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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
/X/ Annual Report pursuant to Section 13 or 15(d)of the Securities Exchange Act
of 1934 (Fee required).
/ / Transaction report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (No fee required).
For the fiscal year ended _______December 31, 1996________________________
Commission file number _______0-20766_____________________________________
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HCC Insurance Holdings, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 76-0336636
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
13403 Northwest Freeway, Houston, Texas 77040-6094
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(Address of principal executive offices) (Zip Code)
(713) 690-7300
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(Registrant's telephone number, including area code)
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Securities registered pursuant to Section 12 (b) of the Act: NONE
Securities registered pursuant to Section 12 (g) of the Act:
TITLE OF EACH CLASS
COMMON STOCK, $1.00 PAR VALUE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes __X__ No _____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Section229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. / /
The aggregate market value on March 24, 1997, of the voting stock held by
non-affiliates of the registrant was approximately $620.4 million. For purposes
of the determination of the above stated amount, only directors and executive
officers are presumed to be affiliates.
The number of shares outstanding of each of the registrant's classes of common
stock as of March 24, 1997:
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CLASS SHARES OUTSTANDING
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Common Stock, $1.00 par value............................................. 36,167,935
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Documents incorporated by reference: Information called for in Part III of this
Form 10-K is incorporated by reference to the Registrant's definitive Proxy
Statement to be filed within 120 days of the close of the Registrant's fiscal
year in connection with the Registrant's annual meeting of shareholders.
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TABLE OF CONTENTS
HCC INSURANCE HOLDINGS, INC.
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PART I.
ITEM 1. Business......................................................................... 3
ITEM 2. Properties....................................................................... 20
ITEM 3 Legal Proceedings................................................................ 20
ITEM 4. Submission of Matters to a Vote of Security Holders.............................. 20
PART II.
ITEM 5. Market for the Registrant's Common Equity and Related Stockholder Matters........ 21
ITEM 6. Selected Financial Data.......................................................... 22
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations....................................................................... 24
ITEM 8. Financial Statements and Supplementary Data...................................... 29
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosures...................................................................... 30
PART III.
ITEM 10. Directors and Executive Officers of the Registrant............................... 30
ITEM 11. Executive Compensation........................................................... 30
ITEM 12. Security Ownership of Certain Beneficial Owners and Management................... 30
ITEM 13. Certain Relationships and Related Transactions................................... 30
PART IV.
ITEM 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K................ 30
SIGNATURES.............................................................................................. 31
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Forward-looking statements in this Form 10-K 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 in its various lines of business,
the impact of inflation, changing regulations in foreign countries, the effect
of pending acquisitions, as well as general market conditions, competition,
licensing 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.
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PART I
ITEM 1. BUSINESS
GENERAL
HCC Insurance Holdings, Inc. ("HCCH" or the "Company") is a Delaware
corporation with principal and executive offices located at 13403 Northwest
Freeway, Houston, Texas 77040. HCCH and its consolidated subsidiaries are
collectively referred to as the "Company". HCCH, through its subsidiaries,
provides specialized property and casualty insurance to commercial customers,
underwritten on both a direct and reinsurance basis, and, to a lesser extent,
insurance agency services. The Company's principal insurance company
subsidiaries are Houston Casualty Company ("HCC") and Trafalgar Insurance
Company ("TIC") in Houston, Texas and IMG Insurance Company Ltd. ("IMG") in
Amman, Jordan. The Company's principal agency subsidiaries are LDG Management
Company, Incorporated ("LDG") in Wakefield, Massachusetts; HCC Underwriters, A
Texas Corporation ("HCCU") in Houston, Texas; North American Special Risk
Associates, Inc. ("NASRA") in Northbrook, Illinois and Middle East Insurance
Brokers, Ltd. ("MEIB") in Amman, Jordan.
The Company's underwriting activities are focused on providing aviation,
marine, property, offshore energy and accident and health insurance on a
worldwide basis and international reinsurance on these same lines of business.
The Company also specializes in marketing and servicing complicated, high value,
structured insurance and reinsurance programs placed on behalf of domestic and
foreign clients which cover large, ocean marine fleets; complex, multinational,
energy and industrial businesses; international aviation operations; large
international property accounts; and a variety of accident and health related
risks. The Company derives substantially the same amount of its business
domestically and internationally. The Company operates primarily on a surplus
lines or a non-admitted basis and is licensed in Texas and Oklahoma.
Since its founding in 1974, the Company and its predecessor companies have
been consistently profitable, generally reporting annual increases in gross
written premium ("GWP"), net written premium ("NWP") and total revenue. During
the period 1992 through 1996, the Company had an average combined ratio of 78.1%
versus the less favorable 109.3% recorded by the U.S. property and casualty
insurance industry overall (1992-1995). During the same period, the Company's
GWP increased from $75.1 million to $230.8 million, an increase of 207% and net
earnings increased from $5.3 million to $29.3 million, an increase of 454%.
HCC and TIC are rated "A"(Excellent) by A.M. Best and HCC is rated "Aq" by
S&P. An A.M. Best or S&P rating is intended to provide an independent opinion of
an insurer's ability to meet its obligations to policyholders and should not be
considered an investment recommendation.
STRATEGY
The Company's operating philosophy is to maximize underwriting profit while
preserving the integrity of shareholders' equity. The Company concentrates its
writings in selected, narrowly defined lines of business in which it believes
there is a substantial opportunity to achieve underwriting profits. The Company
primarily underwrites first party, physical damage coverages and lines of
business which have relatively short lead times between the occurrence of an
insured event and the reporting of claims to the Company. With respect to the
underwriting management, marketing and related services, the Company seeks to
offer quality underwriting, decision-making, support and reinsurance capacity
and financial and other resources to take advantage of market opportunities for
the development of new products.
The property and casualty insurance underwriting business has historically
been cyclical (though not seasonal). Within the overall cycle of the industry,
particular lines of business experience their own cycles.
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These cycles are characterized by periods of excess capital and significant
competition in policy pricing, terms and conditions, followed by periods of
capital shortages, typically resulting from adverse loss experience, which leads
to decreased competition, higher premium rates and stricter underwriting
standards.
The position of a particular line of business in its respective underwriting
cycle depends on prevailing premium rates, availability and cost of reinsurance,
and other market conditions. The Company considers each of these factors in
determining when to increase or decrease premium volume in each line. With this
approach, the Company focuses on increasing net earnings rather than premium
volume or market share.
The Company purchases a substantial amount of reinsurance to limit its net
loss from both individual and catastrophic risks. The degree to which the
Company reinsures varies by, among other things, the particular risks inherent
in the policies underwritten.
The Company's business plan is to expand its underwriting activities and
continue the growth of its insurance agency operations. However, the Company's
business plan is shaped by its underlying operating philosophy, which is to
maximize underwriting profit opportunities, while preserving the integrity of
shareholders' equity and to seek to acquire complementary businesses with
established management and reputation in the insurance agency field, whose
business, the Company believes, can be enhanced through the synergism created by
the Company's underwriting capabilities and other owned insurance businesses. As
a result, the Company's primary interests are not in expanding market share or
necessarily, GWP, but rather in increasing net earnings. To accomplish this
objective, the Company: (i) has been and is prepared to emphasize or reduce
underwritings in certain lines as premium rates, the availability and cost of
reinsurance and other market conditions warrant; and (ii) will continue to
attempt to limit its downside net loss exposure through the effective, prudent
and conservative use of reinsurance.
The Company believes its operational flexibility, experienced underwriting
personnel, and access to and expertise in the reinsurance marketplace allow the
Company to implement its strategy of emphasizing more profitable lines of
business during periods of increased premium rates and de-emphasizing less
profitable lines of business during periods of severe competition. In addition,
through its acquisition and ownership of insurance agency businesses, the
Company believes it has additional lines of business that can complement its
underwriting activities.
RECENT ACQUISITIONS
Effective January 1, 1994, HCCU acquired a 25% interest in MEIB, a wholesale
insurance and reinsurance broker based in Amman, Jordan. Concurrent with the
purchase of IMG on October 1, 1994, HCCH acquired the remaining 75% of interest
in MEIB and HCCU transferred its 25% interest in MEIB to HCCH, thereby making
MEIB a wholly owned subsidiary of HCCH. To acquire 100% of MEIB, the Company
issued 109,524 shares (pre split) of its Common Stock and paid a total of $3.9
million in cash.
Effective October 1, 1994, HCCH acquired 100% of the stock of IMG, a
property and casualty insurance company based in Amman, Jordan. IMG specializes
in insuring large commercial risks. In exchange for IMG's stock, the Company
issued 838,095 shares (pre split) of its Common Stock and paid $4.4 million in
cash.
These acquisitions were made in order to expand the Company's international
business operations, principally in the Middle East, Asia and Africa.
On May 24, 1996, the Company issued 6,250,000 shares of its common stock to
acquire all of the outstanding shares of LDG. LDG acts on behalf of insurance
and reinsurance companies and conducts its business in two areas: (i) insurance
underwriting management and (ii) reinsurance underwriting management and
intermediary services. LDG underwrites insurance and/or reinsurance in the
following lines of business: medical stop-loss insurance for employer sponsored
self-insured health plans, accident and health special risk, workers'
compensation, alternative workers' compensation, and specialty aviation. LDG
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generally concentrates on lines of business that have relatively short lead
times between the occurrence of an insured event and the reporting of claims.
On November 27, 1996, the Company issued 1,136,400 shares of its Common
Stock and paid $1.7 million in cash to acquire all of the outstanding shares of
North American Special Risk Associates, Inc. group of companies ("NASRA"). NASRA
provides underwriting and claims management services to insurance and
reinsurance companies primarily in occupational accident insurance for
self-employed truckers.
On January 24, 1997, the Company issued 266,667 shares of its Common Stock
and paid $6.55 million in cash to acquire all of the occupational accident
business of TRM International, Inc.
These acquisitions were made in order to increase the agency (non-risk
bearing) operations of the Company.
PENDING ACQUISITIONS
On January 6, 1997, the Company announced that it had agreed in principal to
acquire all of the outstanding shares of Interworld Inc. group of companies
("Interworld") in exchange for 725,000 shares of the Company's Common Stock.
Interworld, through its subsidiaries, acts as a managing general agency that
specializes in underwriting general aviation risks throughout the United States,
with special emphasis on private and corporate aircraft as well as small to
medium size airports and commercial operators.
On January 17, 1997, the Company and AVEMCO Corporation ("AVEMCO") jointly
announced that they had signed a letter of intent to merge in a stock-for-stock
transaction, each share of AVEMCO common stock to be exchanged for one share of
HCCH's Common Stock. The Companies executed definitive agreements on February
28, 1997. AVEMCO provides specialized property and casualty insurance products
and services, principally involving aviation. Non-aviation specialty lines
include lenders single interest, short-term health and pleasure marine.
Insurance products are distributed on a direct basis nationally and in Canada
(except Quebec) and through agency and brokerage networks nationwide. AVEMCO's
insurance services businesses offer management and related subrogation and
salvage services, short-term health and travel insurance programs,
administration and availability of short-term health programs primarily for
foreign students resident in the United States, worldwide multilingual emergency
assistance services for individuals who become ill or are injured while
traveling abroad and computer software and related products and services for
property and casualty insurance companies in the United States.
The merger is subject to approval by each of the Company's shareholders and
additional approval by certain regulatory agencies. The Companies have filed
with the Securities and Exchange Commission a Join Proxy Statement/Prospectus
relating to each of their respective Company's special shareholder's meeting.
The Company anticipates that its Special Meeting of Shareholders will be held
prior to May 31, 1997, and the merger will be consummated as soon thereafter as
all other conditions to the merger are satisfied. There can be no assurance that
the conditions to the proposed merger will be satisfied or that the shareholders
will approve the transaction and the merger will consummated.
These acquisitions are expected to expand and strengthen the Company's
existing lines of business.
INSURANCE COMPANY OPERATIONS
The Company's property and casualty insurance business specializes in the
direct, including facultative reinsurance, underwriting of aviation, marine,
offshore energy, property and accident and health risks, as well as treaty
reinsurance in the same lines of business.
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LINES OF BUSINESS
The following table sets forth the Company's GWP by line of business and the
percent to total GWP for the periods indicated:
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FOR THE YEARS ENDED DECEMBER 31,
(DOLLARS IN THOUSANDS)
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1996 1995 1994
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Direct
Aviation...................................... $ 71,697 31% $ 63,615 27% $ 38,743 20%
Marine........................................ 28,061 12 33,797 14 29,230 15
Offshore Energy............................... 8,496 4 14,893 6 20,123 11
Property...................................... 118,149 51 124,331 52 100,832 52
Accident and Health........................... 2,756 1 -- -- -- --
Reinsurance
Excess of Loss................................ 734 .5 1,877 1 2,019 1
Proportional.................................. 862 .5 445 -- 1,931 1
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Total gross written premium..................... $ 230,755 100% $ 238,958 100% $ 192,878 100%
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The following table sets forth the Company's NWP by line of business and the
percent to total NWP for the periods indicated:
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FOR THE YEARS ENDED DECEMBER 31,
(DOLLARS IN THOUSANDS)
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1996 1995 1994
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Direct
Aviation.......................................... $ 47,619 49% $ 38,788 39% $ 14,344 24%
Marine............................................ 21,670 22 29,410 30 17,229 29
Offshore Energy................................... 3,472 4 5,115 5 8,194 14
Property.......................................... 21,534 22 24,186 24 17,242 29
Accident and Health............................... 2,671 3 -- -- -- --
Reinsurance
Excess of Loss.................................... (1,047) (1) 833 1 759 1
Proportional...................................... 857 1 454 1 1,926 3
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Total net written premium........................... $ 96,776 100% $ 98,786 100% $ 59,694 100%
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DIRECT AND FACULTATIVE REINSURANCE UNDERWRITING
AVIATION--The Company insures predominantly foreign general aviation risks
including fixed base, rotor wing and cargo operations and commuter airlines. The
Company does not generally insure major domestic trunk airlines, satellites,
corporate aircraft or United States passenger liabilities. The coverages
underwritten include hull (including engines, avionics and other systems),
liabilities, war, cargo and various ancillary coverages.
The Company has been underwriting aviation risks since 1981. GWP has risen
rapidly since 1992, increasing to $71.7 million in 1996 from $4.3 million in
1992. This growth has occurred due to a dramatic increase in rates as a result
of extremely adverse worldwide underwriting results in prior years and the
Company's ability to respond quickly to the opportunity to write new business in
a rising market. In addition, the Company resumed writing domestic general
aviation risks late in 1996. Rates have now reached very acceptable levels of
profitability but the Company expects the increase in GWP and NWP to slow during
1997 as recent competition is beginning to effect this line of business.
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Treaty reinsurance is maintained on an excess of loss basis to protect the
Company against individual risk severity of loss and the relatively low level of
catastrophe exposure that exists on this book of business.
MARINE--The Company underwrites marine risks for ocean going vessels ("Blue
Water"), inland and coastal trading vessels ("Brown Water") and fishing vessels.
The coverages written include hull and machinery, liabilities (including
protection and indemnity), marine cargo and various ancillary coverages.
The Company has underwritten marine risks since 1984. Rates increased
substantially between 1991 and 1993 and maintained an acceptable level of
profitability. However, recent competition has caused downward pressure on the
rates which has caused a reduction in GWP from $33.8 million in 1995 to $28.1
million in 1996. The Company believes rates will continue to soften during 1997.
Treaty reinsurance is maintained on an excess of loss basis to protect the
Company against individual risk severity of loss and the relatively low level of
catastrophe exposure that exists on this book of business.
OFFSHORE ENERGY--The Company has been underwriting offshore energy risks
since 1988. Offshore energy risks include drilling rigs, production and
gathering platforms, and pipelines. Coverages underwritten include physical
damage, liabilities, business interruption and various ancillary coverages.
Rates have declined significantly during the past few years to levels where
profitability is unlikely. Underwriting has been on a very selective basis,
striving for quality rather than quantity, which has resulted in a continued
reduction in GWP from $20.1 million in 1994 to $8.5 million in 1996. The Company
anticipates a further decline in GWP and NWP during 1997 and continues to
evaluate the viability of this line of business.
Treaty reinsurance is maintained on both a proportional and an excess of
loss basis to protect the Company against individual risk severity of loss and
the catastrophic exposure that exists, for example, from a hurricane in the Gulf
of Mexico.
PROPERTY--The Company specializes in writing catastrophe exposed risks in
general and the property risks of large multinational corporations covering such
commercial risks as hotels, office buildings, retail locations, factories,
industrial plants, utilities, refineries, and natural gas and petrochemical
plants. Coverage includes business interruption and physical damage, including
flood and earthquake.
The Company has written property business since 1986. GWP grew rapidly
beginning in 1993 as the Company expanded its underwriting into international
business, often in the same countries where it already wrote aviation and/or
marine business. Dramatic rate increases occurred during the period 1993 to 1995
due to the severe lack of catastrophe capacity resulting from the effects of
Hurricane Andrew and the Northridge Earthquake on the world's reinsurance
markets. With support from its reinsurers, the Company moved quickly to take
advantage of the changing market. During 1996, premium rates began to soften
toward the end of the year.
GWP grew from $14.9 million in 1992 to $124.3 million in 1995, with a slight
decrease to $118.1 million in 1996. NWP also grew rapidly but substantial
reinsurance costs will always keep the actual premium retained significantly
smaller than GWP. In the absence of a major industry catastrophe loss, the
Company expects both GWP and NWP to decline during 1997 as premium rates
continue to soften.
Treaty reinsurance is maintained on both a proportional and an excess of
loss basis to ensure adequate protection, particularly against catastrophe
exposures. The Company conservatively estimates its aggregate exposure in any
individual catastrophe zone and maintains catastrophe reinsurance to cover its
exposure to any one occurrence.
ACCIDENT AND HEALTH--The Company began reinsuring accident and health risks
during 1996 which are produced by the agencies acquired during the year. The
risks underwritten include medical stop-loss insurance for employer sponsored
self-insured health plans; reinsurance in the medical, accident and health
special risk, workers' compensation and alternative workers' compensation areas;
and occupational
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accident insurance for self-employed truckers. The Company underwrites
reinsurance in this area on both a proportional and excess of loss basis. The
Company expects GWP and NWP to increase significantly during 1997.
REINSURANCE UNDERWRITING
The Company engages in reinsurance underwriting on a periodic basis when
market rates and other conditions make it profitable to do so. The Company began
writing treaty reinsurance in 1984, but has been dramatically reducing its book
of business, particularly excess of loss business, due to the lack of adequate
reinsurance protection available at any reasonable cost.
EXCESS OF LOSS--The Company previously wrote excess of loss reinsurance,
typically aviation, marine and non-marine catastrophe exposures. In 1992, due to
a general market contraction of available reinsurance for excess of loss
business, the Company was unable to purchase adequate protection at a reasonable
cost and, therefore, elected not to continue writing this class other than
selectively on a net basis. The run off of this line of business continues
profitably.
PROPORTIONAL--The Company underwrites proportional reinsurance on a
selective basis. The exposures reinsured are typically the same type of risks
that the Company underwrites on a direct basis. The Company provides this
reinsurance to obtain a more diversified cross section of business which it
might not otherwise have access to and for reciprocity with companies with whom
it has an ongoing business relationship.
FACULTATIVE--The Company underwrites facultative reinsurance in all of its
lines of business. Typically, this is on international business in order to
comply with local licensing requirements or as reinsurance of captives and
usually can be considered direct business, as the Company maintains underwriting
and claims control. However, all of this business is recorded under the caption
of "Reinsurance Assumed".
HOUSTON CASUALTY COMPANY
HCC, the Company's principal insurance company subsidiary, operates
worldwide in all of the lines of business in which the Company specializes.
HCC's business is produced by independent agents and brokers, the group's agency
subsidiaries, TIC, IMG and other insurance and reinsurance companies worldwide.
HCC has a highly experienced staff of underwriters trained to deal with the high
value, complicated exposures prevailing in the lines of business in which the
Company specializes. As of December 31, 1996, HCC had statutory policyholders'
surplus of $150.7 million.
TRAFALGAR INSURANCE COMPANY
HCC formed a wholly owned subsidiary, TIC, in 1993. TIC is an Oklahoma
domiciled property and casualty insurance company which currently underwrites
only domestic property risks and allows HCC to offer insurance on a surplus
lines basis in certain jurisdictions where HCC is not permitted to do so.
Applications for surplus lines approval are pending in many additional states
and TIC will expand its operations as approvals are received. As of December 31,
1996, TIC had statutory policyholders' surplus of $27.6 million.
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IMG INSURANCE COMPANY LTD.
Organized in September, 1991, as a Jordanian Exempt Company ("JEC"), IMG
conducts substantially all of its business outside of Jordan and is principally
engaged in insuring and reinsuring large commercial risks in substantially the
same lines of business as HCC. In connection with IMG's business, the Company
has agreed to unconditionally guarantee certain of the insurance and reinsurance
business of IMG. As of December 31, 1996, IMG had policyholders' surplus of
$59.3 million.
AGENCY OPERATIONS
The Company's agency subsidiaries act on behalf of insurance and reinsurance
companies, conducting business in the areas of insurance and reinsurance
underwriting management and intermediary services. The agency subsidiaries do
not assume any insurance or reinsurance risk themselves. LDG, the largest of
these subsidiaries, manages and markets medical stop-loss and excess coverage
insurance products principally to employer sponsored self-insured health plans.
Other areas of LDG's business include medical, accident and health special risk,
workers' compensation and alternative workers' compensation and specialty
aviation reinsurance. NASRA acts as an insurance and reinsurance underwriting
manager in the area of occupational accident insurance (similar to workers'
compensation) to self-employed truckers. In addition, LDG and NASRA produce all
of the Company's accident and health business.
HCCU and MEIB specialize in marketing and servicing large, complicated
insurance and reinsurance programs placed on behalf of multinational clients
operating in the same lines of business that the Company underwrites. Such
business is placed with domestic and international insurance companies,
including HCC, TIC, and IMG, on a direct basis and through intermediaries. In
addition, LDG, HCCU and MEIB act as reinsurance intermediaries on behalf of HCC,
TIC, IMG and other insurance companies, placing both facultative and treaty
reinsurance. The Company's revenue is composed of fee and commission income
which increased to $38.5 million in 1996 from $17.0 million in 1992. Management
expects continued growth in agency revenues in 1997, both from existing
operations and pending acquisitions.
REINSURANCE CEDED
The Company principally utilizes reinsurance to reduce its net liability on
individual risks, to protect against catastrophic losses and to achieve a
desired ratio of NWP to policyholders' surplus. Various intermediaries,
including LDG, HCCU and MEIB, facilitate the placement of this reinsurance
coverage on behalf of the Company and are compensated, directly or indirectly,
by the reinsurers.
Reinsurance is ceded under treaties on both a proportional (where the
reinsurer shares proportionately in premiums and losses) and an excess of loss
basis (where only losses above a fixed point are reinsured). The Company also
reinsures on a facultative (individual policy) basis on large individual risks.
Management believes that the Company reinsures its risks to a greater extent
than most of its competitors and most other insurance companies. This strategy
greatly reduces the likelihood of a significant net loss from insurance company
operations and protects the integrity of the Company's shareholders' equity.
Under its current reinsurance protections, the Company has limited its net
retained loss, across any single line of business, to a maximum of approximately
$1.0 million for any one risk, but significantly less on most risks.
The type, cost and limits of reinsurance purchased can vary from year to
year based upon the Company's desired retention levels and the availability of
adequate reinsurance at a reasonable price. The majority of the Company's
reinsurance programs are renewed on a calendar year basis. For 1997, the Company
has been successful in renewing its reinsurance protections at reduced costs to
1996 and was able to expand its underwriting capacity. This expanded capacity
will assist the Company in taking advantage of underwriting opportunities as
they present themselves.
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The Company structures a specific reinsurance program for each line of
business it underwrites. This reinsurance is placed to protect the Company from
any foreseeable event; proportionally to cover frequency and for catastrophe
coverage; excess of loss to cover severity on an individual risk; and
catastrophe to cover losses involving multiple risks, such as those resulting
from a hurricane or an earthquake. The Company does not expose itself to a net
loss from an individual risk in excess of its reinsurance protection.
The Company writes business in areas exposed to catastrophic losses and has
significant exposures to this type of loss in California, certain Gulf Coast
states and Mexico. The Company carefully assesses its overall exposures to a
single catastrophic event and applies procedures, that it believes are more
conservative than is typically used by the industry, to ascertain the Company's
probable maximum loss ("PML") from any single event. The Company maintains
reinsurance protection which it believes is sufficient to cover any foreseeable
event.
The Company receives an overriding (ceding) commission on the premium ceded
to reinsurers which compensates the Company for the direct costs associated with
the production of the premium, the servicing of the business during the term of
the policies ceded, and the costs associated with the placement of the related
reinsurance. In addition, certain of the Company's reinsurance treaties allow
for a sharing with the Company by the reinsurers of the net profits generated
under such treaties.
The ceding of reinsurance does not discharge the Company from liability to
its policyholders. The Company is required to pay losses even if the reinsurer
fails to meet its obligations under the reinsurance contract. To minimize its
exposure to reinsurance credit risk, the Company places its reinsurance with a
diverse group of financially sound reinsurers. The Company's 1997 treaty
reinsurance program was placed with more than 56 domestic and foreign
reinsurers. As of December 31, 1996, the total amount recoverable from
reinsurers was approximately $123.2 million, of which $21.7 million represents
paid losses recoverable and $103.9 million represents outstanding losses
recoverable less a $2.4 million reserve for uncollectible reinsurance. In
addition, ceded unearned premium was $65.8 million. The Company held $67.9
million of irrevocable letters of credit and $9.1 million in cash to
collateralize a portion of the total amount recoverable and had other payable
balances due to its reinsurers of $89.6 million as potential offsets against
reinsurance recoverables.
The following table sets forth the reinsurers with a total recoverable
balance greater than $10.0 million and the collateral and potential offsets held
by the Company as of December 31, 1996 (dollars in thousands):
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LETTERS OF
REINSURANCE CREDIT,
RECOVERABLES AND CASH DEPOSITS
CEDED UNEARNED AND
REINSURER LOCATION PREMIUM OTHER PAYABLES
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Underwriters at Lloyd's.............................. London, England $ 28,962 $ 18,446
GIO Insurance Limited................................ Sydney, Australia 25,204 26,106
Reinsurance Australia Corporation, Ltd. ............. Sydney, Australia 20,562 19,332
Underwriters Indemnity Company....................... Houston, TX 12,531 5,934
SCOR Reinsurance Company............................. New York, NY 11,105 2,428
AXA Reinsurance Company.............................. Wilmington, DE 10,402 2,759
</TABLE>
Due to the Company's financial analysis of active and potential reinsurers
and its conservative strategy of diversifying its reinsurers, the Company has
never incurred a significant loss on recoverables from reinsurers. The Company
has established a reserve of $2.4 million as of December 31, 1996, to reduce the
effects of any recoverable problem.
10
<PAGE>
OPERATING RATIOS
PREMIUM TO SURPLUS RATIO
The following table shows, for the periods indicated, the ratio of GWP and
NWP to statutory policyholders' surplus for the Company's property and casualty
insurance company subsidiaries:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(DOLLARS IN THOUSANDS)
---------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ---------
GWP.......................................... $ 230,755 $ 238,958 $ 192,878 $ 123,650 $ 75,119
NWP.......................................... 96,776 98,786 59,694 38,556 25,618
Policyholders' surplus....................... 212,194 177,317 134,464 102,803 39,146
GWP Ratio.................................... 108.7% 134.8% 143.4% 120.3% 191.9%
GWP Industry Average(1)...................... * 194.0 221.8 224.4 238.0
NWP Ratio.................................... 45.6% 55.7% 44.4% 37.5% 65.4%
NWP Industry average (1)..................... * 113.0 129.7 132.6 139.6
</TABLE>
- ------------------------
* Industry average not yet available
(1) Source: A.M. Best Company.
While there is no statutory requirement regarding a permissible premium to
surplus ratio, guidelines established by the National Association of Insurance
Commissioners ("NAIC") provide that a property and casualty insurer's annual
statutory GWP should not exceed 900% and NWP should not exceed 300% of its
policyholders' surplus. In keeping with its philosophy of protecting its
shareholders' equity and limiting its aggregate loss exposure, the Company
maintains premium to surplus ratios significantly lower than such guidelines,
and, as indicated above, below industry norms.
COMBINED RATIO
The underwriting experience of a property and casualty insurance company is
indicated by its combined ratio. The Company's insurance subsidiaries' loss
ratio, expense ratio and combined ratio, determined on the basis of statutory
accounting principles ("SAP"), are shown in the following table:
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Loss ratio............................................................... 56.4% 63.4% 64.6% 66.7% 66.2%
Expense ratio............................................................ 15.6 11.5 10.2 14.4 21.7
--- --------- --------- --------- ---------
Combined ratio........................................................... 72.0% 74.9% 74.8% 81.1% 87.9%
--- --------- --------- --------- ---------
--- --------- --------- --------- ---------
Industry Average(1)...................................................... * 106.4% 108.4% 106.9% 115.7%
</TABLE>
- ------------------------
* Industry average not yet available
(1) Source: A.M. Best Company.
RESERVES
Applicable insurance laws and regulations, under which the Company operates,
require that reserves be maintained for the payment of loss and loss adjustment
expense ("LAE") with respect to both reported and incurred but not reported
("IBNR") claims under insurance and reinsurance policies issued by the Company.
The Company establishes reserves through an evaluation of each individual claim
rather than by any average reserving method. In the case of direct and
facultative reinsurance business, loss reserves are determined by evaluating
reported claims on the basis of the type of loss, jurisdiction of the
occurrence, knowledge of the circumstances surrounding the claim, severity of
injury or damage, potential for ultimate
11
<PAGE>
exposure, experience with the insured and the line of business and policy
provisions relating to the particular type of claim. The Company establishes
loss reserves for excess of loss and proportional reinsurance claims based on
information and reports received from ceding companies. Loss reserves for IBNR
losses are determined in part on the basis of statistical information and in
part on industry experience with respect to the probable number and nature of
claims arising from occurrences which have not been reported. The Company does
not discount any of its loss reserves.
The period of time between the occurrence of an insured event and the final
settlement of a claim may be many years, and during this period it often becomes
necessary to adjust the claim estimates either upward or downward. Certain
classes of marine and offshore energy insurance underwritten by the Company have
historically had long lead times between the occurrence of an insured event,
reporting of the claim to the Company, and final settlement. In such cases, the
Company is forced to estimate reserves over long periods of time, with the
possibility of several adjustments to reserves. Other classes of insurance, such
as property, historically have shorter lead times between the occurrence of an
insured event, reporting of the claim to the Company, and final settlement. The
reserves with respect to such property classes are, therefore, less likely to be
adjusted.
The reserving process is intended to provide implicit recognition of the
impact of inflation and other factors affecting loss payments by taking into
account changes in historical payment patterns and perceived probable trends.
However, there is no precise method for the subsequent evaluation of the
adequacy of the consideration given to inflation, or to any other specific
factor, some of which are interdependent.
The Company underwrites, directly and through reinsurance, risks which are
denominated in a number of foreign currencies, and therefore establishes and
maintains loss reserves with respect to these policies in the respective
currencies. These reserves are subject to exchange rate fluctuations, which may
have an effect on the Company's earnings. The Company continues to limit its
exposure to future currency fluctuations through the use of foreign currency
forward contracts.
The following loss development triangle shows changes in reserves in
subsequent years from the prior loss estimates based on experience as of the end
of each succeeding year on the basis of generally accepted accounting principles
("GAAP"). The estimate is increased or decreased as more information becomes
known about the frequency and severity of losses for individual years. A
redundancy means the original estimate was higher than the current estimate; a
deficiency means that the current estimate is higher than the original estimate.
12
<PAGE>
The first line of each loss development triangle presents, for each of the
years indicated, the gross reserve liability including the reserve for IBNR
losses. The first section of each table shows, by year, the cumulative amounts
of loss and LAE paid as of the end of each succeeding year. The second section
sets forth the re-estimates in later years of incurred losses, including
payments, for the years indicated. The "cumulative redundancy (deficiency)"
represents, as of December 31, 1996, the difference between the latest
re-estimated reserves and the reserves as originally estimated.
The following loss development triangle shows development in loss reserves
on a gross basis:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(DOLLARS IN THOUSANDS)
----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
Balance Sheet Reserves:.............................. $ 185,822 $ 158,451 $ 129,755 $ 98,399 $ 81,997
Cumulative Paid as of:
One year later..................................... 91,910 72,077 54,385 58,367
Two years later.................................... 109,912 90,994 89,519
Three years later.................................. 118,551 115,487
Four years later................................... 136,931
Re-estimated liability as of:
End of year........................................ 185,822 158,451 129,755 98,399 81,997
One year later..................................... 204,262 148,168 121,428 116,007
Two years later.................................... 168,444 140,080 131,317
Three years later.................................. 160,180 148,748
Four years later................................... 169,450
Cumulative redundancy (deficiency)................... $ (45,811) $ (38,689) $ (61,781) $ (87,453)
</TABLE>
[THE REMAINDER OF THIS PAGE LEFT INTENTIONALLY BLANK]
13
<PAGE>
The following loss development triangle shows development in loss reserves
on a net basis:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(DOLLARS IN THOUSANDS)
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1996 1995 1994 1993 1992 1991 1990
---------- ---------- ---------- --------- --------- --------- ---------
Gross reserves for loss and LAE.............. 185,822 158,451 129,755 98,399 81,997 83,889 64,287
Less reinsurance recoverables................ 103,888 92,125 85,214 66,468 60,232 69,325 49,600
---------- ---------- ---------- --------- --------- --------- ---------
Reserves for loss and LAE net of
reinsurance................................ $ 81,934 $ 66,326 $ 44,541 $ 31,931 $ 21,765 $ 14,564 $ 14,687
Cumulative paid, net reinsurance as of
One year later............................. 19,731 15,714 12,361 6,715 4,279 7,100
Two years later............................ 22,231 18,402 13,471 5,533 11,049
Three years later.......................... 20,900 15,238 10,112 11,396
Four years later........................... 15,923 10,812 15,050
Five years later........................... 11,018 15,453
Six years later............................ 15,317
Seven years later..........................
Eight years later..........................
Nine years later...........................
Ten years later............................
Re-estimated liability, net of reinsurance as
of
End of year................................ 81,934 66,326 44,541 31,931 21,765 14,564 14,687
One year later............................. 62,523 42,923 32,648 21,513 14,951 17,514
Two years later............................ 43,316 32,544 22,061 14,590 17,707
Three years later.......................... 33,610 23,180 15,290 16,785
Four years later........................... 25,709 16,346 17,230
Five years later........................... 18,975 18,421
Six years later............................ 20,263
Seven years later..........................
Eight years later..........................
Nine years later...........................
Ten years later............................
Cumulative redundancy (deficiency)........... $ 3,803 $ 1,225 $ (1,679) $ (3,944) $ (4,411) $ (5,576)
<CAPTION>
<S> <C> <C> <C> <C>
1989 1988 1987 1986
--------- --------- --------- ---------
Gross reserves for loss and LAE.............. 48,948 30,680 32,066 22,357
Less reinsurance recoverables................ 36,586 22,253 25,106 17,118
--------- --------- --------- ---------
Reserves for loss and LAE net of
reinsurance................................ $ 12,362 $ 8,427 $ 6,960 $ 5,239
Cumulative paid, net reinsurance as of
One year later............................. 5,515 725 2,544 2,316
Two years later............................ 8,182 2,334 2,490 3,845
Three years later.......................... 10,791 3,558 3,337 3,642
Four years later........................... 11,207 4,149 4,250 4,041
Five years later........................... 13,434 4,223 4,454 4,561
Six years later............................ 13,361 4,138 4,646 4,957
Seven years later.......................... 13,101 4,476 4,082 5,215
Eight years later.......................... 4,475 4,335 5,516
Nine years later........................... 4,379 5,670
Ten years later............................ 5,678
Re-estimated liability, net of reinsurance as
of
End of year................................ 12,362 8,427 6,960 5,239
One year later............................. 13,330 7,215 7,820 5,060
Two years later............................ 14,367 6,980 6,526 6,481
Three years later.......................... 14,621 6,339 5,815 5,472
Four years later........................... 14,426 6,406 5,871 5,825
Five years later........................... 13,975 6,278 5,842 5,578
Six years later............................ 13,994 5,893 5,752 5,520
Seven years later.......................... 14,991 5,830 5,272 5,457
Eight years later.......................... 6,408 5,290 6,009
Nine years later........................... 5,944 6,032
Ten years later............................ 6,181
Cumulative redundancy (deficiency)........... $ (2,629) $ 2,019 $ 1,016 $ (942)
</TABLE>
14
<PAGE>
The following table provides a reconciliation of the gross liability of loss
and LAE on a GAAP basis at the beginning and end of 1996, 1995 and 1994:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(DOLLARS IN THOUSANDS)
----------------------------------
<S> <C> <C> <C>
1996 1995 1994
---------- ---------- ----------
Reserves for loss and LAE at beginning of year............................... $ 158,451 $ 129,755 $ 98,399
Reserves acquired with purchase of subsidiary, net of eliminations........... -- -- 1,059
Provision for loss and LAE for claims occurring in the current year.......... 109,262 128,073 83,194
Increase in estimated loss and LAE for claims occurring in prior years (1)... 45,811 18,413 23,029
---------- ---------- ----------
Incurred loss and LAE........................................................ 155,073 146,486 106,223
---------- ---------- ----------
Loss and LAE payments for claims occurring during:
Current year............................................................... 35,792 45,713 21,541
Prior years................................................................ 91,910 72,077 54,385
---------- ---------- ----------
Loss and LAE payments........................................................ 127,702 117,790 75,926
---------- ---------- ----------
Reserves for loss and LAE at end of the year................................. $ 185,822 $ 158,451 $ 129,755
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
- ------------------------
(1) Changes in loss and LAE reserves on a GAAP basis, for losses occurring in
prior years, reflect the gross effect of the resolution of losses for other
than the reserve value and the subsequent adjustments of loss reserves.
The following table provides a reconciliation of the liability for loss and
LAE, net of reinsurance ceded, on a GAAP basis at the beginning and end of 1996,
1995 and 1994:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER
31,
(DOLLARS IN THOUSANDS)
-------------------------------
<S> <C> <C> <C>
1996 1995 1994
--------- --------- ---------
Reserves for loss and LAE at beginning of year................................... $ 66,326 $ 44,541 $ 31,931
Reserves acquired with purchase of subsidiary, net of eliminations............... -- -- 1,769
Provision for loss and LAE for claims occurring in the current year.............. 55,045 51,387 28,871
Increase in estimated loss and LAE for claims occurring in prior years (2)....... (3,803) (1,618) 717
--------- --------- ---------
Incurred loss and LAE............................................................ 51,242 49,769 29,588
--------- --------- ---------
Loss and LAE payments for claims occurring during:
Current year................................................................... 15,903 12,268 6,386
Prior years.................................................................... 19,731 15,716 12,361
--------- --------- ---------
Loss and LAE payments............................................................ 35,634 27,984 18,747
--------- --------- ---------
Reserves for loss and LAE at end of the year..................................... $ 81,934 $ 66,326 $ 44,541
--------- --------- ---------
--------- --------- ---------
</TABLE>
- ------------------------
(2) Changes in loss and LAE reserves on a GAAP basis, for losses occurring in
prior years, reflect the net effect of the resolution of losses for other
than the reserve value and the subsequent adjustments of loss reserves.
During 1996, the Company had gross loss and LAE deficiency of $45.8 million.
The gross deficiency comes from two primary sources. The first source is the
development of several large claims on individual policies which were
substantially reinsured. These losses were either reported late or reserves were
increased as subsequent information became available. However, because these
policies were substantially reinsured, there is no material effect on a net
basis. The second source is the run-off of the excess of loss
15
<PAGE>
"spiral" business the Company ceased writing in 1991. This development is due to
the delay in reporting of catastrophe losses by the London insurance market,
coupled with the unprecedented number of catastrophes and subsequent insurance
company insolvencies. As the Company did not have enough representative years'
underwriting experience to base a more accurate estimate on, significant gross
development has been experienced. However, this business is substantially
reinsured, thereby not having a material effect on the Company's current
operations or shareholders' equity.
During 1996, the Company had net loss and LAE redundancy of $3.8 million
relating to prior year losses compared to a redundancy of $1.6 million in 1995.
The redundancies have been reflected in the statements of earnings for each year
as they occur.
The Company has no material exposure to environmental pollution losses, as
the Company only began writing business in 1981 and policies issued by the
Company normally contain pollution exclusion clauses which limit pollution
coverage to "sudden and accidental" losses only, thus excluding intentional
(dumping) and seepage claims. Therefore, the Company should not experience any
material development in reserves from environmental pollution claims.
INVESTMENTS
Insurance company investments must comply with applicable laws and
regulations which prescribe the kind, quality and concentration of investments.
In general, these laws and regulations permit investments, within specified
limits and subject to certain qualifications, in Federal, state and municipal
obligations, corporate bonds, preferred and common equity securities, real
estate mortgages and real estate. As of December 31, 1996, the Company had
$320.3 million of investment assets, the majority of which were held by HCC.
The Company's investment policy is determined by the Company's Board of
Directors and is reviewed on a regular basis. Pursuant to its investment policy,
the Company concentrates its investments in obligations of states,
municipalities and political subdivisions, the interest income from which is
predominantly exempt from Federal income tax. The interest rates on these
securities are normally lower than rates on comparable taxable securities. The
Company's portfolio of fixed income securities available for sale principally
consists of intermediate term, tax-exempt securities. The Company generally
intends to hold such securities to maturity. However, the Company regularly
re-evaluates its position based upon market conditions, which may cause the
Company to restructure its portfolio and realize gains or losses in order to
maximize its total return on investments. Accordingly, all fixed income
securities are classified as available for sale and are recorded at market
value.
The Company's financial statements reflect an unrealized ("mark-to-market")
gain on fixed income securities available for sale as of December 31, 1996, of
$2.1 million. Since the Company's intention is to hold these securities until
maturity, it does not currently expect to realize any significant gain or loss
on these investments.
The Company has maintained a substantial level of cash and liquid short-term
instruments in order to maintain the ability to fund large physical damage
losses of the Company's insureds, should they occur. As of December 31, 1996,
the Company had cash and short-term investments of approximately $56.3 million.
The Company also maintains credit facilities which provide for $23 million in
bank lines of credit for the issuance of letters of credit and short-term
borrowings.
From time to time the Company enters into foreign currency forward contracts
as a hedge against foreign currency fluctuations, primarily British Pound
Sterling. The Company's balances denominated in foreign currency fluctuate as
transactions are recorded and settled. During 1996, the average Sterling
liability, for subsidiaries whose functional currency was the United States
dollar, was approximately L907,000 ($1.6 million at December 31, 1996, rate of
exchange) which was hedged by an average open forward contract balance of
approximately L460,000 ($785,000 at the December 31, 1996, rate of
16
<PAGE>
exchange). There was one open foreign currency forward contract as of December
31, 1996, to purchase L500,000 ($856,000 at the December 31, 1996, rate of
exchange) with a maturity of January, 1997. During January, 1997, the Company
entered into a foreign currency forward contact totaling L500,000 ($856,000 at
the December 31, 1996, rate of exchange). The Company expects to continue to
limit its exposure to currency fluctuations through the use of foreign currency
forward contracts.
The Company utilizes these foreign currency forward contracts strictly as a
hedge against existing exposure to foreign currency fluctuations and it does not
do so as any form of speculative or trading investment.
The following tables reflect the investments of the Company (dollars are
expressed in thousands). The table set forth below reflects the average amount
of investments, income earned, and the yield thereon for the years ended
December 31, 1996, 1995, and 1994 respectively:
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Average investments................................................... $ 312,773 $ 258,584 $ 192,397
Net investment income................................................. 15,372 13,250 9,533
Average yield (1)..................................................... 4.9% 5.1% 5.0%
Average tax equivalent yield (1)...................................... 6.7 6.7 6.7
</TABLE>
- ------------------------
(1) Excluding realized and unrealized capital gains and losses.
The table set forth below summarizes, by type, the investments of the
Company as of December 31, 1996:
<TABLE>
<CAPTION>
AMOUNT PERCENT OF TOTAL
---------- -----------------
<S> <C> <C>
Short-term investments................................................................ $ 53,100 16%
U.S. Treasury securities.............................................................. 3,604 1
Obligations of states, municipalities and political subdivisions...................... 261,123 82
Marketable equity securities.......................................................... 2,433 1
---------- ---
Total investments................................................................... $ 320,260 100%
---------- ---
---------- ---
</TABLE>
The table set forth below indicates the expected maturity distribution of
the Company's fixed income securities as of December 31, 1996:
<TABLE>
<CAPTION>
AMOUNT PERCENT OF TOTAL
---------- -----------------
<S> <C> <C>
One year or less...................................................................... $ 4,276 2%
One year to five years................................................................ 67,383 25
Five years to ten years............................................................... 80,876 31
Ten years to fifteen years............................................................ 61,408 23
More than fifteen years............................................................... 50,784 19
---------- ---
Total fixed income securities....................................................... $ 264,727 100%
---------- ---
---------- ---
</TABLE>
COMPETITION
The insurance business is generally highly competitive. The Company faces
competition from domestic and foreign insurers, some of whom are larger and have
greater financial, marketing and management resources than the Company. The
Company's profitability is affected by many other factors, including rate
competition, severity and frequency of claims, interest rates, state
regulations, court decisions, the judicial climate and general business
conditions, all of which are outside the control of the Company. The Company's
medical stop-loss business involves a diversified field of participants from
small start-up
17
<PAGE>
operations to large, well-established organizations. While the medical stop-loss
business has been historically competitive, during the past several years there
has been significant growth in the number of medical stop-loss insurance
underwriters. The Company also faces intense and growing pressure from
alternatives to employer sponsored self-insured health plans, such as
fully-insured plans, HMOs and Point of Service plans, as well as from large well
established direct insurers and competing underwriting managers providing
similar medical stop-loss products to those offered by the Company to employer
sponsored self-insured health plans. Competition in the reinsurance marketplace
is primarily due to an increase in the number of reinsurers participating in the
market as well as a tendency by reinsureds to retain a greater percentage of
their own risk. The Company competes with other reinsurance underwriting
managers and domestic and international reinsurance companies. The Company's
results of operations may also be affected by the competition for reinsurance
business between broker reinsurance markets and direct reinsurance writers. The
Company also competes with many reinsurance intermediaries in the broker
reinsurance market, some of which are affiliated with primary insurance brokers
with substantial financial resources. In each of the above business areas, a
significant number of the Company's competitors have financial resources,
employees, facilities, market recognition, marketing, management, experience,
and other resources substantially greater than those of the Company.
REGULATION
The operations of the Company are subject to state insurance laws and
regulations which require the licensing of insurance agents, brokers,
reinsurance intermediaries, reinsurance underwriting managers, and managing
general agents which regulate certain aspects of their business. These laws and
regulations are intended primarily for the protection of policyholders, rather
than shareholders of the licensed entities, and may include requirements for
certain provisions in contracts entered into between the Company and various
insurers or reinsurers, certain record keeping and reporting requirements,
advertising and business practice rules, and other matters. The Company's
business depends on obtaining and maintaining licenses and approvals pursuant to
which it operates, as well as compliance with pertinent regulations. In addition
to the regulatory supervision of the insurance subsidiaries of the Company, the
Company is subject to regulation under the Texas Insurance Holding Company
System Regulatory Act, which contains certain reporting requirements including
registration and the filing of annual reports. In such registration and annual
reports, the Company is required to provide current information regarding its
capital structure, general financial condition, ownership, management, and the
identity of each member of its insurance holding company system. The Company is
also required in such registration and annual reports to disclose certain
agreements and transactions between the Company and its affiliates, which must
satisfy certain standards set forth in the Texas Insurance Code. There can be no
assurance given that the Company has all such required licenses, approvals of
complying contracts or that such licenses, approvals or complying contracts can
always be obtained or continued. In all jurisdictions, the applicable laws and
regulations are subject to amendment or interpretation by regulatory
authorities. Generally, such authorities are vested with relatively broad
discretion to grant, renew and revoke licenses and approvals, and to implement
regulations, and licenses may be denied or revoked for various reasons,
including the violations of such regulations, conviction of crimes and the like.
In some instances, the Company follows practices based on its interpretations,
or those that it believes may be generally followed by the industry, which may
be different from the requirements or interpretations of regulatory authorities.
Accordingly, the possibility exists that the Company may be precluded or
temporarily suspended from carrying on some or all of its activities or
otherwise penalized in a given jurisdiction. Such preclusion or suspension could
have a materially adverse effect on the business and results of operations of
the Company.
HCC is licensed as an admitted insurer in Texas, is an approved surplus
lines insurer and an accredited reinsurer in Oklahoma and Maryland, is an
approved surplus lines insurer in 32 states, and is otherwise permitted to write
surplus lines insurance in nine more states, the District of Columbia, Guam and
Puerto Rico. All surplus lines insurance is written through licensed surplus
lines insurance brokers, who are required to ensure that no licensed admitted
insurer will write a particular risk prior to placing that risk
18
<PAGE>
with a surplus lines insurer. TIC is licensed as an admitted insurer in
Oklahoma, is an approved surplus lines insurer and an accredited reinsurer in
Texas, is a surplus line insurer in seven states and is otherwise permitted to
write surplus lines insurance in nine more states and the District of Columbia.
