<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended December 31, 1998
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from
_____ to _____.
Commission File Number 1-6563
SAFECO CORPORATION
(Exact name of registrant as specified in its charter)
Washington 91-0742146
(State of Incorporation) (I.R.S. Employer I.D. No.)
SAFECO Plaza, Seattle, Washington 98185
(Address of principal executive offices)
206-545-5000
(Telephone)
Securities registered pursuant to Section
12(g) of the Act:
Common Stock, No Par Value
(136,279,790 shares were outstanding at January 31, 1999)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X]. NO [ ].
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [ ].
The aggregate market value of the voting stock held by nonaffiliates of the
registrant as of January 31, 1999, was $5,300,000,000.
Documents incorporated by reference:
Portions of the registrant's 1998 Annual Report to Shareholders are
incorporated by reference into Parts I and II. Portions of the
registrant's definitive Proxy Statement for the 1999 annual shareholders
meeting to be held May 5, 1999, are incorporated by reference into Part
III.
<PAGE> 2
PART I ITEM 1. BUSINESS
GENERAL
SAFECO Corporation (the Corporation) is a Washington corporation
that owns operating subsidiaries in various segments of insurance and
other financially related businesses. (The Corporation and its
subsidiaries are collectively referred to as "SAFECO".) SAFECO's
businesses operate on a nationwide basis. Non-U.S. operations are
insignificant. The insurance subsidiaries engage in property and
casualty insurance, surety and life insurance, and generated
approximately 95% of SAFECO's total 1998 revenues. The home offices of
the Corporation and its principal subsidiaries are in Seattle and
Redmond, Washington.
On October 1,1997 SAFECO acquired American States Financial
Corporation ("American States"), an Indianapolis, Indiana-based
insurance holding company with 1996 revenues of $2.0 billion. SAFECO
acquired WM Life Insurance Company (WM Life) on December 31, 1997. Both
acquisitions were treated as purchases for accounting purposes. See Note
2 on page 57 of the 1998 Annual Report to Shareholders, incorporated
herein by reference (Exhibit 13), for additional information. As of
December 31, 1998, SAFECO had approximately 13,000 employees.
In February 1998 SAFECO announced its decision to sell its real
estate investment and management operations to focus on its core
insurance and financial services businesses. See page 14 of this report
for additional information. As SAFECO Properties' operations are not
material to the consolidated financial statements they have not been
reclassified as discontinued operations.
SAFECO's insurance subsidiaries engage in two principal lines:
property and casualty (including surety), and life insurance. SAFECO's
property and casualty operation is one of the largest in the United
States. All areas of the insurance business are highly competitive and
no one insurance company or group of insurers dominates the market.
The Corporation and its insurance subsidiaries are subject to
extensive regulation and supervision. This regulation is generally
designed to protect the interests of policyholders rather than
shareholders and other investors. Such regulation, generally
administered by a department of insurance in each state in which the
insurance subsidiaries do business, relates to, among other things, the
standards of solvency that must be met and maintained; the licensing of
insurers and their agents; the nature of and limitations on investments;
the ability to withdraw from the state; the approval of premium rates;
restrictions on the size of risks that may be insured under a single
policy; reserves and provisions for unearned premiums, losses and other
purposes; deposits of securities for the benefit of policyholders;
approval of policy forms; and the regulation of market conduct,
including underwriting and claims practices. State insurance departments
also conduct periodic examinations of the affairs of insurance companies
and require the filing of annual and other reports relating to the
financial condition of insurance companies, holding company issues and
other matters. The Corporation's insurance subsidiaries are collectively
licensed to transact insurance business in all 50 states and the
District of Columbia. See page 28 of the 1998 Annual Report to
Shareholders for more information on regulatory matters.
2
<PAGE> 3
PART I ITEM 1. BUSINESS (CONTINUED)
PROPERTY AND CASUALTY -- OPERATIONS
The Corporation's property and casualty subsidiaries include:
SAFECO Insurance Company of America, General Insurance Company of
America, First National Insurance Company of America, SAFECO National
Insurance Company, SAFECO Insurance Company of Illinois, SAFECO Lloyds
Insurance Company, SAFECO Surplus Lines Insurance Company, American
States Insurance Company, American Economy Insurance Company, American
States Preferred Insurance Company, Insurance Company of Illinois,
American States Insurance Company of Texas, American States Lloyds
Insurance Company, F. B. Beattie & Company, Inc. and SAFECO Select
Insurance Services, Inc.
SAFECO's property and casualty subsidiaries write personal,
commercial and surety lines of insurance through independent agents.
Coverages include automobile, homeowners, fire and allied lines,
workers' compensation, commercial multi-peril, miscellaneous casualty,
surety and fidelity. Products are sold in all states and the District of
Columbia.
As discussed above, SAFECO purchased American States on October
1, 1997. SAFECO's purchase of American States has broadened the product
mix available to the combined companies' agency force, particularly in
introducing American States' small commercial lines products into
existing SAFECO agencies.
Consolidated property and casualty gross premiums written for
SAFECO's ten largest states are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
----------------- ---------------- -----------------
% of % of % of
State Amount Total Amount Total Amount Total
- - ----- ------ ----- ------ ----- ------ -----
(Amounts In Millions)
<S> <C> <C> <C> <C> <C> <C>
California $ 669.1 15% $ 584.0 20% $ 549.4 22%
Washington 587.6 13 444.0 15 389.2 16
Texas 314.3 7 225.0 8 183.2 7
Illinois 273.6 6 151.6 5 111.4 5
Oregon 238.6 5 181.0 6 155.4 6
Missouri 219.3 5 118.4 4 79.9 3
Indiana 167.2 4 50.3 2 17.9 1
Florida 166.9 4 118.8 4 91.8 4
Michigan 131.7 3 58.7 2 40.2 2
Ohio 117.9 3 57.4 2 36.2 1
-------- --- -------- --- -------- ---
2,886.2 65 1,989.2 68 1,654.6 67
All Others 1,555.6 35 998.2 32 808.9 33
-------- --- -------- --- -------- ---
Total $4,441.8 100% $2,987.4 100% $2,463.5 100%
======== === ======== === ======== ===
</TABLE>
The 1997 gross premiums written above include American States
from the October 1, 1997 acquisition date forward. Based on annualized
American States premiums for 1997, the adjusted concentrations are 16%
for California, 13% for Washington, 7% for Texas, 6% for Illinois and 5%
for Oregon.
Personal lines, American States Business Insurance (ASBI),
SAFECO Commercial and surety lines comprised approximately 61%, 21%, 16%
and 2%, respectively, of the 1998 gross premiums written of $4.4
billion.
3
<PAGE> 4
PART I ITEM 1. BUSINESS (CONTINUED)
During 1998 the number of personal lines policies in force
increased by 1.8%, while the number of ASBI policies in force increased
by 2.1%. During the fourth quarter of 1998, premiums written by ASBI
increased 8.5% over the same quarter of 1997. Premiums written by SAFECO
Commercial increased 6.6% in 1998 over 1997. Surety premiums were flat
in 1998 compared with 1997 due to increased rate competition in both the
commercial and contract lines.
Additional financial information about SAFECO's business
segments appears in Note 16 on page 72 of the 1998 Annual Report to
Shareholders.
PROPERTY AND CASUALTY -- LOSS RESERVES
The consolidated financial statements include the estimated
liability (reserves) for unpaid losses and loss adjustment expense
("LAE") of the Corporation's property and casualty insurance
subsidiaries. The liability is presented net of amounts from salvage
and subrogation recoveries and gross of amounts recoverable from
reinsurance.
Reserves for losses that have been reported to SAFECO and
certain legal expenses are established on the "case basis" method.
Claims incurred but not reported (IBNR) and other adjustment expense are
estimated using statistical procedures. Salvage and subrogation
recoveries are accrued using the "case basis" method for large claims
and statistical procedures for smaller claims.
SAFECO's objective is to set reserves that are adequate; that
is, the amounts originally recorded as reserves should at least equal
the amounts ultimately required to settle losses. These reserves
aggregate SAFECO's best estimates of the total ultimate cost of claims
that have been incurred but have not yet been paid. The estimates are
based on past claims experience and consider current claims trends as
well as social, legal and economic conditions, including inflation. The
reserves are not discounted.
Loss and LAE reserve development is reviewed on a regular basis
to determine that the reserving assumptions and methods are appropriate.
Reserves initially determined are compared to the amounts ultimately
paid. A statistical estimate of the projected amounts necessary to
settle outstanding claims is made regularly and compared to the recorded
reserves and adjusted as necessary; such adjustments are included in
current operations. Analysis indicates that SAFECO's reserves are
adequate and probably slightly redundant at December 31, 1998, 1997 and
1996.
The table on page 5 provides an analysis of changes in losses
and LAE reserves for 1998, 1997, and 1996 (net of reinsurance amounts).
Changes in the reserves are reflected in the income statement for the
year when the changes are made. Operations were credited $100.0 million
in 1998 for a decrease in estimated loss and LAE from claims occurring
in years 1997 and prior. This decrease related primarily to American
States operations. Following the acquisition of American States in 1997,
the claims departments of the two companies were combined in 1998. The
unified claims department implemented training and reserving procedures
resulting in lower claims settlements and reduced reserves on prior
years' American States losses. The reductions were in both personal and
commercial auto, workers' compensation and general liability.
4
<PAGE> 5
PART I ITEM 1. BUSINESS (CONTINUED)
The 1997 charge to prior years operations of $30.5 million
included a nonrecurring $40.0 million reserve increase related to the
American States acquisition. This reserve increase related to American
States' assumed reinsurance operations, which had been discontinued by
American States prior to SAFECO's acquisition. Excluding this
nonrecurring charge, the 1997 loss and LAE development on claims
occurring in prior years benefited operations $9.5 million. Operations
were credited $77.7 million in 1996 for loss and LAE development in
prior years.
ANALYSIS OF CHANGES IN LOSS AND LAE EXPENSE RESERVES (NET OF
REINSURANCE):
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
(In Millions)
<S> <C> <C> <C>
Loss and LAE Reserves
at Beginning of Year $4,081.9 $1,955.7 $2,070.1
-------- -------- --------
American States Loss and LAE
Reserves at Acquisition
(October 1, 1997) -- 2,204.6 --
-------- -------- --------
Incurred Loss and LAE for Claims
Occurring in the Current Year 3,163.2 1,969.5 1,658.2
Increase (Decrease) in
Estimated Loss and LAE
for Claims Occurring in Prior Years (100.0) 30.5 (77.7)
-------- -------- --------
Total Incurred Loss and LAE 3,063.2 2,000.0 1,580.5
-------- -------- --------
Loss and LAE Payments for Claims
Occurring During:
Current Year 1,836.2 1,172.1 939.5
Prior Years 1,342.6 906.3 755.4
-------- -------- --------
Total Loss and LAE Payments 3,178.8 2,078.4 1,694.9
-------- -------- --------
Loss and LAE Reserves
at End of Year $3,966.3 $4,081.9 $1,955.7
======== ======== ========
Reconciliation:
Loss and LAE Reserves,
Net of Reinsurance $3,966.3 $4,081.9 $1,955.7
Add: Reinsurance Recoverables
on Unpaid Losses 253.6 228.6 103.4
-------- -------- --------
Loss and LAE Reserves,
Gross of Reinsurance $4,219.9 $4,310.5 $2,059.1
======== ======== ========
</TABLE>
5
<PAGE> 6
PART I ITEM 1. BUSINESS (CONTINUED)
The table on page 7 presents the development of the loss and LAE
reserves for 1988 through 1998. The amounts reported in the table except
for the 1997 and 1998 year end balances are for SAFECO only (i.e., do
not include any amounts for American States.) The top lines of the table
show the estimated reserve for unpaid loss and LAE at December 31 for
each of the indicated years, both gross and net of related reinsurance
amounts. The upper portion of the table shows the cumulative amount paid
with respect to the previously recorded reserve as of the end of each
succeeding year. The next section shows the re-estimated amount of the
previously recorded reserve based on experience as of each succeeding
year. The estimate is increased or decreased as more information becomes
known about individual claims and as changes in conditions and claim
trends become apparent. The lower section of the table shows the
cumulative redundancy developed with respect to the previously recorded
liability as of the end of each succeeding year. For example, the 1988
reserve of $1,426.6 million developed a $28.9 million redundancy after
one year which grew over ten years to a redundancy of $60.9 million.
For 1988 and through 1997, SAFECO's reserve development has been
favorable. This trend reflects several factors: aggressive reserving
previously undertaken to correct deficiencies in years prior to 1988,
favorable workers' compensation legislation, moderation of medical costs
and inflation, and claims department changes. The favorable legislation
in workers' compensation, which relates primarily to the states of
Oregon and California in the early 1990's, helped reduce fraud, allowed
for faster claim settlement and made it more difficult to reopen claims
-- all of which reduced SAFECO's ultimate loss costs. The cost of claim
settlements in several lines of business has benefited from changes in
the organization of SAFECO's claims department which has established
separate specialized units for workers' compensation, environmental
exposures and fraud investigations. In addition, increased focus on
adjustment expenses helped reduce these costs.
In evaluating the reserve development table on page 7, note that
each amount includes the effects of all changes in amounts for prior
periods. For example, the amount of the redundancy shown for the
December 31, 1997 reserves that relates to losses incurred in 1988 is
included in the cumulative redundancy amount for the years 1988 through
1996. Conditions and trends that have affected development of the
liability in the past may not necessarily occur in the future.
Accordingly, it may not be appropriate to extrapolate future
redundancies or deficiencies based on this table.
6
<PAGE> 7
PART I ITEM 1. BUSINESS (CONTINUED)
ANALYSIS OF LOSSES AND ADJUSTMENT EXPENSE RESERVE DEVELOPMENT
<TABLE>
<CAPTION>
Year Ended December 31 1988 1989 1990 1991 1992 1993 1994
-------- -------- -------- -------- -------- -------- --------
(In Millions)
<S> <C> <C> <C> <C> <C> <C> <C>
Reserve for Unpaid
Losses and Adjustment
Expenses:
Gross of Reinsurance $1,523.6 $1,702.5 $1,872.1 $2,017.3 $2,052.3 $2,095.2 $2,236.8
Reinsurance 97.0 75.3 80.7 152.0 89.2 100.1 143.9
-------- -------- -------- -------- -------- -------- --------
Net of Reinsurance $1,426.6 $1,627.2 $1,791.4 $1,865.3 $1,963.1 $1,995.1 $2,092.9
======== ======== ======== ======== ======== ======== ========
Cumulative Net Amount Paid as of:
One Year Later $ 443.1 $ 540.2 $ 603.0 $ 584.9 $ 598.9 $ 620.5 $ 693.0
Two Years Later 725.7 849.6 914.5 905.7 913.4 947.6 1,068.3
Three Years Later 902.5 1,035.0 1,109.4 1,086.5 1,106.0 1,147.6 1,252.9
Four Years Later 1,010.3 1,149.5 1,221.6 1,207.2 1,230.6 1,252.5 1,341.5
Five Years Later 1,083.5 1,222.1 1,301.1 1,294.4 1,295.7 1,300.2
Six Years Later 1,129.9 1,276.4 1,368.9 1,336.7 1,326.1
Seven Years Later 1,169.9 1,323.0 1,403.5 1,356.9
Eight Years Later 1,203.4 1,344.0 1.419.0
Nine Years Later 1,220.3 1,359.4
Ten Years Later 1,232.4
Net Reserve Re-estimated as of:
One Year Later 1,397.7 1,621.9 1,767.4 1,820.7 1,866.2 1,913.8 2,033.2
Two Years Later 1,368.1 1,593.6 1,705.8 1,732.8 1,782.1 1,818.3 1,902.3
Three Years Later 1,355.8 1,541.4 1,666.1 1,686.0 1,712.2 1,716.1 1,801.9
Four Years Later 1,338.6 1,544.8 1,657.2 1,650.7 1,642.3 1,643.6 1,733.8
Five Years Later 1,360.5 1,549.9 1,637.5 1,594.9 1,600.9 1,599.8
Six Years Later 1,386.7 1,546.9 1,608.5 1,569.5 1,554.7
Seven Years Later 1,383.3 1,525.4 1,595.4 1,548.7
Eight Years Later 1,373.7 1,515.4 1,586.7
Nine Years Later 1,369.2 1,510.0
Ten Years Later 1,365.7
Cumulative Net Redundancy as of:
One Year Later 28.9 5.3 24.0 44.6 96.9 81.3 59.7
Two Years Later 58.5 33.6 85.6 132.5 181.0 176.8 190.6
Three Years Later 70.8 85.8 125.3 179.3 250.9 279.0 291.0
Four Years Later 88.0 82.4 134.2 214.6 320.8 351.5 359.1
Five Years Later 66.1 77.3 153.9 270.4 362.2 395.3
Six Years Later 39.9 80.3 182.9 295.8 408.4
Seven Years Later 43.3 101.8 196.0 316.6
Eight Years Later 52.9 111.8 204.7
Nine Years Later 57.4 117.2
Ten Years Later 60.9
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31 1995 1996 1997 1998
-------- -------- -------- --------
(In Millions)
<S> <C> <C> <C> <C>
Reserve for Unpaid
Losses and Adjustment
Expenses:
Gross of Reinsurance $2,180.8 $2,059.1 $4,310.5 $4,219.9
Reinsurance 110.7 103.4 228.6 253.6
-------- -------- -------- --------
Net of Reinsurance $2,070.1 $1,955.7 $4,081.9 $3,966.3
======== ======== ======== ========
Cumulative Net Amount Paid as of:
One Year Later $ 755.4 $ 772.9 $1,345.5
Two Years Later 1,095.0 1,101.4
Three Years Later 1,267.6
Four Years Later
Five Years Later
Six Years Later
Seven Years Later
Eight Years Later
Nine Years Later
Ten Years Later
Net Reserve Re-estimated as of:
One Year Later 1,992.4 1,947.7 3,981.9
Two Years Later 1,889.9 1,861.4
Three Years Later 1,804.7
Four Years Later
Five Years Later
Six Years Later
Seven Years Later
Eight Years Later
Nine Years Later
Ten Years Later
Cumulative Net Redundancy as of:
One Year Later 77.7 8.0 100.0
Two Years Later 180.2 94.3
Three Years Later 265.4
Four Years Later
Five Years Later
Six Years Later
Seven Years Later
Eight Years Later
Nine Years Later
Ten Years Later
</TABLE>
7
<PAGE> 8
PART I ITEM 1. BUSINESS (CONTINUED)
The following table summarizes reserve development, gross of
reinsurance, for the last three years. The 1995 and 1996 reserve amounts
are for SAFECO only (i.e. does not include any amounts for American
States).
<TABLE>
<CAPTION>
1995 1996 1997
-------- -------- --------
(In Millions)
<S> <C> <C> <C>
Gross Reserves $2,180.8 $2,059.1 $4,310.5
======== ======== ========
Cumulative Development
Net of Reinsurance $ 265.4 $ 94.3 $ 100.0
Cumulative Development
of Reinsurance Ceded 3.6 (9.8) (43.1)
-------- -------- --------
Cumulative Development
Gross of Reinsurance $ 269.0 $ 84.5 $ 56.9
======== ======== ========
</TABLE>
Environmental and Asbestos Claims
The property and casualty companies' reserves for losses and LAE
for liability coverages related to environmental, asbestos and other
toxic claims totaled $329.8 million at December 31, 1998 compared with
$346.9 million at December 31, 1997. These amounts are before the effect
of reinsurance, which totaled $30.9 million and $24.7 million at
December 31, 1998 and 1997. These reserves are approximately 8% of total
property and casualty reserves for losses and LAE at both December 31,
1998 and December 31, 1997. The reserves include estimates for both
reported and IBNR losses and related legal expenses.
The vast majority of SAFECO' property and casualty insurance
subsidiaries' environmental, asbestos and other toxic claims result from
the commercial general liability line of business and the discontinued
assumed reinsurance operations of American States. A few of these losses
occur in other coverages such as umbrella, small commercial package
policies and personal lines. Approximately 6,000 of these claims were
pending at December 31, 1998, computed on an occurrence basis. Most of
these pending environmental claims involve some type of
environmental-related coverage dispute. The average settlement cost of
each environmental, asbestos and other toxic claim for 1998 was $13,200
including legal expenses.
The following table summarizes the components of SAFECO's
reserves for environmental, asbestos and other toxic claims at December
31, 1998, before the effect of reinsurance:
<TABLE>
<CAPTION>
Loss LAE Total
------ ------ ------
(In Millions)
<S> <C> <C> <C>
Case $103.6 $ 28.8 $132.4
IBNR 153.5 43.9 197.4
------ ------ ------
Total $257.1 $ 72.7 $329.8
====== ====== ======
</TABLE>
8
<PAGE> 9
PART I ITEM 1. BUSINESS (CONTINUED)
This table shows the loss reserve activity analysis for
liability coverages related to environmental, asbestos and other toxic
claims, before the effect of reinsurance.
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
(In Millions)
<S> <C> <C> <C>
Reserves at Beginning of Year $346.9 $102.8 $107.5
American States Reserves at Acquisition -- 264.4 --
Incurred Losses and LAE 1.6 (9.9) 4.6
Losses and LAE Payments (18.7) (10.4) (9.3)
------ ------ ------
Reserves at End of Year $329.8 $346.9 $102.8
====== ====== ======
</TABLE>
Although estimation of environmental claims is difficult, the
reserves established for these claims at December 31, 1998 are believed
to be adequate based on the known facts and current law. SAFECO has
generally avoided writing coverages for larger companies with
substantial exposure in these areas. In view of changes in environmental
regulations and evolving case law which affect the development of loss
reserves, the process of estimating loss reserves for environmental,
asbestos and other toxic claims results in imprecise estimates.
Quantitative loss reserving techniques have to be supplemented by
subjective considerations and managerial judgment. Because of these
conditions, trends that have affected development of these liabilities
in the past may not necessarily occur in the future.
Construction Defect Claims
Prior to its acquisition by SAFECO, American States had
experienced adverse loss development on construction defect claims.
Construction defect claims are a subset of claims that arise from
coverage provided by general property damage liability insurance. They
are defined as those claims involving allegations of defective work
which result in claims for damages related to the diminution of value of
large construction projects, such as condominiums, office buildings,
shopping centers and housing developments. The vast majority of American
States' reported construction defect claims involve construction
activity in California, with most of such reported claims being incurred
in accident years prior to 1994.
From an operational perspective, in late 1992, American States
established a dedicated claims unit specifically for the management of
construction defect claims. SAFECO has not historically separated these
claims for the purpose of reserve analysis. Beginning in 1993, American
States intentionally began reducing the volume of new contractor
business written in California. American States' reserves for
construction defect claims totaled $328.6 million at December 31, 1998
and $340.3 million at December 31, 1997, representing approximately 8%
of total property and casualty reserves for losses and LAE at both
December 31, 1998 and 1997. The reserves established for these claims at
December 31, 1998 are believed to be adequate.
9
<PAGE> 10
PART I ITEM 1. BUSINESS (CONTINUED)
This following table shows the loss reserve activity analysis
for American States construction defect claims after the effect of
reinsurance for 1998 (the first full year following the acquisition):
<TABLE>
<CAPTION>
1998
------
(In Millions)
<S> <C>
Reserves at Beginning of Year $340.3
Incurred Losses and LAE 55.4
Losses and LAE Payments (67.1)
------
Reserves at End of Year $328.6
======
</TABLE>
GAAP vs. Statutory
State regulatory authorities require SAFECO's property and
casualty insurance subsidiaries to file annual statements prepared on an
accounting basis prescribed or permitted by their respective state of
domicile (that is, on a statutory basis). The difference between the
$4,219.9 million reserve at December 31, 1998, for the losses and LAE
disclosed in the consolidated financial statements in accordance with
generally accepted accounting principles (GAAP), and the $3,966.3
million reported in the annual statements filed with state regulatory
authorities relates to reinsurance recoverables. Under FASB Statement
113, the GAAP-basis liability for losses and LAE is reported gross of
amounts recoverable from reinsurance. Statutory-basis financial
statements show the liability net of reinsurance.
Reinsurance
SAFECO's property and casualty companies use treaty and
facultative reinsurance to help manage exposure to loss. As noted above,
the liability for unpaid losses and LAE is reported gross of reinsurance
recoverables of $253.6 million at December 31, 1998 and $228.6 million
at December 31, 1997. The availability and cost of reinsurance are
subject to prevailing market conditions, both in terms of price and
available capacity. Although the reinsurer is liable to SAFECO to the
extent of the reinsurance ceded, SAFECO remains primarily liable to the
policyholder as the direct insurer on all risks insured. To SAFECO's
knowledge none of its reinsurers is experiencing financial difficulties.
SAFECO's catastrophe property reinsurance program for 1999 is
unchanged from 1998 and covers 90% of $400 million of single-event
losses in excess of a $100 million retention. In a large catastrophe,
SAFECO would, therefore, retain the first $100 million of losses, 10% of
the next $400 million and all losses in excess of $500 million. In
addition to this nationwide coverage, for all states other than
California SAFECO has a supplemental earthquake-only reinsurance
contract that would cover 90% of $350 million of single-event earthquake
losses in excess of $500 million. Both of these 1999 catastrophe
property reinsurance contracts include provisions for one reinstatement
for a second catastrophe event in 1999 at current rates.
SAFECO's insurance subsidiaries do not enter into retrospective
reinsurance contracts and do not participate in any unusual or
nonrecurring reinsurance transactions such as "swaps" of reserves or
loss portfolio transfers. SAFECO does not use "funding covers" and does
not participate in any surplus relief transactions. For additional
information on reinsurance, see Note 6 on page 65 of the 1998 Annual
Report to Shareholders.
10
<PAGE> 11
PART I ITEM 1. BUSINESS (CONTINUED)
LIFE -- OPERATIONS
The Corporation's subsidiaries engaged in the life insurance
business are SAFECO Life Insurance Company, SAFECO National Life
Insurance Company, First SAFECO National Life Insurance Company of New
York, American States Life Insurance Company, Empire Life Insurance
Company and SAFECO Administrative Services, Inc. (collectively referred
to as "SAFECO Life"). These companies offer individual and group
insurance products, retirement services (pension) and annuity products.
SAFECO Life markets these products through professional agents in all
states and the District of Columbia. The most significant product lines
in terms of premium/deposit volume are single premium immediate and
deferred annuities, business-owned life insurance (BOLI), indexed and
variable annuities, tax-sheltered annuities for the education and
nonprofit markets, corporate retirement plans, excess loss group medical
insurance and individual life insurance.
SAFECO acquired American States Life on October 1, 1997 and WM
Life Insurance Company on December 31, 1997. Both acquisitions have been
treated as purchases for accounting purposes. WM Life Insurance Company
was merged into SAFECO Life Insurance Company on July 1, 1998.
SAFECO Life reinsures portions of its individual and group life,
accident and health insurance through commercial reinsurance treaties,
thus providing protection against large risks and catastrophe
situations.
Funds received under deposit contracts relate primarily to the
annuity and retirement services products of SAFECO's life insurance
subsidiaries. The table on page 12 summarizes the components of funds
held under deposit contracts at December 31, 1998, and describes the
applicable surrender charges and surrender experience.
11
<PAGE> 12
PART I ITEM 1. BUSINESS (CONTINUED)
DETAIL OF SAFECO LIFE INSURANCE COMPANIES' FUNDS HELD UNDER DEPOSIT CONTRACTS
<TABLE>
<CAPTION>
Outstanding at Expected Maturities Range of Credited or Approximate
12/31/98 of Liabilities Assumed Interest Rates Surrender
Product (In Millions) (at issue date) at 12/31/98 Surrender Charges Experience
------- ------------- --------------- ----------- ----------------- ----------
<S> <C> <C> <C> <C> <C>
Universal $1,367.4 Approximately 10-20 5.25% to 7.15% Varies by issue age, 7% per annum
Individual Years sex and duration from
Life $1 to $58 per $1,000
of insurance
Annuities:
Structured 5,531.6 Over 25 Years 3.5% to 12.40% Cannot surrender Cannot surrender
Settlement
Immediate
Retirement
Services:
Guaranteed 605.2 Typically 5.63% to 6.20% Market value adjustment or Less than 1%
Investment 2-5 Years cannot surrender in first year per annum
Contracts
Other 4,490.9 Approximately 4.00% to 7.95% Highest surrender charges range 13% per annum
Annuities & 5-20 Years from 10% to 5%, graded down to
Deposits 0% within 5 to 10 years. SAFECO
has the option to defer payout
over 5 years for about 13%
of these contracts.
723.0 Approximately Equity return credited Typically 8% in year 1 graded to 2% to 3% per annum
Equity 6 Years is based on S&P 500 0% after year 6.
Indexed performance with a
Annuities minimum guarantee of
0%. Floor return
based on a minimum
fixed return on a
portion (typically
90%) of the
original deposit
amount.
---------
Total $12,718.1
=========
</TABLE>
12
<PAGE> 13
PART I ITEM 1. BUSINESS (CONTINUED)
INVESTMENTS
A description of SAFECO's investment portfolio appears on pages
38-40 of the 1998 Annual Report to Shareholders. The rest of this
section provides additional information about SAFECO's mortgage-backed
securities and investment income yields.
SAFECO's consolidated investment in mortgage-backed securities
of $3.7 billion at market value at December 31, 1998, consists mainly of
residential collateralized mortgage obligations (CMOs) and
pass-throughs. The life portfolio contains virtually all of these
securities. Approximately 92% of the mortgage-backed securities are
government/agency-backed or AAA rated at December 31, 1998. SAFECO has
intentionally limited its investment in riskier, more volatile CMOs
(principal only, inverse floaters, and so forth) to less than 1% of
total mortgage-backed securities at December 31, 1998.
SAFECO Consolidated Holdings of Mortgage-Backed Securities at
December 31, 1998:
<TABLE>
<CAPTION>
GAAP Market Value
-----------------------
Amortized
Cost Amount %
-------- -------- --------
(Amounts In Millions)
<S> <C> <C> <C>
Residential CMOs:
Planned Amortization Class
(PAC) and
Targeted Amortization Class
(TAC) (Fixed Coupon) $1,088.6 $1,121.6 29.9%
Sequential Pay (SEQ) 726.4 757.5 20.2
Accrual Coupon (Z-Tranche) 647.3 742.0 19.8
Floating Rate 42.3 42.8 1.1
Companion/Support, Principal Only,
Inverse Floaters 24.7 26.9 0.8
-------- -------- --------
Subtotal 2,529.3 2,690.8 71.8
-------- -------- --------
Residential Mortgage-Backed
Pass-Throughs (Non-CMOs):
Government/Agency-Backed 75.0 75.3 2.0
Private Issue 13.1 13.3 0.4
-------- -------- --------
Subtotal 88.1 88.6 2.4
-------- -------- --------
Securitized Commercial
Real Estate:
Government/Agency-Backed 373.6 388.3 10.4
Pass-Throughs (Non-agency) 93.5 95.6 2.5
CMOs (Non-agency) 278.4 284.0 7.6
-------- -------- --------
Subtotal 745.5 767.9 20.5
-------- -------- --------
Asset-Backed Securities
(Non-Real Estate): 196.9 199.1 5.3
-------- -------- --------
Total Mortgaged-Backed
Securities $3,559.8 $3,746.4 100.0%
======== ======== ========
</TABLE>
13
<PAGE> 14
PART I ITEM 1. BUSINESS (CONTINUED)
This table shows the quality distribution of SAFECO's mortgage-backed
security portfolio (GAAP market values):
<TABLE>
<CAPTION>
Percent at
Rating December 31, 1998
------ -----------------
<S> <C>
Government/Agency Backed 56%
AAA 36
AA 3
A 2
BBB 3
BB or lower --
---
Total 100%
===
</TABLE>
The table below summarizes pretax investment income yields for
SAFECO's property and casualty and life insurance subsidiaries
(calculations are based on GAAP amortized cost):
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Property and Casualty 6.3% 6.6% 6.8%
Life 7.8% 7.9% 8.1%
</TABLE>
Investment income yields declined in both portfolios mainly
because of the lower interest rate environment in all years shown.
OTHER OPERATIONS
SAFECO's other operations include subsidiaries involved in
commercial lending and leasing (SAFECO Credit), investment management
and insurance agency and financial services distribution operations.
In February 1998 SAFECO announced its decision to sell its real
estate investment and management operations to focus on its core
insurance and financial services businesses. These operations include
SAFECO Properties, Inc. and its subsidiaries Winmar Company, Inc., which
primarily develops and manages retail shopping centers, and SAFECARE
Company, Inc., which invests in medical real estate including skilled
nursing, retirement and assisted living facilities. In February 1999
SAFECO closed the sale on the majority of SAFECO Properties' assets to
The Macerich Partnership, L.P. and the Ontario Teacher's Pension Plan
Board for $427 million. The closing was the first phase in a series of
sales of SAFECO Properties' holdings. The sales of two additional
properties for the combined proceeds of approximately $143 million are
expected to be completed during the second quarter of 1999. SAFECO is
continuing to market its remaining properties, which have a book value
of approximately $200 million. SAFECO expects to recognize a gain on
the sale of all of the properties. As SAFECO Properties' operations
are not material to the consolidated financial statements they have
not been reclassified as discontinued operations.
14
<PAGE> 15
PART I ITEM 1. BUSINESS (CONTINUED)
SAFECO Credit Company, Inc., organized in 1969, provides loans
and equipment financing and leasing to commercial businesses, including
affiliated companies. At December 31, 1998, 14% of the Credit Company's
outstanding loans and leases consisted of loans to affiliated SAFECO
companies.
SAFECO Asset Management Company, acquired in 1973, is the
investment advisor for SAFECO's mutual funds, variable annuity
portfolios and outside pension and trust accounts.
SAFECO Securities, Inc., organized in 1967, is the principal
underwriter of the SAFECO Mutual Funds, comprising the SAFECO Common
Stock Trust, SAFECO Taxable Bond Trust, SAFECO Tax-Exempt Bond Trust,
SAFECO Money Market Trust, and the SAFECO Managed Bond Trust. These five
trusts are made up of nineteen separate investment portfolios, all of
which are sold directly to the public. Fifteen of these portfolios have
two additional classes of stock which are sold to the public through
broker/dealers.
In addition, SAFECO Securities, Inc. is the principal
underwriter for the SAFECO Resource Series Trust mutual fund, with six
separate investment portfolios. SAFECO Securities is also the principal
underwriter for the variable insurance products issued by SAFECO
Resource Variable Account B, SAFECO Separate Account SL and SAFECO
Separate Account C, all of which are separate accounts of SAFECO Life
Insurance Company and for First SAFECO Separate Account S, which is a
separate account of First SAFECO National Life Insurance Company of New
York.
SAFECO Services Corporation, organized in 1972, is the transfer
agent for SAFECO's mutual funds.
SAFECO Trust Company, organized in 1994, provides asset
management and trust administrative services to high net worth
individuals and unrelated organizations.
SAFECO Investment Services, Inc., organized in 1986, is a
broker/dealer that distributes affiliated and nonaffiliated mutual funds
and variable insurance products through its registered representatives.
Talbot Financial Corporation, acquired in 1993, is a broad-based
insurance broker with a heavy emphasis on the distribution of qualified
and nonqualified annuity products and mutual funds through the banking
and brokerage arenas.
15
<PAGE> 16
PART I ITEM 2. PROPERTIES
SAFECO's property and casualty insurance companies lease their
home office complex located in Seattle, Washington from General America
Corporation (a wholly-owned subsidiary of SAFECO Corporation). This
complex totals 567,000 gross square feet. A 700-car parking garage is
connected to the complex. SAFECO's life insurance companies lease their
headquarters building located in Redmond, Washington from General
America Corporation. This complex totals 232,000 gross square feet.
SAFECO is currently developing approximately 650,000 gross
square feet of additional office space for its use on land near the life
insurance companies' Redmond, Washington headquarters.
American States' main office complex is leased from a third
party and is located in Indianapolis, Indiana. This 408,000 gross square
foot complex is leased through 2009.
Other buildings owned and occupied include service facilities in
Redmond, Washington and Indianapolis, Indiana, as well as regional and
branch offices in Fountain Valley and Pleasant Hill, CA; Denver, CO;
Atlanta, GA; Carol Stream, IL; St. Louis, MO; Cincinnati, OH; Portland,
OR; Montlake Terrace, Redmond, and Spokane, WA. These buildings comprise
approximately 1,800,000 gross square feet. All other branch and service
offices occupy leased premises comprising approximately 2,000,000 square
feet, generally for periods of five years or less.
SAFECO Properties, Inc., and its subsidiaries Winmar Company,
Inc. and SAFECARE Company, Inc., invest in and manage real estate
properties, primarily retail shopping centers throughout the United
States. The properties are owned by subsidiaries of Winmar and in
conjunction with other investors, and others are leased under long-term
leases. See Item 1 on page 14 of this report and Note 2 on page 57 of
the 1998 Annual Report to Shareholders for additional information.
ITEM 3. LEGAL PROCEEDINGS
Because of the nature of their businesses, the Corporation's
insurance and other subsidiaries are subject to certain legal actions
filed or threatened in the ordinary course of their business operations,
generally as liability insurers defending third-party claims brought
against their insureds or as insurers defending policy coverage claims
brought against them. The Corporation does not believe that such
litigation will have a material adverse effect on its financial
condition, future operating results or liquidity.
The property and casualty insurance subsidiaries of the
Corporation are parties to a number of lawsuits for liability coverages
related to environmental claims. Although estimation of environmental
claims loss reserves is difficult, the Corporation believes that
reserves established for these claims are adequate based on the known
facts and current law. The loss and loss adjustment expense with respect
to any such lawsuit, or all lawsuits related to a single incident
combined, are not expected to be material to the financial condition of
SAFECO. See page 8 of Item 1 for more information regarding the
liability of such subsidiaries for environmental claims and the process
of estimating environmental loss reserves.
Four of the Corporation's property and casualty insurance
subsidiaries were among 23 underwriters of real property insurance named
as defendants in a case brought in February 1996 in the United States
District Court for the Western District of Missouri alleging that their
underwriting, sales and marketing practices violated the Fair Housing
Act and certain other civil rights laws. The trial court refused to
certify the plaintiff class and dismissed the lawsuit in June 1997. The
plaintiffs appealed. In July 1998 the Eighth Circuit Court of Appeals
upheld the
16
<PAGE> 17
PART 1 ITEM 3. LEGAL PROCEEDINGS(CONTINUED)
dismissal, and in January 1999 the United States Supreme Court refused
to grant certiori to hear the case. Meanwhile, in January 1999, a group
of plaintiffs filed separate lawsuits in Missouri state court against
the SAFECO property and casualty insurance companies named in the
federal court action. The state court action against the SAFECO
defendants was removed to federal district court in February 1999 and
assigned to the same judge who had ordered dismissal of the original
federal court action. Based on current information, management expects
that the remaining lawsuits against the SAFECO subsidiaries will be
dismissed just as the original federal court action was and intends to
vigorously pursue such dismissal.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders,
through the solicitation of proxies or otherwise, during the fourth
quarter of 1998.
EXECUTIVE OFFICERS OF THE REGISTRANT
As of March 24, 1999, these are the names, ages and positions of
the executive officers of the Registrant as required by Item 10. No
family relationships exist.
<TABLE>
<S> <C> <C>
Roger H. Eigsti 56 Chairman since May 1993. Chief Executive Officer since January 1992. President
from May 1989 to August 1996. Chief Operating Officer from 1989 to 1991. Executive
Vice President and Chief Financial Officer from 1985 to 1989. Director since 1988.
Boh A. Dickey 54 President and Chief Operating Officer since August 1996. Executive Vice President
from January 1992 to August 1996. Chief Financial Officer from May 1989 to August
1996. Senior Vice President from 1989 to 1991. Secretary from 1985 to 1991. Vice
President and Controller from 1982 to 1989. Director since 1993.
Rodney A. Pierson 51 Chief Financial Officer since August 1996. Senior Vice President since February
1994. Secretary since 1991. Controller from 1990 to 1997. Vice President from 1990
to 1994. Vice President of SAFECO Property and Casualty Insurance Companies from
1987 to 1990. Controller of SAFECO Property and Casualty Insurance Companies from
1984 to 1990.
James W. Ruddy 49 Senior Vice President since 1992. General Counsel since 1989. Vice President from
1989 to 1992. Associate General Counsel from 1985 to 1989.
W. Randall Stoddard 51 President of SAFECO Property and Casualty Insurance Companies since July 1997.
Chief Operating Officer of SAFECO Property and Casualty Insurance Companies from
1996 to July 1997. Senior Vice President of Field Operations from 1994 to 1996.
Randall H. Talbot 44 President of SAFECO Life Insurance Companies since February 1998. Chief Executive
Officer and President of Talbot Financial Corporation from 1988 to 1998.
</TABLE>
17
<PAGE> 18
PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SECURITY
HOLDER MATTERS
Pages 41 and 75 of the 1998 Annual Report to Shareholders are
incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
Pages 76 through 79 of the 1998 Annual Report to Shareholders are
incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Pages 26 through 41 of the 1998 Annual Report to Shareholders are
incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Pages 40 and 41 of the 1998 Annual Report to Shareholders are
incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Pages 43 through 75 of the 1998 Annual Report to Shareholders are
incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III The definitive proxy statement to be filed within 120 days after
December 31, 1998, excluding the Annual Report of the Compensation
Committee on Executive Compensation appearing on Pages 6 through 12, is
incorporated herein by reference to fulfill the requirements of ITEM
10, "DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT" (except for
that portion of Item 10 relating to executive officers which appears in
Part I of this 10-K), and to fulfill the requirements of ITEM 11,
"EXECUTIVE COMPENSATION," ITEM 12, "SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT," and ITEM 13, "CERTAIN RELATIONSHIPS
AND RELATED TRANSACTIONS."
18
<PAGE> 19
PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a) (1) Financial Statements
F-1 Consent of Independent Auditors
SAFECO Corporation and Subsidiaries:
The following consolidated financial statements of SAFECO
Corporation and its subsidiaries, included in the 1998 Annual
Report to Shareholders (pages 42 through 75), are incorporated
herein by reference:
Consolidated Balance Sheet
December 31, 1998 and 1997
Statement of Consolidated Income
Years Ended December 31, 1998, 1997 and 1996
Statement of Consolidated Cash Flows
Years Ended December 31, 1998, 1997 and 1996
Statement of Consolidated Comprehensive Income
Years Ended December 31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
December 31, 1998
Report of Independent Auditors
SAFECO Corporation and Subsidiaries Supplemental Consolidating
Information:
F-2 Balance Sheet
December 31, 1998 and 1997
F-3 Statement of Income
Year Ended December 31, 1998
F-4 Statement of Cash Flows
Year Ended December 31, 1998
19
<PAGE> 20
PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(CONTINUED)
(a) (2) Financial Statement Schedules
F-5 Schedule I Summary of Investments Other Than Investments
in Related Parties December 31, 1998
Schedule II Condensed Financial Information of the
Registrant (Parent Company Only):
F-6 Balance Sheet
December 31, 1998 and 1997
F-7 Statement of Income
Years Ended December 31, 1998, 1997 and
1996
F-8 Statement of Cash Flows Years Ended
December 31, 1998, 1997 and 1996
Statement of Changes in Shareholders' Equity
Years Ended December 31, 1998, 1997 and
1996. (See page 48 of the 1998 Annual
Report to Shareholders which is
incorporated herein by reference.)
F-9 Schedule III Supplementary Insurance Information
Years Ended December 31, 1998, 1997 and 1996
F-10 Schedule IV Reinsurance
Years Ended December 31, 1998, 1997 and 1996
F-11 Schedule VI Supplemental Information Concerning
Property/Casualty Insurance Operations
Years Ended December 31, 1998, 1997 and 1996
The following Article 7 schedules are omitted because the
information is provided elsewhere in the Annual Report (Form
10-K) or because of the absence of conditions under which they
are required:
Schedule V
20
<PAGE> 21
PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K(CONTINUED)
(a) (3) Exhibits
F-12 Exhibit Index
Exhibit 3.1 Bylaws (as last amended August 5, 1998),
filed as Exhibit 3 to SAFECO's Quarterly Report
on Form 10-Q for the quarter ended June 30,
1998.
Exhibit 3.2 Restated Articles of Incorporation (as
amended May 7, 1997), filed as Exhibit 3.2 to
SAFECO's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1997.
Exhibit 4.1 SAFECO agrees to furnish the Securities and
Exchange Commission, upon request, with copies
of all instruments defining rights of holders of
long-term debt of SAFECO and its consolidated
subsidiaries.
Exhibit 4.2 Indenture, dated as of July 15, 1997,
between SAFECO and The Chase Manhattan Bank, as
Trustee, filed as Exhibit 4.2 to SAFECO's
Quarterly Report on Form 10-Q for the quarter
ended June 30, 1997.
Exhibit 4.3 Form of Certificate of Exchange Junior
Subordinated Debenture filed as Exhibit 4.2 to
SAFECO's Registration Statement on Form S-4 (No.
333-38205) dated October 17, 1997.
Exhibit 4.4 Certificate of Trust of SAFECO Capital Trust
I dated June 18, 1997, filed as Exhibit 4.4 to
SAFECO's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1997.
Exhibit 4.5 Amended and Restated Declaration of Trust of
SAFECO Capital Trust I dated as of July 15,
1997, filed as Exhibit 4.5 to SAFECO's Quarterly
Report on Form 10-Q for the quarter ended June
30, 1997.
Exhibit 4.6 Form of Exchange Capital Security
Certificate for SAFECO Capital Trust I filed as
Exhibit 4.5 to SAFECO's Registration Statement
on Form S-4 (No. 333-38205) dated October 17,
1997.
Exhibit 4.7 Form of Exchange Guarantee of SAFECO
Corporation relating to the Exchange Capital
Securities filed as Exhibit 4.6 to SAFECO's
Registration Statement on Form S-4 (No.
333-38205) dated October 17, 1997.
21
<PAGE> 22
PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K(CONTINUED)
Exhibit 10.1 Purchase and Sale Agreement by and between
Washington Square, Inc., Kitsap Associates
Limited Partnership, Winmar Cascade, Inc.,
Winmar Oregon, Inc., Winmar of Kitsap, Inc.,
SCIT, Inc., Town Center Associates, and Winmar
Company, Inc., as sellers; and The Macerich
Partnership, L.P., and Ontario Teachers' Pension
Plan Board, as purchaser, dated December 11,
1998. SAFECO agrees to furnish the Securities
and Exchange Commission, upon request, with
copies of all omitted schedules to the foregoing
Purchase and Sale Agreement.
Exhibit 10.4 Five-Year Credit Agreement dated as of
September 24, 1997, among SAFECO; Bank of
America National Trust and Savings Association,
as Agent; Mellon Bank, N.A., as Documentation
Agent; The Chase Manhattan Bank, as Syndication
Agent; and the various co-agents, lead managers,
and financial institutions identified in said
Credit Agreement as parties thereto, filed as
Exhibit 10.1 to SAFECO's Annual Report on Form
10-K for the fiscal year ended December 31,
1997.
The following management contracts and compensatory plan
arrangements:
Exhibit 10.2 SAFECO Corporation Deferred Compensation
Plan for Directors, As Amended and Restated on
November 4, 1998.
Exhibit 10.3 SAFECO Deferred Compensation Plan for
Executives, As Amended and Restated on November
4, 1998.
Exhibit 10.5 Executive Severance Agreements between
SAFECO and each of Roger H. Eigsti and Boh A.
Dickey dated May 23, 1984, filed as Exhibit 10
to SAFECO's Annual Report on Form 10-K for the
fiscal year ended December 31, 1985; the Form of
Executive Severance Agreements between SAFECO
and each of Rod A. Pierson, James W. Ruddy, and
W. Randall Stoddard, in each case dated August
30, 1996, filed as Exhibit 10 to SAFECO's
Quarterly Report on Form 10-Q for the quarter
ended September 30, 1996; and Executive
Severance Agreement between SAFECO and SAFECO
Life Insurance Company and Randall H. Talbot
dated February 7, 1998, filed as Exhibit 10 to
SAFECO's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1998.
Exhibit 10.6 SAFECO Long-Term Incentive Plan of 1997
filed as Exhibit 99.1 to SAFECO's Registration
Statement on Form S-8 (No. 333-26393) dated May
2, 1997.
Exhibit 10.7 Form of Stock Option Contract granted under
the SAFECO Long-Term Incentive Plan of 1997,
filed as Exhibit 10.6 to SAFECO's Annual Report
on Form 10-K for the fiscal year ended December
31, 1997.
22
<PAGE> 23
PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K(CONTINUED)
Exhibit 10.8 Form of Restricted Stock Rights Award
Agreement granted under the SAFECO Long-Term
Incentive Plan of 1997, filed as Exhibit 10.7 to
SAFECO's Annual Report on Form 10-K for the
fiscal year ended December 31, 1997.
Exhibit 10.9 Form of Performance Stock Rights Award
Agreement granted under the SAFECO Long-Term
Incentive Plan of 1997, filed as Exhibit 10.8 to
SAFECO's Annual Report on Form 10-K for the
fiscal year ended December 31, 1997.
Exhibit 10.10 SAFECO Incentive Plan of 1987 contained in
the Prospectus dated November 10, 1989, as
amended January 31, 1990, filed as Exhibit 10 to
SAFECO's Annual Report on Form 10-K for the
fiscal year ended December 31, 1989, and the
Supplement to such Prospectus dated November 8,
1990, filed as Exhibit 10 to Registrant's Annual
Report on Form 10-K for the fiscal year ended
December 31, 1990.
F-13 Exhibit 11 Computation of Income Per Share
F-14 Exhibit 12 Computation of Ratios
F-15 Exhibit 21 Subsidiaries of the Registrant
Exhibit 13 1998 Annual Report to Shareholders
Exhibit 27 Financial Data Schedule
(This exhibit is included only in the electronic
EDGAR filing version of this 10-K. The Financial
Data Schedule is not a separate financial
statement but a schedule that summarizes certain
standard financial information extracted
directly from the financial statements in this
filing.)
(b) Reports on Form 8-K
The Registrant filed two Forms 8-Ks during the quarter ended
December 31, 1998. The Registrant filed an 8-K dated October 14, 1998
under Item 5 (Other Items), announcing that its life operation would
record a pretax charge to earnings in the third quarter of $46.8
million. The Registrant filed an 8-K dated December 17, 1998 under Item
5, announcing an agreement to sell the majority of SAFECO Properties'
assets to The Macerich Partnership, L.P. and the Ontario Teacher's
Pension Plan Board for $570 million.
23
<PAGE> 24
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 on this 24th day of March
1999.
SAFECO CORPORATION
-----------------------------------
Registrant
/s/ ROGER H. EIGSTI
------------------------------------
Roger H. Eigsti, Chairman and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities indicated on March 24, 1999.
<TABLE>
<S> <C>
Name Title
---- -----
<S> <C>
/s/ ROGER H. EIGSTI Chairman and
- - ---------------------------------- Chief Executive Officer
Roger H. Eigsti
/s/ BOH A. DICKEY President,
- - ---------------------------------- Chief Operating Officer
Boh A. Dickey and Director
/s/ ROD A. PIERSON Senior Vice President,
- - ---------------------------------- Chief Financial Officer
Rod A. Pierson and Secretary
/s/ H. PAUL LOWBER Vice President, Controller
- - ---------------------------------- and Chief Accounting Officer
H. Paul Lowber
/s/ PHYLLIS J. CAMPBELL Director
- - ----------------------------------
Phyllis J. Campbell
/s/ ROBERT S. CLINE Director
- - ----------------------------------
Robert S. Cline
/s/ JOHN W. ELLIS Director
- - ----------------------------------
John W. Ellis
</TABLE>
24
<PAGE> 25
<TABLE>
<CAPTION>
Name Title
---- -----
<S> <C>
/s/ WILLIAM P. GERBERDING Director
- - ----------------------------------
William P. Gerberding
/s/ JOSHUA GREEN III Director
- - ----------------------------------
Joshua Green III
/s/ WILLIAM W. KRIPPAEHNE, JR. Director
- - ----------------------------------
William W. Krippaehne, Jr.
/s/ WILLIAM G. REED, JR. Director
- - ----------------------------------
William G. Reed, Jr.
/s/ JUDITH M. RUNSTAD Director
- - ----------------------------------
Judith M. Runstad
/s/ PAUL W. SKINNER Director
- - ----------------------------------
Paul W. Skinner
/s/ GEORGE H. WEYERHAEUSER Director
- - ----------------------------------
George H. Weyerhaeuser
</TABLE>
25
<PAGE> 26
F-1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
SAFECO Corporation:
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of SAFECO Corporation of our report dated February 12, 1999, included in the
1998 Annual Report to Shareholders of SAFECO Corporation.
Our audits also included the financial statement schedules of SAFECO Corporation
listed in Item 14(a). These schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits. In
our opinion, the financial statement schedules referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
We also consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 333-26393) pertaining to the SAFECO Long-Term Incentive Plan of
1997 of our report dated February 12, 1999, with respect to the consolidated
financial statements of SAFECO Corporation incorporated by reference, and our
report included in the preceding paragraph with respect to the financial
statement schedules included in this Annual Report (Form 10-K) for the year
ended December 31, 1998 of SAFECO Corporation.
ERNST & YOUNG LLP
Seattle, Washington
March 23, 1999
<PAGE> 27
Balance Sheet - Supplemental Consolidating Information, SAFECO CORPORATION
AND SUBSIDIARIES F-2
December 31, 1998
- - -------------------------------------------------------------------------------
(In Millions)
<TABLE>
<CAPTION>
Property &
ASSETS Casualty Life Real Estate
-------- --------- -----------
<S> <C> <C> <C>
Investments:
Fixed Maturities Available-for-Sale, at Market Value $ 6,954.0 $10,785.2 $ --
Fixed Maturities Held-to-Maturity, at Amortized Cost -- 2,720.9 --
Marketable Equity Securities, at Market Value 1,910.5 37.9 --
Mortgage Loans 66.6 675.6 --
Real Estate (At cost less accumulated depreciation) -- 8.2 597.7
Policy Loans -- 88.3 --
Short-Term Investments 291.1 63.2 2.1
--------- --------- ---------
Total Investments 9,222.2 14,379.3 599.8
Cash 46.4 10.1 0.6
Accrued Investment Income 119.2 199.2 --
Finance Receivables (Less unearned finance charges
and allowance for doubtful accounts) -- -- --
Loans to Affiliates -- -- --
Premiums and Other Service Fees Receivable 948.3 12.5 10.3
Other Notes and Accounts Receivable 51.4 106.4 20.0
Reinsurance Recoverables 270.4 47.0 --
Deferred Policy Acquisition Costs 308.0 213.1 --
Land, Buildings and Equipment for Company Use
(At cost less accumulated depreciation) 236.9 1.5 1.7
Goodwill 1,252.9 67.2 --
Other Assets 113.8 100.1 7.3
Separate Account Assets -- 1,201.1 --
--------- --------- ---------
Total $12,569.5 $16,337.5 $ 639.7
========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Losses and Adjustment Expense $ 4,219.9 $ 42.8 $ --
Life Policy Liabilities -- 276.8 --
Unearned Premiums 1,742.2 8.7 --
Funds Held Under Deposit Contracts -- 12,718.1 --
Debt:
Commercial Paper -- -- --
Credit Company Borrowings - Nonaffiliates -- -- --
Credit Company Borrowings - Affiliates -- -- --
7.875% Notes Due 2005 -- -- --
6.875% Notes Due 2007 -- -- --
Other Notes and Mortgages - Nonaffiliates -- -- 161.9
Other Notes and Mortgages - Affiliates -- -- 318.1
Other Liabilities 913.3 251.9 22.1
Income Taxes:
Current 26.3 (16.2) 5.6
Deferred (Includes tax on unrealized appreciation
of investment securities) 227.1 194.2 24.9
Separate Account Liabilities -- 1,201.1 --
--------- --------- ---------
Total Liabilities 7,128.8 14,677.4 532.6
--------- --------- ---------
Capital Securities -- -- --
--------- --------- ---------
Common Stock 25.0 11.0 --
Additional Paid-In Capital 3,011.7 266.3 42.1
Retained Earnings 1,343.4 1,036.8 65.0
Total Accumulated Other Comprehensive Income 1,060.6 346.0 --
--------- --------- ---------
Total Shareholders' Equity 5,440.7 1,660.1 107.1
--------- --------- ---------
Total $12,569.5 $16,337.5 $ 639.7
========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
Other and
ASSETS Credit Company Elimination Consolidated
-------------- ----------- ------------
<S> <C> <C> <C>
Investments:
Fixed Maturities Available-for-Sale, at Market Value $ -- $ 116.4 $17,855.6
Fixed Maturities Held-to-Maturity, at Amortized Cost -- -- 2,720.9
Marketable Equity Securities, at Market Value -- 88.2 2,036.6
Mortgage Loans -- (200.7) 541.5
Real Estate (At cost less accumulated depreciation) -- (4.7) 601.2
Policy Loans -- -- 88.3
Short-Term Investments 1.0 (41.5) 315.9
--------- --------- ---------
Total Investments 1.0 (42.3) 24,160.0
Cash 4.6 13.2 74.9
Accrued Investment Income 3.2 1.6 323.2
Finance Receivables (Less unearned finance charges
and allowance for doubtful accounts) 1,207.7 -- 1,207.7
Loans to Affiliates 206.1 (206.1) --
Premiums and Other Service Fees Receivable -- 7.2 978.3
Other Notes and Accounts Receivable 5.4 (28.0) 155.2
Reinsurance Recoverables -- -- 317.4
Deferred Policy Acquisition Costs -- -- 521.1
Land, Buildings and Equipment for Company Use
(At cost less accumulated depreciation) 0.3 39.8 280.2
Goodwill -- 38.9 1,359.0
Other Assets 100.0 (7.6) 313.6
Separate Account Assets -- -- 1,201.1
--------- --------- ---------
Total $ 1,528.3 $ (183.3) $30,891.7
========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Losses and Adjustment Expense $ -- $ -- $ 4,262.7
Life Policy Liabilities -- -- 276.8
Unearned Premiums -- -- 1,750.9
Funds Held Under Deposit Contracts -- -- 12,718.1
Debt:
Commercial Paper -- 732.7 732.7
Credit Company Borrowings - Nonaffiliates 1,255.2 -- 1,255.2
Credit Company Borrowings - Affiliates 61.0 (61.0) --
7.875% Notes Due 2005 -- 200.0 200.0
6.875% Notes Due 2007 -- 200.0 200.0
Other Notes and Mortgages - Nonaffiliates -- 65.8 227.7
Other Notes and Mortgages - Affiliates -- (318.1) --
Other Liabilities 36.5 (70.3) 1,153.5
Income Taxes:
Current (0.2) (13.0) 2.5
Deferred (Includes tax on unrealized appreciation
of investment securities) 47.3 (0.9) 492.6
Separate Account Liabilities -- -- 1,201.1
--------- --------- ---------
---------
Total Liabilities 1,399.8 735.2 24,473.8
--------- --------- ---------
Capital Securities -- 842.1 842.1
--------- --------- ---------
Common Stock 1.0 848.0 885.0
Additional Paid-In Capital 27.0 (3,347.1) --
Retained Earnings 100.5 711.5 3,257.2
Total Accumulated Other Comprehensive Income -- 27.0 1,433.6
--------- --------- ---------
Total Shareholders' Equity 128.5 (1,760.6) 5,575.8
--------- --------- ---------
Total $ 1,528.3 $ (183.3) $30,891.7
========= ========= =========
</TABLE>
<PAGE> 28
Balance Sheet - Supplemental Consolidating Information, SAFECO CORPORATION AND
SUBSIDIARIES F-2
December 31, 1997 Continued
- - -------------------------------------------------------------------------------
(In Millions)
<TABLE>
<CAPTION>
Property &
ASSETS Casualty Life Real Estate
-------- ---- -----------
<S> <C> <C> <C>
Investments:
Fixed Maturities Available-for-Sale, at Market Value $ 7,135.3 $ 9,875.9 $ --
Fixed Maturities Held-to-Maturity, at Amortized Cost -- 2,708.6 --
Marketable Equity Securities, at Market Value 1,742.1 39.3 --
Mortgage Loans 12.0 663.7 --
Real Estate (At cost less accumulated depreciation) -- 3.6 587.0
Policy Loans -- 85.3 --
Short-Term Investments 224.5 66.5 3.1
--------- --------- ---------
Total Investments 9,113.9 13,442.9 590.1
Cash 96.1 246.3 --
Accrued Investment Income 142.9 189.7 --
Finance Receivables (Less unearned finance charges
and allowance for doubtful accounts) -- -- --
Loans to Affiliates -- -- --
Premiums and Other Service Fees Receivable 925.3 12.4 9.4
Other Notes and Accounts Receivable 18.0 37.0 17.1
Reinsurance Recoverables 268.3 42.7 --
Deferred Policy Acquisition Costs 305.5 239.3 --
Land, Buildings and Equipment for Company Use
(At cost less accumulated depreciation) 207.9 1.6 2.4
Goodwill 1,261.0 35.4 0.4
Other Assets 153.2 145.2 6.6
Separate Account Assets -- 905.4 --
--------- --------- ---------
Total $12,492.1 $15,297.9 $ 626.0
========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Losses and Adjustment Expense $ 4,310.5 $ 41.7 $ --
Life Policy Liabilities -- 275.8 --
Unearned Premiums 1,701.5 12.2 --
Funds Held Under Deposit Contracts -- 11,877.9 --
Debt:
Commercial Paper -- -- --
Credit Company Borrowings - Nonaffiliates -- -- --
Credit Company Borrowings - Affiliates -- -- --
7.875% Notes Due 2005 -- -- --
6.875% Notes Due 2007 -- -- --
Other Notes and Mortgages - Nonaffiliates -- -- 193.2
Other Notes and Mortgages - Affiliates -- -- 289.0
Other Liabilities 884.4 306.1 23.3
Income Taxes:
Current (13.5) 21.2 (12.1)
Deferred (Includes tax on unrealized appreciation
of investment securities) 192.6 172.9 28.8
Separate Account Liabilities -- 905.4 --
--------- --------- ---------
Total Liabilities 7,075.5 13,613.2 522.2
--------- --------- ---------
Capital Securities -- -- --
--------- --------- ---------
Common Stock 25.0 11.0 --
Additional Paid-In Capital 3,012.7 266.3 42.1
Retained Earnings 1,463.1 1,098.1 61.7
Total Accumulated Other Comprehensive Income 915.8 309.3 --
--------- --------- ---------
Total Shareholders' Equity 5,416.6 1,684.7 103.8
--------- --------- ---------
Total $12,492.1 $15,297.9 $ 626.0
========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
Other and
ASSETS Credit Company Eliminations Consolidated
-------------- ------------ ------------
<S> <C> <C> <C>
Investments:
Fixed Maturities Available-for-Sale, at Market Value $ -- $ 132.0 $17,143.2
Fixed Maturities Held-to-Maturity, at Amortized Cost -- -- 2,708.6
Marketable Equity Securities, at Market Value -- 98.3 1,879.7
Mortgage Loans -- (176.7) 499.0
Real Estate (At cost less accumulated depreciation) -- (4.5) 586.1
Policy Loans -- -- 85.3
Short-Term Investments 8.9 (168.3) 134.7
--------- --------- ---------
Total Investments 8.9 (119.2) 23,036.6
Cash 3.7 45.3 391.4
Accrued Investment Income 3.5 0.9 337.0
Finance Receivables (Less unearned finance charges
and allowance for doubtful accounts) 1,004.3 -- 1,004.3
Loans to Affiliates 162.7 (162.7) --
Premiums and Other Service Fees Receivable -- 6.8 953.9
Other Notes and Accounts Receivable 0.3 (1.3) 71.1
Reinsurance Recoverables -- -- 311.0
Deferred Policy Acquisition Costs -- -- 544.8
Land, Buildings and Equipment for Company Use
(At cost less accumulated depreciation) 0.5 25.6 238.0
Goodwill -- 35.8 1,332.6
Other Assets 94.1 (57.4) 341.7
Separate Account Assets -- -- 905.4
--------- --------- ---------
Total $ 1,278.0 $ (226.2) $29,467.8
========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Losses and Adjustment Expense $ -- $ -- $ 4,352.2
Life Policy Liabilities -- -- 275.8
Unearned Premiums -- -- 1,713.7
Funds Held Under Deposit Contracts -- -- 11,877.9
Debt:
Commercial Paper -- 812.8 812.8
Credit Company Borrowings - Nonaffiliates 892.0 -- 892.0
Credit Company Borrowings - Affiliates 195.0 (195.0) --
7.875% Notes Due 2005 -- 200.0 200.0
6.875% Notes Due 2007 -- 200.0 200.0
Other Notes and Mortgages - Nonaffiliates -- 61.9 255.1
Other Notes and Mortgages - Affiliates -- (289.0) --
Other Liabilities 29.9 (20.4) 1,223.3
Income Taxes:
Current (0.3) 14.0 9.3
Deferred (Includes tax on unrealized appreciation
of investment securities) 43.7 8.9 446.9
Separate Account Liabilities -- -- 905.4
--------- --------- ---------
Total Liabilities 1,160.3 793.2 23,164.4
--------- --------- ---------
Capital Securities -- 841.7 841.7
--------- --------- ---------
Common Stock 1.0 872.3 909.3
Additional Paid-In Capital 27.0 (3,348.1) --
Retained Earnings 89.7 586.5 3,299.1
Total Accumulated Other Comprehensive Income -- 28.2 1,253.3
--------- --------- ---------
Total Shareholders' Equity 117.7 (1,861.1) 5,461.7
--------- --------- ---------
Total $ 1,278.0 $ (226.2) $29,467.8
========= ========= =========
</TABLE>
<PAGE> 29
Statement of Income - Supplemental Consolidating Information F-3
SAFECO CORPORATION AND SUBSIDIARIES
Year Ended December 31, 1998
- - -------------------------------------------------------------------------------
(In Millions)
<TABLE>
<CAPTION>
Property & Other and
Casualty Life Real Estate Eliminations Consolidated
-------- ---- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
REVENUES
Insurance:
Property and Casualty Earned Premiums $4,208.3 $ -- $ -- $ -- $4,208.3
Life Premiums and Other Revenues -- 353.4 -- -- 353.4
-------- -------- -------- -------- --------
Total 4,208.3 353.4 -- -- 4,561.7
Real Estate -- -- 77.9 -- 77.9
Credit -- -- -- 98.6 98.6
Asset Management -- -- -- 42.8 42.8
Other -- -- -- 57.6 57.6
Net Investment Income 480.2 1,041.0 -- (2.3) 1,518.9
Realized Investment Gain 94.6 18.3 0.5 (18.8) 94.6
-------- -------- -------- -------- --------
Total 4,783.1 1,412.7 78.4 177.9 6,452.1
-------- -------- -------- -------- --------
EXPENSES
Losses, Adjustment Expense and Policy Benefits 3,063.2 1,045.5 -- -- 4,108.7
Commissions 683.4 101.3 -- -- 784.7
Personnel Costs 303.7 64.5 12.4 58.1 438.7
Interest -- -- 30.9 128.6 159.5
Goodwill Amortization 43.0 3.7 -- 6.8 53.5
Other 288.5 90.6 29.3 40.4 448.8
Write-Off of Deferred Acquisition Costs -- 46.8 -- -- 46.8
Amortization of Deferred Policy Acquisition Costs 744.9 39.2 -- -- 784.1
Deferral of Policy Acquisition Costs (766.0) (69.5) -- -- (835.5)
-------- -------- -------- -------- --------
Total 4,360.7 1,322.1 72.6 233.9 5,989.3
-------- -------- -------- -------- --------
Income Before Income Taxes 422.4 90.6 5.8 (56.0) 462.8
-------- -------- -------- -------- --------
Provision (Benefit) for Income Taxes:
Current 75.4 36.1 6.1 (13.0) 104.6
Deferred (25.4) (3.6) (3.9) (5.7) (38.6)
-------- -------- -------- -------- --------
Total 50.0 32.5 2.2 (18.7) 66.0
-------- -------- -------- -------- --------
Income Before Distributions on Capital Securities 372.4 58.1 3.6 (37.3) 396.8
Distributions on Capital Securities, Net of Tax -- -- -- (44.9) (44.9)
-------- -------- -------- -------- --------
Net Income $ 372.4 $ 58.1 $ 3.6 $ (82.2) $ 351.9
======== ======== ======== ======== ========
</TABLE>
<PAGE> 30
Statement of Cash Flows - Supplemental Consolidating Information F-4
SAFECO CORPORATION AND SUBSIDIARIES
Year Ended December 31, 1998
- - -------------------------------------------------------------------------------
(In Millions)
<TABLE>
<CAPTION>
Property &
Casualty Life Real Estate
-------- ---- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Insurance Premiums Received $4,236.7 $ 251.5 $ --
Dividends and Interest Received 460.9 958.4 2.0
Other Operating Receipts -- 37.0 85.0
Insurance Claims and Policy Benefits Paid (3,155.3) (440.8) --
Underwriting, Acquisition and Insurance Operating
Costs Paid (1,286.1) (215.9) --
Interest Paid and Distributions on Capital Securities -- -- (30.9)
Other Operating Costs Paid -- -- (33.0)
Income Taxes Paid (37.1) (73.1) 11.7
-------- -------- --------
Net Cash Provided by (Used in) Operating Activities 219.1 517.1 34.8
-------- -------- --------
INVESTING ACTIVITIES
Purchases of:
Fixed Maturities Available-for-Sale (1,395.1) (2,179.7) --
Fixed Maturities Held-to-Maturity -- (1.7) --
Equities (135.7) (26.8) --
Other Investments -- (116.0) (105.3)
Maturities of Fixed Maturities Available-for-Sale 324.1 760.0 --
Maturities of Fixed Maturities Held-to-Maturity -- 7.3 --
Sales of:
Fixed Maturities Available-for-Sale 1,349.1 655.3 --
Fixed Maturities Held-to-Maturity -- 18.2 --
Equities 182.3 30.7 --
Other Investments 8.5 93.8 74.0
Net (Increase) Decrease in Short-Term Investments (2.1) 15.2 1.0
Finance Receivables Originated or Acquired -- -- --
Principal Payments Received on Finance Receivables -- -- --
Other (144.5) (26.6) (0.1)
-------- -------- --------
Net Cash Provided by (Used in) Investing Activities 186.6 (770.3) (30.4)
-------- -------- --------
FINANCING ACTIVITIES
Funds Received Under Deposit Contracts -- 1,241.9 --
Return of Funds Held Under Deposit Contracts -- (1,116.0) --
Proceeds from Notes and Mortgage Borrowings -- -- 20.0
Repayment of Notes and Mortgage Borrowings -- -- (49.5)
Net Proceeds from Short-Term Borrowings 78.1 3.5 27.0
Common Stock Reacquired -- -- --
Dividends Paid to Shareholders (530.0) (112.5) --
Other (3.5) 0.1 (1.3)
-------- -------- --------
Net Cash Provided by (Used in) Financing Activities (455.4) 17.0 (3.8)
-------- -------- --------
Net Increase (Decrease) in Cash (49.7) (236.2) 0.6
Cash at the Beginning of Year 96.1 246.3 --
-------- -------- --------
Cash at the End of the Year $ 46.4 $ 10.1 $ 0.6
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Other and
Eliminations Consolidated
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
Insurance Premiums Received $ -- $4,488.2
Dividends and Interest Received 84.7 1,506.0
Other Operating Receipts 129.1 251.1
Insurance Claims and Policy Benefits Paid -- (3,596.1)
Underwriting, Acquisition and Insurance Operating
Costs Paid (28.1) (1,530.1)
Interest Paid and Distributions on Capital Securities (206.6) (237.5)
Other Operating Costs Paid (105.2) (138.2)
Income Taxes Paid 12.7 (85.8)
-------- --------
Net Cash Provided by (Used in) Operating Activities (113.4) 657.6
-------- --------
INVESTING ACTIVITIES
Purchases of:
Fixed Maturities Available-for-Sale (27.4) (3,602.2)
Fixed Maturities Held-to-Maturity -- (1.7)
Equities (7.2) (169.7)
Other Investments 2.4 (218.9)
Maturities of Fixed Maturities Available-for-Sale 26.8 1,110.9
Maturities of Fixed Maturities Held-to-Maturity -- 7.3
Sales of:
Fixed Maturities Available-for-Sale 17.2 2,021.6
Fixed Maturities Held-to-Maturity -- 18.2
Equities 20.1 233.1
Other Investments (17.1) 159.2
Net (Increase) Decrease in Short-Term Investments (107.0) (92.9)
Finance Receivables Originated or Acquired (629.2) (629.2)
Principal Payments Received on Finance Receivables 420.3 420.3
Other (50.5) (221.7)
-------- --------
Net Cash Provided by (Used in) Investing Activities (351.6) (965.7)
-------- --------
FINANCING ACTIVITIES
Funds Received Under Deposit Contracts -- 1,241.9
Return of Funds Held Under Deposit Contracts -- (1,116.0)
Proceeds from Notes and Mortgage Borrowings -- 20.0
Repayment of Notes and Mortgage Borrowings (12.3) (61.8)
Net Proceeds from Short-Term Borrowings 277.8 386.4
Common Stock Reacquired (236.8) (236.8)
Dividends Paid to Shareholders 455.0 (187.5)
Other (49.9) (54.6)
-------- --------
Net Cash Provided by (Used in) Financing Activities 433.8 (8.4)
-------- --------
Net Increase (Decrease) in Cash (31.2) (316.5)
Cash at the Beginning of Year 49.0 391.4
-------- --------
Cash at the End of the Year $ 17.8 $ 74.9
======== ========
</TABLE>
<PAGE> 31
Summary of Investments Other Than Investments in Related Parties F-5
SAFECO CORPORATION AND SUBSIDIARIES Schedule I
December 31, 1998
- - -------------------------------------------------------------------------------
(In Millions)
<TABLE>
<CAPTION>
Amount at
Which Shown in
the Balance
Type of Investment Cost Market Value Sheet
- - ----------------- --------- ------------ --------------
<S> <C> <C> <C>
Fixed Maturities Available-for-Sale
Bonds:
United States Government and Government
Agencies and Authorities $ 1,351.0 $ 1,483.1 $ 1,483.1
States, Municipalities and Political
Subdivisions 4,835.1 5,340.4 5,340.4
Mortgage-Backed Securities 3,251.6 3,397.6 3,397.6
Foreign Governments 208.3 244.5 244.5
Public Utilities 1,675.4 1,792.0 1,792.0
All Other Corporate Bonds 5,085.7 5,317.2 5,317.2
Redeemable Preferred Stocks 272.6 280.8 280.8
--------- --------- ---------
Total Fixed Maturities Classified as Available-for-Sale (1) 16,679.7 $17,855.6 17,855.6
--------- --------- ---------
Fixed Maturities Held-to-Maturity
Bonds:
United States Government and Government
Agencies and Authorities 272.1 $ 374.5 272.1
States, Municipalities and Political
Subdivisions 127.2 153.6 127.2
Mortgage-Backed Securities 308.1 348.8 308.1
Foreign Governments 149.6 198.1 149.6
Public Utilities 416.5 497.3 416.5
All Other Corporate Bonds 1,447.4 1,686.9 1,447.4
--------- --------- ---------
Total Fixed Maturities Classified as Held-to-Maturity (1) 2,720.9 $ 3,259.2 2,720.9
--------- --------- ---------
Equity Securities
Common Stocks:
Public Utilities 68.3 $ 151.9 151.9
Banks, Trust and Insurance Companies 56.2 199.0 199.0
Industrial, Miscellaneous and All Other 660.5 1,493.8 1,493.8
Non-Redeemable Preferred Stocks 167.8 191.9 191.9
--------- --------- ---------
Total Equity Securities 952.8 $ 2,036.6 2,036.6
--------- --------- ---------
Other
Mortgage Loans on Real Estate (1) 541.5 541.5
Real Estate (Net of depreciation) (1) 601.2 601.2
Policy Loans 88.3 88.3
Short-Term Investments 315.9 315.9
--------- ---------
Total Other 1,546.9 1,546.9
--------- ---------
Total Investments $21,900.3 $24,160.0
========= =========
</TABLE>
(1) The carrying value of investments in fixed maturities, mortgage loans and
real estate that have not produced income for the last twelve months is
less than one percent of the total of such investments at December 31,
1998.
