<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarterly Period Ended March 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _________ to __________
Commission File Number 001-11462
DELPHI FINANCIAL GROUP, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
Delaware (302) 478-5142 13-3427277
(State or other jurisdiction of (Registrant's telephone number, (I.R.S. Employer Identification
incorporation or organization) including area code) Number)
</TABLE>
1105 North Market Street, Suite 1230, Wilmington, Delaware 19899
(Address of principal executive offices) (Zip Code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to filing requirements
for the past 90 days:
Yes X No ___
As of April 30, 1999, the Registrant had 14,677,298 shares of Class A Common
Stock and 5,207,203 shares of Class B Common Stock outstanding.
<PAGE> 2
DELPHI FINANCIAL GROUP, INC.
FORM 10-Q
INDEX
Page
PART I. FINANCIAL INFORMATION
Consolidated Statements of Income for the Three
Months Ended March 31, 1999 and 1998...........................3
Consolidated Balance Sheets at March 31, 1999 and
December 31, 1998..............................................4
Consolidated Statements of Shareholders' Equity for
the Three Months Ended March 31, 1999 and 1998.................5
Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 1999 and 1998.....................6
Notes to Consolidated Financial Statements.........................7
Management's Discussion and Analysis of Financial
Condition and Results of Operations............................9
PART II. OTHER INFORMATION.................................................12
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<PAGE> 3
PART I. FINANCIAL INFORMATION
DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------
1999 1998
--------- ---------
<S> <C> <C>
Revenue:
Premium and fee income ............................................... $ 150,443 $ 97,376
Net investment income ................................................ 43,801 45,708
Net realized investment (losses) gains ............................... (1,117) 28,122
--------- ---------
193,127 171,206
--------- ---------
Benefits and expenses:
Benefits, claims and interest credited to policyholders .............. 119,624 78,545
Commissions .......................................................... 9,285 7,493
Amortization of cost of business acquired ............................ 7,149 6,372
Other operating expenses ............................................. 20,339 15,029
--------- ---------
156,397 107,439
--------- ---------
Operating income ............................................... 36,730 63,767
Interest expense ..................................................... 4,483 3,912
--------- ---------
Income from continuing operations before income tax expense and
dividends on Capital Securities of Delphi Funding L.L.C ..... 32,247 59,855
Income tax expense ................................................... 10,098 20,100
--------- ---------
Income from continuing operations before dividends on
Capital Securities of Delphi Funding L.L.C .................. 22,149 39,755
Dividends on Capital Securities of Delphi Funding L.L.C .............. 1,513 1,513
--------- ---------
Income from continuing operations .............................. 20,636 38,242
Loss on disposal of discontinued operations, net of income tax benefit (13,847) --
--------- ---------
Net income ..................................................... $ 6,789 $ 38,242
========= =========
Basic results per share of common stock:
Income from continuing operations excluding net realized
investment (losses) gains ...................................... $ 1.04 $ 1.00
Income from continuing operations .................................... 1.01 1.91
Net income ........................................................... 0.33 1.91
Diluted results per share of common stock:
Income from continuing operations excluding net realized
investment (losses) gains ...................................... $ 1.01 $ 0.96
Income from continuing operations .................................... 0.97 1.84
Net income ........................................................... 0.32 1.84
</TABLE>
See notes to consolidated financial statements.
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<PAGE> 4
DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
----------- -----------
<S> <C> <C>
Assets:
Investments:
Fixed maturity securities, available for sale .......................... $ 2,022,174 $ 1,889,604
Cash and cash equivalents .............................................. 196,439 298,843
Other investments ...................................................... 301,235 171,269
----------- -----------
2,519,848 2,359,716
Cost of business acquired ................................................. 112,885 104,460
Reinsurance receivables ................................................... 371,033 356,030
Other assets .............................................................. 269,140 404,674
Assets held in separate account ........................................... 65,597 62,177
----------- -----------
Total assets ........................................................... $ 3,338,503 $ 3,287,057
=========== ===========
Liabilities and Shareholders' Equity:
Future policy benefits .................................................... $ 501,179 $ 482,481
Unpaid claims and claim expenses .......................................... 609,220 563,907
Policyholder account balances ............................................. 667,370 664,576
Corporate debt ............................................................ 226,098 265,165
Advances from Federal Home Loan Bank ...................................... 75,495 75,495
Other liabilities and policyholder funds .................................. 576,855 514,857
Liabilities related to separate account ................................... 57,255 54,136
----------- -----------
Total liabilities ...................................................... 2,713,472 2,620,617
----------- -----------
Company-obligated mandatorily redeemable Capital Securities of Delphi
Funding L.L.C. holding solely junior subordinated deferrable interest
debentures of the Company .............................................. 100,000 100,000
----------- -----------
Shareholders' equity:
Preferred Stock, $.01 par; 10,000,000 shares authorized ................ -- --
Class A Common Stock, $.01 par; 40,000,000 shares authorized;
14,987,985 and 14,955,755 shares issued and outstanding, respectively 150 150
Class B Common Stock, $.01 par; 20,000,000 shares authorized;
5,433,203 shares issued and outstanding, respectively ............... 54 54
Additional paid-in capital ............................................. 333,709 329,023
Net unrealized depreciation on investments ............................. (45,410) (18,074)
Retained earnings ...................................................... 262,076 255,287
Treasury stock, at cost; 633,778 shares of Class A Common Stock ........ (25,548) --
----------- -----------
Total shareholders' equity .......................................... 525,031 566,440
----------- -----------
Total liabilities and shareholders' equity ...................... $ 3,338,503 $ 3,287,057
=========== ===========
</TABLE>
See notes to consolidated financial statements.
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<PAGE> 5
DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Unrealized
Appreciation
Class A Class B Additional (Depreciation)
Common Common Paid-in on Retained Treasury
Stock Stock Capital Investments Earnings Stock Total
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1998 ........... $ 129 $ 62 $ 262,963 $ 40,545 $ 205,787 $ -- $ 509,486
---------
Net income ......................... -- -- -- -- 38,242 -- 38,242
Decrease in net unrealized
appreciation on investments ..... -- -- -- (1,178) -- -- (1,178)
---------
Comprehensive income ............... 37,064
Issuance of stock, exercise of stock
options and share conversions ... 2 (3) 3,648 -- -- -- 3,647
--------- --------- --------- --------- --------- --------- ---------
Balance, March 31, 1998 ............ $ 131 $ 59 $ 266,611 $ 39,367 $ 244,029 $ -- $ 550,197
========= ========= ========= ========= ========= ========= =========
Balance, January 1, 1999 ........... $ 150 $ 54 $ 329,023 $ (18,074) $ 255,287 $ -- $ 566,440
---------
Net income ......................... -- -- -- -- 6,789 -- 6,789
Increase in net unrealized
depreciation on investments ..... -- -- -- (27,336) -- -- (27,336)
---------
Comprehensive loss ................. (20,547)
Issuance of stock and exercise of
stock options ................... -- -- 4,686 -- -- -- 4,686
Acquisition of Treasury Stock ...... -- -- -- -- -- (25,548) (25,548)
--------- --------- --------- --------- --------- --------- ---------
Balance, March 31, 1999 ............ $ 150 $ 54 $ 333,709 $ (45,410) $ 262,076 $ (25,548) $ 525,031
========= ========= ========= ========= ========= ========= =========
</TABLE>
See notes to consolidated financial statements.
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<PAGE> 6
DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------------
1999 1998
----------- -----------
<S> <C> <C>
Operating activities:
Net income ....................................................................... $ 6,789 $ 38,242
Adjustments to reconcile net income to net cash provided (used)
by operating activities:
Change in policy liabilities, reinsurance receivables and policyholder accounts 55,502 24,225
Policy liabilities ceded to Oracle Reinsurance Ltd. ........................... -- (100,000)
Amortization, principally the cost of business acquired and investments ....... (1,889) (4,598)
Deferred costs of business acquired ........................................... (11,144) (8,966)
Net realized losses (gains) on investments .................................... 1,117 (28,122)
Net change in trading account securities ...................................... (6,226) 16,409
Other ......................................................................... 33,724 (3,873)
----------- -----------
Net cash provided (used) by operating activities ............................ 77,873 (66,683)
----------- -----------
Investing activities:
Securities available for sale:
Purchases of investments and loans made ....................................... (789,504) (1,185,321)
Sales of investments and receipts from repayment of loans ..................... 718,722 1,211,550
Maturities of investments ..................................................... 20,625 17,803
Change in deposit in separate account ............................................ (301) (524)
----------- -----------
Net cash (used) provided by investing activities .............................. (50,458) 43,508
----------- -----------
Financing activities:
Deposits to policyholder accounts ................................................ 15,079 9,348
Withdrawals from policyholder accounts ........................................... (16,791) (22,754)
Proceeds from issuance of common stock and exercise of stock options ............. 685 327
Borrowings under the Credit Agreement ............................................ 60,000 34,000
Principal payments under the Credit Agreement .................................... (99,000) (15,000)
Change in liability for securities loaned or sold under agreements to repurchase . (64,244) 35,282
Acquisition of Treasury Stock .................................................... (25,548) --
----------- -----------
Net cash (used) provided by financing activities .............................. (129,819) 41,203
----------- -----------
(Decrease) increase in cash and cash equivalents .................................... (102,404) 18,028
Cash and cash equivalents at beginning of period .................................... 298,843 50,580
----------- -----------
Cash and cash equivalents at end of period .................................... $ 196,439 $ 68,608
=========== ===========
</TABLE>
See notes to consolidated financial statements.
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<PAGE> 7
DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A - SIGNIFICANT ACCOUNTING POLICIES
The financial statements included herein were prepared in conformity with
generally accepted accounting principles for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
Such principles were applied on a basis consistent with those reflected in the
Company's report on Form 10-K for the year ended December 31, 1998. The
information furnished includes all adjustments and accruals of a normal
recurring nature which are, in the opinion of management, necessary for a fair
presentation of results for the interim periods. Operating results for the three
months ended March 31, 1999 are not necessarily indicative of the results that
may be expected for the year ended December 31, 1999. Certain reclassifications
have been made in the 1998 financial statements to conform to the 1999
presentation. For further information refer to the consolidated financial
statements and footnotes thereto included in the Company's report on Form 10-K
for the year ended December 31, 1998. Capitalized terms used herein without
definition have the meanings ascribed to them in the Company's report on Form
10-K for the year ended December 31, 1998.