IMG is a JEC licensed as a property and casualty insurance company. Due to its
status as a JEC, IMG cannot write Jordanian domiciled business directly, but can
write reinsurance of Jordanian risks.
Under the laws of its domiciliary state (Texas), HCC may only pay dividends
out of its statutory earned surplus. The maximum amount of dividends that HCC
may pay without prior regulatory approval in any twelve month period is the
greater of its statutory net investment income for the prior year, or 10% of its
statutory policyholders' surplus as of the prior year end, which at December 31,
1996, was $15.1 million. Under the laws of the State of Oklahoma, TIC may only
pay dividends out of surplus funds. The maximum amount TIC may pay without prior
regulatory approval is the greater of statutory net income excluding realized
capital gains or 10% of statutory capital and surplus, which at December 31,
1996 was $2.8 million. As of December 31, 1996, HCC's total adjusted capital was
1,332% of the NAIC authorized control level risk-based capital and TIC's total
adjusted capital was 17,928% of the NAIC authorized control level risk-based
capital.
PENDING LEGISLATION
In recent years state legislatures have considered or enacted laws that
alter and, in many cases, increase state authority to regulate insurance
companies and insurance holding company systems. In addition, the NAIC and state
insurance regulators, as part of the NAIC's state insurance department
accreditation program, have re-examined existing laws and regulations,
specifically focusing on insurance company investments, issues relating to the
solvency of insurance companies, licensing and market conduct issues,
interpretations of existing laws, the development of new laws, and the
definition of extraordinary dividends. In addition, Congress and certain Federal
agencies have conducted investigations of the current condition of the insurance
industry in the United States to determine whether to impose Federal regulation
of insurers and reinsurers. From time to time, Congress and certain states have
considered various legislative proposals which would provide for governmental
earthquake insurance coverage. Legislation has been introduced in Congress that
could result in the Federal government's assuming some role in the regulation of
the insurance industry. The Company does not know at this time the extent to
which such Federal or state legislative or regulatory initiatives will be
adopted, and no assurance can be given that they would not have a material
adverse effect on the Company.
EMPLOYEES
As of December 31, 1996, the Company had 331 employees, which included seven
executive, seventeen senior management and 45 other management personnel. The
average experience in the insurance industry and tenure with the Company of the
executive and senior management personnel was 21 and eight years, respectively.
The Company is not a party to any collective bargaining agreement and has not
experienced work stoppages or strikes as a result of labor disputes. The Company
considers relations with its employees to be good.
19
<PAGE>
ITEM 2. PROPERTIES
HCC owns the building which houses the Company's principal and executive
offices in Houston, Texas. The building contains approximately 54,000 square
feet, substantially all of which are used by the Company. LDG's principal
facility is leased office space in Wakefield, Massachusetts consisting of
approximately 34,000 square feet. The lease terminates on October 31, 2001.
Principal activities conducted at the Wakefield office include corporate
management, finance and administration, marketing and actuarial services for all
areas of LDG's business, and medical stop-loss insurance underwriting
management, reinsurance underwriting management, claims, and reinsurance
intermediary activities. LDG's Medical Stop-Loss Division maintains sales and
administration offices in Atlanta, Georgia, Overland Park, Kansas, Portland,
Maine, and Minneapolis, Minnesota. LDG maintains a reinsurance underwriting and
sales office in New York, New York. LDG also maintains an office in London,
England. NASRA's principal facility is newly leased office space in Northbrook,
Illinois, consisting of approximately 18,000 square feet. The lease terminates
on November 30, 2005. Principal activities conducted at the Northbrook office
include corporate management, finance and administration, marketing,
underwriting, customer service and claims activities.
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to numerous lawsuits arising in the normal course of
business. All pending lawsuits involve claims under policies underwritten or
reinsured by the Company, which management believes have been adequately
included in its established loss reserves. The Company believes the resolution
of these lawsuits will not have a material adverse effect on its financial
condition, results of operations or cash flows.
ITEM 4. SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
fourth quarter of 1996.
[THE REMAINDER OF THIS PAGE LEFT INTENTIONALLY BLANK]
20
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
MARKET INFORMATION
The Company's Common Stock began trading on the NASDAQ--National Market
System ("NASDAQ") under the symbol HCCH on October 28, 1992, and traded on
NASDAQ until June 19, 1995. On June 20, 1995, the Company's Common Stock began
trading on the New York Stock Exchange ("NYSE") under the symbol HCC and
currently trades on the NYSE.
The high and low bid prices for quarterly periods during the period January
1, 1995 through June 19, 1995, as reported by NASDAQ and the high and low
closing sales prices for the quarterly periods during the period June 20, 1995
through December 31, 1996, as reported by the NYSE were as follows:
<TABLE>
<CAPTION>
1996 (1)
-----------------
<S> <C> <C> <C> <C>
HIGH LOW
------ ------
First Quarter................................................................... $23 1/4 $14 1/2
Second Quarter.................................................................. 25 1/2 19 1/8
Third Quarter................................................................... 32 3/4 22 1/8
Fourth Quarter.................................................................. 29 1/4 23 1/8
<CAPTION>
1995 (1)
-----------------
<S> <C> <C> <C> <C>
HIGH LOW
------ ------
First Quarter................................................................... $10 1/4 $7 7/8
Second Quarter.................................................................. 11 8 3/4
Third Quarter................................................................... 13 3/4 10 1/8
Fourth Quarter.................................................................. 15 1/4 12 1/4
</TABLE>
- ------------------------
(1) The above prices have been retroactively adjusted to reflect the effects of
the five-for-two stock split, payable as a 150% stock dividend to
shareholders of record April 30, 1996. On March 24, 1997, the closing sales
price of one share of HCCH's Common Stock as reported by the NYSE was
$25.00.
SHAREHOLDERS
The Company has one class of authorized capital stock: 100,000,000 shares of
Common Stock, par value $1.00 per share. As of March 24, 1997, there were
36,167,935 shares of issued and outstanding Common Stock held by 130
shareholders of record; however, the Company believes there are in excess of
5,000 beneficial owners.
DIVIDENDS
On April 19, 1996 the Company announced that the Board of Directors had
declared a five-for-two stock split in the form of a 150% stock dividend,
payable to shareholders of record April 30, 1996. In connection with this, the
Company announced it would purchase, for cash, any fractional shares issued in
connection with this split.
On June 18, 1996, the Company announced its first cash dividend of $0.02 per
share payable to shareholders of record July 1, 1996. The Company has paid a
cash dividend of $0.02 per share in each succeeding quarter. On March 24, 1997,
the Company declared a cash dividend of $0.03 per share and plans to continue to
pay $0.03 per share dividend in future quarters. The Board of Directors may
review the Company's dividend policy from time to time, and any determination
with respect thereto will be made in light of regulatory and other conditions
then existing, including the Company's earnings, financial condition, capital
requirements, loan covenants, and other related factors.
21
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data set forth below has been derived
from the Consolidated Financial Statements. All information contained herein
should be read in conjunction with the Consolidated Financial Statements, the
related notes thereto and Management's Discussion and Analysis included
elsewhere in this document.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)(5)
-----------------------------------------------------
<S> <C> <C> <C> <C> <C>
1996 1995 1994(4) 1993 1992
--------- --------- --------- --------- ---------
STATEMENT OF EARNINGS DATA
Revenue
Net earned premium................................... $ 93,314 $ 80,011 $ 46,834 $ 32,663 $ 24,483
Fee and commission income............................ 38,462 32,887 28,456 24,073 16,998
Net investment income................................ 15,372 13,250 9,533 5,454 2,814
Net realized investment gain......................... 5,097 1,061 682 949 17
--------- --------- --------- --------- ---------
Total revenue.................................... 152,245 127,209 85,505 63,139 44,312
Expense
Loss and LAE......................................... 51,242 49,769 29,588 21,210 16,834
Operating expense
Policy acquisition costs........................... 34,110 29,748 21,729 12,747 9,238
Compensation expense............................... 20,353 26,790 23,900 16,258 13,330
Other operating expense............................ 12,855 12,591 8,660 7,261 4,191
Ceding commissions................................. (30,268) (27,228) (20,210) (11,166) (6,276)
--------- --------- --------- --------- ---------
Net operating expense............................ 37,050 41,901 34,079 25,100 20,483
Compensatory stock grant and merger related expenses... 26,160 -- -- -- --
Interest expense....................................... 1,166 2,247 1,972 1,175 607
--------- --------- --------- --------- ---------
Total expense.................................... 115,618 93,917 65,639 47,485 37,924
--------- --------- --------- --------- ---------
Earnings before income tax provision................... 36,627 33,292 19,866 15,654 6,388
Income tax provision................................... 7,329 8,955 4,598 2,966 1,098
--------- --------- --------- --------- ---------
Net earnings..................................... $ 29,298 $ 24,337 $ 15,268 $ 12,688 5,290
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Increase in redemption value of redeemable common stock
(1).................................................. (1,124)
---------
Net earnings applicable to nonredeemable common
stock.......................................... 4,166
---------
---------
EARNINGS PER SHARE DATA
Primary:
Earnings per share applicable to nonredeemable common
stock (2).......................................... $ 0.81 $ 0.75 $ 0.55 $ 0.53 $ 0.28
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Weighted average shares outstanding (2).............. 35,965 32,667 27,910 23,999 14,863
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Fully diluted:
Earnings per share applicable to nonredeemable common
stock (2).......................................... $ 0.81 $ 0.74 $ 0.55 $ 0.52 $ 0.27
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Weighted average shares outstanding (2).............. 35,986 32,804 27,998 24,199 15,260
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Cash dividends declared, per share..................... $ 0.06
---------
---------
PRO FORMA INFORMATION (6):
Net earnings........................................... $ 43,655
---------
Earnings per share..................................... $ 1.21
---------
---------
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31,
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)(5)
-----------------------------------------------------
<S> <C> <C> <C> <C> <C>
1996 1995 1994(4) 1993 1992
--------- --------- --------- --------- ---------
BALANCE SHEET DATA:
Total investments.................................... $ 320,260 $ 305,287 $ 211,881 $ 172,913 $ 78,755
Reinsurance recoverables............................. 123,181 103,408 99,462 73,057 62,089
Premium, claims and other receivables................ 139,109 130,384 113,704 54,781 46,517
Ceded unearned premium............................... 65,845 73,282 60,671 26,177 9,830
Total assets......................................... 745,779 681,676 549,490 352,506 213,905
Loss and LAE payable................................. 185,822 158,451 129,755 98,399 81,997
Unearned premium..................................... 114,758 118,732 87,346 37,382 15,142
Total debt........................................... 16,500 16,661 44,908 28,944 3,673
Shareholders' equity................................. 240,690 195,459 114,374 93,451 43,168
Net tangible book value per share (2) (3)............ $ 6.41 $ 5.33 $ 3.50 $ 3.50 $ 2.01
Book value per share (2) (3)......................... $ 6.71 $ 5.65 $ 3.89 $ 3.50 $ 2.01
</TABLE>
- --------------------------
(1) In a 1987 private placement, the Company sold shares of redeemable common
stock, which incorporated a redemption obligation requiring the Company to
repurchase such shares at a specified multiple of the then current book
value. Prior to its October, 1992 initial public offering, the Company
executed an agreement with the holders of the redeemable common stock
whereby the redemption obligation would terminate upon the effective date of
the initial public offering. During the period in which the redemption
obligation was in force, the Company was required to reduce its earnings by
an amount equal to the increase in the redemption value of the redeemable
common stock and concurrently increase the book value of the redeemable
common stock by a like amount. On October 28, 1992, the effective date of
the Company's initial public offering, the redemption obligation terminated.
(2) These amounts have been adjusted to reflect the effects of the three-for-two
stock split payable as a 50% stock dividend to shareholders of record March
15, 1994, and the five-for-two stock split payable as a 150% stock dividend
to shareholders of record April 30, 1996.
(3) Book value per share is calculated by dividing shares outstanding into total
shareholders' equity. Net tangible book value per share uses total
shareholders' equity less goodwill as the numerator.
(4) Effective October 1, 1994, the Company acquired 100% of the stock of IMG and
MEIB. Both acquisitions were accounted for using the purchase method.
Therefore, the results of operations from both companies are included in the
consolidated statements of earnings beginning October 1, 1994 and assets and
liabilities of IMG and MEIB have been included in the consolidated balance
sheets beginning October 1, 1994.
(5) On May 24, 1996, the Company acquired 100% of the outstanding common stock
of LDG. This business combination has been accounted for as a
pooling-of-interests and, accordingly, the consolidated financial data shown
in this table has been restated to include the accounts and operations of
LDG for all periods presented. On November 27, 1996, the Company acquired
100% of the outstanding shares of NASRA. This combination has been accounted
for as a pooling-of-interests. However, the Company's consolidated financial
statements have not been restated due to immateriality.
(6) The pro forma amounts shown include the following adjustments relating to
the merger of LDG and HCCH: a) to eliminate the non-recurring compensatory
stock grant and expenses related to the merger, and b) to reflect
appropriate Federal income tax expense on LDG's earnings for the period LDG
was an S Corporation.
23
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
FORWARD-LOOKING STATEMENTS IN THIS FORM 10-K 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 IN ITS VARIOUS LINES OF BUSINESS,
THE IMPACT OF INFLATION, CHANGING REGULATIONS IN FOREIGN COUNTRIES, THE EFFECT
OF PENDING ACQUISITIONS, AS WELL AS GENERAL MARKET CONDITIONS, COMPETITION,
LICENSING 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.
GENERAL
The Company's primary sources of revenue are earned premium and investment
income derived from its insurance operations, and fee and commission income from
its insurance agency operations. The Company's core underwriting activities
involve providing aviation, marine, offshore energy, property, and accident and
health insurance, which is underwritten on both a direct and a reinsurance
basis. The Company concentrates on first party, physical damage coverages and
lines of business which have relatively short lead times between the occurrence
of an insured event and the reporting of claims to the Company. The Company also
selectively underwrites a small amount of excess treaty reinsurance. The
Company's agencies market and service medical stop-loss, occupational accident
and excess coverage insurance products plus large complicated insurance and
reinsurance programs on behalf of multinational clients. They also place
reinsurance for the Company's insurance operations and other insurance
companies.
During recent years, the Company has substantially increased its capital and
surplus through the issuance of equity securities, incurrence of debt, and
earnings, thereby enabling it to increase its underwriting capacity. The Company
has utilized this additional capital by increasing underwriting activity across
many of its core lines of business, emphasizing lines of business and individual
opportunities with the most favorable underwriting characteristics at a
particular point in time. In each line of business, the Company also cedes
premiums through the purchase of reinsurance in types and amounts appropriate to
the line of business, market conditions and the Company's desired net risk
retention profile. Accordingly, the Company has substantially increased both its
GWP and NWP, although with different relative increases in each line of
business. In addition, because the Company's operating expense and loss and LAE
have not increased as quickly as its premium volume, the Company has been able
to substantially expand its operating margins.
24
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth certain premium revenue information for the
periods indicated (dollars in thousands):
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------
<S> <C> <C> <C>
1996 1995 1994
---------- ---------- ----------
Direct.................................................................... $ 84,166 $ 111,466 $ 97,585
Reinsurance assumed....................................................... 146,589 127,492 95,293
---------- ---------- ----------
Gross written premium............................................... 230,755 238,958 192,878
Reinsurance ceded......................................................... (133,979) (140,172) (133,184)
---------- ---------- ----------
Net written premium................................................. 96,776 98,786 59,694
Increase in unearned premium.............................................. (3,462) (18,775) (12,860)
---------- ---------- ----------
Net earned premium.................................................. $ 93,314 $ 80,011 $ 46,834
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The following table sets forth the relationships of certain income statement
items as a percent of total revenue for the periods indicated:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER
31,
-------------------------------
<S> <C> <C> <C>
1996 1995 1994
--------- --------- ---------
Net earned premium............................................................. 61.3% 62.9% 54.8%
Fee and commission income...................................................... 25.3 25.9 33.3
All other income............................................................... 13.4 11.2 11.9
--------- --------- ---------
Total revenue............................................................ 100.0 100.0 100.0
Loss and LAE................................................................... 33.7 39.1 34.6
Net operating expense.......................................................... 24.3 32.9 39.9
All other expense.............................................................. 17.9 1.8 2.3
--------- --------- ---------
Earnings before taxes.................................................... 24.1 26.2 23.2
Income taxes................................................................... 4.9 7.1 5.3
--------- --------- ---------
Net earnings............................................................. 19.2% 19.1% 17.9%
--------- --------- ---------
--------- --------- ---------
</TABLE>
YEAR ENDED DECEMBER 31, 1996 VERSUS YEAR ENDED DECEMBER 31, 1995
Total revenue during 1996 increased 20% to $152.2 million from $127.2
million in 1995. 1996 GWP decreased to $230.8 million from $239.0 million in
1995, while 1996 NWP decreased from $98.8 million to $96.8 million. The decrease
in written premium was a result of the planned exit from the offshore energy
business as a result of increased competition that has driven rates below
acceptable levels, as well as the softening in marine rates and, more recently,
property rates. Net earned premium in 1996 increased from $80.0 million to $93.3
million, reflecting the large increase in written premium during 1995.
Fee and commission (non-risk bearing) income in 1996 increased 17% to $38.5
million from $32.9 million in 1995, reflecting increased agency activities. Net
investment income increased 16% to $15.4 million in 1996 from $13.3 million in
1995 reflecting a higher level of investment assets.
Realized investment gains from sales of marketable equity securities were
$5.3 million during 1996 compared to $1.1 million during 1995. Realized
investment losses from dispositions of fixed income securities were $201,000
during 1996, compared to losses of $11,000 during 1995. During 1996, the Company
liquidated most of its equity security portfolio and redeployed those investment
assets into fixed income securities.
Loss and LAE increased $1.5 million in 1996, to $51.2 million, reflecting
the overall increase in business. During 1996, the Company had net loss and LAE
redundancy of $3.8 million relating to prior
25
<PAGE>
year losses compared to a redundancy of $1.6 million in 1995. However, during
1996, the Company had gross loss and LAE deficiency of $45.8 million. The gross
deficiency comes from two primary sources. The first source is the development
of several large claims on individual policies which were substantially
reinsured. These losses were either reported late or reserves were increased as
subsequent information became available. However, because these policies were
substantially reinsured, there is no material effect on a net basis. The second
source is the run-off of the excess of loss "spiral" business which the Company
ceased writing in 1991. This development is due to the delay in reporting of
catastrophe losses by the London market, coupled with the unprecedented number
of catastrophes and subsequent insurance company insolvencies. As the Company
did not have enough representative years' underwriting experience upon which to
base a more accurate estimate, significant gross development has been
experienced. However, this business is substantially reinsured, thereby not
having a material effect on the Company's current operations or shareholders'
equity. The Company continues to believe it has materially provided for all net
incurred losses.
Compensation expense decreased $6.4 million or 24% in 1996, to $20.4 million
due primarily to changes in compensation to LDG's previous principal
shareholders.
Interest expense during 1996 decreased 48% to $1.2 million from $2.2 million
during 1995 due to the reduced level of indebtedness as a portion of the
proceeds of a June, 1995, public offering of Common Stock which was used to
retire debt.
Income tax expense decreased to $7.3 million in 1996, compared to $9.0
million in 1995. The decrease in income tax expense was a result of a deferred
tax benefit of $9.6 million which was recorded in connection with the
compensatory stock grant to certain LDG employees. Also, as an S corporation,
LDG was exempt from Federal income taxes through May 21, 1996. Had LDG been
subject to Federal income taxes for both years, additional income tax expense of
$2.3 million and $722,000 would have been recorded during the years ended
December 31, 1996 and 1995, respectively.
Net earnings increased 20% to $29.3 million in 1996 from $24.3 million in
1995. Included in these amounts were merger related expenses of $2.1 million and
a non-recurring compensation expense of $14.4 million (net of a $9.6 million tax
benefit) recorded by LDG in connection with a compensatory stock grant from
LDG's majority shareholder to certain key employees prior to the Company's May,
1996, acquisition of LDG. The compensation expense was a non-cash item however,
$9.6 million of actual cash tax savings will be recognized. Earnings per share
increased 8% to $0.81 in 1996 from $0.75 in 1995. Excluding the non-recurring
compensation charge and the merger related expenses, net earnings in 1996 would
have been $43.7 million, an increase of 56% over comparable 1995 amounts and
earnings per share would have been $1.21, a 41% increase over comparable 1995
amounts. The non-recurring compensation expense also caused the net loss for the
agency segment during 1996.
The Company's insurance company subsidiaries' statutory combined ratio was
72.0% for 1996 compared to 74.9% in 1995. The Company's combined ratio remains
significantly better than the industry average.
YEAR ENDED DECEMBER 31, 1995 VERSUS YEAR ENDED DECEMBER 31, 1994
Total revenue during 1995 increased 49% to $127.2 million from $85.5 million
in 1994. GWP increased 24% to $239.0 million from $192.9 million in 1994, while
1995 NWP increased 65% from $59.7 million to $98.8 million. Accordingly, net
earned premium in 1995 increased 71% from $46.8 million to $80.0 million. These
increases were due to substantial new business, rate increases on some renewals,
particularly property and aviation, and increased retentions.
Fee and commission (non-risk bearing) income in 1995 increased 16% to $32.9
million from $28.5 million in 1994, reflecting increased agency activities. Net
investment income increased 39% to $13.3 million in 1995 from $9.5 million in
1994 reflecting a substantially higher level of investment assets due to
increased operating cash flow and the deployment of the proceeds from a public
offering of the Company's Common Stock.
26
<PAGE>
Realized investment gains from sales of marketable equity securities were
$1.1 million during 1995 compared to $775,000 during 1994. Realized investment
losses from sales of fixed income securities were $11,000 during 1995, compared
to losses of $89,000 during 1994.
Loss and LAE increased $20.2 million in 1995, to $49.8 million, reflecting
the overall increase in business written. During 1995, the Company had net loss
and LAE redundancy of $1.6 million relating to prior year losses compared to a
deficiency of $717,000 in 1994. However, during 1995, the Company had gross loss
and LAE deficiency of $18.4 million. A substantial portion of this gross
deficiency relates to the run-off of the excess of loss "spiral" business which
the Company ceased writing in 1991. This development is due to the delay in
reporting of catastrophe losses by the London market, coupled with the
unprecedented number of catastrophes and subsequent insurance company
insolvencies. As the Company did not have enough representative years'
underwriting experience to base a more accurate estimate on, significant gross
development has been experienced. However, this business is substantially
reinsured, thereby not having a material effect on the Company's current
operations or shareholders' equity. The Company continues to believe it has
materially provided for all net incurred losses.
Interest expense during 1995 increased 14% to $2.2 million from $2.0 million
during 1994 due to the increased level of indebtedness during the first six
months of 1995, which was incurred during late 1994 to fund the acquisitions of
IMG and MEIB.
Net earnings increased 59% to $24.3 million from $15.3 million in 1994. This
increase was principally a result of more efficient and continued profitable
underwriting plus higher investment income and fee and commission income.
Earnings per share in 1995 increased 36% to $0.75 from $0.55 in 1994. This
reflects the 59% increase in net earnings partially offset by the 17% increase
in weighted average shares outstanding as a result of HCCH's 1994 acquisitions
and 1995 public stock offering.
HCCH's insurance company subsidiaries' statutory combined ratio was 74.9%
for 1995 compared to 74.8% in 1994. HCCH's combined ratio remains significantly
better than the industry average.
LIQUIDITY AND CAPITAL RESOURCES
HCCH completed an initial public offering of 1,437,500 shares (pre splits)
of Common Stock during October, 1992 and secondary public offerings of 1,254,200
shares (pre splits) of Common Stock in September, 1993 and 2,012,500 shares (pre
split) of Common Stock in June, 1995. The offerings dramatically improved the
capital resources of the Company. The net proceeds of the offerings have been
used to reduce the Company's indebtedness and to contribute capital to the
insurance company subsidiaries. HCC now has more than $150 million in
policyholders' surplus and IMG has more than $59 million. This additional
capital enables both HCC and IMG to write significantly more premium income. The
initial public offering also resulted in the termination of all redemption
rights previously held by certain shareholders.
The Company receives substantial cash from premiums and reinsurance
recoverables, and, to a lesser extent, investment income, proceeds from sales
and redemptions of investment assets and fee and commission income. The
principal cash outflows are for the payment of claims, payment of premiums to
reinsurers, purchase of investments, debt service, LAE, policy acquisition
costs, operating expense, income and other taxes and dividends.
During 1996, HCC renewed its existing credit facility which provides for a
$12 million bank line of credit for the issuance of letters of credit and for
short-term borrowings at the prime rate of interest. This line is collateralized
by securities with a market value equal to 125% of the total sum of the letters
of credit issued and cash advances outstanding. This facility matures on April
30, 1997. As of December 31, 1996, letters of credit in the amount of $4.6
million were issued on behalf of the HCC to collateralize certain reinsurance
obligations, however no cash advances were outstanding under this line and,
therefore, $7.4 million is available for short-term borrowings under this
facility.
27
<PAGE>
In January, 1997, the Company obtained an additional bank line of credit for
$10.0 million. This credit facility provides for short-term borrowings and
matures April 30, 1998. Interest is payable quarterly at either (i) variable at
the banks prime rate; or (ii) fixed at the London Interbank Offering Rate
("LIBOR") plus 1 1/2%, at the option of the Company. The line of credit is
collateralized by a pledge of all capital stock of HCC. This new line of credit
improves the Company's short term liquidity.
On September 14, 1993, HCCH borrowed $29.25 million from a bank. HCCH used
the proceeds to retire previous indebtedness and make a $10.0 million capital
contribution to HCC. The principal terms of the note, which matures on October
1, 1998 are (i) quarterly principal repayments of $1.5 million, increasing to
$1.75 million; (ii) interest at the prime lending rate; (iii) collateralization
by a pledge of all capital stock of HCC and substantially all of the common
stock of IMG; and (iv) certain restrictive terms and conditions including
restrictions on certain transactions in the Company's Common Stock or the
capital stock of HCC and IMG and the maintenance of required financial ratios.
During February, 1994, the note was amended by fixing the interest rate at 6.5%
until February 7, 1997. Thereafter, the rate reverts to the prime lending rate
or LIBOR plus 2.25%, at the Company's option. Additionally, the loan agreement
prohibits the payment of dividends by the Company without the bank's approval.
During 1995, the Company prepaid the first two installments of $1.5 million due
in 1996. The bank deferred the second two installments due in 1996 until
maturity. The Company paid the first 1997 quarterly payment of $1.5 million in
January, 1997.
The Company maintains a substantial level of cash and liquid short-term
investments which are used to meet anticipated payment obligations. As of
December 31, 1996, the Company had cash and short-term investments of
approximately $56.3 million. The Company's consolidated investment portfolio of
$320.3 million as of December 31, 1996, is available to provide additional
liquidity and cash for operations.
Property and casualty insurance companies domiciled in the State of Texas
are limited in the payment of dividends to its shareholders in any 12 month
period, without the prior written consent of the Commissioner of Insurance, to
the greater of net investment income or 10% of statutory policyholders' surplus.
HCC paid no dividends in 1996 to HCCH. During 1997, HCC's ordinary dividend
capacity will be approximately $15.1 million.
The Company believes that its operating cash flows, short-term investments
and the bank lines of credit will provide sufficient sources of liquidity to
meet its anticipated needs for the foreseeable future.
At December 31, 1996, the Company had a net deferred tax asset of $11.5
million. Due to the Company's history of consistent earnings, strong operating
cash flows, expectations for the future and the ability to hold investments to
maturity, it is more likely than not that the Company will be able to realize
the benefit of its deferred tax asset.
As of December 31, 1996, HCC's total adjusted capital was $150.7 million,
which is 1,332% of the NAIC authorized control level risk-based capital while
TIC's total adjusted capital was $27.6 million, which is 17,928% of the NAIC
authorized control level risk-based capital.
Industry and regulatory guidelines suggest that a property and casualty
insurer's annual statutory GWP should not exceed 900% of its statutory
policyholders' surplus and NWP should not exceed 300% of its statutory
policyholders' surplus. The Company maintains a premium to surplus ratio
significantly lower than such guidelines, and for the year ended December 31,
1996, its annual statutory GWP was 108.8% of its statutory policyholders'
surplus and NWP was 45.6% of its statutory policyholders' surplus.
IMPACT OF INFLATION
The Company's operations, like those of other property and casualty
insurers, are susceptible to the effects of inflation, as premiums are
established before the ultimate amounts of loss and LAE are known. Although
management considers the potential effects of inflation when setting premiums,
for competitive reasons, such premiums may not adequately compensate the Company
for the effects of inflation. However, as the majority of the Company's business
is comprised of lines which have short lead times
28
<PAGE>
between the occurrence of an insured event, reporting of the claims to the
Company and the final settlement of the claims, the effects of inflation are
minimized.
A significant portion of the Company's revenue is related to healthcare
insurance and reinsurance products which are subject to the effects of the
underlying inflation of medical costs. Such inflation in the costs of healthcare
tends to generate increases in premiums for medical stop-loss coverage,
resulting in greater revenue, but also higher claim payments. Inflation may have
a negative impact on insurance and reinsurance operations by causing higher
claim settlements than may originally have been estimated without an immediate
increase in premiums to a level necessary to maintain profit margins being
possible. No express provision for inflation is made, although trends are
considered when setting underwriting terms and claim reserves for purposes of
determining revenue from underwriting profit commission. Such reserves are
subject to a continuing review process to assess their adequacy and are adjusted
as deemed appropriate. In addition, the market value of the investments held by
the Company varies depending on economic and market conditions and interest
rates, which are highly sensitive to the policies of governmental and regulatory
authorities. Any significant change in interest rates could therefore have a
material adverse effect on the market value of the Company's investments.
EXCHANGE RATE FLUCTUATIONS
The Company underwrites risks which are denominated in a number of foreign
currencies. It establishes and maintains loss reserves with respect to these
policies in their respective currencies. These reserves are subject to exchange
rate fluctuations which can have an effect on the Company's net earnings. The
Company's principal area of exposure is with respect to fluctuation in the
exchange rate between the British Pound Sterling and the United States Dollar.
For the years ended December 31, 1996, 1995 and 1994, the gain (loss) from
currency conversion was ($181,000), ($209,000) and $203,000, respectively.
From time to time the Company enters into foreign currency forward contracts
as a hedge against foreign currency fluctuations, primarily British Pound
Sterling. The Company's balances denominated in foreign currency fluctuate as
transactions are recorded and settled. During 1996, the average Sterling
liability, for subsidiaries whose functional currency was the United States
dollar, was approximately L907,000 ($1.6 million at the December 31, 1996, rate
of exchange) which was hedged by an average open forward contract balance of
approximately L460,000 ($785,000 at the December 31, 1996, rate of exchange).
There was one open foreign currency forward contract as of December 31, 1996, to
purchase L500,000 ($856,000 at the December 31, 1996, rate of exchange) with a
maturity of January, 1997. During January, 1997, the Company entered into a
foreign currency forward contract totaling L500,000 ($856,000 at the December
31, 1996, rate of exchange). The Company expects to continue to limit its
exposure to currency fluctuations through the use of foreign currency forward
contracts.
The Company utilizes these foreign currency forward contracts strictly as a
hedge against existing exposure to foreign currency fluctuations and it does not
do so as any form of speculative or trading investment.
EFFECTS OF RECENT ACCOUNTING PRONOUNCEMENTS
In February, 1997, the Financial Accounting Standards Board issued SFAS
No.128 "Earnings Per Share". SFAS No.128 is effective for fiscal years 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. However, the statement will
have no effect on the Company's net earnings, shareholders' equity or cash
flows.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements required in response to this section
are submitted as part of Item 14 of this report.
29
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
For information regarding Directors and Executive Officers of the
Registrant, reference is made to the Registrant's definitive proxy statement for
its Annual Meeting of Shareholders, which will be filed with the Securities and
Exchange Commission within 120 days after December 31, 1996, and which is
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
For information regarding Executive Compensation, reference is made to the
Registrant's definitive proxy statement for its Annual Meeting of Shareholders,
which will be filed with the Securities and Exchange Commission within 120 days
after December 31, 1996, and which is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
For information regarding Security Ownership of Certain Beneficial Owners
and Management, reference is made to the Registrant's definitive proxy statement
for its Annual Meeting of Shareholders, which will be filed with the Securities
and Exchange Commission within 120 days after December 31, 1996, and which is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
For information regarding Certain Relationships and Related Transactions,
reference is made to the Registrant's definitive proxy statement for its Annual
Meeting of Shareholders, which will be filed with the Securities and Exchange
Commission within 120 days after December 31, 1996, and which is incorporated
herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
FINANCIAL STATEMENTS AND SCHEDULES
The financial statements and schedules listed in the accompanying index on
page 32 are filed as part of this report.
EXHIBITS
The exhibits listed on the accompanying Index to Exhibits on page 33 are
filed as part of this report.
REPORTS ON FORM 8-K
On December 11, 1996, the Registrant filed a report on Form 8-K reporting
the consummation of the acquisition of all the outstanding shares of common
stock of NASRA.
30
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
HCC INSURANCE HOLDINGS, INC.
(Registrant)
By: /s/ STEPHEN L. WAY
------------------------------------------
Stephen L. Way
CHAIRMAN OF THE BOARD
Dated: March 27, 1997 AND CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
NAME TITLE DATE
- ------------------------------ --------------------------- -------------------
Chairman of the Board of
/s/ STEPHEN L. WAY Directors and Chief
- ------------------------------ Executive Officer March 27, 1997
(Stephen L. Way) (Principal Executive
Officer)
/s/ STEPHEN J. LOCKWOOD*
- ------------------------------ Director, President March 27, 1997
(Stephen J. Lockwood)
Executive Vice President,
Secretary and Chief
/s/ FRANK J. BRAMANTI Financial Officer
- ------------------------------ (Principal Financial March 27, 1997
(Frank J. Bramanti) Officer and Principal
Accounting Officer)
/s/ JAMES M. BERRY*
- ------------------------------ Director March 27, 1997
(James M. Berry)
/s/ PATRICK B. COLLINS*
- ------------------------------ Director March 27, 1997
(Patrick B. Collins)
/s/ J. ROBERT DICKERSON*
- ------------------------------ Director March 27, 1997
(J. Robert Dickerson)
/s/ EDWIN H. FRANK, III*
- ------------------------------ Director March 27, 1997
(Edwin H. Frank, III)
/s/ JOHN L. KAVANAUGH*
- ------------------------------ Director March 27, 1997
(John L. Kavanaugh)
/s/ WALTER J. LACK*
- ------------------------------ Director March 27, 1997
(Walter J. Lack)
/s/ HUGH T. WILSON*
- ------------------------------ Director March 27, 1997
(Hugh T. Wilson)
*By: /s/ FRANK J. BRAMANTI
-------------------------
Frank J. Bramanti, March 27, 1997
ATTORNEY-IN-FACT
31
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
<TABLE>
<S> <C>
Reports of Independent Accountants................................................... F-1
Consolidated Balance Sheets at December 31, 1996 and 1995............................ F-3
Consolidated Statements of Earnings for each of the years in the three-year period
ended December 31, 1996............................................................ F-4
Consolidated Statements of Changes in Shareholders' Equity for each of the years in
the three-year period ended December 31, 1996...................................... F-5
Consolidated Statements of Cash Flows for each of the years in the three-year period
ended December 31, 1996............................................................ F-8
Notes to Consolidated Financial Statements........................................... F-9
SCHEDULES:
Report of Independent Accountants......................................... S-1
Schedule 1 Summary of Investments other than Investments in Related Parties........ S-2
Schedule 2 Condensed Financial Information of Registrant........................... S-3
Schedule 3 Supplementary Insurance Information..................................... S-7
Schedule 4 Reinsurance............................................................. S-8
</TABLE>
Schedules other than those listed above have been omitted because they are
either not required, not applicable, or the required information is shown in the
Consolidated Financial Statements and related notes thereto.
32
<PAGE>
INDEX TO EXHIBITS
(ITEMS DENOTED BY A LETTER ARE INCORPORATED BY REFERENCE TO OTHER DOCUMENTS
PREVIOUSLY FILED WITH THE SECURITIES AND EXCHANGE COMMISSION AS SET FORTH AT THE
END OF THIS INDEX. ITEMS NOT DENOTED BY A LETTER ARE BEING FILED HEREWITH.)
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- ------------
<C> <S>
(A)3.4 --Bylaws of HCC Insurance Holdings, Inc., as amended.
(J)3.7 --Restated Certificate of Incorporation of HCC Holdings, Inc., filed with the Delaware Secretary of
State on July 23, 1996.
(A)4.1 --Specimen of Common Stock Certificate, $1.00 par value, of HCC Insurance Holdings, Inc.
(A)10.17 --Cost Allocation Agreement dated September 1, 1991, by and among HCC Holdings, A Texas Corporation,
Houston Casualty Company, Trafalgar Reinsurance Company Ltd., Houston Re Corporation and HCC
Underwriters, A Texas Corporation
(A)10.19 --Agreement for Allocation of Federal Income Tax dated November 29, 1991, by and among HCC Holdings,
Inc., Houston Casualty Company, SBS Insurance Holdings, Trafalgar Reinsurance Company, Ltd., HCC
Underwriters and Houston Re Corporation
(A)10.22 --Investment Advisory Agreement dated January 10, 1992 between Houston Casualty Company and William
Blair & Company relating to investment services to be provided by William Blair & Company
(A)10.23 --HCC Insurance Holdings, Inc. 1992 Incentive Stock Option Plan
(A)10.24 --Program License Agreement dated April 29, 1992, by and between EPG America, Inc., and HCC Holdings,
Inc. pertaining to license for the computer services described therein
(B)10.227 --Loan Agreement dated August 24, 1993 in the original principal amount of $29,250,000 executed by HCC
Insurance Holdings, Inc., payable to First Interstate Bank of Texas, N.A. together with Promissory
Note and Commercial Pledge Agreement relating thereto.
(B)10.227.1 --Change in Loan Agreement dated February 7, 1994 between HCC Insurance Holdings, Inc. and First
Interstate Bank of Texas, N.A. relating to the $29,250,000 loan.
(B)10.228 --Promissory Note dated February 25, 1994 in the original principal amount of $12,000,000 executed by
Houston Casualty Company, payable to First Interstate Bank of Texas, N.A. together with Commercial
Pledge Agreement relating thereto.
(C)10.302 --Aircraft Dry Lease Agreement effective January 4, 1995 between SLW Aviation, Inc. and HCC Insurance
Holdings, Inc.
(C)10.303 --Stock Purchase Agreement effective January 1, 1994 between River Investments Limited and HCC
Underwriters, A Texas Corporation related to the acquisition of 25% of Middle East Insurance Brokers
Ltd.
(C)10.304 --Stock Purchase Agreement effective October 1, 1994 between various shareholders of Middle East
Insurance Brokers Ltd. and HCC Insurance Holdings, Inc. related to the acquisition of 75% of Middle
East Insurance Brokers Ltd.
(C)10.305 --Stock Purchase Agreement effective October 1, 1994 between various shareholders of International
Marine & General Insurance Company Ltd. and HCC Insurance Holdings, Inc. related to the acquisition
of 100% of International Marine & General Insurance Company Ltd.
</TABLE>
33
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- ------------
<C> <S>
(C)10.306 --Loan Agreement dated November 29, 1994 in the original principal amount of $20,000,000 executed by
HCC Insurance Holdings, Inc., payable to First Interstate Bank of Texas, N.A. together with the
Promissory Note.
(D)10.320 --Promissory note dated April 30, 1995, in the original principal amount of $12,000,000 executed by
Houston Casualty Company, payable to First Interstate Bank of Texas, N.A.
(E)10.324 --HCC Insurance Holdings, Inc. 1994 Nonemployee Director Stock Option Plan.
(F)10.325 --HCC Insurance Holdings, Inc. 1995 Flexible Stock Option Plan.
(H)10.326 --Agreement and Plan of Reorganization dated February 22, 1996 between various shareholders of LDG
Management Company Incorporated and affiliated companies and HCC Insurance Holdings, Inc. related to
the acquisition of 100% of the common stock of LDG Management Company Incorporated and affiliated
companies.
(I)10.327 --Agreement and Plan of Reorganization dated February 28, 1997 between AVEMCO Corporation and HCC
Insurance Holdings, Inc. related to the intent to merge in a stock for stock transaction.
(J)10.328 --HCC Insurance Holdings, Inc. 1996 Nonemployee Director Stock Option Plan.
(K)10.329 --HCC Insurance Holdings, Inc. 1995 Flexible Incentive Plan.
10.330 --Agreement and Plan of Reorganization dated November 27, 1996 between various shareholders of North
American Special Risk Associates and affiliated companies and HCC Insurance Holdings, Inc. related to
the acquisition of 100% of the common stock of North American Special Risk Associates, Inc. and
affiliated companies.
10.331 --Agreement of Purchase and Sale dated January 23, 1997, between TRM International, Inc., Unicover
Manager, Inc., North American Special Risk Associates, Inc. and HCC Insurance Holdings, Inc.
10.332 --Revolving Line of Credit Note dated October 7, 1996, in the original principal amount of $12,000,000
executed by Houston Casualty Company, payable to Wells Fargo Bank (Texas), National Association
together with Credit Agreement and General Pledge Agreement and Amendment relating thereto.
10.333 --Revolving Line of Credit Note dated January 10, 1997, in the original principal amount of $10,000,000
executed by HCC Insurance Holdings, Inc., payable to Wells Fargo Bank (Texas), National Association
together with Credit Agreement and General Pledge Agreement relating thereto.
11 --Statement Regarding Computation of Earnings Per Share
12 --Statement Regarding Computation of Ratios
21 --Subsidiaries of HCC Insurance Holdings, Inc.
(G)24 --Powers of Attorney
27 --EDGAR Financial Data Schedule
28 --Information from reports furnished to the State Boards of Insurance
</TABLE>
34
<PAGE>
INDEX TO EXHIBITS
(A) Incorporated by reference to the Exhibits to HCC Insurance Holdings,
Inc.'s Registration Statement (Registration No. 33-48737) filed October 27,
1992.
(B) Incorporated by reference to the Exhibits to HCC Insurance Holdings,
Inc.'s Form 10K for the fiscal year ended December 31, 1993 filed March 30,
1994.
(C) Incorporated by reference to the Exhibits to HCC Insurance Holdings,
Inc.'s Form 10K for the fiscal year ended December 31, 1994 filed March 30,
1995.
(D) Incorporated by reference to the Exhibits to HCC Insurance Holdings, Inc.'s
Form 10Q for the fiscal quarter ended March 31, 1995 filed May 16, 1995.
(E) Incorporated by reference to the Exhibits to HCC Insurance Holdings,
Inc.'s Registration Statement on Form S-8 (Registration No. 33-94472) filed
July 11, 1995.
(F) Incorporated by reference to the Exhibits to HCC Insurance Holdings,
Inc.'s Registration Statement on Form S-8 (Registration No. 33-94468) filed
July 11, 1995.
(G) Incorporated by reference to the Exhibits to HCC Insurance Holdings, Inc.'s
Form 10K for fiscal year ended December 31, 1995 filed March 28, 1996.
(H) Incorporated by reference to the Exhibits to HCC Insurance Holdings, Inc.'s
Registration Statement (Registration No. 333-3652) filed April 15, 1996.
(I) Incorporated by reference to the Exhibits to HCC Insurance Holdings, Inc.
Preliminary Registration Statement filed March 7, 1997.
(J) Incorporated by reference to the Exhibits to HCC Insurance Holdings,
Inc.'s Registration Statement on Form S-8 (Registration No. 333-14479) filed
October 18, 1996.
(K) Incorporated by reference to the Exhibits to HCC Insurance Holdings,
Inc.'s Registration Statement on Form S-8 (Registration No. 333-14471) filed
October 18, 1996.
35
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Shareholders
HCC Insurance Holdings, Inc.
We have audited the accompanying consolidated balance sheets of HCC
Insurance Holdings, Inc. and Subsidiaries as of December 31, 1996 and 1995, and
the related consolidated statements of earnings, changes in shareholders'
equity, and cash flows for each of the three years in the period ended December
31, 1996. These financial statements are the responsibility of HCC Insurance
Holdings, Inc.'s management. Our responsibility is to express an opinion on
these financial statements based on our audits. We did not audit the 1994
financial statements of LDG Management Company Incorporated and Affiliates,
which statements reflect total revenues constituting 30 percent and net earnings
constituting 12 percent of the related consolidated financial statement totals
for the year ended December 31, 1994. Those statements were audited by other
auditors whose report has been furnished to us, and our opinion, insofar as it
relates to data included for LDG Management Company Incorporated and Affiliates
for 1994, is based solely on the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors,
the consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of HCC Insurance
Holdings, Inc. and Subsidiaries as of December 31, 1996 and 1995, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Houston, Texas
March 27, 1997
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Shareholders
LDG Management Company Incorporated and Affiliates
Wakefield, Massachusetts
We have audited the combined statements of earnings, changes in
shareholders' equity, and cash flow of LDG Management Company Incorporated (an S
corporation) and Affiliates (S corporations) for the year ended December 31,
1994. These combined financial statements are the responsibility of the
Companies' management. Our responsibility is to express an opinion on these
combined financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the combined financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the combined financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined results of operations of LDG
Management Company Incorporated and Affiliates and their cash flows for the year
ended December 31, 1994, in conformity with generally accepted accounting
principles.
TONNESON & COMPANY C.P.A.'s P.C.
Wakefield, Massachusetts
April 6, 1995
F-2
<PAGE>
HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
<S> <C> <C>
1996 1995
-------------- --------------
ASSETS
Investments:
Securities available for sale:
Fixed income securities, at market (cost: 1996 $262,667,000; 1995
$231,807,000).............................................................. $ 264,727,000 $ 234,881,000
Marketable equity securities, at market (cost: 1996 $2,481,000 ; 1995
$10,097,000)............................................................... 2,433,000 13,812,000
Mortgage loans, at unpaid principal balance, net............................... -- 81,000
Short-term investments, at cost, which approximates market..................... 53,100,000 56,513,000
-------------- --------------
Total investments.......................................................... 320,260,000 305,287,000
Cash............................................................................. 3,212,000 3,574,000
Restricted cash and short-term investments....................................... 44,363,000 23,495,000
Reinsurance recoverables......................................................... 123,181,000 103,408,000
Premium, claims and other receivables............................................ 139,109,000 130,384,000
Ceded unearned premium........................................................... 65,845,000 73,282,000
Deferred policy acquisition costs................................................ 16,843,000 16,431,000
Property and equipment, net...................................................... 9,135,000 9,440,000
Deferred income tax.............................................................. 11,524,000 2,921,000
Other assets, net................................................................ 12,307,000 13,454,000
-------------- --------------
Total assets............................................................... $ 745,779,000 $ 681,676,000
-------------- --------------
-------------- --------------
LIABILITIES
Loss and loss adjustment expense payable......................................... $ 185,822,000 $ 158,451,000
Reinsurance balances payable..................................................... 43,900,000 68,463,000
Unearned premium................................................................. 114,758,000 118,732,000
Deferred ceding commissions...................................................... 15,418,000 17,497,000
Premium and claims payable....................................................... 119,524,000 96,122,000
Notes payable.................................................................... 16,500,000 16,661,000
Accounts payable and accrued liabilities......................................... 9,167,000 10,291,000
-------------- --------------
Total liabilities.......................................................... 505,089,000 486,217,000
SHAREHOLDERS' EQUITY
Common Stock, $1.00 par value; 100,000,000 shares authorized; (issued and
outstanding: 1996 35,850,832 shares; 1995 13,838,802 shares)................... 35,851,000 13,839,000
Additional paid-in capital....................................................... 131,240,000 123,257,000
Retained earnings................................................................ 72,169,000 53,950,000
Unrealized investment gain, net.................................................. 1,303,000 4,417,000
Foreign currency translation adjustment.......................................... 127,000 (4,000)
-------------- --------------
Total shareholders' equity................................................. 240,690,000 195,459,000
-------------- --------------
Total liabilities and shareholders' equity................................. $ 745,779,000 $ 681,676,000
-------------- --------------
-------------- --------------
</TABLE>
See Notes to Consolidated Financial Statements.