<PAGE> 32
Balance Sheet F-6
SAFECO CORPORATION Schedule II
(Parent Company Only)
<TABLE>
<CAPTION>
December 31 1998 1997
-------- --------
(In Millions)
<S> <C> <C>
ASSETS
Investments:
Stock of Subsidiaries - At Cost Plus Equity in
Undistributed Earnings Since Acquisition
(Includes unrealized appreciation of investment
securities, net of tax, held by subsidiaries) $7,443.3 $7,440.1
Fixed Maturities Available-for-Sale,
at Market Value
(Amortized cost: 1998 - $90.1; 1997 - $92.9) 92.9 94.5
Marketable Equity Securities, at Market Value
(Cost: 1998 - $30.4; 1997 - $37.1) 62.5 73.9
Short-Term Investments 82.3 8.7
-------- --------
Total Investments 7,681.0 7,617.2
Cash 0.3 25.5
Dividends Receivable
from Affiliated Companies 14.3 45.5
Accounts Receivable
from Affiliated Companies 3.7 --
Income Taxes - Current 14.1 --
Other Assets 19.0 20.1
-------- --------
Total $7,732.4 $7,708.3
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts Payable to Affiliated Companies $ -- $ 0.8
Accounts and Interest Payable 45.6 43.4
Income Taxes:
Current -- 12.9
Deferred 12.1 13.5
Dividends Payable to Shareholders 47.7 45.2
Debt:
Commercial Paper 732.8 812.8
Medium-Term Notes Due 2002 50.0 50.0
7.875% Notes Due 2005 200.0 200.0
6.875% Notes Due 2007 200.0 200.0
8.072% Junior Subordinated Debentures
(Capital Securities) 868.4 868.0
-------- --------
Total Liabilities 2,156.6 2,246.6
-------- --------
Preferred Stock, No Par Value:
Shares Authorized:10
Shares Issued and Outstanding: None
Common Stock, No Par Value:
Shares Authorized: 300
Shares Reserved for Options:
1998 - 7.5; 1997 - 7.9
Shares Issued and Outstanding:
1998 - 136.3; 1997 - 141.2 885.0 909.3
Retained Earnings 3,257.2 3,299.1
Total Accumulated Other
Comprehensive Income 1,433.6 1,253.3
-------- --------
Total Shareholders' Equity 5,575.8 5,461.7
-------- --------
Total $7,732.4 $7,708.3
======== ========
</TABLE>
<PAGE> 33
Statement of Income F-7
SAFECO CORPORATION Schedule II
(Parent Company Only)
<TABLE>
<CAPTION>
Year Ended December 31 1998 1997 1996
- - ---------------------- ------ ------ ------
(In Millions)
<S> <C> <C> <C>
REVENUES
Dividends -Nonaffiliates $ 2.5 $ 2.8 $ 3.4
Interest -Affiliates 0.2 0.9 1.5
-Others 6.6 20.0 6.1
Equity in Loss of Unconsolidated Affiliate -- -- (1.0)
Realized Gain from Security Investments 5.8 7.9 17.3
------ ------ ------
Total 15.1 31.6 27.3
------ ------ ------
EXPENSES
Interest 152.7 74.3 19.3
Other 1.9 0.8 0.6
------ ------ ------
Total 154.6 75.1 19.9
------ ------ ------
Income (Loss) Before Income Taxes (139.5) (43.5) 7.4
Provision (Benefit) for Income Taxes
(Includes provision on realized gain:
1998 - $2.0; 1997 - $2.8; 1996 - $6.1) (48.9) (16.0) 1.8
------ ------ ------
Income (Loss) Before Equity in Earnings
of Subsidiaries (90.6) (27.5) 5.6
Equity in Earnings of Subsidiaries
(Includes dividends accrued and received) 442.5 457.5 433.4
------ ------ ------
Consolidated Net Income $351.9 $430.0 $439.0
====== ====== ======
Dividends Accrued and Received From Subsidiaries (Cash):
SAFECO Insurance Company of America $144.5 $383.0 $ 75.0
General Insurance Company of America 106.0 316.5 45.5
First National Insurance Company of America 9.0 29.5 4.0
SAFECO National Insurance Company 5.5 4.5 5.0
SAFECO Insurance Company of Illinois 12.0 12.0 12.0
American States Financial Corporation 233.0 -- --
SAFECO Life Insurance Company 90.0 16.0 4.0
SAFECO Administrative Services, Inc. 14.5 0.5 0.6
SAFECO Properties, Inc. 0.2 1.2 1.4
SAFECO Credit Company, Inc. 3.5 3.0 2.2
SAFECO Asset Management Company 5.6 -- --
SAFECO Capital Trust 2.1 1.0 --
------ ------ ------
Total $625.9 $767.2 $149.7
====== ====== ======
</TABLE>
<PAGE> 34
Statement of Cash Flows F-8
SAFECO CORPORATION Schedule II
(Parent Company Only)
<TABLE>
<CAPTION>
Year Ended December 31 1998 1997 1996
- - ---------------------- -------- -------- --------
(In Millions)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Dividends and Interest Received -Affiliates $ 657.3 $ 760.1 $ 148.6
-Others 9.2 23.8 11.1
Interest Paid (150.0) (34.6) (19.3)
Other Operating Costs Paid (1.2) (0.3) (0.3)
Income Taxes Received (Paid) 23.1 31.6 (2.2)
-------- -------- --------
Net Cash Provided by Operating Activities 538.4 780.6 137.9
-------- -------- --------
INVESTING ACTIVITIES
Purchases of:
Fixed Maturities Available-for-Sale (25.7) -- (45.9)
Equities (7.2) -- (5.0)
Maturities of Fixed Maturities Available-for-Sale 25.0 10.6 0.8
Acquisitions, Net of Cash Acquired -- (3,157.2) --
Sales of:
Fixed Maturities Available-for-Sale 3.2 4.3 16.2
Equities 19.3 10.3 42.9
Net Decrease (Increase) in Short-Term Investments (77.3) 18.9 (5.8)
Other (0.4) -- 2.3
-------- -------- --------
Net Cash Provided by (Used in) Investing Activities (63.1) (3,113.1) 5.5
-------- -------- --------
FINANCING ACTIVITIES
Proceeds from Notes and Mortgage Borrowings -- 196.1 --
Net (Repayment of) Proceeds from Short-Term Borrowings (80.0) 811.2 --
Proceeds from Junior Subordinated Debentures (Capital Securities) -- 832.2 --
Proceeds from Common Stock Secondary Offering -- 677.2 --
Common Stock Reacquired (236.8) (10.7) (9.6)
Dividends Paid to Stockholders (187.5) (154.1) (139.9)
Other 3.8 5.9 6.2
-------- -------- --------
Net Cash Provided by (Used in) Financing Activities (500.5) 2,357.8 (143.3)
-------- -------- --------
Net (Decrease) Increase in Cash (25.2) 25.3 0.1
Cash at the Beginning of Year 25.5 0.2 0.1
-------- -------- --------
Cash at the End of Year $ 0.3 $ 25.5 $ 0.2
======== ======== ========
</TABLE>
<PAGE> 35
Supplementary Insurance Information F-9
SAFECO CORPORATION AND SUBSIDIARIES Schedule III
<TABLE>
<CAPTION>
December 31
- - -----------
(In Millions)
Reserve for Other Policy
Future Policy Claims and
Benefits, Benefits
Deferred Losses, Payable
Policy Claims and (Funds Held
Acquisition Loss Unearned Under Deposit
Segment Costs Expenses Premiums Contracts)
- - ------- ----- -------- -------- ----------
<S> <C> <C> <C> <C>
1998
Property and Casualty:
Personal Lines:
Personal Auto $ 67.6 $ 1,046.9 $ 438.7
Homeowners 78.8 215.2 380.3
Other 22.8 91.6 117.8
Commercial Lines:
ASBI(1) 87.3 1,504.8 463.0
SAFECO Commercial 42.6 1,072.0 268.7
Surety 8.2 (59.3) 62.3
Other 0.7 348.7 11.4
----- ------- -------
Total 308.0 4,219.9 1,742.2
----- ------- -------
Life:
Retirement Services 92.6 12.8 -- $ 5,819.0
Settlement Annuities -- -- -- 5,531.6
Group 9.8 83.3 2.3 --
Individual 110.7 223.5 6.4 1,367.5
Other -- -- -- --
----- ----- --- --------
Total 213.1 319.6 8.7 12,718.1
----- ----- --- --------
Real Estate -- -- -- --
Credit -- -- -- --
Asset Management -- -- -- --
Other and Eliminations -- -- -- --
--------- --------- --------- ---------
Consolidated Totals $ 521.1 $ 4,539.5 $ 1,750.9 $12,718.1
========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31
- - ----------------------
(In Millions)
Other
Operating
Costs
Benefits, (Including
Premiums Claims, Amortization of Dividends to
and Service Net Losses and Deferred Policy Policyholders Net
Fee Investment Adjustment Acquisition and Goodwill Premiums
Segment Revenues Income (3) Expenses Costs Amortization) Written
- - ------- -------- ---------- -------- ----- ------------- -------
<S> <C> <C> <C> <C> <C>
1998
Property and Casualty:
Personal Lines:
Personal Auto $ 1,729.7 $ 1,302.0 $ 210.8 $ 114.3 $ 1,740.5
Homeowners 686.7 532.9 182.4 98.9 701.4
Other 165.2 95.6 51.7 28.0 178.0
Commercial Lines:
ASBI(1) 911.6 670.1 175.6 140.7 927.6
SAFECO Commercial 640.9 438.7 110.7 119.3 648.8
Surety 58.5 16.8 14.1 8.4 58.8
Other 15.7 7.1 (0.4) -- 1.5
------- ------- ----- ----- ---------
Total 4,208.3 $ 480.2 3,063.2 744.9 509.6 $ 4,256.6
------- --------- ------- ----- ----- =========
Life:
Retirement Services 25.2 411.7 349.8 26.8 79.7
Settlement Annuities 1.5 449.4 399.1 -- 21.1
Group 203.1 2.7 161.1 3.8 55.0
Individual 110.2 98.4 135.5 8.6 62.2
Other 13.4 78.8 -- -- 19.4
----- ------- ------- ---- -----
Total 353.4 1,041.0 1,045.5 39.2 237.4(2)
----- ------- ------- ---- -----
Real Estate -- -- -- -- 72.6
Credit -- -- -- -- 87.2
Asset Management -- -- -- -- 34.3
Other and Eliminations -- (2.3) -- -- 155.4
--------- --------- --------- --------- ---------
Consolidated Totals $ 4,561.7 $ 1,518.9 $ 4,108.7 $ 784.1 $ 1,096.5
========= ========= ========= ========= =========
</TABLE>
(1) ASBI is American States Business Insurance.
(2) Life other operating costs for 1998 include the $46.8 million
write-off of deferred acquisition costs.
(3) Property and casualty insurance companies' investments are
available for payment of claims and benefits for all product
lines within the segments; therefore, such investments and the
related investment income and gains have not been identified
with specific segments. In the life companies, a major
portion of investment income, realized gains and assets is
specifically identifiable within an industry segment. The
remainder of these amounts has been allocated in proportion to
the mean policy reserves and liabilities identified with each
segment.
<PAGE> 36
Supplementary Insurance Information F-9
SAFECO CORPORATION AND SUBSIDIARIES Schedule III
<TABLE> Continued
<CAPTION>
December 31
- - -----------
(In Millions)
Reserve for Other Policy
Future Policy Claims and
Benefits, Benefits
Deferred Losses, Payable
Policy Claims and (Funds Held
Acquisition Loss Unearned Under Deposit
Segment Costs Expenses Premiums Contracts)
- - ------- ----- -------- -------- ----------
1997
<S> <C> <C> <C> <C>
Property and Casualty:
Personal Lines:
Personal Auto $ 66.0 $ 1,061.1 $ 427.8
Homeowners 77.1 202.2 365.4
Other 23.0 89.6 115.0
Commercial Lines:
ASBI(1) 93.4 1,582.0 447.0
SAFECO Commercial 38.3 1,068.0 266.0
Surety 7.7 (65.3) 61.4
Other -- 372.9 18.9
----- ------- -------
Total 305.5 4,310.5 1,701.5
----- ------- -------
Life:
Retirement Services 115.1 6.0 -- $ 5,666.7
Settlement Annuities -- -- -- 5,108.5
Group 9.1 72.5 2.4 --
Individual 115.1 239.0 9.8 1,102.7
Other -- -- -- --
--------- --------- --------- ---------
Total 239.3 317.5 12.2 11,877.9
--------- --------- --------- ---------
Real Estate -- -- -- --
Credit -- -- -- --
Asset Management -- -- -- --
Other and Eliminations -- -- -- --
--------- --------- --------- ---------
Consolidated Totals $ 544.8 $ 4,628.0 $ 1,713.7 $11,877.9
========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31
- - ----------------------
(In Millions)
Other
Operating
Costs
Benefits, (Including
Premiums Claims, Amortization of Dividends to
and Service Net Losses and Deferred Policy Policyholders Net
Fee Investment Adjustment Acquisition and Goodwill Premiums
Segment Revenues Income (3) Expenses Costs Amortization) Written
- - ------- -------- ---------- -------- ----- ------------- -------
1997
<S> <C> <C> <C> <C> <C> <C>
Property and Casualty:
Personal Lines:
Personal Auto $ 1,268.1 $ 935.2 $ 124.7 $ 99.4 $ 1,292.2
Homeowners 512.0 351.2 106.5 84.9 533.0
Other 139.0 75.5 33.5 26.7 148.0
Commercial Lines:
ASBI(1) 227.3 142.4 130.3 104.0 200.4
SAFECO Commercial 603.6 417.3 77.5 61.8 602.6
Surety 54.4 27.0 17.9 14.3 51.3
Other 12.2 11.4 5.5 4.4 0.7
------- ------- ----- ------- ---------
Total 2,816.6 $ 327.0 1,960.0 495.9 395.5(4) $ 2,828.2
------- --------- ------- ----- ------- =========
Life:
Retirement Services 18.1 355.6 278.5 26.6 41.6
Settlement Annuities 2.1 420.1 368.9 -- 27.8
Group 193.7 2.7 127.9 3.8 52.5
Individual 64.7 63.1 80.9 6.6 33.7
Other 11.6 74.8 -- -- 9.8
--------- --------- --------- --------- ---------
Total 290.2 916.3 856.2 37.0 165.4
--------- --------- --------- --------- ---------
Real Estate -- -- -- -- 65.5
Credit -- -- -- -- 74.7
Asset Management -- -- -- -- 19.6
Other and Eliminations -- 1.4 -- -- 66.9
--------- --------- --------- --------- ---------
Consolidated Totals $ 3,106.8 $ 1,244.7 $ 2,816.2 $ 532.9 $ 787.6
========= ========= ========= ========= =========
</TABLE>
(4) Property and casualty other operating costs for 1997 include
$60.0 million of nonrecurring acquisition charges related to
SAFECO's October 1, 1997 acquisition of American States.
<PAGE> 37
Supplementary Insurance Information F-9
SAFECO CORPORATION AND SUBSIDIARIES Schedule III
Continued
<TABLE>
<CAPTION>
December 31
- - -----------
(In Millions)
Reserve for Other Policy
Future Policy Claims and
Benefits, Benefits
Deferred Losses, Payable
Policy Claims and (Funds Held
Acquisition Loss Unearned Under Deposit
Segment Costs Expenses Premiums Contracts)
- - ------- ----- -------- -------- ----------
<S> <C> <C> <C> <C>
1996
Property and Casualty:
Personal Lines:
Personal Auto $ 41.8 $ 765.3 $ 275.1
Homeowners 52.3 170.5 249.7
Other 18.4 81.9 92.8
Commercial Lines:
SAFECO Commercial 38.8 1,060.8 260.7
Surety 4.3 (23.6) 59.8
Other -- 4.2 --
----- ------- -----
Total 155.6 2,059.1 938.1
----- ------- -----
Life:
Retirement Services 113.0 0.1 -- $4,611.5
Settlement Annuities -- -- -- 4,591.0
Group 8.5 70.2 2.4 --
Individual 119.0 108.5 6.4 590.2
Other -- -- -- --
-------- -------- -------- --------
Total 240.5 178.8 8.8 9,792.7
-------- -------- -------- --------
Real Estate -- -- -- --
Credit -- -- -- --
Asset Management -- -- -- --
Other and Eliminations -- -- -- --
-------- -------- -------- --------
Consolidated Totals $ 396.1 $2,237.9 $ 946.9 $9,792.7
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31
- - ----------------------
(In Millions)
Other
Operating
Costs
Benefits, (Including
Premiums Claims, Amortization of Dividends to
and Service Net Losses and Deferred Policy Policyholders Net
Fee Investment Adjustment Acquisition and Goodwill Premiums
Segment Revenues Income (3) Expenses Costs Amortization) Written
- - ------- -------- ---------- -------- ----- ------------- -------
<S> <C> <C> <C> <C> <C> <C>
1996
Property and Casualty:
Personal Lines:
Personal Auto $1,073.6 $ 761.5 $ 132.0 $ 66.8 $1,085.0
Homeowners 435.0 371.5 119.6 60.5 448.5
Other 131.1 71.5 41.3 21.0 142.8
Commercial Lines:
SAFECO Commercial 573.3 364.6 90.6 111.2 584.0
Surety 51.3 11.4 7.7 4.3 52.8
Other 11.1 -- -- -- --
------- ------- ----- ----- --------
Total 2,275.4 $ 281.6 1,580.5 391.2 263.8 $2,313.1
------- -------- ------- ----- ----- ========
Life:
Retirement Services 9.5 341.4 258.5 26.6 37.2
Settlement Annuities 1.9 386.9 339.6 -- 26.3
Group 198.8 2.8 131.0 4.0 52.9
Individual 44.6 38.8 53.1 5.1 21.0
Other 11.1 66.8 -- -- 10.7
-------- -------- -------- -------- --------
Total 265.9 836.7 782.2 35.7 148.1
-------- -------- -------- -------- --------
Real Estate -- -- -- -- 66.9
Credit -- -- -- -- 65.2
Asset Management -- -- -- -- 15.6
Other and Eliminations -- (1.6) -- -- 37.8
-------- -------- -------- -------- --------
Consolidated Totals $2,541.3 $1,116.7 $2,362.7 $ 426.9 $ 597.4
======== ======== ======== ======== ========
</TABLE>
<PAGE> 38
Reinsurance F-10
SAFECO CORPORATION AND SUBSIDIARIES Schedule IV
Year Ended December 31
- - -------------------------------------------------------------------------------
(In Millions)
<TABLE>
<CAPTION>
Ceded Assumed Percentage
Gross to Other from Other of Amount
Amount Companies Companies Net Amount Assumed to Net
------ --------- --------- ---------- --------------
<S> <C> <C> <C> <C> <C>
1998
Life Insurance In Force at Year End $45,009.4 $(5,378.4) $ 192.2 $39,823.2 0.5%
========= ========= ========= =========
Premiums earned:
Life Insurance $ 198.8 $ (13.1) $ 0.9 $ 186.6 0.5%
Accident/Health Insurance 174.8 (9.6) 1.6 166.8 1.0%
Property/Casualty Insurance 4,378.5 (188.5) 18.3 4,208.3 0.4%
--------- --------- --------- ---------
Total $ 4,752.1 $ (211.2) $ 20.8 $ 4,561.7 0.5%
========= ========= ========= =========
1997
Life Insurance In Force at Year End $43,499.7 $(3,788.5) $ 210.3 $39,921.5 0.5%
========= ========= ========= =========
Premiums earned:
Life Insurance $ 146.9 $ (10.1) $ 0.2 $ 137.0 0.1%
Accident/Health Insurance 160.3 (9.5) 2.4 153.2 1.6%
Property/Casualty Insurance 2,945.3 (155.8) 27.1 2,816.6 1.0%
--------- --------- --------- ---------
Total $ 3,252.5 $ (175.4) $ 29.7 $ 3,106.8 1.0%
========= ========= ========= =========
1996
Life Insurance In Force at Year End $28,524.8 $(1,791.1) $ 80.9 $26,814.6 0.3%
========= ========= ========= =========
Premiums earned:
Life Insurance $ 120.8 $ (5.6) $ 0.2 $ 115.4 0.2%
Accident/Health Insurance 158.6 (8.1) -- 150.5 0.0%
Property/Casualty Insurance 2,404.9 (152.6) 23.1 2,275.4 1.0%
--------- --------- --------- ---------
Total $ 2,684.3 $ (166.3) $ 23.3 $ 2,541.3 0.9%
========= ========= ========= =========
</TABLE>
<PAGE> 39
Supplemental Information Concerning Consolidated Property/Casualty Insurance
Operations
F-11
SAFECO CORPORATION Schedule VI
<TABLE>
<CAPTION>
December 31
- - -----------
(In Millions)
Reserve For Discount
Deferred Unpaid Losses Deducted
Affiliation Policy and from
with Acquisition Adjustment Loss Unearned
Registrant Costs Expenses Reserves Premiums
---------- ----- -------- -------- --------
<S> <C> <C> <C> <C>
Property/Casualty
Subsidiaries:
1998 $ 308.0 $4,219.9 $ -- $1,742.2
1997 $ 305.5 $4,310.5 $ -- $1,701.5
1996 $ 155.6 $2,059.1 $ -- $ 938.1
</TABLE>
<TABLE>
<CAPTION>
December 31 Year Ended December 31
- - ----------- ----------------------
(In Millions) (In Millions)
Losses and Adjustment Amortization
Expenses Incurred of Deferred Paid Losses
Affiliation Net Related to: Policy and Net
with Earned Investment Acquisition Adjustment Premiums
Registrant Premiums Income Current Year Prior Years Costs Expenses Written
---------- -------- ------ ------------ ----------- ----- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Property/Casualty
Subsidiaries:
1998 $4,208.3 $ 480.2 $3,163.2 $ (100.0) $ 744.9 $3,178.8 $4,256.6
1997 $2,816.6 $ 327.0 $1,969.5 $ 30.5(1) $ 495.9 $2,078.4 $2,828.2
1996 $2,275.4 $ 281.6 $1,658.2 $ (77.7) $ 391.2 $1,694.9 $2,313.1
</TABLE>
(1) The 1997 increase in losses and adjustment expense incurred related to
prior years of $30.5 million includes a nonrecurring $40.0 million
reserve increase related to the American States acquisition.
<PAGE> 40
SAFECO CORPORATION AND SUBSIDIARIES F-12
Exhibit Index
- - --------------------------------------------------------------------------------
Exhibit 3.1* Bylaws (as last amended August 5, 1998), filed as Exhibit 3
to SAFECO's Quarterly Report on Form 10-Q for the quarter ended
June 30,1998 (File No. 1-6563), are incorporated herein by this
reference.
Exhibit 3.2* Restated Articles of Incorporation (as amended May 7,1997),
filed as Exhibit 3.2 to SAFECO's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1997 (File No. 1-6563), are
incorporated herein by this reference.
Exhibit 4.1 SAFECO agrees to furnish the Securities and Exchange
Commission, upon request, with copies of all instruments
defining rights of holders of long- term debt of SAFECO and its
consolidated subsidiaries.
Exhibit 4.2* Indenture, dated as of July 15, 1997, between SAFECO and
The Chase Manhattan Bank, as Trustee, filed as Exhibit 4.2 to
SAFECO's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1997 (File No. 1-6563), is incorporated herein by this
reference.
Exhibit 4.3* Form of Certificate of Exchange Junior Subordinated
Debenture filed as Exhibit 4.2 to SAFECO's Registration
Statement on Form S-4 (No. 333-38205) dated October 17,1997, is
incorporated herein by this reference.
Exhibit 4.4* Certificate of Trust of SAFECO Capital Trust I dated June
18, 1997, filed as Exhibit 4.4 to SAFECO's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1997 (File No. 1-6563),
is incorporated herein by this reference.
Exhibit 4.5* Amended and Restated Declaration of Trust of SAFECO Capital
Trust I dated as of July 15, 1997, filed as Exhibit 4.5 to
SAFECO's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1997 (File No. 1-6563), is incorporated herein by this
reference.
Exhibit 4.6* Form of Exchange Capital Security Certificate for SAFECO
Capital Trust I filed as Exhibit 4.5 to SAFECO's Registration
Statement on Form S-4 (No. 333-38205) dated October 17, 1997, is
incorporated herein by this reference.
Exhibit 4.7* Form of Exchange Guarantee of SAFECO corporation relating to the
Exchange Capital Securities, filed as Exhibit 4.6 to SAFECO's
Registration Statement on Form S-4 (No. 333-38205) dated October
17,1997, is incorporated herein by this reference.
Exhibit 10.1* Purchase and Sale Agreement by and between Washington
Square, Inc., Kitsap Associates Limited Partnership, Winmar
Cascade, Inc., Winmar Oregon, Inc., Winmar of Kitsap, Inc.,
SCIT, Inc., Town Center Associates, and Winmar Company, Inc., as
sellers; and The Macerich Partnership, L.P., and Ontario
Teachers' Pension Plan Board, as purchaser, dated December 11,
1998. SAFECO agrees to furnish the Securities and Exchange
Commission, upon request, with copies of all omitted schedules
to the foregoing Purchase and Sale Agreement.
<PAGE> 41
SAFECO CORPORATION AND SUBSIDIARIES F-12
Exhibit Index Continued
- - --------------------------------------------------------------------------------
Exhibit 10.2* SAFECO Corporation Deferred Compensation Plan for
Directors, As Amended and Restated on November 4, 1998.
Exhibit 10.3* SAFECO Deferred Compensation Plan for Executives, As
Amended and Restated on November 4, 1998.
Exhibit 10.4* Five-Year Credit Agreement dated as of September 24, 1997,
among SAFECO; Bank of America National Trust and Savings
Association, as Agent; Mellon Bank, N.A., as Documentation
Agent; The Chase Manhattan Bank, as Syndication Agent; and the
various co-agents, lead managers, and financial institutions
identified in said Credit Agreement as a party thereto, filed as
Exhibit 10.1 to SAFECO's Annual Report on Form 10-K for the
fiscal year ended December 31, 1997 (File No. 1-6563), is
incorporated herein by this reference.
Exhibit 10.5* The following documents are incorporated herein by this
reference: Executive Severance Agreements between SAFECO and
each of Roger H. Eigsti and Boh A. Dickey dated May 23, 1984,
filed as Exhibit 10 to SAFECO's Annual Report on Form 10-K for
the fiscal year ended December 31, 1985 (File No. 1-6563); the
Form of Executive Severance Agreements between SAFECO and each
of Rod A. Pierson, James W. Ruddy, and W. Randall Stoddard, in
each case dated August 30, 1996, filed as Exhibit 10 to SAFECO's
Quarterly Report on Form 10-Q for the quarter ended September
30, 1996 (File No. 1-6563); and Executive Severance Agreement
between SAFECO and SAFECO Life Insurance Company and Randall H.
Talbot dated February 7, 1998, filed as Exhibit 10 to SAFECO's
Quarterly Report on Form 10-Q for the quarter ended March 31,
1998 (File No. 1-6563).
Exhibit 10.6* SAFECO Long-Term Incentive Plan of 1997 filed as Exhibit
99.1 to SAFECO's Registration Statement on Form S-8 (No.
333-26393) dated May 2, 1997, is incorporated herein by this
reference.
Exhibit 10.7* Form of Stock Option Contract granted under the SAFECO
Long-Term Incentive Plan of 1997, filed as Exhibit 10.6 to
SAFECO's Annual Report on Form 10-K for the fiscal year ended
December 31, 1997 (File No. 1-6563).
Exhibit 10.8* Form of Restricted Stock Rights Award Agreement granted
under the SAFECO Long-Term Incentive Plan of 1997, filed as
Exhibit 10.7 to SAFECO's Annual Report on Form 10-K for the
fiscal year ended December 31, 1997 (File No. 1-6563).
Exhibit 10.9* Form of Performance Stock Rights Award Agreement granted
under the SAFECO Long-Term Incentive Plan of 1997, filed as
Exhibit 10.8 to SAFECO's Annual Report on Form 10-K for the
fiscal year ended December 31, 1997 (File No. 1-6563).
<PAGE> 42
SAFECO CORPORATION AND SUBSIDIARIES F-12
Exhibit Index Continued
- - --------------------------------------------------------------------------------
Exhibit 10.10* SAFECO Incentive Plan of 1987 contained in the Prospectus
dated November 10, 1989, as amended January 31, 1990, filed as
Exhibit 10 to SAFECO's Annual Report on Form 10-K for the fiscal
year ended December 31, 1989 (File No. 1-6563), and the
Supplement to such Prospectus dated November 8, 1990, filed as
Exhibit 10 to SAFECO's Annual Report on Form 10-K for the fiscal
year ended December 31, 1990 (File No. 1-6563).
F-13 Exhibit 11 Computations of Income Per Share
F-14 Exhibit 12 Computation of Ratios
F-15 Exhibit 21 Subsidiaries of the Registrant
Exhibit 13* 1998 Annual Report to Shareholders
Exhibit 27 Financial Data Schedule (This exhibit is included only in the
electronic EDGAR filing version of this 10-K. The Financial Data
Schedule is not a separate financial statement but a schedule
that summarizes certain standard financial information extracted
directly from the financial statements in this filing.)
* Copies of these exhibits are available without charge by making a written
request to:
Rod A. Pierson
Senior Vice President and Chief Financial Officer
SAFECO Corporation
SAFECO Plaza
Seattle, Washington 98185
<PAGE> 1
PURCHASE AND SALE AGREEMENT
BY AND BETWEEN
WASHINGTON SQUARE, INC.,
A WASHINGTON CORPORATION,
KITSAP ASSOCIATES LIMITED PARTNERSHIP,
A WASHINGTON LIMITED PARTNERSHIP,
WINMAR CASCADE, INC.,
A WASHINGTON CORPORATION,
WINMAR OREGON, INC.,
AN OREGON CORPORATION,
WINMAR OF KITSAP, INC.,
A WASHINGTON CORPORATION,
SCIT, INC.,
A MASSACHUSETTS CORPORATION,
TOWN CENTER ASSOCIATES,
A WASHINGTON GENERAL PARTNERSHIP,
AND
WINMAR COMPANY, INC.,
A WASHINGTON CORPORATION,
SELLERS
AND
THE MACERICH PARTNERSHIP, L.P.,
A DELAWARE LIMITED PARTNERSHIP,
AND
ONTARIO TEACHERS' PENSION PLAN BOARD,
A NON-SHARE CAPITAL CORPORATION CONTINUED UNDER THE LAWS OF THE
PROVINCE OF ONTARIO,
PURCHASER
DECEMBER 11, 1998
<PAGE> 2
CONTENTS
<TABLE>
<S> <C>
1. Defined Terms.............................................................. 2
2. Purchase and Sale.......................................................... 2
3. Purchase Price and Manner of Payment....................................... 3
3.1 Purchase Price................................................... 3
3.2 Deposit.......................................................... 3
3.3 Payment of Purchase Price........................................ 4
4. Conveyance of Title........................................................ 5
4.1 Method of Conveyance............................................. 5
4.2 State of Title................................................... 6
5. Purchaser's Due Diligence Investigation of the Property.................... 7
5.1 Commitments for Title Insurance and Surveys...................... 7
5.2 Inspection of the Property and Related Information............... 9
5.3 Late Delivery of Surveys......................................... 12
5.4 Indemnification.................................................. 12
6. Representations and Warranties of the Sellers.............................. 13
6.1 Limitations...................................................... 13
6.2 Representations and Warranties................................... 13
7. Purchaser's Representations and Warranties................................. 20
8. Disclosure................................................................. 21
9. "AS-IS" SALE; LIMITATION; DISCLAIMER....................................... 23
10. Additional Covenants of Sellers............................................ 25
11. Additional Covenants of Purchaser.......................................... 29
12. Closing.................................................................... 30
13. Closing Prorations and Adjustments; Assumption of Obligations;
Special Provisions for Redmond Town Center................................. 34
13.1 Closing Prorations and Adjustments............................... 34
13.2 Assumption of Obligations........................................ 34
</TABLE>
PAGE i
<PAGE> 3
<TABLE>
<S> <C>
13.3 Employment Matters............................................... 36
13.4 Redmond Town Center - Parcels 3 and 4 (Buildings 1, 2 and
3) and Parcel 6 (Buildings 4, 5 and 6)........................... 37
13.5 [Intentionally Omitted].......................................... 42
13.6 Redmond Town Center - Parcel 8................................... 42
13.7 Redmond Town Center - Parcels 2-C and 5-B........................ 42
13.8 Survival......................................................... 43
14. Closing Expenses........................................................... 43
15. Conditions to Closing...................................................... 44
15.1 Conditions to Purchaser's Obligation to Close.................... 44
15.2 Conditions to Sellers' Obligation to Close....................... 47
15.3 [Intentionally Omitted.]......................................... 48
15.4 Hart-Scott-Rodino................................................ 48
15.5 Exclusion of the Joint Venture Interest from Closing............. 48
15.6 Exclusion of Redmond Town Center Parcels 3 and 4 and
Redmond Town Center Parcel 6 from Closing........................ 49
16. Remedies................................................................... 51
17. Casualty; Condemnation..................................................... 52
18. Indemnification............................................................ 53
19. Rights and Duties of Escrow Agent.......................................... 56
20. Notices.................................................................... 58
21. Transfer................................................................... 60
22. Confidentiality............................................................ 62
23. Applicable Law............................................................. 63
24. Brokers.................................................................... 63
25. Costs and Expenses......................................................... 63
26. Miscellaneous.............................................................. 63
26.1 Headings......................................................... 63
26.2 Calculation of Time Periods...................................... 64
</TABLE>
PAGE ii
<PAGE> 4
<TABLE>
<S> <C>
26.3 Time of Essence.................................................. 64
26.4 Gender........................................................... 64
26.5 Counterparts..................................................... 64
26.6 Exhibits and Schedules........................................... 64
27. Attorneys' Fees............................................................ 64
28. Unenforceability........................................................... 65
29. Amendment; Modifications................................................... 65
30. Waiver..................................................................... 65
31. Bulk Transfers............................................................. 65
32. Facsimile Signatures....................................................... 65
33. Entire Agreement........................................................... 65
34. Disclosure Under Oregon Law................................................ 66
35. Joinder.................................................................... 66
36. Joint and Several Liability................................................ 68
37. Consent to Jurisdiction.................................................... 68
</TABLE>
PAGE iii
<PAGE> 5
EXHIBITS
<TABLE>
<S> <C>
Exhibit A Sellers and Shopping Centers
Exhibit B Legal Descriptions
Exhibit C Form of Letter of Credit
Exhibit D Form of Deed
Exhibit E Form of Bill of Sale
Exhibit F Form of Deed and Assignment of Ground Lease
Exhibit G Form of Assignment of Leases
Exhibit H Form of Assignment of Contracts
Exhibit I Form of Assignment of Trade Names
Exhibit J Form of Assignment of REA
Exhibit K Form of Assignment of Joint Venture Interest
Exhibit L Form of Survey Certification
Exhibit M-1 Form of Tenant Estoppel
Exhibit M-2 Form of REA Estoppel
Exhibit M-3 Form of Ground Lessor Estoppel
Exhibit M-4 Form of AT&T Wireless Estoppel
Exhibit N SAFECO Life Loan Commitment
Exhibit O Form of Sellers' Estoppel
Exhibit P Form of Macerich Note
Exhibit Q Site Plan of Redmond Town Center
SCHEDULES
Schedule 1 Defined Terms
Schedule 5.1(a) Commitments
Schedule 6.1(a) Persons Included in Seller's Knowledge
Schedule 6.1(c) Anchor Leases
Schedule 6.2(a) Sellers' Required Consents
Schedule 6.2(b) Violations
Schedule 6.2(d) Litigation
Schedule 6.2(f) Environmental
Schedule 6.2(h) Contracts
Schedule 6.2(i)-1 Leases
Schedule 6.2(i)-2 Defaults under Leases
Schedule 6.2(j) Rent Rolls
Schedule 6.2(k) Ground Leases
</TABLE>
PAGE iv
<PAGE> 6
<TABLE>
<S> <C>
Schedule 6.2(m) Certain Personal Property
Schedule 6.2(n) Bonds
Schedule 6.2(p) Indebtedness
Schedule 6.2(q) REAs
Schedule 6.2(s) Brokerage Commissions
Schedule 7(a) Purchaser's Required Consents
Schedule 13.1 Closing Prorations and Adjustments
Schedule 15.1(h)(ii) Certain Required Tenant Estoppel Certificates
</TABLE>
PAGE v
<PAGE> 7
PURCHASE AND SALE AGREEMENT
THIS PURCHASE AND SALE AGREEMENT (this "Agreement") is made as of the
11th day of December, 1998 by and between (a) WASHINGTON SQUARE, INC., a
Washington corporation, KITSAP ASSOCIATES LIMITED PARTNERSHIP, a Washington
limited partnership, WINMAR CASCADE, INC., a Washington corporation, WINMAR
OREGON, INC., an Oregon corporation, WINMAR OF KITSAP, INC., a Washington
corporation, SCIT, INC., a Massachusetts corporation, TOWN CENTER ASSOCIATES, a
Washington general partnership, and WINMAR COMPANY, INC., a Washington
corporation (each, a "Seller" and, collectively, "Sellers") and (b) THE MACERICH
PARTNERSHIP, L.P., a Delaware limited partnership, and ONTARIO TEACHERS' PENSION
PLAN BOARD, a non-share capital corporation continued under the laws of the
Province of Ontario (together, "Purchaser"). SAFECO Corporation, a Washington
corporation ("SAFECO"), and Transnation Title Insurance Company, an Arizona
corporation ("Escrow Agent") are executing this Agreement solely for the limited
purposes set forth in Section 35 below.
RECITALS
A. Each Seller (other than Winmar Company, Inc. ("Winmar Co.")) is the
owner or ground lessee of certain improved real property that comprises one or
more shopping centers, together with, in some cases, either or both unimproved
land and land improved with fully or partially constructed office buildings.
Each such project, and the Seller by which it is owned or ground leased, is
identified by name on Exhibit A hereto. The parcel or parcels of land that
comprise each shopping center, together with any related unimproved land and
land improved with fully or partially completed office buildings, are legally
described in Exhibits B-1 through B-10 hereto.
B. Winmar Co. owns a fifty percent (50%) partnership interest in Oxmoor
Joint Venture (as defined below), which ground leases certain real property on
which the improvements are located that comprise the shopping center identified
on Exhibit A hereto as "Oxmoor Center Mall." The parcel or parcels of land on
which the improvements are located that comprise such shopping center are
legally described in Exhibit B-11 hereto.
C. Purchaser desires to purchase and Sellers desire to sell all of
Sellers' right, title and interest in and to the shopping centers owned or
ground leased by
PAGE 1
<PAGE> 8
Sellers and the related land and improvements, if any, described in Recital A
above and the Oxmoor Center Joint Venture interest owned by Winmar Co. on the
terms and conditions hereinafter set forth.
D. SAFECO is the indirect owner of Sellers.
E. Escrow Agent has agreed, on the terms and conditions hereinafter set
forth, to act as the escrow agent for the transactions contemplated by this
Agreement.
NOW, THEREFORE, in consideration of the mutual covenants contained in
this Agreement and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, Sellers and Purchaser hereby agree
as follows (and SAFECO and Escrow Agent hereby join this Agreement solely for
the limited purposes set forth in Section 35):
1. DEFINED TERMS
Capitalized terms used and not otherwise defined in this Agreement shall
have the meanings given to them in Schedule 1 hereto.
2. PURCHASE AND SALE
(a) Sellers (other than Winmar Co.) shall sell to Purchaser at
Closing, and Purchaser shall purchase from Sellers at Closing, in accordance
with the terms and subject to the conditions contained in this Agreement, all of
Sellers' right, title and interest in and to:
(i) the Owned Land;
(ii) the Improvements;
(iii) the Ground Leases;
(iv) the Personal Property;
(v) the Leases;
(vi) the Trade Names;
(vii) the Assumed Contracts; and
(viii) the REAs.
PAGE 2
<PAGE> 9
(b) Subject to Section 15.5 below, Winmar Co. shall sell to
Purchaser at Closing, and Purchaser shall purchase from Winmar Co. at Closing,
in accordance with the terms hereof, all right, title and interest of Winmar Co.
in and to the Joint Venture Interest.
3. PURCHASE PRICE AND MANNER OF PAYMENT
3.1 PURCHASE PRICE
The aggregate purchase price for the Property shall be Five Hundred
Seventy Million Three Hundred Thousand and No/00 Dollars ($570,300,000) (the
"Purchase Price"). The Purchase Price shall be adjusted as provided in Section
13 below.
3.2 DEPOSIT
(a) Purchaser shall pay the Deposit to Escrow Agent either by
federal wire transfer of immediately available funds to Escrow Agent's account
with Depository in Seattle, Washington, or by delivery to Escrow Agent's offices
in San Francisco, California, of a clean, irrevocable letter of credit that
satisfies the requirements of Section 3.2(c) below or by a combination of the
two, in either case not later than the third (3rd) Business Day next following
the Effective Date. If any portion of the Deposit is initially provided in cash,
Purchaser may replace such portion with a letter of credit that is in a face
amount equal to such cash and that complies with the provisions of Section
3.2(c) below. The Deposit shall be held as hereinafter provided, shall be
applied toward the Purchase Price, if in cash, or returned to Purchaser, if a
letter of credit, upon Closing, and otherwise shall be returned to Purchaser or
released to Sellers as provided in the Agreement. If Purchaser fails to deliver
the Deposit by 5:00 p.m. Seattle, Washington time on the third (3rd) Business
Day next following the Effective Date, this Agreement shall terminate and,
except as otherwise provided herein, be of no further force or effect.
(b) If any portion of the Deposit is provided in the form of
immediately available funds, that portion of the Deposit shall be deposited by
Escrow Agent with the Depository and shall be invested by the Depository in
United States Treasury Bills or other obligations backed by the full faith and
credit of the United States government, in all cases with maturities of ninety
(90) days or less.
(c) If any portion of the Deposit is provided in the form of a
letter of credit, the letter of credit (i) shall be issued by Wells Fargo Bank,
N.A. or another financial institution acceptable to Sellers in their sole, good
faith discretion, (ii) shall
PAGE 3
<PAGE> 10
provide that it may be drawn by Escrow Agent by sight draft presented at a
branch of Wells Fargo Bank, N.A. located in San Francisco, California certifying
only that the Escrow Agent is entitled to draw thereon, (iii) shall have an
expiration date not earlier than one (1) year after the date of issuance, and
(iv) shall otherwise be substantially in the form of Exhibit C attached hereto.
If, by the date that is thirty (30) days prior to the expiration of the original
letter of credit provided by Purchaser, the original letter of credit has not
been returned to Purchaser or drawn by Escrow Agent in accordance with the terms
of this Agreement and Purchaser has not delivered to Escrow Agent, at its
offices in San Francisco, California, either a replacement letter of credit
identical to the original letter of credit or an amendment or endorsement to the
original letter of credit, in each case extending the expiration of the letter
of credit for not less than one (1) year, Escrow Agent, without further
direction or authorization from Purchaser or Sellers, shall draw upon the letter
of credit prior to its expiration and the proceeds thereof shall thereafter be
held in escrow by Escrow Agent at its account, with Depository in Seattle,
Washington, as the Deposit (or a portion thereof) on the terms herein provided.
If, under the terms of the Agreement, Purchaser is entitled to the return of the
Deposit, Escrow Agent shall deliver the letter of credit and all replacements,
amendments and endorsements thereto (or the proceeds thereof, if the letter of
credit has been drawn by Escrow Agent) promptly to Purchaser. If, under the
terms of this Agreement, Sellers are entitled to the release of the Deposit,
Escrow Agent shall promptly draw the letter of credit in full and pay the
proceeds thereof to Sellers. Purchaser hereby releases and waives all claims
against Escrow Agent arising out of or based upon Escrow Agent's good faith
decision to draw a letter of credit provided by Purchaser as the Deposit;
provided, however, that Escrow Agent shall remain responsible for the
disposition of the proceeds of the letter of credit in accordance with the terms
of this Agreement.
3.3 PAYMENT OF PURCHASE PRICE
At Closing, the Purchase Price (as adjusted pursuant to Section 13
below) shall be paid by or on behalf of Purchaser as follows:
(a) A portion of the Purchase Price equal to the then-outstanding
aggregate principal balance of the Assumed Indebtedness shall be deemed to have
been paid to Sellers by Purchaser's assumption of the Assumed Indebtedness as
provided in Section 13.2(c) below.
(b) Intentionally omitted.
PAGE 4
<PAGE> 11
(c) A portion of the Purchase Price equal to Thirty Million Six
Hundred Thousand Dollars ($30,600,000) shall be paid to Sellers by Macerich's
delivery to Winmar Co., for the benefit of all Sellers, of the Macerich Note and
the Macerich Pledge.
(d) Subject to Section 15.6(d) below, Purchaser shall cause
Escrow Agent to pay so much of the Deposit as is held in cash to Sellers by
federal wire transfer of immediately available funds into an account designated
by Winmar Co., acting on behalf of all Sellers, in a written notice given to
Escrow Agent and Purchaser prior to the Closing Date. If the Deposit has been
provided in the form of a letter of credit, the letter of credit shall, subject
to Section 15.6(d) below, be returned to Purchaser upon completion of the
Closing and no credit toward the Purchase Price shall be made except to the
extent that any proceeds of a draw upon the letter of credit are in fact paid to
Sellers at Closing.
(e) The excess of the Purchase Price (as adjusted pursuant to
Section 13 below) over the sum of (i) the then-outstanding aggregate principal
balance of the Assumed Indebtedness, plus (ii) the portion of the Purchase Price
paid in accordance with Section 3.3(c) above, plus (iii) the portion of the
Purchase Price, if any, paid by transfer of the Deposit to Sellers pursuant to
Section 3.3(d) above shall be paid by Purchaser by federal wire transfer of
immediately available funds into the account designated by Winmar Co.
(f) Payment of portions of the Purchase Price by federal wire
transfer of immediately available funds into the account designated by Winmar
Co. shall constitute payment to Sellers and the sole obligation of Purchaser in
respect of the payment of such portions of the Purchase Price shall be to make
payment or cause payment to be made into such account as provided in this
Section 3.3. Provided that Purchaser makes payment or causes payment of the
Purchase Price to be made in accordance with this Section 3.3, Purchaser shall
have no responsibility or liability for the receipt by a particular Seller of
the portion of the Purchase Price to which, as among all Sellers, such Seller
may be entitled.
4. CONVEYANCE OF TITLE
4.1 METHOD OF CONVEYANCE
(a) Each Seller's title to the Owned Land and the Improvements
located thereon shall be conveyed by a Deed.
PAGE 5
<PAGE> 12
(b) Each Seller's interest in the Personal Property shall be
conveyed by a Bill of Sale or by such other method, such as the endorsement of a
certificate of title, as may be appropriate to the type of Personal Property in
question.
(c) Each Seller's interest in the Ground Leases and the
Improvements located on the Ground Leased Land shall be assigned and conveyed by
a Deed and Assignment of Ground Lease.
(d) Each Seller's interest in the Leases shall be assigned by an
Assignment of Leases.
(e) Each Seller's interest in the Assumed Contracts shall be
assigned by an Assignment of Contracts.
(f) Each Seller's interest in the Trade Names shall be conveyed
by an Assignment of Trade Names.
(g) Each Seller's interest under the REAs shall be assigned by an
Assignment of REA.
(h) Winmar Co. shall convey its right, title and interest in and
to the Joint Venture Interest by the Assignment of Joint Venture Interest.
(i) Sellers' rights and obligations under the agreements,
instruments and documents providing for, evidencing, securing or otherwise
pertaining to the Assumed Indebtedness shall be assigned and assumed by
instruments of assignment and assumption in the forms required by the holder of
the Assumed Indebtedness and reasonably acceptable to Purchaser, which
instruments shall include certifications as of the Closing Date from the holders
of the Assumed Indebtedness with respect to (i) the outstanding principal
balance of the Assumed Indebtedness, (ii) the identity of the agreements,
documents and instruments that provide the terms of, evidence and secure the
Assumed Indebtedness, (iii) the absence of known defaults by Sellers with
respect to the Assumed Indebtedness (or by any Affiliates of Sellers that are
parties to any agreements, documents or instruments pertaining to the Assumed
Indebtedness), and (iv) such other factual matters as Purchaser may reasonably
require.
4.2 STATE OF TITLE
(a) Seller's title to the Property (and Oxmoor Joint Venture's
title to the Oxmoor Ground Lease, Oxmoor Improvements, Oxmoor Leases, and
personal
PAGE 6
<PAGE> 13
property owned by Oxmoor Joint Venture) at Closing shall be free and clear of
liens and encumbrances other than the Permitted Encumbrances.
(b) Encumbrances securing indebtedness of a Seller for borrowed
money (other than the Assumed Indebtedness) shall not constitute Permitted
Encumbrances. Monetary encumbrances that are not Permitted Encumbrances shall be
discharged by Sellers either prior to Closing or out of the Purchase Price at
Closing.
5. PURCHASER'S DUE DILIGENCE INVESTIGATION OF THE PROPERTY
5.1 COMMITMENTS FOR TITLE INSURANCE AND SURVEYS
(a) Sellers have heretofore provided Purchaser with the
Commitments identified on Schedule 5.1(a) hereto with respect to the Shopping
Centers, together with a copy of the documents forming the basis for each
exception to coverage noted therein. Within fifteen (15) days after the
Effective Date (or the next Business Day, if such date is not a Business Day),
Purchaser (or Purchaser's attorneys) shall give notice to Winmar Co., as agent
for Sellers, in writing of any objection by Purchaser to those exceptions to
coverage set forth in the Commitments (and any updates to the Commitments
obtained by Purchaser within the first five (5) days of such fifteen (15) day
period, which shall be deemed part of the Commitments), if any, that are not
Permitted Encumbrances within the meaning of any of clauses (a) through (g),
inclusive, of the definition of that term as set forth on Schedule 1 hereto. In
such notice, Purchaser shall also identify those exceptions to coverage set
forth in the Commitments that Purchaser is unable to evaluate without a Survey
of the affected Shopping Center.
(b) As promptly as is commercially practicable after the
Effective Date, Sellers shall deliver to Purchaser, at Sellers' sole cost and
expense, a Survey of each Shopping Center. Within fifteen (15) days after
receipt of a Survey for a Shopping Center (or the next Business Day if such date
is not a Business Day), Purchaser (or Purchaser's attorneys) shall give notice
to Winmar Co., as agent for Sellers, in writing of any objection by Purchaser
(i) to those facts or matters disclosed by the Survey, if any, that are not
Permitted Encumbrances within the meaning of any of clauses (a) through (g),
inclusive, of the definition of that term as set forth on Schedule 1 hereto and
(ii) to those exceptions to coverage set forth in the Commitments that, under
Section 5.1(a) above, Purchaser stated it could not evaluate without a Survey of
the affected Shopping Center, provided same are not Permitted
PAGE 7
<PAGE> 14
Encumbrances within the meaning of any of clauses (a) through (g), inclusive, of
the definition of that term as set forth on Schedule 1 hereto.
(c) [Intentionally omitted.]
(d) If Purchaser notifies Winmar Co., as agent for Sellers, of
its permitted objections to the status of title or to matters disclosed by a
Survey in the manner and within the time periods set forth in Sections 5.1(a)
and (b) above (subject, however, to Section 5.3 below), then Winmar Co, as agent
for Sellers, shall have the right to give notice to Purchaser within five (5)
days thereafter whether Sellers can and will remove (which may be accomplished
by causing Title Insurer to provide affirmative title insurance coverage
reasonably acceptable to Purchaser against the matter to which Purchaser has
objected) or correct the items to which Purchaser has objected. Except as
otherwise provided in Section 4.2(b) with respect to Sellers' obligation to
discharge monetary encumbrances that are not Permitted Encumbrances, Sellers
shall have no duty or obligation of any kind or nature to remove or correct
items to which Purchaser objects and may, in their sole and absolute discretion,
choose not to remove or correct any or all of such objectionable items. If
Winmar Co., as agent for Sellers, does not give notice to Purchaser within such
five (5) day period that Sellers will remove all such objectionable items at or
prior to Closing, then Purchaser shall have the right, by written notice to
Winmar Co., as agent for Sellers, given within five (5) days after Winmar Co.'s
notice is given or the expiration of the period within which such notice was to
have been given, to elect to terminate this Agreement, in which event, this
Agreement shall thereupon be terminated, except for Purchaser's obligations
under Section 5.4 and such other provisions of this Agreement that, by their
terms, survive termination, and Winmar Co., as agent for Sellers, shall promptly
direct Escrow Agent to return the Deposit to Purchaser. If, prior to the
expiration of the period within which Purchaser is entitled to give notice of
Purchaser's permitted objections to the state of title set forth in the
Commitments or to matters disclosed by a Survey under whichever of Section
5.1(a) or (b) is applicable (and subject to Section 5.3 below), either (a)
Purchaser does not give Winmar Co., as agent for Sellers, notice of Purchaser's
permitted objections to exceptions contained in the Commitments or matters
disclosed by the Surveys or (b) Purchaser gives Winmar Co., as agent for
Sellers, notice of its permitted objections to specified exceptions to coverage
set forth in the Commitments or matters disclosed by the Surveys that Purchaser
finds unsatisfactory and Sellers elect to remove or correct such exceptions or
matters, then this Agreement shall continue in full force and effect in
accordance with its terms and Purchaser shall have no further right to terminate
this Agreement under Section 5.1(a) with respect to the state of title disclosed
in the Commitments or
PAGE 8
<PAGE> 15
under Section 5.1(b) with respect to matters that would be disclosed by accurate
surveys of the Shopping Centers for which Surveys have been provided, whichever
is applicable. If (a) Purchaser gives Winmar Co, as agent for Sellers, notice as
required by Section 5.1(a) of its permitted objections to specified exceptions
to coverage set forth in the Commitments or notice as required by Section 5.1(b)
of its permitted objections to matters disclosed by a Survey, (b) Winmar Co., as
agent for Sellers, does not give Purchaser notice that Sellers will remove or
correct such exceptions or matters, and (c) Purchaser thereafter fails within
the specified period to give Winmar Co., as agent for Sellers, notice of
Purchaser's election to terminate this Agreement, Purchaser shall irrevocably be
deemed to have waived all objections to such exceptions to coverage or to such
survey matters, as the case may be, and this Agreement shall continue in full
force and effect in accordance with its terms and Purchaser shall have no
further right to terminate this Agreement under Section 5.1(a) with respect to
the state of title disclosed in the Commitments or under Section 5.1(b) with
respect to matters that would be disclosed by accurate surveys of the Shopping
Centers for which the Surveys have been provided, whichever is applicable. If
Sellers have elected to remove or correct exceptions to coverage or survey
matters to which Purchaser has made a permitted objection, Sellers shall use
commercially reasonable efforts to remove or correct such exceptions to coverage
and survey matters and completion of such removal or correction shall be a
condition to Purchaser's obligation to consummate the Closing. Closing shall be
extended by such period of time as is reasonably necessary to permit Sellers to
complete such removal or correction, not to exceed, in the aggregate for all
exceptions and survey matters, ninety (90) days. Those title exceptions and
survey matters as to which Purchaser made no permitted objection within the
period provided in whichever of Section 5.1(a) or (b) is applicable or as to
which Purchaser waived or is deemed to have waived its objections under
whichever of Section 5.1(a) or (b) is applicable shall be deemed Permitted
Encumbrances.
(e) Purchaser shall take title to the Property subject to all
matters that are or, pursuant to this Section 5, become Permitted Encumbrances.
5.2 INSPECTION OF THE PROPERTY AND RELATED INFORMATION
(a) Purchaser acknowledges and confirms that, prior to the
execution of this Agreement, Purchaser has had the opportunity to review the
Property Materials, including, without limitation, environmental site
assessments included within the Property Materials, and has conducted such
review and analysis thereof as Purchaser deems necessary in order to enter into
this Agreement.
PAGE 9
<PAGE> 16
(b) During the Access Period, Purchaser shall have the right (i)
to obtain and review environmental reports and to make or have made such
inspections of the Shopping Centers and all factors relevant to the use of the
Shopping Centers with respect to environmental matters, including, without
limitation, the condition of soils and subsurfaces, particularly with respect to
the presence or absence of Hazardous Materials, (ii) to make or have made
reasonable physical, structural, engineering and other inspections of the
physical condition of the Shopping Centers, and (iii) to make or have made such
other inspections and investigations of the Shopping Centers as Purchaser
desires, including further review of all Property Materials.
(c) Purchaser shall be permitted reasonable access to the
Shopping Centers during normal business hours for inspections and tests during
the Access Period. Winmar Co., as agent for Sellers, shall have the right to
designate one or more representatives for purposes of coordinating and
overseeing Purchaser's on-site due diligence investigation. Purchaser shall give
Sellers' designated representative or representatives, if any, advance notice of
its investigation of the Shopping Centers, describing the nature of the review
work to be undertaken and the estimated duration of the review. A representative
of Sellers shall have the right to accompany Purchaser and its agents,
representatives and contractors that are performing tests on or about the
Shopping Centers in connection with such testing and to limit the duration,
frequency and means of such testing to the extent necessary to avoid disrupting
of either the operation of the Shopping Centers in the ordinary course or the
normal operations of the tenants of the Shopping Centers. Purchaser shall
conduct its tests and other due diligence activities in a professional and
confidential manner which minimizes interference with tenants of the Shopping
Centers. Sellers shall permit Purchaser to contact tenants during the Access
Period for the purpose of requesting interviews with such tenants as part of
Purchaser's due diligence investigation of the Shopping Centers. All such tenant
interviews shall be during normal business hours at times acceptable to the
applicable tenants and shall not interfere in any material respect with the
tenants' conduct of business in the ordinary course.
(d) Purchaser shall have the right, prior to the expiration of
the Access Period, to give Winmar Co., as agent for Sellers, written notice that
Purchaser objects to one or more aspects of the Shopping Centers which would
constitute a Material Defective Condition of the Property. Purchaser's notice
shall identify with specificity the Material Defective Conditions of the
Property to which Purchaser objects, the commercially reasonable actions that
would cure such Material Defective Conditions, and Purchaser's reasonable, good
faith estimate of the cost of effectuating
PAGE 10
<PAGE> 17
such cure ("Purchaser's Estimate"). If Purchaser so objects to one or more
Material Defective Conditions of the Property, then Winmar Co., as agent for
Sellers, shall have the right to give notice to Purchaser within five (5) days
after Purchaser's notice is given whether (i) Sellers can and will cure the
Material Defective Conditions to which Purchaser has objected or (ii) Sellers
will give Purchaser a credit at Closing for the cost of the cure in the amount
set forth in Purchaser's Estimate. Sellers shall have no duty or obligation of
any kind or nature to cure Material Defective Conditions to which Purchaser has
objected or to give Purchaser a credit in respect thereof and may, in their sole
and absolute discretion, choose not to cure any or all of such Material
Defective Conditions or to give Purchaser a credit in respect thereof. If Winmar
Co., as agent for Sellers, does not so give Purchaser notice that Sellers will
either cure each such Material Defective Condition or give Purchaser a credit in
the amount set forth in Purchaser's Estimate, Purchaser shall have the right, by
written notice to Winmar Co., as agent for Sellers, given within five (5) days
after Winmar Co.'s notice is given or the expiration of the period within which
such notice was to have been given, to elect to terminate this Agreement, in
which event, this Agreement shall thereupon be terminated, except for
Purchaser's obligations under Section 5.4 and such other provisions of this
Agreement that, by their terms, survive termination, and Winmar Co., as agent
for Sellers, shall promptly direct Escrow Agent to return the Deposit to
Purchaser. If, prior to the expiration of the Access Period, either (i)
Purchaser does not give Winmar Co., as agent for Sellers, notice of Purchaser's
objection to any Material Defective Conditions of the Property or (ii) Purchaser
gives Winmar Co., as agent for Sellers, notice of Purchaser's objection to
specified Material Defective Conditions of the Property and Sellers elect to
cure such Material Defective Conditions in the manner requested by Purchaser (or
in another manner reasonably acceptable to Purchaser) or to give Purchaser a
credit at Closing in the amount set forth in Purchaser's Estimate, then this
Agreement shall continue in full force and effect in accordance with its terms
and Purchaser shall have no further right to terminate this Agreement under this
Section 5.2. If (i) Purchaser gives Winmar Co., as agent for Sellers, notice as
required by this Section 5.2(d) of Purchaser's objection to specified Material
Defective Conditions, (ii) Winmar Co., as agent for Sellers does not give
Purchaser notice that Sellers will either cure each such Material Defective
Condition or give Purchaser a credit in the amount set forth in Purchaser's
Estimate, and (iii) Purchaser thereafter fails within the specified period to
give Winmar Co., as agent for Sellers, notice of Purchaser's election to
terminate this Agreement, Purchaser shall irrevocably be deemed to have waived
all objections to such Material Defective Conditions and this Agreement shall
continue in full force and effect in accordance with its terms and Purchaser
shall have no further right to terminate this Agreement under this Section 5.2.
If Winmar Co., as agent for Sellers, has elected to cure
PAGE 11
<PAGE> 18
Material Defective Conditions of the Property to which Purchaser has objected,
Sellers shall use commercially reasonable efforts to cure such Material
Defective Conditions and completion of such cure shall be a condition to
Purchaser's obligation to consummate the Closing. Closing shall be extended by
such period of time as is reasonably necessary to permit Sellers to complete
such cure, in no event to exceed, in the aggregate for all Material Defective
Conditions being cured by Sellers, ninety (90) days.
(e) Nothing in this Section 5.2 shall limit Seller's
representations and warranties under Section 6.2 or Purchaser's rights in
respect thereof.