NOTE B - DISCONTINUED OPERATIONS
Effective April 30, 1999, the Company completed the disposition of its Unicover
Managers, Inc. subsidiary and a related company (collectively, "Unicover"),
which were acquired in the fourth quarter of 1998, to certain of the former
owners of Unicover. The Company expects that, after giving effect to the
anticipated tax benefits associated with the disposition, the cumulative effect
on the Company, from a cash flow standpoint, resulting from its investment in
and disposition of Unicover will be neutral. The Company recognized a loss of
$13.8 million on the disposition of the discontinued operations of Unicover, net
of a related tax benefit of $18.0 million, in the first quarter of 1999. Revenue
associated with Unicover for the first quarter of 1999 totaled $18.3 million,
and no operating income was associated with Unicover for such quarter. The net
liabilities associated with Unicover's business of $14.3 million at March 31,
1999 are included in other liabilities in the consolidated balance sheet and
consist primarily of cash, trade receivables and payables and deferred revenue.
NOTE C - INVESTMENTS
At March 31, 1999, the Company had fixed maturity securities available for sale
with a carrying value and a fair value of $2,022.2 million and an amortized cost
of $2,090.8 million. At December 31, 1998, the Company had fixed maturity
securities available for sale with a carrying value and a fair value of $1,889.6
million and an amortized cost of $1,917.0 million.
NOTE D - SEGMENT INFORMATION
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------
1999 1998
--------- ---------
<S> <C> <C>
Revenues excluding net realized investment (losses) gains:
Group employee benefit products ....................... $ 169,865 $ 118,705
Asset accumulation products ........................... 19,355 22,700
Other (1) ............................................. 5,024 1,679
--------- ---------
$ 194,244 $ 143,084
========= =========
Operating income (2):
Group employee benefit products ....................... $ 31,863 $ 25,625
Asset accumulation products ........................... 7,740 9,634
Other (1) ............................................. (1,756) 386
--------- ---------
$ 37,847 $ 35,645
========= =========
</TABLE>
(1) Consists of operations that do not meet the quantitative thresholds for
determining reportable segments and includes integrated disability and
absence management services and certain corporate activities.
(2) Income from continuing operations excluding net realized investment gains
and losses and before interest and income tax expense and dividends on
Capital Securities of Delphi Funding L.L.C.
-7-
<PAGE> 8
DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
NOTE E - COMPUTATION OF RESULTS PER SHARE
Prior period results per share and applicable share amounts have been restated
to reflect the stock dividend distributed to stockholders on December 15, 1998.
The following table sets forth the numerators and denominators used to calculate
basic and diluted results per share (dollars in thousands, except per share
data):
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------------
1999 1998
---------- ----------
<S> <C> <C>
Numerator:
Income from continuing operations excluding net
realized investment (losses) gains ................................. $ 21,362 $ 19,963
Realized investment (losses) gains, net of income taxes .............. (726) 18,279
---------- ----------
Income from continuing operations ................................ 20,636 38,242
Loss on disposal of discontinued operations, net of income tax benefit (13,847) --
---------- ----------
Net income ....................................................... $ 6,789 $ 38,242
========== ==========
Denominator:
Weighted average common shares outstanding ........................... 20,448 20,006
Effect of dilutive securities ...................................... 725 802
---------- ----------
Weighted average common shares outstanding, assuming dilution ........ 21,173 20,808
========== ==========
Basic results per share of common stock:
Income from continuing operations excluding net
realized investment (losses) gains ................................ $ 1.04 $ 1.00
Realized investment (losses) gains, net of taxes ........................ (0.03) 0.91
---------- ----------
Income from continuing operations .............................. 1.01 1.91
Loss on disposal of discontinued operations, net of income tax benefit .. (0.68) --
---------- ----------
Net income ..................................................... $ 0.33 $ 1.91
========== ==========
Diluted results per share of common stock:
Income from continuing operations excluding net
realized investment (losses) gains ................................ $ 1.01 $ 0.96
Realized investment (losses) gains, net of taxes ........................ (0.04) 0.88
---------- ----------
Income from continuing operations .............................. 0.97 1.84
Loss on disposal of discontinued operations, net of income tax benefit .. (0.65) --
---------- ----------
Net income ..................................................... $ 0.32 $ 1.84
========== ==========
</TABLE>
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<PAGE> 9
DELPHI FINANCIAL GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The following is an analysis of the results of operations and financial
condition of Delphi Financial Group, Inc. (the "Company," which term includes
the Company and its consolidated subsidiaries unless the context indicates
otherwise). This analysis should be read in conjunction with the Consolidated
Financial Statements and related notes included in this document, as well as the
Company's report on Form 10-K for the year ended December 31, 1998. Capitalized
terms used herein without definition have the meanings ascribed to them in the
Company's report on Form 10-K for the year ended December 31, 1998.
RESULTS OF OPERATIONS
Premium and Fee Income. Premium and fee income for the first quarter of 1999 was
$150.4 million as compared to $97.4 million for the first quarter of 1998, an
increase of 54%. This increase was primarily attributable to the Company's group
employee benefits segment and reflects strong growth in most products, high
levels of new business production and normal growth in employment and salary
levels for the Company's existing customer base. Deposits from the Company's
SPDA products, including the Company's MVA annuity product, were $14.4 million
during the first quarter of 1999 as compared to $8.2 million during the first
quarter of 1998. Deposits for these products, which are long-term in nature, are
not recorded as premiums; instead, the deposits are recorded as a liability. The
increase in annuity deposits in the 1999 period is principally the result of an
increase in the number of networks of independent agents distributing the
Company's annuity products as well as enhancements made to the Company's
products to improve their competitive position in the marketplace.
Net Investment Income. Net investment income for the first quarter of 1999 was
$43.8 million as compared to $45.7 million for the first quarter of 1998. A
decrease in the weighted average annualized yield in the 1999 period was
partially offset by an increase in average invested assets. The investment
results for the first quarter of 1998 reflect particularly strong performance in
the Company's fixed maturity portfolio. The weighted average annualized yield on
invested assets, excluding realized and unrealized investment gains and losses,
was 8.1% on average invested assets of $2,164.2 million for the first quarter
1999 and 8.6% on average invested assets of $2,139.4 million for the comparable
period of 1998.
Benefits and Expenses. Policyholder benefits and expenses were $156.4 million
for the first quarter of 1999 as compared to $107.4 million for the first
quarter of 1998, an increase of 46%. This increase was principally due to growth
in the Company's group employee benefits segment. The combined ratio (loss ratio
plus expense ratio) for group employee benefit products decreased from 96.4% in
the first quarter of 1998 to 94.2% in the first quarter of 1999. This decrease
was primarily attributable to changes in the Company's product mix.
Operating Income. Income from continuing operations excluding realized
investment gains and losses and before interest and income tax expense and
dividends was $37.8 million in the first quarter of 1999 as compared to $35.6
million in the first quarter of 1998, an increase of 6%. This increase primarily
reflects the growth in the Company's group employee benefits segment, partially
offset by a decrease in the yield on invested assets in the asset accumulation
products segment.
Net Realized Investment (Losses) Gains. Net realized investment losses were $1.1
million in the first quarter of 1999 as compared to net realized investment
gains of $28.1 million in the first quarter of 1998. The Company's investment
strategy results in periodic sales of securities and the recognition of realized
investment gains and losses.
Discontinued Operations. Effective April 30, 1999, the Company
completed the disposition of its Unicover Managers, Inc. subsidiary and a
related company (collectively, "Unicover"), which were acquired in the fourth
quarter of 1998, to certain of the former owners of Unicover. The Company
expects that, after giving effect to the anticipated tax benefits associated
with the disposition, the cumulative effect on the Company, from a cash flow
standpoint, resulting from its investment in and disposition of Unicover will
be neutral. The terms relating to such disposition are more specifically
described in the agreement relating thereto, the full text of which is attached
as an exhibit hereto and which is incorporated herein by reference. The Company
recognized a loss of $13.8 million on the disposition of the discontinued
operations of Unicover, net of a related tax benefit of $18.0 million, in the
first quarter of 1999. See Note B to the Consolidated Financial Statements.
-9-
<PAGE> 10
LIQUIDITY AND CAPITAL RESOURCES
The Company had approximately $229.7 million of financial resources available at
the holding company level at March 31, 1999, which was primarily comprised of
investments in the common stock of its investment subsidiaries and fixed
maturity securities. The assets of these investment subsidiaries are primarily
invested in fixed maturity securities, balances with independent investment
managers and marketable securities. Substantially all of the amounts invested
with independent investment managers are withdrawable at least annually, subject
to applicable notice requirements. A shelf registration is also in effect under
which up to $49.2 million in securities may be issued by the Company.
Other sources of liquidity at the holding company level include interest and
principal payments made on the Surplus Debenture issued by RSLIC-Texas to the
Company, dividends paid from subsidiaries, primarily generated from operating
cash flows and investments, and borrowings available under the Credit Agreement.
The Company's insurance subsidiaries are permitted, without prior regulatory or
other approval, to make dividend payments of $40.4 million during 1999, of which
$2.5 million has been paid during the first quarter of 1999. In general,
dividends from the Company's non-insurance subsidiaries are not subject to
regulatory or other restrictions. As of March 31, 1999, the Company had $110.0
million of borrowings available to it under the Credit Agreement.