F-3
<PAGE>
HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------------
<S> <C> <C> <C>
1996 1995 1994
------------- ------------- -------------
REVENUE
Net earned premium.................................................. $ 93,314,000 $ 80,011,000 $ 46,834,000
Fee and commission income........................................... 38,462,000 32,887,000 28,456,000
Net investment income............................................... 15,372,000 13,250,000 9,533,000
Net realized investment gain........................................ 5,097,000 1,061,000 682,000
------------- ------------- -------------
Total revenue................................................. 152,245,000 127,209,000 85,505,000
EXPENSE
Loss and loss adjustment expense.................................... 51,242,000 49,769,000 29,588,000
Operating expense:
Policy acquisition costs.......................................... 34,110,000 29,748,000 21,729,000
Compensation expense.............................................. 20,353,000 26,790,000 23,900,000
Other operating expense........................................... 12,855,000 12,591,000 8,660,000
Ceding commissions................................................ (30,268,000) (27,228,000) (20,210,000)
------------- ------------- -------------
Net operating expense......................................... 37,050,000 41,901,000 34,079,000
Compensatory stock grant and merger related expenses................ 26,160,000 -- --
Interest expense.................................................... 1,166,000 2,247,000 1,972,000
------------- ------------- -------------
Total expense................................................. 115,618,000 93,917,000 65,639,000
------------- ------------- -------------
Earnings before income tax provision.......................... 36,627,000 33,292,000 19,866,000
Income tax provision................................................ 7,329,000 8,955,000 4,598,000
------------- ------------- -------------
Net earnings.................................................. $ 29,298,000 $ 24,337,000 $ 15,268,000
------------- ------------- -------------
------------- ------------- -------------
EARNINGS PER SHARE DATA:
Earnings per share.................................................. $ 0.81 $ 0.75 $ 0.55
------------- ------------- -------------
------------- ------------- -------------
Weighted average shares outstanding................................. 35,965,000 32,667,000 27,910,000
------------- ------------- -------------
------------- ------------- -------------
PRO FORMA INFORMATION (SEE NOTE 2):
Net earnings........................................................ $ 43,655,000
-------------
-------------
Earnings per share.................................................. $ 1.21
-------------
-------------
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE>
HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
ADDITIONAL UNREALIZED
COMMON PAID-IN RETAINED INVESTMENT
STOCK CAPITAL EARNINGS GAIN (LOSS)
------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
BALANCE AS OF DECEMBER 31, 1993............................... $ 10,691,000 $ 61,721,000 $ 18,029,000 $ 3,035,000
128,588 shares of Common Stock issued for exercise of options,
including tax benefit of $659,000............................ 128,000 1,216,000 -- --
947,619 shares of Common Stock issued to acquire subsidiaries,
net of 64,950 shares of Common Stock acquired as treasury
stock........................................................ 948,000 11,983,000 -- --
Capital contributions to LDG prior to merger.................. -- 313,000 -- --
Net earnings.................................................. -- -- 15,268,000 --
Dividends to shareholders of LDG prior to merger.............. -- -- (1,855,000) --
Unrealized investment loss on fixed income securities, net of
deferred tax benefit of $4,270,000........................... -- -- -- (8,017,000)
Unrealized investment loss on marketable equity securities,
net of deferred tax benefit of $148,000...................... -- -- -- (319,000)
Sale of 64,950 shares of treasury stock....................... -- 1,247,000 -- --
Other......................................................... -- -- -- --
------------- -------------- ------------- -------------
BALANCE AS OF DECEMBER 31, 1994........................... $ 11,767,000 $ 76,480,000 $ 31,442,000 $ (5,301,000)
<CAPTION>
FOREIGN
CURRENCY TOTAL
TRANSLATION SHAREHOLDERS'
ADJUSTMENT EQUITY
----------- --------------
<S> <C> <C>
BALANCE AS OF DECEMBER 31, 1993............................... $ (25,000) $ 93,451,000
128,588 shares of Common Stock issued for exercise of options,
including tax benefit of $659,000............................ -- 1,344,000
947,619 shares of Common Stock issued to acquire subsidiaries,
net of 64,950 shares of Common Stock acquired as treasury
stock........................................................ -- 12,931,000
Capital contributions to LDG prior to merger.................. -- 313,000
Net earnings.................................................. -- 15,268,000
Dividends to shareholders of LDG prior to merger.............. -- (1,855,000)
Unrealized investment loss on fixed income securities, net of
deferred tax benefit of $4,270,000........................... -- (8,017,000)
Unrealized investment loss on marketable equity securities,
net of deferred tax benefit of $148,000...................... -- (319,000)
Sale of 64,950 shares of treasury stock....................... -- 1,247,000
Other......................................................... 11,000 11,000
----------- --------------
BALANCE AS OF DECEMBER 31, 1994........................... $ (14,000) $ 114,374,000
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE>
HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
ADDITIONAL UNREALIZED
COMMON PAID-IN RETAINED INVESTMENT
STOCK CAPITAL EARNINGS GAIN (LOSS)
------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
BALANCE AS OF DECEMBER 31, 1994............................... $ 11,767,000 $ 76,480,000 $ 31,442,000 $ (5,301,000)
58,876 shares of Common Stock issued for exercise of options,
including tax benefit of $252,000............................ 59,000 770,000 -- --
2,012,500 shares of Common Stock issued in public offering,
net of costs................................................. 2,013,000 45,957,000 -- --
Capital contribution to LDG prior to merger................... -- 50,000 -- --
Net earnings.................................................. -- -- 24,337,000 --
Dividends to shareholders of LDG prior to merger.............. -- -- (1,829,000) --
Unrealized investment gain on fixed income securities, net of
deferred tax charge of $4,293,000............................ -- -- -- 7,973,000
Unrealized investment gain on marketable equity securities,
net of deferred tax charge of $934,000....................... -- -- -- 1,745,000
Other......................................................... -- -- -- --
------------- -------------- ------------- -------------
BALANCE AS OF DECEMBER 31, 1995........................... $ 13,839,000 $ 123,257,000 $ 53,950,000 $ 4,417,000
<CAPTION>
FOREIGN
CURRENCY TOTAL
TRANSLATION SHAREHOLDERS'
ADJUSTMENT EQUITY
----------- --------------
<S> <C> <C>
BALANCE AS OF DECEMBER 31, 1994............................... $ (14,000) $ 114,374,000
58,876 shares of Common Stock issued for exercise of options,
including tax benefit of $252,000............................ -- 829,000
2,012,500 shares of Common Stock issued in public offering,
net of costs................................................. -- 47,970,000
Capital contribution to LDG prior to merger................... -- 50,000
Net earnings.................................................. -- 24,337,000
Dividends to shareholders of LDG prior to merger.............. -- (1,829,000)
Unrealized investment gain on fixed income securities, net of
deferred tax charge of $4,293,000............................ -- 7,973,000
Unrealized investment gain on marketable equity securities,
net of deferred tax charge of $934,000....................... -- 1,745,000
Other......................................................... 10,000 10,000
----------- --------------
BALANCE AS OF DECEMBER 31, 1995........................... $ (4,000) $ 195,459,000
</TABLE>
See Notes to Consolidated Financial Statements.
F-6
<PAGE>
HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
ADDITIONAL UNREALIZED
COMMON PAID-IN RETAINED INVESTMENT
STOCK CAPITAL EARNINGS GAIN (LOSS)
------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
BALANCE AS OF DECEMBER 31, 1995............................... $ 13,839,000 $ 123,257,000 $ 53,950,000 $ 4,417,000
20,758,172 shares of Common Stock issued for 150% stock
dividend (see note 1)........................................ 20,758,000 (20,758,000) -- --
117,458 shares of Common Stock issued for exercise of options,
including tax benefit of $366,000............................ 118,000 725,000 -- --
Net earnings.................................................. -- -- 29,298,000 --
Cash dividends declared, $0.06 per share...................... -- -- (2,104,000) --
Compensatory grant of LDG stock prior to merger............... -- 23,682,000 -- --
Dividends to shareholders of LDG prior to merger.............. -- -- (3,683,000) --
Capitalize undistributed earnings of LDG 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) --
Unrealized investment loss on fixed income securities, net of
deferred tax benefit of $355,000............................. -- -- -- (659,000)
Unrealized investment loss on marketable equity securities,
net of deferred tax benefit of $1,307,000.................... -- -- -- (2,455,000)
Other......................................................... -- 494,000 -- --
------------- -------------- ------------- -------------
BALANCE AS OF DECEMBER 31, 1996........................... $ 35,851,000 $ 131,240,000 $ 72,169,000 $ 1,303,000
------------- -------------- ------------- -------------
------------- -------------- ------------- -------------
<CAPTION>
FOREIGN
CURRENCY TOTAL
TRANSLATION SHAREHOLDERS'
ADJUSTMENT EQUITY
----------- --------------
<S> <C> <C>
BALANCE AS OF DECEMBER 31, 1995............................... $ (4,000) $ 195,459,000
20,758,172 shares of Common Stock issued for 150% stock
dividend (see note 1)........................................ -- --
117,458 shares of Common Stock issued for exercise of options,
including tax benefit of $366,000............................ -- 843,000
Net earnings.................................................. -- 29,298,000
Cash dividends declared, $0.06 per share...................... -- (2,104,000)
Compensatory grant of LDG stock prior to merger............... -- 23,682,000
Dividends to shareholders of LDG prior to merger.............. -- (3,683,000)
Capitalize undistributed earnings of LDG upon conversion from
S Corporation................................................ -- --
1,136,400 shares of Common Stock issued for NASRA
combination.................................................. -- (316,000)
Unrealized investment loss on fixed income securities, net of
deferred tax benefit of $355,000............................. -- (659,000)
Unrealized investment loss on marketable equity securities,
net of deferred tax benefit of $1,307,000.................... -- (2,455,000)
Other......................................................... 131,000 625,000
----------- --------------
BALANCE AS OF DECEMBER 31, 1996........................... $ 127,000 $ 240,690,000
----------- --------------
----------- --------------
</TABLE>
See Notes to Consolidated Financial Statements.
F-7
<PAGE>
HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------
<S> <C> <C> <C>
1996 1995 1994
------------- -------------- -------------
Cash flows from operating activities:
Net earnings..................................................... $ 29,298,000 $ 24,337,000 $ 15,268,000
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Change in reinsurance recoverables............................. (19,773,000) (3,946,000) (25,233,000)
Change in premium, claims and other receivables................ (8,725,000) (16,680,000) (56,061,000)
Change in ceded unearned premium............................... 7,437,000 (12,611,000) (34,926,000)
Change in deferred policy acquisition costs, net............... (2,491,000) (419,000) 1,115,000
Change in deferred income tax, net of tax effect of unrealized
gain or loss................................................... (6,941,000) (1,545,000) (1,181,000)
Change in loss and loss adjustment expense payable............. 27,371,000 28,696,000 28,746,000
Change in reinsurance balances payable......................... (24,563,000) 403,000 32,922,000
Change in unearned premium..................................... (3,974,000) 31,386,000 47,786,000
Change in premium and claims payable, net of restricted cash... 2,534,000 7,577,000 21,258,000
Change in accounts payable and accrued liabilities............. (1,841,000) 4,027,000 645,000
Net realized investment gain................................... (5,097,000) (1,061,000) (682,000)
Noncash compensation expense................................... 24,176,000 -- --
Depreciation and amortization expense.......................... 2,318,000 1,700,000 1,284,000
Other, net..................................................... 3,126,000 767,000 328,000
------------- -------------- -------------
Cash provided by operating activities........................ 22,855,000 62,631,000 31,269,000
Cash flows from investing activities:
Sales of fixed income securities................................. 3,465,000 21,388,000 24,002,000
Maturity or call of fixed income securities...................... 8,285,000 8,162,000 25,000
Sales of equity securities....................................... 18,211,000 9,458,000 9,104,000
Net cash (paid) received in combinations......................... (1,753,000) -- 1,979,000
Cost of investments acquired..................................... (48,807,000) (107,639,000) (73,738,000)
Purchases of property and equipment.............................. (1,724,000) (3,269,000) (1,438,000)
Other, net....................................................... 81,000 1,229,000 826,000
------------- -------------- -------------
Cash used by investing activities............................ (22,242,000) (70,671,000) (39,240,000)
Cash flows from financing activities:
Proceeds from notes payable...................................... 250,000 -- 20,110,000
Sale of Common Stock, net of costs............................... 843,000 48,799,000 1,344,000
Sales of treasury stock.......................................... -- -- 1,247,000
Capital contributions to LDG..................................... -- -- 313,000
Payments on notes payable........................................ (411,000) (28,247,000) (4,146,000)
Dividends paid................................................... (5,070,000) (1,507,000) (1,855,000)
------------- -------------- -------------
Cash provided (used) by financing activities................. (4,388,000) 19,045,000 17,013,000
------------- -------------- -------------
Net change in cash and short-term investments................ (3,775,000) 11,005,000 9,042,000
Cash and short-term investments at beginning of year......... 60,087,000 49,082,000 40,040,000
------------- -------------- -------------
Cash and short-term investments at end of year............... $ 56,312,000 $ 60,087,000 $ 49,082,000
------------- -------------- -------------
------------- -------------- -------------
</TABLE>
See Notes to Consolidated Financial Statements.
F-8
<PAGE>
HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) GENERAL INFORMATION AND SIGNIFICANT ACCOUNTING AND REPORTING POLICIES
HCC Insurance Holdings, Inc. and its subsidiaries (collectively, "the
Company" or "HCCH"), include domestic and foreign property and casualty
insurance companies and managing general agents, surplus lines insurance brokers
and wholesale insurance and reinsurance brokers. HCCH, through its subsidiaries,
provides specialized property and casualty insurance to commercial customers
worldwide, underwritten on both a direct and reinsurance basis, in the areas of
aviation, marine, property, offshore energy and accident and health. The
principal insurance company subsidiaries are Houston Casualty Company ("HCC")
and Trafalgar Insurance Company ("TIC") in Houston, Texas and IMG Insurance
Company Ltd. ("IMG") in Amman, Jordan. The agency subsidiaries provide
underwriting management and intermediary services for insurance and reinsurance
companies, primarily in the accident and health area, but also in the same lines
of business that the insurance subsidiaries operate. The principal agency
subsidiaries are LDG Management Company Incorporated ("LDG") in Wakefield,
Massachusetts, HCC Underwriters, A Texas Corporation ("HCCU") in Houston, Texas;
North American Special Risk Associates, Inc. ("NASRA") in Northbrook, Illinois
and Middle East Insurance Brokers, Ltd. ("MEIB") in Amman, Jordan.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions. This affects amounts reported in the financial statements and the
disclosure of contingent assets and liabilities. Actual results could differ
from those estimates.
A description of the significant accounting and reporting policies utilized
by the Company in preparing the consolidated financial statements is as follows:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation. The business combinations
with LDG and NASRA have been recorded as poolings-of-interests. The Company's
financial statements have been restated to include the accounts and operations
of LDG for all periods presented. The financial statements have not been
restated to include NASRA due to immateriality. (see note 2).
INVESTMENTS
Fixed income securities and marketable equity securities are classified as
available for sale and are carried at quoted market value, if readily
marketable, or at management's estimated fair value, if not readily marketable.
The change in unrealized gain or loss with respect to these securities is
recorded as a direct increase or decrease to shareholders' equity, net of
related deferred income tax, if any. Fixed income securities available for sale
are purchased with the original intent to hold to maturity, but which may be
available for sale if market conditions warrant, or if the Company's investment
policies dictate, in order to maximize the Company's investment yield. Mortgage
loans on real estate are stated at the aggregate unpaid principal balance less
unamortized fees. Short-term investments and restricted short-term investments
are carried at cost which approximates market value.
The realized gain or loss on investment transactions is determined on an
average cost basis and included in earnings on the trade date. When impairment
of the value of an investment is considered other than temporary, the decrease
in value is reported in earnings as a realized investment loss and a new cost
basis is established.
F-9
<PAGE>
HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1) GENERAL INFORMATION AND SIGNIFICANT ACCOUNTING AND REPORTING POLICIES
(CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost, net of accumulated depreciation.
Depreciation expense is provided using the straight-line method over the
estimated useful lives of the related assets. Amortization of leasehold
improvements is provided using the straight-line method over the term of the
respective lease. Upon disposal of assets, the cost and related accumulated
depreciation are removed from the accounts and the resulting gain or loss is
included in earnings.
Costs incurred in developing or purchasing management information systems
are capitalized and included in property and equipment. These costs are
amortized over their estimated useful lives from the dates the systems are
placed in service.
EARNED PREMIUM, DEFERRED POLICY ACQUISITION COSTS AND CEDING COMMISSIONS OF
INSURANCE COMPANY SUBSIDIARIES
Written premium, net of reinsurance, is generally included in earnings on a
pro rata basis over the lives of the related policies. Policy acquisition costs
related to unearned premium, which include commissions, taxes, fees and other
direct costs of underwriting policies and ceding commissions allowed by
reinsurers, which include expense allowances, are deferred and charged or
credited to earnings on the same basis. Historical and current loss and loss
adjustment expense experience are considered in determining the recoverability
of deferred policy acquisition costs.
FEE AND COMMISSION INCOME
Fee and commission income is recognized on the revenue recognition date,
which is the later of the effective date of the policy, the date when the
premium can be reasonably estimated, or the date when substantially all required
services relating to the insurance placement have been rendered to the client.
Commission income relating to additional or return premiums or other policy
adjustments is recognized when the events occur and the amounts become known or
can be estimated.
PREMIUM AND OTHER RECEIVABLES
The Company has adopted the gross method for reporting receivables and
payables on brokered transactions.
Management considers all premium and other receivables to be collectable
and, therefore, has not recorded an allowance for doubtful accounts.
LOSS AND LOSS ADJUSTMENT EXPENSE OF INSURANCE COMPANY SUBSIDIARIES
Loss and loss adjustment expense is based on undiscounted estimates of
payments to be made for reported and incurred but not reported losses ("IBNR"),
net of reinsurance and anticipated salvage and subrogation receipts. Estimates
for reported losses are based on all available information, including reports
received from ceding companies on assumed business. Estimates for IBNR are based
both on the Company's and industry experience. While management believes that
amounts included in the accompanying financial statements are adequate, such
estimates may be more or less than the amounts ultimately
F-10
<PAGE>
HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1) GENERAL INFORMATION AND SIGNIFICANT ACCOUNTING AND REPORTING POLICIES
(CONTINUED)
paid when the claims are settled. The estimates are continually reviewed and any
changes are reflected in current operations.
REINSURANCE
The Company records all reinsurance recoverables and ceded unearned premiums
as assets and deferred ceding commissions as a liability. All such amounts are
estimated and recorded in a manner consistent with the underlying reinsured
contracts. Management has recorded a reserve for uncollectible reinsurance based
on estimates of collectability.
GOODWILL
In connection with the Company's acquisitions of subsidiaries during 1994,
the excess of cost over fair value of net assets acquired is being amortized
using the straight-line method over forty years. Management of the acquired
businesses have successfully operated in the Companies' insurance markets for a
number of years and, with the additional capital provided by the Company, will
be positioned to take advantage of increased underwriting opportunities.
The Company has no reason to expect major changes in the business conditions
in which the acquired companies operate which might affect the recoverability of
the recorded intangibles. However, in the event business conditions change, the
recoverability will be re-evaluated based upon revised projections of future
undiscounted operating income and cash flows and, if impaired, the balances will
be adjusted accordingly. Amortization charged to income for the years ended
December 31, 1996, 1995 and 1994, was $289,000, $289,000 and $72,000,
respectively.
CASH AND CASH EQUIVALENTS
For purposes of the consolidated statements of cash flows, the Company
considers certificates of deposit, corporate demand notes receivable and
commercial paper with original maturities of three months or less and money
market funds as cash equivalents. These amounts are shown as short-term
investments in the consolidated balance sheets. In conjunction with the
management of reinsurance pools, the Company's agency subsidiaries withhold
premium funds for the payment of claims which are shown as restricted cash and
short-term investments on the consolidated balance sheets.
The Company generally invests its excess cash with major banks and in
investment grade commercial paper and repurchase agreements. These securities
typically mature within 90 days and, therefore, bear minimal risk. The Company
has not experienced any losses on these investments.
FOREIGN CURRENCY TRANSLATION
The functional currency of most foreign subsidiaries is the United States
dollar. Assets and liabilities recorded in foreign currencies are translated
into United States dollars at exchange rates in effect at the balance sheet
date. Transactions in foreign currencies are translated at the rates of exchange
in effect on the date the transaction occurs. The Company's foreign currency
transactions are principally denominated in British Pound Sterling. From time to
time the Company enters into foreign currency forward contracts as a hedge
against foreign currency fluctuations. Gains or losses in the market value of
foreign currency forward contracts are recognized in the statements of earnings
concurrently with the gains and losses on
F-11
<PAGE>
HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1) GENERAL INFORMATION AND SIGNIFICANT ACCOUNTING AND REPORTING POLICIES
(CONTINUED)
the hedged balances. For the years ended December 31, 1996, 1995 and 1994, the
gain (loss) from currency conversion was ($181,000), ($209,000) and $203,000,
respectively.
One subsidiary has a functional currency of the British Pound Sterling
("GBP"). Cumulative translation adjustment, representing the effect of
translating this subsidiary's assets and liabilities into United States dollars
is included in the foreign currency translation adjustment within shareholders'
equity.
INCOME TAX
The domestic companies and the foreign insurance company subsidiaries (which
have all elected to be taxed as domestic companies) file a single consolidated
Federal income tax return and include the foreign subsidiaries' income to the
extent required by law. Deferred income tax is accounted for using the liability
method, which reflects the tax impact of temporary differences between the bases
of assets and liabilities for financial reporting purposes and such bases as
measured by tax laws and regulations. LDG was an S Corporation prior to its
reorganization and merger with the Company. Therefore, Federal income tax
expense was not provided for LDG's earnings until the S Corporation election was
terminated. LDG is included in the Company's consolidated Federal income tax
return beginning May 24, 1996.
EARNINGS PER SHARE
Earnings per share are based on the weighted average number of common and
common equivalent shares outstanding during the year divided into net earnings.
The shares issued in connection with the combination with LDG are included in
outstanding shares for all periods presented. 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. The difference between primary and fully diluted
earnings per share is not material.
STOCK SPLITS
In February, 1994, the Board of Directors declared a three-for-two stock
split in the form of a 50% stock dividend on its shares of $1.00 par value
Common Stock payable to shareholders of record March 15, 1994. This stock split
was recorded retroactively as of December 31, 1993. In April, 1996, the Board of
Directors declared a five-for-two stock split in the form of a 150% stock
dividend on the Company's $1.00 par value Common Stock, payable to shareholders
of record April 30, 1996. The par value of the Company's Common Stock remains
unchanged. All per share, weighted average shares outstanding and option data
presented in the consolidated financial statements and the notes thereto have
been retroactively adjusted to reflect the effects of the splits.
EFFECTS OF RECENT ACCOUNTING PRONOUNCEMENTS
In February, 1997, the Financial Accounting Standards Board issued SFAS No.
128 "Earnings Per Share". SFAS No. 128 is effective for fiscal years 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. However, the statement will
have no effect on the Company's net earnings, shareholders' equity or cash
flows.
F-12
<PAGE>
HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1) GENERAL INFORMATION AND SIGNIFICANT ACCOUNTING AND REPORTING POLICIES
(CONTINUED)
RECLASSIFICATIONS
Certain amounts in the 1995 and 1994 consolidated financial statements have
been reclassified to conform with the 1996 presentation. Such reclassifications
had no effect on the Company's shareholders' equity, net earnings or cash flows.
(2) ACQUISITIONS
IMG AND MEIB
Effective January 1, 1994, the Company acquired a 25% interest in MEIB.
Concurrent with the purchase of IMG on October 1, 1994, the Company acquired the
remaining 75% interest, thereby making MEIB a wholly-owned subsidiary of the
Company. To acquire 100% interest of MEIB the Company issued 109,524 shares (pre
split) of its Common Stock and paid a total of $3.9 million. During the first
nine months of 1994, the Company accounted for its 25% interest using the equity
method and beginning October 1, 1994, MEIB's results of operations have been
included in the consolidated statements of earnings.
Effective October 1, 1994, the Company acquired 100% of the stock of IMG.
IMG specializes in insuring large commercial risks, with an emphasis on energy
related business. In exchange for IMG's stock, the Company issued 838,095 shares
(pre split) of its Common Stock and paid $4.4 million. IMG's results of
operations have been included in the consolidated statements of earnings
beginning October 1, 1994.
Both acquisitions were accounted for using the purchase method. In each case
the purchase price was allocated to assets acquired based on their estimated
fair values. On a combined basis, the fair value of assets acquired was
approximately $29.0 million and the fair value of liabilities assumed was
approximately $18.3 million. This resulted in a combined total cost in excess of
net assets acquired (goodwill) of approximately $11.6 million from both
acquisitions. The resulting goodwill is being amortized on a straight-line basis
over forty years.
The following unaudited pro forma summary presents information for the year
ended December 31, 1994, as if the acquisitions of IMG and MEIB had occurred at
the beginning of the year after giving effect to certain adjustments including
amortization of goodwill, increased interest expense from debt issued to fund
the acquisitions and Federal income taxes. The pro forma summary is for
information purposes only, does not necessarily reflect the actual results that
would have occurred, nor is it necessarily indicative of future results of the
combined Company.
<TABLE>
<CAPTION>
UNAUDITED PRO FORMA INFORMATION 1994
- ------------------------------------------------------------------------------- -------------
<S> <C>
Total revenue.................................................................. $ 89,110,000
Net earnings................................................................... 15,892,000
Earnings per share............................................................. 0.54
</TABLE>
LDG
On May 24, 1996, the Company issued 6,250,000 shares of its Common Stock to
acquire all of the outstanding common stock of LDG. The former principal
shareholder of LDG is a director of the Company. This business combination has
been accounted for as a pooling-of-interests. The Company's
F-13
<PAGE>
HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) ACQUISITIONS (CONTINUED)
consolidated financial statements have been restated to include the accounts and
operations of LDG for all periods presented.
The consolidated financial statements include adjustments made to conform
LDG's accounting policies for fee and commission income to that of HCCH. HCCH's
policy is to recognize fee and commission income on the revenue recognition date
(the later of the effective date of the policy, the date when premium can be
reasonably estimated, or the date when substantially all required services
relating to the placement have been rendered to the client), and subsequent
policy adjustments and contingent profit commissions are recognized when events
occur and amounts are known or can be reasonably estimated. LDG previously
recognized fee and commission income on the later of the effective date or the
reporting date, subsequent adjustments were recognized when they became due, and
contingent profit commission was recognized when received. For the years ended
December 31, 1995 and 1994, these adjustments decreased net income $119,000 and
$844,000, respectively.
Separate total revenue and net earnings (loss) amounts of the merged
entities are presented for the periods prior to merger in the following table:
<TABLE>
<CAPTION>
FOR THE FIVE FOR THE YEAR ENDED DECEMBER
MONTHS 31,
ENDED MAY 31, -----------------------------
1996 1995 1994
------------------ -------------- -------------
<S> <C> <C> <C>
Total revenue:
HCCH........................................................ $ 48,771,000 $ 99,197,000 $ 59,869,000
LDG......................................................... 12,893,000 28,012,000 25,636,000
------------------ -------------- -------------
Total revenue........................................... $ 61,664,000 $ 127,209,000 $ 85,505,000
------------------ -------------- -------------
------------------ -------------- -------------
Net earnings (loss):
HCCH........................................................ $ 12,144,000 $ 22,273,000 $ 13,409,000
LDG......................................................... (9,919,000) 2,064,000 1,859,000
------------------ -------------- -------------
Net earnings.............................................. $ 2,225,000 $ 24,337,000 $ 15,268,000
------------------ -------------- -------------
------------------ -------------- -------------
</TABLE>
Certain nonrecurring expenses were incurred during the first six months of
1996. Of the nonrecurring expenses, approximately $24.0 million was related to
the compensatory grant of LDG stock to certain key employees by LDG's majority
shareholder immediately prior to the combination. Other nonrecurring expenses,
which totalled approximately $2.1 million, included legal, accounting and
investment banking fees in connection with the merger. The following table
presents pro forma net income and earnings per share amounts which reflect the
elimination of nonrecurring compensation and merger related expenses in 1996,
pro forma adjustments to all years to present Federal income taxes on LDG's
earnings prior to its reorganization and merger with the Company and pro forma
adjustments to reduce 1995 and 1994
F-14
<PAGE>
HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) ACQUISITIONS (CONTINUED)
compensation expense based on employment arrangements in effect during 1996, for
LDG's previous principal shareholders.
<TABLE>
<CAPTION>
1996 1995 1994
-------------- ------------- -------------
<S> <C> <C> <C>
Net earnings....................................................... $ 29,298,000 $ 24,337,000 $ 15,268,000
Nonrecurring expenses.............................................. 26,160,000 -- --
Compensation adjustment, net of state income tax................... -- 6,534,000 5,910,000
Pro forma Federal income tax....................................... (11,803,000) (2,923,000) (2,641,000)
-------------- ------------- -------------
Pro forma net earnings......................................... $ 43,655,000 $ 27,948,000 $ 18,537,000
-------------- ------------- -------------
-------------- ------------- -------------
Pro forma earnings per share................................... $ 1.21 $ 0.86 $ 0.66
-------------- ------------- -------------
-------------- ------------- -------------
</TABLE>
NASRA
On November 27, 1996, the Company acquired all of the outstanding shares of
NASRA by issuing 1,136,400 shares of its Common Stock and a payment of $1.7
million in cash to one dissenting shareholder. This combination has been
accounted for as a pooling-of-interests. However, the Company's consolidated
financial statements have not been restated due to immateriality.
TRM
On November 11, 1996, the Company announced that it had agreed to acquire
all of the occupational accident business of the TRM International, Inc. group
of companies ("TRM") in exchange for 266,667 shares of its Common Stock and
$6.55 million in cash. The acquisition was finalized on January 24, 1997 and
will be accounted for as a purchase.
AMIG
On January 6, 1997, the Company announced that it had agreed in principal to
acquire all of the outstanding shares of Interworld Inc. Group ("Interworld") in
exchange for 725,000 shares of its Common Stock. The transaction will be
accounted for as a pooling-of-interests.
AVEMCO
On January 17, 1997, HCCH and AVEMCO Corporation ("AVEMCO") jointly
announced that the Companies had signed a letter of intent to merge in a stock
for stock transaction, each share of AVEMCO common stock to be exchanged for one
share of HCCH's Common Stock. The Companies executed definitive agreements on
February 28, 1997. This transaction will be accounted for as a pooling-of-
interests. The merger is still subject to approval by the shareholders of both
Companies and to certain regulatory approvals. As of March 1, 1997, there were
8.4 million shares of AVEMCO common stock outstanding.
F-15
<PAGE>
HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3) INVESTMENTS
Substantially all of the Company's fixed income securities are investment
grade; most are A rated or better. No high-yield corporate bonds are owned or
contemplated. The amortized cost, gross unrealized gain or loss and estimated
market value of securities available for sale are as follows:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAIN LOSS VALUE
-------------- ------------ ------------- --------------
<S> <C> <C> <C> <C>
December 31, 1996:
Marketable equity securities...................... $ 2,481,000 $ 256,000 $ (304,000) $ 2,433,000
US Treasury securities............................ 3,527,000 83,000 (6,000) 3,604,000
Obligations of states, municipalities and
political subdivisions.......................... 259,140,000 3,078,000 (1,095,000) 261,123,000
-------------- ------------ ------------- --------------
Total securities available for sale............. $ 265,148,000 $ 3,417,000 $ (1,405,000) $ 267,160,000
-------------- ------------ ------------- --------------
-------------- ------------ ------------- --------------
December 31, 1995:
Marketable equity securities...................... $ 10,097,000 $ 3,866,000 $ (151,000) $ 13,812,000
US Treasury securities............................ 3,914,000 44,000 (10,000) 3,948,000
Obligations of states, municipalities and
political subdivisions.......................... 227,893,000 3,872,000 (832,000) 230,933,000
-------------- ------------ ------------- --------------
Total securities available for sale............. $ 241,904,000 $ 7,782,000 $ (993,000) $ 248,693,000
-------------- ------------ ------------- --------------
-------------- ------------ ------------- --------------
</TABLE>
The amortized cost and estimated market value of fixed income securities
available for sale at December 31, 1996, by contractual maturity, are shown
below. Expected maturities may differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties.
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED MARKET
COST VALUE
-------------- --------------
<S> <C> <C>
Due in 1 year or less............................................................ $ 4,229,000 $ 4,276,000
Due after 1 year through 5 years................................................. 66,362,000 67,383,000
Due after 5 years through 10 years............................................... 80,119,000 80,876,000
Due after 10 years through 15 years.............................................. 60,990,000 61,408,000
Due after 15 years............................................................... 50,967,000 50,784,000
-------------- --------------
Total fixed income securities available for sale............................. $ 262,667,000 $ 264,727,000
-------------- --------------
-------------- --------------
</TABLE>
As of December 31, 1996, the Company's insurance company subsidiaries had
deposited fixed income securities available for sale with an amortized cost of
approximately $9.1 million (market: $9.1 million) to meet the deposit
requirements of the insurance departments of certain states.
F-16
<PAGE>
HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3) INVESTMENTS (CONTINUED)
The sources of net investment income for the years ended December 31, 1996,
1995 and 1994, are detailed below:
<TABLE>
<CAPTION>
1996 1995 1994
------------- ------------- ------------
<S> <C> <C> <C>
Fixed income securities.............................................. $ 12,524,000 $ 10,172,000 $ 7,604,000
Short-term investments............................................... 2,817,000 2,952,000 1,633,000
Equity securities.................................................... 130,000 136,000 308,000
Other................................................................ 18,000 152,000 317,000
------------- ------------- ------------
Total investment income.......................................... 15,489,000 13,412,000 9,862,000
Investment expense................................................... (117,000) (162,000) (329,000)
------------- ------------- ------------
Net investment income............................................ $ 15,372,000 $ 13,250,000 $ 9,533,000
------------- ------------- ------------
------------- ------------- ------------
</TABLE>
There were no investments in fixed income securities available for sale that
were non-income producing for the twelve months preceding December 31, 1996.
F-17
<PAGE>
HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3) INVESTMENTS (CONTINUED)
Realized pre-tax gain (loss) on the sale of investments is as follows:
<TABLE>
<CAPTION>
GAIN LOSS NET
------------ ------------- ------------
<S> <C> <C> <C>
For the year ended December 31, 1996:
Fixed income securities available for sale........................... $ 20,000 $ (221,000) $ (201,000)
Equity securities available for sale................................. 5,635,000 (337,000) 5,298,000
------------ ------------- ------------
Realized gain (loss)............................................... $ 5,655,000 $ (558,000) $ 5,097,000
------------ ------------- ------------
------------ ------------- ------------
For the year ended December 31, 1995:
Fixed income securities available for sale........................... $ 513,000 $ (524,000) $ (11,000)
Equity securities available for sale................................. 1,767,000 (697,000) 1,070,000
Other................................................................ 2,000 -- 2,000
------------ ------------- ------------
Realized gain (loss)............................................... $ 2,282,000 $ (1,221,000) $ 1,061,000
------------ ------------- ------------
------------ ------------- ------------
For the year ended December 31, 1994:
Fixed income securities available for sale........................... $ 152,000 $ (241,000) $ (89,000)
Equity securities available for sale................................. 1,156,000 (381,000) 775,000
Other................................................................ -- (4,000) (4,000)
------------ ------------- ------------
Realized gain (loss)............................................... $ 1,308,000 $ (626,000) $ 682,000
------------ ------------- ------------
------------ ------------- ------------
</TABLE>
(4) PROPERTY AND EQUIPMENT
The following table summarizes property and equipment at December 31, 1996
and 1995:
<TABLE>
<CAPTION>
ESTIMATED
1996 1995 USEFUL LIFE
------------- ------------- -------------
<S> <C> <C> <C>
Building and improvements........................................... $ 6,150,000 $ 6,067,000 31.5 years
Furniture, fixtures and equipment................................... 5,753,000 4,875,000 3 to 5 years
Management information systems...................................... 5,356,000 4,847,000 3 to 7 years
------------- -------------
Total property and equipment.................................... 17,259,000 15,789,000
Less accumulated depreciation and amortization...................... (8,124,000) (6,349,000)
------------- -------------
Property and equipment, net..................................... $ 9,135,000 $ 9,440,000
------------- -------------
</TABLE>
(5) NOTES PAYABLE
Notes payable at December 31, 1996 and 1995 are shown in the table below.
The estimated fair value of the notes payable at December 31, 1996 and 1995,
which is based on current rates offered to the company for debt with similar
terms, approximates the carrying value.
<TABLE>
<CAPTION>
1996 1995
------------- -------------
<S> <C> <C>
First note......................................................................... $ 16,250,000 $ 16,250,000
Second note........................................................................ -- 411,000
Line of credit..................................................................... 250,000 --
------------- -------------
Total notes payable............................................................ $ 16,500,000 $ 16,661,000
------------- -------------
------------- -------------
</TABLE>
F-18
<PAGE>
HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(5) NOTES PAYABLE (CONTINUED)
The first note is payable to a bank in quarterly installments of $1.5
million plus interest increasing to quarterly installments of $1.75 million plus
interest as of October 1, 1997. Interest is payable quarterly at the prime rate
(8 1/4% at December 31, 1996). During February, 1994, the first note was amended
changing the interest rate to a fixed rate of 6 1/2% until February 7, 1997. The
rate reverts back to the prime rate after such date or can be set at London
Interbank Offering Rate ("LIBOR") plus 2 1/4% at the Company's discretion. The
note is collateralized by all of the Common Stock of HCC. The loan agreement
contains certain restrictive covenants, including restrictions on certain
transactions in the Company's capital stock or the capital stock of HCC and the
maintenance of required financial ratios. Additionally, the loan agreement
prohibits the payment of dividends by the Company without the bank's approval.
The bank has approved the Company's current dividend policy. During 1995, the
Company prepaid the first two installments of $1.5 million due in 1996. The bank
deferred the second two installments due in 1996 until maturity on October 1,
1998. The Company paid the first 1997 quarterly payment of $1.5 million in
January, 1997.
The second note was payable to a bank in monthly installments of $21,000
plus interest. This note was repaid in full during 1996.
The outstanding advance at December 31, 1996, on a revolving line of credit,
is owed to a bank and represents the maximum available on that line of credit.
Interest is payable quarterly beginning March 20, 1997, at a variable rate which
is the bank's prime rate plus one percent (9 1/4% at December 31, 1996). The
principal is due in one payment upon maturity on December 20, 1998. The loan is
collateralized by a certificate of deposit.
At December 31, 1996, HCC maintained a revolving line of credit with a bank
in the maximum amount of $12 million available through April 30, 1997. Advances
under the line of credit are limited to amounts required to fund draws, if any,
on letters of credit issued by the bank on behalf of HCC and short-term direct
cash advances. The line of credit is collateralized by securities having an
aggregate market value of up to $15 million, the actual amount of collateral at
any one time being 125% of the aggregate amount outstanding. Interest on the
line is payable at the bank's prime rate of interest (8 1/4% at December 31,
1996). At December 31, 1996, letters of credit totaling $4.6 million had been
issued to insurance companies by the bank on behalf of HCC, with total
securities collateralizing the line of $5.8 million. As of December 31, 1996,
there were no cash advances outstanding under this line of credit, therefore,
$7.4 million is available for short-term borrowings under this facility.
Principal payments due on the note payable and the line of credit at
December 31, 1996, are shown in the table below:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, AMOUNT DUE
- --------------------------------------------------------------------------------------------------- -------------
<S> <C>
1997..................................................................................... $ 6,250,000
1998..................................................................................... 10,250,000
-------------
Total principal payments due....................................................................... $ 16,500,000
-------------
-------------
</TABLE>
(6) INCOME TAX
Several of the Company's foreign subsidiaries are not subject to foreign
income taxes and no foreign income tax expense was incurred for the three years
ended December 31, 1996. United States Federal
F-19
<PAGE>
HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(6) INCOME TAX (CONTINUED)
income taxes are provided on all foreign earnings. As of December 31, 1996 and
1995, the Company had income taxes payable of $1.9 million and $702,000,
respectively. For Federal income tax purposes, LDG has approximately $19.1
million of net operating loss carryforwards which will expire in the year 2010.
The components of the income tax provision for the years ended December 31,
1996, 1995 and 1994, are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
Current............................................................. $ 14,655,000 $ 10,500,000 $ 5,782,000
Deferred:
Change in net deferred tax at current enacted tax rate............ (7,326,000) (1,528,000) (1,201,000)
Change in deferred tax valuation allowance........................ -- (17,000) 17,000
------------- ------------- -------------
Total income tax provision...................................... $ 7,329,000 $ 8,955,000 $ 4,598,000
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
The composition of deferred tax assets and liabilities and the related tax
effects as of December 31, 1996 and 1995, are as follows:
<TABLE>
<CAPTION>
1996 1995
------------- ------------
<S> <C> <C>
Tax net operating loss carryforward.................................................. $ 7,820,000 $ --
Excess of financial unearned premium over tax........................................ 3,930,000 3,714,000
Effect of loss reserve discounting and salvage and subrogation accrual for tax....... 3,199,000 2,746,000
Bad debt expense, deducted for financial over tax.................................... 845,000 838,000
Accrued expenses and other items deductible when paid for tax........................ 510,000 677,000
------------- ------------
Total assets..................................................................... 16,304,000 7,975,000
Excess of financial over currently taxable earnings from foreign subsidiaries........ 421,000 --
Unrealized gain on increase in value of securities available for sale (shareholders'
equity)............................................................................ 707,000 2,372,000
Deferred policy acquisition costs, net of ceding commissions, deductible for tax..... 3,027,000 2,240,000
Property and equipment depreciation and other items.................................. 625,000 442,000
------------- ------------
Total liabilities................................................................ 4,780,000 5,054,000
------------- ------------
Net deferred tax asset........................................................... $ 11,524,000 $ 2,921,000
------------- ------------
------------- ------------
</TABLE>
Changes in the valuation allowance account applicable to the net deferred
tax asset are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
--------- ---------- ---------
<S> <C> <C> <C>
Balance, beginning of year...................................................... $ -- $ 17,000 $ --
Increase charged (decrease credited) to income.................................. -- (17,000) 17,000
Valuation allowance acquired.................................................... 54,000 -- --
--------- ---------- ---------
Balance, end of year........................................................ $ 54,000 $ 0 $ 17,000
--------- ---------- ---------
--------- ---------- ---------
</TABLE>
During 1994, the Company's statutory Federal income tax rate changed from
34% to 35%. This change resulted in a deferred tax benefit of approximately
$70,000. The rate change also resulted in an
F-20
<PAGE>
HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(6) INCOME TAX (CONTINUED)
increase in the current income tax provision of approximately $135,000. The
following table summarizes the differences between the Company's effective tax
rate for financial statement purposes and the Federal statutory rate:
<TABLE>
<CAPTION>
1996 1995 1994
------------- ------------- ------------
<S> <C> <C> <C>
Statutory tax rate............................................ 35.0% 35.0% 35.0%
Federal tax at statutory rate................................. $ 12,819,000 $ 11,652,000 $ 6,953,000
Nontaxable municipal bond interest and dividends received
deduction................................................... (3,670,000) (2,624,000) (2,176,000)
State income taxes............................................ (234,000) 397,000 349,000
Tax exempt status of S Corporation............................ (1,617,000) (722,000) (651,000)
Deferred taxes at date of S Corporation conversion............ (680,000) -- --
Other, net.................................................... 711,000 252,000 123,000
------------- ------------- ------------
Income tax provision...................................... $ 7,329,000 $ 8,955,000 $ 4,598,000
------------- ------------- ------------
------------- ------------- ------------
Effective tax rate........................................ 20.0% 26.9% 23.1%
------------- ------------- ------------
------------- ------------- ------------
</TABLE>
(7) SEGMENT AND GEOGRAPHIC DATA
The Company classifies its activities into two core business segments: 1)
property and casualty insurance company operations and 2) insurance agency and
brokerage operations. Corporate includes general corporate items and
intersegment eliminations. The following table shows information by business
segment and geographic location:
<TABLE>
<CAPTION>
COMPANY AGENCY CORPORATE TOTAL
-------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
For the year ended December 31, 1996:
Revenue:
Domestic........................................ $ 94,507,000 $ 36,418,000 $ 41,000 $ 130,966,000
Foreign......................................... 17,836,000 3,443,000 -- 21,279,000
Intersegment.................................... 600,000 763,000 (1,363,000) --
-------------- ------------- ------------- --------------
Total revenue................................. $ 112,943,000 $ 40,624,000 $ (1,322,000) $ 152,245,000
-------------- ------------- ------------- --------------
-------------- ------------- ------------- --------------
Net earnings:
Domestic........................................ $ 28,340,000 $ (766,000) $ (2,853,000) $ 24,721,000
Foreign......................................... 5,254,000 (677,000) -- 4,577,000
-------------- ------------- ------------- --------------
Total net earnings............................ $ 33,594,000 $ (1,443,000) $ (2,853,000) $ 29,298,000
-------------- ------------- ------------- --------------
-------------- ------------- ------------- --------------
Depreciation and amortization..................... $ 1,509,000 $ 780,000 $ 29,000 $ 2,318,000
-------------- ------------- ------------- --------------
-------------- ------------- ------------- --------------
Capital expenditures.............................. $ 598,000 $ 1,126,000 $ -- $ 1,724,000
-------------- ------------- ------------- --------------
-------------- ------------- ------------- --------------
</TABLE>
F-21
<PAGE>
HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(7) SEGMENT AND GEOGRAPHIC DATA (CONTINUED)
<TABLE>
<CAPTION>
COMPANY AGENCY CORPORATE TOTAL
-------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
For the year ended December 31, 1995:
Revenue:
Domestic........................................ $ 79,209,000 $ 30,766,000 $ 36,000 $ 110,011,000
Foreign......................................... 13,889,000 3,309,000 -- 17,198,000
Intersegment.................................... 474,000 383,000 (857,000) --
-------------- ------------- ------------- --------------
Total revenue................................. $ 93,572,000 $ 34,458,000 $ (821,000) $ 127,209,000
-------------- ------------- ------------- --------------
-------------- ------------- ------------- --------------
Net earnings:
Domestic........................................ $ 17,192,000 $ 3,608,000 $ (1,824,000) $ 18,976,000
Foreign......................................... 4,508,000 853,000 -- 5,361,000
-------------- ------------- ------------- --------------
Total net earnings............................ $ 21,700,000 $ 4,461,000 $ (1,824,000) $ 24,337,000
-------------- ------------- ------------- --------------
-------------- ------------- ------------- --------------
Depreciation and amortization..................... $ 932,000 $ 758,000 $ 10,000 $ 1,700,000
-------------- ------------- ------------- --------------
-------------- ------------- ------------- --------------
Capital expenditures.............................. $ 2,399,000 $ 684,000 $ 186,000 $ 3,269,000
-------------- ------------- ------------- --------------
-------------- ------------- ------------- --------------
For the year ended December 31, 1994:
Revenue:
Domestic........................................ $ 54,060,000 $ 28,552,000 $ -- $ 82,612,000
Foreign......................................... 1,996,000 897,000 -- 2,893,000
Intersegment.................................... 674,000 376,000 (1,050,000) --
-------------- ------------- ------------- --------------
Total revenue................................. $ 56,730,000 $ 29,825,000 $ (1,050,000) $ 85,505,000
-------------- ------------- ------------- --------------
-------------- ------------- ------------- --------------
Net earnings:
Domestic........................................ $ 12,475,000 $ 3,959,000 $ (1,377,000) $ 15,057,000
Foreign......................................... 725,000 (514,000) -- 211,000
-------------- ------------- ------------- --------------
Total net earnings............................ $ 13,200,000 $ 3,445,000 $ (1,377,000) $ 15,268,000
-------------- ------------- ------------- --------------
-------------- ------------- ------------- --------------
Depreciation and amortization..................... $ 632,000 $ 652,000 $ -- $ 1,284,000
-------------- ------------- ------------- --------------
-------------- ------------- ------------- --------------
Capital expenditures.............................. $ 1,033,000 $ 405,000 $ -- $ 1,438,000
-------------- ------------- ------------- --------------
-------------- ------------- ------------- --------------
</TABLE>
Identifiable assets by business segment and geographic location are shown in
the following table:
<TABLE>
<CAPTION>
COMPANY AGENCY CORPORATE TOTAL
-------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
December 31, 1996:
Domestic....................................... $ 494,870,000 $ 119,628,000 $ 14,418,000 $ 628,916,000
Foreign........................................ 92,033,000 24,830,000 -- 116,863,000
-------------- -------------- ------------- --------------
Total identifiable assets.................... $ 586,903,000 $ 144,458,000 $ 14,418,000 $ 745,779,000
-------------- -------------- ------------- --------------
-------------- -------------- ------------- --------------
December 31, 1995:
Domestic....................................... $ 466,366,000 $ 95,917,000 $ 11,917,000 $ 574,200,000
Foreign........................................ 89,078,000 18,398,000 -- 107,476,000
-------------- -------------- ------------- --------------
Total identifiable assets.................... $ 555,444,000 $ 114,315,000 $ 11,917,000 $ 681,676,000
-------------- -------------- ------------- --------------
-------------- -------------- ------------- --------------
</TABLE>
F-22
<PAGE>
HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(7) SEGMENT AND GEOGRAPHIC DATA (CONTINUED)
During 1996 and 1995, one broker in London, England, produced gross written
premium to the Company of approximately $25.7 million and $31.2 million,
respectively. This represents 11% and 13% of the Company's total gross written
premium for those years. Approximately 55% of the gross written premium by the
domestic insurance subsidiaries is for insureds located outside the United
States.
