December 31, 1998 participants of the Valley 401(k) Plan owned a total of
3,949 Shares.
All employees of Folksamerica are eligible to participate in an employee
savings plan qualified under Section 401(k) of the Internal Revenue Code ("IRC")
(the "Folksamerica 401(k) Plan"). Contributions to the Folksamerica 401(k) Plan
can be invested in various investment options. The Folksamerica 401(k) Plan does
not currently provide for investments in Shares. There is an employer match
provision to the Folksamerica 401(k) Plan which is equal to 100% of the first 6%
of employee compensation contributed to the plan, subject to IRC limits.
Source One also has a qualified employee savings plan (the "Source One
401(k) Plan"). Contributions to the Source One 401(k) Plan can be invested in
various investments including Shares. In 1997, Source One added a matching
contribution feature to the Source One 401(k) Plan which is equal to a certain
percentage of employee contributions, up to a maximum of 5%, dependent upon
Source One's return on equity. As of December 31, 1998, participants of the
Source One 401(k) Plan owned a total of 38,046 Shares.
SFAS No. 123, "Accounting for Stock Based Compensation," requires
disclosure regarding all employee stock options and encourages companies to
recognize compensation expense for stock-based awards based on the fair value of
such awards on the date of grant. Alternatively, companies may continue
following existing accounting standards provided that disclosures are made
regarding the net income and earnings per share impact as if the value
recognition and measurement criteria of SFAS No. 123 had been adopted. Fund
American has not adopted the recognition and measurement criteria of SFAS No.
123 and alternatively has chosen to disclose the pro forma effects of SFAS No.
123 as it relates to outstanding Warrants and performance shares granted in
1998, 1997 and 1996, as follows:
F-32
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
-------------------------------------
Millions, except per share amounts 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income:
As reported $ 82.2 $43.0 $ 8.6
Pro forma 77.4 39.4 -
- -------------------------------------------------------------------------------------------------------------------
Basic net income per share:
As reported $13.38 $5.98 $ .66
Pro forma 12.56 5.99 -
- -------------------------------------------------------------------------------------------------------------------
Diluted net income per share:
As reported $11.94 $5.40 $ .60
Pro forma 11.20 5.41 -
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
SFAS No. 123 provides for the expense of Warrants, stock options and
performance shares over the life of the award using the Black Scholes option
pricing model. Significant assumptions used include a 5.0% risk-free interest
rate, an expected Share volatility of .167 and an expected life of five years
for Warrants and three years for performance shares. In determining the pro
forma effects of SFAS No. 123, the Company recognizes the pro forma expense of
the Warrants over time. The pro forma net income figures disclosed above may not
be representative of the effects on reported net income to be reported in future
years.
NOTE 12. MINORITY INTEREST - PREFERRED STOCK OF SUBSIDIARY
In 1994 Source One issued 4,000,000 shares of 8.42% Source One Preferred
Stock, having a liquidation preference of $25.00 per share, for net cash
proceeds of $96.8 million. On December 8, 1995, Source One exchanged and retired
2,239,061 shares of Source One Preferred Stock for $56.0 million in principal
amount of subordinated debentures. The Source One Preferred Stock is not
redeemable prior to May 1, 1999.
NOTE 13. SHAREHOLDERS' EQUITY
COMMON SHARE REPURCHASES
During 1998, 1997 and 1996 the Company repurchased 151,916 Shares, 924,739
Shares and 779,077 Shares, respectively, for $19.8 million, $103.7 million and
$66.3 million, respectively. All Shares repurchased during 1998, 1997 and 1996
have been retired. At December 31, 1998, the Company had outstanding
authorization to purchase an additional 41,501 Shares.
CAPITAL STOCK DIVIDENDS
During 1998 and 1997 the Company declared and paid quarterly cash dividends
of $.40 per Share and $.20 per Share, respectively. During 1998 and 1997 Source
One declared and paid quarterly cash dividends of $2.105 per share of Source One
Preferred Stock.
F-33
<PAGE>
NOTE 14. SEGMENT INFORMATION
Fund American has determined that its reportable segments include Mortgage
Banking (Source One), Property and Casualty Insurance (Valley, Charter and
WMIC), Reinsurance (Folksamerica), Investments in Unconsolidated Insurance
Affiliates and other (primarily the Company, FAE and White Mountains, all on a
stand-alone basis). This determination was based on the provisions of SFAS No.
131, "Disclosure About Segments of an Enterprise and Related Information" which
was adopted by Fund American in December 1998. Prior year segment information
has been restated to conform to the current presentation under SFAS No. 131.
Investment results are included within the segment to which the investments
relate. The Company has made this determination based on consideration of the
following criteria: (i) the nature of the business activities of each of the
Company's subsidiaries and affiliates; (ii) the manner in which the Company's
subsidiaries and affiliates are organized; (iii) the existence of primary
managers responsible for specific subsidiaries and affiliates; and (iv) the
organization of information provided to the Board. There are no significant
intercompany transactions among Fund American's segments.
Revenues, pretax earnings and ending assets for Fund American's segments
are shown below:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Property and Investments in
Casualty Unconsolidated
Mortgage Insurance Affiliates
Millions Banking Reinsurance Other Total
- -------------------------------------------------------------------------------------------------------------------
1998
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues for external customers $212.0 $170.0 $ 85.4 $ - $ - $467.4
Net investment income 81.6 8.2 18.1 3.8 6.7 118.4
Equity in earnings of unconsolidated affiliates - - - 24.3 - 24.3
Amortization of deferred credit - - 2.7 - - 2.7
Other (34.8)(a) - - - .1 (34.7)
----------------------------------------------------------------------
Total revenues 258.8 178.2 106.2 28.1(b) 6.8578.1
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
1997
- -------------------------------------------------------------------------------------------------------------------
Revenues for external customers 127.5 153.1 - - - 280.6
Net investment income 43.5 8.9 - 3.8 8.9 65.1
Equity in earnings of unconsolidated affiliates - - - 21.3 - 21.3
Other (56.7)(a) - - - - (56.7)
----------------------------------------------------------------------
Total revenues 114.3 162.0 - 25.1(b) 8.9310.3
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
1996
- -------------------------------------------------------------------------------------------------------------------
Revenues for external customers 206.2 119.1 - - - 325.3
Net investment income 40.8 7.5 - 3.7(a) 5.2 57.2
Equity in earnings of unconsolidated affiliates - - - 12.0 - 12.0
Other (69.3)(a) - - - - (69.3)
----------------------------------------------------------------------
Total revenues $177.7 $126.6 $ - $15.7(b) $5.2$325.2
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Represents amortization and impairment of capitalized mortgage servicing of
$55.2 million, $68.0 million and $79.2 million for 1998, 1997 and 1996,
respectively, partially offset of net gains on financial instruments of
$20.4 million, $11.3 million and $9.9 million, respectively.
(b) Includes interest income on Fund American's investment in MediaOne
preferred stock (considered to be related to Fund American's investment in
FSA) of $3.8 million for 1998, 1997 and 1996.
F-34
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Property and Investments in
Casualty Unconsolidated
Mortgage Insurance Affiliates
Millions Banking Reinsurance Other Total
- -------------------------------------------------------------------------------------------------------------------
1998
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Income (loss) before realized gains, taxes and $123.7 $ 5.3 $ 8.9 $28.1 $(16.6) $149.4
certain other expenses
Net realized investment gains (losses) 2.2 5.4 (.8) - 64.2 71.0
Interest expense (70.2) (1.1) (1.4) - (11.2) (83.9)
Depreciation and amortization (3.1) (3.0) - - (.4) (6.5)
----------------------------------------------------------------------
Pretax earnings 52.6 6.6 6.7 28.1 36.0 130.0
----------------------------------------------------------------------
----------------------------------------------------------------------
Income tax expense (19.3) (1.8) (1.2) (7.6) (17.9)(47.8)
- -------------------------------------------------------------------------------------------------------------------
1997
- -------------------------------------------------------------------------------------------------------------------
Income (loss) before realized gains, taxes and 18.2 11.5 - 25.1 (18.7) 36.1
certain other expenses
Net realized investment gains (losses) (.7) 4.1 - - 93.3 96.7
Interest expense (35.4) (1.2) - - (9.4) (46.0)
Depreciation and amortization (5.0) (3.0) - - (.4) (8.4)
----------------------------------------------------------------------
Pretax earnings (loss) (22.9) 11.4 - 25.1 64.8 78.4
----------------------------------------------------------------------
----------------------------------------------------------------------
Income tax (expense) benefit 7.0 (4.3) - (6.1) (26.0) (29.4)
----------------------------------------------------------------------
Loss on early extinguishment of debt (6.0) - - - - (6.0)
- -------------------------------------------------------------------------------------------------------------------
1996
- -------------------------------------------------------------------------------------------------------------------
Income (loss) before realized gains, taxes and 44.1 (2.7) - 15.7 (9.3) 47.8
certain other expenses
Net realized investment gains (losses) (.2) (.3) - - 39.0 38.5
Interest expense (36.0) (.7) - - (9.6) (46.3)
Depreciation and amortization (6.5) (3.2) - - (2.8) (12.5)
----------------------------------------------------------------------
Pretax earnings (loss) 1.4 (6.9) - 15.7 17.3 27.5
----------------------------------------------------------------------
----------------------------------------------------------------------
Income tax (expense) benefit $ (9.5) $ 3.4 $ - $(3.5) $ (9.3) $ (18.9)
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
F-35
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Millions Property and Investments in
Casualty Unconsolidated
Mortgage Insurance Affiliates
Ending assets: Banking Reinsurance Other Total
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
December 31, 1998 $1,234.1 $311.5 $1,220.5 $404.1 $110.5 $3,280.7
December 31, 1997 1,063.1 288.8 - 409.6 248.8 2,010.3
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE 15. INVESTMENTS IN UNCONSOLIDATED AFFILIATES
INVESTMENT IN FSA
Fund American owned 3,460,200 shares of FSA Common Stock at December 31,
1998, 1997 and 1996. This represented approximately 11.6%, 12.1% and 11.5%,
respectively, of the total shares of FSA Common Stock outstanding at those
times. Fund American had voting rights to an additional 3,893,940 shares of FSA
Common Stock at December 31, 1998, 1997 and 1996, raising Fund American's voting
control of FSA to approximately 23.1%, 24.0% and 23.0%, respectively. At
December 31, 1998, 1997 and 1996, Fund American also owned FSA Options and
Preferred Stock which, in total, give Fund American the right to acquire up to
4,560,607 additional shares of FSA Common Stock for aggregate consideration of
$125.7 million. As of December 31, 1998, 1997 and 1996, Fund American's economic
interest in FSA was 25.1%, 26.2% and 25.1%, respectively.
Fund American's investment in FSA Common Stock is accounted for using the
equity method. FSA Common Stock is publicly traded on the NYSE. The market value
of the FSA Common Stock as of December 31, 1998 and 1997, as quoted on the NYSE,
exceeded Fund American's carrying value of
F-36
<PAGE>
the FSA Common Stock on the equity method. Fund American's investments in FSA
Options and Preferred Stock are accounted for under the provisions of SFAS No.
115 whereby the investments are reported at fair value as of the balance sheet
date, with related unrealized investment gains and losses, after tax, reported
as a net amount in a separate component of shareholders' equity and reported on
the income statement as a component of comprehensive net income.
The following table summarizes financial information for FSA:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Millions 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FSA BALANCE SHEET DATA:
Total investments $ 1,874.8 $ 1,431.6 $1,154.4
Total assets 2,405.5 1,900.6 1,537.7
Deferred premium revenue 721.7 595.2 511.2
Loss and loss adjustment expense reserve 63.9 75.4 72.1
Preferred shareholder's equity .7 .7 .7
Common shareholders' equity 1,072.7 881.7 800.6
FSA INCOME STATEMENT DATA:
Gross premiums written $ 319.3 $ 236.4 $ 177.0
Net premiums written 219.9 172.9 121.0
Net premiums earned 137.9 109.5 90.4
Net investment income 78.8 72.1 65.1
Net income 117.0 100.5 80.8
- ---------------------------------------------------------------------------------------------------------------------
AMOUNTS RECORDED BY FUND AMERICAN:
Investment in FSA Common Stock $ 119.7 $ 104.3 $ 92.3
Investment in FSA Options and Preferred Stock 114.4 87.8 19.8
------------------------------------
Total Investment in FSA $ 234.1 $ 192.1 $ 112.1
------------------------------------
------------------------------------
Equity in earnings from FSA Common Stock (a) $ 13.8 $ 11.4 $ 7.8
Equity in net unrealized investment gains (losses) from FSA's investment
portfolio, before tax (b) 3.1 2.1 (1.0)
Unrealized investment gains on FSA Options and Preferred Stock, before tax (b) 26.6 68.0 17.3
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Recorded net of related amortization of goodwill.
(b) Recorded directly to shareholders' equity (after tax) with related changes
in net unrealized investment gains and losses (after tax) reported on the
income statement as a component of comprehensive net income.
At December 31, 1998 and 1997, Fund American's consolidated retained
earnings included $35.9 million and $23.6 million, respectively, of
F-37
<PAGE>
accumulated undistributed earnings of FSA (net of related amortization of
goodwill).
INVESTMENT IN MSA
At December 31, 1998, 1997 and 1996, Fund American owned 222,093, 90,606
and 90,606 shares of MSA Common Stock. This represented approximately 50.0%,
33.1% and 33.1% of the total shares of MSA Common Stock outstanding at those
times. Fund American's investment in MSA is accounted for using the equity
method. The following tables summarize financial information for MSA:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Millions 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
MSA BALANCE SHEET DATA:
Total investments $ 465.9 $280.1 $ 249.4
Total assets 588.6 337.2 316.2
Unearned premium reserve 113.0 71.8 64.0
Loss and loss adjustment expense reserves 212.2 123.7 120.1
Shareholders' equity 232.5 120.6 101.4
MSA INCOME STATEMENT DATA:
Net premiums written $ 258.5 $156.6 $ 147.2
Net premiums earned 226.3 148.7 141.6
Net investment income 22.1 15.4 14.9
Net income 13.4 11.9 9.7
- ---------------------------------------------------------------------------------------------------------------------
AMOUNTS RECORDED BY FUND AMERICAN:
Investment in MSA Common Stock $ 120.2 $ 40.9 $ 34.7
Equity in earnings from MSA Common Stock (a) 4.9 3.8 1.5
Equity in net unrealized investment gains (losses) from MSA's
investment portfolio, before tax (b) 4.1 2.4 (.5)
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Recorded net of related amortization of goodwill.
(b) Recorded directly to shareholders' equity (after tax) with related changes
in net unrealized investment gains and losses (after tax) reported on the
income statement as a component of comprehensive net income.
At December 31, 1998 and 1997, Fund American's consolidated retained
earnings included $14.2 million and $9.3 million, respectively, of
F-38
<PAGE>
accumulated undistributed earnings of MSA (net of related amortization of
goodwill).
INVESTMENT IN FOLKSAMERICA
On August 18, 1998, Fund American acquired all of the remaining outstanding
shares of the common stock of Folksamerica for $169.1 million which resulted in
Folksamerica becoming a consolidated subsidiary of the Company as of that date.
As of December 31, 1997 and 1996, Folksamerica was an unconsolidated subsidiary
of Fund American.
Prior to the consolidation of Folksamerica in 1998, White Mountains owned
6,920,000 shares of Folksamerica Preferred Stock at December 31, 1997 and 1996
and owned 1,563,907 shares of Folksamerica Common Stock at December 31, 1997.
White Mountains ownership percentage of Folksamerica at December 31, 1997 and
1996 represented 50.0% of the total Folksamerica voting shares outstanding at
those times. At December 31, 1997 and 1996, White Mountains also owned ten year
Folksamerica Warrants to purchase up to 6,920,000 shares of Folksamerica Common
Stock for aggregate consideration of $79.4 million. Fund American acquired its
investment in Folksamerica Preferred Stock and Folksamerica Warrants on June 19,
1996. White Mountains acquired its investment in Folksamerica Common Stock on
November 20, 1997.
Prior to the consolidation of Folksamerica in 1998, White Mountains'
investment in Folksamerica Common Stock was accounted for using the equity
method and Fund American's investment in Folksamerica Preferred Stock and
Folksamerica Warrants were accounted for under the provisions of SFAS No. 115
whereby the investments were reported at fair value as of the balance sheet
date, with related unrealized investment gains and losses, after tax, reported
as a net amount in a separate component of shareholders' equity and reported on
the income statement as a component of comprehensive net income. Dividends
earned on Folksamerica Preferred Stock were recorded as earnings from
unconsolidated insurance affiliates on the income statement.
F-39
<PAGE>
The following table summarizes financial information for Folksamerica:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Millions 1997 1996
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
FOLKSAMERICA BALANCE SHEET DATA:
Total investments $ 926.2 $ 711.4
Total assets 1,213.6 994.8
Unearned premium reserve 96.5 61.5
Loss and loss adjustment expense reserve 739.1 628.9
Preferred shareholder's equity 79.4 79.4
Common shareholders' equity 175.6 88.2
FOLKSAMERICA INCOME STATEMENT DATA:
Gross premiums written $ 251.0 $ 187.2
Net premiums written 232.4 171.9
Net premiums earned 238.0 181.4
Net investment income 46.7 32.4
Net income 35.9 17.1
- ---------------------------------------------------------------------------------------------------------------------
AMOUNTS RECORDED BY FUND AMERICAN:
Investment in Folksamerica Common Stock $ 23.5 $ -
Investment in Folksamerica Preferred Stock and Warrants 80.0 80.0
-------------------------
Total Investment in Folksamerica $ 103.5 $ 80.0
-------------------------
Equity in earnings from Folksamerica Common Stock (a) $ .9 $ -
Dividends from Folksamerica Preferred Stock (a) 5.2 2.7
Equity in net unrealized investment gains from Folksamerica's investment portfolio, before tax (b)1.8 .2
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Recorded net of related amortization of goodwill and accretion of discount.
(b) Recorded directly to shareholders' equity (after tax) with related changes
in net unrealized investment gains and losses (after tax) reported on the
income statement as a component of comprehensive net income.
At December 31, 1997, Fund American's consolidated retained earnings
included $1.0 million of accumulated undistributed earnings of Folksamerica.
INVESTMENT IN AMLIN (FORMERLY MURRAY LAWRENCE)
F-40
<PAGE>
At December 31, 1997 White Mountains owned 38,651,270 shares of the common
stock of Murray Lawrence which it had acquired on December 8, 1997 for $23.6
million. This represented approximately 15.8% of the total shares of Murray
Lawrence common stock outstanding at that time. At December 31, 1997 White
Mountains carried its investment in Murray Lawrence as an "investment in
unconsolidated insurance affiliate" and valued the investment at its original
cost of $23.6 million which approximated its fair value at that date..
During 1998 Murray Lawrence merged with Angerstein Underwriting which
resulted in the creation of Amlin. White Mountains owns 13,980,861 shares of the
common stock of Amlin, which represents an approximate 6.5% ownership stake as
of December 31, 1998 . As a result of White Mountains' decreased ownership
percentage of this investment resulting from the merger, White Mountains
recharacterized its investment in Amlin as an "other investment" and carried the
investment at its fair value of $25.1 million at December 31, 1998.
NOTE 16. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
Source One utilizes derivative financial instruments in the management of
interest rate risk. Source One's use of derivative financial instruments is
primarily limited to (i) commitments to extend credit, (ii) mandatory forward
commitments and (iii) interest rate floor contracts, interest rate swap
agreements and principal-only swap agreements. Although SFAS No. 115 requires
that these financial instruments be classified as held for trading purposes,
Fund American does not consider these investments to be speculative holdings.
Source One is a party to financial instruments with off-balance sheet risk
in the normal course of business to meet the financing needs of its customers
and to reduce its exposure to fluctuations in interest rates. These financial
instruments primarily include commitments to extend credit and mandatory forward
commitments. Those instruments involve, to varying degrees, elements of credit
and market interest rate risk in excess of the amounts recognized in the
consolidated balance sheets. The contract or notional amounts of those
instruments reflect the extent of risk Source One has related to the
instruments.
Source One's exposure to credit loss in the event of nonperformance by the
other party for commitments to extend credit is represented by the contractual
notional amount of those commitments. Source One's locked mortgage loan
commitments expected to close totalled $608.3 million and $284.5 million at
December 31, 1998 and 1997, respectively. Fixed rate commitments result in
Source One having market interest rate risk as well as credit risk. Variable
rate commitments result primarily in credit risk. The amount of collateral
required upon extension of credit is based on management's credit evaluation of
the mortgagor and consists of the mortgagor's residential property.
F-41
<PAGE>
Source One obtains mandatory forward commitments of up to 120 days to sell
mortgage-backed securities to hedge the market interest rate risk associated
with a substantial portion of the Pipeline that is expected to close and all
mortgage loans receivable. At December 31, 1998 and 1997, Source One had
$1,805.3 million and $776.8 million, respectively, of mandatory forward
commitments outstanding. If secondary market interest rates decline after Source
One commits to an interest rate for a loan, the loan may not close and Source
One may incur a loss from the cost of covering its obligations under a related
mandatory forward commitment. If secondary market interest rates increase after
Source One commits to an interest rate for a loan and Source One has not
obtained a forward commitment, Source One may incur a loss when the loan is
subsequently sold.
Source One's risk management function closely monitors the Pipeline to
determine appropriate forward commitment coverage on a daily basis in order to
manage the risk inherent in these off-balance-sheet financial instruments. In
addition, the risk management area seeks to reduce counterparty risk by
committing to sell mortgage loans only to approved dealers with no dealer having
in excess of 20% of current commitments.
Source One sells loans through mortgage-backed securities issued pursuant
to programs of GNMA, FNMA and FHLMC, or through institutional investors. Most
loans are aggregated in pools of $1.0 million or more which are purchased by
institutional investors after having been guaranteed by GNMA, FNMA or FHLMC.
Substantially all GNMA securities are sold by Source One without recourse for
loss of principal in the event of a subsequent default by the mortgagor due to
the FHA and VA insurance underlying such securities. Prior to December 1992,
substantially all conventional securities were sold with recourse to Source One,
to the extent of insufficient proceeds from private mortgage insurance,
foreclosure and other recoveries. Since December 1992 all conventional loans
have been sold without recourse to Source One.
Servicing agreements relating to mortgage-backed securities issued pursuant
to programs of GNMA, FNMA or FHLMC require Source One to advance funds to make
the required payments to investors in the event of a delinquency by the
borrower. Source One expects that it would recover most funds advanced upon cure
of default by the borrower or foreclosure. However, funds advanced in connection
with VA partially guaranteed loans and certain conventional loans (which are at
most partially insured by private mortgage insurers) may not be fully recovered
due to potential declines in collateral value. Source One is subject to limited
amounts of risk with respect to these loans since the insurer has the option to
reimburse the servicer for the lower of fair value of the property or the
mortgage loan outstanding, in addition to the VA guarantee on the loan. In
addition, most of Source One's servicing agreements for mortgage-backed
securities typically require the payment to investors of a full month's interest
on each loan although the loan may be paid off (by optional prepayment or
foreclosure) other than on a month-end basis. In this instance, Source One is
obligated to pay the investor interest at the pass-thru rate from the date of
loan payoff through the end of the calendar month without reimbursement.
F-42
<PAGE>
At December 31, 1998 and 1997, Source One serviced approximately $4.0
billion and $5.4 billion of GNMA loans (without substantial recourse),
respectively, and $1.7 billion and $2.5 billion of conventional loans (with
recourse), respectively. To cover loan losses that may result from these
servicing arrangements and other losses, Source One has provided an allowance
for loan losses of $11.5 million and $12.8 million at December 31, 1998 and
1997, respectively. In addition, the valuation allowance for Source One's
capitalized servicing asset related to its principal recourse portfolio includes
a $5.3 million and $8.2 million reserve for estimated losses at December 31,
1998 and 1997, respectively. Source One's management believes the allowance for
loan losses is adequate to cover unreimbursed foreclosure advances and principal
losses, including losses on loans with recourse.
In order to offset changes in the value of Source One's capitalized
servicing asset and to mitigate the effect on earnings of higher amortization
and impairment of such rights which results from increased prepayment activity,
Source One invests in various financial instruments. As interest rates decline,
prepayment activity increases, thereby reducing the value of the capitalized
servicing asset, while the value of the financial instrument increases.
Conversely, as interest rates increase, the value of the capitalized servicing
asset increases while the value of the financial instrument decreases. The
financial instruments utilized by Source One include interest rate floor
contracts, interest rate swap agreements and principal-only swap agreements.
Source One's interest rate floor contracts derive their value from
differences between the floor strike rate specified in the contract and
prevailing market interest rates and are not subject to total losses in excess
of their original cost. As of December 31, 1998, Source One's open interest rate
contracts had a fair value of $9.9 million, an original cost of $5.3 million and
a total notional value of $1.1 billion. The interest rate contracts have
remaining terms ranging from 5 to 10 years with floor rates ranging from 3.54%
to 5.05%. Source One's interest rate swap agreements, which were entered into in
the 1998 third quarter, entitle Source One to receive interest at fixed rates
and pay interest at variable rates based on a contracted notional amount. As of
December 31, 1998, Source One's open interest rate swap agreements had a fair
value of $4.8 million and had remaining terms ranging from 5 to 10 years. Source
One's exposure to losses on the interest rate swap agreements is related to the
differences between the contracted fixed interest rates assumed and the
contracted variable interest rates ceded over the life of the contract. Source
One's principal-only swap agreements derive their value from changes in the
value of referenced principal-only securities. As of December 31, 1998, Source
One's open principal-only swap agreements had a fair value of $2.7 million, a
notional value of $50.0 million and had a remaining term of 5 years. Source
One's exposure to losses on the principal-only swap agreements is related to
changes in the market value of the underlying principal-only securities over the
life of the contract.
Contingent liabilities exist with respect to reinsurance ceded, which would
become an ultimate liability of Folksamerica in the event that the
F-43
<PAGE>
assuming companies were unable to meet their obligations under reinsurance
agreements in force. Folksamerica evaluates the financial condition of its
reinsurers and monitors concentrations of credit risk arising from similar
activities or economic characteristics of the reinsurers to minimize its
exposure to significant losses from reinsurer insolvencies. At December 31,
1998, reinsurance recoverables with a carrying value of $41.7 million were
associated with a single reinsurer. Folksamerica holds collateral from this
reinsurer in the form of a letter of credit totalling $21.4 million and funds
withheld totalling $23.4 million that can be drawn on for amounts that remain
unpaid.
White Mountains' insurance subsidiaries extend credit to their
policyholders in the normal course of business, perform credit evaluations and
maintain allowances for potential credit losses. Concentration of credit risk
with respect to receivables is limited due to the large number of policyholders
and their dispersion across a multi-state area.
NOTE 17. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of Fund American's financial instruments have
been determined by using appropriate market information and valuation
methodologies. Considerable judgement is required to develop the estimates of
fair value. Therefore, the estimates provided herein are not necessarily
indicative of the amounts that could be realized in a current market exchange.
Carrying value equals or approximates fair value for FIXED MATURITY INVESTMENTS,
COMMON EQUITY SECURITIES, FINANCIAL INSTRUMENTS (DERIVATIVES), SHORT-TERM
INVESTMENTS, CASH, OTHER FINANCIAL ASSETS AND OTHER FINANCIAL LIABILITIES. For
each other class of financial instrument for which it is practicable to estimate
fair value, the following methods and assumptions were used to estimate such
value:
OTHER INVESTMENTS. Mortgage loans held for investment are carried at fair
value. Financial instruments are carried at fair value which is estimated based
on quoted market prices for those or similar investments. For all other
securities classified as other investments, fair values have been determined
using quoted market values or internal appraisal techniques.
MORTGAGE LOANS HELD FOR SALE. Fair values are estimated using quoted market
prices for securities backed by similar loans.
POOL LOAN PURCHASES. Fair values are estimated based on discounted cash
flow analyses using Source One's short-term incremental borrowing rate, quoted
market prices for securities backed by similar loans or actual prices at which
the loans were subsequently sold.
MORTGAGE CLAIMS RECEIVABLE. Fair values are estimated by discounting
anticipated future cash flows using Source One's short-term incremental
borrowing rate.
F-44
<PAGE>
DEBT. Fair value is estimated by discounting future cash flows using
incremental borrowing rates for similar types of borrowing arrangements or
quoted market prices.
OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS. Fair value for commitments to sell
mortgage loans is based on current settlement values for those commitments, net
of the face amounts of the commitments. Fair value for commitments to extend
credit is based on current quoted market prices for securities backed by similar
loans, net of the principal amounts of the commitments.
The carrying amounts and estimated fair values of Fund American's financial
instruments were as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1998 December 31, 1997
-------------------------- -------------------------
CARRYING FAIR Carrying Fair
Millions AMOUNT VALUE amount value
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS:
Fixed maturity investments $929.6 $929.6 $168.3 $168.3
Common equity securities 241.7 241.7 104.2 104.2
Other investments (excluding derivative instruments) 79.4 85.9 147.2 156.7
Derivative instruments:
Interest rate floor contracts 9.9 9.9 8.2 8.2
Interest rate swaps 4.9 4.9 - -
Principal-only swaps 2.7 2.7 12.5 12.5
Short-term investments 79.0 79.0 62.8 62.8
Cash 22.4 22.4 7.0 7.0
Mortgage loans held for sale 676.3 680.0 519.3 529.3
Pool loan purchases 165.0 165.1 149.8 150.2
Mortgage claims receivable, net (a) 27.2 26.5 35.6 34.9
Receivables from sales of servicing 73.8 73.8 27.3 27.3
Other financial assets 39.6 39.6 43.4 43.4
FINANCIAL LIABILITIES:
Short-term debt 748.5 748.5 571.4 571.4
Long-term debt 359.7 370.0 304.3 326.5
Other financial liabilities 5.9 5.9 22.3 22.3
OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS:
Mandatory forward commitments - .6 - 1.6
Commitments to extend credit expected to close - 11.1 - 6.5
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Excludes $5.9 million and $5.6 million of real estate owned in 1998 and
1997, respectively.
OTHER FINANCIAL ASSETS includes investment income receivable, accounts
receivable from securities sales, notes receivable and, for 1997, White River
Shares held for delivery upon exercise of existing employee stock options.
OTHER FINANCIAL LIABILITIES includes accrued interest payable, accounts
payable on securities purchases, dividends payable to
F-45
<PAGE>
shareholders and, for 1997, liability for existing employee stock options to
purchase White River Shares.
Fund American's investments in FSA Options and Preferred Stock,
Folksamerica Preferred Stock and Folksamerica Warrants are not presented in the
table above. These financial instruments are accounted for under the provisions
of SFAS No. 115 and are carried on the balance sheet at fair value. See Note 15.
The estimated fair value amounts for Fund American's financial instruments
have been determined using available market information and valuation
methodologies. Such estimates provided herein are not necessarily indicative of
the amounts that would be potentially realized in a current market exchange.
NOTE 18. RELATED PARTY TRANSACTIONS
For corporate travel purposes Fund American jointly owns two short-range
aircraft with Haverford Utah, LLC ("Haverford"). Messrs. Jack Byrne, Patrick M.
Byrne, a director of the Company and White Mountains, and Kemp are principals of
Haverford. Both aircraft were acquired from unaffiliated third parties during
1996. In exchange for Haverford's 20% ownership interest in the aircraft,
Haverford contributed capital equal to 20% of the total initial cost of the
aircraft and Haverford bears the full costs of its usage and maintenance of the
aircraft pursuant to a Joint Ownership Agreement dated September 16, 1996.
Prior to the Joint Ownership Agreement, Fund American was a party to a "dry
lease" agreement dated January 2, 1995, for the use of aircraft owned by
Haverford Transportation Inc. ("HTI") for corporate travel purposes. Messrs.
Jack Byrne and Kemp are the sole shareholders of HTI. During 1996 Fund American
paid HTI a total of $279,739 pursuant to the dry lease arrangement. The terms of
the agreement provided for the use of HTI's aircraft (excluding pilot and fuel)
for a fixed hourly charge of $200 for a single engine piston aircraft and $800
to $1,000 for a twin engine turbine aircraft. Based on the Company's experience
in operating comparable aircraft, the hourly operating charges incurred pursuant
to the HTI dry lease are considered to be representative of the actual hourly
costs of operating HTI's aircraft.
In September 1998 Fund American sold its 25% joint ownership interest in a
private jet operated by a third party to Haverford for cash proceeds of
$500,000. The purchase price received from Haverford represented a payment of
$437,500 for Fund American's joint ownership interest (which resulted in Fund
American recognizing a pretax gain on sale of approximately $75,000) and $62,500
for reimbursement of prepaid aircraft expenses which were required to be paid to
the operator prior to the sale to Haverford.
Mr. Howard Clark, Jr., a director of the Company, is Vice Chairman of
Lehman Brothers Inc. Lehman Brothers Inc. has, from time to time,
F-46
<PAGE>
provided various services to Fund American including investment banking
services, brokerage services, underwriting of debt and equity securities and
financial consulting services.
Mr. George J. Gillespie, III, a director of the Company, is a Partner in
the firm Cravath, Swaine & Moore, which has been retained by Fund American from
time to time to perform legal services.
Fund American believes that all the above transactions were on terms that
were reasonable and competitive. Additional transactions of this nature may be
expected to take place in the ordinary course of business in the future.
NOTE 19. SUBSEQUENT EVENT - SALE OF VGI
On February 11, 1999, White Mountains entered into a definitive agreement
to sell VGI (which includes Valley, Charter and WMIC but excludes Valley
National) to Unitrin, Inc.
The transaction is expected to close during the 1999 second quarter and is
subject to state regulatory approvals.
NOTE 20. SUBSEQUENT EVENT - SALE OF MORTGAGE BANKING ASSETS
On March 25, 1999 Fund American and Citicorp reached a definitive agreement
under which Citicorp will acquire a substantial amount of Fund American's
mortgage-banking related assets and certain of its mortgage banking liabilities.
Fund American will retain the Source One legal entity which will continue to own
all of Fund American's investments in FSA and certain other mortgage-related and
other assets and liabilities.
The transaction is expected to close during the 1999 second quarter and is
subject to various Federal, state and other regulatory approvals.
F-47
<PAGE>
REPORT ON MANAGEMENT'S RESPONSIBILITIES
The financial information included in this annual report, including the
audited consolidated financial statements, has been prepared by the management
of Fund American. The consolidated financial statements have been prepared in
accordance with generally accepted accounting principles and, where necessary,
include amounts based on informed estimates and judgments. In those instances
where there is no single specified accounting principle or standard, management
makes a choice from reasonable, accepted alternatives which are believed to be
most appropriate under the circumstances. Financial information presented
elsewhere in this report is consistent with that shown in the financial
statements.
Fund American maintains internal financial and accounting controls designed
to provide reasonable and cost effective assurance that assets are safeguarded
from loss or unauthorized use, that transactions are recorded in accordance with
management's policies and that financial records are reliable for preparing
financial statements. The internal controls structure is documented by written
policies and procedures which are communicated to all appropriate personnel and
is updated as necessary. Fund American's business ethics policies require
adherence to the highest ethical standards in the conduct of its business.
Compliance with these controls, policies and procedures is continuously
maintained and monitored by management.
KPMG LLP have audited the consolidated financial statements of Fund
American as of December 31, 1998 and 1997 and for each of the two years in the
period ended December 31, 1998, and issued their unqualified report thereon
dated February 12, 1999, which appears on page F-49. Ernst & Young LLP served as
Fund American's independent auditors as of December 31, 1996 and for the year
then ended, and issued their unqualified report thereon dated March 21, 1997,
which appears on page F-51. PricewaterhouseCoopers LLP served as the independent
auditors of Folksamerica during 1998 and Valley during 1996. The unqualified
reports issued with respect to 1998 audit of Folksamerica and the 1996 audit of
Valley have been included as exhibits to this report.
In connection with their audits, the independent auditors provide an
objective, independent review and evaluation of the structure of internal
controls to the extent they consider necessary. Management reviews all
recommendations of the independent auditors concerning the structure of internal
controls and responds to such recommendations with corrective actions, as
appropriate.
The Audit Committee of the Board, which is comprised solely of
non-management directors, has general responsibility for the oversight and
surveillance of the accounting, reporting and financial control practices of
Fund American. The Audit Committee, which reports to the full Board, annually
reviews the effectiveness of the independent auditors, Fund American's internal
auditors and management with respect to the financial reporting process and the
adequacy of internal
F-48
<PAGE>
controls. Both the internal auditors and the independent auditors have, at all
times, free access to the Audit Committee, without members of management
present, to discuss the results of their audits, the adequacy of internal
controls and any other matter that they believe should be brought to the
attention of the Audit Committee.
<TABLE>
<S> <C> <C>
K. Thomas Kemp Raymond Barrette Michael S. Paquette
Director, President Executive Vice President Senior Vice President
and Chief Executive Officer and Chief Financial Officer and Controller
</TABLE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
Fund American Enterprises Holdings, Inc.
We have audited the accompanying consolidated balance sheets of Fund American
Enterprises Holdings, Inc. and Subsidiaries (the "Company") as of December 31,
1998 and 1997, and the related consolidated income statements, statements of
shareholders' equity , and cash flows for the years then ended (collectively,
the "consolidated financial statements"). In connection with our audits of the
consolidated financial statements, we also have audited the 1998 and 1997
financial information in Schedule I Summary of investments other than
investments in related parties, Schedule II Condensed financial information of
the registrant, Schedule III Reinsurance, Schedule IV Valuation and qualifying
accounts, and Schedule VI Supplementary insurance information (collectively, the
"financial statement schedules"). These consolidated financial statements and
financial statement schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements and financial statement schedules based on our audits. We
did not audit the consolidated financial statements of Folksamerica Holding
Company, Inc. ("Folksamerica"), a wholly-owned subsidiary and Financial Security
Assurance Holdings, Ltd. ("FSA"), an 11.6 percent owned equity investee company.
The financial statements of Folksamerica reflect total assets constituting 37.2
percent and total revenues of 18.4 percent in 1998 of the related consolidated
totals. The Company's equity investment in FSA at December 31, 1998 and 1997 was
$119.7 million and $104.3 million, respectively, and its equity in earnings of
FSA were $13.8 million and $11.4 million for the years 1998 and 1997
respectively. The financial statements of Folksamerica and FSA were audited by
other auditors, PricewaterhouseCoopers LLP, whose reports were furnished to us,
and our opinion, insofar as it relates to the amounts included for Folksamerica
F-49
<PAGE>
and FSA, is based solely on the reports of other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the reports other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audits and the reports of the other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Fund American Enterprises Holdings,
Inc. and Subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles. Also in our opinion, based on our
audits and the reports of other auditors, the 1998 and 1997 information in the
related financial statement schedules, when considered in relation to the basic
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
/s/ KPMG LLP
February 12, 1999
Providence, Rhode Island
except for Note 20
which is as of
March 25, 1999
F-50
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
Fund American Enterprises Holdings, Inc.
We have audited the accompanying consolidated income statement of Fund
American Enterprises Holdings, Inc. and the related statements of shareholders'
equity and cash flows for the year ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our audit also
included the financial statement schedules listed at Item 14(d). Our
responsibility is to express an opinion on these financial statements and
schedules based on our audits. We did not audit the consolidated financial
statements of Valley Group, Inc., a wholly-owned subsidiary, representing
substantially all of the Company's consolidated insurance operations, which
statements reflected total revenues of $126.9 million for the year ended
December 31, 1996, and the consolidated financial statements of Financial
Security Assurance Holdings Ltd. ("FSA"), an equity method investee. The
Company's equity in FSA's earnings represents $7.8 million of total revenues
for the year ended December 31, 1996. Those statements were audited by other
auditors, PricewaterhouseCoopers LLP, whose reports have been furnished to us,
and our opinion, insofar as it relates to data included for Valley Group, Inc.
and FSA, with respect to the amounts in the two preceding sentences, is based
solely on the reports of the other auditors.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, based on our audit and the reports of other auditors, the
financial statements referred to above present fairly, in all material respects,
Fund American Enterprises Holdings, Inc.'s consolidated results of operations
and its cash flows for the year ended December 31, 1996, in conformity with
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedules when considered in relation to the basic financial
statements taken as a whole presents fairly in all material respects the
information set forth therein.
/s/ Ernst & Young LLP
New York, New York
March 21, 1997
F-51
<PAGE>
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected quarterly financial data for 1998 and 1997 is shown in the
following table. The quarterly financial data includes, in the opinion of
management, all recurring adjustments necessary for a fair presentation of the
results of operations for the interim periods. Certain 1998 and 1997 items have
been restated as a result of the Folksamerica transaction, see Note 2.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
1998 Three Months Ended (a) 1997 Three Months Ended (b)
---------------------------------- -----------------------------------
Millions, except per share amounts Dec. 31Sept. 30 June 30 Mar. 31 Dec. 31 Sept. 30 June 30 Mar. 31
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $197.2 $ 153.6 $ 117.6 $109.7 $ 81.9 $78.0 $ 69.5 $ 80.9
Expenses 187.2 130.0 106.7 95.2 91.0 76.4 80.9 80.3
------------------------------------------------------------------------
Pretax operating earnings (loss) 10.0 23.6 10.9 14.5 (9.1) 1.6 (11.4) .6
Net realized investment gains 5.2 61.6 1.7 2.5 49.1 21.8 16.2 9.6
------------------------------------------------------------------------
Pretax earnings 15.2 85.2 12.6 17.0 40.0 23.4 4.8 10.2
Income tax provision 5.5 30.1 5.0 7.2 14.7 7.1 3.2 4.4
------------------------------------------------------------------------
AFTER TAX EARNINGS 9.7 55.1 7.6 9.8 25.3 16.3 1.6 5.8
Loss on early extinguishment of debt, after tax - - - - - - (6.0) -
------------------------------------------------------------------------
NET INCOME (LOSS) 9.7 55.1 7.6 9.8 25.3 16.3 (4.4) 5.8
Other comprehensive net income, after tax 26.7 (73.1) 11.2 26.3 (20.1) 30.1 39.6 (7.9)
------------------------------------------------------------------------
COMPREHENSIVE NET INCOME (LOSS) $ 36.4 $(18.0) $ 18.8 $ 36.1 $ 5.2 $46.4 $ 35.2 $(2.1)
------------------------------------------------------------------------
------------------------------------------------------------------------
BASIC EARNINGS PER COMMON SHARE:
After tax earnings $ 1.51 $ 9.28 $ 1.13 $ 1.50 $ 3.89 $2.41 $ .09 $ .71
Net income (loss) 1.51 9.28 1.13 1.50 3.89 2.41 (.80) .71
Comprehensive net income (loss) 6.08 (3.22) 3.02 5.94 .68 7.12 5.10 (.43)
DILUTED EARNINGS PER COMMON SHARE:
After tax earnings 1.33 8.31 1.00 1.33 3.50 2.18 .08 .65
Net income (loss) 1.33 8.31 1.00 1.33 3.50 2.18 (.73) .65
Comprehensive net income (loss) 5.44 (2.90) 2.70 5.32 .61 6.44 4.63 (.40)
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) The quarterly amounts for the three month periods ended September 30, 1998
and December 31, 1998 reflect the consolidation of Folksamerica which
became a wholly-owned subsidiary on August 18, 1998. The quarterly amounts
for the three month period ended September 30, 1998 include $61.6 million
of pretax realized investment gains which served to increase third quarter
1998 net income by $40.0 million.
(b) The quarterly amounts for the three month period ended June 30, 1997
include a $9.2 million pretax loss on early extinguishment of Source One's
debt which served to decrease second quarter 1997 net income by $6.0
million. The quarterly amounts for the three month period ended December
31, 1997 include $49.1 million of pretax realized investment gains which
served to increase fourth quarter 1997 net income by $31.9 million.
F-52
<PAGE>
SCHEDULE I
FUND AMERICAN ENTERPRISES HOLDINGS, INC.
SUMMARY OF INVESTMENTS -- OTHER THAN
INVESTMENTS IN RELATED PARTIES
AT DECEMBER 31, 1998
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
Fair
Millions Cost Value
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Fixed maturities:
Bonds:
United States Government and government agencies and authorities $ 217.6 $ 222.0
States, municipalities and political subdivisions 189.1 191.8
Foreign governments 26.7 26.9
All other (primarily corporate bonds) 430.8 437.1
Redeemable preferred stock 51.8 51.8
----------------------
Total fixed maturities 916.1 929.6
----------------------
Common equity securities:
Banks, trust and insurance companies 28.3 35.5
All other 167.1 206.2
----------------------
Total common equity securities 195.4 241.7
Other investments 88.5 96.9
Short-term investments 79.0 79.0
- -------------------------------------------------------------------------------------------------
Total investments $ 1,279.0 $ 1,347.2
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
</TABLE>
NOTE - fair value was equal to carrying value at December 31, 1998.
FS-1
<PAGE>
SCHEDULE II
FUND AMERICAN ENTERPRISES HOLDINGS, INC.
(PARENT COMPANY ONLY)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
December 31,
--------------------
Millions 1998 1997
- ---------------------------------------------------------------------------
<S> <C> <C>
Assets:
Common equity securities and other investments $ - $ 49.2
Short-term investments, at amortized cost 10.8 2.3
Other assets 37.8 40.4
Investments in consolidated affiliates 972.2 843.1
--------------------
Total assets $ 1,020.8 $ 935.0
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
Liabilities:
Long-term debt with third parties $ 115.7 $ 115.6
Intercompany borrowings 53.0 30.0
Accounts payable and other liabilities 149.6 130.5
--------------------
Total liabilities 318.3 276.1
Shareholders' equity 702.5 658.9
--------------------
Total liabilities and shareholders' equity $ 1,020.8 $ 935.0
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
</TABLE>
CONDENSED INCOME STATEMENTS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
Year Ended December 31,
-------------------------------
Millions 1998 1997 1996
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues $ 2.2 $ 8.5 $ 11.7
Expenses 23.2 21.2 15.5
-------------------------------
Pretax operating loss (21.0) (12.7) (3.8)
Net realized investment gains (losses) 26.7 44.2 (3.1)
-------------------------------
Pretax earnings (loss) 5.7 31.5 (6.9)
Income tax provision (benefit) 8.3 16.3 .5
-------------------------------
Parent company only operating income (loss) (2.6) 15.2 (7.4)
Earnings from consolidated affiliates 84.8 27.8 16.0
-------------------------------
Consolidated net income 82.2 43.0 8.6
-------------------------------
Consolidated change in net unrealized investment gains,
after tax (8.9) 41.7 54.6
-------------------------------
Consolidated comprehensive net income $ 73.3 $ 84.7 $ 63.2
-------------------------------
-------------------------------
</TABLE>
FS-2
<PAGE>
SCHEDULE II
(CONTINUED)
FUND AMERICAN ENTERPRISES HOLDINGS, INC.
(PARENT COMPANY ONLY)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
1998
---------------------------------
Millions 1998 1997 1996
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income $ 82.2 $ 43.0 $ 8.6
Reconciliation of net income to net cash from operating
activities:
Net realized investment (gains) losses (26.7) (44.2) 3.1
Undistributed earnings from consolidated subsidiaries (78.0) (24.1) (12.3)
Undistributed earnings from unconsolidated insurance - (.4) (1.1)
affiliates
Changes in current income taxes receivable and 8.5 5.1 28.4
payable
Deferred income tax provision (benefit) .1 (3.7) .1
Dividends and return of capital distributions received - - 65.0
from subsidiaries
Other, net 1.7 (1.3) (19.6)
---------------------------------
Net cash (used for) provided from operating activities (12.2) (25.6) 72.2
- -------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Net (increase) decrease in short-term investments (8.5) (2.0) 28.2
Sales of investment securities - 119.4 134.4
Purchases of investment securities - - (108.9)
Investments in consolidated affiliates - (12.7) (25.2)
Investments in unconsolidated affiliates - - (27.7)
Sale of securities carried in other assets 26.8 - -
Purchases of fixed assets - - (.8)
---------------------------------
Net cash (used for) provided from investing activities 18.3 104.7 -
- -------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Purchases of common stock retired (19.5) (103.8) (66.3)
Intercompany borrowings from subsidiaries 23.0 30.0 -
Cash dividends paid to common shareholders (9.4) (5.3) (5.9)
---------------------------------
Net cash used for financing activities (5.9) (79.1) (72.2)
- -------------------------------------------------------------------------------------------------
Net increase in cash during year .2 - -
Cash balance at beginning of year - - -
- -------------------------------------------------------------------------------------------------
Cash balance at end of year $ .2 $ - $ -
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
</TABLE>
FS-3
<PAGE>
SCHEDULE III
FUND AMERICAN ENTERPRISES HOLDINGS, INC.
REINSURANCE
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E Column F
- ----------------------------------------------------------------------------------------------
Percentage
Ceded to Assumed of amount
Premiums earned Gross other from other Net assumed to
(Dollars in millions) amount companies companies amount net
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Years ended:
December 31, 1998:
Property and casualty insurance $ 153.9 $ (6.7) $ -- $ 160.6 -- %
Reinsurance (a) 2.4 (8.7) 91.7 85.4 107.4%
December 31,1997:
Property and casualty insurance 152.1 (6.8) -- 145.3 -- %
December 31,1996:
Property and casualty insurance 116.7 (7.0) -- 109.7 -- %
- ----------------------------------------------------------------------------------------------
</TABLE>
(a) Amounts shown in columns B through F represent activity for Folksamerica
from August 18, 1998 through December 31,1998.
FS-4
<PAGE>
SCHEDULE IV
FUND AMERICAN ENTERPRISES HOLDINGS, INC.
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E
- --------------------------------------------------------------------------------------------------------------
Additions
--------------------
Balance at Charged to Charged Balance
beginning costs and to other Deductions at end
Millions of period expenses accounts described of period
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Years ended:
December 31,1998:
Reinsurance recoverable:
Allowance for reinsurance balances (a) $ 1.2 $ -- $ -- $ -- (b) $ 1.2
Property and casualty insurance:
Allowance for uncollectible accounts .3 1.9 -- (1.8)(b) .4
Mortgage banking:
Allowance for mortgage loan losses 12.8 3.8 .1 (5.2)(b) 11.5
Impairment allowance for mortgage servicing 45.1 14.8 -- (24.3)(c) 35.6
December 31,1997:
Property and casualty insurance:
Allowance for uncollectible accounts .4 1.1 -- (1.2)(b) .3
Mortgage banking:
Allowance for mortgage loan losses 15.4 4.7 -- (7.3)(b) 12.8
Impairment allowance for mortgage servicing 28.9 22.4 -- (6.2)(c) 45.1
December 31,1996:
Property and casualty insurance:
Allowance for uncollectible accounts .8 .7 -- (1.1)(b) .4
Mortgage banking:
Allowance for mortgage loan losses 13.5 3.0 1.7 (2.8)(b) 15.4
Impairment allowance for mortgage servicing 28.0 8.2 -- (7.3)(c) 28.9
- --------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Represents allowances acquired from Folksamerica on August 18, 1998.
(b) Represents charge-offs of balances receivable.
(c) Represents charge-offs of balances receivable relating to recourse mortgage
loans and allowance reductions for mortgage servicing sales.
FS-5
<PAGE>
SCHEDULE V
FUND AMERICAN ENTERPRISES HOLDINGS, INC.
SUPPLEMENTARY INSURANCE INFORMATION
MILLIONS
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E Column F
- -----------------------------------------------------------------------------------------
Future
policy Other
Deferred benefits, policy
policy losses, claims
acquisition and loss Unearned benefits Premiums
Segment cost expenses premiums payable earned
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Years ended:
December 31, 1998:
Reinsurance (a) $20.7 $723.2 $71.2 $ -- $ 85.4
Property casualty insurance 14.7 88.5 81.9 -- 160.6
December 31, 1997:
Property and casualty insurance 14.3 71.9 78.0 -- 145.3
December 31, 1996:
Property and casualty insurance 13.2 65.4 72.6 -- 109.7
- -----------------------------------------------------------------------------------------
<CAPTION>
Column A Column G Column H Column I Column J Column K
- -----------------------------------------------------------------------------------------
Benefits,
claims,
losses, Amortization
Net and of deferred Other
investment settlement acquisition operating Premiums
Segment income (b) expenses costs expenses written
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Years ended:
December 31, 1998:
Reinsurance (a) $18.1 $ 59.7 29.1 $36.0 $ 73.7
Property casualty insurance 8.3 115.1 30.0 62.3 164.9
December 31, 1997:
Property and casualty insurance 9.0 97.1 27.5 58.9 150.8
December 31, 1996:
Property and casualty insurance 7.8 85.9 19.9 53.9 147.0
- ---------------------------------------------------------------------------------------------
</TABLE>
(a) The amounts shown for Reinsurance in columns F through K represent activity
for Folksamerica from August 18, 1998 through December 31, 1998.
(b) The amounts shown exclude net investment income relating to non-insurance
operations of $92.0 million, $56.1 million and $49.5 million for the twelve
months ended December 31,1 998, 1997 and 1996,respectively.
FS-6
<PAGE>
Exhibit 10a
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
$35,000,000
AMENDED AND RESTATED CREDIT AGREEMENT
AMONG
FUND AMERICAN ENTERPRISES HOLDINGS, INC.,
as Borrower,
THE LENDERS NAMED HEREIN
and
THE FIRST NATIONAL BANK OF CHICAGO,
as Agent
DATED AS OF
August 14, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
ARTICLE I
DEFINITIONS..............................................................................................1
ARTICLE II
THE CREDITS.............................................................................................15
2.1. ADVANCES.....................................................................................15
2.2. RATABLE LOANS................................................................................15
2.3. TYPES OF ADVANCES............................................................................15
2.4. FACILITY FEE; REDUCTIONS IN AGGREGATE COMMITMENT.............................................15
2.5. MINIMUM AMOUNT OF EACH ADVANCE...............................................................16
2.6. OPTIONAL PRINCIPAL PAYMENTS..................................................................16
2.7. METHOD OF SELECTING TYPES AND INTEREST PERIODS FOR NEW ADVANCES..............................16
2.8. CONVERSION AND CONTINUATION OF OUTSTANDING ADVANCES..........................................17
2.9. CHANGES IN INTEREST RATE, ETC................................................................17
2.10. RATES APPLICABLE AFTER DEFAULT...............................................................17
2.11. METHOD OF PAYMENT............................................................................18
2.12. NOTES........................................................................................18
2.13. INTEREST PAYMENT DATES; INTEREST AND FEE BASIS...............................................18
2.14. NOTIFICATION OF ADVANCES, INTEREST RATES, PREPAYMENTS AND COMMITMENT REDUCTIONS..............19
2.15. LENDING INSTALLATIONS........................................................................19
2.16. NON-RECEIPT OF FUNDS BY THE AGENT............................................................19
2.17. TAXES........................................................................................19
2.18. AGENT'S FEES.................................................................................20
ARTICLE III
CHANGE IN CIRCUMSTANCES.................................................................................21
3.1. YIELD PROTECTION.............................................................................21
3.2. CHANGES IN CAPITAL ADEQUACY REGULATIONS......................................................21
3.3. AVAILABILITY OF TYPES OF ADVANCES............................................................22
3.4. FUNDING INDEMNIFICATION......................................................................22
3.5. LENDER STATEMENTS; SURVIVAL OF INDEMNITY.....................................................22
ARTICLE IV
CONDITIONS PRECEDENT....................................................................................23
</TABLE>
<PAGE>
<TABLE>
<S> <C>
4.1. EFFECTIVENESS................................................................................23
4.2. EACH FUTURE ADVANCE..........................................................................24
ARTICLE V
REPRESENTATIONS AND WARRANTIES..........................................................................25
5.1. CORPORATE EXISTENCE AND STANDING.............................................................25
5.2. AUTHORIZATION AND VALIDITY...................................................................25
5.3. COMPLIANCE WITH LAWS AND CONTRACTS...........................................................25
5.4. GOVERNMENTAL CONSENTS........................................................................26
5.5. FINANCIAL STATEMENTS.........................................................................26
5.6. MATERIAL ADVERSE CHANGE......................................................................26
5.7. TAXES........................................................................................26
5.8. LITIGATION AND CONTINGENT OBLIGATIONS........................................................27
5.9. CAPITALIZATION...............................................................................27
5.10. ERISA........................................................................................27
5.11. DEFAULTS.....................................................................................27
5.12. FEDERAL RESERVE REGULATIONS..................................................................28
5.13. INVESTMENT COMPANY...........................................................................28
5.14. CERTAIN FEES.................................................................................28
5.15. SOLVENCY.....................................................................................28
5.16. MATERIAL AGREEMENTS..........................................................................28
5.17. ENVIRONMENTAL LAWS...........................................................................28
5.18. INSURANCE....................................................................................29
5.19. DISCLOSURE...................................................................................29
5.20. YEAR 2000. ..................................................................................29
ARTICLE VI
COVENANTS...............................................................................................29
6.1. FINANCIAL REPORTING..........................................................................29
6.2. USE OF PROCEEDS..............................................................................31
6.3. NOTICE OF DEFAULT............................................................................31
6.4. CONDUCT OF BUSINESS..........................................................................31
6.5. TAXES........................................................................................32
6.6. INSURANCE....................................................................................32
6.7. COMPLIANCE WITH LAWS.........................................................................32
6.8. MAINTENANCE OF PROPERTIES....................................................................32
6.9. INSPECTION...................................................................................32
6.10. DIVIDENDS....................................................................................32
6.11. INDEBTEDNESS.................................................................................33
6.12. MERGER.......................................................................................33
6.13. CONTINGENT OBLIGATIONS.......................................................................34
</TABLE>
-iii-
<PAGE>
<TABLE>
<S> <C>
6.14. LIENS........................................................................................34
6.15. INVESTMENTS AND PURCHASES....................................................................35
6.16. AFFILIATES...................................................................................36
6.17. ENVIRONMENTAL MATTERS........................................................................36
6.18. CHANGE IN CORPORATE STRUCTURE; FISCAL YEAR...................................................36
6.19. INCONSISTENT AGREEMENTS......................................................................37
6.20. FINANCIAL COVENANTS - MINIMUM NET WORTH.....................................................37
6.21. TAX CONSOLIDATION............................................................................37
6.22. ERISA COMPLIANCE.............................................................................37
6.23. YEAR 2000....................................................................................38
ARTICLE VII
DEFAULTS................................................................................................38
ARTICLE VIII
ACCELERATION, WAIVERS, AMENDMENTS AND REMEDIES..........................................................40
8.1. ACCELERATION.................................................................................40
8.2. AMENDMENTS...................................................................................40
8.3. PRESERVATION OF RIGHTS.......................................................................41
ARTICLE IX
GENERAL PROVISIONS......................................................................................41
9.1. SURVIVAL OF REPRESENTATIONS..................................................................41
9.2. GOVERNMENTAL REGULATION......................................................................41
9.3. TAXES........................................................................................41
9.4. HEADINGS.....................................................................................41
9.5. ENTIRE AGREEMENT.............................................................................41
9.6. SEVERAL OBLIGATIONS; BENEFITS OF THIS AGREEMENT..............................................41
9.7. EXPENSES; INDEMNIFICATION....................................................................42
9.8. NUMBERS OF DOCUMENTS.........................................................................42
9.9. ACCOUNTING...................................................................................42
9.10. SEVERABILITY OF PROVISIONS...................................................................42
9.11. NONLIABILITY OF LENDERS......................................................................42
9.12. CHOICE OF LAW................................................................................43
9.13. CONSENT TO JURISDICTION......................................................................43
9.14. WAIVER OF JURY TRIAL.........................................................................43
9.15. DISCLOSURE...................................................................................43
9.16. COUNTERPARTS.................................................................................44
9.17. TREATMENT OF CERTAIN INFORMATION: CONFIDENTIALITY............................................44
</TABLE>
-iv-
<PAGE>
<TABLE>
<S> <C>
ARTICLE X
THE AGENT...............................................................................................44
10.1. APPOINTMENT..................................................................................45
10.2. POWERS.......................................................................................45
10.3. GENERAL IMMUNITY.............................................................................45
10.4. NO RESPONSIBILITY FOR LOANS, RECITALS, ETC...................................................45
10.5. ACTION ON INSTRUCTIONS OF LENDERS............................................................45
10.6. EMPLOYMENT OF AGENTS AND COUNSEL.............................................................46
10.7. RELIANCE ON DOCUMENTS; COUNSEL...............................................................46
10.8. AGENT'S REIMBURSEMENT AND INDEMNIFICATION....................................................46
10.9. NOTICE OF DEFAULT............................................................................46
10.10. RIGHTS AS A LENDER...........................................................................46
10.11. LENDER CREDIT DECISION.......................................................................47
10.12. SUCCESSOR AGENT..............................................................................47
ARTICLE XI
SETOFF; RATABLE PAYMENTS................................................................................47
11.1. SETOFF.......................................................................................47
11.2. RATABLE PAYMENTS.............................................................................48
ARTICLE XII
BENEFIT OF AGREEMENT; ASSIGNMENTS; PARTICIPATIONS.......................................................48
12.1. SUCCESSORS AND ASSIGNS.......................................................................48
12.2. PARTICIPATIONS...............................................................................48
12.2.1. PERMITTED PARTICIPANTS; EFFECT. ...................................................48
12.2.2. VOTING RIGHTS.......................................................................49
12.2.3. BENEFIT OF SETOFF...................................................................49
12.3. ASSIGNMENTS..................................................................................49
12.3.1. PERMITTED ASSIGNMENTS...............................................................49
12.3.2. EFFECT; EFFECTIVE DATE..............................................................49
12.4. DISSEMINATION OF INFORMATION.................................................................50
12.5. TAX TREATMENT................................................................................50
ARTICLE XIII
NOTICES.................................................................................................50
13.1. GIVING NOTICE................................................................................50
13.2. CHANGE OF ADDRESS............................................................................50
</TABLE>
-v-
<PAGE>
EXHIBITS
Exhibit A (Article 1) Note
Exhibit B (Section 6.1(c)) Compliance Certificate
Exhibit C (Section 12.3.1) Assignment Agreement
SCHEDULES
Schedule 5.3 - Approvals and Consents
Schedule 5.8 - Material Contingent Obligations
Schedule 5.9 - Capitalization and Subsidiaries
Schedule 5.10 - ERISA
Schedule 5.16 - Material Restrictions
Schedule 6.14 - Liens
Schedule 6.15 - Investment Commitments
-vi-
<PAGE>
AMENDED AND RESTATED CREDIT AGREEMENT
This Amended and Restated Credit Agreement, dated as of August 14,
1998, is among FUND AMERICAN ENTERPRISES HOLDINGS, INC., a Delaware corporation,
the Lenders and THE FIRST NATIONAL BANK OF CHICAGO, individually and as Agent.
R E C I T A L S:
A. The Borrower, the Lenders and the Agent are party to that certain
$35,000,000 credit agreement, dated as of July 31, 1997 (the "Existing Credit
Agreement").
B. The Borrower has requested that the Existing Credit Agreement be
amended and restated in order to extend the maturity and to make certain other
amendments to the Existing Credit Agreement.
C. The Borrower, the Lenders and the Agent desire to amend and restate
the Existing Credit Agreement on the terms and conditions set forth below to
accomplish such amendments.
NOW, THEREFORE, in consideration of the mutual covenants and
undertakings herein contained, and for other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, the Borrower, the
Lenders and the Agent hereby agree as follows:
ARTICLE I
DEFINITIONS
As used in this Agreement:
"ABR Advance" means an Advance which bears interest at the Alternate
Base Rate.
"Advance" means a borrowing pursuant to SECTION 2.1 consisting of the
aggregate amount of the several Loans made on the same Borrowing Date by the
Lenders to the Borrower of the same Type and, in the case of Eurodollar
Advances, for the same Interest Period.
"Affiliate" of any Person means any other Person directly or indirectly
controlling, controlled by or under common control with such Person. A Person
shall be deemed to control another Person if the controlling Person owns 20% or
more of any class of voting securities (or other ownership interests) of the
controlled Person or possesses, directly or indirectly, the power to direct or
cause the direction of the management or policies of the controlled Person,
whether through ownership of stock, by contract or otherwise.
<PAGE>
"Agent" means First Chicago in its capacity as agent for the Lenders
pursuant to ARTICLE X, and not in its individual capacity as a Lender, and any
successor Agent appointed pursuant to ARTICLE X.
"Aggregate Commitment" means the aggregate of the Commitments of all
the Lenders hereunder. The initial Aggregate Commitment is $35,000,000.
"Agreement" means this Amended and Restated Credit Agreement, as it may
be amended, modified or restated and in effect from time to time.
"Agreement Accounting Principles" means generally accepted accounting
principles as in effect from time to time; PROVIDED, HOWEVER, that if any
changes in accounting principles from those in effect on the date of this
Agreement are adopted which result in a material change in the method of
calculation of any of the financial covenants, standards or terms in this
Agreement, the parties agree to enter into negotiations to determine whether
such provisions require amendment and, if so, the terms of such amendment so as
to equitably reflect such changes. Until a resolution thereof is reached, all
calculations made for the purposes of determining compliance with the terms of
this Agreement shall be made by application of generally accepted accounting
principles in effect on the date of this Agreement applied, to the extent
applicable, on a basis consistent with that used in the preparation of the
financial statements furnished to the Lenders pursuant to SECTION 5.5 hereof.
"Alternate Base Rate" means, for any day, a rate of interest per annum
equal to the higher of (a) the Corporate Base Rate for such day, and (b) the sum
of the Federal Funds Effective Rate for such day plus 1/2% per annum, in each
case changing when and as the Corporate Base Rate and the Federal Funds
Effective Rate, as the case may be, changes.
"Applicable Credit Rating" shall mean the highest rating level assigned
by S&P or Moody's, as the case may be, to any long-term senior debt of the
Borrower which ranks on parity, as to payment and security, with the Loans and
the obligations of the Borrower under ARTICLE XIV.
"Applicable Eurodollar Margin" means the applicable percentage set
forth below based upon the Level then in effect:
<TABLE>
<CAPTION>
Level Margin
----- ------
<S> <C>
Level I .175%
Level II .190%
Level III .230%
Level IV .270%
Level V .300%
Level VI .375%
Level VII .550%
</TABLE>
-2-
<PAGE>
"Applicable Facility Fee Margin" means the applicable percentage set
forth below based upon the Level then in effect:
<TABLE>
<CAPTION>
Level Margin
----- ------
<S> <C>
Level I .050%
Level II .060%
Level III .070%
Level IV .080%
Level V .100%
Level VI .125%
Level VII .200%
</TABLE>
"Article" means an article of this Agreement unless another document is
specifically referenced.
"Authorized Officer" means, with respect to the Borrower, any of the
chief executive officer, president, chief financial officer, treasurer or
controller thereof, acting singly.
"Bankruptcy Code" means Title 11, United States Code, sections 1 ET
SEQ., as the same may be amended from time to time, and any successor thereto or
replacement therefor which may be hereafter enacted.
"Benefit Plan" means any deferred benefit plan for the benefit of
present, future or former employees, whether or not such benefit plan is a Plan.
"Borrower" means Fund American Enterprises Holdings, Inc., a Delaware
corporation, and its successors and assigns.
"Borrowing Date" means a date on which an Advance is made hereunder.
"Borrowing Notice" is defined in SECTION 2.7.
"Business Day" means (a) with respect to any borrowing, payment or rate
selection of Eurodollar Advances, a day (other than a Saturday or Sunday) on
which banks generally are open in Chicago for the conduct of substantially all
of their commercial lending activities and on which dealings in United States
dollars are carried on in the London interbank market, and (b) for all other
purposes, a day (other than a Saturday or Sunday) on which banks generally are
open in Chicago for the conduct of substantially all of their commercial lending
activities.
"Capitalized Lease" of a Person means any lease of Property by such
Person as lessee which would be capitalized on a balance sheet of such Person
prepared in accordance with Agreement Accounting Principles.
-3-
<PAGE>
"Capitalized Lease Obligations" of a Person means the amount of the
obligations of such Person under Capitalized Leases which would be shown as a
liability on a balance sheet of such Person prepared in accordance with
Agreement Accounting Principles.
"Cash Equivalents" means Investments maturing within one (1) year from
the date of investment (in the case of Investments referenced in CLAUSES (A)
through (E)) in (a) certificates of deposit, Eurodollar time deposits and other
interest bearing deposits or accounts with United States commercial banks having
a combined capital and surplus of at least $500,000,000 and rated C or better by
Keefe Bruyette and Associates or with any Lender, (b) certificates of deposit,
other interest bearing accounts or deposits and demand deposits with other
United States commercial banks, which deposits and accounts are in amounts fully
insured by the Federal Deposit Insurance Corporation, (c) obligations issued or
unconditionally guaranteed by the United States government or issued by an
agency thereof and backed by the full faith and credit of the United States, (d)
direct obligations issued by any state of the United States or any political
subdivision thereof which have the highest rating obtainable from S&P on the
date of investment, (e) commercial paper rated A-1 or better by S&P and P-1 or
better by Moody's, (f) shares in an open-end management investment company with
U.S. dollar denominated investments in fixed income obligations, including
repurchase agreements, fixed time deposits and other obligations, with a credit
quality comparable to any of the Investments described in CLAUSES (A) through
(E) above and a dollar weighted average maturity of not more than one (1) year,
and for the calculation of this dollar weighted average maturity, certain
instruments which have a variable rate of interest readjusted no less frequently
than annually are deemed to have a maturity equal to the period remaining until
the next readjustment of the interest rate and (g) money market mutual funds
identified by the valuation office of the NAIC as requiring no investment
reserve.
"Change" is defined in SECTION 3.2.
"Change in Control" means (a) the acquisition by any "person" or
"group" (as such terms are used in Section 13(d) and 14(d)(2) of the Securities
Exchange Act of 1934, as amended) (other than John J. Byrne or any Plan or any
Benefit Plan of the Borrower or any of its Subsidiaries), including without
limitation any acquisition effected by means of any transaction contemplated by
SECTION 6.12, of beneficial ownership (within the meaning of Rule 13d-3 of the
Securities and Exchange Commission under the Securities Exchange Act of 1934, as
amended) of 25% or more of the outstanding shares of voting stock of the
Borrower, or (b) during any period of twelve (12) consecutive calendar months,
commencing on the date of the Agreement, the ceasing of those individuals (the
"CONTINUING DIRECTORS") who (i) were directors of the Borrower on the first day
of each such period or (ii) subsequently became directors of the Borrower and
whose initial election or initial nomination for election subsequent to that
date was approved by a majority of the Continuing Directors then on the board of
directors of the Borrower to constitute a majority of the board of directors of
the Borrower, or (c) during any period of twelve (12) consecutive calendar
months, commencing on the date of this Agreement, the ceasing of individuals who
hold an office possessing the title Senior Vice President or such title that
ranks senior to a Senior Vice President (collectively, "Senior Management") of
the Borrower on the first day of each such period to constitute a majority of
the Senior Management of the Borrower.
-4-
<PAGE>
"Code" means the Internal Revenue Code of 1986, as amended, reformed or
otherwise modified from time to time.
"Commitment" means, for each Lender, the obligation of such Lender to
make Loans not exceeding the amount set forth opposite its signature below and
as set forth in any Notice of Assignment relating to any assignment which has
become effective pursuant to SECTION 12.3.2, as such amount may be modified from
time to time pursuant to the terms hereof.
"Consolidated" or "consolidated", when used in connection with any
calculation, means a calculation to be determined on a consolidated basis for a
Person and its Subsidiaries in accordance with Agreement Accounting Principles.
"Consolidated Person" means, for the taxable year of reference, each
Person which is a member of the affiliated group of the Borrower if Consolidated
returns are or shall be filed for such affiliated group for federal income tax
purposes or any combined or unitary group of which the Borrower is a member for
state income tax purposes.
"Contingent Obligation" of a Person means any agreement, undertaking or
arrangement by which such Person assumes, guarantees, endorses, contingently
agrees to purchase or provide funds for the payment of, or otherwise becomes or
is contingently liable upon, the obligation or liability of any other Person, or
agrees to maintain the net worth or working capital or other financial condition
of any other Person, or otherwise assures any creditor of such other Person
against loss, including, without limitation, any comfort letter, operating
agreement or take-or-pay contract or application for a Letter of Credit,
excluding however (a) insurance policies and insurance contracts issued in the
ordinary course of business and (b) any financial guarantees issued by FSA.
"Controlled Group" means all members of a controlled group of
corporations and all trades or businesses (whether or not incorporated) under
common control which, together with the Borrower or any of its Subsidiaries, are
treated as a single employer under Section 414 of the Code.
"Conversion/Continuation Notice" is defined in SECTION 2.8.
"Corporate Base Rate" means a rate per annum equal to the corporate
base rate of interest publicly announced by First Chicago from time to time,
changing when and as said corporate base rate changes. The Corporate Base Rate
is a reference rate and does not necessarily represent the lowest or best rate
of interest actually charged to any customer. First Chicago may make commercial
loans or other loans at rates of interest at, above or below the Corporate Base
Rate.
"Default" means an event described in ARTICLE VII.
"Environmental Laws" is defined in SECTION 5.18.
-5-
<PAGE>
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended from time to time.
"Eurodollar Advance" means an Advance which bears interest at the
Eurodollar Rate.
"Eurodollar Base Rate" means, with respect to a Eurodollar Advance for
the relevant Interest Period, the rate determined by the Agent to be the rate at
which deposits in U.S. dollars are offered by First Chicago to first-class banks
in the London interbank market at approximately 11 a.m. (London time) two (2)
Business Days prior to the first day of such Interest Period, in the approximate
amount of First Chicago's relevant Eurodollar Advance and having a maturity
approximately equal to such Interest Period.
"Eurodollar Rate" means, with respect to a Eurodollar Advance for the
relevant Interest Period, the sum of (a) the quotient of (i) the Eurodollar Base
Rate applicable to such Interest Period, divided by (ii) one minus the Reserve
Requirement (expressed as a decimal) applicable to such Interest Period, plus
(b) the Applicable Eurodollar Margin. The Eurodollar Rate shall be rounded to
the next higher multiple of 1/100 of 1% if the rate is not such a multiple.
"Existing Credit Agreement" is defined in the recitals to this
Agreement.
"Facility Fee" is defined in SECTION 2.4(A).
"Federal Funds Effective Rate" means, for any day, an interest rate per
annum equal to the weighted average of the rates on overnight Federal funds
transactions with members of the Federal Reserve System arranged by Federal
funds brokers on such day, as published for such day (or, if such day is not a
Business Day, for the immediately preceding Business Day) by the Federal Reserve
Bank of New York, or, if such rate is not so published for any day which is a
Business Day, the average of the quotations at approximately 10 a.m. (Chicago
time) on such day on such transactions received by the Agent from three Federal
funds brokers of recognized standing selected by the Agent in its sole
discretion.
"Financial Statements" is defined in SECTION 5.5.
"First Chicago" means The First National Bank of Chicago in its
individual capacity, and its successors.
"Fiscal Quarter" means one of the four three-month accounting periods
comprising a Fiscal Year.
"Fiscal Year" means the twelve-month accounting period ending December
31 of each year.
"Folksamerica" means Folksamerica Holding Company, Inc., a New York
corporation.
"Folksamerica Assumption" is defined in the definition of Folksamerica
Transaction.
-6-
<PAGE>
"Folksamerica Transaction" means that certain transaction by which (a)
White Mountains and/or Fund American Enterprises, Inc. (formerly known as Fund
American Enterprises II, Inc.), a Delaware corporation, acquires all of the
outstanding capital stock of Folksamerica not already owned by White Mountains,
(b) the Borrower assumes the obligations of each of Folksam Omsesidig
Sakforsakring (Sweden) and Samvirke Skadeforsikring AS (Norway) (collectively,
the "Folksamerica Guarantors") to guarantee the obligations of Folksamerica (the
"Folksamerica Guaranty") under a certain $70,000,000 ($56,000,000 of which is
outstanding on the date hereof) loan agreement with Swedbank (Sparbanken Sverige
AB (publ)), New York branch, dated as of November 12, 1991, as amended, and (c)
the Borrower indemnifies the Folksamerica Guarantors and their respective
affiliates, successors and assigns with respect to various matters relating to
the Folksamerica Guaranty. "Folksamerica Assumption" means the obligations of
the Borrower under CLAUSES (B) and (C).
"FSA" means Financial Security Assurance Holdings Ltd., a New York
corporation.
"FSA Amount" means an amount equal to that which is ultimately utilized
by SOMSC on or before May 13, 1999 to excercise certain options, in existence on
the date hereof, on the capital stock of FSA, such amount not to exceed
$18,000,000.
"Funded Indebtedness" means Indebtedness of the type described in
clauses (a), (d), (e) and (h) of the definition "Indebtedness".
"Governmental Authority" means any government (foreign or domestic) or
any state or other political subdivision thereof or any governmental body,
agency, authority, department or commission (including without limitation any
taxing authority or political subdivision) or any instrumentality or officer
thereof (including without limitation any court or tribunal) exercising
executive, legislative, judicial, regulatory or administrative functions of or
pertaining to government and any corporation, partnership or other entity
directly or indirectly owned or controlled by or subject to the control of any
of the foregoing.
"Guaranteed Obligations" means, collectively, (i) the Obligations and
(ii) all Rate Hedging Obligations owing to one or more Lenders.
"Hazardous Materials" is defined in SECTION 5.18.
"Indebtedness" of a Person means such Person's (a) obligations for
borrowed money, (b) obligations representing the deferred purchase price of
Property or services (other than accounts payable arising in the ordinary course
of such Person's business payable on terms customary in the trade), (c)
obligations, whether or not assumed, secured by Liens or payable out of the
proceeds or production from Property now or hereafter owned or acquired by such
Person, (d) obligations which are evidenced by notes, acceptances, or similar
instruments, (e) Capitalized Lease Obligations, (f) Rate Hedging Obligations,
(g) Contingent Obligations, (h) obligations for which such Person is obligated
pursuant to or in respect of a Letter of Credit and (i) repurchase obligations
or liabilities of such Person with respect to accounts or notes receivable sold
by such Person.
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"Insurance Subsidiaries" means Subsidiaries which are engaged in the
insurance business as an issuer or underwriter of insurance policies and/or
insurance contracts.
"Interest Period" means, with respect to a Eurodollar Advance, a period
of one, two, three or six months commencing on a Business Day selected by the
Borrower pursuant to this Agreement. Such Interest Period shall end on (but
exclude) the day which corresponds numerically to such date one, two, three or
six months thereafter; PROVIDED, HOWEVER, that if there is no such numerically
corresponding day in such next, second, third or sixth succeeding month, such
Interest Period shall end on the last Business Day of such next, second, third
or sixth succeeding month. If an Interest Period would otherwise end on a day
which is not a Business Day, such Interest Period shall end on the next
succeeding Business Day; PROVIDED, HOWEVER, that if said next succeeding
Business Day falls in a new calendar month, such Interest Period shall end on
the immediately preceding Business Day.
"Investment" of a Person means any loan, advance (other than
commission, travel and similar advances to officers and employees made in the
ordinary course of business), extension of credit (other than accounts
receivable arising in the ordinary course of business on terms customary in the
trade) or contribution of capital by such Person; stocks, bonds, mutual funds,
partnership interests, notes, debentures or other securities owned by such
Person; any deposit accounts and certificate of deposit owned by such Person;
and structured notes, derivative financial instruments and other similar
instruments or contracts owned by such Person.
"Lenders" means the lending institutions listed on the signature pages
of this Agreement and their respective successors and assigns.
"Lending Installation" means, with respect to a Lender or the Agent,
any office, branch, subsidiary or affiliate of such Lender or the Agent.
"Letter of Credit" of a Person means a letter of credit or similar
instrument which is issued upon the application of such Person or upon which
such Person is an account party or for which such Person is in any way liable.
"Level" means, and includes, Level I, Level II, Level III, Level IV,
Level V, Level VI or Level VII, whichever is in effect at the relevant time.
"Level I" shall exist at any time the Applicable Credit Rating of S&P
is equal to or greater than A+ OR the Applicable Credit Rating of Moody's is
equal to or greater than A1.
"Level II" shall exist at any time (a) the Applicable Credit Rating of
S&P is equal to or greater than A OR the Applicable Credit Rating of Moody's is
equal to or greater than A2 and (b) Level I does not exist.
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"Level III" shall exist at any time (a) the Applicable Credit Rating of
S&P is equal to or greater than A- OR the Applicable Credit Rating of Moody's is
equal to or greater than A3 and (b) Levels I and II do not exist.
"Level IV" shall exist at any time (a) the Applicable Credit Rating of
S&P is equal to or greater than BBB+ OR the Applicable Credit Rating of Moody's
is equal to or greater than Baa1 and (b) Levels I, II and III do not exist.
"Level V" shall exist at any time (a) the Applicable Credit Rating of
S&P is equal to or greater than BBB OR the Applicable Credit Rating of Moody's
is equal to or greater than Baa2 and (b) Levels I, II, III and IV do not exist.
"Level VI" shall exist at any time the Applicable Credit Rating of S&P
is BBB- AND the Applicable Credit Rating of Moody's is Baa3.
"Level VII" shall exist at any time the Applicable Credit Rating of S&P
is less than BBB- OR the Applicable Credit Rating of Moody's is less than Baa3
OR at any time neither S&P nor Moody's assigns an Applicable Credit Rating.
"Lien" means any security interest, lien (statutory or other),
mortgage, pledge, hypothecation, assignment, deposit arrangement, encumbrance or
preference, priority or other security agreement or preferential arrangement of
any kind or nature whatsoever (including, without limitation, the interest of a
vendor or lessor under any conditional sale, Capitalized Lease or other title
retention agreement), save in respect of liabilities and obligations arising out
of the underwriting of insurance policies and contracts of insurance.
"Loan" means, with respect to a Lender, such Lender's portion of any
Advance and "Loans" means, with respect to the Lenders, the aggregate of all
Advances.
"Loan Documents" means this Agreement, the Notes and the other
documents and agreements contemplated hereby and executed by the Borrower in
favor of the Agent or any Lender.
"Margin Stock" has the meaning assigned to that term under
Regulation U.
"Material Adverse Effect" means a material adverse effect on (a) the
business, Property, condition (financial or other), performance, results of
operations, or prospects of the Borrower and its Subsidiaries taken as a whole,
(b) the ability of the Borrower or any Subsidiary to perform its obligations
under the Transaction Documents, or (c) the validity or enforceability of any of
the Transaction Documents or the rights or remedies of the Agent or the Lenders
thereunder.
"Maturity Date" means February 12, 2000.
"Moody's" means Moody's Investors Services, Inc., and any successor
thereto.
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"Multiemployer Plan" means a Plan maintained pursuant to a collective
bargaining agreement or any other arrangement to which the Borrower or any
member of the Controlled Group is a party to which more than one employer is
obligated to make contributions.
"NAIC" means the National Association of Insurance Commissioners or any
successor thereto, or in lieu thereof, any other association, agency or other
organization performing advisory, coordination or other like functions among
insurance departments, insurance commissioners and similar Governmental
Authorities of the various states of the United States toward the promotion of
uniformity in the practices of such Governmental Authorities.
"Net Worth" means, with respect to any Person, at any date the
consolidated shareholders' equity of such Person and its Consolidated
Subsidiaries determined in accordance with Agreement Accounting Principles (but
excluding the effect of Statement of Financial Accounting Standards No.
115).
"Non-Excluded Taxes" is defined in SECTION 2.17(A).
"Note" means a promissory note in substantially the form of EXHIBIT A
hereto, with appropriate insertions, duly executed and delivered to the Agent by
the Borrower and payable to the order of a Lender in the amount of its
Commitment, including any amendment, modification, renewal or replacement of
such promissory note.
"Notice of Assignment" is defined in SECTION 12.3.2.
"Obligations" means all unpaid principal of and accrued and unpaid
interest on the Notes, all accrued and unpaid fees and all expenses,
reimbursements, indemnities and other obligations of the Borrower to the Lenders
or to any Lender, the Agent or any indemnified party hereunder arising under any
of the Transaction Documents.
"Participants" is defined in SECTION 12.2.1.
"Payment Date" means the last day of each March, June, September and
December.
"PBGC" means the Pension Benefit Guaranty Corporation or any successor
thereto.
"Person" means any natural person, corporation, firm, joint venture,
partnership, association, enterprise, trust or other entity or organization, or
any government or political subdivision or any agency, department or
instrumentality thereof.
"Plan" means an employee pension benefit plan, as defined in Section
3(2) of ERISA, as to which the Borrower or any member of the Controlled Group
may have any liability.
"Proceeding" is defined in SECTION 5.18.
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"Property" of a Person means any and all property, whether real,
personal, tangible, intangible, or mixed, of such Person, or other assets owned,
leased or operated by such Person.
"pro-rata" means, when used with respect to a Lender, and any described
aggregate or total amount, an amount equal to such Lender's pro-rata share or
portion based on its percentage of the Aggregate Commitment or if the Aggregate
Commitment has been terminated, its percentage of the aggregate principal amount
of outstanding Advances.
"Purchase" means any transaction, or any series of related
transactions, consummated on or after the date of this Agreement, by which the
Borrower or any of its Subsidiaries (a) acquires any going business or all or
substantially all of the assets of any firm, corporation or division or line of
business thereof, whether through purchase of assets, merger or otherwise, or
(b) directly or indirectly acquires (in one transaction or as the most recent
transaction in a series of transactions) at least a majority (in number of
votes) of the securities of a corporation which have ordinary voting power for
the election of directors (other than securities having such power only by
reason of the happening of a contingency) or a majority (by percentage or voting
power) of the outstanding partnership interests of a partnership or membership
interests of a limited liability company.
"Purchasers" is defined in SECTION 12.3.1.
"Rate Hedging Obligations" of a Person means any and all obligations of
such Person, whether absolute or contingent and howsoever and whensoever
created, arising, evidenced or acquired (including all renewals, extensions and
modifications thereof and substitutions therefor), under (a) any and all
agreements, devices or arrangements designed to protect at least one of the
parties thereto from the fluctuations of interest rates, exchange rates or
forward rates applicable to such party's assets, liabilities or exchange
transactions, including, but not limited to, dollar-denominated or
cross-currency interest rate exchange agreements, forward currency exchange
agreements, interest rate cap or collar protection agreements, forward rate
currency or interest rate options, puts and warrants, and (b) any and all
cancellations, buy backs, reversals, terminations or assignments of any of the
foregoing.
"Regulation D" means Regulation D of the Board of Governors of the
Federal Reserve System as from time to time in effect and any successor thereto
or other regulation or official interpretation of said Board of Governors
relating to reserve requirements applicable to depositary institutions.
"Regulation T" means Regulation T of the Board of Governors of the
Federal Reserve System as from time to time in effect and shall include any
successor or other regulation or official interpretation of such Board of
Governors relating to the extension of credit by securities brokers and dealers
for the purpose of purchasing or carrying margin stocks applicable to such
Persons.
"Regulation U" means Regulation U of the Board of Governors of the
Federal Reserve System as from time to time in effect and any successor or other
regulation or official interpretation
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of said Board of Governors relating to the extension of credit by banks for the
purpose of purchasing or carrying margin stocks applicable to such Persons.
"Regulation X" means Regulation X of the Board of Governors of the
Federal Reserve System as from time to time in effect and shall include any
successor or other regulation or official interpretation of said Board of
Governors relating to the extension of credit by the specified lenders for the
purpose of purchasing or carrying margin stocks applicable to such Persons.
"Release" is defined in the Comprehensive Environmental Response,
Compensation and Liability Act, as amended, 42 U.S.C. 39601 ET SEQ.
"Reportable Event" means a reportable event as defined in Section 4043
of ERISA and the regulations issued under such section, with respect to a Plan,
excluding, however, such events as to which the PBGC has by regulation waived
the requirement of Section 4043(a) of ERISA that it be notified within thirty
(30) days of the occurrence of such event; PROVIDED, that a failure to meet the
minimum funding standard of Section 412 of the Code and of Section 302 of ERISA
shall be a Reportable Event regardless of the issuance of any such waiver of the
notice requirement in accordance with either Section 4043(a) of ERISA or Section
412(d) of the Code.
"Required Lenders" means Lenders in the aggregate having at least
66-2/3% of the Aggregate Commitment or, if the Aggregate Commitment has been
terminated, Lenders in the aggregate holding at least 66-2/3% of the aggregate
unpaid principal amount of the outstanding Loans.
"Reserve Requirement" means, with respect to an Interest Period, the
maximum aggregate reserve requirement (including all basic, supplemental,
marginal and other reserves) which is imposed under Regulation D on Eurocurrency
liabilities.
"Revolver Termination Date" means August 13, 1999.
"Risk-Based Capital Guidelines" is defined in SECTION 3.2.
"S&P" means Standard & Poor's Ratings Group, and any successor thereto.
"Section" means a numbered section of this Agreement, unless another
document is specifically referenced.
"Significant Subsidiary" shall mean and include, at any time, each
Subsidiary of the Borrower to the extent that the Net Worth of such Subsidiary
is equal to or greater than $5,000,000.
"Single Employer Plan" means a Plan subject to Title IV of ERISA
maintained by the Borrower or any member of the Controlled Group for employees
of the Borrower or any member of the Controlled Group, other than a
Multiemployer Plan.
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"Solvent" means, when used with respect to a Person, that (a) the fair
saleable value of the assets of such Person is in excess of the total amount of
the present value of its liabilities (including for purposes of this definition
all liabilities (including loss reserves as determined by such Person), whether
or not reflected on a balance sheet prepared in accordance with Agreement
Accounting Principles and whether direct or indirect, fixed or contingent,
secured or unsecured, disputed or undisputed), (b) such Person is able to pay
its debts or obligations in the ordinary course as they mature and (c) such
Person does not have unreasonably small capital to carry out its business as
conducted and as proposed to be conducted. "Solvency" shall have a correlative
meaning.
"SOMSC" means Source One Mortgage Services Corporation, a Delaware
corporation.
"SOMSC Credit Agreements" means the credit agreement or credit
agreements from time to time in effect among SOMSC, the financial institutions
from time to time party thereto and First Chicago, as agent, as the same may be
amended, supplemented, restated, replaced or otherwise modified from time to
time (and, subsequent to the termination thereof, as in effect on the date of
such termination).
"Subsidiary" of a Person means (a) any corporation more than 50% of the
outstanding securities having ordinary voting power of which shall at the time
be owned or controlled, directly or indirectly, by such Person or by one or more
of its Subsidiaries or by such Person and one or more of its Subsidiaries, or
(b) any partnership, association, joint venture, limited liability company or
similar business organization more than 50% of the ownership interests having
ordinary voting power of which shall at the time be so owned or controlled.
Unless otherwise expressly provided, all references herein to a "Subsidiary"
shall mean a Subsidiary of the Borrower.
"Termination Event" means, with respect to a Plan which is subject to
Title IV of ERISA, (a) a Reportable Event, (b) the withdrawal of the Borrower or
any other member of the Controlled Group from such Plan during a plan year in
which the Borrower or any other member of the Controlled Group was a
"substantial employer" as defined in Section 4001(a)(2) of ERISA or was deemed
such under Section 4068(f) of ERISA, (c) the termination of such Plan, the
filing of a notice of intent to terminate such Plan or the treatment of an
amendment of such Plan as a termination under Section 4041 of ERISA, (d) the
institution by the PBGC of proceedings to terminate such Plan or (e) any event
or condition which might constitute grounds under Section 4042 of ERISA for the
termination of, or appointment of a trustee to administer, such Plan.
"Transaction Documents" means, collectively, the Loan Documents and the
White Mountains Guaranty.
"Transferee" is defined in SECTION 12.4.
"Type" means, with respect to any Advance, its nature as an ABR Advance
or Eurodollar Advance.
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"Unfunded Liability" means the amount (if any) by which the present
value of all vested and unvested accrued benefits under a Single Employer Plan
exceeds the fair market value of assets allocable to such benefits, all
determined as of the then most recent valuation date for such Plans using PBGC
actuarial assumptions for single employer plan terminations.
"Unmatured Default" means an event which but for the lapse of time or
the giving of notice, or both, would constitute a Default.
"Unrestricted Subsidiary" means SOMSC and any Subsidiary thereof.
"Valley Credit Agreement" means the Second Amended and Restated Credit
Agreement, dated as of August 14, 1998 among Valley Group, Inc., the financial
institutions from time to time party thereto and First Chicago, as agent, as the
same may be amended, supplemented or otherwise modified from time to time (and,
subsequent to the termination thereof, as in effect on the date of such
termination).
"White Mountains" means White Mountains Holdings, Inc., a Delaware
corporation formerly known as Fund American Enterprises, Inc. and the survivor
of a merger with White Mountains Holdings, Inc., a New Hampshire corporation.
"White Mountains Credit Agreement" means the Second Amended and
Restated Credit Agreement, dated as of August 14, 1998, among White Mountains,
the financial institutions from time to time party thereto and First Chicago, as
agent, as the same may be amended, supplemented or otherwise modified from time
to time (and, subsequent to the termination thereof, as in effect on the date of
such termination).
"White Mountains Guaranty" means a guaranty of the Guaranteed
Obligations in form and substance satisfactory to the Agent and the Lenders,
dated as of the date hereof and duly executed and delivered to the Agent by
White Mountains, as the same may be amended or modified and in effect from time
to time.
"Wholly-Owned Subsidiary" of a Person means (a) any Subsidiary all of
the outstanding voting securities of which (other than directors' qualifying or
similar shares) shall at the time be owned or controlled, directly or
indirectly, by such Person or one or more Wholly-Owned Subsidiaries of such
Person, or by such Person and one or more Wholly-Owned Subsidiaries of such
Person, or (b) any partnership, association, joint venture, limited liability
company or similar business organization 100% of the ownership interests having
ordinary voting power of which (other than directors' qualifying shares) shall
at the time be so owned or controlled.
"Year 2000 Issues" means anticipated costs, problems and uncertainties
associated with the inability of certain computer applications and hardware to
effectively function on and after January 1, 2000, as such inability affects the
business, operations and financial condition of the Borrower and its
Subsidiaries and of the Borrower's and its Subsidiaries' material customers,
suppliers and vendors.
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"Year 2000 Program" is defined in SECTION 5.20.
The foregoing definitions shall be equally applicable to both the
singular and plural forms of the defined terms.
ARTICLE II
THE CREDITS
2.1. ADVANCES. (a) From and including the date hereof to but excluding
the Revolver Termination Date, each Lender severally (and not jointly) agrees,
on the terms and conditions set forth in this Agreement, to make Advances to the
Borrower from time to time in amounts not to exceed in the aggregate at any one
time outstanding the amount of its pro-rata share of the Aggregate Commitment
existing at such time. Subject to the terms of this Agreement, the Borrower may
borrow, repay and reborrow Advances at any time prior to the Revolver
Termination Date. The Commitments to lend hereunder shall expire on the Revolver
Termination Date. Principal payments made after the Revolver Termination Date
may not be reborrowed.
(b) The Borrower hereby agrees that if at any time, prior to
the Revolver Termination Date, as a result of reductions in the Aggregate
Commitment pursuant to SECTION 2.4 or otherwise, the aggregate balance of the
Loans exceeds the Aggregate Commitment, it shall repay, or cause to be repaid,
immediately outstanding Loans in such amount as may be necessary to eliminate
such excess.
(c) The Borrower's obligation to pay the principal of, and
interest on, the Loans shall be evidenced by the Notes. Although the Notes shall
be dated the date of this Agreement, interest in respect thereof shall be
payable only for the periods during which the Loans evidenced thereby are
outstanding and, although the stated amount of each Note shall be equal to the
applicable Lender's Commitment, each Note shall be enforceable, with respect to
the Borrower's obligation to pay the principal amount thereof, only to the
extent of the unpaid principal amount of the Loans at the time evidenced
thereby.
(d) All Advances and all Loans shall mature, and the
principal amount thereof and the unpaid accrued interest thereon shall be due
and payable in full, on the Maturity Date.
2.2. RATABLE LOANS. Each Advance hereunder shall consist of Loans made
from the several Lenders ratably in proportion to the ratio that their
respective Commitments bear to the Aggregate Commitment.
2.3. TYPES OF ADVANCES. The Advances may be ABR Advances or Eurodollar
Advances, or a combination thereof, selected by the Borrower in accordance with
SECTIONS 2.7 and 2.8.
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2.4. FACILITY FEE; REDUCTIONS IN AGGREGATE COMMITMENT. (a) The Borrower
agrees to pay to the Agent for the account of each Lender a facility fee
("Facility Fee") in an amount equal to the Applicable Facility Fee Margin per
annum times the daily average Commitment (or, on and after the Revolver
Termination Date, times the aggregate outstanding principal amount of the Loans)
of such Lender from the date hereof to and including the Maturity Date, payable
on each Payment Date hereafter and on the Maturity Date. All accrued Facility
Fees shall be payable on the effective date of any termination of the
obligations of the Lenders to make Loans hereunder.
(b) The Borrower may permanently reduce the Aggregate
Commitment in whole, or in part ratably among the Lenders in a minimum aggregate
amount of $2,000,000, upon at least three (3) Business Days' written notice to
the Agent, which notice shall specify the amount of any such reduction;
PROVIDED, HOWEVER, that the amount of the Aggregate Commitment may not be
reduced below the aggregate principal amount of the outstanding Advances.
2.5. MINIMUM AMOUNT OF EACH ADVANCE. Each Advance shall be in the
minimum amount of $2,000,000 (and in integral multiples of $500,000 if in excess
thereof), PROVIDED, HOWEVER, that (a) any ABR Advance may be in the amount of
the unused Aggregate Commitment and (b) in no event shall more than six (6)
Eurodollar Advances be permitted to be outstanding at any time.
2.6. OPTIONAL PRINCIPAL PAYMENTS. The Borrower may from time to time
pay, without penalty or premium, all outstanding ABR Advances, or, in a minimum
aggregate amount of $2,000,000, any portion of the outstanding ABR Advances,
upon two (2) Business Days' prior notice to the Agent. Subject to SECTION 3.4
and upon like notice, a Eurodollar Advance may be paid prior to the last day of
the applicable Interest Period in a minimum amount of $2,000,000 or an integral
multiple of $500,000 in excess thereof.
2.7. METHOD OF SELECTING TYPES AND INTEREST PERIODS FOR NEW ADVANCES.
The Borrower shall select the Type of Advance and, in the case of each
Eurodollar Advance, the Interest Period applicable to each Advance from time to
time; PROVIDED, HOWEVER, that in the event Loans are incurred on the date of
this Agreement, all Loans incurred on such date shall be ABR Advances. The
Borrower shall give the Agent irrevocable notice (a "BORROWING NOTICE") not
later than 10:00 a.m. (Chicago time) on the Borrowing Date of each ABR Advance
and at least three (3) Business Days before the Borrowing Date for each
Eurodollar Advance, specifying:
(a) the Borrowing Date of such Advance, which shall be a
Business Day;
(b) the aggregate amount of such Advance;
(c) the Type of Advance selected;
(d) in the case of each Eurodollar Advance, the Interest
Period applicable thereto, which shall end on or prior to the
Maturity Date; and
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(e) any changes to money transfer instructions previously
delivered to the Agent.
Not later than noon (Chicago time) on each Borrowing Date, each Lender shall
make available its Loan or Loans, in funds immediately available in Chicago, to
the Agent at its address specified pursuant to ARTICLE XIII. The Agent will make
the funds so received from the Lenders available to the Borrower at the Agent's
aforesaid address or at such account at such other institution in the United
States of America as the Borrower may indicate in the Borrowing Notice.
2.8. CONVERSION AND CONTINUATION OF OUTSTANDING ADVANCES. ABR Advances
shall continue as ABR Advances unless and until such ABR Advances are converted
into Eurodollar Advances. Each Eurodollar Advance shall continue as a Eurodollar
Advance until the end of the then applicable Interest Period therefor, at which
time such Eurodollar Advance shall be automatically converted into an ABR
Advance unless the Borrower shall have given the Agent a Conversion/Continuation
Notice requesting that, at the end of such Interest Period, such Eurodollar
Advance continue as a Eurodollar Advance for the same or another Interest
Period. Subject to the terms of SECTION 2.5, the Borrower may elect from time to
time to convert all or any part of an Advance of any Type into any other Type or
Types of Advances; PROVIDED, HOWEVER, that any conversion of any Eurodollar
Advance shall be made on, and only on, the last day of the Interest Period
applicable thereto. The Borrower shall give the Agent irrevocable notice (a
"CONVERSION/ CONTINUATION NOTICE") of each conversion of an ABR Advance or
continuation of a Eurodollar Advance not later than 10:00 a.m. (Chicago time) on
the conversion date, in the case of a conversion into an ABR Advance, or at
least three (3) Business Days, in the case of a conversion into or continuation
of a Eurodollar Advance, prior to the date of the requested conversion or
continuation, specifying:
(a) the requested date of such conversion or continuation,
which shall be a Business Day;
(b) the aggregate amount and Type of the Advance which is to
be converted or continued; and
(c) the amount and Type(s) of Advance(s) into which such
Advance is to be converted or continued and, in the case of a
conversion into or continuation of a Eurodollar Advance, the
duration of the Interest Period applicable thereto, which
shall end on or prior to the Maturity Date.
2.9. CHANGES IN INTEREST RATE, ETC. Each ABR Advance shall bear
interest at the Alternate Base Rate from and including the date of such Advance
or the date on which such Advance was converted into an ABR Advance to (but not
including) the date on which such ABR Advance is paid or converted to a
Eurodollar Advance. Changes in the rate of interest on that portion of any
Advance maintained as an ABR Advance will take effect simultaneously with each
change in the Alternate Base Rate. Each Eurodollar Advance shall bear interest
from and including the first day of the Interest Period applicable thereto to,
but not including, the last day of such Interest Period at the Eurodollar Rate
determined as applicable to such Eurodollar Advance plus the Applicable
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Eurodollar Margin. Changes in the Applicable Eurodollar Margin will take effect
simultaneously with each change in a Level. No Interest Period may end after the
Revolver Termination Date.
2.10. RATES APPLICABLE AFTER DEFAULT. Notwithstanding anything to the
contrary contained in SECTIONS 2.7 or 2.8, no Advance may be made as, converted
into or continued as a Eurodollar Advance (except with the consent of the Agent
and the Required Lenders) when any Default or Unmatured Default has occurred and
is continuing. During the continuance of a Default the Required Lenders may, at
their option, by notice to the Borrower (which notice may be revoked at the
option of the Required Lenders notwithstanding any provision of SECTION 8.2
requiring unanimous consent of the Lenders to changes in interest rates),
declare that each Eurodollar Advance and ABR Advance shall bear interest (for
the remainder of the applicable Interest Period in the case of Eurodollar
Advances) at a rate per annum equal to the rate otherwise applicable plus two
percent (2%) per annum; PROVIDED, HOWEVER, that such increased rate shall
automatically and without action of any kind by the Lenders become and remain
applicable until revoked by the Required Lenders in the event of a Default
described in SECTIONS 7.6 or 7.7.
2.11. METHOD OF PAYMENT. All payments of the Obligations hereunder
shall be made, without setoff, deduction or counterclaim, in immediately
available funds to the Agent at the Agent's address specified pursuant to
ARTICLE XIII, or at any other Lending Installation of the Agent specified in
writing by the Agent to the Borrower (at least two (2) Business Days in
advance), by noon (Chicago time) on the date when due and shall be applied
ratably by the Agent among the Lenders. Each payment delivered to the Agent for
the account of any Lender shall be delivered promptly by the Agent to such
Lender in the same type of funds that the Agent received at its address
specified pursuant to ARTICLE XIII or at any Lending Installation specified in a
notice received by the Agent from such Lender. The Agent is hereby authorized to
charge the account of the Borrower maintained with the Agent for each payment of
principal, interest and fees as it becomes due hereunder.
2.12. NOTES. Each Lender is hereby authorized to record the principal
amount of each of its Loans and each repayment on the schedule attached to its
Note; PROVIDED, HOWEVER, that neither the failure to so record nor any error in
such recordation shall affect the Borrower's obligations under such Note.
2.13. INTEREST PAYMENT DATES; INTEREST AND FEE BASIS. Interest accrued
on each ABR Advance shall be payable on each Payment Date, commencing with the
first such date to occur after the date hereof, on any date on which an ABR
Advance is prepaid, whether due to acceleration or otherwise, and at maturity.
Interest accrued on that portion of the outstanding principal amount of any ABR
Advance converted into a Eurodollar Advance on a day other than a Payment Date
shall be payable on the date of conversion. Interest accrued on each Eurodollar
Advance shall be payable on the last day of its applicable Interest Period, on
any date on which the Eurodollar Advance is prepaid, whether by acceleration or
otherwise, and at maturity. Interest accrued on each Eurodollar Advance having
an Interest Period longer than three (3) months shall also be payable on the
last day of each three-month interval during such Interest Period. Interest and
commitment fees shall be calculated for actual days elapsed on the basis of a
360-day year. Interest shall be payable for the day an Advance is made but not
for the day of any payment on the amount paid if payment is
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received prior to noon (Chicago time) at the place of payment. If any payment of
principal of or interest on an Advance shall become due on a day which is not a
Business Day, such payment shall be made on the next succeeding Business Day
and, in the case of a principal payment, such extension of time shall be
included in computing interest in connection with such payment.
2.14. NOTIFICATION OF ADVANCES, INTEREST RATES, PREPAYMENTS AND
COMMITMENT REDUCTIONS. Promptly after receipt thereof, the Agent will notify
each Lender of the contents of each Aggregate Commitment reduction notice,
Borrowing Notice, Conversion/Continuation Notice, and repayment notice received
by it hereunder. The Agent will notify each Lender of the interest rate
applicable to each Eurodollar Advance promptly upon determination of such
interest rate and will give each Lender prompt notice of each change in the
Alternate Base Rate.
2.15. LENDING INSTALLATIONS. Each Lender may book its Loans at any
Lending Installation selected by such Lender and may change its Lending
Installation from time to time. All terms of this Agreement shall apply to any
such Lending Installation and the Notes shall be deemed held by each Lender for
the benefit of such Lending Installation. Each Lender may, by written or telex
notice to the Agent and the Borrower, designate a Lending Installation through
which Loans will be made by it and for whose account Loan payments are to be
made.
2.16. NON-RECEIPT OF FUNDS BY THE AGENT. Unless the Borrower or a
Lender, as the case may be, notifies the Agent prior to the date on which it is
scheduled to make payment to the Agent of (a) in the case of a Lender, the
proceeds of a Loan, or (b) in the case of the Borrower, a payment of principal,
interest or fees to the Agent for the account of the Lenders, that it does not
intend to make such payment, the Agent may assume that such payment has been
made. The Agent may, but shall not be obligated to, make the amount of such
payment available to the intended recipient in reliance upon such assumption. If
the Borrower has not in fact made such payment to the Agent, the Lenders shall,
on demand by the Agent, repay to the Agent the amount so made available together
with interest thereon in respect of each day during the period commencing on the
date such amount was so made available by the Agent until the date the Agent
recovers such amount at a rate per annum equal to the Federal Funds Effective
Rate for such day. If any Lender has not in fact made such payment to the Agent,
such Lender or the Borrower shall, on demand by the Agent, repay to the Agent
the amount so made available together with interest thereon in respect of each
day during the period commencing on the date such amount was so made available
by the Agent until the date the Agent recovers such amount at a rate per annum
equal to (a) in the case of payment by a Lender, the Federal Funds Effective
Rate for such day, or (b) in the case of payment by the Borrower, the interest
rate applicable to the relevant Loan.
2.17. TAXES. (a) Any payments made by the Borrower under this Agreement
shall be made free and clear of, and without deduction or withholding for or on
account of, any present or future income, stamp or other taxes, levies, imposts,
duties, charges, fees, deductions or withholdings, now or hereafter imposed,
levied, collected, withheld or assessed by any Governmental Authority, excluding
net income taxes and franchise taxes or any other tax based upon any income
imposed on the Agent or any Lender by the jurisdiction in which the Agent or
such Lender is incorporated or has its principal place of business or maintains
its Lending Installation.
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If any such non-excluded taxes, levies, imposts, duties, charges, fees,
deductions or withholdings ("Non-Excluded Taxes") are required to be withheld
from any amounts payable to the Agent or any Lender hereunder, the amounts so
payable to the Agent or such Lender shall be increased to the extent necessary
to yield to the Agent or such Lender (after payment of all Non-Excluded Taxes)
interest or any such other amounts payable hereunder at the rates or in the
amounts specified in or pursuant to this Agreement; PROVIDED, HOWEVER, that the
Borrower shall not be required to increase any such amounts payable to any
Lender that is not organized under the laws of the U.S. or a state thereof if
such Lender fails to comply with the requirements of paragraph (b) of this
SECTION 2.17. Whenever any Non-Excluded Taxes are payable by the Borrower, as
promptly as practicable thereafter the Borrower shall send to the Agent for its
own account or for the account of such Lender, as the case may be, a certified
copy of an original official receipt received by the Borrower showing payment
thereof. If the Borrower fails to pay any Non-Excluded Taxes when due to the
appropriate taxing authority or fails to remit to the Agent the required
receipts or other required documentary evidence, the Borrower shall indemnify
the Agent and the Lenders for any incremental taxes, interest or penalties that
may become payable by any Agent or any Lender as a result of any such failure.
The agreements in this SECTION 2.17 shall survive the termination of this
Agreement and the payment of all other amounts payable hereunder.
(b) At least five (5) Business Days prior to the first date
on which interest or fees are payable hereunder for the account of any Lender,
each Lender that is not incorporated under the laws of the United States of
America, or a state thereof, agrees that it will deliver to the Borrower and the
Agent two (2) duly completed and properly executed copies of United States
Internal Revenue Service Form 1001 or 4224 (or a successor form), certifying in
either case that such Lender is entitled to receive payments under this
Agreement and the Notes without deduction or withholding of any United States
federal income taxes. Each Lender which so delivers a Form 1001 or 4224 (or a
successor form) further undertakes to deliver to the Borrower and the Agent two
(2) additional duly completed and properly executed copies of such form (or a
successor form) on or before the date that such form expires (currently, three
(3) successive calendar years for Form 1001 and each tax year for Form 4224) or
becomes obsolete or after the occurrence of any event requiring a change in the
most recent forms so delivered by it, and such amendments thereto or extensions
or renewals thereof as may be reasonably requested by the Borrower or the Agent,
in each case certifying that such Lender is entitled to receive payments under
this Agreement and the Notes without deduction or withholding of any United
States federal income taxes, unless an event (including, without limitation, any
change in treaty, law or regulation) has occurred prior to the date on which any
such delivery would otherwise be required which renders all such forms
inapplicable or which would prevent such Lender from duly completing and
delivering any such form with respect to it and such Lender advises the Borrower
and the Agent that it is not capable of receiving payments without any deduction
or withholding of United States federal income tax.
2.18. AGENT'S FEES. The Borrower shall pay to the Agent those fees, in
addition to the Facility Fees referenced in SECTION 2.4(A), in the amounts and
at the times separately agreed to between the Agent and the Borrower.
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ARTICLE III
CHANGE IN CIRCUMSTANCES
3.1. YIELD PROTECTION. If, after the date hereof, the adoption of or
any change in any law or any governmental or quasi-governmental rule,
regulation, policy, guideline or directive (whether or not having the force of
law), or any new interpretation thereof, or the compliance of any Lender with
such adoption, change or interpretation.
(a) subjects any Lender or any applicable Lending
Installation to any tax, duty, charge or withholding on or
from payments due from the Borrower (excluding taxation of
the overall net income of any Lender or applicable Lending
Installation imposed by the jurisdiction in which such
Lender or Lending Installation is incorporated or has its
principal place of business), or changes the basis of
taxation of principal, interest or any other payments to any
Lender or Lending Installation in respect of its Loans or
other amounts due it hereunder, or
(b) imposes or increases or deems applicable any reserve,
assessment, insurance charge, special deposit or similar
requirement against assets of, deposits with or for the
account of, or credit extended by, any Lender or any
applicable Lending Installation (other than reserves and
assessments taken into account in determining the interest
rate applicable to Eurodollar Advances), or
(c) imposes any other condition the result of which is to
increase the cost to any Lender or any applicable Lending
Installation of making, funding or maintaining Loans or
reduces any amount receivable by any Lender or any
applicable Lending Installation in connection with any
Loans, or requires any Lender or any applicable Lending
Installation to make any payment calculated by reference to
the amount of Loans held, or interest received by it, by an
amount deemed material by such Lender,
then, within fifteen (15) days of demand by such Lender, the Borrower shall pay
such Lender that portion of such increased expense incurred or resulting in an
amount received which such Lender determines is attributable to making, funding
and maintaining its Loans and its Commitment.
3.2. CHANGES IN CAPITAL ADEQUACY REGULATIONS. If a Lender determines
the amount of capital required or expected to be maintained by such Lender, any
Lending Installation of such Lender or any corporation controlling such Lender
is increased as a result of a Change, then, within fifteen (15) days of demand
by such Lender, the Borrower shall pay such Lender the amount necessary to
compensate for any shortfall in the rate of return on the portion of such
increased capital which such Lender determines is attributable to this
Agreement, its Loans or its obligation to make Loans hereunder (after taking
into account such Lender's policies as to capital adequacy). "CHANGE" means (a)
any change after the date of this Agreement in the Risk-Based Capital
Guidelines, or (b)
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any adoption of or change in any other law, governmental or quasi-governmental
rule, regulation, policy, guideline, interpretation, or directive (whether or
not having the force of law) after the date of this Agreement which affects the
amount of capital required or expected to be maintained by any Lender or any
Lending Installation or any corporation controlling any Lender. "RISK-BASED
CAPITAL GUIDELINES" means (a) the risk-based capital guidelines in effect in the
United States on the date of this Agreement and (b) the corresponding capital
regulations promulgated by regulatory authorities outside the United States
implementing the July 1988 report of the Basle Committee on Banking Regulation
and Supervisory Practices entitled "International Convergence of Capital
Measurements and Capital Standards" and any amendments to such regulations
adopted prior to the date of this Agreement.
3.3. AVAILABILITY OF TYPES OF ADVANCES. If any Lender determines that
maintenance of its Eurodollar Loans at a suitable Lending Installation would
violate any applicable law, rule, regulation, or directive, whether or not
having the force of law, or if the Required Lenders determine that (a) deposits
of a type and maturity appropriate to match fund Eurodollar Advances are not
available, or (b) the interest rate applicable to a Eurodollar Advance does not
accurately or fairly reflect the cost of making or maintaining such Advance,
then the Agent shall suspend the availability of Eurodollar Advances until such
circumstance no longer exists and require any Eurodollar Advances to be repaid.
3.4. FUNDING INDEMNIFICATION. If any payment of a Eurodollar Advance
occurs on a date which is not the last day of the applicable Interest Period,
whether because of acceleration, prepayment or otherwise, or a Eurodollar
Advance is not made on the date specified by the Borrower for any reason other
than default by the Lenders, the Borrower will indemnify the Agent and each
Lender for any loss or cost incurred by it resulting therefrom, including,
without limitation, any loss or cost in liquidating or employing deposits
acquired to fund or maintain the Eurodollar Advance.
3.5. LENDER STATEMENTS; SURVIVAL OF INDEMNITY. To the extent reasonably
possible, each Lender shall designate an alternate Lending Installation with
respect to its Eurodollar Advances to reduce any liability of the Borrower to
such Lender under SECTIONS 2.17, 3.1 and 3.2 or to avoid the unavailability of a
Type of Advance under SECTION 3.3, so long as such designation is not
disadvantageous to such Lender. Each Lender shall deliver a written statement of
such Lender to the Borrower (with a copy to the Agent) as to the amount due, if
any, under SECTIONS 3.1, 3.2 or 3.4. Such written statement shall set forth in
reasonable detail the calculations upon which such Lender determined such amount
and shall be final, conclusive and binding on the Borrower in the absence of
manifest error. Determination of amounts payable under such Sections in
connection with a Eurodollar Advance shall be calculated as though each Lender
funded its Eurodollar Advances through the purchase of a deposit of the type and
maturity corresponding to the deposit used as a reference in determining the
Eurodollar Rate applicable to such Loan, whether in fact that is the case or
not. Unless otherwise provided herein, the amount specified in the written
statement of any Lender shall be payable on demand after receipt by the Borrower
of the written statement. The obligations of the Borrower under SECTIONS 3.1,
3.2 and 3.4 shall survive payment of the Obligations and termination of this
Agreement.
