<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended December 31, 1998
---------------------
[ ] 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
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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
incorporation or organization) including area code) Identification Number)
</TABLE>
1105 North Market Street, Suite 1230, Wilmington, Delaware 19899
- ---------------------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Securities registered pursuant to Section 12(b) of the Act:
Class A Common Stock, $.01 par value New York Stock Exchange
- ------------------------------------ -----------------------
(Title of Each Class) (Name of Each Exchange
On Which Registered)
Securities registered pursuant to Section 12(g) of the Act:
None
----
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to filing requirements
for the past 90 days.
Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
The aggregate market value of the voting stock held by nonaffiliates of
the Registrant, based upon the closing price for the Registrant's Class A
Common Stock on March 12, 1999, was $527,264,233. As of March 12, 1999, the
Registrant had 14,353,823 shares of Class A Common Stock and 5,433,203 shares
of Class B Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Registrant's 1999 Annual Meeting of
Stockholders are incorporated by reference into Part III of this Form 10-K.
<PAGE> 2
PART I
ITEM 1. BUSINESS
Delphi Financial Group, Inc. (the "Company," which term includes the Company and
its consolidated subsidiaries unless the context indicates otherwise), organized
as a Delaware corporation in 1987, is a holding company engaged through its
subsidiaries in offering a diverse portfolio of group employee benefit products
including life, disability, workers' compensation and personal accident
insurance, as well as reinsurance underwriting and integrated disability and
absence management services. The Company also offers asset accumulation
products, primarily annuities, to individuals and groups. The Company offers its
products and services in all fifty states and the District of Columbia. The
Company's two reportable segments are group employee benefit products and asset
accumulation products. See Note A and Note P to the Consolidated Financial
Statements for additional information regarding the Company's segments.
OPERATING STRATEGY
The Company's operating strategy is to offer financial products and services
which have the potential for significant growth or which require expertise to
meet the specialized needs of its customers. The Company has concentrated its
efforts within certain niche insurance markets, primarily group employee
benefits for small to mid-sized employers where nearly all of the employment
growth in the American economy has occurred in the last few years. It has also
developed complementary investment management skills which, together with its
insurance business, are aimed at achieving above average returns on the capital
of the Company. The Company's operating strategy has also emphasized the
acquisition of blocks of insurance business and insurance and financial services
companies and the active management of its investment portfolio.
The Company's operating strategy has contributed to an average annual return on
shareholders' equity of 22% during the period from January 1988 to December
1998. Over this same period, net income and shareholder's equity have grown at a
compound annual rate of 33%, and book value per share has grown at a compound
annual rate of 26%. This strategy has also contributed to a 13% compound annual
growth rate in insurance premiums and fee income during the period from January
1988 through December 1998 and an increase in total assets from $819.1 million
at December 31, 1987 to $3,396.2 million at December 31, 1998, a compound annual
growth rate of 14%.
The Company acquired Reliance Standard Life Insurance Company ("RSLIC") and its
subsidiary, First Reliance Standard Life Insurance Company ("FRSLIC") in
November 1987. RSLIC, founded in 1907, and FRSLIC underwrite a diverse portfolio
of life and accident and health insurance products targeted principally to the
employee benefits market and also market asset accumulation products, primarily
annuities, to individuals and groups.
In March 1996, the Company acquired Safety National Casualty Corporation
("SNCC"). See Note B to the Consolidated Financial Statements. SNCC is an
insurance specialist providing workers' compensation insurance products to the
self-insured market. Founded in 1942, SNCC is one of the oldest continuous
writers of excess workers' compensation insurance in the United States.
In June 1998, the Company acquired Matrix Absence Management, Inc. ("Matrix"), a
provider of integrated disability and absence management services to the
employee benefits market, and, in November 1998, the Company acquired Unicover
Managers, Inc. ("Unicover"), a reinsurance underwriting manager specializing in
workers' compensation coverage. Both Matrix and Unicover are wholly-owned
corporate subsidiaries of the Company. See Note B to the Consolidated Financial
Statements.
The Company's management of its investment portfolio is an important component
of its profitability. The Company's strategy emphasizes liquidity and yield,
while seeking to limit risks associated with interest rate fluctuations and
credit quality. The Company's average yield on invested assets (excluding
realized and unrealized investment gains and losses) was 8.1%, 7.9% and 8.6% in
1998, 1997 and 1996, respectively. See "Investments."
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GROUP EMPLOYEE BENEFIT PRODUCTS
The Company emphasizes the origination of specialty insurance products directed
to the employee benefits market, primarily group life, disability, workers'
compensation and personal accident insurance. The Company also offers group
dental insurance. The Company markets its group products to employer-employee
groups and associations in a variety of industries. The Company insures groups
ranging from 10 to more than 1,000 individuals, although the average size of
insured groups currently ranges from 100 to 300 individuals. In underwriting its
group employee benefit products, the Company attempts to avoid concentrations of
business in any industry segment or geographic area.
The following table sets forth, for the periods indicated, selected financial
data concerning the Company's group employee benefit products:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------
1998 1997 1996
-------- ------- --------
(dollars in thousands)
<S> <C> <C> <C>
Insurance premiums:
Life............................................................... $171,726 $146,485 $135,806
Disability income.................................................. 110,983 96,469 92,024
Workers' compensation.............................................. 79,118 64,499 56,200
Personal accident and other........................................ 54,584 48,439 47,348
-------- -------- --------
Total insurance premiums......................................... $416,411 $355,892 $331,378
======== ======== ========
Sales (new annualized premiums):
Life............................................................... $ 37,848 $ 29,801 $ 24,049
Disability income.................................................. 43,860 27,476 21,961
Workers' compensation.............................................. 43,577 20,987 8,451
Personal accident and other........................................ 16,449 11,405 8,572
-------- -------- --------
Total insurance premiums......................................... $141,734 $ 89,669 $ 63,033
======== ======== ========
</TABLE>
The profitability of group employee benefit products is affected by, among other
things, differences between actual and projected claims experience and the
ability to control administrative expenses. The table below shows the loss and
expense ratios as a percent of premium income for the Company's group employee
benefit products for the periods indicated. Changes in the components of the
ratio between years primarily reflect changes in the Company's product mix.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Loss ratio........................................................... 71.6% 68.3% 70.0%
Expense ratio........................................................ 24.9 27.6 26.7
---- ---- ----
Combined ratio................................................... 96.5% 95.9% 96.7%
==== ==== ====
</TABLE>
The Company's group life insurance products provide for the payment of a stated
amount upon the death of a member of the insured group and policy terms are
generally one year. Accidental death and dismemberment insurance, which provides
for the payment of a stated amount upon the accidental death or dismemberment of
a member of the insured group, is frequently sold in conjunction with group life
policies and is included in premiums charged for group life insurance. The
Company reinsures risks in excess of $150,000 per individual for employer
provided group life insurance policies and $100,000 for voluntary group term
life policies. See "Reinsurance."
Group disability products offered by the Company, principally long-term
disability insurance, generally provide a specified level of benefits to persons
who, because of sickness or injury, are unable to work for a specified period of
time. The Company focuses group long-term disability sales toward employers
engaged principally in service industries such as accounting, architecture and
engineering, as well as certain retailing and manufacturing fields. Long-term
disability benefits generally are paid monthly and typically are limited for any
one employee to two-thirds of the employee's earned income up to a specified
maximum benefit. The Company actively manages its
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disability claims, working with claimants to help them return to work as quickly
as possible. When insureds' disabilities prevent them from returning to their
original jobs, the Company, in appropriate cases, provides assistance in
developing new productive skills for an alternative career. Premiums are
generally determined annually for disability insurance and are based upon
expected morbidity and emerging experience of the insured group, as well as
assumptions regarding operating expenses and future interest rates. The Company
reinsures risks in excess of $2,500 per individual per month. See "Reinsurance."
The Company's workers' compensation products include excess workers'
compensation, workers' compensation self-insured loss portfolio transfers,
workers' compensation self-insurance bonds and primary workers' compensation
insurance with risk sharing features. Historically, the Company has specialized
in excess workers' compensation insurance which provides coverage to employers
and groups who self-insure their workers' compensation risks. The coverage
applies to losses in excess of the applicable self-insured retentions ("SIRs" or
deductibles) of employers and groups, whose workers' compensation claims are
generally handled by third-party administrators ("TPAs"). This product is
principally targeted to mid-sized companies and association groups, particularly
small municipalities, hospitals and schools. These companies and groups tend to
be less prone to catastrophic workers' compensation exposures and less price
sensitive than larger account business. Because claim payments do not begin
until after the SIR is met, it takes an average of 13 years from the date the
claim is incurred to the time claim payments begin. At that point, the payments
are primarily for wage replacement, similar to the benefit provided under
disability coverage. Medical payments, if any, tend to be stable and
predictable. The Company began to actively market its other workers'
compensation products during 1998 due to the weak pricing environment in the
excess workers' compensation sector. These products are typically marketed to
the same types of clients who have historically purchased the Company's excess
workers' compensation product. The Company reinsures excess workers'
compensation risks between $500,000 and $50.0 million per policy per occurrence
and primary workers' compensation up to $3.0 million per policy per occurrence.
See "Reinsurance."
The Company's personal accident insurance products include business travel and
"all risk" accidental death and dismemberment insurance. These policies pay a
stated amount based on a predetermined schedule in the event of accidental
dismemberment or death of a member of the insured group. The Company reinsures
risks in excess of $150,000 per individual and, under a catastrophe reinsurance
agreement, the amount of the Company's loss arising from any one occurrence is
limited to $500,000. See "Reinsurance."
The Company's group employee benefit products are sold primarily by independent
brokers, agents and TPAs. The Company's home office and 23 sales offices located
throughout the country provide nationwide sales support and service existing
business. The Company believes that its national sales network minimizes
expenses traditionally associated with large insurance company captive marketing
systems.
ASSET ACCUMULATION PRODUCTS
The Company's asset accumulation products consist primarily of annuity products,
principally single premium deferred annuities ("SPDAs") and flexible premium
annuities ("FPAs"). An SPDA provides for a single payment by an annuity holder
to the Company and the crediting of interest by the Company at the applicable
crediting rate. An FPA provides for periodic payments by an annuity holder to
the Company, the timing and amount of which are at the discretion of the annuity
holder, and the crediting of interest by the Company at the applicable crediting
rate. Interest credited on SPDAs and FPAs is not paid currently to the annuity
holder but instead accumulates and is added to the annuity holder's account
value. This accumulation is tax deferred. The crediting rate may be increased or
decreased by the Company annually, typically on the policy anniversary, subject
to specified guaranteed minimum crediting rates. Minimum guaranteed crediting
rates currently range from 3.00% to 5.50%. Withdrawals may be made at any time,
but some withdrawals may result in the assessment of surrender charges, market
value adjustments, taxes, and/or tax penalties on the withdrawn amount.
Since 1995, the Company has principally marketed SPDA annuity products,
including a product with a market value adjustment ("MVA") feature that provides
for an adjustment to the accumulated value of the policy if it is surrendered
during the surrender charge period. These products are sold predominantly
through networks of independent agents. In 1998, these new products accounted
for $46.0 million of asset accumulation product
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deposits, of which $38.8 million was attributable to the MVA annuity product.
One network of independent agents accounted for approximately 55% of the
deposits from these new products during 1998. The Company believes that it has a
good relationship with this network. Prior to 1995, the Company's strategy with
respect to this product line focused primarily on the acquisition of blocks of
annuity business from other insurers. See "Reinsurance."
The following table sets forth for the periods indicated selected financial data
concerning the Company's asset accumulation products:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------
1998 1997 1996
-------- -------- --------
(dollars in thousands)
<S> <C> <C> <C>
Asset accumulation product deposits (sales)........................... $ 47,245 $ 57,926 $ 59,460
Funds under management (at period end)................................ 633,676 658,928 690,998
</TABLE>
At December 31, 1998, funds under management consisted of $542.1 million of SPDA
liabilities and $91.6 million of FPA liabilities, with a weighted average
crediting rate of 5.4%. Of these liabilities, $224.7 million were subject to
surrender charges averaging 7.4% at December 31, 1998. Annuity liabilities not
subject to surrender charges have been in force, on average, for 17 years.
The Company prices its annuity products based on assumptions concerning
prevailing and expected interest rates and other factors to achieve a positive
difference, or spread, between its expected return on investments and the
crediting rate. The Company achieves this spread by active portfolio management
focusing on matching the durations of invested assets and related liabilities to
minimize the exposure to fluctuations in market interest rates and by the
adjustment of the crediting rate on its annuity products. In response to changes
in interest rates, the Company increases or decreases the crediting rates on its
annuity products. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources
- -Asset/Liability Management and Market Risk."
In light of the annuity holder's ability to withdraw funds and the volatility of
market interest rates, it is difficult to predict the timing of the Company's
payment obligations under its SPDAs and FPAs. Consequently, the Company
maintains a portfolio of investments which are readily marketable and expected
to be sufficient to satisfy liquidity requirements. See "Investments."
INSURANCE SERVICES
The Company provides integrated disability and absence management services
through Matrix, which was acquired in June 1998. See Note B to the Consolidated
Financial Statements. The Company offers a comprehensive package of disability
and absence management services designed to assist clients in identifying and
minimizing lost productivity and benefit payment costs resulting from employee
absence due to illness, injury or personal leave. Services that the Company
offers include event reporting, leave of absence management, claims and case
management and return to work management. The goal of these services is to
enhance employee productivity and provide more efficient benefit delivery and
enhanced cost containment. Included among the Company's clients for these
services are approximately half of the Fortune 500 companies located in
California, where most of Matrix's business was located prior to the
acquisition. Subsequent to the acquisition of this business, the Company has
begun to expand the offering of these services on a nationwide basis through the
Company's national sales offices.
The Company's subsidiary, Unicover, which was acquired in November 1998,
provides reinsurance underwriting management services, specializing in workers'
compensation insurance. See Note B to the Consolidated Financial Statements.
Unicover does not itself accept insurance risk, but underwrites reinsurance for
the pool and other facilities it manages on behalf of its client insurers
(collectively, the "Pools"). It also arranges for reinsurance protection with
respect to the risks assumed by the Pools, which is commonly known as
retrocessional coverage. Under Unicover's management, the Pools provide
reinsurance coverage with respect to certain risks of self-insured groups which
have converted to primary workers' compensation insurance coverage, as well as
certain risks of
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primary workers' compensation insurers. Unicover receives fee income as
compensation for its services, which is determined primarily as a fixed
percentage of reinsurance premiums earned by the Pools. Due to developments
which have occurred in the first quarter of 1999, Unicover's business prospects
are subject to a number of uncertainties, which are described in "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
VARIABLE LIFE INSURANCE PRODUCTS
In 1991, the Company introduced a variable flexible premium universal life
insurance policy under which the related assets are segregated in a separate
account not subject to claims of general creditors of the Company. Policyholders
may elect to deposit amounts in the account from time to time, subject to
underwriting limits and a minimum initial deposit of $1.0 million. At December
31, 1998, these deposits, excluding the Company's deposit, totaled $54.1
million. Pursuant to the investment option that is available to policyholders,
the assets of the separate account have been invested with independent
investment managers employing a variety of diversified investment strategies.
Both the cash values and death benefits of these policies fluctuate according to
the investment experience of the assets in the separate account; accordingly,
the investment risk with respect to these assets is borne by the policyholders
and any adverse investment experience with respect to these investments would
not have a material adverse effect on the Company's results of operations and
financial condition. The Company earns fee income from the separate account in
the form of charges for management and other administrative fees. The Company
reinsures risks in excess of $200,000 per individual under indemnity reinsurance
arrangements with various reinsurance companies. See "Reinsurance."
UNDERWRITING PROCEDURES
Premiums charged on insurance products are based in part on assumptions about
the incidence and timing of insurance claims. The Company has adopted and
follows detailed underwriting procedures designed to assess and qualify
insurance risks before issuing policies to groups and individuals. To implement
these procedures, the Company employs a professional underwriting staff.
In underwriting group coverage, the Company focuses on the risk characteristics
of the group to be insured as a whole. A prospective group is evaluated with
particular attention paid to the claims experience of the group with prior
carriers, the occupations of the insureds, the nature of the business of the
group, the current economic outlook of the group in relation to others in its
industry and of the industry as a whole, the appropriateness of the benefits or
SIR applied for and income from other sources during disability. The Company's
policies generally afford it the flexibility to adjust premiums charged annually
to its policyholders in order to reflect emerging mortality or morbidity
experience.
INVESTMENTS
The Company's management of its investment portfolio is an important component
of its profitability since a substantial portion of its operating income is
generated from the difference between the yield achieved on invested assets and
the interest credited on policyholder funds and reserves. The Company's overall
investment strategy to achieve its objectives of safety and liquidity, while
seeking the best available return, focuses on, among other things, managing the
durations of the Company's interest-sensitive assets and liabilities and
minimizing the Company's exposure to fluctuations in interest rates.
For information regarding the composition and diversification of the Company's
investment portfolio and asset/liability management, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources" and Notes A, C and I to the Consolidated
Financial Statements.
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The following table sets forth for the periods indicated the Company's pretax
investment results:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------
1998 1997 1996
---------- ----------- ----------
(dollars in thousands)
<S> <C> <C> <C>
Average invested assets (1)................................... $2,082,993 $2,048,181 $1,822,088
Net investment income (2)..................................... 168,692 162,380 157,020
Weighted average annual yield (3)............................. 8.1% 7.9% 8.6%
Net realized investment gains (losses)........................ $ 8,060 $ 14,568 $ (2,651)
</TABLE>
(1) Average invested assets are computed by dividing the total of the
amortized cost of investments at the beginning of the period reduced by
investment related liabilities plus the individual quarter-end balances by
five and deducting one-half of net investment income.
(2) Consists principally of interest and dividend income less investment
expenses.
(3) The weighted average annual yield on the Company's investment portfolio
for each period is computed by dividing net investment income (exclusive
of realized and unrealized gains and losses) by average invested assets
for the period. The 1996 investment yields reflect strong performance by
the Company's independent investment managers program. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Results of Operations."
REINSURANCE
The Company participates in various reinsurance arrangements both as the ceding
insurer and as the assuming insurer. Arrangements in which the Company is the
ceding insurer afford various levels of protection against excessive loss by
assisting the Company in diversifying its risks and by limiting its maximum loss
on risks that exceed retention limits. Under indemnity reinsurance transactions
in which the Company is the ceding reinsurer, the Company is exposed to a degree
of risk if the assuming company becomes insolvent. To limit this risk, the
Company monitors the financial condition of its reinsurers, including, among
other things, the companies' financial ratings, and in certain cases receives
collateral security from the reinsurer. Also, certain of the Company's
reinsurance agreements require the reinsurer to set up trust arrangements for
the Company's benefit in the event of certain ratings downgrades.
The Company cedes portions of the risks relating to its group employee benefit
and variable life insurance products under indemnity reinsurance agreements with
various unaffiliated reinsurers. The terms of these agreements, which are
typical for agreements of this type, provide, among other things, for the
automatic acceptance by the reinsurer of ceded risks in excess of the Company's
retention limits stated in the agreements. The Company pays reinsurance premiums
to these reinsurers which are, in general, based upon percentages of premiums
received by the Company on the business reinsured less, in certain cases, ceding
commissions and experience refunds paid by the reinsurer to the Company. These
agreements are generally terminable at any time as to new risks by either the
Company or the reinsurer on appropriate notice; however, termination does not
affect risks ceded during the term of the agreement, which generally remain with
the reinsurer. See Note O to the Consolidated Financial Statements.
In January 1998, an offering was completed whereby shareholders and
optionholders of the Company received, at no cost, rights to purchase shares of
Delphi International Ltd. ("Delphi International"), a newly-formed, independent
Bermuda insurance holding company. During 1998, the Company entered into various
reinsurance agreements with Oracle Reinsurance Company Ltd. ("Oracle Re"), a
wholly owned subsidiary of Delphi International. Pursuant to these agreements,
approximately $101.5 million of group employee benefit reserves ($35.0 million
of long-term disability insurance reserves and $66.5 million of net excess
workers' compensation and casualty insurance reserves) were ceded to Oracle Re.
The Company has received collateral security from Oracle Re in an amount
sufficient to support the ceded reserves. These agreements are not expected to
have a material effect on the Company's financial condition, liquidity or
results of operations.
The Company currently participates as an assuming insurer in a number of
reinsurance pools, none of which are managed by Unicover. These reinsurance
pools generally are administered by TPAs or managing underwriters who underwrite
risks, coordinate premiums charged and process claims. The Company has the
right, generally exercisable annually, to terminate or change its participation
in any of these pools as to new business. In 1998,
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these reinsurance pools represented, in the aggregate, $59.2 million of premiums
and $56.0 million of benefits, and the Company's five largest participations in
these reinsurance pools represented $49.3 million of earned premiums and $48.0
million of benefits.
In addition, the Company acquired five blocks of annuity policies between 1988
and 1992 that resulted in the assumption of $967.1 million of policyholder
account balances. The first acquisition was an assumption reinsurance
transaction, and the others were indemnity reinsurance transactions. In the case
of each acquisition, assets supporting the related reserves were transferred to,
and are managed by, the Company. Pursuant to the assumption reinsurance
acquisition, the Company has the right to establish the crediting rate with
respect to the business acquired. The Company has the right under each indemnity
reinsurance transaction to recommend to the ceding company crediting rates with
respect to the business acquired. The ceding company is solely responsible for
payment of crediting rates to the extent that these rates exceed the greater of
the recommended rate and certain benchmark rates. The aggregate lapse rates
experienced on the annuity acquisitions have been consistent with the levels
assumed in pricing the transactions and consequently have not adversely affected
the Company's liquidity or results of operations.
LIFE AND ACCIDENT AND HEALTH INSURANCE RESERVES
The Company carries as liabilities actuarially determined reserves to satisfy
its life, accident and health and annuity policy and contract obligations. These
reserves, together with premiums to be received on policies in force and
interest thereon at certain assumed rates, are calculated to be sufficient to
satisfy policy and contract obligations. The Company performs periodic studies
to compare current experience for mortality, interest and lapse rates with
expected experience in the reserve assumptions to determine future policy
benefit reserves for these products. Differences are reflected currently in
earnings for each period. The Company has not experienced significant adverse
deviations from its assumptions.
The life and accident and health insurance reserves carried in the Consolidated
Financial Statements are calculated based on generally accepted accounting
principles ("GAAP") and differ from those reported by the Company for statutory
financial statement purposes. These differences arise from the use of different
mortality and morbidity tables and interest assumptions, the introduction of
lapse assumptions into the reserve calculation and the use of the level-premium
reserve method on all insurance business. See Note A to Consolidated Financial
Statements for certain additional information regarding reserve assumptions
under GAAP.
WORKERS' COMPENSATION INSURANCE RESERVES
The Company carries as liabilities actuarially determined reserves for
anticipated claims and claim expenses for its workers' compensation insurance
and other casualty insurance products. Reserves for claim expenses represent the
estimated probable costs of investigating those claims and, when necessary,
defending lawsuits in connection with those claims. Reserves for claims and
claim expenses are estimated based on individual loss data, historical loss data
and industry averages and indices and include amounts determined on the basis of
individual and actuarially determined estimates of future losses. Therefore, the
ultimate liability could deviate from the amounts currently reflected in the
Consolidated Financial Statements.
Reserving practices under GAAP allow discounting of claim reserves related to
workers' compensation losses to reflect the time value of money. Reserve
discounting for these types of claims is common industry practice, and the
discount factors used are less than the annual tax-equivalent investment yield
earned by the Company on its invested assets. Reserves for claim expenses are
not discounted.
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The following table provides a reconciliation of beginning and ending unpaid
claims and claim expenses for the periods indicated:
<TABLE>
<CAPTION>
Year Ended Period from
December 31, March 5 (1) to
------------------------ December 31
1998 1997 1996
-------- -------- --------
(dollars in thousands)
<S> <C> <C> <C>
Unpaid claims and claim expenses, beginning of period................. $388,051 $380,826 $369,871
Provision for claims and claim expenses incurred in the current year.. 61,776 41,221 28,290
(Decrease) increase in estimated claims and claim expenses
incurred in prior years (2)...................................... (166) (2,419) 7,358
-------- -------- --------
Incurred claims and claim expenses during the current year... 61,610 38,802 35,648
-------- -------- --------
Deduct claims and claim expenses paid, occurring during:
Current year..................................................... 6,953 1,498 249
Prior years...................................................... 36,494 30,079 24,444
-------- -------- --------
Total paid................................................... 43,447 31,577 24,693
-------- -------- --------
Unpaid claims and claim expenses, end of period....................... $406,214 $388,051 $380,826
======== ======== ========
</TABLE>
(1) The date the Company acquired its workers' compensation business.
(2) The 1997 decrease in estimated claims and claim expenses incurred in
prior years is principally due to favorable claims development during
the year. The 1996 increase in estimated claims and claim expenses
incurred in prior years is primarily due to the accretion of interest on
discounted claim reserves.
The effects of the discount to reflect the time value of money of $164.0
million, $168.8 million, $176.7 million and $180.8 million at March 5, 1996,
December 31, 1996, December 31, 1997 and December 31, 1998, respectively, have
been removed from the loss development table which follows in order to present
the gross loss development. The loss development table below illustrates the
development of reserves from March 5, 1996 to December 31, 1998.
<TABLE>
<CAPTION>
December 31,
March 5, -----------------------------------
1996(1) 1996 1997 1998
--------- -------- -------- ---------
(dollars in thousands)
<S> <C> <C> <C> <C>
Reserve for unpaid losses and claims expenses.................. $533,871 $549,653 $564,734 $586,984
Cumulative amount of liability paid:
One year later............................................ 24,444 30,079 36,494
Two years later........................................... 53,605 62,833
Three years later......................................... 85,739
Liability reestimated as of:
One year later............................................ 524,423 531,118 549,577
Two years later........................................... 506,024 524,304
Three years later......................................... 500,301
Cumulative Redundancy.......................................... 33,570 25,349 15,157
</TABLE>
(1) Amounts are as of or for the periods subsequent to March 5, 1996, the
date the Company acquired its workers' compensation business.
The "Reserve for unpaid claims and claim expenses" line of the table above shows
the estimated reserve for unpaid claims and claim expenses recorded at the end
of each of the periods indicated. These liabilities represent the estimated
amount of losses and expenses for claims arising in the current year and all
prior years that are unpaid at the end of each period. The "Cumulative amount of
liability paid" line of the table represents the cumulative amounts paid with
respect to the liability previously recorded as of the end of each succeeding
period. The "Liability reestimated" line of the table shows the reestimated
amount relating to the previously recorded liability and is based upon
experience as of the end of each succeeding period. This estimate is either
increased or decreased as additional information about the frequency and
severity of claims for each period becomes available and is
8
<PAGE> 10
reviewed. The Company periodically reviews the estimated reserves for claims and
claim expenses and any changes are reflected currently in earnings for each
period. The Company has not experienced significant adverse deviations from its
assumptions. The "Cumulative redundancy" line of the table represents the
aggregate change in the estimated claim reserve liabilities from the dates
indicated through December 31, 1998.
The workers' compensation insurance reserves carried in the Consolidated
Financial Statements are calculated in accordance with GAAP and, excluding the
effects of reinsurance, are approximately $28.3 million less than those reported
by the Company for statutory financial statement purposes at December 31, 1998.
This difference is primarily due to the use of different discount factors under
GAAP and SAP. See Note A to Consolidated Financial Statements for certain
additional information regarding reserve assumptions under GAAP.
COMPETITION
The insurance industry is highly competitive. The Company competes with numerous
other insurance and financial services companies both in connection with sales
of insurance and asset accumulation products and services and in acquiring
blocks of business and companies. Many of these organizations have substantially
greater asset bases, higher ratings from ratings agencies, larger and more
diversified portfolios of insurance products and larger agency sales operations.
Competition in asset accumulation product markets is also encountered from the
expanding number of banks, securities brokerage firms and other financial
intermediaries marketing alternative savings products, such as mutual funds,
traditional bank investments and retirement funding alternatives.
The Company believes that its reputation in the marketplace, quality of service
and investment returns have enabled it to compete effectively for new business
in its targeted markets. The Company reacts to changes in the marketplace
generally by focusing on products with adequate margins and attempting to avoid
those with low margins. The Company believes that its smaller size, relative to
some of its competitors, enables it to more easily tailor its products to the
demands of customers.
REGULATION
The Company's insurance subsidiaries are regulated by state insurance
authorities in the states in which they are domiciled and the states in which
they conduct business. These regulations, among other things, limit the amount
of dividends and other payments that can be made by the Company's insurance
subsidiaries without prior regulatory approval and impose restrictions on the
amount and type of investments these subsidiaries may have. These regulations
also affect many other aspects of the Company's insurance subsidiaries'
business, including, for example, risk-based capital ("RBC") requirements,
various reserve requirements, the terms, conditions and manner of sale and
marketing of insurance products and the form and content of required financial
statements. These regulations are intended to protect policyholders rather than
investors. The Company's insurance subsidiaries are required under these
regulations to file detailed annual reports with the supervisory agencies in the
various states in which they do business, and their business and accounts are
subject to examination at any time by these agencies. Under state insurance laws
and the rules of the National Association of Insurance Commissioners ("NAIC"),
the Company's insurance subsidiaries may be examined periodically, usually at
three- to five-year intervals, by the supervisory agencies of the states in
which they do business. To date, no examinations have produced any significant
adverse findings or adjustments.
From time to time, increased scrutiny has been placed upon the insurance
regulatory framework, and a number of state legislatures have considered or
enacted legislative measures that alter, and in many cases increase, state
authority to regulate insurance companies. In addition to legislative
initiatives of this type, the NAIC and insurance regulators are continuously
involved in a process of reexamining existing laws and their application to
insurance companies. Furthermore, while the federal government currently does
not directly regulate the insurance business, federal legislation and
administrative policies in a number of areas, such as employee benefits
regulation, age, sex and disability-based discrimination, financial services
regulation and federal taxation, can significantly affect the insurance
business. It is not possible to predict the future impact of changing regulation
on the operations of the Company and its insurance subsidiaries.
9
<PAGE> 11
The NAIC's RBC requirements for insurance companies take into account asset
risks, insurance risks, interest rate risks and other relevant risks with
respect to the insurer's business and specify varying degrees of regulatory
action to occur to the extent that an insurer does not meet the specified RBC
thresholds, with increasing degrees of regulatory scrutiny or intervention
provided for companies in categories of lesser RBC compliance. The Company
believes that its insurance subsidiaries are adequately capitalized under the
RBC requirements and that the thresholds will not have any significant
regulatory effect on the Company. However, were the insurance subsidiaries' RBC
position to decline in the future, the insurance subsidiaries' continued ability
to pay dividends and the degree of regulatory supervision or control to which
they are subjected may be affected.
The Company's insurance subsidiaries can also be required, under solvency or
guaranty laws of most states in which they do business, to pay assessments to
fund policyholder losses or liabilities of insurance companies that become
insolvent. These assessments may be deferred or forgiven under most solvency or
guaranty laws if they would threaten an insurer's financial strength and, in
most instances, may be offset against future state premium taxes. None of the
Company's insurance subsidiaries has ever incurred any significant costs of this
nature.
EMPLOYEES
The Company and its subsidiaries employed approximately 725 persons at December
31, 1998. The Company believes that it enjoys good relations with its employees.
OTHER SUBSIDIARIES
The Company conducts certain of its investment management activities through its
wholly-owned subsidiary, Delphi Capital Management, Inc. ("DCM"), and makes
certain investments through other wholly-owned non-insurance subsidiaries.
ITEM 2. PROPERTIES
The Company leases its principal executive offices at 1105 North Market Street,
Suite 1230, Wilmington, Delaware under an operating lease expiring in November
1999. RSLIC owns its home office building at 2501 Parkway, Philadelphia,
Pennsylvania, which consists of approximately 100,000 square feet. SNCC also
owns its home office building at 2043 Woodland Parkway, Suite 200, St. Louis,
Missouri, which consists of approximately 58,000 square feet. DCM and FRSLIC
lease their offices at 153 East 53rd Street, 49th Floor, New York, New York
under an operating lease expiring in July 2008. The Company also maintains sales
and administrative offices throughout the country to provide nationwide sales
support and service existing business.
ITEM 3. LEGAL PROCEEDINGS
In the course of their respective businesses, the Company's subsidiaries are
defendants in litigation; in the case of its insurance subsidiaries, principally
involving insurance policy claims and agent disputes, in the case of its
integrated disability and absence management subsidiary, benefit claims-related
litigation, and in the case of its reinsurance underwriting management
subsidiary, reinsurance-related litigation. In the opinion of management, the
ultimate disposition of such pending litigation will not have a material adverse
effect on the Company's financial condition, liquidity or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
10
<PAGE> 12
ITEM 4A. EXECUTIVE OFFICERS OF THE COMPANY
The table below presents certain information concerning each of the executive
officers of the Company:
<TABLE>
<CAPTION>
Name Age Position
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Robert Rosenkranz 56 Director of the Company; Chairman of the Board, President and Chief
Executive Officer of the Company; Chairman of the Board of RSLIC
Robert M. Smith, Jr. 47 Director and Vice President of the Company
Charles P. O'Brien 62 Director of the Company; President and Chief Executive Officer of RSLIC
Chad W. Coulter 36 Vice President and General Counsel of the Company; Vice President, General
Counsel and Assistant Secretary of RSLIC
Louis C. Lucido 50 Vice President, Investments of the Company
Lawrence E. Daurelle 47 Vice President and Treasurer of the Company and RSLIC
</TABLE>
Mr. Rosenkranz has served as the President and Chief Executive Officer of the
Company since May 1987 and has served as Chairman of the Board of Directors of
the Company since April 1989. He is also Chairman of the Board of RSLIC, FRSLIC
and Reliance Standard Life Insurance Company of Texas ("RSLIC-Texas") and serves
on the Board of Directors of SNCC. Mr. Rosenkranz, by means of beneficial
ownership of the corporate general partner of Rosenkranz & Company, an
irrevocable proxy and direct or beneficial ownership, has the power to vote all
of the outstanding shares of Class B Common Stock, which represents 49.9% of the
voting power of the Company's common stock as of March 12, 1999.
Mr. Smith has served as Vice President of the Company and as Vice President of
DCM since July 1994 and as a Director of the Company since January 1995. Mr.
Smith also serves as a Director of RSLIC-Texas, RSLIC, FRSLIC and SNCC. Prior to
July 1994, Mr. Smith was Director, Investment Banking for Merrill Lynch &
Company in New York, New York.
Mr. O'Brien has served as a Director of the Company since November 1987 and as
President, Chief Executive Officer and a Director of RSLIC since August 1976.
Mr. O'Brien also serves as President and Chief Executive Officer and a Director
of RSLIC-Texas and FRSLIC and as a Director of SNCC.
Mr. Coulter has served as Vice President and General Counsel of the Company and
as Vice President, General Counsel and Assistant Secretary of RSLIC, FRSLIC and
RSLIC-Texas since January 1998. He also served for RSLIC in similar capacities
from February 1994 to August 1997, and in various capacities from January 1991
to February 1994. From August 1997 to December 1997 Mr. Coulter was Vice
President and General Counsel of National Life of Vermont.
Mr. Lucido has served as Vice President, Investments of the Company since July
1997 and as a Director of FRSLIC since August 1997. Prior to July 1997, Mr.
Lucido was Managing Director, Chief Operating Officer and Corporate Secretary of
Hyperion Capital Management, Inc. in New York, New York.
Mr. Daurelle has served as Vice President and Treasurer of the Company since
August 1998 and as Vice President and Treasurer of RSLIC, FRSLIC and RSLIC-Texas
since May 1995. From October 1994 to April 1995, he was Senior Vice President
and Chief Financial Officer for Mutual Assurance Company, and from September
1993 to October 1994 he was Senior Vice President, Strategic Planning for The
Fidelity Mutual Life Insurance Company. Prior to September 1993, Mr. Daurelle
was Vice President of United Pacific Life Insurance Company.
11
<PAGE> 13
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS
The closing price of the Company's Class A Common Stock was $36.94 on March 12,
1999. There were approximately 2,800 holders of record of the Company's Class A
Common Stock as of March 12, 1999.
The following table sets forth the high and low closing prices for the Company's
Class A Common Stock. The Company's Class A Common Stock is listed on the New
York Stock Exchange under the symbol DFG. Prior periods have been restated to
reflect the stock dividends distributed in 1997 and 1998.
<TABLE>
<CAPTION>
High Low
--------- ---------
<S> <C> <C> <C>
1997: First Quarter $33 59/64 $27 51/64
Second Quarter 41 3/32 28 5/32
Third Quarter 43 39/64 36 17/32
Fourth Quarter 43 1/4 36 41/64
1998: First Quarter $51 3/16 $39 41/64
Second Quarter 58 61/64 50 45/64
Third Quarter 61 1/32 38 19/64
Fourth Quarter 53 31 43/64
</TABLE>
Cash dividends have not been declared or paid on the Class A Common Stock or the
Class B Common Stock. Dividend payments are permitted under the terms of the
Company's $85.0 million 8% Senior Notes due 2003 (the "Senior Notes") subject to
certain restrictions and covenants. Under the Company's $200.0 million revolving
credit facility (the "Credit Agreement"), dividends on, together with any
repurchases or redemptions by the Company of, its capital stock, may not, during
any fiscal year, exceed 4% of the Company's Consolidated Equity (as defined in
the Credit Agreement) as of the end of the preceding fiscal year. The Credit
Agreement also permits additional repurchases by the Company of its capital
stock in an aggregate amount of up to $20.0 million over the term of the Credit
Agreement.
In addition, dividend payments by the Company's insurance subsidiaries to the
Company are subject to certain regulatory restrictions. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources" and "Business - Regulation." The Company
presently intends to retain earnings to finance the development and growth of
its business. Accordingly, the Company does not anticipate payment of any cash
dividends in the foreseeable future.
12
<PAGE> 14
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data below should be read in conjunction with
Management's Discussion and Analysis of Financial Condition and Results of
Operations and the Consolidated Financial Statements and related notes.
<TABLE>
<CAPTION>
Year Ended December 31, (1)
------------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
INCOME STATEMENT DATA: (dollars and shares in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Insurance premiums and fee income:
Group employee benefit products...... $416,411 $355,892 $331,378 $257,079 $233,697
Asset accumulation products.......... 2,583 3,072 2,122 2,121 1,716
Other................................ 30,890 1,907 1,733 1,702 13,099
Net investment income................... 168,692 162,380 157,020 117,112 106,576
Net realized investment gains (losses).. 8,060 14,568 (2,651) 704 10,213
-------- -------- -------- -------- --------
Total revenue........................ 626,636 537,819 489,602 378,718 365,301
Benefits and expenses................... 471,492 404,925 389,983 314,549 315,407
-------- -------- -------- -------- --------
Operating income (2)................. 155,144 132,894 99,619 64,169 49,894
Interest expense........................ 17,369 15,030 18,269 13,257 12,252
Income taxes............................ 44,688 38,226 27,496 18,170 11,698
Dividends on Capital Securities (3)..... 6,052 4,656 -- -- --
-------- -------- --------- --------- ---------
Income from continuing operations.... $ 87,035 $ 74,982 $ 53,854 $ 32,742 $ 25,944
======== ======== ======== ======== ========
Net income (4) ...................... $ 87,035 $ 74,982 $ 47,253 $ 30,464 $ 25,818
======== ======== ======== ======== ========
BASIC RESULTS PER SHARE: (5)
Income from continuing operations excluding
investment gains (losses)............ $ 4.03 $ 3.36 $ 3.03 $ 2.16 $ 1.31
Income from continuing operations....... $ 4.29 $ 3.85 $ 2.94 $ 2.19 $ 1.76
Net income (4).......................... $ 4.29 $ 3.85 $ 2.58 $ 2.04 $ 1.75
Weighted average shares outstanding..... 20,276 19,487 18,333 14,955 14,712
DILUTED RESULTS PER SHARE: (5)
Income from continuing operations excluding
realized investment gains (losses)... $ 3.88 $ 3.19 $ 2.83 $ 2.12 $ 1.27
Income from continuing operations....... $ 4.13 $ 3.65 $ 2.75 $ 2.15 $ 1.71
Net income (4).......................... $ 4.13 $ 3.65 $ 2.41 $ 2.00 $ 1.70
Weighted average shares outstanding..... 21,069 20,537 19,614 15,259 15,147
OTHER DATA:
Diluted book value per share (6)........ $ 27.66 $ 25.06 $ 18.14 $ 14.61 $ 11.21
Return on average shareholders' equity (7) 15.4% 15.0% 18.5% 16.6% 10.4%
Interest coverage ratio (8)............. 8.93x 8.84x 5.83x 4.84x 4.07x
</TABLE>
<TABLE>
<CAPTION>
December 31, (1)
--------------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
BALANCE SHEET DATA: (dollars in thousands)
<S> <C> <C> <C> <C> <C>
Total investments....................... $2,432,635 $2,480,402 $2,295,007 $1,791,531 $1,965,154
Total assets............................ 3,396,197 3,203,713 2,857,906 2,323,010 2,472,776
Long-term debt.......................... 265,165 178,769 231,004 134,611 159,577
Capital Securities (3).................. 100,000 100,000 -- -- --
Shareholders' equity ................... 566,440 509,486 366,965 222,815 170,382
Debt to total capitalization ratio (9).. 28.5% 22.7% 38.6% 37.7% 48.4%
</TABLE>
13
<PAGE> 15
(1) Reflects the acquisitions of Unicover and Matrix in 1998 and SNCC in 1996.
See Note B to the Consolidated Financial Statements. Amounts for 1994
include individual life insurance business, which the Company exited in
July 1994.
(2) Income from continuing operations before interest and income tax expense
and dividends on Capital Securities of Delphi Funding L.L.C.
(3) Reflects the issuance of and the payment of dividends on $100.0 million of
Capital Securities by Delphi Funding L.L.C. (the "Capital Securities"). See
Note J to the Consolidated Financial Statements.
(4) The Company discontinued its long-term care business in 1996 and recorded a
one-time after-tax charge of $5.8 million in 1996 attributable to this
discontinuance. After-tax operating losses on this business were $0.8
million, $2.3 million and $0.1 million in 1996, 1995 and 1994,
respectively.
(5) Restated to reflect stock dividends distributed during 1998.
(6) Diluted book value per share is calculated by dividing shareholders'
equity, as increased by the proceeds and tax benefit from the assumed
exercise of outstanding stock options, by total shares outstanding, also
increased by shares issued upon the assumed exercise of the options and
deferred shares.
(7) Return on average shareholders' equity is calculated by dividing income
from continuing operations, excluding after-tax realized investment gains
and losses, by average shareholders' equity, excluding after-tax realized
investment gains and losses, discontinued operations, extraordinary items
and changes in accounting principles, as determined as of the beginning and
end of each year.
(8) The interest coverage ratio is calculated by dividing income from
continuing operations before interest and income tax expense and dividends
on the Capital Securities by interest expense (1996 excludes interest paid
in connection with the settlement of prior-year federal income taxes).
(9) The debt to total capitalization ratio is calculated by dividing long-term
debt by the sum of the Company's long-term debt, Capital Securities and
shareholders' equity.
14
<PAGE> 16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The analysis of the results of operations and financial condition of the Company
below should be read in conjunction with the Consolidated Financial Statements
and related notes.
RESULTS OF OPERATIONS
1998 COMPARED TO 1997
Insurance Premiums and Fee Income. Insurance premiums in 1998 were $418.4
million as compared to $358.4 million in 1997, an increase of 17%. This increase
was primarily attributable to the Company's group employee benefits segment and
reflects strong production of new business, normal growth in employment and
salary levels for the Company's existing customer base and expansion within the
alternative risk transfer market. A decrease in excess workers' compensation
premiums from prior year levels as a result of a continued weak pricing
environment in this market sector has not had a material impact on underwriting
results due to corresponding decreases in benefits. Fee income was $31.5 million
($26.3 million in the fourth quarter) in 1998 as compared to $2.5 million in
1997. This increase was due to the inclusion of fee income of $28.8 million from
the Company's reinsurance underwriting management and integrated disability and
absence management subsidiaries, which were acquired in 1998. Deposits from the
Company's SPDA products, including the Company's MVA annuity product, were $46.0
million in 1998 as compared to $55.5 million in 1997. Deposits for these
products, which are long-term in nature, are not recorded as premiums; instead,
the deposits are recorded as a liability. The decrease in deposits was
principally attributable to a decline in the demand for fixed annuity products
due to the low interest rate environment.
The Company's future ability to generate fee income at the level reflected in
the fourth quarter of 1998 is to a significant extent dependent on the future
reinsurance premiums generated by the Pools Unicover manages. Pending the
resolution of certain existing disputes relating to the retrocessional coverage
for the Pools managed by Unicover, which coverage by its contractual terms
extends to December 2000, Unicover has at present ceased accepting new
reinsurance business on behalf of the Pools; moreover, a number of Unicover pool
and facility members have recently terminated participation in the Pools as to
new business. In addition, while substantial future fee income is contractually
associated with anticipated premiums on reinsurance business previously placed
by Unicover on behalf of the Pools, uncertainties, including the retrocessional
coverage disputes, exist which may adversely impact the practical ability to
realize such premiums, and therefore, such fee income. For all of these reasons,
which resulted from developments occurring in the first quarter of 1999, no
assurances can be given concerning future levels of the Company's fee income.
The Unicover acquisition has been accounted for using the purchase accounting
method, and goodwill recorded in connection therewith is presently being
amortized on a straight-line basis over 25 years. However, due to the
uncertainties discussed above as to Unicover's future business, the Company will
on an ongoing basis review and assess, in light of future developments, the
extent, if any, to which future additional consideration relating to the
acquisition will be recorded as goodwill and the manner in which goodwill
associated with this business is amortized or recovered. Any future
determinations by the Company to decrease or eliminate amounts recorded as
goodwill or to accelerate the amortization of goodwill would correspondingly
increase the Company's expenses for the relevant period or periods. However, it
is not possible at this time to predict whether any such determinations will be
made or the extent of any related impact on future expenses. See Note B to the
Consolidated Financial Statements.
Net Investment Income. Net investment income in 1998 was $168.7 million as
compared to $162.4 million in 1997, an increase of 4%. The weighted average
annual yield on invested assets, excluding realized and unrealized investment
gains and losses, was 8.1% on average invested assets of $2,083.0 million in
1998 and 7.9% on average invested assets of $2,048.2 million in 1997.
Net Realized Investment Gains. Net realized investment gains were $8.1 million
in 1998 as compared to $14.6 million in 1997. The Company's investment strategy
results in periodic sales of securities and the recognition of realized
investment gains and losses.
15
<PAGE> 17
Benefits and Expenses. Policyholder benefits and expenses were $471.5 million in
1998 as compared to $404.9 million in 1997, an increase of 16%. Benefits and
expenses for the Company's group employee benefit products increased by $60.6
million in 1998 primarily due to growth in this segment. The combined ratio
(loss ratio plus expense ratio) for group employee benefit products was 96.5% in
1998 and 95.9% in 1997. The increase in benefits and expenses also includes an
$11.9 million increase in other operating expenses primarily attributable to the
Company's reinsurance underwriting management and disability and absence
management subsidiaries, which were acquired in 1998. Benefits and interest
credited on asset accumulation products decreased by $4.1 million in 1998
principally due to a decrease in average funds under management from $670.1
million in 1997 to $628.7 million in 1998. In addition, the weighted average
annual crediting rate on asset accumulation products decreased from 5.3% in 1997
to 5.2% in 1998.
Operating Income. Income from continuing operations before interest and income
tax expense and dividends in 1998 was $155.1 million as compared to $132.9
million in 1997, an increase of 17%. The increase is primarily attributable to
the growth in the Company's group employee benefits segment, the increase in
yield on invested assets in the asset accumulation products segment and the
favorable impact of the Company's acquisitions completed during 1998, partially
offset by the decrease in realized investment gains.
Interest Expense. Interest expense was $17.4 million in 1998 as compared to
$15.0 million in 1997. The increase was primarily due to additional borrowings
under the Credit Agreement in 1998 to fund the Unicover and Matrix acquisitions
and investment opportunities.
Income Taxes. Income tax expense was $44.7 million in 1998 as compared to $38.2
million in 1997. The Company's effective tax rate was 32.4% in both 1998 and
1997.
1997 COMPARED TO 1996
Insurance Premiums and Fee Income. Insurance premiums in 1997 were $358.4
million as compared to $333.0 million in 1996, an increase of 8%. Premiums from
the Company's group employee benefits segment, excluding excess workers'
compensation insurance, increased by $16.2 million primarily due to the impact
of certain price increases, growth and development of the Company's distribution
system and normal growth in employment and salary levels for the Company's
existing customer base. Premiums from the Company's excess workers' compensation
insurance product, which was acquired in March 1996 and included in the
Company's results from the date of the acquisition, totaled $64.5 million in
1997 as compared to $56.2 million in 1996. Excess workers' compensation
insurance premiums have decreased from full-year 1996 levels primarily due to
state mandated reductions in workers' compensation premium rates and increased
competition. The Company does not expect this reduction in premiums to have a
material impact on the underwriting results for this product as decreased
workers' compensation benefit levels, also mandated by the states, are expected
to offset the decline in premiums. Deposits from the Company's SPDA products,
including the Company's MVA annuity product, were $55.5 million in 1997 as
compared to $57.5 million in 1996. Deposits for these products, which are
long-term in nature, are not recorded as premiums; instead, the deposits are
recorded as a liability.
Net Investment Income. Net investment income in 1997 was $162.4 million as
compared to $157.0 million in 1996, an increase of 3%. The increase is primarily
due to an increase in average invested assets as a result of the acquisition of
SNCC, the investment of a portion of the proceeds from the issuance of the
Capital Securities and net cash provided by operating activities, partially
offset by a decrease in the weighted average yield. The 1996 investment results
reflect strong performance by the Company's independent investment managers
program. The weighted average annual yield on invested assets, excluding
realized and unrealized investment gains and losses, was 7.9% on average
invested assets of $2,048.2 million in 1997 and 8.6% on average invested assets
of $1,822.1 million in 1996.
Net Realized Investment Gains (Losses). The Company's investment strategy
results in periodic sales of securities and the recognition of realized
investment gains and losses. Net realized investment gains were $14.6 million in
1997 as compared to net realized investment losses of $2.7 million in 1996.
During 1997, the Company reevaluated the amortization period for deferred
futures losses associated with its mortgage-backed securities portfolio due to a
decline in market interest rates to record low levels and accelerated the
amortization by $9.9 million.
16
<PAGE> 18
Benefits and Expenses. Policyholder benefits and expenses were $404.9 million in
1997 as compared to $390.0 million in 1996, an increase of 4%. During 1997,
benefits and expenses for group employee benefit products increased by $20.8
million as compared to 1996, primarily due to growth in this segment. Also
contributing to the increase was the inclusion of the Company's excess workers'
compensation insurance product, which was acquired in March 1996, for the full
year of 1997. The combined ratio (loss ratio plus expense ratio) for group
employee benefit products was 95.9% and 96.7% for 1997 and 1996, respectively.
While amortization of cost of business acquired related to asset accumulation
products was accelerated by $4.8 million during 1996 due to better than expected
investment results, there was no net acceleration or deceleration during 1997.
The weighted average annual crediting rate on asset accumulation products for
1997 and 1996 was 5.3% and 5.2%, respectively.
Operating Income. Income from continuing operations before interest and income
tax expense and dividends in 1997 was $132.9 million as compared to $99.6
million in 1996, an increase of 33%. The increase was primarily due to the
inclusion of excess workers' compensation insurance results for the entire year
of 1997 and realized investment gains in 1997 as compared to realized investment
losses in 1996.
Interest Expense. Interest expense in 1997 was $15.0 million as compared to
$18.3 million in 1996. This decrease is primarily due to the repayment of $50.0
million of borrowings under the Credit Agreement with a portion of the proceeds
from the issuance of the Capital Securities, partially offset by the inclusion
in 1997 of a full year of interest expense on the $45.0 million of 8.5% senior
secured notes due 2003 (the "SIG Senior Notes") assumed in connection with the
acquisition of SNCC in 1996. In addition, the 1996 period includes interest paid
in connection with the settlement of prior-year federal income taxes.
Income Taxes. Income tax expense in 1997 was $38.2 million as compared to $27.5
million in 1996. The Company's effective tax rate decreased from 33.8% in 1996
to 32.4% in 1997 primarily due to tax-exempt investment income.
Dividends on Capital Securities. In March 1997, Delphi Funding issued $100.0
million of Capital Securities in a public offering. See Note J to the
Consolidated Financial Statements.
Discontinued Operations. During 1997, the Company disposed of its long-term care
business, which was discontinued in 1996. The proceeds from the disposal were
not material and the actual results for this business subsequent to its
discontinuance did not materially differ from the loss of $5.8 million, net of a
tax benefit of $3.2 million, provided for in 1996 in connection with the
discontinuance of this business. See Note Q to the Consolidated Financial
Statements.
LIQUIDITY AND CAPITAL RESOURCES
General. The Company had approximately $223.8 million of financial resources
available at the holding company level at December 31, 1998, 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 a surplus debenture (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. At December 31, 1998, the unpaid principal balance
of the Surplus Debenture, which is payable in quarterly installments through
September 1999, was $18.3 million. Payments on the Surplus Debenture are
generally funded by dividend payments made by RSLIC to RSLIC-Texas. During 1999,
RSLIC will be permitted, without prior regulatory approval, to make dividend
payments of $19.6 million. In addition, SNCC will be permitted, without
regulatory or other approval, to make dividend payments of $20.7 million in
1999. Additional
17
<PAGE> 19
dividends may also be paid by RSLIC and SNCC with the requisite approvals. See
"Business-Regulation." In general, dividends from the Company's non-insurance
subsidiaries are not subject to regulatory or other restrictions. As of December
31, 1998, the Company had $71.0 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 $5.7 million of 8% subordinated notes
due 2003 (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. See Note E to the
Consolidated Financial Statements.
Furthermore, the terms of each of the SNCC, Matrix and Uncover acquisitions
provide for the payment of additional consideration to the former shareholders
of each of the acquired companies based on, in the case of the SNCC and Matrix
acquisitions, the attainment of certain earnings targets and, in the case of the
Unicover acquisition, varying multiples of pre-tax cash flow. See Note B to the
Consolidated Financial Statements.
The Company actively pursues acquisitions of blocks of business and insurance
and financial services companies that complement or may otherwise be
strategically consistent with its existing business. The Company routinely
engages in discussions with respect to certain potential transactions, any of
which could, if consummated, be material to the Company's operations.
Sources of liquidity available to the Company on a parent company-only basis,
including the undistributed earnings of its subsidiaries, scheduled payments
under the Surplus Debenture and additional borrowings available under the Credit
Agreement, are expected to exceed the Company's current and long-term cash
requirements.
The principal liquidity requirements of the Company's insurance subsidiaries
are, in the cases of RSLIC, FRSLIC and SNCC, their contractual obligations to
policyholders, and in the case of RSLIC-Texas, its payments to the Company on
the Surplus Debenture. The primary sources of funding for these obligations, in
addition to operating earnings, are the marketable investments included in the
investment portfolios of RSLIC, FRSLIC and SNCC. The Company believes that these
sources of funding will be adequate for its insurance subsidiaries to satisfy on
both a short-term and long-term basis these contractual obligations throughout
their estimated or stated period.
Cash Flows. During 1998, operating activities increased cash and cash
equivalents by $42.5 million, excluding the one-time effect of the cession of
$101.5 million of group employee benefit product reserves to Oracle Re (see Note
O to the Consolidated Financial Statements). In addition to the Oracle Re
transaction, operating cash flows decreased as compared to 1997 primarily due to
an increase in federal income taxes paid. This increase was principally due to
timing differences in recognizing income from investing activities. Cash flows
from purchases and sales of investments in 1998 reflect the repositioning of a
portion of the Company's portfolio into selected categories of fixed maturity
securities to take advantage of opportunities in the marketplace to enhance
investment returns while maintaining the Company's investment objectives of
safety and liquidity. There were no significant changes in the credit quality of
the Company's investment portfolio as a result of this investment activity. Cash
provided by financing activities was primarily used to fund investment related
activities during the 1998 period.
Investments. The Company's overall investment strategy to achieve its objectives
of safety and liquidity, while seeking the best available return, focuses on,
among other things, managing the durations of the Company's interest-sensitive
assets and liabilities and minimizing the Company's exposure to fluctuations in
interest rates. The Company's investment portfolio primarily consists of
investments in fixed maturity securities, cash and short-term investments. The
weighted average credit rating of the Company's fixed maturity portfolio as
rated by Standard & Poor's Corporation was "AA" at December 31, 1998. While the
investment grade rating of the Company's fixed maturity portfolio addresses
credit risk, it does not address other risks, such as prepayment and extension
risks, which are discussed below.