(8) 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 subsidiaries but issued by other unrelated
companies in order to satisfy local licensing or other requirements,
predominantly on foreign business or as reinsurance of captives. The following
table represents the effect of such reinsurance transactions on net premium and
loss and loss adjustment expense:
<TABLE>
<CAPTION>
LOSS AND LOSS
WRITTEN EARNED ADJUSTMENT
PREMIUM PREMIUM EXPENSE
--------------- --------------- ---------------
<S> <C> <C> <C>
For the year ended December 31, 1996:
Direct business............................................ $ 84,166,000 $ 99,436,000 $ 57,768,000
Reinsurance assumed........................................ 146,589,000 135,294,000 97,305,000
Reinsurance ceded.......................................... (133,979,000) (141,416,000) (103,831,000)
--------------- --------------- ---------------
Net amounts.............................................. $ 96,776,000 $ 93,314,000 $ 51,242,000
--------------- --------------- ---------------
--------------- --------------- ---------------
For the year ended December 31, 1995:
Direct business............................................ $ 111,466,000 $ 97,675,000 $ 81,425,000
Reinsurance assumed........................................ 127,492,000 110,344,000 65,061,000
Reinsurance ceded.......................................... (140,172,000) (128,008,000) (96,717,000)
--------------- --------------- ---------------
Net amounts.............................................. $ 98,786,000 $ 80,011,000 $ 49,769,000
--------------- --------------- ---------------
--------------- --------------- ---------------
For the year ended December 31, 1994:
Direct business............................................ $ 97,585,000 $ 68,174,000 $ 45,386,000
Reinsurance assumed........................................ 95,293,000 76,895,000 60,837,000
Reinsurance ceded.......................................... (133,184,000) (98,235,000) (76,635,000)
--------------- --------------- ---------------
Net amounts.............................................. $ 59,694,000 $ 46,834,000 $ 29,588,000
--------------- --------------- ---------------
--------------- --------------- ---------------
</TABLE>
F-23
<PAGE>
HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(8) REINSURANCE (CONTINUED)
The table below represents the composition of reinsurance recoverables in
the accompanying consolidated balance sheets:
<TABLE>
<CAPTION>
1996 1995
-------------- --------------
<S> <C> <C>
Reinsurance recoverable on paid losses....................... $ 21,708,000 $ 13,678,000
Reinsurance recoverable on outstanding losses................ 96,247,000 83,847,000
Reinsurance recoverable on IBNR.............................. 7,641,000 8,278,000
Reserve for uncollectible reinsurance........................ (2,415,000) (2,395,000)
-------------- --------------
Total reinsurance recoverables........................... $ 123,181,000 $ 103,408,000
-------------- --------------
-------------- --------------
</TABLE>
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 December
31, 1996, the Company held letters of credit and cash deposits in the amounts of
$67.9 million and $9.1 million, respectively, to collateralize certain
reinsurance balances. The Company has established a reserve of $2.4 million as
of December 31, 1996, to reduce the effects of any recoverable problem.
In order to minimize their exposure to reinsurance credit risk, the Company
evaluates the financial condition of their reinsurers and place their
reinsurance with a diverse group of financially sound companies. The following
table shows reinsurance balances relating to the reinsurers with a total
recoverable balance greater than $10.0 million and the collateral and potential
offsets held by the Company as of each year end:
<TABLE>
<CAPTION>
REINSURANCE
RECOVERABLES AND LETTERS OF CREDIT,
CEDED UNEARNED CASH DEPOSITS AND
REINSURER LOCATION PREMIUM OTHER PAYABLES
- ------------------------------------------------------ ------------------- ---------------- ------------------
<S> <C> <C> <C>
December 31, 1996:
Underwriters at Lloyd's............................. London, England $ 28,962,000 $ 18,446,000
GIO Insurance Limited............................... Sydney, Australia 25,204,000 26,106,000
Reinsurance Australia Corporation, Ltd.............. Sydney, Australia 20,562,000 19,332,000
Underwriters Indemnity Company...................... Houston, TX 12,531,000 5,934,000
SCOR Reinsurance Company............................ New York, NY 11,105,000 2,428,000
AXA Reinsurance Company............................. Wilmington, DE 10,402,000 2,759,000
December 31, 1995:
GIO Insurance Limited............................... Sydney, Australia $ 30,160,000 $ 31,202,000
Underwriters at Lloyd's............................. London, England 24,518,000 25,916,000
Reinsurance Australia Corporation, Ltd.............. Sydney, Australia 16,620,000 14,198,000
AXA Reinsurance Company............................. Wilmington, DE 13,096,000 5,586,000
</TABLE>
Approximately $1.9 million in recoverables is due from reinsurers that are
either under regulatory supervision or insolvent. The Company holds letters of
credit and cash deposits totaling $1.9 million to collateralize these balances
plus other credits of $1.1 million available for potential offset. The Company
is involved in a dispute with two reinsurers over coverage and other issues. The
Company believes the reinsurers' positions are without merit and all amounts due
from the reinsurers will be recovered. The total amount in dispute is
approximately $3.4 million.
F-24
<PAGE>
HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(9) COMMITMENTS AND CONTINGENCIES
LITIGATION
The Company is a party to numerous lawsuits arising in the normal course of
business. All pending lawsuits involve claims under policies underwritten or
reinsured by the Company, which management believes have been adequately
included in its established loss reserves. The Company believes the resolution
of these lawsuits will not have a material adverse effect on its financial
condition, results of operations or cash flows.
FOREIGN CURRENCY FORWARD CONTRACTS
From time to time the Company enters into foreign currency forward contracts
as a hedge against foreign currency fluctuations, primarily British Pound
Sterling. The Company's balances denominated in foreign currency fluctuate as
transactions are recorded and settled. During 1996, the average Sterling
liability, for subsidiaries whose functional currency was the United States
dollar, was approximately L907,000 ($1.6 million at the December 31, 1996, rate
of exchange) which was hedged by an average open forward contract balance of
approximately L460,000 ($785,000 at the December 31, 1996, rate of exchange).
There was one open foreign currency forward contract as of December 31, 1996 to
purchase L500,000 ($856,000 at the December 31, 1996, rate of exchange) with a
maturity of January, 1997. As of December 31, 1996, the open foreign currency
contract had a gain of $37,000. During January, 1997, the Company entered into a
foreign currency forward contract for L500,000 ($856,000 at December 31, 1996,
rate of exchange). The Company expects to continue to limit its exposure to
currency fluctuations through the use of foreign currency forward contracts.
The Company utilizes these foreign currency forward contracts strictly as a
hedge against existing exposure to foreign currency fluctuations and it does not
do so as any form of speculative or trading investment.
LEASES
The Company leases administrative office facilities under long-term
noncancelable operating lease agreements expiring at various dates through
October, 2001. The agreements generally require the payment of utilities, real
estate taxes, insurance and repairs. The Company has recognized rent expense on
a straight-line basis over the terms of these leases. In addition, the Company
leases computer equipment and automobiles under operating leases expiring at
various dates through the year 1999. Rent expense under these leases amounted to
$1,495,000, $1,095,000 and $895,000 for the years ended December 31, 1996, 1995
and 1994, respectively.
At December 31, 1996, future minimum annual rental payments required under
the long-term noncancelable operating leases, excluding certain expenses payable
by the Company, are as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, AMOUNT DUE
- ---------------------------------------------------------------------------------------------------- ------------
<S> <C>
1997...................................................................................... $ 1,125,000
1998...................................................................................... 877,000
1999...................................................................................... 815,000
2000...................................................................................... 789,000
2001...................................................................................... 575,000
------------
Total future minimum annual rental payments due..................................................... $ 4,181,000
------------
------------
</TABLE>
F-25
<PAGE>
HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(10) RELATED PARTY TRANSACTIONS
Certain of the Company's directors are officers, directors or owners of
business entities with which the Company transacts business. Balances with these
business entities and other related parties included in the accompanying
consolidated balance sheets are as follows:
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Marketable equity securities.......................................................... $ 773,000 $ --
Reinsurance recoverables.............................................................. 3,472,000 590,000
Ceded unearned premium................................................................ 9,059,000 4,786,000
Reinsurance balances payable.......................................................... 3,780,000 3,903,000
Premium payable....................................................................... 1,532,000 --
Loss and loss adjustment expense payable.............................................. 663,000 9,000
Accounts payable and accrued liabilities.............................................. -- 7,000
</TABLE>
Transactions with these business entities and other related parties included
in the accompanying consolidated statements of earnings are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------------- ------------ ------------
<S> <C> <C> <C>
Gross earned premium.................................................. $ 871,000 $ -- $ --
Commission income..................................................... 1,249,000 -- --
Ceded earned premium.................................................. 12,050,000 1,194,000 1,017,000
Gross loss and loss adjustment expense................................ 661,000 106,000 157,000
Ceded loss and loss adjustment expense................................ 5,852,000 185,000 866,000
Other operating expense............................................... 1,011,000 758,000 104,000
</TABLE>
During 1995, $63,000 was paid to a related party for construction management
services related to improvements to the Company's offices in Houston, Texas.
Also, during 1994, real estate acquired with the acquisition of IMG was sold to
a related party for $788,000. There was no gain or loss recorded on this sale.
(11) EMPLOYEE BENEFIT PLANS
The Company has defined contribution retirement plans under Section 401(k)
of the Internal Revenue Code which cover substantially all of the domestic
employees who meet specified service requirements. The Company's contributions
of these plans are based on varying percentages of the employees' contributions,
up to varying maximum levels. The Company contributed $506,000, $693,000 and
$646,000 to the plans for the years ended December 31, 1996, 1995 and 1994,
respectively, which is included in compensation expense in the accompanying
consolidated statements of earnings.
(12) SHAREHOLDERS' EQUITY
Under the Texas Insurance Code, HCC must maintain minimum statutory capital
of $1,000,000 and minimum statutory surplus of $1,000,000, and can only pay
dividends out of surplus funds. In addition, HCC is limited in the amount of
dividends which it may pay in any twelve month period, without prior regulatory
approval, to the greater of statutory net investment income for the prior
calendar year or ten percent (10%)of statutory capital and surplus as of the
prior calendar year end. During 1997, HCC's ordinary dividend capacity will be
approximately $15.1 million. As of December 31, 1996, HCC's and TIC's total
adjusted capital greatly exceeded the NAIC authorized control level risk-based
capital.
F-26
<PAGE>
HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(12) SHAREHOLDERS' EQUITY (CONTINUED)
Under Jordanian Law, IMG and MEIB must transfer 10% of their earnings before
income tax each year to a statutory reserve until the reserve balance equals the
paid up capital balance. This reserve is not available for the payment of
dividends. As of December 31, 1996, IMG and MEIB had combined capital plus
statutory reserves totaling $17.0 million included as part their combined
shareholders' equity totaling $61.1 million.
(13) STOCK OPTIONS
The Company has four option plans, the 1994 Nonemployee Director Stock
Option Plan, the 1996 Nonemployee Director Stock Option Plan, the 1992 Incentive
Stock Option Plan, and the 1995 Flexible Incentive Plan. All plans are
administered by the Compensation Committee of the Board of Directors. Each
option may be used to purchase one share of Common Stock of the Company. As of
December 31, 1996, 4,004,669 shares of Common Stock were reserved for issuance
of options, of which 1,748,276 shares were reserved for future issuances of
options.
Options generally vest over a one, three or five year period and expire ten
years after grant date. All options have been granted at fixed exercise prices,
generally at the market price of the Company's Common Stock on the grant date.
Any excess of the market price on the grant date over the exercise price is
recognized as compensation expense in the accompanying financial statements.
During 1996, such compensation expense amounted to $494,000. If the fair value
method of valuing compensation related to options would have been used, pro
forma net earnings and pro forma earnings per share would have been $28.3
million, or $0.79 per share, for the year ended December 31, 1996. The pro forma
compensation cost for the year ended December 31, 1995, is immaterial. The fair
value of each option grant was estimated on the grant date using the
Black-Scholes single option pricing model with the following assumptions: a)
risk free interest rate of 5.6% for 1996 and 6.6% for 1995, b) expected
volatility factor of .3, c) dividend yield of .3% for 1996 and 0% for 1995, and
d) expected option life of six years.
Stock option activity is shown below after adjustment for the effects of the
three-for-two stock split payable as a 50% stock dividend to shareholders of
record March 15, 1994, and for the effects of the five-for-two stock split
payable as a 150% stock dividend to shareholders of record April 30, 1996. (See
note 1).
<TABLE>
<CAPTION>
1996 1995 1994
---------------------------------- ------------------------------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
AVERAGE AVERAGE AVERAGE AVERAGE
NUMBER OF EXERCISE FAIR NUMBER OF EXERCISE FAIR NUMBER OF
SHARES PRICE VALUE SHARES PRICE VALUE SHARES
---------- ----------- --------- ---------- ----------- ----------- ----------
Outstanding, beginning of year....... 2,036,563 $ 9.29 1,166,187 $ 5.75 1,146,562
Granted at market value.............. 292,500 23.63 $ 9.87 1,078,751 12.29 $ 4.99 371,250
Granted above market value........... -- -- -- -- -- -- 59,000
Granted below market value........... 60,000 13.01 11.51 16,000 7.70 5.70 --
Cancelled............................ (12,250) 11.51 (77,184) 7.54 (89,155)
Exercised............................ (120,420) 4.52 (147,191) 3.92 (321,470)
---------- ----------- ---------- ----------- ----------
Outstanding, end of year............. 2,256,393 $ 11.49 2,036,563 $ 9.29 1,166,187
---------- ----------- ---------- ----------- ----------
---------- ----------- ---------- ----------- ----------
Exercisable, end of year............. 722,142 $ 8.12 420,142 $ 4.49 387,021
---------- ----------- ---------- ----------- ----------
---------- ----------- ---------- ----------- ----------
<CAPTION>
<S> <C>
AVERAGE
EXERCISE
PRICE
-----------
Outstanding, beginning of year....... $ 3.77
Granted at market value.............. 7.87
Granted above market value........... 8.47
Granted below market value........... --
Cancelled............................ 3.93
Exercised............................ 2.14
-----
Outstanding, end of year............. $ 5.75
-----
-----
Exercisable, end of year............. $ 3.87
-----
-----
</TABLE>
F-27
<PAGE>
HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(13) STOCK OPTIONS (CONTINUED)
Options outstanding at December 31, 1996, are shown on the following
schedule:
<TABLE>
<CAPTION>
OPTIONS EXERCISABLE
OPTIONS OUTSTANDING
---------------------------------------- ------------------------
<S> <C> <C> <C> <C> <C>
AVERAGE
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER OF CONTRACTUAL EXERCISE NUMBER OF EXERCISE
EXERCISE PRICES SHARES LIFE PRICE SHARES PRICE
- ----------------------------------------------------------- ---------- --------------- ----------- ----------- -----------
Under $4.00................................................ 239,842 3.33 years $ 3.73 225,782 $ 3.73
$4.00--$10.00.............................................. 619,050 6.33 7.19 200,927 6.90
$10.01--$15.00............................................. 1,105,001 8.78 12.37 295,433 12.31
$15.01--$21.00............................................. -- -- -- -- --
Over $21.00................................................ 292,500 8.98 23.63 -- --
---------- --------------- ----------- ----------- -----------
Total Options.......................................... 2,256,393 7.55 years $ 11.49 722,142 $ 8.12
---------- --------------- ----------- ----------- -----------
---------- --------------- ----------- ----------- -----------
</TABLE>
(14) STATUTORY TO GAAP RECONCILIATIONS
Reconciliations of statutory policyholders' surplus as of December 31, 1996
and 1995, and net income for the years ended December 31, 1996, 1995 and 1994,
of the Company's insurance company subsidiaries included in those companies'
respective filings with regulatory authorities to the amounts shown in the
F-28
<PAGE>
HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(14) STATUTORY TO GAAP RECONCILIATIONS (CONTINUED)
accompanying consolidated financial statements on the basis of generally
accepted accounting principles ("GAAP") are as follows:
<TABLE>
<CAPTION>
1996 1995
-------------- --------------
<S> <C> <C>
Statutory policyholders' surplus................................................. $ 212,194,000 $ 177,317,000
Difference in carrying value of fixed income securities.......................... 1,652,000 2,467,000
Assets non-admitted for statutory reporting...................................... 2,174,000 2,973,000
Deferred policy acquisition costs and deferred ceding commissions capitalized for
GAAP........................................................................... 820,000 (1,569,000)
Deferred income taxes recorded for GAAP.......................................... 4,519,000 3,199,000
Statutory provisions for reinsurance, net of GAAP reserve for uncollectible
reinsurance.................................................................... 1,587,000 4,224,000
Other............................................................................ (133,000) --
-------------- --------------
Shareholder's equity of insurance company subsidiaries on basis of GAAP...... 222,813,000 188,611,000
Equity attributable to non-insurance company parent and subsidiaries, net of
elimination entries in consolidation........................................... 17,877,000 6,848,000
-------------- --------------
Total shareholders' equity per accompanying consolidated financial
statements................................................................. $ 240,690,000 $ 195,459,000
-------------- --------------
-------------- --------------
</TABLE>
<TABLE>
<CAPTION>
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
Statutory net income................................................ $ 34,640,000 $ 23,004,000 $ 15,711,000
Deferred income tax benefit (expense) not recorded for statutory
purposes.......................................................... (250,000) 1,650,000 1,318,000
Change in deferred policy acquisition costs and deferred ceding
commissions capitalized for GAAP.................................. 2,390,000 (165,000) (1,065,000)
Provision for reinsurance not expensed for statutory purposes....... 100,000 (900,000) (600,000)
Other, net.......................................................... (18,000) (10,000) (4,000)
------------- ------------- -------------
Net income of insurance company subsidiaries on basis of GAAP... 36,862,000 23,579,000 15,360,000
Net income (loss) attributable to non-insurance parent and
subsidiaries...................................................... (7,564,000) 758,000 (92,000)
------------- ------------- -------------
Net earnings per accompanying consolidated financial
statements.................................................... $ 29,298,000 $ 24,337,000 $ 15,268,000
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
(15) SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow information for the three years ended December 31,
1996, is summarized below:
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Interest paid........................................................... $ 1,109,000 $ 2,313,000 $ 1,876,000
Income tax paid......................................................... 13,740,000 9,803,000 5,139,000
</TABLE>
F-29
<PAGE>
HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(15) SUPPLEMENTAL CASH FLOW INFORMATION (CONTINUED)
The unrealized gain or loss on securities available for sale, deferred taxes
related thereto, and the issuance of the Company's Common Stock for the purchase
of subsidiaries are noncash transactions which have been included as direct
increases or decreases in shareholders' equity. During the year ended December
31, 1995, non-cash contributions to LDG's additional paid-in capital of $50,000
was recorded by a reduction in certain payable balances.
(16) LIABILITY FOR UNPAID LOSS AND LOSS ADJUSTMENT EXPENSE
The following table provides a reconciliation of the liability of loss and
loss adjustment expense, for the years ended December 31, 1996, 1995 and 1994:
<TABLE>
<CAPTION>
1996 1995 1994
-------------- -------------- --------------
<S> <C> <C> <C>
Reserves for loss and loss adjustment expense at beginning of
the year...................................................... $ 158,451,000 $ 129,755,000 $ 98,399,000
Less reinsurance recoverables................................... 92,125,000 85,214,000 66,468,000
-------------- -------------- --------------
Net reserves at beginning of the year....................... 66,326,000 44,541,000 31,931,000
Net reserves acquired with purchase of subsidiary............... -- -- 1,769,000
Provision for loss and loss adjustment expense for claims
occurring in the current year................................. 55,045,000 51,387,000 28,871,000
Increase (decrease) in estimated loss and loss adjustment
expense for claims occurring in prior years................... (3,803,000) (1,618,000) 717,000
-------------- -------------- --------------
Incurred loss and loss adjustment expense, net of
reinsurance............................................... 51,242,000 49,769,000 29,588,000
-------------- -------------- --------------
Loss and loss adjustment expense payments for claims occurring
during:
Current year.................................................... 15,903,000 12,268,000 6,386,000
Prior years..................................................... 19,731,000 15,716,000 12,361,000
-------------- -------------- --------------
Loss and loss adjustment expense payments, net of
reinsurance............................................... 35,634,000 27,984,000 18,747,000
-------------- -------------- --------------
Net reserves at end of the year................................. 81,934,000 66,326,000 44,541,000
Plus reinsurance recoverables................................... 103,888,000 92,125,000 85,214,000
-------------- -------------- --------------
Reserves for loss and loss adjustment expense at end of
the year................................................ $ 185,822,000 $ 158,451,000 $ 129,755,000
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
F-30
<PAGE>
HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(17) QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
FOURTH QUARTER THIRD QUARTER SECOND QUARTER FIRST QUARTER
1996 1996 1996 1996
-------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
Net earned premium................................ $ 27,212,000 $20,145,000 $ 22,459,000 $ 23,498,000
Fee and commission income......................... 8,428,000 9,981,000 10,536,000 9,517,000
Total revenue..................................... 41,424,000 35,569,000 37,768,000 37,484,000
Loss and loss adjustment expense.................. 14,367,000 10,508,000 12,128,000 14,239,000
Total expense..................................... 23,683,000 19,308,000 47,430,000 25,197,000
Earnings (loss) before income tax provision....... 17,741,000 16,261,000 (9,662,000) 12,287,000
Income tax provision (benefit).................... 5,177,000 4,931,000 (5,602,000) 2,823,000
-------------- ------------- -------------- -------------
Net earnings (loss)............................... $ 12,564,000 $11,330,000 $ (4,060,000) $ 9,464,000
-------------- ------------- -------------- -------------
-------------- ------------- -------------- -------------
Earnings per share data:
Earnings per share................................ $ 0.35 $ 0.31 $ (0.11) $ 0.27
-------------- ------------- -------------- -------------
-------------- ------------- -------------- -------------
Weighted average shares outstanding............... 36,387,000 35,993,000 35,785,000 35,638,000
-------------- ------------- -------------- -------------
-------------- ------------- -------------- -------------
</TABLE>
<TABLE>
<CAPTION>
FOURTH QUARTER THIRD QUARTER SECOND QUARTER FIRST QUARTER
1995 1995 1995 1995
-------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
Net earned premium................................ $ 21,160,000 $20,254,000 $ 20,532,000 18,065,000
Fee and commission income......................... 9,437,000 7,860,000 8,182,000 7,408,000
Total revenue..................................... 35,000,000 31,535,000 32,186,000 28,488,000
Loss and loss adjustment expense.................. 12,749,000 12,517,000 13,227,000 11,276,000
Total expense..................................... 23,445,000 23,566,000 24,232,000 22,674,000
Earnings before income tax provision.............. 11,555,000 7,969,000 7,954,000 5,814,000
Income tax provision.............................. 3,208,000 2,333,000 1,987,000 1,427,000
-------------- ------------- -------------- -------------
Net earnings...................................... $ 8,347,000 $ 5,636,000 $ 5,967,000 $ 4,387,000
-------------- ------------- -------------- -------------
-------------- ------------- -------------- -------------
Earnings per share data:
Earnings per share................................ $ 0.24 $ 0.16 $ 0.20 $ 0.15
-------------- ------------- -------------- -------------
-------------- ------------- -------------- -------------
Weighted average shares outstanding............... 35,156,000 34,999,000 30,506,000 29,906,000
-------------- ------------- -------------- -------------
-------------- ------------- -------------- -------------
</TABLE>
All amounts have been restated to include the accounts and operations of LDG
(see note 2). All share and per share data have been retroactively adjusted to
reflect the effects of the five-for-two stock split and the shares issued in
connection with the combination with LDG (see note 1). Nonrecurring expenses of
$25.0 million were incurred in the second quarter of 1996. (see note 2).
F-31
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
Our report on the consolidated financial statements of HCC Insurance
Holdings, Inc. and Subsidiaries is included on page F-1 of this Form 10-K. Such
report states that for the year ended December 31, 1994, our opinion, insofar as
it relates to data included for LDG Management Company Incorporated and
Affiliates for 1994, is based solely on the report of the other auditors. In
connection with our audits and the report of other auditors of such financial
statements, we have also audited the related financial statement schedules
listed in the index on page 32 of this Form 10-K. Our opinion on the financial
statement schedules, insofar as it relates to data included for LDG Management
Company Incorporated and Affiliates for 1994, is based solely on the report of
the other auditors.
In our opinion, based on our audits and the report of other auditors, the
financial statement schedules referred to above, when considered in relation to
the basic financial statements taken as a whole, present fairly, in all material
respects, the information required to be included therein.
COOPERS & LYBRAND L.L.P.
Houston, Texas
March 27, 1997
S-1
<PAGE>
SCHEDULE 1
HCC INSURANCE HOLDINGS, INC.
SUMMARY OF INVESTMENTS
OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 1996
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D
- ---------------------------------------------------------------- -------------- -------------- --------------
<S> <C> <C> <C>
AMOUNT AT
WHICH
SHOWN IN THE
BALANCE
TYPE OF INVESTMENT COST VALUE SHEET
- ---------------------------------------------------------------- -------------- -------------- --------------
Fixed maturities available for sale:
Bonds--United States government and government agencies and
authorities................................................. $ 3,527,000 $ 3,604,000 $ 3,604,000
Bonds--states, municipalities and political subdivisions...... 126,256,000 127,552,000 127,552,000
Bonds--special revenue........................................ 132,884,000 133,571,000 133,571,000
-------------- -------------- --------------
Total fixed maturities available for sale................... 262,667,000 $ 264,727,000 264,727,000
-------------- -------------- --------------
--------------
Equity securities available for sale:
Common stocks--banks, trusts & insurance companies............ 1,154,000 1,219,000 1,219,000
Common stocks--industrial..................................... 1,133,000 1,019,000 1,019,000
Nonredeemable preferred stocks................................ 194,000 195,000 195,000
-------------- -------------- --------------
Total equity securities available for sale.................. 2,481,000 $ 2,433,000 2,433,000
-------------- -------------- --------------
--------------
Short-term investments.......................................... 53,100,000 53,100,000
-------------- --------------
Total investments........................................... $ 318,248,000 $ 320,260,000
-------------- --------------
-------------- --------------
</TABLE>
S-2
<PAGE>
SCHEDULE 2
HCC INSURANCE HOLDINGS, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1996 1995
----------- -----------
<S> <C> <C>
ASSETS
Cash and short-term investments.................................. $ 4,192,000 $ 1,055,000
Investment in subsidiaries....................................... 253,680,000 208,006,000
Receivable from subsidiaries..................................... -- 630,000
Deferred Federal income tax...................................... 9,999,000 2,914,000
Other assets..................................................... 205,000 312,000
----------- -----------
Total assets................................................. $268,076,000 $212,917,000
----------- -----------
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Notes payable.................................................... $16,250,000 $16,250,000
Payable to subsidiaries.......................................... 8,636,000 --
Accounts payable and accrued liabilities......................... 2,500,000 1,208,000
----------- -----------
Total liabilities............................................ 27,386,000 17,458,000
Total shareholders' equity................................... 240,690,000 195,459,000
----------- -----------
Total liabilities and shareholders' equity................... $268,076,000 $212,917,000
----------- -----------
----------- -----------
</TABLE>
See Note to Condensed Financial Information.
S-3
<PAGE>
SCHEDULE 2
HCC INSURANCE HOLDINGS, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------------
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
Equity in earnings of subsidiaries.................................. $ 32,621,000 $ 26,558,000 $ 16,881,000
Interest income..................................................... 41,000 36,000 --
Interest expense.................................................... 1,110,000 2,196,000 1,901,000
Merger related expenses............................................. 907,000 -- --
Other operating expense............................................. 1,832,000 784,000 341,000
------------- ------------- -------------
Earnings before income tax benefit.............................. 28,813,000 23,614,000 14,639,000
------------- ------------- -------------
Income tax benefit.................................................. 485,000 723,000 629,000
------------- ------------- -------------
Net earnings.................................................... $ 29,298,000 $ 24,337,000 $ 15,268,000
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
See Note to Condensed Financial Information.
S-4
<PAGE>
SCHEDULE 2
HCC INSURANCE HOLDINGS, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------------
1996 1995 1994
-------------- -------------- --------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings................................................... $ 29,298,000 $ 24,337,000 $ 15,268,000
Adjustment to reconcile net earnings to net cash provided
(used) by operating activities:
Undistributed net income of subsidiaries....................... (32,621,000) (26,558,000) (16,881,000)
Change in deferred Federal income tax, net of tax effect of
unrealized gain or loss........................................ (5,423,000) (1,546,000) (1,216,000)
Amortization and other non-cash expenses....................... 29,000 10,000 116,000
Change in payable to subsidiaries and other.................... 8,971,000 230,000 210,000
-------------- -------------- --------------
Cash provided (used) by operating activities................. 254,000 (3,527,000) (2,503,000)
Cash flows from investing activities:
Cash contributions to subsidiaries............................. -- (24,072,000) (15,959,000)
Purchase of subsidiaries....................................... (1,753,000) -- (8,375,000)
Cash dividends from subsidiaries............................... 5,180,000 7,102,000 10,003,000
-------------- -------------- --------------
Cash provided (used) by investing activities................. 3,427,000 (16,970,000) (14,331,000)
Cash flows from financing activities:
Proceeds from note payable..................................... -- -- 20,000,000
Payments on notes payable...................................... -- (28,000,000) (4,000,000)
Sale of Common Stock, net of costs............................. 843,000 48,799,000 1,344,000
Dividends paid................................................. (1,387,000) -- --
-------------- -------------- --------------
Cash provided (used) by financing activities................. (544,000) 20,799,000 17,344,000
-------------- -------------- --------------
Net increase in cash and short-term investments.............. 3,137,000 302,000 510,000
Cash and short-term investments at beginning of year......... 1,055,000 753,000 243,000
-------------- -------------- --------------
Cash and short-term investments at end of year............... $ 4,192,000 $ 1,055,000 $ 753,000
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
See Note to Condensed Financial Information.
S-5
<PAGE>
HCC INSURANCE HOLDINGS, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTE TO CONDENSED FINANCIAL INFORMATION
The accompanying condensed financial information should be read in
conjunction
with the consolidated financial statements and the related notes thereto of HCC
Insurance Holdings, Inc. and Subsidiaries. Investments in subsidiaries are
accounted for using the equity method.
S-6
<PAGE>
SCHEDULE 3
HCC INSURANCE HOLDINGS, INC.
SUPPLEMENTARY INSURANCE INFORMATION
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN F COLUMN G COLUMN H
------------ --------------- ------------- ----------- ----------- --------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
(1) (1) (2)
<CAPTION>
DECEMBER 31,
------------------------------------------- FOR THE YEARS ENDED DECEMBER 31,
FUTURE POLICY -----------------------------------------
BENEFITS, BENEFITS,
LOSSES, CLAIMS,
DEFERRED POLICY CLAIMS LOSSES AND
ACQUISITION AND LOSS UNEARNED PREMIUM NET INVESTMENT SETTLEMENT
SEGMENTS COSTS EXPENSES PREMIUMS REVENUE INCOME EXPENSES
------------ --------------- ------------- ----------- ----------- --------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
1996 Company...................... $ 1,425 $ 185,822 $ 114,758 $ 93,314 $ 13,932 $ 51,242
Agency....................... 1,399
Corporate.................... 41
------- ------------- ----------- ----------- ------- -----------
Total........................ $ 1,425 $ 185,822 $ 114,758 $ 93,314 $ 15,372 $ 51,242
------- ------------- ----------- ----------- ------- -----------
------- ------------- ----------- ----------- ------- -----------
1995 Company...................... $ (1,066) $ 158,451 $ 118,732 $ 80,011 $ 12,031 49,769
Agency....................... 1,183
Corporate.................... 36
------- ------------- ----------- ----------- ------- -----------
Total........................ $ (1,066) $ 158,451 $ 118,732 $ 80,011 $ 13,250 $ 49,769
------- ------------- ----------- ----------- ------- -----------
------- ------------- ----------- ----------- ------- -----------
1994 Company...................... $ (1,485) $ 129,755 $ 87,346 $ 46,834 $ 8,351 $ 29,588
Agency....................... 1,182
Corporate....................
------- ------------- ----------- ----------- ------- -----------
Total........................ $ (1,485) $ 129,755 $ 87,346 $ 46,834 $ 9,533 $ 29,588
------- ------------- ----------- ----------- ------- -----------
------- ------------- ----------- ----------- ------- -----------
<CAPTION>
COLUMN I COLUMN J COLUMN K
------------- --------------- -----------
<S> <C> <C> <C>
(2)
AMORTIZATION
OF DEFERRED
POLICY
ACQUISITION OTHER OPERATING PREMIUMS
COSTS EXPENSES WRITTEN
------------- --------------- -----------
<S> <C> <C> <C>
1996 $ 3,842 $ 10,815 $ 96,776
20,561
1,832
------ ------- -----------
$ 3,842 $ 33,208 $ 96,776
------ ------- -----------
------ ------- -----------
1995 $ 2,520 $ 11,010 $ 98,786
27,586
785
------ ------- -----------
$ 2,520 $ 39,381 $ 98,786
------ ------- -----------
------ ------- -----------
1994 $ 1,519 $ 7,765 $ 59,694
24,454
341
------ ------- -----------
$ 1,519 $ 32,560 $ 59,694
------ ------- -----------
------ ------- -----------
</TABLE>
- ------------------------
(1) Columns C and D are shown ignoring the effects of reinsurance.
(2) Net investment income was allocated to the company, and therefore the
segment, on which the related investment asset was recorded. Other operating
expenses were allocated to the company, and therefore the corresponding
segment, which actually incurred those expenses.
Note: Column E is omitted because the Company has no other policy claims and
benefits payable.
S-7
<PAGE>
SCHEDULE 4
HCC INSURANCE HOLDINGS, INC.
REINSURANCE
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
- ---------------------------------------------- ------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
(1)
ASSUMED FROM PERCENT OF
CEDED TO OTHER OTHER AMOUNT
EARNED PREMIUM GROSS AMOUNT COMPANIES COMPANIES NET AMOUNT ASSUMED TO NET
- ---------------------------------------------- ------------- -------------- -------------- -------------- --------------
For the year ended December 31, 1996:
Property and liability insurance.............. $ 99,211,000 $ 141,331,000 $ 133,095,000 $ 90,975,000 146%
Accident and health insurance................. 225,000 85,000 2,199,000 2,339,000 94%
------------- -------------- -------------- --------------
Total..................................... $ 99,436,000 $ 141,416,000 $ 135,294,000 $ 93,314,000 145%
------------- -------------- -------------- -------------- -------
------------- -------------- -------------- -------------- -------
For the year ended December 31, 1995:
Property and liability insurance.............. $ 97,675,000 $ 128,008,000 $ 110,344,000 $ 80,011,000 138%
------------- -------------- -------------- -------------- -------
------------- -------------- -------------- -------------- -------
For the year ended December 31, 1994:
Property and liability insurance.............. $ 68,174,000 $ 98,235,000 $ 76,895,000 $ 46,834,000 164%
------------- -------------- -------------- -------------- -------
------------- -------------- -------------- -------------- -------
</TABLE>
- ------------------------
(1) Substantially all of the reinsurance assumed by the Company's insurance
company subsidiaries was underwritten directly by the subsidiaries but
issued by other unrelated companies in order to satisfy local licensing or
other requirements, predominantly on foreign business or as reinsurance of
captives.
S-8
<PAGE>
EXHIBIT 10.330
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
AGREEMENT AND PLAN OF REORGANIZATION
dated as of
November 27, 1996
by and among
HCC INSURANCE HOLDINGS, INC.,
MERGER SUB, INC.,
and
NORTH AMERICAN SPECIAL RISK ASSOCIATES, INC.
NASRA TPA, INC.
NASRA CONSULTING, INC.
and
GEORGE A. MELLON
F. DONALD FLEMING
J. NICHOLAS TEGENKAMP
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE I THE MERGER....................................... 2
Section 1.1 The Merger.................................... 2
Section 1.2 Conversion of Shares.......................... 3
Section 1.3 Exchange of Certificates...................... 3
Section 1.4 Dissenting Shares............................. 4
Section 1.5 Escrow Agreement.............................. 4
Section 1.6 Satisfaction of Fleming's Dissenter's Rights.. 4
ARTICLE II THE SURVIVING CORPORATION........................ 5
Section 2.1 Articles of Incorporation..................... 5
Section 2.2 Bylaws........................................ 5
Section 2.3 Directors and Officers........................ 5
ARTICLE III REPRESENTATIONS AND WARRANTIES OF HOLDCO, AFFILIATED
COMPANIES AND SHAREHOLDERS....................... 5
Section 3.1 Corporate Existence and Power................. 5
Section 3.2 Authorization................................. 6
Section 3.3 Governmental Authorization.................... 6
Section 3.4 Non-Contravention............................. 7
Section 3.5 Capitalization................................ 8
Section 3.6 Subsidiaries and Joint Ventures............... 9
Section 3.7 NASRA Financial Statements.................... 9
Section 3.8 TPA Financial Statements...................... 10
Section 3.9 Consulting Financial Statements............... 10
Section 3.10 Absence of Certain Changes.................... 10
Section 3.11 No Undisclosed Liabilities.................... 12
Section 3.12 Litigation.................................... 12
Section 3.13 Accounting Matters............................ 13
Section 3.14 Taxes......................................... 13
Section 3.15 Employee Benefit Plans, ERISA................. 14
Section 3.16 Material Agreements........................... 16
Section 3.17 Properties.................................... 16
Section 3.18 Environmental Matters......................... 17
Section 3.19 Labor Matters................................. 18
Section 3.20 Compliance with Laws.......................... 18
Section 3.21 Trademarks, Tradenames, Etc................... 18
Section 3.22 Sale of NASRA................................. 18
Section 3.23 Broker's Fees................................. 18
Section 3.24 Investment Representation..................... 18
i
<PAGE>
TABLE OF CONTENTS (Cont.)
Section 3.25 Total Assets.................................. 19
Section 3.26 Resignation of Fleming........................ 19
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF HCCH........... 19
Section 4.1 Corporate Existence and Power................. 19
Section 4.2 Corporate Authorization....................... 20
Section 4.3 Governmental Authorization.................... 20
Section 4.4 Non-Contravention............................. 20
Section 4.5 Capitalization of HCCH........................ 21
Section 4.6 Organization of Merger Sub.................... 22
Section 4.7 Subsidiaries.................................. 22
Section 4.8 SEC Filings................................... 22
Section 4.9 Financial Statements.......................... 23
Section 4.10 Absence of Certain Changes.................... 23
Section 4.11 No Undisclosed Liabilities.................... 24
Section 4.12 Litigation.................................... 24
Section 4.13 Taxes......................................... 24
Section 4.14 Employee Benefit Plans; ERISA................. 25
Section 4.15 Material Agreements........................... 26
Section 4.16 Properties.................................... 27
Section 4.17 Environmental Matters......................... 27
Section 4.18 Labor Matters................................. 28
Section 4.19 Compliance with Laws.......................... 28
Section 4.20 Trademarks, Tradenames, Etc................... 28
Section 4.21 Broker's Fees................................. 28
ARTICLE V COVENANTS OF HOLDCO, ETC......................... 28
Section 5.1 Conduct of Holdco and Affiliated Companies.... 28
Section 5.2 Shareholder Approval.......................... 30
Section 5.3 Access to Financial and Operational
Information.................................. 30
Section 5.4 Other Offers.................................. 31
Section 5.5 Maintenance of Business....................... 31
Section 5.6 Compliance with Obligations................... 31
Section 5.7 Notices of Certain Events..................... 32
Section 5.8 Affiliates Agreement.......................... 32
Section 5.9 Necessary Consents............................ 32
Section 5.10 Regulatory Approval........................... 32
Section 5.11 Satisfaction of Conditions Precedent.......... 33
ii
<PAGE>
TABLE OF CONTENTS (Cont.)
ARTICLE VI COVENANTS OF HCCH AND MERGER SUB................. 33
Section 6.1 Conduct of HCCH............................... 33
Section 6.2 Listing of HCCH Common Stock.................. 33
Section 6.3 Access to Financial and Operation Information. 33
Section 6.4 Maintenance of Business....................... 34
Section 6.5 Compliance with Obligations................... 34
Section 6.6 Notices of Certain Events..................... 34
Section 6.7 Obligations of Merger Sub..................... 35
Section 6.8 Notice to Affiliates.......................... 35
Section 6.9 Employee Matters.............................. 35
Section 6.10 Officers and Directors Insurance.............. 35
ARTICLE VII COVENANTS OF HCCH, HOLDCO AND AFFILIATED
COMPANIES....................................... 35
Section 7.1 Advice of Changes............................. 35
Section 7.2 Regulatory Approvals.......................... 36
Section 7.3 Actions Contrary to Stated Intent............. 36
Section 7.4 Certain Filings............................... 36
Section 7.5 Communications................................ 36
Section 7.6 Satisfaction of Conditions Precedent.......... 36
Section 7.7 Tax Cooperation............................... 37
ARTICLE VIII CONDITIONS TO THE MERGER......................... 37
Section 8.1 Conditions to Obligations of HCCH and
Merger Sub.................................. 37
Section 8.2 Conditions to Obligations of Holdco,
Affiliated Companies and Shareholders........ 39
Section 8.3 Conditions to Obligations of Each Party....... 40
ARTICLE IX TERMINATION OF AGREEMENT......................... 40
Section 9.1 Termination................................... 40
Section 9.2 Effect of Termination......................... 41
ARTICLE X CLOSING MATTERS.................................. 41
Section 10.1 The Closing................................... 41
Section 10.2 Conversion of Certificates.................... 42
ARTICLE XI INDEMNIFICATION AND REMEDIES, CONTINUING
COVENANTS....................................... 42
Section 11.1 Agreement to Indemnify........................ 42
iii
<PAGE>
TABLE OF CONTENTS (Cont.)
Section 11.2 Indemnification with Respect to Jamaica
Lawsuit and Taxes............................ 43
Section 11.3 HCCH Agreement to Indemnify................... 44
Section 11.4 Appointment of Representative................. 44
Section 11.5 Survival of Representations................... 45
Section 11.6 Procedure for Indemnification; Third
Party Claims................................. 46
ARTICLE XII MISCELLANEOUS.................................... 46
Section 12.1 Further Assurances............................ 46
Section 12.2 Fees and Expenses............................. 47
Section 12.3 Notices....................................... 47
Section 12.4 Governing Law................................. 48
Section 12.5 Binding upon Successors and Assigns,
Assignment................................... 48
Section 12.6 Severability.................................. 48
Section 12.7 Entire Agreement.............................. 48
Section 12.8 Amendment and Waivers......................... 48
Section 12.9 No Waiver..................................... 49
Section 12.10 Construction of Agreement..................... 49
Section 12.11 Counterparts.................................. 49
iv
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (this "Agreement") is entered
into as of the 27th day of November, 1996 by and among HCC Insurance
Holdings, Inc., a Delaware corporation ("HCCH"), Merger Sub, Inc. an Illinois
corporation and a wholly owned subsidiary of HCCH ("Merger Sub"), North
American Special Risks Associates, Inc. ("Holdco" or "NASRA"), an Illinois
corporation, NASRA TPA, Inc. ("TPA"), an Illinois corporation, NASRA
Consulting, Inc. ("Consulting"), an Illinois corporation (TPA and Consulting
being from time to time collectively referred to herein as the "Affiliated
Companies"), George A. Mellon ("Mellon"), F. Donald Fleming ("Fleming"), and
J. Nicholas Tegenkamp ("Tegenkamp") (Mellon, Fleming and Tegenkamp being
collectively referred to as the "Original Shareholders" and the Original
Shareholders and any person becoming a shareholder of Holdco subsequent to
the date hereof and on or before the Effective Date who executes a
counterpart signature page in the form attached hereto being collectively
referred to herein as the "Shareholders"). As of the Effective Date, wherever
used herein and in the NASRA Disclosure Schedule (as hereinafter defined),
the term "Affiliated Companies" shall mean "Subsidiaries" (as hereinafter
defined).
RECITALS:
A. The Boards of Directors of each of HCCH, Merger Sub and NASRA have
determined (a) to engage in a transaction pursuant to which (i) prior to the
Effective Date (as hereinafter defined), TPA shall become a wholly owned
subsidiary of Holdco, by means of a contribution to the capital of Holdco by
Mellon, of all of the shares of common stock of TPA held by Mellon in
exchange for 5,382 shares of NASRA Common Stock, (ii) Consulting will merge
into NASRA, with NASRA being the surviving company, and the Original
Shareholders receiving 100 shares of NASRA Common Stock in consideration
therefor, (iii) Merger Sub will merge with and into Holdco (the "Merger"),
(iv) the capital stock of Merger Sub shall be converted into shares of common
stock of Holdco (the "Holdco Common Stock"); and (v) each share of Holdco
Common Stock outstanding immediately prior to the Effective Time shall be
converted into shares of common stock, par value $1.00 per share, of HCCH
(the "HCCH Common Stock") in the manner herein described, all upon the terms
and subject to the conditions set forth herein or (b) if otherwise advised by
counsel, to engage in a transaction involving any alternative structure
whereby the Affiliated Companies will be able to carry out the intent of this
Agreement as agreed upon in a writing signed by each party hereto.
B. The Board of Directors of NASRA has determined that based on the
relative values of their holdings of NASRA, including the detrimental effect
of certain call options relating to the shares of NASRA Common Stock held by
Fleming and Tegenkamp, the shares of NASRA held by the Original Shareholders
result in the value of NASRA after consummation of the transactions described
in Recital A above to be held as follows: Mellon - 93.6%; Fleming - 5.3% and
Tegenkamp 1.1%, and the Original Shareholders have agreed to such relative
values.
C. The Boards of Directors of Holdco and the Affiliated Companies have
approved, and the Board of Directors of Holdco has resolved, subject to the
terms of this Agreement, to
<PAGE>
recommend that shareholders of Holdco approve the Merger, this Agreement and
the Articles of Merger (as defined herein).
D. The Board of Directors of HCCH has approved the Merger, this
Agreement and the Articles of Merger. HCCH, as the sole shareholder of Merger
Sub, has approved the Merger, this Agreement and the Articles of Merger.
E. The parties intend for the transactions contemplated by this
Agreement 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"), and to be accounted for as a "pooling-of-interests" for
accounting purposes.
F. Fleming has informed NASRA that he intends to dissent from agreeing
to the transactions contemplated by this Agreement and the Merger and to
receive the fair value for his shares of NASRA pursuant to the Illinois
Business Corporation Act.
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
THE MERGER
Section 1.1 The Merger.
(a) Subject to the terms and conditions of this Agreement, Merger Sub
will be merged into Holdco in accordance with the laws of the State of
Illinois ("Illinois Law"), whereupon the separate existence of Merger Sub
shall cease, and Holdco shall be the surviving corporation (the "Surviving
Corporation").
(b) As soon as practicable after satisfaction or, to the extent
permitted hereunder, waiver of all conditions to the Merger, Holdco and
Merger Sub shall file articles of merger, in substantially the form attached
hereto as Exhibit 1.1(b) (the "Articles of Merger"), in the Office of the
Secretary of the State of Illinois, and make all such other filings or
recordings required by Illinois Law in connection with the Merger. The Merger
shall become effective at such time as the Articles of Merger are duly filed
with the Office of the Secretary of the State of Illinois, in accordance with
the relevant provisions of Illinois Law (the "Effective Time"). The date on
which the Effective Time shall occur is referred to herein as the "Effective
Date."
(c) From and after the Effective Time, the Surviving Corporation shall
possess all the rights, privileges, powers and franchises and be subject to
all of the restrictions, disabilities and duties of Holdco and Merger Sub,
all as provided under Illinois Law.
2
<PAGE>
Section 1.2 Conversion of Shares. At the Effective Time, each share of
common stock, par value $1.00 per share, of Merger Sub outstanding
immediately prior to the Effective Time shall automatically and without any
action on the part of the holder thereof, be converted into one share of
common stock of the Surviving Corporation, and, except as set forth herein in
connection with the payment of cash for Fleming's shares in NASRA, shares of
Holdco Common Stock outstanding immediately prior to the Effective Time shall
automatically and without any action on the part of the holder thereof cease
to be outstanding and be converted into the right to receive shares of HCCH
Common Stock as follows:
(a) 7,404.2 shares of Holdco held by Mellon shall be converted into
1,123,200 shares of HCCH Common Stock;
(b) 622.2 shares of Holdco held by Fleming shall be converted into
63,600 shares of HCCH Common Stock; and
(c) 155.6 shares of Holdco held by Tegenkamp shall be converted into
13,200 shares of HCCH Common stock.
No fractional shares shall be issued and each holder of Holdco Common Stock
shall be entitled to the nearest whole share of HCCH Common Stock rounded
upwards if such fractional share exceeds .5 and otherwise rounded downwards,
provided, however, that HCCH shall under no circumstances be obligated
hereunder to issue shares of HCCH Common Stock in excess of an aggregate of
1,200,000 shares of HCCH Common Stock.
Section 1.3 Exchange of Certificates.
(a) Prior to the Effective Date, HCCH shall appoint KeyCorp Shareholder
Services, Inc. to act as exchange agent (the "Exchange Agent") in the Merger.
(b) At the Effective Time, HCCH shall exchange the shares of HCCH Common
Stock issuable pursuant to Section 1.2 in exchange for all outstanding shares
of Holdco Common Stock (other than for shares of Holdco Common Stock held by
any Shareholder who has elected to accept appraisal rights as contemplated by
Section 1.4).
(c) If prior to the Merger, HCCH recapitalizes either through a split-up
of its outstanding shares into a greater number, or through a combination of
its outstanding shares into a lesser number, or reorganizes, reclassifies or
otherwise changes its outstanding shares into the same or a different number
of shares of other classes (other than through a split-up or a combination of
shares provided for in the previous clause), or declares a dividend on its
outstanding shares payable in shares or securities convertible into shares
(but not cash), the number of shares of HCCH Common Stock into which the
shares of Holdco Common Stock are to be converted will be adjusted in
proportion to such change.