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ARTICLE IV
CONDITIONS PRECEDENT
4.1. EFFECTIVENESS. This Agreement shall not become effective (in which
case the Existing Credit Agreement shall remain in full force and effect) unless
and until Borrower has furnished the following to the Agent with sufficient
copies for the Lenders and the other conditions set forth below have been
satisfied:
(a) CHARTER DOCUMENTS; GOOD STANDING CERTIFICATES. Copies of
the certificate of incorporation of the Borrower and White Mountains,
together with all amendments thereto, both certified by the appropriate
governmental officer in their respective jurisdictions of
incorporation, together with a good standing certificate issued by the
Secretary of State of their respective jurisdictions of incorporation
and such other jurisdictions as shall be reasonably requested by the
Agent.
(b) BY-LAWS AND RESOLUTIONS. Copies, certified by the
Secretary or Assistant Secretary of the Borrower and White Mountains,
of their respective by-laws and of their respective Board of Directors'
resolutions authorizing the execution, delivery and performance of the
Loan Documents to which the Borrower and White Mountains are a party.
(c) SECRETARY'S CERTIFICATE. An incumbency certificate,
executed by the Secretary or Assistant Secretary of each of the
Borrower and White Mountains, which shall identify by name and title
and bear the signature of the officers of the Borrower and White
Mountains authorized to sign the Loan Documents and to make borrowings
hereunder, upon which certificate the Agent and the Lenders shall be
entitled to rely until informed of any change in writing by the
Borrower and White Mountains.
(d) OFFICER'S CERTIFICATE. A certificate signed by an
Authorized Officer of the Borrower, in form and substance satisfactory
to the Agent, to the effect that on the date hereof (both before and
after giving effect to the consummation of the other transactions
contemplated hereby and the making of any Loans hereunder on such
date): (i) no Default or Unmatured Default has occurred and is
continuing; (ii) no injunction or temporary restraining order which
would prohibit the making of the Loans or other litigation which could
reasonably be expected to have a Material Adverse Effect is pending or,
to the best of such Person's knowledge, threatened; (iii) all orders,
consents, approvals, licenses, authorizations, or validations of, or
filings, recordings or registrations with, or exemptions by, any
Governmental Authority required in connection with the execution,
delivery and performance of this Agreement have been or, prior to the
time required, will have been, obtained, given, filed or taken and are
or will be in full force and effect (or the Borrower has obtained
effective judicial relief with respect to the application thereof) and
all applicable waiting periods have expired; (iv) each of the
representations and warranties set forth in
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ARTICLE V of this Agreement is true and correct on and as of the date
hereof; and (v) since December 31, 1997, no event or change has
occurred that has caused or evidences a Material Adverse Effect.
(e) LEGAL OPINION. (i) A written opinion of Brobeck, Phleger &
Harrison LLP, counsel to the Borrower, addressed to the Agent and the
Lenders in form and substance acceptable to the Agent and its counsel.
(f) NOTES. Notes payable to the order of each of the Lenders
duly executed by the Borrower.
(g) LOAN DOCUMENTS. Executed originals of this Agreement and
each of the Loan Documents, which shall be in full force and effect,
together with all schedules, exhibits, certificates, instruments,
opinions, documents and financial statements required to be delivered
pursuant hereto and thereto.
(h) LETTERS OF DIRECTION. Written money transfer instructions
with respect to the initial Advances and to future Advances in form and
substance acceptable to the Agent and its counsel addressed to the
Agent and signed by an Authorized Officer, together with such other
related money transfer authorizations as the Agent may have reasonably
requested.
(i) SOLVENCY CERTIFICATE. A written solvency certificate from
the chief financial officer of the Borrower and White Mountains in form
and content satisfactory to the Agent with respect to the value,
Solvency and other factual information of, or relating to, as the case
may be, the Borrower, on a consolidated basis, and White Mountains, on
a consolidated basis.
(j) WHITE MOUNTAINS GUARANTY. The White Mountains Guaranty
duly executed by White Mountains, in the form substantially delivered
to the Lenders.
(k) OTHER. Such other documents as the Agent, any Lender or
their counsel may have reasonably requested.
4.2. EACH FUTURE ADVANCE. The Lenders shall not be required to make any
Advance unless on the applicable Borrowing Date:
(a) There exists no Default or Unmatured Default and none
would result from such Advance;
(b) The representations and warranties contained in ARTICLE V
are true and correct as of such Borrowing Date (except to the extent
such representations and warranties are expressly made as of a
specified date, in which event such representations and warranties
shall be true and correct as of such specified date);
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(c) A Borrowing Notice shall have been properly submitted; and
(d) All legal matters incident to the making of such Advance
shall be satisfactory to the Lenders and their counsel.
Each Borrowing Notice with respect to each such Advance shall
constitute a representation and warranty by the Borrower that the conditions
contained in SECTIONS 4.2 (a), (b) and (c) have been satisfied. Any Lender may
require a duly completed compliance certificate in substantially the form of
EXHIBIT B hereto as a condition to making an Advance.
ARTICLE V
REPRESENTATIONS AND WARRANTIES
The Borrower represents and warrants to the Lenders that:
5.1. CORPORATE EXISTENCE AND STANDING. The Borrower and each Subsidiary
is a corporation duly incorporated, validly existing and in good standing under
the laws of its respective jurisdiction of incorporation and is duly qualified
and in good standing as a foreign corporation and is duly authorized to conduct
its business in each jurisdiction in which its business is conducted or proposed
to be conducted, except where the failure to be so qualified could not
reasonably be expected to have a Material Adverse Effect. As of the date of this
Agreement, White Mountains is a Wholly-Owned Subsidiary of the Borrower.
5.2. AUTHORIZATION AND VALIDITY. The Borrower has all requisite power
and authority (corporate and otherwise) and legal right to execute and deliver
each of the Loan Documents and to perform its obligations thereunder. The
execution and delivery by the Borrower of the Loan Documents and the performance
of its respective obligations thereunder has been duly authorized by proper
corporate proceedings and the Loan Documents constitute legal, valid and binding
obligations of the Borrower enforceable against the Borrower in accordance with
their terms, except as enforceability may be limited by bankruptcy, insolvency
or similar laws affecting the enforcement of creditors' rights generally.
5.3. COMPLIANCE WITH LAWS AND CONTRACTS. The Borrower and its
Subsidiaries have complied in all material respects with all applicable
statutes, rules, regulations, orders and restrictions of any domestic or foreign
government or any instrumentality or agency thereof, having jurisdiction over
the conduct of their respective businesses or the ownership of their respective
properties, except where the failure to so comply could not reasonably be
expected to have a Material Adverse Effect. Neither the execution and delivery
by the Borrower of the Loan Documents, the application of the proceeds of the
Loans or the consummation of the transactions contemplated in the Loan
Documents, nor compliance with the provisions of the Loan Documents will, or at
the relevant time did, (a) violate any law, rule, regulation (including
Regulations T, U and
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X), order, writ, judgment, injunction, decree or award binding on the Borrower
or any Subsidiary or the Borrower's or any Subsidiary's charter, articles or
certificate of incorporation or by-laws, (b) violate the provisions of or
require the approval or consent of any party to any indenture, instrument or
agreement to which the Borrower or any Subsidiary is a party or is subject, or
by which it, or its property, is bound, or conflict with or constitute a default
thereunder, or result in the creation or imposition of any Lien (other than
Liens permitted by, the Loan Documents) in, of or on the property of the
Borrower or any Subsidiary pursuant to the terms of any such indenture,
instrument or agreement, or (c) require any consent of the stockholders of any
Person, except for approvals or consents which will be obtained on or before the
initial Advance and are disclosed on SCHEDULE 5.3, except for any violation of,
or failure to obtain an approval or consent required under, any such indenture,
instrument or agreement that could not reasonably be expected to have a Material
Adverse Effect.
5.4. GOVERNMENTAL CONSENTS. No order, consent, approval, qualification,
license, authorization, or validation of, or filing, recording or registration
with, or exemption by, or other action in respect of, any court, governmental or
public body or authority, or any subdivision thereof, any securities exchange or
other Person is or at the relevant time was required to authorize, or is or at
the relevant time was required in connection with the execution, delivery,
consummation or performance of, or the legality, validity, binding effect or
enforceability of, any of the Loan Documents. Neither the Borrower nor any
Subsidiary is in default under or in violation of any foreign, federal, state or
local law, rule, regulation, order, writ, judgment, injunction, decree or award
binding upon or applicable to the Borrower or such Subsidiary, in each case the
consequences of which default or violation could reasonably be expected to have
a Material Adverse Effect.
5.5. FINANCIAL STATEMENTS. The Borrower has heretofore furnished to
each of the Lenders (a) the December 31, 1997 audited consolidated financial
statements of the Borrower and its Subsidiaries, and (b) the unaudited
consolidated financial statements of the Borrower and its Subsidiaries through
March 31, 1998 (collectively, the "FINANCIAL STATEMENTS"). Each of the Financial
Statements was prepared in accordance with Agreement Accounting Principles and
fairly presents the consolidated financial condition and operations of the
Borrower and its Subsidiaries at such dates and the consolidated results of
their operations for the respective periods then ended (except, in the case of
such unaudited statements, for normal year-end audit adjustments).
5.6. MATERIAL ADVERSE CHANGE. No material adverse change in the
business, Property, condition (financial or otherwise), performance, prospects
or results of operations of the Borrower and its Subsidiaries has occurred since
December 31, 1997.
5.7. TAXES. The Borrower and its Subsidiaries have filed or caused to
be filed on a timely basis and in correct form all United States federal and
applicable foreign, state and local tax returns and all other tax returns which
are required to be filed and have paid all taxes due pursuant to said returns or
pursuant to any assessment received by the Borrower or any Subsidiary, except
such taxes, if any, as are being contested in good faith and as to which
adequate reserves have been provided in accordance with Agreement Accounting
Principles and as to which no Lien exists. As of the date hereof, the United
States income tax returns of the Borrower on a consolidated basis have
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been audited by the Internal Revenue Service through its fiscal period ending
December 31, 1988, and all tax years beginning on or after January 1, 1989 are
currently being audited or are subject to audit. No tax liens have been filed
and no claims are being asserted with respect to any such taxes which could
reasonably be expected to have a Material Adverse Effect. The charges, accruals
and reserves on the books of the Borrower and its Subsidiaries in respect of any
taxes or other governmental charges are in accordance with Agreement Accounting
Principles.
5.8. LITIGATION AND CONTINGENT OBLIGATIONS. There is no litigation,
arbitration, proceeding, inquiry or governmental investigation pending or, to
the knowledge of any of their officers, threatened against or affecting the
Borrower or any Subsidiary or any of their respective properties which could
reasonably be expected to have a Material Adverse Effect or to prevent, enjoin
or unduly delay the making of the Loans under this Agreement. Neither the
Borrower nor any Subsidiary has any material contingent obligations incurred
outside of the ordinary course of its business except as set forth on SCHEDULE
5.8 or disclosed in the Financial Statements or in financial statements required
to be delivered under SECTIONS 6.1(A) and (B) and as permitted under this
Agreement.
5.9. CAPITALIZATION. SCHEDULE 5.9 hereto contains (a) an accurate
description of the Borrower's capitalization as of March 31, 1998 and (b) an
accurate list of all of the existing Subsidiaries as of the date of this
Agreement, setting forth their respective jurisdictions of incorporation and the
percentage of their capital stock owned by the Borrower or other Subsidiaries.
All of the issued and outstanding shares of capital stock of the Borrower and of
each Subsidiary have been duly authorized and validly issued, are fully paid and
non-assessable, and are free and clear of all Liens.
5.10. ERISA. Except as disclosed on SCHEDULE 5.10, neither the Borrower
nor any other member of the Controlled Group maintains any Single Employer
Plans, and no Single Employer Plan has any Unfunded Liability. Neither the
Borrower nor any other member of the Controlled Group maintains, or is obligated
to contribute to, any Multiemployer Plan or has incurred, or is reasonably
expected to incur, any withdrawal liability to any Multiemployer Plan. Each Plan
complies in all material respects with all applicable requirements of law and
regulations other than any such failure to comply which could not reasonably be
expected to have a Material Adverse Effect. Neither the Borrower nor any member
of the Controlled Group has, with respect to any Plan, failed to make any
contribution or pay any amount required under Section 412 of the Code or Section
302 of ERISA or the terms of such Plan. There are no pending or, to the
knowledge of the Borrower, threatened claims, actions, investigations or
lawsuits against any Plan, any fiduciary thereof, or the Borrower or any member
of the Controlled Group with respect to a Plan. Neither the Borrower nor any
member of the Controlled Group has engaged in any prohibited transaction (as
defined in Section 4975 of the Code or Section 406 of ERISA) in connection with
any Plan which would subject such Person to any material liability. Within the
last five years neither the Borrower nor any member of the Controlled Group has
engaged in a transaction which resulted in a Single Employer Plan with an
Unfunded Liability being transferred out of the Controlled Group which could
reasonably be expected to have a Material Adverse Effect. No Termination Event
has
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occurred or is reasonably expected to occur with respect to any Plan which is
subject to Title IV of ERISA which could reasonably be expected to have a
Material Adverse Effect.
5.11. DEFAULTS. No Default or Unmatured Default has occurred and is
continuing.
5.12. FEDERAL RESERVE REGULATIONS. Neither the Borrower nor any
Subsidiary is engaged, directly or indirectly, principally, or as one of its
important activities, in the business of extending, or arranging for the
extension of, credit for the purpose of purchasing or carrying Margin Stock. No
part of the proceeds of any Loan will be used in a manner which would violate,
or result in a violation of, Regulation T, Regulation U or Regulation X. Neither
the making of any Advance hereunder nor the use of the proceeds thereof will
violate or be inconsistent with the provisions of Regulation T, Regulation U or
Regulation X.
5.13. INVESTMENT COMPANY. Neither the Borrower nor any Subsidiary is,
or after giving effect to any Advance will be, an "investment company" or a
company "controlled" by an "investment company" within the meaning of the
Investment Company Act of 1940, as amended.
5.14. CERTAIN FEES. No broker's or finder's fee or commission was, is
or will be payable by the Borrower or any Subsidiary with respect to any of the
transactions contemplated by this Agreement, except as described in SECTION 9.5.
The Borrower hereby agrees to indemnify the Agent and the Lenders against, and
agrees that it will hold each of them harmless from, any claim, demand or
liability for broker's or finder's fees or commissions alleged to have been
incurred by the Borrower in connection with any of the transactions contemplated
by this Agreement and any expenses (including, without limitation, attorneys'
fees and time charges of attorneys for the Agent or any Lender, which attorneys
may be employees of the Agent or any Lender) arising in connection with any such
claim, demand or liability. No other similar fee or commissions will be payable
by the Borrower or any Subsidiary for any other services rendered to the
Borrower or any Subsidiary ancillary to any of the transactions contemplated by
this Agreement.
5.15. SOLVENCY. As of the date hereof, after giving effect to the
consummation of the transactions contemplated by the Loan Documents and the
payment of all fees, costs and expenses payable by the Borrower or its
Subsidiaries with respect to the transactions contemplated by the Loan Documents
and the Loans incurred by the Borrower under this Agreement, the Borrower on a
consolidated basis is Solvent.
5.16. MATERIAL AGREEMENTS. Except as set forth in SCHEDULE 5.16 and
except for agreements or arrangements with regulatory agencies with regard to
Insurance Subsidiaries or agreements of any Unrestricted Subsidiary, neither the
Borrower nor any Subsidiary is a party to any agreement or instrument or subject
to any charter or other corporate restriction which could reasonably be expected
to have a Material Adverse Effect or which restricts or imposes conditions upon
the ability of any Subsidiary to (a) pay dividends or make other distributions
on its capital stock (b) make loans or advances to the Borrower, (c) repay loans
or advances from Borrower or (d) grant Liens to the Agent to secure the
Obligations. Neither the Borrower nor any Subsidiary is in default in the
performance, observance or fulfillment of any of the obligations, covenants or
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conditions contained in any agreement to which it is a party, which default
could reasonably be expected to have a Material Adverse Effect.
5.17. ENVIRONMENTAL LAWS. There are no claims, investigations,
litigation, administrative proceedings, notices, requests for information (each
a "PROCEEDING"), whether pending or threatened, or judgments or orders asserting
violations of applicable federal, state and local environmental, health and
safety statutes, regulations, ordinances, codes, rules, orders, decrees,
directives and standards ("ENVIRONMENTAL LAWS") or relating to any toxic or
hazardous waste, substance or chemical or any pollutant, contaminant, chemical
or other substance defined or regulated pursuant to any Environmental Law,
including, without limitation, asbestos, petroleum, crude oil or any fraction
thereof ("HAZARDOUS MATERIALS") asserted against the Borrower or any of its
Subsidiaries other than in connection with an insurance policy issued in the
ordinary course of business to any Person (other than the Borrower or any
Subsidiary of the Borrower) which, in any case, could reasonably be expected to
have a Material Adverse Effect. As of the date hereof, the Borrower and its
Subsidiaries do not have liabilities exceeding $500,000 in the aggregate for all
of them with respect to compliance by them with applicable Environmental Laws or
related to the generation, treatment, storage, disposal, release, investigation
or cleanup by them of Hazardous Materials, and no facts or circumstances exist
which could give rise to such liabilities with respect to compliance with
applicable Environmental Laws and the generation, treatment, storage, disposal,
release, investigation or cleanup of Hazardous Materials.
5.18. INSURANCE. The Borrower and its Subsidiaries maintain with
financially sound and reputable insurance companies insurance on their Property
in such amounts and covering such risks as is consistent with sound business
practice.
5.19. DISCLOSURE. No information, exhibit or report furnished by either
Borrower or any of its Subsidiaries to the Agent or to any Lender in connection
with the negotiation of, or compliance with, the Loan Documents contained any
material misstatement of fact or omitted to state a material fact or any fact
necessary to make the statements contained therein not materially misleading.
There is no fact known to the Borrower (other than matters of a general economic
or political nature) that has had or could reasonably be expected to have a
Material Adverse Effect and that has not been disclosed herein or in such other
documents, certificates and statements furnished to the Lenders for use in
connection with the transactions contemplated by this Agreement.
5.20. YEAR 2000. The Borrower has made a reasonable assessment of the
Year 2000 Issues and has a realistic and achievable program for remediating the
Year 2000 Issues on a timely basis (the "Year 2000 Program"). Based on such
assessment and on the Year 2000 Program the Borrower does not reasonably
anticipate that Year 2000 Issues will have a Material Adverse Effect.
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ARTICLE VI
COVENANTS
During the term of this Agreement, unless the Required Lenders shall
otherwise consent in writing:
6.1. FINANCIAL REPORTING. The Borrower will maintain, for itself and
each Subsidiary, a system of accounting established and administered in
accordance with generally accepted accounting principles, consistently applied,
and furnish to the Lenders:
(a) As soon as practicable and in any event within 100 days
after the close of each of its Fiscal Years, an unqualified audit
report certified by independent certified public accountants,
acceptable to the Lenders, prepared in accordance with Agreement
Accounting Principles on a consolidated and consolidating basis
(consolidating statements need not be certified by such accountants)
for itself and its Subsidiaries, including balance sheets as of the end
of such period and related statements of income, retained earnings and
cash flows.
(b) As soon as practicable and in any event within sixty
(60) days after the close of each of the first three Fiscal Quarters of
each of its Fiscal Years, for itself and its Subsidiaries, consolidated
and consolidating unaudited balance sheets as at the close of each such
period and consolidated and consolidating statements of income,
retained earnings and cash flows for the period from the beginning of
such Fiscal Year to the end of such quarter, all certified by its chief
financial officer.
(c) Together with the financial statements required by
CLAUSES (A) and (B) above, a compliance certificate in substantially
the form of EXHIBIT B hereto signed by its chief financial officer
showing the calculations necessary to determine compliance with this
Agreement and stating that no Default or Unmatured Default exists, or
if any Default or Unmatured Default exists, stating the nature and
status thereof.
(d) Promptly after available after the close of each Fiscal
Year, a statement of the Unfunded Liabilities of each Single Employer
Plan, certified as correct by an actuary enrolled under ERISA.
(e) As soon as possible and in any event within ten (10)
days after the Borrower knows that any Termination Event has occurred
with respect to any Plan, a statement, signed by the chief financial
officer of the Borrower, describing said Termination Event and the
action which the Borrower proposes to take with respect thereto.
(f) As soon as possible and in any event within ten (10)
days after receipt by either Borrower, a copy of (i) any notice, claim,
complaint or order to the effect that the Borrower or any of its
Subsidiaries is or may be liable to any Person as a result of the
release
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by the Borrower or any of its Subsidiaries of any Hazardous Materials
into the environment or requiring that action be taken to respond to or
clean up a Release of Hazardous Materials into the environment, and
(ii) any notice, complaint or citation alleging any violation of any
Environmental Law or Environmental Permit by the Borrower or any of its
Subsidiaries. Within ten (10) days of the Borrower or any Subsidiary
having knowledge of the enactment or promulgation of any Environmental
Law which could reasonably be expected to have a Material Adverse
Effect, the Borrower shall provide the Agent with written notice
thereof.
(g) Promptly upon the furnishing thereof to the shareholders
of the Borrower, copies of all financial statements, reports and proxy
statements so furnished.
(h) Promptly upon the filing thereof, copies of all
registration statements and annual, quarterly, monthly or other regular
reports which the Borrower or any of its Subsidiaries files with the
Securities and Exchange Commission.
(i) Promptly and in any event within ten (10) days after
learning thereof, notification of (i) any tax assessment, demand,
notice of proposed deficiency or notice of deficiency received by the
Borrower or any other Consolidated Person or (ii) the filing of any tax
Lien or commencement of any judicial proceeding by or against any such
Consolidated Person, if any such assessment, demand, notice, Lien or
judicial proceeding relates to tax liabilities in excess of ten percent
(10%) of the net worth (determined according to generally accepted
accounting standards and without reduction for any reserve for such
liabilities) of the Borrower and its Subsidiaries taken as a whole.
(j) Promptly after the same becomes available, any
management letter prepared by the accountants conducting the audit of
the financial statements delivered pursuant to SECTION 6.1 (A).
(k) As soon as possible and in any event within two (2)
Business Days after either Borrower obtains knowledge thereof, notice
of any change in the Applicable Credit Rating of S&P or Moody's.
(l) Such other information (including non-financial
information) as the Agent or any Lender may from time to time
reasonably request.
6.2. USE OF PROCEEDS. The Borrower will, and will cause each Subsidiary
to, use the proceeds of the Advances to meet the working capital and general
corporate needs of the Borrower and its Subsidiaries, including, but not limited
to, the consummation of the Folksamerica Transaction and the making of other
Investments permitted by SECTION 6.15. The Borrower will not, nor will it permit
any Subsidiary to, use any of the proceeds of the Advances in a manner which
would violate, or result in a violation of, Regulation T, Regulation U or
Regulation X, or to finance the Purchase of any Person which has not been
approved and recommended by the board of directors (or functional equivalent
thereof) of such Person.
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6.3. NOTICE OF DEFAULT. The Borrower will give prompt notice in writing
to the Lenders of the occurrence of (a) any Default or Unmatured Default and (b)
of any other event or development, financial or other, relating specifically to
the Borrower or any of its Subsidiaries (and not of a general economic or
political nature) which could reasonably be expected to have a Material Adverse
Effect.
6.4. CONDUCT OF BUSINESS. The Borrower will, and will cause each
Subsidiary to, carry on and conduct its business in substantially the same
manner and in substantially the same fields of as it is presently conducted, to
not conduct any significant business except for financial services, and to do
all things necessary to remain duly incorporated, validly existing and in good
standing as a domestic corporation in its jurisdiction of incorporation and
maintain all requisite authority to conduct its business in each jurisdiction in
which its business is conducted. The Borrower shall cause White Mountains to
remain a Wholly-Owned Subsidiary until the Borrower shall have repaid all
outstanding Advances and other Obligations and the Lenders' Commitments
hereunder have terminated.
6.5. TAXES. The Borrower will, and will cause each Subsidiary to,
timely file complete and correct United States federal and applicable foreign,
state and local tax returns required by applicable law and pay when due all
taxes, assessments and governmental charges and levies upon it or its income,
profits or Property, except those which are being contested in good faith by
appropriate proceedings and with respect to which adequate reserves have been
set aside.
6.6. INSURANCE. The Borrower will, and will cause each Subsidiary to,
maintain with financially sound and reputable insurance companies insurance on
all their Property in such amounts and covering such risks as is consistent with
sound business practice, and the Borrower will furnish to the Agent and any
Lender upon request full information as to the insurance carried.
6.7. COMPLIANCE WITH LAWS. The Borrower will, and will cause each
Subsidiary to, comply with all laws, rules, regulations, orders, writs,
judgments, injunctions, decrees or awards to which it may be subject, the
failure to comply with which could reasonably be expected to have a Material
Adverse Effect.
6.8. MAINTENANCE OF PROPERTIES. The Borrower will, and will cause each
Subsidiary to, do all things necessary to maintain, preserve, protect and keep
its Property in good repair, working order and condition, and make all necessary
and proper repairs, renewals and replacements so that its business carried on in
connection therewith may be properly conducted at all times.
6.9. INSPECTION. The Borrower will, and will cause each Subsidiary to,
at reasonable times during normal business hours and upon reasonable notice,
permit the Agent and the Lenders, by their respective representatives and
agents, to inspect any of the Property, corporate books and financial records of
the Borrower and each Subsidiary, to examine and make copies of the books of
accounts and other financial records of the Borrower and each Subsidiary, and to
discuss the affairs, finances and accounts of the Borrower and each Subsidiary
with, and to be advised as to the same by, their respective officers at such
reasonable times and intervals as the Lenders may designate.
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The Borrower will keep or cause to be kept, and cause each Subsidiary to keep or
cause to be kept, appropriate records and books of account in which complete
entries are to be made reflecting its and their business and financial
transactions, such entries to be made in accordance with Agreement Accounting
Principles.
6.10. DIVIDENDS. The Borrower will not declare or pay any dividends or
make any distributions on its capital stock (other than dividends payable in its
own capital stock) or redeem, repurchase or otherwise acquire or retire any of
its capital stock or any options or other rights in respect thereof at any time
outstanding, except that so long as no Default or Unmatured Default exists
before or after giving effect to the declaration or payment of such dividends or
distributions or repurchase or redemption of such stock or other transaction,
the Borrower may declare and pay dividends, and make distributions, on its
common stock and repurchase and redeem and otherwise acquire or retire its
common stock and any options or other rights in respect thereof.
6.11. INDEBTEDNESS. The Borrower will not, nor will it permit any
Subsidiary (other than an Unrestricted Subsidiary) to, create, incur or suffer
to exist any Indebtedness, except:
(a) the Loans;
(b) Indebtedness existing on the date hereof and any renewals,
extensions, refundings or refinancings of such Indebtedness (including
any necessary pre-payment premium payments on such Indebtedness);
PROVIDED that the amount thereof is not increased and the maturity or
scheduled amortization of principal thereof is not shortened (unless to
a maturity or scheduled amortization occurring after the Maturity
Date);
(c) Indebtedness owing by (x) the Borrower to any Wholly-Owned
Subsidiary and (y) any Wholly-Owned Subsidiary to a Wholly-Owned
Subsidiary or the Borrower;
(d) Indebtedness permitted under the White Mountains Credit
Agreement and the Valley Credit Agreement;
(e) Indebtedness of the Borrower, the proceeds of which are
used directly or indirectly to refund or refinance Indebtedness of
Wholly-Owned Subsidiaries of the Borrower (other than any Unrestricted
Subsidiaries); PROVIDED, however that the amount thereof is not
increased, the maturity or scheduled amortization of principal thereof
is not set to a maturity or scheduled amortization occurring before the
Maturity Date hereunder and the terms of the proposed Indebtedness are
not otherwise, in the reasonable judgment of the Required Lenders,
disadvantageous (relative to the terms of the Indebtedness refunded or
refinanced) to the interests of the Lenders hereunder;
(f) Contingent Obligations permitted by SECTION 6.13; and
(g) other Indebtedness, so long as such other Indebtedness
does not at any time exceed $10,000,000 in aggregate principal amount.
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6.12. MERGER. The Borrower will not, nor will it permit any Significant
Subsidiary to, merge or consolidate with or into any other Person, except that:
(a) a Wholly-Owned Subsidiary may merge into the Borrower or
any Wholly-Owned Subsidiary of the Borrower;
(b) a Significant Subsidiary (other than White Mountains) may
merge or consolidate with any Person so long as either (x) (i) no
Default or Unmatured Default shall have occurred or be continuing
before and after giving effect to such merger or consolidation and (ii)
such Significant Subsidiary is the continuing or surviving corporation
or (y) neither the Borrower nor any Subsidiaries hold any capital stock
of such Significant Subsidiary after giving effect to such merger or
consolidation; and
(c) the Borrower or White Mountains may merge or consolidate
with any other Person, so long as immediately thereafter (and after
giving effect thereto), (i) no Default or Unmatured Default exists,
(ii) the Borrower or White Mountains, as applicable, is the continuing
or surviving corporation and (iii) the covenants contained in SECTION
6.20 shall be complied with on a PRO FORMA basis on the date of, and
after giving effect to, such merger or consolidation.
6.13. CONTINGENT OBLIGATIONS. The Borrower will not, nor will it permit
any Subsidiary (other than an Unrestricted Subsidiary) to, make or suffer to
exist any Contingent Obligation (including, without limitation, any Contingent
Obligation with respect to the obligations of a Subsidiary), except (a) the
issuance of financial guarantees in the ordinary course of business and
consistent with past practices, (b) by endorsement of instruments for deposit or
collection in the ordinary course of business, (c) for insurance policies issued
in the ordinary course of business, (d) the issuance of intercompany guarantees
so long as the primary obligation is permitted pursuant to this Agreement and
(e) Contingent Obligations which are (i) permitted pursuant to the White
Mountains Credit Agreement and the Valley Credit Agreement or (ii) created by
the Folksamerica Assumption.
6.14. LIENS. The Borrower will not, nor will it permit any Subsidiary
to, create, incur, or suffer to exist any Lien in, of or on the Property (other
than Margin Stock) of the Borrower or any of its Subsidiaries (other than an
Unrestricted Subsidiary), except:
(a) Liens for taxes, assessments or governmental charges or
levies on its Property if the same shall not at the time be delinquent
or thereafter can be paid without penalty, or are being contested in
good faith and by appropriate proceedings and for which adequate
reserves in accordance with generally accepted principles of accounting
shall have been set aside on its books;
(b) Liens imposed by law, such as carriers', warehousemen's
and mechanics' liens and other similar liens arising in the ordinary
course of business which secure the payment
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of obligations not more than sixty (60) days past due or which are
being contested in good faith by appropriate proceedings and for which
adequate reserves shall have been set aside on its books;
(c) Liens arising out of pledges or deposits under worker's
compensation laws, unemployment insurance, old age pensions, or other
social security or retirement benefits, or similar legislation;
(d) Utility easements, building restrictions and such other
encumbrances or charges against real property as are of a nature
generally existing with respect to properties of a similar character
and which do not in any material way affect the marketability of the
same or interfere with the use thereof in the business of the Borrower
or its Subsidiaries;
(e) Liens existing on the date hereof and described in
SCHEDULE 6.14 hereto;
(f) Liens in, of or on Property acquired after the date of
this Agreement (by purchase, construction or otherwise), each of which
Liens either (1) existed on such Property before the time of its
acquisition and was not created in anticipation thereof, or (2) was
created solely for the purpose of securing Indebtedness representing,
or incurred to finance, refinance or refund, the cost (including the
cost of construction) of such Property; PROVIDED that no such Lien
shall extend to or cover any Property of the Borrower or such
Subsidiary other than the Property so acquired and improvements
thereon; and PROVIDED, FURTHER, that the principal amount of
Indebtedness secured by any such Lien shall at the time the Lien is
incurred not exceed 75% of the fair market value (as determined in good
faith by a financial officer of the Borrower and, in the case of such
Property having a fair market value in excess of $500,000, certified by
such officer to the Agent, with a copy for each Lender) of the Property
at the time it was so acquired;
(g) Liens not otherwise permitted by the foregoing clauses
(a) through (f) securing any Indebtedness of the Borrower, PROVIDED
that the aggregate principal amount of Indebtedness secured by Liens
permitted by this clause (g) shall not exceed $5,000,000 at any time;
and
(h) Liens permitted under the White Mountains Credit
Agreement and the Valley Credit Agreement.
6.15. INVESTMENTS AND PURCHASES. The Borrower will not, and will not
permit any Subsidiary (other than any Unrestricted Subsidiary) to, make or
suffer to exist any Investments (including, without limitation, loans and
advances to, and other Investments in, Subsidiaries), or commitments therefor,
or to create any Subsidiary or to become or remain a partner in any partnership
or joint venture, or to make any Purchases, except:
(a) Cash and Cash Equivalents;
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(b) Investments or commitments therefor (such commitments
being set forth on SCHEDULE 6.15) in existence as of the date hereof
(including Investments in Subsidiaries as of the date hereof);
(c) Investments in debt securities rated BBB- or better by
S&P, Baa-3 or better by Moody's or NAIC-2 or better by the NAIC;
PROVIDED, that any such Investment which, at any time after which it is
made, ceases to meet such rating requirements shall (A) cease to be
permitted hereby if then permitted by SECTION 6.15(A)(VI) and (B) if
not then permitted by SECTION 6.15(A)(VI) remain permitted hereby until
the earlier of the time it is permitted under SECTION 6.15(A)(VI) and
the date which is thirty (30) days after the date on which such rating
requirement is no longer met;
(d) Purchases of or Investments in businesses or entities
engaged in the insurance business and/or insurance services or
businesses reasonably incident thereto (including holding companies,
the Subsidiaries of which on a consolidated basis are primarily engaged
in such businesses) which do not constitute hostile takeovers
(including the creation of Subsidiaries in connection therewith) so
long as no Default or Unmatured Default has occurred and is continuing
or would occur after giving effect to such Purchase or Investment;
(e) Other Investments by the Borrower in any Person which is
a Subsidiary (other than any Unrestricted Subsidiary) as of the date
hereof, so long as no Default or Unmatured Default has occurred and is
continuing or would occur after giving effect to such Investment;
(f) Investments by the Borrower (in addition to those
permitted by CLAUSES (A) through (E) of this SECTION 6.15) in an amount
not exceeding in aggregate $40,000,000 PLUS the FSA Amount (including
the creation of Subsidiaries and Investments therein and Investments in
any partnership or joint venture) so long as at the time of such
Investment no Default or Unmatured Default has occurred and is
continuing or would occur after giving effect to such Investment;
PROVIDED, however, that any Investments pursuant to this CLAUSE (F) are
made from net proceeds traceable to either (i) dividends, sales,
transfers or other distributions of equity interests in SOMSC or (ii)
the sale or issuance of equity securities of the Borrower after the
date hereof.
(g) Investments by the Borrower (in addition to those
permitted by the other clauses of this SECTION 6.15) in an amount not
exceeding $10,000,000 (including the creation of Subsidiaries and
Investments therein and Investments in any partnership or joint
venture) so long as at the time of such Investment no Default or
Unmatured Default has occurred and is continuing or would occur after
giving effect to such Investment; and
(h) With respect to White Mountains and its Subsidiaries,
Investments permitted under the White Mountains Credit Agreement and
the Valley Credit Agreement.
6.16. AFFILIATES. The Borrower will not, and will not permit any
Subsidiary to, enter into any material transaction (including, without
limitation, the purchase or sale of any Property or
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service) with, or make any payment or transfer to, any Affiliate (other than a
Wholly-Owned Subsidiary), except in the ordinary course of business and pursuant
to the reasonable requirements of the Borrower's or such Subsidiary's business
and upon fair and reasonable terms no less favorable to the Borrower or such
Subsidiary than the Borrower or such Subsidiary would obtain in a comparable
arms-length transaction, except that any Unrestricted Subsidiary may make loans
to the Borrower.
6.17. ENVIRONMENTAL MATTERS. The Borrower shall and shall cause each of
its Subsidiaries to (a) at all times comply in all material respects with all
applicable Environmental Laws and (b) promptly take any and all necessary
remedial actions in response to the presence, storage, use, disposal,
transportation or Release of any Hazardous Materials on, under or about any real
property owned, leased or operated by the Borrower or any of its Subsidiaries.
6.18. CHANGE IN CORPORATE STRUCTURE; FISCAL YEAR. The Borrower shall
not, nor shall it permit any Subsidiary to, (a) permit any amendment or
modification to be made to its certificate or articles of incorporation or
by-laws which is materially adverse to the interests of the Lenders or (b)
change its Fiscal Year to end on any date other than December 31 of each year.
6.19. INCONSISTENT AGREEMENTS. The Borrower shall not, nor shall it
permit any Subsidiary (other than an Unrestricted Subsidiary) to, enter into any
indenture, agreement, instrument or other arrangement which by its terms, (a)
other than pursuant to the White Mountains Credit Agreement or the Valley Credit
Agreement or pursuant to agreements or arrangements with regulatory agencies
with regard to Insurance Subsidiaries, directly or indirectly contractually
prohibits or restrains, or has the effect of contractually prohibiting or
restraining, or contractually imposes materially adverse conditions upon, the
incurrence of the Obligations, the granting of Liens to secure the Obligations,
the amending of the Loan Documents or the ability of any Subsidiary to (i) pay
dividends or make other distributions on its capital stock, (ii) make loans or
advances to the Borrower or (iii) repay loans or advances from the Borrower or
(b) contains any provision which would be violated or breached by the making of
Advances or by the performance by the Borrower or any Subsidiary of any of its
obligations under any Loan Document.
6.20. FINANCIAL COVENANTS - MINIMUM NET WORTH. The Borrower shall, at
all times after the date hereof, maintain a minimum Net Worth at least equal to
(a) the sum of (i) $537,870,000, PLUS (ii) an amount equal to 90% of the cash
and non-cash proceeds of any equity securities issued by the Borrower after June
30, 1998, MINUS (b) an amount equal to the lesser of (i) $30,000,000 or (ii) the
aggregate amount expended by the Borrower after the date hereof to repurchase
its capital stock in compliance with SECTION 6.10.
6.21. TAX CONSOLIDATION. The Borrower will not and will not permit any
of its Subsidiaries to (a) file or consent to the filing of any consolidated,
combined or unitary income tax return with any Person other than the Borrower
and its Subsidiaries or (b) amend, terminate or fail to enforce any existing tax
sharing agreement or similar arrangement if such action would cause a Material
Adverse Effect.
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6.22. ERISA COMPLIANCE.
With respect to any Plan, neither the Borrower nor any
Subsidiary shall:
(a) engage in any "prohibited transaction" (as such term is
defined in Section 406 of ERISA or Section 4975 of the Code) for which
a civil penalty pursuant to Section 502(i) of ERISA or a tax pursuant
to Section 4975 of the Code in excess of $500,000 could be imposed;
(b) incur any "accumulated funding deficiency" (as such term
is defined in Section 302 of ERISA) in excess of $500,000, whether or
not waived, or permit any Unfunded Liability to exceed $500,000;
(c) permit the occurrence of any Termination Event which
could result in a liability to the Borrower or any other member of the
Controlled Group in excess of $500,000;
(d) be an "employer" (as such term is defined in Section
3(5) of ERISA) required to contribute to any Multiemployer Plan or a
"substantial employer" (as such term in defined in Section 4001(a)(2)
of ERISA) required to contribute to any Multiple Employer Plan; or
(e) permit the establishment or amendment of any Plan or
fail to comply with the applicable provisions of ERISA and the Code
with respect to any Plan which could result in liability to the
Borrower or any other member of the Controlled Group which,
individually or in the aggregate, could reasonably be expected to have
a Material Adverse Effect.
6.23. YEAR 2000. The Borrower will take and will cause each of its
Subsidiaries to take all such actions as are reasonably necessary to
successfully implement the Year 2000 Program and to assure that Year 2000 Issues
will not have a Material Adverse Effect. At the request of the Agent or any
Lender, the Borrower will provide a description of the Year 2000 Program,
together with any updates or progress reports with respect thereto.
ARTICLE VII
DEFAULTS
The occurrence of any one or more of the following events shall
constitute a Default:
7.1. Any representation or warranty made or deemed made by or on behalf
of the Borrower or any of its Subsidiaries to the Lenders or the Agent under or
in connection with this Agreement, any other Loan Document, any Loan, or any
certificate or information delivered in connection with this Agreement or any
other Transaction Document shall be false in any material respect on the date as
of which made.
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7.2. Nonpayment of (a) any principal of any Note when due, or (b) any
interest upon any Note or any commitment fee or other fee or obligations under
any of the Loan Documents within five (5) days after the same becomes due.
7.3. The breach by the Borrower of any of the terms or provisions of
SECTION 6.2, SECTION 6.3(A) or SECTIONS 6.10 through 6.16 or SECTIONS 6.18
through 6.22.
7.4. The breach by the Borrower (other than a breach which constitutes
a Default under SECTIONS 7.1, 7.2 or 7.3) of any of the terms or provisions of
this Agreement which is not remedied within twenty (20) days after written
notice from the Agent or any Lender.
7.5. The default by the Borrower or any of its Subsidiaries in the
performance of any term, provision or condition contained in any agreement or
agreements under which any Funded Indebtedness aggregating in excess of
$10,000,000 ($20,000,000, or such lower cross-default threshold amount as is
provided in the SOMSC Credit Agreements, in the case of SOMSC) was created or is
governed, or the occurrence of any other event or existence of any other
condition, the effect of any of which is to cause, or to permit the holder or
holders of such Funded Indebtedness to cause, such Funded Indebtedness to become
due prior to its stated maturity; or any such Funded Indebtedness of the
Borrower or any of its Subsidiaries shall be declared to be due and payable or
required to be prepaid (other than by a regularly scheduled payment) prior to
the stated maturity thereof.
7.6. The Borrower or any of its Significant Subsidiaries shall (a) have
an order for relief entered with respect to it under the Federal bankruptcy laws
as now or hereafter in effect, (b) make an assignment for the benefit of
creditors, (c) apply for, seek, consent to, or acquiesce in, the appointment of
a receiver, custodian, trustee, examiner, liquidator or similar official for it
or any substantial portion of its Property, (d) institute any proceeding seeking
an order for relief under the Federal bankruptcy laws as now or hereafter in
effect or seeking to adjudicate it a bankrupt or insolvent, or seeking
dissolution, winding up, liquidation, reorganization, arrangement, adjustment or
composition of it or its debts under any law relating to bankruptcy, insolvency
or reorganization or relief of debtors or fail to file an answer or other
pleading denying the material allegations of any such proceeding filed against
it, (e) take any corporate action to authorize or effect any of the foregoing
actions set forth in this SECTION 7.6, (f) fail to contest in good faith any
appointment or proceeding described in SECTION 7.7 or (g) become unable to pay,
not pay, or admit in writing its inability to pay, its debts generally as they
become due.
7.7. Without the application, approval or consent of the Borrower or
any of its Significant Subsidiaries, a receiver, trustee, examiner, liquidator
or similar official shall be appointed for the Borrower or any of its
Significant Subsidiaries or any substantial portion of its Property, or a
proceeding described in SECTION 7.6(D) shall be instituted against the Borrower
or any of its Significant Subsidiaries and such appointment continues
undischarged or such proceeding continues undismissed or unstayed for a period
of sixty (60) consecutive days.
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7.8. The Borrower or any of its Subsidiaries shall fail within thirty
(30) days to pay, bond or otherwise discharge any judgment or order for the
payment of money in excess of $2,000,000 (or multiple judgments or orders for
the payment of an aggregate amount in excess of $10,000,000), which is not
stayed on appeal or otherwise being appropriately contested in good faith and as
to which no enforcement actions have been commenced.
7.9. The occurrence of any "default", as defined in any Transaction
Document (other than this Agreement or the Notes), or the breach of any of the
terms or provisions of any Transaction Document (other than this Agreement or
the Notes), which default or breach continues beyond any period of grace therein
provided.
7.10. The White Mountains Guaranty shall fail, after its execution, to
remain in full force or effect or any action shall be taken to discontinue or to
assert the invalidity or unenforceability of the White Mountains Guaranty, or
White Mountains shall fail to comply with any of the terms or provisions of the
White Mountains Guaranty within any applicable grace period provided therein.
7.11. Any Change in Control shall occur.
ARTICLE VIII
ACCELERATION, WAIVERS, AMENDMENTS AND REMEDIES
8.1. ACCELERATION. If any Default described in SECTIONS 7.6 or 7.7
occurs with respect to the Borrower, the obligations of the Lenders to make
Loans hereunder shall automatically terminate and the Obligations shall
immediately become due and payable without any election or action on the part of
the Agent or any Lender. If any other Default occurs, the Required Lenders (or
the Agent with the consent of the Required Lenders) may terminate or suspend the
obligations of the Lenders to make Loans hereunder, or declare the Obligations
to be due and payable, or both, whereupon the Obligations shall become
immediately due and payable, without presentment, demand, protest or notice of
any kind, all of which the Borrower hereby expressly waives.
If, within ten (10) Business Days after acceleration of the maturity of
the Obligations or termination of the obligations of the Lenders to make Loans
hereunder as a result of any Default (other than any Default as described in
SECTIONS 7.6 or 7.7 with respect to the Borrower) and before any judgment or
decree for the payment of the Obligations due shall have been obtained or
entered, the Required Lenders (in their sole discretion) shall so direct, the
Agent shall, by notice to the Borrower, rescind and annul such acceleration
and/or termination.
8.2. AMENDMENTS. Subject to the provisions of this ARTICLE VIII, the
Required Lenders (or the Agent with the consent in writing of the Required
Lenders) and the Borrower may enter into agreements supplemental hereto for the
purpose of adding or modifying any provisions to the Loan Documents or changing
in any manner the rights of the Lenders or the Borrower hereunder or
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waiving any Default hereunder; PROVIDED, HOWEVER, that no such supplemental
agreement shall, without the consent of each Lender:
(a) Extend the final maturity of any Loan or Note or reduce
the principal amount thereof, or reduce the rate or, subject to SECTION
2.10, extend the time of payment of interest or fees thereon;
(b) Reduce the percentage specified in the definition of
Required Lenders;
(c) Increase the amount of the Commitment of any Lender
hereunder;
(d) Extend the Revolver Termination Date or the Maturity Date;
(e) Amend this SECTION 8.2;
(f) Permit any assignment by the Borrower of its Obligations
or its rights hereunder; or
(g) Release the White Mountains Guaranty.
No amendment of any provision of this Agreement relating to the Agent shall be
effective without the written consent of the Agent. The Agent may waive payment
of the fee required under SECTION 12.3.2 without obtaining the consent of any
other party to this Agreement.
8.3. PRESERVATION OF RIGHTS. No delay or omission of the Lenders or the
Agent to exercise any right under the Transaction Documents shall impair such
right or be construed to be a waiver of any Default or an acquiescence therein,
and the making of a Loan notwithstanding the existence of a Default or the
inability of the Borrower to satisfy the conditions precedent to such Loan shall
not constitute any waiver or acquiescence. Any single or partial exercise of any
such right shall not preclude other or further exercise thereof or the exercise
of any other right, and no waiver, amendment or other variation of the terms,
conditions or provisions of the Transaction Documents whatsoever shall be valid
unless in writing signed by the Lenders required pursuant to SECTION 8.2, and
then only to the extent in such writing specifically set forth. All remedies
contained in the Loan Documents or by law afforded shall be cumulative and all
shall be available to the Agent and the Lenders until the Obligations have been
paid in full.
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ARTICLE IX
GENERAL PROVISIONS
9.1. SURVIVAL OF REPRESENTATIONS. All representations and warranties of
the Borrower or any Subsidiary contained in any Loan Document shall survive
delivery of the Notes and the making of the Loans herein contemplated.
9.2. GOVERNMENTAL REGULATION. Anything contained in this Agreement to
the contrary notwithstanding, no Lender shall be obligated to extend credit to
the Borrower in violation of any limitation or prohibition provided by any
applicable statute or regulation.
9.3. TAXES. Any stamp, documentary or similar taxes, assessments or
charges payable or ruled payable by any governmental authority in respect of the
Loan Documents shall be paid by the Borrower, together with interest and
penalties, if any.
9.4. HEADINGS. Section headings in the Loan Documents are for
convenience of reference only, and shall not govern the interpretation of any of
the provisions of the Loan Documents.
9.5. ENTIRE AGREEMENT. The Transaction Documents embody the entire
agreement and understanding among the Borrower, the Agent and the Lenders and
supersede all prior agreements and understandings among the Borrower, the Agent
and the Lenders relating to the subject matter thereof other than the fee
letter, dated August 14, 1998, in favor of First Chicago.
9.6. SEVERAL OBLIGATIONS; BENEFITS OF THIS AGREEMENT. The respective
obligations of the Lenders hereunder are several and not joint and no Lender
shall be the partner or agent of any other (except to the extent to which the
Agent is authorized to act as such). The failure of any Lender to perform any of
its obligations hereunder shall not relieve any other Lender from any of its
obligations hereunder. This Agreement shall not be construed so as to confer any
right or benefit upon any Person other than the parties to this Agreement and
their respective successors and assigns.
9.7. EXPENSES; INDEMNIFICATION. The Borrower shall reimburse the Agent
for any reasonable costs, internal charges and out-of-pocket expenses (including
attorneys' fees and time charges of attorneys for the Agent, which attorneys may
be employees of the Agent) paid or incurred by the Agent in connection with the
preparation, negotiation, execution, delivery, review, amendment, modification,
and administration of the Transaction Documents. The Borrower also agrees to
reimburse the Agent and the Lenders for any reasonable costs, internal charges
and out-of-pocket expenses (including attorneys' fees and time charges of
attorneys for the Agent and the Lenders, which attorneys may be employees of the
Agent or the Lenders) paid or incurred by the Agent or any Lender in connection
with the collection and enforcement of the Transaction Documents. The Borrower
further agrees to indemnify the Agent and each Lender, its directors,
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officers and employees against all losses, claims, damages, penalties,
judgments, liabilities and expenses (including, without limitation, all expenses
of litigation or preparation therefor whether or not the Agent or any Lender is
a party thereto) which any of them may pay or incur arising out of or relating
to this Agreement, the other Transaction Documents, the transactions
contemplated hereby or thereby or the direct or indirect application or proposed
application of the proceeds of any Loan hereunder arising from claims or
assertions by third parties except to the extent that they arise out of the
gross negligence or willful misconduct of the party seeking indemnification. The
obligations of the Borrower under this Section shall survive the termination of
this Agreement.
9.8. NUMBERS OF DOCUMENTS. All statements, notices, closing documents,
and requests hereunder shall be furnished to the Agent with sufficient
counterparts so that the Agent may furnish one to each of the Lenders.
9.9. ACCOUNTING. Except as provided to the contrary herein, all
accounting terms used herein shall be interpreted and all accounting
determinations hereunder shall be made in accordance with Agreement Accounting
Principles.
9.10. SEVERABILITY OF PROVISIONS. Any provision in any Loan Document
that is held to be inoperative, unenforceable, or invalid in any jurisdiction
shall, as to that jurisdiction, be inoperative, unenforceable, or invalid
without affecting the remaining provisions in that jurisdiction or the
operation, enforceability, or validity of that provision in any other
jurisdiction, and to this end the provisions of all Loan Documents are declared
to be severable.
9.11. NONLIABILITY OF LENDERS. The relationship between the Borrower
and the Lenders and the Agent shall be solely that of borrower and lender.
Neither the Agent nor any Lender shall have any fiduciary responsibilities to
the Borrower. Neither the Agent nor any Lender undertakes any responsibility to
the Borrower to review or inform the Borrower of any matter in connection with
any phase of the Borrower's business or operations. The Borrower shall rely
entirely upon its own judgment with respect to its business, and any review,
inspection or supervision of, or information supplied to the Borrower by the
Agent or the Lenders is for the protection of the Agent and the Lenders and
neither the Borrower nor any other Person is entitled to rely thereon. Whether
or not such damages are related to a claim that is subject to the waiver
effected above and whether or not such waiver is effective, neither the Agent
nor any Lender shall have any liability with respect to, and the Borrower hereby
waives, releases and agrees not to sue for, any special, indirect or
consequential damages suffered by the Borrower in connection with, arising out
of, or in any way related to the Transaction Documents or the transactions
contemplated thereby or the relationship established by the Transaction
Documents, or any act, omission or event occurring in connection therewith.
9.12. CHOICE OF LAW. THE LOAN DOCUMENTS (OTHER THAN THOSE CONTAINING A
CONTRARY EXPRESS CHOICE OF LAW PROVISION) SHALL BE CONSTRUED IN ACCORDANCE WITH
THE INTERNAL LAWS, WITHOUT REGARD TO CONFLICT OF LAWS PROVISIONS, OF THE STATE
OF ILLINOIS, BUT GIVING EFFECT TO FEDERAL LAWS APPLICABLE TO NATIONAL BANKS.
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9.13. CONSENT TO JURISDICTION. THE BORROWER HEREBY IRREVOCABLY SUBMITS
TO THE NON-EXCLUSIVE JURISDICTION OF ANY UNITED STATES FEDERAL OR ILLINOIS STATE
COURT SITTING IN CHICAGO IN ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING
TO ANY TRANSACTION DOCUMENT AND THE BORROWER HEREBY IRREVOCABLY AGREES THAT ALL
CLAIMS IN RESPECT OF SUCH ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED IN
ANY SUCH COURT AND IRREVOCABLY WAIVES ANY OBJECTION IT MAY NOW OR HEREAFTER HAVE
AS TO THE VENUE OF ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN SUCH A COURT
OR THAT SUCH COURT IS AN INCONVENIENT FORUM. NOTHING HEREIN SHALL LIMIT THE
RIGHT OF THE AGENT OR ANY LENDER TO BRING PROCEEDINGS AGAINST THE BORROWER IN
THE COURTS OF ANY OTHER JURISDICTION. ANY JUDICIAL PROCEEDING BY THE BORROWER
AGAINST THE AGENT OR ANY LENDER OR ANY AFFILIATE OF THE AGENT OR ANY LENDER
INVOLVING, DIRECTLY OR INDIRECTLY, ANY MATTER IN ANY WAY ARISING OUT OF, RELATED
TO, OR CONNECTED WITH ANY TRANSACTION DOCUMENT SHALL BE BROUGHT ONLY IN A COURT
IN CHICAGO, ILLINOIS; PROVIDED, THAT SUCH PROCEEDINGS MAY BE BROUGHT IN OTHER
COURTS IF JURISDICTION MAY NOT BE OBTAINED IN A COURT IN CHICAGO, ILLINOIS.
9.14. WAIVER OF JURY TRIAL. THE BORROWER, THE AGENT AND EACH LENDER
HEREBY WAIVE TRIAL BY JURY IN ANY JUDICIAL PROCEEDING INVOLVING, DIRECTLY OR
INDIRECTLY, ANY MATTER (WHETHER SOUNDING IN TORT, CONTRACT OR OTHERWISE) IN ANY
WAY ARISING OUT OF, RELATED TO, OR CONNECTED WITH ANY TRANSACTION DOCUMENT OR
THE RELATIONSHIP ESTABLISHED THEREUNDER.
9.15. DISCLOSURE. The Borrower and each Lender hereby (a) acknowledge
and agree that First Chicago and/or its Affiliates from time to time may hold
other investments in, make other loans to or have other relationships with the
Borrower, including, without limitation, in connection with any interest rate
hedging instruments or agreements or swap transactions, and (b) waive any
liability of First Chicago or such Affiliate to the Borrower or any Lender,
respectively, arising out of or resulting from such investments, loans or
relationships other than liabilities arising out of the gross negligence or
willful misconduct of First Chicago or its Affiliates to the extent that such
liability would not have arisen but for First Chicago's status as Agent
hereunder.
9.16. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, all of which taken together shall constitute one agreement, and
any of the parties hereto may execute this Agreement by signing any such
counterpart. This Agreement shall be effective when it has been executed by the
Borrower, the Agent and the Lenders and each party has notified the Agent that
it has taken such action.
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9.17. TREATMENT OF CERTAIN INFORMATION: CONFIDENTIALITY.
(a) The Borrower acknowledges that (i) services may be
offered or provided to it (in connection with this Agreement or otherwise) by
each Lender or by one or more Subsidiaries or Affiliates of such Lender and (ii)
information delivered to each Lender by the Borrower and its Subsidiaries may be
provided to each such Subsidiary and Affiliate, it being understood that any
such Subsidiary or Affiliate receiving such information shall be bound by the
provisions of clause (b) below as if it were a Lender hereunder.
(b) Each Lender and the Agent agrees (on behalf of itself
and each of its affiliates, directors, officers, employees and representatives)
to use reasonable precautions to keep confidential, in accordance with their
customary procedures for handling confidential information of this nature and in
accordance with safe and sound banking practices, any non-public information
supplied to it by the Borrower pursuant to this Agreement, provided that nothing
herein shall limit the disclosure of any such information (i) to the extent
required by statue, rule, regulation or judicial process, (ii) to counsel for
any of the Lenders or the Agent, (iii) to bank examiners, auditors or
accountants, (iv) to the Agent or any other Lender (or to First Chicago Capital
Markets, Inc.), (v) in connection with any litigation to which any one or more
of the Lenders or the Agent is a party, (vi) to a subsidiary or affiliate of
such Lender as provided in clause (a) above, (vii) to any assignee or
participant (or prospective assignee or participant) so long as such assignee or
participant (or prospective assignee or participant) agrees with the respective
Lender to keep such information confidential on substantially the terms set
forth in this SECTION 9.17(B), (viii) to any other Person as may be reasonably
required in the course of the enforcement of any Lender's rights or remedies
hereunder or under any of such Lender's Note, or (ix) to any other creditor of
either Borrower or any of its Subsidiaries at any time during the continuance of
a Default; PROVIDED that in no event shall any Lender or the Agent be obligated
or required to return any materials furnished by the Borrower.
ARTICLE X
THE AGENT
10.1. APPOINTMENT. First Chicago is hereby appointed Agent hereunder
and under each other Transaction Document, and each of the Lenders authorizes
the Agent to act as the agent of such Lender. The Agent agrees to act as such
upon the express conditions contained in this ARTICLE X. The Agent shall not
have a fiduciary relationship in respect of the Borrower or any Lender by reason
of this Agreement or any other Transaction Document.
10.2. POWERS. The Agent shall have and may exercise such powers under
the Transaction Documents as are specifically delegated to the Agent by the
terms of each thereof, together with such powers as are reasonably incidental
thereto. The Agent shall have no implied duties to the Lenders, or any
obligation to the Lenders to take any action thereunder, except any action
specifically provided by the Transaction Documents to be taken by the Agent.
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10.3. GENERAL IMMUNITY. Neither the Agent nor any of its directors,
officers, agents or employees shall be liable to the Borrower or any Lender for
any action taken or omitted to be taken by it or them hereunder or under any
other Transaction Document or in connection herewith or therewith except for its
or their own gross negligence or willful misconduct.
10.4. NO RESPONSIBILITY FOR LOANS, RECITALS, ETC. Neither the Agent nor
any of its directors, officers, agents or employees shall be responsible for or
have any duty to ascertain, inquire into, or verify (a) any statement, warranty
or representation made in connection with any Transaction Document or any
borrowing hereunder, (b) the performance or observance of any of the covenants
or agreements of any obligor under any Transaction Document, including, without
limitation, any agreement by an obligor to furnish information directly to each
Lender; (c) the satisfaction of any condition specified in ARTICLE IV, except
receipt of items required to be delivered to the Agent and not waived at
closing, or (d) the validity, effectiveness, sufficiency, enforceability or
genuineness of any Transaction Document or any other instrument or writing
furnished in connection therewith. The Agent shall have no duty to disclose to
the Lenders information that is not required to be furnished by the Borrower to
the Agent at such time, but is voluntarily furnished by the Borrower to the
Agent (either in its capacity as Agent or in its individual capacity).
10.5. ACTION ON INSTRUCTIONS OF LENDERS. The Agent shall in all cases
be fully protected in acting, or in refraining from acting, hereunder and under
any other Transaction Document in accordance with written instructions signed by
the Required Lenders (or, to the extent required by SECTION 8.2, all Lenders),
and such instructions and any action taken or failure to act pursuant thereto
shall be binding on all of the Lenders and on all holders of Notes. The Agent
shall be fully justified in failing or refusing to take any action hereunder and
under any other Transaction Document unless it shall first be indemnified to its
satisfaction by the Lenders pro rata against any and all liability, cost and
expense that it may incur by reason of taking or continuing to take any such
action.
10.6. EMPLOYMENT OF AGENTS AND COUNSEL. The Agent may execute any of
its duties as Agent hereunder and under any other Transaction Document by or
through employees, agents and attorneys-in-fact and shall not be answerable to
the Lenders, except as to money or securities received by it or its authorized
agents, for the default or misconduct of any such agents or attorneys-in-fact
selected by it with reasonable care. The Agent shall be entitled to advice of
counsel concerning all matters pertaining to the agency hereby created and its
duties hereunder and under any other Transaction Document.
10.7. RELIANCE ON DOCUMENTS; COUNSEL. The Agent shall be entitled to
rely upon any Note, notice, consent, certificate, affidavit, letter, telegram,
statement, paper or document believed by it to be genuine and correct and to
have been signed or sent by the proper person or persons, and, in respect to
legal matters, upon the opinion of counsel selected by the Agent, which counsel
may be employees of the Agent.
10.8. AGENT'S REIMBURSEMENT AND INDEMNIFICATION. The Lenders agree to
reimburse and indemnify the Agent ratably in proportion to their respective
Commitments (or, if the Commitments have been terminated, in proportion to their
Commitments immediately prior to such termination)
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(a) for any amounts not reimbursed by the Borrower for which the Agent is
entitled to reimbursement by the Borrower under the Transaction Documents, (b)
for any other expenses incurred by the Agent on behalf of the Lenders, in
connection with the preparation, execution, delivery, administration and
enforcement of the Transaction Documents, and (c) for any liabilities,
obligations, losses, damages, penalties, actions, judgments, suits, costs,
expenses or disbursements of any kind and nature whatsoever which may be imposed
on, incurred by or asserted against the Agent in any way relating to or arising
out of the Loan Documents or any other document delivered in connection
therewith or the transactions contemplated thereby, or the enforcement of any of
the terms thereof or of any such other documents; PROVIDED, that no Lender shall
be liable for any of the foregoing to the extent they arise from the gross
negligence or willful misconduct of the Agent. The obligations of the Lenders
under this SECTION 10.8 shall survive payment of the Obligations and termination
of this Agreement.
10.9. NOTICE OF DEFAULT. The Agent shall not be deemed to have
knowledge or notice of the occurrence of any Default or Unmatured Default
hereunder unless the Agent has received written notice from a Lender or the
Borrower referring to this Agreement describing such Default or Unmatured
Default and stating that such notice is a "notice of default". In the event that
the Agent receives such a notice, the Agent shall give prompt notice thereof to
the Lenders.
10.10. RIGHTS AS A LENDER. In the event the Agent is a Lender, the
Agent shall have the same rights and powers hereunder and under any other
Transaction Document as any Lender, including, without limitation, pursuant to
ARTICLE XII hereof, and may exercise the same as though it were not the Agent,
and the term "Lender" or "Lenders" shall, at any time when the Agent is a
Lender, unless the context otherwise indicates, include the Agent in its
individual capacity. The Agent may accept deposits from, lend money to, and
generally engage in any kind of trust, debt, equity or other transaction, in
addition to those contemplated by this Agreement or any other Transaction
Document, with the Borrower or any of its Subsidiaries in which the Borrower or
such Subsidiary is not restricted hereby from engaging with any other Person.
10.11. LENDER CREDIT DECISION. Each Lender acknowledges that it has,
independently and without reliance upon the Agent or any other Lender and based
on the financial statements prepared by the Borrower and such other documents
and information as it has deemed appropriate, made its own credit analysis and
decision to enter into this Agreement and the other Transaction Documents. Each
Lender also acknowledges that it will, independently and without reliance upon
the Agent or any other Lender and based on such documents and information as it
shall deem appropriate at the time, continue to make its own credit decisions in
taking or not taking action under this Agreement and the other Transaction
Documents.
10.12. SUCCESSOR AGENT. The Agent may resign at any time by giving
written notice thereof to the Lenders and the Borrower, such resignation to be
effective upon the appointment of a successor Agent or, if no successor Agent
has been appointed, forty-five (45) days after the retiring Agent gives notice
of its intention to resign. Upon any such resignation, the Required Lenders
shall have the right to appoint, on behalf of the Lenders, a successor Agent,
which successor Agent, so long as no Default is continuing, shall be reasonably
acceptable to the Borrower. If no successor
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Agent shall have been so appointed by the Required Lenders and shall have
accepted such appointment within thirty (30) days after the resigning Agent's
giving notice of its intention to resign, then the resigning Agent may appoint,
on behalf of the Borrower and the Lenders, a successor Agent, which successor
Agent, so long as no Default is continuing, shall be reasonably acceptable to
the Borrower. If the Agent has resigned and no successor Agent has been
appointed, the Lenders may perform all the duties of the Agent hereunder and the
Borrower shall make all payments in respect of the Obligations to the applicable
Lender and for all other purposes shall deal directly with the Lenders. No
successor Agent shall be deemed to be appointed hereunder until such successor
Agent has accepted the appointment. Any such successor Agent shall be a
commercial bank having capital and retained earnings of at least $50,000,000 and
with a Lending Installation in the United States of America. Upon the acceptance
of any appointment as Agent hereunder by a successor Agent, such successor Agent
shall thereupon succeed to and become vested with all the rights, powers,
privileges and duties of the resigning Agent. Upon the effectiveness of the
resignation of the Agent, the resigning Agent shall be discharged from its
duties and obligations hereunder and under the Transaction Documents. After the
effectiveness of the resignation of an Agent, the provisions of this ARTICLE X
shall continue in effect for its benefit in respect of any actions taken or
omitted to be taken by it while it was acting as the Agent hereunder and under
the other Transaction Documents.
ARTICLE XI
SETOFF; RATABLE PAYMENTS
11.1. SETOFF. In addition to, and without limitation of, any rights of
the Lenders under applicable law, if the Borrower becomes insolvent, however
evidenced, or any Default or Unmatured Default occurs, any and all deposits
(including all account balances, whether provisional or final and whether or not
collected or available) and any other Indebtedness at any time held or owing by
any Lender to or for the credit or account of the Borrower may be offset and
applied toward the payment of the Obligations owing to such Lender, whether or
not the Obligations, or any part hereof, shall then be due.
11.2. RATABLE PAYMENTS. If any Lender, whether by setoff or otherwise,
has payment made to it upon its Loans (other than payments received pursuant to
SECTIONS 2.17, 3.1, 3.2 or 3.4) in a greater proportion than its pro-rata share
of such Loans, such Lender agrees, promptly upon demand, to purchase a portion
of the Loans held by the other Lenders so that after such purchase each Lender
will hold its ratable proportion of Loans. If any Lender, whether in connection
with setoff or amounts which might be subject to setoff or otherwise, receives
collateral or other protection for its Obligations or such amounts which may be
subject to setoff, such Lender agrees, promptly upon demand, to take such action
necessary such that all Lenders share in the benefits of such collateral ratably
in proportion to their Loans. In case any such payment is disturbed by legal
process, or otherwise, appropriate further adjustments shall be made. If an
amount to be setoff is to be applied to Indebtedness of the Borrower to a
Lender, other than Indebtedness evidenced by any
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of the Notes held by such Lender, such amount shall be applied ratably to such
other Indebtedness and to the Indebtedness evidenced by such Notes.
ARTICLE XII
BENEFIT OF AGREEMENT; ASSIGNMENTS; PARTICIPATIONS
12.1. SUCCESSORS AND ASSIGNS. The terms and provisions of the
Transaction Documents shall be binding upon and inure to the benefit of the
Borrower and the Lenders and their respective successors and assigns, except
that (a) the Borrower shall not have the right to assign its rights or
obligations under the Loan Documents, and (b) any assignment by any Lender must
be made in compliance with SECTION 12.3. Notwithstanding CLAUSE (B) of the
preceding sentence, any Lender may at any time, without the consent of the
Borrower or the Agent, assign all or any portion of its rights under this
Agreement and its Notes to a Federal Reserve Bank; PROVIDED, HOWEVER, that no
such assignment to a Federal Reserve Bank shall release the transferor Lender
from its obligations hereunder. The Agent may treat the payee of any Note as the
owner thereof for all purposes hereof unless and until such payee complies with
SECTION 12.3 in the case of an assignment thereof or, in the case of any other
transfer, a written notice of the transfer is filed with the Agent. Any assignee
or transferee of a Note agrees by acceptance thereof to be bound by all the
terms and provisions of the Transaction Documents. Any request, authority or
consent of any Person, who at the time of making such request or giving such
authority or consent is the holder of any Note, shall be conclusive and binding
on any subsequent holder, transferee or assignee of such Note or of any Note or
Notes issued in exchange therefor.
12.2. PARTICIPATIONS.
12.2.1. PERMITTED PARTICIPANTS; EFFECT. Any Lender may, in
the ordinary course of its business and in accordance with applicable law, at
any time sell to one or more banks or other entities ("PARTICIPANTS")
participating interests in any Loan owing to such Lender, any Note held by such
Lender, any Commitment of such Lender or any other interest of such Lender under
the Transaction Documents. In the event of any such sale by a Lender of
participating interests to a Participant, such Lender's obligations under the
Transaction Documents shall remain unchanged, such Lender shall remain solely
responsible to the other parties hereto for the performance of such obligations,
such Lender shall remain the holder of any such Note for all purposes under the
Transaction Documents, all amounts payable by the Borrower under this Agreement
shall be determined as if such Lender had not sold such participating interests,
and the Borrower and the Agent shall continue to deal solely and directly with
such Lender in connection with such Lender's rights and obligations under the
Transaction Documents.
12.2.2. VOTING RIGHTS. Each Lender shall retain the sole
right to approve, without the consent of any Participant, any amendment,
modification or waiver of any provision of the
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Transaction Documents other than any amendment, modification or waiver which
effects any of the modifications referenced in clauses (a) through (h) of
SECTION 8.2.
12.2.3. BENEFIT OF SETOFF. The Borrower agrees that each
Participant shall be deemed to have the right of setoff provided in SECTION 11.1
in respect of its participating interest in amounts owing under the Transaction
Documents to the same extent as if the amount of its participating interest were
owing directly to it as a Lender under the Transaction Documents; PROVIDED, that
each Lender shall retain the right of setoff provided in SECTION 11.1 with
respect to the amount of participating interests sold to each Participant. The
Lenders agree to share with each Participant, and each Participant, by
exercising the right of setoff provided in SECTION 11.1, agrees to share with
each Lender, any amount received pursuant to the exercise of its right of
setoff, such amounts to be shared in accordance with SECTION 11.2 as if each
Participant were a Lender.
12.3. ASSIGNMENTS.
12.3.1. PERMITTED ASSIGNMENTS. Any Lender may, in the
ordinary course of its business and in accordance with applicable law, at any
time assign to one or more banks or other entities ("PURCHASERS") all or any
part of its rights and obligations under the Transaction Documents; provided,
however, that in the case of an assignment to an entity which is not a Lender or
an Affiliate of a lender, such assignment shall be in a minimum amount of
$5,000,000 (or, if less, the entire amount of such Lender's Commitment). Such
assignment shall be substantially in the form of EXHIBIT C hereto or in such
other form as may be agreed to by the parties thereto. The consent of the Agent
and, so long as no Default under SECTIONS 7.2, 7.6 or 7.7 is continuing, the
Borrower, shall be required prior to an assignment becoming effective with
respect to a Purchaser which is not a Lender or an Affiliate thereof. Such
consent shall not be unreasonably withheld.
12.3.2. EFFECT; EFFECTIVE DATE. Upon (a) delivery to the
Agent of a notice of assignment, substantially in the form attached as Exhibit I
to EXHIBIT C hereto (a "NOTICE OF ASSIGNMENT"), together with any consents
required by SECTION 12.3.1, and (b) payment of a $3,000 fee to the Agent for
processing such assignment, such assignment shall become effective on the
effective date specified in such Notice of Assignment. On and after the
effective date of such assignment, (a) such Purchaser shall for all purposes be
a Lender party to this Agreement and any other Transaction Document executed by
the Lenders and shall have all the rights and obligations of a Lender under the
Transaction Documents, to the same extent as if it were an original party
hereto, and (b) the transferor Lender shall be released with respect to the
percentage of the Aggregate Commitment and Loans assigned to such Purchaser
without any further consent or action by the Borrower, the Lenders or the Agent.
Upon the consummation of any assignment to a Purchaser pursuant to this SECTION
12.3.2, the transferor Lender, the Agent and the Borrower shall make appropriate
arrangements so that replacement Notes are issued to such transferor Lender and
new Notes or, as appropriate, replacement Notes, are issued to such Purchaser,
in each case in principal amounts reflecting their Commitment, as adjusted
pursuant to such assignment.
12.4. DISSEMINATION OF INFORMATION. Subject to SECTION 9.17, the
Borrower authorizes each Lender to disclose to any Participant or Purchaser or
any other Person acquiring an interest in
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the Transaction Documents by operation of law (each a "TRANSFEREE") and any
prospective Transferee any and all information in such Lender's possession
concerning the creditworthiness of the Borrower and its Subsidiaries.
12.5. TAX TREATMENT. If any interest in any Transaction Document is
transferred to any Transferee which is organized under the laws of any
jurisdiction other than the United States or any State thereof, the transferor
Lender shall cause such Transferee, concurrently with the effectiveness of such
transfer, to comply with the provisions of SECTION 2.17.
ARTICLE XIII
NOTICES
13.1. GIVING NOTICE. All notices and other communications provided to
any party hereto under this Agreement or any other Loan Document shall be in
writing, by facsimile, first class U.S. mail or overnight courier and addressed
or delivered to such party at its address set forth below its signature hereto
or at such other address as may be designated by such party in a notice to the
other parties. Any notice, if mailed and properly addressed with first class
postage prepaid, return receipt requested, shall be deemed given three (3)
Business Days after deposit in the U.S. mail; any notice, if transmitted by
facsimile, shall be deemed given when transmitted; and any notice given by
overnight courier shall be deemed given when received by the addressee.
13.2. CHANGE OF ADDRESS. The Borrower, the Agent and any Lender may
each change the address for service of notice upon it by a notice in writing to
the other parties hereto.
[signature pages to follow]
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IN WITNESS WHEREOF, the Borrower, the Lenders and the Agent have
executed this Agreement as of the date first above written.
FUND AMERICAN ENTERPRISES HOLDINGS, INC.
By:
-----------------------------------------------
Print Name:
---------------------------------------
Title:
--------------------------------------------
Address: 80 South Main Street
Hanover, New Hampshire 03755
Attn: Reid T. Campbell
Vice President and
Director of Finance
Fax No.: (603) 640-2203
Tel. No.: (603) 643-4562
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COMMITMENTS
THE FIRST NATIONAL BANK OF CHICAGO,
Commitment $21,000,000 Individually and as Agent
By:
--------------------------------------
Print Name:
------------------------------
Title:
-----------------------------------
Address: 153 West 51st Street
New York, NY 10019
Attn: Samuel W. Bridges
First Vice President
Fax No.: (212) 373-1393
Tel. No.: (212) 373-1142
Commitment $14,000,000 FLEET NATIONAL BANK
By:
--------------------------------------
Print Name:
------------------------------
Title:
-----------------------------------
Address: One Federal Street -MAOFD06H
Boston, MA 02110-2010
Attn: David A. Bosselait
----------------
Fax No.: (617) 346-5825
Tel. No.: (617) 346-5823
Aggregate Initial
Commitment $35,000,000
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Exhibit 10.B
EXECUTION COPY
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
$50,000,000
SECOND AMENDED AND RESTATED
CREDIT AGREEMENT
AMONG
WHITE MOUNTAINS HOLDINGS, INC.,
as Borrower,
THE LENDERS NAMED HEREIN
and
THE FIRST NATIONAL BANK OF CHICAGO,
as Agent
DATED AS OF
August 14, 1998
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
ARTICLE I DEFINITIONS.................................................. 1
ARTICLE II THE CREDITS.................................................. 16
2.1. ADVANCES.................................................. 16
2.2. RATABLE LOANS............................................. 16
2.3. TYPES OF ADVANCES......................................... 16
2.4. FACILITY FEE; REDUCTIONS IN AGGREGATE COMMITMENT.......... 16
2.5. MINIMUM AMOUNT OF EACH ADVANCE............................ 17
2.6. OPTIONAL PRINCIPAL PAYMENTS............................... 17
2.7. MANDATORY COMMITMENT REDUCTIONS........................... 17
2.8. METHOD OF SELECTING TYPES AND INTEREST PERIODS FOR
NEW ADVANCES ............................................. 18
2.9. CONVERSION AND CONTINUATION OF OUTSTANDING ADVANCES....... 18
2.10. CHANGES IN INTEREST RATE, ETC............................. 19
2.11. RATES APPLICABLE AFTER DEFAULT............................ 19
2.12. METHOD OF PAYMENT......................................... 20
2.13. NOTES..................................................... 20
2.14. INTEREST PAYMENT DATES; INTEREST AND FEE BASIS. ......... 20
2.15. NOTIFICATION OF ADVANCES, INTEREST RATES, PREPAYMENTS
AND COMMITMENT REDUCTIONS................................ 20
2.16. LENDING INSTALLATIONS..................................... 21
2.17. NON-RECEIPT OF FUNDS BY THE AGENT......................... 21
2.18. TAXES..................................................... 21
2.19. AGENT'S FEES.............................................. 22
ARTICLE III CHANGE IN CIRCUMSTANCES...................................... 22
3.1. YIELD PROTECTION.......................................... 22
3.2. CHANGES IN CAPITAL ADEQUACY REGULATIONS................... 23
3.3. AVAILABILITY OF TYPES OF ADVANCES......................... 24
3.4. FUNDING INDEMNIFICATION................................... 24
3.5. LENDER STATEMENTS; SURVIVAL OF INDEMNITY.................. 24
ARTICLE IV CONDITIONS PRECEDENT......................................... 24
4.1. EFFECTIVENESS............................................. 24
4.2. EACH FUTURE ADVANCE....................................... 26
ARTICLE V REPRESENTATIONS AND WARRANTIES............................... 27
5.1. CORPORATE EXISTENCE AND STANDING.......................... 27
5.2. AUTHORIZATION AND VALIDITY................................ 27
5.3. COMPLIANCE WITH LAWS AND CONTRACTS........................ 27
</TABLE>
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<TABLE>
<S> <C> <C>
5.4. GOVERNMENTAL CONSENTS..................................... 28
5.5. FINANCIAL STATEMENTS...................................... 28
5.6. MATERIAL ADVERSE CHANGE................................... 28
5.7. TAXES..................................................... 28
5.8. LITIGATION AND CONTINGENT OBLIGATIONS..................... 29
5.9. CAPITALIZATION............................................ 29
5.10. ERISA..................................................... 29
5.11. DEFAULTS.................................................. 30
5.12. FEDERAL RESERVE REGULATIONS............................... 30
5.13. INVESTMENT COMPANY........................................ 30
5.14. CERTAIN FEES.............................................. 30
5.15. SOLVENCY.................................................. 30
5.16. INDEBTEDNESS.............................................. 30
5.17. INSURANCE LICENSES........................................ 31
5.18. MATERIAL AGREEMENTS....................................... 31
5.19. ENVIRONMENTAL LAWS........................................ 31
5.20. INSURANCE................................................. 32
5.21. DISCLOSURE................................................ 32
5.22. YEAR 2000................................................. 32
ARTICLE VI COVENANTS.................................................... 32
6.1. FINANCIAL REPORTING....................................... 32
6.2. USE OF PROCEEDS........................................... 34
6.3. NOTICE OF DEFAULT......................................... 35
6.4. CONDUCT OF BUSINESS....................................... 35
6.5. TAXES..................................................... 35
6.6. INSURANCE................................................. 36
6.7. COMPLIANCE WITH LAWS...................................... 36
6.8. MAINTENANCE OF PROPERTIES................................. 36
6.9. INSPECTION................................................ 36
6.11. INDEBTEDNESS.............................................. 37
6.12. MERGER.................................................... 38
6.13. INVESTMENTS AND PURCHASES................................. 38
6.14. CONTINGENT OBLIGATIONS.................................... 39
6.15. LIENS..................................................... 39
6.16. AFFILIATES................................................ 41
6.17. ENVIRONMENTAL MATTERS..................................... 41
6.18. CHANGE IN CORPORATE STRUCTURE; FISCAL YEAR................ 41
6.19. INCONSISTENT AGREEMENTS................................... 41
6.20. FINANCIAL COVENANTS....................................... 41
6.20.2. LEVERAGE RATIO................................... 42
6.20.3. FIXED CHARGES COVERAGE RATIO..................... 42
6.20.4. STATUTORY SURPLUS................................ 42
</TABLE>
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<TABLE>
<S> <C> <C>
6.21. TAX CONSOLIDATION......................................... 42
6.22. ERISA COMPLIANCE.......................................... 42
6.23. YEAR 2000................................................. 43
ARTICLE VII DEFAULTS..................................................... 43
ARTICLE VIII ACCELERATION, WAIVERS, AMENDMENTS AND REMEDIES............... 45
8.1. ACCELERATION.............................................. 45
8.2. AMENDMENTS................................................ 45
8.3. PRESERVATION OF RIGHTS.................................... 46
ARTICLE IX GENERAL PROVISIONS........................................... 47
9.1. SURVIVAL OF REPRESENTATIONS............................... 47
9.2. GOVERNMENTAL REGULATION................................... 47
9.3. TAXES..................................................... 47
9.4. HEADINGS.................................................. 47
9.5. ENTIRE AGREEMENT.......................................... 47
9.6. SEVERAL OBLIGATIONS; BENEFITS OF THIS AGREEMENT........... 47
9.7. EXPENSES; INDEMNIFICATION................................. 47
9.8. NUMBERS OF DOCUMENTS...................................... 48
9.9. ACCOUNTING................................................ 48
9.10. SEVERABILITY OF PROVISIONS................................ 48
9.11. NONLIABILITY OF LENDERS................................... 48
9.12. CHOICE OF LAW............................................. 48
9.13. CONSENT TO JURISDICTION................................... 48
9.14. WAIVER OF JURY TRIAL...................................... 49
9.15. DISCLOSURE................................................ 49
9.16. COUNTERPARTS.............................................. 49
9.17. TREATMENT OF CERTAIN INFORMATION: CONFIDENTIALITY......... 49
ARTICLE X THE AGENT.................................................... 50
10.1. APPOINTMENT............................................... 50
10.2. POWERS.................................................... 50
10.3. GENERAL IMMUNITY.......................................... 50
10.4. NO RESPONSIBILITY FOR LOANS, RECITALS, ETC................ 51
10.5. ACTION ON INSTRUCTIONS OF LENDERS......................... 51
10.6. EMPLOYMENT OF AGENTS AND COUNSEL.......................... 51
10.7. RELIANCE ON DOCUMENTS; COUNSEL............................ 51
10.8. AGENT'S REIMBURSEMENT AND INDEMNIFICATION................. 51
10.9. NOTICE OF DEFAULT......................................... 52
10.10. RIGHTS AS A LENDER........................................ 52
10.11. LENDER CREDIT DECISION.................................... 52
10.12. SUCCESSOR AGENT........................................... 52
</TABLE>
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<TABLE>
<S> <C> <C>
ARTICLE XI SETOFF; RATABLE PAYMENTS..................................... 53
11.1. SETOFF.................................................... 53
11.2. RATABLE PAYMENTS.......................................... 53
ARTICLE XII BENEFIT OF AGREEMENT; ASSIGNMENTS; PARTICIPATIONS............ 54
12.1. SUCCESSORS AND ASSIGNS.................................... 54
12.2. PARTICIPATIONS............................................ 54
12.2.1. PERMITTED PARTICIPANTS; EFFECT. ................ 54
12.2.2. VOTING RIGHTS.................................... 54
12.2.3. BENEFIT OF SETOFF................................ 54
12.3. ASSIGNMENTS............................................... 55
12.3.1. PERMITTED ASSIGNMENTS............................ 55
12.3.2. EFFECT; EFFECTIVE DATE........................... 55
12.4. DISSEMINATION OF INFORMATION.............................. 55
12.5. TAX TREATMENT............................................. 56
</TABLE>
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<TABLE>
<S> <C> <C>
ARTICLE XIII NOTICES...................................................... 56
13.1. GIVING NOTICE............................................. 56
13.2. CHANGE OF ADDRESS......................................... 56
ARTICLE XIV AMENDMENT AND RESTATEMENT................................... 56
</TABLE>
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EXHIBITS
<TABLE>
<S> <C>
Exhibit A (Article 1) Note
Exhibit B (Section 6.1(g)) Compliance Certificate
Exhibit C (Section 12.3.1) Assignment Agreement
</TABLE>
SCHEDULES
Schedule 1 - Margins
Schedule 5.3 - Approvals and Consents
Schedule 5.9 - Capitalization and Subsidiaries
Schedule 5.10 - ERISA
Schedule 5.16 - Indebtedness
Schedule 5.17 - Insurance Licenses
Schedule 5.18 - Material Restrictions
Schedule 6.13 - Investment Commitments
Schedule 6.15 - Liens
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<PAGE>
SECOND AMENDED AND RESTATED CREDIT AGREEMENT
This Second Amended and Restated Credit Agreement, dated as of August 14,
1998, is among WHITE MOUNTAINS HOLDINGS, INC., a Delaware corporation, the
Lenders and THE FIRST NATIONAL BANK OF CHICAGO, individually and as Agent.
R E C I T A L S:
A. The Borrower, the Lenders and the Agent are party to that certain
$50,000,000 amended and restated credit agreement, dated as of July 30, 1997, as
amended by a certain First Amendment to Credit Agreement, dated as of November
20, 1997 (the "Existing Credit Agreement").
B. The Borrower has requested that the Existing Credit Agreement be
amended and restated in order to make certain amendments to the Existing Credit
Agreement.
C. The Borrower, the Lenders and the Agent desire to amend and restate
the Existing Credit Agreement on the terms and conditions set forth below to
accomplish such amendments.
NOW, THEREFORE, in consideration of the mutual covenants and undertakings
herein contained, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Borrower, the Lenders and the
Agent hereby agree as follows:
ARTICLE I
DEFINITIONS
As used in this Agreement:
"ABR Advance" means an Advance which bears interest at the Alternate Base
Rate.
"Adjusted Net Worth" means, with respect to the Borrower, Net Worth of the
Borrower (on a consolidated basis) on the date of determination (without
duplication for amounts already excluded), MINUS the aggregate book value of the
Borrower's equity interest in SOMSC at such time, MINUS any intercompany loans
or receivables owing from the Parent that are assets of the Borrower or its
Subsidiaries at such time.
"Advance" means a borrowing pursuant to SECTION 2.1 consisting of the
aggregate amount of the several Loans made on the same Borrowing Date by the
Lenders to the Borrower of the same Type and, in the case of Eurodollar
Advances, for the same Interest Period.
<PAGE>
"Affiliate" of any Person means any other Person directly or indirectly
controlling, controlled by or under common control with such Person. A Person
shall be deemed to control another Person if the controlling Person owns 20% or
more of any class of voting securities (or other ownership interests) of the
controlled Person or possesses, directly or indirectly, the power to direct or
cause the direction of the management or policies of the controlled Person,
whether through ownership of stock, by contract or otherwise.
"Agent" means First Chicago in its capacity as agent for the Lenders
pursuant to ARTICLE X, and not in its individual capacity as a Lender, and any
successor Agent appointed pursuant to ARTICLE X.
"Aggregate Commitment" means the aggregate of the Commitments of all the
Lenders hereunder. The initial Aggregate Commitment is $50,000,000.
"Agreement" means this Second Amended and Restated Credit Agreement, as it
may be amended, modified or restated and in effect from time to time.
"Agreement Accounting Principles" means generally accepted accounting
principles as in effect from time to time; PROVIDED, HOWEVER, that if any
changes in accounting principles from those in effect on the date of this
Agreement are adopted which result in a material change in the method of
calculation of any of the financial covenants, standards or terms in this
Agreement, the parties agree to enter into negotiations to determine whether
such provisions require amendment and, if so, the terms of such amendment so as
to equitably reflect such changes. Until a resolution thereof is reached, all
calculations made for the purposes of determining compliance with the terms of
this Agreement shall be made by application of generally accepted accounting
principles in effect on the date of this Agreement applied, to the extent
applicable, on a basis consistent with that used in the preparation of the
Financial Statements furnished to the Lenders pursuant to SECTION 5.5 hereof.
"Alternate Base Rate" means, for any day, a rate of interest per annum
equal to the higher of (a) the Corporate Base Rate for such day, and (b) the sum
of the Federal Funds Effective Rate for such day plus 1/2% per annum, in each
case changing when and as the Corporate Base Rate and the Federal Funds
Effective Rate, as the case may be, changes.
"Annual Statement" means the annual statutory financial statement of any
Insurance Subsidiary required to be filed with the insurance commissioner (or
similar authority) of its jurisdiction of incorporation, which statement shall
be in the form required by such Insurance Subsidiary's jurisdiction of
incorporation or, if no specific form is so required, in the form of financial
statements permitted by such insurance commissioner (or such similar authority)
to be used for filing annual statutory financial statements and shall contain
the type of information permitted by such insurance commissioner (or such
similar authority) to be disclosed therein, together with all exhibits or
schedules filed therewith.
"Applicable Eurodollar Margin" has the meaning ascribed to it by, and
shall be determined in accordance with, SCHEDULE 1.
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"Applicable Facility Fee Margin" has the meaning ascribed to it by, and
shall be determined in accordance with, SCHEDULE 1.
"Article" means an article of this Agreement unless another document is
specifically referenced.
"Asset Disposition" means any sale, transfer or other disposition (outside
the ordinary course of business) of any material asset of the Borrower in a
single transaction or in a series of related transactions (other than the sale
of a Money Market Investment, the Borrower's equity interests in SOMSC or FAE's
equity interest in San Juan Basin Trust, the net proceeds of which are utilized
within one hundred eighty (180) days to pay dividends permitted by SECTION
6.10), including any such sale, transfer or disposition by means of a
transaction permitted by SECTION 6.12.
"Authorized Officer" means any of the chief executive officer, president,
chief financial officer, treasurer or controller of the Borrower, acting singly.
"Bankruptcy Code" means Title 11, United States Code, sections 1 ET SEQ.,
as the same may be amended from time to time, and any successor thereto or
replacement therefor which may be hereafter enacted.
"Benefit Plan" means any deferred benefit plan for the benefit of present,
future or former employees, whether or not such benefit plan is a Plan.
"Borrower" means White Mountains Holdings, Inc., a Delaware corporation,
and its successors and assigns.
"Borrowing Date" means a date on which an Advance is made hereunder.
"Borrowing Notice" is defined in SECTION 2.8.
"Business Day" means (a) with respect to any borrowing, payment or rate
selection of Eurodollar Advances, a day (other than a Saturday or Sunday) on
which banks generally are open in Chicago for the conduct of substantially all
of their commercial lending activities and on which dealings in United States
dollars are carried on in the London interbank market, and (b) for all other
purposes, a day (other than a Saturday or Sunday) on which banks generally are
open in Chicago for the conduct of substantially all of their commercial lending
activities.
"Capitalized Lease" of a Person means any lease of Property by such Person
as lessee which would be capitalized on a balance sheet of such Person prepared
in accordance with Agreement Accounting Principles.
"Capitalized Lease Obligations" of a Person means the amount of the
obligations of such Person under Capitalized Leases which would be shown as a
liability on a balance sheet of such Person prepared in accordance with
Agreement Accounting Principles.
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"Change" is defined in SECTION 3.2.
"Change in Control" means (a) the acquisition by any "person" or "group"
(as such terms are used in Section 13(d) and 14(d)(2) of the Securities Exchange
Act of 1934, as amended) (other than Parent, any Wholly-Owned Subsidiary of
Parent, John J. Byrne or any Plan or any Benefit Plan of Parent, the Borrower or
any of their Subsidiaries), including without limitation any acquisition
effected by means of any transaction contemplated by SECTION 6.12, of beneficial
ownership (within the meaning of Rule 13d-3 of the Securities and Exchange
Commission under the Securities Exchange Act of 1934, as amended) of 25% or more
of the outstanding shares of voting stock of the Borrower; or (b) during any
period of twelve (12) consecutive calendar months, commencing on the date of the
Agreement, the ceasing of those individuals (the "CONTINUING DIRECTORS") who (i)
were directors of the Borrower on the first day of each such period or (ii)
subsequently became directors of the Borrower and whose initial election or
initial nomination for election subsequent to that date was approved by a
majority of the Continuing Directors then on the board of directors of the
Borrower to constitute a majority of the board of directors of the Borrower; or
(c) during any period of twelve (12) consecutive calendar months, commencing on
the date of this Agreement, the ceasing of individuals who hold an office
possessing the title Senior Vice President or such title that ranks senior to a
Senior Vice President (collectively, "Senior Management") of the Borrower on the
first day of each such period to constitute a majority of the Senior Management
of the Borrower.
"Code" means the Internal Revenue Code of 1986, as amended, reformed or
otherwise modified from time to time.
"Commitment" means, for each Lender, the obligation of such Lender to make
Loans not exceeding the amount set forth opposite its signature below and as set
forth in any Notice of Assignment relating to any assignment which has become
effective pursuant to SECTION 12.3.2, as such amount may be modified from time
to time pursuant to the terms hereof.
"Consolidated" or "consolidated", when used in connection with any
calculation, means a calculation to be determined on a consolidated basis for a
Person and its Subsidiaries in accordance with Agreement Accounting Principles.
"Consolidated Person" means, for the taxable year of reference, each
Person which is a member of the affiliated group of the Borrower if Consolidated
returns are or shall be filed for such affiliated group for federal income tax
purposes or any combined or unitary group of which the Borrower is a member for
state income tax purposes.
"Contingent Obligation" of a Person means any agreement, undertaking or
arrangement by which such Person assumes, guarantees, endorses, contingently
agrees to purchase or provide funds for the payment of, or otherwise becomes or
is contingently liable upon, the obligation or liability of any other Person, or
agrees to maintain the net worth or working capital or other financial condition
of any other Person, or otherwise assures any creditor of such other Person
against loss, including, without limitation, any comfort letter, operating
agreement or take-or-pay contract or
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application for a Letter of Credit, excluding however (a) insurance policies and
insurance contracts issued in the ordinary course of business and (b) any
financial guarantees issued by FSA.
"Controlled Group" means all members of a controlled group of corporations
and all trades or businesses (whether or not incorporated) under common control
which, together with the Borrower or any of its Subsidiaries, are treated as a
single employer under Section 414 of the Code.
"Conversion/Continuation Notice" is defined in SECTION 2.9.
"Corporate Base Rate" means a rate per annum equal to the corporate base
rate of interest publicly announced by First Chicago from time to time, changing
when and as said corporate base rate changes. The Corporate Base Rate is a
reference rate and does not necessarily represent the lowest or best rate of
interest actually charged to any customer. First Chicago may make commercial
loans or other loans at rates of interest at, above or below the Corporate Base
Rate.
"Default" means an event described in ARTICLE VII.
"Environmental Laws" is defined in SECTION 5.19.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended from time to time.
"Eurodollar Advance" means an Advance which bears interest at the
Eurodollar Rate.
"Eurodollar Base Rate" means, with respect to a Eurodollar Advance for the
relevant Interest Period, the rate determined by the Agent to be the rate at
which deposits in U.S. dollars are offered by First Chicago to first-class banks
in the London interbank market at approximately 11 a.m. (London time) two (2)
Business Days prior to the first day of such Interest Period, in the approximate
amount of First Chicago's relevant Eurodollar Advance and having a maturity
approximately equal to such Interest Period.
"Eurodollar Rate" means, with respect to a Eurodollar Advance for the
relevant Interest Period, the sum of (a) the quotient of (i) the Eurodollar Base
Rate applicable to such Interest Period, divided by (ii) one minus the Reserve
Requirement (expressed as a decimal) applicable to such Interest Period, plus
the Applicable Eurodollar Margin. The Eurodollar Rate shall be rounded to the
next higher multiple of 1/100 of 1% if the rate is not such a multiple.
"Existing Credit Agreement" is defined in the recitals to this Agreement.
"Facility Fee" is defined in Section 2.4(a).
"Facility Termination Date" means July 30, 2002.
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"FAE" means Fund American Enterprises, Inc. (f/k/a Fund American
Enterprises II, Inc.), a Delaware corporation and direct Wholly-Owned Subsidiary
of the Borrower.
"Federal Funds Effective Rate" means, for any day, an interest rate per
annum equal to the weighted average of the rates on overnight Federal funds
transactions with members of the Federal Reserve System arranged by Federal
funds brokers on such day, as published for such day (or, if such day is not a
Business Day, for the immediately preceding Business Day) by the Federal Reserve
Bank of New York, or, if such rate is not so published for any day which is a
Business Day, the average of the quotations at approximately 10 a.m. (Chicago
time) on such day on such transactions received by the Agent from three Federal
funds brokers of recognized standing selected by the Agent in its sole
discretion.
"Financial Statements" is defined in SECTION 5.5.
"First Chicago" means The First National Bank of Chicago in its individual
capacity, and its successors.
"First-Tier Insurance Subsidiary" means any Insurance Subsidiary that is
either (a) a direct Wholly-Owned Subsidiary of the Borrower or (b) a
Wholly-Owned Subsidiary of a Subsidiary of the Borrower and there exists no
Insurance Subsidiary in the chain of ownership between the Borrower and such
Insurance Subsidiary.
"Fiscal Quarter" means one of the four three-month accounting periods
comprising a Fiscal Year.
"Fiscal Year" means the twelve-month accounting period ending December 31
of each year.
"Fixed Charges Coverage Ratio" means, as of the end of any Fiscal Quarter,
the ratio of:
(a) the sum, without duplication, of,
(i) investments of the Borrower, Valley, FAE, Charter Group, Inc.,
Charter General Agency, Inc., NCM Management Corporation and
Folksamerica (but only after it becomes a Wholly-Owned
Subsidiary of the Borrower) in cash and Money Market
Investments as of the end of such Fiscal Quarter, PLUS
(ii) an amount equal to the maximum amount of dividends and
intercompany fees available to be paid to the Borrower,
Valley, FAE and Folksamerica (but only after it becomes a
Wholly-Owned Subsidiary of the Borrower) without approval of
any Governmental Authority by each present and future Wholly-
Owned Subsidiary of the Borrower that is a First-Tier
Insurance Subsidiary of either the Borrower or any of its
Subsidiaries that is not an Insurance Subsidiary pursuant to
applicable insurance statutes, rules and regulations of
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the applicable Governmental Authority during the succeeding
four Fiscal Quarters, to
(b) Fixed Charges.
"Fixed Charges" means, with respect to Parent and the Borrower, as of the
end of any Fiscal Quarter, the sum, without duplication and after giving effect
to consolidation, of (a) the sum of all interest expense on outstanding
Indebtedness (determined by adjusting the principal amount of such Indebtedness
for scheduled amortization payments and assuming that the applicable interest
rate in effect as of the date of determination would remain constant during the
succeeding four Fiscal Quarter period) payable by Parent, the Borrower and any
of Borrower's Wholly-Owned Subsidiaries (other than any Unrestricted
Subsidiary), (b) dividends payable on preferred stock by Parent, the Borrower
and any of Borrower's Wholly-Owned Subsidiaries (other than any Unrestricted
Subsidiary), (c) Indebtedness payable pursuant to the scheduled amortization of
such Indebtedness by Parent, the Borrower and any of Borrower's Wholly-Owned
Subsidiaries (other than any Unrestricted Subsidiary), (d) Loans payable
pursuant to SECTION 2.1(b) as a result of reductions in the Aggregate Commitment
occurring in any such period pursuant to SECTION 2.7(a) (subject to the last
sentence of this definition with respect to the July 30, 2002 reduction), and
Loans (as defined in the Valley Credit Agreement) payable pursuant to Section
2.1(b) of the Valley Credit Agreement as a result of reductions in the Aggregate
Commitment (as determined in the Valley Credit Agreement) occurring in any such
period pursuant to Section 2.7(a) of the Valley Credit Agreement (subject to the
last sentence of this definition with respect to the July 30, 2002 reduction),
in each case for the period of four Fiscal Quarters immediately following the
date of determination. Solely for purposes of computing Fixed Charges under the
preceding CLAUSE (c), the scheduled principal payment of approximately
$56,000,000 due on or before March 31, 1999 under the Folksamerica Loan
Agreement shall not be included. Solely for purposes of computing Fixed Charges
under the preceding CLAUSE (d) for any period on or after June 30, 2001, the
"Reduction Amount" on July 30, 2002 stated in SECTION 2.7(a) shall be deemed to
be $4,000,000 and the "Reduction Amount" on July 30, 2002 stated in Section
2.7(a) of the Valley Credit Agreement shall be deemed to be $2,000,000.
"Folksamerica" means Folksamerica Holding Company, Inc., a New York
corporation.
"Folksamerica Loan Agreement " means that certain $70,000,000 loan
agreement between Folksamerica and Swedbank (Sparbanken Sverige AB (publ)), New
York Branch, dated as of November 12, 1991, as amended.
"Folksamerica Transaction" means that certain transaction by which (a) the
Borrower and/or FAE acquires all of the outstanding capital stock of
Folksamerica not already owned by the Borrower, (b) Parent assumes the
obligations of each of Folksam Omsesidig Sakforsakring (Sweden) and Samvirke
Skadeforsikring AS (Norway) (collectively, the "Folksamerica Guarantors") to
guarantee the obligations of Folksamerica (the "Folksamerica Guaranty") under
the Folksamerica Loan Agreement and (c) the Parent indemnifies the Folksamerica
Guarantors and their respective affiliates, successors and assigns with respect
to various matters relating to the Folksamerica Guaranty.
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"FSA" means Financial Security Assurance Holdings Ltd., a New York
corporation.
"FSA Amount" means an amount equal to that immediately utilized by SOMSC
to excercise certain options, in existence on the date hereof, on the capital
stock of FSA, such amount not to exceed $18,000,000.
"Funded Indebtedness" means Indebtedness of the type described in clauses
(a), (d), (e) and (h) of the definition "Indebtedness".
"Governmental Authority" means any government (foreign or domestic) or any
state or other political subdivision thereof or any governmental body, agency,
authority, department or commission (including without limitation any board of
insurance, insurance department or insurance commissioner and any taxing
authority or political subdivision) or any instrumentality or officer thereof
(including without limitation any court or tribunal) exercising executive,
legislative, judicial, regulatory or administrative functions of or pertaining
to government and any corporation, partnership or other entity directly or
indirectly owned or controlled by or subject to the control of any of the
foregoing.
"Hazardous Materials" is defined in SECTION 5.19.
"Indebtedness" of a Person means such Person's (a) obligations for
borrowed money, (b) obligations representing the deferred purchase price of
Property or services (other than accounts payable arising in the ordinary course
of such Person's business payable on terms customary in the trade), (c)
obligations, whether or not assumed, secured by Liens or payable out of the
proceeds or production from Property now or hereafter owned or acquired by such
Person, (d) obligations which are evidenced by notes, acceptances, or similar
instruments, (e) Capitalized Lease Obligations, (f) Rate Hedging Obligations,
(g) Contingent Obligations, (h) obligations for which such Person is obligated
pursuant to or in respect of a Letter of Credit and (i) repurchase obligations
or liabilities of such Person with respect to accounts or notes receivable sold
by such Person.
"Insurance Subsidiary" means any Subsidiary which is engaged in the
insurance business as an issuer or underwriter of insurance policies and/or
insurance contracts.
"Interest Period" means, with respect to a Eurodollar Advance, a period of
one, two, three or six months commencing on a Business Day selected by the
Borrower pursuant to this Agreement. Such Interest Period shall end on (but
exclude) the day which corresponds numerically to such date one, two, three or
six months thereafter; PROVIDED, HOWEVER, that if there is no such numerically
corresponding day in such next, second, third or sixth succeeding month, such
Interest Period shall end on the last Business Day of such next, second, third
or sixth succeeding month. If an Interest Period would otherwise end on a day
which is not a Business Day, such Interest Period shall end on the next
succeeding Business Day; PROVIDED, HOWEVER, that if said next succeeding
Business Day falls in a new calendar month, such Interest Period shall end on
the immediately preceding Business Day.
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<PAGE>
"Investment" of a Person means any loan, advance (other than commission,
travel and similar advances to officers and employees made in the ordinary
course of business), extension of credit (other than accounts receivable arising
in the ordinary course of business on terms customary in the trade), deposit
account or contribution of capital by such Person to any other Person or any
investment in, or purchase or other acquisition of, the stock, partnership
interests, notes, debentures or other securities of any other Person made by
such Person.
"Lenders" means the lending institutions listed on the signature pages of
this Agreement and their respective successors and assigns.
"Lending Installation" means, with respect to a Lender or the Agent, any
office, branch, subsidiary or affiliate of such Lender or the Agent.
"Letter of Credit" of a Person means a letter of credit or similar
instrument which is issued upon the application of such Person or upon which
such Person is an account party or for which such Person is in any way liable.
"Leverage Ratio" means, at any time, the ratio of (a) the consolidated
Funded Indebtedness of Parent (excluding SOMSC) at such time to (b) the sum of
the consolidated Funded Indebtedness of the Borrower and its Subsidiaries, other
than SOMSC, at such time PLUS Adjusted Net Worth at such time, in all cases
determined in accordance with Agreement Accounting Principles.
"License" means any license, certificate of authority, permit or other
authorization which is required to be obtained from any Governmental Authority
in connection with the operation, ownership or transaction of insurance
business.
"Lien" means any security interest, lien (statutory or other), mortgage,
pledge, hypothecation, assignment, deposit arrangement, encumbrance or
preference, priority or other security agreement or preferential arrangement of
any kind or nature whatsoever (including, without limitation, the interest of a
vendor or lessor under any conditional sale, Capitalized Lease or other title
retention agreement), save in respect of liabilities and obligations arising out
of the underwriting of insurance policies and contracts of insurance.
"Loan" means, with respect to a Lender, such Lender's portion of any
Advance and "Loans" means, with respect to the Lenders, the aggregate of all
Advances.
"Loan Documents" means this Agreement, the Notes and the other documents
and agreements contemplated hereby and executed by the Borrower in favor of the
Agent or any Lender.
"Margin Stock" has the meaning assigned to that term under Regulation U.
"Material Adverse Effect" means a material adverse effect on (a) the
business, Property, condition (financial or other), performance, results of
operations, or prospects of the Borrower and
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<PAGE>
its Subsidiaries taken as a whole, (b) the ability of the Borrower or any
Subsidiary to perform its obligations under the Loan Documents, or (c) the
validity or enforceability of any of the Loan Documents or the rights or
remedies of the Agent or the Lenders thereunder.
"Money Market Investments" means (a) direct obligations of the United
States of America, or of any agency thereof, or obligations guaranteed as to
principal and interest by the United States of America, or of any agency
thereof, in either case maturing not more than one year from the date of
acquisition thereof; (b) certificates of deposit issued by any bank or trust
company organized under the laws of the United States of America or any state
thereof and having capital, surplus and undivided profits of at least
$500,000,000, maturing not more than ninety (90) days from the date of
acquisition thereof; (c) commercial paper rated A-1 or better P-1 or better by
Standard & Poor's Ratings Group or Moody's Investors Services, Inc.,
respectively, maturing not more than ninety (90) days from the date of
acquisition thereof; and (d) shares in an open-end management investment company
with U.S. dollar denominated investments in fixed income obligations, including
repurchase agreements, fixed time deposits and other obligations, with a dollar
weighted average maturity of not more than one year, and for the calculation of
this dollar weighted average maturity, certain instruments which have a variable
rate of interest readjusted no less frequently than annually are deemed to have
a maturity equal to the period remaining until the next readjustment of the
interest rate.
"Multiemployer Plan" means a Plan maintained pursuant to a collective
bargaining agreement or any other arrangement to which the Borrower or any
member of the Controlled Group is a party to which more than one employer is
obligated to make contributions.
"NAIC" means the National Association of Insurance Commissioners or any
successor thereto, or in lieu thereof, any other association, agency or other
organization performing advisory, coordination or other like functions among
insurance departments, insurance commissioners and similar Governmental
Authorities of the various states of the United States toward the promotion of
uniformity in the practices of such Governmental Authorities.
"Net Available Proceeds" means (a) with respect to any Asset Disposition,
the sum of cash or readily marketable cash equivalents received (including by
way of a cash generating sale or discounting of a note or account receivable)
therefrom, whether at the time of such disposition or subsequent thereto, in
excess in the case of any Asset Disposition of any amounts derived from such
sale used (and permitted by this Agreement to be used) within one hundred eighty
(180) days after such sale to make a Permitted Reinvestment, or (b) with respect
to any sale or issuance of equity securities of the Borrower, cash or readily
marketable cash equivalents received therefrom, whether at the time of such sale
or issuance or subsequent thereto, net, in the case of either CLAUSE (a) or
CLAUSE (b), of all legal, title and recording tax expenses, commissions and
other fees and all costs and expenses incurred, including, without limitation,
incremental income taxes resulting from such transaction.
"Net Worth" means, with respect to any Person, at any date the
consolidated shareholders' equity of such Person and its Consolidated
Subsidiaries determined in accordance with Agreement
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Accounting Principles (but excluding the effect of Statement of Financial
Accounting Standards No. 115).
"Non-Excluded Taxes" is defined in SECTION 2.18(a).
"Note" means a promissory note in substantially the form of EXHIBIT A
hereto, with appropriate insertions, duly executed and delivered to the Agent by
the Borrower and payable to the order of a Lender in the amount of its
Commitment, including any amendment, modification, renewal or replacement of
such promissory note.
"Notice of Assignment" is defined in SECTION 12.3.2.
"Obligations" means all unpaid principal of and accrued and unpaid
interest on the Notes, all accrued and unpaid fees and all expenses,
reimbursements, indemnities and other obligations of the Borrower to the Lenders
or to any Lender, the Agent or any indemnified party hereunder arising under any
of the Loan Documents.
"Parent" means Fund American Enterprises Holdings, Inc., a Delaware
corporation.
"Parent Credit Agreement" means the Amended and Restated Credit Agreement
dated as of August 14, 1998, among Parent, the financial institutions from time
to time party thereto and First Chicago, as agent, as the same may be amended,
supplemented or otherwise modified from time to time.
"Participants" is defined in SECTION 12.2.1.
"Payment Date" means the last day of each March, June, September and
December.
"PBGC" means the Pension Benefit Guaranty Corporation or any successor
thereto.
"Permitted Reinvestment" means an Investment in Subsidiaries (other than
any Unrestricted Subsidiary) in existence on the date hereof, an Investment in
Main Street America Holdings, Inc., or any other Investment approved by the
Required Lenders.
"Person" means any natural person, corporation, firm, joint venture,
partnership, association, enterprise, trust or other entity or organization, or
any government or political subdivision or any agency, department or
instrumentality thereof.
"Plan" means an employee pension benefit plan, as defined in Section 3(2)
of ERISA, as to which the Borrower or any member of the Controlled Group may
have any liability.
"Proceeding" is defined in SECTION 5.19.
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"Property" of a Person means any and all property, whether real, personal,
tangible, intangible, or mixed, of such Person, or other assets owned, leased or
operated by such Person.
"pro-rata" means, when used with respect to a Lender, and any described
aggregate or total amount, an amount equal to such Lender's pro-rata share or
portion based on its percentage of the Aggregate Commitment or if the Aggregate
Commitment has been terminated, its percentage of the aggregate principal amount
of outstanding Advances.
"Purchase" means any transaction, or any series of related transactions,
consummated on or after the date of this Agreement, by which the Borrower or any
of its Subsidiaries (a) acquires any going business or all or substantially all
of the assets of any firm, corporation or division or line of business thereof,
whether through purchase of assets, merger or otherwise, or (b) directly or
indirectly acquires (in one transaction or as the most recent transaction in a
series of transactions) at least a majority (in number of votes) of the
securities of a corporation which have ordinary voting power for the election of
directors (other than securities having such power only by reason of the
happening of a contingency) or a majority (by percentage or voting power) of the
outstanding partnership interests of a partnership.
"Purchasers" is defined in SECTION 12.3.1.
"Quarterly Statement" means the quarterly statutory financial statement of
any Insurance Subsidiary required to be filed with the insurance commissioner
(or similar authority) of its jurisdiction of incorporation or, if no specific
form is so required, in the form of financial statements permitted by such
insurance commissioner (or such similar authority) to be used for filing
quarterly statutory financial statements and shall contain the type of financial
information permitted by such insurance commissioner (or such similar authority)
to be disclosed therein, together with all exhibits or schedules filed
therewith.
"Rate Hedging Obligations" of a Person means any and all obligations of
such Person, whether absolute or contingent and howsoever and whensoever
created, arising, evidenced or acquired (including all renewals, extensions and
modifications thereof and substitutions therefor), under (a) any and all
agreements, devices or arrangements designed to protect at least one of the
parties thereto from the fluctuations of interest rates, exchange rates or
forward rates applicable to such party's assets, liabilities or exchange
transactions, including, but not limited to, dollar-denominated or
cross-currency interest rate exchange agreements, forward currency exchange
agreements, interest rate cap or collar protection agreements, forward rate
currency or interest rate options, puts and warrants, and (b) any and all
cancellations, buy backs, reversals, terminations or assignments of any of the
foregoing.
"Regulation D" means Regulation D of the Board of Governors of the Federal
Reserve System as from time to time in effect and any successor thereto or other
regulation or official interpretation of said Board of Governors relating to
reserve requirements applicable to depositary institutions.
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"Regulation T" means Regulation T of the Board of Governors of the Federal
Reserve System as from time to time in effect and shall include any successor or
other regulation or official interpretation of such Board of Governors relating
to the extension of credit by securities brokers and dealers for the purpose of
purchasing or carrying margin stocks applicable to such Persons.
"Regulation U" means Regulation U of the Board of Governors of the Federal
Reserve System as from time to time in effect and any successor or other
regulation or official interpretation of said Board of Governors relating to the
extension of credit by banks for the purpose of purchasing or carrying margin
stocks applicable to such Persons.
"Regulation X" means Regulation X of the Board of Governors of the Federal
Reserve System as from time to time in effect and shall include any successor or
other regulation or official interpretation of said Board of Governors relating
to the extension of credit by the specified lenders for the purpose of
purchasing or carrying margin stocks applicable to such Persons.
"Release" is defined in the Comprehensive Environmental Response,
Compensation and Liability Act, as amended, 42 U.S.C. 39601 ET SEQ.
"Reportable Event" means a reportable event as defined in Section 4043 of
ERISA and the regulations issued under such section, with respect to a Plan,
excluding, however, such events as to which the PBGC has by regulation waived
the requirement of Section 4043(a) of ERISA that it be notified within thirty
(30) days of the occurrence of such event; PROVIDED, that a failure to meet the
minimum funding standard of Section 412 of the Code and of Section 302 of ERISA
shall be a Reportable Event regardless of the issuance of any such waiver of the
notice requirement in accordance with either Section 4043(a) of ERISA or Section
412(d) of the Code.
"Required Lenders" means Lenders in the aggregate having at least 66-2/3%
of the Aggregate Commitment or, if the Aggregate Commitment has been terminated,
Lenders in the aggregate holding at least 66-2/3% of the aggregate unpaid
principal amount of the outstanding Loans.
