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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): MAY 22, 1996
FRONTIER INSURANCE GROUP, INC.
(Exact name of registrant as specified in charter)
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<S> <C> <C>
DELAWARE 0-15022 14-1681606
(State or other juris- (Commission (IRS Employer
diction of incorp- File Number) Identification No.)
oration)
</TABLE>
<TABLE>
<C> <C>
195 LAKE LOUISE MARIE ROAD, ROCK HILL, NEW YORK 12775-8000
(Address of principal executive Offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code: (914) 796-2100
NOT APPLICABLE
(Former name or former address, if changed since last report)
Page 1 of 3 Pages
Exhibit Index Located on Page 3
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ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
On May 22, 1996, Frontier Insurance Group, Inc. ("Registrant"),
through its wholly-owned subsidiary, Frontier Insurance Company ("FIC"),
acquired all of the issued and outstanding capital stock of United Capitol
Holding Company (the direct or indirect parent company of United Capitol
Insurance Company, United Capitol Managers, Inc. and Fischer Underwriting Group,
Incorporated and, together with such subsidiaries), ("United Capitol") from NI
Acquisition Corp., the wholly-owned subsidiary of Capsure Holdings Corp., a
publicly traded Delaware corporation, for $30,920,000. United Capitol is a
specialy risk underwriter in asbestos abatement, directors and officers
liability, errors and omissions and commercial property. The purchase price was
negotiated by the parties, who are unaffiliated, pursuant to a stock purchase
agreement dated February 29, 1996; the funds for the $30,920,000 purchase price
were provided from Registrant's internal funds.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
(a) Financial Statements of Business Acquired.
The required financial statements of United Capitol Holding
Company are filed as an exhibit hereto.
(b) Pro Forma Financial Information
The required pro forma financial information are filed as an
exhibit hereto.
(2)
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(C) Exhibits.
10.14 Stock Purchase Agreement dated February 29, 1996 among
Frontier Insurance Company, NI Acquisition Corp. and, for
purposes of Section 2.3(c) and Article 11 only, Capsure
Holdings Corp.
10.15 United Capitol Holding Company and Subsidiaries Financial
Statements as of December 31, 1995 and 1994 (with
Independent Auditors' Report thereon) and Unaudited Interim
Condensed Consolidated Financial Statements as of March 31,
1996.
10.16 Frontier Insurance Group, Inc. and Subsidiaries' Unaudited
Pro Forma Condensed Consolidated Statements of Income for
the Year Ended December 31, 1995 and Three Months Ended
March 31, 1996, and Balance Sheet as of March 31, 1996
together with the related Notes thereto.
23(a) Consent of Independent Auditors.
(3)
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has dully caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
FRONTIER INSURANCE GROUP, INC.
(Registrant)
By:/s/ WALTER A. RHULEN
----------------------------
Walter A. Rhulen
President and Chief Executive
Officer
Dated: June 7, 1996
(4)
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STOCK PURCHASE AGREEMENT
DATED FEBRUARY 29, 1996
AMONG
FRONTIER INSURANCE COMPANY,
NI ACQUISITION CORP.
AND
CAPSURE HOLDINGS CORP.
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TABLE OF CONTENTS
<TABLE>
ARTICLE 1
DEFINITIONS
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1.1 Definitions...................................................................... 1
ARTICLE 2
PURCHASE AND SALE
2.1 Purchase and Sale................................................................ 6
2.2 Closing.......................................................................... 6
2.3 Post-Closing Purchase Price Adjustment........................................... 8
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF SELLER
3.1 Corporate Existence and Power.................................................... 9
3.2 Corporate Authorization.......................................................... 9
3.3 Governmental Authorization....................................................... 9
3.4 Non-Contravention................................................................ 9
3.5 Capitalization................................................................... 10
3.6 Ownership of Shares.............................................................. 10
3.7 Subsidiaries..................................................................... 10
3.8 Financial Statements............................................................. 10
3.9 Absence of Certain Changes....................................................... 11
3.10 Material Contracts............................................................... 12
3.11 Litigation....................................................................... 12
3.12 Compliance with Laws............................................................. 12
3.13 Properties....................................................................... 12
3.14 Intentionally omitted............................................................ 13
3.15 Brokers' Fees.................................................................... 13
3.16 ERISA and Employee Representations............................................... 13
3.17 Environmental Matters............................................................ 14
3.18 Intercompany Accounts............................................................ 14
3.19 Reserves......................................................................... 14
3.20 The Company...................................................................... 15
3.21 Investments...................................................................... 15
3.22 Taxes............................................................................ 15
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF BUYER
4.1 Corporate Existence and Power.................................................... 16
4.2 Corporate Authorization.......................................................... 16
4.3 Governmental Authorization....................................................... 16
4.4 Non-Contravention................................................................ 16
4.5 Financing........................................................................ 16
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4.6 Purchase for Investment.......................................................... 16
4.7 Brokers' Fees.................................................................... 17
ARTICLE 5
COVENANTS OF SELLER
5.1 Conduct of the Business.......................................................... 17
5.2 Access to Information............................................................ 17
5.3 Resignations..................................................................... 17
5.4 Regulatory Matters............................................................... 18
5.5 Release from Lenders............................................................. 18
5.6 Audited Financial Statements..................................................... 18
5.7 Investment Portfolio Adjustments................................................. 18
5.8 Estimated UCM Financial Statements............................................... 18
5.9 Case Reserves Files.............................................................. 18
5.10 Confidentiality.................................................................. 18
5.11 Intercompany Accounts............................................................ 18
5.12 Updated Schedules................................................................ 19
5.13 Estimated Adjusted Surplus....................................................... 19
5.14 Tangible Net Worth of UCM........................................................ 19
ARTICLE 6
COVENANTS OF BUYER
6.1 Confidentiality.................................................................. 19
6.2 Post-Closing Access.............................................................. 19
6.3 Regulatory Matters............................................................... 19
6.4 Post-Closing Use of Office Space................................................. 19
6.5 Agreement to Sublease............................................................ 19
ARTICLE 7
COVENANTS OF BUYER AND SELLER
7.1 Necessary Assurances............................................................. 20
7.2 Filings and Consents............................................................. 20
7.3 Public Announcements............................................................. 20
7.4 Post-Closing Reinsurance......................................................... 20
7.5 Government Filings............................................................... 21
7.6 Closing Statements............................................................... 21
7.7 Termination Notices.............................................................. 21
ARTICLE 8
TAX MATTERS
8.1 Buyer Tax Covenants.............................................................. 21
8.2 Property and Casualty Loss Discount Determination................................ 22
8.3 Termination of Tax Sharing Agreements............................................ 22
8.4 Tax Sharing...................................................................... 22
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8.5 Cooperation on Tax Matters....................................................... 22
8.6 Responsibility for Taxes and Tax Returns......................................... 22
8.7 Intentionally omitted............................................................ 23
8.8 Apportionment.................................................................... 23
ARTICLE 9
EMPLOYEE BENEFITS
9.1 Individual Account Plans......................................................... 23
9.2 Plans Following the Closing...................................................... 23
ARTICLE 10
CONDITIONS TO CLOSING
10.1 Conditions to Obligations of Buyer and Seller.................................... 24
10.2 Conditions to Obligation of Buyer................................................ 24
10.3 Conditions to Obligation of Seller............................................... 26
ARTICLE 11
SURVIVAL; INDEMNIFICATION
11.1 Survival of Representations, Warranties and Covenants............................ 27
11.2 Indemnification by Parent........................................................ 27
11.3 Indemnification by Buyer......................................................... 28
11.4 Terms of Indemnification......................................................... 29
11.5 Exclusive Remedy................................................................. 31
11.6 Damages Net of Insurance, Etc.................................................... 31
ARTICLE 12
TERMINATION
12.1 Grounds for Termination.......................................................... 32
12.2 Effect of Termination............................................................ 32
ARTICLE 13
MISCELLANEOUS
13.1 Notices.......................................................................... 32
13.2 Amendments and Waivers........................................................... 33
13.3 Expenses......................................................................... 33
13.4 Successors and Assigns........................................................... 33
13.5 Governing Law.................................................................... 33
13.6 Counterparts; Facsimile Signatures............................................... 33
13.7 Third Party Beneficiaries........................................................ 34
13.8 Entire Agreement................................................................. 34
13.9 Headings......................................................................... 34
13.10 Schedules........................................................................ 34
</TABLE>
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STOCK PURCHASE AGREEMENT
AGREEMENT dated this 29th day of February, 1996 ("Agreement")
between Frontier Insurance Company, a New York corporation ("Buyer"), and NI
Acquisition Corp., a Texas corporation ("Seller") and, for purposes of Section
2.3(c) and Article 11 hereof only, Capsure Holdings Corp., a Delaware
corporation ("Parent").
WITNESSETH:
WHEREAS, Seller is the record and beneficial owner of all of the
issued and outstanding shares of common stock, $.01 par value per share (the
"Common Stock"), and preferred stock, $.01 par value per share (the "Preferred
Stock") of United Capitol Holding Company, a Delaware corporation (the
"Company"); and
WHEREAS, Seller desires to sell all of the issued and outstanding
shares of Common Stock and Preferred Stock (collectively, the "Shares") to
Buyer, and Buyer desires to purchase the Shares from Seller, upon the terms and
subject to the conditions hereinafter set forth.
NOW, THEREFORE, the parties hereto agree as follows:
ARTICLE 1
DEFINITIONS
1.1 Definitions. The following terms, as used herein, have the
following meanings:
"Adjusted Closing Statements" shall have the meaning ascribed to
it in Section 2.3(b).
"Affiliate" means, with respect to any Person, any other Person
directly or indirectly controlling, controlled by, or under common control with
such Person; provided, however, that for purposes of this Agreement neither the
Company nor any of its Subsidiaries shall be considered an Affiliate of Seller.
"Agreement" shall have the meaning ascribed to it in the first
paragraph of this Agreement.
"Applicable Tax Rate" means the corporate Tax rate (without the
application of net operating loss carryovers) actually applicable to Buyer or
Seller at the time a Tax Benefit becomes allowable to Buyer, any of its
Affiliates, Seller, the Company or a Subsidiary of the Company (as the case may
be).
"Arbitrating Accountant" shall have the meaning ascribed to it in
Section 2.3(b).
"Audited Consolidated Financial Statements" shall have the
meaning ascribed to it in Section 3.8(a).
"Audited Statutory Financial Statements" shall have the meaning
ascribed to it in Section 3.8(b).
"Audited UCM Financial Statements" shall have the meaning
ascribed to it in Section 3.8(a).
"Balance Sheet Date" means December 31, 1995.
"Basket" shall have the meaning ascribed to it in Section
11.4(a)(i).
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"Benefit Arrangement" means any employment, severance or similar
contract, or any plan or arrangement (whether or not written) providing for
severance benefits, disability, health and life insurance coverage (including
any self-insured arrangements), workers' compensation, disability benefits,
vacation benefits, retirement benefits, deferred compensation, profit-sharing,
bonuses, stock options or other forms of incentive compensation or
post-retirement insurance, compensation or benefits that (a) is not an Employee
Plan, (b) is entered into or maintained, by Seller or any of its ERISA
Affiliates and (c) covers any employee or former employee of the Company or any
of its Subsidiaries.
"Buyer" shall have the meaning ascribed to it in the first
paragraph of this Agreement.
"Business" means the businesses of the Company and its
Subsidiaries taken as a whole.
"Closing" shall have the meaning ascribed to it in Section 2.2.
"Closing Adjusted Surplus" means the Surplus of UCIC as set forth
in the Closing Balance Sheet (i) minus the Invested Assets (including the
investment in Subsidiaries) as set forth in the Closing Balance Sheet, (ii) plus
such Invested Assets (excluding the investment in Subsidiaries) reflected at the
fair market value thereof as of the Closing Date, (iii) plus the positive amount
of any current liability for Taxes that is the responsibility of Seller pursuant
to Section 8.6 hereof that is reflected in the Closing Balance Sheet, and (iv)
minus the positive amount of any Taxes that is reflected as a recoverable in the
Closing Balance Sheet and which is recoverable by Parent or an Affiliate of
Parent pursuant to Section 8.1(c).
"Closing Balance Sheet" shall have the meaning ascribed to it in
Section 2.3(a).
"Closing Date" means the date of the Closing.
"Closing Income Statement" shall have the meaning ascribed to it
in Section 2.3(a).
"Closing Purchase Price" shall have the meaning ascribed to it in
Section 2.1.
"Closing Statements" shall have the meaning ascribed to it in
Section 2.3(a).
"Closing Worksheet" shall have the meaning ascribed to it in
Section 2.3(a).
"Code" means the United States Internal Revenue Code of 1986, as
amended from time to time, and the rules and regulations promulgated thereunder.
"Common Stock" shall have the meaning ascribed to it in the
second paragraph of this Agreement.
"Company" shall have the meaning ascribed to it in the second
paragraph of this Agreement.
"Confidentiality Agreement" shall have the meaning ascribed to it
in Section 6.1.
"Credit Agreement" shall have the meaning ascribed to it in
Section 5.5.
"Damages" shall have the meaning ascribed to it in Section
11.2(a).
"Direct Rollover" shall have the meaning ascribed to it in
Section 9.1.
"Employee" shall mean any full time, part-time or former employee
of the Company or any of its Subsidiaries who is eligible to participate in an
Employee Plan.
2
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"Employee Plan" means any "employee benefit plan", as defined in
Section 3(3) of ERISA, that (a) is subject to any provision of ERISA, (b) is
maintained or contributed to by Seller or any ERISA Affiliate of Seller and (c)
covers any employee or former employee of the Company or any of its
Subsidiaries.
"Environmental Laws" shall have the meaning ascribed to it in
Section 3.17.
"ERISA" means the Employee Retirement Income Security Act of
1974, as amended, and the rules and regulations promulgated thereunder.
"ERISA Affiliate" of any entity means any other entity which,
together with such entity, would be treated as a single employer under Section
414 of the Code.
"Estimated Adjusted Surplus" means the Surplus of UCIC as set
forth in the Estimated SAP Closing Balance Sheet (i) minus the Invested Assets
(including the investment in Subsidiaries) as set forth in the Estimated SAP
Closing Balance Sheet, (ii) plus such Invested Assets (excluding the investment
in Subsidiaries) reflected at the fair market value thereof as of two business
days prior to the date of delivery of the Estimated SAP Closing Balance Sheet,
(iii) plus the positive amount of any current liability for Taxes that is the
responsibility of Seller pursuant to Section 8.6 hereof, that is reflected in
the Estimated SAP Closing Balance Sheet, and (iv) minus the positive amount of
any Taxes that is reflected as a recoverable in the Estimated SAP Closing
Balance Sheet and which is recoverable by Parent or an Affiliate of Parent
pursuant to Section 8.1(c).
"Estimated GAAP Closing Balance Sheet" shall have the meaning
ascribed to it in Section 2.2(c)(ii).
"Estimated SAP Closing Balance Sheet" shall have the meaning
ascribed to it in Section 2.2(c)(i).
"Estimated Worksheet" shall have the meaning ascribed to it in
Section 2.3(c)(i).
"Federal Tax" means any Tax imposed under Subtitle A of the Code.
"Final Determination" means (a) with respect to Federal Taxes, a
"determination" as defined in Section 1313(a) of the Code or execution of an
Internal Revenue Service Form 870-AD and, with respect to Taxes other than
Federal Taxes, any final determination of liability in respect of a Tax that,
under applicable law, is not subject to further appeal, review or modification
through proceedings or otherwise (including the expiration of a statute of
limitations or a period for the filing of claims for refunds, amended returns or
appeals from adverse determinations) or (b) the payment of Tax by Buyer, Seller
or any of their Affiliates, whichever is responsible for payment of such Tax
under applicable law, with respect to any item disallowed or adjusted by a
Taxing Authority, provided that such responsible party determines that no action
should be taken to recoup such payment and the other party agrees.
"Frontier 401(k) Plan" shall have the meaning ascribed to it in
Section 9.1.
"Frontier Pacific" shall have the meaning ascribed to it in
Section 10.1(d).
"GAAP" means U.S. generally accepted accounting principles.
"HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act
of 1976, as amended, and the rules and regulations promulgated thereunder.
"Hazardous Materials" shall have the meaning ascribed to
it in Section 3.17.
"IBNR" shall have the meaning ascribed to it in Section
2.2(d)(i).
3
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"Indemnified Party" shall have the meaning ascribed to it in
Section 11.6.
"Individual Account Plans" means the Pension Plan and the Parent
401(k) Plan.
"Intercompany Account Statement" shall have the meaning ascribed
to it in Section 5.11.
"Invested Assets" means, as of any date, with respect to (a)
UCIC, those assets required to be included on Page 2, Line 8(a) of UCIC's
Statutory Annual Statement and (b) the Company and its other Subsidiaries,
assets of the type described in clause (a) above.
"Investment Portfolio Adjustments" means the actions taken by
Seller or any of its Subsidiaries to comply with the obligations set forth in
Section 5.7 and in connection with the payment of the Special Dividends.
"Leased Properties" means any offices, buildings and other real
property that are leased by the Company or any of its Subsidiaries as of the
date hereof and that are used in the operation of the Business.
"Lien" means, with respect to any material property or asset, any
mortgage, lien, pledge, security interest or encumbrance of any kind in respect
of such material property or asset. For the purposes of the Agreement, a Person
shall be deemed to own any property or asset subject to a Lien if it has
acquired or holds such property or asset subject to the interest of a vendor or
lessor under any conditional sale agreement, capital lease or other title
retention agreement relating to such property or asset.
"Liquidated Damages" shall have the meaning ascribed to it in
Section 11.4(a)(ii).
"Litigation" shall have the meaning ascribed to it in Section
3.11.
"Material Adverse Effect" means, with respect to any Person, a
material adverse effect on the financial condition, business or assets of such
Person and its Subsidiaries, taken as a whole, excluding the effect of the
transactions contemplated under this Agreement including, without limitation,
the Investment Portfolio Adjustments and the payment of the Special Dividends.
"MGA Agreement" shall have the meaning ascribed to it in Section
7.4.
"Multiemployer Plan" means each Employee Plan that is a
multiemployer plan, as defined in Section 3(37) of ERISA.
"Negative Material Breach" means aggregate costs and penalties in
excess of $75,000; provided, however, that no individual cost or penalty shall
be included in such aggregate unless it exceeds $10,000.
"Parent" shall have the meaning ascribed to it in the first
paragraph of this Agreement.
"Parent 401(k) Plan" means the Capsure Holdings Corp. 401(k)
Plan.
"Pension Plan" means the United Capitol Insurance Company Pension
Plan and Trust.
"Person" means an individual, corporation, partnership,
association, trust, limited liability company, limited liability partnership or
other entity or organization, including a government or political subdivision or
an agency or instrumentality thereof.
"Post-Closing Tax Period" means any Tax period (or portion
thereof) commencing on or after the close of business on the Closing Date.
4
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"Post-Closing Purchase Price Adjustment" shall have the meaning
ascribed to it in Section 2.3(c).
"Pre-Closing Tax Period" means any Tax period (or portion
thereof) ending on or before the close of business on the Closing Date.
"Purchase Price" shall have the meaning ascribed to it in Section
2.1.
"Reinsurance Agreement" shall have the meaning ascribed to it in
Section 7.4.
"Reserves" shall have the meaning ascribed to it in Section 3.19.
"SAP" means the statutory accounting practices prescribed or
permitted by the Office of the Commissioner of Insurance of the State of
Wisconsin or the National Association of Insurance Commissioners.
"SAP Equity Adjustment" shall have the meaning ascribed to it in
Section 2.2(f).
"Seller" shall have the meaning ascribed to it in the first
paragraph of this Agreement.
"Seller Group" means, with respect to Federal income Taxes, the
affiliated group of corporations (as defined in Section 1504(a) of the Code) of
which Seller is a member.
"Seller's Senior Officers" means Bruce A. Esselborn, Mary Jane
Robertson, Kelly L. Stonebraker and Ronald D. Bobman.
"Shares" shall have the meaning ascribed to it in the third
paragraph of this Agreement.
"Special Dividends" means the aggregate of all dividends paid by
the Company to Seller and by the Company's Subsidiaries to the Company from
January 1, 1996 through and including the Closing Date.
"Straddle Period" shall have the meaning ascribed to it in
Section 8.8.
"Subsidiary" means, with respect to any Person, any entity whose
securities or other ownership interests having ordinary voting power to elect a
majority of the board of directors or other persons performing similar functions
are, at the time, directly owned by such Person or indirectly owned by such
Person through a Subsidiary.
"Surplus" means surplus as regards policyholders determined in
accordance with SAP.
"Tangible Net Worth" shall have the meaning ascribed to it in
Section 5.14.
"Tax" means (a) any net income tax or franchise tax based on net
income, (including any alternative or add-on minimum taxes, and gross income,
gross receipts, premium, sales, use, ad valorem, value added, transfer, profits,
license, payroll, employment, excise, severance, stamp, occupation, property or
windfall profit tax, custom duty or other tax, governmental fee or other like
assessments), together with any interest, penalty, addition to tax or additional
amount due from, or in respect of, the Company and its Subsidiaries imposed by a
Taxing Authority and (b) any liability for the payment of any amount of the type
described in the immediately preceding clause (a) as a result of the Company or
any of its Subsidiaries being a member of Seller Group.
"Tax Benefit" means any deduction, amortization, exclusion from
income or credit or other allowance.
5
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"Tax Loss" shall have the meaning ascribed to it in Section
11.2(c)(iii).
"Tax Returns" means all material Tax returns, statements, reports
and forms, including, without limitation, consolidated returns, statements,
reports and forms, where applicable.
"Tax Sharing Agreements" means the various Tax sharing agreements
entered into by and between Parent, Seller, the Company and its Subsidiaries,
applicable to all taxable periods commencing February 20, 1990 and ending on the
Closing Date.