3
<PAGE>
Section 1.4 Dissenting Shares.
(a) Notwithstanding any provision of this Agreement to the contrary, the
shares of any holder of Holdco Common Stock who has demanded and perfected
appraisal rights for such shares in accordance with Illinois Law and who, as
of the Effective Time, has not effectively withdrawn or lost such appraisal
rights ("Dissenting Shares") shall not be converted into or represent a right
to receive HCCH Common Stock pursuant to Section 1.2, but the holder thereof
shall only be entitled to such rights as are granted by Illinois Law.
(b) Notwithstanding the provisions of subsection (a), if any holder of
shares of Holdco Common Stock who demands appraisal of such shares under
Illinois Law shall effectively withdraw such appraisal demand or fail to
perfect or otherwise lose the right to appraisal, then, as of the later of
the Effective Time and the occurrence of such event, such shareholder's
shares of Holdco Common Stock shall automatically be converted into and
represent only the right to receive HCCH Common Stock, without interest
thereon, upon surrender of the certificate representing such shares.
(c) Holdco shall give HCCH (i) prompt notice of any written demands for
appraisal of any shares of Holdco Common Stock, withdrawals of such demands,
and any other instruments served pursuant to Illinois Law and received by
Holdco which relate to any such demand for appraisal and (ii) the opportunity
to participate in all negotiations and proceedings which take place prior to
the Effective Time with respect to demands for appraisal under Illinois Law.
(d) If holders of Holdco Common Stock entitled to receive an excess of
100,000 shares of HCCH Common Stock demand appraisal rights as provided for
herein and refuse to withdraw such demand prior to the Effective Date, HCCH,
in its sole and absolute discretion, shall have the right to terminate this
Agreement.
Section 1.5 Escrow Agreement. Pursuant to an Escrow Agreement to be
entered into on or before the Closing Date (as hereinafter defined) in
substantially the form of Exhibit 1.5 (the "Escrow Agreement"), among HCCH,
the Shareholders and KeyCorp Shareholders Services, Inc., as Escrow Agent,
HCCH will withhold from the shares of HCCH Common Stock that would otherwise
be delivered to the Shareholders, 10% of the total number of shares of HCCH
Common Stock issued to the Shareholders in the Merger and 10% of the cash
otherwise to be received by Fleming pursuant to this Agreement. On the
Closing Date, HCCH will deposit, or cause to be deposited in escrow pursuant
to the Escrow Agreement, certificates representing the shares and the cash
thus withheld. The shares of HCCH Common Stock represented by the
certificates and the cash deposited in escrow as provided above in this
Section 1.5 (the "Escrow Shares") will be held as collateral for the
indemnification obligations of the Shareholders under Sections 11.1 and 11.2
below and pursuant to the Escrow Agreement pending their release from escrow
in accordance with the terms of the Escrow Agreement.
Section 1.6 Satisfaction of Fleming's Dissenter's Rights. At the
Effective Time, HCCH agrees that at the Closing it will pay to Fleming an
amount equal to 63,600 multiplied
4
<PAGE>
by the average of the high and low sales price of HCCH Common Stock on the
New York Stock Exchange for the ten (10) trading days ending two trading days
before the Effective Date, and that such amount is the fair value for
Fleming's shares of NASRA and is in full satisfaction of Fleming's right to
dissent from the consummation of the Merger in accordance with Illinois Law.
ARTICLE II
THE SURVIVING CORPORATION
Section 2.1 Articles of Incorporation. At the Effective Time, the
Articles of Incorporation of Merger Sub as in effect immediately prior to the
Effective Time shall be the Articles of Incorporation of the Surviving
Corporation.
Section 2.2 Bylaws. At the Effective Time, the Bylaws of Merger Sub as
in effect immediately prior to the Effective Time shall be the Bylaws of the
Surviving Corporation.
Section 2.3 Directors and Officers. From and after the Effective Time,
until successors are duly elected or appointed and qualified in accordance
with applicable law, the directors and officers of Merger Sub at the
Effective Time shall become directors and the officers of the Surviving
Corporation. In addition, HCCH shall take all necessary action to cause
Mellon to be appointed Chairman of the Board, Chief Executive Officer and
President of the Surviving Corporation, such appointment to become effective
as of the Effective Time.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF HOLDCO,
AFFILIATED COMPANIES AND SHAREHOLDERS
Except as disclosed in a document referring specifically to this
Agreement (the "NASRA Disclosure Schedule") which has been delivered to HCCH
on or before the date hereof, each of Holdco, each Affiliated Company and
each Shareholder (severally and not jointly) represents and warrants to HCCH
as set forth below (it being agreed that the disclosure on the NASRA
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. Holdco and each of the
Affiliated Companies is a corporation duly organized, validly existing and in
good standing under the laws of the state of its incorporation, and have all
corporate powers and all material governmental licenses, authorizations,
consents and approvals (collectively, "Governmental Authorizations")
5
<PAGE>
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 Holdco or such Affiliated
Company. Holdco and each of the Affiliated Companies 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 Holdco
or such Affiliated Company. For purposes of this Agreement, a "Material
Adverse Effect," with respect to any person or entity (including without
limitation Holdco, each Affiliated Company 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. Holdco has delivered to HCCH true
and complete copies of Holdco's and each Affiliated Company's Articles of
Incorporation or Articles of Incorporation, as the case may be, and Bylaws as
currently in effect.
Section 3.2 Authorization.
(a) The execution, delivery and performance by Holdco and each of the
Affiliated Companies of this Agreement and, in the case of Holdco, the
Articles of Merger, and the consummation by Holdco and each of the Affiliated
Companies of the transactions contemplated hereby and thereby including the
execution of the Confidentiality Agreement (as hereinafter defined), are
within Holdco and each Affiliated Company's corporate powers and have been
duly authorized by all necessary corporate action, excluding approval by the
Shareholders in connection with the consummation of the Merger. This
Agreement, the Articles of Merger, and the Confidentiality Agreement
constitute, or upon execution will constitute, valid and binding agreements
of Holdco and each of the Affiliated Companies party thereto, enforceable
against such agreeing party 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 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 3.3 Governmental Authorization. The execution, delivery and
performance by Holdco, each of the Affiliated Companies and each Shareholder
of this Agreement, the execution, delivery and performance by Holdco of the
Articles of Merger and the Confidentiality
6
<PAGE>
Agreement and the consummation of the Merger by Holdco require no action by
or in respect of, or filing with, any governmental body, agency, official or
authority other than:
(a) the filing of Articles of Merger in accordance with Illinois Law;
(b) compliance with any applicable requirements of the Hart-Scott-Rodino
Antitrust improvements Act of 1976, as amended (the "HSR Act");
(c) compliance with any applicable requirements of the Securities Act
and the rules and regulations promulgated thereunder;
(d) compliance with any applicable foreign or state securities or "blue
sky" laws;
(e) 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;
(f) 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 Holdco, the Affiliated
Companies or the Surviving Corporation, or (ii) would not materially
adversely affect the ability of Holdco, each Affiliated Company, HCCH or
Merger Sub to consummate the transactions contemplated hereby and operate
their businesses as heretofore operated.
Section 3.4 Non-Contravention. The execution, delivery and performance by
Holdco and each of the Affiliated Companies of this Agreement, the execution,
delivery and performance by Holdco of the Articles of Merger and the
consummation by Holdco and each of the Affiliated Companies of the
transactions contemplated hereby and thereby do not and will not:
(a) contravene or conflict with each such company's charter or bylaws;
(b) assuming compliance with the matters referred to in Section 3.3 and
assuming the requisite approval by the Shareholders of the Merger, 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 Holdco or any of the Affiliated Companies;
(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 Holdco or
any of the Affiliated Companies or any material license, franchise, permit or
other similar authorization held by Holdco or any of the Affiliated
Companies; or
(d) result in the creation or imposition of any Lien (as hereinafter
defined) on any material asset of Holdco or any of the Affiliated Companies,
7
<PAGE>
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 Holdco or any of the Affiliated
Companies. 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 3.5 Capitalization.
(a) As of October 31, 1996, the authorized, issued and outstanding
capital stock of each Affiliated Company was as follows:
North American Special Risk Associates, Inc.:
no par value, 100,000 shares Common Stock
authorized; 2,700 shares issued and outstanding
NASRA TPA, Inc.:
no par value, 1,000,000 shares of Class
A Common Stock and 1,000,000
shares of Class B Common Stock authorized;
1,000 shares of Class A issued and outstanding
NASRA Consulting, Inc.:
no par value, 1,000,000 shares Common
Stock authorized; 450 shares issued and outstanding
(b) After giving effect to the merger of Consulting with and into NASRA
and the contribution of the TPA shares of common stock to NASRA by Mellon,
there will be 8,400 shares of NASRA issued and outstanding.
(c) All outstanding shares set forth in (a) and (b) above have been, or
will be prior to the Effective 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 each of
Holdco and each Affiliated Company 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 "NASRA
Securities"), (iv) no obligations to repurchase, redeem or otherwise acquire
any of its outstanding 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.
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Section 3.6 Subsidiaries and Joint Ventures.
(a) For purposes of this Section 3.6, (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. For purposes
of this Agreement, in no event shall "Subsidiary" or "Joint Venture" include
Silver Eagle Agency, Inc., an Illinois corporation; or Mellon Patch, Inc., an
Illinois corporation.
(b) As of the date hereof, neither Holdco nor any of the Affiliated
Companies has any Subsidiaries or Joint Ventures which are material to the
business of Holdco or any of the Affiliated Companies. As of the Closing
Date, as defined herein, the only Subsidiaries of Holdco shall be the
Affiliated Companies and their respective jurisdictions of incorporation or
organization and Holdco's ownership interest therein are identified in
Exhibit 3.6(b). Other than Holdco's investments in its Subsidiaries as of the
Effective Time, neither Holdco nor any of the Affiliated Companies own,
directly or indirectly, any outstanding capital stock or equity interest in
any corporation, partnership, Joint Venture or other entity.
(c) All of the outstanding capital stock of, or other ownership
interests in, each Subsidiary that is or may be owned by Holdco or any
Affiliated Company on the Effective Date, and all of the outstanding stock of
Holdco and each of the Affiliated Companies owned by the Shareholders
directly or indirectly, is or will be owned by Holdco, or the Shareholders,
as the case may be, directly or indirectly, 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 (defined below). Each Shareholder represents and
warrants only as to his or her individual ownership of Holdco Common Stock
for purposes of this Section.
Section 3.7 NASRA Financial Statements. NASRA has delivered to HCCH
NASRA's unaudited balance sheet as of October 31, 1996 (the "Balance Sheet
Date"), NASRA's unaudited income statements for the six month period ended
September 30, 1996, NASRA's audited balance sheet as of March 31, 1996 and
1995, and NASRA's audited income statement for the fiscal years ended March
31, 1996, 1995, and 1994 (collectively, the "NASRA Financial Statements").
The NASRA 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 NASRA 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). Holdco
and the Affiliated Companies taken as a whole have no material debt,
liability or obligation of any nature, whether accrued, absolute, contingent
or
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otherwise, and whether due or to become due, that is not reflected, reserved
against or disclosed in the NASRA Financial Statements, except for (i) those
reflected in the TPA Financial Statements (defined below), (ii) those
reflected in the Consulting Financial Statements (defined below); (iii) those
that are not required to be reported in accordance with the aforesaid
accounting principles; (iv) normal or recurring liabilities incurred since
October 31, 1996 in the ordinary course of business or (v) as disclosed in
the NASRA Disclosure Schedule.
Section 3.8 TPA Financial Statements. Holdco has delivered to HCCH TPA's
unaudited balance sheet as of October 31, 1996 (the "Balance Sheet Date"),
TPA's unaudited income statements for the nine month period ended September
30, 1996, TPA's audited balance sheet as of December 31, 1995 and 1994, and
TPA's audited income statement for the fiscal years ended December 31, 1995,
1994, and 1993 (collectively, the "TPA Financial Statements"). The TPA
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
TPA 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).
Section 3.9 Consulting Financial Statements. Holdco has delivered to
HCCH Consulting's unaudited balance sheet as of October 31, 1996 (the
"Balance Sheet Date"), Consulting's unaudited income statements for the nine
month period ended September 30, 1996, Consulting's unaudited balance sheet
as of December 31, 1995 and 1994, and Consulting's unaudited income statement
for the fiscal years ended December 31, 1995, 1994, and 1993 (collectively,
the "Consulting Financial Statements"). The Consulting 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 Consulting 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).
Section 3.10 Absence of Certain Changes. Except as disclosed in the
NASRA Disclosure Schedule, since March 31, 1996 with respect to NASRA and
since December 31, 1995 with respect to TPA and Consulting, each Affiliated
Company 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
Holdco or any of the Affiliated Companies, which as of the date hereof could
reasonably be expected to have a Material Adverse Effect on Holdco or any of
the Affiliated Companies;
(b) any declaration, setting aside or payment or any dividend or other
distribution in respect of any shares of capital stock of Holdco or any of
the Affiliated Companies other than
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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 the Affiliated Companies' past policy or practice or with
respect to NASRA or Consulting any declaration, setting aside or payment of
distributions or dividends to "S" Corporation shareholders;
(c) any repurchase, redemption or other acquisition by Holdco or any of
the Affiliated Companies of any outstanding shares of capital stock or other
securities of or other ownership interests in Holdco or any of the Affiliated
Companies;
(d) any amendment of any term of any outstanding securities of Holdco or
any of the Affiliated 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 Holdco or any of the Affiliated Companies which,
individually or in the aggregate, has had or would reasonably be expected to
have a Material Adverse Effect on Holdco or any of the Affiliated Companies;
(f) any increase in indebtedness for borrowed money or capitalized lease
obligations of Holdco or any of the Affiliated 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 Holdco or any of the
Affiliated Companies, except in the ordinary course of business and for a
fair and adequate consideration;
(h) any amendment, termination or waiver by Holdco or any of the
Affiliated 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 Holdco or any of the Affiliated Companies;
(j) any (i) grant of any severance or termination pay to any director,
officer or employee of Holdco or any of the Affiliated 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 Holdco or any of the Affiliated 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 Holdco or any of the Affiliated 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
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fringe benefit plan, arrangement or trust agreement adopted or implemented by
Holdco or any of the Affiliated Companies which would result in a material
increase in cost;
(l) any capital expenditures, capital additions or capital improvements
incurred or undertaken by Holdco or any of the Affiliated Companies, except
in the ordinary course of business; or
(m) the entering into of any agreement by Holdco or any of the
Affiliated Companies or any person on behalf of Holdco or any of the
Affiliated Companies to take any of the foregoing actions.
Section 3.11 No Undisclosed Liabilities. There are no liabilities of
Holdco or any of the Affiliated Companies of any kind whatsoever that are,
individually or in the aggregate, material to Holdco and the Affiliated
Companies, taken as a whole, other than:
(a) liabilities disclosed or provided for in the NASRA audited financial
statements as of and for the fiscal year ended March 31, 1996 (including the
notes thereto);
(b) liabilities of NASRA incurred in the ordinary course of business
consistent with past practice since March 31, 1996;
(c) liabilities disclosed or provided for in the TPA audited financial
statements as of and for the fiscal year ended December 31, 1995 (including
the notes thereto):
(d) liabilities of TPA incurred in the ordinary course of business
consistent with past practice since December 31, 1995;
(e) liabilities disclosed or provided for in the Consulting unaudited
financial statements as of and for the fiscal year ended March 31, 1996
(including the notes thereto);
(f) liabilities of Consulting incurred in the ordinary course of
business consistent with past practice since March 31, 1996; and
(g) liabilities under this Agreement or indicated in the NASRA
Disclosure Schedule.
Section 3.12 Litigation. Except as set forth in the NASRA 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 in the aggregate, there
is no action, suit, proceeding, claim or investigation pending or, to the
knowledge of Holdco, any of the Affiliated Companies or the Original
Shareholders, overtly threatened, against Holdco or any of the Affiliated
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 Holdco or any of the Affiliated Companies, including, without limitation,
any such claims for indemnification arising under any agreement to which
Holdco or any of the Affiliated Companies is a party. Neither Holdco nor any
of the Affiliated
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Companies 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 Holdco or any of the Affiliated Companies.
Section 3.13 Accounting Matters. Except for all actions disclosed to and
approved by HCCH, neither Holdco, any of the Affiliated Companies, nor any of
the Shareholders knowingly 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 Merger as a pooling-of-interests. Upon
execution of this Agreement, each of Holdco, NASRA, TPA and Consulting will
have received a letter from its independent public accountants to the effect
that if the Merger were to be consummated on the date of this Agreement, each
of Holdco, NASRA, TPA and Consulting qualifies as an entity that may be a
party to a business combination for which the pooling-of-interests method of
accounting would be available.
Section 3.14 Taxes.
(a) Each of Holdco and each of the Affiliated 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) either paid
when due and payable or established adequate reserves or otherwise, with
respect to Holdco, NASRA, TPA and Consulting, accrued on the NASRA Financial
Statements, TPA Financial Statements or Consulting 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 an Affiliated
Company 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 NASRA Disclosure Schedule sets forth those tax returns of
each of the Affiliated 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 any
of the Affiliated Companies to be due in respect of any tax returns filed by
any of the Affiliated Companies (or any predecessor corporations). Neither
any of the Affiliated Companies nor any predecessor corporation, 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.
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(c) No Affiliated Company is a party to or bound by (or will prior to
the Effective Date become a party to or bound by) any Tax indemnity, Tax
sharing or Tax allocation agreement or other similar arrangement. No
Affiliated Company has been a member of an affiliated group or filed or been
included in a combined, consolidated or unitary Tax return.
(d) Consulting has maintained a valid subchapter S election pursuant to
the Code, and there is no corporate income tax due from Consulting.
Section 3.15 Employee Benefit Plans, ERISA.
(a) Neither Holdco nor any of the Affiliated Companies is 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 Holdco or any
of the Affiliated Companies (A) the benefits of which are contingent, or the
terms of which are materially altered, upon the occurrence of a transaction
involving Holdco or any of the Affiliated 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 Holdco, any Affiliated Company 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 Holdco or any
Affiliated Company (a "NASRA 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 NASRA Disclosure Schedule (which Plans
have been heretofore delivered to HCCH) and maintained by NASRA 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) No Pension Plan or Welfare Plan is currently subject to an audit or
other investigation by the Internal Revenue Service ("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.
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(d) No "prohibited transaction," as defined in Section 406 of ERISA or
Section 4975 of the Code, resulting in liability to Holdco, or any Affiliated
Company, or any NASRA ERISA Affiliate has occurred with respect to any
Pension Plan or Welfare Plan. Each of Holdco, each Affiliated Company or
Original Shareholder has no knowledge of any breach of fiduciary
responsibility under Part 4 of Title I of ERISA which has resulted in
liability of Holdco, any Affiliated Company, and NASRA ERISA Affiliate, any
trustee, administrator or fiduciary of any Pension Plan or Welfare Plan.
(e) Neither Holdco, any Affiliated Company, nor any NASRA 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 Holdco, any Affiliated
Company, nor any NASRA 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 Holdco, any Affiliated Company, or any NASRA ERISA
Affiliate.
(f) There is no contract, agreement, plan or arrangement covering any
employee or former employee of Holdco or any NASRA 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 Holdco, each Affiliated Company and each NASRA ERISA
Affiliate, the NASRA Disclosure Schedule correctly identifies each material
agreement, policy, plan or other arrangement, whether written or oral,
express or implied, fixed or contingent, to which Holdco or any Affiliated
Company is a party or by which Holdco or any Affiliated Company or any
property or asset of Holdco or any Affiliated Company is bound, which is or
relates to a pension, option, bonus, deferred compensation, retirement, stock
purchase, profitsharing, severance pay, health, welfare, incentive,
vacation, sick leave, medical disability, hospitalization, life or other
insurance or fringe benefit plan, policy or arrangement.
(h) Neither Holdco, any Affiliated Company, nor any NASRA 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. Holdco and each Affiliated Company 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 Holdco and each Affiliated Company 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.
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Section 3.16 Material Agreements.
(a) The NASRA Disclosure Schedule includes a complete and accurate list
of all contracts, agreements, leases (other than NASRA Property Leases, as
hereinafter defined), and instruments to which Holdco or any of the
Affiliated Companies 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 Holdco or
any of the Affiliated 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 NASRA Agreements").
(b) Neither Holdco nor any Affiliated Company nor, to the knowledge of
Holdco or any Affiliated Company, any other party is in default under any
Material NASRA 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 NASRA 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 Holdco or any Affiliated Company, which, in any such case, has had
or would reasonably be expected to have a Material Adverse Effect.
(c) To the knowledge of Holdco and each Affiliated Company, each such
Material NASRA 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 NASRA Agreement. No party to a Material NASRA
Agreement has advised Holdco or any Affiliated Company that it intends either
to terminate a Material NASRA Agreement or to refuse to renew a Material
NASRA Agreement upon the expiration of the term thereof.
(d) Holdco and each Affiliated Company is not in violation of, or in
default with respect to, any term of its Articles or Certificate of
Incorporation, as the case may be, or Bylaws.
Section 3.17 Properties. To the knowledge of Holdco and each of the
Affiliated Companies, Holdco or such Affiliated Company owns no real estate,
and all leases of real property to which Holdco or any of the Affiliated
Companies is a party or by which it is bound ("NASRA Property Leases") are in
full force and effect. To the knowledge of Holdco or any Affiliated Company,
there exists no default under such NASRA 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 Holdco and each of the Affiliated Companies are
owned by each of them, respectively, free and clear of any Lien, except for
Liens which do not have a Material Adverse Effect. Holdco and each of the
Affiliated 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 3.17, to
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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 3.18 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.
"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) To the knowledge of Holdco or any of the Affiliated Companies, 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) Neither Holdco nor any of the Affiliated Companies has any material
Environmental Liabilities and there has been no release of Hazardous
Substances into the environment by Holdco or any of the Affiliated Companies
or with respect to any of their respective properties which has had, or would
reasonably be expected to have, a Material Adverse Effect.
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Section 3.19 Labor Matters. Neither Holdco nor any of the Affiliated
Companies is a party to any collective bargaining agreement or other labor
union contract applicable to persons employed by Holdco or any such
Affiliated Companies, nor do they know of any activities or proceedings of
any labor union to organize any such employees.
Section 3.20 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, neither Holdco nor any of the
Affiliated Companies 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 3.21 Trademarks, Tradenames, Etc. Holdco and the Affiliated
Companies own or possess, or hold 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 their business as now conducted, without any
known conflict with the rights of others.
Section 3.22 Sale of NASRA. Except as contemplated by this Agreement,
there are currently no discussions to which any of the Affiliated Companies
is a party relating to (a) the sale of any material portion of their assets
or (b) any merger, consolidation, liquidation, dissolution or similar
transaction involving any of the Affiliated Companies whereby any of the
Affiliated Companies will issue any securities or for which any of the
Affiliated Companies is required to obtain the approval of its shareholders.
Section 3.23 Broker's Fees. Neither Holdco, any Affiliated Company, any
Original 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 the Merger.
Section 3.24 Investment Representation. The shares of HCCH Common Stock
to be acquired by the Shareholders pursuant to the Merger 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
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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.
Section 3.25 Total Assets. The total assets of Holdco and the Affiliated
Companies plus the Designated Assets (as herein defined) of Mellon do not, in
the aggregate, exceed $10 million. As used herein, "Designated Assets", means
investment assets (excluding therefrom any assets of the Affiliated
Companies), voting securities and other income-producing property.
Section 3.26 Resignation of Fleming. Effective June 24, 1996, Fleming
resigned as a director and officer of Holdco and each of the Affiliated
Companies on which he was an officer and a member of the Board of Directors.
ARTICLE IV
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 delivered to Holdco and the Affiliated Companies on or before
the date hereof, each of HCCH and Merger Sub represents and warrants to
Holdco, the Affiliated Companies and the 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 4.1 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. Merger Sub is a
corporation duly incorporated, validly existing and in good standing under
the laws of the State of Illinois. 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 NASRA true and complete copies of HCCH's
Certificate of Incorporation and Bylaws and Merger Sub's Articles of
Organization and Bylaws, each as currently in effect.
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Section 4.2 Corporate Authorization. The execution, delivery and
performance by HCCH and Merger Sub of this Agreement, the Articles of Merger
and the Confidentiality Agreement and the consummation by HCCH and Merger Sub
of the transactions contemplated hereby and thereby are within the corporate
powers of HCCH and Merger Sub and have been duly authorized by all necessary
corporate action. This Agreement, the Articles of Merger and the
Confidentiality Agreement constitute, or upon execution will constitute,
valid and binding agreements of HCCH and Merger Sub, respectively,
enforceable in each case against each in accordance with their respective
terms, except as such enforcement may be limited by bankruptcy, insolvency of
other similar laws affecting the enforcement of creditors' rights generally
or by general principles of equity.
Section 4.3 Governmental Authorization. The execution, delivery and
performance by HCCH and Merger Sub of this Agreement, the Articles of Merger
and the Confidentiality Agreement and the consummation of the Merger by HCCH
and Merger Sub, require no action by or in respect of, or filing with, any
governmental body, agency, official or authority other than:
(a) the filing of the Articles of Merger in accordance with Illinois Law;
(b) compliance with any applicable requirements of the HSR Act;
(c) compliance with any applicable requirements of the Exchange Act and
the rules and regulations promulgated thereunder;
(d) compliance with any applicable requirements of the Securities Act
and the rules and regulations promulgated thereunder;
(e) compliance with any applicable foreign or state securities or "blue
sky" laws and the rules and regulations of the NYSE;
(f) compliance with any applicable requirements of the Texas, Oklahoma
or other insurance regulatory agency having authority over HCCH; and
(g) 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 Holdco, any Affiliated Company,
HCCH or Merger Sub to consummate the transactions contemplated hereby and
operate their businesses as heretofore operated.
Section 4.4 Non-Contravention. The execution, delivery and performance by
HCCH and Merger Sub of this Agreement and the Articles of Merger and the
consummation by HCCH and Merger Sub of the transactions contemplated hereby
and thereby do not and will not:
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(a) contravene or conflict with the Articles or Certificate of
Incorporation, as the case may be, or Bylaws of HCCH or Merger Sub;
(b) assuming compliance with the matters referred to in Section 4.3,
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 Merger Sub 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
Merger Sub or any other Subsidiary of HCCH or any material license,
franchise, permit or other similar authorization held by HCCH or Merger Sub
or any other Subsidiary of HCCH; or
(d) result in the creation or imposition of any Lien on any material
asset of HCCH or Merger Sub or any other 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 4.5 Capitalization of HCCH
(a) The authorized capital stock of HCCH consists of 100,000,000 shares
of HCCH Common Stock. As of September 30, 1996, there were 34,679,307 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, and except for changes since September 30, 1996 resulting from the
exercise of employee and director stock options, 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 in the Merger shall, upon
issuance, be fully paid, validly issued and nonassessable. HCCH has reserved
sufficient shares of HCCH Common Stock for issuance pursuant to the Merger.
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Section 4.6 Organization of Merger Sub. The authorized capital stock of
Merger Sub consists of 1,000 shares of common stock, par value $1.00 per
share, all of which are issued and outstanding. All the issued and
outstanding capital stock of Merger Sub is owned by HCCH. Merger Sub has not
conducted any business prior to the date hereof and has no assets,
liabilities or obligations of any nature other than those incident to its
formation and pursuant to this Agreement.
Section 4.7 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 4.8 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 delivered, and will promptly deliver in the case of any of
the following filed with the SEC on or after the date hereof and prior to the
Effective Date, to Holdco:
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(i) its annual reports on Form 10-K for its fiscal years ended
December 31, 1995 and 1994;
(ii) its quarterly report on Form 10-Q for its fiscal quarters
ending March 31, June 30, and September 30, 1996;
(iii) any current reports on Form 8-K since January 1, 1996 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, 1996; and
(iv) all of its other reports, statements, schedules and
registration statements filed with the SEC since December 31, 1995. 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 4.9 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 4.8 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 September 30, 1996,
and the notes thereto, contained in HCCH's quarterly report on Form 10-Q
filed for its fiscal quarter then ended, and "HCCH Balance Sheet Date" means
September 30, 1996.
Section 4.10 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;
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(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 by the Merger 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 4.11 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 4.12 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 is 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 4.13 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
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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 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 Effective
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 4.14 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 Holdco) 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 Section 412 of the Code. HCCH has made
available to Holdco and the Affiliated 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
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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 4.15 Material Agreements.
(a) The HCCH Disclosure Schedule 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 $1,000,000 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
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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, Merger Sub, 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 4.16 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 6, 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 4.17 Environmental Mailers.
(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.
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Section 4.18 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 4.19 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 4.20 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 4.21 Broker's Fees. Neither HCCH nor Merger Sub, 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 the Merger.
ARTICLE V
COVENANTS OF HOLDCO, ETC.
From the date hereof until the occurrence of the earlier of (i) the
Effective Time or (ii) termination of this Agreement pursuant to Section 9.1
hereof, (a) Holdco and each of the Affiliated Companies agrees, except as
otherwise permitted with the written consent of HCCH, which consent shall not
be unreasonably withheld, (b) with respect to Sections 5.1(i), 5.1(j) and
5.8, each Shareholder agrees and (c) with respect to Sections 5.4 and 5.10,
Mellon agrees that:
Section 5.1 Conduct of Holdco and Affiliated Companies. Holdco and each
of the Affiliated 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 Effective Time, except as
contemplated by this Agreement:
(a) Holdco and each of the Affiliated Companies will not adopt or
propose any change in its Articles of Organization or Certificate of
Incorporation or Bylaws;
(b) Holdco and each of the Affiliated Companies 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, 1995, or
increase the compensation payable to any other employees (other than
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(i) increases in the ordinary course of business which are not in the
aggregate material to the Affiliated Companies, or (ii) pursuant to plans
disclosed in NASRA Disclosure Schedule), or adopt or amend any employee
benefit plan or arrangement (oral or written);
(c) Holdco and each of the Affiliated Companies will not issue any NASRA
Securities;
(d) Holdco and each of the Affiliated 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) Other than the payment of dividends in accordance with its existing
dividend policy or practice, which policy or practice is consistent with past
policy or practice, Holdco and each of the Affiliated Companies will not pay
any dividend or make any other distribution to holders of its capital stock
nor redeem or otherwise acquire any NASRA Securities;
(f) Holdco and each of the Affiliated Companies will not, directly or
indirectly, dispose of or acquire any material properties or assets except in
the ordinary course of business;
(g) Holdco and each of the Affiliated 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) Holdco and each of the Affiliated 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) Holdco, each Affiliated Company 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 by the Merger as a pooling-of-interests;
(j) Holdco, each of the Affiliated Companies and each of the
Shareholders will not, directly or indirectly, agree or commit to do any of
the foregoing; and
(k) No Affiliated Company will (i) change accounting methods except as
necessitated by changes which such Affiliated Company 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 NASRA 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 Holdco and
the Affiliated Companies taken as a whole; (iii) lend any amount to any
person or entity, other than advances for travel and expenses which
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are incurred in the ordinary course of business consistent with past
practices, and which are not material in amount to Holdco and the Affiliated
Companies, 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) except for the Merger, 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 5.2 Shareholder Approval. At the earliest practicable date, Holdco
and each Affiliated Company will duly call and hold a special shareholder
meeting, or duly take action by the written consent of its shareholders,
whereby this Agreement, the Merger and related matters will be submitted for
the consideration and approval of its shareholders (the "Shareholder Vote")
which approval will be recommended by the board of directors of Holdco and
each Affiliated Company, as applicable, subject to Section 5.4. The Board of
Directors of Holdco shall establish the record date for the meeting of Holdco
shareholders at which the Merger will be approved before Mellon distributes
or otherwise transfers any shares of Holdco or of any Affiliated Company to
anyone other than an Original Shareholder. Each Shareholder Vote will be
effected in compliance with applicable law.
Section 5.3 Access to Financial and Operational Information. Holdco and
each Affiliated Company 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
Holdco and each Affiliated Company and in the planning for the combination of
the businesses of Holdco and each Affiliated Company and HCCH following the
consummation of the Merger; 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, Holdco and each Affiliated Company will
cooperate in arranging joint meetings among representatives of Holdco and
each Affiliated Company and HCCH and persons with whom they maintain business
relationships. All requests for information made pursuant to this Section
shall be directed to Mellon or such person as may be designated by him in
writing. All information obtained pursuant to this Section 5.3 shall be
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governed by the Confidentiality Agreement dated as of July 9, 1996 among HCCH
and the Affiliated Companies (the "Confidentiality Agreement").
Section 5.4 Other Offers.
(a) Holdco, each of the Affiliated Companies and Mellon will not, and
will use their best efforts to cause their respective officers, directors,
employees or other agents not to, directly or indirectly, (i) take any action
to solicit, initiate or discuss any Acquisition Proposal (as hereinafter
defined), or (ii) subject to the fiduciary duties of the Board of Directors
under applicable law as advised by counsel, engage in negotiations with, or
disclose any nonpublic information relating to, Holdco or any of the
Affiliated Companies or afford access to the properties, books or records of
Holdco or any of the Affiliated Companies to, any person or entity that may
be considering making, or has made, an Acquisition Proposal. To the extent
that Holdco or the Affiliated Companies or any of their respective officers,
directors, employees or other agents, or Mellon are currently involved in any
discussions with respect to any Acquisition Proposal or contemplated or
proposed Acquisition Proposal, Holdco and the Affiliated Companies shall
terminate, and shall use their best efforts to cause 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 Holdco or the Affiliated Companies or the acquisition
of any equity interest in, or a substantial portion of the assets of; Holdco
or any of the Affiliated Companies other than the transactions contemplated
by this Agreement.
(b) Subject to their fiduciary duties, the Boards of Directors of Holdco
and each of the Affiliated Companies, and each Original 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
Original Shareholder, of this Agreement, the Merger 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 5.5 Maintenance of Business. Holdco and each of the Affiliated
Companies 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 Holdco or any Affiliated Company 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 5.6 Compliance with Obligations. Holdco and each of the
Affiliated Companies shall each use its reasonable best efforts to comply in
all material respects with (i) all
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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 Holdco and each of the Affiliated Companies and
their respective properties or assets.
Section 5.7 Notices of Certain Events. Holdco and each of the Affiliated
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 the Merger,
(b) any notice or other communication from any governmental or
regulatory agency or authority in connection with the Merger, and
(c) any actions, suits, claims, investigations or other judicial
proceedings commenced or threatened against Holdco or any of the Affiliated
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 Merger.
Section 5.8 Affiliates Agreement. To facilitate the treatment of the
Merger for accounting purposes as a pooling-of-interests, Holdco, each
Affiliated Company and each Original Shareholder shall use its or their best
efforts to deliver to HCCH simultaneously with the execution of this
Agreement, a written agreement from each of its "affiliates" (as that term is
used in Rule 144 or 145 under the Securities Act) (the "Affiliates
Agreement") in form and substance reasonably satisfactory to HCCH, and each
Shareholder shall deliver to HCCH an executed Affiliates Agreement
simultaneously with the execution hereof.
Section 5.9 Necessary Consents. Holdco and each of the Affiliated
Companies shall use reasonable best efforts to obtain such written consent
and take such other actions as may be necessary or appropriate for Holdco
and each of the Affiliated 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
10.1 hereof).
Section 5.10 Regulatory Approval. Holdco and each of the Affiliated
Companies, and, where required pursuant to the HSR Act or the rules or
regulations of any regulatory agency, Mellon, 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. Holdco, each
of the Affiliated Companies and Mellon, will use reasonable best efforts to
obtain or assist HCCH in obtaining all such authorizations, approvals and
consents.
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Section 5.11 Satisfaction of Conditions Precedent. Holdco and each
Affiliated Company shall use all reasonable 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 VI
COVENANTS OF HCCH AND MERGER SUB
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
9.1 hereof, HCCH and Merger Sub agree that, except as otherwise permitted
with the written consent of NASRA, which consent shall not be unreasonably
withheld:
Section 6.1 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 generality of
the foregoing, from the date hereof until the Effective Time, except as
contemplated hereby or previously disclosed by HCCH to NASRA 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 6.2 Listing of HCCH Common Stock. HCCH shall cause the shares of
HCCH Common Stock to be issued in the Merger to be approved for listing on
the NYSE on or before the Effective Time.
Section 6.3 Access to Financial and Operation Information. HCCH will
give NASRA, its 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 NASRA, its 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 NASRA in its investigation of the
business of HCCH and its Subsidiaries and in the planning for
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the combination of the businesses of Holdco, the Affiliated Companies and
HCCH following the consummation of the Merger and will furnish promptly to
NASRA 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 Holdco or the Affiliated
Companies or the Shareholders hereunder. In addition, if requested by NASRA
following the public announcement of this Agreement, HCCH will cooperate in
arranging joint meetings among representatives of HCCH and NASRA and persons
with whom HCCH maintains business relationships. All requests for a
information made pursuant to this Section shall be directed to the Chief
Financial Officer of HCCH or such person as may be designated by him in
writing. All information obtained pursuant to this Section 6.3 shall be
governed by the Confidentiality Agreement.
Section 6.4 Maintenance of Business. HCCH 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,
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 NASRA in writing.
Section 6.5 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.
Section 6.6 Notices of Certain Events. HCCH shall, upon obtaining
knowledge of any of the following, promptly notify NASRA 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 the Merger;
(b) any notice or other communication from any governmental or
regulatory agency or authority in connection with the Merger; 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 4.12 or which relate to the consummation
of the Merger.
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Section 6.7 Obligations of Merger Sub. HCCH will take all action
necessary to cause Merger Sub to perform its obligations under this Agreement
and to consummate the Merger on the terms and conditions set forth in this
Agreement. Merger Sub will not issue any shares of its capital stock, any
securities convertible into or exchangeable for its capital stock, or any
option, warrant or other right to acquire its capital stock to any person or
entity other than HCCH or a wholly owned Subsidiary of HCCH. Merger Sub
shall not incur any indebtedness or liabilities of any kind except pursuant
to this Agreement.
Section 6.8 Notice to Affiliates. HCCH shall, at least 30 days prior to
the Effective 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 Merger being accounted for as a
pooling-of-interests in accordance with generally accepted principles and all
published rules, regulations and policies of the SEC.
Section 6.9 Employee Matters. HCCH agrees that all employees of Holdco or
any Affiliated Company that remain employed after the Effective Time shall,
immediately 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. In addition,
employees of Holdco or any Affiliated Company who shall remain employees of
HCCH after the Effective Time (i) shall be credited (for purposes of both
participation and investing) through their periods of service with Holdco or
any Affiliated Company prior to the Effective Time, and (ii) shall be
entitled to receive vacation leave accrued with Holdco or any Affiliated
Company prior to the Effective Time.
Section 6.10 Officers and Directors Insurance. Commencing upon the
Effective Date, to the extent HCCH provides, in its sole discretion,
liability insurance coverage to officers, directors and employees of HCCH,
HCCH shall provide those persons who are officers, directors and employees of
Holdco and each Affiliated Company and who become officers, directors or
employees of HCCH with liability insurance coverage identical to that which
it provides to other officers, directors and employees of HCCH.
ARTICLE VII
COVENANTS OF HCCH, HOLDCO AND AFFILIATED COMPANIES
From the date hereof until the occurrence of the earlier of (i) the
Effective Time or (ii) termination of this Agreement pursuant to Section 9.1
hereof, each of Holdco, the Affiliated Companies and HCCH agree that:
Section 7.1 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
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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 Effective Date, untrue, inaccurate or
misleading in any material respect and (ii) of any Material Adverse Change in
the business condition of the party.
Section 7.2 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 foreign, which may be requested
in connection with the consummation of the Merger. Each party shall use its
reasonable best efforts to obtain all such authorizations, approvals and
consents.
Section 7.3 Actions Contrary to Stated Intent. It shall not, from or after
the date hereof and either before or after the Effective Time, take any
action that would prevent the Merger from qualifying as a reorganization
under Section 368(a) of the Code or prevent the business combination to be
effected by the Merger from being accounted for as a pooling-of-interests
under generally accepted accounting principles. Each of HCCH, Holdco and the
Affiliated Companies 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 Merger as a
pooling-of-interests.
Section 7.4 Certain Filings. Holdco, each Affiliated Company and HCCH
shall cooperate with one another:
(a) in connection with the preparation of any filing required by the HSR
Act;
(b) 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
(c) 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 7.5 Communications. Neither Holdco, any Affiliated Company 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 7.6 Satisfaction of Conditions Precedent. HCCH, Holdco and each
Affiliated Company will each use its reasonable best efforts to satisfy or
cause to be satisfied all the
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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 7.7 Tax Cooperation. HCCH, Holdco and the Affiliated Companies
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.
ARTICLE VIII
CONDITIONS TO THE MERGER
Section 8.1 Conditions to Obligations of HCCH and Merger Sub. The
obligations of HCCH and Merger Sub hereunder are subject to the fulfillment
or satisfaction, on and as of the Effective 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 Holdco, each of the Affiliated
Companies, and each Shareholder contained in Article III shall be true and
accurate in all material respects on and as of the Effective Date with the
same force and effect as if they had been made on the Effective 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
Holdco, each Affiliated Company and each Shareholder 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
Effective Date, to such effect.
(b) Holdco, each Affiliated Company, and each Shareholder shall have
performed and complied in all material respects with all of the covenants
contained herein on or before the Effective 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 NASRA Disclosure Schedule, there shall
have been no Material Adverse Change in Holdco or any of the Affiliated
Companies since June 30, 1996.
(d) HCCH shall have received from (i) each person or entity who may be
deemed pursuant to Section 5.8 to be an affiliate of Holdco or any Affiliated
Company a duly executed Affiliates Agreement and (ii) each Shareholder the
written agreement contemplated to be entered
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into by such person pursuant to Section 5.8 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 Merger
for the continuation in full force and effect of any material contracts or
leases of Holdco and each Affiliated Company shall have been obtained.
(f) HCCH shall have received a written opinion from its counsel to the
effect that the Merger will constitute a 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.
(g) HCCH shall have received the opinion of the general counsel to NASRA
in form and substance satisfactory to HCCH.
(h) All underwriting agreements of NASRA in force on the date hereof
shall be in force on the Effective Date, except for such agreements which
have been replaced with agreements of similar like and kind.
(i) Mellon shall be alive and not, in any way, Disabled. For purposes
of this Agreement, Mellon shall be deemed to be "Disabled" if he is unable to
engage in any substantial portion of his regular duties for Holdco and each
Affiliated Company 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) Holdco and each Affiliated Company shall have received the
unqualified opinion of Jordan Patke & Associates, independent public
accountants to Holdco and the Affiliated Companies on their audited financial
statements for each of the most recent fiscal year end.
(k) HCCH, Holdco and the Affiliated Companies shall have received a
report addressed to each of them from Jordan Patke & Associates confirming
that Holdco and the Affiliated Companies qualify as an entity that may be
party to a business combination for which the pooling-of-interest method of
accounting would be available and that the transactions contemplated hereby
will qualify for pooling-of-interests treatment under generally accepted
accounting principles.
(l) Holdco and each Affiliated Company shall have delivered to HCCH its
audited or unaudited, as the case may be balance sheet and its audited or
unaudited, as the case may be income statement for each of the most recent
fiscal year end.
(m) Holdco, on an adjusted pro-forma combined basis with the Affiliated
Companies and giving effect to this transaction, shall have earned no less
than $1.63 million after taxes for the fiscal year ended March 31, 1996.
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(n) HCCH shall have received a written report from Coopers & Lybrand
L.L.P. in form reasonably satisfactory to HCCH (and generally in accordance
with Statement of Auditing Standards No. 50), to the effect that the business
combination to be effected by the Merger would be properly accounted for as a
pooling-of-interests in accordance with generally accepted accounting
principles and all published rules, regulations, and policies of the SEC.
Section 8.2 Conditions to Obligations of Holdco, Affiliated Companies and
Shareholders. Holdco's, each Affiliated Company's and each Shareholder's
obligations hereunder are subject to the fulfillment or satisfaction, on and
as of the Effective 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 Effective Date
with the same force and effect as if they had been made on the Effective 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 Holdco with a certificate executed by the President
and the Chief Financial Officer of HCCH, dated as of the Effective 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 Holdco and the
Affiliated 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 Effective Date,
and Holdco 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) Holdco shall have received a written opinion in form and substance
satisfactory to it from Winstead Sechrest & Minick P.C. to the effect that
the Merger will be treated for federal income tax purposes 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,
Holdco, the Affiliated Companies and the Shareholders shall make) reasonable
representations as to facts related thereto.
(e) Holdco shall have received from Winstead Sechrest & Minick P.C.,
counsel to HCCH, an opinion in form and substance satisfactory to the
Shareholders.
(f) Mellon shall have been appointed Chairman of the Board, Chief
Executive Officer and President of Holdco.
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(g) The shares of HCCH Common Stock to be issued in the Merger shall
have been approved for listing on the NYSE.
Section 8.3 Conditions to Obligations of Each Party. The respective
obligations of the parties hereunder are subject to the fulfillment, on and
as of the Effective 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) Each of Holdco and each Affiliated Company's shareholders shall have
duly a approved this Agreement, the Articles of Merger and the Merger, all in
accordance with applicable laws and regulatory requirements.
(b) 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 Merger (each
party agreeing to use its reasonable best efforts to have any such order,
decree or injunction lifted).
(c) 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
Merger will be in compliance with applicable laws, the failure to comply with
which would have a Material Adverse Effect on HCCH, Holdco, any Affiliated
Company or the Surviving Corporation, or would be reasonably likely to
subject any of HCCH, Merger Sub, Holdco, any Affiliated Company or any of
their respective directors or officers to penalties or criminal liability.
(d) The waiting period (and any extension thereof) applicable to the
consummation of the Merger under the HSR Act, if applicable, shall have
expired or been terminated.
ARTICLE IX
TERMINATION OF AGREEMENT
Section 9.1 Termination. This Agreement may be terminated at any time
prior to the Effective Time whether before or after the approval by the
shareholders of Holdco and the Affiliated Companies:
(a) By the mutual consent of the Boards of Directors of HCCH and Holdco.
(b) By the Board of Directors of either HCCH or Holdco 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
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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 either HCCH or Holdco if (i) all
conditions of Closing required by Article VIII hereof have not been met or
waived by January 31, 1997, or (ii) the Merger has not occurred by such date;
provided, however, that neither HCCH nor Holdco, 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 Merger and such order, decree, ruling or other
action shall have become final and nonappealable.
(e) By the Board of Directors of HCCH, if Mellon shall have become
Disabled or shall have died.
Section 9.2 Effect of Termination. Upon termination of this Agreement
pursuant to this Article IX, 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, 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 X
CLOSING MATTERS
Section 10.1 The Closing. Subject to termination of this Agreement as
provided in Article IX 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 November 27, 1996, or, if all conditions to Closing
have not been satisfied or waived by such date, such other place, time and
date as Holdco and HCCH may mutually select (the "Closing Date"). Prior to or
concurrently with the Closing, the Agreement of Merger and such officers'
certificates or other documents as may be required to effect the Merger will
be filed in the office of the Secretary of the State of Illinois.
Accordingly, the Merger will become effective at the Effective Time.
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Section 10.2 Conversion of Certificates.
(a) As of the Effective Time, all shares of Holdco or any Affiliated
Company Common Stock that are outstanding immediately prior thereto will, by
virtue of the Merger and without further action, cease to exist, and all such
shares of Holdco will be converted into the right to receive from HCCH the
number of shares of HCCH Common Stock determined as set forth in Section 1.3
hereof.
(b) At and after the Effective Time, each certificate representing
outstanding shares of Holdco Common Stock will represent the number of shares
of HCCH Common Stock into which such shares of Holdco Common Stock will be
deemed registered in the name of the holder of such certificate. At the
Effective Time, the holder of shares of Holdco Common Stock will surrender
the certificates for such shares (the "Holdco Certificates") to HCCH for
cancellation. Promptly following the Effective Time and receipt of the Holdco
Certificates, HCCH will cause its transfer agent to issue to such
surrendering holder certificates for the number of shares of HCCH Common
Stock to which such holder is entitled pursuant to the terms hereof.
(c) All shares of HCCH Common Stock delivered upon the surrender of
Holdco Certificates in accordance with the terms hereof will be delivered to
the registered holder. After the Effective Time, there will be no further
registration of transfers of the shares of Holdco Common Stock on the stock
transfer books of Holdco. If, after the Effective Time, Holdco Certificates
are presented for transfer or for any other reason, they will be canceled and
exchanged and certificates therefor will be delivered as provided in this
Section 10.2.
(d) Until Holdco Certificates representing Holdco Common Stock
outstanding prior to the Merger are surrendered pursuant to this Section
10.2, such certificates will be deemed, for all purposes, to evidence
ownership of the number of whole shares of HCCH Common Stock into which the
shares of Holdco Common Stock will have been converted pursuant to Section
1.3.