"Reserve Requirement" means, with respect to an Interest Period, the
maximum aggregate reserve requirement (including all basic, supplemental,
marginal and other reserves) which is imposed under Regulation D on Eurocurrency
liabilities.
"Restatement Effective Date" means the date on which all conditions
precedent set forth in SECTION 4.1 are satisfied or waived by all of the
Lenders.
"Risk-Based Capital Guidelines" is defined in SECTION 3.2.
"SAP" means, with respect to any Insurance Subsidiary, the statutory
accounting practices prescribed or permitted by the insurance commissioner (or
other similar authority) in the jurisdiction of such Person for the preparation
of annual statements and other financial reports by insurance companies of the
same type as such Person in effect from time to time; PROVIDED, HOWEVER, that if
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any changes in statutory accounting practices from those in effect on the date
of this Agreement are adopted which result in a material change in the method of
calculation of any of the financial covenants, standards or terms in this
Agreement, the parties agree to enter into negotiations to determine whether
such provisions require amendment and, if so, the terms of such amendment so as
to equitably reflect such changes. Until a resolution thereof is reached, all
calculations made for the purposes of determining compliance with the terms of
this Agreement shall be made by application of statutory accounting practices in
effect on the date of this Agreement applied, to the extent applicable, on a
basis consistent with that used in the preparation of the Financial Statements
furnished to the Lenders pursuant to SECTION 5.5 (j) AND (k) hereof.
"Section" means a numbered section of this Agreement, unless another
document is specifically referenced.
"Significant Subsidiary" shall mean and include, at any time, each
Subsidiary of the Borrower to the extent that the Net Worth of such Subsidiary
is equal to or greater than $5,000,000.
"Single Employer Plan" means a Plan subject to Title IV of ERISA
maintained by the Borrower or any member of the Controlled Group for employees
of the Borrower or any member of the Controlled Group, other than a
Multiemployer Plan.
"Solvent" means, when used with respect to a Person, that (a) the fair
saleable value of the assets of such Person is in excess of the total amount of
the present value of its liabilities (including for purposes of this definition
all liabilities (including loss reserves as determined by such Person), whether
or not reflected on a balance sheet prepared in accordance with Agreement
Accounting Principles and whether direct or indirect, fixed or contingent,
secured or unsecured, disputed or undisputed), (b) such Person is able to pay
its debts or obligations in the ordinary course as they mature and (c) such
Person does not have unreasonably small capital to carry out its business as
conducted and as proposed to be conducted. "Solvency" shall have a correlative
meaning.
"SOMSC" means Source One Mortgage Services Corporation, a Delaware
corporation.
"SOMSC Credit Agreements" means the credit agreement or credit agreements
from time to time in effect among SOMSC, the financial institutions from time to
time party thereto and First Chicago, as agent, as the same may be amended,
supplemented, restated, replaced or otherwise modified from time to time (and,
subsequent to the termination thereof, as in effect on the date of such
termination).
"Statutory Surplus" means, with respect to any Insurance Subsidiary at any
time, the statutory capital and surplus of such Insurance Subsidiary at such
time, as determined in accordance with SAP ("Liabilities, Surplus and Other
Funds" statement, page 3, line 25 of the Annual Statement for the 1995 Fiscal
Year entitled "Surplus as Regards Policyholders").
"Subsidiary" of a Person means (a) any corporation more than 50% of the
outstanding securities having ordinary voting power of which shall at the time
be owned or controlled, directly
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or indirectly, by such Person or by one or more of its Subsidiaries or by such
Person and one or more of its Subsidiaries, or (b) any partnership, association,
joint venture, limited liability company or similar business organization more
than 50% of the ownership interests having ordinary voting power of which shall
at the time be so owned or controlled. Unless otherwise expressly provided, all
references herein to a "Subsidiary" shall mean a Subsidiary of the Borrower.
"Termination Event" means, with respect to a Plan which is subject to
Title IV of ERISA, (a) a Reportable Event, (b) the withdrawal of the Borrower or
any other member of the Controlled Group from such Plan during a plan year in
which the Borrower or any other member of the Controlled Group was a
"substantial employer" as defined in Section 4001(a)(2) of ERISA or was deemed
such under Section 4068(f) of ERISA, (c) the termination of such Plan, the
filing of a notice of intent to terminate such Plan or the treatment of an
amendment of such Plan as a termination under Section 4041 of ERISA, (d) the
institution by the PBGC of proceedings to terminate such Plan or (e) any event
or condition which might constitute grounds under Section 4042 of ERISA for
the termination of, or appointment of a trustee to administer, such Plan.
"Transferee" is defined in SECTION 12.4.
"Type" means, with respect to any Advance, its nature as an ABR Advance or
Eurodollar Advance.
"Unfunded Liability" means the amount (if any) by which the present value
of all vested and unvested accrued benefits under a Single Employer Plan exceeds
the fair market value of assets allocable to such benefits, all determined as of
the then most recent valuation date for such Plans using PBGC actuarial
assumptions for single employer plan terminations.
"Unmatured Default" means an event which but for the lapse of time or the
giving of notice, or both, would constitute a Default.
"Unrestricted Subsidiary" means SOMSC and its Subsidiaries.
"Valley Credit Agreement" means the Second Amended and Restated Credit
Agreement, dated as of August 14, 1998, among Valley, the financial institutions
from time to time party thereto and First Chicago, as agent, as the same may be
amended, supplemented or otherwise modified from time to time.
"Valley" means Valley Group, Inc., an Oregon corporation.
"Wholly-Owned Subsidiary" of a Person means (a) any Subsidiary all of the
outstanding voting securities of which (other than directors' qualifying or
similar shares) shall at the time be owned or controlled, directly or
indirectly, by such Person or one or more Wholly-Owned Subsidiaries of such
Person, or by such Person and one or more Wholly-Owned Subsidiaries of such
Person, or (b) any partnership, association, joint venture, limited liability
company or similar
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business organization 100% of the ownership interests having ordinary voting
power of which (other than directors' qualifying or similar shares) shall at the
time be so owned or controlled.
"Year 2000 Issues" means anticipated costs, problems and uncertainties
associated with the inability of certain computer applications and hardware to
effectively function on and after January 1, 2000, as such inability affects the
business, operations and financial condition of the Borrower and its
Subsidiaries and of the Borrower's and its Subsidiaries' material customers,
suppliers and vendors.
"Year 2000 Program" is defined in SECTION 5.22.
The foregoing definitions shall be equally applicable to both the singular
and plural forms of the defined terms. References herein to particular columns,
lines or sections of any Person's Annual Statement shall be deemed, where
appropriate, to be references to the corresponding column, line or section of
such Person's Quarterly Statement, or if no such corresponding column, line or
section exists or if any report form changes, then to the corresponding item
referenced thereby. In the event that the columns, lines or sections of the
Annual Statement referenced herein are changed or renumbered, all such
references shall be deemed references to such column, line or section as so
renumbered or changed. Each accounting term used herein which is not otherwise
defined herein shall be defined in accordance with Agreement Accounting
Principles or SAP, as applicable, unless otherwise specified.
ARTICLE II
THE CREDITS
2.1.ADVANCES. (a) From and including the date hereof to but excluding the
Facility Termination Date, each Lender severally (and not jointly) agrees, on
the terms and conditions set forth in this Agreement, to make Advances to the
Borrower from time to time in amounts not to exceed in the aggregate at any one
time outstanding the amount of its pro-rata share of the Aggregate Commitment
existing at such time. Subject to the terms of this Agreement, the Borrower may
borrow, repay and reborrow Advances at any time prior to the Facility
Termination Date.
(b) The Borrower hereby agrees that if at any time, as a result of
reductions in the Aggregate Commitment pursuant to SECTION 2.7 or otherwise, the
aggregate balance of the Loans exceeds the Aggregate Commitment, the Borrower
shall repay immediately its then outstanding Loans in such amount as may be
necessary to eliminate such excess.
(c) The Borrower's obligation to pay the principal of, and interest
on, the Loans shall be evidenced by the Notes. Although the Notes shall be dated
the date of this Agreement, interest in respect thereof shall be payable only
for the periods during which the Loans evidenced thereby are outstanding and,
although the stated amount of each Note shall be equal to the applicable
Lender's Commitment, each Note shall be enforceable, with respect to the
Borrower's obligation to
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pay the principal amount thereof, only to the extent of the unpaid principal
amount of the Loans at the time evidenced thereby.
(d) All Advances and all Loans shall mature, and the principal
amount thereof and the unpaid accrued interest thereon shall be due and payable,
on the Facility Termination Date.
2.2. RATABLE LOANS. Each Advance hereunder shall consist of Loans made
from the several Lenders ratably in proportion to the ratio that their
respective Commitments bear to the Aggregate Commitment.
2.3. TYPES OF ADVANCES. The Advances may be ABR Advances or Eurodollar
Advances, or a combination thereof, selected by the Borrower in accordance with
SECTIONS 2.8 and 2.9.
2.4. FACILITY FEE; REDUCTIONS IN AGGREGATE COMMITMENT. (a) The Borrower
agrees to pay to the Agent for the account of each Lender a facility fee
("Facility Fee") in an amount equal to the Applicable Facility Fee Margin per
annum times the daily average Commitment of such Lender from the date hereof to
and including the Facility Termination Date, payable on each Payment Date
hereafter and on the Facility Termination Date. All accrued Facility Fees shall
be payable on the effective date of any termination of the obligations of the
Lenders to make Loans hereunder.
(b) The Borrower may permanently reduce the Aggregate Commitment in
whole, or in part ratably among the Lenders in a minimum aggregate amount of
$2,000,000 upon at least three (3) Business Days' written notice to the Agent,
which notice shall specify the amount of any such reduction; PROVIDED, HOWEVER,
that the amount of the Aggregate Commitment may not be reduced below the
aggregate principal amount of the outstanding Advances. Such reductions shall be
in addition to reductions occurring pursuant to SECTION 2.7(b). Voluntary
commitment reductions pursuant to this SECTION 2.4(b) shall be applied to the
mandatory commitment reductions required to be made pursuant to SECTION 2.7(a)
in direct order of maturity.
2.5. MINIMUM AMOUNT OF EACH ADVANCE. Each Advance shall be in the minimum
amount of $2,000,000 (and in integral multiples of $500,000 if in excess
thereof); PROVIDED, HOWEVER, that (a) any ABR Advance may be in the amount of
the unused Aggregate Commitment and (b) in no event shall more than six (6)
Eurodollar Advances be permitted to be outstanding at any time.
2.6. OPTIONAL PRINCIPAL PAYMENTS. The Borrower may from time to time pay,
without penalty or premium, all outstanding ABR Advances, or, in a minimum
aggregate amount of $2,000,000 any portion of the outstanding ABR Advances upon
two (2) Business Days' prior notice to the Agent. Subject to SECTION 3.4 and
upon like notice, a Eurodollar Advance may be paid prior to the last day of the
applicable Interest Period in a minimum amount of $2,000,000 or an integral
multiple of $500,000 in excess thereof.
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2.7. MANDATORY COMMITMENT REDUCTIONS. (a) The Aggregate Commitment shall
be automatically and permanently reduced by the following amounts (or such
lesser amount as a result of reductions pursuant to SECTION 2.7(c)) on the
following dates:
<TABLE>
<CAPTION>
Date Reduction Amount
---- ----------------
<S> <C> <C>
June 30, 1999 $3,000,000
June 30, 2000 $3,000,000
June 30, 2001 $4,000,000
July 30, 2002 $40,000,000
</TABLE>
(b) The Aggregate Commitment shall also be automatically and
permanently reduced in the amounts and at the times set forth below:
(i) within one hundred eighty (180) days after the receipt in the
form of cash or cash equivalents thereof by the Borrower, 100% of the
aggregate Net Available Proceeds in excess of $1,000,000 realized upon all
Asset Dispositions in any Fiscal Year of the Borrower; and
(ii) within five (5) Business Days after the receipt in the form of
cash or cash equivalents thereof by the Borrower, 85% of the Net Available
Proceeds realized upon the sale by the Borrower of any equity securities
issued by it after the date of this Agreement in excess of an aggregate
amount of $1,000,000 (other than a sale of common stock of the Borrower to
Parent).
(c) Mandatory commitment reductions under SECTION 2.7(b) shall be
cumulative and in addition to reductions occurring pursuant to SECTION 2.4(b).
Any mandatory commitment reductions under SECTION 2.7(b) shall be applied to the
mandatory commitment reductions required to be made pursuant to SECTION 2.7(a)
in the inverse order of maturity.
(d) Any reduction in the Aggregate Commitment pursuant to this
SECTION 2.7 or otherwise shall ratably reduce the Commitment of each Lender.
2.8. METHOD OF SELECTING TYPES AND INTEREST PERIODS FOR NEW ADVANCES. The
Borrower shall select the Type of Advance and, in the case of each Eurodollar
Advance, the Interest Period applicable to each Advance from time to time;
PROVIDED, HOWEVER, that in the event Loans are incurred on the date of this
Agreement, all Loans incurred on such date shall be ABR Advances. The Borrower
shall give the Agent irrevocable notice (a "BORROWING NOTICE") not later than
10:00 a.m. (Chicago time) on the Borrowing Date of each ABR Advance and at least
three (3) Business Days before the Borrowing Date for each Eurodollar Advance,
specifying:
(a) the Borrowing Date of such Advance, which shall be a Business
Day;
(b) the aggregate amount of such Advance;
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(c) the Type of Advance selected;
(d) in the case of each Eurodollar Advance, the Interest Period
applicable thereto, which shall end on or prior to the
Facility Termination Date; and
(e) any changes to money transfer instructions previously
delivered to the Agent.
Not later than noon (Chicago time) on each Borrowing Date, each Lender shall
make available its Loan or Loans, in funds immediately available in Chicago, to
the Agent at its address specified pursuant to ARTICLE XIII. The Agent will make
the funds so received from the Lenders available to the Borrower at the Agent's
aforesaid address or at such account at such other institution in the United
States of America as the Borrower may indicate in the Borrowing Notice.
2.9. CONVERSION AND CONTINUATION OF OUTSTANDING ADVANCES. ABR Advances
shall continue as ABR Advances unless and until such ABR Advances are converted
into Eurodollar Advances. Each Eurodollar Advance shall continue as a Eurodollar
Advance until the end of the then applicable Interest Period therefor, at which
time such Eurodollar Advance shall be automatically converted into an ABR
Advance unless the Borrower shall have given the Agent a Conversion/Continuation
Notice requesting that, at the end of such Interest Period, such Eurodollar
Advance continue as a Eurodollar Advance for the same or another Interest
Period. Subject to the terms of SECTION 2.5, the Borrower may elect from time to
time to convert all or any part of an Advance of any Type into any other Type or
Types of Advances; PROVIDED, HOWEVER, that any conversion of any Eurodollar
Advance shall be made on, and only on, the last day of the Interest Period
applicable thereto. The Borrower shall give the Agent irrevocable notice (a
"CONVERSION/ CONTINUATION NOTICE") of each conversion of an ABR Advance or
continuation of a Eurodollar Advance not later than 10:00 a.m. (Chicago time) on
the conversion date, in the case of a conversion into an ABR Advance, or at
least three (3) Business Days, in the case of a conversion into or continuation
of a Eurodollar Advance, prior to the date of the requested conversion or
continuation, specifying:
(a) the requested date of such conversion or continuation, which
shall be a Business Day;
(b) the aggregate amount and Type of the Advance which is to be
converted or continued; and
(c) the amount and Type(s) of Advance(s) into which such Advance
is to be converted or continued and, in the case of a
conversion into or continuation of a Eurodollar Advance, the
duration of the Interest Period applicable thereto, which
shall end on or prior to the Facility Termination Date.
2.10. CHANGES IN INTEREST RATE, ETC. Each ABR Advance shall bear interest
at the Alternate Base Rate from and including the date of such Advance or the
date on which such Advance was converted into an ABR Advance to (but not
including) the date on which such ABR Advance is paid or converted to a
Eurodollar Advance. Changes in the rate of interest on that portion of any
Advance maintained as an ABR Advance will take effect simultaneously with each
change in the
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Alternate Base Rate. Each Eurodollar Advance shall bear interest from and
including the first day of the Interest Period applicable thereto to, but not
including, the last day of such Interest Period at the Eurodollar Rate
determined as applicable to such Eurodollar Advance plus the Applicable
Eurodollar Margin. No Interest Period may end after the Facility Termination
Date. The Borrower shall select Interest Periods so that it is not necessary to
repay any portion of a Eurodollar Advance prior to the last day of the
applicable Interest Period in order to make a mandatory repayment required
pursuant to SECTION 2.7(a).
2.11. RATES APPLICABLE AFTER DEFAULT. Notwithstanding anything to the
contrary contained in SECTIONS 2.8 or 2.9, no Advance may be made as, converted
into or continued as a Eurodollar Advance (except with the consent of the Agent
and the Required Lenders) when any Default or Unmatured Default has occurred and
is continuing. During the continuance of a Default the Required Lenders may, at
their option, by notice to the Borrower (which notice may be revoked at the
option of the Required Lenders notwithstanding any provision of SECTION 8.2
requiring unanimous consent of the Lenders to changes in interest rates),
declare that each Eurodollar Advance and ABR Advance shall bear interest (for
the remainder of the applicable Interest Period in the case of Eurodollar
Advances) at a rate per annum equal to the rate otherwise applicable plus two
percent (2%) per annum; PROVIDED, HOWEVER, that such increased rate shall
automatically and without action of any kind by the Lenders become and remain
applicable until revoked by the Required Lenders in the event of a Default
described in SECTIONS 7.6 or 7.7.
2.12. METHOD OF PAYMENT. All payments of the Obligations hereunder shall
be made, without setoff, deduction or counterclaim, in immediately available
funds to the Agent at the Agent's address specified pursuant to ARTICLE XIII, or
at any other Lending Installation of the Agent specified in writing by the Agent
to the Borrower (at least two (2) Business Days in advance) by noon (Chicago
time) on the date when due and shall be applied ratably by the Agent among the
Lenders. Each payment delivered to the Agent for the account of any Lender shall
be delivered promptly by the Agent to such Lender in the same type of funds that
the Agent received at its address specified pursuant to ARTICLE XIII or at any
Lending Installation specified in a notice received by the Agent from such
Lender. The Agent is hereby authorized to charge the account of the Borrower
maintained with the Agent for each payment of principal, interest and fees as it
becomes due hereunder.
2.13. NOTES. Each Lender is hereby authorized to record the principal
amount of each of its Loans and each repayment on the schedule attached to its
Note; PROVIDED, HOWEVER, that neither the failure to so record nor any error in
such recordation shall affect the Borrower's obligations under such Note.
2.14. INTEREST PAYMENT DATES; INTEREST AND FEE BASIS. Interest accrued on
each ABR Advance shall be payable on each Payment Date, commencing with the
first such date to occur after the date hereof, on any date on which an ABR
Advance is prepaid, whether due to acceleration or otherwise, and at maturity.
Interest accrued on that portion of the outstanding principal amount of any ABR
Advance converted into a Eurodollar Advance on a day other than a Payment Date
shall be payable on the date of conversion. Interest accrued on each Eurodollar
Advance shall be payable on the last day of its applicable Interest Period, on
any date on which the Eurodollar Advance is
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prepaid, whether by acceleration or otherwise, and at maturity. Interest accrued
on each Eurodollar Advance having an Interest Period longer than three (3)
months shall also be payable on the last day of each three-month interval during
such Interest Period. Interest and commitment fees shall be calculated for
actual days elapsed on the basis of a 360-day year. Interest shall be payable
for the day an Advance is made but not for the day of any payment on the amount
paid if payment is received prior to noon (Chicago time) at the place of
payment. If any payment of principal of or interest on an Advance shall become
due on a day which is not a Business Day, such payment shall be made on the next
succeeding Business Day and, in the case of a principal payment, such extension
of time shall be included in computing interest in connection with such payment.
2.15. NOTIFICATION OF ADVANCES, INTEREST RATES, PREPAYMENTS AND COMMITMENT
REDUCTIONS. Promptly after receipt thereof, the Agent will notify each Lender of
the contents of each Aggregate Commitment reduction notice, Borrowing Notice,
Conversion/Continuation Notice, and repayment notice received by it hereunder.
The Agent will notify each Lender of the interest rate applicable to each
Eurodollar Advance promptly upon determination of such interest rate and will
give each Lender prompt notice of each change in the Alternate Base Rate.
2.16. LENDING INSTALLATIONS. Each Lender may book its Loans at any Lending
Installation selected by such Lender and may change its Lending Installation
from time to time. All terms of this Agreement shall apply to any such Lending
Installation and the Notes shall be deemed held by each Lender for the benefit
of such Lending Installation. Each Lender may, by written or telex notice to the
Agent and the Borrower, designate a Lending Installation through which Loans
will be made by it and for whose account Loan payments are to be made.
2.17. NON-RECEIPT OF FUNDS BY THE AGENT. Unless the Borrower or a Lender,
as the case may be, notifies the Agent prior to the date on which it is
scheduled to make payment to the Agent of (a) in the case of a Lender, the
proceeds of a Loan, or (b) in the case of the Borrower, a payment of principal,
interest or fees to the Agent for the account of the Lenders, that it does not
intend to make such payment, the Agent may assume that such payment has been
made. The Agent may, but shall not be obligated to, make the amount of such
payment available to the intended recipient in reliance upon such assumption. If
the Borrower has not in fact made such payment to the Agent, the Lenders shall,
on demand by the Agent, repay to the Agent the amount so made available together
with interest thereon in respect of each day during the period commencing on the
date such amount was so made available by the Agent until the date the Agent
recovers such amount at a rate per annum equal to the Federal Funds Effective
Rate for such day. If any Lender has not in fact made such payment to the Agent,
such Lender or the Borrower shall, on demand by the Agent, repay to the Agent
the amount so made available together with interest thereon in respect of each
day during the period commencing on the date such amount was so made available
by the Agent until the date the Agent recovers such amount at a rate per annum
equal to (a) in the case of payment by a Lender, the Federal Funds Effective
Rate for such day, or (b) in the case of payment by the Borrower, the interest
rate applicable to the relevant Loan.
2.18. TAXES. (a) Any payments made by the Borrower under this Agreement
shall be made free and clear of, and without deduction or withholding for or on
account of, any present or
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future income, stamp or other taxes, levies, imposts, duties, charges, fees,
deductions or withholdings, now or hereafter imposed, levied, collected,
withheld or assessed by any Governmental Authority, excluding net income taxes
and franchise taxes or any other tax based upon any income imposed on the Agent
or any Lender by the jurisdiction in which the Agent or such Lender is
incorporated or has its principal place of business or maintains its Lending
Installation. If any such non-excluded taxes, levies, imposts, duties, charges,
fees, deductions or withholdings ("Non-Excluded Taxes") are required to be
withheld from any amounts payable to the Agent or any Lender hereunder, the
amounts so payable to the Agent or such Lender shall be increased to the extent
necessary to yield to the Agent or such Lender (after payment of all
Non-Excluded Taxes) interest or any such other amounts payable hereunder at the
rates or in the amounts specified in or pursuant to this Agreement; PROVIDED,
HOWEVER, that the Borrower shall not be required to increase any such amounts
payable to any Lender that is not organized under the laws of the U.S. or a
state thereof if such Lender fails to comply with the requirements of paragraph
(b) of this SECTION 2.18. Whenever any Non-Excluded Taxes are payable by the
Borrower, as promptly as practicable thereafter the Borrower shall send to the
Agent for its own account or for the account of such Lender, as the case may be,
a certified copy of an original official receipt received by the Borrower
showing payment thereof. If the Borrower fails to pay any Non-Excluded Taxes
when due to the appropriate taxing authority or fails to remit to the Agent the
required receipts or other required documentary evidence, the Borrower shall
indemnify the Agent and the Lenders for any incremental taxes, interest or
penalties that may become payable by any Agent or any Lender as a result of any
such failure. The agreements in this SECTION 2.18 shall survive the termination
of this Agreement and the payment of all other amounts payable hereunder.
(b) At least five (5) Business Days prior to the first date on which
interest or fees are payable hereunder for the account of any Lender, each
Lender that is not incorporated under the laws of the United States of America,
or a state thereof, agrees that it will deliver to each of the Borrower and the
Agent two (2) duly completed and properly executed copies of United States
Internal Revenue Service Form 1001 or 4224 (or a successor form), certifying in
either case that such Lender is entitled to receive payments under this
Agreement and the Notes without deduction or withholding of any United States
federal income taxes. Each Lender which so delivers a Form 1001 or 4224 (or a
successor form) further undertakes to deliver to each of the Borrower and the
Agent two (2) additional duly completed and properly executed copies of such
form (or a successor form) on or before the date that such form expires
(currently, three (3) successive calendar years for Form 1001 and each tax year
for Form 4224) or becomes obsolete or after the occurrence of any event
requiring a change in the most recent forms so delivered by it, and such
amendments thereto or extensions or renewals thereof as may be reasonably
requested by the Borrower or the Agent, in each case certifying that such Lender
is entitled to receive payments under this Agreement and the Notes without
deduction or withholding of any United States federal income taxes, unless an
event (including, without limitation, any change in treaty, law or regulation)
has occurred prior to the date on which any such delivery would otherwise be
required which renders all such forms inapplicable or which would prevent such
Lender from duly completing and delivering any such form with respect to it and
such Lender advises the Borrower and the Agent that it is not capable of
receiving payments without any deduction or withholding of United States federal
income tax.
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2.19. AGENT'S FEES. The Borrower shall pay to the Agent those fees, in
addition to the Facility Fees referenced in SECTION 2.4(A), in the amounts and
at the times separately agreed to between the Agent and the Borrower.
ARTICLE III
CHANGE IN CIRCUMSTANCES
3.1. YIELD PROTECTION. If, after the date hereof, the adoption of or any
change in any law or any governmental or quasi-governmental rule, regulation,
policy, guideline or directive (whether or not having the force of law), or any
new interpretation thereof, or the compliance of any Lender with such adoption,
change or interpretation,
(a) subjects any Lender or any applicable Lending Installation to
any tax, duty, charge or withholding on or from payments due from the
Borrower (excluding taxation of the overall net income of any Lender or
applicable Lending Installation imposed by the jurisdiction in which such
Lender or Lending Installation is incorporated or has its principal place
of business), or changes the basis of taxation of principal, interest or
any other payments to any Lender or Lending Installation in respect of its
Loans or other amounts due it hereunder, or
(b) imposes or increases or deems applicable any reserve,
assessment, insurance charge, special deposit or similar requirement
against assets of, deposits with or for the account of, or credit extended
by, any Lender or any applicable Lending Installation (other than reserves
and assessments taken into account in determining the interest rate
applicable to Eurodollar Advances), or
(c) imposes any other condition the result of which is to increase
the cost to any Lender or any applicable Lending Installation of making,
funding or maintaining Loans or reduces any amount receivable by any
Lender or any applicable Lending Installation in connection with any
Loans, or requires any Lender or any applicable Lending Installation to
make any payment calculated by reference to the amount of Loans held, or
interest received by it, by an amount deemed material by such Lender,
then, within fifteen (15) days of demand by such Lender, the Borrower shall pay
such Lender that portion of such increased expense incurred or resulting in an
amount received which such Lender determines is attributable to making, funding
and maintaining its Loans and its Commitment.
3.2. CHANGES IN CAPITAL ADEQUACY REGULATIONS. If a Lender determines the
amount of capital required or expected to be maintained by such Lender, any
Lending Installation of such Lender or any corporation controlling such Lender
is increased as a result of a Change, then, within fifteen (15) days of demand
by such Lender, the Borrower shall pay such Lender the amount
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necessary to compensate for any shortfall in the rate of return on the portion
of such increased capital which such Lender determines is attributable to this
Agreement, its Loans or its obligation to make Loans hereunder (after taking
into account such Lender's policies as to capital adequacy). "CHANGE" means (a)
any change after the date of this Agreement in the Risk-Based Capital
Guidelines, or (b) any adoption of or change in any other law, governmental or
quasi-governmental rule, regulation, policy, guideline, interpretation, or
directive (whether or not having the force of law) after the date of this
Agreement which affects the amount of capital required or expected to be
maintained by any Lender or any Lending Installation or any corporation
controlling any Lender. "RISK-BASED CAPITAL GUIDELINES" means (a) the risk-based
capital guidelines in effect in the United States on the date of this Agreement
and (b) the corresponding capital regulations promulgated by regulatory
authorities outside the United States implementing the July 1988 report of the
Basle Committee on Banking Regulation and Supervisory Practices entitled
"International Convergence of Capital Measurements and Capital Standards" and
any amendments to such regulations adopted prior to the date of this Agreement.
3.3. AVAILABILITY OF TYPES OF ADVANCES. If any Lender determines that
maintenance of its Eurodollar Loans at a suitable Lending Installation would
violate any applicable law, rule, regulation, or directive, whether or not
having the force of law, or if the Required Lenders determine that (a) deposits
of a type and maturity appropriate to match fund Eurodollar Advances are not
available, or (b) the interest rate applicable to a Eurodollar Advance does not
accurately or fairly reflect the cost of making or maintaining such Advance,
then the Agent shall suspend the availability of the Eurodollar Advances until
such circumstance no longer exists and require any Eurodollar Advances to be
repaid.
3.4. FUNDING INDEMNIFICATION. If any payment of a Eurodollar Advance
occurs on a date which is not the last day of the applicable Interest Period,
whether because of acceleration, prepayment or otherwise, or a Eurodollar
Advance is not made on the date specified by the Borrower for any reason other
than default by the Lenders, the Borrower will indemnify the Agent and each
Lender for any loss or cost incurred by it resulting therefrom, including,
without limitation, any loss or cost in liquidating or employing deposits
acquired to fund or maintain the Eurodollar Advance.
3.5. LENDER STATEMENTS; SURVIVAL OF INDEMNITY. To the extent reasonably
possible, each Lender shall designate an alternate Lending Installation with
respect to its Eurodollar Advances to reduce any liability of the Borrower to
such Lender under SECTIONS 2.18, 3.1 and 3.2 or to avoid the unavailability of a
Type of Advance under SECTION 3.3, so long as such designation is not
disadvantageous to such Lender. Each Lender shall deliver a written statement of
such Lender to the Borrower (with a copy to the Agent) as to the amount due, if
any, under SECTIONS 3.1, 3.2 or 3.4. Such written statement shall set forth in
reasonable detail the calculations upon which such Lender determined such amount
and shall be final, conclusive and binding on the Borrower in the absence of
manifest error. Determination of amounts payable under such Sections in
connection with a Eurodollar Advance shall be calculated as though each Lender
funded its Eurodollar Advances through the purchase of a deposit of the type and
maturity corresponding to the deposit used as a reference in determining the
Eurodollar Rate applicable to such Loan, whether in fact that is the case or
not. Unless otherwise provided herein, the amount specified in the written
statement of any
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Lender shall be payable on demand after receipt by the Borrower
of the written statement. The obligations of the Borrower under SECTIONS 3.1,
3.2 and 3.4 shall survive payment of the Obligations and termination of this
Agreement.
ARTICLE IV
CONDITIONS PRECEDENT
4.1. EFFECTIVENESS. The Lenders shall not be required to make the initial
Advance hereunder unless and until the Borrower has furnished the following to
the Agent with sufficient copies for the Lenders and the other conditions set
forth below have been satisfied:
(a) CHARTER DOCUMENTS; GOOD STANDING CERTIFICATES. Copies of the
certificate of incorporation of the Borrower, together with all amendments
thereto, both certified by the appropriate governmental officer in its
jurisdiction of incorporation, together with a good standing certificate
issued by the Secretary of State of the jurisdiction of its incorporation
and such other jurisdictions as shall be reasonably requested by the
Agent.
(b) BY-LAWS AND RESOLUTIONS. Copies, certified by the Secretary or
Assistant Secretary of the Borrower, of its by-laws and of its Board of
Directors' resolutions authorizing the execution, delivery and performance
of the Loan Documents to which the Borrower is a party.
(c) SECRETARY'S CERTIFICATE. An incumbency certificate, executed by
the Secretary or Assistant Secretary of the Borrower, which shall identify
by name and title and bear the signature of the officers of the Borrower
authorized to sign the Loan Documents and to make borrowings hereunder,
upon which certificate the Agent and the Lenders shall be entitled to rely
until informed of any change in writing by the Borrower.
(d) OFFICER'S CERTIFICATE. A certificate signed by an Authorized
Officer of the Borrower, in form and substance satisfactory to the Agent,
to the effect that on the Restatement Effective Date (both before and
after giving effect to the consummation of the transactions contemplated
hereby and the making of the Loans hereunder, if any, being made on such
date): (i) no Default or Unmatured Default has occurred and is continuing;
(ii) no injunction or temporary restraining order which would prohibit the
making of any Loans or other litigation which could reasonably be expected
to have a Material Adverse Effect is pending or, to the best of such
Person's knowledge, threatened; (iii) all orders, consents, approvals,
licenses, authorizations, or validations of, or filings, recordings or
registrations with, or exemptions by, any Governmental Authority required
in connection with the execution, delivery and performance of this
Agreement have been or, prior to the time required, will have been,
obtained, given, filed or taken and are or will be in full force and
effect (or the Borrower has obtained effective judicial relief with
respect to the application thereof) and all applicable waiting periods
have expired; (iv) each of the representations and
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warranties set forth in ARTICLE V of this Agreement is true and correct on
and as of the Restatement Effective Date; and (v) since December 31, 1997,
no event or change has occurred that has caused or evidences a Material
Adverse Effect.
(e) LEGAL OPINION. A written opinion of Brobeck, Phleger & Harrison
LLP, counsel to the Borrower, addressed to the Agent and the Lenders in
form and substance acceptable to the Agent and its counsel.
(f) NOTES. Notes payable to the order of each of the Lenders duly
executed by the Borrower.
(g) LOAN DOCUMENTS. Executed originals of this Agreement and each of
the Loan Documents, which shall be in full force and effect, together with
all schedules, exhibits, certificates, instruments, opinions, documents
and financial statements required to be delivered pursuant hereto and
thereto.
(h) LETTERS OF DIRECTION. Written money transfer instructions with
respect to the initial Advances and to future Advances in form and
substance acceptable to the Agent and its counsel addressed to the Agent
and signed by an Authorized Officer, together with such other related
money transfer authorizations as the Agent may have reasonably requested.
(i) SOLVENCY CERTIFICATE. A written solvency certificate from the
chief financial officer of the Borrower in form and content satisfactory
to the Agent with respect to the value, Solvency and other factual
information, or relating to, as the case may be of the Borrower on a
consolidated basis.
(j) REGULATORY MATTERS. Receipt of any required regulatory approvals
from any Governmental Authority.
(k) INVESTMENT POLICY GUIDELINES. Certified copy of the investment
policy guidelines adopted by the finance committee of the board of
directors of the Borrower.
(l) PAYMENT OF FEES. The Borrower shall have paid all fees due to
First Chicago.
(m) FOLKSAMERICA LOAN AGREEMENT. A copy of the Folksamerica Loan
Agreement, including all amendments thereto.
(n) OTHER. Such other documents as the Agent, any Lender or their
counsel may have reasonably requested.
4.2. EACH FUTURE ADVANCE. The Lenders shall not be required to make any
Advance unless on the applicable Borrowing Date:
(a) There exists no Default or Unmatured Default and none would
result from such Advance;
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(b) The representations and warranties contained in ARTICLE V are
true and correct as of such Borrowing Date (except to the extent such
representations and warranties are expressly made as of a specified date,
in which event such representations and warranties shall be true and
correct as of such specified date);
(c) A Borrowing Notice shall have been properly submitted; and
(d) All legal matters incident to the making of such Advance shall
be satisfactory to the Lenders and their counsel.
Each Borrowing Notice with respect to each such Advance shall constitute a
representation and warranty by the Borrower that the conditions contained in
SECTIONS 4.2(A), (B) AND (C) have been satisfied. Any Lender may require a duly
completed compliance certificate in substantially the form of EXHIBIT B hereto
as a condition to making an Advance.
ARTICLE V
REPRESENTATIONS AND WARRANTIES
The Borrower represents and warrants to the Lenders that:
5.1. CORPORATE EXISTENCE AND STANDING. Each of the Borrower and each
Subsidiary is a corporation duly incorporated, validly existing and in good
standing under the laws of its respective jurisdiction of incorporation and is
duly qualified and in good standing as a foreign corporation and is duly
authorized to conduct its business in each jurisdiction in which its business is
conducted or proposed to be conducted, except where the failure to be so
qualified could not reasonably be expected to have a Material Adverse Effect.
5.2. AUTHORIZATION AND VALIDITY. The Borrower has all requisite power and
authority (corporate and otherwise) and legal right to execute and deliver each
of the Loan Documents and to perform its obligations thereunder. The execution
and delivery by the Borrower of the Loan Documents and the performance of its
obligations thereunder have been duly authorized by proper corporate proceedings
and the Loan Documents constitute legal, valid and binding obligations of the
Borrower enforceable against the Borrower in accordance with their terms, except
as enforceability may be limited by bankruptcy, insolvency or similar laws
affecting the enforcement of creditors' rights generally.
5.3. COMPLIANCE WITH LAWS AND CONTRACTS. The Borrower and its Subsidiaries
have complied in all material respects with all applicable statutes, rules,
regulations, orders and restrictions of any domestic or foreign government or
any instrumentality or agency thereof, having jurisdiction over the conduct of
their respective businesses or the ownership of their respective properties,
except where the failure to so comply could not reasonably be expected to have a
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Material Adverse Effect. Neither the execution and delivery by the Borrower of
the Loan Documents, the application of the proceeds of the Loans or the
consummation of the transactions contemplated in the Loan Documents, nor
compliance with the provisions of the Loan Documents will, or at the relevant
time did, (a) violate any law, rule, regulation (including Regulations T, U and
X), order, writ, judgment, injunction, decree or award binding on the Borrower
or any Subsidiary or the Borrower's or any Subsidiary's charter, articles or
certificate of incorporation or by-laws, (b) violate the provisions of or
require the approval or consent of any party to any indenture, instrument or
agreement to which the Borrower or any Subsidiary is a party or is subject, or
by which it, or its property, is bound, or conflict with or constitute a default
thereunder, or result in the creation or imposition of any Lien (other than
Liens permitted by, the Loan Documents) in, of or on the property of the
Borrower or any Subsidiary pursuant to the terms of any such indenture,
instrument or agreement, or (c) require any consent of the stockholders of any
Person, except for approvals or consents which will be obtained on or before the
initial Advance and are disclosed on SCHEDULE 5.3, except for any violation of,
or failure to obtain an approval or consent required under, any such indenture,
instrument or agreement that could not reasonably be expected to have a Material
Adverse Effect.
5.4. GOVERNMENTAL CONSENTS. No order, consent, approval, qualification,
license, authorization, or validation of, or filing, recording or registration
with, or exemption by, or other action in respect of, any court, governmental or
public body or authority, or any subdivision thereof, any securities exchange or
other Person is or at the relevant time was required to authorize, or is or at
the relevant time was required in connection with the execution, delivery,
consummation or performance of, or the legality, validity, binding effect or
enforceability of, any of the Loan Documents or the application of the proceeds
of the Loans or any other transaction contemplated in the Loan Documents.
Neither the Borrower nor any Subsidiary is in default under or in violation of
any foreign, federal, state or local law, rule, regulation, order, writ,
judgment, injunction, decree or award binding upon or applicable to the Borrower
or such Subsidiary, in each case the consequences of which default or violation
could reasonably be expected to have a Material Adverse Effect.
5.5. FINANCIAL STATEMENTS. The Borrower has heretofore furnished to each
of the Lenders (a) the December 31, 1997 audited consolidated financial
statements of the Borrower and its Subsidiaries, (b) the unaudited consolidated
financial statements of the Borrower and its Subsidiaries as of March 31, 1998,
(c) the December 31, 1997 audited financial statements of Charter Group, Inc.
and its Subsidiaries, (d) the December 31, 1997 audited financial statements of
Valley Insurance Co. and its Subsidiaries, (e) the December 31, 1997 audited
financial statements of Valley and its Subsidiaries, (f) the December 31, 1997
audited financial statements of SOMSC and its Subsidiaries, (g) the December 31,
1997 audited financial statements of Parent and its Subsidiaries, (h) the
December 31, 1997 audited financial statements of Folksamerica and its
Subsidiaries, (i) the December 31, 1997 audited financial statements of Main
Street America Holdings, Inc. and its Subsidiaries, (j) the March 31, 1998
unaudited balance sheets and income statements of Parent, the Borrower, Valley,
SOMSC, Folksamerica and Main Street America Holdings, Inc., (k) the December 31,
1997 Annual Statement of each Insurance Subsidiary and Folksamerica Reinsurance
Company and (l) the March 31, 1998 Quarterly Statement of each Insurance
Subsidiary and
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Folksamerica Reinsurance Company (collectively, the "FINANCIAL STATEMENTS").
Each of the Financial Statements (other than as described in CLAUSE (j)) was
prepared in accordance with Agreement Accounting Principles or SAP, as
applicable, and fairly presents the consolidated financial condition and
operations of the Person which is the subject of such Financial Statements at
such dates and the consolidated results of their operations for the respective
periods then ended (except, in the case of such unaudited statements, for normal
year-end audit adjustments).
5.6. MATERIAL ADVERSE CHANGE. No material adverse change in the business,
Property, condition (financial or otherwise), performance, prospects or results
of operations of the Borrower and its Subsidiaries has occurred since December
31, 1997, except as specifically disclosed in the Financial Statements.
5.7. TAXES. Neither the Borrower nor any of its Subsidiaries are required
to file United States federal, foreign, state or local tax returns. As of the
date hereof, the United States income tax returns of Parent on a consolidated
basis have been audited by the Internal Revenue Service through its fiscal
period ending December 31, 1988, and all tax years beginning on or after January
1, 1989 are currently being audited or are subject to audit. No tax liens have
been filed and no claims are being asserted with respect to any taxes of Parent
which could reasonably be expected to have a Material Adverse Effect. The
charges, accruals and reserves on the books of Parent in respect of any taxes or
other governmental charges of Parent are in accordance with Agreement Accounting
Principles.
5.8. LITIGATION AND CONTINGENT OBLIGATIONS. There is no litigation,
arbitration, proceeding, inquiry or governmental investigation pending or, to
the knowledge of any of their officers, threatened against or affecting the
Borrower or any Subsidiary or any of their respective properties which could
reasonably be expected to have a Material Adverse Effect or to prevent, enjoin
or unduly delay the making of the Loans under this Agreement. Neither the
Borrower nor any Subsidiary has any material contingent obligations incurred
outside of the ordinary course of its business except as set forth on SCHEDULE
5.16 or disclosed in the Financial Statements or in financial statements
required to be delivered under SECTIONS 6.1(a) and (b) and as permitted under
this Agreement.
5.9. CAPITALIZATION. SCHEDULE 5.9 hereto contains (a) an accurate
description of the Borrower's capitalization as of March 31, 1998 and (b) an
accurate list of all of the existing Subsidiaries as of the date of this
Agreement, setting forth their respective jurisdictions of incorporation and the
percentage of their capital stock owned by the Borrower or other Subsidiaries.
All of the issued and outstanding shares of capital stock of the Borrower and of
each Subsidiary have been duly authorized and validly issued, are fully paid and
non-assessable, and are free and clear of all Liens. No authorized but unissued
or treasury shares of capital stock of the Borrower or any Subsidiary are
subject to any option, warrant, right to call or commitment of any kind or
character. Except as set forth on SCHEDULE 5.9 or pursuant to management
incentive plans implemented after the date of this Agreement, neither the
Borrower nor any Subsidiary has any outstanding stock or securities convertible
into or exchangeable for any shares of its capital stock, or any right issued to
any Person (either preemptive or other) to subscribe for or to purchase, or any
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options for the purchase of, or any agreements providing for the issuance
(contingent or otherwise) of, or any calls, commitments or claims of any
character relating to any of its capital stock or any stock or securities
convertible into or exchangeable for any of its capital stock other than as
expressly set forth in the certificate or articles of incorporation of the
Borrower or such Subsidiary. Neither the Borrower nor any Subsidiary is subject
to any obligation (contingent or otherwise) to repurchase or otherwise acquire
or retire any shares of its capital stock or any convertible securities, rights
or options of the type described in the preceding sentence except as otherwise
set forth on SCHEDULE 5.9 or pursuant to management incentive plans implemented
after the date of this Agreement.
5.10. ERISA. Except as disclosed on SCHEDULE 5.10, neither the Borrower
nor any other member of the Controlled Group maintains any Single Employer
Plans, and no Single Employer Plan has any Unfunded Liability. Neither the
Borrower nor any other member of the Controlled Group maintains, or is obligated
to contribute to, any Multiemployer Plan or has incurred, or is reasonably
expected to incur, any withdrawal liability to any Multiemployer Plan. Each Plan
complies in all material respects with all applicable requirements of law and
regulations other than any such failure to comply which could not reasonably be
expected to have a Material Adverse Effect. Neither the Borrower nor any member
of the Controlled Group has, with respect to any Plan, failed to make any
contribution or pay any amount required under Section 412 of the Code or Section
302 of ERISA or the terms of such Plan. There are no pending or, to the
knowledge of the Borrower, threatened claims, actions, investigations or
lawsuits against any Plan, any fiduciary thereof, or the Borrower or any member
of the Controlled Group with respect to a Plan. Neither the Borrower nor any
member of the Controlled Group has engaged in any prohibited transaction (as
defined in Section 4975 of the Code or Section 406 of ERISA) in connection with
any Plan which would subject such Person to any material liability. Within the
last five (5) years neither the Borrower nor any member of the Controlled Group
has engaged in a transaction which resulted in a Single Employer Plan with an
Unfunded Liability being transferred out of the Controlled Group which could
reasonably be expected to have a Material Adverse Effect. No Termination Event
has occurred or is reasonably expected to occur with respect to any Plan which
is subject to Title IV of ERISA which could reasonably be expected to have a
Material Adverse Effect.
5.11. DEFAULTS. No Default or Unmatured Default has occurred and is
continuing.
5.12. FEDERAL RESERVE REGULATIONS. Neither the Borrower nor any Subsidiary
is engaged, directly or indirectly, principally, or as one of its important
activities, in the business of extending, or arranging for the extension of,
credit for the purpose of purchasing or carrying Margin Stock. No part of the
proceeds of any Loan will be used in a manner which would violate, or result in
a violation of, Regulation T, Regulation U or Regulation X. Neither the making
of any Advance hereunder nor the use of the proceeds thereof will violate or be
inconsistent with the provisions of Regulation T, Regulation U or Regulation X.
5.13. INVESTMENT COMPANY. Neither the Borrower nor any Subsidiary is, or
after giving effect to any Advance will be, an "investment company" or a company
"controlled" by an "investment company" within the meaning of the Investment
Company Act of 1940, as amended.
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5.14. CERTAIN FEES. No broker's or finder's fee or commission was, is or
will be payable by the Borrower or any Subsidiary with respect to any of the
transactions contemplated by this Agreement, except as described in SECTION 9.5.
The Borrower hereby agrees to indemnify the Agent and the Lenders against and
agrees that it will hold each of them harmless from any claim, demand or
liability for broker's or finder's fees or commissions alleged to have been
incurred by the Borrower in connection with any of the transactions contemplated
by this Agreement and any expenses (including, without limitation, attorneys'
fees and time charges of attorneys for the Agent or any Lender, which attorneys
may be employees of the Agent or any Lender) arising in connection with any such
claim, demand or liability. No other similar fee or commissions will be payable
by the Borrower or any Subsidiary for any other services rendered to the
Borrower or any Subsidiary ancillary to any of the transactions contemplated by
this Agreement.
5.15. SOLVENCY. As of the date hereof, after giving effect to the
consummation of the transactions contemplated by the Loan Documents and the
payment of all fees, costs and expenses payable by the Borrower or its
Subsidiaries with respect to the transactions contemplated by the Loan Documents
and the application of the proceeds of Loans incurred by the Borrower on the
initial Borrowing Date, each of the Borrower and each Subsidiary is Solvent.
5.16. INDEBTEDNESS. Attached hereto as SCHEDULE 5.16 is a complete and
correct list of all Indebtedness of the Borrower and its Subsidiaries
outstanding on the date of this Agreement (other than Indebtedness in a
principal amount not exceeding $500,000 for a single item of Indebtedness and
$2,000,000 in the aggregate for all such Indebtedness listed, it being
understood and agreed that any such Indebtedness shall be permitted to exist
pursuant to SECTION 6.11(b) notwithstanding the absence thereof on SCHEDULE
5.16), showing the aggregate principal amount which was outstanding on such date
after giving effect to the application of the proceeds of Loans incurred by the
Borrower on the initial Borrowing Date.
5.17. INSURANCE LICENSES. SCHEDULE 5.17 hereto lists all of the
jurisdictions in which any Insurance Subsidiary holds a License and is
authorized to and does transact insurance business as of the date of this
Agreement. No such License, the loss of which could reasonably be expected to
have a Material Adverse Effect, is the subject of a proceeding for suspension or
revocation. To the Borrower's knowledge, there is no sustainable basis for such
suspension or revocation, and no such suspension or revocation has been
threatened by any Governmental Authority.
5.18. MATERIAL AGREEMENTS. Except as set forth in SCHEDULE 5.18 and except
for agreements or arrangements with regulatory agencies with regard to Insurance
Subsidiaries, neither the Borrower nor any Subsidiary is a party to any
agreement or instrument or subject to any charter or other corporate restriction
which could reasonably be expected to have a Material Adverse Effect or which
restricts or imposes conditions upon the ability of any Subsidiary (other than
an Unrestricted Subsidiary) to (a) pay dividends or make other distributions on
its capital stock (b) make loans or advances to the Borrower, (c) repay loans or
advances from Borrower or (d) grant Liens to the Agent to secure the
Obligations. Neither the Borrower nor any Subsidiary is in default in the
performance, observance or fulfillment of any of the obligations, covenants or
conditions
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contained in any agreement to which it is a party, which default could
reasonably be expected to have a Material Adverse Effect.
5.19. ENVIRONMENTAL LAWS. There are no claims, investigations, litigation,
administrative proceedings, notices, requests for information (each a
"PROCEEDING"), whether pending or threatened, or judgments or orders asserting
violations of applicable federal, state and local environmental, health and
safety statutes, regulations, ordinances, codes, rules, orders, decrees,
directives and standards ("ENVIRONMENTAL LAWS") or relating to any toxic or
hazardous waste, substance or chemical or any pollutant, contaminant, chemical
or other substance defined or regulated pursuant to any Environmental Law,
including, without limitation, asbestos, petroleum, crude oil or any fraction
thereof ("HAZARDOUS MATERIALS") asserted against the Borrower or any of its
Subsidiaries, other than in connection with an insurance policy issued in the
ordinary course of business to any Person (other than Parent or any Subsidiary
of Parent), which, in any case, could reasonably be expected to have a Material
Adverse Effect. As of the date hereof, the Borrower and its Subsidiaries do not
have liabilities exceeding $100,000 in the aggregate for all of them with
respect to compliance with applicable Environmental Laws or related to the
generation, treatment, storage, disposal, release, investigation or cleanup of
Hazardous Materials, and no facts or circumstances exist which could give rise
to such liabilities with respect to compliance with applicable Environmental
Laws and the generation, treatment, storage, disposal, release, investigation or
cleanup of Hazardous Materials.
5.20. INSURANCE. The Borrower and its Subsidiaries maintain with
financially sound and reputable insurance companies insurance on their Property
in such amounts and covering such risks as is consistent with sound business
practice.
5.21. DISCLOSURE. No information, exhibit or report furnished by the
Borrower or any of its Subsidiaries to the Agent or to any Lender in connection
with the negotiation of, or compliance with, the Loan Documents contained any
material misstatement of fact or omitted to state a material fact or any fact
necessary to make the statements contained therein not materially misleading.
There is no fact known to the Borrower (other than matters of a general economic
or political nature) that has had or could reasonably be expected to have a
Material Adverse Effect and that has not been disclosed herein or in such other
documents, certificates and statements furnished to the Lenders for use in
connection with the transactions contemplated by this Agreement.
5.22. YEAR 2000. The Borrower has made a reasonable assessment of the Year
2000 Issues and has a realistic and achievable program for remediating the Year
2000 Issues on a timely basis (the "Year 2000 Program"). Based on such
assessment and on the Year 2000 Program the Borrower does not reasonably
anticipate that Year 2000 Issues will have a Material Adverse Effect.
ARTICLE VI
COVENANTS
During the term of this Agreement, unless the Required Lenders shall
otherwise consent in writing:
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6.1. FINANCIAL REPORTING. The Borrower will maintain, for itself and each
Subsidiary, a system of accounting established and administered in accordance
with generally accepted accounting principles, consistently applied, and furnish
to the Lenders:
(a) As soon as practicable and in any event within 100 days after
the close of each of its Fiscal Years, an unqualified audit report
certified by independent certified public accountants, acceptable to the
Lenders, prepared in accordance with Agreement Accounting Principles on a
consolidated and consolidating basis (consolidating statements need not be
certified by such accountants) for itself and its Subsidiaries, including
balance sheets as of the end of such period and related statements of
income, retained earnings and cash flows accompanied by a certificate of
said accountants that, in the course of the examination necessary for
their certification of the foregoing, they have obtained no knowledge of
any Default or Unmatured Default, or if, in the opinion of such
accountants, any Default or Unmatured Default shall exist, stating the
nature and status thereof.
(b) As soon as practicable and in any event within sixty (60) days
after the close of each of the first three Fiscal Quarters of each of its
Fiscal Years, for itself and its Subsidiaries, consolidated and
consolidating unaudited balance sheets as at the close of each such period
and consolidated and consolidating statements of income, retained earnings
and cash flows for the period from the beginning of such Fiscal Year to
the end of such quarter, all certified by its chief financial officer.
(c) (i) Upon the earlier of (A) fifteen (15) days after the
regulatory filing date or (B) seventy-five (75) days after the close of
each fiscal year of each Insurance Subsidiary, copies of the unaudited
Annual Statement of such Insurance Subsidiary, certified by the chief
financial officer or the treasurer of such Insurance Subsidiary, all such
statements to be prepared in accordance with SAP and (ii) no later than
each June 15, copies of financial statements prepared in accordance with
SAP, or generally accepted accounting principles with a reconciliation to
SAP, and certified by independent certified public accountants of
recognized national standing.
(d) Upon the earlier of (i) ten (10) days after the regulatory
filing date or (ii) sixty (60) days after the close of each of the first
three (3) fiscal quarters of each fiscal year of each Insurance
Subsidiary, copies of the unaudited Quarterly Statement of each of the
Insurance Subsidiaries, certified by the chief financial officer or the
treasurer of such Insurance Subsidiary, all such statements to be prepared
in accordance with SAP.
(e) Promptly and in any event within ten (10) days after (i)
learning thereof, notification of any changes after the date of this
Agreement in the rating given by A.M. Best & Co. in respect of any
Insurance Subsidiary and (ii) receipt thereof, copies of any ratings
analysis by A.M. Best & Co. relating to any Insurance Subsidiary.
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(f) Copies of any outside actuarial reports prepared with respect to
any valuation or appraisal of any Insurance Subsidiary, promptly after the
receipt thereof.
(g) Together with the financial statements required by CLAUSES (a)
and (b) above, a compliance certificate in substantially the form of
EXHIBIT B hereto signed by the Borrower's chief financial officer showing
the calculations necessary to determine compliance with this Agreement and
stating that no Default or Unmatured Default exists, or if any Default or
Unmatured Default exists, stating the nature and status thereof.
(h) Promptly after the same becomes available after the close of
each Fiscal Year, a statement of the Unfunded Liabilities of each Single
Employer Plan, certified as correct by an actuary enrolled under ERISA.
(i) As soon as possible and in any event within ten (10) days after
the Borrower knows that any Termination Event has occurred with respect to
any Plan, a statement, signed by the chief financial officer of the
Borrower, describing said Termination Event and the action which the
Borrower proposes to take with respect thereto.
(j) As soon as possible and in any event within ten (10) days after
receipt by the Borrower, a copy of (i) any notice, claim, complaint or
order to the effect that the Borrower or any of its Subsidiaries is or may
be liable to any Person as a result of the release by the Borrower or any
of its Subsidiaries of any Hazardous Materials into the environment or
requiring that action be taken to respond to or clean up a Release of
Hazardous Materials into the environment, and (ii) any notice, complaint
or citation alleging any violation of any Environmental Law or
Environmental Permit by the Borrower or any of its Subsidiaries. Within
ten (10) days of the Borrower or any Subsidiary having knowledge of the
enactment or promulgation of any Environmental Law which could reasonably
be expected to have a Material Adverse Effect, the Borrower shall provide
the Agent with written notice thereof.
(k) Promptly upon the furnishing thereof to the shareholders of the
Borrower, copies of all financial statements, reports and proxy statements
so furnished.
(l) Promptly upon the filing thereof, copies of all registration
statements and annual, quarterly, monthly or other regular reports which
the Borrower or any of its Subsidiaries files with the Securities and
Exchange Commission, the National Association of Securities Dealers, any
securities exchange, the NAIC or any insurance commission or department or
analogous Governmental Authority (including any filing made by the
Borrower or any Subsidiary pursuant to any insurance holding company act
or related rules or regulations), but excluding routine or non-material
filings with the NAIC, any insurance commissioner or department or
analogous Governmental Authority.
(m) Promptly and in any event within ten (10) days after learning
thereof, notification of (i) any material tax assessment, demand, notice
of proposed deficiency or notice of deficiency received by Parent or any
other Consolidated Person or (ii) the filing of
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any tax Lien or commencement of any judicial proceeding by or against any
such Consolidated Person, if any such assessment, demand, notice, Lien or
judicial proceeding relates to tax liabilities in excess of ten percent
(10%) of the net worth (determined according to generally accepted
accounting standards and without reduction for any reserve for such
liabilities) of the Borrower and its Subsidiaries taken as a whole.
(n) Promptly after available, any management letter prepared by the
accountants conducting the audit of the financial statements delivered
pursuant to Section 6.1(a).
(o) Promptly after reviewed by the board of directors of the
Borrower, a copy of the Borrower's investment policy compliance report.
(p) Such other information (including, without limitation, the
annual Best's Advance Report Service report prepared with respect to each
Insurance Subsidiary rated by A.M. Best & Co. and non-financial
information) as the Agent or any Lender may from time to time reasonably
request.
6.2. USE OF PROCEEDS. The Borrower will, and will cause each Subsidiary
to, use the proceeds of the Advances to meet the working capital and general
corporate needs of the Borrower and its Subsidiaries, including, but not limited
to, the consummation of the Folksamerica Transaction and the making of any other
Investments permitted by SECTION 6.13. The Borrower will not, nor will it permit
any Subsidiary to, use any of the proceeds of the Advances in any manner which
would violate, or result in the violation of, Regulation T, Regulation U or
Regulation X or to finance the Purchase of any Person which has not been
approved and recommended by the board of directors (or functional equivalent
thereof) of such Person.
6.3. NOTICE OF DEFAULT. The Borrower will give prompt notice in writing to
the Lenders of the occurrence of (a) any Default or Unmatured Default, (b) of
any other event or development, financial or other, relating specifically to the
Borrower or any of its Subsidiaries (and not of a general economic or political
nature) which could reasonably be expected to have a Material Adverse Effect,
(c) receipt by the Borrower or any Subsidiary of any notice from any
Governmental Authority of the expiration without renewal, revocation or
suspension of, or the institution of any proceedings to revoke or suspend, any
License now or hereafter held by any Insurance Subsidiary which is required to
conduct insurance business in compliance with all applicable laws and
regulations and the expiration, revocation or suspension of which could
reasonably be expected to have a Material Adverse Effect, (d) receipt by the
Borrower or any Subsidiary of any notice from any Governmental Authority of the
institution of any disciplinary proceedings against or in respect of any
Insurance Subsidiary, or the issuance of any order, the taking of any action or
any request for an extraordinary audit for cause by any Governmental Authority
which, if adversely determined, could reasonably be expected to have a Material
Adverse Effect, (e) any material judicial or administrative order of which the
Borrower or any Subsidiary is aware limiting or controlling the insurance
business of any Insurance Subsidiary (and not the insurance industry generally)
which has been issued or adopted or (f) the commencement of any litigation of
which the Borrower or any Subsidiary is aware which could reasonably be expected
to create a Material Adverse Effect.
6.4. CONDUCT OF BUSINESS. The Borrower will, and will cause each
Subsidiary to, (a) carry on and conduct its business in substantially the same
manner as it is presently conducted, (b)
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not conduct any significant business except for financial services, (c) do all
things necessary to remain duly incorporated, validly existing and in good
standing as a domestic corporation in its jurisdiction of incorporation and
maintain all requisite authority to conduct its business in each jurisdiction in
which its business is conducted except where the failure to maintain such
authority could not reasonably be expected to have a Material Adverse Effect and
(d) do all things necessary to renew, extend and continue in effect all Licenses
which may at any time and from time to time be necessary for any Insurance
Subsidiary to operate its insurance business in compliance with all applicable
laws and regulations except for any License the loss of which could not
reasonably be expected to have a Material Adverse Effect; PROVIDED, that any
Insurance Subsidiary may withdraw from one or more states (other than its state
of domicile) as an admitted insurer if such withdrawal is determined by the
Borrower's Board of Directors to be in the best interest of the Borrower and
could not reasonably be expected to have a Material Adverse Effect. The Borrower
shall cause Folksamerica to remain a Wholly-Owned Subsidiary (but only after it
becomes a Wholly-Owned Subsidiary) until the Borrower shall have repaid all
outstanding Advances and other Obligations and the Lenders' Commitments
hereunder have terminated.
6.5. TAXES. At any time on and after the date the Borrower or any of its
Subsidiaries is required to do so, the Borrower will, and will cause each
Subsidiary to, timely file complete and correct United States federal and
applicable foreign, state and local tax returns required by applicable law and
pay when due all taxes, assessments and governmental charges and levies upon it
or its income, profits or Property, except those which are being contested in
good faith by appropriate proceedings and with respect to which adequate
reserves have been set aside in accordance with generally accepted accounting
principles or SAP, as applicable.
6.6. INSURANCE. The Borrower will, and will cause each Subsidiary to,
maintain with financially sound and reputable insurance companies insurance on
all their Property in such amounts and covering such risks as is consistent with
sound business practice, and the Borrower will furnish to the Agent and any
Lender upon request full information as to the insurance carried.
6.7. COMPLIANCE WITH LAWS. The Borrower will, and will cause each
Subsidiary to, comply with all laws, rules, regulations, orders, writs,
judgments, injunctions, decrees or awards to which it may be subject, the
failure to comply with which could reasonably be expected to have a Material
Adverse Effect.
6.8. MAINTENANCE OF PROPERTIES. The Borrower will, and will cause each
Subsidiary to, do all things necessary to maintain, preserve, protect and keep
its Property in good repair, working order and condition, and make all necessary
and proper repairs, renewals and replacements so that its business carried on in
connection therewith may be properly conducted at all times.
6.9. INSPECTION. The Borrower will, and will cause each Subsidiary to, at
reasonable times during normal business hours and upon reasonable notice, permit
the Agent and the Lenders, by their respective representatives and agents, to
inspect any of the Property, corporate books and financial records of the
Borrower and each Subsidiary, to examine and make copies of the books of
accounts and other financial records of the Borrower and each Subsidiary, and to
discuss the affairs,
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finances and accounts of the Borrower and each Subsidiary with, and to be
advised as to the same by, their respective officers at such reasonable times
and intervals as the Lenders may designate. The Borrower will keep or cause to
be kept, and cause each Subsidiary to keep or cause to be kept, appropriate
records and books of account in which complete entries are to be made reflecting
its and their business and financial transactions, such entries to be made in
accordance with Agreement Accounting Principles or SAP, as applicable.
6.10. DIVIDENDS. The Borrower will not declare or pay any dividends or
make any distributions on its capital stock (other than dividends payable in its
own capital stock) or redeem, repurchase or otherwise acquire or retire any of
its capital stock or any options or other rights in respect thereof at any time
outstanding, except that so long as no Default or Unmatured Default exists
before or after giving effect to the declaration or payment of such dividends or
distributions or repurchase or redemption of such stock or other transaction,
(a) the Borrower may declare and pay dividends, and make distributions, on its
common stock and repurchase and redeem and otherwise acquire or retire its
common stock and any options or other rights thereof in an aggregate amount not
to exceed, when aggregated with the principal amount of loans (exclusive of
loans described in SECTION 6.13(e)(II)) made during such Fiscal Year from the
Borrower or its Subsidiaries to Parent, (i) during the Borrower's 1998 Fiscal
Year, 2% of Adjusted Net Worth as of December 31, 1997, and (ii) during any
Fiscal Year thereafter, 3% of Adjusted Net Worth as of the end of the Fiscal
Year preceding the Fiscal Year during which such transaction is consummated and
(b) in addition to any dividends, distributions, repurchases, redemptions,
acquisitions or retirements which may be declared, paid or made pursuant to the
preceding CLAUSE (a), the Borrower may declare and pay dividends, and make
distributions, on its common stock and repurchase and redeem and otherwise
acquire or retire its common stock, and any options or rights thereof, (x) in an
amount equal to (1) the net proceeds received by the Borrower from dividends,
sales, transfers or other dispositions of its equity interests in SOMSC or FAE's
equity interest in San Juan Basin Trust, MINUS (2) the amount of loans made
pursuant to SECTION 6.13(e)(II), PROVIDED, that such dividend is paid within one
hundred eighty (180) days of receipt of such net proceeds, (y) its equity
interests in SOMSC and (z) in an amount equal to that immediately utilized by
Parent to repay all or a portion of a certain $40,000,000 loan from FAE to
Parent.
6.11. INDEBTEDNESS. The Borrower will not, nor will it permit any
Subsidiary (other than an Unrestricted Subsidiary) to, create, incur or suffer
to exist any Indebtedness, except:
(a) the Loans;
(b) Indebtedness existing on the date hereof and described in
SCHEDULE 5.16 hereto and any renewals, extensions, refundings or
refinancings of such Indebtedness; PROVIDED that the amount thereof is not
increased and the maturity or scheduled amortization of principal thereof
is not shortened (unless to a maturity or scheduled amortization occurring
after the Facility Termination Date);
(c) Indebtedness owing by (x) the Borrower to any Wholly-Owned
Subsidiary and (y) any Wholly-Owned Subsidiary to a Wholly-Owned
Subsidiary or the Borrower;
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(d) Indebtedness permitted under the Valley Credit Agreement;
(e) Indebtedness of Folksamerica or its Subsidiaries in existence at
the time of the Folksamerica Transaction; PROVIDED, however, such
Indebtedness of Folksamerica or its Subsidiaries may not be renewed,
extended, refunded or refinanced by Folksamerica without the prior written
consent of the Required Lenders;
(f) Indebtedness of the Borrower, the proceeds of which are used
directly or indirectly to refund or refinance the Indebtedness described
in SECTION 6.11(e); PROVIDED, however that the amount thereof is not
increased, the maturity or scheduled amortization of principal thereof is
not set to a maturity or weighted average maturity occurring before the
Facility Termination Date hereunder and the terms of the proposed
Indebtedness are not otherwise, in the reasonable judgment of the Required
Lenders, disadvantageous (relative to the terms of the Indebtedness
refunded or refinanced) to the interests of the Lenders hereunder;
(g) Indebtedness secured by Liens permitted pursuant to SECTION
6.15(f);
(h) Contingent Obligations permitted under SECTION 6.14; and
(i) other Indebtedness of the Borrower or any Subsidiary to the
extent not otherwise included in subparagraphs (a) through (h) of this
SECTION 6.11 or in SECTION 6.14, in an aggregate amount outstanding at any
one time not to exceed $5,000,000.
6.12. MERGER. The Borrower will not, nor will it permit any Significant
Subsidiary to, merge or consolidate with or into any other Person, except that:
(a) a Wholly-Owned Subsidiary (other than any Unrestricted
Subsidiary) may merge with (i) the Borrower, (ii) any Wholly-Owned
Subsidiary of the Borrower or (iii) any other Person so long as no Default
or Unmatured Default shall have occurred or be continuing before and after
giving effect to such merger and the surviving entity of such merger is
the Borrower or a Wholly-Owned Subsidiary of the Borrower;
(b) a Significant Subsidiary (other than Valley) may merge or
consolidate with any Person so long as neither the Borrower nor any of its
Subsidiaries shall hold any capital stock of such Significant Subsidiary
after giving effect to such merger or consolidation; and
(c) the Borrower or Valley may merge into any Person so long as (i)
the Borrower or Valley, as the case may be, is the surviving entity of
such merger, (ii) no Default or Unmatured Default shall have occurred or
be continuing before and after giving effect to such merger and (iii) the
covenants contained in SECTION 6.20 shall be complied with on a PRO FORMA
basis on the date of, and after giving effect to, such merger.
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6.13. INVESTMENTS AND PURCHASES. The Borrower will not, and will not
permit any Subsidiary (other than an Unrestricted Subsidiary) to, make or suffer
to exist any Investments (including, without limitation, loans and advances to,
and other Investments in, Parent or Subsidiaries), or commitments therefor, or
create any Subsidiary or become or remain a partner in any partnership or joint
venture, or make any Purchases, except:
(a) Investments or commitments therefor (such commitments being set
forth on SCHEDULE 6.13) in existence on the date hereof (including a
certain $40,000,000 loan from FAE to Parent);
(b) loans and advances to employees in the ordinary course of
business and consistent with past practices;
(c) Investments made in Subsidiaries (other than any Unrestricted
Subsidiary) and Main Street America Holdings, Inc.;
(d) Purchases of or Investments in businesses or entities engaged in
the insurance and/or insurance services business or businesses reasonably
incident thereto (including holding companies, the Subsidiaries of which
on a consolidated basis are primarily engaged in such businesses) which do
not constitute hostile takeovers (including the creation of Subsidiaries
in connection therewith) so long as no Default or Unmatured Default has
occurred and is continuing or would occur after giving effect to such
Purchase or Investment;
(e) Investments by the Borrower made on or before May 13, 1999
directly in SOMSC in an amount equal to the FSA Amount so long as at the
time of such Investment no Default or Unmatured Default has occurred and
is continuing or would occur after giving effect to such Investment;
PROVIDED, however, that any Investments pursuant to this CLAUSE (E) are
made from net proceeds traceable to dividends, sales, transfers or other
distributions of equity interests in SOMSC after the date hereof;
(f) loans made by the Borrower or its Subsidiaries to Parent (i) so
long as at all times, after giving effect to the aggregate outstanding
principal amount of such loans, the Borrower would be permitted to pay at
least $1.00 in incremental dividends pursuant to SECTION 6.10(a) or (ii)
that are made out of the net proceeds described in SECTION 6.10(b)(x) in
lieu of utilizing such net proceeds to pay a dividend;
(g) other Investments (other than any direct or indirect Investments
in Parent), so long as any such Investment is materially consistent with
the Borrower's investment policy guidelines as approved from time to time
by the finance committee of the board of directors of the Borrower (a copy
of the current version of such guidelines having been delivered to each
Lender); provided that any change from the guidelines previously submitted
to the Lenders shall not materially adversely affect the Lenders; and
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(h) other Investments (other than any direct or indirect Investments
in Parent) by Folksamerica (but only after it becomes a Wholly-Owned
Subsidiary of the Borrower) at any time prior to March 31, 1999, so long
as any such Investment is permitted under the insurance laws of the State
of New York and is materially consistent with Folksamerica's investment
policy guidelines as approved from time to time by the board of directors
of Folksamerica (a copy of the current version of such guidelines having
been delivered to each Lender); provided that any change from the
guidelines previously submitted to the Lenders shall not materially
adversely affect the Lenders.
6.14. CONTINGENT OBLIGATIONS. The Borrower will not, nor will it permit
any Subsidiary (other than an Unrestricted Subsidiary) to, make or suffer to
exist any Contingent Obligation (including, without limitation, any Contingent
Obligation with respect to the obligations of a Subsidiary), except (a) the
issuance of financial guarantees in the ordinary course of business, (b) by
endorsement of instruments for deposit or collection in the ordinary course of
business, (c) for insurance policies issued in the ordinary course of business,
(d) the issuance of intercompany guarantees so long as the primary obligation is
permitted under this Agreement and (e) issuance of financial guarantees to the
holders of seller notes issues by ML (Bermuda) Holdings Ltd. or any of its
Subsidiaries, provided that the aggregate principal amount of all such financial
guarantees shall not at any time exceed 6,500,000 British Pounds.
6.15. LIENS. The Borrower will not, nor will it permit any Subsidiary
(other than an Unrestricted Subsidiary) to, create, incur, or suffer to exist
any Lien in, of or on the Property (other than Margin Stock) of the Borrower or
any of its Subsidiaries (other than an Unrestricted Subsidiary), except:
(a) Liens for taxes, assessments or governmental charges or levies
on its Property if the same shall not at the time be delinquent or
thereafter can be paid without penalty, or are being contested in good
faith and by appropriate proceedings and for which adequate reserves in
accordance with generally accepted principles of accounting shall have
been set aside on its books;
(b) Liens imposed by law, such as carriers', warehousemen's and
mechanics' liens and other similar liens arising in the ordinary course of
business which secure the payment of obligations not more than sixty (60)
days past due or which are being contested in good faith by appropriate
proceedings and for which adequate reserves shall have been set aside on
its books;
(c) Liens arising out of pledges or deposits under worker's
compensation laws, unemployment insurance, old age pensions, or other
social security or retirement benefits, or similar legislation;
(d) Utility easements, building restrictions and such other
encumbrances or charges against real property as are of a nature generally
existing with respect to properties
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of a similar character and which do not in any material way affect the
marketability of the same or interfere with the use thereof in the
business of the Borrower or its Subsidiaries;
(e) Liens existing on the date hereof and described in SCHEDULE 6.15
hereto;
(f) Liens in, of or on Property acquired after the date of this
Agreement (by purchase, construction or otherwise), each of which Liens
either (1) existed on such Property before the time of its acquisition and
was not created in anticipation thereof, or (2) was created solely for the
purpose of securing Indebtedness representing, or incurred to finance,
refinance or refund, the cost (including the cost of construction) of such
Property; PROVIDED that no such Lien shall extend to or cover any Property
of the Borrower or such Subsidiary other than the Property so acquired and
improvements thereon; and PROVIDED, FURTHER, that the principal amount of
Indebtedness secured by any such Lien shall at the time the Lien is
incurred not exceed 75% of the fair market value (as determined in good
faith by a financial officer of the Borrower and, in the case of such
Property having a fair market value in excess of $500,000, certified by
such officer to the Agent, with a copy for each Lender) of the Property at
the time it was so acquired;
(g) Liens on assets securing letters of credit issued on behalf of
Insurance Subsidiaries in the ordinary course of business; and
(h) Liens not otherwise permitted by the foregoing clauses (a)
through (g) securing any Indebtedness of the Borrower, provided that the
aggregate principal amount of Indebtedness secured by Liens permitted by
this clause (h) shall not exceed $3,000,000 at any time.
6.16. AFFILIATES. The Borrower will not, and will not permit any
Subsidiary to, enter into any material transaction (including, without
limitation, the purchase or sale of any Property or service) with, or make any
payment or transfer to, any Affiliates (other than a Wholly-Owned Subsidiary),
except in the ordinary course of business and pursuant to the reasonable
requirements of the Borrower's or such Subsidiary's business and upon fair and
reasonable terms no less favorable to the Borrower or such Subsidiary than the
Borrower or such Subsidiary would obtain in a comparable arms-length
transactions, except that any Unrestricted Subsidiary may make loans to Parent.
6.17. ENVIRONMENTAL MATTERS. The Borrower shall and shall cause each of
its Subsidiaries to (a) at all times comply in all material respects with all
applicable Environmental Laws and (b) promptly take any and all necessary
remedial actions in response to the presence, storage, use, disposal,
transportation or Release of any Hazardous Materials on, under or about any real
property owned, leased or operated by the Borrower or any of its Subsidiaries.
6.18. CHANGE IN CORPORATE STRUCTURE; FISCAL YEAR. The Borrower shall not,
nor shall it permit any Subsidiary to, (a) permit any amendment or modification
to be made to its certificate or
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articles of incorporation or by-laws which is materially adverse to the
interests of the Lenders or (b) change its Fiscal Year to end on any date other
than December 31 of each year.
6.19. INCONSISTENT AGREEMENTS. The Borrower shall not, nor shall it permit
any Subsidiary (other than an Unrestricted Subsidiary) to, enter into any
indenture, agreement, instrument or other arrangement which by its terms, (a)
other than pursuant to the Valley Credit Agreement or pursuant to agreements or
arrangements with regulatory agencies with regard to Insurance Subsidiaries,
directly or indirectly contractually prohibits or restrains, or has the effect
of contractually prohibiting or restraining, or contractually imposes materially
adverse conditions upon, the incurrence of the Obligations, the granting of
Liens to secure the Obligations, the amending of the Loan Documents or the
ability of any Subsidiary to (i) pay dividends or make other distributions on
its capital stock, (ii) make loans or advances to the Borrower or (iii) repay
loans or advances from the Borrower or (b) contains any provision which would be
violated or breached by the making of Advances or by the performance by the
Borrower or any Subsidiary of any of its obligations under any Loan Document.
6.20. FINANCIAL COVENANTS. The Borrower shall (or, in the case of Section
6.20.4, shall cause its Insurance Subsidiaries to):
6.20.1 MINIMUM ADJUSTED NET WORTH. At all times after the date
hereof, maintain a minimum Adjusted Net Worth at least equal to the sum
of, without duplication, (a) $465,000,000, PLUS (b) an amount equal to 85%
of the cash and non-cash proceeds of any equity securities issued or
capital contributions received by the Borrower after June 30, 1998, PLUS
(c) an amount equal to 50% of the Borrower's positive consolidated net
income (excluding from such calculation (i) SOMSC and its Subsidiaries,
(ii) any net realized gain from the sale of Borrower's equity interests in
White River Corp. or Travelers Property Casualty Corp. and (iii) any net
income directly arising out of the consummation of the Folksamerica
Transaction) after June 30, 1998, PLUS (d) an amount equal to 85% of the
proceeds of any sale of the Borrower's equity interest in SOMSC to the
extent such proceeds are not paid out by the Borrower as dividends within
one hundred eighty (180) days after receipt thereof.
6.20.2. LEVERAGE RATIO. At all times after the date hereof,
maintain a Leverage Ratio of (a) not greater than 45% through and
including December 31, 2000 and (b) not greater than 30% at all times
thereafter.
6.20.3. FIXED CHARGES COVERAGE RATIO. As of the end of each
Fiscal Quarter maintain a Fixed Charges Coverage Ratio of not less than
1.5:1.0.
6.20.4. STATUTORY SURPLUS. At all times, maintain Statutory
Surplus for each First-Tier Insurance Subsidiary in an amount not less
than an amount equal to (a) 85% of the Statutory Surplus of each such
First-Tier Insurance Subsidiary, in existence on the date hereof, as of
March 31, 1998 (or, in the case of any First-Tier Insurance Subsidiary
acquired after the date hereof, 85% of the Statutory Surplus of each such
acquired First-Tier Insurance
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Subsidiary as of the most recently ended Fiscal Quarter preceding such
acquisition), PLUS (b) 85% of all subsequent capital contributions to each
such First-tier Insurance Subsidiary, MINUS (c) in the event such
First-Tier Insurance Subsidiary dividends or otherwise distributes to its
parent all the capital stock of a Wholly-Owned Insurance Subsidiary, 100%
of the book value (calculated in accordance with SAP) of such Wholly-Owned
Insurance Subsidiary at the time of such dividend or distribution.
6.21. TAX CONSOLIDATION. The Borrower will not and will not permit any of
its Subsidiaries to (a) file or consent to the filing of any consolidated,
combined or unitary income tax return with any Person other than Parent and its
Subsidiaries or (b) amend, terminate or fail to enforce any existing tax sharing
agreement or similar arrangement if such action would cause a Material Adverse
Effect.
6.22. ERISA COMPLIANCE.
With respect to any Plan, neither the Borrower nor any Subsidiary shall:
(a) engage in any "prohibited transaction" (as such term is defined
in Section 406 of ERISA or Section 4975 of the Code) for which a civil
penalty pursuant to Section 502(i) of ERISA or a tax pursuant to Section
4975 of the Code in excess of $100,000 could be imposed;
(b) incur any "accumulated funding deficiency" (as such term is
defined in Section 302 of ERISA) in excess of $100,000, whether or not
waived, or permit any Unfunded Liability to exceed $100,000;
(c) permit the occurrence of any Termination Event which could
result in a liability to the Borrower or any other member of the
Controlled Group in excess of $100,000;
(d) be an "employer" (as such term is defined in Section 3(5) of
ERISA) required to contribute to any Multiemployer Plan or a "substantial
employer" (as such term in defined in Section 4001(a)(2) of ERISA)
required to contribute to any Multiple Employer Plan; or
(e) permit the establishment or amendment of any Plan or fail to
comply with the applicable provisions of ERISA and the Code with respect
to any Plan which could result in liability to the Borrower or any other
member of the Controlled Group which, individually or in the aggregate,
could reasonably be expected to have a Material Adverse Effect.
6.23. YEAR 2000. The Borrower will take and will cause each of its
Subsidiaries to take all such actions as are reasonably necessary to
successfully implement the Year 2000 Program and to assure that Year 2000 Issues
will not have a Material Adverse Effect. At the request of the Agent or any
Lender, the Borrower will provide a description of the Year 2000 Program,
together with any updates or progress reports with respect thereto.
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ARTICLE VII
DEFAULTS
The occurrence of any one or more of the following events shall constitute
a Default:
7.1. Any representation or warranty made or deemed made by or on behalf of
the Borrower or any of its Subsidiaries to the Lenders or the Agent under or in
connection with this Agreement, any other Loan Document, any Loan, or any
certificate or information delivered in connection with this Agreement or any
other Loan Document shall be false in any material respect on the date as of
which made.
7.2. Nonpayment of (a) any principal of any Note when due, or (b) any
interest upon any Note or any commitment fee or other fee or obligations under
any of the Loan Documents within five (5) days after the same becomes due.
7.3. The breach by the Borrower of any of the terms or provisions of
SECTION 6.2, SECTION 6.3(a) or SECTIONS 6.10 THROUGH 6.16 or SECTIONS 6.18
through 6.22.
7.4. The breach by the Borrower (other than a breach which constitutes a
Default under SECTIONS 7.1, 7.2 or 7.3) of any of the terms or provisions of
this Agreement which is not remedied within twenty (20) days after written
notice from the Agent or any Lender.
7.5. The default by the Borrower or any of its Subsidiaries (or, at any
time the Borrower is a Subsidiary of Parent, by Parent) in the performance of
any term, provision or condition contained in any agreement or agreements under
which any Funded Indebtedness aggregating in excess of $2,000,000 ($10,000,000
in the case of Parent and $20,000,000, or such lower cross-default threshold
amount as is provided in the SOMSC Credit Agreements, in the case of SOMSC) was
created or is governed, or the occurrence of any other event or existence of any
other condition, the effect of any of which is to cause, or to permit the holder
or holders of such Funded Indebtedness to cause, such Funded Indebtedness to
become due prior to its stated maturity; or any such Funded Indebtedness of the
Borrower, any of its Subsidiaries or Parent shall be declared to be due and
payable or required to be prepaid (other than by a regularly scheduled payment)
prior to the stated maturity thereof.
7.6. The Borrower or any of its Significant Subsidiaries shall (a) have an
order for relief entered with respect to it under the Federal bankruptcy laws as
now or hereafter in effect, (b) make an assignment for the benefit of creditors,
(c) apply for, seek, consent to, or acquiesce in, the appointment of a receiver,
custodian, trustee, examiner, liquidator or similar official for it or any
substantial portion of its Property, (d) institute any proceeding seeking an
order for relief under the Federal bankruptcy laws as now or hereafter in effect
or seeking to adjudicate it a bankrupt or insolvent, or seeking dissolution,
winding up, liquidation, reorganization, arrangement, adjustment or composition
of it or its debts under any law relating to bankruptcy, insolvency or
reorganization
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or relief of debtors or fail to file an answer or other pleading denying the
material allegations of any such proceeding filed against it, (e) take any
corporate action to authorize or effect any of the foregoing actions set forth
in this SECTION 7.6, (f) fail to contest in good faith any appointment or
proceeding described in SECTION 7.7 or (g) become unable to pay, not pay, or
admit in writing its inability to pay, its debts generally as they become due.
7.7. Without the application, approval or consent of the Borrower or any
of its Significant Subsidiaries, a receiver, trustee, examiner, liquidator or
similar official shall be appointed for the Borrower or any of its Significant
Subsidiaries or any substantial portion of its Property, or a proceeding
described in SECTION 7.6(d) shall be instituted against the Borrower or any of
its Significant Subsidiaries and such appointment continues undischarged or such
proceeding continues undismissed or unstayed for a period of sixty (60)
consecutive days.
7.8. The Borrower or any of its Subsidiaries shall fail within thirty (30)
days to pay, bond or otherwise discharge any judgment or order for the payment
of money in excess of $1,000,000 (or multiple judgments or orders for the
payment of an aggregate amount in excess of $5,000,000), which is not stayed on
appeal or otherwise being appropriately contested in good faith and as to which
no enforcement actions have been commenced.
7.9. Any Change in Control shall occur.
7.10. The occurrence of any "default", as defined in any Loan Document
(other than this Agreement or the Notes) or the breach of any of the terms or
provisions of any Loan Document (other than this Agreement or the Notes), which
default or breach continues beyond any period of grace therein provided.
7.11. Any License of any Insurance Subsidiary (a) shall be revoked by the
Governmental Authority which issued such License, or any action (administrative
or judicial) to revoke such License shall have been commenced against such
Insurance Subsidiary and shall not have been dismissed within thirty (30) days
after the commencement thereof, (b) shall be suspended by such Governmental
Authority for a period in excess of thirty (30) days or (c) shall not be
reissued or renewed by such Governmental Authority upon the expiration thereof
following application for such reissuance or renewal of such Insurance
Subsidiary, which, in any case, could reasonably be expected to have a Material
Adverse Effect.
7.12. Any Insurance Subsidiary shall be the subject of a final
non-appealable order imposing a fine by or at the request of any state insurance
regulatory agency as a result of the violation by such Insurance Subsidiary of
such state's applicable insurance laws or the regulations promulgated in
connection therewith which could reasonably be expected to have a Material
Adverse Effect.
7.13. Any Insurance Subsidiary shall become subject to any conservation,
rehabilitation or liquidation order, directive or mandate issued by any
Governmental Authority or any Insurance Subsidiary shall become subject to any
other directive or mandate issued by any Governmental
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Authority in either case which could reasonably be expected to have a Material
Adverse Effect and which is not stayed within thirty (30) days.
ARTICLE VIII
ACCELERATION, WAIVERS, AMENDMENTS AND REMEDIES
8.1. ACCELERATION. If any Default described in SECTIONS 7.6 or 7.7 occurs
with respect to the Borrower, the obligations of the Lenders to make Loans
hereunder shall automatically terminate and the Obligations shall immediately
become due and payable without any election or action on the part of the Agent
or any Lender. If any other Default occurs, the Required Lenders (or the Agent
with the consent of the Required Lenders) may terminate or suspend the
obligations of the Lenders to make Loans hereunder, or declare the Obligations
to be due and payable, or both, whereupon the Obligations shall become
immediately due and payable, without presentment, demand, protest or notice of
any kind, all of which the Borrower hereby expressly waives.
If, within ten (10) Business Days after acceleration of the maturity of
the Obligations or termination of the obligations of the Lenders to make Loans
hereunder as a result of any Default (other than any Default as described in
SECTIONS 7.6 or 7.7 with respect to the Borrower) and before any judgment or
decree for the payment of the Obligations due shall have been obtained or
entered, the Required Lenders (in their sole discretion) shall so direct, the
Agent shall, by notice to the Borrower, rescind and annul such acceleration
and/or termination.
8.2. AMENDMENTS. Subject to the provisions of this ARTICLE VIII, the
Required Lenders (or the Agent with the consent in writing of the Required
Lenders) and the Borrower may enter into agreements supplemental hereto for the
purpose of adding or modifying any provisions to the Loan Documents or changing
in any manner the rights of the Lenders or the Borrower hereunder or waiving any
Default hereunder; PROVIDED, HOWEVER, that no such supplemental agreement shall,
without the consent of each Lender:
(a) Extend the final maturity of any Loan or Note or reduce the
principal amount thereof, or, subject to SECTION 2.11, reduce the rate or
extend the time of payment of interest or fees thereon;
(b) Reduce the percentage specified in the definition of Required
Lenders;
(c) Reduce the amount of or extend the date for the mandatory
payments and commitment reductions required under SECTIONS 2.1(b) or 2.7,
or increase the amount of the Commitment of any Lender hereunder;
(d) Extend the Facility Termination Date or reduce the amount or
extend the time of any mandatory commitment reduction required by SECTION
2.7;
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(e) Amend this SECTION 8.2; or
(f) Permit any assignment by the Borrower of its Obligations or its
rights hereunder.
No amendment of any provision of this Agreement relating to the Agent shall be
effective without the written consent of the Agent. The Agent may waive payment
of the fee required under SECTION 12.3.2 without obtaining the consent of any
other party to this Agreement.
8.3. PRESERVATION OF RIGHTS. No delay or omission of the Lenders or the
Agent to exercise any right under the Loan Documents shall impair such right or
be construed to be a waiver of any Default or an acquiescence therein, and the
making of a Loan notwithstanding the existence of a Default or the inability of
the Borrower to satisfy the conditions precedent to such Loan shall not
constitute any waiver or acquiescence. Any single or partial exercise of any
such right shall not preclude other or further exercise thereof or the exercise
of any other right, and no waiver, amendment or other variation of the terms,
conditions or provisions of the Loan Documents whatsoever shall be valid unless
in writing signed by the Lenders required pursuant to SECTION 8.2, and then only
to the extent in such writing specifically set forth. All remedies contained in
the Loan Documents or by law afforded shall be cumulative and all shall be
available to the Agent and the Lenders until the Obligations have been paid in
full.
ARTICLE IX
GENERAL PROVISIONS
9.1. SURVIVAL OF REPRESENTATIONS. All representations and warranties of
the Borrower contained in this Agreement or of the Borrower or any Subsidiary
contained in any Loan Document shall survive delivery of the Notes and the
making of the Loans herein contemplated.
9.2. GOVERNMENTAL REGULATION. Anything contained in this Agreement to the
contrary notwithstanding, no Lender shall be obligated to extend credit to the
Borrower in violation of any limitation or prohibition provided by any
applicable statute or regulation.
9.3. TAXES. Any stamp, documentary or similar taxes, assessments or
charges payable or ruled payable by any governmental authority in respect of the
Loan Documents shall be paid by the Borrower, together with interest and
penalties, if any.
9.4. HEADINGS. Section headings in the Loan Documents are for convenience
of reference only, and shall not govern the interpretation of any of the
provisions of the Loan Documents.
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9.5. ENTIRE AGREEMENT. The Loan Documents embody the entire agreement and
understanding among the Borrower, the Agent and the Lenders and supersede all
prior agreements and understandings among the Borrower, the Agent and the
Lenders relating to the subject matter thereof other than the fee letter, dated
August 14, 1998, in favor of First Chicago.
9.6. SEVERAL OBLIGATIONS; BENEFITS OF THIS AGREEMENT. The respective
obligations of the Lenders hereunder are several and not joint and no Lender
shall be the partner or agent of any other (except to the extent to which the
Agent is authorized to act as such). The failure of any Lender to perform any of
its obligations hereunder shall not relieve any other Lender from any of its
obligations hereunder. This Agreement shall not be construed so as to confer any
right or benefit upon any Person other than the parties to this Agreement and
their respective successors and assigns.
9.7. EXPENSES; INDEMNIFICATION. The Borrower shall reimburse the Agent for
any reasonable costs, internal charges and out-of-pocket expenses (including
attorneys' fees and time charges of attorneys for the Agent, which attorneys may
be employees of the Agent) paid or incurred by the Agent in connection with the
preparation, negotiation, execution, delivery, review, actual or proposed
amendment, modification, and administration of the Loan Documents. The Borrower
also agrees to reimburse the Agent and the Lenders for any reasonable costs,
internal charges and out-of-pocket expenses (including attorneys' fees and time
charges of attorneys for the Agent and the Lenders, which attorneys may be
employees of the Agent or the Lenders) paid or incurred by the Agent or any
Lender in connection with the collection and enforcement of the Loan Documents.
The Borrower further agrees to indemnify the Agent and each Lender, its
directors, officers and employees against all losses, claims, damages,
penalties, judgments, liabilities and expenses (including, without limitation,
all expenses of litigation or preparation therefor whether or not the Agent or
any Lender is a party thereto) which any of them may pay or incur arising out of
or relating to this Agreement, the other Loan Documents, the transactions
contemplated hereby or thereby or the direct or indirect application or proposed
application of the proceeds of any Loan hereunder arising from claims or
assertions by third parties except to the extent that they arise out of the
gross negligence or willful misconduct of the party seeking indemnification. The
obligations of the Borrower under this Section shall survive the termination of
this Agreement.
9.8. NUMBERS OF DOCUMENTS. All statements, notices, closing documents, and
requests hereunder shall be furnished to the Agent with sufficient counterparts
so that the Agent may furnish one to each of the Lenders.
9.9. ACCOUNTING. Except as provided to the contrary herein, all accounting
terms used herein shall be interpreted and all accounting determinations
hereunder shall be made in accordance with Agreement Accounting Principles.
9.10. SEVERABILITY OF PROVISIONS. Any provision in any Loan Document that
is held to be inoperative, unenforceable, or invalid in any jurisdiction shall,
as to that jurisdiction, be inoperative, unenforceable, or invalid without
affecting the remaining provisions in that jurisdiction or the operation,
enforceability, or validity of that provision in any other jurisdiction, and to
this end the provisions of all Loan Documents are declared to be severable.
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9.11. NONLIABILITY OF LENDERS. The relationship between the Borrower and
the Lenders and the Agent shall be solely that of borrower and lender. Neither
the Agent nor any Lender shall have any fiduciary responsibilities to the
Borrower. Neither the Agent nor any Lender undertakes any responsibility to the
Borrower to review or inform the Borrower of any matter in connection with any
phase of the Borrower's business or operations. The Borrower shall rely entirely
upon its own judgment with respect to its business, and any review, inspection
or supervision of, or information supplied to the Borrower by the Agent or the
Lenders is for the protection of the Agent and the Lenders and neither the
Borrower nor any other Person is entitled to rely thereon. Whether or not such
damages are related to a claim that is subject to the waiver effected above and
whether or not such waiver is effective, neither the Agent nor any Lender shall
have any liability with respect to, and the Borrower hereby waives, releases and
agrees not to sue for, any special, indirect or consequential damages suffered
by the Borrower in connection with, arising out of, or in any way related to the
Loan Documents or the transactions contemplated thereby or the relationship
established by the Loan Documents, or any act, omission or event occurring in
connection therewith.
9.12. CHOICE OF LAW. THE LOAN DOCUMENTS (OTHER THAN THOSE CONTAINING A
CONTRARY EXPRESS CHOICE OF LAW PROVISION) SHALL BE CONSTRUED IN ACCORDANCE WITH
THE INTERNAL LAWS, WITHOUT REGARD TO CONFLICT OF LAWS PROVISIONS, OF THE STATE
OF ILLINOIS, BUT GIVING EFFECT TO FEDERAL LAWS APPLICABLE TO NATIONAL BANKS.
9.13. CONSENT TO JURISDICTION. THE BORROWER HEREBY IRREVOCABLY SUBMITS TO
THE NON-EXCLUSIVE JURISDICTION OF ANY UNITED STATES FEDERAL OR ILLINOIS STATE
COURT SITTING IN CHICAGO IN ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING
TO ANY LOAN DOCUMENTS AND THE BORROWER HEREBY IRREVOCABLY AGREES THAT ALL CLAIMS
IN RESPECT OF SUCH ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED IN ANY SUCH
COURT AND IRREVOCABLY WAIVES ANY OBJECTION IT MAY NOW OR HEREAFTER HAVE AS TO
THE VENUE OF ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN SUCH A COURT OR THAT
SUCH COURT IS AN INCONVENIENT FORUM. NOTHING HEREIN SHALL LIMIT THE RIGHT OF THE
AGENT OR ANY LENDER TO BRING PROCEEDINGS AGAINST THE BORROWER IN THE COURTS OF
ANY OTHER JURISDICTION. ANY JUDICIAL PROCEEDING BY THE BORROWER AGAINST THE
AGENT OR ANY LENDER OR ANY AFFILIATE OF THE AGENT OR ANY LENDER INVOLVING,
DIRECTLY OR INDIRECTLY, ANY MATTER IN ANY WAY ARISING OUT OF, RELATED TO, OR
CONNECTED WITH ANY LOAN DOCUMENT SHALL BE BROUGHT ONLY IN A COURT IN CHICAGO,
ILLINOIS; PROVIDED, THAT SUCH PROCEEDINGS MAY BE BROUGHT IN OTHER COURTS IF
JURISDICTION MAY NOT BE OBTAINED IN A COURT IN CHICAGO, ILLINOIS.
9.14. WAIVER OF JURY TRIAL. THE BORROWER, THE AGENT AND EACH LENDER HEREBY
WAIVE TRIAL BY JURY IN ANY JUDICIAL PROCEEDING INVOLVING,
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DIRECTLY OR INDIRECTLY, ANY MATTER (WHETHER SOUNDING IN TORT, CONTRACT OR
OTHERWISE) IN ANY WAY ARISING OUT OF, RELATED TO, OR CONNECTED WITH ANY LOAN
DOCUMENT OR THE RELATIONSHIP ESTABLISHED THEREUNDER.
9.15. DISCLOSURE. The Borrower and each Lender hereby (a) acknowledge and
agree that First Chicago and/or its Affiliates from time to time may hold other
investments in, make other loans to or have other relationships with the
Borrower, including, without limitation, in connection with any interest rate
hedging instruments or agreements or swap transactions, and (b) waive any
liability of First Chicago or such Affiliate to the Borrower or any Lender,
respectively, arising out of or resulting from such investments, loans or
relationships other than liabilities arising out of the gross negligence or
willful misconduct of First Chicago or its Affiliates to the extent that such
liability would not have arisen but for First Chicago's status as Agent
hereunder.
9.16. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, all of which taken together shall constitute one agreement, and
any of the parties hereto may execute this Agreement by signing any such
counterpart. This Agreement shall be effective when it has been executed by the
Borrower, the Agent and the Lenders and each party has notified the Agent that
it has taken such action.
9.17. TREATMENT OF CERTAIN INFORMATION: CONFIDENTIALITY.
(a) The Borrower acknowledges that (i) services may be offered or
provided to it (in connection with this Agreement or otherwise) by each Lender
or by one or more subsidiaries or affiliates of such Lender and (ii) information
delivered to each Lender by the Borrower and its Subsidiaries may be provided to
each such Subsidiary and Affiliate, it being understood that any such Subsidiary
or Affiliate receiving such information shall be bound by the provisions of
clause (b) below as if it were a Lender hereunder.
(b) Each Lender and the Agent agrees (on behalf of itself and each
of its affiliates, directors, officers, employees and representatives) to use
reasonable precautions to keep confidential, in accordance with their customary
procedures for handling confidential information of this nature and in
accordance with safe and sound banking practices, any non-public information
supplied to it by the Borrower pursuant to this Agreement, provided that nothing
herein shall limit the disclosure of any such information (i) to the extent
required by statue, rule, regulation or judicial process, (ii) to counsel for
any of the Lenders or the Agent, (iii) to bank examiners, auditors or
accountants, (iv) to the Agent or any other Lender (or to First Chicago Capital
Markets, Inc.), (v) in connection with any litigation to which any one or more
of the Lenders or the Agent is a party, (vi) to a subsidiary or affiliate of
such Lender as provided in clause (a) above, (vii) to any assignee or
participant (or prospective assignee or participant) so long as such assignee or
participant (or prospective assignee or participant) agrees with the respective
Lender to keep such information confidential on substantially the terms set
forth in this SECTION 9.17(b), (viii) to any other Person as may be reasonably
required in the course of the enforcement of any Lender's rights or remedies
hereunder or under any of such Lender's Note, or (ix) to any other creditor of
the Borrower or any
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of its Subsidiaries at any time during the continuance of a Default; PROVIDED
that in no event shall any Lender or the Agent be obligated or required to
return any materials furnished by the Borrower.
ARTICLE X
THE AGENT
10.1. APPOINTMENT. First Chicago is hereby appointed Agent hereunder and
under each other Loan Document, and each of the Lenders authorizes the Agent to
act as the agent of such Lender. The Agent agrees to act as such upon the
express conditions contained in this ARTICLE X. The Agent shall not have a
fiduciary relationship in respect of the Borrower or any Lender by reason of
this Agreement.
10.2. POWERS. The Agent shall have and may exercise such powers under the
Loan Documents as are specifically delegated to the Agent by the terms of each
thereof, together with such powers as are reasonably incidental thereto. The
Agent shall have no implied duties to the Lenders, or any obligation to the
Lenders to take any action thereunder, except any action specifically provided
by the Loan Documents to be taken by the Agent.
10.3. GENERAL IMMUNITY. Neither the Agent nor any of its directors,
officers, agents or employees shall be liable to the Borrower or any Lender for
any action taken or omitted to be taken by it or them hereunder or under any
other Loan Document or in connection herewith or therewith except for its or
their own gross negligence or willful misconduct.
10.4. NO RESPONSIBILITY FOR LOANS, RECITALS, ETC. Neither the Agent nor
any of its directors, officers, agents or employees shall be responsible for or
have any duty to ascertain, inquire into, or verify (a) any statement, warranty
or representation made in connection with any Loan Document or any borrowing
hereunder, (b) the performance or observance of any of the covenants or
agreements of any obligor under any Loan Document, including, without
limitation, any agreement by an obligor to furnish information directly to each
Lender; (c) the satisfaction of any condition specified in ARTICLE IV, except
receipt of items required to be delivered to the Agent and not waived at
closing, or (d) the validity, effectiveness, sufficiency, enforceability or
genuineness of any Loan Document or any other instrument or writing furnished in
connection therewith. The Agent shall have no duty to disclose to the Lenders
information that is not required to be furnished by the Borrower to the Agent at
such time, but is voluntarily furnished by the Borrower to the Agent (either in
its capacity as Agent or in its individual capacity).
10.5. ACTION ON INSTRUCTIONS OF LENDERS. The Agent shall in all cases be
fully protected in acting, or in refraining from acting, hereunder and under any
other Loan Document in accordance with written instructions signed by the
Required Lenders (or, to the extent required by SECTION 8.2, all Lenders), and
such instructions and any action taken or failure to act pursuant thereto shall
be binding on all of the Lenders and on all holders of Notes. The Agent shall be
fully justified in failing
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or refusing to take any action hereunder and under any other Loan Document
unless it shall first be indemnified to its satisfaction by the Lenders pro rata
against any and all liability, cost and expense that it may incur by reason of
taking or continuing to take any such action.
10.6. EMPLOYMENT OF AGENTS AND COUNSEL. The Agent may execute any of its
duties as Agent hereunder and under any other Loan Document by or through
employees, agents and attorneys-in-fact and shall not be answerable to the
Lenders, except as to money or securities received by it or its authorized
agents, for the default or misconduct of any such agents or attorneys-in-fact
selected by it with reasonable care. The Agent shall be entitled to advice of
counsel concerning all matters pertaining to the agency hereby created and its
duties hereunder and under any other Loan Document.
10.7. RELIANCE ON DOCUMENTS; COUNSEL. The Agent shall be entitled to rely
upon any Note, notice, consent, certificate, affidavit, letter, telegram,
statement, paper or document believed by it to be genuine and correct and to
have been signed or sent by the proper person or persons, and, in respect to
legal matters, upon the opinion of counsel selected by the Agent, which counsel
may be employees of the Agent.
10.8. AGENT'S REIMBURSEMENT AND INDEMNIFICATION. The Lenders agree to
reimburse and indemnify the Agent ratably in proportion to their respective
Commitments (or, if the Commitments have been terminated, in proportion to their
Commitments immediately prior to such termination) (a) for any amounts not
reimbursed by the Borrower for which the Agent is entitled to reimbursement by
the Borrower under the Loan Documents, (b) for any other expenses incurred by
the Agent on behalf of the Lenders, in connection with the preparation,
execution, delivery, administration and enforcement of the Loan Documents, and
(c) for any liabilities, obligations, losses, damages, penalties, actions,
judgments, suits, costs, expenses or disbursements of any kind and nature
whatsoever which may be imposed on, incurred by or asserted against the Agent in
any way relating to or arising out of the Loan Documents or any other document
delivered in connection therewith or the transactions contemplated thereby, or
the enforcement of any of the terms thereof or of any such other documents;
PROVIDED, that no Lender shall be liable for any of the foregoing to the extent
they arise from the gross negligence or willful misconduct of the Agent. The
obligations of the Lenders under this SECTION 10.8 shall survive payment of the
Obligations and termination of this Agreement.
10.9. NOTICE OF DEFAULT. The Agent shall not be deemed to have knowledge
or notice of the occurrence of any Default or Unmatured Default hereunder unless
the Agent has received written notice from a Lender or the Borrower referring to
this Agreement describing such Default or Unmatured Default and stating that
such notice is a "notice of default". In the event that the Agent receives such
a notice, the Agent shall give prompt notice thereof to the Lenders.
10.10. RIGHTS AS A LENDER. In the event the Agent is a Lender, the Agent
shall have the same rights and powers hereunder and under any other Loan
Document as any Lender, including, without limitation, pursuant to Article XII
hereof, and may exercise the same as though it were not the Agent, and the term
"Lender" or "Lenders" shall, at any time when the Agent is a Lender, unless
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the context otherwise indicates, include the Agent in its individual capacity.
The Agent may accept deposits from, lend money to, and generally engage in any
kind of trust, debt, equity or other transaction, in addition to those
contemplated by this Agreement or any other Loan Document, with the Borrower or
any of its Subsidiaries in which the Borrower or such Subsidiary is not
restricted hereby from engaging with any other Person.
10.11. LENDER CREDIT DECISION. Each Lender acknowledges that it has,
independently and without reliance upon the Agent or any other Lender and based
on the financial statements prepared by the Borrower and such other documents
and information as it has deemed appropriate, made its own credit analysis and
decision to enter into this Agreement and the other Loan Documents. Each Lender
also acknowledges that it will, independently and without reliance upon the
Agent or any other Lender and based on such documents and information as it
shall deem appropriate at the time, continue to make its own credit decisions in
taking or not taking action under this Agreement and the other Loan Documents.
10.12. SUCCESSOR AGENT. The Agent may resign at any time by giving written
notice thereof to the Lenders and the Borrower, such resignation to be effective
upon the appointment of a successor Agent or, if no successor Agent has been
appointed, forty-five (45) days after the retiring Agent gives notice of its
intention to resign. Upon any such resignation, the Required Lenders shall have
the right to appoint, on behalf of the Lenders, a successor Agent, which
successor Agent, so long as no Default is continuing, shall be reasonably
acceptable to the Borrower. If no successor Agent shall have been so appointed
by the Required Lenders and shall have accepted such appointment within thirty
(30) days after the resigning Agent's giving notice of its intention to resign,
then the resigning Agent may appoint, on behalf of the Borrower and the Lenders,
a successor Agent, which successor Agent, so long as no Default is continuing,
shall be reasonably acceptable to the Borrower. If the Agent has resigned and no
successor Agent has been appointed, the Lenders may perform all the duties of
the Agent hereunder and the Borrower shall make all payments in respect of the
Obligations to the applicable Lender and for all other purposes shall deal
directly with the Lenders. No successor Agent shall be deemed to be appointed
hereunder until such successor Agent has accepted the appointment. Any such
successor Agent shall be a commercial bank having capital and retained earnings
of at least $50,000,000 and with a Lending Installation in the United States of
America. Upon the acceptance of any appointment as Agent hereunder by a
successor Agent, such successor Agent shall thereupon succeed to and become
vested with all the rights, powers, privileges and duties of the resigning
Agent. Upon the effectiveness of the resignation of the Agent, the resigning
Agent shall be discharged from its duties and obligations hereunder and under
the Loan Documents. After the effectiveness of the resignation of an Agent, the
provisions of this ARTICLE X shall continue in effect for its benefit in respect
of any actions taken or omitted to be taken by it while it was acting as the
Agent hereunder and under the other Loan Documents.
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ARTICLE XI
SETOFF; RATABLE PAYMENTS
11.1. SETOFF. In addition to, and without limitation of, any rights of the
Lenders under applicable law, if the Borrower becomes insolvent, however
evidenced, or any Default or Unmatured Default occurs, any and all deposits
(including all account balances, whether provisional or final and whether or not
collected or available) and any other Indebtedness at any time held or owing by
any Lender to or for the credit or account of the Borrower may be offset and
applied toward the payment of the Obligations owing to such Lender, whether or
not the Obligations, or any part hereof, shall then be due.
11.2. RATABLE PAYMENTS. If any Lender, whether by setoff or otherwise, has
payment made to it upon its Loans (other than payments received pursuant to
SECTIONS 2.18, 3.1, 3.2 or 3.4) in a greater proportion than its pro-rata share
of such Loans, such Lender agrees, promptly upon demand, to purchase a portion
of the Loans held by the other Lenders so that after such purchase each Lender
will hold its ratable proportion of Loans. If any Lender, whether in connection
with setoff or amounts which might be subject to setoff or otherwise, receives
collateral or other protection for its Obligations or such amounts which may be
subject to setoff, such Lender agrees, promptly upon demand, to take such action
necessary such that all Lenders share in the benefits of such collateral ratably
in proportion to their Loans. In case any such payment is disturbed by legal
process, or otherwise, appropriate further adjustments shall be made. If an
amount to be setoff is to be applied to Indebtedness of the Borrower to a
Lender, other than Indebtedness evidenced by any of the Notes held by such
Lender, such amount shall be applied ratably to such other Indebtedness and to
the Indebtedness evidenced by such Notes.
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ARTICLE XII
BENEFIT OF AGREEMENT; ASSIGNMENTS; PARTICIPATIONS
12.1. SUCCESSORS AND ASSIGNS. The terms and provisions of the Loan
Documents shall be binding upon and inure to the benefit of the Borrower and the
Lenders and their respective successors and assigns, except that (a) the
Borrower shall not have the right to assign its rights or obligations under the
Loan Documents, and (b) any assignment by any Lender must be made in compliance
with SECTION 12.3. Notwithstanding CLAUSE (b) of the preceding sentence, any
Lender may at any time, without the consent of the Borrower or the Agent, assign
all or any portion of its rights under this Agreement and its Notes to a Federal
Reserve Bank; PROVIDED, HOWEVER, that no such assignment to a Federal Reserve
Bank shall release the transferor Lender from its obligations hereunder. The
Agent may treat the payee of any Note as the owner thereof for all purposes
hereof unless and until such payee complies with SECTION 12.3 in the case of an
assignment thereof or, in the case of any other transfer, a written notice of
the transfer is filed with the Agent. Any assignee or transferee of a Note
agrees by acceptance thereof to be bound by all the terms and provisions of the
Loan Documents. Any request, authority or consent of any Person, who at the time
of making such request or giving such authority or consent is the holder of any
Note, shall be conclusive and binding on any subsequent holder, transferee or
assignee of such Note or of any Note or Notes issued in exchange therefor.
12.2. PARTICIPATIONS.
12.2.1. PERMITTED PARTICIPANTS; EFFECT. Any Lender may, in the
ordinary course of its business and in accordance with applicable law, at any
time sell to one or more banks or other entities ("PARTICIPANTS") participating
interests in any Loan owing to such Lender, any Note held by such Lender, any
Commitment of such Lender or any other interest of such Lender under the Loan
Documents. In the event of any such sale by a Lender of participating interests
to a Participant, such Lender's obligations under the Loan Documents shall
remain unchanged, such Lender shall remain solely responsible to the other
parties hereto for the performance of such obligations, such Lender shall remain
the holder of any such Note for all purposes under the Loan Documents, all
amounts payable by the Borrower under this Agreement shall be determined as if
such Lender had not sold such participating interests, and the Borrower and the
Agent shall continue to deal solely and directly with such Lender in connection
with such Lender's rights and obligations under the Loan Documents.
12.2.2. VOTING RIGHTS. Each Lender shall retain the sole right to
approve, without the consent of any Participant, any amendment, modification or
waiver of any provision of the Loan Documents other than any amendment,
modification or waiver which effects any of the modifications referenced in
clauses (a) through (f) of SECTION 8.2.
12.2.3. BENEFIT OF SETOFF. The Borrower agrees that each Participant
shall be deemed to have the right of setoff provided in SECTION 11.1 in respect
of its participating interest in amounts
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owing under the Loan Documents to the same extent as if the amount of its
participating interest were owing directly to it as a Lender under the Loan
Documents; PROVIDED, that each Lender shall retain the right of setoff provided
in SECTION 11.1 with respect to the amount of participating interests sold to
each Participant. The Lenders agree to share with each Participant, and each
Participant, by exercising the right of setoff provided in SECTION 11.1, agrees
to share with each Lender, any amount received pursuant to the exercise of its
right of setoff, such amounts to be shared in accordance with SECTION 11.2 as if
each Participant were a Lender.
12.3. ASSIGNMENTS.
12.3.1. PERMITTED ASSIGNMENTS. Any Lender may, in the ordinary
course of its business and in accordance with applicable law, at any time assign
to one or more banks or other entities ("PURCHASERS") all or any part of its
rights and obligations under the Loan Documents; provided, however, that in the
case of an assignment to an entity which is not a Lender or an Affiliate of a
Lender, such assignment shall be in a minimum amount (when added to the amount
of the assignment of such Lender's obligations under the Valley Credit
Agreement) of $5,000,000 (or, if less, the entire amount of such Lender's
Commitment). Such assignment shall be substantially in the form of EXHIBIT C
hereto or in such other form as may be agreed to by the parties thereto. The
consent of the Agent and, so long as no Default under SECTIONS 7.2, 7.6 or 7.7
is continuing, the Borrower, shall be required prior to an assignment becoming
effective with respect to a Purchaser which is not a Lender or an Affiliate
thereof. Such consent shall not be unreasonably withheld. Notwithstanding
anything to the contrary contained herein, any assignment by a Lender of its
rights and obligations under the Loan Documents shall be accompanied by an
assignment to the same assignee of the same ratable share of the rights and
obligations of such Lender under the Valley Credit Agreement in respect of its
obligations thereunder.
12.3.2. EFFECT; EFFECTIVE DATE. Upon (a) delivery to the Agent of a
notice of assignment, substantially in the form attached as Exhibit I to EXHIBIT
C hereto (a "NOTICE OF ASSIGNMENT"), together with any consents required by
SECTION 12.3.1, and (b) payment of a $3,000 fee to the Agent for processing such
assignment, such assignment shall become effective on the effective date
specified in such Notice of Assignment. On and after the effective date of such
assignment, (a) such Purchaser shall for all purposes be a Lender party to this
Agreement and any other Loan Document executed by the Lenders and shall have all
the rights and obligations of a Lender under the Loan Documents, to the same
extent as if it were an original party hereto, and (b) the transferor Lender
shall be released with respect to the percentage of the Aggregate Commitment and
Loans assigned to such Purchaser without any further consent or action by the
Borrower, the Lenders or the Agent. Upon the consummation of any assignment to a
Purchaser pursuant to this SECTION 12.3.2, the transferor Lender, the Agent and
the Borrower shall make appropriate arrangements so that replacement Notes are
issued to such transferor Lender and new Notes or, as appropriate, replacement
Notes, are issued to such Purchaser, in each case in principal amounts
reflecting their Commitment, as adjusted pursuant to such assignment.
