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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, 1999
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
WHITE MOUNTAINS INSURANCE GROUP, LTD.
(Exact name of Registrant as specified in its charter)
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<S> <C>
BERMUDA 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
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Securities registered pursuant to Section 12(b) of the Act:
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<S> <C>
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
Common Stock, par value $1.00 New York Stock Exchange
per share
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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 24, 2000, was $796,743,057.
As of March 24, 2000, 5,904,534 shares of Common Stock, par value of $1.00
per share, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Notice of 2000 Annual Meeting of Shareholders and
Proxy Statement dated March 24, 2000 (Part III)
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WHITE MOUNTAINS INSURANCE GROUP, LTD.
TABLE OF CONTENTS
PART I
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ITEM 1. Business....................................................................................... 1
a. General................................................................................... 1
b. Reinsurance and Insurance Operations...................................................... 1
c. Discontinued Mortgage Banking Operations.................................................. 10
d. Investing Operations...................................................................... 11
e. Regulation................................................................................ 11
f. Employees................................................................................. 11
g. Forward-Looking Statements................................................................ 11
ITEM 2. Properties..................................................................................... 12
ITEM 3. Legal Proceedings.............................................................................. 12
ITEM 4. Submission of Matters to a Vote of Security Holders............................................ 12
PART II
ITEM 5. Market for the Company's Common Equity and Related Stockholder Matters........................ 13
ITEM 6. Selected Financial Data........................................................................ 14
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.......... 15
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk..................................... 27
ITEM 8. Financial Statements and Supplementary Data.................................................... 27
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........... 28
PART III
ITEM 10. Directors and Executive Officers............................................................... 28
ITEM 11. Executive Compensation......................................................................... 29
ITEM 12. Security Ownership of Certain Beneficial Owners and Management................................. 29
ITEM 13. Certain Relationships and Related Transactions................................................. 29
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K............................... 29
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PART I
ITEM 1. BUSINESS
GENERAL
White Mountains Insurance Group, Ltd. (the "Company") was originally formed
as a Delaware corporation in 1980 and became a Bermuda corporation during 1999.
Within this report, the consolidated organization is referred to as "White
Mountains". White Mountains' principal operations are conducted through its
subsidiaries and affiliates in the businesses of property and casualty
insurance, property and casualty reinsurance and financial guaranty insurance.
The Company's headquarters is located at Crawford House, 23 Church Street,
Hamilton, Bermuda and its principal executive office is located at 80 South Main
Street, Hanover, New Hampshire, 03755-2053.
In June 1999 the Company changed its name from "Fund American Enterprises
Holdings, Inc." to "White Mountains Insurance Group, Inc."
On October 25, 1999, the Company completed a corporate reorganization
whereby it changed its domicile from Delaware to Bermuda (the
"Redomestication"). The Redomestication was primarily undertaken to improve the
Company's ability to compete in international markets by creating a corporate
structure which is more favorable for the formation and growth of
internationally-based insurance and reinsurance operations and which has an
enhanced ability to pursue business combinations with non-United States
entities. In connection with the Redomestication, the Company's name was further
changed to "White Mountains Insurance Group, Ltd." to comply with Bermuda law.
REINSURANCE AND INSURANCE OPERATIONS
REINSURANCE OPERATIONS
FOLKSAMERICA HOLDING COMPANY, INC. ("FOLKSAMERICA")
Folksamerica, through its wholly-owned subsidiary, Folksamerica Reinsurance
Company (a New York-domiciled reinsurance company), is a multi-line
broker-market reinsurer 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 1999, 1998
and 1997, Folksamerica had net written premiums of $201.7 million, $212.6
million and $232.4 million, respectively. At December 31, 1999 and 1998,
Folksamerica had total assets of $1.3 billion and $1.2 billion, respectively,
and shareholder's equity of $249.4 million and $302.0 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
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("Folksamerica Warrants") to purchase up to 6,920,000 shares of the common stock
of Folksamerica ("Folksamerica Common Stock") for $11.47 per share. 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 50.0% economic ownership position.
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 White Mountains 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, 1999 and 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 premiums are derived from treaty
reinsurance contracts both on an excess of loss and quota share basis, which in
1999 amounted to 28.5% and 63.9% of its total earned premiums, 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 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
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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 White Mountains'
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:
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Year Ended December 31,
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Millions 1999 1998 1997 1996 1995
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Liability ......................................... $122.6 $122.0 $123.6 $ 79.6 $ 71.9
Property .......................................... 68.9 87.2 104.9 85.9 87.9
Marine ............................................ 3.1 3.4 3.9 6.4 --
Other ............................................. 7.1 -- -- -- --
--------------------------------------------------------
Total ................................................ $201.7 $212.6 $232.4 $171.9 $159.8
========================================================
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Year Ended December 31,
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Millions 1999 1998 1997 1996 1995
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United States ..................................... $172.2 $190.9 $208.6 $155.2 $159.8
Canada ............................................ 21.0 13.9 10.1 4.2 --
Latin America ..................................... 8.5 7.8 13.7 12.5 --
-------------------------------------------------------
Total ................................................ $201.7 $212.6 $232.4 $171.9 $159.8
=======================================================
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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 a significant portion of
Folksamerica's total acquisition costs and are included in its underwriting
expenses. During the year ended December 31, 1999, Folksamerica received
approximately 67% of its gross reinsurance premiums written from three major
reinsurance brokers as follows: (i) Guy Carpenter and affiliates - 26%; (ii)
E.W. Blanch - 21%; and (iii) AON Re, Inc. - 20%. During the year ended
December 31, 1999, Folksamerica received no more than 10% of its gross
reinsurance premiums from any individual ceding company.
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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. 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. 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 reinsurance and property and casualty insurance companies. Since
1991, Folksamerica has acquired several other reinsurers which has served to
raise 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,
thereby reducing the
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amount of reinsurance they purchase. As a result of consolidation within the
industry, many ceding companies are now larger and financially stronger, thereby
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
Over the past several years White Mountains has been acquiring and
developing various property and casualty insurance operating interests. These
interests are described below:
VALLEY GROUP, INC. ("VGI")
In 1995 White Mountains acquired 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-domiciled mid-size
commercial property and casualty company. CGI and WMIC were subsequently
contributed to VGI thereby making them wholly-owned subsidiaries of VGI.
On June 17, 1999, White Mountains completed the sale of VGI to Unitrin (the
"Valley Group Sale") and received net proceeds of $139.0 million in cash after
receiving a special dividend prior to the closing of $76.6 million (net of
related tax liabilities) consisting of cash, investment securities and the
common stock of Valley National Insurance Company (subsequently renamed to
"Waterford Insurance Company"). In connection with the Valley Group Sale, the
Company recorded a pretax gain of $88.1 million, $53.8 million after tax. As
part of the Valley Group Sale, White Mountains has provided Unitrin, Inc. with
certain adverse loss development protections for approximately four years. These
protections are not expected to result in a material subsequent purchase price
adjustment.
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CONSOLIDATED INTERNATIONAL GROUP, INC. ("CIG")
On October 15, 1999, White Mountains completed its acquisition of CIG, a
Delaware-based insurance holding company for $86.7 million in cash. As a result
of the acquisition, the Company has recorded a $62.0 million deferred credit
(negative goodwill) which will be amortized over the estimated period of benefit
of three years. CIG's principal operating subsidiaries are outlined below:
PENINSULA INSURANCE COMPANY ("PIC"). PIC, which was established in 1960, is
a Maryland-domiciled property and casualty insurer which writes both personal
and commercial lines, primarily private passenger auto, homeowners, commercial
auto and commercial multiple peril. Most of PIC's insurance products are sold in
Maryland, Delaware and Virginia. PIC is rated "A" or "excellent" by A.M. Best
Company.
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. PIC markets insurance products
principally through independent agents. PIC'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 small
private businesses. PIC pays their independent agents commissions representing
negotiated percentages of the premium they write. These commissions, which
currently range from 5.0% to 20.0% of premium, depending on the line of
business, constitute a significant portion of total acquisition costs and are
included in underwriting expenses.
The long-term relationships cultivated by PIC with its agents and insured
customers have produced a relatively high level of renewal persistency,
particularly in PIC's standard private passenger auto and commercial auto books
of business. 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) 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.
The principal competitive factors that affect PIC are: (i) pricing; (ii)
underwriting; (iii) quality of claims and policyholder services; (iv) appointing
and retaining high quality independent agents; (v) operating efficiencies; (vi)
product differentiation and availability; and (vii) increased competition from
national direct writers. 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. PIC
maintains 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.
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Selected financial information for PIC is as follows:
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Year Ended December 31,
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Statutory Basis (a), in Millions 1999 1998 1997
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Gross written premiums, by line of business:
Private passenger auto ..................................................... $17.3 $20.9 $ 20.4
Homeowners ................................................................. 2.5 2.5 2.2
Commercial auto ............................................................ 2.8 2.5 2.4
Commercial multiple peril .................................................. 1.9 2.1 2.3
Other ...................................................................... 1.4 1.9 2.2
--------------------------
Total gross written premiums .................................................... $25.9 $29.9 $ 29.5
==========================
Ending total admitted assets .................................................... $62.5 $63.4 $ 57.8
Ending policyholders' surplus ................................................... 33.6 30.4 29.3
==========================
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(a) The term "statutory" as contained herein refers to a basis of accounting
other than generally accepted accounting principles that is prescribed by
the individual states that an insurance company transacts business in.
AMERICAN CENTENNIAL INSURANCE COMPANY ("ACIC"). ACIC is a
Delaware-domiciled property and casualty insurance company in run-off. ACIC was
incorporated in 1970 for the purpose of underwriting primary and excess
liability insurance for many large national and international chemical,
manufacturing and pharmaceutical companies, as well as for the purpose of
underwriting facultative and treaty reinsurance for the same types of risks. In
1983, in response to the poor profitability of these books of business and
substantial difficulties in the collection of its reinsurance recoverables due
principally to financial problems of its reinsurers, ACIC stopped actively
writing insurance and reinsurance and is currently in run-off. Since 1983, ACIC
has concentrated its run-off efforts on commuting its loss exposures with its
insureds and on settling the ultimate amount of its reinsurance recoverables
with its reinsurers. In 1997, ACIC entered into a retrospective excess of loss
reinsurance treaty with a highly rated reinsurer whereby substantially all of
its remaining loss exposure has been reinsured. At December 31, 1999 and 1998,
ACIC had $51.4 million and $51.0 million of total admitted assets, respectively,
and $43.2 million and $43.0 million of policyholders' surplus, respectively.
BRITISH INSURANCE COMPANY OF CAYMAN ("BICC"). BICC is a Cayman
Island-domiciled property and casualty insurance company in run-off. BICC was
established in 1997 as a means to improve CIG's ability to recover reinsurance
recoverables from insolvent or near insolvent international reinsurers. BICC
consists principally of certain reinsurance recoverables and loss reserves
assumed from ACIC and invested assets. At December 31, 1999 and 1998, BICC had
$36.1 million and $26.0 million of total assets, respectively.
WATERFORD INSURANCE COMPANY ("WATERFORD").
Waterford is a Kansas-domiciled property and casualty insurance company.
Waterford was purchased in 1996 (at which time it was an inactive insurance
company) and is licensed to write property and casualty insurance in 48 states.
Waterford had $11.0 million and $11.1 million in gross written premiums ($1.4
million and $1.4 million of net written premiums) during 1999 and 1998,
respectively. As of December 31, 1999, Waterford has ceased writing new
business. At December 31, 1999 and 1998, Waterford had $13.3 million and $13.2
million of total admitted assets, respectively, and $12.2 million and $11.9
million of policyholders' surplus, respectively.
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
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economic interest but does not own more than 50.0% of the entity. Since 1994,
White Mountains has been active in accumulating various 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 1999, 1998 and
1997, FSA's gross premiums written totalled $362.7 million, $319.3 million and
$236.4 million, respectively, and its net income was $125.4 million, $115.4
million and $94.7 million, respectively. As of December 31, 1999 and 1998, FSA's
total assets were $2.9 billion and $2.4 billion, respectively, and its
shareholders' equity was $1.3 billion and $1.1 billion, respectively.
In 1994 White Mountains 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.
White Mountains also acquired various fixed price options ("FSA Options")
and shares of convertible preferred stock ("FSA Preferred Stock") during 1994
which, in total, gave White Mountains the right to acquire up to 4,560,607
additional shares of FSA Common Stock for aggregate consideration of $125.7
million.
White Mountains purchased an additional 460,200 shares of FSA Common Stock
on the open market for $8.8 million during 1995 and an additional 1,000,000
shares of FSA Common Stock in a private transaction for $26.5 million during
1996.
In May 1999, White Mountains exercised FSA Options pursuant to which it
acquired 666,667 shares of FSA Common Stock at a strike price of $23.50 per
share. In September 1999, White Mountains exercised FSA Options pursuant to
which it acquired 1,893,940 shares of FSA Common Stock at a strike price of
$26.40 per share.
In December 1999, White Mountains purchased an additional 922,509 shares of
FSA Common Stock at a price of $54.20 per share. The transaction was part of a
private offering by FSA pursuant to which it sold a total of approximately
$135.0 million of its common stock to White Mountains, XL Capital Ltd, The Tokio
Marine and Fire Insurance Co., Ltd and an FSA management group.
All shares of and rights to acquire FSA Common Stock owned by White
Mountains are either formally registered with the Securities and Exchange
Commission ("SEC") or are subject to demand registration rights. Notwithstanding
SEC registration or the existence of registration rights, White Mountains is
currently subject to the "affiliate" provisions of Rule 144 of the Securities
Act of 1933 which limits public sales of FSA Common Shares by White Mountains.
As of December 31, 1999, 1998 and 1997 White Mountains' economic interest in FSA
was approximately 25.8%, 25.1% and 26.2%, respectively, and White Mountains'
voting interest in FSA was approximately 25.8%, 23.1% and 24.0%, respectively.
Mr. K. Thomas Kemp (Deputy Chairman the Company) and Mr. Terry L. Baxter (a
director of the Company) are directors of FSA. In addition to being FSA
directors, Mr. Kemp is Chairman of FSA's Human Resources Committee and Mr.
Baxter is a member of FSA's Underwriting Committee.
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White Mountains' 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, 1999 and 1998, as quoted on the NYSE, exceeded White Mountains' carrying
value of the FSA Common Stock under the equity method. White Mountains'
investment in FSA Preferred Stock is accounted for under the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 115 whereby the
investment is 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 other comprehensive net income.
MAIN STREET AMERICA HOLDINGS, INC. ("MSA"). MSA is a subsidiary of National
Grange Mutual Insurance ("NGM"), a New Hampshire-domiciled property and casualty
insurance company, which insures 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 direct
written premiums are personal automobile (43.1%), commercial multi-peril
(17.5%), homeowners (15.7%), commercial automobile (12.9%) and all other
(10.8%). MSA participates in NGM's property and casualty business through a
reinsurance agreement. MSA's net written premiums totalled $242.7 million,
$258.5 million and $156.6 million in 1999, 1998 and 1997, respectively, and its
net income was $25.8 million, $13.4 million and $11.9 million, respectively.
MSA's total assets as of December 31, 1999 and 1998 were $582.3 million and
$581.6 million, respectively, and its shareholders' equity was $233.4 million
and $232.5 million, respectively.
In 1994, 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 which 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 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 40.0% to
60.0% and NGM contributed certain of its insurance, reinsurance and financial
services subsidiaries to MSA. White Mountains' investment in MSA Common Stock is
accounted for using the equity method.
Messrs. Kemp, Baxter and John J. Byrne (Chairman and Chief Executive
Officer of the Company) are directors of MSA.
DISCONTINUED MORTGAGE BANKING OPERATIONS
On May 1, 1999, White Mountains concluded its sale (the "Mortgage Banking
Sale") of substantially all the mortgage banking assets of its subsidiary White
Mountains Services Corporation ("WMSC" - formerly Source One Mortgage Services
Corporation) to Citibank Mortgage, Inc. ("Citibank") and received net proceeds
totalling $180.6 million (which is net of WMSC's public indebtedness assumed by
Citibank and WMSC's credit agreement borrowings which were required to be repaid
at closing). Mortgage banking assets and liabilities that were not part of the
Citibank sale were substantially liquidated during 1999. White Mountains
recorded an estimated $11.6 million after tax gain on the sale of its mortgage
banking net assets (which is net of anticipated future liabilities) during 1999.
As a result of the Company's decision to dispose of its net mortgage banking
assets, these activities are shown as discontinued operations herein.
10
<PAGE>
INVESTING OPERATIONS
White Mountains' 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
the investment assets of the insurance companies 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. The Company's Investment Committee,
headed by director John D. Gillespie (a former T. Rowe Price fund manager)
and comprised of certain other directors, key management and investment
professionals, oversee the Company's investment activities which are more
extensive than in the recent past. The Investment Committee regularly
monitors the overall investment results of White Mountains, reviews the
results of each of White Mountains' various investment managers, reviews
compliance with established investment guidelines, approves all purchases and
sales of investment securities and ultimately reports the overall investment
results to the Company's Board of Directors (the "Board").
As previously stated, the investment portfolios of White Mountains'
insurance operations consist, in part, of common equity securities and related
investments. At December 31, 1999, Folksamerica's investment portfolio contained
$126.4 million of common equity securities and other investments which
represented approximately 14% of its total portfolio (excluding short-term
investments). At December 31, 1999, the portfolios of PIC, ACIC, BICC and
Waterford contained $3.5 million of common equity securities and other
investments which represented approximately 3% of the aggregate PIC, ACIC, BICC
and Waterford portfolios (excluding short-term investments). Management believes
that modest investments of common 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.
REGULATION
White Mountains' insurance and reinsurance operations are subject to
regulation and supervision of their operations in each of the jurisdictions
where they are domiciled and licensed to conduct business. Generally, regulatory
authorities have broad supervisory 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
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 as a means of monitoring certain aspects affecting the
overall financial condition of insurance companies. The RBC ratios for
Folksamerica, PIC, ACIC and Waterford at December 31, 1999 and 1998, were above
the levels which would require regulatory action.
White Mountains 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, 1999, White Mountains employed 235 persons (including 11
persons at the Company, 125 persons at Folksamerica, 75 persons at PIC, 20
persons at ACIC and BICC and 4 persons at subsidiary holding companies).
Management believes that White Mountains' employee relations are good.
FORWARD-LOOKING STATEMENTS
White Mountains relies upon the safe harbor for forward looking statements
provided by the Private Securities Litigation Reform Act of 1995. This safe
harbor requires that White Mountains specify important factors that could cause
actual results to differ materially from those contained
11
<PAGE>
in forward-looking statements made by or on behalf of White Mountains.
Accordingly, forward-looking statements by the Company and its affiliates are
qualified by reference to the following cautionary statements.
In its filings with the SEC, reports to shareholders, press releases and
other written and oral communications, White Mountains from time to time makes
forward-looking statements. Such forward-looking statements include, but are not
limited to, (i) projections of revenues, income (or loss), earnings (or loss)
per share, dividends, market share or other financial forecasts, (ii) statements
of plans, objectives or goals of White Mountains or its management, including
those related to growth in book value and deferred credit per share or return on
equity and (iii) expected losses on, and adequacy of loss reserves for,
insurance in force. Words such as "believes", "anticipates", "expects",
"intends" and "plans" and similar expressions are intended to identify
forward-looking statements but are not the exclusive means of identifying such
statements.
White Mountains cautions that a number of important factors could cause
actual results to differ materially from the plans, objectives, expectations,
estimates and intentions expressed in forward-looking statements made by White
Mountains. These factors include: (i) competitive forces, including the conduct
of other property and casualty insurers and reinsurers; (ii) changes in domestic
or foreign laws or regulations applicable to White Mountains, its competitors or
its clients; (iii) an economic downturn or other economic conditions (such as a
rising interest rate environment) adversely affecting White Mountains'
investment portfolio; and (iv) inadequacy of loss reserves established by White
Mountains. White Mountains cautions that the foregoing list of important factors
is not exhaustive. In any event, such forward-looking statements made by White
Mountains speak only as of the date on which they are made, and White Mountains
does not undertake any obligation to update or revise such statements as a
result of new information, future events or otherwise.
ITEM 2. PROPERTIES
The Company maintains two small professional offices in Hamilton, Bermuda
which serve as its headquarters and registered office. In addition, the Company
and certain of its subsidiaries lease 8,600 square feet of office space at 80
South Main Street, Hanover, New Hampshire, under a lease expiring in 2006, which
serves as its principal executive 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. PIC owns its principal offices in Salisbury, Maryland.
ACIC and BICC lease 15,200 square feet of office space in Wilmington, Delaware,
under a lease which expires in December 2000, which serves as their principal
office. White Mountains leases several other office facilities and operating
equipment under cancelable and noncancelable agreements.
ITEM 3. LEGAL PROCEEDINGS
Various claims have been made against White Mountains in the normal course
of its business. Based on all information available at the date of this report,
management believes that the outcome of such claims will not, in the aggregate,
have a material effect on White Mountains' financial position or results of
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Pursuant to a Proxy Statement filed with the SEC on September 23, 1999
calling for a Special Meeting of Shareholders (the "Special Meeting") on
October 22, 1999, shareholders approved the Redomestication, including the
Company's bye-laws and authorization for the Board to exercise its powers set
out in the bye-laws and to take all actions deemed necessary or advisable to
give effect to the Redomestication. As of September 24, 1999, the record date
for the Special Meeting, a total of 5,982,291 shares were eligible to vote.
At the Special Meeting, 3,839,754 votes were cast in favor of the
Redomestication, 692,714 votes were cast against and 16,743 votes abstained.
12
<PAGE>
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
As of March 24, 2000, there were 440 registered holders of shares of the
Company's Common Stock, par value $1.00 per share ("Shares").
During 1999 and 1998 the Company declared and paid total cash dividends of
$1.60 per Share. Dividends are typically declared and paid on a quarterly basis.
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 White Mountains' invested assets and operations and
the amount and regularity of its cash flows at the time. The Company's Common
Stock (symbol WTM) is listed on the NYSE. The quarterly range of the daily
closing price for Shares during 1999 and 1998 is presented below:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
1999 1998
------------------------- -----------------------
HIGH LOW High Low
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Quarter ended:
December 31 ....................................... $134 1/2 $116 $144 $117
September 30 ...................................... 143 130 1/16 153 1/8 119 1/8
June 30 ........................................... 149 131 3/8 149 1/8 135 15/16
March 31 .......................................... 150 120 1/2 137 5/16 120 9/16
=======================================================
</TABLE>
13
<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, 1999, follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
------------------------------------------------------------------
Millions, except per share amounts 1999 1998(a) 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues ..................................................... $ 565 $ 390 $ 293 $ 186 $ 85
Expenses ..................................................... 404 311 192 164 85
------------------------------------------------------------------
Pretax earnings .............................................. 161 79 101 22 --
Income tax provision ...................................... (53) (28) (36) (9) (1)
------------------------------------------------------------------
Net income (loss) from continuing operations ................. $ 108 $ 51 $ 65 $ 13 $ (1)
==================================================================
Net income (loss) from continuing operations per Share:
Basic ..................................................... $ 19.25 $ 8.71 $ 9.88 $ 1.74 $ (.12)
Diluted ................................................... $ 17.66 $ 7.75 $ 8.93 $ 1.59 $ (.11)
------------------------------------------------------------------
ENDING BALANCE SHEET DATA:
Total assets ................................................. $ 2,049 $ 2,164 $ 1,156(b) $ 1,120 $ 1,015
Short-term debt .............................................. 4 52 2 2 21
Long-term debt ............................................... 203 186 132 133 115
Deferred credit .............................................. 101(c) 37(d) -- -- --
Shareholders' equity ......................................... 614(e) 703 659(e) 687(e) 700(e)
Book value per Share (f) ..................................... $103.32 $109.68 $100.08 $ 90.81 $ 83.28
Book value plus deferred credit per Share (f) ................ $120.23 $115.11 $100.08 $ 90.81 $ 83.28
------------------------------------------------------------------
SHARE DATA:
Cash dividends paid per Share ................................ $ 1.60 $ 1.60 $ .80 $ .80 $ .20
Ending common and equivalent Shares (000's) .................. 5,946 6,831 6,983 7,908 8,687
==================================================================
</TABLE>
(a) Includes the interim period income statement and ending balance sheet of
Folksamerica which was acquired during 1998.
(b) Restated as a result of White Mountains' acquisition of Folksamerica
during 1998. See Note 3.
(c) Deferred credits added during 1999 resulted from the purchase of CIG and
exercises of FSA Options. See Note 1.
(d) Deferred credits added during 1998 resulted from the acquisition of
Folksamerica. See Note 1.
(e) Reflects reductions in shareholders' equity resulting from repurchases of
Shares.
(f) As adjusted for the dilutive effects of outstanding options and warrants
to acquire Shares ("Warrants").
14
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
CONSOLIDATED RESULTS
White Mountains reported net income of $121.0 million for the year ended
December 31, 1999, which compares to net income of $78.5 million and $39.3
million for 1998 and 1997, respectively. Net income for 1999, 1998 and 1997
includes after tax gains from sales of investment securities of $45.2 million,
$46.1 million and $63.4 million, respectively. Net income for 1999 includes
after tax gains of $53.8 million from the Valley Group Sale and $11.6 million
from the Mortgage Banking Sale.
Comprehensive net income, which includes other comprehensive income items
(primarily changes in net unrealized investment gains and losses for investments
held during the period), for 1999 was $3.0 million versus $69.6 million and
$81.0 million for 1998 and 1997, respectively. Comprehensive net income for 1999
was adversely affected by $28.8 million of after tax unrealized bond losses at
Folksamerica and a $43.9 million after tax accounting write-down of White
Mountains' investment in FSA. Comprehensive net income for 1997 was favorably
impacted by $105.1 million of after tax unrealized holding gains primarily
associated with White Mountains' investment in FSA.
Book value plus deferred credit per Share was $120.23 at December 31, 1999,
which compares to $115.11 at December 31, 1998. At December 31, 1999 and 1998,
White Mountains had $100.6 million and $37.1 million of after tax unamortized
deferred credit, respectively, which will be amortized to income over the next
four years. During 1998 White Mountains recorded a deferred credit of $39.8
million resulting from its acquisition of Folksamerica. During 1999 White
Mountains added a $62.0 million deferred credit resulting from its acquisition
of the CIG companies and a $14.2 million deferred credit resulting from a
write-down of its investment in FSA.
INSURANCE OPERATIONS
REINSURANCE OPERATIONS
Folksamerica contributed $44.9 million to net income during 1999 versus
$10.0 million and $5.2 million during 1998 and 1997, respectively.
Folksamerica's contribution for 1998 included $5.6 million of pretax earnings
($4.5 million after tax) recorded as earnings from unconsolidated insurance
affiliates. Folksamerica's entire contribution for 1997 was recorded as earnings
from unconsolidated insurance affiliates.
Folksamerica's results for the three years ended December 31, 1999, 1998
and 1997 included $211.0 million, $238.1 million and $238.0 million of earned
reinsurance premiums, respectively, and $182.2 million, $170.3 million and
$165.6 million of losses and loss adjustment expenses, respectively. For 1999
Folksamerica's combined ratio was 122.5% versus a combined ratio of 108.0% and
102.9% for the comparable 1998 and 1997 periods.
A summary of Folksamerica's 1999, 1998 and 1997 underwriting results
follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
-------------------------------------
Dollars in millions 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net written premiums ...................................................... $ 201.7 $ 212.6 $ 232.4
Earned premiums ........................................................... 211.0 238.1 238.0
Losses and loss adjustment expenses ....................................... 182.2 170.3 165.6
Underwriting expenses ..................................................... 81.4 92.6 81.6
--------------------------------------
Underwriting loss ...................................................... $ (52.6) $ (24.8) $ (9.2)
======================================
Statutory combined ratios:
Loss and loss adjustment expense ....................................... 86.5% 71.5% 69.6%
Underwriting expense ................................................... 36.0 36.5 33.3
--------------------------------------
Combined ........................................................ 122.5% 108.0% 102.9%
======================================
</TABLE>
15
<PAGE>
During 1999 Folksamerica acquired USF Re Insurance Co. ("USF Re") from The
Centris Group Inc. for total consideration of $92.5 million. The purchase
consideration included the issuance of a $20.8 million, five-year note by
Folksamerica (which can be reduced by adverse loss development at USF Re post
acquisition).
Folksamerica's 1999 combined ratio of 122.5% included approximately $20.1
million in pretax losses associated with USF Re's loss reserves, $4.0 million of
pretax property catastrophe losses and higher than anticipated asbestos and
environmental losses. These significant 1999 adverse loss developments resulted
primarily from business acquired through Folksamerica's prior acquisitions
(mainly USF Re). However, Folksamerica's 1999 combined ratio does not reflect
the offsetting bargain purchase benefits of such acquisitions which are recorded
at its parent. For 1999, Folksamerica's holding company recorded $20.3 million
of after tax income resulting from the favorable purchase structures of such
acquisitions which were designed to mitigate Folksamerica's adverse loss
development. These benefits for 1999 included a $14.0 million after tax
reduction in the USF Re seller note and $6.3 million of after tax deferred
credit amortization. The effects of such favorable purchase structures, which
are not included in Folksamerica's combined ratio, would serve to reduce the
1999 combined ratio by approximately 13 points to 110%.
Folksamerica's 1998 combined ratio of 108.0% was higher than that of 1997
due primarily to two property events experienced during the year (Canadian ice
storms and Hurricane Georges) and higher than anticipated asbestos and
environmental losses.
In addition to incurred losses, Folksamerica's combined ratios for 1999 and
1998 were higher than anticipated due to lower premium volume resulting from
lower than expected production on a number of domestic treaties, the effects of
non-renewals in its property portfolio, slower than anticipated growth in its
Latin America business and a less favorable pricing environment. During 1999,
Folksamerica's written premium volume decreased 5% versus 1998 despite its
acquisition of USF Re during mid 1999. During 1998, Folksamerica's written
premium volume decreased approximately 9% versus 1997 premium levels. These
premium volume decreases primarily reflect increased non-renewed business due to
deteriorating terms and conditions.
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, 1999, 1998 and 1997 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 1999 and 1998; and (iii)
continued strengthening of reserve portfolios relating to acquired companies.
However, as previously mentioned, Folksamerica has various protections into its
prior acquisition structures at its holding company which are designed to
mitigate such losses.
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 $63.7 million, $27.3 million and $35.9 million for the three years ended
December 31, 1999, 1998 and 1997, respectively, and reported comprehensive net
16
<PAGE>
income of $13.4 million, $54.3 million and $50.9 million during those periods,
respectively. This resulted in Folksamerica attaining an after tax return on its
beginning equity of 5.7%, 20.9% and 29.9% for 1999, 1998 and 1997, respectively.
The following table presents the subsequent development of the year-end
reinsurance losses for the ten-year period from 1989 to 1999. 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:
17
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
Reinsurance Losses and Loss Adjustment Expenses (a)
Year Ended December 31,
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Dollars in Millions 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
- --------------------------------------------------------------------------------------------------------------------------
I. Liability for
unpaid losses and lae .. $341.4 $391.1 $461.6 $698.4 $728.3 $776.9 $836.1 $830.5 $848.1 $869.1 $782.1
- --------------------------------------------------------------------------------------------------------------------------
II. Liability
re-estimated
as of:
1 year later ... 351.2 425.5 493.7 748.2 762.6 847.4 861.5 863.3 890.4 912.8 --
2 years later .. 385.5 448.8 498.5 771.2 825.0 867.9 886.6 881.4 907.5
3 years later .. 408.7 449.8 513.3 813.3 837.3 887.7 907.8 898.6
4 years later .. 409.3 458.4 531.7 819.8 856.6 904.6 923.0
5 years later .. 421.7 471.2 531.8 843.7 872.1 919.0
6 years later .. 430.6 472.6 541.5 856.6 882.8
7 years later .. 432.9 480.6 547.8 864.8
8 years later .. 438.8 486.9 554.2
9 years later .. 444.1 494.7
10 years later .. 452.2
- ---------------------------------------------------------------------------------------------------------------------------
III. Cumulative
amount of
liability paid
through:
1 year later ... 98.7 110.5 133.8 243.3 229.9 238.7 253.6 226.3 241.6 288.5 --
2 years later .. 156.5 175.1 199.6 366.5 363.4 387.1 393.3 364.2 401.3
3 years later .. 195.5 216.2 256.7 452.3 466.2 485.8 484.3 475.0
4 years later .. 221.2 252.7 304.4 525.6 534.4 550.5 570.7
5 years later .. 248.2 285.6 340.0 575.2 576.7 617.1
6 years later .. 271.1 312.6 367.6 604.8 630.5
7 years later .. 293.0 332.8 382.3 651.6
8 years later .. 306.1 342.9 409.4
9 years later .. 314.1 367.5
10 years later .. 336.0
- -------------------------------------------------------------------------------------------------------------------------
IV. Cumulative
deficiency $110.8 $103.6 $92.6 $166.4 $154.5 $142.1 $86.9 $68.1 $59.4 $43.7 --
Percent 32% 26% 20% 24% 21% 18% 10% 8% 7% 5% --
deficient
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) For the years 1989 through 1991 liabilities are shown net of reinsurance
recoverable. For the years 1992 through 1999 liabilities are shown without
regard to reinsurance recoverable in accordance with SFAS No. 113. The
table excludes the insurance operations of VGI and CIG whose liability for
unpaid losses and lae totalled $68.9 million, $88.5 million, $71.9 million
and $65.4 million as of December 31, 1999, 1998, 1997 and 1996,
respectively.
18
<PAGE>
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 1999, 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 reserves: 1995 1996 1997 1998 1999
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Deficiency as reported ............................. 10% 8% 7% 5% -- %
Deficiency as adjusted for the effects described above... 3% 3% 2% 2% -- %
=========================================================
</TABLE>
INSURANCE OPERATIONS
On October 15, 1999, the Company concluded its acquisition of the CIG
companies (PIC, ACIC and BICC) for $86.7 million in cash. Because the cost of
these companies was less than the fair value of their net identifiable assets at
October 15, 1999, the Company recorded a $62.0 million deferred credit ($57.7
million as of December 31, 1999) that will be amortized to income over three
years. For the period from October 15, 1999 to December 31, 1999, the inclusion
of PIC, ACIC and BICC did not have a significant impact on the Company's 1999
operating results.
On June 17, 1999, the Company completed the Valley Group Sale and recorded
a pretax gain of $88.1 million, $53.8 million after tax on the transaction. The
Company recorded net income from Valley Group for the 1999 period through the
date of sale of $3.6 million which primarily represented realized investment
gains. For the years ended December 31,1998 and 1997, VGI contributed $5.0
million and $7.2 million, respectively, to net income.
19
<PAGE>
INVESTMENTS IN UNCONSOLIDATED INSURANCE AFFILIATES
FSA and MSA represented White Mountains' investments in unconsolidated
insurance affiliates at December 31, 1999 and 1998.
FSA and White Mountains' related investment in MediaOne preferred stock
(which was redeemed on September 2, 1999) contributed $15.7 million to net
income during the year ended December 31, 1999 versus $9.3 million for 1998 and
$7.8 million for 1997. The significant increase in FSA-related net income during
1999 resulted from the additional purchase of $50.0 million of FSA Common Stock
and the exercise of FSA Options, each occurring during 1999.
MSA contributed $9.8 million to net income during the year ended December
31, 1999 versus $3.2 million for 1998 and $2.5 million for 1997. The significant
increase in MSA-related net income during 1999 resulted principally from
significant realized gains on sales of investments recorded by MSA during the
year.
INVESTMENT OPERATIONS
Net realized gains on investments and the total net investment return from
White Mountains' investment activities (excluding net unrealized investment
holding gains and losses from White Mountains' investments in unconsolidated
insurance affiliates) are shown below:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
---------------------------------------
Millions 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net realized investment gains, before tax ................................. $ 69.6(a) $ 71.0 $ 97.4
========================================
Net investment income ..................................................... $ 61.9 $ 36.8 $ 21.6
Net unrealized investment gains (losses) for investments held during the
period .................................................................... (20.2) 24.8 87.7
----------------------------------------
Total net investment return, before tax ................................... $ 41.7 $ 61.6 $ 109.3
========================================
</TABLE>
(a) Excludes a $15.8 million realized gain on sale of the USF Re shell company
Net realized investment gains of $69.6 million for the year ended
December 31, 1999 included $23.9 million of pretax gains from sales of San
Juan Basin Royalty Trust ("SJT") units and $28.0 million of pretax gains from
sales of various common stocks and other investments in Folksamerica's
operating portfolio. In addition, $9.4 million of pretax gains on sales of
common stocks and fixed maturity investments were recorded in anticipation of
or in connection with the Valley Group Sale. Net realized investment gains of
$71.0 million for the year ended December 31, 1998 resulted principally from
the sale of White Mountains' investment in White River Corporation ("White
River"). Net realized investment gains of $97.4 million recorded during 1997
included $37.2 million of pretax gains from sales of Travelers Property
Casualty Corp. common stock, $24.3 million of pretax gains from sales of SJT
units, $10.3 million of pretax gains from sales of Mid Ocean Limited common
stock and $15.5 million of pretax gains from sales of Veritas DGC Inc. common
stock.
White Mountains' net investment income is comprised primarily of interest
income associated with the fixed maturity investments of its consolidated
insurance and reinsurance operations and dividend income from its equity
investments. The significant increase in net investment income
20
<PAGE>
from 1997 to 1999 is mainly attributable to White Mountains' growing portfolio
of fixed maturity investments resulting from the consolidation of Folksamerica
in August 1998 and the 1999 acquisitions of USF Re and CIG.
Net unrealized investment losses for investments held during 1999 of $20.2
million pretax resulted from a $48.3 million pretax loss on fixed maturities
held in White Mountains' insurance operating portfolios partially offset by
unrealized gains from common stocks and other investments. Net unrealized gains
for investments held during 1998 of $24.8 million pretax resulted from
unrealized gains on fixed maturities and common stocks. Net unrealized gains for
investments held during 1997 of $87.7 million resulted from gains on common
stocks, particularly White River.
EXPENSES
Insurance losses and loss adjustment expenses totalled $228.3 million for
1999 versus $174.8 million for 1998 and $97.1 million for 1997. Insurance and
reinsurance acquisition expenses totalled $73.4 million for 1999 versus $54.8
million for 1998 and $23.2 million for 1997. The increase in these insurance
expenses from 1997 to 1999 is primarily attributable to the inclusion of
Folksamerica in the Company's consolidated results during 1998 and the
acquisitions of USF Re and CIG during 1999. During 1999 and 1998, losses and
loss adjustment expenses relating to prior years developed unfavorably by $15.3
million (which is net of USF Re purchase price offsets) and $7.8 million,
respectively. During 1997, losses and loss adjustment expenses relating to prior
years developed favorably by $2.5 million pretax.
Compensation and benefits totalled $67.8 million for 1999 versus $51.5
million for 1998 and $45.5 million for 1997. The increase in compensation and
benefits from 1998 to 1999 is due to both the inclusion of Folksamerica in the
Company's consolidated results for the entire 1999 period and expenses incurred
in connection with the Redomestication. See "Liquidity and Capital Resources".
The increase in compensation and benefits from 1997 to 1998 is primarily due to
the initial inclusion of $7.1 million of Folksamerica's compensation and
benefits during 1998.
General expenses totalled $19.5 million for 1999 versus $15.9 million for
1998 and $15.7 million for 1997. The increase in general expenses during the
1999 period are primarily attributable to both the inclusion of Folksamerica in
the Company's consolidated results for the entire 1999 period and expenses
incurred in connection with the Redomestication.
Interest expense totalled $14.7 million during 1999 versus $13.7 million
for 1998 and $10.6 million for 1997. The increase in interest expense from 1998
to 1999 primarily reflects higher average indebtedness levels due to
indebtedness outstanding at Folksamerica for the entire 1999 period. The
increase in interest expense from 1997 to 1998 primarily reflects the inclusion
of $1.4 million of Folksamerica's interest expense for 1998 and an increase in
average indebtedness under White Mountains' credit facility associated with its
1998 acquisition of Folksamerica and its 1998 increase in its investment in MSA.
INCOME TAXES
In connection with the Redomestication, the Company and certain of its
subsidiaries changed their domicile to either Bermuda or Barbados (the "Offshore
Companies") while certain other subsidiaries remained domiciled in the United
States (the "Onshore Companies"). As a result, income earned by the Offshore
Companies will generally be subject to an effective overall tax rate lower than
that imposed by the United States, however, no tax benefits will be attained
21
<PAGE>
in the event of net losses incurred by such companies. Additionally, prior to
the Redomestication, the Company filed a consolidated United States income tax
return with its subsidiaries. The Onshore Companies must continue to file United
States tax returns but may no longer do so on a group-wide consolidated basis.
As a result, the aggregate United States income tax liability of the Onshore
Companies may be higher than it otherwise would have been if part of a
consolidated tax return. These factors may serve to increase or decrease White
Mountains' effective tax rate for 1999 and beyond, depending on the events and
circumstances occurring during such periods.
The income tax provision related to pretax earnings for 1999, 1998 and 1997
represents an effective tax rate of 32.9%, 35.8% and 35.9%, respectively. The
reduction in the effective rate for 1999 resulted from the Redomestication.
White Mountains recorded a deferred tax asset of $52.5 million (relating
primarily to various operating items) and a deferred tax liability of $37.5
million (relating primarily to net unrealized investment holding gains) on its
balance sheet as of December 31, 1999. White Mountains recorded a net deferred
tax liability of $13.4 million on its balance sheet as of December 31, 1998. The
1998 net deferred tax liability consisted of $103.3 million of deferred tax
assets (relating primarily to various operating items) and $116.7 million of
deferred tax liabilities (relating primarily to net unrealized investment
holding gains).
In 1991, the Company sold Fireman's Fund Insurance Company ("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 White Mountains' 1991
or prior years' 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
THE COMPANY, INSURANCE OPERATIONS AND OTHER
The primary sources of cash inflows for the Company are investment income,
sales of investment securities and dividends received from its operating
subsidiaries. Under the insurance laws of the states under which the Company's
insurance subsidiaries are 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 such subsidiaries in the future.
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.
The Company has repurchased its medium-term notes from time to time and during
1999 repurchased $15.9 million in principal amount of the notes due in February
2003. At December 31, 1999 the $96.0 million of medium-term notes outstanding
had an average maturity of 3.6 years and an average yield to maturity of 7.83%.
The Company has a revolving credit agreement whereby it may borrow up to
$35.0 million
22
<PAGE>
(which was increased to $50.0 million during 1999) at short-term market interest
rates. The credit agreement contains certain customary covenants and conditions.
At December 31, 1999 and 1998 the Company was in compliance with all covenants
under the facility and had no borrowings outstanding under the agreement.
During 1999 and 1998 the Company repurchased 1,020,150 Shares for $139.5
million and 151,916 Shares for $19.8 million, respectively. All Shares
repurchased during 1999 and 1998 have been retired. During 1999 and 1998 the
Company declared and paid quarterly cash dividends of $.40 per Share. Shares
repurchased and dividends paid during 1999 and 1998 represented returns of
excess capital to shareholders.
During 1999 the Company issued a total of 1,137,495 common shares to its
Chairman and its key employees in satisfaction of the Chairman's warrant
exercise and various employee benefit plan obligations. In order to entice the
Chairman to exercise his Warrants early, the Company paid Mr. Byrne $6.0 million
to compensate him for the estimated interest cost of borrowing the strike price
and the amounts required to prematurely pay his income taxes.
During 1999 White Mountains exercised FSA Options pursuant to which it
acquired 666,667 shares of FSA Common Stock at a strike price of $23.50 per
share. Also during 1999, White Mountains exercised FSA Options pursuant to which
it acquired 1,893,940 shares of FSA Common Stock at a strike price of $26.40 per
share in accordance with the redemption of the MediaOne preferred stock.
During 1999 White Mountains purchased an additional 922,509 shares of the
common stock of FSA at a price of $54.20 per share. The transaction was part of
a private offering by FSA pursuant to which it sold a total of $140.0 million of
its common stock to White Mountains, XL Capital, Ltd, The Tokio Marine and Fire
Insurance Co., Ltd and an FSA management group.
During 1999 the Company concluded the Mortgage Banking Sale and recorded an
$11.6 million after gain on the sale. The Company has retained the WMSC legal
entity which currently owns the majority of White Mountains' investments in FSA
and certain other mortgage-related and other assets and liabilities.
During 1999 the Company concluded the Valley Group Sale and recorded a
$53.8 million after tax gain on the sale. In connection with the Valley Group
Sale, White Mountains repaid $15.0 million of VGI's long-term indebtedness
during 1999.
During 1999 the Company concluded its previously announced acquisition of
the CIG companies for $86.7 million in cash.
In connection with the Redomestication, White Mountains paid $104.1 million
in certain compensation benefits to its current and former employees and
directors on October 22, 1999 at an incremental after tax cost of $14.9 million.
In connection with the compensation payments, White Mountains paid cash of $89.8
million (primarily to its former employees) and issued $14.3 million in Shares
(primarily to its current employees, directors and advisors). A significant
portion of the compensation paid on October 22, 1999 represented the
acceleration of expenses that would have ordinarily been incurred in future
periods which resulted in increased tax deductible expenses in 1999.
In connection with the Redomestication, the Company was treated as if it
sold all of its directly owned assets in a fully taxable transaction in which
gains, but not losses, were recognized. The Company incurred a United States
income tax liability upon the Redomestication of approximately $2.5 million.
On March 14, 2000, White Mountains entered into a definitive agreement to
sell its indirect,
23
<PAGE>
wholly-owned subsidiary, White Mountains Holdings, Inc. (which controls a
substantial amount of its holdings of FSA Common Stock and the FSA Preferred
Stock) as well as all its other holdings of FSA Common Stock, to Dexia S.A.
("Dexia") for total cash proceeds of $620.4 million. The transaction will occur
only in connection with Dexia's pending merger with FSA in which all holders of
FSA Common Stock will receive $76.00 cash per share. The merger agreement
between FSA and Dexia is subject to, among other matters, regulatory approvals
and the satisfaction of the conditions contained in Dexia's merger agreement
with FSA, including the approval of FSA shareholders. The transaction, if
approved, is expected to close mid-year 2000.
REINSURANCE OPERATIONS
Under the insurance laws of New York 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.
As part of the Folksamerica acquisition in 1998, White Mountains 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 former facility with a revolving credit agreement whereby it
may borrow up to $100.0 million (which was subsequently increased to $120.0
million during 1999) at market interest rates. The new credit agreement contains
certain customary covenants and conditions. At December 31, 1999, Folksamerica
was in compliance with all covenants under the facility and had $100.0 million
of borrowings outstanding under the agreement.
During 1999 Folksamerica acquired USF Re for total consideration of $92.5
million. The purchase consideration included the issuance of a $20.8 million,
five-year note by Folksamerica (which has been reduced to $6.8 million at
year-end 1999 due to adverse loss development at USF Re post acquisition) with
the balance paid in cash. Folksamerica did not record a significant amount of
goodwill in connection with its acquisition of USF Re.
On December 30, 1999, Folksamerica announced that it had signed a
definitive agreement to purchase PCA Property & Casualty Insurance Company
("PCA"), a Florida-domiciled insurance company specializing in workers'
compensation, from Humana Inc. The transaction, for $125.0 million in cash, is
subject to regulatory approvals.
On January 10, 2000, Folksamerica announced that it had signed a definitive
agreement to acquire substantially all the reinsurance operations of Risk
Capital Reinsurance Company ("RCRe"), a wholly-owned subsidiary of Risk Capital
Holdings, Inc., for consideration of $20.3 million. The transaction is subject
to regulatory approvals.
MARKET RISK
White Mountains' 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 and other relevant market rates and
prices such as prices for common equity securities. Due to White Mountains'
sizable investments in fixed maturity investments and common equity securities
and its use of medium- and long-term debt financing, market risk can have a
significant effect on White Mountains' consolidated financial position.
24
<PAGE>
INTEREST RATE RISK
FIXED MATURITY PORTFOLIO. In connection with the Company's consolidated
insurance and reinsurance subsidiaries, White Mountains invests in interest rate
sensitive securities, primarily debt securities. White Mountains' strategy is to
purchase fixed maturity investments that are attractively priced in relation to
perceived credit risks. White Mountains' investments in fixed maturity
investments are held as available for sale and, accordingly, White Mountains
accepts that realized and unrealized losses on these instruments may occur.
White Mountains 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.
INDEBTEDNESS. White Mountains utilizes debt financing at many levels of its
businesses. 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 White Mountains' fixed maturity
portfolio 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.
25
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Estimated Fair Percentage Increase
Fair Value at Assumed Change Value after Change (Decrease) to
Dollars in Millions December 31, 1999 in Interest Rate in Interest Rate Shareholders' Equity
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fixed maturity investments $924.5 50 bp decrease $ 940.8 1.7%
50 bp increase 908.5 (1.7)
100 bp increase 892.9 (3.3)
200 bp increase 862.8 (6.5)
-----------------------------------------------------------------------------------
Fixed rate indebtedness (a) $100.3 50 bp decrease $ 101.8 (.2)%
50 bp increase 98.8 .2
100 bp increase 97.4 .5
200 bp increase 94.7 .9
===================================================================================
</TABLE>
(a) Represents medium-term notes with a carrying value at December 31, 1999 of
$96.4 million. Excludes short-term indebtedness, variable rate obligations
and the USF Re seller note whose principal (and interest payable thereon)
amortizes in response to adverse loss development experienced at
Folksamerica resulting from its acquisition of USF Re.
FOREIGN CURRENCY EXCHANGE RATES
Folksamerica operates a branch office in Toronto, Canada to service its
Canadian customers and a portion of BICC's premiums are denominated in a foreign
currencies. Net unrealized foreign currency translation gains and losses
associated with Folksamerica and BICC are reported, after tax, 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 other comprehensive net income. At December 31, 1999
and 1998, Folksamerica's and BICC's net assets denominated in foreign currency
represented approximately one percent of the Company's shareholders' equity,
therefore, any significant change in foreign currency rates would not have a
material impact on White Mountains' financial position.
EQUITY PRICE RISK
The carrying values of White Mountains' common equity securities, a
significant portion of its other investments (primarily partnership interests
invested in common equity securities) and its investment in FSA 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 White Mountains' equity price risks as of
December 31, 1999 and shows the effects of a hypothetical 20% increase and a 20%
decrease in market prices as of that date.
26
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Assumed Estimated Fair Percentage Increase
Fair Value at Price Value after Assumed (Decrease) to
Dollars in Millions December 31, 1999 Change Price Change Shareholders' Equity
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common equity securities ............. $108.4 20% increase $130.1 2.6%
20% decrease $ 86.7 (2.6)%
Other investments (a) ................ $ 67.7 20% increase $ 81.2 1.6%
20% decrease $ 54.1 (1.6)%
FSA Preferred Stock .................. $ 41.1 20% increase $ 61.3 2.1%
20% decrease $ 20.9 (2.1)%
=====================================================================================================================
</TABLE>
(a) Excludes $.6 million of other investments which would not be directly
affected by the assumed changes in equity prices.
OTHER MATTERS
ACCOUNTING FOR FSA OPTIONS AND FSA PREFERRED STOCK
White Mountains accounts for its investment in FSA Common Stock on the
equity method of accounting and accounts for its unexercised stock options and
convertible securities to acquire FSA Common Stock at fair value. Upon the
exercises of FSA Options during 1999, the Company was required to write its
investments in the FSA Options exercised to their original cost in order to
transition the investment from fair value accounting to equity accounting. In
connection with this accounting transition, the Company reduced its after tax
net unrealized gains at the time of exercise by $39.3 million and recorded a
deferred credit of $14.2 million that will be amortized to income over a
five-year period. The difference between fair value and equity value ($25.1
million at the time of exercise) may not be recognized by White Mountains until
such time as equity accounting is no longer appropriate for its investment in
FSA Common Stock.
RETIREMENT OF COMMON STOCK HELD IN TREASURY
In conformance with Bermuda law, the Company retired all Shares held in its
treasury during 1999. The retirement of treasury shares resulted in a
significant reclassification of several of the Company's various shareholders'
equity accounts but did not affect total shareholders' equity.
YEAR 2000 UPDATE
Neither White Mountains nor any of its unconsolidated insurance affiliates
experienced any significant Year 2000 disruptions to its business operations.
White Mountains' total pretax cost of Year 2000 remediation, excluding its
unconsolidated insurance affiliates, was approximately $3.0 million. This figure
does not include the cost of hardware and software replacements and upgrades
made in the normal course of business.
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 Schedules appearing on page 34 of this
report.
27
<PAGE>
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.
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 to furnish a letter addressed to the SEC
stating whether it agrees with the above statements. A copy of this letter,
dated March 25, 1999, is contained herein as Exhibit 16.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
A. DIRECTORS (AS OF MARCH 24, 2000)
Reported under the caption "Election of Directors" on pages 3 through 6 of
the Company's 2000 Proxy Statement, herein incorporated by reference.
B. EXECUTIVE OFFICERS (AS OF MARCH 24, 2000)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Executive
officer
Name Position Age since
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Raymond Barrette ...... President 49 1997
John J. Byrne ......... Chief Executive Officer 67 1985
Reid T. Campbell ...... Vice President and Director of Finance 32 1996
Michael S. Paquette ... Senior Vice President and Controller 36 1993
David G. Staples ...... Vice President 39 1997
==============================================================================================================
</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.
28
<PAGE>
MR. BARRETTE was appointed President of the Company in January 1999 and
became a Director in February 2000. He joined White Mountains in 1997 as the
Company's Executive Vice President and Chief Financial Officer. He was
formerly a consultant with Tillinghast-Towers Perrin from 1994 to 1996 and
was with Fireman's Fund from 1973 to 1993. Mr. Barrette is also a director of
Folksamerica, PIC, ACIC, BICC and Waterford.
