<PAGE>
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): JANUARY 20, 2000
FRONTIER INSURANCE GROUP, INC.
(Exact name of registrant as specified in charter)
<TABLE>
<S> <C> <C>
DELAWARE 0-15022 14-1681606
(State or other jurisdiction of (Commission File Number) (IRS Employer
incorporation) Identification No.)
195 LAKE LOUISE MARIE ROAD 12775-8000
ROCK HILL, NEW YORK (Zip Code)
(Address of principal executive
offices)
</TABLE>
Registrant's telephone number, including area code: (914) 796-2100
NOT APPLICABLE
(Former name or former address, if changed since last report)
Exhibit Index on Page 10
<PAGE>
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
(a) On January 20, 2000, Frontier Insurance Group, Inc. (the "Company")
sold all of the outstanding shares of the capital stock of Lyndon Insurance
Group, Inc. ("Lyndon"), its wholly-owned subsidiary, to Protective Life
Insurance Company ("Protective") for $163.5 million, subject to certain
post-closing adjustments, pursuant to a Stock Purchase Agreement, dated October
20, 1999, as amended. Lyndon provides credit-related insurance, warranty
administration and related products and services.
Prior to the sale, there were no material relationships between Protective
and the Company or its affiliates, directors or officers of any associate of any
director or officer of the Company.
The Stock Purchase Agreement and the First Amendment thereto are filed as
Exhibits 2.1 and 2.2, respectively, to this Report.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
(b) Pro Forma Financial Information
The following pro forma condensed consolidated financial
statements of the Company are filed as part of this report:
<TABLE>
<CAPTION>
Description of Document Page Number
------------------------ -----------
<S> <C>
Introduction....................................................... 4
Pro forma Condensed Consolidated Balance Sheet
at September 30, 1999 (Unaudited).................................. 5
Pro forma Condensed Consolidated Statement of Operations
for the Nine Months Ended September 30, 1999 (Unaudited)........... 6
Pro forma Condensed Consolidated Statement of Operations
for the Year Ended December 31, 1998 (Unaudited)................... 7
Notes to Pro Forma Condensed Consolidated Financial
Statements......................................................... 8
</TABLE>
<TABLE>
(c) Exhibits
<S> <C>
2.1 Stock Purchase Agreement, dated October 20, 1999, by and
between Frontier Insurance Group, Inc. and Protective Life
Insurance Company.
Pursuant to the regulations of the Securities and
Exchange Commission, all schedules and exhibits to
the foregoing agreement, which are listed in such
agreement, have been intentionally omitted from this
Report. The Company agrees to furnish supplementally
a copy of any omitted schedule or exhibit to the
Securities and
</TABLE>
2
<PAGE>
<TABLE>
<S> <C>
Exchange Commission upon request.
2.2 First Amendment to Stock Purchase Agreement, dated January
20, 2000, by and between Frontier Insurance Group, Inc. and
Protective Life Insurance Company.
99.1 Press Release of the Company, dated January 20, 2000.
</TABLE>
3
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
The following unaudited pro forma condensed consolidated balance sheet
at September 30, 1999 gives effect to the disposition by Frontier Insurance
Group, Inc. ("the Company") of Lyndon Insurance Group, Inc. ("Lyndon") as if the
disposition had occurred at September 30, 1999 and the unaudited pro forma
condensed consolidated statements of operations for the nine months ended
September 30, 1999 and for the year ended December 31, 1998 give effect to such
disposition as if the disposition had occurred on January 1, 1998. The unaudited
pro forma results do not reflect the gain on the sale of Lyndon of approximately
$9.8 million. Unaudited pro forma financial information does not purport to be
indicative of either the results of future operations or the results of
operations that would have occurred had the disposition been consummated on the
dates indicated.
The unaudited pro forma financial statements should be read in
conjunction with the Company's historical consolidated financial statements and
notes thereto previously filed in the Company's Annual Report on Form 10-K for
the year ended December 31, 1998, and the Quarterly Report on Form 10-Q for the
nine months ended September 30, 1999.
4
<PAGE>
Frontier Insurance Group, Inc. and Subsidiaries
Pro Forma Balance Sheet
September 30, 1999
Unaudited - (dollar amounts in thousands)
<TABLE>
<CAPTION>
Historical Lyndon Pro Forma Pro Forma
Consolidated Adjustment Adjustments Consolidated
----------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets
Investments:
Fixed maturity securities, available for sale $1,258,379 ($250,078) $80,000(1) $1,088,301
Equity securities, available for sale 71,721 (11,358) 60,363
Limited investment partnerships 34,683 (130) 34,553
Equity investees 18,443 (694) 17,749
Real estate and mortgage loans 8,049 0 8,049
Short-term investments 87,652 (24,978) 62,674
----------------------------------------------------------------
Total investments 1,478,927 (287,238) 80,000 1,271,689
Cash 22,828 (3,368) 4,910(1) 24,370
Premiums and agents' balances receivable 184,548 (18,835) 165,713
Reinsurance recoverables on:
Paid losses and loss adjustment expenses 52,851 (12,567) 40,284
Unpaid losses and loss adjustment expenses 465,787 (22,209) 443,578
Prepaid reinsurance premiums 168,975 (69,380) 99,595
Accrued investment income 17,418 (3,578) 13,840
Deferred policy acquistion costs 124,785 (55,757) 69,028
Federal income tax recoverable 1,772 4,738 6,510
Deferred federal income taxes 7,216 0 7,216
Property, equipment and software 65,589 (2,138) 63,451
Intangible assets 61,188 (17,774) 43,414
Other assets 31,219 (10,186) 21,033
----------------------------------------------------------------
Total assests $2,683,103 ($498,292) $84,910 $2,269,721
================================================================
Liabilities and Shareholders' Equity
Liabilities:
Policy liabilities:
Unpaid losses $ 926,485 ($ 43,771) $882,714
Unpaid loss adjustment expenses 329,349 (416) 328,933
Unearned premiums 626,714 (263,330) 363,384
----------------------------------------------------------------
Total policy liabilities 1,882,548 (307,517) 1,575,031
Funds withheld under reinsurance contracts 172,443 (1,011) 171,432
Bank debt 132,300 0 (75,000)(1) 57,300
Reinsurance balances payable 79,952 (7,956) 71,996
Cash dividend payable to shareholders 2,434 0 2,434
Other liabilities 67,587 (31,668) 35,919
----------------------------------------------------------------
Total liabilities 2,337,264 (348,152) (75,000) 1,914,112
Guranteed preferred beneficial interest in
Company's convertible subordinated debentures 167,297 0 167,297
Total shareholders' equity 178,542 (150,140) 159,910(1) 188,312
----------------------------------------------------------------
Total liabilities and shareholders' equity $ 2,683,103 ($ 498,292) $ 84,910 $2,269,721
================================================================
</TABLE>
5
<PAGE>
Frontier Insurance Group, Inc. and Subsidiaries
Pro Forma Statement of Operations
For the nine months ended
September 30, 1999 Unaudited - (dollar amounts in thousands, except
per share data)
<TABLE>
<CAPTION>
Historical Lyndon Pro Forma Pro Forma
Consolidated Adjustment Adjustments Consolidated
------------ ---------- ----------- ------------
<S> <C> <C> <C> <C>
Revenues
Premiums earned $ 428,358 $ (56,962) $ 371,396
Net investment income 58,059 (11,874) $ 1,499(2) 47,684
Net realized gains 5,415 (691) 4,724
----------------------------------------------------
Total net investment income 63,474 (12,565) 1,499 52,408
----------------------------------------------------
Net proceeds from company owned life insurance -- -- -- --
----------------------------------------------------
Total revenues 491,832 (69,527) 1,499 423,804
Expenses
Losses 249,216 (30,855) -- 218,361
Loss adjustment expenses 139,705 (3,552) -- 136,153
Amortization of policy acquisition costs 96,811 (11,583) -- 85,228
Underwriting and other expenses 78,081 (12,681) 926(3) 66,326
Minority interest in income of subsidiary trust 8,230 -- -- 8,230
Interest expense 5,262 -- (5,262)(4) --
---------------------------------------------------
Total expenses 577,305 (58,671) (4,336) 514,298
----------------------------------------------------
Income (loss) before income taxes (85,473) (10,856) 5,835 (90,494)
Provision for income taxes:
State 990 (3,045) -- (2,055)
Federal 56,590 (47) 2,042 58,585
----------------------------------------------------
Total income tax expense (benefit) 57,580 (3,092) 2,042 56,530
----------------------------------------------------
Net income (loss) $(143,053) $(7,764) $3,793 $(147,024)
====================================================
Fully diluted loss per common share $ (4.05) $ (4.16)
====================================================
Fully diluted weighted average shares outstanding 34,743 34,743
</TABLE>
6
<PAGE>
Frontier Insurance Group, Inc. and Subsidiaries
Pro Forma Statement of Operations
For the year ended December 31, 1998
Unaudited - (dollar amounts in thousands, except per share data)
<TABLE>
<CAPTION>
Historical Lyndon Pro Forma Pro Forma
Consolidated Adjustment Adjustments Consolidated
------------ ---------- ----------- ------------
<S> <C> <C> <C> <C>
Revenues
Premiums earned $493,054 $(101,221) $391,833
Net investment income 73,528 (16,333) $ 8,525(6) 65,720
Net realized gains 3,010 (424) 2,586
-----------------------------------------------
Total net investment income 76,538 (16,757) 8,525 68,306
Net proceeds from company owned life
insurance 4,400 -- -- 4,400
-----------------------------------------------
Total revenues 573,992 (117,978) 8,525 464,539
Expenses
Losses 274,748 (50,762) -- 223,986
Loss adjustment expenses 168,105 (5,608) -- 162,497
Amortization of policy acquisition costs 122,813 (21,091) -- 101,722
Underwriting and other expenses 87,270 (14,896) 1,772(3) 74,146
Minority interest in income of subsidiary trust 10,966 -- -- 10,966
Interest expense 965 -- (965)(4) --
-----------------------------------------------
Total expenses 664,867 (92,357) 807 573,317
-----------------------------------------------
Income (loss) before income taxes (90,875) (25,621) 7,718 (108,778)
Provision for income taxes:
State 743 (37) -- 706
Federal (41,576) (7,846) 2,701(5) (46,721)
-----------------------------------------------
Total income tax expense (benefit) (40,833) (7,883) 2,701 (46,015)
-----------------------------------------------
Net income (loss) (50,042) (17,738) 5,017 (62,764)
===============================================
Fully diluted loss per common share $ (1.34) $ (1.41)
===============================================
Fully diluted weighted average shares outstanding 37,293 37,293
</TABLE>
7
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
1.) The total sales price for Lyndon was $163.5 million which, after
deducting approximately $3.6 million in related selling costs, resulted
in net proceeds to the Company of approximately $159.9 million. Upon
receipt of the net proceeds, the Company repaid $75 million of its
credit facility and infused $80 million into Frontier Insurance
Company, which subsequently purchased fixed maturity securities with
such funds.
2.) Net investment income has been increased to reflect the additional
funds available for investment as a result of the net proceeds from the
sale of Lyndon, assuming repayments during the period of amounts
outstanding under the credit facility, and assuming a pre-tax yield of
5.3%.
3.) Underwriting and other expenses have been increased to reflect the
reversal of corporate overhead expenses allocated to Lyndon.
4.) Interest expense has been reduced as proceeds from the sale of Lyndon
would be available to fund corporate activities. Accordingly, no
amounts would have been outstanding under the credit facility during
the period.
5.) Federal income taxes have been increased to reflect the net tax effect
of the pro forma adjustments.
6.) Net investment income has been increased to reflect the additional
funds available for investment as a result of the net proceeds from the
sale of Lyndon, assuming repayments during the period of amounts
outstanding under the credit facility, and assuming a pre-tax yield of
6.6%.
8
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, as amended, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned hereunto duly authorized.
Frontier Insurance Group, Inc.
By: /s/ Harry W. Rhulen
------------------------------------------
Harry W. Rhulen
President and Chief Executive Officer
Dated: February 4, 2000
9
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
2.1 Stock Purchase Agreement, dated October 20, 1999, by and
between Frontier Insurance Group, Inc. and Protective Life
Insurance Company.
Pursuant to the regulations of the Securities and Exchange
Commission, all schedules and exhibits to the foregoing
agreement, which are listed in such agreement, have been
intentionally omitted from this Report. The Company agrees
to furnish supplementally a copy of any omitted schedule or
exhibit to the Securities and Exchange Commission upon
request.
2.2 First Amendment to Stock Purchase Agreement, dated January
20, 2000, by and between Frontier Insurance Group, Inc. and
Protective Life Insurance Company.
99.1 Press Release of the Company, dated January 20, 2000.
10
STATEMENT OF DIFFERENCES
The section symbol shall be expressed as...................................'SS'
</TABLE>
<PAGE>
================================================================================
STOCK PURCHASE AGREEMENT
BY AND BETWEEN
PROTECTIVE LIFE INSURANCE COMPANY
AND
FRONTIER INSURANCE GROUP, INC.