12.4. DISSEMINATION OF INFORMATION. Subject to SECTION 9.17(b), the
Borrower authorizes each Lender to disclose to any Participant or Purchaser or
any other Person acquiring an interest in
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the Loan Documents by operation of law (each a "TRANSFEREE") and any prospective
Transferee any and all information in such Lender's possession concerning the
creditworthiness of the Borrower and its Subsidiaries.
12.5. TAX TREATMENT. If any interest in any Loan Document is transferred
to any Transferee which is organized under the laws of any jurisdiction other
than the United States or any State thereof, the transferor Lender shall cause
such Transferee, concurrently with the effectiveness of such transfer, to comply
with the provisions of SECTION 2.18.
ARTICLE XIII
NOTICES
13.1. GIVING NOTICE. All notices and other communications provided to any
party hereto under this Agreement or any other Loan Document shall be in
writing, by facsimile, first class U.S. mail or overnight courier and addressed
or delivered to such party at its address set forth below its signature hereto
or at such other address as may be designated by such party in a notice to the
other parties. Any notice, if mailed and properly addressed with first class
postage prepaid, return receipt requested, shall be deemed given three (3)
Business Days after deposit in the U.S. mail; any notice, if transmitted by
facsimile, shall be deemed given when transmitted; and any notice given by
overnight courier shall be deemed given when received by the addressee.
13.2. CHANGE OF ADDRESS. The Borrower, the Agent and any Lender may each
change the address for service of notice upon it by a notice in writing to the
other parties hereto.
ARTICLE XIV
AMENDMENT AND RESTATEMENT
14.1. (a) This Agreement amends and restates in its entirety the Existing
Credit Agreement and, upon the Restatement Effective Date, the terms and
provisions of the Existing Credit Agreement shall, subject to this ARTICLE XIV,
be superseded hereby and thereby. Prior to the Restatement Effective Date, the
Existing Credit Agreement shall continue to govern the making of any Loans and
any outstanding Loans and Obligations.
(b) Notwithstanding the amendment and restatement of the Existing
Credit Agreement by this Agreement, the Loans under, and as defined in, the
Existing Credit Agreement ("Continuing Loans") and all accrued interest, fees
and expenses owing to First Chicago and Fleet National Bank by the Borrower
shall remain outstanding as of the Restatement Effective Date and constitute
continuing Obligations under this Agreement. The Continuing Loans shall in all
respects be continuing, and this Agreement shall not be deemed to evidence or
result in a novation or
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repayment and re-borrowing of the Continuing Loans. In furtherance of and
without limiting the foregoing (i) all interest, fees and expenses which have
arisen under the Existing Credit Agreement shall be paid on the applicable due
date therefor specified in this Agreement and (ii) from and after the
Restatement Effective Date, the terms, conditions and covenants governing the
Continuing Loans shall be solely as set forth in this Agreement, which shall
supersede the Prior Credit Agreement to the extent provided in this ARTICLE XIV.
[signature pages to follow]
-58-
<PAGE>
IN WITNESS WHEREOF, the Borrower, the Lenders and the Agent have executed
this Agreement as of the date first above written.
WHITE MOUNTAINS HOLDINGS, INC.
By:
-----------------------------------------
Print Name:
---------------------------------
Title:
--------------------------------------
Address: 80 South Main Street
Hanover, New Hampshire 03755
Attn: Reid T. Campbell
Vice President and
Director of Finance
Fax No.: (603) 640-2203
Tel. No.: (603) 643-4562
-59-
<PAGE>
COMMITMENTS
<TABLE>
<S> <C> <C> <C> <C>
THE FIRST NATIONAL BANK OF CHICAGO,
Commitment $27,307,692.31 Individually and as Agent
--------------
By:
-----------------------------------------
Print Name:
---------------------------------
Title:
--------------------------------------
Address: 153 West 51st Street
New York, NY 10019
Attn: Samuel W. Bridges
First Vice President
Fax No.: (212) 373-1393
Tel. No.: (212) 373-1142
$22,692,307.69 FLEET NATIONAL BANK
--------------
By:
-----------------------------------------
Print Name:
---------------------------------
Title:
--------------------------------------
Address: One Federal Street-MAOFD06H
Boston, MA 02110-2010
Attn: David A. Bosselait
---------------
Fax No.: (617) 346-5825
Tel. No.: (617) 346-5823
Aggregate
Initial
Commitment $50,000,000
-----------
-----------
</TABLE>
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<PAGE>
SCHEDULE 1
TO CREDIT AGREEMENT
MARGINS
"Applicable Eurodollar Margin" and "Applicable Facility Fee Margin" means,
for any period, the applicable of the following percentages in effect with such
period based on the Leverage Ratio and the Fixed Charges Coverage Ratio as
follows:
<TABLE>
<CAPTION>
I II III IV
<S> <C> <C> <C> <C>
Greater than Greater than
Leverage Ratio is: Less than 25% or equal to 25% Less than 25% or equal to 25%
- ------------------ ------------- ---------------- ------------- ---------------
If Fixed Charges Less than or Less than or
Coverage Ratio is: Greater than 2:1 Greater than 2:1 equal to 2:1 equal to 2:1
- ------------------ ------------- ---------------- ------------- ---------------
The applicable
margin will be:
- ------------------ ------------- ---------------- ------------- ---------------
Applicable Facility .150% .175% .175% .200%
Fee Margin
- ------------------ ------------- ---------------- ------------- ---------------
Applicable .350% .450% .450% .550%
Eurodollar Margin
- ------------------ ------------- ---------------- ------------- ---------------
</TABLE>
The Leverage Ratio and Fixed Charges Coverage Ratio shall be calculated by
the Borrower as of the end of each of its Fiscal Quarters commencing September
30, 1998 and shall be reported to the Agent pursuant to a certificate executed
by an authorized officer of the Borrower and delivered in accordance with
SECTION 6.1(g) of the Agreement. The foregoing margins shall be adjusted, if
necessary, quarterly as of the fifth (5th) day after the delivery of the
certificate provided for above; PROVIDED that if such certificate, together with
the financial statements to which such certificate relates, are not delivered by
the fifth (5th) day after the due date therefor specified in SECTION 6.1(g),
then until the fifth (5th) day after such delivery, each of the margins
specified above shall be as set forth in Column IV above. Until adjusted as
described above after September 30, 1998, the Applicable Eurodollar Margin and
Applicable Facility Fee Margin, as the case may be, shall be as specified in
Column II above.
<PAGE>
EXHIBIT 10.C
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
$15,000,000
SECOND AMENDED AND RESTATED
CREDIT AGREEMENT
AMONG
VALLEY GROUP, INC.,
as Borrower,
WHITE MOUNTAINS HOLDINGS, INC.,
as Guarantor,
THE LENDERS NAMED HEREIN
and
THE FIRST NATIONAL BANK OF CHICAGO,
as Agent
DATED AS OF
August 14, 1998
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
ARTICLE I DEFINITIONS............................................................................................ 1
ARTICLE II THE CREDITS........................................................................................... 16
2.1. ADVANCES..................................................................................... 16
2.2. RATABLE LOANS................................................................................ 16
2.3. TYPES OF ADVANCES............................................................................ 16
2.4. FACILITY FEE; REDUCTIONS IN AGGREGATE COMMITMENT............................................. 17
2.5. MINIMUM AMOUNT OF EACH ADVANCE............................................................... 17
2.6. OPTIONAL PRINCIPAL PAYMENTS.................................................................. 17
2.7. MANDATORY COMMITMENT REDUCTIONS.............................................................. 17
2.8. METHOD OF SELECTING TYPES AND INTEREST PERIODS FOR NEW ADVANCES.............................. 18
2.9. CONVERSION AND CONTINUATION OF OUTSTANDING ADVANCES.......................................... 19
2.10. CHANGES IN INTEREST RATE, ETC................................................................ 19
2.11. RATES APPLICABLE AFTER DEFAULT............................................................... 19
2.12. METHOD OF PAYMENT............................................................................ 20
2.13. NOTES........................................................................................ 20
2.14. INTEREST PAYMENT DATES; INTEREST AND FEE BASIS............................................... 20
2.15. NOTIFICATION OF ADVANCES, INTEREST RATES, PREPAYMENTS AND COMMITMENT
REDUCTIONS................................................................................... 20
2.16. LENDING INSTALLATIONS........................................................................ 21
2.17. NON-RECEIPT OF FUNDS BY THE AGENT............................................................ 21
2.18. TAXES........................................................................................ 21
2.19. AGENT'S FEES................................................................................. 22
ARTICLE III CHANGE IN CIRCUMSTANCES.............................................................................. 22
3.1. YIELD PROTECTION............................................................................. 22
3.2. CHANGES IN CAPITAL ADEQUACY REGULATIONS...................................................... 23
3.3. AVAILABILITY OF TYPES OF ADVANCES............................................................ 24
3.4. FUNDING INDEMNIFICATION...................................................................... 24
3.5. LENDER STATEMENTS; SURVIVAL OF INDEMNITY..................................................... 24
ARTICLE IV CONDITIONS PRECEDENT.................................................................................. 24
4.1. EFFECTIVENESS................................................................................ 24
4.2. EACH FUTURE ADVANCE.......................................................................... 26
ARTICLE V REPRESENTATIONS AND WARRANTIES......................................................................... 27
5.1. CORPORATE EXISTENCE AND STANDING............................................................. 27
5.2. AUTHORIZATION AND VALIDITY................................................................... 27
5.3. COMPLIANCE WITH LAWS AND CONTRACTS........................................................... 27
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
5.4. GOVERNMENTAL CONSENTS........................................................................ 28
5.5. FINANCIAL STATEMENTS......................................................................... 28
5.6. MATERIAL ADVERSE CHANGE...................................................................... 28
5.7. TAXES........................................................................................ 28
5.8. LITIGATION AND CONTINGENT OBLIGATIONS........................................................ 29
5.9. CAPITALIZATION............................................................................... 29
5.10. ERISA........................................................................................ 29
5.11. DEFAULTS..................................................................................... 30
5.12. FEDERAL RESERVE REGULATIONS.................................................................. 30
5.13. INVESTMENT COMPANY........................................................................... 30
5.14. CERTAIN FEES................................................................................. 30
5.15. SOLVENCY..................................................................................... 30
5.16. INDEBTEDNESS................................................................................. 31
5.17. INSURANCE LICENSES........................................................................... 31
5.18. MATERIAL AGREEMENTS.......................................................................... 31
5.19. ENVIRONMENTAL LAWS........................................................................... 31
5.20. INSURANCE.................................................................................... 32
5.21. DISCLOSURE................................................................................... 32
5.22. YEAR 2000.................................................................................... 32
ARTICLE VI COVENANTS............................................................................................. 32
6.1. FINANCIAL REPORTING.......................................................................... 32
6.2. USE OF PROCEEDS.............................................................................. 35
6.3. NOTICE OF DEFAULT............................................................................ 35
6.4. CONDUCT OF BUSINESS.......................................................................... 35
6.5. TAXES........................................................................................ 36
6.6. INSURANCE.................................................................................... 36
6.7. COMPLIANCE WITH LAWS......................................................................... 36
6.8. MAINTENANCE OF PROPERTIES.................................................................... 36
6.9. INSPECTION................................................................................... 36
6.10. DIVIDENDS.................................................................................... 36
6.11. INDEBTEDNESS................................................................................. 37
6.12. MERGER....................................................................................... 38
6.13. INVESTMENTS AND PURCHASES.................................................................... 38
6.14. CONTINGENT OBLIGATIONS....................................................................... 39
6.15. LIENS........................................................................................ 40
6.16. AFFILIATES................................................................................... 41
6.17. ENVIRONMENTAL MATTERS........................................................................ 41
6.18. CHANGE IN CORPORATE STRUCTURE; FISCAL YEAR................................................... 41
6.19. INCONSISTENT AGREEMENTS...................................................................... 41
6.20. FINANCIAL COVENANTS.......................................................................... 42
6.20.2. LEVERAGE RATIO...................................................................... 42
6.20.3. FIXED CHARGES COVERAGE RATIO........................................................ 42
</TABLE>
-ii-
<PAGE>
<TABLE>
<S> <C>
6.20.4. STATUTORY SURPLUS................................................................... 42
6.21. TAX CONSOLIDATION............................................................................ 42
6.22. ERISA COMPLIANCE............................................................................. 42
6.23. YEAR 2000.................................................................................... 43
ARTICLE VII DEFAULTS............................................................................................. 43
ARTICLE VIII ACCELERATION, WAIVERS, AMENDMENTS AND REMEDIES...................................................... 45
8.1. ACCELERATION................................................................................. 45
8.2. AMENDMENTS................................................................................... 46
8.3. PRESERVATION OF RIGHTS....................................................................... 46
ARTICLE IX GENERAL PROVISIONS.................................................................................... 47
9.1. SURVIVAL OF REPRESENTATIONS.................................................................. 47
9.2. GOVERNMENTAL REGULATION...................................................................... 47
9.3. TAXES........................................................................................ 47
9.4. HEADINGS..................................................................................... 47
9.5. ENTIRE AGREEMENT............................................................................. 47
9.6. SEVERAL OBLIGATIONS; BENEFITS OF THIS AGREEMENT.............................................. 47
9.7. EXPENSES; INDEMNIFICATION.................................................................... 47
9.8. NUMBERS OF DOCUMENTS......................................................................... 48
9.9. ACCOUNTING................................................................................... 48
9.10. SEVERABILITY OF PROVISIONS................................................................... 48
9.11. NONLIABILITY OF LENDERS...................................................................... 48
9.12. CHOICE OF LAW................................................................................ 49
9.13. CONSENT TO JURISDICTION...................................................................... 49
9.14. WAIVER OF JURY TRIAL......................................................................... 49
9.15. DISCLOSURE................................................................................... 49
9.16. COUNTERPARTS................................................................................. 49
9.17. TREATMENT OF CERTAIN INFORMATION: CONFIDENTIALITY............................................ 50
ARTICLE X THE AGENT.............................................................................................. 50
10.1. APPOINTMENT.................................................................................. 50
10.2. POWERS....................................................................................... 50
10.3. GENERAL IMMUNITY............................................................................. 51
10.4. NO RESPONSIBILITY FOR LOANS, RECITALS, ETC................................................... 51
10.5. ACTION ON INSTRUCTIONS OF LENDERS............................................................ 51
10.6. EMPLOYMENT OF AGENTS AND COUNSEL............................................................. 51
10.7. RELIANCE ON DOCUMENTS; COUNSEL............................................................... 51
10.8. AGENT'S REIMBURSEMENT AND INDEMNIFICATION.................................................... 52
10.9. NOTICE OF DEFAULT............................................................................ 52
10.10. RIGHTS AS A LENDER........................................................................... 52
10.11. LENDER CREDIT DECISION....................................................................... 52
</TABLE>
-iii-
<PAGE>
<TABLE>
<S> <C>
10.12. SUCCESSOR AGENT.............................................................................. 52
ARTICLE XI SETOFF; RATABLE PAYMENTS.............................................................................. 53
11.1. SETOFF....................................................................................... 53
11.2. RATABLE PAYMENTS............................................................................. 53
ARTICLE XII BENEFIT OF AGREEMENT; ASSIGNMENTS; PARTICIPATIONS
12.1. SUCCESSORS AND ASSIGNS....................................................................... 54
12.2. PARTICIPATIONS............................................................................... 54
12.2.1. PERMITTED PARTICIPANTS; EFFECT. ................................................... 54
12.2.2. VOTING RIGHTS....................................................................... 54
12.2.3. BENEFIT OF SETOFF................................................................... 55
12.3. ASSIGNMENTS.................................................................................. 55
12.3.1. PERMITTED ASSIGNMENTS............................................................... 55
12.3.2. EFFECT; EFFECTIVE DATE.............................................................. 55
12.4. DISSEMINATION OF INFORMATION................................................................. 56
12.5. TAX TREATMENT................................................................................ 56
ARTICLE XIII NOTICES............................................................................................. 56
13.1. GIVING NOTICE................................................................................ 56
13.2. CHANGE OF ADDRESS............................................................................ 56
ARTICLE XIV GUARANTY............................................................................................ 56
ARTICLE XV AMENDMENT AND RESTATEMENT............................................................................ 60
</TABLE>
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<PAGE>
EXHIBITS
<TABLE>
<S> <C>
Exhibit A (Article 1) Note
Exhibit B (Section 6.1(g)) Compliance Certificate
Exhibit C (Section 12.3.1) Assignment Agreement
</TABLE>
SCHEDULES
<TABLE>
<S> <C> <C>
Schedule 1 -- Margins
Schedule 5.3 -- Approvals and Consents
Schedule 5.9 -- Capitalization and Subsidiaries
Schedule 5.10 -- ERISA
Schedule 5.16 -- Indebtedness
Schedule 5.17 -- Insurance Licenses
Schedule 5.18 -- Material Restrictions
Schedule 6.13 -- Investment Commitments
Schedule 6.15 -- Liens
</TABLE>
-v-
<PAGE>
SECOND AMENDED AND RESTATED CREDIT AGREEMENT
This Second Amended and Restated Credit Agreement, dated as of August
14, 1998, is among VALLEY GROUP, INC., an Oregon corporation, WHITE MOUNTAINS
HOLDINGS, INC., a Delaware corporation, the Lenders and THE FIRST NATIONAL BANK
OF CHICAGO, individually and as Agent.
R E C I T A L S:
A. The Borrower, the Lenders and the Agent are party to that certain
$15,000,000 amended and restated credit agreement, dated as of July 30, 1997
(the "Existing Credit Agreement").
B. The Borrower has requested that the Existing Credit Agreement be
amended and restated in order to make certain amendments to the Existing Credit
Agreement.
C. The Borrower, the Lenders and the Agent desire to amend and restate
the Existing Credit Agreement on the terms and conditions set forth below to
accomplish such amendments.
NOW, THEREFORE, in consideration of the mutual covenants and
undertakings herein contained, and for other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, each Loan Party,
the Lenders and the Agent hereby agree as follows:
ARTICLE I
DEFINITIONS
As used in this Agreement:
"ABR Advance" means an Advance which bears interest at the Alternate
Base Rate.
"Adjusted Net Worth" means, with respect to Parent, Net Worth of Parent
(on a consolidated basis) on the date of determination (without duplication for
amounts already excluded), MINUS the aggregate book value of Parent's equity
interest in SOMSC at such time, MINUS any intercompany loans or receivables
owing from Holdings that are assets of Parent or its Subsidiaries at such time.
"Advance" means a borrowing pursuant to SECTION 2.1 consisting of the
aggregate amount of the several Loans made on the same Borrowing Date by the
Lenders to the Borrower of the same Type and, in the case of Eurodollar
Advances, for the same Interest Period.
"Affiliate" of any Person means any other Person directly or indirectly
controlling, controlled by or under common control with such Person. A Person
shall be deemed to control another Person if the controlling Person owns 20% or
more of any class of voting securities (or other ownership
<PAGE>
interests) of the controlled Person or possesses, directly or indirectly, the
power to direct or cause the direction of the management or policies of the
controlled Person, whether through ownership of stock, by contract or otherwise.
"Agent" means First Chicago in its capacity as agent for the Lenders
pursuant to ARTICLE X, and not in its individual capacity as a Lender, and any
successor Agent appointed pursuant to ARTICLE X.
"Aggregate Commitment" means the aggregate of the Commitments of all
the Lenders hereunder. The initial Aggregate Commitment is $15,000,000.
"Agreement" means this Second Amended and Restated Credit Agreement, as
it may be amended, modified or restated and in effect from time to time.
"Agreement Accounting Principles" means generally accepted accounting
principles as in effect from time to time; PROVIDED, HOWEVER, that if any
changes in accounting principles from those in effect on the date of this
Agreement are adopted which result in a material change in the method of
calculation of any of the financial covenants, standards or terms in this
Agreement, the parties agree to enter into negotiations to determine whether
such provisions require amendment and, if so, the terms of such amendment so as
to equitably reflect such changes. Until a resolution thereof is reached, all
calculations made for the purposes of determining compliance with the terms of
this Agreement shall be made by application of generally accepted accounting
principles in effect on the date of this Agreement applied, to the extent
applicable, on a basis consistent with that used in the preparation of the
Financial Statements furnished to the Lenders pursuant to SECTION 5.5 hereof.
"Alternate Base Rate" means, for any day, a rate of interest per annum
equal to the higher of (a) the Corporate Base Rate for such day, and (b) the sum
of the Federal Funds Effective Rate for such day plus 1/2% per annum, in each
case changing when and as the Corporate Base Rate and the Federal Funds
Effective Rate, as the case may be, changes.
"Annual Statement" means the annual statutory financial statement of
any Insurance Subsidiary required to be filed with the insurance commissioner
(or similar authority) of its jurisdiction of incorporation, which statement
shall be in the form required by such Insurance Subsidiary's jurisdiction of
incorporation or, if no specific form is so required, in the form of financial
statements permitted by such insurance commissioner (or such similar authority)
to be used for filing annual statutory financial statements and shall contain
the type of information permitted by such insurance commissioner (or such
similar authority) to be disclosed therein, together with all exhibits or
schedules filed therewith.
"Applicable Eurodollar Margin" has the meaning ascribed to it by, and
shall be determined in accordance with, SCHEDULE 1.
"Applicable Facility Fee Margin" has the meaning ascribed to it by, and
shall be determined in accordance with, SCHEDULE 1.
-2-
<PAGE>
"Article" means an article of this Agreement unless another document is
specifically referenced.
"Asset Disposition" means any sale, transfer or other disposition
(outside the ordinary course of business) of any material asset of the Borrower
in a single transaction or in a series of related transactions (other than the
sale of a Money Market Investment, the net proceeds of which are utilized within
one hundred eighty (180) days to pay dividends permitted by SECTION 6.10),
including any such sale, transfer or disposition by means of a transaction
permitted by SECTION 6.12.
"Authorized Officer" means, with respect to either Loan Party, any of
the chief executive officer, president, chief financial officer, treasurer or
controller of such Loan Party, acting singly.
"Bankruptcy Code" means Title 11, United States Code, sections 1 ET
SEQ., as the same may be amended from time to time, and any successor thereto or
replacement therefor which may be hereafter enacted.
"Benefit Plan" means any deferred benefit plan for the benefit of
present, future or former employees, whether or not such benefit plan is a Plan.
"Borrower" means Valley Group, Inc., an Oregon corporation, and its
successors and assigns.
"Borrowing Date" means a date on which an Advance is made hereunder.
"Borrowing Notice" is defined in SECTION 2.8.
"Business Day" means (a) with respect to any borrowing, payment or rate
selection of Eurodollar Advances, a day (other than a Saturday or Sunday) on
which banks generally are open in Chicago for the conduct of substantially all
of their commercial lending activities and on which dealings in United States
dollars are carried on in the London interbank market, and (b) for all other
purposes, a day (other than a Saturday or Sunday) on which banks generally are
open in Chicago for the conduct of substantially all of their commercial lending
activities.
"Capitalized Lease" of a Person means any lease of Property by such
Person as lessee which would be capitalized on a balance sheet of such Person
prepared in accordance with Agreement Accounting Principles.
"Capitalized Lease Obligations" of a Person means the amount of the
obligations of such Person under Capitalized Leases which would be shown as a
liability on a balance sheet of such Person prepared in accordance with
Agreement Accounting Principles.
"Change" is defined in SECTION 3.2.
-3-
<PAGE>
"Change in Control" means (a) the acquisition by any "person" or
"group" (as such terms are used in Section 13(d) and 14(d)(2) of the Securities
Exchange Act of 1934, as amended) (other than Holdings, any Wholly-Owned
Subsidiary of Holdings, John J. Byrne or any Plan or any Benefit Plan of
Holdings, Parent, the Borrower or any of their Subsidiaries), including without
limitation any acquisition effected by means of any transaction contemplated by
SECTION 6.12, of beneficial ownership (within the meaning of Rule 13d-3 of the
Securities and Exchange Commission under the Securities Exchange Act of 1934, as
amended) of 25% or more of the outstanding shares of voting stock of the
Borrower; or (b) during any period of twelve (12) consecutive calendar months,
commencing on the date of the Agreement, the ceasing of those individuals (the
"CONTINUING DIRECTORS") who (i) were directors of the Borrower on the first day
of each such period or (ii) subsequently became directors of the Borrower and
whose initial election or initial nomination for election subsequent to that
date was approved by a majority of the Continuing Directors then on the board of
directors of the Borrower to constitute a majority of the board of directors of
the Borrower; or (c) during any period of twelve (12) consecutive calendar
months, commencing on the date of this Agreement, the ceasing of individuals who
hold an office possessing the title Senior Vice President or such title that
ranks senior to a Senior Vice President (collectively, "Senior Management") of
the Borrower on the first day of each such period to constitute a majority of
the Senior Management of the Borrower.
"Code" means the Internal Revenue Code of 1986, as amended, reformed or
otherwise modified from time to time.
"Commitment" means, for each Lender, the obligation of such Lender to
make Loans not exceeding the amount set forth opposite its signature below and
as set forth in any Notice of Assignment relating to any assignment which has
become effective pursuant to SECTION 12.3.2, as such amount may be modified from
time to time pursuant to the terms hereof.
"Consolidated" or "consolidated", when used in connection with any
calculation, means a calculation to be determined on a consolidated basis for a
Person and its Subsidiaries in accordance with Agreement Accounting Principles.
"Consolidated Person" means, for the taxable year of reference, each
Person which is a member of the affiliated group of Parent if Consolidated
returns are or shall be filed for such affiliated group for federal income tax
purposes or any combined or unitary group of which Parent is a member for state
income tax purposes.
"Contingent Obligation" of a Person means any agreement, undertaking or
arrangement by which such Person assumes, guarantees, endorses, contingently
agrees to purchase or provide funds for the payment of, or otherwise becomes or
is contingently liable upon, the obligation or liability of any other Person, or
agrees to maintain the net worth or working capital or other financial condition
of any other Person, or otherwise assures any creditor of such other Person
against loss, including, without limitation, any comfort letter, operating
agreement or take-or-pay contract or application for a Letter of Credit,
excluding however (a) insurance policies and insurance contracts issued in the
ordinary course of business and (b) any financial guarantees issued by FSA.
-4-
<PAGE>
"Controlled Group" means all members of a controlled group of
corporations and all trades or businesses (whether or not incorporated) under
common control which, together with either Loan Party or any of their
Subsidiaries, are treated as a single employer under Section 414 of the Code.
"Conversion/Continuation Notice" is defined in SECTION 2.9.
"Corporate Base Rate" means a rate per annum equal to the corporate
base rate of interest publicly announced by First Chicago from time to time,
changing when and as said corporate base rate changes. The Corporate Base Rate
is a reference rate and does not necessarily represent the lowest or best rate
of interest actually charged to any customer. First Chicago may make commercial
loans or other loans at rates of interest at, above or below the Corporate Base
Rate.
"Default" means an event described in ARTICLE VII.
"Environmental Laws" is defined in SECTION 5.19.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended from time to time.
"Eurodollar Advance" means an Advance which bears interest at the
Eurodollar Rate.
"Eurodollar Base Rate" means, with respect to a Eurodollar Advance for
the relevant Interest Period, the rate determined by the Agent to be the rate at
which deposits in U.S. dollars are offered by First Chicago to first-class banks
in the London interbank market at approximately 11 a.m. (London time) two (2)
Business Days prior to the first day of such Interest Period, in the approximate
amount of First Chicago's relevant Eurodollar Advance and having a maturity
approximately equal to such Interest Period.
"Eurodollar Rate" means, with respect to a Eurodollar Advance for the
relevant Interest Period, the sum of (a) the quotient of (i) the Eurodollar Base
Rate applicable to such Interest Period, divided by (ii) one minus the Reserve
Requirement (expressed as a decimal) applicable to such Interest Period, plus
the Applicable Eurodollar Margin. The Eurodollar Rate shall be rounded to the
next higher multiple of 1/100 of 1% if the rate is not such a multiple.
"Existing Credit Agreement" is defined in the recitals to this
Agreement.
"Facility Fee" is defined in Section 2.4(a).
"Facility Termination Date" means July 30, 2002.
"FAE" means Fund American Enterprises, Inc. (f/k/a Fund American
Enterprises II, Inc.), a Delaware corporation and direct Wholly-Owned Subsidiary
of Parent.
-5-
<PAGE>
"Federal Funds Effective Rate" means, for any day, an interest rate per
annum equal to the weighted average of the rates on overnight Federal funds
transactions with members of the Federal Reserve System arranged by Federal
funds brokers on such day, as published for such day (or, if such day is not a
Business Day, for the immediately preceding Business Day) by the Federal Reserve
Bank of New York, or, if such rate is not so published for any day which is a
Business Day, the average of the quotations at approximately 10 a.m. (Chicago
time) on such day on such transactions received by the Agent from three Federal
funds brokers of recognized standing selected by the Agent in its sole
discretion.
"Financial Statements" is defined in SECTION 5.5.
"First Chicago" means The First National Bank of Chicago in its
individual capacity, and its successors.
"First-Tier Insurance Subsidiary" means any Insurance Subsidiary that
is either (a) a direct Wholly-Owned Subsidiary of Parent or (b) a Wholly-Owned
Subsidiary of a Subsidiary of Parent and there exists no Insurance Subsidiary in
the chain of ownership between Parent and such Insurance Subsidiary.
"Fiscal Quarter" means one of the four three-month accounting periods
comprising a Fiscal Year.
"Fiscal Year" means the twelve-month accounting period ending December
31 of each year.
"Fixed Charges Coverage Ratio" means, as of the end of any Fiscal
Quarter, the ratio of:
(a) the sum, without duplication, of,
(i) investments of Parent, the Borrower, FAE, Charter
Group, Inc., Charter General Agency, Inc., NCM
Management Corporation and Folksamerica (but only
after it becomes a Wholly-Owned Subsidiary of Parent)
in cash and Money Market Investments as of the end of
such Fiscal Quarter, PLUS
(ii) an amount equal to the maximum amount of dividends
and intercompany fees available to be paid to Parent,
the Borrower, FAE and Folksamerica (but only after it
becomes a Wholly-Owned Subsidiary of Parent) without
approval of any Governmental Authority by each
present and future Wholly- Owned Subsidiary of Parent
that is a First-Tier Insurance Subsidiary of either
Parent or any of its Subsidiaries that is not an
Insurance Subsidiary pursuant to applicable insurance
statutes, rules and regulations of the applicable
Governmental Authority during the succeeding four
Fiscal Quarters, to
(b) Fixed Charges.
-6-
<PAGE>
"Fixed Charges" means, with respect to Holdings, Parent and the
Borrower, as of the end of any Fiscal Quarter, the sum, without duplication and
after giving effect to consolidation, of (a) the sum of all interest expense on
outstanding Indebtedness (determined by adjusting the principal amount of such
Indebtedness for scheduled amortization payments and assuming that the
applicable interest rate in effect as of the date of determination would remain
constant during the succeeding four Fiscal Quarter period) payable by Holdings,
Parent, the Borrower and any of Parent's Wholly- Owned Subsidiaries (other than
any Unrestricted Subsidiary), (b) dividends payable on preferred stock by
Holdings, Parent, the Borrower and any of Parent's Wholly-Owned Subsidiaries
(other than any Unrestricted Subsidiary), (c) Indebtedness payable pursuant to
the scheduled amortization of such Indebtedness by Holdings, Parent, the
Borrower and any of Parent's Wholly-Owned Subsidiaries (other than any
Unrestricted Subsidiary), (d) Loans payable pursuant to SECTION 2.1(b) as a
result of reductions in the Aggregate Commitment occurring in any such period
pursuant to SECTION 2.7(a) (subject to the last sentence of this definition with
respect to the July 30, 2002 reduction), and Loans (as defined in the White
Mountains Credit Agreement) payable pursuant to Section 2.1(b) of the White
Mountains Credit Agreement as a result of reductions in the Aggregate Commitment
(as determined in the White Mountains Credit Agreement) occurring in any such
period pursuant to Section 2.7(a) of the White Mountains Credit Agreement
(subject to the last sentence of this definition with respect to the July 30,
2002 reduction), in each case for the period of four Fiscal Quarters immediately
following the date of determination. Solely for purposes of computing Fixed
Charges under the preceding CLAUSE (c), the scheduled principal payment of
approximately $56,000,000 due on or before March 31, 1999 under the Folksamerica
Loan Agreement shall not be included. Solely for purposes of computing Fixed
Charges under the preceding CLAUSE (d) for any period on or after June 30, 2001,
the "Reduction Amount" on July 30, 2002 stated in SECTION 2.7(a) shall be deemed
to be $2,000,000 and the "Reduction Amount" on July 30, 2002 stated in Section
2.7(a) of the White Mountains Credit Agreement shall be deemed to be $4,000,000.
"Folksamerica" means Folksamerica Holding Company, Inc., a New York
corporation.
"Folksamerica Loan Agreement means that certain $70,000,000 loan
agreement between Folksamerica and Swedbank (Sparbanken Sverige AB (publ), New
York Branch, dated as of November 12, 1991, as amended.
"Folksamerica Transaction" means that certain transaction by which (a)
Parent and/or FAE acquires all of the outstanding capital stock of Folksamerica
not already owned by Parent and (b) Holdings assumes the obligations of each of
Folksam Omsesidig Sakforsakring (Sweden) and Samvirke Skadeforsikring AS
(Norway) (collectively, the "Folksamerica Guarantors") to guarantee the
obligations of Folksamerica (the "Folksamerica Guaranty") under the Folksamerica
Loan Agreement and (c) Holdings indemnifies the Folksamerica Guarantors and
their respective affiliates, successors and assigns with respect to various
matters relating to the Folksamerica Guaranty.
"FSA" means Financial Security Assurance Holdings Ltd., a New York
corporation.
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<PAGE>
"FSA Amount" means an amount equal to that immediately utilized by
SOMSC to exercise certain options, in existence on the date hereof, on the
capital stock of FSA, such amount not to exceed $18,000,000.
"Funded Indebtedness" means Indebtedness of the type described in
clauses (a), (d), (e) and (h) of the definition "Indebtedness".
"Governmental Authority" means any government (foreign or domestic) or
any state or other political subdivision thereof or any governmental body,
agency, authority, department or commission (including without limitation any
board of insurance, insurance department or insurance commissioner and any
taxing authority or political subdivision) or any instrumentality or officer
thereof (including without limitation any court or tribunal) exercising
executive, legislative, judicial, regulatory or administrative functions of or
pertaining to government and any corporation, partnership or other entity
directly or indirectly owned or controlled by or subject to the control of any
of the foregoing.
"Guaranty" means the Guaranty of Parent pursuant to ARTICLE XIV.
"Hazardous Materials" is defined in SECTION 5.19.
"Holdings" means Fund American Enterprises Holdings, Inc., a Delaware
corporation.
"Indebtedness" of a Person means such Person's (a) obligations for
borrowed money, (b) obligations representing the deferred purchase price of
Property or services (other than accounts payable arising in the ordinary course
of such Person's business payable on terms customary in the trade), (c)
obligations, whether or not assumed, secured by Liens or payable out of the
proceeds or production from Property now or hereafter owned or acquired by such
Person, (d) obligations which are evidenced by notes, acceptances, or similar
instruments, (e) Capitalized Lease Obligations, (f) Rate Hedging Obligations,
(g) Contingent Obligations, (h) obligations for which such Person is obligated
pursuant to or in respect of a Letter of Credit and (i) repurchase obligations
or liabilities of such Person with respect to accounts or notes receivable sold
by such Person.
"Insurance Subsidiary" means any Subsidiary which is engaged in the
insurance business as an issuer or underwriter of insurance policies and/or
insurance contracts.
"Interest Period" means, with respect to a Eurodollar Advance, a period
of one, two, three or six months commencing on a Business Day selected by the
Borrower pursuant to this Agreement. Such Interest Period shall end on (but
exclude) the day which corresponds numerically to such date one, two, three or
six months thereafter; PROVIDED, HOWEVER, that if there is no such numerically
corresponding day in such next, second, third or sixth succeeding month, such
Interest Period shall end on the last Business Day of such next, second, third
or sixth succeeding month. If an Interest Period would otherwise end on a day
which is not a Business Day, such Interest Period shall end on the next
succeeding Business Day; PROVIDED, HOWEVER, that if said next succeeding
Business Day
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<PAGE>
falls in a new calendar month, such Interest Period shall end on the immediately
preceding Business Day.
"Investment" of a Person means any loan, advance (other than
commission, travel and similar advances to officers and employees made in the
ordinary course of business), extension of credit (other than accounts
receivable arising in the ordinary course of business on terms customary in the
trade), deposit account or contribution of capital by such Person to any other
Person or any investment in, or purchase or other acquisition of, the stock,
partnership interests, notes, debentures or other securities of any other Person
made by such Person.
"Lenders" means the lending institutions listed on the signature pages
of this Agreement and their respective successors and assigns.
"Lending Installation" means, with respect to a Lender or the Agent,
any office, branch, subsidiary or affiliate of such Lender or the Agent.
"Letter of Credit" of a Person means a letter of credit or similar
instrument which is issued upon the application of such Person or upon which
such Person is an account party or for which such Person is in any way liable.
"Leverage Ratio" means, at any time, the ratio of (a) the consolidated
Funded Indebtedness of Holdings (excluding SOMSC) at such time to (b) the sum of
the consolidated Funded Indebtedness of Parent and its Subsidiaries, other than
SOMSC, at such time PLUS Adjusted Net Worth at such time, in all cases
determined in accordance with Agreement Accounting Principles.
"License" means any license, certificate of authority, permit or other
authorization which is required to be obtained from any Governmental Authority
in connection with the operation, ownership or transaction of insurance
business.
"Lien" means any security interest, lien (statutory or other),
mortgage, pledge, hypothecation, assignment, deposit arrangement, encumbrance or
preference, priority or other security agreement or preferential arrangement of
any kind or nature whatsoever (including, without limitation, the interest of a
vendor or lessor under any conditional sale, Capitalized Lease or other title
retention agreement), save in respect of liabilities and obligations arising out
of the underwriting of insurance policies and contracts of insurance.
"Loan" means, with respect to a Lender, such Lender's portion of any
Advance and "Loans" means, with respect to the Lenders, the aggregate of all
Advances.
"Loan Documents" means this Agreement, the Notes and the other
documents and agreements contemplated hereby and executed by either Loan Party
in favor of the Agent or any Lender.
"Loan Party" means each and either of the Borrower or Parent.
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<PAGE>
"Margin Stock" has the meaning assigned to that term under
Regulation U.
"Material Adverse Effect" means a material adverse effect on (a) the
business, Property, condition (financial or other), performance, results of
operations, or prospects of Parent and its Subsidiaries taken as a whole, (b)
the ability of Parent, the Borrower or any Subsidiary of Parent or the Borrower
to perform its obligations under the Loan Documents, or (c) the validity or
enforceability of any of the Loan Documents or the rights or remedies of the
Agent or the Lenders thereunder.
"Money Market Investments" means (a) direct obligations of the United
States of America, or of any agency thereof, or obligations guaranteed as to
principal and interest by the United States of America, or of any agency
thereof, in either case maturing not more than one year from the date of
acquisition thereof; (b) certificates of deposit issued by any bank or trust
company organized under the laws of the United States of America or any state
thereof and having capital, surplus and undivided profits of at least
$500,000,000, maturing not more than ninety (90) days from the date of
acquisition thereof; (c) commercial paper rated A-1 or better P-1 or better by
Standard & Poor's Ratings Group or Moody's Investors Services, Inc.,
respectively, maturing not more than ninety (90) days from the date of
acquisition thereof; and (d) shares in an open-end management investment company
with U.S. dollar denominated investments in fixed income obligations, including
repurchase agreements, fixed time deposits and other obligations, with a dollar
weighted average maturity of not more than one year, and for the calculation of
this dollar weighted average maturity, certain instruments which have a variable
rate of interest readjusted no less frequently than annually are deemed to have
a maturity equal to the period remaining until the next readjustment of the
interest rate.
"Multiemployer Plan" means a Plan maintained pursuant to a collective
bargaining agreement or any other arrangement to which either Loan Party or any
member of the Controlled Group is a party to which more than one employer is
obligated to make contributions.
"NAIC" means the National Association of Insurance Commissioners or any
successor thereto, or in lieu thereof, any other association, agency or other
organization performing advisory, coordination or other like functions among
insurance departments, insurance commissioners and similar Governmental
Authorities of the various states of the United States toward the promotion of
uniformity in the practices of such Governmental Authorities.
"Net Available Proceeds" means (a) with respect to any Asset
Disposition, the sum of cash or readily marketable cash equivalents received
(including by way of a cash generating sale or discounting of a note or account
receivable) therefrom, whether at the time of such disposition or subsequent
thereto, in excess in the case of any Asset Disposition of any amounts derived
from such sale used (and permitted by this Agreement to be used) within one
hundred eighty (180) days after such sale to make a Permitted Reinvestment, or
(b) with respect to any sale or issuance of equity securities of the Borrower,
cash or readily marketable cash equivalents received therefrom, whether at the
time of such sale or issuance or subsequent thereto, net, in the case of either
CLAUSE (a) or
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CLAUSE (b), of all legal, title and recording tax expenses, commissions and
other fees and all costs and expenses incurred, including, without limitation,
incremental income taxes resulting from such transaction.
"Net Worth" means, with respect to any Person, at any date the
consolidated shareholders' equity of such Person and its Consolidated
Subsidiaries determined in accordance with Agreement Accounting Principles (but
excluding the effect of Statement of Financial Accounting Standards No.
115).
"Non-Excluded Taxes" is defined in SECTION 2.18(a).
"Note" means a promissory note in substantially the form of EXHIBIT A
hereto, with appropriate insertions, duly executed and delivered to the Agent by
the Borrower and payable to the order of a Lender in the amount of its
Commitment, including any amendment, modification, renewal or replacement of
such promissory note.
"Notice of Assignment" is defined in SECTION 12.3.2.
"Obligations" means all unpaid principal of and accrued and unpaid
interest on the Notes, all accrued and unpaid fees and all expenses,
reimbursements, indemnities and other obligations of each Loan Party to the
Lenders or to any Lender, the Agent or any indemnified party hereunder arising
under any of the Loan Documents.
"Parent" means White Mountains Holdings, Inc., a Delaware corporation,
formerly known as Fund American Enterprises, Inc. and the survivor of a merger
with White Mountains Holdings, Inc., a Hew Hampshire corporation.
"Participants" is defined in SECTION 12.2.1.
"Payment Date" means the last day of each March, June, September and
December.
"PBGC" means the Pension Benefit Guaranty Corporation or any successor
thereto.
"Permitted Reinvestment" means an Investment in Subsidiaries (other
than any Unrestricted Subsidiary) in existence on the date hereof, an Investment
in Main Street America Holdings, Inc., or any other Investment approved by the
Required Lenders.
"Person" means any natural person, corporation, firm, joint venture,
partnership, association, enterprise, trust or other entity or organization, or
any government or political subdivision or any agency, department or
instrumentality thereof.
"Plan" means an employee pension benefit plan, as defined in Section
3(2) of ERISA, as to which either Loan Party or any member of the Controlled
Group may have any liability.
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<PAGE>
"Proceeding" is defined in SECTION 5.19.
"Property" of a Person means any and all property, whether real,
personal, tangible, intangible, or mixed, of such Person, or other assets owned,
leased or operated by such Person.
"pro-rata" means, when used with respect to a Lender, and any described
aggregate or total amount, an amount equal to such Lender's pro-rata share or
portion based on its percentage of the Aggregate Commitment or if the Aggregate
Commitment has been terminated, its percentage of the aggregate principal amount
of outstanding Advances.
"Purchase" means any transaction, or any series of related
transactions, consummated on or after the date of this Agreement, by which
either Loan Party or any of their Subsidiaries (a) acquiresany going business or
all or substantially all of the assets of any firm, corporation or division or
line of business thereof, whether through purchase of assets, merger or
otherwise, or (b) directly or indirectly acquires (in one transaction or as the
most recent transaction in a series of transactions) at least a majority (in
number of votes) of the securities of a corporation which have ordinary voting
power for the election of directors (other than securities having such power
only by reason of the happening of a contingency) or a majority (by percentage
or voting power) of the outstanding partnership interests of a partnership.
"Purchasers" is defined in SECTION 12.3.1.
"Quarterly Statement" means the quarterly statutory financial statement
of any Insurance Subsidiary required to be filed with the insurance commissioner
(or similar authority) of its jurisdiction of incorporation or, if no specific
form is so required, in the form of financial statements permitted by such
insurance commissioner (or such similar authority) to be used for filing
quarterly statutory financial statements and shall contain the type of financial
information permitted by such insurance commissioner (or such similar authority)
to be disclosed therein, together with all exhibits or schedules filed
therewith.
"Rate Hedging Obligations" of a Person means any and all obligations of
such Person, whether absolute or contingent and howsoever and whensoever
created, arising, evidenced or acquired (including all renewals, extensions and
modifications thereof and substitutions therefor), under (a) any and all
agreements, devices or arrangements designed to protect at least one of the
parties thereto from the fluctuations of interest rates, exchange rates or
forward rates applicable to such party's assets, liabilities or exchange
transactions, including, but not limited to, dollar-denominated or
cross-currency interest rate exchange agreements, forward currency exchange
agreements, interest rate cap or collar protection agreements, forward rate
currency or interest rate options, puts and warrants, and (b) any and all
cancellations, buy backs, reversals, terminations or assignments of any of the
foregoing.
"Regulation D" means Regulation D of the Board of Governors of the
Federal Reserve System as from time to time in effect and any successor thereto
or other regulation or official
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<PAGE>
interpretation of said Board of Governors relating to reserve requirements
applicable to depositary institutions.
"Regulation T" means Regulation T of the Board of Governors of the
Federal Reserve System as from time to time in effect and shall include any
successor or other regulation or official interpretation of such Board of
Governors relating to the extension of credit by securities brokers and dealers
for the purpose of purchasing or carrying margin stocks applicable to such
Persons.
"Regulation U" means Regulation U of the Board of Governors of the
Federal Reserve System as from time to time in effect and any successor or other
regulation or official interpretation of said Board of Governors relating to the
extension of credit by banks for the purpose of purchasing or carrying margin
stocks applicable to such Persons.
"Regulation X" means Regulation X of the Board of Governors of the
Federal Reserve System as from time to time in effect and shall include any
successor or other regulation or official interpretation of said Board of
Governors relating to the extension of credit by the specified lenders for the
purpose of purchasing or carrying margin stocks applicable to such Persons.
"Release" is defined in the Comprehensive Environmental Response,
Compensation and Liability Act, as amended, 42 U.S.C. 39601 ET SEQ.
"Reportable Event" means a reportable event as defined in Section 4043
of ERISA and the regulations issued under such section, with respect to a Plan,
excluding, however, such events as to which the PBGC has by regulation waived
the requirement of Section 4043(a) of ERISA that it be notified within thirty
(30) days of the occurrence of such event; PROVIDED, that a failure to meet the
minimum funding standard of Section 412 of the Code and of Section 302 of ERISA
shall be a Reportable Event regardless of the issuance of any such waiver of the
notice requirement in accordance with either Section 4043(a) of ERISA or Section
412(d) of the Code.
"Required Lenders" means Lenders in the aggregate having at least
66-2/3% of the Aggregate Commitment or, if the Aggregate Commitment has been
terminated, Lenders in the aggregate holding at least 66-2/3% of the aggregate
unpaid principal amount of the outstanding Loans.
"Reserve Requirement" means, with respect to an Interest Period, the
maximum aggregate reserve requirement (including all basic, supplemental,
marginal and other reserves) which is imposed under Regulation D on Eurocurrency
liabilities.
"Restatement Effective Date" means the date on which all conditions
precedent set forth in SECTION 4.1 are satisfied or waived by all of the
Lenders.
"Risk-Based Capital Guidelines" is defined in SECTION 3.2.
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"SAP" means, with respect to any Insurance Subsidiary, the statutory
accounting practices prescribed or permitted by the insurance commissioner (or
other similar authority) in the jurisdiction of such Person for the preparation
of annual statements and other financial reports by insurance companies of the
same type as such Person in effect from time to time; PROVIDED, HOWEVER, that if
any changes in statutory accounting practices from those in effect on the date
of this Agreement are adopted which result in a material change in the method of
calculation of any of the financial covenants, standards or terms in this
Agreement, the parties agree to enter into negotiations to determine whether
such provisions require amendment and, if so, the terms of such amendment so as
to equitably reflect such changes. Until a resolution thereof is reached, all
calculations made for the purposes of determining compliance with the terms of
this Agreement shall be made by application of statutory accounting practices in
effect on the date of this Agreement applied, to the extent applicable, on a
basis consistent with that used in the preparation of the Financial Statements
furnished to the Lenders pursuant to SECTION 5.5(j) AND (k) hereof.
"Section" means a numbered section of this Agreement, unless another
document is specifically referenced.
"Significant Subsidiary" shall mean and include, at any time, each
Subsidiary of the Borrower to the extent that the Net Worth of such Subsidiary
is equal to or greater than $5,000,000.
"Single Employer Plan" means a Plan subject to Title IV of ERISA
maintained by either Loan Party or any member of the Controlled Group for
employees of either Loan Party or any member of the Controlled Group, other than
a Multiemployer Plan.
"Solvent" means, when used with respect to a Person, that (a) the fair
saleable value of the assets of such Person is in excess of the total amount of
the present value of its liabilities (including for purposes of this definition
all liabilities (including loss reserves as determined by such Person), whether
or not reflected on a balance sheet prepared in accordance with Agreement
Accounting Principles and whether direct or indirect, fixed or contingent,
secured or unsecured, disputed or undisputed), (b) such Person is able to pay
its debts or obligations in the ordinary course as they mature and (c) such
Person does not have unreasonably small capital to carry out its business as
conducted and as proposed to be conducted. "Solvency" shall have a correlative
meaning.
"SOMSC" means Source One Mortgage Services Corporation, a Delaware
corporation.
"SOMSC Credit Agreements" means the credit agreement or credit
agreements from time to time in effect among SOMSC, the financial institutions
from time to time party thereto and First Chicago, as agent, as the same may be
amended, supplemented, restated, replaced or otherwise modified from time to
time (and, subsequent to the termination thereof, as in effect on the date of
such termination).
"Statutory Surplus" means, with respect to any Insurance Subsidiary at
any time, the statutory capital and surplus of such Insurance Subsidiary at such
time, as determined in accordance
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with SAP ("Liabilities, Surplus and Other Funds" statement, page 3, line 25 of
the Annual Statement for the 1995 Fiscal Year entitled "Surplus as Regards
Policyholders").
"Subsidiary" of a Person means (a) any corporation more than 50% of the
outstanding securities having ordinary voting power of which shall at the time
be owned or controlled, directly or indirectly, by such Person or by one or more
of its Subsidiaries or by such Person and one or more of its Subsidiaries, or
(b) any partnership, association, joint venture, limited liability company or
similar business organization more than 50% of the ownership interests having
ordinary voting power of which shall at the time be so owned or controlled.
Unless otherwise expressly provided, all references herein to a "Subsidiary"
shall mean a Subsidiary of the Borrower.
"Termination Event" means, with respect to a Plan which is subject to
Title IV of ERISA, (a) a Reportable Event, (b) the withdrawal of either Loan
Party or any other member of the Controlled Group from such Plan during a plan
year in which either Loan Party or any other member of the Controlled Group was
a "substantial employer" as defined in Section 4001(a)(2) of ERISA or was deemed
such under Section 4068(f) of ERISA, (c) the termination of such Plan, the
filing of a notice of intent to terminate such Plan or the treatment of an
amendment of such Plan as a termination under Section 4041 of ERISA, (d) the
institution by the PBGC of proceedings to terminate such Plan or (e) any event
or condition which might constitute grounds under Section 4042 of ERISA for the
termination of, or appointment of a trustee to administer, such Plan.
"Transferee" is defined in SECTION 12.4.
"Type" means, with respect to any Advance, its nature as an ABR Advance
or Eurodollar Advance.
"Unfunded Liability" means the amount (if any) by which the present
value of all vested and unvested accrued benefits under a Single Employer Plan
exceeds the fair market value of assets allocable to such benefits, all
determined as of the then most recent valuation date for such Plans using PBGC
actuarial assumptions for single employer plan terminations.
"Unmatured Default" means an event which but for the lapse of time or
the giving of notice, or both, would constitute a Default.
"Unrestricted Subsidiary" means SOMSC and its Subsidiaries.
"White Mountains Credit Agreement" means the Second Amended and
Restated Credit Agreement, dated as of August 14, 1998, among Parent, the
financial institutions from time to time party thereto and First Chicago, as
agent, as the same may be amended, supplemented or otherwise modified from time
to time (and, subsequent to the termination thereof, as in effect on the date of
such termination).
"Wholly-Owned Subsidiary" of a Person means (a) any Subsidiary all of
the outstanding voting securities of which (other than directors' qualifying or
similar shares) shall at the time be
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owned or controlled, directly or indirectly, by such Person or one or more
Wholly-Owned Subsidiaries of such Person, or by such Person and one or more
Wholly-Owned Subsidiaries of such Person, or (b) any partnership, association,
joint venture, limited liability company or similar business organization 100%
of the ownership interests having ordinary voting power of which (other than
directors' qualifying or similar shares) shall at the time be so owned or
controlled.
"Year 2000 Issues" means anticipated costs, problems and uncertainties
associated with the inability of certain computer applications and hardware to
effectively function on and after January 1, 2000, as such inability affects the
business, operations and financial condition of either Loan Party and their
Subsidiaries and of either Loan Party's and their Subsidiaries' material
customers, suppliers and vendors.
"Year 2000 Program" is defined in SECTION 5.22.
The foregoing definitions shall be equally applicable to both the
singular and plural forms of the defined terms. References herein to particular
columns, lines or sections of any Person's Annual Statement shall be deemed,
where appropriate, to be references to the corresponding column, line or section
of such Person's Quarterly Statement, or if no such corresponding column, line
or section exists or if any report form changes, then to the corresponding item
referenced thereby. In the event that the columns, lines or sections of the
Annual Statement referenced herein are changed or renumbered, all such
references shall be deemed references to such column, line or section as so
renumbered or changed. Each accounting term used herein which is not otherwise
defined herein shall be defined in accordance with Agreement Accounting
Principles or SAP, as applicable, unless otherwise specified.
ARTICLE II
THE CREDITS
2.1. ADVANCES. (a) From and including the date hereof to but excluding
the Facility Termination Date, each Lender severally (and not jointly) agrees,
on the terms and conditions set forth in this Agreement, to make Advances to the
Borrower from time to time in amounts not to exceed in the aggregate at any one
time outstanding the amount of its pro-rata share of the Aggregate Commitment
existing at such time. Subject to the terms of this Agreement, the Borrower may
borrow, repay and reborrow Advances at any time prior to the Facility
Termination Date.
(b) The Borrower hereby agrees that if at any time, as a
result of reductions in the Aggregate Commitment pursuant to SECTION 2.7 or
otherwise, the aggregate balance of the Loans exceeds the Aggregate Commitment,
the Borrower shall repay immediately its then outstanding Loans in such amount
as may be necessary to eliminate such excess.
(c) The Borrower's obligation to pay the principal of, and
interest on, the Loans shall be evidenced by the Notes. Although the Notes shall
be dated the date of this Agreement,
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interest in respect thereof shall be payable only for the periods during which
the Loans evidenced thereby are outstanding and, although the stated amount of
each Note shall be equal to the applicable Lender's Commitment, each Note shall
be enforceable, with respect to the Borrower's obligation to pay the principal
amount thereof, only to the extent of the unpaid principal amount of the Loans
at the time evidenced thereby.
(d) All Advances and all Loans shall mature, and the
principal amount thereof and the unpaid accrued interest thereon shall be due
and payable, on the Facility Termination Date.
2.2. RATABLE LOANS. Each Advance hereunder shall consist of Loans made
from the several Lenders ratably in proportion to the ratio that their
respective Commitments bear to the Aggregate Commitment.
2.3. TYPES OF ADVANCES. The Advances may be ABR Advances or Eurodollar
Advances, or a combination thereof, selected by the Borrower in accordance with
SECTIONS 2.8 and 2.9.
2.4. FACILITY FEE; REDUCTIONS IN AGGREGATE COMMITMENT.
(a) The Borrower agrees to pay to the Agent for the account
of each Lender a facility fee ("Facility Fee") in an amount equal to the
Applicable Facility Fee Margin per annum times the daily average Commitment of
such Lender from the date hereof to and including the Facility Termination Date,
payable on each Payment Date hereafter and on the Facility Termination Date. All
accrued Facility Fees shall be payable on the effective date of any termination
of the obligations of the Lenders to make Loans hereunder.
(b) The Borrower may permanently reduce the Aggregate
Commitment in whole, or in part ratably among the Lenders in a minimum aggregate
amount of $1,000,000 upon at least three (3) Business Days' written notice to
the Agent, which notice shall specify the amount of any such reduction;
PROVIDED, HOWEVER, that the amount of the Aggregate Commitment may not be
reduced below the aggregate principal amount of the outstanding Advances. Such
reductions shall be in addition to reductions occurring pursuant to SECTION
2.7(b). Voluntary commitment reductions pursuant to this SECTION 2.4(b) shall be
applied to the mandatory commitment reductions required to be made pursuant to
SECTION 2.7(a) in direct order of maturity.
2.5. MINIMUM AMOUNT OF EACH ADVANCE. Each Advance shall be in the
minimum amount of $1,000,000 (and in integral multiples of $500,000 if in excess
thereof); PROVIDED, HOWEVER, that (a) any ABR Advance may be in the amount of
the unused Aggregate Commitment and (b) in no event shall more than six (6)
Eurodollar Advances be permitted to be outstanding at any time.
2.6. OPTIONAL PRINCIPAL PAYMENTS. The Borrower may from time to time
pay, without penalty or premium, all outstanding ABR Advances, or, in a minimum
aggregate amount of $1,000,000 any portion of the outstanding ABR Advances upon
two (2) Business Days' prior notice to the Agent. Subject to SECTION 3.4 and
upon like notice, a Eurodollar Advance may be paid prior
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to the last day of the applicable Interest Period in a minimum amount of
$1,000,000 or an integral multiple of $500,000 in excess thereof.
2.7. MANDATORY COMMITMENT REDUCTIONS. (a) The Aggregate Commitment
shall be automatically and permanently reduced by the following amounts (or such
lesser amount as a result of reductions pursuant to SECTION 2.7(c)) on the
following dates:
<TABLE>
<CAPTION>
DATE REDUCTION AMOUNT
---- ----------------
<S> <C>
June 30, 1999 $ 1,000,000
June 30, 2000 $ 2,000,000
June 30, 2001 $ 2,000,000
July 30, 2002 $10,000,000
</TABLE>
(b) The Aggregate Commitment shall also be automatically and
permanently reduced in the amounts and at the times set forth below:
(i) within one hundred eighty (180) days after the receipt
in the form of cash or cash equivalents thereof by the Borrower, 100%
of the aggregate Net Available Proceeds in excess of $1,000,000
realized upon all Asset Dispositions in any Fiscal Year of the
Borrower; and
(ii) within five (5) Business Days after the receipt in the
form of cash or cash equivalents thereof by the Borrower, 85% of the
Net Available Proceeds realized upon the sale by the Borrower of any
equity securities issued by it or equity contributed to it after the
date of this Agreement in excess of an aggregate amount of $1,000,000
(other than a sale of common stock of the Borrower to Parent).
(c) Mandatory commitment reductions under SECTION 2.7(b)
shall be cumulative and in addition to reductions occurring pursuant to SECTION
2.4(b). Any mandatory commitment reductions under SECTION 2.7(b) shall be
applied to the mandatory commitment reductions required to be made pursuant to
SECTION 2.7(a) in the inverse order of maturity.
(d) Any reduction in the Aggregate Commitment pursuant to
this SECTION 2.7 or otherwise shall ratably reduce the Commitment of each
Lender.
2.8. METHOD OF SELECTING TYPES AND INTEREST PERIODS FOR NEW ADVANCES.
The Borrower shall select the Type of Advance and, in the case of each
Eurodollar Advance, the Interest Period applicable to each Advance from time to
time; PROVIDED, HOWEVER, that in the event Loans are incurred on the date of
this Agreement, all Loans incurred on such date shall be ABR Advances. The
Borrower shall give the Agent irrevocable notice (a "BORROWING NOTICE") not
later than 10:00 a.m. (Chicago time) on the Borrowing Date of each ABR Advance
and at least three (3) Business Days before the Borrowing Date for each
Eurodollar Advance, specifying:
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(a) the Borrowing Date of such Advance, which shall be a
Business Day;
(b) the aggregate amount of such Advance;
(c) the Type of Advance selected;
(d) in the case of each Eurodollar Advance, the Interest
Period applicable thereto, which shall end on or
prior to the Facility Termination Date; and
(e) any changes to money transfer instructions previously
delivered to the Agent.
Not later than noon (Chicago time) on each Borrowing Date, each Lender shall
make available its Loan or Loans, in funds immediately available in Chicago, to
the Agent at its address specified pursuant to ARTICLE XIII. The Agent will make
the funds so received from the Lenders available to the Borrower at the Agent's
aforesaid address or at such account at such other institution in the United
States of America as the Borrower may indicate in the Borrowing Notice.
2.9. CONVERSION AND CONTINUATION OF OUTSTANDING ADVANCES. ABR Advances
shall continue as ABR Advances unless and until such ABR Advances are converted
into Eurodollar Advances. Each Eurodollar Advance shall continue as a Eurodollar
Advance until the end of the then applicable Interest Period therefor, at which
time such Eurodollar Advance shall be automatically converted into an ABR
Advance unless the Borrower shall have given the Agent a Conversion/Continuation
Notice requesting that, at the end of such Interest Period, such Eurodollar
Advance continue as a Eurodollar Advance for the same or another Interest
Period. Subject to the terms of SECTION 2.5, the Borrower may elect from time to
time to convert all or any part of an Advance of any Type into any other Type or
Types of Advances; PROVIDED, HOWEVER, that any conversion of any Eurodollar
Advance shall be made on, and only on, the last day of the Interest Period
applicable thereto. The Borrower shall give the Agent irrevocable notice (a
"CONVERSION/ CONTINUATION NOTICE") of each conversion of an ABR Advance or
continuation of a Eurodollar Advance not later than 10:00 a.m. (Chicago time) on
the conversion date, in the case of a conversion into an ABR Advance, or at
least three (3) Business Days, in the case of a conversion into or continuation
of a Eurodollar Advance, prior to the date of the requested conversion or
continuation, specifying:
(a) the requested date of such conversion or
continuation, which shall be a Business Day;
(b) the aggregate amount and Type of the Advance which is
to be converted or continued; and
(c) the amount and Type(s) of Advance(s) into which such
Advance is to be converted or continued and, in the case of a conversion into or
continuation of a Eurodollar Advance, the duration of the Interest Period
applicable thereto, which shall end on or prior to the Facility Termination
Date.
2.10. CHANGES IN INTEREST RATE, ETC. Each ABR Advance shall bear
interest at the Alternate Base Rate from and including the date of such Advance
or the date on which such Advance
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was converted into an ABR Advance to (but not including) the date on which such
ABR Advance is paid or converted to a Eurodollar Advance. Changes in the rate of
interest on that portion of any Advance maintained as an ABR Advance will take
effect simultaneously with each change in the Alternate Base Rate. Each
Eurodollar Advance shall bear interest from and including the first day of the
Interest Period applicable thereto to, but not including, the last day of such
Interest Period at the Eurodollar Rate determined as applicable to such
Eurodollar Advance plus the Applicable Eurodollar Margin. No Interest Period may
end after the Facility Termination Date. The Borrower shall select Interest
Periods so that it is not necessary to repay any portion of a Eurodollar Advance
prior to the last day of the applicable Interest Period in order to make a
mandatory repayment required pursuant to SECTION 2.7(A).
2.11. RATES APPLICABLE AFTER DEFAULT. Notwithstanding anything to the
contrary contained in SECTIONS 2.8 or 2.9, no Advance may be made as, converted
into or continued as a Eurodollar Advance (except with the consent of the Agent
and the Required Lenders) when any Default or Unmatured Default has occurred and
is continuing. During the continuance of a Default the Required Lenders may, at
their option, by notice to the Borrower (which notice may be revoked at the
option of the Required Lenders notwithstanding any provision of SECTION 8.2
requiring unanimous consent of the Lenders to changes in interest rates),
declare that each Eurodollar Advance and ABR Advance shall bear interest (for
the remainder of the applicable Interest Period in the case of Eurodollar
Advances) at a rate per annum equal to the rate otherwise applicable plus two
percent (2%) per annum; PROVIDED, HOWEVER, that such increased rate shall
automatically and without action of any kind by the Lenders become and remain
applicable until revoked by the Required Lenders in the event of a Default
described in SECTIONS 7.6 or 7.7.
2.12. METHOD OF PAYMENT. All payments of the Obligations hereunder
shall be made, without setoff, deduction or counterclaim, in immediately
available funds to the Agent at the Agent's address specified pursuant to
ARTICLE XIII, or at any other Lending Installation of the Agent specified in
writing by the Agent to the Borrower (at least two (2) Business Days in advance)
by noon (Chicago time) on the date when due and shall be applied ratably by the
Agent among the Lenders. Each payment delivered to the Agent for the account of
any Lender shall be delivered promptly by the Agent to such Lender in the same
type of funds that the Agent received at its address specified pursuant to
ARTICLE XIII or at any Lending Installation specified in a notice received by
the Agent from such Lender. The Agent is hereby authorized to charge the account
of the Borrower maintained with the Agent for each payment of principal,
interest and fees as it becomes due hereunder.
2.13. NOTES. Each Lender is hereby authorized to record the principal
amount of each of its Loans and each repayment on the schedule attached to its
Note; PROVIDED, HOWEVER, that neither the failure to so record nor any error in
such recordation shall affect the Borrower's obligations under such Note.
2.14. INTEREST PAYMENT DATES; INTEREST AND FEE BASIS. Interest accrued
on each ABR Advance shall be payable on each Payment Date, commencing with the
first such date to occur after the date hereof, on any date on which an ABR
Advance is prepaid, whether due to acceleration or otherwise, and at maturity.
Interest accrued on that portion of the outstanding principal amount of
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any ABR Advance converted into a Eurodollar Advance on a day other than a
Payment Date shall be payable on the date of conversion. Interest accrued on
each Eurodollar Advance shall be payable on the last day of its applicable
Interest Period, on any date on which the Eurodollar Advance is prepaid, whether
by acceleration or otherwise, and at maturity. Interest accrued on each
Eurodollar Advance having an Interest Period longer than three (3) months shall
also be payable on the last day of each three-month interval during such
Interest Period. Interest and commitment fees shall be calculated for actual
days elapsed on the basis of a 360-day year. Interest shall be payable for the
day an Advance is made but not for the day of any payment on the amount paid if
payment is received prior to noon (Chicago time) at the place of payment. If any
payment of principal of or interest on an Advance shall become due on a day
which is not a Business Day, such payment shall be made on the next succeeding
Business Day and, in the case of a principal payment, such extension of time
shall be included in computing interest in connection with such payment.
2.15. NOTIFICATION OF ADVANCES, INTEREST RATES, PREPAYMENTS AND
COMMITMENT REDUCTIONS. Promptly after receipt thereof, the Agent will notify
each Lender of the contents of each Aggregate Commitment reduction notice,
Borrowing Notice, Conversion/Continuation Notice, and repayment notice received
by it hereunder. The Agent will notify each Lender of the interest rate
applicable to each Eurodollar Advance promptly upon determination of such
interest rate and will give each Lender prompt notice of each change in the
Alternate Base Rate.
2.16. LENDING INSTALLATIONS. Each Lender may book its Loans at any
Lending Installation selected by such Lender and may change its Lending
Installation from time to time. All terms of this Agreement shall apply to any
such Lending Installation and the Notes shall be deemed held by each Lender for
the benefit of such Lending Installation. Each Lender may, by written or telex
notice to the Agent and the Borrower, designate a Lending Installation through
which Loans will be made by it and for whose account Loan payments are to be
made.
2.17. NON-RECEIPT OF FUNDS BY THE AGENT. Unless the Borrower or a
Lender, as the case may be, notifies the Agent prior to the date on which it is
scheduled to make payment to the Agent of (a) in the case of a Lender, the
proceeds of a Loan, or (b) in the case of the Borrower, a payment of principal,
interest or fees to the Agent for the account of the Lenders, that it does not
intend to make such payment, the Agent may assume that such payment has been
made. The Agent may, but shall not be obligated to, make the amount of such
payment available to the intended recipient in reliance upon such assumption. If
the Borrower has not in fact made such payment to the Agent, the Lenders shall,
on demand by the Agent, repay to the Agent the amount so made available together
with interest thereon in respect of each day during the period commencing on the
date such amount was so made available by the Agent until the date the Agent
recovers such amount at a rate per annum equal to the Federal Funds Effective
Rate for such day. If any Lender has not in fact made such payment to the Agent,
such Lender or the Borrower shall, on demand by the Agent, repay to the Agent
the amount so made available together with interest thereon in respect of each
day during the period commencing on the date such amount was so made available
by the Agent until the date the Agent recovers such amount at a rate per annum
equal to (a) in the case of payment by a Lender, the Federal Funds Effective
Rate for such day, or (b) in the case of payment by the Borrower, the interest
rate applicable to the relevant Loan.
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2.18. TAXES. (a) Any payments made by either Loan Party under this
Agreement or any other Loan Document shall be made free and clear of, and
without deduction or withholding for or on account of, any present or future
income, stamp or other taxes, levies, imposts, duties, charges, fees, deductions
or withholdings, now or hereafter imposed, levied, collected, withheld or
assessed by any Governmental Authority, excluding net income taxes and franchise
taxes or any other tax based upon any income imposed on the Agent or any Lender
by the jurisdiction in which the Agent or such Lender is incorporated or has its
principal place of business or maintains its Lending Installation. If any such
non-excluded taxes, levies, imposts, duties, charges, fees, deductions or
withholdings ("Non-Excluded Taxes") are required to be withheld from any amounts
payable to the Agent or any Lender hereunder, the amounts so payable to the
Agent or such Lender shall be increased to the extent necessary to yield to the
Agent or such Lender (after payment of all Non- Excluded Taxes) interest or any
such other amounts payable hereunder at the rates or in the amounts specified in
or pursuant to this Agreement; PROVIDED, HOWEVER, that no Loan Party shall be
required to increase any such amounts payable to any Lender that is not
organized under the laws of the U.S. or a state thereof if such Lender fails to
comply with the requirements of paragraph (b) of this SECTION 2.18. Whenever any
Non-Excluded Taxes are payable by either Loan Party, as promptly as practicable
thereafter such Loan Party shall send to the Agent for its own account or for
the account of such Lender, as the case may be, a certified copy of an original
official receipt received by such Loan Party showing payment thereof. If either
Loan Party fails to pay any Non-Excluded Taxes when due to the appropriate
taxing authority or fails to remit to the Agent the required receipts or other
required documentary evidence, each Loan Party shall indemnify the Agent and the
Lenders for any incremental taxes, interest or penalties that may become payable
by any Agent or any Lender as a result of any such failure. The agreements in
this SECTION 2.18 shall survive the termination of this Agreement and the
payment of all other amounts payable hereunder.
(b) At least five (5) Business Days prior to the first date
on which interest or fees are payable hereunder for the account of any Lender,
each Lender that is not incorporated under the laws of the United States of
America, or a state thereof, agrees that it will deliver to each of the Borrower
and the Agent two (2) duly completed and properly executed copies of United
States Internal Revenue Service Form 1001 or 4224 (or a successor form),
certifying in either case that such Lender is entitled to receive payments under
this Agreement and the Notes without deduction or withholding of any United
States federal income taxes. Each Lender which so delivers a Form 1001 or 4224
(or a successor form) further undertakes to deliver to each of the Borrower and
the Agent two (2) additional duly completed and properly executed copies of such
form (or a successor form) on or before the date that such form expires
(currently, three (3) successive calendar years for Form 1001 and each tax year
for Form 4224) or becomes obsolete or after the occurrence of any event
requiring a change in the most recent forms so delivered by it, and such
amendments thereto or extensions or renewals thereof as may be reasonably
requested by the Borrower or the Agent, in each case certifying that such Lender
is entitled to receive payments under this Agreement and the Notes without
deduction or withholding of any United States federal income taxes, unless an
event (including, without limitation, any change in treaty, law or regulation)
has occurred prior to the date on which any such delivery would otherwise be
required which renders all such forms inapplicable or which would prevent such
Lender from duly completing and delivering any such form with
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respect to it and such Lender advises the Borrower and the Agent that it is not
capable of receiving payments without any deduction or withholding of United
States federal income tax.
2.19. AGENT'S FEES. The Borrower shall pay to the Agent those fees, in
addition to the Facility Fees referenced in SECTION 2.4(a), in the amounts and
at the times separately agreed to between the Agent and the Borrower.
ARTICLE III
CHANGE IN CIRCUMSTANCES
3.1. YIELD PROTECTION. If, after the date hereof, the adoption of or
any change in any law or any governmental or quasi-governmental rule,
regulation, policy, guideline or directive (whether or not having the force of
law), or any new interpretation thereof, or the compliance of any Lender with
such adoption, change or interpretation,
(a) subjects any Lender or any applicable Lending
Installation to any tax, duty, charge or withholding on or from
payments due from the Borrower (excluding taxation of the overall net
income of any Lender or applicable Lending Installation imposed by the
jurisdiction in which such Lender or Lending Installation is
incorporated or has its principal place of business), or changes the
basis of taxation of principal, interest or any other payments to any
Lender or Lending Installation in respect of its Loans or other amounts
due it hereunder, or
(b) imposes or increases or deems applicable any reserve,
assessment, insurance charge, special deposit or similar requirement
against assets of, deposits with or for the account of, or credit
extended by, any Lender or any applicable Lending Installation (other
than reserves and assessments taken into account in determining the
interest rate applicable to Eurodollar Advances), or
(c) imposes any other condition the result of which is to
increase the cost to any Lender or any applicable Lending Installation
of making, funding or maintaining Loans or reduces any amount
receivable by any Lender or any applicable Lending Installation in
connection with any Loans, or requires any Lender or any applicable
Lending Installation to make any payment calculated by reference to the
amount of Loans held, or interest received by it, by an amount deemed
material by such Lender,
then, within fifteen (15) days of demand by such Lender, the Borrower shall pay
such Lender that portion of such increased expense incurred or resulting in an
amount received which such Lender determines is attributable to making, funding
and maintaining its Loans and its Commitment.
3.2. CHANGES IN CAPITAL ADEQUACY REGULATIONS. If a Lender determines
the amount of capital required or expected to be maintained by such Lender, any
Lending Installation of such
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Lender or any corporation controlling such Lender is increased as a result of a
Change, then, within fifteen (15) days of demand by such Lender, the Borrower
shall pay such Lender the amount necessary to compensate for any shortfall in
the rate of return on the portion of such increased capital which such Lender
determines is attributable to this Agreement, its Loans or its obligation to
make Loans hereunder (after taking into account such Lender's policies as to
capital adequacy). "CHANGE" means (a) any change after the date of this
Agreement in the Risk-Based Capital Guidelines, or (b) any adoption of or change
in any other law, governmental or quasi-governmental rule, regulation, policy,
guideline, interpretation, or directive (whether or not having the force of law)
after the date of this Agreement which affects the amount of capital required or
expected to be maintained by any Lender or any Lending Installation or any
corporation controlling any Lender. "RISK-BASED CAPITAL GUIDELINES" means (a)
the risk-based capital guidelines in effect in the United States on the date of
this Agreement and (b) the corresponding capital regulations promulgated by
regulatory authorities outside the United States implementing the July 1988
report of the Basle Committee on Banking Regulation and Supervisory Practices
entitled "International Convergence of Capital Measurements and Capital
Standards" and any amendments to such regulations adopted prior to the date of
this Agreement.
3.3. AVAILABILITY OF TYPES OF ADVANCES. If any Lender determines that
maintenance of its Eurodollar Loans at a suitable Lending Installation would
violate any applicable law, rule, regulation, or directive, whether or not
having the force of law, or if the Required Lenders determine that (a) deposits
of a type and maturity appropriate to match fund Eurodollar Advances are not
available, or (b) the interest rate applicable to a Eurodollar Advance does not
accurately or fairly reflect the cost of making or maintaining such Advance,
then the Agent shall suspend the availability of the Eurodollar Advances until
such circumstance no longer exists and require any Eurodollar Advances to be
repaid.
3.4. FUNDING INDEMNIFICATION. If any payment of a Eurodollar Advance
occurs on a date which is not the last day of the applicable Interest Period,
whether because of acceleration, prepayment or otherwise, or a Eurodollar
Advance is not made on the date specified by the Borrower for any reason other
than default by the Lenders, the Borrower will indemnify the Agent and each
Lender for any loss or cost incurred by it resulting therefrom, including,
without limitation, any loss or cost in liquidating or employing deposits
acquired to fund or maintain the Eurodollar Advance.
3.5. LENDER STATEMENTS; SURVIVAL OF INDEMNITY. To the extent reasonably
possible, each Lender shall designate an alternate Lending Installation with
respect to its Eurodollar Advances to reduce any liability of the Borrower to
such Lender under SECTIONS 2.18, 3.1 and 3.2 or to avoid the unavailability of a
Type of Advance under SECTION 3.3, so long as such designation is not
disadvantageous to such Lender. Each Lender shall deliver a written statement of
such Lender to the Borrower (with a copy to the Agent) as to the amount due, if
any, under SECTIONS 3.1, 3.2 or 3.4. Such written statement shall set forth in
reasonable detail the calculations upon which such Lender determined such amount
and shall be final, conclusive and binding on the Borrower in the absence of
manifest error. Determination of amounts payable under such Sections in
connection with a Eurodollar Advance shall be calculated as though each Lender
funded its Eurodollar Advances through the purchase of a deposit of the type and
maturity corresponding to the deposit used as a
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reference in determining the Eurodollar Rate applicable to such Loan, whether in
fact that is the case or not. Unless otherwise provided herein, the amount
specified in the written statement of any Lender shall be payable on demand
after receipt by the Borrower of the written statement. The obligations of the
Borrower under SECTIONS 3.1, 3.2 and 3.4 shall survive payment of the
Obligations and termination of this Agreement.
ARTICLE IV
CONDITIONS PRECEDENT
4.1. EFFECTIVENESS. The Lenders shall not be required to make the
initial Advance hereunder unless and until each Loan Party has furnished the
following to the Agent with sufficient copies for the Lenders and the other
conditions set forth below have been satisfied:
(a) CHARTER DOCUMENTS; GOOD STANDING CERTIFICATES. Copies of
the certificate of incorporation of each Loan Party, together with all
amendments thereto, both certified by the appropriate governmental
officer in its jurisdiction of incorporation, together with a good
standing certificate issued by the Secretary of State of the
jurisdiction of its incorporation and such other jurisdictions as shall
be reasonably requested by the Agent.
(b) BY-LAWS AND RESOLUTIONS. Copies, certified by the
Secretary or Assistant Secretary of the relevant Loan Party, of its
by-laws and of its Board of Directors' resolutions authorizing the
execution, delivery and performance of the Loan Documents to which it
is a party.
(c) SECRETARY'S CERTIFICATE. An incumbency certificate,
executed by the Secretary or Assistant Secretary of the relevant Loan
Party, which shall identify by name and title and bear the signature of
the officers of such Loan Party authorized to sign the Loan Documents
and, in the case of the Borrower, to make borrowings hereunder, upon
which certificate the Agent and the Lenders shall be entitled to rely
until informed of any change in writing by the Borrower.
(d) OFFICER'S CERTIFICATE. A certificate signed by an
Authorized Officer of the Borrower, in form and substance satisfactory
to the Agent, to the effect that on the Restatement Effective Date
(both before and after giving effect to the consummation of the
transactions contemplated hereby and the making of the Loans hereunder,
if any, being made on such date): (i) no Default or Unmatured Default
has occurred and is continuing; (ii) no injunction or temporary
restraining order which would prohibit the making of any Loans or other
litigation which could reasonably be expected to have a Material
Adverse Effect is pending or, to the best of such Person's knowledge,
threatened; (iii) all orders, consents, approvals, licenses,
authorizations, or validations of, or filings, recordings or
registrations with, or exemptions by, any Governmental Authority
required in connection with the execution, delivery and performance of
this Agreement have been or, prior to the time
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required, will have been, obtained, given, filed or taken and are or
will be in full force and effect (or the relevant Loan Party has
obtained effective judicial relief with respect to the application
thereof) and all applicable waiting periods have expired; (iv) each of
the representations and warranties set forth in ARTICLE V of this
Agreement is true and correct on and as of the Restatement Effective
Date; and (v) since December 31, 1997, no event or change has occurred
that has caused or evidences a Material Adverse Effect.
(e) LEGAL OPINION. A written opinion of Brobeck, Phleger &
Harrison LLP., counsel to each Loan Party, addressed to the Agent and
the Lenders in form and substance acceptable to the Agent and its
counsel.
(f) NOTES. Notes payable to the order of each of the Lenders
duly executed by the Borrower.
(g) LOAN DOCUMENTS. Executed originals of this Agreement and
each of the Loan Documents, which shall be in full force and effect,
together with all schedules, exhibits, certificates, instruments,
opinions, documents and financial statements required to be delivered
pursuant hereto and thereto.
(h) LETTERS OF DIRECTION. Written money transfer
instructions with respect to the initial Advances and to future
Advances in form and substance acceptable to the Agent and its counsel
addressed to the Agent and signed by an Authorized Officer, together
with such other related money transfer authorizations as the Agent may
have reasonably requested.
(i) SOLVENCY CERTIFICATE. A written solvency certificate
from the chief financial officer of the relevant Loan Party in form and
content satisfactory to the Agent with respect to the value, Solvency
and other factual information, or relating to, as the case may be, of
such Loan Party on a consolidated basis.
(j) REGULATORY MATTERS. Receipt of any required
regulatory approvals from any Governmental Authority.
(k) INVESTMENT POLICY GUIDELINES. Certified copy of the
investment policy guidelines adopted by the finance committee of the
board of directors of Parent and the board of directors of the
Borrower.
(l) PAYMENT OF FEES. The Borrower shall have paid all fees
due to First Chicago.
(m) FOLKSAMERICA LOAN AGREEMENT. A copy of the
Folksamerica Loan Agreement, including all amendments thereto.
(n) OTHER. Such other documents as the Agent, any Lender or
their counsel may have reasonably requested.
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4.2. EACH FUTURE ADVANCE. The Lenders shall not be required to
make any Advance unless on the applicable Borrowing Date:
(a) There exists no Default or Unmatured Default and none
would result from such Advance;
(b) The representations and warranties contained in ARTICLE
V are true and correct as of such Borrowing Date (except to the extent
such representations and warranties are expressly made as of a
specified date, in which event such representations and warranties
shall be true and correct as of such specified date);
(c) A Borrowing Notice shall have been properly submitted;
and
(d) All legal matters incident to the making of such Advance
shall be satisfactory to the Lenders and their counsel.
Each Borrowing Notice with respect to each such Advance shall
constitute a representation and warranty by each Loan Party that the conditions
contained in SECTIONS 4.2(a), (b) AND (c) have been satisfied. Any Lender may
require a duly completed compliance certificate in substantially the form of
EXHIBIT B hereto as a condition to making an Advance.
ARTICLE V
REPRESENTATIONS AND WARRANTIES
Each Loan Party represents and warrants to the Lenders that:
5.1. CORPORATE EXISTENCE AND STANDING. Each Loan Party and each of its
Subsidiaries is a corporation duly incorporated, validly existing and in good
standing under the laws of its respective jurisdiction of incorporation and is
duly qualified and in good standing as a foreign corporation and is duly
authorized to conduct its business in each jurisdiction in which its business is
conducted or proposed to be conducted, except where the failure to be so
qualified could not reasonably be expected to have a Material Adverse Effect.
5.2. AUTHORIZATION AND VALIDITY. Each Loan Party has all requisite
power and authority (corporate and otherwise) and legal right to execute and
deliver each of the Loan Documents to which it is a party and to perform its
obligations thereunder. The execution and delivery by each Loan Party of the
Loan Documents to which it is a party and the performance of its obligations
thereunder have been duly authorized by proper corporate proceedings and the
Loan Documents constitute legal, valid and binding obligations of such Loan
Party enforceable against it in accordance with their terms, except as
enforceability may be limited by bankruptcy, insolvency or similar laws
affecting the enforcement of creditors' rights generally.
5.3. COMPLIANCE WITH LAWS AND CONTRACTS. Each Loan Party and each of
its Subsidiaries have complied in all material respects with all applicable
statutes, rules, regulations, orders and
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restrictions of any domestic or foreign government or any instrumentality or
agency thereof, having jurisdiction over the conduct of their respective
businesses or the ownership of their respective properties, except where the
failure to so comply could not reasonably be expected to have a Material Adverse
Effect. Neither the execution and delivery by either Loan Party of the Loan
Documents to which it is party, the application of the proceeds of the Loans or
the consummation of the transactions contemplated in the Loan Documents, nor
compliance with the provisions of the Loan Documents will, or at the relevant
time did, (a) violate any law, rule, regulation (including Regulations T, U and
X), order, writ, judgment, injunction, decree or award binding on such Loan
Party or any of its Subsidiaries or the charter, articles or certificate of
incorporation or by-laws of such Loan Party or any of its Subsidiaries, (b)
violate the provisions of or require the approval or consent of any party to any
indenture, instrument or agreement to which such Loan Party or any of its
Subsidiaries is a party or is subject, or by which it, or its property, is
bound, or conflict with or constitute a default thereunder, or result in the
creation or imposition of any Lien (other than Liens permitted by, the Loan
Documents) in, of or on the property of such Loan Party or any of its
Subsidiaries pursuant to the terms of any such indenture, instrument or
agreement, or (c) require any consent of the stockholders of any Person, except
for approvals or consents which will be obtained on or before the initial
Advance and are disclosed on SCHEDULE 5.3, except for any violation of, or
failure to obtain an approval or consent required under, any such indenture,
instrument or agreement that could not reasonably be expected to have a Material
Adverse Effect.
5.4. GOVERNMENTAL CONSENTS. No order, consent, approval, qualification,
license, authorization, or validation of, or filing, recording or registration
with, or exemption by, or other action in respect of, any court, governmental or
public body or authority, or any subdivision thereof, any securities exchange or
other Person is or at the relevant time was required to authorize, or is or at
the relevant time was required in connection with the execution, delivery,
consummation or performance of, or the legality, validity, binding effect or
enforceability of, any of the Loan Documents or the application of the proceeds
of the Loans or any other transaction contemplated in the Loan Documents. No
Loan Party nor any of its Subsidiaries is in default under or in violation of
any foreign, federal, state or local law, rule, regulation, order, writ,
judgment, injunction, decree or award binding upon or applicable to such Loan
Party or such Subsidiary, in each case the consequences of which default or
violation could reasonably be expected to have a Material Adverse Effect.
5.5. FINANCIAL STATEMENTS. The Loan Parties have heretofore furnished
to each of the Lenders (a) the December 31, 1997 audited consolidated financial
statements of Parent and its Subsidiaries, (b) the unaudited consolidated
financial statements of Parent and its Subsidiaries as of March 31, 1998, (c)
the December 31, 1997 audited financial statements of Charter Group, Inc. and
its Subsidiaries, (d) the December 31, 1997 audited financial statements of
Valley Insurance Co. and its Subsidiaries, (e) the December 31, 1997 audited
consolidated financial statements of the Borrower and its Subsidiaries, (f) the
December 31, 1997 audited financial statements of SOMSC and its Subsidiaries ,
(g) the December 31, 1997 audited financial statements of Holdings and its
Subsidiaries, (h) the December 31, 1997 audited financial statements of
Folksamerica and its Subsidiaries, (i) the December 31, 1997 audited financial
statements of Main Street America Holdings, Inc. and its Subsidiaries, (j) the
March 31, 1998 unaudited balance sheets and income
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statements of Holdings, Parent, the Borrower , SOMSC, Folksamerica and Main
Street America Holdings, Inc., (k) the December 31, 1997 Annual Statement of
each Insurance Subsidiary of Parent and the Borrower and Folksamerica
Reinsurance Company and (l) the March 31, 1998 Quarterly Statement of each
Insurance Subsidiary of Parent and the Borrower and Folksamerica Reinsurance
Company (collectively, the "FINANCIAL STATEMENTS"). Each of the Financial
Statements (other than as described in CLAUSE (j)) was prepared in accordance
with Agreement Accounting Principles or SAP, as applicable, and fairly presents
the consolidated financial condition and operations of the Person which is the
subject of such Financial Statements at such dates and the consolidated results
of their operations for the respective periods then ended (except, in the case
of such unaudited statements, for normal year-end audit adjustments).
5.6. MATERIAL ADVERSE CHANGE. No material adverse change in the
business, Property, condition (financial or otherwise), performance, prospects
or results of operations of either Loan Party and its Subsidiaries has occurred
since December 31, 1997, except as specifically disclosed in the Financial
Statements.
5.7. TAXES. Neither Loan Party nor any of its Subsidiaries is required
to file United States federal, foreign, state or local tax returns. As of the
date hereof, the United States income tax returns of Holdings on a consolidated
basis have been audited by the Internal Revenue Service through its fiscal
period ending December 31, 1988, and all tax years beginning on or after January
1, 1989 are currently being audited or are subject to audit. No tax liens have
been filed and no claims are being asserted with respect to any taxes of
Holdings which could reasonably be expected to have a Material Adverse Effect.
The charges, accruals and reserves on the books of Holdings in respect of any
taxes or other governmental charges of Holdings are in accordance with Agreement
Accounting Principles.
5.8. LITIGATION AND CONTINGENT OBLIGATIONS. There is no litigation,
arbitration, proceeding, inquiry or governmental investigation pending or, to
the knowledge of any of their officers, threatened against or affecting either
Loan Party or any of its Subsidiaries or any of their respective properties
which could reasonably be expected to have a Material Adverse Effect or to
prevent, enjoin or unduly delay the making of the Loans under this Agreement. No
Loan Party nor any of its Subsidiaries has any material contingent obligations
incurred outside of the ordinary course of its business except as set forth on
SCHEDULE 5.16 or disclosed in the Financial Statements or in the financial
statements required to be delivered under SECTIONS 6.1(a) and (b) and as
permitted under this Agreement.
5.9. CAPITALIZATION. SCHEDULE 5.9 hereto contains (a) an accurate
description of each Loan Party's capitalization as of March 31, 1998 and (b) an
accurate list of all of the existing Subsidiaries of each Loan Party as of the
date of this Agreement, setting forth their respective jurisdictions of
incorporation and the percentage of their capital stock owned by such Loan Party
or its other Subsidiaries. All of the issued and outstanding shares of capital
stock of each Loan Party and of each Subsidiary of such Loan Party have been
duly authorized and validly issued, are fully paid and non-assessable, and are
free and clear of all Liens. No authorized but unissued or treasury shares of
capital stock of each Loan Party or any of its Subsidiaries are subject to any
option,
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warrant, right to call or commitment of any kind or character. Except as set
forth on SCHEDULE 5.9 or pursuant to management incentive plans implemented
after the date of this Agreement, no Loan Party nor any of its Subsidiaries has
any outstanding stock or securities convertible into or exchangeable for any
shares of its capital stock, or any right issued to any Person (either
preemptive or other) to subscribe for or to purchase, or any options for the
purchase of, or any agreements providing for the issuance (contingent or
otherwise) of, or any calls, commitments or claims of any character relating to
any of its capital stock or any stock or securities convertible into or
exchangeable for any of its capital stock other than as expressly set forth in
the certificate or articles of incorporation of such Loan Party or such
Subsidiary. No Loan Party nor any of its Subsidiaries is subject to any
obligation (contingent or otherwise) to repurchase or otherwise acquire or
retire any shares of its capital stock or any convertible securities, rights or
options of the type described in the preceding sentence except as otherwise set
forth on SCHEDULE 5.9 or pursuant to management incentive plans implemented
after the date of this Agreement.
5.10. ERISA. Except as disclosed on SCHEDULE 5.10, no Loan Party nor
any other member of the Controlled Group maintains any Single Employer Plans,
and no Single Employer Plan has any Unfunded Liability. No Loan Party nor any
other member of the Controlled Group maintains, or is obligated to contribute
to, any Multiemployer Plan or has incurred, or is reasonably expected to incur,
any withdrawal liability to any Multiemployer Plan. Each Plan complies in all
material respects with all applicable requirements of law and regulations other
than any such failure to comply which could not reasonably be expected to have a
Material Adverse Effect. No Loan Party nor any member of the Controlled Group
has, with respect to any Plan, failed to make any contribution or pay any amount
required under Section 412 of the Code or Section 302 of ERISA or the terms of
such Plan. There are no pending or, to the knowledge of either Loan Party,
threatened claims, actions, investigations or lawsuits against any Plan, any
fiduciary thereof, or either Loan Party or any member of the Controlled Group
with respect to a Plan. No Loan Party nor any member of the Controlled Group has
engaged in any prohibited transaction (as defined in Section 4975 of the Code or
Section 406 of ERISA) in connection with any Plan which would subject such
Person to any material liability. Within the last five (5) years no Loan Party
nor any member of the Controlled Group has engaged in a transaction which
resulted in a Single Employer Plan with an Unfunded Liability being transferred
out of the Controlled Group which could reasonably be expected to have a
Material Adverse Effect. No Termination Event has occurred or is reasonably
expected to occur with respect to any Plan which is subject to Title IV of ERISA
which could reasonably be expected to have a Material Adverse Effect.
5.11. DEFAULTS. No Default or Unmatured Default has occurred and
is continuing.
5.12. FEDERAL RESERVE REGULATIONS. No Loan Party nor any of its
Subsidiaries is engaged, directly or indirectly, principally, or as one of its
important activities, in the business of extending, or arranging for the
extension of, credit for the purpose of purchasing or carrying Margin Stock. No
part of the proceeds of any Loan will be used in a manner which would violate,
or result in a violation of, Regulation T, Regulation U or Regulation X. Neither
the making of any Advance hereunder nor the use of the proceeds thereof will
violate or be inconsistent with the provisions of Regulation T, Regulation U or
Regulation X.
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5.13. INVESTMENT COMPANY. No Loan Party nor any of its Subsidiaries is,
or after giving effect to any Advance will be, an "investment company" or a
company "controlled" by an "investment company" within the meaning of the
Investment Company Act of 1940, as amended.
5.14. CERTAIN FEES. No broker's or finder's fee or commission was, is
or will be payable by either Loan Party or any of its Subsidiaries with respect
to any of the transactions contemplated by this Agreement, except as described
in SECTION 9.5. Each Loan Party hereby agrees to indemnify the Agent and the
Lenders against and agrees that it will hold each of them harmless from any
claim, demand or liability for broker's or finder's fees or commissions alleged
to have been incurred by either Loan Party in connection with any of the
transactions contemplated by this Agreement and any expenses (including, without
limitation, attorneys' fees and time charges of attorneys for the Agent or any
Lender, which attorneys may be employees of the Agent or any Lender) arising in
connection with any such claim, demand or liability. No other similar fee or
commissions will be payable by either Loan Party or any of its Subsidiaries for
any other services rendered to such Loan Party or such Subsidiary ancillary to
any of the transactions contemplated by this Agreement.
5.15. SOLVENCY. As of the date hereof, after giving effect to the
consummation of the transactions contemplated by the Loan Documents and the
payment of all fees, costs and expenses payable by each Loan Party or any of its
Subsidiaries with respect to the transactions contemplated by the Loan Documents
and the application of the proceeds of Loans incurred by the Borrower on the
initial Borrowing Date, each Loan Party and each of its Subsidiaries is Solvent.
5.16. INDEBTEDNESS. Attached hereto as SCHEDULE 5.16 is a complete and
correct list of all Indebtedness of each Loan Party and each of its Subsidiaries
outstanding on the date of this Agreement (other than Indebtedness in a
principal amount not exceeding $100,000 for a single item of Indebtedness and
$1,000,000 in the aggregate for all such Indebtedness listed, it being
understood and agreed that any such Indebtedness shall be permitted to exist
pursuant to SECTION 6.11(b) notwithstanding the absence thereof on SCHEDULE
5.16), showing the aggregate principal amount which was outstanding on such date
after giving effect to the application of the proceeds of Loans incurred by the
Borrower on the initial Borrowing Date.
5.17. INSURANCE LICENSES. SCHEDULE 5.17 hereto lists all of the
jurisdictions in which any Insurance Subsidiary holds a License and is
authorized to and does transact insurance business as of the date of this
Agreement. No such License, the loss of which could reasonably be expected to
have a Material Adverse Effect, is the subject of a proceeding for suspension or
revocation. To each Loan Party's knowledge, there is no sustainable basis for
such suspension or revocation, and no such suspension or revocation has been
threatened by any Governmental Authority.
5.18. MATERIAL AGREEMENTS. Except as set forth in SCHEDULE 5.18 and
except for agreements or arrangements with regulatory agencies with regard to
Insurance Subsidiaries, no Loan Party nor any of its Subsidiaries is a party to
any agreement or instrument or subject to any charter or other corporate
restriction which could reasonably be expected to have a Material Adverse Effect
or which restricts or imposes conditions upon the ability of any Subsidiary of a
Loan Party (other
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than an Unrestricted Subsidiary) to (a) pay dividends or make other
distributions on its capital stock (b) make loans or advances to either Loan
Party, (c) repay loans or advances from either Loan Party or (d) grant Liens to
the Agent to secure the Obligations. No Loan Party nor any of its Subsidiaries
is in default in the performance, observance or fulfillment of any of the
obligations, covenants or conditions contained in any agreement to which it is a
party, which default could reasonably be expected to have a Material Adverse
Effect.
5.19. ENVIRONMENTAL LAWS. There are no claims, investigations,
litigation, administrative proceedings, notices, requests for information (each
a "PROCEEDING"), whether pending or threatened, or judgments or orders asserting
violations of applicable federal, state and local environmental, health and
safety statutes, regulations, ordinances, codes, rules, orders, decrees,
directives and standards ("ENVIRONMENTAL LAWS") or relating to any toxic or
hazardous waste, substance or chemical or any pollutant, contaminant, chemical
or other substance defined or regulated pursuant to any Environmental Law,
including, without limitation, asbestos, petroleum, crude oil or any fraction
thereof ("HAZARDOUS MATERIALS") asserted against either Loan Party or any of its
Subsidiaries, other than in connection with an insurance policy issued in the
ordinary course of business to any Person (other than Holdings or any Subsidiary
of Holdings), which, in any case, could reasonably be expected to have a
Material Adverse Effect. As of the date hereof, Parent and its Subsidiaries do
not have liabilities exceeding $100,000 in the aggregate for all of them with
respect to compliance with applicable Environmental Laws or related to the
generation, treatment, storage, disposal, release, investigation or cleanup of
Hazardous Materials, and no facts or circumstances exist which could give rise
to such liabilities with respect to compliance with applicable Environmental
Laws and the generation, treatment, storage, disposal, release, investigation or
cleanup of Hazardous Materials.
5.20. INSURANCE. Each Loan Party and each of its Subsidiaries maintain
with financially sound and reputable insurance companies insurance on their
Property in such amounts and covering such risks as is consistent with sound
business practice.
5.21. DISCLOSURE. No information, exhibit or report furnished by either
Loan Party or any of its Subsidiaries to the Agent or to any Lender in
connection with the negotiation of, or compliance with, the Loan Documents
contained any material misstatement of fact or omitted to state a material fact
or any fact necessary to make the statements contained therein not materially
misleading. There is no fact known to either Loan Party (other than matters of a
general economic or political nature) that has had or could reasonably be
expected to have a Material Adverse Effect and that has not been disclosed
herein or in such other documents, certificates and statements furnished to the
Lenders for use in connection with the transactions contemplated by this
Agreement.
5.22. YEAR 2000. Each Loan Party has made a reasonable assessment of
the Year 2000 Issues and has a realistic and achievable program for remediating
the Year 2000 Issues on a timely basis (the "Year 2000 Program"). Based on such
assessment and on the Year 2000 Program each Loan Party does not reasonably
anticipate that Year 2000 Issues will have a Material Adverse Effect.
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ARTICLE VI
COVENANTS
During the term of this Agreement, unless the Required Lenders shall
otherwise consent in writing:
6.1. FINANCIAL REPORTING. Parent will maintain, for itself and each of
its Subsidiaries, a system of accounting established and administered in
accordance with generally accepted accounting principles, consistently applied,
and furnish to the Lenders:
(a) As soon as practicable and in any event within 100 days
after the close of each of its Fiscal Years, an unqualified audit
report certified by independent certified public accountants,
acceptable to the Lenders, prepared in accordance with Agreement
Accounting Principles on a consolidated and consolidating basis
(consolidating statements need not be certified by such accountants)
for itself and its Subsidiaries, including balance sheets as of the end
of such period and related statements of income, retained earnings and
cash flows accompanied by a certificate of said accountants that, in
the course of the examination necessary for their certification of the
foregoing, they have obtained no knowledge of any Default or Unmatured
Default, or if, in the opinion of such accountants, any Default or
Unmatured Default shall exist, stating the nature and status thereof.
(b) As soon as practicable and in any event within sixty
(60) days after the close of each of the first three Fiscal Quarters of
each of its Fiscal Years, for itself and its Subsidiaries, consolidated
and consolidating unaudited balance sheets as at the close of each
such period and consolidated and consolidating statements of income,
retained earnings and cash flows for the period from the beginning of
such Fiscal Year to the end of such quarter, all certified by its chief
financial officer.
(c) (i) Upon the earlier of (A) fifteen (15) days after the
regulatory filing date or (B) seventy-five (75) days after the close of
each fiscal year of each Insurance Subsidiary of the Parent, copies of
the unaudited Annual Statement of such Insurance Subsidiary, certified
by the chief financial officer or the treasurer of such Insurance
Subsidiary, all such statements to be prepared in accordance with SAP
and (ii) no later than each June 15, copies of financial statements
prepared in accordance with SAP, or generally accepted accounting
principles with a reconciliation to SAP, and certified by independent
certified public accountants of recognized national standing.
(d) Upon the earlier of (i) ten (10) days after the
regulatory filing date or (ii) sixty (60) days after the close of each
of the first three (3) fiscal quarters of each fiscal year of each
Insurance Subsidiary of the Parent, copies of the unaudited Quarterly
Statement of each of the Insurance Subsidiaries of the Parent,
certified by the chief financial officer or the treasurer of such
Insurance Subsidiary, all such statements to be prepared in accordance
with SAP.
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(e) Promptly and in any event within ten (10) days after (i)
learning thereof, notification of any changes after the date of this
Agreement in the rating given by A.M. Best & Co. in respect of any
Insurance Subsidiary of the Parent and (ii) receipt thereof, copies of
any ratings analysis by A.M. Best & Co. relating to any Insurance
Subsidiary of the Parent.
(f) Copies of any outside actuarial reports prepared with
respect to any valuation or appraisal of any Insurance Subsidiary of
the Parent, promptly after the receipt thereof.
(g) Together with the financial statements required by
CLAUSES (a) and (b) above, a compliance certificate in substantially
the form of EXHIBIT B hereto signed by the Borrower's chief financial
officer showing the calculations necessary to determine compliance with
this Agreement and stating that no Default or Unmatured Default exists,
or if any Default or Unmatured Default exists, stating the nature and
status thereof.
(h) Promptly after the same becomes available after the
close of each Fiscal Year, a statement of the Unfunded Liabilities of
each Single Employer Plan, certified as correct by an actuary enrolled
under ERISA.
(i) As soon as possible and in any event within ten (10)
days after such Loan Party knows that any Termination Event has
occurred with respect to any Plan, a statement, signed by the chief
financial officer of such Loan Party, describing said Termination Event
and the action which such Loan Party proposes to take with respect
thereto.
(j) As soon as possible and in any event within ten (10)
days after receipt by such Loan Party, a copy of (i) any notice, claim,
complaint or order to the effect that such Loan Party or any of its
Subsidiaries is or may be liable to any Person as a result of the
release by such Loan Party or any of its Subsidiaries of any Hazardous
Materials into the environment or requiring that action be taken to
respond to or clean up a Release of Hazardous Materials into the
environment, and (ii) any notice, complaint or citation alleging any
violation of any Environmental Law or Environmental Permit by such Loan
Party or any of its Subsidiaries. Within ten (10) days of such Loan
Party or any of its Subsidiaries having knowledge of the enactment or
promulgation of any Environmental Law which could reasonably be
expected to have a Material Adverse Effect, such Loan Party shall
provide the Agent with written notice thereof.
(k) Promptly upon the furnishing thereof to the shareholders
of such Loan Party, copies of all financial statements, reports and
proxy statements so furnished.
(l) Promptly upon the filing thereof, copies of all
registration statements and annual, quarterly, monthly or other regular
reports which such Loan Party or any of its Subsidiaries files with the
Securities and Exchange Commission, the National Association of
Securities Dealers, any securities exchange, the NAIC or any insurance
commission
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or department or analogous Governmental Authority (including any filing
made by such Loan Party or any of its Subsidiaries pursuant to any
insurance holding company act or related rules or regulations), but
excluding routine or non-material filings with the NAIC, any insurance
commissioner or department or analogous Governmental Authority.
(m) Promptly and in any event within ten (10) days after
learning thereof, notification of (i) any material tax assessment,
demand, notice of proposed deficiency or notice of deficiency received
by Holdings or any other Consolidated Person or (ii) the filing of any
tax Lien or commencement of any judicial proceeding by or against any
such Consolidated Person, if any such assessment, demand, notice, Lien
or judicial proceeding relates to tax liabilities in excess of ten
percent (10%) of the net worth (determined according to generally
accepted accounting standards and without reduction for any reserve for
such liabilities) of such Loan Party and its Subsidiaries taken as a
whole.
(n) Promptly after available, any management letter prepared
by the accountants conducting the audit of the financial statements
delivered pursuant to Section 6.1(a).
(o) Promptly after reviewed by the relevant board of
directors, a copy of the Borrower's and Parent's investment policy
compliance report.
(p) Such other information (including, without limitation,
the annual Best's Advance Report Service report prepared with respect
to each Insurance Subsidiary of the Parent rated by A.M. Best & Co. and
non-financial information) as the Agent or any Lender may from time to
time reasonably request.
6.2. USE OF PROCEEDS. The Borrower will, and will cause each of its
Subsidiaries to, use the proceeds of the Advances to meet the working capital
and general corporate needs of the Borrower and its Subsidiaries, including, but
not limited to, the making of any Investments permitted by SECTION 6.13. The
Borrower will not, nor will it permit any of its Subsidiaries to, use any of the
proceeds of the Advances in any manner which would violate, or result in the
violation of, Regulation T, Regulation U or Regulation X or to finance the
Purchase of any Person which has not been approved and recommended by the board
of directors (or functional equivalent thereof) of such Person.
6.3. NOTICE OF DEFAULT. The Borrower will give prompt notice in writing
to the Lenders of the occurrence of (a) any Default or Unmatured Default, (b) of
any other event or development, financial or other, relating specifically to
either Loan Party or any of their Subsidiaries (and not of a general economic or
political nature) which could reasonably be expected to have a Material Adverse
Effect, (c) receipt by either Loan Party or any of their Subsidiaries of any
notice from any Governmental Authority of the expiration without renewal,
revocation or suspension of, or the institution of any proceedings to revoke or
suspend, any License now or hereafter held by any Insurance Subsidiary of the
Parent which is required to conduct insurance business in compliance with all
applicable laws and regulations and the expiration, revocation or suspension of
which could reasonably be expected to have a Material Adverse Effect, (d)
receipt by either Loan Party or any of their Subsidiaries of any notice from any
Governmental Authority of the institution of any disciplinary proceedings
against or in respect of any Insurance Subsidiary of the Parent, or the issuance
of any order, the taking of any action or any request for an extraordinary audit
for cause by
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any Governmental Authority which, if adversely determined, could reasonably be
expected to have a Material Adverse Effect, (e) any material judicial or
administrative order of which either Loan Party or any of their Subsidiaries are
aware limiting or controlling the insurance business of any Insurance Subsidiary
(and not the insurance industry generally) which has been issued or adopted or
(f) the commencement of any litigation of which either Loan Party or any of
their Subsidiaries are aware which could reasonably be expected to create a
Material Adverse Effect.
6.4. CONDUCT OF BUSINESS. Each Loan Party will, and will cause each of
its Subsidiaries to, (a) carry on and conduct its business in substantially the
same manner as it is presently conducted, (b) not conduct any significant
business except for financial services, (c) do all things necessary to remain
duly incorporated, validly existing and in good standing as a domestic
corporation in its jurisdiction of incorporation and maintain all requisite
authority to conduct its business in each jurisdiction in which its business is
conducted except where the failure to maintain such authority could not
reasonably be expected to have a Material Adverse Effect and (d) do all things
necessary to renew, extend and continue in effect all Licenses which may at any
time and from time to time be necessary for any Insurance Subsidiary of the
Parent to operate its insurance business in compliance with all applicable laws
and regulations except for any License the loss of which could not reasonably be
expected to have a Material Adverse Effect; PROVIDED, that any Insurance
Subsidiary of the Parent may withdraw from one or more states (other than its
state of domicile) as an admitted insurer if such withdrawal is determined by
such Loan Party's Board of Directors to be in the best interest of such Loan
Party and could not reasonably be expected to have a Material Adverse Effect.
The Parent shall cause Folksamerica to remain a Wholly-Owned Subsidiary of the
Parent (but only after it becomes a Wholly-Owned Subsidiary of the Parent) until
the Borrower shall have repaid all outstanding Advances and other Obligations
and the Lenders' Commitments hereunder have terminated.
6.5. TAXES. At any time on and after the date Parent or any of its
Subsidiaries are required to do so, each Loan Party will, and will cause each of
its Subsidiaries to, timely file complete and correct United States federal and
applicable foreign, state and local tax returns required by applicable law and
pay when due all taxes, assessments and governmental charges and levies upon it
or its income, profits or Property, except those which are being contested in
good faith by appropriate proceedings and with respect to which adequate
reserves have been set aside in accordance with generally accepted accounting
principles or SAP, as applicable.
6.6. INSURANCE. Each Loan Party will, and will cause each of its
Subsidiaries to, maintain with financially sound and reputable insurance
companies insurance on all their Property in such amounts and covering such
risks as is consistent with sound business practice, and the Borrower will
furnish to the Agent and any Lender upon request full information as to the
insurance carried.
6.7. COMPLIANCE WITH LAWS. Each Loan Party will, and will cause each of
its Subsidiaries to, comply with all laws, rules, regulations, orders, writs,
judgments, injunctions, decrees or awards to which it may be subject, the
failure to comply with which could reasonably be expected to have a Material
Adverse Effect.
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6.8. MAINTENANCE OF PROPERTIES. Each Loan Party will, and will cause
each of its Subsidiaries to, do all things necessary to maintain, preserve,
protect and keep its Property in good repair, working order and condition, and
make all necessary and proper repairs, renewals and replacements so that its
business carried on in connection therewith may be properly conducted at all
times.
6.9. INSPECTION. Each Loan Party will, and will cause each of its
Subsidiaries to, at reasonable times during normal business hours and upon
reasonable notice, permit the Agent and the Lenders, by their respective
representatives and agents, to inspect any of the Property, corporate books and
financial records of such Loan Party and such Subsidiary, to examine and make
copies of the books of accounts and other financial records of such Loan Party
and such Subsidiary, and to discuss the affairs, finances and accounts of such
Loan Party and such Subsidiary with, and to be advised as to the same by, their
respective officers at such reasonable times and intervals as the Lenders may
designate. Each Loan Party will keep or cause to be kept, and cause each of its
Subsidiaries to keep or cause to be kept, appropriate records and books of
account in which complete entries are to be made reflecting its and their
business and financial transactions, such entries to be made in accordance with
Agreement Accounting Principles or SAP, as applicable.
6.10. DIVIDENDS. The Borrower may declare and pay dividends or make
distributions to Parent. Parent will not declare or pay any dividends or make
any distributions on its capital stock (other than dividends payable in its own
capital stock) or redeem, repurchase or otherwise acquire or retire any of its
capital stock or any options or other rights in respect thereof at any time
outstanding, except that so long as no Default or Unmatured Default exists
before or after giving effect to the declaration or payment of such dividends or
distributions or repurchase or redemption of such stock or other transaction,
(a) Parent may declare and pay dividends, and make distributions, on its common
stock and repurchase and redeem and otherwise acquire or retire its common stock
and any options or other rights thereof in an aggregate amount not to exceed,
when aggregated with the principal amount of loans (exclusive of loans described
in SECTION 6.13(e)(II)) made during such Fiscal Year from Parent or its
Subsidiaries to Holdings, (i) during Parent's 1998 Fiscal Year, 2% of Adjusted
Net Worth as of December 31, 1997, and (ii) during any Fiscal Year thereafter,
3% of Adjusted Net Worth as of the end of the Fiscal Year preceding the Fiscal
Year during which such transaction is consummated and (b) in addition to any
dividends, distributions, repurchases, redemptions, acquisitions or retirements
which may be declared, paid or made pursuant to the preceding CLAUSE (a), Parent
may declare and pay dividends, and make distributions, on its common stock and
repurchase and redeem and otherwise acquire or retire its common stock, and any
options or rights thereof, (x) in an amount equal to (1) the net proceeds
received by Parent from dividends, sales, transfers or other dispositions of its
equity interests in SOMSC or FAE's equity interest in San Juan Basin Trust,
MINUS (2) the amount of loans made pursuant to SECTION 6.13(e)(II), PROVIDED,
that such dividend is paid within one hundred eighty (180) days of receipt of
such net proceeds, (y) its equity interests in SOMSC and (z) in an amount equal
to that immediately utilized by Holdings to repay all or a portion of a certain
$40,000,000 loan from FAE to Holdings.
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6.11. INDEBTEDNESS. No Loan Party will, nor will it permit any of its
Subsidiaries (other than an Unrestricted Subsidiary) to, create, incur or suffer
to exist any Indebtedness, except:
(a) the Loans;
(b) Indebtedness existing on the date hereof and described
in SCHEDULE 5.16 hereto and any renewals, extensions, refundings or
refinancings of such Indebtedness; PROVIDED that the amount thereof is
not increased and the maturity or scheduled amortization of principal
thereof is not shortened (unless to a maturity or scheduled
amortization occurring after the Facility Termination Date);
(c) Indebtedness owing by (x) either Loan Party to any
Wholly-Owned Subsidiary of a Loan Party and (y) any Wholly-Owned
Subsidiary of a Loan Party to a Wholly-Owned Subsidiary of a Loan Party
or either Loan Party;
(d) Indebtedness permitted under the White Mountains
Credit Agreement;
(e) Indebtedness of Folksamerica or its Subsidiaries in
existence at the time of the Folksamerica Transaction; PROVIDED,
HOWEVER, such Indebtedness of Folksamerica or its Subsidiaries may not
be renewed, extended, refunded or refinanced by Folksamerica without
the prior written consent of the Required Lenders;
(f) Indebtedness of the Parent, the proceeds of which are
used directly or indirectly to refund or refinance the Indebtedness
described in SECTION 6.11 (e); PROVIDED, HOWEVER, that the amount
thereof is not increased, the maturity or scheduled amortization of
principal thereof is not set to a maturity or weighted average maturity
occurring before the Facility Termination Date hereunder and the terms
of the proposed Indebtedness are not otherwise, in the reasonable
judgment of the Required Lenders, disadvantageous (relative to the
terms of the Indebtedness refunded or refinanced) to the interests of
the Lenders hereunder;
(g) Indebtedness secured by Liens permitted pursuant to
SECTION 6.15(f);
(h) Contingent Obligations permitted under SECTION 6.14;
and
(i) other Indebtedness of either Loan Party or any of their
Subsidiaries to the extent not otherwise included in subparagraphs (a)
through (h) of this SECTION 6.11 or in SECTION 6.14, in an aggregate
amount outstanding at any one time not to exceed $5,000,000.