MR. BYRNE was appointed Chief Executive Officer of the Company in January
2000. He has served as Chairman of the Board of the Company since 1985 and
formerly served as President and Chief Executive Officer from 1990 to 1997, and
as Chief Executive Officer from 1985 to 1990. Mr. Byrne is also a director of
MSA.
MR. CAMPBELL was elected Vice President and Director of Finance in 1998 and
previously served as Assistant Controller from 1996 to 1998 and Director of
Accounting from 1995 to 1996. Mr. Campbell has been with White Mountains since
1994. Prior to joining White Mountains, Mr. Campbell was with KPMG Peat Marwick
from 1990 to 1994. Mr. Campbell is a director of PIC and Waterford.
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
has been a member of the White Mountains organization since 1989. Mr. Paquette
is also a director of Waterford.
MR. STAPLES was elected Vice President in 1997 and has been with White
Mountains since 1996. Prior to joining White Mountains, 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
11 through 13, "Reports of the Compensation Committees on Executive
Compensation" on pages 13 though 15, "Shareholder Return Graph" on page 16, and
"Compensation Plans" on page 17 of the Company's 2000 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 9 of the Company's 2000 Proxy Statement, herein
incorporated by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Reported under the captions "Certain Relationships and Related
Transactions" on page 13 and "Compensation Committee Interlocks and Insider
Participation in Compensation Decisions" on page 18 of the Company's 2000 Proxy
Statement, herein incorporated by reference.
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 34 of this report. A listing of exhibits filed as
part of the report appear on pages 30 through 32 of this report.
29
<PAGE>
b. REPORTS ON FORM 8-K
During the fourth quarter of 1999 the Company filed two Current Reports
on Form 8-K. The first, dated November 1, 1999, announced that the Company had
completed the Redomestication on October 25, 1999. The second, dated December
30, 1999, announced that Folksamerica had signed a definitive agreement to
purchase PCA.
c. EXHIBITS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
EXHIBIT NUMBER NAME
- ----------------------------------------------------------------------------------------------------------------------
<S> <C>
2 Plan of Reorganization (incorporated by reference herein to the Company's Registration Statement on S-4
(No. 333-87649) dated September 23, 1999)
3(a) Memorandum of Continuance of the Company (incorporated by reference herein to the Company's Registration
Statement on S-4 (No. 333-87649) dated September 23, 1999)
3(b) Bye-Laws of the Company (incorporated by reference herein to the Company's Registration Statement on S-4
(No. 333-87649) dated September 23, 1999)
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 the Company's
Registration Statement on S-3 (No. 33-54006) dated October 30, 1992)
9 Voting Trust Agreement dated September 2, 1994 between the Company, U S WEST Capital Corporation and The
First National Bank of Chicago (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 February 24, 1999 among the Company, the Lenders (as
named therein) and The First National Bank of Chicago (*)
10 (b) Amendment No. 1 dated March 23, 1999 to the Second Amended and Restated Credit Agreement dated February
24, 1999 among the Company, the Lenders (as named therein) and The First National Bank of Chicago (*)
10 (c) Amendment No. 2 dated July 30, 1999 to the Second Amended and Restated Credit Agreement dated February 24,
1999 among the Company, the Lenders (as named therein) and The First National Bank of Chicago (*)
10 (d) Amendment No. 3 dated October 29, 1999 to the Second Amended and Restated Credit Agreement dated February
24, 1999 among the Company, the Lenders (as named therein) and The First National Bank of Chicago (*)
10 (e) Credit Agreement dated February 24, 1999 among Folksamerica Holding Company, Inc., the Lenders (as named
therein) and The First National Bank of Chicago (*)
10 (f) Amendment No.1 dated June 29, 1999 to the Credit Agreement dated February 24, 1999 among Folksamerica
Holding Company, Inc., the Lenders (as named therein) and The First National Bank of Chicago (*)
10 (g) Amendment No. 2 dated October 29, 1999 to the Credit Agreement dated February 24, 1999 among Folksamerica
Holding Company, Inc., the Lenders (as named therein) and The First National Bank of Chicago (*)
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
EXHIBIT NUMBER NAME
- ----------------------------------------------------------------------------------------------------------------------
<S> <C>
10 (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)
10 (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)
10 (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)
10 (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)
10 (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)
10 (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)
10 (n) VGI Stock Acquisition Agreement dated February 10, 1999 between Unitrin, Inc. and the Company (incorporated
by reference herein to Exhibit 10(n) of the Company's 1998 Annual Report on Form 10-K)
10 (o) Transition Services Agreement dated March 25, 1999 between Source One and Citicorp Mortgage, Inc.
(incorporated by reference herein to Exhibit 10(o) of the Company's 1998 Annual Report on Form 10-K)
10 (p) Source One Asset Purchase Agreement dated March 25, 1999 between the Company, Source One and Citicorp
Mortgage Inc. (incorporated by reference herein to Exhibit 10(p) of the Company's 1998 Annual Report on Form
10-K)
10 (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)) (**)
10 (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) (**)
10 (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) (**)
10 (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) (**)
</TABLE>
31
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
EXHIBIT NUMBER NAME
- ----------------------------------------------------------------------------------------------------------------------
<S> <C>
10 (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) (**)
10 (v) Stock Purchase Agreement by and among White Mountains Insurance Group, Inc., Consolidated International
Group, Inc. and The Sellers Named Therein (incorporated by reference herein to Exhibit 10(a) of the
Company's Report on Form 8-K dated June 1, 1999)
10 (w) Stock Purchase Agreement as of December 30, 1999, by and among Humana Inc., Physician Corporation of America
and Folksamerica Holding Company, Inc. (incorporated by reference herein to Exhibit 10(a) of the Company's
Report on Form 8-K dated December 30, 1999)
10 (x) Amended and Restated Management Contract by and between PCA and Humana Workers Compensation Services, Inc.
(incorporated by reference herein to Exhibit 10(a) of the Company's Report on Form 8-K dated December 30,
1999)
10 (y) Stock Purchase Agreement dated March 31, 1999, by and Between the Centris Group, Inc. and Folksamerica
Holding Company, Inc. (incorporated by reference herein to Exhibit 10(a) of the Company's Report on Form 8-K
dated June 29, 1999)
10 (z) Stock Purchase and Indemnity Agreement by and among White Mountains and Dexia for all of the outstanding
capital stock of White Mountains Holdings, Inc. and indirectly for certain of the outstanding capital stock
of FSA (incorporated by reference herein to Exhibit 99.1 of the Company's Report on Form 8-K dated March 17,
2000)
11 Statement Re Computation of Per Share Earnings (***)
16 Letter of KPMG LLP dated March 25, 1999, (incorporated by reference herein to Exhibit 16 of the Company's
1998 Annual Report on Form 10-K)
21 Subsidiaries of the Registrant (*)
22 Notice of Special Meeting of Stockholders and Proxy Statement (incorporated by reference herein to the
Company's Registration Statement on S-4 (No. 333-87649) dated September 23, 1999)
23 (a) Consent of PricewaterhouseCoopers dated March 27, 2000 (*)
23 (b) Consent of KPMG LLP dated March 27, 2000 (*)
23 (c) Consent of PricewaterhouseCoopers LLP dated March 27, 2000 relating to Folksamerica and FSA (*)
24 Powers of Attorney (*)
27 1999 Financial Data Schedule (*)
99 (a) Report of PricewaterhouseCoopers LLP dated February 2, 1999 relating to Folksamerica (incorporated by
reference herein to Exhibit 99(a) of the Company's 1998 Annual Report on Form 10-K)
99 (b) The Consolidated Financial Statements of FSA and the related Report of Independent Accountants as of
December 31, 1999 and 1998 and for each of the three years in the period ended December 31, 1999 (*)
</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 SCHEDULES
The financial statement schedules 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 Schedules appearing
on page 34 of this report.
32
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
WHITE MOUNTAINS INSURANCE GROUP, LTD.
Date: March 27, 2000 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 Company
and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C> <C>
RAYMOND BARRETTE President and Director March 27, 2000
- ------------------------------------------
Raymond Barrette
TERRY L. BAXTER* Director March 27, 2000
- ------------------------------------------
Terry L. Baxter
JOHN J. BYRNE Chairman and Chief Executive Officer March 27, 2000
- -------------------------------------------
John J. Byrne
PATRICK M. BYRNE* Director March 27, 2000
- -------------------------------------------
Patrick M. Byrne
HOWARD L. CLARK, JR.* Director March 27, 2000
- -------------------------------------------
Howard L. Clark, Jr.
ROBERT P. COCHRAN* Director March 27, 2000
- -------------------------------------------
Robert P. Cochran
STEVEN E. FASS* Director March 27, 2000
- -------------------------------------------
Steven E. Fass
GEORGE J. GILLESPIE, III* Director March 27, 2000
- -------------------------------------------
George J. Gillespie, III
JOHN D. GILLESPIE* Director March 27, 2000
- -------------------------------------------
John D. Gillespie
K. THOMAS KEMP* Director March 27, 2000
- -------------------------------------------
K. Thomas Kemp
GORDON S. MACKLIN* Director March 27, 2000
- -------------------------------------------
Gordon S. Macklin
FRANK A. OLSON* Director March 27, 2000
- -------------------------------------------
Frank A. Olson
MICHAEL S. PAQUETTE Senior Vice President and Controller March 27, 2000
- -------------------------------------------
Michael S. Paquette
*By: /s/ RAYMOND BARRETTE
- --------------------------------------------
Raymond Barrette, Attorney-in-Fact
</TABLE>
33
<PAGE>
WHITE MOUNTAINS INSURANCE GROUP, LTD.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
Form
10-K
page(s)
- -----------------------------------------------------------------------------------------------------------------
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated balance sheets as of December 31, 1999 and 1998......................................... 35
Consolidated statements of income and comprehensive income for each of the years ended
December 31, 1999, 1998 and 1997................................................................ 36
Consolidated statements of shareholders' equity for each of the years ended
December 31, 1999, 1998 and 1997................................................................ 37
Consolidated statements of cash flows for each of the years ended
December 31, 1999, 1998 and 1997................................................................ 38
Notes to consolidated financial statements........................................................... 39
OTHER FINANCIAL INFORMATION:
Report on management's responsibilities.............................................................. 68
Reports of independent accountants................................................................... 69
Selected quarterly financial data (unaudited)........................................................ 71
FINANCIAL STATEMENT SCHEDULES:
I. Summary of investments other than investments in related parties........................... 72
II. Condensed financial information of the Registrant.......................................... 73
III. Supplementary insurance information........................................................ 75
IV. Reinsurance................................................................................ 76
V. Valuation and qualifying accounts.......................................................... 77
VI. Supplemental information concerning property and casualty insurance underwriters........... 78
</TABLE>
34
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
December 31,
-----------------------------
Dollars in millions 1999 1998
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Fixed maturity investments, at fair value (cost $957.9 and $916.1) .................. $ 924.5 $ 929.6
Common equity securities, at fair value (cost $100.4 and $195.4) .................... 108.4 241.7
Other investments (cost $57.5 and $69.1) ............................................ 68.3 77.5
Short-term investments, at amortized cost (which approximated fair value) ........... 117.5 79.0
-----------------------------
Total investments .............................................................. 1,218.7 1,327.8
Cash ................................................................................ 3.9 22.4
Investments in unconsolidated insurance affiliates .................................. 422.6 354.3
Reinsurance recoverable on paid and unpaid losses ................................... 193.7 137.3
Insurance and reinsurance balances receivable ....................................... 49.8 124.7
Deferred acquisition costs .......................................................... 22.2 35.4
Investment income accrued ........................................................... 15.0 16.2
Other assets ........................................................................ 106.9 35.2
Net assets of discontinued mortgage banking operations .............................. 16.3 110.4
-----------------------------
Total assets ................................................................... $ 2,049.1 $ 2,163.7
=============================
LIABILITIES
Loss and loss adjustment expense reserves ........................................... $ 851.0 $ 811.7
Unearned insurance and reinsurance premiums ......................................... 92.1 153.1
Short-term debt ..................................................................... 4.0 51.5
Long-term debt ...................................................................... 202.8 186.3
Deferred credit ..................................................................... 100.6 37.1
Accounts payable and other liabilities .............................................. 184.3 221.5
----------------------------
Total liabilities .............................................................. 1,434.8 1,461.2
----------------------------
SHAREHOLDERS' EQUITY
Common stock - authorized 15,000,000 and 125,000,000 Shares,
issued 5,945,953 and 30,863,547 Shares ............................................ 5.9 30.9
Paid-in surplus ..................................................................... 67.0 354.2
Retained earnings ................................................................... 534.2 1,063.2
Common stock in treasury, at cost, 0 and 25,034,939 Shares .......................... - (871.0)
Accumulated other comprehensive net income, after tax ............................... 7.2 125.2
----------------------------
Total shareholders' equity ..................................................... 614.3 702.5
-----------------------------
Total liabilities and shareholders' equity ..................................... $ 2,049.1 $ 2,163.7
=============================
</TABLE>
See Notes to Consolidated Financial Statements including Note 16 for Commitments
and Contingencies.
35
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
-------------------------------------------
Millions, except per Share amounts 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES:
Earned insurance and reinsurance premiums ............................... $ 283.2 $ 246.0 $ 145.3
Gain on sale of Valley Group ............................................ 88.1 - -
Net realized gains on investments and other assets ...................... 85.4 71.0 97.4
Net investment income ................................................... 61.9 36.8 21.6
Earnings from unconsolidated insurance affiliates ....................... 31.1 24.3 21.3
Amortization of deferred credit ......................................... 11.8 2.7 -
Other insurance operations revenue ...................................... 3.7 9.5 7.8
----------------------------------------
Total revenues ..................................................... 565.2 390.3 293.4
----------------------------------------
EXPENSES:
Losses and loss adjustment expenses ..................................... 228.3 174.8 97.1
Insurance and reinsurance acquisition expenses .......................... 73.4 54.8 23.2
Compensation and benefits ............................................... 67.8 51.5 45.5
General expenses ........................................................ 19.5 15.9 15.7
Interest expense ........................................................ 14.7 13.7 10.6
----------------------------------------
Total expenses ..................................................... 403.7 310.7 192.1
----------------------------------------
PRETAX EARNINGS ........................................................... 161.5 79.6 101.3
Income tax provision .................................................... (53.1) (28.5) (36.4)
----------------------------------------
NET INCOME FROM CONTINUING OPERATIONS ..................................... 108.4 51.1 64.9
Gain from sale of discontinued mortgage banking operations .............. 11.6 - -
Net income (loss) from discontinued mortgage banking operations ......... 1.0 27.4 (25.6)
----------------------------------------
NET INCOME ................................................................ 121.0 78.5 39.3
========================================
OTHER COMPREHENSIVE NET INCOME (LOSS) ITEMS, AFTER TAX:
Net unrealized gains (losses) for investments held during the period .... (73.7) 38.1 105.1
Net unrealized gains (losses) on foreign currency translation ........... .9 (.9) -
Recognition of unrealized gains for investments sold during the period .. (45.2) (46.1) (63.4)
----------------------------------------
COMPREHENSIVE NET INCOME .................................................. $ 3.0 $ 69.6 $ 81.0
========================================
BASIC EARNINGS PER SHARE:
Net income ........................................................... $ 21.50 $ 13.38 $ 5.98
Comprehensive net income ............................................. .54 11.87 12.33
DILUTED EARNINGS PER SHARE:
Net income ........................................................... $ 19.73 $ 11.94 $ 5.40
Comprehensive net income ............................................. .39 10.58 11.15
========================================
</TABLE>
See Notes to Consolidated Financial Statements.
36
<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, 1997 ................ $ 686.9 $ 398.4 $1,067.1 $(871.0) $ 92.4 $ -
-------------------------------------------------------------------------
Net income ................................. 39.3 - 39.3 - - -
Dividends to shareholders .................. (5.3) - (5.3) - - -
Shares repurchased and retired ............. (103.7) (11.5) (92.2) - - -
Change in net unrealized investment
gains and losses, after tax .............. 41.7 - - - 41.7 -
-------------------------------------------------------------------------
Balances at December 31, 1997 .............. 658.9 386.9 1,008.9 (871.0) 134.1 -
-------------------------------------------------------------------------
Net income ................................. 78.5 - 78.5 - - -
Dividends to shareholders .................. (9.4) - (9.4) - - -
Shares repurchased and 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)
-------------------------------------------------------------------------
Net income ................................. 121.0 - 121.0 - - -
Dividends to shareholders .................. (8.8) - (8.8) - - -
Issuances of Shares from treasury .......... 57.1 - (58.8) 115.9 - -
Shares repurchased and retired ............. (139.5) (312.2) (582.4) 755.1 - -
Change in net unrealized investment
gains and losses and other, after tax .... (118.0) - - - (118.9) .9
--------------------------------------------------------------------------
BALANCES AT DECEMBER 31, 1999 .............. $ 614.3 $ 72.9 $534.2 $ - $ 7.2 $ -
=========================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
37
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
----------------------------------------
Millions 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income ...................................................................$ 121.0 $ 78.5 $ 39.3
Reconciliation of net income to cash flows from operating activities:
Gain from sale of discontinued mortgage banking operations, after tax ... (11.6) - -
Net (income) loss from discontinued operations .......................... (1.0) (27.4) 25.6
Gain on sale of Valley Group ............................................ (88.1) - -
Undistributed earnings from unconsolidated insurance affiliates ......... (29.0) (19.1) (14.7)
Net realized gains on investments and other assets ...................... (85.4) (71.0) (97.4)
Amortization of deferred credit ......................................... (11.8) (2.7) -
Decrease (increase) in reinsurance recoverable .......................... 5.7 (2.7) 33.2
Decrease (increase) in insurance and reinsurance premiums receivable .... 15.5 (2.4) (3.8)
(Decrease) increase in insurance loss and loss adjustment expense
reserves ............................................................. (83.2) 13.7 6.6
Net change in current and deferred income taxes receivable and payable .. 55.6 (7.1) 19.8
(Decrease) increase in other liabilities ................................ (97.9) 16.5 2.3
Decrease (increase) in other assets ..................................... 7.4 25.1 (14.5)
Other, net .............................................................. (5.5) (5.3) 12.3
--------------------------------------
Net cash (used for) provided from operating activities ....................... (208.3) (3.9) 8.7
--------------------------------------
Cash flows from investing activities:
Net (increase) decrease in short-term investments ....................... (41.3) 38.8 (19.0)
Sales of common equity securities and other investments ................. 256.4 137.5 197.4
Sales and maturities of fixed maturity investments ...................... 273.7 132.8 92.4
Purchases of common equity securities and other investments ............. (71.1) (56.1) (.8)
Purchases of fixed maturity investments ................................. (89.4) (122.7) (102.6)
Investments in unconsolidated insurance affiliates ...................... (115.7) (70.3) (44.4)
Purchase of consolidated affiliates ..................................... (118.6) (167.5) -
Proceeds from sales of consolidated affiliates .......................... 144.5 - -
Net purchases of fixed assets ........................................... (1.0) (1.1) (3.8)
--------------------------------------
Net cash provided from (used for) investing activities ....................... 237.5 (108.6) 119.2
--------------------------------------
Cash flows from financing activities:
Net (decrease) increase of short-term debt .............................. (51.6) (.4) .3
Issuances of long-term debt ............................................. 100.0 50.0 -
Repayments of long-term debt ............................................ (86.4) (1.1) (1.1)
Shares repurchased and retired .......................................... (139.4) (19.5) (103.8)
Proceeds from exercises of Warrants and stock options ................... 21.7 - -
Cash dividends paid to common shareholders .............................. (8.8) (9.4) (5.3)
--------------------------------------
Net cash (used for) provided from financing activities ....................... (164.5) 19.6 (109.9)
--------------------------------------
Net cash provided from (used for) discontinued operations .................... 116.8 108.3 (15.8)
--------------------------------------
Net (decrease) increase in cash during year .................................. (18.5) 15.4 2.2
--------------------------------------
Cash balance at beginning of year ............................................ 22.4 7.0 4.8
--------------------------------------
Cash balance at end of year ..................................................$ 3.9 $ 22.4 $ 7.0
======================================
</TABLE>
See Notes to Consolidated Financial Statements.
38
<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
accounting principles generally accepted in the United States ("GAAP"). The
Company's consolidated operating subsidiaries at December 31, 1999
principally consisted of Folksamerica, PIC, ACIC, BICC and Waterford. The
Company's principal unconsolidated affiliates at December 31, 1999 consisted
of FSA and MSA. 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 White Mountains. 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 period
financial statements have been reclassified to conform with the current
presentation, including the segregation of mortgage banking net assets and
mortgage banking net income as discontinued operations which relates to a
decision made by the Company during 1999 to exit from the mortgage banking
business. See Note 2.
White Mountains has completed numerous significant transactions that
have affected the comparability of the financial statement information
presented herein.
INVESTMENT SECURITIES
White Mountains' portfolio of fixed maturity investments, common equity
securities and other investments are 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 as a separate component of shareholders' equity. Changes in net
unrealized investment gains and losses, after tax, are reported as a component
of other comprehensive net income.
Premiums and discounts on fixed maturity investments are accreted to income
over the anticipated life of the investment.
Other investments principally include investments in limited partnership
interests which are recorded using the equity method of accounting.
Realized gains and losses resulting from sales of investment securities are
accounted for using the specific identification method.
Short-term investments consist of money market funds, certificates of
deposit and other securities which mature or become available for use within one
year. Short-term investments are carried at amortized cost, which approximated
fair value as of December 31, 1999 and 1998.
White Mountains' consolidated insurance and reinsurance operations are
required to maintain deposits with certain insurance regulatory agencies in
order to maintain their insurance licenses. The fair value of such deposits
totalled $59.5 million and $57.7 million as of December 31, 1999 and 1998,
respectively.
CASH
Cash includes amounts on hand and demand deposits with banks and other
financial institutions. Amounts presented in the statement of cash flows are
shown net of balances acquired and sold in the purchase or sale of the Company's
consolidated subsidiaries.
INSURANCE AND REINSURANCE OPERATIONS
Premiums written are recognized as revenues and are earned ratably over the
terms of the related policies or reinsurance treaties. Unearned premiums
represent the portion of premiums collected that are applicable to future
insurance or reinsurance coverage provided by policies or treaties in force.
39
<PAGE>
Deferred acquisition costs represent commissions, premium taxes, brokerage
expenses and other costs which are directly attributable to and vary with the
production of new business. These costs 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.
Losses and loss adjustment expenses are charged against income as incurred.
Unpaid insurance losses and loss adjustment expenses are based on estimates
(generally determined 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.
Due to the nature of the policies written by White Mountains' insurance
subsidiaries, the Company's exposure to environmental and asbestos liabilities
is limited. However, as case law expands, White Mountains may be subject to
environmental and asbestos loss and loss adjustment expense liabilities beyond
that intended by policy coverage. White Mountains' insurance subsidiaries have
estimated environmental and asbestos loss and loss adjustment expense
liabilities based upon several factors including facts surrounding reported
cases (such as policy limits and deductibles), current law, past and projected
claim activity and past settlement values for similar claims. The Company
believes that recorded reserves related to environmental and asbestos loss and
loss adjustment expenses are adequate. Furthermore, in the event that current
case law is expanded to include claims not contemplated in the establishment of
White Mountains' recorded environmental and asbestos loss and loss adjustment
expense reserves, the Company believes that it is unlikely that these claims
will have a material adverse effect on its financial condition or liquidity.
Nonetheless, due to the inherent uncertainty present in the establishment of
environmental and asbestos loss and loss adjustment expense liabilities, the
possibility exists that the reserves for environmental and asbestos liabilities
could be revised in the near term.
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 are reported as a reduction of premiums
written. Amounts applicable to reinsurance ceded for unearned premium reserves
(e.g., prepaid reinsurance premiums) 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.
DEFERRED CREDIT
As of December 31, 1999 and 1998, White Mountains had deferred credit
balances of $100.6 million and $37.1 million, respectively. These deferred
credits resulted from the transactions outlined below.
During 1999 White Mountains completed its acquisition of CIG for $86.7
million in cash. Because the cost acquiring CIG was less than the value of its
net identifiable assets, the Company recorded a $62.0 million deferred credit
(negative goodwill) which is being amortized ratably over the estimated period
of benefit of three years.
During 1999 White Mountains exercised its FSA Options and acquired
2,560,607 shares of FSA Common Stock. In accordance with GAAP, White Mountains
accounted for its FSA Options
40
<PAGE>
at fair value and accounts for its investment in FSA Common Stock on the equity
method of accounting. Upon the exercises of the FSA Options, White Mountains was
required to write down its investments in the FSA Options to their original
cost. Because the cost of White Mountains' investment in FSA Common Stock
(resulting from the exercise of the FSA Options) was less than the incremental
portion of FSA's net identifiable assets it acquired at the date of exercise,
White Mountains recorded a $14.2 million deferred credit that is being amortized
to income ratably over the estimated period of benefit of five years.
During 1998 White Mountains acquired all outstanding shares of
Folksamerica Common Stock for $169.1 million thereby causing Folksamerica to
become a consolidated subsidiary of the Company as of that date. Prior to
1998, White Mountains owned a 50.0% non-consolidated interest in Folksamerica
through its investments in Folksamerica Preferred Stock and Folksamerica
Common Stock. In accordance with GAAP, White Mountains accounted for its
investment in Folksamerica Preferred Stock at fair value and accounts for its
investment in Folksamerica Common Stock on the equity method of accounting.
Upon the acquisition of Folksamerica, White Mountains was required to write
down its investment in Folksamerica Preferred Stock to its original cost.
Because the cost of White Mountains' investment in Folksamerica Preferred
Stock was less than the value of Folksamerica's net identifiable assets at
the date of acquisition, White Mountains recorded a $39.8 million deferred
credit that is being amortized to income ratably over the estimated period of
benefit of 5 years.
INCOME AND WITHHOLDING TAXES
Deferred tax assets and liabilities are recorded when a difference between
an asset or liability's financial statement value and its tax reporting value
exists, and for other temporary differences as defined by SFAS No. 109,
"Accounting for Income Taxes". The deferred tax asset or liability is recorded
based on tax rates expected to be in effect when the difference reverses.
As a result of the Redomestication, income earned by the Offshore Companies
will generally be subject to an effective overall tax rate lower than that
imposed by the United States, however, no tax benefits will be attained in the
event of net losses incurred by such companies. Onshore Companies continue to be
subject to United States income taxes.
The Company is no longer subject to United States income taxes on its
direct earnings. The Company's Barbados subsidiaries are generally subject to
a 5% United States withholding tax and a 1% Barbados income tax on dividends
received from its subsidiaries. Therefore, it is White Mountains' policy to
accrue a 1% foreign income tax and a 5% United States withholding tax on the
equity in earnings of each of its Onshore Companies. In addition, the Company
may be subject to an 8% state tax on dividends it receives from certain of
its subsidiaries. Therefore, it is the Company's policy to accrue an 8% state
income tax on dividends it is expected to receive in any given period from
such subsidiaries. These taxes are recorded in addition to United States
income taxes accrued by its Onshore Companies.
FOREIGN CURRENCY TRANSLATION
Folksamerica operates a branch office in Toronto, Canada to service its
Canadian customers and a portion of BICC's premiums are denominated in a foreign
currencies. Net unrealized foreign currency translation gains and losses
associated with Folksamerica and BICC are reported, after tax, 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 other comprehensive net income.
ACCOUNTING STANDARDS RECENTLY ADOPTED AND ISSUED
In October 1998, the American Institute of Certified Public Accountants
(the "AICPA") issued Statement of Position ("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. SOP 98-7 is
effective for periods beginning January 1, 2000, with early adoption permitted.
White Mountains is currently evaluating the impact of the adoption of SOP 98-7
and the potential effects on its financial position and results of operations.
41
<PAGE>
In June 1998, the Financial Accounting Standards Board 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. The Company is not currently invested in traditional
derivative financial instruments for hedging or for any other purpose. However,
under SFAS 133 derivatives may be deemed to be embedded in other financial
instruments. If the embedded derivatives meet certain criteria, they must be
bifurcated from the original contract and separately accounted for in a manner
that is consistent with other derivative financial instruments. SFAS No. 133 is
effective beginning after June 15, 2000, with initial application as of the
beginning of the first quarter of the applicable fiscal year. White Mountains is
currently evaluating the impact of the adoption of SFAS 133 and the potential
effects on its financial position and results of operations.
In March 1998, the AICPA issued 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 did not have a
material impact on White Mountains' financial position or results of operations.
In December 1997, the AICPA issued SOP 97-3 entitled "Accounting by
Insurance and Other Enterprises for Insurance-Related Assessments". SOP No. 97-3
provides guidance on when a liability should be recognized for guaranty fund and
other assessments and how to measure the liability. This statement is effective
for fiscal years beginning after December 15, 1998. SOP No. 97-3 did not have a
material effect on the results of operations or financial position.
EARNINGS PER SHARE
Basic earnings per Share amounts are based on the weighted average number
of Shares outstanding. Diluted earnings per Share amounts are based on the
average number of Shares and potential dilutive Shares outstanding. Potential
dilutive Shares include outstanding stock options and Warrants. In the diluted
earnings per Share calculation, the Company's net income is reduced by an amount
deemed to be reflective of the dilution to FSA's reported net income caused by
its investment in FSA Preferred Stock. The following table outlines the
Company's computation of earnings per Share for the years ended December 31,
1999, 1998 and 1997:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
----------------------------------------
1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BASIC EARNINGS PER SHARE NUMERATORS (IN MILLIONS):
Net income ................................................................ $121.0 $ 78.5 $ 39.3
=========================================
Net income from continuing operations ..................................... $108.4 $ 51.1 $ 64.9
========================================
Comprehensive net income .................................................. $ 3.0 $ 69.6 $ 81.0
========================================
DILUTED EARNINGS PER SHARE NUMERATORS (IN MILLIONS):
Net income ................................................................ $121.0 $ 78.5 $ 39.3
Dilution to earnings from unconsolidated insurance affiliates .......... (.6) (.4) (.2)
-----------------------------------------
Diluted net income ........................................................ $120.4 $ 78.1 $ 39.1
=========================================
Diluted net income from continuing operations ............................. $107.8 $ 50.7 $ 64.7
=========================================
Diluted comprehensive net income .......................................... $ 2.4 $ 69.2 $ 80.8
=========================================
</TABLE>
42
<PAGE>
<TABLE>
<S> <C> <C> <C>
EARNINGS PER SHARE DENOMINATORS (IN THOUSANDS):
Basic earnings per Share denominator (average Shares outstanding) ......... 5,630 5,866 6,570
Average outstanding dilutive stock options and Warrants (a) ............ 472 669 674
----------------------------------------
Diluted earnings per Share denominator .................................... 6,102 6,535 7,244
========================================
BASIC EARNINGS PER SHARE (IN DOLLARS):
Net income ................................................................ $21.50 $ 13.38 $ 5.98
========================================
Net income from continuing operations ..................................... $19.25 $ 8.71 $ 9.88
========================================
Comprehensive net income .................................................. $ .54 $ 11.87 $ 12.33
========================================
DILUTED EARNINGS PER SHARE (IN DOLLARS):
Net income ................................................................ $19.73 $ 11.94 $ 5.40
========================================
Net income from continuing operations ..................................... $17.66 $ 7.75 $ 8.93
========================================
Comprehensive net income .................................................. $ .39 $ 10.58 $ 11.15
========================================
</TABLE>
(a) See Note 10 for detailed information concerning outstanding dilutive stock
options and Warrants.
43
<PAGE>
NOTE 2. DISCONTINUED MORTGAGE BANKING OPERATIONS
On May 1, 1999, White Mountains concluded the Mortgage Banking Sale which
encompassed substantially all the mortgage banking assets of WMSC and received
net proceeds totalling $180.6 million (which was net of WMSC's public
indebtedness assumed by Citibank and WMSC's credit agreement borrowings which
were required to be repaid at closing). Mortgage banking assets and liabilities
that were not part of the Citibank sale principally included WMSC's investments
in financial instruments, pool loan purchases and preferred stock, each of which
were substantially liquidated during 1999. White Mountains recorded an estimated
$11.6 million after tax gain on the sale of its mortgage banking net assets
(which is net of anticipated future liabilities) during 1999. As a result of the
Company's decision to dispose of its net mortgage banking assets, these
activities are shown as discontinued operations herein.
Summary condensed financial results of discontinued mortgage banking
operations follow:
CONDENSED STATEMENTS OF NET ASSETS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
December 31,
--------------------------
Millions 1999 1998
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS:
Cash and investments ................................................. $ 13.8 $ 19.4
Capitalized mortgage servicing rights ................................ - 169.7
Mortgage loans held for sale ......................................... - 676.3
Pool loan purchases .................................................. 26.9 165.0
Other mortgage origination and servicing assets ...................... 2.1 106.9
Other assets ......................................................... 15.7 90.1
--------------------------
Total assets ..................................................... $ 58.5 $ 1,227.4
--------------------------
LIABILITIES AND PREFERRED STOCK:
Short-term debt ...................................................... $ - $ 697.0
Long-term debt ....................................................... - 173.4
Accounts payable and other liabilities ............................... 42.2 202.6
Preferred stock ...................................................... - 44.0
--------------------------
Total liabilities and preferred stock ............................ 42.2 1,117.0
--------------------------
Net assets of discontinued mortgage banking operations ............... $ 16.3 $ 110.4
==========================
</TABLE>
44
<PAGE>
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
----------------------------------------
Millions 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES:
Net investment income ............................................... $ 27.8 $ 81.6 $ 43.5
Net gain on sales of mortgages ...................................... 25.4 86.8 21.5
Net mortgage servicing revenue ...................................... 10.4 43.3 38.2
Other mortgage operations revenue ................................... 12.0 47.1 14.3
----------------------------------------
Total revenues .................................................. 76.2 258.8 117.5
----------------------------------------
EXPENSES:
Compensation and benefits ........................................... 28.5 78.7 56.3
Interest expense .................................................... 24.5 70.2 35.4
General expenses .................................................... 19.3 59.5 57.9
----------------------------------------
Total expenses .................................................. 72.3 208.4 149.6
----------------------------------------
Pretax earnings (loss) .............................................. 3.9 50.4 (32.1)
Income tax benefit (provision) ................................... (1.7) (19.3) 10.2
----------------------------------------
Net income (loss) before preferred stock dividends .................. 2.2 31.1 (21.9)
Preferred stock dividends ....................................... (1.2) (3.7) (3.7)
----------------------------------------
Net income (loss) from discontinued mortgage banking operations ..... $ 1.0 $ 27.4 $(25.6)
========================================
</TABLE>
NOTE 3. REINSURANCE OPERATIONS
On August 18, 1998, White Mountains acquired all of the remaining
outstanding shares of Folksamerica Common Stock for $169.1 million thereby
causing Folksamerica to become a consolidated subsidiary of White Mountains as
of that date. Prior to that date, White Mountains owned a 50% non-consolidated
interest in Folksamerica, primarily through the Folksamerica Preferred Stock.
Supplemental condensed unaudited pro forma financial information for the
year ended December 31, 1998, which assumes that White Mountains' acquisition of
all the outstanding Folksamerica Common Stock had occurred as of January 1,
1998, follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
(Unaudited)
Pro Forma
Year Ended
Millions, except per Share amounts December 31, 1998
- ----------------------------------------------------------------------------------
<S> <C>
Total revenues ........................................ $ 576.3
Net income ............................................ $ 95.0
Comprehensive net income .............................. $ 95.8
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 unaudited pro forma information presented does not purport to represent
what White Mountains' results of operations actually would have been had White
Mountains acquired all the outstanding common stock of Folksamerica as of
January 1, 1998, or to project White Mountains' results of operations for any
future date or period.
45
<PAGE>
LOSS AND LOSS ADJUSTMENT EXPENSE RESERVE ACTIVITY
The following table summarizes White Mountains' loss and loss adjustment
expense reserve activity relating to Folksamerica for the year ended December
31, 1999 and the interim period from August 18, 1998 to December 31, 1998:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
YEAR ENDED Period Ended
Millions DECEMBER 31, 1999 December 31, 1998
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Beginning balance ........................................................ $ 723.2 $ 726.1
Less beginning reinsurance recoverable ............................... (129.0) (124.1)
-----------------------------------------
Net loss and loss adjustment expense reserves ............................ 594.2 602.0
Loss and loss adjustment expense reserves acquired - USF Re .............. 106.5 -
Losses and loss adjustment expenses incurred relating to:
Current year losses .................................................. 152.9 58.6
Prior year losses .................................................... 29.3 1.1
------------------------------------------
Total incurred losses and loss adjustment expenses ....................... 182.2(a) 59.7
Loss and loss adjustment expenses paid relating to:
Current year losses .................................................. (55.4) (13.0)
Prior year losses .................................................... (181.6) (54.5)
------------------------------------------
Total loss and loss adjustment expense payments .......................... (237.0) (67.5)
Net ending balance ....................................................... 645.9 594.2
Plus ending reinsurance recoverable .................................. 136.2 129.0
-----------------------------------------
Gross ending balance ..................................................... $ 782.1 $ 723.2
==========================================
</TABLE>
(a) Includes adverse loss development on USF Re acquired reserves. This adverse
development resulted in a $14.0 million reduction in Folksamerica's USF Re
seller note payable. See Note 7.
During 1999 Folksamerica acquired USF Re for total consideration of $92.5
million. The purchase consideration included the issuance of a $20.8 million,
five-year note by Folksamerica (which can be reduced by adverse loss development
at USF Re post acquisition). Incurred losses for the year ended December 31,
1999 related to prior accident years are primarily attributable to reserve
additions related to: (i) adverse loss development on USF Re acquired reserves
of $20.1 million pretax (which resulted in a reduction of the USF Re seller note
of $14.0 million) and (ii) reserve additions relating to asbestos and
environmental liability exposures.
As of December 31, 1999 and 1998, Folksamerica carried reported case
reserves for environmental exposures of $9.9 million and $14.9 million, ($8.4
million and $10.9 million, net of reinsurance) respectively. As of December 31,
1999 and 1998, Folksamerica carried reported case reserves for asbestos
exposures of $34.5 million and $29.5 million ($22.3 million and $17.9 million
net of reinsurance), respectively. Folksamerica carried IBNR reserves for these
exposures as of December 31, 1999 and 1998 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, White Mountains
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
46
<PAGE>
Folksamerica. These amounts are shown net of reinsurance ceded by Folksamerica
of $9.4 million of premiums written, $8.8 million of premiums earned, $.9
million of reinsurance acquisition costs and $19.0 million of loss and loss
adjustment expenses.
Folksamerica's policyholders' surplus, as reported to various regulatory
authorities as of December 31, 1999 and 1998, was $338.5 million and $328.5
million, respectively. Folksamerica's statutory net income for the year ended
December 31, 1999 and for the period from August 18, 1998 to December 31, 1998
was $48.6 million and $9.0 million, respectively. The principal differences
between Folksamerica's statutory amounts and the amounts reported in accordance
with GAAP (Folksamerica's stand-alone shareholder's equity was $249.4 million
and $302.0 million at December 31, 1999 and 1998, respectively, and its net
income was $63.7 million and $5.5 million for the year ended December 31, 1999
and for the period from August 18, 1998 to December 31, 1998, respectively)
include deferred taxes, deferred acquisition costs and market value adjustments
for debt securities. Folksamerica's statutory policyholders' surplus at December
31, 1999 was in excess of the minimum requirements of relevant state insurance
regulations.
Under the insurance laws of the state of New York, Folksamerica 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, 1999,
Folksamerica had the ability to pay a dividend to its shareholder of $33.9
million without prior approval of regulatory authorities.
On December 30, 1999, Folksamerica announced that it had signed a
definitive agreement to purchase PCA, a Florida-domiciled workers' compensation
insurance company, from Humana Inc. The transaction, for $125.0 million in cash,
is subject to regulatory approvals.
On January 10, 2000, Folksamerica announced that it had signed a definitive
agreement to acquire substantially all the reinsurance operations of RCRe, a
wholly-owned subsidiary of Risk Capital Holdings, Inc., for consideration of
$20.3 million. The transaction is subject to regulatory approvals.
During the year ended December 31, 1999, Folksamerica received
approximately 67% of its gross reinsurance premiums written from three major
reinsurance brokers as follows: (i) Guy Carpenter and affiliates - 26%; (ii)
E.W. Blanch - 21%; and (iii) AON Re, Inc. - 20%. During the year ended December
31, 1999, Folksamerica received no more than 10% of its gross reinsurance
premiums from any individual ceding company.
NOTE 4. CONSOLIDATED INSURANCE OPERATIONS
On October 15, 1999, White Mountains completed its acquisition of CIG for
$86.7 million in cash. CIG's principal operating subsidiaries are PIC, a
commercial and personal lines writer, and ACIC and BICC, both of which are in
run-off.
On June 17, 1999, White Mountains completed the Valley Group Sale and
received net proceeds of $139.0 million in cash after receiving a special
dividend prior to the closing of $76.6 million (net of related tax liabilities)
consisting of cash, investment securities and the common stock of Waterford. In
connection with the Valley Group Sale, White Mountains recorded a pretax gain of
$88.1 million, $53.8 million after tax. As part of the Valley Group Sale, White
Mountains has provided Unitrin, Inc. with certain adverse loss development
protections for approximately four years. These protections are not expected to
result in a material subsequent purchase price adjustment.
47
<PAGE>
For the years ended December 31,1998 and 1997, VGI contributed $5.0 million
and $7.2 million, respectively, to net income. For the year ended December 31,
1999, VGI's contribution to net income was not material.
LOSS AND LOSS ADJUSTMENT EXPENSE RESERVE ACTIVITY
The following table summarizes loss and loss adjustment expense reserve
activity for White Mountains' consolidated property and casualty insurance
operations for the years ended December 31, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
------------------------------------------
Millions 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Beginning balance .................................................... $ 88.5 $ 71.9 $ 65.4
Less beginning reinsurance recoverable ........................... (8.9) (8.7) (9.2)
------------------------------------------
Net loss and loss adjustment expense reserves ........................ 79.6 63.2 56.2
Loss and loss adjustment expense reserves sold - VGI ................. (87.8) - -
Loss and loss adjustment expense reserves acquired - CIG ............. 22.5 - -
Losses and loss adjustment expenses incurred relating to:
Current year losses .............................................. 57.5 108.4 99.6
Prior year losses ................................................ 2.6 6.7 (2.5)
------------------------------------------
Total incurred losses and loss adjustment expenses ................... 60.1 115.1 97.1
Loss and loss adjustment expense payments ............................ (38.3) (98.7) (90.1)
Net ending balance ................................................... 36.1 79.6 63.2
Plus ending reinsurance recoverable .............................. 32.8 8.9 8.7
------------------------------------------
Gross ending balance ................................................. $ 68.9 $ 88.5 $ 71.9
==========================================
</TABLE>
Total policyholders' surplus of PIC and ACIC at December 31, 1999, as
reported to regulatory authorities, was $76.8 million. Statutory net loss for
the period from October 16, 1999 to December 31, 1999 for PIC and ACIC totalled
$3.9 million. The principal differences between PIC and ACIC's statutory amounts
and the amounts reported in accordance with GAAP (PIC and ACIC's total
shareholder's equity was $73.0 million at December 31, 1999 and its net loss was
$3.3 million for the period from October 16, 1999 to December 31, 1999) include
deferred taxes, deferred acquisition costs and market value adjustments for debt
securities. PIC and ACIC's statutory policyholders' surplus at December 31, 1999
was in excess of the minimum requirements of relevant state insurance
regulations.
Under the insurance laws of the various states under which PIC and ACIC are
domiciled, 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 PIC and ACIC in the future.
At December 31, 1999, $11.0 million of PIC and ACIC's total statutory surplus
was available for the payment of dividends to its shareholders without prior
approval of regulatory authorities.
48
<PAGE>
NOTE 5. INVESTMENT SECURITIES
White Mountains' net investment income is comprised primarily of interest
income associated with the fixed maturity investments of its consolidated
insurance and reinsurance operations and dividend income from its equity
investments. Net investment income for 1999, 1998 and 1997 consisted of the
following:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
----------------------------------------
Millions 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Investment income:
Fixed maturity investments ........................................ $ 53.6 $ 28.4 $ 11.3
Common equity securities .......................................... 3.2 3.6 7.3
Short-term investments ............................................ 6.1 3.4 3.5
Other ............................................................. .3 2.2 -
----------------------------------------
Total investment income .............................................. 63.2 37.6 22.1
Less investment expenses and other charges ........................ (1.3) (.8) (.5)
----------------------------------------
Net investment income, before tax .................................... $ 61.9 $ 36.8 $ 21.6
========================================
</TABLE>
Total net investment gains and losses (excluding net unrealized gains and
losses from investments in unconsolidated insurance affiliates), before tax,
associated with White Mountains' investment portfolio consisted of the
following:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
----------------------------------------
Millions 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Gross realized investment gains ............................................. $ 90.4 $ 74.0 $ 98.3
Gross realized investment losses ............................................ (20.8) (3.0) (.9)
----------------------------------------
Net realized investment gains ............................................... 69.6(a) 71.0 97.4
Change in net unrealized investment gains ................................... (89.8) (46.2) (9.7)
----------------------------------------
Total net investment gains (losses) for investments held during the period,
before tax ............................................................... $(20.2) $ 24.8 $ 87.7
========================================
</TABLE>
(a) Excludes a $15.8 million realized gain on sale of the USF Re shell company
49
<PAGE>
The composition of pretax realized gains consisted of the following:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
Year Ended December 31,
----------------------------------------
Millions 1999 1998 1997
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Fixed maturity investments ...................... $ .7 $ 1.6 $ .6
Common equity securities ........................ 61.3 22.6 59.5
Other investments ............................... 7.6 46.8 37.3
----------------------------------------
Net realized investment gains ................... $ 69.6(a) $ 71.0 $ 97.4
========================================
</TABLE>
(a) Excludes a $15.8 million realized gain on sale of the USF Re shell company
The components of White Mountains' 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 1999 1998
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Investment securities:
Gross unrealized investment gains ...................................... $ 21.6 $ 68.4
Gross unrealized investment losses ..................................... (37.8) (2.5)
--------------------------------------
Net unrealized gains (losses) from investment securities ................... (16.2) 65.9
Net unrealized gains from investments in unconsolidated insurance affiliates 30.0 128.1
--------------------------------------
Total net unrealized investment gains, before tax .......................... $ 13.8 $194.0
======================================
</TABLE>
50
<PAGE>
The cost or amortized cost, gross unrealized investment gains and losses,
and carrying values of White Mountains' fixed maturity investments as of
December 31, 1999 and 1998, were as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1999
--------------------------------------------------------
Cost or Gross Gross
amortized unrealized unrealized Carrying
Millions cost gains losses value
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U. S. Government and agency obligations ................... $351.5 $.6 $(14.5) $337.6
Debt securities issued by industrial corporations ......... 330.8 .4 (11.8) 319.4
Municipal obligations ..................................... 132.0 .7 (4.0) 128.7
Mortgage-backed securities ................................ 93.1 .1 (3.9) 89.3
Foreign government obligations ............................ 50.5 .1 (1.1) 49.5
--------------------------------------------------------
Total fixed maturity investments ..................... $957.9 $1.9 $(35.3) $924.5
========================================================
</TABLE>
<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
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
Other fixed maturity investments ............................ 2.0 - - 2.0
------------------------------------------------------
Total fixed maturity investments ....................... $916.1 $15.7 $(2.2) $929.6
======================================================
</TABLE>
The cost or amortized cost and carrying value of White Mountains' fixed
maturity investments at December 31, 1999 is presented below by contractual
maturity. Actual maturities could differ from contractual maturities because
borrowers may have the right to call or prepay certain obligations with or
without call or prepayment penalties.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
DECEMBER 31, 1999
----------------------------------
Cost or
amortized Carrying
Millions cost value
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Due in one year or less .............................. $81.0 $80.3
Due after one year through five years ................ 455.8 443.4
Due after five years through ten years ............... 300.0 285.4
Due after ten years .................................. 28.0 26.1
Mortgage-backed securities ........................... 93.1 89.3
---------------------------
Total ........................................... $957.9 $924.5
===========================
</TABLE>
51
<PAGE>
The cost or amortized cost, gross unrealized investment gains and losses,
and carrying values of White Mountains' common equity securities and other
investments as of December 31, 1999 and 1998, were as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
DECEMBER 31, 1999
------------------------------------------------------
Cost or Gross Gross
amortized unrealized unrealized Carrying
Millions cost gains losses value
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common equity securities ................ $100.4 $14.8 $(6.8) $108.4
=====================================================
Other investments ....................... $ 57.5 $11.4 $(.6) $68.3
=====================================================
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
December 31, 1998
-------------------------------------------------------
Cost or Gross Gross
amortized unrealized unrealized Carrying
Millions cost gains losses value
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common equity securities .................................. $195.4 $51.4 $(5.1) $241.7
========================================================
Other investments ......................................... $ 69.1 $ 8.6 $(.2) $77.5
=======================================================
</TABLE>
Sales and maturities of investments, excluding short-term investments,
totalled $530.1 million, $270.3 million and $158.0 million for the years ended
December 31, 1999, 1998 and 1997, respectively. There were no non-cash exchanges
or involuntary sales of investment securities during 1999, 1998 and 1997.
52
<PAGE>
The components of the White Mountains' change in net unrealized investment
gains, after tax, from 1997 to 1999 are as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
--------------------------------------
Millions 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net realized investment gains .............................................. $ 69.6(a) $ 71.0 $ 97.4
Income tax expense applicable to net realized investment gains ........... (24.4) (24.9) (34.0)
----------------------------------------
Net realized investment gains, after tax ................................... $ 45.2 $ 46.1 $ 63.4
========================================
Net unrealized investment holding gains (losses) arising during the year ... $ (118.4) $ 58.6 $ 162.0
Income taxes applicable to net unrealized investment holding gains ....... 44.7 (20.5) (56.9)
----------------------------------------
Net unrealized investment holding gains arising during the year, after tax .. (73.7) 38.1 105.1
Recognition of unrealized gains for investments sold, after tax .......... (45.2) (46.1) (63.4)
----------------------------------------
Change in net unrealized investment gains, after tax ....................... $ (118.9) $ (8.0) $ 41.7
========================================
</TABLE>
(a) Excludes a $15.8 million realized gain on sale of the USF Re shell company
NOTE 6. THIRD PARTY REINSURANCE
In the normal course of business, White Mountains' 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. White
Mountains remains 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. White Mountains' insurance subsidiaries evaluate
the financial condition of their reinsurers and monitor concentrations of credit
risk arising from similar activities or economic characteristics of the
reinsurers to minimize the Company's exposure to significant losses from
reinsurer insolvencies.
REINSURANCE OPERATIONS
At December 31, 1999, Folksamerica has reinsurance recoverables with a
carrying value of $46.7 million associated with London Life and Casualty
Reinsurance Corporation. At December 31, 1999, Folksamerica holds a letter of
credit and funds withheld as collateral for amounts due from London Life and
Casualty in excess of the recoverable balance.
INSURANCE OPERATIONS
ACIC is a party to an aggregate excess of loss contract with Gerling Global
International Reinsurance Company, Ltd. ("Gerling") to reinsure direct excess
liability policies written prior to December 31, 1985. At December 31, 1999,
ACIC had reinsurance recoverables with a carrying value of $23.3 million with
Gerling under the contract. ACIC holds a letter of credit and assets held in
trust as collateral for amounts due under the Gerling contract.
53
<PAGE>
The effects of reinsurance on White Mountains' written and earned premiums
and on loss and loss adjustment expenses was as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Consolidated Property and Casualty
Insurance Operations
------------------------------------
Reinsurance ACIC, PIC and
Millions Operations (a) BICC (b) VGI (c) Waterford Total
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1999
Gross written premiums:
Direct .................................................. $ 2.2 $ 4.9 $ 48.2 $ 9.5 $ 64.8
Assumed ................................................. 236.2 2.3 30.1 1.5 270.1
Ceded ................................................... (36.7) (3.0) (10.9) (9.6) (60.2)
-------------------------------------------------------------------
Net written premiums ....................................... $ 201.7 $ 4.2 $ 67.4 $ 1.4 $ 274.7
-------------------------------------------------------------------
Gross earned premiums:
Direct .................................................. $ 2.4 $ 5.9 $ 44.1 $ 11.4 $ 63.8
Assumed ................................................. 241.0 2.7 35.1 1.8 280.6
Ceded ................................................... (32.4) (4.1) (13.2) (11.5) (61.2)
-------------------------------------------------------------------
Net earned premiums ........................................ $ 211.0 $ 4.5 $ 66.0 $ 1.7 $ 283.2
-------------------------------------------------------------------
Losses and loss adjustment expenses:
Direct .................................................. $ (6.2) $ 4.8 $ 44.5 $ (1.8) $ 41.3
Assumed ................................................. 205.4 1.6 14.6 12.9 234.5
Ceded ................................................... (31.0) (.2) (6.6) (9.7) (47.5)
-------------------------------------------------------------------
Net losses and loss adjustment expenses .................... $ 168.2 $ 6.2 $ 52.5 $ 1.4 $ 228.3
===================================================================
Year ended December 31, 1998
Gross written premiums:
Direct .................................................. $ 1.9 $ - $ 96.3 $ 9.6 $ 107.8
Assumed ................................................. 81.2 - 69.9 1.5 152.6
Ceded ................................................... (9.4) - (2.7) (9.7) (21.8)
-------------------------------------------------------------------
Net written premiums ....................................... $ 73.7 $ - $ 163.5 $ 1.4 $ 238.6
-------------------------------------------------------------------
Gross earned premiums:
Direct .................................................. $ 2.0 $ - $ 98.0 $ 6.4 $ 106.4
Assumed ................................................. 92.2 - 68.3 1.0 161.5
Ceded ................................................... (8.8) - (6.6) (6.5) (21.9)
-------------------------------------------------------------------
Net earned premiums ........................................ $ 85.4 $ - $ 159.7 $ .9 $ 246.0
-------------------------------------------------------------------
Losses and loss adjustment expenses:
Direct .................................................. $ 4.4 $ - $ 79.5 $ 3.6 $ 87.5
Assumed ................................................. 74.3 - 37.9 .7 112.9
Ceded ................................................... (19.0) - (2.8) (3.8) (25.6)
-------------------------------------------------------------------
Net losses and loss adjustment expenses .................... $ 59.7 $ - $ 114.6 $ .5 $ 174.8
===================================================================
</TABLE>
54
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Consolidated Property and Casualty
Insurance Operations
--------------------------------------
Reinsurance ACIC, PIC and
Millions Operations (a) BICC (b) VGI (c) Waterford Total
- -----------------------------------------------------------------------------------------------------------------------------------
Year ended December 31, 1997
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Gross written premiums:
Direct ......................................... $ - $ - $ 92.3 $ 2.4 $ 94.7
Assumed ........................................ - - 64.2 1.0 65.2
Ceded .......................................... - - (6.0) (3.1) (9.1)
------------------------------------------------------------------------
Net written premiums .............................. $ - $ 8 $ 150.5 $ .3 $ 150.8
------------------------------------------------------------------------
Gross earned premiums:
Direct ......................................... $ - $ - $ 89.2 $ .5 $ 89.7
Assumed ........................................ - - 61.8 1.2 63.0
Ceded .......................................... - - (5.8) (1.6) (7.4)
------------------------------------------------------------------------
Net earned premiums ............................... $ - $ - $ 145.2 $ .1 $ 145.3
------------------------------------------------------------------------
Losses and loss adjustment expenses:
Direct ......................................... $ - $ - $ 64.3 $ - $ 64.3
Assumed ........................................ - - 33.5 5.1 38.6
Ceded .......................................... - - (.8) (5.0) (5.8)
------------------------------------------------------------------------
Net losses and loss adjustment expenses ........... $ - $ - $ 97.0 $ .1 $ 97.1
========================================================================
</TABLE>
(a) Excludes premiums and loss and loss adjustment expenses from January 1,
1997 to August 17, 1998 during which time Folksamerica was not a
consolidated subsidiary of the Company. See Note 3.
