<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the Quarter Ended SEPTEMBER 30, 1997
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 from _______ to __________
Commission file number 0-20766
-------------------------------------------------------
HCC INSURANCE HOLDINGS, INC.
- ------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 76-0336636
- ------------------------------------------------------------------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
13403 NORTHWEST FREEWAY, HOUSTON, TEXAS 77040-6094
- ------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(713) 690-7300
- ------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to
such filing requirements for the past 90 days.
Yes __X__ No _____
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
On November 7, 1997, there were 46,171,658 shares of Common Stock, $1 par
value issued and outstanding.
<PAGE>
HCC INSURANCE HOLDINGS, INC.
INDEX
PAGE NO.
Part I. FINANCIAL INFORMATION --------
Item 1. Condensed Consolidated Balance Sheets
September 30, 1997 and December 31, 1996 3
Condensed Consolidated Statements of Earnings
Nine months Ended September 30, 1997 and
Nine months Ended September 30, 1996 4
Condensed Consolidated Statements of Earnings
Three Months Ended September 30, 1997 and
Three Months Ended September 30, 1996 5
Condensed Consolidated Statements of Changes in
Shareholders' Equity Nine months Ended
September 30, 1997 and Year Ended December 31, 1996 6
Condensed Consolidated Statements of Cash Flows
Nine months Ended September 30, 1997 and
Nine months Ended September 30, 1996 8
Notes to Condensed Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis 15
Part II. OTHER INFORMATION 18
2
<PAGE>
HCC Insurance Holdings, Inc. and Subsidiaries
---------
Condensed Consolidated Balance Sheets
(Unaudited)
---------
<TABLE>
September 30, 1997 December 31, 1996
------------------ -----------------
<S> <C> <C>
ASSETS
Investments available for sale:
Fixed income securities, at market
(cost: 1997 $379,451,000, 1996 $371,844,000) $ 390,199,000 $377,555,000
Marketable equity securities, at market
(cost: 1997 $10,388,000, 1996 $13,434,000) 10,093,000 13,250,000
-------------- ------------
Total investments 400,292,000 390,805,000
Cash and short-term investments:
Cash 4,827,000 9,171,000
Short-term investments, at cost, which approximates market 132,629,000 78,693,000
-------------- ------------
Total cash and short-term investments 137,456,000 87,864,000
Restricted cash and cash investments 53,213,000 44,363,000
Reinsurance recoverables 185,249,000 132,684,000
Premium, claims and other receivables 229,331,000 168,717,000
Ceded unearned premium 91,102,000 71,758,000
Deferred policy acquisition costs 24,084,000 24,166,000
Property and equipment, net 18,274,000 17,021,000
Deferred income tax 7,234,000 10,871,000
Other assets, net 38,344,000 15,795,000
-------------- ------------
TOTAL ASSETS $1,184,579,000 $964,044,000
-------------- ------------
-------------- ------------
LIABILITIES
Loss and loss adjustment expense payable $ 267,488,000 $229,049,000
Reinsurance balances payable 66,503,000 45,449,000
Unearned premium 158,057,000 151,959,000
Deferred ceding commissions 21,815,000 16,670,000
Premium and claims payable 214,037,000 123,118,000
Notes payable 82,334,000 73,167,000
Accounts payable and accrued liabilities 16,845,000 23,370,000
-------------- ------------
Total liabilities 827,079,000 662,782,000
SHAREHOLDERS' EQUITY
Common Stock, $1.00 par value; 100,000,000 shares authorized,
(issued and outstanding: 1997 46,007,058 shares;
1996 47,416,643 shares) 46,007,000 47,417,000
Additional paid-in capital 153,974,000 139,971,000
Retained earnings 150,881,000 167,012,000
Unrealized investment gain, net 6,834,000 3,623,000
Foreign currency translation adjustment (196,000) (91,000)
Treasury stock (1996 3,301,741 shares) - (56,670,000)
-------------- ------------
Total shareholders' equity 357,500,000 301,262,000
-------------- ------------
TOTAL LIABILITIES AND SHAREHOLDERS' equity $1,184,579,000 $964,044,000
-------------- ------------
-------------- ------------
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
3
<PAGE>
HCC Insurance Holdings, Inc. and Subsidiaries
---------
Condensed Consolidated Statements of Earnings
(Unaudited)
---------
For the Nine Months
Ended September 30,
1997 1996
------------ ------------
REVENUE
Net earned premium $124,431,000 $128,852,000
Fee and commission income 50,145,000 39,444,000
Net investment income 20,424,000 17,326,000
Computer products and services 5,374,000 6,756,000
Net realized investment gain (loss) (258,000) 6,654,000
Gain on sale of subsidiary - 3,307,000
------------ ------------
Total revenue 200,116,000 202,339,000
EXPENSE
Loss and loss adjustment expense 70,537,000 83,812,000
Operating expense:
Policy acquisition costs 38,241,000 34,800,000
Compensation expense 30,488,000 28,157,000
Other operating expense 22,323,000 19,157,000
Merger expense 7,582,000 26,160,000
Ceding commissions (32,032,000) (25,296,000)
------------ ------------
Net operating expense 66,602,000 82,978,000
Interest expense 4,021,000 3,775,000
Total expense 141,160,000 170,565,000
------------ ------------
Earnings before income tax provision 58,956,000 31,774,000
Income tax provision 19,825,000 5,232,000
------------ ------------
NET EARNINGS $ 39,131,000 $ 26,542,000
------------ ------------
------------ ------------
EARNINGS PER SHARE DATA:
Primary:
Earnings per share $ 0.84 $ 0.60
------------ ------------
------------ ------------
Weighted average shares outstanding 46,471,000 44,350,000
------------ ------------
------------ ------------
Fully diluted:
Earnings per share $ 0.84 $ 0.60
------------ ------------
------------ ------------
Weighted average shares outstanding 46,649,000 44,553,000
------------ ------------
------------ ------------
Cash dividends declared, per share $ 0.09 $ 0.04
------------ ------------
------------ ------------
See Notes to Condensed Consolidated Financial Statements.
4
<PAGE>
HCC Insurance Holdings, Inc. and Subsidiaries
---------
Condensed Consolidated Statements of Earnings
(Unaudited)
---------
For the three months
ended September 30,
1997 1996
------------ -----------
REVENUE
Net earned premium $ 31,622,000 $42,047,000
Fee and commission income 17,946,000 13,313,000
Net investment income 7,695,000 5,892,000
Computer products and services 1,773,000 2,658,000
Net realized investment gain 36,000 1,447,000
Gain on sale of subsidiary - 3,307,000
------------ -----------
Total revenue 59,072,000 68,664,000
EXPENSE
Loss and loss adjustment expense 14,467,000 30,155,000
Operating expense:
Policy acquisition costs 12,153,000 11,414,000
Compensation expense 10,335,000 8,906,000
Other operating expense 6,748,000 6,616,000
Merger expense 305,000 -
Ceding commissions (11,671,000) (8,858,000)
------------ -----------
Net operating expense 17,870,000 18,078,000
Interest expense 1,211,000 1,111,000
------------ -----------
Total expense 33,548,000 49,344,000
------------ -----------
Earnings before income tax provision 25,524,000 19,320,000
Income tax provision 8,406,000 5,571,000
------------ -----------
NET EARNINGS $ 17,118,000 $13,749,000
------------ -----------
------------ -----------
EARNINGS PER SHARE DATA:
Primary:
Earnings per share $ 0.36 $ 0.31
------------ -----------
------------ -----------
Weighted average shares outstanding 47,122,000 44,356,000
------------ -----------
------------ -----------
Fully diluted:
Earnings per share $ 0.36 $ 0.31
------------ -----------
------------ -----------
Weighted average shares outstanding 47,201,000 44,419,000
------------ -----------
------------ -----------
Cash dividends declared, per share $ 0.03 $ 0.02
------------ -----------
------------ -----------
See Notes to Condensed Consolidated Financial Statements.
5
<PAGE>
HCC Insurance Holdings, Inc. and Subsidiaries
----------
Condensed Consolidated Statements of Changes in Shareholders' Equity
For the nine months ended September 30, 1997 and
for the year ended December 31, 1996
(Unaudited)
----------
<TABLE>
Additional Unrealized
Common paid-in Retained investment
Stock capital earnings gain (loss)
----------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
BALANCE AS OF DECEMBER 31, 1995 $18,460,000 $138,084,000 $142,134,000 $9,296,000
27,688,869 shares of Common Stock issued
for 150% stock dividend 27,689,000 (27,689,000) - -
132,108 Shares of Common Stock issued for
exercise of options, including tax benefit
of $366,000 132,000 837,000 - -
Net earnings - - 41,586,000 -
Cash dividends declared, $0.06 Per share - - (2,104,000) -
Compensatory grant of pooled company
stock prior to merger - 23,682,000 - -
Dividends to shareholders of pooled
companies prior to merger - - (7,705,000) -
Capitalize undistributed earnings of pooled
company upon conversion from S Corporation - 3,840,000 (3,840,000) -
1,136,400 shares of Common Stock issued
for NASRA combination 1,136,000 - (1,452,000) -
Repurchase of 520,000 shares of Common
Stock by pooled company prior to merger - - - -
Unrealized investment loss on fixed income
securities, net of deferred tax benefit of
$857,000 - - - (1,594,000)
Unrealized investment loss on marketable
equity securities, net of deferred tax benefit
of $2,144,000 - - - (4,079,000)
Other - 1,217,000 (1,607,000) -
----------- ------------ ------------ ----------
BALANCE AS OF DECEMBER 31, 1996 $47,417,000 $139,971,000 $167,012,000 $3,623,000
</TABLE>
<TABLE>
Foreign
currency Total
translation Treasury shareholders'
adjustment stock equity
----------- ------------ ------------
<S> <C> <C> <C>
BALANCE AS OF DECEMBER 31, 1995 $(186,000) $(50,570,000) $257,218,000
27,688,869 shares of Common Stock issued
for 150% stock dividend - - -
132,108 shares of Common Stock issued for
exercise of options, including tax benefit
of $366,000 - - 969,000
Net earnings - - 41,586,000
Cash dividends declared, $0.06 Per share - - (2,104,000)
Compensatory grant of pooled company
stock prior to merger - - 23,682,000
Dividends to shareholders of pooled
companies prior to merger - - (7,705,000)
Capitalize undistributed earnings of pooled
company upon conversion from S Corporation - - -
1,136,400 shares of Common Stock issued
for NASRA combination - - (316,000)
Repurchase of 520,000 shares of Common
Stock by pooled company prior to merger - (7,909,000) (7,909,000)
Unrealized investment loss on fixed income
securities, net of deferred tax benefit of
$857,000 - - (1,594,000)
Unrealized investment loss on marketable
equity securities, net of deferred tax benefit
of $2,144,000 - - (4,079,000)
Other 95,000 1,809,000 1,514,000
-------- ------------ ------------
BALANCE AS OF DECEMBER 31, 1996 $(91,000) $(56,670,000) $301,262,000
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
6
<PAGE>
HCC Insurance Holdings, Inc. and Subsidiaries
----------
Condensed Consolidated Statements of Changes in Shareholders' Equity
For the nine months ended September 30, 1997 and
for the year ended December 31, 1996
(Unaudited)
(Continued)
----------
<TABLE>
Additional Unrealized
Common paid-in Retained investment
Stock capital earnings gain (loss)
----------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
BALANCE AS OF DECEMBER 31, 1996 $47,417,000 $139,971,000 $167,012,000 $3,623,000
575,027 shares of Common Stock issued for
exercise of options, including tax benefit of
$1,474,000 575,000 7,628,000 - -
382,024 shares of Common Stock issued for
purchased companies 382,000 9,805,000 - -
950,000 shares of Common Stock issued for
combinations with pooled companies 950,000 - (1,507,000) -
Net earnings - - 39,131,000 -
Cash dividends declared, $0.09 Per share - - (3,833,000) -
Repurchase of 14,895 shares of Common
Stock by pooled company prior to combination - - - -
Retirement of 3,316,636 shares of treasury
Stock (3,317,000) (3,430,000) (50,247,000) -
Unrealized investment gain on fixed income
securities, net of deferred tax charge of
$1,883,000 - - - 3,268,000
Unrealized investment loss on marketable
equity securities, net of deferred tax benefit
of $54,000 - - - (57,000)
Other - - 325,000 -
----------- ------------ ------------ ----------
BALANCE AS OF SEPTEMBER 30, 1997 $46,007,000 $153,974,000 $150,881,000 $6,834,000
----------- ------------ ------------ ----------
----------- ------------ ------------ ----------
</TABLE>
<TABLE>
Foreign
currency Total
translation Treasury shareholders'
adjustment stock equity
----------- ------------ ------------
<S> <C> <C> <C>
BALANCE AS OF DECEMBER 31, 1996 $ (91,000) $(56,670,000) $301,262,000
575,027 shares of Common Stock issued for
exercise of options, including tax benefit of
$1,474,000 - - 8,203,000
382,024 shares of Common Stock issued for
purchased companies - - 10,187,000
950,000 shares of Common Stock issued for
combinations with pooled companies - - (557,000)
Net earnings - - 39,131,000
Cash dividends declared, $0.09 per share - - (3,833,000)
Repurchase of 14,895 shares of Common
Stock by pooled company prior to combination - (324,000) (324,000)
Retirement of 3,316,636 shares of treasury
stock - 56,994,000 -
Unrealized investment gain on fixed income
securities, net of deferred tax charge of
$1,883,000 - - 3,268,000
Unrealized investment loss on marketable
equity securities, net of deferred tax benefit
of $54,000 - - (57,000)
Other (105,000) - 220,000
----------- ------------ ------------
BALANCE AS OF SEPTEMBER 30, 1997 $ (196,000) - $357,500,000
----------- ------------ ------------
----------- ------------ ------------
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
7
<PAGE>
HCC Insurance Holdings, Inc. and Subsidiaries
---------
Condensed Consolidated Statements of Cash Flows
(Unaudited)
---------
<TABLE>
For the Nine Months
Ended September 30,
1997 1996
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 39,131,000 $ 26,542,000
Adjustments to reconcile net earnings to net
Cash provided by operating activities:
Change in reinsurance recoverables (52,565,000) (20,061,000)
Change in premium, claims and other receivables (60,614,000) (17,223,000)
Change in ceded unearned premium (19,344,000) 3,403,000
Change in deferred income tax, net of tax effect
of unrealized gain or loss 1,922,000 (9,081,000)
Change in loss and loss adjustment expense payable 38,439,000 26,512,000
Change in reinsurance balances payable 21,054,000 (24,552,000)
Change in unearned premium 6,098,000 6,532,000
Change in premium and claims payable, net
of restricted cash 82,069,000 20,370,000
Net realized investment (gain) loss 258,000 (9,961,000)
Non cash compensation expense - 23,975,000
Depreciation and amortization expense 3,586,000 3,004,000
Other, net (3,016,000) (8,938,000)
------------ ------------
Cash provided by operating activities 57,018,000 20,522,000
Cash flows from investing activities:
Sales of fixed income securities 27,090,000 21,312,000
Maturity or call of fixed income securities 15,024,000 16,481,000
Sales of equity securities 17,631,000 31,357,000
Proceeds from sale of subsidiary - 13,957,000
Cash paid for companies acquired (12,948,000) -
Cost of investments acquired (64,417,000) (72,096,000)
Purchases of property and equipment (3,682,000) (1,750,000)
------------ ------------
Cash provided (used) by investing activities (21,302,000) 9,261,000
Cash flows from financing activities:
Proceeds from notes payable 15,298,000 29,000,000
Sale of common stock 8,203,000 798,000
Payments on notes payable (6,131,000) (28,985,000)
Dividends paid (3,170,000) (7,406,000)
Repurchase common stock (324,000) (7,478,000)
------------ ------------
Cash provided (used) by financing activities 13,876,000 (14,071,000)
------------ ------------
Net change in cash and short-term investments 49,592,000 15,712,000
Cash and short-term investments at beginning
of period 87,864,000 78,437,000
------------ ------------
CASH AND SHORT-TERM INVESTMENTS AT END OF PERIOD $137,456,000 $ 94,149,000
------------ ------------
------------ ------------
Supplemental cash flow information:
Interest paid $ 5,076,000 $ 4,146,000
------------ ------------
------------ ------------
Income tax paid $ 16,635,000 $ 12,703,000
------------ ------------
------------ ------------
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
<PAGE>
HCC Insurance Holdings, Inc. and Subsidiaries
----------
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(1) GENERAL INFORMATION
HCC Insurance Holdings, Inc. ("the Company" or "HCCH") and its subsidiaries
include domestic and foreign property and casualty insurance companies and
managing general underwriters, surplus lines insurance brokers and wholesale
insurance and reinsurance brokers. The Company, through its subsidiaries,
provides specialized property, casualty, accident and health insurance,
underwritten on both a direct and reinsurance basis, and insurance agency
services.
BASIS OF PRESENTATION
The unaudited condensed consolidated financial statements have been
prepared in conformity with generally accepted accounting principles and include
all adjustments which are, in the opinion of management, necessary for fair
presentation of the results of the interim periods. All adjustments made to the
interim periods are of a normal recurring nature. The condensed consolidated
financial statements include the accounts of the Company and its wholly-owned
subsidiaries. All significant intercompany balances and transactions have been
eliminated. The condensed consolidated financial statements for periods
reported should be read in conjunction with the annual consolidated financial
statements and notes related thereto. The condensed consolidated balance sheet
as of December 31, 1996, and the statement of shareholders' equity for the year
then ended were derived from audited financial statements, but do not include
all disclosures required by generally accepted accounting principles. The
combination with AVEMCO Corporation ("AVEMCO") was accounted for as a pooling-
of-interests. The Company's condensed consolidated financial statements have
been restated to include the accounts and operations of AVEMCO for all periods
presented (see note 3).
INCOME TAX
For the nine months ended September 30, 1997 and 1996, the income tax
provision has been calculated based on an estimated effective tax rate for each
of the fiscal years. The difference between the Company's effective tax rate
and the Federal statutory rate is primarily the result of nontaxable municipal
bond interest included in pretax income. In addition, during 1996, prior to its
merger with the Company, LDG Management Company Incorporated ("LDG") was an S
Corporation and thus exempt from Federal income tax until May 21, 1996.
9
<PAGE>
HCC Insurance Holdings, Inc. and Subsidiaries
----------
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Continued)
(1) GENERAL INFORMATION, CONTINUED
EARNINGS PER SHARE
Earnings per share are based on the weighted average number of common and
common equivalent shares outstanding during the period divided into net
earnings. Weighted average shares outstanding have been adjusted to include
shares and options issued in connection with the combination of AVEMCO.
Outstanding common stock options, when dilutive, are considered to be common
stock equivalents for the purpose of this calculation. The treasury stock
method is used to calculate common stock equivalents due to options.
EFFECTS ON RECENT ACCOUNTING PRONOUNCEMENTS
In February, 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 128 "Earnings per
Share". SFAS No. 128 is effective for fiscal periods ending after December 15,
1997. Early application is not permitted. SFAS No. 128 modifies the
denominator to be used in the earnings per share calculations, and requires
additional disclosures of the calculations. The statement will have no effect
on the Company's net earnings, shareholders' equity or cash flows and an
insignificant effect on earnings per share.
In June, 1997, the Financial Accounting Standards Board issued SFAS No. 130
"Reporting Comprehensive Income" and SFAS No. 131 "Disclosures about Segments of
an Enterprise and Related Information". Both statements are effective for
fiscal years beginning after December 15, 1997. These SFAS's require that
additional information be included in a complete set of financial statements,
but will have no effect on the Company's net earnings, shareholders' equity or
cash flows.
RECLASSIFICATIONS
Certain amounts in the 1996 condensed consolidated financial statements
have been reclassified to conform to the 1997 presentation. Such
reclassifications had no effect on the Company's net earnings, shareholders'
equity, or cash flows.
10
<PAGE>
HCC Insurance Holdings, Inc. and Subsidiaries
----------
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Continued)
(2) REINSURANCE
In the normal course of business the Company's insurance company
subsidiaries cede a substantial portion of their premium to unrelated domestic
and foreign reinsurers through quota share, surplus, excess of loss and
facultative reinsurance agreements. Although the ceding of reinsurance does not
discharge the primary insurer from liability to its policyholder, the
subsidiaries participate in such agreements for the purpose of limiting their
loss exposure and diversifying their business. Substantially all of the
reinsurance assumed by the Company's insurance company subsidiaries was
underwritten directly by the Company but issued by other unrelated companies in
order to satisfy licensing or other requirements. The following tables
represent the effect of such reinsurance transactions on net premium and loss
and loss adjustment expense:
Loss and Loss
Written Earned Adjustment
Premium Premium Expense
------------- ------------- -------------
For the nine months ended
September 30, 1997:
Direct business $ 136,769,000 $ 131,323,000 $ 90,419,000
Reinsurance assumed 130,703,000 132,408,000 126,165,000
Reinsurance ceded (159,034,000) (139,300,000) (146,047,000)
------------- ------------- -------------
NET AMOUNTS $ 108,438,000 $ 124,431,000 $ 70,537,000
------------- ------------- -------------
------------- ------------- -------------
For the nine months ended
September 30, 1996:
Direct business $ 138,197,000 $ 143,001,000 $ 92,939,000
Reinsurance assumed 117,085,000 105,823,000 78,132,000
Reinsurance ceded (115,336,000) (119,972,000) (87,259,000)
------------- ------------- -------------
NET AMOUNTS $ 139,946,000 $ 128,852,000 $ 83,812,000
------------- ------------- -------------
------------- ------------- -------------
For the three months ended
September 30, 1997:
Direct business $ 44,149,000 $ 44,764,000 $ 40,857,000
Reinsurance assumed 38,123,000 44,283,000 35,441,000
Reinsurance ceded (70,583,000) (57,425,000) (61,831,000)
------------- ------------- -------------
NET AMOUNTS $ 11,689,000 $ 31,622,000 $ 14,467,000
------------- ------------- -------------
------------- ------------- -------------
11
<PAGE>
HCC Insurance Holdings, Inc. and Subsidiaries
----------
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Continued)
(2) REINSURANCE, CONTINUED
Loss and Loss
Written Earned Adjustment
Premium Premium Expense
------------ ------------ ------------
For the three months
ended September 30, 1996:
Direct business $ 40,909,000 $ 47,978,000 $ 33,946,000
Reinsurance assumed 35,957,000 36,670,000 23,413,000
Reinsurance ceded (37,999,000) (42,601,000) (27,204,000)
------------ ------------ ------------
NET AMOUNTS $ 38,867,000 $ 42,047,000 $ 30,155,000
------------ ------------ ------------
------------ ------------ ------------
The table below represents the approximate composition of reinsurance
recoverables in the accompanying condensed consolidated balance sheets:
September 30, December 31,
1997 1996
------------ ------------
Reinsurance recoverable on paid losses $ 28,872,000 $ 23,333,000
Reinsurance recoverable on outstanding losses 145,943,000 102,350,000
Reinsurance recoverable on IBNR 12,939,000 9,416,000
Reserve for uncollectible reinsurance (2,505,000) (2,415,000)
------------ ------------
TOTAL REINSURANCE RECOVERABLES $185,249,000 $132,684,000
------------ ------------
------------ ------------
The insurance company subsidiaries require reinsurers not authorized by
their respective states of domicile to collateralize their reinsurance
obligations to the Company with letters of credit or cash deposits. At
September 30, 1997, the Company held letters of credit and cash deposits in the
amounts of $85.7 million and $8.2 million, respectively, to collateralize
certain reinsurance balances. The Company has established a reserve of $2.5
million as of September 30, 1997, to reduce the effects of any recoverable
problems. In order to minimize its exposure to reinsurance credit risk, the
Company evaluates the financial condition of its reinsurers and places its
reinsurance with a diverse group of financially sound companies.
(3) ACQUISITIONS
TRM
On January 24, 1997, the Company acquired all of the occupational accident
business of the TRM International, Inc. group of companies in exchange for
266,667 shares of the Company's Common Stock and $6.55 million in cash. This
acquisition has been accounted for as a purchase and results of operations of
the business acquired has been included in the consolidated statements of
earnings beginning in January 1997. Cost in excess of net assets acquired
(goodwill) of approximately $13.5 million was recorded from this acquisition.
Goodwill is being amortized over twenty years. The results of operations of TRM
for the periods prior to the acquisition are immaterial to the Company's
consolidated results of operations.
12
<PAGE>
HCC Insurance Holdings, Inc. and Subsidiaries
-----------
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Continued)
(3) ACQUISITIONS, CONTINUED
INTERWORLD
On April 30, 1997, the Company acquired all of the outstanding shares of
Interworld Corporation in exchange for 725,000 shares of the Company's Common
Stock. This business combination has been accounted for as a
pooling-of-interests. However, the Company's consolidated financial
statements have not been restated due to immateriality.
AVEMCO
On June 17, 1997, the Company issued 8,511,625 shares of its Common
Stock and 604,575 options to purchase its Common Stock to acquire all of the
outstanding common stock and options of AVEMCO. This business combination
has been accounted for as a pooling-of-interests and, accordingly, the
Company's condensed consolidated financial statements have been restated to
include the accounts and operations of AVEMCO for all periods presented.
Separate total revenue and net earnings amounts of the merged entities
are presented for the periods prior to the merger in the following table:
For the six For the nine
months ended months ended
June 30, 1997 September 30, 1996
------------- ------------------
Total revenue:
HCCH $ 81,598,000 $110,822,000
AVEMCO 59,446,000 91,517,000
------------- ------------------
TOTAL REVENUE $141,044,000 $202,339,000
------------- ------------------
------------- ------------------
Net earnings:
HCCH $ 21,295,000 $ 16,734,000
AVEMCO 718,000 9,808,000
------------- ------------------
NET EARNINGS $ 22,013,000 $ 26,542,000
------------- ------------------
------------- ------------------
AVEMCO's net earnings for the six months ended June 30, 1997, include
merger expenses of approximately $3.5 million.
13
<PAGE>
HCC Insurance Holdings, Inc. and Subsidiaries
-----------
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Continued)
(3) ACQUISITIONS, CONTINUED
MGU
On June 26, 1997, the Company acquired all of the outstanding shares of
Managed Group Underwriting, Inc. in exchange for 98,003 shares of the
Company's Common Stock and a cash payment of $3.6 million. This acquisition
has been accounted for as a purchase and the results of operations has been
included in the consolidated statements of earnings beginning in July, 1997.
Cost in excess of net assets acquired (goodwill) of approximately $6.2
million was recorded from this acquisition. Goodwill is being amortized over
twenty years. The results of operations of MGU for the periods prior to the
acquisition are immaterial to the Company's consolidated results of
operations.
CONTINENTAL
On July 31, 1997, the Company acquired all of the outstanding shares of
Continental Aviation Underwriters, Inc. in exchange for 17,354 shares of the
Company's Common Stock and a cash payment of $2.8 million. This acquisition
has been accounted for as a purchase and the results of operations have been
included in the consolidated statements of earnings beginning in August,
1997. Cost in excess of net assets acquired (goodwill) of approximately $3.4
million was recorded from this acquisition. Goodwill is being amortized over
twenty years. The results of operations of Continental for the periods prior
to the acquisition are immaterial to the Company's consolidated results of
operations.
SOUTHERN
On August 8, 1997, the Company acquired all of the outstanding shares of
Southern Aviation Insurance Underwriters, Inc. and Aviation Claims
Administrators, Inc. in exchange for 225,000 shares of the Company's Common
Stock. These business combinations have been accounted for as
poolings-of-interests. However, the Company's consolidated financial
statements have not been restated due to immateriality.
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
The Company completed the acquisition of Interworld Corporation on April 30,
1997 (pooling-of-interests), of AVEMCO Corporation on June 17, 1997
(pooling-of-interests), of Managed Group Underwriting, Inc. on June 26, 1997
(purchase), of Continental Aviation Underwriters, Inc. on July 31, 1997
(purchase) and of Southern Aviation Insurance Underwriters, Inc. and Aviation
Claims Administrators, Inc. on August 8, 1997 (poolings-of-interests).
THREE MONTHS ENDED SEPTEMBER 30, 1997 VERSUS THREE MONTHS ENDED
SEPTEMBER 30, 1996.
Gross written premium increased 7% to $82.3 million for the third quarter of
1997 from $76.9 million for the same period in 1996. Aviation and accident
and health premium increased during the quarter offset by a reduction in
property and marine business as competition increases. Net written premium
for the third quarter of 1997 decreased to $11.7 million from $38.9 million
for the same period in 1996. The implementation of a significant reinsurance
program covering AVEMCO's business since the acquisition caused a decline of
$36 million in net written premium, of which $17 million was due to a
portfolio transfer of inforce policies. However, accident and health net
written premium increased during the third quarter. Net earned premium
decreased to $31.6 million for the third quarter of 1997 compared to $42.0
million for the same period in 1996 reflecting increased reinsurance,
particularly the effects of the new reinsurance program at AVEMCO.
Fee and commission income increased 35% to $17.9 million for the third
quarter of 1997, compared to $13.3 million for the same period in 1996 due to
the increased agency activity in light of recent acquisitions. The Company
expects fee and commission income to continue to increase due to the effects
of recent acquisitions and internal growth. Net investment income increased
31% to $7.7 million for the third quarter of 1997 compared to $5.9 million
for the same period in 1996 reflecting increased cash flow and, therefore, a
higher level of investments.
Net realized investment losses from sales of equity securities were $104,000
during the third quarter of 1997, compared to gains of $1.6 million for the
same period in 1996. During 1996, the Company systematically liquidated the
majority of its equity portfolio. Net realized investment gains from
disposition of fixed income securities were $140,000 during the third quarter
of 1997, compared to losses of $112,000 for the same period in 1996. During
the third quarter of 1996, AVEMCO consummated the sale of National Assurance
Underwriters, Inc., which was a subsidiary of AVEMCO prior to the
pooling-of-interests combination. This sale generated an after tax gain of
$2.2 million or $0.05 per share.
Loss and LAE decreased during the third quarter of 1997, to $14.5 million,
reflecting unusually good underwriting results and the effects of increased
ceded reinsurance, particularly the new reinsurance program covering AVEMCO's
business.
Other operating expense increased 2% to $6.7 million for the third quarter of
1997. These expenses reflect increased expenditures required to meet the
overall growth in business. Currency conversion losses amounted to $107,000
for the third quarter of 1997, compared to losses of $30,000 during the same
period in 1996.
Net earnings increased 25% to $17.1 million for the third quarter of 1997
from $13.7 for the same period in 1996. This increase was principally a
result of higher underwriting profits and increased fee and commission income.
Earnings per share increased 16% to $0.36 for the third quarter of 1997 from
$0.31 for the third quarter of 1996. This reflects the increase in net
earnings, offset by a 6% increase in weighted average shares outstanding due
to shares issued for acquisitions and the exercise of options.
The Company's insurance company subsidiaries' GAAP combined ratio was 62.7% for
the third quarter of 1997, as compared to 92.1% for the same period in 1996,
principally due to reduced loss and LAE.
The Company's book value per share was $7.77 as of September 30, 1997, up
from $7.37 as of June 30, 1997. Earnings added $0.37 per share to book value
during the third quarter of 1997.
15
<PAGE>
NINE MONTHS ENDED SEPTEMBER 30, 1997 VERSUS NINE MONTHS ENDED
SEPTEMBER 30, 1996.
Gross written premium increased 5% to $267.5 million for the first nine
months of 1997 from $255.3 million for the same period in 1996, due primarily
to increased aviation and accident and health premiums partially offset by
decreased property and marine premium. Net written premium for the first
nine months of 1997 decreased to $108.4 million from $139.9 million for the
same period in 1996, due to the implementation of a significant reinsurance
program covering AVEMCO's business. Net earned premium decreased to $124.4
million for the first nine months of 1997 compared to $128.9 million for the
same period in 1996 reflecting increased reinsurance, particularly the new
reinsurance program at AVEMCO.
Fee and commission income increased 27% to $50.1 million for the first nine
months of 1997, compared to $39.4 million for the same period in 1996 due to
the increased agency activity. The Company expects fee and commission income
to continue to increase due to the effects of recent acquisitions and
internal growth. Net investment income increased 18% to $20.4 million for
the first nine months of 1997 compared to $17.3 million for the same period
in 1996 reflecting increased cash flow and, therefore, a higher level of
investments.
Net realized investment losses from sales of equity securities were $154,000
during the first nine months of 1997, compared to gains of $6.8 million for
the same period in 1996. During 1996, the Company systematically liquidated
the majority of its equity portfolio. Net realized investment losses from
disposition of fixed income securities were $104,000 during the first nine
months of 1997, compared to losses of $176,000 for the same period in 1996.
During the third quarter of 1996, AVEMCO consummated the sale of National
Assurance Underwriters, Inc., which was a subsidiary of AVEMCO prior to the
pooling-of-interests combination. This sale generated an after tax gain of
$2.2 million or $0.05 per share.
Loss and LAE decreased during the first nine months of 1997, to $70.5
million, as the Company's GAAP loss ratio decreased to 56.7% from 65.0%, due
to the decrease experienced during the third quarter of 1997.
Other operating expense increased 17% to $22.3 million for the first nine
months of 1997. These expenses reflect increased expenditures required to
meet the overall growth in business. Currency conversion losses amounted to
$649,000 for the first nine months of 1997, compared to losses of $203,000
for the same period in 1996.
Merger expense represents non-recurring items incurred to consummate the
acquisitions and mergers which are accounted for as poolings-of-interests.
The amounts incurred during the first nine months of 1996 were due to the
combination with LDG and included a compensatory stock grant of $24.0 million
to certain key LDG employees immediately prior to the merger. The amounts
incurred during 1997 were due to the combinations with AVEMCO Corporation,
Interworld Corporation and Southern Aviation Insurance Underwriters, Inc.
Income tax expense was $19.8 million for the first nine months of 1997,
compared to $5.2 million during the first nine months of 1996. The 1996
amount included a deferred tax benefit of $9.6 million which was recorded in
connection with the compensatory stock grant to certain key LDG employees.
Most of the other merger expenses are not deductible for income tax purposes.
Also, as an S Corporation, LDG was exempt from Federal income taxes through
May 21, 1996. Had LDG been subject to Federal income tax during the period
January 1, 1996 to May 21, 1996, additional income tax expense of $2.3
million would have been recorded for the nine months ended September 30, 1996.
Net earnings increased 47% to $39.1 million for the first nine months of 1997
from $26.5 million for the same period in 1996. This increase was
principally a result of higher underwriting profits and increased fee and
commission income during 1997, and higher merger related expenses during
1996, which included the non-recurring compensation charge.
Earnings per share increased 40% to $0.84 for the first nine months of 1997
from $0.60 for the first nine months of 1996. This reflects a 47% increase
in net earnings, partially offset by a 5% increase in weighted average shares
outstanding due to shares issued for acquisitions and the exercise of options.
16
<PAGE>
The Company's insurance company subsidiaries' GAAP combined ratio was 76.9%
for the first nine months of 1997, as compared to 86.4% for the same period
in 1996.
The Company's book value per share was $7.77 as of September 30, 1997, up
from $6.83 as of December 31, 1996. Earnings added $0.85 per share to book
value during the first nine months of 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company's consolidated cash and investment portfolio increased $59.1
million or 12% since December 31, 1996, and totaled $537.7 million as of
September 30, 1997, of which $137.5 million was cash and short-term
investments. Total assets increased to $1.2 billion as of September 30,
1997, from $964.0 million as of December 31, 1996. The increase in premium
and claims receivables and payables is due to the growth in agency operations
during the year. The increase in reinsurance balances is primarily due to
the new reinsurance program at AVEMCO.
AVEMCO's line of credit has been extended through December 31, 1997.
As the year 2000 approaches, the Company recognizes the need to ensure its
operations will not be adversely impacted by year 2000 computer software
failures. The Company is presently addressing this issue to ensure the
availability and integrity of its financial systems and the reliability of
its operational systems. The Company has established processes for
evaluating and managing the risks and costs associated with this problem.
The Company has and will continue to make certain investments in its software
systems and applications to ensure the Company's systems are year 2000
compliant.
FORWARD-LOOKING STATEMENTS IN THIS FORM 10-Q ARE MADE PURSUANT TO THE SAFE
HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995.
INVESTORS ARE CAUTIONED THAT ALL FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND
UNCERTAINTY, INCLUDING WITHOUT LIMITATION, THE RISK OF A SIGNIFICANT NATURAL
DISASTER, THE INABILITY OF THE COMPANY TO REINSURE CERTAIN RISKS, THE
ADEQUACY OF ITS LOSS RESERVES, EXPANSION OR CONTRACTION OF ITS VARIOUS LINES
OF BUSINESS, THE IMPACT OF INFLATION, CHANGING REGULATIONS IN FOREIGN
COUNTRIES, THE EFFECT OF RECENT AND PENDING ACQUISITIONS, AS WELL AS GENERAL
MARKET CONDITIONS, COMPETITION AND PRICING. PLEASE REFER TO THE COMPANY'S
SECURITIES AND EXCHANGE COMMISSION FILINGS, COPIES OF WHICH ARE AVAILABLE FROM
THE COMPANY WITHOUT CHARGE, FOR FURTHER INFORMATION.
17
<PAGE>
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS:
There are no material pending legal proceedings to which the
Company is a party or of which any of the property of the Company is the
subject, except for claims arising in the ordinary course of business, none
of which are considered material.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K:
(a) Exhibits:
The exhibits listed on the accompanying Index to Exhibits on
the following page are filed as part of this report.
(b) Reports on Form 8-K:
On September 26, 1997, the Company filed a report on Form 8-K
reporting that the Company would employ John N. Molbeck as the
Company's President.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HCC Insurance Holdings, Inc.
------------------------------------------------
(Registrant)
November 14, 1997 /s/ Frank J. Bramanti
- ----------------------- ------------------------------------------------
(Date) Frank J. Bramanti, Executive Vice President
November 14, 1997 /s/ Edward H. Ellis, Jr.
- ----------------------- ------------------------------------------------
(Date) Edward H. Ellis, Jr., Senior Vice President and
Chief Financial Officer
18
<PAGE>
INDEX TO EXHIBITS
10.336 - Stock Purchase Agreement dated July 31, 1997 between
Continental Aviation Underwriters, Inc., the shareholders
thereof, and HCC Insurance Holdings, Inc. related to the
purchase of 100% of the common stock of Continental Aviation
Underwriters, Inc.
10.337 - Acquisition Agreement dated August 8, 1997, between Southern
Aviation Insurance Underwriters, Inc., Aviation Claims
Administrators, Inc., the shareholders thereof, and HCC
Insurance Holdings, Inc. related to the acquisition of 100% of
the common stock of Southern Aviation Insurance Underwriters,
Inc. and Aviation Claims Administrators, Inc.
10.338 - Line of Credit Agreements payable to Wells Fargo Bank (Texas),
National Association executed by HCC Insurance Holdings, Inc.,
Houston Casualty Company and IMG Insurance Company, Ltd.
together with the Credit Agreements and Security Agreements
related thereto.
11 - Statements Regarding Computation of Earnings Per Share.
27 - EDGAR Financial Data Schedule - September 30, 1997.
27.1 - EDGAR Financial Data Schedule - Restated September 30, 1996.
19
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
STOCK PURCHASE AGREEMENT
DATED AS OF
July 31, 1997
BY AND AMONG
HCC INSURANCE HOLDINGS, INC.,
AND
THE SHAREHOLDERS OF
CONTINENTAL AVIATION UNDERWRITERS, INC.
AND
CONTINENTAL AVIATION UNDERWRITERS, INC.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
PAGE
ARTICLE I SALE AND TRANSFER OF THE CONTINENTAL COMMON STOCK . . . . . 1
Section 1.1 Sale of Continental Common Stock.. . . . . . . . . . . 1
Section 1.2 Purchase Price . . . . . . . . . . . . . . . . . . . . 1
Section 1.3 Closing Deliveries . . . . . . . . . . . . . . . . . . 2
ARTICLE II REPRESENTATIONS AND WARRANTIES OF
CONTINENTAL AND SHAREHOLDERS. . . . . . . . . . . . . . . . 3
Section 2.1 Corporate Existence and Power. . . . . . . . . . . . . 3
Section 2.2 Authorization. . . . . . . . . . . . . . . . . . . . . 4
Section 2.3 Governmental Authorization . . . . . . . . . . . . . . 4
Section 2.4 Non-Contravention. . . . . . . . . . . . . . . . . . . 4
Section 2.5 Capitalization . . . . . . . . . . . . . . . . . . . . 5
Section 2.6 Subsidiaries and Joint Ventures. . . . . . . . . . . . 5
Section 2.7 Continental Financial Statements . . . . . . . . . . . 6
Section 2.8 Absence of Certain Changes . . . . . . . . . . . . . . 6
Section 2.9 No Undisclosed Liabilities . . . . . . . . . . . . . . 7
Section 2.10 Litigation . . . . . . . . . . . . . . . . . . . . . . 8
Section 2.11 Taxes. . . . . . . . . . . . . . . . . . . . . . . . . 8
Section 2.12 Employee Benefit Plans, ERISA. . . . . . . . . . . . . 9
Section 2.13 Material Agreements. . . . . . . . . . . . . . . . . . 10
Section 2.14 Properties . . . . . . . . . . . . . . . . . . . . . . 11
Section 2.15 Environmental Matters. . . . . . . . . . . . . . . . . 11
Section 2.16 Labor Matters. . . . . . . . . . . . . . . . . . . . . 12
Section 2.17 Compliance with Laws . . . . . . . . . . . . . . . . . 12
Section 2.18 Trademarks, Tradenames, Etc. . . . . . . . . . . . . . 12
Section 2.19 Sale of Continental. . . . . . . . . . . . . . . . . . 12
Section 2.20 Broker's Fees. . . . . . . . . . . . . . . . . . . . . 13
Section 2.21 Investment Representation. . . . . . . . . . . . . . . 13
ARTICLE III REPRESENTATIONS AND WARRANTIES OF HCCH . . . . . . . . 13
Section 3.1 Corporate Existence and Power. . . . . . . . . . . . . 14
Section 3.2 Corporate Authorization. . . . . . . . . . . . . . . . 14
Section 3.3 Governmental Authorization . . . . . . . . . . . . . . 14
Section 3.4 Non-Contravention. . . . . . . . . . . . . . . . . . . 15
Section 3.5 Capitalization of HCCH . . . . . . . . . . . . . . . . 15
Section 3.6 Subsidiaries . . . . . . . . . . . . . . . . . . . . . 16
Section 3.7 SEC Filings. . . . . . . . . . . . . . . . . . . . . . 16
Section 3.8 Financial Statements . . . . . . . . . . . . . . . . . 17
Section 3.9 Absence of Certain Changes . . . . . . . . . . . . . . 17
Section 3.10 No Undisclosed Liabilities . . . . . . . . . . . . . . 18
i
<PAGE>
TABLE OF CONTENTS (CONT.)
PAGE
Section 3.11 Litigation . . . . . . . . . . . . . . . . . . . . . . 18
Section 3.12 Taxes. . . . . . . . . . . . . . . . . . . . . . . . . 18
Section 3.13 Employee Benefit Plans; ERISA. . . . . . . . . . . . . 19
Section 3.14 Material Agreements. . . . . . . . . . . . . . . . . . 20
Section 3.15 Properties . . . . . . . . . . . . . . . . . . . . . . 20
Section 3.16 Environmental Matters. . . . . . . . . . . . . . . . . 21
Section 3.17 Labor Matters. . . . . . . . . . . . . . . . . . . . . 21
Section 3.18 Compliance with Laws . . . . . . . . . . . . . . . . . 21
Section 3.19 Trademarks, Tradenames, Etc. . . . . . . . . . . . . . 21
Section 3.20 Broker's Fees. . . . . . . . . . . . . . . . . . . . . 21
ARTICLE IV COVENANTS OF CONTINENTAL AND SHAREHOLDERS . . . . . . . . . 22
Section 4.1 Conduct of Continental . . . . . . . . . . . . . . . . 22
Section 4.2 Access to Financial and Operational Information. . . . 23
Section 4.3 Other Offers . . . . . . . . . . . . . . . . . . . . . 24
Section 4.4 Maintenance of Business. . . . . . . . . . . . . . . . 24
Section 4.5 Compliance with Obligations. . . . . . . . . . . . . . 24
Section 4.6 Notices of Certain Events. . . . . . . . . . . . . . . 24
Section 4.7 Representation Agreement . . . . . . . . . . . . . . . 25
Section 4.8 Necessary Consents . . . . . . . . . . . . . . . . . . 25
Section 4.9 Regulatory Approval. . . . . . . . . . . . . . . . . . 25
Section 4.10 Satisfaction of Conditions Precedent . . . . . . . . . 25
ARTICLE V COVENANTS OF HCCH . . . . . . . . . . . . . . . . . . . . . 25
Section 5.1 Conduct of HCCH. . . . . . . . . . . . . . . . . . . . 25
Section 5.2 Listing of HCCH Common Stock . . . . . . . . . . . . . 26
Section 5.3 Access to Information. . . . . . . . . . . . . . . . . 26
Section 5.4 Maintenance of Business. . . . . . . . . . . . . . . . 26
Section 5.5 Compliance with Obligations. . . . . . . . . . . . . . 26
Section 5.6 Notices of Certain Events. . . . . . . . . . . . . . . 27
Section 5.7 Employee Matters . . . . . . . . . . . . . . . . . . . 27
ARTICLE VI COVENANTS OF HCCH, SHAREHOLDERS AND CONTINENTAL . . . . . . 27
Section 6.1 Advice of Changes. . . . . . . . . . . . . . . . . . . 27
Section 6.2 Regulatory Approvals. . . . . . . . . . . . . . . . . 27
Section 6.3 Certain Filings. . . . . . . . . . . . . . . . . . . . 27
Section 6.4 Communications . . . . . . . . . . . . . . . . . . . . 28
Section 6.5 Satisfaction of Conditions Precedent . . . . . . . . . 28
Section 6.6 Tax Cooperation. . . . . . . . . . . . . . . . . . . . 28
ii
<PAGE>
TABLE OF CONTENTS (CONT.)
PAGE
Section 6.7 Confidentiality. . . . . . . . . . . . . . . . . . . . 28
ARTICLE VII CONDITIONS TO CLOSING . . . . . . . . . . . . . . . . . . . 29
Section 7.1 Conditions to Obligations of HCCH. . . . . . . . . . . 29
Section 7.2 Conditions to Obligations of Shareholders. . . . . . . 31
Section 7.3 Conditions to Obligations of Each Party. . . . . . . . 32
ARTICLE VIII TERMINATION OF AGREEMENT. . . . . . . . . . . . . . . . . . 32
Section 8.1 Termination. . . . . . . . . . . . . . . . . . . . . . 32
Section 8.2 Effect of Termination. . . . . . . . . . . . . . . . . 33
ARTICLE IX CLOSING MATTERS . . . . . . . . . . . . . . . . . . . . . . 33
Section 9.1 The Closing. . . . . . . . . . . . . . . . . . . . . . 33
ARTICLE X INDEMNIFICATION AND REMEDIES, CONTINUING COVENANTS. . . . . 33
Section 10.1 Agreement to Indemnify . . . . . . . . . . . . . . . . 33
Section 10.2 HCCH Agreement to Indemnify. . . . . . . . . . . . . . 34
Section 10.3 Survival of Representations. . . . . . . . . . . . . . 34
Section 10.4 Procedure for Indemnification; Third Party Claims. . . 35
Section 10.5 Appointment of Representative. . . . . . . . . . . . . 35
ARTICLE XI MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . 37
Section 11.1 Further Assurances.. . . . . . . . . . . . . . . . . . 37
Section 11.2 Fees and Expenses. . . . . . . . . . . . . . . . . . . 37
Section 11.3 Notices. . . . . . . . . . . . . . . . . . . . . . . . 37
Section 11.4 Governing Law. . . . . . . . . . . . . . . . . . . . . 38
Section 11.5 Binding upon Successors and Assigns, Assignment. . . . 38
Section 11.6 Severability . . . . . . . . . . . . . . . . . . . . . 38
Section 11.7 Entire Agreement . . . . . . . . . . . . . . . . . . . 38
Section 11.8 Amendment and Waivers. . . . . . . . . . . . . . . . . 38
Section 11.9 No Waiver. . . . . . . . . . . . . . . . . . . . . . . 39
Section 11.10 Construction of Agreement. . . . . . . . . . . . . . . 39
Section 11.11 Counterparts . . . . . . . . . . . . . . . . . . . . . 39
iii
<PAGE>
STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT (this "Agreement") is entered into as of
the 31st day of July, 1997 by and among HCC Insurance Holdings, Inc., a
Delaware corporation ("HCCH"), the Shareholders whose names, and share
holdings are set forth on Exhibit "A" hereto and incorporated herein by this
reference (collectively, the "Shareholders" or singularly, a "Shareholder")
of Continental Aviation Underwriters, Inc. ("Continental") a Tennessee
corporation, and Continental.
RECITALS:
A. Shareholders own all of the outstanding stock of Continental, a
Company engaged in the insurance business.
B. HCCH desires to purchase all of the outstanding stock of Continental
and Shareholders desire to sell to HCCH their shares in Continental (being
all of the outstanding stock of Continental) for the consideration and on the
terms set forth in this Agreement.
NOW, THEREFORE, in consideration of the foregoing and the mutual
representations, warranties, covenants and agreements set forth herein, the
parties hereto do hereby agree as follows:
ARTICLE I
SALE AND TRANSFER OF THE CONTINENTAL COMMON STOCK
SECTION 1.1 SALE OF CONTINENTAL COMMON STOCK.
(a) Subject to the terms and conditions of this Agreement, at the
Closing hereinafter defined, Shareholders shall sell, transfer and deliver to
HCCH, and HCCH shall purchase from Shareholders, all of the outstanding stock
of Continental (the "Continental Common Stock").
SECTION 1.2 PURCHASE PRICE.
(a) At the closing, HCCH shall deliver to Shareholders the purchase
price ("Purchase Price") which shall be equal to $3,318,254 to be paid, as
follows:
(i) $1,820,813 in cash (the "Crawley Cash Payment") to be
transferred, by wire transfer, to the account designated by Crawley Warren
(USA) Inc. ("Crawley") in subsection (iv) below (the "Account"), in
immediately available funds;
(ii) $976,982 in cash (the "Other Shareholder Payment" which
collectively with the Crawley Cash Payment, shall hereinafter be called the
"Cash Payment") to be paid to the Shareholders of Continental other than
Crawley (the "Other Shareholders") as set forth
<PAGE>
on Exhibit "B" hereto and to be transferred in immediately available funds
by wire transfer to the Account;
(iii) that number of shares of HCCH Common Stock (the "Share
Payment") equal to (x) $520,459 (y) divided by the HCCH Acquisition Price.
The Share Payment shall be made to Kinnebrew and Saxon, as hereinafter
defined, as set forth on Exhibit "B" hereto, in proportion to their
shareholdings of Continental. As used herein, the HCCH Acquisition Price
means the average of the closing prices of HCCH Common Stock as reported by
the New York Stock Exchange ("NYSE") for the ten trading days ending three
trading days before the Closing Date, hereinafter defined; and
(iv) The Account into which the Cash Payments shall be transferred is:
Fleet Bank of Massachusetts
ABA Routing Number 011 000 138
For Credit to Account of
Morrison Mahoney & Miller
Client Account - IOLTA
Account Number 079 676 3506
(b) No fractional shares of HCCH Common Stock shall be issued and
Kinnebrew and Saxon (hereinafter collectively called the "Other
Shareholders") shall be entitled to receive an additional cash payment equal
to the fractional share of HCCH Common Stock any such Other Shareholder would
otherwise be entitled to receive, multiplied by the HCCH Acquisition Price.
SECTION 1.3 CLOSING DELIVERIES.
At the Closing:
(a) Shareholders shall deliver to HCCH
(i) certificates representing the Continental Common Stock, endorsed
or transferred to HCCH, which shall transfer to HCCH good and indefeasible
title to the Continental Common Stock, free and clear of all encumbrances;
and
(ii) such other documents including officers' certificates and
opinions of counsel as may be required by this Agreement or reasonably
requested by HCCH.
(b) HCCH shall
(i) cause the Cash Payment to be transferred to the accounts
designated by Shareholders in immediately available funds; and
2
<PAGE>
(ii) deliver certificates of HCCH Common Stock in the amount of the
Share Payment in the names and to the accounts designated by Kinnebrew and
Saxon. Kinnebrew and Saxon agree and understand that such shares of HCCH
Common Stock shall be unregistered and, therefore, restricted as to
transfer and the share certificates shall bear an appropriate legend as set
forth thereon; and
(iii) deliver to Shareholders such other documents, including
officers' certificates and opinions of counsel, as may be required by this
Agreement or reasonably requested by Shareholders.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF
CONTINENTAL AND SHAREHOLDERS
Except as disclosed in a document referring specifically to this
Agreement (the "Continental Disclosure Schedule") which has been delivered to
HCCH on or before the date hereof, Continental and each of the Shareholders
(jointly and severally) represent and warrant to HCCH as set forth below.
SECTION 2.1 CORPORATE EXISTENCE AND POWER. Continental is a
corporation duly organized, validly existing and in good standing under the
laws of the state of its incorporation, and has all corporate powers and all
material governmental licenses, authorizations, consents and approvals
(collectively, "Governmental Authorizations") required to carry on its
business as now conducted, except such Governmental Authorizations the
failure of which to have obtained would not have a Material Adverse Effect,
as hereinafter defined, on Continental. Continental has delivered to HCCH
true and complete copies of Continental's Articles of Incorporation and
Bylaws as currently in effect. Continental is duly qualified to do business
as a foreign corporation and is in good standing in each jurisdiction where
the character of the property owned or leased by it or the nature of its
activities makes such qualification necessary, except where the failure to be
so qualified would not have a Material Adverse Effect on Continental. For
purposes of this Agreement, a "Material Adverse Effect," with respect to any
person or entity (including without limitation Continental and HCCH), means a
material adverse effect on the condition (financial or otherwise), business,
properties, assets, liabilities (including contingent liabilities), results
of operations or prospects of such person or entity and its affiliated
companies and subsidiaries and/or parent corporation and/or corporations
under the same stock ownership, taken as a whole; and "Material Adverse
Change" means a change or a development involving a prospective change which
would result in a Material Adverse Effect.
3
<PAGE>
SECTION 2.2 AUTHORIZATION.
(a) Each Shareholder represents and warrants that it has full right,
power and authority to enter into this Agreement, the Representation
Agreements to be entered into by each of them, and each of such other
agreements to be entered into by them in connection with the transactions
contemplated hereby and that this Agreement, the Representation Agreement,
and such other agreements contemplated hereby constitute, or upon execution
will constitute, valid and binding agreements of such Shareholders,
enforceable against each in accordance with their respective terms, except as
such enforcement may be limited by bankruptcy, insolvency or other similar
laws effecting the enforcement of creditors' rights generally or by general
principles of equity.