18
<PAGE> 20
At December 31, 1998, 35% of the Company's total invested assets were comprised
of mortgage-backed securities, of which 40% are guaranteed by U.S. Government
sponsored entities as to the full amount of principal and interest and the
remaining 60% consists of investments in trusts created by banks and finance and
mortgage companies. Ninety-eight percent of the Company's mortgage-backed
securities portfolio, based on fair values, have been rated as investment grade
by nationally recognized statistical rating organizations. The single largest
investment in mortgage-backed securities backed by a single mortgage pool
totaled $64.9 million, or 3% of total invested assets, at December 31, 1998.
Mortgage-backed securities subject the Company to a degree of interest rate
risk, including prepayment and extension risk, which is generally a function of
the sensitivity of each security's underlying collateral to prepayments under
varying interest rate environments and the repayment priority of the securities
in the particular securitization structure. The Company seeks to limit the
extent of this risk by emphasizing the more predictable payment classes and
securities with stable collateral.
The Company maintains an investment program in which securities were purchased
using advances from the FHLB. The Company has utilized this program to manage
the duration of its liabilities and to earn spread income, which is the
difference between the financing cost and the earnings from the securities
purchased with those funds. During 1998, $125.0 million of advances from the
FHLB matured and was repaid. The remaining outstanding advances of $75.0 million
do not begin to mature until 2003. In addition, the Company utilizes reverse
repurchase agreements and futures and option contracts from time to time in
connection with its investment strategy. These transactions require the Company
to maintain securities or cash on deposit with the applicable counterparty as
collateral. As the market value of the collateral or futures and options
contracts changes, the Company may be required to deposit additional collateral
or be entitled to have a portion of the collateral returned to it. The Company
also maintains a securities lending program under which certain securities from
its portfolio are loaned to other institutions for short periods of time. The
collateral received for securities loaned is recorded at the fair value of the
collateral, which is generally in an amount in excess of the market value of the
securities loaned. The Company monitors the market value of the securities
loaned and obtains additional collateral as necessary.
The ability of the Company's insurance subsidiaries to make investments is
subject to the insurance laws and regulations of their respective state of
domicile. Each of these states has comprehensive investment regulations. In
addition, the Credit Agreement and, as to SNCC, the SIG Senior Notes also
contain limitations, with which the Company is currently in compliance in all
material respects, on the composition of the Company's investment portfolio. The
Company also continually monitors its investment portfolio and attempts to
ensure that the risks associated with concentrations of investments in either a
particular sector of the market or a single entity are limited.
Asset/Liability Management and Market Risk. Because the Company's primary assets
and liabilities are financial in nature, the Company's financial position and
earnings are subject to risks resulting from changes in interest rates. The
Company manages this risk by active portfolio management focusing on matching
the durations of invested assets and related liabilities to minimize the
exposure to fluctuations in interest rates and by the adjustment of the
crediting rate on annuity products. In addition, the Company, at times, utilizes
exchange-traded futures and option contracts to hedge the interest rate risk
associated with anticipated purchases of investments. At December 31, 1998, the
Company had no material open derivative positions.
The Company periodically analyzes the results of its asset/liability matching
through cash flow analysis under multiple interest rate scenarios. These
analyses enable the Company to measure the potential gain or loss in fair value
of its interest-rate sensitive financial instruments due to hypothetical changes
in interest rates. Based on these analyses, if interest rates were to increase
by 10% from their December 31, 1998 levels, the fair value of the Company's
interest-sensitive assets, net of corresponding changes in the fair value of
cost of business acquired and insurance and investment-related liabilities,
would decline by approximately $69.8 million. These analyses incorporate
numerous assumptions and estimates and assume no changes in the Company's
investment portfolio in reaction to such interest rate changes. Consequently,
the results of this analysis will likely be different from the actual changes
experienced under given interest rate scenarios, and those differences may be
material.
19
<PAGE> 21
The Company manages the composition of its borrowed capital by considering
factors such as the ratio of borrowed capital to total capital, future debt
requirements, the interest rate environment and other market conditions.
Approximately 51% of the Company's corporate debt was issued at fixed interest
rates. A hypothetical 10% decrease in market interest rates would cause a
corresponding $2.1 million increase in the fair value of the Company's
fixed-rate corporate debt. Because interest expense on the Company's
floating-rate corporate debt fluctuates as prevailing interest rates change,
changes in market interest rates would not materially affect its fair value.
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 74% of the Company's critical internal
computer systems are currently year 2000 compliant, and the necessary
modifications to the remaining 26% are expected to be completed and tested by
the second 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 $7.4 million, of which $5.4 million will be expensed as incurred
and $2.0 million will be capitalized and amortized over the life of the
replacement computer systems. During 1997 and 1998, the Company incurred $5.4
million of costs to address the year 2000 issue of which $3.8 million was
expensed and $1.6 million was capitalized.
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.
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
20
<PAGE> 22
this Form 10-K 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, the
ratings by major rating organizations of its insurance subsidiaries, and, as to
its Unicover subsidiary, the uncertainties and related matters described in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." 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.
ITEM 7A. MARKET RISK DISCLOSURE
The information required by Item 7A is included in this Form 10-K under the
heading "Asset/Liability Management and Market Risk" beginning on page 19 of
this Form 10-K.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by Item 8 is included in this Form 10-K beginning on
page 26 of this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 10 is included in the Company's definitive
Proxy Statement, to be filed pursuant to Regulation 14A of the Securities
Exchange Act of 1934 in connection with the Company's 1999 Annual Meeting of
Stockholders, under the captions "Election of Directors" and "Section 16(a)
Beneficial Ownership Reporting Compliance" and is incorporated herein by
reference, and in Item 4A in Part I of this Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is included in the Company's definitive
Proxy Statement, to be filed pursuant to Regulation 14A of the Securities
Exchange Act of 1934 in connection with the Company's 1999 Annual Meeting of
Stockholders, under the caption "Executive Compensation" and is incorporated
herein by reference.
21
<PAGE> 23
ITEM 12. SECURITY OWNERSHIP OF CERTAIN OWNERS AND MANAGEMENT
The information required by Item 12 is included in the Company's definitive
Proxy Statement, to be filed pursuant to Regulation 14A of the Securities
Exchange Act of 1934 in connection with the Company's 1999 Annual Meeting of
Stockholders, under the caption "Security Ownership of Certain Beneficial Owners
and Management" and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is included in the Company's definitive
Proxy Statement, to be filed pursuant to Regulation 14A of the Securities
Exchange Act of 1934 in connection with the Company's 1999 Annual Meeting of
Stockholders, under the caption "Certain Relationships and Related Party
Transactions" and is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The financial statements and financial statement schedules filed as part
of this report are listed in the Index to Consolidated Financial
Statements and Financial Statement Schedules on page 27 of this Form 10-K.
(b) No reports on Form 8-K were filed during the fourth quarter of 1998.
(c) The following Exhibits are numbered in accordance with the Exhibit Table
of Item 601 of Regulation S-K:
2.1 Agreement and Plan of Merger, dated October 5, 1995, among the
Company, SIG Holdings Acquisition Corp., and SIG Holdings, Inc.
(Exhibit 2.1) (8)
2.2 Agreement and Plan of Merger, dated June 11, 1998, by and among
Delphi Financial Group, Inc., Matrix Absence Management, Inc. and the
Shareholders named therein (14)
2.3 Stock Purchase Agreement, dated as of October 1, 1998, by and among
Delphi Financial Group, Inc., Unicover Managers, Inc., Unicover
Intermediaries, LLC and the Shareholders named therein (14)
3.1 Restated Certificate of Incorporation of Delphi Financial Group, Inc.
(Exhibit 3.2) (3)
3.2 Certificate of Amendment of Restated Certificate of Incorporation of
Delphi Financial Group, Inc. (Exhibit 3.1) (10)
3.3 Restated Certificate of Incorporation of Delphi Financial Group, Inc.
(Exhibit 3.2) (10)
3.4 Amended and Restated By-laws of Delphi Financial Group, Inc.
(Exhibit 3.4) (3)
4.1 Indenture, dated as of October 8, 1993, between Delphi Financial
Group, Inc. and State Street Bank of Connecticut (formerly Shawmut
Bank Connecticut, N.A.) as Trustee (8.0% Senior Notes due 2003)
(Exhibit 4.1) (4)
4.2 Amended and Restated Limited Liability Agreement of Delphi Funding
L.L.C. dated as of March 25, 1997, among Delphi Financial Group,
Inc., as Managing Member, Chestnut Investors III, Inc., as Resigning
Member, and the Holders of Capital Securities described therein, as
Members (Exhibit 4(a))(11)
4.3 Subordinated Indenture, dated as of March 25, 1997, between Delphi
Financial Group, Inc. and Wilmington Trust Company as Trustee
(Exhibit 4(b)) (11)
4.4 Guarantee Agreement dated March 25, 1997, between Delphi Financial
Group, as Guarantor, and Wilmington Trust Company, as Trustee
(Exhibit 4(c)) (11)
10.1 Senior Management Incentive Plan of Reliance Standard Life Insurance
Company (14)
10.2 Second Amended and Restated Employee Nonqualified Stock Option Plan
(Exhibit 4.1) (5)
10.3 The Delphi Capital Management, Inc. Pension Plan for Robert
Rosenkranz (Exhibit 10.4) (2)
10.4 Third Amended and Restated Credit Agreement dated as of
December 5, 1996, among the Company, the Lenders named therein, The
Bank of New York, NationsBank, N.A. (South) and Fleet National Bank,
as Co-Agents for the lenders, and Bank of America National Trust and
Savings Association, as Administrative Agent for the lenders
(Exhibit 10.4) (9)
10.5 Borrower Pledge Agreement, dated as of February 23, 1993, between the
Company and Bank of America Illinois (Exhibit 10.6) (2)
22
<PAGE> 24
10.6 Investment Consulting Agreement, dated as of November 10, 1988,
between Rosenkranz, Inc. and the Company (Exhibit 10.8) (3)
10.7 Investment Consulting Agreement, dated as of November 6, 1988,
between Rosenkranz, Inc. and Reliance Standard Life Insurance Company
(Exhibit 10.9) (3)
10.8 Assumption Reinsurance Agreement, dated as of December 5, 1988,
between John Alden Life Insurance Company and Reliance Standard Life
Insurance Company (Exhibit 10.11) (3)
10.9 Delphi Financial Group, Inc. Long-Term Performance-Based Incentive
Plan (12)
10.10 Settlement Agreement and Release of February 1988 among Insurers
Service Corporation, Frank B. Hall & Co. Inc., Reliance Group
Holdings Inc. and Safety National Casualty Corporation, as
supplemented and amended by letter agreement dated March 4, 1996
(Exhibit 10.11) (7)
10.11 SIG Holdings, Inc. 1992 Long-Term Incentive Plan (Exhibit 10.12) (7)
10.12 Stockholders Agreement, dated as of October 5, 1995, among the
Company and the affiliate stockholders named therein
(Exhibit 10.30) (8)
10.13 Reliance Standard Life Insurance Company Nonqualified Deferred
Compensation Plan (Exhibit 10.14)(8)
10.14 Reliance Standard Life Insurance Company Supplemental Executive
Retirement Plan (Exhibit 10.15) (8)
10.15 Amended and Consolidated Surplus Debenture, in the amount of
$58,000,000, dated December 1, 1996, issued by Reliance Standard Life
Insurance Company of Texas to Delphi Financial Group, Inc.
(Exhibit 10.15) (9)
10.16 Indemnity Coinsurance Agreement and Administrative Services
Agreement, dated as of October 3, 1994, between Reliance Standard
Life Insurance Company and Protective Life Insurance Company
(Exhibit 10.21) (6)
10.17 Indemnity Coinsurance Agreement, dated as of June 30, 1990, between
Reliance Standard Life Insurance Company and John Alden Life
Insurance Company (with exhibit 1 thereto) (Exhibit (10.22) (1)
10.18 Indemnity Coinsurance Agreement, dated as of October 31, 1990,
between Reliance Standard Life Insurance Company and John Alden Life
Insurance Company (with exhibit 1 thereto) (Exhibit 10.23) (1)
10.19 Indemnity Coinsurance Agreement, dated as of March 31, 1992, between
Reliance Standard Life Insurance Company and Washington National Life
Insurance Company of New York (filed with the Trust Agreement dated
as of April 27, 1992, between Reliance Standard Life Insurance
Company and Washington National Life Insurance Company of New York)
(Exhibit 10.24) (1)
10.20 Indemnity Coinsurance Agreement, dated as of December 31, 1992,
between Reliance Standard Life Insurance Company and Lamar Life
Insurance Company (Exhibit 10.25) (1)
10.21 Employment Agreement, dated March 18, 1994, for Robert M. Smith, Jr.
(Exhibit 10.31) (6)
10.22 Employment Agreement, dated December 22, 1995, for B.K. Werner
(Exhibit 10.22) (9)
10.23 SIG Holdings, Inc. Note Agreement, dated as of May 20, 1994 (8.5%
Senior Secured Notes due 2003) (Exhibit 10.25) (7)
10.24 Borrower Pledge Agreement, dated as of May 20, 1994, between SIG
Holdings, Inc., and the Chase Manhattan Bank, N.A., as collateral
agent (Exhibit 10.26) (7)
10.25 Subsidiary Pledge Agreement, dated as of March 5, 1996, between SIG
Holdings, Inc. and Bank of America National Trust and Savings
Association, as Administrative Agent (Exhibit 10.27) (7)
10.26 Delphi Financial Group, Inc. Amended and Restated Directors Stock
Option Plan (12)
10.27 Reinsurance Agreement, dated January 27, 1998, between Reliance
Standard Life Insurance Company and Oracle Reinsurance Company Ltd.
(12)
10.28 Casualty Excess of Loss Reinsurance Agreement, dated January 27,
1998, between Safety National Casualty Corporation and Oracle
Reinsurance Company Ltd. (12)
11.1 Computation of Results per Share of Common Stock (13)
21.1 List of Subsidiaries of the Company (14)
23.1 Consent of Ernst & Young LLP (14)
24.1 Powers of Attorney (14)
27 Financial Data Schedule (14)
- ----------------------------
(1) Incorporated herein by reference to the designated exhibit to the
Company's Registration Statement on Form S-1 dated September 30, 1993
(Registration No. 33-65828).
(2) Incorporated herein by reference to the designated exhibit to the
Company's Form 10-K for the year ended December 31, 1992.
(3) Incorporated herein by reference to the designated exhibit to the
Company's Registration Statement on Form S-1 dated March 13, 1990
(Registration No. 33-32827).
(4) Incorporated herein by reference to the designated exhibit to the
Company's Form 10-K for the year ended December 31, 1993.
23
<PAGE> 25
(5) Incorporated herein by reference to the designated exhibit to the
Company's Registration Statement on Form S-8 dated August 6, 1997
(Registration No. 333-32961).
(6) Incorporated herein by reference to the designated exhibit to the
Company's Form 10-K for the year ended December 31, 1994.
(7) Incorporated herein by reference to the designated exhibit to the
Company's Form 10-K for the year ended December 31, 1995.
(8) Incorporated herein by reference to the designated exhibit to the
Company's Registration Statement on Form S-4 dated January 30, 1996
(Registration No. 33-99164).
(9) Incorporated herein by reference to the designated exhibit to the
Company's Form 10-K for the year ended December 31, 1996.
(10) Incorporated herein by reference to the designated exhibit to the
Company's Form 10-Q for the quarter ended June 30, 1997.
(11) Incorporated herein by reference to the designated exhibit to the
Company's Current Report on Form 8-K dated March 21, 1997.
(12) Incorporated herein by reference to the designated exhibit to the
Company's Form 10-K for the year ended December 31, 1997.
(13) Incorporated herein by reference to Note N to the Consolidated
Financial Statements included elsewhere herein.
(14) Filed herewith.
(d) The financial statement schedules listed in the Index to Consolidated
Financial Statements and Financial Statement Schedules on page 27 of this
Form 10-K are included under Item 8 and are presented beginning on page
50 of this Form 10-K. All other schedules for which provision is made in
the applicable accounting regulations of the Securities and Exchange
Commission are not required under the related instructions or are
inapplicable, and therefore have been omitted.
24
<PAGE> 26
DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Delphi Financial Group, Inc.
By: /S/ ROBERT ROSENKRANZ
------------------------------------
Chairman of the Board, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
this report has been signed by the following persons on behalf of the registrant
and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Name Capacity Date
- ---- -------- ----
<S> <C> <C>
/S/ ROBERT ROSENKRANZ Chairman of the Board, March 22, 1999
- ---------------------------------------------------------- President and Chief Executive
(Robert Rosenkranz) Officer (Principal Executive
Officer)
* Director March 22, 1999
- ----------------------------------------------------------
(Edward A. Fox)
* Director March 22, 1999
- ----------------------------------------------------------
(Charles P. O'Brien)
* Director March 22, 1999
- ----------------------------------------------------------
(Lewis S. Ranieri)
* Director March 22, 1999
- ----------------------------------------------------------
(Thomas L. Rhodes)
/S/ ROBERT M. SMITH, JR. Director and March 22, 1999
- ----------------------------------------------------------
(Robert M. Smith, Jr.) Vice President
* Director March 22, 1999
- ----------------------------------------------------------
(B.K. Werner)
* Vice President and March 22, 1999
- ---------------------------------------------------------- Treasurer (Principal
Lawrence E. Daurelle Accounting and Financial
Officer)
* BY: /S/ ROBERT ROSENKRANZ
----------------------------------------------------
Attorney-in-Fact
</TABLE>
25
<PAGE> 27
DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
SELECTED QUARTERLY FINANCIAL RESULTS (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Year Ended December 31, 1998
---------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues............................................. $171,206 $152,426 $125,893 $177,111
Income from continuing operations, excluding
realized investment gains (losses)................ 19,963 18,376 17,084 26,373
Income from continuing operations.................... 38,242 21,741 10,555 16,497
Net income........................................... 38,242 21,741 10,555 16,497
Basic results per share of common stock:
Income from continuing operations excluding
realized investment gains (losses)............. $ 1.00 $ 0.92 $ 0.83 $ 1.28
Income from continuing operations................. 1.91 1.08 0.52 0.80
Net income........................................ 1.91 1.08 0.52 0.80
Diluted results per share of common stock:
Income from continuing operations excluding
realized investment gains (losses)............. $ 0.96 $ 0.88 $ 0.80 $ 1.24
Income from continuing operations................. 1.84 1.04 0.50 0.77
Net income........................................ 1.84 1.04 0.50 0.77
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31, 1997
---------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues............................................. $139,071 $127,622 $135,490 $135,636
Income from continuing operations, excluding
realized investment gains (losses)................ 17,545 15,934 16,450 15,584
Income from continuing operations.................... 20,298 16,017 19,839 18,828
Net income........................................... 20,298 16,017 19,839 18,828
Basic results per share of common stock:
Income from continuing operations excluding
realized investment gains (losses)............. $ 0.91 $ 0.83 $ 0.85 $ 0.79
Income from continuing operations................. 1.05 0.83 1.02 0.95
Net income........................................ 1.05 0.83 1.02 0.95
Diluted results per share of common stock:
Income from continuing operations excluding
realized investment gains (losses)............. $ 0.86 $ 0.78 $ 0.80 $ 0.75
Income from continuing operations................. 0.99 0.78 0.97 0.91
Net income........................................ 0.99 0.78 0.97 0.91
</TABLE>
Computations of results per share for each quarter are made independently of
results per share for the year. Due to the transactions affecting the weighted
average number of shares outstanding in each quarter and due to the uneven
distribution of earnings and losses during the year, the sum of quarterly
results per share does not equal results per share for the year. Results reflect
inclusion of Matrix and Unicover from the dates of the respective acquisitions.
Prior period results per share have been restated to reflect stock dividends
distributed in 1998.
Reporting the results of operations on a quarterly basis requires the use of
numerous estimates throughout the year, primarily in the computation of
insurance reserves and the effective rate for federal income taxes. The Company
reviews estimates at the end of each quarter and, if necessary, makes
appropriate adjustments, with the effect of these adjustments being reported in
current operations. The Company is able to assess the accuracy of its previous
quarterly estimates only at year-end. The Company's fourth quarter results
include the effect of the difference between previous estimates and actual
year-end results. Therefore, the results of an interim period may not be
indicative of the results for the entire year.
26
<PAGE> 28
DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
Page
----
<S> <C>
Audited Consolidated Financial Statements of Delphi Financial Group, Inc. and Subsidiaries:
Report of Independent Auditors....................................................................... 28
Consolidated Statements of Income - Years Ended December 31, 1998, 1997 and 1996..................... 29
Consolidated Balance Sheets - December 31, 1998 and 1997............................................. 30
Consolidated Statements of Shareholders' Equity - Years Ended December 31, 1998, 1997 and 1996....... 31
Consolidated Statements of Cash Flows - Years Ended December 31, 1998, 1997 and 1996................. 32
Notes to Consolidated Financial Statements........................................................... 33
Financial Statement Schedules of Delphi Financial Group, Inc. and Subsidiaries:
Schedule I, Summary of Investments Other Than Investments in Related Parties......................... 50
Schedule II, Condensed Financial Information of Registrant........................................... 51
Schedule III, Supplementary Insurance Information.................................................... 55
Schedule IV, Reinsurance............................................................................. 56
Schedule VI, Supplemental Information Concerning Property-Casualty Insurance Operations.............. 57
</TABLE>
27
<PAGE> 29
REPORT OF INDEPENDENT AUDITORS
Shareholders and Directors
Delphi Financial Group, Inc.
We have audited the accompanying consolidated balance sheets of Delphi Financial
Group, Inc. and subsidiaries as of December 31, 1998 and 1997, and the related
consolidated statements of income, shareholders' equity, and cash flows for each
of the three years in the period ended December 31, 1998. Our audits also
included the financial statement schedules listed in the Index to Consolidated
Financial Statements and Financial Statement Schedules. These financial
statements and schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Delphi
Financial Group, Inc. and subsidiaries at December 31, 1998 and 1997, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedules, when considered in relation to the basic financial
statements taken as a whole, present fairly, in all material respects, the
information set forth therein.
/s/ ERNST & YOUNG LLP
Philadelphia, Pennsylvania
February 8, 1999
28
<PAGE> 30
DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Revenue:
Insurance premiums................................................. $418,416 $358,417 $332,965
Fee income......................................................... 31,468 2,454 2,268
Net investment income.............................................. 168,692 162,380 157,020
Net realized investment gains (losses)............................. 8,060 14,568 (2,651)
-------- -------- --------
626,636 537,819 489,602
-------- -------- --------
Benefits and expenses:
Benefits, claims and interest credited to policyholders............ 342,997 290,761 280,620
Commissions........................................................ 34,010 27,270 24,550
Amortization of cost of business acquired.......................... 25,758 27,883 31,221
Other operating expenses........................................... 68,727 59,011 53,592
-------- -------- --------
471,492 404,925 389,983
-------- -------- --------
Income from continuing operations before interest
and income tax expense and dividends on Capital
Securities of Delphi Funding L.L.C............................ 155,144 132,894 99,619
Interest expense...................................................... 17,369 15,030 18,269
-------- -------- --------
Income from continuing operations before income tax expense
and dividends on Capital Securities of Delphi Funding L.L.C... 137,775 117,864 81,350
Income tax expense.................................................... 44,688 38,226 27,496
-------- -------- --------
Income from continuing operations before dividends on
Capital Securities of Delphi Funding L.L.C.................... 93,087 79,638 53,854
Dividends on Capital Securities of Delphi Funding L.L.C............... 6,052 4,656 --
-------- -------- --------
Income from continuing operations............................... 87,035 74,982 53,854
Discontinued operations, net of income tax benefit:
Loss from operations............................................... -- -- (765)
Loss on disposal................................................... -- -- (5,836)
-------- -------- --------
Net income...................................................... $ 87,035 $ 74,982 $ 47,253
======== ======== ========
Basic results per share of common stock:
Income from continuing operations excluding
realized investment gains (losses).............................. $ 4.03 $ 3.36 $ 3.03
Income from continuing operations.................................. 4.29 3.85 2.94
Net income......................................................... 4.29 3.85 2.58
Diluted results per share of common stock:
Income from continuing operations excluding
realized investment gains (losses).............................. $ 3.88 $ 3.19 $ 2.83
Income from continuing operations.................................. 4.13 3.65 2.75
Net income......................................................... 4.13 3.65 2.41
</TABLE>
See notes to consolidated financial statements.
29
<PAGE> 31
DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
December 31,
-------------------------
1998 1997
---------- ----------
<S> <C> <C>
Assets:
Investments:
Fixed maturity securities, available for sale ............................... $1,889,604 $2,165,069
Cash and cash equivalents.................................................... 371,762 50,580
Other investments............................................................ 171,269 264,753
---------- ----------
2,432,635 2,480,402
Cost of business acquired....................................................... 104,460 92,931
Reinsurance receivables......................................................... 356,030 234,746
Other assets.................................................................... 440,895 322,985
Assets held in separate account................................................. 62,177 72,649
---------- ----------
Total assets................................................................. $3,396,197 $3,203,713
========== ==========
Liabilities and Shareholders' Equity:
Future policy benefits.......................................................... $ 482,481 $ 436,021
Unpaid claims and claim expenses................................................ 563,907 531,409
Policyholder account balances................................................... 664,576 689,542
Corporate debt.................................................................. 265,165 178,769
Advances from Federal Home Loan Bank............................................ 75,495 201,057
Other liabilities and policyholder funds........................................ 623,997 494,082
Liabilities related to separate account......................................... 54,136 63,347
---------- ----------
Total liabilities............................................................ 2,729,757 2,594,227
---------- ----------
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;
14,955,755 and 12,884,188 shares issued and outstanding, respectively..... 150 129
Class B Common Stock, $.01 par; 20,000,000 shares authorized;
5,433,203 and 6,156,787 shares issued and outstanding, respectively....... 54 62
Additional paid-in capital................................................... 329,023 262,963
Net unrealized (depreciation) appreciation on investments.................... (18,074) 40,545
Retained earnings............................................................ 255,287 205,787
---------- ----------
Total shareholders' equity................................................ 566,440 509,486
---------- ----------
Total liabilities and shareholders' equity............................ $3,396,197 $3,203,713
========== ==========
</TABLE>
See notes to consolidated financial statements.
30
<PAGE> 32
DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Unrealized
Class A Class B Class A Additional (Depreciation)
Common Common Treasury Paid-in Appreciation on Retained
Stock Stock Stock Capital Investments Earnings Total
------- ------- -------- --------- --------------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1996............. $ 67 $ 52 $(2,342) $ 87,734 $(34,832) $172,136 $222,815
--------
Net income........................... -- -- -- -- -- 47,253 47,253
Decrease in net unrealized
depreciation on investments....... -- -- -- -- 16,883 -- 16,883
--------
Comprehensive income................. 64,136
Issuance of stock, exercise of stock
options and share conversions..... 33 -- -- 79,982 -- -- 80,015
Stock dividend....................... 19 11 -- 74,579 -- (74,610) (1)
Retirement of Treasury Stock......... (1) -- 2,342 (2,092) -- (249) --
---- ---- ------- -------- -------- -------- --------
Balance, December 31, 1996........... $118 $ 63 $ -- $240,203 $(17,949) $144,530 $366,965
==== ==== ======= ======== ======== ======== ========
Balance, January 1, 1997............. $118 $ 63 $ -- $240,203 $(17,949) $144,530 $366,965
--------
Net income........................... -- -- -- -- -- 74,982 74,982
Decrease in net unrealized
depreciation on investments....... -- -- -- -- 58,494 -- 58,494
--------
Comprehensive income................. 133,476
Issuance of stock, exercise of stock
options and share conversions..... 9 (2) -- 9,040 -- -- 9,047
Stock dividend....................... 2 1 -- 13,720 -- (13,725) (2)
---- ---- ------- -------- -------- -------- --------
Balance, December 31, 1997........... $129 $ 62 $ -- $262,963 $ 40,545 $205,787 $509,486
==== ==== ======= ======== ======== ======== ========
Balance, January 1, 1998............. $129 $ 62 $ -- $262,963 $ 40,545 $205,787 $509,486
--------
Net income........................... -- -- -- -- -- 87,035 87,035
Decrease in net unrealized
appreciation on investments....... -- -- -- -- (58,619) -- (58,619)
--------
Comprehensive income................. 28,416
Issuance of stock, exercise of stock
options and share conversions..... 15 (10) -- 28,542 -- -- 28,547
Stock dividend....................... 6 2 -- 37,518 -- (37,535) (9)
---- ---- ------- -------- -------- -------- --------
Balance, December 31, 1998........... $150 $ 54 $ -- $329,023 $(18,074) $255,287 $566,440
==== ==== ======= ======== ======== ======== ========
</TABLE>
See notes to consolidated financial statements.
31
<PAGE> 33
DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Operating activities:
Net income......................................................... $ 87,035 $ 74,982 $ 47,253
Adjustments to reconcile net income to net cash
provided by operating activities:
Change in policy liabilities, reinsurance receivables and
policyholder accounts......................................... 63,636 10,493 28,614
Policy liabilities ceded to Oracle Reinsurance Ltd.............. (101,500) -- --
Amortization, principally the cost of business acquired
and investments............................................... (40,895) 14,540 26,978
Deferred costs of business acquired............................. (36,367) (32,727) (28,718)
Net realized (gains) losses on investments...................... (8,060) (14,568) 2,651
Net change in trading account securities........................ 20,513 (21,793) (6,995)
Net change in federal income tax liability...................... (29,059) 10,016 18,360
Other........................................................... (14,334) 11,608 9,682
----------- ----------- -----------
Net cash (used) provided by operating activities.............. (59,031) 52,551 97,825
----------- ----------- -----------
Investing activities:
Securities available for sale:
Purchases of investments and loans made......................... (3,169,570) (1,662,213) (1,445,664)
Sales of investments and receipts from repayment of loans....... 3,520,827 1,429,752 1,475,106
Maturities of investments....................................... 38,798 35,429 35,722
Business acquisitions, net of consideration paid................... 16,111 -- 37,313
Change in deposit in separate account.............................. 1,261 (1,580) (1,506)
----------- ----------- -----------
Net cash provided (used) by investing activities.............. 407,427 (198,612) 100,971
----------- ----------- -----------
Financing activities:
Deposits to policyholder accounts.................................. 50,485 57,931 59,460
Withdrawals from policyholder accounts............................. (83,388) (78,132) (78,435)
Proceeds from issuance of common stock
and exercise of stock options................................... 1,572 9,045 530
Borrowings under the Credit Agreement.............................. 139,000 20,000 64,000
Principal payments under the Credit Agreement...................... (58,000) (72,000) (14,000)
Repayment of advances from the Federal Home Loan Bank.............. (125,000) -- --
Change in liability for securities loaned, sold under agreements
to repurchase and other short-term financing.................... 48,117 71,336 (157,325)
Net proceeds from issuance of Capital Securities................... -- 98,750 --
----------- ----------- -----------
Net cash (used) provided by financing activities.............. (27,214) 106,930 (125,770)
----------- ----------- -----------
Increase (decrease) in cash and cash equivalents...................... 321,182 (39,131) 73,026
Cash and cash equivalents at beginning of year........................ 50,580 89,711 16,685
----------- ----------- -----------
Cash and cash equivalents at end of year........................ $ 371,762 $ 50,580 $ 89,711
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
32
<PAGE> 34
DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation. The consolidated financial statements include the
accounts of Delphi Financial Group, Inc. ("DFG") and all of its wholly-owned
subsidiaries, including, among others, Reliance Standard Life Insurance Company
("RSLIC"), Safety National Casualty Corporation ("SNCC"), First Reliance
Standard Life Insurance Company ("FRSLIC"), Reliance Standard Life Insurance
Company of Texas ("RSLIC-Texas"), Matrix Absence Management, Inc. ("Matrix"),
and Unicover Managers, Inc. ("Unicover"). The term "Company" shall refer herein
collectively to DFG and its subsidiaries, unless the context indicates
otherwise. All significant intercompany accounts and transactions have been
eliminated. Certain reclassifications have been made in the 1997 and 1996
consolidated financial statements to conform with the 1998 presentation. As of
December 31, 1998, Mr. Robert Rosenkranz, Chairman of the Board, President and
Chief Executive Officer of DFG, by means of beneficial ownership of the
corporate general partner of Rosenkranz & Company, an irrevocable proxy and
direct or beneficial ownership, had the power to vote all of the outstanding
shares of Class B Common Stock, which represents 49.9% of the voting power of
the Company's common stock.
Nature of Operations. The Company is a holding company engaged through its
subsidiaries in offering a diverse portfolio of group employee benefit products
including life, disability, workers' compensation and personal accident
insurance, as well as reinsurance underwriting and integrated disability and
absence management services. The Company also offers asset accumulation
products, primarily annuities, to individuals and groups. The Company offers its
products and services in all fifty states and the District of Columbia. The
Company's two reportable segments are group employee benefit products and asset
accumulation products. The Company's reportable segments are strategic operating
divisions that offer distinct types of products with different marketing
strategies. The Company evaluates the performance of its segments on the basis
of income from continuing operations excluding realized investment gains and
losses and before interest and income tax expense and dividends on Capital
Securities of Delphi Funding L.L.C. The accounting policies of the Company's
segments are the same as those used in the consolidated financial statements.
Use of Estimates. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
Investments. Fixed maturity securities available for sale are carried at fair
value with unrealized appreciation and depreciation included as a component of
shareholders' equity. Other investments consist primarily of trading account
securities and equity securities. Trading account securities include bonds,
common stocks and preferred stocks and are carried at fair value with unrealized
appreciation and depreciation included in net investment income. Interest
income, dividend income and realized gains and losses from trading account
securities are also included in net investment income. Equity securities are
carried at fair value with unrealized appreciation or depreciation included as a
component of shareholders' equity. Net realized investment gains and losses on
investment sales are determined under the specific identification method and are
included in income. Declines in the fair value of investments which are
considered to be other than temporary are reported as realized losses.
Cost of Business Acquired. Costs relating to the acquisition of new insurance
business, such as commissions and policy issuance costs, are deferred when
incurred. For certain asset accumulation products, these costs are amortized in
relation to the incidence of expected gross profits over the life of the
policies and products. Deferred acquisition costs for life, accident and health
and workers' compensation insurance policies are amortized over the
premium-paying period or the expected life of the related policies. The present
value of estimated future profits ("PVFP"), which was recorded in connection
with the acquisition of RSLIC and FRSLIC in 1987, is included in cost of
business acquired. The PVFP related to annuities is subject to accrual of
interest on the unamortized balance at the credited rate and amortization is a
constant percentage of the present value of estimated future gross profits on
33
<PAGE> 35
DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1998
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
the business. Amortization of the PVFP for group life and disability insurance
is at the discount rate established at the time of the acquisition. The
amortization of cost of business acquired was accelerated by $4.8 million before
taxes in 1996, primarily due to better than anticipated investment results. The
effect of the accelerated amortization was to decrease net income by $3.1
million, or $0.17 per share ($0.16 per share assuming dilution), in 1996.
Receivables from Reinsurers. Receivables from reinsurers for future policy
benefits, unpaid claims and claim expenses and policyholder account balances are
estimated in a manner consistent with the related liabilities associated with
the reinsured policies.
Separate Account. The separate account assets and liabilities represent funds
invested in a separately administered variable life insurance product for which
the policyholder, rather than the Company, bears the investment risk. The excess
of separate account assets over the related liabilities represents the Company's
deposit in the separate account which is maintained to support the operation of
the separate account program. The Company receives a proportionate share of the
income or loss earned by the assets of the separate account, which it generally
reinvests in the separate account.
Future Policy Benefits. The liabilities for future policy benefits for
traditional nonparticipating business, excluding annuity business, have been
computed using a net level method. Mortality, withdrawals and other assumptions
are based either on the Company's past experience or various actuarial tables,
modified as necessary for possible variations. Changes in these assumptions
could result in changes in these liabilities.
Unpaid Claims and Claim Expenses. The liability for unpaid claims and claim
expenses includes amounts determined on an individual basis for reported losses
and estimates of incurred but not reported losses developed on the basis of past
experience. The methods of making these estimates and establishing the resulting
reserves are continually reviewed and updated, with any resulting adjustments
reflected in earnings currently. At December 31, 1998, reserves with a carrying
value of $454.2 million have been discounted at rates ranging from 3.7% to 7.0%.
Policyholder Account Balances. Policyholder account balances are comprised of
the Company's reserves for interest-sensitive insurance products, including
annuities. Reserves for annuity products are equal to the policyholder's
accumulated value at any point in time.
Income Taxes. RSLIC-Texas and RSLIC are taxed as life insurance companies and
file a consolidated federal tax return. FRSLIC does not qualify as a life
insurance company for federal income tax purposes and files a separate federal
tax return. DFG, SNCC and the non-insurance subsidiaries of the Company file as
a separate subgroup. The Company computes a balance sheet amount for deferred
income taxes, which is included in other assets or other liabilities, at the
rates expected to be in effect when the underlying differences will be reported
in the Company's income tax returns.
Insurance Premiums. The Company's group insurance products consist primarily of
short-duration contracts, and, accordingly, premiums for these products are
reported as earned over the contract period. Deposits for asset accumulation
products are not recorded as premiums; instead the deposits are recorded as a
liability, since these products generally do not involve mortality or morbidity
risk.
Fee Income. Fee income from reinsurance underwriting and disability and absence
management services is recognized as earned when the related services are
rendered. Fees received for services to be performed in the future are deferred
until the related services are rendered. Fee income also includes policy charges
for the cost of insurance, policy administration and surrender fees on certain
asset accumulation products.
34
<PAGE> 36
DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1998
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
Statements of Cash Flows. For purposes of the Statements of Cash Flows, the
Company defines cash equivalents as highly liquid debt instruments purchased
with maturities of three months or less.
Recently Adopted Accounting Standards. As of January 1, 1998, the Company
adopted Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income." SFAS No. 130 establishes new rules for the reporting and
display of comprehensive income and its components; however, the adoption of
SFAS No. 130 had no impact on the Company's net income or shareholders' equity.
SFAS No. 130 requires unrealized gains and losses on the Company's
available-for-sale securities, which are reported as a separate component of
shareholders' equity, to be included as a component of comprehensive income.
Prior year financial statements have been reclassified to conform to the
requirements of SFAS No. 130.
Effective January 1, 1998, the Company adopted SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." SFAS No. 131 establishes
standards for the way public enterprises disclose information about operating
segments in annual financial statements and requires those enterprises to
disclose selected information about operating segments in interim financial
reports. The adoption of SFAS No. 131 had no affect on the Company's results of
operations or financial position. See Note P to the Consolidated Financial
Statements.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which is
required to be adopted in fiscal years beginning after June 15, 1999. SFAS No.
133 permits early adoption as of the beginning of any quarter after its
issuance. The Company has not yet determined whether it will do so. SFAS No. 133
will require all derivatives to be recognized on the balance sheet at fair
value. Derivatives that are not hedges must be adjusted to fair value through
earnings. If the derivatives are a hedge, depending on the nature of the hedge,
changes in fair value of the derivatives will either be offset against the
change in fair value of the hedged items through earnings or recognized in other
comprehensive income until the hedged item is recognized in earnings. The
portion of a derivative's change in fair value not effective as a hedge will be
immediately recognized in earnings. The Company has not yet determined what the
effects of SFAS No. 133 will be on the earnings and financial position of the
Company.
NOTE B - ACQUISITIONS
On June 30, 1998, the Company acquired Matrix, a provider of integrated
disability and absence management services to the employee benefits market. The
purchase price of $33.8 million consisted of 385,810 shares of the Company's
Class A Common Stock, $7.9 million of cash and $5.7 million of notes payable.
Additional consideration of up to $4.2 million in cash will be payable if
Matrix's earnings meet specified targets over the four-year period subsequent to
the acquisition. The Matrix acquisition was accounted for using the purchase
accounting method, and the results of Matrix were included in the Company's
results from June 30, 1998, the date of the acquisition. Goodwill recorded in
connection with the Matrix acquisition is being amortized on a straight-line
basis over 25 years.
On November 25, 1998, the Company acquired Unicover, a reinsurance underwriting
manager specializing in workers' compensation coverage. The purchase price
consisted of a $22.0 million initial cash payment plus additional consideration
payable over the four and a quarter years subsequent to the acquisition based on
varying multiples of Unicover's pre-tax cash flow which average approximately
1.1 times such cash flow over this period. The additional consideration consists
of approximately 60% cash and 40% shares of the Company's Class A Common Stock.
The Company's net investment in Unicover totaled $34.8 million at December 31,
1998. The Unicover acquisition was accounted for using the purchase accounting
method, and the results of Unicover were included in the Company's results from
October 1, 1998, the effective date of the acquisition. Goodwill recorded in
35
<PAGE> 37
DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1998
NOTE B - ACQUISITIONS - (CONTINUED)
connection with the Unicover acquisition is presently being amortized on a
straight-line basis over 25 years. Pending the resolution of certain existing
disputes relating to the retrocessional coverage for the pool and other
facilities Unicover manages on behalf of its client insurers (collectively, the
"Pools"), which coverage by its contractual terms extends to December 2000,
Unicover has at present ceased accepting new reinsurance business on behalf of
the Pools; moreover, a number of Unicover pool and facility members have
recently terminated participation in the Pools as to new business. In addition,
while substantial future fee income is contractually associated with anticipated
premiums on reinsurance business previously placed by Unicover on behalf of the
Pools, uncertainties, including the retrocessional coverage disputes, exist
which may adversely impact the practical ability to realize such premiums, and
therefore, such fee income. For all of these reasons, which resulted from
developments occurring in the first quarter of 1999, the Company will on an
ongoing basis review and assess, in light of future developments, the extent, if
any, to which additional consideration will be recorded as goodwill and the
manner in which goodwill associated with this business is amortized or
recovered.
On March 5, 1996, SIG Holdings, Inc. ("SIG") and its subsidiary SNCC were merged
into a subsidiary of the Company (the "SIG Merger") for consideration of
approximately $131.9 million consisting of $54.5 million of cash, net of
approximately $1.0 million payable upon the exercise of certain SIG stock
options, and approximately 5.5 million shares of the Company's Class A Common
Stock, including shares reserved for issuance upon the exercise of stock options
of SIG assumed by the Company in connection with the merger (the "SIG Options"),
plus contingent consideration of up to $20.0 million if SIG met specified
earnings targets subsequent to the merger. The Company also assumed $45.0
million of SIG's corporate debt in connection with the merger. The contingent
consideration is payable in shares of the Company's Class A Common Stock or, at
the Company's option, in cash. During 1998, the Company paid $10.0 million of
the contingent consideration consisting of $6.9 million of cash and 61,000
shares of the Company's Class A Common Stock. As of December 31, 1998, the
Company accrued the remaining $10.0 million of the contingent consideration and
recorded additional goodwill of $10.0 million because SIG met the remaining
specified earnings targets. The SIG Merger was accounted for using the purchase
accounting method with the results of SIG included in the Company's results from
the date of the SIG Merger. Goodwill recorded in connection with the SIG Merger
is being amortized on a straight-line basis over 40 years.
NOTE C - INVESTMENTS
The amortized cost and fair value of investments in fixed maturity securities
available for sale are as follows:
<TABLE>
<CAPTION>
December 31, 1998
-----------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ----------
(dollars in thousands)
<S> <C> <C> <C> <C>
Mortgage-backed securities........................ $ 739,838 $19,629 $ (5,880) $ 753,587
Corporate securities.............................. 324,437 1,682 (61,678) 264,441
U.S. Treasury and other U.S. Government
guaranteed securities.......................... 299,950 12,997 (3,254) 309,693
Obligations of U.S. states, municipalities and
political subdivisions......................... 445,859 9,720 (2,094) 453,485
Securities sold under agreements to repurchase.... 106,905 2,122 (629) 108,398
---------- ------- -------- ----------
Total fixed maturity securities................ $1,916,989 $46,150 $(73,535) $1,889,604
========== ======= ======== ==========
</TABLE>
36
<PAGE> 38
DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1998
NOTE C - INVESTMENTS - (CONTINUED)
<TABLE>
<CAPTION>
December 31, 1997
-----------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ----------
(dollars in thousands)
<S> <C> <C> <C> <C>
Mortgage-backed securities........................ $ 818,835 $18,176 $(10,695) $ 826,316
Corporate securities.............................. 147,414 4,076 (1,819) 149,671
U.S. Treasury and other U.S. Government
guaranteed securities.......................... 715,914 32,867 (862) 747,919
Obligations of U.S. states, municipalities and
political subdivisions......................... 287,889 12,815 (1,724) 298,980
Securities sold under agreements to repurchase.... 126,968 9,279 -- 136,247
Other fixed maturity securities................... 4,835 1,101 -- 5,936
---------- ------- -------- ----------
Total fixed maturity securities................ $2,101,855 $78,314 $(15,100) $2,165,069
========== ======= ======== ==========
</TABLE>
The amortized cost and fair value of fixed maturity securities available for
sale at December 31, 1998, by contractual maturity are shown below. Expected
maturities will differ from contractual maturities because issuers may have the
right to call or prepay obligations, with or without prepayment penalties.
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
--------- ----------
(dollars in thousands)
<S> <C> <C>
Mortgage-backed securities...................................................... $ 846,743 $ 861,985
Other securities:
Less than one year........................................................... 48,929 49,313
Greater than 1, up to 5 years................................................ 49,424 60,921
Greater than 5, up to 10 years............................................... 389,393 331,752
Greater than 10 years........................................................ 582,500 585,633
---------- ----------
Total..................................................................... $1,916,989 $1,889,604
========== ==========
</TABLE>
Net investment income was attributable to the following:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------
1998 1997 1996
-------- -------- --------
(dollars in thousands)
<S> <C> <C> <C>
Gross investment income:
Fixed maturity securities....................................... $183,828 $120,628 $116,170
Other........................................................... 297 53,956 55,018
-------- -------- --------
184,125 174,584 171,188
Less: Investment expenses.......................................... 15,433 12,204 14,168
-------- -------- --------
$168,692 $162,380 $157,020
======== ======== ========
</TABLE>
Net realized investment gains (losses) arose from the following:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------
1998 1997 1996
-------- -------- --------
(dollars in thousands)
<S> <C> <C> <C>
Fixed maturity securities.......................................... $ 45,273 $ 1,911 $(5,947)
Other investments.................................................. (37,213) 12,657 3,296
-------- ------- ------
$ 8,060 $14,568 $(2,651)
======== ======= =======
</TABLE>
37
<PAGE> 39
DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1998
NOTE C - INVESTMENTS - (CONTINUED)
Proceeds from sales of fixed maturity securities during 1998, 1997 and 1996 were
$3,420.1 million, $1,199.6 million and $1,114.9 million, respectively. Gross
gains of $98.2 million, $34.3 million and $17.1 million and gross losses of
$52.9 million, $21.1 million and $21.7 million, respectively, were realized on
those sales. Sales of fixed maturity securities and gross gains and losses from
such sales do not include sales of securities classified as trading account
securities. During 1997, the Company reevaluated the amortization period for
deferred futures losses associated with its mortgage-backed securities portfolio
due to a decline in market interest rates to record low levels and accelerated
the amortization by $9.9 million.
The change in unrealized (depreciation) appreciation on investments, primarily
fixed maturity securities, included as a component of shareholders' equity was
as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------
1998 1997 1996
-------- ------- -------
(dollars in thousands)
<S> <C> <C> <C>
Gross change in unrealized (depreciation) appreciation
on investments (1).............................................. $(53,380) $67,963 $15,160
Less: reclassification adjustment for gain (losses)
included in net income (2)...................................... 5,239 9,469 (1,723)
-------- ------- -------
Net change in unrealized (depreciation) appreciation
on investments.................................................. $(58,619) $58,494 $16,883
======== ======= =======
</TABLE>
(1) Net of tax (benefit) expense of $(28.7) million, $36.6 million and
$8.2 million, respectively.
(2) Net of tax expense (benefit) of $2.8 million, $5.1 million and
$(0.9) million, respectively.
Unrealized (losses) gains on trading securities included in investment income
totaled $(14.3) million, $(1.4) million and $5.4 million for 1998, 1997 and
1996, respectively.
Bonds and short-term investments with amortized costs of $29.0 million and $25.2
million at December 31, 1998 and 1997, respectively, are on deposit with various
states' insurance departments in compliance with statutory regulations.
Additionally, certain assets of the Company were restricted under the terms of
annuity reinsurance agreements. These agreements provide for the distribution of
assets to the reinsured companies covered under the agreements prior to any
general distribution to policyholders in the event of the Company's insolvency
or bankruptcy. The amount of assets restricted for this purpose was $108.5
million and $129.5 million at December 31, 1998 and 1997, respectively. Further,
$39.6 million of cash and cash equivalents at December 31, 1998 were restricted
pursuant to the terms of certain reinsurance underwriting management agreements.
During 1998, the Company initiated a securities lending program under which
certain securities from its portfolio are loaned to other institutions for short
periods of time. The collateral received for securities loaned is recorded at
the fair value of the collateral, which is generally in an amount in excess of
the market value of the securities loaned. The Company monitors the market value
of the securities loaned and obtains additional collateral as necessary. At
December 31, 1998, deposits on loaned securities totaled $67.3 million, and the
market value of loaned securities totaled $65.6 million.
Other investments at December 31, 1998 and 1997 principally include trading
account securities of $99.9 million and $134.5 million and equity securities of
$37.7 million and $62.3 million, respectively. Included in other assets are
amounts receivable from brokers for investment sales totaling $159.9 million and
$185.6 million at December 31, 1998 and 1997, respectively.
38
<PAGE> 40
DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1998
NOTE C - INVESTMENTS - (CONTINUED)
As of December 31, 1998 and 1997, approximately 35% and 39%, respectively, of
the Company's total invested assets were comprised of mortgage-backed
securities. The Company's mortgage-backed securities are diversified with
respect to size and geographic distribution of the underlying mortgage loans.
The Company also invests in certain non-investment grade securities as
determined by nationally recognized statistical rating agencies. Non-investment
grade securities included in fixed maturity securities had fair values of $81.9
million and $84.2 million at December 31, 1998 and 1997, respectively. Trading
account securities included additional non-investment grade securities with fair
values of $35.8 million and $59.5 million at December 31, 1998 and 1997,
respectively. In the aggregate, non-investment grade securities constituted 5%
and 6% of total invested assets at December 31, 1998 and 1997, respectively.
The fair value of the Company's investment in the securities of any one issuer
or securities backed by a single pool of assets, excluding U.S. Government
obligations, whose value represented 10% or more of shareholders' equity at
December 31, 1998 was as follows: Bankers Trust Corporation Secured Portfolio
Notes, Series 1998-1 - $157.1 million and Federal Home Loan Mortgage Corporation
("FHLMC"), Series 2061-G Certificates - $64.9 million. The Bankers Trust notes,
which are classified as available for sale corporate securities, are
privately-placed structured notes maturing in 2008 having a variable crediting
rate which is linked, on an amortizing basis over the term of the notes, to the
actual investment performance of a special purpose entity which owns investments
in a diversified portfolio of investment vehicles of independent investment
managers. The FHLMC certificates, which are classified as available for sale
mortgage-backed securities, are sequential pay collateralized mortgage
obligations with a fixed coupon rate of 6.5% and a stated maturity in 2028.
The Company from time to time utilizes U.S. Treasury futures and option
contracts to reduce the risk associated with changes in interest rates in
connection with anticipated securities purchases. Because these contracts reduce
the Company's exposure to interest rate risk, they qualify as a hedge for
accounting purposes. During 1998, the Company realized gains of $17.9 million
from futures and option contracts related to this program which were recorded as
an adjustment to the cost basis of the securities when acquired. If the hedged
securities are sold or otherwise disposed of, the related realized gain or loss
would be computed based upon the difference between the adjusted amortized cost
of the security and the proceeds received. In addition, the Company at times
enters into futures and option contracts in connection with its investment
strategy that do not qualify for hedge accounting. Accordingly, these positions
are carried at fair value with gains and losses included in income. During 1998,
the Company recognized net investment income of $2.5 million and net realized
losses of $25.3 million related to these instruments, which had an average fair
value of $4.7 million included in total assets during the period.
Over-the-counter options subject the Company to credit risk to the extent that
counterparties of the transactions fail to perform under the contracts. The
Company manages this risk by only entering into contracts with highly rated
institutions and through listed exchanges. In addition, the contracts to which
the Company is party typically contain collateral requirements and require daily
cash settlement for changes in market value. The Company had no material
derivative positions at December 31, 1998.
39
<PAGE> 41
DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1998
NOTE D - ACCIDENT AND HEALTH AND CASUALTY FUTURE POLICY BENEFITS AND UNPAID
CLAIMS AND CLAIM EXPENSES
The following table provides a reconciliation of the beginning and ending
accident and health and casualty future policy benefits and unpaid claims and
claim expenses:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------
1998 1997 1996
-------- -------- --------
(dollars in thousands)
<S> <C> <C> <C>
Balance at beginning of year, net of reinsurance...................... $650,019 $630,485 $245,323
SNCC reserves at merger, net of reinsurance........................... -- 356,370
Add:
Provisions for claims and claim expenses incurred in the
current year, net of reinsurance................................ 176,154 140,393 133,111
Decrease in estimated claims and claim expenses incurred
in prior years, net of reinsurance.............................. (6,658) (9,102) (3,461)
-------- -------- --------
Incurred claims and claim expenses during the current
year, net of reinsurance........................................ 169,496 131,291 129,650
-------- -------- --------
Deduct claims and claim expenses paid, net of reinsurance,
occurring during:
Current year.................................................... 35,669 24,454 23,870
Prior year...................................................... 188,035 87,303 76,988
-------- -------- --------
223,704 111,757 100,858
-------- -------- --------
Balance at end of year, net of reinsurance............................ 595,811 650,019 630,485
Reinsurance receivables at end of year................................ 200,021 84,446 66,172
-------- -------- --------
Balance at end of year, gross of reinsurance....................... $795,832 $734,465 $696,657
======== ======== ========
</TABLE>
NOTE E - CORPORATE DEBT
At December 31, 1998 and 1997, the Company's outstanding borrowings under its
$200.0 million revolving credit facility with a group of lenders (the "Credit
Agreement") totaled $129.0 million and $48.0 million, respectively. The
borrowings under the Credit Agreement accrue interest at a floating rate which
is indexed to various published interest indices, and a non-use fee is charged
on any unused portion of the commitment. The maximum amount of borrowings
available under the Credit Agreement will be reduced to the following amounts in
October of each year: 1999 - $180.0 million, 2000 - $150.0 million, 2001 -
$110.0 million and 2002 - $60.0 million. The final maturity of the Credit
Agreement is on April 1, 2003. The debt is secured by a security interest in all
of the common stock and the surplus debenture of RSLIC-Texas, the issued and
outstanding common stock of substantially all of the Company's non-insurance
subsidiaries and, on a subordinated basis, the common stock of SNCC. The debt is
also subject to certain restrictions and financial covenants considered ordinary
for this type of borrowing. They include, among others, the maintenance of
certain financial ratios, minimum statutory surplus requirements for RSLIC and
SNCC, minimum consolidated equity requirements for the Company and certain
investment and dividend limitations. As of December 31, 1998, the Company was in
compliance in all material respects with all restrictions and covenants in the
Credit Agreement.
The Company's $85.0 million of 8.0% Senior Notes due 2003 (the "Senior Notes")
are senior unsecured obligations of the Company and, as such, are effectively
subordinated to all existing and future obligations of the Company's
subsidiaries, including the insurance subsidiaries' obligations to
policyholders. The Senior Notes are not redeemable prior to maturity or entitled
to any sinking fund. In certain instances, holders of the Senior Notes have the
right to require the Company to repurchase any or all of the Senior Notes owned
by such holder at 101% of the principal amount thereof, plus accrued and unpaid
interest. The terms of the indenture pursuant to which the Senior
40
<PAGE> 42
DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1998
NOTE E - CORPORATE DEBT - (CONTINUED)
Notes were issued contain certain covenants and restrictions which set forth,
among other things, limitations on incurrence of indebtedness by the Company and
its subsidiaries, limitations on payments of dividends on and repurchases of
stock of the Company and limitations on transactions with stockholders and
affiliates. As of December 31, 1998, the Company was in compliance in all
material respects with the terms of the indenture.
In conjunction with the SIG Merger, the Company assumed $45.0 million of SIG's
8.5% senior secured notes (the "SIG Senior Notes"). The SIG Senior Notes mature
in $9.0 million annual installments beginning in May 1999 and are collateralized
by all of the common stock of SNCC. The terms of the note agreement pursuant to
which the SIG Senior Notes were issued contain certain covenants and
restrictions which set forth, among others, minimum statutory requirements for
SNCC, minimum consolidated equity requirements for SIG, as well as the
maintenance of certain financial ratios. As of December 31, 1998, SIG was in
compliance in all material respects with the terms of the note agreement.
In conjunction with the acquisition of Matrix, the Company issued $5.7 million
of 8% subordinated notes due 2003 (the "Subordinated Notes"). The Subordinated
Notes are unsecured obligations of the Company, and payments of principal and
interest on the notes is subordinated to all of the Company's senior debt
obligations.
Interest paid during 1998, 1997 and 1996 totaled $17.0 million, $14.5 million
and $17.2 million, respectively.