(b) Excludes premiums and loss and loss adjustment expenses from January 1,
1997 to October 14, 1999 during which time ACIC, PIC and BICC were not
consolidated subsidiaries of the Company. See Note 4.
(c) Excludes premiums and loss and loss adjustment expenses from Waterford for
all periods presented, as Waterford was not part of the Valley Group Sale.
See Note 4.
NOTE 7. DEBT
SHORT-TERM DEBT
At December 31, 1999 the Company had short-term debt outstanding of $4.0
million representing medium-term notes due February 2000 with a stated interest
rate of 7.39%. At December 31, 1998 White Mountains had $51.5 million of
short-term debt outstanding which consisted of a $50.0 million credit facility
at a subsidiary holding company with an average interest rate of 6.20% and a
$1.5 million note payable at CGI with a stated interest rate of 6.50%. During
1999, White Mountains repaid the $50.0 million credit facility and extinguished
the CGI obligation in connection with the Valley Group Sale.
In addition, the Company has a revolving credit agreement whereby it may
borrow up to $35.0 million (which was increased to $50.0 million during 1999) at
short-term market interest rates. The credit agreement contains customary
facility fees plus an interest rate equal to the London Interbank Offered Rate
plus .625% on borrowings thereunder. The credit agreement contains certain
customary covenants and conditions. At December 31, 1999 the Company was in
compliance with all covenants under the facility and had no borrowings
outstanding under the agreement. At December 31, 1998 the Company had no
outstanding borrowings under its previous credit agreement.
55
<PAGE>
LONG-TERM DEBT
Long-term debt outstanding consisted of the following:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
December 31,
------------------------------------
Millions 1999 1998
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
The Company:
Medium-term notes ....................................................... $ 96.4 $ 116.3
Less net discounts ...................................................... (.4) (.6)
--------------------------------
Total ................................................................ 96.0 115.7
--------------------------------
Folksamerica:
Revolving credit agreement .............................................. 100.0 -
USF Re seller note ...................................................... 6.8 -
Medium-term notes ....................................................... - 55.6
--------------------------------
Total ................................................................ 106.8 55.6
--------------------------------
VGI: Medium-term notes .................................................... - 15.0
--------------------------------
Total long-term debt ....................................................... $ 202.8 $ 186.3
=================================
</TABLE>
At December 31, 1999 the Company had $96.0 million of outstanding
medium-term notes with an average maturity of 3.6 years and a yield to maturity
of 7.83%. During 1999 the Company repurchased $15.9 million in principal amount
of its medium-term notes due in February 2003.
As part of the Folksamerica acquisition in 1998, White Mountains agreed to
repay or refinance Folksamerica's $55.6 million of outstanding long-term
indebtedness during February 1999. In February 1999 White Mountains repayed and
replaced Folksamerica's former facility with a six-year revolving credit
agreement whereby it may borrow up to $100.0 million (which was subsequently
increased to $120.0 million during 1999) at market interest rates. The new
credit agreement contains certain customary covenants and conditions. At
December 31, 1999 Folksamerica was in compliance with all covenants under the
facility and had $100.0 million of borrowings outstanding under the agreement.
As part of its 1999 acquisition of USF Re, Folksamerica issued a $20.8
million, five-year note which may be reduced by adverse loss development at USF
Re post acquisition. During 1999 Folksamerica reduced the principal amount of
the USF Re note to $6.8 million in response to post acquisition adverse loss
development experienced on loss reserves assumed in connection with
56
<PAGE>
the USF Re acquisition. The reduction of the principal amount of the USF Re note
of $14.0 million has been recorded as a reduction of incurred loss and loss
adjustment expenses for the period ended December 31, 1999.
At December 31, 1998 Valley had $15.0 million outstanding under a five year
credit facility whereby it could borrow up to $15.0 million at market interest
rates. During 1999 this obligation was repaid in connection with the Valley
Group Sale.
Total interest paid by White Mountains for its short-term and long-term
indebtedness was $15.6 million, $13.3 million and $14.3 million in 1999, 1998
and 1997, respectively.
White Mountains' debt maturities for 2000, 2003, 2004 and beyond are $4.0
million, $86.4 million, $6.8 million and $110.0 million, respectively.
NOTE 8. INCOME TAXES
In connection with the Redomestication, the Company and certain of its
subsidiaries changed their domicile to either Bermuda or Barbados while certain
other subsidiaries remained domiciled in the United States. As a result, income
earned by the Offshore Companies will generally be subject to an effective
overall tax rate lower than that imposed by the United States, however, no tax
benefits will be attained in the event of net losses incurred by such companies
Additionally, prior to the Redomestication, the Company filed a consolidated
United States income tax return with its subsidiaries. The Onshore Companies
must continue to file United States tax returns but may no longer do so on a
group-wide consolidated basis. As a result, the aggregate United States income
tax liability of the Onshore Companies may be higher than it otherwise would
have been if part of a consolidated tax return. These factors may serve to
increase or decrease White Mountains' effective tax rate for 1999 and beyond,
depending on the events and circumstances occurring during such periods.
In connection with the Redomestication, the Company was treated as if it
sold all of its directly owned assets in a fully taxable transaction in which
gains, but not losses, were recognized. The Company incurred a tax liability
upon the Redomestication of approximately $2.5 million.
The total income tax provision consisted of the following:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
--------------------------------
Millions 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
United States income tax provision ..................................................... $ 47.0 $ 26.9 $ 35.1
State and local income tax provision ................................................... 6.0 1.6 1.3
United States withholding tax and foreign income tax provision ......................... .1 - -
---------------------------------
Total income tax provision .......................................................... $ 53.1 $ 28.5 $ 36.4
=================================
Net income tax payments ................................................................ $ 14.1 $ 35.7 $ 24.9
=================================
Tax provision recorded directly to shareholders' equity related to:
Changes in net unrealized investment gains and losses .............................. $ (69.1) $ (4.4) $ 22.9
Changes in net foreign currency translation gains and losses ....................... $ .5 $ (.5) $ -
=================================
</TABLE>
57
<PAGE>
The components of the income tax provision (benefit) on pretax earnings
follow:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
Year Ended December 31,
-------------------------------------------
Millions 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current ................................................... $ 14.3 $30.3 $ 36.9
Deferred .................................................. 38.8 (1.8) (.5)
--------------------------------------------
Total income tax provision on pretax earnings ........ $ 53.1 $28.5 $ 36.4
============================================
</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 received for tax purposes. White Mountains recorded a
net deferred income tax asset of $52.5 million in other assets and a net
deferred tax liability of $37.5 million in accounts payable and other
liabilities on its balance sheet as of December 31, 1999. White Mountains
recorded a net deferred income tax liability of $13.4 million in accounts
payable and other liabilities on its balance sheet at December 31, 1998. An
outline of the significant components of White Mountains' deferred tax assets
and liabilities follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
December 31,
----------------------
Millions 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets related to:
Discounting of loss reserves ..................... $ 45.3 $ 40.1
Unearned insurance and reinsurance premiums ...... 5.7 10.5
Compensation and benefit accruals ................ 4.4 49.9
Other items ...................................... .7 2.8
---------------------
Total deferred tax assets ................... $ 56.1 $ 103.3
=====================
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
December 31,
------------------------
Millions 1999 1998
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax liabilities related to:
Earnings from unconsolidated insurance affiliates ............ $ 18.1 $ 17.5
Net unrealized investment gains .............................. 13.9 83.0
Deferred acquisition costs ................................... 7.8 12.4
Other items .................................................. 1.3 3.8
-----------------------
Total deferred tax liabilities .......................... $ 41.1 $ 116.7
=======================
</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, 1999 and 1998.
58
<PAGE>
A reconciliation of taxes calculated using the 35% United States statutory
rate (the tax rate at which the majority of the Company's worldwide operations
are subject to) to the income tax provision on pretax earnings follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
------------------------------------
Millions 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Tax provision at the United States statutory rate .................................. $ 56.5 $ 27.9 $ 35.5
Differences in taxes resulting from:
Deferred credit amortization and purchase price adjustments ..................... (7.9) (.9) -
Tax reserve adjustments ......................................................... 6.1 5.4 5.1
State income taxes, net ......................................................... 3.9 1.0 .9
Non-United States net earnings .................................................. (3.6) - -
United States income tax incurred upon the Redomestication ...................... 2.5 - -
Tax exempt interest ............................................................. (2.2) (1.2) -
Dividends received deduction .................................................... (1.4) (2.6) (3.1)
Other, net ...................................................................... (.8) (1.1) (2.0)
---------------------------------
Total income tax provision on pretax earnings ...................................... $ 53.1 $ 28.5 $ 36.4
=================================
</TABLE>
The non-United States component of net earnings was $9.0 million for the
year ended December 31, 1999.
In 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 White Mountains' 1991 or prior years' Federal income tax returns,
the results of further Internal Revenue Service audits and other matters
affecting the amount of the deductible tax loss from the sale.
NOTE 9. RETIREMENT AND POSTRETIREMENT PLANS
The Company formerly had an unfunded, nonqualified defined contribution
plan for a select group of management employees for the purpose of providing
retirement benefits (the "DBP"). The amount of annual contribution to the DBP
was determined using actuarial assumptions. At December 31, 1998, White
Mountains' liability to participants pursuant to the DBP was $4.8 million.
The Company formerly had an unfunded, nonqualified plan for a select group
of management employees for the purpose of deferring current compensation for
retirement savings (the "DCP"). Pursuant to the DCP, participants could
voluntarily defer all or a portion of qualifying remuneration payable by White
Mountains. At December 31, 1998 White Mountains' liability to participants
pursuant to the DCP was $65.1 million.
Prior to the Redomestication, White Mountains terminated the DBP and the
DCP and paid participants a total of $88.6 million in full satisfaction of White
Mountains' long-term DBP and DCP obligations. This payment resulted in an
incremental pretax cost to the Company of $15.2 million, however, this action
provided the Company with increased tax deductible expenses during 1999 and
served to reduce future compensation and benefit expenses.
During 1999 the Board mandated deferrals of a portion of compensation
earned by certain of its executive officers totalling $3.1 million for a period
of no less than one year. These 1999 deferrals are eligible for inclusion in
any successor plan to the DCP.
59
<PAGE>
White Mountains has various defined contribution employee savings plans for
the benefit of substantially all its employees. The costs of these plans are not
material to White Mountains' financial statements.
Folksamerica has a defined benefit pension plan for the benefit of its
employees. Benefits under this plan are based on years of service and each
employee's highest average eligible compensation over the last five consecutive
years of employment. The cost of this plan is not material to White Mountains'
financial statements.
White Mountains' does not have any significant ongoing postretirement
benefit plan obligations.
NOTE 10. EMPLOYEE STOCK-BASED COMPENSATION PLANS
White Mountains' Long-Term Incentive Plan (the "Incentive Plan") provides
for granting to participants of the Company (and certain of its subsidiaries)
various types of stock-based incentive awards including stock options and
performance shares. At December 31, 1999, 323,400 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.
During 1999, 1998 and 1997 the Company granted a total of 29,300, 47,800
and 50,000 performance shares, respectively, to its employees. During 1999, 1998
and 1997 the Company paid a total of 141,650, 47,129 and 22,944 performance
shares, respectively, to its participants in cash and Shares. Performance shares
paid during 1999 included 58,100 performance shares relating to the period from
1996 to 1998, 40,300 performance shares relating to the period from 1997 to 1999
and 43,250 performance shares relating to the period from 1998 to 2000. At
December 31, 1999 and 1998, 29,300 and 147,350 performance shares remained
outstanding, respectively. The financial goal for full payment of the
performance shares is the achievement of a 13% annual after tax return on equity
(as specifically defined by the Compensation Committee) as measured over the
applicable performance periods. All performance shares that remain unpaid at the
end of any performance period are cancelled. White Mountains expenses
performance shares outstanding ratably over the performance period assuming full
vesting at current market values. During 1999, 1998 and 1997, White Mountains
recorded $6.1 million, $7.2 million and $8.8 million, of pretax performance
share expense, respectively.
As of December 31, 1998 and 1997 there were 2,000 stock options outstanding
which had an exercise price of $27.13 per Share. These options were exercised
during 1999.
As of December 31, 1998 and 1997 the Company's Chairman had Warrants
outstanding entitling him to buy 1,000,000 Shares for $21.66 per Share through
January 2, 2002. During 1999 the Chairman exercised the Warrants early in
exchange for a one-time payment of $6.0 million. This one-time payment
compensated the Chairman for the estimated interest cost of borrowing the strike
price and the amounts required to prematurely pay his income taxes. The 1999
exercise of Warrants provided the Company with increased tax deductible
expenses.
60
<PAGE>
Folksamerica's defined contribution plan (the "Folksamerica 401(k) Plan")
offers its participants the ability to invest their balances in several
different investment options including Shares. As of December 31, 1999 and 1998
the Folksamerica 401(k) Plan owned less than 1% of the total Shares outstanding.
SFAS No. 123, "Accounting for Stock Based Compensation," requires
disclosure regarding all employee compensation involving Shares and Share
equivalents and encourages companies to recognize compensation expense for
stock-based awards based on the fair value of such awards on the date of grant.
White Mountains 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 stock options during 1998 and
1997, as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
Year Ended December 31,
----------------------------
Millions, except per Share amounts 1998 1997
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Net income:
As reported ............................... $ 78.5 $ 39.3
Pro forma ................................. 77.4 39.4
------------------------
Basic net income per Share:
As reported ............................... $ 13.38 $ 5.98
Pro forma ................................. 12.56 5.99
-------------------------
Diluted net income per Share:
As reported ............................... $ 11.94 $ 5.40
Pro forma ................................. 11.20 5.41
========================
</TABLE>
SFAS No. 123 provides for the expense of Warrants and stock options 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 the Warrants. In
determining the pro forma effects of SFAS No. 123, the Company recognizes the
pro forma expense of the Warrants and stock options over time. The pro forma net
income figures disclosed above may not be representative of the effects on net
income to be reported in future years.
As previously mentioned, during 1999 all Warrants and stock options were
exercised. Therefore, no pro forma disclosures in accordance with SFAS No. 123
are provided for the year ended December 31, 1999.
NOTE 11. SHAREHOLDERS' EQUITY
SHARE REPURCHASES AND RETIREMENT
During 1999 and 1998 the Company repurchased 1,020,150 Shares for $139.5
million and 151,916 Shares for $19.8 million, respectively. All Shares
repurchased during 1999 and 1998 were retired.
RETIREMENT OF SHARES HELD IN TREASURY
In conformance with Bermuda law, the Company retired all Shares held in its
treasury during 1999. The retirement of treasury shares resulted in a
significant reclassification of several of the Company's various shareholders'
equity accounts but did not affect total shareholders' equity.
61
<PAGE>
COMMON STOCK DIVIDENDS
During 1999 and 1998 the Company declared and paid quarterly cash dividends
of $.40 per Share.
NOTE 12. SEGMENT INFORMATION
White Mountains has determined that its reportable segments include
Reinsurance, Property and Casualty Insurance, Investments in Unconsolidated
Insurance Affiliates (which includes White Mountains' investment in MediaOne
preferred stock where applicable) and Holding Company (primarily the operations
of the Company and certain of its intermediate subsidiary holding companies).
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. Management and the Board does
not currently review its operating results on a geographic basis. There are no
significant intercompany transactions among White Mountains' segments other than
occasional intercompany sales and transfers of investment securities (gains and
losses resulting from such transfers have been eliminated herein).
Certain amounts in the prior periods have been reclassified to conform with
the current presentation which involved the segregation of the mortgage banking
net assets, revenues and pretax earnings as discontinued operations.
Selected financial information for White Mountains' segments follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Property
and Investments in
Casualty Unconsolidated Holding
Millions Reinsurance Insurance Affiliates Company Total
- -----------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1999
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues from external customers ..................... $ 211.0 $ 75.6 $ - $ - $ 286.6
Gain from the Valley Group Sale ...................... - - - 88.1 88.1
Net realized gains on investments and other assets ... 43.8 10.0 - 31.6 85.4
Net investment income ................................ 49.1 4.9 2.6 5.3 61.9
Equity in earnings of unconsolidated affiliates ...... - - 31.1 - 31.1
Amortization of deferred credit ...................... 6.3 - 1.2 4.3 11.8
Other revenue ........................................ - - - .3 .3
-----------------------------------------------------------------------
Total revenues ....................................... $ 310.2 $ 90.5 $ 34.9(a) $ 129.6 $ 565.2
=======================================================================
Pretax earnings before interest expense .............. $ 60.6 $ .2 $ 34.9 $ 80.5 $ 176.2
Interest expense ..................................... (5.9) (.4) - (8.4) (14.7)
Income tax provision ................................. (9.8) - (1.1) (42.2) (53.1)
-----------------------------------------------------------------------
$ 44.9 $ (.2) $ 33.8 $ 29.9 $ 108.4
====================================================================================================================================
Year ended December 31, 1998
- -----------------------------------------------------------------------------------------------------------------------------------
Revenues from external customers ..................... $ 85.4 $ 170.0 $ - $ - $ 255.4
Net realized gains (losses) on investments ........... (.8) 5.4 - 66.4 71.0
Net investment income ................................ 18.1 8.2 3.8 6.7 36.8
Equity in earnings of unconsolidated affiliates ...... - - 24.3 - 24.3
Amortization of deferred credit ...................... 2.7 - - - 2.7
Other revenue ........................................ - - - .1 .1
-----------------------------------------------------------------------
Total revenues ....................................... $ 105.4 $ 183.6 $ 28.1(a) $ 73.2 $ 390.3
=======================================================================
Pretax earnings before interest expense .............. $ 8.1 $ 7.7 $ 28.1 $ 49.4 $ 93.3
Interest expense ..................................... (1.4) (1.1) - (11.2) (13.7)
Income tax provision ................................. (1.2) (1.8) (7.6) (17.9) (28.5)
-----------------------------------------------------------------------
Net income from continuing operations ................ $ 5.5 $ 4.8 $ 20.5 $ 20.3 $ 51.1
=======================================================================
</TABLE>
62
<PAGE>
<TABLE>
<CAPTION>
Property Investments
and in
casualty unconsolidated Holding
Millions Reinsurance insurance affiliates company Total
- ----------------------------------------------------------------------------------------------------
Year ended December 31, 1997
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues from external customers .............. $ - $ 153.1 $ - $ - $ 153.1
Net realized gains (losses) on investments .... - 4.1 - 93.3 97.4
Net investment income ......................... - 8.9 3.8 8.9 21.6
Equity in earnings of unconsolidated affiliates - -- 21.3 - 21.3
--------------------------------------------------
Total revenues ................................ $ - $ 166.1 $ 25.1(a) $ 102.2 $ 293.4
==================================================
Pretax earnings before interest expense ....... $ - $ 12.6 $ 25.1 $ 74.2 $ 111.9
Interest expense ............................. - (1.2) - (9.4) (10.6)
Income tax provision .......................... - (4.3) (6.1) (26.0) (36.4)
--------------------------------------------------
Net income from continuing operations ......... $ - $ 7.1 $ 19.0 $ 38.8 $ 64.9
==================================================
</TABLE>
(a) Includes interest income on White Mountains' investment in MediaOne
preferred stock (considered to be related to White Mountains' investment in
FSA) of $2.6 million, $3.8 million and $3.8 million for 1999, 1998 and
1997, respectively.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
Property Investments Net assets
and in of
Millions casualty unconsolidated Holding discontinued
Ending assets: Reinsurance insurance affiliates company operations Total
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
December 31, 1999 ........................ $ 1,294.3 198.6 422.6 117.3 16.3 $ 2,049.1
December 31, 1998 ........................ 1,220.5 311.5 404.1 117.2 110.4 2,163.7
======================================================================================================================
</TABLE>
NOTE 13. INVESTMENTS IN UNCONSOLIDATED AFFILIATES
INVESTMENT IN FSA
White Mountains owned 6,943,316, 3,460,200 and 3,460,200 shares of FSA
Common Stock at December 31, 1999, 1998 and 1997, respectively. This represented
approximately 21.2%, 11.6% and 12.1%, respectively, of the total shares of FSA
Common Stock outstanding at those times. At December 31, 1999, 1998 and 1997,
White Mountains also owned FSA Preferred Stock which gives White Mountains the
right to acquire 2,000,000 additional shares of FSA Common Stock for net
consideration of $59.3 million. At December 31, 1998 and 1997, White Mountains
also owned FSA Options which, in total, gave White Mountains the right to
acquire 2,560,607 additional shares of FSA Common Stock for aggregate
consideration of $115.7 million which includes the MediaOne Preferred Stock. As
of December 31, 1999, 1998 and 1997, White Mountains' total interest in FSA was
25.8%, 25.1% and 26.2%, respectively, which includes the economic effects of the
FSA Preferred Stock and the FSA Options.
White Mountains' 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, 1999 and 1998, as quoted on the NYSE,
exceeded White Mountains' carrying value of the FSA Common Stock on the equity
method. White Mountains' investment in FSA Preferred Stock and FSA Options are
accounted for under the provisions of SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities", 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.
63
<PAGE>
The following table summarizes financial information for FSA:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
Millions 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FSA BALANCE SHEET DATA:
Total investments ........................................................ $2,140.0 $1,874.8 $1,431.6
Total assets ............................................................. 2,905.6 2,444.2 1,931.2
Deferred premium revenue ................................................. 844.1 721.7 595.2
Loss and loss adjustment expense reserve ................................. 87.3 63.9 75.4
Preferred shareholder's equity ........................................... .7 .7 .7
Common shareholders' equity .............................................. 1,252.0 1,065.4 875.3
FSA INCOME STATEMENT DATA:
Net premiums written ..................................................... $ 230.4 $ 219.9 $ 172.9
Net premiums earned ...................................................... 175.0 137.9 109.5
Net investment income .................................................... 94.7 78.8 72.1
Net income ............................................................... 125.4 115.4 94.7
Comprehensive net income ................................................. 39.9 127.8 110.8
------------------------------------
AMOUNTS RECORDED BY WHITE MOUNTAINS:
Investment in FSA Common Stock ........................................... $ 262.2 $ 119.7 $ 104.3
Investment in FSA Options and Preferred Stock ............................ 41.1 114.4 87.8
------------------------------------
Total investment in FSA ................................................. $ 303.3 $ 234.1 $ 192.1
====================================
Equity in earnings from FSA Common Stock (a) ............................. $ 19.5 $ 13.8 $ 11.4
Dividends received from FSA Common Stock ................................. 2.1 1.5 1.4
Equity in net unrealized investment gains (losses) from FSA's
investment portfolio, before tax (b) ..................................... (14.0) 3.1 2.1
Unrealized investment gains (losses) on FSA Options and
Preferred Stock, before tax (b) ......................................... (4.1) 26.6 68.0
Write-down from fair value to equity value upon exercise of
FSA Options, before tax .................................................. (45.8) - -
====================================
</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 as a
component of comprehensive net income.
At December 31, 1999 and 1998, White Mountains' consolidated retained
earnings included $53.3 million and $35.9 million, respectively, of accumulated
undistributed earnings of FSA (net of related amortization of goodwill).
64
<PAGE>
INVESTMENT IN MSA
At December 31, 1999, 1998 and 1997, White Mountains owned 222,093, 222,093
and 90,606 shares of MSA Common Stock. This represented approximately 50.0%,
50.0% and 33.1% of the total shares of MSA Common Stock outstanding at those
times. White Mountains' investment in MSA is accounted for using the equity
method. The following tables summarize financial information for MSA:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
Millions 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
MSA BALANCE SHEET DATA:
Total investments ............................................................. $ 466.3 $465.9 $280.1
Total assets .................................................................. 582.3 581.6 337.2
Unearned premium reserve ...................................................... 118.3 113.0 71.8
Loss and loss adjustment expense reserves ..................................... 198.4 212.2 123.7
Shareholders' equity .......................................................... 233.4 232.5 120.6
MSA INCOME STATEMENT DATA:
Net premiums written .......................................................... $ 242.7 $258.5 $156.6
Net premiums earned ........................................................... 237.4 226.3 148.7
Net investment income ......................................................... 24.9 22.1 15.4
Net income .................................................................... 25.8 13.4 11.9
Comprehensive net income ...................................................... .9 21.2 18.7
--------------------------------
AMOUNTS RECORDED BY WHITE MOUNTAINS:
Investment in MSA Common Stock ................................................ $ 119.3 $120.2 $ 40.9
Equity in earnings from MSA Common Stock (a) .................................. 11.6 4.9 3.8
Equity in net unrealized investment gains (losses) from MSA's
investment portfolio, before tax (b) ....................................... (12.5) 4.1 2.4
=================================
</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 as a
component of comprehensive net income.
At December 31, 1999 and 1998, White Mountains' consolidated retained
earnings included $25.7 million and $14.1 million, respectively, of accumulated
undistributed earnings of MSA (net of related amortization of goodwill).
INVESTMENT IN FOLKSAMERICA
On August 18, 1998, White Mountains 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 White Mountains
as of that date. Prior to August 18, 1998, Folksamerica was an unconsolidated
insurance affiliate of White Mountains whereby its investment in Folksamerica
Common Stock was accounted for using the equity method and its investment in
Folksamerica Preferred Stock and Folksamerica Warrants were accounted for under
the provisions of SFAS No. 115. For the years ended December 31, 1998 and 1997,
White Mountains recorded $5.6 million and $6.1 million of pretax earnings from
unconsolidated insurance affiliates, respectively, from its unconsolidated
investment in Folksamerica. For the year ended December 31, 1997, White
Mountains' recorded $1.8 million of equity in net unrealized gains from
Folksamerica's investment portfolio, before tax.
65
<PAGE>
NOTE 14. FAIR VALUE OF FINANCIAL INSTRUMENTS
White Mountains carries all its financial instruments on its balance
sheet at fair value with the exception of long-term indebtedness. At December
31, 1999 and 1998, the market value of White Mountains' long-term
indebtedness was $206.7 million and $198.1 million, respectively, which
compared to a carrying value of $202.8 million and $186.3 million,
respectively. The fair value of long-term indebtedness is estimated by
discounting future cash flows using incremental borrowing rates for similar
types of borrowing arrangements or quoted market prices. Considerable
judgement is required to develop such 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.
NOTE 15. RELATED PARTY TRANSACTIONS
For corporate travel purposes White Mountains Holdings, Inc., an indirect
wholly-owned subsidiary of the Company, jointly owns two short-range aircraft
with Haverford Utah, LLC ("Haverford"). Messrs. Byrne, Patrick M. Byrne (a
director of the Company) 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 pays a pro
rata share of all fixed costs plus the direct operating costs when onboard the
aircraft pursuant to a Joint Ownership Agreement.
During 1998 White Mountains 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 White Mountains' joint ownership interest (which resulted in White
Mountains 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, provided
various services to White Mountains 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 White Mountains
from time to time to perform legal services.
White Mountains owns a limited partnership investment interest which is
managed by John D. Gillespie, a director of the Company.
White Mountains owns a limited partnership investment interest which is
managed by Arthur Zankel, a director of the Company.
White Mountains 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.
66
<PAGE>
NOTE 16. COMMITMENTS AND CONTINGENCIES
Folksamerica leases its principal office space under noncancellable leases
expiring at various dates through July 2008. Rental expense for all of
Folksamerica's locations was approximately $1.6 million, $1.6 million and $1.7
million for the years ended December 31, 1999, 1998 and 1997, respectively.
Folksamerica's future annual minimum rental payments required under
noncancellable leases for office space are $2.5 million for each of the years
2000, 2001, and 2002, $2.6 million for both 2003 and 2004 and $11.3 million for
years thereafter.
Various claims have been made against White Mountains in the normal course
of its business. Based on all information available at the date of this report,
management believes that the outcome of such claims will not, in the aggregate,
have a material effect on White Mountains' financial position or results of
operations.
NOTE 17. SUBSEQUENT EVENT
On March 14, 2000, White Mountains entered into a definitive agreement to
sell its indirect, wholly-owned subsidiary, White Mountains Holdings, Inc.
(which controls a substantial amount of its holdings of FSA Common Stock and the
FSA Preferred Stock) as well as all its other holdings of FSA Common Stock, to
Dexia for total cash proceeds of $620.4 million. The transaction will occur only
in connection with Dexia's pending merger with FSA in which all holders of FSA
Common Stock will receive $76.00 cash per share. The merger agreement between
FSA and Dexia is subject to, among other matters, regulatory approvals and the
satisfaction of the conditions contained in Dexia's merger agreement with FSA,
including the approval of FSA shareholders. The transaction, if approved, is
expected to close mid-year 2000.
White Mountains expects that the transaction will serve to increase its
comprehensive net income by $283.3 million, after tax, based on the December 31,
1999 carrying value of its investments in FSA.
67
<PAGE>
REPORT ON MANAGEMENT'S RESPONSIBILITIES
The financial information included in this report, including the audited
consolidated financial statements, has been prepared by the management of White
Mountains. The consolidated financial statements have been prepared in
accordance with GAAP 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.
White Mountains 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. White Mountains' 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.
PricewaterhouseCoopers has audited the consolidated financial statements of
White Mountains as of December 31, 1999 and for the year then ended and KPMG LLP
has audited the consolidated financial statements of White Mountains as of
December 31, 1998 and for each of the two years in the period ended December 31,
1998. These firms have issued their unqualified reports thereon, which appear on
pages 69 and 70.
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
White Mountains. The Audit Committee, which reports to the full Board, annually
reviews the effectiveness of the independent auditors and management with
respect to the financial reporting process and the adequacy of internal
controls. The internal auditors have 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.
John J. Byrne Raymond Barrette Michael S. Paquette
Chairman and President Senior Vice President
Chief Executive Officer and Controller
68
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of White Mountains Insurance Group, Ltd.:
In our opinion, the 1999 consolidated financial statements listed in the
index referenced under Item 14(a) present fairly, in all material respects,
the financial position of White Mountains Insurance Group, Ltd. and
subsidiaries at December 31, 1999, and the results of their operations and
their cash flows for the period ended December 31, 1999 in conformity with
accounting principles generally accepted in the United States. In addition,
in our opinion, the 1999 financial statement schedules listed in the index
referenced under Item 14(a) present fairly, in all material respects, the
information set forth therein when read in conjunction with the related 1999
consolidated financial statements. These financial statements and financial
statement schedules are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements and
financial statement schedules based on our audit. We conducted our audit of
these statements in accordance with auditing standards generally accepted in
the United States, 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.
/s/ PricewaterhouseCoopers
Hamilton, Bermuda
February 15, 2000, except for Note 17,
which is as of March 14, 2000
69
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
White Mountains Insurance Group, Ltd.
We have audited the accompanying consolidated balance sheets of White Mountains
Insurance Group, Ltd. and Subsidiaries (the "Company") as of December 31, 1998,
and the related consolidated statements of income and comprehensive income,
statements of shareholders' equity, and cash flows for the two year period 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 II Condensed financial
information of the registrant, Schedule III Supplementary insurance information,
Schedule IV Reinsurance, Schedule V Valuation and qualifying accounts, and
Schedule VI Supplementary information for property and casualty insurance
underwriters (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 56.4 percent and total revenues
of 27.0 percent in 1998 of the related consolidated totals. The Company's equity
investment in FSA at December 31, 1998 was $119.7 million 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 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 White Mountains Insurance Group,
Ltd. and Subsidiaries as of December 31, 1998, and the results of their
operations and their cash flows for the two year period 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.
February 12, 1999 /s/ KPMG LLP
Providence, Rhode Island
70
<PAGE>
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected quarterly financial data for 1999 and 1998 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.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
1999 Three Months Ended (a) 1998 Three Months Ended (b)
----------------------------------------------------------------------
Millions, except per share amounts Dec. 31 Sept. 30 June 30 Mar. 31 Dec. 31 Sept. 30 June 30 Mar. 31
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $132.3 $106.5 $ 199.5 $ 126.9 $130.5 $151.3 $ 55.5 $ 53.0
Expenses 115.3 83.4 94.7 110.3 127.4 76.6 54.7 52.0
----------------------------------------------------------------------
Pretax earnings 17.0 23.1 104.8 16.6 3.1 74.7 .8 1.0
Income tax benefit (provision) 2.7 (9.0) (41.0) (5.8) (.4) (26.1) (.6) (1.4)
----------------------------------------------------------------------
Net income (loss) from continuing operations 19.7 14.1 63.8 10.8 2.7 48.6 .2 (.4)
Net income (loss) from discontinued operations - - (2.0) 3.0 6.1 5.6 6.4 9.3
Net gain (loss) from sale of discontinued (3.3) - 14.9 - - - - -
operations
----------------------------------------------------------------------
Net income $ 16.4 $ 14.1 $ 76.7 $ 13.8 $ 8.8 $ 54.2 $ 6.6 $ 8.9
======================================================================
Earnings per Share:
Basic $ 2.73 $ 2.72 $ 13.94 $ 2.36 $1.51 $ 9.28 $ 1.13 $ 1.50
Diluted 2.69 2.43 12.41 2.10 1.33 8.31 1.00 1.33
======================================================================
</TABLE>
(a) The quarterly amounts for the three month period ended June 30, 1999
reflect the Valley Group Sale and the Mortgage Banking Sale. The Mortgage
Banking Sale represented a decision by the Company to exit the mortgage
banking business. As a result, all mortgage banking activities are
presented herein as discontinued operations.
(b) 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.
71
<PAGE>
SCHEDULE I
WHITE MOUNTAINS INSURANCE GROUP, LTD.
SUMMARY OF INVESTMENTS -- OTHER THAN
INVESTMENTS IN RELATED PARTIES
AT DECEMBER 31, 1999
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
FAIR
Millions Cost VALUE
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
Fixed maturities:
Bonds:
United States Government and government agencies and authorities ... $ 444.6 $ 426.9
Corporate bonds .................................................... 330.8 319.4
States, municipalities and political subdivisions .................. 132.0 128.7
Foreign governments ................................................ 50.5 49.5
-------------------------
Total fixed maturities ................................................ 957.9 924.5
-------------------------
Common equity securities:
Banks, trust and insurance companies ............................... 45.0 43.6
Industrial, miscellaneous and other ................................ 55.4 64.8
-------------------------
Total common equity securities ........................................ 100.4 108.4
Other investments ........................................................ 57.5 68.3
Short-term investments ................................................... 117.5 117.5
-------------------------
Total investments ................................................... $ 1,233.3 $ 1,218.7
=========================
</TABLE>
NOTE - fair value was equal to carrying value at December 31, 1999.
72
<PAGE>
SCHEDULE II
WHITE MOUNTAINS INSURANCE GROUP, LTD.
(REGISTRANT ONLY)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
December 31,
----------------------------
Millions 1999 1998
- --------------------------------------------------------------------------------------
<S> <C> <C>
Assets:
Fixed maturities ..................................... $ 39.6 $ -
Common equity securities and other investments ....... 26.3 -
Short-term investments, at amortized cost ............ 5.7 10.8
Other assets ......................................... 1.2 37.8
Investments in consolidated affiliates ............... 770.9 972.2
------------------------
Total assets ....................................... $ 843.7 $1,020.8
========================
Liabilities:
Short-term debt ..................................... $ 4.0 $ -
Long-term debt ...................................... 96.0 115.7
Intercompany borrowings ............................. - 53.0
Deferred credit ..................................... 57.8 -
Accounts payable and other liabilities .............. 71.6 149.6
------------------------
Total liabilities .................................. 229.4 318.3
Shareholders' equity .................................... 614.3 702.5
-------------------------
Total liabilities and shareholders' equity ......... $ 843.7 $1,020.8
========================
</TABLE>
CONDENSED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
Year Ended December 31,
-----------------------------------
Millions 1999 1998 1997
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues ............................................. $ 29.1 $ 28.9 $ 52.7
Expenses ............................................. 46.6 23.2 21.2
------------------------------------
Pretax earnings (loss) ............................... (17.5) 5.7 31.5
Income tax provision ................................. (6.0) (8.3) (16.3)
------------------------------------
Net income (loss) .................................... (23.5) (2.6) 15.2
Earnings from consolidated affiliates ................ 144.5 81.1 24.1
------------------------------------
Consolidated net income .............................. 121.0 78.5 39.3
Other comprehensive net income (loss) items, after tax (118.0) (8.9) 41.7
------------------------------------
Consolidated comprehensive net income ................ $ 3.0 $ 69.6 $ 81.0
====================================
</TABLE>
73
<PAGE>
SCHEDULE II
(CONTINUED)
WHITE MOUNTAINS INSURANCE GROUP, LTD.
(REGISTRANT ONLY)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
------------------------------------
Millions 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income ................................................................................ $ 121.0 $ 78.5 $ 39.3
Reconciliation of net income to net cash from operating activities:
Net realized investment gains ......................................................... (21.7) (26.7) (44.2)
Distributions from consolidated subsidiaries in excess of current earnings ............ 213.0 - -
Undistributed current earnings from consolidated subsidiaries ......................... - (78.0) (24.1)
Undistributed current earnings from unconsolidated insurance affiliates ............... - - (.4)
Changes in current income taxes receivable and payable ................................ (4.3) 8.5 5.1
Deferred income tax provision (benefit) ............................................... 39.7 .1 (3.7)
(Decrease) increase in accounts payable and other liabilities ......................... (103.2) 8.7 7.0
Other, net ............................................................................ (2.5) (3.3) (4.6)
------------------------------------
Net cash (used for) provided from operating activities .................................... 242.0 (12.2) (25.6)
------------------------------------
Cash flows from investing activities:
Net decrease (increase) in short-term investments, net of balances acquired ........... 18.3 (8.5) (2.0)
Sales of investment securities ........................................................ 5.4 - 119.4
Purchases of investment securities .................................................... - - -
Investments in consolidated affiliates, net of balances acquired ...................... (73.5) - (12.7)
Investments in unconsolidated affiliates .............................................. (50.0) - -
Sale of securities carried in other assets ............................................ - 26.8 -
-----------------------------------
Net cash (used for) provided from investing activities .................................... (99.8) 18.3 104.7
-----------------------------------
Cash flows from financing activities:
Purchases of common stock retired ..................................................... (139.4) (19.5) (103.8)
Proceeds from exercises of Warrants and stock options ................................. 21.7 - -
Repayment of long-term debt ........................................................... (15.9) - -
Intercompany borrowings from subsidiaries ............................................. - 23.0 30.0
Cash dividends paid to common shareholders ............................................ (8.8) (9.4) (5.3)
-----------------------------------
Net cash used for financing activities .................................................... (142.4) (5.9) (79.1)
-----------------------------------
Net (decrease) increase in cash during year ............................................... (.2) .2 -
Cash balance at beginning of year ......................................................... .2 - -
-----------------------------------
Cash balance at end of year ............................................................... $ - $ .2 $ -
===================================
</TABLE>
74
<PAGE>
SCHEDULE III
WHITE MOUNTAINS INSURANCE GROUP, LTD.
SUPPLEMENTARY INSURANCE INFORMATION
(MILLIONS)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E Column F Column G
- -----------------------------------------------------------------------------------------------------------------------------------
Future
policy Other
benefits, policy
Deferred losses, claims and Net
acquisition claims and Unearned benefits Premiums investment
Segment costs loss expenses premiums payable earned income (b)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Years ended:
December 31, 1999:
Reinsurance ........................... $ 21.3 $ 782.1 $ 79.0 $ - $ 211.0 $ 49.1
Property casualty insurance ........... .9 68.9 13.1 - 72.2 4.9
December 31, 1998:
Reinsurance (a) ....................... 20.7 723.2 71.2 - 85.4 18.1
Property casualty insurance ........... 14.7 88.5 81.9 - 160.6 8.3
December 31, 1997:
Property and casualty
insurance ........................... 14.3 71.9 78.0 - 145.3 9.0
</TABLE>
(SCHEDULE III TABLE CONTINUED)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Column H Column I Column J Column K
- -----------------------------------------------------------------------------------------------------------------------------------
Benefits, Amortization
claims, of deferred Other
losses, and policy operating
Segment settlement acquisition expenses Premiums
expenses costs payable written
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Years ended:
December 31, 1999:
Reinsurance ........................... $ 168.2 $ 64.3 $ - $ 201.7
Property casualty insurance ........... 60.1 9.1 - 73.0
December 31, 1998:
Reinsurance (a) ....................... 59.7 29.1 - 73.7
Property casualty insurance ........... 115.1 25.7 - 164.9
December 31, 1997:
Property and casualty
insurance ........................... 97.1 23.2 - 150.8
- -----------------------------------------------------------------------------------------------------------------------------------
</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 $7.9 million, $10.4 million and $12.6 million
for the twelve months ended December 31, 1999, 1998 and 1997, respectively.
75
<PAGE>
SCHEDULE IV
WHITE MOUNTAINS INSURANCE GROUP, LTD.
REINSURANCE
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E Column F
- -------------------------------------------------------------------------------------------------------------------------
Ceded to Assumed Percentage
Gross other from other Net of amount
Premiums earned amount companies companies amount assumed to
(Dollars in millions) net
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Years ended:
December 31, 1999:
Property and casualty insurance .................... $ 61.4 $(28.8) $39.6 $72.2 54.8%
Reinsurance ........................................ 2.4 (32.4) 241.0 211.0 114.2%
December 31, 1998:
Property and casualty insurance .................... 104.4 (13.1) 69.3 160.6 43.2%
Reinsurance (a) .................................... 2.0 (8.8) 92.2 85.4 108.0%
December 31, 1997:
Property and casualty insurance .................... 89.7 (7.4) 63.0 145.3 43.4%
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Amounts shown in columns B through F represent activity for Folksamerica
from August 18, 1998 through December 31, 1998.
76
<PAGE>
SCHEDULE V
WHITE MOUNTAINS INSURANCE GROUP, LTD.
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 (a) of period
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Years ended:
December 31,1999:
Reinsurance recoverable:
Allowance for reinsurance balances .......... $1.2 $ - $ - $ - $1.2
Property and casualty insurance:
Allowance for uncollectible accounts ........ 1.1 - - - 1.1
December 31,1998:
Reinsurance recoverable:
Allowance for reinsurance balances (b) ...... $1.2 $ - $ - $ - $1.2
Property and casualty insurance:
Allowance for uncollectible accounts ........ .3 1.9 - (1.8) .4
December 31,1997:
Property and casualty insurance:
Allowance for uncollectible accounts ........ .4 1.1 - (1.2) .3
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Represents charge-offs of balances receivable
(b) Represents allowances acquired from Folksamerica on August 18, 1998
77
<PAGE>
SCHEDULE VI
WHITE MOUNTAINS INSURANCE GROUP, LTD.
SUPPLEMENTAL INFORMATION FOR PROPERTY AND CASUALTY INSURANCE UNDERWRITERS
(MILLIONS)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E Column F Column G
- ----------------------------------------------------------------------------------------------------------------------------------
Reserves for
unpaid claims Discount,
Deferred and claims if any, Net
acquisition adjustment deducted Unearned Earned investment
costs expenses in Column C premiums premiums income
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Consolidated
reinsurance
operations:
1999 $ 21.3 $ 782.1 - $ 79.0 $ 211.0 $ 49.1
1998(a) 20.7 723.2 - 71.2 85.4 18.1
1997 - - - - - -
Consolidated property and
casualty insurance
operations:
1999 .9 68.9 - 13.1 72.2 4.9
1998 14.7 88.5 - 81.9 160.6 8.3
1997 14.3 71.9 - 78.0 145.3 9.0
50%-or-less owned property
and casualty investees (b):
1999 17.5 99.2 - 59.2 118.7 12.5
1998 16.0 106.1 - 56.5 103.6 10.1
1997 6.5 40.9 - 23.8 49.2 5.1
- ----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
- -------------------------------------------------------------------------------------------------
Column A Column H Column I Column J Column K
- -------------------------------------------------------------------------------------------------
Claims and claims
adjustment expenses Amortization
incurred related to of deferred Paid claims
(1) (2) policy and claims
Current Prior acquisition adjustment Premiums
year year Costs expenses written
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Consolidated
reinsurance
operations:
1999 $ 138.9 $ 29.3 $ 64.3 $ 237.0 $ 201.7
1998(a) 58.6 1.1 29.1 67.5 73.7
1997 - - - - -
Consolidated property and
casualty insurance
operations:
1999 57.5 2.6 9.1 38.3 73.0
1998 108.4 6.7 25.7 98.7 164.9
1997 99.6 (2.5) 23.2 90.1 150.8
50%-or-less owned property
and casualty investees (b):
1999 89.3 (7.0) 34.4 84.3 121.3
1998 82.5 (5.1) 24.2 48.1 118.3
1997 35.9 (1.2) 12.7 34.1 51.8
- ------------------------------------------------------------------------------------------------
</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 represent White Mountains' share of its property and
casualty affiliate, MSA, which was 50.0% owned during the years ended December
31, 1999 and 1998 and 33.1% owned during the year ended December 31, 1997.
78
<PAGE>
EXHIBIT 10(a)
$35,000,000
SECOND AMENDED AND RESTATED CREDIT AGREEMENT
AMONG
FUND AMERICAN ENTERPRISES HOLDINGS, INC.,
AS BORROWER,
THE LENDERS NAMED HEREIN,
AS LENDERS,
THE FIRST NATIONAL BANK OF CHICAGO,
AS AGENT,
FLEET NATIONAL BANK,
AS DOCUMENTATION AGENT,
FIRST UNION NATIONAL BANK,
AS DOCUMENTATION AGENT,
AND
DEUTSCHE BANK AG,
AS CO-AGENT,
DATED AS OF
FEBRUARY 24, 1999
LEAD ARRANGER AND BOOK RUNNER
FIRST CHICAGO CAPITAL MARKETS, INC.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
ARTICLE I.....................................................................9
ARTICLE II...................................................................22
ARTICLE III..................................................................28
ARTICLE IV...................................................................30
ARTICLE V....................................................................33
ARTICLE VI...................................................................38
6.20. FINANCIAL COVENANTS.............................................45
6.22. ERISA COMPLIANCE................................................47
ARTICLE VII..................................................................48
ARTICLE VIII.................................................................49
ARTICLE IX...................................................................50
9.17. TREATMENT OF CERTAIN INFORMATION: CONFIDENTIALITY...............53
ARTICLE X....................................................................53
ARTICLE XI...................................................................56
ARTICLE XII..................................................................57
12.2. PARTICIPATIONS..................................................57
12.3. ASSIGNMENTS.....................................................58
ARTICLE XIII.................................................................59
</TABLE>
-3-
<PAGE>
EXHIBITS
<TABLE>
<S> <C>
Exhibit A (Article 1) Form of Note
Exhibit B (Section 6.1(c)) Form of Compliance Certificate
Exhibit C (Section 12.3.1) Form of Assignment Agreement
</TABLE>
SCHEDULES
<TABLE>
<S> <C>
Pricing Schedule
Schedule 1.1 - Senior Management
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 - Indebtedness
Schedule 5.17 - Material Restrictions
Schedule 6.14 - Liens
Schedule 6.15 - Investment Commitments
</TABLE>
-4-
<PAGE>
SECOND AMENDED AND RESTATED CREDIT AGREEMENT
This Second Amended and Restated Credit Agreement, dated as of
February 24, 1999, 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 named therein and the Agent are party to
that certain $35,000,000 amended and restated credit agreement, dated as of
August 14, 1998 (as amended through but not including the date hereof, 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.
"Acceptable Exchange" means any of (a) the New York Stock Exchange, (b)
the American Stock Exchange, (c) NASDAQ or (d) the London Stock Exchange.
"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.
-9-
<PAGE>
"Agent" means First Chicago in its capacity for administrative purposes
as contractual representative of 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 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.
"Applicable Eurodollar Margin" means the percentage rate per annum which
is applicable at such time with respect to Eurodollar Advances as set forth
in the Pricing Schedule.
"Applicable Facility Fee Margin" means the percentage rate per annum
which is applicable at such time as set forth in the Pricing Schedule.
"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.
-10-
<PAGE>
"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.
"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.
-11-
<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 John J. Byrne), 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 of the Borrower and the individual who
holds the title of President of White Mountains (collectively, "Senior
Management") on the first day of each such period to constitute a majority of
the Senior Management of the Borrower. Senior Management on the date of this
Agreement are listed on SCHEDULE 1.1, hereto, such SCHEDULE 1.1 to be updated
by the Borrower and delivered to the Agent within three (3) Business Days of
any change in Senior Management.
"Co-Agent" means Deutsche Bank AG, in its capacity as Co-Agent for the
Lenders pursuant to ARTICLE X, and not in its individual capacity as a Lender.
"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
-12-
<PAGE>
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.
"Documentation Agent" means each of Fleet National Bank and First Union
National Bank, each in its capacity as a Documentation Agent for the Lenders
pursuant to ARTICLE X, and not in its capacity as Lender.
"Eligible FSA Securities" means equity securities of FSA traded on an
Acceptable Exchange or any security convertible into such equity security
owned by SOMSC, so long as (a) neither SOMSC nor any of its subsidiaries is
in default under any of its obligations (contingent or otherwise) as a
consequence of which the ability of SOMSC to sell any equity securities of
FSA or to distribute to SOMSC's shareholders the proceeds thereof is
restricted and (b) SOMSC is a Wholly-Owned Subsidiary of the Borrower.
"Environmental Laws" is defined in SECTION 5.18.
"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
-13-
<PAGE>
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.
"Finance Assets" means each of the following: (a) investments in
securities issued or fully guaranteed by the United States of America or any
agency or instrumentality thereof (PROVIDED that the full faith and credit of
the United States of America is pledged in support thereof), (b) investments
in equity securities traded on an Acceptable Exchange and securities
convertible into such equity securities, (c) investments in Investment Grade
Obligations, (d) investments in money market and mutual funds substantially
all the assets of which are comprised of securities of the types described in
CLAUSES (a) through (c) above and (e) Eligible FSA Securities; PROVIDED, that
Finance Assets shall not include any securities (i) pledged to secure any
obligation (contingent or otherwise) or (ii) restricted as to sale or
disposition by any agreement.
"Finance Assets Ratio" means, at any time, the ratio of (a) Finance
Assets owned by the Borrower and its Subsidiaries (including the Eligible FSA
Securities, but excluding any other Finance Assets owned by any Insurance
Subsidiary, Folksamerica, Valley and SOMSC) at such time to (b) an amount
equal to the excess of (i) the aggregate outstanding principal amount of
Advances under the Facility at such time MINUS (ii) cash and Cash Equivalents
of the Borrower and its Subsidiaries (excluding any Insurance Subsidiary,
Folksamerica, Valley and SOMSC) at such time. For purposes of this
definition, Finance Assets shall be valued, without duplication, at fair
market value to the extent there exists a readily ascertainable fair market
value for such Finance Asset or, in the event there exists no such readily
ascertainable fair market value for such Finance Asset, at book value, as
calculated in accordance with Agreement Accounting Principles.
"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.
-14-
<PAGE>
"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 Credit Agreement" means the $100,000,000 credit agreement,
dated as of February 24, 1999, among Folksamerica, the lenders named therein
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).
"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 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.
"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.
"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
-15-
<PAGE>
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 certificates of deposit owned by such
Person; and structured notes, derivative financial instruments (other than
agreements related to Rate Hedging Obligations entered into in the ordinary
course of business and not for speculative purposes) and other similar
instruments or contracts owned by such Person.
"Investment Grade Obligations" means, as of any date, investments having
an NAIC investment rating of 1 or 2, or an S&P rating within the range of
ratings from AAA to BBB-, or a Moody's rating within the range of ratings
from Aaa to Baa3.