"Taxing Authority" means any governmental authority (domestic or
foreign) responsible for the imposition of any Tax.
"Termination Notice" shall have the meaning ascribed to it in
Section 10.1(d).
"Third Party Claim" shall have the meaning ascribed to it in
Section 11.4(d)(i).
"UCIC" shall have the meaning ascribed to it in Section
2.2(c)(i).
"UCM" means United Capitol Managers, Inc., a Delaware corporation
and wholly-owned subsidiary of UCIC.
"Western Surety" shall have the meaning ascribed to it in Section
7.4.
ARTICLE 2
PURCHASE AND SALE
2.1 Purchase and Sale. Upon the terms and subject to the
conditions set forth in this Agreement, Seller agrees to sell to Buyer, and
Buyer agrees to purchase from Seller, the Shares at the Closing. The purchase
price for the Shares is Thirty Million Nine Hundred Twenty Thousand and 00/100
Dollars ($30,920,000) (the "Purchase Price") plus or minus the amount of the SAP
Equity Adjustment calculated pursuant to Section 2.2(f) (the "Closing Purchase
Price"). The Closing Purchase Price shall be paid in cash as provided in Section
2.2 and further adjusted, if applicable, pursuant to the provisions of Section
2.3 hereto.
2.2 Closing. The closing of the purchase and sale of the Shares
hereunder (the "Closing") shall take place at the offices of Epstein Becker &
Green, P.C., New York, New York as soon as possible, but in no event later than
twelve business days after satisfaction of the conditions set forth in Article
10, or at such other time or place as Buyer and Seller may agree. At the
Closing:
(a) Buyer shall deliver to Seller the Closing Purchase
Price in immediately available funds by wire transfer to an account of Seller,
designated in writing by Seller by notice to Buyer at least two business days
prior to the Closing Date, and all documents to be delivered under Section 10.3.
(b) Seller shall deliver to Buyer certificates for the
Shares duly endorsed in blank or accompanied by stock powers duly endorsed in
blank, and all documents to be delivered under Section 10.2.
(c) At least five business days prior to the Closing Date,
Seller shall deliver, or cause to be delivered, to Buyer the following:
(i) a balance sheet of United Capitol Insurance
Company, a Wisconsin corporation ("UCIC"), estimated as of the Closing
Date prepared (x) in accordance with SAP and (y) on a basis consistent
with the SAP balance sheet included in the Audited Statutory Financial
Statements (the
6
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"Estimated SAP Closing Balance Sheet"), accompanied by a worksheet (the
"Estimated Worksheet") setting forth the calculation of Estimated
Adjusted Surplus, together with the related statement of income for the
period January 1, 1996 through the Closing Date;
(ii) an interim consolidated balance sheet of the
Company and its Subsidiaries estimated as of the Closing Date prepared,
except as noted in Section 2.2(e)(ii), (x) in accordance with GAAP, (y)
on a basis consistent with the GAAP balance sheet included in the 1995
Audited Consolidated Financial Statements (the "Estimated GAAP Closing
Balance Sheet"), together with the related consolidated statement of
income for the period January 1, 1996 through and including the Closing
Date; and
(iii) a certification by the Chief Financial
Officer of Seller and the Controller of the Company representing that
the Estimated SAP Closing Balance Sheet and the Estimated GAAP Closing
Balance Sheet, together with the respective related statements of income
for the period January 1, 1996 through and including the Closing Date,
have been prepared, in all material respects, in accordance with SAP
and, except as noted in Section 2.2(e)(ii), in accordance with GAAP,
respectively, applied on a basis consistent with the Audited Statutory
Financial Statements and the 1995 Audited Consolidated Financial
Statements, respectively, and in accordance with the provisions of
Section 2.2(d) and 2.2(e), respectively.
(d) The Estimated SAP Closing Balance Sheet shall be
prepared in accordance with SAP as set forth in Section 2.2(c)(i) and shall
reflect the following:
(i) Reserves shall be estimated in accordance with
generally accepted actuarial standards and consistent with past practice
and, in estimating Reserves as at the Closing Date, such calculation
shall include, among other things, the amounts of the (x) incurred but
not reported losses (net of ceded reinsurance) and (y) unpaid
unallocated loss adjustment expenses ((x) and (y) together referred to
as "IBNR", which IBNR was twenty-six million dollars ($26,000,000) as of
December 31, 1995); and
(ii) Invested Assets comprised only of (x) cash and
cash equivalents, (y) short-term investments and (z) fixed income
securities that were owned by the Company on December 31, 1995, and
which are not set forth on Schedule 2.2(d)(ii) hereto furnished by
Buyer;
(e) The Estimated GAAP Closing Balance Sheet shall be
prepared on an interim basis in accordance with GAAP (except as provided in
subsection (ii) below) applied as set forth in Section 2.2(c)(ii) and shall
reflect the following:
(i) the accounts of the Company and its
Subsidiaries on a stand-alone basis; and
(ii) the exclusion of financial statement
footnotes.
(f) The "SAP Equity Adjustment" shall be equal to the
positive amount of the difference between $19,000,000 and Estimated Adjusted
Surplus. The Closing Purchase Price shall thereupon be determined as follows:
(i) if Estimated Adjusted Surplus exceeds $19,000,000, then the Closing Purchase
Price shall be equal to the Purchase Price plus the amount by which Estimated
Adjusted Surplus exceeds $19,000,000, or (ii) if Estimated Adjusted Surplus is
less than $19,000,000, then the Closing Purchase Price shall be equal to the
Purchase Price minus the amount by which $19,000,000 exceeds Estimated Adjusted
Surplus.
2.3 Post-Closing Purchase Price Adjustment. (a) Within 45 days
after the Closing Date, Buyer shall cause to be prepared, under the supervision
of Seller and its representatives, a balance sheet of UCIC
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as at the Closing Date (the "Closing Balance Sheet") and a statement of income
of UCIC for the period January 1, 1996 through and including the Closing Date
(the "Closing Income Statement"), each prepared on a basis consistent with the
Estimated SAP Closing Balance Sheet, with account balances computed in
accordance with SAP consistently applied, and a worksheet setting forth the
calculation of Closing Adjusted Surplus (the "Closing Worksheet" and, together
with the Closing Balance Sheet, the "Closing Statements") and certified to such
effect by the Controller of the Company and approved by Buyer and Seller.
(b) Within 15 days after receipt of the Closing
Statements, either Buyer or Seller may notify the other that it disputes all or
part of the Closing Statements, and if neither Buyer nor Seller so notifies the
other, then Buyer and Seller shall be deemed to have accepted the Closing
Statements. If either party notifies the other of a dispute, then, during the
15-day period following the date of the last notice of dispute given, Buyer and
Seller shall use reasonable efforts to resolve the dispute and agree upon the
Closing Statements. If Buyer and Seller are unable to resolve the dispute within
such 15-day period, then the dispute shall be submitted within five days of such
15-day period to an office of KPMG Peat Marwick in the eastern United States
having a significant property and casualty insurance practice for determination
(the "Arbitrating Accountant"). The determination of the Arbitrating Accountant
shall be made within 30 days after submission by the parties hereto, and any
changes to the Closing Statements required by such determination shall be set
forth by the Arbitrating Accountant in adjustments to the Closing Statements
(the "Adjusted Closing Statements"), which Adjusted Closing Statements shall be
final and binding and shall be delivered by the Arbitrating Accountant to Buyer
and Seller. If the Arbitrating Accountant's determination with respect to all
disputes (i) results in a net adjustment to the Closing Purchase Price in favor
of Seller, then Buyer shall pay the reasonable fees and expenses of the
Arbitrating Accountant; (ii) results in a net adjustment to the Closing Purchase
Price in favor of Buyer, then Seller shall pay the reasonable fees and expenses
of the Arbitrating Accountant; (iii) results in no net adjustment to the Closing
Purchase Price, then the party giving the dispute notice shall pay the
reasonable fees and expenses of the Arbitrating Accountant; or (iv) results in
no net adjustment to the Closing Purchase Price and both Buyer and Seller gave a
dispute notice, then Buyer shall pay fifty percent (50%) and Seller shall pay
fifty percent (50%) of the reasonable fees and expenses of the Arbitrating
Accountant.
(c) The Closing Purchase Price shall be adjusted as
follows (the "Post-Closing Purchase Price Adjustment"): (i) If Closing Adjusted
Surplus set forth on the Closing Worksheet (or the closing worksheet included in
the Adjusted Closing Statements, if applicable) exceeds Estimated Adjusted
Surplus, then Buyer shall pay to Seller the amount of such difference, or (ii)
if Closing Adjusted Surplus set forth on the Closing Worksheet (or the closing
worksheet included in the Adjusted Closing Statements, if applicable) is less
than Estimated Adjusted Surplus, then Parent shall pay to Buyer the amount of
such difference. Any payment required in this Section shall be made in
immediately available funds by wire transfer to an account of Seller or Buyer,
as the case may be, as designated in writing by notice by the other party,
within 10 days following the determination of such Post-Closing Purchase Price
Adjustment.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF SELLER
Seller represents and warrants to Buyer as of the date hereof and
as of the Closing Date that:
3.1 Corporate Existence and Power. Seller has been incorporated
and is validly existing as a corporation in good standing under the laws of the
State of Texas and has all corporate powers required to carry on its business as
now conducted. The Company (a) has been incorporated and is validly existing as
a corporation in good standing under the laws of the State of Delaware, (b) has
all corporate powers required to carry on its business as now conducted, (c) has
all governmental licenses, permits, authorizations, consents and approvals
required to carry on the Business as now conducted, all of which are in full
force and effect, and (d) is qualified to do business as a foreign corporation
and is in good standing in each jurisdiction where such qualification is
necessary, except, with respect to clauses (c) and (d) above, for those
licenses, permits, authorizations, consents
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and approvals the absence of which, and those jurisdictions where failure to be
so qualified, would not result in a Negative Material Breach. Seller has
heretofore provided to Buyer true and complete copies of the certificate of
incorporation and bylaws of Seller and the Company as in effect on the date
hereof.
3.2 Corporate Authorization. Except as set forth in Schedule 3.2
hereto, the execution, delivery and, subject to the receipt of the approvals
referred to in Section 3.3, performance by Seller of this Agreement and the
transactions contemplated hereunder are within Seller's corporate powers and
have been duly authorized by all necessary corporate action on the part of
Seller. This Agreement constitutes a valid and legally binding agreement of
Seller, enforceable against Seller in accordance with its terms, subject to (a)
bankruptcy, insolvency, reorganization, fraudulent transfer, moratorium and
other similar laws now or hereafter in effect relating to or affecting the
enforcement of creditors' rights generally and the rights of creditors of
insurance companies generally and (b) general principles of equity (regardless
of whether considered in a proceeding at law or equity).
3.3 Governmental Authorization. Except as set forth in Schedule
3.3 hereto, the execution, delivery and performance by Seller of this Agreement
requires no action by or in respect of, or filing with, any governmental body,
agency, or official on the part of Seller or any of its Subsidiaries other than
(a) compliance with any applicable requirements of the HSR Act, (b) approvals or
filings under applicable Federal and state securities laws and under the
applicable state insurance laws of the jurisdictions set forth on Schedule 3.3
hereto, (c) filings and notices not required to be made or given until after the
Closing Date and filings, at any time, of Tax Returns, Tax reports and Tax
information statements and (d) any such action or filing as to which the failure
to make or obtain would not result in a Negative Material Breach.
3.4 Non-Contravention. Except as set forth in Schedule 3.4
hereto, the execution, delivery and performance by Seller of this Agreement do
not and will not (a) violate the certificate of incorporation or bylaws of
Seller, the Company or any of its Subsidiaries, (b) assuming compliance with the
matters referred to in Section 3.3, violate any applicable law, rule,
regulation, judgment, injunction, order or decree, (c) require any consent or
other action by any Person under, constitute a default under, or give rise to
any right of termination, cancellation or acceleration of any right or
obligation of the Company or any of its Subsidiaries, or to a loss of any
benefit to which the Company or any Subsidiary of the Company is entitled, under
any agreement or other instrument binding upon the Company or any of its
Subsidiaries or (d) result in the creation or imposition of any Lien on any
asset of the Company or any of its Subsidiaries except, in the case of clauses
(b), (c) and (d) above, to the extent that any such violation, failure to obtain
any such consent or other action, default, right, loss or Lien would not result
in a Negative Material Breach.
3.5 Capitalization. (a) The authorized capital stock of the
Company consists of 650,000 shares of Common Stock and 493,750 shares of
Preferred Stock. As of the date hereof, there are outstanding 73,850 shares of
Common Stock and 447,418 shares of Preferred Stock.
(b) All outstanding shares of Common Stock and Preferred
Stock have been duly authorized and validly issued and are fully paid
and non-assessable. Except as set forth in this Section 3.5 and Schedule 3.5
hereto, there are no outstanding (i) shares of capital stock or voting
securities of the Company, (ii) securities of the Company convertible into or
exchangeable for shares of capital stock or voting securities of the Company or
(iii) options or other rights to acquire from the Company, or other obligations
of the Company to issue, any capital stock, voting securities or securities
convertible into or exchangeable for capital stock or voting securities of the
Company; and there are no outstanding obligations of the Company or any of its
Subsidiaries to repurchase, redeem or otherwise acquire any such securities.
3.6 Ownership of Shares. Except as set forth in Schedule 3.6
hereto, Seller is the record and beneficial owner of the Shares, free and clear
of any Lien (except for the pledge pursuant to the Credit Agreement) and will
transfer and deliver to Buyer at the Closing valid title to the Shares, free and
clear of any Lien, except Liens arising as a result of any action taken by Buyer
or any of its Affiliates; provided, however,
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that Seller makes no representation regarding the ability of any Person other
than Seller to transfer or otherwise dispose of the Shares without registration
or qualification under, or in compliance with, applicable Federal securities or
state securities or insurance laws.
3.7 Subsidiaries. Except as set forth in Schedule 3.7: (a) Each
Subsidiary of the Company has been incorporated and is validly existing as a
corporation in good standing under the laws of its jurisdiction of incorporation
and has all corporate powers and all governmental licenses, permits,
authorizations, consents and approvals required to carry on its business as now
conducted, all of which are in full force and effect, and is qualified to do
business as a foreign corporation and is in good standing in each jurisdiction
where such qualification is necessary, except for those jurisdictions where the
failure to be so qualified, and those licenses, authorizations, consents and
approvals the absence of which, would not result in a Negative Material Breach.
Each Subsidiary of the Company, together with its jurisdiction of incorporation
and percentage ownership of the capital stock of any other Subsidiary, is
described on Schedule 3.7 hereto. Attached to Schedule 3.7 are true and complete
copies of the articles of incorporation and by-laws of each of the Subsidiaries
of the Company.
(b) Except as set forth on Schedule 3.7 hereto, as of the
Closing Date, all of the outstanding capital stock of, or other voting
securities or ownership interests in, each Subsidiary of the Company will be
owned by the Company, directly or indirectly, free and clear of any Lien. There
are no outstanding (i) securities of the Company or any of its Subsidiaries
convertible into or exchangeable for shares of capital stock or other voting
securities or ownership interests in any Subsidiary of the Company or (ii)
options or other rights to acquire from the Company or any of its Subsidiaries,
or other obligations of the Company or any of its Subsidiaries to issue, any
capital stock or other voting securities or ownership interests in, or any
securities convertible into or exchangeable for any capital stock or other
voting securities or ownership interests in, any Subsidiary of the Company; and
there are no outstanding obligations of the Company or any of its Subsidiaries
to repurchase, redeem or otherwise acquire any such securities.
3.8 Financial Statements. (a) GAAP Financial Statements. As of
the date of this Agreement, the draft consolidated balance sheets of the Company
and its Subsidiaries as of December 31, 1994 and 1995 and the related draft
consolidated statements of income and cash flows for the years then ended, which
previously have been furnished to Buyer, present fairly, in all material
respects, the consolidated financial position of the Company and its
Subsidiaries as of the dates thereof and the consolidated results of operations
of the Company and its Subsidiaries for the respective periods then ended in
conformity with GAAP. In addition, the draft balance sheet of UCM as of December
31, 1995 and the related statement of income and cash flows for the year then
ended, which previously have been furnished to Buyer, present fairly, in all
material respects, the financial position of UCM as of December 31, 1995 and the
results of operations of UCM for the year then ended in conformity with GAAP. As
of the Closing Date, the audited consolidated balance sheets of the Company and
its Subsidiaries as of December 31, 1994 and 1995 and the related audited
consolidated statements of income and cash flows for the years then ended (the
"Audited Consolidated Financial Statements"), to be furnished to Buyer pursuant
to Section 5.6 hereof, will present fairly, in all material respects, the
consolidated financial position of the Company and its Subsidiaries as of the
dates thereof and the consolidated results of operations of the Company and its
Subsidiaries for the respective periods then ended in conformity with GAAP. In
addition, as of the Closing Date the audited balance sheets of UCM as of
December 31, 1994 and 1995 and the related audited statements of income and cash
flows for the years then ended (the "Audited UCM Financial Statements"), to be
furnished to Buyer pursuant to Section 5.6 hereof, will present fairly, in all
material respects, the financial position of UCM as of the dates thereof and the
results of operations of UCM for the years then ended in conformity with GAAP.
(b) Statutory Financial Statements. The audited statutory
balance sheets of UCIC as of December 31, 1993 and December 31, 1994, and the
related audited statutory statements of income and changes in capital and
surplus and cash flows for each of the years then ended and, as at the date of
this Agreement, the draft statutory balance sheet of UCIC as of December 31,
1995 and the related draft statutory statements of income and changes in capital
and surplus and cash flows for the year then ended, which previously have been
furnished to Buyer, present fairly, in all material respects, the admitted
assets, liabilities, capital and
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surplus, cash flows and other funds of UCIC as at the dates and for the periods
indicated, in conformity with SAP. As of the Closing Date, the audited statutory
balance sheet of UCIC as of December 31, 1995 and the related audited statutory
statements of income and changes in capital and surplus and cash flows for the
year then ended (the "Audited Statutory Financial Statements") to be furnished
to Buyer pursuant to Section 5.6 hereof, will present fairly, in all material
respects, the admitted assets, liabilities, capital and surplus, cash flows and
other funds of UCIC as at the date and for the period indicated, in conformity
with SAP.
3.9 Absence of Certain Changes. Except as disclosed in Schedule
3.9 hereto, since the Balance Sheet Date, the Business has been conducted, in
all material respects, in the ordinary course consistent with past practices,
and other than (a) the Investment Portfolio Adjustments and the transactions
relating to, and the payment of, the Special Dividends, (b) any payments
pursuant to the Tax Sharing Agreements, and (c) a downgrade, if any, in UCIC's
A.M. Best & Co. rating to "A-" or an announcement, if any, that UCIC's rating is
under review with or without negative implications, there has not been:
(i) any declaration, setting aside or payment of
any dividend or other distribution with respect to any shares of capital
stock of the Company or any of its Subsidiaries or any repurchase,
redemption or other acquisition by the Company or any of its
Subsidiaries of any outstanding shares of capital stock or other
securities of, or other ownership interests in, the Company or any of
its Subsidiaries;
(ii) any incurrence, assumption or guarantee by the
Company or any of its Subsidiaries of any outstanding indebtedness for
borrowed money in excess of an aggregate of $100,000 other than under,
or in connection with, the Credit Agreement;
(iii) any transaction or commitment made, or any
contract or agreement entered into, by the Company or any of its
Subsidiaries requiring payments aggregating in excess of $250,000, other
than obligations arising under or in connection with insurance,
reinsurance or indemnity agreements or policies, surety bonds, agency,
brokerage or similar contracts or undertakings issued or entered into in
the ordinary course of the Business consistent with past practices, or
transactions or commitments contemplated by this Agreement;
(iv) any material change in any method of
accounting or accounting practice by the Company or any of its
Subsidiaries, except for any such change after the date hereof as a
result of a change in GAAP or SAP or as contemplated by Sections 2.2(d)
and 2.2(e) hereto; or
(v) any (x) employment, deferred compensation,
severance, retirement or other similar agreement entered into with any
director, officer or employee of the Company or any of its Subsidiaries
(or any amendment to any such existing agreement), other than in the
ordinary course of Business consistent with past practice, (y) grant of
any severance or termination pay to any director, officer or employee of
the Company or any of its Subsidiaries other than in the ordinary course
of Business consistent with existing policies, or (z) change in
compensation or other benefits payable to any director, officer or
employee of the Company or any of its Subsidiaries other than in the
ordinary course of Business consistent with past practice.
3.10 Material Contracts. Except as disclosed in Schedule 3.10
hereto, neither the Company nor any of its Subsidiaries is bound by or a party
to any contract, other than insurance, reinsurance or indemnity agreements or
policies, surety bonds, agency, brokerage or similar contracts or undertakings,
or contracts cancelable on not more than 60 days' notice, which provides for
payments aggregating $100,000 or more, and the Company has not received written
notice of any breach under any such contract.
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3.11 Litigation. Except as set forth on Schedule 3.11 hereto and
except for any action, suit, investigation or proceeding ("Litigation") which
may result in, or which relates in any way to, any insurance, reinsurance or
indemnity policy or agreement, surety bond or similar contract or undertaking
issued or entered into by the Company or any of its Subsidiaries, there is no
Litigation pending or, to the knowledge of Seller's Senior Officers, threatened
against or affecting, the Company or any of its Subsidiaries or any of their
respective properties before any court or arbitrator or any governmental body,
agency or official which, assuming an adverse decision, individually and net of
insurance proceeds or other recoveries and any financial statement reserve for
such Litigation, would reasonably be expected to require payments by the Company
or any of its Subsidiaries of an amount in excess of $50,000.
