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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
[X] SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
[ ] SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ___________ TO ___________.
COMMISSION FILE NUMBER 1-11794
E. W. BLANCH HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 41-1741779
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
500 NORTH AKARD, SUITE 4500, DALLAS, TEXAS 75201
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (214) 756-7000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Name of Each Exchange
Title of Each Class on Which Registered
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Common Stock, par value $.01 per share New York Stock Exchange
Preferred Share Purchase Rights New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes __X__ No _____
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendments to this Form 10-K. [ ]
As of March 11, 1999, 12,890,641 shares of Common Stock were
outstanding and the aggregate market value of the Common Stock held by
non-affiliates of the Registrant on that date was approximately $696,094,614.
DOCUMENTS INCORPORATED BY REFERENCE.
1. Portions of Registrant's 1998 Annual Report to Shareholders are
incorporated into Parts I, II and IV.
2. Portions of Registrant's Proxy Statement dated March 22, 1999 are
incorporated into Part III.
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PART I
Item 1.
BUSINESS
GENERAL
a) Development of Business
E. W. Blanch Holdings, Inc. (the "Company") was incorporated in the
State of Delaware on March 1, 1993 as a holding company for the capital stock of
E. W. Blanch Co., Inc. ("EWBCo"). The Company, through predecessor
organizations, was originally founded in 1957.
The Company's principal business is that of integrated risk management
and distribution services, including reinsurance intermediation and technical,
analytic, and financial consulting services.
In the second quarter of 1998, the Company sold its San Antonio, Texas
based operations, including the sale of its general agency, Blanch Insurance
Services, Inc., and other selected assets. The net effect of these dispositions
was a one-time gain of $1.0 million before taxes. As part of the sale agreement
the Company became a shareholder of the purchasing company.
In June 1998, the Company completed its acquisition of Walbaum
Americana, S.A. ("Walbaum"), a Buenos Aires, Argentina based provider of risk
management services in Latin America.
In July 1998, the Company acquired Dunn & Carter Ltd ("Dunn & Carter"),
a London based insurance broker specializing in retrocessional reinsurance. Also
in July 1998, the Company acquired K2 Technologies, Inc. ("K2"), a San Jose,
California based company specializing in the design and support of interactive
software platforms for use in risk assessment and engineering as well as
information integration.
The combined revenues of Walbaum, Dunn & Carter and K2 were $2.8
million in 1998.
In February 1998, the Company made an initial equity investment in
Insurance Holdings of America, Inc. ("IHA"), a development stage Beverly,
Massachusetts company dedicated to the production and application of technology
for the insurance industry. IHA has developed internet based technology to
support the sale and servicing of insurance through direct distribution
including Sam's Club and the internet. The Company made several additional
investments in IHA during the course of 1998, bringing its ownership to 24% at
year end. The investment in IHA by the Company during 1998 totaled $16.5 million
and at year end the carrying value of the IHA investment after all related
equity accounting charges was $13.0
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million. IHA will continue to require additional investments to fund its
developing operations. Alternatives for obtaining this required funding will be
evaluated by IHA's board of directors.
In March 1998, the Company made an equity investment in Catastrophe
Risk Exchange, Inc. ("Catex"). Catex changes reinsurance distribution by
connecting buyers and sellers through an internet based risk exchange. In June
1998, the Company made an equity investment in MSTC Blanch S.A. ("MSTC"). MSTC
is a leading provider of insurance and reinsurance intermediary services in
Latin American markets.
During 1998, the Company completed the consolidation of its corporate
headquarters to Dallas, Texas. The costs associated with the move were not
material.
Unless otherwise indicated, reference to the "Company" hereinafter
includes all operating subsidiaries.
b) Financial Information About Operating Segments
Financial information about the Company's operating segments is
incorporated by reference to the section entitled "Management's Discussion and
Analysis" on pages 22 through 28, and Note 15 of the Notes to the Consolidated
Financial Statements on page 43, of the Company's 1998 Annual Report to
Shareholders.
c) Narrative Description of Business
DOMESTIC OPERATIONS
Revenues generated by domestic operations are derived from risk
management and distribution services provided to insurance and reinsurance
companies. These services are sold both on a bundled and a component basis.
Major components provided include reinsurance intermediation and technical and
analytic consulting services. These services are generally recurring and, due to
the Company's expertise and the value-added nature of its services, have been
able to operate at relatively higher operating margins. In the second quarter of
1998, the Company disposed of its general agency operations and accordingly 1998
revenues include five months of the general agency operation.
Domestic operations include the operations of the holding company.
The Company provides intermediary services to a diverse group of
insurance, reinsurance and related businesses located throughout the United
States. During 1998, no domestic client accounted for more than 10% of
consolidated revenues earned by the Company.
REINSURANCE INTERMEDIATION
As a reinsurance intermediary, the Company structures and arranges
reinsurance between insurers seeking to cede insurance risks and reinsurers
willing to assume such risks. In 1998, no single reinsurer used by domestic
operations accounted for more than 10% of consolidated revenues earned by the
Company.
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The Company earns revenues from the structuring, placement and
servicing of reinsurance, primarily on a treaty basis. The Company is a
significant intermediary in the property catastrophe and casualty reinsurance
markets. Catastrophe reinsurance indemnifies a ceding company against a
catastrophic loss resulting from a single event such as a hurricane, earthquake,
or tornado. Casualty reinsurance indemnifies a ceding company for a specified
loss caused by injuries to third parties including resulting legal liability.
The Company's activities in the casualty reinsurance arena relate primarily to
professional liability, workers' compensation, and specialized casualty
exposures underwritten by excess and surplus lines insurance carriers.
Reinsurance brokerage rates, which vary by line of business, are
generally standard throughout the industry. Brokerage rates are typically based
upon a percentage of the reinsurance premium placed. In recent years, price
competition among reinsurance intermediaries has increased and there have been
instances of fee-based compensation arrangements between certain large insurers
and intermediaries such as the Company. As a result, the compensation received
by the Company relative to premium volume has in certain instances decreased in
recent years. The introduction of fee-based compensation arrangements may have
the effect of reducing the variability of the reinsurance intermediary's
compensation due to changes in external market factors such as changes in the
price of reinsurance.
The Company's reinsurance intermediary business is highly competitive.
The Company competes with a number of reinsurance intermediaries, direct writers
of reinsurance and other financial institutions, some of which have greater
financial and other resources than the Company. The Company competes on the
basis of the quality and extent of services offered and the ability to provide
solutions that meet the needs of ceding companies, including price and capacity
requirements. In certain situations, the Company competes for reinsurance with
financial institutions which offer alternative products which attempt to
securitize or finance insurance exposures. Among the Company's competitors are
Aon Risk Services, Guy Carpenter and Co., Inc., Employers Re, General Re and
Munich Re. There is also competition within the reinsurance market for
experienced and productive reinsurance professionals that are essential in
delivering the Company's services. The inability of the Company to recruit and
retain such reinsurance professionals could have a material adverse effect upon
its business.
Fiduciary funds and amounts of reinsurance premiums payable by the
ceding company to the reinsurer and loss payments payable by the reinsurer to
the ceding company pursuant to a reinsurance agreement, which amounts represent
receivables of the intermediary, are known as "fiduciary assets." Consistent
with industry practice, interest on the fiduciary funds accrues to the
reinsurance intermediary. Fiduciary funds are maintained in segregated accounts
for the benefit of ceding companies or reinsurers, are not commingled with other
assets of a reinsurance intermediary and are not subject to the claims of the
intermediary's creditors. At December 31, 1998, the Company had domestic
fiduciary assets and liabilities of $551.8 million. Fiduciary assets at December
31, 1998 included $92.6 million of fiduciary funds. In recent years, although
the volume of fiduciary funds processed through the Company's domestic fiduciary
accounts have increased due to business growth, the period of time for which the
funds are held has declined due to advances in technology, including electronic
transfers of funds and data. As
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this trend continues, the amount of investment income earned by the Company on
these funds may diminish.
The Company's reinsurance intermediary business is subject to some
government regulation. In 1990, the National Association of Insurance
Commissioners developed the Reinsurance Intermediary Model Act (the "Model Act")
which has been adopted by most states. The Company currently is licensed or is
in the process of becoming licensed in all states where it is required to be
licensed as a reinsurance intermediary. Government regulation of the Company's
business has not been a significant commercial barrier.
TECHNICAL AND ANALYTIC CONSULTING SERVICES
The Company provides technical and analytic consulting services
primarily to insurance and reinsurance companies, government entities and
underwriting facilities. Such services are generally provided as part of the
Company's core reinsurance intermediation function, but are also marketed on a
component basis. Services include product development, facility administration,
strategic reinsurance program reviews, actuarial services, catastrophe exposure
management and analysis and run-off management. The Company's Catalyst(R) risk
modeling software is a proprietary technology which provides a competitive
advantage in these consulting services.
The Company also provides financial consulting services, tailored
reinsurance products and capital markets products designed to assist its clients
in capital preservation and risk management.
The Company competes with a number of competitors in its risk
management consulting and administration services business, including primary
insurance brokers, reinsurance intermediaries, management consultants,
accounting firms, and financial services firms. Some of these competitors may
have or be affiliated with entities that have greater financial and other
resources than the Company. The Company competes with these entities on the
basis of the quality, price, innovation, and range of products and services.
FOREIGN OPERATIONS
The Company's foreign operations include 70% subsidiary Swire Blanch
Holdings Ltd. ("Swire Blanch"), an international risk management and
distribution services firm headquartered in London, England. Swire Blanch
includes a registered Lloyd's of London insurance and reinsurance broking
operation and international reinsurance intermediary operations. Swire Blanch
also provides financial consulting services through the sale of pension plan
products for insurance companies. Intermediary services include retail insurance
operations located in northern England and Hong Kong. Approximately 79% of Swire
Blanch's revenues are generated in the United Kingdom with the remainder
primarily from the Pacific Rim. The Company's foreign operations have relatively
lower profit margins than its domestic operations. This is due to a number of
factors, including competitive market conditions for Lloyd's brokers, the small,
start-up nature of many of the international offices, the competitiveness of the
insurance brokerage business, and the amortization of goodwill associated with
the purchase of
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the Company's majority holdings of Swire Blanch. The Company seeks to grow its
international profitability through the integration of systems, services and
expertise in order to increase revenue production and processing efficiencies.
The Company's foreign operations provide services to a diverse client
base, including original insureds and insurance companies located throughout the
world. During 1998, no foreign client accounted for more than 10% of
consolidated revenues earned by the Company.
REINSURANCE INTERMEDIATION
In 1998, no single insurer or reinsurer used by foreign operations
accounted for more than 10% of consolidated revenue earned by the Company. The
Company's foreign operations brokerage rates are similar to those for domestic
operations. Like the Company's domestic operations, the Company's international
intermediary business is highly competitive. The Company competes with a number
of reinsurance intermediaries, direct writers of reinsurance and other financial
institutions, some of which have greater financial and other resources than the
Company. The Company competes on the basis of the quality and extent of services
offered and the ability to provide solutions that meet the needs of ceding
companies, including price and capacity requirements. In certain situations, the
Company competes for reinsurance with financial institutions which offer
alternative products which attempt to securitize or finance insurance exposures.
The Company has similar types of competitive issues internationally and
domestically. The Company's primary foreign competitors are other Lloyd's
brokers, in addition to the Company's domestic competitors or affiliates of
those companies. The Company also competes for experienced professionals to
deliver the Company's services internationally and could be adversely affected
if the Company is unable to recruit and retain such employees.
The Company's foreign operations also have fiduciary assets, similar to
its domestic operations, and earns investment income on the funds it holds for
insurance and reinsurance companies. At December 31, 1998, the Company had
foreign fiduciary assets and liabilities of $209.1 million. Fiduciary assets at
December 31, 1998 included $35.9 million of fiduciary funds.
The Company's foreign intermediary business is subject to varying
amounts of government regulation in each of the countries where it has
operations. The Company currently is licensed or is in the process of becoming
licensed in all countries where it is required to be licensed as an insurance or
reinsurance intermediary. Government regulation of the Company's business has
not been a significant commercial barrier.
FINANCIAL PENSION AND CONSULTANCY SERVICES
Through Swire Blanch, the Company provides independent advice on
various aspects of the financial services industry, including the design,
administration and financial control of employee benefits packages, personal
financial planning and pension fund administration. These services are provided,
outside of the United States, to individuals, professional intermediaries,
owner-managed businesses and corporations of all sizes. The Company plans to
continue to develop these services.
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The Company competes with other financial service and insurance
companies in providing these services. Some of these competitors may have, or be
affiliated with, entities that have greater financial and other resources than
the Company. The Company competes with these entities on the basis of the
quality, price, innovation, and range of products and services.
EMPLOYEES
As of December 31, 1998, the Company had 1,164 employees. The table
below reflects the number of Company employees by industry segment at December
31 of the respective year:
1998 1997
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Domestic operations 665 761
Foreign operations 499 369
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Total 1,164 1,130
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The decline in the number of employees in the Company's domestic operations is
primarily due to the sale of the Company's general agency operation in the
second quarter of 1998. The Company believes its relationship with its employees
is excellent. The Company is not a party to any collective bargaining agreement.
CAUTION REGARDING FORWARD-LOOKING STATEMENTS
In connection with the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995, the Company expresses caution that the
following important risk factors, among others, could cause the Company's actual
results to differ materially from those projected in forward-looking statements,
both written and verbal, about the Company made by or on behalf of the Company:
COMPETITION
The reinsurance intermediary business, the Company's primary source of
revenue, is highly competitive. The Company competes with a number of
reinsurance intermediaries in the broker reinsurance market. The consolidation
of reinsurance intermediary competitors through mergers and acquisitions, has
continued in 1998 with the result that certain of the Company's principal
competitors have increased substantially in size and potential resources, which
may make them more formidable competitors. Results of the Company's operations
may also be affected by competition for reinsurance business between broker
reinsurers and direct reinsurance writers. Broker reinsurers compete with direct
writers based primarily upon the price of reinsurance, reinsurance capacity,
contract terms and conditions, quality and extent of services offered, financial
strength, reputation and experience. The Company competes with other reinsurance
intermediaries and direct writers on the basis of the quality and extent of
services offered to ceding companies and the ability to provide solutions that
meet the needs of ceding companies, including price and capacity requirements.
Finally, in certain situations, the Company finds itself in competition for
reinsurance business with other financial institutions
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which offer alternative products which attempt to securitize or finance
insurance exposures using various capital market products.
The Company also faces substantial competition in its efforts to
generate revenues by offering unbundled risk management consulting, financial
consulting and administration services to its clients and prospects.
In addition, the Company competes with other entities with respect to
the employment of personnel, including reinsurance brokers. The Company's
competitors include entities which have, or are affiliated with entities that
have, greater financial and other resources than the Company.
DEPENDENCE ON KEY PERSONNEL
The Company's business depends, and will continue to depend, on the
services of its executive officers, senior reinsurance brokers, senior
consultants and other key employees. Such persons may from time to time leave
the Company due to, among other things, retirement, health, personal and
professional reasons. The Company has entered into employment agreements with
most of its executive officers and senior reinsurance brokers. The employment
agreements contain provisions under which the employees have agreed not to
compete with the Company for specified periods of time following termination of
employment. There can be no assurance that the Company will be able to retain
its existing personnel or to find and attract additional qualified employees.
MARKET CONDITIONS IN THE INSURANCE AND REINSURANCE INDUSTRIES
The Company's business is affected by market conditions in the
insurance and reinsurance industries, which historically have been subject to
significant volatility in demand, supply and price.
Insurance companies generally purchase reinsurance in order to, among
other things, manage their exposures on insured risks, maintain acceptable
financial ratios and protect their underwriting results from catastrophic
events. The propensity of insurers to purchase, as well as the propensity of
reinsurers to supply, reinsurance is affected by a variety of factors, including
the level of surplus capacity in the insurance and reinsurance markets,
prevailing premium rates for insurance and reinsurance, underwriting experience,
regulatory considerations, changes in the investment environment and general
economic conditions and business trends.
To the extent that these factors influence the need for, availability
of and price of insurance and reinsurance, they may also affect the amount of
reinsurance brokerage, normally a function of the ceded premium, received by the
Company. For example, when reinsurance premium rates rise, brokerage associated
with a particular amount of coverage placed may increase. The Company's ability
to earn increased brokerage in this instance may, however, be limited if
insurers purchase less reinsurance which has been an increasing trend among the
Company's clients, or if the supply of certain reinsurance coverage is
curtailed. Conversely, declining prices for reinsurance would generally reduce
the brokerage associated with a
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particular placement. A reduction in brokerage may, however, be limited if
insurers purchase more reinsurance at the lower premium rates or if more or
larger placements of coverages are achieved due to increases in the supply of
reinsurance. The Company's reinsurance brokerage revenues can also be negatively
influenced by clients who choose to increase their retentions of risk, thereby
purchasing less reinsurance, and by acquisitions of the Company's clients where
the acquirer does not purchase reinsurance, purchases less reinsurance or
purchases reinsurance elsewhere.
Price competition among reinsurance intermediaries has increased in
recent years, and there have been instances of fee-based compensation
arrangements between certain large insurers and reinsurance intermediaries such
as the Company. As a result, the compensation received by the Company relative
to premium volume has in certain instances decreased in recent years and there
can be no assurance that these arrangements will not become more prevalent in
the future.
In addition, the development of state or federal underwriting
facilities, pools, or other alternate coverage mechanisms for catastrophic risks
such as earthquakes or hurricanes may, in the future, lead to a reduction in the
amount of such risks insured by primary insurers, and may consequently reduce
such insurers' needs for reinsurance of the type traditionally brokered by the
Company.
The insurance brokerage industry in general is experiencing a period of
low growth due to competitive pricing of underlying insurance and reinsurance
premiums, and competitive pressures on brokerage and commission rates. Although
the Company seeks to achieve growth in this market through its business
strategies, there can be no assurance that these strategies will be successful
to achieve growth in a difficult market environment.
GOVERNMENT REGULATION
Certain countries and states in which the Company operates require the
licensing of certain components of the Company's operations. Reinsurance
intermediary licensing statutes generally require, among other things, a written
contract between the ceding company and the reinsurance intermediary which is
terminable at will by the ceding company. The Company's general agency
operations also require licensing as a managing general agent in the states in
which it does business.
Insurance regulation, including the regulation of intermediaries, has
been subject to increased scrutiny by the National Association of Insurance
Commissioners (the "NAIC") and legislative and regulatory bodies. The NAIC and
state insurance regulators have been re-examining existing laws and regulations,
with an emphasis on insurance company investment and solvency issues. From time
to time members of Congress have raised the possibility of federal regulation
that could result in the federal government assuming some role in the monitoring
of the insurance industry. No assurance can be given as to future legislative or
regulatory changes or as to their effect upon the Company.
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The Company's subsidiary E.W. Blanch Capital Markets, Inc. ("EWB
Capital Markets") is a broker-dealer, registered with the Securities and
Exchange Commission ("SEC") and securities regulatory commissions in certain
states. EWB Capital Markets must maintain current registration with the
applicable regulatory bodies. EWB Capital Markets is a member of the National
Association of Securities Dealers ("NASD"). The securities industry in the
United States is subject to extensive regulation under federal and state laws.
The SEC is the federal agency charged with administration of the federal
securities laws. Much of the regulation of broker-dealers, such as EWB Capital
Markets, has been delegated to self-regulatory organizations like the NASD. The
NASD conducts periodic examinations of member broker-dealers. Securities firms
are also subject to regulation by state securities commissions in the states in
which they are registered.
FIDUCIARY FUNDS
As an intermediary, the Company acts as a conduit for insurance and
reinsurance premiums and loss payments which are paid to and remitted from
fiduciary accounts. The Company could be liable if it were to mishandle such
funds in violation of its fiduciary obligations.
The Company earns investment income on the fiduciary funds it holds on
behalf of insurance and reinsurance companies. In recent years, although the
volume of funds processed through the Company's fiduciary accounts have
increased due to business growth, the period of time for which the funds are
held has declined due to advances in technology, including electronic transfers
of funds and data. As this trend continues, the amount of investment income
earned by the Company on these funds may diminish. The Company's investment
income on the fiduciary funds also is impacted by fluctuating and potentially
falling interest rates.
SPECIFIC ENGAGEMENTS AND NEW OPPORTUNITIES
The Company has been engaged and is pursuing a variety of specific
engagements and opportunities, in addition to its traditional reinsurance
intermediary and wholesale brokerage lines of business. In its efforts to expand
its revenues, the Company is exploring a variety of potential initiatives and
opportunities that are related to the Company's traditional core business, but
that will require the Company in some instances to operate in areas where the
Company does not have historical experience.
These specific engagements and opportunities give rise to certain risks
and uncertainties. For example, alternative distribution opportunities are
subject to significant negotiations among the Company, the primary insurance
company transferring the insurance risks at issue, the alternative insurance
companies assuming those risks, and the reinsurance marketplace providing the
capacity to support the risk transfer. These alternative distribution
transactions also generally require approval of terms and rates by relevant
state insurance departments. As a result, there can be no assurance these
transactions will be consummated, and the timing of the transactions is
difficult to predict, which can reduce or delay the revenues the Company expects
to receive.
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These specific engagements also can result in increased fluctuations in
the Company's earnings. While the revenues in the Company's core reinsurance and
insurance intermediary lines of business also are subject to fluctuation, as
described above, the revenues from these core lines of business do tend to recur
each year, as the reinsurance or insurance contracts are renewed by the
Company's customers. For certain of these specific engagements and new
opportunities, however, the potential revenues may not recur each year.
Also, as the Company expands into new (though related) lines of
business, there likely will be increased unpredictability as to whether the
Company will be successful in those new endeavors. These new opportunities
generally involve technological capabilities and personnel skill sets that the
Company must acquire externally and/or build internally. The demand and revenue
potential for some of these opportunities are unknown or uncertain. For these
reasons, it is possible the Company may invest substantial resources into these
potential specific engagements and opportunities, without achieving the revenues
it anticipates in return.
INTERNATIONAL OPERATIONS
Through Swire Blanch, the Company is significantly increasing its
reinsurance intermediary and wholesale brokerage activities outside of its
traditional territory in the United States. The Company has offices in the
United Kingdom, Copenhagen, Hong Kong, Singapore, Australia, Mexico, Brazil,
Argentina and Chile. The Company has representative offices in Vietnam and
China. With these international operations come increased risks, including the
potential that the Company will not successfully integrate its international
operations with its domestic operations, currency exchange risks, legal and
regulatory constraints and liabilities in jurisdictions where the Company does
not have significant experience, and political risks, especially in third-world
countries.
FOREIGN CURRENCY
The Company's primary functional currency is the U.S. dollar. The
functional currency of the Company's foreign operations is the applicable local
currency. Therefore, fluctuations in foreign currency rates can have an impact
on the Company's results of operations. Although many Pacific Rim financial
markets have recently experienced some unusual changes in value, the Company
does not anticipate a significant impact to its business in that area of the
world, but the risk of an adverse impact is inherent in doing business in that
part of the world. Additional information is contained in the Company's 1998
Annual Report to Shareholders under the caption Market Risk on pages 27 through
28.
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YEAR 2000 ISSUE
BACKGROUND
The Year 2000 issue is the result of computer systems using a two-digit format,
as opposed to four digits, to indicate the year. Computer systems using a
two-digit format will be unable to correctly interpret dates beyond the year
1999, which could cause a system failure or other computer errors, leading to a
disruption in the operation of those systems.
STATE OF READINESS
The Company began reviewing all of its information technology ("IT") systems
developed internally and from outside vendors in the early 1990's because of the
Company's growth and the need to bring about operational improvements. As a
result, the Company decided to develop a new back office processing system and
to implement a new financial and human resource system. All of these systems are
Year 2000 compliant. In 1997, the Company expanded its international operations
through the acquisition of Swire Blanch. Since the acquisition, the Company
began to integrate all worldwide systems into appropriate existing, Year 2000
compliant Company systems. The integration of the Company's IT systems is
expected to be substantially complete by the second quarter of 1999. The
Company's senior management and the Board of Directors receive regular updates
on the status of the Company's Year 2000 readiness.
The Company markets services and software products that are internally developed
or acquired from third party vendors. These software based products and services
were developed using Year 2000 compliant technologies. Software products
developed internally are in various stages of testing for Year 2000 compliance.
The Company has obtained written certifications from the majority of its third
party developers of software marketed by the Company. The Company is in the
process of obtaining written certifications from the few third party developers
that have not responded. The Company expects the process of confirming Year 2000
compliance for the software that the Company markets to be substantially
complete by the end of March 1999.
Interfaces with Third Parties
The Company is reviewing, and has initiated formal communications with third
parties that provide goods or services which are essential to the Company's
operations in order to: (1) determine the extent to which the Company is
vulnerable to any failure by such material third parties to remediate their
respective Year 2000 problems; and (2) resolve such problems to the extent
practicable. In May 1998, the Company has requested information from customers
and vendors regarding the status of their Year 2000 compliance. Follow up
requests were sent in December 1998 to those third parties that had not
responded to the Company's initial request or that indicated compliance issues.
A certification letter has been or will be requested from each of our vendors to
validate compliance. The Company has also requested a statement of Year 2000
compliance from companies in which the Company has made capital investments.
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Independent Verification and Validation
All new IT systems implemented, and any subsequent changes to those systems, go
through several layers of testing and validation, including program testing,
systems testing by an independent quality assurance group, user testing, and
lastly, parallel processing with the old system it is replacing. Portions of the
parallel testing process involve validation of automated interfaces and
reporting by the Company's customers.
In addition, the Company has conducted joint testing with Lloyd's of London on
the international back office processing system. The Company's system has passed
all tests and has been certified by Lloyd's of London.
COSTS
In recent years the Company has made significant investments in new IT systems
that are Year 2000 compliant. However, those investments were made for operating
reasons other than strictly Year 2000 compliance. As stated above, these
systems, whether purchased from an outside vendor or developed internally, are
Year 2000 compliant. The schedule to implement these systems has not been
accelerated because of the Year 2000 issue, nor have any other system projects
been deferred because of the Year 2000 issue. Although the Company does not
record or attempt to allocate expenses for these IT systems which relate solely
to Year 2000 compliance, due to their immateriality, the Company believes that
these costs will not exceed $2 million in total. This estimate does not include
the Company's potential share of Year 2000 costs that may be incurred by other
entities in which the Company does not control.
RISKS
The failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially and adversely affect the Company's
results of operations, liquidity and financial condition. The Company believes
that, with the installation of the Year 2000 compliant systems described above,
the possibility of significant interruptions of normal operations should be
substantially reduced. However, due to the general uncertainty inherent in the
Year 2000 problem, resulting in part from the uncertainty of the Year 2000
readiness of third parties, the Company is continuing to assess the risks and
develop its contingency plans.
CONTINGENCY PLAN
The Company is revising its existing business interruption contingency plans to
address internal and external issues specific to Year 2000 compliance, to the
extent practicable. Such revisions are expected to be completed by April 1,
1999. These plans are intended to enable the Company to continue to operate and
include performing certain processes manually; repairing or obtaining
replacement systems; and changing suppliers. The Company believes, however, that
due to the widespread nature of potential Year 2000 issues, the contingency
planning process is an ongoing one which will require further modifications as
the Company obtains additional information regarding the Company's internal
readiness and the status of third party Year 2000 readiness.
- 13 -
<PAGE>
Item 2.
PROPERTIES
The Company's physical properties consist primarily of leases of
commercial office space. At December 31, 1998, the Company leased 370,000 square
feet of office space, including 217,000 square feet at its three primary
locations, Dallas, London, and Minneapolis. The Company considers its properties
to be adequate for its present and reasonably foreseeable requirements.
Item 3.
LEGAL PROCEEDINGS
The Company is engaged in legal proceedings in the ordinary course of
business, none of which, either individually or in the aggregate, will, in the
opinion of management, have a material adverse effect on the consolidated
financial position of the Company or the results of its operations.
- 14 -
<PAGE>
Item 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of the Company's security
holders during the Company's fourth quarter.
Item 4A.
EXECUTIVE OFFICERS OF THE COMPANY (AS OF MARCH 22, 1999)
<TABLE>
<CAPTION>
DATES
ELECTED TO
NAME AND AGE OFFICE PRESENT POSITION AND BUSINESS EXPERIENCE
- ------------ ---------- ----------------------------------------
<S> <C> <C>
Edgar W. Blanch, Jr. (62) 3/03/93 Chairman and Chief Executive Officer
Chris L. Walker (41) 10/27/94 President and Chief Operating Officer
3/03/93-10/27/94 Executive Vice President
Frank S. Wilkinson, Jr. (59) 3/03/93 Executive Vice President
Ian D. Packer (33) 7/01/96 Executive Vice President and Chief Financial Officer
1993-1996 President and Chief Executive Officer - MarketLink, Inc.
(Communications technology company)
David L. Samuel (35) 1/22/98 Senior Vice President and Chief Accounting Officer
11/4/94-1/22/98 Group Finance Director - Swire Blanch Group
Prior to 11/4/94 Group Financial Controller - Swire Fraser Group
James E. Erickson (48) 2/03/97 Senior Vice President and Chief Information Officer
1995-1997 Senior Vice President - GCC Networks (Developer of
software)
1992-1995 Vice President - Nordictrak (Manufacturer of exercise
equipment)
Daniel P. O'Keefe (46) 4/01/96 Senior Vice President, General Counsel and Corporate
Secretary
Prior to 4/01/96 Partner - Dorsey & Whitney LLP (law firm)
Kerry B. Schaughnessy (44) 12/31/98 Senior Vice President, Director of Human Resources
1993-1998 Assistant Vice President and Vice President, Human
Resources - Rauscher Pierce Refsnes, Inc. and Dain
Rauscher, Inc. (Financial Services)
</TABLE>
- 15 -
<PAGE>
<TABLE>
<S> <C> <C>
Rodman R. Fox (35) 3/7/97 President and Chief Operating Officer - EWBCo
4/1/95-3/7/97 Executive Vice President - EWBCo
5/6/93-4/1/95 Senior Vice President - EWBCo
</TABLE>
- 16 -
<PAGE>
PART II
Item 5.
MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED SHAREHOLDER MATTERS
The information required by Item 5 is incorporated herein by reference
to the section entitled "Stock Listing and Trading Information" on page 47 of
the Company's 1998 Annual Report to Shareholders.
Item 6.
SELECTED FINANCIAL DATA
The information required by Item 6 is incorporated herein by reference
to the section entitled "Six Year Financial Summary" on page 21 of the Company's
1998 Annual Report to Shareholders.
Item 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The information required by Item 7 is incorporated herein by reference
to the section entitled "Management's Discussion and Analysis" on pages 22
through 28 of the Company's 1998 Annual Report to Shareholders.
Item 7(a).
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by Item 7(a) is incorporated herein by
reference to the section entitled "Market Risk" on pages 27 through 28 of the
Company's 1998 Annual Report to Shareholders.
Item 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by Item 8 is incorporated herein by reference
to pages 30 through 45 of the Company's 1998 Annual Report to Shareholders.
- 17 -
<PAGE>
Item 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE.
Not Applicable.
- 18 -
<PAGE>
PART III
Item 10.
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The information required by Item 10 with regard to Directors is
incorporated herein by reference to the section entitled "Election of Directors"
on pages 2 through 3 in the Company's proxy statement for its Annual Meeting of
Shareholders in 1999. The information required by Item 10 with regard to
executive officers is set forth in Item 4A hereof. The information required by
Item 10 with regard to Section 16 reporting is incorporated by reference to the
section entitled "Section 16(a) Beneficial Ownership Reporting Requirements" on
pages 5 through 6 of the Company's proxy statement for its Annual Meeting of
Shareholders in 1999.
Item 11.
EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated herein by reference
to the sections entitled "Directors Compensation" and "Executive Compensation"
on pages 7 through 10 in the Company's proxy statement for its Annual Meeting of
Shareholders in 1999.
Item 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required in Item 12 is incorporated herein by reference
to the section entitled "Security Ownership of Certain Beneficial Owners" on
pages 5 through 6 in the Company's proxy statement for its Annual Meeting of
Shareholders in 1999.
Item 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is incorporated herein by reference
to the section entitled "Certain Relationships and Related Transactions" on page
14 in the Company's proxy statement for its Annual Meeting of Shareholders in
1999.
- 19 -
<PAGE>
PART IV
Item 14.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM 8-K
(a)(1) The following consolidated financial statements of E. W. Blanch
Holdings, Inc. included in the 1998 Annual Report to Shareholders are
incorporated by reference into this Report by Item 8 hereof:
Report of Independent Auditors
Consolidated Balance Sheets as of December 31, 1998 and 1997
Consolidated Statements of Income for the years ended December 31,
1998, 1997 and 1996
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the years ended December 31,
1998, 1997 and 1996
Notes to Consolidated Financial Statements
(a)(2) All schedules to the consolidated financial statements listed in
Article 5 of Regulation S-X are not required under the related
instructions or are inapplicable and therefore have been omitted.
(a)(3) The Exhibits required to be a part of this Report are listed in the
Index to Exhibits on page 22 hereof.
Pursuant to Item 601 (b) (4) (iii) of Regulation S-K, copies of certain
instruments defining the rights of holders of certain long-term debt of
the Company are not filed, and in lieu thereof, the Company agrees to
furnish copies thereof to the Securities and Exchange Commission upon
request.
(b) Reports on Form 8-K
The registrant filed one Current Report on Form 8-K during the quarter
ended December 31, 1998.
* A Current Report on Form 8-K was filed on November 18, 1998
pertaining to an amendment to the Rights Agreement, dated
January 24, 1997, between the Company and Norwest Bank
Minnesota, N.A., as Rights Agent.
(c) Exhibits
Included in Item 14(a)(3) above.
(d) Financial Statement Schedules
Included in Item 14(a)(2) above.
- 20 -
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, E. W. Blanch Holdings, Inc. has duly caused this annual
report on Form 10-K to be signed on its behalf by the undersigned, thereunto
duly authorized, on March 31, 1999.
E. W. BLANCH HOLDINGS, INC.
(Registrant)
By: /s/ Edgar W. Blanch, Jr.
--------------------------------------------
Edgar W. Blanch, Jr., Chairman of the Board,
Chief Executive Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of E. W.
Blanch Holdings, Inc. and in the capacities indicated on March 31, 1999.
Signature Title
- ------------------------------ ----------------------------------------------
/s/ Edgar W. Blanch, Jr. Chairman of the Board, Chief Executive Officer
- ------------------------------ and Director
Edgar W. Blanch, Jr.
/s/ Ian D. Packer Executive Vice President and Chief Financial
- ------------------------------ Officer
Ian D. Packer
/s/ David L. Samuel Senior Vice President and Chief Accounting
- ------------------------------ Officer
David L. Samuel
Edgar W. Blanch, Jr., pursuant to powers of attorney which are being
filed with this Annual Report on Form 10-K, has signed below on March 31, 1999
as attorney-in-fact for the following directors of the Registrant:
James N. Land, Jr. William B. Madden
Steven G. Rothmeier Joseph D. Sargent
Paul B. Ingrey Chris L. Walker
Frank S. Wilkinson, Jr.
/s/ Edgar W. Blanch, Jr.
--------------------------------------------
Edgar W. Blanch, Jr.