The Company's current liquidity needs, in addition to funding operating
expenses, include distributions on the Capital Securities and principal and
interest payments on outstanding borrowings under the Credit Agreement, the
Senior Notes, the SIG Senior Notes and the Subordinated Notes. The junior
subordinated debentures underlying the Capital Securities are not redeemable
prior to March 25, 2007, and, at the Company's current level of borrowings, no
principal repayments are required under the Credit Agreement until October 1,
2001. The Senior Notes mature in their entirety on October 1, 2003 and are not
subject to any sinking fund requirements nor are they redeemable prior to
maturity. The SIG Senior Notes amortize in $9.0 million annual installments
beginning in May 1999, and the Subordinated Notes mature in their entirety in
June 2003. Sources of liquidity available to the Company and its subsidiaries
are expected to exceed their cash requirements on both a short-term and
long-term basis.
Effective April 30, 1999, the Company completed the disposition of Unicover,
which was acquired in the fourth quarter of 1998, to certain of the former
owners of Unicover. The Company expects that, after giving effect to the
anticipated tax benefits associated with the disposition, the cumulative effect
on the Company, from a cash flow standpoint, resulting from its investment in
and disposition of Unicover will be neutral. The discontinuance and disposition
of Unicover is not expected to have a material effect on the Company's future
results, financial condition or liquidity. See Note B to the Consolidated
Financial Statements.
IMPACT OF YEAR 2000
The Year 2000 issue relates to whether computer systems will properly recognize
date-sensitive information when the year changes to 2000. This inability to
recognize the Year 2000 may cause systems to process critical financial and
operational information incorrectly. This, in turn, could cause disruptions of
normal business operations, including the inability to process claims, bill and
collect premium, perform policy administration and manage investment activities.
The Company has a corporate-wide program underway to address the Year 2000
issue, as it relates to its own computer systems, as well as to instances in
which computer systems of third parties may have a significant impact on the
Company's operations, such as those of suppliers, business partners, customers,
facilities and telecommunications.
The Company has completed an assessment of its critical computer related systems
and is in the process of making the necessary modifications or replacements so
that its computer systems will function properly with respect to dates in the
Year 2000 and thereafter. Approximately 87% of the Company's critical internal
computer systems are currently Year 2000 compliant, and the necessary
modifications to the remaining 13% are expected to be completed and tested
during the third quarter of 1999. The Company is primarily utilizing external
resources to remediate and test its software for Year 2000 compliance.
The Company estimates that total internal (opportunity costs) and external
(out-of-pocket) pre-tax costs for addressing the Year 2000 issue will be
approximately $7.6 million, of which $5.5 million will be expensed as incurred
and $2.1 million will be capitalized and amortized over the life of the
replacement computer systems. Since 1997, the Company has incurred $6.5 million
of costs to address the Year 2000 issue of which $4.5 million was expensed and
$2.0 million was capitalized.
-10-
<PAGE> 11
The Company has also requested assurances of Year 2000 compliance from third
parties, the failure of whose computer systems to be Year 2000 compliant may
have a significant impact on the Company's operations, in an effort to identify
and address potential problems arising from such non-compliance. There can be no
assurance, however, that the Company's operations will not be adversely impacted
by such non-compliance on the part of one or more such third parties.
Failure by the Company or significant third parties to successfully address Year
2000 issues could have a material adverse impact on the operations and financial
condition of the Company. During 1999, the Company expects to finalize and have
ready for implementation appropriate contingency plans in the event any of the
computer systems of the Company or significant third parties are not Year 2000
compliant. If the Company's internal computer systems failed due to the Year
2000 issue, the Company would be forced to return to a paper-based system on an
interim basis until the problem could be resolved. With regard to third parties,
the Company would attempt to implement alternative arrangements where possible
if Year 2000 problems are encountered as to these parties. The Company does not
believe that these scenarios are reasonably likely due to planned testing and
problem resolution of all mission critical systems prior to any anticipated
material impact of the Year 2000 issue; however, no assurance can be given in
this regard.
MARKET RISK
There have been no material changes in the Company's exposure to market risk or
its management of such risk since December 31, 1998.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
In connection with, and because it desires to take advantage of, the "safe
harbor" provisions of the Private Securities Litigation Reform Act of 1995, the
Company cautions readers regarding certain forward-looking statements in the
above "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and elsewhere in this Form 10-Q and in any other statement made
by, or on behalf of, the Company, whether or not in future filings with the
Securities and Exchange Commission. Forward-looking statements are statements
not based on historical information and which relate to future operations,
strategies, financial results or other developments. Some forward-looking
statements may be identified by the use of terms such as "expects," "believes,"
"anticipates," "intends" or "judgment." Forward-looking statements are
necessarily based upon estimates and assumptions that are inherently subject to
significant business, economic and competitive uncertainties and contingencies,
many of which are beyond the Company's control and many of which, with respect
to future business decisions, are subject to change. Examples of such
uncertainties and contingencies include, among other important factors, those
affecting the insurance industry generally, such as the economic and interest
rate environment, legislative and regulatory developments and market pricing and
competitive trends, and those relating specifically to the Company and its
businesses, such as the level of its insurance premiums and fee income, the
claims experience of its insurance products, the performance of its investment
portfolio, the successful completion by the Company of its year 2000 compliance
program, acquisitions of companies or blocks of business and the ratings by
major rating organizations of its insurance subsidiaries. These uncertainties
and contingencies can affect actual results and could cause actual results to
differ materially from those expressed in any forward-looking statements made
by, or on behalf of, the Company. The Company disclaims any obligation to update
forward-looking information.
-11-
<PAGE> 12
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
2.1 - Merger, Exchange and Release Agreement, dated April 30,
1999, by and among Delphi Financial Group, Inc., Unicover
Managers, Inc., Unicover Intermediaries, LLC, Unicover
Management Partners, LLC and the Buyers named therein
11 - Computation of Results per Share of Common Stock
(incorporated by reference to Note E to the Consolidated
Financial Statements included elsewhere herein)
27 - Financial Data Schedule - March 31, 1999
27.1 - Restated Financial Data Schedule - December 31, 1998
(b) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DELPHI FINANCIAL GROUP, INC. (Registrant)
/s/ ROBERT ROSENKRANZ
--------------------------------------------
Robert Rosenkranz
Chairman of the Board, President and
Chief Executive Officer
(Principal Executive Officer)
/s/ LAWRENCE E. DAURELLE
--------------------------------------------
Lawrence E. Daurelle
Vice President and Treasurer
(Principal Accounting and Financial Officer)
Date: May 14, 1999
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<PAGE> 1
EXHIBIT 2.1
MERGER, EXCHANGE AND RELEASE AGREEMENT
BY AND AMONG
DELPHI FINANCIAL GROUP, INC.,
UNICOVER MANAGERS, INC.,
UNICOVER INTERMEDIARIES, LLC,
UNICOVER MANAGEMENT PARTNERS, LLC
AND
THE BUYERS NAMED HEREIN
DATED AS OF
APRIL 30, 1999
<PAGE> 2
TABLE OF CONTENTS
Page
ARTICLE I
MERGER, EXCHANGE AND RELEASE
1.1 Merger and Exchange....................................................2
1.2 Extinguishment.........................................................3
1.3 Mutual Release.........................................................3
1.4 Merger Provisions......................................................4
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF DELPHI
2.1 Title to Ownership Interests...........................................6
2.2 Authority Relative to this Agreement...................................6
2.3 Organizational Documents...............................................7
2.4 Cash Out-Flows.........................................................7
2.5 Dividends; Distributions...............................................7
2.6 Absence of Changes or Events...........................................8
2.7 Labor Matters..........................................................8
2.8 Tax Sharing............................................................8
2.9 ERISA..................................................................8
2.10 Insurance..............................................................9
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANIES
3.1 Authority Relative to this Agreement...................................9
3.2 Dividends; Distributions...............................................9
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF PARTNERS
4.1 Authority Relative to this Agreement..................................10
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<PAGE> 3
Page
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF THE BUYERS
5.1 Authority Relative to this Agreement..................................11
5.2 Securities Matters....................................................11
5.3 Acknowledgment of General Disclaimer..................................12
5.4 Tax Matters...........................................................12
5.5 Newco.................................................................12
ARTICLE VI
COVENANTS AND AGREEMENTS
6.1 Publicity.............................................................13
6.2 Nondisclosure of Confidential Information.............................13
6.3 Books and Records.....................................................15
6.4 Resignation of Directors..............................................15
6.5 Fees and Expenses.....................................................15
6.6 Tax Matters...........................................................16
6.7 Employees and Employee Benefits.......................................19
6.8 No Dividends or Distributions.........................................21
6.9 No Asset Distributions................................................21
ARTICLE VII
CONDITIONS TO CLOSING
7.1 Closing...............................................................21
7.2 Conditions to Each Party's Obligations................................21
7.3 Conditions to Obligations of the Buyers...............................22
7.4 Conditions to Obligations of Delphi...................................23
ARTICLE VIII
MISCELLANEOUS
8.1 Survival of Covenants, Agreements, Representations and
Warranties..........................................................24
8.2 Notices...............................................................24
8.3 Counterparts..........................................................27
8.4 Interpretation........................................................27
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<PAGE> 4
8.5 Amendment.............................................................27
8.6 Assignment............................................................27
8.7 No Third Party Beneficiaries..........................................27
8.8 Governing Law.........................................................27
8.9 Entire Agreement......................................................27
8.10 Validity..............................................................27
8.11 Severability..........................................................28
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<PAGE> 5
SCHEDULES
SCHEDULE 2.4 - Cash Out-flows
SCHEDULE 2.5 - Dividends, Etc.
EXHIBITS
EXHIBIT A - Buyer's Percentage Table
EXHIBIT B - Purchase Price Allocation
EXHIBIT C - Form of Opinion of Cahill Gordon & Reindel
EXHIBIT D - Form of Opinion of General Counsel of Delphi Financial
Group, Inc.
EXHIBIT E - Form of Opinion of Robinson Silverman Pearce Aronsohn &
Berman LLP
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<PAGE> 6
MERGER, EXCHANGE AND RELEASE AGREEMENT
MERGER, EXCHANGE AND RELEASE AGREEMENT, dated as of April 30, 1999
(this "Agreement"), by and among Delphi Financial Group, Inc., a Delaware
corporation ("Delphi"), Unicover Managers, Inc., a New Jersey corporation
("Unicover"), Unicover Intermediaries, LLC, a New Jersey limited liability
company ("Intermediaries") (Unicover and Intermediaries, collectively, the
"Companies" and each a "Company"), Unicover Management Partners, LLC, a New
Jersey limited liability company ("Partners"), and Kenneth C. Griebell, John E.