SECTION 2.3 GOVERNMENTAL AUTHORIZATION. The execution, delivery and
performance by Shareholders of this Agreement, and the consummation of the
transactions contemplated hereunder require no action by Continental or
Shareholders or any filing by them with any governmental body, agency,
official or authority other than in respect of:
(a) compliance with any applicable requirements of the Securities Act of
1933, as amended (the "Securities Act") and the rules and regulations
promulgated thereunder;
(b) compliance with any applicable foreign or state securities or "blue
sky" laws;
(c) compliance with any requirements of any federal, state, foreign or
other insurance or reinsurance or intermediaries or managing general agent
laws, including licensing or other related laws;
(d) such other filings or registrations with, or authorizations,
consents or approvals of, governmental bodies, agencies, officials or
authorities, the failure of which to make or obtain (i) would not reasonably
be expected to have a Material Adverse Effect on Continental, or (ii) would
not materially adversely affect the ability of Continental, each Shareholder
or HCCH to consummate the transactions contemplated hereby and operate their
businesses as heretofore operated.
SECTION 2.4 NON-CONTRAVENTION. The execution, delivery and performance
by Shareholders of this Agreement, and the consummation by Shareholders of
the transactions contemplated hereby and thereby do not and will not:
(a) contravene or conflict with Continental's charter or bylaws;
(b) assuming compliance with the matters referred to in Section 2.3,
contravene or conflict with or constitute a violation of any provision
of any law, regulation, judgment, injunction, order or decree binding upon or
applicable to Continental or Shareholders;
(c) conflict with or result in a breach or violation of, or constitute a
default under, or result in a contractual right to cause the termination or
cancellation of or loss of a material
4
<PAGE>
benefit under, or right to accelerate, any material agreement, contract or
other instrument binding upon Continental or any Shareholder or any material
license, franchise, permit or other similar authorization held by Continental
or any Shareholder; or
(d) result in the creation or imposition of any Lien (as hereinafter
defined) on any material asset of Continental,
except, with respect to clauses (b), (c) and (d) above, for contraventions,
defaults, losses, Liens and other matters referred to in such clauses that in
the aggregate would not be reasonably expected to have, individually or in
the aggregate, a Material Adverse Effect on Continental. For purposes of
this Agreement, the term "Lien" means, with respect to any asset, any
mortgage, lien, pledge, charge, security interest or encumbrance of any kind
in respect of such asset.
SECTION 2.5 CAPITALIZATION.
(a) As of May 30, 1997, the authorized, issued and outstanding capital
stock of Continental was 1,000 shares authorized; 131.6 shares issued and
outstanding all of which outstanding shares were owned by Shareholders free
of any Liens or other encumbrances.
(b) All outstanding shares set forth in (a) above have been, or will be
prior to the Closing Date, duly authorized and validly issued and are fully
paid and nonassessable and free from any preemptive rights. Except as set
forth in and as otherwise contemplated by this Agreement, for Continental
there are outstanding (i) no shares of capital stock or other voting
securities, (ii) no securities convertible into or exchangeable for shares of
its capital stock or voting securities), (iii) no options or other rights to
acquire, and no obligation to issue, any capital stock, voting securities or
securities convertible into or exchangeable for its capital stock or other
voting securities (the items in clauses (i), (ii) and (iii) being referred to
collectively as the "Continental Securities"), (iv) no obligations to
repurchase, redeem or otherwise acquire any of Continental Securities and (v)
no contractual rights of any person or entity to include any such securities
in any registration statement proposed to be filed under the Securities Act.
SECTION 2.6 SUBSIDIARIES AND JOINT VENTURES.
(a) For purposes of this Section 2.6, (i) "Subsidiary" means, with respect
to any entity, any corporation of which securities or other ownership
interests having ordinary voting power to elect a majority of the board of
directors or other persons performing similar functions are directly or
indirectly owned by such entity, and (ii) "Joint Venture" means, with respect
to any entity, any corporation or organization (other than such entity and
any Subsidiary thereof) of which such entity or any Subsidiary thereof is,
directly or indirectly, the beneficial owner of 25% or more of any class of
equity securities or equivalent profit participation interest.
(b) As of the date hereof Continental has no Subsidiaries or Joint
Ventures.
5
<PAGE>
SECTION 2.7 CONTINENTAL FINANCIAL STATEMENTS. Continental has
delivered to HCCH Continental's balance sheets as of December 31, 1996 (the
"Balance Sheet Date") and 1995, Continental's income statements for the
annual periods ended December 31, 1996 and 1995 and Continental's unaudited
balance sheets and income statements for the period ending March 31, 1997
(collectively, the "Continental Financial Statements"). The Continental
Financial Statements present fairly in all material respects, substantially
in conformity with generally accepted accounting principles consistently
applied (except as indicated in the notes thereto), the financial position of
Continental as of the dates thereof and results of operations and cash flows
for the periods therein indicated (subject to normal year-end adjustments in
the case of any interim financial statements and the absence of certain
footnotes in the case of unaudited financial statements). Continental has no
material debt, liability or obligation of any nature, whether accrued,
absolute, contingent or otherwise, and whether due or to become due, that is
not reflected, reserved against or disclosed in the Continental Financial
Statements except for (i) those that are not required to be reported in
accordance with the aforesaid accounting principles; (ii) normal or recurring
liabilities incurred since December 31, 1996 in the ordinary course of
business or (iii) as disclosed in the Continental Disclosure Schedule.
SECTION 2.8 ABSENCE OF CERTAIN CHANGES. Since December 31, 1996,
Continental has in all material respects conducted its business in the
ordinary course and there has not been:
(a) any Material Adverse Change with respect thereto or any event,
occurrence or development of a state of circumstances or facts known to
Continental, which as of the date hereof could reasonably be expected to have
a Material Adverse Effect on Continental;
(b) any declaration, setting aside or payment or any dividend or other
distribution in respect of any shares of capital stock of Continental other
than the declaration, setting aside or payment of dividends in accordance
with its existing dividend policy or practice, which policy or practice is
not inconsistent with Continental's past policy or practice;
(c) any repurchase, redemption or other acquisition by Continental of
any outstanding shares of capital stock or other securities of or other
ownership interests in Continental;
(d) any amendment of any term of any outstanding securities of
Continental;
(e) any damage, destruction or other property or casualty loss (whether
or not covered by insurance) affecting the business, assets, liabilities,
earnings or prospects of Continental which, individually or in the aggregate,
has had or would reasonably be expected to have a Material Adverse Effect on
Continental;
(f) any increase in indebtedness for borrowed money or capitalized lease
obligations of Continental, except in the ordinary course of business;
6
<PAGE>
(g) any sale, assignment, transfer or other disposition of any tangible
or intangible asset material to the business of Continental, except in the
ordinary course of business and for a fair and adequate consideration;
(h) any amendment, termination or waiver by Continental of any right of
substantial value under any agreement, contract or other written commitment
to which it is a party or by which it is bound;
(i) any material reduction in the amounts of coverage provided by
existing casualty and liability insurance policies with respect to the
business or properties of Continental;
(j) other than the severance contract with Ted A. Showalter, Jr. in the
amount of $10,000 ("Showalter Payment"), any (i) grant of any severance or
termination pay to any director, officer or employee of Continental, (ii)
entering into of any employment, deferred compensation or other similar
agreement (or any amendment to any such existing agreement) with any
director, officer or employee of Continental, (iii) any increase in benefits
payable under any existing severance or termination pay policies or
employment agreements, or (iv) any increase in compensation, bonus or other
benefits payable to directors, officers or employees of Continental, in each
case other than in the ordinary course of business consistent with past
practice;
(k) any new or amendment to or alteration of any existing bonus,
incentive, compensation, severance, stock option, stock appreciation right,
pension, matching gift, profit-sharing, employee stock ownership, retirement,
pension group insurance, death benefit, or other fringe benefit plan,
arrangement or trust agreement adopted or implemented by Continental which
would result in a material increase in cost;
(l) any capital expenditures, capital additions or capital improvements
incurred or undertaken by Continental except in the ordinary course of
business; or
(m) the entering into of any agreement by Continental or any person on
behalf of Continental to take any of the foregoing actions, provided,
however, that Continental shall be entitled to utilize up to $579,000 (the
"Continental Permitted Payment") prior to the Closing Date for payment of the
Showalter Payment, employee and management bonuses, director's fees,
dividends, and management fees to Crawley.
SECTION 2.9 NO UNDISCLOSED LIABILITIES. There are no existing
liabilities of Continental of any kind whatsoever that are, individually or
in the aggregate, material to Continental, other than:
(a) liabilities disclosed or provided for in the respective financial
statements as of and for the fiscal year ended December 31, 1996 (including
the notes thereto) of Continental;
7
<PAGE>
(b) liabilities incurred in the ordinary course of business consistent
with past practice since December 31, 1996;
(c) liabilities under this Agreement or indicated in the Continental
Disclosure Schedule.
SECTION 2.10 LITIGATION. Other than actions, suits, proceedings, claims
or investigation occurring in the ordinary course of business involving
respective amounts in controversy of less than $10,000 each and $30,000 in
the aggregate, there is no action, suit, proceeding, claim or to the
knowledge of Continental or Shareholders, investigation pending against, nor
have Continental or Shareholders received written notice of a claim
threatened against Continental or any of its assets or against or involving
any of its officers, directors or employees in connection with the business
or affairs of Continental, including, without limitation, any such claims for
indemnification arising under any agreement to which Continental is a party.
Continental has not received written notice that it is subject, or in default
with respect, to any writ, order, judgment, injunction or decree which could,
individually or in the aggregate, have a Material Adverse Effect on
Continental.
SECTION 2.11 TAXES.
(a) Continental (i) has filed when due (taking into account extensions)
with the appropriate federal, state, local, foreign and other governmental
agencies, all material tax returns, estimates and reports required to be
filed by it, (ii) either paid when due and payable or established adequate
reserves or otherwise accrued on the Continental's Financial Statements all
material federal, state, local or foreign taxes, levies, imposts, duties,
licenses and registration fees and charges of any nature whatsoever, and
unemployment and social security taxes and income tax withholding, including
interest and penalties thereon ("Taxes") and there are no tax deficiencies
claimed in writing by any Taxing authority and received by Continental or
Shareholders that, in the aggregate, would result in any tax liability in
excess of the amount of the reserves or accruals and (iii) has or will
establish in accordance with its normal accounting practices and procedures
accruals and reserves that, in the aggregate, are adequate for the payment of
all Taxes not yet due and payable and attributable to any period preceding
the Effective Time. The Continental Disclosure Schedule sets forth those tax
returns for all periods that to the knowledge of Continental or Shareholders,
currently are the subject of audit by any federal, state, local or foreign
taxing authority.
(b) There are no material taxes, interest, penalties, assessments or
deficiencies claimed in writing by any Taxing authority and received by
Continental or Shareholders to be due in respect of any tax returns filed by
Continental (or any predecessor corporations). Neither Continental nor any
predecessor corporation, has executed or filed with the Internal Revenue
Service ("IRS") or any other Taxing authority any agreement or other document
extending, or having the effect of extending, the period of assessment or
collection of any Taxes.
8
<PAGE>
(c) Continental is not a party to or bound by (or will prior to the
Closing Date become a party to or bound by) any Tax indemnity, Tax sharing or
Tax allocation agreement or other similar arrangement. Continental is not a
member of an affiliated group or filed or been included in a combined,
consolidated or unitary Tax return.
SECTION 2.12 EMPLOYEE BENEFIT PLANS, ERISA.
(a) Continental is not a party to any oral or written (i) employment,
severance, collective bargaining or consulting agreement not terminable on 60
days' or less notice, (ii) agreement with any executive officer or other key
employee of Continental (A) the benefits of which are contingent, or the
terms of which are materially altered, upon the occurrence of a transaction
involving Continental of the nature of any of the transactions contemplated
by this Agreement, (B) providing any term of employment or compensation
guarantee extending for a period longer than one year, or (C) providing
severance benefits or other benefits after the termination of employment of
such executive officer or key employee regardless of the reason for such
termination of employment, (iii) agreement, plan or arrangement under which
any person may receive payments subject to the tax imposed by Section 4999 of
the Code, or (iv) agreement or plan, including, without limitation, any stock
option plan, stock appreciation right plan, restricted stock plan or stock
purchase plan, the benefits of which would be increased, or the vesting of
benefits of which will be accelerated, by the occurrence of any of the
transactions contemplated by this Agreement or the value of any of the
benefits of which will be calculated on the basis of any of the transactions
contemplated by this Agreement.
(b) Neither Continental nor any corporation or other entity which under
Section 4001(b) of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), is under common control with Continental (a "Continental
ERISA Affiliate") maintains or within the past five years has maintained,
contributed to, or been obligated to contribute to, any "Employee Pension
Benefit Plan" ("Pension Plan") or any "Employee Welfare Benefit Plan"
("Welfare Plan") as such terms are defined in Sections 3(2) and 3(1)
respectively of ERISA, which is subject to ERISA. Each Pension Plan and
Welfare Plan disclosed in the Continental Disclosure Schedule (which Plans
have been heretofore delivered to HCCH) and maintained by Continental has
been maintained in all material respects in compliance with their terms and
all provisions of ERISA and the Code (including rules and regulations
thereunder) applicable thereto.
(c) Continental has no Pension Plan or Welfare Plan.
(d) No "prohibited transaction," as defined in Section 406 of ERISA or
Section 4975 of the Code, resulting in liability to Continental or any
Continental ERISA Affiliate has occurred with respect to any Pension Plan or
Welfare Plan. Each of Continental or Original Shareholders has no knowledge
of any breach of fiduciary responsibility under Part 4 of Title I of ERISA
which has resulted in liability of Continental and Continental ERISA
Affiliate, any trustee, administrator or fiduciary of any Pension Plan or
Welfare Plan.
9
<PAGE>
(e) Neither Continental nor any Continental ERISA Affiliate, since
January 1, 1986, has maintained or contributed to, or been obligated or
required to contribute to, a "Multiemployer Plan," as such term is defined in
Section 4001(a)(3) of ERISA. Neither Continental nor any Continental ERISA
Affiliate has either withdrawn, partially or completely, or instituted steps
to withdraw, partially or completely, from any Multiemployer Plan nor has any
event occurred which would enable a Multiemployer Plan to give notice of and
demand payment of any withdrawal liability with respect to Continental or any
Continental ERISA Affiliate.
(f) There is no contract, agreement, plan or arrangement covering any
employee or former employee of Continental or any Continental ERISA Affiliate
that, individually or collectively, could give rise to the payment of any
amount that would not be deductible pursuant to the terms of Sections
162(a)(I) or 280G of the Code.
(g) With respect to Continental and each Continental ERISA Affiliate,
the Continental Disclosure Schedule correctly identifies each material
agreement, policy, plan or other arrangement, whether written or oral,
express or implied, fixed or contingent, to which Continental is a party or
by which Continental or any property or asset of Continental is bound, which
is or relates to a pension, option, bonus, deferred compensation, retirement,
stock purchase, profit-sharing, severance pay, health, welfare, incentive,
vacation, sick leave, medical disability, hospitalization, life or other
insurance or fringe benefit plan, policy or arrangement.
(h) Neither Continental nor any Continental ERISA Affiliate maintains or
has maintained or contributed to any Pension Plan that is or was subject to
Section 302 of Title IV of ERISA or Section 412 of the Code. Continental has
made available to HCCH, for each Pension Plan which is intended to be
"qualified" within the meaning of Section 401(a) of the Code, a copy of the
most recent determination letter issued by the IRS to the effect that each
such Plan is so qualified and that each trust created thereunder is tax
exempt under Section 501 of the Code, and Continental is unaware of any fact
or circumstances that would jeopardize the qualified status of each such
Pension Plan or the tax exempt status of each trust created thereunder.
SECTION 2.13 MATERIAL AGREEMENTS.
(a) The Continental Disclosure Schedule includes a complete and accurate
list of all contracts, agreements, leases (other than Continental Property
Leases, as hereinafter defined), and instruments to which Continental is a
party or by which it or its properties or assets are bound which individually
involve net payments or receipts in excess of $25,000 per annum, inclusive of
contracts entered into with customers and suppliers in the ordinary course of
business, or that pertain to employment or severance benefits for any
officer, director or employee of Continental, whether written or oral, but
exclusive of contracts, agreements, leases and instruments terminable without
penalty upon 60 days' or less prior written notice to the other party or
parties thereto (the "Material Continental Agreements").
10
<PAGE>
(b) Neither Continental nor, to the knowledge of Continental, any other
party is in default under any Material Continental Agreement and no event has
occurred which (after notice or lapse of time or both) would become a breach
or default under, or would permit modification, cancellation, acceleration or
termination of any Material Continental Agreement or result in the creation
of any security interest upon, or any person obtaining any right to acquire,
any properties, assets or rights of Continental, which, in any such case, has
had or would reasonably be expected to have a Material Adverse Effect.
(c) To the knowledge of Continental, each such Material Continental
Agreement is in full force and effect and is valid and legally binding and
there are no material unresolved disputes involving or with respect to any
Material Continental Agreement. No party to a Material Continental Agreement
has advised Continental or Shareholders that it intends either to terminate a
Material Continental Agreement or to refuse to renew a Material Continental
Agreement upon the expiration of the term thereof. No representation or
warranty is made that all benefits contemplated in the Material Continental
Agreements will be received.
(d) Continental is not in violation of, or in default with respect to,
any term of its Articles of Incorporation or Bylaws.
SECTION 2.14 PROPERTIES. Continental owns no real estate, and all
leases of real property to which Continental is a party or by which it is
bound ("Continental Property Leases") are in full force and effect. There
exists no default under such Continental Property Leases, nor any event which
with notice or lapse of time or both would constitute a default thereunder,
which default would have a Material Adverse Effect. All of the properties
and assets which are owned by Continental are owned free and clear of any
Lien, except for Liens which do not have a Material Adverse Effect.
Continental has good and indefeasible title with respect to such owned
properties and assets subject to no Liens, other than those permitted under
this Section 2.14, to all of the properties and assets necessary for the conduct
of their business other than to the extent that the failure to have such
title would not have a Material Adverse Effect.
SECTION 2.15 ENVIRONMENTAL MATTERS.
(a) For the purposes of this Agreement, the following terms have the
following meanings:
"Environmental Laws" shall mean any and all federal, state, local and
foreign statutes, laws (including case law), regulations, ordinances,
rules, judgments, orders, decrees, codes, plans, injunctions, permits,
concessions, grants, franchises, licenses, agreements and governmental
restrictions relating to human health, the environment or to emissions,
discharges or releases of pollutants, contaminants, Hazardous Substances
(as hereinafter defined) or wastes into the environment or otherwise
relating to the manufacture, processing, distribution, use, treatment,
storage, disposal, transport or handling of pollutants, contaminants,
Hazardous Substances or wastes or the clean-up or other remediation
thereof.
11
<PAGE>
"Environmental Liabilities" shall mean all liabilities, whether vested
or unvested, contingent or fixed, actual or potential, which (i) arise
under or relate to Environmental Laws and (ii) relate to actions occurring
or conditions existing on or prior to the Effective Time.
"Hazardous Substances" shall mean any toxic, radioactive, caustic or
otherwise hazardous substance, including petroleum, its derivatives,
by-products and other hydrocarbons, or any substance having any constituent
elements displaying any of the foregoing characteristics.
"Regulated Activity" shall mean any generation, treatment, storage,
recycling, transportation, disposal or release of any Hazardous Substances.
(b) No notice, notification, demand, request for information, citation,
summons, complaint or order has been received, no complaint has been filed,
no penalty has been assessed and no investigation or review is pending, or to
any such party's knowledge, has been threatened by any governmental entity or
other party with respect to any (i) alleged violation of any Environmental
Law, (ii) alleged failure to have any environmental permit, certificate,
license, approval, registration or authorization required in connection with
the conduct of its business or (iii) Regulated Activity.
(c) Continental has no material Environmental Liabilities and there has
been no release of Hazardous Substances into the environment by Continental
or with respect to any of its properties which has had, or would reasonably
be expected to have, a Material Adverse Effect.
SECTION 2.16 LABOR MATTERS. Continental is not a party to any
collective bargaining agreement or other labor union contract applicable to
persons employed by Continental, nor does it know of any activities or
proceedings of any labor union to organize any such employees.
SECTION 2.17 COMPLIANCE WITH LAWS. Except for violations which do not
have and would not reasonably be expected to have, individually or in the
aggregate, a Material Adverse Effect, Continental has received no notice that
it is in violation of, or has violated, any applicable provisions of any
laws, statutes, ordinances or regulations or any term of any judgment,
decree, injunction or order binding against it.
SECTION 2.18 TRADEMARKS, TRADENAMES, ETC. Continental owns or
possesses, or holds a valid right or license to use, all intellectual
property, patents, trademarks, tradenames, servicemarks, copyrights and
licenses (collectively "Intellectual Property"), and all rights with respect
to the foregoing, necessary for the conduct of its business as now conducted,
without any known conflict with the rights of others. A schedule of all
Intellectual Property owned, possessed or held by Continental is contained on
Continental's Disclosure Schedule.
SECTION 2.19 SALE OF CONTINENTAL. Except as contemplated by this
Agreement, there are currently no discussions to which Continental or any of the
Shareholders is a party relating to
12
<PAGE>
(a) the sale of any material portion of Continental's assets, (b) any merger,
consolidation, liquidation, dissolution or similar transaction involving
Continental whereby Continental will issue any securities or for which
Continental is required to obtain the approval of its shareholders, or (c)
the sale of the Continental Common Stock.
SECTION 2.20 BROKER'S FEES. Neither Continental, Shareholders nor
anyone acting on the behalf or at the request thereof has any liability to
any broker, finder, investment banker or agent, or has agreed to pay any
brokerage fees, finder's fees or commissions, or to reimburse any expenses of
any broker, finder, investment banker or agent in connection with this
Agreement.
SECTION 2.21 INVESTMENT REPRESENTATION. The shares of HCCH Common Stock
to be acquired by each of the Other Shareholders pursuant to this Agreement
will be acquired solely for the account of such Other Shareholder, for
investment purposes only and not with a view to the distribution thereof.
The Other Shareholders are not participating, directly or indirectly, in any
distribution or transfer of such HCCH Common Stock, nor are they
participating, directly or indirectly, in underwriting any such distribution
of HCCH Common Stock within the meaning of the Securities Act. The Other
Shareholders have such knowledge and experience in business matters that each
is capable of evaluating the merits and risks of an investment in HCCH and
the acquisition of the shares of HCCH Common Stock, and each is making an
informed investment decision with respect thereto. The Other Shareholders
have been informed by HCCH that the shares of HCCH Common Stock to be issued
pursuant to this Agreement and the documents to be executed in connection
herewith will not be registered under the Securities Act at the time of their
issuance and may not be transferred, assigned or otherwise disposed of absent
registration under the Securities Act or availability of an appropriate
exemption therefrom. The Other Shareholders have further been informed that
HCCH will be under no obligation to register the shares of HCCH Common Stock
under the Securities Act or to take any steps to assist the Other
Shareholders to comply with any applicable exemption under the Securities Act
with respect to the shares of HCCH Common Stock; provided, however, HCCH
shall promptly approve the Other Shareholder's pledge of its HCCH Common
Stock to any national bank having three or more bank locations or state bank
chartered in the State of Tennessee having a minimum deposits of $50,000,000.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF HCCH
Except as disclosed in a document referring specifically to this Agreement
or in a document, exhibit, or appendix filed with the Securities and Exchange
Commission ("SEC") which has been filed on or before the date hereof,
(collectively referred to herein as the "HCCH Disclosure Schedule") which has
been made available to Shareholders on or before the date hereof, HCCH
represents and warrants to Shareholders (it being agreed that the disclosure on
the HCCH Disclosure Schedule of the existence of any document or fact or
circumstance or situation relating to any representation, warranty, covenant or
agreement in any section of this Agreement
13
<PAGE>
shall be automatically deemed to be disclosure of such document or fact or
circumstance or situation for purposes of all other representations,
warranties, covenants and agreements in this Agreement):
SECTION 3.1 CORPORATE EXISTENCE AND POWER. HCCH and each of its
Subsidiaries is a corporation duly incorporated, validly existing and in good
standing under the laws of the state of its incorporation. Each of HCCH and
each of its Subsidiaries has all corporate powers and all material
Governmental Authorizations required to carry on its business as now
conducted, except such Governmental Authorizations the failure of which to
have obtained would not have a Material Adverse Effect on HCCH. HCCH and
each of its Subsidiaries is duly qualified to do business as a foreign
corporation and is in good standing in each jurisdiction where the character
of the property owned or leased by it or the nature of its activities makes
such qualification necessary, except where the failure to be so qualified
would not have a Material Adverse Effect on HCCH. HCCH has delivered to
Continental true and complete copies of HCCH's Certificate of Incorporation
and Bylaws, as currently in effect.
SECTION 3.2 CORPORATE AUTHORIZATION. The execution, delivery and
performance by HCCH of this Agreement, and the consummation by HCCH of the
transactions contemplated hereby are within the corporate powers of HCCH and
have been duly authorized by all necessary corporate action. This Agreement
constitutes, or upon execution will constitute, valid and binding agreements
of HCCH enforceable in each case in accordance with their respective terms,
except as such enforcement may be limited by bankruptcy, insolvency or other
similar laws affecting the enforcement of creditors' rights generally or by
general principles of equity.
SECTION 3.3 GOVERNMENTAL AUTHORIZATION. The execution, delivery and
performance by HCCH of this Agreement, require no action by or in respect of,
or filing with, any governmental body, agency, official or authority other
than:
(a) compliance with any applicable requirements of the Exchange Act and
the rules and regulations promulgated thereunder;
(b) compliance with any applicable requirements of the Securities Act
and the rules and regulations promulgated thereunder;
(c) compliance with any applicable foreign or state securities or "blue
sky" laws and the rules and regulations of the NYSE;
(d) compliance with any applicable requirements of any insurance
regulatory agency having authority over HCCH and its Subsidiaries; and
(e) such other filings or registrations with, or authorizations,
consents or approvals of, governmental bodies, agencies, officials or
authorities, the failure of which to make or obtain (i) would not reasonably
be expected to have a Material Adverse Effect on HCCH or (ii) would
14
<PAGE>
not materially adversely affect the ability of Continental or HCCH to
consummate the transactions contemplated hereby and operate their businesses
as heretofore operated.
SECTION 3.4 NON-CONTRAVENTION. The execution, delivery and performance
by HCCH of this Agreement and the consummation by HCCH of the transactions
contemplated hereby and thereby do not and will not:
(a) contravene or conflict with the Certificate of Incorporation, or
Bylaws of HCCH;
(b) assuming compliance with the matters referred to in Section 3.3,
contravene or conflict with or constitute a violation of any provision of any
law, regulation, judgment, injunction, order or decree binding upon or
applicable to HCCH or any Subsidiary of HCCH;
(c) conflict with or result in a breach or violation of, or constitute a
default under, or result in a contractual right to cause the termination or
cancellation of or loss of a material benefit under, or right to accelerate,
any material agreement, contract or other instrument binding upon HCCH or any
other Subsidiary of HCCH or any material license, franchise, permit or other
similar authorization held by HCCH or any Subsidiary of HCCH; or
(d) result in the creation or imposition of any Lien on any material
asset of HCCH or any Subsidiary of HCCH,
except, with respect to clauses (b), (c) and (d) above, for contraventions,
defaults, losses, Liens and other matters referred to in such clauses that in
the aggregate would not be reasonably expected to have, individually or in
the aggregate, a Material Adverse Effect on HCCH.
SECTION 3.5 CAPITALIZATION OF HCCH.
(a) The authorized capital stock of HCCH consists of 100,000,000 shares
of HCCH Common Stock. As of March 31, 1997, there were 36,168,185 shares of
HCCH Common Stock issued and outstanding. All outstanding shares of HCCH
Common Stock have been duly authorized and validly issued and are fully paid
and nonassessable and free from any preemptive rights. Except as set forth
in this Section and as otherwise contemplated by this Agreement and except as
disclosed in public filings made by HCCH with the SEC prior to the Closing
Date or on the HCCH Disclosure Schedule and except for changes since December
31, 1996 resulting from the exercise of employee and director stock options
or resulting from other mergers, acquisitions or purchases, there are
outstanding (i) no shares of capital stock or other voting securities of
HCCH, (ii) no securities of HCCH convertible into or exchangeable for shares
of capital stock or voting securities of HCCH and (iii) no options or other
rights to acquire from HCCH, and no obligation of HCCH to issue, any capital
stock, voting securities or securities convertible into or exchangeable for
capital stock or other voting securities of HCCH (the items in clauses (i),
(ii) and (iii) being referred to collectively as the "HCCH Securities").
There are no outstanding obligations of HCCH or any of its Subsidiaries to
repurchase, redeem or otherwise acquire any HCCH Securities.
15
<PAGE>
(b) All shares of HCCH Common Stock issued to Shareholders shall, upon
issuance, be fully paid, validly issued and nonassessable.
SECTION 3.6 SUBSIDIARIES.
(a) Each HCCH Subsidiary is a corporation duly incorporated, validly
existing and in good standing under the laws of its jurisdiction of
incorporation, has all corporate powers and all material Governmental
Authorizations required to carry on its business as now conducted, except
such Governmental Authorizations the failure of which to have obtained would
not have a Material Adverse Effect on HCCH, and is duly qualified to do
business as a foreign corporation and is in good standing in each
jurisdiction where the character of the property owned or leased by HCCH, or
the nature of its activities make such qualification necessary, except for
those jurisdictions where failure to be so qualified would not, individually
or in the aggregate, have a Material Adverse Effect on HCCH. All
Subsidiaries and Joint Ventures material to the business of HCCH ("Material
HCCH Subsidiaries") and their respective jurisdictions of incorporation or
organization and HCCH's ownership interest therein are identified in the HCCH
Disclosure Schedule. Other than its investments in its Subsidiaries and
Joint Ventures, and shares of stock in publicly held companies aggregating
less than 10% of such public company's outstanding stock, HCCH does not own,
directly or indirectly, any outstanding capital stock or equity interest in
any corporation, partnership, Joint Venture or other entity.
(b) All of the outstanding capital stock of, or other ownership
interests in, each Material HCCH Subsidiary that is owned by HCCH, is owned
by HCCH, directly or indirectly, free and clear of any material Lien and free
of any other material limitation or restriction on its rights as owner
thereof (including any restriction on the right to vote, sell or otherwise
dispose of such capital stock or other ownership interests), other than those
imposed by applicable law. There are no existing options, calls or
commitments of any character relating to the issued or unissued capital stock
or other securities or equity interests (collectively, "HCCH Subsidiary
Securities") of any HCCH Subsidiary.
SECTION 3.7 SEC FILINGS.
(a) HCCH has since October 28, 1992 filed all forms, proxy statements,
schedules, reports and other documents required to be filed by it with the
SEC pursuant to the Exchange Act.
(b) HCCH has made available, and will promptly make available in the
case of any of the following filed with the SEC on or after the date hereof
and prior to the Closing Date, to Continental:
(i) its annual reports on Form 10-K for its fiscal years ended
December 31, 1996, 1995 and 1994;
16
<PAGE>
(ii) any current reports on Form 8-K since January 1, 1997 and its
proxy or information statements relating to meetings of, or actions taken
without a meeting by, the shareholders of HCCH held since January 1, 1997;
and
(iii) all of its other reports, including reports on Form 10-Q,
statements, schedules and registration statements filed with the SEC since
December 31, 1996. None of HCCH's Subsidiaries is required to file any
forms, reports or other documents with the SEC.
(c) As of its filing date, no such report or statement filed pursuant to
the Exchange Act contained any untrue statement of a material fact or omitted
to state any material fact necessary in order to make the statements made
therein, in the light of the circumstances under which they were made, not
misleading.
(d) No registration statement filed pursuant to the Securities Act, if
declared effective by the SEC, as of the date such statement or amendment
became effective, contained any untrue statement of a material fact or
omitted to state any material fact required to be stated therein or necessary
to make the statements therein not misleading.
SECTION 3.8 FINANCIAL STATEMENTS. The audited consolidated financial
statements of HCCH included in its annual reports on Form 10-K and the
unaudited financial statements of HCCH included in its quarterly reports on
Form 10-Q referred to in Section 3.7 present fairly, in conformity with
generally accepted accounting principles applied on a consistent basis
(except as may be indicated in the notes thereto), the consolidated financial
position of HCCH and its consolidated subsidiaries as of the dates thereof
and their consolidated results of operations and cash flows for the periods
then ended (subject to normal year-end adjustments in the case of any interim
financial statements). For purposes of this Agreement, "HCCH Balance Sheet"
means the consolidated balance sheet of HCCH as of December 31, 1996, and the
notes thereto, contained in HCCH's annual report on Form 10-K filed with the
SEC, and "HCCH Balance Sheet Date" means December 31, 1996.
SECTION 3.9 ABSENCE OF CERTAIN CHANGES. Except as disclosed in the HCCH
Disclosure Schedule, since the HCCH Balance Sheet Date, HCCH and each of its
Subsidiaries have in all material respects conducted their business in the
ordinary course and there has not been:
(a) any Material Adverse Change with respect to HCCH or any event,
occurrence or development of a state of circumstances or facts known to HCCH,
which as of the date hereof could reasonably be expected to have a Material
Adverse Effect on HCCH;
(b) any amendment of any material term of any outstanding HCCH
Securities;
(c) the entering into of any agreement by HCCH or any person on behalf
of HCCH to take any of the foregoing actions.
17
<PAGE>
SECTION 3.10 NO UNDISCLOSED LIABILITIES. There are no liabilities of
HCCH or any of its Subsidiaries of any kind whatsoever that are, individually
or in the aggregate, material to HCCH and its Subsidiaries, taken as a whole,
other than:
(a) liabilities disclosed or provided for in the HCCH Balance Sheet
(including the notes thereto);
(b) liabilities incurred in the ordinary course of business consistent
with past practice since the HCCH Balance Sheet Date; and
(c) liabilities under this Agreement or as indicated in the HCCH
Disclosure Schedule.
SECTION 3.11 LITIGATION. Other than actions, suits, proceedings, claims
or investigations occurring in the ordinary course of business or such
actions, suits, proceedings, claims or investigations involving respective
amounts in controversy of less than $100,000 each, there is no action, suit,
proceeding, claim or investigation pending or, to the knowledge of HCCH,
overtly threatened, against HCCH or any of its Subsidiaries or any of their
assets or against or involving any of its officers, directors or employees in
connection with the business or affairs of HCCH, including, without
limitation, any such claims for indemnification arising under any agreement
to which HCCH or any of its Subsidiaries is a party, which could,
individually or in the aggregate, have a Material Adverse Effect on HCCH.
HCCH and each of its Subsidiaries are not subject to or in default with
respect to any writ, order, judgment, injunction or decree which could,
individually or in the aggregate, have a Material Adverse Effect on HCCH.
SECTION 3.12 TAXES.
(a) HCCH and each of its Subsidiaries (i) has filed when due (taking
into account extensions) with the appropriate federal, state, local, foreign
and other governmental agencies, all material tax returns, estimates and
reports required to be filed by it, (ii) either paid when due and payable or
established adequate reserves or otherwise accrued on the HCCH Balance Sheet
all material Taxes, and there are no tax deficiencies claimed in writing by
any Taxing authority and received by HCCH that, in the aggregate, would
result in any tax liability in excess of the amount of the reserves or
accruals, and (iii) has or will establish in accordance with its normal
accounting practices and procedures accruals and reserves that, in the
aggregate, are adequate for the payment of all Taxes not yet due and payable
and attributable to any period preceding the Effective Time. The HCCH
Disclosure Schedule sets forth those tax returns of HCCH (or any predecessor
entities) for all periods that currently are the subject of audit by any
federal, state, local or foreign taxing authority.
(b) There are no material taxes, interest, penalties, assessments or
deficiencies claimed in writing by any taxing authority and received by HCCH
or any of its Subsidiaries to be due in respect of any tax returns filed by
HCCH (or any predecessor corporations) or any of its Subsidiaries. Neither
HCCH nor any predecessor corporation, nor any of their respective
Subsidiaries, has executed or filed with the IRS or any other Taxing
authority any agreement or
18
<PAGE>
other document extending, or having the effect of extending, the period of
assessment or collection of any Taxes.
(c) HCCH is not a party to or bound by (or will prior to the Closing
Date become a party to or bound by) any Tax indemnity, Tax sharing or Tax
allocation agreement or other similar arrangement which includes a party
other than HCCH and its Subsidiaries. Neither HCCH nor any of its
Subsidiaries has been a member of an affiliated group other than one of which
HCCH was the common parent, or filed or been included in a combined,
consolidated or unitary Tax return other than one filed by HCCH (or a return
for a group consisting solely of its Subsidiaries and predecessors).
SECTION 3.13 EMPLOYEE BENEFIT PLANS; ERISA.
(a) Each Pension Plan and Welfare Plan maintained by HCCH has been
maintained in all material respects in compliance with their terms and all
provisions of ERISA and the Code (including rules and regulations thereunder)
applicable thereto.
(b) HCCH has made available to Continental for each Pension Plan which
is intended to be "qualified" within the meaning of Section 401(a) of the
Code, a copy of the most recent determination letter issued by the IRS to the
effect that each such Plan is so qualified and that each trust created
thereunder is tax exempt under Section 501 of the Code, and HCCH is unaware
of any fact or circumstances that would jeopardize the qualified status of
each such Pension Plan or the tax exempt status of each trust created
thereunder.
(c) To the knowledge of HCCH, no Pension Plan or Welfare Plan is
currently subject to an audit or other investigation by the IRS, the
Department of Labor, the Pension Benefit Guaranty Corporation or any other
governmental agency or office nor are any such Plans subject to any lawsuits
or legal proceedings of any kind or to any material pending disputed claims
by employees or beneficiaries covered under any such Plan or by any other
parties.
(d) No "prohibited transaction," as defined in Section 406 of ERISA or
Section 4975 of the Code, resulting in liability to HCCH or any HCCH ERISA
Affiliate has occurred with respect to any Pension Plan or Welfare Plan.
HCCH has no knowledge of any breach of fiduciary responsibility under Part 4
of Title I of ERISA which has resulted in liability of HCCH, any HCCH ERISA
Affiliate, any trustee, administrator or fiduciary of any Pension Plan or
Welfare Plan.
(e) Neither HCCH nor any HCCH ERISA Affiliate, since January 1, 1986,
has maintained or contributed to, or been obligated or required to contribute
to, a "Multiemployer Plan," as such term is defined in Section 4001(a)(3) of
ERISA. Neither HCCH nor any HCCH ERISA Affiliate has either withdrawn,
partially or completely, or instituted steps to withdraw, partially or
completely, from any Multiemployer Plan nor has any event occurred which
would enable a Multiemployer Plan to give notice of and demand payment of any
withdrawal liability with respect to HCCH or any HCCH ERISA Affiliate.
19
<PAGE>
(f) With respect to HCCH and each HCCH ERISA Affiliate, the HCCH
Disclosure Schedule correctly identifies each material agreement, policy,
plan or other arrangement, whether written or oral, express or implied, fixed
or contingent, to which HCCH is a party or by which HCCH or any property or
asset of HCCH is bound, which is or relates to a pension, option, bonus,
deferred compensation, retirement, stock purchase, profit-sharing, severance
pay, health, welfare, incentive, vacation, sick leave, medical disability,
hospitalization, life or other insurance or fringe benefit plan, policy or
arrangement.
SECTION 3.14 MATERIAL AGREEMENTS.
(a) HCCH has disclosed either in its Disclosure Schedule or in filings
with the SEC a complete and accurate list of all contracts, agreements,
leases (other than HCCH Property Leases, as hereinafter defined) and
instruments to which HCCH or any of its Subsidiaries is a party or by which
it or its properties or assets are bound which individually involve net
payments or receipts in excess of $10,000,000 per annum, inclusive of
contracts that pertain to employment or severance benefits for any officer,
director or employee of HCCH, whether written or oral, but exclusive of
contracts entered into with customers and suppliers in the ordinary course of
business or contracts, agreements, leases and instruments terminable without
penalty by HCCH upon 60 days or less prior written notice to the other party
or parties thereto (the "Material HCCH Agreements").
(b) Neither HCCH, any HCCH Subsidiary, nor, to the knowledge of HCCH,
any other party is in default under any Material HCCH Agreement and no event
has occurred which (after notice or lapse of time or both) would become a
breach or default under, or would permit modification, cancellation,
acceleration or termination of any Material HCCH Agreement or result in the
creation of any security interest upon, or any person obtaining any right to
acquire, any properties, assets or rights of HCCH which, in any such case,
has had or would reasonably be expected to have a Material Adverse Effect on
HCCH.
(c) To the knowledge of HCCH, each such Material HCCH Agreement is in
full force and effect and is valid and legally binding and there are no
material unresolved disputes involving or with respect to any Material HCCH
Agreement. No party to a Material HCCH Agreement has advised HCCH or any of
its Subsidiaries that it intends either to terminate a Material HCCH
Agreement or to refuse to renew a Material HCCH Agreement upon the expiration
of the term thereof.
(d) Each of HCCH, and each HCCH Subsidiary is not in violation of, or in
default with respect to, any term of its Certificate of Incorporation or
Bylaws.
SECTION 3.15 PROPERTIES. To the knowledge of HCCH, all leases of real
property to which HCCH or any of its Subsidiaries is a party or by which it
or any of its Subsidiaries is bound ("HCCH Property Leases") which are
material to the business of HCCH and its Subsidiaries taken as a whole are in
full force and effect. To the knowledge of HCCH, there exists no default
under such HCCH Property Leases, nor any event which with notice or lapse
20
<PAGE>
of time or both would constitute a default thereunder by HCCH or any of its
Subsidiaries, which default would have a Material Adverse Effect on HCCH.
All of the properties and assets which are owned by HCCH and each of its
Subsidiaries are owned by each of them, respectively, free and clear of any
Lien, except for Liens which do not have a Material Adverse Effect on HCCH.
HCCH and each of its Subsidiaries have good and indefeasible title with
respect to such owned properties and assets subject to no Liens, other than
those permitted under this Section 3.15, to all of the properties and assets
necessary for the conduct of their business other than to the extent that the
failure to have such title would not have a Material Adverse Effect on HCCH.
SECTION 3.16 ENVIRONMENTAL MATTERS.
(a) To the knowledge of HCCH, no notice, notification, demand, request
for information, citation, summons, complaint or order has been received, no
complaint has been filed, no penalty has been assessed and no investigation
or review is pending, or to HCCH's knowledge, has been threatened by any
governmental entity or other party with respect to any (i) alleged violation
by HCCH or any of its Subsidiaries of any Environmental Law, (ii) alleged
failure by HCCH or any such Subsidiary to have any environmental permit,
certificate, license, approval, registration or authorization required in
connection with the conduct of its business or (iii) Regulated Activity.
(b) To the knowledge of HCCH, neither HCCH nor any of its Subsidiaries
has any material Environmental Liabilities and there has been no release of
Hazardous Substances into the environment by HCCH or any such Subsidiary or
with respect to any of their respective properties which has had, or would be
reasonably expected to have, a Material Adverse Effect on HCCH.
SECTION 3.17 LABOR MATTERS. Neither HCCH nor any of its Subsidiaries is
a party to any collective bargaining agreement or other labor union contract
applicable to persons employed by HCCH or any such Subsidiary, nor do the
executive officers of HCCH know of any activities or proceedings of any labor
union to organize any such employees.
SECTION 3.18 COMPLIANCE WITH LAWS. Except for violations which do not
have and would not reasonably be expected to have, individually or in the
aggregate, a Material Adverse Effect on HCCH, neither HCCH nor any of its
Subsidiaries is in violation of, or has violated, any applicable provisions
of any laws, statutes, ordinances or regulations or any term of any judgment,
decree, injunction or order binding against it.
SECTION 3.19 TRADEMARKS, TRADENAMES, ETC. HCCH owns or possesses, or
holds a valid right or license to use, all intellectual property, patents,
trademarks, tradenames, servicemarks, copyrights and licenses, and all rights
with respect to the foregoing, necessary for the conduct of its business as
now conducted, without any known conflict with the rights of others.
SECTION 3.20 BROKER'S FEES. Neither HCCH, nor anyone acting on the
behalf or at the request thereof has any liability to any broker, finder,
investment banker or agent, or has agreed
21
<PAGE>
to pay any brokerage fees, finder's fees or commissions, or to reimburse any
expenses of any broker, finder, investment banker or agent in connection with
the transactions contemplated by this Agreement.
ARTICLE IV
COVENANTS OF CONTINENTAL AND SHAREHOLDERS
From the date hereof until the occurrence of the earlier of (i) the
Effective Time or (ii) termination of this Agreement pursuant to Section 8.1
hereof, Continental and each of the Shareholders agree that, other than
utilization of the Continental Permitted Payment:
SECTION 4.1 CONDUCT OF CONTINENTAL. Continental shall in all material
respects conduct its business in the ordinary course. Without limiting the
generality of the foregoing, from the date hereof until the Effective Time,
except as contemplated by this Agreement:
(a) Continental will not adopt or propose any change in its Articles of
Incorporation or Bylaws;
(b) Continental will not enter into or amend any employment agreements
(oral or written) or increase the compensation payable or to become payable
by it to any of its officers, directors, or consultants over the amount
payable as of December 31, 1996, or increase the compensation payable to any
other employees (other than (i) increases in the ordinary course of business
which are not in the aggregate material, or (ii) pursuant to plans disclosed
in Continental Disclosure Schedule), or adopt or amend any employee benefit
plan or arrangement (oral or written);
(c) Continental will not issue any Continental Securities;
(d) Continental will keep in full force and effect any existing
directors' and officers' liability insurance and will not modify or reduce
the coverage thereunder;
(e) Continental will not pay any dividend or make any other distribution
to holders of its capital stock nor redeem or otherwise acquire any
Continental Securities;
(f) Continental will not, directly or indirectly, dispose of or acquire
any material properties or assets except in the ordinary course of business;
(g) Continental will not incur any additional indebtedness for borrowed
money except pursuant to existing arrangements which have been disclosed to
HCCH prior to the date hereof;
22
<PAGE>
(h) Continental will not amend or change the period of exercisability or
accelerate the exercisability of any outstanding options or warrants to
acquire shares of capital stock, or accelerate, amend or change the vesting
period of any outstanding restricted stock;
(i) Continental will not (i) change accounting methods except as
necessitated by changes which Continental is required to make in order to
prepare its federal, state and local tax returns; (ii) amend or terminate any
contract, agreement or license to which it is a party (except pursuant to
arrangements previously disclosed in writing to HCCH or disclosed in the
Continental Disclosure Schedule) except those amended or terminated in the
ordinary course of business, consistent with past practices, or involving
changes which are not materially adverse in amount or effect to Continental
individually or taken as a whole; (iii) lend any amount to any person or
entity, other than advances for travel and expenses which are incurred in the
ordinary course of business consistent with past practices, and which are not
material in amount to Continental taken as a whole, which travel and expenses
shall be documented by receipts for the claimed amounts; (iv) enter into any
guarantee or suretyship for any obligation except for the endorsements of
checks and other negotiable instruments in ordinary course of business,
consistent with past practice; (v) waive or release any material right or
claim except in the ordinary course of business, consistent with past
practice; (vi) issue or sell any shares of its capital stock of any class or
any other of its securities, or issue or create any warrants, obligations,
subscriptions, options, convertible securities, stock appreciation rights or
other commitments to issue shares of capital stock, or take any action other
than this transaction to accelerate the vesting of any outstanding option or
other security (except pursuant to existing arrangements disclosed in writing
to HCCH before the date of this agreement); (vii) merge, consolidate or
reorganize with or acquire any entity; (viii) agree to any audit assessment
by any tax authority or file any federal or state income or franchise tax
return unless copies of such returns have been delivered to HCCH for its
review prior to such agreement or filing; and (ix) terminate the employment
of any key executive employee; and
(j) Continental and Shareholders will not, directly or indirectly, agree
or commit to do any of the foregoing.
SECTION 4.2 ACCESS TO FINANCIAL AND OPERATIONAL INFORMATION. Continental
and Shareholders will give HCCH, its counsel, financial advisors, auditors
and other authorized representatives reasonable access during normal business
hours to their offices, properties, books and records, will furnish to HCCH,
its counsel, financial advisors, auditors and other authorized representatives
such financial and operating data as such persons may reasonably request and
will instruct its employees, counsel and financial advisors to cooperate with
HCCH in its investigation of the business of Continental and in the planning
for the combination of the businesses of Continental and HCCH following the
consummation of the transactions contemplated by this Agreement; PROVIDED
that no investigation pursuant to this Section shall affect any representation
or warranty given hereunder. In addition, following the public announcement
of this Agreement or the transactions contemplated hereby, Continental will
cooperate in arranging joint meetings among representatives of Continental
and HCCH and persons with whom they maintain business relationships.
23
<PAGE>
SECTION 4.3 OTHER OFFERS.
(a) Continental and Shareholders will not, directly or indirectly, (i)
take any action to solicit, initiate or discuss any Acquisition Proposal (as
hereinafter defined), or (ii) engage in negotiations with, or disclose any
nonpublic information relating to, Continental or afford access to the
properties, books or records of Continental to, any person or entity that may
be considering making, or has made, an Acquisition Proposal. To the extent
that Continental or any of their respective officers, directors, employees or
other agents, or Shareholders are currently involved in any discussions with
respect to any Acquisition Proposal or contemplated or proposed Acquisition
Proposal, Continental, and Shareholders shall terminate, and shall use their
best efforts to cause, where applicable, their respective officers,
directors, employees or other agents to terminate, such discussions
immediately. The term "Acquisition Proposal" as used herein means any offer
or proposal for, or any indication of interest in, a merger or other business
combination involving Continental or the acquisition of any equity interest
in, or a substantial portion of the assets of, Continental other than the
transactions contemplated by this Agreement.
SECTION 4.4 MAINTENANCE OF BUSINESS. Continental will use its
reasonable best efforts to carry on its business, keep available the services
of its officers and employees and preserve its relationships with those of
its customers, agents, suppliers, licensors and others having business
relationships with it that are material to its business in substantially the
same manner as it has prior to the date hereof. If Continental becomes aware
of a material deterioration or facts which are likely to result in a material
deterioration in the relationship with any customers, supplier, licensor or
others having business relationships with it, it will promptly in writing
bring such information to the attention of the HCCH in writing.
SECTION 4.5 COMPLIANCE WITH OBLIGATIONS. Continental shall use its
reasonable best efforts to comply in all material respects with (i) all
applicable federal, state, local and foreign laws, rules and regulations,
(ii) all material agreements and obligations, including its respective
charter and bylaws, by which it, its properties or its assets may be bound,
and (iii) all decrees, orders, writs, injunctions, judgments, statutes, rules
and regulations applicable to Continental and its respective properties or
assets.
SECTION 4.6 NOTICES OF CERTAIN EVENTS. Continental shall, upon
obtaining knowledge of any of the following, promptly notify HCCH of:
(a) any notice or other communication from any person alleging that the
consent of such person is or may be required in connection with this
Agreement,
(b) any notice or other communication from any governmental or
regulatory agency or authority in connection with this Agreement, and
(c) any actions, suits, claims, investigations or other judicial
proceedings commenced or threatened against Continental which, if pending on
the date of this Agreement, would have
24
<PAGE>
been required to have been disclosed pursuant hereto or which relate to the
consummation of transactions contemplated by this Agreement.
SECTION 4.7 REPRESENTATION AGREEMENT. Shareholders shall deliver to
HCCH simultaneously with the execution of this Agreement, a written agreement
from each of the Shareholders in form and substance reasonably satisfactory
to HCCH relating to their intent to hold any HCCH Common Stock acquired
pursuant to this Agreement for investment purposes.
SECTION 4.8 NECESSARY CONSENTS. Continental shall use its reasonable
best efforts to obtain such written consent and take such other actions as
may be necessary or appropriate for Continental to facilitate and allow the
consummation of the transactions provided for herein and to facilitate and
allow HCCH to carry on the acquired business after the Closing Date (as
defined in Section 9.1 hereof).
SECTION 4.9 REGULATORY APPROVAL. Continental, and, where required
pursuant to the rules or regulations of any regulatory agency, Shareholders,
will execute and file, or join in the execution and filing, with any
application or other document that may be necessary in order to obtain the
authorization, approval or consent of any governmental body, federal, state,
local or foreign which may be reasonably required, or which HCCH may
reasonably request, in connection with the consummation of the transaction
provided for in this Agreement. Continental and Shareholders, will use
reasonable best efforts to obtain or assist HCCH in obtaining all such
authorizations, approvals and consents.
SECTION 4.10 SATISFACTION OF CONDITIONS PRECEDENT. Continental and
Shareholders shall use their reasonable best efforts to cause the
transactions provided for in this Agreement to be consummated, and, without
limiting the generality of the foregoing to obtain all consents and
authorizations of third parties and to make all filings with, and give all
notices to, third parties that may be necessary or reasonably required on its
part in order to effect the transactions provided for herein.
ARTICLE V
COVENANTS OF HCCH
From the date hereof until the occurrence of the earlier of (i) the
Effective Time or (ii) the termination of this Agreement pursuant to Section
8.1 hereof, HCCH agrees that, except as otherwise permitted with the written
consent of Shareholders, which consent shall not be unreasonably withheld:
SECTION 5.1 CONDUCT OF HCCH. HCCH and its Subsidiaries shall in all
material respects conduct their business in the ordinary course PROVIDED,
HOWEVER, THAT nothing in this Agreement shall be construed to prohibit or
otherwise restrain HCCH in any manner from acquiring other businesses or
substantially all of the assets thereof. Without limiting the
25
<PAGE>
generality of the foregoing, from the date hereof until the Effective Time,
except as contemplated hereby or previously disclosed by HCCH to Shareholders
in writing:
(a) HCCH will not adopt or propose any change in its Certificate of
Incorporation or Bylaws;
(b) HCCH will not take any action that would result in a failure to
maintain the trading of HCCH Common Stock on the NYSE; and
(c) HCCH will not, and will not permit any of its Subsidiaries to, agree
or commit to do any of the foregoing.
SECTION 5.2 LISTING OF HCCH COMMON STOCK. HCCH shall cause the shares
of HCCH Common Stock to be issued hereunder to be approved for listing on the
NYSE within sixty days of the Effective Time.
SECTION 5.3 ACCESS TO INFORMATION. HCCH will furnish promptly to
Shareholders copies of all reports, schedules, registration statements,
correspondence and other documents filed with or delivered to the SEC,
PROVIDED that no investigation pursuant to this Section shall affect any
representation or warranty given by HCCH to Shareholders hereunder. In
addition, if requested by Shareholders following the public announcement of
this Agreement, HCCH will cooperate in arranging joint meetings among
representatives of HCCH and Continental and persons with whom HCCH maintains
business relationships. All requests for information made pursuant to this
Section shall be directed to the President of HCCH or such person as may be
designated by him in writing.