Attorney-in-fact
- 21 -
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number Description
- ------- -----------
3.1 Restated Certificate of Incorporation of the Company (5)
3.2 By-Laws of the Company (2)
4.1 Specimen Common Stock Certificate (2)
4.2 Rights Agreement, dated as of January 24, 1997, between the
Company and Norwest Bank Minnesota, N.A., as Rights Agent (3)
4.3 Rights Agreement Amendment, dated as of October 16, 1998,
between the Company and Norwest Bank Minnesota, N.A., as Rights
Agent (10)
4.4 Credit Agreement, dated as of November 3, 1998, between the
Company and Nationsbank, N.A., as Agent (1)
10.1* Non-Employee Directors Stock Plan (2)
10.2* Directors' Stock Option Plan (8)
10.3* 1993 Stock Incentive Plan, as amended (1)
10.4* 1997 Stock Incentive Plan (8)
10.5* Executive Restricted Stock Incentive Plan (8)
10.6* 1998 Management Incentive Plan (1)
10.7* K2 Technologies, Inc. 1994 Stock Plan (11)
10.8* K2 Technologies, Inc. 1996 Stock Plan (11)
10.9* K2 Technologies, Inc. 1998 Key Person Stock Option Plan (11)
10.10* Employment Agreement between the Company and Edgar W. Blanch,
Jr. (4)
10.11* Employment Agreement between the Company and Frank S.
Wilkinson, Jr. (2)
10.12* Employment Agreement between the Company and Chris L. Walker
(2)
10.13* Employment Agreement between the Company and Rodman R. Fox (1)
10.14* Specimen Severance Agreement (7)
- 22 -
<PAGE>
10.15* Schedule of Executives Receiving Severance Agreements, as
amended (1)
10.16 Stock Purchase Agreement by and among Summit Global Partners,
Inc., Summit global Partners (Texas) Holdings, Inc., Blanch
Insurance Services, Inc., E.W. Blanch Insurance Services, Inc.,
and E.W. Blanch Holdings, Inc., dated June 1, 1998 (1)
11 Computation of Earnings per Share(9)
13 Portions of the 1998 Annual Report to Shareholders incorporated
by reference in this Form 10-K (1)
21 Subsidiaries of the Company (1)
23 Consent of Ernst & Young LLP (1)
24 Powers of Attorney (1)
27 Financial Data Schedule for the year ended December 31, 1998
(1)
- -------------------------------------
(1) Filed with this Annual Report on Form 10-K.
(2) Incorporated by reference to the Company's Registration Statement on Form
S-1, Registration No. 33-59198.
(3) Incorporated by reference to the Company's Registration Statement on Form
8-A, dated January 24, 1997.
(4) Filed with the Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended June 30, 1997.
(5) Filed with the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1996.
(6) Filed with the Company's Annual Report on Form 10-K, as amended, for the
fiscal year ended December 31, 1994.
(7) Filed with the Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended September 30, 1997.
(8) Filed with the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1997.
(9) The information required by Exhibit 11 is incorporated by reference to
Note 8 to the Company's Consolidated Financial Statements for the year
ended December 31, 1998 included in Exhibit 13 with this Annual Report on
Form 10-K.
(10) Incorporated by reference to Amendment number one to the Company's
registration statement on Form 8-A dated November 18, 1998.
(11) Filed with the Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended September 30, 1998.
* Management contract and compensatory plan or arrangement required to be
filed pursuant to Item 601(b) (10) (iii) (A) of Regulation S-K.
- 23 -
EXHIBIT 4.4
- --------------------------------------------------------------------------------
CREDIT AGREEMENT
among
E.W. BLANCH HOLDINGS, INC.
as Borrower,
NATIONSBANK, N.A.
as Agent,
and
The Several Lenders From Time to Time Parties Hereto
Dated as of November 3, 1998
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
Page
----
ARTICLE I Definitions..........................................................1
Section 1.1 Definitions.................................................1
Section 1.2 Other Definitional Provisions..............................14
Section 1.3 Accounting Terms and Determination.........................14
Section 1.4 Time of Day................................................15
ARTICLE II Revolving Credit Facility..........................................15
Section 2.1 Commitments................................................15
Section 2.2 Notes......................................................15
Section 2.3 Repayment of Revolving Loans...............................15
Section 2.4 Use of Proceeds............................................15
Section 2.5 Reduction or Termination of Commitments....................15
Section 2.6 Increase in Commitment.....................................16
Section 2.7 Letters of Credit..........................................18
Section 2.8 Swingline Loans............................................20
ARTICLE III Interest and Fees.................................................22
Section 3.1 Interest Rate..............................................22
Section 3.2 Determinations of Applicable Margin and Revolving
Commitment Fee............................................22
Section 3.3 Payment Dates..............................................23
Section 3.4 Default Interest...........................................23
Section 3.5 Conversions and Continuations of Loans.....................23
Section 3.6 Computations...............................................24
Section 3.7 Revolving Commitment Fee...................................24
Section 3.8 Syndication Fee............................................24
ARTICLE IV Administrative Matters.............................................24
Section 4.1 Borrowing Procedure........................................24
Section 4.2 Minimum Amounts............................................25
Section 4.3 Certain Notices............................................25
Section 4.4 Prepayments................................................26
Section 4.5 Method of Payment..........................................26
Section 4.6 Pro Rata Treatment.........................................26
Section 4.7 Sharing of Payments........................................27
Section 4.8 Non-Receipt of Funds by the Agent..........................27
Section 4.9 Participation Obligations Absolute; Failure to Fund
Participation.............................................27
ARTICLE V Change in Circumstances.............................................28
-i-
<PAGE>
Section 5.1 Increased Cost and Reduced Return..........................28
Section 5.2 Limitation on Types of Loans...............................30
Section 5.3 Illegality.................................................30
Section 5.4 Treatment of Affected Loans................................30
Section 5.5 Compensation...............................................31
Section 5.6 Taxes......................................................31
Section 5.7 Replacement of a Lender....................................33
ARTICLE VI Conditions Precedent...............................................33
Section 6.1 Initial Loan and Letter of Credit..........................33
Section 6.2 All Loans and Letters of Credit............................35
ARTICLE VII Representations and Warranties....................................36
Section 7.1 Corporate Existence........................................36
Section 7.2 Financial Statements.......................................36
Section 7.3 Corporate Actions: No Breach...............................36
Section 7.4 Operation of Business......................................37
Section 7.5 Litigation and Judgments...................................37
Section 7.6 Rights in Properties; Liens; Nonproductive Assets..........37
Section 7.7 Enforceability.............................................37
Section 7.8 Approvals..................................................37
Section 7.9 Debt.......................................................37
Section 7.10 Taxes......................................................37
Section 7.11 Margin Securities..........................................38
Section 7.12 ERISA......................................................38
Section 7.13 Disclosure.................................................38
Section 7.14 Subsidiaries...............................................39
Section 7.15 Agreements.................................................39
Section 7.16 Compliance with Laws.......................................39
Section 7.17 Investment Company Act.....................................39
Section 7.18 Public Utility Holding Company Act.........................39
Section 7.19 Environmental Matters......................................39
Section 7.20 Year 2000 Compliance.......................................40
ARTICLE VIII Positive Covenants...............................................41
Section 8.1 Reporting Requirements.....................................41
Section 8.2 Maintenance of Existence; Conduct of Business..............43
Section 8.3 Maintenance of Properties..................................43
Section 8.4 Taxes and Claims...........................................43
Section 8.5 Insurance..................................................43
Section 8.6 Inspection Rights..........................................43
Section 8.7 Keeping Books and Records..................................44
-ii-
<PAGE>
Section 8.8 Compliance with Law........................................44
Section 8.9 Compliance with Agreements.................................44
Section 8.10 Further Assurances; Significant Subsidiary Guaranty
and Contribution and Indemnification Agreement............44
Section 8.11 ERISA......................................................44
Section 8.12 Year 2000 Compliance.......................................44
Section 8.13 Fiduciary Accounts.........................................45
ARTICLE IX Negative Covenants.................................................45
Section 9.1 Debt.......................................................45
Section 9.2 Limitation on Liens and Restrictions on Subsidiaries.......46
Section 9.3 Mergers, Etc...............................................47
Section 9.4 Restricted Junior Payments.................................48
Section 9.5 Investments................................................48
Section 9.6 Limitation on Issuance of Capital Stock....................50
Section 9.7 Transactions With Affiliates...............................50
Section 9.8 Disposition of Assets......................................50
Section 9.9 Sale and Leaseback.........................................50
Section 9.10 Lines of Business..........................................51
Section 9.11 Fiscal Quarter and Fiscal Year.............................51
ARTICLE X Financial Covenants.................................................51
Section 10.1 Net Worth..................................................51
Section 10.2 Fixed Charge Coverage Ratio................................51
Section 10.3 Leverage Ratio.............................................51
Section 10.4 Tangible Net Worth.........................................51
ARTICLE XI Default............................................................51
Section 11.1 Events of Default..........................................51
Section 11.2 Remedies...................................................54
Section 11.3 Cash Collateral............................................54
Section 11.4 Performance by the Agent...................................55
Section 11.5 Right of Set-off; Adjustments..............................55
ARTICLE XII The Agent.........................................................56
Section 12.1 Appointment, Powers, and Immunities........................56
Section 12.2 Reliance by Agent..........................................56
Section 12.3 Defaults...................................................57
Section 12.4 Rights as Lender...........................................57
Section 12.5 Indemnification............................................57
Section 12.6 Non-Reliance on Agent and Other Lenders....................57
Section 12.7 Resignation of Agent.......................................58
-iii-
<PAGE>
Section 12.8 Several Commitments........................................58
Section 12.9 Agent Fee..................................................58
ARTICLE XIII Miscellaneous....................................................58
Section 13.1 Expenses; Indemnification..................................58
Section 13.2 Limitation of Liability....................................60
Section 13.3 No Duty....................................................60
Section 13.4 No Fiduciary Relationship..................................60
Section 13.5 Equitable Relief...........................................60
Section 13.6 No Waiver; Cumulative Remedies.............................60
Section 13.7 Assignments and Participations.............................60
Section 13.8 Survival...................................................62
Section 13.9 ENTIRE AGREEMENT...........................................62
Section 13.10 Amendments and Waivers.....................................62
Section 13.11 Maximum Interest Rate......................................63
Section 13.12 Notices....................................................63
Section 13.13 Governing Law..............................................64
Section 13.14 Counterparts...............................................64
Section 13.15 Severability...............................................64
Section 13.16 Headings...................................................64
Section 13.17 Non-Application of Chapter 346 of Texas Finance Code.......64
Section 13.18 Construction...............................................64
Section 13.19 Independence of Covenants..................................64
Section 13.20 WAIVER OF JURY TRIAL.......................................64
Section 13.21 Confidentiality............................................64
-iv-
<PAGE>
INDEX TO EXHIBITS
Exhibit Description of Exhibit
------- ----------------------
A Revolving Note
B Swingline Note
C Guaranty
D Assignment and Acceptance
E Compliance Certificate
F Commitment and Acceptance
G Contribution and Indemnification Agreement
H Permitted Investment Policy
I Strategic Investment Policy
J Loan or Letter of Credit Request Form
K Rapid Recovery Facility
INDEX TO SCHEDULES
Schedule Description of Schedule
-------- -----------------------
7.14 List of Subsidiaries
7.21 Fiduciary Accounts
9.1(b) Existing Debt
9.1(e) Airplane Lease
9.2 Existing Liens
9.5 Existing Strategic Investments
-v-
<PAGE>
CREDIT AGREEMENT
THIS CREDIT AGREEMENT (the Agreement), dated as of November 3, 1998,
is among E.W. BLANCH HOLDINGS, INC., a Delaware corporation (Borrower), each of
the banks or other lending institutions which is or which may from time to time
become a signatory hereto or any successor or assignee thereof (individually, a
Lender and, collectively, the Lenders), and NATIONSBANK, N.A., individually as a
Lender, as the Swingline Lender, and as Agent for itself and the other Lenders
(in its capacity as agent, together with its successors in such capacity, the
Agent).
R E C I T A L S:
The Borrower has requested that the Lenders extend credit to the
Borrower in the form of a revolving credit facility. The Lenders are willing to
extend such credit to the Borrower upon the terms and conditions hereinafter set
forth.
NOW THEREFORE, in consideration of the premises and the mutual
covenants herein contained, the parties hereto agree as follows:
ARTICLE I
Definitions
Section I.1 Definitions. As used in this Agreement, the following
terms have the following meanings:
Adjusted Eurodollar Rate means, for any Eurodollar Loan for any
Interest Period therefor, the rate per annum (rounded upwards, if necessary, to
the nearest 1/100 of 1%) determined by the Agent to be equal to the quotient
obtained by dividing (a) the Eurodollar Rate for such Eurodollar Loan for such
Interest Period by (b) 1 minus the Reserve Requirement for such Eurodollar Loan
for such Interest Period.
Adjustment Date has the meaning specified in Section 3.2.
Affected Loans has the meaning specified in Section 5.4.
Affiliate means, as to any Person, any other Person (a) that
directly or indirectly, through one or more intermediaries, controls or is
controlled by, or is under common control with, such Person; (b) that directly
or indirectly beneficially owns or holds five percent (5%) or more of any class
of voting stock of such Person; or (c) five percent (5%) or more of the voting
stock of which is directly or indirectly beneficially owned or held by the
Person in question. The term Acontrol means the possession, directly or
indirectly, of the power to direct or cause direction of the management and
policies of a Person, whether through the ownership of voting securities, by
contract, or otherwise;
<PAGE>
provided, however, in no event shall the Agent or any Lender be deemed an
Affiliate of the Borrower or any Subsidiaries.
Agent has the meaning set forth in the introductory paragraph of
this Agreement.
Agreement has the meaning set forth in the introductory paragraph of
this Agreement.
Applicable Lending Office means, for each Lender and for each Type
of Loan, the Lending Office of such Lender (or of an affiliate of such Lender)
designated for such Type of Loan on the signature pages hereof or such other
office of such Lender (or an Affiliate of such Lender) as such Lender may from
time to time specify to the Agent and the Borrower by written notice in
accordance with the terms hereof as the office by which its Loans of such Type
are to be made and maintained.
Applicable Margin has the meaning specified in Section 3.2.
Approved Acquisition has the meaning specified in Section 9.5.
Assignment and Acceptance means an assignment and acceptance entered
into by a Lender and its assignee and accepted by the Agent pursuant to Section
13.7, in substantially the form of Exhibit D hereto.
Base Rate means, for any day, the rate per annum equal to the higher
of (a) the Federal Funds Rate for such day plus one-half of one percent (.5%)
and (b) the Prime Rate for such day. Any change in the Base Rate due to a change
in the Prime Rate or the Federal Funds Rate shall be effective on the effective
date of such change in the Prime Rate or Federal Funds Rate.
Base Rate Loan means a portion of a Loan that bears interest at the
rate based upon the Base Rate.
Borrower has the meaning set forth in the introductory paragraph of
this Agreement.
Borrowing Availability means, on any date, the amount by which the
aggregate Commitments exceed the Outstanding Revolving Credit on such date.
Business Day means (a) any day excluding Saturday, Sunday and any
day which either is a legal holiday under the laws of the State of Texas or is a
day on which banking institutions located in any such State are closed, and (b)
with respect to all borrowings, payments, Conversions, Continuations, Interest
Periods, and notices in connection with Eurodollar Loans, any day which is a
Business Day described in clause (a) above and which is also a day on which
dealings in Dollar deposits are carried out in the London interbank market.
Capital Expenditures means, for any period, all expenditures of the
Borrower and its Subsidiaries which are classified as capital expenditures on
the consolidated statement of cash flows of Borrower in accordance with GAAP,
including all such expenditures so classified as recurring capital expenditures
and all such expenditures associated with Capital Lease Obligations.
<PAGE>
Capital Lease Obligations means, as to any Person, the obligations
of such Person to pay rent or other amounts under a lease of (or other agreement
conveying the right to use) real and/or personal property, which obligations are
required to be classified and accounted for as a capital lease on a balance
sheet of such Person under GAAP. For purposes of this Agreement, the amount of
such Capital Lease Obligations shall be the capitalized amount thereof,
determined in accordance with GAAP.
Closing Date means November 3, 1998.
Code means the Internal Revenue Code of 1986, as amended, and the
regulations promulgated and rulings issued thereunder.
Commitment means, as to each Lender, the obligation of such Lender
to make advances of funds and purchase participation interests in (or with
respect to the Agent as a Lender or the Swingline Lender, hold other interests
in) Letters of Credit and Swingline Loans in an aggregate principal amount at
any one time outstanding up to but not exceeding the amount set forth opposite
the name of such Lender on the signature pages hereto under the heading
Commitment, as the same may be increased, reduced or terminated pursuant to
Section 2.5, 2.6, or 11.2 or, if such Lender was not an original signatory to
this Agreement, in such Lender's Assignment and Acceptance or in any Commitment
and Acceptance that has become effective pursuant to Section 2.6. As of the
Closing Date, the aggregate amount of the Commitments of all Lenders equals One
Hundred Million Dollars ($100,000,000).
Commitment and Acceptance has the meaning specified in Section
2.6(a).
Commitment Percentage means, as to any Lender, the percentage
equivalent of a fraction the numerator of which is the amount of the Commitments
of such Lender and the denominator of which is the aggregate amount of the
Commitments of all of the Lenders.
Compliance Certificate means a certificate in substantially the form
of Exhibit E properly completed and executed by the chief financial officer,
treasurer or assistant treasurer of the Borrower.
Consolidating Schedules means consolidating schedules (not
necessarily in accordance with GAAP) in reasonable form which total to the
consolidated financial statements required by this Agreement. Consolidating
Schedules will include (a) income statements by company for Borrower and each
domestic Subsidiary and an aggregate subtotal for all Subsidiaries constituting
Foreign Companies as of the required period, (b) balance sheets of (i) the
Borrower, (ii) the domestic Subsidiaries aggregated as a group, and (iii) the
Subsidiaries constituting Foreign Companies aggregated as a group, in each case
as of the required period, and (c) statements of retained earnings and cash flow
as of the required period prepared with an aggregate subtotal for (i) Borrower
and all domestic Subsidiaries and (ii) all Subsidiaries constituting Foreign
Companies.
CREDIT AGREEMENT - PAGE 3
<PAGE>
Continue, Continuation, Continuing and Continued shall refer to the
continuation pursuant to Section 3.5 hereof of a Eurodollar Loan as a Eurodollar
Loan from one Interest Period to the next Interest Period.
Contribution and Indemnification Agreement means the Contribution
and Indemnification Agreement executed by the Borrower and the Significant
Subsidiaries, in substantially the form of Exhibit G hereto, as the same may be
amended or otherwise modified from time to time.
Convert, Conversion, and Converted shall refer to a conversion
pursuant to Section 3.5 or Article 5 of one Type of Loan into the other Type of
Loan.
Debt means as to any Person at any time (without duplication): (a)
all obligations of such Person for borrowed money whether secured or unsecured;
(b) all obligations of such Person evidenced by bonds, notes, debentures, or
other similar instruments whether secured or unsecured; (c) all Capital Lease
Obligations of such Person under any lease with remaining lease payments in an
amount greater than One Hundred Thousand Dollars ($100,000) over the term of
such lease; (d) all Debt Guaranteed by such Person; (e) all obligations secured
by a Lien existing on property owned by such Person, whether or not the
obligations secured thereby have been assumed by such Person or are non-recourse
to the credit of such Person; (f) all reimbursement obligations of such Person
(whether contingent or otherwise) in respect of letters of credit, bankers
acceptances, surety or other bonds and similar instruments; (g) all liabilities
of such Person in respect of unfunded vested benefits under any Plan; (h) all
lease obligations incurred in connection with the airplane lease described on
Schedule 9.1(e) attached hereto; and (i) all operating lease obligations
(excluding any real property lease obligations) under any lease with remaining
lease payments in an amount greater than One Hundred Thousand Dollars ($100,000)
over the term of such lease.
Default Rate means, in respect of any principal of any Loan, any
Reimbursement Obligation, or any other amount payable by the Borrower under any
Loan Document which is not paid when due (whether at stated maturity, by
acceleration, or otherwise), a rate per annum during the period commencing on
the due date until such amount is paid in full equal to the sum of two percent
(2%) plus the Base Rate plus the Applicable Margin as in effect from time to
time (provided that, if such amount in default is principal of a Eurodollar Loan
and the due date is a day other than the last day of an Interest Period
therefor, the Default Rate for such principal shall be, for the period from and
including the due date and to but excluding the last day of the Interest Period
therefor, two percent (2%) plus the interest rate for such Loan for such
Interest Period as provided in Section 3.1 hereof, and, thereafter, the rate
provided for above in this definition).
Default means an Event of Default or the occurrence of an event or
condition which with notice or lapse of time or both would become an Event of
Default.
Dollars and $ mean lawful money of the United States of America.
EBITDA means, for any period and any Person, the total of the
following, each calculated without duplication for such Person on a consolidated
basis for such period: (a) Net Income; plus (b) any provision for (or less any
benefit from) income or franchise taxes included in determining
CREDIT AGREEMENT - PAGE 4
<PAGE>
Net Income; plus (c) Net Interest Expense deducted in determining Net Income;
plus (d) amortization and depreciation expense deducted in determining Net
Income; plus (e) minority interests.
Eligible Assignee means (i) a Lender; (ii) an Affiliate of a Lender;
and (iii) any other Person approved by the Agent, such approval not to be
unreasonably withheld or delayed by the Agent, and, unless a Default has
occurred and is continuing at the time any assignment is effected, in accordance
with Section 13.7; the Borrower, such approval not to be unreasonably withheld
or delayed by the Borrower; provided, however, that neither the Borrower nor an
Affiliate of the Borrower shall qualify as an Eligible Assignee.
Environmental Laws means any and all federal, state, and local laws,
regulations, and requirements pertaining to health, safety, or the environment,
as such laws, regulations, and requirements may be amended or supplemented from
time to time.
Environmental Liabilities means, as to any Person, all liabilities,
obligations, responsibilities, Remedial Actions, losses, damages, punitive
damages, consequential damages, treble damages, costs, and expenses, (including,
without limitation, all fees, disbursements and expenses of counsel, expert and
consulting fees and costs of investigation and feasibility studies), fines,
penalties, sanctions, and interest incurred as a result of any claim or demand,
by any Person, whether based in contract, tort, implied or express warranty,
strict liability, criminal or civil statute, including any Environmental Law,
permit, order or agreement with any Governmental Authority or other Person,
arising from environmental, health or safety conditions or the Release or
threatened Release of a Hazardous Material into the environment.
ERISA Affiliate means any corporation or trade or business which is
a member of the same controlled group of corporations (within the meaning of
Section 414(b) of the Code) as the Borrower, which is under common control
(within the meaning of Section 414(c) of the Code) with the Borrower, or which
is otherwise affiliated with the Borrower (within the meaning of Section 414(m)
or Section 414(o) of the Code).
ERISA means the Employee Retirement Income Security Act of 1974, as
amended from time to time, and the regulations and published interpretations
thereunder.
Eurodollar Loans means Loans that bear interest at rates based upon
the Adjusted Eurodollar Rate.
Eurodollar Rate means, for any Eurodollar Loan for any Interest
Period therefor, the rate per annum (rounded upwards, if necessary, to the
nearest 1/100 of 1%) appearing on Telerate Page 3750 (or any successor page) as
the London interbank offered rate for deposits in Dollars at approximately 11:00
a.m. (London time) two (2) Business Days prior to the first day of such Interest
Period for a term comparable to such Interest Period. If for any reason such
rate is not available, the term Eurodollar Rate shall mean, for any Eurodollar
Loan for any Interest Period therefor, the rate per annum (rounded upwards, if
necessary, to the nearest 1/100 of 1%) appearing on Reuters Screen LIBO Page as
the London interbank offered rate for deposits in Dollars at approximately 11:00
a.m.
CREDIT AGREEMENT - PAGE 5
<PAGE>
(London time) two (2) Business Days prior to the first day of such Interest
Period for a term comparable to such Interest Period; provided, however, if more
than one rate is specified on Reuters Screen LIBO Page, the applicable rate
shall be the arithmetic mean of all such rates (rounded upwards, if necessary,
to the nearest 1/100 of 1%).
Event of Default has the meaning specified in Section 11.1.
Executive Officer means any of the chief executive officer, chief
financial officer, president, executive vice president, secretary, treasurer or
assistant treasurer of a Person.
Federal Funds Rate means, for any day, the rate per annum (rounded
upwards, if necessary, to the nearest 1/100 of 1%) equal to the weighted average
of the rates on overnight Federal funds transactions with members of the Federal
Reserve System arranged by Federal funds brokers on such day, as published by
the Federal Reserve Bank of New York on the Business Day next succeeding such
day; provided that (a) if such day is not a Business Day, the Federal Funds Rate
for such day shall be such rate on such transactions on the next preceding
Business Day as so published on the next succeeding Business Day, and (b) if no
such rate is so published on such next succeeding Business Day, the Federal
Funds Rate for such day shall be the average rate charged to the Agent (in its
individual capacity) on such day on such transactions as determined by the
Agent.
"Fiduciary Accounts" means bank accounts with the Lenders,
including, without limitation, those listed on Schedule 7.21, in which funds are
primarily held by the Borrower or its Subsidiaries in a fiduciary capacity.
Fiscal Quarter means any three (3) month period ending December 31,
March 31, June 30 or September 30.
Fiscal Year means calendar year.
Fixed Charge Coverage Ratio means at any time, the ratio of (a) the
sum of (i) EBITDA of the Borrower on a consolidated basis for the prior four (4)
Fiscal Quarter period, plus (ii) rental expense of Borrower on a consolidated
basis deducted in determining Net Income for the prior four (4) Fiscal Quarter
period, minus (iii) the amount of EBITDA of the Borrower on a consolidated basis
derived from all Foreign Companies in excess of 15% of the EBITDA of the
Borrower on a consolidated basis for the prior four (4) Fiscal Quarter period to
(b) the sum of interest expense and rental expense of the Borrower on a
consolidated basis for the prior four (4) Fiscal Quarter period.
Foreign Company means (i) any Subsidiary that is not organized under
the laws of a state located in the United States of America or (ii) any
Affiliate of the Borrower that is not organized under the laws of a state
located in the United States of America.
Funded Debt means as to any Person at any time (without
duplication) those items described in clauses (a), (b), (c) and (h) of the
definition of Debt.
CREDIT AGREEMENT - PAGE 6
<PAGE>
GAAP means generally accepted accounting principles, applied on a
consistent basis, as set forth in Opinions of the Accounting Principles Board of
the American Institute of Certified Public Accountants or in statements of the
Financial Accounting Standards Board and/or their respective successors and
which are applicable in the circumstances as of the date in question. Accounting
principles are applied on a consistent basis when the accounting principles
applied in a current period are comparable in all material respects to those
accounting principles applied in a preceding period.
Governmental Authority means any nation or government, any state or
political subdivision thereof and any entity exercising executive, legislative,
judicial, regulatory, or administrative functions of or pertaining to
government.
Guarantee by any Person means any obligation, contingent or
otherwise, of such Person directly or indirectly guaranteeing any Debt or other
obligation of any other Person and, without limiting the generality of the
foregoing, any obligation, direct or indirect, contingent or otherwise, of such
Person (a) to purchase or pay (or advance or supply funds for the purchase or
payment of) such Debt or other obligation (whether arising by virtue of
partnership arrangements, by agreement to keep-well, to purchase assets, goods,
securities or services, to take-or-pay, or to maintain financial statement
conditions or otherwise) or (b) entered into for the purpose of assuring in any
other manner the obligee of such Debt or other obligation of the payment thereof
or to protect the obligee against loss in respect thereof (in whole or in part),
provided that the term Guarantee shall not include endorsements for collection
or deposit in the ordinary course of business. The term Guarantee used as a verb
has a corresponding meaning.
Guaranty means the guaranty agreement executed by each of the
Significant Subsidiaries in favor of the Agent and the Lenders, in substantially
the form of Exhibit C hereto, as the same may be amended or otherwise modified
from time to time.
Hazardous Material means any substance, product, waste, pollutant,
material, chemical, contaminant, constituent, or other material which is or
becomes listed, regulated, or addressed under any Environmental Law.
Increase Date has the meaning specified in Section 2.6(b).
Increasing Lender has the meaning specified in Section 2.6(a).
Insignificant Subsidiary means each Subsidiary that is not a
Significant Subsidiary.
Interest Period means with respect to any Eurodollar Loans, each
period commencing on the date such Loan is established or Converted from a Base
Rate Loan or, in the case of Continuations, the last day of the next preceding
Interest Period with respect to such Eurodollar Loan, and ending on the
numerically corresponding day in the first, second, third or sixth calendar
month thereafter, as the Borrower may select as provided in Section 3.5 or 4.1,
except that each such Interest Period which commences on the last Business Day
of a calendar month (or on any day for which there is no numerically
corresponding day in the appropriate subsequent calendar month) shall end on the
last Business Day of the appropriate subsequent calendar month. Notwithstanding
the foregoing:
CREDIT AGREEMENT - PAGE 7
<PAGE>
(a) each Interest Period which would otherwise end on a day which is not a
Business Day shall end on the next succeeding Business Day (or if such
succeeding Business Day falls in the next succeeding calendar month, on the next
preceding Business Day); (b) any Interest Period which would otherwise extend
beyond the Termination Date shall end on the Termination Date; (c) no more than
six (6) Interest Periods shall be in effect at the same time; and (d) no
Interest Period for any Eurodollar Loan shall have a duration of less than one
(1) month and, if the Interest Period would otherwise be a shorter period, the
related Eurodollar Loan shall not be available hereunder.
Lender has the meaning set forth in the introductory paragraph of
this Agreement.
Letter of Credit Liabilities means, at any time, the aggregate
maximum amount available to be drawn under all outstanding Letters of Credit (in
each case, determined without regard to whether any conditions to drawing could
then be met) and all unreimbursed drawings under Letters of Credit.
Letters of Credit has the meaning specified in Section 2.7(a).
Leverage Ratio means as of any Fiscal Quarter end, the ratio of (a)
total Funded Debt of the Borrower on a consolidated basis to (b) EBITDA of the
Borrower on a consolidated basis for the prior four (4) Fiscal Quarter period
minus the amount of EBITDA of the Borrower on a consolidated basis derived from
all Foreign Companies in excess of 15% of the EBITDA of the Borrower on a
consolidated basis for the prior four (4) Fiscal Quarter period.
Lien means any lien, mortgage, security interest, tax lien,
financing statement, pledge, charge, hypothecation, assignment, preference,
priority, or other encumbrance of any kind or nature whatsoever (including,
without limitation, any conditional sale or title retention agreement), whether
arising by contract, operation of law, or otherwise.
Loan Documents means this Agreement, the Notes, the Guaranty, the
Contribution and Indemnification Agreement and all other promissory notes,
guaranties, letters of credit, and other instruments, agreements and other
documentation executed and delivered pursuant to or in connection with this
Agreement, as such instruments, agreements and other documentation may be
amended or otherwise modified.
Loan or Letter of Credit Request Form means a certificate, in
substantially the form of Exhibit J, properly completed and signed by an
Executive Officer of the Borrower or any designee thereof, requesting a Loan or
Letter of Credit, as applicable.
Loan Parties means the Borrower and the Significant Subsidiaries.
Loans means Revolving Loans or Swingline Loans.
Material Adverse Effect means a material adverse effect on (a) the
business, condition (financial or otherwise), operations, prospects, or
properties of the Borrower and the Subsidiaries taken as a whole, or (b) the
validity of enforceability of this Agreement or any of the other Loan Documents
or the rights or remedies of the Agent or the Lenders hereunder or thereunder.
In
CREDIT AGREEMENT - PAGE 8
<PAGE>
determining whether any individual event could reasonably be expected to result
in a Material Adverse Effect, notwithstanding that such event does not itself
have such effect, a Material Adverse Effect shall be deemed to have occurred if
the cumulative effect of such event and all other then existing events could
reasonably be expected to result in a Material Adverse Effect.
Maximum Rate means, at any time and with respect to any Lender, the
maximum rate of nonusurious interest under applicable law that such Lender may
charge the Borrower. The Maximum Rate shall be calculated in a manner that takes
into account any and all fees, payments, and other charges contracted for,
charged or received in connection with the Loan Documents that constitute
interest under applicable law. Each change in any interest rate provided for
herein based upon the Maximum Rate resulting from a change in the Maximum Rate
shall take effect without notice to the Borrower at the time of such change in
the Maximum Rate. For purposes of determining the Maximum Rate under Texas law,
the applicable weekly ceiling shall be the indicated rate ceiling described in,
and computed in accordance with, Article 5069-1D.001 et seq. Vernon's Texas
Civil Statutes, as amended or codified.
Multiemployer Plan means a multiemployer plan defined as such in
Section 3(37) of ERISA to which contributions have been made by the Borrower or
any ERISA Affiliate and which is covered by Title IV of ERISA.
NationsBank means NationsBank, N.A.
Net Income means, for any period and any Person, such Person's
consolidated net income (or loss) determined in conformity with GAAP, but
excluding: (a) the income of any other Person (other than its subsidiaries) in
which such Person or any of its subsidiaries has an ownership interest, unless
received by such Person or its subsidiary in a cash distribution; (b) any
after-tax gains or losses attributable to asset disposition; and (c) to the
extent not included in clauses (a) and (b) above, any after-tax extraordinary,
non-cash or nonrecurring gains or extraordinary or non-cash losses or non-cash
charges due to changes in accounting principles required by GAAP.
Net Interest Expense means, for any period and any Person, the total
of the following for such Person calculated on a consolidated basis for such
period in accordance with GAAP: (a) interest expense minus (b) interest income
(excluding all fiduciary interest income).
New Lender means (i) an Affiliate of a Lender; and (ii) any other
Person approved by the Borrower and the Agent (such approval not to be
unreasonably withheld) that, immediately prior to its issuance of a Commitment
pursuant to Section 2.6 was not a Lender hereunder.
Net Worth means, as of any applicable date of determination, the net
worth of the Borrower and the Subsidiaries as determined on a consolidated basis
in accordance with GAAP.
Notes means the Revolving Notes and the Swingline Note.
Obligation means all obligations, indebtedness, and liabilities of
the Borrower to the Agent, the Swingline Lender, and the Lenders, or any of
them, arising pursuant to any of the Loan
CREDIT AGREEMENT - PAGE 9
<PAGE>
Documents, whether now existing or hereafter arising, whether direct, indirect,
related, unrelated, fixed, contingent, liquidated, unliquidated, joint, several,
or joint and several, including, without limitation, the obligation of the
Borrower to repay the Loans, the Reimbursement Obligations, interest on the
Loans and Reimbursement Obligations, and all fees, costs, and expenses
(including reasonable attorneys' fees) provided for in the Loan Documents.
Outstanding Revolving Credit means, at any time of determination,
the sum of (a) the aggregate amount of Revolving Loans then outstanding; plus
(b) the aggregate amount of Letter of Credit Liabilities (or when calculated
with respect to a Lender, including the Agent as a Lender, such Lender's
participation or other interest in such Letter of Credit Liabilities); plus (c)
the aggregate amount of Swingline Loans (or when calculated with respect to a
Lender, including the Swingline Lender, such Lender's participation or other
interest in such Swingline Loans) then outstanding.
Payment Date has the meaning specified in subsection 2.7(c).
Payor has the meaning specified in Section 4.8.
PBGC means the Pension Benefit Guaranty Corporation or any entity
succeeding to all or any of its functions under ERISA.