NOTE F - ADVANCES FROM THE FEDERAL HOME LOAN BANK
The Company maintains an investment program in which securities were purchased
using advances from the Federal Home Loan Bank of Pittsburgh ("FHLB"). As of
December 31, 1998 and 1997, advances from the FHLB, including accrued interest,
totaled $75.5 million and $201.1 million, respectively. Interest expense on the
advances is included as an offset to investment income on the financed
securities. The average interest rate on the outstanding advances was 7.8% and
6.2% at December 31, 1998 and 1997, respectively. The advances had a weighted
average term of 5.5 years at December 31, 1998 and were collateralized by fixed
maturity securities with a fair value of $92.2 million.
NOTE G - INCOME TAXES
Income tax expense is reconciled to the amount computed by applying the
statutory federal income tax rate to income from continuing operations before
income tax expense as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1998 1997 1996
------- ------- -------
(dollars in thousands)
<S> <C> <C> <C>
Federal income tax at statutory rate .............................. $48,221 $41,252 $28,473
Dividends received deduction and tax-exempt income................. (6,264) (3,026) (2,747)
State taxes and other.............................................. 2,731 -- 1,770
------- ------- -------
$44,688 $38,226 $27,496
======= ======= =======
</TABLE>
41
<PAGE> 43
DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1998
NOTE G - INCOME TAXES - (CONTINUED)
Deferred tax assets and liabilities are determined based on the difference
between the book basis and tax basis of assets and liabilities using tax rates
in effect for the year in which the differences are expected to reverse. The
components of the net deferred tax liability are as follows:
<TABLE>
<CAPTION>
December 31,
---------------------
1998 1997
-------- --------
(dollars in thousands)
<S> <C> <C>
Cost of business acquired............................................................ $ 27,859 $ 23,895
Investments.......................................................................... 6,099 53,873
Future policy benefits and unpaid claims and claim expenses.......................... 17,291 13,867
Other................................................................................ 746 702
-------- --------
Gross deferred tax liabilities................................................... 51,995 92,337
-------- --------
Future policy benefits and unpaid claims and claim expenses.......................... (7,103) (6,674)
Investments.......................................................................... (16,706) (9,455)
Other liabilities.................................................................... (15,650) (17,653)
Cost of business acquired and other.................................................. (4,632) (1,651)
-------- --------
Gross deferred tax assets........................................................ (44,091) (35,433)
-------- --------
Net deferred tax liability....................................................... $ 7,904 $ 56,904
======== ========
Deferred tax (benefit) expense ...................................................... $(17,436) $ 7,759
======== ========
</TABLE>
Current tax expense, current tax (recoverable) liability and income taxes paid
are as follows:
<TABLE>
<CAPTION>
As of or for the Year Ended
December 31,
----------------------------------
1998 1997 1996
------- ------- -------
(dollars in thousands)
<S> <C> <C> <C>
Current tax expense................................................... $58,866 $27,960 $23,959
Current tax (recoverable) liability .................................. (140) 9,097 272
Income taxes paid (net of refunds of $1,084, $0, and
$12,465, respectively)............................................ 68,535 18,856 4,887
</TABLE>
NOTE H - PRESENT VALUE OF FUTURE PROFITS
A summary of the activity related to the PVFP asset, which is included in cost
of business acquired on the consolidated balance sheet, is shown below:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1998 1997 1996
------- ------- -------
(dollars in thousands)
<S> <C> <C> <C>
Balance at beginning of year......................................... $21,612 $23,653 $26,898
Interest accrued................................................. 317 506 639
Amortization..................................................... (2,425) (2,547) (3,884)
------- ------- -------
Balance at end of year............................................... $19,504 $21,612 $23,653
======= ======= =======
</TABLE>
An estimate of the percentage of the December 31, 1998 PVFP balance to be
amortized over each of the next five years is as follows: 1999 - 13%, 2000 -
13%, 2001 - 12%, 2002 - 11% and 2003 - 11%.
42
<PAGE> 44
DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1998
NOTE I - FAIR VALUES OF FINANCIAL INSTRUMENTS
The fair values of the Company's financial instruments are shown below. Because
fair values for all balance sheet items are not required to be disclosed by SFAS
No. 107, "Disclosures about Fair Value of Financial Instruments," the aggregate
fair value amounts presented below do not necessarily represent the underlying
value of the Company.
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------
1998 1997
------------------------- --------------------------
Carrying Fair Carrying Fair
Value Value Value Value
---------- ---------- ---------- ----------
(dollars in thousands)
<S> <C> <C> <C> <C>
Assets:
Fixed maturity securities, available for sale...... $1,889,604 $1,889,604 $2,165,069 $2,165,069
Cash and cash equivalents.......................... 371,762 371,762 50,580 50,580
Other investments.................................. 171,269 171,269 264,753 264,753
Assets held in separate account.................... 62,177 62,177 72,649 72,649
Liabilities:
Policyholder account balances...................... 612,710 606,089 641,441 639,998
Corporate debt..................................... 265,165 264,543 178,769 183,340
Advances from Federal Home Loan Bank............... 75,495 83,839 201,057 205,954
Securities loaned or sold under agreements to
repurchase...................................... 169,623 169,623 121,506 121,506
Liabilities related to separate account............ 54,136 54,136 63,347 63,347
</TABLE>
The fair values for fixed maturity securities have been obtained from
broker-dealers, nationally recognized statistical organizations and, in the case
of certain structured notes, by reference to the fair values of the underlying
investments. The carrying values for all other invested assets approximate fair
values based on the nature of the investments. The carrying values of separate
account assets and liabilities are equal to fair value.
Policyholder account balances are net of reinsurance receivables and the
carrying values have been decreased for related acquisition costs of $29.6
million and $26.7 million at December 31, 1998 and 1997, respectively. Fair
values for policyholder account balances were determined by deducting an
estimate of the future profits to be realized from the business, discounted at a
current interest rate, from the adjusted carrying values.
The Company believes the fair value of its variable rate long-term debt is equal
to its carrying value. The Company pays a variable rate of interest on the debt
which reflects changed market conditions since the time the terms were
negotiated. The fair values of the Senior Notes, the SIG Senior Notes and the
Subordinated Notes are based on the expected cash flows discounted to net
present value. The fair values for advances from the FHLB were calculated using
discounted cash flow analyses based on the interest rates for the advances at
the balance sheet date. The carrying value of the liability for securities
loaned or sold under agreements to repurchase approximates fair value as the
liability is very short-term in nature.
NOTE J - CAPITAL SECURITIES OF DELPHI FUNDING L.L.C.
In March 1997, Delphi Funding L.L.C. ("Delphi Funding"), a subsidiary of the
Company, issued $100.0 million liquidation amount of 9.31% Capital Securities,
Series A (the "Capital Securities") in a public offering. In connection with the
issuance of the Capital Securities and the related purchase by the Company of
all of the common limited liability company interests in Delphi Funding (the
"Common Securities" and, collectively with the Capital Securities, the "L.L.C.
Securities"), the Company issued to Delphi Funding $103.1 million principal
amount of 9.31% junior subordinated deferrable interest debentures, Series A,
due 2027 (the "Junior Debentures"). Interest on the Junior Debentures is payable
semiannually, but may, subject to certain exceptions, be deferred at any time or
43
<PAGE> 45
DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1998
NOTE J - CAPITAL SECURITIES OF DELPHI FUNDING L.L.C. - (CONTINUED)
from time to time for a period not exceeding five years with respect to each
deferral period, in which event distributions on the Capital Securities will
also be deferred and the Company will not be permitted to pay cash dividends or
make payments on any junior indebtedness. No interest payments on the Junior
Debentures have been deferred since their issuance. The distribution and other
payment dates on the Capital Securities correspond to the interest and other
payment dates on the Junior Debentures. The Junior Debentures are not redeemable
prior to March 25, 2007, but the Company has the right to dissolve Delphi
Funding at any time and distribute the Junior Debentures to the holders of the
Capital Securities. Pursuant to the related transaction documents, the Company
has, on a subordinated basis, guaranteed all payments due on the Capital
Securities.
NOTE K - SHAREHOLDERS' EQUITY AND RESTRICTIONS
The holders of the Company's Class A Common Stock are entitled to one vote per
share, and the holders of the Company's Class B Common Stock are entitled to the
number of votes per share equal to the lesser of (1) the number of votes such
that the aggregate of all outstanding Class B Common Stock will be entitled to
cast 49.9% of all votes represented by the aggregate of all Class A Common Stock
and Class B Common Stock or (2) ten votes per share. The Company's Board of
Directors declared a 20% stock dividend on August 30, 1996, which was
distributed to stockholders on September 30, 1996, and 2% stock dividends on May
13, 1997, April 1, 1998 and November 19, 1998, which were distributed to
stockholders on June 10, 1997, May 4, 1998 and December 15, 1998, respectively.
Results per share and applicable share amounts have been restated to reflect the
stock dividends. In 1996, the Company retired 126,568 shares (not adjusted for
stock dividends) of its Class A Common Stock.
The Company's life insurance subsidiaries had consolidated statutory capital and
surplus of $203.9 million and $192.5 million at December 31, 1998 and 1997,
respectively. Consolidated statutory net income for the Company's life insurance
subsidiaries, after interest expense of $3.3 million, $4.9 million and $6.6
million, respectively, on a surplus debenture payable to DFG, was $18.7 million,
$27.8 million and $19.9 million in 1998, 1997 and 1996, respectively. The
Company's casualty insurance subsidiary had statutory capital and surplus of
$207.2 million and $168.9 million at December 31, 1998 and 1997, respectively,
and statutory net income of $48.1 million, $34.8 million and $23.5 million in
1998, 1997 and 1996, respectively. Payment of shareholder dividends is regulated
by insurance laws. Dividends are permitted based on, among other things, the
level of prior-year statutory surplus and net income. The Company's insurance
subsidiaries will be permitted to make dividend payments totaling $40.4 million
during 1999 without prior regulatory approval.
The following table provides a reconciliation of beginning and ending shares:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------
1998 1997 1996
------ ------ ------
(shares in thousands)
<S> <C> <C> <C>
Class A Common Stock:
Beginning balance.................................................. 12,884 11,813 6,696
Issuance of stock, exercise of stock options and
conversion of shares....................................... 1,516 832 3,303
Stock dividend.................................................. 556 239 1,941
Retirement of Treasury Stock.................................... -- -- (127)
------ ------ ------
Ending balance..................................................... 14,956 12,884 11,813
====== ====== ======
Class B Common Stock:
Beginning balance.................................................. 6,157 6,259 5,216
Conversion of shares............................................ (950) (226) --
Stock dividend.................................................. 226 124 1,043
------ ------ ------
Ending balance..................................................... 5,433 6,157 6,259
====== ====== ======
</TABLE>
44
<PAGE> 46
DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1998
NOTE L - COMMITMENTS AND CONTINGENCIES
In the course of their respective businesses, the Company's subsidiaries are
defendants in litigation; in the case of its insurance subsidiaries, principally
involving insurance policy claims and agent disputes, in the case of its
integrated disability and absence management subsidiary, benefit claims-related
litigation, and in the case of its reinsurance underwriting management
subsidiary, reinsurance-related litigation. In addition, certain disputes
presently exist relating to the retrocessional coverage for the Pools managed by
its reinsurance underwriting management subsidiary. In the opinion of
management, the ultimate disposition of such pending contingencies will not have
a material adverse effect on the Company's financial condition, liquidity or
results of operations.
NOTE M - STOCK OPTIONS
The Company accounts for stock options in accordance with Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations. Accordingly, no compensation expense has been recognized in the
accompanying financial statements for the Company's stock option plans because
the exercise price of the options granted equaled the market price of the
underlying stock on the date of grant. If compensation expense for options
granted had been recognized based on the provisions of SFAS No. 123, "Accounting
for Stock-Based Compensation," the Company's net income would have been $82.5
million, $71.6 million and $44.7 million and earnings per share would have been
$4.07, $3.67 and $2.44 ($3.90, $3.48 and $2.27, assuming dilution) in 1998, 1997
and 1996, respectively. The weighted average per share fair value used to
calculate pro forma compensation expense for 1998, 1997 and 1996 was $20.68,
$18.95 and $14.30, respectively. These fair values were estimated at the grant
date using the Black-Scholes option pricing model with the following
assumptions: risk-free interest rates ranging from 4.1% to 6.5%, volatility
factors of the expected market price of the Company's common stock ranging from
25% to 29%, expected lives of the options ranging from five to ten years and
dividend yields of 0%.
Under the terms of the Company's employee stock option plan and outside
directors' stock option plan, a total of 2,228,537 shares of Class A Common
Stock have been reserved for issuance. The exercise price for options granted
under these plans is the fair market value of the underlying stock as of the
date of the grant and the maximum term of an option is ten years. The stock
options granted under these plans expire at various dates between 2002 and 2008.
As of December 31, 1998, 541,023 options are remaining to be granted under these
plans.
The Company's long-term performance-based incentive plan for its chief executive
officer (the "Performance Plan") provides for the award of up to 305,628 shares
or options for shares of the Company's Class B Common Stock (76,407 restricted
or deferred shares and options to purchase 229,221 shares) per year over a
ten-year term contingent upon the Company meeting specified annual performance
goals. The restricted or deferred shares do not vest until the earliest of the
individual's retirement, disability or death or a change of ownership of the
Company. The exercise price of the options awarded under the Performance Plan is
the fair market value of the underlying stock as of the date of the grant and
the maximum term of the options is ten years. The options become exercisable 30
days following the date of grant. For each of the years ended December 31, 1998,
1997 and 1996, 76,407 deferred shares and 229,221 options were awarded under the
Performance Plan. The Company recognized $4.0 million, $3.1 million and $2.1
million of compensation expense in 1998, 1997 and 1996, respectively, related to
the deferred shares.
45
<PAGE> 47
DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1998
NOTE M - STOCK OPTIONS - (CONTINUED)
Option activity with respect to the above plans was as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------------------
1998 1997 1996
--------------------- -------------------- ---------------------
Number Average Number Average Number Average
of Exercise of Exercise of Exercise
Options Price Options Price Options Price
--------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding, beginning of year.... 781,765 $28.59 990,665 $12.64 718,592 $ 5.89
Options granted........................ 394,274 46.61 283,619 39.83 291,196 28.62
Options forfeited...................... (401) 37.43 -- -- -- --
Options exercised...................... (3,060) 13.15 (492,519) 2.98 (19,123) 2.12
--------- -------- --------
Options outstanding - end of year......... 1,172,578 34.69 781,765 28.59 990,665 12.64
========= ======== ========
Exercisable options, end of year.......... 653,865 29.35 368,121 23.69 584,467 4.48
</TABLE>
Information about options outstanding at December 31, 1998 was as follows:
<TABLE>
<CAPTION>
Outstanding Exercisable
------------------------------------ ----------------------
Number Average Average Number Average
Range of of Remaining Exercise of Exercise
Exercise Prices Options Life Price Options Price
- ------------------- ---------- ----------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
$ 0.00 - $ 7.17............................. 12,735 3.4 $ 7.17 12,735 $ 7.17
$ 13.15 - $ 14.13............................. 191,156 6.0 13.54 140,341 13.48
$ 22.58 - $ 29.33............................. 291,196 8.0 28.63 254,009 29.01
$ 36.51 - $ 53.00............................. 660,414 9.4 43.40 245,244 39.76
$ 58.64 - $ 58.64............................. 17,077 9.4 58.64 1,536 58.64
--------- --- ------ -------- ---------
1,172,578 8.5 $34.69 653,865 $ 29.35
========= === ====== ======== =========
</TABLE>
In connection with the SIG Merger, the Company assumed 6.0 million SIG Options.
Upon the exercise of the SIG Options, the holder is entitled to receive (i)
.1345 of a share of Class A Common Stock for each SIG Option; plus (ii) an
additional number of shares of Class A Common Stock equal to the quotient of (a)
$1.90 multiplied by the number of SIG Options being exercised increased by an
interest component from the time of the SIG Merger to the exercise date, divided
by (b) the average closing share price for the Company's Class A Common Stock
for the ten days prior to the exercise date. Pursuant to the terms of the SIG
Merger, the exercise price of $0.02 per SIG Option remained the same. The SIG
Options were granted annually from 1992 to 1996 and each grant vests over five
years beginning in the fourth year after the grant date. All of the SIG Options
expire on October 1, 2006. As of December 31, 1998, the weighted average
contractual life of the outstanding SIG Options was 7.8 years.
Activity with respect to the outstanding SIG Options was as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------- Period March 5, 1996
1998 1997 to December 31, 1996
------------------------ ------------------------ ----------------------
Number Equivalent Number Equivalent Number Equivalent
of SIG Class A of SIG Class A of SIG Class A
Options Shares Options Shares Options Shares
--------- -------- --------- ------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
SIG Options - beginning of period...... 4,167,878 773,726 4,740,744 981,215 5,997,716 1,613,375
Options exercised................... (581,032) (109,214) (553,273) 107,017 (1,196,471) 261,376
Options forfeited................... (50,605) -- (19,593) -- (60,501) --
--------- --------- ----------
SIG Options - end of year.............. 3,536,241 623,778 4,167,878 773,726 4,740,744 981,215
========= ========= ==========
Exercisable SIG Options - end of year.. 501,839 88,522 307,124 57,015 117,966 24,416
</TABLE>
46
<PAGE> 48
DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1998
NOTE N - COMPUTATION OF RESULTS PER SHARE
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------
1998 1997 1996
------- ------- -------
(dollars in thousands, except per share data)
<S> <C> <C> <C>
Numerator:
Income from continuing operations excluding net
realized investment gains (losses)............................... $81,796 $65,513 $55,577
Realized investment gains (losses), net of taxes................... 5,239 9,469 (1,723)
------- ------- -------
Income from continuing operations.............................. 87,035 74,982 53,854
Discontinued operations, net of income tax benefit:
Loss from operations............................................. -- -- (765)
Loss on disposal.................................................. -- -- (5,836)
------- ------- -------
Net income..................................................... $87,035 $74,982 $47,253
======= ======= =======
Denominator:
Weighted average common shares outstanding ........................ 20,276 19,487 18,333
Effect of dilutive securities....................................... 793 1,050 1,281
------- ------- -------
Weighted average common shares outstanding, assuming dilution...... 21,069 20,537 19,614
======= ======= =======
Basic results per share of common stock:
Income from continuing operations excluding net
realized investment gains (losses)............................... $ 4.03 $ 3.36 $ 3.03
Realized investment gains (losses), net of taxes................... 0.26 0.49 (0.09)
------- ------- -------
Income from continuing operations.............................. 4.29 3.85 2.94
Discontinued operations, net of income tax benefit:
Loss from operations............................................. -- -- (0.04)
Loss on disposal................................................. -- -- (0.32)
------- ------- -------
Net income..................................................... $ 4.29 $ 3.85 $ 2.58
======= ======= =======
Diluted results per share of common stock:
Income from continuing operations excluding net
realized investment gains (losses)............................... $ 3.88 $ 3.19 $ 2.83
Realized investment gains (losses), net of taxes................... 0.25 0.46 (0.08)
------- ------- -------
Income from continuing operations.............................. 4.13 3.65 2.75
Discontinued operations, net of income tax benefit:
Loss from operations............................................. -- -- (0.04)
Loss on disposal................................................. -- -- (0.30)
------- ------- -------
Net income..................................................... $ 4.13 $ 3.65 $ 2.41
======= ======= =======
</TABLE>
DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1998
NOTE O - REINSURANCE
The Company assumes and cedes reinsurance on both a coinsurance and a risk
premium basis. The Company obtains reinsurance for amounts above certain
retention limits which vary with age, plan of insurance and underwriting
classification. Amounts of standard risks in excess of those limits are
reinsured. Indemnity reinsurance treaties do not provide absolute protection to
the Company since the ceding insurer remains responsible for policy claims to
the extent the reinsurer fails to pay such claims. To reduce this risk, the
Company monitors the financial condition of its reinsurers, including, among
other things, the companies' financial ratings, and in certain cases receives
collateral security from the reinsurer. Also, certain of the Company's
reinsurance agreements require the reinsurer to set up trust arrangements for
the Company's benefit in the event of certain ratings downgrades. As of December
31, 1998, all of the Company's significant reinsurers were either rated "A-"
(Excellent) or higher by A.M. Best Company or had supplied collateral in an
amount sufficient to support the amounts receivable.
47
<PAGE> 49
DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1998
NOTE O - REINSURANCE - (CONTINUED)
In January 1998, an offering was completed whereby shareholders and
optionholders of the Company received, at no cost, rights to purchase shares of
Delphi International, a newly-formed, independent Bermuda insurance holding
company. During 1998, the Company entered into various reinsurance agreements
with Oracle Re, a wholly owned subsidiary of Delphi International. Pursuant to
these agreements, approximately $101.5 million of group employee benefit
reserves ($35.0 million of long-term disability insurance reserves and $66.5
million of net excess workers' compensation and casualty insurance reserves)
were ceded to Oracle Re. The Company has received collateral security from
Oracle Re in an amount sufficient to support the ceded reserves. These
agreements are not expected to have a material effect on the Company's financial
condition, liquidity or results of operations.
A summary of reinsurance activity follows:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------
1998 1997 1996
------- ------- -------
(dollars in thousands)
<S> <C> <C> <C>
Premium income assumed................................................ $95,853 $67,469 $62,626
Premium income ceded.................................................. 71,411 67,059 61,516
Benefits, claims, and interest credited ceded......................... 78,413 68,442 63,525
</TABLE>
NOTE P - SEGMENT INFORMATION
<TABLE>
<CAPTION>
Group
Employee Asset
Benefit Accumulation
Products Products Other (1) Total
---------- ---------- ---------- ----------
(dollars in thousands)
<S> <C> <C> <C> <C>
1998
- ----
Revenues excluding net realized investment gains...... $ 499,821 $ 82,973 $ 35,782 $ 618,576
Operating income (2).................................. 97,987 33,090 16,007 147,084
Net investment income................................. 83,410 80,390 4,892 168,692
Amortization of cost of business acquired............. 23,412 2,346 -- 25,758
Segment assets........................................ 1,793,756 1,337,792 264,649 3,396,197
1997
- ----
Revenues excluding net realized investment gains...... 435,299 81,656 6,296 523,251
Operating income (2).................................. 94,044 24,720 (438) 118,326
Net investment income................................. 79,407 78,584 4,389 162,380
Amortization of cost of business acquired............. 22,546 5,337 -- 27,883
Segment assets........................................ 1,692,697 1,437,835 73,181 3,203,713
1996
- ----
Revenues excluding net realized investment losses..... 403,812 82,505 5,936 492,253
Operating income (2).................................. 83,320 23,317 (4,367) 102,270
Net investment income................................. 72,434 80,383 4,203 157,020
Amortization of cost of business acquired............. 20,676 10,545 -- 31,221
Segment assets........................................ 1,402,587 1,393,176 62,143 2,857,906
</TABLE>
(1) Consists of operations that do not meet the quantitative thresholds for
determining reportable segments and includes reinsurance underwriting and
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.
48
<PAGE> 50
DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1998
NOTE Q - DISCONTINUED OPERATIONS
During 1997, the Company disposed of its long-term care insurance business,
which was discontinued in 1996. This business was purchased in December 1994 and
was expected to become a significant part of the Company's operations. The
Company exited this business due to its continued losses attributable to lower
than expected sales and profit levels and decided to concentrate its resources
on other opportunities such as product and distribution enhancements for the
Company's group employee benefit products. The loss on the disposal of this
business was primarily attributable to the write-off of deferred acquisition
costs and goodwill associated with the business and a provision of $1.4 million,
net of a tax benefit of $0.8 million, for operating losses during the phase-out
period. The proceeds from the disposal were not material and the actual results
for this business subsequent to its discontinuance did not materially differ
from the loss provided for. An operating loss from this business was presented
net of a tax benefit of $0.4 million for the year ended December 31, 1996.
Revenue from the long-term care insurance business totaled $1.6 million for the
year ended December 31, 1996.
49
<PAGE> 51
SCHEDULE I
DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
SUMMARY OF INVESTMENTS
OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Amount
Shown in
Amortized Fair Balance
Type of Investment Cost Value Sheet
- ------------------ --------- ---------- ----------
<S> <C> <C> <C>
Fixed maturity securities available for sale:
U.S. Government backed mortgage-backed securities........ $ 336,730 $ 347,052 $ 347,052
Other mortgage-backed securities......................... 510,013 514,933 514,933
U.S. Treasury and other U.S. Government
guaranteed securities................................. 299,950 309,693 309,693
Obligations of U.S. states, municipalities and
political subdivisions................................ 445,859 453,485 453,485
Corporate securities..................................... 324,437 264,441 264,441
---------- ---------- ----------
Total fixed maturity securities....................... 1,916,989 1,889,604 1,889,604
Equity securities (primarily common stock).................. 38,777 37,724 37,724
Cash and cash equivalents................................... 371,762 371,762 371,762
Other investments. . ....................................... 139,655 133,545 133,545
---------- --------- ----------
Total investments..................................... $2,467,183 $2,432,635 $2,432,635
========== ========== ==========
</TABLE>
50
<PAGE> 52
SCHEDULE II
DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
DELPHI FINANCIAL GROUP, INC. (PARENT COMPANY)
BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
December 31,
---------------------
1998 1997
-------- --------
<S> <C> <C>
Assets:
Fixed maturity securities, available for sale.................................. $ 22,000 $145,638
Cash and other invested assets (including cash and
cash equivalents of $798 and $801, respectively)............................ 14,436 5,816
Investment in subsidiaries..................................................... 719,158 618,889
Surplus debenture due from subsidiary.......................................... 18,250 43,000
Amounts due from subsidiaries.................................................. 137,478 65,792
Other assets................................................................... 12,522 9,436
-------- --------
Total assets................................................................ $923,844 $888,571
======== ========
Liabilities:
Corporate debt................................................................. $219,384 $132,690
Junior subordinated debentures payable to Delphi Funding, L.L.C................ 103,093 103,093
Securities sold under agreements to repurchase................................. 4,952 121,506
Other liabilities.............................................................. 29,975 21,796
-------- --------
357,404 379,085
-------- --------
Shareholders' Equity:
Class A Common Stock........................................................... 150 129
Class B Common Stock........................................................... 54 62
Additional paid-in capital..................................................... 329,023 262,963
Net unrealized (depreciation) appreciation on
investments, net of deferred taxes........................................... (18,074) 40,545
Retained earnings.............................................................. 255,287 205,787
-------- --------
566,440 509,486
-------- --------
Total liabilities and shareholders' equity.................................. $923,844 $888,571
======== ========
</TABLE>
See notes to condensed financial statements
51
<PAGE> 53
SCHEDULE II (CONTINUED)
DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
DELPHI FINANCIAL GROUP, INC. (PARENT COMPANY)
STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------
1998 1997 1996
-------- -------- -------
<S> <C> <C> <C>
Revenue:
Equity in undistributed earnings of subsidiaries............... $130,178 $129,287 $84,872
Interest from subsidiaries..................................... 3,322 4,853 6,981
Dividends from subsidiaries.................................... 9,388 4,322 1,600
Other net investment income (loss)............................. 23,928 707 (2,365)
Realized investment losses..................................... (8,525) (5,357) -
-------- -------- -------
158,291 133,812 91,088
-------- -------- -------
Expenses:
Operating expenses............................................. 6,066 4,245 5,661
Interest expense............................................... 23,761 18,866 14,232
-------- -------- -------
29,827 23,111 19,893
-------- -------- -------
Income before income tax expense......................... 128,464 110,701 71,195
Income tax expense................................................ 41,429 35,719 23,942
-------- -------- -------
Net income .............................................. $ 87,035 $ 74,982 $47,253
======== ======== =======
</TABLE>
See notes to condensed financial statements
52
<PAGE> 54
SCHEDULE II (CONTINUED)
DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
DELPHI FINANCIAL GROUP, INC. (PARENT COMPANY)
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------
1998 1997 1996
--------- --------- --------
<S> <C> <C> <C>
Operating activities:
Net income..................................................... $ 87,035 $ 74,982 $ 47,253
Adjustments to reconcile net income to net cash
used by operating activities:
Equity in undistributed earnings of subsidiaries............ (88,149) (86,189) (56,143)
Change in other assets and other liabilities................ 3,953 4,683 4,405
Change in current and deferred income taxes................. 3,638 (748) 8,025
Amortization, principally of investments and debt
issuance costs.......................................... (27,332) (2,399) 1,341
Net realized losses on investments.......................... 8,525 5,357 -
Change in amounts due from/to subsidiaries.................. (71,686) (54,934) (21,865)
--------- --------- --------
Net cash used by operating activities.................... (84,016) (59,248) (16,984)
--------- --------- --------
Investing activities:
Purchases of investments and loans made........................ (225,980) (187,411) (24,604)
Sales of investments and receipts from repayment of loans...... 350,786 100,194 24,343
Maturities of investments...................................... 4,315 4,100 200
Purchases of investments in subsidiaries....................... (35,876) (3,093) (54,534)
--------- --------- --------
Net cash provided (used) by investing activities............ 93,245 (86,210) (54,595)
--------- --------- --------
Financing activities:
Proceeds from issuance of common stock and exercise of
stock options............................................... 1,572 9,045 530
Borrowings under the Credit Agreement.......................... 139,000 20,000 64,000
Principal payments under the Credit Agreement.................. (58,000) (72,000) (14,000)
Payments received on surplus debenture......................... 24,750 15,000 7,000
Change in liability for securities sold under agreements to
repurchase.................................................. (116,554) 71,336 6,291
Net proceeds from issuance of Junior Debentures ............... - 101,843 -
--------- --------- --------
Net cash (used) provided by financing activities............ (9,232) 145,224 63,821
--------- --------- --------
Decrease in cash and cash equivalents............................. (3) (234) (7,758)
Cash and cash equivalents at beginning of year.................... 801 1,035 8,793
--------- --------- --------
Cash and cash equivalents at end of year.................... $ 798 $ 801 $ 1,035
========= ========= ========
</TABLE>
See notes to condensed financial statements.
53
<PAGE> 55
SCHEDULE II (CONTINUED)
DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
DELPHI FINANCIAL GROUP, INC. (PARENT COMPANY)
NOTES TO CONDENSED FINANCIAL STATEMENTS
The accompanying condensed financial statements should be read in conjunction
with the consolidated financial statements and related notes of Delphi Financial
Group, Inc. and Subsidiaries.
The Company received cash dividends from subsidiaries of $9.4 million, $4.2
million and $1.6 million in 1998, 1997 and 1996, respectively.
54
<PAGE> 56
SCHEDULE III
DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Future Policy
Benefits and
Cost of Unpaid Claim Policyholder
Business and Claim Unearned Account
Acquired Expenses Premiums Balances
-------- ------------- --------- ------------
1998
- ----
<S> <C> <C> <C> <C>
Group employee benefits products.......... $ 74,867 $ 877,065 $20,265 $ --
Asset accumulation products............... 29,593 41,854 -- 664,576
Other..................................... -- 127,469 -- --
-------- ---------- ------- --------
Total................................. $104,460 $1,046,388 $20,265 $664,576
======== ========== ======= ========
1997
- ----
Group employee benefits products.......... $ 66,170 $ 799,167 $17,206 $ --
Asset accumulation products............... 26,761 41,331 -- 689,542
Other..................................... -- 126,932 -- --
-------- ---------- ------- --------
Total................................. $ 92,931 $ 967,430 $17,206 $689,542
======== ========== ======= ========
1996
- ----
Group employee benefits products.......... $ 61,398 $ 752,114 $20,658 $ --
Asset accumulation products............... 33,196 48,087 -- 719,229
Other..................................... -- 126,373 -- --
-------- ---------- ------- --------
Total................................. $ 94,594 $ 926,574 $20,658 $719,229
======== ========== ======= ========
</TABLE>
<TABLE>
<CAPTION>
Benefits,
Insurance Claims and Amortization
Premiums Net Interest of Cost of Other
and Fee Investment Credited to Business Operating
Income(1) Income Policyholders Acquired Expenses
--------- ---------- -------------- ------------- ---------
1998
- ----
<S> <C> <C> <C> <C> <C>
Group employee benefits products.......... $416,411 $ 83,410 $298,141 $23,412 $ 80,281
Asset accumulation products............... 2,583 80,390 41,452 2,346 6,085
Other..................................... 30,890 4,892 3,404 -- 16,371
-------- -------- -------- ------- -------
Total................................. $449,884 $168,692 $342,997 $25,758 $102,737
======== ======== ======== ======= ========
1997
- ----
Group employee benefits products.......... $355,892 $ 79,407 $242,932 $22,546 $75,777
Asset accumulation products............... 3,072 78,584 45,564 5,337 6,035
Other..................................... 1,907 4,389 2,265 -- 4,469
-------- -------- -------- ------- -------
Total................................. $360,871 $162,380 $290,761 $27,883 $86,281
======== ======== ======== ======= =======
1996
- ----
Group employee benefits products.......... $331,378 $ 72,434 $231,943 $20,676 $67,873
Asset accumulation products............... 2,122 80,383 44,820 10,545 3,823
Other..................................... 1,733 4,203 3,857 -- 6,446
-------- -------- -------- ------- -------
Total................................. $335,233 $157,020 $280,620 $31,221 $78,142
======== ======== ======== ======= =======
</TABLE>
(1) Net written premiums for casualty insurance products totaled $80.8
million and $67.5 million for the years ended December 31, 1998 and 1997,
respectively, and $45.5 million for the period from March 5, 1996 to
December 31, 1996.
55
<PAGE> 57
SCHEDULE IV
DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
REINSURANCE
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Percentage
Ceded to Assumed of Amount
Gross Other from Other Net Assumed
Amount Companies Companies Amount to Net
----------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Life insurance in force as of
December 31, 1998........... $59,012,936 $5,231,738 $14,571,867 $68,353,065 21%
=========== ========== =========== =========== ==
Year ended December 31, 1998:
Insurance premiums:
Life insurance and annuity $ 152,683 $ 18,839 $ 39,887 $ 173,731 23%
Accident and health insurance 179,544 41,573 27,596 165,567 17%
Casualty insurance....... 61,747 10,999 28,370 79,118 36%
----------- ---------- ----------- -----------
Total insurance premiums........ $ 393,974 $ 71,411 $ 95,853 $ 418,416
=========== ========== =========== ===========
Life insurance in force as of
December 31, 1997........... $50,380,657 $4,647,109 $11,261,038 $56,994,586 20%
=========== ========== =========== =========== ==
Year ended December 31, 1997:
Insurance premiums:
Life insurance and annuity $ 136,857 $ 21,709 $ 33,862 $ 149,010 23%
Accident and health insurance 154,439 35,318 25,787 144,908 18%
Casualty insurance....... 66,711 10,032 7,820 64,499 12%
----------- ---------- ----------- -----------
Total insurance premiums........ $ 358,007 $ 67,059 $ 67,469 $ 358,417
=========== ========== =========== ===========
Life insurance in force as of
December 31, 1996........... $45,013,763 $6,611,333 $10,788,577 $49,191,007 22%
=========== ========== =========== =========== ==
Year ended December 31, 1996:
Insurance premiums:
Life insurance and annuity $ 122,687 $ 21,679 $ 36,385 $ 137,393 26%
Accident and health insurance 150,396 37,265 26,241 139,372 19%
Casualty insurance ...... 58,772 2,572 -- 56,200 --%
----------- ---------- ----------- -----------
Total insurance premiums........ $ 331,855 $ 61,516 $ 62,626 $ 332,965
=========== ========== =========== ===========
</TABLE>
56
<PAGE> 58
SCHEDULE VI
DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
SUPPLEMENTAL INFORMATION CONCERNING
PROPERTY-CASUALTY INSURANCE OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
December 31,
---------------------------
1998 1997
-------- --------
<S> <C> <C>
Deferred policy acquisition costs........................................ $ 1,478 $ 1,921
Reserves for unpaid claims and claim expenses............................ 406,214 388,051
Discount, if any, deducted from above (1)................................ 180,770 176,683
Unearned premiums........................................................ 17,057 14,404
</TABLE>
<TABLE>
<CAPTION>
Period from
March 5,
Year Ended December 31, 1996 to
--------------------------- December 31,
1998 1997 1996
------- ------- ------------
<S> <C> <C> <C>
Earned premiums........................................ $79,118 $64,499 $56,200
Net investment income.................................. 32,388 33,748 25,028
Claims and claim expenses incurred related to:
Current year....................................... 61,776 41,221 28,290
Prior years........................................ (166) (2,419) 7,358
Amortization of deferred policy acquisition costs...... 7,841 8,896 7,998
Paid claims and claim adjustment expenses.............. 43,447 31,577 24,693
Net premiums written................................... 80,765 67,468 45,480
</TABLE>
- -----------------
(1) Based on interest rates ranging from 3.7% to 6.5%.
57
<PAGE> 1
EXHIBIT 2.2
================================================================================
AGREEMENT AND PLAN OF MERGER
BY AND AMONG
DELPHI FINANCIAL GROUP, INC.,
MATRIX ABSENCE MANAGEMENT, INC.
AND
THE SHAREHOLDERS NAMED HEREIN
DATED
JUNE 11, 1998
================================================================================
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I MERGER........................................................................................... 2
1.1 Formation of Delphi Subsidiary.............................................................. 2
1.2 The Merger ................................................................................. 2
1.3 Filing ..................................................................................... 2
1.4 Effective Time of the Merger................................................................ 3
ARTICLE II CERTIFICATE OF INCORPORATION; BY-LAWS; DIRECTORS AND OFFICERS................................... 3
2.1 Certificate of Incorporation................................................................ 3
2.2 By-Laws .................................................................................... 3
2.3 Directors and Officers...................................................................... 3
ARTICLE III CONVERSION OF SHARES AND CONTINGENT CONSIDERATION.............................................. 3
3.1 Conversion into Merger Consideration........................................................ 3
3.2 Exchange of Certificates.................................................................... 5
(a) Exchange......................................................................... 5
(b) Certificates..................................................................... 5
(c) No Further Rights in Company Capital Stock....................................... 6
(e) No Liability..................................................................... 6
(g) Lost Certificates................................................................ 6
3.3 Stock Transfer Books........................................................................ 7
3.4 Contingent Consideration.................................................................... 7
ARTICLE IV CERTAIN EFFECTS OF THE MERGER................................................................... 9
4.1 Effect of the Merger........................................................................ 9
4.2 Further Assurances.......................................................................... 9
ARTICLE V REPRESENTATIONS AND WARRANTIES OF THE SHAREHOLDERS............................................... 10
5.1 Title to Shares............................................................................. 10
5.2 Authority Relative to Agreement............................................................. 10
5.3 Waiver of Put and Call Rights............................................................... 11
5.4 Securities Matters.......................................................................... 11
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE VI REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE SHAREHOLDERS.............................. 13
6.1 Organization and Qualification.............................................................. 13
6.2 Capital Stock of Subsidiaries............................................................... 14
6.3 Capitalization.............................................................................. 15
6.4 Authority Relative to This Agreement........................................................ 15
6.5 No Violations, etc.......................................................................... 16
6.6 Financial Statements........................................................................ 17
6.7 Regulatory Reports.......................................................................... 18
6.8 Absence of Changes or Events................................................................ 18
6.9 Litigation ................................................................................. 20
6.10 Title to and Condition of Properties....................................................... 20
6.11 Leases .................................................................................... 20
6.12 Contracts; Bank Accounts; Indebtedness..................................................... 20
(a) Contracts and Commitments........................................................ 21
(b) Bank Accounts.................................................................... 22
(c) Indebtedness..................................................................... 22
6.13 Relationships.............................................................................. 22
6.14 Labor Matters.............................................................................. 23
6.15 Compliance with Law........................................................................ 23
6.16 Intellectual Property...................................................................... 24
6.17 Taxes ..................................................................................... 25
6.18 Employee Benefit Plans; ERISA.............................................................. 27
6.19 Environmental Matters...................................................................... 31
6.20 Absence of Undisclosed Liabilities......................................................... 35
6.21 Finders or Brokers......................................................................... 35
6.22 Regulatory Matters......................................................................... 35
6.23 Insurance.................................................................................. 35
6.24 Employment and Labor Contracts............................................................. 36
6.25 Balance Sheet Reserves..................................................................... 36
6.26 Year 2000 Compliance....................................................................... 36
6.27 Qualification of Merger as a Tax Free Reorganization....................................... 37
6.28 Affiliate Transactions..................................................................... 39
6.29 Corporate Records.......................................................................... 39
6.30 Full Disclosure............................................................................ 39
ARTICLE VII REPRESENTATIONS AND WARRANTIES OF DELPHI....................................................... 40
7.1 Organization and Qualification.............................................................. 40
</TABLE>
-ii-
<PAGE> 4
<TABLE>
<CAPTION>
Page
----
<S> <C>
7.2 Capitalization.............................................................................. 40
7.3 Authority Relative to This Agreement........................................................ 41
7.4 No Violations, etc.......................................................................... 41
7.5 SEC Filings; Financial Statements........................................................... 43
7.6 Absence of Changes or Events................................................................ 43
7.7 Stock and Note Consideration................................................................ 43
7.8 Litigation ................................................................................. 44
7.9 Finders or Brokers.......................................................................... 44
7.10 Qualification of Merger as a Tax Free Reorganization........................................ 45
7.11 Regulatory Matters......................................................................... 46
ARTICLE VIII CONDUCT OF BUSINESS OF THE COMPANY PENDING THE MERGER......................................... 46
8.1 Conduct of Business of the Company Pending the Merger....................................... 46
ARTICLE IX COVENANTS AND AGREEMENTS........................................................................ 50
9.1 Cooperation................................................................................. 50
9.2 Availability of Employees and Records....................................................... 51
9.3 Notification of Changes and Default......................................................... 52
9.4 Financial Statements, Etc................................................................... 52
9.5 Publicity .................................................................................. 53
9.6 No Solicitation............................................................................. 53
9.7 Confidentiality............................................................................. 54
9.8 Resignation of Directors.................................................................... 54
9.9 Fees and Expenses........................................................................... 54
9.10 Tax Treatment............................................................................... 54
9.11 Amendment of Tax Returns.................................................................... 55
9.12 Transfer Restrictions....................................................................... 55
9.13 Noncompetition.............................................................................. 56
(a) Prohibited Activities............................................................ 56
(b) Damages.......................................................................... 57
(c) Reasonable Restraint............................................................. 57
(d) Severability; Reformation........................................................ 57
(e) Independent Covenant............................................................. 58
(f) Materiality...................................................................... 58
9.14 Nondisclosure of Confidential Information................................................... 58
9.15 NYSE Listing................................................................................ 60
</TABLE>
-iii-
<PAGE> 5
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE X CONDITIONS TO CLOSING............................................................................ 60
10.1 Conditions to Each Party's Obligation to Effect the Merger................................. 60
(a) No Injunctions or Restraints..................................................... 60
(b) Consents and Approvals........................................................... 60
(c) Registration Rights Agreement.................................................... 60
(d) Side Letter...................................................................... 61
10.2 Conditions to Obligations of Delphi........................................................ 61
(a) Representations and Warranties................................................... 61
(b) Performance of Obligations of the Company........................................ 61
(c) Audit Opinion; SAS 71 Report; Recast EBITDA Review............................... 61
(d) Shareholders' Equity............................................................. 62
(e) Capital Contributions; Uses Thereof; Extraordinary Expenses...................... 62
(f) Repayment of Indebtedness for Money Borrowed..................................... 62
(g) Real Estate Holding Corporation.................................................. 62
(h) Employment Agreements............................................................ 63
(i) Tax Opinion...................................................................... 63
(j) Opinion of Company Counsel....................................................... 63
(k) Gunz Stock Purchase Agreement.................................................... 63
(l) Termination of Shareholders' Agreement........................................... 63
10.3 Conditions to Obligations of the Company and the Shareholders.............................. 64
(a) Representations and Warranties................................................... 64
(b) Performance of Obligations of Delphi and Delphi Subsidiary....................... 64
(c) Tax Opinion...................................................................... 64
(d) Opinion of Delphi Counsel........................................................ 65
ARTICLE XI TERMINATION..................................................................................... 65
11.1 Termination................................................................................ 65
11.2 Effect of Termination...................................................................... 66
ARTICLE XII INDEMNIFICATION................................................................................ 66
12.1 Delphi's Losses............................................................................ 66
</TABLE>
-iv-
<PAGE> 6
<TABLE>
<CAPTION>
Page
----
<S> <C>
12.2 Shareholders' Losses....................................................................... 69
12.3 Notice of Loss............................................................................. 70
12.4 Right to Defend............................................................................ 70
12.5 Cooperation................................................................................ 71
12.6 Subrogation................................................................................ 72
ARTICLE XIII MISCELLANEOUS................................................................................. 72
13.1 Survival of Covenants, Agreements, Representations and Warranties.......................... 72
(a) Covenants and Agreements......................................................... 72
(b) Representations and Warranties................................................... 72
13.2 Closing and Waiver......................................................................... 73
13.3 Notices ................................................................................... 73
13.4 Counterparts............................................................................... 76
13.5 Interpretation............................................................................. 76
13.6 Amendment ................................................................................. 76
13.7 No Third Party Beneficiaries............................................................... 76
13.8 Governing Law.............................................................................. 77
13.9 Entire Agreement........................................................................... 77
13.10 No Recourse Against Others................................................................. 77
13.11 Validity .................................................................................. 77
</TABLE>
-v-
<PAGE> 7
DISCLOSURE SCHEDULE
COMPANY DISCLOSURE SECTIONS
<TABLE>
<CAPTION>
SECTION
<S> <C>
6.1 Organization and Qualification
6.2 Capital Stock of Subsidiaries
6.3 Capitalization
6.5 No Violations, etc.
6.6 Financial Statements
6.8 Absence of Changes or Events
6.9 Litigation
6.10 Title to and Condition of Properties
6.11 Leases
6.12 (a) Contracts and Commitments
(b) Bank Accounts
(c) Indebtedness
6.13 Relationships
6.15 Compliance with Law
6.16 Intellectual Property
6.18 Employee Benefit Plans; ERISA
(r) Employee Termination
(s) Excess Parachute Payments
6.19 Environmental Matters
6.20 Absence of Undisclosed Liabilities
6.23 Insurance
6.24 Employment and Labor Contracts
6.28 Affiliate Transactions
</TABLE>
EXHIBITS
EXHIBIT A - Subsidiaries of the Company
EXHIBIT B - Form of Promissory Note
EXHIBIT C - Merger Consideration Allocation
EXHIBIT D - Contingent Consideration Determination Procedures
EXHIBIT E - Registration Rights Agreement
EXHIBIT F - Employment Agreements
EXHIBIT G - Form of Opinion of Graham & James
EXHIBIT H - Form of Opinion of Cahill Gordon & Reindel
-vi-
<PAGE> 8
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER, dated as of June 11, 1998 (this
"Agreement"), by and among Delphi Financial Group, Inc., a Delaware corporation
("Delphi"), Matrix Absence Management, Inc., a California corporation (the
"Company"), and John H. Payne, David F. Nolan, Martin A. Grable and Thomas E.
Sitter (collectively, the "Shareholders" and, individually, each a
"Shareholder").
W I T N E S S E T H :
WHEREAS, the Boards of Directors of each of Delphi and the
Company have approved the merger (the "Merger") of the Company with and into a
wholly owned subsidiary of Delphi to be formed for the purpose thereof ("Delphi
Subsidiary"), upon the terms and subject to the conditions set forth herein and
in accordance with the General Corporation Law of the State of Delaware (the
"DGCL") and the General Corporation Law of California (the "CGCL"). The term
"Company" as used herein shall, unless the context otherwise requires, include
its subsidiaries, all of which are listed on Exhibit A hereto;
WHEREAS, each Shareholder has consented to and approved the
Merger upon the terms and subject to the conditions set forth herein; and
WHEREAS, for federal income tax purposes, it is intended that
the Merger shall qualify as a tax free reorganization within the meaning of
Section 368 of the Internal Revenue Code of 1986, as amended (the "Code");
WHEREAS, a stock purchase agreement is intended to be entered
into by and among Delphi, Gunz & Associates, Inc. and the shareholders thereof
named therein (the "Gunz 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:
<PAGE> 9
ARTICLE I
MERGER
1.1 Formation of Delphi Subsidiary. Delphi shall form Delphi
Subsidiary under the DGCL. Delphi Subsidiary will be formed solely to facilitate
the Merger and the transactions contemplated thereby and, prior to the Merger,
will conduct no business or activity other than in connection with the Merger.
Delphi will cause Delphi Subsidiary to execute and deliver a joinder to this
Agreement pursuant to Section 251 of the DGCL and will execute a written consent
as the sole stockholder of Delphi Subsidiary, approving the execution, delivery
and performance of this Agreement by Delphi Subsidiary.
1.2 The Merger. At the Effective Time (as hereinafter
defined), the Company shall be merged with and into Delphi Subsidiary as
provided herein. Thereupon, the corporate existence of Delphi Subsidiary, 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 the Company shall be merged with and into Delphi
Subsidiary and Delphi Subsidiary as the corporation surviving the Merger
(hereinafter sometimes called the "Surviving Corporation") shall continue its
corporate existence under the laws of the State of Delaware. The name of the
Surviving Corporation shall be Matrix Absence Management, Inc.
1.3 Filing. As soon as practicable after fulfillment or waiver
of the conditions set forth in Sections 10.1, 10.2 and 10.3 or on such later
date as may be mutually agreed to between Delphi and the Company, the parties
hereto will (i) cause to be filed with the office of the Secretary of State of
the State of Delaware, a certificate of merger (the "Delaware Certificate of
Merger"), in such form as required by, and executed in accordance with, the
relevant provisions of the DGCL, and (ii) cause to be filed with the office of
the Secretary of State of California, a certificate of merger (the "California
Certificate of Merger"), in such form as required by, and executed in accordance
with, the relevant provision of the CGCL.
<PAGE> 10
-3-
1.4 Effective Time of the Merger. The Merger shall be
effective at the time that the filing of the Delaware 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."
ARTICLE II
CERTIFICATE OF INCORPORATION; BY-LAWS;
DIRECTORS AND OFFICERS
2.1 Certificate of Incorporation. The Certificate of
Incorporation of Delphi Subsidiary shall be the Certificate of Incorporation of
the Surviving Corporation.
2.2 By-Laws. The By-Laws of Delphi Subsidiary shall be the
By-Laws of the Surviving Corporation until the same shall thereafter be altered,
amended or repealed in accordance with law, the Certificate of Incorporation of
the Surviving Corporation or said By-Laws.
2.3 Directors and Officers. The directors of Delphi Subsidiary
immediately prior to the Effective Time shall be the directors of the Surviving
Corporation, each to hold office in accordance with the Certificate of
Incorporation and By-laws of the Surviving Corporation, and the initial officers
of the Surviving Corporation shall be David F. Nolan, Chief Executive Officer
and Treasurer, Martin A. Grable, President, and Robert M. Smith, Jr., Secretary,
in each case until their respective successors are duly elected or appointed and
qualified.
ARTICLE III
CONVERSION OF SHARES AND CONTINGENT
CONSIDERATION
3.1 Conversion into Merger Consideration. At the Effective
Time, the issued shares of capital stock of the Com-
<PAGE> 11
-4-
pany shall, by virtue of the Merger and without any action on the part of the
holders thereof, become and be converted as follows: each Shareholder's
outstanding shares of common stock, without par value, of the Company (the
"Company Common Stock") and outstanding shares of Series A Preferred Stock,
without par value, of the Company (the "Series A Preferred Stock" and, together
with the Company Common Stock, the "Company Capital Stock"), if any, shall be
converted into and become the right to receive such Shareholder's Portion (as
defined below) of each component of the Merger Consideration (as defined below).
"Merger Consideration" means $35,074,500, consisting of a combination of (x)
shares of Class A Common Stock, par value $.01 per share (the "Delphi Common
Stock"), of Delphi (the "Stock Merger Consideration"), (y) notes of Delphi,
bearing interest at a rate of 8% per annum, payable semiannually, which will
mature not more than five years from the Closing Date (as defined herein) and
will have such other terms as are set forth on Exhibit B hereto (the "Note
Consideration") and (z) cash (the "Cash Merger Consideration" and, together with
the Note Consideration, the "Non-Stock Consideration"); provided, however, that,
in the event that the Closing Date shall occur after June 30, 1998, each
Shareholder's Portion of the Cash Merger Consideration shall be increased by an
amount equal to the interest on such Shareholder's Portion of the Merger
Consideration that has accrued daily from June 30, 1998 to and including the
Closing Date at a rate of 8% per annum. The allocation of each Shareholder's
Portion of Merger Consideration among Stock Merger Consideration, Note
Consideration and Cash Merger Consideration shall be as set forth on Exhibit C
hereto. "Shareholder's Portion" means, for each Shareholder, as to each
component of the Merger Consideration, the number of shares of Delphi Common
Stock under the "Stock Merger Consideration" column, the aggregate principal
amount of notes of Delphi under the "Note Consideration" column and the amount
of cash under the "Cash Merger Consideration" column, in each case as set forth
opposite such Shareholder's name on Exhibit C hereto.
<PAGE> 12
-5-
3.2 Exchange of Certificates.
(a) Exchange. In exchange for the outstanding shares of
Company Capital Stock, Delphi shall cause to be made available to each
Shareholder, for exchange in accordance with this Article III, (i) certificates
evidencing a sufficient number of shares of Delphi Common Stock to constitute
such Shareholder's Portion of the Stock Merger Consideration and (ii) an amount
in cash and notes of Delphi evidencing such Shareholder's Portion of the
Non-Stock Merger Consideration.
(b) Certificates. At the Effective Time, each Shareholder
shall deliver to Delphi the certificates (the "Certificates") representing
Company Capital Stock, accompanied by blank stock powers duly executed by such
Shareholder and with all necessary transfer tax and other revenue stamps,
acquired at such Shareholder's expense, affixed and canceled, and the
Certificate so surrendered shall forthwith be canceled. Each Shareholder shall
promptly cure any deficiencies with respect to the stock powers accompanying the
Certificates representing such Shareholder's shares of Company Capital Stock.
Until delivered as contemplated by this Section 3.2(b), each Certificate shall
be deemed at any time after the Effective Time to represent only the right to
receive (i) a certificate representing that number of whole shares of Delphi
Common Stock, if any, constituting Stock Merger Consideration to which the
holder thereof is entitled pursuant to this Article III and (ii) without
interest, the amount of cash and notes of Delphi constituting Non-Stock Merger
Consideration to which such holder is entitled to pursuant to this Article III.
The Delphi Common Stock to be distributed as Stock Merger Consideration and the
notes of Delphi to be distributed as the Note Consideration will be stamped or
imprinted with a legend in substantially the following form:
"THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF
ANY STATE, AND MAY NOT BE DISTRIBUTED, SOLD, TRANSFERRED, ASSIGNED,
HYPOTHECATED OR OFFERED UNLESS THERE IS IN EFFECT A REGISTRATION
STATEMENT UNDER SUCH ACT AND LAWS COVERING SUCH SECURITIES
<PAGE> 13
-6-
OR THE ISSUER RECEIVES AN OPINION OF COUNSEL FOR THE HOLDER OF THESE
SECURITIES REASONABLY SATISFACTORY TO THE ISSUER OR A NO-ACTION LETTER
FROM THE COMMISSION INDICATING THAT SUCH DISTRIBUTION, SALE, TRANSFER,
ASSIGNMENT, HYPOTHECATION OR OFFER IS EXEMPT FROM THE REGISTRATION AND
PROSPECTUS DELIVERY REQUIREMENTS OF SUCH ACT AND LAWS.
"THE SECURITIES EVIDENCED BY THIS CERTIFICATE ARE ALSO SUBJECT TO
RESTRICTIONS ON RESALE CONTAINED IN THAT CERTAIN AGREEMENT AND PLAN OF
MERGER, DATED AS OF JUNE 11, 1998, A COPY OF WHICH IS AVAILABLE FROM
THE SECRETARY OF THE ISSUER."
(c) No Further Rights in Company Capital Stock. At the
Effective Time all outstanding shares of Company Capital Stock, by virtue of the
Merger and without any action on the part of the holders thereof, shall no
longer be outstanding and shall be canceled and retired and shall cease to
exist, and each Shareholder shall thereafter cease to have any rights with
respect to such shares of Company Capital Stock, except the right to receive
such Shareholder's Portion of the Merger Consideration for such shares of
Company Capital Stock. All Delphi Common Stock constituting Stock Merger
Consideration and cash and notes constituting Non-Stock Merger Consideration
issued or paid, as the case may be, upon conversion of the shares of Company
Capital Stock in accordance with the terms hereof shall be deemed to have been
issued or paid, as the case may be, in full satisfaction of all rights
pertaining to such shares of Company Capital Stock.
(d) No Liability. Neither Delphi nor the Surviving Corporation
shall be liable to any holder of Certificates for any shares of Delphi Common
Stock (or dividends or distributions with respect thereto), notes or cash
delivered to a public official pursuant to any abandoned property, escheat or
similar law.
(e) Lost Certificates. If any Certificate shall have been
lost, stolen or destroyed, upon the making of an affidavit and indemnity
agreement of that fact, in form and sub-
<PAGE> 14
-7-
stance acceptable to Delphi, by the person claiming such Certificate to be lost,
stolen or destroyed, Delphi shall cause to be issued in exchange for such lost,
stolen or destroyed Certificate the applicable Merger Consideration.