SECTION 5.4 MAINTENANCE OF BUSINESS. HCCH will use its reasonable
efforts to carry on its business, keep available the services of its officers
and employees and preserve its relationships with those of its customers,
suppliers, licensors and others having business relationships with it that
are material to its business in substantially the same manner as it has prior
to the date hereof. If HCCH becomes aware of a material deterioration or
facts which are likely to result in a material deterioration in the
relationship with any material customer, supplier, licensor or others having
business relationships with it, it will promptly bring such information to
the attention of Continental in writing.
SECTION 5.5 COMPLIANCE WITH OBLIGATIONS. HCCH and its Subsidiaries
shall each use its reasonable best efforts to comply in all material respects
with (i) all applicable federal, state, local and foreign laws, rules and
regulations, (ii) all material agreements and obligations, including its
respective charter and bylaws, by which it, its properties or its assets may
be bound, and (iii) all decrees, orders, writs, injunctions, judgments,
statutes, rules and regulations applicable to HCCH and its Subsidiaries and
their respective properties or assets; except to the extent that the failure
to comply with matters in clauses (i), (ii) and (iii) would not have a
Material Adverse Effect on HCCH.
26
<PAGE>
SECTION 5.6 NOTICES OF CERTAIN EVENTS. HCCH shall, upon obtaining
knowledge of any of the following, promptly notify Shareholders of:
(a) any notice or other communication from any person alleging that the
consent of such person is or may be required in connection with this
Agreement;
(b) any notice or other communication from any governmental or
regulatory agency or authority in connection with this Agreement; and
(c) any actions, suits, claims, investigations or other judicial
proceedings commenced or threatened against HCCH or any of its Subsidiaries
which, if pending on the date of this Agreement, would have been required to
have been disclosed pursuant to Section 3.11 or which relate to the consummation
of the transactions contemplated by this Agreement.
SECTION 5.7 EMPLOYEE MATTERS. HCCH agrees that all employees of
Continental that remain employed after the Effective Time shall, within a
reasonable time following the Effective Time, be entitled to receive the same
benefits to which other employees of HCCH are entitled to receive and shall
be entitled to participate in HCCH's Employee Benefit Plan provided such
employees have satisfied the plan's eligibility requirements.
ARTICLE VI
COVENANTS OF HCCH, SHAREHOLDERS AND CONTINENTAL
From the date hereof until the occurrence of the earlier of (i) the
Effective Time or (ii) termination of this Agreement pursuant to Section 8.1
hereof, each of the Shareholders, Continental and HCCH agree that:
SECTION 6.1 ADVICE OF CHANGES. Each will promptly advise the others in
writing (i) of any event known to any of its executive officers or
Shareholders occurring subsequent to the date of this Agreement that in its
or their reasonable judgment renders any representation or warranty of such
party contained in this Agreement, if made on or as of the date of such event
or the Closing Date, untrue, inaccurate or misleading in any material respect
and (ii) of any Material Adverse Change in the business condition of the
party.
SECTION 6.2 REGULATORY APPROVALS. Each shall execute and file, or
join in the execution and filing of, any application or other document
that may be necessary in order to obtain the authorization, approval or
consent of any governmental body, federal, state, local or foreign, which may
be requested in connection with the consummation of the transactions
contemplated by this Agreement. Each shall use its reasonable best efforts
to obtain all such authorizations, approvals and consents.
SECTION 6.3 CERTAIN FILINGS. Shareholders and HCCH shall cooperate
with one another:
27
<PAGE>
(a) in determining whether any action by or in respect of, or filing
with, any governmental body, agency or official, or authority is required, or
any actions, consents, approvals or waivers are required to be obtained from
parties to any material contracts, in connection with the consummation of the
transactions contemplated by this Agreement; and
(b) in seeking any such actions, consents, approvals or waivers or
making any such filings, furnishing information required in connection
therewith and seeking timely to obtain any such actions, consents, approvals
or waivers.
SECTION 6.4 COMMUNICATIONS. Neither Shareholders, Continental nor HCCH
will furnish any communication outside of their respective companies, if the
subject matter thereof relates to the transactions contemplated by this
Agreement and is not in the ordinary course of business, without the prior
approval of the other of them as to the content thereof, which approval shall
not be unreasonably withheld; PROVIDED that the foregoing shall not be deemed
to prohibit any disclosure required by any applicable law or rule of the NYSE.
SECTION 6.5 SATISFACTION OF CONDITIONS PRECEDENT. HCCH, Continental
and Shareholders will each use its reasonable best efforts to satisfy or
cause to be satisfied all the conditions precedent that are applicable to
each of them, and to cause the transactions contemplated by this Agreement to
be consummated, and, without limiting the generality of the foregoing, to
obtain all material consents and authorizations of third parties and to make
filings with, and give all notices to, third parties that may be necessary or
reasonably required on its part in order to effect the transactions
contemplated hereby.
SECTION 6.6 TAX COOPERATION. HCCH, Continental and Shareholders shall
cooperate in the preparation, execution and filing of all returns,
questionnaires, applications or other documents regarding any transfer or
gains, sales, use, transfer, value added, stock transfer and stamp taxes, any
transfer, recording, registration and other fees, and any similar taxes or
fees which become payable in connection with the transactions contemplated by
this Agreement that are required or permitted to be filed on or before the
Effective Time.
SECTION 6.7 CONFIDENTIALITY. Between the date of this Agreement and
the Closing Date, each party, and Continental, will maintain in confidence,
and cause its directors, officers, employees, agents, and advisors to
maintain in confidence, and not use to the detriment of another party, any
written or oral or other information obtained in confidence from another
party or Continental in connection with this Agreement or the transactions
contemplated hereby unless such information is already known to such party or
to others not bound by a duty of confidentiality or unless such information
becomes publicly available through no fault of such party, unless the use of
such information is necessary or appropriate in making any filing or
obtaining any consent or approval required for the consummation of the
transaction contemplated hereby or unless the furnishing or use of such
information is required by or necessary or appropriate in connection with
legal proceedings.
28
<PAGE>
If the transactions contemplated by this Agreement are not consummated,
each party will return or destroy as much of such written information as may
be reasonably requested. Whether or not the Closing takes place,
Shareholders waives, and will upon request cause Continental to waive, any
cause of action, right or claim arising out of the access of HCCH or its
representatives to any trade secrets or other confidential information of
Continental except for the intentional competitive misuse by HCCH of such
trade secrets or confidential information.
ARTICLE VII
CONDITIONS TO CLOSING
SECTION 7.1 CONDITIONS TO OBLIGATIONS OF HCCH. The obligations of HCCH
hereunder are subject to the fulfillment or satisfaction, on and as of the
Closing Date, of each of the following conditions (any one or more of which
may be waived by HCCH, but only in a writing signed by HCCH):
(a) The representations and warranties of Continental and Shareholders
contained in Article III remain true and accurate in all material respects on
and as of the Closing Date with the same force and effect as if they had been
made on the Closing Date (except to the extent a representation or warranty
speaks specifically as of an earlier date and except for changes contemplated
by this Agreement) and Continental and Shareholders shall have provided HCCH
with a certificate executed by the President and the Chief Financial Officer
of the corporation or individually, as the case may be, dated as of the
Closing Date, to such effect.
(b) Continental and Shareholders shall have performed and complied in
all material respects with all of the covenants contained herein on or before
the Closing Date, and HCCH shall receive a certificate to such effect signed
by the President and Chief Financial Officer of the corporation or
individually, as the case may be.
(c) Except as set forth in the Continental Disclosure Schedule, there
shall have been no Material Adverse Change in Continental since December 31,
1996.
(d) HCCH shall have received from (i) each person or entity it deems
necessary or desirable a duly executed Investment Letter and (ii)
Shareholders, the written agreement contemplated to be entered into by such
person pursuant to Section 4.7 and such agreements shall remain in full force
and effect.
(e) All written consents, assignments, waivers or authorizations, other
than Governmental Authorizations, that are required as a result of the
transaction contemplated by this Agreement for the continuation in full force
and effect of any material contracts or leases of Continental shall have been
obtained.
29
<PAGE>
(f) HCCH shall have received the opinion of counsel to Continental and
Shareholders in form and substance satisfactory to HCCH.
(g) All underwriting agreements of Continental in force on the date
hereof shall be in force on the Closing Date, except for such agreements
which have been replaced with agreements of similar like and kind or any
agreements with Reliance Insurance Company or any affiliate thereof.
(h) E. R. ("Butch") Kinnebrew, III ("Kinnebrew") shall be alive and not,
in any way, Disabled. For purposes of this Agreement, Kinnebrew shall be
deemed to be "Disabled" if he is unable to engage in any substantial portion
of his regular duties for Continental by reason of any medically determinable
physical or mental impairment which can be expected to result in death or
which has lasted or can be expected to last for a continuous period of not
less than 12 months.
(i) Continental shall have received a review opinion of independent
public accountants to Continental on their financial statements for the most
recent fiscal year end.
(j) Continental shall have delivered to HCCH its unaudited balance sheet
and its unaudited income statement for each of the two most recent fiscal
year ends.
(k) Continental shall have earned no less than $156,000 after tax for
the fiscal year ended December 31, 1996 and, assuming that Continental
continued to be operated as it had in the past, on a pro-forma basis, as
reasonably determined by HCCH, be expected to earn at least $280,000 after
tax for the year ended December 31, 1997.
(l) Shareholders shall have transferred all the Continental Common Stock
to HCCH, free and clear of all Liens and encumbrances, with transfer taxes,
if any, paid by Shareholders. No claim shall have been filed, made or
threatened by any person or entity asserting that he, she or it is entitled
to any part of the Purchase Price paid for the Continental Common Stock.
(m) On or prior to the Closing Date, Shareholders or Continental shall
have furnished HCCH with evidence of such consents as Shareholders or
Continental shall know, or HCCH shall determine, to be required to enable
HCCH to continue to enjoy the benefit of any lease, license, permit, contract
or other agreement or instrument to or of which Continental is a party or
beneficiary and which can, by its terms (with consent) and consistent with
applicable law, be so enjoyed after the transfer of the Continental Common
Stock to HCCH. If there is in existence any lease, governmental license,
permit or contract that by its terms or applicable law, expires, terminates
or is otherwise rendered invalid upon the transfer of the Continental Common
Stock to HCCH, and such lease, license, permit, or contract is required in
order for the business of Continental to continue to be conducted following
the transfer of the Continental Common Stock in the same manner as conducted
previously, HCCH shall have obtained, or been furnished by Shareholders an
equivalent of, that lease, license, permit, or contract effective as of and
after the Closing Date.
30
<PAGE>
(n) HCCH shall have received resignations of all persons who are
officers or directors of Continental immediately prior to the Closing.
(o) HCCH shall have received general releases in favor of Continental
and HCCH executed by Shareholders and any such other employees, officers or
directors of Continental as HCCH may designate. Those releases will not
relate to rights or obligations arising under this Agreement.
(p) HCCH shall have received possession on the premises of Continental
of all corporate, accounting, business and tax records of Continental.
(q) The form and substance of all actions, proceedings, instruments and
documents required to consummate the transactions contemplated by this
Agreement shall have been satisfactory in all reasonable respects to HCCH and
HCCH's counsel.
SECTION 7.2 CONDITIONS TO OBLIGATIONS OF SHAREHOLDERS. Shareholders'
obligations hereunder are subject to the fulfillment or satisfaction, on and
as of the Closing Date, of each of the following conditions (any one or more
of which may be waived, but only in a writing signed by such party):
(a) The representations and warranties of HCCH set forth herein shall be
true and accurate in all material respects on and as of the Closing Date with
the same force and effect as if they had been made on the Closing Date
(except to the extent a representation or warranty speaks specifically as of
an earlier date and except for changes contemplated by this Agreement) and
HCCH shall have provided Shareholders with a certificate executed by the
President and the Chief Financial Officer of HCCH, dated as of the Closing
Date, to such effect. For the purposes of determining the accuracy of the
representations and warranties of HCCH, any change or effect in the business
of HCCH that results in substantial part as a consequence of the public
announcement or pendency of the intended acquisition of the Continental
Common Stock by HCCH shall not be deemed a Material Adverse Change or
Material Adverse Effect or other breach of representation or warranty with
respect to HCCH.
(b) HCCH shall have performed and complied with all of its covenants
contained herein in all material respects on or before the Closing Date, and
Shareholders shall receive a certificate to such effect signed by HCCH's
President and Chief Financial Officer.
(c) Except as set forth in the HCCH Disclosure Schedule, there shall
have been no Material Adverse Change in HCCH since the HCCH Balance Sheet
Date.
(d) Shareholders shall have received from Winstead Sechrest & Minick
P.C., counsel to HCCH, an opinion in form and substance satisfactory to the
Shareholders.
(e) HCCH shall have executed and delivered to each of Kinnebrew and
Saxon an Employment Agreement in a mutually agreed to form.
31
<PAGE>
(f) The form and substance of all actions, proceedings, instruments and
documents required to consummate the transactions contemplated by this
Agreement shall have been satisfactory in all reasonable respects to
Shareholders and their counsel.
SECTION 7.3 CONDITIONS TO OBLIGATIONS OF EACH PARTY. The respective
obligations of the parties hereunder are subject to the fulfillment, on and
as of the Closing Date, of each of the following conditions (any one or more
of which may be waived by such parties, but only in a writing signed by such
parties):
(a) No statute, rule, regulation, executive order, decree, injunction or
restraining order shall have been enacted, promulgated or enforced (and not
repealed, superseded or otherwise made inapplicable) by any court or
governmental authority which prohibits the consummation of the transaction
contemplated by this Agreement (each party agreeing to use its reasonable
best efforts to have any such order, decree or injunction lifted).
(b) There shall have been obtained any and all Governmental
Authorizations, permits, approvals and consents of securities or "blue sky"
commissions of any jurisdiction and of any other governmental body or agency,
that may reasonably be deemed necessary so that the consummation of the
transaction contemplated by this Agreement will be in compliance with
applicable laws, the failure to comply with which would have a Material
Adverse Effect on HCCH, Continental, or would be reasonably likely to subject
any of HCCH, Continental or any of their respective directors or officers to
penalties or criminal liability.
ARTICLE VIII
TERMINATION OF AGREEMENT
SECTION 8.1 TERMINATION. This Agreement may be terminated at any time
prior to the Effective Time:
(a) By the mutual consent of Shareholders and the Board of Directors of
HCCH.
(b) By the Board of Directors of HCCH or by Shareholders owning at least
85% of Continental if there has been a material breach by the other of any
representation or warranty contained in this Agreement, which in either case
cannot be, or has not been, cured within 15 days after written notice of such
breach is given to the party committing such breach, provided that the right
to effect such cure shall not extend beyond the date set forth in
subparagraph (c) below.
(c) By the Board of Directors of HCCH or by Shareholders owning at least
85% of Continental if all conditions of Closing required by Article VII hereof
have not been met or waived by August 31, 1997, provided, however, that
neither HCCH nor Shareholders, shall be
32
<PAGE>
entitled to terminate this Agreement pursuant to this subparagraph (c) if
such party is in willful and material violation of any of its
representations, warranties or covenants in this Agreement.
(d) If any governmental authority shall have issued an order, decree or
ruling or taken any other action permanently enjoining, restraining or
otherwise prohibiting the transactions contemplated by this Agreement and
such order, decree, ruling or other action shall have become final and
nonappealable.
(e) By the Board of Directors of HCCH, if Kinnebrew shall have become
Disabled or shall have died.
SECTION 8.2 EFFECT OF TERMINATION. Upon termination of this Agreement
pursuant to this Article VIII, this Agreement shall be void and of no effect and
shall result in no obligation of or liability to any party or their
respective directors, officers, employees, agents or shareholders, unless
such termination was the result of an intentional breach of any
representation, warranty or covenant in this Agreement, in which case the
party who breached the representation, warranty or covenant shall be liable
to the other party for damages, and all costs and expenses incurred in
connection with the preparation, negotiation, execution and performance of
this Agreement.
ARTICLE IX
CLOSING MATTERS
SECTION 9.1 THE CLOSING. Subject to termination of this Agreement as
provided in Article VIII above, the closing of the transactions provided for
herein (the "Closing") will take place at the offices of Winstead Sechrest &
Minick P.C., 910 Travis Street, Suite 1700, Houston, Texas 77002 at 10:00
a.m. (the "Effective Time"), Houston Time on July 31, 1997 or, if all
conditions to Closing have not been satisfied or waived by such date, such
other place, time and date as Shareholders and HCCH may mutually select (the
"Closing Date").
ARTICLE X
INDEMNIFICATION AND
REMEDIES, CONTINUING COVENANTS
SECTION 10.1 AGREEMENT TO INDEMNIFY. Subject to the limitations set
forth in this Article X, from and after the Effective Time, Shareholders will
indemnify and hold harmless HCCH and its respective officers, directors,
agents and employees, and each person, if any, who controls or may control
HCCH within the meaning of the Securities Act (hereinafter referred to
individually as a "Continental Indemnified Person" and collectively as
"Continental Indemnified Persons") from and against any and all claims,
demands, actions, causes of action, losses, costs,
33
<PAGE>
damages, liabilities and expenses including, without limitation, reasonable
legal fees, (net of: (i) any recoveries under insurance policies; (ii)
recoveries from third parties; and (iii) tax savings known to Continental
Indemnified Persons at the time of resolution of the claims hereunder) made
against or incurred by Continental Indemnified Persons (hereafter in this
Section 10.1 referred to as "HCCH Damages"), arising out of any material
misrepresentation or breach of or default under any of the representations,
warranties, covenants or agreements given or made in this Agreement or any
certificate or exhibit delivered by or on behalf of Continental or
Shareholders pursuant hereto. The indemnification provided for in this
Section 10.1 will not apply unless and until the aggregate HCCH Damages for
which one or more Continental Indemnified Persons seeks indemnification
exceeds $25,000 in the aggregate, in which event the indemnification provided
for will include all HCCH Damages (a franchise deductible) and shall be
limited in the aggregate to the amount of the Purchase Price (the "Cap").
The Continental Indemnified Persons are only entitled to be reimbursed for
the actual indemnified expenditures or damages incurred by them for the above
described losses not to exceed the Cap. Such Continental Indemnified Persons
are not entitled to consequential, special, or other speculative or punitive
categories of damages. Without limiting the indemnification otherwise set
forth herein, Crawley agrees to indemnify and hold Continental and HCCH
harmless from any and all liabilities relating to Continental's participation
in the Crawley, Health and Welfare Benefit Plan with Great-West Life &
Annuity Insurance Company prior to the Closing Date.
SECTION 10.2 HCCH AGREEMENT TO INDEMNIFY. Subject to the limitations
set forth in this Article X, from and after the Effective Time HCCH will
indemnify and hold harmless Continental and Shareholders and their officers,
shareholders, directors, administrators, heirs, personal representatives,
successors and assigns (hereinafter in this Section 10.2 referred to
individually as an "HCCH Indemnified Person" and collectively as "HCCH
Indemnified Persons") from and against any and all claims, demands, actions,
causes of action, losses, costs, damages, liabilities and expenses including,
without limitation, reasonable legal fees (net of: (i) any recoveries under
insurance policies; (ii) recoveries from third parties; and (iii) tax savings
known to HCCH Indemnified Persons at the time of making a claim hereunder)
(hereafter in this Section 10.2 referred to as "Continental Damages") arising
out of any misrepresentation or breach of or default under any of the
representations, warranties, covenants and agreements given or made by HCCH
in this Agreement or any certificate or exhibit delivered by or on behalf of
HCCH pursuant hereto. The indemnification provided for in this Section 10.2 will
not apply unless and until the aggregate Continental Damages for which one or
more HCCH Indemnified Person seeks indemnification exceeds $25,000 in the
aggregate, in which event the indemnification provided for will include all
Continental Damages (a franchise deductible) and shall be limited in the
aggregate to the Cap. The HCCH Indemnified Persons are only entitled to be
reimbursed for the actual indemnified expenditures or damages incurred by
them for the above described losses not to exceed the Cap. Such HCCH
Indemnified Persons are not entitled to consequential, special, or other
speculative or punitive categories of damages.
SECTION 10.3 SURVIVAL OF REPRESENTATIONS. The right to enforce the
breach of each representation, warranty, covenant and agreement set forth in
this Agreement will remain operative and in full force and effect for the
maximum period permitted by applicable law after
34
<PAGE>
the Closing (the last date of such applicable period being herein called the
"Final Date"), regardless of any investigation made by or on behalf of the
parties to this Agreement, upon which Final Date such representations,
warranties, covenants and agreements shall expire and be of no further force
and effect. Any litigation or other action of any kind arising out of or
attributable to a breach of any representation, warranty, covenant or
agreement contained in this Agreement, must be commenced prior to the Final
Date. If not so commenced prior to the Final Date, any claims or
indemnifications brought under this Article X will thereafter conclusively be
deemed to be waived regardless of when such claim is or should have been
discovered. Any such claim for indemnification brought under this Article X,
brought before the Final Date, shall survive until a final resolution of such
claim is effective. As set forth herein, no investigation by any party
hereto into the business, operations and conditions of the other party shall
diminish in any way the effect of any representation or warranty made by any
such party in this Agreement or shall relieve any party of any of its
obligations under this Agreement.
SECTION 10.4 PROCEDURE FOR INDEMNIFICATION; THIRD PARTY CLAIMS.
(a) Promptly after receipt by an indemnified party under this Article X
of notice of a claim against it for indemnification brought under this
Article X (a "Claim"), the indemnified party will, if a claim is to be made
against an indemnifying party, give prompt written notice to the indemnified
party of the Claim, but the failure to promptly notify the indemnified party
will not relieve the indemnified party of any liability that it may have to
any indemnified party, except to the extent that the indemnifying party
demonstrates that the defense of such action is prejudice by the indemnifying
party's failure to give such prompt notice. Such notice shall contain a
description in reasonable detail of facts upon which such Claim is based and,
to the extent known, the amount thereof.
(b) If any Claim referred to in this Article X is made by a third party
against an indemnified party and such indemnified party gives written notice
to the indemnifying party of the Claim, the indemnifying party will be
entitled to participate in the defense of Claim and, to the extent that it
wishes to assume the defense of the Claim and, after written notice from the
indemnifying party to the indemnified party of its election to assume the
defense of the Claim, the indemnifying party shall assume such defense and
will not be liable to the indemnified party under this Article X for any fees
of other counsel or any other expenses with respect to the defense of the
Claim in each case subsequently incurred by the indemnified party in
connection with the defense of the Claim.
SECTION 10.5 APPOINTMENT OF REPRESENTATIVE. Subject to the
successorship provisions of this Section 10.5, Kinnebrew (the "Representative")
is hereby irrevocably appointed as the attorney-in-fact and representative of
the interests of the Shareholders holding Continental Common Stock for all
purposes of this Agreement, and notice is hereby given thereof to HCCH, and,
without independent verification, HCCH may rely upon Representative's
undertakings in such capacity. The Representative shall have full and
irrevocable authority on behalf of the Shareholders, and shall promptly and
completely exercise such authority in a timely fashion to:
35
<PAGE>
(a) participate in, represent and bind the Shareholders in all respects
with respect to any arbitration or legal proceeding relating to this
Agreement, including without limitation, all matters relating to any
indemnification under this Section 10.5, taking any action under Section 10.4
including, without limitation, the defense and settlement of any matter, and
the calculation thereof for every purpose thereunder, consent to
jurisdiction, enter into any settlement, and consent to entry of judgment,
each with respect to any or all of the Shareholders;
(b) receive, accept and give notices and other communications relating
to this Agreement;
(c) take any action that the Representative deems necessary or desirable
in order to fully effectuate the transactions contemplated by this Agreement;
(d) execute and deliver any instrument or document that the
Representative deems necessary or desirable in the exercise of his authority
under this Section 10.5; and
(e) waive the fulfillment of any condition or conditions to the Closing.
Those Shareholders who, as of the Closing Date, hold a majority of the
Continental Common Stock may, at any time and by written action delivered to
HCCH, remove the Representative or any successor thereto, but such removal
shall be effective only upon the replacement of such Representative or
successor by a new Representative designated, by written notice delivered to
HCCH, by the holders of a majority of Continental Common Stock, PROVIDED,
however, that any such notice shall be effective upon actual receipt by HCCH.
Any such written notice shall be delivered to HCCH in accordance with the
notice provisions set forth herein. If any Representative shall have died,
become incapacitated or unable to serve, those Shareholders of Continental
Common Stock who, as of the date hereof, hold a majority thereof, shall
promptly designate by written notice delivered to HCCH a replacement
Representative. Any costs and expenses incurred by the Representative in
connection with actions taken pursuant to or permitted by this Section 10.5 will
be borne by the Shareholders and paid or reimbursed to the Representative pro
rata.
The foregoing authorization is granted and conferred in consideration for
the various agreements and covenants of HCCH contained herein. In
consideration of the foregoing, and subject to the successorship provisions
of this Section 10.5, this authorization granted to the Representative shall be
irrevocable and shall not be terminated by any act of any of the Shareholders
or by operation of law, whether by death or incompetence of any Shareholder
or by the occurrence of any other event except the termination of this
Agreement pursuant to the provisions hereof. If after the execution hereof
any such Shareholder shall die or become incompetent, the Representative is
nevertheless authorized and directed to exercise the authority granted in
this Section 10.5 as if such death or incompetence had not occurred and
regardless of notice thereof. The Representative shall have no liability to
any Shareholder for any act or omission or obligation hereunder, provided
that such action or omission is taken by the Representative in good faith and
without willful misconduct.
36
<PAGE>
ARTICLE XI
MISCELLANEOUS
SECTION 11.1 FURTHER ASSURANCES. Each party agrees to cooperate
fully with the other parties and to execute such further instruments,
documents and agreements and to give such further written assurances as
may be reasonably requested by any other party to better evidence and
reflect the transactions described herein and contemplated hereby and to
carry into effect the intents and purposes of this Agreement.
SECTION 11.2 FEES AND EXPENSES. Until otherwise agreed by the parties,
each party shall bear its own fees and expenses, including counsel fees and
fees of brokers and investment bankers contracted by such party, in
connection with the transaction contemplated hereby.
SECTION 11.3 NOTICES. Whenever any party hereto desires or is required
to give any notice, demand, or request with respect to this Agreement, each
such communication shall be in writing and shall be effective only if it is
delivered by personal service or mailed, United States registered or
certified mail, postage prepaid, or sent by prepaid overnight courier,
addressed as follows:
HCCH:
HCC Insurance Holdings, Inc.
13403 Northwest Freeway
Houston, TX 77040-6094
Telecopy: (713) 462-2401
Attention: Frank J. Bramanti, President
With a copy to (which shall not constitute notice):
Winstead Sechrest & Minick P.C.
910 Travis, Suite 1700 (until August 23, 1997- then Suite 2400)
Houston, TX 77002-5895
Telecopy: (713) 951-3800 (until August 23, 1997 - then (713) 650-2400)
Attention: Arthur S. Berner, Esq.
Continental and Representative:
E. R. Kinnebrew, III
232 Windover Grove Drive
Memphis, TN 38111
37
<PAGE>
With a copy to (which shall not constitute notice):
Morrison, Mahoney & Miller
250 Summer Street
Boston, MA 02210-1181
Telecopy: (617) 439-7590
Attention: David A. Bakst, Esq
Such communications shall be effective when they are received by the
addressee thereof. Any party may change its address for such
communications by giving notice thereof to other parties in conformity with
this Section.
SECTION 11.4 GOVERNING LAW. The internal laws of the State of Texas
(irrespective of its choice of law principles) will govern the validity of
this Agreement, the construction of its terms, and the interpretation and
enforcement of the rights and duties of the parties hereto. Any dispute
arising hereunder shall lie exclusively in the state courts of the State of
Texas.
SECTION 11.5 BINDING UPON SUCCESSORS AND ASSIGNS, ASSIGNMENT. This
Agreement and the provisions hereof shall be binding upon each of the
parties, their permitted successors and assigns. This Agreement may not be
assigned by any party without the prior consent of the other.
SECTION 11.6 SEVERABILITY. If any provision of this Agreement, or the
application thereof, shall for any reason or to any extent be invalid or
unenforceable, the remainder of this Agreement and application of such
provision to other persons or circumstances shall continue in full force and
effect and in no way be affected, impaired or invalidated.
SECTION 11.7 ENTIRE AGREEMENT. This Agreement, together with the
Confidentiality Agreement, and any other agreement and instrument referenced
herein constitute the entire understanding and agreement of the parties with
respect to the subject matter hereof and supersede all prior and
contemporaneous agreements or understandings, inducements or conditions,
express or implied, written or oral, between parties with respect hereto.
SECTION 11.8 AMENDMENT AND WAIVERS. Any amendment or waiver affecting
the Shareholders shall be valid if consented to in writing by Shareholders.
Any term or provision of this Agreement may be amended, and the observance of
any term of this Agreement may be waived (either generally or in a particular
instance and either retroactively or prospectively) only by a writing signed
by Shareholders. The waiver by Shareholders of any breach hereof or default
in the performance hereof shall not be deemed to constitute a waiver of any
other default or any succeeding breach or default, unless such waiver so
expressly states. At any time before the Effective Time, this Agreement may
be amended or supplemented by Continental, Shareholders or HCCH with respect
to any of the terms contained in this Agreement.
38
<PAGE>
SECTION 11.9 NO WAIVER. The failure of any party to enforce any of the
provisions hereof shall not be construed to be a waiver of the right of such
party thereafter to enforce such provisions.
SECTION 11.10 CONSTRUCTION OF AGREEMENT. A reference to an Article,
Section or an Exhibit shall mean an Article of, a Section in, or Exhibit to,
this Agreement unless otherwise explicitly set forth. The titles and
headings herein are for reference purposes only and shall not in any manner
limit the construction of this Agreement which shall be considered as a
whole. The words "include," "includes" and "including" when used herein
shall be deemed in each case to be followed by the words "without limitation."
SECTION 11.11 COUNTERPARTS. This Agreement may be executed in any
number of counterparts, each of which shall be an original as against any
party whose signature appears thereon and all of which together shall
constitute one and the same instrument. This Agreement shall become binding
when one or more counterparts hereof, individually or taken together, shall
bear the signatures of all the parties reflected hereon as signatories.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
39
<PAGE>
HCC INSURANCE HOLDINGS, INC.
By: /s/ Frank J. Bramanti
-------------------------------------
Name: Frank J. Bramanti,
Title: President
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
SIGNATURE PAGE ATTACHED TO STOCK PURCHASE AGREEMENT
DATED AS OF JULY 31, 1997 BY AND AMONG HCC INSURANCE HOLDINGS, INC.
AND THE SHAREHOLDERS OF CONTINENTAL AVIATION UNDERWRITERS, INC.,
AND CONTINENTAL AVIATION UNDERWRITERS, INC.
<PAGE>
CONTINENTAL AVIATION UNDERWRITERS, INC.
By: /s/ E. R. Kinnebrew, III
-------------------------------------
Name: E. R. Kinnebrew, III
Title: President
SIGNATURE PAGE ATTACHED TO STOCK PURCHASE AGREEMENT
DATED AS OF JULY 31, 1997 BY AND AMONG HCC INSURANCE HOLDINGS, INC.
AND THE SHAREHOLDERS OF CONTINENTAL AVIATION UNDERWRITERS, INC.,
AND CONTINENTAL AVIATION UNDERWRITERS, INC.
<PAGE>
CRAWLEY WARREN (USA) INC.
By: /s/ David A. Bakst
-------------------------------------
Name: David A. Bakst
Title: Treasurer
SIGNATURE PAGE ATTACHED TO STOCK PURCHASE AGREEMENT
DATED AS OF JULY 31, 1997 BY AND AMONG HCC INSURANCE HOLDINGS, INC.
AND THE SHAREHOLDERS OF CONTINENTAL AVIATION UNDERWRITERS, INC.,
AND CONTINENTAL AVIATION UNDERWRITERS, INC.
<PAGE>
/s/ EDWARD R. KINNEBREW, III
----------------------------------------
EDWARD R. KINNEBREW, III
SIGNATURE PAGE ATTACHED TO STOCK PURCHASE AGREEMENT
DATED AS OF JULY 31, 1997 BY AND AMONG HCC INSURANCE HOLDINGS, INC.
AND THE SHAREHOLDERS OF CONTINENTAL AVIATION UNDERWRITERS, INC.,
AND CONTINENTAL AVIATION UNDERWRITERS, INC.
<PAGE>
NATIONAL BANK OF COMMERCE, Trustee,
of the Sidney A. Stewart, Jr. Trust under
Declaration of Trust dated May 14, 1997
By: /s/ Virginia Thornton
-------------------------------------
Name: Virginia Thornton
Title: Vice President & Trust Officer
SIGNATURE PAGE ATTACHED TO STOCK PURCHASE AGREEMENT
DATED AS OF JULY 31, 1997 BY AND AMONG HCC INSURANCE HOLDINGS, INC.
AND THE SHAREHOLDERS OF CONTINENTAL AVIATION UNDERWRITERS, INC.,
AND CONTINENTAL AVIATION UNDERWRITERS, INC.
<PAGE>
/s/ CHARLES H. HARPER
----------------------------------------
CHARLES H. HARPER
SIGNATURE PAGE ATTACHED TO STOCK PURCHASE AGREEMENT
DATED AS OF JULY 31, 1997 BY AND AMONG HCC INSURANCE HOLDINGS, INC.
AND THE SHAREHOLDERS OF CONTINENTAL AVIATION UNDERWRITERS, INC.,
AND CONTINENTAL AVIATION UNDERWRITERS, INC.
<PAGE>
/s/ EUGENE M. SAXON
----------------------------------------
EUGENE M. SAXON
SIGNATURE PAGE ATTACHED TO STOCK PURCHASE AGREEMENT
DATED AS OF JULY 31, 1997 BY AND AMONG HCC INSURANCE HOLDINGS, INC.
AND THE SHAREHOLDERS OF CONTINENTAL AVIATION UNDERWRITERS, INC.,
AND CONTINENTAL AVIATION UNDERWRITERS, INC.
<PAGE>
/s/ NOEL PARRISH
----------------------------------------
NOEL PARRISH
SIGNATURE PAGE ATTACHED TO STOCK PURCHASE AGREEMENT
DATED AS OF JULY 31, 1997 BY AND AMONG HCC INSURANCE HOLDINGS, INC.
AND THE SHAREHOLDERS OF CONTINENTAL AVIATION UNDERWRITERS, INC.,
AND CONTINENTAL AVIATION UNDERWRITERS, INC.
<PAGE>
EXHIBIT "A"
CONTINENTAL AVIATION UNDERWRITERS, INC.
SCHEDULE OF SHAREHOLDING INTEREST
SHAREHOLDERS NUMBER AND TAXPAYER
AND PERCENTAGE OF IDENTIFICATION
ADDRESSES SHARES NUMBER
--------- ------ ------
Crawley Warren (USA) Inc. 71.0 shares 53.95% 04-2565423
c/o David A. Bakst, Esq.
Morrison, Mahoney & Miller
250 Summer Street
Boston, MA 02210
Edward R. Kinnebrew, III ("Kinnebrew") 17.4 shares 13.22% ###-##-####
232 Windover Grove Drive
Memphis, TN 38111
Sidney A. Stewart, Jr. Trust 12.5 shares 9.50% 62-6323844
Under Declaration of Trust
Dated May 14, 1997 ("Stewart Trust")
c/o National Bank of Commerce Trust Division
1 Commerce Square
Memphis, TN 38150
Trustee - National Bank of Commerce
Beneficiary - Sidney A. Stewart, Jr.
Charles H. Harper ("Harper") 12.5 shares 9.50% ###-##-####
102 Overlook Drive
Little Rock, AR 72207
Eugene M. Saxon ("Saxon") 11.6 shares 8.81% ###-##-####
334 N. Rose Road
Memphis, TN 38117
Noel Parrish ("Parrish") 6.6 shares 5.02% ###-##-####
821 Club Drive
Mt. Vernon, OH 43050 ---------------------
131.6 shares 100.00%
<PAGE>
EXHIBIT "B"
Defined terms are as defined on Exhibit "A"
CASH $ AMOUNT
---- OF HCCH
COMMON STOCK
------------
Kinnebrew $133,853 $312,322
Saxon 89,201 208,137
Stewart Trust 298,181 -------
Harper 298,181 -------
Parrish 157,565 -------
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
ACQUISITION AGREEMENT
DATED AS OF
AUGUST 8, 1997
BY AND AMONG
HCC INSURANCE HOLDINGS, INC.,
SOUTHERN AVIATION INSURANCE UNDERWRITERS, INC.,
AVIATION CLAIMS ADMINISTRATORS, INC.,
AND
TRUMAN A. THOMAS, III,
DONALD J. BARKER,
ALEXANDER D. HAHN
AS THE SHAREHOLDERS OF
SOUTHERN AVIATION INSURANCE UNDERWRITERS, INC.
AND
AVIATION CLAIMS ADMINISTRATORS, INC.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
PAGE
ARTICLE I TRANSFER OF THE SOUTHERN COMMON STOCK
AND THE ACA COMMON STOCK . . . . . . . . . . . . . . . . . 2
SECTION 1.1 TRANSFER OF SOUTHERN COMMON STOCK AND ACA COMMON STOCK. 2
SECTION 1.2 PURCHASE PRICE . . . . . . . . . . . . . . . . . . . . 2
SECTION 1.3 CLOSING DELIVERIES . . . . . . . . . . . . . . . . . . 2
ARTICLE II REPRESENTATIONS AND WARRANTIES
OF SOUTHERN, ACA AND SHAREHOLDERS . . . . . . . . . . . . . 3
SECTION 2.1 CORPORATE EXISTENCE AND POWER. . . . . . . . . . . . . 3
SECTION 2.2 AUTHORIZATION. . . . . . . . . . . . . . . . . . . . . 4
SECTION 2.3 GOVERNMENTAL AUTHORIZATION . . . . . . . . . . . . . . 4
SECTION 2.4 NON-CONTRAVENTION. . . . . . . . . . . . . . . . . . . 5
SECTION 2.5 CAPITALIZATION . . . . . . . . . . . . . . . . . . . . 5
SECTION 2.6 SUBSIDIARIES AND JOINT VENTURES. . . . . . . . . . . . 6
SECTION 2.7 SOUTHERN FINANCIAL STATEMENTS. . . . . . . . . . . . . 6
SECTION 2.8 ABSENCE OF CERTAIN CHANGES . . . . . . . . . . . . . . 7
SECTION 2.9 NO UNDISCLOSED LIABILITIES . . . . . . . . . . . . . . 8
SECTION 2.10 LITIGATION . . . . . . . . . . . . . . . . . . . . . . 8
SECTION 2.11 ACCOUNTING MATTERS . . . . . . . . . . . . . . . . . . 9
SECTION 2.12 TAXES. . . . . . . . . . . . . . . . . . . . . . . . . 9
SECTION 2.13 EMPLOYEE BENEFIT PLANS, ERISA. . . . . . . . . . . . . 10
SECTION 2.14 MATERIAL AGREEMENTS. . . . . . . . . . . . . . . . . . 11
SECTION 2.15 PROPERTIES . . . . . . . . . . . . . . . . . . . . . . 12
SECTION 2.16 ENVIRONMENTAL MATTERS. . . . . . . . . . . . . . . . . 12
SECTION 2.17 LABOR MATTERS. . . . . . . . . . . . . . . . . . . . . 13
SECTION 2.18 COMPLIANCE WITH LAWS . . . . . . . . . . . . . . . . . 13
SECTION 2.19 TRADEMARKS, TRADENAMES, ETC. . . . . . . . . . . . . . 13
SECTION 2.20 SALE OF THE COMPANIES. . . . . . . . . . . . . . . . . 14
SECTION 2.21 BROKER'S FEES. . . . . . . . . . . . . . . . . . . . . 14
SECTION 2.22 INVESTMENT REPRESENTATION. . . . . . . . . . . . . . . 14
ARTICLE III REPRESENTATIONS AND WARRANTIES OF HCCH. . . . . . . . . . . 15
SECTION 3.1 CORPORATE EXISTENCE AND POWER. . . . . . . . . . . . . 15
SECTION 3.2 CORPORATE AUTHORIZATION. . . . . . . . . . . . . . . . 15
SECTION 3.3 GOVERNMENTAL AUTHORIZATION . . . . . . . . . . . . . . 15
SECTION 3.4 NON-CONTRAVENTION. . . . . . . . . . . . . . . . . . . 16
SECTION 3.5 CAPITALIZATION OF HCCH . . . . . . . . . . . . . . . . 16
SECTION 3.6 SUBSIDIARIES . . . . . . . . . . . . . . . . . . . . . 17
SECTION 3.7 SEC FILINGS. . . . . . . . . . . . . . . . . . . . . . 18
SECTION 3.8 FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . 18
SECTION 3.9 ABSENCE OF CERTAIN CHANGES . . . . . . . . . . . . . . 19
i
<PAGE>
TABLE OF CONTENTS (CONT.)
PAGE
SECTION 3.10 NO UNDISCLOSED LIABILITIES . . . . . . . . . . . . . . 19
SECTION 3.11 LITIGATION . . . . . . . . . . . . . . . . . . . . . . 19
SECTION 3.12 TAXES. . . . . . . . . . . . . . . . . . . . . . . . . 20
SECTION 3.13 EMPLOYEE BENEFIT PLANS; ERISA. . . . . . . . . . . . . 20
SECTION 3.14 MATERIAL AGREEMENTS. . . . . . . . . . . . . . . . . . 21
SECTION 3.15 PROPERTIES . . . . . . . . . . . . . . . . . . . . . . 22
SECTION 3.16 ENVIRONMENTAL MATTERS. . . . . . . . . . . . . . . . . 22
SECTION 3.17 LABOR MATTERS. . . . . . . . . . . . . . . . . . . . . 23
SECTION 3.18 COMPLIANCE WITH LAWS . . . . . . . . . . . . . . . . . 23
SECTION 3.19 TRADEMARKS, TRADE NAMES, ETC.. . . . . . . . . . . . . 23
SECTION 3.20 BROKER'S FEES. . . . . . . . . . . . . . . . . . . . . 23
ARTICLE IV COVENANTS OF SOUTHERN, ACA AND SHAREHOLDERS . . . . . . . . 23
SECTION 4.1 CONDUCT OF THE COMPANIES . . . . . . . . . . . . . . . 23
SECTION 4.2 ACCESS TO FINANCIAL AND OPERATIONAL INFORMATION. . . . 25
SECTION 4.3 OTHER OFFERS . . . . . . . . . . . . . . . . . . . . . 25
SECTION 4.4 MAINTENANCE OF BUSINESS. . . . . . . . . . . . . . . . 26
SECTION 4.5 COMPLIANCE WITH OBLIGATIONS. . . . . . . . . . . . . . 26
SECTION 4.6 NOTICES OF CERTAIN EVENTS. . . . . . . . . . . . . . . 26
SECTION 4.7 AFFILIATES AGREEMENT . . . . . . . . . . . . . . . . . 27
SECTION 4.8 NECESSARY CONSENTS . . . . . . . . . . . . . . . . . . 27
SECTION 4.9 REGULATORY APPROVAL. . . . . . . . . . . . . . . . . . 27
SECTION 4.10 SATISFACTION OF CONDITIONS PRECEDENT . . . . . . . . . 27
ARTICLE V COVENANTS OF HCCH . . . . . . . . . . . . . . . . . . . . . 27
SECTION 5.1 CONDUCT OF HCCH. . . . . . . . . . . . . . . . . . . . 27
SECTION 5.2 ACCESS TO FINANCIAL AND OPERATION INFORMATION. . . . . 28
SECTION 5.3 MAINTENANCE OF BUSINESS. . . . . . . . . . . . . . . . 28
SECTION 5.4 COMPLIANCE WITH OBLIGATIONS. . . . . . . . . . . . . . 28
SECTION 5.5 NOTICES OF CERTAIN EVENTS. . . . . . . . . . . . . . . 29
SECTION 5.6 NOTICE TO AFFILIATES . . . . . . . . . . . . . . . . . 29
ARTICLE VI COVENANTS OF HCCH, THE COMPANIES AND SHAREHOLDERS . . . . . 29
SECTION 6.1 ADVICE OF CHANGES. . . . . . . . . . . . . . . . . . . 29
SECTION 6.2 REGULATORY APPROVALS. . . . . . . . . . . . . . . . . 29
SECTION 6.3 ACTIONS CONTRARY TO STATED INTENT. . . . . . . . . . . 30
SECTION 6.4 CERTAIN FILINGS. . . . . . . . . . . . . . . . . . . . 30
SECTION 6.5 COMMUNICATIONS . . . . . . . . . . . . . . . . . . . . 30
SECTION 6.6 SATISFACTION OF CONDITIONS PRECEDENT . . . . . . . . . 30
ii
<PAGE>
TABLE OF CONTENTS (CONT.)
PAGE
SECTION 6.7 TAX COOPERATION. . . . . . . . . . . . . . . . . . . . 30
ARTICLE VII CONDITIONS TO CLOSING . . . . . . . . . . . . . . . . . . . 31
SECTION 7.1 CONDITIONS TO OBLIGATIONS OF HCCH. . . . . . . . . . . 31
SECTION 7.2 CONDITIONS TO OBLIGATIONS OF THE COMPANIES AND
SHAREHOLDERS . . . . . . . . . . . . . . . . . . . . . 33
SECTION 7.3 CONDITIONS TO OBLIGATIONS OF EACH PARTY. . . . . . . . 34
ARTICLE VIII TERMINATION OF AGREEMENT. . . . . . . . . . . . . . . . . . 34
SECTION 8.1 TERMINATION. . . . . . . . . . . . . . . . . . . . . . 34
SECTION 8.2 EFFECT OF TERMINATION. . . . . . . . . . . . . . . . . 35
ARTICLE IX CLOSING MATTERS . . . . . . . . . . . . . . . . . . . . . . 35
SECTION 9.1 THE CLOSING. . . . . . . . . . . . . . . . . . . . . . 35
ARTICLE X INDEMNIFICATION AND REMEDIES, CONTINUING COVENANTS. . . . . 36
SECTION 10.1 AGREEMENT TO INDEMNIFY . . . . . . . . . . . . . . . . 36
SECTION 10.2 INDEMNIFICATION WITH RESPECT TO TAXES AND ENVIRONMENT. 37
SECTION 10.3 HCCH AGREEMENT TO INDEMNIFY. . . . . . . . . . . . . . 37
SECTION 10.4 APPOINTMENT OF REPRESENTATIVE. . . . . . . . . . . . . 38
SECTION 10.5 SURVIVAL OF REPRESENTATIONS. . . . . . . . . . . . . . 39
SECTION 10.6 PROCEDURE FOR INDEMNIFICATION; THIRD PARTY CLAIMS. . . 39
ARTICLE XI POST-CLOSING COVENANTS OF HCCH. . . . . . . . . . . . . . . 40
SECTION 11.1 LISTING OF HCCH COMMON STOCK.. . . . . . . . . . . . . 40
SECTION 11.2 EMPLOYEE MATTERS . . . . . . . . . . . . . . . . . . . 40
SECTION 11.3 PRESIDENCY OF SOUTHERN . . . . . . . . . . . . . . . . 40
ARTICLE XII MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . 40
SECTION 12.1 FURTHER ASSURANCES.. . . . . . . . . . . . . . . . . . 40
SECTION 12.2 FEES AND EXPENSES. . . . . . . . . . . . . . . . . . . 41
SECTION 12.3 NOTICES. . . . . . . . . . . . . . . . . . . . . . . . 41
SECTION 12.4 GOVERNING LAW. . . . . . . . . . . . . . . . . . . . . 42
SECTION 12.5 BINDING UPON SUCCESSORS AND ASSIGNS, ASSIGNMENT. . . . 42
SECTION 12.6 SEVERABILITY . . . . . . . . . . . . . . . . . . . . . 42
SECTION 12.7 ENTIRE AGREEMENT . . . . . . . . . . . . . . . . . . . 42
SECTION 12.8 AMENDMENT AND WAIVERS. . . . . . . . . . . . . . . . . 42
SECTION 12.9 NO WAIVER. . . . . . . . . . . . . . . . . . . . . . . 42
SECTION 12.10 CONSTRUCTION OF AGREEMENT. . . . . . . . . . . . . . . 43
iii
<PAGE>
TABLE OF CONTENTS (CONT.)
PAGE
SECTION 12.11 COUNTERPARTS . . . . . . . . . . . . . . . . . . . . . 43
SECTION 12.12 NO THIRD PARTY BENEFICIARIES . . . . . . . . . . . . . 43
iv
<PAGE>
ACQUISITION AGREEMENT
THIS ACQUISITION AGREEMENT (this "Agreement") is entered into as of the
8th day of August, 1997 by and among HCC Insurance Holdings, Inc. ("HCCH"), a
Delaware corporation, Southern Aviation Insurance Underwriters, Inc.
("Southern"), an Alabama corporation, Aviation Claims Administrators, Inc.,
("ACA"), an Alabama corporation, and Truman A. Thomas, III ("Thomas"), a
resident of Alabama, Donald J. Barker, a resident of Alabama, and Alexander
D. Hahn, a resident of Florida, together all of the shareholders of Southern
and ACA (individually a "Shareholder" and collectively the "Shareholders").
For purposes of this Agreement, Southern and ACA shall be referred to herein
collectively as the "Companies" and individually as a "Company".
RECITALS:
A. Shareholders own all of the outstanding stock of Southern, a company
engaged in the insurance business.
B. Shareholders also own all of the outstanding stock of ACA, a third
party administrator for insurance companies.
C. HCCH desires to acquire all of the outstanding stock of Southern and
ACA for shares of common stock of HCCH (the "HCCH Common Stock") and
Shareholders desire to acquire the HCCH Common Stock in exchange for all of
their shares in Southern (being all of the outstanding stock of Southern) and
ACA (being all of the outstanding stock of ACA) for the consideration and on
the terms set forth in this Agreement.
D. The parties intend for the transactions contemplated by this
Agreement to be accounted for as a "pooling-of-interests" for accounting
purposes and to qualify as a plan of reorganization in accordance with the
provisions of Section 368(a) of the Internal Revenue Code of 1986, as amended
(the "Code").
NOW, THEREFORE, in consideration of the foregoing and the mutual
representations, warranties, covenants and agreements set forth herein, the
parties hereto do hereby agree as follows:
<PAGE>
ARTICLE I
TRANSFER OF THE SOUTHERN COMMON STOCK
AND THE ACA COMMON STOCK
SECTION 1.1 TRANSFER OF SOUTHERN COMMON STOCK AND ACA COMMON STOCK.
(a) Subject to the terms and conditions of this Agreement, at the
Closing (hereinafter defined), Shareholders shall transfer and deliver to
HCCH, and HCCH shall acquire from Shareholders, all of the outstanding stock
of Southern (the "Southern Common Stock").
(b) Subject to the terms and conditions of this Agreement, at the
Closing, Shareholders shall transfer and deliver to HCCH, and HCCH shall
acquire from Shareholders, all of the outstanding stock of ACA (the "ACA
Common Stock").
SECTION 1.2 PURCHASE PRICE.
(a) At the Closing, HCCH shall deliver to Shareholders 225,000 shares of
HCCH Common Stock in accordance with the Schedule set forth in Exhibit "A" in
exchange for the Shareholders' respective shares in Southern and ACA (the
"Share Payment").
(b) No fractional shares of HCCH Common Stock shall be issued to
Shareholders hereunder.
SECTION 1.3 CLOSING DELIVERIES.
At the Closing:
(a) Shareholders shall deliver to HCCH
(i) certificates representing the Southern Common Stock, endorsed or
transferred to HCCH, which shall transfer to HCCH good and
indefeasible title to the Southern Common Stock, free and clear of
all encumbrances;
(ii) certificates representing the ACA Common Stock, endorsed or
transferred to HCCH, which shall transfer to HCCH good and
indefeasible title to the ACA Common Stock, free and clear of
all encumbrances; and
(iii) such other documents including officer's certificates and opinions
of counsel as may be required by this Agreement or reasonably
requested by HCCH.
(b) HCCH shall deliver to Shareholders
2
<PAGE>
(i) certificates of HCCH Common Stock representing the amount of the
Share Payment to each of the Shareholders as set forth in
Exhibit "A". Shareholders agree and acknowledge that such shares
of HCCH Common Stock shall be unregistered and, therefore,
restricted as to transfer and the share certificates shall bear an
appropriate legend as set forth thereon with respect to same; and
(ii) such other documents including officer's certificates and
opinions of counsel, as may be required by this Agreement or
reasonably requested by Shareholders.
ARTICLE II
REPRESENTATIONS AND WARRANTIES
OF SOUTHERN, ACA AND SHAREHOLDERS
Except as disclosed in a document referring specifically to this
Agreement (the "Southern/ ACA Disclosure Schedule") which has been delivered
to HCCH on or before the date hereof, each of Southern, ACA and each
Shareholder (jointly and severally) represents and warrants to HCCH as set
forth below (it being agreed that the disclosure on the Southern/ACA
Disclosure Schedule of the existence of any document or fact or circumstance
or situation relating to any representations, warranties, covenants or
agreements in any section of this Agreement shall be automatically deemed to
be disclosure of such document or fact or circumstance or situation for
purposes of all other representations, warranties, covenants, and agreements
in this Agreement).
SECTION 2.1 CORPORATE EXISTENCE AND POWER. Each of Southern and ACA is
a corporation duly organized, validly existing and in good standing under the
laws of Alabama, and has all corporate powers and all material governmental
licenses, authorizations, consents and approvals (collectively, "Governmental
Authorizations") required to carry on its business as now conducted, except
such Governmental Authorizations the failure of which to have obtained would
not have a Material Adverse Effect, as hereinafter defined, on the Companies.
The Companies have each delivered to HCCH true and complete copies of their
Articles of Incorporation or Certificate of Incorporation, as the case may
be, and Bylaws as currently in effect. Each of Southern and ACA is duly
qualified to do business as a foreign corporation and is in good standing in
each jurisdiction where the character of the property owned or leased by it
or the nature of its activities makes such qualification necessary, except
where the failure to be so qualified would not have a Material Adverse Effect
on the Companies. For purposes of this Agreement, a "Material Adverse
Effect," with respect to any person or entity (including without limitation
Southern, ACA and HCCH), means a material adverse effect on the condition
(financial or otherwise), business, properties, assets, liabilities
(including contingent liabilities), results of operations or prospects of
such person or entity and its affiliated companies and subsidiaries and/or
parent corporation and/or corporations under the same stock ownership, taken
as a whole; and "Material Adverse Change" means a change or a development
involving a prospective change which would result in a Material Adverse
Effect.
3
<PAGE>
SECTION 2.2 AUTHORIZATION.
(a) The execution, delivery and performance by the Companies of this
Agreement and the consummation by the Companies of the transactions
contemplated hereby and thereby, are within the corporate powers of the
Companies and have been duly authorized by all necessary corporate action.