Permitted Acquisition means an acquisition (i) greater than fifty
percent (50%) of the outstanding capital stock or other comparable ownership
interest in a Person and such Persons earnings would be required to be
consolidated with the Borrowers earnings in accordance with GAAP, (ii) equal to
fifty percent (50%) of the outstanding capital stock or other comparable
ownership interest in a Person if after such acquisition, the Borrower is deemed
to have control of such Person and such Persons earnings would be required to be
consolidated with the Borrowers earnings in accordance with GAAP, or (iii) of or
all or substantially all of such Persons assets; provided however, (a) such
Person has maintained a positive EBITDA for two of the most recent prior three
Fiscal Years of such Person, (b) such Person has maintained a positive EBITDA
for the prior four (4) Fiscal Quarters of such Person then ended prior to such
acquisition, (c) such Person being acquired is not engaged in any line of
business other than the businesses or complementary or reasonably related
businesses in which the Borrower or any Subsidiary is engaged on the date
hereof, (d) the sum of (i) the cash consideration for such acquisition, plus
(ii) the cash consideration for any other Permitted Acquisitions in each case
described in clauses (i) and (ii) actually paid during the prior four (4) Fiscal
Quarters is in an amount not greater than twenty percent (20%) of the
consolidated gross revenues of the Borrower and its Subsidiaries for the prior
four (4) Fiscal Quarters of the Borrower then ended prior to such acquisition
(which calculation of the consolidated gross revenues for purposes herein shall
include the gross revenues of each Permitted Acquisition made after the Closing
Date and before the date of determination (such date being the date of payment
of the cash consideration described in clause (i) above) for the prior four (4)
Fiscal Quarters even if such Permitted Acquisition has not been a Subsidiary
during the previous four (4) Fiscal Quarters), and (e) at least five (5)
Business Days prior to such acquisition Borrower has executed and delivered to
Agent a Compliance Certificate demonstrating compliance with this Agreement
immediately before and proforma immediately after such acquisition.
CREDIT AGREEMENT - PAGE 10
<PAGE>
Permitted Investment means any advance, loan, extension of credit,
or capital contribution to or investment in any Person, or purchase or ownership
of any stock, bonds, notes, debentures, or other securities of any Person that
complies with the criteria set forth in the Borrowers current investment policy,
a copy of which is attached hereto as Exhibit H.
Person means any individual, corporation, business trust,
association, company, partnership, joint venture, Governmental Authority, or
other entity.
Plan means any employee benefit plan (within the meaning of Section
3(3) of ERISA) established or maintained by the Borrower or any ERISA Affiliate,
which plan is subject to the provisions of ERISA.
Prime Rate means the per annum rate of interest established from
time to time by NationsBank as its prime rate, which rate may not be the lowest
rate of interest charged by NationsBank to its customers.
Principal Office means the principal office of the Agent, personally
located at 901 Main Street, 66th Floor, Dallas, Texas 75202.
Prohibited Transaction means any transaction set forth in Section
406 or 407 of ERISA or Section 4975(c)(1) of the Code for which there does not
exist a statutory or administrative exemption.
Quarterly Payment Date means the last day of March, June, September,
and December of each year, the first of which shall be the first such day after
the date of this Agreement.
Rapid Recovery Facility means that program established by the
Borrower pursuant to which the Borrower makes short-term advances to certain of
its clients which are insurance companies which are parties as ceding companies
to reinsurance contracts with reinsurers; such advances based on obligations
owed to such clients pursuant to such reinsurance contracts, as such program is
more specifically described in Exhibit K.
Regulation D means Regulation D of the Board of Governors of the
Federal Reserve System as the same may be amended or supplemented from time to
time.
Regulatory Change means, with respect to any Lender, any change
after the date of this Agreement in United States federal, state, or foreign
laws or regulations (including Regulation D) or the adoption or making after
such date of any interpretations, directives, or requests applying to a class of
Lenders including such Lender of or under any United States federal or state, or
any foreign, laws or regulations (whether or not having the force of law) by any
court or governmental or monetary authority charged with the interpretation or
administration thereof.
Reimbursement Obligation means the obligation of the Borrower to
reimburse the Agent for any demand for payment or drawing under a Letter of
Credit.
CREDIT AGREEMENT - PAGE 11
<PAGE>
Release means, as to any Person, any release, spill, emission,
leaking, pumping, injection, deposit, disposal, disbursement, leaching, or
migration of Hazardous Materials into the indoor or outdoor environment or into
or out of property owned by such Person, including, without limitation, the
movement of Hazardous Materials through or in the air, soil, surface water,
ground water, or property in violation of Environmental Laws.
Remedial Action means all actions required to (a) cleanup, remove,
treat, or otherwise address Hazardous Materials in the indoor or outdoor
environment, (b) prevent the Release or threat of Release or minimize the
further Release of Hazardous Materials so that they do not migrate or endanger
or threaten to endanger public health or welfare or the indoor or outdoor
environment, or (c) perform pre-remedial studies and investigations and
post-remedial monitoring and care.
Reportable Event means any of the events set forth in Section 4043
of ERISA.
Required Lenders means Lenders having (a) in excess of fifty percent
(50%) of the Commitments, or (b) if all Commitments have terminated, in excess
of fifty percent (50%) of the sum of (i) the outstanding principal amount of the
Loans (less any participations by the Swingline Lender hereunder to the other
Lenders in the outstanding Swingline Loans), (ii) the participations in
outstanding Letter of Credit Liabilities and (iii) the participations by the
Swingline Lender to the other Lenders in outstanding Swingline Loans.
Required Payment has the meaning specified in Section 4.8.
Reserve Requirement means, at any time, the maximum rate at which
reserves (including, without limitation, any marginal, special, supplemental, or
emergency reserves) are required to be maintained under regulations issued from
time to time by the Board of Governors of the Federal Reserve System (or any
successor) by member banks of the Federal Reserve System against Eurocurrency
liabilities (as such term is used in Regulation D). Without limiting the effect
of the foregoing, the Reserve Requirement shall reflect any other reserves
required to be maintained by such member banks by reason of any Regulatory
Change against any category of liabilities which includes deposits by reference
to which the Adjusted Eurodollar Rate is to be determined, or any category of
extensions of credit or other assets which include Eurodollar Loans. The
Adjusted Eurodollar Rate shall be adjusted automatically on and as of the
effective date of any change in the Reserve Requirement.
Revolving Commitment Fee has the meaning specified in Section 3.7.
Revolving Loans means, as to any Lender, the advances made by such
Lender pursuant to Section 2.1.
Revolving Notes means the promissory notes provided for by Sections
2.2, 2.6 and 13.7 and all amendments and other modifications thereof.
Significant Subsidiary means any Subsidiary that is not a Foreign
Company, and meets at least one of the two following criteria:
CREDIT AGREEMENT - PAGE 12
<PAGE>
(a) such Subsidiary either (i) has gross revenues
(determined in accordance with GAAP) during the most recently ended
Fiscal Year of such Subsidiary equal to or greater than One Million
Five Hundred Thousand Dollars ($1,500,000), or (ii) has total assets
(determined in accordance with GAAP) equal to or greater than One
Million Five Hundred Thousand Dollars ($1,500,000); and
(b) beginning one hundred eighty (180) days after the
Closing Date, such Subsidiary is a directly owned Subsidiary of the
Borrower.
Stock Option Plans means collectively, (a) that certain E.W. Blanch
Holdings, Inc. 1997 Stock Incentive Plan, (b) that certain 1993 Stock Incentive
Plan of E.W. Blanch Holdings, Inc., as amended by the First Amendment to the
1993 Stock Incentive Plan of E.W. Blanch Holdings, Inc. and the Second Amendment
to the 1993 Stock Incentive Plan of E.W. Blanch Holdings, Inc., (c) E.W. Blanch
Holdings, Inc. Directors Stock Option Plan, (d) E.W. Blanch Holdings, Inc.
Executive Restricted Stock Incentive Plan, (e) E.W. Blanch Holdings, Inc.
Non-Employee Directors Stock Plan, (f) K2 Technologies, Inc. 1994 Stock Plan
adopted November 15, 1994, (g) K2 Technologies, Inc. 1996 Stock Option Plan
adopted September 19, 1996, and (h) K2 Technologies, Inc. 1998 Key Person Stock
Option Plan adopted July 25, 1998, copies of which the Borrower has delivered to
the Agent.
Strategic Investment means any advance, loan, extension of credit,
or capital contribution to or investment in any Person, or purchase or ownership
of any stock, bonds, notes, debentures, or other securities of any Person that
(a) in the aggregate constitutes less than or equal to fifty percent (50%) of
all outstanding capital stock or other comparable ownership interest in such
Person if after such transaction, the Borrower is deemed not to have control of
such Person, and (b) complies with the Borrowers criteria set forth in the
Borrowers strategic investment policy, a copy of which is attached hereto as
Exhibit I.
Subsidiary means any corporation (or other entity) of which at least
a majority of the outstanding shares of stock (or other ownership interests)
having by the terms thereof ordinary voting power to elect a majority of the
board of directors (or similar governing body) of such corporation (or other
entity) (irrespective of whether or not at the time stock (or other ownership
interests) of any other class or classes of such corporation (or other entity)
shall have or might have voting power by reason of the happening of any
contingency) is at the time directly or indirectly owned or controlled by the
Borrower or one or more of the Subsidiaries or by the Borrower and one or more
of the Subsidiaries.
Swingline Commitment means the obligation of the Swingline Lender to
make advances pursuant to Section 2.8(a) in an aggregate principal amount at any
one time outstanding up to but not exceeding Ten Million Dollars ($10,000,000),
as such amount may be reduced pursuant to subsection 2.8(e) or Section 11.2.
Swingline Lender means NationsBank.
CREDIT AGREEMENT - PAGE 13
<PAGE>
Swingline Loans means the advances made by the Swingline Lender
pursuant to subsection 2.8(a).
Swingline Maturity has the meaning specified in subsection 2.8(c).
Swingline Note means the promissory note provided for by subsection
2.8(b) and all amendments and other modifications thereto.
Tangible Net Worth means, as of any applicable date of
determination, the Net Worth of the Borrower and the Subsidiaries less any
intangible assets, including without limitation, patents, patent rights,
trademarks, trade names, franchises, copyrights, goodwill, and other similar
intangible assets, as determined on a consolidated basis in accordance with
GAAP.
Termination Date means November 3, 2001, or such earlier date on
which the Commitments terminate as provided in this Agreement.
Type shall mean any type of Loan (i.e., a Base Rate Loan or
Eurodollar Loan).
UCC means the Uniform Commercial Code as in effect in the State of
Texas.
UK Senior Facility means the loan facilities made to Swire Fraser
Insurance (Holdings) Ltd pursuant to (a) that certain Letter Agreement dated
November 15, 1995, by and between Midland Bank plc and Swire Fraser Insurance
(Holdings) Ltd, (b) that certain Letter Agreement dated August 22, 1997, by and
between Midland Bank plc and Swire Blanch Insurance (Holdings) Ltd, (c) that
certain Letter Agreement dated February 12, 1998, by and between Midland Bank
plc and Swire Blanch Insurance (Holdings) Ltd, and (d) that certain Letter
Agreement dated June 26, 1998, by and between Midland Bank plc and Swire Blanch
Insurance (Holdings) Ltd, as each has been and may be amended, restated or
modified from time to time.
Year 2000 Compliant has the meaning specified in Section 7.20.
Year 2000 Problem has the meaning specified in Section 7.20.
Section I.2 Other Definitional Provisions. All definitions contained
in this Agreement are equally applicable to the singular and plural forms of the
terms defined. The words hereof, herein, and hereunder and words of similar
import referring to this Agreement refer to this Agreement as a whole and not to
any particular provision of this Agreement. Unless otherwise specified, all
Article and Section references pertain to this Agreement. Terms used herein that
are defined in the UCC, unless otherwise defined herein, shall have the meanings
specified in the UCC.
Section I.3 Accounting Terms and Determination. Except as otherwise
expressly provided herein, all accounting terms used herein shall be
interpreted, and all financial statements and certificates and reports as to
financial matters required to be delivered to the Agent and the Lenders
hereunder shall be prepared, in accordance with GAAP, on a basis consistent with
those used in the preparation of the financial statements referred to in Section
7.2 hereof. All calculations
CREDIT AGREEMENT - PAGE 14
<PAGE>
made for the purposes of determining compliance with the provisions of this
Agreement shall be made by application of GAAP, on a basis consistent with those
used in the preparation of the financial statements referred to in Section 7.2
hereof. In the event any changes in accounting principles required by GAAP or
recommended by Borrower's certified public accountants and implemented by
Borrower occur and such changes result in a change in the method of the
calculation of financial covenants, standards or terms under this Agreement,
then the Borrower, the Agent and the Lenders agree to enter into negotiations in
order to amend such provisions of this Agreement so as to equitably reflect such
changes with the desired result that the criteria for evaluating such covenants,
standards or terms shall be the same after such changes as if such changes had
not been made. Until such time as such an amendment shall have been executed and
delivered by the Agent, the Borrower and the Lenders, all financial covenants,
standards and terms in this Agreement shall continue to be calculated or
construed as if such changes had not occurred.
Section I.4 Time of Day. Unless otherwise indicated, all references
in this Agreement to times of day shall be references to Dallas, Texas time.
ARTICLE II
Revolving Credit Facility
Section II.1 Commitments. Subject to the terms and conditions of
this Agreement, each Lender severally agrees to make one or more Revolving Loans
to the Borrower from time to time from and including the Closing Date to but
excluding the Termination Date in an aggregate principal amount at any time
outstanding up to but not exceeding the amount of such Lender's Commitment as
then in effect; provided, however, (a) the Outstanding Revolving Credit
applicable to a Lender (including the Agent as a Lender) shall not at any time
exceed such Lender's Commitment and (b) the Outstanding Revolving Credit shall
not at any time exceed the aggregate Commitments. Subject to the foregoing
limitations, and the other terms and provisions of this Agreement, the Borrower
may borrow, prepay, and reborrow hereunder the amount of the Commitments and may
obtain Base Rate Loans and Eurodollar Loans thereunder and, until the
Termination Date, the Borrower may Continue Eurodollar Loans established under
the Revolving Loans or Convert Loans established under the Revolving Loans of
one Type into Loans of the other Type. Loans of each Type under the Revolving
Loan made by each Lender shall be established and maintained at such Lender's
Applicable Lending Office for Revolving Loans of such Type.
Section II.2 Notes. The Revolving Loans made by a Lender shall be
evidenced by a single promissory note of the Borrower in substantially the form
of Exhibit A hereto, payable to the order of such Lender in a principal amount
equal to its Commitment as originally in effect and as it may be increased or
decreased pursuant to the provisions of this Agreement and otherwise duly
completed.
Section II.3 Repayment of Revolving Loans. The Borrower shall pay to
the Agent for the account of the Lenders the outstanding principal amount of all
of the Revolving Loans on the Termination Date.
CREDIT AGREEMENT - PAGE 15
<PAGE>
Section II.4 Use of Proceeds. The proceeds of Revolving Loans shall
be used by the Borrower for general corporate purposes including support of
working capital, Permitted Acquisitions, Permitted Investments, Strategic
Investments, Letters of Credit, payment in full of the obligations of the
Borrower under the Amended and Restated Credit Agreement more specifically
described in Section 6.1(i) and other lawful corporate purposes.
Section II.5 Reduction or Termination of Commitments. The Borrower
shall have the right to terminate or reduce in part the unused portion of the
Commitments at any time and from time to time, provided that: (a) the Borrower
shall give notice of each such termination or reduction as provided in Section
4.3; (b) each partial reduction shall be in an aggregate amount at least equal
to Five Million Dollars ($5,000,000); and (c) the Commitments may not be reduced
to an amount less than the sum of the Swingline Commitment plus the Letter of
Credit Liabilities then outstanding. The Commitments may not be reinstated after
they have been terminated or reduced.
Section II.6 Increase in Commitment.
(a) So long as (a) no Default has occurred and is
continuing, and (b) the Borrower has not terminated or reduced in
part any unused portion of the Commitments at any time pursuant to
Section 2.5, the Borrower may, at any time and from time to time, by
notice to the Agent, request an increase in the aggregate amount of
the Commitments within the limitations hereafter described, which
notice shall set forth the amount of such increase. In accordance
with Section 2.6(d), the aggregate amount of the Commitments may be
so increased either by having one or more New Lenders that have been
approved by the Borrower become Lenders and/or by having any one or
more of the then existing Lenders (at their respective election in
their sole discretion) increase the amount of their Commitment
(Increasing Lenders), provided that (i) the Commitment of any New
Lender shall not be less than $10,000,000 and the sum of the
Commitments of the New Lenders and the increases in the Commitments
of the Increasing Lenders shall be in an aggregate amount of not
less than $10,000,000 (and, if in excess thereof, in integral
multiples of $5,000,000); (ii) the aggregate amount of all the
increases in the Commitments pursuant to this Section 2.6 shall not
exceed Fifty Million Dollars ($50,000,000); (ii) the Borrower, each
New Lender and/or each Increasing Lender shall have executed and
delivered to the Agent a commitment and acceptance (the Commitment
and Acceptance) substantially in the form of Exhibit F hereto, and
the Agent shall have accepted and executed the same, (iv) the
Borrower shall have executed and delivered to the Agent a Revolving
Note or Revolving Notes payable to the order of each New Lender
and/or each Increasing Lender, each such Revolving Note to be in the
amount of such New Lender's Commitment or such Increasing Lenders
Commitment (as applicable); (v) the Borrower shall have delivered to
the Agent opinions of counsel (substantially similar to the forms of
opinions provided for in Section 6.1(j), modified to apply to the
increase in the Commitments and each new Revolving Note and
Commitment and Acceptance executed and delivered in connection
therewith); (vi) the Significant Subsidiaries shall have consented
in writing to the new Commitments or increases in Commitments (as
applicable) and shall have agreed that their Guarantees continue in
full force and effect, and (vii) the Borrower, each New Lender
and/or each Increasing Lender shall otherwise have executed and
delivered such other instruments and documents as the
CREDIT AGREEMENT - PAGE 16
<PAGE>
Agent shall have reasonably requested in connection with such new
Commitment or increase in the Commitment (as applicable). The form
and substance of the documents required under clauses (iii) through
(vii) above shall be reasonably acceptable to the Agent. The Agent
shall provide written notice to all of the Lenders hereunder of the
admission of any New Lender or the increase in the Commitment of any
Increasing Lender hereunder and shall furnish to each of the Lenders
copies of the documents required under clause (iii), (v), (vi) and
(vii) above.
(b) Upon the effective date of any increase in the
aggregate amount of Commitments pursuant to the provisions hereof
(Increase Date), which Increase Date shall be mutually agreed upon
by the Borrower, each New Lender, each Increasing Lender and the
Agent, each New Lender and/or Increasing Lender shall make a payment
to the Agent in an amount sufficient, upon the application of such
payments by all New Lenders and Increasing Lenders to the reduction
of the outstanding Revolving Loans held by the Lenders (including
the Increasing Lenders) to cause the principal amount outstanding
under the Revolving Loans made by each Lender to be equal to each
Lenders Commitment Percentage of the aggregate amount of Commitments
as so increased. The Borrower hereby irrevocably authorizes each New
Lender and/or each Increasing Lender to fund to the Agent the
payment required to be made pursuant to the immediately preceding
sentence for application to the reduction of the outstanding
Revolving Loans held by the other Lenders, and each such payment
shall constitute a Revolving Loan hereunder. If, as a result of the
repayment of the Revolving Loans provided for in this Section
2.6(b), any payment of a Eurodollar Loan occurs on a day which is
not the last day of the applicable Interest Period, the Borrower
will pay to the Agent for the benefit of any of the Lenders
(including any Increasing Lender to the extent of Eurodollar Loans
held by such Increasing Bank prior to such Increase Date) holding a
Eurodollar Loan any loss or cost incurred by such Lender resulting
therefrom in accordance with Section 5.5. Upon the Increase Date,
all Revolving Loans outstanding hereunder (including any Revolving
Loans made by the New Lenders and/or Increasing Lenders on the
Increase Date) shall be Base Rate Loans, subject to the Borrower's
right to convert the same to Eurodollar Loans on or after such date
in accordance with the provisions of Section 3.5.
(c) Upon the Increase Date and the making of the
Revolving Loans by the New Lenders and/or Increasing Lenders in
accordance with the provisions of Section 2.6(b), each New Lender
and/or each Increasing Lender shall also be deemed to have
irrevocably and unconditionally purchased and received without
recourse or warranty, from the Lenders immediately prior to the
Increase Date, an undivided interest and participation in any Letter
of Credit and Swingline Loan, as applicable, then outstanding,
ratably, such that each Lender (including each New Lender) holds a
participation interest in each such Letter of Credit and Swingline
Loan, as applicable, in proportion to such Lenders Commitment
Percentage.
(d) Upon the notice by the Borrower to the Agent
pursuant to Section 2.6(a) hereof, each of the then existing Lenders
shall have the right (at its election) to increase its Commitment by
an amount equal to such Lenders Commitment Percentage of the
proposed increase in the aggregate Commitments. If less than all of
the proposed increase in aggregate
CREDIT AGREEMENT - PAGE 17
<PAGE>
Commitments is elected by the existing Lenders, then any of the then
existing Lenders shall have the right to increase its Commitment in
an amount greater than such Lenders Commitment Percentage of the
proposed increase in the aggregate Commitments with the Agents
approval. If the entire amount of the proposed increase in aggregate
Commitments is still not obtained, Agent shall use its best efforts
with Borrowers full cooperation to add New Lenders, acceptable to
the Borrower and to the Agent, with new Commitments which when added
to the increase in Commitments of the Increasing Lenders, shall
equal the requested increase in the aggregate amount of the
Commitments. In the event the sum of each New Lenders Commitment and
the increase in each Increasing Lenders Commitment is less than the
requested increase in the aggregate amount of Commitments, the
Borrower may elect to accept the increase in the aggregate amount of
the Commitments to be equal to such lesser amount. Notwithstanding
anything to the contrary, Agent shall not be liable for any failure
to obtain Increasing Lenders or New Lenders hereunder or any failure
to increase the aggregate amount of Commitments by the amount so
requested by the Borrower pursuant to Section 2.6(a).
(e) Nothing contained herein shall constitute, or
otherwise be deemed to be a commitment or agreement on the part of
any Lender to increase its Commitment hereunder at any time. No
Lender (except only for itself) shall have the right to decline
Borrower=s request pursuant to Section 2.6(a) for an increase in the
aggregate amount of Commitments.
Section II.7 Letters of Credit.
(a) Commitment to Issue. The Borrower may utilize the
Commitments by requesting that the Agent issue, and the Agent,
subject to the terms and conditions of this Agreement, shall issue
standby letters of credit for the Borrower's account (such letters
of credit being hereinafter referred to collectively as the Letters
of Credit); provided, however, (i) the aggregate amount of
outstanding Letter of Credit Liabilities shall not at any time
exceed Fifteen Million Dollars ($15,000,000); (ii) the Outstanding
Revolving Credit shall not at any time exceed the aggregate
Commitments; and (iii) the Outstanding Revolving Credit applicable
to a Lender shall not at any time exceed such Lender's Commitment.
Upon the date of issue of a Letter of Credit, the Agent shall be
deemed, without further action by any party hereto, to have sold to
each other Lender, and each other Lender shall be deemed, without
further action by any party hereto, to have purchased from the Agent
a participation to the extent of such Lender's Commitment Percentage
in such Letter of Credit and the related Letter of Credit
Liabilities.
(b) Letter of Credit Request Procedure. The Borrower
shall give the Agent at least five (5) Business Days irrevocable
prior notice (effective upon receipt) by means of a Loan or Letter
of Credit Request Form specifying the date of each Letter of Credit
to be issued and the nature of the transactions to be supported
thereby. Upon receipt of such notice the Agent shall promptly notify
each other Lender of the contents thereof and of such Lender's
Commitment Percentage of the amount of the proposed Letter of
Credit. The Agent shall provide a Lender a copy of each Letter of
Credit issued hereunder upon such Lender's request. Each Letter of
Credit shall have an expiration date that does not extend beyond the
CREDIT AGREEMENT - PAGE 18
<PAGE>
Termination Date, shall be payable in Dollars, must support a
transaction entered into in the ordinary course of the Borrower's
business, must be satisfactory in form and substance to the Agent,
and shall be issued pursuant to such documentation as the Agent may
require, including, without limitation, the Agent's standard form
letter of credit request and reimbursement agreement; provided that,
in the event of any conflict between the terms of such agreement and
the other Loan Documents, the terms of the other Loan Documents
shall control.
(c) Letter of Credit Fees. The Borrower will pay to the
Agent for the account of each Lender an irrevocable letter of credit
fee on such Lender's Commitment Percentage of the amount available
for drawings under each Letter of Credit, such letter of credit fee
(i) to be paid in arrears on each Quarterly Payment Date after
issuance until the date of expiration or termination thereof (each
such date herein a Payment Date) and (ii) to be calculated for the
period from and including one Payment Date to and excluding the next
at a rate equal to the Applicable Margin applicable to Eurodollar
Loans in effect on the date of payment (as determined in accordance
with Section 3.2). After receiving any payment of any letter of
credit fees under this clause (c), the Agent will promptly pay to
each Lender the letter of credit fees then due such Lender. With
respect to each Letter of Credit, the Borrower will also pay to the
Agent, for its account only, the fees and expenses described in
Section 13.1(a), to the extent applicable, and, on the date of the
issuance of the Letter of Credit, the fronting fee equal to 0.125%
per annum of the aggregate face amount of such Letter of Credit
shall be payable by the Borrower to the Agent for its own account.
(d) Funding of Drawings. Upon receipt from the
beneficiary of any Letter of Credit of any demand for payment or
other drawing under such Letter of Credit, the Agent shall promptly
notify the Borrower and each Lender as to the amount to be paid as a
result of such demand or drawing and the respective payment date.
Not later than 11:00 a.m. on the applicable payment date, each
Lender will make available to the Agent, at the Principal Office, in
immediately available funds, in payment of its participation in
Letters of Credit, an amount equal to such Lender's Commitment
Percentage of the amount to be paid as a result of such demand or
drawing even if the conditions to a Loan under Article 6 have not
been satisfied.
(e) Reimbursements. The Borrower shall be irrevocably
and unconditionally obligated to immediately reimburse the Agent for
any amounts paid by the Agent upon any demand for payment or drawing
under any Letter of Credit, without presentment, demand, protest, or
other formalities of any kind. All payments on the Reimbursement
Obligations shall be made to the Agent at the Principal Office for
the account of the Agent in Dollars and in immediately available
funds, without setoff, deduction or counterclaim not later than 3:00
pm. on the date of the corresponding payment under the Letter of
Credit by the Agent. Subject to the other terms and conditions of
this Agreement, such reimbursement may be made by Borrower
requesting a Revolving Loan or a Swingline Loan in accordance with
Section 4.1, the proceeds of which shall be credited against the
Borrower's Reimbursement Obligations. The Agent will pay to each
Lender such Lender's Commitment Percentage of all amounts received
from the Borrower for application in payment, in whole or in part,
to
CREDIT AGREEMENT - PAGE 19
<PAGE>
the Reimbursement Obligation in respect of any Letter of Credit, but
only to the extent such Lender has made payment to the Agent in
respect of such Letter of Credit pursuant to clause (d) of this
Section 2.7.
(f) Reimbursement Obligations Absolute. The
Reimbursement Obligations of the Borrower under this Agreement shall
be absolute, unconditional, and irrevocable, and shall be performed
strictly in accordance with the terms of the Loan Documents under
all circumstances whatsoever and the Borrower hereby waives any
defense to the payment of the Reimbursement Obligations based on any
circumstance whatsoever, including without limitation, in either
case, the following circumstances: (i) any lack of validity or
enforceability of any Letter of Credit or any other Loan Document;
(ii) any amendment or waiver of or any consent to departure from any
Loan Document; (iii) the existence of any claim, setoff,
counterclaim, defense or other rights which the Borrower, any
Significant Subsidiary, or any other Person may have at any time
against any beneficiary of any Letter of Credit, the Agent, any
Lender, or any other Person, whether in connection with any Loan
Document or any unrelated transaction; (iv) any statement, draft, or
other documentation presented under any Letter of Credit proving to
be forged, fraudulent, invalid, or insufficient in any respect or
any statement therein being untrue or inaccurate in any respect
whatsoever; (v) payment by the Agent under any Letter of Credit
against presentation of a draft or other document that appears on
its face to be in order, without responsibility for further inquiry,
regardless of any notice or information to the contrary; or (vi) any
other circumstance similar to any of the foregoing.
(g) Issuer Responsibility. The Borrower assumes all
risks of the acts or omissions of any beneficiary of any Letter of
Credit with respect to its use of such Letter of Credit. Neither the
Agent, any Lender nor any of their respective officers or directors
shall have any responsibility or liability to the Borrower or any
other Person for: (a) the failure of any draft to bear any reference
or adequate reference to any Letter of Credit, or the failure of any
Person to surrender or to take up any Letter of Credit as required
by the terms of any Letter of Credit, or the failure of any Person
to note the amount of any instrument on any Letter of Credit, each
of which requirements, if contained in any Letter of Credit itself,
it is agreed may be waived by the Agent; (b) errors, omissions,
interruptions, or delays in transmission or delivery of any
messages; (c) the validity, sufficiency, or genuineness of any draft
or other document, or any endorsement(s) thereon, even if any such
draft, document or endorsement should in fact prove to be in any and
all respects invalid, insufficient, fraudulent, or forged or any
statement therein is untrue or inaccurate in any respect; (d) the
payment by the Agent to the beneficiary of any Letter of Credit
against presentation of any draft or other document that appears on
its face to be in order, without responsibility for further inquiry,
regardless of any notice or information to the contrary. The Agent
may accept documents that appear on their face to be in order,
without responsibility for further investigation, regardless of any
notice or information to the contrary. The Agent shall not be
responsible or liable in any way for its actions or inactions in
connection with Letters of Credit except only for its own gross
negligence or willful misconduct.
Section II.8 Swingline Loans.
CREDIT AGREEMENT - PAGE 20
<PAGE>
(a) Swingline Commitment. Subject to the terms and
conditions of this Agreement, the Swingline Lender agrees to make
one or more Swingline Loans to the Borrower from time to time from
and including the Closing Date to but excluding the Termination Date
in an aggregate principal amount at any time outstanding up to but
not exceeding the Swingline Commitment; provided, however, (i) the
Outstanding Revolving Credit shall never exceed the aggregate
Commitments and (ii) the Outstanding Revolving Credit applicable to
a Lender (including the Swingline Lender as a Lender) shall never
exceed such Lender's Commitment. Subject to the foregoing
limitations, and the other terms and provisions of this Agreement,
the Borrower may borrow, prepay, and reborrow hereunder the amount
of the Swingline Commitment and may establish Base Rate Loans
thereunder. On the date a Swingline Loan is made by the Swingline
Lender, the Swingline Lender shall be deemed without further action
by any party hereto, to have sold to each Lender, and each Lender
shall be deemed, without further action by any party hereto, to have
purchased from the Swingline Lender a participation to the extent of
such Lender's Commitment Percentage in the Swingline Loan so made,
such participation to be funded in accordance with clause (c) of
this Section 2.8.
(b) Swingline Note. The Swingline Loans made by the
Swingline Lender shall be evidenced by a single promissory note of
the Borrower in substantially the form of Exhibit B hereto, payable
to the order of the Swingline Lender in a principal amount equal to
the Swingline Commitment as originally in effect and otherwise duly
completed.
(c) Repayment of Swingline Loans; Funding of
Participation. The Borrower shall pay to the Swingline Lender for
its own account the outstanding principal amount of each Swingline
Loan on the earlier of (i) the Termination Date or (ii) the date
which is seven (7) days after the Swingline Loan is made (the
earlier of such date with respect to a Swingline Loan herein the
"Swingline Maturity"). Subject to the other terms and conditions of
this Agreement, Borrower may repay a Swingline Loan on its Swingline
Maturity or at any time prior thereto by requesting a Revolving Loan
in accordance with Section 4.1 with the proceeds thereof payable to
the Swingline Lender for its own account. Swingline Lender, at any
time in its sole and absolute discretion and whether or not a
Swingline Maturity shall have occurred, may require that each Lender
fund its participation in the then outstanding principal amount of
all Swingline Loans by giving each Lender notice thereof.
Additionally, if the Borrower shall not have repaid a Swingline Loan
by 1:00 p.m. on the corresponding Swingline Maturity, the Swingline
Lender will notify each Lender of the aggregate principal amount of
the Swingline Loan which has not been repaid. Upon the giving of any
notice by the Swingline Lender under either of the preceding two
sentences, each Lender shall make available to the Swingline Lender,
at the Principal Office, in immediately available funds, an amount
equal to its Commitment Percentage of the aggregate principal amount
of Swingline Loan or Swingline Loans subject to such notice by not
later than 3:00 p.m. on the date such notice is received if such
notice is received by 1:00 p.m. or by 11:00 a.m. on the next
Business Day, if such notice is received after 1:00 p.m., whether or
not the conditions to a Loan under Article 6 are satisfied.
CREDIT AGREEMENT - PAGE 21
<PAGE>
(d) Use of Proceeds. The proceeds of Swingline Loans
shall be used by the Borrower for the same purposes as Revolving
Loans as described in Section 2.4; provided however, the Swingline
Commitment may not be used for the issuance of Letters of Credit but
may be used at the Borrowers option to fund Reimbursement
Obligations incurred in connection with Letters of Credit.
(e) Reduction or Termination of Swingline Commitment.
The Borrower shall have the right to terminate or reduce in part the
unused portion of the Swingline Commitment at any time and from time
to time, provided that: (i) the Borrower shall give notice of each
such termination or reduction as provided in Section 4.3; and (ii)
each partial reduction shall be in an aggregate amount at least
equal to Five Million Dollars ($5,000,000). The Swingline Commitment
may not be reinstated after it has been terminated or reduced.
ARTICLE III
Interest and Fees
Section III.1 Interest Rate. The Borrower shall pay to the Agent for
the account of each Lender interest on the unpaid principal amount of each Loan
made by such Lender for the period commencing on the date of such Loan to but
excluding the date such Loan is due, at a fluctuating rate per annum equal to
(a) with respect to the Revolving Loans, (i) during the period that such Loans
or portions thereof are Base Rate Loans, the Base Rate plus the Applicable
Margin and (ii) during the period that such Loans or portions thereof are
Eurodollar Loans, the Adjusted Eurodollar Rate plus the Applicable Margin; and
(b) with respect to the Swingline Loans, the Base Rate plus the Applicable
Margin.
Section III.2 Determinations of Applicable Margin and Revolving
Commitment Fee.
(a) The phrase Applicable Margin shall mean, for any
day, (i) the margin of interest over the Adjusted Eurodollar Rate or
Base Rate, as the case may be, that is applicable when any interest
rate is determined under this Agreement, or (ii) the per annum
percentage rate that is applicable when any Revolving Commitment Fee
is determined under this Agreement. The Applicable Margin is subject
to adjustment (upwards or downwards, as appropriate) based upon the
Leverage Ratio. Effective as of each Adjustment Date, the Applicable
Margin for each Type of Loan or Revolving Commitment Fee, as
applicable, shall be adjusted to reflect the Applicable Margin
prescribed below for the Leverage Ratio as demonstrated by the
Compliance Certificate delivered for that Fiscal Quarter:
<TABLE>
<CAPTION>
- ------------- ------------------------------------------------ ------------------- -------------- ----------------
REVOLVING
EURODOLLAR RATE BASE RATE COMMITMENT FEE
APPLICABLE APPLICABLE APPLICABLE
LEVEL LEVERAGE RATIO MARGIN MARGIN MARGIN
- ------------- ------------------------------------------------ ------------------- -------------- ----------------
<S> <C> <C> <C> <C>
I Less than 0.75 to 1.00 0.50% 0% 0.20%
- ------------- ------------------------------------------------ ------------------- -------------- ----------------
</TABLE>
CREDIT AGREEMENT - PAGE 22
<PAGE>
<TABLE>
- ------------- ------------------------------------------------ ------------------- -------------- ----------------
<S> <C> <C> <C> <C>
Greater than or equal to 0.75 to 1.00, but less
II than 1.50 to 1.00 0.625% 0% 0.20%
- ------------- ------------------------------------------------ ------------------- -------------- ----------------
Greater than or equal to 1.50 to 1.00, but less
III than 2.00 to 1.00 0.750% 0% 0.25%
- ------------- ------------------------------------------------ ------------------- -------------- ----------------
Greater than or equal to 2.00 to 1.00, but less
IV than 2.50 to 1.00 1.00% 0% 0.30%
- ------------- ------------------------------------------------ ------------------- -------------- ----------------
V Greater than or equal to 2.50 to 1.00 1.25% 0.25% 0.375%
- ------------- ------------------------------------------------ ------------------- -------------- ----------------
</TABLE>
(b) Notwithstanding anything to the contrary contained
herein, Applicable Margin shall mean the percentage prescribed in
Level II above during the period commencing on the Closing Date
until receipt by the Agent and the Lenders of (i) the Borrowers
audited consolidated financial statement and Consolidating Schedules
for the Fiscal Year ending December 31, 1998, and (ii) a Compliance
Certificate that demonstrates a change in the Leverage Ratio that
would cause another Applicable Margin to be applicable pursuant to
Section 3.2(a).