ARTICLE XI
INDEMNIFICATION AND
REMEDIES, CONTINUING COVENANTS
Section 11.1 Agreement to Indemnify. Subject to the limitations set
forth in this Article XI and except as set forth in Section 11.2, 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 11.1 and in
Section 11.2 below referred to individually as an "Indemnified Person" and
collectively as "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 recovered from third parties and tax
savings known to
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Indemnified Persons at the time of making of claims hereunder (hereafter in
this Section 11.1 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 Holdco, any of the
Affiliated Companies, or any of the Shareholders pursuant hereto. "Pro Rata"
for purposes of Sections 11.1 and 11.2 with respect to each Shareholder
shall mean the proportion that such Shareholder's holdings of Holdco Common
Stock as of immediately prior to the Effective Time bears to the total shares
of Holdco Common Stock held by all Shareholders as of immediately prior to
the Effective Time. The indemnification provided for in this Section 11.1
will not apply unless and until the aggregate HCCH Damages for which one or
more Indemnified Persons seeks indemnification exceeds $100,000 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). In seeking indemnification for HCCH Damages under
this Section 11.1 following the Closing, the 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
Effective Date (the "Closing Date Price"). Provided, however, that
irrespective as to the number of claims asserted by Indemnified Persons
hereunder 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 hereunder beyond the Closing
Date Price multiplied by the number of shares of HCCH Common Stock received
by such Shareholder at the time of the Merger (the "Maximum Shareholder
Liability"). Notwithstanding 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 Effective Time 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 11.1 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 11.2 Indemnification with Respect to Jamaica Lawsuit and Taxes.
In addition to the indemnification provided in Section 11.1 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) that certain lawsuit
styled Jamaica Citizens Bank Ltd. v. North American Special Risk Associates.
Inc. and George A. Mellon, Case #96C-4203 in the United States District
Court, Northern District of Illinois, Eastern Division (the "Jamaica
Lawsuit") and (b) any Taxes arising out of or relating to the business of
Holdco or the Affiliated Companies. In seeking indemnification for HCCH
Damages under this Section following the Closing, the Indemnified Persons
shall be entitled to exercise their remedies with respect to the Escrow
Shares and any other assets deposited in escrow pursuant to the Escrow
Agreement, but the indemnification provided for hereby shall not be limited
to the Escrow Shares.
43
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Section 11.3 HCCH Agreement to Indemnify. Subject to the limitations set
forth in this Article XI, HCCH will indemnify and hold harmless NASRA, each
Affiliated Company, and the NASRA Shareholders and their officers,
shareholders, directors, administrators. successors and assigns (hereinafter
in this Section 11.3 referred to individually as an "Indemnified Person" and
collectively as "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 Indemnified Persons at the time of making a claim hereunder
(hereafter in this Section 11.3 referred to as "NASRA 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
or Merger Sub in this Agreement or any certificate or exhibit delivered by or
on behalf of HCCH or Merger Sub pursuant hereto. In seeking indemnification
for NASRA Damages under this Section 11.3 following the Closing, the
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
NASRA Damages by (b) the Closing Date Price. Provided, however, that
irrespective of the number of claims asserted by Indemnified Persons
hereunder in the amount of the NASRA 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 NASRA Shareholders on the Effective Date (the "Maximum HCCH
Liability"). The indemnification provided for in this Section 11.3 will not
apply unless and until the aggregate NASRA Damages for which one or more
Indemnified Person seeks indemnification exceeds $100,000 in the aggregate,
in which event the indemnification provided for will include all NASRA
Damages (a franchise deductible) up to the Maximum HCCH Liability.
Section 11.4 Appointment of Representative. Subject to the successorship
provisions of this Section 11.4, Mellon (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 Merger Sub, and, without independent
verification, HCCH and Merger Sub 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;
44
<PAGE>
(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 11.4; and
(e) waive the fulfillment of any condition or conditions to the Closing.
Those Shareholders who, as of the Effective Date, hold a majority of the
Holdco 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 Holdco 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 Holdco
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 11.4 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 and Merger Sub contained herein.
In consideration of the foregoing, and subject to the successorship
provisions of this Section 11.4, 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 9.1 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 11.4 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 11.5 Survival of Representations. Unless 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, all representations, warranties, covenants and agreements
concerned in this Agreement will remain operative and in full force and
effect for a period of one year after 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,
except that the covenants set forth in the Confidentiality Agreement shall
survive termination of this Agreement in accordance with
45
<PAGE>
the terms of such Confidentiality Agreement. The indemnification referred to
and set forth in Section 11.2 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 11.2,
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 XI will
thereafter conclusively deemed to be waived regardless of when such claim is
or should have been discovered. Any such claim for indemnification brought
under this Article XI, brought before the Final Date, should 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 11.6 Procedure for Indemnification; Third Party Claims.
(a) Promptly after receipt by an indemnified party under this Article XI
of notice of a claim against it for indemnification brought under this
Article XI (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 Plan, 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 XI is made by a third party
against an indemnified party and each 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 XI 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 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
46
<PAGE>
evidence and reflect the transactions described herein and contemplated
hereby and to carry into effect the intents and purposes of this Agreement.
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 and Merger Sub:
HCC Insurance Holdings, Inc.
13403 Northwest Freeway
Houston, Texas 77040-6094
Telecopy: (713) 462-2401
Attention: Stephen L. Way
With copy to:
Winstead Sechrest & Minick P.C.
910 Travis, Suite 1700
Houston, Texas 77002
Telecopy: (713) 951-3800
Attention: Arthur S. Berner, Esq.
Holdco, each Affiliated Company and all Shareholders:
North American Special Risk Associates, Inc.
3400 Dundee Road, Suite 300
Northbrook, Illinois 60062-5115
Telecopy: (847) 559-9558
Attention: George A. Mellon
With copies to:
Handler & Associates Ltd.
333 W. Wacker Dr., Suite 2020
Chicago, Illinois 60606-1226
Telecopy: (312) 641-6866
Attention: Thomas J. Handler
47
<PAGE>
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. In
the event Mellon 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
arising hereunder shall lie exclusively in the state courts of the State of
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, provided
however, that HCCH shall be permitted at any time prior to the Effective Time
to cause the assignment of Merger Sub's rights and obligations under this
Agreement to another wholly owned Subsidiary of HCCH (without in any way
relieving HCCH of its obligations under this Agreement with respect to Merger
Sub or the Merger).
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, together with the
Confidentiality 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 Holdco Common Stock (i) if given or made
prior to the Effective Time, such majority as determined as of the date of
such amendment or waiver, and (ii) if given or made at or after the Effective
Time, such majority as determined immediately prior to the Effective Time.
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 Effective
Time, this Agreement may be amended or supplemented by Holdco, the Affiliated
Companies, the Shareholders or HCCH with respect to any of the terms
contained in this Agreement.
48
<PAGE>
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.
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.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
[Remainder of Page Intentionally Left Blank]
49
<PAGE>
"HCC INSURANCE HOLDINGS, INC."
By: /s/ FRANK J. BRAMANTI
--------------------------
Name: Frank J. Bramanti
Title: Executive Vice President
"MERGER SUB, INC."
By: /s/ FRANK J. BRAMANTI
---------------------------
Name: Frank J. Bramanti
Title: Vice President
[Remainder of Page Intentionally Left Blank]
Signature Page of Agreement and Plan of Reorganization
<PAGE>
"NORTH AMERICAN SPECIAL RISK
ASSOCIATES. INC.,"
By: /s/ GEORGE A. MELLON
-----------------------------
Name: George A. Mellon
Title: President
"NASRA TPA, INC."
By: /s/ GEORGE A. MELLON
-----------------------------
Name:
George A. Mellon
Title: President
"NASRA CONSULTING, INC."
By: /s/ GEORGE A. MELLON
------------------------------
Name:
George A. Mellon
Title: President
"ORIGINAL SHAREHOLDERS"
/s/ GEORGE A. MELLON
--------------------------
George A. Mellon
/s/ F. DONALD FLEMING
--------------------------
F. Donald Fleming
/s/ J. NICHOLAS TEGENKAMP
--------------------------
J. Nicholas Tegenkamp
Signature Page of Agreement and Plan of Reorganization
<PAGE>
EXHIBIT 10.331
AGREEMENT OF PURCHASE AND SALE
BY AND AMONG
TRM INTERNATIONAL, INC. and
UNICOVER MANAGERS, INC.
AND
NORTH AMERICAN SPECIAL RISK ASSOCIATES, INC. and
HCC INSURANCE HOLDINGS, INC.
--------------------------------------------
DATED JANUARY 23, 1997
--------------------------------------------
<PAGE>
TABLE OF CONTENTS
ARTICLE 1 PURCHASE AND SALE .......................................... 1
Section 1.1 Agreement to Sell ........................... 1
1.1.1 Non-Exclusive Asset Categories ....... 1
1.1.2 Transfer of Assets Free of Liens ..... 3
1.1.3 Excluded Assets ...................... 3
Section 1.2 Agreement to Purchase ....................... 3
Section 1.3 The Purchase Price .......................... 3
1.3.1 Purchase Price ....................... 3
1.3.2 Payment of Purchase Price ............ 3
Section 1.4 Assumption of Liabilities ................... 4
1.4.1 Assumed Liabilities ................. 4
1.4.2 Excluded Liabilities ................ 4
Section 1.5 Adjustments to Purchase Price ............... 4
Section 1.6 Allocation of Earned Commission ............. 5
ARTICLE 2 CLOSING, ITEMS TO BE DELIVERED, THIRD PARTY CONSENTS AND FURTHER
ASSURANCES ................................................ 5
Section 2.1 Closing ..................................... 5
Section 2.2 Items to be Delivered at Closing ............ 5
2.2.1 Seller Documents ................... 5
2.2.2 Payment of Purchase Price .......... 6
2.2.3 Other Documents .................... 6
Section 2.3 Consent of Third Parties .................... 6
Section 2.4 Further Assurances .......................... 7
Section 2.5 Non-Assignable Contracts .................... 7
ARTICLE 3 REPRESENTATIONS AND WARRANTIES ................................ 7
Section 3.1 Representations and Warranties of Seller .... 7
3.1.1 Authorization ..................... 7
3.1.2 Corporate Status .................. 8
3.1.3 No Conflicts ...................... 9
3.1.4 Financial Statements .............. 9
3.1.5 Absence of Undisclosed
Liabilities........................ 9
3.1.6 Taxes ............................. 9
3.1.7 Absence of Changes ................ 10
3.1.8 Litigation ........................ 12
3.1.9 Compliance with Laws; Governmental
Approvals and Consents; Governmental
Contracts ......................... 12
3.1.10 Operation of the Business ......... 12
3.1.11 Assets ............................ 12
3.1.12 Contracts ......................... 13
3.1.13 Territorial Restrictions .......... 14
3.1.14 Policyholders ..................... 14
3.1.15 Absence of Certain Business
Practices ......................... 15
i
<PAGE>
TABLE OF CONTENTS
(Continued)
3.1.16 Confidentiality .................... 15
3.1.17 Records ............................ 15
3.1.18 Brokers and Finders ................ 15
3.1.19 Receivables ........................ 15
3.1.20 Transactions with Affiliates ....... 16
3.1.21 Disclosure ......................... 16
Section 3.2 Securities Act of 1933 ...................... 16
3.2.1 Investment Representations and
Warranties ......................... 16
3.2.2 Legends ............................ 17
Section 3.3 Representations and Warranties of Purchaser
and HCCH. ................................... 18
3.3.1 Corporate Status and Authorization . 18
3.3.2 No Conflicts, Etc .................. 18
3.3.3 Capital Stock ...................... 19
3.3.4 SEC Filings ........................ 19
3.3.5 Financial Statements ............... 20
3.3.6 Absence of Certain Changes ......... 20
3.3.7 No Undisclosed Liabilities ......... 21
3.3.8 Broker's Fees ...................... 21
3.3.9 Territorial Restrictions ........... 21
3.3.10 Disclosure ......................... 21
ARTICLE 4 COVENANTS ..................................................... 22
Section 4.1. Covenants of Seller ......................... 22
4.1.1 Conduct of Truckers Business Prior to
Closing .............................. 22
4.1.2 No Solicitation ...................... 23
4.1.3 Access and Information ............... 23
4.1.4 Public Announcements ................. 23
4.1.5 Further Actions ...................... 24
4.1.6 Further Assurances ................... 24
4.1.7 Disclosure Memorandum ................ 25
4.1.8 Enforcement of Rights and
Non-Competition Agreement ............ 25
4.1.9 Transition Team ...................... 27
Section 4.2 Covenants of Purchaser ...................... 28
4.2.1 Public Announcements ................. 28
4.2.2 Further Actions ...................... 28
4.2.3 Further Assurances ................... 28
4.2.4 Rule 144 ............................. 29
4.2.5 Expenses of Transition Team .......... 29
4.2.6 Access and Information ............... 29
4.2.7 Material Adverse Changes ............. 30
4.2.8 Collection of Receivables for Seller . 30
ii
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TABLE OF CONTENTS
(Continued)
Section 5.1 Conditions to Obligations of Each Party ..... 30
5.1.1 No Injunction, Etc. .................. 30
Section 5.2 Conditions to Obligations of Purchaser
and HCCH .................................... 30
5.2.1 Representations, Performance ......... 31
5.2.2 Consents ............................. 31
5.2.3 No Material Adverse Effect ........... 31
5.2.4 Collateral Agreements ................ 31
5.2.5 Corporate Proceedings ................ 32
5.2.6 Transfer Documents ................... 32
5.2.7 New Program Manager's Agreement ...... 32
5.2.8 Investment Letter .................... 32
Section 5.3 Conditions to Obligations of Seller ......... 32
5.3.1 Representations, Performance ......... 33
5.3.2 Corporate Proceedings ................ 33
5.3.3 Consents and Approvals ............... 33
5.3.4 Collateral Agreements ................ 33
5.3.5 No Material Adverse Effect ........... 33
ARTICLE 6 TERMINATION ................................................ 34
Section 6.1 Termination ................................. 34
Section 6.2 Effect of Termination ....................... 34
ARTICLE 7 INDEMNIFICATION ............................................ 35
Section 7.1 By Seller ................................... 35
Section 7.2 By Purchaser and HCCH ...................... 35
Section 7.3 Adjustments to Indemnification Payments ..... 36
Section 7.4 Indemnification Procedures .................. 36
Section 7.5 Limits on Indemnification ................... 37
ARTICLE 8 DEFINITIONS AND CONSTRUCTION
Section 8.1 Definition of Certain Terms ................. 37
Section 8.2 Rules of Construction ....................... 43
ARTICLE 9 GENERAL PROVISIONS ......................................... 44
Section 9.1 Survival of Representations and Warranties .. 44
Section 9.2 Expenses .................................... 44
Section 9.3 Severability ................................ 45
Section 9.4 Notices ..................................... 45
Section 9.5 Headings .................................... 46
Section 9.6 Entire Agreement ............................ 46
Section 9.7 Counterparts ................................ 46
Section 9.8 Governing Law, Etc .......................... 46
iii
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TABLE OF CONTENTS
(Continued)
Section 9.9 Binding Effect..................................... 46
Section 9.10 Assignment......................................... 46
Section 9.11 No Third Party Beneficiaries....................... 46
Section 9.12 Amendment; Waivers, Etc. .......................... 47
Section 9.13 Form of Payments by Seller......................... 47
1
<PAGE>
AGREEMENT OF PURCHASE AND SALE
This AGREEMENT OF PURCHASE AND SALE (this "Agreement") dated as of
January 23, 1997, and effective as of the Effective Date as defined herein,
is being entered by and between TRM INTERNATIONAL, INC., a New Jersey
corporation ("TRM"); and UNICOVER MANAGERS, INC., a New Jersey corporation
("Unicover") (TRM and Unicover sometimes referred to collectively herein as
"Seller"), on the one hand; and NORTH AMERICAN SPECIAL RISK ASSOCIATES, an
Illinois corporation ("Purchaser"); and HCC INSURANCE HOLDINGS, INC., a
Delaware corporation ("HCCH"), on the other hand, with reference to the
following RECITALS:
RECITALS
A. Seller is engaged in the business of the marketing and sale of
occupational accident and related employers liability insurance Policies to
owner/operators of long-haul trucking companies (the "Truckers Business" as
defined herein).
B. Purchaser is a wholly-owned Subsidiary of HCCH, and subject only to
the limitations and exclusions contained in this Agreement, and upon the
terms and conditions hereinafter set forth, Seller desires to sell and
Purchaser desires to purchase the Truckers Business and certain of the assets
of Seller used therein or related thereto.
NOW, THEREFORE, in consideration of the recitals and of the respective
covenants, representations, warranties and agreements herein contained, and
intending to be legally bound hereby, the parties hereto hereby agree as
follows:
ARTICLE 1
PURCHASE AND SALE
Section 1.1 Agreement to Sell. At the Closing hereunder (as defined in
Section 2.1 hereof), and except as otherwise specifically provided in this
Section 1.1, Seller agrees to grant, sell, convey, assign, transfer and
deliver to Purchaser, upon and subject to the terms and conditions of this
Agreement, all right, title and interest of Seller in and to the properties,
assets and rights of Seller described in Section 1. 1. 1 (other than the
Excluded Assets) relating to or used or held for use in connection with the
Truckers Business as the same may exist on the Closing Date (collectively,
the "Assets").
1.1.1 Non-Exclusive Asset Categories. As used in this Agreement, the
term "Assets" shall include, without limitation, all those items in the
following categories that conform to the definition of the term "Assets" to
the extent such items are used or held for use by Seller in connection with
the Truckers Business:
(a) transfer all amounts held in any Fiduciary Account,
including, without limitation, (i) Billed Premium collected under the
Policies prior to the Effective Date, net of any compensation
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due Seller and payments made to RNRS; and (ii) Billed Premium,
including any compensation payable to Seller in connection with
Billed Premium on and after the Effective Date, net of payments made
to RNRS;
(b) all of the interest of Seller in the American Association of
Independent Contractors, Inc., an Indiana non-profit corporation
("AAIC");
(c) all accounts receivable and all notes, bonds and other
evidences of indebtedness of and rights to receive payments from any
Person held by the Seller relating to the Truckers Business for any
periods on and after the Effective Date;
(d) all of the binding authority and rights of the Seller
related to the Truckers Business under all contracts, arrangements,
licenses, leases and other agreements, including, without
limitation, the Program Manager's Agreement, insurance policy
Expirations as described in the Program Manager's Agreement,
agreements with Producers, to the extent the same may be assignable
by Seller, and any right to receive payment of any compensation on
and after the Effective Date for Policies sold or services rendered
under the Program Manager's Agreement on Billed Premium relating to
any periods on and after the Effective Date and to assert claims
and take other rightful actions in respect of breaches, defaults
and other violations of such contracts, arrangements, licenses,
leases and other agreements and otherwise;
(e) all rights under a non-exclusive license to the use of
Seller's proprietary software system related to the Truckers Business
as set forth in the Software License Agreement, to the extent that the
use of such software by Purchaser does not violate the terms of any
license or other agreement with any other Person relating to such
software system;
(f) all books, records, manuals and other materials (in any
form or medium) relating to the Truckers Business, including,
without limitation, all records and materials maintained at the
headquarters of Seller, advertising matter, correspondence, mailing
lists, Expirations, lists of Policyholders, distribution lists,
production data, sales and promotional materials and records,
purchasing materials and records, personnel records, accounting
records, Policy files and litigation files;
(g) all rights to causes of action, lawsuits, judgments, claims
and demands of any nature available to or being pursued by
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the Seller with respect to Billed Premium due or collected in
connection with the Truckers Business for any period on or after the
Effective Date, whether arising by way of counterclaim or otherwise;
and
(h) all guarantees, warranties, indemnities and similar rights in
favor of the Seller with respect to any Asset.
1.1.2 Transfer of Assets Free of Liens. Subject to the terms and
conditions hereof, at the Closing, the Assets shall be transferred or
otherwise conveyed to Purchaser free and clear of all Liens excepting only
Assumed Liabilities, and Permitted Liens listed on Schedule 3.1.11.
1.1.3 Excluded Assets. Seller shall retain and not transfer, and
Purchaser shall not purchase or acquire, any assets not identified in
Section 1.1.1 (collectively, the "Excluded Assets").
Section 1.2 Agreement to Purchase. At the Closing, Purchaser shall
purchase or otherwise obtain possession of the Assets from Seller, upon and
subject to the terms and conditions of this Agreement and in reliance on the
representations, warranties and covenants of Seller contained herein, in
exchange for the Purchase Price (as defined in Section 1.3 hereof). In
addition, Purchaser shall assume at the Closing and agree to pay, discharge
or perform, as appropriate, certain liabilities and obligations of Seller
only to the extent and as provided in Section 1.4 of this Agreement and
Permitted Liens. Except as specifically provided in Section 1.4 hereof for
Permitted Liens, Purchaser shall not assume or be responsible for any
liabilities or obligations of the Truckers Business or of Seller.
Section 1.3 The Purchase Price.
1.3.1 Purchase Price. The purchase price (the "Purchase Price")
shall be an amount equal to:
(a) 266,667 shares (collectively, the "HCCH Shares") of the
Common Stock, par value $1.00 per share (the "HCCH Common Stock"), of
HCCH; plus
(b) $6,550,000 cash.
On or before the Closing Date, and prior to Closing, HCCH shall
transfer the Purchase Price to Purchaser as a contribution to the
capital of Purchaser in compliance with Treasury Reg. Sec.
1.1502-13(f)(6)(ii).
1.3.2 Payment of Purchase Price. On the Closing Date
Purchaser shall (i) deliver to Seller, on account of the Purchase
Price, a certificate or certificates representing the HCCH Shares and
registered in the names of Seller and/or the Principals in such
proportions as Seller shall designate in writing to Purchaser, and
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(ii) pay to Seller, on account of the Purchase Price, the amount of
$6,550,000, in cash, by wire transfer of immediately available funds
to such account or accounts or such Persons as Seller shall designate
in writing to Purchaser. If, prior to Closing, HCCH recapitalizes
either through a split-up of its outstanding shares into a greater
number, or through a combination of its outstanding shares into a
lesser number, or reorganizes, reclassifies, or otherwise changes its
outstanding shares into the same or a different number of shares of
other classes (other than through a split-up or a combination of
shares provided for in the previous clause), or declares a dividend
on its outstanding shares payable in shares or securities convertible
into shares (but not cash), the number of shares of HCCH Common Stock
that constitutes the HCCH Shares to be issued pursuant to the
provisions of this Agreement will be adjusted in proportion to such
change.
Section 1.4 Assumption of Liabilities
1.4.1 Assumed Liabilities. At the Closing, and subject to
the terms and conditions set forth herein, and effective as of the
Effective Date, Purchaser shall and does hereby assume and agree to
pay, honor and discharge when due any and all liabilities,
obligations and commitments of Seller relating exclusively to the
Truckers Business and/or the Assets, including, without limitation,
compensation payable to Seller and any obligations of Seller to
Producers under the Program Manager's Agreement, existing or
arising out of Billed Premium collected under the Policies for any
periods prior to the Effective Date (collectively, the "Assumed
Liabilities") in accordance with the terms and provisions of the
assumption agreement ("Assumption Agreement") in substantially the
form of Exhibit A attached hereto and hereby made a part hereof.
1.4.2 Excluded Liabilities. Notwithstanding the foregoing
or any other provision hereof or any schedule or exhibit hereto,
and regardless of any disclosure to Purchaser, Purchaser shall not
assume any liabilities, obligations or commitments of Seller
relating to or arising out of any other business or operations of
the Seller, or the ownership of any Excluded Assets by the Seller
other than the Assumed Liabilities (the "Excluded Liabilities").
Section 1.5 Adjustments to Purchase Price. If, during the one-year period
beginning on the Effective Date (the "Measurement Period"), (a) the Billed
Premium for Policies issued in connection with the Truckers Business plus (b)
the Billed Premium for New Business issued by any insurer in connection with
the Truckers Business on and after the Effective Date, except that premium
billed on an annual basis shall be allocated pro rata to the Measurement
Period, (the amount of such calculation being the "Adjusted Gross Premium")
is less than Sixteen Million Dollars ($16,000,000.00) (the "Minimum
Premium"), Seller will refund to Purchaser an amount equal to the ratio of
fifty percent (50.0%) of the difference between Eighteen Million One Hundred
Twenty-Five Thousand Dollars ($18,125,000.00) (the "Target Premium") and the
Adjusted Gross Premium, over the Target Premium, times Thirteen Million Seven
Hundred Fifty Thousand Dollars ($13,750,000.00) payable in cash.
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Section 1.6 Allocation of Earned Commission. Notwithstanding the
Effective Date, the parties agree that all commission income earned with
respect to Billed Premium in connection with the Truckers Business for the
month of December 1996 (the "December Commission Income") shall be payable
50% to Seller and 50% to Purchaser. In addition, all commission earned with
respect to Billed Premium in connection with the Truckers Business for the
month of January 1997 (the "January Commission Income") shall be payable to
Purchaser. The parties agree that, to the extent required by law, they will
file tax returns consistent with the foregoing; provided, however, in the
event that Seller is required for federal income tax purposes to report as
ordinary income more than 50% of the December Commission Income and/or any
portion of the January Commission Income, then the amount of December
Commission Income and/or January Commission Income payable to Seller shall be
increased, and the amount of December Commission Income and/or January
Commission Income payable to Purchaser shall be decreased, by an amount equal
to the difference between (a) the amount of the December Commission Income
and/or January Commission Income required to be reported as income by
Seller for federal income tax purposes in excess of the amount of the
December Commission Income and/or January Commission Income actually paid to
Seller (the "Excess Income Amount") multiplied by the highest combined
federal, state and local income tax rates for individuals on ordinary income
and (b) the Excess Income Amount multiplied by the highest combined federal,
state and local income tax rates for individuals on long-term capital gains.
ARTICLE 2
CLOSING, ITEMS TO BE DELIVERED, THIRD PARTY CONSENTS
AND FURTHER ASSURANCES
Section 2.1 Closing. The closing (the "Closing") of the sale and purchase
of the Assets shall take place at 10:00 A.M., local time, on January 24,
1997, at the offices of Winstead Sechrest & Minick P.C., 910 Travis Street,
Suite 1700, Houston, Texas 77002-5895, or at such other time or place or on
such other date, in each case as may be mutually agreed upon in writing by
Purchaser and Seller. The date of the Closing is sometimes herein referred to
as the "Closing Date."
Section 2.2 Items to be Delivered at Closing. At the Closing, and subject
to the terms and conditions herein contained:
2.2.1 Seller Documents. Seller shall deliver to Purchaser the
following:
(i) such assignments, endorsements, and other good and
sufficient instruments and documents of conveyance and transfer, in
form reasonably satisfactory to Purchaser and its counsel, as shall
be reasonably necessary and appropriate to transfer and assign to
Purchaser all of Seller's right, title and interest in and to the
Truckers Business and the Assets, including without limitation, all
of Seller's rights under all agreements, contracts, commitments,
leases, plans, bids, quotations, proposals, instruments and other
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documents included in the Assets to which Seller is a party or by
which it has rights on the Closing Date;
(ii) the Software License Agreement executed by an officer of the
Seller, in substantially the form of Exhibit B attached hereto and
hereby made a part hereof;
(iii) all of the corporate records, minute books, corporate seal,
membership lists, and files of AAIC, and resignations of all of the
officers, directors, attorney-in-fact, and agent for service of
process of AAIC, and an assignment of all of Seller's interest, if
any, in AAIC;
(iv) Investment Letters, executed by a duly authorized officer of
each Holder of the HCCH Shares, in substantially the form of Exhibit C
attached hereto and hereby made a part hereof, and
(v) the Noncompetition Agreements, executed by each of the
Principals, in substantially the form of Exhibit D attached hereto and
hereby made a part hereof;
and simultaneously with such delivery, all such steps will be taken as may
be required to put Purchaser in actual possession and operating control of
the Truckers Business and the Assets.
2.2.2 Payment of Purchase Price. Purchaser shall deliver
to Seller the HCCH Shares and cash representing the Purchase Price
in accordance with Section 1.3.2 hereof and the Assumption
Agreement, executed by an officer of Purchaser.
2.2.3 Other Documents. At or prior to the Closing, the
parties hereto shall also deliver to each other the agreements,
opinions, certificates and other documents and instruments referred
to in Article 5 hereof.
Section 2.3 Consent of Third Parties. The Closing and the consummation
of the transactions contemplated by this Agreement are subject to the consent
of RNRS to the assignment by Seller to Purchaser of its rights, duties and
obligations under the Program Manager's Agreement, and the execution of a New
Program Manager's Agreement on terms satisfactory to Purchaser by the
Purchaser and RNRS, as set forth in correspondence between HCCH and RNRS
dated October 21, 1996 through November 19, 1996, copies of which are
attached hereto as Exhibit D and hereby made a part hereof In the event the
approval or consent of RNRS to the assignment of Seller's rights, duties and
obligations under the Program Manager's Agreement to Purchaser has not been
obtained on or prior to the Closing Date, Seller shall continue to use all
reasonable efforts to obtain such approval or consent after the Closing Date
until such time as such approval or consent has been obtained, and Seller
will cooperate with
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Purchaser in any lawful and economically feasible arrangement to provide that
Purchaser shall receive the interest of Seller in the benefits under the
Program Manager's Agreement with respect to Billed Premium due and collected
on and after the Effective Date, provided that Purchaser shall pay or satisfy
the corresponding liabilities for the enjoyment of such benefit to the extent
Purchaser would have been responsible therefor if such approval or consent
had been obtained.
Section 2.4 Further Assurances. Seller will, from time to time after the
Closing, at Purchaser's request, execute, acknowledge and deliver to
Purchaser such other instruments of conveyance and transfer and will take
such other actions and execute and deliver such other documents,
certifications and further assurances as Purchaser may reasonably require in
order to vest in Purchaser, or to put Purchaser in possession of, the
Truckers Business and/or any of the Assets, or to better enable Purchaser to
complete, perform or discharge any of the Assumed Liabilities or obligations
assumed by Purchaser at the Closing pursuant to Section 1.4 hereof. Each of
the parties hereto will cooperate with the other and execute and deliver to
the other parties hereto such other instruments and documents and take such
other actions as may be reasonably requested from time to time by any other
party hereto as necessary to carry out, evidence and confirm the intended
purposes of this Agreement.
Section 2.5 Non-Assignable Contracts. To the extent that any Contracts
necessary for the transaction of the Truckers Business by Purchaser are
non-assignable or not transferable to Purchaser, or non-assignable or
non-transferable without the consent of a third party, or shall be subject to
an option held by any other Person arising out of or maturing or originating
by reason of a request by Seller to transfer or assign such Contract or by
reason of the transactions contemplated in this Agreement, this Agreement
shall not constitute a contract to assign or transfer such Contract if any
attempt to transfer or assign such Contract would (i) constitute a breach of
the provisions thereof; or (ii) create rights in any other Person not
acceptable to Purchaser. If Seller shall have failed to procure the consent
of any Person to such assignment or transfer or waiver of such option prior
to the Closing Date, Seller shall use its commercially reasonable efforts to
make the use and benefits of the Truckers Business and the Assets available
to the Purchaser to the same extent, as nearly as may be possible, as if such
impediment to assignment or transfer of any such Contract did not exist.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES
Section 3.1 Representations and Warranties of Seller. Seller represents
and warrants to Purchaser as of the date of this Agreement, except as set
forth in the Disclosure Memorandum delivered to Purchaser as provided in
Section 4.1.8 hereof, each of which exceptions shall specifically identify
the relevant subsection hereof to which it relates and shall be deemed to be
representations and warranties as if made hereunder, as follows:
3.1.1 Authorization. Seller has the corporate power and
authority to execute and deliver this Agreement and each of the Collateral
Agreements to which it is a party, to perform fully their respective
obligations hereunder and
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thereunder, and to consummate the transactions contemplated hereby and
thereby. The execution and delivery by Seller of this Agreement, and the
consummation of the transactions contemplated hereby, have been, and on
the Closing Date the execution and delivery by Seller of each of the
Collateral Agreements to which it is a party and the consummation of the
transactions contemplated thereby will have been, duly authorized by all
requisite corporate action of Seller. Seller has duly executed and
delivered this Agreement to Purchaser and HCCH and on the Closing Date
Seller will have duly executed and delivered to Purchaser and HCCH, each of
the Collateral Agreements to which it or any of the Principals is a party.
This Agreement is, and on the Closing Date each of the Collateral
Agreements to which it is a party will be, legal, valid and binding
obligations of Seller, enforceable against Seller in accordance with their
respective terms.
3.1.2 Corporate Status
(a) TRM and Unicover are each corporations duly organized,
validly existing and in good standing under the laws of the
jurisdiction of their respective incorporation, with full corporate
power and authority to carry on their respective business (including,
without limitation, the Truckers Business) and to own or lease and to
operate their respective properties as and in the places where such
business is conducted and such properties owned, leased or operated.
TRM and Unicover have made elections to be treated as "S" corporations
for federal income tax purposes.
(b) TRM and Unicover are each duly qualified or licensed
to do business in the jurisdictions set forth in Schedule 3.1.2(b),
respectively, and are in good standing in each of the jurisdictions
specified opposite their names in Schedule 3.1.2(b), which are the only
jurisdictions in which the operation of the Truckers Business or the
character of the properties owned, leased or operated by them in connection
with the Truckers Business makes such qualification or licensing necessary.
(c) TRM and Unicover have delivered to Purchaser complete and
correct copies of each of their and AAIC's respective articles of
incorporation and by-laws or other organizational documents, in each case,
as amended and in effect on the date hereof. Neither TRM, Unicover nor
AAIC are in violation in any material respect of any of the provisions of
its respective articles of incorporation or by-laws or other organizational
documents.
(d) As of the date of this Agreement, there are no shares of
common capital stock or membership interests of AAIC authorized or issued
and outstanding.
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3.1.3 No Conflicts. The execution, delivery and performance by Seller
of this Agreement and each of the Collateral Agreements to which it may be
a party, and the consummation of the transactions contemplated hereby and
thereby, do not and will not conflict with or result in a violation of or a
default under (with or without the giving of notice or the lapse of time or
both) (i) any Applicable Law applicable to Seller or any Affiliate thereof
or any of the properties or assets of Seller (including but not limited to
the Assets), (ii) the articles of incorporation or by-laws or other
organizational documents of Seller or AAIC or (iii) except as set forth in
Schedule 3.1.3, any Contract or other contract, agreement or other
instrument to which Seller or AAIC is a party or by which Seller, AAIC or
any of their properties or assets, including but not limited to the Assets,
may be bound or affected, except, in each case, the conflict, violation or
breach of which could not reasonably be expected to have a Material Adverse
Effect on the Truckers Business or the Assets. Except as specified in
Schedule 3.1.3, no Governmental Approval or other Consent is required to be
obtained or made by Seller in connection with the execution and delivery
of this Agreement and the Collateral Agreements to which it is a party or
the consummation of the transactions contemplated hereby or thereby, except
any Consent to which the failure to obtain could not reasonably be
expected to have a Material Adverse Effect on the Truckers Business or the
Assets.
3.1.4 Financial Statements. Seller has delivered to Purchaser certain
unaudited financial information and data prepared by Seller and setting
forth Billed Premium and revenues received by Sellers for the Truckers
Business (the "Financial Statements") as of August 31, 1996 (the
"Financial Statement Date"). The Financial Statements present fairly in all
material respects, the Billed Premium and gross premium revenues of Seller
in connection with the Truckers Business for the periods indicated thereon.
3.1.5 Absence of Undisclosed Liabilities. Seller has no
liabilities or obligations of any nature, whether known or unknown,
absolute, accrued, contingent or otherwise and whether due or to become
due, arising out of or relating to the Truckers Business, except (a) as
set forth in Schedule 3.1.5, (b) as and to the extent disclosed or reserved
against in the Financial Statements (including the notes thereto),
(c) unknown contingent liabilities and (d) for liabilities and obligations
that (i) were incurred after the Financial Statement Date in the ordinary
course of business consistent with prior practice and (ii) individually and
in the aggregate are not material to the Truckers Business and have not
had or resulted in, and will not have or result in, a Material Adverse
Effect on the Truckers Business or the Assets.
3.1.6 Taxes
(a) Seller has (or by the Closing will have) duly and timely
filed all Tax Returns relating to the Truckers Business with respect to
Covered Taxes required to be filed on or before the
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Closing Date ("Covered Returns"). Except for Covered Taxes set forth on
Schedule 3.1.6(a), which are being contested in good faith and by
appropriate proceedings, the following Covered Taxes have (or by the
Closing Date will have) been duly and timely paid: (i) all Covered Taxes
shown to be due on the Covered Returns, (ii) all deficiencies and
assessments of Covered Taxes of which notice has (or by the Closing Date
will have) been received by Seller that are or may become payable by
Purchaser or chargeable as a lien upon the Truckers Business, and (iii)
all other Covered Taxes due and payable on or before the Closing Date for
which neither filing of Covered Returns nor notice of deficiency or
assessment is required, of which Seller or any Shareholder is or
reasonably should be (or by the Closing Date will be or reasonably should
be) aware that are or may become payable by Purchaser or chargeable as a
lien upon the Truckers Business.
(b) Purchaser will not be required to deduct and withhold any amount
pursuant to section 1445(a) of the Code upon the transfer of the Truckers
Business to Purchaser.
3.1.7 Absence of Changes. Except as set forth on Schedule 3.1.7,
since the Financial Statement Date, Seller has conducted the Truckers
Business only in the ordinary course consistent with prior practice and has
not, on behalf of, in connection with or relating to the Truckers Business
or the Assets:
(a) suffered any event which could reasonably be expected to have a
Material Adverse Effect on the Truckers Business or the Assets;
(b) incurred any known obligation or liability, absolute, accrued,
contingent or otherwise, whether due or to become due, except current
liabilities for trade or business obligations incurred in connection with
the purchase of goods or services or otherwise in the ordinary course of
business consistent with prior practice, none of which liabilities, in any
case or in the aggregate, could reasonably be expected to have a Material
Adverse Effect on the Truckers Business or the Assets;
(c) mortgaged, pledged or subjected to any Lien, any property,
business or assets, tangible or intangible, held in connection with the
Truckers Business;
(d) sold, transferred, leased to others or otherwise disposed of any
of the Assets, or, except in the ordinary course of business and consistent
with prior practice, cancelled or
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compromised any debt or claim, or waived or released any right of
substantial value relating to the Truckers Business or the Assets;
(e) made, entered into or assumed, or suffered any amendment or
termination of, any agreement, contract, commitment, lease or plan to which
it is a party or by which it is bound and relating to the Truckers Business
or the Assets, or received any notice of termination of any contract, lease
or other agreement necessary for the operation of the Truckers Business or
the Assets or suffered any damage, destruction or loss (whether or not
covered by insurance) relating to the Truckers Business or Assets, except
in any case or in the aggregate which could not reasonably be expected to
have a Material Adverse Effect on the Truckers Business or the Assets;
(f) made any material change in the rate of compensation, commission,
bonus or other direct or indirect remuneration payable, or paid or agreed
or orally promised to pay, conditionally or otherwise, any bonus,
incentive, retention or other compensation, retirement, welfare, fringe or
severance benefit or vacation pay, to or in respect of any Producer or
agent of Seller relating to the Truckers Business, or made any other
changes to its personnel practices, except in the ordinary course of
business and consistent with past practice;
(g) made any material change in its selling, marketing or advertising
practices which could reasonably be expected to have a Material Adverse
Effect upon the Truckers Business or the Assets;
(h) instituted, settled or agreed to settle any litigation, action or
proceeding before any court or governmental body relating to the Truckers
Business or the Assets other than in the ordinary course of business
consistent with past practices but not in any case involving amounts in
excess of $10,000;
(i) entered into any transaction, contract or commitment other than
in the ordinary course of business consistent with prior practice, or paid
or agreed to pay any brokerage, finder's fee, Taxes or other expenses in
connection with, or incurred any severance pay obligations by reason of,
this Agreement or the transactions contemplated hereby; or
(j) taken any action or omitted to take any action that would result
in the occurrence of any of the foregoing.
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3.1.8 Litigation. Except as set forth on Schedule 3.1.8, there is no
action, claim, demand, suit, proceeding, arbitration, grievance, citation,
summons, subpoena, inquiry or investigation of any nature, civil, criminal,
regulatory or otherwise, in law or in equity, pending or threatened against
or relating to Seller in connection with the Assets or the Truckers
Business or against or relating to the transactions contemplated by this
Agreement, which constitutes or may constitute an Assumed Liability.
3.1.9 Compliance with Laws; Governmental Approvals and Consents;
Governmental Contracts
(a) Except as disclosed on Schedule 3.1.9(a), Seller has complied in
all material respects with all, and is not in material violation of any,
Applicable Laws applicable to the Truckers Business or the Assets, and
Seller has not received any notice alleging any such conflict, violation,
breach or default, except in either case where such failure to comply,
conflict, violation, breach or default could not reasonably be expected to
have a Material Adverse Effect on the Truckers Business or the Assets.
(b) Schedule 3.1.9(b) sets forth all Governmental Approvals and other
Consents issued to Seller in connection with the conduct of the Truckers
Business or the ownership and use of the Assets, including, without
limitation, all licenses, permits or similar authorizations for the
marketing and sale of the Policies by Seller.
(c) To the best of Seller's knowledge, there are no proposed laws,
rules, regulations, ordinances, orders, judgments, decrees, governmental
takings, condemnations or other proceedings which would be applicable to
the Truckers Business or the Assets and which could reasonably be expected
to have a Material Adverse Effect on the Truckers Business or the Assets,
either before or after the Closing Date.
3.1.10 Operation of the Business. Except as set forth in Schedule
3.1.10, (a) Seller has not conducted the Truckers Business through any
divisions or any direct or indirect Subsidiary or Affiliate of Seller
other than AAIC and (b) no part of the Truckers Business is operated by
Seller through any entity other than Seller or AAIC.
3.1.11 Assets. Except as disclosed in Schedule 3.1.11, Seller has good
title to all the Assets, free and clear of any and all Liens other than
Permitted Liens. The Assets comprise all assets required for the continued
conduct of the Truckers Business by Purchaser as now being conducted by
Seller. The Assets, taken as a whole, constitute all the properties and
assets relating to or used or held for use
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in connection with the Truckers Business during the past twelve months to
the extent such assets are still in existence on the Closing Date, and
except cash disposed of, accounts receivable collected, prepaid expenses
realized, Contracts fully performed, properties or assets replaced by
equivalent or superior properties or assets, in each case in the ordinary
course of business consistent with prior practice, and the Excluded Assets.
Except for the Excluded Assets, there are no assets or properties used in
the operation of the Truckers Business and owned by any Person other than
Seller that will not be leased or licensed to Purchaser under valid,
current leases or license arrangements. The Assets are in all material
respects adequate for the purposes for which such assets are currently used
or are held for use, and are in reasonably good repair and operating
condition (subject to normal wear and tear) and, to the knowledge of
Seller, there are no facts or conditions affecting the Assets which could,
individually or in the aggregate, interfere in any material respect with
the use, occupancy or operation thereof as currently used, occupied or
operated, or their adequacy for such use.
3.1.12 Contracts
(a) Schedule 3.1.12(a) contains a complete and correct list of all
agreements, contracts, commitments and other instruments and arrangements
(whether written or oral) of the types described below which are related to
or employed by Seller in connection with the Truckers Business to which
Seller is a party or by which it is bound in connection with the Truckers
Business or the Assets (the "Contracts"):
(i) agreements, contracts, commitments, and other instruments
and arrangements pursuant to which Seller serves as agent, manager,
broker or third-party administrator in connection with the Truckers
Business or any Prohibited Products;
(ii) agreements, contracts, commitments, and other instruments
and arrangements relating to the solicitation of new or additional
business for or on behalf of Seller;
(iii) employment, consulting, agency, collective bargaining or
other similar contracts, agreements, and other instruments and
arrangements relating to or for the benefit of current, future or
former employees, officers, directors, shareholders, sales
representatives, distributors, dealers, Producers, agents, independent
contractors or consultants of Seller or any other Person and which
require, in all cases, any payments of profits on Policies transferred
to Purchaser as part of the Truckers Business;
(iv) any other contracts, agreements or commitments that are
material to the Truckers Business.
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(b) Seller has delivered to Purchaser complete and correct copies of
all written Contracts, together with all amendments thereto, and accurate
descriptions of all material terms of all oral Contracts, which are set
forth or required to be set forth in Schedule 3.1.12(a).
(c) To the best of Seller's knowledge, all such Contracts are in full
force and effect and enforceable against each party thereto. To the best of
Seller's knowledge, there does not exist under any Contract any event of
default or event or condition that, after notice or lapse of time or both,
would constitute a material violation, material breach or event of default
thereunder on the part of Seller or, to the best knowledge of Seller, any
other party thereto except as set forth in Schedule 3.1.12(c) and except
for such events or conditions that, individually and in the aggregate,
(i) has not had or resulted in, and could not reasonably be expected to
have or result in, a Material Adverse Effect on the Truckers Business or
the Assets and (ii) has not and will not materially impair the ability of
Seller to perform its respective obligations under this Agreement and under
the Collateral Agreements to which it is a party. Except as set forth in
Schedule 3.1.12(c), no Consent of any third party is required under any
Contract as a result of or in connection with, and the enforceability of
any Contract will not be affected in any manner by, the execution, delivery
and performance of this Agreement or any of the Collateral Agreements or
the consummation of the transactions contemplated hereby or thereby.
(d) Seller has not granted any power of attorney relating to the
Truckers Business, which is currently in effect.
3.1.13 Territorial Restrictions. Seller is not restricted by any
written agreement or understanding with any other Person from carrying on
the Truckers Business anywhere in the United States of America, and
Purchaser shall not, solely as a result of its purchase of the Truckers
Business from Seller pursuant hereto and the assumption of the Assumed
Liabilities, become restricted in carrying on the Truckers Business
anywhere in the United States of America by reason of any. restrictions
imposed upon Seller under any such agreement or understanding.
3.1.14 Policyholders. Schedule 3.1.14 sets forth (a) the names and
addresses of all owners, participants and/or holders of the Policies
constituting the Truckers Business ("Policyholders") of Seller that
purchased Policies through Seller or Producers of Seller which were in
force and effect upon the Effective Date; (b) the amount of Billed Premium
under such Policies during the one year period ending on the Effective Date
of this Agreement; and (c) a list of the names and addresses of all
Producers of such Policies. Seller has not received any notice or has any
reason to believe that any Policyholder of Seller has lapsed or intends to
permit its Policy to lapse or to non-renew any Policy. To the best
knowledge of Seller, no Policyholder of Seller described in clause (a) of
the first sentence of this section has otherwise threatened to take any
action described in the preceding
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sentence as a result of the consummation of the transactions contemplated
by this Agreement and the Collateral Agreements.
3.1.15 Absence of Certain Business Practices. Seller has not, nor,
to the best knowledge of Seller, has any officer, employee or agent of
Seller, or, to the best knowledge of Seller, any other Person acting on
behalf of Seller or any officer, employee or agent of Seller, directly or
indirectly, within the past five year& given or agreed to give any gift,
rebate, allowance or similar benefit to any Policyholder, Producer,
governmental employee or other Person who is or may be in a position to
help or hinder the Truckers Business (or assist Seller in connection with
any actual or proposed transaction relating to the Truckers Business) (i)
which subjected or might have subjected Seller to any damage or penalty in
any civil, criminal or governmental litigation or proceeding, (ii) which if
not given in the past, could reasonably be expected to have had a Material
Adverse Effect on the Truckers Business or the Assets, (iii) which if not
continued in the future, might have a Material Adverse Effect on the
Truckers Business or the Assets or subject Purchaser or HCCH to suit or
penalty in any private or governmental litigation or proceeding, (iv) for
any of the purposes described in Section 162(c) of the Code or (v) for the
purpose of establishing or maintaining any concealed hind or concealed
bank account.
3.1.16 Confidentiality. Except as set forth on Schedule 3.1.16,
Seller has taken all commercially reasonable steps necessary to preserve
the confidential nature of all material confidential information
(including, without limitation, any proprietary information) with respect
to the Truckers Business.
3.1.17 Records. The books and records of Seller insofar as they
relate to or affect the Truckers Business and the Assets are substantially
complete and correct in all material respects.
3.1.18 Brokers and Finders. All negotiations relating to this
Agreement, the Collateral Agreements, and the transactions contemplated
hereby and thereby, have been carried on without the participation of any
Person acting on behalf of Seller or its Affiliates in such manner as to
give rise to any valid claim against Purchaser, or any of the Subsidiaries
or Affiliates of Purchaser by any Person for any brokerage or finder's
commission, fee or similar compensation, or for any bonus payable to any
officer, director, employee, agent or sales representative of or consultant
to Seller or its Affiliates upon consummation of the transactions
contemplated hereby or thereby.
3.1.19 Receivables. All of Seller's receivables (including accounts
receivable, loans receivable and advances) which have arisen in connection
with the Truckers Business and which are reflected on the Financial
Statements, and all such receivables which will have arisen since the
Financial Statement Date, are valid and genuine and have arisen solely from
bona fide transactions in the ordinary course of business consistent with
past practices. To the best knowledge
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of Seller, all such receivables are collectible, and none of such
receivables is subject to valid defenses, set-offs or counterclaims except
as reserved for in the Financial Statements. Schedule 3.1.19 hereto
accurately lists as of December 31, 1996, all receivables arising out of or
relating to the Truckers Business, the amount owing and the aging of such
receivable, the name and last known address of the party from whom such
receivable is owing, and any security in favor of Seller for the repayment
of such receivable which such Seller purports to have. Seller has delivered
to Purchaser complete and correct copies of all instruments, documents and
agreements evidencing such receivables.