Pallat, Joseph P. Wojtowicz and Robert J. Wojtowicz (each, both in their
individual capacity and, where applicable, as an employee of the Companies, a
"Buyer", and, collectively, the "Buyers").
W I T N E S S E T H :
WHEREAS, the parties entered into a certain Stock Purchase
Agreement, dated as of October 1, 1998, by and among Delphi, the Companies and
the Shareholders named therein (the "1998 Stock Purchase Agreement") whereby (i)
Delphi acquired all of the issued and outstanding shares of capital stock and
membership interests of the Companies (the "Ownership Interests") and the Buyers
received rights to contingent payments as set forth in Section 1.2(b) of the
1998 Stock Purchase Agreement (the "Additional Consideration") and (ii) in
connection therewith, Partners issued to Delphi a promissory note in the
principal amount of $3,052,729 (plus interest pursuant to the terms thereof)
(the "Note") and Delphi agreed to issue to certain members of Partners, upon the
written request of Partners, non-qualified stock options to purchase an
aggregate of 100,000 shares of Delphi Common Stock pursuant to the terms of the
side letter dated as of October 1, 1998, by and between Delphi and Partners (the
"Right to Options");
WHEREAS, the parties desire (a) to merge Unicover with and into a
newly-formed entity wholly-owned by the Buyers ("Newco") and (b) to have Delphi
transfer the ownership interests of Intermediaries (the "Intermediaries
Ownership Inter-
<PAGE> 7
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ests") and cash, all in exchange for (x) the rights to receive Additional
Consideration, (y) prepayment of the Note and (z) the Right to Options;
WHEREAS, the parties desire to release each other and certain other
parties from all claims, causes of action and obligations (including
representations, warranties and covenants) arising out of or resulting from the
1998 Stock Purchase Agreement; the Option Agreements (as defined in the 1998
Stock Purchase Agreement); the side letters dated as of October 1, 1998, by and
between Delphi and each of (i) John E. Pallat, (ii) John E. Pallat, Thomas J.
Dunn ("Dunn") and Kenneth C. Griebell; and (iii) Partners (collectively, the
"Side Letters"); the Employment Agreements, dated as of October 1, 1998, by and
among Delphi, the Companies and each of (i) John E. Pallat, (ii) Kenneth C.
Griebell and (iii) Dunn (collectively, the "Employment Agreements"); and the
Non-Competition Agreements, dated as of October 1, 1998, by and among Delphi,
the Companies and each of (i) John E. Pallat, (ii) Robert J. Wojtowicz, (iii)
Joseph P. Wojtowicz, (iv) Kenneth C. Griebell, (v) Dunn, and (vi) Joseph F.
Munson ("Munson") (the "Non-Competition Agreements," and collectively with the
1998 Stock Purchase Agreement, the Option Agreements, and the Side Letters and
the Employment Agreements, the "1998 Transaction Documents");
WHEREAS, capitalized terms used and not defined in this Agreement
shall have the meanings set forth in the 1998 Stock Purchase Agreement;
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants and agreements herein contained, the parties hereto, intending to be
legally bound, agree as follows:
ARTICLE I
MERGER, EXCHANGE AND RELEASE
1.1 Merger and Exchange. On the basis of the representations and
warranties set forth in Articles II, III, IV and V of this Agreement and subject
to the terms and conditions of this Agreement, the parties agree that (a) at the
Effective Time (as defined in Section 1.4(d)), Unicover shall be merged with and
into Newco as provided herein (the "Merger"), and (b) at the Closing (as defined
in Section 7.1), Delphi will
<PAGE> 8
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(i) transfer to the Buyers the Intermediaries Ownership Interests, (ii) assign
to the Buyers Delphi's rights under the Option Agreements (extended as provided
in Section 7.4(f)), (iii) pay to each Buyer, severally according to such Buyer's
Percentage, an amount in cash equal to an aggregate of $17,588,552 and (iv)
waive its right to one-half of the accrued interest on the Note
($44,646.16)(collectively, the "Transfer"). In exchange for the foregoing, at
the Closing, (i) Partners will prepay the Note (in an amount equal to $3,052,729
of principal and $44,646.16 of accrued interest (representing one-half of the
accrued interest thereon), for a total of $3,097,375.16) and shall have no
further obligation thereunder, and (ii) the Buyers and Partners will relinquish
their respective rights to receive Additional Consideration and the Right to
Options (the "Exchange" and, together with the Merger and the Transfer, the
"Transaction"). "Buyer's Percentage" means, for each Buyer, the percentage set
forth under the column opposite such Buyer's name on Exhibit A hereto.
1.2 Extinguishment. Effective on Closing, all obligations of the
parties (including representations, warranties and covenants) contained in,
arising from or resulting under the 1998 Transaction Documents (whether due or
to become due) shall be extinguished and deemed expired and the respective
parties thereto shall have no further obligation to or rights against each other
thereunder (the "Extinguishment").
1.3 Mutual Release. Without limiting the generality of the
foregoing,
(a) Release. Delphi, the Companies, Partners, Newco, the Buyers,
Dunn and Munson for the consideration set forth in this Agreement, on
behalf of themselves and their attorneys, agents, directors, officers,
employees, parent company(ies), affiliates, subsidiaries, predecessors,
successors, heirs, assigns, and all others claiming by or through any of
the foregoing (such persons collectively referred to as "related persons
and entities"), hereby release, acquit, and forever discharge each other
and their respective related persons and entities from any and all claims,
debts, demands, obligations (including representations, warranties and
covenants), damages, liabilities, benefits, costs, and causes of action,
of whatever kind or character, known or unknown, past, present,
<PAGE> 9
-4-
or future, that they have, had, or may have against each other and their
related persons and entities on account of, or in any way growing out of
or relating to, set forth in, embraced in or arising under the 1998
Transaction Documents or the transactions contemplated thereby (the
"Mutual Release"); provided that the Companies reserve their rights
against Dunn and Munson under the Non-Competition Agreements. Each of the
parties acknowledges that the Mutual Release shall remain in full force
and effect (including without limitation as between Delphi and Newco and
between Delphi and Intermediaries) after giving effect to the Transaction.
(b) Not Applicable to this Agreement. The Mutual Release shall not
apply to any claim for breach of this Agreement, and each of the parties
retains the right to bring suit to enforce this Agreement or for damages
arising from any breach thereof.
(c) No Admission of Liability. The parties to this Agreement
acknowledge and agree that neither entry into the Mutual Release nor the
payment of any consideration in or pursuant to this Agreement shall
constitute or be construed as an admission of liability by any party to
any person or entity.
(d) Advice of Counsel. This Agreement is made and executed by or on
behalf of each of the parties hereto with the advice of counsel, and no
party has been coerced or induced to enter into the Mutual Release by any
improper action of any other party hereto.
1.4 Merger Provisions.
(a) Formation of Newco. The Buyers shall form Newco as a New Jersey
limited liability company to facilitate the Merger and the transactions
contemplated hereby. Prior to the Merger, Newco will conduct no business or
activity other than in connection with the Merger. The Buyers will cause Newco
to execute and deliver a joinder to this Agreement and will execute a written
consent as the sole owners of Newco approving
<PAGE> 10
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the execution, delivery and performance of this Agreement by Newco.
(b) Newco as Survivor. Upon the Merger, the legal existence of Newco
with all its purposes, powers and objects, shall continue unaffected and
unimpaired by the Merger, and the corporate identity and existence, with all the
purposes, powers and objects, of Unicover shall be merged with and into Newco
and Newco as the company surviving the Merger (hereinafter sometimes called the
"Survivor") shall initially continue its existence under the laws of New Jersey.
(c) Filing. As soon as practicable after fulfillment or waiver of
the conditions set forth in Sections 7.1, 7.2, 7.3 and 7.4, the parties hereto
will cause to be filed with the office of the Secretary of State of New Jersey,
a certificate of merger (the "Certificate of Merger"), in such form as required
by, and executed in accordance with, the relevant provisions of applicable law.
(d) Effective Time. The Merger shall be effective at the time that
the filing of the Certificate of Merger, or at such later time specified in such
Certificate of Merger, which time is herein sometimes referred to as the
"Effective Time" and the date thereof is herein sometimes referred to as the
"Effective Date."
(e) Effect of the Merger. The effects and consequences of the Merger
shall be as set forth in the relevant sections of the New Jersey Business
Corporation Act and the New Jersey Limited Liability Company Act. Without
limiting the generality of the foregoing, on and after the Effective Time, the
Survivor shall possess all the rights, privileges, immunities, powers, and
purposes of each of Newco and Unicover; all the property, real and personal,
including subscriptions to shares, causes of action and every other asset
(including books and records) of Newco and Unicover shall vest in the Survivor
without further act or deed; and the Survivor shall assume and be liable for all
the liabilities, obligations and penalties of Newco and Unicover.
<PAGE> 11
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ARTICLE II
REPRESENTATIONS AND WARRANTIES OF DELPHI
Delphi hereby represents and warrants as follows:
2.1 Title to Ownership Interests. Delphi is the true and lawful
owner, of record and beneficially, of the Ownership Interests. At the Closing,
Delphi will validly transfer the Ownership Interests free and clear of any
liens, security interests, pledges, assessments, charges, adverse claims,
leases, licenses, restrictions and other encumbrances ("Liens"), other than any
Liens on the Ownership Interests existing immediately prior to the transfer of
the Ownership Interests to Delphi pursuant to the 1998 Stock Purchase Agreement.
Other than the rights and obligations arising under this Agreement, none of such
Ownership Interests are subject to any rights of any other person to acquire the
same arising at or after the closing pursuant to the 1998 Stock Purchase
Agreement. None of the Ownership Interests are subject to any restrictions on
transfer thereof created by Delphi, except for such restrictions as may be
imposed by applicable federal and state securities laws.