6.12. MERGER. No Loan Party will, nor will it permit any Significant
Subsidiary to, merge or consolidate with or into any other Person, except that:
(a) a Wholly-Owned Subsidiary (other than any Unrestricted
Subsidiary) may merge with (i) either Loan Party, (ii) any Wholly-Owned
Subsidiary of either Loan Party or
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(iii) any other Person so long as no Default or Unmatured Default shall
have occurred or be continuing before and after giving effect to such
merger and the surviving entity of such merger is either Loan Party or
a Wholly-Owned Subsidiary of either Loan Party;
(b) a Significant Subsidiary (other than the Borrower) may
merge or consolidate with any Person so long as neither Parent, the
Borrower, nor any of their Subsidiaries shall hold any capital stock of
such Significant Subsidiary after giving effect to such merger or
consolidation; and
(c) either Loan Party may merge into any Person so long as
(i) such Loan Party is the surviving entity of such merger, (ii) no
Default or Unmatured Default shall have occurred or be continuing
before and after giving effect to such merger and (iii) the covenants
contained in SECTION 6.20 shall be complied with on a PRO FORMA basis
on the date of, and after giving effect to, such merger.
6.13. INVESTMENTS AND PURCHASES. No Loan Party will, and will not
permit any of its Subsidiaries (other than an Unrestricted Subsidiary) to, make
or suffer to exist any Investments (including, without limitation, loans and
advances to, and other Investments in, Holdings or Subsidiaries of either Loan
Party), or commitments therefor, or create any Subsidiary or become or remain a
partner in any partnership or joint venture, or make any Purchases, except:
(a) Investments or commitments therefor (such commitments
being set forth on SCHEDULE 6.13) in existence on the date hereof
(including a certain $40,000,000 loan from FAE to Holdings);
(b) loans and advances to employees in the ordinary course
of business and consistent with past practices;
(c) Investments made in Subsidiaries (other than any
Unrestricted Subsidiary) and Main Street America Holdings, Inc.;
(d) Purchases of or Investments in businesses or entities
engaged in the insurance and/or insurance services business or
businesses reasonably incident thereto (including holding companies,
the Subsidiaries of which on a consolidated basis are primarily engaged
in such businesses) which do not constitute hostile takeovers
(including the creation of Subsidiaries in connection therewith) so
long as no Default or Unmatured Default has occurred and is continuing
or would occur after giving effect to such Purchase or Investment;
(e) Investments by Parent made on or before May 13, 1999
directly in SOMSC in an amount equal to the FSA Amount so long as at
the time of such Investment no Default or Unmatured Default has
occurred and is continuing or would occur after giving effect to such
Investment; PROVIDED, however, that any Investments pursuant to this
CLAUSE (e) are made from net proceeds traceable to dividends, sales,
transfers or other distributions of equity interests in SOMSC after the
date hereof;
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(f) loans made by Parent or its Subsidiaries to Holdings,
(i) so long as at all times, after giving effect to the aggregate
outstanding principal amount of such loans, Parent would be permitted
to pay at least $1.00 in incremental dividends pursuant to SECTION
6.10(a) or (ii) that are made out or the net proceeds described in
SECTION 6.10(b)(x) in lieu of utilizing such net proceeds to pay a
dividend;
(g) other Investments (other than any direct or indirect
Investments in Holdings), so long as any such Investment is materially
consistent with such Loan Party's investment policy guidelines as
approved from time to time by the finance committee of the board of
directors of Parent and the board of directors of the Borrower (a copy
of the current version of such guidelines having been delivered to each
Lender); provided that any change from the guidelines previously
submitted to the Lenders shall not materially adversely affect the
Lenders; and
(h) other Investments (other than any direct or indirect
Investments in Holdings) by Folksamerica (but only after it becomes a
Wholly-Owned Subsidiary of Parent) at any time prior to March 31, 1999,
so long as any such Investment is permitted under the insurance laws of
the State of New York and is materially consistent with Folksamerica's
investment policy guidelines as approved from time to time by the board
of directors of Folksamerica (a copy of the current version of such
guidelines having been delivered to each Lender); provided that any
change from the guidelines previously submitted to the Lenders shall
not materially adversely affect the Lenders.
6.14. CONTINGENT OBLIGATIONS. No Loan Party will, nor will it permit
any of its Subsidiaries (other than an Unrestricted Subsidiary) to, make or
suffer to exist any Contingent Obligation (including, without limitation, any
Contingent Obligation with respect to the obligations of a Subsidiary of either
Loan Party), except (a) the issuance of financial guarantees in the ordinary
course of business, (b) by endorsement of instruments for deposit or collection
in the ordinary course of business, (c) for insurance policies issued in the
ordinary course of business, (d) the issuance of intercompany guarantees so long
as the primary obligation is permitted under this Agreement and (e) issuance of
financial guarantees to the holders of seller notes issued by ML (Bermuda)
Holdings Ltd. or any of its Subsidiaries, provided that the aggregate principal
amount of all such financial guarantees shall not at any time exceed 6,500,000
British Pounds.
6.15. LIENS. No Loan Party will, nor will it permit any of its
Subsidiaries (other than an Unrestricted Subsidiary) to, create, incur, or
suffer to exist any Lien in, of or on the Property (other than Margin Stock) of
such Loan Party or any of its Subsidiaries (other than an Unrestricted
Subsidiary), except:
(a) Liens for taxes, assessments or governmental charges or
levies on its Property if the same shall not at the time be delinquent
or thereafter can be paid without penalty, or are being contested in
good faith and by appropriate proceedings and for which adequate
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reserves in accordance with generally accepted principles of accounting
shall have been set aside on its books;
(b) Liens imposed by law, such as carriers', warehousemen's
and mechanics' liens and other similar liens arising in the ordinary
course of business which secure the payment of obligations not more
than sixty (60) days past due or which are being contested in good
faith by appropriate proceedings and for which adequate reserves shall
have been set aside on its books;
(c) Liens arising out of pledges or deposits under worker's
compensation laws, unemployment insurance, old age pensions, or other
social security or retirement benefits, or similar legislation;
(d) Utility easements, building restrictions and such other
encumbrances or charges against real property as are of a nature
generally existing with respect to properties of a similar character
and which do not in any material way affect the marketability of the
same or interfere with the use thereof in the business of such Loan
Party or any of its Subsidiaries;
(e) Liens existing on the date hereof and described in
SCHEDULE 6.15 hereto;
(f) Liens in, of or on Property acquired after the date of
this Agreement (by purchase, construction or otherwise) by either Loan
Party or any of their Subsidiaries, each of which Liens either (1)
existed on such Property before the time of its acquisition and was not
created in anticipation thereof, or (2) was created solely for the
purpose of securing Indebtedness representing, or incurred to finance,
refinance or refund, the cost (including the cost of construction) of
such Property; PROVIDED that no such Lien shall extend to or cover any
Property of such Loan Party or such Subsidiary other than the Property
so acquired and improvements thereon; and PROVIDED, FURTHER, that the
principal amount of Indebtedness secured by any such Lien shall at the
time the Lien is incurred not exceed 75% of the fair market value (as
determined in good faith by a financial officer of such Loan Party and,
in the case of any Property having a fair market value in excess of
$500,000, certified by such officer to the Agent, with a copy for each
Lender) of the Property at the time it was so acquired;
(g) Liens on assets securing letters of credit issued on
behalf of Insurance Subsidiaries in the ordinary course of business;
and
(h) Liens not otherwise permitted by the foregoing clauses
(a) through (g) securing any Indebtedness of either Loan Party,
PROVIDED that the aggregate principal amount of Indebtedness secured by
Liens permitted by this clause (h) shall not exceed $3,000,000 at any
time.
6.16. AFFILIATES. No Loan Party will, and will not permit any of its
Subsidiaries to, enter into any material transaction (including, without
limitation, the purchase or sale of any Property or service) with, or make any
payment or transfer to, any Affiliates (other than a Wholly-Owned Subsidiary of
either Loan Party), except in the ordinary course of business and pursuant to
the
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reasonable requirements of such Loan Party's or such Subsidiary's business and
upon fair and reasonable terms no less favorable to such Loan Party or such
Subsidiary than such Loan Party or such Subsidiary would obtain in a comparable
arms-length transactions, except that any Unrestricted Subsidiary may make loans
to Holdings.
6.17. ENVIRONMENTAL MATTERS. Each Loan Party shall and shall cause each
of its Subsidiaries to (a) at all times comply in all material respects with all
applicable Environmental Laws and (b) promptly take any and all necessary
remedial actions in response to the presence, storage, use, disposal,
transportation or Release of any Hazardous Materials on, under or about any real
property owned, leased or operated by such Loan Party or any of its
Subsidiaries.
6.18. CHANGE IN CORPORATE STRUCTURE; FISCAL YEAR. No Loan Party shall,
nor shall it permit any of its Subsidiaries to, (a) permit any amendment or
modification to be made to its certificate or articles of incorporation or
by-laws which is materially adverse to the interests of the Lenders or (b)
change its Fiscal Year to end on any date other than December 31 of each year.
6.19. INCONSISTENT AGREEMENTS. No Loan Party shall, nor shall it permit
any of its Subsidiaries (other than an Unrestricted Subsidiary) to, enter into
any indenture, agreement, instrument or other arrangement which by its terms (a)
other than pursuant to the White Mountains Credit Agreement or pursuant to
agreements or arrangements with regulatory agencies with regard to Insurance
Subsidiaries, directly or indirectly contractually prohibits or restrains, or
has the effect of contractually prohibiting or restraining, or contractually
imposes materially adverse conditions upon, the incurrence of the Obligations,
the granting of Liens to secure the Obligations, the amending of the Loan
Documents or the ability of any Subsidiary to (i) pay dividends or make other
distributions on its capital stock, (ii) make loans or advances to such Loan
Party or (iii) repay loans or advances from such Loan Party or (b) contains any
provision which would be violated or breached by the making of Advances or by
the performance by such Loan Party or any of its Subsidiaries of any of its
obligations under any Loan Document.
6.20. FINANCIAL COVENANTS. Parent shall (or, in the case of Section
6.20.4, shall cause its Insurance Subsidiaries to):
6.20.1 MINIMUM ADJUSTED NET WORTH. At all times after the
date hereof, maintain a minimum Adjusted Net Worth at least equal to
the sum of, without duplication, (a) $465,000,000, PLUS (b) an amount
equal to 85% of the cash and non-cash proceeds of any equity securities
issued or capital contributions received by Parent after June 30, 1998,
PLUS (c) an amount equal to 50% of Parent's positive consolidated net
income (excluding from such calculation (i) SOMSC and its Subsidiaries,
(ii) any net realized gain from the sale of Parent's equity interests
in White River Corp. or Travelers Property Casualty Corp. and (iii) any
net income directly arising out of the consummation of the Folksamerica
Transaction) after June 30, 1998, PLUS (d) an amount equal to 85% of
the proceeds of any sale of the Parent's equity interest in SOMSC to
the extent such proceeds are not paid out by Parent as dividends within
one hundred eighty (180) days after receipt thereof.
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6.20.2. LEVERAGE RATIO. At all times after the date hereof,
maintain a Leverage Ratio of (a) not greater than 45% through and
including December 31, 2000 and (b) not greater than 30% at all times
thereafter.
6.20.3. FIXED CHARGES COVERAGE RATIO. As of the end of each
Fiscal Quarter maintain a Fixed Charges Coverage Ratio of not less than
1.5:1.0.
6.20.4. STATUTORY SURPLUS. At all times, maintain Statutory
Surplus for each First-Tier Insurance Subsidiary in an amount not less
than an amount equal to (a) 85% of the Statutory Surplus of each such
First-Tier Insurance Subsidiary, in existence on the date hereof, as of
March 31, 1998 (or, in the case of any First-Tier Insurance Subsidiary
acquired after the date hereof, 85% of the Statutory Surplus of each
such acquired First-Tier Insurance Subsidiary as of the most recently
ended Fiscal Quarter preceding such acquisition), PLUS (b) 85% of all
subsequent capital contributions to each such First-tier Insurance
Subsidiary, MINUS (c) in the event such First-Tier Insurance Subsidiary
dividends or otherwise distributes to its parent all the capital stock
of a Wholly-Owned Insurance Subsidiary, 100% of the book value
(calculated in accordance with SAP) of such Wholly-Owned Insurance
Subsidiary at the time of such dividend or distribution.
6.21. TAX CONSOLIDATION. No Loan Party will and will not permit any of
its Subsidiaries to (a) file or consent to the filing of any consolidated,
combined or unitary income tax return with any Person other than Holdings and
its Subsidiaries or (b) amend, terminate or fail to enforce any existing tax
sharing agreement or similar arrangement if such action would cause a Material
Adverse Effect.
6.22. ERISA COMPLIANCE.
With respect to any Plan, no Loan Party nor any of its
Subsidiaries shall:
(a) engage in any "prohibited transaction" (as such term is
defined in Section 406 of ERISA or Section 4975 of the Code) for which
a civil penalty pursuant to Section 502(i) of ERISA or a tax pursuant
to Section 4975 of the Code in excess of $100,000 could be imposed;
(b) incur any "accumulated funding deficiency" (as such term
is defined in Section 302 of ERISA) in excess of $100,000, whether or
not waived, or permit any Unfunded Liability to exceed $100,000;
(c) permit the occurrence of any Termination Event which could
result in a liability to either Loan Party or any other member of the
Controlled Group in excess of $100,000;
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(d) be an "employer" (as such term is defined in Section 3(5)
of ERISA) required to contribute to any Multiemployer Plan or a
"substantial employer" (as such term in defined in Section 4001(a)(2)
of ERISA) required to contribute to any Multiple Employer Plan; or
(e) permit the establishment or amendment of any Plan or fail
to comply with the applicable provisions of ERISA and the Code with
respect to any Plan which could result in liability to either Loan
Party or any other member of the Controlled Group which, individually
or in the aggregate, could reasonably be expected to have a Material
Adverse Effect.
6.23. YEAR 2000. Each Loan Party will take and will cause each of its
Subsidiaries to take all such actions as are reasonably necessary to
successfully implement its Year 2000 Program and to assure that Year 2000 Issues
will not have a Material Adverse Effect. At the request of the Agent or any
Lender, each Loan Party will provide a description of its Year 2000 Program,
together with any updates or progress reports with respect thereto.
ARTICLE VII
DEFAULTS
The occurrence of any one or more of the following events shall
constitute a Default:
7.1. Any representation or warranty made or deemed made by or on behalf
of either Loan Party or any of its Subsidiaries to the Lenders or the Agent
under or in connection with this Agreement, any other Loan Document, any Loan,
or any certificate or information delivered in connection with this Agreement or
any other Loan Document shall be false in any material respect on the date as of
which made.
7.2. Nonpayment of (a) any principal of any Note when due, or (b) any
interest upon any Note or any commitment fee or other fee or obligations under
any of the Loan Documents within five (5) days after the same becomes due.
7.3. The breach by either Loan Party of any of the terms or provisions
of SECTION 6.2, SECTION 6.3(A) or SECTIONS 6.10 through 6.16 or SECTIONS 6.18
through 6.22.
7.4. The breach by either Loan Party (other than a breach which
constitutes a Default under SECTIONS 7.1, 7.2 or 7.3) of any of the terms or
provisions of this Agreement which is not remedied within twenty (20) days after
written notice from the Agent or any Lender.
7.5. The default by either Loan Party or any of its Subsidiaries (or,
at any time Parent is a Subsidiary of Holdings, by Holdings) in the performance
of any term, provision or condition contained in any agreement or agreements
under which any Funded Indebtedness aggregating in excess of $2,000,000
($10,000,000 in the case of Holdings and $20,000,000, or such lower cross-
default threshold amount as is provided in the SOMSC Credit Agreements, in the
case of SOMSC)
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was created or is governed, or the occurrence of any other event or existence of
any other condition, the effect of any of which is to cause, or to permit the
holder or holders of such Funded Indebtedness to cause, such Funded Indebtedness
to become due prior to its stated maturity; or any such Funded Indebtedness of
either Loan Party or any of its Subsidiaries or Holdings shall be declared to be
due and payable or required to be prepaid (other than by a regularly scheduled
payment) prior to the stated maturity thereof.
7.6. Either Loan Party or any of its Significant Subsidiaries shall (a)
have an order for relief entered with respect to it under the Federal bankruptcy
laws as now or hereafter in effect, (b) make an assignment for the benefit of
creditors, (c) apply for, seek, consent to, or acquiesce in, the appointment of
a receiver, custodian, trustee, examiner, liquidator or similar official for it
or any substantial portion of its Property, (d) institute any proceeding seeking
an order for relief under the Federal bankruptcy laws as now or hereafter in
effect or seeking to adjudicate it a bankrupt or insolvent, or seeking
dissolution, winding up, liquidation, reorganization, arrangement, adjustment or
composition of it or its debts under any law relating to bankruptcy, insolvency
or reorganization or relief of debtors or fail to file an answer or other
pleading denying the material allegations of any such proceeding filed against
it, (e) take any corporate action to authorize or effect any of the foregoing
actions set forth in this SECTION 7.6, (f) fail to contest in good faith any
appointment or proceeding described in SECTION 7.7 or (g) become unable to pay,
not pay, or admit in writing its inability to pay, its debts generally as they
become due.
7.7. Without the application, approval or consent of the relevant Loan
Party or any of its Significant Subsidiaries, a receiver, trustee, examiner,
liquidator or similar official shall be appointed for either Loan Party or any
of its Significant Subsidiaries or any substantial portion of its Property, or a
proceeding described in SECTION 7.6(d) shall be instituted against either Loan
Party or any of its Significant Subsidiaries and such appointment continues
undischarged or such proceeding continues undismissed or unstayed for a period
of sixty (60) consecutive days.
7.8. Either Loan Party or any of its Subsidiaries shall fail within
thirty (30) days to pay, bond or otherwise discharge any judgment or order for
the payment of money in excess of $1,000,000 (or multiple judgments or orders
for the payment of an aggregate amount in excess of $5,000,000), which is not
stayed on appeal or otherwise being appropriately contested in good faith and as
to which no enforcement actions have been commenced.
7.9. Any Change in Control shall occur.
7.10. The occurrence of any "default", as defined in any Loan Document
(other than this Agreement or the Notes) or the breach of any of the terms or
provisions of any Loan Document (other than this Agreement or the Notes), which
default or breach continues beyond any period of grace therein provided.
7.11. Any License of any Insurance Subsidiary of Parent (a) shall be
revoked by the Governmental Authority which issued such License, or any action
(administrative or judicial) to revoke such License shall have been commenced
against such Insurance Subsidiary and shall not have been dismissed within
thirty (30) days after the commencement thereof, (b) shall be suspended
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by such Governmental Authority for a period in excess of thirty (30) days or (c)
shall not be reissued or renewed by such Governmental Authority upon the
expiration thereof following application for such reissuance or renewal of such
Insurance Subsidiary, which, in any case, could reasonably be expected to have a
Material Adverse Effect.
7.12. Any Insurance Subsidiary of Parent shall be the subject of a
final non-appealable order imposing a fine by or at the request of any state
insurance regulatory agency as a result of the violation by such Insurance
Subsidiary of such state's applicable insurance laws or the regulations
promulgated in connection therewith which could reasonably be expected to have a
Material Adverse Effect.
7.13. Any Insurance Subsidiary of Parent shall become subject to any
conservation, rehabilitation or liquidation order, directive or mandate issued
by any Governmental Authority or any Insurance Subsidiary shall become subject
to any other directive or mandate issued by any Governmental Authority in either
case which could reasonably be expected to have a Material Adverse Effect and
which is not stayed within thirty (30) days.
7.14. The Guaranty shall fail to remain in full force or effect or any
action shall be taken to discontinue or to assert the invalidity or
unenforceability of the Guaranty, or Parent shall fail to comply with any of the
terms or provisions of the Guaranty, or shall deny, or give notice to such
effect, that it has any further liability under the Guaranty.
ARTICLE VIII
ACCELERATION, WAIVERS, AMENDMENTS AND REMEDIES
8.1. ACCELERATION. If any Default described in SECTIONS 7.6 or 7.7
occurs with respect to the Borrower, the obligations of the Lenders to make
Loans hereunder shall automatically terminate and the Obligations shall
immediately become due and payable without any election or action on the part of
the Agent or any Lender. If any other Default occurs, the Required Lenders (or
the Agent with the consent of the Required Lenders) may terminate or suspend the
obligations of the Lenders to make Loans hereunder, or declare the Obligations
to be due and payable, or both, whereupon the Obligations shall become
immediately due and payable, without presentment, demand, protest or notice of
any kind, all of which the Borrower hereby expressly waives.
If, within ten (10) Business Days after acceleration of the maturity of
the Obligations or termination of the obligations of the Lenders to make Loans
hereunder as a result of any Default (other than any Default as described in
SECTIONS 7.6 or 7.7 with respect to the Borrower) and before any judgment or
decree for the payment of the Obligations due shall have been obtained or
entered, the Required Lenders (in their sole discretion) shall so direct, the
Agent shall, by notice to the Borrower, rescind and annul such acceleration
and/or termination.
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8.2. AMENDMENTS. Subject to the provisions of this ARTICLE VIII, the
Required Lenders (or the Agent with the consent in writing of the Required
Lenders) and the Loan Parties may enter into agreements supplemental hereto for
the purpose of adding or modifying any provisions to the Loan Documents or
changing in any manner the rights of the Lenders or either Loan Party hereunder
or waiving any Default hereunder; PROVIDED, HOWEVER, that no such supplemental
agreement shall, without the consent of each Lender:
(a) Extend the final maturity of any Loan or Note or reduce
the principal amount thereof, or, subject to Section 2.11, reduce the
rate or extend the time of payment of interest or fees thereon;
(b) Reduce the percentage specified in the definition of
Required Lenders;
(c) Reduce the amount of or extend the date for the mandatory
payments and commitment reductions required under SECTIONS 2.1(b) or
2.7, or increase the amount of the Commitment of any Lender hereunder;
(d) Extend the Facility Termination Date or reduce the amount
or extend the time of any mandatory commitment reduction required by
SECTION 2.7;
(e) Amend this SECTION 8.2;
(f) Release Parent from the Guaranty; or
(g) Permit any assignment by either Loan Party of its
Obligations or its rights hereunder.
No amendment of any provision of this Agreement relating to the Agent shall be
effective without the written consent of the Agent. The Agent may waive payment
of the fee required under SECTION 12.3.2 without obtaining the consent of any
other party to this Agreement.
8.3. PRESERVATION OF RIGHTS. No delay or omission of the Lenders or the
Agent to exercise any right under the Loan Documents shall impair such right or
be construed to be a waiver of any Default or an acquiescence therein, and the
making of a Loan notwithstanding the existence of a Default or the inability of
either Loan Party to satisfy the conditions precedent to such Loan shall not
constitute any waiver or acquiescence. Any single or partial exercise of any
such right shall not preclude other or further exercise thereof or the exercise
of any other right, and no waiver, amendment or other variation of the terms,
conditions or provisions of the Loan Documents whatsoever shall be valid unless
in writing signed by the Lenders required pursuant to SECTION 8.2, and then only
to the extent in such writing specifically set forth. All remedies contained in
the Loan Documents or by law afforded shall be cumulative and all shall be
available to the Agent and the Lenders until the Obligations have been paid in
full.
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ARTICLE IX
GENERAL PROVISIONS
9.1. SURVIVAL OF REPRESENTATIONS. All representations and warranties of
each Loan Party contained in this Agreement or either Loan Party or any of their
Subsidiaries contained in any Loan Document shall survive delivery of the Notes
and the making of the Loans herein contemplated.
9.2. GOVERNMENTAL REGULATION. Anything contained in this Agreement to
the contrary notwithstanding, no Lender shall be obligated to extend credit to
the Borrower in violation of any limitation or prohibition provided by any
applicable statute or regulation.
9.3. TAXES. Any stamp, documentary or similar taxes, assessments or
charges payable or ruled payable by any governmental authority in respect of the
Loan Documents shall be paid by the Borrower, together with interest and
penalties, if any.
9.4. HEADINGS. Section headings in the Loan Documents are for
convenience of reference only, and shall not govern the interpretation of any of
the provisions of the Loan Documents.
9.5. ENTIRE AGREEMENT. The Loan Documents embody the entire agreement
and understanding among each Loan Party, the Agent and the Lenders and supersede
all prior agreements and understandings among each Loan Party, the Agent and the
Lenders relating to the subject matter thereof other than the fee letter, dated
August 14, 1998, in favor of First Chicago.
9.6. SEVERAL OBLIGATIONS; BENEFITS OF THIS AGREEMENT. The respective
obligations of the Lenders hereunder are several and not joint and no Lender
shall be the partner or agent of any other (except to the extent to which the
Agent is authorized to act as such). The failure of any Lender to perform any of
its obligations hereunder shall not relieve any other Lender from any of its
obligations hereunder. This Agreement shall not be construed so as to confer any
right or benefit upon any Person other than the parties to this Agreement and
their respective successors and assigns.
9.7. EXPENSES; INDEMNIFICATION. Each Loan Party agrees to reimburse the
Agent for any costs, internal charges and out-of-pocket expenses (including
attorneys' fees and time charges of attorneys for the Agent, which attorneys may
be employees of the Agent) paid or incurred by the Agent in connection with the
preparation, negotiation, execution, delivery, review, actual or proposed
amendment, modification, and administration of the Loan Documents. Each Loan
Party also agrees to reimburse the Agent and the Lenders for any reasonable
costs, internal charges and out-of-pocket expenses (including attorneys' fees
and time charges of attorneys for the Agent and the Lenders, which attorneys may
be employees of the Agent or the Lenders) paid or incurred by the Agent or any
Lender in connection with the collection and enforcement of the Loan Documents.
Each Loan Party further agrees to indemnify the Agent and each Lender, its
directors, officers and employees against all losses, claims, damages,
penalties, judgments, liabilities and expenses (including, without limitation,
all expenses of litigation or preparation therefor whether or not the Agent or
any Lender is a party thereto) which any of them may pay or incur arising out of
or relating
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to this Agreement, the other Loan Documents, the transactions contemplated
hereby or thereby or the direct or indirect application or proposed application
of the proceeds of any Loan hereunder arising from claims or assertions by third
parties except to the extent that they arise out of the gross negligence or
willful misconduct of the party seeking indemnification. The obligations of each
Loan Party under this Section shall survive the termination of this Agreement.
9.8. NUMBERS OF DOCUMENTS. All statements, notices, closing documents,
and requests hereunder shall be furnished to the Agent with sufficient
counterparts so that the Agent may furnish one to each of the Lenders.
9.9. ACCOUNTING. Except as provided to the contrary herein, all
accounting terms used herein shall be interpreted and all accounting
determinations hereunder shall be made in accordance with Agreement Accounting
Principles.
9.10. SEVERABILITY OF PROVISIONS. Any provision in any Loan Document
that is held to be inoperative, unenforceable, or invalid in any jurisdiction
shall, as to that jurisdiction, be inoperative, unenforceable, or invalid
without affecting the remaining provisions in that jurisdiction or the
operation, enforceability, or validity of that provision in any other
jurisdiction, and to this end the provisions of all Loan Documents are declared
to be severable.
9.11. NONLIABILITY OF LENDERS. The relationship between the Borrower
and the Lenders and the Agent shall be solely that of borrower and lender.
Neither the Agent nor any Lender shall have any fiduciary responsibilities to
either Loan Party. Neither the Agent nor any Lender undertakes any
responsibility to either Loan Party to review or inform either Loan Party of any
matter in connection with any phase of either Loan Party's business or
operations. Each Loan Party shall rely entirely upon its own judgment with
respect to its business, and any review, inspection or supervision of, or
information supplied to either Loan Party by the Agent or the Lenders is for the
protection of the Agent and the Lenders and no Loan Party nor any other Person
is entitled to rely thereon. Whether or not such damages are related to a claim
that is subject to the waiver effected above and whether or not such waiver is
effective, neither the Agent nor any Lender shall have any liability with
respect to, and each Loan Party hereby waives, releases and agrees not to sue
for, any special, indirect or consequential damages suffered by either Loan
Party in connection with, arising out of, or in any way related to the Loan
Documents or the transactions contemplated thereby or the relationship
established by the Loan Documents, or any act, omission or event occurring in
connection therewith.
9.12. CHOICE OF LAW. THE LOAN DOCUMENTS (OTHER THAN THOSE CONTAINING A
CONTRARY EXPRESS CHOICE OF LAW PROVISION) SHALL BE CONSTRUED IN ACCORDANCE WITH
THE INTERNAL LAWS, WITHOUT REGARD TO CONFLICT OF LAWS PROVISIONS, OF THE STATE
OF ILLINOIS, BUT GIVING EFFECT TO FEDERAL LAWS APPLICABLE TO NATIONAL BANKS.
9.13. CONSENT TO JURISDICTION. EACH LOAN PARTY HEREBY IRREVOCABLY
SUBMITS TO THE NON-EXCLUSIVE JURISDICTION OF ANY UNITED
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STATES FEDERAL OR ILLINOIS STATE COURT SITTING IN CHICAGO IN ANY ACTION OR
PROCEEDING ARISING OUT OF OR RELATING TO ANY LOAN DOCUMENTS AND EACH LOAN PARTY
HEREBY IRREVOCABLY AGREES THAT ALL CLAIMS IN RESPECT OF SUCH ACTION OR
PROCEEDING MAY BE HEARD AND DETERMINED IN ANY SUCH COURT AND IRREVOCABLY WAIVES
ANY OBJECTION IT MAY NOW OR HEREAFTER HAVE AS TO THE VENUE OF ANY SUCH SUIT,
ACTION OR PROCEEDING BROUGHT IN SUCH A COURT OR THAT SUCH COURT IS AN
INCONVENIENT FORUM. NOTHING HEREIN SHALL LIMIT THE RIGHT OF THE AGENT OR ANY
LENDER TO BRING PROCEEDINGS AGAINST EITHER LOAN PARTY IN THE COURTS OF ANY OTHER
JURISDICTION. ANY JUDICIAL PROCEEDING BY EITHER LOAN PARTY AGAINST THE AGENT OR
ANY LENDER OR ANY AFFILIATE OF THE AGENT OR ANY LENDER INVOLVING, DIRECTLY OR
INDIRECTLY, ANY MATTER IN ANY WAY ARISING OUT OF, RELATED TO, OR CONNECTED WITH
ANY LOAN DOCUMENT SHALL BE BROUGHT ONLY IN A COURT IN CHICAGO, ILLINOIS;
PROVIDED, THAT SUCH PROCEEDINGS MAY BE BROUGHT IN OTHER COURTS IF JURISDICTION
MAY NOT BE OBTAINED IN A COURT IN CHICAGO, ILLINOIS.
9.14. WAIVER OF JURY TRIAL. EACH LOAN PARTY, THE AGENT AND EACH LENDER
HEREBY WAIVE TRIAL BY JURY IN ANY JUDICIAL PROCEEDING INVOLVING, DIRECTLY OR
INDIRECTLY, ANY MATTER (WHETHER SOUNDING IN TORT, CONTRACT OR OTHERWISE) IN ANY
WAY ARISING OUT OF, RELATED TO, OR CONNECTED WITH ANY LOAN DOCUMENT OR THE
RELATIONSHIP ESTABLISHED THEREUNDER.
9.15. DISCLOSURE. Each Loan Party and each Lender hereby (a)
acknowledge and agree that First Chicago and/or its Affiliates from time to time
may hold other investments in, make other loans to or have other relationships
with either Loan Party, including, without limitation, in connection with any
interest rate hedging instruments or agreements or swap transactions, and (b)
waive any liability of First Chicago or such Affiliate to either Loan Party or
any Lender, respectively, arising out of or resulting from such investments,
loans or relationships other than liabilities arising out of the gross
negligence or willful misconduct of First Chicago or its Affiliates to the
extent that such liability would not have arisen but for First Chicago's status
as Agent hereunder.
9.16. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, all of which taken together shall constitute one agreement, and
any of the parties hereto may execute this Agreement by signing any such
counterpart. This Agreement shall be effective when it has been executed by each
Loan Party, the Agent and the Lenders and each party has notified the Agent that
it has taken such action.
9.17. TREATMENT OF CERTAIN INFORMATION: CONFIDENTIALITY.
(a) Each Loan Party acknowledges that (i) services may be
offered or provided to it (in connection with this Agreement or otherwise) by
each Lender or by one or more subsidiaries or affiliates of such Lender and (ii)
information delivered to each Lender by such Loan Party and its
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Subsidiaries may be provided to each such Subsidiary and Affiliate, it being
understood that any such Subsidiary or Affiliate receiving such information
shall be bound by the provisions of clause (b) below as if it were a Lender
hereunder.
(b) Each Lender and the Agent agrees (on behalf of itself and
each of its affiliates, directors, officers, employees and representatives) to
use reasonable precautions to keep confidential, in accordance with their
customary procedures for handling confidential information of this nature and in
accordance with safe and sound banking practices, any non-public information
supplied to it by either Loan Party pursuant to this Agreement, provided that
nothing herein shall limit the disclosure of any such information (i) to the
extent required by statue, rule, regulation or judicial process, (ii) to counsel
for any of the Lenders or the Agent, (iii) to bank examiners, auditors or
accountants, (iv) to the Agent or any other Lender (or to First Chicago Capital
Markets, Inc.), (v) in connection with any litigation to which any one or more
of the Lenders or the Agent is a party, (vi) to a subsidiary or affiliate of
such Lender as provided in clause (a) above, (vii) to any assignee or
participant (or prospective assignee or participant) so long as such assignee or
participant (or prospective assignee or participant) agrees with the respective
Lender to keep such information confidential on substantially the terms set
forth in this SECTION 9.17(b), (viii) to any other Person as may be reasonably
required in the course of the enforcement of any Lender's rights or remedies
hereunder or under any of such Lender's Note, or (ix) to any other creditor of
either Loan Party or any of their Subsidiaries at any time during the
continuance of a Default; PROVIDED that in no event shall any Lender or the
Agent be obligated or required to return any materials furnished by either Loan
Party.
ARTICLE X
THE AGENT
10.1. APPOINTMENT. First Chicago is hereby appointed Agent hereunder
and under each other Loan Document, and each of the Lenders authorizes the Agent
to act as the agent of such Lender. The Agent agrees to act as such upon the
express conditions contained in this ARTICLE X. The Agent shall not have a
fiduciary relationship in respect of either Loan Party or any Lender by reason
of this Agreement.
10.2. POWERS. The Agent shall have and may exercise such powers under
the Loan Documents as are specifically delegated to the Agent by the terms of
each thereof, together with such powers as are reasonably incidental thereto.
The Agent shall have no implied duties to the Lenders, or any obligation to the
Lenders to take any action thereunder, except any action specifically provided
by the Loan Documents to be taken by the Agent.
10.3. GENERAL IMMUNITY. Neither the Agent nor any of its directors,
officers, agents or employees shall be liable to either Loan Party or any Lender
for any action taken or omitted to be taken by it or them hereunder or under any
other Loan Document or in connection herewith or therewith except for its or
their own gross negligence or willful misconduct.
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10.4. NO RESPONSIBILITY FOR LOANS, RECITALS, ETC. Neither the Agent nor
any of its directors, officers, agents or employees shall be responsible for or
have any duty to ascertain, inquire into, or verify (a) any statement, warranty
or representation made in connection with any Loan Document or any borrowing
hereunder, (b) the performance or observance of any of the covenants or
agreements of any obligor under any Loan Document, including, without
limitation, any agreement by an obligor to furnish information directly to each
Lender; (c) the satisfaction of any condition specified in ARTICLE IV, except
receipt of items required to be delivered to the Agent and not waived at
closing, or (d) the validity, effectiveness, sufficiency, enforceability or
genuineness of any Loan Document or any other instrument or writing furnished in
connection therewith. The Agent shall have no duty to disclose to the Lenders
information that is not required to be furnished by either Loan Party to the
Agent at such time, but is voluntarily furnished by either Loan Party to the
Agent (either in its capacity as Agent or in its individual capacity).
10.5. ACTION ON INSTRUCTIONS OF LENDERS. The Agent shall in all cases
be fully protected in acting, or in refraining from acting, hereunder and under
any other Loan Document in accordance with written instructions signed by the
Required Lenders (or, to the extent required by SECTION 8.2, all Lenders), and
such instructions and any action taken or failure to act pursuant thereto shall
be binding on all of the Lenders and on all holders of Notes. The Agent shall be
fully justified in failing or refusing to take any action hereunder and under
any other Loan Document unless it shall first be indemnified to its satisfaction
by the Lenders pro rata against any and all liability, cost and expense that it
may incur by reason of taking or continuing to take any such action.
10.6. EMPLOYMENT OF AGENTS AND COUNSEL. The Agent may execute any of
its duties as Agent hereunder and under any other Loan Document by or through
employees, agents and attorneys-in-fact and shall not be answerable to the
Lenders, except as to money or securities received by it or its authorized
agents, for the default or misconduct of any such agents or attorneys-in-fact
selected by it with reasonable care. The Agent shall be entitled to advice of
counsel concerning all matters pertaining to the agency hereby created and its
duties hereunder and under any other Loan Document.
10.7. RELIANCE ON DOCUMENTS; COUNSEL. The Agent shall be entitled to
rely upon any Note, notice, consent, certificate, affidavit, letter, telegram,
statement, paper or document believed by it to be genuine and correct and to
have been signed or sent by the proper person or persons, and, in respect to
legal matters, upon the opinion of counsel selected by the Agent, which counsel
may be employees of the Agent.
10.8. AGENT'S REIMBURSEMENT AND INDEMNIFICATION. The Lenders agree to
reimburse and indemnify the Agent ratably in proportion to their respective
Commitments (or, if the Commitments have been terminated, in proportion to their
Commitments immediately prior to such termination) (a) for any amounts not
reimbursed by either Loan Party for which the Agent is entitled to reimbursement
by such Loan Party under the Loan Documents, (b) for any other expenses incurred
by the Agent on behalf of the Lenders, in connection with the preparation,
execution, delivery, administration and enforcement of the Loan Documents, and
(c) for any liabilities, obligations, losses, damages, penalties, actions,
judgments, suits, costs, expenses or disbursements of any kind
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and nature whatsoever which may be imposed on, incurred by or asserted against
the Agent in any way relating to or arising out of the Loan Documents or any
other document delivered in connection therewith or the transactions
contemplated thereby, or the enforcement of any of the terms thereof or of any
such other documents; PROVIDED, that no Lender shall be liable for any of the
foregoing to the extent they arise from the gross negligence or willful
misconduct of the Agent. The obligations of the Lenders under this SECTION 10.8
shall survive payment of the Obligations and termination of this Agreement.
10.9. NOTICE OF DEFAULT. The Agent shall not be deemed to have
knowledge or notice of the occurrence of any Default or Unmatured Default
hereunder unless the Agent has received written notice from a Lender or the
Borrower referring to this Agreement describing such Default or Unmatured
Default and stating that such notice is a "notice of default". In the event that
the Agent receives such a notice, the Agent shall give prompt notice thereof to
the Lenders.
10.10. RIGHTS AS A LENDER. In the event the Agent is a Lender, the
Agent shall have the same rights and powers hereunder and under any other Loan
Document as any Lender, including, without limitation, pursuant to Article XII
hereof, and may exercise the same as though it were not the Agent, and the term
"Lender" or "Lenders" shall, at any time when the Agent is a Lender, unless the
context otherwise indicates, include the Agent in its individual capacity. The
Agent may accept deposits from, lend money to, and generally engage in any kind
of trust, debt, equity or other transaction, in addition to those contemplated
by this Agreement or any other Loan Document, with either Loan Party or any of
their Subsidiaries in which such Loan Party or such Subsidiary is not restricted
hereby from engaging with any other Person.
10.11. LENDER CREDIT DECISION. Each Lender acknowledges that it has,
independently and without reliance upon the Agent or any other Lender and based
on the financial statements prepared by each Loan Party and such other documents
and information as it has deemed appropriate, made its own credit analysis and
decision to enter into this Agreement and the other Loan Documents. Each Lender
also acknowledges that it will, independently and without reliance upon the
Agent or any other Lender and based on such documents and information as it
shall deem appropriate at the time, continue to make its own credit decisions in
taking or not taking action under this Agreement and the other Loan Documents.
10.12. SUCCESSOR AGENT. The Agent may resign at any time by giving
written notice thereof to the Lenders and the Borrower, such resignation to be
effective upon the appointment of a successor Agent or, if no successor Agent
has been appointed, forty-five (45) days after the retiring Agent gives notice
of its intention to resign. Upon any such resignation, the Required Lenders
shall have the right to appoint, on behalf of the Lenders, a successor Agent,
which successor Agent, so long as no Default is continuing, shall be reasonably
acceptable to the Borrower. If no successor Agent shall have been so appointed
by the Required Lenders and shall have accepted such appointment within thirty
(30) days after the resigning Agent's giving notice of its intention to resign,
then the resigning Agent may appoint, on behalf of the Borrower and the Lenders,
a successor Agent, which successor Agent, so long as no Default is continuing,
shall be reasonably acceptable to the Borrower. If the Agent has resigned and no
successor Agent has been appointed, the Lenders
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may perform all the duties of the Agent hereunder and the Borrower shall make
all payments in respect of the Obligations to the applicable Lender and for all
other purposes shall deal directly with the Lenders. No successor Agent shall be
deemed to be appointed hereunder until such successor Agent has accepted the
appointment. Any such successor Agent shall be a commercial bank having capital
and retained earnings of at least $50,000,000 and with a Lending Installation in
the United States of America. Upon the acceptance of any appointment as Agent
hereunder by a successor Agent, such successor Agent shall thereupon succeed to
and become vested with all the rights, powers, privileges and duties of the
resigning Agent. Upon the effectiveness of the resignation of the Agent, the
resigning Agent shall be discharged from its duties and obligations hereunder
and under the Loan Documents. After the effectiveness of the resignation of an
Agent, the provisions of this ARTICLE X shall continue in effect for its benefit
in respect of any actions taken or omitted to be taken by it while it was acting
as the Agent hereunder and under the other Loan Documents.
ARTICLE XI
SETOFF; RATABLE PAYMENTS
11.1. SETOFF. In addition to, and without limitation of, any rights of
the Lenders under applicable law, if the Borrower becomes insolvent, however
evidenced, or any Default or Unmatured Default occurs, any and all deposits
(including all account balances, whether provisional or final and whether or not
collected or available) and any other Indebtedness at any time held or owing by
any Lender to or for the credit or account of the Borrower may be offset and
applied toward the payment of the Obligations owing to such Lender, whether or
not the Obligations, or any part hereof, shall then be due.
11.2. RATABLE PAYMENTS. If any Lender, whether by setoff or otherwise,
has payment made to it upon its Loans (other than payments received pursuant to
SECTIONS 2.18, 3.1, 3.2 or 3.4) in a greater proportion than its pro-rata share
of such Loans, such Lender agrees, promptly upon demand, to purchase a portion
of the Loans held by the other Lenders so that after such purchase each Lender
will hold its ratable proportion of Loans. If any Lender, whether in connection
with setoff or amounts which might be subject to setoff or otherwise, receives
collateral or other protection for its Obligations or such amounts which may be
subject to setoff, such Lender agrees, promptly upon demand, to take such action
necessary such that all Lenders share in the benefits of such collateral ratably
in proportion to their Loans. In case any such payment is disturbed by legal
process, or otherwise, appropriate further adjustments shall be made. If an
amount to be setoff is to be applied to Indebtedness of the Borrower to a
Lender, other than Indebtedness evidenced by any of the Notes held by such
Lender, such amount shall be applied ratably to such other Indebtedness and to
the Indebtedness evidenced by such Notes.
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ARTICLE XII
BENEFIT OF AGREEMENT; ASSIGNMENTS; PARTICIPATIONS
12.1. SUCCESSORS AND ASSIGNS. The terms and provisions of the Loan
Documents shall be binding upon and inure to the benefit of each Loan Party and
the Lenders and their respective successors and assigns, except that (a) no Loan
Party shall have the right to assign their rights or obligations under the Loan
Documents, and (b) any assignment by any Lender must be made in compliance with
SECTION 12.3. Notwithstanding CLAUSE (b) of the preceding sentence, any Lender
may at any time, without the consent of either Loan Party or the Agent, assign
all or any portion of its rights under this Agreement and its Notes to a Federal
Reserve Bank; PROVIDED, HOWEVER, that no such assignment to a Federal Reserve
Bank shall release the transferor Lender from its obligations hereunder. The
Agent may treat the payee of any Note as the owner thereof for all purposes
hereof unless and until such payee complies with SECTION 12.3 in the case of an
assignment thereof or, in the case of any other transfer, a written notice of
the transfer is filed with the Agent. Any assignee or transferee of a Note
agrees by acceptance thereof to be bound by all the terms and provisions of the
Loan Documents. Any request, authority or consent of any Person, who at the time
of making such request or giving such authority or consent is the holder of any
Note, shall be conclusive and binding on any subsequent holder, transferee or
assignee of such Note or of any Note or Notes issued in exchange therefor.
12.2. PARTICIPATIONS.
12.2.1. PERMITTED PARTICIPANTS; EFFECT. Any Lender may, in the
ordinary course of its business and in accordance with applicable law, at any
time sell to one or more banks or other entities ("PARTICIPANTS") participating
interests in any Loan owing to such Lender, any Note held by such Lender, any
Commitment of such Lender or any other interest of such Lender under the Loan
Documents. In the event of any such sale by a Lender of participating interests
to a Participant, such Lender's obligations under the Loan Documents shall
remain unchanged, such Lender shall remain solely responsible to the other
parties hereto for the performance of such obligations, such Lender shall remain
the holder of any such Note for all purposes under the Loan Documents, all
amounts payable by the Borrower under this Agreement shall be determined as if
such Lender had not sold such participating interests, and each Loan Party and
the Agent shall continue to deal solely and directly with such Lender in
connection with such Lender's rights and obligations under the Loan Documents.
12.2.2. VOTING RIGHTS. Each Lender shall retain the sole right
to approve, without the consent of any Participant, any amendment, modification
or waiver of any provision of the Loan Documents other than any amendment,
modification or waiver which effects any of the modifications referenced in
clauses (a) through (f) of SECTION 8.2.
12.2.3. BENEFIT OF SETOFF. The Borrower agrees that each
Participant shall be deemed to have the right of setoff provided in SECTION 11.1
in respect of its participating interest
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in amounts owing under the Loan Documents to the same extent as if the amount of
its participating interest were owing directly to it as a Lender under the Loan
Documents; PROVIDED, that each Lender shall retain the right of setoff provided
in SECTION 11.1 with respect to the amount of participating interests sold to
each Participant. The Lenders agree to share with each Participant, and each
Participant, by exercising the right of setoff provided in SECTION 11.1, agrees
to share with each Lender, any amount received pursuant to the exercise of its
right of setoff, such amounts to be shared in accordance with SECTION 11.2 as if
each Participant were a Lender.
12.3. ASSIGNMENTS.
12.3.1. PERMITTED ASSIGNMENTS. Any Lender may, in the ordinary
course of its business and in accordance with applicable law, at any time assign
to one or more banks or other entities ("PURCHASERS") all or any part of its
rights and obligations under the Loan Documents; provided, however, that in the
case of an assignment to an entity which is not a Lender or an Affiliate of a
Lender, such assignment shall be in a minimum amount (when added to the amount
of the assignment of such Lender's obligations under the White Mountains Credit
Agreement) of $5,000,000 (or, if less, the entire amount of such Lender's
Commitment). Such assignment shall be substantially in the form of EXHIBIT C
hereto or in such other form as may be agreed to by the parties thereto. The
consent of the Agent and, so long as no Default under SECTIONS 7.2, 7.6 or 7.7
is continuing, the Borrower, shall be required prior to an assignment becoming
effective with respect to a Purchaser which is not a Lender or an Affiliate
thereof. Such consent shall not be unreasonably withheld. Notwithstanding
anything to the contrary contained herein, any assignment by a Lender of its
rights and obligations under the Loan Documents shall be accompanied by an
assignment to the same assignee of the same ratable share of the rights and
obligations of such Lender under the White Mountains Credit Agreement in respect
of its obligations thereunder.
12.3.2. EFFECT; EFFECTIVE DATE. Upon (a) delivery to the Agent
of a notice of assignment, substantially in the form attached as Exhibit I to
EXHIBIT C hereto (a "NOTICE OF ASSIGNMENT"), together with any consents required
by SECTION 12.3.1, and (b) payment of a $3,000 fee to the Agent for processing
such assignment, such assignment shall become effective on the effective date
specified in such Notice of Assignment. On and after the effective date of such
assignment, (a) such Purchaser shall for all purposes be a Lender party to this
Agreement and any other Loan Document executed by the Lenders and shall have all
the rights and obligations of a Lender under the Loan Documents, to the same
extent as if it were an original party hereto, and (b) the transferor Lender
shall be released with respect to the percentage of the Aggregate Commitment and
Loans assigned to such Purchaser without any further consent or action by the
Borrower, the Lenders or the Agent. Upon the consummation of any assignment to a
Purchaser pursuant to this SECTION 12.3.2, the transferor Lender, the Agent and
the Borrower shall make appropriate arrangements so that replacement Notes are
issued to such transferor Lender and new Notes or, as appropriate, replacement
Notes, are issued to such Purchaser, in each case in principal amounts
reflecting their Commitment, as adjusted pursuant to such assignment.
12.4. DISSEMINATION OF INFORMATION. Subject to SECTION 9.17(b), each
Loan Party authorizes each Lender to disclose to any Participant or Purchaser or
any other Person acquiring an interest in the Loan Documents by operation of law
(each a "TRANSFEREE") and any prospective Transferee any
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and all information in such Lender's possession concerning the creditworthiness
of such Loan Party and its Subsidiaries.
12.5. TAX TREATMENT. If any interest in any Loan Document is
transferred to any Transferee which is organized under the laws of any
jurisdiction other than the United States or any State thereof, the transferor
Lender shall cause such Transferee, concurrently with the effectiveness of such
transfer, to comply with the provisions of SECTION 2.18.
ARTICLE XIII
NOTICES
13.1. GIVING NOTICE. All notices and other communications provided to
any party hereto under this Agreement or any other Loan Document shall be in
writing, by facsimile, first class U.S. mail or overnight courier and addressed
or delivered to such party at its address set forth below its signature hereto
or at such other address as may be designated by such party in a notice to the
other parties. Any notice, if mailed and properly addressed with first class
postage prepaid, return receipt requested, shall be deemed given three (3)
Business Days after deposit in the U.S. mail; any notice, if transmitted by
facsimile, shall be deemed given when transmitted; and any notice given by
overnight courier shall be deemed given when received by the addressee.
13.2. CHANGE OF ADDRESS. Either Loan Party, the Agent and any Lender
may each change the address for service of notice upon it by a notice in writing
to the other parties hereto.
ARTICLE XIV
GUARANTY
14.1. Parent hereby absolutely, irrevocably and unconditionally
guarantees prompt, full and complete payment when due, whether at stated
maturity, upon acceleration or otherwise, and at all times thereafter, of (a)
the principal of and interest on the Advances made by the Lenders to, and the
Notes held by the Lenders of, the Borrower and (b) all other amounts from time
to time owing to the Lenders by the Borrower under this Agreement, the Notes and
the other Loan Documents, including without limitation all Obligations of the
Borrower (solely for purposes of this ARTICLE XIV, collectively referred to as
the "Guaranteed Debt"). This is a guaranty of payment, not a guaranty of
collection.
14.2. Parent waives notice of the acceptance of this ARTICLE XIV
(solely for purposes of this ARTICLE XIV, referred to as the "Guaranty") and of
the extension or incurrence of the Guaranteed Debt or any part thereof. Parent
further waives all setoffs and counterclaims and presentment, protest, notice,
filing of claims with a court in the event of receivership, bankruptcy or
reorganization of the Borrower, demand or action on delinquency in respect of
the Guaranteed Debt or any part thereof, including any right to require the
Agent or any Lender to sue the Borrower, or any other person obligated with
respect to the Guaranteed Debt or any part
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thereof, or otherwise to enforce payment thereof against any collateral securing
the Guaranteed Debt or any part thereof.
14.3. Parent hereby agrees that, to the fullest extent permitted by
law, its obligations hereunder shall be continuing, absolute and unconditional
under any and all circumstances and not subject to any reduction, limitation,
impairment, termination, defense (other than indefeasible payment in full),
setoff, counterclaim or recoupment whatsoever (all of which are hereby expressly
waived by it to the fullest extent permitted by law), whether by reason of any
claim of any character whatsoever, including, without limitation, any claim of
waiver, release, surrender, alteration or compromise. The validity and
enforceability of this Guaranty shall not be impaired or affected by any of the
following: (a) any extension, modification or renewal of, or indulgence with
respect to, or substitution for, the Guaranteed Debt or any part thereof or any
agreement relating thereto at any time; (b) any failure or omission to perfect
or maintain any lien on, or preserve rights to, any security or collateral or to
enforce any right, power or remedy with respect to the Guaranteed Debt or any
part thereof or any agreement relating thereto, or any collateral securing the
Guaranteed Debt or any part thereof; (c) any waiver of any right, power or
remedy or of any default with respect to the Guaranteed Debt or any part thereof
or any agreement relating thereto or with respect to any collateral securing the
Guaranteed Debt or any part thereof; (d) any release, surrender, compromise,
settlement, waiver, subordination or modification, with or without
consideration, of any collateral securing the Guaranteed Debt or any part
thereof, any other guaranties with respect to the Guaranteed Debt or any part
thereof, or any other obligations of any person or entity with respect to the
Guaranteed Debt or any part thereof; (e) the enforceability or validity of the
Guaranteed Debt or any part thereof or the genuineness, enforceability or
validity of any agreement relating thereto or with respect to any collateral
securing the Guaranteed Debt or any part thereof; (f) the application of
payments received from any source to the payment of indebtedness other than the
Guaranteed Debt, any part thereof or amounts which are not covered by this
Guaranty even though the Agent or any Lender might lawfully have elected to
apply such payments to any part or all of the Guaranteed Debt or to amounts
which are not covered by this Guaranty; (g) any change of ownership of the
Borrower or the insolvency, bankruptcy or any other change in the legal status
of the Borrower; (h) any change in, or the imposition of, any law, decree,
regulation or other governmental act which does or might impair, delay or in any
way affect the validity, enforceability or the payment when due of the
Guaranteed Debt; (i) the failure of the Borrower to maintain in full force,
validity or effect or to obtain or renew when required all governmental and
other approvals, licenses or consents required in connection with the Guaranteed
Debt or this Guaranty, or to take any other action required in connection with
the performance of all obligations pursuant to the Guaranteed Debt or this
Guaranty; (j) the existence of any claim, setoff or other rights which Parent
may have at any time against the Borrower in connection herewith or with any
unrelated transaction; (k) the Agent's or any Lender's election, in any case or
proceeding instituted under chapter 11 of the Bankruptcy Code, of the
application of section 1111(b)(2) of the Bankruptcy Code; (l) any borrowing, use
of cash collateral, or grant of a security interest by the Borrower, as debtor
in possession, under section 363 or 364 of the United States Bankruptcy Code;
(m) the disallowance of all or any portion of the Lender's claims for repayment
of the Guaranteed Debt under section 502 or 506 of the United States Bankruptcy
Code; or (n) any other fact or circumstance which might
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<PAGE>
otherwise constitute grounds at law or equity for the discharge or release of
Parent from its obligations hereunder, all whether or not Parent shall have had
notice or knowledge of any act or omission referred to in the foregoing CLAUSES
(a) THROUGH (n) of this paragraph. It is agreed that Parent's liability
hereunder is independent of any other guaranties or other obligations at any
time in effect with respect to the Guaranteed Debt or any part thereof and that
Parent's liability hereunder may be enforced regardless of the existence,
validity, enforcement or non-enforcement of any such other guaranties or other
obligations or any provision of any applicable law or regulation purporting to
prohibit payment by the Borrower of the Guaranteed Debt in the manner agreed
upon between the Agent, the Lenders and the Borrower.
14.4. Credit may be granted or continued from time to time by the Agent
and/or any Lender to the Borrower without notice to or authorization from Parent
regardless of the Borrower's financial or other condition at the time of any
such grant or continuation. Neither the Agent nor any Lender shall have any
obligation to disclose or discuss with Parent its assessment of the financial
condition of the Borrower.
14.5. Until the irrevocable payment in full of the Obligations and
termination of all commitments which could give rise to any Obligation, Parent
shall have no right of subrogation with respect to the Guaranteed Debt and
hereby waives any right to enforce any remedy which the Agent and/or the Lenders
now has or may hereafter have against the Borrower, any endorser or any other
guarantor of all or any part of the Guaranteed Debt, and Parent hereby waives
any benefit of, and any right to participate in, any security or collateral
given to the Agent and/or the Lenders to secure payment of the Guaranteed Debt
or any part thereof or any other liability of the Borrower to the Agent and/or
the Lenders.
14.6. Parent authorizes the Agent and the Lenders to take any action or
exercise any remedy with respect to any collateral from time to time securing
the Guaranteed Debt, which the Agent and the Lenders in their sole discretion
(but subject, as applicable, to the terms of this Agreement and of any
documentation pursuant to which a Lien in such collateral is granted) shall
determine, without notice to Parent. Notwithstanding any reference herein to any
collateral securing any of the Guaranteed Debt, it is acknowledged that, on the
date hereof, neither Parent nor any of its Subsidiaries has granted, or has any
obligation to grant, any security interest in or other lien on any of its
property as security for the Guaranteed Debt.
14.7. In the event the Agent and the Lenders in their sole discretion
elect to give notice of any action with respect to any collateral securing the
Guaranteed Debt or any part thereof, ten (10) days' written notice mailed to
Parent by ordinary mail at the address shown hereon shall be deemed reasonable
notice of any matters contained in such notice. Parent consents and agrees that
neither the Agent nor any Lender shall be under any obligation to marshall any
assets in favor of Parent or against or in payment of any or all of the
Guaranteed Debt.
14.8. In the event that acceleration of the time for payment of any of
the Guaranteed Debt is stayed upon the insolvency, bankruptcy or reorganization
of the Borrower, or otherwise, all such amounts shall nonetheless be payable by
Parent forthwith upon demand by the Agent. Parent further
-59-
<PAGE>
agrees that, to the extent that the Borrower makes a payment or payments to the
Agent or any Lender on the Guaranteed Debt, or the Agent or any Lender receives
any proceeds of collateral securing the Guaranteed Debt, which payment or
receipt of proceeds or any part thereof is subsequently invalidated, declared to
be fraudulent or preferential, set aside or required to be returned or repaid to
the Borrower, its estate, trustee, receiver, debtor in possession or any other
party, including, without limitation, Parent, under any insolvency or bankruptcy
law, state or federal law, common law or equitable cause, then to the extent of
such payment, return or repayment, the obligation or part thereof which has been
paid, reduced or satisfied by such amount shall be reinstated and continued in
full force and effect as of the date when such initial payment, reduction or
satisfaction occurred.
14.9. No delay on the part of the Agent or any Lender in the exercise
of any right, power or remedy shall operate as a waiver thereof, and no single
or partial exercise by the Agent or any Lender of any right, power or remedy
shall preclude any further exercise thereof; nor shall any amendment,
supplement, modification or waiver of any of the terms or provisions of this
Guaranty be binding upon the Agent or any Lender, except as expressly set forth
in a writing duly signed and delivered by the Agent and the Lenders. The failure
by the Agent or any Lender at any time or times hereafter to require strict
performance by the Borrower or Parent of any of the provisions, warranties,
terms and conditions contained in any promissory note, security agreement,
agreement, guaranty, instrument or document now or at any time or times
hereafter executed pursuant to the terms of, or in connection with, this
Agreement by the Borrower or Parent and delivered to the Agent or any Lender
shall not waive, affect or diminish any right of the Agent or any Lender at any
time or times hereafter to demand strict performance thereof, and such right
shall not be deemed to have been waived by any act or knowledge of the Agent or
any Lender, its agents, officers or employees, unless such waiver is contained
in an instrument in writing duly signed and delivered by the Agent or such
Lender. No waiver by the Agent or any Lender of any default shall operate as a
waiver of any other default or the same default on a future occasion, and no
action by the Agent or any Lender permitted hereunder shall in any way affect or
impair the Agent's or such Lender's rights or powers, or the obligations of
Parent under this Guaranty. Any determination by a court of competent
jurisdiction of the amount of any Guaranteed Debt owing by the Borrower to the
Agent and the Lender shall be conclusive and binding on Parent irrespective of
whether Parent was a party to the suit or action in which such determination was
made.
14.10. Subject to the provisions of SECTION 14.8, this guaranty shall
continue in effect until this Agreement has terminated, the Guaranteed Debt has
been paid in full and the other conditions of this guaranty have been satisfied.
ARTICLE XV
AMENDMENT AND RESTATEMENT
15.1. (a) This Agreement amends and restates in its entirety the
Existing Credit Agreement and, upon the Restatement Effective Date, the terms
and provisions of the Existing Credit Agreement
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<PAGE>
shall, subject to this ARTICLE XV, be superseded hereby and thereby. Prior to
the Restatement Effective Date, the Existing Credit Agreement shall continue to
govern the making of any Loans and any outstanding Loans and Obligations.
(b) Notwithstanding the amendment and restatement of the
Existing Credit Agreement by this Agreement, the Loans under, and as defined in,
the Existing Credit Agreement ("Continuing Loans") and all accrued interest,
fees and expenses owing to First Chicago and Fleet National Bank by the Borrower
shall remain outstanding as of the Restatement Effective Date and constitute
continuing Obligations under this Agreement. The Continuing Loans shall in all
respects be continuing, and this Agreement shall not be deemed to evidence or
result in a novation or repayment and re-borrowing of the Continuing Loans. In
furtherance of and without limiting the foregoing (i) all interest, fees and
expenses which have arisen under the Existing Credit Agreement shall be paid on
the applicable due date therefor specified in this Agreement and (ii) from and
after the Restatement Effective Date, the terms, conditions and covenants
governing the Continuing Loans shall be solely as set forth in this Agreement,
which shall supersede the Prior Credit Agreement to the extent provided in this
ARTICLE XV.
[signature pages to follow]
-61-
<PAGE>
IN WITNESS WHEREOF, each Loan Party, the Lenders and the Agent have
executed this Agreement as of the date first above written.
VALLEY GROUP, INC.
By:
--------------------------------------------
Print Name:
------------------------------------
Title:
-----------------------------------------
Address: 80 South Main Street
Hanover, New Hampshire 03755
Attn:
-----------------------------
Fax No.:
------------------------------------
Tel. No.:
-----------------------------------
WHITE MOUNTAINS HOLDINGS, INC.
By:
--------------------------------------------
Print Name:
------------------------------------
Title:
-----------------------------------------
Address: 80 South Main Street
Hanover, New Hampshire 03755
Attn: Reid T. Campbell
Fax No.: (603) 640-2203
Tel. No.: (603) 643-4562
-62-
<PAGE>
COMMITMENTS
THE FIRST NATIONAL BANK OF CHICAGO,
Commitment $8,192,307.69 Individually and as Agent
-------------
By:
--------------------------------------------
Print Name:
------------------------------------
Title:
-----------------------------------------
Address: 153 West 51st Street
New York, NY 10019
Attn: Samuel W. Bridges
First Vice President
Fax No.: (212) 373-1393
Tel. No.: (212) 373-1142
$6,807,692.31 FLEET NATIONAL BANK
-------------
By:
--------------------------------------------
Print Name:
------------------------------------
Title:
-----------------------------------------
Address: One Federal Street-MAOFD06H
Boston, MA 02110-2010
Attn: David A. Bosselait
Fax No.: (617) 346-5825
Tel. No.: (617) 346-5823
Aggregate Initial
Commitment $15,000,000
-----------
-----------
-63-
<PAGE>
SCHEDULE 1
TO CREDIT AGREEMENT
MARGINS
"Applicable Eurodollar Margin" and "Applicable Facility Fee Margin"
means, for any period, the applicable of the following percentages in effect
with such period based on the Leverage Ratio and the Fixed Charges Coverage
Ratio as follows:
<TABLE>
<CAPTION>
I II III IV
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Leverage Ratio is: Less than 25% Greater than or Equal to 25% Less than 25% Greater than or Equal to 25%
- -----------------------------------------------------------------------------------------------------------------------------------
If Fixed Charges Greater than 2:1 Greater than 2:1 Less than or Equal to 2:1 Less than or Equal to 2:1
Coverage Ratio is:
- -----------------------------------------------------------------------------------------------------------------------------------
The applicable
margin will be:
- -----------------------------------------------------------------------------------------------------------------------------------
Applicable Facility .150% .175% .175% .200%
Fee Margin
- -----------------------------------------------------------------------------------------------------------------------------------
Applicable .350% .450% .450% .550%
Eurodollar Margin
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Leverage Ratio and Fixed Charges Coverage Ratio shall be calculated
by Parent as of the end of each of its Fiscal Quarters commencing September 30,
1998 and shall be reported to the Agent pursuant to a certificate executed by an
authorized officer of Parent and delivered in accordance with SECTION 6.1(g) of
the Agreement. The foregoing margins shall be adjusted, if necessary, quarterly
as of the fifth (5th) day after the delivery of the certificate provided for
above; PROVIDED that if such certificate, together with the financial statements
to which such certificate relates, are not delivered by the fifth (5th) day
after the due date therefor specified in SECTION 6.1(g), then until the fifth
day after such delivery, each of the margins specified above shall be as set
forth in Column IV above. Until adjusted as described above after September 30,
1998, the Applicable Eurodollar Margin and Applicable Facility Fee Margin, as
the case may be, shall be as specified in Column II above.
-64-
<PAGE>
Exhibit 10D
EXECUTION COPY
AMENDMENT NO. 1 TO CREDIT AGREEMENT
This Amendment (this "Amendment") is entered into as of November 20,
1998 by and among Fund American Enterprises Holdings, Inc., a Delaware
corporation (the "Borrower"), The First National Bank of Chicago, individually
and as agent ("Agent"), and the other financial institutions signatory hereto
(the "Lenders").
RECITALS
A. The Borrower, the Agent and the Lenders are party to that certain
$35,000,000 Amended and Restated Credit Agreement dated as of August 14, 1998
(the "Credit Agreement"). Unless otherwise specified herein, capitalized terms
used in this Amendment shall have the meanings ascribed to them by the Credit
Agreement.
B. The Borrower, the Agent and the undersigned Lenders wish to amend
the Credit Agreement on the terms and conditions set forth below.
Now, therefore, in consideration of the mutual execution hereof and
other good and valuable consideration, the parties hereto agree as follows:
1. AMENDMENT TO CREDIT AGREEMENT. Upon the effectiveness of
this Amendment pursuant to SECTION 3 below, the Credit Agreement shall be
amended as follows:
SECTION 6.20(a)(i) shall be amended by deleting the dollar
amount of "$537,870,000" therein and inserting the dollar
amount of "$510,000,000" in lieu thereof.
2. REPRESENTATIONS AND WARRANTIES OF THE BORROWER. The
Borrower represents and warrants that:
(a) The execution, delivery and performance by the
Borrower of this Amendment has been duly authorized by all necessary
corporate action and that this Amendment is a legal, valid and binding
obligation of the Borrower enforceable against the Borrower in
accordance with its terms, except as the enforcement thereof may be
subject to the effect of any applicable bankruptcy, insolvency,
reorganization, moratorium or similar law affecting creditors' rights
generally;
(b) After giving effect to this Amendment, each of
the representations and warranties contained in the Credit Agreement is
true and correct in all material respects on and as of the date hereof
as if made on the date hereof; and
<PAGE>
(c) After giving effect to this Amendment, no Default
or Unmatured Default has occurred and is continuing.
3. EFFECTIVE DATE. This Amendment shall become effective upon
(a) the execution and delivery hereof by the Borrower, the Agent and the
Required Lenders (without respect to whether it has been executed and delivered
by all the Lenders) and (b) the execution and delivery of the Reaffirmation of
White Mountains Guaranty in the form of EXHIBIT A hereto. In the event such
effectiveness has not occurred on or before November 20, 1998, SECTION 1 hereof
shall not become operative and shall be of no force or effect.
4. REFERENCE TO AND EFFECT UPON THE CREDIT AGREEMENT.
(a) Except as specifically amended above, the Credit
Agreement and the other Loan Documents shall remain in full force and
effect and are hereby ratified and confirmed.
(b) The execution, delivery and effectiveness of this
Amendment shall not operate as a waiver of any right, power or remedy
of the Agent or any Lender under the Credit Agreement or any Loan
Document, nor constitute a waiver of any provision of the Credit
Agreement or any Loan Document, except as specifically set forth
herein. Upon the effectiveness of this Amendment, each reference in the
Credit Agreement to "this Agreement", "hereunder", "hereof", "herein"
or words of similar import shall mean and be a reference to the Credit
Agreement as amended hereby.
5. COSTS AND EXPENSES. The Borrower hereby affirms its
obligations under Section 9.7 of the Credit Agreement to reimburse the Agent for
all reasonable costs, internal charges and out-of-pocket expenses paid or
incurred by the Agent in connection with the preparation, negotiation, execution
and delivery of this Amendment, including but not limited to the attorneys' fees
and time charges of attorneys for the Agent with respect thereto.
6. CHOICE OF LAW. THIS AMENDMENT SHALL BE CONSTRUED IN
ACCORDANCE WITH THE INTERNAL LAWS, WITHOUT REGARD TO CONFLICT OF LAWS
PROVISIONS, OF THE STATE OF ILLINOIS, BUT GIVING EFFECT TO FEDERAL LAWS
APPLICABLE TO NATIONAL BANKS.
7. HEADINGS. Section headings in this Amendment are included
herein for convenience of reference only and shall not constitute a part of this
Amendment for any other purposes.
8. COUNTERPARTS. This Amendment may be executed in any number
of counterparts, each of which when so executed shall be deemed an original but
all such counterparts shall constitute one and the same instrument.
-2-
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Amendment
as of the date and year first above written.
FUND AMERICAN ENTERPRISES HOLDINGS, INC.
By:
Name:
-----------------------------------------
Title:
THE FIRST NATIONAL BANK OF CHICAGO,
individually and as Agent
By:
Name:
-----------------------------------------
Title:
FLEET NATIONAL BANK
By:
Name:
-----------------------------------------
Title:
-3-
<PAGE>
EXHIBIT A
REAFFIRMATION OF WHITE MOUNTAINS GUARANTY
The undersigned acknowledges receipt of a copy of the
foregoing Amendment No. 1 to Credit Agreement (the "Amendment") dated as of
November 20, 1998, consents to such amendment and hereby reaffirms its
obligations under the White Mountains Guaranty dated as of August 14, 1998 in
favor of The First National Bank of Chicago, as Agent, and the Lenders (as
defined in the Amendment).
Dated as of November 20, 1998
WHITE MOUNTAINS HOLDINGS, INC.
By:
-----------------------------------------
Name:
---------------------------------------
Title:
--------------------------------------
-4-
<PAGE>
Exhibit 10E
EXECUTION COPY
AMENDMENT NO. 1 TO CREDIT AGREEMENT
This Amendment (this "Amendment") is entered into as of November 20,
1998 by and among White Mountains Holdings, Inc., a Delaware corporation (the
"Borrower"), The First National Bank of Chicago, individually and as agent
("Agent"), and the other financial institutions signatory hereto (the
"Lenders").
RECITALS
A. The Borrower, the Agent and the Lenders are party to that certain
$50,000,000 Second Amended and Restated Credit Agreement dated as of August 14,
1998 (the "Credit Agreement"). Unless otherwise specified herein, capitalized
terms used in this Amendment shall have the meanings ascribed to them by the
Credit Agreement.
B. The Borrower, the Agent and the undersigned Lenders wish to amend
the Credit Agreement on the terms and conditions set forth below.
Now, therefore, in consideration of the mutual execution hereof and
other good and valuable consideration, the parties hereto agree as follows:
1. AMENDMENT TO CREDIT AGREEMENT. Upon the effectiveness of
this Amendment pursuant to SECTION 3 below, the Credit Agreement shall be
amended as follows:
(a) SECTION 6.20.1 (a) shall be amended by deleting
the dollar amount of "$465,000,000" therein and inserting the dollar
amount of "$437,000,000" in lieu thereof.
(b) SECTION 6.20.1 (c) shall be amended by inserting
in the parenthetical exception (ii) the phrase "after tax" between the
words "realized" and "gain".
(c) SECTION 6.20.4 shall be amended in its entirety
to read as follows:
"6.20.4. STATUTORY SURPLUS. At all times, maintain
Statutory Surplus for each First-Tier Insurance Subsidiary in
an amount not less than an amount equal to (a) 85% of the
Statutory Surplus of each such First-Tier Insurance
Subsidiary, in existence on the date hereof, as of March 31,
1998 (or, in the case of any First-Tier Insurance Subsidiary
acquired after the date hereof, 85% of the Statutory Surplus
of each such acquired First-Tier Insurance Subsidiary as of
the most recently ended Fiscal Quarter preceding such
acquisition), PLUS (b) 85% of all subsequent capital
contributions to each such First-Tier Insurance Subsidiary
(other than capital contributions described in SECTION
6.20.4(c)), PLUS (c) 100% of all subsequent capital
<PAGE>
contributions to each such First-Tier Insurance Subsidiary to
the extent that the source of such capital contribution is a
dividend described in SECTION 6.20.4(e), MINUS (d) in the
event such First-Tier Insurance Subsidiary dividends or
otherwise distributes to its parent all the capital stock of a
Wholly-Owned Insurance Subsidiary, 100% of the book value
(calculated in accordance with SAP) of such Wholly-Owned
Insurance Subsidiary at the time of such dividend or
distribution, MINUS (e) the amount of dividends paid after
March 31, 1998 by such First-Tier Insurance Subsidiary which
are substantially contemporaneously utilized by the recipient
thereof to make a capital contribution to another First-Tier
Insurance Subsidiary."
2. REPRESENTATIONS AND WARRANTIES OF THE BORROWER. The
Borrower represents and warrants that:
(a) The execution, delivery and performance by the
Borrower of this Amendment has been duly authorized by all necessary
corporate action and that this Amendment is a legal, valid and binding
obligation of the Borrower enforceable against the Borrower in
accordance with its terms, except as the enforcement thereof may be
subject to the effect of any applicable bankruptcy, insolvency,
reorganization, moratorium or similar law affecting creditors' rights
generally;
(b) After giving effect to this Amendment, each of
the representations and warranties contained in the Credit Agreement is
true and correct in all material respects on and as of the date hereof
as if made on the date hereof; and
(c) After giving effect to this Amendment, no Default
or Unmatured Default has occurred and is continuing.
3. EFFECTIVE DATE. This Amendment shall become effective upon
(a) the execution and delivery hereof by the Borrower, the Agent and the
Required Lenders (without respect to whether it has been executed and delivered
by all the Lenders). In the event such effectiveness has not occurred on or
before November 20, 1998, SECTION 1 hereof shall not become operative and shall
be of no force or effect.
4. REFERENCE TO AND EFFECT UPON THE CREDIT AGREEMENT.
(a) Except as specifically amended above, the Credit
Agreement and the other Loan Documents shall remain in full force and
effect and are hereby ratified and confirmed.
(b) The execution, delivery and effectiveness of this
Amendment shall not operate as a waiver of any right, power or remedy
of the Agent or any Lender under the Credit Agreement or any Loan
Document, nor constitute a waiver of any provision of the Credit
Agreement or any Loan Document, except as specifically set forth
herein. Upon the
-2-
<PAGE>
effectiveness of this Amendment, each reference in the Credit Agreement
to "this Agreement", "hereunder", "hereof", "herein" or words of
similar import shall mean and be a reference to the Credit Agreement as
amended hereby.
5. COSTS AND EXPENSES. The Borrower hereby affirms its
obligations under Section 9.7 of the Credit Agreement to reimburse the Agent for
all reasonable costs, internal charges and out-of-pocket expenses paid or
incurred by the Agent in connection with the preparation, negotiation, execution
and delivery of this Amendment, including but not limited to the attorneys' fees
and time charges of attorneys for the Agent with respect thereto.
6. CHOICE OF LAW. THIS AMENDMENT SHALL BE CONSTRUED IN
ACCORDANCE WITH THE INTERNAL LAWS, WITHOUT REGARD TO CONFLICT OF LAWS
PROVISIONS, OF THE STATE OF ILLINOIS, BUT GIVING EFFECT TO FEDERAL LAWS
APPLICABLE TO NATIONAL BANKS.
7. HEADINGS. Section headings in this Amendment are included
herein for convenience of reference only and shall not constitute a part of this
Amendment for any other purposes.
8. COUNTERPARTS. This Amendment may be executed in any number
of counterparts, each of which when so executed shall be deemed an original but
all such counterparts shall constitute one and the same instrument.
[signature page follows]
-3-
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Amendment
as of the date and year first above written.
WHITE MOUNTAINS HOLDINGS, INC.
By:
-------------------------------------------
Name:
-------------------------------------------
Title:
-----------------------------------------
THE FIRST NATIONAL BANK OF CHICAGO,
individually and as Agent
By:
-------------------------------------------
Name:
-------------------------------------------
Title:
-----------------------------------------
FLEET NATIONAL BANK
By:
-------------------------------------------
Name:
-------------------------------------------
Title:
-----------------------------------------
-4-
<PAGE>
Exhibit 10F
EXECUTION COPY
AMENDMENT NO. 1 TO CREDIT AGREEMENT
This Amendment (this "Amendment") is entered into as of November 20,
1998 by and among Valley Group, Inc., an Oregon corporation (the "Borrower"),
White Mountains Holdings, Inc., a Delaware corporation (the "Parent", and with
the Borrower, each being a "Loan Party"), The First National Bank of Chicago,
individually and as agent ("Agent"), and the other financial institutions
signatory hereto (the "Lenders").
RECITALS
A. The Borrower, the Parent, the Agent and the Lenders are party to
that certain $15,000,000 Second Amended and Restated Credit Agreement dated as
of August 14, 1998 (the "Credit Agreement"). Unless otherwise specified herein,
capitalized terms used in this Amendment shall have the meanings ascribed to
them by the Credit Agreement.
B. The Borrower, the Parent, the Agent and the undersigned Lenders wish
to amend the Credit Agreement on the terms and conditions set forth below.
Now, therefore, in consideration of the mutual execution hereof and
other good and valuable consideration, the parties hereto agree as follows:
1. AMENDMENT TO CREDIT AGREEMENT. Upon the effectiveness of
this Amendment pursuant to SECTION 4 below, the Credit Agreement shall be
amended as follows:
(a) SECTION 6.20.1 (A) shall be amended by deleting
the dollar amount of "$465,000,000" therein and inserting the dollar
amount of "$437,000,000" in lieu thereof.
(b) SECTION 6.20.1 (C) shall be amended by inserting
in the parenthetical exception (ii) the phrase "after tax" between the
words "realized" and "gain".
(c) SECTION 6.20.4 shall be amended in its entirety
to read as follows:
"6.20.4. STATUTORY SURPLUS. At all times, maintain
Statutory Surplus for each First-Tier Insurance Subsidiary in
an amount not less than an amount equal to (a) 85% of the
Statutory Surplus of each such First-Tier Insurance
Subsidiary, in existence on the date hereof, as of March 31,
1998 (or, in the case of any First-Tier Insurance Subsidiary
acquired after the date hereof, 85% of the Statutory Surplus
of each such acquired First-Tier Insurance Subsidiary as of
the most recently ended Fiscal Quarter preceding such
acquisition), PLUS (b) 85% of all subsequent capital
contributions to each such First-Tier Insurance Subsidiary
(other than capital
<PAGE>
contributions described in SECTION 6.20.4(C)), PLUS (c) 100%
of all subsequent capital contributions to each such
First-Tier Insurance Subsidiary to the extent that the source
of such capital contribution is a dividend described in
SECTION 6.20.4(E), MINUS (d) in the event such First-Tier
Insurance Subsidiary dividends or otherwise distributes to its
parent all the capital stock of a Wholly-Owned Insurance
Subsidiary, 100% of the book value (calculated in accordance
with SAP) of such Wholly-Owned Insurance Subsidiary at the
time of such dividend or distribution, MINUS (e) the amount of
dividends paid after March 31, 1998 by such First-Tier
Insurance Subsidiary which are substantially contemporaneously
utilized by the recipient thereof to make a capital
contribution to another First-Tier Insurance Subsidiary."
2. REPRESENTATIONS AND WARRANTIES OF THE BORROWER AND THE
PARENT. Each Loan Party represents and warrants that:
(a) The execution, delivery and performance by each
Loan Party of this Amendment has been duly authorized by all necessary
corporate action and that this Amendment is a legal, valid and binding
obligation of each Loan Party enforceable against each Loan Party in
accordance with its terms, except as the enforcement thereof may be
subject to the effect of any applicable bankruptcy, insolvency,
reorganization, moratorium or similar law affecting creditors' rights
generally;
(b) After giving effect to this Amendment, each of
the representations and warranties contained in the Credit Agreement is
true and correct in all material respects on and as of the date hereof
as if made on the date hereof; and
(c) After giving effect to this Amendment, no Default
or Unmatured Default has occurred and is continuing.
3. REAFFIRMATION OF GUARANTY. The Parent consents to the terms
hereof and hereby reaffirms its obligations under ARTICLE XIV of the Credit
Agreement, as amended hereby.
4. EFFECTIVE DATE. This Amendment shall become effective upon
(a) the execution and delivery hereof by each Loan Party, the Agent and the
Required Lenders (without respect to whether it has been executed and delivered
by all the Lenders). In the event such effectiveness has not occurred on or
before November 20, 1998, SECTION 1 hereof shall not become operative and shall
be of no force or effect.
5. REFERENCE TO AND EFFECT UPON THE CREDIT AGREEMENT.
(a) Except as specifically amended above, the Credit
Agreement and the other Loan Documents shall remain in full force and
effect and are hereby ratified and confirmed.
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<PAGE>
(b) The execution, delivery and effectiveness of this
Amendment shall not operate as a waiver of any right, power or remedy
of the Agent or any Lender under the Credit Agreement or any Loan
Document, nor constitute a waiver of any provision of the Credit
Agreement or any Loan Document, except as specifically set forth
herein. Upon the effectiveness of this Amendment, each reference in the
Credit Agreement to "this Agreement", "hereunder", "hereof", "herein"
or words of similar import shall mean and be a reference to the Credit
Agreement as amended hereby.
6. COSTS AND EXPENSES. Each Loan Party hereby affirms its
obligations under Section 9.7 of the Credit Agreement to reimburse the Agent for
all reasonable costs, internal charges and out-of-pocket expenses paid or
incurred by the Agent in connection with the preparation, negotiation, execution
and delivery of this Amendment, including but not limited to the attorneys' fees
and time charges of attorneys for the Agent with respect thereto.
7. CHOICE OF LAW. THIS AMENDMENT SHALL BE CONSTRUED IN
ACCORDANCE WITH THE INTERNAL LAWS, WITHOUT REGARD TO CONFLICT OF LAWS
PROVISIONS, OF THE STATE OF ILLINOIS, BUT GIVING EFFECT TO FEDERAL LAWS
APPLICABLE TO NATIONAL BANKS.
8. HEADINGS. Section headings in this Amendment are included
herein for convenience of reference only and shall not constitute a part of this
Amendment for any other purposes.
9. COUNTERPARTS. This Amendment may be executed in any number
of counterparts, each of which when so executed shall be deemed an original but
all such counterparts shall constitute one and the same instrument.
[signature page follows]
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<PAGE>
IN WITNESS WHEREOF, the parties have executed this Amendment
as of the date and year first above written.
VALLEY GROUP, INC.
By:
-------------------------------------------
Name:
-------------------------------------------
Title:
-----------------------------------------
WHITE MOUNTAINS HOLDINGS, INC.
By:
-------------------------------------------
Name:
-------------------------------------------
Title:
-----------------------------------------
THE FIRST NATIONAL BANK OF CHICAGO,
individually and as Agent
By:
-------------------------------------------
Name:
-------------------------------------------
Title:
-----------------------------------------
FLEET NATIONAL BANK
By:
-------------------------------------------
Name:
-------------------------------------------
Title:
-----------------------------------------
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<PAGE>
Exhibit 10n
STOCK ACQUISITION AGREEMENT
STOCK ACQUISITION AGREEMENT dated as of February 10, 1999 ("Agreement")
by and between Unitrin, Inc., a Delaware corporation ("Buyer"), and Fund
American Enterprises Holdings, Inc., a Delaware corporation ("Seller"), for the
acquisition and conveyance of all of the outstanding capital stock of Valley
Group, Inc., an Oregon corporation and an indirect wholly owned subsidiary of
Seller (the "Company").
WHEREAS, the Company is the owner of all of the issued and outstanding
capital stock of each of Charter Group, Inc., a Texas corporation ("Charter"),
Valley Insurance Company, a California insurance company ("VIC"), Valley
Pacific, Inc., an Oregon corporation ("Valley Pacific"), and Valley Property &
Casualty Insurance Company, an Oregon insurance company ("VP&C") (Charter, VIC,
Valley Pacific and VP&C are sometimes hereinafter each individually referred to
as a "Subsidiary" and collectively referred to as the "Subsidiaries");
WHEREAS, Charter is the owner of all of the issued and outstanding
capital stock of Charter General Agency, Inc., a Texas corporation ("CGA"),
Charter Indemnity Company, a Texas insurance company ("CIC"), and NCM Management
Corporation, a Delaware corporation ("NCM");
WHEREAS, NCM controls Charter County Mutual Insurance Company, a Texas
insurance company ("Charter County Mutual") pursuant to a general agency
managerial contract;
WHEREAS, pursuant to that certain Stock Purchase Agreement dated as of
October 14, 1998 by and among Charter, Pinnacle Insurance Company, a Georgia
insurance company in rehabilitation ("Pinnacle"), and the Honorable John W.
Oxendine, Commissioner of the Georgia Department of Insurance and Safety Fire
acting solely in his capacity as the rehabilitator of Pinnacle (the "Pinnacle
Acquisition Agreement"), Charter has agreed to acquire all of the outstanding
shares of capital stock of Pinnacle;
WHEREAS, VIC is the owner of all of the issued and outstanding capital
stock of each of Valley National Insurance Company, a Kansas insurance company
("Valley National"), and White Mountains Insurance Company, a New Hampshire
insurance company ("WMIC");
WHEREAS, for the consideration and subject to the terms and conditions
set forth in this Agreement, Buyer desires to purchase or cause to be purchased
from Seller, and
<PAGE>
Seller desires to sell or cause to be sold to Buyer, all of the
issued and outstanding capital stock of the Company for the purpose of Buyer
acquiring control of the Company, the Subsidiaries and the following entities
owned or controlled by the Company, the Subsidiaries or their respective
subsidiaries: CGA, CIC, NCM, WMIC and Charter County Mutual (the Company, the
Subsidiaries, CGA, CIC, NCM, WMIC and Charter County Mutual are sometimes
hereinafter each individually referred to as a "Subject Entity" and collectively
referred to as the "Subject Entities," and VIC, VP&C, CIC, WMIC, and Charter
County Mutual are sometimes each individually referred to as an "Insurance
Company" and collectively referred to as the "Insurance Companies");
WHEREAS, in connection with Buyer's acquisition of control of the
Subject Entities, Buyer wishes to acquire the assets used, and immediately
following the Closing continue to employ those employees engaged, in the
business operations of the Subject Entities, subject to the terms and conditions
set forth in this Agreement; and
WHEREAS, Buyer does not wish to acquire ownership or control of either
Pinnacle or Valley National (Pinnacle and Valley National are hereinafter
collectively referred to as the "Excluded Subsidiaries"); provided, however,
that Buyer wishes to acquire the business of Valley National as in effect on the
Closing Date.
NOW, THEREFORE, in consideration of the covenants and mutual promises
herein contained, Buyer and Seller agree as follows:
1. SALE OF SHARES; RELATED TRANSACTIONS.
1.01 SALE AND PURCHASE OF SHARES. Subject to the terms and conditions
of this Agreement, Seller agrees to sell, transfer and convey (or cause to be
sold, transferred and conveyed) to Buyer, and Buyer agrees to purchase and
accept (or cause to be purchased and accepted) from Seller, for the aggregate
purchase price set forth below in Section 1.02 (the "Purchase Price"), all of
the shares of common stock of the Company beneficially owned by Seller,
representing one hundred percent of the issued and outstanding shares of capital
stock of the Company (the "Shares").
1.02 PURCHASE PRICE; POST-CLOSING ADJUSTMENT.
(A) PURCHASE PRICE. The Purchase Price for the Shares shall be
an amount equal to the sum of (i) $90,000,000 (ninety million dollars)
plus (ii) the sum of (x) the amount of the consolidated book value of
the Company determined in accordance with United States generally
accepted accounting principles ("GAAP") as applied by the Seller and
the Company consistent with the GAAP Consolidated Financial Statements
described in Section 2.09 ("GAAP Book
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Value") at the Closing Date, after taking into account all Related
Transactions completed at or prior to the Closing, and (y) the amount
of any and all bank indebtedness of the Company in respect of borrowed
money ("Indebtedness") which is outstanding immediately prior to the
Closing.
(B) ESTIMATED PURCHASE PRICE. On the Closing Date, Buyer shall
pay to Seller an amount equal to an estimate, prepared by Seller and
delivered to Buyer as described in the following sentence, of the
Purchase Price (the "Estimated Purchase Price"). Not later than five
(5) business days prior to Closing, Seller shall deliver to Buyer (i) a
balance sheet reflecting GAAP Book Value at the end of the month
immediately preceding the Closing Date, prepared in a manner consistent
with the GAAP Consolidated Financial Statements described in Section
2.09 (the "Prior Month-End Balance Sheet") as adjusted on an estimated
basis to give effect to the Related Transactions, (ii) a schedule
detailing the components of the Estimated Purchase Price including,
without limitation, the adjustments for the Related Transactions and
the amount of Indebtedness (if any), and (iii) a certificate from
Seller certifying that such Prior Month-End Balance Sheet has been so
prepared. At Closing, Buyer shall pay to Seller the Estimated Purchase
Price by wire transfer of immediately available funds to a bank account
or other accounts designated by Seller. Buyer and Seller agree that, to
the extent any amount of the Indebtedness is outstanding at Closing, a
portion of Purchase Price equal thereto shall be paid by Buyer directly
to the banking institution or institutions holding such Indebtedness
such that the Indebtedness is fully extinguished contemporaneous with
Closing.
(C) POST-CLOSING DETERMINATION OF ACTUAL PURCHASE PRICE. Not
later than forty-five (45) days after the Closing Date, Buyer shall
deliver to Seller (i) a balance sheet reflecting GAAP Book Value at the
Closing Date (taking into account all Related Transactions completed at
or prior to the Closing) prepared in a manner consistent with the GAAP
Consolidated Financial Statements described in Section 2.09 (the
"Closing Date Balance Sheet") and (ii) a certificate from Buyer
certifying that such Closing Date Balance Sheet has been so prepared.
If GAAP Book Value as reflected on the Closing Date Balance Sheet
exceeds GAAP Book Value used to determine the Estimated Purchase Price
(as adjusted on an estimated basis to give effect to the Related
Transactions) by at least $250,000, then, subject to the resolution of
any disputes pursuant to Section 1.02(D), Buyer shall pay to Seller
such difference (including such $250,000 amount) within ten (10)
business days after the receipt of the Closing Date Balance Sheet by
Seller, together with interest thereon at an annual rate equal to the
average yield to maturity on United States Treasury securities with a
remaining maturity of one year as published from time to time by THE
WALL STREET JOURNAL, calculated on the
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<PAGE>
basis of the actual number of days elapsed over 365 (the "Interest
Rate"), from the Closing Date to the date of payment, by wire transfer
of immediately available funds to a bank account designated by Seller.
If, on the other hand, GAAP Book Value used to determine the Estimated
Purchase Price (as adjusted on an estimated basis to give effect to the
Related Transactions) exceeds GAAP Book Value as reflected on the
Closing Date Balance Sheet by at least $250,000, then, subject to the
resolution of any disputes pursuant to Section 1.02(D), Seller shall
pay to Buyer such difference (including such $250,000 amount) within
ten (10) business days after the receipt of the Closing Date Balance
Sheet by Seller, together with interest thereon at the Interest Rate,
from the Closing Date to the date of payment, by wire transfer of
immediately available funds to a bank account designated by Buyer. In
the event that the GAAP Book Value as reflected on the Closing Date
Balance Sheet is neither $250,000 more nor $250,000 less than the GAAP
Book Value used to determine the Estimated Purchase Price (as adjusted
on an estimated basis to give effect to the Related Transactions),
then, subject to the resolution of any disputes pursuant to Section
1.02(D), the Estimated Purchase Price paid by Buyer to Seller at
Closing shall be the Purchase Price.
(D) DISPUTE RESOLUTION. Seller and Buyer shall seek in good
faith to resolve in writing any disputes which they may have as to the
Closing Date Balance Sheet, GAAP Book Value, the Purchase Price or the
adjustments to reflect the Related Transactions within thirty (30) days
after the receipt of the Closing Date Balance Sheet by Seller. Any such
disputes that remain unresolved at the end of any such 30-day period
shall be referred to an accounting firm of national standing and
reputation mutually agreed to by the parties in writing (the
"Accounting Firm"). The fees of the Accounting Firm agreed to shall be
shared equally by Buyer and Seller. The Accounting Firm shall be
instructed to, within thirty (30) days after the submission of any
disputed matters by Seller and Buyer, review and resolve all such
disputed matters and to report in writing its resolution thereof to
Seller and Buyer. The determination of the Accounting Firm shall be
final, binding and conclusive with respect to Seller and Buyer, and
Seller and Buyer agree that judgment may be entered upon the
determination of the Accounting Firm in any court having jurisdiction
over the party against which such determination is to be enforced.
Balances in dispute due from either party shall be paid by wire
transfer of immediately available funds to a bank account designated by
the payee within ten (10) business days after the parties are notified
in writing of the determination rendered by the Accounting Firm.
1.03 RELATED TRANSACTIONS. Seller shall use its reasonable best efforts
to complete the following transactions (the "Related Transactions") at or prior
to Closing:
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<PAGE>
(A) DISTRIBUTABLE ASSETS.
(i) Buyer and Seller acknowledge and agree that it is
their mutual intent that, subject to the receipt of all necessary
regulatory and governmental approvals therefor, at or prior to the
Closing:
(1) (x) the assets set forth in Section
1.03(A)(i)(1) of the Seller Schedule (as defined in
Section 2)1, and
(y) all other property (other than cash)
purchased by any Subject Entity on or after December 31,
1998 that is designated by Seller and/or Buyer as at the
time of the purchase thereof as a Distributable Asset
(collectively, "Distributable Assets"), shall be
distributed, sold or otherwise transferred by the
Subject Entities; and
(2) subject to completion of the reinsurance
transaction described in this Section 1.03(A)(i)(2), the
statutory capital and surplus of CIC, VIC, WMIC, and
VP&C remaining after all the Distributable Assets have
been distributed, sold or otherwise transferred pursuant
to (1), above, will be reduced by means of investment
asset distributions by each such company to its
respective parent company, as nearly as possible
(leaving a reasonable margin for error) to the minimum
statutory amount required to maintain in good standing
the certificates of authority of each such company to
transact insurance or reinsurance in the jurisdictions
identified in Section 2.21 of the Seller Schedule
("Excess Capital Distributions"), and the parties agree
that such required minimum statutory amounts shall be as
mutually agreed and set forth in Section 1.03(A)(i)(2)
of the Seller Schedule. Any Subject Entity that receives
an Excess Capital Distribution (as defined below), or a
distribution relating to a lower-tier Excess Capital
Distribution, from one or more Subject Entities shall
distribute such amount to its parent. Buyer and Seller
acknowledge that Buyer intends to arrange for the
reinsurance cession of all business of the foregoing
Subject Entities to Trinity Universal Insurance Company
and/or another qualified reinsurer having adequate
capital and surplus to support such reinsurance, subject
to applicable regulatory approval. For purposes of
determining the Purchase Price, the GAAP Book Value
shall be increased by the amount of all of Seller's
deferred policy acquisitions costs, net of related
deferred taxes, calculated in a manner consistent
- ----------
1 to include all investment assets that Seller desires to retain and/or Buyer
does not wish to acquire and the capital stock of Valley National and Pinnacle
5
<PAGE>
with the GAAP Consolidated Financial Statements
described in Section 2.09, related to the business
transferred pursuant to such reinsurance arrangement, if
any. Buyer agrees to undertake such reinsurance upon
terms and conditions reasonably satisfactory to Seller.
The distributions made pursuant to this Section 1.03(A)
shall be treated as made pursuant to a plan of
liquidation adopted by each of the Subject Entities
prior to such distributions and in connection with the
deemed liquidation of each of the Subject Entities that
is occurring by reason of the elections under Section
338(h)(10) of the IRC being filed with respect to each
such entity pursuant to Section 7.09
(ii) At the Closing, Seller shall deliver to Buyer its
calculation of the aggregate Distributable Asset Values (as defined
below) of all Distributable Assets, and, if and to the extent all
necessary regulatory and governmental approvals therefor shall have
been obtained, such Distributable Assets shall be transferred to Seller
in the manner described in Section 1.03(A)(i). "Distributable Asset
Value" of any asset at Closing means the carrying value of such asset,
including related receivables for interest and dividends, all
determined in accordance with GAAP as applied by Seller and the Company
in a manner consistent with the GAAP Consolidated Financial Statements
described in Section 2.09.
(iii) In the event that any Distributable Assets (other
than the voting securities of Valley National and Pinnacle) are not
transferred by distribution to Seller (or its designee) in accordance
with Section 1.03 (A)(i) at the Closing, then Seller (or its designee)
shall buy, and Buyer shall cause the Company or any other Subject
Entity to sell, any or all such remaining Distributable Assets, free
and clear of any lien or encumbrance, at a price equal to the
Distributable Asset Value thereof within one (1) business day following
the date of the Closing. The sale price of such Distributable Assets
shall be payable by wire transfer of immediately available funds to an
account designated by Buyer.
(iv) If at any time after the Closing, the Company or
any other Subject Entity shall receive any cash or other property as a
dividend, distribution, return of capital or principal, premium or
interest payment (or similar payment) with respect to any Distributable
Asset transferred by way of distribution to Seller (or its designee) in
accordance with Sections 1.03 (A)(i) or 1.03(A)(iii), the Company or
such other Subject Entity shall immediately transfer such cash or other
property to Seller (or its designee).
6
<PAGE>
(B) ASSET SALE. Prior to the Closing, subject to the receipt
of all necessary regulatory and governmental approvals therefor, Seller
shall cause Valley Pacific to sell to VIC all assets owned by or in the
possession of Valley Pacific that are located in the State of
California in exchange for an amount equal to the carrying value of
such assets on the date of sale determined in accordance with GAAP as
applied by Seller and the Company in a manner consistent with the GAAP
Consolidated Financial Statements described in Section 2.09 (the "Asset
Sale").
2. REPRESENTATIONS AND WARRANTIES OF SELLER.
For purposes of this Agreement:
the term "Company Material Adverse Effect" means a material adverse
effect on the business, assets, financial condition or results of
operations of the Subject Entities, taken as a whole (excluding any
state of facts, event, change or effect relating to (w) the economy or
securities markets in general, (x) this Agreement or the transactions
contemplated hereby or the announcement thereof, (y) the insurance
industry in general (including any changes in laws or regulations
applicable to the insurance industry) or (z) losses or loss adjustment
expenses in the ordinary course of business; and
the term "knowledge" with respect to Seller shall mean the actual
knowledge of the persons set forth on Schedule A hereto.
Seller represents and warrants to Buyer that, except as set
forth in the disclosure schedule of Seller attached hereto and made a part
hereof (the "Seller Schedule"):
2.01 ORGANIZATION, GOOD STANDING, QUALIFICATION OF THE COMPANIES. Each
of the Subject Entities is duly organized, validly existing and in good standing
under the laws of the state of its organization and has all requisite corporate
power and authority to own or lease and operate its properties and assets and
carry on its business as now being conducted. Each of the Subject Entities is
duly qualified to transact business as a foreign corporation and is in good
standing in every jurisdiction in which such qualification is required by law to
carry on its business as now being conducted or to own, lease or operate its
properties and assets, except where the failure to so qualify or to be in good
standing would not, individually or in the aggregate, have a Company Material
Adverse Effect. Section 2.01 of the Seller Schedule lists each jurisdiction
where each Subject Entity is so qualified.
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<PAGE>
2.02 SUBSIDIARIES. Each of VIC, Charter, Valley Pacific and VP&C is a
direct or indirect wholly-owned subsidiary of the Company. WMIC is a
wholly-owned subsidiary of VIC. CIC, CGA and NCM are wholly-owned subsidiaries
of Charter. Except as described in this Section 2.02 and except for investments
in the Excluded Subsidiaries and for the Distributable Assets, none of the
Subject Entities has any equity investment in any subsidiary, partnership, joint
venture, limited liability company or similar entity.
2.03 AUTHORIZED STOCK.
(A) The authorized capital stock of the Company consists of
500 shares of common stock, no par value per share, of which 100
shares, constituting the Shares, are issued and outstanding on the date
hereof, all of which are owned directly or indirectly by Seller.
Section 2.03 of the Seller Schedule sets forth the authorized and
outstanding capital stock of each Subject Entity other than the Company
and Charter County Mutual.
(B) All of the issued and outstanding shares of the capital
stock, if any, of the Subject Entities have been validly issued and are
fully paid, nonassessable and free of preemptive rights and are owned
free and clear of any liens, claims, charges or encumbrances, and upon
Closing, Buyer will acquire directly or indirectly good and marketable
title to all of such shares.
(C) There is no contract, understanding, restriction or
agreement, including any voting trust or other agreement or
understanding with respect to the voting of any of the capital stock of
the Subject Entities, or any convertible, exchangeable or exercisable
security, option, warrant, call, or commitment on the part of the
Subject Entities of any character relating to issued or unissued shares
of the capital stock of the Subject Entities.
2.04 AUTHORIZATION. Seller has all requisite corporate power and
authority to enter into this Agreement, to perform its obligations hereunder and
to consummate the transactions contemplated hereby. All corporate acts and other
proceedings required to be taken by Seller or any of its affiliates (other than
the Subject Entities) to authorize the execution, delivery and performance of
this Agreement and the consummation of the transactions contemplated hereby have
been duly and properly taken. This Agreement has been duly executed and
delivered by Seller and constitutes a legal, valid and binding obligation of
Seller, enforceable against Seller in accordance with its terms.
2.05 ARTICLES OF INCORPORATION AND BY-LAWS. Seller has delivered to
Buyer true and complete copies of the articles or certificate of incorporation
and by-laws (or
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<PAGE>
comparable constituent instruments) of each of the Subject Entities as in effect
as of the date hereof.
2.06 CONSENTS AND APPROVALS. Except for the consents and approvals
listed on Section 2.06 of the Seller Schedule (the "Seller Consent Schedule")
and except for such filings, permits, authorizations, consents or approvals the
failure of which to obtain or make would not, individually or in the aggregate,
have a Company Material Adverse Effect, no filing with, and no permit,
authorization, consent or approval of, any public body or authority is necessary
for the consummation by Seller or any of its affiliates (other than the Subject
Entities) of the transactions contemplated by this Agreement.
2.07 DEFAULTS AND CONFLICTS. Neither Seller nor any of the Subject
Entities is, or immediately prior to the Closing will be, in default under its
articles or certificate of incorporation or by-laws (or comparable constituent
instruments), or in default under any indenture or under any agreement or other
instrument to which it is a party or by which it or any of its properties is
bound or to which it is subject, which default would have a Company Material
Adverse Effect. Subject to the receipt of all consents and approvals
contemplated by this Agreement, neither the execution and delivery of this
Agreement, the consummation of the transactions contemplated hereby or the
fulfillment of and compliance with the terms and provisions hereof or thereof,
will (i) violate any judicial, administrative or arbitral order, writ, award,
judgment, injunction or decree involving Seller or any of the Subject Entities,
(ii) conflict with the terms, conditions or provisions of the certificate or
articles of incorporation or by-laws (or comparable constituent instruments) of
Seller or any of the Subject Entities, (iii) conflict with, result in a breach
of, constitute a default under or accelerate or permit the acceleration of the
performance required by, any indenture, agreement or other instrument that is
material to the business of any Subject Entity and to which Seller or any of the
Subject Entities is a party or by which any of them is bound (a "Material
Agreement"), (iv) result in the creation of any lien, charge or encumbrance upon
any of the assets of any of the Subject Entities under any such Material
Agreement, or (v) terminate or give any party thereto the right to terminate any
Material Agreement, except for any such violation, conflict, breach, default,
lien, charge, encumbrance, termination or other item which would not have a
Company Material Adverse Effect. Except as disclosed in Section 2.07 of the
Seller Schedule, no consent of any third party to any Material Agreement is
required in connection with this Agreement and the transactions contemplated
hereby.
2.08 STATUTORY FINANCIAL STATEMENTS. Each Subject Entity that is an
insurance company (each, an "Insurance Company") has filed all annual and
quarterly statements, together with all exhibits, interrogatories, notes,
schedules and any actuarial opinions, affirmations or certifications or other
supporting documents in connection therewith, required to be filed since
December 1, 1995 with or submitted to the appropriate
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<PAGE>
regulatory authorities of the jurisdiction in which it is domiciled or
commercially domiciled on forms prescribed or permitted by such authorities.
Financial statements included in such statements, including amendments and the
notes thereto (the "Statutory Financial Statements"), were prepared in
conformity in all material respects with statutory accounting practices
prescribed or permitted by the applicable insurance regulatory authority ("SAP")
consistently applied for the periods covered thereby. The Statutory Financial
Statements, including, without limitation, the provisions made therein for
investments and the valuation thereof, reserves, policy and contract claims,
together with the notes, exhibits and schedules thereto, fairly present the
statement of admitted assets, liabilities and capital and surplus of the
applicable Insurance Company as of the dates thereof and the related statutory
basis statements of income, changes in capital and surplus, and cash flows for
the periods indicated in conformity with SAP, applied on a basis consistent with
prior periods, except as set forth therein. Each such Statutory Financial
Statement was in compliance in all material respects with applicable law when
filed and there were no material omissions therefrom.
2.09 GAAP CONSOLIDATED FINANCIAL STATEMENTS. Seller has delivered or
will deliver to Buyer, consolidated balance sheets of the Company and its
subsidiaries as of December 31, 1997, September 30, 1998, and December 31, 1998,
and the related consolidated statements of income, comprehensive income, cash
flows and shareholders' equity for the years ended December 31, 1997 and 1998
and the related statement of income for the nine months ended September 30,
1998, and in the case of the December 31, 1997 and 1998 financial statements the
notes related to each of the foregoing (the "GAAP Consolidated Financial
Statements"). The GAAP Consolidated Financial Statements have been prepared or
will be prepared in conformity with GAAP consistently applied and present
fairly, or will present fairly in all material respects, the consolidated
financial position of the Company and results of its operations. Such GAAP
Consolidated Financial Statements properly reflect and make adequate provision
for or will properly reflect and make adequate provision for (a) the carrying
value of investments, (b) balances due from policyholders, agents and reinsurers
net of any valuation allowance, (c) deferred policy acquisition costs, (d)
reserves for losses, loss adjustment expenses and unearned premiums, (e) current
and deferred Taxes (as defined in Section 2.17), (f) guaranty fund assessments,
and (g) other liabilities, including, but not limited to, accrued audit and
legal fees, accrued salary, bonus, vacation, sick pay, and post-retirement
benefits other than pensions. Transactions with reinsurers have been or will be
recorded in accordance with Statement of Financial Accounting Standards No. 113,
"Accounting and Reporting for Reinsurance of Short-duration and Long-duration
Contracts."
2.10 ABSENCE OF CERTAIN CHANGES. Since September 30, 1998, except in
connection with this Agreement and the transactions contemplated hereby, the
Subject Entities have conducted their respective businesses only in, and have
not engaged in any
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material transaction other than in, the ordinary course of such businesses
consistent with past practice and there has not been (i) any change in the
business, assets, financial condition or results of operations of the Subject
Entities or any development or combination of developments of which Seller has
knowledge, that, individually or in the aggregate, has had or is reasonably
likely to have a Company Material Adverse Effect, (ii) any material change by
any Subject Entity in accounting principles, practices or methods, other than as
required by changes in GAAP or statutory accounting principles or practices
prescribed by insurance regulatory authorities, or (iii) any change by any
Subject Entity in the actuarial, investment, reserving, underwriting, or claims
administration policies, practices, procedures, methods, assumptions or
principles applied by such Subject Entity in conducting its business in the
usual and ordinary course other than as required by law or regulatory authority.
2.11 PROPERTIES.
(A) REAL ESTATE AND MORTGAGES. Section 2.11(A) of the Seller
Schedule sets forth a list and summary description of (a) all real
property owned by the Subject Entities and all buildings and other
structures located on such real property, (b) all leases, subleases or
other agreements under which any Subject Entity is the lessor or lessee
of any real property, (c) all unexpired options held by any Subject
Entity or contractual obligations on its part to purchase or acquire
any interest in real property, (d) all unexpired options granted by any
Subject Entity or contractual obligations on its part to sell or
dispose of any interest in real property, and (e) all mortgages on
properties owned by a Subject Entity, identifying all such mortgages,
if any, for which deficiency notices have been issued or that are
otherwise not current. Except as disclosed in Section 2.11(A) of the
Seller Schedule, all such leases, subleases, options and other
agreements are in full force and effect and no written notice of any
default thereunder has been received, except where the failure to be in
full force and effect and except where any such default would not have
a Company Material Adverse Effect.
(B) INVESTMENT SECURITIES. Section 2.11(B) of the Seller
Schedule sets forth, as of the date of this Agreement, the common
stock, preferred stock, bonds, notes, mortgage loans, limited
partnerships interests, and other securities and investments owned or
held by the Subject Entities ("Investments"). The Investments are
evidenced by appropriate written instruments and certificates (except
where in non-certificated form), and, to the knowledge of Seller, are
valid and genuine in all material respects and are enforceable in
accordance with their terms against all persons against whom they
purport to create an obligation, subject to bankruptcy, receivership,
insolvency, reorganization, moratorium, or other similar laws affecting
or relating to creditors' rights generally and subject to
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general principles of equity. Except as disclosed in Section 2.11(B) of
the Seller Schedule, all Investments that are held by an Insurance
Company constitute admitted assets of the holder pursuant to applicable
insurance laws. Except as disclosed in Section 2.11(B) of the Seller
Schedule, none of the obligors in respect of such Investments is in
default in the payment of principal, interest or other required
distributions.
(C) TITLE TO PROPERTY. Except as disclosed in Section 2.11(C)
of the Seller Schedule, the Subject Entities have good and valid title
to all real properties and Investments reflected as owned by them in
Sections 2.11(A) and 2.11(B) of the Seller Schedule, all other assets
and properties reflected in the GAAP Consolidated Financial Statements
for the period ended September 30, 1998 and all other assets and
properties acquired subsequent to such date (except assets and
properties disposed of in the ordinary course of business subsequent to
such date), in each case free of all mortgages, liens, charges and
encumbrances of any nature whatsoever, other than (i) liens for Taxes
not yet due and payable and (ii) such minor liens, charges and
encumbrances as, in the aggregate, do not and would not if asserted
have a Company Material Adverse Effect.
(D) CONDITION OF PROPERTY. All real properties, equipment,
fixtures, and other tangible properties owned, leased or used by the
Subject Entities in their respective businesses are in good operating
condition and repair, ordinary wear and tear excepted, and are, and at
the Closing will be, available for the operation of such businesses as
now being conducted, except where the failure to be in such condition
and repair or to be so available would not have a Company Material
Adverse Effect.
2.12 ENVIRONMENTAL LAWS. Except as disclosed in Section 2.12 of the
Seller Schedule, the Subject Entities have conducted and are conducting their
businesses in compliance in all material respects with all applicable federal,
state, and local laws, regulations and requirements currently in force relating
to the protection of the environment ("Environmental Laws") and there is no
pending, or, to the knowledge of Seller, threatened, civil or criminal
litigation, written notice of violation, or administrative proceeding relating
to such Environmental Laws involving any Subject Entity which would reasonably
be expected to have a Company Material Adverse Effect. To the knowledge of
Seller, there is no condition existing with respect to the release, emission,
discharge or presence of hazardous substances in connection with the business or
properties of any Subject Entity which would subject any of them to any
proceeding under such Environmental Laws or would otherwise have a Company
Material Adverse Effect. The Subject Entities have received all approvals,
consents, licenses, and permits with respect to environmental matters necessary
to carry on their respective businesses
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substantially as currently conducted, other than any such approvals, consents,
licenses or permits the failure of which to receive would not, individually or
in the aggregate, have a Company Material Adverse Effect.
2.13 PROPRIETARY RIGHTS. Section 2.13 of the Seller Schedule discloses
all the trademarks, trade names and service marks (and all registrations and
applications with respect thereto) and all material computer software
(collectively the "Proprietary Rights") used in the businesses of the Subject
Entities. To the knowledge of Seller, except as otherwise disclosed in such
Section, the Subject Entities own or are duly licensed or otherwise authorized
to use all of such Proprietary Rights. To the knowledge of Seller, such
Proprietary Rights as used by the Subject Entities in their respective
businesses do not violate or infringe upon the proprietary rights of any third
party. There is no claim, action, proceeding or investigation pending or, to the
knowledge of Seller, threatened, against any of the Subject Entities with
respect to any such Proprietary Rights which claim, action, proceeding or
investigation would reasonably be expected to have a Company Material Adverse
Effect.
2.14 AGREEMENTS. Except for this Agreement and as set forth in Section
2.14 of the Seller Schedule, and other than any Plans (as defined in Section
2.19), none of the Subject Entities is a party to or is bound by any (i) written
contract for the employment of any officer, director or employee with annual
compensation in excess of $100,000 which pursuant to its terms is not terminable
without liability on 30 days' (or less) notice or which provides for any further
payments following such termination, or contract with a former officer, director
or employee pursuant to which payments are required to be made at any time
following the date hereof, (ii) stock ownership, profit sharing, bonus, deferred
compensation, severance pay, pension, retirement or similar plan or agreement,
(iii) mortgage, indenture, note or installment obligation or other instrument
for or relating to any borrowing of money, (iv) guaranty of any obligation for
borrowings or otherwise, other than insurance policies, bonds, or other
contracts in connection with the conduct of the insurance business of the
Insurance Companies in the ordinary course, (v) agreement or arrangement for the
sale or lease of any material amount of the assets or business of any Subject
Entity or for the grant of preferential rights with respect thereto, (vi)
agreement or contract with any labor union or association representing any
employee, (vii) material agreement or contract with or for the benefit of any
Insurance Producer (as defined in Section 2.24) other than pursuant to the forms
of agreement described or included in Section 2.24 of the Seller Schedule, or
(viii) any Material Agreement not otherwise described above. All contracts,
plans, mortgages, indentures, notes, installment obligations, guaranties,
treaties and other agreements disclosed in Section 2.14 of the Seller Schedule
are in full force and effect, and no Subject Entity, nor, to the knowledge of
Seller, any other party thereto, is in default in any material respect as to any
provision thereof, and, except as disclosed in such Section 2.14, no party
thereto may terminate any
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of such agreements or other instruments by reason of the transactions
contemplated by this Agreement.
2.15 LITIGATION. There is no suit, action or proceeding pending or, to
the knowledge of Seller, threatened against or affecting any of the Subject
Entities which would, individually or in the aggregate, be reasonably expected
to have a Company Material Adverse Effect, nor is there any judgment, verdict,
decree, injunction, rule or order of any court, governmental entity or
arbitrator outstanding against any of the Subject Entities which would,
individually or in the aggregate, have a Company Material Adverse Effect.