3.3 Stock Transfer Books. At the Effective Time, the stock
transfer books of the Company shall be closed and there shall be no further
registration of transfers of shares of Company Capital Stock thereafter on the
records of the Company. At the Effective Time, any Certificates presented to
Delphi shall be converted into the applicable Merger Consideration as provided
herein.
3.4 Contingent Consideration.
(a) In addition to the Merger Consideration and as part of the
consideration for the Merger, upon the achievement of certain earnings targets
by the Surviving Corporation set forth below, up to $4,225,500 (the "Contingent
Consideration") will be payable by Delphi in cash to Martin A. Grable and David
F. Nolan, jointly, in accordance with the following:
(i) $2,112,750 of the Contingent Consideration will
be payable within three months after the second Anniversary Date (as
defined below) if either (A) EBITDA (as defined below) for the twelve
calendar months preceding the second Anniversary Date (determined in
accordance with the procedures set forth in Exhibit D hereto)
("EBITDA2") is no less than $5.0 million or (B) the sum of EBITDA for
the twelve calendar months preceding the first Anniversary Date
(determined in accordance with the procedures set forth in Exhibit D
hereto) and EBITDA2 is no less than $9.0 million.
(ii) $4,225,500 of the Contingent Consideration (less
any amount previously paid pursuant to paragraph (i) above) will be
payable within three months after the third Anniversary Date if either
(A) EBITDA for the twelve calendar months preceding the third
Anniversary Date (determined in accordance with the procedures set
forth in Exhibit D hereto) ("EBITDA3") is no less than $6.25 million
<PAGE> 15
-8-
or (B) the sum of EBITDA2 and EBITDA3 is no less than $11.25 million.
(iii) $4,225,500 of the Contingent Consideration
(less any amount previously paid pursuant to paragraph (i) or (ii)
above) will be payable within three months after the fourth Anniversary
Date if EBITDA for the twelve calendar months preceding the fourth
Anniversary Date (determined in accordance with the procedures set
forth in Exhibit D hereto) is no less than $6.25 million.
(b) "EBITDA" means, for any period, earnings (excluding
contributions to the Employee Bonus Fund (as defined below)) before interest,
taxes, depreciation and amortization of the Company and its consolidated
subsidiaries during such period, calculated using generally accepted accounting
principles ("GAAP"). No adjustments to EBITDA shall be made for "purchase"
accounting under GAAP that may result from the Merger, and any changes in
operations of the Company that are determined or imposed by Delphi and which
affect EBITDA will be excluded from the calculation of EBITDA. Notwithstanding
any of the foregoing, in recognition of the difficulty in otherwise fully
ascertaining the direct benefits of the synergies expected to result from the
Merger, EBITDA shall include: (x) 5% of new first year annualized premiums sold
during the relevant period on behalf of any affiliates of Delphi if the
Company's services were utilized, either in the introduction to, or ongoing
servicing of, the account, and (y) 2.5% of annualized renewal premiums during
the relevant period on the accounts referred to in clause (x) above and any
other accounts that the Company has placed with any affiliates of Delphi as of
the Closing Date. "Anniversary Date" means each anniversary of the Closing Date.
"Employee Bonus Fund" means the bonus plan for the benefit of the employees of
the Surviving Corporation established pursuant to a side letter dated as of the
date hereof (the "Side Letter").
<PAGE> 16
-9-
ARTICLE IV
CERTAIN EFFECTS OF THE MERGER
4.1 Effect of the Merger. The effects and consequences of the
Merger shall be as set forth in Section 252 of the DGCL and Sections 1107 and
1108 of the CGCL. Without limiting the generality of the foregoing, on and after
the Effective Time and pursuant to the DGCL and the CGCL, the Surviving
Corporation shall possess all the rights, privileges, immunities, powers, and
purposes of each of Delphi Subsidiary and the Company; all the property, real
and personal, including subscriptions to shares, causes of action and every
other asset (including books and records) of Delphi Subsidiary and the Company
shall vest in the Surviving Corporation without further act or deed; and the
Surviving Corporation shall assume and be liable for all the liabilities,
obligations and penalties of Delphi Subsidiary and the Company; provided,
however, that this shall in no way impair or affect the indemnification
obligations of any party pursuant to the indemnification provisions of this
Agreement. No liability or obligation due or to become due and no claim or
demand for any cause existing against either Delphi Subsidiary or the Company,
or any stockholder or shareholder, officer or director thereof, shall be
released or impaired by the Merger, and no action or proceeding, whether civil
or criminal, then pending by or against Delphi Subsidiary or the Company, or any
stockholder or shareholder, officer or director thereof, shall abate or be
discontinued by the Merger, but may be enforced, prosecuted, settled or
compromised as if the Merger had not occurred, and the Surviving Corporation may
be substituted in any such action or proceeding in place of Delphi Subsidiary or
the Company.
4.2 Further Assurances. If at any time after the Effective
Time, any further action is necessary or desirable to carry out the purposes of
this Agreement and to vest the Surviving Corporation with full right, title and
possession to all assets, property, rights, privileges, powers and franchises of
either of Delphi Subsidiary or the Company, the officers of such corporation are
fully authorized in the name of their cor-
<PAGE> 17
-10-
poration or otherwise to take, and shall take, all such further action.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF THE SHAREHOLDERS
Each Shareholder hereby represents and warrants, severally and
not jointly, to Delphi as follows:
5.1 Title to Shares. Each of the Shareholders is the true and
lawful owner, of record and beneficially, of the shares of Company Capital Stock
set forth opposite the name of such Shareholder under the headings "Company
Common Stock" and "Series A Preferred Stock" on Exhibit C hereto. At the
Effective Time, each of the Shareholders will validly transfer the shares owned
by him free and clear of all liens, security interests, pledges, assessments,
charges, adverse claims, leases, licenses, restrictions and other encumbrances
(collectively, "Liens"). Other than the rights and obligations arising under
this Agreement, none of such shares are subject to any rights of any other
person to acquire the same. None of such shares are subject to any restrictions
on transfer thereof, except for such restrictions as may be imposed by
applicable federal and state securities laws.
5.2 Authority Relative to Agreement. Each of the Shareholders
has full power and authority to enter into this Agreement and the Registration
Rights Agreement and to perform his obligations hereunder and thereunder. This
Agreement has been, and when delivered by such Shareholder at the Effective Time
the Registration Rights Agreement will have been, duly executed and delivered by
each of the Shareholders and this Agreement constitutes, and the Registration
Rights Agreement when so delivered will constitute, assuming the due
authorization, execution and delivery hereof and thereof by Delphi, the legal,
valid and binding obligation of each of the Shareholders, enforceable against
each of them in accordance with its terms, except (i) as enforcement thereof may
be limited by bankruptcy, insolvency, reorganization, moratorium, fraudulent
<PAGE> 18
-11-
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 and the Registration
Rights Agreement by each of the Shareholders 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 Shareholder is subject. Except as
contemplated by Section 6.5(b) hereof, 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 Registration
Rights Agreement and the consummation by each of the Shareholders of the sale of
the shares as contemplated by this Agreement and the performance of their
respective obligations hereunder and thereunder.
5.3 Waiver of Put and Call Rights. The Shareholders which have
put and call rights pursuant to a shareholders' agreement by and among the
Shareholders and the Company dated as of June 1, 1992 shall have effectively
waived such rights.
5.4 Securities Matters.
(a) Each of the Shareholders (a) has such knowledge,
sophistication and experience in business and financial matters that he is
capable of evaluating the merits and risks of an investment in the shares of
Delphi Common Stock and notes of Delphi, (b) fully understands the nature, scope
and duration of the limitations on transfer contained herein and under
applicable law, and (c) can bear the economic risk of an investment in the
shares of Delphi Common Stock and notes of Delphi and can afford a complete loss
of such investment.
<PAGE> 19
-12-
(b) Each of the Shareholders is acquiring the shares of Delphi
Common Stock comprising the Stock Merger Consideration and the notes of Delphi
comprising the Note Consideration for his own account and not with a present
view to or for distributing or reselling such shares or notes (or any portion of
either thereof). Each Shareholder has no contract, undertaking, agreement or
arrangement, written or oral, with any other person to sell, transfer or grant
participation in any shares of Delphi Common Stock or notes of Delphi to be
acquired by such Shareholder in the Merger.
(c) Each of the Shareholders acknowledges receipt of copies of
Delphi's Annual Report on Form 10-K for the fiscal year ended December 31, 1997,
its proxy statement relating to its 1998 annual meeting of stockholders and its
Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1998,
each as filed by the Company with the Securities and Exchange Commission ("SEC")
(collectively, the "Delphi SEC Reports") and further acknowledges that he has
been afforded (i) the opportunity to ask such questions as he has deemed
necessary of, and to receive answers from, representatives of Delphi concerning
the terms and conditions of the payment of the Stock Merger Consideration and
the Note Consideration, and the merits and risks of investing in the Stock
Merger Consideration and the Note Consideration; (ii) access to information
about Delphi and Delphi's financial condition, results of operations, business,
properties, management and prospects sufficient to enable such Shareholder to
evaluate his investment; and (iii) the opportunity to obtain such additional
information which Delphi possesses or can acquire without unreasonable effort or
expense that is necessary to make an informed investment decision with respect
to the investment and to verify the accuracy and completeness of the information
contained in the Delphi SEC Reports.
(d) Each of the Shareholders understands and acknowledges that
(i) the shares of Delphi Common Stock comprising the Stock Merger Consideration
and the notes of Delphi comprising the Note Consideration, if any, are being
offered and sold to him without registration under the Securities Act in a
<PAGE> 20
-13-
private placement that is exempt from registration provisions of the Securities
Act of 1933, as amended (the "Securities Act"), under Section 4(2) of the
Securities Act or Regulation D promulgated thereunder and (ii) the availability
of such exemption depends in part on, and Delphi will rely upon, the accuracy
and truthfulness of the foregoing representations.
ARTICLE VI
REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE
SHAREHOLDERS
The Company and each of the Shareholders, jointly and
severally, represent and warrant to Delphi as follows:
6.1 Organization and Qualification. Each of the Company and
its subsidiaries is a corporation duly organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation and has all
requisite corporate power and authority to own, lease and operate its properties
and to carry on its business as now being conducted. Each of the Company and its
subsidiaries is duly qualified as a foreign corporation to do business, and is
in good standing, in each jurisdiction where the character of its properties
owned or leased or the nature of its activities makes such qualification
necessary, except for failures to be so qualified or in good standing which
would not, individually or in the aggregate, have a material adverse effect on
the business, operations, condition (financial or other), assets or prospects of
the Company and its subsidiaries, taken as a whole (a "Company Material Adverse
Effect"). Section 6.1 of the Disclosure Schedule lists all of the jurisdictions
in which the Company or any of its subsidiaries or any present employee thereof
holds active licenses and permits or authorizations to transact the Company's or
its subsidiaries' business (the "Licenses") and indicates the type of each
License and the name of each such employee. No such License is the subject of
any administrative proceeding for suspension or revocation or any similar
proceedings which would, if decided against the Company, materially and
adversely affect such License; there is no sustainable ba-
<PAGE> 21
-14-
sis for such a suspension or revocation which would, individually or in the
aggregate, have a Company Material Adverse Effect; and no such suspension or
revocation has been threatened by any licensing authority. Section 6.1 of the
Disclosure Schedule sets forth, with respect to the Company and each of its
subsidiaries, the jurisdiction in which they are qualified or otherwise licensed
as a foreign corporation to do business. Neither the Company nor any of its
subsidiaries is in violation of any of the provisions of its certificate or
articles of incorporation or organization (or other applicable charter document)
or by-laws. The Company has delivered to Delphi accurate and complete copies of
the certificate or articles of incorporation or organization (or other
applicable charter document) and by-laws, as currently in effect, of each of the
Company and its subsidiaries.
6.2 Capital Stock of Subsidiaries. The only direct or indirect
subsidiaries of the Company are those listed in Section 6.2 of the Disclosure
Schedule. Except as set forth in Section 6.2 of the Disclosure Schedule, the
Company is directly or indirectly the record and beneficial owner of all of the
outstanding shares of capital stock of each of its subsidiaries. There are no
proxies with respect to such shares, and no equity securities of any of such
subsidiaries are or may be required to be issued by reason of any options,
warrants, scrip, rights to subscribe for, calls or commitments of any character
whatsoever relating to, or securities or rights convertible into or exchangeable
for, shares of any capital stock of any such subsidiary, and there are no
contracts, commitments, understandings or arrangements by which any such
subsidiary is bound to issue additional shares of its capital stock or
securities convertible into or exchangeable for such shares. All of such shares
so owned by the Company are validly issued, fully paid and nonassessable and are
owned by it free and clear of all Liens. Except as disclosed in Section 6.2 of
the Disclosure Schedule, the Company does not directly or indirectly own any
interest in any corporation, partnership, joint venture or other business
association or entity.
<PAGE> 22
-15-
6.3 Capitalization. The authorized capital stock of the
Company consists of 10,000,000 shares of Company Common Stock, of which
2,005,050 are issued and outstanding, and 2,000,000 shares of Series A Preferred
Stock, of which 1,530,000 are issued and outstanding. All of such issued and
outstanding shares of Company Capital Stock are validly issued, fully paid and
nonassessable and free of preemptive rights. Except as set forth on Section 6.3
of the Disclosure Schedule, neither the Company nor any of its subsidiaries is a
party to any agreement or understanding, oral or written, which (a) grants an
option or other right to acquire any of the Company Capital Stock or any other
equitable interest in the Company, (b) grants a right of first refusal or other
such similar right upon the sale of any of the Company Capital Stock, or (c)
restricts or affects the voting rights of any of the Company Capital Stock.
6.4 Authority Relative to This Agreement. The Company has full
corporate power and authority to execute and deliver this Agreement and to
consummate the Merger and other transactions contemplated hereby and by the
Registration Rights Agreement. The execution and delivery of this Agreement and
the consummation of the Merger and other transactions contemplated hereby have
been duly and validly authorized by the Board of Directors of the Company and
consented to and approved by each Shareholder, and no other corporate
proceedings on the part of the Company are necessary to authorize this Agreement
or to consummate the Merger or other transactions contemplated hereby. This
Agreement has been duly and validly executed and delivered by the Company and,
assuming the due authorization, execution and delivery hereof by Delphi,
constitutes the legal, valid and binding agreement of the Company, enforceable
against the 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).
<PAGE> 23
-16-
6.5 No Violations, etc.
(a) Assuming that all filings or waivers thereof have been
duly made or obtained as contemplated by Section 6.5(b) hereof, neither the
execution and delivery of this Agreement by the Company nor the consummation of
the Merger or other transactions contemplated hereby nor compliance by the
Company with any of the provisions hereof will (i) violate, conflict with, or
result in a breach of any provision of, or constitute a default (or an event
which, with notice or lapse of time or both, would constitute a default) under,
or result in the termination or suspension of, or accelerate the performance
required by, or result in a right of termination or acceleration under, or
result in the creation of any Lien upon any of the properties or assets of the
Company or any of its subsidiaries under, any of the terms, conditions or
provisions of (x) their respective charters or by-laws, (y) any note, bond,
mortgage, indenture or deed of trust, or (z) any license, lease, agreement or
other instrument or obligation to which the Company or any such subsidiary is a
party or to which they or any of their respective properties or assets may be
subject, or (ii) subject to compliance with the statutes and regulations
referred to in the next paragraph, violate any judgment, ruling, order, writ,
injunction, decree, statute, rule or regulation applicable to the Company or any
of its subsidiaries or any of their respective properties or assets.
(b) No filing or registration with, notification to and no
permit, authorization, consent or approval of any governmental entity
(including, without limitation, any federal, state or local regulatory authority
or agency) is required by the Company in connection with the execution and
delivery of this Agreement or the consummation by the Company of the Merger or
other transactions contemplated hereby, except (i) the filing of the Delaware
Certificate of Merger, (ii) the filing of the California Certificate of Merger
and (iii) filings with applicable state regulatory authorities identified in
Section 6.5 of the Disclosure Schedule.
(c) None of the Company or any of its subsidiaries is in
violation of or default under (x) any note, bond, mort-
<PAGE> 24
-17-
gage, indenture or deed of trust, or (y) any license, lease, agreement or other
instrument or obligation to which the Company or any such subsidiary is a party
or to which they or any of their respective properties or assets may be subject,
except for such violations or defaults which would not, individually or in the
aggregate, either have a Company Material Adverse Effect or materially impair
the Company's ability to consummate the Merger or other transactions
contemplated hereby.
6.6 Financial Statements.
(a) Set forth in Section 6.6 of the Disclosure Schedule are
true and complete copies of the audited consolidated balance sheets of the
Company at December 31, 1997 and December 31, 1996 (the "December 31 Balance
Sheets") and the audited consolidated statements of income, shareholder's equity
and cash flow of the Company for each of the two years in the period ended
December 31, 1997 (collectively, the "December 31 Financials"), together with
the audit opinion thereon by Ernst & Young LLP, the Company's independent
accountants. The December 31 Financials fairly present, in all material
respects, the financial position of the Company at December 31, 1997 and the
other periods presented therein, and the results of operations of the Company
for the period then ended and the other periods presented therein, and have been
prepared in accordance with generally accepted accounting principles
consistently applied by the Company (except as may be indicated in the notes
thereto). The December 31 Balance Sheets reflect all liabilities of the Company,
whether absolute, accrued or contingent, as of the date thereof of the type
required to be reflected or disclosed on a balance sheet prepared in accordance
with generally accepted accounting principles. Ernst & Young LLP are independent
public accountants within the meaning of the Securities Act.
(b) Prior to the Closing Date, the Company shall provide to
Delphi true and complete copies of (i) the unaudited balance sheet of the
Company at March 31, 1998 (the "March 31 Balance Sheet") and the unaudited
statements of income, shareholder's equity and cash flow of the Company for the
three months then ended (collectively, the "March 31 Financials") and
<PAGE> 25
-18-
(ii) the unaudited balance sheet of the Company at May 31, 1998 (together with
the March 31 Balance Sheet, the "Interim Balance Sheets") and the unaudited
statements of income, shareholder's equity and cash flow of the Company for the
two months ended May 31, 1998 (collectively with the March 31 Financials, the
"Interim Financials"), together with the report on a review of interim financial
information pursuant to Statement on Accounting Standards No. 71 by Ernst &
Young LLP. The Interim Financials will fairly present, in all material respects,
the financial position of the Company at the respective dates thereof (subject
to year-end adjustments and the absence of footnote disclosures), and the
results of operations of the Company for the respective periods then ended, and
have been prepared in accordance with generally accepted accounting principles
consistently applied (except as may be indicated in the notes thereto). The
Interim Balance Sheets will reflect all liabilities of the Company, whether
absolute, accrued or contingent, as of the respective dates thereof of the type
required to be reflected or disclosed on a balance sheet prepared in accordance
with generally accepted accounting principles.
6.7 Regulatory Reports. Section 6.7 of the Disclosure Schedule
contains a complete and accurate list of the most recent regulatory reports
relating to the Company submitted to each governmental entity with authority or
jurisdiction over the Company, its subsidiaries or their businesses, true and
complete copies of which have previously been provided to Delphi. Each such
report is true and accurate in all material respects, complies in all material
respects with the requirements thereof and was prepared in accordance with all
applicable rules, regulations and procedures.
6.8 Absence of Changes or Events. Except as set forth on
Section 6.8 of the Disclosure Schedule, since December 31, 1997:
(a) there has been no material adverse change, or any
development involving a prospective material adverse change, in the
business, operations, condition (financial or other), assets or
prospects of the Company and its subsidiaries, taken as a whole;
<PAGE> 26
-19-
(b) there has not been any direct or indirect redemption,
purchase or other acquisition of any shares of capital stock of the
Company or any of its subsidiaries, or any declaration, setting aside
or payment of any dividend or other distribution by the Company or any
of its subsidiaries in respect of its capital stock;
(c) except in the ordinary course of its business and
consistent with past practice, neither the Company nor any of its
subsidiaries has incurred any indebtedness for borrowed money, or
assumed, guaranteed, endorsed or otherwise as an accommodation become
responsible for the obligations of any other individual, firm or
corporation, or made any loans or advances to any other individual,
firm or corporation;
(d) there has not been any change in the financial or tax
accounting methods, principles or practices of the Company or its
subsidiaries;
(e) there has not been any revaluation by the Company or any
of its subsidiaries of any of their respective assets, including,
without limitation, writing off notes or accounts receivable;
(f) without limiting the generality of the foregoing, there
has not been any action or inaction by the Company, its subsidiaries or
any Shareholder the result of which would constitute a violation of the
covenants contained in Section 8.1 hereof as if such covenants applied
beginning December 31, 1997; and
(g) there has not been any agreement by the Company or any of
its subsidiaries or the Shareholders to (i) do any of the things
described in the preceding clauses (a) through (f) other than as
expressly contemplated or provided for in this Agreement or (ii) take,
whether in writing or otherwise, any action which, if taken prior to
the date of this Agreement, would have made any representation or
warranty in this Article VI untrue or incorrect.
<PAGE> 27
-20-
6.9 Litigation. Except as set forth in Section 6.9 of the
Disclosure Schedule, there is no (i) claim, action, suit or proceeding pending
or, to the knowledge of the Company or any of its subsidiaries, threatened
against or relating to the Company or any of its subsidiaries before any court
or governmental or regulatory authority or body or arbitration tribunal, or (ii)
outstanding judgment, order, writ, injunction or decree, or application, request
or motion therefor, of any court, governmental agency or arbitration tribunal in
a proceeding to which the Company, any subsidiary of the Company or any of their
respective assets was or is a party.
6.10 Title to and Condition of Properties. Section 6.10 of the
Disclosure Schedule contains a true and complete list of all real properties
owned by the Company and its subsidiaries. Each of the Company and its
subsidiaries has good title to all of the real property and owns outright all of
the personal property (except for leased property or assets) which is reflected
on the December 31 Balance Sheets except for property since sold or otherwise
disposed of in the ordinary course of business and consistent with past
practice. No such real or personal property is subject to claims, liens or
encumbrances, whether by mortgage, pledge, lien, conditional sale agreement,
charge or otherwise.
6.11 Leases. Section 6.11 of the Disclosure Schedule contains
a true and complete list of all leases pursuant to which real or personal
property is held under lease by either the Company or any of its subsidiaries
and the leases pursuant to which either the Company or any of its subsidiaries
leases real or personal property to others. All of the leases so listed are
valid and subsisting and in full force and effect and are subject to no default
with respect to either the Company or its subsidiaries, as the case may be, and,
to the Company's knowledge, are in full force and effect and subject to no
default with respect to any other party thereto, and the leased real property is
in good and satisfactory condition.
6.12 Contracts; Bank Accounts; Indebtedness.
<PAGE> 28
-21-
(a) Contracts and Commitments. Section 6.12(a) of the
Disclosure Schedule contains a complete and accurate list of all Material (as
defined below) existing outstanding contracts and commitments, whether written
or oral, of the Company and its subsidiaries (i) the terms of which provide for
the payment by the Company and its subsidiaries after the date hereof as the
recipient of goods or services or involve the receipt by the Company or any of
its subsidiaries as the provider of goods or services, (ii) whereby the Company
or any of its subsidiaries leases equipment or real property, (iii) whereby the
Company or any of its subsidiaries has a firm commitment to purchase capital
equipment (or lease in the nature of a conditional purchase of capital
equipment), (iv) which continue for a period of twelve months or more and are
not subject to a unilateral right of termination by the Company without
consideration, (v) which restrict or purport to restrict any business activities
or freedom of the Company or any of its subsidiaries (or, to the knowledge of
the Company, any of its officers or employees) to engage in any business or to
compete with any person, or (vi) which relate to employment, consulting and
agency agreements which provide for any severance or termination benefit, or any
other agreements, contracts and commitments material to the business of the
Company and its subsidiaries. For purposes of this Section 6.12(a), a "Material"
contract or commitment shall mean any contract or commitment that may give rise
to obligations or liabilities exceeding, during the current term thereof,
$100,000, or that may generate revenues or income exceeding, during the current
term thereof, $100,000 or that is otherwise material to the conduct of the
business of the Company or the Surviving Corporation or their respective
subsidiaries. None of the Company or any of its subsidiaries (A) is in default
(nor is there any event which with notice or lapse of time or both would
constitute a default) under any Material contract or commitment, or (B) has
received notice or any other indication that any such Material Contract or
commitment is about to be terminated or otherwise modified in any material
respect, regardless of any default thereunder. Section 6.12(a) of the Disclosure
Schedule identifies each existing contract or commitment containing an agreement
with respect to any change of control or any indemnifica-
<PAGE> 29
-22-
tion or other contingent obligations that would be triggered by the Merger.
(b) Bank Accounts. Section 6.12(b) of the Disclosure Schedule
contains a complete and accurate list of the name of each bank in which the
Company or any of its subsidiaries has an account or safe deposit box (each, a
"Bank Account" and, collectively, the "Bank Accounts"), the account number
thereof and the names of all persons authorized to draw thereon or to have
access thereto.
(c) Indebtedness. Section 6.12(c) of the Disclosure Schedule
contains a complete and accurate list of all indebtedness for borrowed money of
the Company and its subsidiaries showing the aggregate amount by way of
principal and interest which was outstanding as of a date not more than seven
days prior to the date of this Agreement and, by the terms of agreements
governing such indebtedness, is expected to be outstanding immediately prior to
repayment on the Closing Date. Except as set forth in Section 6.12(c) of the
Disclosure Schedule, neither this Agreement nor the consummation of the Merger
or the other transactions contemplated hereby will result in any outstanding
loans or borrowings by the Company or any subsidiary of the Company becoming
due, going into default or giving the lenders or other holders of debt
instruments the right to require the Company or any of its subsidiaries to repay
all or a portion of such loans or borrowings.
6.13 Relationships. The relationships of the Company and its
subsidiaries with their respective customers, clients, suppliers, sales
representatives and others having business relationships with them are generally
satisfactory, and there is no indication of any intention by any party thereto
to terminate or modify the terms of any such relationship. Without limiting the
generality of the foregoing, except as set forth in Section 6.13 of the
Disclosure Schedule, no customer has notified or otherwise indicated to the
Company or any of its subsidiaries that it will stop, or decrease the rate of,
its purchases of services or products from the Company or such subsidiaries, and
no customer has, during fiscal 1997, ceased or materially decreased its
purchases of any such services or
<PAGE> 30
-23-
products from the Company or any of its subsidiaries; and no supplier has
notified or otherwise indicated to the Company or any of its subsidiaries that
it will stop, or decrease the rate of, or, other than publicly announced
generally applicable price increases, materially increase the cost of, its
supply of materials, products or services used by the Company and its
subsidiaries, and no supplier has, during fiscal 1997, ceased, materially
decreased the rate of, or materially raised the cost of, any such materials,
products or services.
6.14 Labor Matters. Except to the extent that any of the
following, individually or in the aggregate, would have a Company Material
Adverse Effect, (a) neither the Company nor any of its subsidiaries fails to
comply with all applicable laws respecting employment and employment practices,
terms and conditions of employment and wages and hours, and neither the Company
nor any of its subsidiaries is engaged in any "unfair labor practice," as that
term is understood pursuant to the National Labor Relations Act, as amended, (b)
there is no labor strike, slowdown, stoppage or other employee departure of any
nature pending or threatened) against or affecting the Company or any of its
subsidiaries and (c) no petition for certification has been filed and is pending
before the National Labor Relations Board with respect to any employees of the
Company or any of its subsidiaries who are not currently organized.
6.15 Compliance with Law. Except for matters set forth in
Section 6.15 of the Disclosure Schedule, (a) neither the Company nor any of its
subsidiaries has violated or failed to comply with any statute, law, ordinance,
regulation, rule or order of any foreign, federal, state or local government or
any other governmental department or agency, or any judgment, decree or order of
any court, applicable to its business or operations; (b) neither the Company nor
any of its subsidiaries has received any written communication during the past
three years alleging a failure to comply with any statute, law, ordinance, rule
or order of any foreign, federal, state or local government or any other
governmental department or agency, or any judgment, decree or order of any
court, applicable to its business or operations and (c) the conduct of the
business of
<PAGE> 31
-24-
each of the Company and its subsidiaries is in conformity with all foreign,
federal, state and local governmental and regulatory requirements; except, in
the case of clauses (a) and (c), for such violations or failures which would
not, individually or in the aggregate, have a Company Material Adverse Effect.
The Company, its subsidiaries and their employees have all permits, licenses and
franchises from governmental agencies required to conduct their businesses as
now being conducted. The Company and its subsidiaries have duly and validly
filed or caused to be filed all reports, statements, documents, registrations,
filings, or submissions that were required by law to be filed with any person,
except where such failure to file would not, individually or in the aggregate,
have a Company Material Adverse Effect. All such filings complied with
applicable laws in all material respects when filed, and to the knowledge of the
Company, no material deficiencies have been asserted by any person with respect
to any such filings. The Company and its subsidiaries have previously delivered
to Delphi the reports reflecting the results of the most recent examinations of
the Company issued by any applicable governmental authority.
6.16 Intellectual Property. Section 6.16 of the Disclosure
Schedule sets forth a complete and accurate list of all of the trademarks
(whether or not registered) and trademark registrations and applications, patent
and patent applications, copyrights and copyright applications, service marks,
service mark registrations and applications, trade dress, trade and product
names (collectively, the "Intellectual Property") owned or licensed by the
Company and its subsidiaries. Except as set forth on Section 6.16 of the
Disclosure Schedule, (i) each of the Company and its subsidiaries has or owns,
directly or indirectly, all right, title and interest to such Intellectual
Property or has the perpetual right to use such Intellectual Property without
consideration; none of the rights of the Company and its subsidiaries in or use
of such Intellectual Property has been or is currently being or, to the
knowledge of the Company, is threatened to be infringed or challenged; (ii) all
of the patents, trademark registrations, service mark registrations, trade name
registrations and copyright registrations in-
<PAGE> 32
-25-
cluded in such Intellectual Property have been duly issued and have not been
canceled, abandoned or otherwise terminated; and (iii) all of the patent
applications, trademark applications, service mark applications, trade name
applications and copyright applications included in such Intellectual Property
have been duly filed. To the knowledge of the Company, the Company and its
subsidiaries own or have adequate licenses or other rights to use all
Intellectual Property, know-how and technical information required for their
operation.
6.17 Taxes. Except as otherwise set forth in Section 6.17 of
the Disclosure Schedule, (i) the Company and each of its subsidiaries have
prepared and timely filed with the appropriate governmental agencies all Tax
Returns required to be filed on or prior to the date hereof, taking into account
any extension of time to file granted to or obtained on behalf of the Company
and/or its subsidiaries, and each such Tax Return is complete and correct in all
material respects; (ii) all Taxes of the Company and each of its subsidiaries
shown on such Tax Returns have been paid in full to the proper authorities;
(iii) the Company and its subsidiaries have made adequate provision for all
unpaid Taxes in respect of any period (or portion thereof) ending on or before
the Effective Time; (iv) all deficiencies asserted in writing by any taxing
authority against the Company or any of its subsidiaries have been paid or
finally settled, neither the Company nor any of its subsidiaries is presently
under examination or audit by any taxing authority, and neither the Company nor
any of its subsidiaries has received written notice of any pending examination
or audit of the Company or any of its subsidiaries by any taxing authority; (v)
no extension of the period for assessment or collection of any Tax is currently
in effect and no extension of time within which to file any Tax Return has been
requested, which Tax Return has not since been filed; (vi) neither the Company
nor any of its subsidiaries has made, or is required to make, any adjustment by
reason of a change in their accounting methods for any period (or portion
thereof) ending on or before the Closing Date that would result in an adjustment
pursuant to Section 481 of the Code (or any similar provision of state, local or
foreign law) for any period (or portion thereof) ending
<PAGE> 33
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after the Closing Date; (vii) neither the Company nor any of its subsidiaries is
a party to any tax sharing, tax matters or similar agreement or is the
indemnitor under any tax indemnification or similar agreement; (viii) since its
inception through June 30, 1997, the Company qualified as a "S corporation," as
defined in Section 1361 of the Code; (ix) neither the Company nor any of its
subsidiaries has made an election under Section 341(f) of the Code; (x) neither
the Company nor any of its subsidiaries is a party to any agreement or
arrangement that provides for the payment of any amount, or the provision of any
other benefit, that could constitute a "parachute payment" within the meaning of
Section 280G of the Code; (xi) neither the Company nor any of its subsidiaries
has ever been a member of any affiliated, consolidated, combined or unitary
group for any Tax purpose other than a group of which it is currently a member;
(xii) there are no "excess loss accounts" (as defined in Treas. Reg. Section
1.1502-19) with respect to any stock of any subsidiary; (xiii) neither the
Company nor any of its subsidiaries has any (a) deferred gain or loss (1)
arising from any deferred intercompany transactions (as described in Treas. Reg.
Sections 1.1502-13 and 1.1502-13T prior to amendment by Treasury Decision 8597
(issued July 12, 1995)), or (2) with respect to the stock or obligations of any
other member of any affiliated group (as described in Treas. Reg. Sections
1.1502-14 and 1.1502-14T prior to amendment by Treasury Decision 8597) or (b)
any gain subject to Treas. Reg. Section 1.1502-13, as amended by Treasury
Decision 8597; (xiv) neither the Company nor any of its subsidiaries has
requested a ruling from, or entered into a closing agreement with, the IRS or
any other taxing authority with respect to income, withholding, franchise or
sales and use taxes in its current taxable year or at any time during its last
three completed taxable years; and (xv) the Company has previously delivered to
Delphi true and complete copies of (a) all federal income Tax Returns filed by
the Company and/or any of its subsidiaries for the last three taxable years
ending prior to the date hereof (except for those federal income Tax Returns
that have not yet been filed) and (b) any audit reports issued within the last
three years by the IRS or any other taxing authority.
<PAGE> 34
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For all purposes of this Agreement, "Tax" or "Taxes" means (i)
all federal, state, local or foreign taxes, charges, fees, imposts, levies or
other assessments, including, without limitation, all net income, alternative
minimum, gross receipts, capital, sales, use, ad valorem, value added, transfer,
franchise, profits, inventory, capital stock, license, withholding, payroll,
employment, social security, unemployment, excise, severance, stamp, occupation,
property and estimated taxes, customs duties, fees, assessments and charges of
any kind whatsoever, (ii) all interest, penalties, fines, additions to tax or
other additional amounts imposed by any taxing authority in connection with any
item described in clause (i) and (iii) all transferee, successor, joint and
several or contractual liability (including, without limitation, liability
pursuant to Treas. Reg. Section 1.1502-6 (or any similar state, local or foreign
provision)) in respect of any items described in clause (i) or (ii).
For all purposes of this Agreement, "Tax Return" means all
returns, declarations, reports, estimates, information returns and statements
required to be filed in respect of any Taxes.
6.18 Employee Benefit Plans; ERISA. Except as set forth in
Section 6.18 of the Disclosure Schedule:
(a) Section 6.18 of the Disclosure Schedule is a true and
complete schedule of all "employee pension benefit plans" as defined in
Section 3(2) of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), maintained or contributed to by the Company, any of
its subsidiaries or any other ERISA Affiliates, or with respect to
which the Company or any of its subsidiaries contributes or is
obligated to make payments thereunder or otherwise may have any
liability ("Pension Benefit Plans"), all "welfare benefit plans" (as
defined in Section 3(1) of ERISA), maintained or contributed to by the
Company or any of its subsidiaries or with respect to which the Company
or any of its subsidiaries otherwise may have any liability ("Welfare
Plans"), all multiemployer plans as defined in Section 3(37) of ERISA
covering em-
<PAGE> 35
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ployees employed in the United States to which such Company or any of
its subsidiaries is required to make contributions or otherwise may
have any liability, all stock bonus, stock option, restricted stock,
stock appreciation right, stock purchase, bonus, incentive, deferred
compensation, severance and vacation or other employee benefit plans,
programs or arrangements that are not Pension Benefit Plans or Welfare
Plans maintained or contributed to by the Company or a subsidiary or
with respect to which the Company or any subsidiary otherwise may have
any liability ("Other Plans"). For purposes of this Agreement, "ERISA
Affiliate" shall mean any person (as defined in Section 3(9) of ERISA)
that is or has been a member of any group of persons described in
Section 414(b), (c), (m) or (o) of the Code including the Company or
any of its subsidiaries.
(b) The Company and each of its subsidiaries, and each of the
Pension Benefit Plans, Welfare Plans and Other Plans (collectively, the
"Plans"), are in compliance with the applicable provisions of ERISA,
the Code and other applicable laws except where the failure to comply
would not, individually or in the aggregate, have a Company Material
Adverse Effect.
(c) None of the Company, its subsidiaries or any of their
ERISA Affiliates maintain or contribute to, nor have they ever
maintained or contributed to a Pension Benefit Plan subject to Title IV
of ERISA or Section 412 of the Code or 302 of ERISA. None of the
Company or any subsidiary of the Company or any ERISA Affiliate has
incurred, or is reasonably likely to incur, any material liability
under Title IV of ERISA.
(d) Each of the Pension Benefit Plans intended to qualify
under Section 401 of the Code satisfies in form the requirements of
such Section except to the extent amendments are not required by law to
be made until a date after the Closing Date, has received a favorable
determination letter from the Internal Revenue Service ("IRS")
regarding such qualified status, has not, since receipt of
<PAGE> 36
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the most recent favorable determination letter, been amended, and has
not been operated in a way that would cause the loss of such
qualification or exemption or the imposition of any material liability,
penalty or tax under ERISA or the Code.
(e) Each Welfare Plan that is intended to qualify for
exclusion of benefits thereunder from the income of participants or for
any other tax-favored treatment under any provisions of the Code
(including, without limitation, Sections 79, 105, 106, 125 or 129 of
the Code) is and has been maintained in compliance in all material
respects with all pertinent provisions of the Code and Treasury
Regulations thereunder.
(f) There are (i) no investigations, audits or examinations
pending, or to the best knowledge of the Company, threatened by any
governmental entity involving any of the Plans, (ii) no termination
proceedings involving the Plans and (iii) no pending or, to the best
knowledge of the Company, threatened claims (other than routine claims
for benefits), suits or proceedings against any Plan, against the
assets of any of the trusts under any Plan or against any fiduciary of
any Plan with respect to the operation of such plan or asserting any
rights or claims to benefits under any Plan or against the assets of
any trust under such plan, which would, in the case of clause (i), (ii)
or (iii) of this paragraph (f), give rise to any liability which would,
individually or in the aggregate, have a Company Material Adverse
Effect.
(g) None of the Company, any of its subsidiaries or any
employee of the foregoing has engaged in a "prohibited transaction"
(within the meaning of Section 4975 of the Code or Section 406 of
ERISA) or breach of fiduciary duty under Title I of ERISA, which could
result in any tax or penalty on the Company or any of its subsidiaries
under the Code or ERISA which would, individually or in the aggregate,
have a Company Material Adverse Effect.
<PAGE> 37
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(h) With respect to each of the Plans, true, correct and
complete copies of the following documents have been made available to
Delphi: (i) the current plans and related trust documents, including
amendments thereto, (ii) any current summary plan descriptions and
other material communications to participants relating to the Plans,
(iii) the most recent Forms 5500 (if any) filed with respect to each
such Plan, (iv) the most recent financial statements and actuarial
reports, if applicable, (v) the most recent IRS determination letter,
if applicable; and (vi) if any application for an IRS determination
letter is pending, copies of all such applications for determination
including attachments, exhibits and schedules thereto.
(i) None of the Welfare Plans maintained by the Company or any
of its subsidiaries are retiree life or retiree health insurance plans
which provide for continuing benefits or coverage for any participant
or any beneficiary of a participant following termination of
employment, except as may be required under the Consolidated Omnibus
Budget Reconciliation Act of 1985, as amended ("COBRA"), or except
where the full expense of such coverage or benefits is paid by the
participant or the participant's beneficiary. The Company and each of
its subsidiaries which maintain a "group health plan" within the
meaning of Section 5000(b)(1) of the Code have complied with the notice
and continuation requirements of Section 4980B of the Code, COBRA, Part
6 of Subtitle B of Title I of ERISA and the regulations thereunder
except where the failure to comply would not, individually or in the
aggregate, have a Company Material Adverse Effect.
(j) No liability under any Plan has been funded nor has any
such obligation been satisfied with the purchase of a contract from an
insurance company as to which the Company or any of its subsidiaries
has received notice that such insurance company is in rehabilitation.
(k) Except as set forth in Section 6.18(k) of the Disclosure
Schedule, the consummation of the transactions contemplated by this
Agreement will not either alone or in
<PAGE> 38
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connection with an employee's termination of employment or other event
result in an increase in the amount of compensation or benefits or
accelerate the vesting or timing of payment of any benefits or
compensation payable to or in respect of any employee of the Company or
any of its subsidiaries.
(l) Except as set forth in Section 6.18(l) of the Disclosure
Schedule, the consummation of the transactions contemplated by this
Agreement will not result in or satisfy a condition to the payment of
compensation that would, in combination with any other payment, result
in an "excess parachute payment" within the meaning of Section 280G(b)
of the Code.
(m) With respect to any Foreign Plan (as hereinafter defined),
the Company and each of its subsidiaries and each of the Foreign Plans
are in compliance with applicable laws and all required contributions
have been made to the Foreign Plans, except where the failure to comply
or make contributions would not, individually or in the aggregate, have
a Company Material Adverse Effect. Each of the Foreign Plans that is a
funded defined benefit plan has a fair market value of plan assets that
is greater than the plan's liabilities, as determined in accordance
with applicable laws. For purposes hereof, the term "Foreign Plan"
shall mean any plan, program, policy, arrangement or agreement
maintained or contributed to by, or entered into with, the Company or
any subsidiary with respect to employees (or former employees) employed
outside the United States.
6.19 Environmental Matters.
(a) Except as set forth in Section 6.19 of the Disclosure
Schedule and except for such matters as would not reasonably be expected to have
a Company Material Adverse Effect, individually or in the aggregate:
(i) Each of the Company and its subsidiaries (A) has
obtained (or is capable of obtaining without incurring any
<PAGE> 39
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material incremental expense) all Environmental Permits, (B) has no
reason to believe any of them will be revoked prior to their expiration
or modified or will not be renewed (in each case, without incurring any
material incremental expense), and (C) has made all registrations and
given all notifications that are required under any applicable
Environmental Law.
(ii) There is no Environmental Claim pending or, to the
knowledge of the Company, threatened against the Company or any of its
subsidiaries under any Environmental Law.
(iii) Each of the Company and its subsidiaries is in
compliance with, and has no liability under, any applicable
Environmental Laws including, without limitation, all of its
Environmental Permits.
(iv) Neither the Company nor any of its subsidiaries has
assumed, by contract or otherwise, any liabilities or obligations
arising under any Environmental Laws.
(v) There are no past or present actions, activities,
conditions, occurrences or events, including, without limitation, the
Release or threatened Release of any Hazardous Materials, including,
without limitation, asbestos, which could reasonably be expected to
prevent compliance by the Company or any of its subsidiaries with any
Environmental Law, or to result in any liability of the Company or any
of its subsidiaries under any Environmental Law.
(vi) No underground or aboveground storage tank or related
piping, or any disposal site containing any Hazardous Material is
located at, under or on any property owned, operated or leased by the
Company or any of its subsidiaries or any, to the knowledge of the
Company, of their respective predecessors in interest, nor, to the
knowledge of the Company, has any of them been removed or
decommissioned from or at any such property.
<PAGE> 40
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(b) Except as set forth in Section 6.19 of the Disclosure
Schedule:
(i) No lien has been recorded under any Environmental Law with
respect to any property, facility or asset currently owned or operated
by the Company or any of its subsidiaries.
(ii) No property now or previously owned, operated or leased
by the Company or any of its subsidiaries or, to the knowledge of the
Company, any of their respective predecessors in interest is (i) listed
or proposed for listing on the National Priorities List under the
Comprehensive Environmental Response, Compensation, and Liability Act
of 1980, as amended ("CERCLA"), or (ii) listed in the Comprehensive
Environmental Response, Compensation, and Liability Information System
List promulgated pursuant to CERCLA, or on any comparable list
established under any Environmental law, including, without limitation,
such lists relating to petroleum, including crude oil or any fraction
thereof.
(iii) The execution and delivery of this Agreement and the
consummation by the Company of the Merger and other transactions
contemplated hereby and the exercise by Delphi of rights to own and
operate the businesses of each of the Company and its subsidiaries
substantially as presently conducted will not affect the validity or
require the transfer of any Environmental Permits held by the Company
or any of its subsidiaries and will not require any notification,
disclosure, registration, reporting, filing, investigation or
remediation under any Environmental Law.
(iv) The Company has delivered or otherwise made available for
inspection to Delphi copies of any investigations, studies, reports,
assessments, evaluations and audits in its possession, custody or
control of Hazardous Materials at, in, beneath, emanating from or
adjacent to any properties or facilities now or formerly owned, leased,
operated or used by it or any of its subsidiaries or any of their
respective predecessors in interest, or of
<PAGE> 41
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compliance by any of them with, or liability of any of them under,
applicable Environmental Laws.
For purposes of this Section 6.19:
(i) "Environment" means any surface water, ground water,
drinking water supply, land surface or subsurface strata, ambient air,
indoor air and any indoor location and all natural resources such as
flora, fauna and wetlands;
(ii) "Environmental Claim" means any notice, claim, demand,
complaint, suit or other communication by any person alleging potential
liability (including, without limitation, potential liability for
response or corrective action or damages to any person, property or
natural resources, and any fines or penalties) arising out of or
relating to (1) the Release or threatened Release of any Hazardous
Materials or (2) any violation, or alleged violation, of any applicable
Environmental Law;
(iii) "Environmental Laws" means all federal, state, and local
laws, statutes, codes, rules, ordinances, regulations, judgments,
orders, decrees and the common law as now or previously in effect
relating to pollution or protection of human health or the Environment,
including, without limitation, those relating to the Release or
threatened Release of Hazardous Materials;
(iv) "Hazardous Materials" means pollutants, contaminants,
hazardous or toxic substances, constituents, materials or wastes, and
any other waste, substance, material, chemical or constituent subject
to regulation under Environmental Laws;
(v) "Release" means any spilling, leaking, pumping, pouring,
emitting, emptying, discharging, injecting, escaping, leaching, dumping
or disposing into the Environment; and
<PAGE> 42
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(vi) "Environmental Permit" means a permit, identification
number, license, approval, consent or other written authorization
issued pursuant to any applicable Environmental Law.
6.20 Absence of Undisclosed Liabilities. Except as set forth
in Section 6.20 of the Disclosure Schedule, neither the Company nor any of its
subsidiaries has any liabilities or obligations of any nature, whether absolute,
accrued, unmatured, contingent or otherwise, or any unsatisfied judgments or any
leases of personalty or realty or unusual or extraordinary commitments, except
the liabilities recorded on the December 31 Balance Sheets and the notes
thereto.
6.21 Finders or Brokers. None of the Company, the subsidiaries
of the Company, the Board of Directors of the Company or any member of the Board
of Directors of the Company has employed any investment banker, broker, finder
or intermediary in connection with the transactions contemplated hereby who
might be entitled to a fee or any commission in connection with the Merger.
6.22 Regulatory Matters. The Company has not taken or agreed
to take any action, and to the best knowledge of the Company there is no fact or
circumstance, that would materially impede or delay receipt of any approval
referred to in Section 10.1(b) or the consummation of the transactions
contemplated by this Agreement.
6.23 Insurance. Section 6.23 of the Disclosure Schedule
contains a complete and correct listing of all insurance policies which are in
force and maintained by or on behalf of each of the Company and its
subsidiaries. Each of the Company and its subsidiaries is, and has been
continuously since January 1, 1995, insured in such amounts and against such
risks and losses as are customary for companies conducting the respective
businesses conducted by the Company and its subsidiaries during such time
period. Neither the Company nor any of its subsidiaries has received any notice
of cancellation or termination with respect to any material insurance policy
<PAGE> 43
-36-
thereof. All insurance policies of the Company and its subsidiaries are valid
and enforceable policies.
6.24 Employment and Labor Contracts. Neither the Company nor
any of its subsidiaries is a party to any employment, management services,
consultation or other similar contract with any past or present officer,
director, employee or other person or, to the best knowledge of the Company, any
entity affiliated with any past or present officer, director or employee or
other person other than those set forth in Section 6.24 of the Disclosure
Schedule and other than the agreements executed by employees generally, the
forms of which have been delivered to Delphi.
6.25 Balance Sheet Reserves. The reserves reflected in the
December 31 Financials have been, and the reserves reflected in the Interim
Financials will be, established in accordance with generally accepted accounting
principles and such reserves, taken as a whole, are adequate to cover any losses
relating to the subject matter thereof.
6.26 Year 2000 Compliance. None of (a) the computer software,
computer firmware, computer hardware (whether general or special purpose) or
other similar or related items of automated, computerized or software systems
used or relied on by the Company or any of its subsidiaries in the conduct of
their respective businesses or (b) the products and services sold, licensed,
rendered or otherwise provided by the Company or any of its subsidiaries in the
conduct of their respective businesses will malfunction, cease to function,
generate incorrect data or produce incorrect results when processing, providing
or receiving (i) date-related data from, into and between the twentieth and
twenty-first centuries or (ii) date-related data in connection with any valid
date in the twentieth and twenty-first centuries, and neither the Company nor
any of its subsidiaries is or will be subject to any claim, demand, action,
suit, liability, damage, loss or expense arising from or related to
circumstances where such products or services malfunction, cease to function,
generate incorrect data, or produce incorrect results when processing, providing
or receiving such data. Notwithstanding the foregoing, neither the Company nor
<PAGE> 44
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any of its subsidiaries make any representation with respect to the ability of
mass-produced software products or the various governmental and financial
institutions with which the Company and its subsidiaries do business to function
correctly.
6.27 Qualification of Merger as a Tax Free Reorganization.
(a) Neither the Company nor any person related to the Company
within the meaning of Treas. Reg. Sections 1.368-1(e)(3), (e)(4) and (e)(5) has
purchased, redeemed, or otherwise acquired, or made any extraordinary
distributions (as defined in Treas. Reg. Section 1.368-1T(e)(1)(ii)(A)) with
respect to, any shares of Company Capital Stock prior to or in contemplation of
the Merger, or otherwise as part of a plan of which the Merger is a part.
(b) Other than the Company Capital Stock, the Company does not
currently have outstanding and at no point during the past twelve months had
outstanding any indebtedness, options, warrants, or other debt or equity
securities that have been or will be treated as stock for U.S. federal income
tax purposes.
(c) Following the Merger, the Surviving Corporation will hold
at least 90 percent of the fair market value of the net assets and at least 70
percent of the fair market value of the gross assets of the Company immediately
prior to the Merger. For purposes of this representation, amounts paid by
Company to dissenters, amounts paid by the Company to Shareholders who receive
cash or other property in the Merger, amounts used by the Company to pay
reorganization expenses, and all redemptions and distributions (except for
regular, normal dividends) made by the Company will be included as assets of
Company immediately prior to the Merger.
(d) The Company and the Shareholders have paid and will pay
their respective expenses, if any, incurred in connection with the Merger. In
connection with the Merger, the Company has not paid or assumed and will not pay
or assume any expense or other liability, whether fixed or contingent, of any
<PAGE> 45
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Shareholder. In connection with the Merger, neither Delphi nor any of its
affiliates has paid or assumed or will pay or assume any expense of any
Shareholder or, except as provided in Section 9.9 of this Agreement, any expense
of the Company. No shares of Company Capital Stock acquired in the Merger will
be subject to any liabilities.
(e) There is no indebtedness between the Company and Delphi.
(f) None of the Merger Consideration to be received in the
Merger by any Shareholder has been or will be separate consideration for, or
allocable to, past or future services or any employment agreement. None of the
compensation paid, or to be paid under any agreement or arrangement in effect on
the date hereof, by the Company or any subsidiary thereof to any Shareholder
will be separate consideration for, or allocable to, such Shareholder's shares
of Company Capital Stock, and such compensation has been or will be for services
actually rendered in the ordinary course of his or her employment and has been
or will be commensurate with amounts paid to third parties bargaining at arm's
length for similar services.
(g) The Company is not an investment company, as defined in
Sections 368(a)(2)(F)(iii) and (iv) of the Code.
(h) The liabilities of the Company assumed by the Surviving
Corporation and any liabilities to which the assets of the Company are subject
were incurred by the Company in the ordinary course of its business.
(i) Neither the Company nor, to the Company's knowledge, any
of its affiliates has taken, agreed to take, or will take any action that would
prevent the Merger from constituting a transaction qualifying under Section
368(a) of the Code or that would prevent an exchange of Company Capital Stock
for Delphi Common Stock pursuant to the Merger from qualifying as an exchange
described in Section 354 of the Code. Neither the Company nor, to the Company's
knowledge, any of its affiliates or agents is aware of any agreement, plan or
other circumstance that would prevent the Merger from qualifying under Section
<PAGE> 46
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368(a) of the Code or that would prevent an exchange of Company Capital Stock
for Delphi Common Stock pursuant to the Merger from qualifying as an exchange
described in Section 354 of the Code and to the Company's knowledge, the Merger
and each such exchange will so qualify.
6.28 Affiliate Transactions. Except as disclosed in Schedule
6.28 hereto, the Company is not a party to any agreement or transaction with any
of the Shareholders or other Affiliates (as defined in Rule 501(b) under the
Securities Act) of the Company or any of its subsidiaries.
6.29 Corporate Records. Each of the corporate minute books and
stock record books of the Company and each of its subsidiaries is current and
complete and contains, respectively, a true and correct record of all of the
corporate actions and stock records of the Company or such subsidiary, as the
case may be.
6.30 Full Disclosure. As of the Closing Date, all statements
contained in any document, schedule, exhibit, certificate or other instrument
delivered by or on behalf of the Company pursuant to this Agreement, and any
such document, schedule, exhibit, certificate or instrument to be delivered on
or prior to the Closing Date, will be accurate and complete in all material
respects, authentic and incorporated herein by reference and constitute or will
constitute the representations and warranties of the Company. As of the Closing
Date, no statement contained in any such document, schedule, exhibit,
certificate or other instrument and no representation or warranty of the Company
contained in this Agreement will contain any untrue statement or omit to state a
fact necessary in order to make the statements herein or therein, in light of
the circumstances under which they were made, not misleading in any material
respect.
<PAGE> 47
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ARTICLE VII
REPRESENTATIONS AND WARRANTIES OF
DELPHI
Delphi represents and warrants to the Company that:
7.1 Organization and Qualification. Each of Delphi and
Delphi's subsidiaries is a corporation duly organized, validly existing and in
good standing under the laws of the jurisdiction of its incorporation and has
all requisite corporate power and authority to own, lease and operate its
properties and to carry on its business as now being conducted. Each of Delphi
and Delphi's subsidiaries is duly qualified as a foreign corporation to do
business, and is in good standing, in each jurisdiction where the character of
its properties owned or leased or the nature of its activities makes such
qualification necessary, except for failures to be so qualified or in good
standing which would not, individually or in the aggregate, have a material
adverse effect on the general affairs, management, business, operations or
condition (financial or otherwise) of Delphi and its subsidiaries taken as a
whole (a "Delphi Material Adverse Effect"). Neither Delphi nor any of Delphi's
subsidiaries is in violation of any of the provisions of its certificate or
articles of incorporation or organization (or other applicable charter document)
or by-laws. Delphi has delivered to the Company accurate and complete copies of
the certificate or articles of incorporation or organization (or other
applicable charter document) and by-laws, as currently in effect, of Delphi.
7.2 Capitalization. The authorized capital stock of Delphi
consists of 40,000,000 shares of Delphi Common Stock, and 20,000,000 shares of
Delphi Class B Common Stock, par value $.01 per share. As of March 31, 1998,
12,884,188 shares of Delphi Common Stock and 6,156,787 shares of Class B Delphi
Common Stock are outstanding, and no shares of preferred stock are issued and
outstanding. All of such issued and outstanding shares are, and any shares of
Delphi Common Stock to be issued in connection with this Agreement, the Merger
and the transactions contemplated hereby will be, validly issued, fully paid
<PAGE> 48
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and nonassessable and free of preemptive rights granted by statute or by Delphi.
7.3 Authority Relative to This Agreement. Delphi has full
corporate power and authority to execute and deliver this Agreement and to
consummate the Merger and other transactions contemplated hereby and by the
Registration Rights Agreement. The execution and delivery of this Agreement and
the Registration Rights Agreement and the consummation of the Merger and other
transactions contemplated hereby and thereby have been duly and validly
authorized by the Board of Directors of Delphi and no other corporate
proceedings on the part of Delphi are necessary to authorize this Agreement or
to consummate the Merger or other transactions contemplated hereby. This
Agreement has been and, as of the Closing Date, the Registration Rights
Agreement will be duly and validly executed and delivered by Delphi and,
assuming the due authorization, execution and delivery hereof by the Company and
the Shareholders, constitutes or will constitute the legal, valid and binding
agreement 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, (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) and (iii) as
enforcement thereof, as it pertains to indemnification for securities laws
violations, may be limited by public policy.