5.3 LATE DELIVERY OF SURVEYS
With respect to each Survey that Sellers fail to deliver to Purchaser by
the date that is fifteen (15) days prior to the expiration of the Access Period,
Purchaser shall, notwithstanding the expiration of the Access Period, have a
period of fifteen (15) days after receipt of such Survey to review such Survey
and give notice in writing to Winmar Co., as agent for Sellers, of any objection
by Purchaser (a) under Section 5.1(b) above to (i) those facts or matters
disclosed by the Survey, if any, that are not Permitted Encumbrances within the
meaning of any of clauses (a) through (g), inclusive, of the definition of that
term as set forth on Schedule 1 hereto and (ii) those exceptions to coverage set
forth in the Commitments that, under Section 5.1(a) above, Purchaser stated it
could not evaluate without a Survey of the affected Shopping Center, provided
same are not Permitted Encumbrances within the meaning of any of clauses (a)
through (g), inclusive, of the definition of that term as set forth on Schedule
1 hereto; and (b) under Section 5.2(d) above, to any facts or matters disclosed
by the Survey that, together with other aspects of the Shopping Centers to which
Purchaser has objected under Section 5.2(d) above, would constitute one or more
Material Defective Conditions. Notwithstanding the provisions of Sections 12(a)
and 26.3 below, Closing shall be extended as may be necessary to provide
Purchaser with the benefit of this Section 5.3 and, thereafter, to provide both
Sellers and Purchaser with their rights under Sections 5.1(d) and 5.2(d).
5.4 INDEMNIFICATION
Purchaser shall indemnify, protect, defend and hold each and every
Seller harmless from and against all losses, damages, liabilities, claims,
fines, penalties, causes of action and expenses arising from or out of the
presence or activities of Purchaser or its agents, employees, representatives,
consultants or contractors on or in connection with the Property, both before
and after Closing, including, but not limited
PAGE 12
<PAGE> 19
to, reporting, investigation, removal, remediation and cleanup costs related to
Hazardous Materials resulting from the presence or activities of Purchaser or
its agents, employees, representatives, consultants or contractors, other than
Hazardous Materials that already exist on the Shopping Centers at the time of
such inspection and are not released, concentrated, spread or otherwise
exacerbated by Purchaser or its agents, employees, representatives, consultants
or contractors. If Purchaser does not purchase the Property (or if, with respect
to certain portions of Redmond Town Center, the Closing of that portion of the
Property is delayed as provided in Sections 13.4 and 15.6 below), Purchaser
shall promptly upon the demand of any Seller repair any damage caused by such
presence or activities. The terms of this Section 5.4 shall survive Closing or
termination of this Agreement. Purchaser's right to enter upon the Shopping
Centers shall be conditioned on Purchaser's having first provided Sellers with
copies of general liability insurance policies in amounts, with deductibles and
with insurers reasonably acceptable to Sellers, insuring Purchaser's obligations
and liabilities under this Section 5.4, naming Sellers as additional insureds
with respect to claims of third parties for which Sellers are entitled to
indemnification hereunder, with evidence that premiums have been paid.
6. REPRESENTATIONS AND WARRANTIES OF THE SELLERS
6.1 LIMITATIONS
(a) The words "Sellers' knowledge" or "to the best of Sellers'
knowledge" shall mean the actual current knowledge, without investigation of any
kind or nature, of Sellers' Knowledge Parties. Such words expressly exclude
imputed knowledge.
(b) The word "threatened" shall mean expressly threatened in
writing by a third party that is not a governmental entity or by legal counsel
for or a responsible official of a governmental entity.
6.2 REPRESENTATIONS AND WARRANTIES
Subject to the limitations set forth in Section 6.1, Sellers jointly and
severally make the following representations and warranties to Purchaser as of
the Effective Date:
(a) Each Seller is duly formed, validly existing, in good
standing and qualified to do business in the state where the Property owned by
such Seller is located and in each other state where a failure to be in good
standing or to qualify to
PAGE 13
<PAGE> 20
do business could have a material adverse effect upon such Seller's ability to
perform its obligations under this Agreement. Each Seller has the requisite
power and authority to own and operate the Property owned and operated by such
Seller. The execution, delivery and performance of this Agreement by each Seller
have been duly authorized by all necessary action and proceedings other than
receipt of the Sellers' Required Consents identified on Schedule 6.2(a) hereto.
No further corporate action or authorization will be necessary on the part of
any Seller in order to consummate the transactions contemplated herein other
than as disclosed in Schedule 6.2(a). This Agreement and the other legal
documents executed by each Seller in connection herewith are legal, valid and
binding obligations of such Seller. Subject to Sellers' obtaining the Sellers'
Required Consents, neither the execution and delivery of this Agreement by each
Seller, nor the performance of any of a Seller's obligations hereunder, nor the
consummation of the transactions contemplated hereby, will require the consent
of any person or conflict with, result in a breach of or constitute a default
under the terms and conditions of such Seller's organizational documents or any
indenture, mortgage, deed of trust, agreement, undertaking, instrument or
document to which such Seller is a party or by which it is bound, or any order
of any court, regulatory body, administrative agency or governmental body having
jurisdiction over such Seller. (The representations and warranties set forth in
this Section 6.2(a) shall not be deemed to extend to consents of third parties
required to permit Sellers to assign Contracts to Purchaser, which shall be
governed by Section 13.2(c) below.)
(b) Except as disclosed on Schedule 6.2(b) hereto, Sellers have
received no written notice that, and have no knowledge that, any of the Shopping
Centers is in material violation of any applicable law, rule, regulation, code
or ordinance.
(c) Except as disclosed in the Commitments, there are, to
Sellers' knowledge, no special taxes and assessments that have been enacted but
not yet levied upon any Shopping Center by a governmental authority. All real
property taxes and assessments now due and payable in respect of the Shopping
Centers have been paid or, by the Closing Date, will have been paid. There are
no presently pending or, to Sellers' knowledge, threatened proceedings to
condemn any Shopping Center or any material part of a Shopping Center.
(d) Except as disclosed on Schedule 6.2(d) hereto, there are no
actions, suits, proceedings, judgments, orders, decrees or governmental
investigations pending or, to Sellers' knowledge, threatened against the
Property or any Seller which
PAGE 14
<PAGE> 21
would affect the ability of any Seller to perform its obligations under this
Agreement or which would have a material adverse effect on the Property.
(e) No consent from or notice to any federal, state or local
court or federal, state or local government bureau, department, commission or
agency, or any other person or entity whether or not governmental in character,
is required to be obtained in connection with the execution, delivery and
performance of this Agreement by Sellers other than the Sellers' Required
Consents. (The representations and warranties set forth in this Section 6.2(e)
shall not be deemed to extend to consents of third parties required to permit
Sellers to assign Contracts to Purchaser, which shall be governed by Section
13.2(c) below.)
(f) Except as disclosed on Schedule 6.2(f) hereto or in the
environmental reports and other environmental materials identified on Schedule
6.2(f), to Sellers' knowledge, no Shopping Center is in material violation of
federal, state or local laws related to the presence or release of Hazardous
Material.
(g) No Seller is a "foreign person" within the meaning of Section
1445(f) of the Internal Revenue Code.
(h) Attached hereto as Schedule 6.2(h) is a complete list of all
Contracts and Oxmoor Contracts (other than those listed in the Commitments) and
all amendments thereto. Each Contract and each Oxmoor Contract is a valid and
subsisting agreement and is in full force and effect in accordance with the
terms thereof, all amounts due thereunder have been paid, no material default by
a Seller (or Oxmoor Joint Venture) or, to Sellers' knowledge, any other party
thereto exists under any Contract or Oxmoor Contract, neither any Seller nor
Oxmoor Joint Venture has received notice from any other party to any Contract
claiming the existence of a material default under such Contract or Oxmoor
Contract by a Seller or Oxmoor Joint Venture that remains uncured and no
Contract or Oxmoor Contract has been assigned, transferred, hypothecated,
pledged or encumbered by any Seller or Oxmoor Joint Venture other than as
collateral for the Assumed Indebtedness. Neither Sellers nor any of their
Affiliates have any direct or indirect ownership interests in any person
providing goods or services under the Contracts or Oxmoor Contracts.
(i) Attached hereto as Schedule 6.2(i)-1 is a complete list of
all Leases and Oxmoor Leases, with all amendments thereto. Each Lease and Oxmoor
Lease is a valid and subsisting agreement and is in full force and effect in
accordance with the terms thereof. No material default by a Seller exists under
any Lease or Oxmoor Lease. Except as set forth on Schedule 6.2(i)-2 or the rent
rolls attached
PAGE 15
<PAGE> 22
hereto as Schedules 6.2(j), there exists no monetary default by a tenant under
any Lease or Oxmoor Lease that has continued for more than thirty (30) days nor
has a Seller given any tenant written notice of a nonmonetary default by such
tenant under its Lease or Oxmoor Lease that remains uncured. No tenant under any
Lease or Oxmoor Lease has paid rent for more than one month in advance or, to
Sellers' knowledge, is entitled to any offset or defense against its obligation
to pay rent.
(j) The information set forth on the rent rolls attached hereto
as Schedule 6.2(j) is true and correct in all material respects.
(k) Attached hereto as Schedule 6.2(k) is a complete list of all
Ground Leases and the Oxmoor Ground Lease and all amendments thereto. Sellers
have made available to Purchaser true and correct copies of the Ground Leases
and the Oxmoor Ground Lease, including all amendments thereto. Each Ground Lease
and the Oxmoor Ground Lease is in full force and effect. Sellers (i) have paid
all rents and other charges to the extent due and payable under each Ground
Lease and the Oxmoor Ground Lease, (ii) are not in material default under any
Ground Lease or the Oxmoor Ground Lease, (iii) have received no written notice
of default from a Ground Lessor or the lessor under the Oxmoor Ground Lease that
remains uncured and (iv) have no knowledge of a material default by a Ground
Lessor or the lessor under the Oxmoor Ground Lease under any Ground Lease or the
Oxmoor Ground Lease that remains uncured.
(l) To Sellers' knowledge, there are no omissions from or errors
in the 1995, 1996 and 1997 annual operating statements for the Shopping Centers
made available to Purchaser which would materially and adversely alter the
results of operations reflected on those statements.
(m) Set forth on Schedule 6.2(m) is a list of all Personal
Property that (i) is a vehicle or (ii) has an estimated fair market value of
more than Ten Thousand Dollars ($10,000).
(n) All Bonds are identified on Schedule 6.2(n) hereto.
(o) Seller is not a party to or bound by any collective
bargaining or union agreements with respect to the Shopping Center.
(p) The outstanding principal balance of the Indebtedness is set
forth on Schedule 6.2(p) hereto as of the date or dates stated on such schedule.
Set forth on Schedule 6.2(p) hereto is a list of each loan agreement, promissory
note, deed of trust,
PAGE 16
<PAGE> 23
mortgage or mortgage deed, and security agreement that provides for, evidences,
or secures any portion of the Indebtedness and, with respect to all of the
Indebtedness other than that owing to SAFECO Life, all other agreements,
instruments and documents that contain any material terms of any portion of the
Indebtedness that would be binding on Purchaser (or any permitted assignee or
designee of Purchaser that assumes such Indebtedness) after Closing , in each
case with all amendments thereto. True, correct and complete copies of all such
agreements, instruments and documents have been made available to Purchaser,
together with all amendments thereto.
(q) Set forth on Schedule 6.2(q) is a list of all REAs and the
Oxmoor REA and all amendments thereto. Each REA and the Oxmoor REA is a valid
and subsisting agreement and is in full force and effect in accordance with the
terms thereof. No material default by a Seller or Oxmoor Joint Venture or, to
Sellers' knowledge, any other party thereto exists under any REA or the Oxmoor
REA. Sellers have not received or given any notice claiming the existence of a
default under any REA or the Oxmoor REA that remains uncured.
(r) The Land legally described in Exhibits B-1 through B-10 and
the Improvements thereto and the Oxmoor Land legally described in Exhibit B-11
hereto and the Oxmoor Improvements include (i) all of the parcels of land and
all improvements thereto in which space is demised by the Leases or Oxmoor
Leases or that are subject to the Ground Leases or Oxmoor Ground Lease and (ii)
all land and improvements that are owned by Sellers or Oxmoor Joint Venture and
used in conjunction with the operation of the Shopping Centers.
(s) There are no brokerage commissions or finders' fees payable
by the landlord with respect to the current or any renewal term of any of the
Leases other than those set forth on Schedule 6.2(s) attached hereto and Sellers
have no agreement with any broker with respect to any renewal term of any Lease
except as set forth in Schedule 6.2(s).
(t) With respect to Oxmoor Joint Venture:
(i) Oxmoor Joint Venture is a joint venture duly
organized, validly existing and in good standing under the laws of the state of
Kentucky. Oxmoor Joint Venture has full power and authority to lease the Oxmoor
Land and to own the Oxmoor Improvements and to carry on its business as
presently conducted. Winmar Co. is duly qualified in the State of Kentucky and
in each other jurisdiction in which ownership of the Joint Venture Interest
makes such qualification necessary.
PAGE 17
<PAGE> 24
(ii) Sellers have made available to Purchaser true and
complete copies of the Joint Venture Agreement, together with all amendments
thereto. All contributions to capital required to be made by Winmar Co. to
Oxmoor Joint Venture have been paid in full.
(iii) The Joint Venture Interest represents fifty percent
(50%) of the legal and beneficial interests in Oxmoor Joint Venture and (A)
except for the Right of First Refusal, there is no outstanding right,
subscription, warrant, call, unsatisfied preemptive right, option or other
agreement of any kind to purchase from Oxmoor Joint Venture or otherwise to
receive from Oxmoor Joint Venture, any of the Joint Venture Interest or any
other interest in Oxmoor Joint Venture and (B) there is no agreement of any kind
between Oxmoor Joint Venture and any person that gives any person any right to
participate in the profits of Oxmoor Joint Venture, other than the Joint Venture
Agreement.
(iv) Winmar Co. has not caused or permitted Oxmoor Joint
Venture to be engaged in the conduct of any business other than the ownership,
operation and management of Oxmoor Center Mall and any activities incidental or
related thereto. Oxmoor Joint Venture does not own any asset other than the
Oxmoor Property.
(v) Oxmoor Joint Venture does not directly or indirectly
own any capital stock of or other equity interests in any person.
(vi) Except with respect to matters disclosed in
instruments constituting Permitted Encumbrances, Oxmoor Joint Venture has not
entered into any agreement to sell, transfer, mortgage (other than with respect
to the Indebtedness that encumbers Oxmoor Center Mall), lease, grant any
preferential right to purchase (including but not limited to a right of first
refusal or right of first negotiation) with respect to, or otherwise dispose of
or encumber all or any portion of the Oxmoor Property.
(vii) Sellers have made or, during the Access Period, will
make available to Purchaser copies of (A) the audited balance sheet of Oxmoor
Joint Venture at December 31, 1997, the related statements of income and
retained earnings and of cash flows of Oxmoor Joint Venture for the period
ending on December 31, 1997, and the related notes and schedules thereto,
accompanied by the audit report of Ernst & Young (collectively, the "Financial
Statements") and (B) the unaudited balance sheet of Oxmoor Joint Venture as of
December 31, 1998 prepared by Oxmoor Joint Venture (the "Interim Balance
Sheet").
PAGE 18
<PAGE> 25
(A) The Financial Statements present fairly the
financial position of Oxmoor Joint Venture, and the results of its operations
and cash flows, as of the dates thereof on the basis stated in the accompanying
auditors' report.
(B) The Interim Balance Sheet will present fairly the
financial position of Oxmoor Joint Venture as of the date thereof, on the basis
stated therein. The Interim Balance Sheet will reflect all liabilities or
obligations (whether absolute, accrued, contingent or otherwise) of any nature
which would be required to be reflected on a balance sheet prepared on the basis
stated therein, or in the notes thereto.
(viii) Except (A) for the transactions contemplated and
referred to in the notes to the Financial Statements and (B) for the
transactions contemplated and referred to in the Interim Balance Sheet, since
December 31, 1997, Oxmoor Joint Venture has been operated in the ordinary course
of business and there has not been: (i) the incurrence, assumption or guarantee
by Oxmoor Joint Venture of any debt for borrowed money; (ii) any change in any
method of accounting or accounting practice employed by Oxmoor Joint Venture
that would render Oxmoor Joint Venture's financial statements inconsistent with
the Financial Statements; and (iii) any material transactions between Oxmoor
Joint Venture, on the one hand, and Winmar Co. or any Affiliate thereof, on the
other hand.
(ix) (A) All Tax Returns required to be filed by Winmar
Co. prior to the Closing Date or with respect to Oxmoor Joint Venture have been
or will be timely filed within the prescribed period or any extension thereof,
and all such Tax Returns are or will be true, correct and complete in all
material respects. Winmar Co. (1) has timely paid or made provision for (or
there has been paid or provision made on its behalf) all Taxes that are due, or
claimed or asserted by any federal, state or local Tax authority for which
Winmar Co., with respect to its interest in Oxmoor Joint Venture, may be held
liable for periods prior to the Closing Date or (2) has provided for all Taxes
for Winmar Co., with respect to its interest in Oxmoor Joint Venture, may be
held liable, in all cases subject to the right of Winmar Co. to contest or
challenge such Taxes under applicable law. With respect to any period for which
Tax Returns have not yet been filed, or for which Taxes for which Winmar Co.,
with respect to its interest in Oxmoor Joint Venture, may be held liable are not
yet due or owing, Winmar Co. has made due and sufficient provisions for such
Taxes.
(B) Except for liens for current Taxes not yet due
and payable, there are no Tax liens on any assets of Oxmoor Joint Venture.
PAGE 19
<PAGE> 26
(C) To Sellers' knowledge, Oxmoor Joint Venture
qualifies and has since the date of formation qualified to be treated as a
co-ownership for Federal income tax purposes and none of the Oxmoor Joint
Venture, Winmar Co. or any federal, state or local Tax authority has taken a
position inconsistent with such treatment.
(D) Oxmoor Joint Venture does not have income
reportable for a period ending after the Closing Date but attributable to a
transaction (e.g., an installment sale) occurring in or a change in accounting
method made for a period ending on or prior to the Closing Date which resulted
in a deferred reporting of income from such transaction or from such change in
accounting method.
(x) Winmar Co. is the owner and holder of the Joint
Venture Interest and such Joint Venture Interest is held by Winmar Co. free and
clear of any lien, claim, interest or encumbrance. Upon execution and delivery
of the Assignment of Joint Venture Interest, Purchaser (or its permitted
assignee) will receive such Joint Venture Interest free and clear of any lien,
claim, interest or encumbrance.
(xi) Except for the Right of First Refusal, there is no
outstanding right, subscription, warrant, call, unsatisfied preemptive right,
option or other agreement of any kind to purchase or otherwise to receive from
Winmar Co. any of the Joint Venture Interest.
(xii) The principal place of business of Winmar Co. is in
Seattle, Washington, at the address set forth in Section 20 below.
Except for Sellers' representations and warranties contained in Sections
6.2(a), (e), and (t) above, Sellers' representations and warranties, as updated
through Closing, shall survive Closing for a period of one (1) year from the
Closing Date and shall terminate as of the end of such period except to the
extent that Purchaser gives Winmar Co., as agent for Sellers, a Notice of Claim
under Section 18(d) below in respect of an alleged breach thereof prior to such
termination date. Sellers' representations and warranties contained in Sections
6.2(a), (e), and (t) above, as updated through Closing, shall survive Closing
for a period of three (3) years from the Closing Date and shall terminate as of
the end of such period except to the extent that Purchaser gives Winmar Co., as
agent for Sellers, a Notice of Claim under Section 18(d) below in respect of an
alleged breach thereof prior to such termination date.
PAGE 20
<PAGE> 27
7. PURCHASER'S REPRESENTATIONS AND WARRANTIES
Purchaser makes the following representations and warranties to Sellers
as of the Effective Date:
(a) Each of Macerich and Ontario is duly formed, validly
existing, and in good standing under the laws of the jurisdiction of its
organization as identified in the preamble to the Agreement and is qualified to
do business in each jurisdiction where a failure to qualify to do business could
have a material adverse effect upon the ability of either Macerich or Ontario to
perform its obligations under the Agreement. Each of Macerich and Ontario has
the requisite power and authority to conduct its business as presently operated.
The execution, delivery and performance of this Agreement by each of Macerich
and Ontario have been duly and validly authorized by all necessary action and
proceedings other than the Purchaser's Required Consents identified on Schedule
7(a) hereto. No further corporate action or authorization will be necessary on
the part of either Macerich or Ontario in order to consummate the transactions
contemplated herein other than as disclosed on Schedule 7(a). This Agreement and
the other legal documents executed by either or both of Macerich and Ontario (or
Purchaser's permitted assignees and designees) in connection herewith are legal,
valid and binding obligations of either or both of Macerich and Ontario, as the
case may be (or of such permitted assignees and designees).
(b) Subject to Purchaser's obtaining Purchaser's Required
Consents, neither the execution and delivery of this Agreement by Purchaser nor
performance of any of its obligations hereunder, nor consummation of the
transactions contemplated hereby, will require the consent of any person or
conflict with, result in a breach of or constitute a default under the terms and
conditions of either Macerich's or Ontario's organizational documents or any
indenture, mortgage, deed of trust, agreement, undertaking, instrument or
document to which either Macerich or Ontario is a party or by which it is bound,
or any order of any court, regulatory body, administrative agency or
governmental body having jurisdiction over Macerich or Ontario.
(c) Purchaser has or will obtain the funding necessary to enable
Purchaser to pay the Purchase Price at Closing. (Financing shall not, however,
be a condition to Purchaser's obligation to close.)
Purchaser's representations and warranties shall survive Closing.
PAGE 21
<PAGE> 28
8. DISCLOSURE
If, prior to Closing, any of Purchaser's Knowledge Parties or any of
Sellers' Knowledge Parties discovers a fact or circumstance that renders a
representation or warranty made by Sellers in Section 6.2 above untrue or
inaccurate (or, if the representation or warranty in question is not, by its
express terms, subject to a materiality qualification, untrue or inaccurate in
any material respect) and such person becomes aware that such fact or
circumstance renders the affected representation or warranty untrue or
inaccurate, Purchaser or Sellers (depending upon whose Knowledge Party
discovered such fact or circumstance) shall promptly advise the other parties
thereof in reasonable detail in writing. If, after the Effective Date, Purchaser
so discovers and notifies Winmar Co., as agent for Sellers, or is so advised by
Winmar Co., as agent for Sellers, of such a fact or circumstance prior to
Closing, Purchaser shall have the option, exercisable within five (5) Business
Days thereafter (and Closing shall be extended as necessary to give Purchaser
the benefit of such five-day period) to either (a) give notice to Winmar Co., as
agent for Sellers, of Purchaser's intention to terminate this Agreement by
reason of such untruth or inaccuracy or (b) to waive such untruth or inaccuracy,
in which event Purchaser shall be deemed to have waived all rights, claims and
causes of action against Sellers related thereto and the representation or
warranty shall be deemed amended to reflect such fact or circumstance. If
Purchaser so gives notice to Winmar Co., as agent for Sellers, of its intention
to terminate this Agreement, Sellers shall have the right, but not the
obligation, to elect, by written notice to Purchaser given by Winmar Co., as
agent for Sellers, within five (5) days after Purchaser's notice (and the
Closing shall be extended, as necessary to give Sellers the benefit of such
five-day period), to cure the fact or circumstance or otherwise assume liability
to provide a cure within a reasonable period thereafter, in which event this
Agreement shall continue in full force and effect in accordance with its terms.
If Sellers do not so elect within the time required above to cure the fact or
circumstance or otherwise assume liability to provide a cure within a reasonable
period thereafter, then Purchaser shall have the right, by written notice to
Winmar Co., as agent for Sellers, given within five (5) days after Sellers'
notice is given by Winmar Co., as agent for Sellers, or the expiration of the
period within which such notice was to have been given, to elect to terminate
this Agreement, in which event this Agreement shall thereupon be terminated,
except for Purchaser's obligations under Section 5.4 and such other provisions
of this Agreement that, by their terms, survive termination, and Winmar Co., as
agent for Sellers, shall promptly direct Escrow Agent to return the Deposit to
Purchaser. If Purchaser does not so give notice of its election to terminate the
Agreement, Purchaser shall be deemed to have waived all rights, claims and
causes of action against Sellers related to
PAGE 22
<PAGE> 29
the fact or circumstance in question, the representation or warranty in question
shall be deemed amended to reflect such fact or circumstance, and the Agreement
shall continue in full force and effect in accordance with its terms. If Sellers
have elected to cure such a fact or circumstance, Sellers shall use commercially
reasonable efforts to cure such fact or circumstance and completion of such cure
shall be a condition to Purchaser's obligation to consummate the Closing. The
Closing shall be extended by such period of time as is reasonably necessary to
permit Sellers to complete such cure, not to exceed ninety (90) days. The
foregoing notwithstanding, if at the time of their execution of the Agreement,
any of Sellers' Knowledge Parties had actual knowledge (a) of a fact or
circumstance that renders a representation or warranty made by Sellers in
Section 6.2 above untrue or inaccurate (or, if the representation or warranty in
question is not, by its express terms, subject to a materiality qualification,
untrue or inaccurate in any material respect) and (b) that such fact or
circumstance renders the affected representation or warranty untrue or
inaccurate (or, if the representation or warranty in question is not, by its
express terms, subject to a materiality qualification, untrue or inaccurate in
any material respect), then Purchaser shall have the right either (c) to
terminate this Agreement as provided above and to pursue its remedies for a
willful default by Sellers under Section 16(b) below or (d) to consummate the
Closing as herein provided and pursue its remedies under Section 18 for the
breach of such representation and warranty.
9. "AS-IS" SALE; LIMITATION; DISCLAIMER
PURSUANT TO THIS AGREEMENT, PURCHASER AND ITS REPRESENTATIVES (INCLUDING
ENVIRONMENTAL CONSULTANTS, ARCHITECTS AND ENGINEERS) HAVE BEEN OR WILL BE
AFFORDED THE RIGHT AND OPPORTUNITY TO ENTER UPON THE SHOPPING CENTERS AND TO
MAKE SUCH INSPECTIONS OF THE SHOPPING CENTERS AND MATTERS RELATED THERETO,
INCLUDING THE CONDUCT OF SOIL, ENVIRONMENTAL AND ENGINEERING TESTS, AS PURCHASER
AND ITS REPRESENTATIVES DESIRE, SUBJECT TO THE PROVISIONS OF SECTION 5.
PURCHASER ACKNOWLEDGES THAT NOTWITHSTANDING ANY PRIOR OR CONTEMPORANEOUS ORAL OR
WRITTEN REPRESENTATIONS, STATEMENTS, DOCUMENTS OR UNDERSTANDINGS, THIS AGREEMENT
CONSTITUTES THE ENTIRE UNDERSTANDING OF THE PARTIES WITH RESPECT TO THE SUBJECT
MATTER HEREOF AND SUPERSEDES ANY SUCH PRIOR OR CONTEMPORANEOUS ORAL OR WRITTEN
REPRESENTATIONS, STATEMENTS, DOCUMENTS OR UNDERSTANDINGS. PURCHASER FURTHER
ACKNOWLEDGES THAT, EXCEPT AS SET FORTH
PAGE 23
<PAGE> 30
IN THIS AGREEMENT (INCLUDING SECTION 6.2 ABOVE) OR IN THE CONVEYANCE DOCUMENTS
(A) NEITHER SELLERS NOR ANY SHAREHOLDER, OFFICER, DIRECTOR, PRINCIPAL, PARTNER,
AGENT, ATTORNEY, EMPLOYEE, BROKER OR OTHER REPRESENTATIVE OF SELLERS HAS MADE
ANY REPRESENTATIONS OR WARRANTIES OF ANY KIND WHATSOEVER REGARDING THE SHOPPING
CENTERS OR THE PROPERTY, EITHER EXPRESS OR IMPLIED, AND (B) PURCHASER IS NOT
RELYING ON ANY WARRANTY, REPRESENTATION OR COVENANT, EXPRESS OR IMPLIED, WITH
RESPECT TO THE SHOPPING CENTERS OR THE PROPERTY, EXCEPT AS SET FORTH IN THIS
AGREEMENT (INCLUDING SECTION 6.2) OR IN THE CONVEYANCE DOCUMENTS, AND AGREES
THAT PURCHASER IS ACQUIRING THE SHOPPING CENTERS AND THE PROPERTY IN WHOLLY AN
"AS-IS" CONDITION WITH ALL FAULTS. IN PARTICULAR, BUT WITHOUT LIMITATION, EXCEPT
AS SET FORTH IN THIS AGREEMENT (INCLUDING SECTION 6.2) AND IN THE CONVEYANCE
DOCUMENTS, INCLUDING, BUT NOT LIMITED TO, THE DEEDS, SELLERS MAKE NO
REPRESENTATIONS OR WARRANTIES WITH RESPECT TO THE USE, CONDITION, INCLUDING,
WITHOUT LIMITATION, THE CONDITION OF THE SOILS OR GROUNDWATERS OF THE SHOPPING
CENTERS AND THE PRESENCE OR ABSENCE OF HAZARDOUS MATERIALS ON, UNDER OR ABOUT
THE SHOPPING CENTERS, COMPLIANCE WITH APPLICABLE STATUTES, LAWS, CODES,
ORDINANCES, REGULATIONS OR REQUIREMENTS RELATING TO LEASING, ZONING,
SUBDIVISION, PLANNING, BUILDING, FIRE, SAFETY, HEALTH OR ENVIRONMENTAL MATTERS,
COMPLIANCE WITH COVENANTS, CONDITIONS AND RESTRICTIONS (WHETHER OR NOT OF
RECORD), OTHER LOCAL, MUNICIPAL, REGIONAL, STATE OR FEDERAL REQUIREMENTS, OR
OTHER STATUTES, LAWS, CODES, ORDINANCES, REGULATIONS OR REQUIREMENTS. PURCHASER
REPRESENTS THAT IT IS KNOWLEDGEABLE IN REAL ESTATE MATTERS AND THAT UPON
COMPLETION OF THE INSPECTIONS CONTEMPLATED OR PERMITTED BY THIS AGREEMENT AND
REMOVAL OF ITS CONTINGENCIES, PURCHASER WILL HAVE MADE ALL THE INVESTIGATIONS
AND INSPECTIONS PURCHASER DEEMS NECESSARY IN CONNECTION WITH ITS PURCHASE OF THE
SHOPPING CENTERS AND THE PROPERTY, AND THAT EXCEPT AS OTHERWISE EXPRESSLY
PROVIDED IN THIS AGREEMENT APPROVAL BY PURCHASER OF SUCH INSPECTIONS PURSUANT TO
THIS AGREEMENT WILL BE DEEMED APPROVAL BY PURCHASER WITHOUT RESERVATION OF ALL
ASPECTS OF THIS TRANSACTION, INCLUDING, BUT NOT LIMITED
PAGE 24
<PAGE> 31
TO, THE PHYSICAL CONDITION OF THE SHOPPING CENTERS AND THE PROPERTY, AND THE
USE, TITLE AND THE FINANCIAL ASPECTS OF THE OPERATION OF THE SHOPPING CENTERS
AND THE PROPERTY. EXCEPT AS PROVIDED IN THIS AGREEMENT (INCLUDING SECTION 6.2)
AND IN THE CONVEYANCE DOCUMENTS, INCLUDING, BUT NOT LIMITED TO, THE DEEDS,
PURCHASER HEREBY WAIVES, RELINQUISHES AND RELEASES ANY AND ALL RIGHTS, CLAIMS
AND CAUSES OF ACTION WHICH PURCHASER MAY HAVE OR MAY BE ENTITLED TO ASSERT
AGAINST SELLERS OR ANY OF THEM UNDER OR WITH RESPECT TO THE SHOPPING CENTERS OR
THE PROPERTY OR THE CONDITION THEREOF (EXCLUDING, HOWEVER, RIGHTS, CLAIMS AND
CAUSES OF ACTION UNDER OR WITH RESPECT TO TITLE 42 OF THE UNITED STATES CODE,
SECTION 9601 ET SEQ. AND OTHER STATE AND FEDERAL ENVIRONMENTAL LAWS). PURCHASER
EXPRESSLY UNDERSTANDS AND ACKNOWLEDGES THAT IT IS POSSIBLE THAT UNKNOWN
PROBLEMS, CONDITIONS OR CLAIMS MAY EXIST WITH RESPECT TO THE SHOPPING CENTERS OR
THE PROPERTY AND THAT PURCHASER EXPLICITLY TOOK THE RISK OF SUCH PROBLEMS,
CONDITIONS AND CLAIMS INTO ACCOUNT IN DETERMINING THE PURCHASE PRICE FOR THE
PROPERTY, AND THAT A PORTION OF SUCH CONSIDERATION, HAVING BEEN BARGAINED FOR
BETWEEN THE PARTIES WITH THE KNOWLEDGE OF THE POSSIBILITY OF SUCH UNKNOWN
PROBLEMS, CONDITIONS AND CLAIMS, WAS GIVEN IN EXCHANGE FOR A FULL ACCORD,
SATISFACTION AND DISCHARGE OF ALL SUCH PROBLEMS, CONDITIONS AND CLAIMS, EXCEPT
SUCH, IF ANY, AS MAY RESULT FROM A BREACH BY SELLERS OF THIS AGREEMENT
(INCLUDING SECTION 6.2) OR IN THE CONVEYANCE DOCUMENTS, INCLUDING, BUT NOT
LIMITED TO, THOSE CONTAINED IN THE DEEDS. PURCHASER ACKNOWLEDGES THAT FOLLOWING
CLOSING SELLERS SHALL HAVE NO LIABILITY OR DUTY OF ANY KIND WITH RESPECT TO THE
SHOPPING CENTERS OR THE PROPERTY, REGARDLESS OF THE BASIS FOR THE CLAIM, EXCEPT
AS OTHERWISE EXPRESSLY PROVIDED IN THIS AGREEMENT.
10. ADDITIONAL COVENANTS OF SELLERS
In addition to the other covenants of Sellers set forth in this
Agreement, Sellers hereby jointly and severally covenant and agree with
Purchaser as set forth in this Section 10.
PAGE 25
<PAGE> 32
(a) At all times during the Contract Period, each Seller shall
operate and manage the Shopping Centers in the normal and ordinary course,
consistent with past practice, except to the extent otherwise provided herein.
(b) During the Contract Period, a Seller shall not, without the
prior written consent of Purchaser, which consent shall not unreasonably be
withheld or delayed after receipt by Purchaser of a summary of the principal
terms of the proposed transaction, (i) amend or modify any Lease, Contract
(other than Contracts that will expire or be terminated at or prior to Closing),
REA or Ground Lease or renew or extend the term of any Lease, Contract (other
than to a date not later than the Closing Date), REA or Ground Lease, (ii) enter
into any new Lease, Contract (other than a Contract that will expire or be
terminated at or prior to Closing), reciprocal easement agreement (or similar
agreement) or ground lease, or (iii) cancel or terminate any Lease, Contract
(other than as required by the terms of the Agreement), REA or Ground Lease. The
terms to be summarized in a Seller's notice to Purchaser under this Section
10(b) shall be (i) the identity of the tenant or the other party to the proposed
transaction; (ii) the space to be leased or the other subject matter of the
proposed transaction; (iii) the term of any agreement to be entered into in
connection with the proposed transaction; (iv) rent or other payments to be made
by or to Seller in the proposed transaction; (v) rent abatements or other
monetary concessions in the proposed transaction; (vi) renewal options; (vii)
expansion options; (viii) the amount of any required tenant improvements, tenant
allowances, and leasing costs or commissions to be paid or provided by the
landlord with respect to a Lease; and (ix) any other material terms of the
proposed transaction. Purchaser's failure to respond to a request for consent
within five (5) Business Days after receipt of the request and related
information to provided therewith under this Section 10(b) shall be deemed to
constitute Purchaser's approval of such request. During the Contract Period,
Winmar Co. shall not (i) take or permit Oxmoor Joint Venture to take any action
with respect to an Oxmoor Lease, the Oxmoor Ground Lease, the Oxmoor REA or an
Oxmoor Contract that would be prohibited by this Section 10(b) if taken by
another Seller with respect to a Lease, a Ground Lease, an REA or a Contract of
such Seller or (ii) amend or modify the Joint Venture Agreement of Oxmoor Joint
Venture. During the Contract Period, Sellers shall not amend or modify the terms
of the Indebtedness except as required by this Agreement.
(c) At all times during the Contract Period, each Seller duly and
punctually shall pay and perform all of its (or, in the case of Winmar Co.,
Winmar Co. shall cause Oxmoor Joint Venture to pay and perform Oxmoor Joint
Venture's) material obligations under the Ground Leases, Oxmoor Ground Lease,
Leases,
PAGE 26
<PAGE> 33
Oxmoor Leases, Assumed Contracts, Oxmoor Contracts, REAs and the Oxmoor REA, and
timely shall pay all taxes, assessments, utility charges, and rents and other
charges affecting the Shopping Centers that are not the obligation of tenants
under the Leases or the Oxmoor Leases. The foregoing notwithstanding, each
Seller (and Oxmoor Joint Venture) shall have the right to contest and to appeal
in good faith by appropriate proceedings any taxes or assessments imposed prior
to Closing on its Shopping Center, to continue such appeal after Closing and,
subject to the terms of Section 13.1 below, such Seller (or, in the case of
Oxmoor Joint Venture, Winmar Co.) may retain any refund obtained as a result of
such contest that is not required to be refunded to tenants pursuant to the
terms of such tenants' Leases. Any portion of a refund of taxes obtained by
Sellers (or, in the case of Oxmoor Joint Venture, Winmar Co.) that is required
to be refunded to tenants shall be so refunded by the appropriate Seller (or, in
the case of Oxmoor Joint Venture, Winmar Co., if received by Winmar Co.), which
obligation shall survive the Closing.
(d) At all times during the Contract Period, each Seller shall
maintain or cause to be maintained in full force and effect all fire and
extended coverage and liability insurance policies currently covering the
Shopping Centers and Personal Property.
(e) At no time during the Contract Period shall a Seller encumber
the Property or any interest therein or agree to sell the Property or any
interest therein (except to Purchaser) or permit or suffer the Property or any
interest therein to be encumbered with any encumbrance, lien or other claim or
right unless (i) such encumbrance, lien or other claim or right has been
approved by Purchaser in writing, which approval shall not unreasonably be
withheld or delayed with respect to easements typically created in the normal
course of the development and operation of the Shopping Centers. (The foregoing
notwithstanding, Sellers shall have the right to dedicate as a sewer lift
station Parcel 16 of the real property legally described on Exhibit B-10 hereto
(Redmond Town Center), in which event Parcel 16 shall be deemed removed from the
definition of Owned Land.) To the extent that any contractor, subcontractor,
materialman or supplier shall have asserted a right to a mechanic's lien against
a Shopping Center prior to Closing that is not a Permitted Encumbrance, Seller
shall pay or shall have such lien released or bonded off at or prior to Closing.
(f) Sellers, at or prior to Closing, shall terminate or cause to
be terminated (i) all Contracts and Oxmoor Contracts pursuant to which
management or leasing services are provided to Sellers or Oxmoor Joint Venture
in connection with
PAGE 27
<PAGE> 34
the Shopping Centers and (ii) all other Contracts and Oxmoor Contracts (A) that
Purchaser directs Sellers by written notice given prior to the end of the Access
Period to terminate and (B) that by their terms can be terminated by Sellers at
or prior to Closing. Sellers shall pay all costs and penalties in connection
with terminating such Contracts and Oxmoor Contracts.
(g) During the Contract Period, each Seller shall provide
Purchaser with reasonable access to the Property Materials during normal
business hours at Sellers' Seattle, Washington office for review and copying at
Purchaser's expense. Such documentation is provided for informational purposes
only and without warranties of any kind or nature, express or implied, except as
expressly provided in this Agreement.
(h) Sellers shall deliver to each tenant of the Shopping Centers
an estoppel certificate in the form of Exhibit M-1 hereto. Sellers shall deliver
to each party to each REA and Oxmoor REA an estoppel certificate in the form of
Exhibit M-2 hereto. Sellers shall deliver to each party to each Ground Lease and
the Oxmoor Ground Lease an estoppel certificate in whichever of the forms
attached hereto as Exhibit M-3 is applicable to such party. Sellers shall
deliver to AT&T Wireless, an estoppel certificate in the form of Exhibit M-4
hereto for each AT&T Wireless Lease. Sellers shall deliver to Beargrass
Corporation a form of estoppel certificate confirming such facts about Oxmoor
Joint Venture as Purchaser may reasonably require (but receipt of a signed copy
of such estoppel certificate shall not be a condition to Purchaser's obligation
to consummate the Closing). Sellers shall use commercially reasonable efforts to
obtain from all tenants of the Shopping Centers, all parties to the Ground
Leases, Oxmoor Ground Lease, REAs, and Oxmoor REA, AT&T Wireless, and Beargrass
Corporation executed copies of such estoppel certificates. Sellers shall deliver
to Purchaser a copy of each executed estoppel certificate promptly after
Sellers' receipt of same.
(i) Sellers shall use commercially reasonable efforts to obtain
prior to Closing the Seller's Required Consents. Commercially reasonable efforts
shall not include any obligation to make a payment to a third party to obtain a
Sellers' Required Consent other than for reasonable out-of-pocket expenses
incurred by such third party in reviewing Sellers' request for the Sellers'
Required Consent or otherwise as required by the terms of any agreement to which
a Seller is a party relating to the subject matter of such consent. Sellers
shall not be obligated to attempt to obtain Sellers' Required Consents with
respect to Indebtedness that Purchaser elects under Section 13.2(c) not to
assume. Sellers shall, however, obtain prior to Closing from each
PAGE 28
<PAGE> 35
lender to whom any portion of the Indebtedness is owed confirmation from such
lender as of the Closing Date of the outstanding principal balance of the
Indebtedness owed to such lender. In addition to the Sellers' Required Consent
from AT&T Wireless identified on Schedule 6.2(a) hereto, Sellers shall request
and use commercially reasonable efforts to obtain (but the receipt thereof shall
not be a condition to Purchaser's obligation to consummate the Closing) an
amendment to the AT&T Wireless Leases that eliminates or modifies in a manner
reasonably acceptable to Purchaser the last two sentences of Section 15.6
thereof.
(j) During the Contract Period, Sellers, at their sole cost and
expense, shall continue to defend, in a manner consistent with the handling of
the case to date, the litigation identified on Schedule 6.2(d) hereto, provided,
however, that Sellers shall consult with Purchaser about such defense and shall
take no action that could have a material effect upon the outcome of the
litigation without Purchaser's prior written consent, which shall not be
unreasonably withheld or delayed.
(k) During the Contract Period, Sellers shall, at Purchaser's
sole cost and expense and on Purchaser's behalf, cooperate with and make
information available to the independent auditors, Ernst & Young, or another
independent auditor selected by Purchaser as may be necessary to permit such
auditors to prepare financial statements of Sellers with respect to calendar
year 1998 in accordance with the requirements of Rule 3-14 of SEC Regulation
S-X. If so required by Ernst & Young or such other independent auditor as
Purchaser may select, Winmar Co., as agent for Sellers, shall engage the
auditors for the foregoing purposes, in which event the terms of the engagement
shall provide that all invoices for the cost and expense of the engagement will
be sent to and paid by Purchaser, that the engagement shall be assignable by
Sellers to Purchaser at Closing, and that, from and after the Closing Date,
Sellers shall have no further obligations, liability or responsibility in
connection therewith. Sellers' sole obligation in respect of the preparation of
the financial statements identified above shall be to make necessary information
available to the auditors until the Closing Date. Purchaser shall pay all costs
and expenses of the auditors, whether incurred prior to or after the Closing
Date. The obligations under this Section 10(k) shall survive Closing.
(l) Within thirty (30) days after the Effective Date, Winmar Co.,
as agent for Sellers, shall deliver to Purchaser site plans that truly and
correctly identify the stores in each Shopping Center that, as of the Effective
Date, were occupied by tenants who were open for business and who had not given
written notice of their intention to terminate their Leases (or, as applicable,
Oxmoor Leases).
PAGE 29
<PAGE> 36
11. ADDITIONAL COVENANTS OF PURCHASER
In addition to the other covenants of Purchaser set forth in this
Agreement, Purchaser hereby covenants and agrees with Sellers as follows:
(a) Purchaser shall cooperate with Sellers at no material cost to
Purchaser to obtain those Sellers' Required Consents to be obtained from third
parties, which obligation shall include, without limitation, promptly providing
all information reasonably requested by such third parties and making
Purchaser's representatives available to meet with such third parties. Purchaser
shall further use commercially reasonable efforts (but at no material cost to
Purchaser) to assist Sellers in obtaining the estoppel certificates described in
Section 10(h) above. Regardless of whether Purchaser performs its obligations
under this Section 11(a), however, receipt of certain of Sellers' Required
Consents and certain of the estoppel certificates to be requested by Sellers
under Section 10(h) above shall remain conditions to Purchaser's obligation to
consummate the Closing as provided in Sections 15.1(f) and 15.1(h) below.
(b) Purchaser shall give Winmar Co., as agent for Sellers,
written notice of Purchaser's receipt of each of Purchaser's Required Consents
promptly after it receives same. Not later than 5:00 p.m., Seattle, Washington
time on December 18, 1998, Purchaser shall give Winmar Co., as agent for
Sellers, notice stating whether Purchaser has or has not obtained all
Purchaser's Required Consents. If Purchaser has not by such time received all
Purchaser's Required Consents and so notified Winmar Co., as agent for Sellers,
unless Purchaser's notice states that Ontario's Board of Trustees has rejected
the purchase contemplated hereby (a "Rejection Notice"), Sellers shall have the
right, by written notice given to Purchaser within five (5) days after such
date, either to extend by not more than thirty (30) days the period within which
all Purchaser's Required Consents shall be obtained or to terminate the
Agreement, whereupon the Agreement shall be terminated, except for Purchaser's
obligations under Section 5.4 and such other provisions of the Agreement that,
by their terms, survive termination, and Winmar Co., as agent for Sellers, shall
promptly direct Escrow Agent to return the Deposit to Purchaser. If Purchaser
delivers to Winmar Co., as agent for Sellers, a Rejection Notice or if Purchaser
has not received all of Purchaser's Required Consents prior to expiration of
such extended period, this Agreement shall be terminated, except for Purchaser's
obligations under Section 5.4 and such other provisions of the Agreement that,
by their terms, survive termination, and Winmar Co., as agent for Sellers, shall
promptly direct Escrow Agent to return the Deposit to Purchaser.
PAGE 30
<PAGE> 37
(c) Purchaser shall take all commercially reasonable actions to
cause all Bonds outstanding on the Closing Date to be canceled, terminated,
released, collateralized or otherwise discharged on or before the Closing Date
or, to the extent Purchaser cannot perform such obligation by the Closing Date,
as promptly as is commercially practicable after the Closing Date. Purchaser
shall provide or cause to be provided all substitute bonds, deposits and other
undertakings required to permit the Bonds to be canceled, terminated, released
or otherwise discharged. If, despite its commercially reasonable efforts,
Purchaser is not able to cause one or more Bonds to be canceled, terminated,
released, collateralized or otherwise discharged (and in any event during such
period after the Closing Date as any Bonds remain outstanding), Purchaser shall,
as provided in Section 18, protect, defend, indemnify and hold Sellers harmless
from and against all loss, liability, cost, expense and claims arising after the
Closing Date under or relating to such Bonds. The obligations in this Section
11(c) shall survive Closing.
(d) Purchaser shall retain the Property Materials delivered to it
at Closing by Sellers pursuant to Section 12(c) below for a period of six (6)
years after Closing (the "Retention Period"). During the Retention Period,
Purchaser shall make the Property Materials available to Sellers upon request
for review and copying at Seller's cost. Purchaser shall provide Sellers with
originals of the Property Materials if, in connection with litigation or
governmental proceedings or for any other reason, Sellers so require. Sellers
shall preserve and return such originals to Purchaser upon completion of the use
for which they were requested. The obligations in this Section 11(d) shall
survive Closing.
12. CLOSING
(a) Closing shall take place in escrow at the offices of Escrow
Agent in Seattle, Washington or at such other place in Seattle, Washington as
Purchaser and Sellers may agree concurrently, subject to Sections 13.4 and 15.6,
for all portions of the Property (it being understood that Closing, subject to
Sections 13.4 and 15.6, for all of the Property may take place over a period of
several days). The Closing Date shall be not later than February 18, 1999 and
may occur on such earlier date as the parties mutually agree.
(b) At Closing, subject to Sections 13.4 and 15.6, the following
actions shall be taken with respect to the Property, all of which shall be
deemed taken simultaneously at Closing and none of which shall be deemed
completed until all have been completed:
PAGE 31
<PAGE> 38
(i) The Purchase Price (as adjusted pursuant to Section
13) shall be paid in accordance with Section 3.3 above.
(ii) The fully executed and acknowledged Deeds shall be
delivered to Escrow Agent for recording.
(iii) The fully executed and acknowledged Assignments of
Leases shall be delivered to Escrow Agent for recording at the
option of Purchaser or Purchaser's permitted assignees and
designees.
(iv) The fully executed Bills of Sale (or other
instruments of conveyance appropriate to the type of Personal
Property being conveyed) shall be delivered to Purchaser or
Purchaser's permitted assignees and designees.
(v) The fully executed and acknowledged Deeds and
Assignments of Ground Leases shall be delivered to Escrow Agent
for recording.
(vi) The fully executed and acknowledged Assignments of
REAs shall be delivered to Escrow Agent for recording.
(vii) The fully executed Assignments of Trade Names shall
be delivered to Purchaser or Purchaser's permitted assignees and
designees.
(viii) The fully executed Assignments of Contracts shall be
delivered to Purchaser or Purchaser's permitted assignees and
designees.
(ix) Subject to Section 15.5 below, the fully executed
Assignment of Joint Venture Interest shall be delivered to
Purchaser or Purchaser's permitted assignee.
(x) The Title Policies shall be delivered to Purchaser or
Purchaser's permitted assignees and designees, or the Title
Insurer shall irrevocably commit in writing to deliver the same.
(xi) Fully executed certificates from Sellers, confirming
that Sellers' representations and warranties made in this
Agreement, modified to reflect disclosures made under Section 8
above, are true and correct (or, if a representation or warranty
is not, by its express terms, subject to a materiality
qualification, true and correct in all material
PAGE 32
<PAGE> 39
respects) as if made on and as of Closing, shall be delivered to
Purchaser.
(xii) A fully executed certificate from Purchaser,
confirming that Purchaser's representations and warranties made
in this Agreement are true and correct (or, if a representation
or warranty is not, by its express terms, subject to a
materiality qualification, true and correct in all material
respects) as if made on and as of Closing, shall be delivered to
Winmar Co. for the benefit of all Sellers.
(xiii) A fully executed notice for each Shopping Center, in
form and substance reasonably satisfactory to Sellers and
Purchaser, advising the tenants under all Leases and Oxmoor
Leases, ground lessors under all Ground Leases and the Oxmoor
Ground Lease and other parties to the REAs, Oxmoor REA and
Assumed Contracts of the Shopping Center of the transfer of the
Shopping Centers (or, with respect to Oxmoor Center Mall) the
Joint Venture Interest to Purchaser (or its permitted assignees
and designees) and a direction to pay all amounts due as directed
by Purchaser (or its permitted assignees and designees), shall be
delivered to Purchaser or Purchaser's permitted assignees and
designees.
(xiv) Fully executed affidavits of nonforeign status shall
be delivered by Sellers to Purchaser or Purchaser's permitted
assignees and designees.
(xv) The fully executed Macerich Note shall be delivered
to Winmar Co. for the benefit of all Sellers.
(xvi) The fully executed Macerich Pledge shall be delivered
to Winmar Co. for the benefit of all Sellers.
(xvii) An opinion to Sellers from counsel to Macerich (which
may be in-house counsel) opining on the due organization,
existence and good standing of Macerich, the due authorization,
execution and delivery of the Macerich Note and Macerich Pledge,
the enforceability of the Macerich Note and Macerich Pledge in
accordance with their terms, and such other matters relating to
the Macerich Note and Macerich Pledge as Sellers shall reasonably
require, in form and
PAGE 33
<PAGE> 40
substance reasonably satisfactory to Sellers, shall be delivered
to Winmar Co. for the benefit of all Sellers.
(xviii) The original executed estoppel certificates obtained
by Sellers pursuant to Section 10(h) above shall be delivered to
Purchaser.
(xix) Executed original consents evidencing the granting of
the Sellers' Required Consents shall be delivered to Purchaser.
(xx) Such other documents, if any, as may be legally
necessary to enable Sellers and Purchaser to consummate and close
the transactions contemplated by this Agreement pursuant to the
terms and provisions and subject to the limitations hereof shall
be delivered fully executed to the party entitled thereto,
including, without limitation, tax affidavits, reports and
returns required in connection with the recordation of the Deeds,
such customary affidavits as may reasonably be required of
Sellers by Title Insurer in connection with the issuance of the
Title Policies, such customary indemnities as may reasonably be
required of Sellers by Title Insurer in connection with the
removal from the Title Policies of those standard exceptions
required to be removed in order to cause the Title Policies to
provide so-called "extended" coverage, including exceptions for
mechanics liens that are not Permitted Encumbrances, the issuance
of a non-imputation endorsement to the Title Policy for the
Oxmoor Ground Lease and Oxmoor Improvements, and the issuance of
the Title Policies (or irrevocable commitments therefor)
effective as of the Closing Date but in advance of recordation of
the Deeds (i.e., so-called "Gap Indemnities"), and all
instruments of assignment and assumption contemplated by Section
4.1(i) above.
(c) To the extent that any of the Property Materials supplied to
Purchaser were copies, originals of such materials, if in the possession of
Sellers, including, without limitation, the Assumed Contracts and Leases, shall
be delivered to Purchaser outside of escrow within ten (10) days after Closing.
This Section 12(c) shall survive Closing.
PAGE 34
<PAGE> 41
13. CLOSING PRORATIONS AND ADJUSTMENTS; ASSUMPTION OF OBLIGATIONS;
SPECIAL PROVISIONS FOR REDMOND TOWN CENTER
13.1 CLOSING PRORATIONS AND ADJUSTMENTS
Subject to Sections 13.4 and 15.6, all items of income and
expense relating to the Property, including without limitation real and personal
property taxes and local improvement district installments and other assessments
and governmental fees and charges ("Taxes"), ground rents and other amounts
payable under Ground Leases and REAs, rents and other amounts payable under
equipment leases, common area maintenance and service costs, utilities,
insurance costs and all other expenses of owning or ground leasing and operating
the Property other than Taxes ("Operating Expenses"), utility deposits, interest
on the Assumed Indebtedness, fees and charges under the Assumed Contracts,
fixed, minimum and base rents due under the terms of the Leases and additional
rent, common area maintenance charges, expense pass-throughs and other payments
made by tenants to reimburse Sellers for Taxes and Operating Expenses,
percentage, bonus, overage or other rent payable by each tenant on the basis of
sales, income or profits, tenant security deposits, leasing commissions and
fees, tenant allowances, and the cost of constructing tenant improvements shall
be handled at and after Closing, and the Purchase Price shall be adjusted in
respect thereof, in the manner provided on Schedule 13.1 hereto.
13.2 ASSUMPTION OF OBLIGATIONS
(a) Purchaser shall assume at Closing and pay and perform all
obligations of Sellers that arise or accrue from and after the Closing Date
under the Leases, Ground Leases and REAs. Purchaser shall take the Property at
Closing subject to the Permitted Encumbrances.
(b) Purchaser shall assume at Closing and pay and perform all
obligations of Winmar Co. arising or accruing from and after the Closing Date
under the Joint Venture Interest, including, without limitation, all obligations
under the Oxmoor Ground Lease, Oxmoor REA, Oxmoor Leases, Oxmoor Contracts and
the Indebtedness to which the Oxmoor Shopping Center is subject, for which
Winmar Co. is directly or indirectly responsible or liable as a venturer in
Oxmoor Joint Venture.
(c) At Closing, (i) Purchaser (or permitted assignees or
designees of Purchaser) shall assume all obligations of Sellers arising or
accruing after Closing under and in respect of (A) except as otherwise provided
in this Section 13.2(c), the Assumed Indebtedness, including without limitation
all obligations of Sellers under
PAGE 35
<PAGE> 42
the agreements, instruments and documents that provide for, evidence, secure or
otherwise pertain to the Assumed Indebtedness and (B) all Assumed Contracts, and
(ii) except as otherwise provided in this Section 13.2(c), Sellers and all
entities affiliated with Sellers shall be released from all outstanding
guaranties of such Assumed Indebtedness and Assumed Contracts. Purchaser shall
cooperate with and assist Sellers in obtaining the Sellers' Required Consents
that pertain to the assumption of the Assumed Indebtedness, the consent of any
third parties required to permit the assumption of the Assumed Contracts, and
the consent of any third parties required to obtain the release of Sellers'
guarantees of the Assumed Indebtedness or Assumed Contracts, which obligation
shall include, without limitation, promptly providing all non-confidential
information reasonably requested by such third party, making Purchaser's
representatives available to meet with such third party at reasonable times and
upon reasonable notice, agreeing to such modifications to the obligations being
assumed as a third party may reasonably require, provided that the modifications
do not materially change the economic terms of the obligation to be assumed or
materially increase the obligations to be assumed or materially decrease the
rights to be assigned thereunder, and providing substitute guarantees from
Purchaser or a permitted assignee or designee of Purchaser, whichever takes
title to the Shopping Center affected by the Assumed Indebtedness or Assumed
Contract in question. At Closing, Purchaser or a permitted assignee or designee
of Purchaser, whichever takes title to the Shopping Center affected by the
Assumed Indebtedness or Assumed Contract in question, shall execute such
instruments of assumption and other documents, in form reasonably satisfactory
to Purchaser, as any such third party may reasonably require in connection with
the assumption of any of such obligations and the release of any such
guarantees. If Sellers are unable to obtain a Sellers' Required Consent that is
required to permit the assumption of any of the Assumed Indebtedness or any
other consent of a third party that is required to permit the assumption of any
of the Assumed Contracts, Purchaser and its permitted assignees and designees
shall not be required to assume such Assumed Indebtedness or Assumed Contract
and Sellers shall prepay the affected Assumed Indebtedness or terminate the
affected Assumed Contract at or prior to Closing (and same shall not be included
within the meaning of whichever of the terms "Assumed Indebtedness" or "Assumed
Contracts" is applicable). If Purchaser elects not to assume a loan that
constitutes a portion of the Assumed Indebtedness and notifies Sellers of its
election not later than ten (10) days prior to the earlier of (i) the latest
date on which Sellers are able, under the terms of such Indebtedness, to give
the holder thereof notice of Sellers' election to prepay such Indebtedness and
(ii) the Closing Date, Purchaser and its permitted assignees and designees shall
not be required to assume such Assumed Indebtedness and Sellers shall prepay the
affected Indebtedness at or prior to Closing (and such Indebtedness
PAGE 36
<PAGE> 43
shall not be included within the meaning of the term "Assumed Indebtedness").
Sellers shall request that each holder of the Assumed Indebtedness extend to a
date as close to the Closing Date as is acceptable to such holder the latest
date on which Sellers are able, under the terms of such Assumed Indebtedness, to
give the holder thereof notice of Sellers' election to prepay such Assumed
Indebtedness, but Purchaser acknowledges that Sellers have no right to such an
extension. If Sellers and Purchaser are unable to obtain the release of an
outstanding guaranty of any of the Assumed Indebtedness or Assumed Contracts to
be assigned to and assumed by Purchaser or its permitted assignees or designees,
Purchaser shall provide Sellers with an indemnity in form and substance
reasonably satisfactory to Sellers against all liability under such guaranty and
the related Assumed Indebtedness or Assumed Contract shall be assigned to and
assumed by Purchaser or a permitted assignee or designee of Purchaser, whichever
takes title to the Shopping Center affected by the Assumed Indebtedness or
Assumed Contract in question.
(d) At Closing, Purchaser or a permitted assignee or designee of
Purchaser, whichever takes title to the Shopping Center affected by the Assumed
Indebtedness in question, shall assume all Indebtedness owing by Sellers to
SAFECO Life (other than the Indebtedness secured by Redmond Town Center, which
shall be prepaid by Sellers) that is secured by such Shopping Center and the
terms of such Assumed Indebtedness shall be modified as provided in the
commitment attached hereto as Exhibit N.
(e) From and after Closing, Purchaser shall assume and, at its
sole cost and expense, be responsible for the defense of the litigation
identified on Schedule 6.2(d) hereto. At or promptly after Closing, Sellers
shall deliver to Purchaser all of Sellers' files and records pertaining to the
litigation identified on Schedule 6.2(d) hereto, shall provide reasonable
cooperation and assistance to Purchaser in connection with Purchaser's defense
of such litigation (provided that Sellers shall not thereby be required to incur
any material expense), and shall direct counsel currently representing Sellers
in such litigation to cooperate with and assist Purchaser in connection with
Purchaser's defense of such litigation, at Purchaser's sole cost and expense.
13.3 EMPLOYMENT MATTERS
(a) Purchaser and Sellers agree that Purchaser has not assumed and shall
not assume any obligations to (or regarding the employment of), any persons
previously or currently employed by Sellers in the management, ownership or
operation of the Shopping Centers. As of the Closing Date, Sellers shall
terminate the employment of
PAGE 37
<PAGE> 44
all of their employees employed in the management, ownership or operation of the
Shopping Centers in accordance with all applicable laws.
(b) Purchaser shall not assume, shall not take subject to and shall not
be liable for, any liabilities or obligations of any kind or nature, whether
absolute, contingent, accrued, known or unknown, to former or current employees
of any of Sellers (i) which arise or accrue prior to the Closing including,
without limitation, any liabilities or obligations of any Seller in connection
with any employee benefit plans or collective bargaining agreements, employment
agreements or other similar arrangement, any liabilities or obligations with
respect to employment arising under any federal, state or municipal statute or
common law, or any liabilities or obligations in respect of retiree health
benefits, and (ii) with respect to severance payments or other termination
payments owing by Sellers to any of Sellers' former or current employees
(collectively, "Employee Claims"). No portion of any liability respecting the
Employee Claims listed in clause (ii) immediately above shall be passed through
or charged to the tenants under Leases by Sellers.
(c) As of the Closing Date, Purchaser may, at its option, offer
employment to any employee of Sellers on such terms and conditions as may be
mutually agreed upon by Purchaser and such employees. Sellers shall cooperate
with and assist Purchaser in Purchaser's efforts to recruit any such employees
with respect to whom Purchaser elects to offer employment, and shall provide
Purchaser with copies of all existing employment contracts with such employees,
if any.
13.4 REDMOND TOWN CENTER - PARCELS 3 AND 4 (BUILDINGS 1, 2 AND
3) AND PARCEL 6 (BUILDINGS 4, 5 AND 6)
(a) Purchaser acknowledges that, (i) pursuant to the AT&T
Wireless Lease - Parcels 3 and 4, Town Center Associates is currently
constructing an office building known as "Building 1" on Redmond Town Center
Parcel 4; (ii) that, pursuant to AT&T Wireless Lease - Parcel 6, Town Center
Associates has recently completed or will complete shortly construction of an
office building known as "Building 6" and is constructing an office building
known as "Building 4" on Redmond Town Center Parcel 6; and (iii) that, pursuant
to AT&T Wireless Lease - Parcel 6, Town Center Associates is about to commence
construction of an office building to be known as "Building 5" on Redmond Town
Center Parcel 6. (For informational purposes only, a site plan of Redmond Town
Center showing such parcels is attached hereto as Exhibit Q.) As provided in
Section 15.6(a) below, Purchaser may elect to delay the purchase of Redmond Town
Center Parcels 3 and 4 if, on the Closing Date, all of the AT&T Wireless Lease
Conditions for such parcels have not been satisfied. As
PAGE 38
<PAGE> 45
provided in Section 15.6(b) below, Purchaser may elect to delay the purchase of
Redmond Town Center Parcel 6 if, on the Closing Date, all of the AT&T Wireless
Lease Conditions for such parcel have not been satisfied.
(A) If, on the Closing Date, all conditions to the
obligation of Purchaser to purchase Redmond Town Center Parcels 3
and 4 have been satisfied or waived by Purchaser, including
without limitation the AT&T Wireless Lease Conditions for such
parcels, then Purchaser shall purchase at Closing Redmond Town
Center Parcels 3 and 4 and the portion of the Purchase Price
allocated thereto by mutual agreement of Winmar Co., as agent for
Sellers, and Purchaser shall be adjusted as provided in Section
13.4(c) below. If, on the Closing Date, all conditions to the
obligation of Purchaser to purchase Redmond Town Center Parcels 3
and 4 have not been satisfied or waived by Purchaser, including
without limitation the AT&T Wireless Lease Conditions for such
parcels, and Purchaser elects to delay the Closing of the
purchase of Redmond Town Center Parcels 3 and 4 as provided in
Section 15.6 below, the Purchase Price to be paid by Purchaser to
Sellers for the remainder of the Property shall be reduced by the
portion of the Purchase Price allocated to Redmond Town Center
Parcels 3 and 4 by mutual agreement of Winmar Co., as agent for
Sellers, and Purchaser, and, provided all conditions precedent to
Purchaser's obligations have been satisfied, Purchaser shall
thereafter purchase Redmond Town Center Parcels 3 and 4 as
provided in Section 15.6 below.
(B) If, on the Closing Date, all conditions to the
obligation of Purchaser to purchase Redmond Town Center Parcel 6
have been satisfied or waived by Purchaser, including without
limitation the AT&T Wireless Lease Conditions for such parcel,
then Purchaser shall purchase at Closing Redmond Town Center
Parcel 6 and the portion of the Purchase Price allocated thereto
by mutual agreement of Winmar Co., as agent for Sellers, and
Purchaser shall be adjusted as provided in Section 13.4(c) below.
If, on the Closing Date, all conditions to the obligation of
Purchaser to purchase Redmond Town Center Parcel 6 have not been
satisfied or waived by Purchaser, including without limitation
the AT&T Wireless Lease Conditions for such parcel, and Purchaser
elects to delay the Closing of the purchase of Redmond Town
Center Parcel 6 as provided in Section 15.6 below, the Purchase
Price to be paid by Purchaser to Sellers for the remainder of the
Property shall be
PAGE 39
<PAGE> 46
reduced by the portion of the Purchase Price allocated to Redmond
Town Center Parcel 6 by mutual agreement of Winmar Co., as agent
for Sellers, and Purchaser, and, provided all conditions
precedent to Purchaser's obligations have been satisfied,
Purchaser shall thereafter purchase Redmond Town Center Parcel 6
as provided in Section 15.6 below.
(b) If Purchaser is entitled to and does elect to delay the
Closing of the purchase of either Redmond Town Center Parcels 3 and 4 or Redmond
Town Center Parcel 6 as provided in Section 15.6 and the Closing occurs with
respect to the remainder of the Property, Town Center Associates shall retain
all rights in and to such parcel or parcels, the Improvements thereon, all
easements, covenants and other rights and interests appurtenant thereto, all
Contracts related thereto and all rights and obligations under the AT&T Wireless
Lease with respect to whichever of such parcels was not conveyed at Closing,
including, without limitation, the right to all rent paid or accrued and payable
by AT&T Wireless with respect to the period prior to the conveyance of such
parcel or parcels. Town Center Associates agrees that from and after the
Effective Date, it shall diligently and in good faith complete whichever of
Buildings 1, 4 and 6 is not complete as of the Effective Date, and shall deliver
such buildings to AT&T Wireless in the condition and on or before the date
required by the terms of the pertinent AT&T Wireless Lease. After the Closing
Date and until all work to be performed by Town Center Associates has been fully
and finally completed as required by the AT&T Wireless Lease and accepted by
AT&T Wireless, Purchaser, as the owner of the remainder of Redmond Town Center,
shall in good faith cooperate with Town Center Associates as Town Center
Associates completes such work. Without limiting the foregoing obligation, Town
Center Associates and its employees, agents, consultants and contractors shall
have the right (i) to enter upon Redmond Town Center for the purpose of
continuing such construction in substantially the same manner as such
construction has heretofore been undertaken and (ii) to continue to utilize in
the course of such construction the portions of Redmond Town Center currently
used for such construction. At all times during which construction is ongoing,
Town Center Associates shall provide or cause to be provided all insurance
required to be provided by the landlord under the AT&T Lease, including, without
limitation, general public liability insurance in amounts that are customary and
commercially reasonable for the nature and scope of the construction, naming
Purchaser (or its permitted assignee or designee) as an additional insured, and
shall protect, defend, indemnify and hold Purchaser (or its permitted assignee)
harmless from all damages, loss, liability, cost and expense caused by Town
Center Associates or its agents, employees and contractors in connection with
such
PAGE 40
<PAGE> 47
construction. If so required, Purchaser, as the owner of the remainder of
Redmond Town Center, shall execute permit applications in the form required by
the governmental authority with jurisdiction (provided same contain no
conditions, restrictions or obligations binding on Purchaser that are not
acceptable to Purchaser in Purchaser's reasonable discretion) and, at Town
Center Associates' expense, assist Town Center Associates with the processing of
such permit applications.