Section 2.15 of the Seller Schedule sets forth a description of (i) each lawsuit
in which punitive, exemplary or other extra-contractual damages are sought
against a Subject Entity, and (ii) each lawsuit not involving insurance policies
assumed, reinsured or issued by a Subject Entity.
2.16 COMPLIANCE WITH LAWS. Each Subject Entity has complied with all
laws, regulations, orders, ordinances, judgments or decrees of all governmental
authorities (federal, state, local, foreign or otherwise) applicable to its
businesses, except where the failure to have so complied would not, individually
or in the aggregate, have a Company Material Adverse Effect. Except as disclosed
in Section 2.16 of the Seller Schedule, neither Seller nor any Subject Entity
has received any written notification of any asserted material failure by a
Subject Entity to comply with any of such laws.
2.17 TAXES.
(A) Each of the Subject Entities (i) has filed, or caused to
be filed, with the appropriate taxing authority all material Tax
Returns (as hereafter defined) required to be filed on or before the
date hereof (giving effect to any valid extension of time), and such
Tax Returns were true, correct and complete in all material respects
when filed, and (ii) has paid or caused to be paid in full, or has made
or will make adequate provision in the appropriate GAAP Consolidated
Financial Statements and the Prior Month-End Balance Sheet, for all
material Taxes (as hereafter defined) shown to be due on such Tax
Returns. There are no material liens for Taxes upon the assets of any
of the Subject Entities except for statutory liens for current Taxes
not yet due.
(B) The United States federal income Tax Returns in which any
Subject Entity has joined have been audited by the Internal Revenue
Service or are closed by the applicable statute of limitations for all
taxable years through December 31, 1994. As of the date hereof, except
as described in Section 2.17 of the Seller Schedule, neither Seller nor
any of the Subject Entities has given, or been requested in writing to
give, waivers or extensions of any statute of limitations
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relating to any material Tax Returns filed by or on behalf of any of
the Subject Entities.
(C) All tax sharing agreements between the Subject Entities,
on the one hand, and Seller and its affiliates (other than the Subject
Entities), on the other hand, shall be terminated effective at Closing,
and the Subject Entities shall not be bound thereby and shall have no
liability after the Closing for amounts due or arising thereunder,
other than in respect of any Taxes (due or refundable) which are
attributable to a pre-Closing Tax period.
(D) The GAAP Consolidated Financial Statements and the Prior
Month-End Balance Sheet reflect or will reflect an adequate accrual for
all material Taxes due and accrued, or deferred in accordance with
Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes," based on all activity prior to and including the date of
such financial statements.
For purposes of this Agreement, the term "Taxes" shall mean all taxes,
charges, fees, levies or other assessments, including, without limitation, all
net income, gross income, premium or privilege, gross receipts, sales, use, ad
valorem, transfer, franchise, profits, license, withholding, payroll,
employment, excise, estimated, severance, stamp, occupation, property or other
taxes, customs duties, fees, assessments, or charges of any kind whatsoever,
together with any interest and any penalties, additions to tax or additional
amounts imposed by any governmental authority (domestic or foreign) upon any
Subject Entity and the term "Tax Returns" shall mean all returns, declarations,
reports, estimates, and statements, regarding Taxes, required to be filed under
United States federal, state, local or any foreign laws.
2.18 RELATED PARTY TRANSACTIONS. Except as disclosed in Section 2.18 of
the Seller Schedule, no Subject Entity has made any loan to any director,
officer, employee, or affiliate of Seller or any of its direct or indirect
subsidiaries (including the Subject Entities) which remains outstanding, nor has
any Subject Entity entered into any agreement for the purchase or sale of any
property or services from or to any such director, officer, employee or
affiliate.
2.19 EMPLOYEE BENEFIT PLANS.
(A) Section 2.19 of the Seller Schedule sets forth a true and
complete list of each material employee benefit plan, as defined in
Section 3(3) of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA") and each other material plan, arrangement and
agreement providing employee benefits (collectively the "Plans"), that
covers current or former employees of any of the
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Subject Entities (the "Employers") and is presently maintained by any
of them or by any trade or business, whether or not incorporated (an
"ERISA Affiliate"), which together with Employers would be deemed a
"single employer" within the meaning of Section 4001 of ERISA. None of
the Plans is a "multi-employer plan," as defined in Section 3(37) of
ERISA.
(B) Each of the Plans and any related trust agreement, group
annuity contract, insurance policy or other funding arrangement, is in
substantial compliance both in form and operation with all applicable
provisions of law, including the IRC (as defined below), ERISA and the
Age Discrimination in Employment Act. Neither Employers nor any ERISA
Affiliate currently maintains or sponsors a defined benefit pension
plan as defined in Section 414(j) of the Internal Revenue Code of 1986,
as amended ("IRC"), and to the knowledge of Seller neither Employers
nor any ERISA Affiliate, except as disclosed in Section 2.19 of the
Seller Schedule, has ever maintained or sponsored any such plan that
could give rise to any liability against Employers.
(C) No excise tax or penalty (federal or state) is owed by any
person (including, but not limited to, any Plan, any Plan fiduciary,
Employers and ERISA Affiliates) with respect to the operations of, or
any transactions with respect to, any Plan, including, but not limited
to, the civil penalty assessed pursuant to Section 409 or 502(i) of
ERISA or a tax imposed pursuant to Section 4975 or 4976 of the IRC or
the tax imposed under Section 4978 of the IRC. No reserve for any
excise taxes or penalties has been established with respect to any
Plan, nor has any advice been given to any person with respect to the
need to establish such a reserve.
(D) There are no material (i) actions, suits, arbitrations or
claims (other than routine claims for benefits), (ii) legal,
administrative or other proceedings or governmental investigations or
audits, or (iii) complaints to or by any governmental entity, which are
pending or, to the knowledge of Seller, anticipated or threatened,
against the Plans or their assets.
(E) Neither Employers nor any ERISA Affiliate provides or, to
Seller's knowledge, has ever provided post-retirement medical or life
insurance benefits to any present or former employees of Employers,
other than COBRA continuation benefits required by ERISA, the IRC or
state continuation coverage laws and employee conversion of life
insurance benefits to an individual policy.
2.20 INSURANCE. All material tangible and real properties of the
Subject Entities are covered by valid and currently effective insurance
policies. Section 2.20 of the Seller
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Schedule contains a list of all insurance policies covering the Subject
Entities, including the identity of the named insured and all loss payees.
Except as otherwise identified in Section 2.20 of the Seller Schedule and except
where the failure to be in full force and effect would not have a Company
Material Adverse Effect, all insurance policies listed on such schedule will
remain in full force and effect through the Closing Date.
2.21 INSURANCE BUSINESS. Each Insurance Company has all requisite power
and authority to carry on its insurance business pursuant to and to the extent
of the certificates of authority issued under the laws of the jurisdictions
listed in Section 2.21 of the Seller Schedule. Such Section indicates the line
or lines of insurance which are permitted to be written with respect to each
certificate of authority listed. Except as otherwise described in such Section
and except as a result of the transactions contemplated hereby, no certificate
of authority identified therein has been revoked, restricted, suspended, limited
or modified, nor is any certificate of authority the subject of, nor to the
knowledge of the Seller is there a basis for, a proceeding for revocation,
restriction, suspension, limitation or modification, nor is any Insurance
Company operating under any formal or informal agreement or understanding with
the licensing authority of any jurisdiction which restricts its authority to do
business or requires it to take, or refrain from taking, any action (or, in the
case of an agreement or understanding arising between the date hereof and the
Closing, any material action). Section 2.21 of the Seller Schedule identifies
each pending application for a certificate of authority submitted by or on
behalf of an Insurance Company and specifies the jurisdiction in which each
application is pending, the date of submission, the line or lines of business
for which authority is sought and the current status of such application.
Except as disclosed in Section 2.21 of the Seller Schedule,
(i) all policies of insurance issued, reinsured or assumed by each Insurance
Company now in force are, in all material respects to the extent required under
applicable law, on forms approved by applicable insurance regulatory authorities
or which have been filed and not objected to by such authorities within the
period provided for objection and (ii) any premium rates required to be filed
with or approved by insurance regulatory authorities have been so filed or
approved in all material respects, and premiums charged conform in all material
respects thereto.
Each Insurance Company has timely paid in full all guaranty
fund and other residual market assessments required by any regulatory authority
to be paid by it except for any failures to pay which would not, individually or
in the aggregate, have a Company Material Adverse Effect.
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2.22 REINSURANCE; POOLS, ETC.
(A) Section 2.22(A) of the Seller Schedule discloses all
reinsurance treaties or agreements to which any of the Insurance
Companies is a party or is a named reinsured or is the reinsurer, or
was a party or was a named reinsured or was the reinsurer. Except as
disclosed in such Section, all such treaties or agreements are in full
force and effect through the respective dates noted in such Section and
no disputes are pending or asserted in writing under any such treaties
or agreements. None of the Insurance Companies is in default under any
treaty or agreement listed in such Section nor, to the knowledge of
Seller, is any other party in default thereunder except as disclosed in
such Section. Except as disclosed in Section 2.22(A) of the Seller
Schedule, no party may terminate any such treaties or agreements by
reason of the transactions contemplated by this Agreement.
(B) Section 2.22(B) of the Seller Schedule discloses all
pooling agreements, assigned risk pools, joint underwriting
associations or similar arrangements and all fronting arrangements
under which any Insurance Company is now or, to the knowledge of
Seller, has in the past been a participant.
2.23 REGULATORY FILINGS. Each Insurance Company has filed all reports,
statements, documents, registrations, filings or submissions required to be
filed by it with any governmental or regulatory body, except (i) those with
respect to which the imposition, levy or collection of all fines, penalties,
assessments, taxes, forfeitures, money judgments or sanctions of any type are
barred by statutes of limitation, (ii) with respect to which the failure to so
file, individually and in the aggregate, has not and would not have a Company
Material Adverse Effect, and (iii) as otherwise agreed to in writing by the
applicable governmental or regulatory body. Except as disclosed in Section 2.23
of the Seller Schedule, (A) all such registrations, filings and submissions were
in material compliance with applicable law when filed, and (B) no material
deficiencies have been asserted in writing by any such governmental or
regulatory body with respect to such registrations, filings and submissions that
have not been satisfied. Except as may be required for the transactions
contemplated by this Agreement, each Insurance Company has duly filed with
appropriate insurance authorities, to the extent that filing of the same is
required by laws, rules or regulations, all annual and quarterly statements and
other material statements, documents and reports (including, without limitation,
any filings required under applicable state insurance holding company systems
acts) required by the insurance and other applicable laws of its state of
domicile and in each of the states in which it is licensed to conduct an
insurance business. All such statements and filings were correct in all material
respects as of the date filed (or, if the statement or filing covers a period of
time prior to the date of filing, as of such date), and there are no material
omissions therefrom. Section 2.23 of the Seller Schedule sets forth
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all reports of examination (including, without limitation, all financial
examinations and market conduct examinations) issued since December 1, 1995 by
any department of insurance or regulatory body with respect to each Insurance
Company. Such Section contains a copy of each written notice by an issuer of any
such report to an Insurance Company that the issues raised in any such report
have been resolved.
2.24 INSURANCE PRODUCERS. All contracts between an Insurance Company
and its insurance agents, managers, brokers, managing general agents and all
other insurance producers (collectively "Insurance Producers") listed or
required to be listed in Section 2.14 of the Seller Schedule are in full force
and effect, except for any failures to be in full force and effect as would not,
individually or in the aggregate, have a Company Material Adverse Effect. No
Insurance Company is, and to the knowledge of Seller, none of the Insurance
Producers are, in default in any material respect under any such contract. Set
forth in Section 2.24 of the Seller Schedule is a true and correct (i) summary
description of all material compensation arrangements with the Insurance
Producers and (ii) a list of all managing general agents appointed by any
Insurance Company. To the knowledge of Seller, each of the Insurance Producers
is duly licensed in every jurisdiction in which such licensing is required by
law to solicit, negotiate, effect, renew or bind policies of insurance, or
otherwise to act as an insurance agent, broker, producer or managing general
agent (as the case may be), and is in full compliance with applicable laws
governing the activities of the Insurance Producers, except for any failures to
be duly licensed or in full compliance as would not, individually or in the
aggregate, have a Company Material Adverse Effect.
2.25 BANK ACCOUNTS. Section 2.25 of the Seller Schedule sets forth the
name of each bank, trust company, safe deposit company, broker or dealer in or
with which any Subject Entity has or at the Closing will have an account or safe
deposit box and the names of all persons authorized to draw thereon, give
instructions with respect thereto, or to have access thereto.
2.26 MINUTE BOOKS. The minute books of each Subject Entity contain true
and complete minutes of all meetings of its board of directors, board committees
and shareholders and any written consents in lieu of such meetings since
December 1, 1995.
2.27 POWERS OF ATTORNEY; GUARANTEES. Except as disclosed in Section
2.27 of the Seller Schedule, no Subject Entity has any obligation to act under
any outstanding power of attorney or any obligation or liability, either
accrued, accruing or contingent, as guarantor, surety, co-signer, endorser
(other than for purposes of collection in the ordinary course of business),
co-maker or indemnitor in respect of the obligation of any person, corporation,
partnership, joint venture, association, organization or other entity.
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2.28 CHARTER COUNTY MUTUAL. Charter County Mutual (i) is a Texas county
mutual insurance company that is duly organized, validly existing and in good
standing under the laws of the State of Texas, (ii) has all requisite corporate
power and authority to own or lease and operate its properties and assets and
carry on its business as now being conducted, (iii) transacts no business
outside of the State of Texas, (iv) is a party to a general agency managerial
agreement with NCM (the "NCM Agreement") and a quota share reinsurance agreement
with CIC (the "CIC Agreement"), each of which is currently, and will at Closing
be, in full force and effect and a valid and binding agreement, enforceable
against the parties in accordance with its terms, and (v) is not a party to any
agreements with Seller or any of its direct or indirect subsidiaries (including
the Subject Entities) except for the NCM Agreement and the CIC Agreement.
2.29 INVESTMENT ADVISORS. Except as identified in Section 2.29 of the
Seller Schedule, none of the Subject Entities has any written or oral agreement
or arrangement with, or utilizes the services of, any investment advisors or
consultants.
2.30 YEAR 2000. The computer software and hardware, used by the Subject
Entities in the operation of their businesses are capable of providing or are in
the process of being adapted or replaced to accurately record, store, process
and present calendar dates falling on or after January 1, 2000, as well as
date-dependent data, without degradation of the functionality or performance of
such software or hardware, which would have a Company Material Adverse Effect.
Section 2.30 of the Seller Schedule lists all material computer software and
hardware used by the Subject Entities in operation of their businesses and
summarizes for such software and hardware, taken as a whole, their overall state
of readiness and estimated costs of remediation within the meaning of Release
No. 33-7558, dated August 4, 1998, of the Securities and Exchange Commission,
regarding disclosure of Year 2000 issues. None of the Subject Entities has made
any express written warranties to any third parties relating to the Year 2000
readiness of such Subject Entities, which warranties would reasonably be
expected to have a Company Material Adverse Effect. None of Seller or any of the
Subject Entities has received written notice that any vendor or other provider
of services upon which any of the Subject Entities is materially dependent will
not be Year 2000 compliant on a timely basis. None of the Subject Entities has
written or, to the knowledge of Seller, reinsured any insurance policies that
create a material exposure to either property or liability claims for Year 2000
failures. Section 2.30 of the Seller Schedule describes all Year 2000 coverage
exclusions that have been, or are contemplated to be, incorporated in insurance
policies written or reinsured by any of the Subject Entities.
2.31 DIRECTORS AND OFFICERS. The persons listed on Section 2.31 of the
Seller Schedule (the "Directors and Officers Schedule") constitute, and at the
Closing will constitute, all of the directors and officers of the Subject
Entities.
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2.32 CHARTER GENERAL AGENCY, INC. CGA (i) is a Texas corporation duly
organized, validly existing and in good standing under the Texas Business
Corporation Act or the Texas Professional Corporation Act, as applicable, (ii)
has its principal place of business in the State of Texas, and (iii) has as one
of its purposes the authority to act as an agent, general agent, local recording
agent or managing general agent ("Agent"), as the case may be, under Texas
insurance laws. CGA possesses a license to act as an Agent issued by the Texas
Department of Insurance.
2.33 MISSOURI HOME SERVICE BUSINESS. None of the Subject Entities has
(i) written, reinsured or otherwise acquired any home service life insurance
policies currently in force and covering lives in the State of Missouri, or (ii)
any home service insurance agents operating in the State of Missouri.
2.34 DISCLOSURE. To the knowledge of Seller, no representation or
warranty of Seller and no statement or information relating to the Subject
Entities or their respective businesses or properties contained in (i) this
Agreement, (ii) the Seller Schedule, or (iii) any certificate, schedule, list or
other document furnished or to be furnished by Seller to Buyer pursuant to this
Agreement contains or will contain any untrue statement of a material fact or
omits or will omit to state a material fact necessary to make the statements
made herein or therein, in light of the circumstances in which they were made,
not misleading.
3. REPRESENTATIONS AND WARRANTIES OF BUYER
Buyer represents and warrants to Seller as follows:
3.01 ORGANIZATION OF BUYER. Buyer is a corporation duly organized,
validly existing and in good standing under the laws of the State of Delaware:
3.02 AUTHORIZATION. Buyer has all requisite corporate power and
authority to enter into this Agreement, to perform its obligations hereunder and
to consummate the transactions contemplated hereby. All corporate acts and other
proceedings required to be taken by Buyer or any of its affiliates to authorize
the execution, delivery and performance of this Agreement and the consummation
of the transactions contemplated hereby have been duly and properly taken. This
Agreement has been duly executed and delivered by Buyer and constitutes a legal,
valid and binding obligation of Buyer, enforceable against Buyer in accordance
with its terms.
3.03 DEFAULTS AND CONFLICTS. Subject to the receipt of all consents and
approvals contemplated by this Agreement, neither the execution and delivery of
this Agreement, the consummation of the transactions contemplated hereby or the
fulfillment of and
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compliance with the terms and provisions hereof will (i) violate any judicial,
administrative or arbitral order, writ, award, judgment, injunction or decree
involving Buyer, (ii) conflict with the terms, conditions or provisions of the
certificate of incorporation or by-laws of Buyer, (iii) conflict with, result in
a breach of, constitute a default under or accelerate or permit the acceleration
of the performance required by, any indenture or any material agreement or other
material instrument to which Buyer is a party or by which Buyer is bound, (iv)
result in the creation of any lien, charge or encumbrance upon any of the assets
of Buyer under any such agreement or instrument, or (v) terminate or give any
party thereto the right to terminate any such indenture, agreement or
instrument. No consent of any third party to any indenture or any material
agreement or other material instrument to which Buyer or any of its affiliates
is a party is required in connection with the execution and delivery of this
Agreement.
3.04 ACQUISITION FOR INVESTMENT. Buyer is acquiring the Shares for its
own account, for investment purposes and not with a view to, or for resale in
connection with, any distribution or public offering thereof within the meaning
of the Securities Act of 1933, as amended.
3.05 CONSENTS AND APPROVALS. Except for the consents and approvals
listed on the schedule thereof attached hereto (the "Buyer Consent Schedule"),
and except for such filings, permits, authorizations, consents or approvals, the
failure of which to obtain or make would not, individually or in the aggregate,
have a Company Material Adverse Effect or delay or restrict the consummation of
the transactions contemplated hereby, no filing with, and no permit,
authorization, consent or approval of, any public body or authority is necessary
for the consummation by Buyer and its affiliates of the transactions
contemplated by this Agreement.
3.06 FUNDS AVAILABLE. Buyer has, and at all times through the Closing
will have, available to it sufficient funds to consummate its purchase of the
Shares and the other transactions contemplated hereby.
4. ACCESS.
Subject to applicable law, Seller shall afford to the officers,
employees and authorized representatives of Buyer and its affiliates reasonable
access, during normal business hours and upon reasonable notice, to the offices,
properties, senior management, books and records of the Subject Entities;
PROVIDED, HOWEVER, that such access does not unreasonably disrupt the normal
business operations of Seller or the Subject Entities. Seller shall furnish
Buyer with such additional financial and operating data and other information as
to the assets, properties, and business of the Subject Entities as Buyer may
from time to time reasonably request. Seller shall cause the Subject Entities to
consent to
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the review by the officers, employees and authorized representatives of Buyer
and its affiliates of the reports and working papers of the Subject Entities'
independent auditors and to discussions by the officers, employees and
authorized representatives of Buyer and its affiliates with such independent
auditors.
5. COVENANTS OF SELLER
5.01 ORDINARY COURSE. Except with respect to the Related Transactions
and as otherwise expressly contemplated or permitted hereunder, between the date
hereof and the Closing, Seller shall cause the business of the Subject Entities
to be conducted in the ordinary course of business and consistent with past
practices.
5.02 LIABILITIES. Between the date hereof and the Closing, without the
prior written consent of Buyer, Seller shall not permit any of the Subject
Entities to incur or to become subject to any material liability or obligation
(absolute, contingent or otherwise) (including, without limitation, any surplus
notes) except (i) as set forth in Section 5.02 of the Seller Schedule; (ii)
liabilities or obligations incurred in the ordinary course of business (other
than bank indebtedness in excess of the bank indebtedness of the Company
outstanding on the date hereof, which excess shall not be deemed in the ordinary
course of business); (iii) as required by law or regulatory authority or as
contemplated hereunder; and (iv) other liabilities which shall not exceed
$250,000 in the aggregate. Nothing contained herein shall restrict Seller from
causing the Company to repay outstanding Indebtedness prior to the Closing.
5.03 CHANGES IN STOCK. Between the date hereof and the Closing, without
the prior written consent of Buyer, Seller shall not permit any of the Subject
Entities to (i) make any change in its authorized capital stock, (ii) issue any
stock, options, warrants, or other rights calling for the issue, transfer, sale
or delivery of its capital stock or other securities, (iii) pay any stock
dividend or make any reclassification in respect of its outstanding shares of
capital stock, (iv) issue, sell, exchange or deliver any shares of its capital
stock (or securities convertible into or exchangeable, with or without
additional consideration, for such capital stock), or (v) purchase or otherwise
acquire for consideration any outstanding shares of its capital stock.
5.04 NEW AGREEMENT. Except (i) in the ordinary course of business or
(ii) as required by law or regulatory authority or (iii) as contemplated
hereunder, between the date hereof and the Closing, Seller shall not permit any
of the Subject Entities to, without the prior written consent of Buyer, amend in
any material respect or enter into any contract, agreement or other instrument
of the types described in Section 2.14 hereunder or increase the salary or base
compensation of, or pay any bonus or make any special awards to, or amend any
compensation agreements of, any of the directors, officers,
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employees, agents or affiliates of the Subject Entities other than in accordance
with regularly scheduled periodic increases in accordance with past practices or
as disclosed in Section 5.04 of the Seller Schedule. Except as required by law
or regulatory authority Seller shall not, and shall cause NCM not to, terminate,
cancel, amend, modify or otherwise alter the existing General Managerial
Contract between NCM and Charter County Mutual under which NCM controls Charter
County Mutual.
5.05 CONSENTS. Seller shall, as soon as practicable, prepare or cause
to be prepared and make all necessary filings with all governmental or
regulatory bodies or other entities and shall use its reasonable best efforts to
obtain all consents, waivers, approvals, authorizations, rulings or orders from
all governmental or regulatory bodies or other entities listed on the Seller
Consent Schedule and furnish true, correct and complete copies of each thereof
to Buyer. Prior to the Closing, Seller shall (and shall cause each of the
Subject Entities to) use its reasonable best efforts to obtain any required
consents of the parties to any Material Agreements.
5.06 NOTICE. Between the date hereof and Closing, Seller shall give
prompt notice to Buyer of (i) any notice or other communication received by
Seller or any of the Subject Entities relating to a default or event which, with
notice or lapse of time or both, would become a default, under any of the
Subject Entities' articles of incorporation, by-laws or comparable governing
instruments, or any Material Agreement, (ii) any notice or other communication
received by any of the foregoing from any third party alleging that the consent
of such third party is or may be required in connection with the transactions
contemplated hereby, (iii) any circumstances of which Seller or any Subject
Entity becomes aware that is reasonably likely to have a Company Material
Adverse Effect, and (iv) any matter which, if it had occurred prior to the date
hereof, would have been required to be included on the Seller Schedule.
5.07 OTHER TRANSACTIONS. From the date of this Agreement to the
Closing, except for the Related Transactions, none of Seller, any Subject Entity
nor any other affiliate of Seller shall, nor shall they permit any of their
respective officers, directors, stockholders or other representatives to,
directly or indirectly, encourage, solicit, initiate or participate in
discussions or negotiations with, or provide any information or assistance to,
any person or group (other than Buyer, its affiliates and their representatives)
concerning any merger, sale of securities, sale of substantial assets or similar
transaction involving the Subject Entities. In the event that Seller, any
Subject Entity or any other affiliate of Seller receives a proposal relating to
any such transaction, Seller shall promptly notify Buyer of such proposal.
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5.08 EMPLOYEE MATTERS.
(A) TRANSFER OF CONTINUING EMPLOYEES. On or prior to the
Closing Date, subject to the receipt of any necessary regulatory
approvals, Seller shall cause (i) the transfer to VIC of all employees
of Valley Pacific located in California, and (ii) the transfer to WMIC
of all employees of Fund American or its affiliates (other than the
Subject Entities) who provide services to WMIC on a substantially full
time basis. Each of such transfers is hereafter collectively referred
to as the "Employee Transfer."
(B) SELLER EMPLOYEE OBLIGATIONS. Seller shall cause each of
the Subject Entities to take such actions as are necessary to terminate
the participation by the Subject Entities in the Valley Insurance
Companies Long Term Incentive Plan, the Charter Insurance Companies
Long Term Incentive Plan, the Valley Insurance Companies Annual
Incentive Plan, the Charter Insurance Companies Annual Incentive Plan,
the Fund American Enterprises Holdings, Inc. Long Term Incentive Plan,
the Valley Group, Inc. Voluntary Salary Reduction Agreement and the
employee benefit plans of Seller and White Mountains Holdings, Inc. in
which any of them participates, effective no later than the close of
business on the Closing Date. Following the Closing, Seller shall
indemnify Buyer and its affiliates against any Loss or Losses (as
defined in Section 14.01) (including funding deficiencies) arising
under or in respect of any employee benefit plan maintained or
sponsored by any Subject Entity and for any COBRA continuation coverage
provided by any of the same, in each case to the extent those
liabilities, obligations and costs arise out of events or circumstances
prior to the Closing. Following the Closing, Buyer shall be solely
responsible for, and shall indemnify Seller and its affiliates other
than the Subject Entities against any Loss or Losses arising under or
in respect of any employee benefit plan maintained or sponsored by any
Subject Entity and for any COBRA continuation coverage provided by any
of the same to the extent those liabilities, obligations and costs
arise out of events or circumstances subsequent to the Closing.
5.09 DECEMBER 31, 1998 FINANCIAL STATEMENTS. As soon as practicable,
but no later than the later of March 2, 1999 or the filing thereof with
insurance regulatory authorities, Seller shall provide to Buyer the Statutory
Financial Statements of each of the Insurance Companies for the year ended
December 31, 1998, as filed with the departments of insurance of their
respective states of domicile, which shall be prepared in a manner consistent
with the requirements for Statutory Financial Statements specified in Section
2.08 above (the December 31, 1998 Statutory Financial Statements"). In the event
the Closing occurs on or after March 31, 1999, Seller shall provide Buyer with
the GAAP Consolidated Financial Statements for the year ended December 31, 1998,
which
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shall be prepared in a manner which is consistent with the requirements for GAAP
Consolidated Financial Statements specified in Section 2.09 above together with
the actual audit opinion from the Company's independent auditors. The loss and
loss adjustment expense reserve amount shown on the December 31, 1998 Statutory
Financial Statements shall be determined in accordance with SAP.
5.10 INTERCOMPANY AGREEMENTS AND BALANCES. As of or prior to the
Closing, other than in respect of Taxes, Seller shall cause all intercompany
balances between or among the Subject Entities, on the one hand, and Seller and
any of the other affiliates of Seller, on the other hand, to be settled. Except
as contemplated by this Agreement, at or prior to the Closing, Seller shall
terminate, or cause to be terminated, each contract between or among the Subject
Entities, on the one hand, and Seller and any of the other affiliates of Seller,
on the other hand.
5.11 NAME CHANGE. No later than six (6) months after the Closing Date,
Seller shall cause Valley National to amend its articles of incorporation, to
change its corporate name and its doing business designations, in each state
where it is qualified to do business, to a different name that does not include
the word "Valley" in any form. Seller shall forthwith thereafter notify Buyer of
such changes and provide copies of all documents filed in connection therewith.
In addition, six (6) months after the Closing, Seller and its affiliates shall
cease using the name "Valley Group" or "Charter Group" in any manner for
commercial purposes.
5.12 COOPERATION. Seller shall execute such documents and other papers,
provide such information, and take such further actions as may be reasonably
requested by Buyer to carry out the provisions hereof and to consummate the
transactions contemplated hereby. Seller shall use its reasonable best efforts
to obtain, or assist Buyer in obtaining, all applicable regulatory approval of
the reinsurance transaction described in Section 1.03(A)(i)(2).
5.13 CONDITIONS PRECEDENT. Seller shall use its reasonable best efforts
to cause all of the conditions precedent to the consummation of the transactions
contemplated by this Agreement applicable to it to be met.
5.14 SHAREHOLDER VOTE. Seller will cause its subsidiary, White
Mountains Holdings, Inc., and/or each transferee permitted under Section 17.04,
to vote all of its shares in the Company in favor of the sale of the Shares to
Buyer and will not permit White Mountain Holdings, Inc. to transfer any of its
shares in the Company to any other person or entity prior to Closing (except to
the extent permitted under Section 17.04).
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5.15 TERMINATION OF INVESTMENT ADVISOR AGREEMENT. Seller agrees to
cause all investment advisory agreements currently in effect between it and the
Subject Entities to be terminated at or prior to Closing.
5.16 VALLEY NATIONAL. The Company and VIC have entered into a
definitive agreement, dated October 19, 1998, with Executive Risk Indemnity,
Inc. ("ERII") providing for the sale of all of the outstanding capital stock of
Valley National to ERII following the reinsurance cession of all of the
insurance business of Valley National to certain Subject Entities (the "Valley
National Sale Agreement"). Seller hereby agrees to indemnify, defend and hold
Buyer and its affiliates harmless from and against (i) any Loss or Losses (as
defined in Section 14.01)relating to or arising under the Valley National Sales
Agreement and (ii) any Loss or Losses of Valley National incurred prior to the
closing of the sale of Valley National pursuant to the Valley National Sale
Agreement. Seller agrees to use its best efforts to cause all rights, powers and
obligations under the Valley National Sale Agreement to be assigned to Seller or
an affiliate of Seller (other than the Subject Entities), thereby substituting
such assignee for the Company and VIC. If Seller shall determine that the sale
of Valley National to ERII is unlikely to be consummated prior to the
anticipated Closing Date, then Seller shall cause ownership of the stock of
Valley National to be transferred to Seller or an affiliate of Seller (other
than a Subject Entity), whether by dividend or otherwise, prior to the Closing
Date.
5.17 PINNACLE. Seller hereby agrees to indemnify, defend and hold Buyer
and its affiliates (including, without limitation, following the Closing, each
of the Subject Entities) harmless from and against (i) any Loss or Losses
relating to or arising under the Pinnacle Acquisition Agreement and (ii) any
Loss or Losses of Pinnacle incurred prior to the Closing Date. Seller agrees to
use its reasonable best efforts to cause all rights, powers and obligations
under the Pinnacle Acquisition Agreement to be assigned to Seller or an
affiliate of Seller (other than the Subject Entities) in full substitution for
Charter. In the event that Charter acquires Pinnacle prior to the Closing Date,
Seller shall use its reasonable best efforts to cause ownership of the stock of
Pinnacle to be transferred to Seller or an affiliate of Seller (other than a
Subject Entity), whether by dividend or otherwise, prior to the Closing Date.
6. COVENANTS OF BUYER.
6.01 CONSENTS. Buyer shall, as soon as practicable, prepare and make
all necessary filings with all governmental or regulatory bodies or other
entities and shall use its reasonable best efforts to obtain all consents,
waivers, approvals, authorizations, rulings or orders from all governmental or
regulatory bodies or other entities listed on the Buyer Consent Schedule and
furnish true, correct and complete copies of each to Seller.
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6.02 EMPLOYEE MATTERS. Immediately following the Closing, Buyer shall
cause the Subject Entities to continue the employment of all employees thereof
(including those employees subject to the Employee Transfer) at the same base
pay and on terms and conditions not materially less favorable to such employees
than those provided for immediately prior to the Closing. In addition, Buyer
will give each such person credit for all accrued but unused vacation and paid
time off that each such person had with Seller up through the Closing Date.
Nothing herein shall be construed as a change in the status of any such
employees as employees at will.
6.03 NAME CHANGE. No later than six months after the Closing Date,
Buyer shall cause WMIC to amend its articles of incorporation, to change its
corporate name and its doing business designation, in each state where it is
qualified to do business, to a different name that does not include the words
"White Mountains" in any form. Buyer shall forthwith thereafter notify Seller of
such changes and provide copies of all documents filed in connection therewith.
In addition, after June 30, 1999, Buyer and its affiliates shall cease using the
name "White Mountains" in any manner for commercial purposes. It is understood
and agreed that Seller shall retain all right, title and interest in and to the
"White Mountains" name.
6.04 COOPERATION. Buyer shall execute such documents and other papers,
provide such information, and take such further actions as may be reasonably
requested by Seller to carry out the provisions hereof and to consummate the
transactions contemplated hereby.
6.05 CONDITIONS PRECEDENT. Buyer shall use its reasonable best efforts
to cause all of the conditions precedent to the consummation of the transactions
contemplated by this Agreement applicable to it to be met.
6.06 CONFIDENTIALITY. Buyer acknowledges that the information being
provided to it in connection with the purchase and sale of the Shares and the
other transactions contemplated hereby is subject to the terms of a
confidentiality agreement between Buyer and Gill and Roeser on behalf of Seller
entered into in October, 1998 (the "Confidentiality Agreement"), the terms of
which are incorporated herein by reference as if Seller were a party thereto.
Effective upon, and only upon, the Closing, the Confidentiality Agreement shall
terminate with respect to information relating solely to the Subject Entities;
PROVIDED that Buyer acknowledges that any and all other information provided to
it by Seller or Seller's representatives concerning Seller or its affiliates
(other than the Subject Entities) shall remain subject to the terms and
conditions of the Confidentiality Agreement after the Closing Date.
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6.07 INDEMNITY. Buyer will indemnify and defend Seller with respect to
the following claims: (1) any claim by an employee of any Subject Entity that he
or she was not employed as provided in Section 6.02 this Agreement; (2) any
claim for payment of vacation or paid time off accrued up through, as well as
after, the Closing Date; and (3) any claim by any person relating to employment
matters involving the Subject Entities and based on facts or circumstances
occurring after the Closing Date including, but not limited to, the termination
of employment of any employee of the Subject Entities after the Closing Date,
the compensation and benefits such person is entitled to upon termination of
employment after the Closing Date, or the compensation and benefits to which
such person is entitled by virtue of his or her employment with Buyer after the
Closing Date.
7. TAX COVENANTS OF SELLER AND BUYER.
7.01 Seller shall prepare and file, or cause to be prepared and filed,
all material Tax Returns for taxable periods ending on or prior to the Closing
Date required to be filed (giving effect to any valid extensions of time)
including, but not limited to, all calendar year 1998 Tax Returns and those Tax
Returns for the short taxable period commencing on January 1, 1999, and ending
on the Closing Date and shall pay all Taxes shown thereon to be due. Seller
shall prepare such Tax Returns in a manner consistent with the Tax Returns of
the Subject Entities filed prior to the Closing for taxable periods ending on or
before December 31, 1997 (the "Prior Year Returns"). Buyer shall cause the
Subject Entities to pay, or shall itself pay or make provisions to pay on a
timely basis, all Taxes to the extent reflected as liabilities on the Closing
Date Balance Sheet as adjusted in accordance with Section 7.02. Such payment
will exclude any Taxes which are a result of the purchase transaction
contemplated herein, in accordance with the Section 338(h)(10) election
described in Section 7.09. However, the Closing Date Balance Sheet will not
reflect an accrual for the Taxes which result from the Section 338(h)(10)
election or other Taxes resulting from the purchase and sale of the Shares or by
the Related Transactions.
7.02 Buyer shall prepare and file, or cause to be prepared and filed,
all material Tax Returns for taxable periods including (but not ending on) the
Closing Date required to be filed (giving effect to any valid extensions of
time) and shall pay all Taxes due with respect to such Tax Returns; PROVIDED
that Seller shall reimburse Buyer for any amount owed by Seller pursuant to
Section 14.01 within 30 days of Buyer's written notification to Seller of
Seller's liability pursuant to Section 14.01. Buyer shall prepare such Tax
Returns in a manner consistent with the Tax Returns of the Subject Entities
filed prior to the Closing and shall furnish such Tax Returns to the Seller for
the Seller's approval (which approval shall not be unreasonably delayed or
withheld) at least thirty (30) days prior to the due date for filing such Tax
Returns.
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All liabilities or refunds for Taxes for Tax periods covered in
Sections 7.01 and 7.02 which are reflected or which should have been reflected
on the Closing Date Balance Sheet shall be adjusted to their correct amount
based on the Tax Returns as actually filed. Cash settlement of the difference
between the accruals on the Closing Date Balance Sheet and the actual Tax
Returns shall be made within 30 days of the filing of such Tax Returns.
Any and all Taxes that arise from this stock purchase transaction in
accordance with the Section 338(h)(10) election described in Section 7.09 below
shall be entirely borne by Seller.
7.03 Buyer and Seller agree to cause the Subject Entities to file all
Tax Returns for the period including the Closing Date on the basis that the
relevant taxable period ended as of the close of business on the Closing Date,
unless the relevant taxing authority will not accept a Tax Return filed on that
basis.
7.04 Seller shall be responsible for filing any amended, consolidated,
combined or unitary Tax Returns for taxable years ending on or prior to the
Closing Date which are required as a result of examination adjustments made by
the Internal Revenue Service or by the applicable state or local taxing
authorities for such taxable years as finally determined. For those
jurisdictions in which separate Tax Returns are filed by any of the Subject
Entities, any required amended returns resulting from such examination
adjustments, as finally determined, shall be prepared by Seller and furnished to
such Subject Entity, as the case may be for approval (which approval shall not
be unreasonably withheld), signature and filing at least 30 days prior to the
due date for filing such returns.
7.05 Seller, each of the Subject Entities and Buyer shall reasonably
cooperate, and shall cause their respective affiliates, officers, employees,
agents, auditors and representatives reasonably to cooperate, in preparing and
filing all Tax Returns, including maintaining and making available to each other
all records necessary in connection with Taxes and in resolving all disputes and
audits with respect to all taxable periods relating to Taxes. Buyer and Seller
recognize that Seller and its affiliates will need access, from time to time,
after the Closing Date, to certain accounting and Tax records and information
held by the Subject Entities to the extent such records and information pertain
to events occurring prior to the Closing Date; therefore, Buyer agrees, and
agrees to cause each of the Subject Entities, (i) to use its best efforts to
properly retain and maintain such records until the applicable statute of
limitations has expired, and (ii) to allow Seller and its agents and
representatives (and agents or representatives of any of its affiliates), at
times and dates mutually acceptable to the parties, to inspect, review and
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make copies of such records as Seller may deem necessary or appropriate from
time to time, such activities to be conducted during normal business hours and
at Seller's expense.
Seller shall provide prompt notice (within thirty (30) days of
receiving an Internal Revenue Service Notice of Proposed Adjustment or similar
notification from any other taxing authority) to Buyer of any issue raised in
any official inquiry, examination or proceeding involving any Taxes relating to
any of the Subject Entities for any period prior to and including the Closing
Date.
7.06 Any refunds or credits of Taxes other than those accrued on the
Closing Date Balance Sheet as adjusted pursuant to Section 7.02, of any of the
Subject Entities for any taxable period ending on or before the Closing Date
shall be for the account of Seller. Any refunds or credits of Taxes of any of
the Subject Entities for any taxable period beginning after the Closing Date
shall be for the account of the Buyer. Any refunds or credits of Taxes of any of
the Subject Entities for any Straddle Period (as defined in Section 14.01) shall
be equitably apportioned between Seller and Buyer as provided by Section 14.01.
Buyer shall, if Seller so requests and at Seller's expense, cause any of the
Subject Entities to file for and obtain any refunds or credits to which Seller
is entitled under this Section 7.06. Buyer shall permit Seller to control the
prosecution of any such refund claim and, where deemed appropriate by Seller,
shall cause each of the Subject Entities to authorize by appropriate powers of
attorney such persons as Seller shall designate to represent such Subject Entity
with respect to such refund claim. Buyer shall cause each of the Subject
Entities to forward to Seller any such refund within 10 days after the refund is
received (or reimburse Seller for any such credit within 10 days after the
credit is allowed or applied against other Tax liability); PROVIDED, HOWEVER,
that any such amounts payable to Seller shall be net of any Tax cost or benefit
to Buyer or such Subject Entity, attributable to the receipt of such refund
and/or the payment of such amounts to Seller.
7.07 All sales and use Taxes incurred in connection with this Agreement
and the transactions contemplated hereby shall be paid by Buyer, and Seller and
Buyer shall cooperate in timely making all filings, returns, reports and forms
as may be required to comply with the provisions of such Tax laws.
7.08 On the Closing Date, Buyer shall cause each of the Subject
Entities to conduct its business in the ordinary course in substantially the
same manner as presently conducted and shall not permit any of the Subject
Entities to effect any extraordinary transactions (other than any such
transactions expressly required by applicable law or contemplated by this
Agreement) that could result in Tax liability to any of the Subject
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Entities in excess of Tax liability associated with the conduct of its business
in the ordinary course.
On or after the Closing Date, neither Buyer nor any of the Subject
Entities shall, with respect to any Pre-Closing Tax Period, (i) file any amended
Tax Return, or (ii) carry back any loss or other Tax attribute.
7.09 Buyer and Seller shall join in timely making an election under
Section 338(h)(10) of the IRC and similar elections under any applicable state
or local income Tax laws with respect to each Subject Entity. Buyer and Seller
shall report the transactions consistent with such election under Section
338(h)(10) of the IRC or any similar state or local Tax provision (the
"Elections"). Buyer and Seller shall timely execute any and all forms necessary
to effectuate the Elections (including, without limitation, Internal Revenue
Service Form 8023 and any similar forms under applicable state or local income
Tax laws (the "Section 338 Forms")).
Buyer and Seller agree to use all reasonable efforts to enter into an
agreement (the "Allocation Agreement") as soon as practicable after the Closing
to determine the Modified Aggregate Deemed Sale Price ("MADSP"), pursuant to
Section 338(h)(10) of the IRC and the regulations thereunder, of the assets of
the Subject Entities. Buyer shall initially prepare a statement(s) setting forth
a proposed computation and allocation of MADSP (the "Computation") and submit it
to Seller no later than 150 days after the Closing. If within 30 days of
Seller's receipt of the Computation, Seller shall not have objected in writing
to such Computation, the Computation shall become the Allocation Agreement. If
within 60 days of Seller's receipt of the Computation, Seller and Buyer have not
adopted an Allocation Agreement, the parties shall submit any disputed matter to
the Accounting Firm, and cause the Accounting Firm to deliver a final, binding
and conclusive written report resolving all such disputed matters within 30 days
of the submission thereof to the Accounting Firm. Seller and Buyer shall each
cause the Section 338 Forms to be duly executed by an authorized person for
Seller and Buyer, respectively, within 30 days prior to the date such Section
338 Forms are required to be filed, and shall duly and timely file the Section
338 Forms in accordance with applicable Tax laws and the terms of this
Agreement.
8. CLOSING AND CLOSING DOCUMENTS.
8.01 CLOSING. The "Closing" under this Agreement shall be held at the
offices of Buyer at 10:00a.m., Central Time, at the end of the month during
which all the terms and conditions contained in Sections 9, 10 and 11 of this
Agreement have been fulfilled or waived, or at such other place and time as may
be mutually agreed to by the parties (the day on which Closing takes place being
referred to as the "Closing Date").
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8.02 SELLER CLOSING MATTERS. At the Closing, Seller shall deliver, or
cause to be delivered, to Buyer or take, or cause to be taken, the following
actions, as the case may be:
(A) A certificate of Seller, signed by its President, which
shall confirm (i) the compliance by Seller in all material respects with its
covenants and agreements contained in this Agreement, (ii) the accuracy in all
material respects of the representations and warranties made by Seller in this
Agreement that are not qualified as to materiality, at and as of the Closing as
if made at such time (unless made as of a specific date), and (iii) the accuracy
of the representations and warranties made by Seller in this Agreement that are
qualified as to materiality, at and as of the Closing as if made at said time
(unless made as of a specific date).
(B) A certificate of Seller certifying that the GAAP
Consolidated Financial Statements for the year ended December 31, 1998 and the
Prior Month-End Balance Sheet have been prepared in accordance with GAAP on a
basis consistent with the GAAP Consolidated Financial Statements for the periods
ended December 31, 1997 and September 30, 1998 and in accordance with Section
2.09.
(C) Written resignations, effective at the Closing, of the
directors of each of the Subject Entities specified on the Directors
and Officers Schedule.
(D) Certificates representing the Shares being conveyed by
Seller as specified in Section 1 hereto, duly assigned or with executed
stock powers to transfer the shares evidenced thereby to Buyer on the
stock transfer records of the Company.
(E) The opinion of Brobeck, Phleger & Harrison, LLP, or other
counsel to Seller reasonably acceptable to Buyer dated the Closing
Date, covering the matters set forth in Exhibit 8.02(E).
(F) All minute books, stock record books and corporate seals
of each of the Subject Companies to the extent that they are not
already in the possession of the Subject Companies.
(G) Written evidence, reasonably satisfactory to Buyer, from
the banking institution or institutions holding the Indebtedness of the
extinguishment of the Indebtedness in full.
8.03 BUYER CLOSING MATTERS. At the Closing, Buyer shall deliver,
or cause to be delivered, to Seller:
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(A) A certificate of Buyer, signed by its President, which
shall confirm (i) the compliance by Buyer in all material respects with
its covenants and agreements contained in this Agreement, (ii) the
accuracy in all material respects of the representations and warranties
made by it in this Agreement that are not qualified as to materiality,
at and as of the Closing as if made at such time (unless made as of a
specific date), and (iii) the accuracy of the representations and
warranties made by Buyer in this Agreement that are qualified as to
materiality, at and as of the Closing as if made at said time (unless
made as of a specific date).
(B) The Estimated Purchase Price in the amount and manner of
payment specified in Section 1.02(B).
(C) The opinion of counsel to Buyer reasonably acceptable to
Seller, dated the Closing Date, covering the matters set forth in
Exhibit 8.03(C).
9. CONDITIONS TO THE OBLIGATIONS OF BUYER.
The obligations of Buyer under this Agreement to cause this Agreement
to become effective and have the transactions contemplated hereby be consummated
are, at its option, subject to the conditions that:
9.01 VALIDITY OF REPRESENTATIONS AND WARRANTIES. The representations
and warranties of Seller contained herein that are not qualified as to
materiality shall be true in all material respects on and at the Closing (unless
made as of a specific date) with the same force and effect as though made on and
at the Closing. The representations and warranties of Seller contained herein
that are qualified as to materiality shall be true on and at the Closing (unless
made as of a specific date) with the same force and effect as though made on and
at the Closing.
9.02 CONSENTS. All consents, waivers, approvals, authorizations or
orders listed on Seller Consent Schedule shall have been obtained by Seller in
substance reasonably satisfactory to Buyer and copies of the same (if reduced to
writing) shall have been delivered to Buyer.
9.03 COMPLIANCE WITH COVENANTS. Seller shall have performed in all
material respects all obligations and agreements and complied in all material
respects with all covenants and conditions contained in this Agreement to be
performed and complied with at or prior to the Closing (except that any
covenants and conditions which are qualified as to materiality shall have been
so performed and complied with in all respects).
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9.04 NCM/CHARTER COUNTY MUTUAL RELATIONSHIP. The existing General
Agency Managerial Contract between NCM and Charter County Mutual under which NCM
controls Charter County Mutual shall be in full force and effect on the Closing
Date, and shall not have been amended, modified or otherwise altered between the
execution of this Agreement and the Closing Date. Except for NCM and the board
of directors and officers of Charter County Mutual, no individual, corporation,
partnership, joint venture, association, joint stock company, trust, or
unincorporated organization shall have any direct or indirect power or authority
to direct or cause the direction of the management and policies of Charter
County Mutual.
9.05 RESIGNATIONS. The directors of each of the Subject Entities as
specified on the Directors and Officers Schedule shall have tendered their
resignations in writing, effective at the Closing.
9.06 TRANSFER OF VALLEY NATIONAL AND PINNACLE. All of the issued and
outstanding stock of each of Valley National and Pinnacle (if any) owned by any
of the Subject Entities shall have been sold or transferred (including by way of
dividend or distribution) to Seller or to an affiliate of Seller that is not a
Subject Entity or to a third party on terms and conditions reasonably
satisfactory to Buyer; PROVIDED, HOWEVER, that in the event Pinnacle has not yet
been acquired by Charter as of the Closing Date, Seller shall have caused all
rights and obligations under the Pinnacle Acquisition Agreement to be assigned
to Seller or an affiliate of Seller (other than the Subject Entities).
9.07 ASSET SALE/EMPLOYEE TRANSFER. The Asset Sale and the Employee
Transfer shall have been completed in form and substance reasonably satisfactory
to Buyer.
9.08 EXTINGUISHMENT OF INDEBTEDNESS. The Indebtedness shall have been
extinguished in full.
10. CONDITIONS OF THE OBLIGATIONS OF SELLER.
The obligations of Seller under this Agreement to cause this Agreement
to become effective and have the transactions contemplated hereby be consummated
are, at its option, subject to the conditions that:
10.01 VALIDITY OF REPRESENTATIONS AND WARRANTIES. The representations
and warranties of Buyer contained herein that are not qualified as to
materiality shall have been true in all material respects on and at the Closing
(unless made as of a specific date) with the same force and effect as though
made on and at the Closing. The representations and warranties of Buyer
contained herein that are qualified as to materiality shall be true
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on and at the Closing (unless made as of a specific date) with the same force
and effect as though made on and at the Closing.
10.02 CONSENTS. All consents, waivers, approvals, authorizations or
orders listed on the Buyer Consent Schedule shall have been obtained by Buyer in
substance reasonably satisfactory to Seller and copies of the same (if reduced
to writing) shall have been delivered to Seller.
10.03 COMPLIANCE WITH COVENANTS. Buyer shall have performed in all
material respects all obligations and agreements and complied in all material
respects with all covenants and conditions contained in this Agreement to be
performed and complied with by it at or prior to the Closing (except that any
covenants and conditions which are qualified as to materiality shall have been
so performed and complied with in all respects).
11. CONDITIONS APPLICABLE TO BUYER AND SELLER.
The obligations of each of Buyer and Seller under this Agreement to
cause this Agreement to become effective and have the transactions contemplated
hereby be consummated are subject to the following terms and conditions:
11.01 HART-SCOTT-RODINO ACT. Any waiting period applicable to the
consummation of the transactions contemplated by this Agreement under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, shall have
expired or been terminated, and no action instituted by the Department of
Justice or Federal Trade Commission challenging or seeking to enjoin the
consummation of such transactions shall be pending.
11.02 GOVERNMENTAL APPROVALS. A written order approving the purchase
and sale of the Shares as contemplated by this Agreement from the insurance
departments listed on Seller's and Buyer's Consent Schedules and any additional
approvals thereof as may be required by other insurance regulatory authorities
for the purchase and sale of the Shares hereunder shall have been obtained at or
prior to the Closing.
11.03 INJUNCTION. The consummation of the transactions contemplated by
this Agreement shall not have been restrained, enjoined or prohibited by any
court or governmental authority of competent jurisdiction. No material
litigation or administrative proceeding shall be pending as of the Closing
seeking to restrain, enjoin or prohibit the consummation of the transactions
contemplated by this Agreement.
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11.04 CLOSING. The Closing shall occur no later than 5:00 p.m., Central
Time, on June 30, 1999, or such other date as may be mutually agreed to by the
parties.
12. TERMINATION.
12.01 TERMINATION. (a) Anything contained herein to the contrary
notwithstanding, this Agreement may be terminated and the transactions
contemplated hereby abandoned at any time prior to the Closing Date:
(i) by mutual written consent of Seller and Buyer;
(ii) by Seller if any of the conditions set forth in Section
10 shall have become incapable of fulfillment, and shall not have been
waived by Seller;
(iii) by Buyer if any of the conditions set forth in Section 9
shall have become incapable of fulfillment, and shall not have been
waived by Buyer;
(iv) by either party if any of the conditions set forth in
Section 11 (other than Section 11.04) shall have become incapable of
fulfillment, and shall not have been waived by the party seeking
termination; or
(v) by either party if the Closing does not occur on or prior
to June 30, 1999;
PROVIDED, HOWEVER, that the party seeking termination pursuant to
clause (ii), (iii), (iv) or (v) shall only be entitled to terminate
this Agreement if it is not in material breach of any of its
representations, warranties, covenants or agreements contained in this
Agreement.
(b) In the event of termination by Seller or Buyer pursuant to this
Section 12, written notice thereof shall forthwith be given to the other party
and the transactions contemplated by this Agreement shall be terminated, without
further action by either party. If the transactions contemplated by this
Agreement are terminated as provided herein:
(i) Buyer shall return all documents and other material
received from Seller or any Subject Entity relating to the transactions
contemplated hereby, whether so obtained before or after the execution
hereof, to Seller; and
(ii) all confidential information received by Buyer with
respect to the business of the Subject Entities shall be treated in
accordance with the terms of the
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Confidentiality Agreement, which shall remain in full force and effect
in accordance with its terms notwithstanding the termination of this
Agreement.
(c) If this Agreement is terminated and the transactions contemplated
hereby are abandoned as described in this Section 12, this Agreement shall
become null and void and of no further force or effect, except for the
provisions of (i) Section 6.06 relating to the obligation of Buyer to keep
confidential certain information and data obtained by it, (ii) Section 17.01
relating to certain expenses, (iii) Section 17.09 relating to attorney fees and
expenses, (iv) Section 17.06 relating to publicity, (v) Section 17.10 relating
to finder's fees and broker's fees, and (vi) this Section 12. Nothing in this
Section 12 shall be deemed to release either party from any liability for any
breach by such party of the terms and provisions of this Agreement or to impair
the right of either party to compel specific performance by the other party of
its obligations under this Agreement.
13. SURVIVAL OF REPRESENTATIONS AND WARRANTIES; COVENANTS.
The representations and warranties in this Agreement and in any
certificate or schedule delivered pursuant hereto shall survive until the date
which is eighteen (18) months following the Closing Date; provided, however,
that the representations and warranties contained in Sections 2.12
(Environmental), 2.17 (Taxes) and 2.19 (Employee Benefits) shall survive until
the expiration of the relevant statutes of limitation, and the representations
and warranties contained in Sections 2.02 (Subsidiaries; the first two sentences
only) and 2.03 (Authorized Stock), shall survive forever. Unless otherwise
expressly provided by this Agreement, all covenants and obligations under this
Agreement to be performed after the Closing shall survive the Closing in
accordance with their respective terms.
14. TAX INDEMNIFICATION.
14.01 In addition to any indemnification obligations arising under
Section 16 hereof, Seller hereby agrees upon the terms and conditions and in
accordance with the procedures set forth in this Agreement, to indemnify, defend
and hold Buyer and its affiliates (including, without limitation, each of the
Subject Entities) and their respective officers, directors, agents and employees
(the "Seller Indemnitees") harmless from and against any damages (including,
without limitation, extraordinary or punitive damages), deficiencies, costs,
liabilities, claims or expenses, including, without limitation, interest,
penalties and reasonable attorneys' fees (individually a "Loss" and collectively
the "Losses"), that any of the Seller Indemnitees shall incur or suffer,
regardless of whether Buyer had knowledge of such Loss or Losses at the time of
the Closing, resulting from or relating to any and all liability for Taxes (i)
of the Subject Entities related to any taxable period ending on or prior to the
Closing Date and the portion ending on the Closing Date
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of any taxable period that includes (but does not end on) such day ("Pre-Closing
Tax Period") and (ii) resulting from the Elections contemplated by Section 7.09
of this Agreement.
Notwithstanding the foregoing, Seller shall not indemnify any
Seller Indemnitee from any liability for Taxes attributable to any action taken
after the Closing by Buyer, any of its affiliates (including any of the Subject
Entities), or any transferee of Buyer or any of its affiliates (other than any
such action expressly required by applicable law or by this Agreement) (a "Buyer
Tax Act") or attributable to a breach by Buyer of its obligations under this
Agreement.
In the case of any taxable period that includes (but does not
end on) the Closing Date (a "Straddle Period"):
(i) real, personal and intangible property Taxes ("property
Taxes") of the Subject Entities for the Pre-Closing Tax Period shall be
equal to the amount of such property Taxes for the entire Straddle
Period multiplied by a fraction, the numerator of which is the number
of days during the Straddle Period that are in the Pre-Closing Tax
Period and the denominator of which is the number of days in the
Straddle Period; and
(ii) the Taxes of the Subject Entities (other than property
Taxes) for the Pre-Closing Tax Period shall be computed as if such
taxable period ended as of the close of business on the Closing Date.
14.02 Buyer hereby agrees upon the terms and conditions and in
accordance with the procedures set forth in this Agreement to indemnify, defend
and hold Seller and its affiliates and its officers, directors, agents and
employees (the "Buyer Indemnitees") harmless from and against any Loss or Losses
that any of the Buyer Indemnitees shall incur or suffer, regardless of whether
Seller had knowledge of such Loss or Losses at the time of the Closing,
resulting from or relating to any and all liability for Taxes (i) of the Subject
Entities related to any taxable period ending after the Closing Date (except to
the extent such taxable period began before the Closing Date, in which case
Buyer's indemnity will cover only that portion of any such Taxes that are not
for the Pre-Closing Tax Period) and (ii) attributable to a Buyer Tax Act or to a
breach by Buyer of its obligations under this Agreement.
14.03 If a claim with respect to Taxes shall be made by any taxing
authority, which, if successful, might result in an indemnity payment to an
indemnified party pursuant to Section 14.01 or 14.02, the party receiving such
claim shall promptly notify the other party in writing of such claim (a "Tax
Claim"). If the indemnified party
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receives notification of a Tax Claim and fails to notify the indemnifying party
within a sufficient period of time to allow the indemnifying party to
effectively contest such Tax Claim, or in reasonable detail to apprise the
indemnifying party of the nature of the Tax Claim, in each case taking into
account the facts and circumstances with respect to such Tax Claim, the
indemnifying party shall not be liable to the indemnified party, any of its
affiliates or any of their respective officers, directors, agents or employees
to the extent that indemnifying party's position is actually prejudiced as a
result thereof.
With respect to any Tax Claim relating solely to a Pre-Closing Tax
Period, Seller shall control all proceedings taken in connection with such Tax
Claim (including selection of counsel) and, without limiting the foregoing, may
in its sole discretion pursue or forego any and all administrative appeals,
proceedings, hearings and conferences with any taxing authority with respect
thereto, and may, in its sole discretion, either pay the Tax claimed and sue for
a refund where applicable law permits such refund suits or contest the Tax Claim
in any permissible manner.
Buyer, the Subject Entities, and each of their respective affiliates
shall cooperate with Seller in contesting any Tax Claim, which cooperation shall
include the retention until the applicable statute of limitations has expired
and (upon Seller's request) the provision to Seller of records and information
which are reasonably relevant to such Tax Claim, and making their employees
available on a mutually convenient basis to provide additional reasonably
relevant information or explanation of any material provided hereunder or to
testify at proceedings relating to such Tax Claim.
In no case shall Buyer, the Subject Entities, or any of their
respective officers, directors, agents or employees settle or otherwise
compromise any Tax Claim relating to a Pre-Closing Tax Period (excluding
Straddle Periods) without Seller's prior written consent.
15. POST-CLOSING RESERVE ADJUSTMENTS.
15.01 CALCULATION AND ADJUSTMENT. As promptly as reasonably practicable
after it becomes available, Buyer shall deliver to Seller a true and complete
copy of each Annual and Quarterly Statement of each Subject Entity as filed with
the appropriate insurance regulatory authority for any period ending at or prior
to the Settlement Date (as defined in Section 15.02), together with any
actuarial opinion, affirmation or certification filed in connection therewith.
Not later than 90 days following the end of each calendar year until the
Settlement Date, and not later than 90 days following the Settlement Date, Buyer
shall provide Seller with a written report (the "Reserve Report") reflecting the
calculation contemplated by Section 15.02 ("Indicated Reserve Amount"), together
with all work papers and actuarial memoranda used in establishing the Indicated
Reserve Amount. The
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calculation of the Indicated Reserve Amount will be prepared in conformity with
GAAP as in effect on the Closing Date consistently applied and the books and
records of the Subject Entities (with the exception of ULAE which shall be
calculated in accordance with Section 15.02), and will present fairly the loss
and loss adjustment expense reserves of the Insurance Companies as of the
Settlement Date (or earlier date thereof). In the event that the Indicated
Reserve Amount reflected on the final Reserve Report prepared as of the
Settlement Date exceeds the loss and loss adjustment expense ("LAE") reserves,
net of related third party reinsurance, salvage and subrogation recoverables and
receivables, as shown in the Closing Date Balance Sheet ("Closing Reserves"), by
at least $500,000, Seller shall pay or cause to be paid to Buyer in immediately
available funds 90% of the amount (including such $500,000 amount) by which the
Indicated Reserve Amount exceeds the Closing Reserves (including such $500,000
amount). In the event that the Closing Reserves exceed the Indicated Reserve
Amount by at least $500,000, Buyer shall pay or cause to be paid to Seller in
immediately available funds 90% of the amount (including such $500,000 amount)
by which the Closing Reserves exceed the Indicated Reserve Amount (including
such $500,000 amount). Notwithstanding anything herein to the contrary, Seller
shall not in any event be required to pay any amounts hereunder which would
individually or in the aggregate exceed $50,000,000.
15.02 CALCULATION METHODOLOGY. The Indicated Reserve Amount will be
equal to the sum of (i) the Indicated Loss Reserve Amount as defined in Section
15.03 and (ii) the Indicated ALAE Reserve Amount as defined in Section 15.04 and
(iii) 5.4% of the sum of (a) the Indicated Loss Reserve Amount plus (b) the
Indicated ALAE Reserve Amount, such percentage representing the agreed-upon
unallocated loss adjustment expenses ("ULAE") for the Subject Business, in the
case of each of (i) and (ii) and (iii) as of December 31, 2002 (the "Settlement
Date") solely with respect to insurance or reinsurance issued, underwritten or
assumed prior to the Closing Date by the Insurance Companies (the "Subject
Business"). Notwithstanding anything herein to the contrary, and except as
otherwise provided by Section 15.07, the Indicated Reserve Amount shall exclude
from losses and LAE any losses and LAE liabilities (i) paid or incurred in
excess of the limits of any original policy, (ii) constituting an
extra-contractual liability, or (iii) arising from the negligence, fraud or bad
faith of any Insurance Company or any other of Buyer's affiliates in the
handling of the underlying claim, but only to the extent that any such losses
and LAE liabilities in the case of each of (i), (ii) and (iii) arise out of acts
or omissions occurring after the Closing Date.
15.03 INDICATED LOSS RESERVE AMOUNT. The Indicated Loss Reserve Amount
will be the sum of (i) claims paid after the Closing Date for losses occurring
on or prior to the Closing Date with respect to the Subject Business, (ii) case
loss reserves held as of the Settlement Date for losses occurring on or prior to
the Closing Date with respect to the Subject Business, and (iii) the bulk and
incurred but not reported ("IBNR") loss
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reserves held as of the Settlement Date for losses occurring on or prior to the
Closing Date with respect to the Subject Business, less applicable third party
reinsurance, salvage and subrogation recoveries received or receivable after the
Closing Date and applicable to losses incurred on or prior to the Closing Date.
The loss reserves for the Subject Business will be calculated in accordance with
GAAP as in effect on the Closing Date consistently applied and generally
accepted actuarial practices consistently applied.
15.04 INDICATED ALAE RESERVE AMOUNT. The Indicated ALAE Reserve Amount
will be the sum of (i) allocated loss adjustment expenses ("ALAE") paid after
the Closing Date for losses occurring on or prior to the Closing Date with
respect to the Subject Business, (ii) case ALAE reserves held as of the
Settlement Date for losses occurring on or prior to the Closing Date with
respect to the Subject Business and (iii) bulk and IBNR ALAE reserves held as of
the Settlement Date for losses occurring on or prior to the Closing Date with
respect to the Subject Business, less applicable third party reinsurance,
salvage and subrogation recoveries received or receivable after the Closing Date
and applicable to losses incurred on or prior to the Closing Date. The ALAE
reserves for the Subject Business will be calculated in accordance with GAAP as
in effect on the Closing Date consistently applied and generally accepted
actuarial practices consistently applied.
15.05 DISPUTE RESOLUTION. Following the delivery of the Reserve Report
to Seller, Buyer will cause the Subject Entities to allow Seller to have
reasonable access , during normal business hours and upon reasonable notice, to
the books, records and work papers of the Subject Entities relating to the
Indicated Reserve Amount and the Subject Business; PROVIDED, HOWEVER, that such
access does not unreasonably disrupt the normal business operations of the
Subject Entities, Buyer or its other affiliates. In the event that the Seller
has any disagreement with the Indicated Reserve Amount reflected in the Reserve
Report then all unresolved disagreements shall be submitted to an independent
actuarial firm of national standing and reputation as the parties shall jointly
select and retain (the "Independent Actuary") for resolution in accordance with
this Agreement. In the event that the parties are unable to jointly select an
Independent Actuary, each of the Buyer, on the one hand, and the Seller, on the
other hand, shall select an independent certified public accounting firm of
national standing and reputation, which firms shall jointly select the
Independent Actuary for joint retention by the parties. The parties shall, and
Buyer shall cause the Subject Entities to, cooperate in good faith with the
Independent Actuary and shall give the Independent Actuary access to all books,
records, work papers and other information and documents relating to the items
in disagreement as the Independent Actuary may reasonably request for purposes
of such resolution. The Independent Actuary shall, within thirty (30) days after
its engagement, deliver to the parties a conclusive written resolution of all
disagreements submitted to it, which written resolution shall be in accordance
with this Agreement and shall be final and binding upon the parties hereto. The
Indicated Reserve Amount reflected in the Reserve Report shall
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be adjusted accordingly to reflect any such resolution and, as so adjusted,
shall be deemed final for purposes of the payments provided in Section 15.01.
Seller on the one hand, and Buyer on the other hand, shall each pay one-half of
the fees and expenses of the Independent Actuary.
15.06 PAYMENT. Except for any amounts in dispute under Section 15.05,
balances due from either party under Section 15.01 shall be paid within 30 days
of delivery by Buyer of the final Reserve Report contemplated by Section 15.01.
Balances in dispute shall be paid within 30 days after the parties are notified
of the determination rendered by the Independent Actuary. Any such amounts shall
bear interest at an annual rate equal to the Interest Rate from the date of
delivery of the aforesaid report until payment in full.
15.07 CERTAIN COVENANTS. With respect to the Subject Business, from the
Closing Date until the Settlement Date, Buyer agrees to cause each Insurance
Company to, in good faith, (i) pay and settle claims, and handle the defense of
pending or threatened claims, suits or proceedings, in accordance with its
standard past practices, but in no case on a basis less favorable to such
Insurance Company than those practices of affiliates of Buyer, except to the
extent as may otherwise be required by law, (ii) establish reserves for losses
and loss adjustment expenses in accordance with generally accepted actuarial
standards, but in no case on a basis less favorable to such Insurance Company
than those practices of other affiliates of Buyer, and (iii) not delegate any
claims adjustment or claims handling authority to any person or entity not
affiliated therewith, in each case, other than on a basis more favorable to and
involving lesser liabilities, obligations and other costs for such Insurance
Company. Notwithstanding anything contained in this Agreement to the contrary,
each of Buyer and Seller agree that all claims incurred by any Insurance Company
with respect to the Subject Business involving synthetic stucco (sometimes
referred to as Exterior and Insulation Finishing System (EIFS) or Dryvit) shall
be assigned a date of loss as of the inception of the policy period. While this
Section 15 is in effect, Seller shall have the right to inspect and copy, at its
own expense, through its duly authorized representatives, the books, records and
accounts of each Subject Entity pertaining to the Subject Business and payments
of losses and loss adjustment expenses in respect thereof during normal business
hours and upon reasonable notice; PROVIDED, HOWEVER, such inspection and copying
shall not unreasonable disrupt the normal business operations of any Subject
Entity, Buyer or its other affiliates. During the term of this Agreement, Buyer
shall advise Seller promptly of any claim relating to the Subject Business and
any material subsequent developments pertaining thereto, to the extent Buyer or
any of its affiliates is required to notify any reinsurer, retrocessionaire or
other assuming company thereof. Upon the written request of Seller, Buyer will
afford Seller an opportunity to participate with the relevant Insurance Company,
at the sole expense of Seller, in the settlement of any such claim, and the
Insurance Company and Seller shall cooperate in every respect in such
settlement; PROVIDED, HOWEVER, in the event
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that Seller participates in a settlement, and to the extent such participation
results in or contributes to (i) liabilities paid or incurred in excess of the
limits of any original policy, (ii) liabilities constituting extra-contractual
liabilities, or (iii) a finding of negligence, fraud or bad faith as
contemplated by Section 15.02, such settlement and all liabilities associated
therewith shall be included to such extent in the Indicated Reserve Amount.
16. INDEMNIFICATION.
16.01 INDEMNIFICATION BY SELLER. In addition to any indemnification
obligations provided elsewhere herein, Seller hereby agrees upon the terms and
conditions and in accordance with the procedures set forth in this Agreement, to
indemnify, defend and hold Buyer and its affiliates (including, without
limitation, following the Closing, each of the Subject Entities) and their
respective officers, directors, agents and employees (the "Seller Indemnitees")
harmless from and against any Loss or Losses that any of the Seller Indemnitees
shall incur or suffer resulting from or relating to any breach of representation
or warranty, or non-fulfillment of any covenant or agreement, by Seller
contained in this Agreement or any certificate, schedule, list or other document
delivered by Seller to Buyer pursuant to this Agreement. Notwithstanding
anything in this Agreement to the contrary, Seller shall not be required
hereunder to indemnify, defend or hold Seller Indemnitees, any of their
affiliates or any other Person or entity harmless from or against any Losses
arising from or relating to (i) insurance or reinsurance losses or loss
adjustment expenses (including reserves in respect thereof), except to the
extent specifically provided in Section 15, or (ii) Taxes, except to the extent
specifically provided in Section 14, or (iii) any Losses reflected on the
Closing Date Balance Sheet.
16.02 INDEMNIFICATION BY BUYER. In addition to any indemnification
obligations provided elsewhere herein, Buyer hereby agrees upon the terms and
conditions and in accordance with the procedures set forth in this Agreement to
indemnify, defend and hold Seller and its affiliates and their respective
officers, directors, agents and employees (the "Buyer Indemnitees") harmless
from and against any Loss or Losses that any of the Buyer Indemnitees shall
incur or suffer resulting from or relating to any breach of representation or
warranty, or non-fulfillment of any covenant or agreement, by Buyer contained in
this Agreement or any certificate, schedule, list or other document delivered by
Buyer to Seller pursuant to this Agreement.
16.03 LIMITS ON INDEMNIFICATION. Notwithstanding the foregoing, no
party shall be obligated pursuant to Section 16.01 or 16.02, respectively, (i)
until the aggregate Losses of the party suffering Loss is in the amount of
$250,000 or more, in which case the indemnified party shall be entitled to be
indemnified for all such Losses (including such $250,000 amount) and (ii) for
any Losses in excess of $5,000,000 in the aggregate for all Losses; PROVIDED,
HOWEVER, that the limitation for any Loss or Losses resulting
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from or relating to any breach by Seller of the representations and warranties
contained in Sections 2.02 or 2.03 shall be an amount equal to the Purchase
Price, less any other amounts paid to Buyer pursuant to Section 16.01.
16.04 INDEMNIFICATION PROCEDURES. Any indemnified party entitled to
indemnification hereunder pursuant to this Section 16 shall (i) give prompt
written notice to the indemnifying party of any claim with respect to which it
seeks indemnification and (ii) unless in such indemnified party's judgment a
conflict of interest between such indemnified and indemnifying parties may exist
with respect to such claim, permit such indemnifying party to assume the defense
of such claim with counsel reasonably satisfactory to the indemnified party. If
such defense is assumed, the indemnifying party will not be subject to any
liability for any settlement made by the indemnified party without the
indemnifying party's prior written consent (but such consent will not be
unreasonably withheld). An indemnifying party who is not entitled to, or elects
not to, assume the defense of a claim will not be obligated to pay the fees and
expenses of more than one counsel for all parties indemnified by such
indemnifying party with respect to such claim, unless in the reasonable judgment
of any indemnified party a conflict of interest may exist between such
indemnified party and any other of such indemnified parties with respect to such
claim. The indemnified party shall have the right to be represented by counsel
at its own expense in any such contest, defense, litigation or settlement
conducted by the indemnifying party. The indemnifying party also agrees to make
such provisions, as are reasonably requested by any indemnified party, for
contribution to such party in the event the indemnifying party's indemnification
is unavailable for any reason.
17. MISCELLANEOUS.
17.01 PAYMENT OF EXPENSES. Except as otherwise expressly provided
herein, whether or not this Agreement shall be consummated, each party hereto
shall pay its own expenses incident to preparing for, entering into and carrying
out this Agreement and to the consummation of the transactions contemplated
hereby.
17.02 ENTIRE AGREEMENT. This Agreement (together with the Schedules and
Exhibits hereto and the documents referred to herein) contains, and is intended
as, a complete statement of all of the terms of the arrangements between the
parties with respect to the matters provided for herein, and supersedes any
previous agreements and understandings between the parties with respect to those
matters.
17.03 MODIFICATIONS, AMENDMENTS AND WAIVERS. At any time prior to the
Closing, the parties hereto may by written agreement (a) extend the time for the
performance of any of the obligations or other acts of the parties hereto, (b)
waive any inaccuracies in the representations and warranties contained in this
Agreement or in any
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document delivered pursuant hereto, (c) waive compliance with any of the
covenants or agreements contained in this Agreement, or (d) make any other
modification of this Agreement approved by Buyer and Seller. This Agreement
shall not be altered or otherwise amended except pursuant to an instrument in
writing executed and delivered on behalf of each of the parties hereto.
17.04 ASSIGNMENT. This Agreement shall not be assignable by any of the
parties hereto, except that (a) Seller shall have the right, without such
consent, to transfer ownership of the Company to another direct or indirect
wholly owned subsidiary of Seller prior to the Closing and to assign to such
other subsidiary its right and obligation hereunder to sell the Shares to Buyer
(PROVIDED, HOWEVER, that, in the event of such assignment, Seller shall
guarantee the performance by such other subsidiary of such sale obligation and
will remain liable for all its other obligations hereunder) and (b) Buyer shall
have the right, without such consent, to assign to a direct or indirect wholly
owned subsidiary of Buyer its right and obligation hereunder to purchase the
Shares from Seller (PROVIDED, HOWEVER, that, in the event of such assignment,
Buyer shall guarantee the performance by such subsidiary of such purchase
obligation and will remain liable for all its other obligations hereunder). This
Agreement shall be binding upon and inure to the benefit of and be enforceable
by the parties hereto and their respective successors and permitted assigns.
17.05 SCHEDULES. All information set forth in the Seller Schedule shall
be deemed a representation and warranty of Seller as to the accuracy of such
information.
17.06 PUBLICITY. Except as may otherwise be required by law, no press
release or public announcement concerning this Agreement or the transactions
contemplated hereby shall be made prior to the Closing without advance written
approval thereof by Seller and Buyer. Seller and Buyer will cooperate with each
other in the development and distribution of all news releases and other public
information disclosures with respect to this Agreement or any of the
transactions contemplated hereby. Without limiting the foregoing, the parties
contemplate issuing a joint press release announcing this transaction promptly
upon execution of this Agreement.
17.07 NOTICES. Any notice, request, instruction or other document to be
given hereunder by any party to the others shall be in writing and delivered
personally or sent by registered or certified mail, postage prepaid, overnight
express service or confirmed facsimile transmission, if to Buyer, addressed to
Unitrin, Inc., One East Wacker Drive, 10th Floor, Chicago, Illinois 60601,
Attention: Richard C. Vie, facsimile: (312) 661-4690 (with a copy to Unitrin,
Attention: Scott Renwick, Esq., facsimile: (312) 661-4941); and if to Seller
addressed to Fund American Enterprises Holdings, Inc., 80 South Main Street,
Hanover, New Hampshire 03755-2053, Attention: Ray Barrette, facsimile:
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(603) 643-4562, (with a copy to Brobeck, Phleger & Harrison LLP, Two Embarcadero
Place, 2200 Geng Road, Palo Alto, California 94303, Attention: Curtis L. Mo,
Esq., facsimile: (650) 496-2715 or to such other persons as may be designated in
writing by the parties.
17.08 GLOSSARY. Attached hereto as Exhibit A is a glossary of certain
defined terms used in this Agreement.
17.09 ATTORNEY FEES. A party in breach of this Agreement shall, on
demand, indemnify and hold harmless the other party from and against all
reasonable out-of-pocket expenses, including legal fees, incurred by such other
party by reason of the enforcement and protection of its rights under this
Agreement. The payment of such expenses is in addition to any other relief to
which such other party may be entitled.
17.10 BROKERS' FEES. Seller hereby represents and warrants that (a) the
only brokers or finders that have acted for Seller in connection with this
Agreement or the transactions contemplated hereby or that may be entitled to any
brokerage fee, finder's fee or commission in respect thereof are Gill & Roeser
and (b) Seller shall pay all fees or commissions which may be payable to Gill &
Roeser. Buyer hereby represents and warrants that (a) the only brokers or
finders that have acted for Buyer in connection with this Agreement or the
transactions contemplated hereby or that may be entitled to any brokerage fee,
finder's fee or commission in respect thereof are Search Information Services
and (b) Buyer shall pay all fees or commissions which may be payable to Search
Information Services.
17.11 REMEDIES. The parties hereto agree that money damages or other
remedies at law would not be a sufficient or adequate remedy for any breach or
violation of, or a default under, this Agreement by them and that, in addition
to all other remedies available to them, each of them shall be entitled to an
injunction restraining such breach, violation or default or threatened breach,
violation or default and to any other equitable relief, including specific
performance, without bond or other security being required.
17.12 SEVERABILITY. The invalidity or unenforceability of any provision
of this Agreement in any jurisdiction shall not affect the validity or
enforceability of the remainder of this Agreement in that jurisdiction or the
validity or enforceability of this Agreement, including that provision, in any
other jurisdiction. If any restriction or provision of this Agreement is held
unreasonable, unlawful or unenforceable in any respect, such restriction or
provision shall be interpreted, revised or applied in a manner that renders it
lawful and enforceable to the fullest extent possible under law.
47
<PAGE>
17.13 GOVERNING LAW. This Agreement and the rights and obligations of
the parties hereto shall be governed by, and construed and enforced in
accordance with, the internal laws of the State of New York, without giving
effect to the principles of conflict of laws thereof.
17.14 HEADINGS. The Section and paragraph headings in this Agreement
are inserted for convenience of reference only, and shall not control or affect
the meaning or construction of any provision of this Agreement.
17.15 COUNTERPARTS. This Agreement may be executed by the parties
hereto in separate counterparts, each of which when so executed and delivered
shall be deemed to be an original and all of which together shall constitute one
and the same instrument.
17.16 NON-COMPETITION/NON-SOLICITATION. During the twenty-four (24)
months immediately following the Closing Date, Seller agrees that neither it nor
any of its affiliates will, without the written consent of Buyer or its
affiliates:
a) directly or indirectly acquire a majority controlling
interest (whether by merger, consolidation, purchase of stock or assets, or
otherwise) of any Competing Insurer (as defined below);
b) employ or solicit the employment of any employee of the
Subject Entities identified on Schedule 17.16 attached hereto; provided,
however, nothing herein shall prevent Seller or any of its affiliates from
employing any such employee that is terminated by a Subject Entity subsequent to
the Closing Date; or
c) induce or attempt to induce any agent of any Insurance
Company as of the Closing Date to terminate its agency relationship with such
Insurance Company or induce or attempt to induce any agent of any Insurance
Company as of the Closing Date to place the renewal of any insurance policies
written or assumed by any Insurance Company as of the Closing Date with another
insurance company that is owned or controlled by Seller or its affiliates.
For purposes of the above, a "Competing Insurer" shall mean an
insurer (or, if Seller or its affiliates acquire a majority controlling interest
in any group of affiliated insurers, such affiliated group of insurers) which
derived a majority of the gross written premiums, during the calendar year next
preceding the date of determination, from property and casualty insurance in
Oregon or non-standard automobile insurance in Texas .
48
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed and delivered as of the day and year first above written.
UNITRIN, INC.
By:
-------------------------------------
Name:
-----------------------------------
Title:
----------------------------------
FUND AMERICAN ENTERPRISES HOLDINGS, INC.
By:
-------------------------------------
Name:
-----------------------------------
Title:
----------------------------------
49
<PAGE>
EXHIBIT A
GLOSSARY OF CERTAIN TERMS
<TABLE>
<CAPTION>
- ------------------------------------------ -------------------------------------
Term Agreement Section Reference
- ------------------------------------------ -------------------------------------
<S> <C>
Asset Sale 1.03(B)
- ------------------------------------------ -------------------------------------
Buyer Consent Schedule 3.05
- ------------------------------------------ -------------------------------------
Closing Date 8.01
- ------------------------------------------ -------------------------------------
Closing Date Balance Sheet 1.02(C)
- ------------------------------------------ -------------------------------------
Company First Paragraph
- ------------------------------------------ -------------------------------------
Company Material Adverse Effect 2
- ------------------------------------------ -------------------------------------
Excluded Subsidiaries 7th Whereas
- ------------------------------------------ -------------------------------------
GAAP 1.02(A)
- ------------------------------------------ -------------------------------------
GAAP Consolidated Financial 2.09
Statements
- ------------------------------------------ -------------------------------------
Loss and Losses 14.01
- ------------------------------------------ -------------------------------------
Material Agreement 2.07
- ------------------------------------------ -------------------------------------
Prior Month-End Balance Sheet 1.02(B)
- ------------------------------------------ -------------------------------------
Purchase Price 1.01
- ------------------------------------------ -------------------------------------
Related Transactions 1.03
- ------------------------------------------ -------------------------------------
Seller Consent Schedule 2.06
- ------------------------------------------ -------------------------------------
Seller Schedule 2
- ------------------------------------------ -------------------------------------
Shares 1.01
- ------------------------------------------ -------------------------------------
Subsidiary, Subsidiaries 1st Whereas
- ------------------------------------------ -------------------------------------
Taxes 2.17
- ------------------------------------------ -------------------------------------
Tax Returns 2.17
- ------------------------------------------ -------------------------------------
</TABLE>
<PAGE>
Exhibit 10(o)
TRANSITION SERVICES AGREEMENT
This Transition Services Agreement (this "Agreement"), dated as of March
25, 1999 is entered into by and among Source One Mortgage Services Corporation,
a Delaware corporation ("Seller"), and Citicorp Mortgage, Inc., a Delaware
corporation ("Purchaser").
RECITALS
A. Seller, Fund American Enterprises Holdings, Inc., a Delaware
corporation and the direct or indirect owner of all of the common stock of
Seller, and Purchaser have entered into an Asset Purchase Agreement, dated as of
March 23, 1999 (the "Asset Purchase Agreement"), pursuant to which Purchaser
will (i) acquire from Seller substantially all of the assets used in the
Business and (ii) assume certain obligations and liabilities of Seller related
to the Business.
B. Seller and Purchaser desire to enter into this Agreement in order to
facilitate an efficient transition of the Business of Seller to Purchaser and to
assist Seller following the Closing Date.
NOW, THEREFORE, in consideration of the premises and the covenants,
conditions and agreements contained herein, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto hereby agree as follows:
Section 1. DEFINED TERMS. Capitalized terms not otherwise defined in this
Agreement shall have the meanings assigned to them in the Asset Purchase
Agreement.
Section 2. SERVICES RENDERED. Purchaser or its designee shall provide
services to Seller as described herein and in the schedules hereto for the
compensation, duration and subject to any limits set forth in the applicable
schedule. The party providing a service hereunder may be referred to herein as a
Aproviding party" and the party receiving a service hereunder may be referred to
herein as a "receiving party." The description of the services to be provided
hereunder, the expected timing of the provision thereof, and the manner of
performance of any services hereunder do not in any way modify or amend any
party's obligations under the Asset Purchase Agreement or any Related Document.
(a) SPECIAL SERVICES.
(i) SCHEDULE I hereto sets forth services to be provided by
Purchaser to Seller that require the specific employment of specialized
personnel at the providing entity and are charged at the hourly rates set forth
on SCHEDULE V. Prior to the Closing Date, services of the type set forth in
SCHEDULE I were performed by Seller using Seller's personnel.
(ii) The hourly rates listed in SCHEDULE V have been set based
upon the Seller's representation that such amounts are calculated in a manner
consistent with the Seller's past practices with respect to their own internal
cost allocations.
<PAGE>
(b) SERVICING ADMINISTRATION. SCHEDULE II hereto sets forth services
(the "Servicing Administration Services") to be provided by Purchaser to the
Seller that the Seller requires Purchaser's assistance to perform in respect of
(i) certain of Seller's obligations under the Asset Purchase Agreement and (ii)
trailing document and pay-off follow-up services with respect to loans paid off
prior to the Closing Date.
(c) FREE SERVICES. SCHEDULE III hereto sets forth services to be
provided by Purchaser to Seller without charge to Seller.
Section 3. [Reserved.]
Section 4. SCHEDULE AMENDMENTS. The parties contemplate that from time to
time a need may arise for transition services not specifically contemplated
under this Agreement or the Schedules hereto that both parties deem to be
reasonable and appropriate to be provided hereunder, in which event the parties
may, but shall have no duty to, amend the appropriate schedule as necessary. The
amended schedule shall be initialed by a duly authorized individual from each of
Purchaser and Seller.
Section 5. MANNER OF PERFORMANCE AND ACKNOWLEDGMENT. Purchaser agrees that
it shall cause its personnel providing services under this Agreement to perform
such services with the same degree of care, skill, confidentiality and diligence
with which its personnel perform similar services for Purchaser and in a manner
consistent with the level of care given to Purchaser's business. Purchaser shall
provide all services under this Agreement in accordance with the reasonable
written instructions provided by the authorized representatives of Seller, or
their designees, or, in the absence of such instructions, as such services have
been performed for Seller in the past. Purchaser shall cease providing any
services upon the reasonable written instructions of the Seller's authorized
representatives or designees to that effect. Purchaser shall be entitled to rely
upon any written instructions received from such authorized representatives or
designees. The parties hereto acknowledge that services provided hereunder are
not being provided at standard commercial rates for such services but (without
limiting the prices set forth on the Schedules hereto) are being provided at
amounts considered for these purposes to be at cost to most efficiently permit
the transition to occur; the parties further acknowledge that Purchaser is not
in the business of providing the services rendered under this Agreement. Seller
shall reimburse Purchaser for reasonable third-party costs and expenses charged
to Purchaser in connection with Purchaser's performance of its duties under this
Agreement.
Section 6. PRORATION, INVOICING AND PAYMENT.
(a) PRORATION. In any month during which any services with monthly
fees set forth on the applicable Schedule are provided for less than a complete
month, such fees shall be prorated on a daily basis based on the actual number
of days in the month that such services are provided.
(b) INVOICING. The Purchaser shall submit an invoice to the Seller
prior to the tenth day of each month for all services provided hereunder by the
Purchaser during the prior calendar month. Amounts invoiced shall be calculated
or otherwise determined in accordance
-2-
<PAGE>
with the applicable Schedules. Upon termination of this Agreement, each
providing party shall submit a final invoice to the respective receiving parties
within thirty (30) days of such termination.
(c) PAYMENT. Each invoice received by the Seller shall constitute a
"claim" under Section 12.04 of the Asset Purchase Agreement. Prior to the first
anniversary of the Closing Date, such invoice shall be subject to, and shall be
paid in accordance with, the procedures set forth in Section 12.04 of the Asset
Purchase Agreement for claims under Section 3.01(a) thereof regarding deductions
from the holdback amount. On and after the first anniversary of the Closing
Date, such invoice shall be subject to, and shall be paid in accordance with,
the procedures set forth in Section 12.04 of the Asset Purchase Agreement for
claims under Sections 12.02 and 12.03 (without regard to any provisions of
Section 12.04 which reference the expiration of any indemnification obligation
or the tolling of any indemnification period under those sections). If the
Seller disputes any invoice pursuant to the provisions of Section 12.04(b), the
Purchaser shall nevertheless continue to perform all of its obligations under
this Agreement pending resolution thereof. If the Seller fails to timely pay
invoices (other than with respect to amounts disputed in good faith pursuant to
Section 12.04(b)), the Purchaser may, at any time not less than 30 days after
the Purchaser has furnished notice to the Seller of its intent to do so, cease
to provide the compensated services to be provided by the Purchaser under this
Agreement until all undisputed amounts have been paid.
Section 7. RECORDS MAINTENANCE AND AUDITS. Purchaser shall make available
to Seller or its representatives access to or copies of Purchaser's records for
the purpose of verifying the accuracy of the invoices submitted by Purchaser
regarding amounts due such party.
Section 8. INDEMNIFICATION. Purchaser agrees to indemnify and hold Seller
harmless for one year following the provision of services under this Agreement
from and against any and all claims, actions, liabilities, losses, damages,
costs or expenses (including court costs and attorneys' fees) arising out of
Purchaser's or its affiliates' gross negligence or willful misconduct in the
provision by Purchaser or its affiliates of any services under this Agreement.
This indemnity shall survive any termination of this Agreement.
Section 9. RELATIONSHIP OF PARTIES. Purchaser shall act as an independent
contractor, and nothing herein shall at any time be construed to create the
relationship of employer and employee, partnership, principal and agent, broker
or finder, or joint venturers as between Seller and Purchaser. Except as
expressly provided herein, no party shall have any right or authority, and no
party shall attempt to enter into any contract, commitment or agreement nor
incur any debt or liability of any nature, in the name or on behalf of any other
party.
Section 10. CONFIDENTIALITY. Each party acknowledges that in connection
with its performance under this Agreement, it may gain access to confidential
material and information which is identified by the other party as confidential
and proprietary to the other party. Each party agrees to maintain the
confidentiality of all such information. The requirements under this Section 10
shall survive for a period of eighteen (18) months following the provision of
the service out of which such confidential information was acquired.
-3-
<PAGE>
Section 11. [Reserved.]
Section 12. TERMINATION. At any time, either party may terminate any one
or more of the individual services being provided by Purchaser enumerated in
this Agreement due to the non-performance of the other party of its obligations
hereunder by giving the other party written notice to that effect.
Section 13. ASSIGNMENT. No party shall assign, in whole or in part, any of
the rights, obligations or benefits arising under this Agreement without the
prior written consent of the other parties; provided, that any party may at any
time assign any of its rights or benefits arising under this Agreement to any of
its affiliates capable of fulfilling the obligations hereunder upon written
notice thereof to the other parties.
Section 14. GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of New York without giving
effect to the conflict of laws rules or choice of laws rules thereof.
Section 15. NOTICES. All notices, requests and demands to or upon the
respective parties hereto shall be in writing, including by telecopy, and,
unless otherwise expressly provided herein, shall be deemed to have been duly
given or made (a) if delivered by hand (including by courier), when delivered,
(b) in the case of mail, three Business Days after deposit in United States
first class mail, postage prepaid, and (c) in the case of telecopy notice, when
receipt has been confirmed by the transmitting telecopy operator. In each case
notice shall be sent to the address of the party to be notified, as follows, or
to such other address as may be hereafter designated by the respective parties
hereto in accordance with these notice provisions:
If to the Purchaser, to:
Citicorp Mortgage, Inc.
15851 Clayton Road
Ballwin, Missouri 63011
Telecopy: (314) 916-7201
Attention: Legal Department
With a copy to:
Citigroup Inc.
Corporate Legal Department
425 Park Avenue B 2nd Floor
New York, New York 10043
Telecopy: (212) 793-4401
Attention: Stephen Dietz
-4-
<PAGE>
If to the Seller or Parent, to:
Source One Mortgage Services Corporation
114 Goodwives Road
Darien, Connecticut 06820
Telecopy: (203) 655-6044
Attention: James H. Ozanne
With a copy to:
Fund American Enterprises Holdings, Inc.
80 South Main Street
Hanover, New Hampshire 03755
Telecopy: (603) 643-4562
Attention: Terry L. Baxter
Section 16. SEVERABILITY. In the event that any portion of this Agreement
shall be found by a court of competent jurisdiction to be illegal, unenforceable
or invalid, that portion of this Agreement will be null and void and the
remainder of this Agreement will be binding on the parties as if the illegal,
unenforceable or invalid provisions had never been contained therein.
Section 17. WAIVER. No waiver by any party of any term or any breach of
this Agreement shall be construed as a waiver of any other term or breach
hereof, or of the same or a similar term or breach on any other occasion.
Section 18. AMENDMENT. Except as contemplated by Section 4, no
modification or amendment of this Agreement shall be binding upon any party
unless in writing and signed by all parties hereto.
Section 19. ENTIRE AGREEMENT. This Agreement, together with the Asset
Purchase Agreement and all Schedules and Exhibits attached hereto and thereto,
constitutes the entire agreement between the parties pertaining to the subject
matter hereof, and supersedes all prior agreements, understandings, negotiations
and discussions, whether oral or written, of the parties hereto regarding the
subject matter hereof.
Section 20. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which shall
constitute one and the same instrument.
[Remainder of Page Intentionally Left Blank]
-5-
<PAGE>
SOURCE ONE MORTGAGE SERVICES
CORPORATION
By:___________________________________
Name:_________________________________
Title:________________________________
CITICORP MORTGAGE, INC.
By:___________________________________
Name:_________________________________
Title:________________________________
-6-
<PAGE>
Schedule I C Special Services
Purchaser shall cause its personnel to perform the following services, and shall
be reimbursed on an hourly basis in accordance with the rates set forth in
SCHEDULE V.
- --------------------------------------------------------------------------------
Service Description
- --------------------------------------------------------------------------------
PERSONNEL SERVICES - A. Purchaser shall cause its personnel, with respect to
Seller's obligations related to the calendar year 1998 and any stub period
between January 1, 1999 and the Closing Date of the Asset Purchase Agreement
(the "Reporting Period"), to (i) provide or assist in providing complete
payroll services to Seller and (ii) perform all related subsequent year-end
and stub period reporting to individuals, regulators and agencies, as applicable
(collectively, the "Payroll Services").
- --------------------------------------------------------------------------------
PERSONNEL SERVICES - B. Purchaser shall cause its personnel, with respect to
Seller's obligations related to the Reporting Period, to (i) administer or
assist in the administration of all Seller employee benefit programs including,
without limitation, Seller 401(k) Plan, medical benefits, life and disability
insurance benefits, flexible spending accounts and Deferred Compensation Plan,
(ii) perform all related subsequent year-end and stub period reporting to
individuals, regulators and agencies, as applicable, (iii) assist in the
transition of former employees of Seller off of Seller's benefit programs
(including any required reporting obligations), and (iv) assist in the 401(k)
audit for the 1998 plan year as soon as practicable after the Closing Date
(collectively, the "Benefit Plan Services").
- --------------------------------------------------------------------------------
PERSONNEL SERVICES - C. Purchaser shall cause its personnel, with respect to
Seller's obligations related to the Reporting Period, to assist Seller in
performing its reporting obligations under the Securities Exchange Act of
1934, as amended.
- --------------------------------------------------------------------------------
PERSONNEL SERVICES - D. Purchaser shall cause its personnel, with respect to
Seller's obligations after the Closing Date, to assist Seller in performing its
obligations under Section 10.05(b) of the Asset Purchase Agreement.
- --------------------------------------------------------------------------------
PERSONNEL SERVICES - E. Purchaser shall cause its personnel to fulfill, under
third-party servicing sale agreements, the transfer of servicing obligations.
- --------------------------------------------------------------------------------
PERSONNEL SERVICES - F. Purchaser shall cause its personnel to provide certain
functions to the Seller following the Closing Date. These services include, but
are not limited to, assistance with the following:
Preparation of Seller's full 1998, and 1999 short period, tax
returns (including, but not limited to, income and franchise tax
returns)
Responses to federal and state tax audits, including
recalculation of servicing amortization
- --------------------------------------------------------------------------------
-1-
<PAGE>
- --------------------------------------------------------------------------------
Service Description
- --------------------------------------------------------------------------------
Final resolution of loan repurchases (including, but not
limited to, dealing with the initial seller/correspondent)
- --------------------------------------------------------------------------------
-2-
<PAGE>
Schedule II C Servicing Administration
Purchaser shall cause its personnel to provide the following services. Where
flat fees are indicated below, such fees are best estimates of the projected
cost of providing the related services. To the extent such services vary
materially from those estimates, the parties agree to renegotiate these fees.
1. TAX REPORTING SERVICES. Purchaser shall cause its personnel to provide
such tax information reporting services as may be required for the 1999
tax year, including but not limited to annual reporting on tax forms 1098
and 1099, for every loan Seller serviced or subserviced during calendar
year 1999. Such services include customer call support, IRS tape
generation, customer year-end information, IRS corrections and follow-up.
These services shall be provided at a rate of $0.58 per loan (estimated
total fee of $61,224.00).
2. TRAILING DOCUMENTS. Purchaser shall cause its personnel to fulfill
Seller's obligations to follow-up on and resolve existing trailing
documents as of the Closing Date (the "Trailing Documents"). Seller shall
pay for certain full-time employees in accordance with SCHEDULE VI for the
periods set forth therein. Following such periods, Purchaser shall offer
to provide assistance with Seller's obligations with respect to any
remaining Trailing Documents on an hourly rate basis under "Miscellaneous
Support" below. With respect to the services provided pursuant to this
item 2, Purchaser's indemnity of Seller shall survive for a period of 365
days following the provision of the service from which a claim arises.
3. PAYOFF FOLLOW UP. Purchaser shall cause its personnel to fulfill Seller's
obligations to complete mortgage loan payoffs, including processing any
filing releases and satisfaction, processing escrow refund checks,
cancellation of mortgage guarantee insurance policies, and customer call
support for paid in full loans as of the Closing Date. These services
shall be provided at a rate of $9.35 per loan (estimated total fee of
$140,250.00).
4. ASSIGNMENTS. Purchaser shall cause its personnel to fulfill Seller's
obligations under the Asset Purchase Agreement to prepare and record
Assignments of Mortgage. Seller shall pay for the cost of preparing and
recording such Assignments of Mortgage. Purchaser will charge Seller the
hourly rates set forth on SCHEDULE V for performing these services.
5. FILE STORAGE. Purchaser will provide storage, access and retrieval
capabilities with respect to stored inactive loan files for loans that
were serviced by Seller and that became inactive prior to the Closing
Date. Such storage will continue in accordance with the time periods set
forth on SCHEDULE IV. These services shall be provided at a monthly rate
of $0.25 per box. Final destruction of such records (at the times
indicated on SCHEDULE IV) shall be provided at a rate of $0.77 per box.
-1-
<PAGE>
6. MISCELLANEOUS SUPPORT. Purchaser shall cause its personnel to provide
certain functions to the Seller following the Closing Date. Purchaser will
charge Seller the hourly rates set forth on SCHEDULE V for performing
these services. These services include, but are not limited to, assistance
with the following:
Research and follow-up on prior year-end reporting
Research and follow-up on NSF and misapplied payments
Final bank reconciliations
Responses to audit requests
Research and follow-up on loan-level litigation, which will
require, as necessary and by way of example and not limitation,
Purchaser's personnel to participate in litigation as witnesses
Research and follow-up on inactive loans
Research and follow-up on investor repurchase requests
Final agency pool reconciliations (Test of Expected P&I
balanced to the custodial bank accounts) for all pools delivered
prior to Closing Date
Final FHLMC, FNMA and GNMA pool to security balance
reconciliations for all pools delivered prior to Closing Date
Research and follow-up on outstanding custodial account items
Research and follow-up on outstanding checks (e.g., escrow
refunds, GNMA security holder remittances, tax and insurance
disbursements)
Research and final resolution of investor loan-level
discrepancies
Research and final resolution of outstanding customer
investigations
7. SPECIAL PROJECTS. Seller may make requests for other services or for
special reports or information, and Purchaser will provide an estimate of
the cost and completion date.
-2-
<PAGE>
SCHEDULE III - Free Services
1. UPDATED MORTGAGE LOAN SCHEDULE. Purchaser shall cause its personnel to
perform, on behalf of Seller, Seller's obligations under Section 10.15 of
the Asset Purchase Agreement.
2. PRORATION OF CHASE AMOUNT. Within five (5) business days after the Closing
Date, Purchaser shall calculate the proration of the Chase Amount as
required by Section 3.01(a)(ii) of the Asset Purchase Agreement and shall
deliver Schedule 3.01(a)(ii) of the Asset Purchase Agreement to Seller.
3. OTHER SCHEDULES. To the extent that Seller is unable to prepare schedules
or updates thereto required under the Asset Purchase Agreement on and
after the Closing Date, Purchase shall cause its personnel to perform, on
behalf of Seller, Seller's obligations to prepare such schedules or
updates.
-3-
<PAGE>
SCHEDULE IV - File Retention Schedule
The following are the agency guidelines that currently exist for retention of
archive records, i.e., Payoffs and Foreclosures.
FHA
All servicing files must be retained for a minimum of the life of the mortgage
plus three years. Each claim review file must be retained for at least three
years after final or the latest supplemental claim settlement.
VA
VA regulations do not require holders to retain records for any fixed period of
time after a Claim is paid, although, it is recommended that they be retained
for three years.
GNMA
GNMA has no specific requirements that relate to retention of archive storage
records.
FNMA
After a mortgage is liquidated, the servicer must keep the individual mortgage
records for at least four years, measured from the date of payoff or the date
that any applicable claim proceeds are received.
FHLMC
The servicer must maintain the mortgage file while FHLMC retains an interest in
the applicable mortgage and for at least three years from the date FHLMC's
interest in the mortgage is satisfied. If the mortgage was foreclosed upon, the
servicer must maintain the mortgage file for at least six years from the date
FHLMC's interest in the mortgage was satisfied.
The following are the SOMSC's guidelines that currently exist for retention of
archive records, i.e., Payoffs and Foreclosures.
DEPARTMENT TYPE RETENTION
- ---------- ---- ---------
Foreclosure Completed GNMA/FNMA B Four Years
FHLMC B Six Years
Reinstated GNMA/FNMA/FHLMC B Three Years
Payoffs Paid In Full GNMA/FNMA/FHLMC B Four Years
A detailed listing of the archive records exists detailing the destruction dates
for each box.
-4-
<PAGE>
SCHEDULE V - Hourly Rates
The fee for any services performed on an hourly rate will be based upon the
division of the related personnel, and whether such personnel are management or
staff, based upon the following rates:
- -------------------------------------------------------------------------------
Division Management Hourly Rate Staff Hourly Rate
- -------------------------------------------------------------------------------
Financial $37.00 $22.00
- -------------------------------------------------------------------------------
Servicing $32.00 $14.00
- -------------------------------------------------------------------------------
Front Line Production $54.00 $16.50
- -------------------------------------------------------------------------------
Back Room Operations $32.00 $14.50
- -------------------------------------------------------------------------------
Human Resources $52.00 $24.00
- -------------------------------------------------------------------------------
Legal $52.00 $19.00
- -------------------------------------------------------------------------------
Records Management $20.00 $11.00
- -------------------------------------------------------------------------------
Acquisitions $26.00 $12.00
- -------------------------------------------------------------------------------
-5-
<PAGE>
SCHEDULE VI - Trailing Document Cost Structure
- -------------------------------------------------------------------------------
Documents
- -------------------------------------------------------------------------------
Insuring:
$60,350
$21,900 one time
cost
$82,250
- -------------------------------------------------------------------------------
-6-
<PAGE>
- -------------------------------------------------------------------------------
FTE 60 additional days
- -------------------------------------------------------------------------------
-7-
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Source One Loan File Set Up:
$19,000
- --------------------------------------------------------------------------------
-8-
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Document Retrieval & Corrections:
$140,000
TBD one time cost
- -------------------------------------------------------------------------------
-9-
<PAGE>
- -------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Shipping
- --------------------------------------------------------------------------------
Document Control:
$252,900
$50,000 one time cost
- -------------------------------------------------------------------------------
-10-
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Records Management
- -------------------------------------------------------------------------------
New Production: Hourly rates in
accordance with
SCHEDULE V
$ 67,768
$ 17,702
- --------------------------------------------------------------------------------
-11-
<PAGE>
- --------------------------------------------------------------------------------
Loan Sale Exceptions:
- -------------------------------------------------------------------------------
-12-
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Investor Reporting Misc. Follow Up
- -------------------------------------------------------------------------------
Hourly rates in
accordance with
SCHEDULE V
- -------------------------------------------------------------------------------
-13-
<PAGE>
- -------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Financial
- -------------------------------------------------------------------------------
Hourly rates in
accordance with
SCHEDULE V
- -------------------------------------------------------------------------------
-14-
<PAGE>
- --------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SubPrime
- -------------------------------------------------------------------------------
$ 19,500
- -------------------------------------------------------------------------------
-15-
<PAGE>
Exhibit 10(p)
ASSET PURCHASE AGREEMENT
Dated as of
March 23, 1999
by and among
Source One Mortgage Services Corporation,
as Seller,
Fund American Enterprises Holdings, Inc.,
as Parent,
and
Citicorp Mortgage, Inc.,
as Purchaser
<PAGE>
TABLE OF CONTENTS
Page
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ARTICLE I - Certain Definitions...............................................1
Section 1.01 Certain Definitions..........................................1
ARTICLE II - Transfer of Assets and Assumption of Liabilities.................8
Section 2.01 Assets to be Sold............................................8
Section 2.02 Nonassignable Permits, Licenses, Leases and Contracts........10
Section 2.03 Liabilities Assumed by the Purchaser.........................11
Section 2.04 Liabilities Not Assumed by the Purchaser.....................11
ARTICLE III - Payment.........................................................12
Section 3.01 Calculation of Payment.......................................12
ARTICLE IV - Representations and Warranties of the Seller and the Parent......15
Section 4.01 Organization of the Seller and the Parent....................15
Section 4.02 Subsidiaries.................................................15
Section 4.03 Power and Authority..........................................15
Section 4.04 No Conflicts.................................................15
Section 4.05 Litigation; Compliance with Laws.............................16
Section 4.06 Financial Statements; SEC Reports............................17
Section 4.07 Purchased Assets; Real Property; Leases and Other
Contracts; Insurance.........................................18
Section 4.08 Employee Benefit and Pension Plan Matters....................19
Section 4.09 Labor Relations..............................................19
Section 4.10 Mortgage Loans...............................................20
Section 4.11 [Reserved]...................................................26
Section 4.12 Transactions with Affiliates.................................26
Section 4.13 Interest Rate Risk Management Instruments....................26
Section 4.14 Intellectual Property........................................27
Section 4.15 Environmental Liability......................................29
Section 4.16 Brokers......................................................29
Section 4.17 Information Supplied; Accuracy of Data.......................29
Section 4.18 Taxes........................................................30
ARTICLE V - Representations and Warranties of the Purchaser...................31
Section 5.01 Organization of the Purchaser................................31
Section 5.02 Power and Authority..........................................31
Section 5.03 No Conflicts.................................................31
Section 5.04 Brokers......................................................32
Section 5.05 Licenses.....................................................32
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ARTICLE VI - Employee and Employee-Related Matters............................32
Section 6.01 Basic Employment Matters.....................................32
Section 6.02 Defined Benefit Plans........................................33
Section 6.03 Defined Contribution Plans...................................33
Section 6.04 Severance Arrangements.......................................34
Section 6.05 Other Employee Benefits......................................34
ARTICLE VII - Closing.........................................................35
Section 7.01 The Closing..................................................35
ARTICLE VIII - Conditions to Obligations of the Purchaser to Consummate
the Transaction................................................35
Section 8.01 Representations and Warranties; Compliance with Covenants....35
Section 8.02 No Injunction................................................36
Section 8.03 Approvals....................................................36
Section 8.04 Third Party Consents.........................................36
Section 8.05 Bill of Sale, etc............................................36
Section 8.06 Survey; Title Policies.......................................36
Section 8.07 Employment Agreement.........................................36
Section 8.08 Transfer Instructions........................................36
ARTICLE IX - Conditions to Obligations of the Seller and the Parent to
Consummate the Transaction.......................................37
Section 9.01 Representations and Warranties; Compliance with Covenants....37
Section 9.02 No Injunction................................................37
Section 9.03 Approvals....................................................37
Section 9.04 Third Party Consents.........................................37
Section 9.05 Assumption Agreement.........................................37
ARTICLE X - Covenants.........................................................38
Section 10.01 HSR Filings.................................................38
Section 10.02 Injunctions.................................................38
Section 10.03 Access to Information.......................................38
Section 10.04 No Extraordinary Actions by the Seller......................38
Section 10.05 Commercially Reasonable Efforts; Further Assurances.........40
Section 10.06 Bulk Sales Laws.............................................41
Section 10.07 Insurance and Benefits Contracts............................41
Section 10.08 Use of Names................................................41
Section 10.09 Transfer of Mortgage Loans..................................41
Section 10.10 Mail Received After Closing.................................42
Section 10.11 Confidentiality; Publicity..................................42
Section 10.12 Transition Services.........................................42
Section 10.13 Access to Records After the Closing.........................42
Section 10.14 Title Commitments; Surveys..................................43
Section 10.15 Updated Mortgage Loan Schedule..............................44
Section 10.16 System Upgrade..............................................44
Section 10.17 Final Certification and Recertification, etc................44
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Section 10.18 Repurchase of Mortgage Loans................................44
Section 10.19 Agreement Not to Compete; Non-Solicitation..................45
Section 10.20 Parent Guarantee............................................46
Section 10.21 Redemption of QUICS.........................................46
Section 10.22 Collection of Receivables...................................46
Section 10.23 SOM.........................................................47
Section 10.24 Private Label Subservicing Capability.......................47
Section 10.25 Northwest Pacific...........................................47
ARTICLE XI - Tax Matters......................................................48
Section 11.01 Allocation of Responsibility................................48
Section 11.02 Tax Returns.................................................48
Section 11.03 Tax Sharing and Tax Payment Agreements......................49
Section 11.04 Assistance and Cooperation..................................49
Section 11.05 Record Retention............................................50
Section 11.06 Contest.....................................................50
Section 11.07 Section 338(h)(10) Election.................................50
Section 11.08 Allocation of Purchase Price................................51
Section 11.09 Purchaser Activity on Closing Date and Post-Closing.........51
Section 11.10 Liability for Taxes and Related Matters.....................52
ARTICLE XII - Survival and Indemnification....................................53
Section 12.01 Survival....................................................53
Section 12.02 Indemnification by the Seller...............................53
Section 12.03 Indemnification by the Purchaser............................54
Section 12.04 Procedures for Making Claims Against Indemnifying Party.....54
Section 12.05 Limitations and Rules of Construction Regarding
Indemnification Obligations.................................55
Section 12.06 Defense of Claims...........................................56
Section 12.07 Remedies Exclusive..........................................57
ARTICLE XIII - Termination....................................................58
Section 13.01 Termination.................................................58
Section 13.02 Obligations Shall Cease.....................................58
Section 13.03 Fees and Expenses...........................................58
ARTICLE XIV - Miscellaneous...................................................58
Section 14.01 Complete Agreement..........................................58
Section 14.02 Waiver, Discharge, etc......................................58
Section 14.03 Notices.....................................................59
Section 14.04 Governing Law; Waiver of Jury Trial.........................60
Section 14.05 Headings....................................................60
Section 14.06 Successors..................................................60
Section 14.07 Third Parties...............................................60
Section 14.08 Counterparts................................................60
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EXHIBITS
Exhibit A Form of Assumption Agreement
Exhibit B Form of Bill of Sale
Exhibit C Form of Transition Services Agreement
Exhibit D Form of Trademark Assignment
Exhibit E Form of Claim Notice
Appendix I 1998 Financial Statements
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SCHEDULES
Schedule 1.01 Disclosure Schedule
Schedule 2.01(a) Purchased Assets
Schedule 2.01(b) Excluded Assets
Schedule 2.03 Assumed Liabilities
Schedule 2.04 Subsidiary Obligations
Schedule 3.01(a) Closing Statement Procedures
Schedule 3.01(a)(ii) Chase Allocation
Schedule 5.03 Purchaser's Conflicts and Approvals
Schedule 6.01(a) Basic Employment Matters
Schedule 6.01(c) "Reinstated" Employees
Schedule 8.04 Third Party Consents (Purchaser's Condition)
Schedule 8.07 Employment Agreements
Schedule 8.08 Transfer Instructions
Schedule 9.04 Third Party Consents (Seller's Condition)
Schedule 10.04(a)(iv) Capital Expenditures
Schedule 10.04(a)(vi) Open Employee Requisitions
Schedule 10.16 System Upgrade
Schedule 10.22 Collection of Accounts
Schedule 10.23 SOM Approvals to Be Obtained
Schedule 12.05(b) Disregarded Exceptions
DISCLOSURE SCHEDULE
Sections 4.04, 4.05(b), 4.05(c), 4.06(c), 4.06(e), 4.07(a), 4.07(b), 4.07(c),
4.07(d), 4.08(a), 4.10(a), 4.10(f), 4.10(i)(A), 4.10(i)(B), 4.10(j), 4.10(k),
4.10(l), 4.10(q), 4.10(r)(i), 4.10(r)(ii), 4.10(u), 4.10(v)(iii), 4.12, 4.14(a),
4.14(c), 4.14(d), 4.14(f), 4.14(g), 4.17, 4.18(a)(iii), 4.18(a)(vii), 4.18(a)(x)
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ASSET PURCHASE AGREEMENT
ASSET PURCHASE AGREEMENT dated as of March 23, 1999, among Source One
Mortgage Services Corporation, a Delaware corporation (the "Seller"), Fund
American Enterprises Holdings, Inc., a Delaware corporation and the direct or
indirect owner of all of the common stock of the Seller (the "Parent"), and
Citicorp Mortgage, Inc., a Delaware corporation (the "Purchaser").
W I T N E S S E T H:
WHEREAS, upon the terms and subject to the conditions of this Agreement,
the Seller desires to sell, convey, assign, transfer and deliver to the
Purchaser, and the Purchaser desires to purchase and acquire from the Seller,
substantially all of the assets, subject to certain of the liabilities, of the
Seller's business of origination, selling and servicing of residential and
commercial mortgage loans and Seller's business relating to the sale of certain
insurance products (collectively, the "Business");
NOW, THEREFORE, in consideration of the premises and the mutual promises
and covenants contained herein, the parties hereby agree as follows:
ARTICLE I
CERTAIN DEFINITIONS
Section 1.01 CERTAIN DEFINITIONS. As used in this Agreement, unless the
context requires otherwise, the following terms shall have the meanings
indicated, and additional capitalized terms shall have the meanings assigned
elsewhere in this Agreement (with terms being defined in the singular having a
corresponding meaning in the plural and vice versa):
"ADJUSTMENT SCHEDULE" has the meaning assigned in Section 3.01(c).
"AFFILIATE" of any Person means any other Person, existing or future,
directly or indirectly, Controlling, Controlled by or under common Control with
the former Person.