3.12 Compliance with Laws. Except as set forth on Schedule 3.12
hereto or as previously disclosed to Buyer in writing expressly for the purposes
of this Section 3.12 prior to the date hereof, the Company and its Subsidiaries
are in compliance with all applicable laws, statutes, ordinances and
regulations, whether Federal, state or local, except where the failure to comply
would not result in a Negative Material Breach.
3.13 Properties. Schedule 3.13-A hereto sets forth a schedule of
the fixed assets of the Company and its Subsidiaries as set forth on the draft
consolidated balance sheet of the Company and its Subsidiaries as at December
31, 1995 previously furnished to Buyer and the related costs thereof and will,
at the Closing Date, set forth a schedule of such fixed assets as set forth on
the audited consolidated balance sheet of the Company and its Subsidiaries as at
December 31, 1995 to be delivered pursuant to Section 5.6 hereof, and related
costs thereof, except where the failure to schedule assets would not result in a
Negative Material Breach. Except as set forth on Schedule 3.13-B hereto, the
Company and its Subsidiaries have good title to or, in the case of leased
property, have valid leasehold interests in, all property and assets (whether
real or personal, tangible or intangible, other than the Invested Assets which
are referred to in Section 3.21 hereof), to be reflected on the audited
consolidated balance sheet of the Company and its Subsidiaries as at December
31, 1995 or acquired after the Balance Sheet Date except for (a) property and
assets sold or otherwise disposed of since the Balance Sheet Date in the
ordinary course of Business consistent with past practice, (b) property or
assets sold or distributed to Seller by the Company pursuant to the Special
Dividends, and (c) such imperfections in title or invalidities in leasehold
interests as do not result in a Negative Material Breach. None of such property
or assets is subject to any Liens, except:
(i) Liens disclosed on the balance sheet contained
in the 1995 Audited Consolidated Financial Statements;
(ii) Liens for Taxes not yet due or being contested
in good faith (and for which adequate accruals or reserves have been
established on the balance sheet contained in the 1995 Audited
Consolidated Financial Statements);
(iii) Liens arising after the Balance Sheet Date in
the ordinary course of the Business consistent with past practice; or
(iv) Liens which do not materially detract from the
value or materially interfere with any present or intended use of such
property or assets.
3.14 Intentionally omitted.
3.15 Brokers' Fees. Except for Smith Barney Inc., whose fees will
be paid by Seller, there is no investment banker, broker, finder or other
intermediary which has been retained by or is authorized to act on behalf of
Seller, the Company or any of its Subsidiaries who might be entitled to any fee
or commission in connection with the transactions contemplated by this
Agreement.
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3.16 ERISA and Employee Representations. (a) Schedule 3.16(a)
identifies each Employee Plan. Seller has furnished or made available to Buyer
copies of the Employee Plans (and, if applicable, related trust agreements) and
all amendments thereto together with the most recent annual report prepared in
connection with any Employee Plan (Form 5500 including, if applicable, Schedule
B thereto). Except as set forth on Schedule 3.16(a) hereto, all required reports
and descriptions of the Employee Plans (including Form 5500 Annual Reports,
Summary Annual Reports and Summary Plan Descriptions, as required) have been
appropriately filed and distributed, and any notice required by ERISA or the
Code or any other state or Federal law or any ruling or regulation of any state
or Federal administrative agency with respect to the Employee Plans have been
appropriately made, and all contributions for all periods prior to the date
hereof have been made, except where the failure to make such filings,
distributions, notices or contributions would not result in a Negative Material
Breach.
(b) Neither Seller nor any ERISA Affiliate of Seller has
incurred, or reasonably expects to incur prior to the Closing Date, any
liability under Title IV or ERISA arising in connection with the termination of,
or complete or partial withdrawal from, any Employee Plan that is reasonably
expected to become a liability of Buyer or any of its ERISA Affiliates after the
Closing Date.
(c) Except as described in Schedule 3.16(c) hereto, each
Employee Plan that is intended to be qualified under Section 401(a) of the Code
is and has been subject to a favorable determination letter from the Internal
Revenue Service and/or has pending a request for a determination timely filed
with the Internal Revenue Service in respect of compliance with the Code. Except
as set forth in Schedule 3.16(c) hereto, each Employee Plan has been maintained
in compliance with its terms and with requirements prescribed by ERISA and the
Code, except where the failure to so comply would not result in a Negative
Material Breach. No Employee Plan is a Multiemployer Plan.
(d) Schedule 3.16(d) identifies each Benefit Arrangement,
and identifies all outstanding claims for benefits made by any Employee
thereunder as of the date hereof other than health, dental, long-term
disability, group life, and group accidental death and dismemberment claims.
Seller has furnished or made available to Buyer copies or descriptions of each
Benefit Arrangement. Except as set forth in Schedule 3.16(d), each Benefit
Arrangement has been maintained in compliance with its terms and with the
requirements prescribed by any and all applicable statutes, orders, rules and
regulations including, without limitation, the payment in full of insurance
premiums due through the date hereof, except where the failure to so comply
would not result in a Negative Material Breach.
(e) Seller previously has furnished Buyer with a list of
all Employees, together with their respective salaries and accrued vacation
days, and identifying those Employees classified by the Company as "exempt"
under the Federal Labor Standards Act as at the delivery date of such list.
3.17 Environmental Matters. To the actual knowledge of Seller's
Senior Officers without inquiry, except as disclosed on Schedule 3.17, neither
the Company nor any of its Subsidiaries nor any other Person, has stored,
disposed or discharged, on, under or about any of the Leased Properties any
flammables, contaminants, gasoline, petroleum products, crude oil, explosives,
radioactive materials, hazardous materials, hazardous wastes, hazardous or toxic
substances, polychlorinated biphenyls or related or similar materials, asbestos
or any material containing asbestos, any air, soil or water pollution, or any
other substance or material as may be defined as a hazardous or toxic substance
(collectively, "Hazardous Materials") under any applicable Federal or state
governmental law, rule, or regulation, including, without limitation, the
Comprehensive Environmental Response, Compensation, and Liability Act of 1980,
as amended (42 U.S.C. Sections 9601, et. seq.), the Hazardous Materials
Transportation Act, as amended (49 U.S.C. Section 1801, et. seq.), the Solid
Waste Disposal Act, as amended (42 U.S.C. Section 6901 et. seq.), the Resource
Conservation and Recovery Act, as amended (42 U.S.C. Sections 6901 et. seq.),
the Federal Water Pollution Prevention and Control Act, as amended (33 U.S.C.
Sections 1251 et. seq.), the Clean Air Act, as amended (42 U.S.C. Sections 7401
et. seq.), the Toxic Substances Control Act, as amended (15 U.S.C. Sections 2601
et. seq.), the Occupational Safety and
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Health Act, as amended (29 U.S.C. Sections 651 et. seq.) and the state laws
implementing said acts (collectively, "Environmental Laws") requiring
remediation or notice to any governmental authority under the Environmental
Laws, and neither the Company nor any of its Subsidiaries has received written
notice from any governmental authority alleging violations of any Environmental
Laws. To the actual knowledge of Seller's Senior Officers without inquiry, none
of the Leased Properties has ever been used to generate, manufacture, refine,
transport, treat, store, handle, dispose, transfer, produce or process material
amounts of Hazardous Materials, except in compliance with Environmental Laws.
Notwithstanding anything to the contrary contained in this Section, no
representation or warranty is being made with respect to the liability of the
Company and its Subsidiaries under any policy or agreement of insurance,
reinsurance or indemnity relating to any Environmental Laws or Hazardous
Materials.
3.18 Intercompany Accounts. Schedule 3.18 hereto lists all
intercompany balances as of the Balance Sheet Date between Seller and its
Affiliates, on the one hand, and the Company and its Subsidiaries, on the other
hand (except for inaccuracies which would not result in a Negative Material
Breach), and describes the general types of intercompany transactions that have
occurred between the Balance Sheet Date and the date of this Agreement.
3.19 Reserves. The reserves for unpaid losses and loss adjustment
expenses, including but not limited to IBNR (collectively, the "Reserves"), in
the draft consolidated balance sheet of the Company and its Subsidiaries as of
December 31, 1995 and the draft statutory financial statement of UCIC as of
December 31, 1995, each previously furnished to Buyer, were, and upon delivery
of the audited consolidated balance sheet of the Company and its Subsidiaries as
of December 31, 1995 and the audited statutory balance sheet of UCIC as of
December 31, 1995 the Reserves therein will be, estimated as of December 31,
1995 in accordance with generally accepted actuarial standards, in accordance
with GAAP and SAP, respectively. Due to the variability and uncertainty which
are intrinsic to the claim evaluation and settlement processes, neither Parent
nor Seller can guaranty, and neither Parent nor Seller assumes any liability or
makes any representation or warranty with respect to, the ultimate adequacy of
Reserves or the sufficiency of Reserves to provide for all unpaid loss and loss
adjustment expense obligations.
3.20 The Company. Prior to the date hereof, the Company has not
engaged in any operations or activities other than operations or activities in
connection with (a) its formation and organization, (b) this Agreement and the
transactions contemplated hereby and (c) the ownership of stock of one or more
of its Subsidiaries.
3.21 Investments. Except as set forth on Schedule 3.21 hereof,
the Company or its Subsidiaries are in possession of all certificates and other
documentation necessary to evidence ownership of the Invested Assets, and has
good and marketable title, free and clear of all Liens, to all Invested Assets
as of December 31, 1995 or acquired after December 31, 1995, other than Invested
Assets that (a) have been disposed of in the ordinary course of the Business
consistent with past practices, or (b) have been transferred or disposed of by
the Company or its Subsidiaries (i) in connection with the Investment Portfolio
Adjustments or (ii) pursuant to transactions relating to, and the payment of,
the Special Dividends.
3.22 Taxes. Except as set forth on Schedule 3.22-A hereto, (a)
all Tax Returns required to be filed with any Taxing Authority by or with
respect to the Company or any of its Subsidiaries with respect to any
Pre-Closing Tax Period have been filed or will be filed in accordance with all
applicable laws (taking into account any extension of a required filing date);
(b) the Company and its Subsidiaries have timely paid all Taxes including,
without limitation, pursuant to the Tax Sharing Agreements, shown as due and
payable on the Tax Returns that have been filed by or on behalf of the Company
and its Subsidiaries; (c) the Company and its Subsidiaries have made or will on
or before the Closing Date make provision for all Taxes payable by the Company
and its Subsidiaries for any pre-Closing Tax Period for which no Tax Return has
yet been filed; (d) the amounts paid to Seller or Parent pursuant to the Tax
Sharing Agreements and the reserves for Taxes with respect to the Company and
its Subsidiaries to be reflected on the Estimated GAAP Closing Balance Sheet
will be
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adequate to cover the Tax liabilities accruing through the date thereof; (e)
there is no action, suit, proceeding, investigation, audit or claim now pending
or, to the knowledge of Seller's Senior Officers, proposed against or with
respect to the Company or its Subsidiaries in respect of any Tax; (f) the
Company and its Subsidiaries have withheld payments of all amounts required to
be withheld and have paid all withholding Taxes required to be paid under
Federal, state, local and foreign Tax laws or have made adequate provision for
all such withholding or payments; (g) no election under Sections 108, 168, 338,
441, 1017, 1033 or 4977 of the Code is in effect with respect to the Company or
any of its Subsidiaries; (h) neither the Company nor any of its Subsidiaries is
required to make any adjustment pursuant to Section 481 of the Code by reason of
a change in accounting method, and there are no applications for changes in
accounting method pending with any Tax Authority; (i) there are no deferred
intercompany gains or losses (as defined in Treasury Regulation 1.1502-13 of the
Code) with respect to the Company and its Subsidiaries, on the one hand, and the
Seller and its Affiliates, on the other hand; (j) neither the Company nor any of
its Subsidiaries is jointly or severally liable for Federal Taxes on income as a
result of being a member of another consolidated group, other than Seller Group;
and (k) each of the Company and its Subsidiaries has paid or made adequate
provision for payment of all guarantee fund assessments that are due, claimed or
asserted by any insurance regulatory authority, provided, however, with respect
to guarantee fund assessments claimed or asserted, that written notice of such
claimed or asserted assessments has been received by the Company or its
Subsidiaries. Schedule 3.22-B hereto lists all of the Tax Sharing Agreements,
and a list of jurisdictions in which the Company or any of its Subsidiaries has
filed an income, franchise or premium Tax Return.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF BUYER
Buyer represents and warrants to Seller as of the date hereof and
as of the Closing Date that:
4.1 Corporate Existence and Power. Buyer has been incorporated
and is validly existing as a corporation in good standing under the laws of the
State of New York and has all corporate powers and all governmental licenses,
authorizations, permits, consents and approvals required to carry on its
business as now conducted, except for those licenses, authorizations, consents
and approvals the absence of which would not have a Material Adverse Effect on
Buyer. Buyer has heretofore provided to Seller true and complete copies of its
certificate of incorporation and bylaws as in effect on the date hereof.
Schedule 4.1 hereto sets forth a list of each insurance Affiliate of Buyer and
its respective State of incorporation.
4.2 Corporate Authorization. The execution, delivery and, subject
to the receipt of the approvals referred to in Section 4.3, performance by Buyer
of this Agreement is within the corporate powers of Buyer and have been duly
authorized by all necessary corporate action on the part of Buyer. This
Agreement constitutes a valid and legally binding agreement of Buyer,
enforceable against Buyer in accordance with its terms, subject to (a)
bankruptcy, insolvency, reorganization, fraudulent transfer, moratorium and
other similar laws now or hereafter in effect relating to or affecting the
enforcement of creditors' rights generally and the rights of creditors of
insurance companies generally and (b) general principles of equity (regardless
of whether considered in a proceeding at law or in equity).
4.3 Governmental Authorization. The execution, delivery and
performance by Buyer of this Agreement requires no action by or in respect of,
or filing with, any governmental body, agency or official on the part of Buyer
or any of its Subsidiaries other than (a) compliance with any applicable
requirements of the HSR Act, (b) approvals or filings under the applicable
insurance laws of the jurisdictions set forth in Schedule 4.3, and (c) filings
and notices not required to be made or given until after the Closing Date and
filings, at any time, of Tax Returns, Tax reports and Tax information
statements.
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4.4 Non-Contravention. The execution, delivery and performance by
Buyer of this Agreement do not and will not (a) violate the certificate of
incorporation or bylaws of Buyer or any of its Subsidiaries, (b) assuming
compliance with the matters referred to in Section 4.3, violate (x) any
applicable law, rule or regulation or (y) any judgment, injunction, order or
decree, (c) require any consent or other action by any Person under, constitute
a default under, or give rise to any right of termination, cancellation or
acceleration of any right or obligation of Buyer or any of its Subsidiaries or
to a loss of any benefit to which Buyer or any of its Subsidiaries is entitled
under, any agreement or other instrument binding upon Buyer or any of its
Subsidiaries or any license, franchise, permit or other similar authorization
held by Buyer or any of its Subsidiaries or (d) result in the creation or
imposition of any Lien on any asset of Buyer or any of its Subsidiaries except,
in the case of clauses (b), (c) and (d) above, to the extent that any such
violation, failure to obtain any such consent or other action, default, right,
loss or Lien would not result in a Material Adverse Effect on Buyer.
4.5 Financing. Buyer has, or will have prior to the Closing,
sufficient immediately available funds to enable it to make payment at the
Closing of the Closing Purchase Price, plus a Post-Closing Purchase Price
Adjustment, if any, and any other amounts to be paid by it hereunder.
4.6 Purchase for Investment. Buyer is purchasing the Shares for
investment for its own account and not with a view to, or for sale in connection
with, any distribution thereof. Buyer is an "accredited investor" within the
meaning of Rule 501 of the Securities Act of 1933, as amended, and (either alone
or together with its advisors) has had access to Seller and the Company and has
sufficient knowledge and experience in financial and business matters so as to
be capable of evaluating the merits and risks of its investment in the Shares
and is capable of bearing the economic risks of such investment.
4.7 Brokers' Fees. There is no investment banker, broker, finder
or other intermediary which has been retained by or is authorized to act on
behalf of Buyer who might be entitled to any fee or commission from Seller or
any of its Affiliates upon consummation of the transactions contemplated by this
Agreement.
ARTICLE 5
COVENANTS OF SELLER
Seller hereby covenants and agrees that:
5.1 Conduct of the Business. Except as contemplated by this
Agreement (including, without limitation, the Investment Portfolio Adjustments,
the transactions relating to, and the payment of, the Special Dividends and the
payments under the Tax Sharing Agreements), including the Schedules hereto, from
the date hereof until the Closing Date, Seller shall cause the Company and its
Subsidiaries to conduct the Business in all material respects in the ordinary
course consistent with past practice. Without limiting the generality of the
foregoing, from the date hereof until the Closing Date, except as set forth on
Schedule 5.1(c) hereto, Seller will not permit the Company or any of its
Subsidiaries to:
(a) adopt or propose any change in its certificate of
incorporation or bylaws;
(b) merge or consolidate with any other Person or acquire
a material amount of assets of any other Person;
(c) sell, lease, license or otherwise dispose of any
assets or property having a value in excess of $5,000 except (i) pursuant to
existing contracts or commitments, (ii) in the ordinary course of the Business
consistent with past practices, or (iii) the furniture and equipment set forth
on Schedule 5.1(c) hereof; or
(d) agree or commit to do any of the foregoing.
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5.2 Access to Information. From the date hereof until the Closing
Date and subject to the terms of the Confidentiality Agreement, applicable legal
privileges and legal or contractual restrictions, Seller will (a) give, and will
cause the Company and its Subsidiaries to give, Buyer, its counsel, financial
advisors, auditors and other authorized representatives full access, upon
reasonable prior notice and during normal business hours, to the offices,
properties, books and records of the Company and each of its Subsidiaries and to
the books and records of Seller relating to the Company and its Subsidiaries,
(b) furnish, and will cause the Company and its Subsidiaries to furnish, to
Buyer, its counsel, financial advisors, auditors and other authorized
representatives such financial and operating data and other information relating
to the Company or any of its Subsidiaries as such Persons may reasonably request
and (c) instruct the employees, counsel and financial advisors of Seller or the
Company or any of its Subsidiaries to cooperate with Buyer in its investigation
of the Company or any of its Subsidiaries.
5.3 Resignations. At or prior to the Closing Date, Seller will
deliver to Buyer the resignations of Bruce A. Esselborn, Mary Jane Robertson,
Kelly L. Stonebraker, and all other non-employee officers and directors of the
Company and its Subsidiaries from their positions with the Company or any of its
Subsidiaries.
5.4 Regulatory Matters. Seller, with Buyer's cooperation, will
promptly prepare and file all applications and notices to obtain the state
regulatory approvals specified on Schedule 3.3, and use all reasonable efforts
to process such applications and notices and obtain the requisite consents.
5.5 Release from Lenders. Seller will use all reasonable efforts
to cause the release of the pledged capital stock of the Company and its
Subsidiaries by, and any and all obligations of the Company and the Subsidiaries
to, Chemical Bank and the other lenders named in the Credit Agreement dated
March 29, 1994 among such lenders, Capsure Financial Group, Inc. and Parent (the
"Credit Agreement").
5.6 Audited Financial Statements. Within ten days following the
date of this Agreement, Seller shall deliver to Buyer the Audited Consolidated
Financial Statements, the Audited Statutory Financial Statements and the Audited
UCM Financial Statements, each of which shall be substantially similar to their
respective drafts previously furnished to Buyer.
5.7 Investment Portfolio Adjustments. Prior to the Closing Date,
Seller shall take such actions as is required to cause UCIC's Invested Assets to
conform to the description set forth in Section 2.2(d)(ii) of this Agreement.
5.8 Estimated UCM Financial Statements. At least five business
days prior to the Closing Date, Seller shall deliver, or cause to be delivered,
to Buyer, an unaudited balance sheet of UCM estimated as of the Closing Date,
and related statements of income and cash flows for the period January 1, 1996
through and including the Closing Date (on an estimated basis), prepared, except
as noted in Section 2.2(e)(ii) of this Agreement, (x) in accordance with GAAP
and (y) on a basis consistent with the audited balance sheet of UCM as of
December 31, 1995 included as part of the Audited UCM Financial Statements to be
delivered to Buyer pursuant to Section 5.6 hereof.
5.9 Case Reserves Files. At least five business days prior to the
Closing Date, Seller shall deliver, or cause to be delivered, to Buyer, a
schedule setting forth every case reserve file opened or closed and every change
in the estimate of case reserves of UCIC from January 1, 1996 through and
including a date not more than ten business days prior to the Closing Date.
5.10 Confidentiality. Seller will hold, and will use reasonable
efforts to cause its officers, directors, employees, accountants, counsel,
consultants, advisors and agents to hold, in confidence, unless compelled to
disclose by any judicial or administrative process or by other requirements of
law, all confidential
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documents and information concerning the Company or any of its Subsidiaries
provided to it pursuant to Section 6.2 or otherwise.
5.11 Intercompany Accounts. At least five business days prior to
the Closing, Seller shall prepare and deliver to Buyer a statement (the
"Intercompany Account Statement") setting forth in reasonable detail the
calculation of the intercompany account balances between Seller or any of its
Affiliates, on the one hand, and the Company and its Subsidiaries, on the other
hand, based upon the latest available financial information as of five business
days prior to such date and, to the extent requested in writing by Buyer,
provide Buyer with supporting documentation to verify the underlying
intercompany charges and transactions. All such intercompany account balances
(other than those under or relating to reinsurance contracts, agency agreements
and arrangements) shall be paid in full in cash at or prior to the Closing.
5.12 Updated Schedules. No later than ten business days prior to
the Closing Date, Seller shall provide updated, amended and/or supplemental
Schedules to Buyer.
5.13 Estimated Adjusted Surplus. Prior to the Closing Date,
Seller shall use its reasonable efforts to cause Estimated Adjusted Surplus to
be $19,000,000.