(c) There shall be an adjustment of the portion of the Purchase
Price allocated by mutual agreement of Winmar Co., as agent for Sellers, and
Purchaser to Redmond Town Center Parcels 3 and 4 and to Redmond Town Center
Parcel 6 calculated in the manner set forth below for Redmond Town Center
Parcels 3 and 4 either on the Closing Date or the Parcels 3 and 4 Delayed
Closing Date (as defined in Section 15.6 below) and for Redmond Town Center
Parcel 6 either on the Closing Date or the Parcel 6 Delayed Closing Date (as
defined in Section 15.6 below), whichever is applicable:
(i) If the annual Base Rent determined under the AT&T
Wireless Lease - Parcels 3 and 4 with respect to Building 1
exceeds Two Million Three Hundred Forty Thousand One Hundred
Thirty-Three Dollars ($2,340,133), Purchaser shall pay Sellers an
additional amount equal to the product of (A) the Multiplier (as
hereinafter defined) multiplied by (B) the amount of the excess
and, if the annual Base Rent so determined is less than Two
Million Three Hundred Forty Thousand One Hundred Thirty-Three
Dollars ($2,340,133), Purchaser shall receive a credit in an
amount equal to the product of (C) the Multiplier multiplied by
(D) the amount of the deficiency.
(ii) If the annual Base Rent currently in effect for
Buildings 2 and 3 under the AT&T Wireless Lease - Parcels 3 and 4
is adjusted by reason of AT&T Wireless' election under the AT&T
Wireless Lease Parcels 3 and 4 to reallocate costs among
Buildings 1, 2 and 3 (provided, and only to the extent that,
costs are reallocated between the same categories of expense for
different buildings, as such categories are set forth on Exhibit
D to the AT&T Wireless Lease - Parcels 3 and 4) and the Base Rent
as so adjusted exceeds Three Million One Hundred Eight Thousand
Eight Hundred Sixty Dollars ($3,108,860), Purchaser shall pay
Sellers an additional amount equal to the product of (A) the
Multiplier multiplied by (B) the amount of the excess and, if the
annual Base Rent so determined is less than Three Million One
Hundred Eight
PAGE 41
<PAGE> 48
Thousand Eight Hundred Sixty Dollars ($3,108,860), Purchaser
shall receive a credit in an amount equal to the product of (C)
the Multiplier multiplied by (D) the amount of the deficiency.
(iii) If the annual Base Rent determined under the AT&T
Wireless Lease - Parcel 6 with respect to Building 4 exceeds Two
Million Six Hundred Ninety-Five Thousand Eighty-Six Dollars
($2,695,086), Purchaser shall pay Sellers an additional amount
equal to the product of (A) the Multiplier multiplied by (B) the
amount of the excess and, if the annual Base Rent so determined
is less than Two Million Six Hundred Ninety-Five Thousand
Eighty-Six Dollars ($2,695,086), Purchaser shall receive a credit
in an amount equal to the product of (C) the Multiplier
multiplied by (D) the amount of the deficiency.
(iv) If the annual Base Rent determined under the AT&T
Wireless Lease - Parcel 6 with respect to Building 6 exceeds One
Million Eight Hundred Fifty-Three Thousand Nine Hundred Forty
Dollars ($1,853,940), Purchaser shall pay Sellers an additional
amount equal to the product of (A) the Multiplier multiplied by
(B) the amount of the excess and, if the annual base rent so
determined is less than One Million Eight Hundred Fifty-Three
Thousand Nine Hundred Forty Dollars ($1,853,940), Purchaser shall
receive a credit in an amount equal to the product of (C) the
Multiplier multiplied by (D) the amount of the deficiency.
(v) For purposes of this Section 13.4(c), the Multiplier
shall be 10.9.
(d) In accordance with the exercise by AT&T Wireless of its
option under the AT&T Wireless Lease - Parcel 6 to require that Town Center
Associates construct Building 5, Town Center Associates shall commence and
continue the construction of Building 5 in accordance with the requirements of
the AT&T Wireless Lease - Parcel 6. Upon the transfer of Redmond Town Center
Parcel 6 either on the Closing Date or at a postponed Closing in accordance with
Section 15.6(b) below, Purchaser shall assume and become liable and responsible
for the completion of the construction of Building 5 and shall pay to Town
Center Associates an amount equal to all costs, actual or imputed, that, as of
the Closing Date or the date of a postponed Closing under Section 15.6(b) below,
have been incurred or are imputed to have been incurred and that can be used in
the computation of Base Rent under Paragraphs A, B
PAGE 42
<PAGE> 49
and C of Exhibit D to the AT&T Wireless Lease--Parcel 6, to the extent such
costs exceed Six Million Three Hundred Fifteen Thousand Two Hundred and No/100
Dollars ($6,315,200). If such costs are less than Six Million Three Hundred
Fifteen Thousand Two Hundred and No/100 Dollars ($6,315,200), Purchaser shall be
credited with the amount of such shortfall at the closing of the transfer of
Redmond Town Center Parcel 6. After the Effective Date, Town Center Associates
shall allow a representative from Purchaser to monitor any construction or other
work being performed on Building 5. Town Center Associates shall consult with
and follow the reasonable recommendations of such representative in regard to
the work to be performed for Building 5, provided that such recommendations are
consistent with the landlord's obligations under the AT&T Wireless Lease -
Parcel 6, are not objectionable to AT&T Wireless, will not cause Town Center
Associates to incur costs that will not be used in the computation of Base Rent
under Paragraphs A, B and C of Exhibit D to the AT&T Wireless Lease - Parcel 6
and will not delay completion of Building 5.
(e) From and after the Closing Date, Sellers shall not, without
the prior written consent of Purchaser, which consent shall not unreasonably be
withheld or delayed after receipt by Purchaser of a summary of all material
terms of the proposed transaction, take any action involving any of Redmond Town
Center Parcels 3, 4 or 6 that would have been prohibited prior to the Closing
Date under Section 10(b).
13.5 [INTENTIONALLY OMITTED]
13.6 REDMOND TOWN CENTER - PARCEL 8
Town Center Associates shall pay the tenant allowances required to be
paid by the landlord prior to Closing under the Lease dated September 29, 1998
between Town Center Associates, as landlord, and Associated Grocers, as tenant,
for a portion of Redmond Town Center Parcel 8 (the "Parcel 8 Lease") as and when
required by the Parcel 8 Lease and Purchaser shall reimburse Town Center
Associates at Closing for the amount of the tenant allowances so paid. Town
Center Associates shall consult with and follow the reasonable recommendations
of Purchaser in regard to the payment of such tenant allowances, provided that
such recommendations are consistent with the landlord's obligations under the
Parcel 8 Lease. Upon assumption of the Parcel 8 Lease by Purchaser at Closing,
Purchaser shall be responsible for the payment of all tenant allowances required
to be paid by the landlord thereunder.
PAGE 43
<PAGE> 50
13.7 REDMOND TOWN CENTER - PARCELS 2-C AND 5-B
Subject to Purchaser's prior written approval of the scope and
cost thereof, Town Center Associates shall, during the Contract Period, perform
such development and construction work as may be necessary to maintain existing
entitlements on Redmond Town Center Parcels 2-C and 5-B prior to the Closing
Date. Purchaser shall reimburse Town Center Associates at Closing for costs
approved by Purchaser and incurred by Town Center Associates during the Contract
Period.
13.8 SURVIVAL
This Section 13 shall survive Closing.
14. CLOSING EXPENSES
(a) Purchaser shall pay (i) the fees and expenses of its legal
and other advisors and consultants, including, without limitation, all
surveyors, engineers, environmental consultants, Americans With Disabilities Act
consultants, roofing contractors and the like, (ii) all sales and use tax and
other similar taxes and charges, if any, due in connection with the conveyance
of the Personal Property; (iii) all recording charges for those of the
Conveyance Documents that are recorded; (iv) all assignment, assumption and
transfer fees required to be paid in connection with the assumption by Purchaser
of the Assumed Indebtedness (other than Assumed Indebtedness owing to SAFECO
Life); (v) all premiums for title insurance coverage and endorsements in excess
of or in addition to the coverage that would be provided by the Title Policies;
and (vi) subject to Section 14(c), one-half (1/2) of Escrow Agent's fees.
(b) Sellers shall pay (i) the fees and expenses of their legal
and other advisors and consultants; (ii) all transfer taxes and documentary
stamp taxes due in connection with the conveyance of the Shopping Centers or the
assignment of the Joint Venture Interest; (iii) all prepayment fees required to
be paid by Sellers in connection with the prepayment of Indebtedness that is not
Assumed Indebtedness; (iv) all termination fees payable in connection with the
termination of Contracts that are not Assumed Contracts; (v) the cost of
obtaining the Commitments and the Surveys; (vi) the cost of the premiums for the
Title Policies; and (vii) subject to Section 14(c) below, one-half (1/2) of
Escrow Agent's fees.
PAGE 44
<PAGE> 51
(c) Purchaser shall pay to Escrow Agent any additional fees or
compensation due in respect of additional services provided by Escrow Agent to
facilitate or assist with any financing obtained by Purchaser.
(d) All closing costs not otherwise enumerated in this Section 14
shall be allocated between Purchaser and Sellers according to local custom.
15. CONDITIONS TO CLOSING
15.1 CONDITIONS TO PURCHASER'S OBLIGATION TO CLOSE
Purchaser's obligation to purchase the Property and consummate the
transactions contemplated under this Agreement is expressly conditioned on the
following being satisfied as of the Closing Date, unless such conditions are
waived in writing by Purchaser, and, absent satisfaction of same on the Closing
Date, Purchaser may terminate this Agreement and thereafter no party shall have
any further obligations to the other hereunder, except as otherwise provided
herein, and Winmar Co., as agent for Sellers, shall promptly direct Escrow Agent
to return the Deposit to Purchaser.
(a) The Title Insurer shall be irrevocably committed to issue the
Title Policies.
(b) No suit, action or other proceeding shall be pending or
threatened which seeks, nor shall there exist any judgment the effect of which
is, to restrain or impose damages in connection with the purchase and sale of a
Shopping Center or the Joint Venture Interest or the transfer of any other
material portion of the Property.
(c) Sellers' representations and warranties set forth herein
shall be true and correct at and as of the Closing Date.
(d) Sellers shall have performed all of their covenants and
agreements hereunder in all material respects.
(e) Purchaser and Purchaser's permitted assignees and designees,
if any, shall have received all items to be delivered to Purchaser and
Purchaser's permitted assignees and designees under Section 12(b) above.
(f) Purchaser shall have received all Purchaser's Required
Consents and Sellers shall have received all Seller's Required Consents with
respect to the assignment and assumption of the Ground Leases and the AT&T
Wireless Leases.
PAGE 45
<PAGE> 52
(g) (i) Each Anchor shall be in occupancy of its store in a
Shopping Centers, shall be open for business and shall not have given any Seller
written notice of its intention to terminate its Lease (or Oxmoor Lease) or its
obligations under an REA (or an Oxmoor REA), as the case may be, which notice
has not been rescinded or withdrawn; (ii) the square footage of each of Redmond
Town Center, Oxmoor Center Mall, and the Shopping Centers identified on Exhibit
A as "Washington Square," "Kitsap Mall" and "Cascade Mall" occupied by tenants
(other than Anchors) who are open for business and who have not given a Seller
written notice of the exercise of a right under a Lease to terminate such Lease
(which notice has not been rescinded or withdrawn) shall not have declined by
more than five percent (5%) from the square footage occupied by such tenants on
the Effective Date (excluding tenants whose Leases (or Oxmoor Leases) have
expired in accordance with their terms) ; and (iii) the square footage of each
of the Shopping Centers other than those identified in clause (ii) occupied by
tenants (other than Anchors) who are open for business and who have not given a
Seller written notice of the exercise of a right under a Lease to terminate such
Lease (which notice has not been rescinded or withdrawn) shall not have declined
by more than ten percent (10%) from the square footage occupied by such tenants
on the Effective Date (excluding tenants whose Leases (or Oxmoor Leases) have
expired in accordance with their terms).
(h) Not later than two (2) Business Days prior to the Closing
Date, Purchaser shall have received copies of the following estoppel
certificates, each dated not earlier than forty-five (45) days prior to the
Closing Date and executed by the party from which it is to be obtained:
(i) with respect to each Anchor Lease (other than the AT&T
Wireless Leases), an estoppel certificate either (A) in substantially
the form of Exhibit M-1 attached hereto or (B) in substantially the same
form or, if no form is provided, containing the information as is
required to be provided under the terms of such Anchor Lease;
(ii) with respect to each Lease or Oxmoor Lease identified on
Schedule 15.1(h)(ii) hereto (other than those Leases and Oxmoor Leases,
if any, that have expired in accordance with their terms and have not
been extended in accordance with the requirements of this Agreement), an
estoppel certificate in substantially the same form as set forth in
Exhibit M-1 attached hereto from at least seventy-five percent (75%) of
the tenants under such Leases or Oxmoor Leases and (B) a Seller's
Estoppel from the applicable Seller for the remainder of such Leases or
Oxmoor Leases;
PAGE 46
<PAGE> 53
(iii) with respect to each other Lease or Oxmoor Lease not
identified in clauses (i) or (ii) above or clause (vi) below (other than
those Leases and Oxmoor Leases, if any, that have expired in accordance
with their terms and have not been extended in accordance with the
requirements of this Agreement), (A) an estoppel certificate in
substantially the same form as set forth in Exhibit M-1 attached hereto
from at least sixty-five percent (65%) of tenants under such Leases and
Oxmoor Leases and (B) a Seller Estoppel for such Leases or Oxmoor Leases
as necessary to provide Purchaser estoppels, when taken together with
the estoppels delivered under clause (A), from at least eighty percent
(80%) of such tenants;
(iv) With respect to each REA and the Oxmoor REA, an estoppel
certificate from each party to the REA (other than a Seller or such
Seller's predecessor interest under the REA) or Oxmoor REA (other than
Oxmoor Joint Venture or Oxmoor Joint Venture's predecessor in interest
under the Oxmoor REA) in the form required by such REA or substantially
in the form of Exhibit M-2 hereto;
(v) with respect to each Ground Lease and the Oxmoor Ground
Lease, an estoppel certificate either (A) in the form (or, if no form is
provided, containing the information) as is required to be provided
under the terms of the Ground Lease or Oxmoor Ground Lease or (B)
substantially in whichever form attached hereto as Exhibit M-3 is
applicable thereto; and
(vi) with respect to each AT&T Wireless Lease, an estoppel
certificate in the form required by the AT&T Wireless Lease or in
substantially the same form as set forth in Exhibit M-4 hereto.
With respect to each estoppel certificate required to be delivered to
Purchaser hereunder, it shall be a condition to Purchaser's obligation to close
that such estoppel certificate not (1) disclose a fact or matter that renders
any of Sellers' representations and warranties contained in this Agreement false
(or, if such representation or warranty is not by its express terms subject to a
materiality qualification, false in any material respect) or (2) deviate from
the form required hereby in any material respect. Sellers' Estoppels shall not
apply (and shall terminate and be of no further force or effect) as to any Lease
or Oxmoor Lease for which and to the extent that an estoppel certificate is
later received from the tenant which does not (1) disclose a fact or matter that
renders any of the certifications made by the pertinent Seller in the Sellers'
Estoppel false in any material respect or (2) deviate from the form required
hereby in any material respect. The certifications and representations made by
Sellers in the
PAGE 47
<PAGE> 54
Sellers' Estoppels shall survive Closing for a period of three (3) years and
shall terminate at the end of such period except to the extent that Purchaser
gives Winmar Co., as agent for Sellers, a Notice of Claim under Section 18(d)
below in respect of an alleged breach thereof prior to such termination date.
(i) With respect only to Purchaser's obligation to purchase
Redmond Town Center Parcels 3 and 4, the AT&T Wireless Lease Conditions for such
parcels shall have been satisfied.
(j) With respect only to Purchaser's obligation to purchase
Redmond Town Center Parcel 6, the AT&T Wireless Lease Conditions for such parcel
shall have been satisfied.
(k) Sellers shall have prepaid, at no cost to Purchaser, the
Indebtedness owing by Town Center Associates to SAFECO Life that currently is
secured by a lien on Redmond Town Center (or shall otherwise have caused SAFECO
Life to release Redmond Town Center and all other portions of the Property from
all liens and encumbrances securing such Indebtedness) and either (i) the loan
to be provided by SAFECO Life under the commitment attached hereto as Exhibit N
shall have closed and SAFECO Life shall have advanced to or as Purchaser may
direct the net loan proceeds to be advanced by SAFECO Life under the commitment
(which proceeds are to be applied by Purchaser to the portion of the Purchase
Price payable under Section 3.3(e) above) or (ii) SAFECO Life shall be prepared
to close such loan and advance such net loan proceeds but shall not have done so
due to the failure of a condition to SAFECO Life's obligation to close that is
within the reasonable control of Purchaser.
(l) SAFECO Life shall have executed and delivered such
instruments of amendment and modification as may be necessary to amend and
modify the terms of the Assumed Indebtedness owing to SAFECO Life (other than
that currently secured by Redmond Town Center) in accordance with the commitment
attached hereto as Exhibit N.
15.2 CONDITIONS TO SELLERS' OBLIGATION TO CLOSE
Sellers' obligation to sell the Property is expressly conditioned on the
following being satisfied as of the Closing Date, unless waived in writing by
Winmar Co., as agent for Sellers, and, absent satisfaction of same on the
Closing Date, Sellers may terminate this Agreement and thereafter no party shall
have any further obligations to the other hereunder, except as otherwise
provided herein.
PAGE 48
<PAGE> 55
(a) Purchaser's representations and warranties set forth herein
shall be true and correct at and as of the Closing Date.
(b) No suit, action or other proceeding shall be pending or
threatened which seeks, nor shall there exist any judgment the effect of which
is, to restrain or impose damages in connection with the purchase and sale of a
Shopping Center or the Joint Venture Interest or the transfer of any other
material portion of the Property.
(c) Purchaser shall have performed all of its covenants and
agreements hereunder in all material respects.
(d) Sellers shall have received all Sellers' Required Consents
with respect to the assignment and assumption of the Ground Leases and the AT&T
Wireless Leases and Purchaser shall have received all Purchaser's Required
Consents; provided, however, that if Purchaser waives the condition to its
obligation to close that Sellers' have received all Sellers' Required Consents
with respect to the assignment and assumption of the Ground Leases and the AT&T
Wireless Leases and requests that Sellers also waive such condition, Sellers
shall do so and proceed with the consummation of the transactions contemplated
hereby on the terms set forth herein, in which event Purchaser, on the terms set
forth in Section 18, shall protect, defend, indemnify and hold Sellers harmless
from and against any and all loss, liability, cost, and expense arising out of
or related to claims brought by the ground lessor or AT&T Wireless based upon
the failure to obtain such consents, which indemnification obligation shall
survive Closing.
15.3 [INTENTIONALLY OMITTED.]
15.4 HART-SCOTT-RODINO
Sellers and Purchaser have each independently determined that the
execution of this Agreement and the consummation of the transactions
contemplated hereby are exempt from the filing and waiting period requirements
of Section 7A of the Clayton Act, as added by Section 201 of the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, 15 U.S.C. Section 18a, and
the rules and regulations promulgated thereunder ("HSR Act"). In making such
determination, Sellers and Purchaser each did not and shall not rely on any
written or oral statement, representation or warranty made by or on behalf of
another party, whether or not contained in this Agreement, as to the
applicability of the HSR Act to the transactions contemplated hereby.
PAGE 49
<PAGE> 56
15.5 EXCLUSION OF THE JOINT VENTURE INTEREST FROM CLOSING
If Beargrass Corporation exercises the Right of First Refusal or if
Sellers do not obtain the applicable Sellers' Required Consent from Connecticut
General Life Insurance Company for the transfer of the Joint Venture Interest,
the Joint Venture Interest shall be deemed withdrawn from the Property for all
purposes under the Agreement, the Joint Venture Interest shall not be
transferred by Winmar Co. to Purchaser, and the Purchase Price shall be reduced
by the portion of the Purchase Price allocated to the Joint Venture Interest by
mutual agreement of Winmar Co., as agent for Sellers, and Purchaser.
15.6 EXCLUSION OF REDMOND TOWN CENTER PARCELS 3 AND 4 AND
REDMOND TOWN CENTER PARCEL 6 FROM CLOSING
(a) If, on the Closing Date, the conditions set forth in Section 15.1(i)
are not satisfied with respect to Redmond Town Center Parcels 3 and 4, Purchaser
may, provided it consummates the purchase of the remainder of the Property
(subject, however, to Section 15.6(b) below) on the Closing Date in accordance
with the terms of the Agreement, elect by written notice to Winmar Co., as agent
for Sellers, given not later than the Closing Date to delay the purchase of
Redmond Town Center Parcels 3 and 4 and all related Property to the date that is
fifteen (15) days after the date on which Winmar Co., as agent for Sellers,
gives Purchaser written notice that all such conditions have been satisfied (the
"Parcels 3 and 4 Delayed Closing Date"). On the terms set forth in Section
15.6(c) below, Town Center Associates shall convey Redmond Town Center Parcels 3
and 4 and all related Property to Purchaser and Purchaser shall purchase such
parcels and related Property from Town Center Associates on the Parcels 3 and 4
Delayed Closing Date.
(b) If, on the Closing Date, the conditions set forth in Section 15.1(j)
are not satisfied with respect to Redmond Town Center Parcel 6, Purchaser may,
provided it consummates the purchase of the remainder of the Property (subject,
however, to Section 15.6(a) above) on the Closing Date in accordance with the
terms of the Agreement, elect by written notice to Winmar Co., as agent for
Sellers, given not later than the Closing Date to delay the purchase of Redmond
Town Center Parcel 6 and the related Property to the date that is fifteen (15)
days after the date on which Winmar Co., as agent for Sellers, gives Purchaser
written notice that all such conditions have been satisfied (the "Parcel 6
Delayed Closing Date"). On the terms set forth in Section 15.6(c) below, Town
Center Associates shall convey Redmond Town Center Parcel 6 and all related
Property to Purchaser and Purchaser shall
PAGE 50
<PAGE> 57
purchase such parcel and related Property from Town Center Associates on the
Parcel 6 Delayed Closing Date.
(c) Purchaser shall purchase from Town Center Associates and Town Center
Associates shall sell to Purchaser Redmond Town Center Parcels 3 and 4 and
Parcel 6 and the related Property on whichever of the Parcels 3 and 4 Delayed
Closing Date or the Parcel 6 Delayed Closing Date is applicable on and subject
to all of the terms and conditions set forth in this Agreement with respect to
the transfer of the Property, modified as follows:
(i) The purchase price for the parcel or parcels and related
Property to be conveyed shall be deemed to be the portion of the Purchase Price
allocated thereto by mutual agreement of Winmar Co., as agent for Sellers, and
Purchaser, adjusted with respect only to such parcel or parcels and related
Property as provided in Section 13 and Schedule 13.1 and in Section 13.4(c).
(ii) The conditions to the obligations of Purchaser and Town
Center Associates to consummate the purchase and sale of such parcel or parcels
and related Property shall be those set forth in Sections 15.1 and 15.2 above,
limited, however, to the parcel or parcels and related Property then to be
transferred.
(iii) The Closing shall be deemed to mean the consummation of the
conveyance of the parcel or parcels and related Property then being conveyed and
the Closing Date with respect to the parcel or parcels and related Property then
being conveyed shall be deemed to be whichever of the Parcels 3 and 4 Delayed
Closing Date or the Parcel 6 Delayed Closing Date is applicable for all purposes
under the Agreement (including, without limitation, for establishing the periods
for which representations, warranties and indemnities pertaining to such parcel
or parcels and related Property (but no other representations, warranties and
indemnities) survive Closing).
(iv) The representations and warranties of Sellers to be made as
of the Closing Date with respect to the Property shall be deemed limited to the
parcel or parcels and the related Property then being conveyed.
(d) Notwithstanding Section 3.3(d) above, an allocable portion of the
Deposit shall continue to be held by Escrow Agent after the Closing Date in
respect of Redmond Town Center Parcels 3 and 4, if Purchaser is entitled and
elects to delay the purchase of such parcels, and in respect of Redmond Town
Center Parcel 6, if Purchaser is entitled and elects to delay the purchase of
such parcel. The portion of
PAGE 51
<PAGE> 58
the Deposit that Escrow Agent shall continue to hold shall, for each of Redmond
Town Center Parcels 3 and 4 and Redmond Town Center Parcel 6, be determined by
multiplying the Deposit by a fraction, the numerator of which shall be the
portion of the Purchase Price allocated to such parcels or parcel, as the case
may be, by agreement of Purchaser and Winmar Co., as agent for Sellers, and the
denominator of which shall be the Purchase Price. A portion of the Deposit held
by Escrow Agent in respect of Redmond Town Center Parcels 3 and 4 or Redmond
Town Center Parcel 6 shall be subject to the terms of the Agreement applicable
to the Deposit and shall be applied to the purchase price of the parcel or
parcels then being transferred, returned to Purchaser or released to Sellers, in
each case on the terms provided herein for the Deposit, limited, however, to the
parcel or parcels in question.
(e) If this Agreement is terminated in accordance with its terms, all
rights of Purchaser under this Section 15.6 shall terminate.
16. REMEDIES
(a) IF SELLERS (OR ANY OF THEM) ARE NOT IN DEFAULT AND PURCHASER
FAILS TO COMPLETE THE PURCHASE OF THE PROPERTY AS REQUIRED BY THIS AGREEMENT,
THE DEPOSIT TOGETHER WITH ACCRUED INTEREST THEREON SHALL BE FORFEITED TO SELLERS
AS THE SOLE AND EXCLUSIVE REMEDY AVAILABLE TO SELLERS FOR SUCH FAILURE, EXCEPT
FOR A BREACH OF PURCHASER'S OBLIGATIONS UNDER SECTION 5.4.
(b) IF PURCHASER IS NOT IN DEFAULT AND SELLERS (OR ANY OF THEM)
FAIL TO COMPLETE THE SALE OF THE PROPERTY AS REQUIRED BY THIS AGREEMENT,
PURCHASER SHALL HAVE THE RIGHT TO TERMINATE THIS AGREEMENT AND RECEIVE THE
RETURN OF ITS DEPOSIT TOGETHER WITH ACCRUED INTEREST THEREON, OR BE ENTITLED AS
ITS EXCLUSIVE REMEDY TO SPECIFIC PERFORMANCE. IN NO EVENT SHALL SELLERS BE
LIABLE TO PURCHASER FOR CONSEQUENTIAL OR INCIDENTAL DAMAGES, INCLUDING, BUT NOT
LIMITED TO, LOST PROFITS, EXCEPT THAT, IF SELLERS' (OR ANY SELLER'S) FAILURE OR
REFUSAL TO COMPLETE THE SALE OF THE PROPERTY CONSTITUTES A WILLFUL BREACH OF
SELLERS' OBLIGATIONS UNDER THE AGREEMENT AND PURCHASER EXERCISES ITS RIGHT TO
TERMINATE THE AGREEMENT, SELLERS SHALL PAY TO PURCHASER ON DEMAND ALL OF
PURCHASER'S REASONABLE OUT-OF-POCKET, THIRD-PARTY EXPENSES INCURRED IN
CONNECTION WITH
PAGE 52
<PAGE> 59
PREPARATION OF THE AGREEMENT, INVESTIGATION OF THE PROPERTY, AND PREPARATION FOR
CLOSING, WHICH OBLIGATION SHALL SURVIVE THE TERMINATION OF THE AGREEMENT.
(c) BY THEIR INITIALS BELOW, PURCHASER AND WINMAR CO., AS AGENT
FOR SELLERS, SPECIFICALLY ACKNOWLEDGE THAT THEY HAVE READ AND SPECIFICALLY
NEGOTIATED AND AGREED TO FORFEITURE OF THE DEPOSIT AND LIMITATION OF REMEDIES AS
PROVIDED FOR IN PARAGRAPHS 16(a) AND 16(b).
-------------------- --------------------
Purchaser's Initials Winmar Co.'s Initials
17. CASUALTY; CONDEMNATION
(a) If, prior to Closing, a Shopping Center is materially damaged
by fire or other casualty or a material portion of the Shopping Center becomes
the subject of a condemnation proceeding or a deed in lieu of condemnation,
Purchaser shall have the right to terminate this Agreement with respect only to
such Shopping Center if Purchaser notifies Winmar Co., as agent for Sellers, of
Purchaser's election to do so in writing not later than the date that is thirty
(30) days after Purchaser is given written notice of the casualty, condemnation
proceeding or deed in lieu of condemnation. If Closing would otherwise have
occurred within such thirty-day period, Closing shall be extended as necessary
to provide Purchaser a full thirty (30) days within which to make its election
under the preceding sentence and Sellers shall not be required to obtain
estoppel certificates to replace those that, but for such extension, would have
satisfied the requirement of the Agreement that they be dated not earlier than
forty-five (45) days prior to the Closing Date. If Purchaser so elects to
terminate this Agreement with respect to a Shopping Center, the Shopping Center
and all related portions of the Property shall not be conveyed to Purchaser, the
Purchase Price shall be reduced by the amount allocated to such Shopping Center
by mutual agreement of Purchaser and Winmar Co., as agent for Sellers, and
Purchaser and Sellers shall consummate the Closing with respect to the remainder
of the Property as provided herein. If, however, the Shopping Center identified
on Exhibit A hereto as "Washington Square" is materially damaged prior to
Closing, Purchaser shall have the further right, exercisable by written notice
given to Winmar Co., as agent for Sellers, within the foregoing time period, to
terminate this Agreement in its entirety. If Purchaser is entitled and elects
under this Section 17(a) to terminate this Agreement in its entirety, this
Agreement shall thereupon be terminated, except for Purchaser's obligations
under Section 5.4 and such other provisions of this Agreement that, by
PAGE 53
<PAGE> 60
their terms, survive termination, and Winmar Co., as agent for Sellers, shall
promptly direct Escrow Agent to return the Deposit to Purchaser. A Shopping
Center shall be deemed to have suffered a material casualty if (i) the sum of
(A) the cost to repair the casualty, as reasonably estimated by an independent,
third-party engineer retained by Sellers, plus (B) the post-Closing rent and
other income that, during the period that such engineer estimates will be
required to repair the casualty, will be abated under the terms of the affected
Leases (reduced by the operating expenses of the affected Shopping Center that
will be saved during such period and by the amount of any rental interruption
insurance that will be payable to or may be assigned by Sellers to Purchaser)
would exceed ten percent (10%) of the amount allocated to such Shopping Center
by mutual agreement of Purchaser and Winmar Co., as agent for Sellers, or (ii)
as a result of such casualty, any Anchor terminates or has the right to
terminate either an Anchor Lease or its obligations under an REA or an Oxmoor
REA under the terms thereof or ceases or has the right to cease operating in the
affected Shopping Center. A material portion of a Shopping Center shall be
deemed to be subject to condemnation or a deed in lieu of condemnation if (i)
the amount of the award made for the portion of the Shopping Center condemned or
transferred in lieu of condemnation would exceed ten percent (10%) of the amount
allocated to such Shopping Center by mutual agreement of Purchaser and Winmar
Co., as agent for Sellers, (ii) as a result of such condemnation or conveyance,
any Anchor terminates or has a right to terminate either an Anchor Lease or its
obligations under an REA or an Oxmoor REA or ceases or has the right to cease
operating in the affected Shopping Center, or (iii) the remainder of the
Shopping Center not condemned or transferred in lieu of condemnation (A) can no
longer be operated as a shopping center in a commercially reasonable fashion
under applicable zoning, building and other applicable laws or (B) with respect
to Redmond Town Center, the remainder of the Shopping Center not condemned or
transferred in lieu of condemnation can no longer be operated as a shopping
center and office project in a commercially reasonable fashion substantially as
it is currently (or, with respect to those portions of Redmond Town Center that
are undeveloped or under development, as it is intended to be) operated under
applicable zoning, building and other applicable laws).
(b) In the event of damage, destruction or condemnation that does
not permit Purchaser to terminate this Agreement under Section 17(a) above or as
to which Purchaser does not elect to terminate this Agreement, this Agreement
shall remain in full force and effect and Purchaser shall purchase the Property,
without any reduction of the Purchase Price, but with an assignment to Purchaser
of all condemnation proceeds or insurance proceeds and any deductibles and
coinsurance otherwise payable to Sellers; provided, however, that the Purchase
Price shall be
PAGE 54
<PAGE> 61
reduced by the amount of any deductible under Sellers' insurance policies that
reduces the proceeds otherwise payable to Purchaser and by any amount of such
proceeds previously received by a Seller.
18. INDEMNIFICATION
(a) Sellers shall protect, defend and indemnify Purchaser
(including its partners, trustees, directors, officers, employees, agents, and
affiliates) and hold it (and them) harmless from and against any claim, loss,
liability and expense (including reasonable attorneys', consultants', and
experts' fees and court costs) (collectively, "Losses") suffered or incurred by
Purchaser or such other persons arising out of or in connection with (i) any and
all tenant allowances and tenant improvement costs and leasing commissions and
fees incurred in respect of Leases for which Sellers are liable under this
Agreement; (ii) Sellers' failure to perform any of their obligations, covenants
or agreements set forth in this Agreement; (iii) subject to the limitation on
survival set forth in Section 6.2, any breach of the representations and
warranties made by Sellers in Section 6.2; (iv) subject to the limitation on
survival set forth in Section 15.1(h), any breach of the representations and
warranties made by Sellers in the Sellers' Estoppels; (v) third-party tort
claims arising or accruing prior to the Closing Date; (vi) Employee Claims; and
(vii) the Leases, Ground Leases, REAs, Assumed Contracts, Joint Venture
Interest, and Assumed Indebtedness arising or accruing prior to the Closing
Date.
(b) Purchaser shall protect, defend and indemnify Sellers
(including their partners, directors, officers, employees, agents, and
affiliates) and hold them harmless from and against all Losses suffered or
incurred by Sellers or such other persons arising out of or in connection with
(i) the ownership, operation, leasing, maintenance or improvement of the
Shopping Centers and the Property on or after the Closing Date, including,
without limitation, those arising out of or in connection with the Leases,
Ground Leases, REAs, Permitted Encumbrances, Assumed Indebtedness, Assumed
Contracts and Joint Venture Interest, (ii) any and all tenant allowances and
tenant improvement costs and leasing commissions and fees other than those for
which Sellers are obligated under this Agreement, (iii) Purchaser's failure to
perform any of its obligations, covenants or agreements set forth in this
Agreement, (iv) any breach of the representations and warranties made by
Purchaser in Section 7 above, (v) all liabilities arising under Bonds not
canceled, terminated, released or otherwise discharged in accordance with
Section 11(c) above, and claims brought by a ground lessor or AT&T Wireless as
provided in Section 15.2(d).
PAGE 55
<PAGE> 62
(c) The sole remedy of Purchaser and Sellers for matters subject
to the provisions of Sections 18(a) and (b) shall be pursuant to the
indemnification provisions of this Section 18, and, except as otherwise provided
in Section 18(d) below, such indemnification liability shall be subject to the
following limitations:
(i) The aggregate liability of all Sellers for all claims
of indemnification shall be limited to Fifty Million Dollars
($50,000,000).
(ii) Indemnification shall not be payable for the first
Two Hundred Fifty Thousand Dollars ($250,000) of indemnification
claims by Purchaser (the "Deductible Amount"). Once
indemnification claims that, in the aggregate, exceed the
Deductible Amount have been asserted, all claims, other than for
amounts equal to or below the Deductible Amount, shall be payable
in accordance with the terms of this Agreement.
(d) The limitations on Sellers' obligations set forth in Section
18(c) above shall not apply to Sellers' obligation to protect, indemnify and
hold Purchaser harmless from and against a breach of Sellers' covenants herein
pertaining to (i) Sellers' obligation to pay tenant allowances and tenant
improvement costs and leasing commissions and fees as provided in this Agreement
and (ii) post-Closing amounts payable by Sellers in respect of adjustments made
to the prorations performed at Closing as provided in Section 13.1 and Schedule
13.1.
(e) Promptly upon obtaining knowledge of any claim, event,
statement of fact or demand which has given rise to, or could reasonably give
rise to, a claim for indemnification under this Section 18, the party seeking
indemnification in respect of such matter (the "Indemnified Party") shall give
written notice of such matter ("Notice of Claim") to the party or parties from
whom indemnification is being sought (the "Indemnifying Party"), setting forth
the amount of the Losses, or the Indemnified Party's then best estimate of the
amount of the Losses. The Indemnified Party shall furnish to the Indemnifying
Party, in reasonable detail, such information as it may have with respect to
such indemnification claim (including copies of any summons, complaint or other
pleading which may have been served on it and any written claim, demand,
invoice, billing or other document evidencing or asserting the same). No failure
or delay by the Indemnified Party in the performance of the foregoing shall
reduce or otherwise affect the obligation of the Indemnifying Party to indemnify
and hold the Indemnified Party harmless, except to the extent that such failure
or delay shall have adversely affected the Indemnifying Party's ability to
PAGE 56
<PAGE> 63
defend against, settle or satisfy any liability, damage, loss, claim or demand
for which the Indemnified Party is entitled to indemnification hereunder.
(f) If the Notice of Claim given by the Indemnified Party
pursuant to Section 18(d) hereof arises from a claim or demand that is asserted
by a third party, the Indemnifying Party shall have twenty-five (25) days after
the date of the Notice of Claim to notify the Indemnified Party in writing of
its election to defend such third party claim or demand on behalf of the
Indemnified Party. If the Indemnifying Party elects to defend such third party
claim or demand, the Indemnified Party shall make available to the Indemnifying
Party all records and other materials which are reasonably required in the
defense of such third party claim or demand and shall otherwise cooperate with,
and assist the Indemnifying party in the defense of, such third party claim or
demand, and, so long as the Indemnifying Party is defending such third party
claim or demand in good faith, the Indemnified Party shall not pay, settle or
compromise such third party claim or demand. If the Indemnifying Party elects to
defend such third party claim or demand, the Indemnified Party shall have the
right to participate in the defense of such third party claim or demand, at its
own expense. If the Indemnifying Party does not elect to defend such third party
claim or demand, or does not defend such third party claim or demand in good
faith, then the Indemnified Party shall have the right, in addition to any other
right or remedy it may have hereunder, at the Indemnifying Party's expense, to
defend such third party claim or demand or to pay or settle the same.
Notwithstanding any of the foregoing, (i) the Indemnified Party shall not have
any obligation to participate in the defense of, or defend, any such third party
claim or demand; and (ii) the Indemnified Party's defense of or its
participation in the defense of any such third party claim or demand shall not
in any way diminish or lessen the obligations of the Indemnifying Party under
the agreement of indemnification set forth in this Section 18. The Indemnifying
Party shall not make any settlement of a third party claim or demand without the
prior written consent of the Indemnified party.
(g) Subject to the earlier expiration of the underlying
representations, warranties or obligations to which Sellers' indemnification
obligation may relate as may be provided in this Agreement, Sellers'
indemnification obligation under Section 18(a) above shall survive Closing for a
period of three (3) years and shall terminate at the end of such period except
as to claims or demands with respect to which Purchaser has given Sellers a
Notice of Claim in accordance with Section 18(d) above. Purchaser's
indemnification obligation under Section 18(b) above shall survive Closing
without such limitation.
PAGE 57
<PAGE> 64
19. RIGHTS AND DUTIES OF ESCROW AGENT
(a) Escrow Agent is executing this Agreement for the purposes of
confirming (i) the opening of escrow, at its offices in Seattle, Washington, and
San Francisco, California, for the transactions contemplated hereby and (ii)
Escrow Agent's agreement to act in accordance with the provisions hereof
governing the Escrow Agent. This Agreement, together with any supplemental
instructions jointly executed by Purchaser and Winmar Co., as agent for Sellers,
and delivered to Escrow Agent, shall constitute the escrow instructions by which
the transaction contemplated herein shall be consummated, provided that in the
event of an inconsistency between any such jointly executed supplemental
instructions and the terms of this Agreement, the terms of the jointly executed
supplemental instructions shall prevail. If this Agreement is terminated by
Purchaser or Sellers under and in accordance with a provision hereof that
entitles Purchaser to the return of the Deposit, Winmar Co., as agent for
Sellers, shall promptly instruct Escrow Agent to return the Deposit to
Purchaser.
(b) Escrow Agent shall be entitled to employ such legal counsel
and other experts as Escrow Agent may deem necessary to advise Escrow Agent
properly in connection with its obligations hereunder and to represent Escrow
Agent in any litigation to which Escrow Agent may be a party by reason of this
Agreement, and Escrow Agent may rely on the advice of such counsel and may pay
them reasonable compensation for their services as part of Escrow Agent's fee
payable by Purchaser and Sellers in accordance with Section 14 hereof.
(c) Escrow Agent shall not be responsible for the sufficiency or
accuracy of the form, execution, validity or genuineness of documents now or
hereafter presented to Escrow Agent hereunder or of any endorsement thereon or
for any lack of endorsement thereon or for any description therein, nor shall
Escrow Agent be responsible or liable in any respect on account of the
liability, authority or rights of the persons executing or delivering or
purporting to execute or deliver any such document or endorsement or this
Agreement.
(d) The duties and responsibilities of Escrow Agent shall be
limited to those expressly set forth herein, as the same may be supplemented by
written escrow instructions executed and delivered by Purchaser and Winmar Co.,
as agent for Sellers.
(e) Escrow Agent may resign by providing not less than thirty
(30) days' prior written notice to Purchaser and to Winmar Co., as agent for
Sellers, in
PAGE 58
<PAGE> 65
accordance with the provisions of Section 20 hereof. In the event of such
resignation, Purchaser and Winmar Co., as agent for Sellers, shall appoint a
mutually agreeable successor Escrow Agent with offices in Seattle, Washington,
and San Francisco, California, and, promptly following the appointment of such
successor, Escrow Agent shall transfer to the successor the Deposit and all
documents held by Escrow Agent under the terms of this Agreement.
(f) The provisions set forth in this Section 19 shall apply to
Escrow Agent solely in its capacity as Escrow Agent, and nothing contained in
this Section 19 shall in any way be construed to limit the Title Insurer's
obligations or liabilities under any of the Title Policies.
(g) In the event that escrow shall fail to close by reason of the
default by either party hereunder, the defaulting party shall be liable for all
escrow cancellation charges and for all of Escrow Agent's fees.
(h) If either Purchaser or Winmar Co., as agent for Sellers,
makes a written demand upon Escrow Agent for payment of the Deposit (or return
of a letter of credit or drawing of a letter of credit provided for or as part
of the Deposit), Escrow Agent shall, within twenty-four (24) hours, give written
notice to the other of such demand. If Escrow Agent does not receive a written
objection to the payment (or return or draw, as applicable) of the Deposit as
demanded within five (5) Business Days after the giving of such notice by Escrow
Agent, Escrow Agent shall, and is hereby authorized to, make such payment (and,
as necessary to draw a letter of credit provided for or as part of the Deposit
in connection therewith) as demanded. If Escrow Agent does receive such written
objection within such five (5) Business Day period, Escrow Agent shall either
(i) continue to hold the Deposit until otherwise directed by joint written
instructions from Purchaser and Winmar Co., as agent for Sellers, or a final
judgment of a court of competent jurisdiction or (ii) commence an interpleader
action in the Superior Court of King County, Washington and thereupon deposit
the Deposit with the Clerk of the Court of King County, Washington. Escrow Agent
shall give written notice of such deposit to Winmar Co., as agent for Sellers,
and Purchaser. Upon such deposit, Escrow Agent shall be relieved and discharged
of all further obligations and responsibilities hereunder.
20. NOTICES
(a) All notices provided for herein may be telecopied (with
machine verification of receipt), sent by Federal Express or other overnight
courier service, personally delivered or mailed registered or certified mail,
return receipt requested. If
PAGE 59
<PAGE> 66
a notice is sent by telecopy, it shall be deemed given when transmission is
complete if (i) a confirmation of successful transmission is contemporaneously
printed by the transmitting telecopy machine and (ii) a copy of the notice is
sent to the recipient by overnight courier for delivery on the Business Day next
following the date of telecopy transmission. If a notice is personally
delivered, sent by overnight courier service or sent by registered or certified
mail, it shall be deemed given upon receipt or refusal of delivery. The
addresses to be used in connection with notices are the following, or such other
address as a party shall from time to time direct by notice given in accordance
with this Section 20:
Purchaser: The Macerich Partnership, L.P.
c/o The Macerich Company
401 Wilshire Boulevard, Suite 700
Santa Monica, CA 90401
Attention: Arthur M. Coppola and
Richard A. Bayer, Esq.
Telecopy No.: (310) 395-2791
and to: Ontario Teachers' Pension Plan Board
5650 Yonge Street
North York, Ontario, Canada
M2M 4H6
Attention: Vice President, Real Estate
Telecopy No.: (310) 395-2791
With a copy to: The Macerich Company
Two Galleria Tower
13455 Noel Road, Suite 1480
Dallas, TX 75240
Attention: Edward C. Coppola, Jr.
Telecopy No.: (214) 458-7021
and to: O'Melveny & Myers
1999 Avenue of the Stars, Suite 700
Los Angeles, CA 90067
Attention: James H. Kinney, Esq.
Telecopy No.: (310) 246-6779
PAGE 60
<PAGE> 67
and to: Simpson Thacher & Bartlett
425 Lexington Avenue
New York, NY 10017
Attention: John M. Forelle, Esq.
Telecopy No.: (212) 455-2502
Sellers: c/o Winmar Company, Inc.
700 Fifth Avenue, Suite 2600
Seattle, WA 98104
Attn: Eddie L. Hendrikson
Telecopy No.: (206) 223-4565
With a copy to: SAFECO Corporation
4333 Brooklyn Avenue N.E.
SAFECO Plaza T-22
Seattle, WA 98185
Attention: General Counsel
Telecopy No.: (206) 545-5559
and to: Perkins Coie LLP
1201 Third Avenue
Seattle, WA 98101
Attn: Michael A. Barrett
Telecopy No.: (206) 583-8500
Escrow Agent: Transnation Title Insurance Company
1200 Sixth Avenue
Seattle, WA 98101
Attention: Martin J. Strelecky
Telecopy No.: (206) 628-0631
(b) Sellers hereby appoint Winmar Co. to act as their agent for
giving notices to and receiving notices from Purchaser and Escrow Agent. Any
notice given by Winmar Co. shall be binding on all Sellers, Purchaser and Escrow
Agent shall be entitled to rely on any notice given by Winmar Co. as if such
notice were signed and given by all Sellers, and any notice given by Purchaser
or Escrow Agent to Winmar Co. shall, when given to Winmar Co. in accordance with
the requirements of this Agreement, be deemed to have been given to all Sellers.
If Purchaser or Escrow
PAGE 61
<PAGE> 68
Agent receives conflicting notices from Winmar Co. and any other Seller, only
the notice from Winmar Co. shall be effective.
(c) Each of Macerich and Ontario shall be and hereby is
authorized to give any and all notices that are or may be given by Purchaser to
Sellers or Escrow Agent under or in connection with this Agreement and any
notice given by Macerich or Ontario shall be binding on the other. Sellers and
Escrow Agent shall be entitled to rely on any notice given by either Macerich or
Ontario as if such notice were signed and given by both Macerich and Ontario. If
any Seller or Escrow Agent receives conflicting notices from Macerich and
Ontario, only the first notice to be given shall be effective.
(d) Any notice given by one party to another may be given by such
party's attorneys. It shall not be a prerequisite to the effectiveness of a
notice otherwise given in accordance with the requirements set forth above that
it be received by the persons designated above to receive only copies of such
notice.
21. TRANSFER
(a) This Agreement shall inure to the benefit of and be binding
on the parties hereto and their heirs, successors and assigns; provided,
however, that Purchaser may not assign its rights hereunder, in whole or in
part, without Sellers' prior written consent, which consent may be withheld in
Sellers' sole and absolute discretion.
(b) Notwithstanding the prohibition set forth in Section 21(a)
above,
(i) Purchaser shall have the right to assign this
Agreement (in whole or in part) at or prior to the Closing Date
to one or more corporations, partnerships, limited partnerships,
limited liability companies, trusts or pension plans that are
owned or controlled (as "control" is defined in the definition of
Affiliate) by either or both of Macerich and Ontario, provided
that Purchaser gives Winmar Co., as agent for Sellers, notice not
later than seven (7) days prior to the Closing Date of
Purchaser's intent so to assign all or a part of this Agreement
and provides in such notice the identity of each proposed
assignee, with such information about such assignee as Winmar
Co., as agent of Sellers, may reasonably require in order to
determine that the assignee satisfies the foregoing requirements.
PAGE 62
<PAGE> 69
(ii) After Closing, Purchaser (or its permitted assignees)
may grant a collateral assignment of its or their surviving
interests in this Agreement to any lender of Purchaser or such
permitted assignees for the purposes of funding a portion of the
Purchase Price.
(iii) Purchaser, by notice to Winmar Co., as agent for
Sellers, given not later than seven (7) days prior to the Closing
Date, shall have the right to designate (A) one or more
corporations, partnerships, limited partnerships, limited
liability companies, trusts or pension plans that are owned or
controlled (as "control" is defined in the definition of
Affiliate) by either or both of Macerich and Ontario to which
title to any of the Shopping Centers and the other Property
related thereto will be transferred at Closing without an
assignment of this Agreement and (B) one or more entities that
are not included within clause (A) to which title to Eastland
Plaza and Albany Plaza and the other Property related thereto
will be transferred at Closing, but Purchaser shall not in
connection therewith assign any of its rights hereunder to such
designee.
(c) If Purchaser assigns all or any part of this Agreement to one
or more Affiliates or designates one or more entities to take title to one or
more of the Shopping Centers as permitted herein, Purchaser shall not thereby be
relieved of its obligations, duties or liabilities hereunder. Each such assignee
to whom all or any portion of this Agreement shall be assigned shall assume by a
written instrument reasonably acceptable to Sellers and thereby become jointly
and severally responsible for all of Purchaser's obligations, duties and
liabilities hereunder insofar as they relate to the part of the Agreement
assigned to such assignee.
(d) If any Seller assigns all or any part of this Agreement, it
shall not thereby be relieved of its obligations, duties or liabilities
hereunder.
22. CONFIDENTIALITY
(a) Each Seller and Purchaser agrees that, without the agreement of the
other parties hereto, it shall not prior to Closing disclose the existence of
the terms and/or conditions of this Agreement and Purchaser shall not prior to
Closing disclose any confidential information concerning the Property or the
Sellers to any third party other than (a) any existing or prospective lender or
other financing source of Purchaser or any Affiliate thereof, or any prospective
investor in Purchaser or any Affiliate thereof, (b) to Sellers' or Purchaser's
agents, employees, partners, investors, directors or officers, (c) to Sellers'
or Purchaser's consultants, advisors, attorneys and
PAGE 63
<PAGE> 70
accountants, (d) as required by law or by governmental regulation, requirement
or order, or (e) as may be necessary to assert its rights hereunder. If this
transaction does not close, Purchaser shall destroy and shall cause its
employees, agents, representatives, consultants and advisors to destroy all such
information and materials and all documentation prepared based thereon and all
copies which Purchaser or such other persons made thereof. This Section 22 shall
survive termination of this Agreement.
(b) At all times prior to Closing, Sellers and Purchaser will each
consult with the other before issuing or making any reports, statements, or
releases to the public with respect to this Agreement or the transactions
contemplated hereby and will use good faith efforts to agree on the text of a
joint public report, statement, or release or will use good faith efforts to
obtain the other party's approval of the text of any public report, statement,
release to be made solely on behalf of a party. If Sellers and Purchaser are
unable to agree on or approve any such public report, statement, or release and
such report, statement, or release is required by law or appropriate to
discharge such party's disclosure obligations, then such party may make or issue
the legally required or appropriate report, statement, or release. Any such
report, statement, or release approved or permitted to be made pursuant to this
Section may be disclosed or otherwise provided by Sellers or Purchaser to any
person or entity, including without limitation to any employee or customer of
either party hereto and to any governmental authority.
23. APPLICABLE LAW
This Agreement shall be governed by and construed in accordance with the
laws of the State of Washington.
24. BROKERS
(a) Each Seller represents and warrants to Purchaser that it has
dealt with no broker, salesman, finder or consultant with respect to this
Agreement or the transactions contemplated hereby other than Salomon Smith
Barney. Each Seller agrees to indemnify, protect, defend and hold Purchaser
harmless from and against all claims, losses, damages, liabilities, costs,
expenses (including reasonable attorneys' fees and disbursements) and charges
resulting from the Seller's breach of the foregoing representation in this
subsection (a). The provisions of this subsection (a) shall survive Closing and
any termination of this Agreement. Purchaser shall not be responsible for
broker's fees due to Salomon Smith Barney, which shall be paid by or on behalf
of Sellers pursuant to a separate agreement with Salomon Smith Barney.
PAGE 64
<PAGE> 71
(b) Purchaser represents and warrants to the Sellers that it has
dealt with no broker, salesman, finder or consultant with respect to this
Agreement or the transactions contemplated hereby other than Salomon Smith
Barney. The Purchaser agrees to indemnify, protect, defend and hold the Sellers
harmless from and against all claims, losses, damages, liabilities, costs,
expenses (including reasonable attorneys' fees and disbursements) and charges
resulting from the Purchaser's breach of the foregoing representations in this
subsection (b). The provisions of this subsection (b) shall survive Closing and
any termination of this Agreement.
25. COSTS AND EXPENSES
Except as otherwise provided herein, each party hereto will bear its own
costs and expenses in connection with the negotiation, preparation and execution
of this Agreement and other documentation related hereto and in the performance
of its duties hereunder.
26. MISCELLANEOUS
26.1 HEADINGS
The headings in this Agreement are for convenience only and do not in
any way limit or affect the terms and provisions hereof.
26.2 CALCULATION OF TIME PERIODS
Unless otherwise specified, in computing any period of time described in
this Agreement, the day of the act or event after which the designated period of
time begins to run is not to be included and the last day of the period so
computed is to be included, unless such last day is not a Business Day. The
final day of any such period shall be deemed to end at 5:00 p.m., Pacific
standard time or Pacific daylight time, as applicable.
26.3 TIME OF ESSENCE
Time is of the essence of this Agreement.
26.4 GENDER
Wherever appropriate in this Agreement, the singular shall be deemed to
refer to the plural and the plural to the singular, and pronouns of certain
genders shall be deemed to include either or both of the other genders.
PAGE 65
<PAGE> 72
26.5 COUNTERPARTS
This Agreement and each Conveyance Document may be executed in
counterparts, each of which shall be deemed an original, but which when taken
together shall constitute one and same instrument.
26.6 EXHIBITS AND SCHEDULES
The Exhibits and Schedules referred to herein and attached to this
Agreement are incorporated herein as if set forth in full.
27. ATTORNEYS' FEES
If any lawsuit or arbitration arises in connection with this Agreement,
the substantially prevailing party therein shall be entitled to recover from the
losing party the substantially prevailing party's costs and expenses, including
reasonable attorneys' fees, incurred in connection therewith, in preparation
therefor and on appeal therefrom, including those in any bankruptcy proceeding,
which amounts shall be included in any judgment entered therein.
28. UNENFORCEABILITY
If any provision of this Agreement is held to be invalid, illegal or
unenforceable in any respect, such invalidity, illegality or unenforceability
shall not affect the remainder of such provision or any other provisions hereof.
29. AMENDMENT; MODIFICATIONS
This Agreement may not be altered, amended, changed, waived, terminated
or modified in any respect or particular unless the same shall be in writing and
signed by or on behalf of the party to be charged therewith.
30. WAIVER
A party may, at any time or times, at its election, waive any of the
conditions to its obligations hereunder, but any such waiver shall be effective
only if contained in a writing signed by or on behalf of such party. No waiver
shall reduce the rights and remedies of such party by reason of any breach of
any other party. No waiver by any party of any breach hereunder shall be deemed
a waiver of any other or subsequent breach.
PAGE 66
<PAGE> 73
31. BULK TRANSFERS
Purchaser hereby waives compliance by Sellers with the bulk transfer
laws, if applicable, of all jurisdictions in which portions of the Property are
located.
32. FACSIMILE SIGNATURES
Each party (a) has agreed to permit the use, from time to time and where
appropriate, of telecopied signatures in order to expedite the transactions
contemplated by this Agreement, (b) intends to be bound by its respective
telecopied signature, (c) is aware that the other will rely on the telecopied
signature, and (d) acknowledges such reliance and waives any defenses to the
enforcement of the documents effecting the transaction contemplated by this
Agreement based on the fact that a signature was sent by telecopy.
33. ENTIRE AGREEMENT
This Agreement constitutes the entire agreement among the parties with
respect to the subject matter hereof and supersedes all prior agreements, oral
or written, express or implied, and all negotiations or discussions of the
parties, whether oral or written, and there are no warranties, representations
or agreements among the parties in connection with the subject matter hereof
except as set forth herein.
34. DISCLOSURE UNDER OREGON LAW
THE PROPERTY DESCRIBED IN THIS INSTRUMENT MAY NOT BE WITHIN A FIRE
PROTECTION DISTRICT PROTECTING STRUCTURES. THE PROPERTY IS SUBJECT TO LAND USE
LAWS AND REGULATIONS, WHICH, IN FARM OR FOREST ZONES, MAY NOT AUTHORIZE
CONSTRUCTION OR SITING OF A RESIDENCE AND WHICH LIMIT LAWSUITS AGAINST FARMING
OR FOREST PRACTICES AS DEFINED IN ORS 30.930 IN ALL ZONES. BEFORE SIGNING OR
ACCEPTING THIS INSTRUMENT THE PERSON ACQUIRING FEE TITLE TO THE PROPERTY SHOULD
CHECK WITH THE APPROPRIATE CITY OR COUNTY PLANNING DEPARTMENT TO VERIFY APPROVED
USES AND EXISTENCE OF FIRE PROTECTION FOR STRUCTURES.
35. JOINDER
SAFECO and Escrow Agent are executing the Agreement solely for the
limited purposes set forth in this Section 35.
PAGE 67
<PAGE> 74
(a) By its execution of the Agreement, SAFECO agrees (i) to cause
SAFECO Life to perform its obligations under the commitment attached as Exhibit
N hereto and (ii) to cause Sellers to pay and perform their obligations when and
as due under Section 18 above and, failing payment and performance by Sellers
when due, that SAFECO shall be liable and responsible for the payment and
performance of Sellers' obligations under Section 18 above as if such
obligations were the primary obligations of SAFECO (the obligations of SAFECO
Life and Sellers identified in this Section 35(a) are hereinafter referred to as
the "Guaranteed Obligations".
(i) SAFECO's undertakings in Section 35(a) shall be an
independent obligation of SAFECO, separate and distinct from the
Guaranteed Obligations. A separate action may be brought or
prosecuted against SAFECO, whether or not any such action is
brought or prosecuted against SAFECO Life or Sellers or whether
SAFECO Life or Sellers are joined in any such action or actions.
SAFECO's undertakings in Section 35(a) shall be an absolute
guarantee of payment and performance, and not a guarantee of
collection. The obligations of SAFECO under Section 35(a) are
direct and primary, regardless of the validity or enforceability
of the Guaranteed Obligations against Sellers or SAFECO Life or
any renewal, extension or modification thereof. SAFECO shall
continue to be liable under Section 35(a) even if all or part of
the Guaranteed Obligations become uncollectible by operation of
law or otherwise.
(ii) With respect to its undertaking in Section 35(a),
SAFECO waives (A) any defense arising from or out of the exercise
by Purchaser of any right or remedy it may have with respect to
the Guaranteed Obligations; (B) grace, demand, presentment,
notice of dishonor and protest with respect to the Guaranteed
Obligations; (C) any defense based upon any change in the name,
location, composition or structure of Sellers or SAFECO Life, or
any change in the type of business conducted by Sellers or SAFECO
Life, or any other change in the financial condition, identity or
legal status of Sellers or SAFECO Life; (D) the benefit of
suretyship defenses generally; and (E) any defense based upon any
failure by Purchaser to obtain a similar guaranty from any other
person or entity, or file a creditor's claim in the estate of any
person or entity, including Sellers or SAFECO Life, whether in
administration, bankruptcy or any other proceeding.
PAGE 68
<PAGE> 75
(iii) Purchaser shall not be bound to exhaust its recourse
or take any action against Sellers or SAFECO Life or against any
other person or entity, or proceed against any collateral, but
Purchaser may make such demands and take such actions as it deems
advisable, and Purchaser, without affecting the liability of
SAFECO under Section 35(a), may with or without notice or
consideration (A) release any other person or entity liable for
the Guaranteed Obligations and (B) extend the maturity, modify
the terms, grant any indulgence or forbearance or postpone the
time of payment of the Guaranteed Obligations or otherwise amend
or modify the terms of any agreement or instrument giving rise to
all or any of the Guaranteed Obligations. All rights and remedies
of Purchaser under Section 35(a), at law or in equity, are
separate and cumulative and may be pursued separately,
successively or concurrently, or not pursued, without affecting
or limiting any other right or remedy of Purchaser and without
affecting or impairing the liability of SAFECO under Section
35(a).
(b) By its execution of the Agreement, Escrow Agent agrees to be
bound by Section 19 hereof and all other provisions of the Agreement providing
for the receipt, investment and release of the Deposit.
36. JOINT AND SEVERAL LIABILITY
(a) All obligations of Sellers under this Agreement and the
Conveyance Documents, including all indemnification obligations hereunder and
under the Conveyance Documents, shall be joint and several obligations of each
of the Sellers without regard to the particular obligation and Purchaser may
make a claim against all Sellers or any of them for the entire amount of such
claim.
(b) All obligations of Macerich and Ontario under this Agreement
and the Conveyance Documents, including all indemnification obligations
hereunder and under the Conveyance Documents, shall be joint and several
obligations of each of Macerich and Ontario without regard to the particular
obligation and Sellers may make a claim against both of Macerich and Ontario or
either of them for the entire amount of such claim.
37. CONSENT TO JURISDICTION
Each Seller, and each of Macerich and Ontario hereby submits to the
jurisdiction of any state or federal court sitting in Seattle, Washington, in
any action or
PAGE 69
<PAGE> 76
proceeding relating to this Agreement and hereby waives any claim that such a
forum is inconvenient or that there is a more convenient forum.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date set forth above.
SHOPPING CENTER: SELLERS:
Washington Square WASHINGTON SQUARE, INC.,
a Washington corporation
By:
-----------------------------------------
Name:
------------------------------------
Title:
-----------------------------------
By:
-----------------------------------------
Name:
------------------------------------
Title:
-----------------------------------
Kitsap Mall KITSAP ASSOCIATES LIMITED PARTNERSHIP,
a Washington limited partnership
By: Kitsap Mall, Inc., a Washington
corporation, general partner
By:
-----------------------------------------
Name:
------------------------------------
Title:
-----------------------------------
By:
-----------------------------------------
Name:
------------------------------------
Title:
-----------------------------------
PAGE 70
<PAGE> 77
Cascade Mall and
Cross Court Plaza WINMAR CASCADE, INC.,
a Washington corporation
By:
-----------------------------------------
Name:
------------------------------------
Title:
-----------------------------------
By:
-----------------------------------------
Name:
------------------------------------
Title:
-----------------------------------
Fringe Land Shopping Center,
Square Too, Albany Plaza WINMAR OF OREGON, INC.,
an Oregon corporation
By:
-----------------------------------------
Name:
------------------------------------
Title:
-----------------------------------
By:
-----------------------------------------
Name:
------------------------------------
Title:
-----------------------------------
North Point Plaza
and Kitsap Place WINMAR OF KITSAP, INC.,
a Washington corporation
By:
-----------------------------------------
Name:
------------------------------------
Title:
-----------------------------------
By:
-----------------------------------------
Name:
------------------------------------
Title:
-----------------------------------
PAGE 71
<PAGE> 78
Eastland Plaza SCIT, INC., a Massachusetts corporation
By:
-----------------------------------------
Name:
------------------------------------
Title:
-----------------------------------
By:
-----------------------------------------
Name:
------------------------------------
Title:
-----------------------------------
Redmond Town Center and
Creekside Crossing TOWN CENTER ASSOCIATES,
a Washington joint venture
By: Winmar Redmond, Inc.,
a Washington corporation
By:
-----------------------------------------
Name:
------------------------------------
Title:
-----------------------------------
By:
-----------------------------------------
Name:
------------------------------------
Title:
-----------------------------------
Oxmoor Center Mall WINMAR COMPANY, INC.,
a Washington corporation
By:
-----------------------------------------
Name:
------------------------------------
Title:
-----------------------------------
By:
-----------------------------------------
Name:
------------------------------------
Title:
-----------------------------------
PAGE 72
<PAGE> 79
PURCHASER:
ONTARIO TEACHERS' PENSION PLAN BOARD, a
non-share capital corporation continued under
the laws of the Province of Ontario
By:
-----------------------------------------
Name:
------------------------------------
Title:
-----------------------------------
THE MACERICH PARTNERSHIP, L.P.,
a Delaware limited partnership
By: The Macerich Company,
a Maryland corporation, its general
partner
By:
-----------------------------------------
Name:
------------------------------------
Title:
-----------------------------------
ESCROW AGENT:
TRANSNATION TITLE INSURANCE COMPANY,
an Arizona corporation
By:
-----------------------------------------
Name:
------------------------------------
Title:
-----------------------------------
PAGE 73
<PAGE> 80
SAFECO:
SAFECO CORPORATION,
a Washington corporation
By:
-----------------------------------------
Name:
------------------------------------
Title:
-----------------------------------
PAGE 74
<PAGE> 81
SCHEDULE 1
TO
PURCHASE AND SALE AGREEMENT
DEFINED TERMS
As used in the Purchase and Sale Agreement between Washington Square,
Inc., Kitsap Associates Limited Partnership., Winmar Cascade, Inc., Winmar
Oregon, Inc., Winmar of Kitsap, Inc., SCIT, Inc., Town Center Associates, and
Winmar Company, Inc., collectively as Sellers, and Ontario Teachers' Pension
Plan Board and The Macerich Partnership, L.P., together as Purchaser, the
following terms shall have the following meanings:
ACCESS PERIOD shall mean the period commencing on the Effective Date and
continuing until 5:00 p.m. Seattle time on the day that is sixty (60) days after
the Effective Date.
AFFILIATE means, with respect to a party hereto, any corporation,
partnership, limited partnership or limited liability company, trust or pension
plan that controls, is controlled by or is under common control with the party
in question. One entity shall be deemed to control another if the entity owns
not less than fifty-one percent (51%) of the outstanding voting equity interests
in such other entity and has the right, by virtue of owning such voting equity
interests, by proxy, by voting trust or by another arrangement, to direct the
day to day affairs of such other entity. Macerich and Ontario and the Affiliates
of each shall be deemed to be Affiliates of Purchaser.
AGREEMENT shall mean the Purchase and Sale Agreement between Washington
Square, Inc., Kitsap Associates Limited Partnership., Winmar Cascade, Inc.,
Winmar Oregon, Inc., Winmar of Kitsap, Inc., SCIT, Inc., Town Center Associates,
and Winmar Company, Inc., collectively as Sellers, and Ontario Pension Plan
Board and The Macerich Partnership, L.P., together as Purchaser, to which this
Schedule 1 is appended.
ALBANY PLAZA shall mean the Shopping Center so designated on Exhibit A
to the Agreement.
ANCHOR shall mean each Anchor Tenant and each party to an REA or the
Oxmoor REA.
PAGE 1
<PAGE> 82
ANCHOR LEASE shall mean each Lease or Oxmoor Lease identified on
Schedule 6.1(c) hereto.
ANCHOR TENANT shall mean the tenant under an Anchor Lease.
ASSIGNMENT OF CONTRACTS shall mean an assignment and assumption of the
Assumed Contracts in the form of Exhibit H to the Agreement.
ASSIGNMENT OF JOINT VENTURE INTEREST shall mean an assignment and
assumption of the Joint Venture Interest in the form of Exhibit K to the
Agreement.
ASSIGNMENT OF LEASES shall mean an assignment and assumption of the
Leases in the form of Exhibit G to the Agreement, modified, as necessary, to
conform to the requirements of local law.
ASSIGNMENT OF REA shall mean an assignment and assumption of each REA in
the form of Exhibit J to the Agreement, modified, as necessary, to conform to
the requirements of local law.
ASSIGNMENT OF TRADE NAMES shall mean an assignment and assumption of
Trade Names in the form of Exhibit I to the Agreement.
ASSUMED CONTRACTS shall mean all Contracts other than those to be
terminated by Sellers prior to Closing pursuant to Section 10(f) or Section
13.2(c) of the Agreement.