"APPLICABLE REQUIREMENTS" means, with respect to a Mortgage Loan, all
applicable contractual requirements (including contractual requirements of
private investors), all applicable Laws, all requirements of any insurer under
any applicable Primary Insurance Policy, and all applicable requirements and
guidelines of FNMA, FHLMC, HUD, GNMA, FHA and VA.
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"APPRAISED VALUE" means with respect to any Mortgaged Property, the lesser
of (i) the purchase price paid for the related Mortgaged Property by the
Mortgagor with the proceeds of the Mortgage Loan and (ii) the value thereof as
determined by an appraisal made for the originator of the Mortgage Loan at the
time of origination of the Mortgage Loan by an appraiser who met the minimum
requirements of FNMA, FHLMC and HUD (an "approved appraiser"), provided,
however, in the case of a Refinanced Mortgage Loan, either (x) the appraisal was
made at the time of origination of such Refinanced Mortgage Loan by an approved
appraiser or (y) if a new appraisal was not needed to satisfy the Applicable
Requirements, the appraisal was made for the originator of the mortgage loan
that was replaced by such Refinanced Mortgage Loan at the time of origination of
such initial mortgage loan by an approved appraiser.
"APPROVALS" means franchises, licenses, permits, certificates of occupancy
and other approvals, authorizations and consents.
"ASSIGNMENT OF MORTGAGE" means an individual assignment of the Mortgage,
notice of transfer or equivalent instrument in recordable form, sufficient under
the laws of the jurisdiction wherein the related Mortgaged Property is located
to give record notice of the sale of the Seller's interest in the Mortgage to
the Purchaser or its designee.
"ASSUMED LIABILITIES" has the meaning assigned in Section 2.03.
"ASSUMPTION AGREEMENT" means a duly executed assumption agreement in
substantially the form of Exhibit A hereto.
"BILL OF SALE" means a duly executed bill of sale in substantially the
form of Exhibit B hereto.
"BUSINESS" has the meaning assigned in the preamble to this Agreement.
"BUSINESS DAY" means any day on which the Seller, Parent, Purchaser and
commercial banks in New York City and Michigan are open for business.
"CLOSING" means the closing of the transactions contemplated by this
Agreement.
"CLOSING DATE" means the date on which the Closing actually occurs.
"CLOSING STATEMENT" has the meaning assigned in Section 3.01(a).
"CODE" means the Internal Revenue Code of 1986, as amended.
"COMMERCIALLY REASONABLE EFFORTS" means the efforts that a prudent Person
desirous of achieving a result would use in similar circumstances to ensure that
such result is achieved in the required time frame.
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"CONTRACT" means any note, bond, mortgage, indenture, deed of trust,
license agreement, franchise, contract, agreement, Lease, instrument or
guarantee.
"CONTROL" means the power to direct or cause the direction of the
management and policies of another Person, whether through the ownership of
voting securities, by contract or otherwise.
"CONVENTIONAL MORTGAGE LOAN" means any Mortgage Loan that is neither an
FHA Loan nor a VA Loan.
"CUT-OFF DATE" has the meaning assigned in Section 4.10(b).
"DISCLOSURE SCHEDULE" means the disclosure schedule attached hereto as
Schedule 1.01.
"EMPLOYEES" has the meaning assigned in Section 6.01.
"EMPLOYEE PLANS" has the meaning assigned in Section 4.08.
"EMPLOYER" has the meaning assigned in Section 6.01.
"EXCLUDED ASSETS" has the meaning assigned in Section 2.01(b).
"FHA INSURANCE CONTRACT" or "FHA INSURANCE" means the contractual
obligation of FHA respecting the insurance of an FHA Loan pursuant to the
National Housing Act, as amended.
"FHA LOAN" means a Mortgage Loan which is the subject of an FHA Insurance
Contract as evidenced by a Mortgage Insurance Certificate.
"GAAP" means generally accepted accounting principles, applied
consistently with the Seller's past practices (to the extent such past practices
are consistent with generally accepted accounting principles).
"GAAP BOOK VALUE" means book value determined in accordance with GAAP.
"GOVERNMENTAL AGENCY" means any governmental body or other regulatory or
administrative agency or commission (including FNMA, FHLMC and GNMA).
"HAZARDOUS MATERIALS" means (a) any petroleum or petroleum products,
radioactive materials, asbestos in any form that is or could become friable,
polychlorinated biphenyls and radon gas; (b) any chemicals, materials or
substances defined as or included in the definition of "hazardous substances,"
"hazardous waste," "hazardous materials," "extremely hazardous substances,"
"toxic substances," "toxic pollutants," "contaminants," or "pollutants," or
words of similar import, under any applicable Laws; and (c) any materials which
could be or are defined by any applicable Law to be hazardous to human health.
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"INCOME TAX" means any federal, state, local, or foreign income or
franchise tax, and any other tax imposed on or measured by income, including any
interest, penalty, or addition thereto, whether disputed or not.
"INCOME TAX RETURN" means any return, declaration, report, claim for
refund, or information return or statement relating to Income Taxes, including
any schedule or attachment thereto.
"INDEMNIFIABLE LOSS" means a Purchaser Indemnifiable Loss or a Seller
Indemnifiable Loss, as such terms are defined in Section 12.02 and Section
12.03, respectively.
"INDEMNIFIED PARTY" has the meaning assigned in Section 12.05.
"INDEMNIFYING PARTY" means a party having indemnification obligations
pursuant to Article XII.
"INTELLECTUAL PROPERTY RIGHTS" means any and all of the following used in
or related to the Business: (i) trade secrets, inventions, ideas and conceptions
of inventions, whether or not patentable, whether or not reduced to practice,
and whether or not yet made the subject of a patent application or applications,
(ii) United States, international and foreign patents, patent, applications and
statutory invention registrations, all rights therein provided by international
treaties or conventions and all improvements thereto, (iii) trademarks, service
marks, certification marks, collective marks, trade dress, logos, domain names,
product configurations, trade names, business names, corporate names, and other
source identifiers, whether or not registered, whether currently in use or not,
including all common law rights, and registrations and applications for
registration thereof, all rights therein provided by international treaties or
conventions, and all reissues, extension and renewals of any of the foregoing,
(iv) copyrightable works, copyrights, whether or not registered, and
registrations and applications for registration thereof in the United States or
any foreign country, and all rights therein provided by international treaties
or conventions, (v) Software, (vi) technical and business information, including
know-how, manufacturing and production processes and techniques, research and
development information, technical data, financial, marketing and business data,
pricing and cost information, business and marketing plans, and customer and
supplier lists and information, whether or not confidential, (vii) copies and
tangible embodiments of all the foregoing, in whatever form or medium, (viii)
licenses and sublicenses (whether as licensee, sublicensee, licensor or
sublicensor) in connection with any of the foregoing, and (ix) all goodwill
associated with the foregoing and all rights to sue or recover and retain
damages and costs and attorneys' fees for past, present, and future infringement
or breach of any of the foregoing; provided that Intellectual Property Rights
shall not include readily available commercial products such as off-the-shelf or
publicly vended software programs.
"JUDGMENT" means any judgment, ruling, order or decree.
"KNOWLEDGE" by a Person of a particular fact or matter means that a member
of senior management of such Person (i.e., a senior vice president or more
senior officer), after reasonable investigation, is actually aware of such fact
or matter, provided that any such member of senior
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management shall be presumed to know such fact or matter based on facts,
circumstances or information contained or described in the books, records or
files of such Person.
"LAW" means any order, writ, injunction, decree, judgment, ruling, law,
decision, opinion, statute, rule or regulation of any governmental, judicial,
legislative, executive, administrative or regulatory authority of the United
States, or of any state, local or foreign government or any subdivision thereof,
or of any Governmental Agency, including, without limitation, any federal, state
or local fair lending laws.
"LEASE" means any lease, sublease, easement, license, right-of-way or
similar interest in real or personal property.
"LIEN" means any lien, easement, encumbrance, mortgage or other
conflicting ownership or security interest in favor of any third party.
"LITIGATION" means any action, suit, claim, proceeding, investigation or
written inquiry by or before any Governmental Agency, court or arbitrator.
"LOAN GUARANTY CERTIFICATE" means the certificate evidencing a VA Guaranty
Agreement.
"LOAN-TO-VALUE RATIO" or "LTV" means with respect to any Mortgage Loan as
of any date of determination, the ratio on such date of the outstanding
principal amount of the Mortgage Loan to the Appraised Value of the Mortgaged
Property.
"MATERIAL ADVERSE EFFECT" or "MATERIAL ADVERSE CHANGE", with respect to
any party or with respect to the Business, means any change, occurrence or
effect, direct or indirect, that would have a material adverse effect on the
business, operations, properties (including tangible properties), financial
condition, assets, obligations or liabilities (whether absolute, accrued or
contingent) of such party and its subsidiaries taken as a whole or of the
Business taken as a whole, as the case may be.
"MORTGAGE" means the mortgage, deed of trust or other instrument creating
a lien on Mortgaged Property securing the Mortgage Note.
"MORTGAGE INSURANCE CERTIFICATE" means the certificate evidencing an FHA
Insurance Contract.
"MORTGAGE LOANS" means (i) the mortgage loans (including subprime loans)
and Pipeline Loans owned by Seller or the Subsidiaries and (ii) without
duplication, the mortgage loans for which Seller or a Subsidiary owns the
related Servicing Rights, in each case as identified on the Mortgage Loan
Schedule, and all of Seller's or a Subsidiary's rights and benefits with respect
thereto, including without limitation rights with respect to related payments
and proceeds (including real estate acquired in respect of a mortgage loan).
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"MORTGAGE LOAN SCHEDULE" has the meaning assigned in Section 4.10(b).
"MORTGAGE NOTE" means the original executed note or other evidence of the
Mortgage Loan indebtedness of a Mortgagor.
"MORTGAGED PROPERTY" means the Mortgagor's real property securing
repayment of a related Mortgage Note.
"MORTGAGOR" means the obligor on a Mortgage Note, the owner of the
Mortgaged Property and the grantor or mortgagor named in the related Mortgage
and such grantor's or mortgagor's successors in title to the Mortgaged Property.
"NET PURCHASE PRICE" has the meaning assigned in Section 3.01(a).
"OWNED MORTGAGE LOANS" means those mortgage loans referred to in clause
(i) of the definition of "Mortgage Loans".
"PERSON" means an individual, a corporation, a limited liability company,
a partnership, an unincorporated association, a joint venture, a government or
Governmental Agency or another entity or group.
"PRE-CLOSING SERVICING OBLIGATIONS" has the meaning assigned in Section
2.03.
"PIPELINE LOAN" means each pending mortgage loan to be secured by
residential real property by a mortgage lien (i) with respect to which Seller or
its Subsidiaries has (a) issued a commitment or otherwise agreed with an
applicant to fund, (b) determined to fund, (c) committed to a specified interest
rate or (d) issued a commitment (including, without limitation, bulk commitments
or assignments of trades) or otherwise agreed with a broker or correspondent
originator or purchaser to purchase and (ii) which has not closed or been
purchased from a correspondent as of the Closing Date.
"PRIMARY INSURANCE POLICY" means a policy of primary mortgage guaranty
insurance issued by an insurer acceptable to FNMA, FHLMC and any private
investor.
"PURCHASED ASSETS" has the meaning assigned in Section 2.01(a).
"QUICS" has the meaning assigned in Section 2.03.
"REFINANCED MORTGAGE LOAN" means a Mortgage Loan the proceeds of which
were not used to purchase the related Mortgaged Property.
"RELATED DOCUMENTS" means all other agreements and instruments described
in this Agreement that are to be executed and delivered at or prior to the
Closing in connection with the transactions contemplated hereby.
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"RETAINED LIABILITIES" has the meaning assigned in Section 2.04.
"SELLER IPR" means all Intellectual Property Rights owned by or licensed
to the Seller or a Subsidiary.
"SERVICING RIGHTS" means the right, title and interest of the Seller and
each Subsidiary in and to the servicing of the Mortgage Loans.
"SOFTWARE" means computer software and subsequent versions thereof
developed or currently being developed, manufactured, sold or marketed by the
Seller or any Subsidiary or acquired from third parties, including without
limitation, source code, object code, objects, comments, screens, user
interfaces, report formats, templates, menus, buttons and icons, and all files,
data materials, manuals, design notes and other items and documentation related
thereto or associated therewith.
"SUBSERVICED MORTGAGE LOANS" means the mortgage loans identified as such
on the Mortgage Loan Schedule.
"SUBSERVICING RIGHTS" means the right, title and interest of the Seller
and each Subsidiary in and to the subservicing of the Subserviced Mortgage
Loans.
"SUBSIDIARIES" means Central Pacific Mortgage Corporation ("CPM"), CMC
Insurance Agency, Inc., MHMC Insurance Agency, Inc., SOMSC Services, Inc. and
Source One Mortgage Corporation ("SOM"), the wholly owned subsidiaries of the
Seller.
"TAXES" (including, with correlative meaning, the term "TAXABLE") means
all taxes, charges, fees, duties, levies, or other assessments imposed by any
federal, state, local or foreign taxing authority, including without limitation
federal, state, local and foreign income, profits, franchise, gross receipts,
environmental, customs duty, severances, stamp, payroll, sales, use, employment,
unemployment, disability, property, withholding, backup withholding, excise,
production, occupation, service, service use, leasing and leasing use, AD
VALOREM, value added, occupancy, transfer, and other taxes, of any nature
whatsoever, together with all interest, penalties and additions imposed with
respect to such amounts and any interest in respect of such penalties and
additions.
"TAX RETURNS" means all returns and reports, information returns, or payee
statements (including, but not limited to elections, declarations, filings,
forms, statements, disclosures, schedules, estimates and information returns)
required to be supplied to a Tax authority relating to Taxes.
"THIRD PARTY IPR" means the rights possessed by the Seller or any
Subsidiary in any other Person's Intellectual Property Rights, including without
limitation, patents, copyrights, trademarks, or trade secrets, which relate to
or are used in the Business and which are not owned by the Seller or any
Subsidiary.
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"TRADE SECRETS" means each trade secret included in the Intellectual
Property Rights.
"TRADEMARK ASSIGNMENT" means a duly executed trademark assignment in
substantially the form of Exhibit D hereto.
"TRANSFER INSTRUCTIONS" means the transfer instructions identified on
Schedule 8.08.
"TRANSITION SERVICES AGREEMENT" has the meaning assigned in Section 10.12.
"VA GUARANTY AGREEMENT" means the obligation of the United States to pay a
specific percentage of a Mortgage Loan (subject to a maximum amount) upon
default of the Mortgagor pursuant to the Serviceman's Readjustment Act, as
amended.
"VA LOAN" means a Mortgage Loan which is the subject of a VA Guaranty
Agreement as evidenced by a Loan Guaranty Certificate.
"VA NO-BID" means a VA no-bid or a VA buydown.
"YEAR 2000 COMPLIANT" means, with respect to an internal system, that at
all times before, during and after January 1, 2000, such internal system
accurately processes and handles date and time data from, into and between the
twentieth and twenty-first centuries, and the years 1999 and 2000, including,
without limitation, leap year calculations, to the extent that other information
technology used in combination with such internal systems and such products and
services properly exchange date and time data with it.
ARTICLE II
TRANSFER OF ASSETS AND
ASSUMPTION OF LIABILITIES
Section 2.01 ASSETS TO BE SOLD.
(a) Upon the terms and subject to the conditions of this Agreement, at the
Closing, the Seller shall sell, convey, assign, transfer and deliver to the
Purchaser all of the properties, Contracts, Approvals, rights and assets (of
every kind, nature, character and description, real, personal or mixed, tangible
or intangible, accrued, contingent or otherwise, and wherever situated) of the
Seller, other than the Excluded Assets. Such assets and property shall include,
without limitation, all right, title and interest of the Seller in all land,
offices, buildings (together with improvements, appurtenances, licenses and
permits), motor vehicles, equipment, furniture and fixtures, supplies,
stationery, cash and cash equivalents, Owned Mortgage Loans, other loans, the
Servicing Rights, the Subservicing Rights, accrued interest, interests in real
estate investment conduits, securities, hedging instruments (other than hedges
relating to the Servicing Rights), accounts receivable (including written-off
accounts), bank accounts (including escrow accounts), credits, deferred
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charges, security deposits, advance payments, prepaid expenses, deposits,
Approvals of any Governmental Agency or other third party, claims (including
insurance claims), suits and judgments against third parties (including warranty
claims relating to goods, equipment or real property sold to the Seller and
claims arising from the infringement of any Intellectual Property Right), all of
the outstanding capital stock of the Subsidiaries, the Seller's investment in
MERSCORP, Inc., the right to receive mail, payments on loans and accounts
receivable and other communications, Software and licenses and other rights to
use Software, lists of customers and suppliers, other files and business
records, advertising materials, customer application forms, Seller IPR, Third
Party IPR, the Seller's right, title and interest in Contracts and the goodwill
associated with the foregoing, but shall not include the Excluded Assets. All
the assets to be transferred pursuant to this Agreement are referred to
collectively herein as the "Purchased Assets". The Purchased Assets shall
include, without limitation, all assets in the categories described on Schedule
2.01(a) owned by the Seller immediately prior to the Closing. For purposes of
this Agreement, except where the context requires otherwise, the properties,
contracts, rights and assets of the Subsidiaries shall be considered Purchased
Assets.
(b) Notwithstanding anything to the contrary in this Agreement, the
Purchased Assets shall not include any of the following (the "Excluded Assets"):
(i) any deferred Tax assets and current Tax receivables relating to the Seller
and the Subsidiaries; (ii) any claims, refunds, credits or overpayments with
respect to any Taxes paid or incurred by the Seller and its Affiliates, or any
related interest received from the relevant taxing authority for periods ending
prior to the Closing Date, and the appropriately prorated portion thereof for
periods commencing prior to the Closing Date and ending on or after the Closing
Date; (iii) the rights of the Seller under this Agreement and the Related
Documents; (iv) the minute books, stock transfer books, seal and general
corporate accounting records of the Seller; (v) Contracts relating to any
Employee Plans (other than those relating to post-Closing benefits provided to
or for the benefit of persons who are employees of CPM on the Closing Date) and
Contracts to make any payment to an employee, officer or director of the Seller
or an Affiliate; (vi) Contracts between the Seller on the one hand and the
Parent or its Affiliates (other than the Subsidiaries) on the other hand, and
any claims or rights of the Seller thereunder, except as provided in the
Transition Services Agreement; (vii) insurance policies (other than financial
guarantee or similar policies insuring other Purchased Assets); (viii) any
capital stock of, or other investments in, Financial Security Assurance Holdings
Ltd. ("FSA"), US West Inc., Northwest Pacific Mortgage Company ("Northwest
Pacific") or any other corporation of which the Seller owns less than all of the
outstanding capital stock (except for the Seller's investment in MERSCORP,
Inc.), and the Seller's interest in Insurance Partners L.P.; (ix) any mortgage
loans or servicing or subservicing rights not identified on the Mortgage Loan
Schedule; (x) hedging instruments related to the Servicing Rights; (xi) prepaid
expenses related to any of the foregoing; (xii) recorded goodwill; and (xiii)
without duplication, all assets listed on Schedule 2.01(b).
(c) The sale, conveyance, assignment, transfer and delivery of the
Purchased Assets shall be effected by delivery by the Seller to the Purchaser at
the Closing or otherwise in accordance with the Transfer Instructions of (i) the
Bill of Sale and the Trademark Assignment, (ii) good and sufficient warranty
deeds in recordable or registrable form, with respect to all real property owned
by the Seller and included in the Purchased Assets, (iii) certificates
representing all
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of the outstanding stock of each of the Subsidiaries, duly endorsed in blank or
accompanied by stock powers duly endorsed in blank, (iv) endorsements in blank
(or otherwise as required by Applicable Requirements) of Mortgage Notes and
Assignments of Mortgage with respect to the Seller's and the Subsidiaries'
Mortgage Loans sufficient to transfer all of the Seller's and the Subsidiaries'
right, title and interest in the Mortgage Loans and (v) such other instruments
of conveyance and transfer as the Purchaser shall reasonably request in
accordance with the Transfer Instructions or otherwise.
Section 2.02 NONASSIGNABLE PERMITS, LICENSES, LEASES AND CONTRACTS.
(a) To the extent that any Contract or Approval to be included in the
Purchased Assets would be subject to termination or restriction or is not
capable of being assigned, transferred, subleased or sublicensed without the
consent or waiver of the issuer thereof or the other party thereto or any third
party, or if such assignment, transfer or sublease would constitute a breach
thereof or a violation of any Law, this Agreement shall not constitute an
assignment, transfer, sublease or sublicense thereof.
(b) The Seller agrees to use Commercially Reasonable Efforts prior to the
Closing to obtain the consents and waivers and to resolve any impracticalities
of assignment referred to in Section 2.02(a) and to obtain any other consents
and waivers necessary to sell, convey, assign, transfer and deliver title to
such Purchased Assets to the Purchaser at the Closing, subject to Section
10.05(b).
(c) To the extent that the consents and waivers referred to in Section
2.02(a) are not obtained by the Seller, or until the impracticalities of
transfer referred to therein are resolved, and subject to Section 10.05(b), (i)
the Seller shall use Commercially Reasonable Efforts (x) to provide to the
Purchaser the benefits of any Contract or Approval intended to be included in
the Purchased Assets, (y) to cooperate in any arrangement, reasonable and lawful
as to the Seller and the Purchaser, designed to provide such benefits to the
Purchaser and (z) at the Purchaser's request, to enforce for the account and at
the expense of the Purchaser any rights of the Seller arising from the Contracts
and Approvals intended to be included among the Purchased Assets, including the
right to elect to terminate or not renew in accordance with the terms thereof on
the advice of the Purchaser, which termination shall, upon becoming effective,
relieve the Seller of any further obligation under this Section 2.02(c) with
respect to such Contract or Approval, and (ii) after the Closing, the Purchaser
shall use Commercially Reasonable Efforts to perform the obligations of the
Seller arising under such Contracts and Approvals, to the extent the Purchaser
receives the benefit thereof. The Seller and the Purchaser shall cooperate with
each other to take such actions, including entering into subservicing agreements
or similar arrangements, as are reasonably calculated to effectuate the intent
of the preceding sentence. Notwithstanding anything to the contrary in the
foregoing, the Purchaser may determine, in its reasonable discretion, that any
Contract (except with respect to servicing or subservicing agreements) or
Approval for which the required consents and waivers referred to in Section
2.02(a) are not obtained by the Seller, or the impracticalities of transfer
referred to therein are not resolved, by the Business Day prior to the Closing
Date, shall not be a Purchased Asset, and in that event all rights and
obligations with respect to such Contract or
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Approval shall be retained by the Seller. The Purchaser shall give notice to the
Seller of any such determination on or within 30 days after the Closing Date,
provided that at the time of such notice such consents and waivers have not been
obtained, and such impracticalities of transfer have not been resolved. The
Purchaser shall, upon request of the Seller, use Commercially Reasonable Efforts
to provide the following assistance to the Seller in connection with its
attempting to obtain any consents or waivers required hereunder: (i) providing
reasonable access to an appropriate employee or employees of the Purchaser
solely for the purpose of speaking with third parties (from whom any consents or
waivers are requested by the Seller) concerning the general nature of the
business of the Purchaser to the extent it relates to the Purchaser's
obligations to acquire the Purchased Assets and the Contracts and (ii) the
provision of financial information concerning the Purchaser, subject to
customary confidentiality arrangements.
Section 2.03 LIABILITIES ASSUMED BY THE PURCHASER. Upon the terms and
subject to the conditions of this Agreement, the Purchaser agrees to assume as
of the Closing Date the following liabilities of the Seller (collectively, the
"Assumed Liabilities"), and only such liabilities: (i) the liabilities set forth
on Schedule 2.03, including without limitation the Seller's obligations under
$92 million principal amount of 9% debentures due June 1, 2012 (the
"Debentures"), $18.723 million principal amount due October 15, 2001 (the
"Notes") and $55.976 million principal amount of quarterly income capital
securities (the "QUICS"), provided that such liabilities and obligations that
accrue, or arise out of or are based on acts or omissions occurring, prior to
the Closing Date shall be Assumed Liabilities only to the extent they are
reflected on the Adjustment Schedule; (ii) the liabilities and obligations of
the Seller that accrue based on services performed on or after the Closing Date
under all Contracts and Approvals included in the Purchased Assets; (iii)
subject to Section 12.02(d), liabilities relating to VA No-bids in connection
with Mortgage Loans originated or committed prior to the Closing Date; and (iv)
subject to Section 12.02(e), obligations ("Pre-Closing Servicing Obligations")
with respect to (A) customary representations and warranties made in connection
with Mortgage Loans sold prior to the Closing Date, with Servicing Rights
retained by the Seller and (B) performance by the Seller prior to the Closing
Date of its duties under the Servicing Rights in accordance with their terms.
For the avoidance of doubt, it is understood that Pre-Closing Servicing
Obligations shall not include (i) any credit-related or other recourse,
indemnification or similar obligations (other than for breaches of customary
representations and warranties) and (ii) any liabilities or obligations of the
Seller based on or arising out of any violations of Law (provided that the
failure of an individual Mortgage Loan to conform to the Applicable Requirements
shall not be considered a violation of Law for these purposes) or any
intentional or bad faith violation of the Seller's contractual obligations. The
assumption of the Assumed Liabilities shall be effected by delivery by the
Purchaser to the Seller at the Closing of the Assumption Agreement, whereby the
Purchaser shall assume and agree to pay and discharge in accordance with their
terms the Assumed Liabilities.
Section 2.04 LIABILITIES NOT ASSUMED BY THE PURCHASER. All obligations and
liabilities of the Seller not constituting Assumed Liabilities, including any
other obligations and liabilities that arise before, on or after the Closing
Date based on or arising out of an act or omission occurring before the Closing
Date (whether or not disclosed to the Purchaser), are hereinafter referred to as
the "Retained Liabilities". Retained Liabilities shall include, but not be
limited to, (i) any deferred
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Tax liabilities and current Tax liability relating to the Seller and its
subsidiaries, except for current Taxes payable attributable to periods beginning
before the Closing Date and ending after the Closing Date, (ii) any pension or
employee benefits liabilities, (iii) any obligation of the Seller under any
servicing sale agreement (including, without limitation, servicing transfer
obligations at the expiration of interim or subservicing agreements, repurchase
or indemnification provisions, or purchase price adjustments due to prepayments,
delinquencies or document deficiencies), (iv) any obligations to repurchase, or
otherwise indemnify or reimburse any third party for losses or claims with
respect to, mortgage loans (other than the Pre-Closing Servicing Obligations),
(v) any VA-vendee indemnifications, and (vi) any liabilities arising out of
Litigation which is pending on the Closing Date or which arises after the
Closing Date based on an act or omission occurring before the Closing Date. In
addition, any obligations and liabilities of the Subsidiaries (other than the
normal operating liabilities of the Subsidiaries set forth on Schedule 2.04,
which shall be treated as Assumed Liabilities for purposes of the Closing
Statement and the Adjustment Schedule) that arise before, on or after the
Closing Date based on an act or omission occurring before the Closing Date
(including, without limitation, all liabilities of the types referred to in the
preceding sentence) shall be Retained Liabilities for all purposes of this
Agreement. Notwithstanding anything to the contrary in the foregoing, any
liabilities of the Subsidiaries arising out of Litigation which is pending on
the Closing Date or which arises after the Closing Date based on an act or
omission occurring before the Closing Date, whether or not described on Schedule
2.04, shall be Retained Liabilities for all purposes of this Agreement. The
obligations and liabilities of the Subsidiaries which are Retained Liabilities
as described in this Section 2.04 shall be assumed by the Seller and the Parent
at the Closing pursuant to an appropriate assumption agreement. The Purchaser
shall not assume or be liable with respect to the Retained Liabilities.
ARTICLE III
PAYMENT
Section 3.01 CALCULATION OF PAYMENT.
(a) (i) In consideration of the transfer of the Purchased Assets and the
covenants of the Seller and the Parent in this Agreement, the Purchaser shall
deliver or cause to be delivered to the Seller at the Closing the Assumption
Agreement, and the Purchaser shall pay to the Seller, by wire transfer of
immediately available funds to an account designated by the Seller, the amount
reflected on a statement (the "Closing Statement") prepared in accordance with
the procedures detailed on Schedule 3.01(a), which amount (the "Net Purchase
Price") shall be equal to: (A) the value of the Servicing Rights plus (B) the
GAAP Book Value (except as otherwise indicated on Schedule 3.01(a)) of the other
Purchased Assets plus (C) $65 million minus (D) the GAAP Book Value of the
Assumed Liabilities minus (E) (without duplication with (D)) the mark-to-market
adjustment for the debt obligations included in the Assumed Liabilities;
provided, however, that the Purchaser shall retain $2,000,000 as a holdback
amount. The Purchaser shall reimburse itself from the holdback amount for
amounts owing from the Seller to the Purchaser under this Agreement or any
Related Document in accordance with Section 12.04 (Procedures for Making Claims
Against Indemnifying Party). At the time the Adjustment Amount is paid pursuant
to Section 3.01(d), the
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Purchaser shall pay to the Seller the amount, if any, by which the holdback
amount (taking into account all reimbursements previously made to the Purchaser
from such amount and any amounts owing to the Purchaser in respect of the
Adjustment Amount) exceeds $500,000. Thereafter, within three Business Days
after the end of each month, the Seller will make any payment to the Purchaser
required to keep the holdback amount at $500,000 until the first anniversary of
the Closing Date. On the first anniversary of the Closing Date, the Purchaser
shall remit to the Seller any monies remaining in the holdback amount less any
amounts for pending claims identified by the Purchaser. Retention of the monies
until the first anniversary of the Closing Date and release of any remaining
funds after such anniversary in no manner abrogates or modifies the
indemnification or other obligations of the Seller or the Parent under this
Agreement.
(ii) The provisions of Section 2.02(c) shall apply with respect to
any Contract if the parties have not received, by the Business Day before the
Closing Date, the written consent of each other party to that Contract to the
assignment of the Seller's rights thereunder to the Purchaser; provided that if
consents have not been so obtained with respect to the subservicing agreements
with Chase Manhattan Mortgage Corp. ("Chase"), for all purposes of calculating
the purchase price under this Agreement, including for purposes of the Closing
Statement and the Adjustment Schedule, the value of the Purchased Assets shall
be reduced by $8 million (the "Chase Amount"). The Chase Amount will be
allocated to each of the four Chase subservicing agreements in accordance with
Schedule 3.01(a)(ii), which the Purchaser and the Seller will jointly prepare
within five Business Days after the Closing Date. The Purchaser will pay to the
Seller 1/24th of the amount allocated to each Chase subservicing agreement for
each month such agreement has not been terminated by Chase after the Closing.
Such payment shall be made by wire transfer of immediately available funds no
later than the third Business Day after the end of the relevant month. If, after
the Closing Date, Chase consents to the assignment of a subservicing agreement,
the Purchaser will pay to the Seller the remainder of the Chase Amount allocated
to that agreement; if Chase terminates an agreement, the Purchaser will retain
the remainder of the portion of the Chase Amount allocated to that agreement.
Notwithstanding anything to the contrary in the foregoing, if Chase terminates
any subservicing agreement because of a breach of such agreement by the Seller
or its Affiliates occurring prior to the Closing, the Purchaser will retain (or
the Seller will repay to the Purchaser) the unearned portion of the Chase Amount
allocated to that agreement, and if Chase terminates any such agreement because
of a breach of such agreement by the Purchaser or its Affiliates occurring after
the Closing, the Purchaser will pay (or the Seller will retain) the unearned
portion of the Chase Amount allocated to that agreement to the Seller.
(b) The Seller shall prepare the Closing Statement as of a date no more
than five Business Days prior to Closing and (except as otherwise described in
Section 3.01(a)) as if the Closing had occurred on such earlier date, provided
that the GAAP Book Value of the Purchased Assets and the Assumed Liabilities
(other than the "mark-to-market" debt adjustment) shown thereon shall be
determined as of the last day of the prior month. The Closing Statement shall be
delivered to the Purchaser no less than two Business Days prior to the Closing
Date. The Purchaser and its representatives shall have full access to the
accounting records from which the Closing Statement was prepared.
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(c) Not later than 30 calendar days after the Closing Date, the Purchaser
shall prepare or cause to be prepared a statement of the items shown on the
Closing Statement (the "Adjustment Schedule"). The Adjustment Schedule shall be
prepared in the same manner as the Closing Statement, except that all amounts
shall be determined as of the Closing Date, and the Adjustment Schedule shall
reflect the reduction of the holdback amount in accordance with Section
3.01(a)(i). The Seller and its representatives shall have full access to the
accounting records from which the Adjustment Schedule was prepared.
(d) Subject to Section 3.01(e), the Seller shall pay to the Purchaser the
Adjustment Amount (as defined below) if such amount is a negative number, and
the Purchaser shall pay to the Seller the Adjustment Amount if such amount is a
positive number, in either event promptly after its determination, by wire
transfer of immediately available funds equal to such excess, together with
interest thereon for each day after the Closing Date to the date of such payment
at 5% per annum (the "Interest Rate"), to an account to be designated in writing
by the Purchaser or the Seller, as the case may be. "Adjustment Amount" means a
positive or negative number equal to (i) the Net Purchase Price reflected on the
Adjustment Schedule (as modified pursuant to Section 3.01(e), if appropriate)
minus (ii) the Net Purchase Price reflected on the Closing Statement.
(e) If, within 30 calendar days after the delivery of the Adjustment
Schedule to the Seller pursuant to Section 3.01(c), the Seller determines in
good faith that the Net Purchase Price reflected therein is inaccurate, the
Seller shall give notice to the Purchaser within such 30-day period (i) setting
forth the Seller's determination of the Net Purchase Price and (ii) specifying
in reasonable detail the Seller's basis for its disagreement with the
Purchaser's computation of the Net Purchase Price. The failure by the Seller so
to express its disagreement within such 30-day period shall constitute
acceptance of the Net Purchase Price reflected on the Adjustment Schedule. If
the Seller and the Purchaser are unable to resolve their disagreement within 30
days after receipt by the Purchaser of notice of such disagreement, the items in
dispute shall be referred to independent accountants selected by the Purchaser
and the Seller (the "Accountants"). The Accountants shall make a determination
(which shall not constitute an audit or valuation with respect to the Adjustment
Schedule or any item thereon) as to each of the items in dispute, which
determination shall be (A) in writing, (B) furnished to each of the Seller and
the Purchaser as promptly as practicable after the items in dispute have been
referred to the Accountants and (C) final, conclusive and binding on the parties
hereto. The Adjustment Schedule shall thereupon be modified in accordance with
the Accountants' determination. The fees and expenses of the Accountants shall
be shared equally by the Seller and Purchaser. Within three Business Days after
either (i) the expiration of the 30-day period referred to in this Section
3.01(e) if the Seller does not within such period give the notice of
disagreement provided for above, or (ii) the date on which the Accountants
furnish to the Seller and the Purchaser such firm's written determination, the
appropriate party shall make payment in accordance with Section 3.01(d) hereof.
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ARTICLE IV
REPRESENTATIONS AND WARRANTIES
OF THE SELLER AND THE PARENT
The Seller and the Parent, jointly and severally, represent and warrant to
the Purchaser as follows:
Section 4.01 ORGANIZATION OF THE SELLER AND THE PARENT. Each of the Seller
and the Parent is a corporation duly organized, validly existing and in good
standing under the laws of the State of Delaware, with the requisite corporate
power and authority to own, operate and lease its properties and to carry on its
business as now being conducted.
Section 4.02 SUBSIDIARIES.
(a) The Seller owns, beneficially and of record, all of the capital stock
of each Subsidiary, free and clear of all Liens. The outstanding stock of each
Subsidiary has been validly issued and is fully paid and non-assessable. There
are no outstanding options, rights or warrants to acquire any equity interest in
any Subsidiary. Each of the Subsidiaries has been duly organized and is validly
existing and in good standing under the laws of its jurisdiction of
organization, with the requisite corporate power and authority to own, operate
and lease its properties and to carry on its business as now being conducted.
(b) Other than (i) the investments identified as Excluded Assets in
Section 2.01(b), (ii) shares of the capital stock of the Subsidiaries and the
Seller's investment in MERSCORP, Inc. and (iii) interests, acquired and held in
the ordinary course of the Business, in real estate investment conduits and
other entities organized for the exclusive purpose of holding mortgage loans,
the Seller does not, directly or indirectly, own, control or have the power to
vote any equity securities of any other corporation, partnership, joint venture,
trust or other business entity.
Section 4.03 POWER AND AUTHORITY. Each of the Seller and the Parent has
the requisite corporate power and authority to execute and deliver this
Agreement and the Related Documents to which it is or will be a party and to
perform the transactions contemplated hereby and thereby to be performed by it.
All corporate action on the part of the Seller and the Parent, necessary to
approve or to authorize the execution and delivery of this Agreement and the
Related Documents to which it is a party, and the performance of the
transactions contemplated hereby and thereby to be performed by it, has been
duly taken. This Agreement is a valid and binding obligation of the Seller and
the Parent, enforceable in accordance with its terms.
Section 4.04 NO CONFLICTS. Except as may be required under the
Hart-Scott-Rodino Antitrust Improvements Act (the "HSR Act") and except as set
forth in Section 4.04 of the Disclosure Schedule (which Section the Seller
agrees to provide to the Purchaser within five Business Days after the date of
this Agreement), neither the execution or delivery by the Seller and the Parent
of this Agreement or any Related Document to which it is or will be a party nor
the performance of the transactions contemplated hereby or thereby to be
performed by it shall:
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(i) conflict with or result in a breach of any provision of the
Certificate of Incorporation (or other charter documents) or Bylaws of the
Parent, the Seller or any Subsidiary;
(ii) violate any Law applicable to the Parent, the Seller or any
Subsidiary or by which the Parent, the Seller or any Subsidiary or any of their
properties is bound; or
(iii) constitute an event of default under, permit the termination
of, give rise to a right to accelerate any indebtedness under, or otherwise
violate, breach or conflict with, any material Contract or Approval binding on
the Parent, the Seller or any Subsidiary, or by which any material asset which
will be a Purchased Asset is bound, or result in the creation of any Lien upon
any asset which will be a Purchased Asset, other than such Liens that may be
imposed by or as a result of any action of the Purchaser or any of its
Affiliates; or require any consent, approval, authorization or other order or
action of, or notice to, or declaration, filing or registration with any
Governmental Agency or other third party.
Section 4.05 LITIGATION; COMPLIANCE WITH LAWS.
(a) To the Seller's Knowledge, neither the Seller nor any Subsidiary (i)
is in violation of, or has received any notice alleging a violation of, any
applicable Law or any Approval issued or required to be obtained thereunder or
(ii) has any unsatisfied liability or obligation in respect of any such
violation. The Seller and the Subsidiaries own or possess in the operation of
the Business all Approvals which are necessary for the conduct of the Business.
(b) Except as set forth in Section 4.05(b) of the Disclosure Schedule,
there is no pending or, to the Knowledge of the Seller, threatened Litigation by
or before any Governmental Agency, court or arbitrator, to which the Seller or
any Subsidiary is a party or by which any asset that will be a Purchased Asset
may be bound or affected, nor, to the Knowledge of the Seller, is there any
reasonable basis therefor. Since January 1, 1996, no Governmental Agency has
initiated any proceeding or, to the Seller's Knowledge, any investigation into
the business or operations of the Parent, the Seller or any Subsidiary, except
for routine audits and similar proceedings that did not result in the
determination of any violations, criticisms, citations or exceptions that, if
not cured, would have a Material Adverse Effect on the Business. There are no
unresolved violations, criticisms, citations or exceptions by any Governmental
Agency with respect to any examinations of the Seller or any Subsidiary that, if
not cured, would have a Material Adverse Effect on the Business.
(c) Except as set forth in Section 4.05(c) of the Disclosure Schedule, on
the date hereof, neither the Seller nor any of its Subsidiaries is a party to
any consent decree and, to the Knowledge of the Parent and the Seller, none are
threatened, pending or contemplated.
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Section 4.06 FINANCIAL STATEMENTS; SEC REPORTS.
(a) Since January 1, 1997, the Seller has filed all required reports,
schedules, forms, statements and other documents (including exhibits and all
other information incorporated therein) with the Securities and Exchange
Commission (the "SEC"). As of their respective dates, such documents (the
"Seller SEC Documents") complied in all material respects with the applicable
requirements of the Securities Act of 1933, as amended, and the Securities
Exchange Act of 1934, as amended, and the rules of the SEC applicable to such
Seller SEC Documents, and no Seller SEC Document when filed contained any untrue
statement of a material fact or omitted to state a material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading.
(b) Attached hereto as Appendix I is a draft of the Seller's financial
statements for the year ended December 31, 1998 (the "1998 Financial
Statements"). The 1998 Financial Statements include a balance sheet of the
Seller and its consolidated subsidiaries as of December 31, 1998 (the "1998
Balance Sheet"), together with related statements of operations, changes in
shareholder's equity and cash flows of the Seller and its consolidated
subsidiaries (and notes thereto) for such period. The 1998 Financial Statements
fairly present, and the Seller's audited 1998 financial statements as filed with
the SEC will fairly present, in all material respects the consolidated financial
position and the consolidated results of operations and cash flows of the Seller
and its consolidated subsidiaries for the period therein identified in
conformity with GAAP (except as may be indicated in the notes thereto).
(c) Except for (i) liabilities or obligations incurred by the Seller or
its consolidated subsidiaries in the ordinary course of business and not
required by GAAP to be set forth on the 1998 Balance Sheet (all material known
items of which are described in Section 4.06(c) of the Disclosure Schedule) and
(ii) liabilities of and obligations incurred by the Seller and the consolidated
subsidiaries in the ordinary course of business since December 31, 1998 (none of
which known items could reasonably be expected to cause a Material Adverse
Effect on the Business), there is no material liability or obligation (whether
absolute, accrued or contingent) that is not set forth on the 1998 Balance
Sheet.
(d) The Seller has previously delivered to the Purchaser copies of the
Seller's internally prepared accounting reports for January 1999, and will
deliver such reports for February 1999 when available (such reports
collectively, the "Internal Reports"). The statements of income for the months
ended January 31 and February 28, 1999 and the balance sheets as of January 31
and February 28, 1999 included in the Internal Reports were or will be prepared
consistently with the 1998 Financial Statements in accordance with GAAP as
appropriate for the preparation of interim reports of that type.
(e) Since December 31, 1998 there has been no Material Adverse Change in
the operations, business or financial condition of the Business (other than as a
result of changes in general economic, political or industry conditions
including, without limitation, rises and falls in interest rates and/or
prepayment rates or forecasts or changes due to military action or war). Since
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December 31, 1998, except as identified on Section 4.06(e) of the Disclosure
Schedule, there has been no action taken by the Seller or any of its
Subsidiaries of the type described in Section 10.04(a).
Section 4.07 PURCHASED ASSETS; REAL PROPERTY; LEASES AND OTHER CONTRACTS;
INSURANCE.
(a) Except as described in Section 4.07(a) of the Disclosure Schedule, the
Seller has good and marketable title to the Mortgage Loans included in the
Purchased Assets, and good and indefeasible title to, a leasehold interest in or
the right to use all other Purchased Assets, and at the Closing will (subject to
Section 2.02) have the right to convey and transfer to the Purchaser, all
Purchased Assets, and the Subsidiaries have good and indefeasible title to, a
leasehold interest in or the right to use all their assets, in each case free
and clear of all Liens, except for Liens for Taxes not yet due and payable or
which are being contested in good faith by appropriate proceedings. All of the
tangible assets which will be Purchased Assets and the assets leased or licensed
under Contracts which will be Purchased Assets are in good operating condition
and repair, reasonable wear and tear excepted. The assets that will be Purchased
Assets and Excluded Assets, taken together, include all material properties,
Contracts, rights and assets which are being used in the conduct of the Business
at the date hereof. The Purchased Assets, together with any Contracts otherwise
excluded from the definition of "Purchased Assets" pursuant to Section 2.02(c)
and 3.01(a), comprise all the material properties, Contracts, rights and assets
required by the Seller and its Subsidiaries to conduct the Business. The
Purchased Assets are not subject to any option to purchase or right of first
refusal.
(b) Section 4.07(b) of the Disclosure Schedule contains a brief
description of all real property owned in fee simple or held pursuant to a Lease
by the Seller or a Subsidiary that will be included in the Purchased Assets,
other than REO properties. Except as set forth in Section 4.07(b) of the
Disclosure Schedule, (i) no condemnation proceedings have been instituted or, to
the Knowledge of the Seller, threatened with respect to any such real property,
and (ii) the Leases are all in full force and effect and no notices of default
have been given or received thereunder. Section 4.07(b) of the Disclosure
Schedule accurately sets forth all payment obligations under the Leases,
expiration dates of the Leases and options to renew or cancel the Leases.
(c) Section 4.07(c) of the Disclosure Schedule contains a complete and
correct list of all Contracts that will be included in the Purchased Assets or
the Assumed Liabilities. Except as set forth in Section 4.07(c) of the
Disclosure Schedule, all such Contracts listed or required to be listed pursuant
to the preceding sentence are in full force and effect and are valid and binding
obligations of the Seller or a Subsidiary and, to the Seller's Knowledge, of the
other parties thereto. The Seller has provided to the Purchaser true and
complete copies of all such Contracts. Except as set forth in Section 4.07(c) of
the Disclosure Schedule, no party to any such Contract is in default in any
material respect under any such Contract; nor to the Knowledge of the Seller,
does there presently exist any event or condition which, with the passage of
time or giving of notice or both, would be reasonably expected to constitute
such a default. The accounts receivable of the Seller and the Subsidiaries to be
reflected on the Closing Statement represent bona fide amounts receivable for
services rendered in the ordinary course of the Business. The values at which
accounts receivable,
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net of reserves, are carried on the books and records of the Seller and the
Subsidiaries reflect the amounts deemed collectible in accordance with GAAP.
(d) Section 4.07(d) on the Disclosure Schedule contains a complete and
correct list of (i) all material insurance policies under which the Seller or a
Subsidiary is a named insured and that provide coverage with respect to the
Purchased Assets and (ii) any outstanding claims under such insurance policies
related to the Purchased Assets. Neither Seller nor any Subsidiary has received
notice of cancellation of any such policies.
Section 4.08 EMPLOYEE BENEFIT AND PENSION PLAN MATTERS.
(a) Section 4.08(a) on the Disclosure Schedule lists all material pension,
retirement, profit sharing, deferred compensation, stock option, stock purchase,
stock ownership, stock appreciation right, savings, bonus, severance, vacation,
incentive, medical, dental or health, life, accident, disability or other
employee benefit plans, programs, agreements, understandings or arrangements,
including, without limitation, all employee benefit plans as defined in Section
3(3) of the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), for the benefit of any of the present or former directors or
employees of the Business or their beneficiaries or dependents, or which are
maintained or sponsored by the Seller or a Subsidiary, or to which the Seller or
a Subsidiary makes, or is required to make, contributions (collectively,
"Employee Plans").
(b) Except to the extent that any of the following would not, individually
or in the aggregate, have a Material Adverse Effect on the Business, (i) each of
the Employee Plans and its administration and operation are in compliance in all
material respects with all applicable Laws and, except as otherwise permitted or
required by applicable Law, the provisions of such Employee Plan and (ii) all
contributions, premiums, benefits or other payments required to be made to or
with respect to any Employee Plan which is a welfare plan within the meaning of
Section 3(1) of ERISA for all periods preceding the Closing Date and for the
period including the Closing Date have, or prior to the Closing Date will have,
been made.
Section 4.09 LABOR RELATIONS. With respect to any employees of the
Business, neither the Seller nor any Subsidiary is a party to any collective
bargaining agreement with a labor organization certified by the National Labor
Relations Board (the "NLRB"), and (a) there is no unfair labor practice charge
or complaint against the Seller or a Subsidiary pending before the NLRB, (b)
there is no labor strike, or organized dispute, slowdown, work stoppage or other
form of collective labor activity actually pending or, to the knowledge of the
Seller or a Subsidiary, threatened against or affecting the Seller or a
Subsidiary, (c) there is no union representation claim or petition pending
before the NLRB and (d) neither the Seller nor any Subsidiary has experienced
any organized dispute, slowdown, work stoppage or other form of collective
activity in the past three years.
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Section 4.10 MORTGAGE LOANS.
(a) Except as otherwise described with respect to SOM in Section 4.10(a)
of the Disclosure Schedule, each of the Seller, CPM and SOM is (i) an approved
seller/servicer of mortgage loans for Fannie Mae ("FNMA") and Freddie Mac
("FHLMC") in good standing, (ii) a Department of Housing and Urban Development
("HUD") approved mortgagee pursuant to Section 203 of the National Housing Act,
(iii) authorized by Government National Mortgage Association ("GNMA") as an
eligible issuer/servicer and in good standing to service GNMA loans and (iv) a
Federal Housing Administration ("FHA") approved mortgagee and (except for SOM) a
Veterans Administration ("VA") approved lender in good standing to originate and
service FHA and VA loans. Neither the Seller nor either such Subsidiary has been
suspended as a mortgagee or servicer by the FHA, the VA, FHMLC, FNMA or GNMA,
and each of the Seller and CPM has facilities, procedures and experienced
personnel necessary for the sound servicing of FHA, VA, FHMLC, FNMA and GNMA
loans. No event has occurred, including but not limited to a change in insurance
coverage, which would make the Seller or either such Subsidiary unable to comply
with FNMA, FHLMC, HUD, GNMA, FHA or VA eligibility requirements or which would
require notification by the Seller or either such Subsidiary to FNMA, FHLMC,
HUD, GNMA, FHA or VA.
(b) In connection with the execution of this Agreement, Seller has
delivered to Purchaser in a computer tape format reasonably acceptable to
Purchaser, a report that identifies the Mortgage Loans (and which identifies the
Mortgage Loans that are Owned Mortgage Loans) and the Subserviced Mortgage Loans
(the "Mortgage Loan Schedule," which term includes, except where the context
requires otherwise, the updated schedule to be prepared and delivered in
accordance with Section 10.15 (Updated Mortgage Loan Schedule)). The Mortgage
Loan Schedule identifies each Mortgage Loan owned, or serviced by the Seller and
the Subsidiaries and each Subserviced Mortgage Loan subserviced by the Seller
and the Subsidiaries (identifying any third party owner or servicer) and sets
forth the following information with respect to each such Mortgage Loan and
Subserviced Mortgage Loan (or, with respect to each Pipeline Mortgage Loan, such
of the following information as is then available) as of the close of business
on the last day of the preceding month (the "Cut-off Date"): (1) the Seller's
mortgage loan identifying number; (2) the mortgagor's first and last name; (3)
the street address of the mortgaged property including the state and zip code;
(4) a code indicating whether the mortgaged property is owner-occupied; (5) the
type of dwelling constituting the mortgaged property; (6) the original term to
maturity in months; (7) the original date of the mortgage; (8) to the extent
available, the LTV at origination; (9) the mortgage interest rate in effect on
the Cut-off Date; (10) the date on which the first monthly payment was due; (11)
the stated maturity date; (12) the amount of the monthly payment of principal
and interest at origination; (13) the amount of the monthly payment as of the
Cut-off Date; (14) the last due date on which a monthly payment was actually
applied to the unpaid principal balance; (15) the original principal amount;
(16) [reserved]; (17) to the extent available, a code indicating the purpose of
the loan (e.g., purchase financing, rate/term refinancing, cash-out
refinancing); (18) the mortgage interest rate at origination; (19) to the extent
available, a code indicating the documentation style (i.e., full, alternative or
reduced); (20) a code indicating if the Mortgage Loan or Subserviced Mortgage
Loan is subject to a Primary Insurance Policy; (21) a code indicating if the
Mortgage
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Loan or Subserviced Mortgage Loan is an FHLMC, FNMA or GNMA loan, is owned by
the Seller or a Subsidiary or has been sold to private investors; (22) a code
indicating if the Mortgage Loan or Subserviced Mortgage Loan is an FHA or VA
loan; (23) a code indicating if the mortgage loan servicing is owned, interim
serviced or subserviced, (24) to the extent available, the appraised value of
the mortgaged property as of a given date; (25) to the extent available, the
sale price of the mortgaged property, if applicable; (26) the actual unpaid
principal balance of the Mortgage Loan or Subserviced Mortgage Loan as of the
Cut-off Date; (27) the servicing fee, including any excess servicing fee
retained by the Seller; (28) any guarantee fees; (29) whether the Mortgage Loan
or Subserviced Mortgage Loan is in foreclosure (provided that this information
will be included on the updated Mortgage Loan Schedule only) or is an REO
property; and (30) with respect to each adjustable rate Mortgage Loan: (i) the
first adjustment date; (ii) the applicable index and margin; (iii) the maximum
mortgage interest rate; (iv) the minimum mortgage interest rate; (v) the
periodic rate cap; (vi) the first adjustment date following the Cut-off Date;
and (vii) a code indicating whether the Mortgage Loan is a convertible mortgage
loan. With respect to all such Mortgage Loans and Subserviced Mortgage Loans in
the aggregate for each investor or owner or servicer, the Mortgage Loan Schedule
sets forth the following information, as of the related Cut-off Date: (1) the
number of Mortgage Loans; (2) the aggregate principal balance; (3) the weighted
average mortgage interest rate; and (4) the weighted average maturity. The
information set forth in the Mortgage Loan Schedule is complete, true and
correct in all material respects as of the date hereof.
(c) The Mortgage Loans have been underwritten, originated, held and
serviced in compliance in all material respects with all Applicable
Requirements. In the case of all Mortgage Loans described in the Mortgage Loan
Schedule or the Seller's and the Subsidiaries' books and records as FHA Loans or
VA Loans, the related Mortgage is guaranteed by the VA to the maximum extent
permitted by law or fully insured by the FHA, all necessary steps have been
taken to make and keep such guarantee or insurance valid, binding and
enforceable, and the related FHA Insurance Contract or VA Guaranty Agreement is
the binding, valid and enforceable obligation of the VA or the FHA, as the case
may be, without surcharge, set-off or defense.
(d) The Mortgage Notes evidencing the Mortgage Loans and the notes and
other evidences of indebtedness and related security agreements for all other
loans to be included among the Purchased Assets are correct in original amount,
genuine as to signatures of makers and endorsers, and accurate as to lien
priority and in all material respects as to description of collateral; the
related mortgages and other liens have been recorded and perfected in accordance
with the Applicable Requirements; and such notes and other evidences of
indebtedness and related security agreements were given for valid consideration
and constitute legally binding and enforceable claims against the makers and
endorsers thereof (except as enforceability may be limited by bankruptcy,
insolvency and other laws relating to creditors' rights generally or by general
equitable principles), without any set-off, defense or counterclaim, for the
full amounts shown on the books and records of the Seller and the Subsidiaries.
All insurance products for which the Seller or a Subsidiary has acted as agent
have been underwritten, marketed and sold in compliance with applicable Law and
constitute legally binding and enforceable claims against the insurer and the
insured (except as enforceability may be limited by bankruptcy, insolvency and
other laws relating to creditors' rights generally or by general equitable
principles).
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(e) The Parent and its subsidiaries have not, and the Seller and the
Parent have no Knowledge that any other person has, taken any action or omitted
to take any reasonably required action, which action or omission would impair
the rights of the Seller, the Subsidiaries or (after the Closing) the Purchaser
in the Mortgage Loans or prevent any such person from collecting any amounts due
thereunder.
(f) Except as disclosed in Section 4.10(f) of the Disclosure Schedule, the
Seller has no Knowledge that any taxes, ground rents, water charges, sewer
rents, assessments (including assessments payable in future installments),
insurance premiums, leasehold payments or other outstanding charges affecting
the related Mortgaged Properties with respect to any Mortgage Loan, in each case
that are due, have not been paid.
(g) The terms of each Mortgage Note and each Mortgage with respect to any
Mortgage Loan have not been impaired, waived, altered or modified in any
respect, except (i) in the case of a Conventional Mortgage Loan, by written
instrument, recorded in the applicable public recording office if necessary to
maintain the lien priority of the Mortgage, and the substance of any such
waiver, alteration or modification has been approved by the insurer under the
Primary Insurance Policy, if any, and the title insurer, to the extent required
by the related policy, and (ii) in the case of an FHA Loan or a VA Loan, by
written instrument, and the substance of any such waiver, alteration or
modification has been approved by the FHA or the VA, as the case may be, to the
extent required by the applicable insurance agreement, and in each case, the
substance of any waiver, alteration or modification is reflected on the Mortgage
Loan Schedule. No instrument of waiver, alteration or modification has been
executed, and no Mortgagor has been released, in whole or in part, except in
connection with an assumption agreement approved by the insurer under the
Primary Insurance Policy, if any, and the title insurer, to the extent required
by the policy, and which assumption agreement has been delivered to the
custodian and the terms of which are reflected in the Mortgage Loan Schedule.
(h) No Mortgage with respect to any Mortgage Loan has been satisfied,
cancelled, subordinated or rescinded, in whole or in part, and the related
Mortgaged Property has not been released from the lien of the Mortgage, in whole
or in part, nor has any instrument been executed that would effect any such
satisfaction, cancellation, subordination, rescission or release, except in
connection with an assumption agreement which has been delivered to the related
custodian and which has been approved (a) in the case of a Conventional Mortgage
Loan, by the insurer under the Primary Insurance Policy, if any, and (b) in the
case of an FHA Loan or a VA Loan, by the FHA or the VA, as the case may be, to
the extent required by the applicable insurance agreement; and, in any event,
any such release is reflected on the Mortgage Loan Schedule.
(i) Each Mortgage with respect to any Mortgage Loan is a valid, existing
and enforceable first lien on the related Mortgaged Property (except for those
identified in Section 4.10(i)(A) of the Disclosure Schedule, all of which are
valid, existing and enforceable second liens subordinate only to a first lien),
including all improvements on the Mortgaged Property, subject only to (i) the
lien of current real property taxes and assessments not yet due and payable,
(ii)
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covenants, conditions and restrictions, rights of way, easements and other
matters of the public record as of the date of recording being acceptable to
mortgage lending institutions generally and the FHMLC, FNMA, GNMA, HUD, FHA or
the VA, as the case may be, and any private investor and specifically referred
to in the lender's title insurance policy or attorney's opinion of title
delivered to the originator of the Mortgage Loan and which do not adversely
affect the Appraised Value of the Mortgaged Property, and (iii) other matters to
which like properties are commonly subject which do not materially interfere
with the benefits of the security intended to be provided by the Mortgage or the
use, enjoyment, value or marketability of the related Mortgaged Property and
which shall not in any way prevent realization of the benefits of any FHA
Insurance Contract or VA Guaranty Agreement, if applicable. All of the Mortgage
Properties securing the Mortgage Loans are residential properties, except for
those identified in Section 4.10(i)(B) of the Disclosure Schedule. Except to the
extent identified in Section 4.10(i)(A) of the Disclosure Schedule, any security
agreement, chattel mortgage or equivalent document related to and delivered in
connection with any such Mortgage Loan establishes and creates a valid, existing
and enforceable first lien and first priority security interest on the property
described therein and the Seller has full right to sell and assign the same to
the Purchaser. Except to the extent identified in Section 4.10(i)(A) of the
Disclosure Schedule, the Mortgaged Property was not, at the time of origination
of the Mortgage Loan, subject to a mortgage, deed of trust, deed to secure debt
or other security instrument creating a lien subordinate to the lien of the
Mortgage, which subordinate lien could cause such Mortgage Loan not to be
saleable to FHLMC, FNMA or GNMA.
(j) Except for Mortgage Loans identified in Section 4.10(j) of the
Disclosure Schedule, the proceeds of each Mortgage Loan have been fully
disbursed to or for the account of the related Mortgagor and there is no
obligation for the Mortgagee to advance additional funds thereunder and any and
all requirements as to completion of any on-site or off-site improvement and as
to disbursements of any escrow funds therefor have been complied with. All
costs, fees and expenses incurred in making or closing each Mortgage Loan and
the recording of the Mortgage have been paid, and the related Mortgagor is not
entitled to any refund of any amounts paid or due to the Mortgagee pursuant to
the Mortgage Note or Mortgage.
(k) Each Mortgage Loan is covered by an American Land Title Association or
similar lender's title insurance policy (or a title commitment or title binder
committing the title company to issue such title insurance policy) or, where
customary, an attorney's opinion of title, in each case meeting the Applicable
Requirements, issued by an insurer acceptable to FNMA, FHLMC, HUD, GNMA, FHA or
VA, as applicable, and any private investor and qualified to do business in the
jurisdiction where the Mortgaged Property is located, insuring the Seller or a
Subsidiary, its successors and assigns as to the lien of the Mortgage in the
original principal amount of the Mortgage Loan and against any loss by reason of
the invalidity or unenforceability of the lien. Additionally, such lender's
title insurance policy affirmatively insures (or, for Pipeline Loans, will
insure at the Closing Date or when the Mortgage Loan is closed) ingress and
egress to and from the Mortgaged Property, and against encroachments by or upon
the Mortgaged Property or any interest therein. The Seller or a Subsidiary is
(or, for Pipeline Loans, will be at the Closing Date or when the Mortgage Loan
is closed) the sole insured of each lender's title insurance policy, and each
lender's title insurance policy is (or, for Pipeline Loans, will be at the
Closing Date or when the
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Mortgage Loan is closed) in full force and effect and will be in full force and
effect upon the consummation of the transactions contemplated by this Agreement.
To the Seller's and the Parent's Knowledge, except as disclosed in Section
4.10(k) of the Disclosure Schedule, no claims have been made under a lender's
title insurance policy, and no prior holder of the related Mortgage, including
the Seller, has done, by act or omission, anything which would impair the
coverage of any lender's title insurance policy.
(l) Each appraisal made in connection with the origination of a Mortgage
Loan was performed in accordance with the requirements of the Financial
Institutions Reform, Recovery and Enforcement Act of 1989. Except as disclosed
in Section 4.10(l) of the Disclosure Schedule or to the extent otherwise
permitted or required by the Applicable Requirements, each Conventional Mortgage
Loan (other than second mortgage loans identified on Section 4.10(i)(A) of the
Disclosure Schedule) with an LTV at origination in excess of 80% is subject to a
Primary Insurance Policy, which insures as to payment defaults that portion of
the Mortgage Loan in excess of the portion of the Appraised Value of the
Mortgaged Property required by FNMA and FHLMC, whether or not such Mortgage Loan
has been sold to FNMA or FHLMC. All provisions of such Primary Insurance Policy
have been and are being complied with, such policy is in full force and effect,
and all premiums due thereunder have been paid. Except as disclosed in Section
4.10(l) of the Disclosure Schedule, any Mortgage subject to any such Primary
Insurance Policy obligates the Mortgagor thereunder to maintain such insurance
and to pay all premiums and charges in connection therewith. The Mortgage
Interest Rate for the Mortgage Loan does not include any such insurance premium.
(m) (i) No material error, omission, misrepresentation, negligence, fraud
or similar occurrence with respect to a Mortgage Loan has taken place on the
part of any Person, including without limitation the Mortgagor, any appraiser,
any builder or developer, any correspondent or broker, any employee of the
Seller or a Subsidiary, or any other party involved in the origination of the
Mortgage Loan or in the application of any insurance in relation to such
Mortgage Loan, and (ii) no action has been taken or failed to be taken, no event
has occurred and no state of facts exists or has existed on or prior to the
Closing Date (whether or not known to the Seller on or prior to such date) which
has resulted or will result in an exclusion from, denial of, or defense to
coverage under any Primary Insurance Policy (including, without limitation, any
exclusions, denials or defenses which would limit or reduce the availability of
the timely payment of the full amount of the loss otherwise due thereunder to
the insured) whether arising out of actions, representations, errors, omissions,
negligence, or fraud of the Seller, the related Mortgagor or any party involved
in the application for such coverage, including the appraisal, plans and
specifications and other exhibits or documents submitted therewith to the
insurer under such insurance policy, or for any other reason under such
coverage, but not including the failure of such insurer to pay by reason of such
insurer's breach of such insurance policy or such insurer's financial inability
to pay.
(n) The brokers and correspondents involved in the origination of any
Mortgage Loan have complied in all material respects with all internal policies
and procedures of the Seller or CPM with respect to the origination of such
Mortgage Loans.
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(o) To the Seller's Knowledge, all contracts or agreements between the
Seller or any Subsidiary on the one hand, and any broker or correspondent on the
other hand, require any such broker or correspondent to repurchase from the
Seller or a Subsidiary the Mortgage Loans originated by such broker or
correspondent on terms and conditions substantially identical to the related
repurchase obligations of the Seller or a Subsidiary to FNMA, GNMA, FHLMC, HUD,
FHA, VA or any private investor with respect to such Mortgage Loans.
(p) The Seller has no Knowledge, with respect to any Mortgage Loan, that
the Mortgaged Property is not in material compliance with all applicable
environmental Laws, including, without limitation, Laws relating to asbestos and
other Hazardous Materials. The Seller has not, and the Seller has no Knowledge
that the related Mortgagor has, received any notice of any violation or
potential violation of any such Law.
(q) Except as disclosed in Section 4.10(q) of the Disclosure Schedule, the
Seller has no Knowledge that the file relating to a serviced Mortgage Loan does
not contain all documentation necessary for the Purchaser to service such
Mortgage Loan following the Closing.
(r) Except as disclosed in Section 4.10(r)(i) of the Disclosure Schedule,
all Mortgage Loans have been initially certified, finally certified and/or
recertified in accordance with Applicable Requirements. All Mortgage Loans
listed in Section 4.10(r)(i) of the Disclosure Schedule have no impediment to
final certification and/or recertification by the applicable deadline, giving
effect to any available extension. The mortgage loan documents to be delivered
to the Purchaser will include all documents necessary (other than Assignments of
Mortgage that are to be delivered after the Closing Date and other than
documents identified in Section 4.10(r)(ii) of the Disclosure Schedule) in order
for the Purchaser's document custodian to finally certify or recertify, as
applicable, the Mortgage Loans by applicable deadlines, giving effect to any
available extension. Each Mortgage Loan included in a mortgage loan pool meets
all the eligibility requirements of the investor for inclusion in such mortgage
pool. After reconciliation required hereunder, each security of each mortgage
pool will be balanced to the collateral and the expected cash will be deposited
in the applicable custodial account.
(s) All flood and hazard insurance policies and flood certifications with
respect to Mortgage Loans were obtained where required, are in compliance with
applicable Laws and remain in full force and effect.
(t) Except for Mortgage Loans that are delinquent or in default, or which
have been foreclosed, the Seller has no Knowledge of any circumstances or
conditions with respect to the Mortgage, the Mortgaged Property, the Mortgagor
or the Mortgagor's credit standing that can reasonably be expected to cause
institutional investors investing in loans of the same type as a Mortgage Loan
to regard such Mortgage Loan to be an unacceptable investment or adversely
affect the value of the Mortgage Loan.
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(u) Except for Mortgage Loans disclosed in Section 4.10(u) of the
Disclosure Schedule, all of the Mortgage Loans have been sold to investors, and
are being serviced, without recourse to the Seller or any Subsidiary (other than
for breaches of customary representations and warranties).
(v) With respect to the Subserviced Mortgage Loans:
(i) The Subserviced Mortgage Loans are being subserviced in
compliance in all material respects with the provisions of the applicable
subservicing agreements.
(ii) The Parent and its subsidiaries have not, and the Seller and
the Parent have no Knowledge that any other person has, taken any action
or omitted to take any reasonably required action, which action or
omission would impair the rights of the Seller, the Subsidiaries or (after
the Closing) the Purchaser in the Subserviced Mortgage Loans or prevent
any such person from collecting any amounts due thereunder.
(iii) Except as disclosed in Section 4.10(v)(iii) of the Disclosure
Schedule, the Seller has no Knowledge that the file relating to a
Subserviced Mortgage Loan does not contain all documentation necessary for
the Purchaser to subservice such Subserviced Mortgage Loan in accordance
with the related subservicing agreement following the Closing.
(iv) All of the Subserviced Mortgage Loans are being subserviced
without recourse to the Seller or any Subsidiary (other than for breaches
of customary representations and warranties).
Section 4.11 [RESERVED]
Section 4.12 TRANSACTIONS WITH AFFILIATES. Since January 1, 1997, except
as set forth in Section 4.12 of the Disclosure Schedule, neither the Seller nor
any Subsidiary has purchased, acquired or leased any property or services from
or sold, transferred or leased any property or services to, or lent or advanced
any money to, or borrowed any money from, or acquired any capital stock,
obligations or securities of, or made any management consulting or similar fee
agreement with the Parent or any other Affiliate of the Parent or any officer,
director or employee of the Seller or any Affiliate of the Seller.
Section 4.13 INTEREST RATE RISK MANAGEMENT INSTRUMENTS. All interest rate
swaps, caps, floors and option agreements and other interest rate risk
management arrangements entered into for the account of the Seller or the
Subsidiaries were entered into in the ordinary course of business and in
accordance with prudent business practice and applicable rules, regulations and
policies of any Governmental Agency and with counterparties believed to be
financially responsible and are legal, valid and binding obligations of the
Seller or one of the Subsidiaries and, to the Seller's Knowledge, of the other
parties thereto, enforceable against the Seller or the applicable Subsidiary,
and to the Seller's Knowledge, in accordance with their terms (except as
enforceability may be limited by bankruptcy, insolvency and other laws relating
to creditors' rights generally or by general equitable
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principles), without any set-off, defense or counterclaim, and are in full force
and effect with respect to the Seller or the applicable Subsidiary and, to the
Seller's Knowledge, the other parties thereto. The Seller and the Subsidiaries
have duly performed all of their material obligations thereunder to the extent
that such obligations to perform have accrued, and there are no breaches,
violations or defaults or allegations or assertions of such by any party
thereunder.
Section 4.14 INTELLECTUAL PROPERTY.
(a) Section 4.14(a) of the Disclosure Schedule sets forth a list of all
trademarks, trade names, service marks, copyrights and patents, or applications
therefor, which constitute material Seller IPR. The Seller IPR constitutes all
of the Intellectual Property Rights necessary to conduct the Business. Except as
set forth in Section 4.14(a) of the Disclosure Schedule, the Seller or one of
the Subsidiaries is the sole owner of all right, title and interest in, or a
valid right to use, the Seller IPR, free and clear of all Liens. All renewal
fees and actions reasonably required to be taken for the maintenance or
protection of the Seller IPR have been paid and taken. Except as set forth in
Section 4.14(a) of the Disclosure Schedule, the Seller or one of the
Subsidiaries has the exclusive, unqualified right to use the Seller IPR and to
transfer the Seller IPR to the Purchaser. Neither the Seller nor the Parent has
received any charge, complaint, claim, demand or notice alleging that the
ownership or use of the Seller IPR constitutes any interference with or
infringement or misappropriation of any rights of any Person, and the Seller has
no Knowledge of any reasonable basis therefor. To the Seller's Knowledge, no
Person has interfered with, infringed or misappropriated any Seller IPR. The
Seller IPR is not subject to any outstanding Judgment or Contract prohibiting or
restricting the use thereof by the Seller or its Subsidiaries with respect to
the Business or prohibiting or restricting the licensing or transfer thereof by
the Seller and its Subsidiaries to the Purchaser or any other Person, or
restricting the use thereof by the Purchaser or any other Person.
(b) The Seller and its Subsidiaries have the unqualified right to use the
Third Party IPR in connection with and for the Business, and there is no
prohibition or restriction against the Purchaser's use of any of the Third Party
IPR following the Closing, except to the extent that the right to use such Third
Party IPR arises under a Contract which is deemed to be an Excluded Asset
pursuant to Section 3.01(a).
(c) Except to the extent set forth in Section 4.14(c) of the Disclosure
Schedule, neither the Seller nor any Subsidiary has entered into any agreement
to indemnify any Person against any charge of infringement of any Intellectual
Property Right or misappropriation of any trade secret.
(d) Except as set forth in Section 4.14(d) of the Disclosure Schedule, all
Software, computer hardware and other systems currently used in the Business are
Year 2000 Compliant. Except as set forth in Section 4.14(d) of the Disclosure
Schedule, each third party whose systems interface with the Business' internal
systems has advised the Seller that such third party's systems will be Year 2000
Compliant, and by the Closing Date, the Seller will have used Commercially
Reasonable Efforts to verify the accuracy of such advice.
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(e) The Seller and each of the Subsidiaries have taken all reasonable,
customary and usual measures to protect the trade secrets used in or related to
the Business. To the extent that information of a confidential nature has been
used in relation to the Business in the five-year period prior to the date of
this Agreement, such information (except insofar as it has fallen into the
public domain through no fault of the Seller or the Subsidiaries) has been kept
strictly confidential and has not been disclosed otherwise than subject to a
customary confidentiality agreement.
(f) Except as set forth in Section 4.14(f) of the Disclosure Schedule, all
records and systems (including without limitation computer systems) and all data
and information of the Business is owned by the Seller or one or more of the
Subsidiaries, and is recorded, stored, maintained or operated or otherwise held
by the Seller or one or more of the Subsidiaries and is not wholly or partly
dependent on any facilities which are not under the exclusive ownership or
control of the Seller or one or more of the Subsidiaries and which are included
in the Purchased Assets.
(g) None of the operations of the Business involve the unlicensed or
unauthorized use of confidential information. To the Seller's Knowledge, the
processes employed, the services provided, the business conducted and the
products used or dealt in by the Seller and each of the Subsidiaries in the
conduct of the Business do not infringe any Intellectual Property Rights of any
unaffiliated Person. Except as set forth in Section 4.14(g) of the Disclosure
Schedule, none of the operations of the Business give rise to any royalty or
like payment obligation for the use of any Third Party IPR.
(h) Neither the Seller, any Subsidiary nor, to the Seller's Knowledge, any
Person with which the Seller or any Subsidiary have contracted, is in breach in
any material respect of any license, sublicense, Contract or assignment granted
to or by it with respect to any Intellectual Property Rights, including but not
limited to the use, maintenance, or support of any Software or hardware, nor
does the Seller have any Knowledge of any disputes or disagreements with respect
thereto.
(i) There are no issued patents or registered copyrights included in the
Intellectual Property Rights. All marks included in the Intellectual Property
Rights ("Marks") that have been registered with the United States Patent and
Trademark Office are currently in compliance with all formal legal requirements
(including the timely postregistration filing of affidavits or use and
incontestability and renewal applications), are valid and enforceable, and are
not subject to any maintenance fees or taxes or actions falling due within 90
days after the Closing Date, except where the failure thereof would not
reasonably be expected to result in a Material Adverse Effect on the Business.
All products and materials containing a Mark bear the proper federal
registration notice where permitted by law, except where the failure thereof
would not reasonably be expected to result in a Material Adverse Effect on the
Business.
(l) The Seller and its Subsidiaries have taken all reasonable customary
and usual precautions to protect the secrecy, confidentiality, and value of
their Trade Secrets. The Seller or one of its Subsidiaries has good title and an
absolute right to use the Trade Secrets. To the Seller's Knowledge, none of the
Trade Secrets are part of the public knowledge or literature, or have been
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used, divulged, or appropriated either for the benefit of any Person (other than
the Seller or its Subsidiaries) or to the detriment of the Seller or one of its
Subsidiaries. No Trade Secret is subject to any adverse claim or, to the
Seller's Knowledge, has been challenged or threatened in any way.
Section 4.15 ENVIRONMENTAL LIABILITY. Neither the Seller nor, to the
Seller's Knowledge, any third party has engaged in the generation, use,
manufacture, treatment, transportation, storage or disposal of any Hazardous
Material on any of the properties included in the Purchased Assets, and the
Seller has no Knowledge that any such properties, as currently used and
occupied, do not comply in all material respects with applicable Laws and
Approvals, including those relating to land use, pollution, Hazardous Materials
and the environment. There is no Litigation and there are no private
investigations or remediation activities or governmental investigations pending
or, to the Seller's Knowledge threatened, seeking to impose, or that would
reasonably be expected to result in the imposition, on the Seller or any
Subsidiary of any material obligation or liability under any Law relating to
pollution, Hazardous Materials or the environment, nor does the Seller know of
any reasonable basis therefor.
Section 4.16 BROKERS. Neither the Parent nor any Affiliate has retained
any broker or finder, and no broker or finder has acted on behalf of the Parent
or any Affiliate in connection with this Agreement or the transactions provided
for hereby (other than Cohane Rafferty Securities, Inc., all of whose fees and
expenses are for the Seller's account).
Section 4.17 INFORMATION SUPPLIED; ACCURACY OF DATA.
(a) The written materials (including computer tapes and disks) identified
in Section 4.17 of the Disclosure Schedule provided by or on behalf of the
Parent, the Seller, any of its Subsidiaries or any of their Affiliates to the
Purchaser or any of its Affiliates in connection with the negotiation of this
Agreement and the consummation of the transactions contemplated hereby are true,
complete and correct in all material respects; provided, however, that all
forward-looking information (including, without limitation, forecasts and
budgets) shall be excluded from the purview of this Section 4.17(a); and,
provided, further, that in the event that any matter identified in Section 4.17
of the Disclosure Schedule is covered specifically by any other representation
and warranty made by the Seller and Parent hereunder, such other representation
and warranty shall control.
(b) The records (including computer records), files and other information
in written or recorded form relating to, or used by the Seller and the
Subsidiaries in connection with, the Business accurately reflect in all material
respects the information supplied to the Seller by third parties and the actions
taken by the Seller. To the Seller's Knowledge, all servicing accounts
maintained by or on behalf of Seller or any of its Subsidiaries accurately
reflect all transactions in such accounts and all information supplied to the
Seller by third parties.
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Section 4.18 TAXES. (a) With respect to Taxes:
(i) for the purposes of this Section 4.18, the term "Sellers" shall
include the Seller and each of the Subsidiaries, the capital stock of which is
included among the Purchased Assets;
(ii) all Income Tax Returns that are required to be filed by or with
respect to the Parent or the Sellers have been timely filed, and all Income
Taxes required to be shown thereon as owing have been paid, except where the
failure to file Income Tax Returns or to pay Income Taxes would not have a
Material Adverse Effect on the Sellers;
(iii) except to the extent disclosed on Section 4.18(a)(iii) of the
Disclosure Schedule, no adjustments relating to Taxes of the Subsidiaries have
been proposed by the Internal Revenue Service or any state, local or foreign
taxing authority, whether informally or in writing, and to the Sellers'
Knowledge no basis exists for such an adjustment;
(iv) to the Seller's Knowledge, there are no pending or threatened
actions or proceedings for the assessment or collection of Taxes against the
Subsidiaries, other than as set forth on Section 4.18(a)(iii) of the Disclosure
Schedule;
(v) to the Seller's Knowledge, there are no Tax liens on any
Purchased Assets other than for taxes that are not yet due and payable, or for
Taxes that are being contested in good faith and that are properly reflected on
the Closing Statement;
(vi) no Subsidiary has been, at any time, a member of any
partnership or joint venture or the holder of a beneficial interest in any trust
for any period for which the applicable statute of limitations for any Income
Tax has not expired;
(vii) except as disclosed in Section 4.18(a)(vii) of the Disclosure
Schedule, no waivers of statutes of limitation have been given by the
Subsidiaries or requested with respect to any Tax Return of the Subsidiaries;
(viii) there are no requests for information by any Governmental
Agency currently outstanding relating to the Taxes of the Subsidiaries;
(ix) to the Seller's Knowledge, there are no proposed reassessments
of the Purchased Assets or any property owned by the Subsidiaries, or other
proposals that could increase the amount of Tax to which the Subsidiaries would
be subject; and
(x) Except as disclosed in Section 4.18(a)(x) of the Disclosure
Schedule, no penalties under Section 6721, 6722 or 6723 of the Code have been
assessed against the Seller or any of the Subsidiaries, or if penalties have
been assessed, all such penalties have been abated.
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(b) Sellers have delivered to the Purchaser a true and complete copy of
each Tax sharing, Tax allocation or Tax payment agreement or arrangement
involving the Subsidiaries, and a true and complete description of all such
unwritten or informal agreements or arrangements.
(c) Except as otherwise provided in this Agreement, on the Closing
Statement reserves and allowances will have been provided, adequate to satisfy
all liabilities for Taxes relating to the Subsidiaries for periods through the
Closing Date.
ARTICLE V
REPRESENTATIONS AND WARRANTIES
OF THE PURCHASER
The Purchaser represents and warrants to the Seller and the Parent as
follows:
Section 5.01 ORGANIZATION OF THE PURCHASER. The Purchaser is a corporation
duly organized, validly existing and in good standing under the laws of the
State of Delaware and has the requisite power and authority to own, operate and
lease its properties and to carry on its business as now being conducted.
Section 5.02 POWER AND AUTHORITY. The Purchaser has the requisite power
and authority to execute and deliver this Agreement and the Related Documents to
which it is or will be a party and to perform the transactions contemplated
hereby and thereby to be performed by it. All corporate action on the part of
the Purchaser necessary to approve or to authorize the execution and delivery of
this Agreement and the Related Documents to which it is or will be a party and
the performance of the transactions contemplated hereby and thereby to be
performed by it has been duly taken. This Agreement is a valid and binding
obligation of the Purchaser, enforceable in accordance with its terms.
Section 5.03 NO CONFLICTS. Except as may be required under the HSR Act and
except as set forth on Schedule 5.03, neither the execution or delivery by the
Purchaser of this Agreement or the Related Documents to which it is or will be a
party nor the performance by the Purchaser of the transactions contemplated
hereby or thereby to be performed by it, shall:
(i) conflict with or result in a breach of any provision of the
Certificate of Incorporation or Bylaws of the Purchaser;
(ii) violate any Law applicable to the Purchaser or by which the
Purchaser or any of its properties is bound; or
(iii) require any consent, approval, authorization or other order or
action of, or notice to, or declaration, filing or registration with, any
Governmental Agency or other third party.
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Section 5.04 BROKERS. The Purchaser has not retained any broker or finder,
and no broker or finder has acted on behalf of the Purchaser, in connection with
this Agreement or the transactions provided for hereby.
Section 5.05 LICENSES. The Purchaser is (i) an approved seller/servicer of
mortgage loans for FNMA and FHLMC in good standing, (ii) a HUD approved
mortgagee pursuant to Section 203 of the National Housing Act, (iii) authorized
by GNMA as an eligible issuer/servicer and in good standing to service GNMA
loans and (iv) a FHA approved mortgagee and a VA approved lender in good
standing to originate and service FHA and VA loans. The Purchaser has not been
suspended as a mortgagee or servicer by the FHA, the VA, FHLMC, FNMA or GNMA,
and the Purchaser has facilities, procedures and experienced personnel necessary
for the sound servicing of FHA, VA, FHLMC, FNMA and GNMA loans.
ARTICLE VI
EMPLOYEES AND EMPLOYEE-RELATED MATTERS
Section 6.01 BASIC EMPLOYMENT MATTERS.
(a) Effective as of the Closing Date, the Purchaser or an Affiliate of the
Purchaser (the "Employer") shall offer to employ, at their then-current rates of
base pay, all employees of the Seller employed in the Business on the day before
the Closing Date, but excluding (i) any employees who are absent from work due
to an approved leave of absence (but excluding any absence reasonably expected
to be of short duration taken in accordance with Seller's standard policy for
such absences, including, but not limited to, vacation, jury duty, bereavement
and illness) or on corrective action or job discontinuance, (ii) any employees
identified on Schedule 6.01(a), which the Purchaser agrees to deliver to the
Seller at least ten Business Days before the Closing Date, and (iii) at the
Employer's discretion, any persons referred to as "excluded employees" in
Section 10.04(a)(vi). The employees to whom the Employer is obligated or
otherwise elects to offer employment pursuant to the preceding sentence and who
accept such employment are referred to collectively herein as the "Employees,"
which term, unless the context requires otherwise, includes the employees of the
Subsidiaries employed in the Business on the Closing Date (it being understood
that, as of the Closing and for purposes of this Article VI, such employees of
the Subsidiaries will continue to participate in any applicable separate
employee benefit and compensation plans maintained by the employing Subsidiary,
rather than the Employer's corresponding plan).
(b) Notwithstanding anything to the contrary in the foregoing, any
employee of the Seller referred to in clause (i) of Section 6.01(a) employed in
the Business who is absent from work on the Closing Date due to a leave of
absence as referred to above and who, within six months after the commencement
of such absence, reports for employment and is able to return to active
employment with the Employer, shall be eligible to return to his or her former
position if it is then available or, if such position is not available, shall be
eligible to seek another position with the Employer for a 30-day period (and
shall be offered employment by the Employer for at least such
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30-day period at the same rate of base pay); provided, however, that employees
referred to in this sentence shall be considered Employees for purposes of this
Agreement from and after the time they report for employment and are able to
return to active employment with the Purchaser.
(c) The Seller will pay all targeted bonuses and any other incentive
compensation to the Employees for the period between January 1, 1999 and the
Closing Date in accordance with the Seller's and the Subsidiaries' existing
incentive compensation plans. With respect to those employees listed on Schedule
6.01(c), the Employer shall "reinstate" their prior service with Seller upon the
first anniversary of their reemployment date with Seller (as set forth on
Schedule 6.01(c)) for purposes of this Article VI.
(d) The Employer will, subject to changes necessitated by or in response
to regulatory considerations, business performance or matters of fairness and
equity, maintain incentive compensation plans substantially consistent with the
Seller's existing plans (other than any bonuses or other compensation in respect
of the sale of the Business). Subject to this Article VI, after the Closing
Date, the Employer may modify, alter or terminate, in its sole and exclusive
discretion, any of the terms and conditions of employment of the Employees.
Nothing in this Agreement shall prevent the Employer from terminating the
employment of any Employee at any time after the Closing Date, in its sole and
exclusive discretion. Any non-competition agreements between an Employee and the
Seller or any of its Affiliates shall terminate as of the time such Employee
commences employment with the Employer.
Section 6.02 DEFINED BENEFIT PLANS. Effective as of the day before the
date the person becomes an Employee, such Employee shall cease to be an active
employee for purposes of the Seller's Retirement Plan (the "Retirement Plan").
As of the date the person becomes an Employee (for each such person, the
"Employment Date"), the Employer shall cause such Employee who participated in
the Retirement Plan to participate and commence to accrue benefits under the
Employer's pension plan on the same terms and conditions applicable to other
comparably situated employees of the Employer and its participating Affiliates.
The Employer shall grant past service credit for purposes of eligibility for
participation and vesting (but not for purposes of benefit credit) under the
Employer's pension plan to such Employee for all service credited as of the
Employment Date under the Retirement Plan.
Section 6.03 DEFINED CONTRIBUTION PLANS. Effective as of the day before
the Employment Date, each Employee shall cease to be an active employee for
purposes of the Seller's Savings Incentive Plan (the "SIP"). As of the
Employment Date the Employer shall cause each Employee who was eligible to
participate in the SIP to be eligible to participate in the Employer's savings
investment plan on the same terms and conditions applicable to other comparably
situated employees of the Employer and its participating Affiliates. The
Employer shall grant past service credit for purposes of eligibility and vesting
to each Employee under the Employer's savings investment plan ("ESIP") for all
service credited to such Employee as of the Employment Date under the SIP. The
Employees shall be eligible to make direct rollovers from the SIP to the ESIP in
the form of cash and participant notes held by the SIP.
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Section 6.04 SEVERANCE ARRANGEMENTS. From the Employment Date until the
date which is six months after the Closing Date, each Employee shall be entitled
to severance benefits in accordance with the Seller's existing severance
program. After the date which is six months after the Closing Date, the Employer
shall provide each Employee with the Employer's severance program (as the same
may be amended) on the same basis as applicable to other comparably situated
employees of the Employer and its participating affiliates providing benefits in
the event of termination of employment. The Employer will grant past service
credit for all purposes under its severance program to each Employee for all
service credited to such Employee as of the Employment Date under the
corresponding severance programs of the Seller. The Seller and the Purchaser
shall share, in accordance with the following sentence, the obligation for all
severance benefits in the aggregate payable in accordance with the Seller's or
the applicable Subsidiary's severance plans ("covered severance payments") to
(i) all Employees whose employment with the Employer and its Affiliates is
terminated within six months after the Closing Date and (ii) all employees to
whom the Employer is not required to offer employment because they are
identified on Schedule 6.01(a) and whose employment with the Seller or its
Affiliates is terminated within six months after the Closing Date. The Seller
shall be responsible for the first $1,500,000 of covered severance payments; the
Seller shall be responsible for 75%, and the Purchaser shall be responsible for
the balance, of covered severance payments between $1,500,001 and $2,500,000;
the Purchaser and the Seller shall each be responsible for 50% of covered
severance payments between $2,500,001 and $3,500,000; the Purchaser shall be
responsible for 75%, and the Seller shall be responsible for the balance, of
covered severance payments between $3,500,001 and $4,500,000; and the Purchaser
shall be responsible for all covered severance payments above $4,500,000. Each
party shall reimburse the other promptly after receipt of reasonable documentary
evidence for amounts owed pursuant to the preceding sentence. The Employer and
its Affiliates will not hire or rehire any such employee in respect of whom the
Seller has made any portion of such severance payments, and the Parent and its
Affiliates will not hire or rehire any such employee in respect of whom the
Purchaser has made any portion of such severance payments (other than Employees
whose employment with the Employer and its Affiliates has been terminated), in
either case until the first anniversary of such employee's termination.
Section 6.05 OTHER EMPLOYEE BENEFITS.
(a) As of the Employment Date, the Employer shall cause each Employee to
participate in the welfare benefit plans (as defined in Section 3(1) of ERISA)
sponsored or maintained by the Employer and its participating Affiliates on the
same terms and conditions applicable to other comparably situated employees of
the Employer and its participating Affiliates. The Employer will waive any
pre-existing conditions clause and will grant past service credit for all
purposes under each such welfare plan, other than retiree medical, to each
Employee for all service credited as of the Employment Date under the
corresponding welfare plans of the Seller. The Employer shall also cause the
welfare benefit plans referred to in this Section 6.05(a) to give each Employee
credit for the portion of 1999 deductibles that were satisfied prior to the
Employment Date. Notwithstanding anything herein to the contrary, the Seller
shall be responsible for (i) all covered welfare benefit claims under its and
the Subsidiaries' employee benefit plans by each Employee or eligible dependents
that arise for treatment received prior to the Employment Date, and with respect
to
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Employees or their eligible dependents who were hospitalized on the Closing
Date, that arise by reason of events occurring before such Employees or eligible
dependents are discharged from the hospital and (ii) workers' compensation
payments in respect of events occurring prior to the Closing Date.
(b) During 1999, the Employer shall grant to all Employees the number of
vacation days for which they would be eligible had they continued to be
employees of the Seller, except for any days which have been used as of the
Employment Date. Starting as of January 1, 2000, the Employer shall provide the
Employees with vacation time under the vacation policies applicable to other
comparably situated employees of the Employer and its Affiliates and will grant
past service credit for all purposes under such policies to Employees for all
service credited as of the Employment Date under the vacation policies of the
Seller.
ARTICLE VII
CLOSING
Section 7.01 THE CLOSING. The Closing shall be held at 10:00 a.m. on the
earliest date that is five Business Days after the satisfaction or waiver of all
of the conditions to Closing set out in Articles VIII and IX hereto (other than
any condition to be satisfied or waived at the Closing) at the offices of the
Purchaser at 750 Washington Boulevard, Stamford, Connecticut, or at such other
time and place as may mutually be agreed upon by the parties hereto. At the
Closing, the appropriate parties shall take all other actions not previously
taken but required to be taken hereunder on or prior to the Closing Date. The
transfer of the Purchased Assets to the Purchaser and the assumption of the
Assumed Liabilities by the Purchaser shall be deemed to occur at 12:01 a.m. on
the Closing Date.
ARTICLE VIII
CONDITIONS TO OBLIGATIONS OF THE PURCHASER
TO CONSUMMATE THE TRANSACTION
The obligations of the Purchaser to be performed at the Closing shall be
subject to the satisfaction or waiver, at or prior to the Closing, of the
following conditions:
Section 8.01 REPRESENTATIONS AND WARRANTIES; COMPLIANCE WITH COVENANTS.
The representations and warranties of the Seller and the Parent contained in
this Agreement shall be true and correct in all material respects on and as of
the Closing Date with the same force and effect as though such representations
and warranties were made at the Closing except for changes expressly permitted
or contemplated by this Agreement; the covenants required to be performed by the
Seller and the Parent at or prior to the Closing pursuant to the terms of this
Agreement shall have been duly performed in all material respects; and the
Purchaser shall have received a certificate of the President or a Vice President
of each of the Seller and the Parent to that effect.
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Section 8.02 NO INJUNCTION. No Judgment shall have been rendered in any
Litigation which has the effect of enjoining the consummation of the
transactions contemplated by this Agreement.
Section 8.03 APPROVALs. All Approvals required from any Governmental
Agency in order to consummate the transactions contemplated by this Agreement
and to conduct the Business following the Closing shall have been obtained
(other than Approvals of which the failure to obtain, individually or in the
aggregate, would not have a Material Adverse Effect on the Business), and all
applicable waiting periods under the HSR Act and other applicable Laws shall
have expired or been terminated, without the imposition of any materially
burdensome restrictions or conditions on the Purchaser.
Section 8.04 THIRD PARTY CONSENTS. Each of the Approvals set forth in
Schedule 8.04 of this Agreement shall have been obtained.
Section 8.05 BILL OF SALE, ETC. The Seller shall have duly authorized,
executed and delivered to the Purchaser the Bill of Sale and the Trademark
Assignment, each dated as of the Closing Date, and the deeds and other
instruments of conveyance referred to in Section 2.01(c).
Section 8.06 SURVEY; TITLE POLICIES. The Purchaser shall have received the
surveys and commitments to issue title policies with respect to the real
property owned by the Seller, as specified in Section 10.14.
Section 8.07 EMPLOYMENT AGREEMENT. Those persons identified on Schedule
8.07 shall have executed employment agreements with the Purchaser effective as
of the Closing Date, in form and substance satisfactory to the Purchaser,
provided that (i) the Purchaser will offer each such person comparable
compensation and benefits to those he or she has currently and will not require
relocation as a condition of such employment and (ii) unless the Purchaser
notifies the Seller within 30 days after the date of this Agreement that it
elects to terminate this Agreement on account of the failure of this condition
(in which event the Agreement shall be deemed to have been terminated by the
parties' mutual consent pursuant to Section 13.01(a)), this condition shall be
deemed to have been waived by the Purchaser.
Section 8.08 TRANSFER INSTRUCTIONS. The Transfer Instructions identified
on Schedule 8.08 to be completed prior to the Closing Date shall have been
completed in all material respects.
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ARTICLE IX
CONDITIONS TO OBLIGATIONS OF THE SELLER
AND THE PARENT TO CONSUMMATE THE TRANSACTION
The obligations of the Seller and the Parent to be performed at the
Closing shall be subject to the satisfaction or waiver, at or prior to the
Closing, of the following conditions:
Section 9.01 REPRESENTATIONS AND WARRANTIES; COMPLIANCE WITH COVENANTS.
The representations and warranties of the Purchaser contained in this Agreement
shall be true and correct in all material respects on and as of the Closing Date
with the same force and effect as though such representations and warranties
were made at the Closing except for changes expressly permitted or contemplated
by this Agreement; the covenants required to be performed by the Purchaser at or
prior to the Closing pursuant to the terms of this Agreement shall have been
duly performed in all material respects; and the Seller shall have received a
certificate of the President or a Vice President of the Purchaser to such
effect.
Section 9.02 NO INJUNCTION. No Judgment shall have been rendered in any
Litigation which has the effect of enjoining the consummation of the
transactions contemplated by this Agreement.
Section 9.03 APPROVALS. All Approvals required from any Governmental
Agency in order to consummate the transactions contemplated by this Agreement
shall have been obtained (other than Approvals of which the failure to obtain,
individually or in the aggregate, would not have a Material Adverse Effect on
the Seller or the Parent), and all applicable waiting periods under the HSR Act
and other applicable laws shall have expired or been terminated, without the
imposition of any materially burdensome restrictions or conditions on the
Seller.
Section 9.04 THIRD PARTY CONSENTS. Each of the Approvals identified on
Schedule 9.04 shall have been obtained.
Section 9.05 ASSUMPTION AGREEMENT. The Purchaser shall have duly
authorized, executed and delivered to the Seller the Assumption Agreement, dated
as of the Closing Date, and shall have acknowledged the Bill of Sale.
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ARTICLE X
COVENANTS
Section 10.01 HSR FILINGS. As soon as practicable after the execution of
this Agreement, the parties shall make all filings with the appropriate
Governmental Agencies of the information and documents required or contemplated
by the HSR Act with respect to the transactions contemplated by this Agreement.
The Seller and the Parent, on the one hand, and the Purchaser, on the other
hand, shall use their respective best efforts to comply as expeditiously as
possible with all lawful requests of such Governmental Agencies for additional
information and documents.
Section 10.02 INJUNCTIONS. If any court having jurisdiction over any of
the parties hereto issues or otherwise promulgates any restraining order,
injunction, decree or similar order which prohibits the consummation of any of
the transactions contemplated hereby or by any Related Document, the parties
hereto shall use Commercially Reasonable Efforts to have such restraining order,
injunction, decree or similar order dissolved or otherwise eliminated as
promptly as possible and to pursue the underlying Litigation diligently and in
good faith. Notwithstanding anything to the contrary contained in this
Agreement, nothing contained in this Section 10.02 shall limit the respective
rights of the parties to terminate this Agreement pursuant to Section 13.01 or
shall limit or otherwise affect the respective conditions to the obligations of
the parties set forth in Articles VIII and IX hereof.
Section 10.03 ACCESS TO INFORMATION. Between the date of this Agreement
and the Closing Date, the Seller shall, and shall cause its Affiliates to, upon
reasonable request by the Purchaser, (i) provide the Purchaser and its
accountants, counsel and other authorized representatives reasonable access,
during normal business hours and under reasonable circumstances, to any and all
premises, properties, Contracts, commitments, books, records and other
information of or relating to the Business and to the officers, employees and
agents of the Business and (ii) cause its officers to furnish to the Purchaser
and its authorized representatives any financial, environmental, health and
safety, technical and operating data and other information pertaining to the
Business, as the Purchaser shall from time to time reasonably request and which
is either normally available to the Seller in the ordinary and usual course of
business or which may be obtained or produced by the Seller at a de minimis cost
to the Seller; PROVIDED, HOWEVER, that such access may be limited to the
location at which the relevant information is normally maintained and shall not
unreasonably interfere with the operations of the Seller and its Affiliates, and
the Seller and its Affiliates shall not be required to give the Purchaser access
to any information relating solely to the Excluded Assets.
Section 10.04 NO EXTRAORDINARY ACTIONS BY THE SELLER.
(a) In each case except as (x) consented to or approved by the Purchaser
in writing (which consent shall not be unreasonably withheld, bearing in mind
the Purchaser's plans to operate the Business after the Closing), (y) required
by this Agreement or the Related Documents or (z) related to the Excluded Assets
or the Retained Liabilities, from the date hereof until the Closing, the Parent
and the Seller shall not take any action that would cause their representations
and warranties herein to be untrue in any material respect and shall conduct the
Business only in the
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ordinary course and in accordance with its present policies and procedures
(including loan collection and chargeoff practices) and use Commercially
Reasonable Efforts to preserve intact its present business organization, keep
available the services of its present management and employees and preserve its
relationships with suppliers and customers and others having business dealings
with it (including, to the extent consistent with the provisions of this
Agreement, the Parent and its Affiliates) so that the Business shall not be
impaired in any material respect, and the Seller and the Subsidiaries will not
(and the Parent will cause the Seller and the Subsidiaries not to):
(i) Permit or allow any of the assets that will be Purchased Assets
to be subjected to any Lien, except as set forth in Section 4.07 of the
Disclosure Schedule and except for Liens for Taxes not yet due and payable or
which are being contested in good faith by appropriate proceedings;
(ii) Sell, transfer or otherwise dispose of or agree to dispose of,
or acquire or agree to acquire, any material assets that would be Purchased
Assets except in the ordinary course of business, or sell, transfer or otherwise
dispose of or agree to dispose of any material servicing rights, other than
pursuant to Contracts identified on Section 4.07(c) of the Disclosure Schedule
or extensions thereof on substantially similar terms. To the extent the Seller
needs to sell servicing rights in the ordinary course of business, the Seller
shall sell such servicing rights to the Purchaser in accordance with the flow
matrix set forth on Exhibit A to Schedule 3.01(a)(i)(A);
(iii) Grant any general increase or implement any general decrease
in the compensation of officers or employees (including any such increase
pursuant to any bonus, pension, profit-sharing or other plan or commitment) or
grant any increase in the compensation payable or to become payable to any
officer or employee, other than (A) in the ordinary course of business or
pursuant to promotions or (B) bonuses payable by the Seller in connection with
the consummation of the transactions contemplated by this Agreement;
(iv) Other than as set forth in Schedule 10.04(a)(iv), make any
single capital expenditure or commitment in excess of $50,000 for additions to
property, plant, equipment or intangible capital assets that would be included
in the Purchased Assets or make aggregate capital expenditures and commitments
for such purposes in excess of $200,000;
(v) Enter into any agreement for real estate tax service or any
other agreement (other than Mortgage Loans or commitments to make Mortgage
Loans) for a non-cancelable term in excess of one year or involving aggregate
payments by the Seller in excess of $25,000; or
(vi) Except as set forth in Schedule 10.04(a)(vi), hire any person
who would become an Employee, provided that the Seller may hire (A) any
non-exempt employee to fill a vacancy or (B) any other person, it being
understood that (x) any person described in this clause (B) to whose employment
the Purchaser has not consented shall be an "excluded employee" to whom the
Employer will not be required to offer employment under Section 6.01 and (y) the
Seller will advise each such employee to that effect in connection with its
offer of employment.
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(b) The Parent and the Seller agree to cooperate with the Purchaser
throughout the period prior to the Closing to meet with employees of the
Business at such times as shall be approved by a representative of the Parent or
the Seller, for purposes of retaining such employees.
(c) From the date hereof until the Closing or the earlier termination of
this Agreement, the Seller and the Parent will not, and will cause their
officers, directors, employees and agents not to, initiate contact with, solicit
any inquiries from, request or invite submission of any proposal or offer from,
or provide any confidential information to, or participate in any negotiations
with, any third party in connection with any possible proposal by such third
party regarding a sale of all or any substantial portion of the assets of the
Business, provided that the provisions of this paragraph shall not apply to any
assets that would be Excluded Assets.
Section 10.05 COMMERCIALLY REASONABLE EFFORTS; FURTHER ASSURANCES.
(a) Upon the terms and subject to the conditions hereof, the Seller and
the Parent, on the one hand, and the Purchaser, on the other hand, agree to use
Commercially Reasonable Efforts to take or cause to be taken all actions, and to
do or cause to be done all things, necessary, proper or advisable to ensure that
the conditions set forth in Articles VIII and IX are satisfied and to consummate
and make effective the transactions contemplated by this Agreement and the
Related Documents (including without limitation, the preparation of supplemental
indentures and other documents in connection with assumption of the Debentures,
the Notes and the QUICS), insofar as such matters are within their respective
control.
(b) Except as otherwise expressly provided for in this Agreement, through
the date which is 180 days after the Closing Date (i) each of the Purchaser and
the Seller shall, and shall cause each of their respective Affiliates to, use
Commercially Reasonable Efforts to obtain at the earliest practicable date,
whether before or after the Closing Date, all consents required to be obtained
by it for the performance of the transactions contemplated by this Agreement and
the Related Documents, (ii) the Seller shall use Commercially Reasonable Efforts
to obtain, whether before or after the Closing Date, any amendments, novations,
releases, waivers, consents or approvals with respect to all outstanding
Contracts of the Seller which are necessary either to cure any defaults
thereunder existing immediately prior to the Closing Date or for the
consummation of the transactions contemplated by this Agreement and the Related
Documents, and (iii) each party hereto shall execute and deliver such
instruments, certificates and other documents and take such other actions as any
other party hereto may reasonably require in order to carry out this Agreement
or any of the Related Documents and the transactions contemplated hereby and
thereby; PROVIDED, HOWEVER, that (A) in obtaining any such amendments,
novations, releases, waivers, consents or approvals, no party hereto shall, or
shall permit any of its Affiliates to, agree to any amendment of any such
instrument which imposes any obligation or liability on another party without
the prior written consent of such other party, and (B) except as otherwise
expressly provided by this Agreement, no party hereto shall be obligated to
execute any guarantees or undertakings or otherwise incur or assume any expense
or liability (other than for filing fees and similar costs required in
connection with the purchase and sale of the Purchased Assets) in obtaining any
such release, novation, approval, consent, authorization or waiver.
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(c) The Purchaser, on the one hand, and the Seller and the Parent, on the
other hand, shall provide such information and cooperate fully with each other
party hereto in making such applications, filings and other submissions which
may be required or reasonably necessary in order to obtain all approvals,
consents, authorizations and waivers as may be required from any Governmental
Agency or other third party in connection with the transactions contemplated by
this Agreement and the Related Documents and shall promptly use Commercially
Reasonable Efforts to make each such application, filing or other submission,
including without limitation, any supplemental filing.
Section 10.06 BULK SALES LAWS. The Purchaser hereby waives compliance by
the Seller with the provisions of the "bulk sales" or similar laws of any
jurisdiction and all bulk sales tax provisions in all states. The Seller and the
Parent shall indemnify the Purchaser and hold it harmless from and against any
and all claims, losses, damages, liabilities, costs and expenses incurred by the
Purchaser or any of its Affiliates as a result of any failure to comply with any
such laws.
Section 10.07 INSURANCE AND BENEFITS CONTRACTS. The Seller shall use
Commercially Reasonable Efforts to maintain all insurance policies and binders
relating to the Business in full force and effect at all times up to and
including the Closing Date and shall pay all premiums, deductibles and
retro-adjustment billings, if any, with respect thereto covering all periods,
and ensuring coverage of the Business, up to and including the Closing Date.
Section 10.08 USE OF NAMES.
(a) As soon as reasonably practicable after the Closing, the Seller shall
(i) change its corporate name to one not including the words "Source One" or any
confusingly similar words and (ii) cease to use (including use through the
internet) any written materials, including, without limitation, signs, labels,
packing materials, letterhead, advertising and promotional materials and forms,
which include the words "Source One" or any trademark, trade name, domain name,
service mark or trade dress owned by the Seller and the Subsidiaries prior to
the Closing Date.
(b) As soon as reasonably practicable after the Closing, the Purchaser
shall cease to use any written materials, including, without limitation, labels,
packing materials, letterhead, advertising materials and forms, that identify
the Business as an Affiliate of the Parent; PROVIDED, HOWEVER, that the
Purchaser may use signs, inventory, checks, application forms, sales literature,
letterhead, business cards or the like in existence as of the Closing Date until
the earlier of the exhaustion of such materials or the date six months after the
Closing Date.
Section 10.09 TRANSFER OF MORTGAGE LOANS. The Seller shall, both before
and after the Closing, at its expense, complete the steps required by the
Transfer Instructions in accordance with the applicable timetable and take all
such other actions and pay such other costs as are, in the Purchaser's
reasonable judgment, necessary to effect and evidence the transfer of all of the
Seller's and the Subsidiaries' right, title and interest in and to the Mortgage
Loans.
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Section 10.10 MAIL RECEIVED AFTER CLOSING. Following the Closing, (i) the
Purchaser may receive and open all mail addressed or directed to the Seller at
the offices of the Business, (ii) to the extent that such mail and the contents
thereof relate to the Purchased Assets, the Business or to any of the Assumed
Liabilities, the Purchaser may deal with the contents thereof in its sole
discretion and (iii) the Purchaser shall forward any other such mail to the
Seller.
Section 10.11 CONFIDENTIALITY; PUBLICITY. Each party shall hold, and shall
use its best efforts to cause its employees and agents to hold, in strict
confidence all information concerning another party furnished to it by such
other, all in accordance with the Confidentiality Agreement previously executed
and delivered by the parties in connection with the transactions contemplated
hereby, which shall remain in full force and effect and shall survive any
termination of this Agreement for a period of one year. Any release to the
public of information with respect to the matters contemplated by this Agreement
(including without limitation any termination of this Agreement) shall be made
only in the form and manner approved by the Purchaser, the Seller and the
Parent, provided that if a party is required by law to make any disclosure
concerning such matters, such party shall discuss in good faith with the other
parties the form and content of such disclosure prior to its release.
Section 10.12 TRANSITION SERVICES. At the Closing, the parties will
execute and deliver an agreement substantially in the form of Exhibit C (the
"Transition Services Agreement").
Section 10.13 ACCESS TO RECORDS AFTER THE CLOSING.
(a) The Seller, on the one hand, and the Purchaser, on the other hand,
recognize that subsequent to the Closing they may have information and documents
which relate to the Business, its employees, its properties, the Purchased
Assets, the Excluded Assets, the Retained Liabilities, the Excluded Liabilities
and Taxes and to which the other party may need access subsequent to the
Closing. Each party shall provide the other party access, during normal business
hours on reasonable notice, to all such information and documents, and to such
of its employees, which such other party reasonably requests. The Purchaser, on
the one hand, and the Seller, on the other hand, agree that prior to the
destruction or disposition of any such documents or any books or records
pertaining to or containing such information at any time within five years (or,
in any matter involving Taxes, until the later of the expiration of all
applicable statutes of limitations (including extensions thereof) or the
conclusion of all litigation (including exhaustion of all appeals relating
thereto) with respect to such Taxes) after the Closing Date, each party shall
provide not less than 30 calendar days prior written notice to the other of any
such proposed destruction or disposal. If the recipient of such notice desires
to obtain any such documents, it may do so by notifying the other party in
writing at any time prior to the scheduled date for such destruction or
disposal. Such notice must specify the documents which the requesting party
wishes to obtain. The parties shall then promptly arrange for the delivery of
such documents. All out-of-pocket costs associated with the delivery of the
requested documents shall be paid by the requesting party.
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(b) With respect to audits conducted by federal, state and local taxing
authorities, Purchaser agrees to provide Parent with responses to information
document requests presented by such taxing authorities within 30 calendar days.
Such information document requests may include, but shall not be limited to, all
tax matters related to Seller and subsidiaries for all tax years currently open
under the relevant jurisdictions' statute of limitation.
Section 10.14 TITLE COMMITMENTS; SURVEYS.
(a) The Seller shall, not less than 30 days prior to the Closing Date,
deliver to the Purchaser a commitment of a title insurance company reasonably
satisfactory to the Purchaser to issue an owner's policy of title insurance on a
standard American Land Title Association form covering title to each parcel of
real property owned by the Seller described in Section 4.07(b) in an amount
reasonably satisfactory to the Purchaser naming the Purchaser as the insured.
The Seller agrees to pay the cost of such title insurance commitments.
(b) As soon as reasonably practicable after the execution of this
Agreement, the Seller shall, at its expense, furnish to the Purchaser a current
on-the-ground staked "as-built" survey of the owned premises included in the
Purchased Assets made in accordance with the "Minimum Standard Detail
Requirements for ALTA/ACSM Land Title Surveys" jointly established by ALTA and
ACSM in 1992 and meeting the accuracy requirements of an Urban Class Survey, as
defined therein, including Items 1-44, 6-11 and 13 on Table A contained therein
(the "Survey") prepared by a registered land surveyor licensed in the state
where such premise is located (the "Surveyor"), and which survey shall otherwise
be acceptable to the Purchaser, in its reasonable discretion, and the title
company for deletion of the exceptions pertaining to areas and boundaries. The
Survey (including specifically the certificate of the Surveyor forming a part
thereof) shall be in form and substance acceptable to the Purchaser, in its
reasonable discretion, and to the title insurance company and shall locate all
existing improvements, easements and rights-of-way (which shall show recording
data, if applicable), encroachments, conflicts and protrusions affecting such
premises, water, sewer, gas and electric lines, telephone and television cable
lines and the size and capacity thereof, parking spaces and the size of each,
shall set forth the outside perimeter of the premises, shall contain a metes and
bounds description of the premises and shall set forth the acres included within
the premises. The Survey shall contain a statement on the face thereof
certifying as to the Zone Designation by the Secretary of Housing and Urban
Development with reference to the appropriate Flood Insurance Rate Map Number
(which Flood Insurance Rate Map Number shall be the current Flood Insurance Rate
Map for the community in which the premises is located). In the event the Survey
shows any easement, right-of-way, encroachment, conflict or protrusion affecting
the premises that is unacceptable to the Purchaser, in its reasonable
discretion, the Purchaser shall within 20 days after receipt of such Survey, the
title commitment and a legible copy of each exception document, notify the
Seller in writing of such fact. The Seller shall then promptly undertake to
eliminate or modify such unacceptable matters to the satisfaction of the
Purchaser, as determined in its reasonable discretion. In the event the Seller
is unable to do so prior to the Closing, the Purchaser may accept such title to
the premises as the Seller can deliver and receive a credit against the purchase
price in an amount reasonably acceptable to the Purchaser.
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Section 10.15 UPDATED MORTGAGE LOAN SCHEDULE. Within five Business Days
after the Closing Date, the Seller shall deliver to the Purchaser an updated
copy of the Mortgage Loan Schedule as of the Closing Date. The information set
forth in such updated Mortgage Loan Schedule shall be complete, true and correct
in all material respects as of its date.
Section 10.16 SYSTEM UPGRADE. Prior to the Closing Date, the Seller will
complete the upgrade of its investor accounting system in accordance with
Schedule 10.16 to the extent the timetable on such Schedule would require
completion by such date.
Section 10.17 FINAL CERTIFICATION AND RECERTIFICATION, ETC.
(a) The Seller shall use Commercially Reasonable Efforts prior to the
Closing Date to (i) obtain final certification or recertification, as
applicable, of any Mortgage Loan pool and (ii) obtain any Mortgage Loan
documents that are missing.
(b) The Seller shall use Commercially Reasonable Efforts prior to the
Closing Date to ensure that all investor reporting is fully reconciled and
balanced. The Seller will reimburse the Purchaser for any reasonable
post-Closing out-of-pocket expenses required to reconcile and balance investor
reporting in respect of the Mortgage Loans and to maintain such reconciliation
until the scheduled completion of the investor accounting upgrade contemplated
by Section 10.16, or arising out of the failure of such reporting to be
reconciled and balanced on the Closing Date.
(c) From the date of this Agreement until the Closing Date, the Seller
shall provide reports and documentation to the Purchaser every two weeks
regarding the status of the matters referred to in this Section 10.17.
Section 10.18 REPURCHASE OF MORTGAGE LOANS.
(a) If the Purchaser determines that a Mortgage Loan will or may be
required to be repurchased from a third party or may be subject to a claim for
indemnification pursuant to Section 12.02, in either case arising out of (x) the
Pre-Closing Servicing Obligations or (y) a breach of the representations and
warranties contained in Section 4.10, then in order to mitigate any losses the
Seller may bear with respect to such Mortgage Loan, the Purchaser shall take
such steps as it would take with respect to other comparable mortgage loans in
its own portfolio. Such steps shall include using Commercially Reasonable
Efforts to enforce any contractual remedies that may be available to the
Purchaser under any agreement with any broker or correspondent; provided,
however, that no failure of a broker or correspondent to perform its obligations
under the applicable Contract shall relieve the Seller of its obligations
hereunder. Such steps may also include entering into indemnification agreements
with the applicable investors in lieu of repurchase; provided, however, that as
a condition of entering into any such indemnification agreement with an
investor, the Purchaser may require that the Seller provide to the Purchaser a
"back-to-back" indemnification agreement with respect to the applicable Mortgage
Loan(s).