OCTOBER 20, 1999
================================================================================
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I - TRANSACTION
1.1. Purchase and Sale of Stock...........................................................1
1.2. Consideration........................................................................1
ARTICLE II - THE CLOSING AND TRANSFER OF STOCK
2.1. The Closing..........................................................................3
2.2. Deliveries at the Closing............................................................3
ARTICLE III - REPRESENTATIONS AND WARRANTIES OF SELLER
3.1. Due Organization.....................................................................5
3.2. Capitalization; Ownership of Company and Subsidiaries................................6
3.3. Authorization of Transaction.........................................................7
3.4. Consents and Approvals; No Violations................................................7
3.5. SAP Financial Statements.............................................................7
3.6. Consolidated Balance Sheets..........................................................8
3.7. Assets...............................................................................8
3.8. Investments..........................................................................9
3.9. Events Subsequent to Balance Sheet Date..............................................9
3.10. Tax Matters..........................................................................9
3.11. Legal Compliance.....................................................................9
3.12. Intellectual Property...............................................................10
3.13. Contracts...........................................................................10
3.14. Legal Proceedings...................................................................11
3.15. Employee Plans......................................................................12
3.16. Certain Business Relationships with the Company.....................................12
3.17. Brokers'Fees........................................................................13
3.18. Insurance...........................................................................13
3.19. Year 2000 Liability.................................................................13
3.20. Labor Matters.......................................................................13
3.21. Environmental Matters...............................................................14
3.22. Disclaimer..........................................................................14
ARTICLE IV - REPRESENTATIONS AND WARRANTIES OF BUYER
4.1. Organization of Buyer...............................................................14
4.2. Authorization of Transaction........................................................15
4.3. Consents and Approvals; No Violations...............................................15
4.4. Acquisition of Stock for Investment.................................................15
4.5. Buyer's Business Investigation......................................................15
4.6. Financing...........................................................................16
4.7. Brokers'Fees........................................................................16
ARTICLE V - COVENANTS OF SELLER
5.1. Interim Conduct of Business.........................................................16
</TABLE>
<PAGE>
<TABLE>
<S> <C>
5.2. Access..............................................................................17
5.3. Consummation........................................................................17
5.4. HSR Consent.........................................................................18
5.5. Other Actions.......................................................................18
5.6. September Financial Statements......................................................18
ARTICLE VI - COVENANTS OF BUYER
6.1. Consummation........................................................................18
6.2. HSR Consent.........................................................................18
6.3. Other Actions.......................................................................19
6.4. Records and Documents...............................................................19
ARTICLE VII - CONDITIONS PRECEDENT TO OBLIGATIONS OF BUYER
7.1. Accuracy of Warranties and Performance of Covenants.................................19
7.2. No Pending Action...................................................................19
7.3. HSR.................................................................................20
7.4. Insurance Approvals.................................................................20
7.5. Termination of Inter-Company Agreements.............................................20
7.6. No Material Adverse Change..........................................................20
ARTICLE VIII - CONDITIONS PRECEDENT TO OBLIGATIONS OF SELLER
8.1. Accuracy of Warranties and Performance of Covenants.................................20
8.2. No Pending Action...................................................................21
8.3. HSR.................................................................................21
8.4. Insurance Approvals.................................................................21
ARTICLE IX - SURVIVAL AND INDEMNIFICATION
9.1. Survival............................................................................21
9.2. Indemnification.....................................................................21
9.3. General Provisions Relating to Indemnification......................................22
9.4. WARN Act............................................................................24
ARTICLE X - TERMINATION
10.1. Termination or Abandonment..........................................................24
10.2. Effect of Termination...............................................................25
ARTICLE XI - CERTAIN EMPLOYEE MATTERS
11.1. Transfer of ERISA Plans.............................................................25
11.2. Termination of Employee Benefit Plans...............................................25
11.3. Employee Benefit Plans Maintained by First Protection Company.......................26
11.4. Hiring of Company Employees.........................................................27
ARTICLE XII - OTHER AGREEMENTS
12.1. Taxes...............................................................................27
12.2. Acquisition of First Protection Company.............................................29
12.3. Inter-Company Payables..............................................................29
</TABLE>
<PAGE>
<TABLE>
<S> <C>
12.4. Transfer of Certain Reserves........................................................30
12.5. Transition Services.................................................................30
ARTICLE XIII - GENERAL PROVISIONS
13.1. Amendments and Waiver...............................................................30
13.2. Notices.............................................................................30
13.3. Expenses............................................................................31
13.4. Counterparts........................................................................31
13.5. Successors and Assigns; Beneficiaries...............................................31
13.6. Entire Agreement....................................................................32
13.7. Announcements.......................................................................32
13.8. Partial Invalidity..................................................................32
13.9. Governing Law; Arbitration..........................................................32
</TABLE>
SCHEDULES
SCHEDULE 3.0 PERSONS WITH KNOWLEDGE
SCHEDULE 3.1 CERTAIN REGULATORY MATTERS
SCHEDULE 3.2 OWNERSHIP OF COMPANY AND SUBSIDIARIES
SCHEDULE 3.4 CONSENTS AND APPROVALS; NO VIOLATIONS
SCHEDULE 3.5 SAP FINANCIAL STATEMENTS
SCHEDULE 3.6 CERTAIN LIABILITIES
SCHEDULE 3.7 ASSETS
SCHEDULE 3.9 EVENTS SUBSEQUENT TO MOST RECENT FISCAL YEAR END
SCHEDULE 3.10 TAX MATTERS
SCHEDULE 3.11 LEGAL COMPLIANCE
SCHEDULE 3.12 INTELLECTUAL PROPERTY
SCHEDULE 3.13 CONTRACTS
SCHEDULE 3.14 LEGAL PROCEEDINGS
SCHEDULE 3.15 EMPLOYEE PLANS
SCHEDULE 3.16 CERTAIN BUSINESS RELATIONSHIPS
SCHEDULE 5.1 INTERIM CONDUCT OF BUSINESS
ANNEX A POST-CLOSING PURCHASE PRICE ADJUSTMENT FORMULA
ANNEX B TAX DISAFFILIATION AGREEMENT
ANNEX C LOSS PORTFOLIO REINSURANCE AGREEMENT
ANNEX D UNEARNED PREMIUM PORTFOLIO REINSURANCE AGREEMENT
ANNEX E STOP LOSS REINSURANCE AGREEMENT
<PAGE>
STOCK PURCHASE AGREEMENT
STOCK PURCHASE AGREEMENT made this 20th day of October, 1999 (the
"Agreement"), by and between Frontier Insurance Group, Inc., a Delaware
corporation ("Seller") and Protective Life Insurance Company, a Tennessee
corporation ("Buyer").
W I T N E S S E T H:
WHEREAS, Lyndon Insurance Group, Inc., a Missouri corporation (the
"Company"), through entities in which it owns all or more than fifty percent of
the outstanding equity interests (each, a "Subsidiary and, collectively, the
"Subsidiaries"), is engaged in the business of providing credit-related
insurance, warranty administration and related products and services (the
"Business"); and
WHEREAS, Seller is the owner of all of the 1,000 issued and
outstanding shares of the capital stock of the Company (the "Stock"); and
WHEREAS, Buyer desires to acquire the Business through the purchase of the
Stock from Seller and Seller desires to sell the Stock to Buyer, all upon the
terms and subject to the conditions set forth herein.
NOW, THEREFORE, Seller and Buyer hereby agree as follows:
ARTICLE I
TRANSACTION
1.1. PURCHASE AND SALE OF STOCK. Subject to the terms and conditions set
forth in this Agreement, at the Closing (as hereinafter defined), Seller will
sell, convey, assign, transfer and deliver to Buyer, and Buyer will purchase,
acquire and accept from Seller, the Stock for the consideration set forth in
Section 1.2 below.
1.2. CONSIDERATION.
(a) Closing Consideration. The aggregate consideration for the Stock shall
be One Hundred Sixty-Three Million Five Hundred Thousand Dollars ($163,500,000),
payable in cash at the closing set forth in Section 2.1 (the "Closing
Consideration"), subject to the post-closing purchase price adjustments provided
in Section 1.2(b) below.
(b) Post-Closing Adjustments.
(i) Within 45 days after the Closing, the Buyer shall deliver to the
Seller the balance sheets of the Company and each of its Subsidiaries as of
December 31, 1999 (the "Year-End Balance Sheets"), the last day of the
calendar month preceding the Closing (the "Pre-Closing Balance Sheets"),
and the last day of the calendar month in which the Closing occurs (the
"Post-Closing Balance Sheets"). The Year-End Balance
<PAGE>
Sheets, Pre-Closing Balance Sheets and Post-Closing Balance Sheets (each of
such three sets of balance sheets, "Relevant Balance Sheets") shall be
prepared by the Company, under the direction of Buyer, in cooperation with
Seller and its representatives. The Relevant Balance Sheets shall be
prepared in accordance with SAP (as defined in Section 3.5), consistently
applied in accordance with their past practices, with respect to the
Subsidiaries conducting business as insurance companies (each, an
"Insurance Subsidiary" and, collectively, the "Insurance Subsidiaries") and
in accordance with GAAP (as defined in Section 3.6(a)), consistently
applied in accordance with their past practices, with respect to the
Company and the non-Insurance Subsidiaries.
(ii) Within 15 days after the Year-End Balance Sheets are deemed final
pursuant to this Section 1.2(b), Seller shall pay Buyer the amount, if any,
by which $106,700,000 exceeds the Aggregate Book Value determined from the
Year-End Balance Sheets.
(iii) Within 15 days after the last of the Year-End Balance Sheets,
Pre-Closing Balance Sheets and Post-Closing Balance Sheets are deemed final
pursuant to this Section 1.2(b), the Buyer or the Seller, as appropriate,
shall pay to the other the amount of the post-closing adjustment determined
pursuant to Annex A hereto.
(iv) On or prior to June 30, 2000, each of Buyer and Seller shall
notify the other if it disputes any of the Relevant Balance Sheets; if
neither party so notifies the other with respect to any of the Relevant
Balance Sheets, such Relevant Balance Sheets shall be deemed accepted and
final for purposes hereof. If either or both parties notifies the other of
such a dispute, the Buyer and Seller shall use reasonable efforts to
resolve the dispute and finalize the applicable Relevant Balance Sheets on
or prior to July 15, 2000. If Buyer and Seller do not resolve such dispute
prior to July 15, 2000, then the dispute shall be submitted, within five
days thereafter, to KPMG LLP (the "Arbitrating Accountant"). The
determination of the Arbitrating Accountant as to any appropriate
adjustments to the disputed Relevant Balance Sheets shall be made in
accordance with this Section 1.2(b), within 30 days after submission by the
parties hereto, and the Relevant Balance Sheets, as so adjusted, shall be
deemed final for purposes hereof. Buyer and Seller shall each pay fifty
percent (50%) of the reasonable fees and expenses of the Arbitrating
Accountant relating to this Section 1.2(b).
(c) Certain Defined Terms.
(i) "Aggregate Book Value," as of any specified date, means the sum of
(a) the Adjusted Statutory Book Value of the Insurance Subsidiaries and (b)
the GAAP Book Value of the Company and the non-Insurance Subsidiaries as of
such date.
(ii) "Adjusted Statutory Book Value," as of any specified date, means
the aggregate sum for the Insurance Subsidiaries of (1) statutory capital
and surplus, excluding the carrying value, on the balance sheet of any
Insurance Subsidiary, of the capital stock of any other Subsidiary, (2)
IMR, and (3) AVR, each as calculated for each Insurance Subsidiary as of
such date in accordance with SAP (as defined in Section 3.5).
2
<PAGE>
(iii) "AVR" means Asset Valuation Reserve of any Insurance Subsidiary,
as defined for purposes of SAP.
(iv) "GAAP Book Value," as of any specified date, means the aggregate
sum, for the Company and the non-Insurance Subsidiaries, of total assets
(excluding any value for goodwill other than for Consumer Auto Resale
Express, LLC or First Protection Company and its subsidiaries) minus total
liabilities, excluding the carrying value, on the balance sheet of the
Company and any non-Insurance Subsidiary, of the capital stock of any other
Subsidiary, each as calculated for the Company and each non-Insurance
Subsidiary as of such date in accordance with GAAP (as defined in Section
3.6).
(v) "IMR" means Interest Maintenance Reserve of an Insurance
Subsidiary, as defined for purposes of SAP.
ARTICLE II
THE CLOSING AND TRANSFER OF STOCK
2.1. THE CLOSING. The closing of the transactions contemplated by this
Agreement (the "Closing") shall take place at the offices of Epstein Becker &
Green, P.C., counsel to the Seller, 250 Park Avenue, New York, New York 10177,
commencing at 10:00 a.m., local time, on the third business day following the
date on which the last of the conditions to Closing in Articles VII and VIII
have been fulfilled or waived in accordance with this Agreement, or on such
other date as the parties may mutually determine (the "Closing Date").
2.2. DELIVERIES AT THE CLOSING.
(a) Deliveries by Seller. At the Closing, Seller will execute (if
appropriate), acknowledge (if appropriate), and deliver to Buyer:
(i) certificates for the Stock with duly executed stock powers to
effect the transfer of ownership of the Stock to Buyer;
(ii) a copy of all charter documents (or other governing documents) of
the Company and of each Subsidiary certified by the Secretary of State of
its jurisdiction of incorporation (or organization) as of a recent date;
(iii) certificates of the Secretary of the Company and of each
Subsidiary certifying copies of the By-laws, minute books and stock record
books of the Company and of each Subsidiary as of the Closing Date;
(iv) the officer's certificate specified in Section 7.1;
(v) resignations from their offices as officers and/or directors (as
the case may be) of such officers and directors of the Company and the
Subsidiaries as Buyer shall request in writing at least three business days
prior to the Closing;
3
<PAGE>
(vi) opinions of counsel to Seller or the General Counsel of the
Company opining as to the matters set forth in Section 3.1(a), the record
ownership of the Stock and the record ownership of the capital stock (or
other applicable ownership interest) of the Subsidiaries as set forth on
Section 3.2 of the Disclosure Schedule, including Buyer's title to the
Stock, the due authorization and enforceability of this Agreement and the
transactions contemplated hereby and the matters set forth in the first
sentence of Section 3.4;
(vii) assignment by Seller of any non-competition agreements executed
by employees of the Company and the Subsidiaries in favor of Seller,
including the Employee Secrecy & Nonpiracy Agreement;
(viii) assignment by Seller of its rights to indemnification, if any,
under the four agreements specifically listed on Section 3.13(k) of the
Disclosure Schedule, except to the extent the Seller is providing
indemnification under Section 9.2;
(ix) waiver of applicable right of first refusal with respect to the
transactions contemplated hereby executed by the applicable member(s) of
Consumer Auto Resale Express, LLC; and
(x) all other documents, instruments and writings required to be
delivered by Seller at or prior to the Closing Date pursuant to this
Agreement.