Assuming the accuracy of the representations in Section 3.3 of the
1998 Stock Purchase Agreement at the time they were made, the Ownership
Interests represent 100% of all of the outstanding capital stock and membership
interests of the Companies, and there are no agreements or understandings, oral
or written, to which Delphi is a party which (a) grant an option or right to
acquire any equitable interest in either Company, (b) grant a right of first
refusal or other such similar right upon the sale of any of the Ownership
Interests or any other equitable interest in either Company, or (c) restricts or
affects the voting rights of any of the Ownership Interests.
2.2 Authority Relative to this Agreement. Delphi has full power and
authority to enter into this Agreement and the transactions contemplated hereby
and to perform its obligations hereunder. This Agreement has been duly executed
and delivered by Delphi; and this Agreement constitutes, assuming the
<PAGE> 12
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due authorization, execution and delivery thereof by each of the other parties
to this Agreement, the legal, valid and binding obligation of Delphi,
enforceable against Delphi in accordance with its terms, except (i) as
enforcement thereof may be limited by bankruptcy, insolvency, reorganization,
moratorium, fraudulent conveyance, or other similar laws affecting the
enforcement of creditors' rights generally, and (ii) as enforcement thereof is
subject to general principles of equity (regardless of whether enforcement is
considered in a proceeding at law or in equity). The execution and delivery of
this Agreement by Delphi and performance of its obligations hereunder will not
conflict with or result in a breach, default (or an event which, with notice or
lapse of time or both, would constitute a default) or violation of any of the
terms, provisions or conditions of any agreement, document or instrument, or any
judgment, decree, court order, statute, regulation, ordinance or law to which
Delphi is subject. No permit, authorization, consent or approval of, or filing
with or notification to, any court or public body or authority or expiration of
any governmentally imposed waiting period, and no authorization, consent, or
approval of, or release by, any other third party, is necessary for the
execution and delivery of this Agreement and the consummation by Delphi of
actions contemplated by this Agreement and the performance of its obligations
hereunder.
2.3 Organizational Documents. Delphi has not caused or permitted any
amendment or other modification to the charter or by-laws of Unicover or the
operating agreement of Intermediaries since the Closing Date (as such term is
defined in the 1998 Stock Purchase Agreement).
2.4 Cash Out-Flows. Since the Closing Date (as such term is defined
in the 1998 Stock Purchase Agreement), the amounts set forth on Schedule 2.4
hereto are the amounts paid by Delphi in respect of taxes owed by the Company
for the periods indicated.
2.5 Dividends; Distributions. Delphi has not caused or permitted
either of the Companies to declare, set aside or pay any dividends or other
distributions in respect of its capital stock or ownership interests, or make
any other pay-
<PAGE> 13
-8-
ments in respect of taxes, to Delphi or any affiliate of Delphi except as set
forth on Schedule 2.5 hereto. Delphi has not caused or expressly permitted
either of the Companies to sell, transfer or otherwise distribute any other
significant assets, including without limitation, trademarks, service marks,
trade names and logos, to Delphi or any affiliate of Delphi, nor without the
consent of John Pallat to any third party, since the Closing Date (as defined in
the 1998 Stock Purchase Agreement).
2.6 Absence of Changes or Events. Except as may have been approved
by John Pallat as President of Unicover, Delphi has not, since the Closing Date
(as defined in the 1998 Stock Purchase Agreement), (a) caused or expressly
permitted either of the Companies to incur any indebtedness for borrowed money,
or assume, guarantee or otherwise be responsible for the obligations of any
other individual, firm or corporation, or made any loans or advances to any
other individual, firm or corporation or (b) caused any reevaluation by either
of the Companies of any of their assets including, without limitation, writing
off notes or accounts receivable.
2.7 Labor Matters. Delphi is in compliance with all applicable
provisions of ERISA, the Internal Revenue Code and other applicable laws
pertaining to the employee benefit plans maintained by it with respect to the
employees of the Companies, except where the failure to comply would not,
individually and in the aggregate, have a material adverse effect.
2.8 Tax Sharing. Delphi has not, since the Closing Date (as defined
in the 1998 Stock Purchase Agreement), caused or expressly permitted either of
the Companies to enter into any tax sharing agreement.
2.9 ERISA. No tax or penalty is or will be payable by either of the
Companies as a result of any conduct by Delphi or any trustee, administrator,
other fiduciary or any other "party-in-interest" or "disqualified person" with
respect to the employee benefit plans maintained by Delphi covering the
Companies' employees during the period that Delphi owned the Companies.
<PAGE> 14
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2.10 Insurance. Delphi has provided to the Buyers a true and correct
copy of Delphi's insurance company professional liability insurance policy.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANIES
Each of the Companies, jointly and severally, represents and
warrants as follows:
3.1 Authority Relative to this Agreement. Each Company has full
power and authority to enter into this Agreement and the transactions
contemplated hereby and to perform its obligations hereunder. This Agreement has
been duly executed and delivered by such Company; and this Agreement
constitutes, assuming the due authorization, execution and delivery thereof by
each of the other parties to this Agreement, the legal, valid and binding
obligation of such Company, enforceable against such Company in accordance with
its terms, except (i) as enforcement thereof may be limited by bankruptcy,
insolvency, reorganization, moratorium, fraudulent conveyance, or other similar
laws affecting the enforcement of creditors' rights generally, and (ii) as
enforcement thereof is subject to general principles of equity (regardless of
whether enforcement is considered in a proceeding at law or in equity).
3.2 Dividends; Distributions. Neither of the Companies have
declared, set aside or paid any dividends or other distributions in respect of
its capital stock or ownership interests, or made any other payments in respect
of taxes, to Delphi or any affiliate of Delphi except as set forth on Schedule
2.5. Neither of the Companies has sold, transferred or otherwise distributed any
other significant assets, including without limitation, trademarks, service
marks, trade names and logos, to Delphi or any affiliate of Delphi since the
Closing Date (as defined in the 1998 Stock Purchase Agreement).
<PAGE> 15
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ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF PARTNERS
Partners represents and warrants that:
4.1 Authority Relative to this Agreement. Partners has full power
and authority to enter into this Agreement and the transactions contemplated
hereby and to perform its obligations hereunder. This Agreement has been duly
executed and delivered by Partners; and this Agreement constitutes, assuming the
due authorization, execution and delivery thereof by each of the other parties
to this Agreement, the legal, valid and binding obligation of Partners,
enforceable against Partners in accordance with its terms, except (i) as
enforcement thereof may be limited by bankruptcy, insolvency, reorganization,
moratorium, fraudulent conveyance, or other similar laws affecting the
enforcement of creditors' rights generally, and (ii) as enforcement thereof is
subject to general principles of equity (regardless of whether enforcement is
considered in a proceeding at law or in equity). The execution and delivery of
this Agreement by Partners and performance of its obligations hereunder will not
conflict with or result in a breach, default (or an event which, with notice or
lapse of time or both, would constitute a default) or violation of any of the
terms, provisions or conditions of any agreement, document or instrument, or any
judgment, decree, court order, statute, regulation, ordinance or law to which
Partners is subject. No permit, authorization, consent or approval of, or filing
with or notification to, any court or public body or authority or expiration of
any governmentally imposed waiting period, and no authorization, consent, or
approval of, or release by, any other third party, is necessary for the
execution and delivery of this Agreement and the consummation by Partners of the
actions contemplated by this Agreement and the performance of its obligations
hereunder.
<PAGE> 16
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ARTICLE V
REPRESENTATIONS AND WARRANTIES OF THE BUYERS
Each of the Buyers, severally, represents and warrants that:
5.1 Authority Relative to this Agreement. Such Buyer has full power
and authority to enter into this Agreement and the transactions contemplated
hereby and to perform his obligations hereunder. This Agreement has been duly
executed and delivered by such Buyer; and this Agreement constitutes, assuming
the due authorization, execution and delivery thereof by each of the other
parties to this Agreement, the legal, valid and binding obligation of such
Buyer, enforceable against such Buyer in accordance with its terms, except (i)
as enforcement thereof may be limited by bankruptcy, insolvency, reorganization,
moratorium, fraudulent conveyance, or other similar laws affecting the
enforcement of creditors' rights generally, and (ii) as enforcement thereof is
subject to general principles of equity (regardless of whether enforcement is
considered in a proceeding at law or in equity). The execution and delivery of
this Agreement by such Buyer and performance of his obligations hereunder will
not conflict with or result in a breach, default (or an event which, with notice
or lapse of time or both, would constitute a default) or violation of any of the
terms, provisions or conditions of any agreement, document or instrument, or any
judgment, decree, court order, statute, regulation, ordinance or law to which
such Buyer is subject. No permit, authorization, consent or approval of, or
filing with or notification to, any court or public body or authority or
expiration of any governmentally imposed waiting period, and no authorization,
consent, or approval of, or release by, any other third party, is necessary for
the execution and delivery of this Agreement and the consummation by such Buyer
of the actions contemplated by this Agreement and the performance of his
respective obligations hereunder.
5.2 Securities Matters. Such Buyer is acquiring his portion of the
Ownership Interests solely for investment purposes, for his own account and not
with a present view towards
<PAGE> 17
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any distribution that would violate the Securities Act or applicable state
securities laws of any state; such Buyer understands that his portion of the
Ownership Interests has not been registered under the Securities Act or the
securities laws of any state and must be held indefinitely unless subsequently
registered under the Securities Act and applicable state securities laws or
unless an exemption from such registration becomes or is available. Such Buyer
acknowledges that he can bear the economic risk of his purchase of the Ownership
Interests and has such knowledge and experience in financial and business
matters that he is capable of evaluating such purchase. Such Buyer has made his
own independent examination, investigation, analysis and evaluation of the
Companies.
5.3 ACKNOWLEDGMENT OF GENERAL DISCLAIMER. EACH OF THE BUYERS AND
PARTNERS ACKNOWLEDGES THAT DELPHI MAKES NO REPRESENTATIONS REGARDING THE
BUSINESS, FINANCIAL OR OTHER CONDITION, PAST OR FUTURE FINANCIAL OR OTHER
PERFORMANCE OR PROSPECTS OF THE COMPANIES AND THAT THE BUYERS AND NEWCO ARE
ACQUIRING THE ASSETS, LIABILITIES, BUSINESS AND OTHER OPERATIONS OF THE
COMPANIES "AS IS" AND "WHERE IS."