ASSUMED INDEBTEDNESS shall mean all Indebtedness other than (a) the
Indebtedness of Town Center Associates owing to SAFECO Life that currently is
secured by a lien on Redmond Town Center and (b) the Indebtedness, if any, (i)
that Purchaser directs Sellers to prepay as provided in Section 13(c) or (ii)
for which Sellers are unable to obtain a Sellers' Required Consent permitting
the assumption thereof by Purchaser.
AT&T WIRELESS shall mean AT&T Wireless Services, Inc., a Delaware
corporation and the tenant under the AT&T Wireless Leases.
AT&T WIRELESS LEASE CONDITIONS means (a) with respect to Redmond Town
Center Parcels 3 and 4, (i) AT&T Wireless shall have taken occupancy of Building
1 on such parcels, (ii) the final reconciliation of costs as required under
Section II of Exhibit D to the AT&T Wireless Lease - Parcels 3 and 4 shall have
been provided to AT&T Wireless, (iii) if, as a result of such final
reconciliation, an adjustment to the
PAGE 2
<PAGE> 83
"Base Rent" (as such term is defined in Section 1.3 of the AT&T Wireless Lease -
Parcels 3 and 4) to be paid by AT&T Wireless is required under Section II of
Exhibit D to the AT&T Wireless Lease - Parcels 3 and 4, such adjustment of Base
Rent has been made, and (iv) AT&T Wireless has commenced paying such Base Rent;
and (b) with respect to Redmond Town Center Parcel 6, (i) AT&T Wireless shall
have taken occupancy of Buildings 4 and 6 on such parcel, (ii) the final
reconciliation of costs as required under Section II of Exhibit D to the AT&T
Wireless Lease - Parcel 6 shall have been provided to AT&T Wireless, (iii) if,
as a result of such final reconciliation, an adjustment to the "Base Rent" (as
such term is defined in Section 1.3 of the AT&T Wireless Lease - Parcel 6) to be
paid by AT&T Wireless is required under Section II of Exhibit D to the AT&T
Wireless Lease - Parcel 6, such adjustment of Base Rent has been made, and (iv)
AT&T Wireless has commenced paying such Base Rent.
AT&T WIRELESS LEASES shall mean AT&T Wireless Lease - Parcels 3 and 4
and AT&T Wireless Lease - Parcel 6.
AT&T WIRELESS LEASE - PARCELS 3 AND 4 shall mean that certain Lease
dated June 21, 1996 between Town Center Associates, as landlord, and AT&T
Wireless, as tenant, as amended February 10, 1998.
AT&T WIRELESS LEASE - PARCEL 6 shall mean that certain Phase II Lease
dated February 16, 1998 between Town Center Associates, as landlord, and AT&T
Wireless, as tenant.
BILL OF SALE shall mean a bill of sale in the form attached hereto as
Exhibit E, modified, as necessary, to conform to the requirements of the laws of
the jurisdiction in which each Shopping Center is located.
BONDS shall mean all bonds, deposits and other undertakings currently
outstanding in favor of governmental authorities or other third parties to
secure the performance of an obligation of a Seller or Oxmoor Joint Venture, not
including collateral or guarantees provided by a Seller or Oxmoor Joint Venture
to secure the payment of indebtedness for borrowed money.
BUSINESS DAY shall mean a day, other than a Saturday or Sunday, on which
banks in both of New York, New York and Seattle, Washington are open for
business.
PAGE 3
<PAGE> 84
CLOSING shall mean the consummation of the purchase and sale of the
Property (or each portion thereof, if Closing is delayed for certain portions of
Redmond Town Center) as contemplated by the Agreement.
CLOSING DATE shall mean the date upon which the Purchase Price
(excluding any portion thereof not paid by reason of a delay in the Closing for
certain portions of Redmond Town Center as provided in the Agreement) is paid to
Sellers.
CODE shall mean the Internal Revenue Code of 1986, as amended.
COMMITMENTS shall mean the preliminary commitments for title insurance
identified on Schedule 5.1(a) to the Agreement.
CONTRACT PERIOD shall mean the period beginning on the Effective Date
and ending on the first to occur of (a) termination of the Agreement in
accordance with its terms and (b) the Closing Date.
CONTRACTS shall mean all service, maintenance, construction, and other
contracts and agreements respecting the operation, use, maintenance,
development, redevelopment or improvement of the Shopping Centers or any portion
thereof, including, without limitation, space leased to tenants under Leases
(but excluding the Agreement, the Leases, the Oxmoor Leases, the Ground Leases,
the Oxmoor Ground Lease, the Oxmoor Contracts, the Bonds, the Permitted
Encumbrances, the REAs, and agreements, instruments and documents that provide
for, evidence, secure or otherwise pertain to the Assumed Indebtedness).
CONVEYANCE DOCUMENTS shall mean the Deeds, Bills of Sale, Assignments of
Leases, Assignments of Contracts, Assignments of REAs, Assignment of Trade
Names, and Assignment of Joint Venture Interest.
DEED shall mean, with respect to a Shopping Center located in the State
of Washington, a special warranty deed in the form attached hereto as Exhibit D,
and, as to a Shopping Center located in another jurisdiction, the local
equivalent of a special warranty deed in such jurisdiction. DEEDS shall mean all
the Deeds.
DEED AND ASSIGNMENT OF GROUND LEASE shall mean an assignment and
assumption of each Ground Lease in the form of Exhibit F to the Agreement,
modified, as necessary, to conform to the requirements of local law.
DEPOSIT shall mean the amount of Fifteen Million Dollars ($15,000,000)
deposited with Escrow Agent either in cash, by a letter of credit or in a
combination of
PAGE 4
<PAGE> 85
cash and a letter of credit pursuant to Section 3.2 of the Agreement. The
Deposit shall include all interest earned on cash held by Escrow Agent, if the
Deposit is made in cash or if a draw is made against any letter of credit
provided for the Deposit. "Deposit" shall also refer to any portion thereof held
by Escrow Agent after the Closing Date pursuant to Section 15.6(d) of the
Agreement.
DEPOSITORY shall mean Seattle-First National Bank, Seattle, Washington.
EASTLAND PLAZA shall mean the Shopping Center so designated on Exhibit A
to the Agreement.
EFFECTIVE DATE shall mean the date of the Agreement as set forth in the
preamble thereto.
EMPLOYEE CLAIMS shall have the meaning given to such term in Section
13.3(b) of the Agreement.
ENVIRONMENTAL LAWS shall mean all federal, state and local statutes,
ordinances, codes, rules, regulations, guidelines, orders and decrees
regulating, relating to or imposing liability or standards concerning or in
connection with Hazardous Materials, underground or above-ground storage tanks
or the protection of human health or the environment, as any of the same may be
amended from time to time, including, but not limited to, the Comprehensive
Environmental Response, Compensation, and Liability Act ("CERCLA"), 42 U.S.C.
Section 9601 et seq., as amended by the Superfund Amendments and Reauthorization
Act or any equivalent state or local laws or ordinances; the Resource
Conservation and Recovery Act ("RCRA"), 42 U.S.C. Section 6901 et seq., as
amended by the Hazardous and Solid Waste Amendments of 1984, or any equivalent
state or local laws or ordinances; the Federal Insecticide, Fungicide, and
Rodenticide Act ("FIFRA"), 7 U.S.C. Section 136 et seq. or any equivalent state
or local laws or ordinances; the Hazardous Materials Transportation Act (49
U.S.C. Section 1801 et seq.); the Emergency Planning and Community Right-To-Know
Act ("EPCRA"), 42 U.S.C. Section 11001 et seq. or any equivalent state or local
laws or ordinances; the Toxic Substances Control Act ("TSCA"), 15 U.S.C. Section
2601 et seq. or any equivalent state or local laws or ordinances; the Atomic
Energy Act, 42 U.S.C. Section 2011 et seq., or any equivalent state or local
laws or ordinances; the Clean Water Act (the "Clean Water Act"), 33 U.S.C.
Section 1251 et seq. or any equivalent state or local laws or ordinances; the
Clean Air Act (the "Clean Air Act"), 42 U.S.C. Section 7401 et seq. or any
equivalent state or local laws or ordinances; and the Occupational Safety and
Health Act, 29 U.S.C. Section 651 et seq. or any equivalent state or local laws
or ordinances.
PAGE 5
<PAGE> 86
ESCROW AGENT shall mean Transnation Title Insurance Company (formerly
Transamerica Title Insurance Company).
GROUND LEASE shall mean one, and GROUND LEASES shall mean two or more,
of the lease agreements identified on Schedule 6.2(k) hereto. The term "Ground
Lease" shall not include the Oxmoor Ground Lease.
GROUND LEASED LAND shall mean (a) the parcels of real property that are
legally described in Exhibit B-11 to the Agreement and (b) Parcels 7, 8, and 9
of the real property that is legally described in Exhibit B-10 to the Agreement.
The term "Ground Leased Land" shall not include the Oxmoor Land.
HAZARDOUS MATERIALS shall mean any substance, material, waste, gas or
particulate matter that (a) is regulated by the United States government or any
state or local governmental authority with jurisdiction over a Shopping Center
the exposure to which, or manufacture, possession, presence, use, generation,
storage, transportation, treatment, release, disposal, abatement, cleanup,
removal, remediation or handling of which, is prohibited, controlled or
regulated by any Environmental Law, or (b) requires investigation or remediation
under any Environmental Law or common law, or (c) is toxic, explosive,
corrosive, flammable, infectious, radioactive, carcinogenic, mutagenic or
otherwise hazardous. Such term includes, without limitation, any material or
substance that is (1) defined as a "hazardous waste," "hazardous material,"
"hazardous substance," "extremely hazardous waste," "restricted hazardous waste"
or any like or similar term under any applicable Environmental Law; (2) oil and
petroleum products; (3) asbestos or asbestos-containing material as defined in
the regulations of the Occupational Safety and Health Administration at 29
C.F.R. Section 1910.1001; (4) polychlorinated biphenyls; (5) radioactive
material; (6) designated as a "toxic pollutant" or a "hazardous substance"
pursuant to Section 307 or 311 of the Clean Water Act; (7) defined as a
"hazardous waste" pursuant to Section 1004 of RCRA; (8) defined as a "hazardous
substance" pursuant to Section 101 of CERCLA; (9) now designated as a "hazardous
chemical" substance or mixture pursuant to TSCA; (10) designated as an
"extremely hazardous" substance under Section 302 of EPCRA; (11) designated as a
"priority pollutant" or "hazardous air pollutant" pursuant to the Clean Air Act;
(12) designated as a hazardous chemical under the Occupational Safety and Health
Act; (13) radon gas or other radioactive source material, including special
nuclear material and byproduct materials regulated under the Atomic Energy Act,
42 U.S.C. Section 2011 et seq.; (14) subject to regulation under FIFRA; (15)
natural gas, natural gas liquids, liquefied natural gas and synthetic
PAGE 6
<PAGE> 87
gas usable for fuel; or (16) infectious wastes or materials and pathogenic
bacteria or other pathogenic microbial agents.
IMPROVEMENTS shall mean all buildings, structures (surface and
subsurface) and other improvements located on the Owned Land and the Ground
Leased Land that are owned by a Seller, including fixtures that constitute real
property under applicable provisions of law. The term "Improvements" shall not
include the Oxmoor Improvements.
INDEBTEDNESS shall mean all indebtedness of Sellers for borrowed money
that is secured in whole or in part by any portion of the Property.
JOINT VENTURE AGREEMENT shall mean the Oxmoor Center Joint Venture
Agreement dated April 23, 1969 between Winmar Co. and Beargrass Corporation, as
amended August 17, 1983, June 1, 1988, September 30, 1995 and October 21, 1997.
JOINT VENTURE INTEREST shall mean the fifty percent (50%) joint venture
interest owned by Winmar Co. in Oxmoor Joint Venture and shall include all of
Winmar Co.'s right, title and interest in, to and under the Oxmoor Joint Venture
and the Joint Venture Agreement including, without limitation, all of Winmar
Co.'s right, title and interest in, to and under all (a) distributions after the
Closing Date of profits and income of Oxmoor Joint Venture, (b) repayments after
the Closing Date of any and all loans made by Winmar Co. to Oxmoor Joint
Venture, whether pursuant to the terms of the Joint Venture Agreement or
otherwise, (c) capital distributions after the Closing Date from Oxmoor Joint
Venture, (d) distributions after the Closing Date of cash flow by Oxmoor Joint
Venture, (e) property of Oxmoor Joint Venture to which Winmar Co. now or in the
future may be entitled, (f) other claims which Winmar Co. now has or may in the
future acquire against the Oxmoor Joint Venture and its property, (g) proceeds
of any liquidation upon the dissolution of the Oxmoor Joint Venture and winding
up of its affairs, (h) general intangibles for money due or to become due from
Oxmoor Joint Venture, (i) other rights of Winmar Co. to receive any
distributions or other payments of any kind whatsoever from or in respect of
Oxmoor Joint Venture or in any way derived from Oxmoor Joint Venture, Oxmoor
Center Mall or the ownership or operation thereof, whether any of the above
distributions consist of money or property and (j) all other rights of Winmar
Co. as a partner or venturer in Oxmoor Joint Venture including, without
limitation, rights to reports, accounting, information and voting.
LAND shall mean the Owned Land and the Ground Leased Land.
PAGE 7
<PAGE> 88
LEASES shall mean all leases, licenses and other agreements pursuant to
which a Seller has granted any person the right to use and occupy any portion of
the Owned Land or the Improvements. The term "Leases" shall not include the
Oxmoor Leases.
MACERICH shall mean The Macerich Partnership, L.P., a Delaware limited
partnership.
MACERICH NOTE shall mean a promissory note in the principal amount of
Thirty Million Six Hundred Thousand Dollars ($30,600,000), bearing interest at a
rate of six and one-half percent (6.5%) per annum, requiring monthly payments in
arrears of accrued interest only, and having a maturity date of one (1) year
from the Closing Date, executed and delivered by Macerich in the form of Exhibit
P hereto.
MACERICH PLEDGE shall mean a pledge of all of Macerich's right, title
and interest in and to the shares of stock, membership interests, partnership
interests and other equity interests in all Affiliates of Purchaser that take
title to one or more Shopping Centers, which shall be given to secure the
payment of the Macerich Note and shall be in a commercially reasonable form.
MATERIAL DEFECTIVE CONDITION shall mean any one or more of the
following:
(a) a structural defect or a latent condition in a building at a
Shopping Center, which condition is not consistent with what would reasonably be
expected to be found in buildings of similar age and type that have been
maintained in accordance with sound, commercially reasonable industry practices,
provided that (A) the defect or condition has been specifically identified in a
written report prepared for Purchaser by a qualified, reputable, licensed,
independent engineer, (B) a complete copy of the report is delivered to Winmar
Co., as agent for Sellers, with Purchaser's election under Section 5.2 to
terminate this Agreement, and (C) the cost of repairing the defect or condition
as estimated by the report (to the extent such cost is not chargeable to tenants
under Leases or Oxmoor Leases or to third parties under REAs or the Oxmoor REA)
will (x) exceed the Materiality Threshold (as defined in the last paragraph of
this definition) and (y) together with the estimated cost of correcting all
other conditions identified in the other clauses of this definition and in
clause (c) of the definition of Permitted Encumbrances (to the extent such cost
is not chargeable to tenants under Leases or Oxmoor Leases or to third parties
under REAs or the Oxmoor REA), be greater than seventy-five one-hundredths
percent (0.75%) of the Purchase Price;
PAGE 8
<PAGE> 89
(b) the presence of Hazardous Materials in the ground or
groundwater at or beneath a Shopping Center or adjacent to a Shopping Center,
provided that (A) the Hazardous Materials have been specifically identified in a
written report prepared for Purchaser by a qualified, reputable, independent
environmental consultant, (B) a complete copy of the report is delivered to
Winmar Co., as agent for Sellers, with Purchaser's election under Section 5.2 to
terminate this Agreement, (C) the Hazardous Materials are present in
concentrations that require removal or remediation under applicable
Environmental Laws, (D) if such Hazardous Materials are not in the ground or
groundwater at or beneath a Shopping Center but only adjacent to a Shopping
Center, the report states that such Hazardous Materials are reasonably likely to
migrate onto or beneath the Shopping Center in concentrations that will require
removal or remediation under applicable Environmental Laws (to the extent such
cost is not chargeable to tenants under Leases or Oxmoor Leases or to third
parties under REAs or the Oxmoor REA), and (E) the report estimates that the
cost of removing or remediating the Hazardous Materials to the extent required
by applicable Environmental Laws will, together with the estimated cost of
correcting all other conditions identified in the other clauses of this
definition and in clause (c) of the definition of Permitted Encumbrances (to the
extent such cost is not chargeable to tenants under Leases or Oxmoor Leases or
to third parties under REAs or the Oxmoor REA), be greater than Seventy-Five
One-Hundredths percent (0.75%) of the Purchase Price;
(c) a defect in the ability of a Shopping Center to withstand
seismic shock to the extent customary for shopping centers of similar age, size,
construction and tenant mix located in the general area of such Shopping Center,
provided that (A) the defect has been specifically identified in a written
report prepared for Purchaser by a qualified, reputable, licensed, independent
engineer, (B) a complete copy of the report is delivered to Winmar Co., as agent
for Sellers, with Purchaser's election under Section 5.2 to terminate this
Agreement, and (C) the cost of repairing the defect as estimated by the report
(to the extent such cost is not chargeable to tenants under Leases or Oxmoor
Leases or to third parties under REAs or the Oxmoor REA) will, together with the
estimated cost of correcting all other conditions identified in the other
clauses of this definition and in clause (c) of the definition of Permitted
Encumbrances (to the extent such cost is not chargeable to tenants under Leases
or Oxmoor Leases or to third parties under REAs or the Oxmoor REA), be greater
than seventy-five one-hundredths percent (0.75%) of the Purchase Price; or
(d) a violation by a Shopping Center of a statute, ordinance,
code or other law applicable thereto (including zoning) or an REA (or Oxmoor
REA),
PAGE 9
<PAGE> 90
provided that (A) the violation has been specifically identified in a written
opinion or report prepared for Purchaser by a qualified, reputable, professional
that is not and has not been an employee of Purchaser or an Affiliate of
Purchaser or the violation has been noted by a governmental authority or written
notice thereof has been provided by a governmental authority, (B) a complete
copy of the opinion or report is delivered to Winmar Co., as agent for Sellers,
with Purchaser's election under Section 5.2 to terminate this Agreement, and (C)
the cost of curing the violation as estimated by the report (to the extent such
cost is not chargeable to tenants under Leases or Oxmoor Leases or to third
parties under REAs or the Oxmoor REA) will, together with the estimated cost of
correcting all other conditions identified in the other clauses of this
definition and in clause (c) of the definition of Permitted Encumbrances (to the
extent such cost is not chargeable to tenants under Leases or Oxmoor Leases or
to third parties under REAs or the Oxmoor REA), be greater than seventy-five
one-hundredths percent (0.75%) of the Purchase Price.
As used in clause (a) of this definition, "Materiality Threshold"
shall mean (x) for each of Redmond Town Center, Oxmoor Center Mall, and the
Shopping Centers identified on Exhibit A as "Washington Square," "Kitsap Mall"
and "Cascade Mall," an amount equal to One Hundred Thousand Dollars ($100,000)
and (y) for each other Shopping Center, an amount equal to Twenty-Five Thousand
Dollars ($25,000).
NOTICE OF CLAIM shall have the meaning given to such term in Section
18(d) of the Agreement.
ONTARIO shall mean Ontario Teachers' Pension Plan Board, a non-share
capital corporation continued under the laws of the Province of Ontario.
OXMOOR CENTER MALL shall mean the Shopping Center so designated on
Exhibit A to the Agreement.
OWNED LAND shall mean (a) the parcels of real property that are legally
described in Exhibits B-1 through B-9 to the Agreement, (b) the parcels of real
property that are legally described in Exhibit B-10 to the Agreement other than
Parcels 7, 8, and 9 (which are included in the definition of Ground Leased Land)
and Parcels 13, 14, and 15, which have been dedicated as public streets, in each
case as set forth in Exhibit B-10, and (c) (i) any land lying in the beds of any
streets, roads or avenues, open or proposed, public or private, in front of or
adjoining the Owned Land to the center lines thereof, and in and to any awards
to be made in lieu thereof and in and to any unpaid awards for damage to the
foregoing by reason of the change of
PAGE 10
<PAGE> 91
grade of any such streets, roads or avenues and (ii) all easements, rights,
licenses, privileges, rights-of-way, strips and gores, hereditaments and such
other real property rights and interests appurtenant to the foregoing.
OXMOOR CONTRACTS shall mean all service, maintenance, construction, and
other contracts and agreements respecting the operation, use, maintenance,
development, redevelopment or improvement of Oxmoor Center Mall (but excluding
the Agreement, the Oxmoor Leases, the Oxmoor REA and the Permitted
Encumbrances).
OXMOOR GROUND LEASE shall mean the ground lease for Oxmoor Center Mall,
which ground lease is identified as such on Schedule 6.2(k).
OXMOOR IMPROVEMENTS shall mean all buildings, structures (surface and
subsurface) and other improvements located on the Oxmoor Land and owned by
Oxmoor Joint Venture.
OXMOOR JOINT VENTURE shall mean Oxmoor Center Joint Venture, a Kentucky
joint venture between Winmar Co. and Beargrass Corporation.
OXMOOR LAND shall mean the parcel or parcels of real property that are
legally described in Exhibit B-12.
OXMOOR LEASES shall mean all leases, licenses and other agreements
pursuant to which Oxmoor Joint Venture has granted any person the right to use
and occupy any portion of the Oxmoor Land or the Oxmoor Improvements.
OXMOOR PROPERTY shall mean the leasehold interest in the Oxmoor Ground
Lease, title to the Oxmoor Improvements, the lessor's interest in the Oxmoor
Leases, interests in the Oxmoor Contracts and the Oxmoor REA, personal property
related to Oxmoor Center Mall, and cash, cash equivalents and receivables
relating to the ownership and operation of the Oxmoor Center Mall.
OXMOOR REA shall mean the reciprocal easement agreement described in
Schedule 6.2(9) Oxmoor Center Mall.
PERMITTED ENCUMBRANCES shall mean (a) the Leases, REAs, Ground Leases,
Oxmoor Leases, Oxmoor REA, Oxmoor Ground Lease, and encumbrances securing or
otherwise pertaining to the Assumed Indebtedness; (b) easements, rights of way,
setbacks, covenants, restrictions and other matters affecting title that do not
materially and adversely affect the use and operation of a Shopping Center as it
is currently
PAGE 11
<PAGE> 92
being (or, with respect to those portions of Redmond Town Center that are under
development or undeveloped, intended to be) used and operated; (c) encroachments
of buildings into easements, rights of way or setbacks and encroachments of any
Improvements or Oxmoor Improvements onto other real property, unless the costs
of removing all such encroachments either by modifying the encroaching buildings
or Improvements or Oxmoor Improvements or relocating the affected easements (to
the extent such cost is not chargeable to tenants under Leases or Oxmoor Leases
or to third parties under REAs or the Oxmoor REA), together with the cost of
correcting all conditions identified in clauses (a) through (d) of the
definition of Material Defective Condition to which Purchaser has made an
objection in accordance with the requirements of the Agreement (to the extent
such cost is not chargeable to tenants under Leases or Oxmoor Leases or to third
parties under REAs or the Oxmoor REA), is reasonably estimated to exceed an
amount equal to seventy-five one-hundredths percent (0.75%) of the Purchase
Price; (d) liens for taxes and local improvement and other assessments not yet
due and payable; (e) liens for labor performed at or work supplied to the
Shopping Centers for which a tenant is responsible under the terms of its Lease,
provided that such tenant is not more than thirty (30) days delinquent in the
payment of rent under its Lease and is not the subject of a petition for relief
filed under United States Bankruptcy Code; (f) financing statements and
agreements made by, or judgments entered against, tenants; (g) defects in title
attributable to acts or omissions of Purchaser or Purchaser's employees, agents,
consultants or contractors; and (h) matters approved or deemed approved by
Purchaser under Section 5.1 of the Agreement.
PERSONAL PROPERTY shall mean all right, title and interest of Sellers in
and to the personal property, both tangible and intangible, located in or upon
or used by Sellers in connection with the operation and maintenance of the
Shopping Centers, including, without limitation, fixtures; machinery; equipment;
building supplies and materials; consumables; inventories; all assignable
licenses, permits and certificates of occupancy; all assignable guaranties or
warranties (including performance bonds obtained by, or for the benefit of,
Sellers pertaining to the ownership, construction or development of the Shopping
Centers or any part thereof); the Property Materials; and advertising materials
and telephone exchange numbers.
PROPERTY shall mean all right, title and interest of Sellers in and to,
collectively, the Owned Land, Improvements, Ground Leases, Personal Property,
Leases, Assumed Contracts, Trade Names, REAs and Joint Venture Interest.
PAGE 12
<PAGE> 93
PROPERTY MATERIALS shall mean all records, books of account and papers
in the possession of Sellers relating to the construction, ownership and
operation of the Shopping Centers, whether on paper or electronic media,
including, without limitation, architect's drawings, blue prints and as-built
plans, maintenance logs, instruction books, licenses and permits, employee
manuals, records and correspondence relating to insurance claims, copies of
guaranties and warranties, financial statements, operating budgets, structural,
mechanical, geotechnical and other engineering studies, soil test reports,
environmental (including, without limitation underground storage tank) reports,
Americans with Disabilities Act surveys or reports, lease summaries and original
and/or copies of the Ground Leases, the Oxmoor Ground Lease, the Leases, the
Oxmoor Leases, the REAs, the Oxmoor REA, the Contracts and the Oxmoor Contracts,
and correspondence related thereto, but excluding (a) attorney-client privileged
documents, (b) appraisals, (c) marketing studies with respect to the Shopping
Centers, and (d) materials prepared by or for Sellers in connection with the
proposed sale of the Shopping Centers.
PURCHASE PRICE shall have the meaning given to such term in Section 3.1
of the Agreement.
PURCHASER shall have the meaning given to such term in the preamble to
the Agreement.
PURCHASER'S KNOWLEDGE PARTIES shall mean Edward C. Coppola, Jr., Arthur
Coppola, Richard Bayer, Thomas J. Pendergrast, Edward Salo, Philip Runions,
Brian Muzyk, Andrea Stephen, Michael Busenhart, and Robert Aptaker.
PURCHASER'S REQUIRED CONSENTS shall mean the consents, approvals and
waivers identified on Schedule 7(a) herein.
REAS shall mean all reciprocal easement agreements relating to the
Shopping Centers, with all amendments and modifications thereto, other than the
Oxmoor REA.
REDMOND TOWN CENTER shall mean the Shopping Center so designated on
Exhibit A to the Agreement.
REDMOND TOWN CENTER PARCEL 1 shall mean that portion of the Land
described in Exhibit B-10 as Parcels 1-A, 1-B, 1-C, 1-D, and 1-E.
REDMOND TOWN CENTER PARCEL 2-C shall mean that portion of the Land
described in Exhibit B-10 as Parcel 2-C.
PAGE 13
<PAGE> 94
REDMOND TOWN CENTER PARCEL 5-B shall mean that portion of the Land
described in Exhibit B-10 as Parcel 5-B.
REDMOND TOWN CENTER PARCELS 3 AND 4 shall mean that portion of the Land
described in Exhibit B-10 as Parcels 3 and 4.
REDMOND TOWN CENTER PARCEL 6 shall mean that portion of the Land
described in Exhibit B-10 as Parcel 6.
REDMOND TOWN CENTER PARCEL 7 shall mean that portion of the Land
described in Exhibit B-10 as Parcels 7-A, 7-B, 7-C, and 7-D.
REDMOND TOWN CENTER PARCEL 8 shall mean that portion of the Land
described in Exhibit B-10 as Parcel 8.
RIGHT OF FIRST REFUSAL means the right of Beargrass Corporation under
the Joint Venture Agreement to purchase the Joint Venture Interest on the terms
offered by Purchaser.
SAFECO shall mean SAFECO Corporation, a Washington corporation.
SAFECO LIFE shall mean SAFECO Life Insurance Company, a Washington
corporation.
SELLER and SELLERS shall have the meanings given to such terms in the
preamble to the Agreement.
SELLERS' ESTOPPEL shall mean an estoppel certificate executed by a
Seller in the form of Exhibit O to the Agreement.
SELLERS' REQUIRED CONSENTS shall mean the consents, approvals and
waivers identified on Schedule 6.2(a) hereto.
SELLERS' KNOWLEDGE PARTIES shall mean the persons identified on Schedule
6.1(a) hereto.
SHOPPING CENTER shall mean (a) the Owned Land or the Ground Leased Land,
as the case may be, and the Improvements thereon that comprise one of the
properties identified by name on Exhibits B-1 through B-10 to the Agreement and
(b) the Oxmoor Land and the Oxmoor Improvements that comprise the Oxmoor Center
Mall as identified on Exhibit B-11. SHOPPING CENTERS shall mean all of the
Shopping Centers.
PAGE 14
<PAGE> 95
SURVEY shall mean an ALTA survey of each Shopping Center certified to
Purchaser and Title Company as of a date not earlier than fifteen (15) days
prior to the Effective Date by a certification substantially in the form of
Exhibit L to the Agreement, showing all matters described in such certification
(except to the extent the Survey expressly states that a matter is not
locatable) and the number, location and size of all parking spaces for each
Shopping Center.
TAX or TAXES shall mean any and all taxes imposed by or on behalf of a
federal, state or local governmental taxing authority, together with any and all
penalties, fines, additions to tax and interest thereon.
TAX RETURN shall mean any return, declaration, report, claim for refund
or information return or statement or other tax form relating to Taxes,
including any schedule or attachment thereof.
TITLE INSURER shall mean Escrow Agent, acting in its capacity as a title
insurance company.
TITLE POLICIES shall mean 1970 (Form B) ALTA standard owners' policies
of title insurance, issued by Title Insurer with respect to the Shopping
Centers, insuring as of the Closing Date (a) fee title to the Owned Land, the
Improvements, and the appurtenant easements under the REAs in Purchaser or
Purchaser's permitted assignee or designee, (b) title to the leasehold interest
in the Ground Leases, to the Improvements on the Ground Leased Land and to the
appurtenant easements under the REAs in Purchaser or Purchaser's permitted
assignee or designee, and (c) the leasehold interest in the Oxmoor Ground Lease,
title to the Oxmoor Improvements, and title to the appurtenant easements under
the Oxmoor REA in Oxmoor Joint Venture as of the Closing Date, in each case free
of all liens, encumbrances and other defects in title other than the Permitted
Encumbrances.
TRADE NAMES shall mean all logos, trademarks (including registrations
thereof) and trade names used by Sellers in connection with the operation of the
Shopping Centers.
WINMAR CO. shall mean Winmar Company, Inc., a Washington corporation and
one of Sellers.
PAGE 15
<PAGE> 96
SCHEDULE 13.1
TO
PURCHASE AND SALE AGREEMENT
PRORATION METHOD
A. Prorations for Shopping Centers (except Oxmoor Center Mall). The
parties agree that the following shall be prorated and adjusted between Seller
and Purchaser as of the Closing Date with respect to all Shopping Centers except
Oxmoor Center Mall, except as otherwise specified:
(a) As used herein,
(i) "Recoveries" shall mean all common area maintenance
charges, enclosed mall maintenance charges, real estate taxes, and other
reimbursable charges for the current fiscal period for each such item to the
extent denominated as such charges in Leases or REAs.
(ii) "Recoverable Expenses" shall mean, for each Shopping
Center, any operating expenses of the Shopping Center for which funds are
collected as Recoveries under the Leases or REAs of such Shopping Center for the
current fiscal period for each such item.
(iii) "Recovery Rate" shall mean, for each Shopping
Center, a fraction, the numerator of which is the total aggregate Recoveries
with respect to the Shopping Center for a specified fiscal period, and the
denominator of which is the total aggregate Recoverable Expenses with respect to
the Shopping Center for the same fiscal period.
(b) Except for prorations with respect to overage and percentage
rents and Recoveries which are provided for in Sections (c) and (e) hereof,
respectively, (i) all rents and other occupancy charges payable under the Leases
shall be prorated on an accrual basis as of the Closing Date, and (ii) Purchaser
shall receive a credit for (1) any prepaid rent or other charges and (2) all
current and, to the extent expressly provided for under the terms of the Leases
as they exist on the Closing Date, future abatements in rent and other charges,
excluding fifty percent (50%) of each of the abatements and other charges
relating to minimum rent deductions for leases as detailed in Schedule 6.2(j) of
the Agreement.
PAGE 1
<PAGE> 97
(c) Overage rent as collected shall be prorated based upon actual
overage rent payable for the lease year under a Lease based upon the actual
sales in each party's respective period of ownership during such lease year
after taking into account each party's proportionate share of the breakpoint for
calculating overage rent under such Lease on the basis of a per diem method of
allocation. Percentage only rent payable in lieu of minimum rent shall be
prorated monthly on a per diem basis.
(d) All expenses and liabilities of the Property incurred (on an
accrual basis) (i) prior to the Closing shall be the obligation of Sellers, and
(ii) on and after the Closing shall be the obligation of Purchaser. The
proration of real estate taxes and personal property taxes assessed against the
Property shall be based upon the most recent ascertainable tax bills, shall be
adjusted upon receipt of the actual tax bills, and shall take account of amounts
held in lender escrow accounts for the payment of taxes, to the extent
transferred to Purchaser or a permitted assignee or designee of Purchaser. Taxes
applicable to calendar year 1999 shall be prorated through the Closing, even if
such taxes are not payable to the taxing authority until calendar year 2000 or
beyond. Utility expenses shall be prorated based on a reading of utility meters
for the Shopping Centers, to the extent applicable, on the Closing Date.
(e) All Recoveries with respect to the Property shall be prorated
on the following basis:
(i) At Closing, Recoveries shall be prorated based upon
the estimated Recovery Rate (the "Estimated Recovery Rate"), on a Shopping
Center by Shopping Center basis, (which shall be equal to the Recovery Rate
actually experienced with respect to Recoverable Expenses in the fiscal year
ending December 31, 1997 or January 31, 1998, as applicable, except Redmond Town
Center, which shall use an Estimated Recovery Rate of seventy percent (70%)). At
the Closing, Seller shall receive a credit or debit, as the case may be, equal
to the difference between:
(1) the Recoveries for fiscal year 1999
billed through the Closing Date, and
(2) the product of (x) the 1999
Recoverable Expenses incurred (on an accrual basis) prior to the Closing Date
("Pre-Closing Recoverable Expenses"), and (y) the Estimated Recovery Rate.
PAGE 2
<PAGE> 98
(ii) Upon the determination by Sellers of the actual
Recovery Rate for fiscal year ending December 31, 1998 or January 31, 1999, as
applicable, the actual Recovery Rate will be compared to the Estimated Recovery
Rate used at the Closing, and if the actual Recovery Rate is less than the
Estimated Recovery Rate used at the Closing, the difference between the
Estimated Recovery Rate and the actual Recovery Rate will be applied to the
Pre-Closing Recoverable Expenses and, within thirty (30) days of such
determination, Sellers shall pay Purchaser an amount equal to such result. If
the actual Recovery Rate is greater than the Estimated Recovery Rate used at the
Closing, the difference between the actual Recovery Rate and the Estimated
Recovery Rate will be applied to the Pre-Closing Recoverable Expenses; and,
within thirty (30) days of such determination, Purchaser shall pay Sellers an
amount equal to such result.
(iii) As an obligation which shall survive the Closing
for a period of three (3) years after the Closing Date, Sellers shall remain
liable for any refunds or credits which may be due to tenants with respect to
overpayments of Recoveries made by such tenants to Sellers relating to any
periods ending on or before December 31, 1998 or January 31, 1999, as
applicable.
(f) Sellers' mandatory contributions, if any, (whether cash or
non-cash) to merchant's associations or promotional funds at the Shopping
Centers shall be prorated as of the Closing Date.
(g) Subject to the provisions regarding overage and percentage
rent and Recoveries set forth in Sections (c) and (e) hereof, rents and other
remittances from tenants under the Leases collected after the Closing Date shall
be distributed as follows:
(i) Rents and remittances which accrue from and after
the Closing Date shall remain the sole property of Purchaser.
(ii) Rents and other remittances (including judgments on
past-due amounts) which were due and payable prior to the Closing Date (subject
to a proration for the month in which the Closing occurs) shall be, subject to
Section (g)(iii) hereof, forthwith distributed to Sellers as their sole
property;
(iii) All monies received after the Closing Date shall be
first applied to current rents and remittances rather than past due amounts to
which Sellers may be entitled pursuant to Section (g)(ii) hereof. Purchaser
shall use good faith efforts (without the obligation of incurring monetary
expense or filing actions for
PAGE 3
<PAGE> 99
unlawful detainer) to collect any unpaid pre-Closing rents. If delinquencies
have not been paid within six (6) months of the Closing Date, Sellers shall have
the right to sue or otherwise make claims against tenants who have failed to
timely pay pre-Closing rents, excluding any unlawful detainer actions.
(h) Purchaser shall receive a credit for all security deposits
and interest accrued thereon which are payable to tenants under the Leases.
Purchaser shall also receive a credit for any gift certificates distributed by
Sellers to users of the Shopping Centers to the extent required to be honored by
Purchaser or its successors or assigns.
For purposes of calculating prorations, Purchaser shall be
deemed to be in title to the Shopping Centers, and, therefore, entitled to the
income therefrom and responsible for the expenses thereof for the entire day
upon which the Closing Date occurs. All such prorations shall be made on the
basis of the actual number of days of the month which shall have elapsed as of
the Closing Date and based upon a three hundred sixty-five (365) day year. The
amount of such prorations shall be subject to adjustment in cash after the
Closing outside of escrow, as and when complete and accurate information becomes
available. Sellers and Purchaser agree to cooperate and use their best efforts
to make such adjustments no later than April 30, 2000. Except as set forth in
this Schedule 13.1, all items of income and expense for the period prior to the
Closing Date will be for the account of Sellers and all items of income and
expense for the period on and after the Closing Date will be for the account of
Purchaser, all as determined by the accrual method of accounting. Bills received
after the Closing Date which relate to expenses incurred, services performed or
other amounts allocable to the period prior to the Closing Date shall be paid by
Sellers. The terms and provisions of this Schedule 13.1 shall survive the
Closing.
B. Adjustments for Oxmoor Center Mall.
1. The Purchase Price allocated by Winmar Co., as agent for
Sellers, and Purchaser for the Joint Venture Interest ("Oxmoor Purchase Price")
shall be subject to adjustment as follows:
(a) $28,000,000 (the "Base Price"); shall be increased
or decreased by the following adjustments ("Adjustments"), calculated based on
Oxmoor Joint Venture's assets and liabilities as of the Closing Date;
(b) The Base Price shall be increased by the following
Adjustments:
PAGE 4
<PAGE> 100
(i) Winmar Co.'s share (50%) ("Winmar
Co.'s Share") of any decrease in the principal amount of the loan held by
Connecticut General Life Insurance Company that encumbers Oxmoor Center Mall
("CIGNA Loan") below $19,800,000;
(ii) Winmar Co.'s Share of Oxmoor Joint
Venture's positive Adjusted Working Capital (as hereinafter defined).
(c) The Base Price shall be decreased by the following
Adjustments:
(i) Winmar Co.'s Share of any negative
Adjusted Working Capital of Oxmoor Joint Venture; and
(ii) Winmar Co.'s Share of any increase
in the principal amount of the CIGNA Loan above $19,800,000.
2. For purposes of the Agreement and this Schedule 13.1,
"Adjusted Working Capital" means the following assets less the following
liabilities, calculated as of the Closing Date:
(a) Assets shall include the following:
(i) Cash, cash equivalents and
investments, excluding any deferred rents receivable; plus
(ii) Billed accounts receivable; plus
(iii) Accrued but unbilled accounts
receivable; plus
(iv) Notes receivable; plus
(v) Prepaid operating expenses,
excluding capitalized leasing costs, capitalized legal costs, capitalized
leasing commissions, other deferred assets, and other assets.
(b) Liabilities shall include the following:
(i) Accrued but unpaid interest,
loan fees, and swap interest payable, if any;
PAGE 5
<PAGE> 101
(ii) Accounts payable to Beargrass
Corporation, if any, but excluding Beargrass Corporation's capital account;
(iii) Accounts payable to tenants under
Oxmoor Leases, including tenant deposits of every kind and nature, except for
security deposits in the form of letters of credit, promissory notes or separate
deposit accounts to the extent the same are not cash obligations of Oxmoor Joint
Venture and are not reflected as assets on Oxmoor Joint Venture's books and
records;
(iv) Accounts payable to others; and
(v) Other accrued liabilities, including
accrued obligations to tenants under Oxmoor Leases executed prior to the
Effective Date, straight-lining of rents under the Oxmoor Ground Lease and
deferred income on lease termination payments.
3. In calculating assets and liabilities for the purpose of
determining Adjusted Working Capital, the accrual method shall be utilized,
including, without limitation, accruals for base rent, percentage rent (based on
annual percentage rent allocated based on number of days the Oxmoor Joint
Venture Interest was owned in that fiscal year), CAM recoveries, tenant loan
payments (but, consistent with Section 2(a)(iii) above, there shall not be any
accrual asset for "straight lining" of rents), real and personal property taxes
and assessments, insurance expense or returned premiums, if any, business
license taxes, security deposits, tenant improvement costs, tenant allowances,
and leasing commissions, effectively prorated as of the Closing Date in
substantially the same manner provided above as if Winmar Co. owned Oxmoor
Center Mall and were selling it to Purchaser pursuant to the Agreement.
4. Approximately five (5) days prior to Closing, the parties
will, to the best of their ability, calculate the Adjustments and the Oxmoor
Purchase Price, utilizing the 1998 fiscal year financial statements and the most
recent monthly financial statements for the Oxmoor Joint Venture (the
"Statements"), and such additional information as the parties are able with
their diligent efforts to obtain. The Oxmoor Purchase Price will be estimated
initially, based on a Pre-Closing Balance Sheet prepared in accordance with such
calculations and initialed by the parties, subject to further adjustment based
upon the Closing Date Balance Sheet described below.
5. Audited Closing Date Balance Sheet.
PAGE 6
<PAGE> 102
(a) Purchaser shall cause Ernst & Young ("E&Y") to
prepare and issue a report (the "Initial Report") within ninety (90) days
following the Closing Date, certifying an "Initial Closing Date Balance Sheet."
The cost of such certification will be borne 50% by Winmar Co. and 50% by
Purchaser, and each party agrees to pay its share within fifteen (15) days of
invoice therefor.
(b) The Oxmoor Purchase Price will be adjusted
positively or negatively on a retroactive basis to reflect the amount, if any,
by which the Oxmoor Purchase Price calculated as per the Initial Closing Date
Balance Sheet is greater or less than the Oxmoor Purchase Price estimated
pursuant to the Pre-Closing Balance Sheet initialed by the parties. If the
Initial Closing Date Balance Sheet shows a decrease in the Oxmoor Purchase
Price, then Winmar Co. shall pay to Purchaser the amount thereof (the "Initial
Seller Post-Closing Payment") within fifteen (15) days of its receipt of the
Initial Report. If the change in the Oxmoor Purchase Price is an increase, then
Purchaser shall pay to Winmar Co. the amount thereof (the "Initial Purchaser
Post-Closing Payment") within fifteen (15) days of Purchaser's receipt of the
Initial Report.
(c) Not later than thirty (30) days after the final
calculation and collection from tenants under Oxmoor Leases or parties to the
Oxmoor REA of payments due (for example, Tenant/REA contributions and overage
and percentage rent payments for 1998), whether in the nature of a
reconciliation payment or full payment, in arrears, Purchaser shall cause E&Y to
prepare and issue an updated report ("Final Report") certifying a "Final Closing
Date Balance Sheet." The cost of such certification will be borne 50% by Winmar
Co. and 50% by Purchaser, and each party agrees to pay its share within fifteen
(15) days of invoice therefor. The Oxmoor Purchase Price will again be adjusted
positively or negatively on a retroactive basis to reflect the amount, if any,
by which the Oxmoor Purchase Price calculated as per the Final Closing Date
Balance Sheet is greater or less than the Oxmoor Purchase Price calculated as
per the Initial Closing Date Balance Sheet. If the Final Closing Date Balance
Sheet shows a decrease in the Oxmoor Purchase Price, then Winmar Co. shall pay
to Purchaser the amount thereof (the "Final Seller Post-Closing Payment") within
fifteen (15) days of its receipt of the Final Report. If the change in the
Oxmoor Purchase Price is an increase, then Purchaser shall pay to Winmar the
amount thereof within fifteen (15) days of Purchaser's receipt of the Final
Report.
(d) If Purchaser fails to deliver either the Initial
Report or the Final Report, Winmar Co., after thirty (30) days prior written
notice to Purchaser, shall have the right to engage E&Y to prepare whichever
balance sheets or reports
PAGE 7
<PAGE> 103
have not been prepared. E&Y shall thereafter promptly prepare whichever reports
have not been prepared. Any balance sheets and reports prepared by E&Y shall be
final and binding upon Winmar Co. and Purchaser. Purchaser shall cooperate with
and provide all information requested by E&Y in its preparation of balance
sheets and reports. The cost of such work by E&Y will be borne 50% by Winmar Co.
and 50% by Purchaser, and each party agrees to pay its share within fifteen (15)
days of invoice therefor.
C. Prepayment Penalties for Washington Square Mall and Kitsap Mall.
1. If Purchaser elects to assume the Indebtedness owing to
Lincoln National Life Insurance Company ("Lincoln National") with respect to
Washington Square Mall, Purchaser shall receive a credit at Closing in the
amount of the prepayment penalty payable under such Indebtedness and Purchaser
shall be responsible for the payment of any assumption fee in connection
therewith. If Purchaser does not assume such Indebtedness at the Closing,
Sellers shall be responsible for paying such Indebtedness and any prepayment
penalty in connection therewith.
2. If Purchaser elects to assume the Indebtedness owing to
Lincoln National with respect to Kitsap Mall, Purchaser shall receive a credit
at Closing in the amount of the prepayment penalty payable under such
Indebtedness and Purchaser shall be responsible for the payment of any
assumption fee in connection therewith. If Purchaser does not assume such
Indebtedness at the Closing, Sellers shall be responsible for paying such
Indebtedness and any prepayment penalty in connection therewith.
D. Tenant Allowances and Lease Commissions.
1. Attached as Schedule A is a list of prospective Leases and
Oxmoor Leases, including rental terms, tenant improvement allowances and leasing
commissions with respect to each such Lease or Oxmoor Lease, which Sellers are
presently negotiating for certain of the Shopping Centers. The terms provided on
Schedule A for such Leases and Oxmoor Leases have been approved by Purchaser and
Sellers are authorized to execute Leases and Oxmoor Leases prior to the Closing
Date on terms consistent with Schedule A. If any of the Leases or Oxmoor Leases
set forth on Schedule A are executed prior to the Closing Date, Sellers shall
pay all leasing commissions, tenant allowances and costs of constructing the
initial tenant improvements for the Leases and Oxmoor Leases set forth on
Schedule A to the extent payable under such Leases or Oxmoor Leases prior to the
Closing Date (or, if not
PAGE 8
<PAGE> 104
paid, shall credit Purchaser with same at Closing or, as to Oxmoor Leases, shall
include the unpaid portion as a liability in the calculation of Adjusted Working
Capital). If any of such Leases or Oxmoor Leases for which lease requisitions
("LR") have been approved (as so indicated on Schedule A) are not executed prior
to the Closing Date or, if executed, the amounts are not payable prior to the
Closing, Purchaser shall receive a credit at the Closing for all of any such
tenant allowances, leasing commissions and costs of constructing the initial
tenant improvements for any such Leases and the amount of any such allowances,
commissions and costs under Oxmoor Leases shall be included as a liability in
the calculation of Adjusted Working Capital. Schedule A is attached hereto
solely for the purposes set forth in this Section D(1). Sellers make no
representation or warranty with respect to Schedule A or the information
therein. In the event of a difference between the information in Schedule A and
Schedule 6.2(j) to the Agreement, Schedule 6.2(j) shall control.
2. In addition to the provisions of Paragraph 1 above with
respect to the Leases on Schedule A, Sellers shall pay (or credit Purchaser at
Closing for) all leasing commissions, tenant allowances and costs of
constructing initial tenant improvements for all Leases which have been executed
on or prior to the Effective Date.
3. Except as otherwise provided in Paragraph 1 above, Purchaser
shall pay all leasing commissions and fees, tenant allowances and costs of
constructing tenant improvements (or shall reimburse Sellers at Closing for same
to the extent paid prior to the Closing Date) under Leases which are signed
after the Effective Date in accordance with the terms of the Agreement. Upon
assumption of such Leases at Closing, Purchaser shall be responsible for the
completion of all tenant improvement work then under construction.
4. Except as otherwise provided in Paragraph 1 above, leasing
commissions and fees, tenant allowances and costs of constructing tenant
improvements under Oxmoor Leases which are signed after the Effective Date in
accordance with this Agreement shall, to the extent not paid prior to the
Closing Date, be excluded from liabilities in the calculation of Adjusted
Working Capital and, to the extent paid prior to the Closing Date, shall be
included among assets in the calculation of Adjusted Working Capital.
PAGE 9
<PAGE> 105
SCHEDULE A
[SCHEDULE OF PENDING LEASES]
PAGE 10
<PAGE> 1
SAFECO CORPORATION
DEFERRED COMPENSATION PLAN FOR DIRECTORS
AS AMENDED AND RESTATED ON NOVEMBER 4, 1998
1. PURPOSE
The purpose of this Deferred Compensation Plan ("Plan") is to provide for
deferral of payment of all or any portion of the annual retainer and meeting
fees payable to non-employee directors of SAFECO Corporation ("Company") and all
or any part of certain gains realized by such directors on stock-for-stock
exercises of options to purchase the Company's common stock ("Common Stock").
2. ADMINISTRATIVE COMMITTEE
The Board shall from time to time appoint a committee to administer this Plan
(the "Administrative Committee"). The Administrative Committee shall have full
power and authority to construe and interpret the Plan. Members of the
Administrative Committee who are otherwise eligible to participate in this Plan
may do so while serving as members of that Committee, provided that no member
shall be entitled to vote or take any other action as part of the Committee with
respect to his or her benefits under the Plan. Decisions of the Administrative
Committee shall be final and binding upon the directors, their legal
representatives and beneficiaries. Approval by the Administrative Committee of
any election or request made by a director or the legal representative or
beneficiary of a director shall be subject to the sole discretion of the
Administrative Committee.
3. ELIGIBILITY
Any non-employee director of the Company is eligible to participate in the Plan.
4. ELECTION TO DEFER FEES
(a) Deferral Election. A non-employee director may elect to defer all
or a specified percentage of the annual retainer, meeting fees,
or both (collectively, "Fees") that may thereafter become payable
by executing and delivering to the Administrative Committee an
election ("Deferral Election") stating the dollar amount or
percentage of the Fees to be deferred.
(b) Timing. To be effective, a Deferral Election must be filed
with the Administrative Committee by December 31 of the year
prior to the year in which the Fees are payable, except that any
director newly elected to the Company's Board of Directors shall
have 30 days following the date of such director's election in
which to file an irrevocable Deferral Election covering Fees
payable during the remainder of the current year. A Deferral
Election filed by December 31 shall be irrevocable for the next
year and will thereafter remain in effect indefinitely on a
year-by-year basis until participation in the Plan terminates, or
until the Deferral Election is
<PAGE> 2
amended or revoked by a new Deferral Election, which shall take
effect the following year.
5. ELECTION TO DEFER GAINS ON STOCK-FOR-STOCK OPTION EXERCISES
(a) Deferral of Qualifying Gains. A non-employee director may elect
to defer Qualifying Gain (as defined below) realized on the
exercise of one or more non-qualified stock options to purchase
Common Stock, provided the option exercised was granted under a
plan or program that permits deferral of gain with respect to
such option.
(i) Qualifying Gain. "Qualifying Gain" means the net value
accrued upon exercise of an option using a stock-for-stock
payment method (i.e., the amount by which the total value of
the shares exercised exceeds the total value of the shares
used to pay the exercise price). For example, a director
elects to defer the Qualifying Gain accrued upon exercise of
an option to purchase 1,000 shares of Common Stock at an
exercise price of $20 per share when the Common Stock has a
current fair market value of $25 per share. The director
delivers 800 shares of Common Stock (worth $20,000) to pay
the exercise price. In return, the director receives 800
shares of Common Stock worth $20,000 and the director's
Account (as defined below) is credited with a Qualifying
Gain of $5,000.
(ii) Valuation of shares. For purposes of calculating the
Qualifying Gain, shares shall be valued at the price at
which the last sale of the Common Stock was made prior to
1:00 p.m. Pacific Time on the NASDAQ Stock Market on the
date the option is exercised.
(b) Stock Option Election. An election to defer Qualifying Gain on a
stock option exercise shall be valid only if: (i) a separate
irrevocable election ("Stock Option Election") is completed and
signed by the director with respect to the stock option; (ii) the
Stock Option Election is delivered to and accepted by the
Administrative Committee at least six months before the director
elects to exercise the stock option; (iii) the exercise price is
paid in Common Stock (either through physical delivery or
attestation); and (iv) the director complies with such other
rules as the Administrative Committee may establish from time to
time.
6. DEFERRAL ACCOUNTS
(a) Establishment of Accounts. The Company shall establish an account
("Account") in the name of each participating non-employee
director, to which all deferred Fees and Qualifying Gains
attributable to the director and the earnings thereon shall be
credited. A director's Account shall at all times be a
bookkeeping entry only and shall not represent any investment
made by the Company on the director's behalf.
2
<PAGE> 3
A director shall be fully vested at all times in the deferred
Fees and Qualifying Gains credited to his or her Account.
(b) Crediting of Accounts. Deferrals of Fees shall be credited to the
director's Account on the date the Fees would have been paid but
for the Deferral Election. Each Qualifying Gain shall be credited
to the director's Account on the date that the option to which
the gain relates is exercised.
7. MEASUREMENT FUNDS
(a) Allocation Among Measurement Funds. A director's Account shall be
allocated among phantom investments (each a "Measurement Fund")
designated by the Administrative Committee for use as an index to
value the portion, if any, of the director's Account allocated to
that phantom investment. The allocation of a director's deferred
Fees and Qualifying Gains shall be governed by the director's
most recent Allocation Election (described below) and such rules
as the Administrative Committee may establish from time to time.
The Account of each director shall be credited (or debited) on a
daily basis according to the performance of each Measurement Fund
selected by the director.
(b) Available Funds. The Measurement Funds available under this Plan
at any given time shall be set forth on Appendix A. The Company
is under no obligation to offer any particular investment as a
Measurement Fund and reserves the right to eliminate, change and
add Measurement Funds at any time by action of the Administrative
Committee.
(c) Allocation Election. Each non-employee director shall file a
written election ("Allocation Election") with the Administrative
Committee indicating the manner in which the director's future
Qualifying Gains and deferred Fees are to be allocated among the
available Measurement Funds. A director may file a new Allocation
Election at any time. An Allocation Election will be given effect
no later than the next business day after it is received and
accepted by the Administrative Committee.
(d) Reallocation Election. Once each year, in accordance with such
rules as the Administrative Committee may establish from time to
time, a director may file a written election with the
Administrative Committee reallocating the director's Account
among the available Measurement Funds (a "Reallocation
Election"). A Reallocation Election shall be effective as of the
next regularly-scheduled quarterly meeting of the Company's Board
of Directors held after the Administrative Committee's receipt
and acceptance of the director's Reallocation Election, except
that a Reallocation Election will not be given effect if it would
generate a "non-exempt" transaction for purposes of the rules
promulgated under Section 16 of the Securities Exchange Act of
1934, as amended. (A "non-exempt" transaction would result if a
director's Reallocation Election would cause a transfer of all or
part of
3
<PAGE> 4
the director's Account into (or out of) the Phantom Stock Fund
less than six months after the director filed a Reallocation
Election electing an opposite-way transfer into or out of that
Fund.)
(e) No Actual Investment. Notwithstanding any other Plan provision
that may be interpreted to the contrary, the Measurement Funds
are to be used for measurement purposes only. Neither a
director's election of any Measurement Fund nor the crediting or
debiting of amounts to the director's Account in accordance with
that election shall be construed as an actual investment of the
director's Account in any Measurement Fund.
8. PHANTOM STOCK FUND
(a) Phantom Stock Fund. Amounts allocated to the Phantom Stock Fund
shall be credited in units ("Units" or "Phantom Stock Units")
based on the price at which the last sale of Common Stock was
made prior to 1:00 p.m. Pacific Time on the NASDAQ Stock Market
on the date of crediting (the "Closing Price"). Fractional Units
shall be credited to three decimal points.
(b) Dividends. To the extent cash dividends are paid by the Company
on the Common Stock, a director's Account shall be credited with
phantom dividends on Phantom Stock Units. Phantom dividends shall
equal the product of the dividend paid on a share of Common Stock
multiplied by the number of Units in a director's Account on the
record date for the cash dividend. Phantom dividends shall be
credited to a director's Account in the form of additional
Phantom Stock Units. The number of additional Units credited
shall be determined based on the Closing Price of the Common
Stock on the dividend payment date.
(c) No Actual Shares. No actual shares of Common Stock will be issued
directly or indirectly under the Plan in respect of Phantom Stock
Units.
(d) Reorganizations. In the event of any change in the Common Stock
by reason of an issuance of additional shares, recapitalization,
reclassification, merger, reorganization, stock split, reverse
stock split, combination of shares, stock dividend or similar
transaction, the number of Phantom Stock Units held by directors
under the Plan shall be proportionately adjusted by the
Administrative Committee.
(e) No Voting Rights. No voting or other rights of any kind
associated with the ownership of Common Stock shall inure to a
director by virtue of the director's allocation of all or any
part of the director's Account to the Phantom Stock Fund.
9. DISTRIBUTION OF DEFERRED COMPENSATION ACCOUNT
(a) General. Except as otherwise expressly provided in this Plan, no
withdrawal or payment shall be made from a director's Account
except following the first to occur
4
<PAGE> 5
of the director's death, permanent disability, retirement as a
director or other termination of service as a director of the
Company. Payments shall be made in accordance with paragraphs (b)
and (c) of this Section 9 unless the director has filed an
election under paragraph (d) of this Section requesting an
alternative distribution type and/or time period. All payments
shall be made in cash, regardless of the Measurement Funds
selected by the director.
(b) Retirement and Disability Distributions. If a director terminates
service as a director on account of a permanent disability, as
determined by the Administrative Committee, or retires as a
director of the Company under the Company's retirement policy for
directors as then in effect, the balance in the director's
Account shall be paid to the director in 10 annual installments,
with each installment payable in January as soon as practicable
after year-end, commencing the January next following the
director's death or termination of service. The amount of the
installment payable following any given year-end shall be
determined by valuing the director's Account as of the close of
business on the last business day of the year and then
multiplying that value by a fraction, the numerator of which is
one and the denominator of which is the remaining number of
installment payments.
(c) Distributions Following Death and Other Non-Retirement
Terminations. If a director dies prior to retirement as a
director or terminates service as a director of the Company for
any reason besides retirement or a permanent disability, the
entire balance of the director's Account shall be paid out in a
single lump sum within 30 days after the termination of service
or the date the Company is notified, in a form acceptable to the
Administrative Committee, of the director's death, as applicable.
The value of the director's Account shall be determined as of the
date of the director's death or termination of service.
(d) Distribution Election.
(i) Election permitted. A director shall be permitted, in
accordance with rules established by the Administrative
Committee from time to time, to elect a distribution type
and/or period (up to ten years) different from those set
forth in paragraphs (b) and (c) above (a "Distribution
Election"), provided that distributions must commence no
later than the year after the director retires from the
Board of Directors or otherwise terminates service as a
director.
(ii) Procedure. To be effective, a Distribution Election must
be made in writing and be received by the Administrative
Committee at least 12 months prior to the director's
retirement or termination of service as a director of the
Company, except that the 12-month waiting period shall not
apply if the termination of service was due to the
director's death or permanent disability. Except as
provided in paragraph (iv) below, a director may revoke a
Distribution Election by written notice or file a new
Distribution
5
<PAGE> 6
Election with the Administrative Committee at any time,
subject to the above 12-month waiting period, except that
a Distribution Election shall become irrevocable once the
director is within 12 months of normal retirement under
the Company's retirement policy for directors as then in
effect.
(iii) Entire Account. Any Distribution Election filed by a
director shall apply to his or her entire Account,
including both the amounts credited to the Account prior
to the date of the Distribution Election and those
credited thereafter, without regard to how the Account may
be allocated among investment options.
(iv) Elections by first-time directors. In the case of a
director making his or her first Deferral Election under
this Plan, a Distribution Election filed with the
Administrative Committee at the same time as the
director's initial Deferral Election shall be given effect
even if the director terminates service as a director less
than 12 months later. A Distribution Election filed at the
same time as the director's initial Deferral Election
shall be irrevocable for 12 months.
(v) Prior Distribution Elections. In the case of any director
already participating in the Plan who files a new
distribution election at the Administrative Committee's
request by December 31, 1998, the new distribution
election shall be given effect even if the director
terminates service as a director less than 12 months
later.
(e) Tax Distributions. If, for any reason, all or any portion of a
director's Account becomes taxable to the director prior to
distribution in accordance with the Plan, a director may petition
the Administrative Committee for a special distribution of the
taxable portion. Upon the grant of such a petition, which shall
not be unreasonably withheld, the Company shall promptly
distribute to the director the portion of his or her Account that
has become taxable.
10. BENEFICIARIES
A director may designate one or more beneficiaries to receive amounts payable
under the Plan in the event of the director's death. To designate beneficiaries,
the director shall complete a beneficiary designation form in accordance with
the Administrative Committee's rules and procedures as in effect from time to
time. A director may change a beneficiary designation at any time by filing a
new beneficiary designation form with the Administrative Committee. Upon the
Administrative Committee's acceptance of the new form, all beneficiary
designations previously filed shall be canceled. If the director names someone
other than his or her spouse as primary beneficiary, a spousal consent, in the
form designated by the Administrative Committee, must be signed by the
director's spouse and returned to the Administrative Committee. If the director
fails to designate a beneficiary or if the designated beneficiary predeceases
the director, then the unpaid
6
<PAGE> 7
amounts in the Account of a deceased director shall be paid to the director's
surviving spouse, or, if the director has no surviving spouse, to the personal
representative of the director's probate estate.
11. ANNUAL STATEMENTS
At least annually, the Company will provide each non-employee director with a
statement showing the deferred Fees and Qualifying Gains credited to the
director's Account and any additional amounts credited (or debited) thereto in
accordance with the director's Allocation Election(s) and the provisions of this
Plan.
12. TERMINATION OR AMENDMENT OF THE PLAN
The Plan may be terminated, modified, or amended from time to time by resolution
of the Board of Directors. If the Plan is terminated, all amounts accrued in
directors' Accounts before termination will remain subject to the provisions of
the Plan as though the Plan had not been terminated.
13. DIRECTORS' RIGHTS
(a) No Funding or Interest in Company Assets. Amounts deferred and
accrued under the Plan remain the property of the Company, and no
director or other person shall acquire any property interest in
any assets of the Company on account of participation in the
Plan. A director's rights are limited to receiving from the
Company the payments provided for in the Plan. The Plan is
unfunded, and to the extent that any director acquires a right to
receive payments from the Plan, such right shall be no greater
than the right of an unsecured creditor of the Company.
(b) Transferability. Interests in the Plan may not be transferred,
assigned, pledged or encumbered. Prior to the time payment of an
Account is actually made to a director, the director shall have
no rights by way of anticipation or otherwise to assign or
dispose of any interest under the Plan.
14. GOVERNING LAW
This Plan shall be governed by and interpreted in accordance with the internal
laws of the state of Washington without regard to conflict of law principles.
15. EFFECTIVE DATE
The effective date of this Plan is November 2, 1994.
7
<PAGE> 8
Appendix A
MEASUREMENT FUNDS UNDER
THE SAFECO CORPORATION DEFERRED COMPENSATION PLAN FOR DIRECTORS
The following Measurement Funds shall be available under the Plan:
a. Phantom Stock Fund (described in Section 8 of the Plan);
b. Interest-Accruing Fund (interest credited at an annual rate equal
to the applicable federal long-term rate for purposes of Section
1274 of the Internal Revenue Code of 1986, as amended, in effect
at January 1 of each year);
c. SAFECO 401(k) Savings Plan Investment Options:
o Diversified Common Stock Portfolio
o Intermediate Term Bond Portfolio
o Money Market Portfolio
o SAFECO Equity Fund
o SAFECO Growth Fund
o SAFECO Income Fund
o SAFECO International Stock Fund
o SAFECO Small Company Stock Fund.
8
<PAGE> 1
SAFECO DEFERRED COMPENSATION PLAN FOR EXECUTIVES
1. PURPOSE
The purpose of the SAFECO Deferred Compensation Plan for Executives (the
"Plan") is to provide a select group of management or highly compensated
employees of SAFECO Corporation ("SAFECO") and its Subsidiaries with an
opportunity to defer all or part of the Eligible Compensation payable by
the Corporation to such employees and all or part of such employees'
Excess Contributions to the Savings Plan.
2. DEFINITIONS
2.01 Account. The term "Account" means a separate deferred
compensation account established by the Corporation in the name
of a Participant.
2.02 Administrative Committee. The "Administrative Committee" shall be
the three-person committee, appointed by the SAFECO Board of
Directors, and which is responsible for the administration of the
Corporation's qualified retirement and savings plans.
2.03 Beneficial Owner. "Beneficial Owner" has the meaning set forth in
Rule 13d-3 under the Securities Exchange Act of 1934, as amended
(the "Exchange Act").
2.04 Beneficiary. "Beneficiary" refers to an individual or individuals
designated by the Participant to receive certain benefits
described in this Plan in the event of the Participant's death.
2.05 Board of Directors or Board. The "Board of Directors" or the
"Board" shall refer to the Board of Directors of SAFECO
Corporation.
2.06 Change in Control. A "Change in Control" shall be deemed to have
occurred if the event set forth in any one of the following
paragraphs has occurred:
(a) Any Person is or becomes the Beneficial Owner, directly or
indirectly, of SAFECO securities (not including in the
securities beneficially owned by such Person any
securities acquired directly from SAFECO or its
Affiliates) representing 25% or more of the combined
voting power of SAFECO's then outstanding securities,
excluding any Person who becomes such a Beneficial Owner
in connection with a transaction described in clause (x)
of paragraph (c) of this Section 2.06; or
(b) The following individuals cease for any reason to
constitute a majority of the number of directors then
serving: individuals who were directors of SAFECO on the
date the Plan is adopted by the SAFECO Board of Directors,
and any
<PAGE> 2
new director (other than a director whose initial
assumption of office is in connection with an actual or
threatened election contest, including but not limited to
a consent solicitation, relating to the election of
directors of SAFECO) whose appointment or election by the
Board of Directors or nomination for election by SAFECO's
shareholders was approved by a vote of at least two-thirds
of the directors then still in office who either were
directors on the date the Plan was adopted or whose
appointment, election or nomination for election was
previously so approved or recommended; or
(c) There is consummated a merger or consolidation of SAFECO
or any Subsidiary with any other corporation, other than
(x) a merger or consolidation which would result in the
voting securities of SAFECO outstanding immediately prior
to such merger or consolidation continuing to represent
(either by remaining outstanding or by being converted
into voting securities of the surviving entity or any
parent thereof), in combination with the ownership of any
trustee or other fiduciary holding securities under an
employee benefit plan of SAFECO or any Subsidiary, at
least 75% of the combined voting power of the securities
of SAFECO or such surviving entity or any parent thereof
outstanding immediately after such merger or
consolidation, or (y) a merger or consolidation effected
to implement a recapitalization of SAFECO (or similar
transaction) in which no Person is or becomes the
Beneficial Owner, directly or indirectly, of securities of
SAFECO (not including in the securities beneficially owned
by such Person any securities acquired directly from
SAFECO or its Affiliates other than in connection with the
acquisition by SAFECO or its Affiliates of a business)
representing 25% or more of the combined voting power of
SAFECO's then outstanding securities; or
(d) The shareholders of SAFECO approve a plan of complete
liquidation or dissolution or there is consummated an
agreement for the sale or disposition of all or
substantially all of SAFECO's assets, other than a sale or
disposition by SAFECO of all or substantially all of its
assets to an entity of which at least 75% of the combined
voting power is owned by shareholders of SAFECO in
substantially the same proportions as their ownership of
SAFECO immediately prior to such sale.
Notwithstanding the foregoing, a "Change in Control" shall not be
deemed to have occurred by virtue of the consummation of any
transaction or series of integrated transactions immediately
following which the record holders of the Common Stock
immediately prior to such transaction or series of transactions
continue to have substantially the same proportionate ownership
in an entity which owns all or substantially all of SAFECO's
assets immediately following such transaction or series of
transactions.
2
<PAGE> 3
2.07 Closing Price. "Closing Price" means the price at which the last
trade of SAFECO Common Stock was made prior to 1:00 p.m. West
Coast time on the NASDAQ Stock Market.