(b) Deliveries by Buyer. At the Closing, Buyer will execute (if
appropriate), acknowledge (if appropriate), and deliver to the Company:
(i) the Closing Consideration by wire transfer of immediately
available funds to an account designated by Seller;
(ii) repayment to Seller, by or on behalf of the Company, by wire
transfer of immediately available funds to an account designated by Seller
of the principal (anticipated to be approximately $10 million) and accrued
interest on an inter-company loan made by Seller to the Company to fund the
Company's acquisition of First Protection Company (if such acquisition is
completed prior to the Closing Date);
(iii) the officer's certificate specified in Section 8.1;
(iv) opinion of General Counsel of Buyer as to the due authorization
and enforceability of this Agreement and the transactions contemplated
hereby; and
(v) all other documents, instruments and writings required to be
delivered by Buyer at or prior to the Closing Date pursuant to this
Agreement.
(c) Deliveries by the Parties. At the Closing, Buyer and Seller shall enter
into and deliver:
(i) the Tax Disaffiliation Agreement attached hereto as Annex B;
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(ii) the Loss Portfolio Reinsurance Agreement and the Unearned Premium
Portfolio Reinsurance Agreement (both relating to non-standard auto
policies) attached hereto as Annex C and Annex D, respectively, approved by
the Missouri Department of Insurance (if such approval is required);
(iii) the Excess Loss Ratio Reinsurance Contract (relating to certain
service contracts) attached hereto as Annex E, approved by the Missouri
Department of Insurance (if such approval is required).
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF SELLER
Seller hereby represents and warrants to Buyer as of the date hereof as set
forth below. For purposes of this Agreement, the phrase "to the knowledge of
Seller," "to the knowledge of the Company and/or a Subsidiary," or other
language of similar effect, shall mean to the actual knowledge of the persons
listed on Schedule 3.0 and/or constructive knowledge ascribed to any such
officer as being knowledge that such officer, in the exercise of reasonable
diligence with respect to his or her duties, should possess.
3.1. DUE ORGANIZATION.
(a) The Company and each Subsidiary is a corporation duly organized,
validly existing and in corporate good standing under the laws of its state of
incorporation, and has all requisite power and authority, corporate and
governmental, to own, lease and operate its respective assets and to carry on
the Business as now conducted, except where the failures to have such power or
authority would not, in the aggregate, have a Material Adverse Effect. For
purposes of this Agreement, a "Material Adverse Effect" shall mean any
circumstance, change in, or effect on the Business or the Company and the
Subsidiaries taken as a whole (other than changes in market interest rates or
general economic conditions) that is, or is reasonably likely to be, materially
adverse to the results of operations or financial condition of the Company and
the Subsidiaries, taken as a whole, or to the Business.
(b) The Company and each Subsidiary is duly qualified or licensed to do
business as a foreign corporation and is in good standing in all jurisdictions
in which the ownership, leasing or operation of its assets or the conduct of the
Business requires such qualification, except where the failures to be so
qualified or licensed would not in the aggregate have a Material Adverse Effect.
(c) Each Insurance Subsidiary possesses a license or other necessary
authorization to transact business as an insurance company in each jurisdiction
where it is required to do so and is duly authorized in its jurisdiction of
incorporation and/or each other applicable jurisdiction to write each line of
business reported as being written in its SAP Statements (as defined in Section
3.5) All such insurance licenses, including but not limited to authorizations to
transact reinsurance, are listed and described in Schedule T to the most recent
Annual Statement (as defined in Section 3.5) of the applicable Insurance
Subsidiary and are in full force and effect without amendment, limitation or
restriction, other than as described in Section 3.1 of the
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Disclosure Schedule. To the knowledge of Seller, there is no reasonably likely
event, inquiry, or proceeding of any kind that would lead to the revocation,
amendment, failure to renew, limitation, suspension or restriction of any such
insurance license.
(d) Copies of the articles of incorporation and bylaws (or other governing
documents) and stock ledgers (or other ownership records) of the Company and the
Subsidiaries have been made available to Buyer and such copies are accurate and
complete as of the date hereof.
(e) The minute books of the Company and the Subsidiaries which have been
made available to the Buyer for its inspection contain true and complete copies
of all minutes of meetings and consents in lieu of meeting of the Board of
Directors (and any committee thereof) of such entities during the ownership of
the Company by Seller, and summarize in all material respects all actions of the
Board (or such committee) referred to in such minutes or consents in lieu of
meeting.
(f) Seller is validly existing and in good standing under the laws of the
State of Delaware.
3.2. CAPITALIZATION; OWNERSHIP OF COMPANY AND SUBSIDIARIES.
(a) The aggregate authorized capital stock of the Company consists of
30,000 shares of common stock, par value $ 1.00 per share, 1,000 of which are
issued and outstanding. The Stock is the only issued and outstanding capital
stock of the Company.
(b) Section 3.2 of the Disclosure Schedule sets forth each direct and
indirect Subsidiary of the Company or entity in which the Company holds a
significant minority interest, its jurisdiction of incorporation, its authorized
capital stock, and the shares of capital stock issued and outstanding. Except as
set forth in Section 3.2 of the Disclosure Schedule, none of the issued and
outstanding shares of capital stock of any Subsidiary or other such entity is
owned (beneficially or legally) by persons other than the Company or another
Subsidiary.
(c) All of the outstanding shares of Stock and of the capital stock of each
Subsidiary are duly authorized, validly issued, fully paid and nonassessable,
with no preemptive rights of third parties attaching thereto. Except as set
forth in Section 3.2 of the Disclosure Schedule, there are no outstanding
options, rights, warrants, conversion rights or other agreements or commitments
to which the Company or any Subsidiary is a party or subject providing for the
issuance of additional capital stock or for any other adjustment, purchase or
transfer affecting the ownership interests in the Company or any Subsidiary.
(d) Seller owns (beneficially and of record) and has good title to the
Stock, and has the right, power and capacity to sell, assign and transfer the
Stock to the Buyer, without the consent of any other person (other than the
required consents referred to in Section 3.4), free and clear of all liens or
encumbrances. Seller has not entered into any contract, agreement or arrangement
with respect to the disposition or voting of the Stock. Upon completion of the
transactions contemplated hereby, Buyer will have good title to the Stock, free
and clear of all liens or encumbrances, except those created by or on behalf of
Buyer.
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3.3. AUTHORIZATION OF TRANSACTION. Seller has full corporate power and
authority to execute and deliver this Agreement and the other documents to be
executed and delivered by Seller at the Closing (this Agreement and the
documents to be executed and delivered by any party at Closing, collectively,
the "Transaction Documents") and to perform its obligations hereunder and
thereunder. All acts and proceedings required to be taken by Seller to authorize
the execution, delivery and performance of the Transaction Documents and all
transactions contemplated thereby have been duly and properly taken. This
Agreement has been, and the other Transaction Documents to be executed and
delivered by Seller at Closing will be, duly executed and delivered by Seller.
Assuming due authorization, execution and delivery by Buyer, this Agreement
constitutes the lawful, valid and legally binding obligation of Seller. Assuming
due authorization, execution and delivery by Buyer, the other Transaction
Documents, upon execution and delivery by Seller, will constitute lawful, valid
and legally binding obligations of Seller, enforceable, in all cases, in
accordance with their terms, except as limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other similar laws now or hereafter in
effect relating to creditors' rights and remedies.
3.4. CONSENTS AND APPROVALS; NO VIOLATIONS. Except for (a) applicable
requirements of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended (the "HSR Act"), and (b) filings and/or notices and related approvals
required under the insurance laws of the jurisdictions set forth in Section 3.4
of the Disclosure Schedule (the "Seller Insurance Filings"), no filing with, and
no permit, authorization, consent or approval of, any public body or authority,
domestic or foreign, is necessary for the consummation by Seller of the
transactions contemplated by this Agreement. Neither the execution and delivery
of this Agreement by Seller, nor the consummation by Seller of the transactions
contemplated hereby, nor compliance by Seller with any of the provisions hereof
will (a) conflict with or result in any breach of any provision of the
certificate of incorporation or bylaws (or other governing documents) of Seller,
the Company or any Subsidiary, (b) except as set forth in Section 3.4 of the
Disclosure Schedule, result in a violation or breach of, or constitute (with or
without due notice or lapse of time or both) a default under, or give rise to
any right of termination, cancellation or acceleration under any of the terms,
conditions or provisions of, any indenture, license, contract, agreement or
other instrument or obligation to which the Company, a Subsidiary or Seller is a
party or by which any of them or any of their properties or assets may be bound,
or (c) assuming that the filings and consents contemplated hereby are duly and
timely made, violate any order, writ, injunction, decree, statute, treaty, rule
or regulation applicable to the Company, any Subsidiary or Seller or any of
their properties or assets, except in the case of (b) or (c) for violations,
breaches or defaults which, in the aggregate, would not have a Material Adverse
Effect.
3.5. SAP FINANCIAL STATEMENTS. The Annual Convention Statements for the
years ended December 31, 1997 and 1998 (each, an "Annual Statement" and,
collectively, the "Annual Statements") of each Insurance Subsidiary listed on
Section 3.5 of the Disclosure Schedule, as filed with the respective insurance
department reflected thereon, audited by Ernst & Young LLP as indicated by its
report thereon, together with the unaudited Quarterly Statements of each
Insurance Subsidiary for the quarters ended March 31 and June 30, 1999 (the
"Quarterly Statements"), have been delivered or made available to Buyer. Each
Annual and Quarterly Statement (the "SAP Statements") was prepared in all
material respects in accordance with statutory accounting practices prescribed
or permitted by the applicable insurance regulator of the state in which filed
("SAP"), presents fairly the statutory financial condition, assets,
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liabilities, surplus and other funds of the Subsidiary as of such date and the
statutory results of operations and cash flows of the Subsidiary for the periods
therein specified, and the reserves reflected therein were established in
accordance with accepted actuarial standards as of the date of such SAP
Statement, consistently applied and fairly stated in accordance with sound
actuarial principles.
3.6. CONSOLIDATED BALANCE SHEETS.
(a) Unaudited consolidated balance sheets of the Company and the
Subsidiaries as at December 31, 1998 and June 30, 1999, prepared in all material
respects in accordance with generally accepted accounting principles ("GAAP"),
consistently applied in accordance with the past practices of such entities
(except for the absence of notes thereto), present fairly the consolidated
financial condition, assets and liabilities of the Company and the Subsidiaries
as at the respective dates indicated, and have been delivered or made available
to Buyer. June 30, 1999 is referred to herein as the "Balance Sheet Date" and
the unaudited consolidated GAAP balance sheet of the Company as at June 30, 1999
and the SAP balance sheets of the Subsidiaries as at June 30, 1999 are referred
to herein, collectively, as the "Most Recent Balance Sheet."
(b) There are no material liabilities or obligations of the Company, either
accrued, absolute, contingent or otherwise, whether or not of a kind required by
GAAP to be disclosed on a financial statement, except (a) those accrued,
reflected or otherwise provided for on the Most Recent Balance Sheet, (b) those
incurred in the ordinary course of business of the Company or a Subsidiary (as
the case may be) since the Balance Sheet Date, consistent with past practices,
and (c) those listed on Section 3.6 of the Disclosure Schedule.
3.7. ASSETS. The Company and each Subsidiary has good title to, or a valid
leasehold interest in, the properties and assets owned or leased by them
reflected on the Most Recent Balance Sheet or acquired after the date thereof,
free and clear of any and all liens and encumbrances, except for (a) liens or
encumbrances for current Taxes (as defined in Section 3.10) not yet due and
payable, (b) liens or encumbrances that do not exceed $50,000 in the aggregate,
(c) mechanics', carriers', workers' and other similar liens or encumbrances
arising or incurred in the ordinary course of business, (d) in the case of
properties or assets acquired after the Balance Sheet Date, liens or
encumbrances securing all or part of the purchase price thereof and (e) liens or
encumbrances set forth in Section 3.7 to the Disclosure Schedule, except for
properties and assets disposed of in the ordinary course of business since the
Balance Sheet Date.
3.8. INVESTMENTS. The Company has good and valid title to, and is in
possession of, all documentation reasonably necessary to evidence ownership of
the invested assets reflected on the Most Recent Balance Sheet.
3.9. EVENTS SUBSEQUENT TO BALANCE SHEET DATE. Except as provided in Section
3.9 to the Disclosure Schedule, since the Balance Sheet Date, the Business has
been operated in the ordinary course and there has not been any change in the
business, financial condition, operations or results of operations of the
Business, except such changes which, in the aggregate, are not reasonably likely
to have a Material Adverse Effect. Except as set forth in Section 3.9 to the
Disclosure Schedule, none of the events set forth in Section 5.1 hereof have
occurred since the Balance Sheet Date.