This Agreement constitutes, or upon execution will constitute, valid and
binding agreements of the Companies, enforceable against the Companies in
accordance with their respective terms, except as such enforcement may be
limited by bankruptcy, insolvency or other similar laws affecting the
enforcement of creditors' rights generally or by general principles of equity.
(b) Each of the Shareholders, severally, represents and warrants that he
has full right, power and authority to enter into this Agreement, the
Affiliates Agreement (hereinafter defined) to be entered into by him, and
each other agreement to be entered into by him in connection with the
transactions contemplated hereby and that this Agreement, the Affiliates
Agreement, and such other agreements contemplated hereby constitute, or upon
execution will constitute, valid and binding agreements of such Shareholder,
enforceable against him in accordance with their respective terms, except as
such enforcement may be limited by bankruptcy, insolvency or other similar
laws effecting the enforcement of creditors' rights generally or by general
principles of equity.
SECTION 2.3 GOVERNMENTAL AUTHORIZATION. The execution, delivery and
performance by the Companies and each Shareholder of this Agreement, and the
consummation of the transactions contemplated hereunder require no action by
the Companies or any Shareholder or any filing by them with any governmental
body, agency, official or authority other than:
(a) compliance with any applicable requirements of the Securities Act of
1933, as amended (the "Securities Act"), and the rules and regulations
promulgated thereunder;
(b) compliance with any applicable foreign or state securities or "blue
sky" laws;
(c) compliance with any requirements of any federal, state, foreign or
other insurance or reinsurance or intermediaries or managing general agent
laws, including licensing or other related laws;
(d) such other filings or registrations with, or authorizations,
consents or approvals of, governmental bodies, agencies, officials or
authorities, the failure of which to make or obtain (i) would not reasonably
be expected to have a Material Adverse Effect on the Companies, or (ii) would
not materially adversely affect the ability of the Companies, each
Shareholder or HCCH to consummate the transactions contemplated hereby and
operate their businesses as heretofore operated.
4
<PAGE>
SECTION 2.4 NON-CONTRAVENTION. The execution, delivery and performance
by the Companies and Shareholders of this Agreement and the consummation by
the Companies and Shareholders of the transactions contemplated hereby and
thereby do not and will not:
(a) contravene or conflict with the Companies' charter or bylaws;
(b) assuming compliance with the matters referred to in Section 2.3,
contravene or conflict with or constitute a violation of any provision
of any law, regulation, judgment, injunction, order or decree binding upon or
applicable to the Companies or any Shareholder;
(c) conflict with or result in a breach or violation of, or constitute a
default under, or result in a contractual right to cause the termination or
cancellation of or loss of a material benefit under, or right to accelerate,
any material agreement, contract or other instrument binding upon the
Companies or any Shareholder or any material license, franchise, permit or
other similar authorization held by the Companies or any Shareholder; or
(d) result in the creation or imposition of any Lien (as hereinafter
defined) on any material asset of the Companies;
except, with respect to clauses (b), (c) and (d) above, for contraventions,
defaults, losses, Liens and other matters referred to in such clauses that in
the aggregate would not be reasonably expected to have, individually or in
the aggregate, a Material Adverse Effect on the Companies or any Shareholder.
For purposes of this Agreement, the term "Lien" means, with respect to any
asset, any mortgage, lien, pledge, charge, security interest or encumbrance
of any kind in respect of such asset.
(e) All of the outstanding capital stock of the Companies owned by the
Shareholders directly or indirectly is or will be owned directly or
indirectly by the Shareholders free and clear of any material Lien and free
of any other material limitation or restriction on its or their rights as
owner thereof (including any restriction on the right to vote, sell or
otherwise dispose of such capital stock or other ownership interests), other
than those imposed by applicable law or this Agreement or the Affiliates
Agreement. Each Shareholder represents and warrants only as to his or her
individual ownership of Southern Common Stock and ACA Common Stock,
respectively, for purposes of this Section.
SECTION 2.5 CAPITALIZATION.
(a) As of June 30, 1997, the authorized capital stock of Southern was
1,000 shares of common stock, par value $1.00 per share, and 1,000 shares of
common stock are issued and outstanding and held by the Shareholders in the
percentages as set forth on Exhibit "A". All outstanding shares set forth
above have been, or will be prior to the Closing Date, duly authorized and
validly issued and are fully paid and nonassessable and free from any
preemptive rights. Except as set forth in and as otherwise contemplated by
this Agreement, there are
5
<PAGE>
outstanding, with respect to Southern, (i) no shares of capital stock or
other voting securities, (ii) no securities convertible into or exchangeable
for shares of its capital stock or voting securities), (iii) no options or
other rights to acquire, and no obligation to issue, any capital stock,
voting securities or securities convertible into or exchangeable for its
capital stock or other voting securities (the items in clauses (i), (ii) and
(iii) being referred to collectively as the "Southern Securities"), (iv) no
obligations to repurchase, redeem or otherwise acquire any of Southern
Securities and (v) no contractual rights of any person or entity to include
any such securities in any registration statement proposed to be filed under
the Securities Act.
(b) As of June 30, 1997, the authorized capital stock of ACA was 1,000
shares of common stock, par value $1.00 per share, and 1,000 shares of common
stock are issued and outstanding and held by the Shareholders in the
percentages set forth on Exhibit "A". All outstanding shares set forth above
have been, or will be prior to the Closing Date, duly authorized and validly
issued and are fully paid and nonassessable and free from any preemptive
rights. Except as set forth in and as otherwise contemplated by this
Agreement, there are outstanding, with respect to ACA, (i) no shares of
capital stock or other voting securities, (ii) no securities convertible into
or exchangeable for shares of its capital stock or voting securities), (iii)
no options or other rights to acquire, and no obligation to issue, any
capital stock, voting securities or securities convertible into or
exchangeable for its capital stock or other voting securities (the items in
clauses (i), (ii) and (iii) being referred to collectively as the "ACA
Securities"), (iv) no obligations to repurchase, redeem or otherwise acquire
any of ACA Securities and (v) no contractual rights of any person or entity
to include any such securities in any registration statement proposed to be
filed under the Securities Act.
SECTION 2.6 SUBSIDIARIES AND JOINT VENTURES.
(a) For purposes of this Section 2.6, (i) "Subsidiary" means, with
respect to any entity, any corporation of which securities or other ownership
interests having ordinary voting power to elect a majority of the board of
directors or other persons performing similar functions are directly or
indirectly owned by such entity, and (ii) "Joint Venture" means, with respect
to any entity, any corporation or organization (other than such entity and
any Subsidiary thereof) of which such entity or any Subsidiary thereof is,
directly or indirectly, the beneficial owner of 25% or more of any class of
equity securities or equivalent profit participation interest.
(b) Except as set forth in the Southern/ACA Disclosure Schedule, as of
the date hereof, the Companies do not have any Subsidiaries or Joint Ventures
which are material to the business of the Companies. The Companies do not
own, directly or indirectly, any outstanding capital stock or equity interest
in any corporation, partnership, Joint Venture or other entity.
SECTION 2.7 SOUTHERN FINANCIAL STATEMENTS. Southern has delivered to
HCCH Southern's audited balance sheets as of December 31, 1996 (the "Balance
Sheet Date") and Southern's unaudited income statements for the annual period
ended December 31, 1996, (collectively, the "Southern Financial Statements").
ACA has delivered to HCCH ACA's audited balance sheets as of April 30, 1997
and ACA's unaudited income statements for the annual period
6
<PAGE>
ended April 30, 1996 (collectively, the "ACA Financial Statements"). The
Southern Financial Statements and ACA Financial Statements present fairly in
all material respects (except as indicated in the notes thereto), the
financial position of the Companies as of the dates thereof and results of
operations and cash flows for the periods therein indicated (subject to
normal year-end adjustments in the case of any interim financial statements
and the absence of certain footnotes in the case of unaudited financial
statements). The Companies have no material debt, liability or obligation of
any nature, whether accrued, absolute, contingent or otherwise, and whether
due or to become due, that is not reflected, reserved against or disclosed in
the Southern Financial Statements and the ACA Financial Statements, except
for (i) those that are not required to be reported in accordance with the
aforesaid accounting principles; (ii) normal or recurring liabilities
incurred since December 31, 1996 in the ordinary course of business or (iii)
as disclosed in the Southern/ACA Disclosure Schedule.
SECTION 2.8 ABSENCE OF CERTAIN CHANGES. Except as disclosed in the
Southern/ACA Disclosure Schedule, since December 31, 1996, Southern and ACA
have in all material respects conducted their business in the ordinary course
and there has not been:
(a) any Material Adverse Change with respect thereto or any event,
occurrence or development of a state of circumstances or facts known to the
Companies which as of the date hereof could reasonably be expected to have a
Material Adverse Effect on the Companies;
(b) any declaration, setting aside or payment of any dividend or other
distribution in respect of any shares of capital stock of the Companies other
than the declaration, setting aside or payment of dividends in accordance
with their existing dividend policy or practice, which policy or practice is
not inconsistent with past policy or practice;
(c) any repurchase, redemption or other acquisition by the Companies of
any outstanding shares of capital stock or other securities of or other
ownership interests in the Companies;
(d) any amendment of any term of any outstanding securities of the
Companies;
(e) any damage, destruction or other property or casualty loss (whether
or not covered by insurance) affecting the business, assets, liabilities,
earnings or prospects of the Companies which, individually or in the
aggregate, has had or would reasonably be expected to have a Material Adverse
Effect on the Companies;
(f) any increase in indebtedness for borrowed money or capitalized lease
obligations of the Companies, except in the ordinary course of business;
(g) any sale, assignment, transfer or other disposition of any tangible
or intangible asset material to the business of the Companies, except in the
ordinary course of business and for a fair and adequate consideration;
7
<PAGE>
(h) any amendment, termination or waiver by the Companies of any right
of substantial value under any agreement, contract or other written
commitment to which it is a party or by which it is bound;
(i) any material reduction in the amounts of coverage provided by
existing casualty and liability insurance policies with respect to the
business or properties of the Companies;
(j) any (i) grant of any severance or termination pay to any director,
officer or employee of the Companies, (ii) entering into of any employment,
deferred compensation or other similar agreement (or any amendment to any
such existing agreement) with any director, officer or employee of the
Companies, (iii) any increase in benefits payable under any existing
severance or termination pay policies or employment agreements, or (iv) any
increase in compensation, bonus or other benefits payable to directors,
officers or employees of the Companies, in each case other than in the
ordinary course of business consistent with past practice;
(k) any new or amendment to or alteration of any existing bonus,
incentive, compensation, severance, stock option, stock appreciation right,
pension, matching gift, profit-sharing, employee stock ownership, retirement,
pension group insurance, death benefit, or other fringe benefit plan,
arrangement or trust agreement adopted or implemented by the Companies which
would result in a material increase in cost;
(l) any capital expenditures, capital additions or capital improvements
incurred or undertaken by the Companies, except in the ordinary course of
business; or
(m) the entering into of any agreement by the Companies or any person on
behalf of the Companies to take any of the foregoing actions.
SECTION 2.9 NO UNDISCLOSED LIABILITIES. There are no liabilities of
the Companies of any kind whatsoever that are, individually or in the
aggregate, material to the Companies, other than:
(a) liabilities disclosed or provided for in the respective unaudited
financial statements as of and for the fiscal year ended December 31, 1996
(including the notes thereto) of the Companies;
(b) liabilities incurred in the ordinary course of business consistent
with past practice since December 31, 1996;
(c) liabilities under this Agreement or indicated in the Southern/ACA
Disclosure Schedule.
SECTION 2.10 LITIGATION. Except as set forth in the Southern/ACA
Disclosure Schedule and other than actions, suits, proceedings, claims or
investigation occurring in the ordinary course of business involving
respective amounts in controversy of less than $10,000 each and $100,000
8
<PAGE>
in the aggregate, there is no action, suit, proceeding, claim or
investigation pending or threatened, against the Companies or any of their
assets or against or involving any of their officers, directors or employees
in connection with the business or affairs of the Companies, including,
without limitation, any such claims for indemnification arising under any
agreement to which the Companies are a party. The Companies are not subject,
or in default with respect, to any writ, order, judgment, injunction or
decree which could, individually or in the aggregate, have a Material Adverse
Effect on the Companies.
SECTION 2.11 ACCOUNTING MATTERS. Except for all actions disclosed to
and approved by HCCH, neither the Companies nor any of the Shareholders has
taken or agreed to take any action that (without giving effect to any action
taken or agreed to be taken by HCCH or any of its affiliates) would prevent
HCCH from accounting for the business combination to be effected by the
Agreement as a pooling-of-interests.
SECTION 2.12 TAXES.
(a) Each of the Companies (i) has filed when due (taking into account
extensions) with the appropriate federal, state, local, foreign and other
governmental agencies, all material tax returns, estimates and reports
required to be filed by it, (ii) has either paid when due and payable or has
established adequate reserves or otherwise accrued on the Southern Financial
Statements and the ACA Financial Statements all material federal, state,
local or foreign taxes, levies, imposts, duties, licenses and registration
fees and charges of any nature whatsoever, and unemployment and social
security taxes and income tax withholding, including interest and penalties
thereon ("Taxes" or "Tax", as the case may be) and there are no tax
deficiencies claimed in writing by any taxing authority and received by the
Companies or Shareholders that, in the aggregate, would result in any Tax
liability in excess of the amount of the reserves or accruals and (iii) has
or will establish in accordance with its normal accounting practices and
procedures accruals and reserves that, in the aggregate, are adequate for the
payment of all Taxes not yet due and payable and attributable to any period
preceding the Closing Date. The Southern/ACA Disclosure Schedule sets forth
those tax returns of the Companies (or any predecessor entities) for all
periods that currently are the subject of audit by any federal, state, local
or foreign taxing authority.
(b) There are no material taxes, interest, penalties, assessments or
deficiencies claimed in writing by any taxing authority and received by the
Companies or the Shareholders to be due in respect of any tax returns filed
by the Companies (or any predecessor corporations). Neither Company nor any
predecessor corporation has executed or filed with the Internal Revenue
Service ("IRS") or any other taxing authority any agreement or other document
extending, or having the effect of extending, the period of assessment or
collection of any Taxes.
(c) The Companies are not a party to or bound by (or will not prior to
the Closing Date become a party to or bound by) any Tax indemnity, Tax
sharing or Tax allocation agreement or other similar arrangement. The
Companies have not been a member of an affiliated group or filed or been
included in a combined, consolidated or unitary tax return.
9
<PAGE>
SECTION 2.13 EMPLOYEE BENEFIT PLANS, ERISA.
(a) The Companies are not a party to any oral or written (i) employment,
severance, collective bargaining or consulting agreement not terminable on 60
days' or less notice, (ii) agreement with any executive officer or other key
employee of the Companies (A) the benefits of which are contingent, or the
terms of which are materially altered, upon the occurrence of a transaction
involving the Companies of the nature of any of the transactions contemplated
by this Agreement, (B) providing any term of employment or compensation
guarantee extending for a period longer than one year, or (C) providing
severance benefits or other benefits after the termination of employment of
such executive officer or key employee regardless of the reason for such
termination of employment, (iii) agreement, plan or arrangement under which
any person may receive payments subject to the tax imposed by Section 4999 of
the Code, or (iv) agreement or plan, including, without limitation, any stock
option plan, stock appreciation right plan, restricted stock plan or stock
purchase plan, the benefits of which would be increased, or the vesting of
benefits of which will be accelerated, by the occurrence of any of the
transactions contemplated by this Agreement or the value of any of the
benefits of which will be calculated on the basis of any of the transactions
contemplated by this Agreement.
(b) Neither the Companies nor any corporation or other entity which
under Section 4001(b) of the Employee Retirement Income Security Act of 1974,
as amended ("ERISA"), is under common control with the Companies (a "Company
ERISA Affiliate") maintains or within the past five years has maintained,
contributed to, or been obligated to contribute to, any "Employee Pension
Benefit Plan" ("Pension Plan") or any "Employee Welfare Benefit Plan"
("Welfare Plan") as such terms are defined in Sections 3(2) and 3(1)
respectively of ERISA, which is subject to ERISA. Each Pension Plan and
Welfare Plan disclosed in the Southern/ACA Disclosure Schedule (which Plans
have been heretofore delivered to HCCH) and maintained by the Companies have
been maintained in all material respects in compliance with their terms and
all provisions of ERISA and the Code (including rules and regulations
thereunder) applicable thereto.
(c) No Pension Plan or Welfare Plan is currently subject to an audit or
other investigation by the IRS, the Department of Labor (the "DOL"), the
Pension Benefit Guaranty Corporation or any other governmental agency or
office nor are any such Plans subject to any lawsuits or legal proceedings of
any kind or to any material pending disputed claims by employees or
beneficiaries covered under any such Plan or by any other parties.
(d) No "prohibited transaction," as defined in Section 406 of ERISA or
Section 4975 of the Code, resulting in liability to the Companies or any
Company ERISA Affiliate has occurred with respect to any Pension Plan or
Welfare Plan. Neither the Companies nor any Shareholder has any knowledge of
any breach of fiduciary responsibility under Part 4 of Title I of ERISA which
has resulted in liability of the Companies and the Company ERISA Affiliate,
any trustee, administrator or fiduciary of any Pension Plan or Welfare Plan.
10
<PAGE>
(e) Neither the Companies nor any Company ERISA Affiliate, since January
1, 1986, has maintained or contributed to, or been obligated or required to
contribute to, a "Multiemployer Plan," as such term is defined in Section
4001(a)(3) of ERISA. Neither the Companies nor any Company ERISA Affiliate
has either withdrawn, partially or completely, or instituted steps to
withdraw, partially or completely, from any Multiemployer Plan nor has any
event occurred which would enable a Multiemployer Plan to give notice of and
demand payment of any withdrawal liability with respect to the Companies or
any Company ERISA Affiliate.
(f) There is no contract, agreement, plan or arrangement covering any
employee or former employee of the Companies or any Company ERISA Affiliate
that, individually or collectively, could give rise to the payment of any
amount that would not be deductible pursuant to the terms of Sections
162(a)(I) or 280G of the Code.
(g) With respect to the Companies and each Company ERISA Affiliate, the
Southern/ACA Disclosure Schedule correctly identifies each material
agreement, policy, plan or other arrangement, whether written or oral,
express or implied, fixed or contingent, to which the Companies are a party
or by which the Companies or any property or asset of the Companies are
bound, which is or relates to a pension, option, bonus, deferred
compensation, retirement, stock purchase, profit-sharing, severance pay,
health, welfare, incentive, vacation, sick leave, medical disability,
hospitalization, life or other insurance or fringe benefit plan, policy or
arrangement.
(h) Neither the Companies nor any Company ERISA Affiliate maintains or
has maintained or contributed to any Pension Plan that is or was subject to
Section 302 of Title IV of ERISA or Section 412 of the Code. The Companies
have made available to HCCH, for each Pension Plan which is intended to be
"qualified" within the meaning of Section 401(a) of the Code, a copy of the
most recent determination letter issued by the IRS to the effect that each
such Plan is so qualified and that each trust created thereunder is tax
exempt under Section 501 of the Code, and the Companies are unaware of any
fact or circumstances that would jeopardize the qualified status of each such
Pension Plan or the tax exempt status of each trust created thereunder.
SECTION 2.14 MATERIAL AGREEMENTS.
(a) The Southern/ACA Disclosure Schedule includes a complete and
accurate list of all contracts, agreements, leases (other than Company
Property Leases, as hereinafter defined), and instruments to which the
Companies are a party or by which it or its properties or assets are bound
which individually involve net payments or receipts in excess of $25,000 per
annum, inclusive of contracts entered into with customers and suppliers in
the ordinary course of business, or that pertain to employment or severance
benefits for any officer, director or employee of the Companies, whether
written or oral, but exclusive of contracts, agreements, leases and
instruments terminable without penalty upon 60 days' or less prior written
notice to the other party or parties thereto (the "Material Company
Agreements").
11
<PAGE>
(b) Neither the Companies nor, to the knowledge of the Companies or any
Shareholder, any other party is in default under any Material Company
Agreement and no event has occurred which (after notice or lapse of time or
both) would become a breach or default under, or would permit modification,
cancellation, acceleration or termination of any Material Company Agreement
or result in the creation of any security interest upon, or any person
obtaining any right to acquire, any properties, assets or rights of the
Companies, which, in any such case, has had or would reasonably be expected
to have a Material Adverse Effect.
(c) Each such Material Company Agreement is in full force and effect and
is valid and legally binding and there are no material unresolved disputes
involving or with respect to any Material Company Agreement. No party to a
Material Company Agreement has advised the Company or any Shareholder that it
intends either to terminate a Material Company Agreement or to refuse to
renew a Material Company Agreement upon the expiration of the term thereof.
(d) No representation or warranty is made that all benefits contemplated
in the Material Company Agreements will be received.
(e) The Companies are not in violation of, or in default with respect
to, any term of their Articles or Certificate of Incorporation, as the case
may be, or Bylaws.
SECTION 2.15 PROPERTIES. The Companies own no real estate, and all
leases of real property to which the Companies are a party or by which they
are bound ("the Company Property Leases") are in full force and effect.
There exists no default under such Company Property Leases, nor any event
which with notice or lapse of time or both would constitute a default
thereunder, which default would have a Material Adverse Effect. All of the
properties and assets which are owned by the Companies are owned by the
Companies free and clear of any Lien, except for Liens which do not have a
Material Adverse Effect. The Companies have good and indefeasible title with
respect to such owned properties and assets subject to no Liens, other than
those permitted under this Section 2.15, to all of the properties and assets
necessary for the conduct of their business other than to the extent that the
failure to have such title would not have a Material Adverse Effect.
SECTION 2.16 ENVIRONMENTAL MATTERS.
(a) For the purposes of this Agreement, the following terms have the
following meanings:
"Environmental Laws" shall mean any and all federal, state, local and
foreign statutes, laws (including case law), regulations, ordinances,
rules, judgments, orders, decrees, codes, plans, injunctions, permits,
concessions, grants, franchises, licenses, agreements and governmental
restrictions relating to human health, the environment or to emissions,
discharges or releases of pollutants, contaminants, Hazardous Substances
(as hereinafter defined) or wastes into the environment or otherwise
relating to the manufacture, processing, distribution, use, treatment,
storage, disposal, transport or handling of
12
<PAGE>
pollutants, contaminants, Hazardous Substances or wastes or the clean-up or
other remediation thereof.
"Environmental Liabilities" shall mean all liabilities, whether vested
or unvested, contingent or fixed, actual or potential, which (i) arise
under or relate to Environmental Laws and (ii) relate to actions occurring
or conditions existing on or prior to the Closing.
"Hazardous Substances" shall mean any toxic, radioactive, caustic or
otherwise hazardous substance, including petroleum, its derivatives,
by-products and other hydrocarbons, or any substance having any constituent
elements displaying any of the foregoing characteristics.
"Regulated Activity" shall mean any generation, treatment, storage,
recycling, transportation, disposal or release of any Hazardous Substances.
(b) No notice, notification, demand, request for information, citation,
summons, complaint or order has been received, no complaint has been filed,
no penalty has been assessed and, to the knowledge of the Companies and the
Shareholders, no investigation or review is pending, or has been threatened
by any governmental entity or other party with respect to any (i) alleged
violation of any Environmental Law, (ii) alleged failure to have any
environmental permit, certificate, license, approval, registration or
authorization required in connection with the conduct of its business or
(iii) Regulated Activity.
(c) The Companies have no material Environmental Liabilities and there
has been no release of Hazardous Substances into the environment by the
Companies or with respect to any of their properties which has had, or would
reasonably be expected to have, a Material Adverse Effect.
SECTION 2.17 LABOR MATTERS. The Companies are not a party to any
collective bargaining agreement or other labor union contract applicable to
persons employed by the Companies, and the Companies do not know of any
activities or proceedings of any labor union to organize any such employees.
SECTION 2.18 COMPLIANCE WITH LAWS. Except for violations which do not
have and would not reasonably be expected to have, individually or in the
aggregate, a Material Adverse Effect, the Companies are not in violation of,
and have not violated, any applicable provisions of any laws, statutes,
ordinances or regulations or any term of any judgment, decree, injunction or
order binding against it.
SECTION 2.19 TRADEMARKS, TRADENAMES, ETC. The Companies own or possess,
or hold a valid right or license to use, all intellectual property, patents,
trademarks, trade names, service marks, copyrights and licenses (collectively
"Intellectual Property"), and all rights with respect to the foregoing,
necessary for the conduct of their business as now conducted, without any
13
<PAGE>
known conflict with the rights of others. The Southern/ACA Disclosure
Schedule lists all Intellectual Property owned, possessed or held by the
Companies.
SECTION 2.20 SALE OF THE COMPANIES. Except as contemplated by this
Agreement, there are currently no discussions to which the Companies or
Shareholders are a party relating to (a) the sale of any material portion of
its assets, (b) any merger, consolidation, liquidation, dissolution or
similar transaction involving the Companies whereby the Companies will issue
any securities or for which the Companies are required to obtain the approval
of their shareholders, or (c) the sale of the Southern Common Stock or ACA
Common Stock.
SECTION 2.21 BROKER'S FEES. Neither the Companies, any Shareholder nor
anyone acting on the behalf or at the request thereof has any liability to
any broker, finder, investment banker or agent, or has agreed to pay any
brokerage fees, finder's fees or commissions, or to reimburse any expenses of
any broker, finder, investment banker or agent in connection with this
Agreement.
SECTION 2.22 INVESTMENT REPRESENTATION. The shares of HCCH Common Stock
to be acquired by the Shareholders pursuant to this Agreement will be
acquired solely for the account of such Shareholders, for investment purposes
only and not with a view to the distribution thereof. The Shareholders are
not participating, directly or indirectly, in any distribution or transfer of
such HCCH Common Stock, nor are they participating, directly or indirectly,
in underwriting any such distribution of HCCH Common Stock within the meaning
of the Securities Act. Each Shareholder has such knowledge and experience in
business matters that he is capable of evaluating the merits and risks of an
investment in HCCH and the acquisition of the shares of HCCH Common Stock,
and he is making an informed investment decision with respect thereto. The
Shareholders have been informed by HCCH that the shares of HCCH Common Stock
to be issued pursuant to this Agreement and the documents to be executed in
connection herewith will not be registered under the Securities Act at the
time of their issuance and may not be transferred, assigned or otherwise
disposed of absent registration under the Securities Act or availability of
an appropriate exemption therefrom. The Shareholders have further been
informed that HCCH will be under no obligation to register the shares of HCCH
Common Stock under the Securities Act or to take any steps to assist the
Shareholders to comply with any applicable exemption under the Securities Act
with respect to the shares of HCCH Common Stock.
Provided, however, the foregoing provisions of Article II are limited in
the following respect: the representations and warranties made hereunder by
the Shareholders are made based on each such Shareholder's current, actual
knowledge after having conducted an investigation.
14
<PAGE>
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF HCCH
Except as disclosed in a document referring specifically to this
Agreement or in a document, exhibit, or appendix filed with the Securities
and Exchange Commission ("SEC") which has been filed on or before the date
hereof, (collectively referred to herein as the "HCCH Disclosure Schedule")
which have been made available to the Companies or any of the Shareholders on
or before the date hereof, HCCH represents and warrants to the Companies and
Shareholders as set forth below (it being agreed that the disclosure on the
HCCH Disclosure Schedule of the existence of any document or fact or
circumstance or situation relating to any representations, warranties,
covenants or agreements in any section of this Agreement shall be
automatically deemed to be disclosure of such document or fact or
circumstance or situation for purposes of all other representations,
warranties, covenants and agreements in this Agreement):
SECTION 3.1 CORPORATE EXISTENCE AND POWER. HCCH is a corporation duly
incorporated, validly existing and in good standing under the laws of the
state of its incorporation. HCCH has all corporate powers and all material
Governmental Authorizations required to carry on its business as now
conducted, except such Governmental Authorizations the failure of which to
have obtained would not have a Material Adverse Effect on HCCH. HCCH is duly
qualified to do business as a foreign corporation and is in good standing in
each jurisdiction where the character of the property owned or leased by it
or the nature of its activities makes such qualification necessary, except
where the failure to be so qualified would not have a Material Adverse Effect
on HCCH. HCCH has delivered to the Companies true and complete copies of
HCCH's Certificate of Incorporation and Bylaws as currently in effect.
SECTION 3.2 CORPORATE AUTHORIZATION. The execution, delivery and
performance by HCCH of this Agreement and the consummation by HCCH of the
transactions contemplated hereby are within the corporate powers of HCCH and
have been duly authorized by all necessary corporate action. This Agreement
constitutes or upon execution will constitute, a valid and binding agreement
of HCCH enforceable against HCCH in accordance with its terms, except as such
enforcement may be limited by bankruptcy, insolvency or other similar laws
affecting the enforcement of creditors' rights generally or by general
principles of equity.
SECTION 3.3 GOVERNMENTAL AUTHORIZATION. The execution, delivery and
performance by HCCH of this Agreement requires no action by or in respect of,
or filing with, any governmental body, agency, official or authority other
than:
(a) compliance with any applicable requirements of the Securities and
Exchange Act of 1934, as amended (the "Exchange Act"), and the rules and
regulations promulgated thereunder;
(b) compliance with any applicable requirements of the Securities Act
and the rules and regulations promulgated thereunder;
15
<PAGE>
(c) compliance with any applicable foreign or state securities or "blue
sky" laws and the rules and regulations of the NYSE;
(d) compliance with any applicable requirements of any insurance
regulatory agency having authority over HCCH; and
(e) such other filings or registrations with, or authorizations,
consents or approvals of, governmental bodies, agencies, officials or
authorities, the failure of which to make or obtain (i) would not reasonably
be expected to have a Material Adverse Effect on HCCH or (ii) would not
materially adversely affect the ability of the Companies or HCCH to
consummate the transactions contemplated hereby and operate their businesses
as heretofore operated.
SECTION 3.4 NON-CONTRAVENTION. The execution, delivery and performance
by HCCH of this Agreement and the consummation by HCCH of the transactions
contemplated hereby and thereby do not and will not:
(a) contravene or conflict with the Certificate of Incorporation or
Bylaws of HCCH;
(b) assuming compliance with the matters referred to in Section 3.3,
contravene or conflict with or constitute a violation of any provision of any
law, regulation, judgment, injunction, order or decree binding upon or
applicable to HCCH;
(c) conflict with or result in a breach or violation of, or constitute a
default under, or result in a contractual right to cause the termination or
cancellation of or loss of a material benefit under, or right to accelerate,
any material agreement, contract or other instrument binding upon HCCH or any
material license, franchise, permit or other similar authorization held by
HCCH; or
(d) result in the creation or imposition of any Lien on any material
asset of HCCH,
except, with respect to clauses (b), (c) and (d) above, for contraventions,
defaults, losses, Liens and other matters referred to in such clauses that in
the aggregate would not be reasonably expected to have, individually or in
the aggregate, a Material Adverse Effect on HCCH.
SECTION 3.5 CAPITALIZATION OF HCCH.
(a) The authorized capital stock of HCCH consists of 100,000,000 shares
of HCCH Common Stock. As of March 31, 1997, there were 36,168,185 shares of
HCCH Common Stock issued and outstanding. All outstanding shares of HCCH
Common Stock have been duly authorized and validly issued and are fully paid
and nonassessable and free from any preemptive rights. Except as set forth
in this Section and as otherwise contemplated by this Agreement and except as
disclosed in public filings made by HCCH with the SEC prior to the Closing
Date or pursuant to publicly disseminated policy releases, or on the HCCH
Disclosure Schedule and except for changes since March 31, 1997 resulting
from the exercise of employee and director
16
<PAGE>
stock options, or resulting from other mergers, acquisitions or purchases,
there are outstanding (i) no shares of capital stock or other voting
securities of HCCH, (ii) no securities of HCCH convertible into or
exchangeable for shares of capital stock or voting securities of HCCH and
(iii) no options or other rights to acquire from HCCH, and no obligation of
HCCH to issue, any capital stock, voting securities or securities convertible
into or exchangeable for capital stock or other voting securities of HCCH
(the items in clauses (i), (ii) and (iii) being referred to collectively as
the "HCCH Securities"). There are no outstanding obligations of HCCH or any
of its Subsidiaries to repurchase, redeem or otherwise acquire any HCCH
Securities.
(b) All shares of HCCH Common Stock issued to Shareholders shall, upon
issuance, be fully paid, validly issued and nonassessable.
SECTION 3.6 SUBSIDIARIES.
(a) Each HCCH Subsidiary is a corporation duly incorporated, validly
existing and in good standing under the laws of its jurisdiction of
incorporation, has all corporate powers and all material Governmental
Authorizations required to carry on its business as now conducted, except
such Governmental Authorizations the failure of which to have obtained would
not have a Material Adverse Effect on HCCH, and is duly qualified to do
business as a foreign corporation and is in good standing in each
jurisdiction where the character of the property owned or leased by HCCH, or
the nature of its activities make such qualification necessary, except for
those jurisdictions where failure to be so qualified would not, individually
or in the aggregate, have a Material Adverse Effect on HCCH. All
Subsidiaries and Joint Ventures material to the business of HCCH ("Material
HCCH Subsidiaries") and their respective jurisdictions of incorporation or
organization and HCCH's ownership interest therein are identified in the HCCH
Disclosure Schedule. Other than its investments in its Subsidiaries and
Joint Ventures, and shares of stock in publicly held companies aggregating
less than 10% of such public company's outstanding stock, HCCH does not own,
directly or indirectly, any outstanding capital stock or equity interest in
any corporation, partnership, Joint Venture or other entity.
(b) All of the outstanding capital stock of, or other ownership
interests in, each Material HCCH Subsidiary that is owned by HCCH, is owned
by HCCH, directly or indirectly, free and clear of any material Lien and free
of any other material limitation or restriction on its rights as owner
thereof (including any restriction on the right to vote, sell or otherwise
dispose of such capital stock or other ownership interests), other than those
imposed by applicable law. There are no existing options, calls or
commitments of any character relating to the issued or unissued capital stock
or other securities or equity interests (collectively, "HCCH Subsidiary
Securities") of any HCCH Subsidiary.
17
<PAGE>
SECTION 3.7 SEC FILINGS.
(a) HCCH has since October 28, 1992 filed all forms, proxy statements,
schedules, reports and other documents required to be filed by it with the
SEC pursuant to the Exchange Act.
(b) HCCH has made available, and will promptly make available in the
case of any of the following filed with the SEC on or after the date hereof
and prior to the Closing Date, to the Shareholders:
(i) its annual reports on Form 10-K for its fiscal years ended
December 31, 1996, 1995 and 1994;
(ii) any current reports on Form 8-K since January 1, 1997 and its
proxy or information statements relating to meetings of, or actions taken
without a meeting by, the shareholders of HCCH held since January 1, 1997;
and
(iii) all of its other reports, including reports on Form 10-Q,
statements, schedules and registration statements filed with the SEC since
December 31, 1996. None of HCCH's Subsidiaries is required to file any
forms, reports or other documents with the SEC.
(c) As of its filing date, no such report or statement filed pursuant to
the Exchange Act contained any untrue statement of a material fact or omitted
to state any material fact necessary in order to make the statements made
therein, in the light of the circumstances under which they were made, not
misleading.
(d) No registration statement filed pursuant to the Securities Act, if
declared effective by the SEC, as of the date such statement or amendment
became effective, contained any untrue statement of a material fact or
omitted to state any material fact required to be stated therein or necessary
to make the statements therein not misleading.
SECTION 3.8 FINANCIAL STATEMENTS. The audited consolidated financial
statements of HCCH included in its annual reports on Form 10-K and the
unaudited financial statements of HCCH included in its quarterly reports on
Form 10-Q referred to in Section 3.7 present fairly, in conformity with
generally accepted accounting principles applied on a consistent basis
(except as may be indicated in the notes thereto), the consolidated financial
position of HCCH and its consolidated subsidiaries as of the dates thereof
and their consolidated results of operations and cash flows for the periods
then ended (subject to normal year-end adjustments in the case of any interim
financial statements). For purposes of this Agreement, "HCCH Balance Sheet"
means the consolidated balance sheet of HCCH as of December 31, 1996, and the
notes thereto, contained in HCCH's annual report on Form 10-K filed with the
SEC, and "HCCH Balance Sheet Date" means December 31, 1996.
18
<PAGE>
SECTION 3.9 ABSENCE OF CERTAIN CHANGES. Except as disclosed in the HCCH
Disclosure Schedule, since the HCCH Balance Sheet Date, HCCH and each of its
Subsidiaries have in all material respects conducted their business in the
ordinary course and there has not been:
(a) any Material Adverse Change with respect to HCCH or any event,
occurrence or development of a state of circumstances or facts known to HCCH,
which as of the date hereof could reasonably be expected to have a Material
Adverse Effect on HCCH;
(b) any amendment of any material term of any outstanding HCCH
Securities;
(c) any action by HCCH or, to HCCH's knowledge, any affiliate of HCCH
which would preclude the ability of HCCH to account for the business
combination to be effected hereunder as a pooling-of-interests under
generally accepted accounting principles; or
(d) the entering into of any agreement by HCCH or any person on behalf
of HCCH to take any of the foregoing actions.
SECTION 3.10 NO UNDISCLOSED LIABILITIES. There are no liabilities of
HCCH or any of its Subsidiaries of any kind whatsoever that are, individually
or in the aggregate, material to HCCH and its Subsidiaries, taken as a whole,
other than:
(a) liabilities disclosed or provided for in the HCCH Balance Sheet
(including the notes thereto);
(b) liabilities incurred in the ordinary course of business consistent
with past practice since the HCCH Balance Sheet Date; and
(c) liabilities under this Agreement or as indicated in the HCCH
Disclosure Schedule.
SECTION 3.11 LITIGATION. Other than actions, suits, proceedings, claims
or investigations occurring in the ordinary course of business or such
actions, suits, proceedings, claims or investigations involving respective
amounts in controversy of less than $1,000,000 each, there is no action,
suit, proceeding, claim or investigation pending or, to the knowledge of
HCCH, overtly threatened, against HCCH or any of its Subsidiaries or any of
their assets or against or involving any of its officers, directors or
employees in connection with the business or affairs of HCCH, including,
without limitation, any such claims for indemnification arising under any
agreement to which HCCH or any of its Subsidiaries is a party, which could,
individually or in the aggregate, have a Material Adverse Effect on HCCH.
HCCH and each of its Subsidiaries are not subject to or in default with
respect to any writ, order, judgment, injunction or decree which could,
individually or in the aggregate, have a Material Adverse Effect on HCCH.
19
<PAGE>
SECTION 3.12 TAXES.
(a) HCCH and each of its Subsidiaries (i) has filed when due (taking
into account extensions) with the appropriate federal, state, local, foreign
and other governmental agencies, all material tax returns, estimates and
reports required to be filed by it, (ii) either paid when due and payable or
established adequate reserves or otherwise accrued on the HCCH Balance Sheet
all material Taxes, and there are no tax deficiencies claimed in writing by
any taxing authority and received by HCCH that, in the aggregate, would
result in any Tax liability in excess of the amount of the reserves or
accruals, and (iii) has or will establish in accordance with its normal
accounting practices and procedures accruals and reserves that, in the
aggregate, are adequate for the payment of all Taxes not yet due and payable
and attributable to any period preceding the Closing. The HCCH Disclosure
Schedule sets forth those tax returns of HCCH (or any predecessor entities)
for all periods that currently are the subject of audit by any federal,
state, local or foreign taxing authority.
(b) There are no material taxes, interest, penalties, assessments or
deficiencies claimed in writing by any taxing authority and received by HCCH
or any of its Subsidiaries to be due in respect of any tax returns filed by
HCCH (or any predecessor corporations) or any of its Subsidiaries. Neither
HCCH nor any predecessor corporation, nor any of their respective
Subsidiaries, has executed or filed with the IRS or any other taxing
authority any agreement or other document extending, or having the effect of
extending, the period of assessment or collection of any Taxes.
(c) HCCH is not a party to or bound by (or will prior to the Closing
Date become a party to or bound by) any Tax indemnity, Tax sharing or Tax
allocation agreement or other similar arrangement which includes a party
other than HCCH and its Subsidiaries. Neither HCCH nor any of its
Subsidiaries has been a member of an affiliated group other than one of which
HCCH was the common parent, or filed or been included in a combined,
consolidated or unitary tax return other than one filed by HCCH (or a return
for a group consisting solely of its Subsidiaries and predecessors).
SECTION 3.13 EMPLOYEE BENEFIT PLANS; ERISA.
(a) Neither HCCH nor any corporation or other entity which under Section
4001(b) of ERISA is under common control with HCCH (an "HCCH ERISA
Affiliate") maintains or within the past five years has maintained,
contributed to, or been obligated to contribute to, any Pension Plan or any
Welfare Plan which is subject to ERISA. Each Pension Plan and Welfare Plan
disclosed in the HCCH Disclosure Schedule (which Plans have been heretofore
delivered to the Companies) and maintained by HCCH has been maintained in all
material respects in compliance with their terms and all provisions of ERISA
and the Code (including rules and regulations thereunder) applicable thereto.
(b) Neither HCCH nor any HCCH ERISA Affiliate maintains or has
maintained or contributed to any Pension Plan that is or was subject to
Section 302 or Title IV of ERISA or
20
<PAGE>
Section 412 of the Code. HCCH has made available to the Companies for each
Pension Plan which is intended to be "qualified" within the meaning of
Section 401(a) of the Code, a copy of the most recent determination letter
issued by the IRS to the effect that each such Plan is so qualified and that
each trust created thereunder is tax exempt under Section 501 of the Code,
and HCCH is unaware of any fact or circumstances that would jeopardize the
qualified status of each such Pension Plan or the tax exempt status of each
trust created thereunder.
(c) To the knowledge of HCCH, no Pension Plan or Welfare Plan is
currently subject to an audit or other investigation by the IRS, the
Department of Labor, the Pension Benefit Guaranty Corporation or any other
governmental agency or office nor are any such Plans subject to any lawsuits
or legal proceedings of any kind or to any material pending disputed claims
by employees or beneficiaries covered under any such Plan or by any other
parties.
(d) No "prohibited transaction," as defined in Section 406 of ERISA or
Section 4975 of the Code, resulting in liability to HCCH or any HCCH ERISA
Affiliate has occurred with respect to any Pension Plan or Welfare Plan.
HCCH has no knowledge of any breach of fiduciary responsibility under Part 4
of Title I of ERISA which has resulted in liability of HCCH, any HCCH ERISA
Affiliate, any trustee, administrator or fiduciary of any Pension Plan or
Welfare Plan.
(e) Neither HCCH nor any HCCH ERISA Affiliate, since January 1, 1986,
has maintained or contributed to, or been obligated or required to contribute
to, a "Multiemployer Plan," as such term is defined in Section 4001(a)(3) of
ERISA. Neither HCCH nor any HCCH ERISA Affiliate has either withdrawn,
partially or completely, or instituted steps to withdraw, partially or
completely, from any Multiemployer Plan nor has any event occurred which
would enable a Multiemployer Plan to give notice of and demand payment of any
withdrawal liability with respect to HCCH or any HCCH ERISA Affiliate.
(f) With respect to HCCH and each HCCH ERISA Affiliate, the HCCH
Disclosure Schedule correctly identifies each material agreement, policy,
plan or other arrangement, whether written or oral, express or implied, fixed
or contingent, to which HCCH is a party or by which HCCH or any property or
asset of HCCH is bound, which is or relates to a pension, option, bonus,
deferred compensation, retirement, stock purchase, profit-sharing, severance
pay, health, welfare, incentive, vacation, sick leave, medical disability,
hospitalization, life or other insurance or fringe benefit plan, policy or
arrangement.
SECTION 3.14 MATERIAL AGREEMENTS.
(a) The HCCH Disclosure Schedule or its filings with the SEC includes a
complete and accurate list of all contracts, agreements, leases (other than
HCCH Property Leases, as hereinafter defined) and instruments to which HCCH
or any of its Subsidiaries is a party or by which it or its properties or
assets are bound which individually involve net payments or receipts in
excess of $10,000,000 per annum, inclusive of contracts that pertain to
employment or severance benefits for any officer, director or employee of
HCCH, whether written or oral, but
21
<PAGE>
exclusive of contracts entered into with customers and suppliers in the
ordinary course of business or contracts, agreements, leases and instruments
terminable without penalty by HCCH upon 60 days or less prior written notice
to the other party or parties thereto (the "Material HCCH Agreements").
(b) Neither HCCH, any HCCH Subsidiary, nor, to the knowledge of HCCH,
any other party is in default under any Material HCCH Agreement and no event
has occurred which (after notice or lapse of time or both) would become a
breach or default under, or would permit modification, cancellation,
acceleration or termination of any Material HCCH Agreement or result in the
creation of any security interest upon, or any person obtaining any right to
acquire, any properties, assets or rights of HCCH which, in any such case,
has had or would reasonably be expected to have a Material Adverse Effect on
HCCH.
(c) Each such Material HCCH Agreement is in full force and effect and is
valid and legally binding and there are no material unresolved disputes
involving or with respect to any Material HCCH Agreement. No party to a
Material HCCH Agreement has advised HCCH or any of its Subsidiaries that it
intends either to terminate a Material HCCH Agreement or to refuse to renew a
Material HCCH Agreement upon the expiration of the term thereof.
(d) Each of HCCH and each HCCH Subsidiary is not in violation of, or in
default with respect to, any term of its Certificate of Incorporation or
Bylaws.
SECTION 3.15 PROPERTIES. To the knowledge of HCCH, all leases of real
property to which HCCH or any of its Subsidiaries is a party or by which it
or any of its Subsidiaries is bound ("HCCH Property Leases") which are
material to the business of HCCH and its Subsidiaries taken as a whole are in
full force and effect. To the knowledge of HCCH, there exists no default
under such HCCH Property Leases, nor any event which with notice or lapse of
time or both would constitute a default thereunder by HCCH or any of its
Subsidiaries, which default would have a Material Adverse Effect on HCCH.
All of the properties and assets which are owned by HCCH and each of its
Subsidiaries are owned by each of them, respectively, free and clear of any
Lien, except for Liens which do not have a Material Adverse Effect on HCCH.
HCCH and each of its Subsidiaries have good and indefeasible title with
respect to such owned properties and assets subject to no Liens, other than
those permitted under this Section 3.15, to all of the properties and assets
necessary for the conduct of their business other than to the extent that the
failure to have such title would not have a Material Adverse Effect on HCCH.
SECTION 3.16 ENVIRONMENTAL MATTERS.
(a) No notice, notification, demand, request for information, citation,
summons, complaint or order has been received, no complaint has been filed,
no penalty has been assessed and, to the knowledge of HCCH, no investigation
or review is pending, or to HCCH's knowledge, has been threatened by any
governmental entity or other party with respect to any (i) alleged violation
by HCCH or any of its Subsidiaries of any Environmental Law, (ii) alleged
failure by HCCH or any such Subsidiary to have any environmental permit,
certificate, license, approval,
22
<PAGE>
registration or authorization required in connection with the conduct of its
business or (iii) Regulated Activity.
(b) Neither HCCH nor any of its Subsidiaries has any material
Environmental Liabilities and there has been no release of Hazardous
Substances into the environment by HCCH or any such Subsidiary or with
respect to any of their respective properties which has had, or would be
reasonably expected to have, a Material Adverse Effect on HCCH.
SECTION 3.17 LABOR MATTERS. HCCH is not a party to any collective
bargaining agreement or other labor union contract applicable to persons
employed by HCCH, nor do the executive officers of HCCH know of any
activities or proceedings of any labor union to organize any such employees.
SECTION 3.18 COMPLIANCE WITH LAWS. Except for violations which do not
have and would not reasonably be expected to have, individually or in the
aggregate, a Material Adverse Effect on HCCH, neither HCCH nor any of its
Subsidiaries is in violation of, or has violated, any applicable provisions
of any laws, statutes, ordinances or regulations or any term of any judgment,
decree, injunction or order binding against it.
SECTION 3.19 TRADEMARKS, TRADE NAMES, ETC. HCCH owns or possesses, or
holds a valid right or license to use, all intellectual property, patents,
trademarks, trade names, service marks, copyrights and licenses, and all
rights with respect to the foregoing, necessary for the conduct of its
business as now conducted, without any known conflict with the rights of
others.
SECTION 3.20 BROKER'S FEES. Neither HCCH nor anyone acting on the
behalf or at the request thereof has any liability to any broker, finder,
investment banker or agent, or has agreed to pay any brokerage fees, finder's
fees or commissions, or to reimburse any expenses of any broker, finder,
investment banker or agent in connection with this Agreement.
ARTICLE IV
COVENANTS OF SOUTHERN, ACA AND SHAREHOLDERS
From the date hereof until the occurrence of the earlier of (i) the
Closing or (ii) termination of this Agreement pursuant to Section 8.1 hereof,
(a) the Companies and each Shareholder agrees, except as otherwise permitted
with the written consent of HCCH, that:
SECTION 4.1 CONDUCT OF THE COMPANIES. The Companies shall in all
material respects conduct their business in the ordinary course. Without
limiting the generality of the foregoing, from the date hereof until the
Closing, except as contemplated by this Agreement:
(a) The Companies will not adopt or propose any change in their Articles
or Certificate of Incorporation or Bylaws;
23
<PAGE>
(b) The Companies will not enter into or amend any employment agreements
(oral or written) or increase the compensation payable or to become payable
by them to any of their officers, directors, or consultants over the amount
payable as of December 31, 1996, or increase the compensation payable to any
other employees (other than (i) increases in the ordinary course of business
which are not in the aggregate material to the Companies, or (ii) pursuant to
plans disclosed in the Southern/ACA Disclosure Schedule), or adopt or amend
any employee benefit plan or arrangement (oral or written);
(c) Southern will not issue any Southern Securities and ACA will not
issue any ACA Securities;
(d) The Companies will keep in full force and effect any existing
directors' and officers' liability insurance and will not modify or reduce
the coverage thereunder;
(e) The Companies will not pay any dividends or make any other
distributions to holders of its capital stock nor redeem or otherwise acquire
any Southern Securities or ACA Securities;
(f) The Companies will not, directly or indirectly, dispose of or
acquire any material properties or assets except in the ordinary course of
business;
(g) The Companies will not incur any additional indebtedness for
borrowed money except pursuant to existing arrangements which have been
disclosed to HCCH prior to the date hereof;
(h) The Companies will not amend or change the period of exercisability
or accelerate the exercisability of any outstanding options or warrants to
acquire shares of capital stock, or accelerate, amend or change the vesting
period of any outstanding restricted stock;
(i) The Companies and each Shareholder will not knowingly take any
action, other than those which have been disclosed to and approved by HCCH,
that would prevent the accounting for the business combination to be effected
hereunder as a pooling-of-interests;
(j) The Companies and each of the Shareholders will not, directly or
indirectly, agree or commit to do any of the foregoing; and
(k) The Companies will not (i) change accounting methods except as
necessitated by changes which the Companies are required to make in order to
prepare their federal, state and local tax returns; (ii) amend or terminate
any contract, agreement or license to which they are a party (except pursuant
to arrangements previously disclosed in writing to HCCH or disclosed in the
Southern/ACA Disclosure Schedule) except those amended or terminated in the
ordinary course of business, consistent with past practices, or involving
changes which are not materially adverse in amount or effect to the
Companies; (iii) lend any amount to any person or entity, other than advances
for travel and expenses which are incurred in the ordinary course of business
24
<PAGE>
consistent with past practices, and which are not material in amount to the
Companies, which travel and expenses shall be documented by receipts for the
claimed amounts; (iv) enter into any guarantee or suretyship for any
obligation except for the endorsements of checks and other negotiable
instruments in ordinary course of business, consistent with past practice;
(v) waive or release any material right or claim except in the ordinary
course of business, consistent with past practice; (vi) issue or sell any
shares of its capital stock of any class or any other of its securities, or
issue or create any warrants, obligations, subscriptions, options,
convertible securities, stock appreciation rights or other commitments to
issue shares of capital stock, or take any action other than this transaction
to accelerate the vesting of any outstanding option or other security (except
pursuant to existing arrangements disclosed in writing to HCCH before the
date of this Agreement); (vii) merge, consolidate or reorganize with or
acquire any entity; (viii) agree to any audit assessment by any tax authority
or file any federal or state income or franchise tax return unless copies of
such returns have been delivered to HCCH for its review prior to such
agreement or filing; and (ix) terminate the employment of any key executive
employee.
SECTION 4.2 ACCESS TO FINANCIAL AND OPERATIONAL INFORMATION. The
Companies and the Shareholders will give HCCH, its counsel, financial
advisors, auditors and other authorized representatives reasonable access
during normal business hours to their offices, properties, books and records,
will furnish to HCCH, its counsel, financial advisors, auditors and other
authorized representatives such financial and operating data as such persons
may reasonably request and will instruct their employees, counsel and
financial advisors to cooperate with HCCH in its investigation of the
business of the Companies and in the planning for the combination of the
businesses of the Companies and HCCH following the consummation of the
transactions contemplated in this Agreement; PROVIDED that no investigation
pursuant to this Section shall affect any representation or warranty given
hereunder. In addition, following the public announcement of this Agreement
or the transactions contemplated hereby, the Companies will cooperate in
arranging joint meetings among representatives of the Companies and HCCH and
persons with whom they maintain business relationships. All requests for
information made pursuant to this Section shall be directed to Thomas or such
person as may be designated by him in writing. All information conveyed
pursuant to this Section 5.3 shall be governed by the Confidentiality
Agreement between HCCH and Southern (the "Confidentiality Agreement").
SECTION 4.3 OTHER OFFERS.
(a) The Companies and each of the Shareholders will not, and will use
their best efforts to cause, where applicable, their respective officers,
directors, employees or other agents and affiliates not to, directly or
indirectly, (i) take any action to solicit, initiate or discuss any
Acquisition Proposal (as hereinafter defined), or (ii) engage in negotiations
with, or disclose any nonpublic information relating to, the Companies or
afford access to the properties, books or records of the Companies to, any
person or entity that may be considering making, or has made, an Acquisition
Proposal. To the extent that the Companies or any of their respective
officers, directors, employees or other agents, or Thomas is currently
involved in any discussions with respect to any Acquisition Proposal or
contemplated or proposed Acquisition Proposal, the Companies and Thomas shall
terminate, and shall use their best efforts to cause, where
25
<PAGE>
applicable, their respective officers, directors, employees or other agents
to terminate, such discussions immediately. The term "Acquisition Proposal"
as used herein means any offer or proposal for, or any indication of interest
in, a merger or other business combination involving the Companies or the
acquisition of any equity interest in, or a substantial portion of the assets
of, the Companies other than the transactions contemplated by this Agreement.