2.08 Code. "Code" means the Internal Revenue Code of 1986, as amended.
2.09 Common Stock. "Common Stock" means SAFECO Corporation common
stock.
2.10 Compensation Committee. "Compensation Committee" means the
Compensation Committee of the Board of Directors.
2.11 Corporation. "Corporation" means SAFECO Corporation and its
subsidiaries, collectively.
2.12 Deferrals. "Deferrals" refers to the amount of Eligible
Compensation and/or Excess Contributions that a Participant
specifies in his or her Election pursuant to the terms and
conditions of the Plan.
2.13 Disability. "Disability" means a permanent and total disability
as defined in Section 22(e) of the Code.
2.14 Election. "Election" means a written document signed by an
eligible employee stating the employee's intent to participate in
the Plan and specifying the amount or percentage of Eligible
Compensation and/or Excess Contributions which the employee
desires to have credited to his Account in the Plan.
2.15 Eligible Compensation. "Eligible Compensation" means compensation
payable to a Participant by the Corporation in the form of
salary, bonus, gain on the exercise of non-qualified stock
options, settlements of restricted stock rights ("RSRs"), and
dividend equivalents payable on RSRs.
2.16 Excess Contributions. "Excess Contributions" means the amount of
base salary (not to exceed 6%) elected by an employee to
contribute to the Savings Plan which is in excess of applicable
Code limitations on contributions to the Savings Plan.
2.17 Hardship. "Hardship" means an unforeseeable emergency resulting
from a sudden and unexpected illness or accident of the
Participant or a Participant's dependent (as defined in Section
152(a) of the Code), loss of the Participant's property due to
casualty, or other similar extraordinary and unforeseeable
circumstances arising from events beyond the Participant's
control.
2.18 Match. "Match" means an amount equal to two-thirds of the amount
of Excess Contributions which a Participant has elected to defer
under the Plan.
2.19 Participant. A "Participant" means an employee eligible to
participate in the Plan who has timely filed an Election to defer
compensation in accordance with Section 3.
3
<PAGE> 4
Any such person shall be a Participant as of the effective date
of his or her first Election and shall continue until the date of
the last payment pursuant to Section 6.
2.20 Person. "Person" for purposes of Section 2.06 means any person
(as defined in Section 2(a)(9) of the Exchange Act, and as such
term is modified in Section 13(d) and 14(d) of the Exchange Act)
other than (i) any employee plan established by SAFECO, (ii)
SAFECO or any of its affiliates (as defined in Rule 12b-2
promulgated under the Exchange Act) ("Affiliates"), (iii) an
underwriter temporarily holding securities pursuant to an
offering of such securities, or (iv) a corporation owned,
directly or indirectly, by SAFECO shareholders in substantially
the same proportions as their ownership of SAFECO.
2.21 Phantom Stock. "Phantom Stock" refers to an investment option
tied to the performance of the Common Stock where each unit of
Phantom Stock is the economic equivalent of one share of Common
Stock.
2.22 RSRs. "RSRs" refers to restricted stock rights issued under the
SAFECO Incentive Plan of 1987, the SAFECO Long-Term Incentive
Plan of 1997, or any successor incentive plan.
2.23 Retirement. "Retirement" means a Participant's termination of
employment with the Corporation occurring at or after age 55
(other than as a result of death or Disability), provided the sum
of the Participant's age and the Participant's years of service
with the Corporation equals or exceeds 75.
2.24 Savings Plan. "Savings Plan" means the SAFECO Employees' Savings
Plan.
2.25 Subsidiary. "Subsidiary" means any corporation of which 50% or
more of the voting stock is owned, directly or indirectly, by
SAFECO Corporation.
3. ELECTIONS TO DEFER
3.01 Filing of Election. An eligible employee who wishes to
participate in the Plan shall file an Election with the
Corporation in the form provided by the Administrative Committee,
which shall specify the timing and amount of Deferrals, if any,
to be made under the Plan by the Participant. A Participant may
elect to defer all or any portion of the Participant's Eligible
Compensation and/or Excess Contributions.
3.02 Election Irrevocable. An Election is irrevocable as to the amount
or percentage of Eligible Compensation or Excess Contributions to
be deferred in the year to which the Election relates. Any
request to change the amount or percentage to be deferred shall
not be effective until the first day of the next calendar year.
Notwithstanding the above, if a Participant obtains a Hardship
withdrawal from the Plan under Section 6.06, the Participant's
Election shall be automatically revoked, beginning with the first
day of the next regularly scheduled payroll period, for the
remainder of the calendar year.
4
<PAGE> 5
3.03 Timing of Election
(a) Elections to defer Eligible Compensation shall be filed
with the Administrative Committee no later than December
31 and shall be effective for Eligible Compensation earned
on or after January 1 of the following calendar year,
except that Elections to defer amounts payable in
settlement of RSRs shall not take effect until one
additional year later.
(b) Elections to defer Excess Contributions shall be filed
with the Administrative Committee no later than December
31 of the year prior to the year in which the Excess
Contributions will occur.
3.04 Special Rule Applicable in 1998. Eligible employees shall have
until May 15, 1998 to file Elections to defer Eligible
Compensation earned and/or Excess Contributions made during the
remainder of 1998 as well as settlements of RSRs payable in
February 1999.
4. DEFERRAL ACCOUNTS
4.01 Establishment of Accounts. An Account shall be established for
each Participant to which all Deferrals and Matches made on
behalf of the Participant shall be credited.
4.02 Crediting of Accounts.
(a) Deferrals of Eligible Compensation shall be credited to a
Participant's Account on the date such Deferrals would
otherwise be payable to the Participant.
(b) Deferrals of Excess Contributions and the corresponding
Match shall be credited to a Participant's Account on the
date the Excess Contributions would have been contributed
to the Savings Plan but for applicable Code limitations.
4.03 Earnings. Each Account shall be credited with earnings equivalent
to those that would accrue if the Account were actually invested
in the investment options selected by the Participant from among
the phantom investment options offered under the Plan from time
to time.
5. INVESTMENT OPTIONS
5.01 Investment Options. The phantom investment options available
under the Plan are those set forth in Appendix A. The Corporation
is under no obligation to offer any particular investment option
and reserves the right to eliminate, change, and add investment
options at any time.
5
<PAGE> 6
5.02 Switching Investments. Participants may change investment option
selections from time to time under rules established by the
Administrative Committee.
6. DISTRIBUTION OF DEFERRED COMPENSATION ACCOUNT
6.01 General. Except as provided in Section 6.07 with respect to
Hardship withdrawals and Section 7 concerning Change in Control
situations, no withdrawal or payment shall be made from a
Participant's Account except following the earliest to occur of
the Participant's death, Disability, Retirement or other
termination of service with the Corporation. Payments shall be
made in accordance with Sections 6.02 and 6.03 unless the
Participant files an election pursuant to Section 6.05 requesting
an alternative distribution type and/or time period. All payments
shall be made in cash, regardless of the investment options
selected by the Participant.
6.02 Retirement Distributions. The Participant's Account balance shall
be paid to the Participant (or the Participant's Beneficiary) in
10 annual installments commencing in January of the year
following the Participant's retirement. The amount of each annual
installment payment shall equal the value of the Participant's
Account as of December 31 divided by the remaining number of
installment payments (including the payment in question).
6.03 Distributions Following Death, Disability and Other
Non-Retirement Terminations. In the event that a Participant dies
prior to Retirement or terminates employment with the Corporation
due to Disability or for any other reason besides Retirement, the
entire balance of the Participant's Account shall be paid out in
a single lump sum in January of the year following the year in
which the death, Disability, or other termination of employment
occurred. The value of the Account shall be determined as of
December 31 of the year in which the Participant's death,
Disability, or other termination occurred.
6.04 Designation of Beneficiary. A Participant may designate a
Beneficiary to receive amounts payable under the Plan in the
event of the Participant's death. The Participant may revoke or
change a Beneficiary designation by filing a written notice of
revocation or change of Beneficiary with the Administrative
Committee at any time. If the Participant fails to designate a
Beneficiary or if the designated Beneficiary predeceases the
Participant, then the unpaid amounts in the Account of a deceased
Participant shall be paid to the Participant's estate.
6.05 Distribution Election. Participants shall be permitted, in
accordance with rules established by the Administrative
Committee, to specify a distribution type and/or period different
from those set forth in Sections 6.02 and 6.03 above. To be
effective, a distribution election must be made in writing and
received by the Administrative Committee at least 12 months prior
to the Participant's termination of employment with the
Corporation, except that the 12-month waiting period shall not
apply if the termination of employment was due to the
Participant's death or Disability. A Participant may revoke any
such distribution election by written notice or file a new
6
<PAGE> 7
distribution election with the Administrative Committee at any
time, subject to Section 6.06; provided, however, that an
election made under this Section 6.05 shall become irrevocable
once the Participant is within 12 months of termination. Any
distribution election filed by a Participant shall apply to the
entire Account, including both the amounts credited to the
Account prior to the election date and those credited thereafter,
without regard to how the Account may be allocated among
investment options.
6.06 Special Rule for First-Time Participants. In the case of
Participants making an Election to defer compensation for the
first time, a distribution election made under Section 6.05 shall
be given effect even if the Participant terminates employment
within 12 months of such election, provided the distribution
election was made at the same time as the initial Election to
defer compensation. A distribution election made by a first-time
Participant at the time of his or her initial Election shall be
irrevocable for 12 months.
6.07 Hardship Withdrawals. A Participant may request that the
Corporation make an immediate, accelerated distribution from his
or her Account in the event the Participant has incurred a severe
financial Hardship. Distributions will not be made to the extent
that such Hardship can be relieved through insurance proceeds,
liquidation of the Participant's assets (but only to the extent
that such liquidation would not itself cause a severe financial
Hardship) or by cessation of deferrals under the Plan. Payments
for severe financial Hardship under this Plan are limited to the
extent necessary to comply with Treas. Reg. Section 1.457-2. The
Administrative Committee shall determine whether the Participant
has incurred a severe financial Hardship and may, in its sole
discretion, grant the immediate, accelerated distribution of all
or any portion of the Participant's Account; provided, however,
that such distribution shall not exceed the amount determined by
the Administrative Committee to be necessary to alleviate the
severe financial Hardship.
7. CHANGE IN CONTROL
In the event of a Change in Control, the entire unpaid balance of each
Participant's Account shall be paid to the Participant (or the
Participant's Beneficiary or estate) in a single lump sum within 30 days
after the Change in Control.
8. PHANTOM STOCK UNITS
8.01 Phantom Stock Units. Deferrals allocated to Phantom Stock shall
be credited in units ("Units") based on the Closing Price of the
Common Stock on the date such amounts are credited to a
Participant's Account.
8.02 Phantom Dividends. To the extent cash dividends are paid by
SAFECO on the Common Stock, Participants' Accounts shall be
credited with phantom dividends on Phantom Stock Units. Phantom
dividends shall equal the product of the dividend paid on a share
of Common Stock multiplied by the number of Units in a
7
<PAGE> 8
Participant's Account on the record date for the cash dividend.
Phantom dividends shall be credited to a Participant's account in
the form of additional Phantom Stock Units. The number of
additional Units credited shall be determined based on the
Closing Price of the Common Stock on the dividend payment date.
8.03 Distributions. In determining the amount of an installment
payment or lump sum distribution payable to a Participant (other
than a distribution under Section 7 following a Change in
Control), the value of a Phantom Stock Unit shall equal the
average of the Closing Price of the Common Stock during the last
10 trading days of the year prior to the year in which the lump
sum distribution or installment payment is to be made.
8.04 Distributions Resulting from a Change in Control. In determining
the amount of the lump sum distribution payable to a Participant
following a Change in Control, Phantom Stock Units shall be
valued as follows:
(a) If the Change in Control was of the type described in
paragraph (a) of Section 2.06, the value of a Phantom
Stock Unit shall equal the highest price paid for shares
of Common Stock by any Person who became a Beneficial
Owner of securities representing 25% or more of the
combined voting power of SAFECO's outstanding securities.
(b) If the Change in Control was of any type other than that
described in paragraph (a) of Section 2.06, the value of a
Phantom Stock Unit shall equal the highest Closing Price
of the Common Stock during the last 10 trading days prior
to and including the date of the Change in Control.
8.05 No Share Issuance. No actual shares of Common Stock will be
issued directly or indirectly under the Plan in respect of
Phantom Stock Units.
8.06 Changes in Capital Structure. In the event of any change in the
Common Stock of SAFECO by reason of an issuance of additional
shares, recapitalization, reclassification, merger,
reorganization, stock split, reverse stock split, combination of
shares, stock dividend or similar transaction, the number of
Phantom Stock Units held by Participants under the Plan shall be
proportionately adjusted by the Administrative Committee.
8.07 No Voting or Other Rights. No voting or other rights of any kind
associated with the ownership of Common Stock shall inure to a
Participant by virtue of the Participant's deemed investment in
Phantom Stock Units.
8
<PAGE> 9
9. TRANSFERABILITY
Interests in the Plan may not be transferred, assigned, pledged or
encumbered. Prior to the time payment of an Account is actually made to
a Participant, the Participant shall have no rights by way of
anticipation or otherwise to assign or dispose of any interest under the
Plan.
10. ADMINISTRATION
The Plan shall be administered by the Administrative Committee. The
Administrative Committee shall have the exclusive authority over all
matters involving administration of the Plan, including the selection of
employees eligible to participate. The Administrative Committee shall
also have exclusive authority to interpret the Plan and may adopt such
rules and procedures as it deems necessary or desirable from time to
time, subject to the Plan's express provisions. The Administrative
Committee may delegate administrative duties to other persons, including
officers of the Corporation, and may retain the services of lawyers,
accountants, or other outside third parties to assist with the
administration of the Plan. In cases where a decision or Plan
interpretation of the Administrative Committee relates specifically to
the benefits to which a member of the Administrative Committee may be
entitled, the decision or interpretation shall be subject to review and
approval by the Compensation Committee.
11. AMENDMENT OF THE PLAN
The Compensation Committee may from time to time make such amendments to
the Plan as it deems appropriate, including without limitation the
addition or elimination of one or more investment options; provided,
however, that (i) no amendment which cancels or reduces the benefits to
which any Participant is entitled as of the date of such amendment shall
be effective without the written consent of the Participant, and (ii)
the provisions contained in Sections 7 and 8.04 shall not be amended
following a Change in Control without the written consent of 66.67% of
the Participants. The Administrative Committee shall be authorized to
make amendments to the Plan which are immaterial or clerical in nature
or which are, in the opinion of counsel, required by local, state or
federal law or regulation.
12. TERMINATION OF THE PLAN
The Corporation reserves the right to terminate the Plan at any time by
action of the Board of Directors or the Compensation Committee, subject
to the limitations on amendments set forth in Section 11. Unless the
Board or the Compensation Committee determines otherwise, in the event
the Plan is terminated, the Account of each Participant shall be valued
as of the date specified for such purpose by the Board or the
Compensation Committee (the "Valuation Date"), and the value of the
Account shall be paid in cash to the Participant within 30 days
following the Valuation Date. In valuing Accounts following a
termination of the Plan, the value of a Phantom Stock Unit shall equal
the average of the Closing Price of the Common Stock during the last 10
trading days prior to and including the Valuation Date.
9
<PAGE> 10
13. NO EMPLOYMENT RIGHTS.
Nothing in the Plan shall confer upon any Participant any right to be
continued in the employment of the Corporation or to interfere in any
way with the right of the Corporation, in its sole discretion, to
terminate such Participant's employment at any time.
14. NO RIGHTS TO ASSETS
Participants shall have no rights to any assets of the funds selected as
investment options. The rights of a Participant (and of his or her
Beneficiary or estate) shall be solely those of an unsecured general
creditor of the Corporation, and shall not constitute an interest in any
specific asset of the Corporation.
15. DISPUTES
By participating in the Plan, a Participant waives the right to litigate
any dispute arising in connection with the Plan in any court of
otherwise competent jurisdiction. The determination of the
Administrative Committee as to any disputed questions concerning
interpretation of the Plan shall be final, binding, and conclusive upon
all persons. The Corporation may, but is not required to, agree to
assistance in the resolution of any dispute arising under the Plan from
a mediator who shall be a disinterested party to the dispute.
16. EMPLOYMENT TAXES; WITHHOLDING; EXPENSES
The Corporation will collect applicable employment taxes from
Participants on all amounts deferred under the Plan. From distributions
under the Plan, the Corporation will deduct federal, state, and local
taxes and such other amounts as may be required by law to be withheld
with respect to such payments.
17. EQUITABLE ADJUSTMENTS
The Administrative Committee may make equitable adjustments under the
Plan from time to time, including retroactive adjustments to correct
mathematical, accounting, or factual errors made in good faith by the
Corporation or a Participant. Any such adjustments will be final and
binding on all Participants and Beneficiaries.
18. GOVERNING LAW; SEVERABILITY
This Plan shall be governed by and interpreted in accordance with the
internal laws of the State of Washington without regard to conflicts of
law principles. If any provision of the Plan is held to be invalid or
unenforceable, such invalidity or unenforceability shall in no way
affect the validity or enforceability of any other Plan provision.
10
<PAGE> 11
19. BINDING PROVISIONS
All of the provisions of the Plan shall be binding upon and inure to the
benefit of the Corporation, its successors and assigns, each Participant
and every Beneficiary, guardian, personal representative and heir of a
Participant.
20. EFFECTIVE DATE
The effective date of the Plan shall be May 6, 1998.
11
<PAGE> 12
Appendix A
INVESTMENT OPTIONS UNDER
THE SAFECO DEFERRED COMPENSATION PLAN FOR EXECUTIVES
May 1998
In the case of deferrals of Eligible Compensation or Excess Contributions, the
following investment options shall be available:
a. SAFECO Phantom Stock Units on which dividend equivalents shall be
credited.
b. Interest-Accruing Account on which interest shall be credited at
a rate equal to the applicable federal long-term rate for
purposes of Section 1274 of the Internal Revenue Code of 1986, as
amended, in effect at January 1 of each year.
c. Savings Plan Portfolios
o Common Stock - Fund A
o Fixed Income - Fund B
o Short-Term Securities - Fund C
12
<PAGE> 1
Computation of Income Per Share F-13
SAFECO CORPORATION AND SUBSIDIARIES Exhibit 11
<TABLE>
<CAPTION>
Year Ended December 31 1998 1997 1996
- - ---------------------- ------- ------- -------
(In Millions Except Per Share Amounts)
<S> <C> <C> <C>
BASIC NET INCOME PER SHARE OF COMMON STOCK
1. Net Income $ 351.9 $ 430.0 $ 439.0
------- ------- -------
2. Average Number of Common
Shares Outstanding 139.4 129.2 126.1
------- ------- -------
3. Basic Net Income Per Share
of Common Stock (L.1 /L.2) $ 2.52 $ 3.33 $ 3.48
======= ======= =======
DILUTED NET INCOME PER SHARE OF COMMON STOCK
1. Net Income $ 351.9 $ 430.0 $ 439.0
------- ------- -------
2. Average Number of Common
Shares Outstanding 139.4 129.2 126.1
3. Additional Common Shares Assumed
Issued Under Treasury Stock Method
(All due to employee stock options) 0.5 0.6 0.4
------- ------- -------
4. Diluted Average Number of Common
Shares Outstanding 139.9 129.8 126.5
------- ------- -------
5. Diluted Net Income Per Share
of Common Stock (L.1 /L.4) $ 2.51 $ 3.31 $ 3.47
======= ======= =======
</TABLE>
<PAGE> 1
Computation of Ratio of Earnings to Fixed Charges F-14
Year Ended December 31 Exhibit 12
- - --------------------------------------------------------------------------------
(In Millions, Except Ratios)
<TABLE>
<CAPTION>
SAFECO CORPORATION AND SUBSIDIARIES
(Ratio of Earnings to Fixed Charges
Excluding Distributions on Capital Securities)
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Earnings:
Income Before Income Taxes and
Distributions on Capital Securities $462.8 $572.6 $578.5 $513.8 $389.7
Total Fixed Charges Below 168.1 109.3 76.3 89.7 75.1
Less Interest Capitalized (0.5) (2.0) (0.1) (0.3) (0.8)
Less Undistributed Loss
from Unconsolidated Subsidiary -- -- 0.9 1.0 0.2
------ ------ ------ ------ ------
Total Earnings $630.4 $679.9 $655.6 $604.2 $464.2
====== ====== ====== ====== ======
Fixed Charges:
Interest $159.5 $101.8 $ 72.4 $ 85.4 $ 70.3
Interest Capitalized 0.5 2.0 0.1 0.3 0.8
Interest Portion of Rental Expense 6.7 4.8 3.3 3.2 3.1
Amortization of Deferred Debt Expense 1.4 0.7 0.5 0.8 0.9
------ ------ ------ ------ ------
Total Fixed Charges $168.1 $109.3 $ 76.3 $ 89.7 $ 75.1
====== ====== ====== ====== ======
Ratio of Earnings to Fixed Charges
Excluding Distributions on Capital Securities 3.8 6.2 8.6 6.7 6.2
====== ====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
SAFECO CORPORATION AND SUBSIDIARIES
(Ratio of Earnings to Fixed Charges
and Distributions on Capital Securities)
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Earnings:
Income Before Income Taxes $ 393.7 $ 549.8 $ 578.5 $ 513.8 $ 389.7
Total Fixed Charges Below 237.2 132.1 76.3 89.7 75.1
Less Interest Capitalized (0.5) (2.0) (0.1) (0.3) (0.8)
Less Undistributed Loss
from Unconsolidated Subsidiary -- -- 0.9 1.0 0.2
------- ------- ------- ------- -------
Total Earnings $ 630.4 $ 679.9 $ 655.6 $ 604.2 $ 464.2
======= ======= ======= ======= =======
Fixed Charges:
Interest $ 159.5 $ 101.8 $ 72.4 $ 85.4 $ 70.3
Distributions on Capital Securities 69.1 22.8 -- -- --
Interest Capitalized 0.5 2.0 0.1 0.3 0.8
Interest Portion of Rental Expense 6.7 4.8 3.3 3.2 3.1
Amortization of Deferred Debt Expense 1.4 0.7 0.5 0.8 0.9
------- ------- ------- ------- -------
Total Fixed Charges $ 237.2 $ 132.1 $ 76.3 $ 89.7 $ 75.1
======= ======= ======= ======= =======
Ratio of Earnings to Fixed Charges
and Distributions on Capital Securities 2.7 5.1 8.6 6.7 6.2
======= ======= ======= ======= =======
SAFECO CREDIT
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
Earnings:
Income Before Income Taxes $ 22.7 $ 21.5 $ 19.1 $ 13.3 $ 10.8
Total Fixed Charges Below 67.1 56.4 47.5 41.9 30.7
------- ------- ------- ------- -------
Total Earnings $ 89.8 $ 77.9 $ 66.6 $ 55.2 $ 41.5
======= ======= ======= ======= =======
Fixed Charges:
Interest $ 67.0 $ 56.3 $ 47.4 $ 41.8 $ 30.6
Interest Portion of Rental Expense 0.1 0.1 0.1 0.1 0.1
------- ------- ------- ------- -------
Total Fixed Charges $ 67.1 $ 56.4 $ 47.5 $ 41.9 $ 30.7
======= ======= ======= ======= =======
Ratio of Earnings to Fixed Charges 1.3 1.4 1.4 1.3 1.4
======= ======= ======= ======= =======
</TABLE>
<PAGE> 1
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SAFECO Corporation (the Corporation) is a Washington corporation that owns
operating subsidiaries in various segments of insurance and other financially
related businesses. (The Corporation and its subsidiaries are collectively
referred to as "SAFECO".) The insurance subsidiaries engage in property and
casualty insurance, surety and life insurance, and generated approximately 95%
of SAFECO's total 1998 revenues. On October 1, 1997 SAFECO acquired American
States Financial Corporation ("American States"), an Indianapolis, Indiana-based
insurance holding company with 1996 revenues of $2.0 billion. SAFECO acquired WM
Life Insurance Company (WM Life) on December 31, 1997. Both acquisitions were
treated as purchases for accounting purposes. See Note 2 on page 57 for
additional information.
SAFECO Credit Company provides loans and equipment financing and leasing to
commercial businesses including affiliated companies. SAFECO Asset Management
Company provides asset management services to the SAFECO family of mutual funds,
SAFECO Trust Company and outside managed accounts. Talbot Financial Corporation
provides insurance brokerage and financial services distribution operations. In
February 1998 SAFECO announced its decision to sell its real estate subsidiary,
SAFECO Properties, Inc., to focus on SAFECO's core insurance and financial
services businesses. In December 1998 SAFECO entered into an agreement to sell
the majority of SAFECO Properties' assets to The Macerich Partnership, L.P. and
the Ontario Teachers' Pension Plan Board for $570 million. The transaction is
expected to be completed in a series of closings in the first and second
quarters of 1999. As SAFECO Properties' operations are not material to the
consolidated financial statements they have not been reclassified as
discontinued operations.
CAPITAL RESOURCES AND LIQUIDITY
SOURCES AND USES OF FUNDS
SAFECO's liquidity requirements are met primarily by funds generated from
operations, the sale and maturity of invested assets, bank borrowings and
issuances of commercial paper and other securities. The primary sources of cash
from operations are insurance premiums, funds received under deposit contracts,
dividends, interest, rental income and asset management fees.
SAFECO's primary uses of funds are to fund operations, service and pay down
debt, pay dividends to SAFECO shareholders, fund acquisitions and stock
repurchases and to expand the investment portfolio. Cash from insurance
operations is used primarily to pay claims and claim adjustment expenses. Most
insurance premiums are received before or at the time premium revenues are
recognized, while related claims are incurred and paid in subsequent months or
years. Catastrophe claims, the timing and amount of which are inherently
unpredictable, may create increased liquidity requirements.
Total cash provided by operating activities for the years ended December 31,
1998, 1997 and 1996 was $657.6 million, $710.9 million and $684.3 million,
respectively (see Statement of Consolidated Cash Flows on page 46). The
increases in property and casualty insurance premiums received in 1998 and 1997
resulted from a combination of rate increases and higher numbers of policies in
force, as well as the acquisition of American States in 1997. The increases in
dividends and interest received in both 1998 and 1997 were due mainly to the
increasing invested asset base of the life insurance companies as well as the
acquisition of American States. Although cash flow from property and casualty
operations was positive in all three years, the high level of catastrophe losses
and non-catastrophe, weather-related losses in 1998 and 1996, combined with the
relatively low interest rate environment and bond call activity has dampened the
growth of investment income. Growth in property and casualty investment income
is expected to be flat or modest in 1999. It is anticipated that the property
and casualty subsidiaries will pay dividends to SAFECO Corporation in 1999 at
the maximum statutory levels in order to fund shareholder dividends, service and
pay down debt and fund other capital management activities including additional
repurchases of SAFECO stock.
Funds received under deposit contracts relate primarily to the annuity and
retirement services products of SAFECO's life insurance subsidiaries. (SAFECO's
life insurance subsidiaries are collectively referred to as "SAFECO Life.") Of
the total of $12.7 billion in deposit contracts at December 31, 1998,
approximately 43% are structured settlement immediate annuity products. These
annuities have average expected maturities of over 25 years at issuance and
cannot be surrendered by policyholders. Equity-indexed annuities, comprising
approximately 6% of total deposit contracts, generally have expected maturities
of 6 years at issuance and associated surrender charges graded from 8% in year
one to zero in year six. Other annuity and retirement services products comprise
approximately 35% of total deposit contracts. These products generally have
expected maturities of 5 to 20 years at issuance and associated
26 SAFECO 1998 ANNUAL REPORT
<PAGE> 2
surrender charges graded from a range of 10% to 5% in year one to zero within 5
to 10 years, and SAFECO Life retains the option to defer payouts over five years
on approximately 13% of these contracts. SAFECO Life's guaranteed investment
contracts (GICs) within its retirement services area comprise approximately 5%
of total deposit contracts. Universal life products comprise the remaining 11%
of total deposit contracts, and have expected maturities of 10 to 20 years at
issuance with surrender charges varying according to policy type.
The high level of proceeds from the maturity of fixed maturities in all three
years was due to the high number of calls of fixed maturities and prepayments of
mortgage-backed securities. These calls and prepayments were primarily due to
the declining interest rate environment. The level of purchase and sale activity
related to fixed maturities available-for-sale in 1998 was due in part to the
realignment of the American States property and casualty investment portfolio.
Proceeds from the sale of available-for-sale fixed maturities and equities were
higher in 1997 due in part to the sale of approximately $600 million of
securities by SAFECO's property and casualty subsidiaries to raise funds for a
portion of the purchase price of American States. Changes in interest rates have
also caused fluctuations in the market value of fixed maturity investments. This
has affected SAFECO's reported book value (shareholders' equity) and
comprehensive income because the difference between market value and the
amortized cost of fixed maturities classified as available-for-sale is included
in shareholders' equity and comprehensive income, net of related income tax.
SAFECO Credit Company has ongoing needs for outside capital. Its borrowings are
of short to medium-term duration and are obtained primarily by the issuing of
commercial paper and entering into interest rate swaps to convert variable rate
interest payments to fixed rates, as discussed further below. At December 31,
1998 SAFECO Credit had $24.6 million of medium-term notes outstanding, which
were issued in 1991 and 1993. These debt securities are guaranteed by SAFECO
Corporation. Including these medium-term notes and commercial paper, SAFECO
Credit had unaffiliated borrowings at December 31, 1998 totaling $1,255.2
million, of which $1,230.6 million was due within one year. All of this current
portion is comprised of short-term commercial paper borrowings. It is
anticipated that the majority of these commercial paper borrowings will be
rolled over in 1999.
SAFECO Credit enters into interest rate swap agreements to reduce the impact of
changes in interest rates on its variable rate debt by converting variable rate
interest payments to fixed rates. The interest rate swap agreements provide only
for the exchange of interest on the notional amounts at the stated rates, with
no multipliers or leverage. At December 31, 1998, interest rate swap agreements
were outstanding with notional amounts of $499.0 million, replacing variable
rates with fixed rates with a weighted average interest rate of 5.9%. Maturities
of these agreements range from February 1999 to June 2007. At December 31, 1997,
interest rate swap agreements were outstanding with notional amounts of $359.4
million, replacing variable rates with fixed rates with a weighted average
interest rate of 6.1%. The notional amount of interest rate swaps outstanding is
higher in 1998 compared with 1997 because SAFECO Credit has increased its use of
rate swaps to correspond with the increase in variable rate debt.
The real estate subsidiaries (SAFECO Properties, Inc.) borrow from life
insurance companies, banks, savings and loan associations and other lenders. At
December 31, 1998, the real estate subsidiaries had notes and mortgages payable
to nonaffiliates of $161.9 million, of which $33.3 million was due within one
year. It is anticipated that these obligations will be retired from the proceeds
of the sale of SAFECO Properties as described above.
To pay for its October 1, 1997, $2,824 million cash acquisition of American
States and the related $300 million debt repayment, SAFECO Corporation issued
commercial paper, senior notes, capital securities and common stock in 1997. In
late September 1997 SAFECO Corporation issued $1,482.0 million of commercial
paper. As of December 31, 1998, $732.7 million of this commercial paper remained
outstanding, with a weighted average interest rate of 5.2%. Commercial paper
maturing in 1997 was paid off in part with proceeds from the issuance of common
stock. SAFECO Corporation entered into two interest rate swap agreements in
December 1997 to fix the interest rates on a portion of the outstanding
commercial paper. The swaps are for notional amounts of $150.0 million each and
replace variable rates with fixed rates of 5.9%. The two swap agreements mature
in December 2002 and December 2007.
SAFECO Corporation has a bank credit facility available for $1,050.0 million. It
is a five-year facility originated in 1997 that extends to 2002 and is available
for general corporate purposes, including repurchases of SAFECO common stock as
well as support of SAFECO Corporation's and SAFECO Credit's commercial paper
programs. It is anticipated that the majority of the $732.7 million of
commercial paper borrowings outstanding at December 31, 1998 will be rolled over
in 1999. Over the next five years, it is anticipated that a substantial portion
of this commercial paper will be retired primarily through property and casualty
and life subsidiary dividends. In addition, a portion of the proceeds from the
sale of SAFECO Properties may be used to retire a like amount of debt.
On July 15, 1997 SAFECO Corporation issued $200.0 million
SAFECO 1998 ANNUAL REPORT 27
<PAGE> 3
of noncallable 10-year 6.875% senior notes. Also on July 15, 1997 SAFECO
Corporation issued $841.5 million (net of underwriting compensation) of 40-year
8.072% capital securities through a subsidiary trust. These capital securities
are callable by SAFECO after 10 years at a price of 104% of their principal,
with the call premium graded down to zero after 20 years. See Note 10 on page 68
for more information on these securities.
In the fourth quarter of 1997, in a secondary offering, SAFECO issued 14.8
million shares of common stock at $47.50 per share, receiving net proceeds of
$678 million. The proceeds were used to pay off SAFECO Corporation commercial
paper debt maturing in 1997.
As part of its active capital management strategy, SAFECO periodically
repurchases its common stock through open market and negotiated purchases. In
August 1998 SAFECO's board of directors approved the repurchase of up to $200
million of common stock. This authorization was in addition to the February 1996
stock repurchase program, which authorized the repurchase of up to 2.0 million
shares. For the year ended December 31, 1998 SAFECO repurchased 5.2 million
shares at a total cost of $235.6 million for an average price of $45.66. This
represented approximately 3.7% of SAFECO's outstanding common shares at the
beginning of 1998. To fund the 1998 stock repurchases SAFECO Corporation issued
additional commercial paper and received additional dividends from its property
and casualty and life insurance subsidiaries. As of December 31, 1998, no
amounts remained available under the August 1998 repurchase authorization, and
approximately 800,000 shares remain available to be repurchased under the 1996
authorization.
RATINGS
The claims paying abilities of insurers are rated to provide both insurance
consumers and industry participants with comparative information on specific
insurance companies. Higher ratings generally indicate greater financial
strength and a stronger ability to pay claims and are important in marketing
certain insurance products. Ratings focus on factors such as capital resources,
financial strength, demonstrated management expertise in the insurance business,
marketing, investment operations, minimum policyholders' surplus requirements
and capital sufficiency to meet projected growth, as well as access to such
traditional capital as may be necessary to continue to meet standards for
capital adequacy. Coincident with the 1997 acquisition of American States and
the related financings, A.M. Best, Moody's and Standard & Poor's issued revised
ratings for SAFECO's senior debt and for the insurance subsidiaries' financial
strength/claims paying ability. The revised ratings are lower due to the
financing related to the American States acquisition, yet remain strong,
reflecting SAFECO's ongoing profitability and solid balance sheet. Also rated
were SAFECO's capital securities and commercial paper.
The following table summarizes SAFECO's current ratings:
<TABLE>
<CAPTION>
A.M. DUFF & STANDARD
BEST PHELPS MOODY'S & POOR'S
---- ------ ------- --------
<S> <C> <C> <C> <C>
SAFECO Corporation:
Senior Debt a+ -- A3 A+
Capital Securities a+ -- a3 A
Commercial Paper -- D-1 P-2 A-1
Financial Strength/Claims Paying Ability:
Property and
Casualty Subsidiaries A+ -- A1 AA+
SAFECO Life Subsidiaries A+ AA A1 AA-
</TABLE>
REGULATORY ISSUES
SAFECO is not aware of any recently passed or current recommendations by
regulatory authorities, which have or would have, if passed, a material effect
on its liquidity, capital resources or results of operations.
Those states in which SAFECO's insurance subsidiaries are domiciled or deemed to
be commercially domiciled limit the amount of dividend payments that can be made
by those subsidiaries without prior regulatory approval. Three of SAFECO's
insurance subsidiaries received approval in July 1997 to pay extraordinary
dividends totaling $600 million to fund a portion of the American States
purchase price. It is expected that these state limits will not restrict
SAFECO's insurance subsidiaries from paying dividends to SAFECO Corporation
(parent company) in amounts similar to those presently being paid and those paid
in the past (exclusive of the $600 million extraordinary dividends in 1997).
The National Association of Insurance Commissioners (NAIC) has adopted
risk-based capital (RBC) formulas for both life insurers and property and
casualty insurers. The formulas are used as an early warning tool by the NAIC
and state regulators to identify companies that are undercapitalized and which
merit further regulatory attention or the initiation of regulatory action.
SAFECO's life and property and casualty companies have more than sufficient
capital to meet the RBC requirements.
Similarly, the NAIC's proposed Model Investment Law, if adopted by certain
states in which SAFECO operates, should not significantly impact SAFECO, as its
assets are, and historically have been, conservatively invested.
The NAIC has undertaken a major project to codify statu-
28 SAFECO 1998 ANNUAL REPORT
<PAGE> 4
tory accounting practices. Final guidance is expected to be issued in the spring
of 1999, and will be effective beginning January 1, 2001. The impact of these
proposals is currently being studied, and the effect on the statutory surplus of
SAFECO's insurance subsidiaries has not yet been determined.
YEAR 2000
SAFECO, like most other companies, is faced with the fact that some of its
computer programs have time sensitive logic that typically recognizes a date
using "00" as the year 1900 rather than the year 2000. SAFECO is highly
dependent on automated systems and systems applications that use computer
programs to conduct ongoing operations. Such systems are used to process claims,
bill and collect premiums from customers, manage investments and many other
activities. If these systems were unable to process data accurately because of
Year 2000-related failures, these activities would be interrupted and could have
a material adverse effect on SAFECO's results of operations.
SAFECO has completed an assessment of Year 2000 issues in connection with its
computer systems and the technology embedded in the equipment it uses. SAFECO
has been modifying and replacing portions of its software since 1995 so that its
systems will function properly with respect to dates in the year 2000 and
thereafter. In addition, SAFECO is engaged in a regular program of testing and
running the systems once Year 2000 programming changes have been made. This
testing includes trials at SAFECO's hot site, a location provided and maintained
by a third party separate from any SAFECO facility. SAFECO believes that its
program to address Year 2000 issues is comprehensive and on schedule.
The total Year 2000 compliance cost for SAFECO is currently estimated at
approximately $17 million and as of December 31, 1998 SAFECO has incurred
approximately $16 million of that amount. These estimated amounts include both
modification costs, which are expensed as incurred, and certain replacement
systems costs, some of which are capitalized and amortized. Approximately 90% of
SAFECO's existing systems have been internally verified as being Year 2000 ready
at January 31, 1999. SAFECO's objective is to have substantially all of its
systems Year 2000 ready by March 31, 1999, with the last mission-critical system
expected to be Year 2000 ready in August 1999. The program of testing and
running the systems after Year 2000 programming changes have been made is
currently in process and expected to continue through 1999. SAFECO also intends
to bring all of its mainframe systems down on December 31, 1999 and bring them
back up on January 1, 2000. This will preserve information contained in those
systems at December 31, 1999 and permit SAFECO to retrieve and use that
information should an unanticipated Year 2000 problem occur. In addition, as a
contingency against unanticipated problems on and after January 1, 2000,
SAFECO's Information Systems department will be prepared to address on an
expedited basis any problems that should arise. Although absolute assurance is
not possible, based on our current progress and continuing modifications, SAFECO
believes that by January 1, 2000 it will be Year 2000 ready and that Year 2000
issues will not pose significant operational problems for its computer systems.
SAFECO is also working with its third-party partners and vendors, e.g., its
independent insurance agents, local and long distance telephone companies, banks
and securities trading firms, to assure that they are on schedule to detect and
fix any Year 2000 problems which might affect SAFECO's systems or business
processes. SAFECO will assess and attempt to mitigate risks with respect to the
failure of any mission critical third-party partners and vendors to be Year 2000
ready. Failure of such parties to be Year 2000 ready could have a material
adverse effect on SAFECO's results of operations.
SAFECO may be exposed to Year 2000 claims stemming from coverage under insurance
policies its property and casualty subsidiaries have sold to customers. Although
SAFECO has not written any specific Year 2000 coverage, customers may allege
coverage exists under current commercial policies, including commercial general
liability, directors and officers liability, errors and omissions liability and
product policies. The effect of such coverage issues on SAFECO's results of
operations is not reasonably estimable at this time. However, SAFECO expects
that any potential exposures will be limited because its commercial lines
business has historically not included significant numbers of the types of risks
that have the greatest Year 2000 exposure, such as financial institutions and
software and chip companies. In addition, SAFECO's directors and officers
liability and errors and omissions books of insurance business are not large,
together comprising approximately 1% of total property and casualty premiums
over the last three years. SAFECO continues to assess its potential exposure to
insurance claims arising from property and casualty insurance policies written
and is taking a number of actions to limit that exposure. Such actions include
the use of endorsements on commercial property policies clarifying that there is
no coverage for Year 2000 occurrences, as well as using policy language that
excludes Year 2000 coverage on certain commercial liability policies in states
where such endorsements and exclusions are permitted.
SAFECO 1998 ANNUAL REPORT 29
<PAGE> 5
SUMMARY OF FINANCIAL INFORMATION
The following summarized financial information sets forth the contributions of
each business segment to the consolidated net income of SAFECO Corporation. The
information should be read in conjunction with the related statements of income
on pages 49 through 53 of this report.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1998 1997 1996
------- ------- -------
(In Millions Except Per Share Amounts)
<S> <C> <C> <C>
Income (Loss), Net of Income Taxes, Before Realized Gain:
Property and Casualty $ 310.2 $ 260.2** $ 270.6
Life 46.4* 97.0 88.8
Real Estate 3.4 6.2 8.4
Credit 14.4 14.1 12.2
Asset Management 5.5 4.9 5.1
Corporate (45.0) (16.3) (4.9)
------- ------- -------
Total 334.9 366.1 380.2
Realized Gain, Net of Income Taxes 61.9 78.7 58.8
------- ------- -------
Income Before Distributions on Capital Securities 396.8 444.8 439.0
Distributions on Capital Securities, Net of Tax (44.9) (14.8) --
------- ------- -------
Net Income $ 351.9 $ 430.0 $ 439.0
======= ======= =======
Net Income Per Diluted Share of Common Stock:
Income Before Realized Gain $ 2.07* $ 2.71** $ 3.01
Realized Gain .44 .60 .46
------- ------- -------
Net Income $ 2.51 $ 3.31 $ 3.47
======= ======= =======
</TABLE>
* 1998 Life Income includes a write-off of deferred acquisition costs of
$46.8 ($30.4 after tax, $0.22 per share).
** 1997 Property and Casualty Income includes nonrecurring acquisition charges
of $60.0 ($39.0 after tax, $0.30 per share) related to SAFECO's October 1,
1997 acquisition of American States.
PROPERTY AND CASUALTY--OPERATIONS
Through independent agents, SAFECO's property and casualty subsidiaries write
personal, commercial and surety lines of insurance. Coverages include
automobile, homeowners, fire and allied lines, workers' compensation, commercial
multi-peril, miscellaneous casualty, surety and fidelity. Products are sold in
all states and the District of Columbia.
As described in more detail in Note 2 on page 57, SAFECO purchased American
States on October 1, 1997. The acquisition has been treated as a purchase for
accounting purposes, thus the revenue and profit amounts reported include
American States amounts from the October 1, 1997 acquisition date forward.
Because of this, in the following discussion of operations the revenue and
profit amounts will not be comparable for the three years, as American States
amounts are included for all of 1998, only the fourth quarter of 1997 and not at
all for 1996.
SAFECO's purchase of American States has broadened the product mix available to
the combined companies' agency force, particularly in introducing American
States' small commercial lines products into existing SAFECO agencies. The
combination added approximately 4,000 agents to SAFECO's agency force and
geographically diversified SAFECO's revenue and earnings base and its
catastrophe risk exposure. During 1998, SAFECO focused on cross-licensing and
training agents in both SAFECO and American States product lines on a
state-by-state basis. At February 1, 1999 more than 6,100 agents have been
reappointed. The remaining 2,100 agents should be reappointed by late summer of
1999.
30 SAFECO 1998 ANNUAL REPORT
<PAGE> 6
Income from property and casualty operations in 1998, before realized gains and
income taxes, totaled $327.8 million in 1998, compared with $292.2 million in
1997 and $320.0 million in 1996. Excluding the $60.0 million of nonrecurring
1997 acquisition charges, income for 1997 was $352.2 million. The $60.0 million
charge included $40.0 million to strengthen American States' loss reserves and
$20.0 million for incentive payments to agents.
Approximately 15% of SAFECO's property and casualty premiums are written in
California and approximately 34% of premiums are written in the three West Coast
states of California, Washington and Oregon. Prior to the acquisition
approximately 45% of premiums were written in these three West Coast states.
SAFECO's writing of new property business continues to be restricted in
California to reduce its exposure to large single-event catastrophes (see
discussion below).
The following table summarizes SAFECO's underwriting gains (losses) for the last
three years:
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
(In Millions)
<S> <C> <C> <C>
Personal Lines:
Personal Auto $ 11.5 $ 30.7 $ 57.2
Homeowners (56.4) (2.0) (73.1)
Other Personal Lines 14.8 20.6 20.1
Commercial Lines:
American States
Business Insurance (72.7) 8.5 --
SAFECO Commercial (27.9) (34.9) 6.6
Surety 19.2 12.8 26.9
Other 2.1 0.5 0.7
------ ------ ------
Total $(109.4) $ 36.2 $ 38.4
====== ====== ======
</TABLE>
Personal lines, American States Business Insurance (ASBI), SAFECO Commercial and
surety lines comprised approximately 61%, 21%, 16% and 2%, respectively, of the
1998 gross premiums written of $4.4 billion. The 1997 gross premiums written of
$3.0 billion includes American States premiums from the October 1, 1997
acquisition date forward.
During 1998 the number of personal lines policies in force increased by 1.8%,
while the number of ASBI policies in force increased by 2.1%. During the year,
as noted above, we have been appointing SAFECO and American States agents to
sell the products of both companies. This effort, and our focus on a smooth
transition of customer policies between companies resulted in the modest growth
of policies in force during 1998, but has positioned us for increased future
growth. During the fourth quarter of 1998, premiums written by ASBI increased
8.5% over the same quarter of 1997.
Premiums written by SAFECO Commercial increased 6.6% in 1998 over 1997. Surety
premiums were flat in 1998 compared with 1997 due to increased rate competition
in both the commercial and contract lines.
Losses caused by catastrophes have had a significant impact on SAFECO's results.
Catastrophe losses for all lines, net of reinsurance, totaled $159 million, $40
million and $104 million in 1998, 1997 and 1996, respectively. The 1998
catastrophe losses were mainly due to adverse weather in the Midwest, which
caused property losses in SAFECO's homeowners and ASBI lines. Weather events
also were the primary cause of the 1996 catastrophe losses, including
approximately $35 million in losses from a winter storm that hit the Puget Sound
area in December.
SAFECO's strategy to reduce the impact of future catastrophe losses includes
continuing to maintain a strong catastrophe reinsurance program (see discussion
on page 35) and reducing exposures by modifying coverages and obtaining higher
deductibles on earthquake coverages in some states. SAFECO suspended writing new
homeowners, dwelling fire and condominium policies in California in July 1994
because California requires insurers to offer earthquake coverage in connection
with homeowners and other residential policies. SAFECO received approval for a
new earthquake mini-policy in California in September of 1996 and began to
convert existing homeowners policies to the more limited coverage provided by
the mini-policy as they reach renewal date. In April of 1997, SAFECO began to
reopen the California market for new homeowners and fire business in a modest
fashion in response to the reducing earthquake exposure resulting from the new
mini-policy. In Washington State, SAFECO's second largest homeowners market, a
separate earthquake policy has been introduced which lowers exposures to
earthquakes in that state. SAFECO has also modified its earthquake policies in
several other states to increase the deductible. SAFECO has restricted the
writing of new property business in catastrophe-prone states and has implemented
spread-of-risk strategies in certain states such as Colorado, Texas and Florida
to help mitigate the effects of hail storm, wind storm and hurricane losses. In
addition, for the last several years SAFECO has invested in earthquake and wind
modeling technologies, which allow it to better monitor exposures. SAFECO
believes federal legislation is necessary to create a permanent, long-term
solution for the losses that arise from natural disasters such as earthquakes.
SAFECO 1998 ANNUAL REPORT 31
<PAGE> 7
Voluntary personal auto produced pretax underwriting profits of $11.5 million,
$30.7 million and $57.2 million for 1998, 1997 and 1996, respectively. Average
auto rates were increased 1% in 1998, after an increase of 2% in 1997 and a
decrease of 1% in 1996. These rate changes reflect the increased competition in
this line, which is expected to continue in 1999. Average loss costs (which
include the severity or cost of settling claims and the frequency of accidents)
increased by 1% in 1998 after decreasing by 4% in 1997.
The homeowners line produced pretax underwriting losses of $56.4 million, $2.0
million and $73.1 million in 1998, 1997 and 1996, respectively. Losses due to
catastrophes have affected results for this line but were lower in 1997 compared
to 1998 and 1996. Catastrophe losses for homeowners totaled $83 million, $33
million and $69 million for 1998, 1997 and 1996, respectively. Average
homeowners rates were increased 3%, 7% and 6% in 1998, 1997 and 1996,
respectively. Continuing rate increases and insurance-to-value efforts, combined
with restricted writings, higher deductibles and spread-of-risk strategies in
catastrophe-prone areas are all continuing to be pursued to improve future
results in the homeowners line. A continuing increase in premiums per policy is
expected in 1999 as a result of planned rate increases and the ongoing
insurance-to-value effort. Excluding the impact of catastrophes, these measures
are expected to improve homeowners' results in 1999.
Other personal lines produced underwriting gains of $14.8 million, $20.6 million
and $20.1 million in 1998, 1997 and 1996, respectively. Coverages in these lines
include earthquake, dwelling fire, inland marine and boats.
American States Business Insurance (ASBI), which focuses on small- to
medium-sized businesses, produced an underwriting loss of $72.7 million for 1998
primarily due to adverse weather experience and weaker commercial auto results.
The combined ratio for ASBI for 1998 was 108.0 and for the fourth quarter of
1997 was 96.3. The adverse weather experience comprised 7.5 of the combined
ratio in 1998. The profit of $8.5 million for 1997 includes ASBI from the
acquisition date of October 1, 1997 forward.
SAFECO Commercial, which services medium-to-large complex commercial clients,
produced pretax underwriting losses of $27.9 million in 1998 and $34.9 million
in 1997 and an underwriting gain of $6.6 million in 1996. The losses in 1998 and
1997 were due primarily to increased price competition in workers' compensation
and in commercial auto. The loss in 1997 was also affected by several unusually
large losses in the third quarter. After several years of improving
profitability due to enacted workers' compensation reforms, the benefits of
these reforms have largely been realized and underwriting results began
deteriorating in 1997 as a result of significant price competition. Price
competition in workers' compensation is expected to continue into 1999. Overall,
the SAFECO Commercial lines combined ratio was 104.3, 105.8 and 98.8 for 1998,
1997 and 1996, respectively. The combined ratios for all three years compare
favorably with the industry and are a result of continued disciplined risk
selection, relatively limited impact of weather-related losses on SAFECO
Commercial's property risks and concentration of commercial writings in states
viewed as having more favorable legal and regulatory climates.
The surety line produced pretax underwriting profits of $19.2 million, $12.8
million and $26.9 million for 1998, 1997 and 1996, respectively. The decline in
1997 was due mainly to two large contract bond losses in the fourth quarter.
Other insurance product lines produced underwriting gains of $2.1 million, $0.5
million and $0.7 million in 1998, 1997 and 1996, respectively. These lines
include assumed reinsurance and other business in run-off and assigned risk
plans.
32 SAFECO 1998 ANNUAL REPORT
<PAGE> 8
PROPERTY AND CASUALTY OPERATING STATISTICS
<TABLE>
<CAPTION>
1998 1997* 1996
---- ----- ----
PERCENTAGE
PERCENTAGE PERCENTAGE INCREASE
INCREASE INCREASE (DECREASE)
OVER PRIOR OVER PRIOR OVER PRIOR
YEAR YEAR YEAR
---- ---- ----
(In Millions)
<S> <C> <C> <C> <C> <C> <C>
Gross Premiums Written $4,441.8 48.7% $2,987.4 21.3% $2,463.5 4.1%
======== ======== ========
Net Premiums Written $4,256.6 50.5 $2,828.2 22.3 $2,313.1 4.8
======== ======== ========
Earned Premiums $4,208.3 49.4 $2,816.6 23.8 $2,275.4 5.2
======== ======== ========
Underwriting Profit (Loss) $ (109.4) $ 36.2 $38.4
Nonrecurring 1997 Acquisition Charges - (60.0) -
Net Investment Income 480.2 46.9 327.0 16.1 281.6 (3.4)
Goodwill Amortization (43.0) (11.0) -
-------- -------- --------
Income Before Realized Gain and
Income Taxes $327.8 $292.2 $320.0
======== ======== ========
</TABLE>
*1997 amounts include American States from the October 1, 1997 acquisition date
forward.
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
OPERATING RATIOS AS A PERCENTAGE
OF EARNED PREMIUMS*
-------------------
<S> <C> <C> <C>
Loss Ratio 61.34% 58.40% 59.09%
Adjustment Expense Ratio 11.45 11.18 10.37
Expense Ratio 29.52 28.47 28.14
Dividends to Policyholders .29 .66 .71
------ ----- ------
Combined Ratio 102.60% 98.71% 98.31%
====== ===== ======
</TABLE>
* Ratios exclude goodwill amortization and nonrecurring 1997 acquisition
charges.
PROPERTY AND CASUALTY--LOSS RESERVES
The liability (reserves) for losses and loss adjustment expense ("LAE") for the
property and casualty companies was $4,219.9 million at December 31, 1998,
compared to $4,310.5 million at December 31, 1997. The decrease in the liability
at December 31, 1998 compared with December 31, 1997 is due in part to revised
claims handling procedures following the acquisition of American States on
October 1, 1997. These new procedures result from the combining of the SAFECO
and American States claims departments into one unified claims department and
utilizing procedures to effect lower claims and LAE costs. These benefits have
been realized in 1998 both in payments on closed claims and reserves on
still-open claims. The liability is presented net of amounts recoverable from
salvage and subrogation recoveries (see Note 1 on page 55) and gross of amounts
recoverable from reinsurance (see Note 6 on page 65). The amount of reinsurance
recoverables related to the above gross liabilities was $253.6 million at
December 31, 1998 and $228.6 million at December 31, 1997.
Reserves for losses that have been reported to SAFECO and certain legal expenses
are established on the "case basis" method. Claims incurred but not reported
(IBNR) and other adjustment expense are estimated using statistical procedures.
Salvage and subrogation recoveries are accrued using the "case basis" method for
large claims and statistical procedures for smaller claims.
SAFECO's objective is to set reserves that are adequate; that is, the amounts
originally recorded as reserves should at least equal the amounts ultimately
required to settle losses. SAFECO's reserves aggregate its best estimates of the
total ultimate cost of claims that have been incurred but have not yet been
paid. The estimates are based on past claims experience and consider current
claim trends as well as social, legal and economic conditions, including
inflation. The reserves are not discounted.
SAFECO 1998 ANNUAL REPORT 33
<PAGE> 9
Loss and LAE reserve development is reviewed on a regular basis to determine
that the reserving assumptions and methods are appropriate. Reserves initially
determined are compared to the amounts ultimately paid. A statistical estimate
of the projected amounts necessary to settle outstanding claims is made
regularly and compared to the recorded reserves and adjusted as necessary; such
adjustments are included in current operations.
Analysis indicates that SAFECO's reserves are adequate and probably slightly
redundant at December 31, 1998, 1997 and 1996. Operations were credited $100.0
million in 1998 for a decrease in estimated loss and LAE from claims occurring
in years 1997 and prior due primarily to the claims handling changes implemented
in 1998 noted above. Operations were charged $30.5 million in 1997 due primarily
to a nonrecurring $40.0 million reserve increase related to the American States
acquisition. This 1997 reserve increase related to American States previously
discontinued assumed reinsurance operations. Excluding this nonrecurring charge,
the 1997 loss and LAE development on claims occurring in prior years benefited
operations $9.5 million. Operations were credited $77.7 million in 1996 for loss
and LAE development in prior years.
ENVIRONMENTAL AND ASBESTOS CLAIMS
The property and casualty companies' reserves for losses and LAE for liability
coverages related to environmental, asbestos and other toxic claims totaled
$329.8 million at December 31, 1998 compared with $346.9 million at December 31,
1997. These amounts are before the effect of reinsurance, which totaled $30.9
million and $24.7 million at December 31, 1998 and 1997. These reserves are
approximately 8% of total property and casualty reserves for losses and LAE at
both December 31, 1998 and December 31, 1997. The reserves include estimates for
both reported and IBNR losses and related legal expenses.
The vast majority of SAFECO's property and casualty insurance subsidiaries'
environmental, asbestos and other toxic claims result from the commercial
general liability line of business and the discontinued assumed reinsurance
operations of American States. A few of these losses occur in other coverages
such as umbrella, small commercial package policies and personal lines.
The following table presents the loss reserve activity analysis for liability
coverages related to environmental, asbestos and other toxic claims, before the
effect of reinsurance:
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
(In Millions)
<S> <C> <C> <C>
Reserves at Beginning of Year $346.9 $102.8 $107.5
American States Reserves
at Acquisition -- 264.4 --
Incurred Losses and LAE 1.6 (9.9) 4.6
Losses and LAE Payments (18.7) (10.4) (9.3)
------ ------ ------
Reserves at End of Year $329.8 $346.9 $102.8
====== ====== ======
</TABLE>
Although estimation of environmental claims is difficult, the reserves
established for these claims at December 31, 1998 are believed to be adequate
based on the known facts and current law. SAFECO has generally avoided writing
coverages for larger companies with substantial exposure in these areas. In view
of changes in environmental regulations and evolving case law, which affect the
development of loss reserves, the process of estimating loss reserves for
environmental, asbestos and other toxic claims results in imprecise estimates.
Quantitative loss reserving techniques have to be supplemented by subjective
considerations and managerial judgment. Because of these conditions, trends that
have affected development of these liabilities in the past may not necessarily
occur in the future.
CONSTRUCTION DEFECT CLAIMS
Prior to its acquisition by SAFECO, American States had experienced adverse loss
development on construction defect claims. Construction defect claims are a
subset of claims that arise from coverage provided by general property damage
liability insurance. They are defined as those claims involving allegations of
defective work which result in claims for damages related to the diminution of
value of large construction projects, such as condominiums, office buildings,
shopping centers and housing developments. SAFECO has not historically separated
these claims for the purpose of reserve analysis. American States' reserves for
construction defect claims totaled $328.6 million at December 31, 1998 and
$340.3 million at December 31, 1997, representing approximately 8% of total
property and casualty reserves for losses and LAE at both December 31, 1998 and
1997. The reserves established for these claims at December 31, 1998 are
believed to be adequate.
34 SAFECO 1998 ANNUAL REPORT
<PAGE> 10
REINSURANCE
SAFECO's property and casualty companies use treaty and facultative reinsurance
to help manage exposure to loss. As noted above, the liability for unpaid losses
and LAE is reported gross of reinsurance recoverables of $253.6 million at
December 31, 1998 and $228.6 million at December 31, 1997. The availability and
cost of reinsurance are subject to the prevailing market conditions, both in
terms of price and available capacity. Although the reinsurer is liable to
SAFECO to the extent of the reinsurance ceded, SAFECO remains primarily liable
to the policyholder as the direct insurer on all risks insured. To SAFECO's
knowledge none of its reinsurers is experiencing financial difficulties.
SAFECO's catastrophe property reinsurance program for 1999 is unchanged from
1998 and covers 90% of $400 million of single-event losses in excess of a $100
million retention. In a large catastrophe, SAFECO would, therefore, retain the
first $100 million of losses, 10% of the next $400 million and all losses in
excess of $500 million. In addition to this nationwide coverage, for all states
other than California SAFECO has a supplemental earthquake-only reinsurance
contract that would cover 90% of $350 million of single-event earthquake losses
in excess of $500 million. Both of these 1999 catastrophe property reinsurance
contracts include provisions for one reinstatement for a second catastrophe
event in 1999 at current rates.
SAFECO's insurance subsidiaries do not enter into retrospective reinsurance
contracts and do not participate in any unusual or nonrecurring reinsurance
transactions such as "swaps" of reserves or loss portfolio transfers. SAFECO
does not use "funding covers" and does not participate in any surplus relief
transactions. Additional information on reinsurance can be found in Note 6 on
page 65.
LIFE
The life companies offer individual and group insurance products, retirement
services (pension) and annuity products. These products are marketed through
professional agents in all states and the District of Columbia. The most
significant product lines in terms of premium/deposit volume include: single
premium immediate and deferred annuities, business-owned life insurance (BOLI),
indexed and variable annuities, tax-sheltered annuities for the education and
nonprofit markets, corporate retirement plans, excess loss group medical
insurance and individual life insurance.
SAFECO acquired American States Life on October 1, 1997 and WM Life Insurance
Company on December 31, 1997. Both acquisitions have been treated as purchases
for accounting purposes.
Earnings before investment transactions and income taxes ("pretax income") for
all lines combined were $72.3 million in 1998, compared with $147.9 million in
1997 and $136.7 million in 1996. The 1998 results include the write-off of
deferred acquisition costs of $46.8 million, discussed further below.
The following table summarizes the pretax income amounts of the life companies'
major product lines, excluding the $46.8 million write-off of deferred
acquisition costs in 1998:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
(In Millions)
<S> <C> <C> <C>
Settlement Annuities $ 30.6 $ 25.5 $ 23.0
Retirement Services 12.8 27.0 28.6
Group (14.1) 12.3 12.6
Individual 13.9 6.6 4.2
Corporate and Other 75.9 76.5 68.3
-------- -------- --------
Pretax Income $ 119.1 $ 147.9 $ 136.7
======== ======== ========
</TABLE>
The $46.8 million pretax write-off taken in the third quarter of 1998 is
primarily tied to two blocks of annuity business - the equity-indexed annuity
and a declared rate fixed annuity product - and to the life subsidiaries'
universal life business. Of the total $46.8 million write-off, $41.8 million is
related to deferred acquisition costs on the three lines of business noted
above. SAFECO's equity-indexed annuity (EIA) product, which was first sold in
1997, has produced operating losses which have adversely affected the projected
recoverability of its deferred acquisition costs (primarily commissions). The
main reason for the losses was the higher cost of S&P 500 call options which
SAFECO purchased to hedge the obligation under the EIA product. Consequently,
$28.3 million of deferred acquisition costs was written off on this product
line. Steps taken to improve the results of this product include raising the
retained margin and using new hedging strategies such as the purchase of equity
futures contracts. The remaining $13.5 million relates to the write-off of
deferred acquisition costs on a block of single premium deferred annuities which
are experiencing higher than anticipated withdrawal experience, and to the
write-off of deferred acquisition costs on SAFECO's universal life line of
business which is experiencing higher-than-expected operating costs. Of the
total $46.8 million amount, the remaining $5.0 million relates to the estimated
cost of consolidating certain life operations to a central location and the
associated employee severance and relocation costs.
SAFECO 1998 ANNUAL REPORT 35
<PAGE> 11
The settlement annuities operations produced pretax income of $30.6 million,
$25.5 million and $23.0 million in 1998, 1997 and 1996, respectively. Settlement
annuities' products are single premium immediate annuities (SPIAs) sold to fund
third-party personal injury settlements and are nonsurrenderable contracts. The
invested assets supporting these annuities are primarily long-maturity bonds.
New SPIA deposits were $424 million in 1998 compared with $507 million in 1997
and $460 million in 1996. Lower interest rates, competitive pressures and SAFECO
Life's lowered ratings were the main reasons for the decline in deposit volume
in 1998. Total annuity assets amounted to $5.6 billion at December 31, 1998
compared with $5.1 billion at December 31, 1997. The increase in these
operations' income in 1998 compared to 1997 is due in part to this increase in
assets.
On December 31, 1997 SAFECO closed its acquisition of WM Life Insurance Company,
the insurance subsidiary of Washington Mutual, Inc. and the related strategic
alliance to distribute SAFECO Life annuities through Washington Mutual Inc.'s
multi-state banking network. This $140 million cash acquisition was funded from
internal sources. This acquisition is expected to strengthen SAFECO's bank
distribution of annuities.
SAFECO's retirement services operations produced pretax income of $12.8 million,
$27.0 million and $28.6 million in 1998, 1997 and 1996, respectively. Retirement
services products are primarily tax-sheltered annuities, which are marketed to
teachers and employees of hospitals and charitable organizations, guaranteed
investment contracts (GICs), fixed and variable deferred annuities (both
qualified and non-qualified) and corporate retirement funds. SAFECO Life has
protection against early policy surrenders or withdrawals of most of these
products in the form of surrender charges during the initial years of each
policy or the option to defer payouts over 20 quarters. Retirement services had
$6.9 billion of assets on deposit at December 31, 1998 compared with $5.6
billion at December 31, 1997. New deposits from fixed return products (excluding
EIA) declined to approximately $560 million in 1998 from $620 million in 1997,
due mainly to the low interest rate environment. New deposits from variable
return products are growing - increasing to approximately $270 million in 1998
compared with $220 million in 1997 - and SAFECO continues to successfully focus
its efforts on these types of products.
The 1998 retirement services pretax income amount of $12.8 million does not
include the $28.3 million write-off of deferred acquisition costs on the EIA
product noted above. In addition to the $28.3 million write-off, the EIA product
produced a pretax loss in 1998 of $38.2 million, compared with a loss of $8.4
million in 1997. As noted above, the cost of S&P 500 call options purchased to
hedge the obligation associated with the EIA product increased dramatically
throughout 1998. SAFECO is taking steps to improve the profitability of this
product, including raising the retained margin and using new hedging strategies
including the purchase of equity futures contracts. SAFECO suspended the writing
of new business in this line in the fourth quarter of 1998 and is considering
making changes in this product, which may allow it to be re-launched in the
future. New deposits from EIA products totaled $378 million in 1998 and $243
million in 1997.
SAFECO's group insurance operations produced a loss of $14.1 million in 1998,
compared with income of $12.3 million in 1997 and $12.6 million in 1996. The
strategic focus of the group operation is excess loss medical insurance, sold to
self-insured employers for their employee medical plans. Excess loss medical
produced a loss of $18.7 million in 1998 and profits of $7.5 million and $12.4
million in 1997 and 1996, respectively. Total medical profit, which includes
some small-case, fully insured business, a market from which SAFECO is in the
process of withdrawing, declined in both 1998 and 1997. Total group premiums
increased 5% during 1998, compared with decreases of 2% in 1997 and 1% in 1996.
The declines in premium for a few years prior to 1998 were due primarily to
greater competition in the excess loss market. The negative impact of this
competition has been compounded by accelerating medical inflation. Because of
these recent trends SAFECO Life has been increasing rates in the excess loss
medical line and this is expected to have a positive effect on future earnings.
Group life results improved in 1998 and 1997 compared to 1996. In 1996 SAFECO
Life began reinsuring 100% of its long-term disability business, which should
reduce the volatility of future earnings.
36 SAFECO 1998 ANNUAL REPORT
<PAGE> 12
SAFECO Life's individual life operations produced pretax gains of $13.9 million,
$6.6 million and $4.2 million in 1998, 1997 and 1996, respectively. Results in
1998 benefited from decreased death claims compared with 1997 and the American
States Life acquisition. In addition, profits from a new business-owned life
insurance program (BOLI) benefited results in both 1998 and 1997.
The corporate and other line is primarily comprised of investment income
resulting from the investment of capital and prior years' earnings of the
operating lines of business. It is a major component of SAFECO's life earnings,
contributing pretax income of $75.9 million in 1998, $76.5 million in 1997 and
$68.3 million in 1996. Due in part to a desire to improve SAFECO Life's return
on equity, in December 1998 SAFECO Life paid a $78 million dividend to SAFECO
Corporation. It is anticipated that dividends will be paid at the maximum
statutory level in 1999. These dividends will reduce the investment income of
the corporate and other line of business.
SAFECO's life insurance subsidiaries have not participated as a ceding company
in any assumptive reinsurance transactions. See Note 6 on page 65 for additional
information regarding reinsurance.
REAL ESTATE
SAFECO Properties, Inc. invests in and manages real estate properties, primarily
retail centers, and invests in medical real estate, primarily skilled nursing
facilities. In February 1998 SAFECO announced its decision to sell SAFECO
Properties, Inc., to focus on SAFECO's core insurance and financial services
businesses. In December 1998 SAFECO entered into an agreement to sell the
majority of SAFECO Properties' assets to The Macerich Partnership, L.P. and the
Ontario Teachers' Pension Plan Board for $570 million. The transaction is
expected to be completed in a series of closings in the first and second
quarters of 1999. A gain of approximately $60 million is currently anticipated
from the sale of all of the properties. As SAFECO Properties' operations are not
material to the consolidated financial statements they have not been
reclassified as discontinued operations.