3.1.20 Transactions with Affiliates. No shareholder, director, officer
or employee of Seller, or any member of his or her immediate family or any
other of its, his or her Affiliates, owns or has a 5% or more ownership
interest in any corporation or other entity that is or was during the last
three years a party to, or in any property which is or Was during the last
three years the subject of, any material contract, agreement or
understanding, business arrangement or relationship with Seller or AAIC
material to the Truckers Business.
3.1.21 Disclosure. No representation or warranty by Seller contained in
this Agreement or any statement or certificate furnished or to be furnished
by, or on behalf of Seller to Purchaser or its representatives in
connection herewith or pursuant hereto contains or will contain any untrue
statement of a material fact or omits or will omit to state any material
fact required to make the statements contained herein or therein not
misleading.
Section 3.2 Securities Act of 1933
3.2.1 Investment Representations and Warranties. Seller represents
and warrants, on behalf of itself and each of the Principals to whom it
shall designate that any HCCH Shares should be distributed under this
Agreement (collectively, "Holder(s)") to Purchaser and HCCH that:
(a) Each Holder is an "accredited investor" as that term is
defined in Rule 501 promulgated under the Securities Act.
(b) The HCCH Shares to be received upon consummation of the
transactions contemplated hereby will be acquired for investment for
an indefinite period for each Holder's own account and not with a view
to the sale or distribution of any part thereof, and that Holders have
no present intention of selling or otherwise distributing the same.
Holders do not have any contract, undertaking, agreement or
arrangement with any Person to sell or transfer to such Person any of
the HCCH Shares.
(c) Each Holder understands that the HCCH Shares are not and may
never be registered under the Securities Act on the ground
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that the sale provided for in this Agreement and the issuance of
securities is exempt from the registration provisions thereof, and
that the reliance by Purchaser and HCCH on such exemption is
predicated on Seller's representations set forth herein.
(d) Seller agrees, and shall cause each of the Principals who are
designated Holder to agree, that in no event will any Holder make a
disposition of any of the HCCH Shares, unless the HCCH Shares shall
have been registered under the Securities Act, unless and until
(i) Holder shall have notified HCCH of the proposed disposition, and
(ii) Holder shall have furnished HCCH with an opinion of counsel
reasonably satisfactory to HCCH or a "no action" or interpretive
letter from the Securities and Exchange Commission to the effect that
such registration is not required under the circumstances of such sale
or transfer.
(e) Each Holder has such knowledge and experience in financial
and business matters as to be capable of evaluating the merits and
risks of Holder's investment, has the ability to bear the economic
risks of Holder's investment and has been furnished with and has had
access to such information as would be made available in the form of
a registration statement together with such additional information as
is necessary to verify the accuracy of the information supplied and
to have all questions which have been asked by Holders answered by or
on behalf of HCCH.
(f) Each Holder understands that if a registration statement
covering the HCCH Shares under the Securities Act is not in effect
when such Holder desires to sell any of the HCCH Shares, Holder may be
required to hold such HCCH Shares for an indeterminate period. Seller
also acknowledges, and shall cause each Holder to acknowledge, that
Holder understands that any sale of the HCCH Shares which might be
made by Holder in reliance upon Rule 144 under the Securities Act may
be made only in limited amounts in accordance with the terms and
conditions of that Rule. Each Holder has consulted with Seller's or
Holder's own counsel regarding the terms of Rule 144 and the
restrictions on sales of the HCCH Shares imposed thereby, and is
willing to accept the HCCH Shares pursuant to this Agreement subject
to the limitations of Rule 144.
3.2.2 Legends. All certificates representing the HCCH Shares shall
bear substantially the following legend:
"THE SHARES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF
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1933, AS AMENDED, AND HAVE BEEN ACQUIRED BY THE
HOLDER FOR INVESTMENT PURPOSES. SAID SHARES MAY NOT BE SOLD OR
TRANSFERRED UNLESS (A) THEY HAVE BEEN REGISTERED UNDER SAID ACT, OR
(B) THE TRANSFER AGENT (OR THE COMPANY IF THEN ACTING AS ITS TRANSFER
AGENT) IS PRESENTED WITH EITHER A WRITTEN OPINION OF COUNSEL
SATISFACTORY TO COUNSEL FOR THE COMPANY OR A 'NO-ACTION' OR
INTERPRETIVE LETTER FROM THE SECURITIES AND EXCHANGE COMMISSION TO
THE EFFECT THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE
CIRCUMSTANCES OF SUCH SALE OR TRANSFER."
Section 3.3 Representations and Warranties of Purchaser and HCCH. Purchaser
and HCCH represent and warrant to Seller that:
3.3.1 Corporate Status and Authorization. Purchaser is a
corporation duly organized, validly existing and in good standing under
the laws of the State of Illinois, with full corporate power and
authority to execute and deliver this Agreement and the Collateral
Agreements to which it is a party, to perform its obligations hereunder
and thereunder, and to consummate the transactions contemplated hereby
and thereby. Purchaser is duly qualified and licensed and in good
standing in each of the jurisdictions in which such qualification or
licensing may be necessary for the transaction of the Truckers Business
by Purchaser after the Closing Date. HCCH is a corporation duly
organized, validly existing and in good standing under the laws of the
State of Delaware, with full corporate power and authority to execute
and deliver this Agreement and the Collateral Agreements to which it is
a party, to perform its obligations hereunder and thereunder, and to
consummate the transactions contemplated hereby and thereby. The
execution and delivery by Purchaser and HCCH of this Agreement, and the
consummation of the transactions contemplated hereby, have been, and on
the Closing Date, the execution and delivery by the Purchaser and HCCH
of each of the Collateral Agreements to which they are a party will have
been, duly authorized by all requisite corporate action. Purchaser and
HCCH have duly executed and delivered this Agreement and on the Closing
Date will have duly executed and delivered the Collateral Agreements to
which they are a party. This Agreement is, and on the Closing Date each
of the Collateral Agreements to which they are a party will be, valid
and legally binding obligations of Purchaser and HCCH, enforceable
against Purchaser and HCCH in accordance with their respective terms.
3.3.2 No Conflicts, Etc. The execution, delivery and
performance by Purchaser and HCCH of this Agreement and each of the
Collateral Agreements to which they are a party, and the consummation of
the transactions contemplated hereby and thereby, do not and will not
conflict with or result in a violation of or under (with or without the
giving of notice or the lapse of time, or both) (i) the respective
articles of incorporation or by-laws or other organizational documents
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of Purchaser or HCCH, (ii) any Applicable Law applicable to Purchaser or
HCCH, or any of their respective Affiliates or any of their properties
or assets or (iii) any contract, agreement or other instrument
applicable to the Purchaser or HCCH, or any of their Affiliates or any
of their properties or assets, except, in the case of clause (iii), for
violations and defaults that, individually and in the aggregate, have
not and will not materially impair the ability of the Purchaser or HCCH
to perform its respective obligations under this Agreement or under any
of the Collateral Agreements to which they are a party or to consummate
the transactions contemplated hereby or thereby. Except as specified in
Schedule 3.3.2, no Governmental Approval or other Consent is required to
be obtained or made by Purchaser or HCCH in connection with the
execution and delivery of this Agreement or the Collateral Agreements to
which they are a party or the consummation of the transactions
contemplated hereby and thereby.
3.3.3 Capital Stock. The authorized capital stock of HCCH consists
of 100,000,000 shares of Common Stock, par value $1.00 per share, of
which 35,815,457 shares were issued and outstanding as of November 30,
1996. All of the issued and outstanding shares of Common Stock have been
duly authorized and validly issued and are fully paid and nonassessable.
Except as set forth on Schedule 3.3.3 or as provided in this Agreement,
(i) no subscription, warrant, option, convertible security or other
right (contingent or otherwise) to purchase or acquire any shares of
capital stock of HCCH is authorized or outstanding, (ii) there is not
any commitment of HCCH to issue any subscription, warrant, option,
convertible security or other such right or to issue or distribute to
holders of any shares of its capital stock any evidences of indebtedness
or assets of HCCH, and (iii) HCCH has no obligation (contingent or
otherwise) to purchase, redeem or otherwise acquire any shares of its
capital stock or any interest therein or to pay any dividend or make any
other distribution in respect thereof. No person or entity is entitled to
any preemptive or similar right with respect to the issuance of any
capital stock of HCCH.
3.3.4 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 delivered, and will promptly deliver in the case of
any of the following filed with the SEC on or after the date hereof and
prior to the Effective Date, to Seller:
(i) its annual reports on Form. 10-K for its fiscal years ended
December 31, 1995 and 1994;
(ii) its quarterly report on Form 10-Q for its fiscal quarters
ending March 31, June 30, and September 30, 1996;
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(iii) any current reports on Form 8-K since January 1, 1996
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, 1996; and
(iv) all of its other reports, statements, schedules and
registration statements filed with the SEC since December 31, 1995.
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.
3.3.5 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 3.3.4 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 September 30, 1996, and the
notes thereto, contained in HCCH's quarterly report on Form 10-Q filed
for its fiscal quarter then ended, and "HCCH Balance Sheet Date" means
September 30, 1996.
3.3.6 Absence of Certain Changes. 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, other than the
acquisition of Purchaser by HCCH on November 27, 1996, there has not
been:
(a) any 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;
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(b) any amendment of any material term of any outstanding
securities of HCCH;
(c) the entering into of any agreement by HCCH or any person on
behalf of HCCH to take any of the foregoing actions.
3.3.7 No Undisclosed Liabilities. Except as set forth on Schedule
3.3.7, 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 (other
than the acquisition of Purchaser by HCCH on November 27, 1996); and
(c) liabilities under this Agreement.
3.3.8 Broker's Fees. Neither HCCH nor Purchaser, nor any Person
acting on their 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 to any Person, or to reimburse
any expenses of any broker, finder, investment banker or agent in
connection with this Agreement.
3.3.9 Territorial Restrictions. Purchaser is not restricted by any
written agreement or understanding with any other Person from carrying on
the Truckers Business anywhere in the United States of America, and
Purchaser shall not, solely as a result of its purchase of the Truckers
Business from Seller pursuant hereto and the assumption of the Assumed
Liabilities, become restricted in carrying on the Truckers Business
anywhere in the United States of America by reason of any restrictions
imposed upon Purchaser under any such agreement or understanding.
3.3.10 Disclosure. No representation or warranty by Purchaser or HCCH
contained in this Agreement or any statement or certificate furnished or to
be furnished by or on behalf of Purchaser or HCCH to Seller or its
representatives in connection herewith or pursuant hereto contains or will
contain any untrue statement of a material fact, or omits or will omit to
state any material fact required to make the statements contained herein or
therein not misleading.
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ARTICLE 4
COVENANTS
Section 4.1 Covenants of Seller
4.1.1 Conduct of Truckers Business Prior to Closing. From the date
hereof to the Closing Date, except as expressly permitted or required by
this Agreement or as otherwise consented to by Purchaser in writing, Seller
will:
(a) carry on the Truckers Business in, and only in, the ordinary
course, in substantially the same manner as heretofore conducted, and
use all reasonable efforts to preserve intact its present business
organization, maintain its properties in commercially reasonable
operating condition and repair, keep available the services of its
present officers and significant employees, and preserve its
relationship with agents, Producers, Policyholders and others having
business dealings with it;
(b) pay accounts payable and other obligations of Seller
relating to the Truckers Business when they become due and payable in
the ordinary course of business consistent with prior practice;
(c) perform in all material respects all of its obligations
under the Policies and all other Contracts, agreements and instruments
relating to or affecting the Truckers Business or the Assets, and
comply in all material respects with all Applicable Laws applicable to
the Assets or the Truckers Business;
(d) other than new Policies issued pursuant to the Program
Manager's Agreement and amendments or endorsements to existing
Policies in the ordinary course of business, not enter into or assume
any material agreement, contract or instrument relating to the
Truckers Business, or enter into or permit any material amendment,
supplement, waiver or other modification in respect thereof,
(e) not grant (or commit to grant) any increase in the
compensation (including incentive or bonus compensation, commissions
or service fees) of any agent or Producer engaged in the solicitation,
sale or operation of the Truckers Business, or institute, adopt or
amend (or commit to institute, adopt or amend) any compensation or
benefit plan, policy, program or arrangement applicable to any such
agent or Producer; and
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(f) not take any action or omit to take any action, which action
or omission would result in a breach of any of the representations and
warranties set forth in Section 3.1.7.
4.1.2 No Solicitation. From the date of this Agreement to the
Closing Date, neither the Seller, any of its respective Affiliates nor any
Person acting on their behalf and under their control shall (i) solicit or
encourage any inquiries or proposals for, or enter into any discussions
with respect to, the purchase or sale of any properties and assets
constituting the Assets or (ii) furnish or cause to be furnished any non-
public information concerning the Truckers Business to any Person (other
than Purchaser and its agents and representatives), other than in the
ordinary course of business or pursuant to Applicable Law and after prior
written notice to Purchaser. Seller shall not sell, transfer or otherwise
dispose of, grant any option or proxy to any Person with respect to, create
any Lien upon, or transfer any interest in, any Asset, other than in the
ordinary course of business consistent with prior practice and in
accordance with each and every term of this Agreement.
4.1.3 Access and Information
(a) From the date of this Agreement to the Closing Date, Seller
will (and will cause each of their respective Affiliates and their
Affiliates' respective accountants, counsel, consultants, employees
and agents) to give Purchaser and its accountants, counsel,
consultants, employees and agents, full access during normal business
hours to, and furnish them with all documents, records, work papers
and information with respect to, all of such Person's properties,
assets, books, contracts, commitments, reports and records relating to
the Truckers Business and the Assets, as Purchaser shall from time to
time reasonably request. In addition, Seller will permit Purchaser and
Purchaser's accountants, counsel, consultants, employees and agents,
reasonable access to such personnel of Seller during normal business
hours as may be necessary or useful to Purchaser in its review of the
properties, assets and business affairs of the Seller relating to the
Truckers Business and the above-mentioned documents, records and
information. Seller will endeavor to keep Purchaser generally
informed as to the affairs of the Truckers Business.
(b) Seller will retain all books and records relating to the
Truckers Business in accordance with Seller's record retention
policies as presently in effect.
4.1.4 Public Announcements. Except as required by Applicable Law,
Seller shall not, and shall not permit any Affiliate to, make any public
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announcement in respect of this Agreement or the transactions contemplated
hereby without the prior written consent of Purchaser.
4.1.5 Further Actions
(a) Seller agrees to use all reasonable good faith efforts to
take all actions and to do all things reasonably necessary, proper or
advisable to consummate the transactions contemplated hereby on the
expected Closing Date.
(b) Seller will, as promptly as practicable, file or supply, or
cause to be filed or supplied, all applications, notifications and
information required to be filed or supplied by it pursuant to
Applicable Law in connection with this Agreement, the Collateral
Agreements, the sale and transfer of the Truckers Business and the
Assets pursuant to this Agreement and the consummation of the other
transactions contemplated hereby and thereby.
(c) Seller shall, as promptly as practicable, use all reasonable
efforts to obtain, or cause to be obtained, all Consents (including,
without limitation, all Governmental Approvals and any Consents
required under any Contract) necessary to be obtained by Seller in
order to consummate the sale and transfer of the Truckers Business and
the Assets pursuant to the Agreement and the consummation of the other
transactions contemplated hereby.
(d) Seller shall, and shall cause each of its Affiliates to,
coordinate and cooperate with Purchaser in exchanging such information
and supplying such assistance as may be reasonably requested by
Purchaser in connection with the filings and other actions
contemplated by Section 4.2.2.
(e) At all times prior to the Closing, Seller shall promptly
notify Purchaser in writing of any fact, condition, event or
occurrence that will or may result in the failure of any of the
conditions contained in Sections 5.1 and 5.2 to be satisfied in any
material respect, promptly upon becoming aware of the same.
4.1.6 Further Assurances. Following the Closing, Seller shall, and
shall cause each of its Affiliates to, from time to time, execute and
deliver such additional instruments, documents, conveyances or assurances
and take such other actions as shall be necessary, or otherwise reasonably
requested by Purchaser, to confirm and assure the rights and obligations
provided for in this Agreement and in the Collateral Agreements to which it
is a party and to render effective the consummation of the transactions
contemplated thereby.
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4.1.7 Disclosure Memorandum [Intentionally Omitted.]
4.1.8 Enforcement of Rights and Non-Competition Agreement
(a) Cooperation in Enforcement of Rights. On and after the
Closing Date, to the extent required to allow Purchaser to avail
itself of any rights acquired or liabilities assumed hereunder and to
exercise all legal, equitable and contractual rights acquired or
liabilities assumed by Purchaser and HCCH hereunder, Seller shall, and
shall cause its Affiliates to, at the request of Purchaser, cooperate
with Purchaser in taking timely legal action and exercising all legal,
equitable and contractual rights that may be available to Seller with
respect thereto.
(b) Support of Marketing Efforts of Purchaser. On and after the
Closing Date, Purchaser shall have the exclusive right to market the
Truckers Business through the Producers. Seller shall take any and all
other commercially reasonable steps and actions that may be requested
by Purchaser to effect the appointment of all Producers as agents of
Purchaser, and to notify promptly such Producers of the assignment of
their contracts to Purchaser with respect to the Truckers Business.
(c) Non-Competition. Seller acknowledges and agrees that the
Purchase Price paid by Purchaser to Seller for the Truckers Business
and the Assets has been calculated and based upon, among other things,
the present and future value of the Truckers Business. and the ability
of Purchaser to conserve the Truckers Business following the Closing
Date through the use of the Producers currently marketing and
servicing the Policies under the Program Manager's Agreement in the
continued marketing and servicing of the Policies, and that
Purchaser's conservation efforts, and the future value of the Truckers
Business, will be enhanced substantially by reason of the continued
relationship among the Producers, Purchaser and RNRS. Seller
recognizes and agrees that the nature of the Truckers Business is a
national business throughout the continental United States of America,
and that Purchaser will, after the Closing Date, continue to market
the Truckers Business throughout the continental United States through
a variety of channels, including by means of its own employees,
brokers, representatives, agents, Producers, and otherwise. Seller
also recognizes Purchaser's interest in protecting the Truckers
Business and the establishment and maintenance of good relationships
with the Producers and RNRS, and that such interest gives rise to
Purchaser's desire to restrain Seller and the Principals, and their
respective successors and assigns, from competing with
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Purchaser in any Competitive Business for a reasonable
period of time and within reasonable geographic limits after the
Closing Date. Therefore, Seller agrees to enter into this covenant not
to compete with Purchaser and shall cause each of the Principals to
enter into the Noncompetition Agreements with Purchaser in
consideration of the Purchaser's payment of the Purchase Price and
the other agreements and covenants contained in this Agreement. ln
consideration of the foregoing, Seller agrees that, during the ten
(10) year period following the Effective Date, or for such shorter
period during which Purchaser or its successors or assigns shall
engage in the Truckers Business and except as may be specifically
requested by Purchaser in writing or as otherwise required, permitted
or contemplated under this Agreement, Seller will not, directly or
indirectly, alone or with or through any other Person or entity, as a
member of a partnership, limited liability company, or other business
entity or as an investor in any security of any class (except for
ownership of the HCCH Shares or as an investor in less than 5% of any
outstanding equity securities of any corporation, partnership, limited
liability company or other business entity), or as a consultant,
advisor, agent, representative of any business entity, or through any
officer, director, agent, employee, or Affiliate of the Seller, their
successors or assigns, or by any contract, agreement, arrangement or
understanding with any other Person or business entity, engage in a
Competitive Business in any state, district or jurisdiction in the
continental United States of America. Seller and Purchaser recognize
and agree that Purchaser's enforcement of this covenant and the
Noncompetition Agreements is necessary to prevent irreparable harm and
damage to the Truckers Business acquired by Purchaser under this
Agreement, and that the limitations as to time, geographical area and
the scope of activity restrained hereby are reasonable and do not
impose on Seller and the Principals any greater restraint than is
necessary to protect the Truckers Business and Purchaser's
relationships with the Producers and RNRS. If Seller or any of the
Principals commits a breach, or threatens to commit a breach, of any
of the provisions of this Section 4.1.8 or of the Noncompetition
Agreements, Purchaser shall have the right and remedy, in addition to
any other remedies available to it at law or in equity:
(i) to have the provisions of this Section 4.1.8
specifically enforced by any court having equity jurisdiction,
including, without limitation, immediate injunctive relief, it
being acknowledged and agreed by Seller that any such breach or
threatened breach will cause irreparable injury or harm to
Purchaser and that
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money damages will not provide an adequate remedy to Purchaser;
and
(ii) to require Seller and the Principals to account for
and pay over to Purchaser all compensation, profits, monies,
accruals, increments or other benefits (collectively,
"Benefits") derived or received by Seller or the Principals as
the result of any transactions constituting a breach of any of
the provisions of this Section 4.1.8, and Seller hereby agrees
to account for and pay over such Benefits to Purchaser; and
(iii) to recover from Seller reasonable attorney's fees and
expenses incurred by Purchaser in connection with any proceedings
to enforce the provisions of this Section 4.1.8.
(d) Each of the rights and remedies enumerated in this Section
4.1.8 shall be independent of the other, and shall be severally
enforceable, and such rights and remedies shall be in addition to,
and not in lieu of, any other rights and remedies available to
Purchaser under law or in equity. In the event that Purchaser
prevails in any action or proceeding in any court of competent
jurisdiction that, results in a finding that this covenant or any of
the Noncompetition Agreements have been breached or violated by
Seller or any of the Principals, then the parties agree that, in
addition to any other damages awarded to Purchaser for such
violation or breach, the Seller shall pay to Purchaser an amount
equal to two and one-half (2 1/2) times the total amount of damages,
costs and attorney's fees awarded Purchaser by the court in any such
court proceedings, not to exceed the Purchase Price as adjusted
pursuant to Section 1.5.
(e) If any provision of this Section 4.1.8 is held to be
unenforceable because of the scope, duration or area of its
applicability, the tribunal making such determination shall have the
power to modify such scope, duration, or area, or all of them, and
such provision or provisions shall then be applicable in such
modified form.
4.1.9 Transition Team. Seller hereby designates Sue Carson and
Bernadette Leiggi (the "Designated Employees") to assist in the orderly
transfer of the Truckers Business from Seller to Purchaser ("Transition
Services") during a period not less than six (6) months nor longer than one
year from the Closing Date (the "Transition Period"). During the Transition
Period, Seller shall provide and bear the cost of office space and related
office furniture and equipment,
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including, without limitation, computers, copy machines, facsimile
machines, and other equipment customarily required in the operation of a
managing general insurance agency, to support the Designated Employees in
providing Transition Services to the Purchaser.
Section 4.2 Covenants of Purchaser
4.2.1 Public Announcements. Prior to the Closing, except as
required by Applicable Law, Purchaser and HCCH shall not, and shall not
permit their Affiliates to, make any public announcement in respect of this
Agreement or the transactions contemplated hereby without the prior written
consent of Seller.
4.2.2 Further Actions
(a) Purchaser and HCCH agree to use all commercially reasonable
efforts in good faith to take all corporate and other actions and to
do all things necessary, proper or advisable to consummate the
transactions contemplated hereby by the expected Closing Date,
including, without limitation, the issuance of the HCCH Shares to
Purchaser by HCCH.
(b) Purchaser and HCCH will, as promptly as practicable, file or
supply, or cause to be filed or supplied, all applications,
notifications and information required to be filed or supplied by
Purchaser or HCCH pursuant to Applicable Law in connection with this
Agreement, the Collateral Agreements to which they may be a party, the
acquisition of the Assets pursuant to this Agreement, and the
consummation of the other transactions contemplated hereby and
thereby.
(c) Purchaser and HCCH will coordinate and cooperate with
Seller in exchanging such information and supplying such reasonable
assistance as may be reasonably requested by Seller in connection
with the filings and other actions contemplated by Section 4.1.6.
(d) At all times prior to the Closing, Purchaser and HCCH shall
promptly notify Seller in writing of any fact, condition, event or
occurrence that will or may result in the failure of any of the
conditions contained in Sections 5.1 and 5.3 to be satisfied, promptly
upon becoming aware of the same.
4.2.3 Further Assurances. Following the Closing, Purchaser and
HCCH shall, and shall cause its Subsidiaries and Affiliates to, from time
to time, execute and deliver such additional instruments, documents,
conveyances or assurances and take such other actions as shall be
necessary, or otherwise reasonably
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requested by Seller, to confirm and assure the rights and obligations
provided for in this Agreement and in the Collateral Agreements and render
effective the consummation of the transactions contemplated hereby and
thereby. On or before the Closing Date, HCCH will make application to the
New York Stock Exchange and will use reasonable commercial efforts to have
the HCCH Shares listed thereon.
4.2.4 Rule 144. HCCH covenants and agrees that, for so long as it
may be required to file reports under the Securities Act or the Exchange
Act, as the case may be, it will undertake to file any reports that may be
required to be filed by it under the Securities Act and the Exchange Act
and that it will take such further action as Seller may reasonably request,
from time to time, to the extent required to enable the Holders of the HCCH
Shares to sell any of the HCCH Shares without registration under the
Securities Act within the limitations or the exemptions provided by (a)
Rule 144 under the Securities Act, as such rule may be amended from time to
time, or (b) any similar or successor rule or regulation hereinafter
adopted by the Securities and Exchange Commission. Upon the written
request of Seller, HCCH will deliver to the Holders a written statement as
to whether it has complied with such filing requirements.
4.2.5 Expenses of Transition Team. During the Transition Period,
Purchaser agrees to reimburse Seller for fifty percent (50.0%) of the base
salaries of the Designated Employees, and all telephone, facsimile,
stationery and travel expenses incurred by the Designated Employees in
connection with the rendering of Transition Services to Purchaser.
Purchaser may, in its sole discretion and by providing notice in writing
to Seller in the manner provided in this Agreement, terminate the
Transition Period at any time after six (6) months thereof following the
Closing Date; and shall not, on and after the date specified in such
notice, be responsible for reimbursement of any salaries or other expenses
of the Designated Employees other than salaries and expenses incurred prior
to the date specified in the notice, and the Transition Period shall
terminate upon such date. Upon such termination by Purchaser, Seller shall
be relieved of any further obligation to provide Transition Services to
Purchaser, but may, in its sole discretion, continue to provide such
Transition Services and make available the services of the Designated
Employees, at the sole expense of Seller. If Purchaser elects to terminate
the Transition Period at any time prior to one year following the Closing
Date, it will furnish Seller with monthly production reports of New
Business for the remainder of the Measurement Period.
4.2.6 Access and Information. From the date of this Agreement and
until the date of payment of any refund of any portion of the Purchase
Price that may be required pursuant to the provisions of Section 1.5,
Purchaser will (and will cause its Affiliates and their respective
accountants, counsel, consultants, employees and agents) to give Seller and
its accountants, counsel, consultants, employees and agents, full access
during normal business hours to, and furnish them with all documents,
records, work papers and information with respect to,
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all of such Person's properties, assets, books, contracts, commitments,
reports and records relating to the Truckers Business and the Assets,
including, without limitation, the Billed Premium for New Business during
the Measurement Period, as Seller shall from time to time reasonably
request in connection with Purchaser's calculation of the Adjusted Gross
Premium pursuant to the provisions of Section 1.5. In addition, Purchaser
will permit Seller and Seller's accountants, counsel, consultants,
employees and agents, reasonable access to such personnel of Purchaser
during normal business hours as may be necessary or useful to Seller in its
review of the calculation of the Adjusted Gross Premium by Purchaser.
4.2.7 Material Adverse Changes. From the date of this Agreement to
the Closing Date, Purchaser and HCCH shall provide Seller with all
information which Purchaser and HCCH are required to disclose to the public
that may have a Material Adverse Effect upon the business or financial
condition of HCCH or Purchaser, such disclosure to be made no later than
the time such information is first disclosed by HCCH and/or Purchaser to
the public.
4.2.8 Collection of Receivables for Seller. On and after the
Closing Date, Purchaser shall use commercially reasonable efforts to
collect all receivables, notes, bonds and other evidences of indebtedness
of and rights to receive payments from any Person relating to the Truckers
Business for any period prior to the Effective Date, and promptly account
for and pay over to Seller any such amounts collected by Purchaser and due
Seller.
ARTICLE 5
CONDITIONS PRECEDENT
Section 5.1 Conditions to Obligations of Each Party. The obligations of
the parties to consummate the transactions contemplated hereby shall be
subject to the fulfillment on or prior to the Closing Date of the following
conditions:
5.1.1 No Injunction, Etc. Consummation of the transactions
contemplated hereby shall not have been restrained, enjoined or otherwise
prohibited by any applicable Law, including any order, injunction, decree
or judgment of any court or other Governmental Authority. No court or
other Governmental Authority shall have determined any Applicable Law to
make illegal the consummation of the transactions contemplated hereby or by
the Collateral Agreements, and no proceeding with respect to the
application of any such Applicable Law to such effect shall be pending.
Section 5.2 Conditions to Obligations of Purchaser and HCCH. The
obligations of Purchaser and HCCH to consummate the transactions contemplated
hereby shall be subject to the fulfillment (or waiver by Purchaser and HCCH)
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on or prior to the Closing Date of the following additional conditions, which
Seller agrees to use reasonable good faith efforts to cause to be fulfilled:
5.2.1 Representations, Performance. The representations and
warranties of Seller contained in this Agreement and in the Collateral
Agreements to which it is a party (i) shall be true and correct in all
respects (in the case of any representation or warranty containing any
materiality qualification) or in all material respects (in the case of any
representation or warranty without any materiality qualification) at and as
of the date hereof, and (ii) shall be repeated and shall be true and
correct in all respects (in the case of any representation or warranty
containing any materiality qualification) or in all material respects (in
the case of any representation or warranty without any materiality
qualification) on and as of the Closing Date with the same effect as though
made on and as of the Closing Date. Seller shall have duly performed and
complied in all material respects with all agreements and conditions
required by this Agreement and each of the Collateral Agreements to which
it is a party to be performed or complied with by it prior to or on the
Closing Date. Seller shall have delivered or shall cause to be delivered to
Purchaser a certificate, dated the Closing Date and signed by the duly
authorized officers of Seller, to the foregoing effect.
5.2.2 Consents. Seller shall have obtained and shall have
delivered or caused to be delivered to Purchaser copies of (i) all
Governmental Approvals required to be obtained by Seller in connection with
the execution and delivery of this Agreement and the Collateral Agreements
to which Seller is a party and the consummation of the transactions
contemplated hereby or thereby and (ii) subject to Section 2.5.5, all
Consents (including, without limitation, all Consents required under any
Contract material to the transfer of the Assets or the operation of the
Truckers Business) necessary to be obtained in order to consummate the sale
and transfer of the Assets pursuant to this Agreement and the consummation
of the other transactions contemplated thereby and by the Collateral
Agreements.
5.2.3 No Material Adverse Effect. Except as set forth in Schedule
3.1.8, no event, occurrence, fact, condition, change, development or effect
shall have occurred, existed or come to exist that, individually or in the
aggregate, has constituted or resulted in, or could reasonably be expected
to constitute or result in, a Material Adverse Effect on the Truckers
Business or the Assets.
5.2.4 Collateral Agreements. Purchaser shall have received each of
the following agreements, in each case duly executed by the other parties
thereto:
(a) the Software License Agreement;
(b) the Noncompetition Agreements.
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5.2.5 Corporate Proceedings. All corporate and other proceedings
of Seller in connection with this Agreement and the Collateral Agreements
and the transactions contemplated hereby and thereby, and all documents and
instruments incident hereto and thereto, shall be reasonably satisfactory
in substance and form to Purchaser and HCCH and its counsel, and Purchaser
and HCCH and its counsel shall have received all such documents and
instruments, or copies thereof, certified if requested, as may be
reasonably requested.
5.2.6 Transfer Documents. Seller shall have delivered or shall
have caused to be delivered to Purchaser and HCCH at the Closing all
documents, certificates and agreements necessary to transfer to Purchaser
good and marketable title to the Truckers Business and the Assets, free and
clear of any and all Liens thereon, other than Permitted Liens, including,
without limitation:
(a) an assignment and general conveyance, in form and substance
reasonably satisfactory to Purchaser and HCCH, dated the Closing Date,
with respect to the Assets (other than any Asset to be transferred
pursuant to any of the instruments referred to in any other clause of
this Section 5.2.6); and
(b) assignments of all Contracts and any other agreements and
instruments constituting a part of the Truckers Business and Assets to
be transferred to Purchaser hereunder, dated the Closing Date,
assigning to Purchaser all of Seller's right, title and interest
therein and thereto with respect to Billed Premium for any period on
and after the Effective Date, with any required Consent endorsed
thereon; and
(c) an assignment of Leases, dated as of the Closing Date, with
respect to each Lease of Seller utilized in connection with the
Truckers Business, including office equipment leases, in form and
substance reasonably satisfactory to Purchaser, together with any
necessary transfer declarations or other filings.
5.2.7 New Program Manager's Agreement. The Purchaser shall have
entered into the New Program Manager's Agreement with RNRS substantially
upon the terms set forth in Exhibit E.
5.2.8 Investment Letter. Each Holder shall have delivered an
investment letter to HCCH in substantially the form attached hereto as
Exhibit C.
Section 5.3 Conditions to Obligations of Seller. The obligation of Seller
to consummate the transactions contemplated hereby shall be subject to the
fulfillment (or waiver by Seller), on or prior to the Closing Date, of the
following additional conditions, which HCCH and Purchaser agree to use
reasonable good faith efforts to cause to be fulfilled.
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5.3.1 Representations, Performance. The representations and
warranties of Purchaser and HCCH contained in this Agreement and the
Collateral Agreements shall be true and correct in all respects (in the
case of any representation or warranty containing any materiality
qualification) or in all material respects (in the case of any
representation or warranty without any materiality qualification) at and as
of the date hereof and (ii) shall be repeated and shall be true and correct
in all respects (in the case of any representation or warranty containing
any materiality qualification) or in all material respects (in the case of
any representation or warranty without any materiality qualification) on
and as of the Closing Date with the same effect as though made at and as of
such time. Purchaser and HCCH shall have duly performed and complied in
all material respects with all agreements and conditions required by this
Agreement and the Collateral Agreements to be performed or complied with by
them prior to or on the Closing Date. Purchaser shall have delivered to
Seller a certificate, dated the Closing Date and signed by a duly
authorized officers of Purchaser and HCCH, to the foregoing effect.
5.3.2 Corporate Proceedings. All corporate proceedings of
Purchaser and HCCH in connection with this Agreement, the Collateral
Agreements and the transactions contemplated hereby and thereby, and all
documents and instruments incident hereto and thereto, shall be reasonably
satisfactory in substance and form to Seller, and its counsel, and Seller
and its counsel shall have received all such documents and instruments, or
copies thereof, certified if requested, as may be reasonably requested.
5.3.3 Consents and Approvals. Seller shall have obtained all
Governmental Approvals necessary to consummate the transactions
contemplated hereby.
5.3.4 Collateral Agreements. Purchaser and HCCH shall have entered
into each of the Collateral Agreements to which it is a party, and Seller
shall have received the Assumption Agreement, duly executed by an officer
of Purchaser.
5.3.5 No Material Adverse Effect. Except as set forth on Schedule
3.3.7, no event, occurrence, fact, condition, change, development or effect
shall have occurred, existed or come to exist that, individually or in the
aggregate, has constituted or resulted in, or could reasonably be expected
to constitute or result in, a Material Adverse Effect on Purchaser or HCCH.
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ARTICLE 6
TERMINATION
Section 6.1 Termination. This Agreement may be terminated at any time
prior to the Closing Date:
(a) by the written agreement of Purchaser and Seller;
(b) by either Seller or Purchaser by written notice to the other
party if the transactions contemplated hereby shall not have been
consummated pursuant hereto by 5:00 p.m. Central Standard Time, on
January 31, 1997, unless such date shall be extended by the mutual written
consent of Seller and Purchaser;
(c) by Purchaser by written notice to Seller if (i) the
representations and warranties of Seller shall not have been true and
correct in all respects (in the case of any representation or warranty
containing any materiality qualification) or in all material respects (in
the case of any representation or warranty without any materiality
qualification) as of the date when made or (ii) if any of the conditions
set forth in Section 5.1 or 5.2 shall not have been, or if it could not
reasonably be expected that any of such conditions will be, fulfilled by
5:00 p.m. Central Standard Time, on January 31, 1997, unless such failure
shall be due to the failure of Purchaser or HCCH to perform or comply with
any of the covenants, agreements or conditions hereof to be performed or
complied with by them prior to the Closing; or
(d) by Seller by written notice to Purchaser if (i) the
representations and warranties of Purchaser or HCCH shall not have been
true and correct in all respects (in the case of any representation or
warranty containing any materiality qualification) or in all material
respects (in the case of any representation or warranty without any
materiality qualification) as of the date when made or (ii) if any of the
conditions set forth in Section 5.1 or 5.3 shall not have been, or if it
could not reasonably be expected that any of such conditions will be,
fulfilled by 5:00 p.m. Central Standard Time on January 31, 1997, unless
such failure shall be due to the failure of Seller to perform or comply
with any of the covenants, agreements or conditions hereof to be performed
or complied with by them prior to the Closing.
Section 6.2 Effect of Termination. In the event of the termination of this
Agreement pursuant to the provisions of Section 6.1, this Agreement shall
become void and have no effect, without any liability to any Person in respect
hereof or of the transactions contemplated hereby on the part of any party
hereto, or any of its directors, officers, employees, agents, consultants,
representatives, advisers, stockholders or Affiliates, except as specified in
Section 9.2 and except for any liability resulting from such party's breach of
this Agreement.
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ARTICLE 7
INDEMNIFICATION
Section 7.1 By Seller. Seller shall defend, indemnify and hold harmless
HCCH and Purchaser, their respective officers, directors, employees, agents,
advisers, representatives in such capacities and Affiliates (collectively, the
"Purchaser Indemnitees") from and against, and pay or reimburse Purchaser
Indemnitees for, any and all claims, liabilities, obligations, losses, fines,
costs, royalties, proceedings, deficiencies or damages (whether absolute,
accrued, conditional or otherwise and whether or not resulting from third party
claims), including expenses paid to third parties and reasonable outside
attorneys' and accountants' fees incurred in the investigation or defense of
any of the same or in asserting any of their respective rights hereunder
(collectively, "Losses"), resulting from or arising out of:
(i) any inaccuracy of any representation or warranty by Seller
made or contained in this Agreement or in any Collateral Agreement to
which it is a party or in connection herewith or therewith;
(ii) any failure of Seller to perform in any material respect any
covenant or agreement hereunder or under any Collateral Agreement to
which it is a party or to fulfill any other obligation in respect
hereof or of any Collateral Agreement to which it is a party;
(iii) any Excluded Liabilities or Excluded Assets; and
(iv) any and all Taxes of Seller and all Affiliates thereof not
relating to or arising out of the Truckers Business.
Notwithstanding anything in this Agreement to the contrary, the maximum
aggregate amount recoverable by Purchaser Indemnitees for all claims for
indemnification under this Agreement under this Section 7.1 shall, in the
aggregate, not exceed the Purchase Price.
Section 7.2 By Purchaser and HCCH. Purchaser and HCCH shall defend,
indemnify and hold harmless Seller and its officers, directors, employees,
agents, advisers, representatives and Affiliates (collectively, the "Seller
Indemnitees") from and against any and all Losses resulting from or arising out
of:
(i) any inaccuracy in any representation or warranty by
Purchaser or HCCH made or contained in this Agreement or in any
Collateral Agreement to which it is a party or in connection herewith
or therewith; or
(ii) any failure of Purchaser or HCCH to perform in any material
respect any covenant or agreement hereunder or under any Collateral
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Agreement to which it is a party or fulfill any other obligation in
respect hereof or thereof;
(iii) the Assumed Liabilities;
(iv) any Taxes relating to the Truckers Business for any period
on and after the Effective Date; and
(v) the operation of the Truckers Business by Purchaser or
Purchaser's ownership, operation or use of the Assets following the
Closing Date,
except, in the case of clause (v), to the extent such Losses result from or
arise out of the Excluded Liabilities or constitute Losses for which Seller
is required to indemnify Purchaser Indemnitees under Section 7.1.
Section 7.3 Adjustments to Indemnification Payments. Any payment made by
Seller to Purchaser Indemnities, on the one hand, or by Purchaser to the Seller
Indemnities, on the other hand, pursuant to this Article 7 in respect of any
claim (i) shall be net of any insurance proceeds realized by and paid to the
Indemnified Party in respect of such claim and (ii) shall be (A) reduced by an
amount equal to any Tax benefits attributable to such claim and (B) increased
by an amount equal to any Taxes attributable to the receipt of such payment,
but only to the extent that such Tax benefits are actually realized, or such
Taxes are actually paid, as the case may be, by Seller or by Purchaser or by
any consolidated, combined or unitary group of which Purchaser or Seller is a
member. The Indemnified Party shall use its reasonable efforts to make
insurance claims relating to any claim for which it is seeking indemnification
pursuant to this Article 7; provided that the Indemnified Party shall not be
obligated to make such an insurance claim if the Indemnified Party in its
reasonable judgment believes that the cost of pursuing such an insurance claim
together with any corresponding increase in insurance premiums or other
chargebacks to the Indemnified Party, as the case may be, would exceed the
value of the claim for which the Indemnified Party is seeking indemnification.
Section 7.4 Indemnification Procedures. In the case of any claim asserted
by a third party against a party entitled to indemnification under this
Agreement (the "Indemnified Party"), notice shall be given by the Indemnified
Party to the party required to provide indemnification (the "Indemnifying
Party") promptly after such Indemnified Party has actual knowledge of any claim
as to which indemnity may be sought, and the Indemnified Party shall permit the
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Indemnifying Party (at the expense of such Indemnifying Party) to assume the
defense of any claim or any litigation resulting therefrom, provided that (i)
the counsel for the Indemnifying Party who shall conduct the defense of such
claim or litigation shall be reasonably satisfactory to the Indemnified
Party, (ii) the Indemnified Party may participate in such defense at such
Indemnified Party's expense, and (iii) the omission by any Indemnified Party
to give notice as provided herein shall not relieve the Indemnifying Party of
its indemnification obligation under this Agreement except to the extent that
such omission results in a failure of actual notice to the Indemnifying Party
and such indemnifying Party is materially damaged as a result of such failure
to give notice. Except with the prior written consent of the Indemnified
Party, no Indemnifying Party, in the defense of any such claim or litigation,
shall consent to entry of any judgment or enter into any settlement that
provides for injunctive or other nonmonetary relief affecting the Indemnified
Party or that does not include as an unconditional term thereof the giving by
each claimant or plaintiff to such Indemnified Party of a release from all
liability with respect to such claim or litigation. In the event that the
Indemnified Parry shall in good faith determine that the conduct of the
defense of any claim subject to indemnification hereunder or any proposed
settlement of any such claim by the Indemnifying Party might be expected to
affect adversely the Indemnified Party's Tax liability or the ability of
Purchaser to conduct its business, or that the Indemnified Party may have
available to it one or more defenses or counterclaims that are inconsistent
with one or more of those that may be available to the Indemnifying Party in
respect of such claim or any litigation relating thereto, the Indemnified
Party shall have the right at all times to take over and assume control over
the defense, settlement, negotiations or litigation relating to any such
claim at the sole cost of the Indemnifying Party, provided that if the
Indemnified Party does so take over and assume control, the Indemnified Party
shall not settle such claim or litigation without the written consent of the
Indemnifying Parry, such consent not to be unreasonably withheld. In the
event that the Indemnifying Party does not accept the defense of any matter
as above provided, the Indemnified Parry shall have the full right to defend
against any such claim or demand and shall be entitled to settle or agree to
pay in full such claim or demand. In any event, the Indemnifying Party and
the Indemnified Party shall cooperate in the defense of any claim or
litigation subject to this Section 7 and the records of each shall be
available to the other with respect to such defense.
Section 7.5 Limits on Indemnification. Anything in this Agreement to the
contrary notwithstanding, claims for indemnification of Losses hereunder
shall not be made by any party unless the aggregate amount of such Losses
exceeds Twenty-Five Thousand Dollars ($25,000.00) ("Threshold Amount"), and
Seller shall have no obligation for any Losses in excess of the Purchase
Price, as adjusted pursuant to Section 1.5. In the event the aggregate Losses
for which any claim of indemnification is made exceed the Threshold Amount,
the Indemnifying Party shall be liable for the full amount of such Losses,
subject to the limitations set forth herein.
ARTICLE 8
DEFINITIONS AND CONSTRUCTION
Section 8.1 Definition of Certain Terms. Capitalized words and terms
used in this Agreement, but not otherwise defined in this Article 8, shall
have the meaning given them in the other Articles of this Agreement where
such words or terms are first used and defined. Except as otherwise expressly
provided or unless the context otherwise requires, the terms defined in this
Section 8.1, whenever used in this Agreement (including in the Schedules),
shall have the respective meanings assigned to them in this Section for all
purposes of this Agreement, and include the plural as well as the singular.
Adjusted Gross Premium: as defined in Section 1.5.
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Affiliate: of a Person means a Person that directly or indirectly
through one or more intermediaries, controls, is controlled by, or is under
common control with, the first Person. "Control" (including the terms
"controlled by" and "under common control with") means the possession,
directly or indirectly, of the power to direct or cause the direction of
the management policies of a person, whether through the ownership of
voting securities, by contract or credit arrangement, as trustee or
executor, or otherwise.
Agreement: this instrument as originally executed, including the
Schedules hereto, or as it may be from time to time supplemented or amended
by one or more supplements or amendments hereto entered pursuant to the
applicable provisions hereof.
Applicable Law: all applicable provisions of all (i) constitutions,
treaties, statutes, laws (including the common law), rules, regulations,
ordinances, codes or orders of any Governmental Authority,
(ii) Governmental Approvals and (iii) orders, decisions, injunctions,
judgments, awards and decrees of or agreements with any Governmental
Authority.
Assets: as defined in Section 1.1.
Assumed Liabilities: as defined in Section 1.4.1
Assumption Agreement: as defined in Section 1.4.1, and in
substantially the form of Exhibit A.
Balance Sheet: the balance sheet contained in the Unaudited Financial
Statements.
Balance Sheet Date: as defined in Section 3.1.4.
Billed Premium: premium billed in connection with the Policies or New
Business.
Closing: as defined in Section 2.1.
Closing Date: as defined in Section 2.1.
Code: the Internal Revenue Code of 1986, as amended.
Collateral Agreements: the agreements and other documents and
instruments described in Sections 5.2.4, 5.2.7, 5.2.8, & 5.3.4 the
agreements in substantially the form set forth on the Exhibits attached to
this Agreement.
Competitive Business: Any business engaged as an agent or producer
(other than as an agent for Purchaser), managing general agent or
38
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underwriter for primary insurers in the offering, sale, solicitation,
marketing, development, issuance or promotion of (a) occupational accident
insurance issued to provide medical and indemnity benefits for work-related
injuries to sole proprietor truckers, independent owner/operators of
trucking companies, and independent operators or non-employee drivers
of trucks owned by other Persons ("Sole Proprietor Truckers"); (b) related
workers compensation insurance issued to Sole Proprietor Truckers who are
not, as of the Effective Date, required by law to obtain workers
compensation insurance and (c) liability policies or certificates of
insurance, other than workers compensation insurance, issued primarily to
indemnify insureds against claims by Sole Proprietor Truckers for benefits
under a workers compensation statute or similar law. Purchaser
acknowledges and agrees that Seller, either directly or indirectly through
Affiliates or the Principals, or by contract, agreement or arrangement, is
currently engaged in, and will continue to engage in after the Closing
Date, the offering, sale, solicitation, marketing, development, issuance
and promotion of (i) workers compensation insurance programs and products
to Persons and entities other than to Sole Proprietor Truckers who are not
required by law to obtain workers compensation insurance, (ii) reinsurance
relating to the types of insurance described in clauses (a), (b) and (c) of
this definition, (iii) administration of claims made under insurance
policies for the types of insurance described in clauses (a), (b) and
(c) of this definition and (iv) insurance programs and products other than
those described in clauses (a), (b) and (c) of this definition; and,
notwithstanding anything to the contrary contained herein or in any other
agreement, Purchaser acknowledges and agrees that none of the activities
described in clauses (i), (ii), (iii) and (iv) shall be considered to be a
Competitive Business.
Consent: any consent, approval, authorization, waiver, permit, grant,
franchise, concession, agreement, license, exemption or order of,
registration, certificate, declaration or filing with, or report or notice
to, any Person, including but not limited to any Governmental Authority.
Contract: as defined in Section 3.1.12(a).
Covered Returns: as defined in Section 3.1.6(a).
Covered Taxes: all Taxes relating to or assessed by reason of the
Truckers Business or the Assets.
Designated Employees: those employees of Seller designated in
Section 4.1.9.
Disclosure Memorandum: as defined in Section 4.1.8.
Dollars or $: lawful money of the United States.
Effective Date: 12:01 a.m. on December 1, 1996.
39
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Exchange Act: the Securities Exchange Act of 1934, as amended.
Excluded Assets: as defined in Section 1.1.3.
Excluded Liabilities: as defined in Section 1.4.2.
Expirations: all binding authority of Seller under the Program
Manager's Agreement, including records and files of Seller for the
solicitation and sale of Truckers Business written or bound through Seller
under the Program Manager's Agreement.