"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 the Borrower and its Subsidiaries (excluding SOMSC) at
such time to (b) the sum of (i) the consolidated Funded Indebtedness of the
Borrower and its Subsidiaries (excluding SOMSC) at such time PLUS (ii) Net
Worth at such time. For purposes of computing the Leverage Ratio, (A)
Allowable Seller Paper (as defined in the Folksamerica Credit Agreement)
which has been Defeased (as defined in the Folksamerica Credit Agreement) and
Letters of Credit issued on behalf of Folksamerica in support of Allowable
Seller Paper, (B) Indebtedness of any Insurance Subsidiary of Folksamerica
permitted pursuant to Section 6.11(f) of the Folksamerica Credit Agreement
and (C) Indebtedness of Folksamerica permitted by Section 6.11(g) of the
Folksamerica Credit Agreement shall be excluded from Funded Indebtedness.
"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
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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 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.
"Maturity Date" means August 23, 2000.
"Moody's" means Moody's Investors Services, Inc., and any successor
thereto.
"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.
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"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.
"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, limited liability company, 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.
"Pricing Schedule" means the Schedule attached hereto identified as such.
"Proceeding" is defined in SECTION 5.18.
"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
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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 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.
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"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 February 23, 2000.
"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.
"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.
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"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 any Subsidiary thereof.
"Valley" means Valley Group, Inc., an Oregon corporation.
"Valley Credit Agreement" means the $15,000,000 third amended and
restated credit agreement, dated as of February 24, 1999, among Valley, the
lenders named therein 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 $50,000,000 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 amended through but not including the date hereof.
"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
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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 5.21.
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.
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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.
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 written notice to the Agent.
Subject to SECTION 3.4 and upon three (3) Business Days' prior written
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:
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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 Maturity
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.
2.8. 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.
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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 by the Agent as applicable to such Eurodollar
Advance based upon the Borrower's selections under SECTIONS 2.7 AND 2.8 and
otherwise in accordance with the terms hereof. Changes in the Applicable
Eurodollar Margin will take effect simultaneously with each change in a
Level. No Interest Period may end after the Maturity 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
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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 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
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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. 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 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 any applicable
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 any applicable 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 any
applicable 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
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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.
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,
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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) 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 (a) 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 and gives notice of such fact to the Agent or (b)
the Required Lenders determine that (i) deposits of a type and maturity
appropriate to match fund Eurodollar Advances are not available or (ii) 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 or
converted to ABR Advances, subject to the payment of any funding
indemnification amounts required by SECTION 3.4.
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
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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 2.17, 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 2.17, 3.1, 3.2 and 3.4 shall survive payment of the Obligations and
termination of this Agreement.
3.6. SUBSTITUTION OF LENDERS. Any Lender claiming any additional amounts
payable pursuant to SECTION 2.17, 3.1 or 3.2 or which gives a notice
described in SECTION 3.3(a) shall, so long as no Default or Unmatured Default
has occurred and is continuing, upon the written request of the Borrower
delivered, within ninety (90) days after such Lender's claim or notice, to
such Lender and the Agent, assign, pursuant to and in accordance with the
provisions of SECTION 12.3, all of its rights and obligations under this
Agreement and under the Loan Documents to another Lender or to a commercial
bank, other financial institution, commercial finance company or other
business lender selected by the Borrower and reasonably acceptable to the
Agent that has agreed not to claim any additional amounts under SECTION 2.17,
3.1 or 3.2 with respect to some or all of the costs or regulatory charges
that gave rise to such assigning Lender's claim for such compensation or, as
applicable, has not made a determination of the type described in SECTION
3.3(a), in consideration for (a) the payment by such assignee to such
assigning Lender of the principal of, and interest accrued and unpaid to the
date of such assignment on, the Loans held by such assigning Lender, (b) the
payment by the Borrower to such assigning Lender of any and all other amounts
owing to such assigning Lender under any provision of this Agreement accrued
and unpaid to the date of such assignment and (c) the payment by the Borrower
to such assigning Lender of any amounts which would be payable to such Lender
pursuant to SECTION 3.4 were such assignment treated as a repayment of such
Loans.
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, together with all
amendments thereto, certified by the
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appropriate governmental officer in its jurisdiction of incorporation,
together with a good standing certificate issued by the Secretary of
State of its jurisdiction 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, 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 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 ARTICLE V of this Agreement is true and correct
on and as of the date hereof; and (v) since September 30, 1998, 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
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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 of, or relating to, as the case may be, the Borrower, on a
consolidated basis.
(j) PAYMENTS UNDER EXISTING CREDIT AGREEMENT. Repayment in full of
all loans and of all accrued and unpaid fees and interest arising under
the Existing Credit Agreement.
(k) PAYMENT OF FEES. The Borrower shall have paid all fees due to
First Chicago.
(l) FOLKSAMERICA CREDIT AGREEMENT. Executed original of the
Folksamerica Credit Agreement, which shall be in full force and effect,
in a form satisfactory to the Lenders.
(m) WHITE MOUNTAINS CREDIT AGREEMENT. Evidence satisfactory to the
Agent that the White Mountains Credit Agreement has been terminated and
all Indebtedness, liabilities and obligations outstanding thereunder
shall have been paid in full.
(n) YEAR 2000 MATTERS. Information satisfactory to the Agent and
the Required Lenders regarding the Borrower's Year 2000 Program.
(o) REGULATORY MATTERS. Receipt of any required regulatory
approvals from any Governmental Authority.
(p) 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);
(c) A Borrowing Notice shall have been properly submitted; and
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(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.
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 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
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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 September 30, 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 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
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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 hereto or disclosed in the Financial Statements or in
financial statements required to be delivered under SECTIONS 6.1(a) and (b)
or as otherwise disclosed by the Borrower in writing to the Lenders 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 September 30, 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. Neither the Borrower 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 relating to its capital stock 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.
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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. INDEBTEDNESS. Attached hereto as SCHEDULE 5.16 is a complete and
correct list of all Indebtedness of the Borrower and its Subsidiaries (other
than Unrestricted 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), 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. MATERIAL AGREEMENTS. Except as set forth in SCHEDULE 5.17 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
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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 conditions contained in any agreement to which it
is a party, which default could reasonably be expected to have a Material
Adverse Effect.
5.18. 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.
5.19. 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.
5.20. 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.
5.21. 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 (3) 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 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.
(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
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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.
(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 the 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 making of 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.
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
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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 business 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.
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 in accordance with generally accepted accounting principles or
statutory accounting practices, 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, 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
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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 described in
SCHEDULE 5.16 hereto (it being understood and agreed that 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 shall be permitted to exist pursuant to this SECTION 6.11(b)
notwithstanding the absence thereof on SCHEDULE 5.16) 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 of Folksamerica and its Subsidiaries permitted
under the Folksamerica Credit Agreement and Indebtedness of Valley and
its Subsidiaries permitted under 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) Indebtedness secured by Liens permitted pursuant to SECTION
6.14(f);
(g) Contingent Obligations permitted by SECTION 6.13; and
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(h) other Indebtedness, so long as such other Indebtedness does not
at any time exceed $10,000,000 in aggregate principal amount.
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 (i) into the Borrower, (ii) with any Wholly-Owned
Subsidiary of the Borrower or (iii) with 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 (in the case of CLAUSE (i)) or a Wholly-Owned
Subsidiary of the Borrower (in the case of either CLAUSE (ii) or (iii));
(b) a Significant Subsidiary 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 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 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 (other than for an Unrestricted
Subsidiary, excluding Contingent Obligations regarding servicing
arrangements) so long as the primary obligation is permitted pursuant to this
Agreement, (e) Contingent Obligations which are permitted pursuant to the
Folksamerica Credit Agreement and the Valley Credit Agreement and (f) the
Contingent Obligations described on SCHEDULE 5.8.
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;
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(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 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 of Folksamerica and its Subsidiaries permitted under the
Folksamerica Credit Agreement and Liens of Valley and its Subsidiaries
permitted under the Valley Credit Agreement; 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 $5,000,000 at any time.
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 remain permitted hereby
until 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) loans made by (x) the Borrower to any Wholly-Owned Subsidiary
(other than any Unrestricted Subsidiary) and (y) any Wholly-Owned
Subsidiary to a Wholly-Owned Subsidiary (other than any Unrestricted
Subsidiary) or the Borrower so long as, in all cases, no Default or
Unmatured Default has occurred and is continuing or would occur after
giving effect to such loan;
(g) Investments by the Borrower (in addition to those permitted by
CLAUSES (a) through (f) of this SECTION 6.15) in an amount not exceeding
in aggregate at any time $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 (g) 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;
(h) Investments by the Borrower (in addition to those permitted by
the other clauses of this SECTION 6.15) in an amount not exceeding in
aggregate at any time $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 any such Investment no
Default or Unmatured Default has occurred and is continuing or would
occur after giving effect to such Investment; and
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(i) other Investments by Folksamerica and its Subsidiaries
permitted under the Folksamerica Credit Agreement and other Investments
by Valley and its Subsidiaries permitted under 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 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 Folksamerica 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.
6.20.1 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) $514,530,000, PLUS (ii) an amount equal to 90% of the cash
and non-cash proceeds of any equity securities issued by the Borrower
after September 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
September 30, 1998 to repurchase its capital stock in compliance with
SECTION 6.10.
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6.20.2 MAXIMUM LEVERAGE RATIO. The Borrower shall, at all times
after the date hereof, maintain a Leverage Ratio of not greater than 35%.
6.20.3 FINANCE ASSETS RATIO. The Borrower shall, at all times after
the date hereof when Loans are outstanding and the aggregate sum of cash
and Cash Equivalents of the Borrower and its Subsidiaries (excluding any
Insurance Subsidiaries, Folksamerica, Valley and SOMSC) at such time is
less than the aggregate outstanding principal amount of Advances at such
time, maintain a Finance Assets Ratio of not less than 1.5:1.0.
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.
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
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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
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 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,
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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.
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. 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 Authority in either
case which could reasonably be expected to have a Material Adverse Effect and
which is not stayed within thirty (30) days.
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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 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; 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.
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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 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 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 January 5, 1999, 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.
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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.
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
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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 (INCLUDING, WITHOUT LIMITATION, 735 ILCS SECTION
105/5-1 ET SEQ, BUT OTHERWISE WITHOUT REGARD TO THE 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 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 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, 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
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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 statute, 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 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.
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The Agent shall not have a fiduciary relationship in respect of the Borrower
or any Lender by reason of this Agreement or any other Loan Document.
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 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
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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 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.
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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
$250,000,000 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.
10.13. DOCUMENTATION AGENT. Each of Fleet National Bank and First Union
National Bank is hereby appointed Documentation Agent of the Lenders
hereunder and under each Loan Document. Each of Fleet National Bank and First
Union National Bank shall not have any duties, responsibilities or
liabilities in its capacity as Documentation Agent.
10.14. CO-AGENT. Deutsche Bank AG is hereby appointed Co-Agent of the
Lenders hereunder and under each Loan Document. Deutsche Bank AG shall not
have any duties, responsibilities or liabilities in its capacity as Co-Agent.
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.
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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 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 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
-57-
<PAGE>
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 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, excluding the Borrower or an
Affiliate thereof, ("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 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 Borrower and the Agent
shall be required prior to an assignment becoming effective with respect to a
Purchaser which is not a Lender or an Affiliate thereof; PROVIDED, HOWEVER,
that if a Default has occurred and is continuing, the consent of the Borrower
shall not be required. Such consent shall not be unreasonably withheld or
delayed.
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 $3,500 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
-58-
<PAGE>
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 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 2.17.
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]
-59-
<PAGE>
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
-60-
<PAGE>
PRICING SCHEDULE
- -----------------------------------------------------------------------------
APPLICABLE EURODOLLAR MARGIN
(AS A PER ANNUM RATE)
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
APPLICABLE EURODOLLAR MARGIN
(BASED ON PERCENT USAGE)
------------------------------------------
LEVEL Less than 66 2/3% Greater than 66 2/3%
-----
<S> <C> <C>
Level I 0.300% 0.550%
Level II 0.375% 0.625%
Level III 0.475% 0.725%
Level IV 0.800% 1.050%
</TABLE>
- -----------------------------------------------------------------------------
APPLICABLE FACILITY FEE MARGIN
(AS A PER ANNUM RATE)
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
LEVEL APPLICABLE FACILITY FEE MARGIN
----- ------------------------------
<S> <C>
Level I 0.100%
Level II 0.125%
Level III 0.150%
Level IV 0.200%
</TABLE>
For the purposes of this Schedule, the following terms have the
following meanings:
"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 this Agreement.
"Level" means, and includes, Level I, Level II, Level III or Level IV,
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 BBB+ OR the Applicable Credit Rating of Moody's is
equal to or greater than Baa1.
"Level II" 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) Level I does not exist.
"Level III" shall exist at any time the Applicable Credit Rating of S&P
is BBB- AND the Applicable Credit Rating of Moody's is Baa3.
-61-
<PAGE>
"Level IV" 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.
"Percent Usage" shall mean at any time the percentage equal to the
aggregate outstanding principal amount of the Loans to the Aggregate
Commitment (or, on and after the Revolver Termination Date, the Percent Usage
shall be the percentage equal to the percentage determined on the Revolver
Termination Date).
-62-
<PAGE>
EXHIBIT 10 (b)
AMENDMENT NO. 1 TO CREDIT AGREEMENT AND WAIVER
This Amendment and Waiver (this "Amendment") is entered into as of March
23, 1999 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 Second Amended and Restated Credit Agreement dated as of February
24, 1999 (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 and waive certain provisions thereof 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. The Credit Agreement shall be
amended as follows:
(a) SCHEDULE 5.8 Upon the Effective Date (as defined below),
Schedule 5.8 shall be amended in its entirety and replaced with
Schedule 5.8 attached hereto.
(b) SCHEDULE 5.10 Effective as of February 24, 1999, Schedule
5.10, is amended in its entirety and replaced with Schedule 5.10
attached hereto.
(c) SCHEDULE 5.16 Upon the Effective Date, Schedule 5.16 shall
be amended in its entirety and replaced with Schedule 5.16 attached
hereto.
(d) SECTION 6.15(e) Upon the Effective Date, Section 6.15(e)
shall be amended in its entirety and replaced with the following:
"(e) other Investments by the Borrower in any Person which is
a 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; PROVIDED, however, that the
aggregate amount of Investments in SOMSC pursuant to this CLAUSE (e)
after December 31, 1998 (when taken together with the aggregate
amount of loans made to SOMSC pursuant to SECTION 6.15(f) after
December 31, 1998) do not exceed the amount of net proceeds
received from dividends, transfers, loans or other distributions
from SOMSC after December 31, 1998
<PAGE>
(less the aggregate amount of Investments made by the Borrower
under SECTION 6.15(g) after December 31, 1998 to the extent such
Investments under SECTION 6.15(g) are made from net proceeds
traceable to dividends, sales, transfers or other distributions of
equity interests in SOMSC after December 31, 1998 and are not held
by SOMSC or SOMSC's Subsidiaries;"
(e) SECTION 6.15(f) Upon the Effective Date, Section 6.15(f)
shall be amended in its entirety and replaced with the following:
"(f) loans made by (x) the Borrower to any Wholly-Owned
Subsidiary and (y) any Wholly-Owned Subsidiary to a Wholly-Owned
Subsidiary or the Borrower so long as, in all cases, no Default or
Unmatured Default has occurred and is continuing or would occur
after giving effect to such loan; PROVIDED, however, that the
aggregate amount of loans to SOMSC pursuant to this CLAUSE (f)
after December 31, 1998 (when taken together with the aggregate
amount of Investments made in SOMSC pursuant to SECTION 6.15(e)
after December 31, 1998) do not exceed the amount of net proceeds
received from dividends, transfers, loans or other distributions
from SOMSC after December 31, 1998 (less the aggregate amount of
Investments made by the Borrower under SECTION 6.15(g) after
December 31, 1998 to the extent such Investments under SECTION
6.15(g) are made from net proceeds traceable to dividends, sales,
transfers or other distributions of equity interests in SOMSC after
December 31, 1998 and are not held by SOMSC or SOMSC's
Subsidiaries;"
2. CONSENT AND WAIVER. The Lenders hereby (a) waive any breach of
SECTION 6.4 of the Credit Agreement arising solely out of the sale by the
Borrower's Subsidiary, Source One Mortgage Services Corporation ("SOMSC"), of
substantially all of its business pursuant to that certain Asset Purchase
Agreement by and among SOMSC, the Borrower and Citicorp Mortgage, Inc., dated
as of March 23, 1999 (as it may be amended or otherwise modified, the
"Purchase Agreement"), and the resulting failure of such Subsidiary to carry
on and conduct its business in substantially the same manner and in
substantially the same fields of business as it conducted on February 24,
1999, (b) waive any breach of SECTION 6.22(b) of the Credit Agreement to and
including July 31, 1999 arising solely out of the Unfunded Liability of
certain Subsidiaries of the Borrower exceeding $500,000 as disclosed on
SCHEDULE 5.10 attached hereto (the "Excess Unfunded Liability") and (c) waive
any Default or Unmatured Default under SECTIONS 7.1, 7.3, 7.4 and 7.5 of the
Credit Agreement which has heretofore arisen as a result of the Purchase
Agreement, the Contingent Obligations of the Borrower related thereto, any
Funded Indebtedness of SOMSC which shall be declared to be due and payable or
required to be repaid (other than by a regularly scheduled payment) prior to
its stated maturity resulting from consummation of the Purchase Agreement, or
the Excess Unfunded Liability.
-2-
<PAGE>
3. 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.
4. EFFECTIVE DATE. This Amendment shall become effective upon 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); provided that SECTIONS 1 and 2 hereof shall not become
effective until the date (the "Effective Date") when the following additional
conditions have also been satisfied:
(a) delivery of a copy, certified by the Secretary or Assistant
Secretary of the Borrower, of the fully executed Purchase Agreement with
all schedules (as may be requested by the Agent) and amendments thereto;
(b) a certificate, executed by the Secretary or Assistant
Secretary of the Borrower, certifying the consummation of the
transactions contemplated by the Purchase Agreement on the "Closing
Date" (as defined in the Purchase Agreement);
(c) a certificate, executed by the Secretary or Assistant
Secretary of the Borrower, certifying (i) an attached copy of the
Borrower's Board of Directors' resolutions authorizing its execution,
delivery and performance under the Purchase Agreement and (ii) that
there has been no amendments, supplements or modifications to the
Articles of Incorporation, Bylaws or certificate of incumbency delivered
to the Agent on February 24, 1999;
(d) evidence satisfactory to the Agent that all credit
arrangements of SOMSC and its Subsidiaries related to Funded
Indebtedness of SOMSC and its Subsidiaries have been either (i)
terminated and all Indebtedness, liabilities and obligations outstanding
thereunder shall have been paid in full and all liens thereunder
released or (ii) assumed by Citicorp Mortgage, Inc. pursuant to the
Purchase Agreement; and
(e) such other documents as the Agent, any Lender or their
counsel may have reasonably requested.
-3-
<PAGE>
In the event the Effective Date has not occurred on or before June 30,
1999, SECTIONS 1(a), (b), (d) AND (e) and 2 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.
(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. 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.
7. CHOICE OF LAW. THIS AMENDMENT SHALL BE CONSTRUED IN ACCORDANCE
WITH THE INTERNAL LAWS (INCLUDING, WITHOUT LIMITATION, 735 ILCS SECTION
105/5-1 ET SEQ, BUT OTHERWISE WITHOUT REGARD TO THE 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.
-4-
<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:
----------------------------------
-5-
<PAGE>
THE FIRST NATIONAL BANK OF CHICAGO,
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-
<PAGE>
FLEET NATIONAL BANK
By:
---------------------------------
Print Name:
-----------------------------
Title:
------------------------------
Address: One Federal Street-MAOFD06H
Boston, MA 02110-2010
Attn: David A. Bosselait
Vice President
Fax No.: (617) 346-5825
Tel. No.: (617) 346-5823
-7-
<PAGE>
FIRST UNION NATIONAL BANK
By:
---------------------------------
Print Name:
-----------------------------
Title:
------------------------------
Address: 1339 Chestnut Street, PA4819
Philadelphia, PA 19101-4819
Attn: Joseph DiFrancesco
Fax No.: 215-786-4114
Tel. No.: 215-973-2944
-8-
<PAGE>
DEUTSCHE BANK AG,
New York and/or Cayman Islands Branch
By:
---------------------------------
Print Name:
-----------------------------
Title:
------------------------------
By:
---------------------------------
Print Name:
-----------------------------
Title:
------------------------------
Address: 31 West 52nd Street
New York, NY 10019
Attn: George Korchowsky
Fax No.: 212-469-8366
Tel. No.: 212-469-8242
-9-
<PAGE>
ABN AMRO BANK N.V.
By:
---------------------------------
Print Name:
-----------------------------
Title:
------------------------------
By:
---------------------------------
Print Name:
-----------------------------
Title:
------------------------------
Address: 500 Park Avenue
New York, NY 10022
Attn: Bruce Ballentine
Fax No.: 212-446-4335
Tel. No.: 212-446-4358
Fund American Enterprises Holdings, Inc.
Schedule 5.8
To Credit Agreement
MATERIAL CONTINGENT OBLIGATIONS
Guaranty by Fund American Enterprises Holdings, Inc. (the "Company") of a
$15,000,000 term loan, dated as of October 23, 1995, by and between John J.
Byrne, as borrower, and First National Bank of Chicago, as agent. The term
loan is due December 31, 1999. The guaranty is provided pursuant to Mr.
Byrne's employment contract and is recourse to Mr. Byrne's net worth.
Guaranty dated February 28, 1997, in connection with Source One Mortgage
Services Corporation's ("Source One") February 28, 1997 sale of approximately
$17.0 billion of mortgage servicing rights to Chemical Mortgage Company
("Chemical") whereby the company made certain collection, payment and
performance guarantees to Chemical for a period of no more than ten years.
The aggregate amount of the Company's obligation is initially limited to
$20,000,000 and amortizes down to $15,000,000 as mortgage loans serviced
under the related servicing agreements are repaid. During 1998, the Company
permitted Chemical to include an
-10-
<PAGE>
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 guaranty.
Stock Purchase Agreement dated as of October 19, 1998 by and between the
Company, Valley Insurance Company ("VIC") and Executive Risk Indemnity Inc.
("ERII") providing for the sale of all the outstanding capital stock of
Valley National Insurance Company ("VNIC") to ERII following the reinsurance
cession of all the insurance business of VNIC to VIC and Charter Indemnity
Company ("CIC") (the "VNIC Sale Agreement"). In conjunction with the VNIC
Sale Agreement, the Company and ERII entered into a Keep Well Agreement dated
as of October 19, 1998 whereby the Company has agreed to maintain the
shareholder's equity of Valley Group, Inc. ("VGI") at predetermined levels
(initially set at $60,000,000). In conjunction with the VGI Sale Agreement
(as defined below), The Company and VIC intend to amend the VNIC Sale
Agreement and Keep Well Agreement prior to closing to, among other items,
remove the obligation to maintain the shareholder's equity of VGI at
predetermined levels. The VNIC Sale Agreement and Keep Well Agreement are
subject to the receipt of regulatory approval.
Stock Acquisition Agreement dated as of February 10, 1999 by and between the
Company, and Unitrin, Inc. ("Unitrin") providing for the sale of all the
outstanding capital stock of VGI to Unitrin (the "VGI Sale Agreement"). In
conjunction with the VGI Sale Agreement the Company has agreed to guarantee
the Closing Date Loss and Loss Adjustment Expense Reserves of VGI's insurance
subsidiaries (the "Reserves") for a period of four years. The Company is
obligated to pay Unitrin an amount equal to 90% of the amount by which the
Reserves develop unfavorably to the extent that such unfavorable development
exceeds $500,000. Conversely, the Company is entitled to receive from Unitrin
an amount equal to 90% of the amount by which the Reserves develop favorably
to the extent that such favorable development exceeds $500,000. The Company's
exposure to the Reserves is limited to $50,000,000. The VGI Sale Agreement is
subject to the receipt of regulatory approval.
The Company has guaranteed the obligations of Source One (including but not
limited to indemnity obligations) under that certain Asset Purchase Agreement
dated as of March 23, 1999 by and among Source One as Seller, the Company as
Parent and Citicorp Mortgage, Inc. as Purchaser. Such Asset Purchase
Agreement provides for the sale by Source One to Citicorp Mortgage, Inc. of a
significant portion of the assets and liabilities of Source One (other than
the stock of Financial Security Assurance Holdings Ltd. held by Source One).
There is currently no litigation, arbitration, proceeding, inquiry or
governmental investigation pending or threatened against or affecting the
Borrower or any Subsidiary of the Borrower (outside of those in the ordinary
course of the insurance and mortgage banking businesses) which could
reasonably be expected to have a Material Adverse Effect upon the Borrower.
-11-
<PAGE>
Fund American Enterprises Holdings, Inc.
Schedule 5.16
To Credit Agreement
INDEBTEDNESS
FUND AMERICAN ENTERPRISES HOLDINGS, INC.
Guaranty by Fund American Enterprises Holdings, Inc. (the "Company") of a
$15,000,000 term loan, dated as of October 23, 1995, by and between John J.
Byrne, as borrower, and First National Bank of Chicago, as agent. The term
loan is due December 31, 1999. The guaranty is provided pursuant to Mr.
Byrne's employment contract and is recourse to Mr. Byrne's net worth.
Guaranty dated February 28, 1997, in connection with Source One Mortgage
Services Corporation's ("Source One") February 28, 1997 sale of approximately
$17.0 billion of mortgage servicing rights to Chemical Mortgage Company
("Chemical") whereby the company made certain collection, payment and
performance guarantees to Chemical for a period of no more than ten years.
The aggregate amount of the Company's obligation is initially limited to
$20,000,000 and amortizes down to $15,000,000 as mortgage loans serviced
under the related servicing agreements are repaid. During 1998, the Company
permitted Chemical 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 guaranty.
Stock Purchase Agreement dated as of October 19, 1998 by and between the
Company, Valley Insurance Company ("VIC") and Executive Risk Indemnity Inc.
("ERII") providing for the sale of all the outstanding capital stock of
Valley National Insurance Company ("VNIC") to ERII following the reinsurance
cession of all the insurance business of VNIC to VIC and Charter Indemnity
Company ("CIC") (the "VNIC Sale Agreement"). In conjunction with the VNIC
Sale Agreement, the Company and ERII entered into a Keep Well Agreement dated
as of October 19, 1998 whereby the Company has agreed to maintain the
shareholder's equity of Valley Group, Inc. ("VGI") at predetermined levels
(initially set at $60,000,000). In conjunction with the VGI Sale Agreement
(as defined below), The Company and VIC intend to amend the VNIC Sale
Agreement and Keep Well Agreement prior to closing to, among other items,
remove the obligation to maintain the shareholder's equity of VGI at
predetermined levels. The VNIC Sale Agreement and Keep Well Agreement are
subject to the receipt of regulatory approval.
Stock Acquisition Agreement dated as of February 10, 1999 by and between the
Company, and Unitrin, Inc. ("Unitrin") providing for the sale of all the
outstanding capital stock of VGI to Unitrin (the "VGI Sale Agreement"). In
conjunction with the VGI Sale Agreement the Company has agreed to guarantee
the Closing Date Loss and Loss Adjustment Expense Reserves of VGI's insurance
subsidiaries (the "Reserves") for a period of four years. The Company is
obligated to pay Unitrin an amount equal to 90% of the amount by which the
Reserves develop unfavorably to the extent that such unfavorable development
exceeds $500,000. Conversely, the Company is entitled to receive from Unitrin
an amount equal to 90% of the amount by which the Reserves develop favorably
to the extent that such favorable development exceeds $500,000. The Company's
exposure to the Reserves is limited to $50,000,000. The VGI Sale Agreement is
subject to the receipt of regulatory approval.
-12-
<PAGE>
The Company has guaranteed the obligations of Source One (including but not
limited to indemnity obligations) under that certain Asset Purchase Agreement
dated as of March 23, 1999 by and among Source One as Seller, the Company as
Parent and Citicorp Mortgage, Inc. as Purchaser. Such Asset Purchase
Agreement provides for the sale by Source One to Citicorp Mortgage, Inc. of a
significant portion of the assets and liabilities of Source One (other than
the stock of Financial Security Assurance Holdings Ltd. held by Source One).
FUND AMERICAN ENTERPRISES HOLDINGS, INC. (cont.)
<TABLE>
<S> <C>
Creditor Various
Subject matter of debt/lease Medium Term Notes
Date of note/lease January 27, 1993
Unpaid principal balance $1,000,000
Maturity date 2003
Interest rate 7.86%
Date to which interest has been paid November 1, 1998
Creditor Various
Subject matter of debt/lease Medium Term Notes
Date of note/lease February 4, 1993
Unpaid principal balance $10,000,000
Maturity date 2008
Interest rate 7.8%
Date to which interest has been paid November 1, 1998
Creditor Various
Subject matter of debt/lease Medium Term Notes
Date of note/lease February 10, 1993
Unpaid principal balance $4,000,000
Maturity date 2000
Interest rate 7.39%
Date to which interest has been paid November 1, 1998
Creditor Various
Subject matter of debt/lease Medium Term Notes
Date of note/lease February 3, 1993
Unpaid principal balance $101,250,000
Maturity date 2003
Interest rate 7.75%
Date to which interest has been paid February 1, 1999
Creditor(s) AT&T Capital Corporation
Subject matter of debt Telephone and video equipment
Date of note Feb. 1, 1996
Original amount of note $174,038
Unpaid principal balance $53,271.10
Maturity date Feb. 1999, Feb. 2001
Interest rate n/a
Monthly payment $3,450.47
Date to which interest has been paid n/a
</TABLE>
-13-
<PAGE>
FOLKSAMERICA HOLDING COMPANY, INC.
<TABLE>
<S> <C>
Creditor Swedbank
Subject matter of debt/lease Financing
Date of note/lease July 14, 1996 (date of refinancing)
Unpaid principal balance $55,553,118
Maturity date 2005*
Interest rate LIBOR + .55%
</TABLE>
* to be refinanced in conjunction with the Folksamerica Credit Agreement
Folksamerica has obtained two Letters of Credit in the amount of
approximately $7.4 million which inure to the benefit of Folksamerica
Reinsurance Company as beneficiary as a result of unauthorized reinsurance
and an intercompany tax sharing agreement in the ordinary course of business.
Folksamerica Reinsurance Company has issued a Letter of Credit in the amount
of approximately $2.6 million in the ordinary course of its reinsurance
business.
Folksamerica $100,000,000 Credit Agreement, dated as of February 24, 1999,
among Folksamerica, the lenders named therein and First Chicago, as agent.
VALLEY GROUP, INC.
Valley Group $15,000,000 Third Amended and Restated Credit Agreement, dated
as of February 24, 1999, among Valley Group, the lenders named therein and
First Chicago, as agent.
VALLEY INSURANCE COMPANY
<TABLE>
<S> <C> <C> <C>
Creditor IBM IBM IBM
Subject matter of IBM Equip. IBM Equip. IBM Equip.
debt/lease
AS400/Model 530 AS400/Model 320 AS400/Model 320
Date of note/lease 10/01/97 03/01/96 03/01/96
Original amount of note $617,724.00 $340,000.00 $127,797.61
Unpaid principal balance $442,100.00 $20,504.00 $8,074.00
Maturity Date Feb. 1, 2001 Mar. 1, 1999 Mar. 1, 1999
Interest Rate 4.51% 5.90% 8.19%
Monthly Payment $18,654.00 $10,328.06 $4,078.75
Date to which interest/
lease has been paid Dec. 31, 1998 Dec. 31, 1998 Dec. 31, 1998
</TABLE>
-14-
<PAGE>
CHARTER GENERAL AGENCY, INC.
<TABLE>
<S> <C>
Creditor(s) Skandia U.S. Holdings, Inc.
Subject matter of debt Payable under the terms of the Stock Purchase
Agreement Skandia U.S. Holdings, Inc.
Date of note Sept. 30, 1996
Original amount of note $3,174,956
Unpaid principal balance $1,058,319
Maturity date Sept. 30, 1999
Interest rate 6.5%
Monthly payment $1,058,319 due 9/30/99
Date to which interest
has been paid Sept. 30, 1998
</TABLE>
CHARTER GROUP, INC.
<TABLE>
<S> <C>
Creditor(s) AT&T Capital Corporation
Subject matter of debt IBM Equip. - Lease AS400
Date of note June 1, 1998
Original amount of note $455,370
Unpaid principal balance $363,971
Maturity date June 1, 2001
Interest rate n/a
Monthly payment $14,373
Date to which interest has n/a
been paid
</TABLE>
-15-
<PAGE>
EXHIBIT 10(C)
AMENDMENT NO. 2 TO CREDIT AGREEMENT AND WAIVER
This Amendment (this "Amendment") is entered into as of July 30, 1999 by
and among White Mountains Insurance Group, Inc., a Delaware corporation,
formerly known as Fund American Enterprises Holdings, Inc., (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 Second Amended and Restated Credit Agreement dated as of February
24, 1999 (as amended, 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 Effective Date (as
defined below), the Credit Agreement shall be amended as follows:
(a) ARTICLE I is amended by deleting the definitions of
"Borrower" and "Unfunded Liability" and replacing each in its entirety
to read as follows:
"`Borrower' means White Mountains Insurance Group, Inc., a
Delaware corporation, formerly known as Fund American Enterprises
Holdings, Inc., and its successors and assigns"
"`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 and valued on a basis
consistent with that used to prepare the Borrower's annual audited
financial statements."
<PAGE>
(b) SECTION 5.10 is amended by deleting the first sentence in
such section and replacing it in its entirety to read as follows:
"Except as disclosed on SCHEDULE 5.10 or as otherwise disclosed by
the Borrower in writing to the Lenders, 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."
(c) SECTION 6.22(b) is amended by deleting the second
reference contained therein to the dollar amount of "$500,000" and
replacing it with a reference to the dollar amount of "$1,000,000".
(d) SCHEDULE 5.10 is amended in its entirety and replaced with
SCHEDULE 5.10 attached hereto.
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 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); provided that SECTION 1 hereof shall not become effective until
the date (the "Effective Date") when the following additional conditions have
also been satisfied:
(a) a certificate, executed by the Secretary or Assistant
Secretary of the Borrower, certifying (i) an attached copy of the
Borrower's Board of Directors' resolutions authorizing and directing any
changes to the Borrower's Articles of Incorporation to effect a change
in its corporate name and (ii) that there have been no amendments,
supplements or modifications to any of the Articles of Incorporation,
Bylaws or certificate of incumbency of the Borrower delivered to the
Agent on February 24, 1999, or attached copies of such amendments,
supplements or modifications; and
(b) such other documents as the Agent, any Lender or their
counsel may have reasonably requested.
-2-
<PAGE>
In the event the Effective Date has not occurred on or before July 31,
1999, 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 (INCLUDING, WITHOUT LIMITATION, 735 ILCS SECTION
105/5-1 ET SEQ, BUT OTHERWISE WITHOUT REGARD TO THE 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 pages to follow]
-3-
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Amendment as of
the date and year first above written.
WHITE MOUNTAINS INSURANCE GROUP, INC.
By:
-------------------------------------
Name:
-----------------------------------
Title:
----------------------------------
-4-
<PAGE>
THE FIRST NATIONAL BANK OF CHICAGO,
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
-5-
<PAGE>
FLEET NATIONAL BANK
By:
-------------------------------------
Print Name:
-----------------------------
Title:
----------------------------------
Address: One Federal Street-MAOFD06H
Boston, MA 02110-2010
Attn: David A. Bosselait
Vice President
Fax No.: (617) 346-5825
Tel. No.: (617) 346-5823
-6-
<PAGE>
FIRST UNION NATIONAL BANK
By:
-------------------------------------
Print Name:
-----------------------------
Title:
----------------------------------
Address: 1339 Chestnut Street, PA4819
Philadelphia, PA 19101-4819
Attn: Joseph DiFrancesco
Fax No.: 215-786-4114
Tel. No.: 215-973-2944
-7-
<PAGE>
DEUTSCHE BANK AG,
New York and/or Cayman Islands Branch
By:
-------------------------------------
Print Name:
-----------------------------
Title:
----------------------------------
By:
-------------------------------------
Print Name:
-----------------------------
Title:
----------------------------------
Address: 31 West 52nd Street
New York, NY 10019
Attn: George Korchowsky
Fax No.: 212-469-8366
Tel. No.: 212-469-8242
-8-
<PAGE>
ABN AMRO BANK N.V.
By:
-------------------------------------
Print Name:
-----------------------------
Title:
----------------------------------
By:
-------------------------------------
Print Name:
-----------------------------
Title:
----------------------------------
Address: 500 Park Avenue
New York, NY 10022
Attn: Bruce Ballentine
Fax No.: 212-446-4335
Tel. No.: 212-446-4358
-9-
<PAGE>
EXHIBIT 10(D)
AMENDMENT NO. 3 TO CREDIT AGREEMENT
This AMENDMENT NO. 3 TO CREDIT AGREEMENT (this "Amendment") is entered
into as of October 29, 1999 by and among White Mountains Insurance Group,
Ltd., a Bermuda company formerly an Arizona corporation and survivor of a
merger with White Mountains Insurance Group, Inc., a Delaware corporation
formerly known as Fund American Enterprises Holdings, Inc. (the "Borrower"),
Bank One, NA (f/k/a 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, the Lenders and ABN AMRO Bank, NA are party
to that certain $35,000,000 Second Amended and Restated Credit Agreement
dated as of February 24, 1999 (as amended, 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 Effective Date (as
defined below), the Credit Agreement shall be amended as follows:
(a) ARTICLE I is amended as follows:
(i) by deleting the definitions of "Aggregate Commitment",
"Alternate Base Rate", "Commitment", "Corporate Base Rate",
"Documentation Agent", "Eurodollar Base Rate", "Lenders", "Maturity
Date" and "Revolver Termination Date" and replacing each in its entirety
to read as follows:
"`Aggregate Commitment' means the aggregate of the Commitments
of all the Lenders hereunder. The Aggregate Commitment as of
October 29, 1999 is $50,000,000."
"`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; PROVIDED, that "Alternate Base Rate"
means, for any day for the period from November 15, 1999 to January
15, 2000, a rate of interest per annum equal to the highest of (i)
the Corporate Base Rate for such day, (ii) the sum of the Federal
Funds Effective
<PAGE>
Rate for such day plus 1/2% per annum and (iii) the sum of the then
current Federal Reserve Board Open Market Committee's `Target Fed
Funds Rate' for such day plus 1 1/2% per annum plus the Applicable
Eurodollar Margin, in each case changing when and as the Corporate
Base Rate, the Federal Funds Effective Rate or the Target Fed Funds
Rate, as the case may be, changes."
"`Commitment' means, for each Lender, the obligation of such
Lender to make Loans not exceeding the amount set forth opposite
its name on the Commitment Schedule 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."
"`Corporate Base Rate' means a rate per annum equal to the
corporate base rate or prime rate of interest announced by Bank One
or by its parent, Bank One Corporation, from time to time, changing
when and as said corporate base rate or prime 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. Bank One may make commercial loans or other loans at
rates of interest at, above or below the Corporate Base Rate."
"`Documentation Agent' means First Union National Bank, in its
capacity as Documentation Agent for the Lenders pursuant to ARTICLE
X, and not in its capacity as Lender."
"`Eurodollar Base Rate' means, with respect to a Eurodollar
Advance for the relevant Interest Period, the applicable British
Bankers' Association Interest Settlement Rate for deposits in U.S.
dollars appearing on Reuters Screen FRBD as of 11:00 a.m. (London
time) two Business Days prior to the first day of such Interest
Period, and having a maturity equal to such Interest Period,
PROVIDED that, (i) if Reuters Screen FRBD is not available to the
Agent for any reason, the applicable Eurodollar Base Rate for the
relevant Interest Period shall instead be the applicable British
Bankers' Association Interest Settlement Rate for deposits in U.S.
dollars as reported by any other generally recognized financial
information service as of 11:00 a.m. (London time) two Business
Days prior to the first day of such Interest Period, and having a
maturity equal to such Interest Period, and (ii) if no such British
Bankers' Association Interest Settlement Rate is available to the
Agent, the applicable Eurodollar Base Rate for the relevant
Interest Period shall instead be the rate determined by the Agent
to be the rate at which Bank One or one of its Affiliate banks
offers to place deposits in U.S. dollars with first-class banks in
the London interbank market at approximately 11:00 a.m. (London
time) two Business Days prior to the first day of such Interest
Period, in the approximate amount of Bank One's relevant Loan and
having a maturity equal to such Interest Period."
"`Lenders' means the lending institutions listed on the
signature pages of Amendment No. 3 to Credit Agreement, dated as of
October 29, 1999, and their respective successors and assigns."
-2-
<PAGE>
"`Maturity Date' means April 27, 2001."
"`Revolver Termination Date' means October 27, 2000."
(ii) by deleting the definition of "First Chicago" and
replacing it in its entirety with the following definition of "Bank One"
in its proper alphabetical order:
"`Bank One' means Bank One, NA, a national banking association
having its principal office in Chicago, Illinois, in its individual
capacity, and its successors."
(iii) by adding the following definitions for "Commitment
Schedule", "Medium Term Notes", "Medium Term Note Indenture", "merge",
"Reorganization Conditions", "Reorganization Transactions", "Syndication
Agent", "White Mountains-Arizona", "White Mountains-Bermuda", "White
Mountains-Delaware", "WMSC" and "WMSC Obligations" each in its proper
alphabetical order:
"`Commitment Schedule' means the Schedule attached hereto
identified as such."
"`Medium Term Notes' means the securities issued by the
Borrower under the Medium Term Note Indenture in the original
aggregate principal amount of $150,000,000, of which approximately
$100,385,000 remains outstanding as of October 29, 1999."
"`Medium Term Note Indenture' means that certain indenture
dated as January 1, 1993 between the Borrower, as issuer, and Bank
One Trust Company, NA (f/k/a The First National Bank of Chicago),
as trustee, as amended and supplemented from time to time."
"`merge' means merge or amalgamate."
"`Reorganization Conditions' means: (a) with respect to the
transaction described in CLAUSE (b) of the definition of
Reorganization Transactions, the Borrower shall have furnished to
the Agent, with sufficient copies for the Lenders, the following
documents, all of which shall be in form and substance reasonably
satisfactory to the Lenders and their counsel: (i) the certificate
of merger and all other merger documents, (ii) the articles of
incorporation of the surviving entity, (iii) the bylaws of the
surviving entity, (iv) a certificate of incumbency as to the
Authorized Officers for the surviving entity, (v) an affirmation by
the surviving entity of its Obligations under the Credit Agreement
as successor to the Borrower, (vi) opinions of counsel as to such
matters as the Agent may reasonably request and (vii) a certificate
of compliance by the surviving entity as to the matters described
in SECTIONS 6.12(c)(i) and (iii) of the Credit Agreement; and (b)
with respect to the transaction described in CLAUSE (c) of the
definition of Reorganization Transactions, the Borrower shall have
-3-
<PAGE>
furnished to the Agent, with sufficient copies for the Lenders, the
following documents, all of which shall be in form and substance
reasonably satisfactory to the Lenders and their counsel: (i) the
memorandum of continuance filed with the Registrar of Companies in
Bermuda and all other redomestication documents, (ii) the bye-laws
of the continuing entity, (iii) a certificate of incumbency as to
the Authorized Officers for the continuing entity, (iv) an
affirmation by the continuing entity of its Obligations under the
Credit Agreement as successor to the Borrower, (v) opinions of
counsel as to such matters as the Agent may reasonably request and
(vi) a certificate of compliance by the continuing entity as to the
matters described in SECTIONS 6.12(c)(i) and (iii) of the Credit
Agreement."
"`Reorganization Transactions' means the Subsidiary formation,
merger and change of domicile transactions, taken together, by
which (a) White Mountains-Delaware has formed a Wholly-Owned
Subsidiary, White Mountains Insurance Group (Arizona), Inc., (b)
immediately preceding and for the purpose of consummating the
transaction described in CLAUSE (c) below, White Mountains-Delaware
merges with and into White Mountains-Arizona, which will be the
surviving corporation in the merger, with each outstanding share of
common stock of White Mountains-Delaware converted automatically
into one share of common stock of White Mountains-Arizona, (c)
White Mountains-Arizona is redomiciled and continues its existence
as White Mountains-Bermuda upon registration of the memorandum of
continuance by the Registrar of Companies in Bermuda, with each
outstanding share of common stock of White Mountains-Arizona
continuing automatically as one common share of White
Mountains-Bermuda, (d) White Mountains forms a new subsidiary,
White Mountains Properties (Barbados) SRL, a Barbados corporation
(and Wholly-Owned Subsidiary of White Mountains-Delaware), and
contributes all the shares of common stock of White Mountains
Properties, Inc., a Delaware corporation and survivor of a merger
with Fund American Enterprises, Inc., to such new subsidiary, after
which White Mountains Properties (Barbados) SRL will merge White
Mountains Properties, Inc. with and into Folksamerica with
Folksamerica being the surviving entity and (e) White
Mountains-Delaware forms a new Wholly-Owned Subsidiary, White
Mountains Holdings (Barbados) SRL, a Barbados corporation, and
contributes all the shares of common stock of White Mountains to
such new subsidiary."
"`Syndication Agent' means Fleet National Bank, in its
capacity as Syndication Agent for the Lenders pursuant to ARTICLE
X, and not in its capacity as Lender."
"`White Mountains-Arizona' means White Mountains Insurance
Group (Arizona), Inc., an Arizona corporation."
"`White Mountains-Bermuda' means White Mountains Insurance
Group, Ltd., a Bermuda company, following the registration of the
memorandum of continuance by White Mountains-Arizona with the
Registrar of Companies in Bermuda."
-4-
<PAGE>
"`White Mountains-Delaware' means the Borrower prior to the
consummation of the Reorganization Transactions."
"`WMSC' means White Mountains Services Corporation, a Delaware
corporation formerly known as Source One Mortgage Services
Corporation, and its successors and assigns."
"`WMSC Obligations' means, individually and collectively, the
Letters of Credit, Liens and Contingent Obligations of the Borrower
relating to the sale of WMSC in an aggregate principal amount
outstanding at any one time not to exceed $25,000,000."
(iv) by deleting the definitions for "Eligible FSA
Securities", "FSA Amount", "SOMSC", "SOMSC Credit Agreement",
"Unrestricted Subsidiary", "Valley", "Valley Credit Agreement" and
"White Mountains Credit Agreement".
(b) Each reference therein to "First Chicago" is deemed amended
to be a reference to "Bank One".
(c) Each reference therein to "Eligible FSA Securities", "FSA
Amount", "SOMSC", "SOMSC Credit Agreement", "Unrestricted Subsidiary",
"Valley", "Valley Credit Agreement" and "White Mountains Credit
Agreement" is deemed deleted with appropriate grammatical amendments
made therein.
(d) SECTION 3.1 is amended by inserting "(a)" before the body
of text therein, replacing the subclause numbering of "(a)" , "(b)" and
"(c)" therein with "(i)", "(ii)" and "(iii)", respectively, and adding
the following new subsection 3.1(b) as follows:
"(b) NON-U.S. RESERVE COSTS OR FEES WITH RESPECT TO LOANS TO
NON-U.S. BORROWER. If any law or any governmental or
quasi-governmental rule, regulation, policy, guideline or directive
of any jurisdiction outside of the United States of America or any
subdivision thereof (whether or not having the force of law),
imposes or deems applicable any reserve requirement against or fee
with respect to assets of, deposits with or for the account of, or
credit extended by, any Lender or any applicable Lending
Installation, and the result of the foregoing is to increase the
cost to such Lender or applicable Lending Installation of making or
maintaining its Loans to the Borrower at any time that the Borrower
is not incorporated under the laws of the United States of America
or a state thereof or its Commitment to the Borrower at any such
time or to reduce the return received by such Lender or applicable
Lending Installation in connection with such Loans to the Borrower
or Commitment to the Borrower, then, within fifteen (15) days of
demand by such Lender, the Borrower shall pay such Lender such
additional amount or amounts as will compensate such Lender for
such increased cost or reduction in amount received, PROVIDED that
the Borrower shall not be required to compensate any Lender for
such non-U.S. reserve costs or fees to the extent that an amount
equal to such reserve costs or fees is received by such Lender as a
-5-
<PAGE>
result of the calculation of the interest rate applicable to
Eurodollar Advances pursuant to clause (a)(ii) of the definition of
`Eurodollar Rate.'"
(e) ARTICLE IV is amended by adding the following Section 4.3:
"4.3. ADVANCES FOLLOWING REORGANIZATION TRANSACTIONS. The
Lenders shall not be required to make any Advance after the
consummation of any of the Reorganization Transactions unless on
the applicable Borrowing Date the applicable Reorganization
Conditions have been satisfied."
(f) SECTION 6.4 is amended by adding the following at the end
of such section:
"; PROVIDED, HOWEVER, that (a) subject to satisfaction of the
applicable Reorganization Conditions, the Reorganization
Transactions are approved by the Lenders hereunder and (b) any
Wholly-Owned Subsidiary may discontinue its business pursuant to a
merger permitted pursuant to SECTION 6.12 or discontinue its
business where the recipient of any liquidating dividend is the
Borrower or a Wholly-Owned Subsidiary of the Borrower."
(g) SECTION 6.8 is amended by adding the following at the end
of such section:
"; PROVIDED, HOWEVER, that (a) subject to satisfaction of the
applicable Reorganization Conditions, the Reorganization
Transactions are approved by the Lenders hereunder and (b) any
Wholly-Owned Subsidiary may discontinue its business pursuant to a
merger permitted pursuant to SECTION 6.12 or discontinue its
business where the recipient of any liquidating dividend is the
Borrower or a Wholly-Owned Subsidiary of the Borrower."
(h) SECTION 6.11(d) is amended in its entirety and replaced
with the following:
"(d) Indebtedness of Folksamerica and its Subsidiaries
permitted under the Folksamerica Credit Agreement and Letters of
Credit issued on behalf of the Borrower related to the WMSC
Obligations;"
(i) SECTION 6.12(c) is amended in its entirety and replaced
with the following:
"(c) the Borrower 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 is the continuing or surviving corporation (PROVIDED,
HOWEVER, subject to satisfaction of the applicable Reorganization
Conditions, the Borrower may consummate the merger pursuant to the
Reorganization Transactions, so long as contemporaneously with each
step the successor, continuing or surviving entity affirms its
obligations hereunder pursuant to a writing in form and substance
satisfactory to the Agent) and (iii) the
-6-
<PAGE>
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."
(j) SECTION 6.13(e) is amended in its entirety and replaced
with the following:
"(e) Contingent Obligations which are permitted pursuant to
the Folksamerica Credit Agreement and Contingent Obligations
related to the WMSC Obligations and"
(k) SECTION 6.14(g) is amended in its entirety and replaced
with the following:
"(g) Liens of Folksamerica and its Subsidiaries permitted
under the Folksamerica Credit Agreement and Liens of the Borrower
or any of its Subsidiaries related to the WMSC Obligations; and"
(l) SECTION 6.15(d) is amended by inserting on the first line
after the word "entities" contained therein, the parenthetical
phrase reading as follows:
"(including the creation of Wholly-Owned Subsidiaries)"
(m) SECTION 6.15(e) is amended in its entirety and replaced
with the following:
"(e) other Investments by the Borrower in any Person which is
a Subsidiary as of February 24, 1999, so long as no Default or
Unmatured Default has occurred and is continuing or would occur
after giving effect to such Investment;"
(n) SECTION 6.15(f) is amended in its entirety and replaced
with the following:
"(f) loans made by (x) the Borrower to any Wholly-Owned
Subsidiary and (y) any Wholly-Owned Subsidiary to a Wholly-Owned
Subsidiary or the Borrower so long as, in all cases, no Default or
Unmatured Default has occurred and is continuing or would occur
after giving effect to such loan;"
(o) SECTION 6.15(g) is amended in its entirety and replaced
with the following:
"(g) Investments by the Borrower (in addition to those
permitted by the other clauses of this SECTION 6.15) in an amount
not exceeding in the aggregate at any time $25,000,000 (including
the creation of Subsidiaries and Investments therein and
Investments in any partnership or joint venture) so long as at the
time of any such Investment no Default or Unmatured Default has
occurred and is continuing or would occur after giving effect to
such Investment; and"
-7-
<PAGE>
(p) SECTION 6.15(h) is amended in its entirety and replaced
with the following:
"(h) other Investments by Folksamerica and its Subsidiaries
permitted under the Folksamerica Credit Agreement."
(q) SECTION 6.15(i) is deleted in its entirety.
(r) SECTION 6.18 is amended by adding the following at the end
of such section:
"; PROVIDED, HOWEVER that subject to satisfaction of the
applicable Reorganization Conditions, the Reorganization
Transactions are approved by the Lenders hereunder."
(s) SECTION 6.19(a) is amended by deleting the language "or
the Valley Credit Agreement" therein.
(t) SECTION 6.20.3 is amended by deleting the parenthetical
phrase contained therein and replacing it in its entirety with the
following:
"(excluding any Insurance Subsidiaries and Folksamerica)"
(u) SECTION 6.21(a) is amended in its entirety and replaced
with the following:
"(a) file or consent to the filing of any consolidated,
combined or unitary income tax return with any Person other than
the Borrower or its Wholly-Owned Subsidiaries or"
(v) SECTION 7.5 is amended in its entirety and replaced with
the following:
"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 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; PROVIDED, HOWEVER, that in each case if any of
the above described events arises with respect to the Medium Term
Notes or the Medium Term Notes Indenture and arises solely out of
the Borrower's consummation of the Reorganization Transactions, a
Default shall not occur unless the Borrower shall fail within
ninety (90) days to pay in full any such Funded Indebtedness which
has been declared to be due and payable or required
-8-
<PAGE>
to be prepaid (other than by a regularly scheduled payment) prior
to the stated maturity thereof."