5.14 Tangible Net Worth of UCM. The payment of the Special
Dividends shall not cause the net worth of UCM as reflected on the balance sheet
of UCM described in Section 5.8 above, after excluding excess cost over net
assets acquired, net of amortization ("Tangible Net Worth") to be less than such
Tangible Net Worth as calculated from the audited UCM balance sheet as of
December 31, 1995.
ARTICLE 6
COVENANTS OF BUYER
Buyer hereby covenants and agrees that:
6.1 Confidentiality. All information provided to Buyer or any of
the persons referred to in Section 5.2 hereof will be treated as if provided
under the confidentiality agreement dated as of September 29, 1995 by and
between Frontier Insurance Group, Inc. and Parent (the "Confidentiality
Agreement").
6.2 Post-Closing Access. Buyer will cause the Company and each of
its Subsidiaries, on and after the Closing Date, so long as Parent has
indemnification obligations to Buyer pursuant to Article 11 hereof, to afford
promptly to Seller and its agents and representatives full access, upon
reasonable prior notice and during normal business hours, to their offices,
properties, books, records, employees and auditors to the extent reasonably
necessary to permit Seller to determine any matter relating to its rights and
obligations hereunder or to any period ending on or before the Closing Date,
including, without limitation, in connection with the preparation of Tax Returns
and the Closing Financial Statements.
6.3 Regulatory Matters. Buyer, with Seller's cooperation will
promptly, and in any event no later than ten business days after the date
hereof, prepare and file all applications, notices, consents and other documents
necessary or advisable to obtain the state regulatory approvals specified in
Schedule 4.3, promptly file all supplements or amendments thereto and use all
reasonable efforts to obtain the regulatory approvals specified in Schedule 4.3
hereto as promptly as practicable. Buyer will provide Seller and its counsel (a)
the opportunity to review in advance and comment on all such filings with
regulatory authorities and rating agencies relating to this transaction and all
written communications with respect thereto a reasonable time prior to such
filings or written communications, (b) prompt notice of all contacts by such
regulatory authorities and rating agencies, and (c) with respect to any
regulatory approval or review required by any state other than Buyer's and
UCIC's states of domicile, the right to approve any filings, written
communications and the substance of any oral communications and to participate
in any meetings. Buyer will keep Seller informed of the status of matters
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relating to obtaining the regulatory approvals specified in Schedule 4.3 hereto
and will promptly furnish Seller with copies of all written communications with
respect thereto.
6.4 Post-Closing Use of Office Space. To assist in an orderly
transition of ownership of the Business, Buyer shall permit each of Bruce A.
Esselborn, Mary Jane Robertson, Ronald D. Bobman and Vicki Hicks to continue to
use the office space currently occupied by them for a period of 60 days
following the Closing Date.
6.5 Agreement to Sublease. In the event Richard Weingarten &
Company ("Weingarten"), which currently occupies office space within the
Company's leased premises, is unable to enter into an independent lease with
Taylor & Mathis, the landlord of such premises, on or prior to the Closing Date
with respect to such office space, Buyer hereby agrees to cause the Company to
enter into a sublease with Weingarten or any other Person reasonably
satisfactory to Buyer with respect to such space, on substantially the same
terms and conditions as are contained in the master lease, with rent to be
determined according to the pro rata portion attributable to the space being
sublet, and expiring on the expiration date of the initial term of the master
lease. Notwithstanding the foregoing, if Weingarten elects to vacate such space
on or before the Closing Date and gives Buyer written notice thereof at least 30
days prior to the Closing Date, the requirement provided in Section 10.2(b)(xi)
shall be waived.
ARTICLE 7
COVENANTS OF BUYER AND SELLER
Buyer and Seller hereby covenant and agree that:
7.1 Necessary Assurances. Subject to the terms and conditions of
this Agreement, Buyer and Seller will use reasonable efforts to take, or cause
to be taken, all actions and to do, or cause to be done, all things reasonably
necessary or desirable under applicable laws and regulations to consummate the
transactions contemplated by this Agreement. Seller and Buyer agree, and Seller,
prior to the Closing and Buyer, after the Closing, agree to cause the Company
and each of its Subsidiaries to execute and deliver such other documents,
certificates, applications, agreements and other writings and to take such other
actions as may be reasonably necessary or desirable in order to consummate or
implement expeditiously the transactions contemplated by this Agreement.
7.2 Filings and Consents. Seller and Buyer shall cooperate with
one another (a) with respect to any filing with any governmental body, agency,
official or authority required in connection with this Agreement or the
consummation of the transactions contemplated by this Agreement, or any actions,
consents, approvals or waivers required to be obtained from parties to any
material contracts, in connection with this Agreement or the consummation of the
transactions contemplated by this Agreement and (b) in taking such actions or
making any such filings, furnishing information required in connection
therewith, timely seeking to obtain any such actions, consents, approvals or
waivers and Seller shall have the right to attend meetings with governmental
authorities or rating agencies in connection therewith.
7.3 Public Announcements. The parties agree to consult with each
other before issuing any press release or making any public statement with
respect to this Agreement or the transactions contemplated hereby and, subject
to any such party's disclosure obligations under applicable law or any
applicable listing agreement, manual, by-laws, rules or regulations of any
national securities exchange, will not issue any such press release or make any
such public statement prior to such consultation.
7.4 Post-Closing Reinsurance. Prior to the Closing Date, Seller
shall cause (a) UCIC and Western Surety Company ("Western Surety") to agree to
continue in full force and effect the Directors' and Officers' and Errors and
Omissions Liability Quota Share Reinsurance Agreement between Western Surety and
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UCIC dated August 15, 1994 (the "Reinsurance Agreement") until the 61st day
following the Closing Date and granting UCIC the unilateral right to terminate
the Reinsurance Agreement at any time prior to the expiration date upon three
days' prior written notice, pursuant to the Termination Addendum with respect to
the Reinsurance Agreement to be delivered pursuant to Section 10.2(b)(ix)
hereof, and (b) Western Surety and UCM to agree to continue in full force and
effect the Managing General Agency Agreement dated October 29, 1992 between
Western Surety and UCM (the "MGA Agreement") until the 61st day following the
Closing Date and granting UCM the unilateral right to terminate the MGA
Agreement at any time prior to the expiration date upon three days' prior
written notice, pursuant to the Termination Addendum with respect to the MGA
Agreement to be delivered pursuant to Section 10.2(b)(ix) hereof, such MGA
Agreement to be amended to terminate the authority with respect to certain lines
of business reinsured under the Reinsurance Agreement, pursuant to Amendment No.
4 to the MGA Agreement to be delivered pursuant to Section 10.2(b)(ix) hereof.
Buyer hereby agrees to cause UCIC to continue to manage, adjust and settle
claims under the policies reinsured under the Reinsurance Agreement consistent
with past practices, and shall use its reasonable efforts prior to and during
the 60-day period following the Closing Date to replace Western Surety as the
direct insurer under all policies reinsured under the Reinsurance Agreement.
Buyer hereby agrees to save, indemnify and hold Seller and Western Surety
harmless from and against any Damages relating to policies issued by Western
Surety pursuant to the MGA Agreement and reinsured under the Reinsurance
Agreement subsequent to the Closing Date, or arising out of any actions taken by
UCIC or its Subsidiaries subsequent to the Closing Date with respect to the
Reinsurance Agreement or MGA Agreement, including all actions, suits,
proceedings, claims, demands, assessments, judgments, costs and expenses,
including reasonable outside attorneys' fees, incident to the foregoing.
7.5 Government Filings. Each of Buyer, Seller, the Company and
its Subsidiaries shall as soon as practicable, but no later than ten business
days following execution of this Agreement, make any and all filings required to
be made by it with any and all governmental authorities in connection with the
consummation of the transactions contemplated herein. Accordingly, and not in
limitation of the preceding sentence, Buyer, Seller and the Company shall
promptly file, after the execution of this Agreement, (a) the notification
required by the HSR Act and any requested or supplementary filings required
pursuant to the HSR Act in such manner and at such places as are specified in
the HSR Act and the applicable rules and regulations thereunder, and (b) any
other notifications or requests, including the filing by the Buyer at its
expense of an application for authority to acquire control of the Company and
its Subsidiaries with the insurance authorities of the jurisdictions specified
on Schedule 4.3 hereto. Buyer and Seller equally shall pay the fee due in
connection with the filing of the notification required under the HSR Act. Each
party shall furnish the other party with any information, certificates and other
documents in a timely manner and shall cooperate with the other party in all
reasonable ways necessary to effect such filings.
7.6 Closing Statements. Buyer and Seller shall cooperate, use
reasonable efforts and act in good faith in the preparation and delivery, each
on a timely basis, of the Closing Statements in accordance with Section 2.3(a)
hereof.
7.7 Termination Notices. Until six months after the Closing Date,
Buyer shall cause the Company to use its reasonable efforts, with Seller's
cooperation to the extent required, to cure any Termination Notices received
prior to the Closing Date.
ARTICLE 8
TAX MATTERS
8.1 Buyer Tax Covenants. (a) Buyer covenants that it will not
cause or permit the Company, any Subsidiary or any Affiliate of Buyer to (i)
make any election or deemed election under Section 338 of the Code or (ii) amend
any Tax Returns for any Pre-Closing Tax Periods.
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(b) Buyer agrees to cause the Company and its Subsidiaries
to elect, where permitted by law, to carry forward any net operating loss or
other item arising after the Closing Date that would, absent such election, be
carried back to a Pre-Closing Tax Period of the Company or a Subsidiary which
filed a consolidated, combined or unitary Tax Return with Seller or an Affiliate
of Seller.
(c) Buyer shall promptly pay or shall cause prompt payment
to be made to Parent of (i) the amount of any reduction of Tax liability
attributable to the carryover of any net operating loss or capital loss, and
(ii) all refunds of Taxes and interest thereon realized or received,
respectively, by Buyer, any Affiliate of Buyer, the Company or any of its
Subsidiaries, attributable to Taxes paid by or on behalf of Seller, the Company
or any of its Subsidiaries, whether pursuant to the Tax Sharing Agreements or
otherwise, with respect to any Pre-Closing Tax Period.
(d) All transfer, documentary, sales, use, stamp,
registration and other such Taxes and fees (including any penalties and
interest) incurred in connection with this Agreement (including any state real
property transfer and gains taxes, city real property transfer tax and any
similar tax imposed in other states or subdivisions) shall be borne and paid by
Buyer and Buyer will, at its own expense, file all necessary Tax Returns and
other documentation with respect to all such Taxes and fees if required by
applicable law.
8.2 Property and Casualty Loss Discount Determination. Seller
shall determine the provision for discounted unpaid losses of the Company and
its Subsidiaries under Sections 832(b)(5) and 846 of the Code for all
Pre-Closing Tax Periods, provided that such determination shall be made in a
manner consistent with past practice of the Company and its Subsidiaries and in
compliance with the Code.
8.3 Termination of Tax Sharing Agreements. The Tax Sharing
Agreements between the Company and its Subsidiaries and any member of the Seller
Group shall be terminated as of the Closing Date. Subject to Sections 8.1(c) and
8.4 hereof, after the Closing Date neither the Company and its Subsidiaries,
Seller nor any Affiliate of Seller shall have any further rights or liabilities
thereunder.
8.4 Tax Sharing. Immediately preceding the Closing, the Company
and each of its Subsidiaries shall pay to Seller and Seller shall pay to Parent
the amount, with respect to all Pre-Closing Tax Periods for which no Tax Return
has yet been filed, required by the Tax Sharing Agreements and, with respect to
pre-Closing interim periods not required by the Tax Sharing Agreements,
estimated in accordance with the provisions of the Tax Sharing Agreements, or
determined in accordance with principles comparable thereto, based upon Seller's
good faith estimates, as of the Closing Date, of the consolidated Tax liability
of the Company and its Subsidiaries, and reduced by the amount of any payments
on account of such Taxes previously paid to Seller.
8.5 Cooperation on Tax Matters. Buyer and Seller agree to furnish
or cause to be furnished to each other, upon request, as promptly as
practicable, such information (including access to books and records) and
assistance relating to the Company or its Subsidiaries as is reasonably
necessary (i) for the filing of any Tax Return, (ii) for the verification of any
amounts due in accordance with Section 8.1(c), (iii) for the preparation for any
audit and (iv) for the prosecution or defense of any claim, suit or proceeding
relating to any proposed adjustment. Buyer and Seller agree to retain or cause
to be retained all books and records pertinent to the Company or its
Subsidiaries (such books and records not limited solely to Tax accounting books,
records and work papers) until the applicable period for assessment under
applicable law (giving effect to any and all extensions or waivers and to the
period of Tax indemnification provided in this Agreement) has expired, and to
abide by or cause the abidance with all record retention agreements entered into
with any Taxing Authority. Buyer agrees, and after the Closing shall cause the
Company and its Subsidiaries, to give Seller reasonable notice prior to
transferring, discarding or destroying any such books and records and, if Seller
so requests, the Company and its Subsidiaries shall allow Seller to take
possession of such books and records. Buyer and Seller shall notify each other
in writing of, and cooperate with each other in the conduct of, any claim,
audit, examination or other proceeding or proposed change or other adjustment
involving the Company and its Subsidiaries for any Tax
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purposes and each shall execute and deliver such other documents as are
necessary to carry out the intent of this Section 8.5.
8.6 Responsibility for Taxes and Tax Returns. Except as expressly
provided otherwise in this Article 8, Seller is responsible for all Taxes, and
for preparing and filing all Tax Returns, with respect to the Company and its
Subsidiaries, for all periods commencing prior to and ending on the Closing
Date, and Buyer is so responsible for all periods commencing on the Closing Date
and ending thereafter.
8.7 Intentionally omitted.
8.8 Apportionment. For any Tax period that begins on or before
and ends after the Closing Date (a "Straddle Period"), for purposes of
apportioning a Tax to the portion of such Tax period that ends on the Closing
Date, (i) the parties shall treat the Closing Date as the last day of such
period, and (ii) the Tax for the Tax period that is allocable to the portion of
the Tax period ending on the Closing Date shall be (A), in the case of a Tax
that is not based on income or gross receipts, the total Tax for the Straddle
Period multiplied by a fraction, the numerator of which is the number of days in
the Tax period ending on (and including) the Closing Date and the denominator of
which is the total number of days in the Straddle Period, and (B), in the case
of a Tax that is based on income or gross receipts, the Tax that would be due
with respect to the period ending on (and including) the Closing Date, based on
actual operations of the Company and its Subsidiaries during such period as
shown on their permanent books and records.
ARTICLE 9
EMPLOYEE BENEFITS
9.1 Individual Account Plans. Prior to the Closing Date, Seller
shall cause the sponsorship of the Pension Plan to be transferred to and assumed
by Parent. Seller shall take such action as may be necessary (not including the
termination of the Pension Plan and/or Parent 401(k) Plan), to permit each
Employee to elect within a reasonable period of time following the Closing Date,
an immediate distribution of the vested balance of such Employee's respective
accounts under the Pension Plan and the Parent 401(k) Plan or to effect a
tax-free rollover (a "Direct Rollover") of the taxable portions of the
respective account balances into the 401(k) Plan maintained for the employees of
Frontier Insurance Group, Inc. and its subsidiaries, which constitutes an
eligible retirement plan within the meaning of Section 401(a)(31) of the Code
(the "Frontier 401(k) Plan"), and Buyer shall cooperate with Seller in its
efforts to permit such election; provided, however, that nothing contained
herein shall obligate the Frontier 401(k) Plan to accept a Direct Rollover in a
form other than cash. If, in the opinion of counsel for Seller, a distribution
or Direct Rollover of the Employees' respective accounts under the Pension Plan
and/or Parent 401(k) Plan could adversely affect the qualification of such
Plan(s) under Section 401 of the Code unless such Plan(s) were terminated or, in
the opinion of counsel to Buyer, such Direct Rollover could adversely affect the
qualification of the Frontier 401(k) Plan under Section 401 of the Code, then at
Buyer's election, either the account balances of all Employees participating in
such Plan(s) who cease to be covered by virtue of the transaction contemplated
hereunder will be transferred to the Frontier 401(k) Plan by means of a direct
trustee-to-trustee transfer in a manner consistent with Sections 411(d)(6) and
414(l) of the Code, or the account balances of such Employees will be retained
in the Pension Plan and/or Parent 401(k) Plan and such Employees will thereafter
be treated as inactive participants, and such distribution or Direct Rollover
shall be accomplished with respect to the Employees when it is permissible, in
the opinion of such counsel.
9.2 Plans Following the Closing. (a) Following the Closing, the
Employees will be entitled to participate in the employee plans and benefit
arrangements generally available to employees of Frontier Insurance Group, Inc.
and its subsidiaries and, for purposes of eligibility, vesting and pre-existing
medical conditions thereunder (but not for benefit accrual purposes), will be
given full credit, as applicable, for services recognized for such purposes
under the Employee Plans and Benefit Arrangements.
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(b) For a period of one year from the Closing Date, the
Employees (other than Employees party to change in control agreements assumed by
Buyer) will be entitled to the more favorable of the following severance
arrangements: (i) the Company's current severance arrangement, consisting of
severance payment of two weeks' salary for non-management-level employees and
four weeks' salary for management-level employees upon termination of
employment; and (ii) the standard severance arrangement available to employees
of Frontier Insurance Group, Inc. and its subsidiaries.
(c) Buyer shall cause UCIC and its Subsidiaries to pay
their respective employees, in December 1996, an aggregate of $200,000 in
special cash bonuses (in addition to bonuses or compensation, if any, which such
employees are otherwise entitled to receive as employees of the Company and its
Subsidiaries at such time), which shall be distributed in accordance with
written instructions to be furnished by Seller to Buyer not later than ten days
prior to the Closing Date. In the event any person designated to receive such a
special cash bonus is not employed by the Company or its Subsidiaries at the
date of distribution, such person's special cash bonus shall be distributed per
capita to all other distributees.
ARTICLE 10
CONDITIONS TO CLOSING
10.1 Conditions to Obligations of Buyer and Seller. The
obligations of Buyer and Seller to consummate the transactions contemplated
hereunder at the Closing are subject to the satisfaction or waiver by both
parties of the following conditions:
(a) any applicable waiting period under the HSR Act
relating to the transactions contemplated hereby shall have expired or been
terminated;
(b) no action or proceeding shall have been instituted
before any court or instituted or threatened by any governmental agency to
restrain or prohibit, or to obtain damages in respect of, this Agreement, or the
consummation of the transactions contemplated by this Agreement;
(c) all regulatory approvals set forth in Schedule 3.3 and
approvals from insurance authorities in the jurisdictions set forth in Schedule
4.3 and any other regulatory approvals requested of Buyer or its Affiliates
after the date of this Agreement in a written notice received from any other
State in which an insurance company Affiliate of Buyer is domiciled and
necessary for the execution and performance of this Agreement shall have been
obtained and be in full force and effect and without conditions or limitations
which unreasonably restrict the ability of the parties hereto to perform this
Agreement or the Company's or any of its Subsidiaries' ability to conduct their
respective businesses as presently conducted and Buyer and Seller shall have
been furnished with appropriate evidence, reasonably satisfactory to them and
their respective counsel, of the granting of such consents and approvals.
(d) neither Buyer, the Company nor its Subsidiaries shall
have received written notice from any state commissioner of insurance of the
states in which the Company or its Subsidiaries conduct business that such state
will seek to terminate the authority of the Company and its Subsidiaries to
conduct business in such state following the Closing (a "Termination Notice");
provided, however, that no failure of this condition shall be deemed to have
occurred if a Termination Notice is received with respect to (i) any state in
which Frontier Pacific Insurance Company ("Frontier Pacific") has authority to
act as an excess and surplus lines insurer as set forth in Schedule 10.1(d)
hereof or (ii) any state not described in clause (i) above in which UCIC's
direct written premiums in 1995 (as set forth in Schedule T of UCIC's 1995
Statutory Annual Statement) did not exceed $200,000, provided that UCIC's direct
written premiums in 1995 (as set forth in such Schedule T) from all states for
which a Termination Notice has been received and which are not described in
clause (i) above did not, in the aggregate, exceed $700,000.
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10.2 Conditions to Obligation of Buyer. The obligation of Buyer
to consummate the transactions contemplated hereunder at the Closing is subject
to the satisfaction or waiver by Buyer of the following further conditions:
(a) (i) Seller shall have performed, in all material
respects, all of its obligations hereunder required to be performed by it on or
prior to the Closing Date, (ii) the representations and warranties and covenants
of Seller contained in this Agreement shall be true and correct at and as of the
Closing Date, as if made at and as of such date, except for any inaccuracies in
any such representations and warranties which have not had a Material Adverse
Effect on the Company, and (iii) Buyer shall have been delivered a certificate
signed by the Chief Financial Officer of Seller and the Controller of the
Company, certifying the information in subsections (i) and (ii) hereof.