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3.10. TAX MATTERS. Except as provided in Section 3.10 to the Disclosure
Schedule, the Seller, the Company and each Subsidiary has filed all Tax returns
that it was required to file and paid all Taxes shown thereon as owing. All such
Tax returns were completed and filed in accordance with applicable law in all
material respects. Neither Seller, the Company nor any Subsidiary has waived any
statute of limitations in respect of Taxes or agreed to any extension of time
with respect to a Tax assessment or deficiency. Except as provided in Section
3.10 to the Disclosure Schedule, neither Seller, the Company nor any Subsidiary
is subject to or, to the knowledge of Seller, threatened with any action, suit,
proceeding, investigation, audit or claim with respect to the payment of any
Tax. Except as provided in Section 3.10 to the Disclosure Schedule, neither the
Company nor any Subsidiary is a party to any Tax allocation or sharing agreement
with the Seller or its affiliates. As used herein, "Tax" or "Taxes" means any
federal, state, local, or foreign income, gross receipts, franchise, estimated,
alternative minimum, add-on minimum, sales, use, transfer, registration, value
added, excise, natural resources, severance, stamp, occupation, premium, profit,
customs, duties, real property, personal property, capital stock, intangibles,
social security, employment, unemployment, disability, payroll, license,
employee, or other tax, withholding tax, or levy, of any kind whatsoever,
including any interest, penalties, or additions to tax in respect of the
foregoing.
3.11. LEGAL COMPLIANCE.
(a) Except as provided in Section 3.11 to the Disclosure Schedule, to the
knowledge of the Seller, the Business is in compliance with all applicable laws
(including the common law, rules, regulations, codes, plans, injunctions,
licensing requirements, judgments, orders, decrees, rulings, and charges
thereunder) of federal, state, local, and foreign governments (and all agencies
thereof), except where such violation or non-compliance would not reasonably be
expected to have a Material Adverse Effect.
(b) Seller shall make available, or cause the Company to make available,
for inspection by Buyer all material registrations, filings or submissions made
by the Company and each Subsidiary with any governmental or regulatory body and
each and every Annual Statement and Quarterly Statement filed with or submitted
to any state insurance governmental or regulatory body since 1994 and any
reports of examinations issued by any such state insurance governmental or
regulatory body since June, 1997 received by the Company or any Subsidiary.
Except as provided in Section 3.11 to the Disclosure Schedule, (i) all such
registrations, filings and submissions made by the Company and each Subsidiary
since the Seller's acquisition of the Company, and (ii) to the Seller's
knowledge, all such other registrations, filings and submissions made by the
Company and each Subsidiary, complied in all material respects with applicable
law when filed and no deficiencies have been asserted in writing to the Company
or any Subsidiary by any such governmental or regulatory body with respect to
such registrations, filings or submissions that have not been satisfied.
3.12. INTELLECTUAL PROPERTY. Except as set forth in Section 3.12 to the
Disclosure Schedule, with respect to all patents, trademarks, copyrights,
registrations and licenses of the Business (the "Intellectual Property"), (a)
the Company or a Subsidiary is the owner or has the right to use the
Intellectual Property in the manner in which it is currently being used, (b) no
action, suit or proceeding is pending against the Company or, to Seller's
knowledge, threatened with respect to the Intellectual Property, (c) to the
knowledge of Seller, the Intellectual Property
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does not infringe upon the rights of others and is not subject to any
outstanding order, decree or judgment, and (d) there are no royalty, commission
or similar arrangements, and no licenses, sublicenses or agreements, pertaining
to any of the Intellectual Property. Notwithstanding anything contained herein
to the contrary, neither the Company nor any Subsidiary has any right to the
corporate name of Seller or any derivative thereof.
3.13. CONTRACTS. Section 3.13 to the Disclosure Schedule lists the
following contracts and other agreements to which the Company or a Subsidiary is
a party:
(a) any agreement providing for reinsurance, assumption reinsurance (as the
ceding or assuming company), coinsurance or other similar contract providing for
the transfer or sharing of liabilities with respect to in-force insurance
business, and each trust agreement or other security agreement related thereto;
(b) any agreement providing for the distribution of insurance-related
products of an Insurance Subsidiary by third parties with a remaining term of
one year or greater;
(c) any agreement (or group of related agreements) for the lease of
personal property to or from any person providing for lease payments in excess
of $50,000 per annum;
(d) any agreement (or group of related agreements) under which the Company
or a Subsidiary has created, incurred, assumed, or guaranteed any indebtedness
for borrowed money;
(e) any agreement imposing non-competition obligations on the Company or a
Subsidiary;
(f) any defined benefit pension, profit sharing, stock option, stock
purchase, stock appreciation, deferred compensation, severance, welfare or other
plan or arrangement for the benefit of employees of the Company or a Subsidiary;
(g) any agreement for the employment of any individual not terminable upon
ninety (90) days' or less notice;
(h) any agency or consulting contract that is not terminable without
penalty or other liability (other than liabilities previously accrued
thereunder) upon 90 days' or less notice;
(i) each lease or sublease of real property to which the Company or any
Subsidiary is a party that is not terminable by the Company or any Subsidiary
without penalty or other liability (other than liabilities previously accrued
thereunder) upon 90 days' or less notice;
(j) any agreement not made in the ordinary course of business;
(k) any agreement pursuant to which the Company or any Subsidiary agrees to
indemnify or hold harmless another person, and each agreement pursuant to which
another party has agreed to indemnify or hold harmless the Company or any
Subsidiary, not in the ordinary course of business;
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(l) any agreement pursuant to which the Company or any Subsidiary grants or
purports to grant a power of attorney to anyone; and
(m) any agreement not disclosed pursuant to the foregoing clauses (a)
through (l) that involves the payment or would reasonably be expected to involve
the potential payment, pursuant to the terms of such contract, by or to the
Company or any Subsidiary of more than $50,000 in the aggregate, other than an
insurance policy or other contract entered into in the ordinary course of
business.
With respect to each such agreement, except as described in Section 3.13 to the
Disclosure Schedule, (i) the agreement is a legal, valid and binding obligation
of the Company or the Subsidiary, as applicable, and (ii) to Seller's knowledge,
no party is in breach or default thereunder and no event has occurred which,
with notice or lapse of time, would constitute a breach or default of any such
contract, except for such as would not be reasonably expected, in the aggregate,
to have a Material Adverse Effect.
3.14. LEGAL PROCEEDINGS. Except as set forth in Section 3.14 to the
Disclosure Schedule, (i) neither the Company nor any Subsidiary is engaged in or
a party to or, to the knowledge of Seller, threatened with any action, suit or
other legal proceeding involving the Company, a Subsidiary or their assets,
other than litigation in the ordinary course of business under policies of
insurance relating to the non-standard auto line of business, (ii) Seller has no
knowledge of any investigation threatened by any governmental or regulatory
authority with respect to the Company, a Subsidiary, or their assets, (iii)
neither the Company nor any Subsidiary is subject to any judgment, order, writ,
injunction, stipulation or decree of any court or any governmental agency, and
(iv) to the knowledge of Seller, there is no specific dispute or controversy,
pattern of disputes or controversies or pattern of alleged improper conduct
relating to allegedly improper business practices of the Company or any
Subsidiary.
3.15. EMPLOYEE PLANS.
(a) ERISA Plans.
(i) Section 3.15 to the Disclosure Schedule lists all of the following
types of plans maintained by Seller for the benefit of the employees of the
Company or any Subsidiary ("Benefit Plans"): (a) employee pension benefit
plans ("Pension Benefit Plans"), as defined in Section 3(2) of the
Employment Retirement Income Security Act of 1974, as amended ("ERISA"),
and (b) employee welfare benefit plans ("Welfare Benefit Plans"), as
defined in Section 3(l) of ERISA, true and complete copies of which have
been made available to Buyer. The participation of the Company and
Subsidiaries in all Benefit Plans may be terminated without liability to
the Company or the Subsidiaries with respect to such termination.
(ii) The Seller and all entities under "common control" (as defined in
Section 4001(b)(1) of ERISA) with the Seller do not contribute and have not
contributed to any multiemployer plan as defined in Section 3(37) of ERISA.
(b) Administration of Benefit Plans. Each Pension Benefit Plan that is
intended to be a qualified plan under Section 401(a) of the Internal Revenue
Code of 1986, as amended (the
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"Code"), including each trust related to any such Benefit Plan, has received a
favorable and current determination letter from the Internal Revenue Service
("IRS"). To the knowledge of Seller, no event has occurred or condition exists
that could adversely affect any such determination. Each Benefit Plan's
administration and enforcement is in material compliance with its terms, the
Code, ERISA, and all other applicable state and federal laws, and any current or
past failure to be in compliance would not result in a material adverse
financial consequence to such Benefit Plan, its participants, the Seller, the
Company or any Subsidiary. To the knowledge of Seller, no event has occurred
with respect to any Benefit Plan in connection with which the Company or any
Subsidiary could be subject to any liability, lien or encumbrance other than
liabilities in the ordinary course of business. All returns, reports or other
filings which are required by any governmental agency or which must be furnished
to any person have been timely filed or furnished. All contributions due and
payable prior to the Closing Date with respect to any fiscal year of any Benefit
Plan ending prior to the Closing Date have been timely made. No material claims
for benefits under any Benefit Plan are in dispute, and there are no actions,
suits, arbitrations, investigations or audits by any person, entity or
governmental authority pending or threatened against any Benefit Plan or the
Seller, the Company, a Subsidiary, or any trustee, fiduciary or administrator
regarding any Benefit Plan, and to the knowledge of Seller, no basis to
anticipate any such action exists. All Welfare Benefit Plans subject to the
requirements of the Consolidated Omnibus Budget Reconciliation Act of 1985
("COBRA") to provide health care continuation coverage pursuant to Section
4980B(f) of the Code are in material compliance with the COBRA requirements.
3.16. CERTAIN BUSINESS RELATIONSHIPS WITH THE COMPANY. Except as set forth
in Section 3.16 to the Disclosure Schedule, the Seller and its Affiliates (as
hereinafter defined) (a) have not been involved in any business arrangement or
relationship with the Company or any Subsidiary within the past 12 months, (b)
do not own any asset, tangible or intangible, which is used in the business of
the Company or a Subsidiary, other than assets involved in general and
administrative activities, and (c) do not owe any amount to, or are owed any
amount by, the Company or any Subsidiary.'
3.17. BROKERS' FEES. Neither the Seller, the Company nor any Subsidiary has
any liability or obligation to pay any fees or commissions to any broker,
finder, or agent with respect to the transactions contemplated by this Agreement
for which the Buyer, the Company or any Subsidiary will be liable.
3.18. INSURANCE. Section 3.18 to the Disclosure Schedule lists all
insurance provided by Seller's insurance carriers covering the Company, its
Subsidiaries or their respective employees or directors, other than the employee
benefit plans listed in Section 3.15 to the Disclosure Schedule.
3.19. YEAR 2000 LIABILITY. Seller represents and warrants that all material
computer software (other than "shrinkwrap software") and hardware necessary for
the conduct of the business of the Company and the Subsidiaries and that the
Company or any of its Subsidiaries has provided to its customers, agents,
vendors, suppliers, Affiliates or any other third party (the "Software") is
designed to be used prior to, during and after the calendar year 2000 A.D. and
that the Software has been successfully tested to properly operate during each
such time period without material error relating to the year 2000, specifically
including any error relating to, or the
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product of, date data which represents or references different centuries or more
than one century. The Seller further represents and warrants that the Software
has been successfully tested to properly accept, calculate, sort, extract and
otherwise process date inputs and date values, and has been successfully tested
to properly return and display date values, in a consistent manner regardless of
the dates used, whether before, on or after January 1, 2000.
3.20. LABOR MATTERS.
(a) Neither the Company nor any Subsidiary is a party to any collective
bargaining agreement or other labor union contract applicable to persons
employed by any of them and currently there are no organizational campaigns,
petitions or other unionization activities known to the Seller seeking
recognition of a collective bargaining unit which is reasonably likely to have a
Material Adverse Effect.
(b) Each of the Company and the Subsidiaries is in compliance, in all
material respects, with all applicable laws relating to the employment of labor,
including without limitation those related to wages, hours and the payment and
withholding of taxes and other sums as required by the applicable governmental
authority, and have withheld and paid to the applicable governmental authority
all amounts required to have been withheld from employees of the Company and the
Subsidiaries and are not liable for any arrears of wages, taxes, penalties or
other sums for failure to comply with any of the foregoing.
3.21. ENVIRONMENTAL MATTERS.
(a) To the knowledge of Seller, the Company and each Subsidiary is, and has
been, in compliance in all material respects with all applicable laws relating
to the protection of the environment, human health, safety or natural resources,
or to emissions, discharges, or releases of any pollutant, contaminant, or
hazardous substance under the Comprehensive Environmental Response,
Compensation, and Liability Act, 42 U.S.C. 'SS' 9601 et seq., or any applicable
similar state law ("Hazardous Material") into the environment (including air,
surface water, ground water or land) or otherwise relating to the manufacture,
processing, distribution, use, treatment, storage, disposal, transport or
handling of any Hazardous Material ("Environmental Laws").
(b) To the knowledge of Seller, there is no action, arbitration, claim,
complaint, criminal prosecution, governmental or other examination or
investigation, hearing, inquiry, or administrative or other proceeding
("Proceeding") commenced against or with respect to any person or any assets
pending or threatened, before any court, governmental entity or other forum in
which the Company or any Subsidiary has been or, with respect to any threatened
Proceeding, may be, named as a defendant (i) for alleged noncompliance
(including by any predecessor), with any Environmental Law, or (ii) relating to
the release into the environment of any Hazardous Material or oil whether or not
occurring at or on a site owned, leased or operated by the Company or any
Subsidiary, nor to the knowledge of Seller, is there any reasonable basis for
any such Proceeding.