The real estate subsidiaries produced pretax income before investment
transactions ("pretax income") of $5.3 million, $9.6 million and $13.0 million
in 1998, 1997 and 1996, respectively. These pretax income amounts include gains
from the sale of properties held for sale of $1.2 million, $1.1 million and $2.7
million in 1998, 1997 and 1996, respectively.
In addition to the pretax income amounts above, the real estate subsidiaries
realized a pretax investment gain of $0.5 million in 1998 and losses of $28.3
million and $2.6 million in 1997 and 1996, respectively. The 1997 realized
investment loss was due to the sale of a property in Palm Desert, California.
The property was under development for several years but SAFECO decided in
mid-1997 that the property no longer fit its long-term investment criteria. The
1996 realized investment loss was the result of a $20 million loss reserve
related to SAFECO Properties' guarantee of outstanding debt financing for a
not-for-profit hospital, offset by a $17.4 million gain on the sale of a
shopping center. The debt guarantee was discharged in 1997.
At December 31, 1998, investment real estate held by SAFECO Properties totaled
$598 million, approximately 2.5% of SAFECO's consolidated investments. Major
retail shopping centers (including land held for development), office and
industrial space and healthcare facilities comprised approximately 90% of the
total. Approximately 70% of total holdings are located in the states of
Washington and Oregon. Rental properties included in investment real estate are
summarized in Note 15 on page 71.
CREDIT
SAFECO Credit Company, Inc. provides loans and equipment financing and leasing
to commercial businesses, including affiliated companies. Credit operations
produced pretax income of $22.7 million in 1998, compared with $21.5 million in
1997 and $19.1 million in 1996. Loan and lease receivables from nonaffiliates
grew 19% in 1998 and 22% in 1997. Continued growth in receivables is expected
although the strong growth rate of the last few years may be difficult to
achieve in 1999, due to the competitive rate environment and SAFECO Credit's
desire to maintain acceptable interest rate spreads on its new business. The
strong earnings in all three years are primarily attributable to the continuing
increase in loan and lease production, combined with favorable collection
experience and low delinquencies.
Approximately 70% of nonaffiliate loan and lease receivables outstanding at
December 31, 1998 are from commercial businesses involved in heavy construction,
transportation and manufacturing. Most of these businesses are located in the
West Coast and Rocky Mountain regions of the United States. Loans and leases are
fully secured by liens on the collateral financed. Less than 1% of the
receivables were non-performing at both December 31, 1998 and 1997. At December
31, 1998, 14% of SAFECO Credit's total outstanding loans and leases consisted of
loans to affiliated SAFECO companies.
SAFECO 1998 ANNUAL REPORT 37
<PAGE> 13
ASSET MANAGEMENT
SAFECO Asset Management Company is the investment advisor for the SAFECO mutual
funds, variable annuity portfolios and a growing number of outside pension and
trust accounts. These investment management activities produced pretax income of
$8.5 million in 1998, $7.5 million in 1997 and $7.6 million in 1996. Assets
under management continue to grow and totaled $7.1 billion at December 31, 1998,
an increase of 37% compared with 1997. Net sales exceeded $1.0 billion in both
1998 and 1997 and were driven by efforts to increase the number of channels
through which products are sold and excellent mutual fund performance. Expenses
related to two major systems conversions and additional marketing costs caused
earnings growth in 1998 to be lower than asset growth. Continued growth in
assets under management is anticipated - from existing funds, new funds and from
new pension accounts.
INVESTMENT SUMMARY
SAFECO's consolidated pretax investment income increased to $1,518.9 million
during 1998 from $1,244.7 million in 1997 and $1,116.7 million in 1996.
Substantially all of this investment income is produced by the investment
portfolios of SAFECO's property and casualty and life insurance subsidiaries.
The property and casualty companies' pretax investment income was $480.2 million
in 1998, $327.0 million in 1997 and $281.6 million in 1996. The increases in
1998 and 1997 were due to the acquisition of American States. Although property
and casualty cash flow was positive in all three years, the high level of
catastrophe losses and non-catastrophe, weather-related losses, particularly in
1998 and 1996, combined with the relatively low interest rate environment and
bond call activity has dampened the growth of investment income. The sale of
approximately $600 million of securities in 1997 to raise funds for a portion of
the American States acquisition reduced the investment base and consequently
investment income from the sale date forward. Growth in investment income in
1999 is expected to be slowed by the lower interest rate environment and the
high level of dividends paid to SAFECO Corporation to fund shareholder
dividends, service and pay down debt and to fund other capital management
activities including additional repurchases of SAFECO stock.
The life companies' pretax investment income was $1,041.0 million in 1998,
$916.3 million in 1997 and $836.7 million in 1996. The growth in all years was
due primarily to the increasing amount of retirement services and annuity assets
under management.
Consolidated pretax realized gains from security investments totaled $94.2
million in 1998, compared with $147.7 million in 1997 and $92.7 million in 1996.
The 1997 amount includes approximately $78 million of gains due to the property
and casualty companies' sale of securities to raise funds for a portion of the
purchase price of American States, as discussed above. The relatively high level
of gains in all three years is due to falling interest rates that produced calls
and redemptions of debt securities and to the strong stock market. In addition,
some realignments of the American States investment portfolio, which began in
late 1997, continued into 1998, resulting in net capital gains. These
realignments shifted some of American States' tax-exempt bond holdings to longer
maturities and increased the allocation to common stock.
Consolidated realized gains from security investments are recorded net of losses
on the sale or writedown of investments. Each investment that has declined in
market value below cost is monitored closely. If the decline is judged to be
other than temporary the security is written down to fair value. The amounts of
such writedowns in 1998, 1997 and 1996 were $0.4 million, $0.2 million and $5.5
million, respectively. These writedowns relate primarily to fixed income
securities, which were investment grade when purchased and later downgraded. The
low amount of writedowns in all three years reflects the high quality of
SAFECO's investment portfolios.
SAFECO's property and casualty investment portfolio totaled $9.2 billion at
market value at December 31, 1998, compared with $9.1 billion at December 31,
1997. The investment philosophy for the property and casualty portfolio is to
emphasize investment yield without sacrificing investment quality, and to
provide for liquidity and diversification. Fixed income securities comprised 78%
of this portfolio while equity securities comprised 22% (see table on page 40).
The property and casualty fixed income portfolio, which totaled $7.0 billion at
market value at December 31, 1998, is currently comprised of 75% tax-exempt and
25% taxable investments. The property and casualty companies have been investing
new money primarily in long-maturity, high-quality tax-exempt bonds; however,
SAFECO may periodically shift its investment of new money between taxables and
tax-exempts in the future to maximize the portfolio's after-tax return in view
of the alternative minimum tax. The effective tax rate on investment income for
1998 was 14%, compared with 13% in 1997 and 12% in 1996.
38 SAFECO 1998 ANNUAL REPORT
<PAGE> 14
The quality of the property and casualty companies' fixed income portfolio is
detailed in the following table:
<TABLE>
<CAPTION>
PERCENT AT
RATING DECEMBER 31, 1998
- - ------ -----------------
<S> <C>
AAA 58%
AA 21
A 15
BBB 5
BB or lower 1
---
Total 100%
===
</TABLE>
SAFECO's life investment portfolio totaled $14.9 billion at market value at
December 31, 1998. Fixed income securities, all of which are taxable, comprised
94% of this investment portfolio at December 31, 1998. The investment philosophy
for this portfolio is to emphasize investment yield without sacrificing
investment quality, and to provide for liquidity and diversification. SAFECO
also matches the projected cash inflows of this portfolio with the projected
cash outflows of the liabilities of the various product lines within the life
operations.
The quality of the life companies' fixed income portfolio is detailed in the
following table:
<TABLE>
<CAPTION>
PERCENT AT
RATING DECEMBER 31, 1998
- - ------ -----------------
<S> <C>
AAA 33%
AA 11
A 31
BBB 22
BB or lower 3
---
Total 100%
===
</TABLE>
This portfolio contains $453.1 million (at market value) of securities below
investment grade quality. This was approximately 3% of the total $14.0 billion
life fixed income portfolio at market value at December 31, 1998. On a
consolidated basis, below investment grade securities with a market value of
$530.1 million were held at December 31, 1998. This was approximately 2% of
total consolidated investments at market value of SAFECO Corporation and
subsidiaries at December 31, 1998.
SAFECO's consolidated investment in "exotic" securities and high-risk
derivatives was less than 1% of SAFECO's total investments at both December 31,
1998 and 1997. SAFECO has intentionally avoided investing in these types of
securities. In addition, SAFECO does not enter into financial instruments for
trading or speculative purposes.
SAFECO's consolidated investments in mortgage-backed securities of $3.7 billion
at market value at December 31, 1998 consist mainly of residential
collateralized mortgage obligations (CMOs) and pass-throughs. The life portfolio
contains virtually all of these securities. Approximately 92% of the
mortgage-backed securities are government/agency-backed or AAA rated at December
31, 1998. SAFECO has intentionally limited its investment in riskier, more
volatile CMOs (principal only, inverse floaters, and so forth) to less than 1%
of total mortgage-backed securities at December 31, 1998.
SAFECO Corporation, the parent company, holds an investment portfolio of
securities at market value that totaled $158.7 million at December 31, 1998,
compared with $177.1 million at December 31, 1997. The majority of these
securities are high quality, preferred stocks and U.S. Treasuries.
SAFECO's consolidated investment portfolio also includes $541.5 million of
mortgage loan investments at December 31, 1998, approximately 2% of total
investments. Nearly all of these loans are held by the life companies and are
secured by first mortgage liens on completed, income-producing commercial real
estate, primarily in the retail, industrial and office building sectors. The
majority of the properties are located in the western United States, with
approximately 50% of the total in California. Individual loans generally do not
exceed $10 million. Less than 2% of the loans were non-performing at both
December 31, 1998 and 1997. The allowance for mortgage loan losses was $11.2
million at December 31, 1998 and $11.6 million at December 31, 1997.
For a discussion of SAFECO's investment in real estate, which is made through
SAFECO Properties, Inc., see page 37 of this report.
SAFECO 1998 ANNUAL REPORT 39
<PAGE> 15
The table below provides a summary of SAFECO's consolidated securities
investment portfolio at December 31, 1998. The excess of market value over cost
of the consolidated fixed income and equity security portfolios was $2.8 billion
at December 31, 1998 and $2.4 billion at December 31, 1997. This increase in the
excess of market over cost was due to the decline in interest rates in 1998,
which increased the market value of SAFECO's fixed income securities, and to the
increase in equity prices.
<TABLE>
<CAPTION>
AMORTIZED CARRYING MARKET
DECEMBER 31, 1998 COST VALUE VALUE
- - ----------------- ----------- ----------- -----------
(In Millions)
<S> <C> <C> <C>
Property and Casualty:
Fixed Income - Taxable (available-for-sale) $ 1,637.1 $ 1,740.4 $ 1,740.4
Fixed Income - Non-taxable (available-for-sale) 4,720.6 5,213.6 5,213.6
Equity Securities 869.2 1,910.5 1,910.5
Life:
Fixed Income - Taxable (available-for-sale) 10,208.7 10,785.2 10,785.2
Fixed Income - Taxable (held-to-maturity) 2,720.9 2,720.9 3,259.2
Equity Securities 33.3 37.9 37.9
SAFECO Corporation:
Fixed Income - Taxable (available-for-sale) 90.1 92.9 92.9
Equity Securities 30.4 62.5 62.5
Miscellaneous 43.1 49.2 49.2
Short-Term Investments 315.9 315.9 315.9
----------- ----------- -----------
Total $ 20,669.3 $ 22,929.0 $ 23,467.3
=========== =========== ===========
</TABLE>
MARKET RISK DISCLOSURES FOR FINANCIAL INSTRUMENTS
The first two columns of the following table under each year show the financial
statement carrying values and related current estimated fair values of certain
of SAFECO's financial instruments as of December 31, 1998 and 1997. The third
column shows the effect on current estimated fair values assuming a 100 basis
point increase in market interest rates and a 10% decline in equity prices
("sensitivity analysis"). This sensitivity analysis is required by Securities
and Exchange Commission (SEC) rules issued in 1997.
<TABLE>
<CAPTION>
DECEMBER 31 1998 1997
- - ----------- ---- ----
ESTIMATED ESTIMATED
ESTIMATED FAIR VALUE ESTIMATED FAIR VALUE
FAIR VALUE AT AT ADJUSTED FAIR VALUE AT AT ADJUSTED
CURRENT MARKET CURRENT MARKET
CARRYING MARKET RATES/PRICES AS CARRYING MARKET RATES/PRICES AS
VALUE RATES/PRICES INDICATED BELOW VALUE RATES/PRICES INDICATED BELOW
----- ------------ --------------- ----- ------------ ---------------
(In Millions)
<S> <C> <C> <C> <C> <C> <C>
Interest Rate Risk:*
Financial Assets:
Fixed Maturities Available-for-Sale$ 17,855.6 $17,855.6 $16,695.0 $17,143.2 $17,143.2 $16,012.0
Fixed Maturities Held-to-Maturity 2,720.9 3,259.2 2,969.0 2,708.6 3,159.9 2,951.0
Mortgage Loans 541.5 562.0 540.0 499.0 524.0 488.0
Commercial Loans 776.8 782.0 764.0 634.9 637.0 624.0
Financial Liabilities:
Funds Held under Deposit Contracts 12,718.1 13,031.0 12,511.0 11,877.9 12,347.0 11,795.0
Commercial Paper 732.7 732.7 732.7 812.8 812.8 812.8
Credit Company Borrowings 1,255.2 1,256.0 1,256.0 892.0 893.0 892.0
7.875% Notes Due 2005 200.0 217.0 210.0 200.0 213.0 204.0
6.875% Notes Due 2007 200.0 214.0 201.0 200.0 205.0 191.0
Other Debt 227.7 235.0 229.0 255.1 261.0 255.0
Capital Securities 842.1 912.0 832.0 841.7 881.0 799.0
Equity Price Risk:**
Marketable Equity Securities 2,036.6 2,036.6 1,833.0 1,879.7 1,879.7 1,692.0
</TABLE>
* Adjusted interest rates assume a 100 basis point increase in market rates
at December 31, 1998 and 1997.
** Adjusted equity prices assume a 10 percent decline in values at December
31, 1998 and 1997.
40 SAFECO 1998 ANNUAL REPORT
<PAGE> 16
Market risk is the risk of loss from adverse changes in market prices and
interest rates. In addition to market risk, SAFECO is exposed to other risks,
including the credit risk related to its financial instruments and the
underlying insurance risk related to its core business. The sensitivity analysis
above summarizes only the exposure to market risk.
SAFECO manages its market risk by matching the projected cash inflows of assets
with the projected cash outflows of liabilities of its investment and financial
products (e.g., annuities, retirement services products, commercial lending).
For all its financial assets and liabilities, SAFECO seeks to maintain
reasonable average durations, consistent with the maximization of income without
sacrificing investment quality and providing for liquidity and diversification.
SAFECO uses certain derivative financial instruments to increase its matching of
cash flows. For example, interest rate swaps are used to convert debt
liabilities with variable rates to fixed rates to better match the fixed rate
assets they support. In addition, S&P 500 call option contracts and futures (in
1999) are purchased to hedge the liability of SAFECO Life' equity-indexed
annuity product. Derivatives are used for hedging purposes rather than
speculation. SAFECO does not enter into financial instruments for trading
purposes.
The estimated fair values at current market rates for financial instruments
subject to interest rate risk in the table above are the same as those disclosed
in Note 8 (Financial Instruments) to the financial statements. The estimated
fair values at the adjusted market rates (assuming a 100 basis point increase in
market interest rates) are calculated using discounted cash flow analysis and
duration modeling, where appropriate. The estimated values do not consider the
effect that changing interest rates could have on prepayment activity (e.g.,
CMOs and annuities). Estimated fair values for derivatives are not presented, as
the amounts are not material.
This sensitivity analysis provides only a limited, point-in-time view of the
market risk sensitivity of certain of SAFECO's financial instruments. The actual
impact of market interest rate and price changes on the financial instruments
may differ significantly from those shown in the sensitivity analysis. The
sensitivity analysis is further limited as it does not consider any actions
SAFECO could take in response to actual and/or anticipated changes in interest
rates and equity prices. As allowed under the SEC requirements, certain
financial instruments (e.g., lease receivables) are not required to be included
in the sensitivity analysis. In addition, certain non-financial instruments
(e.g., insurance liabilities, and real estate) are excluded from the sensitivity
analysis. Accordingly, any aggregation of the estimated fair value amounts or
adjusted fair value amounts would not represent the underlying fair value of net
equity.
NEW ACCOUNTING STANDARDS
See discussion of new accounting standards on page 56.
DIVIDENDS
The Corporation has paid cash dividends continuously since 1933. Common stock
dividends paid to shareholders were $1.34 per share in 1998 compared with $1.22
in 1997 and $1.11 in 1996. These dividends are funded with dividends to the
Corporation from its subsidiaries. The Corporation expects to continue paying
dividends in the foreseeable future. However, payment of future dividends is
subject to the Board of Directors' approval and is dependent upon earnings and
the financial condition of the Corporation.
NUMBER OF SHAREHOLDERS
There were approximately 4,000 common shareholders of record at December 31,
1998.
ANNUAL REPORT ON FORM 10-K
SAFECO FILES AN ANNUAL REPORT ON FORM 10-K WITH THE SECURITIES AND EXCHANGE
COMMISSION IN COMPLIANCE WITH THE REGULATIONS OF THE SECURITIES AND EXCHANGE
COMMISSION. ANY SAFECO SHAREHOLDER MAY OBTAIN FORM 10-K FOR THE YEAR ENDED
DECEMBER 31, 1998, WITHOUT CHARGE, BY MAKING A WRITTEN REQUEST TO:
ROD A. PIERSON
SENIOR VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
SAFECO CORPORATION
SAFECO PLAZA
SEATTLE, WASHINGTON 98185
SAFECO 1998 ANNUAL REPORT 41
<PAGE> 17
MANAGEMENT'S REPORT
The management of SAFECO is responsible for the financial statements, related
notes and all other information presented in this annual report. The financial
statements have been prepared in conformity with generally accepted accounting
principles appropriate in the circumstances and include amounts based on the
best estimates and judgments of management.
In order to safeguard assets and to maintain the integrity and objectivity of
data in these financial statements, SAFECO maintains a comprehensive system of
internal accounting controls. These controls are supported by the careful
selection and training of qualified personnel, by the appropriate division of
duties and responsibilities and by written policies and procedures. In addition,
an integral part of the comprehensive system of internal control is an effective
internal audit department. SAFECO's internal audit department systematically
evaluates the adequacy and effectiveness of internal accounting controls and
measures adherence to established policies and procedures.
The financial statements for the years ended December 31, 1998, 1997 and 1996
have been audited by Ernst & Young LLP, independent auditors. Their audits were
made in accordance with generally accepted auditing standards and included a
review of the system of internal accounting controls to the extent necessary to
express an opinion on the financial statements.
The Audit Committee of the Board of Directors, comprised solely of outside
directors, meets regularly with the independent auditors, management and
internal auditors to review the scope and results of the audit work performed.
The independent auditors have unrestricted access to the audit committee,
without the presence of management, to discuss the results of their audit, the
adequacy of internal accounting controls and the quality of financial reporting.
The management of SAFECO believes that as of December 31, 1998, its system of
internal control is adequate to accomplish the objectives discussed herein.
/s/ BOH DICKEY
Boh A. Dickey
President and Chief Operating Officer
/s/ ROD PIERSON
Rod A. Pierson
Senior Vice President and Chief Financial Officer
REPORT OF ERNST & YOUNG LLP,
INDEPENDENT AUDITORS
Board of Directors and Shareholders of SAFECO Corporation:
We have audited the financial statements of SAFECO Corporation and its
subsidiaries for the years ended December 31, 1998, 1997 and 1996 (pages 43 to
75 inclusive). These financial statements are the responsibility of the
Corporation's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of SAFECO Corporation and its
subsidiaries as of December 31, 1998 and 1997, and the 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.
As described in Note 1 to the financial statements, SAFECO Corporation and its
subsidiaries adopted certain new accounting standards in 1998, 1997 and 1996 as
required by the Financial Accounting Standards Board.
/s/ ERNST & YOUNG LLP
Seattle, Washington
February 12, 1999
42 SAFECO 1998 ANNUAL REPORT
<PAGE> 18
STATEMENT OF CONSOLIDATED INCOME
SAFECO Corporation and Subsidiaries
YEAR ENDED DECEMBER 31
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
(In Millions Except Per Share Amounts)
<S> <C> <C> <C>
REVENUES
Insurance:
Property and Casualty Earned Premiums $ 4,208.3 $ 2,816.6 $ 2,275.4
Life Premiums and Other Revenues 353.4 290.2 265.9
--------- --------- ---------
Total 4,561.7 3,106.8 2,541.3
Real Estate (Note 2) 77.9 75.1 79.9
Credit 98.6 86.5 75.7
Asset Management 42.8 27.1 23.2
Other 57.6 49.7 38.5
Net Investment Income (Note 3) 1,518.9 1,244.7 1,116.7
Realized Investment Gain (Note 3) 94.6 119.4 90.1
--------- --------- ---------
Total 6,452.1 4,709.3 3,965.4
--------- --------- ---------
EXPENSES
Losses, Adjustment Expense and Policy Benefits 4,108.7 2,816.2 2,362.7
Commissions 784.7 524.3 415.7
Nonrecurring Acquisition Charges (Note 2) -- 60.0 --
Personnel Costs 438.7 329.7 272.3
Interest 159.5 101.8 72.4
Goodwill Amortization 53.5 17.7 4.8
Other 448.8 314.4 275.5
Write-Off of Deferred Acquisition Costs (Note 1) 46.8 -- --
Amortization of Deferred Policy Acquisition Costs 784.1 532.9 426.9
Deferral of Policy Acquisition Costs (835.5) (560.3) (443.4)
--------- --------- ---------
Total 5,989.3 4,136.7 3,386.9
--------- --------- ---------
Income Before Income Taxes 462.8 572.6 578.5
--------- --------- ---------
Provision (Benefit) for Income Taxes (Note 17):
Current 104.6 107.1 133.5
Deferred (38.6) 20.7 6.0
--------- --------- ---------
Total 66.0 127.8 139.5
--------- --------- ---------
Income Before Distributions on Capital Securities 396.8 444.8 439.0
Distributions on Capital Securities, Net of Tax (Note 10) (44.9) (14.8) --
--------- --------- ---------
Net Income $ 351.9 $ 430.0 $ 439.0
========= ========= =========
Net Income Per Share of Common Stock (Note 9):
Basic $ 2.52 $ 3.33 $ 3.48
========= ========= =========
Diluted $ 2.51 $ 3.31 $ 3.47
========= ========= =========
</TABLE>
See Notes to Financial Statements on pages 54 through 75.
SAFECO 1998 ANNUAL REPORT 43
<PAGE> 19
CONSOLIDATED BALANCE SHEET
SAFECO Corporation and Subsidiaries
<TABLE>
<CAPTION>
DECEMBER 31 1998 1997
--------- ---------
(In Millions)
<S> <C> <C>
ASSETS
Investments (Note 3):
Fixed Maturities Available-for-Sale, at Market Value
(Amortized cost: 1998 - $16,679.7; 1997 - $16,086.8) $17,855.6 $17,143.2
Fixed Maturities Held-to-Maturity, at Amortized Cost
(Market value: 1998 - $3,259.2; 1997 - $3,159.9) 2,720.9 2,708.6
Marketable Equity Securities, at Market Value
(Cost: 1998 - $952.8; 1997 - $969.0) 2,036.6 1,879.7
Mortgage Loans 541.5 499.0
Real Estate (At cost less accumulated depreciation:
1998 - $98.6; 1997 - $93.2) (Note 4) 601.2 586.1
Policy Loans 88.3 85.3
Short-Term Investments 315.9 134.7
--------- ---------
Total Investments 24,160.0 23,036.6
Cash 74.9 391.4
Accrued Investment Income 323.2 337.0
Finance Receivables (Less unearned finance charges and allowance
for doubtful accounts: 1998 - $101.7; 1997 - $89.7) 1,207.7 1,004.3
Premiums and Other Service Fees Receivable 978.3 953.9
Other Notes and Accounts Receivable 155.2 71.1
Reinsurance Recoverables (Note 6) 317.4 311.0
Deferred Policy Acquisition Costs 521.1 544.8
Land, Buildings and Equipment for Company Use
(At cost less accumulated depreciation:
1998 - $217.5; 1997 - $184.7) 280.2 238.0
Goodwill 1,359.0 1,332.6
Other Assets 313.6 341.7
Separate Account Assets 1,201.1 905.4
--------- ---------
Total $30,891.7 $29,467.8
========= =========
</TABLE>
See Notes to Financial Statements on pages 54 through 75.
44 SAFECO 1998 ANNUAL REPORT
<PAGE> 20
CONSOLIDATED BALANCE SHEET
SAFECO Corporation and Subsidiaries
<TABLE>
<CAPTION>
DECEMBER 31 1998 1997
--------- ---------
(In Millions)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Losses and Adjustment Expense (Note 5) $ 4,262.7 $ 4,352.2
Life Policy Liabilities 276.8 275.8
Unearned Premiums 1,750.9 1,713.7
Funds Held Under Deposit Contracts 12,718.1 11,877.9
Debt (Note 4):
Commercial Paper 732.7 812.8
Credit Company Borrowings 1,255.2 892.0
7.875% Notes Due 2005 200.0 200.0
6.875% Notes Due 2007 200.0 200.0
Other 227.7 255.1
Other Liabilities 1,153.5 1,223.3
Income Taxes (Note 17):
Current 2.5 9.3
Deferred (Includes tax on unrealized appreciation
of investment securities: 1998 - $769.9; 1997 - $672.7) 492.6 446.9
Separate Account Liabilities 1,201.1 905.4
--------- ---------
Total Liabilities 24,473.8 23,164.4
--------- ---------
Commitments and Contingencies (Note 7)
Corporation-Obligated, Mandatorily Redeemable Capital Securities
of Subsidiary Trust Holding Solely Junior Subordinated
Debentures of the Corporation ("Capital Securities") (Note 10) 842.1 841.7
--------- ---------
Preferred Stock, No Par Value:
Shares Authorized: 10
Shares Issued and Outstanding: None
Common Stock, No Par Value (Notes 9 and 11):
Shares Authorized: 300
Shares Reserved for Options: 1998 - 7.5; 1997 - 7.9
Shares Issued and Outstanding: 1998 - 136.3; 1997 - 141.2 885.0 909.3
Retained Earnings (Note 13) 3,257.2 3,299.1
Total Accumulated Other Comprehensive Income:
Unrealized Appreciation of Investment Securities, Net of Tax (Note 3) 1,433.6 1,253.3
--------- ---------
Total Shareholders' Equity 5,575.8 5,461.7
--------- ---------
Total $30,891.7 $29,467.8
========= =========
</TABLE>
See Notes to Financial Statements on pages 54 through 75.
SAFECO 1998 ANNUAL REPORT 45
<PAGE> 21
STATEMENT OF CONSOLIDATED CASH FLOWS
SAFECO Corporation and Subsidiaries
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1998 1997 1996
-------- -------- --------
(In Millions)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Insurance Premiums Received $4,488.2 $3,063.3 $2,514.2
Dividends and Interest Received 1,506.0 1,249.6 1,103.6
Other Operating Receipts 251.1 195.5 172.9
Insurance Claims and Policy Benefits Paid (3,596.1) (2,423.4) (1,998.4)
Underwriting, Acquisition and Insurance
Operating Costs Paid (1,530.1) (1,091.2) (801.7)
Interest Paid and Distributions on Capital Securities (237.5) (94.7) (69.6)
Other Operating Costs Paid (138.2) (92.6) (88.6)
Income Taxes Paid (85.8) (95.6) (148.1)
-------- -------- --------
Net Cash Provided by Operating Activities 657.6 710.9 684.3
-------- -------- --------
INVESTING ACTIVITIES
Purchases of:
Fixed Maturities Available-for-Sale (3,602.2) (2,578.8) (2,079.5)
Fixed Maturities Held-to-Maturity (1.7) (199.6) (473.2)
Equities (169.7) (261.2) (154.9)
Other Investments (218.9) (241.6) (189.8)
Purchase of Subsidiaries, Net of Cash Acquired (Note 2) -- (3,014.3) --
Maturities of Fixed Maturities Available-for-Sale 1,110.9 693.4 709.6
Maturities of Fixed Maturities Held-to-Maturity 7.3 8.9 21.7
Sales of:
Fixed Maturities Available-for-Sale 2,021.6 1,712.6 979.9
Fixed Maturities Held-to-Maturity 18.2 -- 13.3
Equities 233.1 510.6 181.7
Other Investments 159.2 128.3 101.0
Net (Increase) Decrease in Short-Term Investments (92.9) 137.7 (32.1)
Finance Receivables Originated or Acquired (629.2) (489.6) (378.7)
Principal Payments Received on Finance Receivables 420.3 317.3 292.0
Other (221.7) (146.7) (69.2)
-------- -------- --------
Net Cash Used in Investing Activities (965.7) (3,423.0) (1,078.2)
-------- -------- --------
FINANCING ACTIVITIES
Funds Received Under Deposit Contracts 1,241.9 1,403.5 1,148.6
Return of Funds Held Under Deposit Contracts (1,116.0) (866.6) (765.5)
Proceeds from Notes and Mortgage Borrowings 20.0 211.0 40.2
Repayment of Notes and Mortgage Borrowings (61.8) (9.2) (107.5)
Net Proceeds from Short-Term Borrowings 386.4 942.9 213.6
Proceeds from Capital Securities -- 832.2 --
Proceeds from Common Stock Secondary Offering -- 677.2 --
Common Stock Reacquired (236.8) (10.7) (9.6)
Dividends Paid to Shareholders (187.5) (154.1) (139.9)
Other (54.6) 21.8 4.0
-------- -------- --------
Net Cash Provided by Financing Activities (8.4) 3,048.0 383.9
-------- -------- --------
Net Increase (Decrease) in Cash (316.5) 335.9 (10.0)
Cash at the Beginning of Year 391.4 55.5 65.5
-------- -------- --------
Cash at the End of Year $ 74.9 $ 391.4 $ 55.5
======== ======== ========
</TABLE>
See Notes to Financial Statements on pages 54 through 75.
46 SAFECO 1998 ANNUAL REPORT
<PAGE> 22
STATEMENT OF CONSOLIDATED CASH FLOWS--RECONCILIATION OF
NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES
SAFECO Corporation and Subsidiaries
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1998 1997 1996
------ ------ ------
(In Millions)
<S> <C> <C> <C>
Net Income $ 351.9 $ 430.0 $ 439.0
------- ------- -------
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities:
Realized Investment Gain (94.6) (119.4) (90.1)
Amortization and Depreciation 156.9 89.7 68.9
Amortization of Fixed Maturity Investments (41.6) (32.2) (38.6)
Deferred Income Tax (Benefit) Expense (38.6) 20.7 6.0
Interest Expense on Deposit Contracts 584.9 478.9 460.6
Nonrecurring Acquisition Charges -- 60.0 --
Other Adjustments 0.1 (18.2) (3.3)
Changes in:
Losses and Adjustment Expense (89.5) (110.3) (118.9)
Life Policy Liabilities 1.0 2.3 (4.5)
Unearned Premiums 37.2 19.9 36.1
Accrued Income Taxes (6.8) 26.7 (14.5)
Accrued Interest on Accrual Bonds (50.4) (48.4) (44.0)
Accrued Investment Income 13.8 (7.0) (6.6)
Deferred Policy Acquisition Costs 11.1 (27.0) (16.0)
Other Assets and Liabilities (177.8) (54.8) 10.2
------- ------- -------
Total Adjustments 305.7 280.9 245.3
------- ------- -------
Net Cash Provided by Operating Activities $ 657.6 $ 710.9 $ 684.3
======= ======= =======
</TABLE>
See Notes to Financial Statements on pages 54 through 75.
SAFECO 1998 ANNUAL REPORT 47
<PAGE> 23
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
SAFECO Corporation and Subsidiaries
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1998 1997 1996
-------- -------- --------
(In Millions)
<S> <C> <C> <C>
Common Stock (Notes 9 and 11):
Balance at the Beginning of Year $ 909.3 $ 225.3 $ 217.4
Secondary Offering -- 677.2 --
Stock Issued for Acquisition of Subsidiary -- -- 0.6
Stock Issued for Options and Rights 7.8 6.0 6.2
Common Stock Reacquired (33.4) (0.4) (0.5)
Other 1.3 1.2 1.6
-------- -------- --------
Balance at the End of Year 885.0 909.3 225.3
-------- -------- --------
Retained Earnings (Note 13):
Balance at the Beginning of Year 3,299.1 3,042.2 2,755.5
Net Income 351.9 430.0 439.0
Amortization of Underwriting Compensation
on Capital Securities (0.4) (0.2) --
Dividends Declared (190.0) (162.7) (143.2)
Common Stock Reacquired (203.4) (10.2) (9.1)
-------- -------- --------
Balance at the End of Year 3,257.2 3,299.1 3,042.2
-------- -------- --------
Unrealized Appreciation of Investment Securities, Net of Tax (Note 3):
Balance at the Beginning of Year 1,253.3 847.8 1,009.7
Change in Unrealized Appreciation 180.3 405.5 (161.9)
-------- -------- --------
Balance at the End of Year 1,433.6 1,253.3 847.8
-------- -------- --------
Shareholders' Equity $5,575.8 $5,461.7 $4,115.3
======== ======== ========
</TABLE>
See Notes to Financial Statements on pages 54 through 75.
STATEMENT OF CONSOLIDATED COMPREHENSIVE INCOME
SAFECO Corporation and Subsidiaries
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1998 1997 1996
------ ------ ------
(In Millions)
<S> <C> <C> <C>
Net Income $351.9 $430.0 $439.0
------ ------ ------
Other Comprehensive Income, Net of Tax (Note 3):
Unrealized Appreciation (Depreciation) of Investment
Securities Arising During the Period* 239.7 502.5 (100.2)
Less: Reclassification Adjustment for Realized Gain
Included in Net Income** (59.4) (97.0) (61.7)
------ ------ ------
Other Comprehensive Income (Loss) 180.3 405.5 (161.9)
------ ------ ------
Comprehensive Income $532.2 $835.5 $277.1
====== ====== ======
</TABLE>
See Notes to Financial Statements on pages 54 through 75.
* Net of related tax of $129.2, $270.2 and ($54.7) in 1998, 1997 and 1996,
respectively.
** Net of related tax of $31.3, $50.7 and $32.5 in 1998, 1997 and 1996,
respectively.
48 SAFECO 1998 ANNUAL REPORT
<PAGE> 24
STATEMENT OF COMBINED INCOME
Property and Casualty Insurance Companies*
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1998 1997 1996
-------- -------- --------
(In Millions)
<S> <C> <C> <C>
Net Premiums Written $4,256.6 $2,828.2 $2,313.1
Increase in Unearned Premiums (48.3) (11.6) (37.7)
-------- -------- --------
Earned Premiums 4,208.3 2,816.6 2,275.4
-------- -------- --------
Losses and Expenses:
Losses and Adjustment Expense 3,063.2 1,960.0 1,580.5
Commissions 683.4 429.1 342.0
Personnel Costs 303.7 210.2 168.8
Taxes Other than Payroll and Income Taxes 115.0 78.0 62.3
Dividends to Policyholders 12.3 18.5 16.2
Other Operating Expenses 161.2 95.3 76.9
Amortization of Deferred Policy Acquisition Costs 744.9 495.9 391.2
Deferral of Policy Acquisition Costs (766.0) (506.6) (400.9)
-------- -------- --------
Total 4,317.7 2,780.4 2,237.0
-------- -------- --------
Underwriting Profit (Loss) (109.4) 36.2 38.4
Nonrecurring Acquisition Charges -- (60.0) --
Net Investment Income (Excluding realized gain) 480.2 327.0 281.6
Goodwill Amortization (43.0) (11.0) --
-------- -------- --------
Income Before Realized Gain and Income Taxes 327.8 292.2 320.0
Realized Gain from Security Investments and Company-Owned
Real Estate Before Income Taxes 94.6 132.8 64.7
-------- -------- --------
Income Before Income Taxes 422.4 425.0 384.7
Provision for Income Taxes
(Including tax provision on realized gain:
1998 - $32.4; 1997 - $46.0; 1996 - $22.0) 50.0 78.0 71.3
-------- -------- --------
Net Income $ 372.4 $ 347.0 $ 313.4
======== ======== ========
</TABLE>
See Notes to Financial Statements on pages 54 through 75.
* SAFECO Insurance Company of America / General Insurance Company of America
/ First National Insurance Company of America
SAFECO National Insurance Company / SAFECO Insurance Company of Illinois
/ SAFECO Lloyds Insurance Company
SAFECO Surplus Lines Insurance Company / American States Insurance Company /
American Economy Insurance Company
American States Preferred Insurance Company / Insurance Company of Illinois /
American States Insurance Company of Texas
American States Lloyds Insurance Company / F.B. Beattie & Company, Inc. /
SAFECO Select Insurance Services, Inc.
SAFECO 1998 ANNUAL REPORT 49
<PAGE> 25
STATEMENT OF COMBINED INCOME
Life Companies*
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1998 1997 1996
-------- -------- --------
(In Millions)
<S> <C> <C> <C>
Premiums and Other Revenue $ 353.4 $ 290.2 $ 265.9
Net Investment Income (Excluding realized gain) 1,041.0 916.3 836.7
-------- -------- --------
Total 1,394.4 1,206.5 1,102.6
-------- -------- --------
Benefits and Expenses:
Policy Benefits 1,045.5 856.2 782.2
Commissions 101.3 95.2 73.7
Personnel Costs 64.5 56.2 49.4
Taxes Other than Payroll and Income Taxes 14.7 12.4 15.9
Other Operating Expenses 79.6 55.3 51.5
Amortization of Deferred Policy Acquisition Costs 39.2 37.0 35.6
Deferral of Policy Acquisition Costs (69.5) (53.7) (42.4)
-------- -------- --------
Total 1,275.3 1,058.6 965.9
-------- -------- --------
Income Before Realized Gain, Income Taxes and
Write-Off of Deferred Acquisition Costs 119.1 147.9 136.7
Write-Off of Deferred Acquisition Costs (46.8) -- --
-------- -------- --------
Income Before Realized Investment Gain and Income Taxes 72.3 147.9 136.7
Realized Gain from Security Investments
Before Income Taxes 18.3 6.8 10.5
-------- -------- --------
Income Before Income Taxes 90.6 154.7 147.2
Provision for Income Taxes
(Including tax provision on realized gain:
1998 - $6.6; 1997 - $1.8; 1996 - $3.9) 32.5 52.7 51.8
-------- -------- --------
Net Income $ 58.1 $ 102.0 $ 95.4
======== ======== ========
</TABLE>
See Notes to Financial Statements on pages 54 through 75.
* SAFECO Life Insurance Company / SAFECO National Life Insurance Company /
First SAFECO National Life Insurance Company of New York
American States Life Insurance Company / SAFECO Administrative Services, Inc.
50 SAFECO 1998 ANNUAL REPORT
<PAGE> 26
STATEMENT OF CONSOLIDATED INCOME
Real Estate Companies*
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1998 1997 1996
----- ------ -----
(In Millions)
<S> <C> <C> <C>
REVENUES
Operating Property Revenue $70.4 $ 63.0 $62.6
Real Estate Sales 4.0 8.5 13.9
Interest 2.2 2.1 1.9
Other 1.3 1.5 1.5
----- ------ -----
Total 77.9 75.1 79.9
----- ------ -----
EXPENSES
Operating Property Expenses 11.3 11.5 11.2
Real Estate Sales Costs 2.8 7.4 11.2
Interest 35.2 32.8 29.0
Depreciation 18.6 14.8 14.3
General and Administrative 11.6 13.5 13.6
----- ------ -----
Total 79.5 80.0 79.3
Interest and Other Expenses Capitalized (6.9) (14.5) (12.4)
----- ------ -----
Net Expenses 72.6 65.5 66.9
----- ------ -----
Income Before Realized Gain (Loss) and Income Taxes 5.3 9.6 13.0
Realized Gain (Loss) from Real Estate Investments
Before Income Taxes 0.5 (28.3) (2.6)
----- ------ -----
Income (Loss) Before Income Taxes 5.8 (18.7) 10.4
Provision (Benefit) for Income Taxes
(Including tax expense (benefit) on realized gain (loss):
1998 - $0.3; 1997 - $(9.9); 1996 - $(0.6)) 2.2 (6.5) 4.0
----- ------ -----
Net Income (Loss) $ 3.6 $(12.2) $ 6.4
===== ====== =====
</TABLE>
See Notes to Financial Statements on pages 54 through 75.
* SAFECO Properties, Inc. / Winmar Company, Inc. / SAFECARE Company, Inc.
SAFECO 1998 ANNUAL REPORT 51
<PAGE> 27
STATEMENT OF INCOME
SAFECO Credit Company, Inc.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1998 1997 1996
----- ----- -----
(In Millions)
<S> <C> <C> <C>
Investment Revenues:
Interest and Finance Charges:
Finance Receivables $87.0 $77.2 $68.1
Affiliates 11.3 9.7 8.6
----- ----- -----
Total Investment Revenues 98.3 86.9 76.7
Interest Expense 67.0 56.3 47.5
----- ----- -----
Net Investment Income 31.3 30.6 29.2
Provision for Credit Losses 2.4 2.4 2.4
----- ----- -----
Net Investment Income After Provision for Credit Losses 28.9 28.2 26.8
Other Revenue 11.6 9.3 7.6
----- ----- -----
Total 40.5 37.5 34.4
----- ----- -----
Operating Expenses:
Personnel Costs 9.1 8.4 8.6
General and Administrative 8.7 7.6 6.7
----- ----- -----
Total 17.8 16.0 15.3
----- ----- -----
Income Before Income Taxes 22.7 21.5 19.1
Provision for Income Taxes 8.3 7.4 6.9
----- ----- -----
Net Income $14.4 $14.1 $12.2
===== ===== =====
</TABLE>
See Notes to Financial Statements on pages 54 through 75.
52 SAFECO 1998 ANNUAL REPORT
<PAGE> 28
STATEMENT OF COMBINED INCOME
Asset Management Companies*
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1998 1997 1996
----- ----- -----
(In Millions)
<S> <C> <C> <C>
REVENUES
Management and Advisory Fees $27.8 $18.3 $14.4
Transfer Agent Fees 8.7 4.7 3.5
Other 6.3 4.1 5.3
----- ----- -----
Total 42.8 27.1 23.2
----- ----- -----
EXPENSES
Personnel Costs 15.5 10.6 7.8
Marketing and Shareholder Communication 5.0 3.1 2.7
Other 13.8 5.9 5.1
----- ----- -----
Total 34.3 19.6 15.6
----- ----- -----
Income Before Income Taxes 8.5 7.5 7.6
Provision for Income Taxes 3.0 2.6 2.5
----- ----- -----
Net Income $ 5.5 $ 4.9 $ 5.1
===== ===== =====
</TABLE>
See Notes to Financial Statements on pages 54 through 75.
* SAFECO Asset Management Company / SAFECO Securities, Inc. / SAFECO Services
Corporation / SAFECO Trust Company
SAFECO 1998 ANNUAL REPORT 53
<PAGE> 29
NOTES TO FINANCIAL STATEMENTS
(All dollar amounts are in millions, except share data, unless otherwise stated)
NOTE 1: NATURE OF OPERATIONS
AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
SAFECO Corporation (the Corporation) is a Washington corporation that owns
operating subsidiaries in various segments of insurance and other financially
related businesses. (The Corporation and its subsidiaries are collectively
referred to as "SAFECO".) SAFECO's businesses operate on a nationwide basis.
Non-U.S. operations are insignificant. The insurance subsidiaries engage in
property and casualty, surety and life and health insurance. Products are
marketed primarily through independent agents. Approximately 34% of SAFECO's
property and casualty premiums are written in the three West Coast states of
California, Washington and Oregon. SAFECO made two significant acquisitions in
1997 -- see Note 2.
SAFECO's other operations include subsidiaries involved in commercial lending
and leasing (SAFECO Credit), investment management and insurance agency and
financial services distribution operations. In February of 1998, SAFECO
announced its decision to sell its real estate subsidiary, SAFECO Properties
Inc., to focus on its core insurance and financial services businesses. In
December 1998 SAFECO entered into a definitive agreement to sell the majority of
SAFECO Properties' assets -- see Note 2.
BASIS OF REPORTING
The financial statements have been prepared in conformity with generally
accepted accounting principles appropriate in the circumstances and include
amounts based on the best estimates and judgments of management. The financial
statements include SAFECO Corporation and its subsidiaries and real estate joint
ventures.
All significant intercompany transactions and accounts have been eliminated in
the consolidated financial statements. Certain reclassifications have been made
to prior year financial information to conform to the 1998 classifications.
ACCOUNTING FOR PREMIUMS
Property and casualty insurance premiums are included in income as earned over
the terms of the respective policies. The unearned portion is included in the
balance sheet as a liability for unearned premiums, before the effect of
reinsurance. See Note 6 for more information on reinsurance.
Life and health insurance premiums are reported as income when collected for
traditional individual life policies and when earned for group life and health
policies. Funds received under retirement services deposit contracts, annuity
contracts and universal life policies were $1,241.9, $1,403.5, and $1,148.6 in
1998, 1997 and 1996, respectively. These amounts are recorded as liabilities
rather than premium income when received. Revenues for universal life products
consist of front-end loads, mortality charges and expense charges assessed
against individual policyholder account balances. These loads and charges are
recognized as income when earned.
INVESTMENTS
Fixed maturity investments (bonds and redeemable preferred stock) which SAFECO
has the positive intent and ability to hold to maturity are classified as
held-to-maturity and carried at amortized cost in the balance sheet. Fixed
maturities classified as available-for-sale are carried at market value, with
changes in unrealized gains and losses recorded directly to shareholders' equity
(comprehensive income), net of applicable income tax and deferred policy
acquisition costs valuation allowance. SAFECO has no fixed maturities classified
as trading.
All marketable equity securities are classified as available-for-sale and are
carried at market value, with changes in unrealized gains and losses recorded
directly to shareholders' equity (comprehensive income), net of applicable
income tax.
When the collectibility of income for certain investments is considered
doubtful, they are placed on nonaccrual status and thereafter interest income is
recognized only when payment is received. Investments that have declined in
market value below cost and for which the decline is judged to be other than
temporary are written down to fair value. Writedowns are made directly on an
individual security basis and reduce realized investment gains in the statement
of income.
The cost of security investments sold is determined by the "identified cost"
method.
Mortgage loans are carried at outstanding principal balances, less an allowance
for mortgage loan losses. The allowance for mortgage loan losses at December 31,
1998 and 1997 was $11.2 and $11.6, respectively.
Short-term investments are carried at cost, which approximates market value.
54 SAFECO 1998 ANNUAL REPORT
<PAGE> 30
PROPERTY, EQUIPMENT AND DEPRECIATION
Property and equipment are classified as investment real estate or as land,
buildings and equipment for company use, and are carried at cost less
accumulated depreciation.
See Note 2 for information regarding the sale of investment real estate held by
SAFECO Properties, Inc.
SAFECO provides depreciation on buildings, furniture and automobiles at various
rates based on estimated useful lives using straight-line and accelerated
methods.
DEFERRED POLICY ACQUISITION COSTS
Property and casualty insurance acquisition costs, consisting of commissions and
certain other underwriting expenses, which vary with and are primarily related
to the production of business, are deferred and amortized over the effective
period of the related insurance policies. Investment income is considered in
determining whether a premium deficiency exists. No deficiencies have been
indicated in the periods presented.
Life insurance acquisition costs, consisting of commissions and certain other
underwriting expenses, which vary with and are primarily related to the
production of new business are deferred. Acquisition costs for deferred annuity
contracts, retirement services deposit contracts and universal life insurance
policies are amortized over the lives of the contracts or policies in proportion
to the present value of estimated future gross profits. To the extent actual
experience differs from assumptions, and to the extent estimates of future gross
profits require revision, the unamortized balance of deferred policy acquisition
costs is adjusted accordingly; such adjustments are included in current
operations. A $46.8 write-off was taken in the third quarter of 1998 related to
two blocks of annuity business - the equity-indexed annuity and a declared rate
fixed annuity product - and to universal life business. These three lines were
adversely impacted by market conditions which adversely affected the projected
recoverability of deferred acquisition costs. Acquisition costs for traditional
individual life insurance policies are amortized over the premium payment period
of the related policies using assumptions consistent with those used in
computing policy benefit liabilities.
GOODWILL
Goodwill represents the excess of the cost of businesses acquired over the fair
value of their net assets. Goodwill is amortized on systematic bases over
periods, not exceeding 30 years, that correspond with the benefits estimated to
be derived from the acquisitions. SAFECO evaluates the carrying amount of
goodwill by analyzing historical and estimated future income of the related
businesses. Goodwill is written down when impaired. Amortization periods are
revised if it is estimated that the remaining period of benefit of the goodwill
has changed. See Note 2 for information on acquisitions.
LOSSES AND ADJUSTMENT EXPENSE
Unpaid losses and adjustment expense ("LAE") represent the estimated liability
for claims reported plus losses incurred but not yet reported and the related
estimated LAE. The liability for losses and LAE is determined using "case basis"
evaluations and statistical analyses and represents an estimate of the ultimate
net cost of all losses incurred but not paid through December 31 of each year.
Although considerable variability is inherent in such estimates, management
believes that the liability for unpaid losses and LAE is adequate. These
estimates are continually reviewed and adjusted as necessary; such adjustments
are reflected in current operations. See Note 5 for more information on loss
reserves.
Salvage and subrogation recoverables are accrued using the "case basis" method
for large recoverables and statistical estimates based on historical experience
for smaller recoverables. Recoverable amounts deducted from the liability for
losses and adjustment expense net of reinsurance were $208.6 and $221.3 at
December 31, 1998 and 1997, respectively.
The property and casualty companies' liability for unpaid losses and adjustment
expense is presented gross of amounts recoverable from insurers. See Note 6 for
more information on reinsurance.
LIFE POLICY LIABILITIES
Liabilities for universal life insurance policies, deferred annuity contracts
and retirement services deposit contracts are equal to the accumulated account
value of such policies or contracts as of the valuation date. Liabilities for
structured settlement annuities are based on interest rate assumptions using
market rates at issue, graded downward over 40 years to a range of 5.5% to
8.75%.
Liabilities for future policy benefits under traditional individual life
insurance policies have been computed on the level premium method and reflect
interest, mortality and persistency assumptions based on actual experience
modified to provide for adverse deviation. Interest assumptions generally range
from 8.5% graded to 3.25%.
SAFECO 1998 ANNUAL REPORT 55
<PAGE> 31
NOTE 1: NATURE OF OPERATIONS
AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (CONTINUED)
NET INCOME PER DILUTED SHARE
OF COMMON STOCK
Net income per diluted share of common stock is based on the weighted average
number of diluted common shares outstanding during each year. SAFECO's only
potentially dilutive instruments are stock options outstanding, and dilution
from these is not significant. See discussion of new accounting standards below.
NEW ACCOUNTING STANDARDS
The Financial Accounting Standards Board ("FASB") issued Statement 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of," in 1995. Statement 121 requires impairment losses to be
recorded on long-lived assets used in operations, when indicators of impairment
are present and the undiscounted cash flows estimated to be generated by those
assets are less than the assets' carrying value. It also addresses the
accounting for long-lived assets that are expected to be disposed of. Statement
121 was effective for financial statements for fiscal years beginning after
December 15, 1995, and SAFECO adopted it in the first quarter of 1996. Adoption
did not affect net income.
In 1995, the FASB issued Statement 123, "Accounting for Stock-Based
Compensation." Statement 123 permits either expensing the fair value of
stock-based compensation or disclosing in the financial statement footnotes the
pro forma impact on net income as if the awards had been expensed. The Statement
was effective for fiscal years beginning after December 15, 1995, and SAFECO
adopted it in the fourth quarter of 1996, with no effect on net income. See Note
11 for related disclosures.
The FASB issued Statement 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishment of Liabilities," in June 1996. Statement 125
was effective for transfers and servicing of financial assets and extinguishment
of liabilities occurring after December 31, 1996, and SAFECO adopted it in the
first quarter of 1997. Statement 125 provides guidance in determining whether a
transfer of a financial asset represents a sale or a secured borrowing, as well
as the accounting for any servicing assets retained.
The Statement also provides guidance relating to extinguishment of liabilities
by debtors. This statement did not have a material effect on SAFECO's financial
position or results of operations.
In February of 1997, the FASB issued Statement 128, "Earnings Per Share."
Statement 128 was effective for financial statements issued for periods ending
after December 15, 1997, and SAFECO adopted it in the fourth quarter of 1997.
The Statement simplifies the calculation of earnings per share (EPS) and
requires the dual presentation of "basic" and "diluted" EPS on the face of the
income statement. SAFECO's previously reported EPS ("primary" EPS) was not
affected by Statement 128. That is, basic EPS is the same as previously reported
primary EPS. Because SAFECO's stock options do not have a significant dilutive
effect (and are the only potentially dilutive instrument) the difference between
"basic" and "diluted" EPS is not material.
In June of 1997, the FASB issued Statement 130, "Reporting Comprehensive
Income." Statement 130 is effective for fiscal years beginning after December
15, 1997, and SAFECO adopted it in the first quarter of 1998. The Statement has
no effect on net income but requires the reporting of "comprehensive income,"
which includes net income and certain items currently reported in shareholders'
equity. See the "Statement of Consolidated Comprehensive Income" on page 48 of
this report.
The FASB issued Statement 131, "Disclosures About Segments of an Enterprise and
Related Information" in June of 1997. Statement 131 changes the way information
about business segments is reported in annual financial statements and requires
the reporting of selected segment information in interim reports. This statement
is effective for financial statements for periods beginning after December 15,
1997 except that providing interim information in the initial year (1998) may be
deferred until 1999. The required annual segment information is presented in
Note 16. SAFECO will provide the required interim segment information in its
interim reports beginning in 1999. The Statement has no effect on net income.
The FASB issued Statement 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits," in February 1998. Statement 132 revises employers'
disclosures about pension and other postretirement benefit plans. This statement
is effective for financial statements for periods beginning after December 15,
1997. SAFECO has provided the disclosures in Note 14. This statement has no
effect on net income.
56 SAFECO 1998 ANNUAL REPORT
<PAGE> 32
The FASB issued Statement 133, "Accounting for Derivative Instruments and
Hedging Activities," in June 1998. The Statement amends or supersedes several
previous FASB statements and requires recognizing all derivatives as either
assets or liabilities in the statement of financial position and measuring those
instruments at fair value. The Statement is effective for fiscal years beginning
after June 15, 1999. It may also be adopted early, as of the beginning of any
fiscal quarter that begins after June 1998. SAFECO will adopt the new statement
no later than the first quarter of 2000. The impact of the Statement is
currently being studied, and the effect of the new statement on the financial
statements has not yet been determined.
NOTE 2: ACQUISITIONS AND DISPOSITIONS
On October 1, 1997, SAFECO acquired all of the outstanding shares of common
stock of American States Financial Corporation ("American States") for $2,824 in
cash. SAFECO also repaid $300 of outstanding debt obligations of American
States. The acquisition has been treated as a purchase for accounting purposes;
therefore, American States' operations are included in SAFECO's consolidated
financial statements since October 1, 1997. The excess of the purchase price
over the fair value of net assets acquired of $1,300 was recorded as goodwill
and is being amortized over 30 years. The fair value of assets acquired
excluding cash was $7,035.1 and the fair value of liabilities assumed was
$4,204.7. American States is an Indianapolis, Indiana-based insurer that writes
commercial and personal insurance, as well as life insurance, throughout the
United States. Its revenues were $1,984 for 1996.
SAFECO financed the purchase of American States and related debt repayment from
the following sources: $600 of internal funds, $804 of commercial paper debt,
$200 of 10-year senior notes, $842 of capital securities and $678 of SAFECO
common stock issued in a secondary offering.
The $600 of internal funds came from dividends to SAFECO Corporation from
SAFECO's property and casualty subsidiaries on September 30, 1997. SAFECO
received prior approval from the Washington State Insurance Department for these
dividends.
In the fourth quarter of 1997 SAFECO recognized $60.0 of nonrecurring charges
related to its acquisition of American States. These nonrecurring charges
included $40.0 to strengthen American States' loss reserves and $20.0 for
incentive payments to agents.
The unaudited pro forma condensed results of operations presented below assume
the acquisition of American States occurred at the beginning of 1996, and give
effect to actual operating results prior to the acquisition adjusted for
acquisition financing costs and goodwill amortization. These pro forma results
are not necessarily indicative of what actually would have occurred if the
acquisition had been completed as of the beginning of 1996, nor are they
necessarily indicative of future consolidated results.
<TABLE>
<CAPTION>
PRO FORMA INFORMATION UNAUDITED
YEAR ENDED DECEMBER 31 1997 1996
--------- ---------
<S> <C> <C>
Revenues $ 6,221.0 $ 5,917.0
Net Income $ 485.0 $ 473.0
Net Income Per Share $ 3.44 $ 3.36
</TABLE>
On December 31, 1997, SAFECO acquired Washington Mutual, Inc.'s life insurance
subsidiaries, WM Life Insurance Company and Empire Life Insurance Company, and
Washington Mutual, Inc. agreed to distribute SAFECO annuity products through the
Washington Mutual, Inc. multi-state banking network. The transaction was valued
at $140 and the acquisition of the two insurance subsidiaries has been treated
as a purchase for accounting purposes. The financing of this transaction was
through internal sources. Pro forma results of operations showing the effects of
the acquisition on SAFECO's operations for 1997 and 1996 have not been presented
due to immateriality.
No significant acquisitions were made in 1998 or 1996.
In December 1998 SAFECO entered into a definitive agreement to sell the majority
of SAFECO Properties' assets for $570. The sale is expected to be completed in a
series of closings in the first and second quarters of 1999. SAFECO expects to
recognize a gain on the sale, net of any projected loss on the sale of the
remaining assets and any operating losses thereon. As SAFECO Properties'
operations are not material to the consolidated financial statements they have
not been reclassified as discontinued operations.
SAFECO 1998 ANNUAL REPORT 57
<PAGE> 33
NOTE 3: INVESTMENTS
Investment income is comprised of:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Interest:
Fixed Maturities $1,385.2 $1,133.6 $1,025.0
Mortgage Loans 46.2 43.2 40.9
Short-Term Investments 16.2 14.0 7.6
Dividends:
Marketable Equity Securities 48.8 40.0 39.2
Redeemable Preferred Stock 20.7 20.0 12.7
Other Investment Income 9.0 6.2 3.3
-------- -------- --------
Total Investment Income 1,526.1 1,257.0 1,128.7
Investment Expenses 7.2 12.3 12.0
-------- -------- --------
Net Investment Income $1,518.9 $1,244.7 $1,116.7
======== ======== ========
</TABLE>
The carrying value of investments in fixed maturities and mortgage loans that
have not produced income for the last twelve months is less than 1% of the total
of such investments at December 31, 1998.
The following analysis summarizes realized gains and losses on investments:
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Realized Investment Gains (Losses):
Fixed Maturities $ 45.8 $ 50.2 $ 31.1
Marketable Equity Securities 48.3 97.5 61.6
Investment Real Estate 0.5 (28.3) (2.6)
------ ------ ------
Realized Investment Gain Before Income Taxes 94.6 119.4 90.1
Applicable Income Taxes (32.7) (40.7) (31.3)
------ ------ ------
Net Realized Investment Gain $ 61.9 $ 78.7 $ 58.8
====== ====== ======
</TABLE>
The proceeds from sales of investment securities and related gains and losses
for 1998 are as follows:
<TABLE>
<CAPTION>
FIXED FIXED
MATURITIES MATURITIES MARKETABLE
AVAILABLE- HELD-TO- EQUITY
FOR-SALE MATURITY SECURITIES
<S> <C> <C> <C>
Proceeds from Sales $2,021.6 $ 18.2 $ 233.1
======== ======== ========
Gross Realized Gains on Sales $ 42.9 $ 3.4 $ 58.8
Gross Realized Losses on Sales (5.2) -- (10.5)
-------- -------- --------
Realized Gains on Sale 37.7 3.4 48.3
Writedowns (0.4) -- --
Other, Including Gains on Calls and Redemptions 5.1 -- --
-------- -------- --------
Total Realized Gain $ 42.4 $ 3.4 $ 48.3
======== ======== ========
</TABLE>
The 1998 sales of fixed maturities held-to-maturity were made due to evidence of
significant deterioration in the bond issuer's creditworthiness.
58 SAFECO 1998 ANNUAL REPORT
<PAGE> 34
The proceeds from sales of investment securities and related gains and losses
for 1997 are as follows:
<TABLE>
<CAPTION>
FIXED FIXED
MATURITIES MATURITIES MARKETABLE
AVAILABLE- HELD-TO- EQUITY
FOR-SALE MATURITY SECURITIES
-------- -------- ----------
<S> <C> <C> <C>
Proceeds from Sales $1,712.6 $ -- $ 510.6
======== ======== ========
Gross Realized Gains on Sales $ 46.9 $ -- $ 107.6
Gross Realized Losses on Sales (14.8) -- (10.1)
-------- -------- --------
Realized Gains on Sale 32.1 -- 97.5
Writedowns (0.2) -- --
Other, Including Gains on Calls and Redemptions 18.3 -- --
-------- -------- --------
Total Realized Gain $ 50.2 $ -- $ 97.5
======== ======== ========
</TABLE>
The proceeds from sales of investment securities and related gains and losses
for 1996 are as follows:
<TABLE>
<CAPTION>
FIXED FIXED
MATURITIES MATURITIES MARKETABLE
AVAILABLE- HELD-TO- EQUITY
FOR-SALE MATURITY SECURITIES
-------- -------- ----------
<S> <C> <C> <C>
Proceeds from Sales $979.9 $ 13.3 $181.7
====== ====== ======
Gross Realized Gains on Sales $ 33.0 $ -- $ 66.2
Gross Realized Losses on Sales (27.6) (1.3) (4.6)
------ ------ ------
Realized Gains (Losses) on Sale 5.4 (1.3) 61.6
Writedowns (5.5) -- --
Other, Including Gains (Losses) on Calls and Redemptions 32.7 (0.2) --
------ ------ ------
Total Realized Gain (Loss) $ 32.6 $ (1.5) $ 61.6
====== ====== ======
</TABLE>
The 1996 sales of fixed maturities held-to-maturity were made due to evidence of
significant deterioration in the bond issuer's creditworthiness.
The following analysis summarizes the changes in unrealized gains and losses on
investment securities (includes fixed maturities held-to-maturity and
available-for-sale):
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Increase (Decrease) in Unrealized Appreciation of Investment Securities:
Fixed Maturities $ 206.5 $ 660.2 $ (571.2)
Marketable Equity Securities 173.2 253.7 135.7
Applicable Income Taxes (132.9) (319.9) 152.4
-------- -------- --------
Net Change in Unrealized Appreciation $ 246.8 $ 594.0 $ (283.1)
======== ======== ========
</TABLE>
SAFECO 1998 ANNUAL REPORT 59
<PAGE> 35
NOTE 3: INVESTMENTS (CONTINUED)
The following is a summary of fixed maturities and marketable equity securities
classified as available-for-sale at December 31, 1998:
<TABLE>
<CAPTION>
GROSS GROSS NET ESTIMATED
AMORTIZED UNREALIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES GAIN VALUE
--------- --------- --------- ------- ---------
<S> <C> <C> <C> <C> <C>
U.S. Treasury Securities and Obligations of U.S.
Government Corporations and Agencies $ 1,351.0 $ 134.2 $ (2.1) $ 132.1 $ 1,483.1
Obligations of States and Political Subdivisions 4,835.1 509.3 (4.0) 505.3 5,340.4
Debt Securities Issued by Foreign Governments 208.3 36.9 (0.7) 36.2 244.5
Corporate Securities 7,033.7 389.5 (33.2) 356.3 7,390.0
Mortgage-Backed Securities 3,251.6 154.2 (8.2) 146.0 3,397.6
--------- --------- --------- ------- ---------
Total Fixed Maturities Classified as
Available-for-Sale 16,679.7 1,224.1 (48.2) 1,175.9 17,855.6
Marketable Equity Securities 952.8 1,107.0 (23.2) 1,083.8 2,036.6
--------- --------- --------- ------- ---------
Total $17,632.5 $ 2,331.1 $ (71.4) 2,259.7 $19,892.2
========= ========= ========= =========
Deferred Policy Acquisition Costs
Valuation Allowance and Other (60.5)
Applicable Income Taxes (765.6)
------
Unrealized Appreciation of Investment Securities,
Net of Tax, Included in Shareholders' Equity $ 1,433.6
=========
The following is a summary of fixed maturities
classified as held-to-maturity at December 31, 1998:
</TABLE>
<TABLE>
<CAPTION>
GROSS GROSS NET ESTIMATED
AMORTIZED UNREALIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES GAIN VALUE
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
U.S. Treasury Securities and Obligations of U.S.
Government Corporations and Agencies $ 272.1 $ 102.4 $ -- $ 102.4 $ 374.5
Obligations of States and Political Subdivisions 127.2 26.4 -- 26.4 153.6
Debt Securities Issued by Foreign Governments 149.6 48.5 -- 48.5 198.1
Corporate Securities 1,863.9 324.7 (4.4) 320.3 2,184.2
Mortgage-Backed Securities 308.1 40.7 -- 40.7 348.8
-------- -------- -------- -------- --------
Total Fixed Maturities Classified as
Held-to-Maturity $2,720.9 $ 542.7 $ (4.4) $ 538.3 $3,259.2
======== ======== ======== ======== ========
</TABLE>
The following is a summary of fixed maturities and marketable equity securities
classified as available-for-sale at December 31, 1997:
<TABLE>
<CAPTION>
GROSS GROSS NET ESTIMATED
AMORTIZED UNREALIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES GAIN VALUE
--------- --------- --------- ------- ---------
<S> <C> <C> <C> <C> <C>
U.S. Treasury Securities and Obligations of U.S.
Government Corporations and Agencies $ 1,489.0 $ 85.3 $ (1.6) $ 83.7 $ 1,572.7
Obligations of States and Political Subdivisions 4,969.2 479.8 (2.6) 477.2 5,446.4
Debt Securities Issued by Foreign Governments 248.8 48.5 (0.2) 48.3 297.1
Corporate Securities 6,214.4 312.7 (4.3) 308.4 6,522.8
Mortgage-Backed Securities 3,165.4 142.9 (4.1) 138.8 3,304.2
--------- --------- --------- ------- ---------
Total Fixed Maturities Classified as
Available-for-Sale 16,086.8 1,069.2 (12.8) 1,056.4 17,143.2
Marketable Equity Securities 969.0 914.7 (4.0) 910.7 1,879.7
--------- --------- --------- ------- ---------
Total $17,055.8 $ 1,983.9 $ (16.8) 1,967.1 $19,022.9
========= ========= ========= =========
Deferred Policy Acquisition Costs
Valuation Allowance and Other (45.0)
Applicable Income Taxes (668.8)
---------
Unrealized Appreciation of Investment Securities,
Net of Tax, Included in Shareholders' Equity $ 1,253.3
=========
</TABLE>
60 SAFECO 1998 ANNUAL REPORT
<PAGE> 36
The following is a summary of fixed maturities classified as held-to-maturity at
December 31, 1997:
<TABLE>
<CAPTION>
GROSS GROSS NET ESTIMATED
AMORTIZED UNREALIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES GAIN VALUE
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
U.S. Treasury Securities and Obligations of U.S.
Government Corporations and Agencies $ 257.9 $ 74.2 $ -- $ 74.2 $ 332.1
Obligations of States and Political Subdivisions 120.4 14.9 -- 14.9 135.3
Debt Securities Issued by Foreign Governments 148.9 40.3 -- 40.3 189.2
Corporate Securities 1,880.5 286.5 (0.1) 286.4 2,166.9
Mortgage-Backed Securities 300.9 35.6 (0.1) 35.5 336.4
-------- -------- -------- -------- --------
Total Fixed Maturities Classified as
Held-to-Maturity $2,708.6 $ 451.5 $ (0.2) $ 451.3 $3,159.9
======== ======== ======== ======== ========
</TABLE>
The amortized cost and estimated market value of fixed maturities at December
31, 1998, by contractual maturity, are presented below. Expected maturities will
differ from contractual maturities because borrowers may have the right to call
or prepay obligations with or without prepayment penalties.