(w) SECTION 10.13 is amended in its entirety and replaced with
the following:
"10.13 SYNDICATION AGENT AND DOCUMENTATION AGENT.
(a) Fleet National Bank is hereby appointed Syndication Agent
of the Lenders hereunder and under each Loan Document. Fleet
National Bank shall not have any duties, responsibilities or
liabilities in its capacity as Syndication Agent.
(b) First Union National Bank is hereby appointed
Documentation Agent of the Lenders hereunder and under each Loan
Document. First Union National Bank shall not have any duties,
responsibilities or liabilities in its capacity as Documentation
Agent."
(x) The PRICING SCHEDULE is amended in its entirety and
replaced with the PRICING SCHEDULE attached hereto.
(y) EXHIBIT C is amended in its entirety and replaced with
EXHIBIT C attached hereto.
(z) The Credit Agreement is amended by adding the COMMITMENT
SCHEDULE attached hereto.
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 the
execution and delivery hereof by the Borrower, the Agent and each of the
Lenders; provided that SECTION 1 hereof shall not become effective until the
date (the "Effective Date") when the following additional conditions have
also been satisfied:
-9-
<PAGE>
(a) a certificate, executed by the Secretary or Assistant
Secretary of the Borrower, certifying (i) an attached copy of the Board
of Directors' resolutions for White Mountains-Arizona and the Board of
Directors' resolutions for White Mountains-Delaware authorizing the
execution, delivery and performance under this Amendment and (ii) that
there have been no amendments, supplements or modifications to any of
the Articles of Incorporation, Bylaws or certificate of incumbency of
White Mountains-Delaware delivered to the Agent on February 24, 1999, or
attached copies of such amendments, supplements or modifications;
(b) Notes payable to the order of each of the Lenders in the
amount of their respective increased Commitment duly executed by the
Borrower;
(c) payment of all fees by the Borrower due to the Agent and
the Lenders;
(d) ABN AMRO Bank, NA shall have consented to this Amendment
and the reduction to $0 of its commitment under the Credit Agreement,
such consent to be in form and substance satisfactory to the Agent; and
(e) such other documents as the Agent or its counsel may have
reasonably requested.
In the event the Effective Date has not occurred on or before November
15, 1999, 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 (INCLUDING, WITHOUT LIMITATION, 735 ILCS SECTION
105/5-1 ET SEQ, BUT OTHERWISE
-10-
<PAGE>
WITHOUT REGARD TO THE 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 pages to follow]
-11-
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Amendment as of
the date and year first above written.
WHITE MOUNTAINS INSURANCE GROUP, LTD.
By:
-------------------------------------
Name:
-----------------------------------
Title:
----------------------------------
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<PAGE>
BANK ONE, NA,
Individually and as Agent
By:
-------------------------------------
Print Name:
-----------------------------
Title:
----------------------------------
Address: One Bank One Plaza
Chicago, IL 60670
Attn: Samuel W. Bridges
First Vice President
Fax No.: (212) 373-1393
Tel. No.: (212) 373-1142
-13-
<PAGE>
FLEET NATIONAL BANK
By:
-------------------------------------
Print Name:
-----------------------------
Title:
----------------------------------
Address: One Federal Street-MAOFD06H
Boston, MA 02110-2010
Attn: David A. Bosselait
Vice President
Fax No.: (617) 346-5825
Tel. No.: (617) 346-5823
-14-
<PAGE>
FIRST UNION NATIONAL BANK
By:
-------------------------------------
Print Name:
-----------------------------
Title:
----------------------------------
Address: 1339 Chestnut Street, PA4819
Philadelphia, PA 19101-4819
Attn: Joseph DiFrancesco
Fax No.: 215-786-4114
Tel. No.: 215-973-2944
-15-
<PAGE>
DEUTSCHE BANK AG,
New York and/or Cayman Islands Branch
By:
-------------------------------------
Print Name:
-----------------------------
Title:
----------------------------------
By:
-------------------------------------
Print Name:
-----------------------------
Title:
----------------------------------
Address: 31 West 52nd Street
New York, NY 10019
Attn: George Korchowsky
Fax No.: 212-469-8366
Tel. No.: 212-469-8242
-16-
<PAGE>
DRESDNER BANK AG, New York and
Grand Cayman Branches
By:
-------------------------------------
Print Name:
-----------------------------
Title:
----------------------------------
By:
-------------------------------------
Print Name:
-----------------------------
Title:
----------------------------------
Address: 75 Wall Street, 34th Floor
New York, NY 10005
Attn: George Ferguson
Fax No.: 212-429-2524
Tel. No.: 212-429-3189
-17-
<PAGE>
PRICING SCHEDULE
- -----------------------------------------------------------------------------
APPLICABLE EURODOLLAR MARGIN
(AS A PER ANNUM RATE)
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
APPLICABLE EURODOLLAR MARGIN
(BASED ON PERCENT USAGE)
----------------------------------------------
LEVEL Less than 50% Greater than or equal to 50%
-----
<S> <C> <C>
Level I 0.625% 0.875%
Level II 0.725% 0.975%
Level III 0.825% 1.075%
Level IV 1.125% 1.375%
</TABLE>
- -----------------------------------------------------------------------------
APPLICABLE FACILITY FEE MARGIN
(AS A PER ANNUM RATE)
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
LEVEL APPLICABLE FACILITY FEE MARGIN
----- ------------------------------
<S> <C>
Level I 0.125%
Level II 0.150%
Level III 0.175%
Level IV 0.375%
</TABLE>
For the purposes of this Schedule, the following terms have the
following meanings:
"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 this Agreement.
"Level" means, and includes, Level I, Level II, Level III or Level IV,
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 BBB+ OR the Applicable Credit Rating of Moody's is
equal to or greater than Baa1.
-18-
<PAGE>
"Level II" 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) Level I does not exist.
"Level III" 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 IV" 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.
"Percent Usage" shall mean at any time the percentage equal to the
aggregate outstanding principal amount of the Loans to the Aggregate
Commitment (or, on and after the Revolver Termination Date, the Percent Usage
shall be the percentage equal to the percentage determined on the Revolver
Termination Date).
-19-
<PAGE>
COMMITMENT SCHEDULE
<TABLE>
<CAPTION>
LENDER COMMITMENT AMOUNT
- ------ -----------------
<S> <C>
Bank One, NA $ 14,000,000
Fleet National Bank $ 13,000,000
First Union National Bank $ 11,000,000
Deutsche Bank AG, New York and/or $ 7,000,000
Cayman Islands Branch
Dresdner Bank AG, New York and $ 5,000,000
Grand Cayman Branches ------------
AGGREGATE COMMITMENT $ 50,000,000
</TABLE>
-20-
<PAGE>
EXHIBIT 10(e)
$100,000,000
CREDIT AGREEMENT
AMONG
FOLKSAMERICA HOLDING COMPANY, INC.,
AS BORROWER,
THE LENDERS NAMED HEREIN,
AS LENDERS,
THE FIRST NATIONAL BANK OF CHICAGO,
AS AGENT,
FLEET NATIONAL BANK,
AS DOCUMENTATION AGENT,
FIRST UNION NATIONAL BANK,
AS DOCUMENTATION AGENT,
AND
DEUTSCHE BANK AG,
AS CO-AGENT,
DATED AS OF
FEBRUARY 24, 1999
LEAD ARRANGER AND BOOK RUNNER
FIRST CHICAGO CAPITAL MARKETS, INC.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ARTICLE I......................................................................8
ARTICLE II....................................................................25
ARTICLE III...................................................................36
ARTICLE IV....................................................................42
ARTICLE V.....................................................................45
ARTICLE VI....................................................................51
ARTICLE VII...................................................................63
ARTICLE VIII..................................................................65
ARTICLE IX....................................................................67
ARTICLE X.....................................................................70
ARTICLE XI....................................................................74
ARTICLE XII...................................................................75
ARTICLE XIII..................................................................78
ARTICLE XIV...................................................................78
ARTICLE XV....................................................................78
</TABLE>
-2-
<PAGE>
EXHIBITS
<TABLE>
<S> <C>
Exhibit A (Article I) - Form of Note
Exhibit B (Section 4.2) - Form of Compliance Certificate
Exhibit C (Section 12.3.1) - Form of Assignment Agreement
Exhibit D (Section 4.1(xi)) - Form of Written Money Transfer Instructions
</TABLE>
SCHEDULES
<TABLE>
<S> <C>
Dividend Schedule
Pricing Schedule
Schedule 1.1 - Senior Management/Continuing Directors
Schedule 5.3 - Approvals and Consents
Schedule 5.8 - Material Contingent Obligations
Schedule 5.9 - Capitalization and Subsidiaries
Schedule 5.10 - ERISA
Schedule 5.15 - Indebtedness
Schedule 5.16 - Insurance Licenses
Schedule 5.17 - Reinsurance
Schedule 5.18 - Dividend Restrictions
Schedule 5.21 - Material Restrictions
Schedule 6.14 - Investment Commitments
Schedule 6.16 - Liens
</TABLE>
-3-
<PAGE>
CREDIT AGREEMENT
This Credit Agreement, dated as of February 24, 1999, is among
Folksamerica Holding Company, Inc., a New York corporation, the Lenders and
The First National Bank of Chicago, as Agent.
R E C I T A L S:
A. The Borrower is party to a certain $70,000,000 credit agreement
between the Borrower and Swedbank (Sparbanken Sverige AB (publ)), New York
Branch, dated as of November 12, 1991, as amended (the "Existing Credit
Agreement");
B. The Borrower is party to a certain Purchase Agreement (as hereinafter
defined), pursuant to which the Borrower has agreed to redeem $30,000,000 of
its capital stock from Fund American Enterprises, Inc., a Delaware
corporation ("FAE");
C. The Borrower has requested the Lenders to make financial
accommodations to it in the aggregate principal amount of $100,000,000, the
proceeds of which the Borrower will use (a) in part to repay approximately
$56,114,729 due under the Existing Credit Agreement, (b) in part to finance
the cash payment to be made pursuant to the Purchase Agreement and (c) for
the general corporate needs of the Borrower and its Subsidiaries; and
D. The Lenders are willing to extend such financial accommodations on
the terms and conditions set forth herein.
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:
"Account" is defined in the definition of Defeased.
"Acquisition" 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 limited
liability company, or division thereof, whether through purchase or swap 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
-8-
<PAGE>
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 any limited
liability company.
"Advance" means a borrowing hereunder, made by the Lenders on the same
Borrowing Date, consisting of the aggregate amount of the several Loans of
the same Type and, in the case of Eurodollar Loans, 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.
"Agent" means The First National Bank of Chicago in its capacity for
administrative purposes as contractual representative of 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 Available Commitment" means, at any time, (a) the Aggregate
Commitment at such time LESS (b) the outstanding Facility Letter of Credit
Obligations at such time.
"Aggregate Commitment" means the aggregate of the Commitments of all the
Lenders, as reduced from time to time pursuant to the terms hereof. The
initial Aggregate Commitment is $100,000,000.
"Agreement" means this 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, applied in a manner consistent
with that used in preparing the Financial Statements referred to in SECTION
5.5; 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.
"Allowable Seller Paper" means Subordinated Indebtedness of the
Borrower, in an amount described in the Borrower's audited consolidated
financial statements, issued to a seller in connection with an Acquisition or
Investment permitted by SECTION 6.14(a)(v) and on terms and conditions
satisfactory to the Required Lenders, including (a) terms of subordination,
(b)
-9-
<PAGE>
default provisions, (c) limitation on amortization of principal and payment
of fees and cash interest until one year after the Loans have been paid in
full and the Commitments hereunder terminated, (d) interest rates and (e)
covenants; PROVIDED that if such Indebtedness has been Defeased, the
condition set forth in CLAUSE (c) above shall not be applicable.
"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.
"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 Fee Rate" means, at any time, the percentage rate per annum
at which Commitment Fees are accruing on the unused portion of the Aggregate
Commitment at such time as set forth in the Pricing Schedule.
"Applicable Margin" means, with respect to Advances of any Type at any
time, the percentage rate per annum which is applicable at such time with
respect to Advances of such Type as set forth in the Pricing Schedule.
"Arranger" means First Chicago Capital Markets, Inc., a Delaware
corporation, and its successors.
"Article" means an article of this Agreement unless another document is
specifically referenced.
"Authorized Officer" means any of the chief executive officer,
president, chief financial officer, treasurer or controller of the Borrower,
acting singly.
"Borrower" means Folksamerica Holding Company, Inc., a New York
corporation, and its successors and assigns.
"Borrowing Date" means a date on which an Advance is made or a Facility
Letter of Credit is issued 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 and New York for the conduct of
substantially all of their commercial lending
-10-
<PAGE>
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.
"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.
"Cash Flow" means an amount equal to the maximum amount of dividends
available to be paid to the Borrower without approval of any Governmental
Authority by each present and future Wholly-Owned Subsidiary of the Borrower
that is a First-Tier Significant Insurance Subsidiary of the Borrower
pursuant to applicable insurance statutes, rules and regulations of the
applicable Governmental Authority during the succeeding four (4) Fiscal
Quarters.
"Change" is defined in SECTION 3.2.
"Change in Control" means (a) Fund (or a successor to Fund satisfactory
to the Required Lenders) shall cease to own directly or indirectly at least
51% of the fully diluted common equity
-11-
<PAGE>
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
or Folksamerica Reinsurance Company on the first day of each such period to
constitute a majority of the combined Senior Management of the Borrower and
Folksamerica Reinsurance Company. Senior Management and the Continuing
Directors on the date of this Agreement are listed on SCHEDULE 1.1, hereto,
such SCHEDULE 1.1 to be updated by the Borrower and delivered to the Agent
within three (3) Business Days of any change in Senior Management or the
Continuing Directors.
"Co-Agent" means Deutsche Bank AG, in its capacity as Co-Agent for the
Lenders pursuant to ARTICLE X, and not in its individual capacity as a Lender.
"Code" means the Internal Revenue Code of 1986, as amended, reformed or
otherwise modified from time to time.
"Commercial Letter of Credit" means a trade or commercial Facility
Letter of Credit issued by the Issuer pursuant to SECTION 2.19 hereof.
"Commitment" means, for each Lender, the obligation of such Lender to
make Loans and participate in Facility Letters of Credit not exceeding the
amount set forth opposite its signature below or as set forth in any Notice
of Assignment relating to any assignment that 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
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against loss, including, without limitation, any comfort letter, operating
agreement, take-or-pay contract, application for a Letter of Credit or the
obligations of any such Person as general partner of a partnership with
respect to the liabilities of the partnership, but excluding Contingent
Obligations in respect of insurance policies and insurance contracts issued
in the ordinary course of business.
"Controlled Group" means all members of a controlled group of
corporations or other business entities 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 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.
"Defeased" means, with respect to any Indebtedness of the Borrower, that
such Indebtedness is subject to an arrangement which is in all respects
(including, without limitation, the related documentation and the amount and
maturity of Cash Equivalents involved) satisfactory to the Required Lenders
whereby an amount of Cash Equivalents described in CLAUSE (c) of the
definition thereof (but regardless of maturity thereof) sufficient to repay
such Indebtedness and related interest is deposited in an account (the
"Account") with First Chicago which is pledged to the Agent to secure the
Obligations pursuant to documentation reasonably satisfactory to the Agent,
which documentation shall irrevocably direct the Agent (a) to apply amounts
from the Account to pay principal and interest on such Indebtedness as it
comes due, (b) to release such funds or a portion thereof to the Borrower
upon the direction of the Borrower and subject to the Agent's determination
that the Borrower's audited consolidated financial statements evidence a
reduction in the amount of such Indebtedness equal to or greater than such
funds so released or (c) to apply amounts from the Account to repay Advances
and reduce the Aggregate Commitment by the amount of such repayment pursuant
to SECTION 2.5.4 upon the earlier of (i) direction of the Borrower or (ii)
the acceleration of the Obligations. "Defeasing" and "Defease" shall have
correlative meanings.
"Dividend Schedule" means the Schedule attached hereto identified as
such.
"Documentation Agent" means each of Fleet National Bank and First Union
National Bank, each in its capacity as a Documentation Agent for the Lenders
pursuant to ARTICLE X, and not in its capacity as Lender.
"Environmental Laws" means any and all federal, state, local and foreign
statutes, laws, judicial decisions, regulations, ordinances, rules,
judgments, orders, decrees, plans, injunctions,
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permits, concessions, grants, franchises, licenses, agreements and other
governmental restrictions relating to (i) the protection of the environment,
(ii) the effect of the environment on human health, (iii) emissions,
discharges or releases of pollutants, contaminants, hazardous substances or
wastes into surface water, ground water or land, or (iv) the manufacture,
processing, distribution, use, treatment, storage, disposal, transport or
handling of pollutants, contaminants, hazardous substances or wastes or the
clean-up or other remediation thereof.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended from time to time, and any rule or regulation issued thereunder.
"Eurodollar Advance" means an Advance which, except as otherwise
provided in SECTION 2.11, bears interest at the applicable 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 First Chicago offers to place deposits in U.S. dollars with
first-class banks in the London interbank market at approximately 11:00 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 Loan
and having a maturity approximately equal to such Interest Period.
"Eurodollar Loan" means a Loan which, except as otherwise provided in
SECTION 2.11, bears interest at the applicable Eurodollar Rate.
"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 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.
"Excluded Taxes" means, in the case of each Lender or applicable Lending
Installation and the Agent, taxes imposed on its overall net income, and
franchise taxes imposed on it, by (a) the jurisdiction under the laws of
which such Lender or the Agent is incorporated or organized or (b) the
jurisdiction in which the Agent's or such Lender's principal executive office
or such Lender's applicable Lending Installation is located.
"Exhibit" refers to an exhibit to this Agreement, unless another
document is specifically referenced.
"Existing Credit Agreement" is defined in the recitals to this Agreement.
"Facility Letter of Credit" means a Letter of Credit issued pursuant to
SECTION 2.19.
"Facility Letter of Credit Obligations" means as at the time of
determination thereof, the sum of (i) the Reimbursement Obligations then
outstanding and (ii) the aggregate then undrawn face amount of the then
outstanding Facility Letters of Credit.
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"Facility Letter of Credit Sublimit" means an aggregate amount of
$22,500,000.
"Facility Termination Date" means February 23, 2005 or any earlier date
on which the Aggregate Commitment is reduced to zero or otherwise terminated
pursuant to the terms hereof.
"FAE" is defined in the recitals to this Agreement.
"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 10:00
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-Tier Significant Insurance Subsidiary" means any Significant
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 Significant Insurance Subsidiary.
"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.
"Fixed Charges Coverage Ratio" means, as of the end of any Fiscal
Quarter, the ratio of (a) Cash Flow to (b) Fixed Charges.
"Fixed Charges" means, with respect to 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 (excluding the Loans hereunder) for the period of four Fiscal
Quarters immediately preceding the date of determination (except that for
each Fiscal Quarter prior to the first anniversary of the date of this
Agreement, interest expense shall be annualized with respect to such period)
paid by the Borrower and its Subsidiaries, PLUS (b) the sum of all interest
expense payable under the Loans for the period of four Fiscal Quarters
immediately following the date of determination, assuming the Loans equal the
Aggregate Commitment as of the date of determination (adjusted for any
scheduled mandatory reductions during such period pursuant to SECTION
2.5.3(a)) during the succeeding four Fiscal Quarter period and that the
applicable interest rate in effect as of the date of determination would
remain
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constant during the succeeding four Fiscal Quarter period, PLUS (c)
Indebtedness (excluding the Loans hereunder) payable pursuant to the
scheduled amortization of such Indebtedness by the Borrower and its
Subsidiaries for the period of four Fiscal Quarters immediately following the
date of determination, PLUS (d) Loans payable pursuant to the second sentence
of SECTION 2.2(a) as a result of reductions in the Aggregate Commitment
occurring pursuant to SECTION 2.5.3(a) for the period of four Fiscal Quarters
immediately following the date of determination.
"Floating 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.
"Floating Rate Advance" means an Advance which, except as otherwise
provided in SECTION 2.11, bears interest at the Floating Rate.
"Fund" means Fund American Enterprises Holdings, Inc., a Delaware
corporation.
"Fund Credit Agreement" means the $35,000,000 Second Amended and
Restated Credit Agreement, dated as of February 24, 1999, among Fund, the
lenders named therein and First Chicago, as agent, as the same may be
amended, supplemented or otherwise modified and in effect from time to time.
"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 a Guaranty in form and substance satisfactory to the
Agent, dated as of the date hereof, duly executed and delivered to the Agent
by Fund, as the same may be amended, modified or restated and in effect from
time to time.
"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
other 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 Facility Letter of Credit
and the face amount of any other Letter of Credit, (i) repurchase obligations
or liabilities of such Person with
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respect to accounts or notes receivable sold by such Person and (j)
obligations of such Person to purchase securities or other Property arising
out of or in connection with the sale of the same or substantially similar
securities or Property.
"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, six or, with the consent of all the Lenders with respect
to any such requested Interest Period, twelve 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, six or twelve months thereafter, PROVIDED, HOWEVER, that if
there is no such numerically corresponding day in such next, second, third,
sixth or twelfth succeeding month, such Interest Period shall end on the last
Business Day of such next, second, third, sixth or twelfth 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 certificates of deposit owned by such
Person; and structured notes, derivative financial instruments (other than
Rate Hedging Agreements entered into in the ordinary course of business and
not for speculative purposes) and other similar instruments or contracts
owned by such Person.
"Issuance Request" is defined in Section 2.19.4.
"Issuer" means First Chicago.
"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, the
office, branch, subsidiary or affiliate of such Lender or the Agent listed on
the signature pages hereof or on a Schedule or otherwise selected by such
Lender or the Agent pursuant to SECTION 2.17.
"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.
"Letter of Credit Cash Collateral Account" is defined in SECTION 8.1.
Such account and the related cash collateralization shall be subject to
documentation satisfactory to the Agent.
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"Leverage Ratio" means, with respect to any Person, at any time, the
ratio of (a) the consolidated Funded Indebtedness of such Person and its
Subsidiaries (excluding SOMSC, if applicable) at such time to (b) the sum of
(i) the consolidated Funded Indebtedness of such Person and its Subsidiaries
(excluding SOMSC, if applicable) at such time PLUS (ii) the Net Worth of such
Person at such time. For purposes of computing the Leverage Ratio, (A)
Allowable Seller Paper which has been Defeased and Letters of Credit issued
in support of Allowable Seller Paper, (B) Indebtedness of any Insurance
Subsidiary of the Borrower permitted pursuant to SECTION 6.11(f) and (C)
Indebtedness of the Borrower permitted by SECTION 6.11(g) shall be excluded
from Funded Indebtedness.
"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 loan made pursuant
to ARTICLE II (or any conversion or continuation thereof).
"Loan Documents" means this Agreement, any Notes issued pursuant to
SECTION 2.13, the Pledge Agreement, the Reimbursement Agreements, the
Guaranty and the other documents and agreements contemplated hereby and
executed by the Borrower or any Subsidiary 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 otherwise), results of
operations, or prospects of the Borrower and its Subsidiaries taken as a
whole, (b) the ability of the Borrower to perform its obligations under the
Loan Documents to which it is a party, or (c) the validity or enforceability
of any of the Loan Documents or the rights or remedies of the Agent or the
Lenders thereunder.
"Moody's" means Moody's Investors Service, Inc.
"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
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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-U.S. Lender" is defined in SECTION 3.5(d).
"Note" means any promissory note issued at the request of a Lender
pursuant to SECTION 2.13 in the form of EXHIBIT A.
"Notice of Assignment" is defined in SECTION 12.3.2.
"Obligations" means all unpaid principal of and accrued and unpaid
interest on the Loans, the Facility Letter of Credit Obligations and all
other liabilities (if any), whether actual or contingent, of the Borrower
with respect to Facility Letters of Credit, 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
arising under the Loan Documents.
"Other Taxes" is defined in SECTION 3.5(b).
"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, limited liability company, 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 which is covered by Title
IV of ERISA or subject to the minimum funding standards under Section 412 of
the Code as to which the Borrower or any member of the Controlled Group may
have any liability.
"Pledge Agreement" means a pledge agreement in form and substance
satisfactory to the Agent, dated as of the date hereof, duly executed and
delivered to the Agent by the Borrower, as the same may be amended, modified
or restated and in effect from time to time.
"Pricing Schedule" means the Schedule attached hereto identified as such.
"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.
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"Purchase Agreement" means that certain letter agreement dated as of
February 5, 1999 between the Borrower and FAE, as amended up to but not
including the date hereof, pursuant to which the Borrower has agreed to
repurchase $30,000,000 of its capital stock from FAE.
"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 Agreement" means an agreement, device or arrangement
providing for payments which are related to 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.
"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
Rate Hedging Agreements, and (b) any and all cancellations, buy backs,
reversals, terminations or assignments of any Rate Hedging Agreement.
"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 member banks of the
Federal Reserve System.
"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 member banks of the Federal Reserve
System.
"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
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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.
"Reimbursement Agreement" means a letter of credit application and
reimbursement agreement in such form as the Issuer may from time to time
employ in the ordinary course of business.
"Reimbursement Obligations" means, at any time, the aggregate (without
duplication) of the Obligations of the Borrower to the Lenders, the Issuer
and/or the Agent in respect of all unreimbursed payments or disbursements
made by the Lenders, the Issuer and/or the Agent under or in respect of draws
made under the Facility Letters of Credit.
"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, HOWEVER, 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, the sum of (a) the aggregate unpaid principal amount of the
outstanding Loans plus (b) the aggregate amount of the outstanding Facility
Letter of Credit Obligations).
"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.
"Risk-Based Capital Act" means the Risk-Based Capital (RBC) for Insurers
Model Act adopted by the NAIC, together with the RBC instructions referred to
herein, as in effect on the date hereof.
"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 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
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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(e) AND (f) hereof.
"S&P" means Standard and Poor's Ratings Services, a division of The
McGraw Hill Companies, Inc.
"Schedule" refers to a specific schedule to this Agreement, unless
another document is specifically referenced.
"Section" means a numbered section of this Agreement, unless another
document is specifically referenced.
"Significant Insurance Subsidiary" shall mean an Insurance Subsidiary
that is a Significant Subsidiary.
"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 maintained by the Borrower or any
member of the Controlled Group for employees of the Borrower or any member of
the Controlled Group.
"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.
"Standby Letter of Credit" means a Facility Letter of Credit which is
not a Commercial Letter of Credit.
"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 1997
Fiscal Year entitled "Surplus as Regards Policyholders").
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"Subordinated Indebtedness" of a Person means any Indebtedness of such
Person the payment of which is subordinated to payment of the Obligations to
the written satisfaction of the Required Lenders.
"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, limited liability company, association,
joint venture 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.
"Substantial Portion" means, with respect to the Property of any Person
and its Subsidiaries, Property which (a) represents more than 10% of the
consolidated assets of such Person and its Subsidiaries as would be shown in
the consolidated financial statements of such Person and its Subsidiaries as
at the beginning of the twelve-month period ending with the month in which
such determination is made, or (b) is responsible for more than 10% of the
consolidated net sales or of the consolidated net income of such Person and
its Subsidiaries as reflected in the financial statements referred to in
CLAUSE (a) above.
"Taxes" means any and all present or future taxes, duties, levies,
imposts, deductions, charges or withholdings, and any and all liabilities
with respect to the foregoing, but EXCLUDING Excluded Taxes.
"Termination Event" means, with respect to a Single Employer Plan, (a) a
Reportable Event, (b) the withdrawal of the Borrower or any other member of
the Controlled Group from such Single Employer 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
Single Employer Plan, the filing of a notice of intent to terminate such
Single Employer Plan or the treatment of an amendment of such Single Employer
Plan as a termination under Section 4041 of ERISA, (d) the institution by the
PBGC of proceedings to terminate such Single Employer Plan or (e) any event
or condition which could reasonably be expected to constitute grounds under
Section 4042 of ERISA for the termination of, or appointment of a trustee to
administer, such Single Employer Plan.
"Transferee" is defined in SECTION 12.4.
"Type" means, with respect to any Advance, its nature as a Floating Rate
Advance or a Eurodollar Advance.
"Unfunded Liabilities" means the amount (if any) by which the present
value of all vested and unvested accrued benefits under all Single Employer
Plans exceeds the fair market value of all such Plan assets allocable to such
benefits, all determined as of the then most recent
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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.
"USF RE" means USF RE Insurance Company, a Massachusetts insurance
company.
"USF RE Transaction" means that certain transaction by which (a) the
Borrower and/or Folksamerica Reinsurance Company acquires all of the
outstanding capital stock of USF RE (but at no time shall USF RE be owned
such that it would be deemed a First-Tier Significant Insurance Subsidiary)
on substantially the terms and conditions contained in that certain letter of
intent dated as of January 28, 1999, (b) Folksamerica Reinsurance Company
assumes substantially all of the assets and liabilities of USF RE and (c) the
corporate "shell" of USF RE is sold to a party other than Fund or any of its
Subsidiaries.
"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 $50,000,000 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 amended through but not including the date hereof.
"Wholly-Owned Subsidiary" of a Person means (a) any Subsidiary all of
the outstanding voting securities of which (other than director' 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, limited liability company, association, joint
venture or similar business organization 100% of the ownership interests
having ordinary voting power of which (other than director' 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 5.23.
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
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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. COMMITMENT. From and including the date of this Agreement and prior
to the Facility Termination Date, each Lender severally (and not jointly)
agrees, on the terms and conditions set forth in this Agreement, to make
Loans 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 (relative to
the respective Commitments of the Lenders) share of the Aggregate Available
Commitment. Subject to the terms of this Agreement, the Borrower may borrow,
repay and reborrow at any time prior to the Facility Termination Date. The
Commitments to lend hereunder shall expire on the Facility Termination Date.
2.2. REQUIRED PAYMENTS; TERMINATION. (a) Any outstanding Advances and
all other accrued but unpaid Obligations shall be paid in full by the
Borrower on the Facility Termination Date. The Borrower shall also make such
mandatory prepayments as may be required upon giving effect to a reduction in
the Aggregate Commitment pursuant to SECTIONS 2.5.3(a) and 2.5.3(b) so that
the sum of (i) the amount of Advances outstanding and (ii) the Facility
Letter of Credit Obligations does not at any time does not at any time exceed
the Aggregate Commitment as in effect at such time; PROVIDED, that if an
excess remains after repayment of all Advances outstanding under the
Commitment, then the Borrower shall cash collateralize the Facility Letter of
Credit Obligations by depositing into the Letter of Credit Cash Collateral
Account such amount as may be necessary to eliminate such excess.
(b) Within three (3) Business Days of the sale of any common stock,
warrant or other common equity by the Borrower or any of its Subsidiaries
(other than a sale to Fund or any of its Wholly-Owned Subsidiaries), the
Borrower shall make a mandatory prepayment of Advances in an amount equal to
50% of the net cash proceeds realized upon such sale, PROVIDED that the
Borrower shall not be obligated to pay any amount under this SECTION 2.2(b)
in excess of the aggregate principal amount of Advances outstanding;
PROVIDED, FURTHER that if substantially contemporaneously with the receipt
thereof such proceeds or a portion thereof are used to Defease Allowable
Seller Paper, then the Borrower shall not be obligated to make a prepayment
with respect to such proceeds or portion thereof, as applicable; and
PROVIDED, FURTHER that if, within three (3) Business Days of such sale the
Borrower gives notice to the Agent of its intent to utilize the net cash
proceeds of such sale to finance an Acquisition permitted by SECTION 6.14 and
deposits such portion of the net cash proceeds applicable to a prepayment in
a cash collateral account securing the Obligations maintained by the Agent
pursuant to documentation
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satisfactory to the Agent, then the Borrower shall not be obligated to make a
prepayment with respect to such proceeds except as provided in the last
sentence of this Section. The Agent is authorized by the Lenders to remit all
or any portion of the amounts in such account to the seller in an Acquisition
permitted by SECTION 6.14 as the Borrower may from time to time direct;
PROVIDED that the Borrower may not give such direction at any time a Default
or Unmatured Default is pending. Any amounts (other than investment income,
which will be remitted to the Borrower) remaining in such account ninety (90)
days after their deposit shall be applied as a prepayment under this Section
on such date.
(c) Upon issuance of any Indebtedness for borrowed money (other than
any such Indebtedness permitted by SECTION 6.11), preferred stock or other
capital securities (other than described in SECTION 2.2(b)) by the Borrower
or any of its Subsidiaries, the Borrower shall make a mandatory prepayment of
Advances in an amount equal to 100% of the net cash proceeds so realized in
excess of $1,000,000 in any Fiscal Year; PROVIDED that the Borrower shall not
be obligated to pay any amount under this SECTION 2.2(c) in excess of the
aggregate principal amount of Advances outstanding.
2.3. 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.
2.4. TYPES OF ADVANCES. The Advances may be Floating Rate Advances or
Eurodollar Advances, or a combination thereof, selected by the Borrower in
accordance with SECTIONS 2.8 and 2.9.
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2.5. COMMITMENT FEE; REDUCTIONS IN AGGREGATE COMMITMENT.
2.5.1 COMMITMENT FEES. The Borrower agrees to pay to the Agent for
the account of each Lender a commitment fee at a per annum rate equal to the
Applicable Fee Rate on the daily unused portion of such Lender's Commitment
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 commitment fees shall be payable on the effective date of any
termination of the obligations of the Lenders to make Loans hereunder.
2.5.2 AGENT'S FEES. The Borrower agrees to pay to the Agent, for the
Agent's own account, such fees as the Borrower and the Agent may agree upon
from time to time.
2.5.3 MANDATORY REDUCTIONS IN AGGREGATE COMMITMENT. (a) The
Aggregate Commitment will be permanently reduced annually on each anniversary
of the date of this Agreement commencing with February 24, 2000 through and
including the Facility Termination Date. Each reduction in the Aggregate
Commitment on the date set forth below shall be in an amount equal to the
lesser of (i) the amount for each date set forth below opposite such date and
(ii) the then-effective Aggregate Commitment. Reductions in the Aggregate
Commitment pursuant to this Section shall be in addition to, and shall not be
reduced by, reductions in the Aggregate Commitment pursuant to SECTION
2.5.3(b).
<TABLE>
<CAPTION>
DATE ANNUAL REDUCTION
- ---- ----------------
<S> <C>
February 24, 2000 $ 5,000,000
February 24, 2001 $12,500,000
February 24, 2002 $17,500,000
February 24, 2003 $20,000,000
February 24, 2004 $22,500,000
February 24, 2005 $22,500,000
</TABLE>
Contemporaneously with each such reduction, the Borrower shall make such
payments as are required by SECTION 2.2(a).
(b) Upon any sale or series of sales or issuance of equity or
issuance of Indebtedness subject to the prepayment provisions of SECTIONS
2.2(b) and (c) the Aggregate Commitment shall be reduced by the full amount
which would have been required to be repaid thereunder (as determined without
respect to the first proviso to SECTION 2.2(b) and (c) and whether or not
sufficient Loans are outstanding for such amount to be applied as a
prepayment). Any mandatory reductions in the Aggregate Commitment due
pursuant to this SECTION 2.5.3(b) shall be applied to the scheduled
reductions in the Aggregate Commitment described in SECTION 2.5.3(a) in the
inverse order of maturity.
2.5.4 VOLUNTARY REDUCTIONS IN AGGREGATE COMMITMENT. The Borrower may
permanently reduce the Aggregate Commitment in whole, or in part ratably
among the Lenders in integral multiples of $2,000,000, upon at least three
(3) Business Days' prior written notice to
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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 sum of (a) the aggregate principal amount of the
outstanding Advances, plus (b) the aggregate amount of the outstanding
Facility Letter of Credit Obligations. All accrued commitment fees in respect
of any terminated portion of the Aggregate Commitment shall be payable on the
effective date of the termination thereof. Any voluntary reductions in the
Aggregate Commitment shall be applied to the scheduled reductions in the
Aggregate Commitment described in SECTION 2.5.3(a) in the direct order of
maturity.
2.6. MINIMUM AMOUNT OF EACH ADVANCE. Each Advance shall be in the
minimum amount of $2,000,000 (and in multiples of $500,000 if in excess
thereof), PROVIDED, HOWEVER, that any Floating Rate Advance may be in the
amount of the unused Aggregate Commitment.
2.7. OPTIONAL PRINCIPAL PAYMENTS. The Borrower may from time to time
pay, without penalty or premium, all outstanding Floating Rate Advances, or,
in a minimum aggregate amount of $2,000,000 or any integral multiple of
$500,000 in excess thereof, any portion of the outstanding Floating Rate
Advances upon two (2) Business Days' prior written notice to the Agent. The
Borrower may from time to time pay, subject to the payment of any funding
indemnification amounts required by SECTION 3.4 but without penalty or
premium, all outstanding Eurodollar Advances, or, in a minimum aggregate
amount of $2,000,000 or any integral multiple of $500,000 in excess thereof,
any portion of the outstanding Eurodollar Advances upon three (3) Business
Days' prior written notice to the Agent.
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 thereto from time to time.
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
Floating Rate Advance and at least three (3) Business Days before the
Borrowing Date for each Eurodollar Advance, specifying:
(i) the Borrowing Date, which shall be a Business Day, of such
Advance,
(ii) the aggregate amount of such Advance,
(iii) the Type of Advance selected, and
(iv) in the case of each Eurodollar Advance, the Interest Period
applicable thereto, which shall end on or prior to the Facility
Termination Date.
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.
2.9. CONVERSION AND CONTINUATION OF OUTSTANDING ADVANCES. Floating Rate
Advances shall continue as Floating Rate Advances unless and until such
Floating Rate Advances are
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converted into Eurodollar Advances pursuant to this SECTION 2.9 or are repaid
in accordance with SECTION 2.2 OR 2.7. 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 a Floating Rate Advance unless (a) such Eurodollar Advance is
or was repaid in accordance with SECTION 2.2 OR 2.7 or (b) the Borrower shall
have given the Agent a Conversion/Continuation Notice (as defined below)
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 2.6, the Borrower may elect from time to time
to convert all or any part of a Floating Rate Advance into a Eurodollar
Advance. The Borrower shall give the Agent irrevocable notice (a
"Conversion/Continuation Notice") of each conversion of a Floating Rate
Advance into a Eurodollar Advance or continuation of a Eurodollar Advance not
later than 10:00 a.m. (Chicago time) at least three (3) Business Days prior
to the date of the requested conversion or continuation, specifying:
(i) the requested date, which shall be a Business Day, of such
conversion or continuation,
(ii) the aggregate amount and Type of the Advance which is to be
converted or continued, and
(iii) the amount of such Advance which is to be converted into or
continued as a Eurodollar Advance and 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 Floating Rate Advance shall
bear interest on the outstanding principal amount thereof, for each day from
and including the date such Advance is made or is automatically converted
from a Eurodollar Advance into a Floating Rate Advance pursuant to SECTION
2.9, to but excluding the date it is paid or is converted into a Eurodollar
Advance pursuant to SECTION 2.9 hereof, at a rate per annum equal to the
Floating Rate for such day. Changes in the rate of interest on that portion
of any Advance maintained as a Floating Rate Advance will take effect
simultaneously with each change in the Alternate Base Rate. Each Eurodollar
Advance shall bear interest on the outstanding principal amount thereof 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 by the Agent as applicable to such Eurodollar Advance based upon
the Borrower's selections under SECTIONS 2.8 and 2.9 and otherwise in
accordance with the terms hereof. No Interest Period may end after the
Facility Termination Date.
2.11. RATES APPLICABLE AFTER DEFAULT. Notwithstanding anything to the
contrary contained in SECTION 2.8 or 2.9, no Advance may be made as,
converted into or continued as a Eurodollar Advance 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 (a) each Eurodollar
Advance shall bear interest for the remainder of the
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applicable Interest Period at the rate otherwise applicable to such Interest
Period PLUS 2% per annum and (b) each Floating Rate Advance shall bear
interest at a rate per annum equal to the Floating Rate in effect from time
to time PLUS 2% per annum, PROVIDED that, during the continuance of a Default
under SECTION 7.6 or 7.7, the interest rates set forth in clauses (a) and (b)
above shall be applicable to all Advances without any election or action on
the part of the Agent or any Lender.
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, 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 First
Chicago for each payment of principal, interest and fees as it becomes due
hereunder.
2.13. NOTELESS AGREEMENT; EVIDENCE OF INDEBTEDNESS. (a) Each Lender
shall maintain in accordance with its usual practice an account or accounts
evidencing the indebtedness of the Borrower to such Lender resulting from
each Loan made by such Lender from time to time, including the amounts of
principal and interest payable and paid to such Lender from time to time
hereunder.
(b) The Agent shall also maintain accounts in which it will record (i)
the amount of each Loan made hereunder, the Type thereof and the Interest
Period with respect thereto, (ii) the amount of any principal or interest due
and payable or to become due and payable from the Borrower to each Lender
hereunder and (iii) the amount of any sum received by the Agent hereunder
from the Borrower and each Lender's share thereof.
(c) The entries maintained in the accounts maintained pursuant to
paragraphs (a) and (b) above shall be PRIMA FACIE evidence of the existence
and amounts of the Obligations therein recorded; PROVIDED, HOWEVER, that the
failure of the Agent or any Lender to maintain such accounts or any error
therein shall not in any manner affect the obligation of the Borrower to
repay the Obligations in accordance with their terms.
(d) Any Lender may request that its Loans be evidenced by a promissory
note (a "Note"). In such event, the Borrower shall prepare, execute and
deliver to such Lender a Note payable to the order of such Lender in a form
supplied by the Agent. Thereafter, the Loans evidenced by such Note and
interest thereon shall at all times (including after any assignment pursuant
to SECTION 12.3) be represented by one or more Notes payable to the order of
the payee named therein or any assignee pursuant to SECTION 12.3, except to
the extent that any such Lender or
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assignee subsequently returns any such Note for cancellation and requests
that such Loans once again be evidenced as described in paragraphs (a) and
(b) above.
2.14. TELEPHONIC NOTICES. The Borrower hereby authorizes the Lenders and
the Agent to extend, convert or continue Advances, effect selections of Types
of Advances and to transfer funds based on telephonic notices made by any
person or persons the Agent or any Lender in good faith believes to be acting
on behalf of the Borrower, it being understood that the foregoing
authorization is specifically intended to allow Borrowing Notices and
Conversion/Continuation Notices to be given telephonically. The Borrower
agrees to deliver promptly to the Agent a written confirmation, if such
confirmation is requested by the Agent or any Lender, of each telephonic
notice signed by an Authorized Officer. If the written confirmation differs
in any material respect from the action taken by the Agent and the Lenders,
the records of the Agent and the Lenders shall govern absent manifest error.
2.15. INTEREST PAYMENT DATES; INTEREST AND FEE BASIS. Interest accrued
on each Floating Rate 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 the Floating Rate Advance is prepaid, whether due to
acceleration or otherwise, and at maturity. Interest accrued on that portion
of the outstanding principal amount of any Floating Rate 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.
2.16. NOTIFICATION OF ADVANCES, INTEREST RATES, PREPAYMENTS, COMMITMENT
REDUCTIONS AND ISSUANCE REQUESTS. Promptly after receipt thereof, the Agent
will notify each Lender of the contents of each Aggregate Commitment
reduction notice, Borrowing Notice, Conversion/Continuation Notice, Issuance
Request 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.
2.17. 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 Loans and any Notes issued hereunder
shall be deemed held by each Lender for the benefit of any such Lending
Installation. Each Lender may, by written notice to the Agent and the
Borrower in accordance
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with ARTICLE XIII, designate replacement or additional Lending Installations
through which Loans will be made by it and for whose account Loan payments
are to be made.
2.18. 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 such Lender or the Borrower, as the case may be, has not
in fact made such payment to the Agent, the recipient of such payment 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 (i) in
the case of payment by a Lender, the Federal Funds Effective Rate for such
day for the first three days and, thereafter, the interest rate applicable to
the relevant Loan or (ii) in the case of payment by the Borrower, the
interest rate applicable to the relevant Loan.
2.19. FACILITY LETTERS OF CREDIT.
2.19.1 ISSUANCE OF FACILITY LETTERS OF CREDIT.
(a) From and after the date hereof, the Issuer agrees, upon the
terms and conditions set forth in this Agreement, to issue at the
request and for the account of the Borrower, one or more Facility
Letters of Credit; PROVIDED, HOWEVER, that the Issuer shall not be under
any obligation to issue, and shall not issue, any Facility Letter of
Credit if (i) any order, judgment or decree of any governmental
authority or other regulatory body with jurisdiction over the Issuer
shall purport by its terms to enjoin or restrain such Issuer from
issuing such Facility Letter of Credit, or any law or governmental rule,
regulation, policy, guideline or directive (whether or not having the
force of law) from any governmental authority or other regulatory body
with jurisdiction over the Issuer shall prohibit, or request that the
Issuer refrain from, the issuance of Facility Letters of Credit in
particular or shall impose upon the Issuer with respect to any Facility
Letter of Credit any restriction or reserve or capital requirement (for
which the Issuer is not otherwise compensated) or any unreimbursed loss,
cost or expense which was not applicable, in effect and known to the
Issuer as of the date of this Agreement and which the Issuer in good
faith deems material to it; (ii) one or more of the conditions to such
issuance contained in SECTION 4.2 is not then satisfied; or (iii) after
giving effect to such issuance, the aggregate outstanding amount of the
Facility Letter of Credit Obligations would exceed the Facility Letter
of Credit Sublimit.
(b) In no event shall: (i) the aggregate amount of the Facility
Letter of Credit Obligations at any time exceed the Facility Letter of
Credit Sublimit; (ii) the sum at any time of (A) the aggregate amount of
Facility Letter of Credit Obligations and (B) the aggregate principal
balance of outstanding Advances exceed the amount of the Aggregate
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Commitment; or (iii) the expiration date of any Facility Letter of
Credit (including, without limitation, Facility Letters of Credit issued
with an automatic "evergreen" provision providing for renewal absent
advance notice by the Borrower or the Issuer), or the date for payment
of any draft presented thereunder and accepted by the Issuer, be later
than the date five (5) Business Days prior to the Facility Termination
Date.
2.19.2 INTERESTS. Immediately upon the issuance by the Issuer of a
Facility Letter of Credit in accordance with SECTION 2.19.4, each Lender
shall be deemed to have irrevocably and unconditionally purchased and
received from the Issuer, without recourse, representation or warranty,
an undivided participation interest equal to its pro-rata share of the
Aggregate Commitment of the face amount of such Facility Letter of
Credit and each draw paid by the Issuer thereunder. Each Lender's
obligation to pay its proportionate share of all draws under the
Facility Letters of Credit, absent gross negligence or willful
misconduct by the Issuer in honoring any such draw, shall be absolute,
unconditional and irrevocable and in each case shall be made without
counterclaim or set-off by such Lender.
2.19.3 FACILITY LETTER OF CREDIT REIMBURSEMENT OBLIGATIONS.
(a) The Borrower agrees to pay to the Issuer of a Facility Letter
of Credit (i) on each date that any amount is drawn under each Facility
Letter of Credit a sum (and interest on such sum as provided in clause
(ii) below) equal to the amount so drawn plus all other charges and
expenses with respect thereto specified in Section 2.19.6 or in the
applicable Reimbursement Agreement and (ii) interest on any and all
amounts remaining unpaid under this SECTION 2.19.3 until payment in full
at the Floating Rate plus the margin specified in SECTION 2.11. The
Borrower agrees to pay to the Issuer the amount of all Facility Letter
of Credit Reimbursement Obligations owing in respect of any Facility
Letter of Credit immediately when due, under all circumstances,
including, without limitation, any of the following circumstances: (w)
any lack of validity or enforceability of this Agreement or any of the
other Loan Documents; (x) the existence of any claim, set-off, defense
or other right which the Borrower may have at any time against a
beneficiary named in a Facility Letter of Credit, any transferee of any
Facility Letter of Credit (or any Person for whom any such transferee
may be acting), any Lender or any other Person, whether in connection
with this Agreement, any Facility Letter of Credit, the transactions
contemplated herein or any unrelated transactions (including any
underlying transaction between the Borrower and the beneficiary named in
any Facility Letter of Credit); (y) the validity, sufficiency or
genuineness of any document which the Issuer has determined in good
faith complies on its face with the terms of the applicable Facility
Letter of Credit, even if such document should later prove to have been
forged, fraudulent, invalid or insufficient in any respect or any
statement therein shall have been untrue or inaccurate in any respect;
or (z) the surrender or impairment of any security for the performance
or observance of any of the terms hereof.
(b) Notwithstanding any provisions to the contrary in any
Reimbursement Agreement, the Borrower agrees to reimburse the Issuer for
amounts which the Issuer pays under
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such Facility Letter of Credit no later than the time specified in
this Agreement. If the Borrower does not pay any such Facility Letter of
Credit Reimbursement Obligations when due, the Borrower shall be deemed
to have immediately requested that the Lenders make a Floating Rate
Advance under this Agreement in a principal amount equal to such
unreimbursed Facility Letter of Credit Reimbursement Obligations. The
Agent shall promptly notify the Lenders of such deemed request and,
without the necessity of compliance with the requirements of SECTIONS
2.6 and 4.2, each Lender shall make available to the Agent its Loan in
the manner prescribed for Floating Rate Advances. The proceeds of such
Loans shall be paid over by the Agent to the Issuer for the account of
the Borrower in satisfaction of such unreimbursed Facility Letter of
Credit Reimbursement Obligations, which shall thereupon be deemed
satisfied by the proceeds of, and replaced by, such Floating Rate
Advance.
(c) If the Issuer makes a payment on account of any Facility Letter
of Credit and is not concurrently reimbursed therefor by the Borrower
and if for any reason a Floating Rate Advance may not be made pursuant
to paragraph (b) above, then as promptly as practical during normal
banking hours on the date of its receipt of such notice or, if not
practicable on such date, not later than noon (Chicago time) on the
Business Day immediately succeeding such date of notification, each
Lender shall deliver to the Agent for the account of the Issuer, in
immediately available funds, the purchase price for such Lender's
interest in such unreimbursed Facility Letter of Credit Obligations,
which shall be an amount equal to such Lender's pro-rata share of such
payment. Each Lender shall, upon demand by the Issuer, pay the Issuer
interest on such Lender's pro-rata share of such draw from the date of
payment by the Issuer on account of such Facility Letter of Credit until
the date of delivery of such funds to the Issuer by such Lender at a
rate per annum, computed for actual days elapsed based on a 360-day
year, equal to the Federal Funds Effective Rate for such period;
PROVIDED, that such payments shall be made by the Lenders only in the
event and to the extent that the Issuer is not reimbursed in full by the
Borrower for interest on the amount of any draw on the Facility Letters
of Credit.
(d) At any time after the Issuer has made a payment on account of
any Facility Letter of Credit and has received from any other Lender
such Lender's pro-rata share of such payment, such Issuer shall,
forthwith upon its receipt of any reimbursement (in whole or in part) by
the Borrower for such payment, or of any other amount from the Borrower
or any other Person in respect of such payment (including, without
limitation, any payment of interest or penalty fees and any payment
under any collateral account agreement of the Borrower or any Loan
Document but excluding any transfer of funds from any other Lender
pursuant to SECTION 2.19.3(b)), transfer to such other Lender such other
Lender's ratable share of such reimbursement or other amount; PROVIDED,
that interest shall accrue for the benefit of such Lender from the time
such Issuer has made a payment on account of any Facility Letter of
Credit; PROVIDED, FURTHER, that in the event that the receipt by the
Issuer of such reimbursement or other amount is found to have been a
transfer in fraud of creditors or a preferential payment under the
United States Bankruptcy Code or is otherwise required to be returned,
such Lender shall promptly return to the Issuer any portion thereof
previously transferred by the Issuer to such Lender, but without
interest to the extent that interest is not payable by the Issuer in
connection therewith.
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2.19.4 PROCEDURE FOR ISSUANCE. Prior to the issuance of each
Facility Letter of Credit, and as a condition of such issuance, the
Borrower shall deliver to the Issuer (with a copy to the Agent) a
Reimbursement Agreement signed by the Borrower, together with such other
documents or items as may be required pursuant to the terms thereof, and
the proposed form and content of such Facility Letter of Credit shall be
reasonably satisfactory to the Issuer. Each Facility Letter of Credit
shall be issued no earlier than two (2) Business Days after delivery of
the foregoing documents, which delivery may be by the Borrower to the
Issuer by telecopy, telex or other electronic means followed by delivery
of executed originals within five (5) days thereafter. The documents so
delivered shall be in compliance with the requirements set forth in
SECTION 2.19.1(b), and shall specify therein (i) the stated amount of
the Facility Letter of Credit requested, (ii) the effective date of
issuance of such requested Facility Letter of Credit, which shall be a
Business Day, (iii) the date on which such requested Facility Letter of
Credit is to expire, which shall be a Business Day prior to the earlier
of one (1) year from the effective date of such Facility Letter of
Credit and the date five (5) Business Days prior to the Facility
Termination Date, (iv) the entity on whose behalf the requested Facility
Letter of Credit is to be issued, which shall be the Borrower or a
Subsidiary, (v) whether the requested Facility Letter of Credit is a
Standby Letter of Credit or Commercial Letter of Credit, and (vi) the
aggregate amount of Facility Letter of Credit Obligations in respect of
Standby Letters of Credit and Commercial Letters of Credit which are
outstanding and which will be outstanding after giving effect to the
requested Facility Letter of Credit issuance. The delivery of the
foregoing documents and information shall constitute an "Issuance
Request" for purposes of this Agreement. Subject to the terms and
conditions of SECTION 2.19.1 and provided that the applicable conditions
set forth in SECTION 4.2 hereof have been satisfied, the Issuer shall,
on the requested date, issue a Facility Letter of Credit on behalf of
the Borrower in accordance with the Issuer's usual and customary
business practices. In addition, any amendment of an existing Facility
Letter of Credit shall be deemed to be an issuance of a new Facility
Letter of Credit and shall be subject to the requirements set forth
above. The Issuer shall give the Agent prompt written notice of the
issuance of any Facility Letter of Credit.