Fiduciary Account: any bank account or accounts maintained by Seller
as trustee for RNRS for all premiums collected and received by Seller for
Truckers Business written under the Program Manager's Agreement.
Financial Statement Date: as defined in Section 3.1.4.
Financial Statements: each of the financial statements required
to be provided by Section 3.1.4.
GAAP: generally accepted accounting principles as in effect in the
United States.
Government Approval: any Consent of, with or to any Governmental
Authority.
Governmental Authority: any nation or government, any state or other
political subdivision thereof, any entity exercising executive, legislative,
judicial, regulatory or administrative functions of or pertaining to
government, including, without limitation, any government authority,
insurance regulatory authority, insurance director, commissioner or
superintendent, or any agency, department, board, commission or
instrumentality of the United States, any State of the United States or any
political subdivision thereof, and any tribunal or arbitrator(s) of competent
jurisdiction, and any self-regulatory organization.
HCCH Balance Sheet: as defined in Section 3.3.5.
HCCH Balance Sheet Date: as defined in Section 3.3.5.
HCCH Common Stock: as defined in Section 1.3.1(a).
HCCH Shares: as defined in Section 1.3.1(a).
Holder: as defined in Section 3.2.1.
Indemnified Party: as defined in Section 7.4.
40
<PAGE>
Indemnifying Party: as defined in Section 7.4.
IRS: the Internal Revenue Service.
Leases: means all real property leases, subleases, licenses and
occupancy agreements pursuant to which Seller is the lessee, sublessee,
licensee or occupant other than real property leases, subleases, licenses and
occupancy agreements included in Excluded Assets, and all equipment leases,
licenses, licensing arrangements and other contracts providing in whole or in
part for the use of, or limiting the use of, any copiers, office equipment,
telephone systems, computers or data processing equipment or software relating
to the Truckers Business.
Lien: any mortgage, pledge, hypothecation, right of others, claim,
security interest, encumbrance, lease, sublease, license, occupancy agreement,
adverse claim or interest, easement, covenant, encroachment, burden, title
defect, title retention agreement, voting trust agreement, interest, equity,
option, lien, right of first refusal, charge or other restrictions or
limitations of any nature whatsoever, including but not limited to such as may
arise under any Contracts.
Losses: as defined in Section 7.1.
Material Adverse Effect: any event, occurrence, fact, condition,
change or effect that is materially adverse to the business, operations,
results of operations, condition (financial or otherwise), properties
(including intangible properties), assets (including intangible assets) or
liabilities of any Person.
Minimum Premium: as defined in Section 1.5.
New Business: Policies issued by RNRS or any other insurer written or
renewed on or after the Effective Date for any Policyholder listed on Schedule
3.1.14 or by any Producer of Seller listed on Schedule 3.1.14.
New Program Manager's Agreement: the program manager's agreement upon
substantially the terms set forth on Exhibit E.
Noncompetition Agreement: the agreements not to compete in
substantially the form set forth on Exhibit D.
Permitted Liens: (i) Liens reserved against in the Balance Sheet, to
the extent so reserved, (ii) Liens for Taxes not yet due and payable or which
are being contested in good faith and by appropriate proceedings if adequate
reserves with respect thereto are maintained on Seller's books in accordance
with GAAP, (iii) Liens listed on the Disclosure Memorandum, or (iv) Liens that,
individually and in the aggregate, do not and would not materially detract
from the value of any of the Assets or the Truckers Business or materially
interfere with the use thereof as currently used or contemplated to be used or
otherwise.
41
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Person: any natural person, firm, partnership, association,
corporation, company, trust, business trust, Governmental Authority or other
entity.
Policy; Policies: all individual and group policies of insurance
(including endorsements), including master policies, certificates of insurance;
renewal certificates, or riders, and which constitute part of the Truckers
Business.
Policyholder(s): as defined in Section 3.1.14.
Principals: Robert J. Wojtowicz, John Pallat, Joseph Munson and Joseph
Wojtowicz.
Producer: any licensed insurance agent, broker, solicitor,
representative, or sub-agent of any person recruited by, assigned to or under
contract with Seller, and identified on Schedule 3.1.14.
Program Manager's Agreement: the agreement, restated August 1, 1996
from the original dated November 17, 1992, by and among Seller and RNRS (on
behalf of Reliance Insurance Company and Reliance National Indemnity Company),
together with all Exhibits and Schedules thereto, and as the same may be
amended, modified or supplemented by the parties thereto from time to time.
Prohibited Products: insurance policies or products constituting
or relating to a Competitive Business.
Purchaser Indemnitees: as defined in Section 7.1.
Purchase Price: as defined in Section 1.3.1.
RNRS: Reliance National Risk Specialists, a division of Reliance
Insurance Company.
Securities Act: the Securities Act of 1933, as amended.
Seller: as defined in the first paragraph of this Agreement.
Software License Agreement: the agreement substantially in the form of
Exhibit B.
Subsidiary; Subsidiaries: each corporation or other Person in which a
Person owns or controls, directly or indirectly, capital stock or other equity
interests representing at least 50% of the outstanding voting stock or other
equity interests.
Supporting Documents: as defined in Section 4.1.8.
42
<PAGE>
Tax: any federal, state, provincial, local, foreign or other income,
alternative, minimum, accumulated earnings, personal holding company,
franchise, capital stock, net worth, capital, profits, windfall profits, gross
receipts, value added, sales, use, goods and services, excise, customs duties,
transfer, conveyance, mortgage, registration, stamp, documentary, recording,
premium, severance, environmental (including taxes under Section 59A of the
Code), real property, personal property, ad valorem, intangibles, rent,
occupancy, license, occupational, employment, unemployment insurance, social
security, disability, workers' compensation, payroll, health care, withholding,
estimated or other similar tax, duty or other governmental charge or assessment
or deficiencies thereof (including all interest and penalties thereon and
additions thereto whether disputed or not).
Tax Return: any return, report, declaration, form, claim for refund or
information return or statement relating to Taxes, including any schedule or
attachment thereto, and including any amendment thereof.
Transaction Expenses: as defined in Section 9.2.
Transition Period: as defined in Section 4.1.9.
Treasury Regulations: the regulations prescribed pursuant to the Code.
Truckers Business: the classes of business, products, and Policies of
insurance (including all endorsements), and lines and limits of insurance
described on Exhibit A to the Program Manager's Agreement, as amended, modified
or supplemented by the parties at any time prior to the Closing Date, and which
would constitute a Competitive Business if engaged in by Seller or the
Principals after the Closing Date.
Section 8.2 Rules of Construction
(a) "This Agreement" means this instrument as originally executed,
including the Schedules hereto, or as it may be from time to time supplemented
or amended by one or more supplements or amendments hereto entered pursuant to
the applicable provisions hereof;
(b) "includes" and "including" are not limiting, and, in each case,
shall be construed as if followed by the words "without limitation," "but not
limited to" or words of similar import;
(c) "may not" is prohibitive, and not permissive;
(d) "shall" is mandatory, and not permissive;
43
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(e) "or" is not exclusive [i.e., if a party "may do (a), (b) or (c),"
then the party may do all of any one of' or any combination of' (a), (b) or
(c)] unless the context expressly provides otherwise;
(f) all references in this instrument to designated "Articles,"
"Sections" and other subdivisions are to the designated Articles, Sections and
other subdivisions of this instrument as originally executed;
(g) the words "herein," "hereof," "hereto" and "hereunder" and other
words of similar import refer to this Agreement as a whole and not to any
particular Article, Section or other subdivision;
(h) all terms used herein which are defined in the Securities Act,
the Exchange Act or the rules and regulations promulgated thereunder have the
meanings assigned to them therein unless otherwise defined herein; and
(i) all accounting terms not otherwise defined herein have the
meaning assigned to them in accordance with GAAP.
ARTICLE 9
GENERAL PROVISIONS
Section 9.1 Survival of Representations and Warranties. The
representations and warranties contained in this Agreement shall survive the
execution and delivery of this Agreement, any examination by or on behalf of
the parties hereto and the completion of the transactions contemplated herein,
but only to the extent specified below:
(a) except as set forth in clauses (b) and (c) below, the
representations and warranties contained in Section 3.1 and Section 3.2
shall survive for a period of two years following the Closing Date;
(b) the representations and warranties contained in Sections 3.1.1,
3.1.2, 3.1.3, 3.3.1 and 3.3.2 shall survive without limitation; and
(c) the representations and warranties of Seller contained in Section
3.1.6 shall survive as to any Tax covered by such representations and
warranties for so long as any statute of limitations for such Tax remains
open, in whole or in part, including without limitation by reason of waiver
of such statute of limitations.
Section 9.2 Expenses. Seller, on the one hand, and Purchaser and HCCH, on
the other hand, shall bear their respective expenses, costs and fees (including
attorneys', auditors' and financing commitment fees) in connection with the
44
<PAGE>
transactions contemplated hereby, including the preparation, execution and
delivery of this Agreement and compliance herewith (the "Transaction
Expenses"), whether or not the transactions contemplated hereby shall be
consummated.
Section 9.3 Severability. If any provision of this Agreement, including
any phrase, sentence, clause, Section or subsection is inoperative or
unenforceable for any reason, such circumstances shall not have the effect of
rendering the provision in question inoperative or unenforceable in any other
case or circumstance, or of rendering any other provision or provisions herein
contained invalid, inoperative, or unenforceable to any extent whatsoever.
Section 9.4 Notices. All notices, requests, demands, waivers and other
communications required or permitted to be given under this Agreement shall be
in writing and shall be deemed to have been duly given if (a) delivered
personally, (b) mailed by first-class, registered or certified mail, return
receipt requested, postage prepaid, or (c) sent by next-day or overnight mail
or delivery or (d) sent by telecopy or telegram,
(i) if to Purchaser or HCCH, to:
HCC Insurance Holdings, Inc.
13403 Northwest Freeway
Houston, Texas 77040-6094
Attention: Stephen L. Way
with a copy to:
David D. Knoll, Esq.
Winstead Sechrest & Minick P.C.
910 Travis, Suite 1700
Houston, Texas 77002-5895
(ii) if to Seller, to:
TRM International, Inc.
One Cragwood Road
South Plainfield, N.J. 07080-1007
Attention: Robert J. Wojtowicz
with a copy to:
Eric I Cohen, Esquire
Robinson Silverman Pearce Aronsohn & Berman LLP
1290 Avenue of the Americas
New York, N.Y. 10104
or, in each case, at such other address as may be specified in writing to the
other parties hereto.
45
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All such notices, requests, demands, waivers and other communications
shall be deemed to have been received (w) if by personal delivery on the day
after such delivery, (x) if by certified or registered mail, on the seventh
business day after the mailing thereof, (y) if by next-day or overnight mail
or delivery, on the day delivered, (z) if by telecopy or telegram, on the
next day following the day on which such telecopy or telegram was sent,
provided that a copy is also sent by certified or registered mail.
Section 9.5 Headings. The headings contained in this Agreement are for
purposes of convenience only and shall not affect the meaning or
interpretation of this Agreement.
Section 9.6 Entire Agreement. This Agreement (including the Schedules
hereto) and the Collateral Agreements to which all parties hereto are parties
thereto (when executed and delivered) constitute the entire agreement and
supersede all prior agreements and understandings, both written and oral,
between the parties with respect to the subject matter hereof.
Section 9.7 Counterparts. This Agreement may be executed in several
counterparts, each of which shall be deemed an original and all of which
shall together constitute one and the same instrument.
Section 9.8 Governing Law, Etc. This Agreement shall be governed in all
respects, including as to validity, interpretation and effect, by the
internal laws of the State of Illinois, without giving effect to the conflict
of laws rules thereof Purchaser and Seller hereby irrevocably submit to the
jurisdiction of the courts of the State of Illinois and the Federal courts of
the United States of America located in the State of Illinois, City of
Chicago and County of Cook, solely in respect of the interpretation and
enforcement of the provisions of this Agreement and of the documents referred
to in this Agreement, and hereby waive, and agree not to assert, as a defense
in any action, suit or proceeding for the interpretation or enforcement
hereof or of any such document, that it is not subject thereto or that such
action, suit or proceeding may not be brought or is not maintainable in said
courts or that the venue thereof may not be appropriate or that this
Agreement or any of such document may not be enforced in or by said courts,
and the parties hereto irrevocably agree that all claims with respect to such
action or proceeding shall be heard and determined in such an Illinois State
or Federal court. Purchaser and Seller hereby consent to and grant any such
court jurisdiction over the person of such parties and over the subject
matter of any such dispute and agree that mailing of process or other papers
in connection with any such action or proceeding in the manner provided in
Section 9.4, or in such other manner as may be permitted by law, shall be
valid and sufficient service thereof.
Section 9.9 Binding Effect. This Agreement shall be binding upon and
inure to the benefit of the parties hereto and their respective heirs,
successors and permitted assigns.
Section 9.10 Assignment. This Agreement shall not be assignable or
otherwise transferable by any party hereto without the prior written consent
of the other parties hereto.
Section 9.11 No Third Party Beneficiaries. Except as provided in Article
7 with respect to indemnification of Indemnified Parties hereunder, nothing
46
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in this Agreement shall confer any rights upon any person or entity other
than the parties hereto and their respective heirs, successors and permitted
assigns.
Section 9.12 Amendment; Waivers, Etc. No amendment, modification or
discharge of this Agreement, and no waiver hereunder, shall be valid or
binding unless set forth in writing and duly executed by the party against
whom enforcement of the amendment, modification, discharge or waiver is
sought. Any such waiver shall constitute a waiver only with respect to the
specific matter described in such writing and shall in no way impair the
rights of the party granting such waiver in any other respect or at any other
time. Neither the waiver by any of the parties hereto of a breach of or a
default under any of the provisions of this Agreement, nor the failure by any
of the parties, on one or more occasions, to enforce any of the provisions of
this Agreement or to exercise any right or privilege hereunder, shall be
construed as a waiver of any other breach or default of a similar nature, or
as a waiver of any of such provisions, rights or privileges hereunder. The
rights and remedies herein provided are cumulative and are not exclusive of
any rights or remedies that any party may otherwise have at law or in equity.
The rights and remedies of any party based upon, arising out of or otherwise
in respect of any inaccuracy or breach of any representation, warranty,
covenant or agreement or failure to fulfill any condition shall in no way be
limited by the fact that the act, omission, occurrence or other state of
facts upon which any claim of any such inaccuracy or breach is based may also
be the subject matter of any other representation, warranty, covenant or
agreement as to which there is no inaccuracy or breach. The representations
and warranties of Seller shall not be affected or deemed waived by reason of
any investigation made by or on behalf of Purchaser (including but not
limited to by any of their respective advisors, consultants or
representatives) or by reason of the fact that Purchaser or any of such
advisors, consultants or representatives knew or should have known that any
such representation or warranty is or might be inaccurate. The
representations and warranties of Purchaser shall not be affected or deemed
waived by reason of any investigation made by or on behalf of Seller
(including but not limited to by any of its advisors, consultants or
representatives) or by reason of the fact that Seller any of such advisors,
consultants or representatives knew or should have known that any such
representation or warranty is or might be inaccurate.
Section 9.13 Form of Payments by Seller. Any amounts payable by Seller to
Purchaser under this Agreement shall be payable in cash, provided, however,
if Seller is required to make any payments to Purchaser at any time before
the expiration of any holding period for the HCCH Shares required under
Securities Act Rule 144, Seller and the Holders may furnish to Purchaser a
promissory note or notes bearing interest at the rate of nine percent (9.0%)
per annum, secured by such number of the HCCH Shares, as shall be of a value
equal to one hundred twenty-five percent (125.0%) of the principal amount of
the note(s), payable upon the first date upon which the HCCH shares may be
sold by Holders in compliance with Rule 144.
47
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IN WITNESS WHEREOF, the parties have duly executed this Agreement as of
the date first above written.
TRM INTERNATIONAL, INC.
By: /s/ Robert J. Wojtowicz
---------------------------
Robert J. Wojtowicz
President
UNICOVER MANAGERS, INC.
By: /s/ Illegible
---------------------------
Executive Vice President
---------------------------
[Title]
NORTH AMERICAN SPECIAL RISK
ASSOCIATES, INC.
By:
-------------------------
-------------------------
[Title]
HCC INSURANCE HOLDINGS, INC.
By:
---------------------
Stephen L. Way, Chairman and
Chief Executive Officer
48
<PAGE>
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of
the date first above written.
TRM INTERNATIONAL, INC.
By:
---------------------
Robert J. Wojtowicz
President
UNICOVER MANAGERS, INC.
By:
---------------------
---------------------
[Title]
NORTH AMERICAN SPECIAL RISK
ASSOCIATES, INC.
By: /s/ FRANK J. BRAMANTI
-----------------------
EVP & SEC
-----------------------
[Title]
HCC INSURANCE HOLDINGS, INC.
By: /s/ FRANK J. BRAMANTI
---------------------
Frank J. Bramanti
EVP & CFO
48
<PAGE>
INDEX OF DEFINED TERMS
AAIC 2
Accredited investor 16
Adjusted Gross Premium 4
Affiliate 38
Agreement 1, 38
Applicable Law 38
Assets 1, 38
Assumed Liabilities 4, 38
Assumption Agreement 4, 38
Balance Sheet 38
Balance Sheet Date 38
Billed Premium 38
Closing 5, 38
Closing Date 5, 38
Code 38
Collateral Agreements 38
Consent 39
Contract 39
Contracts 13
Control 38
Covered Returns 10, 39
Covered Taxes 39
Designated Employees 27
Disclosure Memorandum 39
Dollars 39
Exchange Act 40
Excluded Assets 3, 40
Excluded Liabilities 4, 40
Fiduciary Account 40
Financial Statement Date 9
Financial Statements 9, 40
Financial Statement Date 40
GAAP 40
Government Approval 40
Governmental Authority 40
HCCH 1
HCCH Balance Sheet 20, 40
HCCH Balance Sheet Date 20, 40
HCCH Common Stock 3, 40
HCCH Shares 3, 40
Holder 40
Holder(s) 16
Indemnified Party 36, 40
Indemnifying Party 36, 41
49
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IRS 41
Leases 41
Lien 41
Losses 35, 41
Material Adverse Effect 41
Measurement Period 4
Minimum Premium 4
New Business 41
New Program Manager's Agreement 41
Non-Competition Agreement 26, 41
Permitted Liens 41
Person 42
Policy; Policies 42
Policyholders 14
Producer 42
Program Manager's Agreement 42
Prohibited Products 42
Purchase Price 3, 42
Purchaser 1
Purchaser Indemnitees 35, 42
RNRS 42
Securities Act 42
Seller l, 42
Seller Indemnitees 35
Subsidiaries 42
Supporting Documents 42
Target Premium 4
Tax 43
Tax Return 43
Transaction Expenses 43, 45
Transition Period 27
Transition Services 27
Treasury Regulations 43
TRM 1
Truckers Business 1, 43
Unicover 1
50
<PAGE>
EXHIBIT LIST
Reference Exhibit Description
1.4.1 A Assumption Agreement
5.2.5(a) B Employment Agreements
5.2.5(b) C Software License Agreement
5.2.11 D Investment Letter
8.1 E New Program Manager's Agreement
8.1 F Program Manager's Agreement
51
<PAGE>
EXHIBIT 10.332
REVOLVING LINE OF CREDIT NOTE
$12,000,000.00 Houston, Texas
October 7, 1996
FOR VALUE RECEIVED, the undersigned HOUSTON CASUALTY COMPANY ("Borrower")
promises to pay to the order of WELLS FARGO BANK (TEXAS), NATIONAL ASSOCIATION
("Bank") at its office at 1000 Louisiana, Houston, Texas, 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 Twelve Million
Dollars ($12,000,000.00), 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.
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 365/366-day year, as the case may be, actual days
elapsed) at the lesser of (i) a rate per annum equal to the Prime Rate in
effect from time to time, or (ii) the Maximum Rate. The "Prime Rate" is a base
rate that Bank from time to time establishes and which serves as the basis upon
which effective rates of interest are calculated for those loans making
reference thereto. Each change in the rate of interest hereunder shall become
effective on the date each Prime Rate change is announced within Bank.
(b) Payment of Interest. Interest accrued on this Note shall be payable on the
first (1st) day of each month, commencing December 1, 1996.
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 shall be due and
payable in full on April 30, 1997.
(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)
or , 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.
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 October 7, 1996,
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
<PAGE>
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 attorney's 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 amount 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 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 constructed 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, 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 circumstances 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
and 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 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 note 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 subsequent
renewals and extensions hereof and 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.
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(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 tri-party 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.
HOUSTON CASUALTY COMPANY
By: Frank J. Bramanti
Title: EVP & CFO
<PAGE>
CREDIT AGREEMENT
THIS AGREEMENT is entered into as of October 7, 1996, by and between
HOUSTON CASUALTY COMPANY, a Texas 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, 1997, not to exceed at any time the aggregate
principal amount of Twelve Million Dollars ($12,000,000.00) ("Line of
Credit"), the proceeds of which shall be used to finance 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) Letter of Credit Subfeature. As a subfeature under the Line of
Credit, Bank agrees from time to time during the term thereof to issue
Standby Letters of Credit for the account of Borrower (each, a "Letter of
Credit" and collectively, "Letters of Credit"); 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
undrawn amount of all outstanding Letters of Credit shall not at any time
exceed Twelve Million Dollars ($12,000,000.00). The last day any such Letter
of Credit may expire is April 30, 1998. The undrawn amount of all Letters of
Credit shall be reserved under the Line of Credit and shall not be available
for borrowings thereunder. Each Letter of Credit shall be subject to the
additional terms and conditions of the Letter of Credit Agreement and related
<PAGE>
documents, if any, required by Bank in connection with the issuance thereof
(each, a "Letter of Credit Agreement" and collectively, "Letter of Credit
Agreements"). Each draft paid by Bank under a Letter of Credit shall be
deemed an advance under the Line of Credit and shall be repaid by Borrower in
accordance with the terms and conditions of this Agreement applicable to such
advances; provided however, that if advances under the Line of Credit are not
available, for any reason, at the time any draft is paid by Bank, then
Borrower shall immediately pay to Bank the full amount of such draft,
together with interest thereon from the date such amount is paid by Bank to
the date such amount is fully repaid by Borrower, at the rate of interest
applicable to advances under the Line of Credit. In such event Borrower
agrees that Bank, in its sole discretion, may debit any demand deposit
account maintained by Borrower with Bank for the amount of any such draft.
(c) 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
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) Letter of Credit Fees. Borrower shall pay to Bank (i) fees upon the
issuance of each Letter of Credit equal to the greater of one percent (1.00%) of
the face amount thereof, or $300.00, (ii) fees upon payment or negotiation by
Bank of each draft under any Letter of Credit equal to $60.00, and (iii) 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) equal to $40.00.
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SECTION 1.3. COLLATERAL.
As security for all indebtedness of Borrower to Bank subject hereto,
Borrower hereby grants to Bank a security interest equal to one hundred
twenty-five percent (125%) (based on the current market values of Borrower's
outstanding Letters of Credit and advances under the Line of Credit) in
Borrower's interest in and to the account maintained by Borrower with Wells
Fargo Bank (Texas), National Association (Trust Department), as custodian
(the "Custodian") under account number 9002183500 and styled Houston Casualty
Company Custody Account(the "Account"), as same may have been or may be
amended from time to time, and in and to all securities, certificates of
deposit, monies, instruments, documents, general intangibles and other
property held and to be held in the Account, or held or to be held by
Custodian for the benefit of Debtor, together with all renewals,
reinvestments and substitutions therefor, all monies, income, interest,
profits, proceeds and benefits attributable or accruing to said property,
including, but not limited to, all stock, voting, surrender, borrowing,
redemption or similar rights, options, rights to subscribe, dividends,
liquidated dividends, stock dividends, dividends paid in stock, new security
or other properties or benefits to which the undersigned is or may hereafter
become entitled to receive on account of said property, and all accruals or
increases thereof. 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.
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 Texas, 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.
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<PAGE>
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 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 December 31, 1995, 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
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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
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.
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<PAGE>
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) Corporate Borrowing Resolution;
(iii) Certificate of Incumbency;
(iv) General Pledge Agreement (with Addendum);
(v) Custodial Agreement; and
(vi) 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 [or any guarantor hereunder], 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 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.
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.
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<PAGE>
(b) Documentation. Bank shall have received all additional documents
which may be required in connection with such extension of credit.
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.
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 120 days after and as of the end of each fiscal year,
an audited financial statement of HCC Insurance Holdings, Inc., prepared by a
certified public accountant acceptable to Bank, to include balance sheet,
income statement, and statement of cash flows together with a copy of Form
10-K of HCC Insurance Holdings, Inc. for such year;
(b) not later than 90 days after and as of the end of each quarter, a
financial statement of HCC Insurance Holdings, Inc., prepared by a certified
public accountant acceptable to Bank, to include a copy of Form 10-Q of HCC
Insurance Holdings, Inc. for such year;
(c) 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
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<PAGE>
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.
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. 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 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.
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<PAGE>
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 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.
SECTION 5.5. MERGER, CONSOLIDATION, TRANSFER OF ASSETS. 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 5.6. 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 5.7. 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 5.8. DIVIDENDS, DISTRIBUTIONS. 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, and Borrower shall provide to Bank, upon request, any
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documentation required by Bank to substantiate the appropriateness of amounts
paid or to be paid.
SECTION 5.9. 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.
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
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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.
(i) Any change in ownership during the term of this Agreement of an
aggregate of twenty-five percent (25%) or more of the common stock 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 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
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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 and delivered to each party at
the following address:
BORROWER: HOUSTON CASUALTY COMPANY
13403 Northwest Freeway
Suite 200
Houston, Texas 77040
BANK: WELLS FARGO BANK (TEXAS),
NATIONAL ASSOCIATION
1000 Louisiana, Third Floor
Houston, Texas 77002
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
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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.
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, 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.
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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 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.
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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
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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 tb 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 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
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<PAGE>
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
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.
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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),
HOUSTON CASUALTY COMPANY NATIONAL ASSOCIATION
By: /s/ FRANK J. BRAMANTI By: /s/ KEN TEUSINK
Ken Tuesink
Title: EVP & CFO Relationship Manager
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GENERAL PLEDGE AGREEMENT
TO: WELLS FARGO BANK (TEXAS), NATIONAL ASSOCIATION
1. GRANT OF SECURITY INTEREST. For valuable consideration, the
undersigned Houston Casualty Company, a Texas corporation, or any of them
("Debtor"), hereby assigns, transfers to and pledges with WELLS FARGO BANK
(TEXAS), NATIONAL ASSOCIATION, ("Bank"), and grants to Bank a security
interest in, all money and property this day delivered to and deposited with
Bank, together with all other money or property heretofore delivered or which
shall hereafter be delivered to or come into the possession, custody or
control of Bank in any manner or for any purpose whatsoever during the
existence of this Agreement (collectively called "Collateral"), and whether
held in a general or special account or deposit for safekeeping or otherwise,
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, (a) all rights to payment, including returned premiums, with
respect to any insurance relating to any of the foregoing, (b) all rights to
payment with respect to any cause of action affecting or relating to any of
the foregoing, and (c) 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"), and in the event that 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.
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,
<PAGE>
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.
(a) Bank has no obligation to make any loans hereunder. Any money
received by Bank in respect of the Collateral may be deposited, at Bank's
option, into a non-interest bearing account over which Debtor shall have no
control, and the same shall, for all purposes, be deemed Collateral hereunder.
(b) Bank's obligation with respect to Collateral and Proceeds in its
possession shall be strictly limited to the duty to exercise reasonable care
in the custody and preservation of such Collateral and Proceeds, and such
duty shall not include any obligation to ascertain or to initiate any action
with respect to or to inform Debtor of maturity dates, conversion, call or
exchange rights, or offers to purchase the Collateral or Proceeds, or any
similar matters, notwithstanding Bank's knowledge of the same. 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. Bank may at any time deliver the Collateral and
Proceeds, or any part thereof, to any Debtor, and the receipt thereof by any
Debtor shall be a complete and full acquittance for the Collateral and
Proceeds so delivered, and Bank shall thereafter be discharged from any
liability or responsibility therefor.
5. REPRESENTATIONS AND WARRANTIES. Debtor represents and warrants to
Bank that: (a) Debtor is the owner and has possession or control of the
Collateral and Proceeds; (b) Debtor has the right to pledge 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 as 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
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<PAGE>
party other than Bank, is on file in any public office; and (f) 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 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 the places where Debtor
keeps any of the Collateral or 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 lien on the
Collateral or Proceeds, except in favor of Bank; (ii) not to withdraw any
funds from any deposit account pledged to Bank hereunder; (iii) not to sell,
hypothecate or otherwise dispose of, nor permit the transfer by operation of
law of, any of the Collateral or Proceeds or any interest therein; (iv) 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; (v)
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; (vi) not to commingle Collateral or Proceeds, or
collections thereunder, with other property; (vii) 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; (viii) 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 (ix) if the
Collateral or Proceeds consists of securities and so long as no Event of
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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.
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 Banks 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
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<PAGE>
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
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, or (ii) any
other agreement between any Debtor and Bank, including without limitation any
loan agreement, relating to or executed in connection with any Indebtedness;
(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
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extend credit to Debtor. Bank shall have all other rights, powers, privileges
and remedies granted to a secured party upon default under the Texas Uniform
Commercial Code or otherwise provided by law, including without limitation,
the right to contact all persons obligated to Debtor on any Collateral or
Proceeds and to instruct such persons 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 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) Bank may, at any time
and at Bank's sole option, liquidate any time deposits pledged hereunder,
whether or not said time deposits have matured and notwithstanding the fact
that such liquidation may give rise to penalties for early withdrawal of
funds; (b) Debtor will not dispose of any of the Collateral or Proceeds
except on terms approved by Bank; (c) 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; and (d) at Bank's request,
Debtor will assemble and deliver all Collateral and Proceeds, and books and
records pertaining thereto, 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
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<PAGE>
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 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; provided
however, that in each instance Bank believes in good faith that the action in
question is commercially reasonable in that it does not unreasonably increase
the risk of nonpayment of the Indebtedness to which the action applies. 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
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<PAGE>
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, 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.
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 77040.
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<PAGE>
IN WITNESS WHEREOF, this Agreement has been duly executed as of October 7,
1996.
HOUSTON CASUALTY COMPANY
BY: /s/ FRANK J. BRAMANTI
Name: Frank J. Bramanti
Title: EVP & CFO
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<PAGE>
ADDENDUM TO GENERAL PLEDGE AGREEMENT
THIS ADDENDUM is attached to and made a part of that certain General
Pledge Agreement ("Agreement") executed by HOUSTON CASUALTY COMPANY
("Debtor"), as of October 7, 1996, in favor of WELLS FARGO BANK (TEXAS),
NATIONAL ASSOCIATION ("Bank").
Debtor acknowledges and agrees as follows:
1. Collateral. Notwithstanding any reference in the Agreement to a
transfer, pledge or delivery to Bank, or a deposit with Bank, of the
Collateral and Proceeds defined in paragraph I of the Agreement, and
notwithstanding any reference in the Agreement to the possession, custody or
control by Bank of the Collateral or Proceeds, said Collateral includes
without limitation: (a) all securities, bonds, documents, instruments, money,
notes, repurchase agreements, general intangibles, financial assets,
investment property, and all other property of whatever nature or
description, whether tangible or intangible, whether certificated or
uncertificated, now or hereafter held on account of or for Debtor in Debtor's
Custody Account maintained with Custodian in the name of Debtor, under
Account Number 9002183500 ("Account") ; (b) the Account itself and all
replacements and substitutions therefor; and (c) Proceeds of all
<PAGE>
of the foregoing; provided however, that notwithstanding the generality of
the foregoing, the term "Collateral" does not include any and Bank disclaims
a security interest in all WF Securities or Collective Investment Funds (as
hereinafter defined) now or hereafter in the Account. The parties hereto
expressly agree that all property, including cash, certificates of deposit,
and mutual funds held in the account are to be treated as "financial assets"
under the Uniform Commercial Code of the State of Texas.
2. Security Interest. In accordance with and subject to the provisions
of the Agreement, and to secure the obligations described therein, Debtor
grants and transfers to Bank a security interest in all of the Collateral
described in the Agreement and paragraph l of this Addendum. Grantor expressly
agrees that all Collateral shall be security for the indebtedness secured hereby
and by the Agreement, whether the Collateral is located at one or more offices,
branches or affiliates of Bank or Custodian, and whether or not the office or
branch where any secured indebtedness is created is aware of or relies upon
the Collateral.
2
<PAGE>
3. Account Activity. So long as no default exists with respect to the
indebtedness secured hereby, Debtor may sell, exchange, transfer or otherwise
dispose of assets in and withdraw assets from the Account, provided however
that the Collateral Value of the Account, as hereinafter defined, shall at
all times be equal to or greater than one hundred twenty five percent (125%)
of the outstanding principal balance of the indebtedness secured hereby, but
in no event shall the Collateral Value of the Account exceed Fifteen Million
Dollars ($15,000,000.00).
In the event that the Collateral Value of
the Account should, for any reason and at any time, be less than the required
amount, Debtor shall promptly either make a principal reduction on the
indebtedness secured hereby, or pledge to Bank and deposit in the Account
additional assets, of a nature satisfactory to Bank, in either case,
sufficient such that the Collateral Value of the Account achieves the
required amount.
4. Priority. The terms of this Addendum override and
take precedence over any provision to the contrary in any other agreement or
other documentation relative to the opening and maintenance of the Account.
3
<PAGE>
5. Defined Terms. All terms defined in the Agreement and used herein
shall have the same meaning when used in this Addendum.
"Custodian" means Wells Fargo Bank (Texas), National Association (Trust
Department), with whom the Account is registered and that has the custody
and/or management of the securities and other financial assets comprising the
Account. The Custodian may be a separate department, division, group or
affiliate of Bank.
"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).
6. Negative Pledge. So long as Bank retains a security interest in the
Collateral, Debtor shall not (a) further pledge, encumber, grant or permit to
exist a security interest in or lien upon any assets now or hereafter in the
Account, including without limitation, WF Securities or Collective Investment
Funds, (b) cause any of the Collateral to be registered in the name of any
party, other than Grantor, nor to grant to any other party any entitlement in
any Collateral, (c) grant to any party,
4
<PAGE>
other than Bank, the right to take any action with respect to the Collateral,
including sale of such portions of the Collateral that are securities or
other investment property, without any further action by Debtor or (d) the
Account agreement between the Debtor and the Custodian, other than ordinary
and reasonable charges in Custodian's charges for handling the Account, in
any way which would affect Bank's interest in the Collateral without the
prior written consent of Bank, or terminate the Account agreement without
sixty (60) days' prior notice to Lender.
7. Instruction to Custodian. This Addendum constitutes an instruction
and authorization by Debtor to the Custodian to abide by the terms hereof,
and following written instructions from Bank, to take any action requested by
Bank with respect to the Account with the necessity of no further action by
Debtor.
IN WITNESS WHEREOF, the Debtor has executed this Addendum as of the same
date as the Agreement.
HOUSTON CASUALTY COMPANY
By: /s/ FRANK J. BRAMANTI
Title: EVP & CFO
5
<PAGE>
UCC-1 COLLATERAL DESCRIPTION
All present and future right, title and interest in Debtor's Debtor's
Custody Account maintained with Custodian in the name of Debtor, under
Account Number 9002183500 (the "Account"); all property, whether tangible or
intangible, now or hereafter maintained in or identified to the Account,
including without limitation, all securities, bonds, documents, instruments,
money, notes, repurchase agreements, general intangibles, financial assets,
investment property, and other rights to payment, whether certificated or
uncertificated, and any collateral therefor and/or guaranties thereof; all
replacements and substitutions of the foregoing; and all proceeds of, and all
additions to, the foregoing.
6
<PAGE>
EXHIBIT 10.333
REVOLVING LINE OF CREDIT NOTE
$10,000,000.00 Houston, Texas
January 10, 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 TEN MILLION AND NO/100 Dollars
($10,000,000.00), 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 meanings set forth after each,
and any other term defined in this Note shall have the meanings set forth at the
place defined:
(a) "Business Day" means any day except 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
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 no 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.
(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 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
<PAGE>
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 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
<PAGE>
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 March 31, 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.
(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,
<PAGE>
calculated as follows for each such month:
(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 January 10, 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 attorney's 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 constructed 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, instrument or document evidencing or
securing the payment hereof or otherwise 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
<PAGE>
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.
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(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:
<PAGE>
CREDIT AGREEMENT
THIS AGREEMENT is entered into as of January 10, 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 TEN MILLION AND NO/100 Dollars ($10,000,000.00) ("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.
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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 fill force and effect until the fill 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
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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 June 30, 1996, 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
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<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.
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<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.
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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 December 31, 1996:
(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;
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(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 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.
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.
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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
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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: Kenneth Teusink
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.
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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
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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 ceiilng 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
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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
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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: /s/ KENNETH TEUSINK
-------------------------------
Name: Kenneth Teusink
-------------------------------
Title: Vice President
-------------------------------
HCC INSURANCE HOLDINGS, INC.,
a Delaware corporation
By: /s/ FRANK J. BRAMANTI
-------------------------------
Name Frank J. Bramanti
-------------------------------
Title: Exec VP & CFO
-------------------------------
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GENERAL PLEDGE AGREEMENT
TO: WELLS FARGO BANK (TEXAS), NATIONAL ASSOCIATION
1. GRANT OF SECURITY INTEREST. For valuable consideration, the
undersigned HCC INSURANCE HOLDINGS, INC., a Delaware corporation, or any of
them ("Debtor"), hereby assigns, transfers to and pledges with WELLS FARGO
BANK (TEXAS), NATIONAL ASSOCIATION ("Bank"), and grants to Bank a security
interest in, all money and property this day or previously delivered to and
deposited with Bank. including but not limited to, the property described on
Exhibit "A" hereto, together with all other money or property heretofore
delivered or which shall hereafter be delivered to or come into the
possession, custody or control of Bank in any manner or for any purpose
whatsoever during the existence of this Agreement (collectively called
"Collateral"), and whether held in a general or special account or deposit
for safekeeping or otherwise, 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, (a) all rights to payment,
including returned premiums, with respect to any insurance relating to any of
the foregoing, (b) all rights to payment with respect to any cause of action
affecting or relating to any of the foregoing, and (c) 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"), and in the
event that 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.
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, 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.
(a) Bank has no obligation to make any loans hereunder. Any money
received by Bank in respect of the Collateral may be deposited, at Bank's
option, into a non-interest bearing account over which Debtor shall have no
control, and the same shall, for all purposes, be deemed Collateral hereunder.
(b) Bank's obligation with respect to Collateral and Proceeds in its
possession shall be strictly limited to the duty to exercise reasonable care
in the custody and preservation of such Collateral and Proceeds, and such
duty shall not include any obligation to ascertain or to initiate any action
with respect to or to inform Debtor of maturity dates, conversion, call or
exchange rights, or offers to purchase the
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Collateral or Proceeds, or any similar matters, notwithstanding Bank's
knowledge of the same. 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. Bank may at any
time deliver the Collateral and Proceeds, or any part thereof, to any Debtor,
and the receipt thereof by any Debtor shall be a complete and full
acquittance for the Collateral and Proceeds so delivered, and Bank shall
thereafter be discharged from any liability or responsibility therefor.
5. REPRESENTATIONS AND WARRANTIES. Debtor represents and warrants to
Bank that: (a) Debtor is the owner and has possession or control of the
Collateral and Proceeds; (b) Debtor has the right to pledge 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 as 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; and (f) 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 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 the places where Debtor keeps any of
the Collateral or 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 lien on the Collateral or
Proceeds, except in favor of Bank; (ii) not to withdraw any finds from any
deposit account pledged to Bank hereunder; (iii) not to sell, hypothecate or
otherwise dispose of, nor permit the transfer by operation of law of, any of
the Collateral or Proceeds or any interest therein; (iv) 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; (v) 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; (vi) not to commingle Collateral or Proceeds, or
collections thereunder, with other property; (vii) 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; (viii) 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 (ix) 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,
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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.
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
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, or (ii) any
other agreement between any Debtor and Bank, including without limitation any
loan agreement,
3
<PAGE>
relating to or executed in connection with any Indebtedness; (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 Uniform
Commercial Code or otherwise provided by law, including without limitation,
the right to contact all persons obligated to Debtor on any Collateral or
Proceeds and to instruct such persons 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 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) Bank may, at any time
and at Bank's sole option, liquidate any time deposits pledged hereunder,
whether or not said time deposits have matured and notwithstanding the fact
that such liquidation may give rise to penalties for early withdrawal of
funds; (b) Debtor will not dispose of any of the Collateral or Proceeds
except on terms approved by Bank; (c) 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; and (d) at Bank's request,
Debtor will assemble and deliver all Collateral and Proceeds, and books and
records pertaining thereto, 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 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.
4
<PAGE>
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; provided
however, that in each instance Bank believes in good faith that the action in
question is commercially reasonable in that it does not unreasonably increase
the risk of nonpayment of the Indebtedness to which the action applies. 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,
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.
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 77040.
5
<PAGE>
IN WITNESS WHEREOF, this Agreement has been duly executed as
of January 10, 1997.
HCC INSURANCE HOLDINGS, INC.,
a Delaware corporation
By: /s/ FRANK J. BRAMANTI
-------------------------------
Name: Frank J. Bramanti
-------------------------------
Title: Exec VP & CFO
-------------------------------
6
<PAGE>
EXHIBIT "A"
1. One hundred percent (100%) of the Class A common stock of Houston Casualty
Company, as evidenced by Certificate No. 73 in the amount of 4,411,765
shares in the name of HCC Insurance Holdings, Inc.
2. One hundred percent (100%) of the Class B common stock of Houston Casualty
Company, as evidenced by Certificate No. 3 in the amount of 588,235 shares
in the name of HCC Insurance Holdings, Inc.
<PAGE>
Exhibit 11
HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
For the years ended December 31,
-------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Net earnings $ 29,298,000 $ 24,337,000 $ 15,268,000
--------------- --------------- ---------------
Primary:
Weighted average common and common stock
equivalents outstanding 35,965,000 32,667,000 27,910,000
--------------- --------------- ---------------
Earnings per share $ 0.81 $ 0.75 $ 0.55
--------------- --------------- ---------------
Reconciliation of number of shares outstanding:
Common Stock outstanding at period end 35,851,000 13,839,000 11,767,000
Additional dilutive effect of outstanding options and
warrants (as determined by the application of the
treasury stock method) 1,196,000 181,000 200,000
Changes in Common Stock for issuance (1,082,000) (953,000) (803,000)
Effect of five-for-two stock split (1) - 19,600,000 16,746,000
--------------- --------------- ---------------
Weighted average common and common stock
equivalents outstanding 35,965,000 32,667,000 27,910,000
--------------- --------------- ---------------
Fully Diluted:
Weighted average common and common stock
equivalents outstanding 35,986,000 32,804,000 27,998,000
--------------- --------------- ---------------
Earnings per share $ 0.81 $ 0.74 $ 0.55
--------------- --------------- ---------------
Reconciliation of number of shares outstanding:
Common Stock outstanding at period end 35,851,000 13,839,000 11,767,000
Additional dilutive effect of outstanding options and
warrants (as determined by the application of the
treasury stock method) 1,172,000 231,000 154,000
Changes in Common Stock for issuance (1,037,000) (948,000) (722,000)
Effect of five-for-two stock split (1)
- 19,682,000 16,799,000
--------------- --------------- ---------------
Weighted average common and common stock
equivalents outstanding 35,986,000 32,804,000 27,998,000
--------------- --------------- ---------------
</TABLE>
(1) In April, 1996, the Board of Directors declared a five-for-two stock
split in the form of a 150% stock dividend on the Company's $1.00 par
value Common Stock, payable to shareholders of record April 30, 1996.
The par value of the Company's Common Stock remains unchanged.
Adjustments have been made to 1995 and 1994 amounts to present weighted
average shares outstanding and earnings per share on a consistent basis.
Note: Shares outstanding for all periods have been adjusted to include the
6,250,000 shares issued with respect to the acquisition of LDG. Prior
periods have not been adjusted for 1,136,400 shares issued with the
acquisition of NASRA due to immateriality.
<PAGE>
Exhibit 12
HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
STATEMENT OF RATIOS
<TABLE>
<CAPTION>
For the years ended December 31,
(dollars in thousands)
------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Gross premium to surplus ratio:
Gross written premium 230,755 238,958 192,878 123,650 75,119
Policyholders' surplus 212,194 177,317 134,464 102,803 39,146
Premium to surplus ratio (1) 108.7% 134.8% 143.4% 120.3% 191.9%
</TABLE>
(Gross premium to surplus ratio = gross written premium divided by
policyholders' surplus)
Net premium to surplus ratio:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Net written premium 96,776 98,786 59,694 38,556 25,618
Policyholders' surplus 212,194 177,317 134,464 102,803 39,146
Premium to surplus ratio (1) 45.6% 55.7% 44.4% 37.5% 65.4%
</TABLE>
(Net premium to surplus ratio = net written premium divided by policyholders'
surplus)
Loss ratio:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Incurred loss and LAE 52,663 50,721 30,237 21,774 17,125
Net earned premium 93,314 80,011 46,834 32,663 25,875
Loss ratio (1) 56.4% 63.4% 64.6% 66.7% 66.2%
</TABLE>
(Loss ratio = incurred loss and LAE divided by net earned premium)
Expense ratio:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Underwriting expense 15,137 11,372 6,076 5,540 5,561
Net written premium 96,776 98,786 59,694 38,556 25,618
Expense ratio (1) 15.6% 11.5% 10.2% 14.4% 21.7%
</TABLE>
(Expense ratio = underwriting expense divided by net written premium)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Combined ratio (1) 72.0% 74.9% 74.8% 81.1% 87.9%
</TABLE>
(Combined ratio = loss ratio plus expense ratio)
(1) Calculated for the Company's insurance company subsidiaries on the basis of
statutory accounting principles.
<PAGE>
Exhibit 21
HCC INSURANCE HOLDINGS, INC.
SUBSIDIARIES
<TABLE>
<CAPTION>
State or Country
Name of Incorporation
---- ----------------
<S> <C>
Houston Casualty Company...................................................................Texas
HCC Underwriters, A Texas Corporation....................................................Texas
Trafalgar Insurance Company...........................................................Oklahoma
SBS Insurance Holdings, A Texas Corporation................................................Texas
Houston Reinsurance Company, Ltd.......................................................Bermuda
IMG Insurance Company Ltd.................................................................Jordan
Middle East Insurance Brokers Ltd.........................................................Jordan
LDG Management Company Incorporated................................................Massachusetts
SRRF Management Incorporated..........................................................New York
Medical Reinsurance Underwriters Incorporated....................................Massachusetts
LDG Worldwide Limited.................................................................Delaware
LDG Insurance Agency.............................................................Massachusetts
North American Special Risk Associates, Inc.............................................Illinois
NASRA TPA, Inc........................................................................Illinois
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION FROM THE CONSOLIDATED
BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF EARNINGS FOUND ON PAGES F-3 AND
F-4 OF THE COMPANY'S FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1996, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<DEBT-HELD-FOR-SALE> 264,727,000
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 2,433,000
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 320,260,000
<CASH> 3,212,000
<RECOVER-REINSURE> 123,181,000
<DEFERRED-ACQUISITION> 1,425,000
<TOTAL-ASSETS> 745,779,000
<POLICY-LOSSES> 185,822,000
<UNEARNED-PREMIUMS> 114,758,000
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 16,500,000
0
0
<COMMON> 35,851,000
<OTHER-SE> 204,839,000
<TOTAL-LIABILITY-AND-EQUITY> 745,779,000
93,314,000
<INVESTMENT-INCOME> 15,372,000
<INVESTMENT-GAINS> 5,097,000
<OTHER-INCOME> 38,462,000
<BENEFITS> 51,242,000
<UNDERWRITING-AMORTIZATION> 3,842,000
<UNDERWRITING-OTHER> 33,208,000
<INCOME-PRETAX> 36,627,000
<INCOME-TAX> 7,329,000
<INCOME-CONTINUING> 29,298,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 29,298,000
<EPS-PRIMARY> 0.81
<EPS-DILUTED> 0.81
<RESERVE-OPEN> 66,326,000
<PROVISION-CURRENT> 55,045,000
<PROVISION-PRIOR> (3,803,000)
<PAYMENTS-CURRENT> 15,903,000
<PAYMENTS-PRIOR> 19,731,000
<RESERVE-CLOSE> 81,934,000
<CUMULATIVE-DEFICIENCY> (3,803,000)
</TABLE>
<PAGE>
Exhibit 28
HCC INSURANCE HOLDINGS, INC.
SCHEDULE P OF INSURANCE COMPANY SUBSIDIARIES
Schedule P of Houston Casualty Company included in its December 31, 1996
Annual Statement filed with the Texas Department of Insurance and Schedule P
of Trafalgar Insurance Company included in its December 31, 1996 Annual
Statement filed with the Oklahoma Department of Insurance have not been filed
via EDGAR, but have been filed using Form SE. Schedule O for Houston
Casualty Company and Trafalgar Insurance Company and Schedules O and P for
IMG Insurance Company Ltd. and Houston Reinsurance Company Ltd., the
Company's insurance company subsidiaries based in Jordan and Bermuda,
respectively, are not included as they are not required to be filed with the
respective regulatory authorities.