(c) To the knowledge of Seller, there are no facts, events or circumstances
relating to the past or present facilities or operations of the Company and any
Subsidiary (including any real property that the Company or any Subsidiary owns,
leases or previously owned or leased) that
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would interfere with or prevent compliance with applicable Environmental Laws or
that would give rise to liability under any applicable Environmental Laws or
related common law theories. This representation extends to the presence and
removal of asbestos.
3.22. DISCLAIMER. Seller makes no representation or warranty with regard to
any statements, oral or written, with respect to the Stock, the Business, the
Company or any Subsidiary except as expressly provided in this Agreement.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF BUYER
Buyer represents and warrants to Seller as follows:
4.1. ORGANIZATION OF BUYER. Buyer is a corporation validly existing and in
good standing under the laws of the State of Tennessee.
4.2. AUTHORIZATION OF TRANSACTION. Buyer has full corporate power and
authority to execute and deliver this Agreement and the Transaction Documents
and to perform its obligations hereunder and thereunder. All acts and
proceedings required to be taken by Buyer to authorize the execution, delivery
and performance of the Transaction Documents and all transactions contemplated
thereby have been duly and properly taken. This Agreement has been, and the
other Transaction Documents to be executed and delivered by Buyer at Closing
will be, duly executed and delivered by Buyer. Assuming due authorization,
execution and delivery by Seller, this Agreement constitutes the lawful, valid
and legally binding obligation of Buyer. Assuming due authorization, execution
and delivery by Seller, the other Transaction Documents, upon execution and
delivery by Buyer, will constitute lawful, valid and legally binding obligations
of Buyer, enforceable, in all cases, in accordance with their terms, except as
limited by applicable bankruptcy, insolvency, reorganization, moratorium or
other similar laws now or hereafter in effect relating to creditors' rights and
remedies.
4.3. CONSENTS AND APPROVALS; NO VIOLATIONS. Except for (a) applicable
requirements of the HSR Act, and (b) filings and/or notices and related
approvals required under the insurance laws of the jurisdictions set forth in
Section 3.4 to the Disclosure Schedule (the "Buyer Insurance Filings"), no
filing with, and no permit, authorization, consent or approval of, any public
body or authority, domestic or foreign, is necessary for the consummation by
Buyer of the transactions contemplated by this Agreement. Neither the execution
and delivery of this Agreement by Buyer nor the consummation by Buyer of the
transactions contemplated hereby nor compliance by Buyer with any of the
provisions hereof will (a) conflict with or result in any breach of any
provision of the certificate of incorporation of Buyer, (b) result in a
violation or breach of, or constitute (with or without due notice or lapse of
time or both) a default under, or give rise to any right of termination,
cancellation or acceleration under any of the terms, conditions or provisions
of, any indenture, license, contract, agreement or other instrument or
obligation to which the Buyer is a party or by which Buyer or any of its
properties or assets may be bound, or (c) assuming that the filings and consents
contemplated hereby are duly and timely made, violate any order, writ,
injunction, decree, statute, treaty, rule or regulation applicable to the Buyer
or any of its properties or assets, except in the case of (b) or (c) for
violations, breaches or defaults
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which, in the aggregate, would not have a material adverse effect on Seller or
deprive Seller of the benefits anticipated by this Agreement.
4.4. ACQUISITION OF STOCK FOR INVESTMENT. Buyer is acquiring the Stock for
investment and not with a view toward any distribution thereof, and will dispose
of such Stock only in compliance with the Securities Act of 1933 and any
applicable state securities laws.
4.5. BUYER'S BUSINESS INVESTIGATION. Buyer has conducted such investigation
of the Company, the Subsidiaries, and the Business as it has deemed necessary in
order to make an informed decision concerning the transactions contemplated
hereby. Buyer has reviewed all of the documents, records, reports and other
materials identified in the Disclosure Schedule hereto or referred to in Section
3.1, and is familiar with the content thereof. Buyer acknowledges that it has
been given access to and has visited and examined the premises of the Business
and is familiar with the condition thereof. For the purpose of conducting these
investigations, Buyer has employed the services of its own agents,
representatives, experts and consultants. All materials and information
requested by Buyer have been provided to Buyer to Buyer's satisfaction.
Notwithstanding the foregoing, Buyer is relying upon the accuracy of the
representations and warranties of Seller under this Agreement in entering into
this Agreement and consummating the transactions contemplated hereby.
4.6. FINANCING. As of the date of this Agreement, Buyer has sufficient
funds and commitments for funding from appropriate parties to fund the
consideration to be paid at Closing to Seller for the Stock and, as of the
Closing Date, Buyer will have sufficient funds for such purpose.
4.7. BROKERS' FEES. Buyer has no liability or obligation to pay any fees or
commissions to any broker, finder, or agent with respect to the transactions
contemplated by this Agreement for which the Seller will be liable.
ARTICLE V
COVENANTS OF SELLER
5.1. INTERIM CONDUCT OF BUSINESS. Except as contemplated by this Agreement,
as set forth in Section 5.1 to the Disclosure Schedule, or with the prior
consent of Buyer, from the date hereof until the Closing, Seller shall (and
shall cause the Company and the Subsidiaries to) use all reasonable efforts to
operate the Business consistent with past practice and in the ordinary course of
business, or otherwise consistent with the terms of this Agreement. Without
limiting the generality of the foregoing and except as otherwise provided in
this Agreement or the transactions contemplated hereby or as set forth in
Section 5.1 to the Disclosure Schedule, the Seller will cause the Company and
each Subsidiary not to, prior to the Closing Date without the prior consent of
Buyer, do any of the following:
(a) declare, set aside, or pay any dividend or make any distribution with
respect to its capital stock (whether in cash or in kind) or redeem, purchase,
or otherwise acquire any of its capital stock, other than transactions solely
between the Company and a Subsidiary;
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(b) sell, lease, transfer, or assign any of its assets, tangible or
intangible, to any third party, other than in the ordinary course of business,
or apply, utilize or otherwise dispose of any assets of the Business to
discharge any indebtedness or claims against Seller or any of its Affiliates,
other than between the Company and a Subsidiary.
(c) impose any Lien upon any of its assets, tangible or intangible;
(d) change or authorize a change in the Certificate of Incorporation or
bylaws of the Company or any Subsidiary;
(e) issue, sell or otherwise dispose of any of its capital stock, or grant
any options, warrants, or other rights to purchase or acquire (including upon
conversion, exchange, or exercise) any of its capital stock;
(f) guarantee any third-party indebtedness;
(g) incur any borrowings from third parties in excess of $100,000;
(h) enter into any agreement or transaction with Seller or its Affiliates,
other than between the Company and a Subsidiary;
(i) merge or consolidate with any other person or entity or acquire a
material amount of assets of any other person or entity;
(j) grant any general or uniform increase in the rates of pay of employees
of the Company or the Subsidiaries or any increase in salary payable or to
become payable to any such employee, or increase in any manner the compensation
of any directors, officers or other employees of the Company or the
Subsidiaries, except (in the case of all of the foregoing) in the ordinary
course of business in accordance with past practices;
(k) permit any officer, director or employee of the Company or a Subsidiary
to distribute any policyholder lists to any agent, person or other company; or
(l) agree or commit to do any of the foregoing.
"Affiliates" for purposes of this Agreement shall mean any entity which
controls, or is controlled by, or is under common control with the Seller or the
Buyer, as the case may be.
5.2. ACCESS. From the date hereof through the Closing Date, Seller shall
give Buyer and its representatives access, during normal business hours and
under reasonable circumstances, to all properties, records and appropriate
personnel of the Business and shall furnish Buyer with all financial and other
information in its possession relating to the Business and the Company as Buyer
may from time to time reasonably request.
5.3. CONSUMMATION. Subject to the terms and conditions provided herein,
Seller agrees to use all reasonable efforts to take, or cause to be taken, all
actions and to do, or cause to be done, all things necessary, proper or
advisable under applicable laws and regulations to consummate and make effective
the transactions contemplated by this Agreement in accordance
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with its terms; except that this covenant shall not require Seller to make any
payment or incur any economic burden not provided for herein.
5.4. HSR CONSENT. As promptly as possible, but in any event not later than
five (5) business days after the execution hereof, Seller shall file with the
Federal Trade Commission (the "FTC") and the Antitrust Division of the United
States Department of Justice (the "Antitrust Division") a pre-merger
notification in accordance with the HSR Act with respect to the sale of the
Stock pursuant to this Agreement. Seller shall furnish promptly to the FTC and
the Antitrust Division any additional information requested by either of them
pursuant to the HSR Act in connection with such filings and shall diligently
take, or cooperate in the taking of, all steps that are necessary or desirable
and proper to expedite the termination of the waiting period under the HSR Act.
5.5. OTHER ACTIONS. As promptly as possible, Seller shall make the Seller
Insurance Filings with governmental agencies in connection with the transactions
contemplated hereby. Seller shall keep Buyer informed as to the status of
discussions with the governmental agencies.
5.6. SEPTEMBER FINANCIAL STATEMENTS. On or prior to November 15, 1999,
Seller shall deliver to Buyer copies of (i) the consolidated balance sheet of
the Company and the Subsidiaries as at September 30, 1999, prepared in all
material respects in accordance with GAAP (except for the absence of notes
thereto), consistently applied in accordance with the past practices of such
entities, and (ii) the Quarterly Statements of each Insurance Subsidiary for the
quarter ended September 30, 1999, prepared in all material respects in
accordance with SAP.
ARTICLE VI
COVENANTS OF BUYER
6.1. CONSUMMATION. Subject to the terms and conditions provided herein,
Buyer agrees to use all reasonable efforts to take, or cause to be taken, all
actions and to do, or cause to be done, all things necessary, proper or
advisable under applicable laws and regulations to consummate and make effective
the transactions contemplated by this Agreement in accordance with its terms;
except that this covenant shall not require Buyer to make any payment or incur
any economic burden not provided for herein.
6.2. HSR CONSENT. As promptly as possible, but in any event not later than
five (5) business days after the execution hereof, Buyer shall file with the FTC
and the Antitrust Division, including payment of the required filing fee, a
pre-merger notification in accordance with the HSR Act with respect to the
purchase of the Stock pursuant to this Agreement. Buyer shall furnish promptly
to the FTC and the Antitrust Division any additional information requested by
either of them pursuant to the HSR Act in connection with such filings and shall
diligently take, or cooperate in the taking of, all steps that are necessary or
desirable and proper to expedite the termination of the waiting period under the
HSR Act.
6.3. OTHER ACTIONS. As promptly as possible, Buyer shall make the Buyer
Insurance Filings with governmental agencies in connection with the transactions
contemplated hereby. Buyer shall keep Seller informed as to the status of
discussions with the governmental agencies.
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6.4. RECORDS AND DOCUMENTS. Following the Closing Date, Buyer shall grant
to Seller and its respective representatives, at Seller's reasonable request,
reasonable access to and the right to make copies at Seller's expense of those
records and documents covering any period prior to the Closing related to the
Business as may be reasonably necessary for litigation, preparation of financial
statements, Tax returns and audits or other business purposes. If Buyer elects
to dispose of such records, Buyer shall first give Seller sixty (60) days'
written notice, during which period Seller shall have the right to take such
records without further consideration.
ARTICLE VII
CONDITIONS PRECEDENT TO OBLIGATIONS OF BUYER
The obligation of Buyer to consummate the transactions contemplated by this
Agreement is subject to delivery of the items specified in Sections 2.2(a) and
2.2(c) and fulfillment prior to or at the Closing of the following conditions
(unless waived in writing in the sole discretion of Buyer):
7.1. ACCURACY OF WARRANTIES AND PERFORMANCE OF COVENANTS. The
representations and warranties of Seller contained herein shall be accurate in
all material respects (except to the extent such representations and warranties
are already qualified by materiality, in which case such representations and
warranties shall be accurate) as if made on and as of the Closing Date, except
for changes occurring in the ordinary course of the Business. Seller shall, in
all material respects, have performed all obligations and complied with each and
all of the covenants and agreements required to be performed or complied with on
or prior to the Closing. A Certificate of the Chief Executive Officer or Chief
Financial Officer of Seller shall be delivered to the foregoing effect.
7.2. NO PENDING ACTION. No order of any court, administrative agency or
other governmental authority shall be pending which prohibits the carrying out
of this Agreement or any of the significant transactions contemplated hereby or
declares unlawful the transactions contemplated hereby.
7.3. HSR. The waiting period under the HSR Act required to permit the
consummation of the transactions provided for herein shall have expired or
otherwise been terminated.
7.4. INSURANCE APPROVALS. Approvals required in connection with the Buyer
Insurance Filings shall have been obtained.
7.5. TERMINATION OF INTER-COMPANY AGREEMENTS. The Income Tax Sharing
Agreement between the Company and the Subsidiaries and Seller effected as of
June 3, 1997 (the "Tax Sharing Agreement") shall be terminated effective as of
the Closing Date. All other agreements between the Company and/or any of the
Subsidiaries, on the one hand, and the Seller, on the other hand, shall be
terminated effective on or prior to the Closing Date.
7.6. NO MATERIAL ADVERSE CHANGE. There shall not have been any change in
the business, financial condition, operations or results of operations of the
Company and its
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Subsidiaries and First Protection Company and its subsidiaries, all taken as a
whole, except such changes which, in the aggregate, are not reasonably likely to
have a Material Adverse Effect (such change being measured from the date of this
Agreement in the case of the Company and its Subsidiaries and from October 11,
1999 in the case of First Protection and its subsidiaries). The foregoing
sentence shall be deemed to exclude First Protection Company and its
subsidiaries in the event the Stock Purchase Agreement relating to the
acquisition of such entities has been terminated.