(b) Buyer shall have received the following deliveries
from Seller:
(i) certificates of good standing (or comparable
documents) for the Company (long-form with a statement as to the payment
of franchise taxes from the State of Delaware) and each of its
Subsidiaries from their respective States of incorporation, and
certificates of good standing (or comparable documents) as foreign
corporations in each jurisdiction where the Company and its Subsidiaries
are so qualified, in each case issued as of a date not more than
fourteen days prior to the Closing Date;
(ii) a Secretary's certificate of Seller certifying
as to the incumbency of Seller's authorized officers, genuineness of
their respective signatures and validity and effectiveness of attached
copies of the Company's certificate of incorporation, by-laws and
authorizing corporate resolutions;
(iii) an opinion of counsel to Seller, addressed to
Buyer, substantially in the form attached as Exhibit A hereto;
(iv) an opinion of counsel to Parent, addressed to
Buyer, as to the authorization and enforceability of Section 2.3(c) and
Article 11 hereof with respect to Parent, substantially in the form
attached as Exhibit B hereto;
(v) evidence reasonably satisfactory to Buyer that
the Company and its Subsidiaries have been released of any and all
obligations under the Credit Agreement;
(vi) non-competition/non-solicitation agreements
executed by Parent and Bruce A. Esselborn substantially in the forms
attached as Exhibit C-1 and Exhibit C-2 hereof, and a non-solicitation
agreement executed by Mary Jane Robertson substantially in the form
attached as Exhibit C-3 hereto;
(vii) a signed letter from Tillinghast
substantially in the form attached as Exhibit D hereto, to be furnished
at Buyer's expense;
(viii) the resignations specified in Section 5.3
hereof;
(ix) executed copies of the Termination Addendum
with respect to the Reinsurance Agreement substantially in the form
attached as Exhibit E-1 hereto, Amendment No. 4 to the MGA Agreement
substantially in the form attached as Exhibit E-2 hereto, the
Termination Addendum with respect to the MGA Agreement, substantially in
the form attached as Exhibit E-3 hereto, and the Termination Addendum
with respect to the Surety Bond Quota Share Reinsurance Agreement
effective
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September 1, 1992 between Western Surety and UCIC substantially in the
form attached as Exhibit E-4 hereto;
(x) evidence reasonably satisfactory to Buyer of
the termination of (A) the Tax Sharing Agreements pursuant to Section
8.3 hereof, and (B) the Service Agreement dated January 1, 1993 between
Parent and UCIC; and
(xi) a signed letter from Equity Group Investments,
Inc. with respect to certain matters relating to Section 6.5 hereof,
substantially in the form attached as Exhibit F hereto.
(c) Except as disclosed in Schedule 3.9 hereto, since the
Balance Sheet Date, there has not been any event, occurrence, development or
state of circumstances or facts which has had a Material Adverse Effect on the
Company other than those resulting from (i) changes in general conditions
applicable to the property and casualty insurance industry (excluding changes in
statutes and regulations applicable to UCIC) or changes in general economic
conditions, (ii) the Investment Portfolio Adjustments and the transactions
relating to, and the payment of, the Special Dividends, and (iii) any payments
pursuant to the Tax Sharing Agreements.
(d) The capital stock of the Company and its Subsidiaries
shall be free and clear of all Liens.
(e) UCIC shall have maintained a rating by A.M. Best & Co.
of "A-" ("A Minus") or better from the date of this Agreement through and
including one business day prior to the Closing Date. For purposes hereof, any
notice that UCIC's rating is under review, whether with or without negative
implications, by A.M. Best & Co. shall not constitute a downgrade below A Minus.
10.3 Conditions to Obligation of Seller. The obligation of Seller
to consummate the transactions contemplated hereunder at the Closing is subject
to the satisfaction or waiver by Seller of the following further conditions:
(a) (i) Buyer shall have performed, in all material
respects, all of its obligations hereunder required to be performed by it at or
prior to the Closing Date; provided, however, that the obligation to pay to
Seller the Closing Purchase Price and any other amounts hereunder shall be
without qualification of any kind; (ii) the representations and warranties of
Buyer contained in this Agreement shall be true and correct at and as of the
Closing Date, as if made at and as of such date, except for any inaccuracies in
any such representations and warranties which have not had a Material Adverse
Effect on Buyer, and (iii) Seller shall have received a certificate signed by
the Chief Financial Officer (or equivalent officer) of Buyer to the foregoing
effect.
(b) Seller shall have received from Buyer the following:
(i) an executed Assignment and Assumption of
Executive Change In Control And Termination Benefits Agreement
substantially in the form attached as Exhibit G hereto, providing for
the assumption by Buyer of the obligations of the Executive Change in
Control and Termination Benefits Agreements previously furnished to
Buyer, provided that the transaction bonus payments thereunder have been
paid by Parent;
(ii) a Secretary's certificate of Buyer certifying
as to the incumbency of Seller's authorized officers, genuineness of
their respective signatures and validity of and effectiveness of
attached copies of the Company's certificate of incorporation, by-laws
and authorizing corporate resolution;
(iii) an opinion of counsel to Buyer, addressed to
Seller, substantially in the form attached as Exhibit H hereto;
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(iv) an officer's certificate of Frontier Pacific
or Buyer certifying the states in which Frontier Pacific has authority
to act as an excess and surplus lines insurer as of the Closing Date;
and
(v) executed Assignments of Employment
Agreement and Guaranty substantially in the forms attached as Exhibit
I-1 and Exhibit I-2 hereto.
(c) Seller, the Company or its Subsidiaries, as the case
may be, shall have received all approvals from all state commissioners of
insurance of the states in which the Company and its Subsidiaries conduct the
Business that any of the Company and its Subsidiaries is required by applicable
law or regulation to obtain or provide in connection with the Special Dividends,
all in amount, form and substance acceptable to Seller.
ARTICLE 11
SURVIVAL; INDEMNIFICATION
11.1 Survival of Representations, Warranties and Covenants. The
representations and warranties of Seller set forth in Article 3 hereof, and of
Buyer set forth in Article 4 hereof, shall survive the Closing, as follows: (a)
the representations and warranties of Seller set forth in Sections 3.5, 3.6 and
3.7(b), and the representations and warranties of Buyer in Section 4.6 hereof
shall survive the Closing without limitation, (b) the representations and
warranties of Seller contained in Section 3.22 and the covenants and agreements
set forth in Section 5.10 and Article 8 hereof shall survive until the
applicable statutes of limitations have expired, and (c) all other
representations and warranties set forth in Articles 3 and 4 hereof and, unless
expressly provided otherwise in this Agreement, the covenants and agreements
contained in Article 9 hereof shall survive the Closing for a period of one year
following the Closing Date. Except as set forth above, no covenant or indemnity
contained in this Agreement shall survive (i) the Closing unless the express
terms of such covenant or agreement provide for performance or effect after the
Closing; or (ii) after the time at which it would otherwise terminate pursuant
to the preceding clause (i), unless notice of the breach thereof shall have been
given to the party against whom such indemnity may be sought prior to such time.
11.2 Indemnification by Parent. Parent agrees to save, indemnify
and hold Buyer and, effective after the Closing Date but without duplication,
the Company and its Subsidiaries, harmless from and against:
(a) any and all actual loss, liability or damage
(collectively, "Damages") resulting from any misrepresentation or breach of
warranty by Seller or non-fulfillment of any covenant or condition to be
performed or complied with by Seller under the terms of this Agreement or as a
result of any Litigation set forth on Schedule 3.11, or as a result of the
receipt of any Termination Notices subject, however, to the cure period in
Section 7.7 hereof and excluding, however, any Damages resulting from the
termination or demotion of any Employee after the Closing Date;
(b) any and all Damages directly resulting from the
failure by Seller and, prior to the Closing Date, the Company or any of its
Subsidiaries, to substantially perform their respective obligations pursuant to
Section 9.1;
(c) (i) any and all Taxes with respect to any Pre-Closing
Period resulting from the Company or its Subsidiaries ceasing to be included in
the consolidated Federal income Tax Return filed by Seller Group including,
without limitation, any Taxes attributable to the restoration of a "deferred
intercompany transaction" within the meaning of Treasury Regulations Section
1.1502-13 (a)(2), and the recognition of excess loss accounts;
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(ii) any and all unpaid Federal, state, local, or
foreign Taxes imposed on the Company or its Subsidiaries directly or
indirectly, whether determined on a separate, consolidated, combined,
unitary, or group basis, (A) pursuant to Treasury Regulation Section
1.1502-6 or any comparable provisions of state, local, or foreign law by
reason of the Company or its Subsidiary having been a member of a
consolidated, combined, unitary, or group Tax Return during any
Pre-Closing Taxable Period, or (B) pursuant to any guaranty,
indemnification, or similar agreement made on or before the Closing Date
relating to the sharing of liability for, or payment of, Taxes, or (C)
arising out of, resulting from, or attributable to any transaction
contemplated by this Agreement to be performed by Seller or, prior to
the Closing Date, by the Company or its Subsidiaries;
(iii) any (x) Tax of the Company and its
Subsidiaries and (y) liabilities, costs, expenses (including, without
limitation, reasonable expenses of investigation and outside attorneys'
fees and expenses), arising out of or incident to the imposition,
assessment or assertion of any Tax, including those incurred in the
contest of good faith in appropriate proceedings relating to the
imposition, assessment or assertion of any Tax, in each case with
respect to any Pre-Closing Tax Period and in each case incurred or
suffered by Buyer, any of its Affiliates or, effective upon the Closing,
the Company and its Subsidiaries (the sum of paragraphs (i) and (ii)
above and clauses (x) and (y) of this paragraph (iii) being referred to
as a "Tax Loss"); provided, however, that Parent shall have no liability
for any Tax Loss attributable to or resulting from any action described
in Section 8.1(a) hereof, including, but not limited to, an election
made or deemed made by Buyer under Section 338 of the Code or any
comparable provision of applicable law. In the event Parent's
indemnification obligation under this Section 11.2(c) arises in respect
of an adjustment which makes allowable to Buyer, any of its Affiliates
or, effective upon the Closing, the Company or any of its Subsidiaries,
a Tax Benefit which would not, but for such adjustment be allowable,
then Buyer shall reimburse Parent for such Tax Benefit when and if
realized; and
(d) all actions, suits, proceedings, claims, demands,
assessments, judgments, costs and expenses, including reasonable outside
attorneys' fees, incident to the foregoing.
(e) Notwithstanding the foregoing, Parent shall not be
liable under Section 11.2(c) for (i) any Tax the payment of which was made
without Parent's prior written consent or (ii) any settlements effected without
the consent of Parent, not to be unreasonably withheld, or resulting from any
claim, suit, action, litigation or proceeding in which Parent was not permitted
an opportunity to participate.
11.3 Indemnification by Buyer. Buyer agrees to save,
indemnify and hold Seller harmless from and against:
(a) any and all Damages resulting from any
misrepresentation or breach of warranty by Buyer or non-fulfillment of any
covenant or condition to be performed or complied with by Buyer under the terms
of this Agreement;
(b) any Tax or any reduction in the value of any net
operating loss carryover, Tax credit deduction, recovery of Tax or deferred Tax
asset resulting from any action referred to in Section 8.1(a) hereof, of the
Company and its Subsidiaries, Buyer or any Affiliate of Buyer; and
(c) all actions, suits, proceedings, claims, demands,
assessments, judgments, costs and expenses, including reasonable outside
attorneys' fees, incident to the foregoing.
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11.4 Terms of Indemnification. The foregoing indemnification
obligations are subject to the following:
(a) Limitations on Time Periods and Amounts.
(i) No party hereto shall be required to indemnify
another party pursuant to the foregoing unless the party claiming the
right to be indemnified promptly notifies the other party of facts which
are the basis for indemnification hereunder specifying in reasonable
detail the basis of any such claim ("Notice") pursuant to this Article
11 on or before the expiration or termination of such representation,
warranty, covenant or agreement. If, after the Closing Date and prior to
the close of business on the date any representation, warranty or
covenant ceases to survive, the indemnifying party shall have received
the written Notice and such claim shall not have been finally resolved
or disposed of at such date, such claim shall continue as a basis for
indemnity until it is finally resolved or disposed of, subject to
applicable statutes of limitation. If the recipient of the Notice
desires to dispute such claim, it shall, within 30 days after notice of
the claim of loss against it is given, give a counternotice, setting
forth the basis for disputing such claim, to Buyer or Parent, as the
case may be. If no such counternotice is given within such 30-day
period, or if Buyer or Parent, as the case may be, acknowledges
liability for indemnification, then such loss shall be promptly
satisfied. The amount of any indemnification for Damages recoverable
from Parent under this Agreement shall be reduced by the amount of any
reserve, contra-liability or other provision for such Damages reflected
in the Closing Statements. In the event that Damages arise as a result
of new or corrected disclosures set forth in updated Schedules furnished
to Buyer after the date hereof which are not reflected in the Closing
Statements, then 70% of such Damages shall be indemnifiable by Parent
hereunder if the updated Schedules do not correct disclosures in the
Schedules delivered as of the date of this Agreement, and 100% of such
Damages shall be so indemnifiable if such updated Schedules correct the
disclosures in the Schedules delivered as of the date of this Agreement.
Notwithstanding anything to the contrary in this Agreement and subject
to the provisions of Sections 11.4(a)(ii) and 11.6 below, except for
liability for a breach of the representations set forth in Sections 3.5,
3.6, 3.7(b) and 3.22 hereof, and a breach of the covenants set forth in
Sections 8.6 and 11.2(c) hereof, Buyer shall not be entitled to recover
under rights to indemnification hereunder until the aggregate Damages
suffered by Buyer in respect of all such claims exceed $300,000 (such
amount being referred to herein as the "Basket"), at which time Buyer
shall be entitled to indemnification for all such Damages, including the
Basket; and in no event shall any party hereto be entitled to
consequential or punitive damages or damages for lost profits in any
action under this Agreement or relating to the subject matter hereof.
The maximum aggregate liability of Parent and Seller to Buyer pursuant
to this Article 11 for all Damages suffered by Buyer, and all other
expenses, Taxes and other amounts indemnifiable by Parent to Buyer under
this Article 11, is $7,500,000.
(ii) Notwithstanding anything to the contrary
contained in Section 11.4(a)(i) above, the Basket shall not be
applicable to (x) Tax Losses and (y) Damages that arise in connection
with the EEOC claim set forth on Schedule 3.11 and the receipt of
Termination Notices. For purposes of this Agreement, Damages from the
receipt of Termination Notices shall be deemed to be the following: for
each state for which a Termination Notice is received, 50% of Buyer's
expenses incurred in connection with curing such Termination Notice
(subject to a maximum of $25,000 per state in expenses), to be increased
to 15% of UCIC's direct written premiums in 1995 in such state (as set
forth in Schedule T of UCIC's 1995 Statutory Annual Statement) in the
event such Termination Notice is not cured within six months following
the Closing Date ("Liquidated Damages"); provided, however, that Parent
shall be entitled to a credit against such Liquidated Damages for the
amount of Buyer's expenses reimbursed by Seller.
(b) Arbitration. If, within thirty (30) days after giving
the counternotice by Buyer or Parent, as the case may be, Parent and Buyer shall
not have reached agreement as to the claim in question, then
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the claim for indemnification may be submitted to and settled by arbitration as
hereinafter provided. Arbitration shall be by a single arbitrator experienced in
the matters at issue selected by Parent and Buyer in accordance with the
Commercial Arbitration Rules of the American Arbitration Association. The
meeting of the arbitrator shall be held in Atlanta, Georgia and shall be
conducted in accordance with, but not under the auspices of, the Commercial
Arbitration Rules existing at the date thereof of the American Arbitration
Association to the extent not inconsistent with this Agreement. The decision of
the arbitrator shall be final and binding as to any matters submitted to such
arbitrator under this Agreement, and to the extent this decision is that a loss
has been suffered for which either party is to be indemnified under this
Agreement, it shall be promptly satisfied; provided, however, that, if
necessary, such decision and satisfaction procedure may be enforced by either
Buyer or Parent in any court of record having jurisdiction over the subject
matter or over any of the parties hereto. All costs and expenses incurred in
connection with any such arbitration proceeding shall be borne by the party
against whom the decision is rendered or, if no decision is rendered or if the
decision is a compromise, equally by Buyer and Parent.
(c) Satisfaction of Damages. Any Damages suffered by
Seller and Parent or Buyer, as the case may be, for which it is to be
indemnified hereunder shall be paid promptly by the indemnifying party.
(d) Notice and Right to Contest.
(i) Upon obtaining knowledge of the institution or
threat of any action, proceeding or other event by a third party which
could give rise to a claim of indemnity under Section 11.2 or 11.3
hereof ("Third Party Claim"), the party seeking indemnification shall
promptly notify the indemnifying party of such claim.
(ii) The provisions of this Section 11.4(d)(ii)
shall apply to any Third Party Claim (other than those under Section
11.4(d)(iv) hereto relating to Taxes), for which the indemnifying party
is liable hereunder. The indemnifying party shall have the right, at the
indemnifying party's expense to defend such claim or demand. Any defense
undertaken by the indemnifying party hereunder shall not be deemed an
admission by the indemnifying party and may be subject to a reservation
of rights as to the indemnified party's rights to indemnification
pursuant to this Article 11. If the indemnifying party fails to notify
the indemnified party of its election to defend such Third Party Claim
within 30 days after notice thereof was given to the indemnifying party,
the indemnifying party shall be deemed to have waived its right to
defend such Third Party Claim. If the indemnifying party elects to
defend such Third Party Claim, it shall not be responsible for
attorney's fees incurred by the indemnified party; provided, however,
that the indemnified party may participate in such defense at its own
cost and expense. So long as the indemnifying party is defending such
Third Party Claim in good faith, the indemnified party will not settle
such claim or demand without the indemnifying party's consent, which
consent shall not be unreasonably withheld. The indemnified party shall
make available to the indemnifying party all records and other materials
and employees reasonably required by it in contesting a Third Party
Claim and shall cooperate in the defense thereof.
(iii) If with respect to any claim for
indemnification under this Article 11 the indemnified party refuses to
consent to any settlement recommended by the indemnifying party and the
indemnified party elects to contest or continue any dispute or legal
proceedings in connection with such claim, then in connection with such
claim (x) the indemnifying party's liability for all Damages, including
all costs of defense, plus any later settlements or Damage awards
arising from such claim, shall not exceed the amount for which the claim
could have been settled (the "Recommended Settlement"), and the
indemnified party (y) shall assume all costs of defense reasonably
incurred by the indemnifying party after the date of such refusal in
contesting or continuing any dispute or legal proceedings and (z) shall
hold the indemnifying party harmless from all amounts in excess of the
Recommended Settlement.
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(iv) Notwithstanding the foregoing Section
11.4(d)(ii), if any claim or demand for Taxes in respect of which
indemnity may be sought pursuant to this Section 11.4(d)(iv) is asserted
in writing against Buyer, any of its Affiliates or, effective upon the
Closing, the Company and its Subsidiaries, Buyer shall notify Parent of
such claim or demand within 10 days of receipt thereof, or such earlier
time that would allow Parent to timely respond to such claim or demand,
and shall give Parent such information with respect thereto as Parent
may reasonably request. Parent may discharge, at any time, its
indemnification obligation under this Section 11.4(d)(iv) by paying to
Buyer the amount of the applicable Tax Loss, calculated on the date of
such payment. Parent may, at its own expense, participate in and, upon
notice to Buyer, assume the defense of any such claim, suit, action,
litigation or proceeding (including any Tax audit), provided, however,
that Parent shall not agree to any settlement of an issue without the
consent of Buyer, which consent shall not be unreasonably withheld, to
the extent that such settlement would have an adverse effect, with
respect to any Taxes which are the responsibility of Buyer hereunder, on
the Company or its Subsidiaries after the Closing Date. Any defense
undertaken by the indemnifying party hereunder shall not be deemed an
admission by the indemnifying party and may be subject to a reservation
of rights as to the indemnified party's rights to indemnification
pursuant to this Article 11. If Parent assumes such defense, Buyer shall
have the right (but not the duty) to participate in the defense thereof
and to employ counsel, at its own expense, separate from the counsel
employed by Parent. Whether or not Parent chooses to defend or prosecute
any claim, all of the parties hereto shall cooperate in the defense or
prosecution thereof.
11.5 Exclusive Remedy. The provisions of this Article 11 are the
exclusive remedy of any party to this Agreement against any other party to this
Agreement (excluding the Parent non-competition/non- solicitation agreement
delivered pursuant to Section 10.2(b)(vi) hereof) for any claim for breach of
any covenant, agreement, representation, warranty or other provision of this
Agreement or any agreement, certificate or other document delivered hereto by
any party to this Agreement (other than a claim for specific performance or
injunctive relief or a claim based upon intentional fraud) with the intent that
all such claims shall be subject to the limitations and other provisions
contained in this Article 11.
11.6 Damages Net of Insurance, Etc. The amount of any Damages or
Tax for which indemnification is provided under this Agreement shall be net of
any amounts actually recovered by any party seeking indemnification under this
Agreement (the "Indemnified Party"), and shall be net of any amounts recoverable
under insurance policies or reinsurance agreements, proceeds from indemnity,
contribution or recoveries from Third Party Actions, with respect to such
Damages or Tax and shall be reduced by any Tax Benefit arising from the
incurrence or payment of any such Damages or Tax by the Indemnified Party. Any
indemnity payment by Parent to Buyer under Article 11 shall be treated as an
adjustment to Buyer's basis in the Shares unless such treatment would be
inconsistent with any Final Determination governing such treatment, in which
case Parent shall also indemnify Buyer for any increase in liability for Taxes
that is imposed on Buyer, the Company, and/or any Subsidiary, which is
attributable to the indemnity payment or other payment made by Parent being
treated as currently taxable. Buyer and/or its Subsidiaries shall not be a party
to any such Final Determination without the written approval of Seller which
approval shall not be unreasonably withheld.
ARTICLE 12
TERMINATION
12.1 Grounds for Termination. This Agreement may be terminated at
any time prior to the Closing:
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(a) by mutual written agreement of Seller and Buyer; or
(b) by either Seller or Buyer if the Closing shall not
have been consummated on or before June 30, 1996; or
(c) by Buyer within five business days following receipt
of updated Schedules pursuant to Section 5.12 hereof containing new or corrected
information which would reasonably be expected to have a Material Adverse Effect
on the Company.
The party desiring to terminate this Agreement shall give written
notice of such termination to the other party.
12.2 Effect of Termination. If this Agreement is terminated as
permitted by Section 12.1, termination shall be without liability of either
party (or any stockholder, director, officer, employee, agent, consultant or
representative of such party) to the other party to this Agreement, except that
no such termination shall relieve Buyer of its obligations under Section 6.1.