(b) Subject to their fiduciary duties, the Board of Directors of the
Companies and each Shareholder shall not (i) withdraw or modify, or propose
to withdraw or modify, in a manner adverse to HCCH, the approval or
recommendation by such Board of Directors or Shareholder, of this Agreement
or the other documents or transactions contemplated hereby, (ii) approve or
recommend, or propose to approve or recommend, any Acquisition Proposal
(other than an Acquisition Proposal made by HCCH or an affiliate of HCCH) or
(iii) approve or authorize the entering into any agreement with respect to
any Acquisition Proposal.
SECTION 4.4 MAINTENANCE OF BUSINESS. The Companies will use their
reasonable best efforts to carry on their respective business, keep available
the services of its respective officers and employees and preserve their
relationships with those of their customers, agents, suppliers, licensors and
others having business relationships with them that are material to their
business in substantially the same manner as they have prior to the date
hereof. If the Companies become aware of a material deterioration or facts
which are likely to result in a material deterioration in the relationship
with any customers, supplier, licensor or others having business
relationships with them, they will promptly in writing bring such information
to the attention of the HCCH in writing.
SECTION 4.5 COMPLIANCE WITH OBLIGATIONS. The Companies shall use their
reasonable best efforts to comply in all material respects with (i) all
applicable federal, state, local and foreign laws, rules and regulations,
(ii) all material agreements and obligations, including their respective
charter and bylaws, by which they, their properties or their assets may be
bound, and (iii) all decrees, orders, writs, injunctions, judgments,
statutes, rules and regulations applicable to the Companies and their
properties or assets.
SECTION 4.6 NOTICES OF CERTAIN EVENTS. The Companies shall, upon
obtaining knowledge of any of the following, promptly notify HCCH of:
(a) any notice or other communication from any person alleging that the
consent of such person is or may be required in connection with this
Agreement;
(b) any notice or other communication from any governmental or
regulatory agency or authority in connection with this Agreement; and
(c) any actions, suits, claims, investigations or other judicial
proceedings commenced or threatened against the Companies which, if pending
on the date of this Agreement, would have been required to have been
disclosed pursuant hereto or which relate to the consummation of the
transactions contemplated by this Agreement.
26
<PAGE>
SECTION 4.7 AFFILIATES AGREEMENT. To facilitate the treatment of the
transactions hereunder for accounting purposes as a pooling-of-interests,
each Shareholder shall deliver to HCCH simultaneously with the execution of
this Agreement, a written agreement (the "Affiliates Agreement") from each
Shareholder and from each "affiliate" (as that term is used in Rule 144 or
145 under the Securities Act) in form and substance reasonably satisfactory
to HCCH relating to their intent to hold any HCCH Common Stock acquired
pursuant to this Agreement for investment purposes.
SECTION 4.8 NECESSARY CONSENTS. The Companies and each Shareholder
shall use their reasonable best efforts to obtain such written consent and
take such other actions as may be necessary or appropriate for the Companies
to facilitate and allow the consummation of the transactions provided for
herein and to facilitate and allow HCCH to carry on the acquired business
after the Closing Date (as defined in Section 9.1 hereof).
SECTION 4.9 REGULATORY APPROVAL. The Companies and, where required
pursuant to the rules or regulations of any regulatory agency, all
Shareholders will execute and file, or join in the execution and filing, with
any application or other document that may be necessary in order to obtain
the authorization, approval or consent of any governmental body, federal,
state, local or foreign which may be reasonably required, or which HCCH may
reasonably request, in connection with the consummation of the transaction
provided for in this Agreement. The Companies and Shareholders will use
reasonable best efforts to obtain or assist HCCH in obtaining all such
authorizations, approvals and consents.
SECTION 4.10 SATISFACTION OF CONDITIONS PRECEDENT. The Companies and
each Shareholder shall use their reasonable best efforts to cause the
transactions provided for in this Agreement to be consummated, and, without
limiting the generality of the foregoing to obtain all consents and
authorizations of third parties and to make all filings with, and give all
notices to, third parties that may be necessary or reasonably required on its
part in order to effect the transactions provided for herein.
ARTICLE V
COVENANTS OF HCCH
From the date hereof until the occurrence of the earlier of (i) the
Closing or (ii) the termination of this Agreement pursuant to Section 8.1
hereof, HCCH agrees that, except as otherwise permitted with the written
consent of Shareholders, which consent shall not be unreasonably withheld:
SECTION 5.1 CONDUCT OF HCCH. HCCH and its Subsidiaries shall in all
material respects conduct their business in the ordinary course PROVIDED,
HOWEVER, THAT nothing in this Agreement shall be construed to prohibit or
otherwise restrain HCCH in any manner from acquiring other businesses or
substantially all of the assets thereof. Without limiting the
27
<PAGE>
generality of the foregoing, from the date hereof until the Closing, except
as contemplated hereby or previously disclosed by HCCH to Shareholders in
writing:
(a) HCCH will not adopt or propose any change in its Certificate of
Incorporation or Bylaws;
(b) HCCH will not take any action that would result in a failure to
maintain the trading of HCCH Common Stock on the NYSE; and
(c) HCCH will not, and will not permit any of its Subsidiaries to, agree
or commit to do any of the foregoing.
SECTION 5.2 ACCESS TO FINANCIAL AND OPERATION INFORMATION. HCCH will
give the Companies, their counsel, financial advisors, auditors and other
authorized representatives reasonable access during normal business hours to
the offices, properties, books and records of HCCH and its Subsidiaries, will
furnish to the Companies, their counsel, financial advisors, auditors and
other authorized representatives such financial and operating data such as
persons may reasonably request and will instruct HCCH's employees, counsel
and financial advisors to cooperate with the Companies in their investigation
of the business of HCCH and its Subsidiaries and in the planning for the
combination of the businesses of the Companies and HCCH following the
consummation of the transaction hereunder and will furnish promptly to the
Companies copies of all reports, schedules, registration statements,
correspondence and other documents filed with or delivered to the SEC,
PROVIDED that no investigation pursuant to this Section shall affect any
representation or warranty given by HCCH to the Companies or the Shareholders
hereunder. In addition, if requested by the Companies following the public
announcement of this Agreement, HCCH will cooperate in arranging joint
meetings among representatives of HCCH and the Companies and persons with
whom HCCH maintains business relationships. All requests for information
made pursuant to this Section shall be directed to the President of HCCH or
such person as may be designated by him in writing.
SECTION 5.3 MAINTENANCE OF BUSINESS. HCCH will use its reasonable
efforts to carry on its business, keep available the services of its officers
and employees and preserve its relationships with those of its customers,
suppliers, licensors and others having business relationships with it that
are material to its business in substantially the same manner as it has prior
to the date hereof. If HCCH becomes aware of a material deterioration or
facts which are likely to result in a material deterioration in the
relationship with any material customer, supplier, licensor or others having
business relationships with it, it will promptly bring such information to
the attention of the Companies in writing.
SECTION 5.4 COMPLIANCE WITH OBLIGATIONS. HCCH and its Subsidiaries
shall each use its reasonable best efforts to comply in all material respects
with (i) all applicable federal, state, local and foreign laws, rules and
regulations, (ii) all material agreements and obligations, including its
respective charter and bylaws, by which it, its properties or its assets may
be bound, and (iii) all decrees, orders, writs, injunctions, judgments,
statutes, rules and regulations
28
<PAGE>
applicable to HCCH and its Subsidiaries and their respective properties or
assets; except to the extent that the failure to comply with matters in
clauses (i), (ii) and (iii) would not have a Material Adverse Effect on HCCH.
SECTION 5.5 NOTICES OF CERTAIN EVENTS. HCCH shall, upon obtaining
knowledge of any of the following, promptly notify the Companies of:
(a) any notice or other communication from any person alleging that the
consent of such person is or may be required in connection with this
Agreement;
(b) any notice or other communication from any governmental or
regulatory agency or authority in connection with this Agreement; and
(c) any actions, suits, claims, investigations or other judicial
proceedings commenced or threatened against HCCH or any of its Subsidiaries
which, if pending on the date of this Agreement, would have been required to
have been disclosed pursuant to Section 3.11 or which relate to the consummation
of the transactions contemplated in this Agreement.
SECTION 5.6 NOTICE TO AFFILIATES. HCCH shall, at least 30 days prior
to the Closing Date, cause to be delivered to each person HCCH believes to be
an "affiliate," as that term is used in paragraphs (c) and (d) of Rule 145
under the Securities Act, of HCCH a notice informing such persons of
restrictions on transfer resulting from the transactions hereunder being
accounted for as a pooling-of-interests in accordance with generally accepted
principles and all published rules, regulations and policies of the SEC.
ARTICLE VI
COVENANTS OF HCCH, THE COMPANIES AND SHAREHOLDERS
From the date hereof until the occurrence of the earlier of (i) the
Closing or (ii) termination of this Agreement pursuant to Section 8.1 hereof,
each of the Shareholders, where applicable, the Companies and HCCH agree that:
SECTION 6.1 ADVICE OF CHANGES. It will promptly advise the others in
writing (i) of any event known to any of its executive officers or the
Shareholders occurring subsequent to the date of this Agreement that in its
reasonable judgment renders any representation or warranty of such party
contained in this Agreement, if made on or as of the date of such event or
the Closing Date, untrue, inaccurate or misleading in any material respect
and (ii) of any Material Adverse Change in the business condition of the
party.
SECTION 6.2 REGULATORY APPROVALS. It shall execute and file, or
join in the execution and filing of, any application or other document
that may be necessary in order to obtain the authorization, approval or
consent of any governmental body, federal, state, local or
29
<PAGE>
foreign, which may be requested in connection with the consummation of the
transactions hereunder. Each party shall use its reasonable best efforts to
obtain all such authorizations, approvals and consents.
SECTION 6.3 ACTIONS CONTRARY TO STATED INTENT. It shall not, from or
after the date hereof and either before or after the Closing, take any action
that would prevent the transactions hereunder from qualifying as a
reorganization under Section 368(a) of the Code or prevent the business
combination to be effected by the transactions hereunder from being accounted
for as a pooling-of-interests under generally accepted accounting principles.
Each of HCCH and the Companies and the Shareholders shall use its reasonable
best efforts to cause its affiliates not to take any action that would
preclude the ability of HCCH to account for the business combination to be
effected by the transactions hereunder as a pooling-of-interests.
SECTION 6.4 CERTAIN FILINGS. Each of the Shareholders, the Companies
and HCCH shall cooperate with one another:
(a) in determining whether any action by or in respect of, or filing
with, any governmental body, agency or official, or authority is required, or
any actions, consents, approvals or waivers are required to be obtained from
parties to any material contracts, in connection with the consummation of the
transactions contemplated by this Agreement; and
(b) in seeking any such actions, consents, approvals or waivers or
making any such filings, furnishing information required in connection
therewith and seeking timely to obtain any such actions, consents, approvals
or waivers.
SECTION 6.5 COMMUNICATIONS. Neither the Companies, any Shareholder nor
HCCH will furnish any communication outside of their respective companies, if
the subject matter thereof relates to the transactions contemplated by this
Agreement and is not in the ordinary course of business, without the prior
approval of the other of them as to the content thereof, which approval shall
not be unreasonably withheld; PROVIDED that the foregoing shall not be deemed
to prohibit any disclosure required by any applicable law or rule of the NYSE.
SECTION 6.6 SATISFACTION OF CONDITIONS PRECEDENT. HCCH, the Companies
and each Shareholder will use its reasonable best efforts to satisfy or cause
to be satisfied all the conditions precedent that are applicable to each of
them, and to cause the transactions contemplated by this Agreement to be
consummated, and, without limiting the generality of the foregoing, to obtain
all material consents and authorizations of third parties and to make filings
with, and give all notices to, third parties that may be necessary or
reasonably required on its part in order to effect the transactions
contemplated hereby.
SECTION 6.7 TAX COOPERATION. HCCH, the Companies and the Shareholders
shall cooperate in the preparation, execution and filing of all returns,
questionnaires, applications or other documents regarding any transfer or
gains, sales, use, transfer, value added, stock transfer and stamp taxes, any
transfer, recording, registration and other fees, and any similar taxes or
fees
30
<PAGE>
which become payable in connection with the transactions contemplated by this
Agreement that are required or permitted to be filed on or before the Closing.
ARTICLE VII
CONDITIONS TO CLOSING
SECTION 7.1 CONDITIONS TO OBLIGATIONS OF HCCH. The obligations of HCCH
hereunder are subject to the fulfillment or satisfaction, on and as of the
Closing Date, of each of the following conditions (any one or more of which
may be waived by HCCH, but only in a writing signed by HCCH):
(a) The representations and warranties of the Companies and each
Shareholder contained in Article II shall be true and accurate in all material
respects on and as of the Closing Date with the same force and effect as if
they had been made on the Closing Date (except to the extent a representation
or warranty speaks specifically as of an earlier date and except for changes
contemplated by this Agreement) and the Companies and each Shareholder shall
have provided HCCH with a certificate executed by the President and the
Secretary of the Companies or individually, as the case may be, dated as of
the Closing Date, to such effect.
(b) The Companies and each Shareholder shall have performed and complied
in all material respects with all of the covenants contained herein on or
before the Closing Date, and HCCH shall receive a certificate to such effect
signed by the President and Chief Financial Officer or individually, as the
case may be.
(c) Except as set forth in the Southern/ACA Disclosure Schedule and
acceptable to HCCH, there shall have been no Material Adverse Change in the
Companies since December 31, 1996.
(d) HCCH shall have received from (i) each person or entity who may be
deemed to be an affiliate of the Companies a duly executed Affiliates
Agreement and (ii) each Shareholder, the written agreement contemplated to be
entered into by such person pursuant to this Agreement and such agreements
shall remain in full force and effect.
(e) All written consents, assignments, waivers or authorizations, other
than Governmental Authorizations, that are required for the continuation in
full force and effect of any material contracts or leases of the Companies
shall have been obtained.
(f) HCCH shall have received a written opinion from its counsel to the
effect that the transactions hereunder will qualify as a tax-free
reorganization within the meaning of Section 368 of the Code. In preparing
such opinion, counsel may rely on (and to the extent reasonably required, the
parties and their shareholders shall make) reasonable representations related
thereto.
31
<PAGE>
(g) HCCH shall have received the opinion of counsel to the Companies and
the Shareholders in form and substance satisfactory to HCCH.
(h) All underwriting agreements of the Companies in force on the date
hereof shall be in force on the Closing Date, except for such agreements
which have been replaced with agreements of similar like and kind.
(i) Thomas shall be alive and not, in any way, Disabled. For purposes
of this Agreement, Thomas shall be deemed to be "Disabled" if he is unable to
engage in any substantial portion of his regular duties for the Companies by
reason of any medically determinable physical or mental impairment which can
be expected to result in death or which has lasted or can be expected to last
for a continuous period of not less than 12 months.
(j) At HCCH's election, HCCH shall have received a report addressed to
it from Coopers & Lybrand L.L.P. confirming that the Companies qualify as an
entity that may be party to a business combination for which the
pooling-of-interest method of accounting is available and that the
transactions contemplated hereby will qualify for pooling-of-interests
treatment under generally accepted accounting principles and all published
rules, regulations, and policies of the SEC.
(k) The Companies shall have delivered to HCCH their unaudited balance
sheet and their unaudited income statement for each of the most recent fiscal
year end.
(l) The Companies shall have earned no less than $318,000 after taxes
for the fiscal year ended December 31, 1996 and on a pro-forma combined
basis, as reasonably determined by HCCH, be expected to earn at least
$476,000 after taxes for the year ended December 31, 1997.
(m) Shareholders shall have transferred all the Southern Common Stock
and ACA Common Stock to HCCH, free and clear of all Liens and encumbrances,
with transfer taxes, if any, paid by Shareholders. No claim shall have been
filed, made or threatened by any person or entity asserting that he, she, or
it is entitled to any part of the Share Payment for the Southern Common Stock
or ACA Common Stock.
(n) On or prior to the Closing Date, the Companies and Shareholders
shall have furnished HCCH with evidence of such consents as the Companies or
Shareholders shall know, or HCCH shall determine, to be required to enable
HCCH to continue to enjoy the benefit of any lease, license, permit, contract
or other agreement or instrument to or of which the Companies are a party or
beneficiary and which can, by its terms (with consent) and consistent with
applicable law, be so enjoyed after the transfer of the Southern Common Stock
and ACA Common Stock to HCCH. If there is in existence any lease,
governmental license, permit or contract that by its terms or applicable law,
expires, terminates, or is otherwise rendered invalid upon the transfer of
the Southern Common Stock or ACA Common Stock to HCCH, and such lease,
license, permit, or contract is required in order for the business of the
Companies to
32
<PAGE>
continue to be conducted following the transfer of each Company's Common
Stock in the same manner as conducted previously, HCCH shall have obtained,
or been furnished by Shareholders an equivalent of, that lease, license,
permit, or contract effective as of and after the Closing Date.
(o) HCCH shall have received resignations of all persons who are
officers or directors of the Companies immediately prior to the Closing.
(p) HCCH shall have received general releases in favor of the Companies
and HCCH executed by each Shareholder and any such other officers or
directors of the Companies as HCCH may designate. Those releases will not
relate to rights or obligations arising under this Agreement.
(q) HCCH shall have received possession on the premises of each of the
Companies of all corporate, accounting, business and tax records of each such
Company.
(r) The form and substance of all actions, proceedings, instruments and
documents required to consummate the transactions contemplated by this
Agreement shall have been satisfactory in all reasonable respects to HCCH and
HCCH's counsel.
SECTION 7.2 CONDITIONS TO OBLIGATIONS OF THE COMPANIES AND SHAREHOLDERS.
The Companies' and each Shareholder's obligations hereunder are subject to
the fulfillment or satisfaction, on and as of the Closing Date, of each of
the following conditions (any one or more of which may be waived, but only in
a writing signed by such party):
(a) The representations and warranties of HCCH set forth herein shall be
true and accurate in all material respects on and as of the Closing Date with
the same force and effect as if they had been made on the Closing Date
(except to the extent a representation or warranty speaks specifically as of
an earlier date and except for changes contemplated by this Agreement) and
HCCH shall have provided the Companies with a certificate executed by the
President and the Chief Financial Officer of HCCH, dated as of the Closing
Date, to such effect. For the purposes of determining the accuracy of the
representations and warranties of HCCH, any change or effect in the business
of HCCH that results in substantial part as a consequence of the public
announcement or pendency of the intended acquisition of the Companies by HCCH
shall not be deemed a Material Adverse Change or Material Adverse Effect or
other breach of representation or warranty with respect to HCCH.
(b) HCCH shall have performed and complied with all of its covenants
contained herein in all material respects on or before the Closing Date, and
the Companies shall receive a certificate to such effect signed by HCCH's
President and Chief Financial Officer.
(c) Except as set forth in the HCCH Disclosure Schedule, there shall
have been no Material Adverse Change in HCCH since the HCCH Balance Sheet
Date.
33
<PAGE>
(d) The Companies shall have received from Winstead Sechrest & Minick
P.C., counsel to HCCH, an opinion in form and substance satisfactory to the
Shareholders.
(e) Thomas shall have received a letter from HCCH specifying the terms
of his continued employment with the Companies including provision for a
salary of $150,000 per year. Such letter of employment shall also include
provisions for reimbursement of reasonable business related travel and
entertainment expenses, consistent with that provided to other HCCH officers.
(f) Each of the Shareholders shall agree to a three year non-compete
provision beginning for those who are officers or directors of the Companies
upon their ceasing to be employed by HCCH or the Companies and, for all
others, from the Closing Date.
(g) The form and substance of all actions, proceedings, instruments and
documents required to consummate the transactions contemplated by this
Agreement shall have been satisfactory in all reasonable respects to
Shareholders and their counsel.
SECTION 7.3 CONDITIONS TO OBLIGATIONS OF EACH PARTY. The respective
obligations of the parties hereunder are subject to the fulfillment, on and
as of the Closing Date, of each of the following conditions (any one or more
of which may be waived by such parties, but only in a writing signed by such
parties):
(a) No statute, rule, regulation, executive order, decree, injunction or
restraining order shall have been enacted, promulgated or enforced (and not
repealed, superseded or otherwise made inapplicable) by any court or
governmental authority which prohibits the consummation of the transactions
hereunder (each party agreeing to use its reasonable best efforts to have any
such order, decree or injunction lifted).
(b) There shall have been obtained any and all Governmental
Authorizations, permits, approvals and consents of securities or "blue sky"
commissions of any jurisdiction and of any other governmental body or agency,
that may reasonably be deemed necessary so that the consummation of the
transaction contemplated by this Agreement will be in compliance with
applicable laws, the failure to comply with which would have a Material
Adverse Effect on HCCH, the Companies, or would be reasonably likely to
subject any of HCCH, the Companies or any of their respective directors or
officers to penalties or criminal liability.
ARTICLE VIII
TERMINATION OF AGREEMENT
SECTION 8.1 TERMINATION. This Agreement may be terminated at any time
prior to the Closing:
34
<PAGE>
(a) By the mutual consent of the Boards of Directors of HCCH and the
Shareholders of Southern and Aviation holding two-thirds of the outstanding
shares.
(b) By either the Board of Directors of HCCH or the Shareholders of
Southern and Aviation holding two-thirds of the outstanding shares if there
has been a material breach by the other of any representation or warranty
contained in this Agreement, which in either case cannot be, or has not been,
cured within 15 days after written notice of such breach is given to the
party committing such breach, provided that the right to effect such cure
shall not extend beyond the date set forth in subparagraph (c) below.
(c) By either the Board of Directors of HCCH or the Shareholders of
Southern and Aviation holding two-thirds of the outstanding shares if all
conditions of Closing required by Article VII hereof have not been met or
waived by September 30, 1997; provided, however, that neither HCCH nor the
Shareholders, shall be entitled to terminate this Agreement pursuant to this
subparagraph (c) if such party is in willful and material violation of any of
its representations, warranties or covenants in this Agreement.
(d) If any governmental authority shall have issued an order, decree or
ruling or taken any other action permanently enjoining, restraining or
otherwise prohibiting the transactions hereunder and such order, decree,
ruling or other action shall have become final and nonappealable.
(e) By the Board of Directors of HCCH, if Thomas shall have become
Disabled or shall have died.
SECTION 8.2 EFFECT OF TERMINATION. Upon termination of this Agreement
pursuant to this Article VIII, this Agreement shall be void and of no effect and
shall result in no obligation of or liability to any party or their
respective directors, officers, employees, agents or shareholders, other than
the obligations pursuant to the Confidentiality Agreement previously entered
into by the parties hereto, unless such termination was the result of an
intentional breach of any representation, warranty or covenant in this
Agreement, in which case the party who breached the representation, warranty
or covenant shall be liable to the other party for damages, and all costs and
expenses incurred in connection with the preparation, negotiation, execution
and performance of this Agreement.
ARTICLE IX
CLOSING MATTERS
SECTION 9.1 THE CLOSING. Subject to termination of this Agreement as
provided in Article VIII above, the closing of the transactions provided for
herein (the "Closing") will take place at the offices of Winstead Sechrest &
Minick P.C., 910 Travis Street, Suite 1700, Houston, Texas 77002 at 10:00
a.m., Houston Time on August 5, 1997, or, if all conditions to Closing
35
<PAGE>
have not been satisfied or waived by such date, such other place, time and
date as the Shareholders and HCCH may mutually select (the "Closing Date").
ARTICLE X
INDEMNIFICATION AND
REMEDIES, CONTINUING COVENANTS
SECTION 10.1 AGREEMENT TO INDEMNIFY. Subject to the limitations set
forth in this Article X and except as set forth in Section 10.2, each
Shareholder, severally and Pro Rata (as hereinafter defined), will indemnify
and hold harmless HCCH and its respective officers, directors, agents and
employees, and each person, if any, who controls or may control HCCH within
the meaning of the Securities Act (hereinafter in this Section 10.1 and in
Section 10.2 below referred to individually as a "Southern/ACA Indemnified
Person" and collectively as the "Southern/ACA Indemnified Persons") from and
against any and all claims, demands, actions, causes of action, losses,
costs, damages, liabilities and expenses including, without limitation,
reasonable legal fees, net of any recoveries under insurance policies,
recoveries from third parties, and tax savings known to the Southern/ACA
Indemnified Persons at the time of making of claims hereunder (hereafter in
this Section 10.1 referred to as "HCCH Damages"), arising out of any
misrepresentation or breach of or default under any of the representations,
warranties, covenants or agreements given or made in this Agreement or any
certificate or exhibit delivered by or on behalf of the Companies or any of
the Shareholders pursuant hereto. "Pro Rata" for purposes of this Article X
with respect to each Shareholder shall mean the proportion that such
Shareholder's holdings of the Companies Common Stock as of immediately prior
to the Closing bears to the total shares of the Companies Common Stock held
by all Shareholders as of immediately prior to the Closing. The
indemnification provided for in this Section 10.1 will not apply unless and
until the aggregate HCCH Damages for which one or more Southern/ACA
Indemnified Persons seeks indemnification exceeds $50,000 in the aggregate,
in which event the indemnification provided for will include all HCCH Damages
(a franchise deductible) up to the Maximum Shareholder Liability (as
hereinafter defined). The Southern/ACA Indemnified Persons are only entitled
to be reimbursed for the actual indemnified expenditures or damages incurred
by them for the above described losses. Such Southern/ACA Indemnified
Persons are not entitled to consequential, special, or other speculative or
punitive categories of damages. In seeking indemnification for HCCH Damages
under this Section 10.1 following the Closing, the Southern/ACA Indemnified
Persons' remedy will be limited to receiving up to that number of shares of
HCCH Common Stock determined by dividing (a) the amount of the HCCH Damages
by (b) the closing sale price of HCCH's Common Stock on the New York Stock
Exchange on the Closing Date (the "Closing Date Price"), provided, however,
that irrespective as to the number of claims asserted by the Southern/ACA
Indemnified Persons and the amount of the HCCH Damages for which
indemnification is sought, any such Shareholder, in the aggregate, shall
under no circumstances be required to make indemnification payments beyond
the Closing Date Price multiplied by the number of shares of HCCH Common
Stock received by such Shareholder at the time of Closing (the "Maximum
Shareholder Liability"). Notwithstanding
36
<PAGE>
anything to the contrary set forth herein, in the event that at the time of
the resolution of any such indemnification claim, such Shareholder does not
hold the number of shares of HCCH Common Stock (including any shares
otherwise acquired at any time before or after the Closing or at any time
after any claim is made for indemnification) necessary to settle any
indemnification claim, then such Shareholder shall pay in cash or other
immediately available funds the cash equivalent of the remainder of his
in-stock indemnification obligations under this Section 10.1 up to his Maximum
Shareholder Liability. In lieu of HCCH Common Stock, any Shareholder shall
have the option to pay in cash or other immediately available funds the cash
equivalent of all or any part of his in-stock Maximum Shareholder Liability.
SECTION 10.2 INDEMNIFICATION WITH RESPECT TO TAXES AND ENVIRONMENT.
In addition to the indemnification provided in Section 10.1 above, each
Shareholder, severally and Pro Rata hereby specifically agrees individually
to indemnify and hold harmless the Indemnified Persons from and against all
HCCH Damages, whenever incurred, arising out of (a) any Taxes arising out of
or relating to the business of the Companies, and (b) any liability,
including any Environmental Liabilities, arising out of the violation of any
Environmental Laws or the use of any Hazardous Substances incurred on any
Company Property Leases or resulting from the ownership of any real estate by
any Shareholder or the Companies which results in liability to any of the
Companies or HCCH.
SECTION 10.3 HCCH AGREEMENT TO INDEMNIFY. Subject to the limitations
set forth in this Article X, from and after the Closing, HCCH will indemnify
and hold harmless the Shareholders (hereinafter in this Section 10.3 referred to
individually as an "HCCH Indemnified Person" and collectively as "HCCH
Indemnified Persons") from and against any and all claims, demands, actions,
causes of action, losses, costs, damages, liabilities and expenses including,
without limitation, reasonable legal fees, net of any recoveries under
insurance policies, recoveries from third parties and tax savings known to
HCCH Indemnified Persons at the time of making a claim hereunder (hereafter
in this Section 10.3 referred to as the "Shareholders' Damages") arising out of
any misrepresentation or breach of or default under any of the
representations, warranties, covenants and agreements given or made by HCCH
in this Agreement or any certificate or exhibit delivered by or on behalf of
HCCH pursuant hereto. In seeking indemnification for the Shareholders'
Damages under this Section 10.3 following the Closing, the HCCH Indemnified
Person's remedy will be limited to receiving up to that number of shares of
HCCH Common Stock determined by dividing (a) the amount of the Shareholders'
Damages by (b) the Closing Date Price; provided, however, that irrespective
of the number of claims asserted by HCCH Indemnified Persons hereunder in the
amount of the Shareholders' Damages for which indemnification is sought,
HCCH, in the aggregate, shall under no circumstances be obligated to make an
indemnification payment hereunder beyond that number of shares of HCCH Common
Stock equal to the total number of shares of HCCH Common Stock provided to
the Shareholders on the Closing Date (the "Maximum HCCH Liability"). The
indemnification provided for in this Section 10.3 will not apply unless and
until the aggregate Shareholders' Damages for which one or more HCCH
Indemnified Person seeks indemnification exceeds $50,000 in the aggregate, in
which event the indemnification provided for will include all Shareholders'
Damages (a franchise deductible) up to the Maximum HCCH Liability. The HCCH
Indemnified Persons are only
37
<PAGE>
entitled to be reimbursed for the actual indemnified expenditures or damages
incurred by them for the above described losses. Such HCCH Indemnified
Persons are not entitled to consequential, special, or other speculative or
punitive categories of damages.
SECTION 10.4 APPOINTMENT OF REPRESENTATIVE. Subject to the
successorship provisions of this Section 10.4, Thomas (the "Representative") is
hereby irrevocably appointed as the attorney-in-fact and representative of
the interests of the Shareholders for all purposes of this Agreement, and
notice is hereby given thereof to HCCH and, without independent verification,
HCCH may rely upon Representative's undertakings in such capacity. The
Representative shall have full and irrevocable authority on behalf of the
Shareholders, and shall promptly and completely exercise such authority in a
timely fashion to:
(a) participate in, represent and bind the Shareholders in all respects
with respect to any arbitration or legal proceeding relating to this
Agreement, including, without limitation, the defense and settlement of any
matter, and the calculation thereof for every purpose thereunder, consent to
jurisdiction, enter into any settlement, and consent to entry of judgment,
each with respect to any or all of the Shareholders;
(b) receive, accept and give notices and other communications relating
to this Agreement;
(c) take any action that the Representative deems necessary or desirable
in order to fully effectuate the transactions contemplated by this Agreement;
(d) execute and deliver any instrument or document that the
Representative deems necessary or desirable in the exercise of his authority
under this Section 10.4; and
(e) waive the fulfillment of any condition or conditions to the Closing.
Those Shareholders who, as of the Closing Date, hold a majority of the
Companies Common Stock may, at any time and by written action delivered to
HCCH, remove the Representative or any successor thereto, but such removal
shall be effective only upon the replacement of such Representative or
successor by a new Representative designated, by written notice delivered to
HCCH, by those Shareholders who, as of the date hereof hold a majority of the
Companies Common Stock, PROVIDED, however, that any such notice shall be
effective upon actual receipt by HCCH. Any such written notice shall be
delivered to HCCH in accordance with the notice provisions set forth in
Section 12.3 hereof. If any Representative shall have died, become
incapacitated or unable to serve, those Shareholders who, as of the date
hereof, hold a majority of the Companies' Common Stock shall promptly
designate by written notice delivered to HCCH, a replacement Representative.
Any costs and expenses incurred by the Representative in connection with
actions taken pursuant to or permitted by this Section 10.4 will be borne by the
Shareholders and paid or reimbursed to the Representative.
38
<PAGE>
The foregoing authorization is granted and conferred in consideration for
the various agreements and covenants of HCCH contained herein. In
consideration of the foregoing, and subject to the successorship provisions
of this Section 10.4, this authorization granted to the Representative shall be
irrevocable and shall not be terminated by any act of any of the Shareholders
or by operation of law, whether by death or incompetence of any Shareholder
or by the occurrence of any other event except the termination of this
Agreement pursuant to Section 8.1 hereof. If after the execution hereof any
such Shareholder shall die or become incompetent, the Representative is
nevertheless authorized and directed to exercise the authority granted in
this Section 10.4 as if such death or incompetence had not occurred and
regardless of notice thereof. The Representative shall have no liability to
any Shareholder for any act or omission or obligation hereunder, provided
that such action or omission is taken by the Representative in good faith and
without willful misconduct.
SECTION 10.5 SURVIVAL OF REPRESENTATIONS. Unless the right to enforce
the breach of any representation, warranty, covenant or agreement is required
to terminate at an earlier time in order to maintain the appropriate
pooling-of-interest accounting treatment, the right to enforce the breach of
each representation, warranty, covenant and agreement set forth in this
Agreement will remain operative and in full force and effect until the filing
by HCCH pursuant to the rules and regulations of the Exchange Act of the
first Form 10-K following the Closing (the last date of such applicable
period of not more than one year being herein called the "Final Date"),
regardless of any investigation made by or on behalf of the parties to this
Agreement, upon which Final Date such representations, warranties, covenants
and agreements shall expire and be of no further force and effect. The
indemnification referred to and set forth in Section 10.2 shall survive until a
final resolution of such claim is effective. Any litigation or other action
of any kind arising out of or attributable to a breach of any representation,
warranty, covenant or agreement contained in this Agreement, except as set
forth in Section 10.2, must be commenced prior to the Final Date. If not so
commenced prior to the Final Date, any claims or indemnifications brought
under this Article X will thereafter conclusively be deemed to be waived
regardless of when such claim is or should have been discovered. Any such
claim for indemnification brought under this Article X, brought before the
Final Date, shall survive until a final resolution of such claim is
effective. As set forth herein, no investigation by any party hereto into
the business, operations and conditions of the other party shall diminish in
any way the effect of any representation or warranty made by any such party
in this Agreement or shall relieve any party of any of its obligations under
this Agreement.
SECTION 10.6 PROCEDURE FOR INDEMNIFICATION; THIRD PARTY CLAIMS.
(a) Promptly after receipt by an indemnified party under this Article X
of notice of a claim against it for indemnification brought under this
Article X (a "Claim"), the indemnified party will, if a claim is to be made
against an indemnifying party, give prompt written notice to the indemnified
party of the Claim, but the failure to promptly notify the indemnified party
will not relieve the indemnified party of any liability that it may have to
any indemnified party, except to the extent that the indemnifying party
demonstrates that the defense of such action is prejudice by the indemnifying
party's failure to give such prompt notice. Such notice shall
39
<PAGE>
contain a description in reasonable detail of facts upon which such Claim is
based and, to the extent known, the amount thereof.
(b) If any Claim referred to in this Article X is made by a third party
against an indemnified party and such indemnified party gives written notice
to the indemnifying party of the Claim, the indemnifying party will be
entitled to participate in the defense of Claim and, to the extent that it
wishes to assume the defense of the Claim and, after written notice from the
indemnifying party to the indemnified party of its election to assume the
defense of the Claim, the indemnifying party shall assume such defense and
will not be liable to the indemnified party under this Article X for any fees
of other counsel or any other expenses with respect to the defense of the
Claim in each case subsequently incurred by the indemnified party in
connection with the defense of the Claim.
ARTICLE XI
POST-CLOSING COVENANTS OF HCCH
SECTION 11.1 LISTING OF HCCH COMMON STOCK. HCCH shall cause the shares
of HCCH Common Stock to be issued hereunder to be approved for listing on the
NYSE within sixty (60) days of the Closing.
SECTION 11.2 EMPLOYEE MATTERS. HCCH agrees that all employees of the
Companies that remain employed after the Closing shall, within reasonable
time following the Closing, be entitled to receive the same benefits to which
other employees of HCCH are entitled to receive and shall be entitled to
participate in HCCH's Employee Benefit Plan provided such employees have
satisfied the plan's eligibility requirements.
SECTION 11.3 PRESIDENCY OF SOUTHERN. As soon as practicable after the
Closing, HCCH shall elect Thomas as President of Southern.
ARTICLE XII
MISCELLANEOUS
SECTION 12.1 FURTHER ASSURANCES. Each party agrees to cooperate
fully with the other parties and to execute such further instruments,
documents and agreements and to give such further written assurances as
may be reasonably requested by any other party to better evidence and
reflect the transactions described herein and contemplated hereby and to
carry into effect the intents and purposes of this Agreement.
40
<PAGE>
SECTION 12.2 FEES AND EXPENSES. Until otherwise agreed by the parties,
each party shall bear its own fees and expenses, including counsel fees and
fees of brokers and investment bankers contracted by such party, in
connection with the transaction contemplated hereby.
SECTION 12.3 NOTICES. Whenever any party hereto desires or is required
to give any notice, demand, or request with respect to this Agreement, each
such communication shall be in writing and shall be effective only if it is
delivered by personal service or mailed, United States registered or
certified mail, postage prepaid, or sent by prepaid overnight courier or
confirmed telecopier, addressed as follows:
HCCH:
HCC Insurance Holdings, Inc.
13403 Northwest Freeway
Houston, Texas 77040-6094
Telecopy: (713) 462-2401
Attention: Frank J. Bramanti, President
With copies (which shall not constitute notice) to:
Winstead Sechrest & Minick P.C.
910 Travis, Suite 1700 (until August 23, 1997 - then Suite 2400)
Houston, Texas 77002
Telecopy: (713) 951-3800 (until August 23, 1997 - then (713) 650-2400)
Attention: Arthur S. Berner, Esq.
the Companies and all Shareholders:
Truman A. Thomas, III
c/o Southern Aviation Insurance Underwriters, Inc.
5616 Clifford Circle
Birmingham, Alabama 35210
With copies (which shall not constitute notice) to:
Burr & Forman, L.L.P.
420 North 20th Street, Suite 3100
Birmingham, Alabama 35203
Telecopy: (205) 458-5100
Attention: Lee Thuston
Such communications shall be effective when they are received by the
addressee thereof. Any party may change its address for such communications
by giving notice thereof
41
<PAGE>
to other parties in conformity with this Section. In the event Thomas is no
longer the Representative, such successor Representative's address shall be
the address for the Shareholders.
SECTION 12.4 GOVERNING LAW. The internal laws of the State of Texas
(irrespective of its choice of law principles) will govern the validity of
this Agreement, the construction of its terms, and the interpretation and
enforcement of the rights and duties of the parties hereto. Any dispute,
claim, or cause of action arising hereunder shall lie exclusively in the
state courts of Harris County, Texas or, if federal jurisdiction can be
acquired, in the United States District Court for the Southern District of
Texas, sitting in Harris County, Texas.
SECTION 12.5 BINDING UPON SUCCESSORS AND ASSIGNS, ASSIGNMENT. This
Agreement and the provisions hereof shall be binding upon each of the
parties, their permitted successors and assigns. This Agreement may not be
assigned by any party without the prior consent of the others.
SECTION 12.6 SEVERABILITY. If any provision of this Agreement, or the
application thereof, shall for any reason or to any extent be invalid or
unenforceable, the remainder of this Agreement and application of such
provision to other persons or circumstances shall continue in full force and
effect and in no way be affected, impaired or invalidated.
SECTION 12.7 ENTIRE AGREEMENT. This Agreement and the other agreements
and instruments referenced herein constitute the entire understanding and
agreement of the parties with respect to the subject matter hereof and
supersede all prior and contemporaneous agreements or understandings,
inducements or conditions, express or implied, written or oral, between
parties with respect hereto.
SECTION 12.8 AMENDMENT AND WAIVERS. Any amendment or waiver affecting
the Shareholders shall be valid if consented to in writing by Shareholders
holding a majority of the shares of each Company's Common Stock (i) if given
or made prior to the Closing, such majority as determined as of the date of
such amendment or waiver, and (ii) if given or made at or after the Closing,
such majority as determined immediately prior to the Closing. Any term or
provision of this Agreement may be amended, and the observance of any term of
this Agreement may be waived (either generally or in a particular instance
and either retroactively or prospectively) only by a writing signed by those
persons as provided in this Section 12.8. The waiver by a party of any breach
hereof or default in the performance hereof shall not be deemed to constitute
a waiver of any other default or any succeeding breach or default, unless
such waiver so expressly states. At any time before the Closing, this
Agreement may be amended or supplemented by the Companies, the Shareholders
or HCCH with respect to any of the terms contained in this Agreement.
SECTION 12.9 NO WAIVER. The failure of any party to enforce any of the
provisions hereof shall not be construed to be a waiver of the right of such
party thereafter to enforce such provisions.
42
<PAGE>
SECTION 12.10 CONSTRUCTION OF AGREEMENT. A reference to an Article,
Section or an Exhibit shall mean an Article of, a Section in, or Exhibit to,
this Agreement unless otherwise explicitly set forth. The titles and
headings herein are for reference purposes only and shall not in any manner
limit the construction of this Agreement which shall be considered as a
whole. The words "include," "includes" and "including" when used herein
shall be deemed in each case to be followed by the words "without limitation."
SECTION 12.11 COUNTERPARTS. This Agreement may be executed in any number
of counterparts, each of which shall be an original as against any party
whose signature appears thereon and all of which together shall constitute
one and the same instrument. This Agreement shall become binding when one or
more counterparts hereof, individually or taken together, shall bear the
signatures of all the parties reflected hereon as signatories.
SECTION 12.12 NO THIRD PARTY BENEFICIARIES. Any agreement to perform any
obligation herein contained, express or implied, shall be only for the
benefit of HCCH, the Companies, the Shareholders and their permitted
successors and assigns, and such agreements shall not inure to the benefit of
an obligee, whomever, it being the intention of the undersigned parties that
no one shall be or be deemed to be a third party beneficiary under this
Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
43
<PAGE>
"HCC INSURANCE HOLDINGS, INC."
By: /s/ Frank J. Bramanti
-------------------------------------
Name: Frank J. Bramanti
Title: President
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
SIGNATURE PAGE OF ACQUISITION AGREEMENT
<PAGE>
"SOUTHERN AVIATION INSURANCE
UNDERWRITERS, INC."
By: /s/ Truman A. Thomas, III
----------------------------------------------
Name: Truman A. Thomas, III
Title: President
"AVIATION CLAIMS ADMINISTRATORS, INC."
By: /s/ John D. Young
----------------------------------------------
Name: John D. Young
Title: President
"SHAREHOLDERS"
/s/ Truman A. Thomas, III
----------------------------------------------
Truman A. Thomas, III
/s/ Donald J. Barker
----------------------------------------------
Donald J. Barker
/s/ Alexander D. Hahn
----------------------------------------------
Alexander D. Hahn
SIGNATURE PAGE OF ACQUISITION AGREEMENT
<PAGE>
EXHIBIT "A"
I. For the shares of Southern - 168,750 shares of HCCH Common Stock to be
distributed as follows:
- -----------------------------------------------------------------------
- -----------------------------------------------------------------------
% OF SOUTHERN HCCH STOCK
NAME STOCK OWNED TO BE RECEIVED
- ---- ----------- --------------
- -----------------------------------------------------------------------
- -----------------------------------------------------------------------
Truman A. Thomas, III 71.2% 120,150 Shares
- -----------------------------------------------------------------------
- -----------------------------------------------------------------------
Alexander D. Hahn 25.0% 42,187 Shares
- -----------------------------------------------------------------------
- -----------------------------------------------------------------------
Donald J. Barker 3.8% 6,413 Shares
- -----------------------------------------------------------------------
- -----------------------------------------------------------------------
II. For the shares of ACA - 56,250 shares of HCCH Common Stock to be
distributed as follows:
- -----------------------------------------------------------------------
- -----------------------------------------------------------------------
% OF ACA HCCH STOCK
NAME STOCK OWNED TO BE RECEIVED
- ---- ----------- --------------
- -----------------------------------------------------------------------
- -----------------------------------------------------------------------
Truman A. Thomas, III 70.0% 39,375 Shares
- -----------------------------------------------------------------------
- -----------------------------------------------------------------------
Alexander D. Hahn 25.0% 14,062 Shares
- -----------------------------------------------------------------------
- -----------------------------------------------------------------------
Donald J. Barker 5.0% 2,813 Shares
- -----------------------------------------------------------------------
- -----------------------------------------------------------------------
<PAGE>
SOUTHERN/ACA DISCLOSURE
SCHEDULE
SECTION 2.6-SUBSIDIARIES AND JOINT VENTURES:
Southern Aviation Insurance Underwriting Services, Inc., an Alabama
corporation, is a wholly owned subsidiary of Southern.
SECTION 2.7-SOUTHERN FINANCIAL STATEMENTS:
None.
SECTION 2.8-ABSENCE OF CERTAIN CHANGES:
None.
SECTION 2.9-NO UNDISCLOSED LIABILITIES:
None.
SECTION 2.10-LITIGATION:
None.
SECTION 2.12-TAXES:
None.
SECTION 2.13-EMPLOYEE BENEFIT PLANS, ERISA:
1. Split Dollar Insurance Agreement between Southern Aviation Insurance
Underwriters, Inc. and Truman A. Thomas, III covering Insurance
Policy No. 932812478 issued by Metropolitan Life Insurance Company
on Truman A. Thomas, III.
2. Split Dollar Assignment Metropolitan Life Insurance Company between
Truman A. Thomas, III and Southern Aviation Insurance Underwriters,
Inc.
3. Life Insurance Policy issued by Protective Life Insurance Company,
Policy No. PLO566575, insuring life of Truman A. Thomas, III, owner-
Truman A. Thomas, III.
4. American Pioneer Life Insurance Company, Group Policy No. 3360000,
$10,000 Life Insurance Policy for certain employees.
<PAGE>
5. Liberty Mutual Worker's Compensation Policy No. WCI-355-2575611-016
(Southern).
6. Blue Cross and Blue Shield of Alabama, Group Health Benefit Plan,
Group No. 21592 (Southern).
7. Blue Cross and Blue Shield of Alabama, Group Dental Plan, Group No.
21592 (Southern).
SECTION 2.14-MATERIAL AGREEMENTS:
1. Split Dollar Insurance Agreement between Southern Aviation Insurance
Underwriters, Inc. and Truman A. Thomas, III covering Insurance
Policy No. 932812478 issued by Metropolitan Life Insurance Company
on Truman A. Thomas, III.
2. Split Dollar Assignment Metropolitan Life Insurance Company between
Truman A. Thomas, III and Southern Aviation Insurance Underwriters,
Inc.
3. The Cincinnati Insurance Company, Policy No. CPP045 42 91 Commercial
Property Coverage, Commercial Inland Marine, Commercial Crime,
Building and Commercial Property, Builder's Risk, Condominium
Association, Condominium Commercial Unit - Owner's Standard Policy.
4. Liberty Mutual Worker's Compensation Policy No. WCI-35S-257564-016.
5. Aviation Claims Administrators, Inc. Gulf Insurance Company Insurance
Services Professionals Errors and Omissions Liability Insurance
Policy, Policy No. IG6503095.
6. Commercial Lease, dated January 1, 1996 between T & O Racing, Inc.,
as Lessor and Southern Aviation Insurance Underwriters, Inc., as
Lessee for 8200 square feet of office space located at 5616 Clifford
Circle, Birmingham, Alabama 35210.
7. Claim Service Contract dated June 20, 1994 between Aviation Claims
Administrators, Inc. and Northern American Speciality Insurance
Company.
8. Commercial lease, dated January 1, 1996 between T & O Racing, Inc.,
as Lessor and Aviation Claims Administrators, Inc. as Lessee for
1800 square feet of office space located at 5616 Clifford Circle,
Birmingham, Alabama 35210.
2
<PAGE>
9. Note between Southern and First Commercial Bank dated October 8,
1993 for the principal sum of $24,575.00:
a. Collateral - 1993 Ford Explorer.
10. Note between Southern and First Commercial Bank dated November 18,
1994 for the principal sum of $43,640.75:
a. Security Agreement (Chattel Mortgage) dated September 17,
1992 for $43,640.75;
b. Collateral-Security Agreement (Chattel Mortgage) dated
November 18, 1994; Continuing Guaranty Agreement dated
September 17, 1992 executed by Truman A. Thomas, III.
11. Note between Southern and First Commercial Bank dated September 17,
1992 for the Principal Sum of $125,035.00:
a. Aircraft Chattel Mortgage dated September 17, 1996 for
$125,035.00.
12. Note between Southern and First Commercial Bank dated November 8,
1996 for the principal sum of $162,880.71:
a. Security Agreement dated November 8, 1996 for $162,880.71.
13. Note between Southern and First Commercial Bank dated December 17,
1996 for the principal sum of $185,035.00:
a. Security Agreement (Accounts) dated March 22, 1994;
b. Continuing Guaranty Agreement dated September 17, 1992
executed by Truman A. Thomas, III.
14. Unlimited Continuing Guaranty between Southern and First Commercial
Bank (executed by Truman A. Thomas, III as Guarantor) dated May 29,
1997 for the principal sum of $200,075.00.
15. Note between ACA and First Commercial Bank dated June 27, 1996
for the principal sum of $125,035.00:
a. Aircraft Chattel Mortgage dated June 27, 1995;
b. Collateral - Continuing Guaranty Agreement dated June 27,
1995 executed by Truman A. Thomas, III.
3
<PAGE>
16. Hangar Lease, dated February 24, 1995, between Airsouth, L.L.C. and
Southern Aviation Insurance Underwriters, Inc.
17. Oral Hangar Lease between Airsouth, L.L.C. and Aviation Claims
Administrators, Inc. for hangar space at St. Clair County Airport,
St. Claim County, Alabama.
SECTION 2.19-TRADEMARKS, TRADENAMES, ETC.:
None.
4
<PAGE>
[LOGO]
COMMERCIAL BANKING GROUP
P.O. BOX 3326
HOUSTON, TX 77253-3326
(713) 250-1170
April 30, 1997
International Marine and
General Insurance Company, Ltd.
13403 Northwest Freeway, Suite 200
Houston, TX 77040
Dear Gentlemen:
This letter is to confirm that Wells Fargo Bank (Texas), National
Association ("Bank"), subject to all terms and conditions contained herein, has
agreed to make available to International Marine and General Insurance Company,
Ltd. ("Borrower") a commitment under which Bank will issue standby letters of
credit for the account of Borrower (each, a "Letter of Credit" and collectively,
"Letters of Credit") from time to time up to and including April 30, 1998, not
to exceed at any time the maximum principal amount of One Million Dollars
($1,000,000.00) ("Letter of Credit Line").
1. LETTER OF CREDIT LINE:
(a) LETTERS OF CREDIT. Letters of Credit shall be issued under the Letter
of Credit Line in lieu of performance bonds; provided however, that the form and
substance of each Letter of Credit shall be subject to approval by Bank, in its
sole discretion; and provided further, that the aggregate of all undrawn
amounts, and all amounts drawn and unreimbursed, under any Letters of Credit
issued by Bank under the Letter of Credit Line shall not at any time exceed the
maximum principal amount available thereunder, as set forth above. Each Letter
of Credit shall be issued for a term not to exceed 365 days, as designated by
Borrower; provided however, that no Letter of Credit shall have an expiration
date subsequent to April 30, 1998. Each Letter of Credit shall be subject to
the additional terms of the Letter of Credit Agreement and related documents, if
any, required by Bank in connection with the issuance thereof (each, a
<PAGE>
International Marine and
General Insurance Company, Ltd.
April 30, 1997
Page 2
"Letter of Credit Agreement" and collectively, "Letter of Credit Agreements").
(b) REPAYMENT OF DRAFTS. Each draft paid by Bank under any Letter of
Credit shall be repaid by Borrower in accordance with the provisions of the
applicable Letter of Credit Agreement.
2. COLLATERAL:
As security for all indebtedness of Borrower to Bank subject hereto,
Borrower hereby grants to a Bank security interest of first priority in
Borrower's custodial account #421281 maintained with the Bank of New York.
All of the foregoing shall be evidenced by and subject to the terms of such
security agreements, financing statements, deeds of trust and other documents as
Bank shall reasonably require, all in form and substance satisfactory to Bank.
Borrower shall reimburse Bank immediately upon demand for all costs and expenses
incurred by Bank in connection with any of the foregoing security, including
without limitation, filing and recording fees and costs of appraisals, audits
and title insurance.
II. INTEREST/FEES:
1. INTEREST. The amount of each draft paid by Bank under the Standby
Letter of Credit shall bear interest from the date such draft is paid by Bank to
the date such amount is fully repaid by Borrower at the rate of interest set
forth in the Standby Letter of Credit Agreement.
2. COMPUTATION AND PAYMENT. Interest shall be computed on the basis of a
360-day year, actual days elapsed, unless such calculation would result in a
usurious rate, in which case interest shall be computed on the basis of a
365/366-day year, as the case may be, actual days elapsed. Interest shall be
payable at the times and place set forth in the Standby Letter of Credit Note.
3. LETTER OF CREDIT FEES. Borrower shall pay to Bank (a) fees upon the
issuance of each Letter of Credit equal to one percent (1.00%) of the face
amount thereof, (b) fees upon the payment or negotiation by Bank of each draft
under any Letter of Credit equal to one percent (1.00%) of the amount of such
draft, and (c) fees upon the occurrence of any other activity with
<PAGE>
International Marine and
General Insurance Company, Ltd.
April 30, 1997
Page 3
respect to any Letter of Credit (including without limitation, the transfer,
amendment or cancellation of any Letter of Credit) determined in accordance
with Bank's standard fees and charges then in effect for such activity.
4. COLLECTION OF PAYMENTS. Borrower authorizes Bank to collect all
principal, interest and fees due under the Standby Letter of Credit by charging
Borrower's demand deposit account number ______________ with Bank, or any other
demand deposit account maintained by Borrower with Bank, for the full amount
thereof. Should there be insufficient funds in any such demand deposit account
to pay all such sums when due, the full amount of such deficiency shall be
immediately due and payable by Borrower.
III. REPRESENTATIONS AND WARRANTIES:
Borrower makes the following representations and warranties to Bank, which
representations and warranties shall survive the execution of this letter and
shall continue in full force and effect until the full and final payment, and
satisfaction and discharge, of all obligations of Borrower to Bank subject to
this letter.
1. LEGAL STATUS. Borrower is a limited liability company, duly organized
and existing and in good standing under the laws of the Hashemite Kingdom of
Jordan, and is qualified or licensed to do business in all jurisdictions in
which such qualification or licensing is required or in which the failure to so
qualify or to be so licensed could have a material adverse effect on Borrower.
2. AUTHORIZATION AND VALIDITY. This letter, and each other document,
contract or instrument deemed necessary by Bank to evidence any extension of
credit to Borrower pursuant to the terms and conditions hereof, or now or at any
time hereafter required by or delivered to Bank in connection with this letter
(collectively, the "Loan Documents") have been duly authorized, and upon their
execution and delivery in accordance with the provisions hereof will constitute
legal, valid and binding agreements and obligations of Borrower or the party
which executes the same, enforceable in accordance with their respective terms.