(c) Upon delivery of the Compliance Certificate pursuant
to subsection 8.1(c) in connection with the financial statements of
Borrower and the Subsidiaries required to be delivered pursuant to
Section 8.1(b) at the end of each Fiscal Quarter commencing with
such Compliance Certificate delivered at the end of the Fiscal
Quarter ending on December 31, 1998, the Applicable Margin shall
automatically be adjusted in accordance with the Leverage Ratio set
forth therein and the table set forth in Section 3.2(a), such
automatic adjustment to take effect as of the first Business Day
after the receipt by the Agent of the related Compliance Certificate
pursuant to Section 8.1(c) (each such Business Day when such margins
or fees change pursuant to this sentence or the next following
sentence, herein an Adjustment Date). If Borrower fails to deliver
such Compliance Certificate which so sets forth the Leverage Ratio
within the period of time required by subsection 8.1(c), the
Applicable Margin shall automatically be adjusted to the highest
Applicable Margin provided in the table set forth in Section 3.2(a),
such automatic adjustments to take effect as of the first Business
Day after the last day on which the Borrower was required to deliver
the applicable Compliance Certificate in accordance with Section
8.1(c) and to remain in effect until subsequently adjusted in
accordance herewith upon the delivery of a Compliance Certificate.
Section III.3 Payment Dates. Accrued interest on the Loans shall be
due and payable as follows: (i) in the case of all Loans (including Base Rate
Loans and Eurodollar Loans), on each Quarterly Payment Date; (ii) in addition to
accrued interest paid in accordance with the foregoing
CREDIT AGREEMENT - PAGE 23
<PAGE>
clause (i) and with respect to Eurodollar Loans, on the last day of the Interest
Period with respect thereto; and (iii) on the Termination Date.
Section III.4 Default Interest. Notwithstanding the foregoing, upon
the occurrence and during the continuance of an Event of Default, the
outstanding principal amount of all Loans and (to the fullest extent permitted
by law) any other amount payable by the Borrower under any Loan Document shall
bear interest at the applicable Default Rate at the Required Lenders' option
beginning upon the occurrence of such Event of Default or such later date as
selected by the Required Lenders. Interest payable at the Default Rate shall be
payable from time to time on demand.
Section III.5 Conversions and Continuations of Loans. Subject to
Section 4.2, the Borrower shall have the right from time to time to Convert all
or part of any Base Rate Loan (other than a Swingline Loan) into a Eurodollar
Loan under the same Revolving Loan or to Continue Eurodollar Loans in existence
as Eurodollar Loans under the same Revolving Loan, provided that: (a) the
Borrower shall give the Agent notice of each such Conversion or Continuation as
provided in Section 4.3; (b) a Eurodollar Loan may only be Converted on the last
day of the Interest Period therefore; (c) except for Conversions into Base Rate
Loans, no Conversions or Continuations shall be made while a Default has
occurred and is continuing; and (d) the Swingline Loan may not be a Eurodollar
Loan.
Section III.6 Computations. Interest and fees payable by the
Borrower hereunder and under the other Loan Documents shall be computed as
follows: (i) with respect to Eurodollar Loans and the Default Rate when
calculated with respect to a Eurodollar Loan, on the basis of a year of 360 days
and the actual number of days elapsed (including the first day but excluding the
last day) occurring in the period for which payable unless in the case of
interest such calculation would result in a usurious rate, in which case
interest shall be calculated on the basis of a year of 365 or 366 days, as the
case may be and (ii) with respect to Base Rate Loans, the Default Rate when
calculated based on the Base Rate and all fees payable hereunder, on the basis
of a year of 365 or 366 days, as the case may be and the actual number of days
elapsed (including the first day but excluding the last day) occurring in the
period for which payable.
Section III.7 Revolving Commitment Fee. The Borrower agrees to pay
to the Agent for the account of each Lender a nonrefundable commitment fee
(Revolving Commitment Fee) on the daily average unused amount of such Lender's
Commitment for the period from and including the Closing Date to and including
the Termination Date, at the Applicable Margin rate (as prescribed in Sections
3.2(a) and (b) hereof based on a 360 day year and the actual number of days
elapsed. For the purpose of calculating the Revolving Commitment Fee hereunder,
the Commitments shall be deemed utilized by all outstanding Revolving Loans and
all Letter of Credit Liabilities but shall not, for purposes of this Section 3.7
only, be deemed utilized by any Swingline Loans. Accrued Revolving Commitment
Fee under this Section 3.7 shall be payable in arrears on each Quarterly Payment
Date and on the Termination Date.
Section III.8 Syndication Fee. Upon the exercise of the Borrowers
option pursuant to Section 2.6, the Borrower agrees to pay to the Agent on each
Increase Date solely for the account
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of the Agent a nonrefundable syndication fee in an amount equal to 0.1% of the
actual increase in the aggregate amount of Commitments.
ARTICLE IV
Administrative Matters
Section IV.1 Borrowing Procedure. The Borrower shall give the Agent
by means of a Loan or Letter of Credit Request Form, and the Agent will give the
Lenders, notice of each borrowing under any Commitment in accordance with
Section 4.3. Not later than 3:00 p.m. on the date specified for each borrowing
under the applicable Commitment (other than the Swingline Commitment) each
Lender will make available the amount of the Loan to be made by it on such date
to the Agent, at the Principal Office, in immediately available funds, for the
account of the Borrower. The amount so received by the Agent shall, subject to
the terms and conditions of this Agreement, be made available to the Borrower by
(a) depositing the same, in immediately available funds, in an account of the
Borrower (designated by the Borrower) maintained with the Agent at the Principal
Office or (b) wire transferring such funds to a Person or Persons designated by
the Borrower in writing. Swingline Lender at its option may accept telephone
requests for Swingline Loans received not later than 1:00 p.m. on the date of
such requested borrowing. Any telephone request for a Swingline Loan by the
Borrower shall be promptly confirmed by delivery of written Loan or Letter of
Request Form for such Swingline Loan via facsimile to the Swingline Lender not
later than 4:30 p.m. on the same date of such telephone request. Not later than
3:00 p.m. on the date specified for each borrowing under the Swingline
Commitment, the Swingline Lender will make available the amount of the Swingline
Loan to be made by it on such date to the Borrower by (i) depositing the same,
in immediately available funds, in an account of the Borrower (designated by the
Borrower) maintained with the Swingline Lender at the Principal Office or (ii)
wire transferring such funds to a Person or Persons designated by the Borrower
in writing.
Section IV.2 Minimum Amounts. Except for prepayments pursuant to
Article 5, each borrowing under (a) a Revolving Loan constituting a Base Rate
Loan and each prepayment of Revolving Loans constituting Base Rate Loans shall
be in an amount at least equal to Three Hundred Thousand Dollars ($300,000) or
any larger amount in increments of One Hundred Thousand Dollars ($100,000); and
(b) a Swingline Loan and each prepayment of Swingline Loans shall be in an
amount at least equal to One Hundred Thousand Dollars ($100,000) or any larger
amount in increments of One Hundred Thousand Dollars ($100,000). Except for
Conversions pursuant to Article 5, each Eurodollar Loan shall be in a minimum
principal amount of Five Million Dollars ($5,000,000) or any larger amount in
increments of One Million Dollars ($1,000,000).
Section IV.3 Certain Notices. Notices by the Borrower to the Agent
of terminations or reductions of Commitments, of borrowings and prepayments of
Loans and of Conversion and Continuations of Loans shall be irrevocable and
shall be effective only if received by the Agent not later than 1:00 p.m. (a) on
the Business Day which is at least three (3) Business Days prior to the date of
termination or reduction of Commitments, (b) on the Business Day of the
borrowing, prepayment or repayment of Base Rate Loans, or Conversions into Base
Rate Loans, or (c) on the Business Day which is at least three (3) Business Days
prior to the date of borrowing, prepayment
CREDIT AGREEMENT - PAGE 25
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or repayment of Eurodollar Loans, Conversions into or Continuations as
Eurodollar Loans. Any notices of the type described in this Section 4.3 which
are received by the Agent after 1:00 p.m. on a Business Day shall be deemed to
be received and shall be effective on the next Business Day. Each such notice of
termination or reduction shall specify the applicable Commitments to be affected
and the amount of the Commitments to be terminated or reduced. Each such notice
of borrowing, Conversion, Continuation, or prepayment shall (a) specify the
Loans to be borrowed or prepaid or the Loans to be Converted or Continued; (b)
the amount (subject to Section 4.2 hereof) to be borrowed, Converted, Continued
or prepaid; (c) in the case of a Conversion, the Type of Loan to result from
such Conversion; (d) in the case of a borrowing (other than a borrowing under
the Swingline Loan), the Type of Loan or Loans to be applicable to such
borrowing and the amounts thereof; (e) in the event a Eurodollar Loan is
selected, the duration of the Interest Period therefor; and (f) the date of
borrowing, Conversion, Continuation, or prepayment (which shall be a Business
Day). The Agent shall notify the Lenders of the contents of each such notice on
the date of its receipt of the same or, if received after 1:00 p.m. on a
Business Day, on the next Business Day. In the event the Borrower fails to
select the Type of Loan, or the duration of any Interest Period for any
Eurodollar Loan, within the time period and otherwise as provided in this
Section 4.3, such Loan (if outstanding as Eurodollar Loan) will be automatically
Converted into a Base Rate Loan on the last day of preceding Interest Period for
such Loan or (if outstanding as a Base Rate Loan) will remain as, or (if not
then outstanding) will be made as, a Base Rate Loan. The Borrower may not borrow
any Eurodollar Loans, Convert any Base Rate Loans into Eurodollar Loans, or
Continue any Eurodollar Loan as a Eurodollar Loan if the interest rate for such
Eurodollar Loans would exceed the Maximum Rate.
Section IV.4 Prepayments. Subject to Section 4.2 and the provisions
of this Section 4.4, Borrower may, at any time and from time to time without
premium or penalty upon prior notice to the Agent as specified in Section 4.3,
prepay or repay any Loan in full or in part. Eurodollar Loans may be prepaid or
repaid only on the last day of the Interest Period applicable thereto unless the
Borrower pays to the Agent for the account of the applicable Lenders any amounts
due under Section 5.5 as a result of such prepayment or repayment.
Section IV.5 Method of Payment. Except as otherwise expressly
provided herein, all payments of principal, interest, and other amounts to be
made by the Borrower or any Significant Subsidiary under the Loan Documents
shall be made to the Agent at the Principal Office for the account of each
Lender's Applicable Lending Office in Dollars and in immediately available
funds, without setoff, deduction, or counterclaim, not later than 1:00 p.m. on
the date on which such payment shall become due (each such payment made after
such time on such due date to be deemed to have been made on the next succeeding
Business Day). The Borrower and each Significant Subsidiary making any payment
shall, at the time of making each such payment, specify to the Agent the sums
payable under the Loan Documents to which such payment is to be applied (and in
the event that the Borrower or such Significant Subsidiary fails to so specify,
or if a Default has occurred and is continuing, the Agent may apply such payment
and any proceeds of any collateral to the Obligations in such order and manner
as it may elect in its sole discretion, subject to Section 4.6 hereof). Each
payment received by the Agent under any Loan Document for the account of a
Lender shall be paid to such Lender by 3:00 p.m. on the date the payment is
deemed made to the Agent in immediately available funds, for the account of such
Lender's Applicable Lending Office. Whenever
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any payment under any Loan Document shall be stated to be due on a day that is
not a Business Day, such payment may be made on the next succeeding Business
Day, and such extension of time shall in such case be included in the
computation of the payment of interest and Revolving Commitment Fee, as the case
may be.
Section IV.6 Pro Rata Treatment. Except to the extent otherwise
provided herein: (a) each Loan (other than the Swingline Loan) shall be made by
the Lenders, each payment of the Revolving Commitment Fee under Section 3.7 and
letter of credit fees under subsection 2.7(c) shall be made for the account of
the Lenders, and each termination or reduction of the Commitments shall be
applied to the Commitments of the Lenders, pro rata according to their
respective Commitment Percentages; (b) the making, Conversion, and Continuation
of Loans of a particular Type (other than Conversions provided for by Section
5.4) shall be made pro rata among the Lenders holding Loans of such Type
according to their respective Commitment Percentages; (c) each payment and
prepayment of principal of or interest on Loans or Reimbursement Obligations by
the Borrower shall be made to the Agent for the account of the Agent or the
Lenders holding such Loans or Reimbursement Obligations (or participation
interests therein) pro rata in accordance with the respective unpaid principal
amounts of such Loans or participation interests held by the Agent or such
Lenders (provided that only the Agent shall be entitled to principal and
interest on the Swingline Loan unless the other Lenders have funded their
participations therein in accordance with subsection 2.8(c); (d) proceeds of any
collateral shall be shared by the Agent and the Lenders pro rata in accordance
with the respective unpaid principal amounts of and interest on the Obligations
then due the Agent and the Lenders; and (e) the Lenders (other than the Agent)
shall purchase from the Agent and the Swingline Lender, respectively,
participations in the Letters of Credit and Swingline Loans to the extent of
their respective Commitment Percentages. If at any time payment, in whole or in
part, of any amount distributed by the Agent hereunder is rescinded or must
otherwise be restored or returned by Agent as a preference, fraudulent
conveyance or otherwise under any bankruptcy, insolvency or similar law, then
each Person receiving any portion of such amount agrees, upon demand, to return
the portion of such amount it has received to the Agent.
Section IV.7 Sharing of Payments. If a Lender shall obtain payment
of any principal of or interest on any of the Obligations due to such Lender
hereunder directly (and not through the Agent) through the exercise of any right
of setoff, bank's lien, counterclaim or similar right, or otherwise, it shall
promptly purchase from the other Lenders participations in the Obligations held
by the other Lenders in such amounts, and make such other adjustments from time
to time as shall be equitable to the end that all the Lenders shall share the
benefit of such payment pro rata in accordance with the unpaid principal of and
interest on the Obligations then due to each of them. To such end, all of the
Lenders shall make appropriate adjustments among themselves (by the resale of
participations sold or otherwise) if all or any portion of such excess payment
is thereafter rescinded or must otherwise be restored. The Borrower agrees, to
the fullest extent it may effectively do so under applicable law, that any
Lender so purchasing a participation in the Obligations held by the other
Lenders may exercise all rights of setoff, Lender's lien, counterclaim, or
similar rights with respect to such participation as fully as if such Lender
were a direct holder of Obligations in the amount of such participation. Nothing
contained herein shall require any Lender to exercise any such right or shall
affect the right of any Lender to exercise, and retain the benefits of
exercising, any such right with respect to any other indebtedness or obligation
of the Borrower.
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Section IV.8 Non-Receipt of Funds by the Agent. Unless the Agent
shall have been notified by a Lender or the Borrower (the Payor) prior to the
date on which such Lender is to make payment to the Agent hereunder or the
Borrower is to make a payment to the Agent for the account of one or more of the
Lenders, as the case may be (such payment being herein called the Required
Payment), which notice shall be effective upon receipt, that the Payor does not
intend to make the Required Payment to the Agent, the Agent may assume that the
Required Payment has been made and may, in reliance upon such assumption (but
shall not be required to), make the amount thereof available to the intended
recipient on such date and, if the Payor has not in fact made the Required
Payment to the Agent, (a) the recipient of such payment shall, on demand, pay to
the Agent the amount made available to it together with interest thereon in
respect of the period commencing on the date such amount was so made available
by the Agent until the date the Agent recovers such amount at a rate per annum
equal to (i) if recovered from a Lender, at the Federal Funds Rate for such
period and (ii) if recovered from the Borrower, the rate of interest applicable
to the respective Loan, as determined pursuant to Section 3.1 and (b) Agent
shall be entitled to offset against any and all sums to be paid to such
recipient, the amount calculated in accordance with the foregoing clause (a).
Section IV.9 Participation Obligations Absolute; Failure to Fund
Participation. The obligations of a Lender to fund its participation in the
Swingline Loans and Letters of Credit in accordance with the terms hereof shall
be absolute, unconditional and irrevocable and shall be performed strictly in
accordance with the terms of the Loan Documents under all circumstances
whatsoever, including without limitation, the following circumstances: (a) any
lack of validity of any Loan Document; (b) the occurrence of any Default; (c)
the existence of any claim, setoff, counterclaim, defenses or other rights which
such Lender, the Borrower, any Significant Subsidiary, or any other Person may
have; (d) the occurrence of any event that has or could reasonably be expected
to have a Material Adverse Effect; (e) the failure of any condition to a Loan
under Article 6 to be satisfied; or (f) any other circumstance whatsoever,
whether or not similar to any of the foregoing. If a Lender fails to fund its
participation in a Swingline Loan or a Letter of Credit as required hereby, such
Lender shall remain obligated to pay to the Swingline Lender or the Agent,
respectively, the amount it failed to fund on demand together with interest
thereon in respect of the period commencing on the date such amount should have
been funded until the date the amount was actually funded to the Swingline
Lender or the Agent, respectively, at a rate per amount equal to the Federal
Funds Rate for such period and the Swingline Lender or the Agent, respectively,
shall be entitled to offset against any and all sums to be paid to such Lender
hereunder the amount due the Swingline Lender or the Agent, respectively, under
this sentence.
ARTICLE V
Change in Circumstances
Section V.1 Increased Cost and Reduced Return.
(a If, after the date hereof, the adoption of any
applicable law, rule, or regulation, or any change in any applicable
law, rule, or regulation, or any change in the
CREDIT AGREEMENT - PAGE 28
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interpretation or administration thereof by any governmental
authority, central Lender, or comparable agency charged with the
interpretation or administration thereof, or compliance by any
Lender (or its Applicable Lending Office) with any request or
directive (whether or not having the force of law) of any such
governmental authority, central Lender, or comparable agency:
(i shall subject such Lender (or its
Applicable Lending Office) to any tax, duty, or other
charge with respect to any Eurodollar Loans, its Note,
or its obligation to make Loans, issue or participate in
Letters of Credit, or change the basis of taxation of
any amounts payable to such Lender (or its Applicable
Lending Office) under this Agreement or its Note in
respect of any Eurodollar Loans (other than taxes
imposed on the overall net income of such Lender by the
jurisdiction in which such Lender has its principal
office or such Applicable Lending Office);
(ii shall impose, modify, or deem
applicable any reserve, special deposit, assessment, or
similar requirement (other than the Reserve Requirement
utilized in the determination of the Adjusted Eurodollar
Rate relating to any extensions of credit or other
assets of, or any deposits with or other liabilities or
commitments of, such Lender (or its Applicable Lending
Office), including the Commitment of such Lender
hereunder; or
(iii shall impose on such Lender (or its
Applicable Lending Office) or on the London interbank
market any other condition affecting this Agreement or
its Note or any of such extensions of credit or
liabilities or commitments;
and the result of any of the foregoing is to increase the cost to
such Lender (or its Applicable Lending Office) of making, Converting
into, Continuing, or maintaining any Eurodollar Loans or to reduce
any sum received or receivable by such Lender (or its Applicable
Lending Office) under this Agreement or its Note with respect to any
Lender Loans, then the Borrower shall pay to such Lender on demand
such amount or amounts as will compensate such Lender for such
increased cost or reduction. If any Lender requests compensation by
the Borrower under this Section 5.1(a), the Borrower may, by notice
to such Lender (with a copy to the Agent), suspend the obligation of
such Lender to make or Continue Loans of the Type with respect to
which such compensation is requested, or to Convert Loans of any
other Type into Loans of such Type, until the event or condition
giving rise to such request ceases to be in effect (in which case
the provisions of Section 5.4 shall be applicable); provided that
such suspension shall not affect the right of such Lender to receive
the compensation so requested.
(b If, after the date hereof, any Lender shall have
determined that the adoption of any applicable law, rule, or
regulation regarding capital adequacy or any change therein or in
the interpretation or administration thereof by any governmental
authority, central Lender, or comparable agency charged with the
interpretation or administration thereof, or any request or
directive regarding capital adequacy (whether or not having the
force of law) of any such governmental authority, central Lender, or
comparable agency, has or would
CREDIT AGREEMENT - PAGE 29
<PAGE>
have the effect of reducing the rate of return on the capital of
such Lender or any corporation controlling such Lender as a
consequence of such Lender's obligations hereunder to a level below
that which such Lender or such corporation could have achieved but
for such adoption, change, request, or directive (taking into
consideration its policies with respect to capital adequacy), then
from time to time upon demand the Borrower shall pay to such Lender
such additional amount or amounts as will compensate such Lender for
such reduction.
(c Each Lender shall promptly notify the Borrower and
the Agent of any event of which it has knowledge, occurring after
the date hereof, which will entitle such Lender to compensation
pursuant to this Section and will designate a different Applicable
Lending Office if such designation will avoid the need for, or
reduce the amount of, such compensation and will not, in the
judgment of such Lender, be otherwise disadvantageous to it. Any
Lender claiming compensation under this Section shall furnish to the
Borrower and the Agent a statement setting forth the additional
amount or amounts to be paid to it hereunder which shall be
conclusive in the absence of manifest error. In determining such
amount, such Lender may use any reasonable averaging and attribution
methods. If any Lender fails to give such notice of any such event
within ninety (90) days after it obtains knowledge of such an event,
such Lender shall, with respect to compensation payable pursuant to
this Section, only be entitled to payment under this Section for
diminished return as a result of such reduction for the period from
and after the date ninety (90) days prior to the date that such
Lender does give such notice.
Section V.2 Limitation on Types of Loans. If on or prior to the
first day of any Interest Period for any Eurodollar Loan:
(a the Agent determines (which determination shall be
conclusive) that by reason of circumstances affecting the relevant
market, adequate and reasonable means do not exist for ascertaining
the Eurodollar Rate for such Interest Period; or
(b the Required Lenders determine (which determination
shall be conclusive) and notify the Agent that the Adjusted
Eurodollar Rate will not adequately and fairly reflect the cost to
the Lenders of funding Eurodollar Loans for such Interest Period;
then the Agent shall give the Borrower prompt notice thereof specifying the
relevant Type of Loans and the relevant amounts or periods, and so long as such
condition remains in effect, the Lenders shall be under no obligation to make
additional Loans of such Type, Continue Loans of such Type, or to Convert Loans
of any other Type into Loans of such Type and the Borrower shall, on the last
day(s) of the then current Interest Period(s) for the outstanding Loans of the
affected Type, either prepay such Loans or Convert such Loans into another Type
of Loan in accordance with the terms of this Agreement.
Section V.3 Illegality. Notwithstanding any other provision of this
Agreement, in the event that it becomes unlawful for any Lender or its
Applicable Lending Office to make, maintain,
CREDIT AGREEMENT - PAGE 30
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or fund Eurodollar Loans hereunder, then such Lender shall promptly notify the
Borrower thereof and such Lender's obligation to make or Continue Eurodollar
Loans and to Convert other Types of Loans into Eurodollar Loans shall be
suspended until such time as such Lender may again make, maintain, and fund
Eurodollar Loans (in which case the provisions of Section 5.4 shall be
applicable).
Section V.4 Treatment of Affected Loans. If the obligation of any
Lender to make a Eurodollar Loan or to Continue, or to Convert Loans of any
other Type into, Loans of a particular Type shall be suspended pursuant to
Section 5.1 or 5.3 hereof (Loans of such Type being herein called Affected Loans
and such Type being herein called the Affected Type), such Lender's Affected
Loans shall be automatically Converted into Base Rate Loans on the last day(s)
of the then current Interest Period(s) for Affected Loans (or, in the case of a
Conversion required by Section 5.3 hereof, on such earlier date as such Lender
may specify to the Borrower with a copy to the Agent) and, unless and until such
Lender gives notice as provided below that the circumstances specified in
Section 5.1 or 5.3 hereof that gave rise to such Conversion no longer exist:
(a to the extent that such Lender's Affected Loans have
been so Converted, all payments and prepayments of principal that
would otherwise be applied to such Lender's Affected Loans shall be
applied instead to its Base Rate Loans; and
(b all Loans that would otherwise be made or Continued
by such Lender as Loans of the Affected Type shall be made or
Continued instead as Base Rate Loans, and all Loans of such Lender
that would otherwise be Converted into Loans of the Affected Type
shall be Converted instead into (or shall remain as) Base Rate
Loans.
If such Lender gives notice to the Borrower (with a copy to the Agent) that the
circumstances specified in Section 5.1 or 5.3 hereof that gave rise to the
Conversion of such Lender's Affected Loans pursuant to this Section 5.4 no
longer exist (which such Lender agrees to do promptly upon such circumstances
ceasing to exist) at a time when Loans of the Affected Type made by other
Lenders are outstanding, such Lender's Base Rate Loans shall be automatically
Converted, on the first day(s) of the next succeeding Interest Period(s) for
such outstanding Loans of the Affected Type, to the extent necessary so that,
after giving effect thereto, all Loans held by the Lenders holding Loans of the
Affected Type and by such Lender are held pro rata (as to principal amounts,
Types, and Interest Periods) in accordance with their respective Commitments.
Section V.5 Compensation. Upon the request of any Lender, the
Borrower shall pay to such Lender such amount or amounts as shall be sufficient
(in the reasonable opinion of such Lender) to compensate it for any loss, cost,
or expense (excluding loss of anticipated profits) incurred by it as a result
of:
(a any payment, prepayment, or Conversion of a
Eurodollar Loan for any reason (including, without limitation, the
acceleration of the Loans pursuant to Section 11.2(a) on a date
other than the last day of the Interest Period for such Loan; or
CREDIT AGREEMENT - PAGE 31
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(b any failure by the Borrower for any reason
(including, without limitation, the failure of any condition
precedent specified in Article 6 to be satisfied) to borrow,
Convert, Continue, or prepay a Eurodollar Loan on the date for such
borrowing, Conversion, Continuation, or prepayment specified in the
relevant notice of borrowing, prepayment, Continuation, or
Conversion under this Agreement.
Section V.6 Taxes.
(a Any and all payments by the Borrower to or for the
account of any Lender or the Agent hereunder or under any other Loan
Document shall be made free and clear of and without deduction for
any and all present or future taxes, duties, levies, imposts,
deductions, charges or withholdings, and all liabilities with
respect thereto, excluding, in the case of each Lender and the
Agent, taxes imposed on its income, and franchise taxes imposed on
it, by the jurisdiction under the laws of which such Lender (or its
Applicable Lending Office) or the Agent (as the case may be) is
organized or any political subdivision thereof (all such
non-excluded taxes, duties, levies, imposts, deductions, charges,
withholdings, and liabilities being hereinafter referred to as
Taxes). If the Borrower shall be required by law to deduct any Taxes
from or in respect of any sum payable under this Agreement or any
other Loan Document to any Lender or the Agent, (i) the sum payable
hereunder shall be increased as necessary so that after making all
required deductions (including deductions applicable to additional
sums payable under this Section 5.6) such Lender or the Agent
receives an amount equal to the sum it would have received had no
such deductions been made, (ii) the Borrower shall make such
deductions, (iii) the Borrower shall pay the full amount deducted to
the relevant taxation authority or other authority in accordance
with applicable law, and (iv) the Borrower shall furnish to the
Agent, at its address below its signature hereof, the original or a
certified copy of a receipt evidencing payment thereof.
(b In addition, the Borrower agrees to pay any and all
present or future stamp or documentary taxes and any other excise or
property taxes or charges or similar levies which arise from any
payment made under this Agreement or any other Loan Document or from
the execution or delivery of, or otherwise with respect to, this
Agreement or any other Loan Document (hereinafter referred to as
Other Taxes).
(c The Borrower agrees to indemnify each Lender and the
Agent for the full amount of Taxes and Other Taxes (including,
without limitation, any Taxes or Other Taxes imposed or asserted by
any jurisdiction on amounts payable under this Section 5.6) paid by
such Lender or the Agent (as the case may be) and any liability
(including penalties, interest, and expenses) arising therefrom or
with respect thereto.
(d Each Lender organized under the laws of a
jurisdiction outside the United States, on or prior to the date of
its execution and delivery of this Agreement in the case of each
Lender listed on the signature pages hereof and on or prior to the
date on which it becomes a Lender in the case of each other Lender,
and from time to time thereafter if reasonably requested in writing
by the Borrower or the Agent (but only so long as such Lender
remains lawfully able to do so), shall provide the Borrower and the
Agent with
CREDIT AGREEMENT - PAGE 32
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(i) Internal Revenue Service Form 1001 or 4224, as appropriate, or
any successor form prescribed by the Internal Revenue Service,
certifying that such Lender is entitled to benefits under an income
tax treaty to which the United States is a party which reduces the
rate of withholding tax on payments of interest or certifying that
the income receivable pursuant to this Agreement is effectively
connected with the conduct of a trade or business in the United
States, (ii) Internal Revenue Service Form W-8 or W-9, as
appropriate, or any successor form prescribed by the Internal
Revenue Service, and (iii) any other form or certificate required by
any taxing authority (including any certificate required by Sections
871(h) and 881(c) of the Internal Revenue Code), certifying that
such Lender is entitled to an exemption from or a reduced rate of
tax on payments pursuant to this Agreement or any of the other Loan
Documents.
(e For any period with respect to which a Lender has
failed to provide the Borrower and the Agent with the appropriate
form pursuant to Section 5.6(d) (unless such failure is due to a
change in treaty, law, or regulation occurring subsequent to the
date on which a form originally was required to be provided), or to
the extent such form does not establish a complete exemption from
withholding, such Lender shall not be entitled to indemnification
under Section 5.6(a) or 5.6(b) with respect to Taxes imposed by the
United States; provided, however, that should a Lender, which is
otherwise exempt from or subject to a reduced rate of withholding
tax, become subject to Taxes because of its failure to deliver a
form required hereunder, the Borrower shall take such steps as such
Lender shall reasonably request to assist such Lender to recover
such Taxes.
(f If the Borrower is required to pay additional amounts
to or for the account of any Lender pursuant to this Section 5.6,
then such Lender will agree to use reasonable efforts to change the
jurisdiction of its Applicable Lending Office so as to eliminate or
reduce any such additional payment which may thereafter accrue if
such change, in the judgment of such Lender, is not otherwise
disadvantageous to such Lender.
(g Within thirty (30) days after the date of any payment
of Taxes, the Borrower shall furnish to the Agent the original or a
certified copy of a receipt evidencing such payment.
(h Without prejudice to the survival of any other
agreement of the Borrower hereunder, the agreements and obligations
of the Borrower contained in this Section 5.6 shall survive the
termination of the Commitments and the payment in full of the Notes.
Section V.7 Replacement of a Lender. If (i) the obligation of a
Lender (other than the Agent as a Lender) to make or Continue Eurodollar Loans
has been suspended pursuant to Section 5.1, 5.2 or 5.3 or (ii) a Lender (other
than the Agent as a Lender) has demanded compensation under Section 5.1 or
Section 5.6, the Borrower shall have the right to require such Lender to assign
to an Eligible Assignee selected by the Borrower and reasonably satisfactory to
the Agent (which may be one or more of the Lenders) the Notes and participation
interests in the Letter of Credit Liabilities and Swingline Loans held by such
Lender pursuant to the terms of an appropriately completed Assignment and
Acceptance in accordance with subsection 13.7; provided
CREDIT AGREEMENT - PAGE 33
<PAGE>
that, neither the Agent nor any Lender shall have any obligation to Borrower to
find any such Eligible Assignee and in order for Borrower to replace a Lender,
the Borrower must require such replacement within three (3) months of the date
such obligations of the Lender were suspended or the date the Lender demanded
such compensation. Each Lender (other than the Agent as a Lender) agrees to its
replacement at the option of the Borrower pursuant to this Section 5.7; provided
that, the Eligible Assignee selected by Borrower shall purchase such Lender's
interest in the Obligations of the Borrower to such Lender for cash in an
aggregate amount equal to the aggregate unpaid principal thereof, all unpaid
interest accrued thereon, all unpaid commitment and letter of credit fees
accrued for the account of such Lender, any breakage costs incurred by the
selling Lender because of the prepayment of any Eurodollar Loans, all other fees
(if any) applicable thereto and all other amounts (including any amounts due
under Section 5.1 or 5.6) then owing to such Lender hereunder or under any other
Loan Document.
ARTICLE VI
Conditions Precedent
Section VI.1 Initial Loan and Letter of Credit. The obligation of
each Lender to make its initial Loan and the obligation of the Agent to issue
the initial Letter of Credit and make the initial Swingline Loan are subject to
the condition precedent that the Agent shall have received on or before the day
of any such Loan or Letter of Credit all of the following, each dated (unless
otherwise indicated) the date hereof, in form and substance satisfactory to the
Agent:
(a Resolutions. Resolutions of the Board of Directors of
the Borrower and each Significant Subsidiary certified by its
Secretary or an Assistant Secretary which authorize its execution,
delivery, and performance of the Loan Documents to which it is or is
to be a party.
(b Incumbency Certificate. A certificate of incumbency
certified by the Secretary or an Assistant Secretary of the Borrower
and each Significant Subsidiary certifying the name of each of its
officers (i) who is authorized to sign the Loan Documents to which
it is or is to be a party (including the certificates contemplated
herein) together with specimen signatures of each such officer and
(ii) who will, until replaced by other officers duly authorized for
that purpose, act as its representative for the purposes of signing
documentation and giving notices and other communications in
connection with this Agreement and the transactions contemplated
hereby.
(c Certificate of Incorporation. The certificate of
incorporation of the Borrower and each Significant Subsidiary
certified by the Secretary of State of the state of its
incorporation and dated a current date.
(d Bylaws. The bylaws of the Borrower and each
Significant Subsidiary certified by its Secretary or an Assistant
Secretary.
CREDIT AGREEMENT - PAGE 34
<PAGE>
(e Governmental Certificates. Certificates of the
appropriate government officials of the state of incorporation of
the Borrower and each Significant Subsidiary as to its existence and
good standing and certificates of the appropriate government
officials of each state in which the Borrower and each Significant
Subsidiary is required to qualify to do business and where failure
to so qualify could reasonably be expected to have a Material
Adverse Effect, as to the Borrower's and each such Significant
Subsidiary's qualification to do business and good standing in such
state, all dated a current date.
(f Notes. The Notes executed by the Borrower.
(g Guaranty. A Guaranty duly executed by each
Significant Subsidiary.
(h Contribution and Indemnification Agreement. A
Contribution and Indemnification Agreement duly executed by each
Significant Subsidiary.