7.4 No Violations, etc.
(a) Assuming that all filings or waivers thereof have been
duly made or obtained as contemplated by Section 6.5(b) hereof and assuming the
accuracy of the representations set forth in Article V, neither the execution
and delivery of this Agreement and the Registration Rights Agreement by Delphi
nor the consummation of the Merger or other transactions contemplated hereby or
thereby nor compliance by Delphi with any of the provisions hereof or thereof
will (i) violate, conflict with, or result in a breach of any provision of, or
con-
<PAGE> 49
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stitute a default (or an event which, with notice or lapse of time or both,
would constitute a default) under, or result in the termination or suspension
of, or accelerate the performance required by, or result in a right of
termination or acceleration under, or result in the creation of any Lien, upon
any of the properties or assets of Delphi or any of Delphi's subsidiaries under,
any of the terms, conditions or provisions of (x) their respective charters or
by-laws, (y) any note, bond, mortgage, indenture or deed of trust, or (z) any
license, lease, agreement or other instrument or obligation to which Delphi or
any such subsidiary is a party or to which they or any of their respective
properties or assets may be subject, or (ii) subject to compliance with the
statutes and regulations referred to in the next paragraph, violate any
judgment, ruling, order, writ, injunction, decree, statute, rule or regulation
applicable to Delphi or any of Delphi's subsidiaries or any of their respective
properties or assets, except, in the case of clauses (i)(y), (i)(z) and (ii)
above, for such violations, conflicts, breaches, defaults, terminations,
suspensions, accelerations, rights of termination or acceleration or creations
of liens, security interests, charges or encumbrances which would not,
individually or in the aggregate, either have a Delphi Material Adverse Effect
or materially impair the consummation of the Merger or other transactions
contemplated hereby.
(b) No filing or registration with, notification to and no
permit, authorization, consent or approval of any governmental entity is
required by Delphi, Delphi Subsidiary or any of Delphi's subsidiaries in
connection with the execution and delivery of this Agreement or the consummation
by Delphi of the Merger or other transactions contemplated hereby, except (i)
the filing of the Delaware Certificate of Merger and the California Certificate
of Merger, (ii) filings with the New York Stock Exchange, Inc. ("NYSE"), (iii)
filings with the SEC and state securities administrators, and (iv) such other
filings, registrations, notifications, permits, authorizations, consents or
approvals the failure of which to be obtained, made or given would not,
individually or in the aggregate, either have an Delphi Material Adverse Effect
or materially impair the
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consummation of the Merger or other transactions contemplated hereby.
7.5 SEC Filings; Financial Statements. Delphi has filed the
Delphi SEC Reports with the SEC, all of which complied when filed in all
material respects with all applicable requirements of the Securities Act and the
Securities Exchange Act of 1934, as amended. The audited consolidated financial
statements and unaudited consolidated interim financial statements of Delphi and
its subsidiaries included or incorporated by reference in such Delphi SEC
Reports were prepared in accordance with generally accepted accounting
principles applied on a consistent basis during the periods involved (except as
may be indicated in the notes thereto) and present fairly, in all material
respects, the financial position and results of operations and cash flows of
Delphi and its subsidiaries on a consolidated basis at the respective dates and
for the respective periods indicated (except in the case of all such financial
statements that are interim financial statements for year-end adjustments and
the absence of footnote disclosures). Except to the extent that information
contained in any Delphi SEC Report was revised or superseded by a later filed
Delphi SEC Report, when filed, none of the Delphi SEC Reports contained any
untrue statement of a material fact or omitted to state any material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading.
7.6 Absence of Changes or Events. Except as set forth in the
Delphi SEC Reports as filed with the SEC, since March 31, 1998 there has been no
material adverse change in the business, operations or condition (financial or
otherwise) of Delphi and its subsidiaries taken as a whole.
7.7. Stock and Note Consideration.
(a) The shares initially issuable upon payment of the Stock
Merger Consideration have been duly authorized and reserved for issuance out of
Delphi's authorized and unissued shares of Delphi Common Stock and, when issued
and delivered in accordance with the provisions of this Agreement, will be
val-
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idly issued, fully paid and non-assessable and will conform to the description
of the Delphi Common Stock contained in Delphi's most recent registration
statement on Form S-3 (Registration 33-77028).
(b) The Note Consideration has been duly authorized and, when
issued and delivered pursuant to this Agreement, will have been duly executed,
issued and delivered and will constitute valid and legally binding obligations
of Delphi; and the Registration Rights Agreement has been duly authorized and,
when executed and delivered by the parties thereto, will constitute a valid and
legally binding obligation of Delphi, in each case enforceable in accordance
with their respective 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).
7.8 Litigation. Except as set forth in the Delphi SEC Reports,
there is no (i) claim, action, suit or proceeding pending or, to the knowledge
of Delphi or any of its subsidiaries, threatened against or relating to Delphi
or any of its subsidiaries before any court or governmental or regulatory
authority or body or arbitration tribunal, or (ii) outstanding judgment, order,
writ, injunction or decree, or application, request or motion therefor, of any
court, governmental agency or arbitration tribunal in a proceeding to which
Delphi, any subsidiary of Delphi or any of their respective assets was or is a
party except, in the case of clauses (i) and (ii) above, such as would not,
individually or in the aggregate, either have a Delphi Material Adverse Effect
or materially impair Delphi's ability to consummate the Merger or the other
transactions contemplated hereby.
7.9 Finders or Brokers. None of Delphi, the subsidiaries of
Delphi, the Board of Directors of Delphi or any member of the Board of Directors
of Delphi has employed any investment banker, broker, finder or intermediary in
connection
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with the transactions contemplated hereby who might be entitled to a fee or any
commission in connection with the Merger.
7.10 Qualification of Merger as a Tax Free Reorganization.
(a) Delphi has no plan or intention to reacquire or cause or
permit any person related (as defined in Treas. Reg. Section 1.368-1(e)(3)) to
Delphi to acquire any of the Delphi Common Stock issued to the holders of
Company Capital Stock pursuant to the Merger.
(b) Prior to the transaction, Delphi will be in control of
Delphi Subsidiary within the meaning of section 368(c) of the Code.
(c) Following the Merger, Delphi has no plan or intention to
cause or permit Delphi Subsidiary to issue additional shares of its stock that
would result in Delphi's losing control of Delphi Subsidiary within the meaning
of Section 368(c) of the Code.
(d) There is no indebtedness between the Company and Delphi.
(e) None of the Merger Consideration to be paid in the Merger
by Delphi will be separate consideration for, or allocable to, past or future
services or any employment agreement.
(f) Neither Delphi nor Delphi Subsidiary is an investment
company, as defined in Sections 368(a)(2)(F)(iii) and (iv) of the Code.
(g) Delphi has no plan or intention to liquidate Delphi
Subsidiary, to merge Delphi Subsidiary with or into another corporation, to sell
or otherwise dispose of the stock of Delphi Subsidiary, or to cause Delphi
Subsidiary to sell or otherwise dispose of any of the assets of the Company
acquired in the Merger, except for dispositions of such assets made in the
ordinary course of business or transfers of such assets to
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a corporation controlled (within the meaning of Section 368(c) of the Code) by
Delphi Subsidiary or, in the case of a successive transfer, the transferor
corporation.
(h) None of Delphi, Delphi Subsidiary or any affiliate of
Delphi has taken, agreed to take, or will take any action that would prevent the
Merger from constituting a transaction qualifying under Section 368(a) of the
Code or that would prevent an exchange of Company Capital Stock for Delphi
Common Stock pursuant to the Merger from qualifying as an exchange described in
Section 354 of the Code. None of Delphi, Delphi Subsidiary or any affiliate of
Delphi is aware of any agreement, plan or other circumstance that would prevent
the Merger from qualifying under Section 368(a) of the Code or that would
prevent an exchange of Company Capital Stock for Delphi Common Stock pursuant to
the Merger from qualifying as an exchange described in Section 354 of the Code
and to the knowledge of Delphi, the Merger and each such exchange will so
qualify.
7.11 Regulatory Matters. Neither Delphi nor any of its
subsidiaries has taken or agreed to take any action that would materially impede
or delay receipt of any approval referred to in Section 10.1(b) or the
consummation of the transactions contemplated by this Agreement.
ARTICLE VIII
CONDUCT OF BUSINESS OF THE COMPANY
PENDING THE MERGER
8.1 Conduct of Business of the Company Pending the Merger. The
Company and each Shareholder, jointly and severally, hereby covenant and agree
with Delphi as follows:
(a) Except as contemplated by this Agreement or as expressly
agreed to in writing by Delphi, during the period from the date of this
Agreement to the Effective Time, each of the Company and its subsidiaries will
conduct their respective operations according to its ordinary course of business
consistent with past practice, and will use its best efforts to pre-
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serve intact its business organization, to keep available the services of its
current officers and key employees and to maintain satisfactory relationships
with customers, clients and suppliers and others having business relationships
with it and will take no action which would adversely affect the ability of the
parties to consummate the transactions contemplated by this Agreement.
(b) Without limiting the generality of the foregoing, and
except as otherwise expressly provided in this Agreement (including, without
limitation, as forth in Section 10.2(e) hereof), prior to the Effective Time,
the Company will not nor will it permit any of its subsidiaries to, without the
prior written consent of Delphi:
(i) amend its certificate or articles of incorporation or
organization or by-laws;
(ii) authorize for issuance, issue, sell, deliver, grant any
options for, or otherwise agree or commit to issue, sell or deliver any
shares of any class of its capital stock or any securities convertible
into shares of any class of its capital stock, including the filing or
processing of a registration statement under the Securities Act in
connection with an initial public offering;
(iii) split, combine or reclassify any shares of its capital
stock, declare, set aside or pay any dividend or other distribution
(whether in cash, stock or property or any combination thereof) in
respect of its capital stock or purchase, redeem or otherwise acquire
any shares of its own capital stock or of any of its subsidiaries,
except as otherwise expressly provided in this Agreement;
(iv) (A) create, incur, assume, maintain or permit to exist
any debt for borrowed money other than under existing promissory notes
and lines of credit in the ordinary course of business consistent with
past practice in an amount not to exceed $100,000 in the aggregate; (B)
assume, guarantee, endorse or otherwise become liable or responsible
(whether directly, contingently or other-
<PAGE> 55
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wise) for the obligations of any other person except for its wholly
owned subsidiaries in the ordinary course of business and consistent
with past practice and subclause (A) above; or (C) make any loans,
advances or capital contributions to, or investments in, any other
person, other than advances to employees for ordinary business expenses
in accordance with the Company's standard policies and consistent with
past practice;
(v) pay, directly or indirectly, any of its liabilities before
the same becomes due in accordance with its terms or otherwise other
than in the ordinary course of business consistent with past practice;
(vi) (A) increase in any manner the compensation of (x) any
employee except in the ordinary course of business consistent with past
practice or (y) any of its directors or officers; (B) pay or agree to
pay any pension, retirement allowance or other employee benefit not
required, or enter into or agree to enter into any agreement or
arrangement with such director or officer or employee, whether past or
present, relating to any such pension, retirement allowance or other
employee benefit, except as required under currently existing
agreements, plans or arrangements; (C) grant any severance or
termination pay to, or enter into any employment or severance agreement
with, (x) any employee except in the ordinary course of business
consistent with past practice or (y) any of its directors or officers;
or (D) except as may be required to comply with applicable law, become
obligated (other than pursuant to any new or renewed collective
bargaining agreement) under any new pension plan, welfare plan,
multiemployer plan, employee benefit plan, benefit arrangement, or
similar plan or arrangement, which was not in existence on the date
hereof, including any bonus, incentive, deferred compensation, stock
purchase, stock option, stock appreciation right, group insurance,
severance pay, retirement or other benefit plan, agreement or
arrangement, or employment or consulting agreement with or for the
benefit of
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any person, or amend any of such plans or any of such agreements in
existence on the date hereof;
(vii) make any loan or advance (A) to its shareholders or to
any of its directors, officers, consultants, agents or other
representatives or (B) in excess of $10,000;
(viii) except as otherwise expressly contemplated by this
Agreement, enter into any other agreements, commitments or contracts,
except agreements, commitments or contracts for the purchase, sale or
lease of goods or services in the ordinary course of business
consistent with past practice;
(ix) authorize, recommend, propose or announce an intention to
authorize, recommend or propose, or enter into any agreement in
principle or agreement with respect to, any plan of liquidation or
dissolution, any acquisition of assets or securities, any sale,
transfer, lease, license, pledge, mortgage, or other disposition or
encumbrance of assets or securities or any change in its
capitalization;
(x) make any capital expenditures or commitments therefor in
excess of $100,000 individually or in excess of $200,000 in the
aggregate, other than investment transactions in the ordinary course of
business;
(xi) make any change in the accounting methods or accounting
practices followed by the Company;
(xii) settle or compromise any material federal, state, local
or foreign Tax liability, make any new material Tax election, revoke or
modify any existing Tax election, or make, request or consent to a
change in any method of Tax accounting;
(xiii) intentionally take any action that would impede or
delay the consummation of the transactions contemplated by this
Agreement or the ability of the Company or Delphi to obtain any
approval required for the transactions con-
<PAGE> 57
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templated by this Agreement or to perform their covenants and
agreements under this Agreement;
(xiv) take, cause or permit to be taken any action, whether
before or after the Effective Date, that could reasonably be expected
to prevent the Merger from constituting a "reorganization" within the
meaning of Section 368(a) of the Code; or
(xv) agree to do any of the foregoing.
ARTICLE IX
COVENANTS AND AGREEMENTS
9.1 Cooperation.
(a) Subject to the terms and conditions herein provided, each
of the parties hereto agrees to use commercially reasonable efforts to take, or
cause to be taken, all action and to do, or cause to be done, all things
necessary, proper or advisable to consummate and make effective as promptly as
practicable the transactions contemplated by this Agreement, and to cooperate
with each other in connection with the foregoing, including using commercially
reasonable efforts (i) to obtain all necessary waivers, consents and approvals
from other parties to loan agreements, leases and other contracts, (ii) to
obtain all necessary consents, approvals and authorizations as are required to
be obtained under any federal, state or foreign law or regulations, (iii) to
defend all lawsuits or other legal proceedings challenging this Agreement or the
consummation of the transactions contemplated hereby, (iv) to lift or rescind
any injunction or restraining order or other order adversely affecting the
ability of the parties to consummate the transactions contemplated hereby, (v)
to effect all necessary registrations and filings, and submissions of
information requested by governmental authorities, and (vi) to fulfill all
conditions to this Agreement.
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(b) The Company will supply Delphi with copies of all
correspondence, filings or communications (or memoranda setting forth the
substance thereof) between the Company or its representatives, on the one hand,
and the state regulatory authorities referred to in Section 6.5(b) hereof, on
the other hand, with respect to this Agreement, the Merger and the other
transactions contemplated hereby. Each of the parties hereto agrees to furnish
to the other party hereto such necessary information and reasonable assistance
as such other party may request in connection with its preparation of necessary
filings or submissions to any regulatory or governmental agency or authority,
including, without limitation, any filing necessary under the provisions of any
applicable Federal or state statute.
(c) Delphi and Delphi Subsidiary will supply the Company with
copies of all correspondence, filings or communications (or memoranda setting
forth the substance thereof) between Delphi, Delphi Subsidiary or their
representatives, on the one hand, and the state regulatory authorities referred
to in Section 6.5(b) hereof, on the other hand, with respect to this Agreement,
the Merger and the other transactions contemplated hereby.
9.2 Availability of Employees and Records. The Company and the
Shareholders covenant and agree that, between the date of execution of this
Agreement and the Closing Date, the Company will use its best efforts to cause
the advisors and service providers of the Company to make available to Delphi
and its authorized agents, actuaries, attorneys, accountants, and other
representatives, at all reasonable times and under reasonable circumstances, for
inspection, examination, copying or verification, all of the books, operating
records, financial records, investment records, returns, and reports of every
kind, and all working papers pertaining thereto, of the Company, its
subsidiaries and their respective advisors and service providers, and to permit
access to and examination of all contracts and records pertaining to agreements
between the Company or any subsidiary and any person and of all properties and
assets owned by the Company or any subsidiary, or in which the
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Company or any subsidiary has any interest, all for the purpose of making such
verification of the warranties, representations, statements, and other
information made or provided by the Company (collectively, the "Diligence
Update"). The Company and the Shareholders will cause the officers and employees
of the Company having material knowledge concerning the operation of its
business and the business of the Company and its subsidiaries to cooperate in
connection with any such Diligence Update at reasonable times and upon
reasonable notice. The representations, warranties, covenants and agreements of
the Company, its subsidiaries and the Shareholders set forth in this Agreement
shall be effective regardless of any investigation that Delphi have undertaken
or failed to undertake.
9.3 Notification of Changes and Default. The Company and the
Shareholders covenant and agree that between the date of execution of this
Agreement and the Closing Date, inclusive, the Company will promptly give notice
to Delphi of any of the following when known, or when it reasonably should be
known, to the Company or the Shareholders: (i) the occurrence of any event or
circumstance or the discovery of any inaccuracy, omission, or mistake, which, in
any way, would cause the representations and warranties made by the Company or
the Shareholders or any of the information or documents theretofore delivered by
the Company or the Shareholder to Delphi pursuant to this Agreement, to be
untrue or inaccurate in any material respect, whether as of the date of
execution of this Agreement or at any time subsequent thereto and prior to the
Closing Date; or (ii) the occurrence of any events or circumstances that would
result in a violation or breach of any of the terms and provisions of this
Agreement obligatory upon the Company or the Shareholders.
9.4 Financial Statements, Etc.
(a) The Company and the Shareholders covenant and agree to
deliver to Delphi, promptly upon the same becoming available to the Company,
copies of any financial statements or reports, filings, orders, and other
communications delivered to or received from governmental authorities with
respect to the licensure of the Company or any of its subsidiaries or any
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other material matter from the date hereof through the Closing Date.
(b) The Company and the Shareholders covenant and agree to
deliver to Delphi, promptly upon the same becoming available to the Company,
copies of regularly prepared monthly quarterly and annual financial statements
with respect to the Company or any of its subsidiaries from the date hereof
until the Closing Date.
(c) Delphi covenants and agrees to provide to the Company and
the Shareholders copies of any filings with the SEC made after the date hereof
and prior to the Closing Date.
9.5 Publicity. The Company and Delphi agree to consult with
each other in issuing any press release and with respect to the general content
of other public statements with respect to the transactions contemplated hereby,
and shall not issue any such press release prior to such consultation; provided,
however, that nothing herein will prohibit any party from issuing or causing
publication of any such press release or public announcement to the extent that
such party determines such action to be required by law or the rules of the
NYSE, in which event the party making such determination will, if practicable in
the circumstances, use all commercially reasonable efforts to allow the other
party reasonable time to comment on such release or announcement in advance of
its issuance.
9.6 No Solicitation. The Company agrees that it shall not, and
shall not authorize or permit any of its subsidiaries or any of its or its
subsidiaries' directors, officers, employees, agents or representatives to,
directly or indirectly, solicit, initiate, facilitate or encourage (including by
way of furnishing or disclosing non-public information) any inquiries or the
making of any proposal with respect to any merger, consolidation or other
business combination involving the Company or its subsidiaries or acquisition of
any kind of all or substantially all of the assets or capital stock of the
Company and its subsidiaries taken as a whole (an "Acquisition Transaction") or
negotiate, explore or otherwise communicate in any way with any third party
(other than Delphi) with respect
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to any Acquisition Transaction or enter into any agreement, arrangement or
understanding requiring it to abandon, terminate or fail to consummate the
Merger or any other transactions contemplated by this Agreement. The Company
shall immediately advise Delphi in writing of the receipt, directly or
indirectly, of any inquiries, discussions, negotiations, or proposals relating
to an Acquisition Transaction (including the material terms thereof).
9.7 Confidentiality. All documents and information furnished
to Delphi or the Company pursuant to this Agreement shall be subject to the
terms and conditions set forth in the Confidentiality Agreement dated as of
April 16, 1998 between Delphi and the Company (the "Confidentiality Agreement"),
the terms of which are incorporated by reference herein and shall apply, for
purposes of this Agreement, to Delphi, the Company and the Shareholders as if
each had executed such agreement.
9.8 Resignation of Directors. At or prior to the Effective
Time, the Company shall deliver to Delphi the resignations of the directors of
the Company and its subsidiaries, effective at the Effective Time.
9.9 Fees and Expenses. Whether or not the Merger is
consummated, the Company, the Shareholders and Delphi shall bear their
respective expenses incurred in connection with the Merger, 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, except that Delphi shall bear and pay
the costs and expenses incurred in connection with the filing, printing and
mailing of the registration statement on Form S-3 required by the Registration
Rights Agreement as, and to the extent, set forth therein.
9.10 Tax Treatment. Each of Delphi and the Company shall treat
the Merger as a tax free reorganization under the provisions of Section 368 of
the Code on its Tax Returns, unless otherwise required by law.
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9.11 Amendment of Tax Returns. The Shareholders shall not
amend (or cause or permit to be amended) any Tax Returns relating to a taxable
period (or portion thereof) ending on or prior to the Effective Time, of the
Company or any subsidiary without Delphi's prior written consent.
9.12 Transfer Restrictions.
(a) Each Shareholder agrees that it will not sell, offer to
sell, pledge, hypothecate, transfer or otherwise dispose of ("transfer") any of
its shares of Company Capital Stock except (i) to Delphi or Delphi Subsidiary in
accordance with this Agreement or (ii) for estate planning purposes and for no
consideration, to a spouse, child or other lineal descendant of such Shareholder
or a trust, so long as the Shareholder or one or more of the foregoing
individuals retain substantially all of the controlling or beneficial interest
thereunder (a "Permitted Transfer"), in which event such individual or trust
shall be deemed an additional party to this Agreement, without releasing the
original Shareholder from its obligations hereunder.
(b) Each Shareholder receiving shares of Delphi Common Stock
comprising the Stock Merger Consideration agrees that it will not transfer such
shares except (a) pursuant to an effective registration statement under the
Securities Act covering such transfer of such shares, (b) pursuant to Rules 144
and 145, as applicable, under the Securities Act or (c) with the prior written
consent of Delphi or pursuant to a Permitted Transfer, pursuant to another
available exemption from the registration requirements of the Securities Act. In
connection with any transfer of such shares other than pursuant to an effective
registration statement or a Permitted Transfer or to Delphi or an Affiliate of
Delphi, Delphi may, in its discretion, require the transferor thereof to provide
to Delphi a written opinion of counsel reasonably acceptable to Delphi, the form
and substance of which opinion shall be reasonably satisfactory to Delphi, to
the effect that such transfer does not require registration under the Securities
Act.
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(c) Each Shareholder receiving notes of Delphi comprising the
Note Consideration agrees that it will not transfer such notes without the prior
written consent of Delphi.
9.13 Noncompetition.
(a) Prohibited Activities. Each of the Shareholders agrees
that, for a period of four years following the Effective Time, he shall not:
(i) engage, as an officer, director, shareholder, owner,
partner, joint venturer, or in a managerial capacity, whether as an
employee, independent contractor, consultant or advisor, or as a sales
representative, in any business selling any products or services in
direct competition with the Surviving Corporation or any future
subsidiary, division or other business of Delphi engaged in business as
a third party administrator for absence management, worker's
compensation or disability insurance (a "Delphi TPA") within the United
States of America (the "Territory");
(ii) call upon or hire any person who is, at that time, or who
was at any time within one year prior to that time, an employee of
Delphi or the Company (including its subsidiaries) in a managerial
capacity for the purpose or with the intent of enticing such employee
away from or out of the employ of Delphi or the Surviving Corporation
(including its subsidiaries);
(iii) call upon any person or entity which is, at that time,
or which has been, within one year prior to that time, a customer of
Delphi or the Company (including their respective subsidiaries) within
the Territory for the purpose of soliciting or selling products or
services within the Territory that are competitive with those of the
Surviving Corporation or any other Delphi TPA;
(iv) call upon any prospective acquisition candidate, on the
Shareholder's own behalf or on behalf of any competitor, which
candidate was called upon by the Company
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within one year prior to the Closing Date (including its subsidiaries)
or was the subject of an acquisition analysis conducted by the Company
(including its subsidiaries); or
(v) disclose customers, whether in existence or proposed, of
the Company to any person, firm, partnership, corporation or business
for any reason or purpose whatsoever.
Notwithstanding the above, the foregoing covenant shall not be
deemed to prohibit any Shareholder from (i) acquiring as an investment not more
than one percent of the capital stock of any business enterprise whether or not
engaged in competition with the Company or Delphi (including their respective
subsidiaries) to the extent that such securities are actively traded on a
national securities exchange or in the over-the-counter market in the United
States or on any foreign exchange or (ii) engaging in any activity to which
Delphi shall have provided its prior written consent.
(b) Damages. Because of the difficulty of measuring economic
losses to Delphi and the Surviving Corporation as a result of the breach of the
foregoing covenant, and because of the immediate and irreparable damage that
would be caused to Delphi and the Surviving Corporation for which they would
have no other adequate remedy, each Shareholder agrees that, in the event of a
breach by him of the foregoing covenant, the covenant may be enforced by Delphi
or the Surviving Corporation by, without limitation, injunctions and restraining
orders.
(c) Reasonable Restraint. It is agreed by the parties that the
foregoing covenants in this Section 9.13 impose a reasonable restraint on each
Shareholder in light of the activities and business of Delphi on the date of the
execution of this Agreement and the current and future plans of Delphi and the
Surviving Corporation (as successors to the businesses of the Company).
(d) Severability; Reformation. The covenants in this Section
9.13 are severable and separate, and the unen-
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forceability of any specific covenant shall not affect the provisions of any
other covenant. Moreover, in the event any court of competent jurisdiction shall
determine that the scope, time or territorial restrictions set forth are
unreasonable, then it is the intention of the parties that such restrictions be
enforced to the fullest extent which the court deems reasonable, and this
Agreement shall thereby be reformed.
(e) Independent Covenant. All of the covenants in this Section
9.13 shall be construed as an agreement independent of any other provision of
this Agreement, and the existence of any claim or cause of action of the
Shareholders against the Company, the Surviving Corporation or Delphi, whether
predicated on this Agreement or otherwise, shall not constitute a defense to the
enforcement of such covenants. It is specifically agreed that the period of four
years stated above shall be computed by excluding from such computation any time
during which the Shareholders are found by a court of competent jurisdiction to
have been in violation of any provision of this Section 9.13 and any time during
which there is pending in any court of competent jurisdiction any action
(including any appeal from any judgment) brought by any person, whether or not a
party to this Agreement, in which action Delphi or the Surviving Corporation
seeks to enforce the agreements and covenants of the Shareholders or in which
any person contests the validity of such agreements and covenants or their
enforceability or seeks to avoid their performance or enforcement; provided,
however, that if the Shareholders are found not to be in violation of the
agreements or covenants in any such activity the period during which the action
was pending shall not be excluded from such computation.
(f) Materiality. The Company and the Shareholders hereby agree
that the covenants set forth in this Section 9.13 are a material and substantial
part of the transactions contemplated by this Agreement, supported by adequate
consideration.
9.14 Nondisclosure of Confidential Information.
(a) Shareholders. Each of the Shareholders recognizes and
acknowledges that he has had in the past, currently
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has, and in the future may possibly have, access to certain confidential
information of the Company, such as lists of customers, operational policies,
and pricing and cost policies that are valuable, special and unique assets of
the Company and the Company's business. Each of the Shareholders agrees that he
will not disclose any such confidential information to any person, firm,
corporation, association or other entity for any purpose or reason whatsoever,
except to authorized representatives of Delphi, the Company and the Surviving
Corporation, or any of their subsidiaries and affiliates, unless (i) the
Shareholders can show that such information has become known to the public
generally through no fault of the Shareholders, (ii) disclosure is required by
law or the order of any governmental authority, or (iii) 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 pursuant to clause
(i), (ii) or (iii) above, the Shareholder 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 Shareholders of the provisions of
this Section 9.14, Delphi and the Surviving Corporation shall be entitled to an
injunction restraining the Shareholders from disclosing, in whole or in part,
such confidential information. Nothing herein shall be construed as prohibiting
Delphi and the Surviving Corporation from pursuing any other available remedy
for such breach or threatened breach, including the recovery of damages.
(b) Damages. Because of the difficulty of measuring economic
losses as a result of the breach of the foregoing covenants, and because of the
immediate and irreparable damage that would be caused for which they would have
no other adequate remedy, Delphi, the Surviving Corporation and the Shareholders
agree that, in the event of a breach by any of them of the foregoing covenant,
the covenant may be enforced against them by injunctions and restraining orders.
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9.15 NYSE Listing. Delphi shall promptly after the Closing
Date prepare and submit to the NYSE a listing application covering the shares of
Delphi Common Stock to be issued in the Merger and shall use its commercially
reasonable efforts to obtain, prior to the effectiveness of the registration
statement to be filed pursuant to the Registration Rights Agreement, approval
for the listing of such Delphi Common Stock, subject to official notice of
issuance.
ARTICLE X
CONDITIONS TO CLOSING
10.1 Conditions to Each Party's Obligation to Effect the
Merger. The respective obligation of each party to effect the Merger is subject
to the satisfaction or waiver on or prior to the Closing Date of the following
conditions:
(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 Merger.
(b) Consents and Approvals. All necessary consents and
approvals of any United States or any other governmental authority or
any other third party and the expiration or termination of any
applicable regulatory waiting periods required for the consummation of
the transactions contemplated by this Agreement shall have been
obtained, including, without limitation, those set forth in Section 6.5
of the Disclosure Schedules.
(c) Registration Rights Agreement. The Shareholders and Delphi
shall have entered into the Registration Rights Agreement substantially
in the form attached hereto as Exhibit E.
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(d) Side Letter. The Side Letter creating the Employee Bonus
Fund and establishing the funding criteria thereof shall have been
entered into by the parties thereto.
10.2 Conditions to Obligations of Delphi. The obligation of
Delphi to effect the Merger is further subject to satisfaction or waiver of the
following conditions:
(a) Representations and Warranties. The representations,
warranties and covenants of the Company and the Shareholders set forth
herein, to the extent qualified with respect to materiality, shall be
true and correct in all respects, and to the extent not so qualified
shall be true and correct in all material respects, in each case as of
the date of this Agreement and at and as of the Effective Time as if
made at and as of such time (except to the extent expressly made as of
earlier date, in which case as of such date). The Company shall have
delivered to Delphi an officer's certificate and the Shareholders shall
have delivered 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 this Section 10.2(a) and Section 10.2(b).
(b) Performance of Obligations of the Company and the
Shareholders. The Company and the Shareholders shall have performed in
all material respects all obligations required to be performed by them
under this Agreement at or prior to the Closing Date.
(c) Audit Opinion; SAS 71 Report; Recast EBITDA Review. Ernst
& Young LLP, the Company's independent accountants, shall have
delivered an audit opinion covering the December 31 Financials and a
SAS 71 Report referred to in Section 6.6(b) hereof covering the Interim
Financials, each in form and substance acceptable to Delphi. In
addition, Ernst & Young LLP shall have reviewed the EBITDA of the
Company for the twelve calendar months ended May 31, 1998 and made
adjustments for expenses that will not recur
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after the Closing Date, and such recast EBITDA will be at least $3.1
million.
(d) Shareholders' Equity. The shareholders' equity of the
Company shall be calculated by the Company and Delphi, to the
satisfaction of such parties, to be at least $1.5 million (after giving
effect to (i) a distribution (in an amount not to exceed $450,000) to
be made not later than July 31, 1998 to the Shareholders of previously
undistributed profits accumulated by the Company while it was a S
Corporation and (ii) the payment of legal and accounting expenses
related to the Merger). The Company shall have delivered to Delphi a
certificate of its principal financial officer, in form and substance
and determined on a basis satisfactory to Delphi, to the effect of the
matters stated in this Section 10.2(d) and Sections 10.2(e) and (f),
together with evidence of the repayment of such indebtedness.
(e) Capital Contributions; Uses Thereof; Extraordinary
Expenses. The Shareholders shall have contributed an aggregate of $3.8
million to the Company, $3.65 million of which shall have been applied
to repay in full all obligations under the promissory notes held by
Thomas H. Larkin, Jr. ("Larkin") and Michael L. Oliver ("Oliver"). In
addition, the Shareholders shall have repaid in full their personal
debts to Oliver and Larkin in an aggregate amount of $201,000.
(f) Repayment of Indebtedness for Money Borrowed. The Company
shall have repaid in full all outstanding indebtedness for money
borrowed by the Company using newly contributed funds from the
Shareholders.
(g) Real Estate Holding Corporation. The Company shall have
(i) delivered an affidavit stating, under penalty of perjury, that (A)
the Company is not and has not been at any time during the five-year
period prior to the Effective Time a "United States real property
holding corporation," as defined for purposes of section 897(c)(2) of
the Code and (B) as of the Effective Time, interests in
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the Company are not United States real property holding company
interests by reasons of Section 897(c)(1)(B) of the Code and (ii)
complied with the requirements of Treas. Reg. Section 1.897-2(h) and
provided evidence (reasonably satisfactory to Delphi) of such
compliance.
(h) Employment Agreements. Each of Martin A. Grable and David
F. Nolan shall have entered into an employment agreement with the
Surviving Corporation in the respective forms set forth as Exhibit F
hereto.
(i) Tax Opinion. Delphi shall have received an opinion of
Cahill Gordon & Reindel, special tax counsel to Delphi, dated on or
about the Closing Date, based upon such representations and assumptions
as counsel may reasonably deem relevant, to the effect that the Merger
will be treated for federal income tax purposes as a reorganization
qualifying under the provisions of Sections 368(a)(1)(A) and
368(a)(2)(D) of the Code; that each of Delphi, Delphi Subsidiary and
the Company will be a party to the reorganization within the meaning of
Section 368(b) of the Code; that gain, if any, realized by a
Shareholder on the exchange of Company Capital Stock for the Merger
Consideration will be recognized only to the extent of the Non-Stock
Merger Consideration received by such Shareholder; and that no loss
will be recognized by a Shareholder on the exchange of Company Capital
Stock for the Merger Consideration pursuant to the Merger.
(j) Opinion of Company Counsel. Delphi shall have received an
opinion from Graham & James LLP, counsel to the Company, dated the
Closing Date, substantially to the effect set forth in Exhibit G
hereto.
(k) Gunz Stock Purchase Agreement. All the conditions to
closing under the Gunz Stock Purchase Agreement shall have been
satisfied or waived.
(l) Termination of Shareholders' Agreement. The shareholders'
agreement by and among the Shareholders and
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the Company dated as of June 1, 1992 shall have been terminated by the
parties thereto.
10.3 Conditions to Obligations of the Company and the
Shareholders. The obligation of the Company and the Shareholders to effect the
Merger is further subject to satisfaction or waiver of the following conditions:
(a) Representations and Warranties. The representations and
warranties of Delphi set forth herein, to the extent qualified with
respect to materiality, shall be true and correct in all respects, and
to the extent not so qualified shall be true and correct in all
material respects, in each case as of the date of this Agreement and at
and as of the Effective Time as if made at and as of such time (except
to the extent expressly made as of an earlier date, in which case as of
such date). Delphi shall have delivered to the Company and the
Shareholders a certificate of an officer of Delphi, in form and
substance and determined on a basis satisfactory to the Company and its
counsel, to the foregoing effect.
(b) Performance of Obligations of Delphi and Delphi
Subsidiary. Delphi and Delphi Subsidiary shall have performed in all
material respects all obligations required to be performed by them
under this Agreement at or prior to the Closing Date.
(c) Tax Opinion. The Company shall have received an opinion of
Graham & James LLP, counsel to the Company, dated on or about the
Closing Date, based upon such representations and assumptions as
counsel may reasonably deem relevant, to the effect that the Merger
will be treated for federal income tax purposes as a reorganization
qualifying under the provisions of Sections 368(a)(1)(A) and
368(A)(2)(D) of the Code; that each of Delphi, Delphi Subsidiary and
the Company will be a party to the reorganization within the meaning of
Section 368(b) of the Code; that gain, if any, realized by a
Shareholder on the exchange of Company Capital Stock for the Merger
Consideration will be recognized only to the extent of the Non
<PAGE> 72
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Stock Merger Consideration received by such Shareholder; and that no
loss will be recognized by a Shareholder on the exchange of Company
Capital Stock for the Merger Consideration pursuant to the Merger.
(d) Opinion of Delphi Counsel. The Company shall have received
an opinion from Cahill Gordon & Reindel, special counsel to Delphi,
substantially to the effect set forth in Exhibit H hereto.
ARTICLE XI
TERMINATION
11.1 Termination. This Agreement may be terminated at any time
prior to the Effective Time:
(a) by mutual written consent of the Company and Delphi;
(b) by either the Company and the Shareholders as a group, on
the one hand, or Delphi, on the other hand:
(i) if the Merger shall not have been consummated by
July 31 1998; provided, however, that the right to terminate
this Agreement pursuant to this Section 11.1(b)(i) shall not
be available to any party (with the Company and the
Shareholders deemed to be a single party for this purpose)
whose failure to perform any of its obligations under this
Agreement results in the failure of the Merger to be
consummated by such time; or
(ii) if any Restraint having any of the effects set
forth in Section 10.1(a) shall be in effect and shall have
become final and nonappealable;
(c) by Delphi, if the Company or any Shareholder shall have
breached or failed to perform in any material respect any of its
representations, warranties, covenants or other agreements contained in
this Agreement (which
<PAGE> 73
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breach is not cured within 15 business days after receipt by the
Company or such Shareholders, as the case may be, of a written notice
of such breach from Delphi specifying the breach and requesting that it
be cured); or
(d) by the Company and the Shareholders as a group, if Delphi
shall have breached or failed to perform in any material respect any of
its representations, warranties, covenants or other agreements
contained in this Agreement (which breach is not cured within 15
business days after receipt by Delphi of a written notice of such
breach from the Company and the Shareholders specifying the breach and
requesting that it be cured).
11.2 Effect of Termination. The termination of this Agreement
shall become effective upon delivery to the other party of written notice
thereof. In the event of the termination of this Agreement pursuant to the
foregoing provisions of this Article XI, this Agreement shall become void and
have no effect, with no liability on the part of any party or its shareholders
or stockholders or directors or officers in respect thereof except for (i)
agreements which survive the termination of this Agreement, (ii) any liability
that Delphi, the Company or any Shareholder might have arising from a breach of
this Agreement and (iii) in the event of termination pursuant to Section 11.1(c)
or (d), then notwithstanding Section 9.9, the breaching party (with the Company
and the Shareholders deemed to be a single party for this purpose) shall be
liable to the other party for any expenses incurred in connection with this
Agreement and the transactions contemplated hereby, as well as any damages in
accordance with applicable law.
ARTICLE XII
INDEMNIFICATION
12.1 Delphi's Losses.
(a) For purposes of this Section 12.1 only, the term
"Shareholders" shall include Cheryl Nolan, a shareholder of
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Gunz & Associates, Inc. and a party to the Gunz Stock Purchase Agreement.
Subject to the other provisions of this Article XII, the Shareholders agree,
severally and not jointly, to indemnify and hold harmless Delphi, Delphi
Subsidiary and the Surviving Corporation and their respective officers,
directors, employees, stockholders, assigns, successors and affiliates
(collectively, the "Delphi Indemnified Parties" and, each, a "Delphi Indemnified
Party") from, against and in respect of any and all Delphi's Losses (as defined
below) suffered, sustained, incurred or required to be paid by any Delphi
Indemnified Party by reason of (i) any representation or warranty made by any of
the Shareholders (to the extent a party hereto) in Article V of this Agreement,
in the Disclosure Schedule or in any certificate or other document or instrument
delivered by or on behalf of any Shareholder in connection herewith (all of
which, for purposes of this Article XII, shall be read as if they contained no
qualifications for material adverse effect or material adverse change and no
other qualifications, exceptions or provisos relating to materiality) being
untrue or incorrect in any material (as defined below) respect; (ii) any
representation or warranty made by any of the Shareholders in Article II of the
Gunz Stock Purchase Agreement, in the Disclosure Schedule to such agreement or
in any certificate or other document or instrument delivered by or on behalf of
any Shareholder in connection therewith (all of which, for purposes of this
Article XII, shall be read as if they contained no qualifications for material
adverse effect or material adverse change and no other qualifications,
exceptions or provisos relating to materiality) being untrue or incorrect in any
material (as defined below) respect; or (iii) any failure by any of the
Shareholders to observe or perform any of their respective covenants and
agreements set forth in this Agreement and the Gunz Stock Purchase Agreement in
any material respect.
(b) Subject to the other provisions of this Article XII, the
Shareholders agree, severally and not jointly, to indemnify and hold harmless
the Delphi Indemnified Parties from, against and in respect of any and all
Delphi's Losses suffered, sustained, incurred or required to be paid by Delphi
by reason of (i) any representation or warranty made by the
<PAGE> 75
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Company and the Shareholders (to the extent a party hereto) in Article VI of
this Agreement, in the Disclosure Schedule or in any certificate or other
document or instrument delivered by or on behalf of the Company in connection
herewith (all of which, for purposes of this Article XII, shall be read as if
they contained no qualifications for material adverse effect or material adverse
change and no other qualifications, exceptions or provisos relating to
materiality) being untrue or incorrect in any material (as defined below)
respect; (ii) any representation or warranty made by the Company and the
Shareholders in Article III of the Gunz Stock Purchase Agreement, in the
Disclosure Schedule to such agreement or in any certificate or other document or
instrument delivered by or on behalf of the Company in connection therewith (all
of which, for purposes of this Article XII, shall be read as if they contained
no qualifications for material adverse effect or material adverse change and no
other qualifications, exceptions or provisos relating to materiality) being
untrue or incorrect in any material (as defined below) respect; (iii) any
failure by the Company or the Shareholders to observe or perform any of its
covenants and agreements set forth in this Agreement and the Gunz Stock Purchase
Agreement in any material respect; or (iv) the business, operations or assets of
the Company and each of its subsidiaries and predecessors prior to the Closing
Date or the actions or omissions of the directors, officers, shareholders,
employees or agents thereof prior to the Closing Date, other than Delphi's
Losses directly arising from matters expressly disclosed in this Agreement, the
Gunz Stock Purchase Agreement or the Disclosure Schedules hereto and thereto.
(c) "Delphi's Losses" shall mean all damages (including,
without limitation, amounts paid in settlement with the Shareholders' consent,
not to be unreasonably withheld), losses, liabilities, claims, costs and
expenses (including, without limitation, reasonable fees of attorneys,
consultants and technical representatives). For purposes of indemnification
pursuant to this Section 12.1 and for purposes of the representations and
warranties and covenants herein and in the Gunz Stock Purchase Agreement insofar
as they form a basis for such indemnification, "material" shall mean that the
amount of
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Delphi's Losses suffered, sustained, incurred or required to be paid by reason
of a representation or warranty being untrue or incorrect or a failure to
observe or perform shall, taken together with all other Delphi's Losses
suffered, sustained, incurred or required to be paid by reason of any other such
breach or failure, have exceeded $500,000, in which event the Shareholders'
indemnification shall be effective with respect to all such Delphi's Losses in
excess of such amount. The aggregate amount of any Shareholder's liability under
this Article XII shall not exceed such Shareholder's Portion of the Merger
Consideration plus such Shareholder's Portion (as defined in the Gunz Stock
Purchase Agreement) of the Consideration (as defined in the Gunz Stock Purchase
Agreement).
12.2 Shareholders' Losses.
(a) Subject to the other provisions of this Article XII,
Delphi agrees to indemnify and hold harmless the Shareholders and any recipient
of Company Common Stock, Delphi Common Stock or notes received in a Permitted
Transfer or transfer otherwise made in accordance with Section 9.12 hereof and
their respective successors (collectively, the "Shareholder Indemnified Parties"
and each, a "Shareholder Indemnified Party") from, against, for and in respect
of any and all Shareholders' Losses (as defined below) suffered, sustained,
incurred or required to be paid by any Shareholder Indemnified Party by reason
of (i) any representation or warranty made by Delphi in Article VII of this
Agreement, in the Disclosure Schedule or in any certificate or other document or
instrument delivered by or on behalf of Delphi in connection herewith being
untrue or incorrect in any material respect; or (ii) any failure by Delphi to
observe or perform its covenants and agreements set forth in this Agreement in
any material respect.
(b) "Shareholders' Losses" shall mean all damages (including,
without limitation, amounts paid in settlement with Delphi's consent, not to be
unreasonably withheld), losses, liabilities, claims, costs and expenses
(including, without limitation, reasonable fees of attorneys, consultants and
technical representatives).
<PAGE> 77
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12.3 Notice of Loss. Except to the extent set forth in the
next sentence, Delphi and the Shareholders will not have any liability under the
indemnity provisions of this Article XII with respect to a particular matter
unless a notice setting forth in reasonable detail the breach or other matter
which is asserted has been given to the Indemnifying Party (as defined below)
and, in addition, if such matter arises out of a suit, action, investigation,
proceeding or claim, such notice is given promptly, but in any event within
thirty (30) days after the Indemnified Party (as defined below) is given written
notice of the claim or the commencement of the suit, action, investigation or
proceeding. Notwithstanding the preceding sentence, failure of the Indemnified
Party to give notice hereunder shall not release the Indemnifying Party from its
obligations under this Article XII, except to the extent the Indemnifying Party
is actually prejudiced by such failure to give notice. With respect to Delphi's
Losses pertaining to matters set forth in Section 12.l(a) and Section 12.1(b),
the Shareholders shall be the Indemnifying Party and the Delphi Indemnified
Party or Parties suffering such Delphi's Losses shall be the Indemnified Party.
With respect to the Shareholders' Losses, Delphi shall be the Indemnifying Party
and the Shareholder Indemnified Party or Parties suffering such Shareholders'
Losses shall be the Indemnified Party.
12.4 Right to Defend. Upon receipt of notice of any suit,
action, investigation, proceeding or claim for which indemnification might be
claimed by an Indemnified Party, the Indemnifying Party shall be entitled to
assume control of the defense of any such suit, action, investigation,
proceeding or claim at its own cost and expense, and to settle or compromise
such suit, action, investigation, proceeding or claim in its discretion, subject
to the consent of the Indemnified Party, which consent will not be unreasonably
withheld or delayed. The Indemnified Party shall have the right, but not the
obligation, to participate at its own expense in defense thereof by counsel of
its own choosing, but the Indemnifying Party shall be entitled to control the
defense unless the Indemnified Party has relieved the Indemnifying Party from
liability with respect to the particular matter or the Indemnifying Party fails
to as-
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sume defense of the matter. In the event the Indemnifying Party shall fail to
defend, contest or otherwise protect in a timely manner against any such suit,
action, investigation, proceeding or claim, the Indemnified Party shall have the
right, but not the obligation, thereafter to defend, contest or otherwise
protect against the same and make any compromise or settlement thereof and
recover the entire cost thereof from the Indemnifying Party, including, without
limitation, reasonable fees of attorneys, consultants and technical
representatives, disbursements and all amounts paid as a result of such suit,
action, investigation, proceeding or claim or the compromise or settlement
thereof; provided, however, that the Indemnified Party must send a written
notice to the Indemnifying Party of any such proposed settlement or compromise,
which settlement or compromise the Indemnifying Party may reject, in its
reasonable judgment, within thirty (30) days of receipt of such notice. The
Indemnified Party shall have the right to effect a settlement or compromise over
the objection of the Indemnifying Party; provided, that if (i) the Indemnifying
Party is contesting such claim in good faith or (ii) the Indemnifying Party has
assumed the defense from the Indemnified Party, the Indemnified Party waives any
right to indemnity therefor. If the Indemnifying Party undertakes the defense of
such matters, the Indemnified Party shall not, so long as the Indemnifying Party
does not abandon the defense thereof, be entitled to recover from the
Indemnifying Party any legal or other expenses subsequently incurred by the
Indemnified Party in connection with the defense thereof.
12.5 Cooperation. The Delphi Indemnified Parties, the
Shareholder Indemnified Parties and each of their affiliates, successors and
assigns shall cooperate with each other in the defense of any suit, action,
investigation, proceeding or claim by a third party and, during normal business
hours, shall afford each other access to their books and records and employees
relating to such suit, action, investigation, proceeding or claim and shall
furnish each other all such further information that they have the right and
power to furnish as may reasonably be necessary to defend such suit, action,
investigation, proceeding or claim.
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12.6 Subrogation. In the event the Indemnifying Party shall be
obligated to indemnify the Indemnified Party pursuant to this Article XII, the
Indemnifying Party shall, upon payment of such indemnity in full, be subrogated
to all rights of the Indemnified Party with respect to the claims to which such
indemnification relates; provided, however, that the Indemnifying Party shall
only be subrogated to the extent of any amounts paid by it pursuant to this
Article XII in connection therewith.
ARTICLE XIII
MISCELLANEOUS
13.1 Survival of Covenants, Agreements, Representations and
Warranties.
(a) Covenants and Agreements. All covenants and agreements
made hereunder or pursuant hereto or in connection with the transactions
contemplated hereby shall survive the Effective Time and shall continue in full
force and effect thereafter according to their terms without limit as to
duration.
(b) Representations and Warranties. All representations and
warranties contained herein shall survive the Effective Time and shall continue
in full force and effect thereafter for the period from the Effective Time until
the date that is two years after the Effective Time, except that (i) the
representations and warranties in Section 6.17 and Section 6.27 shall survive
until ten (10) days after all potential claims thereon shall be barred by the
applicable statute of limitations, (ii) the representations and warranties made
in Section 6.15 (insofar as the representations and warranties therein relate to
environmental matters) and Section 6.19 shall survive for a period of four years
after the Effective Time and (iii) the representations and warranties made in
Article V shall survive indefinitely; provided that, in the event any claim for
a breach of any representation or warranty has been asserted prior to the last
day such representation or warranty would otherwise survive pursuant to this
Section 13.1, such represen-
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tation and warranty shall survive until final disposition of such claim.
13.2 Closing and Waiver.
(a) Unless this Agreement shall have been terminated in
accordance with the provisions of Section 11.1 hereof, a closing (the "Closing"
and the date and time thereof being the "Closing Date") will be held on June 30,
1998 or such other date as the parties may agree after the conditions set forth
in Sections 10.1, 10.2 and 10.3 shall have been satisfied or waived. The Closing
will be held at the offices of Cahill Gordon & Reindel, 80 Pine Street, New
York, New York or at such other places as the parties may agree. Simultaneously
therewith, the Delaware Certificate of Merger will be filed and promptly
thereafter, the California Certificate of Merger will be filed.
(b) At any time prior to the Effective Date, any party hereto
may (i) extend the time for the performance of any of the obligations or other
acts of any other party hereto, (ii) waive any inaccuracies in the
representations and warranties of the other party contained herein or in any
document delivered pursuant hereto, and (iii) waive compliance with any of the
agreements of any other party or with any conditions to its own obligations
contained herein. Any agreement on the part of a party hereto to any such
extension or waiver shall be valid only if set forth in an instrument in writing
duly authorized by and signed on behalf of such party.
13.3 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.
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If to Delphi or Delphi Subsidiary:
Delphi Financial Group, Inc.
1105 North Market Street, Suite 1230
P.O. Box 8985
Wilmington, Delaware 19899
Facsimile No.: (302) 427-7663
Attention: President
with copies to:
Delphi Capital Management, Inc.
650 Madison Avenue
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 the Company:
Matrix Absence Management, Inc.
2099 Gateway Place, Fifth Floor
P.O. Box 11035
San Jose, CA 95103
Facsimile No.: (408) 467-9662
Attention: David F. Nolan
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with a copy to:
Graham & James LLP
600 Hansen Way
Palo Alto, California 94304
Facsimile No.: (650) 856-3619
Attention: Joe C. Sorenson, Esq.
If to the Shareholders:
John H. Payne
P.O. Box 8895
16517 Via Lago Azul
Rancho Santa Fe, CA 92067
David F. Nolan
1289 Mokelumne Place
San Jose, CA 95120
Martin A. Grable
18400 Overlook Road, #65
Los Gatos, CA 95030
Thomas E. Sitter
1125 Taylor Street, Suite 5
San Francisco, CA 94108
with a copy to:
Graham & James LLP
600 Hansen Way
Palo Alto, California 94304
Facsimile No.: (650) 856-3619
Attention: Joe C. Sorenson, 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
delivery to the courier, if sent by overnight air courier guaranteeing next day
delivery.
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13.4 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.
13.5 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. As used in this Agreement, "person" means any individual, corporation,
limited or general partnership, joint venture, association, joint stock company,
trust, unincorporated organization or government or any agency or political
subdivision thereof; "subsidiary" of any person means (i) a corporation more
than 50% of the outstanding voting stock of which is owned, directly or
indirectly, by such person or by one or more other subsidiaries of such person
or by such person and one or more subsidiaries thereof or (ii) any other person
(other than a corporation) in which such person, or one or more other
subsidiaries of such person or such person and one or more other subsidiaries
thereof, directly or indirectly, have at least a majority ownership and voting
power relating to the policies, management and affairs thereof; and "voting
stock" of any person means capital stock of such person which ordinarily has
voting power for the election of directors (or persons performing similar
functions) of such person, whether at all times or only so long as no senior
class of securities has such voting power by reason of any contingency.
13.6 Amendment. This Agreement may be amended by the parties
at any time before or after any required approval of matters presented in
connection with the Merger by the shareholders of the Company; provided,
however, that after any such approval, there shall not be made any amendment
that by law requires further approval by such shareholders without the further
approval of such shareholders. This Agreement may not be amended except by an
instrument in writing signed on behalf of each of the parties.
13.7 No Third Party Beneficiaries. Nothing in this Agreement
shall confer any rights upon any person or entity
<PAGE> 84
-77-
which is not a party or permitted assignee of a party to this Agreement, except
for rights of Delphi Indemnified Parties and Shareholder Indemnified Parties as
set forth in Article XII (Indemnification).
13.8 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.
13.9 Entire Agreement. This Agreement, the Gunz Stock Purchase
Agreement, the Registration Rights Agreement, the Side Letter and the
Confidentiality Agreement constitute the entire agreement among the parties with
respect to the subject matter hereof and thereof and supersede all other prior
agreements and understandings, both written and oral, between the parties with
respect to the subject matter hereof and thereof.
13.10 No Recourse Against Others. No director, officer or
employee, as such, of Delphi, Delphi Subsidiary or the Company or any of their
respective subsidiaries shall have any liability for any obligations of Delphi,
Delphi Subsidiary or the Company, respectively, under this Agreement for any
claim based on, in respect of or by reasons of such obligations or their
creation.
13.11 Validity. The invalidity or unenforceability of any
provision of this Agreement shall not affect the validity or enforceability of
any other provisions of this Agreement, which shall remain in full force and
effect.
<PAGE> 85
-78-
IN WITNESS WHEREOF, the parties hereto have caused this Merger
Agreement to be executed by their duly authorized officers all as of the day and
year first above written.
DELPHI FINANCIAL GROUP, INC.
By: /s/ Robert M. Smith, Jr.
------------------------------
Name: Robert M. Smith, Jr.
Title: Vice President
MATRIX ABSENCE MANAGEMENT, INC.
By: /s/ David F. Nolan
-----------------------------
Name: David F. Nolan
Title: Chief Executive Officer
SHAREHOLDERS:
/s/ John H. Payne
----------------------------------
John H. Payne
/s/ David F. Nolan
----------------------------------
David F. Nolan
/s/ Martin A. Grable
----------------------------------
Martin A. Grable
/s/ Thomas E. Sitter
----------------------------------
Thomas E. Sitter
<PAGE> 86
EXHIBIT A
SUBSIDIARIES OF THE COMPANY
Matrix Payroll Services, Inc.
Gunz & Associates, Inc.
<PAGE> 87
EXHIBIT B
THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF ANY STATE, AND MAY
NOT BE DISTRIBUTED, SOLD, TRANSFERRED, ASSIGNED, HYPOTHECATED OR OFFERED UNLESS
THERE IS IN EFFECT A REGISTRATION STATEMENT UNDER SUCH ACT AND LAWS COVERING
SUCH SECURITIES OR THE ISSUER RECEIVES AN OPINION OF COUNSEL FOR THE HOLDER OF
THESE SECURITIES REASONABLY SATISFACTORY TO THE ISSUER OR A NO-ACTION LETTER
FROM THE COMMISSION INDICATING THAT SUCH DISTRIBUTION, SALE, TRANSFER,
ASSIGNMENT, HYPOTHECATION OR OFFER IS EXEMPT FROM THE REGISTRATION AND
PROSPECTUS DELIVERY REQUIREMENTS OF SUCH ACT AND LAWS.
THE SECURITIES EVIDENCED BY THIS CERTIFICATE ARE ALSO SUBJECT TO RESTRICTIONS ON
RESALE CONTAINED IN THAT CERTAIN AGREEMENT AND PLAN OF MERGER, DATED AS OF JUNE
11, 1998, A COPY OF WHICH IS AVAILABLE FROM THE SECRETARY OF THE ISSUER.
No. US $
DELPHI FINANCIAL GROUP, INC.