5.4 Tax Matters.
(a) From its inception through the Closing (as defined by the 1998
Stock Purchase Agreement), Unicover qualified as an "S Corporation," as defined
in Section 1361 of the Code, and was taxable as an S Corporation for federal,
state, local and applicable foreign income tax purposes.
(b) From its inception through the Closing (as defined by the 1998
Stock Purchase Agreement), Intermediaries was taxable as a partnership for
federal, state, local and applicable foreign income tax purposes.
5.5 Newco. At the Closing, Newco will be a duly formed limited
liability company wholly owned by the Buyers which is in good standing in the
State of New Jersey and will be deemed to make all the representations and
warranties in Sections 5.1 through 5.3 as if the term "Buyer" or "Buyers"
re-
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ferred to Newco. No member of Newco will own, of record or beneficially, 50% or
more of the membership interests of Newco.
ARTICLE VI
COVENANTS AND AGREEMENTS
6.1 Publicity. Each of the Companies, the Buyers, Partners and
Delphi on behalf of themselves and their respective subsidiaries, directors or
officers covenant that they shall not issue any press release or make any other
statement that contains or might reasonably be deemed to imply any disparaging
remarks concerning another party or make statements that present another party
in a negative context with respect to the transactions contemplated hereby and
the transactions arising from the 1998 Stock Purchase Agreement or any other
1998 Transaction Document; provided, however, that nothing herein will prohibit
any party from making any statement to the extent that such party reasonably
determines upon advice from counsel that such statement is required by law, and
further provided, that in such event where a public release or announcement is
contemplated, the party making such determination will use all commercially
reasonable efforts to allow the other party reasonable time to comment on such
release or announcement in advance of its issuance. Subject to the parties'
respective legal obligations, the parties agree that they shall exercise
commercially reasonable efforts to cause any press release related to the
Transaction to be mutually agreed upon in advance.
6.2 Nondisclosure of Confidential Information.
(a) Delphi. Delphi recognizes and acknowledges that it has had in
the past and currently has access to confidential information concerning the
business and affairs of the Companies ("Unicover Confidential Information").
Delphi agrees that neither it, nor any of its subsidiaries, directors, officers
or employees, will disclose to any person, firm, corporation, association or
other entity or otherwise make use of any such Unicover Confidential Information
for a purpose competitive with the business of the Companies, except for
disclosure to
<PAGE> 19
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authorized representatives of the Companies, or any of their successors or
affiliates, unless (i) Delphi can show that such Unicover Confidential
Information has become known or available to the public generally through no
fault of Delphi, (ii) disclosure is required by law or the order of any
governmental authority, (iii) disclosure is required to be made by the
disclosing party to any federal, state, local or foreign governmental tax
authority or (iv) the disclosing party reasonably believes, based on the advice
of counsel, that such disclosure is required in connection with the defense of a
lawsuit against the disclosing party, provided that, prior to disclosing any
information, Delphi shall give prior written notice thereof to the Companies and
provide the Companies with the opportunity to contest such disclosure and shall
cooperate with efforts to prevent such disclosure. In the event of a breach or
threatened breach by Delphi of the provisions of this Section 6.2(a), the
affected Company shall be entitled to an injunction restraining Delphi from
disclosing, in whole or in part, such confidential information. Nothing herein
shall be construed as prohibiting the affected Company from pursuing any other
available remedy for such breach or threatened breach, including the recovery of
damages.
(b) Buyers. Each Buyer recognizes and acknowledges that he has had
in the past and currently has access to confidential information concerning the
business and affairs of Delphi and its subsidiaries (other than the Companies)
("Delphi Confidential Information"). Each Buyer agrees that neither he, nor any
of his representatives, will disclose to any person, firm, corporation,
association or other entity or otherwise make use of any such Delphi
Confidential Information for a purpose competitive with the business of Delphi
and its subsidiaries, except to authorized representatives of Delphi and its
subsidiaries, or any of their successors or affiliates, unless (i) the Buyer can
show that such Delphi Confidential Information has become known or available to
the public generally through no fault of the Buyers, (ii) disclosure is required
by law or the order of any governmental authority, (iii) disclosure is required
to be made by the disclosing party to any federal, state, local or foreign
governmental tax authority or
<PAGE> 20
-15-
(iv) the disclosing party reasonably believes, based on the advice of counsel,
that such disclosure is required in connection with the defense of a lawsuit
against the disclosing party, provided that, prior to disclosing any
information, the Buyer shall give prior written notice thereof to Delphi and
provide Delphi with the opportunity to contest such disclosure and shall
cooperate with efforts to prevent such disclosure. In the event of a breach or
threatened breach by the Buyers of the provisions of this Section 6.2(b), Delphi
shall be entitled to an injunction restraining the Buyers from disclosing, in
whole or in part, such confidential information. Nothing herein shall be
construed as prohibiting Delphi from pursuing any other available remedy for
such breach or threatened breach, including the recovery of damages.
6.3 Books and Records. Delphi shall return to the Companies all
corporate and organizational records of the Companies held by Delphi. Each of
Delphi and the Companies covenants and agrees to provide the other with access
to their respective corporate records relating to the other, as such party may
reasonably request. The party receiving such access shall be subject to the
obligations of Section 6.2(a) or (b), as applicable, with respect to the
information received pursuant to any such request.
6.4 Resignation of Directors. At the Closing, Delphi shall deliver
to the Buyers the resignations of Robert Rosenkranz and Robert M. Smith, Jr. as
directors of Unicover, effective at the Closing. Delphi represents and warrants
to the Buyers that there are no other Delphi employees or affiliates serving as
directors or officers of Unicover and that it is the sole manager of
Intermediaries.
6.5 Fees and Expenses. Whether or not the transactions contemplated
hereby are consummated, the Companies, the Buyers, Partners and Delphi shall
bear their respective expenses incurred in connection with the transactions
contemplated hereby, including, without limitation, the preparation, execution
and performance of this Agreement and the transactions contemplated hereby, and
all fees and expenses of agents, representatives, counsel and accountants;
provided, that Delphi
<PAGE> 21
-16-
agrees to pay one half of the fees and expenses of New Jersey counsel to the
Buyers, in an amount not to exceed $1,500.
6.6 Tax Matters.
(a) Treatment of the Merger as an Asset Sale. Delphi, the Buyers,
Partners and Newco agree to treat the Merger for all federal, state, local and
applicable foreign tax purposes as a sale of all of Unicover's assets to Newco
followed by a liquidation of Unicover into Delphi. All corporate income taxes
imposed with respect to such asset sale shall be borne by Delphi. Delphi shall
be entitled to the benefit of any federal income tax refund arising in
connection with such asset sale. The Buyers, Partners and Newco shall be
entitled to the benefit of any state, local or foreign income tax refund of
Unicover arising in connection with such asset sale.
(b) Purchase Price Allocation. Delphi, the Buyers, Partners and
Newco agree to allocate the consideration exchanged in the Transaction as
provided in Exhibit B. The Buyers shall prepare and deliver such allocation to
Delphi no later than December 31, 1999. Unless otherwise required by law no
party shall take any position inconsistent with the foregoing allocation on any
Tax Return (including, without limitation IRS Form 8594 or any comparable state,
local or foreign form) or for any other Tax purpose.
(c) Mutual Cooperation. Delphi, the Buyers, Partners and Newco will
provide each other with such assistance as may reasonably be requested by any of
them in connection with the preparation of any Tax Return or amendment thereto
(including, without limitation, any refund claim), any audit or other
examination by any taxing authority or any judicial or administrative proceeding
relating to Taxes.
(d) Tax Covenant. As promptly as practicable after the Closing Date,
Delphi, the Buyers and the other Shareholders (as defined in the 1998 Stock
Purchase Agreement) shall make a Section 338(h)(10) election (and any comparable
state, local and foreign elections) with respect to the prior sale of the common
stock of Unicover to Delphi (under the 1998 Stock Pur-
<PAGE> 22
-17-
chase Agreement) by jointly filing an IRS Form 8023 (and any comparable state,
local or foreign forms). The foregoing forms shall be prepared in accordance
with a purchase price allocation prepared by Delphi in a manner consistent with
Section 6.9(a) of the 1998 Stock Purchase Agreement and shall reflect the
consideration paid by Delphi under this Agreement (including, without
limitation, the cash, the value of the Unicover assets and the value of the
membership interests of Intermediaries (each as determined in accordance with
Exhibit B hereto) and the state and local Unicover income tax refunds described
in Sections 6.6(a) and (e) hereof) and under the 1998 Stock Purchase Agreement.
Unless otherwise required by law, Delphi, the Buyers and the other Shareholders
shall not, and the Buyers and the other Shareholders shall not cause or permit
the Companies to, take any position on any Tax Return or for any Tax purpose
that is inconsistent with (i) the foregoing Section 338(h)(10) election (or
comparable state, local or foreign elections) or (ii) the Section 754 election
(and any comparable state, local and foreign elections) to be made by
Intermediaries as provided in Section 6.6(g) hereof.