The provisions of Sections 6.1, 7.3, this Section 12.2 and Section 13.4 shall
survive any termination hereof pursuant to Section 12.1.
ARTICLE 13
MISCELLANEOUS
13.1 Notices. Any notices hereunder shall be in writing and shall
be deemed to have been given when delivered by hand or when transmitted by
facsimile transmission, the first business day after sent by a
nationally-recognized overnight courier (such as Airborne or Federal Express),
or on the fifth business day after deposit in the United States Mail, registered
or certified, return receipt requested, postage prepaid, addressed to:
if to Buyer, to:
Mr. Walter A. Rhulen, President
Frontier Insurance Group, Inc.
195 Lake Louise Marie Road
Rock Hill, New York 12775
Fax: (914) 796-1900
with a copy to:
Sidney Todres, Esq.
Epstein Becker & Green, P.C.
250 Park Avenue
New York, New York 10177
Fax: (212) 661-0989
if to Seller, to:
Bruce A. Esselborn, President
Capsure Holdings Corp.
Two N. Riverside Plaza
Suite 1600
Chicago, Illinois 60606
Fax: (312) 454-1819
31
<PAGE>
<PAGE>
with a copy to:
Kelly L. Stonebraker, Esq.
Rosenberg & Liebentritt, P.C.
Two N. Riverside Plaza
Suite 1515
Chicago, Illinois 60606
Fax: (312) 454-0335
or at such other address, or facsimile number or to the attention of such other
person as Buyer or Seller may designate by written notice to the other party
hereto. Notice by facsimile transmission shall be confirmed by certified or
registered mail, postage prepaid, return receipt requested but shall be deemed
given when such facsimile was transmitted.
13.2 Amendments and Waivers. (a) Any provision of this Agreement
may be amended or waived prior to the Closing Date if, but only if, such
amendment or waiver is in writing and is signed, in the case of an amendment, by
each party to this Agreement, or in the case of a waiver, by the party against
whom the waiver is to be effective.
(b) No failure or delay by any party in exercising any
right, power or privilege hereunder shall operate as a waiver thereof nor shall
any single or partial exercise thereof preclude any other or further exercise
thereof or the exercise of any other right, power or privilege. The rights and
remedies herein provided shall be cumulative and not exclusive of any rights and
remedies provided by law.
13.3 Expenses. Unless otherwise expressly provided herein, all
costs and expenses incurred in connection with this Agreement shall be paid by
the party incurring such cost or expense.
13.4 Successors and Assigns. The provisions of this Agreement
shall be binding upon and inure to the benefit of the parties hereto and their
respective successors and assigns; provided, however, that no party may assign,
delegate or otherwise transfer any of its rights or obligations under this
Agreement without the written consent of each other party hereto.
13.5 Governing Law. This Agreement shall be governed by and
construed in accordance with the law of the State of New York without regard to
the conflict of laws rules of such state.
13.6 Counterparts; Facsimile Signatures. This Agreement may be
signed in any number of counterparts, each of which shall be an original, with
the same effect as if the signatures thereto and hereto were upon the same
instrument. The parties hereto acknowledge and agree that original signatures
delivered by facsimile transmission shall be acceptable as original signatures.
13.7 Third Party Beneficiaries. No provision of this Agreement is
intended to confer upon any Person, other than the parties hereto, any rights or
remedies hereunder, including, without limitation, any employee or former
employee of the Company or any of its Subsidiaries.
13.8 Entire Agreement. This Agreement, together with the Exhibits
and Schedules hereto and the Confidentiality Agreement, constitute the entire
agreement between the parties with respect to the subject matter of this
Agreement and supersede all prior agreements and understandings, both oral and
written, between the parties with respect to the subject matter of this
Agreement. No representation, inducement, promise, understanding, condition or
warranty not set forth herein has been made or relied upon by either party
hereto.
13.9 Headings. The headings of the articles, sections and
schedules of this Agreement are inserted for the sake of convenience only and
shall not constitute a part hereof.
32
<PAGE>
<PAGE>
13.10 Schedules. For purposes of this Agreement, the disclosure
of an item on a schedule hereto shall be deemed to be disclosure of such item on
each other applicable schedule.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement
to be duly executed by their respective authorized officers as of the day and
year first above written.
FRONTIER INSURANCE COMPANY
By: ___________________________
Name: Peter H. Foley
Title: Vice President
NI ACQUISITION CORP.
By: ___________________________
Name: Bruce A. Esselborn
Title: President
FOR PURPOSES OF SECTIONS 2.3(c)
AND ARTICLE 11 ONLY:
CAPSURE HOLDINGS CORP.
By: ___________________________
Name:
Title:
33
<PAGE>
<PAGE>
SCHEDULES AND EXHIBITS
The following is a list of schedules and exhibits to this stock purchase
agreement which will be furnished supplementally to the Securities and Exchange
Commission upon request.
INDEX TO SCHEDULES
Schedule 2.2(d)(iii) Investments
Schedule 3.2 Corporate Authorization
Schedule 3.3 Governmental Authorization
Schedule 3.4 Non-Contravention
Schedule 3.5 Capitalization
Schedule 3.6 Ownership of Shares
Schedule 3.7 Subsidiaries
Schedule 3.9 Absence of Certain Changes
Schedule 3.10 Material Contracts
Schedule 3.11 Litigation
Schedule 3.12 Compliance with Laws
Schedule 3.13-A Properties
Schedule 3.13-B Properties
Schedule 3.16(a) Employee Plans
Schedule 3.16(c) Certain Employee Plans
Schedule 3.16(d) Benefit Arrangements
Schedule 3.17 Environmental Matters
Schedule 3.18 Intercompany Accounts
Schedule 3.21 Investments
Schedule 3.22-A Taxes
Schedule 3.22-B Taxes-Listing of Agreements and Jurisdictions
Schedule 4.1 Insurance Affiliate of Buyer
Schedule 4.3 Governmental Authorization
Schedule 5.1(c) Conduct of Business
Schedule 6.4 Post-Closing Use of Office Space
Schedule 10.1(d) Frontier Pacific Ins Company-States Authorized
34
<PAGE>
<PAGE>
INDEX OF EXHIBITS
A Form of Opinion of Counsel to Seller
B Form of Opinion of Counsel to Parent (contained in Exhibit A)
C-1 Form of Non-Solicitation/Non-Competition Agreement to be executed by
Parent
C-2 Form of Non-Solicitation/Non-Competition Agreement to be executed by
Bruce A. Esselborn
C-3 Form of Non-Solicitation Agreement to be executed by Mary Jane Robertson
D Form of Tillinghast letter
E-1 Form of Termination Addendum with respect to the Reinsurance Agreement
E-2 Form of Amendment No. 4 to the MGA Agreement
E-3 Form of Termination Addendum with respect to the MGA Agreement
E-4 Form of Termination Addendum with respect to the Surety Bond Quota Share
Reinsurance Agreement effective September 1, 1992 between Western
Surety and UCIC
F Form of letter from Equity Group Investments, Inc. re: obligations under
sublease
G Form of Assignment and Assumption of Executive Change In Control And
Termination Benefits Agreements to be executed by Buyer
H Form of Opinion of Counsel to Buyer
I-1 Form of Assignment of Employment Agreement and Guaranty for Mr. Zeitman
I-2 Form of Assignment of Employment Agreement and Guaranty for Mr. Fischer
35
<PAGE>
<PAGE>
EXHIBIT 10.15
United Capitol Holding Company
and Subsidiaries
Consolidated Financial Statements
December 31, 1995 and 1994
(With Independent Auditors'
Report Thereon)
<PAGE>
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
United Capitol Holding Company
We have audited the accompanying consolidated balance sheets of United Capitol
Holding Company and Subsidiaries (the "Company") as of December 31, 1995 and
1994, and the related statements of income, stockholder's equity and cash flows
for the years ended December 31, 1995, 1994 and 1993. 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 in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 15, the Company may be sold in connection with the proposed
transaction described therein.
In our opinion, the financial statements referred to above present fairly, in
all material respects the consolidated financial position of United Capitol
Holding Company and Subsidiaries as of December 31, 1995 and 1994, and the
results of its operations and its cash flows for the years ended December
31, 1995, 1994 and 1993 in conformity with generally accepted accounting
principles.
/s/ Coopers & Lybrand L.L.P.
Atlanta, Georgia
March 1, 1996
<PAGE>
<PAGE>
UNITED CAPITOL HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
December 31,
-----------------
1995 1994
---- ----
ASSETS
Invested assets and cash:
Fixed maturities:
<S> <C> <C>
At fair value (amortized cost: 1995 - $ 98,546; 1994 - $114,982).......... $ 99,655 $108,158
At amortized cost (fair value: 1994 - $ 9,426)............................ - 10,038
Equity securities, at fair value (cost: 1995 - $9,576; 1994 - $12,526)....... 9,690 12,362
Short-term investments, at cost which approximates fair value................ 18,667 5,874
Cash......................................................................... 1,866 1,832
-------- --------
129,878 138,264
Deferred policy acquisition costs............................................... 586 911
Reinsurance receivable........................................................... 33,707 33,674
Excess cost over net assets acquired, net of amortization........................ 4,805 18,757
Deferred income taxes ........................................................... 4,612 9,763
Other assets..................................................................... 8,110 9,657
-------- --------
$181,698 $211,026
======== ========
LIABILITIES
Reserves:
Unpaid losses and loss adjustment expenses................................... $ 86,215 $108,790
Unearned premiums............................................................ 9,994 12,831
-------- --------
96,209 121,621
Reinsurance payable.............................................................. 773 3,373
Other liabilities................................................................ 9,672 5,982
-------- --------
Total liabilities......................................................... 106,654 130,976
-------- --------
Commitments and contingencies
STOCKHOLDER'S EQUITY
Preferred stock, par value $.01 per share, 493,750 shares authorized;
474418 shares issued and outstanding at December 31, 1995 and 1994.......... 4 4
Common stock, par value $.01 per share, 650,000 shares authorized;
75,150 shares issued and outstanding at December 31, 1995 and 1994.......... 1 1
Additional paid-in capital....................................................... 74,373 84,716
Retained earnings................................................................ - -
Unrealized gain (loss) on securities, net of deferred income taxes............... 795 (4,542)
Treasury stock, at cost (1,400 shares in 1995 and 1994).......................... (129) (129)
-------- --------
Total stockholder's equity................................................. 75,044 80,050
-------- --------
$181,698 $211,026
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
<PAGE>
UNITED CAPITOL HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------
1995 1994 1993
---- ---- ----
Revenues:
<S> <C> <C> <C>
Net earned premiums................................................ $ 13,709 $ 19,226 $ 18,088
Net investment income.............................................. 9,257 9,366 11,027
Net realized investment losses..................................... (1,030) (72) (767)
-------- --------- --------
21,936 28,520 28,348
-------- --------- --------
Expenses:
Net losses and loss adjustment expenses........................... (15,030) 11,752 8,590
Net commissions, brokerage and other underwriting.................. 3,142 4,322 3,914
Amortization and impairment of goodwill............................ 13,952 753 495
--------- --------- --------
2,064 16,827 12,999
-------- --------- --------
Income before income taxes............................................ 19,872 11,693 15,349
Income taxes.......................................................... 11,215 4,382 5,437
--------- ---------- --------
Net income............................................................ $ 8,657 $ 7,311 $ 9,912
========= ========== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
<PAGE>
UNITED CAPITOL HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Preferred Stock:
Balance, December 31............................................ $ 4 $ 4 $ 4
========== ========== ==========
Common Stock:
Balance, December 31............................................ $ 1 $ 1 $ 1
=========== =========== ==========
Additional Paid-In Capital:
Balance, January 1 .......................................... $ 84,716 $ 87,405 $ 87,405
Capital distributions .......................................... (10,343) (2,689) -
---------- ---------- ----------
Balance, December 31............................................ $ 74,373 $ 84,716 $ 87,405
========== ========== ==========
Retained Earnings (Deficit):
Balance, January 1.............................................. $ - $ 1,558 $ (2,115)
Net income...................................................... 8,657 7,311 9,912
Dividends paid (8,657) (8,869) (6,239)
Balance, December 31............................................ $ - $ - $ -
========== ========== ==========
Unrealized Gain (Loss) on Securities, Net of Deferred Income Taxes:
Balance, January 1.............................................. $ (4,542) $ 37 $ 7
Impact of adopting SFAS No. 115................................. - 2,041 -
Transfer of securities held-to-maturity ........................ 189 - -
Chage for the year.............................................. 5,148 (6,620) 30
---------- ---------- ----------
Balance, December 31............................................ $ 795 $ (4,452) $ 37
========== ========== ==========
Treasury Stock:
Balance, December 31............................................ $ (129) $ (129) $ (129)
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
<PAGE>
UNITED CAPITOL HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income............................................................ $ 8,657 $ 7,311 $ 9,912
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization...................................... 14,036 819 559
Accretion of bond discount, net.................................... (2,018) (2,791) (3,173)
Net realized investment losses..................................... 1,030 72 767
Changes in:
Reserve for unpaid losses and loss adjustment expenses........... (22,575) 5,965 3,664
Reserve for unearned premiums.................................... 2,837) (1,392) 370
Deferred income taxes, net....................................... 2,277 (93) (1,262)
Other assets and liabilities..................................... 2,970 (4,190) (3,161)
---------- -------- --------
Net cash provided by operating activities............................... 1,540 5,701 7,676
---------- -------- --------
INVESTING ACTIVITIES:
Securities available-for-sale:
Purchases - fixed maturities....................................... (37,416) (48,504) (83,753)
Slaes - fixed maturities........................................... 32,064 18,218 20,813
Maturities - fixed maturities...................................... 32,372 34,765 70,963
Purchases - equity securities...................................... - (14,012) -
Sales - equity securities.......................................... 3,166 2,468 -
Securities held-to-maturity:
Purchases - fixed securities....................................... (4,051) (1,110) (4,899)
Maturities - fixed maturities 4,100 - 2,800
Change in short-term investments...................................... (12,615) 14,866 (5,162)
Acquisitions, net of cash acquired.................................... - - (1,375)
Proceeds from sale of other invested assets........................... - (23) -
Capital expenditures, net............................................. (126) (38) (109)
---------- -------- --------
Net cash provided by (used in) investing activities..................... 17,494 6,630 (722)
---------- --------- ---------
FINANCING ACTIVITIES:
Dividends and capital distributions paid to parent...................... (19,000) (11,558) (6,239)
---------- -------- --------
Net cash used in financing activities................................... (19,000) (11,558) (6,239)
---------- -------- --------
Increase in cash........................................................ 34 773 715
Cash at beginning of year............................................... 1,832 1,059 344
--------- --------- ---------
Cash at end of year..................................................... $ 1,866 $ 1,832 $ 1,059
========== ======== =========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for:
Income taxes, net of refunds....................................... $ 4,566 $ 5,103 $ 7,264
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
<PAGE>
UNITED CAPITOL HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of United
Capitol Holding Company and all subsidiaries (the "Company"). The Company is
engaged principally in the property and casualty insurance business through its
wholly owned subsidiary United Capitol Insurance Company ("UCIC"). In addition,
the Company is engaged in the insurance agency business through its two wholly
owned subsidiaries United Capitol Managers, Inc. ("Managers") and Fischer
Underwriting Group, Incorporated ("Fischer"). All significant intercompany
accounts and transactions have been eliminated in consolidation. The Company is
an indirect wholly owned subsidiary of Capsure Holdings Corp. ("Capsure").
BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles. Such accounting
principles differ from statutory reporting practices used by insurance companies
in reporting to state regulatory authorities. The preparation of financial
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
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.
The accompanying consolidated financial statements have been prepared
using the push-down method of accounting. Push-down accounting is a procedure
whereby a subsidiary uses its parent company's purchase accounting principles in
preparing the subsidiary financial statements.
INVESTMENTS
Effective January 1, 1994, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in
Debt and Equity Securities." The Company has the ability to hold all debt
securities to maturity. However, the Company may dispose of securities prior to
their scheduled maturities due to changes in interest rates, prepayments, tax
and credit considerations, liquidity or regulatory capital requirements, or
other similar factors. As a result, the Company considers all of its debt (bonds
and redeemable preferred stocks) and equity securities as available-for-sale.
Available-for-Sale Securities -- These securities are reported at fair
value, with unrealized gains and losses, net of deferred income taxes, reported
as a separate component of stockholder's equity until realized.
<PAGE>
<PAGE>
1. SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
In 1994, debt securities, deposited with state insurance regulatory
authorities, were considered held to maturity and were reported at amortized
cost on the balance sheet. Effective December 31, 1995 the Company implemented
the one-time reassessment provision contained in the Financial Accounting
Standards Board Special Report, "A Guide to Implementation of Statement 115 on
Accounting for Certain Investments in Debt and Equity Securities" and,
accordingly, reclassified all held-to-maturity securities to the
available-for-sale category as of December 31, 1995. The amortized cost and fair
value of these securities as of December 31,1995 were $9.9 million and $10.2
million, respectively. The net unrealized gains and losses on such securities,
net of deferred income taxes, of $0.2 million has been reflected in
stockholder's equity.
Prior to the adoption of SFAS 115, all debt securities were carried at
amortized cost and all equity securities reported at fair value, with unrealized
gains and losses, net of deferred income taxes, reflected
in stockholder's equity.
The amortized cost of debt securities is adjusted for amortization of
premiums and accretion of discounts to maturity. Such amortization is included
in investment income. For mortgage-backed and certain asset-backed securities,
the Company recognizes income using a constant effective yield based on
estimated cash flows including anticipated prepayments. Significant variances in
actual cash flows from expected cash flows are accounted for prospectively. Any
related adjustment is reflected in investment income. Investment gains or losses
are determined using the specific identification method. Investments with an
other than temporary decline in value are written down to fair value, resulting
in losses that are included in realized investment gains and losses.
Short-term investments are carried at cost which approximates fair value.
DEFERRED POLICY ACQUISITION COSTS
Policy acquisition costs, consisting of commissions and other
underwriting expenses which vary with, and are directly related to, the
production of business, net of reinsurance commission income, are deferred and
amortized to income as the related premiums are earned. Deferred policy
acquisition costs are subject to a limitation representing the excess of
anticipated net earned premiums over anticipated losses, loss adjustment
expenses and maintenance costs. The ultimate recoverability of policy
acquisition costs is determined without regard to investment income.
EXCESS COST OVER NET ASSETS ACQUIRED
The excess cost over the fair value of net assets acquired relating to
the acquisition of United Capitol Holding Company by an indirect wholly owned
subsidiary of Capsure is being amortized over 40 years. The excess cost over
the fair value of net assets acquired relating to the acquisition of Fischer is
being amortized over 10 years. Excess cost over net assets acquired is reported
net of accumulated amortization of $16.5 million and $2.6 million at December
31, 1995 and 1994, respectively.
Management assesses the recoverability of goodwill based upon estimates
of undiscounted future operating cashflows whenever significant events or
changes in circumstances suggest that the carrying amount of an asset may not be
recoverable. As described in Note 15, the operations of the Company are expected
to be sold and the push-down goodwill associated with the Company has been
reduced to estimated net realizable value.
<PAGE>
<PAGE>
1. SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES
The liability for unpaid losses and loss adjustment expenses is based on
estimates of (a) the ultimate settlement value of reported claims, (b) incurred
but not reported ("IBNR") claims, (c) future expenses to be incurred in the
settlement of claims and (d) claim recoveries. These estimates are determined
based on Company and industry loss experience as well as consideration of
current trends and conditions. The liability for unpaid losses and loss
adjustment expenses is an accounting estimate and, similar to other accounting
estimates, there is the potential that actual future loss payments will differ
from the initial estimate. The methods of determining such estimates and the
resulting estimated liability are continually reviewed and updated. Changes in
the estimated liability are reflected in operating income in the year in which
such changes are determined. As described in Note 7, the Company's incurred
losses and loss adjustment expenses in 1995 were reduced by $23.2 million as a
result of favorable claim settlements and certain changes in underlying
actuarial assumptions relating to insured events of prior years.
INSURANCE PREMIUMS
Insurance premiums are recognized as revenue ratably over the terms of
the related policies. Unearned premiums represent the portion of premiums
written applicable to the unexpired terms of policies in force calculated on a
daily pro rata basis. Premium revenues are reported net of amounts ceded to
reinsurers.
REINSURANCE
Amounts recoverable from reinsurers are estimated in a manner consistent
with the claim liability associated with the reinsured policy and are reported
as reinsurance receivable rather than netted against the liability for unpaid
losses and loss adjustment expenses. Losses and loss adjustment expenses
incurred are reported net of estimated recoveries under reinsurance contracts.
INCOME TAXES
The Company is included in the Capsure group's consolidated federal
income tax return. Pursuant to a February 20, 1990 intercompany tax sharing
agreement between the Company and Capsure, the Company makes or receives
payments equal to the tax expense/benefit realized based upon separate return
calculations. The Company computes its income tax provision and related deferred
tax assets and liabilities under SFAS 109, which was adopted January 1, 1993. In
accordance with the standard, the balance sheet reflects the deferred income tax
balances for anticipated tax impact of future taxable income or deductions
implicit in the balance sheet in the form of temporary differences. These
temporary differences reflect the difference between the basis in assets and
liabilities as measured in the financial statements and as measured by tax laws
using enacted tax rates. Such temporary differences primarily relate to loss
reserve discounting.
2. ACQUISITION
On November 10, 1993, the Company acquired all of the outstanding common
stock of Fischer for an aggregate purchase price of $3.5 million. Fischer is a
managing general agency engaged in producing and underwriting specialty
directors' and officers' and miscellaneous professional liability insurance.