2.19.5 NATURE OF THE LENDERS' OBLIGATIONS.
(a) As between the Borrower and the Lenders, the Borrower assumes
all risks of the acts and omissions of, or misuse of the Facility
Letters of Credit by, the respective beneficiaries of the Facility
Letters of Credit. In furtherance and not in limitation of the
foregoing, the Lenders shall not be responsible for (i) the form,
validity, sufficiency, accuracy, genuineness or legal effect of any
document submitted by any party in connection with the application for
an issuance of a Facility Letter of Credit, even if it should in fact
prove to be in any or all respects invalid, insufficient, inaccurate,
fraudulent or forged; (ii) the validity or sufficiency of any instrument
transferring or assigning or purporting to transfer or assign a Facility
Letter of Credit or the rights or benefits thereunder or proceeds
thereof, in whole or in part, which may prove to be invalid or
ineffective for any reason; (iii) the failure of the beneficiary of a
Facility Letter of Credit to comply fully with conditions required to be
satisfied by any Person other than the Issuer in order to draw upon such
Facility Letter of Credit; (iv)
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errors, omissions, interruptions or delays in transmission or delivery
of any messages, by mail, cable, telegraph, telex or otherwise; (v)
errors in the interpretation of technical terms; (vi) the misapplication
by the beneficiary of a Facility Letter of Credit of the proceeds of any
drawing under such Facility Letter of Credit; or (vii) any consequences
arising from causes beyond control of the Issuer.
(b) In furtherance and extension and not in limitation of the
specific provisions hereinabove set forth, any action taken or omitted
by the Issuer under or in connection with the Facility Letters of Credit
or any related certificates, if taken or omitted in good faith, shall
not put the Agent or any Lender under any resulting liability to the
Borrower or relieve the Borrower of any of its obligations hereunder to
the Issuer or any such Person.
2.19.6 FACILITY LETTER OF CREDIT FEES. The Borrower hereby agrees
to pay to the Agent for the account of the Issuer or the Lenders, as
applicable, letter of credit fees with respect to each Facility Letter
of Credit from and including the date of issuance thereof until the date
such Facility Letter of Credit is fully drawn, cancelled or expired, (a)
for the account of the Issuer, computed at such rate as may be agreed
upon between the Issuer and the Borrower, on the aggregate initial face
amount of such Facility Letter of Credit payable quarterly in arrears on
each Payment Date in each year, and (b) for the ratable account of the
Lenders, equal to (i) in the case of Commercial Letters of Credit, an
amount equal to the then Applicable Margin for Eurodollar Loans
multiplied by the aggregate initial face amount of such Commercial
Letter of Credit, payable upon the date of issuance thereof, and (ii) in
the case of Standby Letters of Credit, an amount equal to the then
Applicable Margin for Eurodollar Loans multiplied by the aggregate
amount from time to time available to be drawn on such Standby Facility
Letter of Credit, calculated with respect to actual days elapsed on the
basis of a 360-day year and payable quarterly in arrears on each Payment
Date in each year and upon the expiration, cancellation or utilization
in full of such Facility Letter of Credit. In addition to the foregoing,
the Borrower agrees to pay the Issuer any other fees customarily charged
by it in respect of Standby or Commercial Letters of Credit issued by it.
ARTICLE III
YIELD PROTECTION; TAXES
3.1. YIELD PROTECTION. If, on or after the date of this Agreement, the
adoption of any law or any governmental or quasi-governmental rule,
regulation, policy, guideline or directive (whether or not having the force
of law), or any change in the interpretation or administration thereof by any
governmental or quasi-governmental authority, central bank or comparable
agency charged with the interpretation or administration thereof, or
compliance by any Lender or applicable Lending Installation with any request
or directive (whether or not having the force of law) of any such authority,
central bank or comparable agency:
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(i) subjects any Lender or any applicable Lending Installation to any
Taxes, or changes the basis of taxation of payments (other than
with respect to Excluded Taxes) to any Lender in respect of its
Eurodollar Loans, its interest in the Facility Letters of Credit or
other amounts due hereunder, or
(ii) 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
(iii) 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 its Eurodollar Loans or issuing
Facility Letters of Credit or reduces any amount receivable by any
Lender or any applicable Lending Installation in connection with
its Eurodollar Loans or Facility Letters of Credit, or requires any
Lender or any applicable Lending Installation to make any payment
calculated by reference to the amount of Eurodollar Loans held,
Facility Letters of Credit issued or participated in or interest
received by it, by an amount deemed material by such Lender,
and the result of any of the foregoing is to increase the cost to such Lender
or applicable Lending Installation of making or maintaining its Eurodollar
Loans, its interest in the Facility Letters of Credit or Commitment or to
reduce the return received by such Lender or applicable Lending Installation
in connection with such Eurodollar Loans or Commitment, then, within fifteen
(15) days of demand by such Lender, the Borrower shall pay such Lender such
additional amount or amounts as will compensate such Lender for such
increased cost or reduction in amount received.
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, its interest in the Facility
Letters of Credit or its Commitment to make Loans or participate in or issue
Facility Letters of Credit 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 (i) the risk-based capital guidelines
in effect in the United States on the date of this Agreement, including
transition rules, and (ii) the corresponding capital regulations promulgated
by regulatory
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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,"
including transition rules, and any amendments to such regulations adopted
prior to the date of this Agreement.
3.3. AVAILABILITY OF TYPES OF ADVANCES. If (a) 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 and gives notice of such fact to the Agent or (b)
the Required Lenders determine that (i) deposits of a type and maturity
appropriate to match fund Eurodollar Advances are not available or (ii) the
interest rate applicable to Eurodollar Advances does not accurately reflect
the cost of making or maintaining Eurodollar Advances, then the Agent shall
suspend the availability of Eurodollar Advances and require any Eurodollar
Advances to be repaid or converted to Floating Rate Advances, subject to the
payment of any funding indemnification amounts required by SECTION 3.4.
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 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 such Eurodollar Advance.
3.5. TAXES. (a) All payments by the Borrower to or for the account of
any Lender or the Agent hereunder or under any Note shall be made free and
clear of and without deduction for any and all Taxes. If the Borrower shall
be required by law to deduct any Taxes from or in respect of any sum payable
hereunder to any Lender or the Agent, (i) the sum payable shall be increased
as necessary so that after making all required deductions (including
deductions applicable to additional sums payable under this SECTION 3.5) such
Lender or the Agent (as the case may be) receives an amount equal to the sum
it would have received had no such deductions been made, (ii) the Borrower
shall make such deductions, (iii) the Borrower shall pay the full amount
deducted to the relevant authority in accordance with applicable law and (iv)
the Borrower shall furnish to the Agent the original copy of a receipt
evidencing payment thereof within thirty (30) days after such payment is made.
(b) In addition, the Borrower hereby agrees to pay any present or future
stamp or documentary taxes and any other excise or property taxes, charges or
similar levies which arise from any payment made hereunder or under any Note
or from the execution or delivery of, or otherwise with respect to, this
Agreement or any Note ("Other Taxes").
(c) The Borrower hereby agrees to indemnify the Agent and each Lender
for the full amount of Taxes or Other Taxes (including, without limitation,
any Taxes or Other Taxes imposed on amounts payable under this SECTION 3.5)
paid by the Agent or such Lender and any liability (including penalties,
interest and expenses) arising therefrom or with respect thereto.
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Payments due under this indemnification shall be made within thirty (30) days
of the date the Agent or such Lender makes demand therefor pursuant to
SECTION 3.6.
(d) Each Lender that is not incorporated under the laws of the United
States of America or a state thereof (each a "Non-U.S. Lender") agrees that
it will, not less than ten Business Days after the date of this Agreement,
(i) deliver to each of the Borrower and the Agent two duly completed copies
of United States Internal Revenue Service Form 1001 or 4224 (or any
applicable successor form), certifying in either case that such Lender is
entitled to receive payments under this Agreement without deduction or
withholding of any United States federal income taxes, and (ii) deliver to
each of the Borrower and the Agent a United States Internal Revenue Form W-8
or W-9 (or any applicable successor form), as the case may be, and certify
that it is entitled to an exemption from United States backup withholding
tax. Each Non-U.S. Lender further undertakes to deliver to each of the
Borrower and the Agent (x) renewals or additional copies of such form (or any
applicable successor form) on or before the date that such form expires or
becomes obsolete, and (y) after the occurrence of any event requiring a
change in the most recent forms so delivered by it, such additional forms or
amendments thereto as may be reasonably requested by the Borrower or the
Agent. All forms or amendments described in the preceding sentence shall
certify that such Lender is entitled to receive payments under this Agreement
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
or amendment 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.
(e) For any period during which a Non-U.S. Lender has failed to provide
the Borrower with an appropriate form pursuant to clause (d), above (unless
such failure is due to a change in treaty, law or regulation, or any change
in the interpretation or administration thereof by any governmental
authority, occurring subsequent to the date on which a form originally was
required to be provided), such Non-U.S. Lender shall not be entitled to
indemnification under this SECTION 3.5 with respect to Taxes imposed by the
United States; PROVIDED that, should a Non-U.S. Lender which is otherwise
exempt from or subject to a reduced rate of withholding tax become subject to
Taxes because of its failure to deliver a form required under clause (d),
above, the Borrower shall take such steps as such Non-U.S. Lender shall
reasonably request to assist such Non-U.S. Lender to recover such Taxes.
(f) Any Lender that is entitled to an exemption from or reduction of
withholding tax with respect to payments under this Agreement or any Note
pursuant to the law of any relevant jurisdiction or any treaty shall deliver
to the Borrower (with a copy to the Agent), at the time or times prescribed
by applicable law, such properly completed and executed documentation
prescribed by applicable law as will permit such payments to be made without
withholding or at a reduced rate.
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(g) If the U.S. Internal Revenue Service or any other governmental
authority of the United States or any other country or any political
subdivision thereof asserts a claim that the Agent did not properly withhold
tax from amounts paid to or for the account of any Lender (because the
appropriate form was not delivered or properly completed, because such Lender
failed to notify the Agent of a change in circumstances which rendered its
exemption from withholding ineffective, or for any other reason), such Lender
shall indemnify the Agent fully for all amounts paid, directly or indirectly,
by the Agent as tax, withholding therefor, or otherwise, including penalties
and interest, and including taxes imposed by any jurisdiction on amounts
payable to the Agent under this subsection, together with all costs and
expenses related thereto (including attorneys fees and time charges of
attorneys for the Agent, which attorneys may be employees of the Agent). The
obligations of the Lenders under this SECTION 3.5(g) shall survive the
payment of the Obligations and termination of this Agreement.
3.6. LENDER STATEMENTS; SURVIVAL OF INDEMNITY. To the extent reasonably
possible, each Lender shall designate an alternate Lending Installation with
respect to its Eurodollar Loans to reduce any liability of the Borrower to
such Lender under SECTIONS 3.1, 3.2 and 3.5 or to avoid the unavailability of
Eurodollar Advances under SECTION 3.3, so long as such designation is not, in
the reasonable judgment of such Lender, 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 SECTION 3.1, 3.2,
3.4 or 3.5. 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 Loan shall be calculated as though each Lender funded its
Eurodollar Loan 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 such written statement. The obligations of the Borrower under
SECTIONS 3.1, 3.2, 3.4 and 3.5 shall survive payment of the Obligations and
termination of this Agreement.
3.7. SUBSTITUTION OF LENDERS. Any Lender claiming any additional amounts
payable pursuant to SECTION 3.1, 3.2, or 3.5 or which gives a notice
described in SECTION 3.3(a) shall, so long as no Default or Unmatured Default
has occurred and is continuing, upon the written request of the Borrower
delivered, within ninety (90) days after such Lender's claim or notice, to
such Lender and the Agent, assign, pursuant to and in accordance with the
provisions of SECTION 12.3, all of its rights and obligations under this
Agreement and under the Loan Documents to another Lender or to a commercial
bank, other financial institution, commercial finance company or other
business lender selected by the Borrower and reasonably acceptable to the
Agent that has agreed not to claim any additional amounts under SECTION 3.1,
3.2 or 3.5 with respect to some or all of the costs or regulatory charges
that gave rise to such assigning Lender's claim for such compensation or, as
applicable, has not made a determination of the type described in SECTION
3.3(a), in consideration for (a) the payment by such assignee to such
assigning Lender of the principal of, and interest accrued and unpaid to the
date of such assignment on, the Loans held by such assigning Lender, (b) the
payment by the Borrower to such assigning Lender of any and
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all other amounts owing to such assigning Lender under any provision of this
Agreement accrued and unpaid to the date of such assignment and (c) the
payment by the Borrower to such assigning Lender of any amounts which would
be payable to such Lender pursuant to SECTION 3.4 were such assignment
treated as a repayment of such Loans.
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ARTICLE IV
CONDITIONS PRECEDENT
4.1. INITIAL ADVANCE AND FACILITY LETTERS OF CREDIT. The Lenders shall
not be required to make the initial Advance hereunder and the Issuer shall
not be required to issue any Facility Letter of Credit hereunder unless and
until the Borrower (a) has furnished the following to the Agent with
sufficient copies for the Lenders and (b) the other conditions set forth
below have been satisfied:
(i) Copies of the articles or certificate of incorporation of the
Borrower, together with all amendments thereto, and a certificate
of good standing, each certified by the appropriate governmental
officer in its jurisdiction of incorporation.
(ii) Copies, certified by the Secretary or Assistant Secretary of the
Borrower, of its by-laws and of its Board of Directors' resolutions
and of resolutions or actions of any other body authorizing the
execution of the Loan Documents to which the Borrower is a party.
(iii) An incumbency certificate, executed by the Secretary or Assistant
Secretary of the Borrower, which shall identify by name and title
and bear the signatures of the Authorized Officers and any other
officers of the Borrower authorized to sign the Loan Documents to
which the Borrower is a party, upon which certificate the Agent and
the Lenders shall be entitled to rely until informed of any change
in writing by the Borrower.
(iv) 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, the
making of any Loans hereunder and the issuance of any Facility
Letters of Credit hereunder on such date): (A) no Default or
Unmatured Default has occurred and is continuing; (B) 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; (C) 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 (subject to prior
approval of the relevant insurance commission or analogous
Governmental Authority (if and to the extent required by applicable
insurance laws and regulations) in respect of the exercise pursuant
to the Pledge Agreement of any right to control, or to sell or
otherwise require the transfer of title to any collateral
constituting capital stock of, any Insurance Subsidiary); (D) 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 (E) since September 30, 1998, no event or change
has occurred that has caused or evidences a Material Adverse Effect.
(v) Copies of the certificate or articles of incorporation of Fund
together with all amendments thereto, 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 requested by the Agent.
(vi) Copies, certified by the Secretary or Assistant Secretary of Fund,
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.
(vii) An incumbency certificate, executed by the Secretary or Assistant
Secretary of Fund, which shall identify by name and title and bear
the signature of its officers authorized to sign the Loan Documents
to which it is a party.
(viii) Copies of the articles of incorporation of each Significant
Insurance Subsidiary, together with all amendments thereto,
certified by the Secretary or Assistant Secretary of the Borrower,
together with such good standing certificates and certificates of
authority and/or compliance as shall be required by the Agent.
(ix) 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.
(x) Any Notes requested by a Lender pursuant to SECTION 2.13 payable to
the order of each such requesting Lender.
(xi) Written money transfer instructions, in substantially the form of
EXHIBIT D, 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.
(xii) 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.
(xiii) A written solvency certificate from the chief financial officer of
the Borrower and Fund 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 Fund, on a consolidated basis.
(xiv) The Guaranty duly executed by Fund.
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(xv) Executed originals of the Pledge Agreement, together with the stock
certificates representing the capital stock of each Subsidiary of
the Borrower (other than any Subsidiary of an Insurance Subsidiary)
and stock powers with respect thereto executed in blank.
(xvi) A copy of the Purchase Agreement and any amendments, supplements
and modifications thereto.
(xvii) Evidence satisfactory to the Agent that the Existing Credit
Agreement has been terminated and all Indebtedness, liabilities and
obligations outstanding thereunder shall have been paid in full.
(xviii) Evidence satisfactory to the Agent that the White Mountains Credit
Agreement has been terminated and all Indebtedness, liabilities
and obligations outstanding thereunder shall have been paid in
full.
(xix) Executed original of the Fund Credit Agreement, which shall be in
full force and effect, in a form satisfactory to the Lenders.
(xx) Receipt of any required regulatory approvals from any Governmental
Authority, including the Department of Insurance of the State of
New York (subject to prior approval of the relevant insurance
commission or analogous Governmental Authority (if and to the
extent required by applicable insurance laws and regulations) in
respect of the exercise pursuant to the Pledge Agreement of any
right to control, or to sell or otherwise require the transfer of
title to any collateral constituting capital stock of, any
Insurance Subsidiary).
(xxi) Information satisfactory to the Agent and the Required Lenders
regarding the Borrower's Year 2000 Program.
(xxii) The Borrower shall have paid all fees due to First Chicago.
(xxiii) Such other documents as any Lender or its counsel may have
reasonably requested.
4.2. EACH ADVANCE AND FACILITY LETTER OF CREDIT. The Lenders shall not
be required to make any Advance and the Issuer shall not be obligated to
issue any future Facility Letter of Credit unless on the applicable Borrowing
Date:
(a) There exists no Default or Unmatured Default and none would result
from such Advance or issuance of such Facility Letter of Credit;
(b) The representations and warranties contained in ARTICLE V are true
and correct as of such Borrowing Date, except to the extent any
such representation or warranty is stated to relate solely to an
earlier date, in which case such representation or warranty shall
have been true and correct on and as of such earlier 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 or
issuance of such Facility Letter of Credit shall be satisfactory to
the Lenders and their counsel.
Each Borrowing Notice with respect to each such Advance and each
Issuance request with respect to each Facility Letter of Credit shall
constitute a representation and warranty by the Borrower that the conditions
contained in SECTIONS 4.2(a) and (b) have been satisfied. Any Lender may
require a duly completed compliance certificate in substantially the form of
EXHIBIT B as a condition to making an Advance or issuing a Facility Letter of
Credit.
ARTICLE V
REPRESENTATIONS AND WARRANTIES
The Borrower represents and warrants to the Lenders that:
5.1. EXISTENCE AND STANDING. Each of the Borrower and its Subsidiaries
is a corporation, partnership (in the case of Subsidiaries only) or limited
liability company duly and properly incorporated or organized, as the case
may be, validly existing and (to the extent such concept applies to such
entity) in good standing under the laws of its jurisdiction of incorporation
or organization and has all requisite authority 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
by expected to have a Material Adverse Effect.
5.2. AUTHORIZATION AND VALIDITY. Each of the Borrower and Fund has the
power and authority (corporate or otherwise) and legal right to execute and
deliver the Loan Documents to which it is a party and to perform its
obligations thereunder. The execution and delivery by the Borrower and Fund
of the Loan Documents to which it is a party and the performance of their
respective obligations thereunder have been duly authorized by proper
corporate proceedings, and the Loan Documents constitute legal, valid and
binding obligations of the Borrower and Fund, as applicable, enforceable
against the Borrower or Fund, as applicable, 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 X), order, writ, judgment,
injunction, decree or award binding on the
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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 or granted under, 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 or 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 (subject to prior approval of the relevant
insurance commission or analogous Governmental Authority (if and to the
extent required by applicable insurance laws and regulations) in respect of
the exercise pursuant to the Pledge Agreement of any right to control, or to
sell or otherwise require the transfer of title to any collateral
constituting capital stock of, any Insurance Subsidiary). 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
through September 30, 1998, (c) the December 31, 1997 audited consolidated
financial statements of Fund and its Subsidiaries, (d) the unaudited
consolidated financial statements of Fund and its Subsidiaries through
September 30, 1998, (e) the December 31, 1997 Annual Statement of each
Significant Insurance Subsidiary of the Borrower and (f) the September 30,
1998 Quarterly Statement of each Significant Insurance Subsidiary of the
Borrower (collectively, the "FINANCIAL STATEMENTS"). Each of the Financial
Statements 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 Statement
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).
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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 or SAP, as applicable, 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 not been audited by the Internal
Revenue Service. 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
or SAP, as applicable.
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 hereto or disclosed in the Financial Statements or in
financial statements required to be delivered under SECTIONS 6.1(a) and (b)
or as otherwise disclosed by the Borrower in writing to the Lenders 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 the date of this Agreement
after giving effect to the transactions contemplated hereby 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 of its Subsidiaries 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 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 the
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Borrower or such Subsidiary. Neither the Borrower 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, 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.
5.14. SOLVENCY. As of the date hereof, after giving effect to the
consummation of the transactions contemplated by the Loan Documents
(including the stock redemption referenced in
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Recital B to this Agreement) 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, each of the Borrower (both individually and on a
consolidated basis) and Fund is Solvent.
5.15. INDEBTEDNESS. Attached hereto as SCHEDULE 5.15 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), 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.
5.16. INSURANCE LICENSES. SCHEDULE 5.16 hereto lists, as of the date of
this Agreement, (a) all of the jurisdictions in which any Insurance
Subsidiary holds a License and is authorized to and does transact insurance
business and (b) the line or lines of insurance in which each such Insurance
Subsidiary is engaged. Such Licenses are sufficient for each such Insurance
Subsidiary to conduct its insurance business. 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.
5.17. REINSURANCE. Each reinsurance agreement to which any Significant
Insurance Subsidiary is a party (collectively, the "EXISTING REINSURANCE
AGREEMENTS") is in full force and effect and is valid and binding in all
material respects in accordance with its terms, and, as of the date hereof,
no Significant Insurance Subsidiary has, to the Borrower's knowledge,
received notice (other than provisional notices of cancellation received in
the ordinary course of business) that any other party to an in-force Existing
Reinsurance Agreement will cancel or not renew such agreement, which
cancellation or nonrenewal could reasonably be expected to have a Material
Adverse Effect. Except as set forth on SCHEDULE 5.17, the Borrower does not
have knowledge as of the date hereof that any amount recoverable by any
Significant Insurance Subsidiary pursuant to any Existing Reinsurance
Agreement is not fully collectible in due course. To the knowledge of the
Borrower, no Significant Insurance Subsidiary is in default in any material
respect as to any Existing Reinsurance Agreement. Except as disclosed in
SCHEDULE 5.17, each Significant Insurance Subsidiary is entitled to take full
credit in its statutory financial statements for ceded reinsurance under the
Existing Reinsurance Agreements pursuant to applicable insurance laws. Except
as disclosed in SCHEDULE 5.17, as of the date hereof there is no claim
currently in litigation (or as to which litigation has been threatened in
writing) under any Existing Reinsurance Agreement in excess of $1,000,000.
5.18. DIVIDENDS. Except as set forth on SCHEDULE 5.18, no Significant
Insurance Subsidiary is subject to any regulatory prohibition regarding the
declaration or payment of dividends that is not generally applicable to all
insurance companies which are domiciled in the same jurisdiction and are
engaged in the same line of business as such Significant Insurance Subsidiary.
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5.19. SECURITY. The Pledge Agreement is effective to create and give the
Agent, for the benefit of the Lenders, as security for the repayment of the
obligations secured thereby, a legal, valid, perfected and enforceable first
priority Lien upon and security interest in the capital stock pledged
thereunder.
5.20. PLAN ASSETS; PROHIBITED TRANSACTIONS. The Borrower is not an
entity deemed to hold "plan assets" within the meaning of 29 C.F.R. Section
2510.3-101 of an employee benefit plan (as defined in Section 3(3) of ERISA)
which is subject to Title I of ERISA or any plan (within the meaning of
Section 4975 of the Code), and neither the execution of this Agreement nor
the making of Loans hereunder gives rise to a prohibited transaction within
the meaning of Section 406 of ERISA or Section 4975 of the Code.
5.21. MATERIAL AGREEMENTS. Except as set forth in SCHEDULE 5.21 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 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
contained in any agreement to which it is a party, which default could
reasonably be expected to have a Material Adverse Effect.
5.22. 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.
5.23. 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.
5.24. 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.
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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 accompanied by
any management letter prepared by said accountants and 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 (3) 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 Significant Insurance Subsidiary of the
Borrower, 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 Significant
Insurance Subsidiary of the Borrower, copies of the unaudited Quarterly
Statement of such Insurance Subsidiary, certified by the chief financial
officer
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or the treasurer of such Insurance Subsidiary, all such statements to be
prepared in accordance with SAP consistently applied through the period
reflected herein.
(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
Significant Insurance Subsidiary of the Borrower and (ii) receipt
thereof, copies of any ratings analysis by A.M. Best & Co. relating to
any Significant Insurance Subsidiary of the Borrower.
(f) Copies of any outside actuarial reports prepared with respect
to any valuation or appraisal of any Significant Insurance Subsidiary of
the Borrower, 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 by the Borrower or any of its Subsidiaries. Within ten
(10) days of the Borrower 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, 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
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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 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 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.
(n) Promptly after reviewed by the relevant board of directors, a
copy of the Borrower's investment policy compliance report.
(o) As soon as possible and in any event within two (2) Business
Days after the Borrower obtains knowledge thereof, notice of any change
in the S&P or Moody's credit rating of Fund.
(p) Such other information (including, without limitation, the
annual Best's Advance Report Service report prepared with respect to
each Insurance Subsidiary of the Borrower 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 making of (a) payments required by the Purchase Agreement,
(c) payments to terminate the Existing Credit Agreement and (c) any
Investments permitted by SECTION 6.14. The Borrower will not, nor will it
permit any of its Subsidiaries to, use any of the proceeds of the Advances or
any Facility Letters of Credit in any manner which would violate, or result
in the violation of, Regulation T, Regulation U or Regulation X or to finance
the Acquisition 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, and will cause each
Subsidiary to, give prompt notice in writing to the Lenders of (a) the
occurrence of any Default or Unmatured Default, (b) the occurrence of any
other development, financial or otherwise (including, without limitation,
developments with respect to Year 2000 Issues) which could reasonably be
expected to have a Material Adverse Effect, (c) the receipt of any notice
from any Governmental Authority of the expiration without renewal, revocation
or suspension of, or the institution of any
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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) the receipt 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 judicial or
administrative order limiting or controlling the insurance business of any
Insurance Subsidiary (and not the insurance industry generally) which has
been issued or adopted and which has had, or could reasonably be expected to
have, a Material Adverse Effect, or (f) the commencement of any litigation of
which the Borrower or any of its Subsidiaries 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 of its
Subsidiaries to, (a) carry on and conduct its business in substantially the
same manner and in substantially the same fields of business as it is
presently conducted (except USF RE, when it becomes a Subsidiary, may
consummate the USF RE Transaction), (b) not conduct any significant business
except for insurance or insurance related 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. No Insurance Subsidiary shall change its state of domicile or
incorporation without the prior written consent of the Required Lenders. Each
Wholly-Owned Subsidiary in existence as of the date of this Agreement which
is a Significant Subsidiary shall continue to be a Wholly-Owned Subsidiary.
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 in accordance with Agreement 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 any
Lender upon request full information as to the insurance carried.
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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
including, without limitation, all Environmental Laws, 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
(except USF RE, when it becomes a Subsidiary, may consummate the USF RE
Transaction).
6.9. INSPECTION. The Borrower 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 the Borrower and such Subsidiary, to examine and
make copies of the books of accounts and other financial records of the
Borrower and such Subsidiary, and to discuss the affairs, finances and
accounts of the Borrower 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. The Borrower 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 will not, nor will it permit any
Subsidiary to, 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
options or other rights in respect thereof at any time outstanding, except
that (a) any Subsidiary may declare and pay dividends or make distributions
to the Borrower or to a Wholly-Owned Subsidiary and (b) 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
or make distributions, repurchase stock or make other capital distributions
(i) as described on the Dividend Schedule hereto and (ii) in an amount equal
to any amounts which have been contributed as equity to the Borrower and used
to Defease Allowable Seller Paper but which is released from the Account
because of a reduction in the principal amount of such Allowable Seller Paper
other than as a result of the payment thereof.
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6.11. INDEBTEDNESS. The Borrower will not, nor will it permit any
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 5.15 hereto (it being understood and agreed that 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 shall be permitted to exist pursuant to this SECTION 6.11(b)
notwithstanding the absence thereof on SCHEDULE 5.15) 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 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;
(d) Allowable Seller Paper in an aggregate principal amount not to
exceed $25,000,000 at any time;
(e) Indebtedness secured by Liens permitted pursuant to SECTION
6.16(f);
(f) Letters of Credit issued on behalf of Insurance Subsidiaries in
the ordinary course of business and ordinary course reinsurance
obligations of USF RE (when it becomes a Wholly-Owned Subsidiary) which
are secured by Liens permitted by SECTION 6.16(h); PROVIDED that the sum
of the acceptable face amount of such Letters of Credit and the amount
of such reinsurance obligations shall not exceed $25,000,000 at any time;
(g) Letters of Credit having an aggregate outstanding face amount
at no time in excess of $15,000,000 issued on behalf of the Borrower for
the benefit of Insurance Subsidiaries in the ordinary course of business
relating to tax sharing agreements and reinsurance agreements;
(h) Contingent Obligations permitted under SECTION 6.15; and
(i) other Indebtedness (including Contingent Obligations) to the
extent not otherwise included in subparagraphs (a) through (h) of this
SECTION 6.11 or in SECTION 6.15, in an aggregate principal amount
outstanding at any one time not to exceed $10,000,000.
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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 (i) into the Borrower, (ii)
with any Wholly-Owned Subsidiary of the Borrower, (iii) with any other
Person (excluding Fund and its Subsidiaries) 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 (in the case of CLAUSE (i)) or a Wholly-Owned Subsidiary of
the Borrower (in the case of either CLAUSE (ii) or (iii), except USF RE,
when it becomes a Wholly-Owned Subsidiary, may pursuant to the USF RE
Transaction merge with any Person so long as after giving effect thereto
Fund will not, nor will any of its Subsidiaries, own any portion of the
surviving entity);
(b) a Significant Subsidiary may merge or consolidate with any
Person (including the Borrower and any of its Subsidiaries, but
otherwise excluding Fund and its Subsidiaries) so long as (i) no Default
or Unmatured Default shall have occurred or be continuing before or
after giving effect to such merger or consolidation and (ii) a
Significant Subsidiary is the continuing or surviving corporation; and
(c) the Borrower may merge or consolidate with any other Person
(including the Borrower's Subsidiaries, but otherwise excluding Fund and
its Subsidiaries), so long as immediately thereafter (and after giving
effect thereto), (i) no Default or Unmatured Default exists, (ii) the
Borrower is the continuing or surviving corporation and (iii) the
covenants contained in SECTION 6.21 shall be complied with on a PRO
FORMA basis on the date of, and after giving effect to, such merger or
consolidation.
6.13. SALE OF ASSETS. The Borrower will not, nor will it permit any
Subsidiary to, lease, sell or otherwise dispose of its Property to any other
Person except for (a) sales of Cash Equivalents or Investments by the
Borrower and Insurance Subsidiaries, in each case in the ordinary course of
business, (b) sales of the stock or assets of Insurance Subsidiaries which
are not Significant Subsidiaries as of the date of sale or as of the date
hereof and (c) other leases, sales, transfers or other dispositions of
Property which do not exceed (i) $2,000,000 per calendar year in the
aggregate for the Borrower or (ii) $30,000,000 per calender year in the
aggregate for the Borrower's Subsidiaries.
6.14. INVESTMENTS AND ACQUISITIONS.
(a) The Borrower will not, nor will it permit any Subsidiary which
is not an Insurance 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 Acquisition of any Person, except:
(i) Cash and Cash Equivalents;
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(ii) Investments in debt securities rated BBB- or better by S&P,
Baa3 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 remain permitted hereby
until thirty (30) days after the date on which such rating requirement
is no longer met;
(iii) Investments or commitments therefor (such commitments being
set forth on SCHEDULE 6.14) in existence on the date hereof;
(iv) Investments made in Subsidiaries;
(v) Acquisitions 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 Acquisition or Investment; and
(vi) loans made by (x) the Borrower to any Wholly-Owned Subsidiary
of the Borrower and (y) any Wholly-Owned Subsidiary to a Wholly-Owned
Subsidiary of the Borrower or the Borrower so long as, in all cases, no
Default or Unmatured Default has occurred and is continuing or would
occur after giving effect to such loan.
(b) The Borrower will not permit any Insurance 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 Acquisition of any Person,
except for Investments permitted by law and so long as:
(i) 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;
(ii) any Acquisitions or Investments of the type described in
SECTION 6.14(a)(v) shall satisfy the requirements of such section; and
(iii) the following types of Investments shall not in the aggregate
constitute at any time more than 30% in value of the Investments of any
Insurance Subsidiary: (A) common equities of a Person other than a
Subsidiary; (B) Investments rated below NAIC-2; and (C) debt instruments
rated below BBB- by S&P or below Baa3 by Moody's.
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(c) Notwithstanding the foregoing, neither the Borrower nor any of
its Subsidiaries shall make any loan to, or any other Investment in, Fund or
in any Subsidiary of Fund which is not the Borrower or a Subsidiary of the
Borrower nor shall the Borrower permit more than 25% in value of the assets
of the Borrower or any of its Subsidiaries to consist of Margin Stock.
6.15. CONTINGENT OBLIGATIONS. The Borrower will not, nor will it permit
any Subsidiary to, make or suffer to exist any material Contingent Obligation
(including, without limitation, any Contingent Obligation with respect to the
obligations of a Subsidiary), except (a) the Contingent Obligations described
on SCHEDULE 5.8, (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 and (d) Contingent Obligations in respect of
Facility Letters of Credit or Letters of Credit permitted by SECTION 6.11(f)
or (g).
6.16. 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 of
the Borrower or any of its Subsidiaries, 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 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 any of
its Subsidiaries;
(e) Liens existing on the date hereof and described in SCHEDULE
6.16 hereto;
(f) Liens in, of or on Property acquired after the date of this
Agreement (by purchase, construction or otherwise) by the Borrower 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
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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 the Account in connection with Defeasing any Allowable
Seller Paper;
(h) Liens on assets of Insurance Subsidiaries securing Letters of
Credit permitted by SECTION 6.11(f) and Liens on assets of USF RE, when
it becomes a Wholly-Owned Subsidiary, securing ordinary course
reinsurance obligations of USF RE permitted by SECTION 6.11(f);
(i) Liens on assets of the Borrower securing Letters of Credit
permitted by SECTION 6.11(g); and
(j) Liens not otherwise permitted by the foregoing clauses (a)
through (i) securing any Indebtedness of the Borrower, PROVIDED that the
aggregate principal amount of Indebtedness secured by Liens permitted by
this CLAUSE (j) shall not exceed $5,000,000 at any time.
6.17. 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 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.
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 to, enter into any indenture, agreement, instrument or
other arrangement which by its terms, (a) other than 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
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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. SUBORDINATED INDEBTEDNESS; PREPAYMENTS. The Borrower will not, and
will not permit any Subsidiary to, make any amendment or modification to the
indenture, note or other agreement evidencing or governing any Subordinated
Indebtedness, or directly or indirectly voluntarily prepay, defease (other
than the Defeasing of Allowable Seller Paper) or in substance defease,
purchase, redeem, retire or otherwise acquire, any Subordinated Indebtedness
before the stated maturity thereof.
6.21. FINANCIAL COVENANTS
6.21.1 MINIMUM NET WORTH. The Borrower shall at all times maintain
a minimum Net Worth at least equal to the sum of, without duplication,
(a) $201,420,000, PLUS (b) an amount equal to 50% of the cash and
non-cash proceeds of any equity securities issued or capital
contributions (other than capital contributions to the extent used to
Defease Allowable Seller Paper) received by the Borrower after September
30, 1998, PLUS (c) an amount equal to 50% of the Borrower's positive
consolidated net income for each Fiscal Quarter ending after September
30, 1998.
6.21.2. MAXIMUM LEVERAGE RATIO. The Borrower shall at all times
maintain a Leverage Ratio of (a) not greater than 35% through and
including December 31, 1999, (b) not greater than 30% from January 1,
2000 through and including December 31, 2000, (c) not greater than 25%
from January 1, 2001 through and including December 31, 2002 and (d) not
greater than 20% at all times thereafter.
6.21.3. MINIMUM FIXED CHARGES COVERAGE RATIO. As of the end of each
Fiscal Quarter, the Borrower shall maintain a Fixed Charges Coverage
Ratio of not less than 1.5:1.0.
6.21.4. MINIMUM STATUTORY SURPLUS. The Borrower shall at all times
maintain Statutory Surplus for each First-Tier Significant Insurance
Subsidiary in an amount not less than an amount equal to (a) 90% of the
Statutory Surplus of each such First-Tier Significant Insurance
Subsidiary in existence on the date hereof as of September 30, 1998 (or,
in the case of any First-Tier Significant Insurance Subsidiary acquired
after the date hereof, 90% of the Statutory Surplus of each such
acquired First-Tier Significant Insurance Subsidiary as of the most
recently ended Fiscal Quarter preceding such acquisition) PLUS (b) an
amount equal to 50% of the cash and non-cash proceeds of any equity
securities issued or capital contributions received by each such
First-Tier Significant Insurance Subsidiary.
6.21.5. MINIMUM RISK BASED CAPITAL RATIO. The Borrower shall at the
end of each Fiscal Year cause each Significant Insurance Subsidiary to
maintain a ratio of (a)
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total Adjusted Capital (as defined in the Risk-Based Capital Act or in
the rules and procedures prescribed from time to time by the NAIC with
respect thereto) to (b) the Company Action Level RBC (as defined in the
Risk-Based Capital Act or in the rules and procedures prescribed from
time to time by the NAIC with respect thereto) of at least 150%.
6.22. 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 Fund, 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.
6.23. 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.
6.24. 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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6.25. SUBSIDIARY STOCK PLEDGE. Within five (5) Business Days of any
Person becoming a Subsidiary of the Borrower, the Borrower shall pledge all
of the stock or other equity interests thereof owned by the Borrower to the
Agent for the benefit of the Lenders pursuant to documentation (including
related certificates, opinions and financing statements) reasonably
acceptable to the Agent.
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 Loan, any Facility Letter of
Credit, 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 principal of any Loan or any Reimbursement Obligation
when due, or nonpayment of interest upon any Loan or of any commitment fee or
other 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, SECTIONS 6.3(a) and (b) or SECTIONS 6.10 through 6.25.
7.4. The breach by the Borrower (other than a breach which constitutes a
Default under SECTION 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 Indebtedness aggregating in excess of $2,000,000
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 Indebtedness to cause, such Indebtedness to
become due prior to its stated maturity; any such Indebtedness of the
Borrower or any of its Subsidiaries or of Fund 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; or
the Borrower or any of its Subsidiaries shall not pay, or shall admit in
writing its inability to pay, its debts generally as they become due.
7.6. The Borrower or any of its Subsidiaries or Fund or any of its
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
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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 or partnership action to
authorize or effect any of the foregoing actions set forth in this SECTION
7.6 or (f) fail to contest in good faith any appointment or proceeding
described in SECTION 7.7.
7.7. Without the application, approval or consent of the Borrower or any
of its Subsidiaries or Fund or any of its Subsidiaries, a receiver, trustee,
examiner, liquidator or similar official shall be appointed for the Borrower
or any of its Subsidiaries or Fund or any of its 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 Subsidiaries or
Fund or any of its Subsidiaries and such appointment continues undischarged
or such proceeding continues undismissed or unstayed for a period of sixty
(60) consecutive days.
7.8. Any court, government or governmental agency shall condemn, seize
or otherwise appropriate, or take custody or control of, all or any
Substantial Portion of the Property of the Borrower and its Subsidiaries
which, when taken together with all other Property of the Borrower and its
Subsidiaries.
7.9. The Borrower or any of its Subsidiaries shall fail within thirty
(30) days to pay, bond or otherwise discharge one or more (a) judgments or
orders for the payment of money in excess of $2,000,000 in the aggregate, or
(b) nonmonetary judgments or orders which, individually or in the aggregate,
could reasonably be expected to have a Material Adverse Effect, which
judgment(s), in any such case, is/are not stayed on appeal or otherwise being
appropriately contested in good faith.
7.10. There shall occur any Change in Control.
7.11. The occurrence of any "default", as defined in any Loan Document
(other than this Agreement) or the breach of any of the terms or provisions
of any Loan Document (other than this Agreement), which default or breach
continues beyond any period of grace therein provided.
7.12. The Pledge Agreement shall for any reason fail to create a valid
and perfected, first priority security interest in any collateral purported
to be covered thereby, except as permitted by the terms of such Pledge
Agreement, or the Pledge Agreement 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 Pledge Agreement, or a default shall
occur under such Pledge Agreement.
7.13. 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 Fund shall
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fail to comply with any of the material terms or provisions of the Guaranty
or Fund denies that it has any further liability under the Guaranty or gives
notice to such effect.
7.14. Any License of any Insurance Subsidiary of the Borrower (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.
7.15. Any Insurance Subsidiary of the Borrower 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.
7.16. Any Insurance Subsidiary of the Borrower 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.
7.17. The representations and warranties set forth in SECTION 5.20
("Plan Assets; Prohibited Transactions") shall at any time not be true and
correct.
7.18. The Borrower or any other member of the controlled Group shall be
obligated in respect of any Multiemployer Plan, the Unfunded Liabilities of
all Single Employer Plans shall exceed in the aggregate $500,000 or any
Reportable Event shall occur in connection with any Plan.
ARTICLE VIII
ACCELERATION, WAIVERS, AMENDMENTS AND REMEDIES
8.1. ACCELERATION. If any Default described in SECTION 7.6 or 7.7 occurs
with respect to the Borrower, the obligations of the Lenders to make Loans or
issue Facility Letters of Credit 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 or issue Facility Letters of Credit 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. In
addition to the
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foregoing, following the occurrence and during the continuance of a Default,
so long as any Facility Letter of Credit has not been fully drawn and has not
been cancelled or expired by its terms, upon demand by the Agent, the
Borrower shall deposit in an account (the "LETTER OF CREDIT CASH COLLATERAL
ACCOUNT") maintained with First Chicago in the name of the Agent, for the
ratable benefit of the Lenders and the Agent, cash in an amount equal to the
aggregate undrawn face amount of all outstanding Facility Letters of Credit
and all fees and other amounts due or which may become due with respect
thereto. The Borrower shall have no control over funds in the Letter of
Credit Cash Collateral Account, which funds shall be invested by the Agent
from time to time in its discretion in certificates of deposit of First
Chicago having a maturity not exceeding thirty days. Such funds shall be
promptly applied by the Agent to reimburse the Issuer for drafts drawn from
time to time under the Facility Letters of Credit. Such funds, if any,
remaining in the Letter of Credit Cash Collateral Account following the
payment of all Obligations in full or the earlier termination of all Defaults
shall, unless the Agent is otherwise directed by a court of competent
jurisdiction, be promptly paid over to the Borrower.
If, within ten (10) 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
SECTION 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 all of the Lenders:
(a) Extend the final maturity of any Loan or reduce or forgive all
or any portion of the principal amount thereof, or 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) Extend the Facility Termination Date, or permit any Facility
Letter of Credit to have an expiry date beyond the date five (5)
Business Days prior to the Facility Termination Date, or reduce the
amount or extend the payment date for, the mandatory payments required
under SECTION 2.2, or reduce the amount or extend the effective date
for, the mandatory reductions of the Aggregate Commitment required under
SECTION 2.5.3(a), or increase the amount of the Commitment of any Lender
hereunder without the consent of such Lender, or permit the Borrower to
assign its rights under this Agreement.
(d) Amend this SECTION 8.2.
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(e) Release any guaranty of the Obligations or, except as provided
in the Pledge Agreement, release all or substantially all of the assets
pledged thereunder.
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 shall survive 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 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
described in SECTION 10.13.
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
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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, PROVIDED, HOWEVER, that the parties hereto expressly
agree that the Arranger shall enjoy the benefits of the provisions of
SECTIONS 9.7, 9.11 and 10.11 to the extent specifically set forth therein and
shall have the right to enforce such provisions on its own behalf and in its
own name to the same extent as if it were a party to this Agreement.
9.7. EXPENSES; INDEMNIFICATION. (a) The Borrower shall reimburse the
Agent and the Arranger 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 or the Arranger in connection with the preparation, negotiation,
execution, delivery, syndication, review, actual or proposed amendment,
modification, and administration of the Loan Documents. The Borrower also
agrees to reimburse the Agent, the Arranger and the Lenders for any costs,
internal charges and out-of-pocket expenses (including attorneys' fees and
time charges of attorneys for the Agent, the Arranger and the Lenders, which
attorneys may be employees of the Agent, the Arranger or the Lenders) paid or
incurred by the Agent, the Arranger or any Lender in connection with the
collection and enforcement of the Loan Documents.
(b) The Borrower hereby further agrees to indemnify the Agent, the
Arranger 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, the Arranger 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 or the use or intended use
of any Facility Letter of Credit, except to the extent that they are
determined in a final non-appealable judgment by a court of competent
jurisdiction to have resulted from the gross negligence or willful misconduct
of the party seeking indemnification. The obligations of the Borrower under
this SECTION 9.7 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
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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 on
the one hand and the Lenders and the Agent on the other hand shall be solely
that of borrower and lender. Neither the Agent, the Arranger nor any Lender
shall have any fiduciary responsibilities to the Borrower. Neither the Agent,
the Arranger 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 agrees that neither the
Agent, the Arranger nor any Lender shall have liability to the Borrower, 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.
9.12. 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 statute, 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 9.12(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
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.
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9.13. NONRELIANCE. Each Lender hereby represents that it is not relying
on or looking to any Margin Stock for the repayment of the Loans provided for
herein.
9.14. 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 any conflict of
interest arising from such investments, loans or relationships.
ARTICLE X
THE AGENT
10.1. APPOINTMENT; NATURE OF RELATIONSHIP. The First National Bank of
Chicago is hereby appointed by each of the Lenders as its contractual
representative (herein referred to as the "Agent") hereunder and under each
other Loan Document, and each of the Lenders irrevocably authorizes the Agent
to act as the contractual representative of such Lender with the rights and
duties expressly set forth herein and in the other Loan Documents. The Agent
agrees to act as such contractual representative upon the express conditions
contained in this ARTICLE X. Notwithstanding the use of the defined term
"Agent," it is expressly understood and agreed that the Agent shall not have
any fiduciary responsibilities to any Lender by reason of this Agreement or
any other Loan Document and that the Agent is merely acting as the
contractual representative of the Lenders with only those duties as are
expressly set forth in this Agreement and the other Loan Documents. In its
capacity as the Lenders' contractual representative, the Agent (i) does not
hereby assume any fiduciary duties to any of the Lenders, (ii) is a
"representative" of the Lenders within the meaning of Section 1-201 of the
Uniform Commercial Code and (iii) is acting as an independent contractor, the
rights and duties of which are limited to those expressly set forth in this
Agreement and the other Loan Documents. Each of the Lenders hereby agrees to
assert no claim against the Agent on any agency theory or any other theory of
liability for breach of fiduciary duty, all of which claims each Lender
hereby waives.
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, the Lenders 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 to the extent such action or inaction is determined in a
final non-
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appealable judgment by a court of competent jurisdiction to have arisen from
the gross negligence or willful misconduct of such Person.
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 solely to the
Agent; (d) the existence or possible existence of any Default or Unmatured
Default; (e) the validity, enforceability, effectiveness, sufficiency or
genuineness of any Loan Document or any other instrument or writing furnished
in connection therewith; (f) the value, sufficiency, creation, perfection or
priority of any Lien in any collateral security; or (g) the financial
condition of the Borrower or any guarantor of any of the Obligations or of
any of the Borrower's or any such guarantor's respective Subsidiaries. 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, and such instructions and any action taken or failure to
act pursuant thereto shall be binding on all of the Lenders. The Lenders
hereby acknowledge that the Agent shall be under no duty to take any
discretionary action permitted to be taken by it pursuant to the provisions
of this Agreement or any other Loan Document unless it shall be requested in
writing to do so by the Required Lenders. 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 the contractual arrangement between the Agent and the
Lenders and all matters pertaining to the Agent's 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.
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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 (including, without limitation, for any expenses incurred by
the Agent in connection with any dispute between the Agent and any Lender or
between two or more of the Lenders) 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 (including, without
limitation, for any such amounts incurred by or asserted against the Agent in
connection with any dispute between the Agent and any Lender or between two
or more of the Lenders), or the enforcement of any of the terms of the Loan
Documents or of any such other documents, PROVIDED that (i) no Lender shall
be liable for any of the foregoing to the extent any of the foregoing is
found in a final non-appealable judgment by a court of competent jurisdiction
to have resulted from the gross negligence or willful misconduct of the Agent
and (ii) any indemnification required pursuant to SECTION 3.5(g) shall,
notwithstanding the provisions of this SECTION 10.8, be paid by the relevant
Lender in accordance with the provisions thereof. 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 with respect to its Commitment and its Loans as any Lender 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
and its Affiliates 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, the Arranger 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
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without reliance upon the Agent, the Arranger 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. Notwithstanding the previous sentence, the Agent may at any time
without the consent of the Borrower or any Lender, appoint any of its
Affiliates which is a commercial bank as a successor Agent hereunder. 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 $250,000,000 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. In the event that there is a successor to the
Agent by merger, or the Agent assigns its duties and obligations to an
Affiliate pursuant to this SECTION 10.12, then the term "Corporate Base Rate"
as used in this Agreement shall mean the prime rate, base rate or other
analogous rate of the new Agent.
10.13. AGENT'S FEE. The Borrower agrees to pay to the Agent, for its own
account, the fees agreed to by the Borrower and the Agent pursuant to that
certain letter agreement dated as of February 23, 1999, or as otherwise
agreed from time to time.
10.14. DELEGATION TO AFFILIATES. The Borrower and the Lenders agree that
the Agent may delegate any of its duties under this Agreement to any of its
Affiliates. Any such Affiliate (and such Affiliate's directors, officers,
agents and employees) which performs duties in connection with this Agreement
shall be entitled to the same benefits of the indemnification, waiver and
other protective provisions to which the Agent is entitled under ARTICLES IX
and X.
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10.15. EXECUTION OF COLLATERAL DOCUMENTS. The Lenders hereby empower and
authorize the Agent to execute and deliver to the Borrower on their behalf
the Pledge Agreement and all related financing statements and any financing
statements, agreements, documents or instruments as shall be necessary or
appropriate to effect the purposes of the Pledge Agreement(s).
10.16. COLLATERAL RELEASES. The Lenders hereby empower and authorize the
Agent to execute and deliver to the Borrower on their behalf any agreements,
documents or instruments as shall be necessary or appropriate to effect any
releases of collateral which shall be permitted by the terms hereof or of any
other Loan Document or which shall otherwise have been approved by the
Required Lenders (or, if required by the terms of SECTION 8.2, all of the
Lenders) in writing. Without limiting the foregoing, the Agent is hereby
authorized and directed by the Lenders to deliver releases of the Liens with
respect to collateral sold in sales permitted by, and made in compliance
with, the terms of SECTION 6.13 or sales which shall otherwise have been
approved by the Required Lenders.
10.17. DOCUMENTATION AGENT. Each of Fleet National Bank and First Union
National Bank is hereby appointed Documentation Agent of the Lenders
hereunder and under each Loan Document. Each of Fleet National Bank and First
Union National Bank shall not have any duties, responsibilities or
liabilities in its capacity as Documentation Agent.
10.18. CO-AGENT. Deutsche Bank AG is hereby appointed Co-Agent of the
Lenders hereunder and under each Loan Document. Deutsche Bank AG shall not
have any duties, responsibilities or liabilities in its capacity as Co-Agent.
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 or any Affiliate of 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 SECTION 3.1, 3.2, 3.4 or 3.5) in a greater proportion than that received
by any other Lender, 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
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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 comprised of
Loans made by such Lender, such amount shall be applied ratably to such other
Indebtedness and to the Indebtedness comprised of such Loans.
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
any Note 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 Person which made any Loan
or which holds any Note as the owner thereof for all purposes hereof unless
and until such Person 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 the rights to
any Loan or any Note agrees by acceptance of such transfer or assignment 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 owner of the rights to any Loan
(whether or not a Note has been issued in evidence thereof), shall be
conclusive and binding on any subsequent holder, transferee or assignee of
the rights to such Loan.
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<PAGE>
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 Lender's interest in any Facility Letter of Credit
Obligation, 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 owner of
its Loans and the holder of any Note issued to it in evidence thereof
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 (e) 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 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, excluding the
Borrower or an Affiliate thereof, ("Purchasers") all or any part of its
rights and obligations under the Loan Documents. Such assignment shall
be substantially in the form of EXHIBIT C or in such other form as may
be agreed to by the parties thereto. The consent of the Borrower and the
Agent shall be required prior to an assignment becoming effective with
respect to a Purchaser which is not a Lender or an Affiliate thereof;
PROVIDED, HOWEVER, that if a Default has occurred and is continuing, the
consent of the Borrower shall not be required. Such consent shall not be
unreasonably withheld or delayed. Each such assignment shall (unless it
is to a Lender or an Affiliate
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thereof or each of the Borrower and the Agent otherwise consents) be in
an amount not less than the lesser of (a) $5,000,000 or (b) the
remaining amount of the assigning Lender's Commitment (calculated as at
the date of such assignment).