<TABLE>
<CAPTION>
AVAILABLE-FOR-SALE HELD-TO-MATURITY
------------------------- ------------------------
ESTIMATED ESTIMATED
AMORTIZED MARKET AMORTIZED MARKET
COST VALUE COST VALUE
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Due in One Year or Less $ 459.5 $ 464.1 $ -- $ --
Due After One Year Through Five Years 2,891.2 3,002.7 -- --
Due After Five Years Through Ten Years 2,513.3 2,662.7 48.7 57.2
Due After Ten Years 7,564.1 8,328.5 2,364.1 2,853.2
Mortgage-Backed Securities 3,251.6 3,397.6 308.1 348.8
--------- --------- --------- ---------
Total $16,679.7 $17,855.6 $ 2,720.9 $ 3,259.2
========= ========= ========= =========
</TABLE>
The following table summarizes SAFECO's consolidated allowance for credit losses
related to its mortgage loan investments and finance receivables:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Allowance at Beginning of Year $ 32.5 $ 30.4 $ 27.5
Provision for Credit Losses 2.4 3.3 4.4
Loans Charged Off as Uncollectible (2.3) (1.5) (1.8)
Recoveries 0.4 0.3 0.3
------- ------- -------
Allowance at End of Year $ 33.0 $ 32.5 $ 30.4
======= ======= =======
</TABLE>
These allowances relate to SAFECO Credit's finance receivables ($1,207.7 at
December 31, 1998) and to mortgage loan investments ($541.5 at December 31,
1998), nearly all of which are held by SAFECO Life Insurance Company. The
allowances include specific reserves, as well as general reserve amounts. The
total investment in impaired loans before any reserve for losses, is $3.2 at
December 31, 1998. A specific loan loss reserve has been established for each
impaired loan, the total of which is $0.3 at December 31, 1998 and is included
in the overall allowance of $33.0 at December 31, 1998.
SAFECO 1998 ANNUAL REPORT 61
<PAGE> 37
NOTE 4: DEBT
At December 31, 1998, SAFECO Corporation had commercial paper borrowings
outstanding of $732.7. The majority of this commercial paper relates to funding
for SAFECO's 1997 acquisition of American States, described in Note 2.
At December 31, 1998, SAFECO Credit had short-term borrowings of $1,230.6
through commercial paper and $24.6 of medium-term notes. The repayment of each
of these borrowings is guaranteed by SAFECO Corporation. The weighted average
interest rates on the short-term borrowings were 5.3% and 5.9% at December 31,
1998 and 1997, respectively. The medium-term notes have maturities from January
2000 to December 2001 and a weighted average interest rate of 7.5% at December
31, 1998.
SAFECO Corporation has a bank credit facility available for $1,050.0. It is a
five-year facility originated in 1997 that extends to 2002 and is available for
general corporate purposes, including support of SAFECO Corporation's and
SAFECO Credit's commercial paper program. There were no borrowings outstanding
under this facility as of December 31, 1998. SAFECO Corporation pays a fee to
have this line of credit available and does not maintain deposits as
compensating balances. The facility has certain covenants that include requiring
SAFECO to maintain a specified minimum level of shareholders' equity and a
maximum debt-to-capitalization ratio. As of December 31, 1998, SAFECO was in
compliance with all such covenants.
SAFECO Credit and SAFECO Corporation have entered into interest rate swap
agreements with outside parties to reduce the impact of changes in interest
rates on their variable rate debt by converting variable rate interest payments
to fixed rates. The interest rate swap agreements provide only for the exchange
of interest on the notional amounts at the stated rates, with no multipliers or
leverage. There were no swap terminations in 1998, 1997, or 1996. The net
interest accrued under these agreements is recorded as an adjustment to interest
expense. At December 31, 1998, SAFECO Credit interest rate swap agreements were
outstanding with notional amounts of $499.0, replacing variable rates with fixed
rates with a weighted average interest rate of 5.9%. Maturities of these
agreements range from February 1999 to June 2007. At December 31, 1997, SAFECO
Credit interest rate swap agreements were outstanding with notional amounts of
$359.4, replacing variable rates with fixed rates with a weighted average
interest rate of 6.1%. SAFECO Corporation entered into two interest rate swap
agreements in December 1997. The swap agreements are for notional amounts of
$150.0 each and replace variable rates with fixed rates of 5.9%. The two swaps
mature in December 2002 and December 2007, respectively.
Real estate mortgages are collateralized by the related investment real estate
buildings and property.
See discussion of capital securities in Note 10.
62 SAFECO 1998 ANNUAL REPORT
<PAGE> 38
The total amount, current portions, interest rates and maturities of debt at
December 31 are as follows:
<TABLE>
<CAPTION>
1998 1997
---------------------- --------------------
TOTAL CURRENT TOTAL CURRENT
-------- -------- -------- --------
<S> <C> <C> <C> <C>
SAFECO Corporation Commercial Paper Payable in 1999;
Weighted Average Interest Rates at December 31:
1998 - 5.2%; 1997 - 5.9% $ 732.7 $ 732.7 $ 812.8 $ 812.8
======== ======== ======== ========
SAFECO Credit Borrowings Payable Through 2001;
Weighted Average Interest Rates at December 31:
1998 - 5.3%; 1997 - 6.0% $1,255.2 $1,230.6 $ 892.0 $ 867.5
======== ======== ======== ========
SAFECO Corporation, 7.875% Notes Due 2005 $ 200.0 $ -- $ 200.0 $ --
======== ======== ======== ========
SAFECO Corporation, 6.875% Notes Due 2007 $ 200.0 $ -- $ 200.0 $ --
======== ======== ======== ========
Other Debt:
Unsecured Notes and Loans Payable in Installments in 1999;
Weighted Average Interest Rates at December 31:
1998 - 6.4%; 1997 - 6.9% $ 45.8 $ 34.9 $ 90.4 $ 82.2
SAFECO Corporation, Medium-Term Notes
Due 2002 and 2003; Weighted Average Interest
Rates at December 31, 1998 and 1997 - 7.1% 50.0 -- 50.0 --
Real Estate Mortgages Payable in Installments Through 2014;
Weighted Average Interest Rates at December 31:
1998 - 7.9%; 1997 - 8.0% 131.9 3.3 114.7 2.3
-------- -------- -------- --------
Total $ 227.7 $ 38.2 $ 255.1 $ 84.5
======== ======== ======== ========
</TABLE>
Aggregate annual principal installments payable under these obligations for each
of the five years subsequent to 1998 are as follows: 1999 - $2,001.5; 2000 -
$58.6; 2001 - $17.3; 2002 - $47.9; 2003 - $78.6.
SAFECO 1998 ANNUAL REPORT 63
<PAGE> 39
NOTE 5: PROPERTY AND CASUALTY LOSS RESERVES
Unpaid losses and loss adjustment expense ("LAE") represent the estimated
liability (reserves) for claims reported plus losses incurred but not yet
reported and the related LAE. Although considerable variability is inherent in
such estimates, management believes that the liability for unpaid losses and LAE
is adequate. These estimates are continually reviewed and adjusted as necessary;
such adjustments are included in current operations.
The following is a summary of the activity related to SAFECO's property and
casualty companies' reserves for losses and LAE (net of reinsurance amounts):
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Loss and LAE Reserves at Beginning of Year $4,081.9 $1,955.7 $2,070.1
-------- -------- --------
American States Loss and LAE Reserves at Acquisition -- 2,204.6 --
-------- -------- --------
Incurred Loss and LAE for Claims Occurring
in the Current Year 3,163.2 1,969.5 1,658.2
Increase (Decrease) in Estimated Loss and LAE for Claims
Occurring in Prior Years (100.0) 30.5 (77.7)
-------- -------- --------
Total Incurred Loss and LAE 3,063.2 2,000.0 1,580.5
-------- -------- --------
Loss and LAE Payments for Claims Occurring During:
Current Year 1,836.2 1,172.1 939.5
Prior Years 1,342.6 906.3 755.4
-------- -------- --------
Total Loss and LAE Payments 3,178.8 2,078.4 1,694.9
-------- -------- --------
Loss and LAE Reserves at End of Year $3,966.3 $4,081.9 $1,955.7
======== ======== ========
</TABLE>
The year-end reserve amounts above are net of related reinsurance recoverables
of $253.6, $228.6 and $103.4 for 1998, 1997 and 1996, respectively.
The amounts above do not include SAFECO's life subsidiaries' loss reserves for
accident and health claims as these amounts are not material in relation to
consolidated loss and LAE reserves. In addition, the majority of these claims
are incurred and paid in full within a one-year period.
Operations in 1998 were credited $100.0 from a decrease in estimated loss
and LAE for claims occurring in prior years. This decrease relates primarily
to American States operations. Following the acquisition of American States in
1997, the claims departments of the two companies were combined in 1998. The
unified claims department implemented training and reserving procedures
resulting in lower claims settlements and reduced reserves on prior years'
American States losses. The reductions were in both personal and commercial
auto, workers' compensation and general liability.
The 1997 charge to prior years included a nonrecurring $40.0 reserve increase
related to the American States acquisition as described in Note 2. This reserve
increase related to American States' assumed reinsurance operations, which had
been discontinued by American States prior to SAFECO's acquisition. Excluding
this nonrecurring charge, the 1997 loss and LAE development on claims
occurring in prior years benefited operations $9.5.
The 1996 development benefited operations $77.7 due to several factors
including: aggressive reserving in years prior to 1995, favorable workers'
compensation legislation enacted in the early 1990's and fraud prevention
initiatives in the mid 1990's. The 1997 newly reported and still open claims
were reserved at lower, more accurate levels than 1996 and prior years.
The property and casualty companies' loss and LAE reserves include reserves for
environmental, asbestos and other toxic claims. These reserves are approximately
8% of total property and casualty reserves for losses and LAE at both December
31, 1998 and December 31, 1997. The reserves include estimates for both reported
and incurred but not reported (IBNR) losses and related legal expenses. In view
of changes in environmental regulations and evolving case law which affect the
development of loss reserves, the process of estimating loss reserves for
environmental, asbestos and other toxic claims results in imprecise estimates.
Quantitative techniques have to be supplemented by subjective considerations and
managerial judgment. Because of these conditions, trends that have affected
development of these liabilities in the past may not necessarily occur in the
future. Although estimation of environmental claims is difficult, the reserves
established for these claims at December 31, 1998 are believed to be adequate
based on the known facts and current law.
64 SAFECO 1998 ANNUAL REPORT
<PAGE> 40
NOTE 6: REINSURANCE
SAFECO's insurance subsidiaries protect themselves from excessive losses by
reinsuring on treaty and facultative bases. The availability and cost of
reinsurance are subject to prevailing market conditions, both in terms of price
and available capacity. Although the reinsurer is liable to SAFECO to the extent
of the reinsurance ceded, SAFECO remains primarily liable to the policyholder as
the direct insurer on all risks reinsured. SAFECO evaluates the financial
condition of its reinsurers to minimize its exposure to losses from reinsurer
insolvencies. To SAFECO's knowledge, none of its reinsurers is experiencing
financial difficulties.
SAFECO's insurance subsidiaries do not enter into retrospective reinsurance
contracts and do not participate in any unusual or nonrecurring reinsurance
transactions such as "swaps" of reserves or loss portfolio transfers. SAFECO
does not use funding covers and does not participate in any surplus relief
transactions.
The balance sheet caption reinsurance recoverables is comprised of the following
amounts at December 31:
<TABLE>
<CAPTION>
1998 1997
------ ------
<S> <C> <C>
Property and Casualty:
Reinsurance Recoverables on:
Unpaid Loss and LAE Reserves $253.6 $228.6
Paid Losses and LAE 16.8 39.7
Life:
Reinsurance Recoverables on:
Unpaid Loss and LAE Reserves (Policy and Contract Claims) 0.8 1.0
Paid Claims 1.4 0.8
Life Policy Liabilities 44.8 40.9
------ ------
Reinsurance Recoverables $317.4 $311.0
====== ======
</TABLE>
The unearned premium liability is presented before the effect of reinsurance.
The reinsurance amounts related to the unearned premium liability are included
with other assets in the balance sheet and totaled $53.3 and $61.0 at December
31, 1998 and 1997, respectively.
The effects of reinsurance are netted against the insurance revenue and loss
amounts in the statement of income. These amounts are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Property and Casualty Ceded Earned Premiums $188.5 $155.8 $152.6
Life Ceded Earned Premiums 21.3 14.5 13.7
------ ------ ------
Total Ceded Earned Premiums $209.8 $170.3 $166.3
====== ====== ======
Property and Casualty Ceded Losses and LAE $ 98.4 $ 46.1 $ 34.5
Life Ceded Policy Benefits 12.2 8.3 4.0
------ ------ ------
Total Ceded Losses, LAE and Policy Benefits $110.6 $ 54.4 $ 38.5
====== ====== ======
</TABLE>
Reinsurance premiums ceded on a written basis are approximately equal to the
ceded earned premiums disclosed above. Reinsurance premiums assumed are
insignificant.
SAFECO 1998 ANNUAL REPORT 65
<PAGE> 41
NOTE 7: COMMITMENTS AND CONTINGENCIES
SAFECO leases office space, commercial real estate and certain equipment under
leases which expire at various dates through 2058. These leases are accounted
for as operating leases. Minimum rental commitments for leases in effect at
December 31, 1998 are as follows:
<TABLE>
<CAPTION>
YEAR PAYABLE MINIMUM RENTALS
- - ------------ ---------------
<S> <C>
1999 $35.8
2000 33.0
2001 29.9
2002 26.0
2003 21.6
2004 and Thereafter 161.7
------
Total $308.0
======
</TABLE>
In addition, SAFECO has commitments under real estate construction and
development contracts that total approximately $200 at December 31, 1998. These
commitments are estimated to be paid as follows: $40 in 1999; $52 in 2000; $80
in 2001; $28 in 2002.
The amount of rent charged to operations was $20.1, $14.4 and $10.0 for 1998,
1997 and 1996, respectively.
For information on environmental, asbestos and other toxic claim liabilities,
see Note 5.
See Note 6 for discussion relating to reinsurance.
NOTE 8: FINANCIAL INSTRUMENTS
Estimated fair value amounts of financial instruments have been determined using
available market information and appropriate valuation methodologies. However,
considerable judgment is required in developing the estimates of fair value.
Accordingly, these estimates are not necessarily indicative of the amounts that
could be realized in a current market exchange. The use of different market
assumptions and/or estimating methodologies may have a material effect on the
estimated fair value amounts.
For cash, short-term investments, accounts receivable, policy loans and other
liabilities, carrying value is a reasonable estimate of fair value.
Fair value amounts for fixed maturities and marketable equity securities are the
same as market prices for securities traded in the public marketplace or
analytically determined values for securities not publicly traded.
The fair values for mortgage and commercial loans have been estimated by
discounting the projected cash flows using the current rate at which loans would
be made to borrowers with similar credit ratings and for the same maturities.
Commercial loans are a component of finance receivables in the balance sheet.
Finance receivables also include lease receivables, which are exempt from fair
value disclosure requirements.
The fair values of investment contracts (funds held under deposit contracts)
with defined maturities are estimated by discounting projected cash flows using
rates that would be offered for similar contracts with the same remaining
maturities. For investment contracts with no defined maturities, fair values are
estimated to be the present surrender value.
The carrying values of SAFECO Corporation's and SAFECO Credit's commercial paper
as well as other debt that have variable interest rates are reasonable estimates
of fair value. For SAFECO Credit and other debt that have fixed interest rates,
fair values are estimated by discounting the projected cash flows using the rate
at which similar borrowings could currently be made. The fair values of the
7.875% notes, the 6.875% notes and the capital securities are estimated based on
quotes from broker/dealers who make markets in similar securities.
Other insurance-related financial instruments are exempt from fair value
disclosure requirements.
66 SAFECO 1998 ANNUAL REPORT
<PAGE> 42
Estimated fair values of financial instruments at December 31 are as follows:
<TABLE>
<CAPTION>
1998 1997
-------------------------- --------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
--------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Financial Assets:
Fixed Maturities Available-for-Sale $17,855.6 $17,855.6 $17,143.2 $17,143.2
Fixed Maturities Held-to-Maturity 2,720.9 3,259.2 2,708.6 3,159.9
Marketable Equity Securities 2,036.6 2,036.6 1,879.7 1,879.7
Mortgage Loans 541.5 562.0 499.0 524.0
Commercial Loans 776.8 782.0 634.9 637.0
Financial Liabilities:
Funds Held Under Deposit Contracts 12,718.1 13,031.0 11,877.9 12,347.0
Commercial Paper 732.7 732.7 812.8 812.8
Credit Company Borrowings 1,255.2 1,256.0 892.0 893.0
7.875% Notes Due 2005 200.0 217.0 200.0 213.0
6.875% Notes Due 2007 200.0 214.0 200.0 205.0
Other Debt 227.7 235.0 255.1 261.0
Capital Securities 842.1 912.0 841.7 881.0
</TABLE>
DERIVATIVE FINANCIAL INSTRUMENTS
SAFECO's consolidated investments in mortgage-backed securities of $3,746.4 at
market value at December 31, 1998 ($3,640.6 at December 31, 1997) are primarily
residential collateralized mortgage obligations and pass-throughs (CMOs). CMOs,
while technically defined as derivative instruments, are exempt from derivative
disclosure requirements. SAFECO's investment in CMOs comprised of the riskier,
more volatile type (e.g., principal only, inverse floaters, etc.) has been
intentionally limited to only a small amount -- less than 1% of total CMOs at
both December 31, 1998 and 1997.
SAFECO Credit provides loan and lease commitments at both variable and fixed
rates of interest. Fixed rate loan and lease commitments outstanding at December
31, 1998 and 1997 were approximately $50, or less than 1% of consolidated
investments. The majority of these commitments have original terms of up to 90
days and contracted fixed interest rates with a weighted average rate of 8% at
December 31, 1998. Exposure to credit risk relating to these commitments (i.e.,
risk that the borrower will be unable to perform its obligations) is mitigated
through credit review and approval controls. Because the majority of the fixed
rate commitments have terms of 90 days or less, the estimated fair values of
these commitments are not material.
In 1997 SAFECO Life Insurance Company introduced an equity-indexed annuity
product that credits the policyholder based on a percentage of the gain in the
S&P 500 index. S&P 500 call options are purchased to hedge the growth in
interest credited to the policyholder due to increases in the S&P 500 index.
Premiums paid to purchase the S&P 500 call options are capitalized and included
as assets on the balance sheet and expensed over the term of the option on a
straight line basis. Any gain or loss on the call options purchased is included
in income when realized. Futures combined with call options will be used to
hedge the 1999 exposure to changes in the S&P 500 index. On December 31, 1998,
futures contracts were entered into requiring an initial margin deposit of $4.9.
The balance included in assets for call options purchased was $24.0 at December
31, 1998 and $21.2 at December 31, 1997. The amount included as an asset on the
balance sheet for futures contracts at December 31, 1998 was $4.9. The estimated
fair values of call options purchased were not material at December 31, 1998 and
1997; thus, no additional disclosures are warranted.
SAFECO does not enter into financial instruments for trading or speculative
purposes. SAFECO's involvement in other investment-type derivatives is
intentionally of a limited nature. Such derivatives include currency-linked
bonds and equity-linked bonds. Individually, and in the aggregate, these
derivatives are not material and thus no additional disclosures are warranted.
SAFECO 1998 ANNUAL REPORT 67
<PAGE> 43
NOTE 8: FINANCIAL INSTRUMENTS (CONTINUED)
Interest rate swap agreements are entered into by SAFECO Corporation and SAFECO
Credit to reduce the impact of changes in interest rates on their variable rate
debt by converting variable rate interest payments to fixed rates. The interest
rate swap agreements provide only for the exchange of interest on the notional
amounts at the stated rates, with no multipliers or leverage. At December 31,
1998, interest rate swap agreements were outstanding with notional amounts of
$799.0, replacing variable rates with fixed rates with a weighted average of
5.9%. Maturities of these agreements range from February 1999 to December 2007.
At December 31, 1997, interest rate swap agreements were outstanding with
notional amounts of $659.4 replacing variable rates with fixed rates with a
weighted average of 6.0%. There were no swap terminations in 1998, 1997 or 1996.
The net interest accrued under these agreements is recorded as an adjustment to
interest expense. Exposure to credit risk relating to interest rate swaps is the
risk that the counterparty will be unable to perform its obligations. This risk
is mitigated through credit review, approval controls and by entering into
agreements with only highly rated counterparties. The estimated fair value of
interest rate swaps was not material at December 31, 1998 or 1997; thus, no
additional disclosures are warranted.
NOTE 9: COMMON STOCK
Changes in common stock outstanding for the last three years are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Number of Shares Outstanding at the Beginning of Year 141,151,093 126,308,237 125,978,742
Shares Reacquired (5,184,360) (233,542) (254,767)
Shares Issued for Stock Options and Rights 295,437 276,398 326,613
Secondary Offering -- 14,800,000 --
Shares Issued for Acquisition of Subsidiary -- -- 257,649
----------- ----------- -----------
Number of Shares Outstanding at the End of Year 136,262,170 141,151,093 126,308,237
=========== =========== ===========
</TABLE>
The secondary offering in 1997 relates to SAFECO's cash acquisition of American
States on October 1, 1997 (see Note 2). The 14,800,000 total shares issued under
the offering include 1,800,000 shares issued under the underwriters'
over-allotment option.
NOTE 10: CAPITAL SECURITIES
On July 15, 1997, SAFECO Capital Trust I ("Capital Trust"), a consolidated
wholly owned subsidiary of SAFECO Corporation issued $850.0 of 8.072%
Corporation-Obligated, Mandatorily Redeemable Capital Securities (the "Capital
Securities"). In connection with Capital Trust's issuance of the Capital
Securities and the related purchase by SAFECO Corporation of all of Capital
Trust's common securities (the "Common Securities"), SAFECO Corporation issued
to Capital Trust $876.3 principal amount of its 8.072% Junior Subordinated
Deferrable Interest Debentures, due July 15, 2037 (the "Subordinated
Debentures"). The sole assets of Capital Trust are and will be the Subordinated
Debentures and any interest due thereon. The interest and other payment dates on
the Subordinated Debentures correspond to the distribution and other payment
dates on the Capital Securities and the Common Securities. Distributions on the
Capital Securities and Common Securities are cumulative and payable
semi-annually in arrears. The Subordinated Debentures and the related income
effects are eliminated in SAFECO's financial statements.
For federal income tax purposes, the Subordinated Debentures are classified as
indebtedness. Accordingly interest on the Subordinated Debentures is deductible
at the federal statutory rate of 35%.
The Capital Securities are mandatorily redeemable on July 15, 2037, the same
date the Subordinated Debentures are due. The Capital Securities may be
redeemed, contemporaneously with the Subordinated Debentures, beginning in 2007
at a price of 104%, with the call premium graded down to zero in 2017. SAFECO
Corporation's obligations under the Subordinated Debentures and related
agreements, taken together, constitute a full and unconditional guarantee of
payments due on the Capital Securities.
SAFECO Corporation has the right, at any time, to defer payments of interest on
the Subordinated Debentures for up to five years. Consequently, the
distributions on the Capital Securities and Common Securities would be deferred
(though such distributions would continue to accrue with interest thereon since
interest would accrue on the Subordinated Debentures during any such extended
interest payment period). In no case may the deferral of payments and
distributions extend beyond the stated maturity dates of the respective
securities. SAFECO Corporation cannot pay dividends on its common stock during
such deferments.
68 SAFECO 1998 ANNUAL REPORT
<PAGE> 44
NOTE 11: STOCK INCENTIVE PLAN
The SAFECO Long-Term Incentive Plan of 1997 provides for the issuance of up to
6,000,000 shares of SAFECO Corporation common stock. Stock options, restricted
stock rights, performance stock rights and stock appreciation rights are
authorized under the Plan.
Stock options are granted at exercise prices not less than the fair market value
of the stock on the date of the grant. The terms and conditions upon which
options become exercisable may vary among grants; however, option rights expire
no later than ten years from the date of grant.
SAFECO continues to apply Accounting Principles Board (APB) Opinion 25 in
accounting for its stock options, as allowed under FASB Statement 123. Under APB
25, because the exercise price of SAFECO's employee stock options equals the
fair market value of the underlying stock on the date of grant, no compensation
expense is recognized.
Applying Statement 123's fair value method would have resulted in net annual
compensation expense of $2.9, $2.0 and $1.4 in 1998, 1997 and 1996,
respectively. Under Statement 123 only options granted beginning in 1995 are
required to be valued, therefore these pro forma expense amounts are not
representative of future amounts. Because of the immateriality of these expense
amounts, the pro forma effects on net income and earnings per share are not
shown. The weighted average fair value (at grant date) of options granted in
1998 was $12 per share and was estimated using the Black-Scholes option pricing
model with the following assumptions: risk free interest rate of 5.5%, dividend
yield of 2.9%, volatility factor of 24% and expected life of six years.
Changes in stock options for the three years ended December 31, 1998 are as
follows:
<TABLE>
<CAPTION>
Options Outstanding
-------------------
Weighted
Average Price
Shares Per Share
------ ---------
<S> <C> <C>
Balance December 31, 1995 1,803,633 $ 23.57
Granted 372,700 33.60
Exercised (317,890) 17.19
Canceled -- --
--------- ----------
Balance December 31, 1996 1,858,443 26.67
Granted 339,900 42.05
Exercised (270,939) 21.67
Canceled (21,950) 31.87
--------- ----------
Balance December 31, 1997 1,905,454 30.07
Granted 365,400 47.85
Exercised (289,387) 26.05
Canceled (34,150) 38.96
--------- ----------
Balance December 31, 1998 1,947,317 $ 33.85
========= ==========
Exercisable at
December 31, 1998 1,012,645 $ 27.93
========= ==========
</TABLE>
Exercise prices for options outstanding as of December 31, 1998 range from
$14.31 to $51.38 per share.
Restricted stock rights provide for the holder to receive a stated number of
share rights if the holder remains employed for the stated number of years.
Performance stock rights provide for the holder to receive a stated number of
share rights if the holder attains certain specified performance goals within a
stated performance cycle. Performance goals may include net income, return on
equity, stock price appreciation and/or other criteria. Performance stock rights
were first awarded in 1997.
Matured restricted stock rights and earned performance stock rights are issued
in stock and/or paid in cash at the option of the holder. During 1998, 1997 and
1996, $2.9, $2.8 and $2.0, respectively, were charged to operations for the
compensation element of restricted and performance stock rights and stock
appreciation rights.
Changes in restricted and performance stock rights for the three years ended
December 31, 1998 are as follows:
<TABLE>
<CAPTION>
SHARE RIGHTS
------------
<S> <C>
Balance December 31, 1995 95,576
Awarded 44,500
Matured (37,342)
Canceled --
--------
Balance December 31, 1996 102,734
Awarded 97,000
Matured (45,091)
Canceled --
-------
Balance December 31, 1997 154,643
Awarded 89,990
Matured (43,891)
Canceled (12,359)
--------
Balance December 31, 1998 188,383
========
</TABLE>
There were 5,412,385 shares of common stock reserved for future options and
rights at December 31, 1998.
SAFECO 1998 ANNUAL REPORT 69
<PAGE> 45
NOTE 12: STATUTORY INFORMATION
The insurance subsidiaries are required to file annual statements with state
regulatory authorities prepared on an accounting basis prescribed or permitted
by such authorities (i.e., statutory basis). Prescribed statutory accounting
practices include state laws, regulations and general administrative rules, as
well as a variety of publications of the National Association of Insurance
Commissioners (NAIC). Permitted statutory accounting practices encompass all
accounting practices not so prescribed.
Statutory net income differs from the net income reported in accordance with
generally accepted accounting principles primarily because policy acquisition
costs are expensed when incurred, life insurance reserves are based on different
assumptions and income tax expense reflects only taxes paid or currently
payable.
Statutory net income and equity are as follows:
<TABLE>
<CAPTION>
STATUTORY NET INCOME 1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Property and Casualty $497.4 $580.0 $317.7
Life 92.5 115.7 97.2
</TABLE>
<TABLE>
<CAPTION>
STATUTORY SHAREHOLDER'S EQUITY
DECEMBER 31 1998 1997
---- ----
<S> <C> <C>
Property and Casualty $ 3,294.4 $ 3,160.5
Life 646.5 739.3
</TABLE>
The statutory net income amounts for 1997 reported above include American States
for the entire calendar year.
SAFECO's insurance subsidiaries have received written approval from the
Washington State Insurance Department to treat certain loans to related SAFECO
subsidiaries (all made at market rates) as admitted assets. The allowance of
such loans has not materially enhanced surplus at December 31, 1998.
NOTE 13: DIVIDEND RESTRICTIONS
SAFECO's subsidiaries are restricted as to the amount of dividends they may pay
to their parent without regulatory or lender consent. The amount of subsidiary
retained earnings available for the payment of dividends to SAFECO Corporation
without prior regulatory or lender approval approximated $965.9 at December 31,
1998.
NOTE 14: EMPLOYEE BENEFIT PLANS
The Corporation sponsors profit-sharing bonus, defined contribution and defined
benefit plans covering substantially all employees. The defined contribution
plans include profit sharing retirement plans, a savings plan and a 401(k) plan.
A defined benefit plan covering substantially all American States employees
provides benefits based on total years of service and compensation. A cash
balance defined benefit plan covering substantially all other employees provides
benefits for each year of service after 1988, based on the employee's
compensation level plus a stipulated rate of return on the benefit balance. The
defined benefit plan covering the American States employees was merged with the
SAFECO Cash Balance Plan effective January 1, 1999. It is SAFECO's policy to
fund these defined benefit plans on a current basis to the full extent
deductible under federal income tax regulations.
The following table summarizes the funded status of the defined benefit plans:
<TABLE>
<CAPTION>
DECEMBER 31 1998 1997
------ ------
<S> <C> <C>
Change in Benefit Obligation:
Benefit Obligation at Beginning of Year $254.2 $ 48.7
Service and Interest Cost 34.5 16.4
Amendments and Changes
in Assumptions 4.3 (2.7)
Acquisition -- 197.0
Benefits Paid and Annuities Purchased (108.8) (5.2)
------ ------
Benefit Obligation at End of Year 184.2 254.2
------ ------
Change in Plan Assets:
Fair Value of Plan Assets
at Beginning of Year 257.5 38.7
Actual Return on Plan Assets 29.9 4.8
Acquisition -- 212.7
Company Contributions 6.9 6.5
Benefits Paid and Annuities Purchased (127.8) (5.2)
------ ------
Fair Value of Plan Assets at End of Year 166.5 257.5
------ ------
Funded Status of Plan (Underfunded) (17.7) 3.3
Unrecognized Net Actuarial Loss (Gain) (1.2) 4.4
------ ------
Prepaid (Accrued) Benefit Cost $(18.9) $ 7.7
====== ======
</TABLE>
Plan assumptions include a discount rate of 7.0% at December 31, 1998, a rate of
return on plan assets of 9.0% for 1998 and a rate of increase in compensation of
4.5% for 1998.
The annuity purchased in 1998 to settle the accrued benefits for certain
American States retirees and former employees was purchased from SAFECO Life
Insurance Company, a wholly-owned subsidiary of SAFECO. The cost of the annuity
was $117.9 and reduced the benefit obligation by $98.9.
The cost of the plans discussed above charged to income is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Profit-Sharing Bonus $22.7 $23.8 $21.4
Defined Contribution 27.1 31.3 30.5
Defined Benefit 11.9 7.9 6.5
----- ----- -----
Total $61.7 $63.0 $58.4
===== ===== =====
</TABLE>
70 SAFECO 1998 ANNUAL REPORT
<PAGE> 46
In addition, SAFECO provides certain healthcare and life insurance benefits
("other postretirement benefits") for retired employees. Substantially all
employees become eligible for these benefits if they reach retirement age while
working for SAFECO. The cost of these benefits is shared by SAFECO and the
retiree.
Net periodic other postretirement benefit costs were $9.1, $3.9 and $3.2 in
1998, 1997 and 1996, respectively.
The following table summarizes the funded status of other postretirement
benefits:
<TABLE>
<CAPTION>
DECEMBER 31 1998 1997
- - ----------- ------ ------
<S> <C> <C>
Change in Benefit Obligation:
Benefit Obligation at Beginning of Year $ 87.4 $ 25.3
Service and Interest Cost 9.2 4.3
Amendments and Changes in
Assumptions 23.4 4.1
Acquisition -- 55.2
Net Benefits Paid (3.7) (1.5)
------ ------
Benefit Obligation at End of Year 116.3 87.4
Fair Value of Plan Assets at End of Year 1.6 1.4
------ ------
Funded Status of Plan (Underfunded) (114.7) (86.0)
Unrecognized Net Actuarial Loss (Gain) 11.8 (2.3)
Unrecognized Prior Service Cost 9.3 --
------ ------
Prepaid (Accrued) Benefit Cost $(93.6) $(88.3)
====== ======
</TABLE>
A discount rate assumption of 7.0% was used at December 31, 1998 and 1997. The
accumulated postretirement benefit obligation at December 31, 1998 was
determined using a healthcare cost trend rate of 10% for 1999, gradually
decreasing to 6% in 2003 and remaining at that level thereafter. A
one-percentage point increase (decrease) in the assumed healthcare cost trend
rate for each year would increase (decrease) the accumulated other
postretirement benefit obligation as of December 31, 1998 by $15.3 ($12.4) and
the annual net periodic other postretirement benefit cost for the year then
ended by $1.4 ($1.2).
NOTE 15: REAL ESTATE COMPANIES' LEASED PROPERTIES
SAFECO is currently in the process of selling its real estate subsidiary, SAFECO
Properties, Inc. For more information see Note 2 on page 57.
The real estate companies receive rental income, principally from shopping
centers, under leases which expire at various dates through 2034. These leases
are accounted for as operating leases. Minimum future rentals from leases in
effect at December 31, 1998 are as follows:
<TABLE>
<CAPTION>
YEAR RECEIVABLE AMOUNT
- - --------------- ------
<S> <C>
1999 $54.0
2000 51.7
2001 50.3
2002 48.5
2003 45.0
2004 and Thereafter 270.5
------
Total $520.0
======
</TABLE>
These amounts do not include contingent rentals that are based on a percentage
of sales in excess of stipulated minimums or increases in the Consumer Price
Index. Contingent rentals included in revenue were $4.5, $4.4 and $4.7 in 1998,
1997 and 1996, respectively.
The real estate companies' investment in rental property and related accumulated
depreciation is as follows:
<TABLE>
<CAPTION>
DECEMBER 31 1998 1997
- - ----------- ---- ----
<S> <C> <C>
Shopping Centers $ 407.8 $ 372.3
Office and Industrial Space 105.6 84.1
Healthcare Facilities 22.0 50.9
Other 36.2 43.1
-------- --------
571.6 550.4
Less Accumulated Depreciation 99.4 93.9
-------- --------
Total $ 472.2 $ 456.5
======== ========
</TABLE>
SAFECO 1998 ANNUAL REPORT 71
<PAGE> 47
NOTE 16: SEGMENT DATA
<TABLE>
<CAPTION>
PRETAX
UNDERWRITING INVESTMENT INCOME REALIZED NET INCOME IDENTIFIABLE
REVENUES* GAIN(LOSS) INCOME *** (LOSS)** GAIN (LOSS) (LOSS) ASSETS***
-------- ---------- ------ ------ ----------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
1998
Property and Casualty:
Personal Lines:
Personal Auto $1,729.7 $ 11.5 $ 308.1
Homeowners 686.7 (56.4) 177.3
Other 165.2 14.8 53.9
Commercial Lines:
ASBI**** 911.6 (72.7) 440.9
SAFECO Commercial 640.9 (27.9) 245.5
Surety 58.5 19.2 29.1
Other 15.7 2.1 1.4
-------- -------
Total 4,208.3 $(109.4) $ 480.2 $ 327.8 $ 94.6 $372.4 12,569.5
-------- ======= -------- ------- ------ ---------
Life:
Retirement Services 25.2 411.7 12.8 4.3 7,195.1
Settlement Annuities 1.5 449.4 30.6 -- 5,972.4
Group 203.1 2.7 (14.1) -- 90.1
Individual 110.2 98.4 13.9 1.8 1,985.1
Other 13.4 78.8 75.9 12.2 1,110.9
-------- -------- ------- ------ ---------
Total 353.4 1,041.0 119.1 18.3 58.1 16,353.6
-------- -------- ------- ------ ---------
Real Estate 77.9 5.3 0.5 3.6 639.7
Credit 109.9 22.7 14.4 1,528.3
Asset Management 42.8 8.5 5.5 67.4
Other and Eliminations 46.3 (2.3) (115.2) (18.8) (102.1) (266.8)
-------- --------- ------- ------ ------ ---------
Consolidated Totals $4,838.6 $ 1,518.9 $ 368.2 $ 94.6 $351.9 $30,891.7
======== ========= ======= ====== ====== =========
1997
Property and Casualty:
Personal Lines:
Personal Auto $1,268.1 $ 30.7 $ 284.2
Homeowners 512.0 (2.0) 165.8
Other 139.0 20.6 52.0
Commercial Lines:
ASBI**** 227.3 8.5 405.7
SAFECO Commercial 603.6 (34.9) 296.0
Surety 54.4 12.8 26.4
Other 12.2 0.5 0.7
-------- -------
Total 2,816.6 $ 36.2 $ 327.0 $292.2 $132.8 $347.0 12,505.5
======== ======= --------- ------- ------ ---------
Life:
Retirement Services 18.1 355.6 27.0 1.6 6,833.1
Settlement Annuities 2.1 420.1 25.5 -- 5,611.7
Group 193.7 2.7 12.3 -- 83.3
Individual 64.7 63.1 6.6 (0.6) 1,765.4
Other 11.6 74.8 76.5 5.8 1,004.3
-------- --------- ------- ------ ---------
Total 290.2 916.3 147.9 6.8 102.0 15,297.8
-------- --------- ------- ------ ---------
Real Estate 75.1 9.6 (28.3) (12.2) 638.1
Credit 96.2 21.5 14.1 1,278.2
Asset Management 27.1 7.5 4.9 66.9
Other and Eliminations 40.0 1.4 (25.5) 8.1 (25.8) (318.7)
-------- --------- ------- ------ ------ ---------
Consolidated Totals $3,345.2 $ 1,244.7 $ 453.2 $119.4 $430.0 $29,467.8
======== ========= ======= ====== ====== =========
</TABLE>
72 SAFECO 1998 ANNUAL REPORT
<PAGE> 48
<TABLE>
<CAPTION>
PRETAX
UNDERWRITING INVESTMENT INCOME REALIZED IDENTIFIABLE
REVENUES* GAIN(LOSS) INCOME *** (LOSS)** GAIN (LOSS) NET INCOME ASSETS***
-------- ------------ ------ ------ ----------- ---------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
1996
Property and Casualty:
Personal Lines:
Personal Auto $1,073.6 $ 57.2 $ 191.1
Homeowners 435.0 (73.1) 116.7
Other 131.1 20.1 44.4
SAFECO Commercial 573.3 6.6 223.8
Surety 51.3 26.9 20.2
Other 11.1 0.7 --
-------- ------
Total 2,275.4 $ 38.4 $ 281.6 $320.0 $64.7 $313.4 6,244.0
-------- ====== ------- ------ ----- ---------
Life:
Retirement Services 9.5 341.4 28.6 3.0 5,179.6
Settlement Annuities 1.9 386.9 23.0 4.6 4,979.7
Group 198.8 2.8 12.6 -- 85.7
Individual 44.6 38.8 4.2 (2.4) 839.0
Other 11.1 66.8 68.3 5.3 981.1
-------- ------- ------ ----- ---------
Total 265.9 836.7 136.7 10.5 95.4 12,065.1
-------- ------- ------ ----- ---------
Real Estate 79.9 13.0 (2.6) 6.4 601.3
Credit 84.3 19.1 12.2 1,067.5
Asset Management 23.2 7.6 5.1 45.0
Other and Eliminations 29.9 (1.6) (8.0) 17.5 6.5 (105.2)
-------- -------- ------ ----- ------ ---------
Consolidated Totals $2,758.6 $1,116.7 $488.4 $90.1 $439.0 $19,917.7
======== ======== ====== ===== ====== =========
</TABLE>
The primary segments regularly reviewed by management are property and
casualty insurance, life insurance, real estate investment and management,
commercial lending and leasing (Credit) and asset management. SAFECO's two
largest segments - property and casualty insurance and life insurance - are
further disaggregated into major product lines.
* Revenues combined with Investment Income and Realized Gains equals Total
Revenue on the Statement of Consolidated Income.
** Earnings before realized gains (losses), distributions on capital
securities and income taxes. This is viewed by management as the key
measurement of segment profit or loss. For the property and casualty
product lines, underwriting gain (loss) is viewed by management as the key
measurement of product line profit or loss. Property and Casualty Pretax
Income amounts include goodwill amortization expense of $43.0 for 1998 and
$11.0 for 1997. The 1997 Property and Casualty amount includes nonrecurring
acquisition charges of $60.0 related to the acquisition of American States.
The 1998 Life amount excludes the write-off of $46.8 of deferred
acquisition costs.
*** Property and casualty companies' investments are available for payments of
claims and benefits for all product lines within the segments; therefore,
such investments and the related investment income and realized gains have
not been identified with specific segments. In the life companies, a major
portion of investment income, realized gains and assets is specifically
identifiable within an industry segment. The remainder of these amounts has
been allocated in proportion to the mean policy reserves and liabilities
identified with each segment.
**** ASBI is American States Business Insurance.
SAFECO 1998 ANNUAL REPORT 73
<PAGE> 49
NOTE 17: INCOME TAXES
SAFECO uses the liability method of accounting for income taxes under which
deferred tax assets and liabilities are determined based on the differences
between their financial reporting and their tax bases and are measured using the
enacted tax rates.
Differences between income tax computed by applying the U.S. Federal income tax
rate of 35% to income before income taxes and the consolidated provision for
income taxes are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Computed "Expected" Tax Expense $ 162.0 $ 200.4 $ 202.5
Tax-Exempt Municipal Bond Income (103.0) (73.2) (66.2)
Dividends Received Deduction (12.6) (10.5) (9.4)
Proration Adjustment 14.7 10.3 8.7
Other 4.9 0.8 3.9
-------- -------- --------
Consolidated Provision for Income Taxes $ 66.0 $ 127.8 $ 139.5
======== ======== ========
</TABLE>
The tax effects of temporary differences which give rise to the deferred tax
assets and deferred tax liabilities at December 31, 1998, 1997 and 1996 are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31 1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Deferred Tax Assets:
Discounting of Loss and Adjustment Expense Reserves $ 265.5 $ 250.0 $ 122.7
Unearned Premium Liability 117.4 113.9 62.3
Adjustment to Life Policy Liabilities 58.7 72.1 34.8
Capitalization of Life Policy Acquisition Costs 54.6 49.2 33.4
Postretirement Benefits 32.8 30.9 10.8
Nondeductible Accruals 46.0 58.2 8.6
Alternative Minimum Tax Credit Carryforward 33.0 -- --
Other 45.6 32.9 39.8
-------- -------- --------
Total Deferred Tax Assets 653.6 607.2 312.4
-------- -------- --------
Deferred Tax Liabilities:
Deferred Policy Acquisition Costs 199.6 203.5 145.3
Bond Discount Accrual 38.2 36.2 27.2
Accelerated Depreciation 76.1 81.4 75.7
Real Estate Development Expenses Capitalized 5.4 11.9 11.6
Unrealized Appreciation of Investment Securities
(Net of Deferred Policy Acquisition Costs Valuation
Allowance: 1998 - $17.2; 1997 - $12.8; 1996 - $6.7) 769.9 672.7 454.4
Other 57.0 48.4 16.0
-------- -------- --------
Total Deferred Tax Liabilities 1,146.2 1,054.1 730.2
-------- -------- --------
Net Deferred Tax Liability $ 492.6 $ 446.9 $ 417.8
======== ======== ========
</TABLE>
The following table reconciles the deferred tax expense (benefit) in the
Statement of Consolidated Income to the net change in the deferred tax liability
in the Consolidated Balance Sheet:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Deferred Tax Expense (Benefit) $ (38.6) $ 20.7 $ 6.0
Net Deferred Tax Assets Acquired in Acquisitions (12.9) (209.9) --
Deferred Tax Changes Reported in Shareholders' Equity:
Increase (Decrease) in Liability Related to Unrealized
Appreciation (Depreciation) of Investment Securities,
Net of Deferred Policy Acquisition Costs Valuation Allowance 97.2 218.3 (87.1)
-------- -------- --------
Increase (Decrease) in Net Deferred Tax Liability $ 45.7 $ 29.1 $ (81.1)
======== ======== ========
</TABLE>
74 SAFECO 1998 ANNUAL REPORT
<PAGE> 50
NOTE 18: INTERIM FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER ANNUAL
------- ------- ------- ------- ------
<S> <C> <C> <C> <C> <C>
Revenues:
1998 $ 1,585.7 $ 1,600.1 $ 1,626.7 $ 1,639.6 $ 6,452.1
1997 1,015.0 1,031.3 1,111.9 1,551.1 4,709.3
1996 977.6 976.0 992.5 1,019.3 3,965.4
Income Before Realized Gain:*
1998 $ 93.2 $ 58.2 $ 63.7 $ 74.9 $ 290.0
1997 96.8 104.5 79.7 70.3 351.3
1996 89.2 92.9 105.2 92.9 380.2
Realized Gain:**
1998 $ 18.4 $ 11.0 $ 11.2 $ 21.3 $ 61.9
1997 14.8 12.7 42.0 9.2 78.7
1996 21.5 13.1 10.8 13.4 58.8
Net Income:
1998 $ 111.6 $ 69.2 $ 74.9 $ 96.2 $ 351.9
1997 111.6 117.2 121.7 79.5 430.0
1996 110.7 106.0 116.0 106.3 439.0
(Per Share)***
Income Before Realized Gain:*
1998 $ .66 $ .41 $ .46 $ .55 $ 2.07
1997 .77 .82 .63 .50 2.71
1996 .70 .74 .83 .74 3.01
Realized Gain:**
1998 $ .13 $ .08 $ .08 $ .15 $ .44
1997 .11 .10 .33 .07 .60
1996 .17 .10 .09 .10 .46
Net Income:
1998 $ .79 $ .49 $ .54 $ .70 $ 2.51
1997 .88 .92 .96 .57 3.31
1996 .87 .84 .92 .84 3.47
Dividends Paid:
1998 $ .32 $ .32 $ .35 $ .35 $ 1.34
1997 .29 .29 .32 .32 1.22
1996 .265 .265 .29 .29 1.11
Market Price Range:****
1998 - High $ 55.00 $ 54.81 $ 48.75 $ 45.81 $ 55.00
- Low 46.25 43.13 40.63 39.88 39.88
1997 - High 43.06 48.91 54.25 54.47 54.47
- Low 36.75 38.75 45.81 46.06 36.75
</TABLE>
* Income amounts are after distributions on capital securities and are net of
income tax.
** Amounts are net of income tax.
*** Income per share amounts are on a diluted basis.
**** SAFECO Corporation common stock trades on The Nasdaq Stock Market under the
symbol SAFC.
The price range represents the high and low closing sales price.
Third quarter 1998 income before realized gain and net income include the
write-off of Life Company deferred acquisition costs of $46.8 ($30.4 after
tax, $0.22 per share).
Fourth quarter 1997 income before realized gain and net income include
nonrecurring acquisition charges of $60.0 ($39.0 after tax, $0.28 per
share).
SAFECO 1998 ANNUAL REPORT 75
<PAGE> 51
SUMMARY OF GROWTH
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994 1993
--------- --------- --------- --------- --------- ---------
(In Millions Except Per Share Amounts)
INCOME SUMMARY
<S> <C> <C> <C> <C> <C> <C>
Income (Loss), Net of Income Taxes, Before Realized
Gain:
Property and Casualty $ 310.2 $ 260.2 $ 270.6 $ 256.4 $ 192.7 $ 217.2
Life 46.4 97.0 88.8 89.0 85.0 76.9
Real Estate 3.4 6.2 8.4 5.9 6.6 6.1
Credit 14.4 14.1 12.2 8.9 7.4 6.4
Asset Management 5.5 4.9 5.1 4.7 4.1 4.3
Corporate (45.0) (16.3) (4.9) (7.5) (7.3) (3.9)
--------- --------- --------- --------- --------- ---------
Total 334.9 366.1 380.2 357.4 288.5 307.0
Realized Gain, Net of Income Taxes 61.9 78.7 58.8 41.6 25.9 118.9
--------- --------- --------- --------- --------- ---------
Income Before Distributions on Capital Securities 396.8 444.8 439.0 399.0 314.4 425.9
Distributions on Capital Securities, Net of Tax (44.9) (14.8) -- -- -- --
Cumulative Effect of Accounting Changes -- -- -- -- -- 2.9
--------- --------- --------- --------- --------- ---------
Net Income $ 351.9 $ 430.0 $ 439.0 $ 399.0 $ 314.4 $ 428.8
========= ========= ========= ========= ========= =========
Statistics Per Share of Common Stock*
Net Income - Basic:
Income Before Realized Gain** $ 2.08 $ 2.72 $ 3.02 $ 2.84 $ 2.29 $ 2.44
Realized Gain .44 .61 .46 .33 .21 .95
Cumulative Effect of Accounting Changes -- -- -- -- -- .02
Net Income 2.52 3.33 3.48 3.17 2.50 3.41
Average Number of Shares 139.4 129.2 126.1 126.0 125.9 125.8
Net Income - Diluted:
Income Before Realized Gain** 2.07 2.71 3.01 2.83 2.28 2.43
Realized Gain .44 .60 .46 .33 .21 .94
Cumulative Effect of Accounting Changes -- -- -- -- -- .02
Net Income 2.51 3.31 3.47 3.16 2.49 3.39
Average Number of Shares 139.9 129.8 126.5 126.4 126.4 126.5
Dividends Paid 1.34 1.22 1.11 1.02 .94 .86
Market Price:
High 55.00 54.47 41.63 37.63 29.81 33.25
Low 39.88 36.75 30.88 25.25 23.69 27.00
Close 42.94 48.75 39.44 34.50 26.00 27.50
Shareholders' Equity:
Book Value 40.92 38.69 32.58 31.61 22.47 22.04
With Securities at Market Value, Net of Tax 43.49 40.77 33.52 33.39 21.93 28.47
Revenues (Excluding Realized Gain)
Insurance:
Property and Casualty (Gross premiums written) $ 4,441.8 $ 2,987.4 $ 2,463.5 $ 2,366.9 $ 2,278.0 $ 2,134.5
Life 353.4 290.2 265.9 261.6 276.8 306.0
Net Investment Income (Excluding realized gain or
loss):
Property and Casualty 480.2 327.0 281.6 291.5 283.5 277.6
Life 1,041.0 916.3 836.7 778.2 706.2 668.2
Other (2.3) 1.4 (1.6) 5.6 1.9 6.0
Real Estate (Excluding realized gain or loss) 77.9 75.1 79.9 75.0 107.3 78.3
Credit (Including affiliate loans) 109.9 96.2 84.3 71.8 58.2 54.0
Asset Management 42.8 27.1 23.2 18.5 15.1 13.2
Talbot Financial 57.6 49.7 38.5 32.1 25.5 --
--------- --------- --------- --------- --------- ---------
Total $ 6,602.3 $ 4,770.4 $ 4,072.0 $ 3,901.2 $ 3,752.5 $ 3,537.8
========= ========= ========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
1992 1991 1990 1989 1988
--------- --------- --------- --------- ---------
(In Millions Except Per Share Amounts)
INCOME SUMMARY
<S> <C> <C> <C> <C> <C>
Income (Loss), Net of Income Taxes, Before Realized
Gain:
Property and Casualty $ 187.1 $ 145.4 $ 183.7 $ 188.9 $ 191.4
Life 75.6 79.7 77.6 70.9 44.7
Real Estate 6.0 5.9 6.1 0.7 (8.1)
Credit 6.1 6.4 4.5 4.0 3.5
Asset Management 4.3 3.4 3.0 2.5 2.0
Corporate (7.6) (3.9) (3.2) (3.3) 1.3
--------- --------- --------- --------- ---------
Total 271.5 236.9 271.7 263.7 234.8
Realized Gain, Net of Income Taxes 39.8 22.7 6.7 36.5 33.8
--------- --------- --------- --------- ---------
Income Before Distributions on Capital Securities 311.3 259.6 278.4 300.2 268.6
Distributions on Capital Securities, Net of Tax -- -- -- -- --
Cumulative Effect of Accounting Changes -- -- -- -- --
--------- --------- --------- --------- ---------
Net Income $ 311.3 $ 259.6 $ 278.4 $ 300.2 $ 268.6
========= ========= ========= ========= =========
Statistics Per Share of Common Stock*
Net Income - Basic:
Income Before Realized Gain** $ 2.17 $ 1.89 $ 2.16 $ 2.09 $ 1.79
Realized Gain .31 .18 .05 .29 .26
Cumulative Effect of Accounting Changes -- -- -- -- --
Net Income 2.48 2.07 2.21 2.38 2.05
Average Number of Shares 125.6 125.5 126.2 126.4 130.9
Net Income - Diluted:
Income Before Realized Gain** 2.15 1.87 2.14 2.07 1.79
Realized Gain .31 .18 .05 .29 .25
Cumulative Effect of Accounting Changes -- -- -- -- --
Net Income 2.46 2.05 2.19 2.36 2.04
Average Number of Shares 126.5 126.5 126.9 127.4 131.5
Dividends Paid .78 .71 .64 .57 .51
Market Price:
High 29.56 24.38 21.06 19.63 14.75
Low 21.19 15.63 12.69 11.63 11.50
Close 28.63 24.38 16.44 17.81 11.81
Shareholders' Equity:
Book Value 19.49 17.70 15.75 14.63 12.44
With Securities at Market Value, Net of Tax 23.92 21.92 16.57 16.57 13.54
Revenues (Excluding Realized Gain)
Insurance:
Property and Casualty (Gross premiums written) $ 1,937.1 $ 1,830.2 $ 1,792.8 $ 1,696.9 $ 1,627.9
Life 328.5 332.7 312.0 274.3 265.0
Net Investment Income (Excluding realized gain or
loss):
Property and Casualty 280.8 286.1 283.3 263.4 220.5
Life 623.6 557.4 476.2 391.9 296.2
Other (1.4) 3.2 5.3 14.7 20.2
Real Estate (Excluding realized gain or loss) 187.2 274.4 254.7 246.2 223.2
Credit (Including affiliate loans) 51.3 54.4 45.2 38.7 34.3
Asset Management 13.1 10.8 9.0 8.3 7.2
Talbot Financial -- -- -- -- --
--------- --------- --------- --------- ---------
Total $ 3,420.2 $ 3,349.2 $ 3,178.5 $ 2,934.4 $ 2,694.5
========= ========= ========= ========= =========
</TABLE>
* Share amounts are adjusted for stock splits.
** Net income per share amounts are after distributions on capital securities.
76 SAFECO 1998 ANNUAL REPORT
<PAGE> 52
SUMMARY OF GROWTH (CONTINUED)
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(In Millions Except Ratios)
<S> <C> <C> <C> <C> <C>
PREMIUMS BY MAJOR CLASSES OF
PROPERTY AND CASUALTY INSURANCE
Personal Auto $ 1,745.8 $ 1,295.2 $ 1,087.0 $ 1,043.6 $ 1,013.4
Homeowners 717.4 547.8 469.1 440.2 403.7
Other Personal 217.2 182.0 170.0 163.1 144.6
---------- ---------- ---------- ---------- ----------
Total Personal 2,680.4 2,025.0 1,726.1 1,646.9 1,561.7
SAFECO Commercial 687.2 642.1 607.3 588.1 591.9
American States Business Insurance 952.3 195.7 -- -- --
Surety 107.2 99.5 103.2 100.1 90.2
Other 14.7 25.1 26.9 31.8 34.2
---------- ---------- ---------- ---------- ----------
Gross Premiums Written 4,441.8 2,987.4 2,463.5 2,366.9 2,278.0
Ceded Reinsurance Premiums 185.2 159.2 150.4 159.9 174.5
---------- ---------- ---------- ---------- ----------
Net Premiums Written $ 4,256.6 $ 2,828.2 $ 2,313.1 $ 2,207.0 $ 2,103.5
========== ========== ========== ========== ==========
OPERATING RATIOS OF PROPERTY
AND CASUALTY INSURANCE
Ratios to Earned Premiums:*
Losses 61.34% 58.40% 59.09% 60.04% 64.70%
Adjustment Expense 11.45 11.18 10.37 10.58 9.72
Underwriting Expenses 29.52 28.47 28.14 28.39 28.24
Dividends to Policyholders 0.29 .66 .71 .70 1.11
---------- ---------- ---------- ---------- ----------
Combined Losses and Expenses 102.60% 98.71% 98.31% 99.71% 103.77%
========== ========== ========== ========== ==========
Premiums Written to Policyholders' Surplus 1.3:1 1.3:1 1.1:1 1.2:1 1.4:1
PRETAX INCOME (LOSS) BEFORE REALIZED GAIN
Property and Casualty:
Underwriting $ (109.4) $ 36.2 $ 38.4 $ 6.3 $ (77.4)
Nonrecurring Acquisition Charges -- (60.0) -- -- --
Investment 480.2 327.0 281.6 291.5 283.5
Goodwill Amortization (43.0) (11.0) -- -- --
Proposition 103 Settlement -- -- -- -- --
Life 119.1 147.9 136.7 135.6 131.0
Write-Off of Deferred Acquisition Costs (46.8) -- -- -- --
Real Estate 5.3 9.6 13.0 9.1 10.2
Credit 22.7 21.5 19.1 13.3 10.8
Asset Management 8.5 7.5 7.6 6.9 6.4
Corporate (68.4) (25.5) (8.0) (13.2) (13.8)
---------- ---------- ---------- ---------- ----------
Total $ 368.2 $ 453.2 $ 488.4 $ 449.5 $ 350.7
========== ========== ========== ========== ==========
SHAREHOLDERS' EQUITY
Book Value $ 5,575.8 $ 5,461.7 $ 4,115.3 $ 3,982.6 $ 2,829.5
With Securities at Market Value, Net of Tax 5,925.7 5,755.1 4,233.4 4,206.2 2,761.3
Long-Term Debt from Operations (Excludes Capital
Securities) 625.6 632.9 453.9 503.6 534.2
Total Assets 30,891.7 29,467.8 19,917.7 18,767.8 15,901.7
</TABLE>
<TABLE>
<CAPTION>
1993 1992 1991 1990 1989
---- ---- ---- ---- ----
(In Millions Except Ratios)
<S> <C> <C> <C> <C> <C>
PREMIUMS BY MAJOR CLASSES OF
PROPERTY AND CASUALTY INSURANCE
Personal Auto $ 977.1 $ 907.0 $ 864.1 $ 822.2 $ 742.3
Homeowners 362.4 310.8 294.2 274.5 255.4
Other Personal 126.4 109.1 92.6 93.0 83.3
---------- ---------- ---------- ---------- ----------
Total Personal 1,465.9 1,326.9 1,250.9 1,189.7 1,081.0
SAFECO Commercial 544.2 492.0 452.6 473.0 489.5
American States Business Insurance -- -- -- -- --
Surety 84.2 79.7 79.1 75.9 77.2
Other 40.2 38.5 47.6 54.2 49.2
---------- ---------- ---------- ---------- ----------
Gross Premiums Written 2,134.5 1,937.1 1,830.2 1,792.8 1,696.9
Ceded Reinsurance Premiums 134.3 116.7 200.5 104.8 101.4
---------- ---------- ---------- ---------- ----------
Net Premiums Written $ 2,000.2 $ 1,820.4 $ 1,629.7 $ 1,688.0 $ 1,595.5
========== ========== ========== ========== ==========
OPERATING RATIOS OF PROPERTY
AND CASUALTY INSURANCE
Ratios to Earned Premiums:*
Losses 60.21% 63.93% 67.81% 65.50% 63.13%
Adjustment Expense 9.78 10.55 10.72 11.67 9.99
Underwriting Expenses 28.43 28.72 29.33 29.24 29.31
Dividends to Policyholders 1.07 .91 .76 .75 .88
---------- ---------- ---------- ---------- ----------
Combined Losses and Expenses 99.49% 104.11% 108.62% 107.16% 103.31%
========== ========== ========== ========== ==========
Premiums Written to Policyholders' Surplus 1.3:1 1.3:1 1.4:1 1.6:1 1.5:1
PRETAX INCOME (LOSS) BEFORE REALIZED GAIN
Property and Casualty:
Underwriting $ 9.9 $ (72.0) $ (141.1) $ (119.2) $ (52.2)
Nonrecurring Acquisition Charges -- -- -- -- --
Investment 277.6 280.8 286.1 283.3 263.4
Goodwill Amortization -- -- -- -- --
Proposition 103 Settlement (40.0) -- -- -- --
Life 125.3 123.6 124.1 118.5 106.9
Write-Off of Deferred Acquisition Costs -- -- -- -- --
Real Estate 10.1 8.4 8.5 9.1 0.9
Credit 10.2 9.0 9.5 6.8 6.0
Asset Management 6.5 6.5 5.2 4.6 3.9
Corporate (10.3) (13.6) (9.7) (8.8) (8.8)
---------- ---------- ---------- ---------- ----------
Total $ 389.3 $ 342.7 $ 282.6 $ 294.3 $ 320.1
========== ========== ========== ========== ==========
SHAREHOLDERS' EQUITY
Book Value $ 2,774.4 $ 2,448.1 $ 2,221.1 $ 1,975.7 $ 1,850.7
With Securities at Market Value, Net of Tax 3,583.5 3,005.4 2,750.5 2,078.7 2,096.0
Long-Term Debt from Operations (Excludes Capital
Securities) 600.2 504.6 523.6 451.3 512.9
Total Assets 14,807.3 13,391.1 12,113.9 10,683.5 9,415.9
</TABLE>
<TABLE>
<CAPTION>
1988
----
(In Millions Except Ratios)
<S> <C>
PREMIUMS BY MAJOR CLASSES OF
PROPERTY AND CASUALTY INSURANCE
Personal Auto $ 691.5
Homeowners 252.2
Other Personal 79.7
----------
Total Personal 1,023.4
SAFECO Commercial 493.3
American States Business Insurance --
Surety 69.8
Other 41.4
----------
Gross Premiums Written 1,627.9
Ceded Reinsurance Premiums 110.0
----------
Net Premiums Written $ 1,517.9
==========
OPERATING RATIOS OF PROPERTY
AND CASUALTY INSURANCE
Ratios to Earned Premiums:*
Losses 58.05%
Adjustment Expense 11.94
Underwriting Expenses 29.38
Dividends to Policyholders .97
----------
Combined Losses and Expenses 100.34%
==========
Premiums Written to Policyholders' Surplus 1.8:1
PRETAX INCOME (LOSS) BEFORE REALIZED GAIN
Property and Casualty:
Underwriting $ (5.1)
Nonrecurring Acquisition Charges --
Investment 220.5
Goodwill Amortization --
Proposition 103 Settlement --
Life 68.0
Write-Off of Deferred Acquisition Costs --
Real Estate (12.5)
Credit 5.1
Asset Management 3.1
Corporate (2.5)
----------
Total $ 276.6
==========
SHAREHOLDERS' EQUITY
Book Value $ 1,570.4
With Securities at Market Value, Net of Tax 1,709.7
Long-Term Debt from Operations (Excludes Capital
Securities) 541.0
Total Assets 7,869.2
</TABLE>
*Ratios exclude goodwill amortization, nonrecurring acquisition charges in
1997 and Proposition 103 settlement in 1993.
78 SAFECO 1998 ANNUAL REPORT
<PAGE> 1
SAFECO CORPORATION Organization Chart F-15
December 31, 1998 Exhibit 21
- - --------------------------------------------------------------------------------
SAFECO Corporation (Washington)
(ownership percentages are 100% except where indicated)
1. SAFECO Insurance Company of America (WA)
A. SAFECO Management Corporation (NY)
B. SAFECO Surplus Lines Insurance Company (WA)
2. General Insurance Company of America (WA)
3. First National Insurance Company of America (WA)
4. American States Financial Corporation (IN)
A. American States Insurance Company (IN)
a) American Economy Insurance Company (IN)
i) American States Insurance Company of Texas (TX)
b) American States Preferred Insurance Company (IN)
c) American States Life Insurance Company (IN)
d) Insurance Company of Illinois (IL)
e) City Insurance Agency, Inc. (IN)
5. SAFECO National Insurance Company (MO)
6. SAFECO Insurance Company of Illinois (IL)
7. SAFECO Life Insurance Company (WA)
A. SAFECO National Life Insurance Company (WA)
B. First SAFECO National Life Insurance Company of New York (NY)
C. Empire Life Insurance Company (WA)
8. SAFECO Assigned Benefits Service Company (WA)
9. SAFECO Administrative Services, Inc. (WA)
A. Employee Benefit Claims of Wisconsin, Inc. (WI)
B. Wisconsin Pension and Group Services, Inc. (WI)
10. SAFECO Credit Company, Inc. (WA)
<PAGE> 2
F-15
SAFECO CORPORATION Organization Chart Exhibit 21
December 31, 1998 Continued
- - --------------------------------------------------------------------------------
11. SAFECO Properties, Inc. (WA)
A. SAFECARE Company, Inc. (WA)
a) RIA Development, Inc. (WA)
b) S.C. Bellevue, Inc. (WA)
c) S.C. Marysville, Inc. (WA)
B. Winmar Company, Inc. (WA)
a) Capitol Court Corporation (WI)
b) Kitsap Mall, Inc. (WA)
c) SCIT, Inc. (MA)
d) Winmar Cascade, Inc. (WA)
e) Winmar Metro, Inc. (WA)
f) Winmar Northwest, Inc. (WA)
g) Winmar Oregon, Inc. (OR)
i) North Coast Management, Inc. (OR)
ii) Pacific Surfside Corporation (OR)
iii) Washington Square, Inc. (WA)
iv) Winmar of Jantzen Beach, Inc. (OR)
v) W-P Development, Inc. (OR)
h) Winmar Redmond, Inc. (WA)
i) Winmar of Kitsap, Inc. (WA)
j) Winmar of Texas, Inc. (TX)
k) Winmar of the Desert, Inc. (CA)
12. SAFECO Asset Management Company (WA)
13. SAFECO Securities, Inc. (WA)
14. SAFECO Services Corporation (WA)
15. SAFECO Trust Company (WA)
<PAGE> 3
F-15
SAFECO CORPORATION Organization Chart Exhibit 21
December 31, 1998 Continued
- - --------------------------------------------------------------------------------
16. General America Corporation (WA)
A. F.B. Beattie & Co., Inc. (WA)
a) F.B. Beattie Insurance Services, Inc. (CA)
B. General America Corporation of Texas (TX)-(Attorney-in-fact)
for:
a) American States Lloyds Insurance Company (TX)
b) SAFECO Lloyds Insurance Company (TX)
C. Goldware & Taylor Insurance Services (CA)
D. R.F. Bailey (Underwriting Agencies), LTD. (UK)
E. Talbot Financial Corporation (WA)
a) Talbot Agency, Inc. (NM)
i) BHJ, Inc. (WY)
ii) Boney Moore and Talbot, Inc. (NM)
iii) Glacier Insurance, Inc. (MT)
iv) J. Dorr Forbes, Inc. (WA)
v) Hemet Insurance Service (CA)
vi) Newport Financial Corporation (IL)
vii) SAFECO Investment Services, Inc. (WA)
viii) Talbot Agency of California, Inc. (CA)
ix) Talbot Agency of Texas, Inc. (TX)
x) Talbot Financial Services of Hawaii, Inc. (HI)
xi) Tandy & Wood, Inc. (ID)
F. SAFECO Select Insurance Services, Inc. (CA)
17. SAFECO UK, Limited
18. SAFECO Capital Trust I (WA)
Note: Certain inactive companies are not shown.
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND THE STATEMENT OF CONSOLIDATED INCOME AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<DEBT-HELD-FOR-SALE> 17,856
<DEBT-CARRYING-VALUE> 2,721
<DEBT-MARKET-VALUE> 3,259
<EQUITIES> 2,037
<MORTGAGE> 542
<REAL-ESTATE> 601
<TOTAL-INVEST> 24,160
<CASH> 75
<RECOVER-REINSURE> 317
<DEFERRED-ACQUISITION> 521
<TOTAL-ASSETS> 30,892
<POLICY-LOSSES> 4,263
<UNEARNED-PREMIUMS> 1,751
<POLICY-OTHER> 277
<POLICY-HOLDER-FUNDS> 12,718
<NOTES-PAYABLE> 2,616
842
0
<COMMON> 885
<OTHER-SE> 4,691
<TOTAL-LIABILITY-AND-EQUITY> 30,892
4,562
<INVESTMENT-INCOME> 1,519
<INVESTMENT-GAINS> 95
<OTHER-INCOME> 277
<BENEFITS> 4,109
<UNDERWRITING-AMORTIZATION> 784
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 463
<INCOME-TAX> 66
<INCOME-CONTINUING> 397
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 352
<EPS-PRIMARY> 2.52
<EPS-DILUTED> 2.51
<RESERVE-OPEN> 4,082
<PROVISION-CURRENT> 3,163
<PROVISION-PRIOR> (100)
<PAYMENTS-CURRENT> 1,836
<PAYMENTS-PRIOR> 1,343
<RESERVE-CLOSE> 3,966
<CUMULATIVE-DEFICIENCY> (100)
</TABLE>