SUBORDINATED PROMISSORY NOTE DUE 2003
FOR VALUE RECEIVED, DELPHI FINANCIAL GROUP, INC. (the
"Company") promises to pay to ___________________, the registered holder hereof
(the "Holder"), the principal sum of _________________ United States Dollars
(US $ ) on _________, 2003 (the "Maturity Date").
The undersigned hereby further agrees to pay accrued interest,
in like money, at a rate per annum equal to eight percent (8%), payable
semi-annually on January 1 and July 1 of each year, the first such payment to
commence January 1, 1999. Interest shall be calculated on the basis of a 360-day
year for the actual days elapsed.
The principal of and interest on this Promissory Note is
payable in cash in such coin or currency of the United
<PAGE> 88
-2-
States of America as at the time of payment is legal tender for payment of
public and private debts. The Company shall make any payments of principal or
interest hereunder, less any amounts required by law to be deducted as set forth
in Section 1 below, by check payable to the order of the registered holder of
this Promissory Note as of the tenth day prior to the interest payment date or
the Maturity Date, as the case may be, addressed to such holder at the address
last appearing on the records of the Company as designated in writing by the
Holder from time to time. The forwarding of such check shall constitute a
payment of principal or interest, as applicable, hereunder and shall satisfy and
discharge the liability for principal or interest, as applicable, of this
Promissory Note to the extent of the sum represented by such check plus any
amounts so deducted.
This Promissory Note is subject to the following additional
provisions:
Withholding. The Company shall be entitled to withhold from
all payments of principal or interest of this Promissory Note any amounts
required to be withheld under the applicable provisions of the United States
income tax laws or other applicable laws at the time of such payments, and the
Holder shall execute and deliver all required documentation in connection
therewith.
Registered Holder. Unless the Company receives transfer
documentation relating to a transfer permitted by Section 4 hereof and this
Promissory Note has been presented together with such documentation, the Company
and any agent of the Company may treat the person in whose name this Promissory
Note is duly registered on the Company's records as the owner hereof for the
purpose of receiving payment as herein provided and for all other purposes,
whether or not this Promissory Note be overdue, and neither the Company nor any
such agent shall be affected by notice to the contrary.
No Recourse to Others. No recourse shall be had for the
payment of the principal of or interest on this Promissory Note, or for any
claim based hereon, or otherwise in respect
<PAGE> 89
-3-
hereof, against any incorporator, shareholder, officer or director, as such,
past, present or future, of the Company or any successor corporation, whether by
virtue of any constitution, statute or rule of law, or by the enforcement of any
assessment or penalty or otherwise, all such liability being, by the acceptance
hereof and as part of the consideration for the issue hereof, expressly waived
and released.
Transfer Restrictions. The Holder, by acceptance hereof,
agrees that this Promissory Note is being acquired for investment and that such
Holder will not offer, sell, resell, pledge, assign or otherwise transfer or
dispose of this Promissory Note, except in accordance with Section 9.12(c) of
the Agreement and Plan of Merger dated as of June 11, 1998 and under
circumstances which will not result in a violation of the Securities Act of 1933
or any applicable state Blue Sky laws or similar laws relating to the sale of
securities.
Default. The following shall constitute an "Event of Default":
The Company shall default in the payment of principal on this
Promissory Note when due and such default shall continue for a period
of 10 days; or
The Company shall default in the payment of interest on this Promissory
Note when due and such default shall continue for a period of 30 days;
or
Bankruptcy, reorganization, insolvency or liquidation proceedings or
other proceedings for relief under any bankruptcy law or any law for
the relief of debtors shall be instituted by or against the Company
and, if instituted against the Company, shall not be dismissed within
sixty (60) days after such institution or the Company shall by any
action or answer approve of, consent to, or acquiesce in any such
proceedings or admit the material allegations of, or default in
answering a petition filed in any such proceeding.
<PAGE> 90
-4-
Then, or at any time thereafter, and in each and every such case, unless such
Event of Default shall have been waived in writing by the Holder (which waiver
shall not be deemed to be a waiver of any subsequent default) at the option of
the Holder and in the Holder's sole discretion, the Holder may, upon written
notice to the Company, consider this Promissory Note immediately due and
payable, without presentment, demand, protest or notice of any kind, all of
which are hereby expressly waived, anything herein or in any note or other
instruments contained to the contrary notwithstanding, and the Holder may
immediately, and without expiration of any further period of grace, enforce any
and all of the Holder's rights and remedies provided herein or any other rights
or remedies afforded by law.
Subordination. (a) The Company and the Holder covenant and
agree that the payment of the principal of and interest on this Promissory Note
shall be subordinated in right of payment to the prior payment in full in cash
of all of the Company's indebtedness or obligations of any kind whatsoever
outstanding from time to time that is not expressly designated as subordinated
indebtedness (the "Senior Debt"). In the event of any insolvency, bankruptcy or
similar proceedings relative to the Company or to its property, then:
the holders of Senior Debt shall be entitled to receive
payment in full in cash of all amounts due on or in respect of all
Senior Debt before the Holder is entitled to receive any payment or
distribution of any kind or character on account of this Promissory
Note;
any payment or distribution by the Company of any kind or
character to which the Holder would be entitled but for the provisions
of this Section 6 shall be paid, ratably, directly to the holders of
Senior Debt or their representative or representatives; and
in the event that, notwithstanding the foregoing, the Holder
shall have received any payment or distribution by the Company of any
kind or character, from and after the date of any such event set forth
above before all Senior
<PAGE> 91
-5-
Debt is paid in full in cash, then and in such event such payment or
distribution shall be paid over or delivered forthwith to the Senior
Debt or other person or entity making payment or distribution of assets
of the Company for application to the payment of all Senior Debt
remaining unpaid.
(b) In case any payment or distribution shall be paid or
delivered to any Holder in violation or contravention of the terms of this
Section 6, such payment or distribution shall, upon such Holder's receipt of
notice of such violation or contravention, be held in trust for and paid and
delivered ratably to the holders of Senior Debt (or their duly authorized
representatives), until all Senior Debt shall have been paid in full.
General Provisions.
(a) GOVERNING LAW. THIS PROMISSORY NOTE SHALL BE GOVERNED BY
AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK
WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW.
(b) Amendment. No amendment or modification of the terms of
this Promissory Note shall be binding on either the Holder or the Company unless
reduced to writing and signed by an authorized officer of the party to be bound.
(c) Binding Effect. This Promissory Note shall be binding upon
and inure to the benefit of the Holder and the Company and their respective
successors and permitted assigns.
(d) Obligations of Note Holder. By accepting this Promissory
Note, the Holder agrees to all of its obligations contained herein.
<PAGE> 92
-6-
IN WITNESS WHEREOF, the Company has caused this instrument to
be duly executed by an officer thereunto duly authorized.
Dated: ________________, 1998
DELPHI FINANCIAL GROUP, INC.
By: _______________________________
Name:
Title:
<PAGE> 93
Exhibit C to
Merger Agreement
----------------
<TABLE>
<CAPTION>
Company Series A Total
Common Preferred Stock Merger Note Cash Merger Shareholder's
Shareholder Stock Stock Consideration Consideration Consideration Portion(1)
- ----------- ----- ----- ------------- ------------- ------------- --------
<S> <C> <C> <C> <C> <C> <C>
Grable 866,087 -0- 53,215 shares $2,000,000 $2,357,255 $7,357,255
Nolan 866,087 -0- 75,388 1,650,000 1,457,255 7,357,255
Payne 163,727 918,000 186,253 -0- 1,715,994 12,215,994
Sitter 109,149 612,000 70,954 2,000,000 2,143,996 8,143,996
--------- --------- -------------- ---------- ---------- -----------
Total 2,005,050 1,530,000 385,810 shares $5,650,000 $7,674,500 $35,074,500
</TABLE>
(1) Including the approximate value of Stock Merger Consideration based on
a price of $56.375 per share of Delphi Common Stock
C-1
<PAGE> 94
EXHIBIT D
Contingent Consideration Determination Procedures
OBJECTIVE:
The following procedures are intended to be a measurement tool for the
Contingent Consideration to be paid pursuant to Section 3.4 of the Merger
Agreement (to which these procedures are attached as Exhibit D) based upon the
GAAP EBITDA of the Surviving Corporation (as the successor to Matrix Absence
Management, Inc. ("Matrix" or the "Company")). Capitalized terms used and not
defined herein shall have the meanings set forth in the Merger Agreement.
It is intended that the Surviving Corporation's EBITDA be adjusted (positively
or negatively) for any items or transactions determined or imposed by Delphi or
its affiliates that were not contemplated in the stand-alone projections of
Matrix, including, but not limited to, the following: additional expenses
imposed by Delphi, additional investments made by Delphi, asset transfers,
effects of "purchase" accounting adjustments under GAAP, and affiliated
transactions. The calculation of EBITDA will be made within 90 days after each
Anniversary Date.
CALCULATION:
The parties shall have agreed on the amount of Base EBITDA on or before the
Closing Date.
Delphi shall provide Messrs. Nolan and Grable (the "Shareholders") with a
detailed written calculation of its determination of whether the applicable
EBITDA goal has been achieved and whether a contingency payment is due and owing
under the Merger Agreement(each such determination, a "Delphi Determination")
within 90 days after each Anniversary Date.
ARBITRATION:
If the Shareholders shall disagree with any Delphi Determination, the
Shareholders shall give written notice of such disagreement to Delphi within 10
business days after receipt of the applicable Delphi Determination. If, within
20 business days after Delphi's receipt of such notice of disagreement, Delphi
and the Shareholders are unable to agree with regard to any Delphi
Determination, the disagreement may be submitted to arbitration by either Delphi
or the Shareholders, which arbi-
<PAGE> 95
-3-
tration election shall be final and binding on the parties. The party
instituting the arbitration procedures shall give written notice to the other
party of its election to arbitrate, and such notice shall specify the name and
address of the person designated to act as an arbitrator on its behalf. Within
10 business days after the service of such notice, the second party shall notify
the first party of the appointment of the person designated to act as arbitrator
on the second party's behalf. If the second party fails to notify the first
party of the appointment of its arbitrator within the period specified above,
then the second arbitrator shall be appointed by the American Arbitration
Association ("AAA"), or any organization successor thereto, in accordance with
its then prevailing rules. The two arbitrators so chosen shall meet within 10
business days after the second arbitrator is appointed and shall select the
third arbitrator by mutual agreement. If the two arbitrators shall fail to
appoint a third arbitrator within 10 business days after the second arbitrator
is appointed, then the third arbitrator shall be appointed by AAA, or any
organization successor thereto, in accordance with its then prevailing rules.
Each arbitrator chosen or appointed pursuant to this Exhibit D shall be an
active or retired officer of an insurance or reinsurance company and shall be a
disinterested person.
The arbitrators shall review the relevant provisions of the Merger Agreement and
any documents or materials supplied by either party supporting such party's
position. The arbitrators shall render their decision with regard to the
disputed Delphi Determination upon the concurrence of at least two of their
number not later than 30 business days after the appointment of the third
arbitrator. The decision of the arbitrators shall be in writing, and counterpart
copies shall be delivered to each of Delphi and the Shareholders. In rendering
their decision, the arbitrators shall have no power to modify any of the
provisions of the Merger Agreement. The decision of the arbitrators shall be
final and binding. All arbitration proceedings shall occur in New York, New York
and, absent express written agreement by the parties to the contrary, shall be
governed by the then prevailing rules of AAA, or any organization successor
thereto. Judgment may be entered on the award of the arbitrators and may be
enforced in accordance with the laws of the State of New York.
Immediately upon a party hereto giving written notice of its election to
arbitrate hereunder, Delphi agrees upon reasonable advance request to cause the
Surviving Corporation to provide the Shareholders with access to the books and
records of the
<PAGE> 96
-4-
Surviving Corporation which reasonably relate to the Delphi Determination in
dispute at reasonable times during the normal business hours of the Surviving
Corporation.
Each party shall pay the fees and expenses of the original arbitrator that it
appointed (or, in the case of the second party, the arbitrator appointed on its
behalf if it should fail to appoint its own arbitrator). The fees and expenses
of the third arbitrator and all other expenses of the arbitrators shall be borne
by the parties equally. Each party shall bear the expense of its own counsel and
the preparation and presentation of proof, or supportive documentation.
<PAGE> 1
EXHIBIT 2.3
================================================================================
STOCK PURCHASE AGREEMENT
BY AND AMONG
DELPHI FINANCIAL GROUP, INC.,
UNICOVER MANAGERS, INC.,
UNICOVER INTERMEDIARIES, LLC
AND
THE SHAREHOLDERS NAMED HEREIN
DATED AS OF
OCTOBER 1, 1998
================================================================================
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I AGREEMENT TO PURCHASE AND SELL OWNERSHIP INTERESTS............................................... 2
1.1 Agreement to Purchase and Sell Ownership Interests................................. 2
1.2 Consideration...................................................................... 2
1.3 Purchase Price Allocation.......................................................... 6
1.4 Certificates....................................................................... 7
ARTICLE II REPRESENTATIONS AND WARRANTIES OF THE SHAREHOLDERS.............................................. 8
2.1 Title to Ownership Interests....................................................... 8
2.2 Authority Relative to Agreements................................................... 8
2.3 Securities Matters................................................................. 9
2.4 FIRPTA Affidavit................................................................... 10
ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE COMPANIES AND THE SHAREHOLDERS........................... 11
3.1 Organization and Qualification..................................................... 11
3.2 No Subsidiaries.................................................................... 12
3.3 Capitalization..................................................................... 12
3.4 Authority Relative to Agreements................................................... 12
3.5 No Violations, etc................................................................. 13
3.6 Financial Statements............................................................... 14
3.7 Regulatory Reports................................................................. 15
3.8 Absence of Changes or Events....................................................... 16
3.9 Litigation......................................................................... 17
3.10 Title to and Condition of Properties............................................... 17
3.11 Leases............................................................................. 17
3.12 Contracts; Bank Accounts; Indebtedness............................................. 18
3.13 Relationships; Threats of Cancellation............................................. 20
3.14 Labor Matters...................................................................... 21
3.15 Compliance with Law................................................................ 22
3.16 Intellectual Property.............................................................. 22
3.17 Taxes.............................................................................. 23
3.18 Employee Benefit Plans; ERISA...................................................... 25
3.19 Environmental Matters.............................................................. 29
</TABLE>
-i-
<PAGE> 3
<TABLE>
<CAPTION>
Page
----
<S> <C>
3.20 Absence of Undisclosed Liabilities................................................. 31
3.21 Finders or Brokers................................................................. 32
3.22 Regulatory Matters................................................................. 32
3.23 Operational Insurance.............................................................. 32
3.24 Employment and Labor Contracts..................................................... 32
3.25 Balance Sheet Reserves............................................................. 33
3.26 Year 2000 Compliance............................................................... 33
3.27 Affiliate Transactions............................................................. 33
3.28 Corporate Records.................................................................. 34
3.29 Full Disclosure.................................................................... 34
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF DELPHI........................................................ 34
4.1 Organization and Qualification..................................................... 34
4.2 Authority Relative to Agreements................................................... 35
4.3 No Violations, Etc................................................................. 35
4.4 Investment......................................................................... 36
4.5 Sophisticated Purchaser............................................................ 37
4.6 Due Diligence...................................................................... 37
4.7 Litigation......................................................................... 37
4.8 Finders or Brokers................................................................. 38
4.9 Regulatory Matters................................................................. 38
ARTICLE V CONDUCT OF BUSINESS OF THE COMPANIES PENDING THE CLOSING......................................... 38
5.1 Conduct of Business of the Companies Pending the Closing........................... 38
ARTICLE VI COVENANTS AND AGREEMENTS........................................................................ 42
6.1 Cooperation........................................................................ 42
6.2 Availability of Employees and Records.............................................. 43
6.3 Notification of Changes and Default................................................ 44
6.4 Financial Statements, Etc.......................................................... 45
6.5 Publicity.......................................................................... 45
6.6 No Solicitation.................................................................... 46
6.7 Resignation of Directors........................................................... 46
6.8 Fees and Expenses.................................................................. 46
6.9 Tax Matters........................................................................ 47
6.10 Transfer Restrictions.............................................................. 50
6.11 Change of Control.................................................................. 52
</TABLE>
-ii-
<PAGE> 4
<TABLE>
<CAPTION>
Page
----
<S> <C>
6.12 Employment of Chief Executive Officer.............................................. 52
6.13 Effect on Business................................................................. 52
6.14 401(k) Rollover.................................................................... 53
6.15 Nondisclosure of Confidential Information.......................................... 53
ARTICLE VII CONDITIONS TO CLOSING.......................................................................... 55
7.1 Conditions to Each Party's Obligations............................................. 55
7.2 Conditions to Obligations of Delphi................................................ 55
7.3 Conditions to Obligations of the Company and the Shareholders...................... 56
ARTICLE VIII TERMINATION................................................................................... 57
8.1 Termination........................................................................ 57
8.2 Effect of Termination.............................................................. 58
ARTICLE IX INDEMNIFICATION................................................................................. 59
9.1 Delphi's Losses.................................................................... 59
9.2 Shareholders' Losses............................................................... 61
9.3 Notice of Loss..................................................................... 61
9.4 Right to Defend.................................................................... 62
9.5 Cooperation........................................................................ 63
9.6 Subrogation........................................................................ 63
ARTICLE X MISCELLANEOUS.................................................................................... 64
10.1 Survival of Covenants, Agreements, Representations and Warranties.................. 64
10.2 Closing and Waiver................................................................. 64
10.3 Notices............................................................................ 65
10.4 Counterparts....................................................................... 67
10.5 Interpretation..................................................................... 68
10.6 Amendment.......................................................................... 68
10.7 Assignment......................................................................... 68
10.8 No Third Party Beneficiaries....................................................... 68
10.9 Governing Law...................................................................... 69
10.10 Entire Agreement................................................................... 69
10.11 Relationship among Certain Agreements.............................................. 69
10.12 No Recourse Against Others......................................................... 70
10.13 Validity........................................................................... 70
</TABLE>
-iii-
<PAGE> 5
<TABLE>
<CAPTION>
Page
----
<S> <C>
10.14 Severability....................................................................... 70
10.15 Facsimiles......................................................................... 70
10.16 Construction....................................................................... 70
</TABLE>
-iv-
<PAGE> 6
DISCLOSURE SCHEDULE
COMPANY DISCLOSURE SECTIONS
SECTION
2.1 Restrictions on Transfer
2.2 Authority Relative to Agreements
3.1 Organization and Qualification
3.3 Capitalization
3.5 Violations
3.6 Financial Statements
3.7 Regulatory Reports
3.8 Absence of Changes or Events
3.11 Leases
3.12 (a) Contracts and Commitments
(b) Bank Accounts
3.13 Relationships; Threats of Cancellation
3.15 Compliance with Law
3.16 Intellectual Property
3.17 Taxes
3.18 Employee Benefit Plans; ERISA
3.20 Liabilities as of September 30, 1998
3.23 Operational Insurance
3.24 Employment Contracts
3.27 Affiliate Transactions
5.1(b) Bonuses
EXHIBIT A - Ownership Interests
EXHIBIT B - Consideration Determination Procedures
EXHIBIT C - Pre-tax Cash Flow Multiples
EXHIBIT D - Description of Zero-Premium Collar
EXHIBIT E - Form of Opinion of Robinson Silverman Pearce Aronsohn & Berman LLP
EXHIBIT F - Form of Opinion of Cahill Gordon & Reindel
-v-
<PAGE> 7
STOCK PURCHASE AGREEMENT
STOCK PURCHASE AGREEMENT, dated as of October 1, 1998 (this
"Agreement"), by and among Delphi Financial Group, Inc., a Delaware corporation
("Delphi"), Unicover Managers, Inc., a New Jersey corporation ("Unicover"), and
Unicover Intermediaries, LLC, a New Jersey limited liability company
("Intermediaries") (collectively, the "Companies" and each a "Company"), and
John E. Pallat, Kenneth C. Griebell and Thomas J. Dunn (collectively, the
"Management Shareholders") and Robert J. Wojtowicz, Joseph P. Wojtowicz and
Joseph F. Munson (collectively, the "Non-Management Shareholders" and together
with the Management Shareholders, the "Shareholders" and, individually, each a
"Shareholder").
W I T N E S S E T H :
WHEREAS, the Shareholders desire to sell to Delphi, and Delphi
desires to purchase from the Shareholders, all of the issued and outstanding
shares of capital stock and membership interests, as the case may be, of each of
the Companies held by such Shareholders (the "Ownership Interests"), in the
amounts from each Shareholder set forth in Exhibit A hereto;
WHEREAS, concurrently with the signing of this Agreement,
letter agreements have been entered into between Delphi and each of (the "Letter
Agreements");
WHEREAS, concurrently with the signing of this Agreement, side
letters have been entered into with (the "Side Letters");
WHEREAS, concurrently with the signing of this Agreement,
options have been granted by the Shareholders to Delphi for the purchase of all
of the issued and outstanding shares of capital stock of Olga Reinsurance Ltd.
and Alternative Risk Reinsurance Co. Ltd. held by such Shareholders pursuant to
separate option agreements (the "Option Agreements");
<PAGE> 8
-2-
WHEREAS, concurrently with the signing of this Agreement,
non-competition agreements have been entered into by and among Delphi, the
Companies and each of the Shareholders (the "Non-competition Agreements");
WHEREAS, concurrently with the signing of this Agreement,
employment agreements have been entered into with John E. Pallat and Kenneth C.
Griebell and an Employment and Consulting Agreement has been entered into with
Thomas J. Dunn (collectively, the "Employment Agreements" and each an
"Employment 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
AGREEMENT TO PURCHASE AND SELL
OWNERSHIP INTERESTS
1.1 Agreement to Purchase and Sell Ownership Interests. On the
basis of the representations and warranties set forth in Articles II, III and IV
of this Agreement and subject to the terms and conditions of this Agreement,
Delphi agrees to purchase and each of the Shareholders agrees to sell, at the
Closing (as defined in Section 10.2 hereof) provided for herein, such
Shareholder's Ownership Interests for consideration equal to such Shareholder's
Percentage of the aggregate Consideration specified in Section 1.2.
"Shareholder's Percentage" means, for each Shareholder, as to each component of
the Consideration, the percentage set forth under the "Shareholder's Percentage"
column opposite such Shareholder's name on Exhibit A hereto.
<PAGE> 9
-3-
1.2 Consideration.
(a) At the Closing, Delphi shall pay to the Shareholders,
severally according to their Shareholder's Percentages, an amount in cash equal
in the aggregate to the pre-tax cash flow (determined in accordance with the
procedures set forth in Exhibit B hereto) ("Pre-tax Cash Flow") generated by the
Companies during the period from January 1, 1998 through June 30, 1998 (minus
any amounts of Pre-tax Cash Flow attributable to such period previously
distributed by either of the Companies to the Shareholders or affiliates thereof
during 1998 ("Prior Distributions")). On or before December 31, 1998, Delphi
shall pay to the Shareholders, severally according to their Shareholder's
Percentages, an amount in cash equal in the aggregate to the Pre-tax Cash Flow
generated by the Companies during the period from July 1, 1998 through September
30, 1998 (minus any Prior Distributions); provided, however, that to the extent
the aggregate of the Prior Distributions exceeds Pre-tax Cash Flow for the
period from January 1, 1998 through September 30, 1998 determined in accordance
with the provisions of Exhibit B ("Excess Distributions"), Delphi shall promptly
notify the Shareholders of its determination and the Shareholders shall repay,
on or before December 31, 1998, such Excess Distributions severally according to
their Shareholder's Percentages, in cash, to Delphi.
(b) As further consideration for the purchase of the Ownership
Interests by Delphi (the "Additional Consideration" and collectively with the
payments described in the preceding paragraph, the "Consideration"), the
following amounts will be payable by Delphi to each of the Shareholders
severally according to their Shareholder's Percentages; provided, however, that
any Excess Distributions made to a particular Shareholder, owed to Delphi by
such Shareholder and not fully repaid in accordance with Section 1.2(a) as of
the payment date of any Additional Consideration shall be deducted from such
Shareholder's Additional Consideration payment:
(i) an amount equal in the aggregate to 1.0 times Pre-tax
Cash Flow generated by the Companies during the period from October 1,
1998 through December 31, 1998 will be payable as Additional
Consideration within three months after the end of such period,
provided, however, that to
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the extent Pre-tax Cash Flow for such period exceeds $7,100,000, such
excess will be multiplied instead by 2.0;
(ii) an amount equal in the aggregate to 2.0 times Pre-tax
Cash Flow generated by the Companies during the period from January 1,
1999 through December 31, 1999 will be payable as Additional
Consideration within three months after the end of such period,
provided, however, that the portion of Pre-tax Cash Flow for such
period equal to the amount, if any, by which Pre-tax Cash Flow for the
period described in paragraph (i) above is less than $7,100,000 will be
multiplied instead by 1.0;
(iii) an amount equal in the aggregate to 1.75 times Pre-tax
Cash Flow generated by the Companies during the period from January 1,
2000 through December 31, 2000 will be payable as Additional
Consideration within three months after the end of such period;
(iv) an amount equal in the aggregate to 1.5 times Pre-tax
Cash Flow generated by the Companies during the period from January 1,
2001 through December 31, 2001 will be payable as Additional
Consideration within three months after the end of such period; and
(v) an amount equal in the aggregate to 1.25 times Pre-tax
Cash Flow generated by the Companies during the period from January 1,
2002 through December 31, 2002 will be payable as Additional
Consideration within three months after the end of such period.
For the avoidance of doubt, the exact multiples to be applied
to Pre-tax Cash Flow for each period for each Shareholder (i.e., the multiples
set forth in clauses (i)-(v) above times each Shareholder's Percentage) are set
forth opposite such Shareholder's name on Exhibit C hereto.
Each such payment of Additional Consideration shall be payable
to each Shareholder 60% in cash and 40% in Class A Common Stock, par value $.01
per share (the "Delphi Common Stock"), of Delphi (such payments in cash to the
Shareholders,
<PAGE> 11
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the "Cash Consideration" and such payments of stock to the Shareholders, the
"Stock Consideration"), provided, however, that if the amount of the Cash
Consideration that would otherwise be paid pursuant to paragraph (i) above is
less than the amount of the aggregate Federal, state and local ordinary income
tax liability that will arise on the part of the Shareholders due to the Section
338(h)(10) election made pursuant to Section 6.9(a), the portion of the
Additional Consideration for such period to be paid in cash to the Shareholders
shall be adjusted upward, and the proportion thereof payable in Delphi Common
Stock correspondingly adjusted downward, pro rata in each case among the
Shareholders according to their Shareholder's Percentages, such that the
aggregate amount of such Additional Consideration paid in cash to the
Shareholders shall be equal to the lesser of such aggregate tax liability or 75%
of the aggregate Additional Consideration payment for such period.
(c) The number of shares of Delphi Common Stock to be issued
in payment of the Stock Consideration will be determined based on the average
per share closing price thereof as reported on the principal national securities
exchange or inter-dealer quotation system on which the Delphi Common Stock is
then listed for the last 10 trading days of the period with respect to which
such payment of Stock Consideration is being made (the "Market Price"), adjusted
as appropriate for any stock dividend with respect to which the record date
occurs during such 10 day period.
(d) Notwithstanding the provisions of paragraphs (b) and (c)
above, in the event that, at the time a payment of Additional Consideration is
to be made, (i) the Delphi Common Stock is not listed on any national securities
exchange or inter-dealer quotation system, then Delphi will have the option to
elect to pay and the Shareholders will have the option to elect to receive such
Additional Consideration payment
<PAGE> 12
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100% in cash in either case upon written notice to the other party and/or (ii)
there has occurred a Change of Control (as hereinafter defined) of Delphi, then
the Shareholders will have the option to elect to receive such Additional
Consideration payment 100% in cash, upon written notice by such Shareholder to
Delphi; provided, that in the event of a Change of Control wherein 50% or more
of the consideration to be received by the holders of Delphi Common Stock
consists of publicly-traded voting common equity of the surviving entity, then
the Shareholders will not have the option to receive such payment 100% in cash
but will instead be entitled to receive such publicly-traded common equity in
payment of the Stock Consideration. "Change of Control" shall mean any merger,
consolidation or other acquisition of Delphi pursuant to which Delphi is not the
surviving entity or pursuant to which the Delphi Common Stock would be converted
into cash, other securities or other property, other than any such transaction
in which (i) members of Delphi's Board of Directors immediately prior to such
transaction will initially constitute at least a majority of the Board of
Directors of the surviving entity, (ii) the holders of Delphi Common Stock
immediately prior to such transaction will initially hold at least a majority of
the outstanding shares of voting common equity of the surviving entity, or (iii)
the management of Delphi immediately prior to such transaction will continue to
manage, directly or indirectly, the business and operations of the surviving
entity.
(e) Notwithstanding any other provision of this Agreement,
neither certificates nor scrip for fractional shares of Delphi Common Stock
shall be issued as Stock Consideration. Each Shareholder who otherwise would
have been entitled to a fraction of a share of Delphi Common Stock shall receive
in lieu thereof cash (without interest) in an amount determined by multiplying
the fractional share interest to which such Shareholder would otherwise be
entitled by the Market Price for such payment of Stock Consideration. No such
Shareholder shall be entitled to dividends, voting rights or any other rights in
respect of any fractional share.
1.3 Purchase Price Allocation. Delphi and the Shareholders
agree that a portion of the Consideration equal to the net worth of
Intermediaries (as determined in accordance with GAAP) on September 30, 1998
shall be allocated to the purchase of Intermediaries with the remainder of the
Consideration
<PAGE> 13
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allocated to the purchase of Unicover. Unless otherwise required by law, no
party shall take any position inconsistent with the foregoing allocation or
inconsistent with Sections 6.9(a) or (b) hereof on any Tax Return (as defined in
Section 3.17 hereof) or for any other Tax purpose.
1.4 Certificates.
(a) At the Closing, each Shareholder shall deliver to Delphi
the certificates (the "Certificates") representing such Shareholder's Ownership
Interests, accompanied by blank stock or other similar powers duly executed by
such Shareholder and with all necessary transfer tax and other revenue stamps,
acquired at such Shareholder's expense, affixed and canceled. Each Shareholder
shall promptly cure any deficiencies with respect to the stock or other similar
powers accompanying the Certificates representing such Shareholder's Ownership
Interests.
(b) The Delphi Common Stock to be distributed as Stock
Consideration will be stamped or imprinted with a legend in substantially the
following form:
"THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE
SECURITIES LAWS OF ANY STATE, AND MAY NOT BE DISTRIBUTED, SOLD,
TRANSFERRED, ASSIGNED, HYPOTHECATED OR OFFERED UNLESS THERE IS IN
EFFECT A REGISTRATION STATEMENT UNDER SUCH ACT AND LAWS COVERING SUCH
SECURITIES OR AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF SUCH
ACT IS AVAILABLE AND, IF REQUESTED, AN OPINION OF COUNSEL FOR THE
HOLDER OF THESE SECURITIES REASONABLY SATISFACTORY TO THE ISSUER IS
PROVIDED.
"THE SECURITIES EVIDENCED BY THIS CERTIFICATE ARE ALSO SUBJECT
TO RESTRICTIONS ON RESALE CONTAINED IN THAT CERTAIN STOCK PURCHASE
AGREEMENT, DATED AS OF OCTOBER 1, 1998, A COPY OF WHICH IS AVAILABLE
FROM THE SECRETARY OF THE ISSUER."
<PAGE> 14
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ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE SHAREHOLDERS
Each Shareholder hereby represents and warrants, severally and
not jointly, to Delphi as follows:
2.1 Title to Ownership Interests. Each such Shareholder is the
true and lawful owner, of record and beneficially, of the Ownership Interests
set forth opposite the name of such Shareholder in each of the columns under the
heading "Ownership Interests" on Exhibit A hereto. At the Closing, each
Shareholder will validly transfer the Ownership Interests owned by him free and
clear of all liens, security interests, pledges, assessments, charges, adverse
claims, leases, licenses, restrictions and other encumbrances (collectively,
"Liens"). 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. Except as disclosed in Section 2.1 of the Disclosure
Schedules, none of such Ownership Interests are subject to any restrictions on
transfer thereof, except for such restrictions as may be imposed by applicable
federal and state securities laws.
2.2 Authority Relative to Agreements. Each such Shareholder
has full power and authority to enter into this Agreement, a Non-competition
Agreement, the Option Agreements and, if applicable, an Employment Agreement, a
Letter Agreement and/or a Side Letter (this Agreement, the Non-competition
Agreements, the Option Agreements, the Employment Agreements, the Letter
Agreements and the Side Letters are hereinafter sometimes referred to
collectively as the "Transaction Documents") and to perform his obligations
hereunder and thereunder. The Transaction Documents have been duly executed and
delivered by such Shareholder party thereto; and the Transaction Documents
constitute, assuming the due authorization, execution and delivery thereof by
Delphi, the legal, valid and binding obligation of such Shareholder party
thereto, enforceable against each of them in accordance with its terms, except
(i) as enforcement thereof may be limited by bankruptcy, insolvency,
reorganization, moratorium, fraudulent conveyance, or
<PAGE> 15
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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). Except as disclosed in Section 2.2 of the Disclosure Schedule, the
execution and delivery of the Transaction Documents by each of the Shareholders
party thereto and performance of his obligations hereunder and thereunder 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 Shareholder is subject. Except as contemplated by Section 7.1(b) hereof, 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 the Transaction Documents and the consummation by such Shareholder of the
sale of the Ownership Interests as contemplated by this Agreement and the
performance of his respective obligations hereunder and thereunder.
2.3 Securities Matters.
(a) Such Shareholder (a) has such knowledge, sophistication
and experience in business and financial matters that he is capable of
evaluating the merits and risks of an investment in the shares of Delphi Common
Stock, (b) fully understands the nature, scope and duration of the limitations
on transfer contained herein and under applicable law, and (c) can bear the
economic risk of an investment in the shares of Delphi Common Stock and can
afford a complete loss of such investment.
(b) Such Shareholder is acquiring the shares of Delphi Common
Stock comprising the Stock Consideration for his own account and not with a
present view to or for distributing or reselling such shares (or any portion
thereof). Such Shareholder has no contract, undertaking, agreement or
arrangement, written or oral, with any other person to sell, transfer or
<PAGE> 16
-10-
grant participation in any shares of Delphi Common Stock to be acquired by such
Shareholder pursuant to this Agreement.
(c) Such Shareholder acknowledges receipt of copies of
Delphi's Annual Report on Form 10-K for the fiscal year ended December 31, 1997,
its proxy statement relating to its 1998 annual meeting of stockholders and its
Quarterly Reports on Form 10-Q for the quarterly periods ended March 31, 1998
and June 30, 1998, each as filed by the Company with the Securities and Exchange
Commission ("SEC") (collectively, the "Delphi SEC Reports") and further
acknowledges that he has been afforded (i) the opportunity to ask such questions
as he has deemed necessary of, and to receive answers from, representatives of
Delphi concerning the terms and conditions of the payment of the Stock
Consideration and the merits and risks of investing in the Stock Consideration;
(ii) access to information about Delphi and Delphi's financial condition,
results of operations, business, properties, management and prospects sufficient
to enable such Shareholder to evaluate his investment; and (iii) the opportunity
to obtain such additional information which Delphi possesses or can acquire
without unreasonable effort or expense that is necessary to make an informed
investment decision with respect to the investment and to verify the accuracy
and completeness of the information contained in the Delphi SEC Reports.
(d) Such Shareholder understands and acknowledges that (i) the
shares of Delphi Common Stock comprising the Stock Consideration are being
offered and sold to him without registration under the Securities Act in a
private placement that is exempt from registration provisions of the Securities
Act of 1933, as amended (the "Securities Act"), under Section 4(2) of the
Securities Act or Regulation D promulgated thereunder and (ii) the availability
of such exemption depends in part on, and Delphi will rely upon, the accuracy
and truthfulness of the foregoing representations.
2.4 FIRPTA Affidavit. Such Shareholder has provided an
affidavit to Delphi stating, under penalty of perjury, such Shareholder's United
States taxpayer identification number and
<PAGE> 17
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that such Shareholder is not a foreign person (within the meaning of Section
1445(b)(2) of the Code).
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANIES AND THE
SHAREHOLDERS
Each of the Companies and each of the Shareholders, jointly
and severally, represent and warrant to Delphi as follows:
3.1 Organization and Qualification. Each of the Companies is a
corporation or limited liability company duly organized, validly existing and in
good standing under the laws of the jurisdiction of its incorporation or
organization and has all requisite corporate or other power and authority to
own, lease and operate its properties and to carry on its business as now being
conducted. Each of the Companies is duly qualified as a foreign corporation or
limited liability company to do business, as the case may be, and is in good
standing, in each jurisdiction where the character of its properties owned or
leased or the nature of its activities makes such qualification necessary,
except where the failures to be so qualified or in good standing would not,
individually or in the aggregate, have a material adverse effect on the
business, operations, condition (financial or other) or assets of the Companies,
taken as a whole (a "Company Material Adverse Effect"). Section 3.1 of the
Disclosure Schedule lists all of the jurisdictions in which the Companies or any
present employee thereof holds active licenses and permits or authorizations to
transact the Companies' business (the "Licenses") and indicates the type of each
License and the name of each such employee. No such License is the subject of
any administrative proceeding for suspension or revocation or any similar
proceedings which would, if decided against either of the Companies or the
relevant employee, materially and adversely affect such License; there is no
sustainable basis for such a suspension or revocation which would, individually
or in the aggregate, have a Company Material Adverse Effect; and neither of the
Companies nor
<PAGE> 18
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any of the Shareholders has received notice of any pending or threatened
suspension or revocation of any license or permit from any licensing authority.
Section 3.1 of the Disclosure Schedule sets forth, with respect to the
Companies, all jurisdictions in which they are qualified or otherwise licensed
as a foreign corporation or other entity to do business. Neither of the
Companies is in violation of any of the provisions of its articles of
incorporation, by-laws or other organizational documents. Each of the Companies
has delivered to Delphi accurate and complete copies of the articles of
incorporation and by-laws or other organizational documents, as currently in
effect, of such Company.
3.2 No Subsidiaries. There are no direct or indirect
subsidiaries of either of the Companies. The Companies do not directly or
indirectly own any interest in any corporation, partnership, limited liability
company, joint venture or other business association or entity.
3.3 Capitalization. The authorized capital stock of Unicover
consists of 1,000 shares of common stock, par value $1.00 per share, 102.564 of
which are issued and outstanding, fully paid and nonassessable and free of
preemptive rights. The capitalization of Intermediaries is $100 of membership
interests, all of which are issued and outstanding, fully paid and nonassessable
and free of preemptive rights. Except as disclosed in Section 3.3 of the
Disclosure Schedule, no Company is a party to any agreement or understanding,
oral or written, which (a) grants an option or other right to acquire any of the
Ownership Interests or any other equitable interest in either Company, (b)
grants a right of first refusal or other such similar right upon the sale of any
of the Ownership Interests, or (c) restricts or affects the voting rights of any
of the Ownership Interests.
3.4 Authority Relative to Agreements. Each of the Companies
has full corporate or other power and authority to execute and deliver the
Transaction Documents to the extent a party thereto and to consummate the
transactions contemplated thereby. The execution and delivery of the Transaction
Documents to which it is a party and the consummation of the transactions
<PAGE> 19
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contemplated thereby have been duly and validly authorized by the Boards of
Directors or equivalent governing body of each of the Companies and consented to
and approved by each Shareholder, and no other corporate or other proceedings on
the part of the Companies are necessary to authorize the Transaction Documents
to which they are parties or to consummate the transactions contemplated
thereby. The Transaction Documents to which it is a party have been duly and
validly executed and delivered by each of the Companies party to such
Transaction Documents and, assuming the due authorization, execution and
delivery thereof by Delphi, constitute the legal, valid and binding agreement of
each of the Companies, enforceable against each of the Companies 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).
3.5 No Violations, etc.
(a) Except as disclosed in Section 3.5(a) of the Disclosure
Schedule, neither the execution and delivery of the Transaction Documents by
each of the Companies party thereto nor the consummation of transactions
contemplated thereby nor compliance by each of the Companies party thereto with
any of the provisions hereof will (i) violate, conflict with, or result in a
breach of any provision of, or constitute a default (or an event which, with
notice or lapse of time or both, would constitute a default) under, or result in
the termination or suspension of, or accelerate the performance required by, or
result in a right of termination or acceleration under, or result in the
creation of any Lien upon any of the properties or assets of either of the
Companies under, any of the terms, conditions or provisions of (x) its charter,
by-laws or other organizational documents, (y) any note, bond, mortgage,
indenture or deed of trust, or (z) any license, lease, agreement or other
instrument or obligation to which either of the Companies is a party or to which
either of them or their respective properties or assets may be subject, or (ii)
violate any judgment, ruling,
<PAGE> 20
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order, writ, injunction, decree, statute, rule or regulation applicable to
either of the Companies or their respective properties or assets.
(b) Except as contemplated by Section 7.1(b) hereof, no filing
or registration with, notification to and no permit, authorization, consent or
approval of any governmental entity (including, without limitation, any federal,
foreign governmental, state or local regulatory authority or agency) is required
by each of the Companies in connection with the execution and delivery of the
Transaction Documents to which it is a party or the performance by each of the
Companies of the transactions contemplated thereby.
(c) Neither of the Companies is in violation of or default
under (x) any note, bond, mortgage, indenture or deed of trust, or (y) any
license, lease, agreement or other instrument or obligation to which either of
the Companies is a party or to which either of them or their respective
properties or assets may be subject, except for such violations or defaults
which would not, individually or in the aggregate, have a Company Material
Adverse Effect or materially impair either of the Companies' ability to
consummate the transactions contemplated hereby or by the other Transaction
Documents.
3.6 Financial Statements.
(a) Set forth in Section 3.6(a) of the Disclosure Schedule are
true and complete copies of the audited balance sheet of Unicover at December
31, 1997 (the "December 31 Balance Sheet") and the audited statements of income
and retained earnings and cash flow of Unicover for the year ended December 31,
1997 (collectively, the "December 31 Financials"). The December 31 Financials
fairly present, in all material respects, the financial position of Unicover at
December 31, 1997 and the other periods presented therein, and the results of
operations of Unicover for the period then ended and the other periods presented
therein, and have been prepared in accordance with generally accepted accounting
principles ("GAAP") consistently applied. The December 31 Balance Sheets reflect
all liabilities of Unicover, whether absolute, accrued or contingent,
<PAGE> 21
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as of the date thereof of the type required to be reflected or disclosed on a
balance sheet prepared in accordance with GAAP.
(b) Set forth in Section 3.6(b) of the Disclosure Schedule are
true and complete copies of the (i) audited balance sheet, statement of income
and retained earnings and statement of cash flow of Unicover as of and for the
six months ended June 30, 1998 and (ii) audited balance sheet, statement of
income and members' capital and statement of cash flow of Intermediaries as of
and for the one month ended July 31, 1998 (collectively, the "Interim
Financials"). The Interim Financials fairly present, in all material respects,
the financial position and results of operations of each of the respective
Companies at the respective dates thereof and then-ended (subject to changes
resulting from normal year-end adjustments). The Interim Financials have been
prepared in accordance with GAAP consistently applied and reflect all
liabilities of each of the respective Companies, whether absolute, accrued or
contingent, as of the date thereof, of the type required to be reflected or
disclosed on financial statements prepared in accordance with GAAP.
(c) Set forth in Section 3.6(c) of the Disclosure Schedule are
true and complete copies of the (i) unaudited balance sheet and statement of
income and expense of Unicover as of and for the nine months ended September 30,
1998 and (ii) unaudited balance sheet, statement of income and expense of
Intermediaries as of and for the three months ended September 30, 1998
(collectively, the "September Financials"). The September Financials fairly
present (on a cash basis), in all material respects, the financial position and
results of operations of each of the respective Companies at the respective
dates thereof and then-ended (subject to the lack of footnote disclosure and
changes resulting from normal year-end adjustments). The September Financials
have been derived from the accounting books and records of each of the
respective Companies.
3.7 Regulatory Reports. Section 3.7 of the Disclosure Schedule
contains a complete and accurate list of the most recent regulatory reports
relating to the Companies submitted
<PAGE> 22
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to each governmental entity with authority or jurisdiction over either of the
Companies or their businesses, true and complete copies of which have previously
been provided to Delphi. Each such report is true and accurate in all material
respects, complies in all material respects with the requirements thereof and
was prepared in accordance with all applicable rules, regulations and
procedures.
3.8 Absence of Changes or Events. Except as set forth on
Section 3.8 of the Disclosure Schedule, since June 30, 1998:
(a) there has been no material adverse change in the business,
operations, condition (financial or other), or assets of either of the
Companies;
(b) there has not been any direct or indirect redemption,
purchase or other acquisition of any shares of capital stock or
ownership interests of either of the Companies, or any declaration,
setting aside or payment of any dividend or other distribution by
either of the Companies in respect of its capital stock or ownership
interests;
(c) neither of the Companies has incurred any indebtedness for
borrowed money, or assumed, guaranteed or otherwise become responsible
for the obligations of any other individual, firm or corporation, or
made any loans or advances to any other individual, firm or
corporation;
(d) there has not been any change in the financial or tax
accounting methods, principles or practices of either of the Companies
except as required by the Financial Accounting Standards Board in its
published statements or by GAAP;
(e) there has not been any revaluation by either of the
Companies of any of their assets, including, without limitation,
writing off notes or accounts receivable;
<PAGE> 23
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(f) without limiting the generality of the foregoing, there
has not been any action or inaction by either of the Companies or any
Shareholder the result of which would constitute a violation of the
covenants contained in Section 5.1 hereof as if such covenants applied
beginning June 30, 1998 (without giving effect to the provisions
relating to the consent of Delphi); and
(g) there has not been any agreement by either of the
Companies or the Shareholders to (i) do any of the things described in
the preceding clauses (a) through (f) other than as expressly
contemplated or provided for in this Agreement or (ii) take, whether in
writing or otherwise, any action which, if taken prior to the date of
this Agreement, would have made any representation or warranty in this
Article III untrue or incorrect.
3.9 Litigation. There is no (i) claim, action, suit or
proceeding pending or, to the knowledge of either of the Companies or the
Shareholders, threatened against or relating to either of the Companies before
any court or governmental or regulatory authority or body or arbitration
tribunal, or (ii) outstanding judgment, order, writ, injunction or decree, or
application, request or motion therefor, of any court, governmental agency or
arbitration tribunal in a proceeding to which either of the Companies or any of
their respective assets was or is a party.
3.10 Title to and Condition of Properties. Neither of the
Companies owns any real properties. Each of the Companies owns outright all of
the personal property (except for leased property or assets) which is reflected
on the First Interim Balance Sheets except for property since sold or otherwise
disposed of in the ordinary course of business and consistent with past
practice. No such personal property is subject to claims, liens or encumbrances,
whether by mortgage, pledge, lien, conditional sale agreement, charge or
otherwise.
3.11 Leases. Section 3.11 of the Disclosure Schedule contains
a true and complete list of all leases pursuant to which real or personal
property is held under lease by each of
<PAGE> 24
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the Companies and the leases pursuant to which each of the Companies leases real
or personal property to others. All of the leases so listed are valid and in
full force and effect and are subject to no default with respect to either of
the Companies and, to either of the Companies' or any of the Shareholders'
knowledge, are in full force and effect and subject to no default with respect
to any other party thereto, and the leased real property is in good and
satisfactory condition.
3.12 Contracts; Bank Accounts; Indebtedness.
(a) Contracts. Section 3.12(a)(i) of the Disclosure Schedule
contains a complete and accurate list of all Material (as defined below)
contracts, reinsurance treaties and reinsurance agreements, pool agreements,
facility agreements, retrocession agreements, insurance and reinsurance cover
notes and slips, commitments and other Material agreements, whether written or
oral, of each of the Companies (collectively, "Contracts"). All such Material
Contracts constitute legal, valid and binding obligations of the Companies party
thereto and, to the best knowledge of either of the Companies or any of the
Shareholders, the other party or parties thereto, enforceable against each of
them in accordance with their 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), and no act, omission or course of conduct has occurred on the
part of either Company that would impair the enforceability of any such Material
Contract against the other party or parties thereto. Except as disclosed on
Section 3.12(a)(ii) of the Disclosure Schedule, neither of the Companies (A) is
in default (nor is there any event which with notice or lapse of time or both
would constitute a default) under any Material Contract, or (B) has received
notification (I) that any such Material Contract is about to be terminated or
otherwise materially and adversely modified or (II) alleging that either Company
or any employee thereof has breached any material obligation under, or
<PAGE> 25
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violated any material term of, any such Material Contract. Section 3.12(a)(iii)
of the Disclosure Schedule identifies each existing Contract containing an
agreement with respect to any change of control or any indemnification or other
contingent obligations that would be triggered by the consummation of the
transactions contemplated hereby. Section 3.12(a)(iv) of the Disclosure Schedule
identifies each Material Contract which is not yet reflected in a fully
executed, definitive agreement, together with the date of effectiveness of the
agreement underlying such Contract. Other than those disclosed on Section
3.12(a)(iv) of the Disclosure Schedule, there are no Contracts that are not yet
reflected in a fully executed, definitive agreements which, in the aggregate,
may give rise to obligations or liabilities exceeding, during the current term
thereof, $125,000, or that may generate revenues or income exceeding, during the
current term thereof, $500,000.
For purposes of this Section 3.12(a), a "Material" Contract
shall mean (i) any pool agreement, facility agreement or retrocession agreement,
(ii) any reinsurance treaty or reinsurance agreement which may give rise to
obligations or liabilities exceeding, during the current term thereof, $50,000,
or that may generate revenues or income exceeding, during the current term
thereof, $200,000, (iii) any other Contract which may give rise to obligations
or liabilities exceeding, during the current term thereof, $50,000, or that may
generate revenues or income exceeding, during the current term thereof, $200,000
(A) whereby either of the Companies or any facility managed or administered by
either of the Companies provides insurance or reinsurance related services
(including, without limitation, reinsurance of worker's compensation coverage or
services as a managing general underwriter of reinsurance facilities or a
reinsurance intermediary), (B) whereby either of the Companies or any facility
managed or administered by either of the Companies cedes risk to any
retrocessionaire, (C) whereby either of the Companies leases equipment or real
property or (D) which continues for a period of twelve months or more and is not
subject to a unilateral right of termination by such Company without
consideration and (iv) any other Contract (A) which restricts or purports to
restrict the ability of either
<PAGE> 26
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of the Companies (or, to the knowledge of either of the Companies or any of the
Shareholders, any of its officers or employees) to engage in any business or to
compete with any person, (B) which relates to employment, consulting and agency
agreements which provide for any severance or termination benefit or (C) which
is otherwise material to the conduct of the business of either of the Companies.
(b) Bank Accounts. Section 3.12(b) of the Disclosure Schedule
contains a complete and accurate list of the name of each bank in which either
of the Companies has an account or safe deposit box (each, a "Bank Account" and,
collectively, the "Bank Accounts"), the account number thereof and the names of
all persons authorized to draw thereon or to have access thereto.
(c) No Indebtedness. There is no outstanding indebtedness for
borrowed money of either of the Companies as of the date of this Agreement.
Neither this Agreement nor the consummation of the transactions contemplated
hereby will result in the incurrence of any such indebtedness.
3.13 Relationships; Threats of Cancellation. The relationships
of each of the Companies with its customers, programs (as defined herein),
cedents, brokers, pool members, facility participants, fronting companies,
retrocessionaires and others having business relationships with it are generally
satisfactory, and, except as set forth on Section 3.13 of the Disclosure
Schedule, there has been no notification (I) of any intention by any such party
to terminate, or otherwise materially and adversely modify the terms of any such
relationship or (II) alleging that either Company or any employee thereof has
breached any material obligation under, or violated any material term of, any
such relationship. Except as disclosed on Section 3.13 of the Disclosure
Schedule, (i) no programs accounting in the aggregate for more than five percent
(5%) of the Companies' aggregate gross revenue for the twelve months ended June
30, 1998 has notified either of the Companies that it will stop, or materially
and adversely modify or change the terms of, its purchases of services from
either such Company, and no program has, since June 30, 1998, ceased or
materially
<PAGE> 27
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decreased its purchases of any such services from any such Company; and no
retrocessionaire or other service provider to the Companies has notified either
of the Companies that it will stop, or seek to change the terms of, or
materially increase the cost of, its services used by either of the Companies,
and no retrocessionaire or other service provider to the Companies has, since
June 30, 1998, ceased, materially decreased the reliability of, or materially
raised the cost of, any such services and (ii) since June 30, 1998, no
policyholder or group of policyholders under a group policy, or agent, broker,
provider or other person writing, selling, buying or providing reinsurance or
retrocessional coverage, which, individually or in the aggregate, together with
other related policyholders, agents, brokers and providers, accounted for five
percent (5%) or more of the aggregate gross premiums written by the facilities
managed or administered by the Companies has terminated or failed to renew or
given written notice of termination of or failure to renew its relationship with
the facilities managed or administered by the Companies, and none of such
facilities has received notice that any such policyholder or group of
policyholders under a group policy, or agent, broker, provider or other person
will or is reasonably likely to terminate or fail to renew such relationship.
For purposes of this Section 3.13, a "program" shall mean one or more contracts
in support of the same book of business of a single cedent.
3.14 Labor Matters. (a) Each of the Companies complies with
all applicable laws respecting employment and employment practices, terms and
conditions of employment and wages and hours, and neither of the Companies is
engaged in any "unfair labor practice," within the meaning of Section 8 of the
National Labor Relations Act, as amended, (b) there is no labor strike,
slowdown, stoppage or other employee work action (pending or, to the best
knowledge of either of the Companies or any of the Shareholders, threatened)
against or affecting either of the Companies and (c) no petition for
representation has been filed and is pending before the National Labor Relations
Board with respect to any employees of either of the Companies who are not
currently organized.
<PAGE> 28
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3.15 Compliance with Law. (a) Neither of the Companies has
violated or failed to comply with or has received any written communication
during the past three years alleging a failure to comply with any statute, law,
ordinance, regulation, rule or order of any foreign, federal, state or local
government or any other governmental department or agency, or any judgment,
decree or order of any court, applicable to its business or operations; (b) the
conduct of the business of each of the Companies is in conformity with all
foreign, federal, state and local governmental and regulatory requirements
including, but not limited to, those regulating insurance and insurance related
activities and all applicable orders and directives of insurance regulatory
authorities; and (c) the underwriting standards utilized and ratings applied by
the Companies and by the facilities or third parties to any reinsurance or other
similar contract with either of the Companies conform in all material respects
to industry accepted practices and to the standards and ratings required
pursuant to the terms of the respective reinsurance or other similar contracts.
Each of the Companies and its employees have all permits, licenses and
franchises from governmental agencies required to conduct its business as now
being conducted. Each of the Companies has duly and validly filed or caused to
be filed all reports, statements, documents, registrations, filings or
submissions that were required by law to be filed with any person. All such
filings complied with applicable laws in all material respects when filed, and
to the knowledge of each of the Companies and each of the Shareholders, no
material deficiencies have been asserted by any person with respect to any such
filings. Each of the Companies has previously delivered to Delphi the reports
reflecting the results of the most recent examinations of the Companies issued
by any applicable governmental authority.
3.16 Intellectual Property. Section 3.16 of the Disclosure
Schedule sets forth a complete and accurate list of all of the trademarks
(whether or not registered) and trademark registrations and applications, patent
and patent applications, copyrights and copyright applications, service marks,
service mark registrations and applications, trade dress, trade and
<PAGE> 29
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product names (collectively, the "Intellectual Property") owned or licensed by
either of the Companies. Except as set forth on Section 3.16 of the Disclosure
Schedule, (i) each of the Companies has or owns, directly or indirectly, all
right, title and interest to such Intellectual Property or has the perpetual
right to use such Intellectual Property without consideration; none of the
rights of either of the Companies in or use of such Intellectual Property has
been or is currently being or, to the knowledge of each of the Companies and
each of the Shareholders, is threatened to be infringed or challenged; (ii) all
of the patents, trademark registrations, service mark registrations, trade name
registrations and copyright registrations included in such Intellectual Property
have been duly issued and have not been canceled, abandoned or otherwise
terminated; and (iii) all of the patent applications, trademark applications,
service mark applications, trade name applications and copyright applications
included in such Intellectual Property have been duly filed. Each of the
Companies owns or has adequate licenses or other rights to use all Intellectual
Property, know-how and technical information required for its operations.