ARTICLE VIII
CONDITIONS PRECEDENT TO OBLIGATIONS OF SELLER
The obligation of Seller to consummate the transactions contemplated by
this Agreement is subject to delivery of the items specified in Sections 2.2(b)
and 2.2(c) and fulfillment prior to or at the Closing of the following
conditions (unless waived in writing in the sole discretion of Seller):
8.1. ACCURACY OF WARRANTIES AND PERFORMANCE OF COVENANTS. The
representations and warranties of Buyer contained herein shall be accurate in
all material respects (except to the extent such representations and warranties
are already qualified by materiality, in which case such representations and
warranties shall be accurate) as if made on and as of the Closing Date. Buyer
shall have, in all material respects, performed all obligations and complied
with each and all of the covenants and agreements required to be performed or
complied with on or prior to the Closing. A Certificate of the Chief Executive
Officer, Chief Financial Officer or General Counsel of the Buyer shall be
delivered to the foregoing effect.
8.2. NO PENDING ACTION. No order of any court, administrative agency or
other governmental authority shall be pending which prohibits the carrying out
of this Agreement or any of the significant transactions contemplated hereby or
declares unlawful the transactions contemplated hereby.
8.3. HSR. The waiting period under the HSR Act required to permit the
consummation of the transactions provided for herein shall have expired or
otherwise been terminated.
8.4. INSURANCE APPROVALS. Approvals required in connection with the Seller
Insurance Filings shall have been obtained.
ARTICLE IX
SURVIVAL AND INDEMNIFICATION
9.1. SURVIVAL. Unless otherwise specified herein, all covenants and
agreements contained herein or in any agreement or document delivered pursuant
hereto, shall survive the Closing until fully performed. All representations and
warranties contained herein or in any agreement or other document delivered
pursuant hereto shall survive the Closing for a period of eighteen (18) months
from the Closing Date, after which they shall be of no further force or
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effect; provided, however, that all representations and warranties set forth in
Sections 3.10, 3.15 and 3.21 hereof and in the Tax Disaffiliation Agreement
shall survive until the expiration of the applicable statute of limitations and
all representations and warranties set forth in Section 3.2 shall survive
indefinitely. Notwithstanding the foregoing, any claim for indemnification that
is asserted by written notice as provided in Section 9.3 within the applicable
survival period shall survive until resolved pursuant to a final non-appealable
judicial determination or otherwise.
9.2. INDEMNIFICATION. Seller shall indemnify and hold harmless Buyer, and
Buyer shall indemnify and hold harmless Seller, from and against any and all
loss, damage, cost or expense, including reasonable attorneys' fees and expenses
(collectively, "Losses"), caused by any misrepresentation, breach of warranty or
failure to fulfill any covenant or agreement contained herein or in any
agreement or other document delivered pursuant to the terms hereof, other than
the Loss Portfolio Reinsurance Agreement, the Unearned Premium Portfolio
Reinsurance Agreement and the Excess Loss Ratio Contract. Seller shall indemnify
and hold harmless Buyer, the Company and the Subsidiaries from and against any
and all Losses attributable to (i) any pending or threatened litigation,
arbitration or other recognized "alternative dispute resolution" proceeding
against the Company, any Subsidiary, or First Protection Company or any of its
subsidiaries (such corporation and its subsidiaries, collectively, "FPC") as of
the Closing Date, other than pending or threatened litigations, arbitrations or
other such proceedings relating to policies of insurance with respect to the
non-standard auto line of business (the pending or threatened litigations,
arbitrations and other proceedings covered by this clause (i), collectively, the
"Assumed Litigation"), (ii) any demands, claims, actions or causes of action of
whatever kind or character (including, without limitation, claims by any current
or former director, officer or employee) relating to any employee benefit plan
(within the meaning of Section 3(3) of ERISA) which has at any time prior to the
Closing Date been sponsored by Seller, the Company, any Subsidiary or FPC or any
person who is or was a member of Seller's, the Company's , any Subsidiary's or
FPC's controlled group or under common control with Seller, the Company, any
Subsidiary or FPC within the meaning of Section 414 of the Code or with respect
to which Seller, the Company, any Subsidiary or FPC or any such person
contributes or has been obligated or required to contribute (collectively,
"Benefit Claims"), (iii) any alleged improper market conduct or business
practices of the Company, any Subsidiary or FPC (including, without limitation,
any alleged improper marketing or claims action), but solely to the extent
relating to any time period prior to the Closing Date (collectively, "Market
Conduct Claims"), (iv) any breach of Section 3.10 as it relates to FPC (the "FPC
Tax Indemnification"), and (v) the failure of the Company to recover from one or
more parties (including First Union), on or prior to one year after the Closing
Date, the amounts owed to Lyndon Property Insurance Company referred to in
Section 3.9 of the Disclosure Schedule (the "Everest Re Receivable
Indemnification"). For purposes of this Section 9.2, each representation and
warranty contained in this Agreement shall be construed without any reference to
any materiality or knowledge limitation.
9.3. GENERAL PROVISIONS RELATING TO INDEMNIFICATION. (a) Seller shall not
be required to make any payments pursuant to this Article IX, unless and until
the aggregate amount of all claims pursuant to this Article IX shall exceed
$2,500,000 (the "Threshold Amount"), after which Seller shall be responsible
only for the excess over the Threshold Amount. The maximum aggregate amount
recoverable from Seller pursuant to this Article IX shall not exceed an amount
equal to twenty-five percent (25%) of the Aggregate Consideration (the "Ceiling
Amount").
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Notwithstanding anything contained herein to the contrary, the Threshold Amount
and Ceiling Amount shall not be applicable to (i) claims for breach of the
representations and warranties contained in Sections 3.1(a), 3.2, 3.10 and 3.15,
(ii) the indemnification for Assumed Litigation, Benefit Claims, the FPC Tax
Indemnification and the Everest Re Receivable Indemnification, and (iii) the
indemnification for Market Conduct Claims asserted by Buyer against Seller in
writing within one year after the Closing Date (it being acknowledged that Buyer
shall be entitled to indemnification for Market Conduct Claims asserted by Buyer
against Seller in writing later than one year after the Closing Date, but such
indemnification shall be subject to the Threshold Amount and the Ceiling
Amount), (iv) claims for indemnification attributable to any active and willful
fraudulent misrepresentation by Seller hereunder and (v) the Tax Disaffiliation
Agreement; provided, however, that the maximum aggregate amount recoverable from
Seller for breach of the representations and warranties contained in Sections
3.1(a), 3.2, 3.10, and 3.15 shall not exceed the Aggregate Consideration.
Notwithstanding the foregoing, the Threshold Amount shall not be applicable to
indemnification for the failure to fulfill any covenant or agreement contained
herein or in any agreement or other document delivered pursuant to the terms
hereof. For purposes of this Agreement, the "Aggregate Consideration" shall mean
the Closing Consideration, as adjusted pursuant to Section 1.2(b). In the event
the acquisition of First Protection Company by the Company is not consummated on
or prior to March 7, 2000, no references in this Section 9.2 to FPC shall have
any force or effect.
(b) The party entitled to indemnification shall take all reasonable steps
to mitigate all indemnifiable liabilities and damages upon and after becoming
aware of any event which could reasonably be expected to give rise to any
liabilities and damages that are indemnifiable hereunder, and shall reimburse
the Indemnifying Party for any amounts actually received in excess of 100% of
the Loss, up to the amount of the Indemnifying Party's actual indemnification
payment for the Loss. No party shall be entitled to indemnification to the
extent of any Tax benefits resulting from the facts and circumstances relating
to any indemnifiable claim, in which event, the tax consequences of the
indemnification payment to the party entitled thereto shall be given effect in
determining the indemnifiable amount.
(c) The party seeking indemnification shall give written notice to the
indemnifying party of the facts and circumstances giving rise to any claim for
indemnification as soon as reasonably possible but in any event within thirty
(30) days after it obtains knowledge of the basis for a claim for
indemnification hereunder; provided, however, that notwithstanding any failure
of the party seeking indemnification to give notice within such thirty days, the
indemnifying party shall remain liable hereunder except (and only) to the extent
the delay in receiving notice has materially impaired the ability of the
indemnifying party to contest any such claim; and, provided, further, that in no
event shall any claim for indemnification be made after the expiration of the
applicable survival period provided in Section 9.1.
(d) With respect to each third-party claim subject to this Article IX (a
"Third Party Claim"), the party seeking indemnification (the "Indemnified
Party") must give prompt notice to the indemnifying party (the "Indemnifying
Party") of the Third Party Claim. The Indemnifying Party may, at its sole cost
and expense, upon notice to the Indemnified Party within thirty (30) days after
the Indemnifying Party receives notice of the Third Party Claim, assume the
defense of the Third Party Claim, with counsel of its choice (which counsel
shall be reasonably satisfactory to the Indemnified Party) without prejudice to
the right of the Indemnifying Party to
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contest its obligation to indemnify the Indemnified Party in respect to the
claims asserted therein. The Indemnifying Party shall not consent to a
settlement of, or the entry of any judgment arising from, any Third Party Claim,
unless the Indemnified Party consents thereto, which consent shall not be
unreasonably withheld. The Indemnifying Party shall provide the Indemnified
Party with ten (10) business days' prior notice before it consents to a
settlement of, or the entry of a judgment arising from, any Third Party Claim.
The Indemnified Party shall be entitled to participate in the defense of (but
not control) any Third Party Claim, the defense of which is assumed by the
Indemnifying Party, with its own counsel and at its own expense. In no event
shall the Indemnified Party consent (without the consent of the Indemnifying
Party) to a settlement of, or the entry of any judgment arising from, any Third
Party Claim. The parties shall cooperate in the defense of any Third Party Claim
and the relevant records of each party shall be made available on a timely
basis. Any Indemnified Party shall have the right to retain its own counsel, but
the fees and expenses of such counsel shall be at the expense of such
Indemnified Party unless (i) the Indemnifying Party and the Indemnified Party
shall have mutually agreed to the contrary, (ii) the Indemnifying Party has
failed within a reasonable time to retain counsel reasonably satisfactory to the
Indemnified Party, or (iii) the named parties in any such proceeding (including
any impleaded parties) include both the Indemnified Party and the Indemnifying
Party and representation of both parties by the same counsel would be
inappropriate due to actual or potential differing interests between them.
(e) After the Closing, the indemnification rights provided hereunder shall
be the exclusive remedy of Seller and Buyer with respect to any dispute arising
out of or related to this Agreement; provided, however, that any disputes under
the Loss Portfolio Reinsurance Agreement, the Unearned Premium Portfolio
Reinsurance Agreement and the Excess Loss Ratio Reinsurance Contract shall be
resolved in accordance with the terms of such agreements.
(f) To the extent Seller indemnifies Buyer, the Company or any Subsidiary
hereunder pursuant to the FPC Tax Indemnification or the Everest Re Receivable
Indemnification, the Seller shall be subrogated to the rights, if any, of the
indemnified party against any third parties with respect to that matter
indemnified, and the indemnified party shall execute and deliver such
assignments of those rights as Seller shall reasonably request from time to
time. Nothing herein shall limit the Seller's rights to subrogation for any
matter under applicable law (including, without limitation, the common law).
9.4. WARN ACT. Buyer and Seller agree that for purposes of the Worker
Adjustment and Retraining Notification Act (the "WARN Act"), the Closing Date
shall be the "effective date" as such term is used in the WARN Act. Each of
Buyer and Seller acknowledges and represents that it has no present intent to
engage in a "mass layoff" or "plant closing" as defined in the WARN Act with
respect to the Company or a Subsidiary. Buyer agrees that from and after the
Closing Date it shall be responsible for any notification required under the
WARN Act with respect to the Company or any Subsidiary and shall indemnify
Seller and hold the Seller harmless from and against all fines, other payments
and related expenses (including reasonable attorneys' fees and expenses) which
may become due under the WARN Act on or after the Closing Date with respect to
the Company or a Subsidiary or actions with respect thereto. Seller agrees that
prior to the Closing Date it shall be responsible for any notification required
under the WARN Act with respect to the Company or any Subsidiary (other than in
connection with the termination by Seller contemplated hereby of employees of
Seller working for the Company or
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any Subsidiary as of the Closing) and shall indemnify Buyer and hold the Buyer
harmless from and against all fines, other payments and related expenses
(including reasonable attorneys' fees and expenses) which may become due under
the WARN Act prior to the Closing Date with respect to the Company or a
Subsidiary or actions with respect thereto.
ARTICLE X
TERMINATION
10.1. TERMINATION OR ABANDONMENT. Notwithstanding anything contained in
this Agreement to the contrary, this Agreement may be terminated and abandoned
at any time prior to the Closing:
(a) by the mutual written consent of Seller and Buyer;
(b) by Seller or Buyer, if any court of competent jurisdiction or
governmental body, authority or agency having jurisdiction shall have issued an
order, decree or ruling or taken any other action restraining, enjoining or
otherwise prohibiting the transactions contemplated by this Agreement and such
order, decree, ruling or other action shall have become final and
non-appealable;
(c) by Buyer after March 31, 2000, if one or more of the conditions set
forth in Article VII to Buyer's obligation to consummate the transactions has
not been fulfilled by the date of termination; and
(d) by Seller after March 31, 2000, if one or more of the conditions set
forth in Article VIII to Seller's obligation to consummate the transactions has
not been fulfilled by the date of termination.