(i Termination Agreement. A termination agreement in
form and substance reasonably satisfactory to the Agent or other
documents confirming that the prior credit facilities provided
pursuant to that certain Amended and Restated Credit Agreement dated
as of April 29, 1996, by and among the Borrower, the several lenders
from time to time party thereto and Norwest Bank Minnesota, National
Association, as agent, shall be terminated and paid in full
effective as of the Closing Date.
(j Opinion of Counsel. Favorable opinions of legal
counsel to the Borrower and the Significant Subsidiaries as to such
matters as the Agent or the Required Lenders may reasonably request.
(k Lender Fees. The arrangement, upfront, underwriting
and administrative fees Borrower has agreed to pay to NationsBank
and the other Lenders (as to the upfront fees only) under and as
described in the terms of that certain fee letter dated August 14,
1998 among Borrower, NationsBank and NationsBanc Montgomery
Securities LLC.
(l Attorneys' Fees and Expenses. Evidence that the costs
and expenses (including reasonable attorneys' fees) referred to in
Section 3.1, to the extent incurred, shall have been paid in full by
the Borrower.
(m Financial Statements. Audited consolidated financial
statements of the Borrower and the Subsidiaries as at and for the
Fiscal Years ended December 31, 1995, December 31, 1996 and December
31, 1997 containing balance sheets and statements of income and cash
flow, all in reasonable detail and audited and certified by
independent certified public accountants of recognized national
standing acceptable to the Agent, to the effect that such reports
have been prepared in accordance with GAAP.
Section VI.2 All Loans and Letters of Credit. The obligation of each
Lender to make any Loan (including the initial Loan) and the obligation of the
Agent to issue any Letter of Credit
CREDIT AGREEMENT - PAGE 35
<PAGE>
(including the initial Letter of Credit) or make any Swingline Loan are subject
to the following additional conditions precedent:
(a Loan or Letter of Credit Request Form. The Agent or
Swingline Lender shall have received a Loan or Letter of Credit
Request Form, dated the date of such Loan or Letter of Credit, as
applicable, executed by an Executive Officer of the Borrower, or any
designee thereof;
(b No Default. No Default shall have occurred and be
continuing, or would result from such Loan or Letter of Credit;
(c Representations and Warranties. All of the
representations and warranties contained in Article 7 hereof and in
the other Loan Documents shall be true and correct in all material
respects on and as of the date of such Loan or Letter of Credit with
the same force and effect as if such representations and warranties
had been made on and as of such date except to the extent that such
representations and warranties relate specifically to another date;
and
(d Additional Documentation. The Agent shall have
received such additional approvals, opinions, or documents as the
Agent may reasonably request.
Each notice of borrowing by the Borrower hereunder, and each request for the
issuance of a Letter of Credit, shall constitute a representation and warranty
by the Borrower that the conditions precedent set forth in subsections 6.2(b)
and (c) have been satisfied (both as of the date of such notice and, unless the
Borrower otherwise notifies the Agent prior to the date of such borrowing or
Letter of Credit, as of the date of such borrowing or Letter of Credit).
ARTICLE VII
Representations and Warranties
To induce the Agent and the Lenders to enter into this Agreement,
the Borrower represents and warrants to the Agent and the Lenders that:
Section VII.1 Corporate Existence. The Borrower and each Subsidiary
(a) is a corporation or other entity (as reflected on Schedule 7.14) duly
organized, validly existing, and in good standing under the laws of the
jurisdiction of its incorporation or organization; (b) has all requisite power
and authority to own its assets and carry on its business as now being or as
proposed to be conducted; and (c) is qualified to do business in all
jurisdictions in which the nature of its business makes such qualification
necessary and where failure to so qualify could reasonably be expected to have a
Material Adverse Effect. Borrower and each Significant Subsidiary has the
corporate power and authority to execute, deliver, and perform their respective
obligations under the Loan Documents to which it is or may become a party.
CREDIT AGREEMENT - PAGE 36
<PAGE>
Section VII.2 Financial Statements. The Borrower has delivered to
the Agent and the Lenders audited consolidated financial statements of the
Borrower and the Subsidiaries as at and for the Fiscal Year ended December 31,
1997 and unaudited consolidated financial statements of the Borrower and the
Subsidiaries for the Fiscal Quarter ended June 30, 1998. Such financial
statements, have been prepared in accordance with GAAP, and present fairly, on a
consolidated basis, the financial condition of the Borrower and the Subsidiaries
as of the respective dates indicated therein and the results of operations for
the respective periods indicated therein. Neither the Borrower nor any of the
Subsidiaries has any material contingent liabilities, liabilities for taxes,
unusual forward or long-term commitments, or unrealized or anticipated losses
from any unfavorable commitments except as referred to or reflected in such
financial statements. There has been no material adverse change in the business,
condition (financial or otherwise), operations, prospects, or properties of the
Borrower and the Subsidiaries taken as a whole since December 31, 1997.
Section VII.3 Corporate Actions: No Breach. The execution, delivery,
and performance by the Borrower and each Significant Subsidiary of the Loan
Documents to which each is or may become a party and compliance with the terms
and provisions hereof and thereof have been duly authorized by all requisite
action on the part of the Borrower and each Significant Subsidiary and do not
and will not (a) violate or conflict with, or result in a breach of, or require
any consent under (i) the articles or certificate of incorporation or bylaws or
other applicable organizational documents of the Borrower or any of such
Subsidiary, (ii) any applicable law, rule, or regulation or any order, writ,
injunction, or decree of any Governmental Authority or arbitrator other than
such violations, conflicts and breaches which could not be reasonably expected
to have a Material Adverse Effect, or (iii) any agreement or instrument to which
the Borrower or any of the Subsidiaries is a party or by which any of them or
any of their property is bound or subject (the Other Agreements) other than such
violations, conflicts and breaches which could not be reasonably expected to
have a Material Adverse Effect, or (b) constitute a default under any Other
Agreement, or result in the creation or imposition of any Lien (except as
permitted herein) upon any of the revenues or assets of the Borrower or any
Subsidiary other than such defaults which could not be reasonably expected to
have a Material Adverse Effect.
Section VII.4 Operation of Business. The Borrower and each of the
Subsidiaries possess all licenses, permits, franchises, patents, copyrights,
trademarks, and tradenames, or rights thereto, necessary to conduct their
respective businesses substantially as now conducted and as presently proposed
to be conducted except those that the failure to so possess could not reasonably
be expected to have a Material Adverse Effect, and the Borrower and each of its
Subsidiaries are not in violation of any valid rights of others with respect to
any of the foregoing except violations that could not reasonably be expected to
have a Material Adverse Effect.
Section VII.5 Litigation and Judgments. There is no action, suit,
investigation, or proceeding before or by any Governmental Authority or
arbitrator pending, or to the knowledge of the Borrower, threatened against or
affecting the Borrower or any Subsidiary, that could be reasonably expected to
have a Material Adverse Effect. As of the Closing Date, there are no outstanding
judgments against the Borrower or any Subsidiary that could reasonably be
expected to have a Material Adverse Effect.
CREDIT AGREEMENT - PAGE 37
<PAGE>
Section VII.6 Rights in Properties; Liens; Nonproductive Assets. The
Borrower and each Subsidiary have good title to or valid leasehold interests in
their respective properties and assets, real and personal, including the
properties, assets, and leasehold interests reflected in the financial
statements described in Section 7.2 except where the failure to maintain good
title to or valid leasehold interest could reasonably be expected to have a
Material Adverse Effect (except as sold or otherwise disposed of since the date
of such financial statements in the ordinary course of business or as otherwise
permitted by this Agreement), and none of the properties, assets, or leasehold
interests of the Borrower or any Subsidiary is subject to any Lien, except as
permitted by Section 9.2.
Section VII.7 Enforceability. The Loan Documents to which the
Borrower or any Significant Subsidiary is party, when delivered, shall
constitute the legal, valid, and binding obligations of the Borrower or the
Significant Subsidiary, as applicable, enforceable against Borrower or the
applicable Significant Subsidiary in accordance with their respective terms,
except as limited by bankruptcy, insolvency, or other laws of general
application relating to the enforcement of creditors' rights and general
principles of equity.
Section VII.8 Approvals. No authorization, approval, or consent of,
and no filing or registration with, any Governmental Authority or third party is
or will be necessary for the execution, delivery, or performance by the Borrower
or any Significant Subsidiary of the Loan Documents to which each is or may
become a party or for the validity or enforceability thereof except for such
authorizations, approvals, consents, filings and registrations the failure to
obtain or make could not be reasonably expected to have a Material Adverse
Effect.
Section VII.9 Debt. The Borrower and the Subsidiaries have no Debt,
except as permitted by Section 9.1.
Section VII.10 Taxes. The Borrower and each Subsidiary have filed
all tax returns (federal, state, and local) required to be filed, including all
income, franchise, employment, property, and sales and use tax returns, and have
paid all of their respective liabilities for taxes, assessments, governmental
charges, and other levies that are due and payable other than those being
contested in good faith by appropriate proceedings diligently pursued for which
adequate reserves have been established except where failure to file or pay
could reasonably be expected to have a Material Adverse Effect. The Borrower
knows of no pending investigation of the Borrower or any Subsidiary by any
taxing authority or of any pending but unassessed tax liability of the Borrower
or any Subsidiary.
Section VII.11 Margin Securities. Neither the Borrower nor any
Subsidiary is engaged principally, or as one of its important activities, in the
business of extending credit for the purpose of purchasing or carrying margin
stock (within the meaning of Regulations T, U, or X of the Board of Governors of
the Federal Reserve System), and no part of the proceeds of any Loan will be
used to purchase or carry any margin stock or to extend credit to others for the
purpose of purchasing or carrying margin stock.
CREDIT AGREEMENT - PAGE 38
<PAGE>
Section VII.12 ERISA. The Borrower, each Subsidiary, ERISA
Affiliate, and each Plan are in compliance with all applicable provisions of
ERISA and the Code except for such events of noncompliance that will not have a
Material Adverse Effect. Neither a Reportable Event nor a Prohibited Transaction
has occurred with respect to any Plan. No notice of intent to terminate a Plan
has been filed, nor has any Plan been terminated. No circumstances exist which
constitute grounds entitling the PBGC to institute proceedings to terminate, or
appoint a trustee to administer, a Plan, nor has the PBGC instituted any such
proceedings. Neither the Borrower nor any ERISA Affiliate has completely or
partially withdrawn from a Multiemployer Plan. The Borrower and each ERISA
Affiliate have met their minimum funding requirements under ERISA and the Code
with respect to all of their Plans except for those instances of noncompliance
with such requirements that will not have a Material Adverse Effect and no
accumulated funding deficiency (for which an excise tax is due or would be due
in the absence of a waiver) as defined in Section 412 of the Code or Section
302(a)(2) of ERISA, whichever may apply, has been incurred with respect to any
Plan, whether or not waived. The present value of all vested benefits under each
Plan do not exceed the fair market value of all Plan assets allocable to such
benefits, determined on a termination basis as of the most recent valuation date
of the Plan and in accordance with ERISA, by an amount that could reasonably be
expected to have a Material Adverse Effect. Neither the Borrower nor any ERISA
Affiliate has incurred any liability to the PBGC under ERISA in an amount that
could reasonably be expected to have a Material Adverse Effect. Neither the
Borrower nor any ERISA Affiliate is subject to any lien imposed under Section
412(n) of the Code or Section 302(f) or 4068 of ERISA, whichever may apply, with
respect to any Plan. Neither the Borrower nor any ERISA Affiliate is required to
provide security to a Plan under Section 401(a)(29) of the Code.
Section VII.13 Disclosure. All factual information (taken as a
whole) furnished by or on behalf of the Borrower in writing to the Agent or any
Lender (including, without limitation, all information contained in the Loan
Documents) for purposes of or in connection with this Agreement, the other Loan
Documents or any transaction contemplated herein or therein is, and all other
such factual information (taken as a whole) hereafter furnished by or on behalf
of the Borrower to the Agent or any Lender, will be true and accurate in all
material respects on the date as of which such information is dated or certified
and not incomplete by omitting to state any fact necessary to make such
information (taken as a whole) not misleading in any material respect at such
time in light of the circumstances under which such information was provided.
Section VII.14 Subsidiaries. As of the Closing Date and as of any
date Schedule 7.14 is amended pursuant to Section 8.10, the Borrower has no
Subsidiaries other than those listed on Schedule 7.14 hereto. Schedule 7.14 sets
forth the type of each Subsidiary listed thereon, the jurisdiction of
incorporation or organization of each such Subsidiary, the percentage of the
Borrower's ownership of the outstanding voting stock (or other ownership
interests) of each Subsidiary, and with respect to each Significant Subsidiary
that is a corporation, the authorized, issued and outstanding capital stock of
each such Significant Subsidiary. All of the outstanding capital stock of each
Significant Subsidiary listed on Schedule 7.14 has been validly issued, is fully
paid, and is nonassessable. There are no outstanding subscriptions, options,
warrants, calls, or rights (including preemptive rights) to acquire, and no
outstanding securities or instruments convertible into, capital stock of any
Significant Subsidiary except as listed on Schedule 7.14.
CREDIT AGREEMENT - PAGE 39
<PAGE>
Section VII.15 Agreements. Neither the Borrower nor any Subsidiary
is in default in any respect in the performance, observance, or fulfillment of
any of the obligations, covenants, or conditions contained in any agreement or
instrument to which it is a party other than defaults which could not be
reasonably be expected to have a Material Adverse Effect.
Section VII.16 Compliance with Laws. Neither the Borrower nor any
Subsidiary is in violation of any law, rule, regulation, order, or decree of any
Governmental Authority or arbitrator other than defaults which could not be
reasonably expected to have a Material Adverse Effect.
Section VII.17 Investment Company Act. Neither the Borrower nor any
Subsidiary is an investment company within the meaning of the Investment Company
Act of 1940, as amended.
Section VII.18 Public Utility Holding Company Act. Neither the
Borrower nor any Subsidiary is a holding company or a subsidiary company of a
holding company or an Affiliate of a holding company or a public utility within
the meaning of the Public Utility Holding Company Act of 1935, as amended.
Section VII.19 Environmental Matters. Except for those matters which
will not have a Material Adverse Effect:
(a The Borrower, each Subsidiary, and all of their
respective properties, assets, and operations are in full compliance
with all Environmental Laws. The Borrower is not aware of, nor has
the Borrower received notice of, any past or present conditions,
events, activities, practices, or incidents which may interfere with
or prevent the compliance or continued compliance of the Borrower
and the Subsidiaries with all Environmental Laws;
(b The Borrower and each Subsidiary have obtained all
permits, licenses, and authorizations that are required under
applicable Environmental Laws, and all such permits are in good
standing and the Borrower and its Subsidiaries are in compliance
with all of the terms and conditions of such permits;
(c No Hazardous Materials exist on, about, or within or
have been used, generated, stored, transported, disposed of on, or
Released from any of the properties or assets of the Borrower or any
Subsidiary except in compliance with Environmental Laws. The use
which the Borrower and the Subsidiaries make and intend to make of
their respective properties and assets will not result in the use,
generation, storage, transportation, accumulation, disposal, or
Release of any Hazardous Material on, in, or from any of their
properties or assets except in compliance with Environmental Laws;
(d Neither the Borrower nor any of the Subsidiaries nor
any of their respective currently or previously owned or leased
properties or operations is subject to any outstanding or, to the
best of its knowledge, threatened order from or agreement with any
Governmental Authority or other Person or subject to any judicial or
administrative proceeding with respect to (i) failure to comply with
Environmental Laws, (ii) Remedial Action, or (iii) any Environmental
Liabilities arising from a Release or threatened Release;
CREDIT AGREEMENT - PAGE 40
<PAGE>
(e There are no conditions or circumstances associated
with the currently or previously owned or leased properties or
operations of the Borrower or any of the Subsidiaries that could
reasonably be expected to give rise to any Environmental
Liabilities;
(f Neither the Borrower nor any of the Subsidiaries is a
treatment, storage, or disposal facility requiring a permit under
the Resource Conservation and Recovery Act, 42 U.S.C. ' 6901 et
seq., regulations thereunder or any comparable provision of state
law. The Borrower and the Subsidiaries are compliance with all
applicable financial responsibility requirements of all
Environmental Laws;
(g Neither the Borrower nor any of the Subsidiaries has
filed or failed to file any notice required under applicable
Environmental Law reporting a Release; and
(h No Lien arising under any Environmental Law has
attached to any property or revenues of the Borrower or the
Subsidiaries.
Section VII.20 Year 2000 Compliance. The Borrower has (i) initiated
a review and assessment of all areas within its and each of its Subsidiaries'
business and operations (including those affected by suppliers, vendors and
customers) that could reasonably be expected to be adversely affected by the
"Year 2000 Problem" (that is the risk that computer applications used by the
Borrower or any of its Subsidiaries (or suppliers and customers) may be unable
to recognize and perform properly date-sensitive functions involving certain
dates prior to and any date after December 31, 1999), (ii) developed a plan and
timeline for addressing the Year 2000 Problem on a timely basis, and (iii) to
date, substantially implemented that plan in accordance with that timetable.
Based on the foregoing, the Borrower believes that all computer applications
(including those of its suppliers, vendors and customers) that are material to
its or any of its Subsidiaries' business and operations are reasonably expected
on a timely basis to be able to perform properly date-sensitive functions for
all dates before and after January 1, 2000 (that is, be Year 2000 compliant),
except to the extent that a failure to do so could not reasonably be expected to
have Material Adverse Effect.
ARTICLE VIII
Positive Covenants
The Borrower covenants and agrees that, as long as the Obligations
or any part thereof are outstanding or any Lender has any Commitment hereunder,
the Borrower will perform and observe the following positive covenants:
Section VIII.1 Reporting Requirements. The Borrower will furnish to
the Agent and each Lender:
(a Annual Financial Statements. As soon as available,
and in any event within ninety (90) days after the end of each
Fiscal Year of the Borrower, beginning with the Fiscal
CREDIT AGREEMENT - PAGE 41
<PAGE>
Year ending December 31, 1998, (i) a copy of the annual audited
consolidated financial statement of the Borrower and the
Subsidiaries for such Fiscal Year containing balance sheets and
statements of income, retained earnings, and cash flow as at the end
of such Fiscal Year and for the Fiscal Year then ended, in each case
setting forth in comparative form the figures for the preceding
Fiscal Year, all in reasonable detail and audited and certified by
independent certified public accountants of recognized national
standing acceptable to the Agent, to the effect that such report has
been prepared in accordance with GAAP and (ii) a copy of the
Consolidating Schedules for such Fiscal Year, in each case setting
forth in comparative form the figures for the preceding Fiscal Year,
all in reasonable detail certified by the chief financial officer,
treasurer or assistant treasurer of the Borrower;
(b Quarterly Financial Statements. As soon as available,
and in any event within fifty (50) days after the end of each of the
first three (3) Fiscal Quarters in each such Fiscal Year, (i) a copy
of an unaudited consolidated financial statement of the Borrower and
the Subsidiaries as of the end of such period and for the portion of
the Fiscal Year then ended containing balance sheets and statements
of income, retained earnings, and cash flow, in each case setting
forth in comparative form the figures for the corresponding period
of the preceding Fiscal Year, all in reasonable detail certified by
the chief financial officer, treasurer or assistant treasurer of the
Borrower to have been prepared in accordance with GAAP and to fairly
present (subject to year-end audit adjustments) the financial
condition and results of operations of the Borrower and the
Subsidiaries at the date and for the periods indicated therein and
(ii) a copy of the Consolidating Schedules as of the end of such
period and for the portion of the Fiscal Year then ended, in each
case setting forth in comparative form the figures for the
corresponding period of the preceding Fiscal Year, all in reasonable
detail certified by the chief financial officer, treasurer or
assistant treasurer of the Borrower to fairly present the financial
condition and results of operations of the Borrower and the
Subsidiaries at the date and for the periods indicated therein;
(c Compliance Certificate. Within fifty (50) days after
the end of each Fiscal Quarter of each Fiscal Year, or with respect
to the last Fiscal Quarter of each Fiscal Year, within ninety (90)
days of the end of such Fiscal Quarter, a Compliance Certificate
accompanying the applicable financial statements required to be
delivered pursuant to Section 8.1(a) or 8.1(b), as applicable;
(d Management Letters. Promptly upon receipt thereof, a
copy of any management letter or written report submitted to the
Borrower or any Subsidiary by independent certified public
accountants with respect to the business, condition (financial or
otherwise), operations, prospects, or properties of the Borrower or
any Subsidiary;
(e Notice of Litigation. Promptly after the commencement
thereof, notice of all actions, suits, investigations (with respect
to investigations only, of which the Borrower has actual knowledge)
and proceedings before any Governmental Authority or arbitrator
affecting the Borrower or any Subsidiary which could reasonably be
expected to have a Material Adverse Effect;
CREDIT AGREEMENT - PAGE 42
<PAGE>
(f Notice of Default. As soon as possible and in any
event within five (5) Business Days after an Executive Officer of
the Borrower has knowledge of the occurrence of each Default, a
written notice setting forth the details of such Default and the
action that the Borrower has taken and proposes to take with respect
thereto;
(g ERISA Reports. Promptly after the filing or receipt
thereof, copies of all material reports, including annual reports,
and notices which the Borrower or any ERISA Affiliate files with or
receives from the PBGC, the Internal Revenue Service or the U.S.
Department of Labor with respect to any Plan; and as soon as
possible and in any event within five (5) Business Days after the
Borrower or any ERISA Affiliate knows or has reason to know that any
Reportable Event or Prohibited Transaction has occurred with respect
to any Plan or that the PBGC or the Borrower or any ERISA Affiliate
has instituted or will institute proceedings under Title IV of ERISA
to terminate any Plan, a certificate of the chief financial officer
of the Borrower setting forth the details as to such Reportable
Event or Prohibited Transaction or Plan termination and the action,
if any, that the Borrower proposes to take with respect thereto;
(h Notice of Material Adverse Effect. As soon as
possible and in any event within five (5) Business Days after an
Executive Officer of the Borrower has knowledge of the occurrence
thereof, written notice of any matter that could reasonably be
expected to have a Material Adverse Effect;
(i Proxy Statements, Etc. As soon as available, one copy
of each financial statement, report, notice or proxy statement sent
by the Borrower or any Subsidiary to its stockholders generally and
one copy of each regular, periodic or special report, registration
statement, or prospectus, or any other document filed by the
Borrower or any Subsidiary with any securities exchange or the
Securities and Exchange Commission or any successor agency;
(j General Information. Promptly, such other information
concerning the Borrower or any Subsidiary as the Agent or any Lender
may from time to time reasonably request; and
(k Balance Sheets. (i) Within ninety (90) days after the
Closing Date, balance sheets as of September 30, 1998 for each
domestic Subsidiary;
ii)At any time upon the request of the
Required Lenders, within thirty (30) calendar days of
such request, balance sheets for each domestic
Subsidiary of the Borrower for the last reported period;
and
(iii) Upon the occurrence and during the
continuance of an Event of Default and at the request of
the Required Lenders, within five (5) Business Days of
such request, balance sheets for each domestic
Subsidiary of the Borrower for the last reported period.
CREDIT AGREEMENT - PAGE 43
<PAGE>
Section VIII.2 Maintenance of Existence; Conduct of Business. Except
as permitted by Section 9.3, the Borrower will, and will cause each Significant
Subsidiary to, preserve and maintain its corporate or other organizational
existence and all of its leases, privileges, licenses, permits, franchises,
qualifications, and rights that are necessary or desirable in the ordinary
conduct of its business. The Borrower will, and will cause each Subsidiary to,
conduct its business in an orderly and efficient manner in accordance with good
business practices.
Section VIII.3 Maintenance of Properties. The Borrower will, and
will cause each Subsidiary to, maintain, keep, and preserve all of its material
properties necessary in the conduct of its business in good working order and
condition (exclusive of ordinary wear and tear), the failure of which could
reasonably be expected to have a Material Adverse Effect.
Section VIII.4 Taxes and Claims. The Borrower will, and will cause
each Subsidiary to, pay or discharge at or before maturity or before becoming
delinquent (a) all taxes, penalties, interest, levies, assessments, and
governmental charges imposed on it or its income or profits or any of its
property, and (b) all lawful claims for labor, material, and supplies, which, if
unpaid, might become a Lien upon any of its property; provided, however, that
neither the Borrower nor any Subsidiary shall be required to pay or discharge
any tax, levy, assessment, or governmental charge or Liens which is being
contested in good faith by appropriate proceedings diligently pursued, and for
which adequate reserves have been established.
Section VIII.5 Insurance. The Borrower will, and will cause each
Subsidiary to, maintain insurance with financially sound and reputable insurance
companies in such amounts and covering such risks as are usually carried by
corporations engaged in similar businesses and owning similar properties in the
same general areas in which the Borrower and the Subsidiaries operate, provided
that in any event the Borrower will maintain and cause each Subsidiary to
maintain workmen's compensation insurance, property insurance and comprehensive
general liability insurance reasonably satisfactory to the Agent.
Section VIII.6 Inspection Rights. At any reasonable time and from
time to time prior to a Default upon three (3) Business Day's prior notice and
at any reasonable time after the occurrence and during the continuance of a
Default, the Borrower will, and will cause each Subsidiary to, permit
representatives of the Agent and each Lender to examine, copy, and make extracts
from its books and records, to visit and inspect its properties, and to discuss
its business, operations, and financial condition with its officers and
independent certified public accountants.
Section VIII.7 Keeping Books and Records. The Borrower will, and
will cause each Subsidiary to, maintain proper books of record and account in
which full, true, and correct entries in conformity with GAAP shall be made of
all dealings and transactions in relation to its business and activities.
Section VIII.8 Compliance with Law. The Borrower will, and will
cause each Subsidiary to, comply with all applicable laws (including, without
limitation, all Environmental Laws), rules, regulations, orders, and decrees of
any Governmental Authority or arbitrator other than such noncompliance which
will not have a Material Adverse Effect.
CREDIT AGREEMENT - PAGE 44
<PAGE>
Section VIII.9 Compliance with Agreements. The Borrower will, and
will cause each Subsidiary to, comply with all agreements, contracts, and
instruments binding on it or affecting its properties or business other than
such noncompliance which will not have a Material Adverse Effect.
Section VIII.10 Further Assurances; Significant Subsidiary Guaranty
and Contribution and Indemnification Agreement. The Borrower will, and will
cause each Significant Subsidiary to, execute and deliver such further
documentation and take such further action as may be reasonably requested by the
Agent to carry out the provisions and purposes of the Loan Documents. Without
limiting the foregoing, upon the creation or acquisition of any Significant
Subsidiary or if any Insignificant Subsidiarys gross revenues or total assets
increase so that it becomes a Significant Subsidiary, the Borrower shall (a)
provide written notice of such event to the Agent within five (5) Business Days
following the date an Executive Officer of the Borrower has knowledge thereof
and (b) cause each such Significant Subsidiary to execute and deliver a
Guaranty, a Contribution and Indemnification Agreement, and such other
documentation as the Agent may request to cause such Significant Subsidiary to
evidence or otherwise implement the guaranty of the Obligations contemplated by
a Guaranty or a Contribution and Indemnification Agreement within thirty (30)
calendar days following the date an Executive Officer of the Borrower has
knowledge thereof. No Subsidiary that is a Foreign Company shall be required to
execute a Guaranty or a Contribution and Indemnification Agreement. If any
Significant Subsidiary is created or acquired after the Closing Date, the
Borrower shall execute and deliver to the Agent (a) an amendment to Schedule
7.14 to this Agreement (which only needs the signature of the Agent to be
effective if the only change is the addition of the new Significant Subsidiary)
and (b) any other documents which would have otherwise been required to be
delivered to the Agent and the Lenders if such Significant Subsidiary had been a
Significant Subsidiary as of the Closing Date. If any Insignificant Subsidiary
is created or acquired after the Closing Date, the Borrower shall execute and
deliver to the Agent an amendment to Schedule 7.14 to this Agreement (which only
needs the signature of the Agent to be effective if the only change is the
addition of the new Subsidiary) on the date of actual delivery of a Compliance
Certificate under Section 8.1(c) demonstrating the existence thereof.
Section VIII.11 ERISA. The Borrower will, and will cause each
Subsidiary to, comply with all minimum funding requirements and all other
requirements of ERISA, if applicable, so as not to give rise to any liability
which will have a Material Adverse Effect.
Section VIII.12 Year 2000 Compliance. The Borrower will promptly
notify the Lender in the event the Borrower discovers or determines that any
computer application (including those of its suppliers, vendors and customers)
that is material to its or any of its Subsidiaries' business and operations will
not be Year 2000 compliant, except to the extent that such failure could not
reasonably be expected to have a Material Adverse Effect.
Section VIII.13 Fiduciary Accounts. Within five (5) Business Days of
opening or closing a Fiduciary Account, the Borrower shall execute and deliver
to the Agent an amendment to Schedule 7.21 to this Agreement (which only needs
the signature of the Agent to be effective if the only change is the addition or
deletion of a Fiduciary Account). Upon the occurrence and during the continuance
of an Event of Default and at the request of the Required Lenders, the Borrower
will
CREDIT AGREEMENT - PAGE 45
<PAGE>
transfer, or will cause the transfer of, the funds owned by the Borrower and/or
its Subsidiaries in the Fiduciary Accounts at such intervals as determined by
the Agent into a general corporate account of the Borrower maintained at Agent.
ARTICLE IX
Negative Covenants
The Borrower covenants and agrees that, as long as the Obligations
or any part thereof are outstanding or any Lender has any Commitment hereunder,
the Borrower will perform and observe the following negative covenants:
Section IX.1 Debt. The Borrower will not, and will not permit any
Subsidiary to, incur, create, assume, or permit to exist any Debt, except:
(a) Debt to the Lenders pursuant to the Loan Documents;
(b) Debt (including, without limitation, the UK Senior
Facility) described on Schedule 9.1 (b) hereto and any extensions,
renewals or refinances thereof so long as (i) the principal amount
of such Debt and the formula for determining the interest rate
charged thereon after such renewal, extension or refinancing shall
not exceed the principal amount of such Debt which was outstanding
and the formula for determining the interest rate which was in
effect immediately prior to such renewal, extension or refinancing;
provided however, (1) the aggregate principal amount of the Debt
incurred in connection with the UK Senior Facility may increase to
an amount not to exceed Eighteen Million Dollars ($18,000,000) (such
amount as determined based on the exchange rate on the date of such
increase) and (2) the formula for determining the interest rate of
the UK Senior Facility may increase and (ii) such Debt shall not be
secured by any assets other than assets securing such Debt, if any,
prior to such renewal, extension or refinancing;
(c) Intercompany Debt among Borrower and the
Subsidiaries; provided that (i) the obligations of each obligor of
such Debt shall be subordinated in right of payment to the
Obligations from and after such time as any portion of the
Obligations shall become due and payable (whether at stated
maturity, by acceleration or otherwise) and shall have such other
terms and provisions as Agent may reasonably require; provided
however, so long as no Default has occurred and is continuing, such
subordinated obligations may be repaid; (ii) the aggregate amount of
such Debt outstanding at any time which is owed by the Insignificant
Subsidiaries to Borrower shall not exceed Ten Million Dollars
($10,000,000); and (iii) the aggregate amount of such Debt
outstanding at any time which is owed by Subsidiaries organized in a
jurisdiction outside the United States of America shall not exceed
the sum of Five Million Dollars ($5,000,000);
(d) Debt (including Capital Lease Obligations but
excluding Debt described in Section 9.1(e)) not to exceed Two
Million Five Hundred Thousand Dollars ($2,500,000) in
CREDIT AGREEMENT - PAGE 46
<PAGE>
the aggregate at any time outstanding secured by purchase money
Liens permitted by Section 9.2;
(e) Debt incurred in connection with the airplane lease
described on Schedule 9.1(e) hereto;
(f) Guaranties incurred in the ordinary course of
business with respect to surety and appeal bonds, performance and
return-of-money bonds and other similar obligations of the Borrower
or any Subsidiary not exceeding at any time outstanding One Million
Dollars ($1,000,000) in aggregate liability;
(g) Debt which constitutes Strategic Investments which
is permitted by Section 9.5;
(h) Guaranties of Debt otherwise permitted by clauses
(a) through (g) of this Section 9.1; and
(i) Debt in addition to that specifically described in
clauses (a) through (h) of this Section 9.1 which in the aggregate
does not exceed One Million Dollars ($1,000,000) at any time
outstanding.
Section IX.2 Limitation on Liens and Restrictions on Subsidiaries.
The Borrower will not, and will not permit any Subsidiary to, incur, create,
assume, or permit to exist any Lien upon any of its property, assets, or
revenues, whether now owned or hereafter acquired, except the following:
(a) Liens disclosed on Schedule 9.2 hereto;
(b) Encumbrances consisting of minor easements, zoning
restrictions, or other restrictions on the use of real property that
do not (individually or in the aggregate) materially affect the
value of the assets encumbered thereby or materially impair the
ability of the Borrower or the Subsidiaries to use such assets in
their respective businesses, and none of which is violated in any
material respect by existing or proposed structures or land use;
(c) Liens (other than Liens relating to Environmental
Liabilities or ERISA) for taxes, assessments, or other governmental
charges that are not delinquent or which are being contested in good
faith and for which adequate reserves have been established;
(d) Liens of mechanics, materialmen, warehousemen,
carriers, landlords or other similar statutory Liens securing
obligations that are not yet due and are incurred in the ordinary
course of business;
(e) Liens resulting from good faith deposits to secure
payments of workmen's compensation or other social security programs
or to secure the performance of tenders, statutory obligations,
surety and appeal bonds, bids or contracts (other than for payment
of Debt);
CREDIT AGREEMENT - PAGE 47
<PAGE>
(f) Liens for purchase money obligations; provided that:
(i) the Debt secured by any such Lien is permitted under Section
9.1; and (ii) any such Lien encumbers only the asset so purchased;
(g) Any attachment or judgment Lien not constituting an
Event of Default;
(h) Liens arising from filing UCC financing statements
regarding leases not prohibited by this Agreement;
(i) Liens in favor of the Borrower or any Subsidiary to
support intercompany Debt permitted by this Agreement;
(j) Liens on property of a Person existing at the time
such Person becomes a Subsidiary; provided, that such Liens were in
existence prior to such acquisition and do not extend to any assets
other than those of such Person;
(k) Liens on property existing at the time of
acquisition thereof by the Borrower or any Subsidiary of the
Borrower; provided that such Liens were in existence prior to such
acquisition; and
(l) Liens securing Debt in an amount less than One
Hundred Thousand Dollars ($100,000) outstanding; provided however,
the aggregate amount of such Debt shall not exceed Five Hundred
Thousand Dollars ($500,000) at any time outstanding.
Except as provided on Schedule 9.2, neither Borrower nor any Subsidiary shall
enter into or assume any agreement (other than the Loan Documents) prohibiting
the creation or assumption of any Lien upon its properties or assets, whether
now owned or hereafter acquired; provided that, in connection with the creation
of purchase money Liens, the Borrower or the Subsidiary may agree that it will
not permit any other Liens to encumber the asset subject to such purchase money
Lien. Except as provided herein or on Schedule 9.2, Borrower will not and will
not permit any Subsidiaries directly or indirectly to create or otherwise cause
or suffer to exist or become effective any consensual encumbrance or restriction
of any kind on the ability of any Subsidiary to: (1) pay dividends or make any
other distribution on any of such Subsidiary's capital stock owned by Borrower
or any Subsidiary of Borrower; (2) subject to subordination provisions pay any
Debt owed to Borrower or any other Subsidiary; (3) make loans or advances to
Borrower or any other Subsidiary; or (4) transfer any of its property or assets
to Borrower or any other Subsidiary.