3.17 Taxes. Except as otherwise set forth in section 3.17 of
the Disclosure Schedule, (i) each of the Companies has prepared and timely filed
with the appropriate governmental agencies all material Tax Returns required to
be filed on or prior to the date hereof, taking into account any extension of
time to file granted to or obtained on behalf of either of the Companies, and
each such Tax Return is complete and correct in all material respects; (ii) each
of the Companies has timely paid all Taxes due and payable by it through the
date hereof and has made adequate provision for all Taxes attributable to any
taxable period (or portion thereof) ending on or prior to the date hereof that
are not yet due and payable; (iii) each of the Companies has withheld and paid
to the appropriate governmental authorities in a timely manner all Taxes
required to have been withheld by it through the date hereof; (iv) all
deficiencies or assessments asserted in writing against either of the Companies
by any taxing authority have been paid or fully and finally settled, and, to the
best knowledge of either of the Companies or any of the Shareholders, no issue
previously
<PAGE> 30
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raised in writing by any such taxing authority reasonably could be expected to
result in a proposed deficiency or assessment for any prior, parallel or
subsequent period (including periods subsequent to the date hereof); (v) neither
of the Companies is presently under examination or audit by any taxing
authority, and neither of the Companies has received written notice of any
pending examination or audit by any taxing authority; (vi) no extension of the
period for assessment or collection of any Tax is currently in effect and no
extension of time within which to file any Tax Return has been requested, which
Tax Return has not since been filed; (vii) no liens have been filed with respect
to any Taxes of either of the Companies, other than liens in respect of property
taxes not yet due and payable; (viii) neither of the Companies has made or
agreed to make, or was or is required to make, any change in its accounting
methods that would result in an adjustment pursuant to Section 481 of the Code
(or any similar provision of state, local or foreign law); (ix) neither of the
Companies is a party to any tax sharing, tax matters, tax indemnification or
similar agreement; (x) since its inception, Unicover has qualified as an "S
Corporation," as defined in Section 1361 of the Code and has been taxable as an
S corporation for federal, state and local income tax purposes; (xi) since its
inception, Intermediaries has been taxable as a partnership for federal, state
and local income tax purposes; (xii) neither of the Companies has made an
election under Section 341(f) of the Code (or any similar provision of state,
local or foreign law); (xiii) neither of the Companies is a party to any
agreement or arrangement that provides for the payment of any amount, or the
provision of any other benefit, that could constitute a "parachute payment"
within the meaning of Section 280G of the Code (or any similar provision of
state, local or foreign law); (xiv) neither of the Companies has ever been a
member of any affiliated, consolidated, combined, unitary or similar group for
any Tax purpose; (xv) neither of the Companies has requested a ruling from, or
entered into a closing agreement with, the IRS or any other taxing authority;
and (xvi) each of the Companies has previously delivered to Delphi true and
complete copies of (a) all federal income Tax Returns filed by the Companies for
the last three taxable years ending prior to the date hereof (except for
<PAGE> 31
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those Tax Returns that have not yet been filed) and (b) any audit reports issued
within the last three years by the IRS or any other taxing authority.
For all purposes of this Agreement, "Tax" or "Taxes" means (i)
all federal, state, local or foreign taxes, charges, fees, imposts, levies or
other assessments, including, without limitation, all net income, alternative
minimum, gross receipts, capital, sales, use, ad valorem, value added, transfer,
franchise, profits, inventory, capital stock, license, withholding, payroll,
employment, social security, unemployment, excise, severance, stamp, occupation,
property and estimated taxes, customs duties, fees, assessments and charges of
any kind whatsoever, (ii) all interest, penalties, fines, additions to tax or
other additional amounts imposed by any taxing authority in connection with any
item described in clause (i) and (iii) all transferee, successor, joint and
several or contractual liability (including, without limitation, liability
pursuant to Treas. Reg. Section 1.1502-6 (or any similar state, local or foreign
provision)) in respect of any items described in clause (i) or (ii).
For all purposes of this Agreement, "Tax Return" means all
returns, declarations, reports, estimates, information returns and statements
required to be filed in respect of any Taxes.
3.18 Employee Benefit Plans; ERISA.
(a) Except as set forth in Section 3.18 of the Disclosure
Schedule, there are no "employee pension benefit plans" as defined in Section
3(2) of the Employee Retirement Income Security Act of 1974, as amended
("ERISA") ("Pension Benefit Plans"), "welfare benefit plans" as defined in
Section 3(1) of ERISA ("Welfare Plans") or stock bonus, stock option, restricted
stock, stock appreciation right, stock purchase, bonus, incentive, deferred
compensation, severance, or vacation plans, or any other employee benefit plan,
program, policy or arrangement, covering employees (or former employees)
employed in the United States, maintained or contributed to by either of the
Companies or any of their ERISA Affiliates (as hereinafter
<PAGE> 32
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defined), or to which either of the Companies or any of their ERISA Affiliates
contributes or is obligated to make payments thereunder or otherwise may have
any liability (collectively, the "Employee Benefit Plans"). For purposes of this
Agreement, "ERISA Affiliate" shall mean any person (as defined in Section 3(9)
of ERISA) that is or has been a member of any group of persons described in
Section 414(b), (c), (m) or (o) of the Code including either of the Companies.
(b) Each of the Companies, and each of the Pension Benefit
Plans and Welfare Plans, are in compliance with the applicable provisions of
ERISA, the Code and other applicable laws except where the failure to comply
would not, individually and in the aggregate, have a Material Adverse Effect.
(c) All contributions to, and payments from, the Pension
Benefit Plans that are required to have been made in accordance with the Pension
Benefit Plans have been timely made except where the failure to make such
contributions or payments on a timely basis would not, individually and in the
aggregate, either impair the Companies' ability to consummate the transactions
contemplated hereby or have a Material Adverse Effect.
(d) Any Pension Benefit Plans intended to qualify under
Section 401 of the Code have been determined by the Internal Revenue Service
("IRS") to be so qualified and no event has occurred and no condition exists
with respect to the form or operation of such Pension Benefit Plans that would
cause the loss of such qualification or exemption or the imposition of any
material liability, penalty or tax under ERISA or the Code.
(e) There are (i) no investigations pending by any
governmental entity (including the Pension Benefit Guaranty Corporation
("PBGC")) involving the Pension Benefit Plans or Welfare Plans, and (ii) no
pending or threatened claims (other than routine claims for benefits), suits or
proceedings against any Pension Benefit or Welfare Plan, against the assets of
any of the trusts under which any of the Pension Benefit Plans or Welfare Plans
are maintained or against any fiduciary of any Pension Benefit Plan or Welfare
Plan with respect to the operation of such plan or asserting any rights or
claims to benefits
<PAGE> 33
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under any Pension Benefit Plan or against the assets of any trust under such
plan, except for those that would not, individually and in the aggregate, give
rise to any liability which would have a Material Adverse Effect, nor, to the
best of the Companies' knowledge, are there any facts that would give rise to
any liability except for those that would not, individually or in the aggregate,
either impair the Companies' ability to consummate the transactions contemplated
hereby or have a Material Adverse Effect in the event of any such investigation,
claim, suit or proceeding.
(f) Neither of the Companies or any employee of the foregoing,
nor any trustee, administrator, other fiduciary or any other "party in interest"
or "disqualified person" with respect to the Pension Benefit Plans or Welfare
Plans, has engaged in a "prohibited transaction" (as such term is defined in
Section 4975 of the Code or Section 406 of ERISA) that could result in a tax or
penalty on either of the Companies under Section 4975 of the Code or Section
502(i) of ERISA, except any such event that would not, individually and in the
aggregate, either impair the Companies' ability to consummate the transactions
contemplated hereby or have a Material Adverse Effect.
(g) Neither of the Companies or any of their ERISA Affiliates
maintain or contribute to, nor have they ever maintained or contributed to, any
pension plan subject to Title IV of ERISA or Sections 412 of the Code or 302 of
ERISA.
(h) Neither of the Companies or any ERISA Affiliate has
incurred, or is reasonably likely to incur any material liability under Title IV
of ERISA.
(i) Neither of the Companies or any of their ERISA Affiliates
has any material liability (including any contingent liability under Section
4204 of ERISA) with respect to any multiemployer plan, within the meaning of
Section 3(37) of ERISA, covering employees (or former employees) employed in the
United States.
(j) Except as disclosed in Section 3.18 of the Disclosure
Statement, with respect to each of the Employee Benefit
<PAGE> 34
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Plans, true, correct and complete copies of the following documents have been
made available to Delphi: (i) the plan document and any related trust agreement,
including amendments thereto, (ii) any current summary plan descriptions and
other material communications to participants relating to the Employee Benefit
Plans, (iii) the most recent Forms 5500, if applicable and (iv) the most recent
IRS determination letter, if applicable.
(k) None of the Welfare Plans maintained by any of the
Companies provide for continuing benefits or coverage for any participant or any
beneficiary of a participant following termination of employment, except as may
be required under the Consolidated Omnibus Budget Reconciliation Act of 1985, as
amended ("COBRA"), or except at the expense of the participant or the
participant's beneficiary. Each of the Companies which maintain a "group health
plan" within the meaning of Section 5000(b)(1) of the Code have complied with
the notice and continuation requirements of Section 4980B of the Code, COBRA,
Part 6 of Subtitle B of Title I of ERISA and the regulations thereunder except
where the failure to comply would not, individually and in the aggregate, either
impair the Companies' ability to consummate the transactions contemplated hereby
or have a Material Adverse Effect.
(l) No liability under any Pension Benefit or Welfare Plan has
been funded nor has any such obligation been satisfied with the purchase of a
contract from an insurance company as to which either of the Companies has
received notice that such insurance company is in rehabilitation or a comparable
proceeding.
(m) Except as otherwise specifically provided by this
Agreement or the Transaction Documents, the consummation of the transactions
contemplated by this Agreement will not result in an increase in the amount of
compensation or benefits or accelerate the vesting or timing of payment of any
benefits or compensation payable to or in respect of any employee of either of
the Companies.
<PAGE> 35
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(n) The consummation of the transactions contemplated by this
Agreement will not result in or satisfy a condition to the payment of
compensation that would, in combination with any other payment, result in an
"excess parachute payment" within the meaning of Section 280G(b) of the Code.
(o) There is no plan, program, policy, arrangement or
agreement maintained or contributed to by, or entered into with, either of the
Companies with respect to employees (or former employees) employed outside the
United States.
3.19 Environmental Matters.
(a) Except for such matters as would not reasonably be
expected to have a Company Material Adverse Effect, individually or in the
aggregate:
(i) Each of the Companies (A) has obtained (or is capable of
obtaining without incurring any material incremental expense) and is in
compliance with all applicable Environmental Permits, and (B) has made
all registrations and given all notifications that are required under
any applicable Environmental Law (or, in each case, is capable of doing
so without incurring any material incremental expense).
(ii) There is no Environmental Claim pending or, to the
knowledge of either of the Companies or any of the Shareholders,
threatened against either of the Companies arising under any
Environmental Law.
(iii) Each of the Companies is in compliance with, and has no
liability under, any applicable Environmental Laws.
(iv) Neither of the Companies has assumed, by contract or
otherwise, any liabilities or obligations arising under any
Environmental Laws.
(v) There are no past or present actions, activities,
conditions, occurrences or events, including, without limitation, the
Release or threatened Release of any
<PAGE> 36
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Hazardous Materials, including, without limitation, asbestos, which
could reasonably be expected to prevent compliance by either of the
Companies with any Environmental Law, or to result in any liability of
either of the Companies under any Environmental Law.
(b) (i) No lien has been recorded under any Environmental Law
with respect to any property currently owned by either of the Companies.
(ii) The execution and delivery of this Agreement and the
consummation by each of the Companies of the transactions contemplated hereby
and the exercise by Delphi of rights to own and operate the businesses of each
of the Companies substantially as presently conducted will not require any
notification, disclosure, registration, reporting, filing, investigation or
remediation under any Environmental Law.
(iii) Neither of the Companies has in its possession, custody
or control any investigations, studies, reports, assessments, evaluations or
audits of Hazardous Materials at, in, beneath, emanating from or adjacent to any
properties now or formerly owned, leased or operated by it or any of its
predecessors in interest, or of compliance by any of them with, or liability of
any of them under, applicable Environmental Laws.
For purposes of this Section 3.19:
(i) "Environment" means any surface water, ground water,
drinking water supply, land surface or subsurface strata, ambient air,
indoor air and any indoor location and all natural resources,
including, without limitation, flora, fauna and wetlands;
(ii) "Environmental Claim" means any notice, claim, demand,
complaint, suit or other communication by any person alleging potential
liability (including, without limitation, potential liability for
response or corrective action or damages to any person, property or
natural resources, and any fines or penalties) arising out of or
relating to (1) the Release or threatened Release of any
<PAGE> 37
-31-
Hazardous Materials or (2) any violation, or alleged violation, of any
applicable Environmental Law;
(iii) "Environmental Laws" means all federal, state, and local
laws, statutes, codes, rules, ordinances, regulations, judgments,
orders, decrees and the common law as now or previously in effect
relating to pollution or protection of human health or the Environment,
including, without limitation, those relating to the Release or
threatened Release of Hazardous Materials;
(iv) "Environmental Permit" means a permit, identification
number, license, approval, consent or other written authorization
issued pursuant to any applicable Environmental Law;
(v) "Hazardous Materials" means pollutants, contaminants,
hazardous or toxic substances, constituents, materials or wastes, and
any other waste, substance, material, chemical or constituent subject
to regulation under Environmental Laws; and
(vi) "Release" means any spilling, leaking, pumping, pouring,
emitting, emptying, discharging, injecting, escaping, leaching, dumping
or disposing into the Environment.
3.20 Absence of Undisclosed Liabilities. As of September 30,
1998, the liabilities of the Companies are as set forth in Section 3.20(a) of
the Disclosure Schedule, provided that legal, accounting and other professional
fees incurred in connection with this Agreement and the transactions
contemplated hereby may be stated as a reasonable estimate of such fees. As of
the date of signing of this Agreement, neither of the Companies has any
liabilities or obligations of any nature, whether absolute or contingent,
liquidated or unliquidated, and whether due or to become due, except (i) for
liabilities incurred or otherwise arising after September 30, 1998 in the
ordinary course of business of the Companies, consistent with past practice,
(other than allowances for bad debts), in an amount not in excess of $150,000
(as determined in accordance with the Companies' historical accounting
practices) in the aggregate.
<PAGE> 38
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3.21 Finders or Brokers. Neither of the Companies, the Board
of Directors of either of the Companies or any member of the Board of Directors
of either of the Companies has employed any investment banker, broker, finder or
intermediary in connection with the transactions contemplated hereby who might
be entitled to a fee or any commission in connection with the transactions
contemplated hereby other than the arrangements set forth in the engagement
letter by and between Unicover and Fox-Pitt, Kelton Inc. dated May 4, 1998.
3.22 Regulatory Matters. Neither of the Companies has taken or
agreed to take any action, and to the best knowledge of either of the Companies
and each of the Shareholders there is no fact or circumstance, that would
materially impede or delay receipt of any approval referred to in Section 7.1(b)
or the consummation of the transactions contemplated by this Agreement.
3.23 Operational Insurance. Section 3.23 of the Disclosure
Schedule contains a complete and correct listing of all insurance policies
covering risks of the Companies which are in force and maintained by or on
behalf of the Companies. Each of the Companies is, and Unicover and
Intermediaries have been continuously since December 1, 1994 and July 8, 1998,
respectively, insured in such amounts and against such risks and losses as are
customary for companies conducting the respective businesses conducted by the
Companies during such time period. Neither of the Companies has received any
notice of cancellation or termination with respect to any material insurance
policy thereof. All insurance policies of the Companies are valid and
enforceable policies.
3.24 Employment and Labor Contracts. Neither of the Companies
is a party to any employment, management services, consultation or other similar
contract or letter with any past or present officer, director, employee or other
person or any entity affiliated with any past or present officer, director or
employee or
<PAGE> 39
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other person other than those set forth in Section 3.24 of the Disclosure
Schedule.
3.25 Balance Sheet Reserves. The reserves reflected in the
Interim Financials have been established in accordance with GAAP and such
reserves, taken as a whole, are adequate to cover any losses relating to the
subject matter thereof.
3.26 Year 2000 Compliance. None of (a) the computer software,
computer firmware, computer hardware (whether general or special purpose) or
other similar or related items of automated, computerized or software systems
used by each of the Companies in the conduct of its business, (b) to the best
knowledge of either of the Companies and each of the Shareholders, the computer
software, computer firmware, computer hardware (whether general or special
purpose) or other similar or related items of automated, computerized or
software systems of third parties relied on by each of the Companies in the
conduct of its business or (c) the services sold, rendered or otherwise provided
by each of the Companies in the conduct of its business will malfunction, cease
to function, generate incorrect data or produce incorrect results when
processing, providing or receiving (i) date-related data from, into and between
the twentieth and twenty-first centuries or (ii) date-related data in connection
with any valid date in the twentieth and twenty-first centuries, and neither of
the Companies is or will be subject to any claim, demand, action, suit,
liability, damage, loss or expense arising from or related to circumstances
where such services are interfered with, generate incorrect data, or produce
incorrect results when processing, providing or receiving such data.
Notwithstanding the foregoing, neither of the Companies makes any representation
with respect to the ability of mass-produced software products or the various
governmental and financial institutions with which any of the Companies does
business to function correctly.
3.27 Affiliate Transactions. Except as otherwise set forth in
Section 3.27 of the Disclosure Schedule, neither of the Companies is a party to
any agreement or transaction with any of the Shareholders or other affiliates of
any of the Companies or any of the Shareholders. Section 3.27 of the Disclosure
<PAGE> 40
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Schedule contains a complete and accurate list of each affiliate of either of
the Companies or any of the Shareholders with which either Company has a
business relationship and all Contracts with any such affiliates.
3.28 Corporate Records. The corporate minute books and stock
or equity interest record books of each of the Companies are current and
complete and contain, respectively, a true and correct record of all of the
corporate actions and stock records of each of the Companies.
3.29 Full Disclosure. As of the Closing Date, all
representations and warranties contained in Articles II or III of this Agreement
(including the Disclosure Schedule) or in Section 4 of the Option Agreements are
and will be accurate and will not contain any untrue statement of material fact
or omit to state a fact necessary in order to make the statements herein, in
light of the circumstances under which they were made, not misleading in any
material respect. The projections contained in Table 11 on page 42 of the
Confidential Information Memorandum dated July 1998 provided to Delphi were
prepared in good faith on the basis of information and assumptions that the
Companies believed to be fair and reasonable as of the date of the projections.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF
DELPHI
Delphi represents and warrants to the Company that:
4.1 Organization and Qualification. Delphi is a corporation
duly organized, validly existing and in good standing under the laws of the
jurisdiction of its incorporation and has all requisite corporate power and
authority to own, lease and operate its properties and to carry on its business
as now being conducted. Delphi is duly qualified as a foreign corporation to do
business, and is in good standing, in each jurisdiction
<PAGE> 41
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where the character of its properties owned or leased or the nature of its
activities makes such qualification necessary, except where the failures to be
so qualified or in good standing which would not, individually or in the
aggregate, have a material adverse effect on the business, operations or
condition (financial or otherwise) or assets of Delphi and its subsidiaries
taken as a whole (a "Delphi Material Adverse Effect"). Delphi is not in
violation of any of the provisions of its certificate or articles of
incorporation or organization (or other applicable charter document) or by-laws.
4.2 Authority Relative to Agreements. Delphi has full
corporate power and authority to execute and deliver the Transaction Documents
and to consummate the transactions contemplated thereby. The execution and
delivery of the Transaction Documents and the consummation of the transactions
contemplated thereby have been duly and validly authorized by the Board of
Directors of Delphi and no other corporate proceedings on the part of Delphi are
necessary to authorize the Transaction Documents or to consummate the
transactions contemplated thereby. The Transaction Documents have been validly
executed and delivered by Delphi and, assuming the due authorization, execution
and delivery thereof by each of the Companies and the Shareholders party
thereto, constitutes the legal, valid and binding agreement 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).
4.3 No Violations, Etc.
(a) Assuming the accuracy of the representations set forth in
Article II, neither the execution and delivery of this Agreement by Delphi nor
the consummation of transactions contemplated hereby nor compliance by Delphi
with any of the provisions hereof will (i) violate, conflict with, or result in
a breach of any provision of, or constitute a default (or an
<PAGE> 42
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event which, with notice or lapse of time or both, would constitute a default)
under, or result in the termination or suspension of, or accelerate the
performance required by, or result in a right of termination or acceleration
under, or result in the creation of any Lien, upon any of the properties or
assets of Delphi or any of Delphi's subsidiaries under, any of the terms,
conditions or provisions of (x) their respective charters or by-laws, (y) any
material note, bond, mortgage, indenture or deed of trust, or (z) any material
license, lease, agreement or other instrument or obligation, to which Delphi or
any such subsidiary is a party or to which they or any of their respective
properties or assets may be subject, or (ii) subject to compliance with the
statutes and regulations referred to in the next paragraph, violate any
judgment, ruling, order, writ, injunction, decree, statute, rule or regulation
applicable to Delphi or any of Delphi's subsidiaries or any of their respective
properties or assets, except, in the case of clauses (i)(y), (i)(z) and clause
(ii) above, for such violations, conflicts, breaches, defaults, terminations,
suspensions, accelerations, rights of termination or acceleration or creations
of liens, security interests, charges or encumbrances which would not,
individually or in the aggregate, either have a Delphi Material Adverse Effect
or materially impair the consummation of the transactions contemplated hereby.
(b) Except as contemplated by Section 7.1(b) hereof, no filing
or registration with, notification to and no permit, authorization, consent or
approval of any governmental entity is required by Delphi or any of Delphi's
subsidiaries in connection with the execution and delivery of this Agreement or
the consummation by Delphi of the transactions contemplated hereby, except such
filings, registrations, notifications, permits, authorizations, consents or
approvals the failure of which to be obtained, made or given would not,
individually or in the aggregate, materially impair the consummation of the
transactions contemplated hereby.
4.4 Investment. Delphi is acquiring the Ownership Interests
solely for investment purposes, for its own account and not with a present view
towards any distribution that would
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violate the Securities Act or applicable state securities laws of any state;
Delphi understands that the Ownership Interests have 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.
4.5 Sophisticated Purchaser. Delphi acknowledges that it can
bear the economic risk of its purchase of the Ownership Interests and has such
knowledge and experience in financial and business matters that it is capable of
evaluating the materials provided by the Companies.
4.6 Due Diligence. Delphi has made its own independent
examination, investigation, analysis and evaluation of the Companies. Delphi has
had the opportunity to visit the Companies and meet with its officers and
representatives to discuss the business, assets, liabilities and financial
condition of the Companies. Delphi has been furnished and has reviewed to its
satisfaction the documents referred to in this Agreement and the Disclosure
Schedule. Delphi acknowledges that: (a) subject to the accuracy of the
representations and warranties made by the Companies and the Shareholders, all
materials and financial and other information requested by Delphi have been
provided to Delphi and (b) it has been afforded the opportunity to obtain
additional information necessary to verify the accuracy of the representations,
warranties and information in this Agreement and the Disclosure Schedule or
otherwise provided to it.
4.7 Litigation. Except as set forth in the Delphi SEC Reports,
each as filed by the Company with the SEC, there is no (i) claim, action, suit
or proceeding pending or, to the knowledge of Delphi or any of its subsidiaries,
threatened against or relating to Delphi or any of its subsidiaries before any
court or governmental or regulatory authority or body or arbitration tribunal,
or (ii) outstanding judgment, order, writ, injunction or decree, or application,
request or motion therefor, of any court, governmental agency or arbitration
tribunal
<PAGE> 44
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in a proceeding to which Delphi, any subsidiary of Delphi or any of their
respective assets was or is a party except, in the case of clauses (i) and (ii)
above, such as would not, individually or in the aggregate, materially impair
Delphi's ability to consummate the transactions contemplated hereby.
4.8 Finders or Brokers None of Delphi, the subsidiaries of
Delphi, the Board of Directors of Delphi or any member of the Board of Directors
of Delphi has employed any investment banker, broker, finder or intermediary in
connection with the transaction contemplated hereby who might be entitled to a
fee or any commission in connection with the transactions contemplated hereby.
4.9 Regulatory Matters. Delphi has not taken nor agreed to
take any action, and to the best of its knowledge there is no fact or
circumstance, that would materially impede or delay receipt of any approval
referred to in Section 7.1(b) or the consummation of the transactions
contemplated by this Agreement.
ARTICLE V
CONDUCT OF BUSINESS OF THE COMPANIES
PENDING THE CLOSING
5.1 Conduct of Business of the Companies Pending the Closing.
Each of the Companies and each Shareholder, jointly and severally, hereby
covenant and agree with Delphi as follows:
(a) Except as contemplated by this Agreement or as expressly
agreed to in writing by Delphi or as set forth in the Schedules
attached hereto, during the period from the date of the execution of
this Agreement to the Closing, each of the Companies will conduct its
operations according to its ordinary course of business consistent with
past practice, and will use all commercially reasonable efforts to
preserve intact its business organization, to keep available the
services of its current officers and
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key employees and to maintain satisfactory relationships with
customers, clients, cedents, brokers, pool members, facility
participants, fronting companies, retrocessionaires and others having
business relationships with it and will take no action that is
reasonably likely to adversely affect the ability of the parties to
consummate the transactions contemplated by this Agreement.
(b) Without limiting the generality of the foregoing, prior to
the Closing, neither of the Companies will, without the prior written
consent of Delphi:
(i) amend its certificate or articles of
incorporation or organization or by-laws or other
organizational documents;
(ii) authorize for issuance, issue, sell, deliver,
grant any options for, or otherwise agree or commit to issue,
sell or deliver any shares of any class of its capital stock
or ownership interests or any securities convertible into
shares of any class of its capital stock or ownership
interests, including the filing or processing of a
registration statement under the Securities Act in connection
with an initial public offering;
(iii) split, combine or reclassify any shares of its
capital stock or ownership interests, declare, set aside or
pay any dividend or other distribution (whether in cash,
stock, ownership interests or property or any combination
thereof) in respect of its capital stock or ownership
interests or purchase, redeem or otherwise acquire any shares
of its capital stock or ownership interests, except as
otherwise expressly provided in this Agreement;
(iv) (A) create, incur, assume, maintain or permit to
exist any debt for borrowed money; (B) assume, guarantee,
endorse or otherwise become liable or responsible (whether
directly, contingently or otherwise) for the obligations of
any other person; or
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(C) make any loans, advances or capital contributions to, or
investments in, any other person;
(v) pay, directly or indirectly, any of its
liabilities before the same becomes due in accordance with its
terms or otherwise other than in the ordinary course of
business consistent with past practice;
(vi) except for the bonuses disclosed in Section
5.1(b) of the Disclosure Schedule, (A) increase in any manner
the compensation of (x) any employee except in the ordinary
course of business consistent with past practice or (y) any of
its directors or officers; (B) pay or agree to pay any
pension, retirement allowance or other employee benefit not
required, or enter into or agree to enter into any agreement
or arrangement with such director or officer or employee,
whether past or present, relating to any such pension,
retirement allowance or other employee benefit, except as
required under currently existing agreements, plans or
arrangements; (C) grant any severance or termination pay to,
or enter into any employment or severance agreement with, (x)
any employee except in the ordinary course of business
consistent with past practice or (y) any of its directors or
officers; or (D) except as may be required to comply with
applicable law, become obligated (other than pursuant to any
new or renewed collective bargaining agreement) under any new
pension plan, welfare plan, multiemployer plan, employee
benefit plan, benefit arrangement, or similar plan or
arrangement, which was not in existence on the date hereof,
including any bonus, incentive, deferred compensation, stock
(or equity) purchase, stock (or equity) option, stock (or
equity) appreciation right, group insurance, severance pay,
retirement or other benefit plan, agreement or arrangement, or
employment or consulting agreement with or for the benefit of
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any person, or amend any of such plans or any of such
agreements in existence on the date hereof;
(vii) make any loan or advance to its shareholders or
to any of its directors, officers, consultants, agents,
related parties or other representatives;
(viii) enter into any agreement or arrangement, or
modify or amend any existing agreement or arrangement, between
either of the Companies, on the one hand, and any affiliate of
either of the Companies or any of the Shareholders, on the
other hand (other than the Transaction Documents);
(ix) except as otherwise expressly contemplated by
this Agreement, enter into any Contracts or modify or amend
such Contracts directly, or on behalf of any reinsurance
facility, except Contracts for reinsurance, retrocession or
other services in the ordinary course of business consistent
with past practice;
(x) authorize or enter into any agreement in
principle or agreement with respect to, any plan of
liquidation or dissolution, any acquisition of assets or
securities, any sale, transfer, lease, license, pledge,
mortgage, or other disposition or encumbrance of assets or
securities or any change in its capitalization, the value of
which does not exceed $50,000 in the aggregate;
(xi) make any capital expenditures or commitments
therefor in excess of $100,000 in the aggregate, other than
investment transactions in the ordinary course of business
consistent with past practice;
(xii) make any change in the accounting methods or
accounting practices followed by the Companies;
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(xiii) settle or compromise any federal, state, local
or foreign Tax liability, make any new Tax election (other
than an income tax election that relates solely to the method
of allocating among the Shareholders Unicover's taxable income
for its S Corporation taxable year ending on the Closing
Date), revoke or modify any existing Tax election, or make,
request or consent to a change in any method of Tax
accounting, except as otherwise expressly required or
permitted elsewhere in this Agreement or in the other
Transaction Documents;
(xiv) intentionally take any action that would impede
or delay the consummation of the transactions contemplated by
this Agreement or the ability of either of the Companies or
Delphi to obtain any approval required for the transactions
contemplated by this Agreement or to perform their covenants
and agreements under this Agreement; or
(xv) agree to do any of the foregoing.
ARTICLE VI
COVENANTS AND AGREEMENTS
6.1 Cooperation.
(a) Subject to the terms and conditions herein provided, each
of the parties hereto agrees to use commercially reasonable efforts to take, or
cause to be taken, all action and to do, or cause to be done, all things
necessary, proper or advisable to consummate and make effective as promptly as
practicable the transactions contemplated by this Agreement and to cooperate
with each other in connection with the foregoing, including without limitation
using commercially reasonable efforts (i) to obtain all necessary waivers,
consents and approvals from other parties to loan agreements, leases and other
contracts, (ii) to obtain all necessary consents, approvals and authorizations
as are required to be obtained under any federal,
<PAGE> 49
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state or foreign law or regulations, (iii) to defend all lawsuits or other legal
proceedings challenging this Agreement or the consummation of the transactions
contemplated hereby, (iv) to lift or rescind any injunction or restraining order
or other order adversely affecting the ability of the parties to consummate the
transactions contemplated hereby, (v) to effect all necessary registrations and
filings, and submissions of information requested by governmental authorities,
and (vi) to fulfill all conditions to this Agreement.
(b) Each of the Companies will make available to Delphi copies
of all written correspondence, filings or communications (or memoranda setting
forth the substance thereof) between (i) either of the Companies or their
representatives, on the one hand, and the regulatory authorities referred to in
Section 7.1(b) hereof, on the other hand, and (ii) either of the Companies or
their representatives, on the one hand, and the pool members, facility
participants, retrocessionaires and other reinsurance clients with which they
conduct business, on the other hand, with respect to this Agreement and the
transactions contemplated hereby. Each of the parties hereto agrees to furnish
to the other party hereto such necessary information and reasonable assistance
as such other party may request in connection with its preparation of necessary
filings or submissions to any regulatory or governmental agency or authority,
including, without limitation, any filing necessary under the provisions of any
applicable foreign, Federal or state statute.
(c) Delphi will supply the Companies with copies of all
correspondence, filings or communications (or memoranda setting forth the
substance thereof) between Delphi or its representatives, on the one hand, and
the regulatory authorities referred to in Section 7.1(b) hereof, on the other
hand, with respect to this Agreement and the transactions contemplated hereby.
6.2 Availability of Employees and Records. Each of the
Companies and the Shareholders covenant and agree that, between the date of
execution of this Agreement and the Closing Date, each of the Companies will,
and will use its best efforts to cause the advisors and service providers of
each of the Companies
<PAGE> 50
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to, make available to Delphi and its authorized agents, actuaries, attorneys,
accountants, and other representatives, at all reasonable times and under
reasonable circumstances, for inspection, examination, copying or verification,
all of the books, operating records, financial records, investment records,
returns, and reports of every kind, and all working papers pertaining thereto,
of each of the Companies, its advisors and service providers, and permit access
to and examination of all contracts and records pertaining to agreements between
either of the Companies and any person and of all properties and assets owned by
the Companies, or in which either of the Companies has any interest, all for the
purpose of making such verification of the warranties, representations,
statements, and other information made or provided by the Companies
(collectively, the "Diligence Update"). Each of the Companies and the
Shareholders will cause the officers and employees of the Companies having
material knowledge concerning the operation of the business of either of the
Companies to cooperate in connection with any such Diligence Update at
reasonable times and upon reasonable notice. The representations, warranties,
covenants and agreements of each of the Companies and the Shareholders set forth
in this Agreement shall be effective regardless of any investigation that Delphi
have undertaken or failed to undertake.
6.3 Notification of Changes and Default. Each of the Companies
and the Shareholders covenant and agree that between the date of execution of
this Agreement and the Closing Date, inclusive, each of the Companies will
promptly give notice to Delphi of any of the following when known to either of
the Companies or any of the Shareholders: (i) the occurrence of any event or
circumstance or the discovery of any inaccuracy, omission or mistake which would
cause the representations and warranties made by the Companies or the
Shareholders or any of the information or documents theretofore delivered by the
Companies or the Shareholders to Delphi pursuant to this Agreement, to be untrue
or inaccurate in any material respect, whether as of the date of execution of
this Agreement or at any time subsequent thereto and prior to the Closing Date;
or (ii) the occurrence of any events or circumstances that would result
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in a violation or breach of any of the terms and provisions of this Agreement
obligatory upon the Companies or the Shareholders.
6.4 Financial Statements, Etc.
(a) Each of the Companies and the Shareholders covenant and
agree to deliver to Delphi, promptly upon the same becoming available to either
of the Companies, copies of any financial statements or reports, filings,
orders, and other communications delivered to or received from governmental
authorities with respect to the licensure of each of the Companies or any other
material matter from the date hereof through the Closing Date.
(b) Each of the Companies and the Shareholders covenant and
agree to deliver to Delphi, promptly upon the same becoming available to either
of the Companies, copies of regularly prepared monthly, quarterly and annual
financial statements with respect to each of the Companies from the date hereof
until the Closing Date.
(c) Delphi covenants and agrees to deliver to Robert J.
Wojtowicz copies of quarterly and annual financial information with respect to
each of the Companies for each such period through December 31, 2002, as
prepared by management of the Companies in the ordinary course of business.
Quarterly financial information shall be provided no later than 45 days after
the end of each quarterly period and annual financial information shall be
provided no later than 90 days after the end of each fiscal year.
6.5 Publicity. Neither of the Companies nor Delphi shall issue
any press release or make any other public statements the general content of
which pertains to the transactions contemplated hereby without the prior consent
of the other party, such consent not to be unreasonably withheld; provided,
however, that nothing herein will prohibit any party from issuing or causing
publication of any such press release or public announcement to the extent that
such party determines such action
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to be required by law or the rules of the New York Stock Exchange, in which
event the party making such determination will, if practicable in the
circumstances, use all commercially reasonable efforts to allow the other party
reasonable time to comment on such release or announcement in advance of its
issuance.
6.6 No Solicitation. Each of the Companies and each of the
Shareholders agrees that it shall not, and shall not authorize or permit any of
its directors, officers, employees, agents or representatives to, directly or
indirectly, solicit, initiate, facilitate or encourage (including by way of
furnishing or disclosing non-public information) any inquiries or the making of
any proposal with respect to any merger, consolidation or other business
combination involving either of the Companies or acquisition of any kind of all
or substantially all of the assets, or any of the capital stock or ownership
interests of either of the Companies (an "Acquisition Transaction") or
negotiate, explore or otherwise communicate in any way with any third party
(other than Delphi) with respect to any Acquisition Transaction or enter into
any agreement, arrangement or understanding requiring it to abandon, terminate
or fail to consummate the transactions contemplated by this Agreement. The
Shareholders shall promptly, but in no event more than one day after such
receipt, advise Delphi in writing of the receipt, directly or indirectly, of any
inquiries, discussions, negotiations, or proposals relating to an Acquisition
Transaction (including the material terms thereof).
6.7 Resignation of Directors. At or prior to the Closing, each
of the Companies shall deliver to Delphi the resignations of the directors,
other than John E. Pallat, of each of the Companies, effective at the Closing.
6.8 Fees and Expenses. Whether or not the transactions
contemplated hereby are consummated, the Companies, the Shareholders 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
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contemplated hereby, and all fees and expenses of agents, representatives,
counsel and accountants.
6.9 Tax Matters.
(a) Section 338(h)(10) Election. Delphi and the Shareholders
shall make a joint election pursuant to Section 338(h)(10) of the Code, and any
similar provision of state, local or foreign law, with respect to the sale of
Unicover's stock. Within 120 days after the Closing Date, Delphi shall prepare
and deliver to the Shareholders an allocation of the deemed sale price for
Unicover's assets (the "Initial Purchase Price Allocation"). Within 120 days
after each payment of Consideration made by Delphi pursuant to Section 1.2,
Delphi shall prepare and deliver to the Shareholders a revised allocation of the
deemed sale price for Unicover's assets (each, a "Revised Purchase Price
Allocation"). In each of the foregoing allocations, (1) the aggregate amount of
consideration that shall be allocated to accounts receivable of Unicover shall
not exceed the aggregate book value of such accounts receivable as of the
Closing Date, as determined in accordance with GAAP, and (2) all consideration
in excess of the aggregate book value of all of the assets of Unicover as of the
Closing Date, as determined in accordance with GAAP, shall be allocated to
goodwill, going concern value, and other intangible assets described in Section
197(d)(1) of the Code, as mutually determined by Delphi and Unicover. Unless
otherwise required by law, Delphi and the Shareholders shall not take any
position inconsistent with the Initial Purchase Price Allocation and the Revised
Purchase Price Allocations on any Tax Return (including, without limitation,
Form 8023) or for any other tax purpose. All New Jersey and Illinois corporate
income taxes imposed on Unicover as a result of the foregoing Section 338(h)(10)
election (or any similar election under state or local law), other than state
income taxes that are imposed under any New Jersey or Illinois law (including,
without limitation, the Illinois Personal Property Tax Replacement Income Tax)
that is similar or corresponds to Sections 1374 or 1375 of the Code, shall be
borne by Delphi. All other state, local and foreign corporate income taxes
imposed on Unicover as a result of the foregoing Section
<PAGE> 54
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338(h)(10) election (or any similar election under state or local law), other
than any such corporate income taxes that are imposed under Sections 1374 or
1375 of the Code (or any similar provision of any state, local or foreign law),
shall be borne 50% by Delphi and 50% by the Shareholders. All federal, state,
local or foreign taxes imposed on the Shareholders in their capacity as
shareholders of Unicover in connection with the foregoing Section 338(h)(10)
election (or any similar election under state, local or foreign law) and any
federal, state, local or foreign corporate income taxes imposed on Unicover
pursuant to Sections 1374 and 1375 of the Code (or any similar provision of any
state, local or foreign law) in connection with the foregoing Section 338(h)(10)
election (or any similar election under state or local law), shall be borne by
the Shareholders.
(b) Section 754 Election. The Shareholders shall cause
Intermediaries to make an election pursuant to Section 754 of the Code (and any
similar provision of state, local or foreign law) with respect to the sale of
the ownership interests in Intermediaries pursuant to this Agreement. Any
allocation required to be made pursuant to Section 755 of the Code in connection
with such election(s) shall be made as determined by Delphi.
(c) Transfer Taxes. Any real estate transfer or other transfer
taxes arising in connection with the sale of Ownership Interests contemplated by
this Agreement shall be borne by the Shareholders.
(d) Pre-Closing Tax Refunds of Unicover. Any refunds or
overpayments of Taxes of Unicover for any taxable period ending on or prior to
the Closing Date or that are attributable to the period from January 1, 1998
through the Closing Date that are received by, or otherwise applied for the
benefit of, Delphi shall be forwarded to the Shareholders; provided, however,
that Delphi shall have no obligation to pursue any such refunds or overpayments.
(e) Mutual Cooperation. Delphi and the Shareholders will
provide each other with such assistance as may reasonably be requested by either
of them in connection with the preparation
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of any Tax Return or amendment thereto, any audit or other examination by any
taxing authority or any judicial or administrative proceeding relating to Taxes.
The party requesting assistance hereunder shall reimburse the other party only
for expenses incurred to third parties in providing such assistance.
(f) Delphi Tax Covenant. Delphi covenants that, without the
prior consent of the Shareholders, it will not cause or permit any of the
Companies, except as otherwise required by law or regulation or pursuant to any
audit by any taxing authority, to make or change any tax election of a Company
(except for the elections contemplated in this Section 6.9 or any other election
required or expressly permitted elsewhere in this Agreement or the other
Transaction Documents), amend any Tax Return of a Company or take any tax
position on any Tax Return of a Company (other than a position based on any
allocation contemplated by Section 6.9(a) hereof or a position required or
permitted elsewhere in this Agreement or the other Transaction Documents), or
take any action or enter into any transaction on or after the Closing Date
(except as otherwise expressly required or expressly permitted elsewhere in this
Agreement or in the other Transaction Documents) that will result in any tax
liability of such Company or the Shareholders in respect of any tax period of
such Company ending prior to Closing. Delphi agrees that the Shareholders are to
have no liability for any pre-closing tax of a Company or its Shareholders
resulting from any action prohibited by the preceding sentence, that is taken by
Delphi or any of the Companies on or after the Closing Date and agrees to
indemnify and hold harmless the Shareholders against any such pre-closing tax of
a Company or its Shareholders (together with any interest, penalty, addition to
tax or additional amount) and any costs and expenses directly related thereto
(including, without limitation, reasonable expenses of investigation and
reasonable attorney's fees and expenses). Any indemnity payment made pursuant to
the preceding sentence of this Section 6.9(f) shall be reduced by the net tax
benefit, if any, realized by the Shareholders (directly or indirectly through
the Company) after taking into account all deductions, increased tax basis and
income resulting
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from the event giving rise to such indemnity payment and the receipt of such
indemnity payment.
6.10 Transfer Restrictions.
(a) Each Shareholder agrees that it will not sell, offer to
sell, pledge, hypothecate, transfer or otherwise dispose of ("transfer") any of
its Ownership Interests except to Delphi or a subsidiary of Delphi in accordance
with this Agreement.
(b) For a period of three (3) years after each payment of
Stock Consideration pursuant to Section 1.2(b) hereof (each such payment a
"Stock Consideration Payment" and each such three-year period a "Three-Year
Lock-Up Period"), each Management Shareholder shall not transfer any of the
shares of Delphi Common Stock received by such Management Shareholder as part of
such Stock Consideration Payment, except for (i) transfers by a Management
Shareholder upon the death of such Management Shareholder by will or pursuant to
the laws of descent or distribution, (ii) transfers to a Permissible Transferee
(as hereinafter defined), or (iii) transfers in compliance with the applicable
provisions of Rules 144 and 145 under the Securities Act, as amended from time
to time, in an amount not to exceed twenty-five percent (25%) of the number of
shares of Delphi Common Stock issued to such Management Shareholder as part of
each Stock Consideration Payment. For purposes of this Section 6.10,
"Permissible Transferee" shall mean, with respect to each Shareholder, (i) any
other Shareholder, (ii) any spouse, child or grandchild or spouse of a child or
grandchild of such Shareholder (a "Family Member"), or (iii) any trust for the
benefit of such Shareholder or Family Member of such Shareholder.
(c) For a period of two (2) years after each Stock
Consideration Payment (each such two-year period a "Two-Year Lock-Up Period"),
each Non-Management Shareholder shall not transfer any of the shares of Delphi
Common Stock received by such Non-Management Shareholder as part of such Stock
Consideration Payment, except for (i) transfers by a Non-Management Shareholder
upon the death of such Non-Management Shareholder
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by will or pursuant to the laws of descent or distribution, (ii) transfers to a
Permissible Transferee, or (iii) transfers in compliance with the applicable
provisions of Rules 144 and 145 under the Securities Act, as amended from time
to time, in an amount not to exceed twenty-five percent (25%) of the number of
shares of Delphi Common Stock issued to such Shareholder as part of each Stock
Consideration Payment.
(d) In addition to the foregoing restrictions, during each
Three-Year Lock-up Period or Two-Year Lock-up Period, as applicable, each
Shareholder shall not make or engage in any "short sales" or any option or other
form of derivative transaction involving or relating to Delphi Common Stock
except that each Non-Management Shareholder may enter into a zero-premium collar
transaction as described in Exhibit D hereto (a "Collar"), provided, however,
that any such Collar must be provided by a nationally recognized financial
institution reasonably acceptable to Delphi and provided, further, that such
provider shall agree, in writing for the benefit of Delphi, not to hedge its
exposure to Delphi Common Stock under such Collar by means of any transaction
involving or relating to Delphi Common Stock (including but not limited to short
sales, options and any other form of derivative transaction relating to Delphi
Common Stock).
(e) Any transfers by the Shareholders following the expiration
of the applicable Three-Year Lock-up Period or Two-Year Lock-up Period, as the
case may be, of shares of Delphi Common Stock received by such Shareholder as a
Stock Consideration Payment shall be made only pursuant to an effective
registration statement or a valid exemption from the registration requirements
of the Securities Act; provided that with respect to any transfer pursuant to
such an exemption, Delphi may, in its discretion, require the transferor thereof
to provide to Delphi a written opinion of counsel reasonably acceptable to
Delphi, the form and substance of which opinion shall be reasonably satisfactory
to Delphi, to the effect that such transfer does not require registration under
the Securities Act.
(f) Notwithstanding anything to the contrary in this Section
6.10, in no event shall the transfer restrictions on
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any Stock Consideration paid in the publicly-traded common equity of another
entity pursuant to clause (ii) of Section 1.2(d) hereof as a result of a Change
of Control ("Change of Control Stock Consideration") be more restrictive than
the transfer restrictions applicable to the publicly-traded common equity of
such entity received by senior management of Delphi in connection with such
Change of Control, and in such circumstances, to the extent this Section 6.10
would be more restrictive with respect thereto, such lesser restrictions
applicable to senior management of Delphi shall be deemed incorporated by
reference herein and made applicable to the Change of Control Stock
Consideration.
(g) Notwithstanding anything to the contrary contained in this
Section 6.10, no transfer permitted pursuant to Section 6.10(b)(ii) or
6.10(c)(ii) shall be permitted unless and until the transferee of such shares
executes a written instrument in favor of Delphi agreeing to be bound by the
terms and provisions of this Agreement.
6.11 Change of Control. In the event of a Change of Control in
which the surviving entity or one of its subsidiaries or divisions manages
worker's compensation and accident and health reinsurance pools, then Delphi or
such surviving entity shall cause a majority of the members of Unicover's Board
of Directors to be selected from Unicover's senior management as constituted
immediately prior to such Change of Control, effective upon such Change of
Control and continuing until the end of the period to which the payment provided
for in Section 1.2(b)(v) hereof relates.
6.12 Employment of Chief Executive Officer. Delphi covenants
and agrees that in the event that during the Employment Period (as defined in
the Employment Agreement with John E. Pallat), John E. Pallat shall cease to act
as Chief Executive Officer of the Companies by reason of death or disability,
then any successor shall be reasonably acceptable to the Shareholders other than
John E. Pallat.
6.13 Effect on Business. Delphi covenants and agrees that it
will not take any action which materially inhibits
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or would otherwise have a material adverse effect on the business, operations or
financial condition of the Companies as the business is currently being
conducted or as contemplated in the financial projections referenced in Section
3.29 hereof, provided, that Delphi makes no representation as to the ability of
the Companies to achieve the results reflected in such projections.
6.14 401(k) Rollover. Effective as of the Closing Date,
employees of the Companies ("Company Employees") who are participants in the TRM
International, Inc. Savings and Profit Sharing Plan (the "TRM 401(k) Plan")
shall cease to be eligible for any future contributions to the TRM 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 the TRM 401(k) Plan in accordance with and to the extent permitted by Code
Section 401(k)(10) and other applicable provisions of the Code. Company
Employees who receive an eligible rollover distribution (within the meaning of
Section 402(f)(2) of the Code, including a direct rollover distribution with the
meaning of Section 401(a)(31) of the Code) from the TRM 401(k) Plan shall,
subject to the provisions of Section 402 of the Code, be eligible to make a
rollover contribution to the Reliance Standard Life Insurance Company Retirement
Savings (401(k)) Plan or to another defined contribution plan of Delphi or its
affiliates (the "Buyer's 401(k) Plan"). To the extent that a direct rollover
distribution, within the meaning of Section 401(a)(31) of the Code, is made,
such rollover contribution may include promissory notes for loans made to
Company Employees under the terms of the TRM 401(k) Plan, provided such
rollovers are permitted by applicable provisions of the plans. Service by
Company Employees under the TRM 401(k) Plan shall be recognized under the
Buyer's 401(k) Plan for purposes of the eligibility to participate and vesting.
6.15 Nondisclosure of Confidential Information.
(a) Shareholders. Each Shareholder recognizes and acknowledges
that he has had in the past, currently has, and in the future may possibly have,
access to information concerning
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the business and affairs of Delphi and its subsidiaries or the Companies
("Confidential Information"). Each Shareholder agrees that he will not disclose
any such Confidential Information to any person, firm, corporation, association
or other entity for any purpose or reason whatsoever, except to authorized
representatives of Delphi, its subsidiaries and the Companies, or any of their
successors or affiliates, unless (i) the Shareholders can show that such
Confidential Information has become known or available to the public generally
through no fault of the Shareholders, (ii) disclosure is required by law or the
order of any governmental authority, (iii) 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, or (iv)
in each case of the Management Shareholder, disclosure by such Management
Shareholder of certain information is necessary or appropriate for the conduct
of the business of the Company, in accordance with Unicover's internal policies
in effect at the time of such disclosure, provided that, prior to disclosing any
information pursuant to clause (i), (ii) or (iii) above, the Shareholder 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
Shareholders of the provisions of this Section 6.12, Delphi and the Companies
shall be entitled to an injunction restraining the Shareholders from disclosing,
in whole or in part, such confidential information. Nothing herein shall be
construed as prohibiting Delphi and the Companies from pursuing any other
available remedy for such breach or threatened breach, including the recovery of
damages.
(b) Damages. Because of the difficulty of measuring economic
losses as a result of the breach of the foregoing covenants, and because of the
immediate and irreparable damage that would be caused for which they would have
no other adequate remedy, Delphi, each of the Companies and the Shareholders
agree that, in the event of a breach by any of them of the foregoing covenant,
the covenant may be enforced against them by, without limitation, injunctions
and restraining orders.
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ARTICLE VII
CONDITIONS TO CLOSING
7.1 Conditions to Each Party's Obligations. The respective
obligation of each party to consummate the purchase and sale of the Ownership
Interests as contemplated by this Agreement is subject to the satisfaction or
waiver on or prior to the Closing Date of the following conditions:
(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.
(b) Premerger Notification. The waiting period required
pursuant to the Hart-Scott-Rodino Antitrust Improvements Act of 1976,
as amended (the "HSR Act"), shall have expired or been terminated.
7.2 Conditions to Obligations of Delphi. The obligation of
Delphi to consummate the purchase and sale of the Ownership Interests as
contemplated by this Agreement is further subject to satisfaction or waiver of
the following conditions:
(a) Representations and Warranties. The representations,
warranties and covenants of the Companies and the Shareholders set
forth herein, to the extent qualified with respect to materiality,
shall be true and correct in all respects, and to the extent not so
qualified shall be true and correct in all material respects, in each
case as of the date of this Agreement and at and as of the Closing Date
as if made at and as of such time (except to the extent expressly made
as of an earlier date, in which case as of such date).
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(b) Performance of Obligations of the Companies and the
Shareholders. Each of the Companies and the Shareholders shall have
performed in all material respects all obligations required to be
performed by them under this Agreement at or prior to the Closing Date.
(c) Opinion of Counsel to the Companies and the Shareholders.
Delphi shall have received an opinion from Robinson Silverman Pearce
Aronsohn & Berman LLP, counsel to the Companies and the Shareholders,
dated the Closing Date, substantially to the effect set forth in
Exhibit E hereto.
(d) Certificates. Each of the Companies shall have delivered
to Delphi an officer's certificate and the Shareholders shall have
delivered 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 7.2(a) and Section 7.2(b).
7.3 Conditions to Obligations of the Companies and the
Shareholders. The obligation of the Companies and the Shareholders to consummate
the purchase and sale of the Ownership Interests as contemplated by this
Agreement is further subject to satisfaction or waiver of the following
conditions:
(a) Representations and Warranties. The representations and
warranties of Delphi set forth herein, to the extent qualified with
respect to materiality, shall be true and correct in all respects, and
to the extent not so qualified shall be true and correct in all
material respects, in each case as of the date of this Agreement and at
and as of the Closing Date as if made at and as of such time (except to
the extent expressly made as of an earlier date, in which case as of
such date).
(b) Performance of Obligations of Delphi. Delphi shall have
performed in all material respects all obligations required to be
performed by it under this Agreement at or prior to the Closing Date.
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(c) Opinion of Delphi Counsel. The Companies shall have
received an opinion from Cahill Gordon & Reindel, special counsel to
Delphi, substantially to the effect set forth in Exhibit F hereto.
(d) Certificates. Delphi shall have delivered to the Companies
and the Shareholders a certificate of an officer of Delphi, in form and
substance and determined on a basis satisfactory to the Companies and
their counsel to the effect of the matters stated in Section 7.3(a) and
(b).
ARTICLE VIII
TERMINATION
8.1 Termination. This Agreement may be terminated at any time
prior to the Closing Date:
(a) by mutual written consent of each of the Companies and
Delphi;
(b) by either the Companies and the Shareholders as a group,
on the one hand, or Delphi, on the other hand, if the purchase and sale
of Ownership Interests as contemplated by this Agreement shall not have
been consummated by the later to occur of (i) November 15, 1998 or (ii)
one week after the expiration or termination of the waiting period
required pursuant to the HSR Act; provided, however, that the right to
terminate this Agreement pursuant to this Section 8.1(b) shall not be
available to any party (with the Companies and the Shareholders deemed
to be a single party for this purpose) whose failure to perform any of
its obligations under this Agreement results in the failure of such
transactions to be consummated by such time;
(c) by Delphi, if either of the Companies or any Shareholder
shall have breached or failed to perform in any material respect any of
its representations, warranties,
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covenants or other agreements contained in this Agreement (which breach
is not cured within 15 business days after receipt by either of the
Companies or such Shareholders, as the case may be, of a written notice
of such breach from Delphi specifying the breach and requesting that it
be cured); or
(d) by either of the Companies and the Shareholders as a
group, if Delphi shall have breached or failed to perform in any
material respect any of its representations, warranties, covenants or
other agreements contained in this Agreement (which breach is not cured
within 15 business days after receipt by Delphi of a written notice of
such breach from either of the Companies and the Shareholders
specifying the breach and requesting that it be cured).
8.2 Effect of Termination. The termination of this Agreement
shall become effective upon delivery to the other party of written notice
thereof. In the event of the termination of this Agreement pursuant to the
foregoing provisions of this Article VIII, this Agreement shall become void and
have no effect, with no liability on the part of any party or its shareholders
or stockholders or directors or officers in respect thereof except for (i)
agreements which survive the termination of this Agreement, (ii) any liability
that Delphi, either of the Companies or any Shareholder might have arising from
a breach of this Agreement and (iii) in the event of termination pursuant to
Section 8.1(c) or (d), then notwithstanding Section 6.8, the breaching party
(with the Companies and the Shareholders deemed to be a single party for this
purpose) shall be liable to the other party for any expenses incurred in
connection with this Agreement and the transactions contemplated hereby, as well
as any damages in accordance with applicable law.
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ARTICLE IX
INDEMNIFICATION
9.1 Delphi's Losses.
(a) Subject to the other provisions of this Article IX, each
Shareholder agrees, severally and not jointly, to indemnify and hold harmless
Delphi and each of the Companies and their respective officers, directors,
employees, stockholders, assigns, successors and affiliates (collectively, the
"Delphi Indemnified Parties", and each, a "Delphi Indemnified Party") from,
against and in respect of any and all Delphi's Losses (as defined below)
suffered, sustained, incurred or required to be paid by any Delphi Indemnified
Party by reason of (i) any representation or warranty made (whether as of the
date of this Agreement, as of the Closing Date or as of another date) by such
Shareholder in Article II of this Agreement or in Section 4 of either of the
Option Agreements, in the Disclosure Schedule or in any certificate or other
document or instrument delivered by or on behalf of any Shareholder in
connection herewith (all of which, for purposes of this Article IX, shall be
read as if they contained no qualifications for material adverse effect or
material adverse change and no other qualifications, exceptions or provisos
relating to materiality) being untrue or incorrect in any material (as defined
below) respect; or (ii) any failure by any of such Shareholder to observe or
perform any of their respective covenants and agreements set forth in this
Agreement in any material respect.