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 (a "Notice of Assignment"), together with any consents
required by SECTION 12.3.1, and (b) payment of a $3,500 fee to the Agent
for processing such assignment, such assignment shall become effective
on the effective date specified in such Notice of Assignment. The Notice
of Assignment shall contain a representation by the Purchaser to the
effect that none of the consideration used to make the purchase of the
Commitment and Loans under the applicable assignment agreement are "plan
assets" as defined under ERISA and that the rights and interests of the
Purchaser in and under the Loan Documents will not be "plan assets"
under ERISA. On and after the effective date of such assignment, such
Purchaser shall for all purposes be a Lender party to this Agreement and
any other Loan Document executed by or on behalf of 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 no further consent or action by the Borrower, the Lenders or the
Agent shall be required to release the transferor Lender with respect to
the percentage of the Aggregate Commitment and Loans assigned to such
Purchaser. 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, if the transferor Lender or the Purchaser desires
that its Loans be evidenced by Notes, make appropriate arrangements so
that new Notes or, as appropriate, 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 respective Commitments, as adjusted pursuant to such
assignment.
12.4. DISSEMINATION OF INFORMATION. The Borrower 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 and all information in such Lender's
possession concerning the creditworthiness of the Borrower and its
Subsidiaries, including without limitation any information contained in any
Reports; PROVIDED that each Transferee and prospective Transferee agrees to
be bound by SECTION 9.12 of this Agreement.
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 3.5(d).
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<PAGE>
ARTICLE XIII
NOTICES
13.1. NOTICES. Except as otherwise permitted by SECTION 2.14 with
respect to borrowing notices, all notices, requests and other communications
to any party hereunder shall be in writing (including electronic
transmission, facsimile transmission or similar writing) and shall be given
to such party: (a) in the case of the Borrower or the Agent, at its address
or facsimile number set forth on the signature pages hereof, (b) in the case
of any Lender, at its address or facsimile number set forth below its
signature hereto or (c) in the case of any party, at such other address or
facsimile number as such party may hereafter specify for the purpose by
notice to the Agent and the Borrower in accordance with the provisions of
this SECTION 13.1. Each such notice, request or other communication shall be
effective (i) if given by facsimile transmission, when transmitted to the
facsimile number specified in this Section and confirmation of receipt is
received, (ii) if given by mail, three (3) Business Days after such
communication is deposited in the mails with first class postage prepaid,
addressed as aforesaid, or (iii) if given by any other means, when delivered
(or, in the case of electronic transmission, received) at the address
specified in this Section; PROVIDED that notices to the Agent under ARTICLE
II shall not be effective until received.
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
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 by facsimile
transmission or telephone that it has taken such action.
ARTICLE XV
CHOICE OF LAW; CONSENT TO JURISDICTION; WAIVER OF JURY TRIAL
15.1. 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 (INCLUDING, WITHOUT LIMITATION, 735 ILCS SECTION
105/5-1 ET SEQ, BUT OTHERWISE WITHOUT REGARD TO THE CONFLICT OF LAWS
PROVISIONS) OF THE STATE OF
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ILLINOIS, BUT GIVING EFFECT TO FEDERAL LAWS APPLICABLE TO NATIONAL BANKS.
15.2. 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, ILLINOIS 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.
15.3. 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 LOAN DOCUMENT OR
THE RELATIONSHIP ESTABLISHED THEREUNDER.
[Signature pages follow]
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<PAGE>
IN WITNESS WHEREOF, the Borrower, the Lenders and the Agent have
executed this Agreement as of the date first above written.
FOLKSAMERICA HOLDING COMPANY, INC.
By:
------------------------------------
Name:
----------------------------------
Title:
---------------------------------
One Liberty Plaza
New York, New York 10006
Attention: Michael E. Tyburski
Executive Vice President &
Chief Financial Officer
Telephone: (212) 312-2503
FAX: (212) 346-0762
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<PAGE>
PRICING SCHEDULE
- ------------------------------------------------------------------------------
EURODOLLAR RATE APPLICABLE MARGIN*
(AS A PER ANNUM RATE)
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
LEVERAGE RATIO BEST'S RATING** KHI "A" BEST'S RATING LESS THAN "A"
- -------------- ----------------------- ---------------------------
<S> <C> <C>
KHI 0.275 to 1.0 1.25% 1.50%
KHI 0.20 to 1.0 but LESS THAN 0.275 to 1.0 1.00% 1.25%
KHI 0.15 to 1.0 but LESS THAN 0.20 to 1.0 0.75% 1.00%
LESS THAN 0.15 to 1.0 0.625% 0.75%
</TABLE>
* Beginning on the fourth anniversary of the Closing Date, and continuing
through the Maturity Date, the Applicable Margins shown in the table
above will increase by 0.50%.
** Means the rating of Folksamerica Reinsurance Company provided by A.M.
Best & Co.
- ------------------------------------------------------------------------------
COMMITMENT FEE
(AS A PER ANNUM RATE)
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
LEVERAGE RATIO APPLICABLE FEE RATE
-------------- -------------------
<S> <C>
KHI 0.20 to 1.0 0.25%
KHI 0.15 to 1.0 but LESS THAN 0.20 to 1.0 0.225%
LESS THAN 0.15 to 1.0 0.20%
</TABLE>
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<PAGE>
DIVIDEND SCHEDULE
I. APPLIES AT ALL TIMES PRIOR TO TERMINATION OR EXPIRATION OF THE FUND CREDIT
AGREEMENT:
<TABLE>
<S> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------------
No "default" has occurred and is continuing A "default" has occurred and is continuing
under the Fund Credit Agreement AND Fund under the Fund Credit Agreement OR Fund
owns directly or indirectly at least 80% of owns directly or indirectly less than 80% of
the fully-diluted common equity of the the fully-diluted common equity of the
Borrower. Borrower.
- -----------------------------------------------------------------------------------------------------------------------------------
Dividends, Repurchases or The Borrower will be permitted in any The Borrower will be permitted in any
other Capital Distributions Fiscal Year to pay dividends, repurchase Fiscal Year to pay dividends, repurchase
stock or make other capital distributions stock or make other capital distributions
(excluding the FAE Amount) in an aggregate (excluding the FAE Amount) in an aggregate
amount equal to the lesser of: amount equal to the lesser of:
(a) $8,000,000; (a) $2,000,000;
(b) Combined Statutory Net Income for all (b) Combined Statutory Net Income for all
First-Tier Significant Insurance Subsidiaries First-Tier Significant Insurance Subsidiaries
for the most recently completed Fiscal Year; for the most recently completed Fiscal Year;
and and
(c) an amount equal to the excess of (i) the (c) an amount equal to the excess of (i) the
sum of (x) Cash Flow (determined as of sum of (x) Cash Flow (determined as of
December 31 of the preceding Fiscal Year) December 31 of the preceding Fiscal Year)
PLUS (y) cash and cash equivalents of the PLUS (y) cash and cash equivalents of the
Borrower (determined as of December 31 of the Borrower (determined as of December 31 of the
preceding Fiscal Year), MINUS (ii) Fixed preceding Fiscal Year), MINUS (ii) Fixed
Charges (determined as of December 31 of the Charges (determined as of December 31 of the
preceding Fiscal Year) multiplied by 125%. preceding Fiscal Year) multiplied by 125%.
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
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<PAGE>
II. APPLIES AT ALL OTHER TIMES:
<TABLE>
<S> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------------
Fund is in compliance with each of the Fund is not in compliance with each of the
Guarantor Ratios AND Fund owns directly Guarantor Ratios OR Fund owns directly
or indirectly at least 80%of the fully- or indirectly less than 80%of the fully-
diluted common equity of the Borrower. diluted common equity of the Borrower.
- -----------------------------------------------------------------------------------------------------------------------------------
Dividends, Repurchases or The Borrower will be permitted in any The Borrower will be permitted in any
other Capital Distributions Fiscal Year to pay dividends, repurchase Fiscal Year to pay dividends, repurchase
stock or make other capital distributions stock or make other capital distributions
(excluding the FAE Amount) in an aggregate (excluding the FAE Amount) in an aggregate
amount equal to the lesser of: amount equal to the lesser of:
(a) $8,000,000; (a) $2,000,000;
(b) Combined Statutory Net Income for all (b) Combined Statutory Net Income for all
First-Tier Significant Insurance Subsidiaries First-Tier Significant Insurance Subsidiaries
for the most recently completed Fiscal Year; for the most recently completed Fiscal Year;
and and
(c) an amount equal to the excess of (i) the (c) an amount equal to the excess of (i) the
sum of (x) Cash Flow (determined as of sum of (x) Cash Flow (determined as of
December 31 of the preceding Fiscal Year) December 31 of the preceding Fiscal Year)
PLUS (y) cash and cash equivalents of the PLUS (y) cash and cash equivalents of the
Borrower (determined as of December 31 of Borrower (determined as of December 31 of
the preceding Fiscal Year), MINUS (ii) Fixed the preceding Fiscal Year), MINUS (ii) Fixed
Charges (determined as of December 31 of the Charges (determined as of December 31 of the
preceding Fiscal Year) multiplied by 125%. preceding Fiscal Year) multiplied by 125%.
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
For the purposes of this Dividend Schedule, the following terms have the
following meanings:
"FAE Amount" means a certain dividend, stock repurchase or other capital
distribution by the Borrower in an aggregate amount not in excess of
$30,000,000 to FAE on February 24, 1999, the total amount of which is used to
repay all indebtedness, liabilities and obligations under and to terminate
the White Mountains Credit Agreement.
"Guarantor Ratios" shall mean:
GUARANTOR MINIMUM NET WORTH The Guarantor shall at all times maintain a
minimum Net Worth at least equal to (a) the sum of (i) $514,530,000,
PLUS (ii) an amount equal to 90% of the cash and non-cash proceeds of
any equity securities issued by Fund after September 30, 1998, MINUS (b)
an amount equal to the lesser of (i) $30,000,000 or (ii) the
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aggregate amount expended by Fund after September 30, 1998 to repurchase
its capital stock in compliance with the Fund Credit Agreement.
GUARANTOR MAXIMUM LEVERAGE RATIO Fund shall at all times maintain a
Leverage Ratio of not greater than 35%.
"Statutory Net Income" means, with respect to any First-Tier Significant
Insurance Subsidiary for any computation period, the net income earned by
such First-Tier Significant Insurance Subsidiary during such period, as
determined in accordance with SAP.
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<PAGE>
EXHIBIT 10(f)
AMENDMENT NO. 1 TO CREDIT AGREEMENT, CONSENT AND WAIVER
This Amendment, Consent and Waiver (this "Amendment") is entered into as
of June 29, 1999 by and among Folksamerica Holding Company, Inc., a New York
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
$100,000,000 Credit Agreement dated as of February 24, 1999 (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, provide certain consents thereunder and waive certain
provisions thereof 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 Effective Date (as
defined below), the Credit Agreement shall be amended as follows:
(a) ARTICLE I is amended by deleting the definitions of
"Aggregate Available Commitment", "Fund" and "Unfunded Liabilities" and
replacing each in its entirety to read as follows:
"`Aggregate Available Commitment' means, at any time, (a) the
Aggregate Commitment at such time LESS (b) the outstanding Facility
Letter of Credit Obligations at such time LESS (c) the outstanding
Allowable Fund Indebtedness at such time."
"`Fund' means White Mountains Insurance Group, Inc., a
Delaware corporation, formerly known as Fund American Enterprises
Holdings, Inc."
"`Unfunded Liabilities' means the amount (if any) by which the
present value of all vested and unvested accrued benefits under all
Single Employer Plans exceeds the fair market value of all such
Plan assets allocable to such benefits, all determined as of the
then most recent valuation date for such Plans and valued on a
basis consistent with that used to prepare the Borrower's annual
audited financial statements."
(b) ARTICLE I is amended by deleting the proviso at the end of
the definition of "Allowable Seller Paper" and replacing such proviso in
its entirety to read as follows:
<PAGE>
"PROVIDED, that (i) to the extent such Indebtedness has been
Defeased or (ii) during such time when there are no outstanding
Advances and no Facility Letter of Credit Obligations, the
condition set forth in CLAUSE (c) above shall not be applicable."
(c) ARTICLE I is amended by adding the following definition
for "Allowable Fund Indebtedness" in its proper alphabetical order:
"`Allowable Fund Indebtedness' means Subordinated Indebtedness
of the Borrower issued to Fund, in an aggregate principal amount
not to exceed $85,000,000, the proceeds of which are used to either
(a) finance a mandatory prepayment of Advances pursuant to SECTION
2.2(c) or (b) so long as there are no outstanding Advances, finance
the general corporate needs of the Borrower; PROVIDED, in either
case such Indebtedness is issued on terms and conditions
satisfactory to the Required Lenders, including (i) terms of
subordination, (ii) default provisions, (iii) limitation on
amortization of principal and payment of fees and cash interest,
(iv) interest rates and (v) covenants."
(d) SECTION 2.2(c) is amended by adding the following at the
end of the first parenthetical phrase of such section:
", excluding SECTION 6.11(i)"
(e) SECTION 2.5.3(b) is amended by adding the following
proviso at the end of such section:
"PROVIDED, that issuance of Allowable Fund Indebtedness subject to
the prepayment provisions of SECTION 2.2(c) shall not require that
the Aggregate Commitment be reduced to the extent that Allowable
Fund Indebtedness is repaid on or prior to June 30, 2000."
(f) SECTION 5.10 is amended by deleting the first sentence in
such section and replacing it in its entirety to read as follows:
"Except as disclosed on SCHEDULE 5.10 or as otherwise disclosed by
the Borrower in writing to the Lenders, 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."
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<PAGE>
(g) SECTION 6.11 is amended (i) by removing the word "and" at
the end of SECTION 6.11(h), (ii) by moving the existing SECTION 6.11(i)
to a new SECTION 6.11(j) and (iii) by replacing SECTION 6.11(i) in its
entirety with the following:
"(i) Allowable Fund Indebtedness to the extent that it
complies with the mandatory prepayment provisions of SECTION
2.2(c) and the reductions in the Aggregate Commitment provisions
of SECTION 2.5.3(b); and"
(h) SECTION 6.16(g) is amended in its entirety to read as
follows:
"(g) Liens on (1) the Account in connection with Defeasing
Allowable Seller Paper or (2) escrow accounts in connection with
Allowable Seller Paper;"
(i) SECTION 6.23(b) is amended by deleting the second
reference contained therein to the dollar amount of "$500,000" and
replacing it with a reference to the dollar amount of "$1,000,000".
(j) SECTION 7.18 is amended by deleting the reference
contained therein to the dollar amount of "$500,000" and replacing it
with a reference to the dollar amount of "$1,000,000".
(k) SCHEDULE 5.10 is amended in its entirety and replaced with
SCHEDULE 5.10 attached hereto.
2. CONSENT AND WAIVER UNDER THE CREDIT AGREEMENT. Upon the Effective
Date the Agent and the other Lenders signatory hereto hereby:
(a) consent to and approve the terms and conditions of the
Subordinated Promissory Note, in substantially the form of EXHIBIT A
hereto, to be issued by the Borrower to The Centris Group, Inc.(the
"Centris Note") in an aggregate principal amount of $20,750,000 and deem
such Indebtedness to be Allowable Seller Paper to the extent such
Indebtedness complies with the requirements described in the proviso to
the definition of "Allowable Seller Paper" in the Credit Agreement;
(b) consent to and approve the terms and conditions of the
Subordinated Promissory Note, in substantially the form of EXHIBIT B
hereto, to be issued by the Borrower to Fund (the "Fund Note") in the
aggregate principal amount of $85,000,000 and deem such note to be
Allowable Fund Indebtedness;
(c) waive any breach of Section 6.23(b) of the Credit Agreement
to and including the Effective Date arising solely out of the Unfunded
Liabilities of the Folksamerica Holding Company Employees Retirement
Plan exceeding $500,000 as disclosed on Schedule 5.10 attached to the
Credit Agreement (the "Excess Unfunded Liability"); and
(d) waive any Default or Unmatured Default under Section 7.3 or
7.18 of the Credit Agreement which has heretofore arisen as a result of
the Excess Unfunded Liability; PROVIDED, that such waiver shall only be
valid through the Effective Date.
-3-
<PAGE>
3. REPRESENTATIONS AND WARRANTIES OF THE BORROWER. The Borrower
represents and warrants that:
(a) The execution, delivery and performance by the Borrower of
this Amendment have 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 the enforcement of 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.
4. EFFECTIVE DATE. This Amendment shall become effective upon 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); provided that SECTIONS 1 and 2 hereof shall not become
effective until the date (the "Effective Date") when the following additional
conditions have also been satisfied:
(a) delivery of copies, certified by the Secretary or Assistant
Secretary of the Borrower, of the fully executed Centris Note and Fund
Note, each in substantially the form of EXHIBIT A and B, respectively;
(b) a certificate, executed by the Secretary or Assistant
Secretary of the Borrower, certifying (i) an attached copy of the
Borrower's Board of Directors' resolutions authorizing its execution,
delivery and performance under the Centris Note, the Fund Note and this
Amendment and (ii) that there has been no amendments, supplements or
modifications to any of the Articles of Incorporation, Bylaws or
certificate of incumbency of the Borrower delivered to the Agent on
February 24, 1999;
(c) the execution and delivery of the Reaffirmation of Guaranty
in the form of EXHIBIT C hereto;
(d) a certificate, executed by the Secretary or Assistant
Secretary of Fund, certifying (i) an attached copy of Fund's Board of
Directors' resolutions authorizing and directing any changes to Articles
of Incorporation to effect a change in its corporate name and (ii) that
there have been no amendments, supplements or modifications to any of
the Articles of Incorporation, Bylaws or certificate of incumbency of
Fund delivered to the Agent on February 24, 1999, or attached copies of
such amendments, supplements or modifications; and
(e) such other documents as the Agent, any Lender or their
counsel may have reasonably requested.
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<PAGE>
In the event the Effective Date has not occurred on or before July 15,
1999, SECTIONS 1 and 2 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, 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
Administrative 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. GOVERNING LAW. THIS AMENDMENT SHALL BE CONSTRUED IN ACCORDANCE
WITH THE INTERNAL LAWS (AND NOT THE LAW OF CONFLICTS) 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 govern the interpretation of
any of the provisions of this Amendment.
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 pages follow]
-5-
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Amendment as of the
date and year first above written.
FOLKSAMERICA HOLDING COMPANY, INC.
By:
-----------------------------------
Name:
---------------------------------
Title:
--------------------------------
One Liberty Plaza
New York, NY 10006
Attention: Michael E. Tyburski
Telephone: (212) 312-2503
Telecopier: (212) 346-0762
-6-
<PAGE>
EXHIBIT C
REAFFIRMATION OF GUARANTY
The undersigned acknowledges receipt of a copy of Amendment No. 1 to
Credit Agreement, Consent and Waiver (the "Amendment") dated as of June __,
1999, consents to such amendment and hereby reaffirms its obligations under
the Guaranty dated as of February 24, 1999 in favor of The First National
Bank of Chicago, as Agent, for the Lenders (as defined in the Amendment).
Dated as of June , 1999
--
WHITE MOUNTAINS INSURANCE GROUP, INC.
(FORMERLY KNOWN AS FUND AMERICAN
ENTERPRISES HOLDINGS, INC.)
By:
----------------------------------
Name:
--------------------------------
Title:
-------------------------------
-7-
<PAGE>
EXHIBIT 10(g)
AMENDMENT NO. 2 TO CREDIT AGREEMENT
This AMENDMENT NO. 2 TO CREDIT AGREEMENT (this "Amendment") is entered
into as of October 29, 1999 by and among Folksamerica Holding Company, Inc.,
a New York corporation (the "Borrower"), Bank One, NA (f/k/a The First
National Bank of Chicago), individually and as agent ("Agent"), and the other
financial institutions signatory hereto (the "Lenders").
R E C I T A L S
A. The Borrower, the Agent, the Lenders and ABN AMRO Bank, NA are party
to that certain $100,000,000 Credit Agreement dated as of February 24, 1999
(as amended, 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 Effective Date (as
defined below), the Credit Agreement shall be amended as follows:
(a) ARTICLE I is amended as follows:
(i) by deleting the definitions of "Aggregate Commitment",
"Commitment", "Corporate Base Rate", "Documentation Agent", "Eurodollar
Base Rate", "Facility Termination Date", "Floating Rate" and "Lenders"
and replacing each in its entirety to read as follows:
"`Aggregate Commitment' means the aggregate of the Commitments
of all the Lenders, as reduced from time to time pursuant to the
terms hereof. The Aggregate Commitment as of October 29, 1999 is
$120,000,000."
"`Commitment' means, for each Lender, the obligation of such
Lender to make Loans and participate in Facility Letters of Credit
not exceeding the amount set forth opposite its name on the
Commitment Schedule or 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."
<PAGE>
"`Corporate Base Rate' means a rate per annum equal to the
corporate base rate or prime rate of interest announced by Bank One
or by its parent, Bank One Corporation, from time to time, changing
when and as said corporate base rate or prime 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. Bank One may make commercial loans or other loans at
rates of interest at, above or below the Corporate Base Rate."
"`Documentation Agent' means First Union National Bank, in its
capacity as Documentation Agent for the Lenders pursuant to ARTICLE
X, and not in its capacity as Lender."
"`Eurodollar Base Rate' means, with respect to a Eurodollar
Advance for the relevant Interest Period, the applicable British
Bankers' Association Interest Settlement Rate for deposits in U.S.
dollars appearing on Reuters Screen FRBD as of 11:00 a.m. (London
time) two Business Days prior to the first day of such Interest
Period, and having a maturity equal to such Interest Period,
PROVIDED that, (i) if Reuters Screen FRBD is not available to the
Agent for any reason, the applicable Eurodollar Base Rate for the
relevant Interest Period shall instead be the applicable British
Bankers' Association Interest Settlement Rate for deposits in U.S.
dollars as reported by any other generally recognized financial
information service as of 11:00 a.m. (London time) two Business
Days prior to the first day of such Interest Period, and having a
maturity equal to such Interest Period, and (ii) if no such British
Bankers' Association Interest Settlement Rate is available to the
Agent, the applicable Eurodollar Base Rate for the relevant
Interest Period shall instead be the rate determined by the Agent
to be the rate at which Bank One or one of its Affiliate banks
offers to place deposits in U.S. dollars with first-class banks in
the London interbank market at approximately 11:00 a.m. (London
time) two Business Days prior to the first day of such Interest
Period, in the approximate amount of Bank One's relevant Loan and
having a maturity equal to such Interest Period."
"`Facility Termination Date' means February 24, 2005 or any
earlier date on which the Aggregate Commitment is reduced to zero
or otherwise terminated pursuant to the terms hereof."
"`Floating 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; PROVIDED, that `Floating Rate' means, for
any day for the period from November 15, 1999 to January 15, 2000,
a rate of interest per annum equal to the highest of (i) the
Corporate Base Rate for such day, (ii) the sum of the Federal Funds
Effective Rate for such day plus 1/2% per annum and (iii) the sum
of the then current Federal Reserve Board Open Market Committee's
`Target Fed Funds Rate' for such day plus 1 1/2% per annum plus the
Applicable Eurodollar Margin, in each case changing when and as the
Corporate Base Rate, the Federal Funds Effective Rate or the Target
Fed Funds Rate, as the case may be, changes."
-2-
<PAGE>
"`Lenders' means the lending institutions listed on the
signature pages of Amendment No. 2 to Credit Agreement, dated as of
October 29, 1999, and their respective successors and assigns."
(ii) by deleting the definition of "First Chicago" and
replacing it in its entirety with the following definition of "Bank One"
in its proper alphabetical order:
"`Bank One' means Bank One, NA, a national banking association
having its principal office in Chicago, Illinois, in its individual
capacity, and its successors."
(iii) by deleting the definition of "Fund" and replacing it in
its entirety with the following definition of "WMIG" in its proper
alphabetical order:
"`WMIG' means White Mountains Insurance Group, Inc., a
Delaware corporation formerly known as Fund American Enterprises
Holdings, Inc., and, subject to satisfaction of the applicable
Reorganization Conditions, its successors pursuant to the
Reorganization Transactions."
(iv) by adding the following definitions for "Commitment
Schedule", "Medium Term Notes", "Medium Term Note Indenture",
"Reorganization Conditions", "Reorganization Transactions", "Syndication
Agent", "White Mountains-Arizona", "White Mountains-Bermuda" and "White
Mountains-Delaware" each in its proper alphabetical order:
"`Commitment Schedule' means the Schedule attached hereto
identified as such."
"`Medium Term Notes' means the securities issued by WMIG under
the Medium Term Note Indenture in the original aggregate principal
amount of $150,000,000, of which approximately $100,385,000 remains
outstanding as of October 29, 1999."
"`Medium Term Note Indenture' means that certain indenture
dated as January 1, 1993 between WMIG, as issuer, and Bank One
Trust Company, NA (f/k/a The First National Bank of Chicago), as
trustee, as amended and supplemented from time to time."
"`Reorganization Conditions' means: (a) with respect to the
transaction described in CLAUSE (b) of the definition of
Reorganization Transactions, WMIG shall have furnished to the
Agent, with sufficient copies for the Lenders, the following
documents, all of which shall be in form and substance reasonably
satisfactory to the Lenders and their counsel: (i) the certificate
of merger and all other merger documents, (ii) the articles of
incorporation of the surviving entity, (iii) the bylaws of the
surviving entity, (iv) a certificate of incumbency as to the
authorized officers for the surviving entity, (v) an affirmation by
the surviving entity of its Obligations under the Guaranty as
successor to WMIG, (vi) opinions
-3-
<PAGE>
of counsel as to such matters as the Agent may reasonably request
and (vii) a certificate of compliance by the surviving entity as to
the matters described in SECTIONS 6.12(c)(i) and (iii) of the WMIG
Credit Agreement; and (b) with respect to the transaction described
in CLAUSE (c) of the definition of Reorganization Transactions,
WMIG shall have furnished to the Agent, with sufficient copies for
the Lenders, the following documents, all of which shall be in form
and substance reasonably satisfactory to the Lenders and their
counsel: (i) the memorandum of continuance filed with the Registrar
of Companies in Bermuda and all other redomestication documents,
(ii) the bye-laws of the continuing entity, (iii) a certificate of
incumbency as to the authorized officers for the continuing entity,
(iv) an affirmation by the continuing entity of its Obligations
under the Guaranty as successor to WMIG, (v) opinions of counsel as
to such matters as the Agent may reasonably request and (vi) a
certificate of compliance by the continuing entity as to the
matters described in SECTIONS 6.12(c)(i) and (iii) of the WMIG
Credit Agreement."
"`Reorganization Transactions' means the subsidiary formation,
merger and change of domicile transactions, taken together, by
which (a) White Mountains-Delaware has formed a Wholly-Owned
Subsidiary, White Mountains Insurance Group (Arizona), Inc., (b)
immediately preceding and for the purpose of consummating the
transaction described in CLAUSE (c) below, White Mountains-Delaware
merges with and into White Mountains-Arizona, which will be the
surviving corporation in the merger, with each outstanding share of
common stock of White Mountains-Delaware converted automatically
into one share of common stock of White Mountains-Arizona, (c)
White Mountains-Arizona is redomiciled and continues its existence
as White Mountains-Bermuda upon registration of the memorandum of
continuance by the Registrar of Companies in Bermuda, with each
outstanding share of common stock of White Mountains-Arizona
continuing automatically as one common share of White
Mountains-Bermuda, (d) White Mountains forms a new subsidiary,
White Mountains Properties (Barbados) SRL, a Barbados corporation
(and Wholly-Owned Subsidiary of White Mountains-Delaware), and
contributes all the shares of common stock of White Mountains
Properties, Inc., a Delaware corporation and survivor of a merger
with Fund American Enterprises, Inc., to such new subsidiary, after
which White Mountains Properties (Barbados) SRL will merge White
Mountains Properties, Inc. with and into the Borrower with the
Borrower being the surviving entity and (e) White
Mountains-Delaware forms a new Wholly-Owned Subsidiary, White
Mountains Holdings (Barbados) SRL, a Barbados corporation, and
contributes all the shares of common stock of White Mountains to
such new subsidiary."
"`Syndication Agent' means Fleet National Bank, in its
capacity as Syndication Agent for the Lenders pursuant to ARTICLE
X, and not in its capacity as Lender."
"`White Mountains-Arizona' means White Mountains Insurance
Group (Arizona), Inc., an Arizona corporation."
-4-
<PAGE>
"`White Mountains-Bermuda' means White Mountains Insurance
Group, Ltd., a Bermuda company, following the registration of the
memorandum of continuance by White Mountains-Arizona with the
Registrar of Companies in Bermuda."
"`White Mountains-Delaware' means WMIG prior to the
consummation of the Reorganization Transactions."
(v) by deleting the definition for "Alternate Base Rate".
(b) Each reference therein to "First Chicago" is deemed amended
to be a reference to "Bank One".
(c) Each reference therein to "Alternate Base Rate" is deemed
amended to be a reference to "Floating Rate".
(d) Each reference therein to "Fund" is deemed amended
(including in other defined terms) to be a reference to "WMIG".
(e) SECTION 2.5.3(a) is amended by deleting the table therein
and replacing it in its entirety with the following table:
<TABLE>
<CAPTION>
"DATE ANNUAL REDUCTION
---- ------------------
<S> <C>
February 24, 2000 $ 5,000,000
February 24, 2001 $15,000,000
February 24, 2002 $20,000,000
February 24, 2003 $20,000,000
February 24, 2004 $25,000,000
February 24, 2005 $35,000,000"
</TABLE>
(f) ARTICLE IV is amended by adding the following Section 4.3:
"4.3. ADVANCES FOLLOWING REORGANIZATION TRANSACTIONS. The
Lenders shall not be required to make any Advance and the Issuer
shall not be obligated to issue any future Facility Letter of
Credit after the consummation of any of the Reorganization
Transactions unless on the applicable Borrowing Date the applicable
Reorganization Conditions have been satisfied."
(g) SECTION 6.4(a) is amended by adding the following at the
end of the parenthetical phrase contained such section:
"and any Wholly-Owned Subsidiary may discontinue its business
pursuant to a merger permitted pursuant to SECTION 6.12 (or by a
liquidation into another entity if a merger into such entity would
be permitted by SECTION 6.12)"
(h) SECTION 6.4(c) is amended by adding the following
parenthetical phrase after the word "incorporation" on the second line
of such section:
-5-
<PAGE>
"(except any Wholly-Owned Subsidiary may discontinue its
business pursuant to a merger permitted pursuant to SECTION 6.12
(or by a liquidation into another entity if a merger into such
entity would be permitted by SECTION 6.12))"
(i) SECTION 6.8 is amended by adding the following at the end
of the parenthetical phrase contained in such section:
"and any Wholly-Owned Subsidiary may discontinue its business
pursuant to a transaction permitted pursuant to SECTION 6.12(or by
a liquidation into another entity if a merger into such entity
would be permitted by SECTION 6.12)"
(j) SECTION 6.11(j) is amended by deleting the reference
contained therein to the dollar amount of "$10,000,000" and replacing it
with a reference to the dollar amount of "$15,000,000".
(k) SECTION 6.12(c) is amended by adding the following to the
parenthetical phrase after the words "Borrower's Subsidiaries" and
before the comma:
"or pursuant to the Reorganization Transactions"
(l) SECTION 6.14(a)(v) is amended by inserting on the first
line after the word "entities" contained therein, the parenthetical
phrase reading as follows:
"(including the creation of Wholly-Owned Subsidiaries)"
(m) SECTION 6.21.1 is amended by adding the following clause
"(d)" at the end of such section:
", MINUS (d) an amount equal to 90% of the Special Dividend
(as defined in the Dividend Schedule)."
(n) Section 6.21.2 is amended in its entirety and replaced with
the following:
"6.21.2 MAXIMUM LEVERAGE RATIO. The Borrower shall at all
times maintain a Leverage Ratio of (a) not greater than 37.5%
through and including March 31, 2000 (b) not greater than 35% from
April 1, 2000 through and including December 31, 2000, (c) not
greater than 30% from January 1, 2001 through and including
December 31, 2001, (d) not greater than 25% from January 1, 2002
through and including December 31, 2002, and (e) not greater than
20% at all times thereafter."
(o) SECTION 6.21.4 is amended by adding the following clause
"(c)" at the end of such section:
", MINUS (c) $13,500,000."
-6-
<PAGE>
(p) SECTION 6.22(a) is amended in its entirety and replaced
with the following:
"(a) file or consent to the filing of any consolidated,
combined or unitary income tax return with any Person other than
WMIG or the Borrower and its Wholly-Owned Subsidiaries or"
(q) SECTION 7.5 is amended by adding the following proviso at
the end of such section:
"PROVIDED, HOWEVER, that in each case if any of the above
described events arises with respect to WMIG and with respect to
the Medium Term Notes or the Medium Term Notes Indenture and arises
solely out of WMIG's consummation of the Reorganization
Transactions, a Default shall not occur unless WMIG shall fail
within ninety (90) days to pay in full any such Funded Indebtedness
which has been declared to be due and payable or required to be
prepaid (other than by a regularly scheduled payment) prior to the
stated maturity thereof."
(r) SECTION 10.17 is amended in its entirety and replaced with
the following:
"10.17 SYNDICATION AGENT AND DOCUMENTATION AGENT.
(a) Fleet National Bank is hereby appointed Syndication Agent
of the Lenders hereunder and under each Loan Document. Fleet
National Bank shall not have any duties, responsibilities or
liabilities in its capacity as Syndication Agent.
(b) First Union National Bank is hereby appointed
Documentation Agent of the Lenders hereunder and under each Loan
Document. First Union National Bank shall not have any duties,
responsibilities or liabilities in its capacity as Documentation
Agent."
(s) The DIVIDEND SCHEDULE is amended in its entirety and
replaced with the DIVIDEND SCHEDULE attached hereto.
(t) The PRICING SCHEDULE is amended in its entirety and
replaced with the PRICING SCHEDULE attached hereto.
(u) EXHIBIT C is amended in its entirety and replaced with
EXHIBIT C attached hereto.
(v) The Credit Agreement is amended by adding the COMMITMENT
SCHEDULE attached hereto.
2. REPRESENTATIONS AND WARRANTIES OF THE BORROWER. The Borrower
represents and warrants that:
-7-
<PAGE>
(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 the
execution and delivery hereof by the Borrower, the Agent and each of Lenders;
provided that SECTION 1 hereof shall not become effective until the date (the
"Effective Date") when the following additional conditions have also been
satisfied:
(a) a certificate, executed by the Secretary or Assistant
Secretary of the Borrower, certifying (i) an attached copy of the
Borrower's Board of Directors' resolutions authorizing its execution,
delivery and performance under this Amendment and (ii) that there have
been no amendments, supplements or modifications to any of the Articles
of Incorporation, Bylaws or certificate of incumbency of the Borrower
delivered to the Agent on February 24, 1999;
(b) the execution and delivery of the Reaffirmation of Guaranty
in the form of EXHIBIT A hereto;
(c) a certificate, executed by the Secretary or Assistant
Secretary of WMIG, certifying that there have been no amendments,
supplements or modifications to any of the Articles of Incorporation,
Bylaws or certificate of incumbency of Fund delivered to the Agent on
February 24, 1999, or attached copies of such amendments, supplements or
modifications;
(d) Notes payable to the order of each of the Lenders in the
amount of their respective increased Commitment duly executed by the
Borrower;
(e) payment of all fees by the Borrower due to the Agent and
the Lenders;
(f) ABN AMRO Bank, NA shall have consented to this Amendment
and the reduction to $0 of its commitment under the Credit Agreement,
such consent to be in form and substance satisfactory to the Agent; and
(g) such other documents as the Agent or its counsel may have
reasonably requested.
-8-
<PAGE>
In the event the Effective Date has not occurred on or before November
15, 1999, 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 (INCLUDING, WITHOUT LIMITATION, 735 ILCS SECTION
105/5-1 ET SEQ, BUT OTHERWISE WITHOUT REGARD TO THE 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 pages to follow]
-9-
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Amendment as of
the date and year first above written.
FOLKSAMERICA HOLDING COMPANY, INC.
By:
------------------------------------
Name:
----------------------------------
Title:
---------------------------------
One Liberty Plaza
New York, NY 10006
Attention: Michael E. Tyburski
Telephone: (212) 312-2503
Telecopier: (212) 346-0762
-10-
<PAGE>
BANK ONE, NA,
Individually and as Agent
By:
------------------------------------
Print Name:
----------------------------
Title:
---------------------------------
Address: One Bank One Plaza
Chicago, IL 60670
Attn: Samuel W. Bridges
First Vice President
Fax No.: (212) 373-1393
Tel. No.: (212) 373-1142
-11-
<PAGE>
FLEET NATIONAL BANK
By:
------------------------------------
Print Name:
----------------------------
Title:
---------------------------------
Address: One Federal Street-MAOFD06H
Boston, MA 02110-2010
Attn: David A. Bosselait
Vice President
Fax No.: (617) 346-5825
Tel. No.: (617) 346-5823
-12-
<PAGE>
FIRST UNION NATIONAL BANK
By:
------------------------------------
Print Name:
----------------------------
Title:
---------------------------------
Address: 1339 Chestnut Street, PA4819
Philadelphia, PA 19101-4819
Attn: Joseph DiFrancesco
Fax No.: 215-786-4114
Tel. No.: 215-973-2944
-13-
<PAGE>
DEUTSCHE BANK AG,
New York and/or Cayman Islands Branch
By:
------------------------------------
Print Name:
----------------------------
Title:
---------------------------------
By:
------------------------------------
Print Name:
----------------------------
Title:
---------------------------------
Address: 31 West 52nd Street
New York, NY 10019
Attn: George Korchowsky
Fax No.: 212-469-8366
Tel. No.: 212-469-8242
-14-
<PAGE>
DRESDNER BANK AG, New York and
Grand Cayman Branches
By:
------------------------------------
Print Name:
----------------------------
Title:
---------------------------------
By:
------------------------------------
Print Name:
----------------------------
Title:
---------------------------------
Address: 75 Wall Street, 34th Floor
New York, NY 10005
Attn: George Ferguson
Fax No.: 212-429-2524
Tel. No.: 212-429-3189
-15-
<PAGE>
EXHIBIT A
REAFFIRMATION OF GUARANTY
The undersigned acknowledges receipt of a copy of Amendment No. 2 to
Credit Agreement (the "Amendment") dated as of October 29, 1999, consents to
such amendment and hereby reaffirms its obligations under the Guaranty dated
as of February 24, 1999 in favor of Bank One, NA (f/k/a The First National
Bank of Chicago), as Agent, for the Lenders (as defined in the Amendment).
Dated as of , 1999
---------- ---
WHITE MOUNTAINS INSURANCE GROUP, LTD.
By:
------------------------------------
Name:
----------------------------------
Title:
---------------------------------
-16-
<PAGE>
PRICING SCHEDULE
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
EURODOLLAR RATE APPLICABLE MARGIN*
(AS A PER ANNUM RATE)
- --------------------------------------------------------------------------------------------------------------------------------
LEVERAGE RATIO BEST'S RATING** GREATER THAN OR EQUAL TO"A" BEST'S RATING** LESS THAN "A"
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
GREATER THAN OR EQUAL TO 0.275 to 1.0 1.250% 1.50%
- --------------------------------------------------------------------------------------------------------------------------------
GREATER THAN OR EQUAL TO 0.20 to 1.0 but LESS THAN 0.275 to 1.0 1.000% 1.25%
- --------------------------------------------------------------------------------------------------------------------------------
GREATER THAN OR EQUAL TO 0.15 to 1.0 but LESS THAN 0.20 to 1.0 0.750% 1.00%
- --------------------------------------------------------------------------------------------------------------------------------
LESS THAN 0.15 to 1.0 0.625% 0.75%
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Beginning on February 24, 2003, and continuing through the Maturity Date,
the Applicable Margins shown in the table above will increase by 0.50%.
** Means the rating of Folksamerica Reinsurance Company provided by A. M.
Best & Co.
<TABLE>
- -----------------------------------------------------------------------------
COMMITMENT FEE
(AS A PER ANNUM RATE)
- -----------------------------------------------------------------------------
LEVERAGE RATIO APPLICABLE FEE RATE
-------------- -------------------
<S> <C>
GREATER THAN OR EQUAL TO 0.20 to 1.0 0.250%
GREATER THAN OR EQUAL TO 0.15 to 1.0 but LESS THAN 0.20 to 1.0 0.225%
LESS THAN 0.15 to 1.0 0.200%
</TABLE>
-17-
<PAGE>
DIVIDEND SCHEDULE
I. APPLIES AT ALL TIMES PRIOR TO TERMINATION OR EXPIRATION OF THE WMIG CREDIT
AGREEMENT:
<TABLE>
<S> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------------
No "default" has occurred and is continuing A "default" has occurred and is continuing
under the WMIG Credit Agreement AND WMIG owns under the WMIG Credit Agreement OR WMIG owns
directly or indirectly at least 80% of the directly or indirectly less than 80% of the
fully-diluted common equity of the Borrower. fully-diluted common equity of the Borrower
- -----------------------------------------------------------------------------------------------------------------------------------
Dividends, Repurchases or The Borrower will be permitted in any The Borrower will be permitted in any
other Capital Distributions Fiscal Year to pay dividends, repurchase Fiscal Year to pay dividends, repurchase
stock or make other capital distributions stock or make other capital distributions
(excluding the FAE Amount and the Special (excluding the FAE Amount and the Special
Dividend) in an aggregate amount equal to Dividend) in an aggregate amount equal to
the lesser of: the lesser of:
(a) $8,000,000; (a) $2,000,000;
(b) Combined Statutory Net Income for all (b) Combined Statutory Net Income for all
First-Tier Significant Insurance Subsidiaries First-Tier Significant Insurance Subsidiaries
for the most recently completed Fiscal Year; for the most recently completed Fiscal Year;
and and
(c) an amount equal to the excess of (i) the (c) an amount equal to the excess of (i) the
sum of (x) Cash Flow (determined as of sum of (x) Cash Flow (determined as of
December 31 of the preceding Fiscal Year) December 31 of the preceding Fiscal Year)
PLUS (y) cash and cash equivalents of the PLUS (y) cash and cash equivalents of the
Borrower (determined as of December 31 of the Borrower (determined as of December 31 of the
preceding Fiscal Year), MINUS (ii) Fixed preceding Fiscal Year), MINUS (ii) Fixed
Charges (determined as of December 31 of the Charges (determined as of December 31 of the
preceding Fiscal Year) multiplied by 125%. preceding Fiscal Year) multiplied by 125%.
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
-18-
<PAGE>
II. APPLIES AT ALL OTHER TIMES:
<TABLE>
<S> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------------
WMIG is in compliance with each of the WMIG is not in compliance with each of the
Guarantor Ratios AND WMIG owns directly Guarantor Ratios OR WMIG owns directly
or indirectly at least 80% of the fully- or indirectly less than 80% of the fully-
diluted common equity of the Borrower. diluted common equity of the Borrower.
- -----------------------------------------------------------------------------------------------------------------------------------
Dividends, Repurchases or The Borrower will be permitted in any The Borrower will be permitted in any
other Capital Distributions Fiscal Year to pay dividends, repurchase Fiscal Year to pay dividends, repurchase
stock or make other capital distributions stock or make other capital distributions
(excluding the FAE Amount and the Special (excluding the FAE Amount and the Special
Dividend) in an aggregate amount equal to Dividend) in an aggregate amount equal to
the lesser of: the lesser of:
(a) $8,000,000; (a) $2,000,000;
(b) Combined Statutory Net Income for all (b) Combined Statutory Net Income for all
First-Tier Significant Insurance Subsidiaries First-Tier Significant Insurance Subsidiaries
for the most recently completed Fiscal Year; for the most recently completed Fiscal Year;
and (c) an amount equal to the excess of (i) and (c) an amount equal to the excess of (i)
the sum of (x) Cash Flow (determined as of the sum of (x) Cash Flow (determined as of
December 31 of the preceding Fiscal Year) December 31 of the preceding Fiscal Year)
PLUS (y) cash and cash equivalents of the PLUS (y) cash and cash equivalents of the
Borrower (determined as of December 31 of Borrower (determined as of December 31 of
the preceding Fiscal Year), MINUS (ii) Fixed the preceding Fiscal Year), MINUS (ii) Fixed
Charges (determined as of December 31 of the Charges (determined as of December 31 of the
preceding Fiscal Year) multiplied by 125% preceding Fiscal Year) multiplied by 125%
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
For the purposes of this Dividend Schedule, the following terms have the
following meanings:
"FAE Amount" means a certain dividend, stock repurchase or other capital
distribution by the Borrower in an aggregate amount not in excess of
$30,000,000 to Fund American Enterprises, Inc., a Delaware corporation, on
February 24, 1999, the total amount of which is used to repay all
indebtedness, liabilities and obligations under and to terminate the
$50,000,000 credit agreement of WMH.
"Guarantor Ratios" shall mean:
-19-
<PAGE>
WMIG MINIMUM NET WORTH WMIG shall at all times maintain a minimum Net
Worth at least equal to (a) the sum of (i) $514,530,000, PLUS (ii) an
amount equal to 90% of the cash and non-cash proceeds of any equity
securities issued by WMIG after September 30, 1998, MINUS (b) an amount
equal to the lesser of (i) $30,000,000 or (ii) the aggregate amount
expended by WMIG after September 30, 1998 to repurchase its capital
stock in compliance with the WMIG Credit Agreement.
WMIG MAXIMUM LEVERAGE RATIO WMIG shall at all times maintain a Leverage
Ratio of not greater than 35%.
"Special Dividend" means that certain one-time dividend (payable in two
installments) made prior to December 31, 1999 by the Borrower to White
Mountains Properties, Inc., a Delaware corporation and survivor of a merger
with Fund American Enterprises, Inc., a Delaware corporation, and/or White
Mountains Properties (Barbados) SRL, a Barbados corporation (or their
successors) in an aggregate amount not to exceed $30,000,000.
"Statutory Net Income" means, with respect to any First-Tier Significant
Insurance Subsidiary for any computation period, the net income earned by
such First-Tier Significant Insurance Subsidiary during such period, as
determined in accordance with standard accounting practices.
-20-
<PAGE>
COMMITMENT SCHEDULE
<TABLE>
<CAPTION>
LENDER COMMITMENT AMOUNT
- ------ -----------------
<S> <C>
Bank One, NA $ 30,000,000
Fleet National Bank $ 27,000,000
First Union National Bank $ 24,000,000
Dresdner Bank AG, New York and $ 22,000,000
Grand Cayman Branches
Deutsche Bank AG, New York and/or $ 17,000,000
Cayman Islands Branch ------------
AGGREGATE COMMITMENT $120,000,000
</TABLE>
-21-
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
AS OF DECEMBER 31, 1999
<TABLE>
<CAPTION>
FULL NAME OF SUBSIDIARY PLACE OF INCORPORATION
- ----------------------- ----------------------
<S> <C>
WHITE MOUNTAINS HOLDINGS (BARBADOS) SRL BARBADOS, WEST INDIES
WM FACILITIES, LTD. BERMUDA
BRITISH INSURANCE COMPANY OF CAYMAN CAYMAN ISLANDS
WHITE MOUNTAINS PROPERTIES (BARBADOS) SRL BARBADOS, WEST INDIES
WHITE MOUNTAINS HOLDINGS, INC. DELAWARE, USA
WHITE MOUNTAINS SERVICES CORPORATION DELAWARE, USA
WATERFORD INSURANCE COMPANY KANSAS, USA
PENINSULA INSURANCE COMPANY MARYLAND, USA
PENINSULA INDEMNITY COMPANY MARYLAND, USA
AMERICAN CENTENNIAL HOLDINGS, INC. DELAWARE, USA
AMERICAN CENTENNIAL INSURANCE COMPANY DELAWARE, USA
FOLKSAMERICA HOLDING COMPANY, INC. NEW YORK, USA
FOLKSAMERICA REINSURANCE COMPANY NEW YORK, USA
</TABLE>
<PAGE>
EXHIBIT 23(a)
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby 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), Common Stock
Warrants (Form S-3, No. 33-54749), Folksamerica Holding Company 401(K) Savings
and Investment Plan (Form S-8, No. 333-82563), the Executive Bonus Plan (Form
S-8, No. 333-89381), the Deferred Benefit Plan (Form S-8, No. 333-89383), the
Directors' Retirement Benefit Plan (Form S-8, No. 333- 89385) and the Voluntary
Deferred Compensation Plan (Form S-8, No. 333-89387) of White Mountains
Insurance Group, Ltd. of our report dated February 15, 2000, except for Note 17,
which is as of March 14, 2000, relating to the 1999 financial statements and
financial statement schedules, which appears in this Form 10-K.
/s/ PricewaterhouseCoopers
Hamilton, Bermuda
March 27, 2000
<PAGE>
EXHIBIT 23(b)
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
White Mountains Insurance Group, Ltd.:
We consent to the incorporation by reference in the registration statements,
as amended, No. 33-5297 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. 333-82563
on Form S-8 pertaining to Folksamerica Holding Company 401(k) Savings and
Investment Plan, No. 333-89381 on Form S-8 pertaining to the Executive Bonus
Plan, No. 333-89383 on Form S-8 pertaining to the Deferred Benefit Plan, No.
333-89385 on Form S-8 pertaining to the Directors Retirement Benefit Plan,
No. 333-89387 on Form S-8 pertaining to the Voluntary Deferred Compensation
Plan of our report dated February 12, 1999, with respect to the consolidated
balance sheet of White Mountains Insurance Group, Ltd. and subsidiaries
(formerly "Fund American Enterprises Holdings, Inc.") as of December 31,
1998, and the related consolidated statements of income and comprehensive
income, statements of shareholders' equity, and cash flows for each of the
years in the two-year period ended December 31, 1998, and all related
schedules, in the December 31, 1999 annual report on Form 10-K of White
Mountains Insurance Group, Ltd.
/s/ KPMG LLP
Providence, Rhode Island
March 27, 2000
<PAGE>
EXHIBIT 23(c)
CONSENT OF INDEPENDENT ACCOUNTANTS
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), Common Stock Warrants (Form
S-3, No. 33-54749), Folksamerica Holding Company 401(K) Savings and Investment
Plan (Form S-8, No. 333-82563), the Executive Bonus Plan (Form S-8, No.
333-89381), the Deferred Benefit Plan (Form S-8, No. 333-89383), the Directors'
Retirement Benefit Plan (Form S-8, No. 333-89385) and the Voluntary Deferred
Compensation Plan (Form S-8, No. 333-89387) of White Mountains Insurance Group,
Ltd. of our report dated January 25, 2000, except for Note 22, as to which the
date is March 14, 2000, with respect to the consolidated financial statements of
Financial Security Assurance Holdings, Ltd. and Subsidiaries as of December 31,
1999 and 1998 and for each of the three years in the period ended December 31,
1999 and 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.
/s/ PricewaterhouseCoopers LLP
New York, New York
March 27, 2000
<PAGE>
EXHIBIT 24
WHITE MOUNTAINS INSURANCE GROUP, LTD.
POWER OF ATTORNEY
KNOW ALL MEN by these presents, that Terry L. Baxter 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 22nd
day February 2000.
/s/ Terry L. Baxter
<PAGE>
WHITE MOUNTAINS INSURANCE GROUP, LTD.
POWER OF ATTORNEY
KNOW ALL MEN by these presents, that Patrick M. Byrne does hereby make,
constitute and appoint Raymond Barrette 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 22nd
day February 2000.
/s/ Patrick M. Byrne
<PAGE>
WHITE MOUNTAINS INSURANCE GROUP, LTD.
POWER OF ATTORNEY
KNOW ALL MEN by these presents, that Howard L. Clark Jr. does hereby make,
constitute and appoint Raymond Barrette 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 22nd
day February 2000.
/s/ Howard L. Clark Jr.
<PAGE>
WHITE MOUNTAINS INSURANCE GROUP, LTD.
POWER OF ATTORNEY
KNOW ALL MEN by these presents, that Robert P. Cochran does hereby make,
constitute and appoint Raymond Barrette 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 22nd
day February 2000.
/s/ Robert P. Cochran
<PAGE>
WHITE MOUNTAINS INSURANCE GROUP, LTD.
POWER OF ATTORNEY
KNOW ALL MEN by these presents, that Steven E. Fass does hereby make, constitute
and appoint Raymond Barrette 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 22nd
day February 2000.
/s/ Steven E. Fass
<PAGE>
WHITE MOUNTAINS INSURANCE GROUP, LTD.
POWER OF ATTORNEY
KNOW ALL MEN by these presents, that George J. Gillespie III does hereby make,
constitute and appoint Raymond Barrette 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 22nd
day February 2000.
/s/ George J. Gillespie III
<PAGE>
WHITE MOUNTAINS INSURANCE GROUP, LTD.
POWER OF ATTORNEY
KNOW ALL MEN by these presents, that John D. Gillespie does hereby make,
constitute and appoint Raymond Barrette 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 22nd
day February 2000.
/s/ John D. Gillespie
<PAGE>
WHITE MOUNTAINS INSURANCE GROUP, LTD.
POWER OF ATTORNEY
KNOW ALL MEN by these presents, that K. Thomas Kemp does hereby make, constitute
and appoint Raymond Barrette 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 22nd
day February 2000.
/s/ K. Thomas Kemp
<PAGE>
WHITE MOUNTAINS INSURANCE GROUP, LTD.
POWER OF ATTORNEY
KNOW ALL MEN by these presents, that Gordon S. Macklin does hereby make,
constitute and appoint Raymond Barrette 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 22nd
day February 2000.
/s/ Gordon S. Macklin
<PAGE>
WHITE MOUNTAINS INSURANCE GROUP, LTD.
POWER OF ATTORNEY
KNOW ALL MEN by these presents, that Frank A. Olson does hereby make, constitute
and appoint Raymond Barrette 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 22nd
day February 2000.
/s/ Frank A. Olson
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors
of Financial Security Assurance Holdings Ltd.:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, changes in shareholders' equity, and cash
flows present fairly, in all material respects, the financial position of
Financial Security Assurance Holdings Ltd. and Subsidiaries (the Company) at
December 31, 1999 and 1998, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1999 in
conformity with accounting principles generally accepted in the United States.
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
auditing standards generally accepted in the United States, 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.