10.2. EFFECT OF TERMINATION. If any party terminates this Agreement
pursuant to Section 10.1 above, all obligations of the parties hereunder shall
terminate without any liability of any party to any other party (except for any
liability of any party then in breach); provided, however, that the provisions
of this Section 10.2 and the Confidentiality Agreement of the parties dated on
or about April, 1999 (the "Confidentiality Agreement") shall survive termination
of this Agreement.
ARTICLE XI
CERTAIN EMPLOYEE MATTERS
11.1. TRANSFER OF ERISA PLANS. Except as otherwise provided in this Article
XI, no assets, liabilities or sponsorship of any ERISA Plan will be transferred
pursuant to the Agreement from Seller to Buyer; except with respect to the
Buyer's liability under COBRA for "qualifying events" (as defined in Section
4980B(f)(3) of the Code) occurring after the Closing; notwithstanding the
foregoing, to the extent permitted by the Code and underlying regulations,
participants in the Seller's defined contribution plan may rollover to the
Buyer's defined contribution plan (to the extent permitted by such plan) any
portion of the taxable lump sum
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distribution received from the Seller's plan; provided, however, that nothing
contained herein shall obligate Buyer's plan to accept a rollover in a form
other than cash. Seller shall be responsible and liable for providing
continuation coverage under COBRA for "qualifying events" (as defined in Section
4980B(f)(3) of the Code) occurring prior to the Closing, and no such liability
shall be transferred to or assumed by Buyer or deemed to be the responsibility
of the Company.
11.2. TERMINATION OF EMPLOYEE BENEFIT PLANS. Prior to the Closing, except
as provided in Section 11.3(a) below, Seller shall terminate, or cause to have
terminated, all employee benefit plans or programs sponsored by the Company or
any Subsidiary and shall terminate the participation of the Company and all
Subsidiaries in all employee benefit plans or programs sponsored by the Seller
or any other person or entity (including, but not limited to, those plans and
programs listed in Schedule 3.15(a)). Seller shall take all actions necessary,
or cause such actions to be taken, to terminate and wind up such plans and
programs or the Company's or the Subsidiaries' participation in such plans and
programs (as the case may be). Buyer and, post-Closing, the Company and the
Subsidiaries shall have no obligation to take or participate in such actions or
have any liability for the termination and wind-up of such plans and programs.
11.3. EMPLOYEE BENEFIT PLANS MAINTAINED BY FIRST PROTECTION COMPANY. Buyer
acknowledges that the Company has entered into an agreement to acquire First
Protection Company and, pursuant to Section 12.2 of this Agreement, has agreed
to consummate the acquisition of the Company hereunder whether or not the
acquisition by the Company of First Protection Company is consummated prior to
the Closing Date. The parties hereby agree that the following actions will be
taken with respect to all benefit plans and programs maintained by First
Protection Company:
(a) If the Company's acquisition of First Protection Company is consummated
prior to the Closing Date, the Seller and the Company will determine whether to
continue or terminate all benefit plans or programs maintained by First
Protection Company and whether to provide to employees of First Protection
Company benefits otherwise provided by the Seller and/or the Company to
employees of the Company. If any First Protection Company benefit plans or
programs are continued after the acquisition of First Protection Company by the
Company, sponsorship and administration of such plans or programs will be
assumed by the Seller rather than the Company ("assumed First Protection
plans"). Except for the plans or programs assumed by the Buyer pursuant to the
next two sentences, if any First Protection Company benefit plans or programs
are terminated either prior to or following the acquisition of First Protection
Company by the Company, Seller will be solely responsible for the termination
and wind up of such plans and programs, and Buyer, the Company and the
Subsidiaries shall have no liability or responsibility for any such actions on
or after the Closing Date. Prior to the Closing Date, Buyer will determine
whether it will continue any of the assumed First Protection plans by a transfer
of sponsorship from Seller to Buyer as of the Closing Date. In the event Buyer
agrees to assume sponsorship of any or all of the assumed First Protection
plans, Seller will take all actions necessary to transfer sponsorship of such
plans to Buyer as of the Closing Date and Buyer will take all actions necessary
to accept sponsorship of such assumed First Protection plans. In the event Buyer
does not agree to assume sponsorship of one or more assumed First Protection
plans, Seller will terminate such plans or the participation of the Company and
Subsidiaries
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(including First Protection Company) prior to the Closing Date as provided in
Section 11.2 above, and Seller shall be solely responsible for all actions
necessary to wind up such plans. If Seller provides to employees of First
Protection Company benefit plans and programs made available to other employees
of the Company, the participation of First Protection Company employees in such
plans and programs shall terminate prior to the Closing and no transfer of
sponsorship, assets or liabilities with respect to those plans shall occur, as
provided in Sections 11.1 and 11.2 above.
(b) If the Company's acquisition of First Protection Company is not
consummated prior to the Closing Date, the Buyer will determine the actions to
be taken with respect to the benefit plans and programs sponsored by First
Protection Company and the benefits to be provided to employees of First
Protection Company upon consummation of the transaction.
11.4. HIRING OF COMPANY EMPLOYEES. Buyer shall offer employment, effective
as of the Closing Date, to each of the persons who are employees of the Company
and the Subsidiaries immediately prior to the Closing (collectively the "Company
Employees"). The parties acknowledge that the Seller may be the actual employer
of such persons prior to the Closing and, accordingly, references in this
Agreement to "employees of the Company and the Subsidiaries" (or phrases of
similar import) shall include employees of Seller who are based out of the
offices of the Company or any Subsidiary. A Company Employee who accepts
employment as of the Closing Date shall be compensated by Buyer at his or her
rate of compensation with the Seller, the Company or Subsidiary, as applicable,
in effect immediately prior to the Closing and shall be eligible to participate
in Buyer's vacation program, 401(k) and Stock Ownership Plan, and a health plan.
Solely for purposes of Buyer's vacation program and for purposes of determining
eligibility to participate in and vesting under the Buyer's 401(k) and Stock
Ownership Plan, Buyer shall recognize service of Company Employees with (or with
a parent entity on behalf of) the Company and Subsidiaries prior to the Closing
Date from each Company Employee's most recent date of hire. Buyer shall also
recognize service of Company Employees under the health plan referred to above
for the period of "creditable coverage" that the Company Employee has under
Seller's health plans. Notwithstanding the above, after the Closing Buyer shall
have the right to manage the Company in accordance with Buyer's business
judgment.
ARTICLE XII
OTHER AGREEMENTS
12.1. TAXES.
(a) The parties understand and agree that, up to and including the Closing
Date, the Company shall continue to make payments to the Seller as required by
the Tax Sharing Agreement, with respect to both (i) all amounts otherwise due
and payable (but which have not previously been paid) to Seller for all Tax
periods ending prior to the Closing Date and (ii) the estimated United States
federal income Tax of the Company and the Subsidiaries for the current Tax
period which will end on the Closing Date, computed in accordance with the
provisions of Section 2(c)(i) of the Tax Disaffiliation Agreement (each, a
"Relevant Tax Period").
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<PAGE>
(b) When the United States federal Tax return for a Relevant Tax Period,
with respect to the operations of the Company and the Subsidiaries, has been
completed by Seller and accepted by Buyer, the parties will compare the Tax
amounts shown to be due and payable thereunder (the "Taxes Due") with the
aggregate payments made by the Company to the Seller with respect thereto under
the Tax Sharing Agreement (the "Estimated Tax Payments"). If the Taxes Due
exceed the Estimated Tax Payments for any such Tax return, Buyer and the Company
will promptly pay to Seller the amount of such excess. If the Estimated Tax
Payments exceed the Taxes Due for any such Tax return, Seller will promptly pay
to Buyer and the Company the amount of such excess.
(c) The parties agree as follows:
(i) Buyer and Seller shall file an election under Section 338(h)(10)
of the Code (collectively the "Election") for the Company and each of the
Subsidiaries. Seller, Buyer, the Company and each of the Subsidiaries shall
report (except where not permitted under applicable state or local Tax
law), in connection with the determination of Taxes, the transactions
contemplated by this Agreement in a manner consistent with the Election.
Seller and Buyer shall comply with all of the requirements of Section
338(h)(10) of the Code and the Treasury Regulations thereunder. Seller and
Buyer shall take no action which is inconsistent with the Election or its
validity under the Code and the applicable Treasury Regulations.
Any income, deduction, gain or loss that result from the deemed sale
of the Company's and each of the Subsidiaries' assets and assumption of
their liabilities (including any deemed reinsurance transaction) shall be
included in the final pre-closing tax period tax return of the Company and
each of the Subsidiaries that ends on the Closing Date.
(ii) As soon as practicable, but no later than 180 days after the
Closing Date, Buyer shall deliver to Seller a written notice setting forth
Buyer's good faith calculation of (I) the Aggregate Deemed Sales Price (as
defined in the applicable Treasury Regulations) and (II) the allocation
thereof among the assets of the Company and each of the Subsidiaries,
including the incorporation of any associated deemed reinsurance
transaction as appropriate (the "Purchase Price Allocation"). Buyer, the
Company, each of the Subsidiaries and Seller shall file (except where not
permitted under applicable state or local Tax law) all Returns in a manner
consistent with the Purchase Price Allocation (as finally determined
hereunder).
(iii) Buyer shall be responsible for the preparation and timely filing
of all forms and documents required in connection with the Election. Buyer
shall provide Seller with copies of (I) completed IRS Form 8023-A and any
similar forms under applicable state, local or foreign law (the "Election
Forms"), (II) any necessary corrections, amendments or supplements to the
Election Forms, and (III) all attachments required to be filed therewith
pursuant to applicable Treasury Regulations. Seller shall review, execute,
and deliver to Buyer within thirty days of receipt such documents or forms
as are required to properly complete the Election. Seller, the Company,
each of the Subsidiaries and Buyer shall cooperate fully with each other
and make available to each
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<PAGE>
other such tax data and other information as may be reasonably required by
Seller or Buyer in order to timely file the Election and any other required
statements or schedules. Seller shall promptly execute and deliver to Buyer
any amendments made to the Election Forms subsequent to the filing of the
Election and any attachments which are required to be filed under
applicable law. Buyer and Seller shall cause the Company and each of the
Subsidiaries to attach the executed Form 8023-A to the Company's tax
returns per the instructions to Form 8023-A as required by Regulation
Section 1.338(h)(10)-(1)(d).
(iv) In the event that the Seller has any objection to the Aggregate
Deemed Sales Price, the Purchase Price Allocation, or the Election Forms
(or any corrections, amendments or supplements thereto) as prepared by
Buyer, Seller shall notify Buyer in writing within fifteen days of receipt
thereof of its objections, and Buyer and Seller shall negotiate in good
faith to resolve any such disputes. In the event that such dispute is not
resolved within thirty days of Seller's written objections, then such
dispute shall be submitted to a Tax Referee (as defined in the Tax
Disaffiliation Agreement) to settle such dispute. Seller and Buyer shall
cooperate with the Tax Referee and provide reasonable access to all
information relevant to the disputed matters. As soon as practicable and in
all events not later than ten days prior to the due date for filing the
Election, the Tax Referee shall issue a written report resolving such
dispute in a fair and equitable manner and in accordance with the
applicable tax law. Notwithstanding the existence of any dispute, Seller
shall be obligated to execute and return to Buyer the Election Forms in
order to permit Buyer to file the Election prior to the due date thereof.
Seller, Buyer, the Company and each of the Subsidiaries shall file the
Election and all Tax Returns (or in appropriate case shall file amendments
thereto) in a manner consistent with the determination of the Tax Referee.
(v) For any deemed reinsurance transaction relating to the Election,
Buyer shall capitalize specified policy acquisition expenses with respect
to such deemed reinsurance transaction without regard to the general
deductions limitation of Section 848(c)(1) of the Code.
12.2. ACQUISITION OF FIRST PROTECTION COMPANY. The Buyer acknowledges that
the Company has entered into an agreement to acquire FPC, consents to such
acquisition and agrees that, whether or not the acquisition by the Company of
FPC is consummated prior to the Closing Date, (i) Buyer shall be obligated,
pursuant to the terms of this Agreement, to consummate the transactions
contemplated hereby, and (ii) except as expressly provided in this Section 12.2,
in no event shall any references herein to Subsidiaries be deemed to include
First Protection Company and its subsidiaries. In the event the acquisition by
the Company of FPC is consummated on or prior to March 7, 2000, First Protection
and its subsidiaries shall each be deemed a Subsidiary, and the Business shall
be deemed to include the business of FPC, as of the Closing Date for purposes of
(and only for purposes of) Sections 3.10, 3.12, 3.17, 3.19, 3.20, 3.21, 3.22,
4.5 and 7.6 and the related indemnification in Section 9.2 for the foregoing
Sections. In addition, in the event the acquisition by the Company of FPC is
consummated on or prior to the Closing Date, First Protection and its
subsidiaries shall also each be deemed a Subsidiary, and the Business shall
also be deemed to include the business of FPC, from and after the consummation
of such acquisition for purposes of (and only for the additional purposes of)
Sections 1.2, 5.1, 5.2, 7.5, 11.4, 12.1, 12.3 and 12.4 and the related
indemnification in Section
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<PAGE>
9.2 for the foregoing Sections. The parties acknowledge and agree that Seller
shall be liable for any breaches by the Company of the Stock Purchase Agreement
for the acquisition of FPC prior to the Closing and Buyer shall be liable for
any breaches by the Company of said agreement after the Closing.