<PAGE>
<PAGE>
2. ACQUISITION, CONTINUED
The following table of unaudited proforma information has been prepared
as if the acquisition of Fischer had been consummated on January 1, 1993, at the
same purchase price, with adjustments to the consolidated results of operations
for the effects of the acquisition in the same manner as subsequent to the
acquisition. In management's opinion, the proforma financial information is not
indicative of consolidated results of operations that may have occurred had the
acquisition taken place on January 1, 1993, or of future results of operations
of the combined companies under the ownership and operation of the Company.
<TABLE>
<CAPTION>
Pro Forma (Unaudited)
for the Year Ended December 31, 1993
(Dollars in thousands)
------------------------------------
<S> <C>
Revenues................................... $ 29,705
Net income................................. 10,013
</TABLE>
3. INVESTMENTS
The cost and estimated fair values of investments in debt and equity
securities as of December 31, 1995 were as follows (dollars in thousands):
<TABLE>
<CAPTION>
Amortized Gross Gross Estimated
Cost Unrealized Unrealized Fair
or Cost Gains Losses Value
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Available-For-Sale Securities
Fixed maturities:
U.S. Treasury securities and obligations of U.S.
Government corporations and agencies:
U.S. Treasury notes............................ $ 9,925 $ 292 $ ( 1) $ 10,216
Collateralized mortgage obligations............ 37,552 187 (203) 37,536
Debt securities of foreign governments............. 5 - - 5
Non-agency collateralized mortgage obligations..... 21,139 156 (13) 21,282
Asset-backed securities:
Second mortgages/home equity loans............. 24,092 657 (18) 24,731
Automobile loans............................... 1,105 - (1) 1,104
Other underlying assets........................ 4,728 54 (1) 4,781
--------- --------- -------- ---------
Total fixed maturities...................... 98,546 1,346 (237) 99,655
Equity securities.................................. 9,576 515 (401) 9,690
--------- --------- -------- ---------
Total available-for-sale securities......... $ 108,122 $ 1,861 $ (638) $ 109,345
========= ========= ======== =========
</TABLE>
<PAGE>
<PAGE>
3. INVESTMENTS, CONTINUED
The cost and estimated fair values of investments in debt and equity
securities as of December 31, 1994 were as follows (dollars in thousands):
<TABLE>
<CAPTION>
Amortized Gross Gross Estimated
Cost Unrealized Unrealized Fair
or Cost Gains Losses Value
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Available-For-Sale Securities
Fixed maturities:
U.S. Treasury securities and obligations of U.S.
Government corporations and agencies:
U.S. Treasury notes............................ $ 66,895 $ 5 $ (5,617) $ 61,283
Collateralized mortgage obligations............ 1,465 62 - 1,527
Debt securities of foreign governments............. 5 - - 5
Non-agency collateralized mortgage obligations..... 4,166 - (174) 3,992
Asset-backed securities:
Second mortgages/home equity loans............. 30,919 38 (678) 30,279
Credit card receivables........................ 4,000 44 - 4,044
Automobile loans............................... 3,839 25 (438) 3,426
Other underlying assets........................ 3,693 - (91) 3,602
--------- --------- --------- ---------
Total fixed maturities...................... 114,982 174 (6,998) 108,158
Equity securities.................................. 12,526 - (164) 12,362
--------- --------- --------- ---------
Total available-for-sale securities........ $ 127,508 $ 174 $ (7,162) $ 120,520
========= ========= ========= =========
Held-To-Maturity Securities
Fixed maturities - U.S. Treasury securities........ $ 10,038 $ 19 $ (631) $ 9,426
========= ========= ========= =========
</TABLE>
As of December 31, 1995, 99% of the Company's debt securities were
considered investment grade by The Standard & Poors Corporation or Moody's
Investor Services, Inc., and 96% were rated at least AA by those agencies. In
addition, the Company's investments in debt securities did not contain any
significant geographic or industry concentration of credit risk.
The U.S. Treasury notes are backed by the full faith and credit of the
U.S. Government. The U.S. Government collateralized mortgage obligations consist
of securities collateralized by first mortgages issued by the Federal National
Mortgage Association and the Federal Home Loan Mortgage Corporation, or
guaranteed by the Government National Mortgage Association.
UCIC, as required by state law, deposits certain securities with state
insurance regulatory authorities. At December 31, 1995, fixed maturities on
deposit had an aggregate fair value of $10.2 million.
Short-term investments are comprised of U.S. Treasury notes, federal
discount notes, money market and mutual funds, and investment grade commercial
paper equivalents.
<PAGE>
<PAGE>
3. INVESTMENTS, CONTINUED
The amortized cost and estimated fair value of debt securities at
December 31, 1995, by contractual maturity, are shown below. Expected maturities
will differ from contractual maturities as borrowers may have the right to call
or prepay obligations with or without call or prepayment penalties (dollars in
thousands):
<TABLE>
<CAPTION>
Estimated
Amortized Fair
Cost Value
--------- ---------
<S> <C> <C>
Available-For-Sale Securities
Due within one year........................................... $ - $ -
Due after one year but within five years...................... 4,168 4,380
Due after five years but within ten years..................... 5,762 5,841
Due after ten years........................................... - -
---------- -----------
9,930 10,221
Collateralized
mortgage obligations and asset-backed securities............ 88,616 89,434
---------- -----------
$ 98,546 $ 99,655
========== ===========
</TABLE>
Major categories of net investment income and net realized investment
losses were as follows (dollars in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ------
<S> <C> <C> <C>
Investment income:
Fixed maturities....................... $ 8,012 $ 8,542 $ 10,686
Equity securities...................... 880 699 49
Short-term investments................. 590 377 544
--------- --------- ---------
Total investment income................ 9,482 9,618 11,279
Investment expenses........................ 225 252 252
--------- --------- ---------
Net investment income...................... $ 9,257 $ 9,366 $ 11,027
========= ========= =========
Gross investment gains:
Fixed maturities....................... $ 320 $ 56 $ 1,733
Equity securities...................... 363 209 -
Gross investment losses:
Fixed maturities....................... (1,566) (337) (2,500)
Equity securities...................... (147) - -
--------- --------- ---------
Net realized investment losses............. $ (1,030) $ (72) $ (767)
========= ========= =========
</TABLE>
Net unrealized gain (loss) on securities included in stockholder's equity
for December 31, 1995 and 1994 was as follows (dollars in thousands):
<TABLE>
<CAPTION>
1995 1994
------------------------------- ------------------------------
Gains Losses Net Gains Losses Net
--------- --------- ---------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Fixed maturities......................$ 1,346 $ (237) $ 1,109 $ 174 $(6,998) $ (6,824)
Equity securities..................... 515 (401) 114 - (164) (164)
--------- --------- ---------- --------- --------- ---------
$ 1,861 $ (638) 1,223 $ 174 $(7,162) (6,988)
========= ========= ========= =========
Deferred income taxes................. (428) 2,446
---------- ---------
Net unrealized gain (loss) on
securities........................... $ 795 $ (4,542)
========= =========
</TABLE>
<PAGE>
<PAGE>
3. INVESTMENTS, CONTINUED
At December 31, 1994, the carrying value of debt securities on
non-accrual status was $1.9 million related to two interest-only U.S. Government
collateralized mortgage obligations.
4. DEFERRED POLICY ACQUISITION COSTS
Policy acquisition costs deferred and the related amortization charged to
income were as follows (dollars in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- -------
<S> <C> <C> <C>
Balance, beginning of year...................... $ 911 $ 1,207 $ 1,204
Costs deferred during year...................... 906 2,118 2,267
Amortization during year........................ (1,231) (2,414) (2,264)
--------- --------- ---------
Balance, end of year............................ $ 586 $ 911 $ 1,207
========= ========= =========
</TABLE>
5. REINSURANCE
UCIC, in the ordinary course of business, cedes reinsurance to other
insurance companies to limit their exposure to loss and to provide greater
diversification of risk. Reinsurance contracts do not relieve the Company of its
primary obligations to claimants. A contingent liability exists with respect to
reinsurance ceded to the extent that any reinsurer is unable to meet the
obligations assumed under the reinsurance agreements. The Company evaluates the
financial condition of its reinsurers, establishes allowances for uncollectible
amounts and monitors concentrations of credit risk. At December 31, 1995, the
Company's largest reinsurance receivable, including prepaid reinsurance premiums
of $1.2 million and estimated ceded IBNR of $11.8 million, was approximately
$19.8 million with Generali - U.S. Branch. Generali - U.S. Branch is rated A
(Excellent), XV by A.M. Best Company, Inc. No other receivable from a single
reinsurer exceeded 10% of total reinsurance receivables.
The effect of reinsurance on premiums written and earned for the years
ended December 31, 1995, 1994 and 1993 was as follows (dollars in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
----------------------- ---------------------- ----------------------
Written Earned Written Earned Written Earned
<S> <C> <C> <C> <C> <C> <C>
Direct............... $ 20,741 $ 23,609 $ 26,754 $ 28,268 $ 28,291 $ 28,053
Assumed.............. 1,068 1,037 776 654 772 639
Ceded................ (10,827) (10,937) (10.479) (9,696) (11,355) (10,604)
-------- -------- -------- --------- -------- ---------
Net premiums......... $ 10,982 $ 13,709 $ 17,051 $ 19,226 $ 17,708 $ 18,088
======== ======== ======== ======== ======== =========
</TABLE>
The effect of reinsurance on losses and loss adjustment expenses incurred
for the years ended December 31, 1995, 1994 and 1993 was as follows (dollars in
thousands):
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ------
<S> <C> <C> <C>
Gross losses and loss adjustment expenses ..... $(11,519) $ 17,931 $ 14,486
Reinsurance recoveries......................... (3,511) (6,179) (5,896)
-------- -------- --------
Net losses and loss adjustment expenses ....... $(15,030) $ 11,752 $ 8,590
======== ======== ========
</TABLE>
<PAGE>
<PAGE>
5. REINSURANCE, CONTINUED
The Company recognized $2.6 million and $2.5 million in 1995 and 1994,
respectively, of contingent reinsurance premiums under its reinsurance
agreements. These amounts are included in net earned premiums on the income
statement.
6. LEASES
The Company leases office space under non-cancelable operating leases
expiring in various years through 2000. One of the leases calls for annual
adjustments to be determined at the end of each lease year. The total minimum
payments required under this lease for the next five years are as follows:
<TABLE>
<S> <C>
1996....... $ 451,123
1997....... 451,123
1998....... 451,123
1999....... 451,123
2000....... 207,037
----------
$ 2,011,529
===========
</TABLE>
Total rental expense under operating leases for office space for the
years ended December 31, 1995, 1994 and 1993 was $177,202, $194,651 and
$203,232, respectively.
7. LIABILITY FOR UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES
Activity in the liability for unpaid losses and loss adjustment expenses
was as follows (dollars in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
---------- ----------- ----------
<S> <C> <C> <C>
Gross balance at January 1............................. $ 108,790 $ 102,825 $ 99,161
Incurred related to:
Current year........................................... 16,477 30,758 29,582
Prior years............................................ (27,996) (12,827) (15,096)
---------- ----------- ----------
Total incurred......................................... (11,519) 17,931 14,486
---------- ----------- ----------
Paid related to:
Current year........................................... 964 1,077 1,019
Prior years............................................ 10,092 10,889 9,803
--------- ----------- ----------
Total paid............................................. 11,056 11,966 10,822
---------- ---------- ----------
Gross balance at December 31........................... $ 86,215 $ 108,790 $ 102,825
========== ========== ==========
</TABLE>
As a result of favorable claim settlements and changes in estimates of
insured events in prior years, the provision for unpaid losses and loss
adjustment expenses decreased by $28.0 million ($23.2 million, net of
reinsurance) in 1995, $12.8 million ($7.2 million, net of reinsurance) in 1994
and $15.1 million ($11.4 million, net of reinsurance) in 1993.
<PAGE>
<PAGE>
7. LIABILITY FOR UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES, CONTINUED
The Company's claims development through December 31, 1995 has been
favorable relative to expectations based on industry experience. Due to the
limited prior operating experience of the Company and the long-tail nature of
its business, the Company previously relied principally upon industry
development patterns and expected loss ratios in estimating IBNR. Given the
availability of nine full years of Company experience and the growing evidence
of favorable loss trends relative to industry indications, management concluded
in the fourth quarter of 1995 that it is appropriate to place greater reliance
on the Company's own development patterns and emerging loss ratios in estimating
IBNR.
Substantially all of the $28.1 million reduction in loss and loss adjustment
expenses pertains to this change in estimate, resulting in an increase in the
Company's 1995 income before taxes and net income of $23.2 million and $15.1
million, respectively.
8. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table summarizes disclosure of fair value information of
financial instruments, whether or not recognized in the balance sheet, for which
it is practicable to estimate that value. In cases where quoted market prices
are not available, fair values may be based on estimates using present value or
other valuation techniques. These techniques are significantly affected by the
assumptions used, including the discount rates and estimates of future cash
flows. Accordingly, the estimates presented herein are subjective in nature and
are not necessarily indicative of the amounts that the Company could realize in
a current market exchange. This information excludes certain financial
instruments and all nonfinancial instruments such as insurance contracts from
fair value disclosure. Thus, the following fair value amounts cannot be
aggregated to determine the underlying economic value of the Company.
The carrying amounts and estimated fair values of financial instruments
for the years ended December 31, 1995 and 1994 were as follows (dollars in
thousands):
<TABLE>
<CAPTION>
1995 1994
--------------------------- ---------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
--------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Fixed maturities...................... $ 99,655 $ 99,655 $ 118,196 $ 117,584
Equity securities..................... 9,690 9,690 12,362 12,362
Short-term investments................ 18,667 18,667 5,874 5,874
Cash.................................. 1,866 1,866 1,832 1,832
</TABLE>
The following methods and assumptions were used by the Company in
estimating fair values of financial instruments:
Investment Securities -- The estimated fair values for debt securities
(including redeemable preferred stock) are based upon quoted market prices,
where available. For debt securities not actively traded, the estimated fair
values are determined using values obtained from independent pricing services
or, in the case of private placements, by discounting expected future cash flows
using a current market rate applicable to the yield, credit quality and maturity
of the investments. The estimated fair values for equity securities are based on
quoted market prices.
<PAGE>
<PAGE>
8. FAIR VALUE OF FINANCIAL INSTRUMENTS, CONTINUED
Cash and Short-Term Investments -- The carrying amount for these
instruments approximates their estimated fair values.
9. STATUTORY FINANCIAL DATA
UCIC files annual financial statements prepared in accordance with
statutory accounting practices prescribed or permitted by the office of the
Commissioner of Insurance of the State of Wisconsin. Prescribed statutory
accounting practices include state laws, regulations and general administrative
rules, as well as guidance provided in a variety of publications of the National
Association of Insurance Commissioners ("NAIC"). Permitted statutory accounting
practices encompass all accounting practices that are not prescribed. Such
practices may differ from state to state, may differ from company to company
within a state, and may change in the future. The permitted statutory accounting
practices of UCIC did not have a material effect on reported statutory surplus.
The principal differences between statutory financial statements and financial
statements prepared in accordance with generally accepted accounting principles
are that statutory financial statements do not reflect deferred policy
acquisition costs and deferred income taxes and debt securities are generally
carried at amortized cost in statutory financial statements.
The NAIC has promulgated risk-based capital ("RBC") requirements for
property/casualty insurance companies to evaluate the adequacy of statutory
capital and surplus in relation to investment and insurance risks such as asset
quality, asset and liability matching, loss reserve adequacy and other business
factors. The RBC information will be used by state insurance regulators as an
early warning tool to identify, for the purpose of initiating regulatory action,
insurance companies that potentially are inadequately capitalized. In addition,
the formula defines new minimum capital standards that will supplement the
current system of fixed minimum capital and surplus requirements on a
state-by-state basis. Regulatory compliance is determined by a ratio of the
enterprise's regulatory total adjusted capital, as defined by the NAIC (the
"Ratio"), to its authorized control level RBC, as defined by the NAIC.
Generally, a Ratio in excess of 200% of authorized control level RBC requires no
corrective actions on the behalf of the company or regulators. As of December
31, 1995, the Company's insurance subsidiary had a Ratio that was substantially
in excess of the minimum RBC requirements.
UCIC is subject to regulation and supervision by the various state
insurance regulatory authorities in which it conducts business. Such regulation
is generally designed to protect policyholders and includes such matters as
maintenance of minimum statutory surplus and restrictions on the payments of
dividends. Generally, statutory surplus of an insurance subsidiary in excess of
statutorily prescribed minimum is available for transfer to the parent company.
However, such distributions as dividends may be subject to prior regulatory
approval, including a review of the implications on RBC. Without prior
regulatory approval in 1996, UCIC may pay stockholder dividends of $6.8 million
in the aggregate. In 1995, 1994 and 1993, UCIC paid dividends, ultimately to
Capsure, of $19.0 million (including $12.9 million of dividends requiring prior
approval), $11.6 million (including $5.1 million of dividends requiring prior
approval), and $6.2 million, respectively.
<PAGE>
<PAGE>
9. STATUTORY FINANCIAL DATA, CONTINUED
Statutory surplus and net income of UCIC, as reported to insurance
regulatory authorities, were as follows (dollars in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
--------- ---------- ---------
<S> <C> <C> <C>
Statutory surplus..................... $ 68,026 $ 61,750 $ 65,676
Statutory net income.................. 24,697 9,473 9,551
</TABLE>
10. INCOME TAXES
The components of deferred income taxes as of December 31, 1995 and 1994
were as follows (dollars in thousands):
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
Deferred tax assets:
Loss and loss adjustment expense reserves.................. $ 4,584 $ 6,952
Unearned premium reserves.................................. 260 451
Invested assets............................................ - 2,434
Other...................................................... 347 245
---------- ----------
Total deferred tax assets...................................... 5,191 10,082
Deferred tax liabilities:
Deferred policy acquisition costs.......................... 205 319
Invested assets............................................ 374 -
---------- ----------
Total deferred tax liabilities................................. 579 319
---------- ----------
Net deferred tax asset......................................... $ 4,612 $ 9,763
========== ==========
</TABLE>
The Company has a past history of profitability and anticipates future
taxable income sufficient to support the net deferred tax asset balance at
December 31, 1995, including but not limited to the reversal of existing
temporary differences and the implementation of tax planning strategies, if
needed.
The income tax provisions consisted of the following (dollars in
thousands):
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- -------
<S> <C> <C> <C>
Federal deferred............ $ 2,286 $ 103 $(1,258)
Federal current............. 9,210 4,243 6,679
State....................... (281) 36 16
-------- -------- -------
Total income tax expense... $11,215 $ 4,382 $ 5,437
========= ======== =======
</TABLE>
<PAGE>
<PAGE>
10. INCOME TAXES, CONTINUED
Reconciliations from the federal statutory tax rate to the effective tax
rate are as follows:
<TABLE>
<CAPTION>
1995 1994 1993
------- ------- ------
<S> <C> <C> <C>
Federal statutory rate 35.0% 35.0% 35.0%
Amortization of goodwill 24.6 2.1 1.1
Impact of change in tax rate - - (1.2)
Other (3.2) 0.4 0.5
----- --- ---
Effective tax rate 56.4% 37.5% 35.4%
====== ===== =====
</TABLE>
Intercompany tax sharing agreements between Capsure and its subsidiaries
provide that federal income taxes shall be allocated based upon separate return
calculations in accordance with the Internal Revenue Code of 1986, as amended.
Intercompany tax payments are remitted at such times as estimated tax payments
would be required to be made to the Internal Revenue Service. The Company made
federal income tax sharing payments to Capsure of $4.6 million, $5.1 million and
$7.3 million in 1995, 1994 and 1993, respectively.
11. COMMITMENTS AND CONTINGENCIES
UCIC, in the ordinary course of business, chooses to underwrite accounts
which have hazardous, unique or unusual risk characteristics and applies a
strict and specialized underwriting discipline to such risks. Since UCIC's
organization in 1986, its liability policies have included an absolute pollution
coverage exclusion (except for policies offering pollution liability coverage to
contractors involved in the remediation of pre-existing pollution). In addition,
except as discussed below, UCIC's product liability and other general liability
policies contain exclusions, which management believes are enforceable, for
coverage of claims for bodily injury or property damage caused by exposure to
asbestos.
UCIC provides coverage to asbestos abatement contractors against third
parties who have alleged bodily injury or property damage as a result of
exposure to asbestos. Employees of the insured contractor and others required to
be in the abatement area are not intended to be covered by UCIC's policies and
management believes such coverage exclusions are enforceable. Through the date
hereof, there have been no valid claims against UCIC's asbestos abatement
liability policies alleging bodily injury arising from exposure to asbestos.
Management believes that none of the other insurance products offered by the
UCIC creates any potential material environmental exposure.
Management believes that the Company is adequately reserved for risks
associated with environmental liabilities although there can be no assurance
that legal or other developments will not increase the Company's exposure to
environmental liabilities.
The Company is subject to litigation in the ordinary course of business.
In the opinion of management, the outcome of such litigation will not have a
material effect on the results of operations or financial position of the
Company.
<PAGE>
<PAGE>
12. RETIREMENT PLANS
The Company sponsors a noncontributory defined contribution retirement
plan and a tax-deferred savings plan. Both plans cover substantially all
employees and provide for Company contributions based upon percentages of annual
compensation. The Company contributed $0.2 million in each of the years ended
December 31, 1995, 1994 and 1993.
13. CONCENTRATIONS
The Company writes business through a network of brokers located
throughout the United States. In 1995, approximately 17% of total gross written
premiums was generated by Fischer and 12% was generated by one unaffiliated
broker. No state accounted for more than 11% of total direct written premiums.
14. RELATED PARTY TRANSACTIONS
The Company charges Capsure under a service agreement for service
performed by the Company's executive management on behalf of Capsure. Under the
terms of the same agreement Capsure charges the Company for certain
administrative services including legal, corporate records, investor relations
and financial and tax accounting. Net charges received by the Company were $0.5
million and $0.3 million in 1995 and 1993, respectively.