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(b) If the Purchaser repurchases a Mortgage Loan as contemplated by the
first sentence of the preceding paragraph, the Seller shall purchase such
Mortgage Loan from the Purchaser for the price paid by the Purchaser to
repurchase such Mortgage Loan. The Purchaser shall service each Mortgage Loan so
repurchased by the Seller pursuant to a Services Agreement in form agreeable to
the parties. In addition, with respect to each such repurchased Mortgage Loan,
the Purchaser shall, at the Seller's request, exercise any contractual remedies
that may be available against any applicable broker or correspondent. The
Seller's obligations under this Section 10.18(b) shall terminate on the date
which is eight years and six months after the Closing Date. For purposes of the
monetary limitation described in Section 12.05(c) on the Seller's
indemnification obligations with respect to Mortgage Loan Claims after the
seventh anniversary of the Closing Date, only actual monetary losses incurred by
the Seller upon complete liquidation of a Mortgage Loan repurchased pursuant to
this Section 10.18 (rather than any gross repurchase price paid to the
Purchaser) shall be considered Purchaser Indemnifiable Losses arising out of
Mortgage Loan Claims.
(c) After the Closing Date, the Seller may repurchase mortgage loans in
connection with the Retained Liabilities and request the Purchaser to service
such mortgage loans on the Seller's behalf. In the event the Seller requests the
Purchaser to perform such servicing, the Seller and the Purchaser shall enter
into a Services Agreement in form agreeable to the parties.
(d) The Seller shall indemnify the Purchaser for any losses or
out-of-pocket costs or expenses incurred by the Purchaser in performing its
duties under Section 10.18, except for any such losses, costs or expenses
arising from the negligence or willful misconduct of the Purchaser.
Section 10.19 AGREEMENT NOT TO COMPETE; NON-SOLICITATION.
(a) Each of the Parent and the Seller agrees that during the period ending
on the fifth anniversary of the Closing Date, neither the Parent nor the Seller
nor any other entity of which the Parent or the Seller owns, directly or
indirectly, 25% or more of the voting stock or other similar equity interests
(collectively, the "Parent's Affiliates"; provided that FSA and any of its
majority-owned subsidiaries will not be considered a Parent's Affiliate unless
Parent directly or indirectly (x) owns 50% or more of FSA's voting stock or
similar equity interests or (y) otherwise has the power to elect, or has
designated, a majority of FSA's board of directors) will engage in the business
of originating, selling or servicing residential mortgage loans in the United
States (the "mortgage business"). Nothing in this paragraph (a) shall restrict
any Parent's Affiliate from investing in the debt or equity securities of, or
lending funds or rendering advice or other services to, any other entity, or
from engaging in any other business activity, except in each case as
specifically provided in the preceding sentence.
(b) Notwithstanding anything to the contrary in paragraph (a) of this
Section 10.19, any Parent's Affiliate may acquire any entity or business which
engages in the mortgage business (a "covered business"), provided that (i) such
acquired entity or business is primarily engaged in one or more non-mortgage
businesses and (ii) if more than 25% of such acquired entity's gross revenues
are derived from the covered business during the twelve full calendar months
immediately
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preceding such acquisition, then within one year after the date of such
acquisition, the Parent's Affiliate shall have ceased conducting the covered
business or shall have entered into a binding agreement (which may be an
agreement with the Purchaser) for the disposition of the covered business. If
any such binding agreement shall terminate prior to the completion of the sale
of the covered business, the Parent's Affiliate shall cease conducting the
covered business or enter into a new binding agreement for its disposition
within three months after the date of such termination.
(c) Each of the Seller and the Parent agrees that (i) from the date of
this Agreement to the Closing Date, it will not solicit any customers of the
Business or use any list of customers, suppliers, brokers, correspondents or
other business contacts of the Business maintained by the Seller or any of its
Subsidiaries for any purpose except to promote the Business, and from and after
the date of this Agreement it will not allow any unaffiliated party to use such
lists or information for any purpose, (ii) from and after the Closing Date, it
will not solicit on a targeted basis any person who became a customer of the
Seller or any of its Subsidiaries in connection with the Business or use any
list of customers, suppliers, brokers, correspondents or other business contacts
maintained by the Seller or any of its Subsidiaries in connection with the
Business and (iii) from the date of this Agreement until the third anniversary
of the Closing Date, the Parent and its Affiliates not engaged in the Business
will not, and from the Closing Date until the third anniversary of the Closing
Date, the Seller will not, solicit for employment or employ any employee of the
Business, other than any such employee who will not be or has not been offered
post-closing employment pursuant to Section 6.01 or whose employment with the
Seller or the Purchaser has otherwise been terminated, whether voluntarily or
involuntarily; provided that this provision shall not be violated by any general
solicitation or advertising not directed at any such employee or group of
employees.
Section 10.20 PARENT GUARANTEE. The Parent hereby unconditionally and
irrevocably guarantees all of the obligations of the Seller pursuant to this
Agreement and the Related Documents.
Section 10.21 REDEMPTION OF QUICS. The Seller will cause notice of
redemption of the QUICS to be sent to the holders thereof on the Closing Date,
and will use Commercially Reasonable Efforts in order to cause the QUICS to be
redeemed as soon as reasonably practicable following the Closing Date.
Section 10.22 COLLECTION OF RECEIVABLES.
(a) The Seller will indemnify the Purchaser and hold it harmless against
any losses arising out of the failure of any accounts receivable included in the
Purchased Assets to be collectible in accordance with their terms. The Purchaser
agrees to use Commercially Reasonable Efforts after the Closing to collect such
accounts receivable. The Purchaser may require the Seller to comply with this
Section 10.22 by repurchasing at the face amount plus accrued interest any such
accounts receivable which have not been collected by 180 days after their due
date (or such other date as is shown on Schedule 10.22).
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(b) For purposes of this Section 10.22, the Purchased Assets shall include
the right to receive interest at 7% per annum on the face amount of those
receivables included in the Purchased Assets related to sales of mortgage loans
or mortgage loan servicing prior to the Closing Date, provided that the Seller
shall receive a credit against the amount of such interest for any interest
received by the Purchaser in accordance with the terms of such receivables. Such
interest shall be computed from the Closing Date to the date each such
receivable is (i) collected by the Purchaser or (ii) repurchased by the Seller
in accordance with Section 10.22(a). The Purchaser may deduct amounts owing
under this Section 10.22(b) from the holdback amount or request such amount from
the Seller in accordance with Section 12.04.
Section 10.23 SOM. The Seller will use Commercially Reasonable Efforts to
obtain all Approvals for SOM listed on Section 4.10(a) of the Disclosure
Schedule and Schedule 10.23. The Purchaser will cooperate with and assist the
Seller in obtaining such Approvals and shall reimburse Seller for its reasonable
out-of-pocket costs and expenses incurred in seeking such Approvals (including
up to $150,000 for such costs and expenses paid or incurred prior to the date of
this Agreement); provided that any such reimbursed amounts shall not be included
in the value of the Purchased Assets for purposes of the Closing Statement and
the Adjustment Schedule. If the parties determine that such Approvals will not
be obtained before the Closing, the Purchaser and the Seller will cooperate in
using Commercially Reasonable Efforts to make alternative arrangements.
Section 10.24 PRIVATE LABEL SUBSERVICING CAPABILITY. Prior to the Closing,
the Seller will use Commercially Reasonable Efforts to complete and test
enhancements to its servicing system sufficient to enable customer service,
collections, delinquency and default management of Subserviced Mortgage Loans
under a name different from that used in connection with the servicing of the
Mortgage Loans (or any subset thereof). The Seller will reimburse the Purchaser
for its reasonable and necessary expenses (including but not limited to the
incremental internal and external costs to complete the aforementioned
enhancements). The parties agree that if Chase terminates a subservicing
agreement on account of a failure to so complete and test such enhancements, the
Seller shall pay to the Purchaser, as liquidated damages and not as a penalty,
the unearned portion of the Chase Amount allocated to such agreement, and the
Purchaser shall not be entitled to any other remedy from the Seller or the
Parent for such termination or the resulting loss of prospective benefits or
advantages. The previous sentence notwithstanding, the Seller shall indemnify
the Purchaser for any out-of-pocket losses arising out of a failure of the
servicing system to operate in a manner substantially similar to the manner in
which it operated prior to the implementation of the enhancements contemplated
by this Section 10.24.
Section 10.25 NORTHWEST PACIFIC. Prior to the Closing, the Seller will
transfer the stock of Northwest Pacific, in a manner that will not adversely
affect the operation of the Business after the Closing, so that such stock is
directly owned by the Seller or will liquidate Northwest Pacific in a manner
that its assets and liabilities are transferred directly to the Seller and will
be Excluded Assets and Retained Liabilities.
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ARTICLE XI
TAX MATTERS
Section 11.01 ALLOCATION OF RESPONSIBILITY.
(a) All Taxes based on the ownership of property (other than any sales,
use, transfer, income or franchise Taxes) imposed with respect to the Purchased
Assets for a tax or assessment period that included the Closing Date shall be
apportioned between the Seller and the Purchaser, with the Seller bearing a
portion of such taxes based on the number of days in the tax or assessment
period prior to the Closing Date and the Purchaser bearing a portion of such
Taxes based on the number of days in the tax or assessment period on or after
the Closing Date.
(b) Taxes described in Section 11.01(a) shall initially be timely paid as
provided by applicable Law and the paying party shall be entitled to
reimbursement from the non-paying party in accordance with the obligations of
the parties described in such Section except that the Purchaser shall not be
entitled to reimbursement until the amount of Taxes described in Section
11.01(a) to be reimbursed by the Seller to the Purchaser exceeds the amount of
the "real estate taxes payable" and "personal property taxes payable" recorded
on the Adjustment Schedule. The paying party shall promptly notify the
non-paying party in writing of the payment of any such tax and the non-paying
party shall make such reimbursement within ten business days after it receives
such notice. Any payment not made within such time shall bear interest at a rate
per annum equal to the Interest Rate.
(c) Seller shall pay all sales, use, transfer, real property transfer,
recording, gains, stock transfer and other similar taxes and fees ("Transfer
Taxes") arising out of or in connection with the transactions effected pursuant
to this Agreement, and shall indemnify, defend, and hold harmless the Purchaser
(and its Affiliates) against Transfer Taxes in excess of such amount. Seller
shall file all necessary documentation and Tax Returns with respect to such
Transfer Taxes, and Purchaser shall cooperate with Seller with respect to such
filings.
Section 11.02 TAX RETURNS.
(a) Parent and Seller shall join and Seller shall cause the Subsidiaries
to join, for any taxable year or portion thereof ending on or prior to the
Closing Date, in (i) the consolidated federal Income Tax Returns and (ii) any
combined, consolidated or unitary state or local income or franchise tax returns
with respect to which the Seller and the Subsidiaries are required to be
included or have been included in accordance with the most recent past practice
of the Seller. Seller shall properly prepare (or cause to be prepared) and
timely file (or cause to be timely filed) all applicable separate company state,
local, and foreign Income Tax Returns of the Seller and the Subsidiaries for any
taxable year ending on or before the Closing Date, and Seller or the
Subsidiaries, as applicable, shall timely and fully pay all Income Taxes shown
thereon. Purchaser shall, subject to Seller's consent (which shall not be
withheld unreasonably), properly prepare (or cause to be prepared), and
Purchaser shall file (or cause to be timely filed) all separate company income
and franchise tax returns of the Subsidiaries for any taxable year or period
commencing prior to the Closing Date and ending subsequent to the Closing Date.
Purchaser shall provide drafts
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of such returns to Seller for Seller's review and comment no later than 30 days
prior to filing. Purchaser shall accept all reasonable comments of the Seller
with respect to such Tax Returns. All such returns shall be consistent with the
most recent equivalent returns filed with respect to such Subsidiaries. Seller
shall, upon written notice from Purchaser, provide Purchaser with funds to
timely pay the portion of the tax liability shown on such income or franchise
tax returns which is described as being the responsibility of the Seller under
this Agreement, and Purchaser shall timely pay over (or cause to be paid over)
such amounts to the appropriate authority.
(b) Subject to Seller and the Seller's Subsidiaries making or causing to
be made the payments required by it and providing the information it is required
to provide or cause to be provided hereunder, Purchaser shall prepare and file
all other Tax Returns required of Seller and Seller's Subsidiaries (including
without limitation all information returns and payee statements required under
the Code or applicable state law for the entire calendar year), shall cause to
be paid all Taxes payable with respect thereto, and shall cause to be reported
on such Tax Returns any transactions or payments by or relating to Seller, and
Seller's subsidiaries occurring after the Closing Date.
Section 11.03 TAX SHARING AND TAX PAYMENT AGREEMENTS.
(a) Any amounts (including deferred taxes which become current through the
end of the Closing Date by virtue of the transactions which are the subject of
this Agreement) that would be required to be paid pursuant to any Tax Sharing or
Tax Payment Agreement to which either the Seller or the Seller's Subsidiaries is
a party shall be paid prior to the Closing Date and all such agreements shall be
terminated as to the Seller, and the Seller's Subsidiaries as of the Closing
Date, and the Seller and the Seller's Subsidiaries shall have no further
obligations thereunder, provided all such payments have been made. For purposes
of this section the term "Tax Sharing Agreement" and "Tax Payment Agreement"
includes any agreement or arrangement, whether or not written, providing for the
sharing or allocation of liability for Taxes of the parties thereto.
Section 11.04 ASSISTANCE AND COOPERATION. After the Closing Date Seller
and Purchaser shall:
(a) assist in all reasonable respects (and cause their respective
affiliates to assist) the other party in preparing any Tax Returns or reports
for which such other party is responsible for under this Agreement;
(b) cooperate in all reasonable respects in preparing for any audits of,
or disputes with taxing authorities regarding, any Tax Returns of the Seller and
the Subsidiaries;
(c) provide timely notice to the other in writing of any pending or
threatened tax audits or assessments of the Seller and the Subsidiaries for
Taxable periods for which the other may have a liability under this Agreement;
and
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(d) furnish the other with copies of all correspondence received from any
taxing authority in connection with any tax audit or information request with
respect to such Taxable period.
Section 11.05 RECORD RETENTION. After the Closing Date Seller shall
retain, until the applicable statutes of limitation (including extensions) have
expired, copies of the Subsidiaries' separate company returns, supporting work
schedules, and other records or information in the possession of the Seller
which may be relevant to such returns for all tax periods or portions thereof
ending before or including the Closing Date and shall not destroy or otherwise
dispose of any such records without first providing the Purchaser with a
reasonable opportunity to review and copy the same.
Section 11.06 CONTEST. Purchaser shall have the right to exercise, at
Purchaser's expense, complete control of any issue raised in any inquiry,
examination or proceeding with respect to Taxes imposed on or with respect to
the assets purchased by the Purchaser, and the Taxes of Seller's Subsidiaries
for which the Purchaser is required to bear the tax burden hereunder or for
which Purchaser gets the tax benefit hereunder of any refund or credit, except
that prior to settling any issue in any way that affects the tax benefits
available to the Seller for any time period after the Closing Date, Purchaser
will consult with the Seller. Seller shall have the right to exercise, at
Seller's expense, complete control of any issue raised in any inquiry,
examination or proceeding with respect to Taxes imposed on or with respect to
the assets purchased by the Purchaser, and the Taxes of the Seller's
Subsidiaries for which the Seller is required to bear the tax burden hereunder
or for which Seller gets the tax benefit hereunder of any refund or credit,
except that prior to settling any issue in any way that affects the tax benefits
available to the Purchaser for any time period up to the Closing Date, Seller
will consult with the Purchaser. Each party shall notify the other in writing
upon learning of that any such issue has been raised.
Section 11.07 SECTION 338(h)(10) ELECTION.
(a) Seller, the Subsidiaries and Purchaser shall jointly make timely and
irrevocable elections under Section 338(h)(10) of the Code and, if permissible,
similar elections under any applicable state or local income tax laws, and
Purchaser shall make timely and irrevocable elections under Section 338(g) of
the Code. Seller and Purchaser shall report the transaction consistent with such
elections under Section 338(g) and Section 338(h)(10) of the Code or any similar
state or local tax provisions (the "Elections"), and shall take no position
contrary thereto unless and to the extent required to do so pursuant to a
determination (as defined in Section 1313(a) of the Code or any similar state or
local tax provision).
(b) To the extent possible, Seller and Purchaser shall execute at or prior
to the Closing any and all forms necessary to effectuate the Elections
(including, without limitation, Internal Revenue Service Form 8023 and any
similar forms under state and local income tax laws (the "Section 338 Forms")).
In the event, however, any Section 338 Forms are not executed at the Closing,
the Seller and the Purchaser shall prepare and complete each Section 338 Form no
later than 60 days prior to the date such Section 338 Form is required to be
filed. Seller and Purchaser
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shall each cause the Section 338 Form to be duly executed by an authorized
person for Seller and Purchaser in each case, and shall duly and timely file the
Section 338 Forms in accordance with applicable Tax laws and the terms of this
Agreement.
Section 11.08 ALLOCATION OF PURCHASE PRICE.
(a) After giving effect to the allocation required by Section 3.01,
Purchaser and Seller shall act together in good faith to determine and agree
upon the amount of the MADSP (as defined under Treasury Regulation Section
1.338(h)(10)-1(f)) and the allocation of such MADSP among the Purchased Assets.
The tax allocation of the Purchase Price among the Purchased Assets (as
determined by Section 3.01 of this Agreement, except that with respect to the
Seller's Subsidiaries, the Purchase Price shall be allocated to the assets of
the Seller's Subsidiaries) shall be made by Purchaser and Seller acting together
and in good faith, all in accordance with Section 1060 of the Code, the
applicable regulations thereunder and with Treasury Regulation Section
1.338(h)(10)-1(f). Any issue that remains unresolved with respect to the amount
or allocation of the Purchase Price on the date that is 120 days prior to the
date on which the Section 338 Forms are required to be filed shall be referred
to a nationally recognized accounting firm jointly selected by Seller and
Purchaser (the "Neutral Auditors"), and the Neutral Auditors shall resolve such
issue no later than 60 days prior to the date on which the Section 338 Forms are
required to be filed. The fees and expenses of the Neutral Auditors shall be
borne equally by Seller and Purchaser. Seller and Purchaser shall (i) be bound
by such allocation for purposes of determining any Taxes, (ii) prepare and file
all Tax Returns to be filed with any taxing authority in a manner consistent
with such allocation and (iii) take no position inconsistent with such
allocation in any Tax Return, any proceeding before any taxing authority or
otherwise. Appropriate adjustment shall be made to such allocation to specific
categories of assets to reflect any Purchase Price adjustment pursuant to this
Agreement or other adjustment required pursuant to law. In the event such
allocation is disputed by any taxing authority, the party receiving notice of
such dispute shall promptly notify the other party of such dispute, and Seller
and Purchaser shall cooperate in good faith in responding to such challenge in
order to preserve the effectiveness of such allocation.
(b) Each of the Purchaser and the Seller shall timely file a Form 8594
Asset Acquisition Statement of Allocation consistent with the Adjustment
Schedule, shall provide a copy of such form to the other party hereto and shall
file a copy of such form with its federal income Tax Return for the periods that
includes the Closing Date. Each of the Purchaser and Seller further agrees not
to take any position inconsistent with the allocations contemplated by this
Section for any Tax purpose.
Section 11.09 PURCHASER ACTIVITY ON CLOSING DATE AND POST-CLOSING.
(a) On the Closing Date, Purchaser shall cause the Subsidiaries to conduct
their business in the ordinary course in substantially the same manner as
presently conducted and shall not permit the Subsidiaries to effect any
extraordinary transactions (other than any such transactions expressly required
by applicable law or by this Agreement) that could result in Tax liability in
excess of the Tax liability associated with the conduct of its business in the
ordinary course.
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(b) Purchaser shall not, with respect to any Taxable year or period ending
on or before the Closing Date (or, with respect to any Taxable year or period
beginning before and ending after the Closing Date, the portion of such taxable
period ending on and including the Closing Date) (a "Pre-Closing Period", and
any Taxable year and period (or portion thereof) not included in a Pre-Closing
Period, a "Post-Closing Period"), (i) file any amended Tax Return with respect
to the Subsidiaries, (ii) carry back any loss or other Tax attribute of the
Subsidiaries, or (iii) take any position with respect to Taxes of the
Subsidiaries that would have the effect of shifting income from a Post-Closing
Period to a Pre-Closing Period unless, in each case, Seller shall have consented
in writing to such action by Purchaser, provided, in each case, Seller's consent
shall not be withheld unreasonably.
Section 11.10 LIABILITY FOR TAXES AND RELATED MATTERS.
(a) Except to the extent of any amounts reserved for Taxes (other than
reserves for deferred taxes, if any) on the Closing Statement, Parent and Seller
shall be responsible for and indemnify and hold harmless Purchaser, against any
and all liability (including reasonable fees for attorneys and other outside
consultants incurred in contesting or otherwise in connection with any such
liability as reasonably agreed to by Seller and parent) for (i) Taxes of the
Subsidiaries for any Taxable year or period ending on or before the Closing
Date, (ii) Taxes relating to the Purchased Assets for any Taxable year or period
ending on or before the Closing Date, (iii) with respect to any Taxable year or
period beginning before and ending after the Closing Date, Taxes of the
Subsidiaries and Taxes relating to the Purchased Assets for the portion of such
taxable period ending on and including the Closing Date, (iv) all income,
franchise or similar Taxes measured by income or gain realized on the deemed
sale of assets resulting, directly or indirectly, from the Elections, (v) all
liability for income Taxes of Seller or any affiliate (other than liability for
Income Taxes of the Subsidiaries arising out of a Post-closing Period) thereof
arising from the application of Treasury Regulations ss. 1.1502-6 or any
analogous state or local tax provision. Seller shall be entitled to all refunds
with respect to Taxes for which Seller has responsibility hereunder, other than
refunds resulting from carrybacks from taxable years beginning after the Closing
Date.
(b) Purchaser shall be liable for and indemnify Seller for the Taxes (and
reasonable fees for attorneys and other outside consultants incurred in
contesting or otherwise in connection with an such liability as reasonably
agreed to by Purchaser) that are not allocated to Seller pursuant to Paragraph
(a).
(c) For purposes of Sections 11.10(a) and 11.10(b), whenever it is
necessary to determine the liability for Taxes of the Subsidiaries or Taxes
relating to the Purchased Assets for a portion of a Taxable year or period that
begins before and ends after the Closing Date, the determination of such Taxes
for the portion of the year or period ending on, and the portion of the year or
period beginning after, the Closing Date shall be determined by assuming that
the Seller, or the Subsidiaries, as applicable, had a Taxable year or period
which ended at the close of the Closing Date, except that (A) exemptions,
allowances or deductions that are calculated on an annual basis, such as the
deduction for depreciation, and (B) all taxes that are imposed on a periodic
basis with
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respect to the Purchased Asset or otherwise measured by the level of any item
such Taxes or items shall be apportioned pro rata by day. For purposes of
Section 11.10(a) and 11.10(b), any state net operating losses that are available
as of the Closing Date shall, to the extent permitted by applicable law, be
applied first to reduce the gain realized for state Tax purposes on the deemed
asset sale resulting from the Elections.
(d) Parent, Seller and Purchaser will treat any payment by Purchaser or
Seller under this Agreement as an adjustment to the Purchase Price unless
otherwise required by a final and non-appealable decision, in which case any
such payment shall be made on an after tax basis.
(e) The indemnity set out above in this Section 11.10 shall, anything in
this Agreement to the contrary notwithstanding, survive until the expiration of
the applicable statutes of limitation, including extensions thereof, and Article
XII hereof shall not apply to Taxes.
ARTICLE XII
SURVIVAL AND INDEMNIFICATION
Section 12.01 SURVIVAL. The representations and warranties in Article IV
and Article V hereof shall survive the Closing but shall terminate and be of no
further force and effect on the third anniversary of the Closing Date; provided
that the representations and warranties in Section 4.10 (Mortgage Loans) shall
terminate and be of no further force and effect on the date which is eight years
and six months after the Closing Date. Unless a specific period is set forth in
this Agreement (in which event such specified period shall control), all other
covenants and agreements contained in this Agreement shall survive the Closing
and remain in effect indefinitely. With respect to a claim for indemnification
that may fall under more than one provision of Section 12.02 or 12.03, the
expiration of the survival period for a claim under one applicable provision
shall not impact in any way a party's right to bring a claim under another
applicable provision, the survival period of which has not yet expired.
Section 12.02 INDEMNIFICATION BY THE SELLER. On the terms set forth
herein, the Seller and the Parent, jointly and severally, shall indemnify,
defend and hold harmless the Purchaser, each of its Affiliates and each of their
respective past, present and future directors, officers, agents and
representatives (together, the "Purchaser Indemnitees") from and against any and
all liabilities, obligations, claims, suits, damages, civil and criminal
penalties and fines, out-of-pocket costs and expenses, including without
limitation any reasonable and necessary attorney's and other professional fees,
after deducting any insurance proceeds received by the Purchaser Indemnitees in
connection therewith ("Purchaser Indemnifiable Losses"), relating to, resulting
from or arising out of the following:
(a) any breach of any representation, warranty, covenant or undertaking by
the Seller or the Parent contained in this Agreement or any Related Document;
(b) any Retained Liabilities or any matters related to the Excluded
Assets;
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(c) any claim by any Employee based on or arising out of matters occurring
before the Closing Date;
(d) any VA No-bids relating to Mortgage Loans originated or committed
before the Closing Date; provided that the Seller's and the Parent's obligations
pursuant to this clause (d) shall expire on the second anniversary of the
Closing Date; and
(e) any Pre-Closing Servicing Obligations; provided that the Seller's and
the Parent's obligations pursuant to this clause (e) shall expire on the date
which is eight years and six months after the Closing Date.
The items described in clauses (a) through (e) above are collectively
referred to herein as "Purchaser Claims".
Section 12.03 INDEMNIFICATION BY THE PURCHASER. On the terms set forth
herein, the Purchaser shall indemnify, defend and hold harmless the Seller, each
of its Affiliates (including the Parent), and each of their respective past,
present and future directors, officers, agents and representatives (together,
the "Seller Indemnitees"), from and against any liabilities, obligations,
claims, suits, damages, civil and criminal penalties and fines, out-of-pocket
costs and expenses, including without limitation any reasonable and necessary
attorney's and other professional fees, after deducting any insurance proceeds
received by the Seller Indemnitees in connection therewith ("Seller
Indemnifiable Losses") relating to, resulting from or arising out of any of the
following:
(a) any breach of any representation, warranty, covenant or undertaking of
the Purchaser contained in this Agreement or any Related Document;
(b) any Assumed Liabilities;
(c) any matters related to the Purchased Assets based on or arising out of
matters occurring after the Closing Date; and
(d) any claim by any Employee based on or arising out of matters occurring
on or after the Closing Date.
The items described in clauses (a) through (d) above are collectively
referred to herein as "Seller Claims".
Section 12.04 PROCEDURES FOR MAKING CLAIMS AGAINST INDEMNIFYING PARTY.
(a) Except with respect to third party claims made under Section 12.06
(which shall be governed by that Section), from time to time on or before the
first anniversary of the Closing Date, in the case of Section 3.01(a), or the
expiration, if any, of the applicable indemnification obligation, in the case of
Section 12.02 or Section 12.03, the Purchaser or the Indemnified Party, as the
case
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may be (a "claimant"), may give notice in substantially the form of Exhibit E
hereto to the Seller or the Indemnifying Party, as the case may be, specifying
in reasonable detail the nature and dollar amount of any deduction the Purchaser
has made from the holdback amount under Section 3.01(a) or any claim under
Section 12.02 or Section 12.03 of this Agreement (each a "claim"); a claimant
may from time to time make more than one claim (including any supplements
thereto) with respect to any underlying state of facts. If the Seller or the
Indemnifying Party, as the case may be, gives notice disputing any claim (a
"counter notice") within 30 days following receipt of the notice regarding such
claim, such claim shall be resolved as provided in Section 12.04(b). If no
counter notice is received by the claimant within such 30-day period, then the
dollar amount of the claim as set forth in the original notice shall be deemed
established for purposes of this Agreement and, at the end of such 30-day
period, in the case of a claim under Section 12.02 or Section 12.03, the
Indemnifying Party shall make a payment to the Indemnified Party in the dollar
amount claimed in the notice. Any claim pending at the expiration of the
indemnification period under Section 12.01, Section 12.02(d) or Section 12.02(e)
shall be tolled until such claim has been resolved and the Indemnifying Party
has made any required payments to the Indemnified Party.
(b) If the counter notice as described in Section 12.04(a) is timely
received with respect to a claim, the parties shall attempt in good faith to
agree on resolution of the disputed amount. The Indemnifying Party shall pay to
Indemnified Party all non-disputed amounts in accordance with the time period
specified in Section 12.04(a). Any amount mutually agreed upon or awarded to the
Indemnified Party under a final and non-appealable Judgment of a court of
competent jurisdiction shall be paid by the Indemnifying Party within five
Business Days following agreement or Judgment, as applicable. If the parties'
agreement or the Judgment determines that a withdrawal of monies from the
holdback under Section 3.01(a) was not appropriate, the Purchaser shall replace
those monies in the holdback amount, or if the time for maintaining the holdback
has expired under Section 3.01(a), pay those monies directly to Seller within
five Business Days after such determination.
Section 12.05 LIMITATIONS AND RULES OF CONSTRUCTION REGARDING
INDEMNIFICATION OBLIGATIONS.
(a) Notwithstanding any other provision in this Agreement, the liability
of an Indemnifying Party to indemnify the Purchaser Indemnitees or the Seller
Indemnitees, as the case may be (the "Indemnified Party") pursuant to Section
12.02 or Section 12.03 against any Indemnifiable Losses arising out of a breach
of a representation or warranty included in Article IV or Article V or pursuant
to Section 12.02(d) (relating to VA No-bids) or Section 12.02(e) (relating to
Pre-Closing Servicing Obligations) shall be limited to claims as to which the
Indemnified Party has given to the Indemnifying Party written notice of a claim
within the survival period set forth in Section 12.01, Section 12.02(d) or
Section 12.02(e), as the case may be, whether or not any such Indemnifiable
Losses have then actually been sustained.
(b) For purposes of Section 12.02 and Section 12.03, in determining
whether a representation or warranty included in Article IV (except for Section
4.15) or Article V has been breached, any qualification in such representation
or warranty with respect to the Indemnifying
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Party's Knowledge shall be disregarded (i.e., a breach shall be deemed to have
occurred whether or not the Indemnifying Party had Knowledge of the facts giving
rise to the breach). For purposes of Section 12.02, in determining whether a
representation or warranty included in Article IV has been breached, the
Sections of the Disclosure Schedule identified on Schedule 12.05(b) shall be
disregarded (i.e., a breach shall be deemed to have occurred whether or not the
relevant Section of the Disclosure Schedule gives notice of exceptions to the
representation or warranty).
(c) Notwithstanding anything to the contrary in this Agreement, (i) the
Parent's and the Seller's liability for any Purchaser Claims arising out of a
breach of the representations and warranties contained in Article IV (other than
Section 4.10), and the Purchaser's liability for any Seller Claims arising out
of a breach of the representations and warranties contained in Article V, shall
be limited as follows: the Indemnifying Party shall be liable for (A) 90% of the
first $1,000,000 of all related Indemnifiable Losses, and all such Indemnifiable
Losses in excess of $1,000,000, to the extent such Indemnifiable Losses arise
from claims made on or before the first anniversary of the Closing Date, (B) 80%
of the first $1,000,000 of all related Indemnifiable Losses, and all such
Indemnifiable Losses in excess of $1,000,000, to the extent such Indemnifiable
Losses arise from claims made after the first anniversary of the Closing Date
and on or before the second anniversary of the Closing Date and (C) 50% of all
related Indemnifiable Losses to the extent such Indemnifiable Losses arise from
claims made after the second anniversary of the Closing Date and on or before
the last date on which claims may be made pursuant to this Agreement, and (ii)
the Parent's and the Seller's aggregate liability for Mortgage Loan Claims (as
defined below) made after the seventh anniversary of the Closing Date and on or
before the last date on which claims may be made pursuant to this Agreement
shall be limited to the amount, if any, by which $15 million exceeds the amount
of all Mortgage Loan Claims previously determined to be Purchaser Indemnifiable
Losses pursuant to this Agreement (including, without limitation, pursuant to
Section 10.18(b)). "Mortgage Loan Claims" means any Purchaser Claims arising out
of (x) a breach of the representations and warranties contained in Section 4.10
or (y) the Pre-Closing Servicing Obligations.
Section 12.06 DEFENSE OF CLAIMS.
(a) If an Indemnified Party shall receive written notice of the assertion
of any third party claim with respect to which an Indemnifying Party is
obligated under this Agreement to provide indemnification, such Indemnified
Party shall give the Indemnifying Party prompt notice thereof; PROVIDED,
HOWEVER, that the failure of any Indemnified Party to give such notice shall not
relieve any Indemnifying Party of its obligations under this Article XII, except
to the extent that such Indemnifying Party is actually prejudiced by such
failure to give notice. Such notice shall describe the claim in reasonable
detail, and, if practicable, shall indicate the estimated amount of the
Indemnifiable Loss that has been or may be sustained by such Indemnified Party.
(b) An Indemnifying Party, at such Indemnifying Party's own expense and
through counsel chosen by such Indemnifying Party (which counsel shall be
reasonably satisfactory to the Indemnified Party), may elect to defend any third
party claim; and if it so elects, it shall, within 20 Business Days after
receiving notice of such third party claim (or sooner, if the nature of such
third
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party claim so requires), notify the Indemnified Party of its intent to do so,
and such Indemnified Party shall cooperate in the defense of such third party
claim. Such Indemnifying Party shall pay such Indemnified Party's reasonable
out-of-pocket expenses incurred in connection with such cooperation. After
notice from an Indemnifying Party to an Indemnified Party of its election to
assume the defense of a third party claim, such Indemnifying Party shall not be
liable to such Indemnified Party under this Article XII for any legal or other
expenses subsequently incurred by such Indemnified Party in connection with the
defense thereof; PROVIDED, HOWEVER, that such Indemnified Party shall have the
right to employ one counsel to represent such Indemnified Party and all other
persons entitled to indemnification in respect of such claim hereunder (which
counsel shall be reasonably acceptable to the Indemnifying Party) if, in such
Indemnified Party's reasonable judgment, either a conflict of interest between
such Indemnified Party and such Indemnifying Party exists in respect of such
claim or there may be defenses available to such Indemnified Party which are
different from or in addition to those available to such Indemnifying Party, and
in that event (i) the reasonable fees and expenses of such separate counsel
shall be paid by such Indemnifying Party and (ii) each of such Indemnifying
Party and such Indemnified Party shall have the right to direct its own defense
in respect of such claim. If any Indemnifying Party elects not to defend against
a third party claim, or fails to notify an Indemnified Party of its election
within a reasonable period of time, such Indemnified Party may defend,
compromise and settle such third party claim; PROVIDED, HOWEVER, that no such
Indemnified Party may, without the prior written consent of the Indemnifying
Party (which consent shall not be unreasonably withheld), settle or compromise
any third party claim or consent to the entry of any Judgment which does not
include as an unconditional term thereof the delivery by the claimant to the
Indemnifying Party of a written release from all liability in respect of such
third party claim. The Indemnifying Party may defend, compromise and settle any
third party claim on such terms as it deems appropriate, PROVIDED, HOWEVER, that
no Indemnifying Party may, without the prior written consent of the Indemnified
Party (which consent shall not be unreasonably withheld), settle or compromise
any third party claim or consent to the entry of any Judgment which does not
include as an unconditional term thereof the delivery by the claimant to the
Indemnified Party of a written release from all liability in respect of such
third party claim.
Section 12.07 REMEDIES EXCLUSIVE. The remedies provided to the parties in
this Article XII for the matters set forth in this Article XII shall be
exclusive and shall preclude assertion by them of all other rights and the
seeking of all other remedies for such matters against any other party hereto;
provided that any party hereto shall not be precluded from (i) seeking specific
performance or any other available remedy for a breach of a covenant or
agreement contained in this Agreement or in any Related Document or (ii) seeking
any other remedy explicitly provided by any other provision of this Agreement or
a Related Document.
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ARTICLE XIII
TERMINATION
Section 13.01 TERMINATION. This Agreement may be terminated at any time
prior to the Closing:
(a) by mutual consent of the parties hereto;
(b) upon written notice by any party hereto, if (i) any court of competent
jurisdiction in the United States or any other Governmental Agency shall have
issued a Judgment or taken any other action restraining, enjoining or otherwise
prohibiting the transactions contemplated by this Agreement and (ii) such
Judgment or other action shall have become final and nonappealable; or
(c) upon written notice at any time on or after June 30, 1999 by the
Purchaser or the Seller, if the Closing has not occurred by such date, provided
that the failure to close is not the result of a material breach of this
Agreement by the terminating party.
Section 13.02 OBLIGATIONS SHALL CEASE. In the event that this Agreement
shall be terminated pursuant to Section 13.01 hereof, all obligations of the
parties hereto under this Agreement shall terminate and there shall be no
liability of any party hereto to any other party except (a) for the obligations
with respect to confidentiality and publicity contained in Section 10.11 hereof
and (b) as set forth in Section 13.03; provided that nothing contained in this
Section shall relieve any party of liability for its bad faith or willful
violation of the provisions of this Agreement.
Section 13.03 FEES AND EXPENSES. Except as otherwise specifically provided
herein, each party hereto shall pay all of the fees and expenses incurred by it
in connection herewith.
ARTICLE XIV
MISCELLANEOUS
Section 14.01 COMPLETE AGREEMENT. This Agreement, the Related Documents,
the Confidentiality Agreement and the exhibits attached hereto and thereto and
the documents referred to herein and therein shall constitute the entire
agreement between the parties hereto with respect to the subject matter hereof
and thereof and shall supersede all previous negotiations, commitments and
writings with respect to such subject matter.
Section 14.02 WAIVER, DISCHARGE, ETC. This Agreement may not be released,
discharged, abandoned, waived, changed or modified in any manner, except by an
instrument in writing signed on behalf of each of the parties hereto by their
duly authorized representatives. The failure of any party hereto to enforce at
any time any of the provisions of this Agreement shall in no way be construed to
be a waiver of any such provision, nor in any way be construed to affect the
validity of this Agreement or any part thereof or the right of any party
thereafter to enforce each and every
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such provision. No waiver of any breach of this Agreement shall be held to be a
waiver of any other or subsequent breach. If any provision of this Agreement
shall be declared by any court of competent jurisdiction to be illegal or
unenforceable, the other provisions shall not be affected, but shall remain in
full force and effect.
Section 14.03 NOTICES. All notices, requests and demands to or upon the
respective parties hereto shall be in writing, including by telecopy, and,
unless otherwise expressly provided herein, shall be deemed to have been duly
given or made (a) if delivered by hand (including by courier), when delivered,
(b) in the case of mail, three Business Days after deposit in United States
first class mail, postage prepaid and (c) in the case of telecopy notice, when
receipt has been confirmed by the transmitting telecopy operator. In each case
notice shall be sent to the address of the party to be notified, as follows, or
to such other address as may be hereafter designated by the respective parties
hereto in accordance with these notice provisions:
If to the Purchaser, to:
Citicorp Mortgage, Inc.
15851 Clayton Road
Ballwin, Missouri 63011
Telecopy: (314) 916-7201
Attention: Legal Department
With a copy to:
Citigroup Inc.
Corporate Legal Department
425 Park Avenue - 2nd Floor
New York, New York 10043
Telecopy: (212) 793-4401
Attention: Stephen Dietz
If to the Seller or Parent, to:
Source One Mortgage Services Corporation
114 Goodwives Road
Darien, Connecticut 06820
Telecopy: (203) 655-6044
Attention: James H. Ozanne
59
<PAGE>
With a copy to:
Fund American Enterprises Holdings, Inc.
80 South Main Street
Hanover, NH 03755
Telecopy: (603) 643-4562
Attention: Terry L. Baxter
Section 14.04 GOVERNING LAW; WAIVER OF JURY TRIAL.
(a) This Agreement shall be governed by and construed in accordance with
the laws of the State of New York, without regard to conflict of law principles.
(b) Each party waives, to the fullest extent permitted by applicable law,
any right it may have to a trial by jury in respect of any action, suit or
proceeding arising out of or relating to this Agreement or any Related Document.
Section 14.05 HEADINGS. The descriptive headings of the several Articles
and Sections of this agreement are inserted for convenience only and do not
constitute a part of this Agreement.
Section 14.06 SUCCESSORS. This Agreement and all of the provisions hereof
shall be binding upon and inure to the benefit of the parties hereto and their
respective successors and permitted assigns. Neither this Agreement nor any of
the rights, interests or obligations hereunder shall be assigned by any of the
parties hereto except with the prior written consent of the other parties or by
operation of law, provided that without such consent the Seller may assign its
rights and obligations hereunder to the Parent or any of the Parent's direct or
indirect wholly owned subsidiaries, and the Purchaser may assign its rights and
obligations hereunder to Citigroup Inc. or any of its direct or indirect wholly
owned subsidiaries, in which event such assignee shall be substituted for the
assignor for purposes of this Agreement to the extent appropriate, but without
affecting any liability of the assignor hereunder.
Section 14.07 THIRD PARTIES. Except as specifically set forth or referred
to herein (including, without limitation, in Article XII), nothing herein
expressed or implied is intended or shall be construed to confer upon or given
any person or entity, other than the parties hereto and their successors and
permitted assigns, any rights or remedies under or by reason of this Agreement.
Section 14.08 COUNTERPARTS. This Agreement may be executed in two or more
counterparts, all of which shall be considered one and the same instrument and
each of which shall be deemed an original.
60
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement
to be executed by its duly authorized representatives as of the day and year
first above written.
SOURCE ONE MORTGAGE SERVICES
CORPORATION,
as Seller
By:
-------------------------------
Name:
Title:
FUND AMERICAN ENTERPRISES HOLDINGS, INC.,
as Parent
By:
-------------------------------
Name:
Title:
CITICORP MORTGAGE, INC.
as Purchaser
By:
-------------------------------
Name:
Title:
61
<PAGE>
Exhibit 16
Securities and Exchange Commission
Washington, D.C. 20549
March 26, 1999
Ladies and Gentlemen:
We were previously principal accountants for Fund American Enterprises Holdings,
Inc. and, under the date of February 12, 1999, except for note 20, which is as
of March 25, 1999, we reported on the consolidated financial statements of Fund
American Enterprises Holdings, Inc. and subsidiaries as of and for the years
ended December 31, 1998 and 1997. On March 10, 1999, our appointment as
principal accountants was terminated. We have read Fund American Enterprises
Holdings, Inc.'s statements included under Item 9 of its December 31, 1998 Form
10-K, and we agree with such statements, except that we are not in a position to
agree or disagree with paragraph two of Item 9 of the Form 10-K.
Very truly yours,
KPMG LLP
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
AS OF DECEMBER 31, 1998
<TABLE>
<CAPTION>
FULL NAME OF SUBSIDIARY PLACE OF INCORPORATION
- ----------------------- ----------------------
<S> <C>
CHARTER INDEMNITY COMPANY TEXAS, USA
FOLKSAMERICA HOLDING COMPANY, INC. NEW YORK, USA
FOLKSAMERICA REINSURANCE COMPANY NEW YORK, USA
FUND AMERICAN CASUALTY REINSURANCE, LTD. ISLANDS OF BERMUDA
FUND AMERICAN ENTERPRISES, INC. DELAWARE, USA
SOURCE ONE MORTGAGE SERVICES
CORPORATION and subsidiaries DELAWARE, USA
VALLEY INSURANCE COMPANY CALIFORNIA, USA
VALLEY NATIONAL INSURANCE COMPANY KANSAS, USA
VALLEY PROPERTY & CASUALTY INSURANCE COMPANY OREGON, USA
WHITE MOUNTAINS HOLDINGS, INC. DELAWARE, USA
WHITE MOUNTAINS INSURANCE COMPANY NEW HAMPSHIRE, USA
</TABLE>
<PAGE>
Exhibit 23(a)
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Fund American Enterprises Holdings, Inc.:
We consent to the incorporation by reference in the registration statements, as
amended, No. 33-5287 on Form S-8 pertaining to the Long-Term Incentive Plan, No.
33-54006 on Form S-3 pertaining to the Medium-Term Notes Series A, No. 33-54749
on Form S-3 pertaining to Common Stock Warrants, No. 333-30233 on Form S-8
pertaining to Valley Group Employees' 401(k) Savings Plan, No. 333-13027 on Form
S-8 pertaining to the Source One Mortgage Services Corporation Employee Stock
Ownership and 401(k) Plan of our report dated February 12, 1999, except for note
20, which is as of March 25, 1999, with respect to the consolidated balance
sheets of Fund American Enterprises Holdings, Inc. and subsidiaries as of
December 31, 1998 and 1997, and the related consolidated income statements and
consolidated statements of shareholders' equity and cash flows and the related
schedules for the years ended December 31, 1998 and 1997, which report appears
in the December 31, 1998 annual report on form 10-K of Fund American Enterprises
Holdings, Inc.
/s/ KPMG LLP
Providence, Rhode Island
March 26, 1999
<PAGE>
EXHIBIT 23(b)
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration
Statements, as amended, pertaining to the Long-Term Incentive Plan (Form S-8,
No. 33-5297), Medium-Term Notes Series A (Form S-3, No. 33-54006) and Common
Stock Warrants (Form S-3, No. 33-54749) of Fund American Enterprises Holdings,
Inc. and to the Source One Mortgage Services Corporation Employee Stock
Ownership and 401(K) Plan (Form S-8, No. 333-13027) of our report dated March
21, 1997, with respect to the consolidated financial statements and schedules of
Fund American Enterprises Holdings, Inc. included in the Annual Report (Form
10-K) for the year ended December 31, 1996.
/s/ Ernst & Young LLP
New York, New York
March 25, 1999
<PAGE>
EXHIBIT 23(c)
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statements, as
amended, pertaining to Long-Term Incentive Plan (Form S-8, No. 33-5297),
Medium-Term Notes Series A (Form S-3, No. 33-54006), Common Stock Warrants (Form
S-3, No. 33-54749) and the Valley Group Employees' 401(K) Savings Plan (Form
S-8, No. 333- 30233) of Fund American Enterprises Holdings, Inc. and to the
Source One Mortgage Services Corporation Employee Stock Ownership and 401(K)
Plan (Form S-8, No. 333-13027) of our report dated January 26, 1999 with respect
to the consolidated financial statements of Financial Security Assurance
Holdings, Ltd. and Subsidiaries as of December 31, 1998 and 1997 and for each of
the three years in the period ended December 31, 1998, our report dated February
2, 1999, except for Note 17 as to which the date is February 24, 1999, with
respect to the consolidated financial statements of Folksamerica Holding
Company, Inc. and its subsidiaries as of and for the year ended December 31,
1998 and our report dated February 14, 1997 with respect to the consolidated
statements of operations, changes in stockholder's equity and cash flows of
Valley Group Inc. and Subsidiaries for the year ended December 31, 1996.
PricewaterhouseCoopers LLP
New York, New York
March 25, 1999
<PAGE>
Exhibit 24
FUND AMERICAN ENTERPRISES HOLDINGS, INC.
POWER OF ATTORNEY
KNOW ALL MEN by these presents, that John J. Byrne does hereby make, constitute
and appoint K. Thomas Kemp the true and lawful attorney-in-fact of the
undersigned, with full power of substitution and revocation, for and in the
name, place and stead of the undersigned, to execute and deliver the Annual
Report on Form 10-K, and any and all amendments thereto; such Form 10-K and each
such amendment to be in such form and to contain such terms and provisions as
said attorney or substitute shall deem necessary or desirable; giving and
granting unto said attorney, or to such person or persons as in any case may be
appointed pursuant to the power of substitution herein given, full power and
authority to do and perform any and every act and thing whatsoever requisite,
necessary or, in the opinion of said attorney or substitute, able to be done in
and about the premises as fully and to all intents and purposes as the
undersigned might or could do if personally present, hereby ratifying and
confirming all that said attorney or such substitute shall lawfully do or cause
to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has duly executed these presents this 23rd
day February 1999.
/s/ Raymond Barrette
<PAGE>
FUND AMERICAN ENTERPRISES HOLDINGS, INC.
POWER OF ATTORNEY
KNOW ALL MEN by these presents, that John J. Byrne does hereby make, constitute
and appoint K. Thomas Kemp the true and lawful attorney-in-fact of the
undersigned, with full power of substitution and revocation, for and in the
name, place and stead of the undersigned, to execute and deliver the Annual
Report on Form 10-K, and any and all amendments thereto; such Form 10-K and each
such amendment to be in such form and to contain such terms and provisions as
said attorney or substitute shall deem necessary or desirable; giving and
granting unto said attorney, or to such person or persons as in any case may be
appointed pursuant to the power of substitution herein given, full power and
authority to do and perform any and every act and thing whatsoever requisite,
necessary or, in the opinion of said attorney or substitute, able to be done in
and about the premises as fully and to all intents and purposes as the
undersigned might or could do if personally present, hereby ratifying and
confirming all that said attorney or such substitute shall lawfully do or cause
to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has duly executed these presents this 23rd
day February 1999.
/s/ John J. Byrne
<PAGE>
FUND AMERICAN ENTERPRISES HOLDINGS, INC.
POWER OF ATTORNEY
KNOW ALL MEN by these presents, that Howard L. Clark does hereby make,
constitute and appoint K. Thomas Kemp the true and lawful attorney-in-fact of
the undersigned, with full power of substitution and revocation, for and in the
name, place and stead of the undersigned, to execute and deliver the Annual
Report on Form 10-K, and any and all amendments thereto; such Form 10-K and each
such amendment to be in such form and to contain such terms and provisions as
said attorney or substitute shall deem necessary or desirable; giving and
granting unto said attorney, or to such person or persons as in any case may be
appointed pursuant to the power of substitution herein given, full power and
authority to do and perform any and every act and thing whatsoever requisite,
necessary or, in the opinion of said attorney or substitute, able to be done in
and about the premises as fully and to all intents and purposes as the
undersigned might or could do if personally present, hereby ratifying and
confirming all that said attorney or such substitute shall lawfully do or cause
to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has duly executed these presents this 23rd
day February 1999.
/s/ Patrick M. Byrne
<PAGE>
FUND AMERICAN ENTERPRISES HOLDINGS, INC.
POWER OF ATTORNEY
KNOW ALL MEN by these presents, that Howard L. Clark, Jr. does hereby make,
constitute and appoint K. Thomas Kemp the true and lawful attorney-in-fact of
the undersigned, with full power of substitution and revocation, for and in the
name, place and stead of the undersigned, to execute and deliver the Annual
Report on Form 10-K, and any and all amendments thereto; such Form 10-K and each
such amendment to be in such form and to contain such terms and provisions as
said attorney or substitute shall deem necessary or desirable; giving and
granting unto said attorney, or to such person or persons as in any case may be
appointed pursuant to the power of substitution herein given, full power and
authority to do and perform any and every act and thing whatsoever requisite,
necessary or, in the opinion of said attorney or substitute, able to be done in
and about the premises as fully and to all intents and purposes as the
undersigned might or could do if personally present, hereby ratifying and
confirming all that said attorney or such substitute shall lawfully do or cause
to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has duly executed these presents this 23rd
day February 1999.
/s/ Howard L. Clark, Jr.
<PAGE>
FUND AMERICAN ENTERPRISES HOLDINGS, INC.
POWER OF ATTORNEY
KNOW ALL MEN by these presents, that Robert P. Cochran does hereby make,
constitute and appoint K. Thomas Kemp the true and lawful attorney-in-fact of
the undersigned, with full power of substitution and revocation, for and in the
name, place and stead of the undersigned, to execute and deliver the Annual
Report on Form 10-K, and any and all amendments thereto; such Form 10-K and each
such amendment to be in such form and to contain such terms and provisions as
said attorney or substitute shall deem necessary or desirable; giving and
granting unto said attorney, or to such person or persons as in any case may be
appointed pursuant to the power of substitution herein given, full power and
authority to do and perform any and every act and thing whatsoever requisite,
necessary or, in the opinion of said attorney or substitute, able to be done in
and about the premises as fully and to all intents and purposes as the
undersigned might or could do if personally present, hereby ratifying and
confirming all that said attorney or such substitute shall lawfully do or cause
to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has duly executed these presents this 23rd
day February 1999.
/s/ Robert P. Cochran
<PAGE>
FUND AMERICAN ENTERPRISES HOLDINGS, INC.
POWER OF ATTORNEY
KNOW ALL MEN by these presents, that George J. Gillespie III does hereby make,
constitute and appoint K. Thomas Kemp the true and lawful attorney-in-fact of
the undersigned, with full power of substitution and revocation, for and in the
name, place and stead of the undersigned, to execute and deliver the Annual
Report on Form 10-K, and any and all amendments thereto; such Form 10-K and each
such amendment to be in such form and to contain such terms and provisions as
said attorney or substitute shall deem necessary or desirable; giving and
granting unto said attorney, or to such person or persons as in any case may be
appointed pursuant to the power of substitution herein given, full power and
authority to do and perform any and every act and thing whatsoever requisite,
necessary or, in the opinion of said attorney or substitute, able to be done in
and about the premises as fully and to all intents and purposes as the
undersigned might or could do if personally present, hereby ratifying and
confirming all that said attorney or such substitute shall lawfully do or cause
to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has duly executed these presents this 23rd
day February 1999.
/s/ George J. Gillespie III
<PAGE>
FUND AMERICAN ENTERPRISES HOLDINGS, INC.
POWER OF ATTORNEY
KNOW ALL MEN by these presents, that Gordon S. Macklin does hereby make,
constitute and appoint K. Thomas Kemp the true and lawful attorney-in-fact of
the undersigned, with full power of substitution and revocation, for and in the
name, place and stead of the undersigned, to execute and deliver the Annual
Report on Form 10-K, and any and all amendments thereto; such Form 10-K and each
such amendment to be in such form and to contain such terms and provisions as
said attorney or substitute shall deem necessary or desirable; giving and
granting unto said attorney, or to such person or persons as in any case may be
appointed pursuant to the power of substitution herein given, full power and
authority to do and perform any and every act and thing whatsoever requisite,
necessary or, in the opinion of said attorney or substitute, able to be done in
and about the premises as fully and to all intents and purposes as the
undersigned might or could do if personally present, hereby ratifying and
confirming all that said attorney or such substitute shall lawfully do or cause
to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has duly executed these presents this 23rd
day February 1999.
/s/ Gordon S. Macklin
<PAGE>
FUND AMERICAN ENTERPRISES HOLDINGS, INC.
POWER OF ATTORNEY
KNOW ALL MEN by these presents, that Frank A. Olson does hereby make, constitute
and appoint K. Thomas Kemp the true and lawful attorney-in-fact of the
undersigned, with full power of substitution and revocation, for and in the
name, place and stead of the undersigned, to execute and deliver the Annual
Report on Form 10-K, and any and all amendments thereto; such Form 10-K and each
such amendment to be in such form and to contain such terms and provisions as
said attorney or substitute shall deem necessary or desirable; giving and
granting unto said attorney, or to such person or persons as in any case may be
appointed pursuant to the power of substitution herein given, full power and
authority to do and perform any and every act and thing whatsoever requisite,
necessary or, in the opinion of said attorney or substitute, able to be done in
and about the premises as fully and to all intents and purposes as the
undersigned might or could do if personally present, hereby ratifying and
confirming all that said attorney or such substitute shall lawfully do or cause
to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has duly executed these presents this 23rd
day February 1999.
/s/ Frank A. Olson
<PAGE>
FUND AMERICAN ENTERPRISES HOLDINGS, INC.
POWER OF ATTORNEY
KNOW ALL MEN by these presents, that Michael S. Paquette does hereby make,
constitute and appoint K. Thomas Kemp the true and lawful attorney-in-fact of
the undersigned, with full power of substitution and revocation, for and in the
name, place and stead of the undersigned, to execute and deliver the Annual
Report on Form 10-K, and any and all amendments thereto; such Form 10-K and each
such amendment to be in such form and to contain such terms and provisions as
said attorney or substitute shall deem necessary or desirable; giving and
granting unto said attorney, or to such person or persons as in any case may be
appointed pursuant to the power of substitution herein given, full power and
authority to do and perform any and every act and thing whatsoever requisite,
necessary or, in the opinion of said attorney or substitute, able to be done in
and about the premises as fully and to all intents and purposes as the
undersigned might or could do if personally present, hereby ratifying and
confirming all that said attorney or such substitute shall lawfully do or cause
to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has duly executed these presents this 23rd
day February 1999.
/s/ Michael S. Paquette
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<DEBT-HELD-FOR-SALE> 930
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 339
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 1,347
<CASH> 22
<RECOVER-REINSURE> 137
<DEFERRED-ACQUISITION> 35
<TOTAL-ASSETS> 3,281
<POLICY-LOSSES> 812
<UNEARNED-PREMIUMS> 153
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 1,108
0
44
<COMMON> 577
<OTHER-SE> 125
<TOTAL-LIABILITY-AND-EQUITY> 3,281
246
<INVESTMENT-INCOME> 118
<INVESTMENT-GAINS> 71
<OTHER-INCOME> 214
<BENEFITS> 175
<UNDERWRITING-AMORTIZATION> 55
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 130
<INCOME-TAX> 48
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 82
<EPS-PRIMARY> 13.38
<EPS-DILUTED> 11.94
<RESERVE-OPEN> 798
<PROVISION-CURRENT> 172
<PROVISION-PRIOR> 8
<PAYMENTS-CURRENT> 78
<PAYMENTS-PRIOR> 88
<RESERVE-CLOSE> 812
<CUMULATIVE-DEFICIENCY> (17)
</TABLE>
<PAGE>
EXHIBIT 99(a)
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Folksamerica Holding Company, Inc.:
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, stockholders' equity and cash flows
present fairly, in all material respects, the financial position of Folksamerica
Holding Company, Inc. and its subsidiaries at December 31, 1998, and the results
of their operations and their cash flows for the year then ended, in conformity
with generally accepted accounting principles. These financial statements are
the responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audit. We conducted our
audit of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
New York, New York
February 2, 1999
except for Note 17 as to which
the date is February 24, 1999
<PAGE>
FINANCIAL SECURITY ASSURANCE INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
CONTENTS
<TABLE>
<CAPTION>
PAGE
-------------
<S> <C>
A. 1998 YEAR END FINANCIAL STATEMENTS
Report of Independent Accountants.............................................................. F-2
Consolidated Balance Sheets as of December 31, 1998 and 1997................................... F-3
Consolidated Statements of Income for the Years Ended December 31, 1998, 1997 and 1996......... F-4
Consolidated Statements of Changes in Shareholder's Equity for the Years Ended December 31,
1998, 1997 and 1996.......................................................................... F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and 1996..... F-6-F-7
Notes to Consolidated Financial Statements for the Years Ended December 31, 1998, 1997 and
1996......................................................................................... F-8-F-27
</TABLE>
The New York State Insurance Department recognizes only statutory accounting
practices for determining and reporting the financial condition and results of
operations of an insurance company, for determining its solvency under the New
York Insurance Law, and for determining whether its financial condition warrants
the payment of a dividend to its stockholders. No consideration is given by the
New York State Insurance Department to financial statements prepared in
accordance with generally accepted accounting principles in making such
determinations.
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholder and Board of Directors
of Financial Security Assurance Inc.:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, changes in shareholder's equity, and cash
flows present fairly, in all material respects, the financial position of
Financial Security Assurance Inc. and Subsidiaries (the Company) at December 31,
1998 and 1997, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
New York, New York
January 26, 1999
F-2
<PAGE>
FINANCIAL SECURITY ASSURANCE INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
Bonds at market value (amortized cost of $1,631,094 and $1,192,771).................. $1,683,928 $1,235,441
Equity investments at market value (cost of $34,250 and $20,405)..................... 37,268 20,762
Short-term investments............................................................... 92,241 103,926
------------ ------------
Total investments................................................................ 1,813,437 1,360,129
Cash................................................................................. 2,729 11,235
Deferred acquisition costs........................................................... 199,559 171,098
Prepaid reinsurance premiums......................................................... 217,096 173,123
Reinsurance recoverable on unpaid losses............................................. 3,907 30,618
Receivable for securities sold....................................................... 1,656 20,535
Other assets......................................................................... 105,379 72,901
------------ ------------
TOTAL ASSETS................................................................... $2,343,763 $1,839,639
------------ ------------
------------ ------------
LIABILITIES AND MINORITY INTEREST AND SHAREHOLDER'S EQUITY
Deferred premium revenue............................................................. $ 721,699 $ 595,196
Losses and loss adjustment expenses.................................................. 63,947 75,417
Deferred federal income taxes........................................................ 56,672 59,867
Ceded reinsurance balances payable................................................... 31,502 11,199
Payable for securities purchased..................................................... 105,749 72,979
Long-term debt....................................................................... 120,000 50,000
Minority interest.................................................................... 20,388
Accrued expenses and other liabilities............................................... 119,215 77,121
------------ ------------
TOTAL LIABILITIES AND MINORITY INTEREST........................................ 1,239,172 941,779
------------ ------------
COMMITMENTS AND CONTINGENCIES
Common stock (500 and 528 shares authorized, issued and outstanding; par value of
$30,000 and $28,391 per share)..................................................... 15,000 15,000
Additional paid-in capital........................................................... 694,788 617,870
Accumulated other comprehensive income (net of deferred income tax provision of
$19,904 and $15,059)............................................................... 36,964 27,968
Accumulated earnings................................................................. 357,839 237,022
------------ ------------
TOTAL SHAREHOLDER'S EQUITY..................................................... 1,104,591 897,860
------------ ------------
TOTAL LIABILITIES AND MINORITY INTEREST AND SHAREHOLDER'S EQUITY............... $2,343,763 $1,839,639
------------ ------------
------------ ------------
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
F-3
<PAGE>
FINANCIAL SECURITY ASSURANCE INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
<S> <C> <C> <C>
1998 1997 1996
---------- ---------- ----------
REVENUES:
Net premiums written....................................................... $ 219,853 $ 172,878 $ 121,000
Increase in deferred premium revenue....................................... (81,926) (63,367) (30,552)
---------- ---------- ----------
Premiums earned............................................................ 137,927 109,511 90,448
Net investment income...................................................... 76,023 69,643 62,728
Net realized gains......................................................... 21,667 6,023 1,851
Other income............................................................... 381 10,774 502
---------- ---------- ----------
TOTAL REVENUES......................................................... 235,998 195,951 155,529
---------- ---------- ----------
EXPENSES:
Losses and loss adjustment expenses........................................ 3,949 9,156 6,874
Policy acquisition costs................................................... 35,439 27,962 23,829
Other operating expenses................................................... 28,502 20,717 14,852
---------- ---------- ----------
TOTAL EXPENSES......................................................... 67,890 57,835 45,555
---------- ---------- ----------
Minority interest............................................................ (388)
----------
INCOME BEFORE INCOME TAXES................................................... 167,720 138,116 109,974
---------- ---------- ----------
Provision (benefit) for income taxes:
Current.................................................................... 54,942 29,832 28,208
Deferred................................................................... (8,039) 8,025 911
---------- ---------- ----------
Total provision............................................................ 46,903 37,857 29,119
---------- ---------- ----------
NET INCOME............................................................... 120,817 100,259 80,855
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during period (net of deferred
income tax provision (benefit) of $12,428, $12,268 and $(5,057))....... 23,080 22,784 (9,392)
Less: reclassification adjustment for gains included in net income (net
of deferred income tax provision of $7,583, $2,108
and $648).............................................................. (14,084) (3,915) (1,203)
---------- ---------- ----------
Other comprehensive income (loss)........................................ 8,996 18,869 (10,595)
---------- ---------- ----------
COMPREHENSIVE INCOME....................................................... $ 129,813 $ 119,128 $ 70,260
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
F-4
<PAGE>
FINANCIAL SECURITY ASSURANCE INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
UNREALIZED
ADDITIONAL GAIN (LOSS)
COMMON PAID-IN ON RETAINED
STOCK CAPITAL INVESTMENTS EARNINGS TOTAL
--------- ---------- ------------- ---------- ------------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1995....................... $ 15,000 $ 681,470 $ 19,694 $ 73,822 $ 789,986
Net income....................................... 80,855 80,855
Dividends paid on common stock................... (18,000) (18,000)
Net change in accumulated comprehensive income
(net of deferred income tax benefit of
$5,705)........................................ (10,595) (10,595)
Stock repurchase................................. (27,000) (27,000)
Adjustment to prior-year disposal of
subsidiary..................................... 86 86
--------- ---------- ------------- ---------- ------------
BALANCE, December 31, 1996....................... 15,000 654,470 9,099 136,763 815,332
Net income....................................... 100,259 100,259
Net change in accumulated comprehensive income
(net of deferred income taxes of $10,160)...... 18,869 18,869
Stock repurchase................................. (39,500) (39,500)
Deferred equity payout by Parent................. 2,900 2,900
--------- ---------- ------------- ---------- ------------
BALANCE, December 31, 1997....................... 15,000 617,870 27,968 237,022 897,860
Net income....................................... 120,817 120,817
Net change in accumulated comprehensive income
(net of deferred income taxes
of $4,844)..................................... 8,996 8,996
Stock repurchase................................. (8,500) (8,500)
Capital contribution from Parent................. 80,000 80,000
Deferred equity payout by Parent................. 5,418 5,418
--------- ---------- ------------- ---------- ------------
BALANCE, December 31, 1998....................... $ 15,000 $ 694,788 $ 36,964 $ 357,839 $ 1,104,591
--------- ---------- ------------- ---------- ------------
--------- ---------- ------------- ---------- ------------
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
F-5
<PAGE>
FINANCIAL SECURITY ASSURANCE INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Premiums received, net................................................. $ 247,229 $ 171,145 $ 124,540
Policy acquisition and other operating expenses paid, net.............. (81,559) (50,046) (49,261)
Recoverable advances received (paid)................................... 1,473 (7,629) 10,213
Losses and loss adjustment expenses recovered (paid)................... 10,989 (6,463) (15,473)
Net investment income received......................................... 67,268 63,207 59,923
Federal income taxes paid.............................................. (52,210) (27,080) (33,297)
Interest paid.......................................................... (22)
Other.................................................................. (877) 2,142 1,330
----------- ----------- -----------
Net cash provided by operating activities............................ 192,313 145,276 97,953
----------- ----------- -----------
Cash flows from investing activities:
Proceeds from sales of bonds........................................... 1,735,585 1,071,845 1,095,929
Proceeds from sales of equity investments.............................. 22,571 3,568
Proceeds from maturities of bonds...................................... 32,468 2,965
Purchases of bonds..................................................... (2,098,264) (1,196,117) (1,139,129)
Purchases of equity investments........................................ (37,034) (24,662)
Gain on sale of subidiaries............................................ 9,486
Purchases of property and equipment.................................... (1,071) (2,985) (2,081)
Net decrease (increase) in short-term investments...................... 15,857 (45,661) (3,675)
Other investments...................................................... 20,037
----------- ----------- -----------
Net cash provided by (used for) investing activities................. (342,319) (152,058) (45,991)
----------- ----------- -----------
Cash flows from financing activities:
Stock repurchase....................................................... (8,500) (39,500) (27,000)
Surplus notes issued................................................... 70,000 50,000
Capital contribution................................................... 80,000
Dividends paid......................................................... (18,000)
----------- ----------- -----------
Net cash provided by (used for) financing activities................. 141,500 10,500 (45,000)
----------- ----------- -----------
Net increase (decrease) in cash.......................................... (8,506) 3,718 6,962
Cash at beginning of year................................................ 11,235 7,517 555
----------- ----------- -----------
Cash at end of year...................................................... $ 2,729 $ 11,235 $ 7,517
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
F-6
<PAGE>
FINANCIAL SECURITY ASSURANCE INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Reconciliation of net income to net cash flows from operating activities:
Net income............................................................... $ 120,817 $ 100,259 $ 80,855
Increase in accrued investment income.................................. (3,939) (1,811) (842)
Increase in deferred premium revenue and related foreign exchange
adjustment........................................................... 82,530 62,101 29,622
Increase in deferred acquisition costs................................. (28,461) (24,865) (13,282)
Increase (decrease) in current federal income taxes payable............ 2,732 (519) (5,090)
Increase (decrease) in unpaid losses and loss adjustment expenses...... 15,240 2,596 (8,023)
Increase in amounts withheld for others................................ 81 133 52
Provision (benefit) for deferred income taxes.......................... (8,039) 11,296 911
Net realized gains on investments...................................... (21,667) (6,023) (1,851)
Depreciation and accretion of bond discount............................ (3,540) (1,736) (1,616)
Gain on sale of subsidiaries........................................... (9,486)
Minority interest...................................................... 388
Change in other assets and liabilities................................. 36,171 13,331 17,217
----------- ----------- -----------
Cash provided by operating activities.................................... $ 192,313 $ 145,276 $ 97,953
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
F-7
<PAGE>
FINANCIAL SECURITY ASSURANCE INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1. ORGANIZATION AND OWNERSHIP
Financial Security Assurance Inc. (the Company), an indirect wholly owned
subsidiary of Financial Security Assurance Holdings Ltd. (the Parent), is an
insurance company domiciled in the State of New York. The Company is engaged in
providing financial guaranty insurance on asset-backed and municipal
obligations. The Company's underwriting policy is to insure asset-backed and
municipal obligations that it determines would be of investment-grade quality
without the benefit of the Company's insurance. The asset-backed obligations
insured by the Company are generally issued in structured transactions and are
backed by pools of assets such as residential mortgage loans, consumer or trade
receivables, securities or other assets having an ascertainable cash flow or
market value. The municipal obligations insured by the Company consist primarily
of general obligation bonds that are supported by the issuers' taxing power and
special revenue bonds and other special obligations of states and local
governments that are supported by the issuers' ability to impose and collect
fees and charges for public services or specific projects. Financial guaranty
insurance written by the Company guarantees scheduled payments on an issuer's
obligation. In the case of a payment default on an insured obligation, the
Company is generally required to pay the principal, interest or other amounts
due in accordance with the obligation's original payment schedule or, at its
option, to pay such amounts on an accelerated basis.
The Company expects to continue to emphasize a diversified insured portfolio
characterized by insurance of both asset-backed and municipal obligations, with
a broad geographic distribution and a variety of revenue sources and transaction
structures. The Company's insured portfolio consists primarily of asset-backed
and municipal obligations originated in the United States, but the Company has
also written and continues to pursue business in Europe and the Asia Pacific
region.
At December 31, 1996, the Parent was owned 40.4% by U S WEST Capital
Corporation (U S WEST), 11.5% by Fund American Enterprises Holdings, Inc. (Fund
American), 6.4% by The Tokio Marine and Fire Insurance Co., Ltd. (Tokio Marine)
and 41.7% by the public and employees. At December 31, 1997, the Parent was
owned 42.1% by U S WEST, 12.0% by Fund American, 6.7% by Tokio Marine and 39.2%
by the public and employees. At December 31, 1998, the Parent was owned 40.5% by
MediaOne Capital Corporation (MediaOne), formerly U S WEST, 11.6% by Fund
American, 6.4% by Tokio Marine, 5.5% by XL Capital Ltd (XL) and 36.0% by the
public and employees.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying financial statements have been prepared in accordance with
generally accepted accounting principles (GAAP), which differ in certain
material respects from the accounting practices prescribed or permitted by
insurance regulatory authorities (see Note 5). The preparation of financial
statements in conformity with GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities in the Company's consolidated
balance sheets at December 31, 1998 and 1997 and the reported amounts of
revenues and expenses in the consolidated statements of income during the years
ended December 31, 1998, 1997 and 1996. Such estimates and assumptions include,
but are not limited to, losses and loss
F-8
<PAGE>
FINANCIAL SECURITY ASSURANCE INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
adjustment expenses and the deferral and amortization of deferred policy
acquisition costs. Actual results may differ from those estimates. Significant
accounting policies under GAAP are as follows:
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company
and its direct and indirect subsidiaries, FSA Insurance Company, Financial
Security Assurance International Ltd., Financial Security Assurance of Oklahoma,
Inc. and Financial Security Assurance (U.K.) Limited (collectively, the
Subsidiaries). All intercompany accounts and transactions have been eliminated.
Certain prior-year balances have been reclassified to conform to the 1998
presentation.
INVESTMENTS
Investments in debt securities designated as available for sale are carried
at market value. Equity investments are carried at market value. Any resulting
unrealized gain or loss is reflected as a separate component of shareholders'
equity, net of applicable deferred income taxes. All of the Company's long-term
investments are classified as available for sale.
Bond discounts and premiums are amortized on the effective yield method over
the remaining terms of the securities acquired. For mortgage-backed securities,
and any other holdings for which prepayment risk may be significant, assumptions
regarding prepayments are evaluated periodically and revised as necessary. Any
adjustments required due to the resulting change in effective yields are
recognized in current income. Short-term investments, which are those
investments with a maturity of less than one year at time of purchase, are
carried at market value, which approximates cost. Realized gains or losses on
sale of investments are determined on the basis of specific identification.
Investment income is recorded as earned.
The Company holds derivative securities, including U.S. Treasury bond
futures contracts and call option contracts, that are not accounted for as
hedges and are marked-to-market on a daily basis. Any gains or losses are
included in capital gains or losses.
PREMIUM REVENUE RECOGNITION
Gross and ceded premiums are earned in proportion to the amount of risk
outstanding over the expected period of coverage. Deferred premium revenue and
prepaid reinsurance premiums represent the portion of premium that is applicable
to coverage of risk to be provided in the future on policies in force. When an
insured issue is retired or defeased prior to the end of the expected period of
coverage, the remaining deferred premium revenue and prepaid reinsurance
premium, less any amount credited to a refunding issue insured by the Company,
are recognized.
LOSSES AND LOSS ADJUSTMENT EXPENSES
A case basis reserve for unpaid losses and loss adjustment expenses is
recorded at the present value of the estimated loss when, in management's
opinion, the likelihood of a future loss is probable and determinable at the
balance sheet date. The estimated loss on a transaction is discounted using
current risk-free rates.
F-9
<PAGE>
FINANCIAL SECURITY ASSURANCE INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The general reserve is calculated by applying a loss factor to the total net
par amount outstanding of the Company's insured obligations over the term of
such insured obligations and discounting the result at risk-free rates. The loss
factor used for this purpose has been determined based upon an independent
rating agency study of bond defaults and the Company's portfolio characteristics
and history. The general reserve is available to be applied against future
additions or accretions to existing case basis reserves or to new case basis
reserves to be established in the future.
Management of the Company periodically evaluates its estimates for losses
and loss adjustment expenses and establishes reserves that management believes
are adequate to cover the present value of the ultimate net cost of claims. The
reserves are necessarily based on estimates, and there can be no assurance that
the ultimate liability will not differ from such estimates. The Company will, on
an ongoing basis, monitor these reserves and may periodically adjust such
reserves based on the Company's actual loss experience, its future mix of
business, and future economic conditions.
DEFERRED ACQUISITION COSTS
Deferred acquisition costs comprise those expenses that vary with and are
primarily related to the production of business, including commissions paid on
reinsurance assumed, compensation and related costs of underwriting and
marketing personnel, certain rating agency fees, premium taxes and certain other
underwriting expenses, reduced by ceding commission income on premiums ceded to
reinsurers. Deferred acquisition costs and the cost of acquired business are
amortized over the period in which the related premiums are earned.
Recoverability of deferred acquisition costs is determined by considering
anticipated losses and loss adjustment expenses.
FEDERAL INCOME TAXES
The provision for income taxes consists of an amount for taxes currently
payable and a provision for tax consequences deferred to future periods
reflected at current income tax rates.
SEGMENT REPORTING
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 131, Disclosure about Segments of an
Enterprise and Related Information, establishing standards for the way that
public business enterprises report information about operating segments in
annual and interim financial statements and requiring presentation of a measure
of profit or loss, certain specific revenue and expense items and segment
assets. The Company has no reportable operating segments as a monoline financial
guaranty insurer.
3. INVESTMENTS
Bonds at amortized cost of $11,481,000 and $11,025,000 at December 31, 1998
and 1997, respectively, were on deposit with state regulatory authorities as
required by insurance regulations.
F-10
<PAGE>
FINANCIAL SECURITY ASSURANCE INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
3. INVESTMENTS (CONTINUED)
Consolidated net investment income consisted of the following (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Bonds........................................................ $ 69,216 $ 65,149 $ 61,130
Equity investments........................................... 830 376 14
Short-term investments....................................... 7,376 5,452 3,525
Investment expenses.......................................... (1,399) (1,334) (1,941)
--------- --------- ---------
Net investment income........................................ $ 76,023 $ 69,643 $ 62,728
--------- --------- ---------
--------- --------- ---------
</TABLE>
The credit quality of the fixed-income investment portfolio at December 31,
1998 was as follows:
<TABLE>
<CAPTION>
PERCENT OF FIXED-INCOME
RATING INVESTMENT PORTFOLIO
- --------- -------------------------
<S> <C>
AAA 68.7%
AA 21.3
A 9.3
BBB 0.4
Other 0.3
</TABLE>
The amortized cost and estimated market value of bonds were as follows (in
thousands):
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
------------ ----------- ----------- ------------
<S> <C> <C> <C> <C>
DECEMBER 31, 1998
- -----------------------------------------
U.S. Treasury securities and obligations
of U.S. government corporations and
agencies............................... $ 134,910 $ 2,297 $ (337) $ 136,870
Obligations of states and political
subdivisions........................... 1,041,718 42,265 (637) 1,083,346
Mortgage-backed securities............... 261,322 3,911 (180) 265,053
Corporate securities..................... 162,663 5,510 (463) 167,710
Asset-backed securities.................. 30,481 493 (25) 30,949
------------ ----------- ----------- ------------
Total................................ $ 1,631,094 $ 54,476 $ (1,642) $ 1,683,928
------------ ----------- ----------- ------------
------------ ----------- ----------- ------------
</TABLE>
F-11
<PAGE>
FINANCIAL SECURITY ASSURANCE INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
3. INVESTMENTS (CONTINUED)
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
------------ ----------- ----------- ------------
<S> <C> <C> <C> <C>
DECEMBER 31, 1997
- -----------------------------------------
U.S. Treasury securities and obligations
of U.S. government corporations and
agencies............................... $ 120,314 $ 800 $ (436) $ 120,678
Obligations of states and political
subdivisions........................... 777,042 40,187 (135) 817,094
Foreign securities....................... 8,252 (562) 7,690
Mortgage-backed securities............... 195,567 2,213 (28) 197,752
Corporate securities..................... 72,388 1,375 (1,093) 72,670
Asset-backed securities.................. 19,208 349 19,557
------------ ----------- ----------- ------------
Total................................ $ 1,192,771 $ 44,924 $ (2,254) $ 1,235,441
------------ ----------- ----------- ------------
------------ ----------- ----------- ------------
</TABLE>
The change in net unrealized gains (losses) consisted of (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
<S> <C> <C> <C>
1998 1997 1996
--------- --------- ----------
Bonds....................................................... $ 10,164 $ 28,671 $ (16,299)
Equity investments.......................................... 2,661 357
Other....................................................... 1,017
--------- --------- ----------
Change in net unrealized gains (losses)................. $ 13,842 $ 29,028 $ (16,299)
--------- --------- ----------
--------- --------- ----------
</TABLE>
The amortized cost and estimated market value of bonds at December 31, 1998,
by contractual maturity, are shown below (in thousands). Actual maturities could
differ from contractual maturities because borrowers have the right to call or
prepay certain obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED MARKET
COST VALUE
------------ ------------
<S> <C> <C>
Due in one year or less........................................... $ 1,002 $ 1,006
Due after one year through five years............................. 135,398 137,917
Due after five years through ten years............................ 211,500 219,185
Due after ten years............................................... 991,391 1,029,818
Mortgage-backed securities (stated maturities of
1 to 30 years).................................................. 261,322 265,053
Asset-backed securities (stated maturities of 3 to 30 years)...... 30,481 30,949
------------ ------------
Total......................................................... $ 1,631,094 $ 1,683,928
------------ ------------
------------ ------------
</TABLE>
F-12
<PAGE>
FINANCIAL SECURITY ASSURANCE INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
3. INVESTMENTS (CONTINUED)
Proceeds from sales of bonds during 1998, 1997 and 1996 were $2,132,146,000,
$1,124,848,000 and $1,096,568,000, respectively. Gross gains of $26,373,000,
$11,702,000 and $13,420,000 and gross losses of $4,156,000, $6,007,000 and
$11,569,000 were realized on sales in 1998, 1997 and 1996, respectively.
Proceeds from sales of equity investments during 1998 and 1997 were
$22,571,000 and $3,568,000, respectively. Gross gains of $973,000 and $33,000
and gross losses of $1,323,000 and $7,000 were realized on sales in 1998 and
1997, respectively.
4. DEFERRED ACQUISITION COSTS
Acquisition costs deferred for amortization against future income and the
related amortization charged to expenses are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Balance, beginning of period............................. $ 171,098 $ 146,233 $ 132,951
---------- ---------- ----------
Costs deferred during the period:
Ceding commission income............................... (27,693) (18,956) (15,956)
Assumed commission expense............................. 22 31 38
Premium taxes.......................................... 8,081 5,554 3,718
Compensation and other acquisition costs............... 83,490 66,198 49,311
---------- ---------- ----------
Total................................................ 63,900 52,827 37,111
---------- ---------- ----------
Costs amortized during the period........................ (35,439) (27,962) (23,829)
---------- ---------- ----------
Balance, end of period................................... $ 199,559 $ 171,098 $ 146,233
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
5. STATUTORY ACCOUNTING PRACTICES
GAAP for the Company differs in certain significant respects from accounting
practices prescribed or permitted by insurance regulatory authorities. The
principal differences result from the following statutory accounting practices:
- Upfront premiums on municipal business are recognized as earned when
related principal and interest have expired rather than over the expected
coverage period;
- Acquisition costs are charged to operations as incurred rather than as
related premiums are earned;
- A contingency reserve (rather than a general reserve) is computed based on
the following statutory requirements:
(i) For all policies written prior to July 1, 1989, an amount equal to
50% of cumulative earned premiums less permitted reductions, plus;
(ii) For all policies written on or after July 1, 1989, an amount equal
to the greater of 50% of premiums written for each category of insured
obligation or a designated percentage of principal
F-13
<PAGE>
FINANCIAL SECURITY ASSURANCE INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
5. STATUTORY ACCOUNTING PRACTICES (CONTINUED)
guaranteed for that category. These amounts are provided each quarter as
either 1/60th or 1/80th of the total required for each category, less
permitted reductions;
- Certain assets designated as "non-admitted assets" are charged directly to
statutory surplus but are reflected as assets under GAAP;
- Federal income taxes are provided only on taxable income for which income
taxes are currently payable;
- Accruals for deferred compensation are not recognized;
- Purchase accounting adjustments are not recognized;
- Bonds are carried at amortized cost;
- Surplus notes are recognized as surplus rather than a liability.
A reconciliation of net income for the calendar years 1998, 1997 and 1996
and shareholder's equity at December 31, 1998 and 1997, reported by the Company
on a GAAP basis, to the amounts reported by the Subsidiaries on a statutory
basis, is as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
------------ ---------- ---------
<S> <C> <C> <C>
Net Income:
GAAP BASIS............................................... $ 120,817 $ 100,259 $ 80,855
Premium revenue recognition.............................. (16,411) (23,130) (5,518)
Losses and loss adjustment expenses incurred............. 12,938 4,653 (2,138)
Deferred acquisition costs............................... (28,461) (24,865) (12,482)
Deferred income tax provision (benefit).................. (8,039) 8,025 911
Amortization of bonds.................................... 56 566
Accrual of deferred compensation, net.................... 33,268 26,681 12,737
Other.................................................... 100 (61) 1,404
------------ ---------- ---------
STATUTORY BASIS.......................................... $ 114,212 $ 91,618 $ 76,335
------------ ---------- ---------
------------ ---------- ---------
<CAPTION>
DECEMBER 31,
------------------------
1998 1997
------------ ----------
<S> <C> <C> <C>
Shareholder's Equity:
GAAP BASIS............................................... $ 1,104,591 $ 897,860
Premium revenue recognition.............................. (91,297) (74,863)
Loss and loss adjustment expense reserves................ 47,250 34,313
Deferred acquisition costs............................... (199,559) (171,098)
Contingency reserve...................................... (367,454) (287,694)
Unrealized gain on investments, net of tax............... (55,851) (43,027)
Deferred income taxes.................................... 56,672 59,867
Accrual of deferred compensation......................... 70,022 41,451
Surplus notes............................................ 120,000 50,000
Other.................................................... (14,118) (12,841)
------------ ----------
STATUTORY BASIS SURPLUS.................................. $ 670,256 $ 493,968
------------ ----------
SURPLUS PLUS CONTINGENCY RESERVE......................... $ 1,037,710 $ 781,661
------------ ----------
------------ ----------
</TABLE>
F-14
<PAGE>
FINANCIAL SECURITY ASSURANCE INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
6. FEDERAL INCOME TAXES
The Parent, the Company and its Subsidiaries (except Financial Security
Assurance International Ltd.) file a consolidated federal income tax return. The
calculation of each member's tax benefit or liability is controlled by a tax
sharing agreement that bases the allocation of such benefit or liability upon a
separate return calculation.
The cumulative balance sheet effects of deferred tax consequences are (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1997
--------- ---------
<S> <C> <C>
Deferred acquisition costs.............................................. $ 69,079 $ 59,884
Deferred premium revenue adjustments.................................... 10,354 8,424
Unrealized capital gains................................................ 20,749 16,998
Contingency reserves.................................................... 46,260 38,037
--------- ---------
Total deferred tax liabilities...................................... 146,442 123,343
--------- ---------
Loss and loss adjustment expense reserves............................... (16,613) (12,009)
Deferred compensation................................................... (34,020) (20,328)
Tax and loss bonds...................................................... (38,726) (30,520)
Other, net.............................................................. (411) (619)
--------- ---------
Total deferred tax assets........................................... (89,770) (63,476)
--------- ---------
Total deferred income taxes............................................. $ 56,672 $ 59,867
--------- ---------
--------- ---------
</TABLE>
No valuation allowance was necessary at December 31, 1998 or 1997.
A reconciliation of the effective tax rate with the federal statutory rate
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Tax at statutory rate................................................... 35.0% 35.0% 35.0%
Tax-exempt interest..................................................... (8.1) (7.9) (8.9)
Other................................................................... 1.1 0.3 0.4
--- --- ---
Provision for income taxes.............................................. 28.0% 27.4% 26.5%
--- --- ---
--- --- ---
</TABLE>
7. DIVIDENDS AND CAPITAL REQUIREMENTS
Under New York Insurance Law, The Company may pay a dividend without the
prior approval of the Superintendent of the New York State Insurance Department
only from earned surplus subject to the maintenance of a minimum capital
requirement. In addition, the dividend, together with all dividends declared or
distributed by it during the preceding twelve months, may not exceed the lesser
of 10% of its policyholders' surplus shown on its last filed statement, or
adjusted net investment income, as defined, for such twelve-month period. As of
December 31, 1998, the Company had $65,726,000 available for the payment of
dividends over the next twelve months.
F-15
<PAGE>
FINANCIAL SECURITY ASSURANCE INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
7. DIVIDENDS AND CAPITAL REQUIREMENTS (CONTINUED)
In 1998, the Company repurchased $8,500,000 of its shares from the Parent,
representing the balance remaining of $75,000,000 that had been approved for
repurchase by the New York Insurance Department.
8. CREDIT ARRANGEMENTS AND ADDITIONAL CLAIMS-PAYING RESOURCES
The Company has a credit arrangement aggregating $150,000,000 at December
31, 1998, which is provided by commercial banks and intended for general
application to transactions insured by the Company and the Subsidiaries. At
December 31, 1998, there were no borrowings under this arrangement, which
expires on November 23, 1999. In addition, there are credit arrangements
assigned to specific insured transactions. In August 1994, the Company entered
into a facility agreement with Canadian Global Funding Corporation and Hambros
Bank Limited. Under the agreement, which expires in August 2004, the Company can
arrange financing for transactions subject to certain conditions. The amount of
this facility was $186,911,000, of which $44,974,000 was unutilized at December
31, 1998.
The Company has a standby line of credit commitment in the amount of
$240,000,000 with a group of international Aaa/AAA-rated banks to provide loans
to the Company after it has incurred, during the term of the facility,
cumulative municipal losses (net of any recoveries) in excess of the greater of
$230,000,000 or 5.75% of average annual debt service of the covered portfolio.
The obligation to repay loans made under this agreement is a limited recourse
obligation payable solely from, and collateralized by, a pledge of recoveries
realized on defaulted insured obligations in the covered portfolio, including
certain installment premiums and other collateral. This commitment has a term
beginning on April 30, 1997 and expiring on April 30, 2004 and contains an
annual renewal provision subject to approval by the banks. No amounts have been
utilized under this commitment as of December 31, 1998.
At December 31, 1998, the Company has borrowed $120,000,000 from its Parent
in the form of Surplus Notes. These notes carried a simple interest rate of 5.0%
per annum. Principal of and interest on the Surplus Notes may be paid at any
time at the option of the Company, subject to prior approval of the New York
Insurance Department and compliance with the conditions to such payments as
contained in the New York Insurance Laws. These notes have no stated maturity.
The Company did not pay interest in 1998 or 1997.
9. EMPLOYEE BENEFIT PLANS
The Company maintains both a qualified and a non-qualified non-contributory
defined contribution pension plan for the benefit of all eligible employees. The
Company's contributions are based upon a fixed percentage of employee
compensation. Pension expense, which is funded as accrued, amounted to
$2,380,000, $2,312,000 and $1,977,000 for the years ended December 31, 1998,
1997 and 1996, respectively.
The Company has an employee retirement savings plan for the benefit of all
eligible employees. The plan permits employees to contribute a percentage of
their salaries up to limits prescribed by the Internal Revenue Service (IRS
Code, Section 401(k)). The Company's contributions are discretionary, and none
have been made.
Pursuant to the 1993 Equity Participation Plan, 1,810,780 shares of the
Parent's common stock, subject to anti-dilutive adjustment, were reserved for
awards of options, restricted shares of common stock, and performance shares to
employees for the purpose of providing, through the grant of long-term
incentives, a
F-16
<PAGE>
FINANCIAL SECURITY ASSURANCE INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
9. EMPLOYEE BENEFIT PLANS (CONTINUED)
means to attract and retain key personnel and to provide to participating
officers and other key employees long-term incentives for sustained high levels
of performance. Shares available under the 1993 Equity Participation Plan were
increased from 1,810,780 to 2,110,780 in December 1995. The 1993 Equity
Participation Plan also contains provisions that permit the Human Resources
Committee to pay all or a portion of employees' bonuses in the form of shares of
the Parent's common stock credited to the employees at a 15% discount from
current market value and paid to employees five years from the date of award. Up
to an aggregate of 10,000,000 shares may be allocated to such equity bonuses.
Common stock to pay performance shares, stock options and equity bonus awards is
acquired by the Parent through open-market purchases by a trust established for
such purpose.
Performance shares are awarded under the Parent's 1993 Equity Participation
Plan. The Plan authorizes the discretionary grant of performance shares by the
Human Resources Committee to key employees of the Company. The number of shares
of the Parent's common stock earned for each performance share depends upon the
attainment by the Parent of certain growth rates of adjusted book value per
outstanding share over a three-year period. At each payout date, each
performance share is adjusted to pay out from zero up to two common shares. No
common shares are paid out if the compound annual growth rate of the Parent's
adjusted book value per outstanding share was less than 7%. Two common shares
per performance share are paid out if the compound annual growth rate was 19% or
greater. Payout percentages are interpolated for compound annual growth rates
between 7% and 19%.
Performance shares granted under the 1993 Equity Participation Plan were as
follows:
<TABLE>
<CAPTION>
OUTSTANDING GRANTED EARNED FORFEITED OUTSTANDING MARKET
AT BEGINNING DURING DURING DURING AT END PRICE AT
OF YEAR THE YEAR THE YEAR THE YEAR OF YEAR GRANT DATE
------------ --------- --------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
1996.............. 1,109,150 282,490 17,300 1,374,340 $ 25.2500
1997.............. 1,374,340 253,057 201,769 59,253 1,366,375 35.5000
1998.............. 1,366,375 273,656 229,378 26,145 1,384,508 46.0625
</TABLE>
The Company applies APB Opinion 25 and related Interpretations in accounting
for the Parent's performance shares. The Company estimates the final cost of
these performance shares and accrues for this expense over the performance
period. The accrued expense for the performance shares was $39,480,000,
$28,439,000 and $12,737,000 for the years ended December 31, 1998, 1997 and
1996, respectively. In tandem with this accrued expense, the Parent estimates
those performance shares that it expects to settle in stock and records this
amount in shareholders' equity as deferred compensation. The remainder of the
accrual, which represents the amount of performance shares that the Parent
estimates it will settle in cash, is recorded in accrued expenses and other
liabilities. The Company recognized a benefit for the difference between the
market value of the Parent's common stock and the cost of the stock when it was
purchased by the independent trustee (which amount was reimbursed by the Company
to its Parent) for shares distributed under the performance share plan. This
benefit was recorded by the Company as a capital contribution which totaled
$5,418,000 and $2,900,000 in 1998 and 1997, respectively. In 1996, the Parent
adopted disclosure provisions of SFAS No. 123. Had the compensation cost for the
Parent's performance shares been determined based upon the provisions of SFAS
No. 123, there would have been no effect on the Company's reported net income.
F-17
<PAGE>
FINANCIAL SECURITY ASSURANCE INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
9. EMPLOYEE BENEFIT PLANS (CONTINUED)
In November 1994, the Parent appointed an independent trustee authorized to
purchase shares of the Parent's common stock in open market transactions, at
times and prices determined by the trustee. These purchases are intended to fund
future obligations relating to equity bonuses, performance shares and stock
options under the 1993 Equity Participation Plan and other employee benefit
plans and are presented as treasury stock in these financial statements. During
1998, 1997 and 1996, the total number of shares purchased by the trust was
496,940, 162,573 and 529,131, respectively, at a cost of $23,907,000, $5,434,000
and $14,111,000, respectively. In 1996, the Parent also repurchased stock from
its employees in satisfaction of withholding taxes on shares distributed under
its restricted stock plan.
The Company does not currently provide post-retirement benefits, other than
under its defined contribution plans, to its employees, nor does it provide
post-employment benefits to former employees other than under its severance
plans.
10. COMMITMENTS AND CONTINGENCIES
The Company leases office space and equipment under non-cancelable operating
leases, which expire at various dates through 2005.
Future minimum rental payments are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
- -----------------------------------------------------------------------------------
<S> <C>
1999............................................................................... $ 2,489
2000............................................................................... 2,327
2001............................................................................... 2,014
2002............................................................................... 1,739
2003............................................................................... 1,739
Thereafter......................................................................... 3,333
---------
Total.............................................................................. $ 13,641
---------
---------
</TABLE>
Rent expense for the years ended December 31, 1998, 1997 and 1996 was
$4,025,000, $3,708,000 and $3,383,000, respectively.
During the ordinary course of business, the Company and its Subsidiaries
have become parties to certain litigation. Management believes that these
matters will be resolved with no material financial impact on the Company.
F-18
<PAGE>
FINANCIAL SECURITY ASSURANCE INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
11. REINSURANCE
The Company reinsures portions of its risks with affiliated (see Note 13)
and unaffiliated reinsurers under quota share and first-loss treaties and on a
facultative basis. The Company's principal ceded reinsurance program consisted
in 1998 of two quota share treaties, one first-loss treaty and four automatic
facultative facilities. One treaty covered all of the Company's approved regular
lines of business, except U.S. municipal obligation insurance. Under this treaty
in 1998, the Company ceded 6.75% of each covered policy, up to a maximum of
$13,500,000 insured principal per policy. At its sole option, the Company could
have increased, and in certain instances did increase, the ceding percentage to
13.5% up to $27,000,000 of each covered policy. A second treaty covered the
Company's U.S. municipal obligation insurance business. Under this treaty in
1998, the Company ceded 6% of each covered policy that is classified by the
Company as providing U.S. municipal bond insurance as defined by Article 69 of
the New York Insurance Law up to a limit of $16,000,000 per single risk, which
is defined by revenue source. At its sole option, the Company could have
increased, and in certain instances did increase, the ceding percentage to 30%
up to $80,000,000 per single risk. These cession percentages under both treaties
were reduced on smaller-sized transactions. The first-loss treaty applied to
qualifying U.S. mortgage-backed transactions. Under the four automatic
facultative facilities in 1998, the Company at its option could allocate up to a
specified amount for each reinsurer (ranging from $4,000,000 to $40,000,000
depending on the reinsurer) for each transaction, subject to limits and
exclusions, in exchange for which the Company agreed to cede in the aggregate a
specified percentage of gross par insured by the Company. Each of the quota
share treaties and automatic facultative facilities allowed the Company to
withhold a ceding commission to defray its expenses. The Company also employed
non-treaty quota share and first-loss facultative reinsurance on various
transactions in 1998.
In the event (which management considers to be highly unlikely) that any or
all of the reinsuring companies were unable to meet their obligations to the
Company, the Company would be liable for such defaulted amounts. The Company has
also assumed reinsurance of municipal obligations from unaffiliated insurers.
F-19
<PAGE>
FINANCIAL SECURITY ASSURANCE INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
11. REINSURANCE (CONTINUED)
Amounts reinsured were as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
<S> <C> <C> <C>
1998 1997 1996
--------- --------- ---------
Written premiums ceded........................................................... $ 99,413 $ 63,513 $ 55,965
Written premiums assumed......................................................... 935 1,352 1,873
Earned premiums ceded............................................................ 55,939 41,713 38,723
Earned premiums assumed.......................................................... 4,271 5,121 6,020
Loss and loss adjustment expense payments ceded.................................. 22,619 2,862 29,408
Loss and loss adjustment expense payments assumed................................ 3 2 3
Incurred (recovered) losses and loss adjustment expenses ceded................... (4,673) 3,605 (2,249)
Incurred (recovered) losses and loss adjustment expenses assumed................. (139) 161 38
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
<S> <C> <C>
1998 1997
------------- -------------
Principal outstanding ceded........................................................ $ 32,914,844 $ 24,547,361
Principal outstanding assumed...................................................... 1,360,916 1,670,468
Deferred premium revenue ceded..................................................... 217,096 173,123
Deferred premium revenue assumed................................................... 10,799 14,128
Loss and loss adjustment expense reserves ceded.................................... 3,907 30,618
Loss and loss adjustment expense reserves assumed.................................. 723 865
</TABLE>
12. OUTSTANDING EXPOSURE AND COLLATERAL
The Company's policies insure the scheduled payments of principal and
interest on asset-backed and municipal obligations. The principal amount insured
(in millions) as of December 31, 1998 and 1997 (net of amounts ceded to other
insurers) and the terms to maturity are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1997
------------------------- -------------------------
<S> <C> <C> <C> <C>
TERMS TO MATURITY ASSET-BACKED MUNICIPAL ASSET-BACKED MUNICIPAL
- ---------------------------------------------- ------------ ----------- ------------ -----------
0 to 5 Years.................................. $ 8,468 $ 2,756 $ 7,553 $ 2,230
5 to 10 Years................................. 7,516 7,495 5,637 5,683
10 to 15 Years................................ 5,661 12,427 2,858 8,257
15 to 20 Years................................ 670 20,265 524 14,340
20 Years and Above............................ 15,308 24,107 11,917 16,479
------------ ----------- ------------ -----------
Total..................................... $ 37,623 $ 67,050 $ 28,489 $ 46,989
------------ ----------- ------------ -----------
------------ ----------- ------------ -----------
</TABLE>
F-20
<PAGE>
FINANCIAL SECURITY ASSURANCE INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
12. OUTSTANDING EXPOSURE AND COLLATERAL (CONTINUED)
The principal amount ceded as of December 31, 1998 and 1997 and the terms to
maturity are as follows (in millions):
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1997
-------------------------- -------------------------
<S> <C> <C> <C> <C>
TERMS TO MATURITY ASSET-BACKED MUNICIPAL ASSET-BACKED MUNICIPAL
- ---------------------------------------------- ------------- ----------- ------------ -----------
0 to 5 Years.................................. $ 2,727 $ 1,157 $ 3,828 $ 965
5 to 10 Years................................. 1,859 2,143 2,118 1,693
10 to 15 Years................................ 1,116 3,022 553 2,078
15 to 20 Years................................ 591 4,852 257 3,005
20 Years and Above............................ 3,230 12,218 3,373 6,677
------ ----------- ------------ -----------
Total..................................... $ 9,523 $ 23,392 $ 10,129 $ 14,418
------ ----------- ------------ -----------
------ ----------- ------------ -----------
</TABLE>
The Company limits its exposure to losses from writing financial guarantees
by underwriting investment-grade obligations, diversifying its portfolio and
maintaining rigorous collateral requirements on asset-backed obligations, as
well as through reinsurance. The gross principal amounts of insured obligations
in the asset-backed insured portfolio are backed by the following types of
collateral (in millions):
<TABLE>
<CAPTION>
NET OF AMOUNTS CEDED
CEDED
DECEMBER 31, DECEMBER 31,
-------------------- --------------------
<S> <C> <C> <C> <C>
TYPES OF COLLATERAL 1998 1997 1998 1997
- --------------------------------------------------- --------- --------- --------- ---------
Residential mortgages.............................. $ 15,647 $ 12,928 $ 3,324 $ 3,665
Consumer receivables............................... 12,539 10,659 3,663 4,601
Government securities.............................. 821 787 267 120
Pooled corporate obligations....................... 6,776 3,004 1,388 540
Commercial mortgage portfolio:
Commercial real estate........................... 15 98 49 418
Corporate secured................................ 42 55 314 481
Investor-owned utility obligations................. 757 643 464 229
Other asset-backed obligations..................... 1,026 315 54 75
--------- --------- --------- ---------
Total asset-backed obligations............... $ 37,623 $ 28,489 $ 9,523 $ 10,129
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
The asset-backed insured portfolio, which aggregated $47,146,604,000
principal before reinsurance at December 31, 1998, was collateralized by assets
with an estimated fair value of $53,754,485,000. At December 31, 1997, it
aggregated $38,618,244,000 principal before reinsurance and was collateralized
by assets with an estimated fair value of $44,382,716,000. Such estimates of
fair value are calculated at the inception of each insurance policy and are
changed only in proportion to changes in exposure. At December 31, 1998, the
estimated fair value of collateral and reserves over the principal insured
averaged from 110% for commercial real estate to 181% for corporate secured
obligations. At December 31, 1997, the estimated fair value of collateral and
reserves over the principal insured averaged from 100% for commercial real
estate to 172% for corporate secured obligations. Collateral for specific
transactions is generally not available to pay claims related to other
transactions. The amounts of losses ceded to reinsurers are determined net of
collateral.
F-21
<PAGE>
FINANCIAL SECURITY ASSURANCE INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
12. OUTSTANDING EXPOSURE AND COLLATERAL (CONTINUED)
The gross principal amount of insured obligations in the municipal insured
portfolio includes the following types of issues (in millions):
<TABLE>
<CAPTION>
NET OF AMOUNTS CEDED
CEDED
DECEMBER 31, DECEMBER 31,
-------------------- --------------------
<S> <C> <C> <C> <C>
TYPES OF ISSUES 1998 1997 1998 1997
- -------------------------------------------------- --------- --------- --------- ---------
General obligation bonds.......................... $ 25,337 $ 17,101 $ 4,517 $ 3,182
Housing revenue bonds............................. 2,509 1,770 1,108 955
Municipal utility revenue bonds................... 9,218 5,892 5,489 2,294
Health care revenue bonds......................... 5,812 3,924 3,348 2,175
Tax-supported bonds (non-general obligation)...... 14,731 11,210 5,238 3,526
Transportation revenue bonds...................... 2,937 1,972 2,154 1,041
Other municipal bonds............................. 6,506 5,120 1,538 1,245
--------- --------- --------- ---------
Total municipal obligations................... $ 67,050 $ 46,989 $ 23,392 $ 14,418
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
In its asset-backed business, the Company considers geographic concentration
as a factor in underwriting insurance covering securitizations of pools of such
assets as residential mortgages or consumer receivables. However, after the
initial issuance of an insurance policy relating to such securitization, the
geographic concentration of the underlying assets may not remain fixed over the
life of the policy. In addition, in writing insurance for other types of
asset-backed obligations, such as securities primarily backed by government or
corporate debt, geographic concentration is not deemed by the Company to be
significant given other more relevant measures of diversification such as issuer
or industry.
The Company seeks to maintain a diversified portfolio of insured municipal
obligations designed to spread its risk across a number of geographic areas. The
following table sets forth, by state, those states in
F-22
<PAGE>
FINANCIAL SECURITY ASSURANCE INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
12. OUTSTANDING EXPOSURE AND COLLATERAL (CONTINUED)
which municipalities located therein issued an aggregate of 2% or more of the
Company's net par amount outstanding of insured municipal securities as of
December 31, 1998:
<TABLE>
<CAPTION>
NET PAR PERCENT OF TOTAL CEDED PAR
NUMBER AMOUNT MUNICIPAL NET PAR AMOUNT
STATE OF ISSUES OUTSTANDING AMOUNT OUTSTANDING OUTSTANDING
- ---------------------------------- ----------- ----------- --------------------- -----------
<S> <C> <C> <C> <C>
(IN (IN
MILLIONS) MILLIONS)
California........................ 517 $ 10,233 15.3% $ 3,103
New York.......................... 388 5,836 8.7 4,137
Pennsylvania...................... 356 4,821 7.2 834
Texas............................. 414 4,128 6.1 1,441
Florida........................... 130 4,091 6.1 1,616
New Jersey........................ 275 3,475 5.2 1,486
Illinois.......................... 359 3,125 4.7 628
Massachusetts..................... 126 2,259 3.4 976
Michigan.......................... 217 2,161 3.2 511
Wisconsin......................... 252 1,685 2.5 228
Indiana........................... 103 1,461 2.2 162
Minnesota......................... 146 1,340 2.0 191
All Other States.................. 1,453 20,993 31.3 6,812
Non-U.S........................... 32 1,442 2.1 1,267
----- ----------- ----- -----------
Total......................... 4,768 $ 67,050 100.0% $ 23,392
----- ----------- ----- -----------
----- ----------- ----- -----------
</TABLE>
13. RELATED PARTY TRANSACTIONS
Allocable expenses are shared by the Company and its Parent on a basis
determined principally by estimates of respective usage as stated in an expense
sharing agreement. The agreement is subject to the provisions of the New York
Insurance Law. Amounts included in other assets at December 31, 1998 and 1997
are $1,625,000 and $4,702,000, respectively, for unsettled expense allocations
due from the Parent.
The Company ceded premiums of $23,838,000, $21,216,000 and $19,890,000 to
Tokio Marine for the years ended December 31, 1998, 1997 and 1996, respectively.
The amounts included in prepaid reinsurance premiums at December 31, 1998 and
1997 for reinsurance ceded to Tokio Marine were $62,422,000 and $53,603,000,
respectively. Reinsurance recoverable on unpaid losses ceded to Tokio Marine was
$612,000 and $613,000 at December 31, 1998 and 1997, respectively. The Company
ceded losses and loss adjustment expenses of $603,000, $1,095,000 and $232,000
to Tokio Marine for the years ended December 31, 1998, 1997 and 1996,
respectively. The Company ceded premiums of $7,297,000 and $15,000 to X.L.
Insurance Company, Ltd., a subsidiary of XL, for the years ended December 31,
1998 and 1997, respectively. The amounts included in prepaid reinsurance
premiums at December 31, 1998 and 1997 for reinsurance ceded to X.L. Insurance
Company, Ltd. were $5,306,000 and $6,000, respectively.
The Company ceded premiums of $25,862,000, $16,890,000 and $15,409,000 on a
quota share basis to affiliates of MediaOne (Enhance Reinsurance Company, Asset
Guaranty Insurance Company and Commercial Reinsurance Company) for the years
ended December 31, 1998, 1997 and 1996, respectively. The
F-23
<PAGE>
FINANCIAL SECURITY ASSURANCE INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
13. RELATED PARTY TRANSACTIONS (CONTINUED)
amounts included in prepaid reinsurance premiums for reinsurance ceded to these
affiliates were $61,088,000 and $51,980,000 at December 31, 1998 and 1997,
respectively. The amounts of reinsurance recoverable on unpaid losses ceded to
these affiliates at December 31, 1998 and 1997 were $1,755,000 and $24,195,000,
respectively. The Company ceded losses and loss adjustment expenses (recoveries)
of $(11,956,000), $2,105,000 and $(3,316,000) to these affiliates for the years
ended December 31, 1998, 1997 and 1996, respectively.
14. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following estimated fair values have been determined by the Company
using available market information and appropriate valuation methodologies.
However, considerable judgment is necessary to interpret the data to develop the
estimates of fair value. Accordingly, the estimates presented herein are not
necessarily indicative of the amount the Company could realize in a current
market exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value amounts.
Bonds--The carrying amount of bonds represents fair value. The fair value of
bonds is based upon quoted market price.
Short-term investments--The carrying amount is fair value, which
approximates cost due to the short maturity of these instruments.
Cash, receivable for investments sold and payable for investments
purchased--The carrying amount approximates fair value because of the short
maturity of these instruments.
Deferred premium revenue, net of prepaid reinsurance premiums--The carrying
amount of deferred premium revenue, net of prepaid reinsurance premiums,
represents the Company's future premium revenue, net of reinsurance, on policies
where the premium was received at the inception of the insurance contract. The
fair value of deferred premium revenue, net of prepaid reinsurance premiums, is
an estimate of the premiums that would be paid under a reinsurance agreement
with a third party to transfer the Company's financial guaranty risk, net of
that portion of the premiums retained by the Company to compensate it for
originating and servicing the insurance contracts.
Installment premiums--Consistent with industry practice, there is no
carrying amount for installment premiums since the Company will receive premiums
on an installment basis over the term of the insurance contract. Similar to
deferred premium revenue, the fair value of installment premiums is the
estimated present value of the future contractual premium revenues that would be
paid under a reinsurance agreement with a third party to transfer the Company's
financial guaranty risk, net of that portion of the premium retained by the
Company to compensate it for originating and servicing the insurance contract.
F-24
<PAGE>
FINANCIAL SECURITY ASSURANCE INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
14. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
Losses and loss adjustment expenses, net of reinsurance recoverable on
unpaid losses--The carrying amount is fair value, which is the present value of
the expected cash flows for specifically identified claims and potential losses
in the Company's insured portfolio.
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1997
-------------------------- --------------------------
<S> <C> <C> <C> <C>
CARRYING ESTIMATED CARRYING ESTIMATED
(IN THOUSANDS) AMOUNT FAIR VALUE AMOUNT FAIR VALUE
- ------------------------------------- ------------ ------------ ------------ ------------
Assets:
Bonds.............................. $ 1,683,928 $ 1,683,928 $ 1,235,441 $ 1,235,441
Short-term investments............. 92,241 92,241 103,926 103,926
Cash............................... 2,729 2,729 11,235 11,235
Receivable for securities sold..... 1,656 1,656 20,535 20,535
Liabilities:
Deferred premium revenue, net of
prepaid reinsurance premiums..... 504,603 417,130 422,073 347,855
Losses and loss adjustment
expenses, net of reinsurance
recoverable on unpaid losses..... 60,040 60,040 44,799 44,799
Notes payable...................... 120,000 120,000 50,000 50,000
Payable for investments
purchased........................ 105,749 105,749 72,979 72,979
Off-balance-sheet instruments:
Installment premiums............... 163,239 116,888
</TABLE>
F-25
<PAGE>
FINANCIAL SECURITY ASSURANCE INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
15. LIABILITY FOR LOSSES AND LOSS ADJUSTMENT EXPENSES
The Company's liability for losses and loss adjustment expenses consists of
the case basis and general reserves. Activity in the liability for losses and
loss adjustment expenses is summarized as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
<S> <C> <C> <C>
1998 1997 1996
--------- --------- ----------
Balance at January 1........................................ $ 75,417 $ 72,079 $ 111,759
Less reinsurance recoverable................................ 30,618 29,875 61,532
--------- --------- ----------
Net balance at January 1.................................... 44,799 42,204 50,227
Incurred losses and loss adjustment expenses:
Current year.............................................. 8,049 5,400 5,300
Prior years............................................... (4,100) 3,756 1,574
Recovered (paid) losses and loss adjustment expenses:
Current year.............................................. (192) (2,850) --
Prior years............................................... 11,484 (3,711) (14,897)
--------- --------- ----------
Net balance December 31..................................... 60,040 44,799 42,204
Plus reinsurance recoverable................................ 3,907 30,618 29,875
--------- --------- ----------
Balance at December 31.................................... $ 63,947 $ 75,417 $ 72,079
--------- --------- ----------
--------- --------- ----------
</TABLE>
During 1996, the Company increased its general reserve by $6,874,000, of
which $5,300,000 was for originations of new business and $1,574,000 was to
reestablish a portion of the general reserve that had previously been
transferred to case basis reserves. During 1996, the Company transferred
$9,012,000 from its general reserve to case basis reserves associated
predominantly with certain residential mortgage and timeshare receivables
transactions. Giving effect to these transfers, the general reserve totaled
$29,660,000 at December 31, 1996.
During 1997, the Company increased its general reserve by $9,156,000, of
which $5,400,000 was for originations of new business and $3,756,000 was to
reestablish a portion of the general reserve that had previously been
transferred to case basis reserves. During 1997, the Company transferred
$4,503,000 from its general reserve to case basis reserves associated
predominantly with certain residential mortgage transactions. Giving effect to
these transfers, the general reserve totaled $34,313,000 at December 31, 1997.
During 1998, the Company increased its general reserve by $3,949,000, of
which $8,049,000 was for originations of new business offset by a $4,100,000
decrease in the amount needed to fund the general loss reserve because of
recoveries on certain commercial mortgage transactions. During 1998, the Company
transferred $18,403,000 to its general reserve from case basis reserves due to
those recoveries on commercial mortgage transactions. Also during 1998, the
Company transferred $9,414,000 from its general reserve to case basis reserves
associated predominantly with certain consumer receivable transactions. Giving
effect to these transfers, the general reserve totaled $47,251,000 at December
31, 1998.
F-26
<PAGE>
FINANCIAL SECURITY ASSURANCE INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
15. LIABILITY FOR LOSSES AND LOSS ADJUSTMENT EXPENSES (CONTINUED)
Reserves for losses and loss adjustment expenses are discounted at risk-free
rates. The amount of discount taken was approximately $16,029,000, $19,779,000
and $17,944,000 at December 31, 1998, 1997 and 1996, respectively.
16. RECENTLY ISSUED ACCOUNTING STANDARD
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. SFAS No. 133 is effective January 1, 2000.
The Company is in the process of determining the effect of these standards
on its financial statements, but management does not believe that it will have a
material effect on the Company's financial condition.
17. FINANCIAL SECURITY ASSURANCE INTERNATIONAL LTD. AND MINORITY INTEREST
On November 3, 1998, the Parent funded the Company's $80,000,000 investment
in Financial Security Assurance International Ltd. (International), a new
Bermuda-based financial guaranty insurer.
In November 1998, XL made a minority investment in International for
$20,000,000. This interest is in the form of Cumulative Participating Voting
Preferred Shares, which in total have a minimum fixed dividend of $1,000,000 per
annum. For the period ended December 31, 1998, the Company recognized minority
interest of $388,000.
F-27
<PAGE>
EXHIBIT 99(C)
Board of Directors and Shareholder
Valley Group, Inc.
We have audited the consolidated statements of operations, changes in
stockholder's equity and cash flows of Valley Group, Inc. and Subsidiaries (a
wholly owned subsidiary of Fund American Enterprises Holdings, Inc.) for the
year ended December 31, 1996, (not presented separately herein). These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above (not presented
separately herein) present fairly, in all material respects, the consolidated
results of operations and cash flows of Valley Group, Inc. and Subsidiaries for
the year ended December 31, 1996, in conformity with generally accepted
accounting principles.
Coopers & Lybrand L.L.P.
Portland, Oregon
February 14, 1997