3. NO VIOLATION. The execution, delivery and performance by Borrower of
each of the Loan Documents do not violate any provision of any law or
regulation, Articles of Organization or Operating Agreement of Borrower, or
result in a breach of or
<PAGE>
International Marine and
General Insurance Company, Ltd.
April 30, 1997
Page 4
constitute a default under any contract, obligation, indenture or other
instrument to which Borrower is a party or by which Borrower may be bound.
4. LITIGATION. There are no pending, or to the best of Borrower's
knowledge threatened, actions, claims, investigations, suits or proceedings by
or before any governmental authority, arbitrator, court or administrative agency
which could have a material adverse effect on the financial condition or
operation of Borrower other than those disclosed by Borrower to Bank in writing
prior to the date hereof.
5. INCOME TAX RETURNS. Borrower has no knowledge of any pending
assessments or adjustments of its income tax payable with respect to any year.
6. NO SUBORDINATION. There is no agreement, indenture, contract or
instrument to which Borrower is a party or by which Borrower may be bound that
requires the subordination in right of payment of any of Borrower's obligations
subject to this letter to any other obligation of Borrower.
7. PERMITS, FRANCHISES. Borrower possesses, and will hereafter possess,
all permits, consents, approvals, franchises and licenses required and all
rights to trademarks, trade names, patents and fictitious names, if any,
necessary to enable it to conduct the business in which it is now engaged in
compliance with applicable law.
8. ERISA. Borrower is in compliance in all material respects with all
applicable provisions of the Employee Retirement Income Security Act of 1974, as
amended or recodified from time to time ("ERISA"); Borrower has not violated any
provision of any defined employee pension benefit plan (as defined in ERISA)
maintained or contributed to by Borrower (each, a "Plan"); no Reportable Event,
as defined in ERISA, has occurred and is continuing with respect to any Plan
initiated by Borrower; Borrower has met its minimum funding requirements under
ERISA with respect to each Plan; and each Plan will be able to fulfill its
benefit obligations as they come due in accordance with the Plan documents and
under generally accepted accounting principles.
9. OTHER OBLIGATIONS. Borrower is not in default on any obligation for
borrowed money, any purchase money obligation or any other material lease,
commitment, contract, instrument or obligation.
<PAGE>
International Marine and
General Insurance Company, Ltd.
April 30, 1997
Page 5
10. ENVIRONMENTAL MATTERS. Except as disclosed by Borrower to Bank in
writing prior to the date hereof, Borrower is in compliance in all material
respects with all applicable federal or state environmental, hazardous waste,
health and safety statutes, and any rules or regulations adopted pursuant
thereto, which govern or affect any of Borrower's operations and/or properties,
including without limitation, the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, the Superfund Amendments and
Reauthorization Act of 1986, the Federal Resource Conservation and Recovery Act
of 1976, and the Federal Toxic Substances Control Act, as any of the same may be
amended, modified or supplemented from time to time. None of the operations of
Borrower is the subject of any federal or state investigation evaluating whether
any remedial action involving a material expenditure is needed to respond to a
release of any toxic or hazardous waste or substance into the environment.
Borrower has no material contingent liability in connection with any release of
any toxic or hazardous waste or substance into the environment.
11. LIMITED LIABILITY COMPANY. To the best of Borrower's knowledge, after
reasonable investigation, Borrower qualifies for tax treatment as if it were a
partnership for federal and state income tax purposes, and Borrower has no
knowledge of any pending action, claim, investigation, suit or proceeding by or
before any governmental authority, arbitrator, court or administrative agency
challenging or denying such qualification.
IV. CONDITIONS:
1. CONDITIONS OF INITIAL EXTENSION OF CREDIT. The obligation of Bank to
extend any credit contemplated by this letter is subject to fulfillment to
Bank's satisfaction of all of the following conditions:
(a) DOCUMENTATION. Bank shall have received each of the Loan Documents,
duly executed and in form and substance satisfactory to Bank.
(b) FINANCIAL CONDITION. There shall have been no material adverse
change, as determined by Bank, in the financial condition or business of
Borrower, nor any material decline, as determined by Bank, in the market value
of any collateral required hereunder or a substantial or material portion of the
assets of Borrower.
(c) INSURANCE. Borrower shall have delivered to Bank evidence of
insurance coverage on all Borrower's property, in
<PAGE>
International Marine and
General Insurance Company, Ltd.
April 30, 1997
Page 6
form, substance, amounts, covering risks and issued by companies satisfactory
to Bank, and where required by Bank, with loss payable endorsements in favor
of Bank.
2. CONDITIONS OF EACH EXTENSION OF CREDIT. The obligation of Bank to
make each extension of credit requested by Borrower hereunder shall be subject
to the fulfillment to Bank's satisfaction of each of the following conditions:
(a) COMPLIANCE. The representations and warranties contained herein and
in each of the other Loan Documents shall be true on and as of the date of the
signing of this letter and on the date of each extension of credit by Bank
pursuant hereto, with the same effect as though such representations and
warranties had been made on and as of each such date, and on each such date, no
default hereunder, and no condition, event or act which with the giving of
notice or the passage of time or both would constitute such a default, shall
have occurred and be continuing or shall exist.
(b) DOCUMENTATION. Bank shall have received all additional documents
which may be required in connection with such extension of credit.
V. COVENANTS:
Borrower covenants that so long as Bank remains committed to extend credit
to Borrower pursuant hereto, or any liabilities (whether direct or contingent,
liquidated or unliquidated) of Borrower to Bank under any of the Loan Documents
remain outstanding, and until payment in full of all obligations of Borrower
subject hereto, Borrower shall, unless Bank otherwise consents in writing:
1. PUNCTUAL PAYMENT. Punctually pay all principal, interest, fees or
other liabilities due under any of the Loan Documents at the times and place and
in the manner specified therein.
2. ACCOUNTING RECORDS. Maintain adequate books and records in accordance
with generally accepted accounting principles consistently applied, and permit
any representative of Bank, at any reasonable time, to inspect, audit and
examine such books and records, to make copies of the same, and inspect the
properties of Borrower.
<PAGE>
International Marine and
General Insurance Company, Ltd.
April 30, 1997
Page 7
3. COMPLIANCE. Preserve and maintain all licenses, permits, governmental
approvals, rights, privileges and franchises necessary for the conduct of its
business; and comply with the provisions of all documents pursuant to which
Borrower is organized and/or which govern Borrower's continued existence and
with the requirements of all laws, rules, regulations and orders of a
governmental agency applicable to Borrower and/or its business.
4. INSURANCE. Maintain and keep in force insurance of the types and in
amounts customarily carried in lines of business similar to that of Borrower,
including but not limited to fire, extended coverage, public liability, flood,
property damage and workers' compensation, with all such insurance carried with
companies and in amounts satisfactory to Bank, and deliver to Bank from time to
time at Bank's request schedules setting forth all insurance then in effect.
5. FACILITIES. Keep all properties useful or necessary to Borrower's
business in good repair and condition, and from time to time make necessary
repairs, renewals and replacements thereto so that such properties shall be
fully and efficiently preserved and maintained.
6. TAXES AND OTHER LIABILITIES. Pay and discharge when due any and all
indebtedness, obligations, assessments and taxes, both real or personal,
including without limitation federal and state income taxes and state and local
property taxes and assessments, except (a) such as Borrower may in good faith
contest or as to which a bona fide dispute may arise, and (b) for which Borrower
has made provision, to Bank's satisfaction, for eventual payment thereof in the
event that Borrower is obligated to make such payment.
7. LITIGATION. Promptly give notice in writing to Bank of any litigation
pending or threatened against Borrower.
8. OTHER INDEBTEDNESS. Not create, incur, assume or permit to exist any
indebtedness or liabilities resulting from borrowings, loans or advances,
whether secured or unsecured, matured or unmatured, liquidated or unliquidated,
joint or several, except (a) the liabilities of Borrower to Bank, and (b) any
other liabilities of Borrower existing as of, and disclosed to Bank prior to,
the date hereof.
9. MERGER, CONSOLIDATION, TRANSFER OF ASSETS. Not merge into or
consolidate with any other entity; nor make any substantial change in the nature
of Borrower's business as
<PAGE>
International Marine and
General Insurance Company, Ltd.
April 30, 1997
Page 8
conducted as of the date hereof; nor acquire all or substantially all of the
assets of any other entity; nor sell, lease, transfer or otherwise dispose of
all or a substantial or material portion of Borrower's assets except in the
ordinary course of its business.
10. GUARANTIES. Not guarantee or become liable in any way as surety,
endorser (other than as endorser of negotiable instruments for deposit or
collection in the ordinary course of business), accommodation endorser or
otherwise for, nor pledge or hypothecate any assets of Borrower as security for,
any liabilities or obligations of any other person or entity, except any of the
foregoing in favor of Bank.
11. LOANS, ADVANCES, INVESTMENTS. Not make any loans or advances to or
investments in any person or entity, except any of the foregoing existing as of,
and disclosed to Bank prior to, the date hereof.
VI. DEFAULT, REMEDIES:
1. DEFAULT, REMEDIES. Upon the violation of any term or condition of any
of the Loan Documents, or upon the occurrence of any default or defined event of
default under any of the Loan Documents: (a) all principal and accrued and
unpaid interest outstanding under each of the Loan Documents, any term thereof
to the contrary notwithstanding, shall at Bank's option and without notice
become immediately due and payable without presentment, demand, or any notices
of any kind, including without limitation notice of nonperformance, notice of
protest, protest, notice of dishonor, notice of intention to accelerate or
notice of acceleration, all of which are hereby expressly waived by each
Borrower; (b) the obligation, if any, of Bank to extend any further credit under
any of the Loan Documents shall immediately cease and terminate; and (c) Bank
shall have all rights, powers and remedies available under each of the Loan
Documents, or accorded by law, including without limitation the right to resort
to any or all security for any credit extended by Bank to Borrower under any of
the Loan Documents and to exercise any or all of the rights of a beneficiary or
secured party pursuant to the applicable law. All rights, powers and remedies
of Bank may be exercised at any time by Bank and from time to time after the
occurrence of any such breach or default, are cumulative and not exclusive, and
shall be in addition to any other rights, powers or remedies provided by law or
equity.
<PAGE>
International Marine and
General Insurance Company, Ltd.
April 30, 1997
Page 9
2. NO WAIVER. No delay, failure or discontinuance of Bank in
exercising any right, power or remedy under any of the Loan Documents shall
affect or operate as a waiver of such right, power or remedy; nor shall any
single or partial exercise of any such right, power or remedy preclude, waive
or otherwise affect any other or further exercise thereof or the exercise of
any other right, power or remedy. Any waiver, permit, consent or approval of
any kind by Bank of any breach of or default under any of the Loan Documents
must be in writing and shall be effective only to the extent set forth in
such writing.
VII. MISCELLANEOUS:
1. NOTICES. All notices, requests and demands which any party is
required or may desire to give to any other party under any provision of this
letter must be in writing delivered to each party at its address first set
forth above, or to such other address as any party may designate by written
notice to all other parties. Each such notice, request and demand shall be
deemed given or made as follows: (a) if sent by hand delivery, upon
delivery; (b) if sent by mail, upon the earlier of the date of receipt or
three (3) days after deposit in the U.S. mail, first class and postage
prepaid; and (c) if sent by telecopy, upon receipt.
2. COSTS, EXPENSES AND ATTORNEYS' FEES. Borrower shall pay to Bank
immediately upon demand the full amount of all payments, advances, charges,
costs and expenses, including reasonable attorneys' fees (to include outside
counsel fees and all allocated costs of Bank's in-house counsel to the extent
permissible), expended or incurred by Bank in connection with (a) the
negotiation and preparation of this letter and the other Loan Documents,
Bank's continued administration hereof and thereof, and the preparation of
amendments and waivers hereto and thereto, (b) the enforcement of Bank's
rights and/or the collection of any amounts which become due to Bank under
any of the Loan Documents, and (c) the prosecution or defense of any action
in any way related to any of the Loan Documents, including without
limitation, any action for declaratory relief, whether incurred at the trial
or appellate level, in an arbitration proceeding or otherwise, and including
any of the foregoing incurred in connection with any bankruptcy proceeding
(including without limitation, any adversary proceeding, contested matter or
motion brought by Bank or any other person) relating to any Borrower or any
other person or entity.
<PAGE>
International Marine and
General Insurance Company, Ltd.
April 30, 1997
Page 10
3. SUCCESSORS, ASSIGNMENT. This letter shall be binding upon and inure
to the benefit of the heirs, executors, administrators, legal
representatives, successors and assigns of the parties; provided however,
that Borrower may not assign or transfer its interest hereunder without
Bank's prior written consent. Bank reserves the right to sell, assign,
transfer, negotiate or grant participations in all or any part of, or any
interest in, Bank's rights and benefits under each of the Loan Documents. In
connection therewith Bank may disclose all documents and information which
Bank now has or hereafter may acquire relating to any credit extended by Bank
to Borrower, Borrower or its business, or any collateral required hereunder.
4. AMENDMENT. This letter may be amended or modified only in writing
signed by each party hereto.
5. NO THIRD PARTY BENEFICIARIES. This letter is made and entered into
for the sole protection and benefit of the parties hereto and their
respective permitted successors and assigns, and no other person or entity
shall be a third party beneficiary of, or have any direct or indirect cause
of action or claim in connection with, this letter or any other of the Loan
Documents to which it is not a party.
6. SEVERABILITY OF PROVISIONS. If any provision of this letter shall
be prohibited by or invalid under applicable law, such provision shall be
ineffective only to the extent of such prohibition or invalidity without
invalidating the remainder of such provision or any remaining provisions of
this letter.
7. GOVERNING LAW. This letter shall be governed by and construed in
accordance with the laws of the State of Texas.
8. SAVINGS CLAUSE. It is the intention of the parties to comply
strictly with applicable usury laws. Accordingly, notwithstanding any
provision to the contrary in the Loan Documents, in no event shall any Loan
Documents require the payment or permit the payment, taking, reserving,
receiving, collection or charging of any sums constituting interest under
applicable laws that exceed the maximum amount permitted by such laws, as the
same may be amended or modified from time to time (the "Maximum Rate"). If
any such excess interest is called for, contracted for, charged, taken,
reserved or received in connection with any Loan Documents, or in any
communication by or any other person to Borrower or any other person, or in
the event that all or part of the principal or interest hereof or thereof
shall be prepaid or accelerated, so that under any of such circumstances or
under any other circumstance whatsoever the
<PAGE>
International Marine and
General Insurance Company, Ltd.
April 30, 1997
Page 11
amount of interest contracted for, charged, taken, reserved or received on
the amount of principal actually outstanding from time to time under the Loan
Documents shall exceed the Maximum Rate, then in such event it is agreed
that: (i) the provisions of this paragraph shall govern and control; (ii)
neither Borrower nor any other person or entity now or hereafter liable for
the payment of any Loan Documents shall be obligated to pay the amount of
such interest to the extent it is in excess of the Maximum Rate; (iii) any
such excess interest which is or has been received by, notwithstanding this
paragraph, shall be credited against the then unpaid principal balance hereof
or thereof, or if any of the Loan Documents has been or would be paid in full
by such credit, refunded to Borrower; and (iv) the provisions of each of the
Loan Documents, and any other communication to Borrower, shall immediately be
deemed reformed and such excess interest reduced, without the necessity of
executing any other document, to the Maximum Rate. The right to accelerate
the maturity of the Loan Documents does not include the right to accelerate,
collect or charge unearned interest, but only such interest that has
otherwise accrued as of the date of acceleration. Without limiting the
foregoing, all calculations of the rate of interest contracted for, charged,
taken, reserved or received in connection with any of the Loan Documents
which are made for the purpose of determining whether such rate exceeds the
Maximum Rate shall be made to the extent permitted by applicable laws by
amortizing, prorating, allocating and spreading during the period of the full
term of such Loan Documents, including all prior and subsequent renewals and
extensions hereof or thereof, all interest at any time contracted for,
charged, taken, reserved or received by. The terms of this paragraph shall
be deemed to be incorporated into each of the other Loan Documents.
To the extent that Article 5069-1.04 of the Texas Revised Civil Statutes
is relevant to for the purpose of determining the Maximum Rate, Bank hereby
elects to determine the applicable rate ceiling under such Article by the
indicated (weekly) rate ceiling from time to time in effect, subject to 's
right subsequently to change such method in accordance with applicable law,
as the same may be amended or modified from time to time.
9. RIGHT OF SETOFF; DEPOSIT ACCOUNTS. Upon and after the occurrence of
an Event of Default, (a) Borrower hereby authorizes Bank, at any time and
from time to time, without notice, which is hereby expressly waived by each
Borrower, and whether or not Bank shall have declared any credit extended
hereunder to be due and payable in accordance with the terms hereof, to set
off against, and to appropriate and apply to the payment of, Borrower's
<PAGE>
International Marine and
General Insurance Company, Ltd.
April 30, 1997
Page 12
obligations and liabilities under the Loan Documents (whether matured or
unmatured, fixed or contingent, liquidated or unliquidated), any and all
amounts owing by Bank to Borrower (whether payable in U.S. dollars or any
other currency, whether matured or unmatured, and in the case of deposits,
whether general or special (except trust and escrow accounts), time or demand
and however evidenced), and (b) pending any such action, to the extent
necessary, to hold such amounts as collateral to secure such obligations and
liabilities and to return as unpaid for insufficient funds any and all checks
and other items drawn against any deposits so held as Bank, in its sole
discretion, may elect. Borrower hereby grants to Bank a security interest in
all deposits and accounts maintained with Bank and with any other financial
institution to secure the payment of all obligations and liabilities of
Borrower to Bank under the Loan Documents.
10. BUSINESS PURPOSE. Borrower represents and warrants that any credit
extended hereunder is for a business, commercial, investment, agricultural or
other similar purpose and not primarily for a personal, family or household
use.
11. ARBITRATION.
(a) ARBITRATION. Upon the demand of any party, any Dispute shall be
resolved by binding arbitration (except as set forth in (e) below) in
accordance with the terms of this letter. A "Dispute" shall mean any action,
dispute, claim or controversy of any kind, whether in contract or tort,
statutory or common law, legal or equitable, now existing or hereafter
arising under or in connection with, or in any way pertaining to, any of the
Loan Documents, or any past, present or future extensions of credit and other
activities, transactions or obligations of any kind related directly or
indirectly to any of the Loan Documents, including without limitation, any of
the foregoing arising in connection with the exercise of any self-help,
ancillary or other remedies pursuant to any of the Loan Documents. Any party
may by summary proceedings bring an action in court to compel arbitration of
a Dispute. Any party who fails or refuses to submit to arbitration following
a lawful demand by any other party shall bear all costs and expenses incurred
by such other party in compelling arbitration of any Dispute.
(b) GOVERNING RULES. Arbitration proceedings shall be administered by
the American Arbitration Association ("AAA") or such other administrator as
the parties shall mutually agree upon in accordance with the AAA Commercial
Arbitration Rules. All Disputes submitted to arbitration shall be resolved
in accordance with the Federal Arbitration Act (Title 9 of the United States
<PAGE>
International Marine and
General Insurance Company, Ltd.
April 30, 1997
Page 13
Code), notwithstanding any conflicting choice of law provision in any of the
Loan Documents. The arbitration shall be conducted at a location in Texas
selected by the AAA or other administrator. If there is any inconsistency
between the terms hereof and any such rules, the terms and procedures set
forth herein shall control. All statutes of limitation applicable to any
Dispute shall apply to any arbitration proceeding. All discovery activities
shall be expressly limited to matters directly relevant to the Dispute being
arbitrated. Judgment upon any award rendered in an arbitration may be
entered in any court having jurisdiction; provided however, that nothing
contained herein shall be deemed to be a waiver by any party that is a bank
of the protections afforded to it under 12 U.S.C. Section 91 or any similar
applicable state law.
(c) NO WAIVER; PROVISIONAL REMEDIES, SELF-HELP AND FORECLOSURE. No
provision hereof shall limit the right of any party to exercise self-help
remedies such as setoff, foreclosure against or sale of any real or personal
property collateral or security, or to obtain provisional or ancillary
remedies, including without limitation injunctive relief, sequestration,
attachment, garnishment or the appointment of a receiver, from a court of
competent jurisdiction before, after or during the pendency of any
arbitration or other proceeding. The exercise of any such remedy shall not
waive the right of any party to compel arbitration hereunder.
(d) ARBITRATOR QUALIFICATIONS AND POWERS; AWARDS. Arbitrators must be
active members of the Texas State Bar with expertise in the substantive laws
applicable to the subject matter of the Dispute. Arbitrators are empowered
to resolve Disputes by summary rulings in response to motions filed prior to
the final arbitration hearing. Arbitrators (i) shall resolve all Disputes in
accordance with the substantive law of the state of Texas, (ii) may grant any
remedy or relief that a court of the state of Texas could order or grant
within the scope hereof and such ancillary relief as is necessary to make
effective any award, and (iii) shall have the power to award recovery of all
costs and fees, to impose sanctions and to take such other actions as they
deem necessary to the same extent a judge could pursuant to the Federal Rules
of Civil Procedure, the Texas Rules of Civil Procedure or other applicable
law. Any Dispute in which the amount in controversy is $5,000,000 or less
shall be decided by a single arbitrator who shall not render an award of
greater than $5,000,000 (including damages, costs, fees and expenses). By
submission to a single arbitrator, each party expressly waives any right or
claim to recover more than $5,000,000. Any Dispute in which the amount in
controversy exceeds $5,000,000 shall be
<PAGE>
International Marine and
General Insurance Company, Ltd.
April 30, 1997
Page 14
decided by majority vote of a panel of three arbitrators; provided however,
that all three arbitrators must actively participate in all hearings and
deliberations.
(e) JUDICIAL REVIEW. Notwithstanding anything herein to the contrary,
in any arbitration in which the amount in controversy exceeds $25,000,000,
the arbitrators shall be required to make specific, written findings of fact
and conclusions of law. In such arbitrations (i) the arbitrators shall not
have the power to make any award which is not supported by substantial
evidence or which is based on legal error, (ii) an award shall not be binding
upon the parties unless the findings of fact are supported by substantial
evidence and the conclusions of law are not erroneous under the substantive
law of the state of Texas, and (iii) the parties shall have in addition to
the grounds referred to in the Federal Arbitration Act for vacating,
modifying or correcting an award the right to judicial review of (A) whether
the findings of fact rendered by the arbitrators are supported by substantial
evidence, and (B) whether the conclusions of law are erroneous under the
substantive law of the state of Texas. Judgment confirming an award in such
a proceeding may be entered only if a court determines the award is supported
by substantial evidence and not based on legal error under the substantive
law of the state of Texas.
(f) MISCELLANEOUS. To the maximum extent practicable, the AAA, the
arbitrators and the parties shall take all action required to conclude any
arbitration proceeding within 180 days of the filing of the Dispute with the
AAA. No arbitrator or other party to an arbitration proceeding may disclose
the existence, content or results thereof, except for disclosures of
information by a party required in the ordinary course of its business, by
applicable law or regulation, or to the extent necessary to exercise any
judicial review rights set forth herein. If more than one agreement for
arbitration by or between the parties potentially applies to a Dispute, the
arbitration provision most directly related to the Loan Documents or the
subject matter of the Dispute shall control. This arbitration provision
shall survive termination, amendment or expiration of any of the Loan
Documents or any relationship between the parties.
NOTICE: THIS DOCUMENT AND ALL OTHER DOCUMENTS RELATING TO THE INDEBTEDNESS
CONSTITUTE A WRITTEN LOAN AGREEMENT WHICH REPRESENTS THE FINAL AGREEMENT
BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO
UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES RELATING TO THE INDEBTEDNESS.
<PAGE>
International Marine and
General Insurance Company, Ltd.
April 30, 1997
Page 15
Your acknowledgment of this letter shall constitute acceptance of the
foregoing terms and conditions. Bank's commitment to extend any credit to
Borrower pursuant to the terms of this letter shall terminate on September
15, 1997, unless this letter is acknowledged by Borrower and returned to Bank
on or before that date.
Sincerely,
WELLS FARGO BANK (TEXAS),
NATIONAL ASSOCIATION
By: /s/ Jonathan Homeyer
--------------------------------
Jonathan Homeyer
Relationship Manager
Acknowledged and accepted as of April 30, 1997:
INTERNATIONAL MARINE AND
GENERAL INSURANCE COMPANY, LTD.
By: /s/ Frank J. Bramanti
----------------------------
Frank J. Bramanti
Executive Vice President
<PAGE>
[LETTERHEAD]
South Texas Regional
Commercial Banking Office
1000 Louisiana, 3rd Floor
Houston, TX 77002
April 30, 1997
Houston Casualty Company
13403 Northwest Freeway, Suite 200
Houston, TX 77040
Dear Gentlemen:
This letter is to confirm that Wells Fargo Bank (Texas), National
Association ("Bank"), subject to all terms and conditions contained herein,
has agreed to make available to Houston Casualty Company ("Borrower") a
commitment under which Bank will issue standby letters of credit for the
account of Borrower (each, a "Letter of Credit" and collectively, "Letters of
Credit") from time to time up to and including April 30, 1998, not to exceed
at any time the maximum principal amount of Twelve Million Dollars
($12,000,000.00) ("Letter of Credit Line").
1. LETTER OF CREDIT LINE:
(a) LETTERS OF CREDIT. Letters of Credit shall be issued under the
Letter of Credit Line in lieu of performance bonds; provided however, that
the form and substance of each Letter of Credit shall be subject to approval
by Bank, in its sole discretion; and provided further, that the aggregate of
all undrawn amounts, and all amounts drawn and unreimbursed, under any
Letters of Credit issued by Bank under the Letter of Credit Line shall not at
any time exceed the maximum principal amount available thereunder, as set
forth above. Each Letter of Credit shall be issued for a term not to exceed
365 days, as designated by Borrower; provided however, that no Letter of
Credit shall have an expiration date subsequent to April 30, 1998. Each
Letter of Credit shall be subject to the additional terms of the Letter of
Credit Agreement and related documents, if any, required by Bank in
connection with the issuance thereof (each, a "Letter of Credit Agreement"
and collectively, "Letter of Credit Agreements").
<PAGE>
Houston Casualty Company
April 30, 1997
Page 2
(b) REPAYMENT OF DRAFTS. Each draft paid by Bank under any Letter of
Credit shall be repaid by Borrower in accordance with the provisions of the
applicable Letter of Credit Agreement.
2. COLLATERAL:
As security for all indebtedness of Borrower to Bank subject hereto,
Borrower hereby grants to a Bank security interest of first priority in
Borrower's custodial account #420954 maintained with the Bank of New York.
All of the foregoing shall be evidenced by and subject to the terms of
such security agreements, financing statements, deeds of trust and other
documents as Bank shall reasonably require, all in form and substance
satisfactory to Bank. Borrower shall reimburse Bank immediately upon demand
for all costs and expenses incurred by Bank in connection with any of the
foregoing security, including without limitation, filing and recording fees
and costs of appraisals, audits and title insurance.
II. INTEREST/FEES:
1. INTEREST. The amount of each draft paid by Bank under the Standby
Letter of Credit shall bear interest from the date such draft is paid by Bank
to the date such amount is fully repaid by Borrower at the rate of interest
set forth in the Standby Letter of Credit Agreement.
2. COMPUTATION AND PAYMENT. Interest shall be computed on the basis
of a 360-day year, actual days elapsed, unless such calculation would result
in a usurious rate, in which case interest shall be computed on the basis of
a 365/366-day year, as the case may be, actual days elapsed. Interest shall
be payable at the times and place set forth in the Standby Letter of Credit
Note.
3. LETTER OF CREDIT FEES. Borrower shall pay to Bank (a) fees upon
the issuance of each Letter of Credit equal to one percent (1.00%) of the
face amount thereof, (b) fees upon the payment or negotiation by Bank of each
draft under any Letter of Credit equal to one percent (1.00%) of the amount
of such draft, and (c) fees upon the occurrence of any other activity with
respect to any Letter of Credit (including without limitation, the transfer,
amendment or cancellation of any Letter of Credit) determined in accordance
with Bank's standard fees and charges then in effect for such activity.
<PAGE>
Houston Casualty Company
April 30, 1997
Page 3
4. COLLECTION OF PAYMENTS. Borrower authorizes Bank to collect all
principal, interest and fees due under the Standby Letter of Credit by
charging Borrower's demand deposit account number ______________ with Bank,
or any other demand deposit account maintained by Borrower with Bank, for the
full amount thereof. Should there be insufficient funds in any such demand
deposit account to pay all such sums when due, the full amount of such
deficiency shall be immediately due and payable by Borrower.
III. REPRESENTATIONS AND WARRANTIES:
Borrower makes the following representations and warranties to Bank,
which representations and warranties shall survive the execution of this
letter and shall continue in full force and effect until the full and final
payment, and satisfaction and discharge, of all obligations of Borrower to
Bank subject to this letter.
1. LEGAL STATUS. Borrower is corporation duly organized and existing
and in good standing under the laws of the Texas, and is qualified or
licensed to do business in all jurisdictions in which such qualification or
licensing is required or in which the failure to so qualify or to be so
licensed could have a material adverse effect on Borrower.
2. AUTHORIZATION AND VALIDITY. This letter, and each other document,
contract or instrument deemed necessary by Bank to evidence any extension of
credit to Borrower pursuant to the terms and conditions hereof, or now or at
any time hereafter required by or delivered to Bank in connection with this
letter (collectively, the "Loan Documents") have been duly authorized, and
upon their execution and delivery in accordance with the provisions hereof
will constitute legal, valid and binding agreements and obligations of
Borrower or the party which executes the same, enforceable in accordance with
their respective terms.
3. NO VIOLATION. The execution, delivery and performance by Borrower
of each of the Loan Documents do not violate any provision of any law or
regulation, Articles of Organization or Operating Agreement of Borrower, or
result in a breach of or constitute a default under any contract, obligation,
indenture or other instrument to which Borrower is a party or by which
Borrower may be bound.
4. LITIGATION. There are no pending, or to the best of Borrower's
knowledge threatened, actions, claims, investigations, suits or proceedings
by or before any governmental authority,
<PAGE>
Houston Casualty Company
April 30, 1997
Page 4
arbitrator, court or administrative agency which could have a material
adverse effect on the financial condition or operation of Borrower other than
those disclosed by Borrower to Bank in writing prior to the date hereof.
5. INCOME TAX RETURNS. Borrower has no knowledge of any pending
assessments or adjustments of its income tax payable with respect to any year.
6. NO SUBORDINATION. There is no agreement, indenture, contract or
instrument to which Borrower is a party or by which Borrower may be bound
that requires the subordination in right of payment of any of Borrower's
obligations subject to this letter to any other obligation of Borrower.
7. PERMITS, FRANCHISES. Borrower possesses, and will hereafter
possess, all permits, consents, approvals, franchises and licenses required
and all rights to trademarks, trade names, patents and fictitious names, if
any, necessary to enable it to conduct the business in which it is now
engaged in compliance with applicable law.
8. ERISA. Borrower is in compliance in all material respects with all
applicable provisions of the Employee Retirement Income Security Act of 1974,
as amended or recodified from time to time ("ERISA"); Borrower has not
violated any provision of any defined employee pension benefit plan (as
defined in ERISA) maintained or contributed to by Borrower (each, a "Plan");
no Reportable Event, as defined in ERISA, has occurred and is continuing with
respect to any Plan initiated by Borrower; Borrower has met its minimum
funding requirements under ERISA with respect to each Plan; and each Plan
will be able to fulfill its benefit obligations as they come due in
accordance with the Plan documents and under generally accepted accounting
principles.
9. OTHER OBLIGATIONS. Borrower is not in default on any obligation
for borrowed money, any purchase money obligation or any other material
lease, commitment, contract, instrument or obligation.
10. ENVIRONMENTAL MATTERS. Except as disclosed by Borrower to Bank in
writing prior to the date hereof, Borrower is in compliance in all material
respects with all applicable federal or state environmental, hazardous waste,
health and safety statutes, and any rules or regulations adopted pursuant
thereto, which govern or affect any of Borrower's operations and/or
properties, including without limitation, the Comprehensive Environmental
Response, Compensation and Liability Act of 1980,
<PAGE>
Houston Casualty Company
April 30, 1997
Page 5
the Superfund Amendments and Reauthorization Act of 1986, the Federal
Resource Conservation and Recovery Act of 1976, and the Federal Toxic
Substances Control Act, as any of the same may be amended, modified or
supplemented from time to time. None of the operations of Borrower is the
subject of any federal or state investigation evaluating whether any remedial
action involving a material expenditure is needed to respond to a release of
any toxic or hazardous waste or substance into the environment. Borrower has
no material contingent liability in connection with any release of any toxic
or hazardous waste or substance into the environment.
IV. CONDITIONS:
1. CONDITIONS OF INITIAL EXTENSION OF CREDIT. The obligation of Bank
to extend any credit contemplated by this letter is subject to fulfillment to
Bank's satisfaction of all of the following conditions:
(a) DOCUMENTATION. Bank shall have received each of the Loan
Documents, duly executed and in form and substance satisfactory to Bank.
(b) FINANCIAL CONDITION. There shall have been no material adverse
change, as determined by Bank, in the financial condition or business of
Borrower, nor any material decline, as determined by Bank, in the market
value of any collateral required hereunder or a substantial or material
portion of the assets of Borrower.
(c) INSURANCE. Borrower shall have delivered to Bank evidence of
insurance coverage on all Borrower's property, in form, substance, amounts,
covering risks and issued by companies satisfactory to Bank, and where
required by Bank, with loss payable endorsements in favor of Bank.
2. CONDITIONS OF EACH EXTENSION OF CREDIT. The obligation of Bank to
make each extension of credit requested by Borrower hereunder shall be
subject to the fulfillment to Bank's satisfaction of each of the following
conditions:
(a) COMPLIANCE. The representations and warranties contained herein
and in each of the other Loan Documents shall be true on and as of the date
of the signing of this letter and on the date of each extension of credit by
Bank pursuant hereto, with the same effect as though such representations and
warranties had been made on and as of each such date, and on each such date,
no default hereunder, and no condition, event or act which with the giving of
notice or the passage of time or both
<PAGE>
Houston Casualty Company
April 30, 1997
Page 6
would constitute such a default, shall have occurred and be continuing or
shall exist.
(b) DOCUMENTATION. Bank shall have received all additional documents
which may be required in connection with such extension of credit.
V. COVENANTS:
Borrower covenants that so long as Bank remains committed to extend
credit to Borrower pursuant hereto, or any liabilities (whether direct or
contingent, liquidated or unliquidated) of Borrower to Bank under any of the
Loan Documents remain outstanding, and until payment in full of all
obligations of Borrower subject hereto, Borrower shall, unless Bank otherwise
consents in writing:
1. PUNCTUAL PAYMENT. Punctually pay all principal, interest, fees or
other liabilities due under any of the Loan Documents at the times and place
and in the manner specified therein.
2. ACCOUNTING RECORDS. Maintain adequate books and records in
accordance with generally accepted accounting principles consistently
applied, and permit any representative of Bank, at any reasonable time, to
inspect, audit and examine such books and records, to make copies of the
same, and inspect the properties of Borrower.
3. COMPLIANCE. Preserve and maintain all licenses, permits,
governmental approvals, rights, privileges and franchises necessary for the
conduct of its business; and comply with the provisions of all documents
pursuant to which Borrower is organized and/or which govern Borrower's
continued existence and with the requirements of all laws, rules, regulations
and orders of a governmental agency applicable to Borrower and/or its
business.
4. INSURANCE. Maintain and keep in force insurance of the types and
in amounts customarily carried in lines of business similar to that of
Borrower, including but not limited to fire, extended coverage, public
liability, flood, property damage and workers' compensation, with all such
insurance carried with companies and in amounts satisfactory to Bank, and
deliver to Bank from time to time at Bank's request schedules setting forth
all insurance then in effect.
<PAGE>
Houston Casualty Company
April 30, 1997
Page 7
5. FACILITIES. Keep all properties useful or necessary to Borrower's
business in good repair and condition, and from time to time make necessary
repairs, renewals and replacements thereto so that such properties shall be
fully and efficiently preserved and maintained.
6. TAXES AND OTHER LIABILITIES. Pay and discharge when due any and
all indebtedness, obligations, assessments and taxes, both real or personal,
including without limitation federal and state income taxes and state and
local property taxes and assessments, except (a) such as Borrower may in good
faith contest or as to which a bona fide dispute may arise, and (b) for which
Borrower has made provision, to Bank's satisfaction, for eventual payment
thereof in the event that Borrower is obligated to make such payment.
7. LITIGATION. Promptly give notice in writing to Bank of any
litigation pending or threatened against Borrower.
8. OTHER INDEBTEDNESS. Not create, incur, assume or permit to exist
any indebtedness or liabilities resulting from borrowings, loans or advances,
whether secured or unsecured, matured or unmatured, liquidated or
unliquidated, joint or several, except (a) the liabilities of Borrower to
Bank, and (b) any other liabilities of Borrower existing as of, and disclosed
to Bank prior to, the date hereof.
9. MERGER, CONSOLIDATION, TRANSFER OF ASSETS. Not merge into or
consolidate with any other entity; nor make any substantial change in the
nature of Borrower's business as conducted as of the date hereof; nor acquire
all or substantially all of the assets of any other entity; nor sell, lease,
transfer or otherwise dispose of all or a substantial or material portion of
Borrower's assets except in the ordinary course of its business.
10. GUARANTIES. Not guarantee or become liable in any way as surety,
endorser (other than as endorser of negotiable instruments for deposit or
collection in the ordinary course of business), accommodation endorser or
otherwise for, nor pledge or hypothecate any assets of Borrower as security
for, any liabilities or obligations of any other person or entity, except any
of the foregoing in favor of Bank.
11. LOANS, ADVANCES, INVESTMENTS. Not make any loans or advances to or
investments in any person or entity, except any of the foregoing existing as
of, and disclosed to Bank prior to, the date hereof.
<PAGE>
Houston Casualty Company
April 30, 1997
Page 8
12. DIVIDENDS, DISTRIBUTIONS. Not declare or pay any dividend or
distribution either in cash, stock or any other property on Borrower's stock now
or hereafter outstanding, nor redeem, retire, repurchase or otherwise acquire
any shares of any class of Borrower's stock now or hereafter outstanding.
VI. DEFAULT, REMEDIES:
1. DEFAULT, REMEDIES. Upon the violation of any term or condition of any
of the Loan Documents, or upon the occurrence of any default or defined event of
default under any of the Loan Documents: (a) all principal and accrued and
unpaid interest outstanding under each of the Loan Documents, any term thereof
to the contrary notwithstanding, shall at Bank's option and without notice
become immediately due and payable without presentment, demand, or any notices
of any kind, including without limitation notice of nonperformance, notice of
protest, protest, notice of dishonor, notice of intention to accelerate or
notice of acceleration, all of which are hereby expressly waived by each
Borrower; (b) the obligation, if any, of Bank to extend any further credit under
any of the Loan Documents shall immediately cease and terminate; and (c) Bank
shall have all rights, powers and remedies available under each of the Loan
Documents, or accorded by law, including without limitation the right to resort
to any or all security for any credit extended by Bank to Borrower under any of
the Loan Documents and to exercise any or all of the rights of a beneficiary or
secured party pursuant to the applicable law. All rights, powers and remedies
of Bank may be exercised at any time by Bank and from time to time after the
occurrence of any such breach or default, are cumulative and not exclusive, and
shall be in addition to any other rights, powers or remedies provided by law or
equity.
2. NO WAIVER. No delay, failure or discontinuance of Bank in exercising
any right, power or remedy under any of the Loan Documents shall affect or
operate as a waiver of such right, power or remedy; nor shall any single or
partial exercise of any such right, power or remedy preclude, waive or otherwise
affect any other or further exercise thereof or the exercise of any other right,
power or remedy. Any waiver, permit, consent or approval of any kind by Bank of
any breach of or default under any of the Loan Documents must be in writing and
shall be effective only to the extent set forth in such writing.
<PAGE>
Houston Casualty Company
April 30, 1997
Page 9
VII. MISCELLANEOUS:
1. NOTICES. All notices, requests and demands which any party is
required or may desire to give to any other party under any provision of this
letter must be in writing delivered to each party at its address first set forth
above, or to such other address as any party may designate by written notice to
all other parties. Each such notice, request and demand shall be deemed given
or made as follows: (a) if sent by hand delivery, upon delivery; (b) if sent by
mail, upon the earlier of the date of receipt or three (3) days after deposit in
the U.S. mail, first class and postage prepaid; and (c) if sent by telecopy,
upon receipt.
2. COSTS, EXPENSES AND ATTORNEYS' FEES. Borrower shall pay to Bank
immediately upon demand the full amount of all payments, advances, charges,
costs and expenses, including reasonable attorneys' fees (to include outside
counsel fees and all allocated costs of Bank's in-house counsel to the extent
permissible), expended or incurred by Bank in connection with (a) the
negotiation and preparation of this letter and the other Loan Documents, Bank's
continued administration hereof and thereof, and the preparation of amendments
and waivers hereto and thereto, (b) the enforcement of Bank's rights and/or the
collection of any amounts which become due to Bank under any of the Loan
Documents, and (c) the prosecution or defense of any action in any way related
to any of the Loan Documents, including without limitation, any action for
declaratory relief, whether incurred at the trial or appellate level, in an
arbitration proceeding or otherwise, and including any of the foregoing incurred
in connection with any bankruptcy proceeding (including without limitation, any
adversary proceeding, contested matter or motion brought by Bank or any other
person) relating to any Borrower or any other person or entity.
3. SUCCESSORS, ASSIGNMENT. This letter shall be binding upon and inure
to the benefit of the heirs, executors, administrators, legal representatives,
successors and assigns of the parties; provided however, that Borrower may not
assign or transfer its interest hereunder without Bank's prior written consent.
Bank reserves the right to sell, assign, transfer, negotiate or grant
participations in all or any part of, or any interest in, Bank's rights and
benefits under each of the Loan Documents. In connection therewith Bank may
disclose all documents and information which Bank now has or hereafter may
acquire relating to any credit extended by Bank to Borrower, Borrower or its
business, or any collateral required hereunder.
<PAGE>
Houston Casualty Company
April 30, 1997
Page 10
4. AMENDMENT. This letter may be amended or modified only in writing
signed by each party hereto.
5. NO THIRD PARTY BENEFICIARIES. This letter is made and entered into
for the sole protection and benefit of the parties hereto and their respective
permitted successors and assigns, and no other person or entity shall be a third
party beneficiary of, or have any direct or indirect cause of action or claim in
connection with, this letter or any other of the Loan Documents to which it is
not a party.
6. SEVERABILITY OF PROVISIONS. If any provision of this letter shall be
prohibited by or invalid under applicable law, such provision shall be
ineffective only to the extent of such prohibition or invalidity without
invalidating the remainder of such provision or any remaining provisions of this
letter.
7. GOVERNING LAW. This letter shall be governed by and construed in
accordance with the laws of the State of Texas.
8. SAVINGS CLAUSE. It is the intention of the parties to comply strictly
with applicable usury laws. Accordingly, notwithstanding any provision to the
contrary in the Loan Documents, in no event shall any Loan Documents require the
payment or permit the payment, taking, reserving, receiving, collection or
charging of any sums constituting interest under applicable laws that exceed the
maximum amount permitted by such laws, as the same may be amended or modified
from time to time (the "Maximum Rate"). If any such excess interest is called
for, contracted for, charged, taken, reserved or received in connection with any
Loan Documents, or in any communication by or any other person to Borrower or
any other person, or in the event that all or part of the principal or interest
hereof or thereof shall be prepaid or accelerated, so that under any of such
circumstances or under any other circumstance whatsoever the amount of interest
contracted for, charged, taken, reserved or received on the amount of principal
actually outstanding from time to time under the Loan Documents shall exceed the
Maximum Rate, then in such event it is agreed that: (i) the provisions of this
paragraph shall govern and control; (ii) neither Borrower nor any other person
or entity now or hereafter liable for the payment of any Loan Documents shall be
obligated to pay the amount of such interest to the extent it is in excess of
the Maximum Rate; (iii) any such excess interest which is or has been received
by , notwithstanding this paragraph, shall be credited against the then unpaid
principal balance hereof or thereof, or if any of the Loan Documents has been or
would be paid in full by such credit, refunded to Borrower; and (iv) the
provisions of each of the Loan Documents, and any other communication to
<PAGE>
Houston Casualty Company
April 30, 1997
Page 11
Borrower, shall immediately be deemed reformed and such excess interest reduced,
without the necessity of executing any other document, to the Maximum Rate. The
right to accelerate the maturity of the Loan Documents does not include the
right to accelerate, collect or charge unearned interest, but only such interest
that has otherwise accrued as of the date of acceleration. Without limiting the
foregoing, all calculations of the rate of interest contracted for, charged,
taken, reserved or received in connection with any of the Loan Documents which
are made for the purpose of determining whether such rate exceeds the Maximum
Rate shall be made to the extent permitted by applicable laws by amortizing,
prorating, allocating and spreading during the period of the full term of such
Loan Documents, including all prior and subsequent renewals and extensions
hereof or thereof, all interest at any time contracted for, charged, taken,
reserved or received by . The terms of this paragraph shall be deemed to be
incorporated into each of the other Loan Documents.
To the extent that Article 5069-1.04 of the Texas Revised Civil Statutes is
relevant to for the purpose of determining the Maximum Rate, Bank hereby elects
to determine the applicable rate ceiling under such Article by the indicated
(weekly) rate ceiling from time to time in effect, subject to 's right
subsequently to change such method in accordance with applicable law, as the
same may be amended or modified from time to time.
9. RIGHT OF SETOFF; DEPOSIT ACCOUNTS. Upon and after the occurrence of an
Event of Default, (a) Borrower hereby authorizes Bank, at any time and from time
to time, without notice, which is hereby expressly waived by each Borrower, and
whether or not Bank shall have declared any credit extended hereunder to be due
and payable in accordance with the terms hereof, to set off against, and to
appropriate and apply to the payment of, Borrower's obligations and liabilities
under the Loan Documents (whether matured or unmatured, fixed or contingent,
liquidated or unliquidated), any and all amounts owing by Bank to Borrower
(whether payable in U.S. dollars or any other currency, whether matured or
unmatured, and in the case of deposits, whether general or special (except trust
and escrow accounts), time or demand and however evidenced), and (b) pending any
such action, to the extent necessary, to hold such amounts as collateral to
secure such obligations and liabilities and to return as unpaid for insufficient
funds any and all checks and other items drawn against any deposits so held as
Bank, in its sole discretion, may elect. Borrower hereby grants to Bank a
security interest in all deposits and accounts maintained with Bank and with any
other financial institution to secure the payment of all obligations and
liabilities of Borrower to Bank under the Loan Documents.
<PAGE>
Houston Casualty Company
April 30, 1997
Page 12
10. BUSINESS PURPOSE. Borrower represents and warrants that any credit
extended hereunder is for a business, commercial, investment, agricultural or
other similar purpose and not primarily for a personal, family or household use.
11. ARBITRATION.
(a) ARBITRATION. Upon the demand of any party, any Dispute shall be
resolved by binding arbitration (except as set forth in (e) below) in accordance
with the terms of this letter. A "Dispute" shall mean any action, dispute,
claim or controversy of any kind, whether in contract or tort, statutory or
common law, legal or equitable, now existing or hereafter arising under or in
connection with, or in any way pertaining to, any of the Loan Documents, or any
past, present or future extensions of credit and other activities, transactions
or obligations of any kind related directly or indirectly to any of the Loan
Documents, including without limitation, any of the foregoing arising in
connection with the exercise of any self-help, ancillary or other remedies
pursuant to any of the Loan Documents. Any party may by summary proceedings
bring an action in court to compel arbitration of a Dispute. Any party who
fails or refuses to submit to arbitration following a lawful demand by any other
party shall bear all costs and expenses incurred by such other party in
compelling arbitration of any Dispute.
(b) GOVERNING RULES. Arbitration proceedings shall be administered by the
American Arbitration Association ("AAA") or such other administrator as the
parties shall mutually agree upon in accordance with the AAA Commercial
Arbitration Rules. All Disputes submitted to arbitration shall be resolved in
accordance with the Federal Arbitration Act (Title 9 of the United States Code),
notwithstanding any conflicting choice of law provision in any of the Loan
Documents. The arbitration shall be conducted at a location in Texas selected
by the AAA or other administrator. If there is any inconsistency between the
terms hereof and any such rules, the terms and procedures set forth herein shall
control. All statutes of limitation applicable to any Dispute shall apply to
any arbitration proceeding. All discovery activities shall be expressly limited
to matters directly relevant to the Dispute being arbitrated. Judgment upon any
award rendered in an arbitration may be entered in any court having
jurisdiction; provided however, that nothing contained herein shall be deemed to
be a waiver by any party that is a bank of the protections afforded to it under
12 U.S.C. Section 91 or any similar applicable state law.
(c) NO WAIVER; PROVISIONAL REMEDIES, SELF-HELP AND FORECLOSURE. No
provision hereof shall limit the right of any
<PAGE>
Houston Casualty Company
April 30, 1997
Page 13
party to exercise self-help remedies such as setoff, foreclosure against or
sale of any real or personal property collateral or security, or to obtain
provisional or ancillary remedies, including without limitation injunctive
relief, sequestration, attachment, garnishment or the appointment of a
receiver, from a court of competent jurisdiction before, after or during the
pendency of any arbitration or other proceeding. The exercise of any such
remedy shall not waive the right of any party to compel arbitration hereunder.
(d) ARBITRATOR QUALIFICATIONS AND POWERS; AWARDS. Arbitrators must be
active members of the Texas State Bar with expertise in the substantive laws
applicable to the subject matter of the Dispute. Arbitrators are empowered to
resolve Disputes by summary rulings in response to motions filed prior to the
final arbitration hearing. Arbitrators (i) shall resolve all Disputes in
accordance with the substantive law of the state of Texas, (ii) may grant any
remedy or relief that a court of the state of Texas could order or grant within
the scope hereof and such ancillary relief as is necessary to make effective any
award, and (iii) shall have the power to award recovery of all costs and fees,
to impose sanctions and to take such other actions as they deem necessary to the
same extent a judge could pursuant to the Federal Rules of Civil Procedure, the
Texas Rules of Civil Procedure or other applicable law. Any Dispute in which
the amount in controversy is $5,000,000 or less shall be decided by a single
arbitrator who shall not render an award of greater than $5,000,000 (including
damages, costs, fees and expenses). By submission to a single arbitrator, each
party expressly waives any right or claim to recover more than $5,000,000. Any
Dispute in which the amount in controversy exceeds $5,000,000 shall be decided
by majority vote of a panel of three arbitrators; provided however, that all
three arbitrators must actively participate in all hearings and deliberations.
(e) JUDICIAL REVIEW. Notwithstanding anything herein to the contrary, in
any arbitration in which the amount in controversy exceeds $25,000,000, the
arbitrators shall be required to make specific, written findings of fact and
conclusions of law. In such arbitrations (i) the arbitrators shall not have the
power to make any award which is not supported by substantial evidence or which
is based on legal error, (ii) an award shall not be binding upon the parties
unless the findings of fact are supported by substantial evidence and the
conclusions of law are not erroneous under the substantive law of the state of
Texas, and (iii) the parties shall have in addition to the grounds referred to
in the Federal Arbitration Act for vacating, modifying or correcting an award
the right to judicial review of (A) whether the findings of fact rendered by the
arbitrators are
<PAGE>
Houston Casualty Company
April 30, 1997
Page 14
supported by substantial evidence, and (B) whether the conclusions of law are
erroneous under the substantive law of the state of Texas. Judgment
confirming an award in such a proceeding may be entered only if a court
determines the award is supported by substantial evidence and not based on
legal error under the substantive law of the state of Texas.
(f) MISCELLANEOUS. To the maximum extent practicable, the AAA, the
arbitrators and the parties shall take all action required to conclude any
arbitration proceeding within 180 days of the filing of the Dispute with the
AAA. No arbitrator or other party to an arbitration proceeding may disclose the
existence, content or results thereof, except for disclosures of information by
a party required in the ordinary course of its business, by applicable law or
regulation, or to the extent necessary to exercise any judicial review rights
set forth herein. If more than one agreement for arbitration by or between the
parties potentially applies to a Dispute, the arbitration provision most
directly related to the Loan Documents or the subject matter of the Dispute
shall control. This arbitration provision shall survive termination, amendment
or expiration of any of the Loan Documents or any relationship between the
parties.
NOTICE: THIS DOCUMENT AND ALL OTHER DOCUMENTS RELATING TO THE INDEBTEDNESS
CONSTITUTE A WRITTEN LOAN AGREEMENT WHICH REPRESENTS THE FINAL AGREEMENT BETWEEN
THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR
SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL
AGREEMENTS BETWEEN THE PARTIES RELATING TO THE INDEBTEDNESS.
<PAGE>
Houston Casualty Company
April 30, 1997
Page 15
Your acknowledgment of this letter shall constitute acceptance of the
foregoing terms and conditions. Bank's commitment to extend any credit to
Borrower pursuant to the terms of this letter shall terminate on September 15,
1997, unless this letter is acknowledged by Borrower and returned to Bank on
or before that date.
Sincerely,
WELLS FARGO BANK (TEXAS),
NATIONAL ASSOCIATION
By: /s/ Jonathan Homeyer
-----------------------------
Jonathan Homeyer
Relationship Manager
Acknowledged and accepted as of April 30, 1997:
HOUSTON CASUALTY COMPANY
By: /s/ Frank J. Bramanti
----------------------------
Title: EVP & CFO
<PAGE>
CREDIT AGREEMENT
THIS AGREEMENT is entered into as of ___________________, 1997, by and
between HCC INSURANCE HOLDINGS, INC., a Delaware corporation ("Borrower"),
and WELLS FARGO BANK (TEXAS), NATIONAL ASSOCIATION ("Bank").
RECITAL
Borrower has requested from Bank the credit accommodation described
below, and Bank has agreed to provide said credit accommodation to Borrower
on the terms and conditions contained herein.
NOW, THEREFORE, for valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, Bank and Borrower hereby agree as follows:
ARTICLE I
THE CREDIT
SECTION 1.1. LINE OF CREDIT.
(a) LINE OF CREDIT. Subject to the terms and conditions of this
Agreement, Bank hereby agrees to make advances to Borrower from time to time
up to and including April 30, 1998, not to exceed at any time the aggregate
principal amount of SIXTEEN MILLION FIVE HUNDRED THOUSAND AND NO/100 Dollars
($16,500,000.00) ("Line of Credit"), the proceeds of which shall be used for
working capital. Borrower's obligation to repay advances under the Line of
Credit shall be evidenced by a promissory note substantially in the form of
Exhibit "A" attached hereto ("Line of Credit Note"), all terms of which are
incorporated herein by this reference.