Section IX.3 Mergers, Etc. The Borrower will not, and will not
permit any Subsidiary to, become a party to a merger or consolidation, or
purchase or otherwise acquire all or a substantial part of the business or
assets of any Person or of a division or branch of any Person or any shares or
other equity interest issued by any Person (whether or not certificated), or
wind-up, dissolve, or liquidate itself; provided that, (i) a Subsidiary may
wind-up, dissolve or liquidate if no Default exists or would result therefrom
and its assets are transferred to Borrower or a Significant Subsidiary; (ii) any
Subsidiary may merge with and into Borrower if Borrower is the surviving entity
and no Default exists or would result therefrom; (iii) any Subsidiary may merge
with and into any other Subsidiary
CREDIT AGREEMENT - PAGE 48
<PAGE>
that is organized under the laws of the United States of America if the
Subsidiary organized under the laws of the United States of America is the
surviving entity, no Default exists or would result therefrom and, to the extent
applicable, Section 8.10 is complied with; (iv) any Subsidiary organized under
the laws of a jurisdiction outside the United States of America may merge with
any other Subsidiary organized under the laws of a jurisdiction outside of the
United States of America, if no Default exists or would result therefrom; and
(v) the Borrower may make any Permitted Acquisitions, Permitted Investments,
Approved Acquisitions and Strategic Investments.
Section IX.4 Restricted Junior Payments. Borrower will not directly
or indirectly declare, order, pay, make or set apart any sum for (a) any
dividend or other distribution, direct or indirect, on account of any shares of
any class of stock or other equity interest of Borrower now or hereafter
outstanding; provided however, the Borrower may make regularly scheduled
quarterly dividends based on historical dividend methodology of the Borrower so
long as (i) no Default shall have occurred and be continuing immediately before
and immediately after such payment, (ii) compliance of the Borrower with the
historical dividend methodology as to such dividends and (iii) in the case of
any increase in the dividend amount to be paid per share over the most recent
dividend previously paid, Borrower shall have obtained Agents prior written
approval to such increase, such approval not to be unreasonably withheld; (b)
any redemption, conversion, exchange, retirement, sinking fund or similar
payment, purchase or other acquisition for value, direct or indirect, of any
shares of any class of stock or other equity interest of Borrower now or
hereafter outstanding; or (c) any payment made to retire, or to obtain the
surrender of, any outstanding warrants, options or other rights to acquire
shares of any class of stock or other equity interest of Borrower now or
hereafter outstanding; provided however, Borrower may purchase or acquire any
shares of any class of stock of the Borrower or make any payment to retire or
obtain the surrender of any outstanding warrants or options to acquire shares of
any class of stock of the Borrower in an aggregate amount not to exceed
Twenty-Five Million Dollars ($25,000,000) at any time.
Section IX.5 Investments. The Borrower will not, and will not permit
any Subsidiary to, make or permit to remain outstanding any advance, loan,
extension of credit, or capital contribution to or investment in any Person, or
purchase or own any stock, bonds, notes, debentures, or other securities of any
Person except:
(a) Borrower and its Subsidiaries may own stock of the
Subsidiaries existing on the Closing Date and notes payable by
Subsidiaries in accordance with the restrictions set forth in
Section 9.1;
(b) loans and advances to employees for business
expenses incurred in the ordinary course of business not to exceed
One Million Dollars ($1,000,000) in the aggregate at any time
outstanding;
(c) Strategic Investments, including those specified on
Schedule 9.5 hereto, in the aggregate at any time outstanding not to
exceed Sixty Million Dollars ($60,000,000); provided however, (i)
Borrower shall have obtained the Agents prior written consent (which
consent shall not be unreasonably withheld) to the purchase of any
Strategic Investment in an amount greater than One Million Dollars
($1,000,000) made after the date hereof and
CREDIT AGREEMENT - PAGE 49
<PAGE>
(ii) in the event Borrower or any Subsidiary sells a Strategic
Investment, the total amount of Strategic Investments outstanding at
such time shall be reduced by an amount equal to the lesser of (1)
the original purchase price of such Strategic Investment sold and
(2) the sale price of such Strategic Investment sold;
(d) Permitted Investments;
(e) Permitted Acquisitions for which the total
consideration contracted for at closing during any four (4)
consecutive Fiscal Quarters of the Borrower does not exceed in the
aggregate One Hundred Million Dollars ($100,000,000) (for purposes
hereof, if the total consideration of any Permitted Acquisition
includes a component incapable of valuation at closing (i.e.,
profits interest) (Future Amount) then (i) the component of
consideration which can be valued at the closing of such Permitted
Acquisition shall be deemed to be contracted for at closing of such
Permitted Acquisition and (ii) upon payment of the Future Amount,
such payment shall be deemed to be contracted for in the Fiscal
Quarter such payment is made for the purpose of calculating the
amount of consideration paid for such Permitted Acquisition);
(f) acquisitions of all the equity or other comparable
interests issued by a Person or the acquisition of all or
substantially all of such Persons assets (together with all the
equity or other comparable interests issued by a Person herein an
Approved Acquisition) other than a Permitted Acquisition in an
aggregate amount for all such Approved Acquisitions of Ten Million
Dollars ($10,000,000) at any time; provided however, in the event
Borrower or any Subsidiary sells such Approved Acquisition, the
total amount of Approved Acquisitions outstanding at such time shall
be reduced by an amount equal to the lesser of (i) the original
purchase price of such Approved Acquisition sold and (ii) the sale
price of such Approved Acquisition sold;
(g) advances pursuant to the Rapid Recovery Facility to
clients of the Borrower not to exceed Twenty Million Dollars
($20,000,000) in the aggregate outstanding at any time; provided
however, (i) such advances are not outstanding more than fifteen
(15) Business Days, (ii) the reinsurer associated with each such
advance shall have capital and surplus of at least One Hundred
Million Dollars ($100,000,000) as most recently reported to the
applicable Governmental Authority and the aggregate amount of all
such advances with respect to such reinsurer is not in excess of the
greater of (A) Two Million Dollars ($2,000,000) and (B) two percent
(2%) of such reinsurers capital and surplus as most recently
reported to the applicable Governmental Authority, and (iii) such
clients are rated at least B+ by the Bests Insurance Reports and the
aggregate amount of all such advances to a single client are not
greater than fifteen percent (15%) of such clients capital and
surplus as most recently reported to the applicable Governmental
Authority; and
(h) all advances pursuant to the Rapid Recovery Facility
(other than advances described in Section 9.5(g)) or outside the
Rapid Recovery Facility but for the same purpose to clients of the
Borrower not to exceed Five Million Dollars ($5,000,000) in the
aggregate outstanding at any time.
CREDIT AGREEMENT - PAGE 50
<PAGE>
Upon the date of actual delivery of a Compliance Certificate under
Section 8.1(c) or under the definition of Permitted Acquisition in Section 1.1
demonstrating the existence thereof, any investments made as permitted hereunder
shall be recharacterized from time to time, as applicable, as either Strategic
Investments, Permitted Acquisitions or Approved Acquisitions, as applicable, in
accordance with the criteria set forth in the definitions of such terms set
forth in Section 1.1 and herein. Any such recharacterization shall immediately
result in the coverage of such investment from one subsection of this Section
9.5 to the new subsection, as applicable, provided however, an additional
condition of an acquisition constituting an Approved Acquisition in or of a
Person moving out of Section 9.5 (f) to any other subsection is the requirement
that the EBITDA of such Person for the prior four (4) Fiscal Quarter period be
positive.
Section IX.6 Limitation on Issuance of Capital Stock. The Borrower
will not permit any Subsidiary to, at any time issue, sell, assign, or otherwise
dispose of (a) any of its capital stock or other equity interests, (b) any
securities exchangeable for or convertible into or carrying any rights to
acquire any of its capital stock or other equity interests, or (c) any option,
warrant, or other right to acquire any of its capital stock or other equity
interests; provided however, (i) Borrower or any Subsidiary may issue stock
options or capital stock upon exercise of stock options issued pursuant to the
Stock Option Plans and (ii) the Borrower or any Subsidiary may transfer any
capital stock or other equity interests in a Subsidiary to either the Borrower
or any other Subsidiary so long as at the time of such transfer, Borrower shall
redetermine whether the Subsidiaries involved in such transfer are Significant
Subsidiaries immediately after giving effect thereto.
Section IX.7 Transactions With Affiliates. The Borrower will not,
and will not permit any Subsidiary to, enter into any transaction, including,
without limitation, the purchase, sale, or exchange of property or the rendering
of any service, with any Affiliate of the Borrower or such Subsidiary, except in
the ordinary course of and pursuant to the reasonable requirements of the
Borrower's or such Subsidiary's business and upon fair and reasonable terms no
less favorable to the Borrower or such Subsidiary than would be obtained in a
comparable arms-length transaction with a Person not an Affiliate of the
Borrower or such Subsidiary.
Section IX.8 Disposition of Assets. The Borrower will not, and will
not permit any Subsidiary to, sell, lease, assign, transfer, or otherwise
dispose (collectively, a Disposition) of any of its assets with net sale
proceeds of any Disposition greater than One Million Dollars ($1,000,000),
except Dispositions of unnecessary, obsolete or worn out equipment or
Dispositions of assets of a Subsidiary to the Borrower or another Subsidiary so
long as at the time of such Disposition, Borrower shall redetermine whether the
Subsidiaries involved in such Disposition are Significant Subsidiaries
immediately after giving effect thereto.
Section IX.9 Sale and Leaseback. The Borrower will not, and will not
permit any Subsidiary to, enter into any arrangement with any Person pursuant to
which it leases from such Person real or personal property that has been or is
to be sold or transferred, directly or indirectly, by it to such Person.
CREDIT AGREEMENT - PAGE 51
<PAGE>
Section IX.10 Lines of Business. The Borrower will not, and will not
permit any Subsidiary to, engage in any line or lines of business activity other
than the businesses in which they are engaged on the date hereof or lines of
business complementary or reasonably related to their existing lines of
business.
Section IX.11 Fiscal Quarter and Fiscal Year. The Borrower will not
change the manner in which either the last day of its Fiscal Year or the last
days of the first three (3) Fiscal Quarters of its Fiscal Years is calculated.
ARTICLE X
Financial Covenants
The Borrower covenants and agrees that, as long as the Obligations
or any part thereof are outstanding or any Lender has any Commitment hereunder,
the Borrower will perform and observe the following financial covenants:
Section X.1 Net Worth. Beginning at the Closing Date for the Fiscal
Quarter ended September 30, 1998, the Borrower will at all times maintain a Net
Worth in an amount not less than Ninety Million Dollars ($90,000,000), and for
each Fiscal Quarter thereafter, not less than the sum of (i) the minimum Net
Worth required for the prior Fiscal Quarter then ended, plus (ii) 75% of the
Borrowers Net Income for the prior Fiscal Quarter then ended, plus (iii) 75% of
the net proceeds of any equity issuances by the Borrower for the prior Fiscal
Quarter then ended. If Net Income for a Fiscal Quarter is negative, no
adjustment to the requisite level of Net Worth shall be made.
Section X.2 Fixed Charge Coverage Ratio. The Borrower will at all
times maintain a Fixed Charge Coverage Ratio of not less than 2.0 to 1.0.
Section X.3 Leverage Ratio. The Borrower will at all times maintain
a Leverage Ratio of not more than 2.5 to 1.0.
Section X.4 Tangible Net Worth. The Borrower will at all times
maintain a Tangible Net Worth in an amount not less than fifty percent (50%) of
the Borrowers minimum Net Worth required for the same period pursuant to Section
10.1
ARTICLE XI
Default
Section XI.1 Events of Default. Each of the following shall be
deemed an Event of Default:
(a) The Borrower shall fail to pay (i) within one (1)
Business Day of the date due any principal payable under any Loan
Document or any part thereof; (ii) within one (1) Business Day of
the date due any interest or fees payable under the Loan Documents
or any
CREDIT AGREEMENT - PAGE 52
<PAGE>
part thereof; and (iii) within three (3) Business Days of the date
due of any other Obligation or any part thereof.
(b) Any representation, warranty or certification made
or deemed made by the Borrower or any Significant Subsidiary (or any
of their respective officers) in any Loan Document or in any
certificate, report, notice, or financial statement furnished at any
time in connection with any Loan Document shall be false,
misleading, or erroneous in any material respect when made or deemed
to have been made.
(c) The Borrower shall fail to perform, observe, or
comply with any covenant, agreement, or term contained in Section
8.1 and Articles 9 and 10 of this Agreement. Any Significant
Subsidiary shall fail to perform, observe or comply with any
covenant, agreement or term contained in paragraph 8 of the Guaranty
to which it is a party.
(d) The Borrower or any Significant Subsidiary shall
fail to perform, observe, or comply with any other covenant,
agreement, or term contained in any Loan Document (other than
covenants to pay the Obligations and the covenants described in
subsection 11.1 (c)) and such failure shall continue for a period of
fifteen (15) Business Days after the earlier of (i) the date the
Agent or any Lender provides the Borrower with notice thereof or
(ii) the date the Borrower should have notice thereof or (iii) the
date the Borrower should have notified the Agent thereof in
accordance with Subsection 8.1(f), notice thereof.
(e) The Borrower or any Significant Subsidiary shall (i)
apply for or consent to the appointment of, or the taking of
possession by, a receiver, custodian, trustee, examiner, liquidator
or the like of itself or of all or a substantial part of its
property, (ii) make a general assignment for the benefit of its
creditors, (iii) commence a voluntary case under the United States
Bankruptcy Code (as now or hereafter in effect, the Bankruptcy
Code), (iv) institute any proceeding or file a petition seeking to
take advantage of any other law relating to Bankruptcy, insolvency,
reorganization, liquidation, dissolution, winding-up, or composition
or readjustment of debts, (v) fail to controvert in a timely and
appropriate manner, or acquiesce in writing to, any petition filed
against it in an involuntary case under the Bankruptcy Code, (vi)
admit in writing its inability to, or be generally unable to pay its
debts as such debts become due, or (vii) take any corporate action
for the purpose of effecting any of the foregoing.
(f) A proceeding or case shall be commenced, without the
application, approval or consent of the Borrower or any Significant
Subsidiary, in any court of competent jurisdiction, seeking (i) its
reorganization, liquidation, dissolution, arrangement or winding-up,
or the composition or readjustment of its debts, (ii) the
appointment of a receiver, custodian, trustee, examiner, liquidator
or the like of the Borrower or such Subsidiary or of all or any
substantial part of its property, or (iii) similar relief in respect
of the Borrower or such Subsidiary under any law relating to
bankruptcy, insolvency, reorganization, winding-up, or composition
or adjustment of debts, and such proceeding or case shall continue
undismissed, or an order, judgment or decree approving or ordering
any of the foregoing shall be entered and continue unstayed and in
effect, for a period of sixty
CREDIT AGREEMENT - PAGE 53
<PAGE>
(60) or more days; or an order for relief against the Borrower or
any Subsidiary shall be entered in an involuntary case under the
Bankruptcy Code.
(g) The Borrower or any Subsidiary shall fail to
discharge within a period of thirty (30) days after the commencement
thereof any attachment, sequestration, forfeiture, or similar
proceeding or proceedings involving an aggregate amount in excess of
One Million Dollars ($1,000,000) against any of its assets or
properties.
(h) A final judgment or judgments for the payment of
money in excess of One Million Dollars ($1,000,000) in the aggregate
shall be rendered by a court or courts against the Borrower or any
Subsidiary and the same shall not be discharged (or provision shall
not be made for such discharge) (or not be covered by a solvent and
reputable insurance company reasonably acceptable to the Agent), or
a stay of execution thereof shall not be procured, within thirty
(30) days from the date of entry thereof and the Borrower or the
relevant Subsidiary shall not, within said period of thirty (30)
days, or such longer period during which execution of the same shall
have been stayed, appeal therefrom and cause the execution thereof
to be stayed during such appeal.
(i) The Borrower or any Subsidiary shall fail to pay
when due any principal of or interest on any Debt if the aggregate
principal amount of the affected Debt equals or exceeds One Million
Dollars ($1,000,000) (other than the Obligations), or the maturity
of any such Debt shall have been accelerated, or any such Debt shall
have been required to be prepaid prior to the stated maturity
thereof or any event shall have occurred with respect to any Debt in
the aggregate principal amount equal to or in excess of One Million
Dollars ($1,000,000) that permits (or, with the giving of notice or
lapse of time or both, would permit) any holder or holders of such
Debt or any Person acting on behalf of such holder or holders to
accelerate the maturity thereof or require any such prepayment.
(j) This Agreement, any Guaranty or any Note shall cease
to be in full force and effect (other than, with respect to a
Guaranty, as a result of a permitted dissolution pursuant to Section
9.3) or shall be declared null and void or the validity or
enforceability thereof shall be contested or challenged by the
Borrower, any Subsidiary, or the Borrower or any Subsidiary shall
deny that it has any further liability or obligation under any of
the Loan Documents.
(k) Any of the following events shall occur or exist
with respect to the Borrower or any ERISA Affiliate: (i) any
Prohibited Transaction involving any Plan; (ii) any Reportable Event
with respect to any Plan; (iii) the filing under Section 4041 of
ERISA of a notice of intent to terminate any Plan or the termination
of any Plan; (iv) any event or circumstance that might constitute
grounds entitling the PBGC to institute proceedings under Section
4042 of ERISA for the termination of, or for the appointment of a
trustee to administer, any Plan, or the institution by the PBGC of
any such proceedings; or (v) complete or partial withdrawal under
Section 4201 or 4204 of ERISA from a Multiemployer Plan or the
reorganization, insolvency, or termination of any Multiemployer
Plan; and in each case above, such event or condition, together with
all other events or
CREDIT AGREEMENT - PAGE 54
<PAGE>
conditions, if any, have subjected or could in the reasonable
opinion of Required Lenders subject the Borrower to any tax,
penalty, or other liability to a Plan, a Multiemployer Plan, the
PBGC, or otherwise (or any combination thereof) which in the
aggregate exceed or could reasonably be expected to exceed One
Million Dollars ($1,000,000).
(l) Any Person or group of related Persons for purposes
of Section 13(d) of the Exchange Act acquires beneficial ownership
(within the meaning of Section 13(d) under the Exchange Act) in
excess of thirty-three percent (33%) of the total voting power of
all classes of capital stock then outstanding of Borrower entitled
(without regard to the occurrence of any contingency) to vote in
elections of directors of Borrower.
Section XI.2 Remedies. If any Event of Default shall occur and be
continuing, the Agent may (and if directed by Required Lenders, shall) do any
one or more of the following:
(a) Acceleration. By notice to the Borrower, declare all
outstanding principal of and accrued and unpaid interest on the
Notes and all other amounts payable by the Borrower under the Loan
Documents immediately due and payable, and the same shall thereupon
become immediately due and payable, without further notice, demand,
presentment, notice of dishonor, notice of acceleration, notice of
intent to accelerate, protest, or other formalities of any kind, all
of which are hereby expressly waived by the Borrower.
(b) Termination of Commitments. Terminate the
Commitments, including, without limitation, the obligation of the
Agent to issue Letters of Credit, without notice to the Borrower.
(c) Judgment. Reduce any claim to judgment.
(d) Foreclosure. Foreclose or otherwise enforce any Lien
granted to the Agent for the benefit of itself and the Lenders to
secure payment and performance of the Obligations in accordance with
the terms of the Loan Documents.
(e) Rights. Exercise any and all rights and remedies
afforded by the laws of the State of Texas or any other
jurisdiction, by any of the Loan Documents, by equity, or otherwise.
Provided, however, that upon the occurrence of an Event of Default under Section
11.1(e) or (f), the Commitments of all of the Lenders shall automatically
terminate (including, without limitation, the obligation of the Agent to issue
Letters of Credit), and the outstanding principal of and accrued and unpaid
interest on the Notes and all other amounts payable by the Borrower under the
Loan Documents shall thereupon become immediately due and payable without
notice, demand, presentment, notice of dishonor, notice of acceleration, notice
of intent to accelerate, protest, or other formalities of any kind, all of which
are hereby expressly waived by the Borrower.
Section XI.3 Cash Collateral. If an Event of Default shall have
occurred and be continuing the Borrower shall, if requested by the Agent or
Required Lenders, pledge to the Agent as security
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for the Obligations an amount in immediately available funds equal to the then
outstanding Letter of Credit Liabilities, such funds to be held in a cash
collateral account at the Agent without any right of withdrawal by the Borrower.
Section XI.4 Performance by the Agent. If the Borrower or any
Significant Subsidiary shall fail to perform any covenant or agreement in
accordance with the terms of the Loan Documents, the Agent may, at the direction
of Required Lenders, perform or attempt to perform such covenant or agreement on
behalf of the Borrower. In such event, the Borrower shall, at the request of the
Agent, promptly pay any amount expended by the Agent or the Lenders in
connection with such performance or attempted performance to the Agent at the
Principal Office, together with interest thereon at the applicable Default Rate
from and including the date of such expenditure to but excluding the date such
expenditure is paid in full. Notwithstanding the foregoing, it is expressly
agreed that neither the Agent nor any Lender shall have any liability or
responsibility for the performance of any obligation of the Borrower or any
Significant Subsidiary under any Loan Document.
Section XI.5 Right of Set-off; Adjustments.
Upon the occurrence and during the continuance of any
Event of Default, each Lender (and each of its Affiliates) is hereby
authorized at any time and from time to time, to the fullest extent permitted by
law, to set off and apply any and all deposits (general or special, time or
demand, provisional or final) at any time held and other indebtedness at any
time owing by such Lender (or any of its Affiliates) to or for the credit or the
account of the Borrower against any and all of the obligations of the Borrower
now or hereafter existing under this Agreement and the Note held by such Lender,
irrespective of whether such Lender shall have made any demand under this
Agreement or such Note and although such obligations may be unmatured.
Notwithstanding anything to the contrary contained in this Section 11.5, each
Lender agrees that if it shall set off or apply any deposits in a Fiduciary
Account maintained by such Lender it will do so only to the extent such deposits
are for the Borrower's or any Subsidiary's own account, and such Lender shall
not freeze such Fiduciary Account during the exercise of such Lender's rights
hereunder. Each Lender agrees promptly to notify the Borrower after any such
set-off and application made by such Lender; provided, however, that the failure
to give such notice shall not affect the validity of such set-off and
application. The rights of each Lender under this Section are in addition to
other rights and remedies (including, without limitation, other rights of
set-off) that such Lender may have.
If any Lender (a benefitted Lender) shall at any time
receive any payment of all or part of the Loans owing to it, or interest
thereon, or receive any collateral in respect thereof (whether voluntarily or
involuntarily, by set-off, or otherwise), in a greater proportion than any such
payment to or collateral received by any other Lender, if any, in respect of
such other Lender's Loans owing to it, or interest thereon, such benefitted
Lender shall purchase for cash from the other Lenders a participating interest
in such portion of each such other Lender's Loans owing to it, or shall provide
such other Lenders with the benefits of any such collateral, or the proceeds
thereof, as shall be necessary to cause such benefitted Lender to share the
excess payment or benefits of such collateral or proceeds ratably with each of
the Lenders; provided, however, that if all or any portion of such excess
payment or benefits is thereafter recovered from such benefitted Lender, such
purchase shall
CREDIT AGREEMENT - PAGE 56
<PAGE>
be rescinded, and the purchase price and benefits returned, to the extent of
such recovery, but without interest. The Borrower agrees that any Lender so
purchasing a participation from a Lender pursuant to this Section 11.5 may, to
the fullest extent permitted by law, exercise all of its rights of payment
(including the right of set-off) with respect to such participation as fully as
if such Person were the direct creditor of the Borrower in the amount of such
participation.
ARTICLE XII
The Agent
Section XII.1 Appointment, Powers, and Immunities. Each Lender
hereby irrevocably appoints and authorizes the Agent to act as its agent under
this Agreement and the other Loan Documents with such powers and discretion as
are specifically delegated to the Agent by the terms of this Agreement and the
other Loan Documents, together with such other powers as are reasonably
incidental thereto. The Agent (which term as used in this sentence and in
Section 12.5 and the first sentence of Section 12.6 hereof shall include its
Affiliates and its own and its Affiliates' officers, directors, employees, and
agents): (a) shall not have any duties or responsibilities except those
expressly set forth in this Agreement and shall not be a trustee or fiduciary
for any Lender; (b) shall not be responsible to the Lenders for any recital,
statement, representation, or warranty (whether written or oral) made in or in
connection with any Loan Document or any certificate or other document referred
to or provided for in, or received by any of them under, any Loan Document, or
for the value, validity, effectiveness, genuineness, enforceability, or
sufficiency of any Loan Document, or any other document referred to or provided
for therein or for any failure by any Loan Party or any other Person to perform
any of its obligations thereunder; (c) shall not be responsible for or have any
duty to ascertain, inquire into, or verify the performance or observance of any
covenants or agreements by any Loan Party or the satisfaction of any condition
or to inspect the property (including the books and records) of any Loan Party
or any of its Subsidiaries or Affiliates; (d) shall not be required to initiate
or conduct any litigation or collection proceedings under any Loan Document; and
(e) shall not be responsible for any action taken or omitted to be taken by it
under or in connection with any Loan Document, except for its own gross
negligence or willful misconduct. The Agent may employ agents and
attorneys-in-fact and shall not be responsible for the negligence or misconduct
of any such agents or attorneys-in-fact selected by it with reasonable care.
Section XII.2 Reliance by Agent. The Agent shall be entitled to rely
upon any certification, notice, instrument, writing, or other communication
(including, without limitation, any thereof by telephone or telecopy) believed
by it to be genuine and correct and to have been signed, sent or made by or on
behalf of the proper Person or Persons, and upon advice and statements of legal
counsel (including counsel for any Loan Party), independent accountants, and
other experts selected by the Agent. The Agent may deem and treat the payee of
any Note as the holder thereof for all purposes hereof unless and until the
Agent receives and accepts an Assignment and Acceptance executed in accordance
with Section 13.7 hereof. As to any matters not expressly provided for by this
Agreement, the Agent shall not be required to exercise any discretion or take
any action, but shall be required to act or to refrain from acting (and shall be
fully protected in so acting or refraining from acting) upon the instructions of
the Required Lenders, and such instructions shall be binding
CREDIT AGREEMENT - PAGE 57
<PAGE>
on all of the Lenders; provided, however, that the Agent shall not be required
to take any action that exposes the Agent to personal liability or that is
contrary to any Loan Document or applicable law or unless it shall first be
indemnified to its satisfaction by the Lenders against any and all liability and
expense which may be incurred by it by reason of taking any such action.
Section XII.3 Defaults. The Agent shall not be deemed to have
knowledge or notice of the occurrence of a Default or Event of Default unless
the Agent has received written notice from a Lender or the Borrower specifying
such Default or Event of Default and stating that such notice is a Notice of
Default. In the event that the Agent receives such a notice of the occurrence of
a Default or Event of Default, the Agent shall give prompt notice thereof to the
Lenders. The Agent shall (subject to Section 12.2 hereof) take such action with
respect to such Default or Event of Default as shall reasonably be directed by
the Required Lenders, provided that, unless and until the Agent shall have
received such directions, the Agent may (but shall not be obligated to) take
such action, or refrain from taking such action, with respect to such Default or
Event of Default as it shall deem advisable in the best interest of the Lenders.
Section XII.4 Rights as Lender. With respect to its Commitment and
the Loans made by it, NationsBank (and any successor acting as Agent) in its
capacity as a Lender hereunder shall have the same rights and powers hereunder
as any other Lender and may exercise the same as though it were not acting as
the Agent, and the term Lender or Lenders shall, unless the context otherwise
indicates, include the Agent in its individual capacity. NationsBank (and any
successor acting as Agent) and its Affiliates may (without having to account
therefor to any Lender) accept deposits from, lend money to, make investments
in, provide services to, and generally engage in any kind of lending, trust, or
other business with any Loan Party or any of its Subsidiaries or Affiliates as
if it were not acting as Agent, and NationsBank (and any successor acting as
Agent) and its Affiliates may accept fees and other consideration from any Loan
Party or any of its Subsidiaries or Affiliates for services in connection with
this Agreement or otherwise without having to account for the same to the
Lenders.
Section XII.5 Indemnification. The Lenders agree to indemnify the
Agent (to the extent not reimbursed under Section 13.1 hereof, but without
limiting the obligations of the Borrower under such Section) ratably in
accordance with their respective Commitments, for any and all liabilities,
obligations, losses, damages, penalties, actions, judgments, suits, costs,
expenses (including attorneys' fees), or disbursements of any kind and nature
whatsoever that may be imposed on, incurred by or asserted against the Agent
(including by any Lender) in any way relating to or arising out of any Loan
Document or the transactions contemplated thereby or any action taken or omitted
by the Agent under any Loan Document (including any of the foregoing arising
from the negligence of the Agent); provided that no Lender shall be liable for
any of the foregoing to the extent they arise from the gross negligence or
willful misconduct of the Person to be indemnified. Without limitation of the
foregoing, each Lender agrees to reimburse the Agent promptly upon demand for
its ratable share of any costs or expenses payable by the Borrower under Section
13.1, to the extent that the Agent is not promptly reimbursed for such costs and
expenses by the Borrower. The agreements contained in this Section shall survive
payment in full of the Loans and all other amounts payable under this Agreement.
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<PAGE>
Section XII.6 Non-Reliance on Agent and Other Lenders. Each Lender
agrees that it has, independently and without reliance on the Agent or any other
Lender, and based on such documents and information as it has deemed
appropriate, made its own credit analysis of the Loan Parties and their
Subsidiaries and decision to enter into this Agreement and that it will,
independently and without reliance upon the Agent or any other Lender, and based
on such documents and information as it shall deem appropriate at the time,
continue to make its own analysis and decisions in taking or not taking action
under the Loan Documents. Except for notices, reports, and other documents and
information expressly required to be furnished to the Lenders by the Agent
hereunder, the Agent shall not have any duty or responsibility to provide any
Lender with any credit or other information concerning the affairs, financial
condition, or business of any Loan Party or any of its Subsidiaries or
Affiliates that may come into the possession of the Agent or any of its
Affiliates.
Section XII.7 Resignation of Agent. The Agent may resign at any time
by giving notice thereof to the Lenders and the Borrower. Upon any such
resignation, the Required Lenders shall have the right to appoint a successor
Agent, and if no Default has occurred and is continuing, such successor Agent
shall be reasonably satisfactory to the Borrower. If no successor Agent shall
have been so appointed by the Required Lenders and shall have accepted such
appointment within thirty (30) days after the retiring Agent's giving of notice
of resignation, then the retiring Agent may, on behalf of the Lenders, appoint a
successor Agent which shall be a commercial Lender organized under the laws of
the United States of America having combined capital and surplus of at least
$100,000,000. Upon the acceptance of any appointment as Agent hereunder by a
successor, such successor shall thereupon succeed to and become vested with all
the rights, powers, discretion, privileges, and duties of the retiring Agent,
and the retiring Agent shall be discharged from its duties and obligations
hereunder. After any retiring Agent's resignation hereunder as Agent, the
provisions of this Article 12 shall continue in effect for its benefit in
respect of any actions taken or omitted to be taken by it while it was acting as
Agent.
Section XII.8 Several Commitments. The Commitments and other
obligations of the Lenders under any Loan Document are several. The default by
any Lender in making a Loan in accordance with its Commitment shall not relieve
the other Lenders of their obligations under any Loan Document. In the event of
any default by any Lender in making any Loan, each nondefaulting Lender shall be
obligated to make its Loan but shall not be obligated to advance the amount
which the defaulting Lender was required to advance hereunder. No Lender shall
be responsible for any act or omission of any other Lender.
Section XII.9 Agent Fee. The Borrower agrees to pay to the Agent on
the Closing Date and each anniversary of the Closing Date the administrative fee
described in that certain fee letter dated August 14, 1998, among the Borrower,
NationsBank and NationsBanc Montgomery Securities LLC.
ARTICLE XIII
Miscellaneous
Section XIII.1 Expenses; Indemnification.
CREDIT AGREEMENT - PAGE 59
<PAGE>
(a) The Borrower agrees to pay on demand all costs and
expenses of the Agent in connection with the syndication,
preparation, execution, delivery, administration, modification, and
amendment of this Agreement, the other Loan Documents, and the other
documents to be delivered hereunder, including, without limitation,
the reasonable fees and expenses of counsel for the Agent (including
the cost of internal counsel) with respect thereto and with respect
to advising the Agent as to its rights and responsibilities under
the Loan Documents. The Borrower further agrees to pay on demand all
costs and expenses of the Agent and the Lenders, if any (including,
without limitation, reasonable attorneys' fees and expenses and the
cost of internal counsel), in connection with the enforcement
(whether through negotiations, legal proceedings, or otherwise) of
the Loan Documents and the other documents to be delivered
hereunder.
(b) THE BORROWER AGREES TO INDEMNIFY AND HOLD HARMLESS
THE AGENT AND EACH LENDER AND EACH OF THEIR AFFILIATES AND THEIR
RESPECTIVE OFFICERS, DIRECTORS, EMPLOYEES, ATTORNEYS, AGENTS, AND
ADVISORS (EACH, AN INDEMNIFIED PARTY) FROM AND AGAINST ANY AND ALL
CLAIMS, DAMAGES, LOSSES, LIABILITIES, COSTS, AND EXPENSES
(INCLUDING, WITHOUT LIMITATION, REASONABLE ATTORNEYS' FEES) THAT MAY
BE INCURRED BY OR ASSERTED OR AWARDED AGAINST ANY INDEMNIFIED PARTY,
IN EACH CASE ARISING OUT OF OR IN CONNECTION WITH OR BY REASON OF
(INCLUDING, WITHOUT LIMITATION, IN CONNECTION WITH ANY
INVESTIGATION, LITIGATION, OR PROCEEDING OR PREPARATION OF DEFENSE
IN CONNECTION THEREWITH) THE LOAN DOCUMENTS, ANY OF THE TRANSACTIONS
CONTEMPLATED HEREIN OR THE ACTUAL OR PROPOSED USE OF THE PROCEEDS OF
THE LOANS (INCLUDING ANY OF THE FOREGOING ARISING FROM THE SOLE OR
CONTRIBUTORY NEGLIGENCE OF THE INDEMNIFIED PARTY), EXCEPT TO THE
EXTENT SUCH CLAIM, DAMAGE, LOSS, LIABILITY, COST, OR EXPENSE IS
FOUND IN A FINAL, NON-APPEALABLE JUDGMENT BY A COURT OF COMPETENT
JURISDICTION TO HAVE RESULTED FROM SUCH INDEMNIFIED PARTY'S GROSS
NEGLIGENCE OR WILLFUL MISCONDUCT. IN THE CASE OF AN INVESTIGATION,
LITIGATION OR OTHER PROCEEDING TO WHICH THE INDEMNITY IN THIS
SECTION 13.1 APPLIES, SUCH INDEMNITY SHALL BE EFFECTIVE WHETHER OR
NOT SUCH INVESTIGATION, LITIGATION OR PROCEEDING IS BROUGHT BY THE
BORROWER, ITS DIRECTORS, SHAREHOLDERS OR CREDITORS OR AN INDEMNIFIED
PARTY OR ANY OTHER PERSON OR ANY INDEMNIFIED PARTY IS OTHERWISE A
PARTY THERETO AND WHETHER OR NOT THE TRANSACTIONS CONTEMPLATED
HEREBY ARE CONSUMMATED. THE BORROWER AGREES NOT TO ASSERT ANY CLAIM
AGAINST THE AGENT, ANY LENDER, ANY OF THEIR AFFILIATES, OR ANY OF
THEIR RESPECTIVE DIRECTORS, OFFICERS, EMPLOYEES, ATTORNEYS, AGENTS,
AND ADVISERS, ON ANY THEORY OF LIABILITY, FOR SPECIAL, INDIRECT,
CONSEQUENTIAL, OR PUNITIVE DAMAGES ARISING OUT OF OR OTHERWISE
RELATING TO THE LOAN DOCUMENTS, ANY OF THE TRANSACTIONS CONTEMPLATED
HEREIN OR THE ACTUAL OR PROPOSED USE OF THE PROCEEDS OF THE LOANS.