(b) Subject to the other provisions of this Article IX, the
Shareholders agree, severally and not jointly, to indemnify and hold harmless
the Delphi Indemnified Parties from, against and in respect of any and all
Delphi's Losses suffered, sustained, incurred or required to be paid by Delphi
by reason of (i) any representation or warranty made (whether as of the date of
this Agreement, as of the Closing Date or as of another date) by the Companies
and the Shareholders in Article III of this Agreement, in the Disclosure
Schedule or in any certificate or other document or instrument delivered by or
on behalf of the Companies in connection herewith (all of which,
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for purposes of this Article IX, shall be read as if they contained no
qualifications for material adverse effect or material adverse change and no
other qualifications, exceptions or provisos relating to materiality) being
untrue or incorrect in any material (as defined below) respect; (ii) any failure
by either of the Companies or the Shareholders to observe or perform any of its
covenants and agreements set forth in this Agreement in any material respect; or
(iii) the business, operations or assets of each of the Companies and
predecessors prior to the Closing Date or the actions or omissions of the
directors, officers, shareholders, employees or agents thereof prior to the
Closing Date, other than Delphi's Losses directly arising from matters expressly
disclosed in this Agreement or the Disclosure Schedule hereto.
(c) "Delphi's Losses" shall mean all damages (including,
without limitation, amounts paid in settlement with the Shareholders' consent,
not to be unreasonably withheld), losses, liabilities, claims, costs and
expenses (including, without limitation, reasonable fees of attorneys,
consultants and technical representatives). For purposes of indemnification
pursuant to this Section 9.1 and for purposes of the representations and
warranties and covenants herein insofar as they form a basis for such
indemnification, "material" shall mean that the amount of Delphi's Losses
suffered, sustained, incurred or required to be paid by reason of a
representation or warranty being untrue or incorrect or a failure to observe or
perform shall, taken together with all other Delphi's Losses suffered,
sustained, incurred or required to be paid by reason of any other such breach or
failure, have exceeded $1,000,000, in which event the Shareholders'
indemnification shall be effective with respect to all such Delphi's Losses in
excess of such amount. The aggregate amount of any Shareholder's liability under
this Article IX shall not exceed such Shareholder's Percentage of the
Consideration, provided, however, that if any liability arises on the part of
any Shareholder under this Article IX which is not satisfied in full, Delphi
shall be entitled to offset against any and all payments of Additional
Consideration which are then or thereafter become due to such Shareholder the
amount of such Shareholder's unpaid liability
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under this Article IX as of the date such Additional Consideration payment is
determined and Delphi's obligation to make such payment of Additional
Consideration shall be fully satisfied to the extent of such offset amount.
9.2 Shareholders' Losses.
(a) Subject to the other provisions of this Article IX, Delphi
agrees to indemnify and hold harmless the Shareholders from, against, for and in
respect of any and all Shareholders' Losses (as defined below) suffered,
sustained, incurred or required to be paid by the Shareholders by reason of (i)
any representation or warranty made (whether as of the date of this Agreement,
as of the Closing Date or as of another date) by Delphi in Article IV of this
Agreement, in the Disclosure Schedule or in any certificate or other document or
instrument delivered by or on behalf of Delphi in connection herewith being
untrue or incorrect in any material respect; or (ii) any failure by Delphi to
observe or perform its covenants and agreements set forth in this Agreement in
any material respect.
(b) "Shareholders' Losses" shall mean all damages (including,
without limitation, amounts paid in settlement with Delphi's consent, not to be
unreasonably withheld), losses, liabilities, claims, costs and expenses
(including, without limitation, reasonable fees of attorneys, consultants and
technical representatives).
9.3 Notice of Loss. Except to the extent set forth in the next
sentence, Delphi and the Shareholders will not have any liability under the
indemnity provisions of this Article IX with respect to a particular matter
unless a notice setting forth in reasonable detail the breach or other matter
which is asserted has been given to the Indemnifying Party (as defined below)
and, in addition, if such matter arises out of a suit, action, investigation,
proceeding or claim, such notice is given promptly, but in any event within
thirty (30) days after the Indemnified Party (as defined below) is given written
notice of the claim or the commencement of the suit, action, investigation or
proceeding. Notwithstanding the preceding sentence,
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failure of the Indemnified Party to give notice hereunder shall not release the
Indemnifying Party from its obligations under this Article IX, except to the
extent the Indemnifying Party is actually prejudiced by such failure to give
notice. With respect to Delphi's Losses pertaining to matters set forth in
Section 9.1, the Shareholders shall be the Indemnifying Party and the Delphi
Indemnified Party or Parties suffering such Delphi's Losses shall be the
Indemnified Party. With respect to the Shareholders' Losses, Delphi shall be the
Indemnifying Party and the Shareholder suffering such Shareholders' Losses shall
be the Indemnified Party.
9.4 Right to Defend. Upon receipt of notice of any suit,
action, investigation, proceeding or claim for which indemnification might be
claimed by an Indemnified Party, the Indemnifying Party shall be entitled to
assume control of the defense of any such suit, action, investigation,
proceeding or claim at its own cost and expense, and to settle or compromise
such suit, action, investigation, proceeding or claim in its discretion, subject
to the consent of the Indemnified Party, which consent will not be unreasonably
withheld or delayed. The Indemnified Party shall have the right, but not the
obligation, to participate at its own expense in defense thereof by counsel of
its own choosing, but the Indemnifying Party shall be entitled to control the
defense unless the Indemnified Party has relieved the Indemnifying Party from
liability with respect to the particular matter or the Indemnifying Party fails
to assume defense of the matter. In the event the Indemnifying Party shall fail
to defend, contest or otherwise protect in a timely manner against any such
suit, action, investigation, proceeding or claim, the Indemnified Party shall
have the right, but not the obligation, thereafter to defend, contest or
otherwise protect against the same and make any compromise or settlement thereof
and recover the entire cost thereof from the Indemnifying Party, including,
without limitation, reasonable fees of attorneys, consultants and technical
representatives, disbursements and all amounts paid as a result of such suit,
action, investigation, proceeding or claim or the compromise or settlement
thereof; provided, however, that the Indemnified Party must send a written
notice to the Indemnifying Party of
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any such proposed settlement or compromise, which settlement or compromise the
Indemnifying Party may reject, in its reasonable judgment, within thirty (30)
days of receipt of such notice. The Indemnified Party shall have the right to
effect a settlement or compromise over the objection of the Indemnifying Party;
provided, that if (i) the Indemnifying Party is contesting such claim in good
faith or (ii) the Indemnifying Party has assumed the defense from the
Indemnified Party, the Indemnified Party waives any right to indemnity therefor.
If the Indemnifying Party undertakes the defense of such matters, the
Indemnified Party shall not, so long as the Indemnifying Party does not abandon
the defense thereof, be entitled to recover from the Indemnifying Party any
legal or other expenses subsequently incurred by the Indemnified Party in
connection with the defense thereof.
9.5 Cooperation. The Delphi Indemnified Parties, the
Shareholders and each of their affiliates, successors and assigns shall
cooperate with each other in the defense of any suit, action, investigation,
proceeding or claim by a third party and, during normal business hours, shall
afford each other access to their books and records and employees relating to
such suit, action, investigation, proceeding or claim and shall furnish each
other all such further information that they have the right and power to furnish
as may reasonably be necessary to defend such suit, action, investigation,
proceeding or claim.
9.6 Subrogation. In the event the Indemnifying Party shall be
obligated to indemnify the Indemnified Party pursuant to this Article IX, the
Indemnifying Party shall, upon payment of such indemnity in full, be subrogated
to all rights of the Indemnified Party with respect to the claims to which such
indemnification relates; provided, however, that the Indemnifying Party shall
only be subrogated to the extent of any amounts paid by it pursuant to this
Article IX in connection therewith.
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ARTICLE X
MISCELLANEOUS
10.1 Survival of Covenants, Agreements, Representations and
Warranties.
(a) Covenants and Agreements. All covenants and agreements
made hereunder or pursuant hereto or in connection with the transactions
contemplated hereby 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.
(b) Representations and Warranties. All representations and
warranties contained herein shall survive the Closing Date and shall continue in
full force and effect thereafter for the period from the Closing Date until June
1, 2000, except that (i) the representations and warranties in Section 3.17
shall survive until ten (10) days after all potential claims thereon shall be
barred by the applicable statute of limitations and (ii) the representations and
warranties made in Article II shall survive indefinitely; provided that, in the
event any claim for a breach of any representation or warranty has been asserted
with reasonable specificity prior to the last day such representation or
warranty would otherwise survive pursuant to this Section 10.1, such
representation and warranty shall survive until final disposition of such claim.
10.2 Closing and Waiver.
(a) Unless this Agreement shall have been terminated in
accordance with the provisions of Section 8.1 hereof, 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 7.1, 7.2 and
7.3 shall have been satisfied or waived. The Closing will be held at the offices
of Cahill Gordon & Reindel, 80 Pine Street, New York, New York or at such other
places as the parties may agree.
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(b) At any time prior to the Closing, any party hereto may (i)
extend the time for the performance of any of the obligations or other acts of
any other party hereto, (ii) waive any inaccuracies in the representations and
warranties of the other party contained herein or in any document delivered
pursuant hereto, and (iii) waive compliance with any of the agreements of any
other party or with any conditions to its own obligations contained herein. Any
agreement on the part of a party hereto to any such extension or waiver shall be
valid only if set forth in an instrument in writing duly authorized by and
signed on behalf of such party.
10.3 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
with copies to:
Delphi Capital Management, Inc.
650 Madison Avenue, Suite 2600
New York, NY 10022
Facsimile No.: (212) 838-7598
Attention: President
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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
Robinson Silverman Pearce Aronsohn & Berman LLP
1290 Avenue of the Americas
New York, New York 10104-0053
Facsimile No.: (212) 541-4630
Attention: Michael Rosen, Esq.
If to the Shareholders:
John E. Pallat
37 Humbert Street
Princeton, NJ 08542
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Thomas J. Dunn
2347 Wilmington Court
Naperville, IL 60565
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
Joseph F. Munson
13502 Coco Plum Court
Palm City, FL 34990
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: Michael Rosen, 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
delivery to the courier, if sent by overnight air courier guaranteeing next day
delivery postage pre-paid or billed to sender.
10.4 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.
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10.5 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. As used in this Agreement, "person" means any individual, corporation,
limited or general partnership, joint venture, association, joint stock company,
trust, unincorporated organization or government or any agency or political
subdivision thereof; "subsidiary" of any person means (i) a corporation more
than 50% of the outstanding voting stock of which is owned, directly or
indirectly, by such person or by one or more other subsidiaries of such person
or by such person and one or more subsidiaries thereof or (ii) any other person
(other than a corporation) in which such person, or one or more other
subsidiaries of such person or such person and one or more other subsidiaries
thereof, directly or indirectly, have at least a majority ownership and voting
power relating to the policies, management and affairs thereof; and "voting
stock" of any person means capital stock of such person which ordinarily has
voting power for the election of directors (or persons performing similar
functions) of such person, whether at all times or only so long as no senior
class of securities has such voting power by reason of any contingency.
10.6 Amendment. This Agreement may not be amended except by an
instrument in writing signed on behalf of Delphi, each of the Companies and
Shareholders representing in excess of seventy-five percent (75%) of the
Ownership Interests held by Shareholders affected by such proposed amendment.
10.7 Assignment. This Agreement may not be assigned, other
than by Delphi to an affiliate of Delphi, by any party hereto except with the
prior written consent of the non-assigning parties.
10.8 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, except for rights of Delphi
Indemnified Parties as set forth in Article IX (Indemnification).
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10.9 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.
10.10 Entire Agreement. This Agreement (including the Exhibits
and Schedules hereto), the Employment Agreements, the Letter Agreements, the
Side Letters, the Non-competition Agreements and the Option Agreements
constitute 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 the
Transaction Documents including the Schedules hereto. Without limiting the
generality of the foregoing, the Shareholders make no representation to Delphi
with respect to (a) any projections, estimates or budgets delivered to Delphi of
future revenues, expenses or expenditures or future results of operations of the
Companies or (b) any other documents or information made available to Delphi or
its counsel, accountants or advisers except in the case of either (a) or (b) as
expressly covered by the representations and warranties contained in Articles II
and III hereof. Specifically, and in that regard, Delphi agrees that it has not
relied on any information or statements contained in that certain Confidential
Information Memorandum, dated July, 1998 (except to the extent that consistent
information or statements were made in the representations and warranties herein
or in the Option Agreements) and is relying solely on its own due diligence and
the representations and warranties contained herein and in the Option
Agreements.
10.11 Relationship Among Certain Agreements. In the event that
a final determination has been made, in accordance with the arbitration
provisions of Exhibit B hereto, that Delphi has breached the provisions of
Section 6.13 hereof, then the Non-Competition Agreements shall automatically
become void and have no effect. Any (i) termination of John E. Pallat other than
(A) for Cause (as defined in his Employment Agreement) or (B) as a result of a
breach by him of his Employment
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Agreement or (ii) breach by Delphi of Section 2 of his Employment Agreement will
also be deemed a breach by Delphi under this Agreement. The remedy contained in
this Section 10.11 shall be in addition to any other remedy available pursuant
to this Agreement.
10.12 No Recourse Against Others. No director, officer or
employee, as such, of Delphi, its Subsidiaries or either of the Companies shall
have any liability for any obligations of Delphi or either of the Companies,
respectively, under this Agreement for any claim based on, in respect of or by
reasons of such obligations or their creation.
10.13 Validity. The invalidity or unenforceability of any
provision of this Agreement shall not affect the validity or enforceability of
any other provisions of this Agreement, which shall remain in full force and
effect.
10.14 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.
10.15 Facsimiles. Any facsimile signature of any party hereto
or to any other agreement executed in connection herewith (other than on any
securities or transfer instruments) shall constitute a legal, valid and binding
execution hereof by such party.
10.16 Construction. The parties have participated jointly in
the negotiation and drafting of this Agreement. In the event that an ambiguity
or question of intent or interpretation arises, this Agreement shall be
construed as if drafted jointly by the parties and no presumption or burden of
proof shall arise favoring or disfavoring any party by virtue of the authorship
of any of the provisions of this Agreement.
<PAGE> 77
IN WITNESS WHEREOF, the parties hereto have caused this Stock
Purchase Agreement to be executed on this 10th day of November, 1998 by their
duly authorized officers all as of the day and year first above written.
DELPHI FINANCIAL GROUP, INC.
By: /s/ Robert Rosenkranz
----------------------------------------
Name: Robert Rosenkranz
Title: Chairman & President
Unicover Managers, Inc.
By: /s/ John E. Pallat
----------------------------------------
Name: John E. Pallat, III
Title: Chief Executive Officer
Unicover Intermediaries, LLC
By: /s/ John E. Pallat
----------------------------------------
Name: John E. Pallat, III
Title: Chief Executive Officer
<PAGE> 78
-2-
SHAREHOLDERS:
/s/ John E. Pallat
----------------------------------
John E. Pallat
/s/ Thomas J. Dunn
----------------------------------
Thomas J. Dunn
/s/ Robert J. Wojtowicz
----------------------------------
Robert J. Wojtowicz
/s/ Joseph P. Wojtowicz
----------------------------------
Joseph P. Wojtowicz
/s/ Kenneth C. Griebell
----------------------------------
Kenneth C. Griebell
/s/ Joseph F. Munson
----------------------------------
Joseph F. Munson
<PAGE> 79
Exhibit A to
Stock Purchase Agreement
Ownership Interests
-------------------
<TABLE>
<CAPTION>
Unicover
Unicover Intermediaries
Managers Membership Shareholder's
Shareholder Common Stock Interests Percentage
----------- ------------ -------------- -------------
<S> <C> <C> <C>
Shareholder A 30 shares 29.25 29.25 %
Shareholder B 30 29.25 29.25
Shareholder C 30 29.25 29.25
Shareholder D 5 4.875 4.875
Shareholder E 5 4.875 4.875
Shareholder F 2.564 2.5 2.5
------------- -------- --------
102.564 shares 100 100.00 %
Total
</TABLE>
<PAGE> 80
Exhibit B
to Stock Purchase Agreement
Consideration Determination Procedures
OBJECTIVE:
The following procedures are intended to be a measurement tool
for the Consideration to be paid pursuant to Section 1.2 of the Stock Purchase
Agreement (the "Agreement") (to which these procedures are attached as Exhibit
B) based upon the Pre-tax Cash Flow of the Companies. Capitalized terms used and
not defined herein shall have the meanings set forth in the Agreement.
Pre-tax Cash Flow for the periods following the Closing will
be adjusted dollar-for-dollar positively for any expense, capital expenditure,
allocation or any other items that reduce Pre-tax Cash Flow which were
determined or imposed by Delphi or its affiliates that were not contemplated in
the stand-alone projections referenced in Section 3.29 of the Agreement. Pre-tax
Cash Flow for the periods following the Closing will be adjusted
dollar-for-dollar negatively for any investment or other items that increase
Pre-tax Cash Flow that do not represent cash flow generated by the Companies.
CALCULATION:
Delphi will provide the Shareholders with a detailed written
calculation of its determination of Pre-tax Cash Flow (each such determination,
a "Delphi Determination") within three months after the end of the relevant
measurement period. Pre-tax Cash Flow will be the result of subtracting actual
cash expenditures of the Companies from actual cash received by the Companies
for each relevant measurement period. Actual cash received by the Companies will
include actual cash receipts from services provided to the Unicover Occupational
Accident Facility, the Lincoln National Life Insurance Company Occupational
Accident Facility, the Reliance Insurance Company
<PAGE> 81
-2-
Facility, the Loss Portfolio Transfer Facility, the Buffer Facility, any new
facilities, investment income on cash received through the end of the quarter in
which such cash is received and any other actual cash received. Actual cash
expenditures will include actual costs related to salaries, taxes (other than
federal, state and local income taxes), benefits, bonuses (other than through
the Employee Limited Liability Company), rent, utilities, telecommunications,
travel and entertainment, professional fees, information systems, insurance,
miscellaneous and any other actual expenditures (including capital
expenditures). Actual cash expenditures will exclude any income taxes that
result from the activities of the Companies and any bonuses paid through the
Employee Limited Liability Company.
ARBITRATION:
If the Shareholders shall disagree with any Delphi
Determination, the Shareholders shall give written notice of such disagreement
to Delphi within 10 business days after receipt of the applicable Delphi
Determination. If, within 20 business days after Delphi's receipt of such notice
of disagreement, Delphi and the Shareholders are unable to agree with regard to
any Delphi Determination, the disagreement may be submitted to arbitration by
either Delphi or the Shareholders, which arbitration election shall be final and
binding on the parties. The party instituting the arbitration procedures shall
give written notice to the other party of its election to arbitrate, and such
notice shall specify the name and address of the person designated to act as an
arbitrator on its behalf. Within 10 business days after the service of such
notice, the second party shall notify the first party of the appointment of the
person designated to act as arbitrator on the second party's behalf. If the
second party fails to notify the first party of the appointment of its
arbitrator within the period specified above, then the second arbitrator shall
be appointed by the American Arbitration Association ("AAA"), or any
organization successor thereto, in accordance with its then prevailing rules.
The two arbitrators so chosen shall meet within 10 business days after the
second arbitrator is appointed and shall select the third arbitrator by mutual
<PAGE> 82
-3-
agreement. If the two arbitrators shall fail to appoint a third arbitrator
within 10 business days after the second arbitrator is appointed, then the third
arbitrator shall be appointed by AAA, or any organization successor thereto, in
accordance with its then prevailing rules. Each arbitrator chosen or appointed
pursuant to this Exhibit B shall be an active or retired officer of an insurance
or reinsurance company, experienced and in good standing in the insurance or
reinsurance industry and shall be a disinterested person.
The arbitrators shall review the relevant provisions of the
Stock Purchase Agreement and any documents or materials supplied by either party
supporting such party's position. The arbitrators shall render their decision
with regard to the disputed Delphi Determination upon the concurrence of at
least two of their number not later than 30 business days after the appointment
of the third arbitrator. The decision of the arbitrators shall be in writing,
and counterpart copies shall be delivered to each of Delphi and the
Shareholders. In rendering their decision, the arbitrators shall have no power
to modify any of the provisions of the Stock Purchase Agreement. The decision of
the arbitrators shall be final and binding. All arbitration proceedings shall
occur in New York, New York and, absent express written agreement by the parties
to the contrary, shall be governed by the then prevailing rules of AAA, or any
organization successor thereto. Judgment may be entered on the award of the
arbitrators and may be enforced in accordance with the laws of the State of New
York.
Immediately upon a party hereto giving written notice of its
election to arbitrate hereunder, Delphi agrees upon reasonable advance request
to cause the Companies to provide the Shareholders with access to the books and
records of the Companies which reasonably relate to the Delphi Determination in
dispute at reasonable times during the normal business hours of the Companies.
Each party shall pay the fees and expenses of the original
arbitrator that it appointed (or, in the case of the second party, the
arbitrator appointed on its behalf if it should fail to appoint its own
arbitrator). The fees and expenses
<PAGE> 83
-4-
of the third arbitrator and all other expenses of the arbitrators shall be borne
by the parties equally. Each party shall bear the expense of its own counsel and
the preparation and presentation of proof, or supportive documentation.
<PAGE> 84
Exhibit C
to Stock Purchase Agreement
Pre-tax Cash Flow Multiples
---------------------------
<TABLE>
<CAPTION>
4th Quarter 1999 2000 2001 2002
Shareholder 1998 Results Results Results Results Results
----------- ------------ ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Shareholder A 0.2925000 0.5850000 0.5118750 0.4387500 0.3656250
Shareholder B 0.2925000 0.5850000 0.5118750 0.4387500 0.3656250
Shareholder C 0.2925000 0.5850000 0.5118750 0.4387500 0.3656250
Shareholder D 0.0487500 0.0975000 0.0853125 0.0731250 0.0609375
Shareholder E 0.0487500 0.0975000 0.0853125 0.0731250 0.0609375
Shareholder F 0.0250000 0.0500000 0.0437500 0.0375000 0.0312500
-----------------------------------------------------------------------------------------
Total 1.0 2.0 1.75 1.5 1.25
--- --- ---- --- ----
</TABLE>
<PAGE> 85
DELPHI FINANCIAL GROUP, INC.
1105 North Market Street
Suite 1230, P.O. Box 8985
Wilmington, Delaware 19899
As of October 1, 1998
Shareholder B
RE: UNICOVER MANAGERS, INC.
Dear Mr. [Name]:
Reference is made to the Stock Purchase Agreement dated as of
the date hereof by and among Delphi Financial Group, Inc. ("Delphi"), Unicover
Managers, Inc. and Unicover Intermediaries, LLC (collectively, the "Companies")
and the Shareholders named therein (the "Stock Purchase Agreement") and the
Option Agreements dated as of the date hereof by and among Delphi and the
Shareholders (the "Option Agreements"). Terms used but not defined in this
letter agreement have the meanings assigned thereto in the Stock Purchase
Agreement or the Option Agreements.
Simultaneously with the execution hereof, Delphi, the
Companies and the Shareholders have entered into the Stock Purchase Agreement
and the Option Agreements. Subject to the conditions set forth in the Stock
Purchase Agreement and the Option Agreements, the Ownership Interests in the
Companies held by the Shareholders will be purchased by Delphi for, in part, the
Additional Consideration and Exercise Consideration set forth in the Stock
Purchase Agreement and the Option Agreements, respectively.
Due to circumstances personal to you, without affecting in any
way (a) your obligations under the Stock Purchase
<PAGE> 86
Agreement or the Option Agreements or (b) the rights or obligations of, or
Delphi's obligations to, the other Shareholders under the Stock Purchase
Agreement or the Option Agreements, Delphi will pay to you, at the Closing,
$21,090,713 (plus interest at a rate per annum equal to 6% from October 1, 1998
until the Closing Date) in cash in lieu of 98.325% of the Additional
Consideration payments and 100% of the Exercise Consideration payments that may
become due to you pursuant to the Stock Purchase Agreement and Option
Agreements, respectively, provided, however, that you will repay, pursuant to
Section 1.2 of the Stock Purchase Agreement and Section 3 of the Option
Agreements, your Shareholder's Percentage of any Excess Distributions. Delphi
hereby agrees to waive your representation and warranty under Section 2.3(b) of
the Stock Purchase Agreement insofar as such section conflicts with the
provisions of this letter agreement. By your execution of this letter agreement,
you acknowledge that your receipt of this amount satisfies in all respects the
obligations of Delphi pursuant to the Stock Purchase Agreement and the Option
Agreements to make any Additional Consideration payments or payments of Exercise
Consideration to you and, together with the payment to which you may be entitled
pursuant to Section 1.2(a) of the Stock Purchase Agreement and Section 3(a)(i)
of the Option Agreements, constitutes payment in full for your Ownership
Interests in the Companies and, to the extent the Options granted in the Option
Agreements are exercised, Olga and ARRCL. Furthermore, you hereby waive any and
all rights you may have to receive payment of any Consideration or Exercise
Consideration (including, without limitation, any and all Additional
Consideration), other than the payments to which you may be entitled pursuant to
Section 1.2(a) of the Stock Purchase Agreement and Section 3(a)(i) of the Option
Agreements. Finally, you reiterate the representations and warranties contained
in Section 2.2 of the Stock Purchase Agreement and Section 4 of the Option
Agreements in relation to this letter agreement as fully as if this letter
agreement were referenced therein, and agree that the provisions of Sections
6.3, 7.2(a) and 9.1 of the Stock Purchase Agreement shall for all purposes be
applied as if this letter agreement were so referenced.
<PAGE> 87
This letter agreement shall become effective only upon
consummation of the Stock Purchase Agreement. This letter agreement may not be
amended or any provision hereof waived or modified except by an instrument in
writing signed by each of the parties hereto. This letter 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 law.
[Signature Page Follows]
<PAGE> 88
Very truly yours,
DELPHI FINANCIAL GROUP, INC.
By: /s/Robert Rosenkranz
---------------------------------
Name: Robert Rosenkranz
Title: Chairman & President
Accepted and agreed to as of
the date first written above:
/s/[Name]
- -----------------------------
[Name]
<PAGE> 89
DELPHI FINANCIAL GROUP, INC.
1105 North Market Street
Suite 1230, P.O. Box 8985
Wilmington, Delaware 19899
As of October 1, 1998
Shareholder E
RE: UNICOVER MANAGERS, INC.
Dear [Name]:
Reference is made to the Stock Purchase Agreement dated as of
the date hereof by and among Delphi Financial Group, Inc. ("Delphi"), Unicover
Managers, Inc. and Unicover Intermediaries, LLC (collectively, the "Companies")
and the Shareholders named therein (the "Stock Purchase Agreement") and the
Option Agreement with Alternative Risk Reinsurance Co. Ltd. ("ARRCL") dated as
of the date hereof by and among Delphi and the Shareholders (the "Option
Agreement"). Terms used but not defined in this letter agreement have the
meanings assigned thereto in the Stock Purchase Agreement or the Option
Agreement.
Simultaneously with the execution hereof, Delphi, the
Companies and the Shareholders have entered into the Stock Purchase Agreement
and the Option Agreement. Subject to the conditions set forth in the Stock
Purchase Agreement and the Option Agreement, the Ownership Interests in the
Companies held by the Shareholders will be purchased by Delphi for, in part, the
Additional Consideration and Exercise Consideration set forth in the Stock
Purchase Agreement and the Option Agreement, respectively.
<PAGE> 90
Without affecting in any way (a) your obligations under the
Stock Purchase Agreement or the Option Agreement or (b) the rights or
obligations of, or Delphi's obligations to, the other Shareholders under the
Stock Purchase Agreement or the Option Agreement, Delphi will pay to you, at the
Closing, $490,119 (plus interest at a rate per annum equal to 6% from October 1,
1998 until the Closing Date) in cash in lieu of 13.7% of the Additional
Consideration payments and 100% of the Exercise Consideration payments that may
become due to you pursuant to the Stock Purchase Agreement and Option Agreement,
respectively, provided, however, that you will repay, pursuant to Section 1.2 of
the Stock Purchase Agreement and Section 3 of the Option Agreement, your
Shareholder's Percentage of any Excess Distributions. Delphi hereby agrees to
waive your representation and warranty under Section 2.3(b) of the Stock
Purchase Agreement insofar as such section conflicts with the provisions of this
letter agreement. By your execution of this letter agreement, you acknowledge
that your receipt of this amount satisfies in all respects the obligations of
Delphi pursuant to the Stock Purchase Agreement and the Option Agreement to make
any Additional Consideration payments or payments of Exercise Consideration to
you and, together with the payment to which you may be entitled pursuant to
Section 1.2(a) of the Stock Purchase Agreement and Section 3(a)(i) of the Option
Agreement, constitutes payment in full for your Ownership Interests in the
Companies and, to the extent the Options granted in the Option Agreement are
exercised, ARRCL. Furthermore, you hereby waive any and all rights you may have
to receive payment of any Consideration or Exercise Consideration (including,
without limitation, any and all Additional Consideration), other than the
payments to which you may be entitled pursuant to Section 1.2(a) of the Stock
Purchase Agreement and Section 3(a)(i) of the Option Agreement. Finally, you
reiterate the representations and warranties contained in Section 2.2 of the
Stock Purchase Agreement and Section 4 of the Option Agreement in relation to
this letter agreement as fully as if this letter agreement were referenced
therein, and agree that the provisions of Sections 6.3, 7.2(a) and 9.1 of the
Stock Purchase Agreement shall for all purposes be applied as if this letter
agreement were so referenced.
<PAGE> 91
This letter agreement shall become effective only upon
consummation of the Stock Purchase Agreement. This letter agreement may not be
amended or any provision hereof waived or modified except by an instrument in
writing signed by each of the parties hereto. This letter 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 law.
[Signature Page Follows]
<PAGE> 92
Very truly yours,
DELPHI FINANCIAL GROUP, INC.
By: /s/ Robert Rosenkranz
---------------------------------
Name: Robert Rosenkranz
Title: Chairman & President
Accepted and agreed to as of
the date first written above:
/s/[Name]
- -------------------------
[Name]
<PAGE> 93
DELPHI FINANCIAL GROUP, INC.
1105 North Market Street
Suite 1230, P.O. Box 8985
Wilmington, Delaware 19899
As of October 1, 1998
John E. Pallat
Thomas J. Dunn
Kenneth C. Griebell
c/o Unicover Managers, Inc.
901 Warrenville Rd., Suite 115
Lisle, IL 60532
RE: UNICOVER MANAGERS, INC.
Dear Sirs:
Reference is made to the Stock Purchase Agreement dated as of
the date hereof by and among Delphi Financial Group, Inc. ("Delphi"), Unicover
Managers, Inc. and Unicover Intermediaries, LLC (collectively, the "Companies")
and the Shareholders named therein (the "Stock Purchase Agreement"). Terms used
but not defined in this letter agreement have the meanings assigned thereto in
the Stock Purchase Agreement.
Simultaneously with the execution hereof, Delphi, the
Companies and the Shareholders have entered into the Stock Purchase Agreement.
Subject to the conditions set forth in the Stock Purchase Agreement, the
Ownership Interests in the Companies held by the Shareholders will be purchased
by Delphi for, in part, the Additional Consideration set forth in the Stock
Purchase Agreement.
Without otherwise affecting (a) your rights and obligations
under the Stock Purchase Agreement or (b) the rights and obligations of, or
Delphi's obligations to, the Non-Management Shareholders under the Stock
Purchase Agreement, as
<PAGE> 94
an additional inducement to Delphi's willingness to enter into the Stock
Purchase Agreement, you hereby grant to Delphi the option to sell to you Delphi
Common Stock equal in value to 10% of each Additional Consideration payment owed
to you pursuant to Section 1.2(b) of the Stock Purchase Agreement (based on the
Market Price of such Delphi Common Stock as of the end of the period for which
such Additional Consideration payment is being made), which option shall be
exerciseable by Delphi at any time up to the time of such Additional
Consideration payment. The Management Shareholders shall pay as the exercise
price 10% of each Additional Consideration payment, which payment may be made by
Delphi withholding an amount of cash equal to such exercise price from the
Additional Consideration payment that would otherwise have been paid to you in
cash and applying such amount in full payment of the exercise price. Any such
shares of Delphi Common Stock shall be treated for all purposes under the Stock
Purchase Agreement as Stock Consideration.
This letter agreement shall become effective only upon
consummation of the Stock Purchase Agreement. This letter agreement may not be
amended or any provision hereof waived or modified except by an instrument in
writing signed by each of the parties hereto. This letter 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 law.
[Signature Page Follows]
<PAGE> 95
Very truly yours,
DELPHI FINANCIAL GROUP, INC.
By: /s/ Robert Rosenkranz
--------------------------------
Name: Robert Rosenkranz
Title: Chairman & President
Accepted and agreed to as of
the date first written above:
/s/ John E. Pallat
- ----------------------------------
John E. Pallat
/s/ Thomas J. Dunn
- ----------------------------------
Thomas J. Dunn
/s/ Kenneth C. Griebell
- ----------------------------------
Kenneth C. Griebell
<PAGE> 1
EXHIBIT 10.1
RELIANCE STANDARD LIFE INSURANCE COMPANY
1998 SENIOR MANAGEMENT INCENTIVE PLAN
FOR THE TWELVE MONTH PERIOD
JANUARY 1, 1998 THROUGH DECEMBER 31, 1998
<PAGE> 2
I OBJECTIVE
To promote profitable growth of Reliance Standard Life Insurance
Company ("RSL") by providing a financial incentive plan that will
compensate its eligible employees for the achievement of results
recommended by the Corporate Compensation Committee (the "Committee")
of the Board of Directors of Reliance Standard Life Insurance Company
(the "Board") and ratified by the Board. Thus, RSL will attract and
retain employees of the highest caliber who will demonstrate
outstanding performance and will assist in the achievement of overall
objectives.
II ADMINISTRATION
The Reliance Standard Life Senior Management Incentive Plan (the
"Plan") will be supervised by the Committee.
The Committee shall have the authority to recommend procedures for the
administration of the Plan to the Board for approval and to take any
and all action necessary to implement such procedures. Any references
in this document to the Board shall include any committee designated by
the Board from time to time to exercise authority with respect to the
Plan, including the Executive Committee of the Board.
III INCENTIVE PARTICIPATION
Eligibility to participate in the Plan is restricted to the positions
outlined in Exhibit B. The approved percentages relate to the
employees' December 31, 1997 base salary. Changes in incentive rates or
participants shall be approved by the Committee and the Board.
Each participant will be notified of his or her participation in the
Plan, either in terms of the applicable percentage participation or
dollar amount, if the specified results are achieved.
IV METHOD
Targets for Operating Results and Personal Objectives, as well as
participants and payout schedules, must be submitted to the Committee
and approved by the Board. The bonus paid is allocated to the
achievement of the established objectives as outlined in Exhibit C
(Method of Computation) and is subject to the Management Pool available
as outlined in Exhibit A (Management Pool).
V DISTRIBUTION
Up to 70% of the estimated bonus amount may be distributed prior to
year-end. Such distribution is subject to the approval of Robert
Rosenkranz. The final payment shall not be distributed until the
amounts are determined and verified. Any estimated payments shall be
deducted from the final distribution which shall be made to eligible
participants
<PAGE> 3
no later than 60 days following the last day of the year for the
performance achieved for the previous year.
VI PAYMENT OF INCENTIVE AND GENERAL GUIDELINES
No employee shall participate in more than one Incentive Compensation
Plan, except as required by transfer within a given year.
Except as provided below, an employee must be employed by RSL at the
close of the year in order to participate in and receive compensation
under the Plan. If employment is terminated during the year on account
of death, disability, or retirement, he or she may participate
proportionately for the part of the year he or she was employed prior
to termination. If employment is terminated during the year for the
convenience of RSL, but not for cause or by resignation, he or she will
participate to the extent (if any) deemed appropriate by the President
of RSL, at his sole discretion. If an employee is terminated for cause
after the close of the year but prior to the date for actual payment of
compensation under this Plan no such compensation will be paid.
If an employee terminates employment (other than on account of death,
disability, or retirement) after the close of the year but prior to the
date for actual payment of compensation under this Plan, the President
of RSL, will unilaterally determine, at his sole discretion, whether
and to what extent (if any), under the circumstances, payment of
incentive compensation to the former employee under the terms of the
Plan would be appropriate.
Participants hired or promoted during the year to a participating
position will become a participant on the first day of the month
following permanent assignment to a participating position after having
been approved by the Committee and the Board of Directors.
This Plan does not constitute a contract between RSL and the
participants, and no participant shall have any legal rights by reason
of the existence of this Plan. It may be changed, modified, amended or
terminated at any time by the Committee or the Board of Directors.
No right or benefit under this Plan shall be subject to anticipation,
alienation, sale, assignment, pledge, encumbrance or charge, and any
attempt to anticipate, alienate, sell, assign, pledge, encumber or
charge the same shall be void; and, if any participant hereunder should
become bankrupt or attempt to participate, alienate, sell, assign,
pledge, encumber or charge any right or benefit hereunder, then such
right or benefit shall, at the discretion of the Committee or the Board
of Directors, cease and terminate. RSL may offset any claim it has
against the participant against any amount to which a participant may
otherwise be entitled to hereunder, but rights hereunder shall not
otherwise be subject to debts or liabilities of the participant.
<PAGE> 4
VII RESPONSIBILITY
The Committee is responsible for establishing appropriate rationale,
strategy and targets within the organizational structure for approval
by the Board of Directors.
If the agreed upon operating strategy for RSL is changed during the
year, objectives and strategies in the Plan may be changed accordingly,
with approval of the Committee or the Board of Directors.
RSL is responsible for providing full financial data to establish
appropriate rates to compute results, obtaining approval of the Plan,
and for coordination of the total program.
<PAGE> 5
EXHIBIT A
MANAGEMENT POOL
I. THE POOL
A pool will be established for the purpose of paying incentive
compensation to senior officers. The pool will be based on a percentage
(1.15%) of the excess by which Delphi's pre-tax, pre-dividend income,
per the Elements of Profit, exceeds 10% of beginning equity (before
application of FAS 115).
The total pool amount available will be the maximum amount which could
be paid to participants in this plan and will be based on the following
formula:
o Minimum pre-tax pre-dividend earnings for Delphi (excluding
compensation expense related to the incentive plan), which
must be achieved before any incentive compensation will be
paid, will be 10% of beginning equity without regard for FAS
115 adjustments.
<TABLE>
<CAPTION>
<S> <C>
Beginning equity (1-1-98) $ 509,486
FAS 115 adjustment (40,545)
-----------
468,941
-----------
Times 10% (minimum earnings) $ 46,894
===========
</TABLE>
o This amount of $46,894 will be subtracted from the actual
pre-tax pre-dividend earnings of Delphi Financial Group as per
Form 10-K, and the result multiplied by the pool (multiplier)
percentage of 1.15%.
o For example, if the actual pre-tax pre-dividend earnings,
exactly matched budget of $126,523, the pool amount would be
$916 as follows:
<TABLE>
<CAPTION>
<S> <C>
Pre-tax pre-dividend earnings $ 126,523
Minimum earnings 46,894
-----------
Pool 79,629
(Multiplier) percentage x 1.15%
-----------
Pool available $ 916
===========
</TABLE>
If actual earnings deviate by 10% from plan earnings, either over or
under, the pool (multiplier) percentage is adjusted.
<PAGE> 6
EXHIBIT A
MANAGEMENT POOL - (Continued)
o If actual pre-tax pre-dividend earnings for Delphi exceed
budgeted pre-tax pre-dividend earnings ($126,523) by 10% or
more, the multiplier of 1.15% will be increased to 1.80%.
Therefore, pre-tax earnings must be at least $139,175 in order
to achieve a multiplier of 1.80%.
o Also, if actual pre-tax pre-dividend earnings for Delphi are
less than budgeted pre-tax pre-dividend earnings ($126,523) by
10% or more, the multiplier will be reduced to 0.75%.
Therefore, if pre-tax pre-dividend earnings decrease to
$113,871 or less, the multiplier will decrease to 0.75%
<PAGE> 7
EXHIBIT B
SENIOR MANAGEMENT PARTICIPANTS
<TABLE>
<CAPTION>
BONUS
NAME POSITION PERCENTAGE
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Charles P. O'Brien President & Chief Executive Officer 75%
Lawrence E. Daurelle Vice President & Treasurer 50%
Kenneth R. Hamm Vice President, Group Actuary 40%
Debra Staples Vice President, Claims Administration 40%
</TABLE>
<PAGE> 8
EXHIBIT C
METHOD OF COMPUTATION
Achievement of specific operating results for Delphi Financial Group, Inc., and
subsidiaries, as described in Exhibit E, have been assigned percentages as shown
on the chart in Exhibit D. The percentage of achievement is determined pro rata
based on the actual achievement at year-end. These percentages are then
aggregated and added to the percentage of achievement awarded to each
participant for personal objectives, as described in Exhibit F.
If results exactly equaled plan, these percentages would total 120%.
The actual sum of these percentages will be multiplied by the participation
percentage (as shown on Exhibit B) and salary as of December 31, 1997 (as shown
on Exhibit G) to determine the amount of incentive compensation.
Finally, the sum of all bonus amounts to be paid to the senior officers listed
in Exhibit G will be compared to the pool amount in Exhibit A. Any excess over
the pool amount will be eliminated pro rata.
<PAGE> 9
EXHIBIT D
1998 INCENTIVE COMPENSATION PLAN OBJECTIVES
<TABLE>
<CAPTION>
Life Insurance Asset
Earnings Per Operating Group Accumulation
Share* Income Production Production Expenses
--------------- --------------- --------------- --------------- -------------------
Objective Objective Objective Objective Objective
($) % ($000) % ($000) % ($000) % ($000) %
--------- --- --------- --- --------- --- ---------- --- --------- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
4.74 40.0 68,200 75.0 98,600 15.0 140,000 10.0 40,600 25.0
4.35 32.5 62,600 60.0 91,800 12.5 120,000 7.5 41,700 20.0
3.96 25.0 57,000 45.0 85,000 10.0 100,000 5.0 42,800 15.0
3.57 17.5 51,400 30.0 78,200 7.5 80,000 2.5 43,900 10.0
3.18 10.0 45,800 15.0 72,600 5.0 60,000 0.0 45,000 5.0
</TABLE>
* Base amount, to be restated for stock dividends as paid during the year.
<PAGE> 10
EXHIBIT E
OBJECTIVES DEFINED
1. EARNINGS PER SHARE (Objective $3.96)
A. Earnings per share (EPS) will be "Income from Continuing
Operations After Dividends on Capital Securities, Excluding
Realized Investment Gains (Losses)" divided by "weighted average
shares outstanding" as reported on the Consolidated Statements of
Income per Form 10-K for Delphi Financial Group, Inc.
2. LIFE INSURANCE COMPANIES OPERATING RESULTS (Objective $57,000)
A. This objective will be operating income per the Elements of Profit
on page two of the monthly financial package for the life
insurance companies only.
3. GROUP PRODUCTION (Objective $85,000)
A. All wholesale and retail production generated through the efforts
of RSL and affiliates will be considered, including business
written by Reliance Standard Life Insurance Company of Texas
(RSL-T) and First Reliance Standard Life Insurance Company (FRSL).
B. Retail Group Production is defined as total new annualized
production for Group Life, Disability (LTD and Weekly Income),
Dental, and Special Risk before deduction of reinsurance.
C. Retail production will be determined using the Paid Annualized
Premium Production Report from the internal financial package,
with certain adjustments. Any policy that has an effective date of
September 30, 1998 or prior and has not been approved by the
Underwriting department will not be included in the 1998 incentive
calculation.
D. For the three-year Special risk policies which are fully paid at
inception, the first year's annualized premium (before discount
factor) will count as production.
E. If a submitted policy does not remain in force for twelve months,
production will be reduced in the year that the policy lapses. In
the case of submitted production in 1997 not equaling paid
production in 1998, adjustments will be made to the Annualized
Paid Production Report in 1998. Likewise, should submitted
production in 1998 not equal paid production in 1999, adjustments
will be made to the Annualized Paid Production Report in 1999.
<PAGE> 11
F. Wholesale production (or alternative distribution) can include
blocks of policies in any line of business listed in Section B
(above). Reinsurance assumed will be included only if the contract
provides for risk transfer and material economic value.
4. ASSET ACCUMULATION PRODUCTION (Objective $100,000)
A. Components of asset accumulation production will include FPA, GIC,
SPDA, MVA, Group annuities and variable products.
B. Blocks of annuity business acquired, regardless of the source,
will be counted in determining actual asset accumulation
production.
C. Reinsurance assumed will be considered for purposes of determining
achievement of this objective only if the contract provides for
risk transfer and has material economic value.
4. EXPENSES (Objective $42,800)
A. The objective is defined as total general expenses on an accrual
basis. The objective will be the RSL-Texas Statutory General
Expenses as shown on the Overview page in the monthly financial
package.
<PAGE> 12
EXHIBIT F
PERSONAL OBJECTIVES
Each senior officer has established personal goals and objectives to be achieved
during 1998.
Achievement of these goals and objectives will be reviewed at year-end 1998 and
a percentage (up to 20%) will be assigned based on results.
<PAGE> 1
EXHIBIT 21.1
DELPHI FINANCIAL GROUP, INC. AND SUBSIDIARIES
LIST OF SUBSIDIARIES OF THE REGISTRANT
Reliance Standard Life Insurance Company of Texas (Incorporated in Texas), a
subsidiary of Delphi Financial Group, Inc.
Reliance Standard Life Insurance Company (Incorporated in Illinois), a
subsidiary of Reliance Standard Life Insurance Company of Texas.
First Reliance Standard Life Insurance Company (Incorporated in New York), a
subsidiary of Reliance Standard Life Insurance Company.
SIG Holdings, Inc. (Incorporated in Delaware), a subsidiary of Delphi Financial
Group, Inc.
Safety National Casualty Corporation (Incorporated in Missouri), a subsidiary of
SIG Holdings, Inc.
Safety National Re (Incorporated in the Cayman Islands), a subsidiary of Safety
National Casualty Corporation
Unicover Managers, Inc. (Incorporated in New Jersey), a subsidiary of Delphi
Financial Group, Inc.
Unicover Intermediaries, LLC (Organized in New Jersey), a subsidiary of Delphi
Financial Group, Inc.
Matrix Absence Management, Inc. (Incorporated in Delaware), a subsidiary of
Delphi Financial Group, Inc.
Matrix Payroll Services, Inc. (Incorporated in California), a subsidiary of
Matrix Absence Management, Inc.
Gunz & Associates, Inc. (Incorporated in California), a subsidiary of Matrix
Absence Management, Inc.
RSL Investors, Inc. (Incorporated in Delaware), a subsidiary of Delphi Financial
Group, Inc.
Chestnut Investors II, Inc. (Incorporated in Delaware), a subsidiary of Delphi
Financial Group, Inc.
Chestnut Investors III, Inc. (Incorporated in Delaware), a subsidiary of Delphi
Financial Group, Inc.
Chestnut Investors IV, Inc. (Incorporated in Delaware), a subsidiary of Delphi
Financial Group, Inc.
DFG II Corporation (Incorporated in Delaware), a subsidiary of Delphi Financial
Group, Inc.
DFG Corporation (Incorporated in Delaware), a subsidiary of DFG II Corporation.
APDEL LLC (Organized in Delaware), a subsidiary of DFG II Corporation and
Chestnut Investors IV, Inc.
Delphi Capital Management, Inc. (Incorporated in Delaware), a subsidiary of
Delphi Financial Group, Inc.
RSL Marketing, Inc. (Incorporated in Nevada), a subsidiary of Delphi Financial
Group, Inc.
Delphi Brokerage Company (Incorporated in Delaware), a subsidiary of Delphi
Financial Group, Inc.
Delphi Funding L.L.C. (Organized in Delaware), a subsidiary of Delphi Financial
Group, Inc.
<PAGE> 1
EXHIBIT 23.1
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statements
(Form S-8 No. 33-42634) pertaining to the Employee Nonqualified Stock Option
Plan, (Form S-8 No. 333-32961) pertaining to the Employee Nonqualified Stock
Option Plan, (Form S-8 No. 33-72614) pertaining to the Employee Stock Purchase
Plan, (Form S-8 No. 33-99164) pertaining to the SIG Holdings, Inc. 1992 Long
Term Incentive, (Form S-3 No. 33-77028) and in the related Prospectus pertaining
to the Shelf Registration of securities of Delphi Financial Group, Inc. of our
report dated February 8, 1999, with respect to the consolidated financial
statements and schedules of Delphi Financial Group, Inc. included in the Annual
Report (Form 10-K) for the year ended December 31, 1998.
/s/ ERNST & YOUNG LLP
Philadelphia, Pennsylvania
March 22, 1999
<PAGE> 1
EXHIBIT 24.1
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, being a director
of Delphi Financial Group, Inc., a Delaware corporation (the "Company"), hereby
constitutes and appoints Robert Rosenkranz and Robert M. Smith, Jr. or either of
them his true and lawful attorney(s)-in-fact and agent(s), with full power of
substitution and resubstitution, for him and in his place and stead in any and
all capacities, to execute one or more Annual Reports for the Company's fiscal
year ended December 31, 1998, on Form 10-K pursuant to the Securities Exchange
Act of 1934, as amended, or such other form as such attorney(s)-in-fact may deem
necessary or desirable, any amendments thereto, and all additional amendments
thereto in such form as either of them may approve, and to file the same with
all exhibits thereto and other documents in connection therewith with the
Securities and Exchange Commission, granting unto said attorney(s)-in-fact and
agent(s) full power and authority to do and perform each and every act and thing
requisite and necessary to be done to the end that such Annual Report or Annual
Reports shall comply with the Securities Exchange Act of 1934, as amended, and
the applicable rules and regulations of the Securities and Exchange Commission
adopted or issued pursuant thereto, as fully and to all intents and purposes as
he might or could do in person, hereby ratifying and confirming all that said
attorney(s)-in-fact and agent(s) or his substitute or resubstitute, may lawfully
do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 5th
day of February, 1999.
/s/ EDWARD A. FOX
---------------------------------
Edward A. Fox
Director
<PAGE> 2
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, being a director
of Delphi Financial Group, Inc., a Delaware corporation (the "Company"), hereby
constitutes and appoints Robert Rosenkranz and Robert M. Smith, Jr. or either of
them his true and lawful attorney(s)-in-fact and agent(s), with full power of
substitution and resubstitution, for him and in his place and stead in any and
all capacities, to execute one or more Annual Reports for the Company's fiscal
year ended December 31, 1998, on Form 10-K pursuant to the Securities Exchange
Act of 1934, as amended, or such other form as such attorney(s)-in-fact may deem
necessary or desirable, any amendments thereto, and all additional amendments
thereto in such form as either of them may approve, and to file the same with
all exhibits thereto and other documents in connection therewith with the
Securities and Exchange Commission, granting unto said attorney(s)-in-fact and
agent(s) full power and authority to do and perform each and every act and thing
requisite and necessary to be done to the end that such Annual Report or Annual
Reports shall comply with the Securities Exchange Act of 1934, as amended, and
the applicable rules and regulations of the Securities and Exchange Commission
adopted or issued pursuant thereto, as fully and to all intents and purposes as
he might or could do in person, hereby ratifying and confirming all that said
attorney(s)-in-fact and agent(s) or his substitute or resubstitute, may lawfully
do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 17th
day of February, 1999.
/s/ CHARLES P. O'BRIEN
---------------------------------
Charles P. O'Brien
Director
<PAGE> 3
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, being a director
of Delphi Financial Group, Inc., a Delaware corporation (the "Company"), hereby
constitutes and appoints Robert Rosenkranz and Robert M. Smith, Jr. or either of
them his true and lawful attorney(s)-in-fact and agent(s), with full power of
substitution and resubstitution, for him and in his place and stead in any and
all capacities, to execute one or more Annual Reports for the Company's fiscal
year ended December 31, 1998, on Form 10-K pursuant to the Securities Exchange
Act of 1934, as amended, or such other form as such attorney(s)-in-fact may deem
necessary or desirable, any amendments thereto, and all additional amendments
thereto in such form as either of them may approve, and to file the same with
all exhibits thereto and other documents in connection therewith with the
Securities and Exchange Commission, granting unto said attorney(s)-in-fact and
agent(s) full power and authority to do and perform each and every act and thing
requisite and necessary to be done to the end that such Annual Report or Annual
Reports shall comply with the Securities Exchange Act of 1934, as amended, and
the applicable rules and regulations of the Securities and Exchange Commission
adopted or issued pursuant thereto, as fully and to all intents and purposes as
he might or could do in person, hereby ratifying and confirming all that said
attorney(s)-in-fact and agent(s) or his substitute or resubstitute, may lawfully
do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 17th
day of February, 1999.
/s/ LEWIS S. RANIERI
---------------------------------
Lewis S. Ranieri
Director
<PAGE> 4
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, being a director
of Delphi Financial Group, Inc., a Delaware corporation (the "Company"), hereby
constitutes and appoints Robert Rosenkranz and Robert M. Smith, Jr. or either of
them his true and lawful attorney(s)-in-fact and agent(s), with full power of
substitution and resubstitution, for him and in his place and stead in any and
all capacities, to execute one or more Annual Reports for the Company's fiscal
year ended December 31, 1998, on Form 10-K pursuant to the Securities Exchange
Act of 1934, as amended, or such other form as such attorney(s)-in-fact may deem
necessary or desirable, any amendments thereto, and all additional amendments
thereto in such form as either of them may approve, and to file the same with
all exhibits thereto and other documents in connection therewith with the
Securities and Exchange Commission, granting unto said attorney(s)-in-fact and
agent(s) full power and authority to do and perform each and every act and thing
requisite and necessary to be done to the end that such Annual Report or Annual
Reports shall comply with the Securities Exchange Act of 1934, as amended, and
the applicable rules and regulations of the Securities and Exchange Commission
adopted or issued pursuant thereto, as fully and to all intents and purposes as
he might or could do in person, hereby ratifying and confirming all that said
attorney(s)-in-fact and agent(s) or his substitute or resubstitute, may lawfully
do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 19th
day of February, 1999.
/s/ THOMAS L. RHODES
---------------------------------
Thomas L. Rhodes
Director
<PAGE> 5
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, being a director
of Delphi Financial Group, Inc., a Delaware corporation (the "Company"), hereby
constitutes and appoints Robert Rosenkranz and Robert M. Smith, Jr. or either of
them his true and lawful attorney(s)-in-fact and agent(s), with full power of
substitution and resubstitution, for him and in his place and stead in any and
all capacities, to execute one or more Annual Reports for the Company's fiscal
year ended December 31, 1998, on Form 10-K pursuant to the Securities Exchange
Act of 1934, as amended, or such other form as such attorney(s)-in-fact may deem
necessary or desirable, any amendments thereto, and all additional amendments
thereto in such form as either of them may approve, and to file the same with
all exhibits thereto and other documents in connection therewith with the
Securities and Exchange Commission, granting unto said attorney(s)-in-fact and
agent(s) full power and authority to do and perform each and every act and thing
requisite and necessary to be done to the end that such Annual Report or Annual
Reports shall comply with the Securities Exchange Act of 1934, as amended, and
the applicable rules and regulations of the Securities and Exchange Commission
adopted or issued pursuant thereto, as fully and to all intents and purposes as
he might or could do in person, hereby ratifying and confirming all that said
attorney(s)-in-fact and agent(s) or his substitute or resubstitute, may lawfully
do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 7th
day of February, 1999.
/s/ B.K. WERNER
----------------------------------
B.K. Werner
Director
<PAGE> 6
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, being the
principal financial officer and principal accounting officer of Delphi Financial
Group, Inc., a Delaware corporation (the "Company"), hereby constitutes and
appoints Robert Rosenkranz and Robert M. Smith, Jr. or either of them his or her
true and lawful attorney(s)-in-fact and agent(s), with full power of
substitution and resubstitution, for him or her and in his or her place and
stead in any and all capacities, to execute one or more Annual Reports for the
Company's fiscal year ended December 31, 1998, on Form 10-K pursuant to the
Securities Exchange Act of 1934, as amended, or such other form as such
attorney(s)-in-fact may deem necessary or desirable, any amendments thereto, and
all additional amendments thereto in such form as either of them may approve,
and to file the same with all exhibits thereto and other documents in connection
therewith with the Securities and Exchange Commission, granting unto said
attorney(s)-in-fact and agent(s) full power and authority to do and perform each
and every act and thing requisite and necessary to be done to the end that such
Annual Report or Annual Reports shall comply with the Securities Exchange Act of
1934, as amended, and the applicable rules and regulations of the Securities and
Exchange Commission adopted or issued pursuant thereto, as fully and to all
intents and purposes as he or she might or could do in person, hereby ratifying
and confirming all that said attorney(s)-in-fact and agent(s) or his substitute
or resubstitute, may lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his or her hand
this 8th day of February, 1999.
/s/ LAWRENCE E. DAURELLE
----------------------------------
Lawrence E. Daurelle
Principal Financial Officer
and Principal Accounting
Officer
<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> 371,762
<RECOVER-REINSURE> 356,030
<DEFERRED-ACQUISITION> 104,460
<TOTAL-ASSETS> 3,396,197
<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> 3,396,197
418,416
<INVESTMENT-INCOME> 168,692
<INVESTMENT-GAINS> 8,060
<OTHER-INCOME> 31,468
<BENEFITS> 342,997
<UNDERWRITING-AMORTIZATION> 25,758
<UNDERWRITING-OTHER> 120,106
<INCOME-PRETAX> 137,775
<INCOME-TAX> 44,688
<INCOME-CONTINUING> 87,035
<DISCONTINUED> 0
<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 15, 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>