(b) BORROWING AND REPAYMENT. Borrower may from time to time during the
term of the Line of Credit borrow, partially or wholly repay its outstanding
borrowings, and reborrow, subject to all of the limitations, terms and
conditions contained herein or in the Line of Credit Note; provided however,
that the total outstanding borrowings under the Line of Credit shall not at
any time exceed the maximum principal amount available thereunder, as set
forth above.
SECTION 1.2. INTEREST/FEES.
(a) INTEREST. The outstanding principal balance of the Line of Credit
Note shall bear interest at the rate of interest set forth in the Line of
Credit Note.
(b) COMPUTATION AND PAYMENT. Interest shall be computed on the basis of
a 360-day year, actual days elapsed, unless such calculation would result in
a usurious rate, in which case interest shall be computed on the basis of a
365/366-day year, as the case may be, actual days elapsed. Interest shall be
payable at the times and place set forth in the Line of Credit Note.
(c) UNUSED COMMITMENT FEE. Borrower shall pay to Bank a fee equal to
one-quarter percent (1/4%) per annum (computed on the basis of a 360-day
year, actual days elapsed) on the average daily unused amount of the Line of
Credit, which fee shall be calculated on a quarterly basis by Bank and shall
be due and payable by Borrower in arrears and Bank shall be entitled to debit
the accounts of Borrower at Bank for such fees.
1
<PAGE>
SECTION 1.3. COLLATERAL.
As security for all indebtedness of Borrower to Bank subject hereto,
Borrower hereby grants to Bank security interests of first priority in 100%
of the outstanding stock of Houston Casualty Company.
All of the foregoing shall be evidenced by and subject to the terms of such
security agreements, financing statements, deeds of trust and other documents
as Bank shall reasonably require, all in form and substance satisfactory to
Bank. Borrower shall reimburse Bank immediately upon demand for all costs and
expenses incurred by Bank in connection with any of the foregoing security,
including without limitation, filing and recording fees and costs of
appraisals, audits and title insurance.
SECTION 1.4. TERM LOAN.
(a) Term Loan. Bank has made a loan to Borrower in the original
principal amount of Twenty Million and No/100 Dollars ($20,000,000.00) ("Term
Loan"), as evidenced by a promissory note dated November 29, 1994 ("Term
Note").
(b) Repayment. Principal and interest on the Term Loan shall be repaid
in accordance with the provisions of the Term Note.
(c) Borrower expressly agrees that any default in the Term Note or in
any documents executed in connection with or securing the Term Note or
default in any other debt now or hereafter owed to Bank by Borrower or any of
its subsidiaries or affiliates shall constitute a default under the Line of
Credit Note, and that any default in the Line of Credit Note or any document
executed in connection with or securing the Line of Credit Note or default in
any other debt now or hereafter owed to Bank by Borrower or any of its
subsidiaries or affiliates shall constitute a default in the Term Note.
ARTICLE II
REPRESENTATIONS AND WARRANTIES
Borrower makes the following representations and warranties to Bank,
which representations and warranties shall survive the execution of this
Agreement and shall continue in full force and effect until the full and
final payment, and satisfaction and discharge, of all obligations of Borrower
to Bank subject to this Agreement.
SECTION 2.1. LEGAL STATUS. Borrower is a corporation, duly organized
and existing and in good standing under the laws of the State of Delaware,
and is qualified or licensed to do business (and is in good standing as a
foreign corporation, if applicable) in all jurisdictions in which such
qualification or licensing is required or in which the failure to so qualify
or to be so licensed could have a material adverse effect on Borrower.
SECTION 2.2. AUTHORIZATION AND VALIDITY. This Agreement, the Line of
Credit Note, and each other document, contract and instrument required hereby
or at any time hereafter delivered to Bank in connection herewith
(collectively, the "Loan Documents") have been duly authorized, and upon
their execution and delivery in accordance with the provisions hereof will
constitute legal, valid and binding agreements and obligations of Borrower or
the party which executes the same, enforceable in accordance with their
respective terms.
SECTION 2.3. NO VIOLATION. The execution, delivery and performance by
Borrower of each of the Loan Documents do not violate any provision of any
law or regulation, or contravene any provision of the Articles of
Incorporation or By-Laws of Borrower, or result in any breach of or default
under any
2
<PAGE>
contract, obligation, indenture or other instrument to which Borrower is a
party or by which Borrower may be bound.
SECTION 2.4. LITIGATION. There are no pending, or to the best of
Borrower's knowledge threatened, actions, claims, investigations, suits or
proceedings by or before any governmental authority, arbitrator, court or
administrative agency which could have a material adverse effect on the
financial condition or operation of Borrower other than those disclosed by
Borrower to Bank in writing prior to the date hereof.
SECTION 2.5. CORRECTNESS OF FINANCIAL STATEMENT. The financial
statement of Borrower dated March 31, 1997, a true copy of which has been
delivered by Borrower to Bank prior to the date hereof, (a) is complete and
correct and presents fairly the financial condition of Borrower, (b)
discloses all liabilities of Borrower that are required to be reflected or
reserved against under generally accepted accounting principles, whether
liquidated or unliquidated, fixed or contingent, and (c) has been prepared in
accordance with generally accepted accounting principles consistently
applied. Since the date of such financial statement there has been no
material adverse change in the financial condition of Borrower, nor has
Borrower mortgaged, pledged, granted a security interest in or otherwise
encumbered any of its assets or properties except in favor of Bank or as
otherwise permitted by Bank in writing.
SECTION 2.6. INCOME TAX RETURNS. Borrower has no knowledge of any
pending assessments or adjustments of its income tax payable with respect to
any year.
SECTION 2.7. NO SUBORDINATION. There is no agreement, indenture,
contract or instrument to which Borrower is a party or by which Borrower may
be bound that requires the subordination in right of payment of any of
Borrower's obligations subject to this Agreement to any other obligation of
Borrower.
SECTION 2.8. PERMITS, FRANCHISES. Borrower possesses, and will
hereafter possess, all permits, consents, approvals, franchises and licenses
required and rights to all trademarks, trade names, patents, and fictitious
names, if any, necessary to enable it to conduct the business in which it is
now engaged in compliance with applicable law.
SECTION 2.9. ERISA. Borrower is in compliance in all material respects
with all applicable provisions of the Employee Retirement Income Security Act
of 1974, as amended or recodified from time to time ("ERISA"); Borrower has
not violated any provision of any defined employee pension benefit plan (as
defined in ERISA) maintained or contributed to by Borrower (each, a "Plan");
no Reportable Event as defined in ERISA has occurred and is continuing with
respect to any Plan initiated by Borrower; Borrower has met its minimum
funding requirements under ERISA with respect to each Plan; and each Plan
will be able to fulfill its benefit obligations as they come due in
accordance with the Plan documents and under generally accepted accounting
principles.
SECTION 2.10. OTHER OBLIGATIONS. Borrower is not in default on any
obligation for borrowed money, any purchase money obligation or any other
material lease, commitment, contract, instrument or obligation.
SECTION 2.11. ENVIRONMENTAL MATTERS. Except as disclosed by Borrower to
Bank in writing prior to the date hereof, Borrower is in compliance in all
material respects with all applicable federal or state environmental,
hazardous waste, health and safety statutes, and any rules or regulations
adopted pursuant thereto, which govern or affect any of Borrower's operations
and/or properties, including without limitation, the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, the Superfund
Amendments and Reauthorization Act of 1986, the Federal Resource Conservation
and Recovery Act of 1976, and the Federal Toxic Substances Control Act, as
any of the same may be amended, modified or supplemented from time to time.
None of the operations of Borrower is the subject of any federal or state
investigation evaluating whether any remedial action involving a material
3
<PAGE>
expenditure is needed to respond to a release of any toxic or hazardous waste
or substance into the environment. Borrower has no material contingent
liability in connection with any release of any toxic or hazardous waste or
substance into the environment.
ARTICLE III
CONDITIONS
SECTION 3.1. CONDITIONS OF INITIAL EXTENSION OF CREDIT. The obligation
of Bank to extend any credit contemplated by this Agreement is subject to the
fulfillment to Bank's satisfaction of all of the following conditions:
(a) APPROVAL OF BANK COUNSEL. All legal matters incidental to the
extension of credit by Bank shall be satisfactory to Bank's counsel.
(b) DOCUMENTATION. Bank shall have received, in form and substance
satisfactory to Bank, each of the following, duly executed:
(i) This Agreement and the Line of Credit Note.
(ii) General Pledge Agreement.
(iii) Certified Copy of Resolutions
(iv) Notice and Acknowledgment of No Oral Agreement
(v) Attorney Representation Notice
(vi) Borrower's Affidavit
(vii) Borrower's Certificate
(viii) Statement of Purpose for an Extension of Credit Secured by Margin
Stock
(ix) Such other documents as Bank may require under any other Section of
this Agreement.
(c) FINANCIAL CONDITION. There shall have been no material adverse
change, as determined by Bank, in the financial condition or business of
Borrower, nor any material decline, as determined by Bank, in the market
value of any collateral required hereunder or a substantial or material
portion of the assets of Borrower.
(d) INSURANCE. Borrower shall carry insurance coverage on all
Borrower's property, in form, substance, amounts, covering risks and issued
by companies satisfactory to Bank, and where required by Bank and customary
for the industry of Borrower, with loss payable endorsements in favor of Bank.
SECTION 3.2. CONDITIONS OF EACH EXTENSION OF CREDIT. The obligation of
Bank to make each extension of credit requested by Borrower hereunder shall
be subject to the fulfillment to Bank's satisfaction of each of the following
conditions:
(a) COMPLIANCE. The representations and warranties contained herein and
in each of the other Loan Documents shall be true on and as of the date of
the signing of this Agreement and on the date of each extension of credit by
Bank pursuant hereto, with the same effect as though such representations and
warranties had been made on and as of each such date, and on each such date,
no Event of Default as defined herein, and no condition, event or act which
with the giving of notice or the passage of time or both would constitute
such an Event of Default, shall have occurred and be continuing or shall
exist.
(b) DOCUMENTATION. Bank shall have received all additional documents
which may be required in connection with such extension of credit.
4
<PAGE>
ARTICLE IV
AFFIRMATIVE COVENANTS
Borrower covenants that so long as Bank remains committed to extend
credit to Borrower pursuant hereto, or any liabilities (whether direct or
contingent, liquidated or unliquidated) of Borrower to Bank under any of the
Loan Documents remain outstanding, and until payment in full of all
obligations of Borrower subject hereto, Borrower shall, unless Bank otherwise
consents in writing:
SECTION 4.1. PUNCTUAL PAYMENTS. Punctually pay all principal,
interest, fees or other liabilities due under any of the Loan Documents at
the times and place and in the manner specified therein, and immediately upon
demand by Bank, the amount by which the outstanding principal balance of the
Line of Credit Note at any time exceeds any limitation on borrowings
applicable thereto. Borrower authorizes Bank to debit Borrower's accounts at
Bank for all principal, interest, fees or other liabilities due to Bank under
any of the Loan Documents.
SECTION 4.2. ACCOUNTING RECORDS. Maintain adequate books and records
in accordance with generally accepted accounting principles consistently
applied, and permit any representative of Bank, at any reasonable time, to
inspect, audit and examine such books and records, to make copies of the
same, and to inspect the properties of Borrower.
SECTION 4.3. FINANCIAL STATEMENTS. Provide to Bank all of the
following, in form and detail satisfactory to Bank:
(a) not later than one hundred twenty (120) days after and as of the end
of each fiscal year, an audited financial statement of Borrower, prepared by
a Certified Public Accountant acceptable to Bank, to include a copy of form
10-K of Borrower;
(b) not later than ninety (90) days after and as of the end of each
quarter, a financial statement of Borrower, prepared by Borrower, to include
a copy of Form 10-Q of Borrower;
(c) contemporaneously with each annual and quarterly financial statement
of Borrower required hereby, a certificate of the president or chief
financial officer of Borrower that said financial statements are accurate and
that there exists no Event of Default nor any condition, act or event which
with the giving of notice or the passage of time or both would constitute an
Event of Default;
(d) from time to time such other information as Bank may reasonably
request.
SECTION 4.4. COMPLIANCE. Preserve and maintain all licenses, permits,
governmental approvals, rights, privileges and franchises necessary for the
conduct of its business; and comply with the provisions of all documents
pursuant to which Borrower is organized and/or which govern Borrower's
continued existence and with the requirements of all laws, rules, regulations
and orders of any governmental authority applicable to Borrower and/or its
business.
SECTION 4.5. INSURANCE. Maintain and keep in force insurance of the
types and in amounts customarily carried in lines of business similar to that
of Borrower, including but not limited to fire, extended coverage, public
liability, flood, property damage and workers' compensation, with all such
insurance carried with companies and in amounts satisfactory to Bank, and
deliver to Bank from time to time at Bank's request schedules setting forth
all insurance then in effect.
SECTION 4.6. FACILITIES. Keep all properties useful or necessary to
Borrower's business in good repair and condition, and from time to time make
necessary repairs, renewals and replacements thereto so that such properties
shall be fully and efficiently preserved and maintained.
5
<PAGE>
SECTION 4.7. TAXES AND OTHER LIABILITIES. Pay and discharge when due
any and all indebtedness, obligations, assessments and taxes, both real or
personal, including without limitation Federal and state income taxes and
state and local property taxes and assessments, except such (a) as Borrower
may in good faith contest or as to which a bona fide dispute may arise, and
(b) for which Borrower has made provision, to Bank's satisfaction, for
eventual payment thereof in the event Borrower is obligated to make such
payment.
SECTION 4.8. LITIGATION. Promptly give notice in writing to Bank of
any litigation pending or threatened against Borrower with a claim in excess
of $100,000.00.
SECTION 4.9. FINANCIAL CONDITION. Maintain Borrower's financial
condition as follows using generally accepted accounting principles
consistently applied and used consistently with prior practices (except to
the extent modified by the definitions herein), with compliance determined
commencing with Borrower's financial statements for the period ending March
31, 1997:
(a) statutory Capital and Surplus of Borrower's insurance company
subsidiaries not at anytime less than $200,000,000.00. Capital and Surplus
shall equal common stock plus additional paid in capital plus retained
earnings plus net unrealized investment gain (loss).
(b) the statutory Combined Ratio of Borrower's insurance company
subsidiaries for each fiscal quarter of Borrower not at anytime greater than
105% per consolidated financial statements of Borrower. Combined Ratio for a
particular period of time, with respect to Borrower shall mean the sum of 1)
the loss ratio percentage of Borrower, which shall be losses incurred plus
loss expense incurred for such period divided by premiums earned by Borrower
for such period, and 2) the expense ratio percentage of Borrower, which shall
be other net operating expenses incurred for such period divided by net
premiums earned by Borrower for such period, as such items would be reflected
on a consolidated financial statement of Borrower for such period.
SECTION 4.10. NOTICE TO BANK. Promptly (but in no event more than five
(5) days after the occurrence of each such event or matter) give written
notice to Bank in reasonable detail of: (a) the occurrence of any Event of
Default, or any condition, event or act which with the giving of notice or
the passage of time or both would constitute an Event of Default; (b) any
change in the name or the organizational structure of Borrower; (c) the
occurrence and nature of any Reportable Event or Prohibited Transaction, each
as defined in ERISA, or any funding deficiency with respect to any Plan; or
(d) any termination or cancellation of any insurance policy which Borrower is
required to maintain, or any uninsured or partially uninsured loss through
liability or property damage, or through fire, theft or any other cause
affecting Borrower's property in excess of an aggregate of $100,000.00.
SECTION 4.11. SUBSIDIARY REQUIREMENTS. Ensure that:
(a) the total of all equity securities owned by Houston Casualty Company
in non-affiliated entities shall at no time from and after the date hereof
exceed 15% of total cash and invested assets of Houston Casualty Company per
statutory financial statements for such time.
(b) all investments in bonds by Houston Casualty Company will from and
after the date hereof be of investment grade quality, except as set out
herein. The non-investment grade debt securities of Houston Casualty Company
shall not exceed five percent (5%) of the Total Invested Assets of Houston
Casualty Company; non-investment grade debt securities are defined as debt
securities that Moody's or Standard & Poor would classify with less than an A
rating; Total Invested Assets of Houston Casualty Company are defined as cash
and invested assets as indicated in the statutory financial statements of
Houston Casualty Company prepared in accordance with requirements of the
State Board of Insurance of Texas;
6
<PAGE>
(c) the total of all equity securities owned by International Marine &
General Insurance Company, Ltd., a Jordanian exempt company ("IMG") in
non-affiliated entities shall at no time from and after the date hereof,
exceed 15% of total cash and invested assets of IMG per the financial
statements of IMG for such time prepared in accordance with generally
accepted accounting principles.
ARTICLE V
NEGATIVE COVENANTS
Borrower further covenants that so long as Bank remains committed to
extend credit to Borrower pursuant hereto, or any liabilities (whether direct
or contingent, liquidated or unliquidated) of Borrower to Bank under any of
the Loan Documents remain outstanding, and until payment in full of all
obligations of Borrower subject hereto, Borrower will not without Bank's
prior written consent:
SECTION 5.1. USE OF FUNDS. Use any of the proceeds of any credit
extended hereunder except for the purposes stated in Article I hereof.
SECTION 5.2. OTHER INDEBTEDNESS. Create, incur, assume or permit to
exist with respect to Borrower, Houston Casualty Company or IMG, any
indebtedness or liabilities resulting from borrowings, loans or advances,
whether secured or unsecured, matured or unmatured, liquidated or
unliquidated, joint or several, except (a) the liabilities of Borrower to
Bank, (b) any other liabilities of Borrower existing as of, and disclosed to
Bank prior to, the date hereof and accounts payable and other accrued
liabilities in the normal course of Borrower's business, and (c) other
indebtedness of Borrower and its subsidiaries to creditors other than Bank
not exceeding $5,000,000.00 in the aggregate at any time.
SECTION 5.3. MERGER, CONSOLIDATION, TRANSFER OF ASSETS. Unless
Borrower is the surviving entity, merge into or consolidate with any other
entity; make any substantial change in the nature of Borrower's business as
conducted as of the date hereof; acquire all or substantially all of the
assets of any other entity; nor sell, lease, transfer or otherwise dispose of
all or a substantial or material portion of Borrower's assets except in the
ordinary course of its business.
SECTION 5.4. GUARANTIES. Guarantee or become liable in any way as
surety, endorser (other than as endorser of negotiable instruments for
deposit or collection in the ordinary course of business), accommodation
endorser or otherwise for, nor pledge or hypothecate any assets of Borrower
as security for, any liabilities or obligations of any other person or
entity, except any of the foregoing in favor of Bank.
SECTION 5.5. LOANS, ADVANCES, INVESTMENTS. Make any loans or advances
to or investments in any person or entity, except any of the foregoing
existing as of, and disclosed to Bank prior to, the date hereof.
SECTION 5.6. DIVIDENDS, DISTRIBUTIONS. Declare or pay any dividends or
distributions in excess of $10,000,000.00 in the aggregate per fiscal year of
Borrower either in cash, stock or any other property on Borrower's stock now
or hereafter outstanding, nor redeem, retire, repurchase or otherwise acquire
any shares of any class of Borrower's stock now or hereafter outstanding.
SECTION 5.7. PLEDGE OF ASSETS. Mortgage, pledge, grant or permit to
exist a security interest in, or lien upon, all or any portion of Borrower's
assets now owned or hereafter acquired, except any of the foregoing in favor
of Bank or which is existing as of, and disclosed to Bank in writing prior
to, the date hereof.
7
<PAGE>
ARTICLE VI
EVENTS OF DEFAULT
SECTION 6.1. The occurrence of any of the following shall constitute an
"Event of Default" under this Agreement:
(a) Borrower shall fail to pay when due any principal, interest, fees or
other amounts payable under any of the Loan Documents.
(b) Any financial statement or certificate furnished to Bank in
connection with, or any representation or warranty made by Borrower or any
other party under this Agreement or any other Loan Document shall prove to be
incorrect, false or misleading in any material respect when furnished or made.
(c) Any default in the performance of or compliance with any obligation,
agreement or other provision contained herein or in any other Loan Document
(other than those referred to in subsections (a) and (b) above), and with
respect to any such default which by its nature can be cured, such default
shall continue for a period of twenty (20) days from its occurrence.
(d) Any default in the payment or performance of any obligation, or any
defined event of default, under the terms of any contract or instrument
(other than any of the Loan Documents) pursuant to which Borrower has
incurred any debt or other liability to any person or entity, including Bank.
(e) The filing of a notice of judgment lien against Borrower; or the
recording of any abstract of judgment against Borrower in any county in which
Borrower has an interest in real property; or the service of a notice of levy
and/or of a writ of attachment or execution, or other like process, against
the assets of Borrower; or the entry of a judgment against Borrower.
(f) Borrower shall become insolvent, or shall suffer or consent to or
apply for the appointment of a receiver, trustee, custodian or liquidator of
itself or any of its property, or shall generally fail to pay its debts as
they become due, or shall make a general assignment for the benefit of
creditors; Borrower shall file a voluntary petition in bankruptcy, or seeking
reorganization, in order to effect a plan or other arrangement with creditors
or any other relief under the Bankruptcy Reform Act, Title 11 of the United
States Code, as amended or recodified from time to time ("Bankruptcy Code"),
or under any state or federal law granting relief to debtors, whether now or
hereafter in effect; or any involuntary petition or proceeding pursuant to
the Bankruptcy Code or any other applicable state or federal law relating to
bankruptcy, reorganization or other relief for debtors is filed or commenced
against Borrower, or Borrower shall file an answer admitting the jurisdiction
of the court and the material allegations of any involuntary petition; or
Borrower shall be adjudicated a bankrupt, or an order for relief shall be
entered against Borrower by any court of competent jurisdiction under the
Bankruptcy Code or any other applicable state or federal law relating to
bankruptcy, reorganization or other relief for debtors.
(g) There shall exist or occur any event or condition which Bank in good
faith believes impairs, or is substantially likely to impair, the prospect of
payment or performance by Borrower of its obligations under any of the Loan
Documents.
(h) The dissolution or liquidation of Borrower; or Borrower, or any of
its directors, stockholders or members, shall take action seeking to effect
the dissolution or liquidation of Borrower.
SECTION 6.2. REMEDIES. Upon the occurrence of any Event of Default:
(a) all principal and accrued and unpaid interest outstanding under each of
the Loan Documents, any term thereof to the contrary notwithstanding, shall
at Bank's option and without notice become immediately due and payable
without presentment, demand, or any notices of any kind, including without
limitation notice of nonperformance, notice of protest, protest, notice of
dishonor, notice of intention to accelerate or notice
8
<PAGE>
of acceleration, all of which are hereby expressly waived by each Borrower;
(b) the obligation, if any, of Bank to extend any further credit under any of
the Loan Documents shall immediately cease and terminate; and (c) Bank shall
have all rights, powers and remedies available under each of the Loan
Documents, or accorded by law, including without limitation the right to
resort to any or all security for any credit accommodation from Bank subject
hereto and to exercise any or all of the rights of a beneficiary or secured
party pursuant to applicable law. All rights, powers and remedies of Bank
may be exercised at any time by Bank and from time to time after the
occurrence of an Event of Default, are cumulative and not exclusive, and
shall be in addition to any other rights, powers or remedies provided by law
or equity.
ARTICLE VII
MISCELLANEOUS
SECTION 7.1. NO WAIVER. No delay, failure or discontinuance of Bank in
exercising any right, power or remedy under any of the Loan Documents shall
affect or operate as a waiver of such right, power or remedy; nor shall any
single or partial exercise of any such right, power or remedy preclude, waive
or otherwise affect any other or further exercise thereof or the exercise of
any other right, power or remedy. Any waiver, permit, consent or approval of
any kind by Bank of any breach of or default under any of the Loan Documents
must be in writing and shall be effective only to the extent set forth in
such writing.
SECTION 7.2. NOTICES. All notices, requests and demands which any
party is required or may desire to give to any other party under any
provision of this Agreement must be in writing delivered to each party at the
following address:
BORROWER: HCC INSURANCE HOLDINGS, INC.
13403 Northwest Freeway, Suite 200
Houston, Texas 77040
BANK: WELLS FARGO BANK (TEXAS),
NATIONAL ASSOCIATION
1000 Louisiana, 3rd Floor
Houston, Texas 77002
Attn: Jonathan C. Homeyer
or to such other address as any party may designate by written notice to all
other parties. Each such notice, request and demand shall be deemed given or
made as follows: (a) if sent by hand delivery, upon delivery; (b) if sent by
mail, upon the earlier of the date of receipt or three (3) days after deposit
in the U.S. mail, first class and postage prepaid; and (c) if sent by
telecopy, upon receipt.
SECTION 7.3. COSTS, EXPENSES AND ATTORNEYS' FEES. Borrower shall pay
to Bank immediately upon demand the full amount of all payments, advances,
charges, costs and expenses, including reasonable attorneys' fees (to include
outside counsel fees and all allocated costs of Bank's in-house counsel to
the extent permissible), expended or incurred by Bank in connection with (a)
the negotiation and preparation of this Agreement and the other Loan
Documents, Bank's continued administration hereof and thereof, and the
preparation of any amendments and waivers hereto and thereto, (b) the
enforcement of Bank's rights and/or the collection of any amounts which
become due to Bank under any of the Loan Documents, and (c) the prosecution
or defense of any action in any way related to any of the Loan Documents,
including without limitation, any action for declaratory relief, whether
incurred at the trial or appellate level, in an arbitration proceeding or
otherwise, and including any of the foregoing incurred in connection with any
bankruptcy proceeding (including without limitation, any adversary
proceeding, contested matter or motion brought by Bank or any other person)
relating to any Borrower or any other person or entity.
9
<PAGE>
SECTION 7.4. SUCCESSORS, ASSIGNMENT. This Agreement shall be binding
upon and inure to the benefit of the heirs, executors, administrators, legal
representatives, successors and assigns of the parties; provided however,
that Borrower may not assign or transfer its interest hereunder without
Bank's prior written consent. Bank reserves the right to sell, assign,
transfer, negotiate or grant participations in all or any part of, or any
interest in, Bank's rights and benefits under each of the Loan Documents. In
connection therewith, Bank may disclose all documents and information which
Bank now has or may hereafter acquire relating to any credit extended by Bank
to Borrower, Borrower or its business, or any collateral required hereunder.
SECTION 7.5. ENTIRE AGREEMENT; AMENDMENT. This Agreement and the other
Loan Documents constitute the entire agreement between Borrower and Bank with
respect to any extension of credit by Bank subject hereto and supersede all
prior negotiations, communications, discussions and correspondence concerning
the subject matter hereof. This Agreement may be amended or modified only by
a written instrument executed by each party hereto.
SECTION 7.6. NO THIRD PARTY BENEFICIARIES. This Agreement is made and
entered into for the sole protection and benefit of the parties hereto and
their respective permitted successors and assigns, and no other person or
entity shall be a third party beneficiary of, or have any direct or indirect
cause of action or claim in connection with, this Agreement or any other of
the Loan Documents to which it is not a party.
SECTION 7.7. TIME. Time is of the essence of each and every provision
of this Agreement and each other of the Loan Documents.
SECTION 7.8. SEVERABILITY OF PROVISIONS. If any provision of this
Agreement shall be prohibited by or invalid under applicable law, such
provision shall be ineffective only to the extent of such prohibition or
invalidity without invalidating the remainder of such provision or any
remaining provisions of this Agreement.
SECTION 7.9. COUNTERPARTS. This Agreement may be executed in any
number of counterparts, each of which when executed and delivered shall be
deemed to be an original, and all of which when taken together shall
constitute one and the same Agreement.
SECTION 7.10. GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of Texas.
SECTION 7.11. SAVINGS CLAUSE. It is the intention of the parties to
comply strictly with applicable usury laws. Accordingly, notwithstanding any
provision to the contrary in the Loan Documents, in no event shall any Loan
Documents require the payment or permit the payment, taking, reserving,
receiving, collection or charging of any sums constituting interest under
applicable laws that exceed the maximum amount permitted by such laws, as the
same may be amended or modified from time to time (the "Maximum Rate"). If
any such excess interest is called for, contracted for, charged, taken,
reserved or received in connection with any Loan Documents, or in any
communication by Lender or any other person to Borrower or any other person,
or in the event that all or part of the principal or interest hereof or
thereof shall be prepaid or accelerated, so that under any of such
circumstances or under any other circumstance whatsoever the amount of
interest contracted for, charged, taken, reserved or received on the amount
of principal actually outstanding from time to time under the Loan Documents
shall exceed the Maximum Rate, then in such event it is agreed that: (i) the
provisions of this paragraph shall govern and control; (ii) neither Borrower
nor any other person or entity now or hereafter liable for the payment of any
Loan Documents shall be obligated to pay the amount of such interest to the
extent it is in excess of the Maximum Rate; (iii) any such excess interest
which is or has been received by Lender, notwithstanding this paragraph,
shall be credited against the then unpaid principal balance hereof or
thereof, or if any of the Loan Documents has been or would be paid in full by
such credit, refunded to Borrower; and (iv) the
10
<PAGE>
provisions of each of the Loan Documents, and any other communication to
Borrower, shall immediately be deemed reformed and such excess interest
reduced, without the necessity of executing any other document, to the
Maximum Rate. The right to accelerate the maturity of the Loan Documents
does not include the right to accelerate, collect or charge unearned
interest, but only such interest that has otherwise accrued as of the date of
acceleration. Without limiting the foregoing, all calculations of the rate
of interest contracted for, charged, taken, reserved or received in
connection with any of the Loan Documents which are made for the purpose of
determining whether such rate exceeds the Maximum Rate shall be made to the
extent permitted by applicable laws by amortizing, prorating, allocating and
spreading during the period of the full term of such Loan Documents,
including all prior and subsequent renewals and extensions hereof or thereof,
all interest at any time contracted for, charged, taken, reserved or received
by Lender. The terms of this paragraph shall be deemed to be incorporated
into each of the other Loan Documents.
To the extent that Article 5069-1.04 of the Texas Revised Civil Statutes
is relevant to Lender for the purpose of determining the Maximum Rate, Bank
hereby elects to determine the applicable rate ceiling under such Article by
the indicated (weekly) rate ceiling from time to time in effect, subject to
Lender's right subsequently to change such method in accordance with
applicable law, as the same may be amended or modified from time to time.
SECTION 7.12. RIGHT OF SETOFF; DEPOSIT ACCOUNTS. Upon and after the
occurrence of an Event of Default, (a) Borrower hereby authorizes Bank, at
any time and from time to time, without notice, which is hereby expressly
waived by each Borrower, and whether or not Bank shall have declared any
credit extended hereunder to be due and payable in accordance with the terms
hereof, to set off against, and to appropriate and apply to the payment of,
Borrower's obligations and liabilities under the Loan Documents (whether
matured or unmatured, fixed or contingent, liquidated or unliquidated), any
and all amounts owing by Bank to Borrower (whether payable in U.S. dollars or
any other currency, whether matured or unmatured, and in the case of
deposits, whether general or special (except trust and escrow accounts), time
or demand and however evidenced), and (b) pending any such action, to the
extent necessary, to hold such amounts as collateral to secure such
obligations and liabilities and to return as unpaid for insufficient funds
any and all checks and other items drawn against any deposits so held as
Bank, in its sole discretion, may elect. Borrower hereby grants to Bank a
security interest in all deposits and accounts maintained with Bank and with
any other financial institution to secure the payment of all obligations and
liabilities of Borrower to Bank under the Loan Documents.
SECTION 7.13. BUSINESS PURPOSE. Borrower represents and warrants that
any credit extended hereunder is for a business, commercial, investment,
agricultural or other similar purpose and not primarily for a personal,
family or household use.
SECTION 7.14. ARBITRATION.
(a) ARBITRATION. Upon the demand of any party, any Dispute shall be
resolved by binding arbitration (except as set forth in (e) below) in
accordance with the terms of this Agreement. A "Dispute" shall mean any
action, dispute, claim or controversy of any kind, whether in contract or
tort, statutory or common law, legal or equitable, now existing or hereafter
arising under or in connection with, or in any way pertaining to, any of the
Loan Documents, or any past, present or future extensions of credit and other
activities, transactions or obligations of any kind related directly or
indirectly to any of the Loan Documents, including without limitation, any of
the foregoing arising in connection with the exercise of any self-help,
ancillary or other remedies pursuant to any of the Loan Documents. Any party
may by summary proceedings bring an action in court to compel arbitration of
a Dispute. Any party who fails or refuses to submit to arbitration following
a lawful demand by any other party shall bear all costs and expenses incurred
by such other party in compelling arbitration of any Dispute.
(b) GOVERNING RULES. Arbitration proceedings shall be administered by
the American Arbitration Association ("AAA") or such other administrator as
the parties shall mutually agree upon in accordance
11
<PAGE>
with the AAA Commercial Arbitration Rules. All Disputes submitted to
arbitration shall be resolved in accordance with the Federal Arbitration Act
(Title 9 of the United States Code), notwithstanding any conflicting choice
of law provision in any of the Loan Documents. The arbitration shall be
conducted at a location in Texas selected by the AAA or other administrator.
If there is any inconsistency between the terms hereof and any such rules,
the terms and procedures set forth herein shall control. All statutes of
limitation applicable to any Dispute shall apply to any arbitration
proceeding. All discovery activities shall be expressly limited to matters
directly relevant to the Dispute being arbitrated. Judgment upon any award
rendered in an arbitration may be entered in any court having jurisdiction;
provided however, that nothing contained herein shall be deemed to be a
waiver by any party that is a bank of the protections afforded to it under 12
U.S.C. Section 91 or any similar applicable state law.
(c) NO WAIVER; PROVISIONAL REMEDIES, SELF-HELP AND FORECLOSURE. No
provision hereof shall limit the right of any party to exercise self-help
remedies such as setoff, foreclosure against or sale of any real or personal
property collateral or security, or to obtain provisional or ancillary
remedies, including without limitation injunctive relief, sequestration,
attachment, garnishment or the appointment of a receiver, from a court of
competent jurisdiction before, after or during the pendency of any
arbitration or other proceeding. The exercise of any such remedy shall not
waive the right of any party to compel arbitration hereunder.
(d) ARBITRATOR QUALIFICATIONS AND POWERS; AWARDS. Arbitrators must be
active members of the Texas State Bar with expertise in the substantive laws
applicable to the subject matter of the Dispute. Arbitrators are empowered
to resolve Disputes by summary rulings in response to motions filed prior to
the final arbitration hearing. Arbitrators (i) shall resolve all Disputes in
accordance with the substantive law of the state of Texas, (ii) may grant any
remedy or relief that a court of the state of Texas could order or grant
within the scope hereof and such ancillary relief as is necessary to make
effective any award, and (iii) shall have the power to award recovery of all
costs and fees, to impose sanctions and to take such other actions as they
deem necessary to the same extent a judge could pursuant to the Federal Rules
of Civil Procedure, the Texas Rules of Civil Procedure or other applicable
law. Any Dispute in which the amount in controversy is $5,000,000 or less
shall be decided by a single arbitrator who shall not render an award of
greater than $5,000,000 (including damages, costs, fees and expenses). By
submission to a single arbitrator, each party expressly waives any right or
claim to recover more than $5,000,000. Any Dispute in which the amount in
controversy exceeds $5,000,000 shall be decided by majority vote of a panel
of three arbitrators; provided however, that all three arbitrators must
actively participate in all hearings and deliberations.
(e) JUDICIAL REVIEW. Notwithstanding anything herein to the contrary,
in any arbitration in which the amount in controversy exceeds $25,000,000,
the arbitrators shall be required to make specific, written findings of fact
and conclusions of law. In such arbitrations (i) the arbitrators shall not
have the power to make any award which is not supported by substantial
evidence or which is based on legal error, (ii) an award shall not be binding
upon the parties unless the findings of fact are supported by substantial
evidence and the conclusions of law are not erroneous under the substantive
law of the state of Texas, and (iii) the parties shall have in addition to
the grounds referred to in the Federal Arbitration Act for vacating,
modifying or correcting an award the right to judicial review of (A) whether
the findings of fact rendered by the arbitrators are supported by substantial
evidence, and (B) whether the conclusions of law are erroneous under the
substantive law of the state of Texas. Judgment confirming an award in such
a proceeding may be entered only if a court determines the award is supported
by substantial evidence and not based on legal error under the substantive
law of the state of Texas.
(f) MISCELLANEOUS. To the maximum extent practicable, the AAA, the
arbitrators and the parties shall take all action required to conclude any
arbitration proceeding within 180 days of the filing of the Dispute with the
AAA. No arbitrator or other party to an arbitration proceeding may disclose
the existence, content or results thereof, except for disclosures of
information by a party required in the ordinary course of its business, by
applicable law or regulation, or to the extent necessary to exercise any
12
<PAGE>
judicial review rights set forth herein. If more than one agreement for
arbitration by or between the parties potentially applies to a Dispute, the
arbitration provision most directly related to the Loan Documents or the
subject matter of the Dispute shall control. This arbitration provision
shall survive termination, amendment or expiration of any of the Loan
Documents or any relationship between the parties.
NOTICE: THIS DOCUMENT AND ALL OTHER DOCUMENTS RELATING TO THE INDEBTEDNESS
CONSTITUTE A WRITTEN LOAN AGREEMENT WHICH REPRESENTS THE FINAL AGREEMENT
BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO
UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES RELATING TO THE INDEBTEDNESS.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the day and year first written above.
WELLS FARGO BANK (TEXAS),
NATIONAL ASSOCIATION
By:
-----------------------------------
Name:
---------------------------------
Title:
--------------------------------
HCC INSURANCE HOLDINGS, INC.,
a Delaware corporation
By:
-----------------------------------
Name:
---------------------------------
Title:
--------------------------------
13
<PAGE>
REVOLVING LINE OF CREDIT NOTE
$16,500,000.00 Houston Texas
_______________, 1997
FOR VALUE RECEIVED, the undersigned HCC INSURANCE HOLDINGS, INC., a
Delaware corporation ("Borrower") promises to pay to the order of WELLS FARGO
BANK (TEXAS), NATIONAL ASSOCIATION ("Bank") at its office at 1000 Louisiana,
Third Floor, Houston, Texas 77002, or at such other place as the holder hereof
may designate, in lawful money of the United States of America and in
immediately available funds, the principal sum of SIXTEEN MILLION FIVE HUNDRED
THOUSAND AND NO/100 Dollars ($16,500,000.00), or so much thereof as may be
advanced and be outstanding, with interest thereon, to be computed on each
advance from the date of its disbursement as set forth herein.
DEFINITIONS:
As used herein, the following terms shall have the meanings set forth after
each, and any other term defined in this Note shall have the meaning set forth
at the place defined:
(a) "Business Day" means any day except a Saturday, Sunday or any other
day on which commercial banks in Texas are authorized or required by law to
close.
(b) "Fixed Rate Term" means a period commencing on a Business Day and
continuing for one (1), two (2) or three (3) months, as designated by Borrower,
during which all or a portion of the outstanding principal balance of this Note
bears interest determined in relation to LIBOR; provided however, that no Fixed
Rate Term may be selected for a principal amount less than One Million and
No/100 Dollars ($1,000,000.00); and provided further, that no Fixed Rate Term
shall extend beyond the scheduled maturity date hereof. If any Fixed Rate Term
would end on a day which is not a Business Day, then such Fixed Rate Term shall
be extended to the next succeeding Business Day.
(c) "LIBOR" means the rate per annum (rounded upward, if necessary, to the
nearest whole 1/8 of 1%) and determined pursuant to the following formula:
LIBOR = Base LIBOR
-------------------------------
100% - LIBOR Reserve Percentage
(i) "Base LIBOR" means the rate per annum for United States dollar
deposits quoted by Bank as the Inter-Bank Market Offered Rate, with the
understanding that such rate is quoted by Bank for the purpose of calculating
effective rates of interest for loans making reference thereto, on the first day
of a Fixed Rate Term for delivery of funds on said date for a period of time
approximately equal to the number of days in such Fixed Rate Term and in an
amount approximately equal to the principal amount to which such Fixed Rate Term
applies. Borrower understands and agrees that Bank may base its quotation of
the Inter-Bank Market Offered Rate upon such offers or other market indicators
of the Inter-Bank Market as Bank in its discretion deems appropriate including,
but not limited to, the rate offered for U.S. dollar deposits on the London
Inter-Bank Market.
(ii) "LIBOR Reserve Percentage" means the reserve percentage prescribed by
the Board of Governors of the Federal Reserve System (or any successor) for
"Eurocurrency Liabilities" (as defined in Regulation D of the Federal Reserve
Board, as amended), adjusted by Bank for expected changes in such reserve
percentage during the applicable Fixed Rate Term.
1
<PAGE>
(d) "Prime Rate" means at any time the rate of interest most recently
announced within Bank at its principal office as its Prime Rate, with the
understanding that the Prime Rate is one of Bank's base rates and serves as the
basis upon which effective rates of interest are calculated for those loans
making reference thereto, and is evidenced by the recording thereof after its
announcement in such internal publication or publications as Bank may designate.
INTEREST:
(a) INTEREST. The outstanding principal balance of this Note shall bear
interest (computed on the basis of a 360-day year, actual days elapsed, unless
such calculation would result in a usurious rate, in which case interest shall
be computed on the basis of a 365/366-day year, as the case may be, actual days
elapsed) at the lesser of (i) either (A) a fluctuating rate per annum equal to
the Prime Rate in effect from time to time, or (B) a fixed rate per annum
determined by Bank to be one and one-half percent (1.50%) above LIBOR in effect
on the first day of the applicable Fixed Rate Term, or (ii) the Maximum Rate.
When interest is determined in relation to the Prime Rate, each change in the
rate of interest hereunder shall become effective on the date each Prime Rate
change is announced within Bank. With respect to each LIBOR selection
hereunder, Bank is hereby authorized to note the date, principal amount,
interest rate and Fixed Rate Term applicable thereto and any payments made
thereon on Bank's books and records (either manually or by electronic entry)
and/or on any schedule attached to this Note, which notations shall be prima
facie evidence of the accuracy of the information noted.
(b) SELECTION OF INTEREST RATE OPTIONS. At any time any portion of this
Note bears interest determined in relation to LIBOR, it may be continued by
Borrower at the end the Fixed Rate Term applicable thereto so that all or a
portion thereof bears interest determined in relation to the Prime Rate or to
LIBOR for a new Fixed Rate Term designated by Borrower. At any time any portion
of this Note bears interest determined in relation to the Prime Rate, Borrower
may convert all or a portion thereof so that it bears interest determined in
relation to LIBOR for a Fixed Rate Term designated by Borrower. At such time as
Borrower requests an advance hereunder or wishes to select a LIBOR option for
all or a portion of the outstanding principal balance hereof, and at the end of
each Fixed Rate Term, Borrower shall give Bank notice specifying: (i) the
interest rate option selected by Borrower; (ii) the principal amount subject
thereto; and (iii) for each LIBOR selection, the length of the applicable Fixed
Rate Term. Any such notice may be given by telephone so long as, with respect
to each LIBOR selection, (A) Bank receives written confirmation from Borrower
not later than three (3) Business Days after such telephone notice is given, and
(B) such notice is given to Bank prior to 10:00 a.m., California time, three (3)
Business Days before the first day of the Fixed Rate Term. For each LIBOR
option requested hereunder, Bank will quote the applicable fixed rate to
Borrower at approximately 10:00 a.m., California time, on the first day of the
Fixed Rate Term. If Borrower does not immediately accept the rate quoted by
Bank, any subsequent acceptance by Borrower shall be subject to a
redetermination by Bank of the applicable fixed rate; provided however, that if
Borrower fails to accept any such rate by 11:00 a.m., California time, on the
Business Day such quotation is given, then the quoted rate shall expire and Bank
shall have no obligation to permit a LIBOR option to be selected on such day.
If no specific designation of interest is made at the time any advance is
requested hereunder or at the end of any Fixed Rate Term, Borrower shall be
deemed to have made a Prime Rate interest selection for such advance or the
principal amount to which such Fixed Rate Term applied.
(c) ADDITIONAL LIBOR PROVISIONS.
(i) If Bank at any time shall determine that for any reason adequate and
reasonable means do not exist for ascertaining LIBOR, then Bank shall promptly
give notice thereof to Borrower. If such notice is given and until such notice
has been withdrawn by Bank, then (A) no new LIBOR option may be selected by
Borrower, and (B) any portion of the outstanding principal balance hereof which
bears interest
2
<PAGE>
determined in relation to LIBOR, subsequent to the end of the Fixed Rate Term
applicable thereto, shall bear interest determined in relation to the Prime
Rate.
(ii) If any law, treaty, rule, regulation or determination of a court or
governmental authority or any change therein or in the interpretation or
application thereof (each, a "Change in Law") shall make it unlawful for Bank
(A) to make LIBOR options available hereunder, or (B) to maintain interest rates
based on LIBOR, then in the former event, any obligation of Bank to make
available such unlawful LIBOR options shall immediately be canceled, and in the
latter event, any such unlawful LIBOR-based interest rates then outstanding
shall be converted, at Bank's option, so that interest on the portion of the
outstanding principal balance subject thereto is determined in relation to the
Prime Rate; provided however, that if any such Change in Law shall permit any
LIBOR-based interest rates to remain in effect until the expiration of the Fixed
Rate Term applicable thereto, then such permitted LIBOR-based interest rates
shall continue in effect until the expiration of such Fixed Rate Term. Upon the
occurrence of any of the foregoing events, Borrower shall pay to Bank
immediately upon demand such amounts as may be necessary to compensate Bank for
any fines, fees, charges, penalties or other costs incurred or payable by Bank
as a result thereof and which are attributable to any LIBOR options made
available to Borrower hereunder, and any reasonable allocation made by Bank
among its operations shall be conclusive and binding upon Borrower.
(iii) If any Change in Law or compliance by Bank with any request or
directive (whether or not having the force of law) from any central bank or
other governmental authority shall:
(A) subject Bank to any tax, duty or other charge with respect to any
LIBOR options, or change the basis of taxation of payments to Bank of
principal, interest, fees or any other amount payable hereunder
(except for changes in the rate of tax on the overall net income of
Bank); or
(B) impose, modify or hold applicable any reserve, special deposit,
compulsory loan or similar requirement against assets held by,
deposits or other liabilities in or for the account of, advances or
loans by, or any other acquisition of funds by any office of Bank; or
(C) impose on Bank any other condition;
and the result of any of the foregoing is to increase the cost to Bank of
making, renewing or maintaining any LIBOR options hereunder and/or to reduce any
amount receivable by Bank in connection therewith, then in any such case,
Borrower shall pay to Bank immediately upon demand such amounts as may be
necessary to compensate Bank for any additional costs incurred by Bank and/or
reductions in amounts received by Bank which are attributable to such LIBOR
options. In determining which costs incurred by Bank and/or reductions in
amounts received by Bank are attributable to any LIBOR options made available to
Borrower hereunder, any reasonable allocation made by Bank among its operations
shall be conclusive and binding upon Borrower.
(iv) Only one amount may be quoted a LIBOR rate, and that amount, except
for permitted repayments, may not be changed between Fixed Rate Terms.
(d) PAYMENT OF INTEREST. Interest accrued on any portion of this Note
which bears interest determined in relation to the Prime Rate shall be payable
on the last day of each calendar quarter, commencing September 30, 1997.
Interest accrued on any portion of this Note which bears interest determined in
relation to LIBOR shall be payable on the last day of each Fixed Rate Term.
Borrower authorizes Bank to debit Borrower's accounts at Bank for all principal,
interest, fees or other liabilities due to Bank under any of the Loan Documents
as defined in the hereinafter described Credit Agreement.
3
<PAGE>
(e) DEFAULT INTEREST. From and after the maturity date of this Note, or
such earlier date as all principal owing hereunder becomes due and payable by
acceleration or otherwise, the outstanding principal balance of this Note shall
bear interest until paid in full at an increased rate per annum (computed on the
basis of a 360-day year, actual days elapsed, unless such calculation would
result in a usurious rate, in which case interest shall be computed on the basis
of a 365/366-day year, as the case may be, actual days elapsed) equal to four
percent (4%) above the rate of interest from time to time applicable to this
Note, but in no event at a rate greater than the Maximum Rate.
BORROWING AND REPAYMENT:
(a) BORROWING AND REPAYMENT. Borrower may from time to time during the
term of this Note borrow, partially or wholly repay its outstanding borrowings,
and reborrow, subject to all of the limitations, terms and conditions of this
Note and of any document executed in connection with or governing this Note;
provided however, that the total outstanding borrowings under this Note shall
not at any time exceed the principal amount stated above. The unpaid principal
balance of this obligation at any time shall be the total amounts advanced
hereunder by the holder hereof less the amount of principal payments made hereon
by or for any Borrower, which balance may be endorsed hereon from time to time
by the holder. The outstanding principal balance of this Note together with all
accrued but unpaid interest shall be due and payable in full on April 30, 1998.
(b) ADVANCES. Advances hereunder, to the total amount of the principal
sum stated above, may be made by the holder at the oral or written request of
(i) Frank J. Bramanti or L. Edward Tuffly, any one acting alone, who are
authorized to request advances and direct the disposition of any advances until
written notice of the revocation of such authority is received by the holder at
the office designated above, or (ii) any person, with respect to advances
deposited to the credit of any account of any Borrower with the holder, which
advances, when so deposited, shall be conclusively presumed to have been made to
or for the benefit of each Borrower regardless of the fact that persons other
than those authorized to request advances may have authority to draw against
such account. The holder shall have no obligation to determine whether any
person requesting an advance is or has been authorized by any Borrower.
(c) APPLICATION OF PAYMENTS. Each payment made on this Note shall be
credited first, to any interest then due and second, to the outstanding
principal balance hereof. All payments credited to principal shall be applied
first, to the outstanding principal balance of this Note which bears interest
determined in relation to the Prime Rate, if any, and second, to the outstanding
principal balance of this Note which bears interest determined in relation to
LIBOR, with such payments applied to the oldest Fixed Rate Term first.
PREPAYMENT:
(a) PRIME RATE. Borrower may prepay principal on any portion of this Note
which bears interest determined in relation to the Prime Rate at any time, in
any amount and without penalty.
(b) LIBOR. Borrower may prepay principal on any portion of this Note
which bears interest determined in relation to LIBOR at any time and in the
minimum amount of One Hundred Thousand and No/100 Dollars ($100,000.00);
provided however, that if the outstanding principal balance of such portion of
this Note is less than said amount, the minimum prepayment amount shall be the
entire outstanding principal balance thereof. In consideration of Bank
providing this prepayment option to Borrower, or if any such portion of this
Note shall become due and payable at any time prior to the last day of the Fixed
Rate Term applicable thereto, Borrower shall pay to Bank immediately upon demand
a fee which is the sum of the discounted monthly differences for each month from
the month of prepayment through the month in which such Fixed Rate Term matures,
calculated as follows for each such month:
4
<PAGE>
(i) DETERMINE the amount of interest which would have accrued each month
on the amount prepaid at the interest rate applicable to such amount
had it remained outstanding until the last day of the Fixed Rate Term
applicable thereto.
(ii) SUBTRACT from the amount determined in (i) above the amount of
interest which would have accrued for the same month on the amount
prepaid for the remaining term of such Fixed Rate Term at LIBOR in
effect on the date of prepayment for new loans made for such term and
in a principal amount equal to the amount prepaid.
(iii) If the result obtained in (ii) for any month is greater than
zero, discount that difference by LIBOR used in (ii) above.
Each Borrower acknowledges that prepayment of such amount may result in Bank
incurring additional costs, expenses and/or liabilities, and that it is
difficult to ascertain the full extent of such costs, expenses and/or
liabilities. Each Borrower, therefore, agrees to pay the above-described
prepayment fee and agrees that said amount represents a reasonable estimate of
the prepayment costs, expenses and/or liabilities of Bank.
EVENTS OF DEFAULT:
This Note is made pursuant to and is subject to the terms and conditions of
that certain Credit Agreement between Borrower and Bank dated as of
_______________, 1997, as amended from time to time (the "Credit Agreement").
Any default in the payment or performance of any obligation under this Note, or
any defined event of default under the Credit Agreement, shall constitute an
"Event of Default" under this Note.
MISCELLANEOUS:
(a) REMEDIES. Upon the occurrence of any Event of Default, the holder of
this Note, at the holder's option, may declare all sums of principal and accrued
and unpaid interest outstanding hereunder to be immediately due and payable
without presentment, demand, or any notices of any kind, including without
limitation notice of nonperformance, notice of protest, protest, notice of
dishonor, notice of intention to accelerate or notice of acceleration, all of
which are expressly waived by each Borrower, and the obligation, if any, of the
holder to extend any further credit hereunder shall immediately cease and
terminate. Each Borrower shall pay to the holder immediately upon demand the
full amount of all payments, advances, charges, costs and expenses, including
reasonable attorneys' fees (to include outside counsel fees and all allocated
costs of the holder's in-house counsel to the extent permissible), expended or
incurred by the holder in connection with the enforcement of the holder's rights
and/or the collection of any amounts which become due to the holder under this
Note, and the prosecution or defense of any action in any way related to this
Note, including without limitation, any action for declaratory relief, whether
incurred at the trial or appellate level, in an arbitration proceeding or
otherwise, and including any of the foregoing incurred in connection with any
bankruptcy proceeding (including without limitation, any adversary proceeding,
contested matter or motion brought by Bank or any other person) relating to any
Borrower or any other person or entity.
(b) OBLIGATIONS JOINT AND SEVERAL. Should more than one person or entity
sign this Note as a Borrower, the obligations of each such Borrower shall be
joint and several.
(c) GOVERNING LAW. This Note shall be governed by and construed in
accordance with the laws of the State of Texas.
(d) SAVINGS CLAUSE. It is the intention of the parties to comply strictly
with applicable usury laws. Accordingly, notwithstanding any provision to the
contrary in this Note, or in any contract,
5
<PAGE>
instrument or document evidencing or securing the payment hereof or otherwise
relating hereto (each, a "Related Document"), in no event shall this Note or
any Related Document require the payment or permit the payment, taking,
reserving, receiving, collection or charging of any sums constituting interest
under applicable laws that exceed the maximum amount permitted by such laws,
as the same may be amended or modified from time to time (the "Maximum Rate").