CREDIT AGREEMENT - PAGE 60
<PAGE>
(c) Without prejudice to the survival of any other
agreement of the Borrower hereunder, the agreements and obligations
of the Borrower contained in this Section 13.1 shall survive the
payment in full of the Loans and all other amounts payable under
this Agreement.
Section XIII.2 Limitation of Liability. None of the Agent, any
Lender, or any Affiliate, officer, director, employee, attorney, or agent
thereof shall have any liability with respect to, and the Borrower and, by the
execution of the Loan Documents, to which it is a party each Significant
Subsidiary, hereby waives, releases, and agrees not to sue any of them upon, any
claim for any special, indirect, incidental, consequential or punitive damages
suffered or incurred by the Borrower or any Significant Subsidiary in connection
with, arising out of, or in any way related to any of the Loan Documents, or any
of the transactions contemplated by any of the Loan Documents.
Section XIII.3 No Duty. All attorneys, accountants, appraisers, and
other professional Persons and consultants retained by the Agent or any Lender
shall have the right to act exclusively in the interest of the Agent and the
Lenders and shall have no duty of disclosure, duty of loyalty, duty of care, or
other duty or obligation of any type or nature whatsoever to the Borrower or any
of the Borrower's shareholders or any other Person.
Section XIII.4 No Fiduciary Relationship. The relationship between
the Borrower and the Significant Subsidiaries on the one hand and the Agent and
each Lender on the other is solely that of debtor and creditor, and neither the
Agent nor any Lender has any fiduciary or other special relationship with the
Borrower or any Significant Subsidiaries, and no term or condition of any of the
Loan Documents shall be construed so as to deem the relationship between the
Borrower and the Significant Subsidiaries on the one hand and the Agent and each
Lender on the other and any Lender to be other than that of debtor and creditor.
Section XIII.5 Equitable Relief. The Borrower recognizes that in the
event the Borrower or any Significant Subsidiary fails to pay, perform, observe,
or discharge any or all of the obligations under the Loan Documents, any remedy
at law may prove to be inadequate relief to the Agent and the Lenders. The
Borrower therefore agrees that the Agent and the Lenders, if the Agent or the
Required Lenders so request, shall be entitled to temporary and permanent
injunctive relief in any such case without the necessity of proving actual
damages.
Section XIII.6 No Waiver; Cumulative Remedies. No failure on the
part of the Agent or any Lender to exercise and no delay in exercising, and no
course of dealing with respect to, any right, power, or privilege under any Loan
Document shall operate as a waiver thereof, nor shall any single or partial
exercise of any right, power, or privilege under any Loan Document preclude any
other or further exercise thereof or the exercise of any other right, power, or
privilege. The rights and remedies provided for in the Loan Documents are
cumulative and not exclusive of any rights and remedies provided by law.
Section XIII.7 Assignments and Participations.
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<PAGE>
(a) Each Lender may assign to one or more Eligible
Assignees all or a portion of its rights and obligations under this
Agreement (including, without limitation, all or a portion of its
Loans, its Note, and its Commitment); provided, however, that
(i) each such assignment shall be to an
Eligible Assignee;
(ii) except in the case of an assignment to
another Lender or an assignment of all of a Lender's
rights and obligations under this Agreement, any such
partial assignment shall be in an amount at least equal
to $5,000,000 or an integral multiple of $2,500,000 in
excess thereof;
(iii) each such assignment by a Lender shall
be of a constant, and not varying, percentage of all of
its rights and obligations under this Agreement and the
Note; and
(iv) the parties to such assignment shall
execute and deliver to the Agent for its acceptance an
Assignment and Acceptance, together with any Note
subject to such assignment and a processing fee of
$3,500.
Upon execution, delivery, and acceptance of such Assignment and Acceptance, the
assignee thereunder shall be a party hereto and, to the extent of such
assignment, have the obligations, rights, and benefits of a Lender hereunder and
the assigning Lender shall, to the extent of such assignment, relinquish its
rights and be released from its obligations under this Agreement. Upon the
consummation of any assignment pursuant to this Section, the assignor, the Agent
and the Borrower shall make appropriate arrangements so that, if required, new
Notes are issued to the assignor and the assignee. If the assignee is not
incorporated under the laws of the United States of America or a state thereof,
it shall deliver to the Borrower and the Agent certification as to exemption
from deduction or withholding of Taxes in accordance with Section 5.6.
(b) The Agent shall maintain at its address below its
signature hereof a copy of each Assignment and Acceptance delivered
to and accepted by it and a register for the recordation of the
names and addresses of the Lenders and the Commitment of, and
principal amount of the Loans owing to, each Lender from time to
time (the "Register"). The entries in the Register shall be
conclusive and binding for all purposes, absent manifest error, and
the Borrower, the Agent and the Lenders may treat each Person whose
name is recorded in the Register as a Lender hereunder for all
purposes of this Agreement. The Register shall be available for
inspection by the Borrower or any Lender at any reasonable time and
from time to time upon reasonable prior notice.
(c) Upon its receipt of an Assignment and Acceptance
executed by the parties thereto, together with any Note subject to
such assignment and payment of the processing fee, the Agent shall,
if such Assignment and Acceptance has been completed and is in
substantially the form of Exhibit D hereto, (i) accept such
Assignment and Acceptance, (ii) record the information contained
therein in the Register and (iii) give prompt notice thereof to the
parties thereto.
CREDIT AGREEMENT - PAGE 62
<PAGE>
(d) Each Lender may sell participations to one or more
Persons in all or a portion of its rights, obligations or rights and
obligations under this Agreement (including all or a portion of its
Commitment or its Loans); provided, however, that (i) such Lenders
obligations under this Agreement shall remain unchanged, (ii) such
Lender shall remain solely responsible to the other parties hereto
for the performance of such obligations, (iii) the participant shall
be entitled to the benefit of the yield protection provisions
contained in Article 5 and the right of set-off contained in Section
11.5, and (iv) the Borrower shall continue to deal solely and
directly with such Lender in connection with such Lenders rights and
obligations under this Agreement, and such Lender shall retain the
sole right to enforce the obligations of the Borrower relating to
its Loans and its Note and to approve any amendment, modification,
or waiver of any provision of this Agreement (other than amendments,
modifications, or waivers decreasing the amount of principal of or
the rate at which interest is payable on such Loans or Note,
extending any scheduled principal payment date or date fixed for the
payment of interest on such Loans or Note, extending its Commitment
or releasing any Significant Subsidiary from the Guaranty).
(e) Notwithstanding any other provision set forth in
this Agreement, any Lender may at any time assign and pledge all or
any portion of its Loans and its Note to any Federal Reserve Lender
as collateral security pursuant to Regulation A and any Operating
Circular issued by such Federal Reserve Lender. No such assignment
shall release the assigning Lender from its obligations hereunder.
(f) Any Lender may furnish any information concerning
the Borrower or any of its Subsidiaries in the possession of such
Lender from time to time to assignees and participants (including
prospective assignees and participants), subject, however, to the
provisions of Section 13.21 hereof.
Section XIII.8 Survival. All representations and warranties made in
any Loan Document or in any document, statement, or certificate furnished in
connection with any Loan Document shall survive the execution and delivery of
the Loan Documents and no investigation by the Agent or any Lender or any
closing shall affect the representations and warranties or the right of the
Agent or any Lender to rely upon them. Without prejudice to the survival of any
other obligation of the Borrower hereunder, the obligations of the Borrower
under Article 5 and Sections 13. 1 and 13.2 shall survive repayment of the Notes
and termination of the Commitments and the Letters of Credit.
Section XIII.9 ENTIRE AGREEMENT. THIS AGREEMENT, THE NOTES, AND THE
OTHER LOAN DOCUMENTS REFERRED TO HEREIN EMBODY THE FINAL, ENTIRE AGREEMENT AMONG
THE PARTIES HERETO AND SUPERSEDE ANY AND ALL PRIOR COMMITMENTS, AGREEMENTS,
REPRESENTATIONS, AND UNDERSTANDINGS, WHETHER WRITTEN OR ORAL, RELATING TO THE
SUBJECT MATTER HEREOF AND MAY NOT BE CONTRADICTED OR VARIED BY EVIDENCE OF
PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OR DISCUSSIONS OF THE
PARTIES HERETO. THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONG THE PARTIES
THERETO.
CREDIT AGREEMENT - PAGE 63
<PAGE>
Section XIII.10 Amendments and Waivers. Any provision of this
Agreement or any other Loan Document may be amended or waived if, but only if,
such amendment or waiver is in writing and is signed by the Borrower and the
Required Lenders (and, if Article 12 or the rights or duties of the Agent are
affected thereby, by the Agent); provided that no such amendment or waiver
shall, unless signed by all the Lenders, (i) increase the Commitment of any
Lender hereunder (except as agreed to by such Lender pursuant to the provisions
of Section 2.6), (ii) reduce the principal of or rate of interest on any Loan or
any fees or other amounts payable hereunder, (iii) postpone any date fixed for
the payment of any scheduled installment of principal of or interest on any Loan
or any fees or other amounts payable hereunder or for termination of any
Commitment, (iv) release any Significant Subsidiary from its obligations under
its Guaranty.
Section XIII.11 Maximum Interest Rate.
(a) No interest rate specified in any Loan Document
shall at any time exceed the Maximum Rate. If at any time the
interest rate (the Contract Rate) for any Obligation shall exceed
the Maximum Rate, thereby causing the interest accruing on such
Obligation to be limited to the Maximum Rate, then any subsequent
reduction in the Contract Rate for such Obligation shall not reduce
the rate of interest on such Obligation below the Maximum Rate until
the aggregate amount of interest accrued on such Obligation equals
the aggregate amount of interest which would have accrued on such
Obligation if the Contract Rate for such Obligation had at all times
been in effect.
(b) No provision of any Loan Document shall require the
payment or the collection of interest in excess of the maximum
amount permitted by applicable law. If any excess of interest in
such respect is hereby provided for, or shall be adjudicated to be
so provided, in any Loan Document or otherwise in connection with
this loan transaction, the provisions of this Section shall govern
and prevail and neither the Borrower nor the sureties, guarantors,
successors, or assigns of the Borrower shall be obligated to pay the
excess amount of such interest or any other excess sum paid for the
use, forbearance, or detention of sums loaned pursuant hereto. In
the event any Lender ever receives, collects, or applies as interest
any such sum, such amount which would be in excess of the maximum
amount permitted by applicable law shall be applied as a payment and
reduction of the principal of the Obligations; and, if the principal
of the Obligations has been paid in full, any remaining excess shall
forthwith be paid to the Borrower. In determining whether or not the
interest paid or payable exceeds the Maximum Rate, the Borrower and
each Lender shall, to the extent permitted by applicable law, (a)
characterize any non-principal payment as an expense, fee, or
premium rather than as interest, (b) exclude voluntary prepayments
and the effects thereof, and (c) amortize, prorate, allocate, and
spread in equal or unequal parts the total amount of interest
throughout the entire contemplated term of the Obligations so that
interest for the entire term does not exceed the Maximum Rate.
Section XIII.12 Notices. All notices and other communications
provided for in any Loan Document to which the Borrower or any Significant
Subsidiary is a party shall be given or made in writing and telecopied, mailed
by certified mail return receipt requested, or delivered to the
CREDIT AGREEMENT - PAGE 64
<PAGE>
intended recipient at the Address for Notices specified below its name on the
signature pages hereof and, if to a Significant Subsidiary, at the address for
notices for Borrower; or, as to any party at such other address as shall be
designated by such party in a notice to each other party given in accordance
with this Section. Except as otherwise provided in any Loan Document, all such
communications shall be deemed to have been duly given when transmitted by
telecopy, subject to telephone confirmation of receipt, or when personally
delivered or, in the case of a mailed notice, three (3) Business Days after
being duly deposited in the mails, in each case given or addressed as aforesaid;
provided, however, notices to the Agent pursuant to Section 2.7 or 4.3 shall not
be effective until received by the Agent.
Section XIII.13 Governing Law. This Agreement shall be governed by
and construed in accordance with the laws of the State of Texas and the
applicable laws of the United States of America.
Section XIII.14 Counterparts. This Agreement may be executed in one
or more counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same agreement.
Section XIII.15 Severability. Any provision of any Loan Document
held by a court of competent jurisdiction to be invalid or unenforceable shall
not impair or invalidate the remainder of any Loan Document and the effect
thereof shall be confined to the provision held to be invalid or illegal.
Section XIII.16 Headings. The headings, captions, and arrangements
used in this Agreement are for convenience only and shall not affect the
interpretation of this Agreement.
Section XIII.17 Non-Application of Chapter 346 of Texas Finance
Code. The provisions of Chapter 346 of the Texas Finance Code (formerly Chapter
15 of the Texas Credit Code (Vernon's Texas Civil Statutes, Article 5069-15))
are specifically declared by the parties hereto not to be applicable to any Loan
Documents or to the transactions contemplated thereby.
Section XIII.18 Construction. The Borrower, each Significant
Subsidiary (by its execution of the Loan Documents to which it is a party), the
Agent and each Lender acknowledges that each of them has had the benefit of
legal counsel of its own choice and has been afforded an opportunity to review
the Loan Documents with its legal counsel and that the Loan Documents shall be
construed as if jointly drafted by the parties thereto.
Section XIII.19 Independence of Covenants. All covenants under the
Loan Documents shall be given independent effect so that if a particular action
or condition is not permitted by any of such covenants, the fact that it would
be permitted by an exception to, or be otherwise within the limitations of,
another covenant shall not avoid the occurrence of a Default if such action is
taken or such condition exists.
Section XIII.20 WAIVER OF JURY TRIAL. TO THE FULLEST EXTENT
PERMITTED BY APPLICABLE LAW, EACH OF THE PARTIES HERETO HEREBY
CREDIT AGREEMENT - PAGE 65
<PAGE>
IRREVOCABLY AND EXPRESSLY WAIVES ALL RIGHT TO A TRIAL BY JURY IN ANY ACTION,
PROCEEDING, OR COUNTERCLAIM (WHETHER BASED UPON CONTRACT, TORT, OR OTHERWISE)
ARISING OUT OF OR RELATING TO ANY OF THE LOAN DOCUMENTS OR THE TRANSACTIONS
CONTEMPLATED THEREBY OR THE ACTIONS OF THE AGENT OR ANY LENDER IN THE
NEGOTIATION, ADMINISTRATION, OR ENFORCEMENT THEREOF.
Section XIII.21 Confidentiality. The Agent and each Lender (each, a
"Lending Party") agrees to keep confidential any information furnished or made
available to it by the Borrower pursuant to this Agreement that is marked
confidential; provided that nothing herein shall prevent any Lending Party from
disclosing such information (a) to any other Lending Party or subject to
provisions substantially similar to those contained in this Section, any
affiliate of any Lending Party, or any officer, director, employee, agent, or
advisor of any Lending Party or affiliate of any Lending Party, (b) to any other
Person if reasonably incidental to the administration of the credit facility
provided herein so long as such Person is subject to provisions substantially
similar to those contained in this Section, (c) as required by any law, rule, or
regulation, (d) upon the order of any court or administrative agency, (e) upon
the request or demand of any regulatory agency or authority, (f) that is or
becomes available to the public or that is or becomes available to any Lending
Party other than as a result of a disclosure by any Lending Party prohibited by
this Agreement, (g) in connection with any litigation to which such Lending
Party or any of its affiliates may be a party, (h) to the extent necessary in
connection with the exercise of any remedy under this Agreement or any other
Loan Document, and (i) subject to provisions substantially similar to those
contained in this Section, to any actual or proposed participant or assignee.
[Remainder of page intentionally left blank]
CREDIT AGREEMENT - PAGE 66
<PAGE>
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement as of the day and year first above written.
BORROWER:
E.W. BLANCH HOLDINGS, INC.
By:
-------------------------------------
Name:
--------------------------------
Title:
-------------------------------
Address for Notices:
500 N. Akard, Suite 4500
Dallas, Texas 75201
Fax No.: (214) 756-7119
Telephone No.: (214) 756-7102
Attention: Ian D. Packer
3500 West 80th Street
Minneapolis, Minnesota 55431
Fax No.:(612) 896-4646
Telephone No.: (612) 844-9764
Attention: Donna J. Hager
CREDIT AGREEMENT
<PAGE>
AGENT AND LENDER:
Commitment: NATIONSBANK, N.A.,
$40,000,000 individually as a Lender and as the Agent
Swingline Commitment: By:
$10,000,000 -------------------------------------
Name:
-----------------------------------
Title:
----------------------------------
Address for Notices:
901 Main Street
Dallas, Texas 75202
Fax No.: (214) 508-0604
Telephone No.:(214) 508-0611
Attention: Keith Thompson
Lending Office for Base Rate
Loans and Eurodollar Loans:
901 Main Street
Dallas, Texas 75202
CREDIT AGREEMENT
<PAGE>
OTHER LENDERS:
NORWEST BANK MINNESOTA, N.A.
Commitment: By:
$25,000,000 -------------------------------------
Name:
-----------------------------------
Title:
----------------------------------
Address for Notices:
Sixth and Marquette
Minneapolis, Minnesota 55479-0105
Fax No.: (612) 667-7251
Telephone No.:(612) 667-7059
Attention: D.E. Jackson
Lending Office for Base Rate
Loans and Eurodollar Loans:
Sixth and Marquette
Minneapolis, Minnesota 55479-0105
CREDIT AGREEMENT
<PAGE>
THE FIRST NATIONAL BANK OF CHICAGO
Commitment: By:
$15,000,000 -------------------------------------
Name:
-----------------------------------
Title:
----------------------------------
Address for Notices:
1717 Main, 4th Floor
Dallas, Texas 75201
Fax No.: (214) 290-2309
Telephone No.: (214) 290-2077
Attention: Timothy. J. Stambaugh
Lending Office for Base Rate
Loans and Eurodollar Loans:
One First National Plaza, Suite 0085
Chicago, Illinois 60670
Attention: Lillian Arroyo
CREDIT AGREEMENT
<PAGE>
FLEET NATIONAL BANK
Commitment: By:
$20,000,000 -------------------------------------
Name:
-----------------------------------
Title:
----------------------------------
Address for Notices:
777 Main Street, Mail Stop CTMO 0250
Hartford, Connecticut 06115
Fax No.: (860) 986-1264
Telephone No.: (860) 986-3127
Attention: Elizabeth Shelley
Lending Office for Base Rate
Loans and Eurodollar Loans:
777 Main Street, Mail Stop CTMO 0250
Hartford, Connecticut 06115
Fax No.: (860) 986-1094
Telephone No.: (860) 986-4616
Attention: Icy Mounds
CREDIT AGREEMENT
EXHIBIT 10.3
Third Amendment
to the
1993 Stock Incentive Plan of
E. W. Blanch Holdings, Inc.
This Third Amendment to the 1993 Stock Incentive Plan of E. W. Blanch
Holdings, Inc. has been made by E. W. Blanch Holdings, Inc. ("the Company"):
WHEREAS, the Company has previously established the 1993 Stock
Incentive Plan to provide a means to attract able persons to enter and remain in
the employ of the Company; and
WHEREAS, the Company has reserved the right to amend the Plan under the
terms hereof;
NOW, THEREFORE, the Company hereby amends the Agreement as follows:
Subsection "a" of Section 5 has been amended to read as follows:
"(a) Subject to Section 12, the aggregate number of shares of Stock
made subject to Awards may not exceed 4,400,000;"
The provisions of the 1993 Stock Incentive Plan shall remain otherwise
unchanged.
EXHIBIT 10.6
E. W. BLANCH HOLDINGS, INC.
MANAGEMENT INCENTIVE PLAN
This document explains the terms of the Management Incentive Plan (the Plan) of
E. W. Blanch Holdings, Inc. (the Company, Holdings, or Holdings Company).
Participants
- ------------
Edgar W. Blanch, Jr. Chris L. Walker
Rodman R. Fox Frank S. Wilkinson, Jr.
Ian D. Packer
Funding
- -------
The sum of the following two components equals the total amount of the Plan
pool:
1. 20% of the 1998 pre-tax profits in excess of 20% growth over 1997 pre-tax
profits, adjusted for the 1997 Plan expense.
1997 pre-tax profits $43,161,592
Add back 1997 Plan expense 1,093,000
-----------
$44,254,592
Times Growth Goal (120%) 1.20
-----------
1998 pre-tax profit goal $53,105,510
2. 37.5% of the aggregate amount awarded to the E. W. Blanch Holdings, Inc,
Incentive Plan (for all other employees) will be allocated to the bonus
pool.
Any stock acquisitions or stock offerings may require adjustment to the
measurement of earnings to ensure that the cost of capital is recognized.
Allocation and Payment
- ----------------------
Mr. Blanch shall be paid 50% of the Plan pool. The Committee may not increase
this percentage allocation, but may, at its discretion, reduce it. Awards will
be allocated to the other participants from the remaining funds in the Plan
pool, based upon the Committee's judgment of their performance and contributions
during the year. Additionally, individual bonuses paid to the participants may
not exceed 100% of their respective base salaries.
Funds available for distribution shall be paid no later than March 15, 1999. In
order to be eligible to receive an award, a participant must be an employee of
the Company on the date such award is to be paid.
Administration and Amendments
- -----------------------------
The Company's shareholders must approve the Plan. The Plan shall then be
administered, construed and interpreted by the Committee. The Plan shall be
effective for the Company's 1998 fiscal year.
The Committee may require that Plan participants enter into written
participation agreements, in such form or forms as the Committee shall deem
appropriate.
EXHIBIT 10.13
EMPLOYMENT AGREEMENT
AGREEMENT between E. W. Blanch Co. Inc., a Delaware corporation
(hereinafter called the "Company"), and Rodman R. Fox (hereinafter called the
"Employee").
1. EFFECTIVE DATE. The effective date of this Agreement shall be May 6,
1996.
2. EMPLOYMENT. The Company hereby employs the Employee and the Employee
hereby accepts employment upon the terms and conditions hereinafter set forth.
3. TERM. The term of this Agreement shall be from May 6, 1996 to March
31, 1997 and shall automatically renew for annual periods thereafter unless the
Company gives notice of its intention not to renew, not less than 30 days prior
to the end of the current annual period. This Agreement is also subject to early
termination by the Company for "Cause."
For purposes of this Agreement, the Company shall have Cause to
terminate Employee's employment hereunder upon (A) the Employee having been
convicted of any felony under any state or federal law; (B) an act or acts of
personal dishonesty committed by Employee and intended to result in substantial
personal enrichment of Employee at the expense of the Company; (C) the willful
malfeasance or gross negligence by the Employee in the performance of his duties
hereunder; or (D) gross misconduct by the Employee materially injurious to the
Company. In the event that this Agreement shall be terminated for Cause, the
Company shall continue to make payments hereunder for all services rendered by
the Employee up to the date of termination but shall have no further obligations
to make payments after that date.
The Company may terminate the Employee's employment hereunder if (i)
the Employee becomes disabled, as such term is defined in the group disability
insurance policy of Employer or (ii) the Employee dies. In any such case, the
Company shall have no further obligation or liability under this Agreement.
4. COMPENSATION. For all services rendered by the Employee under this
Agreement, the Company shall pay the Employee at a salary rate of not less than
$300,000 per year, payable in accordance with the Company's payroll practice as
from time to time in effect.
Employee shall be entitled to the use of the services of a qualified
tax professional hired or contracted with by the Company. The services will
include periodic and year end projections of Employee's income tax liability,
preparation of Employee's income tax return, including the federal and any
necessary states, preparation of the returns of any dependent minors, and
reasonable consulting regarding Employee's income tax matters that may arise
from time to time. The value of those services for a calendar year will be added
to Employee's W-2 in compliance with IRS regulations. In the event that Employee
chooses to use a tax professional other than the one hired or contracted with by
the Company, Employee shall be entitled to receive reimbursement for the cost of
any of the above referenced services in an amount not to exceed $2,000 during
any calendar year.
- 1 -
<PAGE>
5. DUTIES. The Employee is engaged as an executive of the Company and
hereby promises to perform and discharge faithfully and efficiently the duties
which may be assigned to him from time to time which are appropriate for an
executive in the reinsurance brokerage business.
6. EXTENT OF SERVICES. The Employee shall devote substantially his full
time, attention and energies to the business of the Company and shall not during
the term of this Agreement be engaged in any other substantial business
activity, whether or not such business activity is pursued for gain, profit or
other pecuniary advantage; but this shall not be construed as preventing the
Employee from investing his personal assets in businesses which do not compete
with the Company in such form or manner as will not require any substantial
services on the part of the Employee in the operation of the affairs of the
companies in which such investments are made and in which his participation is
solely that of an investor and except that the Employee may purchase securities
in any corporation whose securities are regularly traded, provided that such
purchases shall not result in him collectively owning beneficially at any time
more than 1% of any class of securities of any corporation engaged in a business
competitive with that of the Company.
7. COVENANTS NOT TO COMPETE OR INTERFERE. For a period of two (2) years
from and after the termination of Employee's employment hereunder for any
reason, Employee will not, directly or indirectly, as a sole proprietor, member
of a partnership, or stockholder, investor, officer or director of a
corporation, or as an employee, agent, associate or consultant of any person,
firm or corporation:
(a) Solicit or accept business (i) from any clients or prospects of the
Company or its affiliates who were solicited or serviced directly by the
Employee or where the Employee supervised, directly or indirectly, in whole or
in part, the solicitation or service activities related to such clients or
prospects or (ii) from any former client of the Company or its affiliates who
was such within two (2) years prior to Employee's date of termination and who
was solicited or serviced directly by the Employee or where the Employee
supervised, directly or indirectly, in whole or in part, the solicitation or
service activities related to such former client; or
(b) Solicit, or assist anyone else in the solicitation of, any of the
Company's employees to terminate their employment with the Company and to become
employed by any business enterprise with which the Employee may then be
associated, affiliated, or connected; or
(c) Engage in the business of the type performed by the Company or its
affiliates in the geographic areas where Employee solicited such business on
behalf of the Company or its affiliates or where Employee supervised the
solicitation of such business on behalf of the Company or its affiliates.
As used in this paragraph 7 and in paragraph 8, "affiliate" shall mean
any person, firm or corporation that, directly or indirectly, controls, is
controlled by, or is under common control with, the Company, whether such
control is through stock ownership, contract or otherwise, and shall expressly
include the Company's predecessor, E. W. Blanch Co. Limited Partnership; and
"prospect" shall mean any person or organization to whom a proposal for services
was rendered by the Company or its affiliates during the 12-month period
immediately preceding the Employee's date of termination.
- 2 -
<PAGE>
It is the desire and intent of the parties that the provisions of this
paragraph 7 shall be enforced to the fullest extent permissible under the laws
and public policies applied in each jurisdiction in which enforcement is sought.
Accordingly, if any particular portion of this paragraph 7 shall be adjudicated
to be invalid or unenforceable, this paragraph 7 shall be deemed amended to
delete therefrom the portion thus adjudicated to be invalid or unenforceable,
such deletion to apply only with respect to the operation of this paragraph in
the particular jurisdiction in which such adjudication is made.
8. NONDISCLOSURE OF INFORMATION. Employee recognizes and acknowledges
that the Company's trade secrets and confidential or proprietary information,
including such trade secrets or information as may exist from time to time, and
information as to the identity of clients of the Company, reinsurance contract
data and other similar items, are valuable, special and unique assets of the
Company's business, access to and knowledge of which are essential to the
performance of the duties of Employee hereunder. Employee will not, during or
after the term hereof, in whole or in part, disclose such secrets or
confidential or proprietary information to any person, firm, corporation,
association or other entity for any reason or purpose whatsoever, nor shall
Employee make use of any such property for his own purposes or for the benefits
of any person, firm, corporation or other entity (except the Company) under any
circumstances, during or after the term hereof, provided that after the term
hereof these restrictions shall not apply to such secrets or information which
are then in the public domain (provided that Employee was not responsible,
directly or indirectly, for such secrets or information entering the public
domain without the Company's consent).
9. INJUNCTIVE RELIEF. If there is a breach or threatened breach of the
provisions of paragraphs 7 or 8 of this Agreement, the Company shall be entitled
to an injunction restraining Employee from such breach. Nothing herein shall be
construed as prohibiting the Company from pursuing any other remedies for such
breach or threatened breach including recovery of any profits made by Employee
as a result thereof as well as the Company's legal fees, which legal fees
Employee agrees to pay in the event he breaches or threatens to breach this
Agreement.
10. EMPLOYEE BENEFITS. During the term of this Agreement, Employee
shall participate in all employee benefit plans of the Company, subject to the
eligibility, enrollment and other requirements of such plans.
11. NOTICES. Any notice required or permitted to be given under this
Agreement shall be in writing and shall be deemed to have been duly given or
delivered if delivered personally or mailed by registered or certified mail,
return receipt requested, with first class postage prepaid, to his residence in
the case of Employee and to its principal office in the case of the Company.
12. BREACH, WAIVER OF BREACH. The waiver by the Company of a breach of
any provision of this Agreement by the Employee shall not operate or be
construed as a waiver of any subsequent breach by the Employee.
13. GOVERNING LAW. The validity, interpretation, construction,
performance, enforcement and remedies of or relating to this Agreement, and the
rights and obligations of the parties hereunder, shall be governed by the
substantive laws of the State of Minnesota (without
- 3 -
<PAGE>
regard to the conflict of laws rules or statutes of any jurisdiction), and any
and every legal proceeding arising out of or in connection with this Agreement
shall be brought in the appropriate courts of the State of Minnesota, each of
the parties hereby consenting to the exclusive jurisdiction of said courts for
this purpose.
14. ASSIGNMENT. The rights and obligations of the Company under this
Agreement shall inure to the benefit of and shall be binding upon the successors
of the Company and may be assigned, for all or any part of the term hereof, by
the Company to any corporation, (i) which at the time controls the capital stock
of the Company, (ii) which succeeds to substantially all the assets of the
Company or (iii) the controlling capital stock of which is at the time owned by
the Company; provided, however, that in the event of any transaction specified
in (i), (ii) or (iii) above, the Company shall remain liable with respect to the
obligations of the Company under this Agreement. In the event of such
assignment, any and all references to the "Company" in other paragraphs of this
Agreement shall be deemed to mean and include such assignee corporation.
15. ENTIRE AGREEMENT. This instrument contains the entire agreement of
the parties with respect to employment. It may not be changed orally but only by
an agreement in writing signed by the party against whom enforcement of any
waiver, change, modification, extension or discharge is sought.
16. SURVIVAL. The parties expressly acknowledge and agree that the
provisions of this Agreement, which by their express or implied terms extend
beyond the termination of Employee's employment hereunder (including, without
limitation, the provisions of paragraphs 7 and 8 relating to noncompetition and
nondisclosure of information), shall continue in full force and effect
notwithstanding Employee's termination of employment hereunder or the
termination of this Agreement, respectively.
IN WITNESS WHEREOF, the parties have executed this Agreement as of
the dates below.
COMPANY:
E. W. Blanch Co., Inc.
3500 West 80th Street
Minneapolis, MN 55431
By:
------------------------------ ------------------------------------
Its: Date
-----------------------------
- --------------------------------- ------------------------------------
Rodman R. Fox Date
429 Sked St.
Pennington, NJ 08534
- 4 -
EXHIBIT 10.15
SCHEDULE OF EXECUTIVES RECEIVING SEVERANCE AGREEMENTS
Name of Executive Severance Amount (4(I) (a))
- --------------------------- ---------------------------------------
E.W. Blanch, Jr. three (3)
Ian D. Packer three (3)
Chris L. Walker three (3)
Frank S. Wilkinson, Jr. three (3)
James E. Erickson two (2)
Daniel P. O'Keefe two (2)
David L. Samuel two (2)
James Caulfield one (1)
EXHIBIT 10.16
STOCK PURCHASE AGREEMENT
BY AND AMONG
SUMMIT GLOBAL PARTNERS, INC.,
SUMMIT GLOBAL PARTNERS (TEXAS) HOLDINGS, INC.
BLANCH INSURANCE SERVICES, INC.,
E.W. BLANCH INSURANCE SERVICES, INC.
AND
E.W. BLANCH HOLDINGS, INC.