12.3. INTER-COMPANY PAYABLES. Except as provided in Section 2.2(b)(ii), all
inter-company payables between the Seller and the Company or its Subsidiaries,
including any amounts relating to accrued taxes payable, existing as of the
Closing Date shall be paid by the applicable party within 60 days after the
Closing Date.
12.4. TRANSFER OF CERTAIN RESERVES. Within 30 days after the Closing Date
(or, with respect to any portion in dispute, within 10 days after such dispute
is resolved by the Arbitrating Accountant), the Buyer shall cause the Company to
pay to Seller the aggregate amount of all reserves, existing on the consolidated
balance sheet (prepared in accordance with SAP) of the Company and its
Subsidiaries as of the Closing Date, reasonably allocable to the Assumed
Litigation (as defined in Section 9.2), which allocation shall be determined by
the parties in accordance with presently accepted actuarial principles and
procedures consistently applied (or, in the absence of such agreement within 30
days after the Closing Date, by the Arbitrating Accountant). Buyer and Seller
shall each pay fifty percent (50%) of the reasonable fees and expenses of the
Arbitrating Accountant relating to this Section 12.4.
12.5. TRANSITION SERVICES. To the extent requested by Buyer, Seller agrees
to enter into an agreement to provide, for a period of up to six months
immediately following the Closing (except with respect to continued use of the
Seller's AS 400, which will be for a period of up to one year immediately
following the Closing) and at market rates to be negotiated by Seller and Buyer,
administrative and other services of the kind currently performed by Seller for
the Company and the Subsidiaries.
ARTICLE XIII
GENERAL PROVISIONS
13.1. AMENDMENTS AND WAIVER. No amendment, waiver or consent with respect
to any provision of this Agreement shall in any event be effective, unless the
same shall be in writing and signed by the parties hereto, and then such
amendment, waiver or consent shall be effective only in the specific instance
and for the specific purpose for which given.
13.2. NOTICES. All notices, requests, consents, demands and other
communications hereunder must be in writing and shall be personally delivered or
sent by facsimile transmission with confirming copy sent by overnight carrier
(such as Express Mail, Federal Express, etc.) and a delivery receipt obtained
and addressed to the intended recipient as follows:
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(a) If to Seller:
Frontier Insurance Group, Inc.
195 Lake Louise Marie Road
Rock Hill, New York 12775
Telecopy No.: (914) 796-4084
Attn: Mark H. Mishler, Vice President - Finance
With copies to:
Epstein Becker & Green, P.C.
250 Park Avenue 12th Floor
New York, New York 10177
Telecopy No.: (212) 661-0989
Attn: Sidney Todres, Esq.
(b) If to Buyer:
Protective Life Insurance Company
2801 Highway 280 South
Birmingham, Alabama 35223
Telecopy No.: (205) 868-3086
Attn: Steven A. Schultz
With copies to:
Protective Life Insurance Company
2801 Highway 280 South
Birmingham, Alabama 35223
Telecopy No.: (205) 868-3597
Attn: Deborah J. Long, Esq.
Any party may change its address or add or change parties for receiving notice
by written notice given to the others named above.
13.3. EXPENSES. Except as otherwise expressly provided herein, each party
to this Agreement shall pay its own costs and expenses in connection with the
transactions contemplated hereby.
13.4. COUNTERPARTS. This Agreement may be executed in counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
13.5. SUCCESSORS AND ASSIGNS; BENEFICIARIES. This Agreement shall bind and
inure to the benefit of the parties named herein and their respective permitted
successors and assigns. No party may assign any rights, benefits, duties or
obligations under this Agreement without the prior written consent of the other
party. No third party shall be entitled to enforce any provision hereof and no
third party is intended to benefit from this Agreement.
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<PAGE>
13.6. ENTIRE AGREEMENT. This Agreement and the documents referred to herein
contain the entire agreement and understanding among the parties with respect to
the transactions contemplated hereby and supersede all other agreements,
understandings and undertakings among the parties on the subject matter hereof.
13.7. ANNOUNCEMENTS. No announcement of the specific terms of this
Agreement shall be made by any party without the written approval of the other
party (which approval shall not be unreasonably withheld), except for filings
required under the HSR Act and other regulatory filings and disclosures made
based upon advice of counsel. Each party shall promptly advise the other of any
such contemplated announcements.
13.8. PARTIAL INVALIDITY. In the event that any provision of this Agreement
shall be held invalid or unenforceable by any court of competent jurisdiction,
such holding shall not invalidate or render unenforceable any other provision
hereof.
13.9. GOVERNING LAW; ARBITRATION. This Agreement shall be interpreted in
accordance with the substantive laws of the State of New York applicable to
contracts made and to be performed wholly within said State. Except as provided
in Section 1.2(b), Section 12.1 and Section 12.4, in the event of any dispute
hereunder between the parties, such dispute shall be resolved only by
arbitration conducted in Rock Hill, New York by the American Arbitration
Association ("AAA") pursuant to its Commercial Arbitration Rules, as the same
may be amended from time to time. The parties hereto agree to participate
therein diligently and in good faith. The determination made in any such
arbitration shall be binding upon the parties and may entered for judgment in
any court of competent jurisdiction. Any arbitration shall be before an arbitral
tribunal composed of three arbitrators appointed by agreement of the parties
hereto (or as otherwise provided in this Section) in accordance with said Rules.
In the event the parties fail to agree upon a panel of arbitrators from the
first list of potential arbitrators proposed by the AAA, the AAA will submit a
second list in accordance with said Rules. In the event the parties shall have
failed to agree upon three arbitrators after said second list, the remaining
arbitrator(s) shall be appointed by the AAA in accordance with said Rules.
Except to the extent otherwise determined by the arbitrators, all fees and
expenses of the arbitrators and of the AAA itself shall be borne equally by the
parties hereto.
IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as of
the date first above written.
FRONTIER INSURANCE GROUP, INC. PROTECTIVE LIFE INSURANCE
COMPANY
By: /s/ Mark H. Mishler By: /s/ Steven A. Schultz
_________________________________ _____________________________________
Its: Vice President - Finance Its: Senior Vice President
_________________________________ _____________________________________
30
<PAGE>
ANNEX A
POST -CLOSING ADJUSTMENT
<TABLE>
<S> <C>
Aggregate Book Value per Year-End Balance Sheets (1) $______________
Aggregate Book Value per Pre-Closing Balance Sheets (2) $______________
Aggregate Book Value per Post-Closing Balance Sheets (3) $______________
Adjustment [(2) minus (1)] plus [(the day of the month
of the Closing divided by 30) multiplied by ((3) minus
(2))] $______________
</TABLE>
31
<PAGE>
FIRST AMENDMENT TO
STOCK PURCHASE AGREEMENT
This First Amendment to Stock Purchase Agreement (the "First
Amendment") is made and entered into this 20th day of January, 2000 by and
between Frontier Insurance Group, Inc., a Delaware corporation ("Seller"), and
Protective Life Insurance Company, a Tennessee corporation ("Buyer").
RECITALS
Buyer and Seller have heretofore entered into that certain Stock
Purchase Agreement dated October 20, 1999 (the "Agreement"). Buyer and Seller
desire to amend the Agreement as provided in this First Amendment.
AGREEMENT
NOW, THEREFORE, in consideration of the premises and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, Buyer and Seller hereby agree and the Agreement is hereby amended
as follows:
1. DEFINED TERMS. Capitalized terms not otherwise defined herein shall
have the meanings ascribed thereto in the Agreement.
2. TRANSFER OF DOMAIN NAMES. The parties acknowledge that certain
domain names that relate to or are associated with the Company or its
Subsidiaries are registered in the name of Seller or its agents. Seller agrees
to execute all documents reasonably necessary to transfer such domain names to
Buyer or the Company, as requested by Buyer.
3. AMENDMENTS TO SECTION 9.2 OF THE AGREEMENT.
(a) Section 9.2 of the Agreement is hereby amended to add at the end of
the second sentence thereof the following: "(vi) the failure of the Company to
recover from Accel International Corporation ("Accel"), on or prior to one year
from the Closing Date, the receivable in the amount of $997,150 due to be paid
by Accel to the Company or one of its Subsidiaries (the "Accel Receivable") in
connection with the settlement of the litigation described in item 32 of
Schedule 3.14 of the Agreement, which receivable shall be reflected in full on
the Relevant Balance Sheets; and (vii) any contractual obligation by the Company
to provide insurance to a third party in the form of a surety bond, that is not
reflected on the books and records of the Company or for which an entity other
than the Company or one of its Subsidiaries has received the entire premium."
The Threshold Amount and the Ceiling Amount shall not be applicable to the
indemnification obligations of Seller described in (vi) and (vii) above. Seller
shall be responsible for the collection of the Accel Receivable and shall pay
its costs in connection therewith and Buyer shall, and shall cause the Company
and its Subsidiaries, to cooperate with Seller in such collection efforts.
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<PAGE>
(b) Clause (i) of the second sentence of Section 9.2 of the
Agreement is hereby amended to read in its entirety as follows: "(i) any pending
or threatened litigation, arbitration or other recognized "alternative dispute
resolution" proceeding against the Company, any Subsidiary, or First Protection
Company or any of its subsidiaries (such corporation and its subsidiaries,
collectively, "FPC") as of the Closing Date, other than pending or threatened
litigations, arbitrations or other such proceedings relating to policies of
insurance with respect to the non-standard auto line of business or the personal
lines policies produced by the Masters Insurance Agency or the Award Insurance
Agency (the pending or threatened litigations, arbitrations and other
proceedings covered by this clause (i), collectively, the "Assumed
Litigation"),".
4. Y2K INFORMATION. Seller shall retain for a period of two years, or
shall provide Buyer with copies of, all computer software and hardware testing
information and regulatory filings related to the conduct of business by the
Company and its Subsidiaries on and after January 1, 2000.
5. POWERS OF ATTORNEY. All powers of attorney provided by the Company
or any of its Subsidiaries to Seller or any of its subsidiaries (other than
subsidiaries that are being transferred pursuant to the Agreement), other than
those currently attached to surety bonds in the normal course of business, shall
be returned to the Company and Seller acknowledges that no such powers of
attorney may hereafter be used by Seller or any of its subsidiaries.
6. CORPORATE SEALS. Except to the extent otherwise agreed to in writing
by the Company, all corporate seals of the Company or any of its Subsidiaries
that are in the possession of Seller or any of its subsidiaries shall be
returned promptly to the Company.
7. AGREEMENT TO REMAIN IN EFFECT. Except as specifically amended
hereby, the Agreement shall remain in full force and effect.
8. PROVISIONS OF THE AGREEMENT. Sections 13.4 (Counterparts), 13.5
(Successors and Assigns; Beneficiaries), 13.8 (Partial Invalidity) and 13.9
(Governing Law; Arbitration) of the Agreement shall apply to this First
Amendment.
2
<PAGE>
IN WITNESS WHEREOF, Buyer and Seller hereto have executed this First
Amendment as of the date first above written.
FRONTIER INSURANCE GROUP, INC.
By: /s/ Mark H. Mishler
---------------------------------------
Its Senior Vice President and Chief
Financial Officer
PROTECTIVE LIFE INSURANCE
COMPANY
By: /s/ Jerry DeFoor
---------------------------------------
Its Vice President and Controller and
Chief Accounting Officer
3
<PAGE>
FOR IMMEDIATE RELEASE
CONTACT: Mark Mishler, Chief Financial Officer, 800-836-2100, ext. 5490
Frontier Insurance Group, Inc. Announces:
Completion of the Sale of Lyndon Operations
Signature of Amendment and Waiver to Credit Agreement
Resignation of Board Member, Paul Guenther
COMPLETION OF THE SALE OF LYNDON OPERATIONS
Rock Hill, New York, January 20, 2000.......Frontier Insurance Group, Inc.
(Frontier)(NYSE-FTR) announced today that it has completed the sale of Lyndon
Insurance Group, Inc. to Protective Life Insurance Company for $163.5 million in
cash. On the completion of the sale of Lyndon, Harry Rhulen, Frontier's Chairman
and Chief Executive Officer, stated, "We are pleased to conclude this
transaction and will take this opportunity to infuse $80 million into Frontier
Insurance Company and pay $75 million on our outstanding line of credit. These
two positive actions benefit the overall capital position of Frontier and
support our strategy to focus on our core specialty insurance operations."
SIGNATURE OF AMENDMENT AND WAIVER TO CREDIT AGREEMENT
Frontier also announced that on January 14, 2000 it signed an amendment and
waiver to its Line of Credit Agreement with Frontier's Bank Group. The Amendment
waives any default with respect to all financial covenants through and including
December 31, 1999. The total commitment on the line of credit was reduced to
$67.5 million and provides Frontier the financial flexibility to raise
subordinated debt up to $82.5 million. The Amendment also modifies the leverage,
interest coverage and net written premium to surplus ratio covenants, which are
effective in the first quarter of 2000. Mark Mishler, Chief Financial Officer,
stated, "The signing of this document was an important step in resolving the
outstanding issues related to certain financial covenants. The financial
flexibility that we have achieved with this amendment will enhance our ability
to continue to evaluate capital raising alternatives."
RESIGNATION OF BOARD MEMBER, PAUL GUENTHER
Frontier also announced that Paul Guenther has resigned as a member of the Board
of Directors effective immediately. Harry Rhulen stated, "We want to take this
opportunity to thank Paul for the expertise and experience that he brought to
our Board." The nominating committee of the Board has started a search for Mr.
Guenther's replacement.
Frontier provides niche products in the property and casualty insurance markets
through affinity marketing with various agents, brokers and program
administrators. Frontier's core operations are surety, excess and surplus lines,
environmental, a wide variety of specialty programs, healthcare and alternative
risk.
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