(e) Preparation and Filing of Final Unicover Tax Returns. Delphi
shall (i) include Unicover, for the periods that Unicover was owned by Delphi
(i.e., from the Closing (as defined in the 1998 Stock Purchase Agreement)
through the Closing Date) in Delphi's 1998 and 1999 federal consolidated income
tax returns, (ii) include the taxable income of Unicover for such periods in the
respective Delphi federal consolidated income tax returns, (iii) pay any federal
income taxes imposed on Unicover for such periods, and (iv) be entitled to the
benefit of any Unicover federal income tax loss, deduction, credit, carryback
(to taxable periods of the Delphi consolidated group) or refund in respect of
such periods. Notwithstanding anything to the contrary in this Agreement, the
Buyers, Partners and Newco shall not be liable for the payment of any federal
consolidated income tax liabilities of the affiliated group of which Delphi is
the common parent. The Buyers shall cause Newco or its designee to prepare and
file Unicover's state and local income tax returns with respect to Unicover's
taxable periods ended December 31, 1998 (the "Short Period 1998 Return") and
ending on the
<PAGE> 23
-18-
Closing Date (the "Short Period 1999 Return"), which returns shall be delivered
to Delphi (for Delphi's review) at least 20 business days (as the same may be
extended) before the due date for filing such returns and shall not be filed
without prior written consent of Delphi (not to be unreasonably withheld or
delayed). Newco shall be solely responsible for, and the Buyers shall cause
Newco to pay, any state and local income tax attributable to the Unicover tax
period covered by the Short Period 1998 Return and the Short Period 1999 Return,
and, as provided in Section 6.6(a), Newco shall be entitled to the benefit of
any Unicover state or local income tax refunds in respect of such periods. The
Buyers shall control any such state and local refund claims (and shall bear the
cost thereof). Any such state and local refunds received by Delphi shall be
promptly paid to the Buyers.
(f) Treatment of Intermediaries. For the periods that Delphi owned
Intermediaries (i.e., from the Closing (as defined in the 1998 Stock Purchase
Agreement) through the Closing Date), Delphi shall treat Intermediaries as a
"branch" of Delphi for federal, state and local income taxes purposes, shall
include the taxable income of Intermediaries for such periods in Delphi's
corporate income tax returns, shall be solely liable for the federal, state and
local income taxes with respect to such income and shall be entitled to the
benefit of any tax loss, deduction, credit, carryback (to taxable periods during
which Intermediaries was owned by Delphi) or refund with respect to such periods
of Intermediaries. The Buyers and the other Shareholders shall be responsible
for all federal, state, local and foreign taxes (including interest, penalties,
and other additions to tax) attributable to Intermediaries for all taxable
periods prior to Delphi's acquisition of Intermediaries and shall be entitled to
all federal, state, local and foreign tax refunds for such taxable periods.
(g) Section 754 Election. Intermediaries will make a timely election
under Section 754 of the Code (and any comparable election available under
state, local and foreign law) with respect to Delphi's acquisition of the
Ownership Interests of Intermediaries and will not revoke such elections. Any
al-
<PAGE> 24
-19-
location required to be made pursuant to Section 755 of the Code (or comparable
state, local or foreign law) in connection with such election(s) shall be made
as determined by Delphi.
(h) Taxes for Taxable Periods Prior to Delphi's Acquisition of
Unicover. Notwithstanding anything to the contrary in this Agreement or the 1998
Stock Purchase Agreement, the Buyers and the other Shareholders shall be solely
responsible for all federal, state, local and foreign taxes (including all
related interest, penalties and other additions to tax) imposed on Unicover, the
Buyers or the other Shareholders with respect to all taxable periods of Unicover
prior to Delphi's acquisition of Unicover (including, without limitation, all
corporate income taxes imposed on Unicover, and all income taxes imposed on the
Buyers or the other Shareholders, in connection with the Section 338(h)(10)
election (and comparable state, local and foreign elections) described in
Section 6.6(d)). The Buyers and the other Shareholders shall be entitled to the
benefit of any federal income tax deductions attributable to the taxes described
in the preceding sentence.
6.7 Employees and Employee Benefits.
(a) Effective as of the Closing Date, employees of the Companies
(collectively, the "Company Employees") shall cease active participation in all
employee benefit plans, other than plans that are maintained by the Companies
solely for Company Employees.
(b) Effective as of the Closing Date, Company Employees who are
participants in the Reliance Standard Life Insurance Company Retirement Savings
(401(k)) Plan ("Delphi's 401(k) Plan") shall cease to be eligible for any future
contributions to Delphi's 401(k) plan, shall have a fully vested and
nonforfeitable interest in their account balances thereunder, and shall be
entitled to a distribution of their account balances under Delphi's 401(k) Plan
in accordance with and to the extent permitted by Code Section 401(k)(10) and
other applicable provisions of the Code.
<PAGE> 25
-20-
As soon as practical after the Closing Date and following (i)
delivery by the Buyers to Delphi of a favorable IRS determination letter
regarding the Companies' 401(k) plan or an opinion of counsel satisfactory to
Delphi, and (ii) delivery by Delphi to the Companies of a favorable IRS
determination letter regarding Delphi's 401(k) Plan or an opinion of counsel
satisfactory to the Companies, Delphi shall cause the trustee of Delphi's 401(k)
Plan to transfer all of the assets not theretofore withdrawn pursuant to the
preceding paragraph of this Section 6.7(b) and liabilities thereof attributable
to Company Employees who are employed by the Companies on the Closing Date to
the Companies' defined contribution plan.
(c) Effective as of the Closing Date, the Buyers or the Companies
shall make available health and other group welfare plans as defined in Section
3(1) of ERISA (with no pre-existing condition limitations) for the benefit of
Company Employees and their dependents and beneficiaries covered by the
Companies' or Delphi's plans immediately prior to the Closing. Delphi shall
retain responsibility for all medical services incurred prior the Closing Date
and the Buyers and the Companies shall retain responsibility for claims incurred
on or after the Closing Date. For purposes of the preceding sentence, a claim
shall be deemed to have been incurred on the date on which medical or other
treatment or service was rendered and not the date of inception of the related
illness or injury or the date of submission of a claim related thereto.
(d) The Buyers shall have sole responsibility for "continuation
coverage" obligations with respect to Company Employees and "qualified
beneficiaries" of such employees for whom a "qualifying event" has occurred,
whether prior to, in connection with, or after the Closing Date, provided that
Delphi agrees to provide a certificate of creditable coverage for all such
Company employees. The phrases "continuation coverage," "qualified
beneficiaries" and "qualifying event" shall have the meaning ascribed to them in
Section 4980B of the Code and Sections 601-608 of ERISA.
(e) The parties hereto expressly acknowledge that Delphi shall not
be obligated to pay any unemployment, sever-
<PAGE> 26
-21-
ance or termination benefits or any similar liabilities under the employee
benefit plans that are maintained solely for Company Employees to or in respect
of any Company Employee terminated for any reason on or after the Closing Date,
including without limitation any liability triggered under any employment
compensation or government-mandated benefits relating to the termination of any
Company Employee on or after the Closing Date, including without limitation
under the Workers Adjustment and Retraining Notification Act of 1988.
6.8 No Dividends or Distributions. Each of Delphi and the Companies,
jointly and severally, hereby covenants and agrees with the Buyers that, during
the period from the date of the execution of this Agreement to the Closing,
neither of the Companies will declare, set aside or pay any dividend or other
distribution in respect of its capital stock or ownership interests to Delphi or
any affiliate of Delphi.
6.9 No Asset Distributions. Each of Delphi and the Companies,
jointly and severally, hereby covenants and agrees with the Buyers that, during
the period from the date of the execution of this Agreement to the Closing Date,
neither of the Companies will sell, transfer or otherwise distribute any other
significant assets, including, without limitation, trademarks, service marks,
trade names and logos, to Delphi or any affiliate of Delphi or, without the
prior consent of John Pallat, to any third party.
ARTICLE VII
CONDITIONS TO CLOSING
7.1 Closing. A closing (the "Closing" and the date and time thereof
being the "Closing Date") will be held as soon as reasonably practicable after
the conditions set forth in Sections 7.2, 7.3 and 7.4 shall have been satisfied
or waived.
7.2 Conditions to Each Party's Obligations. The respective
obligation of each party to consummate the transactions contemplated by this
Agreement is subject to the satis-
<PAGE> 27
-22-
faction or waiver on or prior to the Closing Date of the following condition:
(a) No Injunctions or Restraints. No material judgment, order,
decree, statute, law, ordinance, rule or regulation entered, enacted,
promulgated, enforced or issued by any court or other governmental entity
of competent jurisdiction or other legal restraint or prohibition
(collectively, "Restraints") shall be in effect preventing the
consummation of the transaction contemplated hereby.
7.3 Conditions to Obligations of the Buyers. The obligation of the
Buyers to consummate the transactions contemplated by this Agreement is further
subject to satisfaction or waiver of the following conditions:
(a) Representations and Warranties. The representations and
warranties of the Companies and Delphi set forth herein shall be true and
correct in all respects as of the date of this Agreement and at and as of
the Closing Date as if made at and as of such time.
(b) Performance of Obligations of the Companies and Delphi. Each of
the Companies and Delphi shall have performed all obligations required to
be performed by them under this Agreement at or prior to the Closing Date.
(c) Opinion of Counsel to Delphi. The Buyers shall have received an
opinion from Cahill Gordon & Reindel, counsel to Delphi, dated the Closing
Date, substantially to the effect set forth in Exhibit C hereto.
(d) Opinion of General Counsel of Delphi. The Buyers shall have
received an opinion from the General Counsel of Delphi, dated the Closing
Date, substantially to the effect set forth in Exhibit D hereto.
(e) Certificates. Each of the Companies and Delphi shall have
delivered to the Buyers an officer's certificate, each in form and
substance and determined on a basis satisfactory to the Buyers and their
counsel, to the ef-
<PAGE> 28
-23-
fect of the matters stated in Section 7.3(a) and Section 7.3(b).
(f) Ownership Interests and Note. At the Closing, Delphi shall
deliver to the Buyers the stock certificate (the "Certificate")
representing the Ownership Interests in Unicover and shall deliver to
Partners the Note.
7.4 Conditions to Obligations of Delphi. The obligation of Delphi to
consummate the transactions contemplated by this Agreement is further subject to
satisfaction or waiver of the following conditions:
(a) Representations and Warranties. The representations and
warranties of the Buyers, Partners and Newco set forth herein shall be
true and correct in all respects as of the date of this Agreement and at
and as of the Closing Date as if made at and as of such time.
(b) Performance of Obligations of the Buyers, Partners and Newco.
Each of the Buyers, Partners and Newco shall have performed all
obligations required to be performed by each Buyer under this Agreement at
or prior to the Closing Date.