If any such excess interest is called for, contracted for, charged, taken,
reserved or received in connection with this Note or any Related Document, or
in any communication by Bank or any other person to Borrower or any other
person, or in the event that all or part of the principal or interest hereof
or thereof shall be prepaid or accelerated, so that under any of such
circumstances or under any other circumstance whatsoever the amount of
interest contracted for, charged, taken, reserved or received on the amount of
principal actually outstanding from time to time under this Note shall exceed
the Maximum Rate, then in such event it is agreed that: (i) the provisions of
this paragraph shall govern and control; (ii) neither Borrower nor any other
person or entity now or hereafter liable for the payment of this Note or any
Related Document shall be obligated to pay the amount of such interest to the
extent it is in excess of the Maximum Rate; (iii) any such excess interest
which is or has been received by Bank, notwithstanding this paragraph, shall
be credited against the then unpaid principal balance hereof or thereof, or if
this Note or any Related Document has been or would be paid in full by such
credit, refunded to Borrower; and (iv) the provisions of this Note and each
Related Document, and any other communication to Borrower, shall immediately
be deemed reformed and such excess interest reduced, without the necessity of
executing any other document, to the Maximum Rate. The right to accelerate
the maturity of this Note or any Related Document does not include the right
to accelerate, collect or charge unearned interest, but only such interest
that has otherwise accrued as of the date of acceleration. Without limiting
the foregoing, all calculations of the rate of interest contracted for,
charged, taken, reserved or received in connection with this Note and any
Related Document which are made for the purpose of determining whether such
rate exceeds the Maximum Rate shall be made to the extent permitted by
applicable laws by amortizing, prorating, allocating and spreading during the
period of the full term of this Note or such Related Document, including all
prior and subsequent renewals and extensions hereof or thereof, all interest
at any time contracted for, charged, taken, reserved or received by Bank. The
terms of this paragraph shall be deemed to be incorporated into each Related
Document.
To the extent that Article 5069-1.04 of the Texas Revised Civil Statutes is
relevant to Bank for the purpose of determining the Maximum Rate, Bank hereby
elects to determine the applicable rate ceiling under such Article by the
indicated (weekly) rate ceiling from time to time in effect, subject to Bank's
right subsequently to change such method in accordance with applicable law, as
the same may be amended or modified from time to time.
(e) RIGHT OF SETOFF; DEPOSIT ACCOUNTS. Upon and after the occurrence of
an Event of Default, (i) Borrower hereby authorizes Bank, at any time and from
time to time, without notice, which is hereby expressly waived by Borrower, and
whether or not Bank shall have declared this Note to be due and payable in
accordance with the terms hereof, to set off against, and to appropriate and
apply to the payment of, Borrower's obligations and liabilities under this Note
(whether matured or unmatured, fixed or contingent, liquidated or unliquidated),
any and all amounts owing by Bank to Borrower (whether payable in U.S. dollars
or any other currency, whether matured or unmatured, and in the case of
deposits, whether general or special (except trust and escrow accounts), time or
demand and however evidenced), and (ii) pending any such action, to the extent
necessary, to hold such amounts as collateral to secure such obligations and
liabilities and to return as unpaid for insufficient funds any and all checks
and other items drawn against any deposits so held as Bank, in its sole
discretion, may elect. Borrower hereby grants to Bank a security interest in
all deposits and accounts maintained with Bank and with any other financial
institution to secure the payment of all obligations and liabilities of Borrower
to Bank under this Note.
(f) BUSINESS PURPOSE. Borrower represents and warrants that all loans
evidenced by this Note are for a business, commercial, investment, agricultural
or other similar purpose and not primarily for a personal, family or household
use.
6
<PAGE>
(g) CERTAIN TRI-PARTY ACCOUNTS. Borrower and Bank agree that Tex. Rev.
Civ. Stat. Ann. Art. 5056, ch. 15 (which regulates certain revolving credit loan
accounts and revolving triparty accounts) shall not apply to any revolving loan
accounts created under this Note or maintained in connection herewith.
NOTICE: THIS NOTE AND ALL OTHER DOCUMENTS RELATING TO THE INDEBTEDNESS
EVIDENCED HEREBY CONSTITUTE A WRITTEN LOAN AGREEMENT WHICH REPRESENTS THE FINAL
AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO
UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES RELATING TO THIS NOTE AND THE
INDEBTEDNESS EVIDENCED HEREBY.
IN WITNESS WHEREOF, the undersigned has executed this Note as of the date
first written above.
HCC INSURANCE HOLDINGS, INC.,
a Delaware corporation
By:
---------------------------------
Name:
-------------------------------
Title:
------------------------------
7
<PAGE>
SECURITY AGREEMENT; SECURITIES ACCOUNT
1. GRANT OF SECURITY INTEREST. For valuable consideration, the
undersigned INTERNATIONAL MARINE AND GENERAL INSURANCE COMPANY, LTD., or any
of them ("Debtor"), hereby grants and transfers to WELLS FARGO BANK (TEXAS),
NATIONAL ASSOCIATION ("Bank") a security interest in (a) Debtor's Investment
Account No. 421281 (the "Securities Account") maintained with the Bank of New
York Trust Company of Florida, N.A. ("Intermediary"), (b) all financial
assets credited to the Securities Account, (c) all security entitlements with
respect to the financial assets credited to the Securities Account, and (d)
any and all other investment property or assets maintained or recorded in the
Securities Account (with all the foregoing defined as "Collateral"), together
with whatever is receivable or received when any of the Collateral or
proceeds thereof are sold, collected, exchanged or otherwise disposed of,
whether such disposition is voluntary or involuntary, including without
limitation, (i) all rights to payment, including returned premiums, with
respect to any insurance relating to any of the foregoing, (ii) all rights to
payment with respect to any cause of action affecting or relating to any of
the foregoing, and (iii) all stock rights, rights to subscribe, stock splits,
liquidating dividends, cash dividends, dividends paid in stock, new
securities or other property of any kind which Debtor is or may hereafter be
entitled to receive on account of any securities pledged hereunder, including
without limitation, stock received by Debtor due to stock splits or dividends
paid in stock or sums paid upon or in respect of any securities pledged
hereunder upon the liquidation or dissolution of the issuer thereof
(hereinafter called "Proceeds"). Except as otherwise expressly permitted
herein, in the event Debtor receives any such Proceeds, Debtor will hold the
same in trust on behalf of and for the benefit of Bank and will immediately
deliver all such Proceeds to Bank in the exact form received, with the
endorsement of Debtor if necessary and/or appropriate undated stock powers
duly executed in blank, to be held by Bank as part of the Collateral, subject
to all terms hereof. As used herein, the terms "security entitlement,"
"financial asset" and "investment property" shall have the respective
meanings set forth in the Texas Business and Commerce Code.
2. OBLIGATIONS SECURED. The obligations secured hereby are the payment
and performance of: (a) all present and future Indebtedness of Debtor to
Bank; (b) all obligations of Debtor and rights of Bank under this Agreement;
and (c) all present and future obligations of Debtor to Bank of other kinds.
The word "Indebtedness" is used herein in its most comprehensive sense and
includes any and all advances, debts, obligations and liabilities of Debtor,
or any of them, heretofore, now or hereafter made, incurred or created,
whether voluntary or involuntary and however
<PAGE>
arising, whether due or not due, absolute or contingent, liquidated or
unliquidated, determined or undetermined, and whether Debtor may be liable
individually or jointly with others, or whether recovery upon such
Indebtedness may be or hereafter becomes unenforceable.
3. TERMINATION. This Agreement will terminate upon the performance of
all obligations of Debtor to Bank, including without limitation, the payment of
all Indebtedness of Debtor to Bank, and the termination of all commitments of
Bank to extend credit to Debtor, existing at the time Bank receives written
notice from Debtor of the termination of this Agreement.
4. OBLIGATIONS OF BANK. Bank shall have no duty to take any steps
necessary to preserve the rights of Debtor against prior parties, or to initiate
any action to protect against the possibility of a decline in the market value
of the Collateral or Proceeds. Bank shall not be obligated to take any action
with respect to the Collateral or Proceeds requested by Debtor unless such
request is made in writing and Bank determines, in its sole discretion, that the
requested action would not unreasonably jeopardize the value of the Collateral
and Proceeds as security for the Indebtedness.
5. REPRESENTATIONS AND WARRANTIES. Debtor represents and warrants to
Bank that: (a) Debtor is the sole owner of the Collateral and Proceeds; (b)
Debtor has the right to grant a security interest in the Collateral and
Proceeds; (c) all Collateral and Proceeds are genuine, free from liens,
adverse claims, setoffs, default, prepayment, defenses and conditions
precedent of any kind or character, except the lien created hereby or as
otherwise agreed to by Bank, or heretofore disclosed by Debtor to Bank, in
writing; (d) all statements contained herein and, where applicable, in the
Collateral, are true and complete in all material respects; (e) no financing
statement covering any of the Collateral or Proceeds, and naming any secured
party other than Bank, is on file in any public office; (f) no person or
entity, other than Debtor, Bank and Intermediary, has any interest in or
control over the Collateral; and (g) specifically with respect to Collateral
and Proceeds consisting of investment securities, instruments, chattel paper,
documents, contracts, insurance policies or any like property, (i) all
persons appearing to be obligated thereon have authority and capacity to
contract and are bound as they appear to be, and (ii) the same comply with
applicable laws concerning form, content and manner of preparation and
execution.
6. COVENANTS OF DEBTOR.
(a) Debtor agrees in general: (i) to pay Indebtedness secured hereby when
due; (ii) to indemnify Bank against all losses, claims, demands, liabilities and
expenses of every kind
-2-
<PAGE>
caused by property subject hereto; (iii) to pay all costs and expenses,
including reasonable attorneys' fees, incurred by Bank in the perfection and
preservation of the Collateral or Bank's interest therein and/or the
realization, enforcement and exercise of Bank's rights, powers and remedies
hereunder; (iv) to permit Bank to exercise its powers; (v) to execute and
deliver such documents as Bank deems necessary to create, perfect and
continue the security interests contemplated hereby; and (vi) not to change
its chief place of business (or personal residence, if applicable) or the
places where Debtor keeps any of Debtor's records concerning the Collateral
and Proceeds without first giving Bank written notice of the address to which
Debtor is moving same.
(b) Debtor agrees with regard to the Collateral and Proceeds, unless Bank
agrees otherwise in writing: (i) not to permit any security interest in or lien
on the Collateral or Proceeds, except in favor of Bank and except liens in favor
of Intermediary to the extent expressly permitted by Bank in writing; (ii) not
to hypothecate or permit the transfer by operation of law of any of the
Collateral or Proceeds or any interest therein; (iii) to keep, in accordance
with generally accepted accounting principles, complete and accurate records
regarding all Collateral and Proceeds, and to permit Bank to inspect the same
and make copies thereof at any reasonable time; (iv) if requested by Bank, to
receive and use reasonable diligence to collect Proceeds, in trust and as the
property of Bank, and to immediately endorse as appropriate and deliver such
Proceeds to Bank daily in the exact form in which they are received together
with a collection report in form satisfactory to Bank; (v) in the event Bank
elects to receive payments of Proceeds hereunder, to pay all expenses incurred
by Bank in connection therewith, including expenses of accounting,
correspondence, collection efforts, filing, recording, record keeping and
expenses incidental thereto; (vi) to provide any service and do any other acts
which may be necessary to keep all Collateral and Proceeds free and clear of all
defenses, rights of offset and counterclaims; and (vii) if the Collateral or
Proceeds consists of securities and so long as no Event of Default exists, to
vote said securities and to give consents, waivers and ratifications with
respect thereto, provided that no vote shall be cast or consent, waiver or
ratification given or action taken which would impair Bank's interests in the
Collateral and Proceeds or be inconsistent with or violate any provisions of
this Agreement. Debtor further agrees that any party now or at any time
hereafter authorized by Debtor to advise or otherwise act with respect to the
Securities Account shall be subject to all terms and conditions contained herein
and in any control, custodial or other similar agreement at any time in effect
among Bank, Debtor and Intermediary relating to the Collateral.
-3-
<PAGE>
7. POWERS OF BANK. Debtor appoints Bank its true attorney in fact to
perform any of the following powers, which are coupled with an interest, are
irrevocable until termination of this Agreement and may be exercised from
time to time by Bank's officers and employees, or any of them, whether or not
Debtor is in default: (a) to perform any obligation of Debtor hereunder in
Debtor's name or otherwise; (b) to notify any person obligated on any
security, instrument or other document subject to this Agreement of Bank's
rights hereunder; (c) to collect by legal proceedings or otherwise all
dividends, interest, principal or other sums now or hereafter payable upon or
on account of the Collateral or Proceeds; (d) to enter into any extension,
reorganization, deposit, merger or consolidation agreement, or any other
agreement relating to or affecting the Collateral or Proceeds, and in
connection therewith to deposit or surrender control of the Collateral and
Proceeds, to accept other property in exchange for the Collateral and
Proceeds, and to do and perform such acts and things as Bank may deem proper,
with any money or property received in exchange for the Collateral or
Proceeds, at Bank's option, to be applied to the Indebtedness or held by Bank
under this Agreement; (e) to make any compromise or settlement Bank deems
desirable or proper in respect of the Collateral and Proceeds; (f) to insure,
process and preserve the Collateral and Proceeds; (g) to exercise all rights,
powers and remedies which Debtor would have, but for this Agreement, with
respect to all Collateral and Proceeds subject hereto; and (h) to do all acts
and things and execute all documents in the name of Debtor or otherwise,
deemed by Bank as necessary, proper and convenient in connection with the
preservation, perfection or enforcement of its rights hereunder. To effect
the purposes of this Agreement or otherwise upon instructions of Debtor, or
any of them, Bank may cause any Collateral and/or Proceeds to be transferred
to Bank's name or the name of Bank's nominee. If an Event of Default has
occurred and is continuing, any or all Collateral and/or Proceeds consisting
of securities may be registered, without notice, in the name of Bank or its
nominee, and thereafter Bank or its nominee may exercise, without notice, all
voting and corporate rights at any meeting of the shareholders of the issuer
thereof, any and all rights of conversion, exchange or subscription, or any
other rights, privileges or options pertaining to such Collateral and/or
Proceeds, all as if it were the absolute owner thereof. The foregoing shall
include, without limitation, the right of Bank or its nominee to exchange, at
its discretion, any and all Collateral and/or Proceeds upon the merger,
consolidation, reorganization, recapitalization or other readjustment of the
issuer thereof, or upon the exercise by the issuer thereof or Bank of any
right, privilege or option pertaining to any shares of the Collateral and/or
Proceeds, and in connection therewith, the right to deposit and deliver any
and all of the Collateral and/or Proceeds with any committee, depository,
transfer agent, registrar or other designated agency upon such terms and
-4-
<PAGE>
conditions as Bank may determine. All of the foregoing rights,
privileges or options may be exercised without liability on the part of Bank
or its nominee except to account for property actually received by Bank. Bank
shall have no duty to exercise any of the foregoing, or any other rights,
privileges or options with respect to the Collateral or Proceeds and shall
not be responsible for any failure to do so or delay in so doing.
8. PAYMENT OF PREMIUMS, TAXES, CHARGES, LIENS AND ASSESSMENTS. Debtor
agrees to pay, prior to delinquency, all insurance premiums, taxes, charges,
liens and assessments against the Collateral and Proceeds, and upon the
failure of Debtor to do so, Bank at its option may pay any of them and shall
be the sole judge of the legality or validity thereof and the amount
necessary to discharge the same. Any such payments made by Bank shall be
obligations of Debtor to Bank, due and payable immediately upon demand,
together with interest at a rate determined in accordance with the
provisions of Section 15 hereof, and shall be secured by the Collateral and
Proceeds, subject to all terms and conditions of this Agreement.
9. EVENTS OF DEFAULT. The occurrence of any of the following shall
constitute an "Event of Default" under this Agreement: (a) any default in the
payment or performance of any obligation, or any defined event of default,
under (i) any contract or instrument evidencing any Indebtedness, (ii) any
other agreement between any Debtor and Bank, including without limitation any
loan agreement, relating to or executed in connection with any Indebtedness,
or (iii) any control, custodial or other similar agreement in effect among
Bank, Debtor and Intermediary relating to the Collateral; (b) any
representation or warranty made by any Debtor herein shall prove to be
incorrect, false or misleading in any material respect when made; (c) any
Debtor shall fail to observe or perform any obligation or agreement contained
herein; (d) any attachment or like levy on any property of any Debtor; and
(e) Bank, in good faith, believes any or all of the Collateral and/or
Proceeds to be in danger of misuse, dissipation, commingling, loss, theft,
damage or destruction, or otherwise in jeopardy or unsatisfactory in
character or value.
10. REMEDIES. Upon the occurrence of any Event of Default, Bank shall
have the right to declare immediately due and payable all or any Indebtedness
secured hereby and to terminate any commitments to make loans or otherwise
extend credit to Debtor. Bank shall have all other rights, powers, privileges
and remedies granted to a secured party upon default under the Texas
Business and Commerce Code or otherwise provided by law, including without
limitation, the right to contact Intermediary and to instruct Intermediary to
deliver all Collateral and/or Proceeds directly to Bank. All rights,
powers, privileges and remedies of Bank shall be cumulative. No delay,
failure or discontinuance of Bank
-5-
<PAGE>
in exercising any right, power, privilege or remedy hereunder shall affect or
operate as a waiver of such right, power, privilege or remedy; nor shall any
single or partial exercise of any such right, power, privilege or remedy
preclude, waive or otherwise affect any other or further exercise thereof or
the exercise of any other right, power, privilege or remedy. Any waiver,
permit, consent or approval of any kind by Bank of any default hereunder, or
any such waiver of any provisions or conditions hereof, must be in writing
and shall be effective only to the extent set forth in writing. It is agreed
that public or private sales, for cash or on credit, to a wholesaler or
retailer or investor, or user of property of the types subject to this
Agreement, or public auction, are all commercially reasonable since
differences in the sales prices generally realized in the different kinds of
sales are ordinarily offset by the differences in the costs and credit risks
of such sales. While an Event of Default exists: (a) Debtor will not dispose
of any of the Collateral or Proceeds except on terms approved by Bank; (b)
Bank may appropriate the Collateral and apply all Proceeds toward repayment
of the Indebtedness in such order of application as Bank may from time to
time elect; (c) Bank may take any action with respect to the Collateral
contemplated by any control, custodial or other similar agreement then in
effect among Bank, Debtor and Intermediary; and (d) at Bank's request, Debtor
will assemble and deliver all books and records pertaining to the Collateral
or Proceeds to Bank at a reasonably convenient place designated by Bank. For
any Collateral or Proceeds consisting of securities, Bank shall have no
obligation to delay a sale of any portion thereof for the period of time
necessary to permit the issuer thereof to register such securities for public
sale under any applicable state or Federal law, even if the issuer thereof
would agree to do so.
11. DISPOSITION OF COLLATERAL AND PROCEEDS. Upon the transfer of all or
any part of the Indebtedness, Bank may transfer all or any part of the
Collateral or Proceeds and shall be fully discharged thereafter from all
liability and responsibility with respect to any of the foregoing so
transferred, and the transferee shall be vested with all rights and powers of
Bank hereunder with respect to any of the foregoing so transferred; but with
respect to any Collateral or Proceeds not so transferred, Bank shall retain
all rights, powers, privileges and remedies herein given. Any proceeds of
any disposition of any of the Collateral or Proceeds, or any part thereof,
may be applied by Bank to the payment of expenses incurred by Bank in
connection with the foregoing, including reasonable attorneys' fees, and the
balance of such proceeds may be applied by Bank toward the payment of the
Indebtedness in such order of application as Bank may from time to time elect.
12. STATUTE OF LIMITATIONS. Until all Indebtedness shall have been paid in
full and all commitments by Bank to extend
-6-
<PAGE>
credit to Debtor have been terminated, the power of sale and all other
rights, powers, privileges and remedies granted to Bank hereunder shall
continue to exist and may be exercised by Bank at any time and from time to
time irrespective of the fact that the Indebtedness or any part thereof may
have become barred by any statute of limitations, or that the personal
liability of Debtor may have ceased, unless such liability shall have ceased
due to the payment in full of all Indebtedness secured hereunder.
13. MISCELLANEOUS. (a) The obligations of Debtor hereunder are joint and
several; (b) Debtor hereby waives any right (i) to require Bank to make any
presentment or demand, or give any notices of any kind, including without
limitation any notice of nonpayment or nonperformance, protest, notice of
protest, notice of dishonor, notice of the intention to accelerate or notice
of acceleration hereunder, (ii) to direct the application of payments or
security for any Indebtedness of Debtor, or indebtedness of customers of
Debtor, or (iii) to require proceedings against others or to require
exhaustion of security; and (c) Debtor hereby consents to extensions,
forbearances or alterations of the terms of Indebtedness, the release or
substitution of security, and the release of any guarantors. Until all
Indebtedness shall have been paid in full, no Debtor shall have any right of
subrogation or contribution, and each Debtor hereby waives any benefit of or
right to participate in any of the Collateral or Proceeds or any other
security now or hereafter held by Bank. Any requirement of reasonable notice
to Debtor with respect to the sale or other disposition of Collateral shall
be met if such notice is given pursuant to the requirements of Section 14
hereof at least 5 days before the date of any public sale or the date after
which any private sale or other disposition will be made.
14. NOTICES. All notices, requests and demands required under this
Agreement must be in writing, addressed to Bank at the address specified in
any other loan documents entered into between Debtor and Bank and to Debtor
at the address of its chief executive office (or personal residence, if
applicable) specified below or to such other address as any party may
designate by written notice to each other party, and shall be deemed to have
been given or made as follows: (a) if personally delivered, upon delivery;
(b) if sent by mail, upon the earlier of the date of receipt or three (3)
days after deposit in the U.S. mail, first class and postage prepaid; and (c)
if sent by telecopy, upon receipt.
15. COSTS, EXPENSES AND ATTORNEYS' FEES. Debtor shall pay to Bank
immediately upon demand the full amount of all payments, advances, charges,
costs and expenses, including reasonable attorneys' fees (to include outside
counsel fees and all allocated costs of Bank's in-house counsel to the extent
permissible), incurred by Bank in exercising any right, power,
-7-
<PAGE>
privilege or remedy conferred by this Agreement or in the enforcement
thereof, whether incurred at the trial or appellate level, in an arbitration
proceeding or otherwise, and including any of the foregoing incurred in
connection with any bankruptcy proceeding (including without limitation, any
adversary proceeding, contested matter or motion brought by Bank or any other
person) relating to Debtor or in any way affecting any of the Collateral or
Bank's ability to exercise any of its rights or remedies with respect thereto.
All of the foregoing shall be paid by Debtor from the date of demand to the
date paid in full with interest at the maximum rate permitted by applicable
law.
16. SUCCESSORS; ASSIGNS; AMENDMENT. This Agreement shall be binding upon
and inure to the benefit of the heirs, executors, administrators, legal
representatives, successors and assigns of the parties, and may be amended or
modified only in writing signed by Bank and Debtor.
17. SEVERABILITY OF PROVISIONS. If any provision of this Agreement shall
be held to be prohibited by or invalid under applicable law, such provision
shall be ineffective only to the extent of such prohibition or invalidity,
without invalidating the remainder of such provision or any remaining
provisions of this Agreement.
18. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the state of Texas.
19. ADDENDUM. Additional terms and conditions relating to the Securities
Account are set forth in an Addendum attached hereto and incorporated herein
by this reference.
Debtor warrants that its chief executive office (or personal residence,
if applicable) is located at the following address: 13403 Northwest Freeway,
Suite 200, Houston, Texas 77002.
IN WITNESS WHEREOF, this Agreement has been duly executed as of April 30,
1997.
INTERNATIONAL MARINE AND
GENERAL INSURANCE COMPANY,
LTD.
By: /s/ Frank J. Bramanti
-----------------------------
Frank J. Bramanti
-8-
<PAGE>
ADDENDUM TO SECURITY AGREEMENT: SECURITIES ACCOUNT
THIS ADDENDUM is attached to and made a part of that certain Security
Agreement: Securities Account executed by INTERNATIONAL MARINE AND GENERAL
INSURANCE COMPANY, LTD. ("Debtor") in favor of WELLS FARGO BANK (TEXAS),
NATIONAL ASSOCIATION ("Bank"), dated as of April 30, 1997 (the "Agreement").
The following provisions are hereby incorporated into the Agreement:
1. SECURITIES ACCOUNT ACTIVITY. So long as no Event of Default exists,
Debtor, or any party authorized by Debtor to act with respect to the
Securities Account, may (a) receive payments of interest and/or cash
dividends earned on financial assets maintained in the Securities Account,
and (b) trade financial assets maintained in the Securities Account. Without
Bank's prior written consent, except as permitted by the preceding sentence,
neither Debtor nor any party other than Bank may withdraw or receive any
distribution of any Collateral from the Securities Account. The Collateral
Value of the Securities Account shall at all times be equal to or greater
than one hundred twenty-five percent (125.00%) of all Indebtedness secured
hereby. In the event that the Collateral Value of the Securities Account
should, for any reason and at any time, be less than the required amount,
Debtor shall promptly make a principal reduction on the Indebtedness, or
deposit into the Securities Account additional assets, of a nature
satisfactory to Bank, in either case, sufficient such that the Collateral
Value of the Securities Account achieves the required amount.
2. "COLLATERAL VALUE OF THE SECURITIES ACCOUNT" means 100% of the
market value of the Securities Account, with market value, in all instances,
determined by Bank in its sole discretion, and excluding from such
computation all WF Securities and Common Trust Funds.
3. EXCLUSION FROM COLLATERAL. Notwithstanding anything herein to the
contrary, the terms "Collateral" and "Proceeds" do not include, and Bank
disclaims a security interest in all WF Securities and Common Trust Funds now
or hereafter maintained in the Securities Account.
4. "COMMON TRUST FUNDS" means common trust funds as described in 12
CFR 9.18 and includes, without limitation, common trust funds maintained by
Bank for the exclusive use of its fiduciary clients.
5. "WF SECURITIES" means stock, securities or obligations of Wells
Fargo & Company or of any affiliate thereof (as the term
<PAGE>
affiliate is defined in Section 23A of the Federal Reserve Act (12 USC 371(c),
as amended from time to time).
6. LIMITATION ON INDEBTEDNESS. Notwithstanding anything in this
Agreement to the contrary, the Indebtedness secured hereby is limited to all
obligations of Debtor arising under or in connection with all letters of
credit issued by Bank for the benefit of Borrower, and all extensions,
renewals or modifications thereof, and restatements or substitutions
therefor; provided that the maximum aggregate amount of such letters of
credit shall not exceed $1,000,000.00.
IN WITNESS WHEREOF, this Addendum has been executed as of the same date as
the Agreement.
INTERNATIONAL MARINE WELLS FARGO BANK (TEXAS),
AND GENERAL INSURANCE NATIONAL ASSOCIATION
COMPANY, LTD.
By: /s/ Frank J. Bramanti By:
------------------------- -----------------------
Frank J. Bramanti Jonathan Homeyer
Executive Vice President Relationship Manager
-2-
<PAGE>
SECURITY AGREEMENT; SECURITIES ACCOUNT
1. GRANT OF SECURITY INTEREST. For valuable consideration, the
undersigned HOUSTON CASUALTY COMPANY, or any of them ("Debtor"), hereby
grants and transfers to WELLS FARGO BANK (TEXAS), NATIONAL ASSOCIATION
("Bank") a security interest in (a) Debtor's Investment Account No. 420954
(the "Securities Account") maintained with the Bank of New York Trust Company
of Florida, N.A. ("Intermediary"), (b) (b) all financial assets credited to
the Securities Account, (c) all security entitlements with respect to the
financial assets credited to the Securities Account, and (d) any and all
other investment property or assets maintained or recorded in the Securities
Account (with all the foregoing defined as "Collateral"), together with
whatever is receivable or received when any of the Collateral or proceeds
thereof are sold, collected, exchanged or otherwise disposed of, whether such
disposition is voluntary or involuntary, including without limitation, (i)
all rights to payment, including returned premiums, with respect to any
insurance relating to any of the foregoing, (ii) all rights to payment with
respect to any cause of action affecting or relating to any of the foregoing,
and (iii) all stock rights, rights to subscribe, stock splits, liquidating
dividends, cash dividends, dividends paid in stock, new securities or other
property of any kind which Debtor is or may hereafter be entitled to receive
on account of any securities pledged hereunder, including without limitation,
stock received by Debtor due to stock splits or dividends paid in stock or
sums paid upon or in respect of any securities pledged hereunder upon the
liquidation or dissolution of the issuer thereof (hereinafter called
"Proceeds"). Except as otherwise expressly permitted herein, in the event
Debtor receives any such Proceeds, Debtor will hold the same in trust on
behalf of and for the benefit of Bank and will immediately deliver all such
Proceeds to Bank in the exact form received, with the endorsement of Debtor
if necessary and/or appropriate undated stock powers duly executed in blank,
to be held by Bank as part of the Collateral, subject to all terms hereof. As
used herein, the terms "security entitlement," "financial asset" and
"investment property" shall have the respective meanings set forth in the
Texas Business and Commerce Code.
2. OBLIGATIONS SECURED. The obligations secured hereby are the payment
and performance of: (a) all present and future Indebtedness of Debtor to
Bank; (b) all obligations of Debtor and rights of Bank under this Agreement;
and (c) all present and future obligations of Debtor to Bank of other kinds.
The word "Indebtedness" is used herein in its most comprehensive sense and
includes any and all advances, debts, obligations and liabilities of Debtor,
or any of them, heretofore, now or hereafter made, incurred or created,
whether voluntary or involuntary and however arising, whether due or not due,
absolute or contingent,
<PAGE>
liquidated or unliquidated, determined or undetermined, and whether Debtor
may be liable individually or jointly with others, or whether recovery upon
such Indebtedness may be or hereafter becomes unenforceable.
3. TERMINATION. This Agreement will terminate upon the performance of
all obligations of Debtor to Bank, including without limitation, the payment of
all Indebtedness of Debtor to Bank, and the termination of all commitments of
Bank to extend credit to Debtor, existing at the time Bank receives written
notice from Debtor of the termination of this Agreement.
4. OBLIGATIONS OF BANK. Bank shall have no duty to take any steps
necessary to preserve the rights of Debtor against prior parties, or to initiate
any action to protect against the possibility of a decline in the market value
of the Collateral or Proceeds. Bank shall not be obligated to take any action
with respect to the Collateral or Proceeds requested by Debtor unless such
request is made in writing and Bank determines, in its sole discretion, that the
requested action would not unreasonably jeopardize the value of the Collateral
and Proceeds as security for the Indebtedness.
5. REPRESENTATIONS AND WARRANTIES. Debtor represents and warrants to
Bank that: (a) Debtor is the sole owner of the Collateral and Proceeds; (b)
Debtor has the right to grant a security interest in the Collateral and
Proceeds; (c) all Collateral and Proceeds are genuine, free from liens,
adverse claims, setoffs, default, prepayment, defenses and conditions
precedent of any kind or character, except the lien created hereby or as
otherwise agreed to by Bank, or heretofore disclosed by Debtor to Bank, in
writing; (d) all statements contained herein and, where applicable, in the
Collateral, are true and complete in all material respects; (e) no financing
statement covering any of the Collateral or Proceeds, and naming any secured
party other than Bank, is on file in any public office; (f) no person or
entity, other than Debtor, Bank and Intermediary, has any interest in or
control over the Collateral; and (g) specifically with respect to Collateral
and Proceeds consisting of investment securities, instruments, chattel paper,
documents, contracts, insurance policies or any like property, (i) all
persons appearing to be obligated thereon have authority and capacity to
contract and are bound as they appear to be, and (ii) the same comply with
applicable laws concerning form, content and manner of preparation and
execution.
6. COVENANTS OF DEBTOR.
(a) Debtor agrees in general: (i) to pay Indebtedness secured hereby when
due; (ii) to indemnify Bank against all losses, claims, demands, liabilities and
expenses of every kind caused by property subject hereto; (iii) to pay all
costs and
-2-
<PAGE>
expenses, including reasonable attorneys' fees, incurred by Bank in the
perfection and preservation of the Collateral or Bank's interest therein
and/or the realization, enforcement and exercise of Bank's rights, powers and
remedies hereunder; (iv) to permit Bank to exercise its powers; (v) to
execute and deliver such documents as Bank deems necessary to create,
perfect and continue the security interests contemplated hereby; and (vi) not
to change its chief place of business (or personal residence, if applicable)
or the places where Debtor keeps any of Debtor's records concerning the
Collateral and Proceeds without first giving Bank written notice of the
address to which Debtor is moving same.
(b) Debtor agrees with regard to the Collateral and Proceeds, unless Bank
agrees otherwise in writing: (i) not to permit any security interest in or lien
on the Collateral or Proceeds, except in favor of Bank and except liens in favor
of Intermediary to the extent expressly permitted by Bank in writing; (ii) not
to hypothecate or permit the transfer by operation of law of any of the
Collateral or Proceeds or any interest therein; (iii) to keep, in accordance
with generally accepted accounting principles, complete and accurate records
regarding all Collateral and Proceeds, and to permit Bank to inspect the same
and make copies thereof at any reasonable time; (iv) if requested by Bank, to
receive and use reasonable diligence to collect Proceeds, in trust and as the
property of Bank, and to immediately endorse as appropriate and deliver such
Proceeds to Bank daily in the exact form in which they are received together
with a collection report in form satisfactory to Bank; (v) in the event Bank
elects to receive payments of Proceeds hereunder, to pay all expenses incurred
by Bank in connection therewith, including expenses of accounting,
correspondence, collection efforts, filing, recording, record keeping and
expenses incidental thereto; (vi) to provide any service and do any other acts
which may be necessary to keep all Collateral and Proceeds free and clear of all
defenses, rights of offset and counterclaims; and (vii) if the Collateral or
Proceeds consists of securities and so long as no Event of Default exists, to
vote said securities and to give consents, waivers and ratifications with
respect thereto, provided that no vote shall be cast or consent, waiver or
ratification given or action taken which would impair Bank's interests in the
Collateral and Proceeds or be inconsistent with or violate any provisions of
this Agreement. Debtor further agrees that any party now or at any time
hereafter authorized by Debtor to advise or otherwise act with respect to the
Securities Account shall be subject to all terms and conditions contained herein
and in any control, custodial or other similar agreement at any time in effect
among Bank, Debtor and Intermediary relating to the Collateral.
-3-
<PAGE>
7. POWERS OF BANK. Debtor appoints Bank its true attorney in fact to
perform any of the following powers, which are coupled with an interest, are
irrevocable until termination of this Agreement and may be exercised from
time to time by Bank's officers and employees, or any of them, whether or not
Debtor is in default: (a) to perform any obligation of Debtor hereunder in
Debtor's name or otherwise; (b) to notify any person obligated on any
security, instrument or other document subject to this Agreement of Bank's
rights hereunder; (c) to collect by legal proceedings or otherwise all
dividends, interest, principal or other sums now or hereafter payable upon or
on account of the Collateral or Proceeds; (d) to enter into any extension,
reorganization, deposit, merger or consolidation agreement, or any other
agreement relating to or affecting the Collateral or Proceeds, and in
connection therewith to deposit or surrender control of the Collateral and
Proceeds, to accept other property in exchange for the Collateral and
Proceeds, and to do and perform such acts and things as Bank may deem proper,
with any money or property received in exchange for the Collateral or
Proceeds, at Bank's option, to be applied to the Indebtedness or held by Bank
under this Agreement; (e) to make any compromise or settlement Bank deems
desirable or proper in respect of the Collateral and Proceeds; (f) to insure,
process and preserve the Collateral and Proceeds; (g) to exercise all rights,
powers and remedies which Debtor would have, but for this Agreement, with
respect to all Collateral and Proceeds subject hereto; and (h) to do all acts
and things and execute all documents in the name of Debtor or otherwise,
deemed by Bank as necessary, proper and convenient in connection with the
preservation, perfection or enforcement of its rights hereunder. To effect
the purposes of this Agreement or otherwise upon instructions of Debtor, or
any of them, Bank may cause any Collateral and/or Proceeds to be transferred
to Bank's name or the name of Bank's nominee. If an Event of Default has
occurred and is continuing, any or all Collateral and/or Proceeds consisting
of securities may be registered, without notice, in the name of Bank or its
nominee, and thereafter Bank or its nominee may exercise, without notice, all
voting and corporate rights at any meeting of the shareholders of the issuer
thereof, any and all rights of conversion, exchange or subscription, or any
other rights, privileges or options pertaining to such Collateral and/or
Proceeds, all as if it were the absolute owner thereof. The foregoing shall
include, without limitation, the right of Bank or its nominee to exchange, at
its discretion, any and all Collateral and/or Proceeds upon the merger,
consolidation, reorganization, recapitalization or other readjustment of the
issuer thereof, or upon the exercise by the issuer thereof or Bank of any
right, privilege or option pertaining to any shares of the Collateral and/or
Proceeds, and in connection therewith, the right to deposit and deliver any
and all of the Collateral and/or Proceeds with any committee, depository,
transfer agent, registrar or other designated agency upon such terms and
-4-
<PAGE>
conditions as Bank may determine. All of the foregoing rights,
privileges or options may be exercised without liability on the part of Bank
or its nominee except to account for property actually received by Bank. Bank
shall have no duty to exercise any of the foregoing, or any other rights,
privileges or options with respect to the Collateral or Proceeds and shall
not be responsible for any failure to do so or delay in so doing.
8. PAYMENT OF PREMIUMS, TAXES, CHARGES, LIENS AND ASSESSMENTS. Debtor
agrees to pay, prior to delinquency, all insurance premiums, taxes, charges,
liens and assessments against the Collateral and Proceeds, and upon the
failure of Debtor to do so, Bank at its option may pay any of them and shall
be the sole judge of the legality or validity thereof and the amount
necessary to discharge the same. Any such payments made by Bank shall be
obligations of Debtor to Bank, due and payable immediately upon demand,
together with interest at a rate determined in accordance with the
provisions of Section 15 hereof, and shall be secured by the Collateral and
Proceeds, subject to all terms and conditions of this Agreement.
9. EVENTS OF DEFAULT. The occurrence of any of the following shall
constitute an "Event of Default" under this Agreement: (a) any default in the
payment or performance of any obligation, or any defined event of default,
under (i) any contract or instrument evidencing any Indebtedness, (ii) any
other agreement between any Debtor and Bank, including without limitation any
loan agreement, relating to or executed in connection with any Indebtedness,
or (iii) any control, custodial or other similar agreement in effect among
Bank, Debtor and Intermediary relating to the Collateral; (b) any
representation or warranty made by any Debtor herein shall prove to be
incorrect, false or misleading in any material respect when made; (c) any
Debtor shall fail to observe or perform any obligation or agreement contained
herein; (d) any attachment or like levy on any property of any Debtor; and
(e) Bank, in good faith, believes any or all of the Collateral and/or
Proceeds to be in danger of misuse, dissipation, commingling, loss, theft,
damage or destruction, or otherwise in jeopardy or unsatisfactory in
character or value.
10. REMEDIES. Upon the occurrence of any Event of Default, Bank shall
have the right to declare immediately due and payable all or any Indebtedness
secured hereby and to terminate any commitments to make loans or otherwise
extend credit to Debtor. Bank shall have all other rights, powers, privileges
and remedies granted to a secured party upon default under the Texas
Business and Commerce Code or otherwise provided by law, including without
limitation, the right to contact Intermediary and to instruct Intermediary to
deliver all Collateral and/or Proceeds directly to Bank. All rights,
powers, privileges and remedies of Bank shall be cumulative. No delay,
failure or discontinuance of Bank
-5-
<PAGE>
in exercising any right, power, privilege or remedy hereunder shall affect or
operate as a waiver of such right, power, privilege or remedy; nor shall any
single or partial exercise of any such right, power, privilege or remedy
preclude, waive or otherwise affect any other or further exercise thereof or
the exercise of any other right, power, privilege or remedy. Any waiver,
permit, consent or approval of any kind by Bank of any default hereunder, or
any such waiver of any provisions or conditions hereof, must be in writing
and shall be effective only to the extent set forth in writing. It is agreed
that public or private sales, for cash or on credit, to a wholesaler or
retailer or investor, or user of property of the types subject to this
Agreement, or public auction, are all commercially reasonable since
differences in the sales prices generally realized in the different kinds of
sales are ordinarily offset by the differences in the costs and credit risks
of such sales. While an Event of Default exists: (a) Debtor will not dispose
of any of the Collateral or Proceeds except on terms approved by Bank; (b)
Bank may appropriate the Collateral and apply all Proceeds toward repayment
of the Indebtedness in such order of application as Bank may from time to
time elect; (c) Bank may take any action with respect to the Collateral
contemplated by any control, custodial or other similar agreement then in
effect among Bank, Debtor and Intermediary; and (d) at Bank's request, Debtor
will assemble and deliver all books and records pertaining to the Collateral
or Proceeds to Bank at a reasonably convenient place designated by Bank. For
any Collateral or Proceeds consisting of securities, Bank shall have no
obligation to delay a sale of any portion thereof for the period of time
necessary to permit the issuer thereof to register such securities for public
sale under any applicable state or Federal law, even if the issuer thereof
would agree to do so.
11. DISPOSITION OF COLLATERAL AND PROCEEDS. Upon the transfer of all or
any part of the Indebtedness, Bank may transfer all or any part of the
Collateral or Proceeds and shall be fully discharged thereafter from all
liability and responsibility with respect to any of the foregoing so
transferred, and the transferee shall be vested with all rights and powers of
Bank hereunder with respect to any of the foregoing so transferred; but with
respect to any Collateral or Proceeds not so transferred, Bank shall retain
all rights, powers, privileges and remedies herein given. Any proceeds of
any disposition of any of the Collateral or Proceeds, or any part thereof,
may be applied by Bank to the payment of expenses incurred by Bank in
connection with the foregoing, including reasonable attorneys' fees, and the
balance of such proceeds may be applied by Bank toward the payment of the
Indebtedness in such order of application as Bank may from time to time elect.
12. STATUTE OF LIMITATIONS. Until all Indebtedness shall have been paid in
full and all commitments by Bank to extend
-6-
<PAGE>
credit to Debtor have been terminated, the power of sale and all other
rights, powers, privileges and remedies granted to Bank hereunder shall
continue to exist and may be exercised by Bank at any time and from time to
time irrespective of the fact that the Indebtedness or any part thereof may
have become barred by any statute of limitations, or that the personal
liability of Debtor may have ceased, unless such liability shall have ceased
due to the payment in full of all Indebtedness secured hereunder.
13. MISCELLANEOUS. (a) The obligations of Debtor hereunder are joint and
several; (b) Debtor hereby waives any right (i) to require Bank to make any
presentment or demand, or give any notices of any kind, including without
limitation any notice of nonpayment or nonperformance, protest, notice of
protest, notice of dishonor, notice of the intention to accelerate or notice
of acceleration hereunder, (ii) to direct the application of payments or
security for any Indebtedness of Debtor, or indebtedness of customers of
Debtor, or (iii) to require proceedings against others or to require
exhaustion of security; and (c) Debtor hereby consents to extensions,
forbearances or alterations of the terms of Indebtedness, the release or
substitution of security, and the release of any guarantors. Until all
Indebtedness shall have been paid in full, no Debtor shall have any right of
subrogation or contribution, and each Debtor hereby waives any benefit of or
right to participate in any of the Collateral or Proceeds or any other
security now or hereafter held by Bank. Any requirement of reasonable notice
to Debtor with respect to the sale or other disposition of Collateral shall
be met if such notice is given pursuant to the requirements of Section 14
hereof at least 5 days before the date of any public sale or the date after
which any private sale or other disposition will be made.
14. NOTICES. All notices, requests and demands required under this
Agreement must be in writing, addressed to Bank at the address specified in
any other loan documents entered into between Debtor and Bank and to Debtor
at the address of its chief executive office (or personal residence, if
applicable) specified below or to such other address as any party may
designate by written notice to each other party, and shall be deemed to have
been given or made as follows: (a) if personally delivered, upon delivery;
(b) if sent by mail, upon the earlier of the date of receipt or three (3)
days after deposit in the U.S. mail, first class and postage prepaid; and (c)
if sent by telecopy, upon receipt.
15. COSTS, EXPENSES AND ATTORNEYS' FEES. Debtor shall pay to Bank
immediately upon demand the full amount of all payments, advances, charges,
costs and expenses, including reasonable attorneys' fees (to include outside
counsel fees and all allocated costs of Bank's in-house counsel to the extent
permissible), incurred by Bank in exercising any right, power,
-7-
<PAGE>
privilege or remedy conferred by this Agreement or in the enforcement
thereof, whether incurred at the trial or appellate level, in an arbitration
proceeding or otherwise, and including any of the foregoing incurred in
connection with any bankruptcy proceeding (including without limitation, any
adversary proceeding, contested matter or motion brought by Bank or any other
person) relating to Debtor or in any way affecting any of the Collateral or
Bank's ability to exercise any of its rights or remedies with respect thereto.
All of the foregoing shall be paid by Debtor from the date of demand to the
date paid in full with interest at the maximum rate permitted by applicable
law.
16. SUCCESSORS; ASSIGNS; AMENDMENT. This Agreement shall be binding upon
and inure to the benefit of the heirs, executors, administrators, legal
representatives, successors and assigns of the parties, and may be amended or
modified only in writing signed by Bank and Debtor.
17. SEVERABILITY OF PROVISIONS. If any provision of this Agreement shall
be held to be prohibited by or invalid under applicable law, such provision
shall be ineffective only to the extent of such prohibition or invalidity,
without invalidating the remainder of such provision or any remaining
provisions of this Agreement.
18. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the state of Texas.
19. ADDENDUM. Additional terms and conditions relating to the Securities
Account are set forth in an Addendum attached hereto and incorporated herein
by this reference.
Debtor warrants that its chief executive office (or personal residence,
if applicable) is located at the following address: 13403 Northwest Freeway,
Suite 200, Houston, Texas 77002.
IN WITNESS WHEREOF, this Agreement has been duly executed as of April 30,
1997.
HOUSTON CASUALTY COMPANY
/s/ Frank J. Bramanti
- -----------------------------
Title: EVP & CFO
-----------------------
-8-
<PAGE>
ADDENDUM TO SECURITY AGREEMENT: SECURITIES ACCOUNT
THIS ADDENDUM is attached to and made a part of that certain Security
Agreement: Securities Account executed by HOUSTON CASUALTY COMPANY ("Debtor")
in favor of WELLS FARGO BANK (TEXAS), NATIONAL ASSOCIATION ("Bank"), dated as
of April 30, 1997 (the "Agreement").
The following provisions are hereby incorporated into the Agreement:
1. SECURITIES ACCOUNT ACTIVITY. So long as no Event of Default exists,
Debtor, or any party authorized by Debtor to act with respect to the
Securities Account, may (a) receive payments of interest and/or cash
dividends earned on financial assets maintained in the Securities Account,
and (b) trade financial assets maintained in the Securities Account. Without
Bank's prior written consent, except as permitted by the preceding sentence,
neither Debtor nor any party other than Bank may withdraw or receive any
distribution of any Collateral from the Securities Account. The Collateral
Value of the Securities Account shall at all times be equal to or greater
than one hundred twenty-five percent (125.00%) of all Indebtedness secured
hereby. In the event that the Collateral Value of the Securities Account
should, for any reason and at any time, be less than the required amount,
Debtor shall promptly make a principal reduction on the Indebtedness, or
deposit into the Securities Account additional assets, of a nature
satisfactory to Bank, in either case, sufficient such that the Collateral
Value of the Securities Account achieves the required amount.
2. "COLLATERAL VALUE OF THE SECURITIES ACCOUNT" means 100% of the
market value of the Securities Account, with market value, in all instances,
determined by Bank in its sole discretion, and excluding from such
computation all WF Securities and Common Trust Funds.
3. EXCLUSION FROM COLLATERAL. Notwithstanding anything herein to the
contrary, the terms "Collateral" and "Proceeds" do not include, and Bank
disclaims a security interest in all WF Securities and Common Trust Funds now
or hereafter maintained in the Securities Account.
4. "COMMON TRUST FUNDS" means common trust funds as described in 12
CFR 9.18 and includes, without limitation, common trust funds maintained by
Bank for the exclusive use of its fiduciary clients.
5. "WF SECURITIES" means stock, securities or obligations of Wells
Fargo & Company or of any affiliate thereof (as the term affiliate is defined
in Section 23A of the Federal Reserve Act (12 USC 371(c), as amended from
time to time).
<PAGE>
6. LIMITATION ON INDEBTEDNESS. Notwithstanding anything in this
Agreement to the contrary, the Indebtedness secured hereby is limited to all
obligations of Debtor arising under or in connection with all letters of
credit issued by Bank for the benefit of Borrower, and all extensions,
renewals or modifications thereof, and restatements or substitutions
therefor; provided that the maximum aggregate amount of such letters of
credit shall not exceed $12,000,000.00.
IN WITNESS WHEREOF, this Addendum has been executed as of the same date as
the Agreement.
HOUSTON CASUALTY COMPANY WELLS FARGO BANK (TEXAS),
NATIONAL ASSOCIATION
By: /s/ Frank J. Bramanti By:
------------------------- -----------------------
Jonathan Homeyer
Title: EVP & CFO Relationship Manager
----------------------
-2-
<PAGE>
EXHIBIT 11
HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE (UNAUDITED)
- -------------------------------------------------------------------------------
For the nine months ended September 30,
1997 1996
- -------------------------------------------------------------------------------
Net earnings $39,131,000 $26,542,000
----------- -----------
----------- -----------
Primary:
Weighted average Common Stock and common stock
equivalents outstanding 46,471,000 44,350,000
----------- -----------
----------- -----------
Earnings per share $ 0.84 $ 0.60
----------- -----------
----------- -----------
Reconciliation of number of shares outstanding:
Common Stock outstanding at period end 46,007,000 42,970,000
Additional dilutive effect of outstanding
options (as determined by the application
of the treasury stock method) 1,312,000 1,212,000
Net changes in Common Stock for issuance (848,000) 168,000
----------- -----------
Weighted average Common Stock and common stock
equivalents outstanding 46,471,000 44,350,000
----------- -----------
----------- -----------
Fully Diluted:
Weighted average Common Stock and common stock
equivalents outstanding 46,649,000 44,553,000
----------- -----------
----------- -----------
Earnings per share $ 0.84 $ 0.60
----------- -----------
----------- -----------
Reconciliation of number of shares outstanding:
Common Stock outstanding at period end 46,007,000 42,970,000
Additional dilutive effect of outstanding
options (as determined by the application of
the treasury stock method) 1,291,000 1,398,000
Net changes in Common Stock for issuance (649,000) 185,000
----------- -----------
Weighted average Common Stock and common stock
equivalents outstanding 46,649,000 44,553,000
----------- -----------
----------- -----------
Note: Share and option amounts have been restated for all periods presented
to include the shares and options of AVEMCO Corporation prior to its
combination with the Company (see notes 1 and 3 to the condensed
consolidated financial statements).
<PAGE>
EXHIBIT 11
HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE (UNAUDITED)
- -------------------------------------------------------------------------------
For the three months ended September 30,
1997 1996
- -------------------------------------------------------------------------------
Net earnings $17,118,000 $13,749,000
----------- -----------
----------- -----------
Primary:
Weighted average Common Stock and common stock
equivalents outstanding 47,122,000 44,356,000
----------- -----------
----------- -----------
Earnings per share $ 0.36 $ 0.31
----------- -----------
----------- -----------
Reconciliation of number of shares outstanding:
Common Stock outstanding at period end 46,007,000 42,970,000
Additional dilutive effect of outstanding
options (as determined by the application
of the treasury stock method) 1,292,000 1,370,000
Net changes in Common Stock for issuance (177,000) 16,000
----------- -----------
Weighted average Common Stock and common stock
equivalents outstanding 47,122,000 44,356,000
----------- -----------
----------- -----------
Fully Diluted:
Weighted average Common Stock and common stock
equivalents outstanding 47,201,000 44,419,000
----------- -----------
----------- -----------
Earnings per share $ 0.36 $ 0.31
----------- -----------
----------- -----------
Reconciliation of number of shares outstanding:
Common Stock outstanding at period end 46,007,000 42,970,000
Additional dilutive effect of outstanding
options (as determined by the application
of the treasury stock method) 1,292,000 1,431,000
Net changes in Common Stock for issuance (98,000) 18,000
----------- -----------
Weighted average Common Stock and common stock
equivalents outstanding 47,201,000) 44,419,000
----------- -----------
----------- -----------
Note: Share and option amounts have been restated for all periods presented
to include the shares and options of AVEMCO Corporation prior to its
combination with the Company (see notes 1 and 3 to the condensed
consolidated financial statements).
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION FROM THE CONDENSED
CONSOLIDATED BALANCE SHEETS AND CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
FOUND ON PAGES 3 AND 4 OF THE COMPANY'S FORM 10-Q FOR THE QUARTER ENDED
SEPTEMBER 30, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<DEBT-HELD-FOR-SALE> 390,199,000
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 10,093,000
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 532,921,000
<CASH> 4,827,000
<RECOVER-REINSURE> 185,249,000
<DEFERRED-ACQUISITION> 2,269,000
<TOTAL-ASSETS> 1,184,579,000
<POLICY-LOSSES> 267,488,000
<UNEARNED-PREMIUMS> 158,057,000
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 82,334,000
0
0
<COMMON> 46,007,000
<OTHER-SE> 311,493,000
<TOTAL-LIABILITY-AND-EQUITY> 1,184,579,000
124,431,000
<INVESTMENT-INCOME> 20,424,000
<INVESTMENT-GAINS> (258,000)
<OTHER-INCOME> 55,519,000
<BENEFITS> 70,537,000
<UNDERWRITING-AMORTIZATION> 6,209,000
<UNDERWRITING-OTHER> 60,393,000
<INCOME-PRETAX> 58,956,000
<INCOME-TAX> 19,825,000
<INCOME-CONTINUING> 39,131,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 39,131,000
<EPS-PRIMARY> 0.84
<EPS-DILUTED> 0.84
<RESERVE-OPEN> 117,283,000
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 108,606,000
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<LEGEND>
THIS RESTATED SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION FROM THE FINANCIAL
STATEMENTS OF THE COMPANY'S FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1997,
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. THE
AMOUNTS SHOWN BELOW HAVE BEEN RESTATED DUE TO THE MERGER WITH AVEMCO ON
SEPT. 17, 1997, WHICH WAS ACCOUNTED FOR AS A POOLING-OF-INTERESTS (SEE NOTE 1).
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<DEBT-HELD-FOR-SALE> 354,491,000
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 20,475,000
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 455,431,000
<CASH> 13,684,000
<RECOVER-REINSURE> 137,761,000
<DEFERRED-ACQUISITION> 7,085,000
<TOTAL-ASSETS> 965,532,000
<POLICY-LOSSES> 227,268,000
<UNEARNED-PREMIUMS> 157,627,000
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 71,643,000
0
0
<COMMON> 46,245,000
<OTHER-SE> 240,335,000
<TOTAL-LIABILITY-AND-EQUITY> 965,532,000
128,852,000
<INVESTMENT-INCOME> 17,326,000
<INVESTMENT-GAINS> 6,654,000
<OTHER-INCOME> 49,507,000
<BENEFITS> 83,812,000
<UNDERWRITING-AMORTIZATION> 9,504,000
<UNDERWRITING-OTHER> 73,474,000
<INCOME-PRETAX> 31,774,000
<INCOME-TAX> 5,232,000
<INCOME-CONTINUING> 26,542,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 26,542,000
<EPS-PRIMARY> 0.60
<EPS-DILUTED> 0.60
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