UCIC is a party to an assumption reinsurance treaty with Western Surety
Company ("Western"), an affiliated company sharing Capsure as its ultimate
parent. Total premiums assumed under this treaty were $0.9 million, $0.5 million
and $0.4 million in 1995, 1994 and 1993, respectively.
Managers is a party to a managing general agency agreement with Western.
Gross commission income recognized by the Company under this agreement were $0.3
million in 1995, $0.2 million in 1994 and $0.2 million in 1993.
The Company is a guarantor on a senior reducing revolving credit
agreement between Capsure and a syndicate of banks (the "Credit Agreement"). The
common stock of the Company and its subsidiaries and substantially all of the
assets of the Company's non-insurance operations have been pledged as collateral
under the Credit Agreement. As of December 31, 1995, $25.0 million was
outstanding under the Credit Agreement.
15. SUBSEQUENT EVENT
On February 29, 1996, Capsure announced that it had signed an agreement
to sell the Company and its subsidiaries to a subsidiary of Frontier Insurance
Group, Inc. Net proceeds from the sale will be approximately $75.0 million,
which includes release of excess statutory surplus at UCIC on or before closing.
The sale is subject to several conditions including approval by insurance
regulatory authorities. The transaction is expected to close in the second
quarter of 1996.
The pushdown goodwill associated with the acquisition of the Company by
Capsure has been reduced to estimated net realizable value as of December 31,
1995, resulting in the recognition of a $13.2 million impairment of goodwill.
<PAGE>
<PAGE>
FRONTIER INSURANCE GROUP, INC. FORM 8-K DATED May 22, 1996 EXHIBIT 10.15
UNITED CAPITOL HOLDING COMPANY
AND SUBSIDIARIES
Unaudited Interim Condensed
Consolidated Financial Statements
MARCH 31, 1996
<PAGE>
<PAGE>
FRONTIER INSURANCE GROUP, INC. FORM 8-K DATED May 22, 1996 EXHIBIT 10.15
UNITED CAPITOL HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share data)
(Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
--------- ----------
ASSETS
<S> <C> <C>
Invested assets and cash:
Fixed maturities, available for sale:
At fair value(amortized cost: 1996--$76,629; 1995--98,546) $ 76,194 $ 99,655
Equity securities, at fair value (cost: 1995--$9,576) 9,690
Short-term investments, at cost which approximates fair value 45,083 18,667
Cash 2,726 1,866
--------- ----------
124,003 129,878
Deferred policy acquisition costs 459 586
Reinsurance receivable 33,268 33,707
Excess cost over net assets acquired, net of amortization 4,805 4,805
Deferred income taxes 5,212 4,612
Other assets 12,705 8,110
---------- -----------
$180,452 $181,698
======== ========
LIABILITIES
Reserves:
Unpaid losses and loss adjustment expenses $ 84,428 $ 86,215
Unearned premiums 12,405 9,994
-------- ---------
96,833 96,209
Reinsurance payable 701 773
Other liabilities 6,255 9,672
---------- ----------
Total Liabilities 103,789 106,654
Commitments and contingencies
STOCKHOLDER'S EQUITY
Preferred stock, par value $.01 per share, 493,750 share authorized;
447,418 shares issued and outstanding 4 4
Common stock, par value $.01 per share, 650,000 shares authorized;
75,250 shares issued and outstanding 1 1
Additional paid-in capital 74,373 74,373
Retained earnings 2,695 -
Unrealized gain (loss) on securities, net of deferred income taxes (281) 795
Treasury stock, at cost (1,400 shares) (129) (129)
------------- ------------
Total stockholder's equity 76,663 75,044
---------- ----------
$180,452 $181,698
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE>
<PAGE>
FRONTIER INSURANCE GROUP, INC. FORM 8-K DATED May 22, 1996 EXHIBIT 10.15
UNITED CAPITOL HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31
------------------------
1996 1995
------- -------
<S> <C> <C>
Revenues:
Net earned premiums $ 1,971 $ 3,808
Net investment income 2,262 2,394
Net realized investment gains 297
------- -------
4,530 6,202
Expenses:
Net losses and loss adjustment expenses 431 2,251
Net commissions, brokerage and other underwriting (83) 171
Amortization and impairment of goodwill 188
------- -------
348 2,610
------- -------
Income before income taxes 4,182 3,592
Income taxes 1,487 1,371
------- -------
Net Income $2,695 $2,221
====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
<PAGE>
FRONTIER INSURANCE GROUP, INC. FORM 8-K DATED May 22, 1996 EXHIBIT 10.15
UNITED CAPITAL HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31
----------------------
1996 1995
------ -----
<S> <C> <C>
OPERATING ACTIVITIES:
Net Income $2,695 $2,221
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 23 207
Accretion of bond discount, net (275) (557)
Net realized investment gains (289)
Changes in:
Reserve for unpaid losses and loss adjustment expenses (1,787) 1,971
Reserve for unearned premiums 2,411 175
Deferred income taxes, net (20) (143)
Other assets and liabilities (7,516) 1,656
------ -----
Net cash provided by operating activities (4,758) 5,530
------ -----
INVESTING ACTIVITIES:
Securities available-for-sale:
Sales - fixed maturities 15,965 3,455
Maturities - fixed maturities 6,217
Sales - equity securities 9,874
Securities held to maturity
Purchases - fixed securities (4,026)
Change in short-term investments (26,416) (419)
Capital expenditures, net (22) (7)
---------- --------
Net cash provided by (used in) investing activities 5,618 (997)
-------- -------
FINANCING ACTIVITIES:
Dividends and capital distributions paid to parent ______ (3,500)
------
Net cash used in financing activities (3,500)
------
Increase in cash 860 1,033
Cash at beginning of year 1,866 1,832
-------- --------
Cash at end of period $ 2,726 $ 2,865
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
<PAGE>
EXHIBIT 10.15
UNITED CAPITAL HOLDING COMPANY AND SUBSIDIARIES
NOTE TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996
(UNAUDITED)
1. Significant Accounting Policies
Basis of Presentation
These unaudited Consolidated Financial Statements should be read in
conjunction with the Annual Consolidated Financial Statements and Notes thereto
included in this Form 8-K. The accompanying unaudited Consolidated Financial
Statements reflect, in the opinion of management, all adjustments necessary for
a fair presentation of the interim financial statements. All such adjustments
are of a normal and recurring nature. The financial results for interim periods
may not be indicative of financial results for a full year.
5
<PAGE>
<PAGE>
FRONTIER INSURANCE GROUP, INC. FORM 8-K DATED MAY 22, 1996 EXHIBIT 10-16
FRONTIER INSURANCE GROUP, INC. AND SUBSIDIARIES
PRO FORMA FINANCIAL INFORMATION
The following unaudited Pro Forma Condensed Consolidated Financial Statements of
Frontier Insurance Group, Inc. and Subsidiaries, ("Frontier" or the "Company")
give effect to the Company's acquisition of United Capital Holding Company
("UCHC') (the "Acquisition") as more fully described in the accompanying Notes
to Unaudited Pro Forma Condensed Consolidated Financial Statements. The
unaudited Pro Forma Condensed Consolidated Financial Statements reflect the
Company's preliminary purchase price allocation and is subject to revision as
information becomes available. Management believes that the preliminary
allocation of purchase price is not expected to differ materially from the final
allocation. The Pro Forma Condensed Consolidated Statements of Income have been
prepared as if the Acquisition had been consummated on January 1, 1995. The Pro
Forma Condensed Consolidated Balance Sheet has been prepared as if the
Acquisition had been consummated at March 31, 1996. Such Pro Forma Condensed
Consolidated Financial Statements are not necessarily indicative of the results
of future operations, nor of the results of historical operations had the
Acquisition been consummated on such dates.
The unaudited Pro Forma Condensed Consolidated Financial Statements should be
read in conjunction with: the accompanying Notes to Unaudited Pro Forma
Condensed Consolidated Financial Statements; Frontier's Annual Report on Form
10-K for the year ended December 31, 1995; Frontier's Quarterly Report on Form
10-Q for the three months ended March 31, 1996; UCHC's audited consolidated
financial statements for the year ended December 31, 1995 and UCHC's unaudited
interim consolidated financial statements for the three months ended March 31,
1996.
<PAGE>
<PAGE>
FRONTIER INSURANCE GROUP, INC. AND SUBSIDIARIES FORM 8-K DATED MAY 22, 1996
EXHIBIT 10.16
FRONTIER INSURANCE GROUP, INC., AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENT OF INCOME
For the Year Ended December 31, 1995
(Unaudited)
(dollar amounts in thousands)
<TABLE>
<CAPTION>
Historical For the Year Pro Forma
Ended December 31, 1995 Adjustments The Company
--------------------------- ------------------------- Pro Forma
REVENUES: The Company UCHC Debit Credit Combined
----------- ---------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Premiums written $ 264,314 $ 21,809 $ 286,123
Premiums ceded 43,557 10,827 54,384
----------- ---------- ----------
NET PREMIUMS WRITTEN 220,757 10,982 231,739
(Increase) decrease in unearned premiums (24,537) 2,727 (21,810)
----------- ---------- ----------
NET PREMIUMS EARNED 196,220 13,709 209,929
Net Investment Income 30,035 9,257 $5,411 (a) 33,881
Realized capital gains (losses) 20 (1,030) (1,010)
----------- ---------- ---------- ---------- ----------
TOTAL NET INVESTMENT INCOME 30,055 8,227 5,411 32,871
Gross claims adjusting income 130 130
----------- ---------- ---------- ---------- ----------
TOTAL REVENUES 226,405 21,936 5,411 242,930
EXPENSES:
Losses 89,422 (10,721) 74,392
Loss adjustment expenses 29,833 (4,309) 29,833
Amortization of policy acquisition costs 42,258 1,231 43,489
Underwriting and other expenses 20,717 15,863 492 (b) $13,952 (c) 23,120
Interest expense 895 895
----------- ---------- ---------- ---------- ----------
TOTAL EXPENSES 183,125 2,064 492 13,952 171,729
INCOME BEFORE TAXES 43,280 19,872 5,903 13,952 71,201
Income taxes:
State 1,173 (281) 892
Federal 10,896 11,496 1,598 (d) 20,794
----------- ---------- ---------- ----------
TOTAL INCOME TAXES 12,069 11,215 1,598 21,686
----------- ---------- ---------- ---------- ----------
NET INCOME $ 31,211 $ 8,657 $ 5,903 $ 15,550 $ 49,515
======== ======= ====== ======= ========
PER SHARE DATA
Net income per share $2.40 $3.80
========= =========
</TABLE>
2
<PAGE>
<PAGE>
FRONTIER INSURANCE GROUP, INC. AND SUBSIDIARIES FORM 8-K DATED MAY 22, 1996
EXHIBIT 10.16
FRONTIER INSURANCE GROUP, INC., AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENT OF INCOME
For the Three Months Ended March 31, 1996
(Unaudited)
(dollar amounts in thousands)
<TABLE>
<CAPTION>
Historical For the three month Pro Forma
Ended March 31, 1996 Adjustments The Company
------------------------------ --------------- Pro Forma
REVENUES: The Company UCHC Debit Credit Combined
----------- ---- ----- ------ --------
<S> <C> <C> <C> <C> <C>
Premiums written $74,860 $7,670 $82,530
Premiums ceded 13,131 5,177 18,308
-------- ------ --------
NET PREMIUMS WRITTEN 61,729 2,493 64,222
Increase in unearned premiums (3,435) (522) (3,957)
-------- ------ ------ ------ --------
NET PREMIUMS EARNED 58,294 1,971 60,265
Net Investment Income 7,786 2,262 $1,352 (e) 8,696
Realized capital gains 691 297 988
-------- ------ ------ ------ --------
TOTAL NET INVESTMENT INCOME 8,477 2,559 1,352 9,684
Gross claims adjusting income 25 25
-------- ------ ------ ------ --------
TOTAL REVENUES 66,796 4,530 1,352 69,974
EXPENSES:
Losses 26,512 214 26,943
Loss adjustment expenses 8,931 217 8,931
Amortization of policy acquisition costs 12,381 (554) 11,827
Underwriting and other expenses 5,791 471 123(f) 6,385
Interest expense 441 441
-------- ------ ------ ------ --------
TOTAL EXPENSES 54,056 348 123 54,527
INCOME BEFORE TAXES 12,740 4,182 1,475 15,447
Income taxes:
State 115 115
Federal 3,361 1 ,487 $443 (g) 4,405
-------- ------ -------
TOTAL INCOME TAXES 3,476 1,487 443 4,520
-------- ------ ------ ---- --------
NET INCOME $ 9,264 $ 2,695 $1,475 $443 $10,927
======= ======= ====== ==== =======
PER SHARE DATA
Net income per share $ 0.71 $ 0.84
======== ========
3
<PAGE>
<PAGE>
FRONTIER INSURANCE GROUP, INC. AND SUBSIDIARIES FORM 8-K DATED MAY 22, 1996
EXHIBIT 10.16
FRONTIER INSURANCE GROUP, INC., AND SUBSIDIARIES
PRO FORMA CONSOLIDATED BALANCE SHEETS
As of March 31, 1996
(Unaudited)
ASSETS
(dollar amounts in thousands)
</TABLE>
<TABLE>
<CAPTION>
Historical as of Pro Forma
March 31, 1996 Adjustments The Company
-------------------------- ------------------- Pro Forma
The Company UCHC Debit Credit Combined
----------- ---- ----- ------ --------
<S> <C> <C> <C> <C> <C>
Investments:
Fixed maturities, Available for sale
at fair value ............................... $527,661 $ 76,194 $ 35,619(1) $568,236
Equity securities, at fair value .................. 24,381 24,381
Short-term investments--at principal
balances, which approximate
fair value .................................... 9,546 45,083 45,083(2) 9,546
Investment in limited liability corporation ......... 3,115 3,115
--------- --------------- ---------- ------------ ----------
TOTAL INVESTMENTS ............................. 564,703 121,277 80,702 605,278
Cash ................................................ 2,532 2,726 $80,702(3) 80,702(3) 5,258
Agents' balances due, less
allowances for doubtful accounts ................ 25,014 4,571 29,585
Premiums receivable from insureds, less
allowances for doubtful accounts ............... 25,024 25,024
Deferred federal income tax benefits ................ 25,395 5,212 30,607
Accrued investment income ........................... 6,824 797 7,621
Deferred policy acquisition costs ................... 21,155 459 21,614
Net reinsurance recoverables
Less allowances for possible
uncollectible amounts .......................... 91,154 37,967 129,121
Data processing equipment and software
at cost, less accumulated depreciation
and amortization ............................... 1,381 150 1,531
Insurance renewal rights and claims ad-
justing rights and other intangible
assets, less accumulated amortization ........... 2,865 4,805 5,344(4) 6,805(5) 5,422
Home office building and equipment-- ................ 787(6)
at cost, less accumulated depreciation .......... 27,721 236 27,957
Other assets ........................................ 4,881 2,252 6,872
----------- ----------- --------- -------- --------
TOTAL ASSETS .................................. $798,649 $180,452 $ 86,046 $168,996 $896,151
======== ======== ======= ======== ========
</TABLE>
4
<PAGE>
<PAGE>
FRONTIER INSURANCE GROUP, INC. AND SUBSIDIARIES FORM 8-K DATED MAY 22, 1996
EXHIBIT 10.16
FRONTIER INSURANCE GROUP, INC., AND SUBSIDIARIES
PRO FORMA CONSOLIDATED BALANCE SHEETS
As of March 31, 1996
(Unaudited)
LIABILITIES AND CAPITAL
(dollar amounts in thousands)
<TABLE>
<CAPTION>
Historical as of Pro Forma
March 31, 1996 Adjustments The Company
-------------------------- ----------------------------- Pro Forma
The Company UCHC Debit Credit Combined
----------- ---- ----- ------ --------
<S> <C> <C> <C> <C> <C>
LIABILITIES
Policy liabilities::
Unpaid losses ................................... $ 322,561 $ 59,538 $ 406,989
Unpaid loss adjustment expenses ................. 60,670 24,890 60,670
Unearned premiums ............................... 110,241 12,405 122,646
--------- -------- ----------- ------------- --------
TOTAL POLICY LIABILITIES ....................... 493,472 96,833 590,305
Note payable ........................................ 25,000 25,000
Funds withheld under reinsurance
contract ......................................... 34,208 275 34,483
Federal income taxes payable ........................ 1,829 3,460 $ 2,000(5) 3,289
Cash dividend payable to shareholders ............... 1,573 1,573
Other liabilities ................................... 10,431 3,221 13,652
---------- --------- ------------ ------------- ---------
TOTAL LIABILITIES .............................. 566,513 103,789 2,000 668,302
COMMITMENTS AND CONTINGENT LIABILITIES
CAPITAL
Preferred Stock, par value $.01
per share; authorized and
unissued--1,000,000 shares ...................... 4 4(7)
Common Stock, par value $.01 per share;
authorized--20,000,000 shares; issued
(1996--13,068,205 shares; 1995--
13,062,501 shares) ............................... 131 1 1(7) 131
Additional paid-in capital .......................... 168,090 77,069 77,069(7) 168,090
Net unrealized appreciation (depreciation)
of investments in available-for-sale
securities ....................................... 2,158 (282) $ 282(7) 2,158
Retained earnings ................................... 62,545 4,287(8) 58,258
--------- ------------ -------- -------- ---------
SUBTOTAL ......................................... 232,924 76,792 81,361 282 228,637
Less: Treasury stock--at cost
(41,000 shares) ................................. (788) (129) 129(7) (788)
------------- ------------- -------------- ----- -------------
TOTAL CAPITAL ....................................... 232,136 76,663 81,361 411 227,849
TOTAL LIABILITIES AND CAPITAL ...................... $ 798,649 $ 180,452 $ 83,361 $ 411 $ 896,151
======== ======== ------- ==== ========
</TABLE>
5
<PAGE>
<PAGE>
FRONTIER INSURANCE GROUP INC., AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following pro forma adjustments have been applied to the historical
condensed consolidated statements of income for the year ended December 31, 1995
of the Company and UCHC to give effect to the Acquisition as if it had occurred
on January 1, 1995, it should be noted that, as a result of favorable claim
settlements and changes in estimates in prior years loss and loss adjustment
expense reserves, UCHC's incurred loss and loss adjustment were reduced by $23.2
million in1995 which reduction is reflected in UCHC's historical financial
statements.
(a) Net investment income has been decreased by $5.4 million to reflect the
reduction of investment income from the sale of fixed maturities to fund the
purchase of the acquisition ($30.9 million), and from the sale of short-term
investments and fixed maturities for the payment of a $49.8 million dividend
from UCHC to its parent, Capsure Holding Corp. ("Capsure") prior to the closing.
The yield assumed on the two transactions was 6.4% and 6.9%, respectively.
(b) Underwriting and other expense has been increased by $0.5 million to reflect
the amortization of the excess cost over net assets acquired arising from the
acquisition.
(c) Underwriting and other expense has been decreased by $14.0 million as a
result of the assessment of the recoverability of goodwill made by UCHC at year
end in contemplation of the sale of UCHC to Frontier, and subsequent recognition
of the impairment of goodwill based on the assessment.
(d) Income taxes have been decreased by $1.6 million to reflect the net tax
effect of the pro forma adjustments.
The following pro forma adjustments have been applied to the historical
condensed consolidated statements of income of the Company and UCHC for the
three-month period ended March 31, 1996, to give effect to the Acquisition as if
it had occurred on January 1, 1995:
(e) Net investment income has been decreased by $1.4 million to reflect the
reduction of investment income from the sale of fixed maturities to fund the
purchase of the acquisition ($30.9 million), and from the sale of short-term
investments and fixed maturities for the payment of a $49.8 million dividend
from UCHC to Capsure prior to the closing. The yield assumed on the two
transactions was 6.4% and 6.9%, respectively.
(f) Underwriting and other expense has been increased by $0.1 million to reflect
the amortization of the excess cost over net assets acquired arising from the
acquisition.
(g) Income taxes have been decreased by $0.4 million to reflect the net tax
effect of the pro forma adjustments.
The following pro forma adjustments have been applied to the historical
condensed consolidated balance sheets of the Company and UCHC to give effect to
the Acquisition as of March 31, 1996, as if it had occurred on January 1, 1995.
(1) Fixed maturities decreased through sales in order to fund the acquisition of
UCHC by Frontier ( $30.9 million) and partially fund the dividend payment from
UCHC to Capsure, ($4.7 million).
(2) Short-term investments were decreased through sales in order to fund the
dividend payment from UCHC to Capsure.
(3) Cash has been used to acquire UCHC by Frontier and the dividend payment from
UCHC to Capsure.
(4) The purchase price of $30.92 million exceeded the fair value of net assets
acquired by approximately $5.3 million. The excess cost over assets acquired is
being amortized over 10 years.
(5) Intangible assets decreased as a result of the write-off and
re-establishment of excess cost over net assets acquired.
(6) Amortization of excess cost over net assets acquired.
(7) UCHC's stockholder's equity has been eliminated.
(8) Retained earnings has been decreased to recognize the pro forma income
statement adjustments.
6
<PAGE>
<PAGE>
FRONTIER INSURANCE GROUP, INC. FORM 8-K EXHIBIT 23(a)
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
of Frontier Insurance Group, Inc. on Form S-8 (File No. 33-30217, No. 33-39638,
and No. 33-77332) of our report dated March 1, 1996, on our audits of the
consolidated financial statements and schedules of United Capital Holding
Company as of December 31, 1995 and 1994, and for the years ended December 31,
1995, 1994 and 1993, which report is included in this Form 8-K.
/S/ Cooper & Lybrand LLP
-------------------------------
Atlanta, Georgia
June 7, 1996