/s/ PRICEWATERHOUSECOOPERS LLP
PRICEWATERHOUSECOOPERS LLP
New York, New York
January 25, 2000, except for
Note 22, as to which the date
is March 14, 2000
<PAGE>
[page 26 of Annual Report]
FINANCIAL SECURITY ASSURANCE HOLDINGS LTD.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
December 31, December 31,
ASSETS 1999 1998
- ------ ---- ----
<S> <C> <C>
Bonds at market value (amortized cost of $1,919,677
and $1,655,042) $ 1,852,669 $ 1,708,040
Equity investments at market value (cost of $30,104
and $64,292) 23,606 68,243
Short-term investments 263,747 98,554
----------- -----------
Total investments 2,140,022 1,874,837
Cash 6,284 3,490
Deferred acquisition costs 198,048 199,559
Prepaid reinsurance premiums 285,105 217,096
Reinsurance recoverable on unpaid losses 9,492 6,421
Receivable for securities sold 40,635 1,655
Investment in unconsolidated affiliates 29,709 29,496
Other assets 196,349 119,712
----------- -----------
TOTAL ASSETS $ 2,905,644 $ 2,452,266
=========== ===========
LIABILITIES AND MINORITY INTEREST, REDEEMABLE
PREFERRED STOCK AND SHAREHOLDERS' EQUITY
Deferred premium revenue $ 844,146 $ 721,699
Losses and loss adjustment expenses 87,309 72,007
Deferred federal income taxes 43,341 87,254
Ceded reinsurance balances payable 36,387 31,502
Payable for securities purchased 243,519 105,859
Notes payable 230,000 230,000
Minority interest 32,945 20,388
Accrued expenses and other liabilities 135,313 117,421
----------- -----------
TOTAL LIABILITIES AND MINORITY INTEREST 1,652,960 1,386,130
----------- -----------
COMMITMENTS AND CONTINGENCIES
Redeemable preferred stock (20,000,000 and 3,000,000 shares
authorized; 2,000,000 issued and outstanding; par value
of $.01 per share) 20 20
Additional paid-in capital - preferred 680 680
----------- -----------
REDEEMABLE PREFERRED STOCK 700 700
----------- -----------
Common stock (200,000,000 and 50,000,000 shares authorized;
33,676,301 and 32,276,301 issued; par value of $.01 per
share) 337 323
Additional paid-in capital - common 836,853 733,442
Accumulated other comprehensive income (loss) [net of
deferred income tax provision (benefit)
of $(25,727) and $20,288] (47,779) 37,678
Accumulated earnings 436,417 325,150
Deferred equity compensation 52,670 43,946
Less treasury stock at cost (961,418
and 2,372,839 shares held) (26,514) (75,103)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 1,251,984 1,065,436
----------- -----------
TOTAL LIABILITIES AND MINORITY INTEREST, REDEEMABLE
PREFERRED STOCK AND SHAREHOLDERS' EQUITY $ 2,905,644 $ 2,452,266
=========== ===========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are
an integral part of these statements.
<PAGE>
[page 27 of Annual Report]
FINANCIAL SECURITY ASSURANCE HOLDINGS LTD.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended December 31,
REVENUES: 1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Net premiums written $ 230,435 $ 219,853 $ 172,878
Increase in deferred premium revenue (55,476) (81,926) (63,367)
--------- --------- ---------
Premiums earned 174,959 137,927 109,511
Net investment income 94,723 78,823 72,085
Net realized gains (losses) (13,301) 20,890 11,522
Other income 1,323 474 9,303
--------- --------- ---------
TOTAL REVENUES 257,704 238,114 202,421
--------- --------- ---------
EXPENSES:
Losses and loss adjustment expenses 8,829 3,949 9,156
Interest expense 16,614 10,625 5,325
Policy acquisition costs 39,809 35,439 27,962
Other operating expenses 26,429 30,006 30,430
--------- --------- ---------
TOTAL EXPENSES 91,681 80,019 72,873
--------- --------- ---------
Minority interest and equity in earnings of unconsolidated
affiliates (2,045) (844) --
--------- --------- ---------
INCOME BEFORE INCOME TAXES 163,978 157,251 129,548
--------- --------- ---------
Provision (benefit) for income taxes:
Current 36,471 44,140 22,966
Deferred 2,102 (2,245) 11,898
--------- --------- ---------
Total provision 38,573 41,895 34,864
--------- --------- ---------
NET INCOME 125,405 115,356 94,684
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:
Unrealized gains (losses) on securities:
Holding gains (losses) arising during period
[net of deferred income tax provision (benefit)
of $(51,221), $14,024 and $12,701] (95,125) 26,045 23,587
Less: reclassification adjustment for losses
(gains) included in net income [net of deferred
income tax benefit (provision) of $3,633,
$(7,311) and $(4,033)] 9,668 (13,579) (7,489)
--------- --------- ---------
Other comprehensive income (loss) (85,457) 12,466 16,098
--------- --------- ---------
COMPREHENSIVE INCOME $ 39,948 $ 127,822 $ 110,782
========= ========= =========
As based upon net income:
Basic earnings per common share $ 4.08 $ 3.96 $ 3.16
========= ========= =========
Diluted earnings per common share $ 3.89 $ 3.77 $ 3.06
========= ========= =========
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.
<PAGE>
[page 28 of Annual Report]
FINANCIAL SECURITY ASSURANCE HOLDINGS LTD.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Dollars
in thousands, except per share data)
<TABLE>
<CAPTION>
Additional Unrealized
Paid-In Gain Deferred
Common Capital- (Loss) on Accumulated Equity Treasury
Stock Common Investments Earnings Compensation Stock Total
----- ------ ----------- -------- ------------ ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1996 $ 323 $ 695,118 $ 9,114 $ 139,986 $ 12,069 $ (58,785) $ 797,825
Net income for the year 94,684 94,684
Net change in accumulated
comprehensive
income (net of deferred
income taxes of $8,667) 16,098 16,098
Dividends paid on common
stock ($0.405 per share) (12,099) (12,099)
Deferred equity compensation 17,781 17,781
Deferred equity payout 187 (3,287) 56 (3,044)
Purchase of 162,573 shares
of common stock (5,434) (5,434)
Issuance of 125,106 shares
of treasury stock for options
exercised 688 (382) 3,042 3,348
Forward share settlements
with counterparties (33,910) (33,910)
----- --------- --------- --------- -------- --------- -----------
BALANCE, December 31, 1997 323 695,993 25,212 222,571 26,181 (95,031) 875,249
Net income for the year 115,356 115,356
Net change in accumulated
comprehensive income (net
of deferred income taxes
of $6,713) 12,466 12,466
Dividends paid on common
stock ($0.44 per share) (12,777) (12,777)
Deferred equity compensation 23,970 23,970
Deferred equity payout 750 (6,371) 204 (5,417)
Purchase of 496,940 shares of
common stock (23,907) (23,907)
Issuance of 1,632,653 shares
of treasury stock for XL stock 36,721 43,279 80,000
Issuance of 13,295 shares of
treasury stock for options
exercised (22) 166 352 496
----- --------- --------- --------- -------- --------- -----------
BALANCE, December 31, 1998 323 733,442 37,678 325,150 43,946 (75,103) 1,065,436
Net income for the year 125,405 125,405
Net change in accumulated
comprehensive income (net
of deferred income tax
benefit of $46,015) (85,457) (85,457)
Dividends paid on common
stock ($0.465 per share) (14,138) (14,138)
Deferred equity compensation 19,822 19,822
Deferred equity payout 1,535 (11,087) 1,644 (7,908)
Purchase of 53,165 shares of
common stock (2,571) (2,571)
Issuance of 450 shares of
treasury stock for options
exercised 3 (11) 18 10
Sale of 1,183,764 shares of
treasury stock and 1,400,000
shares of unissued common stock 14 95,986 43,715 139,715
Sale of 221,100 shares of
treasury stock 5,887 5,783 11,670
----- --------- --------- --------- -------- --------- -----------
BALANCE, December 31, 1999 $ 337 $ 836,853 $ (47,779) $ 436,417 $ 52,670 $ (26,514) $ 1,251,984
===== ========= ========= ========= ======== ========= ===========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are
an integral part of these statements.
<PAGE>
[page 29 of Annual Report]
FINANCIAL SECURITY ASSURANCE HOLDINGS LTD.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Premiums received, net $ 230,394 $ 247,229 $ 171,145
Policy acquisition and other operating
expenses paid, net (51,702) (53,306) (43,279)
Recoverable advances paid (2,335) (4,073) (7,629)
Losses and loss adjustment expenses
recovered (paid) 3,302 16,535 (6,463)
Net investment income received 80,803 70,146 65,662
Federal income taxes paid (39,603) (54,020) (19,797)
Interest paid (16,306) (9,614) (5,158)
Other 357 (1,623) (2,017)
----------- ----------- -----------
Net cash provided by operating
activities 204,910 211,274 152,464
----------- ----------- -----------
Cash flows from investing activities:
Proceeds from sales of bonds 2,123,445 1,908,098 1,074,658
Proceeds from sales of equity investments 87,471 33,613 3,568
Proceeds from maturities of bonds -- -- 32,468
Purchases of bonds (2,303,633) (2,257,947) (1,229,612)
Purchases of equity investments (46,581) (48,475) (24,662)
Net gain on sale of subsidiaries -- -- 7,986
Purchases of property and equipment (1,132) (1,168) (3,097)
Net decrease (increase) in short-term
investments (161,147) 39,513 (55,551)
Other investments (5,894) (14,610) --
----------- ----------- -----------
Net cash used for investing
activities (307,471) (340,976) (194,242)
----------- ----------- -----------
Cash flows from financing activities:
Issuance of notes payable, net -- 96,850 125,905
Repayment of notes payable -- -- (30,000)
Dividends paid (14,138) (12,777) (12,099)
Treasury stock, net 628 (23,686) (36,246)
Sale of stock 151,385
Issuance of stock for acquisition of
subsidiary (a) -- 60,000 --
Other (32,520) 330 (1,453)
----------- ----------- -----------
Net cash provided by financing
activities 105,355 120,717 46,107
----------- ----------- -----------
Net increase (decrease) in cash 2,794 (8,985) 4,329
Cash at beginning of year 3,490 12,475 8,146
----------- ----------- -----------
Cash at end of year $ 6,284 $ 3,490 $ 12,475
=========== =========== ===========
</TABLE>
(a) The Company exchanged $20,000 of its stock at fair market value for $20,000
of XL stock at fair market value.
The accompanying Notes to Consolidated Financial Statements are
an integral part of these statements.
<PAGE>
FINANCIAL SECURITY ASSURANCE HOLDINGS LTD.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
(Dollars in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Reconciliation of net income to net cash flows from operating activities:
Net income $ 125,405 $ 115,356 $ 94,684
Increase in accrued investment income (4,136) (3,613) (2,504)
Increase in deferred premium revenue and
related foreign exchange adjustment 54,438 82,530 62,101
Decrease (increase) in deferred
acquisition costs 1,511 (28,461) (24,865)
Increase (decrease) in current federal
income taxes payable 6,166 (1,674) 7,891
Increase in unpaid losses and loss
adjustment expenses 12,231 20,786 2,596
Increase in amounts withheld for others -- 82 133
Provision (benefit) for deferred income
taxes 2,102 (2,245) 15,170
Net realized losses (gains) on investments 13,301 (20,890) (11,522)
Deferred equity compensation 8,725 17,765 14,299
Depreciation and accretion of bond discount (2,837) (4,523) (2,802)
Minority interest and equity in earnings of
unconsolidated affiliates 2,045 844 --
Net gain on sale of subsidiaries -- -- (7,986)
Change in other assets and liabilities (14,041) 35,317 5,269
--------- --------- ---------
Cash provided by operating activities $ 204,910 $ 211,274 $ 152,464
========= ========= =========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are
an integral part of these statements.
<PAGE>
[pages 30 through 44 of Annual Report]
FINANCIAL SECURITY ASSURANCE HOLDINGS LTD.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1. ORGANIZATION AND OWNERSHIP
Financial Security Assurance Holdings Ltd. (the Company) is a holding
company incorporated in the State of New York. The Company is principally
engaged, through its insurance company subsidiaries, 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,
<PAGE>
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 of 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, 1997, the Company was owned 42.1% by U S WEST Capital
Corporation (U S WEST), 12.0% by Fund American Enterprises Holdings, Inc. (Fund
American), 6.7% by The Tokio Marine and Fire Insurance Co., Ltd. (Tokio Marine)
and 39.2% by the public and employees. On November 3, 1998, the Company issued
1,632,653 common shares out of treasury to XL Capital Ltd (XL), which was named
EXEL Limited until February 1999, in exchange for $80,000,000 of XL's common
stock in conjunction with the creation of a new subsidiary (see Note 7). At
December 31, 1998, the Company 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 and 36.0% by the public and employees. At December 31, 1999, the
Company was owned 5.3% by MediaOne, 21.2% by White Mountains Insurance Group,
Ltd. (White Mountains), formerly Fund American, 8.0% by Tokio Marine, 7.8% by XL
and 57.7% by the public and employees. These percentages are calculated based
upon outstanding shares, which are reduced by treasury shares as presented in
these financial statements.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying financial statements have been prepared in accordance
with accounting principles generally accepted in the United States (GAAP),
which, for the insurance company subsidiaries, 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, 1999 and 1998 and the reported amounts of revenues and expenses
in the consolidated statements of income during the years ended December 31,
1999, 1998 and 1997. Such estimates and assumptions include, but are not limited
to, losses and loss 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 Portfolio Management Inc.,
Transaction Services Corporation, Financial Security Assurance Inc. (FSA), 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 1999 presentation.
<PAGE>
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. Except as
specified in Note 20, 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. Cash equivalents are amounts
deposited in money market funds and investments with a maturity at time of
purchase of three months or less and are included in short-term investments.
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 realized capital gains or losses.
Investments in unconsolidated affiliates are based on the equity method of
accounting (see Note 20).
Premium Revenue Recognition
Gross and ceded premiums are earned in proportion to the amount of risk
outstanding over the expected period of coverage. The amount of risk outstanding
is equal to the sum of the par amount of debt insured. 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 ranging from 5.5% to 6.1%.
The Company also maintains a non-specific general reserve, which 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.
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.
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
<PAGE>
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.
Earnings per Common Share
In 1997, the Company adopted Statement of Financial Accounting Standards
(SFAS) No. 128, Earnings Per Share (EPS), specifying the computation,
presentation and disclosure requirements for EPS (see Note 19). The new standard
defines "basic" and "diluted" earnings per share. Basic earnings per share are
based on average basic shares outstanding, which is calculated by adding shares
earned but not issued under the Company's equity bonus and performance share
programs to the average common shares outstanding. Diluted earnings per share
are based on average diluted shares outstanding, which is calculated by adding
shares contingently issuable under stock options, the performance share program
and the Company's redeemable preferred stock to the average basic shares
outstanding.
Segment Reporting
As a monoline financial guaranty insurer, the Company has no reportable
operating segments.
3. INVESTMENTS
Bonds at amortized cost of $10,979,000 and $11,481,000 at December 31,
1999 and 1998, respectively, were on deposit with state regulatory authorities
as required by insurance regulations.
Consolidated net investment income consisted of the following (in
thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Bonds $ 88,867 $ 71,888 $ 65,422
Equity investments 1,495 1,075 1,393
Short-term investments 6,664 8,391 7,206
Investment expenses (2,303) (2,531) (1,936)
-------- -------- --------
Net investment income $ 94,723 $ 78,823 $ 72,085
======== ======== ========
</TABLE>
The credit quality of bonds at December 31, 1999 was as follows:
<PAGE>
<TABLE>
<CAPTION>
Rating Percent of Bonds
--------------------- ----------------
<S> <C>
AAA 72.3%
AA 18.5
A 8.8
BBB 0.1
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
December 31, 1999 Cost Gains Losses Value
- ----------------- ---- ----- ------ -----
<S> <C> <C> <C> <C>
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $ 80,446 $ 27 $ (568) $ 79,905
Obligations of states and political
subdivisions 1,189,115 5,469 (58,571) 1,136,013
Foreign securities 2,277 1 (1) 2,277
Mortgage-backed securities 384,349 450 (9,339) 375,460
Corporate securities 222,703 2,123 (5,371) 219,455
Asset-backed securities 40,787 17 (1,245) 39,559
---------- ------- -------- ----------
Total $1,919,677 $ 8,087 $(75,095) $1,852,669
========== ======= ======== ==========
December 31, 1998
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $ 148,669 $ 2,432 $ (336) $ 150,765
Obligations of states and political
subdivisions 1,041,718 42,265 (637) 1,083,346
Mortgage-backed securities 266,770 3,920 (190) 270,500
Corporate securities 164,697 5,539 (463) 169,773
Asset-backed securities 33,188 494 (26) 33,656
---------- ------- -------- ----------
Total $1,655,042 $54,650 $ (1,652) $1,708,040
========== ======= ======== ==========
</TABLE>
The change in net unrealized gains (losses) consisted of (in thousands):
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1999 1998 1997
--------- ------- -------
<S> <C> <C> <C>
Bonds $(120,006) $15,319 $23,657
Equity investments (10,449) 2,842 1,109
Other (1,017) 1,017 --
--------- ------- -------
Change in net unrealized gains
(losses) $(131,472) $19,178 $24,766
========= ======= =======
</TABLE>
The amortized cost and estimated market value of bonds at December 31,
1999, 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>
Amortized Estimated
Cost Market Value
---- ------------
<S> <C> <C>
Due in one year or less $ 6,082 $ 6,078
Due after one year through five years 189,461 188,584
Due after five years through ten years 154,121 153,523
Due after ten years 1,144,877 1,089,465
Mortgage-backed securities (stated maturities of 1 to
30 years) 384,349 375,460
Asset-backed securities (stated maturities of 3 to 30
years) 40,787 39,559
---------- ----------
Total $1,919,677 $1,852,669
========== ==========
</TABLE>
Proceeds from sales of bonds during 1999, 1998 and 1997 were
$2,162,425,000, $1,889,130,000 and $1,127,749,000, respectively. Gross gains of
$17,896,000, $27,439,000 and $12,437,000 and gross losses of $32,406,000,
$8,585,000 and $1,433,000 were realized on sales in 1999, 1998 and 1997,
respectively.
Proceeds from sales of equity investments during 1999, 1998 and 1997 were
$87,471,000, $33,613,000 and $3,568,000, respectively. Gross gains of
$11,707,000, $2,684,000 and $33,000 and gross losses of $5,008,000, $1,331,000
and $7,000 were realized on sales in 1999, 1998 and 1997, respectively. Equity
investments had gross unrealized gains of $0 and $4,504,000 and gross unrealized
losses of $6,498,000 and $553,000 as of December 31, 1999 and 1998,
respectively.
The Company held open positions in U.S. Treasury bond futures contracts
with an aggregate notional amount of $30,800,000 and $57,700,000 as of December
31, 1999 and 1998, respectively. The Company held open positions in Eurodollar
futures contracts with an aggregate notional amount of $155,500,000 and
$1,000,000 as of December 31, 1999 and 1998, respectively. The Company also held
open positions in municipal bond index futures with an aggregate notional amount
of $3,000,000 as of December 31, 1999. Such positions are marked to market on a
daily basis and, for the years ended December 31, 1999, 1998 and 1997, resulted
in net realized gains (losses) of $(5,490,000), $883,000 and $190,000,
respectively.
<PAGE>
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,
-----------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Balance, beginning of period $ 199,559 $ 171,098 $ 146,233
--------- --------- ---------
Costs deferred during the period:
Ceding commission income (52,376) (27,693) (18,956)
Assumed commission expense 44 22 31
Premium taxes 9,017 8,081 5,554
Compensation and other acquisition costs 81,613 83,490 66,198
--------- --------- ---------
Total 38,298 63,900 52,827
--------- --------- ---------
Costs amortized during the period (39,809) (35,439) (27,962)
--------- --------- ---------
Balance, end of period $ 198,048 $ 199,559 $ 171,098
========= ========= =========
</TABLE>
5. STATUTORY ACCOUNTING PRACTICES
GAAP for the Subsidiaries 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 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;
<PAGE>
- Surplus notes are recognized as surplus rather than a liability.
A reconciliation of net income for the calendar years 1999, 1998 and 1997
and shareholders' equity at December 31, 1999 and 1998, 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>
Net Income: 1999 1998 1997
--------- --------- --------
<S> <C> <C> <C>
GAAP BASIS $ 125,405 $ 115,356 $ 94,684
Non-insurance companies net loss 7,812 5,461 5,575
Premium revenue recognition (19,397) (16,411) (23,130)
Losses and loss adjustment expenses incurred 4,171 12,938 4,653
Deferred acquisition costs 1,511 (28,461) (24,865)
Deferred income tax provision 1,375 167 16,019
Current income tax (9,266) (8,206) (7,994)
Amortization of bonds -- -- 56
Accrual of deferred compensation, net 22,119 33,268 26,681
Other (124) 100 (61)
--------- --------- --------
STATUTORY BASIS $ 133,606 $ 114,212 $ 91,618
========= ========= ========
December 31,
--------------------------
Shareholders' Equity: 1999 1998
----------- -----------
GAAP BASIS $ 1,251,984 $ 1,065,436
Non-insurance companies liabilities, net 42,962 39,155
Premium revenue recognition (110,650) (91,297)
Loss and loss adjustment expense reserves 54,971 47,250
Deferred acquisition costs (198,048) (199,559)
Contingency reserve (473,387) (367,454)
Unrealized loss (gain) on investments, net of
tax 67,179 (55,851)
Deferred income taxes 53,357 95,398
Accrual of deferred compensation 80,811 70,022
Surplus notes 120,000 120,000
Other (42,484) (52,844)
----------- -----------
STATUTORY BASIS SURPLUS $ 846,695 $ 670,256
=========== ===========
SURPLUS PLUS CONTINGENCY RESERVE $ 1,320,082 $ 1,037,710
=========== ===========
</TABLE>
6. FEDERAL INCOME TAXES
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.
Federal income taxes have not been provided on substantially all of the
undistributed earnings of non-U.S. subsidiaries, since it is the Company's
practice and intent to reinvest such earnings in the operations of these
subsidiaries. The cumulative amount of such untaxed earnings was $6,537,000 and
$0 at December 31, 1999 and 1998, respectively.
<PAGE>
The cumulative balance sheet effects of deferred tax consequences are (in
thousands):
<TABLE>
<CAPTION>
December 31,
------------
1999 1998
--------- ---------
<S> <C> <C>
Deferred acquisition costs $ 65,769 $ 69,079
Deferred premium revenue adjustments 14,860 10,354
Unrealized capital gains -- 21,134
Contingency reserves 55,028 46,260
--------- ---------
Total deferred tax liabilities 135,657 146,827
--------- ---------
Loss and loss adjustment expense reserves (18,219) (16,613)
Deferred compensation (48,975) (41,545)
Unrealized capital losses (24,882) --
Other, net (240) (1,415)
--------- ---------
Total deferred tax assets (92,316) (59,573)
--------- ---------
Total deferred income taxes $ 43,341 $ 87,254
========= =========
</TABLE>
No valuation allowance was necessary at December 31, 1999 or 1998.
A reconciliation of the effective tax rate with the federal statutory rate
follows:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Tax at statutory rate 35.0% 35.0% 35.0%
Tax-exempt interest (10.1) (8.6) (8.4)
Income of foreign subsidiary (1.4) -- --
Other -- 0.3 0.3
------ ------ ------
Provision for income taxes 23.5% 26.7% 26.9%
====== ====== ======
</TABLE>
7. SHAREHOLDERS' EQUITY AND REDEEMABLE PREFERRED STOCK
On September 2, 1994, the Company issued to White Mountains 2,000,000
shares of Series A, non-dividend paying, voting, redeemable preferred stock
having an aggregate liquidation preference of $700,000. The preferred stock is
redeemable, at the option of the holder upon payment of the conversion price
therefor, into an equal number of shares of common stock (subject to
anti-dilutive adjustment). The conversion price per share (subject to
anti-dilutive adjustment) is $29.65. The preferred stock will be redeemed (if
then outstanding) on May 13, 2004 at a redemption price of $0.35 per share.
White Mountains is entitled to one vote per share of redeemable preferred stock,
voting together as a single class with the holders of common stock on all
matters upon which holders of common stock are entitled to vote. As the holder
of the redeemable preferred stock, White Mountains is not entitled to receive
dividends or other distributions of any kind payable to shareholders of the
Company, except that, in the event of the liquidation, dissolution or winding up
of the Company, it is entitled to receive out of the assets of the Company
available therefor, before any distribution or payment is made to the holders of
<PAGE>
common stock or to any other class of capital stock of the Company ranking
junior to the Company's preferred stock, liquidation payments in the amount of
$0.35 per share. White Mountains may not transfer the redeemable preferred
stock, except to one of its majority-owned subsidiaries.
In May 1996, the Company repurchased 1,000,000 shares of its common stock
from MediaOne for a purchase price of $26.50 per share. At the same time, the
Company also entered into forward agreements with two financial institutions
(the Counterparties) in respect of 1,750,000 shares (the Forward Shares) of the
Company's common stock. Under the forward agreements, the Company has the
obligation either: (i) to purchase the Forward Shares from the Counterparties
for a price equal to $26.50 per share plus carrying costs or (ii) to direct the
Counterparties to sell the Forward Shares, with the Company receiving any excess
or making up any shortfall between the sale proceeds and $26.50 per share plus
carrying costs in cash or additional shares, at its option. At the same time it
entered into the forward agreements, the Company made the economic benefit and
risk of 750,000 of these shares available for subscription by certain of the
Company's employees and directors. When an individual participant exercises
Forward Shares under the subscription program, the Company settles with the
participant but does not necessarily close out the corresponding Forward Share
position with the Counterparties. These settlements during 1999, 1998 and 1997
were $0, $733,000 and $2,142,000,
respectively. By the fourth quarter of 1997, such exercises by participants had
increased the number of shares allocated to the Company from 1,000,000 shares to
1,187,800 shares. During the fourth quarter of 1997, the Company purchased
1,187,800 Forward Shares for $33,910,000 by exercising rights under the forward
agreements. At December 31, 1999, 562,200 Forward Shares remained in the
program. Of these, 33,078 shares were held for the benefit of the Company as a
result of the repurchase of Forward Shares from employees and directors, and
529,122 shares continued to be held for the benefit of employees and directors.
In the fourth quarter of 1999, the Company entered into additional forward
agreements with two counterparties to purchase 750,000 Forward Shares at an
initial cost of $53.50 per share. These agreements are similar to the Forward
Share agreements described above, and the economic benefit and risk of these
shares are for the account of the Company's employees and directors as described
above. At December 31, 1999, all 750,000 shares were outstanding. In total, for
both plans, net income will be affected by approximately $831,000, or $0.03 per
share, for each dollar change in the Company's share price. The Company has
recognized compensation expense for the difference between (i) the $26.50
per-share price for the 1996 Forward Shares and $53.50 per-share price for the
1999 Forward Shares, plus the carrying cost and (ii) the market value at
December 31, 1999, 1998 and 1997 of $(1,865,000), $2,495,000 and $8,951,000,
respectively.
On November 3, 1998, the Company and XL closed a transaction to create two
new Bermuda-based financial guaranty insurance companies. Each of the new
companies was initially capitalized with approximately $100,000,000. One
company, Financial Security Assurance International Ltd., is an indirect
subsidiary of FSA, and the other company, XL Financial Assurance Ltd, is a
subsidiary of XL. The Company has a minority interest in the XL subsidiary, and
XL has a minority interest in the FSA indirect subsidiary. In conjunction with
forming the new companies, the Company and XL exchanged $80,000,000 of their
respective common shares, with the Company delivering to XL 1,632,653 common
shares out of treasury. Prior to the closing of the transaction with XL, the
Company had entered into an agreement with an unrelated third party to sell for
cash, at no gain or loss, $60,000,000 of the XL shares. This $60,000,000 was
used to fund, in part, the Company's investment in Financial Security Assurance
International Ltd.
8. DIVIDENDS AND CAPITAL REQUIREMENTS
Under New York Insurance Law, FSA may pay a dividend to the Company
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
<PAGE>
capital requirement. In addition, the dividend, together with all dividends
declared or distributed by FSA during the preceding twelve months, may not
exceed the lesser of 10% of its policyholders' surplus shown on FSA's last filed
statement, or adjusted net investment income, as defined, for such twelve-month
period. As of December 31, 1999, FSA had $81,960,000 available for the payment
of dividends over the next twelve months. In addition, the Company holds
$120,000,000 of surplus notes of FSA. Payments of principal or interest on such
notes may be made with the approval of the New York Insurance Department. In
1998, FSA repurchased $8,500,000 of its shares from its parent, representing the
balance remaining of $75,000,000 that had been approved for repurchase by the
New York Insurance Department.
9. CREDIT ARRANGEMENTS AND ADDITIONAL CLAIMS-PAYING RESOURCES
FSA has a credit arrangement aggregating $150,000,000 at December 31,
1999, which is provided by commercial banks and intended for general application
to transactions insured by the Subsidiaries. At
December 31, 1999, there were no borrowings under this arrangement, which
expires on April 28, 2000, if not extended. In addition, there are credit
arrangements assigned to specific insured transactions. In August 1994, FSA
entered into a facility agreement with Canadian Global Funding Corporation and
Hambros Bank Limited. Under the agreement, which expires in August 2004, FSA can
arrange financing for transactions subject to certain conditions. The amount of
this facility was $186,911,000, of which $99,302,000 was unutilized at December
31, 1999.
FSA has a standby line of credit commitment in the amount of $240,000,000
with a group of international banks to provide loans to FSA 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, 1999 and
expiring on April 30, 2006 and contains an annual renewal provision subject to
approval by the banks. No amounts have been utilized under this commitment as of
December 31, 1999.
10. LONG-TERM DEBT
On September 18, 1997, the Company issued $130,000,000 of 7.375% Senior
Quarterly Income Debt Securities (Senior QUIDS) due September 30, 2097 and
callable without premium or penalty on or after September 18, 2002. Interest on
these notes is paid quarterly beginning on December 31, 1997. Debt issuance
costs of $4,320,000 are being amortized over the life of the debt. The Company
used the proceeds to repay $30,000,000 of outstanding notes, to augment capital
in the Subsidiaries, to repurchase Forward Shares (see Note 7) and for general
corporate purposes.
On November 13, 1998, the Company issued $100,000,000 of 6.950% Senior
QUIDS due November 1, 2098 and callable without premium or penalty on or after
November 1, 2003. Interest is paid quarterly beginning on February 1, 1999. Debt
issuance costs of $3,375,000 are being amortized over the life of the debt. The
Company used the proceeds to augment capital in the Subsidiaries and for general
corporate purposes.
11. EMPLOYEE BENEFIT PLANS
The Subsidiaries maintain both a qualified and a non-qualified,
non-contributory defined contribution pension plan for the benefit of all
eligible employees. The Subsidiaries' contributions are based upon a fixed
percentage of employee compensation. Pension expense, which is funded as
accrued, amounted to $1,788,000 (net of forfeitures of $1,316,000), $2,584,000
and $2,535,000 for the years ended December 31, 1999, 1998 and 1997,
respectively.
<PAGE>
The Subsidiaries have 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 Subsidiaries' contributions are discretionary, and
none have been made.
Pursuant to the 1993 Equity Participation Plan, 3,610,780 shares of 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 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. 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 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.
Performance shares are awarded under the Company'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 and its
subsidiaries. The number of shares of the Company's common stock earned for each
performance share depends upon the attainment by the Company 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 Company'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
at Granted Earned Forfeited Outstanding Market
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>
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
1999 1,384,508 236,915 352,726 45,672 1,223,025 53.6250
</TABLE>
The Company applies APB Opinion 25 and related Interpretations in
accounting for its 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 $33,442,000,
$40,862,000 and $29,500,000 for the years ended December 31, 1999, 1998 and
1997, respectively. In tandem with this accrued expense, the Company 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 Company
estimates it will settle in cash, is recorded in accrued expenses and other
liabilities. In 1996, the Company adopted disclosure provisions of SFAS No. 123.
Had the compensation cost for the Company'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 and earnings per share.
<PAGE>
In November 1994, the Company created a rabbi trust and appointed an
independent trustee authorized to purchase shares of the Company'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.
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.
12. COMMITMENTS AND CONTINGENCIES
The Company and its Subsidiaries lease 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>
2000 $3,228
2001 2,915
2002 2,660
2003 2,683
2004 2,683
Thereafter 2,459
-------
Total $16,628
=======
</TABLE>
Rent expense for the years ended December 31, 1999, 1998 and 1997 was
$4,352,000, $4,372,000 and $4,067,000, respectively.
During the ordinary course of business, the Company and its Subsidiaries
become parties to certain litigation. Management believes that these matters
will be resolved with no material impact on the Company's financial position,
results of operations or cash flows.
13. REINSURANCE
The Subsidiaries reinsure portions of their risks with affiliated (see
Note 15) and unaffiliated reinsurers under quota share, first-loss and
excess-of-loss treaties and on a facultative basis. The Subsidiaries' principal
ceded reinsurance program consisted in 1999 of two quota share treaties, a
combination quota share and aggregate excess-of-loss treaty, four first-loss
treaties and seven automatic facultative facilities. One quota share treaty
covered all of the Subsidiaries' approved regular lines of business, except U.S.
municipal obligation insurance. Under this treaty in 1999, the Subsidiaries
ceded 7.25% of each covered policy, up to a maximum of $14,500,000 insured
principal per policy. At their option, the Subsidiaries could have increased,
and in certain instances did increase, the ceding percentage to 14.5% up to
$29,000,000 of each covered policy. A second quota share treaty covered the
Subsidiaries' U.S. municipal obligation insurance business. Under this treaty in
1999, the Subsidiaries ceded 6.5% of each covered policy that is classified by
the Subsidiaries as providing U.S. municipal bond insurance as defined by
Article 69 of the New York Insurance Law up to a limit of $17,333,000 per single
risk, which is defined by revenue source. At their option, the Subsidiaries
could have increased, and in certain instances did increase, the ceding
percentage to 35% up to $93,333,000 per single risk. These cession percentages
under both treaties were reduced on smaller sized transactions. The combination
quota share and aggregate excess-of-loss treaty covers qualifying
emerging-market collateralized debt obligations. This treaty reinsures (i) on a
quota share basis 50% of such transactions insured in 1999 and 2000 and (ii) on
<PAGE>
an aggregate excess-of-loss basis 90% of the Subsidiaries' net losses on
qualifying transactions in excess of $50,000,000, up to a limit of liability of
$200,000,000. The four first-loss treaties applied to qualifying U.S.
mortgage-backed, U.S. auto loan-backed, U.S. multifamily housing and
collateralized debt obligations. Under the seven automatic facultative
facilities in 1999, the Subsidiaries, at their option, could allocate up to a
specified amount for each reinsurer (ranging from
$4,000,000 to $100,000,000 depending on the reinsurer) for each transaction,
subject to limits and exclusions, in exchange for which the Subsidiaries agreed
to cede in the aggregate a specified percentage of gross par insured by the
Subsidiaries. Each of the quota share treaties and automatic facultative
facilities allowed the Subsidiaries to withhold a ceding commission to defray
their expenses. The Subsidiaries also employed non-treaty quota share and
first-loss facultative reinsurance on various transactions in 1999.
In the event that any or all of the reinsuring companies were unable to
meet their obligations to the Subsidiaries, or contested such obligations, the
Subsidiaries would be liable for such defaulted amounts. The Subsidiaries have
also assumed reinsurance of municipal obligations from unaffiliated insurers.
Amounts reinsured were as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Written premiums ceded $ 132,236 $ 99,413 $63,513
Written premiums assumed 995 935 1,352
Earned premiums ceded 63,615 55,939 41,713
Earned premiums assumed 2,514 4,271 5,121
Loss and loss adjustment expense payments ceded (2,461) 22,619 2,862
Loss and loss adjustment expense payments
assumed 1 3 2
Incurred (recovered) losses and loss adjustment
expenses ceded 3,124 (4,673) 3,605
Incurred (recovered) losses and loss adjustment
expenses assumed 40 (139) 161
</TABLE>
<TABLE>
<CAPTION>
December 31,
------------
1999 1998
---- ----
<S> <C> <C>
Principal outstanding ceded $45,313,349 $32,914,844
Principal outstanding assumed 1,245,430 1,360,916
Deferred premium revenue ceded 285,105 217,096
Deferred premium revenue assumed 9,100 10,799
Loss and loss adjustment expense reserves ceded 9,492 6,421
Loss and loss adjustment expense reserves assumed 762 723
</TABLE>
14. 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
<PAGE>
(in millions) as of December 31, 1999 and 1998 (net of amounts ceded to other
insurers) and the terms to maturity are as follows:
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
----------------- -----------------
Terms to Maturity Asset-Backed Municipal Asset-Backed Municipal
- ----------------- ------------ --------- ------------ ---------
<S> <C> <C> <C> <C>
0 to 5 Years $10,272 $ 3,351 $ 8,468 $ 2,756
5 to 10 Years 13,911 8,741 7,516 7,495
10 to 15 Years 8,956 15,441 5,661 12,427
15 to 20 Years 814 24,711 670 20,265
20 Years and Above 16,762 26,979 15,308 24,107
------- ------- ------- -------
Total $50,715 $79,223 $37,623 $67,050
======= ======= ======= =======
</TABLE>
The principal amount ceded as of December 31, 1999 and 1998 and the terms
to maturity are as follows (in millions):
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
----------------- -----------------
Terms to Maturity Asset-Backed Municipal Asset-Backed Municipal
- ----------------- ------------ --------- ------------ ---------
<S> <C> <C> <C> <C>
0 to 5 Years $ 3,962 $ 1,477 $2,727 $ 1,157
5 to 10 Years 4,055 2,307 1,859 2,143
10 to 15 Years 1,777 3,995 1,116 3,022
15 to 20 Years 769 7,423 591 4,852
20 Years and Above 3,313 16,235 3,230 12,218
------- ------- ------ -------
Total $13,876 $31,437 $9,523 $23,392
======= ======= ====== =======
</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,
------------ ------------
Types of Collateral 1999 1998 1999 1998
- ------------------- ------- ------- ------- ------
<S> <C> <C> <C> <C>
Residential mortgages $16,713 $15,647 $ 3,198 $3,324
Consumer receivables 15,102 12,539 3,374 3,663
Government securities 1,010 821 483 267
Pooled corporate obligations 15,446 6,776 5,590 1,388
Commercial mortgage portfolio:
Commercial real estate 12 15 38 49
Corporate secured 42 42 300 314
Investor-owned utility obligations 733 757 466 464
Other asset-backed obligations 1,657 1,026 427 54
------- ------- ------- ------
Total asset-backed obligations $50,715 $37,623 $13,876 $9,523
======= ======= ======= ======
</TABLE>
<PAGE>
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,
------------ ------------
Types of Issues 1999 1998 1999 1998
- --------------- ------- ------- ------- -------
<S> <C> <C> <C> <C>
General obligation bonds $31,446 $25,337 $ 6,237 $ 4,517
Housing revenue bonds 2,780 2,509 1,064 1,108
Municipal utility revenue bonds 11,293 9,218 7,326 5,489
Health care revenue bonds 5,950 5,812 4,674 3,348
Tax-supported bonds (non-general obligation) 17,719 14,731 7,095 5,238
Transportation revenue bonds 3,482 2,937 2,918 2,154
Other municipal bonds 6,553 6,506 2,123 1,538
------- ------- ------- -------
Total municipal obligations $79,223 $67,050 $31,437 $23,392
======= ======= ======= =======
</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 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, 1999:
<TABLE>
<CAPTION>
Net Par Percent of Total Ceded Par
Number Amount Municipal Net Par Amount
State of Issues Outstanding Amount Outstanding Outstanding
----- --------- ----------- ------------------ -----------
(in millions) (in millions)
<S> <C> <C> <C> <C>
California 575 $11,543 14.6% $ 3,737
New York 428 7,006 8.8 4,918
Pennsylvania 403 5,509 7.0 1,313
Texas 469 5,095 6.4 2,075
Florida 147 4,696 5.9 1,966
New Jersey 317 4,444 5.6 2,500
Illinois 420 4,103 5.2 1,304
Massachusetts 132 2,568 3.2 1,356
Michigan 274 2,543 3.2 538
Wisconsin 298 2,184 2.8 253
Washington 167 1,736 2.2 665
All Other U.S. Jurisdictions 1,758 26,390 33.3 9,559
International 31 1,406 1.8 1,253
----- ------- ----- -------
Total 5,419 $79,223 100.0% $31,437
===== ======= ===== =======
</TABLE>
<PAGE>
15. RELATED PARTY TRANSACTIONS
The Subsidiaries ceded premiums of $28,388,000, $23,838,000 and
$21,216,000 to Tokio Marine for the years ended December 31, 1999, 1998 and
1997, respectively. The amounts included in prepaid reinsurance premiums at
December 31, 1999 and 1998 for reinsurance ceded to Tokio Marine were
$76,327,000 and $62,422,000, respectively. Reinsurance recoverable on unpaid
losses ceded to Tokio Marine was $4,889,000 and $612,000 at December 31, 1999
and 1998, respectively. The Subsidiaries ceded losses and loss adjustment
expenses of $3,376,000, $603,000 and $1,095,000 to Tokio Marine for the years
ended December 31, 1999, 1998 and 1997, respectively. The Subsidiaries ceded
premiums of $19,840,000, $7,297,000 and $15,000 to XL Insurance Company Ltd and
XL Financial Assurance Ltd, subsidiaries of XL, for the years ended December 31,
1999, 1998 and 1997, respectively. The amounts included in prepaid reinsurance
premiums at December 31, 1999 and 1998 for reinsurance ceded to XL Insurance
Company Ltd and XL Financial Assurance Ltd were $15,813,000 and $5,306,000,
respectively.
The Subsidiaries ceded premiums of $84,000, $203,000 and $351,000 on a
quota share basis to Commercial Reinsurance Company, an affiliate of MediaOne,
for the years ended December 31, 1999, 1998 and 1997, respectively. The amounts
included in prepaid reinsurance premiums for reinsurance ceded to this affiliate
were $1,728,000 and $2,464,000 at December 31, 1999 and 1998, respectively. The
amounts of reinsurance recoverable on unpaid losses ceded to this affiliate at
December 31, 1999 and 1998 were $501,000 and $519,000, respectively. The
Subsidiaries ceded losses and loss adjustment expenses (recoveries) of
$(22,000), $(7,822,000) and $1,569,000 to this affiliate for the years ended
December 31, 1999, 1998 and 1997, respectively.
The Subsidiaries ceded premiums of $25,659,000 and $16,539,000 on a quota
share basis to Enhance Reinsurance Company and Asset Guaranty Insurance Company,
former affiliates of MediaOne, for the years ended December 31, 1998 and 1997,
respectively. The amount included in prepaid reinsurance premiums for
reinsurance ceded to these former affiliates was $58,624,000 at December 31,
1998. The amount of reinsurance recoverable on unpaid losses ceded to these
former affiliates at December 31, 1998 was $1,236,000. The Subsidiaries ceded
losses and loss adjustment expenses (recoveries) of $(4,134,000) and $536,000 to
these affiliates for the years ended December 31, 1998 and 1997, respectively.
16. 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 and equity investments -- The carrying amount represents fair value.
The fair value 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.
Investments in unconsolidated affiliates -- The carrying amount is fair
value due to accounting for these investments on the equity method of
accounting.
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
<PAGE>
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 contract.
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.
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, 1999 December 31, 1998
----------------- -----------------
Carrying Estimated Carrying Estimated
(In thousands) Amount Fair Value Amount Fair Value
------ ---------- ------ ----------
<S> <C> <C> <C> <C>
Assets:
Bonds $1,852,669 $1,852,669 $1,708,040 $1,708,040
Equity investments 23,606 23,606 68,243 68,243
Short-term investments 263,747 263,747 98,554 98,554
Cash 6,284 6,284 3,490 3,490
Receivable for securities sold 40,635 40,635 1,655 1,655
Investment in unconsolidated
affiliates 29,709 29,709 29,496 29,496
Liabilities:
Deferred premium revenue, net of
prepaid reinsurance premiums 559,041 468,784 504,603 417,130
Losses and loss adjustment
expenses, net of reinsurance
recoverable on unpaid losses 77,817 77,817 65,586 65,586
Notes payable 230,000 188,576 230,000 232,736
Payable for investments purchased 243,519 243,519 105,859 105,859
Off-balance-sheet instruments:
Installment premiums -- 237,802 -- 163,239
</TABLE>
17. 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,
-----------------------
1999 1998 1997
------- -------- --------
<S> <C> <C> <C>
Balance at January 1 $72,007 $ 75,417 $ 72,079
Less reinsurance recoverable 6,421 30,618 29,875
------- -------- --------
Net balance at January 1 65,586 44,799 42,204
Incurred losses and loss adjustment expenses:
Current year 8,575 8,049 5,400
Prior years 254 (4,100) 3,756
Recovered (paid) losses and loss adjustment expenses:
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C>
Current year -- -- --
Prior years 3,402 16,838 (6,561)
------- -------- --------
Net balance December 31 77,817 65,586 44,799
Plus reinsurance recoverable 9,492 6,421 30,618
------- -------- --------
Balance at December 31 $87,309 $ 72,007 $ 75,417
======= ======== ========
</TABLE>
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 been previously
transferred to case basis reserves. During 1997, the Company transferred
$4,503,000 to case basis reserves. 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 primarily 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.
During 1999, the Company increased its general reserve by $8,829,000, of
which $8,575,000 was for originations of new business and $254,000 was for the
reestablishment of the general reserve. Also during 1999, the Company
transferred to the general reserve $3,549,000 representing recoveries received
on prior-year transactions and transferred from the general reserve to case
basis reserves $4,580,000. Giving effect to these transfers, the general reserve
totaled $54,971,000 at December 31, 1999.
Reserves for losses and loss adjustment expenses are discounted at
risk-free rates for the general reserve and for the case basis reserves at rates
between 5.5% and 6.1%. The amount of discount taken was approximately
$31,113,000, $28,564,000 and $19,779,000 at December 31, 1999, 1998 and 1997,
respectively.
18. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
(In thousands, except share data) First Second Third Fourth Full Year
----- ------ ----- ------ ---------
<S> <C> <C> <C> <C> <C>
1999
Gross premiums written $78,334 $71,925 $111,959 $100,453 $362,671
Net premiums written 49,910 51,835 70,853 57,837 230,435
Net premiums earned 41,294 42,774 42,701 48,190 174,959
Net investment income 22,024 22,736 24,432 25,531 94,723
Losses and loss adjustment expenses 2,175 1,825 1,950 2,879 8,829
Income before taxes 42,849 29,296 38,396 53,437 163,978
Net income 32,157 23,472 29,707 40,069 125,405
Basic earnings per common share 1.05 0.77 0.97 1.28 4.08
Diluted earnings per common share 1.01 0.73 0.93 1.22 3.89
1998
Gross premiums written $54,338 $89,242 $77,024 $98,662 $319,266
Net premiums written 37,947 62,121 54,462 65,323 219,853
Net premiums earned 31,921 32,452 32,618 40,936 137,927
Net investment income 18,683 19,255 19,710 21,175 78,823
Losses and loss adjustment expenses 1,047 1,047 1,046 809 3,949
Income before taxes 32,817 36,184 48,016 40,234 157,251
Net income 24,314 26,739 34,604 29,699 115,356
Basic earnings per common share 0.84 0.92 1.20 1.00 3.96
Diluted earnings per common share 0.81 0.88 1.15 0.96 3.77
</TABLE>
<PAGE>
19. EARNINGS PER SHARE
The calculations of average basic and diluted common shares outstanding
are as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Average common shares outstanding 30,322 28,854 29,858
Shares earned but unissued under
equity-based compensation plans 398 248 170
------ ------ ------
Average basic common shares outstanding 30,720 29,102 30,028
Shares contingently issuable under:
Equity-based compensation plans 656 622 395
Redeemable preferred stock 874 875 490
------ ------ ------
Average diluted common shares
outstanding 32,250 30,599 30,913
====== ====== ======
</TABLE>
20. INVESTMENTS IN UNCONSOLIDATED AFFILIATES
In June 1998, the Company invested $10,000,000 to purchase 1,000,000
shares of common stock, representing a 25% interest, in Fairbanks Capital
Holding Corp. (Fairbanks), which buys, sells and services residential mortgages.
In October 1999, the Company invested $4,517,000 to purchase 361,333 shares of
preferred stock in Fairbanks and holds an approximate 22.2% interest in
Fairbanks as of
December 31, 1999. The Company's investment in Fairbanks is accounted for using
the equity method of accounting. Amounts recorded by the Company in connection
with Fairbanks as of December 31, 1999 and 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
-------- -------
<S> <C> <C>
Investment in Fairbanks $ 13,078 $ 9,263
Equity in earnings (losses) from Fairbanks, net of
goodwill amortization (702) (788)
</TABLE>
At December 31, 1999 and 1998, the Company's retained earnings included
$(1,490,000) and $(788,000), respectively, of accumulated undistributed earnings
(losses) of Fairbanks (net of goodwill amortization).
In November 1998, the Company invested $19,900,000 to purchase a 19.9%
interest in XL Financial Assurance Ltd (XLFA), a financial guaranty insurance
subsidiary of XL (see Note 7). In February 1999, the Company sold $4,900,000 of
its interest back to XLFA, giving the Company a 15.0% interest in XLFA as of
December 31, 1999. The Company's investment in XLFA is accounted for using the
equity method of accounting because the Company has significant influence over
XLFA's operations. Amounts recorded by the Company in connection with XLFA as of
December 31, 1999 and 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Investment in XLFA $16,631 $20,233
Equity in earnings from XLFA 1,372 333
Dividends received from XLFA 74 --
</TABLE>
<PAGE>
At December 31, 1999 and 1998, the Company's retained earnings included
$1,631,000 and $333,000, respectively, of accumulated undistributed earnings of
XLFA.
21. MINORITY INTEREST IN SUBSIDIARY
In November 1998, Financial Security Assurance International Ltd.
(International), a Bermuda-based financial guaranty subsidiary of FSA (see Note
7), sold to XL $20,000,000 of preferred shares representing a minority interest
in International. In December 1999, International sold to XL an additional
$10,000,000 of preferred shares to maintain its minority ownership percentage.
The preferred shares are Cumulative Participating Voting Preferred Shares, which
in total have a minimum fixed dividend of $1,500,000 per annum. For the years
ended December 31, 1999 and 1998, the Company recognized minority interest of
$2,715,000 and $388,000, respectively.
22. SUBSEQUENT EVENT
On March 14, 2000, the Company announced that it had entered into a merger
agreement pursuant to which the Company would become a wholly owned subsidiary
of Dexia S.A., a publicly held Belgian corporation, subject to shareholder
approval and satisfaction of regulatory and other closing conditions. Pursuant
to the merger, each outstanding share of the Company's common stock will be
converted into the right to receive $76.00 in cash. Dexia S.A., through its bank
subsidiaries, is primarily engaged in the business of public finance in France,
Belgium and other European countries.
In conjunction with this transaction, the Company anticipates, at closing,
valuing its liabilities under the Company's equity-based compensation plans at
the transaction price and changing its assumption regarding those plans by
assuming all future payments will be settled in cash or, as the case may be,
exchanged at the cash value for alternative investments and settled upon
expiration of any applicable deferral period. It also intends to settle its
Forward Share agreements at the merger price.
While the effect on the Company's consolidated operating results and
financial position between December 31, 1999 and the closing date (assuming the
transaction closes) cannot be accurately predicted, had the above transaction
been effective at December 31, 1999, the pro forma effect would have been to
decrease reported 1999 net income and December 31, 1999 stockholders' equity by
$44,700,000 and $18,800,000, respectively.
There can be no assurance that this transaction will close or that it will
close without modification.
<PAGE>
[page 48 of Annual Report]
Common Stock Data
<TABLE>
<CAPTION>
Market Price
-------------------------------------------
Dividends per
Share High Low Close
<S> <C> <C> <C> <C>
1999
Quarter ended March 31 $0.1125 $55.4375 $46.1250 $49.6250
Quarter ended June 30 $0.1125 59.1250 47.8125 52.0000
Quarter ended September 30 $0.1200 55.5000 46.6875 51.6875
Quarter ended December 31 $0.1200 60.2500 47.8750 52.1250
1998
Quarter ended March 31 $0.1075 $56.4375 $44.0000 $54.6250
Quarter ended June 30 $0.1075 60.3750 54.6250 58.7500
Quarter ended September 30 $0.1125 61.1250 45.2500 48.7500
Quarter ended December 31 $0.1125 56.7500 38.8750 54.2500
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<DEBT-HELD-FOR-SALE> 0
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 925
<EQUITIES> 177
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 1,219
<CASH> 4
<RECOVER-REINSURE> 194
<DEFERRED-ACQUISITION> 22
<TOTAL-ASSETS> 2,049
<POLICY-LOSSES> 851
<UNEARNED-PREMIUMS> 92
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 207
0
0
<COMMON> 73
<OTHER-SE> 541
<TOTAL-LIABILITY-AND-EQUITY> 2,049
283
<INVESTMENT-INCOME> 62
<INVESTMENT-GAINS> 85
<OTHER-INCOME> 135
<BENEFITS> 228
<UNDERWRITING-AMORTIZATION> 73
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 161
<INCOME-TAX> 53
<INCOME-CONTINUING> 108
<DISCONTINUED> 13
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 121
<EPS-BASIC> 21.50
<EPS-DILUTED> 19.73
<RESERVE-OPEN> 812
<PROVISION-CURRENT> 196
<PROVISION-PRIOR> 32
<PAYMENTS-CURRENT> (75)
<PAYMENTS-PRIOR> (114)
<RESERVE-CLOSE> 851
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