(c) Opinion of Buyers' Counsel. Delphi shall have received an
opinion from Robinson Silverman Pearce Aronsohn & Berman LLP, counsel to
the Buyers, substantially to the effect set forth in Exhibit E hereto.
(d) Opinion of New Jersey Counsel. Delphi shall have received an
opinion from New Jersey counsel to the Buyers substantially to the effect
that upon the filing of the Certificate of Merger, the Merger shall be
effective, with the effects described in the Agreement.
(e) Certificates. Each of the Buyers, Partners and Newco shall have
delivered to Delphi a certificate, each in form and substance and
determined on a basis satisfactory to Delphi and its counsel, to the
effect of the matters stated in Section 7.4(a) and Section 7.4(b).
<PAGE> 29
-24-
(f) Extension of Options. At the Closing, the Buyers shall deliver
to Delphi a letter in form and substance satisfactory to Delphi extending
the term of the options granted to Delphi in the Option Agreements until
June 30, 1999, executed by all the respective parties thereto other than
Delphi.
ARTICLE VIII
MISCELLANEOUS
8.1 Survival of Covenants, Agreements, Representations and
Warranties. All covenants, agreements, representations and warranties made
hereunder or pursuant hereto or in connection with the transactions contemplated
hereby or contained herein shall survive the Closing Date and shall continue in
full force and effect thereafter according to their terms without limit as to
duration unless otherwise expressly provided therein.
8.2 Notices.
(a) Any notice or communication to any party hereto shall be duly
given if in writing and delivered in person or mailed by first class mail
(registered or certified, return receipt requested), facsimile or overnight air
courier guaranteeing next day delivery, to such other party's address.
If to Delphi:
Delphi Financial Group, Inc.
1105 North Market Street, Suite 1230
P.O. Box 8985
Wilmington, Delaware 19899
Facsimile No.: (302) 427-7663
Attention: President
<PAGE> 30
-25-
with copies to:
Delphi Capital Management, Inc.
153 East 53rd Street
New York, NY 10022
Facsimile No.: (212) 838-7598
Attention: President
Cahill Gordon & Reindel
80 Pine Street
New York, New York 10005
Facsimile No.: (212) 269-5420
Attention: Geoffrey E. Liebmann, Esq.
If to either of the Companies:
Unicover Managers, Inc.
901 Warrenville Road
Suite 115
Lisle, IL 60532
Facsimile No.: (630) 663-1889
Attention: President
with copies to:
Unicover Managers, Inc.
One Cragwood Road
South Plainfield, NJ 07080
Facsimile No.: (908) 668-0805
Attention: Chairman
<PAGE> 31
-26-
If to Partners:
Unicover Management Partners, LLC
901 Warrenville Road
Suite 115
Lisle, IL 60532
Facsimile No.: (630) 663-1889
Attention: Manager
If to the Buyers:
John E. Pallat
37 Humbert Street
Princeton, NJ 08542
Robert J. Wojtowicz
13 Hill Hollow Road
Warren, NJ 07059
Joseph P. Wojtowicz
42 Vanderver Drive
Basking Ridge, NJ 07920
Kenneth C. Griebell
104 North Kenilworth Avenue
Oak Park, IL 60301
with a copy to:
Robinson Silverman Pearce Aronsohn & Berman LLP
1290 Avenue of the Americas
New York, New York 10104-0053
Facsimile No.: (212) 541-4630
Attention: Walter H. Curchack, Esq.
(b) All notices and communications will be deemed to have been duly
given: at the time delivered by hand, if personally delivered; three business
days after being deposited in the mail, if mailed; when sent, if sent by
facsimile (with receipt confirmed); and the next business day after timely
deliv-
<PAGE> 32
-27-
ery to the courier, if sent by overnight air courier guaranteeing next day
delivery postage pre-paid or billed to sender.
8.3 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
8.4 Interpretation. The headings of articles and sections herein are
for convenience of reference, do not constitute a part of this Agreement, and
shall not be deemed to limit or affect any of the provisions hereof.
8.5 Amendment. This Agreement may not be amended except by an
instrument in writing signed on behalf of each of the parties affected thereby.
8.6 Assignment. This Agreement may not be assigned by any party
hereto except with the prior written consent of the non-assigning parties.
8.7 No Third Party Beneficiaries. Nothing in this Agreement shall
confer any rights upon any person or entity which is not a party or permitted
assignee of a party to this Agreement.
8.8 Governing Law. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of New York without regard
to principles of conflicts of laws.
8.9 Entire Agreement. This Agreement (including the Exhibits hereto)
constitutes the entire agreement between the parties pertaining to the subject
matter hereof and thereof, and supersede all prior agreements or understandings
as to such subject matter. No party hereto has made any representation or
warranty or given any covenant to the other except as set forth in this
Agreement.
8.10 Validity. The invalidity or unenforceability of any provision
of this Agreement shall not affect the valid-
<PAGE> 33
-28-
ity or enforceability of any other provisions of this Agreement, which shall
remain in full force and effect.
8.11 Severability. In case any provision of this Agreement shall be
invalid, illegal or unenforceable, it shall, to the extent possible, be modified
in such manner as to be valid, legal and enforceable but so as to most nearly
retain the intent of the parties. If such modification is not possible, such
provision shall be severed from this Agreement. In either case the validity,
legality and enforceability of the remaining provisions of this Agreement shall
not in any way be affected or impaired thereby.
<PAGE> 34
IN WITNESS WHEREOF, the parties hereto have caused this Merger,
Exchange and Release Agreement to be duly executed as of the day and year first
above written.
DELPHI FINANCIAL GROUP, INC.
By: _____________________________________
Name:
Title:
UNICOVER MANAGERS, INC.
By: _____________________________________
Name:
Title:
UNICOVER INTERMEDIARIES, LLC
By: Delphi Financial Group, Inc., as manager
By: _____________________________________
Name:
Title:
S-1
<PAGE> 35
UNICOVER MANAGEMENT PARTNERS, LLC
By: _____________________________________
Name: John E. Pallat
Title: Manager
By: _____________________________________
Name: Thomas J. Dunn
Title: Manager
BUYERS:
_________________________________________
John E. Pallat
_________________________________________
Robert J. Wojtowicz
_________________________________________
Joseph P. Wojtowicz
_________________________________________
Kenneth C. Griebel
S-2
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 1999 (UNAUDITED) AND THE CONSOLIDATED
STATEMENT OF INCOME FOR THE THREE MONTHS ENDED MARCH 31, 1999 (UNAUDITED) AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<DEBT-HELD-FOR-SALE> 2,022,174
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 2,323,409
<CASH> 196,439
<RECOVER-REINSURE> 371,033
<DEFERRED-ACQUISITION> 112,885
<TOTAL-ASSETS> 3,338,503
<POLICY-LOSSES> 1,110,399
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 667,370
<NOTES-PAYABLE> 226,098
100,000<F1>
0
<COMMON> 204
<OTHER-SE> 524,827
<TOTAL-LIABILITY-AND-EQUITY> 3,338,503
150,443
<INVESTMENT-INCOME> 43,801
<INVESTMENT-GAINS> (1,117)
<OTHER-INCOME> 0
<BENEFITS> 119,624
<UNDERWRITING-AMORTIZATION> 7,149
<UNDERWRITING-OTHER> 34,107
<INCOME-PRETAX> 32,247
<INCOME-TAX> 10,098
<INCOME-CONTINUING> 20,636
<DISCONTINUED> (13,847)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,789
<EPS-PRIMARY> 0.33
<EPS-DILUTED> 0.32
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
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<FN>
<F1>REPRESENTS COMPANY-OBLIGATED MANDATORILY REDEEMABLE CAPITAL SECURITIES OF
DELPHI FUNDING L.L.C. HOLDING SOLELY JUNIOR SUBORDINATED DEFERRABLE INTEREST
DEBENTURES OF THE COMPANY.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1998 AND THE CONSOLIDATED
STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<DEBT-HELD-FOR-SALE> 1,889,604
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 2,060,873
<CASH> 298,843
<RECOVER-REINSURE> 356,030
<DEFERRED-ACQUISITION> 104,460
<TOTAL-ASSETS> 3,287,057
<POLICY-LOSSES> 1,046,388
<UNEARNED-PREMIUMS> 20,265
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 664,576
<NOTES-PAYABLE> 265,165
100,000<F1>
0
<COMMON> 204
<OTHER-SE> 566,236
<TOTAL-LIABILITY-AND-EQUITY> 3,287,057
426,874
<INVESTMENT-INCOME> 168,692
<INVESTMENT-GAINS> 8,060
<OTHER-INCOME> 0
<BENEFITS> 342,997
<UNDERWRITING-AMORTIZATION> 25,758
<UNDERWRITING-OTHER> 120,106
<INCOME-PRETAX> 115,651
<INCOME-TAX> 35,797
<INCOME-CONTINUING> 73,802
<DISCONTINUED> 13,233
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 87,035
<EPS-PRIMARY> 4.29<F2>
<EPS-DILUTED> 4.13<F2>
<RESERVE-OPEN> 388,051
<PROVISION-CURRENT> 61,776
<PROVISION-PRIOR> (166)
<PAYMENTS-CURRENT> 6,953
<PAYMENTS-PRIOR> 36,494
<RESERVE-CLOSE> 406,214
<CUMULATIVE-DEFICIENCY> 33,570
<FN>
<F1>REPRESENTS COMPANY-OBLIGATED MANDATORILY REDEEMABLE CAPITAL SECURITIES OF
DELPHI FUNDING L.L.C. HOLDING SOLELY JUNIOR SUBORDINATED DEFERRABLE INTEREST
DEBENTURES OF THE COMPANY.
<F2>THE COMPANY'S BOARD OF DIRECTORS DECLARED A 2% STOCK DIVIDEND ON NOVEMBER 19,
1998, WHICH WAS DISTRIBUTED ON DECEMBER 25, 1998 TO STOCKHOLDERS' OF RECORD ON
DECEMBER 1, 1998. FINANCIAL DATA SCHEDULES FOR PRIOR PERIODS HAVE NOT BEEN
RESTATED TO REFLECT THE STOCK DIVIDEND.
</FN>
</TABLE>