____________
DATED AS OF JUNE 1, 1998
____________
<PAGE>
TABLE OF CONTENTS
ARTICLE 1
Sale and Purchase of Stock. . . . . . . . . . . . . . . . . . . . . . . 1
ARTICLE 2. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Closing and Consideration for the Shares. . . . . . . . . . . . . . . . 2
2.1 Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2.2 Delivery and Payment. . . . . . . . . . . . . . . . . . . . . 2
2.3 Consideration and Payment for the Shares. . . . . . . . . . . 2
2.4 Net Commission Revenue and Shareholder Equity Adjustments . . 3
ARTICLE 3. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Representations and Warranties of the Buyers. . . . . . . . . . . . . . 5
3.1 Organization and Standing of Buyers . . . . . . . . . . . . . 5
3.2 Corporate Approval; Binding Effect. . . . . . . . . . . . . . 5
3.3 Noncontravention. . . . . . . . . . . . . . . . . . . . . . . 5
3.4 Consents. . . . . . . . . . . . . . . . . . . . . . . . . . . 6
3.5 Brokers . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
3.6 SGP Holdings' Investment Intent . . . . . . . . . . . . . . . 6
3.7 Issuance of Shares. . . . . . . . . . . . . . . . . . . . . . 6
3.8 Capitalization. . . . . . . . . . . . . . . . . . . . . . . . 6
3.9 Knowledge of Buyers; Access to Information. . . . . . . . . . 6
3.10 Hart-Scott-Rodino Matters . . . . . . . . . . . . . . . . . . 7
ARTICLE 4. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Representations and Warranties of the Sellers . . . . . . . . . . . . . 7
4.1 Capitalization; Ownership of Shares; No Liens on Shares . . . 7
4.2 Due Organization. . . . . . . . . . . . . . . . . . . . . . . 7
4.3 Subsidiaries. . . . . . . . . . . . . . . . . . . . . . . . . 7
4.4 Due Authorization . . . . . . . . . . . . . . . . . . . . . . 8
4.5 Financial Statements and Related Matters. . . . . . . . . . . 9
4.6 Conduct of Business; Certain Actions. . . . . . . . . . . . .10
4.7 Title to Properties . . . . . . . . . . . . . . . . . . . . .11
4.8 Indebtedness. . . . . . . . . . . . . . . . . . . . . . . . .11
4.9 Absence of Undisclosed Liabilities. . . . . . . . . . . . . .12
4.10 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . .12
4.11 Labor Relations . . . . . . . . . . . . . . . . . . . . . . .15
4.12 Contracts . . . . . . . . . . . . . . . . . . . . . . . . . .16
4.13 ERISA Compliance. . . . . . . . . . . . . . . . . . . . . . .16
4.14 Licenses and Permits. . . . . . . . . . . . . . . . . . . . .17
4.15 Intellectual Property Rights. . . . . . . . . . . . . . . . .17
4.16 Compliance with Laws. . . . . . . . . . . . . . . . . . . . .17
4.17 Certain Environmental Matters . . . . . . . . . . . . . . . .18
4.18 Potential Conflicts of Interest . . . . . . . . . . . . . . .18
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4.19 Accounts Receivable . . . . . . . . . . . . . . . . . . . . .18
4.20 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . .18
4.21 Bank Accounts . . . . . . . . . . . . . . . . . . . . . . . .20
4.22 Certain Consents. . . . . . . . . . . . . . . . . . . . . . .20
4.23 Managing General Agent License; Compliance. . . . . . . . . .20
4.24 Company Relationships . . . . . . . . . . . . . . . . . . . .21
4.25 Other Company Activities. . . . . . . . . . . . . . . . . . .22
4.26 Brokers . . . . . . . . . . . . . . . . . . . . . . . . . . .22
4.27 Premium Trust Funds . . . . . . . . . . . . . . . . . . . . .23
4.28 Information Furnished . . . . . . . . . . . . . . . . . . . .23
4.29 Investment Representation . . . . . . . . . . . . . . . . . .23
4.30 Knowledge of Sellers; Access to Information . . . . . . . . .24
4.31 Claims and Proceedings. . . . . . . . . . . . . . . . . . . .24
4.32 Year 2000 . . . . . . . . . . . . . . . . . . . . . . . . . .25
4.33 Hart-Scott-Rodino Matters . . . . . . . . . . . . . . . . . .25
4.34 Meaning of Knowledge. . . . . . . . . . . . . . . . . . . . .25
4.35 Assignment and Assumption Agreement . . . . . . . . . . . . .25
4.36 Administrative Services . . . . . . . . . . . . . . . . . . .25
ARTICLE 5. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .26
Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .26
5.1 Transfer of Assets and Assumption of Liabilities
Prior to Closing. . . . . . . . . . . . . . . . . . . . . .26
5.2 Effective Date Balance Sheet. . . . . . . . . . . . . . . . .26
5.3 Investigation . . . . . . . . . . . . . . . . . . . . . . . .27
5.4 Continuation of Insurance Coverage. . . . . . . . . . . . . .27
5.5 Employment Matters. . . . . . . . . . . . . . . . . . . . . .27
5.6 Employee Benefits . . . . . . . . . . . . . . . . . . . . . .28
5.7 Use of Managing General Agent License . . . . . . . . . . . .28
5.8 Section 338(h)(10) Election . . . . . . . . . . . . . . . . .28
5.9 Stockholder Agreement . . . . . . . . . . . . . . . . . . . .29
5.10 Software License. . . . . . . . . . . . . . . . . . . . . . .29
5.11 Sublease. . . . . . . . . . . . . . . . . . . . . . . . . . .29
5.12 The AD System . . . . . . . . . . . . . . . . . . . . . . . .29
5.13 Preferred Reinsurance Broker. . . . . . . . . . . . . . . . .30
5.14 Note Prepayment and Purchase Price Warrant Adjustment . . . .30
5.15 MGA "Run-Off" Matters. . . . . . . . . . . . . . . . . . . .31
5.16 Registration Rights . . . . . . . . . . . . . . . . . . . . .32
5.17 Prohibition Upon Use of Sellers' Name . . . . . . . . . . . .32
5.18 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .32
5.19 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .33
ARTICLE 6. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .33
The Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .33
6.1 Obligations of Sellers and the Company. . . . . . . . . . . .33
6.2 Obligations of Buyers . . . . . . . . . . . . . . . . . . . .34
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ARTICLE 7. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .34
Noncompetition and Related Covenants. . . . . . . . . . . . . . . . . .34
7.1 Covenant Not to Compete . . . . . . . . . . . . . . . . . . .34
7.2 Covenant of Confidentiality . . . . . . . . . . . . . . . . .35
7.3 Non-Solicitation of Employees . . . . . . . . . . . . . . . .36
7.4 Non-Solicitation of Customers . . . . . . . . . . . . . . . .36
ARTICLE 8. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .36
Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . .36
8.1 Indemnification . . . . . . . . . . . . . . . . . . . . . . .36
8.2 Defense of Third-Party Claims . . . . . . . . . . . . . . . .37
8.3 Existing Claims . . . . . . . . . . . . . . . . . . . . . . .39
8.4 Direct Claims . . . . . . . . . . . . . . . . . . . . . . . .39
8.5 Indemnification for Tax Matters . . . . . . . . . . . . . . .39
8.6 Limitations on Indemnification. . . . . . . . . . . . . . . .41
8.7 Limitation on Claims. . . . . . . . . . . . . . . . . . . . .42
8.8 Recourse. . . . . . . . . . . . . . . . . . . . . . . . . . .43
ARTICLE 9. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .43
Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . .43
9.1 Collateral Agreements, Amendments and Waivers . . . . . . . .43
9.2 Successors and Assigns. . . . . . . . . . . . . . . . . . . .43
9.3 Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . .43
9.4 Arbitration . . . . . . . . . . . . . . . . . . . . . . . . .44
9.5 Invalid Provisions. . . . . . . . . . . . . . . . . . . . . .44
9.6 Information and Confidentiality . . . . . . . . . . . . . . .44
9.7 Waiver. . . . . . . . . . . . . . . . . . . . . . . . . . . .44
9.8 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . .44
9.9 Waiver of Certain Rights. . . . . . . . . . . . . . . . . . .46
9.10 Further Assurances. . . . . . . . . . . . . . . . . . . . . .46
9.11 No Third-Party Beneficiaries. . . . . . . . . . . . . . . . .46
9.12 Governing Law . . . . . . . . . . . . . . . . . . . . . . . .46
9.13 Access to Books and Records . . . . . . . . . . . . . . . . .46
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STOCK PURCHASE AGREEMENT
This STOCK PURCHASE AGREEMENT ("Agreement") is entered into as of the
Effective Date (as hereinafter defined) and executed on June 2, 1998 (the
"Closing Date") by and among SUMMIT GLOBAL PARTNERS (TEXAS) HOLDINGS, INC., a
Delaware corporation ("SGP Holdings"), SUMMIT GLOBAL PARTNERS, INC., a Delaware
corporation ("Summit"), and BLANCH INSURANCE SERVICES, INC. (d/b/a/ Elton George
& Company), a Texas corporation (the "Company"), E. W. BLANCH INSURANCE
SERVICES, INC. (formerly E.W. Blanch Wholesale Insurance Services, Inc.), a
Delaware corporation ("Parent"), and E. W. BLANCH HOLDINGS, INC., a Delaware
corporation ("Blanch"). Parent and Blanch are sometimes collectively referred to
herein as "Sellers." SGP Holdings and Summit are sometimes collectively referred
to herein as "Buyers."
WHEREAS, the Company is a wholly-owned subsidiary of Parent and an
indirect wholly-owned subsidiary of
Blanch;
WHEREAS, SGP Holdings is a wholly-owned subsidiary of Summit; and
WHEREAS, the Sellers desire to sell all of the issued and outstanding stock
of the Company (the "Shares") to SGP Holdings and SGP Holdings desires to
purchase the Shares from the Sellers upon the terms and subject to the
conditions contained in this Agreement;
WHEREAS, as a condition to the parties' willingness to enter into this
Agreement, concurrently with the execution of this Agreement: (i) the Company,
Blanch Wholesale Insurance Services, Inc., a Texas corporation (an affiliate of
Sellers) ("Wholesale"), and Vista Wholesale Insurance Group, Inc., a Texas
corporation (an affiliate of Summit) ("Vista Wholesale"), are entering into that
certain Assignment and Assumption Agreement (hereinafter so called), of even
date, pursuant to which Wholesale assigns to Vista or the Company all of its
rights, title and interest in, to and under those certain Wholesale Contracts
that are identified in paragraph 2 of Schedule 4.12, and (ii) the Company and
Wholesale are entering into an Administrative Services Agreement, of even date,
pursuant to which the Company will provide certain administrative services to
Wholesale in connection with the Wholesale Contracts prior to the Effective Time
provided for in the Assignment and Assumption Agreement;
NOW, THEREFORE, in consideration of the mutual agreements and covenants
herein contained, the parties hereto agree as follows:
ARTICLE 1
SALE AND PURCHASE OF STOCK
Subject to the terms and conditions set forth in this Agreement, Sellers
agree to sell to SGP Holdings and SGP Holdings agrees to purchase from Sellers
at the Closing (as that term is defined herein) all of the Shares in exchange
for the consideration as specified in Section 2.3. (All "Section"
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references herein are to Sections in this Agreement and all "Schedule" and
"Exhibit" references are to Schedules and Exhibits to this Agreement set forth
in the disclosure schedules.)
ARTICLE 2
CLOSING AND CONSIDERATION FOR THE SHARES
2.1 Closing. The closing of the transactions contemplated by this Agreement
(the "Closing") shall take place at the offices of Carrington, Coleman, Sloman &
Blumenthal, L.L.P., 200 Crescent Court, Suite 1500, Dallas, Texas 75201, at 9:00
a.m., local time, on the date hereof, the next following business day, or at
such other time and place as Buyers and Sellers may agree upon in writing;
provided, however, that this Agreement and the transactions referred to herein
shall be effective as of 12:01 a.m., June 1, 1998, which is the "Effective
Date," as that term is used in this Agreement. The date on which the Closing
occurs is hereinafter referred to as the "Closing Date."
2.2 Delivery and Payment. At the Closing, in addition to any other
instruments referred to herein, Sellers shall
deliver or cause to be delivered to SGP Holdings the stock certificate or
certificates evidencing the Shares, duly endorsed
in blank or with duly executed stock powers attached, free and clear of any
lien, claim or encumbrance, and Buyers shall
deliver or cause to be delivered to Sellers the consideration for the Shares
as specified in Section 2.3.
2.3 Consideration and Payment for the Shares. At the Closing, Buyers
shall deliver to Sellers the aggregate
consideration for the Shares (the "Purchase Price"), which shall consist of
the following:
(a) Buyers shall deliver Two Million Five Hundred Thousand and No/100
Dollars ($2,500,000) by cashier's check or by wire transfer of
immediately available funds to the account of Sellers designated in
writing by Parent prior to Closing;
(b) SGP Holdings shall deliver a promissory note, issued to Blanch and
dated the Effective Date, in the principal amount of Four Million Five
Hundred Thousand and No/100 Dollars ($4,500,000) substantially in the
form of Exhibit A (the "Note"), which Note shall provide for six (6)
equal annual payments of principal plus interest on the unpaid
principal balance at a fixed interest rate of 5.52% per annum, the
first installment of which shall be due on the date that is the twelve
month anniversary of the Effective Date, and which Note shall be
subject to the adjustments provided for in Section 2.4;
(c) Summit shall guarantee SGP Holdings' obligations under the Note;
(d) Summit shall issue to Blanch Seven Hundred Fifty Thousand (750,000)
shares of common stock, par value $.01 per share, of Summit ("Purchase
Price Stock"), the value of which is hereby agreed by the parties to
be $4.00 per share, such Purchase Price Stock to be issued in the name
of Blanch; and
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(e) Summit shall issue Seventy-Five Thousand (75,000) warrants of Summit
to purchase an aggregate of Seventy-Five Thousand (75,000) shares of
Summit common stock. Each such warrant will be substantially in the
form of Exhibit B, will represent the right to purchase one share of
Summit common stock, will be issued in the name of Blanch, and will be
subject to the provisions of Section 5.14 and will be exercisable at a
price of $4.00 per share (the "Purchase Price Warrants").
2.4 Net Commission Revenue and Shareholder Equity Adjustments.
(a) Net Commission Revenue Adjustment. Provided that Buyers have used
their reasonable best efforts to maintain the Net Commission Revenue
(as herein defined) at an amount equal to or greater than Nine Million
Two Hundred Thousand and No/100 Dollars ($9,200,000), if the Net
Commission Revenue of the Company and the Subsidiaries (as hereinafter
defined) for the twelve-month period ended as of the date that is the
twelve month anniversary of the Effective Date (the "Measuring Date")
as set forth in the Net Commission Revenue Statement (as herein
defined) is less than Nine Million Two Hundred Thousand and No/100
Dollars ($9,200,000),then the Purchase Price shall be automatically
reduced by an amount equal to the difference between $9,200,000 and
such Net Commission Revenue, the remaining principal amount of the
Note will be decreased by the reduction in Purchase Price, and the
remaining annual payments due on the Note will be decreased on a
pro-rata basis to reflect the decrease in the Purchase Price.
Notwithstanding the foregoing, in no event shall the Purchase Price be
reduced more than Eight Hundred Thousand and No/100 Dollars
($800,000).
(b) Net Commission Revenue Statement. Within ninety (90) days after the
Measuring Date, Buyers shall prepare and deliver to Sellers a
statement (the "Net Commission Revenue Statement"), setting forth in
reasonable detail (i) the Net Commission Revenue of the Company and
the Subsidiaries (as hereinafter defined) for the twelve-month period
ending on the Measuring Date, and (ii) the amount, if any, of the
Purchase Price reduction pursuant to Section 2.4(a). As used herein,
"Net Commission Revenue" shall mean the dollar amount, determined as
of the Measuring Date, of all commissions and policy fees (other than
late charges on overdue premiums and contingent, bonus or profit
sharing commissions) that became payable to the Company or the
Subsidiaries (as hereinafter defined) during the twelve month period
ending on the Measuring Date by reason of the
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sale or placement of or services related to an insurance policy or an
insurance program less the following amounts which become payable by
the Company or the Subsidiaries (as hereinafter defined) during the
twelve-month period ending on the Measuring Date: (i) return
commissions which become payable for any reason (such as
cancellations, endorsements, audit adjustments, or the like) and (ii)
fees and commissions which become payable by reason of the sale or
placement of or services related to an insurance policy or insurance
program. The Net Commission Revenue Statement shall be prepared in
accordance with generally accepted accounting principles, which are
applied on a basis consistent with that of the preceding periods,
based on the data as in effect as of the Measuring Date.
(c) Shareholder Equity Adjustment. Within forty-five (45) days after the
delivery to it of the Effective Date Balance Sheet (as provided for
and defined in Section 5.2), Buyers shall deliver to Sellers
adjustments to the Effective Date Balance Sheet accompanied by written
comments from Buyers' independent accountants that such adjustments
(including any adjustment to shareholder equity as of the Effective
Date) are in accordance with generally accepted accounting principles
(the "Adjusted Effective Date Balance Sheet"). In the event that the
shareholder equity as so adjusted is less than $10 million, then the
Purchase Price shall be automatically reduced by an amount equal to
the difference between $10 million and the shareholder equity as
adjusted and Sellers shall pay to Buyers the amount of such
difference. In the event that the shareholder equity as adjusted is
greater than $10 million, then Buyers shall pay to Sellers such
difference up to a maximum of $100,000. The payment provided for in
this Section 2.4(c) shall be made by cashier's check or wire transfer
promptly upon completion of the process set out in Section 2.4(d) and
shall include interest on such payment from the Effective Date to the
date of payment at the interest rate established for the Note pursuant
to Section 2.3(b).
(d) Disputed Matters. Sellers and their respective representatives shall
be entitled to review all work papers, schedules and other supporting
materials relating to, the preparation of the Net Commission Revenue
Statement and the Adjusted Effective Date Balance Sheet and to consult
with Buyers' representatives regarding the methods used to calculate
the Net Commission Revenue and the Adjusted Effective Date Balance
Sheet. The Net Commission Revenue Statement and the adjustment to
shareholder equity as reflected on the Adjusted Effective Date Balance
Sheet shall be final and binding on Sellers unless they give written
notice to Buyers of their disagreement with respect to any matter
contained therein (the "Notice of Disagreement") within 45 days after
the receipt thereof. A Notice of Disagreement shall specify in
reasonable detail the nature of any disagreement so asserted. For a
period of 30 days after the delivery of the Notice of Disagreement,
Buyers and Sellers shall attempt to resolve all of their differences
with respect to each matter specified in the Notice of Disagreement,
in which case any such resolution shall be final and binding on the
parties. If, at the end of such 30-day period (the "Negotiating
Period"), Buyers and Sellers have not resolved in writing all of their
differences with respect to any such matter, then each unresolved
matter (the "Disputed Matters") shall be submitted to and reviewed by
one of the six
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largest accounting firms in the United States (a so-called "Big Six"
firm) that had no involvement in advising Buyers or Sellers in
connection with the transactions contemplated by this Agreement, and
that is mutually agreeable to Buyers and Sellers (the "Independent
Firm") who will complete such review within thirty (30) days after the
Disputed Matters are submitted to it. Except as referenced below, no
Disputed Matters shall be subject to the provisions of Section 9.4 of
this Agreement. In the event that the parties cannot agree upon an
Independent Firm within five (5) business days following expiration of
the Negotiating Period, such firm will be selected by binding
arbitration pursuant to the procedure set out in Section 9.4. The
Independent Firm shall consider only the Disputed Matters and shall
act promptly to resolve in writing all Disputed Matters and shall
direct the preparation of a report reflecting resolution of the
Disputed Matters. The decisions of the Independent Firm with respect
to any Disputed Matter shall be final and binding on the parties
hereto. Buyers and Sellers will share equally the fees, costs, and
expenses of the Independent Firm and the arbitrator, if any.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF THE BUYERS
Buyers represent and warrant to Parent and Blanch as follows as of this
Closing Date (with the understanding that Parent and Blanch are materially
relying on such representations and warranties):
3.1 Organization and Standing of Buyers. Each of the Buyers is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware and has full corporate power and authority under its
certificate of incorporation and bylaws and applicable laws to execute and
deliver this Agreement and to consummate all transactions contemplated hereby
and thereby.
3.2 Corporate Approval; Binding Effect. Each of the Buyers has obtained all
necessary authorizations and approvals from its Board of Directors required for
the execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby and thereby. This Agreement has been duly
executed and delivered by Buyers and constitutes the legal, valid and binding
obligation of Buyers enforceable against Buyers in accordance with its terms,
except as the same may be limited by applicable bankruptcy, insolvency,
reorganization or other laws affecting the enforcement of creditors' rights
generally and the application of general principles of equity.
3.3 Noncontravention. The execution, delivery and performance by each of
the Buyers of this Agreement will not result in any violation of or be in
conflict with its certificate of incorporation or by-laws or any agreement,
instrument, judgment, decree, order, or subject to the provisions of Section
3.10, any statute, rule or governmental regulation applicable to it, or be in
conflict with or constitute a default under any of the foregoing.
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3.4 Consents. Subject to the provisions of Section 3.10, no consent,
approval or authorization of or registration, designation, declaration or filing
with any governmental authority, federal or other, on the part of any of the
Buyers is required in connection with the purchase of the Shares pursuant to
this Agreement or the consummation of any other transaction contemplated hereby,
except for relevant authorizations of and required filings under any applicable
securities laws. Except as set forth on Schedule 3.4, there are no waivers,
consents or approvals required to be executed and/or obtained from third parties
in connection with the execution, delivery and performance by Buyers of this
Agreement or any other agreement, instrument and document required to be
executed by it in connection herewith, and the transactions contemplated hereby.
3.5 Brokers. Neither of the Buyers has retained, utilized or been
represented by, any broker or finder, in connection with the negotiation or
consummation of this Agreement or the transactions contemplated hereby.
3.6 SGP Holdings' Investment Intent. SGP Holdings is acquiring the Shares
for its own account for investment and not with a view to, or for resale in
connection with, any distribution thereof.
3.7 Issuance of Shares. The issuance of the Purchase Price Stock, the
Purchase Price Warrants, and shares of Summit common stock issuable upon
exercise of the Purchase Price Warrants (the "Conversion Shares"), has been duly
authorized and the Conversion Shares have been reserved for issuance upon
exercise of such warrants. Except for the restrictions set out in Sections 4.29
and 5.9, the Purchase Price Stock, the Purchase Price Warrants, and the
Conversion Shares when issued will be validly issued, fully paid and
nonassessable, will be free of preemptive rights, and will be free and clear of
all liens, restrictions, security interests, claims, rights of another or
encumbrances, other than transfer restrictions imposed by the Securities Act of
1933, as amended (the "Securities Act").
3.8 Capitalization. The authorized capital stock of Summit consists of: (a)
one hundred million (100,000,000) shares of Common Stock, par value $0.01 per
share, of which 4,862,130 are issued and outstanding; (b) two million five
hundred thousand (2,500,000) shares of Class A Convertible Preferred Stock, par
value $0.01 per share, all of which are issued and outstanding; (c) three
million four hundred sixty-one thousand five hundred thirty-nine (3,461,539)
shares of Class B Convertible Preferred Stock, par value $0.01 per share, all of
which are issued and outstanding; (d) two million five hundred thousand
(2,500,000) shares of Class C Convertible Preferred Stock, par value $0.01 per
share, all of which are issued and outstanding. The Class A Convertible
Preferred Stock, the Class B Convertible Preferred Stock and the Class C
Convertible Preferred Stock are hereinafter collectively referred to as the
"Preferred Stock"). As identified in Schedule 3.8, there are currently
outstanding common stock purchase warrants, options, and rights to purchase
common stock of Summit. Summit has reviewed the provisions of the Stockholder's
Agreement attached hereto as Exhibit C and understands the effect of such
provisions on Summit's equity financings following the Closing Date.
3.9 Knowledge of Buyers; Access to Information. Buyers hereby acknowledge
that they (through their officers, attorneys and other representatives) have had
full access to information
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regarding Sellers (as such information is relevant to this transaction), the
Company and their assets, properties, liabilities, conditions (financial or
otherwise), business, results of operations, or prospects. Buyers acknowledge
that they (through their officers, attorneys and other representatives) have had
an opportunity to ask questions of and receive answers from, Sellers and the
Company concerning the Company's assets, properties, liabilities, conditions
(financial or otherwise), business, results of operations and prospects. The
Buyers acknowledge that they have had full opportunity to consult with counsel
of their choosing and have been advised by counsel and/or such other experts
which they desire in connection with consummating the transactions contemplated
by this Agreement.
3.10 Hart-Scott-Rodino Matters. Assuming the correctness of the
representations of Sellers contained in Section 4.5(c), Buyers expressly
acknowledge that the consummation of the transactions contemplated by this
Agreement will require no filings pursuant to the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended, or the rules and regulations thereunder
promulgated (collectively hereinafter, the "HSR Act").
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF THE SELLERS
Sellers jointly and severally represent and warrant to Buyers as follows
(with the understanding that Buyers are relying materially on such
representations and warranties in entering into and performing this Agreement).
These representations and warranties are made as of the Closing Date unless
specifically otherwise provided:
4.1 Capitalization; Ownership of Shares; No Liens on Shares. The authorized
capital stock of the Company consists of one thousand (1,000) shares of common
stock, one dollar ($1.00) par value per share, one thousand (1,000) of which are
issued and outstanding (the "Shares"). All such issued and outstanding Shares
are duly authorized, validly issued, fully paid and nonassessable and none of
the Shares are subject to any outstanding options, warrants, calls, preemptive,
preferential or similar rights of any other person to acquire the same; or to
any other restrictions on transfer thereof. Parent is the true and lawful owner,
of record and beneficially, of the Shares and has the full power and authority
to convey, and will convey to SGP Holdings at the Closing, good and marketable
title to the Shares, free and clear of any liens, restrictions, security
interests, claims, rights of another or encumbrances.
4.2 Due Organization. The Company is a corporation, validly existing and in
good standing under the laws of the State of Texas and has the corporate power
and authority to carry on its business as now conducted. The Company is
qualified to do business and is in good standing in the jurisdictions set forth
on Schedule 4.2.
4.3 Subsidiaries. The Company does not directly or indirectly have (or
possess any options or other rights to acquire) any subsidiaries or any direct
or indirect ownership interests in any person, business, corporation,
partnership, association, joint venture, trust or other entity, other than
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the subsidiaries listed on Schedule 4.3 (collectively, the "Subsidiaries"), and
does not own any legal and/or beneficial interests in any partnerships, limited
liability companies, business trusts or joint ventures or in any other
unincorporated trade or business enterprises. Except as set forth on Schedule
4.3, attached hereto, the Company is the true and lawful owner, of record and
beneficially, of all of the outstanding capital stock of each Subsidiary, free
and clear of any liens, restrictions, security interests, claims, rights of
another or encumbrances. Each Subsidiary is a corporation, validly existing and
in good standing under the laws of the state of its incorporation, and has full
power and authority to carry on its business as now conducted. Each Subsidiary
is qualified to do business and is in good standing in the jurisdictions set
forth on Schedule 4.3 attached hereto, which jurisdictions represent every
jurisdiction where such qualification is required except where failure to be so
qualified would not have a material adverse effect on the business, properties
or assets of such Subsidiary. There are no authorized or outstanding warrants,
options or rights of any kind to acquire from the Company, any Subsidiary, or
any Seller, any equity or debt securities of any Subsidiary or securities
convertible into or exchangeable for equity or debt securities of any
Subsidiary.
4.4 Due Authorization.
(a) Each of the Sellers and the Company has full corporate power and
authority to enter into and perform this Agreement and each other
agreement, instrument and document required to be executed by such
parties in connection herewith. The execution, delivery and
performance of this Agreement and such other agreements, instruments
and documents have been duly authorized by all requisite corporate
action of Parent and the Company.
(b) This Agreement, and upon its execution and delivery, each other
agreement, instrument and document required to be executed by the
Company or any Seller in connection herewith, has been or shall have
been duly and validly executed and delivered by the Company and the
Sellers and constitutes or will constitute a valid and binding
obligation of the Company and the Sellers enforceable in accordance
with its terms, except as the same may be limited by applicable
bankruptcy, insolvency, reorganization or other laws affecting the
enforcement of creditors' rights generally and the application of
general principles of equity.
(c) Neither the execution, delivery and performance of this Agreement by
the Company and Sellers, nor the execution, delivery and performance
by the Company and/or any Seller of each other agreement, instrument
or document required to be executed by it in connection herewith,
shall, except as set forth on Schedule 4.4, (i) violate in a material
way any federal, state, county or local law, rule or regulation
applicable to the Company, any Seller, any Subsidiary, or their
respective properties, (ii) violate or conflict with in a material
way, or permit the cancellation of, any material agreement to which
the Company, any Seller, or any Subsidiary is a party, or by which any
of them or any of their respective properties is bound, or result in
the creation
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of any lien, security interest, charge or encumbrance upon any of such
properties, (iii) permit the acceleration of the maturity of any
indebtedness of, or indebtedness secured by the property of, the
Company, any Seller, or any Subsidiary, or (iv) violate or conflict
with any provision of the certificate (or articles) of incorporation,
or by-laws of the Company, any Seller, or any Subsidiary.
(d) Except as set forth on Schedule 4.4, no action, consent or approval of
or filing with any federal, state, county or local governmental
authority is required in connection with the execution, delivery or
performance of this Agreement (or any other agreement, instrument or
document executed in connection herewith by the Company or any
Seller), except for required filings under any applicable insurance or
securities laws.
4.5 Financial Statements and Related Matters.
(a) The unaudited consolidated balance sheet and related consolidated
statement of income of the Company and the Subsidiaries as of and for
the fiscal year ended December 31, 1997, has been delivered to Buyers
(the "1997 Financial Statements").
(b) The unaudited consolidated balance sheet and related consolidated
statements of income of the Company and the Subsidiaries, as of and
for the three-month period ended March 31, 1998, has been delivered to
Buyers (collectively, the "Interim Financial Statements").
(c) The most recently regularly prepared unaudited consolidated balance
sheet of the Company and the Subsidiaries dated as of April 30, 1998,
annexed hereto as Exhibit D (the "Current Balance Sheet") reflects
completion of the transfer of assets and assumptions of liabilities
contemplated by Section 5.1 and reflects that the "total assets of the
Company" (including the Subsidiaries) (as that term is defined in the
Pre-Notification Rules issued by the Federal Trade Commission pursuant
to the Hart- Scott-Rodino Antitrust Improvement Act as amended) is
less than $25 million. In accordance with the last regularly prepared
balance sheet of the Company and as of the Effective Date, the total
assets of the Company and the Subsidiaries are less than $25 million.
The "annual net sales" (as that term is defined in the
above-referenced rules) of the Company and the Subsidiaries for the
12-month period ending as of the Effective Date is less than $25
million.
(d) The 1997 Financial Statements, the Interim Financial Statements, and
the Current Balance Sheet have been prepared in accordance with
generally accepted accounting principles applied on a consistent basis
throughout the periods indicated and present fairly the financial
position, results of operations, revenue and changes in financial
position of the Company and the
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Subsidiaries as of the indicated dates and for the indicated periods.
The 1997 Financial Statements, the Interim Financial Statements, and
the Current Balance Sheet have been prepared in a manner which is
materially consistent with the historical treatment of the financial
statements of the Company and the Subsidiaries. Except to the extent
reflected, disclosed or provided for in the balance sheet included in
the Interim Financial Statements, subsequent to December 31, 1997,
neither the Company nor any Subsidiary has incurred any material
liabilities or material obligations that would normally be reflected
in financial statements (including footnotes) prepared in accordance
with generally accepted accounting principles, other than liabilities
incurred in the ordinary course of business or described in Schedule
4.5(d), and neither the Company nor any Seller has knowledge of any
basis for the assertion of any such liability or obligation.
(e) Since December 31, 1997, there has been no material adverse change in
the financial position, assets, liabilities, results of operations or
business of the Company or any Subsidiary. To the knowledge of Sellers
and the Company and Subsidiaries as of the Closing Date, there are no
pending or proposed statutes, rules or regulations, nor any current or
pending developments or circumstances, which would have a material
adverse effect on the financial position, assets, liabilities, results
of operations or business of the Company or any Subsidiary.
(f) The Net Commission Revenue of the Company and the Subsidiaries for the
year ended December 31, 1997, was $9,494,678, and Sellers have
furnished a schedule to Buyer setting forth the computation of such
Net Commission Revenue.
4.6 Conduct of Business; Certain Actions. Except as set forth on Schedule
4.6 and allowing for the transfer of assets and assumption of liabilities
provided for in Section 5.1, since December 31, 1997, the Company and the
Subsidiaries have conducted their businesses and operations in the ordinary
course and consistent with its past practices and have not (a) paid or declared
any dividend or distribution or purchased or retired any indebtedness from any
stockholder thereof, or purchased, retired or redeemed any capital stock from
any stockholder, (b) with respect to any current employees of the Company or any
Subsidiary who will continue to be employed by the Company or any Subsidiary
following the Closing (the "Continuing Employees"), increased the compensation
of any of such Continuing Employees by more than six percent (6%), except for
wage and salary increases made in the ordinary course of business and consistent
with past practices, (c) made any capital expenditures, except in the ordinary
course of business, (d) sold any asset (or any group of related assets) other
than in the ordinary course of business, (e) discharged or satisfied any lien or
encumbrance or paid any obligation or liability, absolute or contingent, other
than current liabilities incurred and paid in the ordinary course of business,
(f) made or guaranteed any loans or advances or any wage or draw against
commission to any party whatsoever, (g) suffered or permitted any lien, security
interest, claim, charge or other encumbrance to arise or be granted or created
against or upon any of the assets of the Company or any Subsidiary, real or
personal, tangible or
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intangible, (h) canceled, waived or released any of the Company's or any
Subsidiary's debts, rights or claims against third parties, (i) amended the
charter or by-laws of the Company or any Subsidiary , (j) made or paid any
severance or termination payment to any employees or consultants in excess of
$25,000 in the aggregate, (k) made any change in the method of accounting of the
Company or any Subsidiary, (l) made any investment or commitment to invest in
any business, corporation, association, partnership, joint venture, trust or
other entity, (m) except as otherwise required to comply with the terms of this
Agreement, made, entered into, amended or terminated any written employment or
consulting contract, created, made, amended or terminated any bonus, stock
option, pension, retirement, profit sharing or other employee benefit plan or
arrangement, or withdrawn from any "multi-employer plan" (as defined in Section
414(f) of the Internal Revenue Code of 1986, as amended (the "Code")) so as to
create any new liability under Article IV of ERISA (as hereinafter defined) to
any entity, (n) materially amended or experienced a termination of any material
contract, agreement, lease, franchise or license to which the Company or any
Subsidiary is a party or experienced any material cancellation or nonrenewal of
insurance business, (o) entered into any other material transactions except in
the ordinary course of business, (p) suffered any material damage, destruction
or loss (whether or not covered by insurance) to any assets, (q) entered into
any contract, commitment, agreement or understanding to do any acts described in
the foregoing clauses (a)-(p) of this Section 4.6, (r) experienced any strike,
slowdown or demand for recognition by a labor organization by or with respect to
any of the employees of the Company or any Subsidiary, or (s) experienced or
effected any shutdown, material slow-down or cessation of any operations
conducted by, or constituting part of, the Company or any Subsidiary.
4.7 Title to Properties. Schedule 4.7 contains depreciation schedules
setting forth lists of the personal properties owned by the Company or any
Subsidiary and lists of all leases covering personal properties and real
properties leased by the Company or any Subsidiary. Neither the Company nor any
Subsidiary owns any interests in real property. Except as set forth on Schedule
4.7, (a) the real and personal properties of the Company or any Subsidiary are
free and clear of all liens, security interests, claims, and rights of another,
and are also free and clear of encumbrances which materially affect the
ownership, use, or operation of such real and personal properties by the Company
or any Subsidiary, (b) the leased real properties and the personal properties
owned, leased or utilized by the Company or any Subsidiary in the conduct of its
business are in satisfactory condition and repair, normal wear and tear
excepted, are adequate and sufficient for their normal and intended use, as
presently conducted, and (c) the Company or the Subsidiaries, as the case may
be, has full and unrestricted legal and equitable title to, or a valid leasehold
interest in, all such properties. To the Sellers' knowledge and the Company and
Subsidiaries as of the Closing Date, the present and past use of the properties
and operations of the Company and the Subsidiaries does not violate and has not
violated in any material respect any zoning ordinances, municipal regulations or
other rules, regulations or laws, the violation of which could have a material
adverse effect on the Company or any Subsidiary.
4.8 Indebtedness. The Company and the Subsidiaries have no inter-company
indebtedness outstanding and the Company and the Subsidiaries have no other
indebtedness except as set forth on Schedule 4.8. Neither the Company nor any
Subsidiary is in material default with respect to any outstanding indebtedness
or any instrument relating thereto, and no such indebtedness
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or any instrument or agreement relating thereto purports to limit the issuance
of any securities by the Company or any Subsidiary or the operation of the
business of the Company or any Subsidiary.
4.9 Absence of Undisclosed Liabilities. Without limiting any representation
or warranty made elsewhere in this Agreement which is not limited by knowledge,
to the knowledge of the Sellers or the Company or the Subsidiaries as of the
Closing Date, except to the extent reflected or reserved against in the 1997
Financial Statements, the Interim Financial Statements, the Current Balance
Sheet, or incurred in the ordinary course of business after the date of the
Interim Financial Statements or described in any Schedule hereto, neither the
Company nor any Subsidiary has any material liabilities or obligations of any
nature, whether accrued, absolute, contingent or otherwise (including, without
limitation, liabilities as guarantor or otherwise with respect to obligations of
others) and whether due or to become due, including, without limitation, any
liabilities for Taxes (as defined herein) due or to become due.
4.10 Taxes.
(a) Elections. All material elections with respect to Taxes (including,
without limitation, any elections under the Internal Revenue Code of
1986, as amended (the "Code")), Code sections 108(b)(5), 338(g), 565,
936(a), or 936(e), or Treasury Regulation section 1.1502-20(g)
affecting the Company or any Subsidiary are set forth on Schedule
4.10.
(b) Other Items. Except as set forth on Schedule 4.10:
(i) Filing of Tax Returns and Payment of Taxes. Since September 30,
1994, the Company and the Subsidiaries have timely filed all
returns, reports and declarations of estimated tax (collectively,
"Tax Returns") required to be filed by them, each such Tax Return
has been prepared in compliance with all applicable laws and
regulations, and all such Tax Returns are true and accurate in
all material respects. All federal, foreign, state, county and
local income, gross receipts, excise, franchise, license,
withholding, and other taxes ("Taxes") due and payable by the
Company and the Subsidiaries have been paid.
(ii) Audit History. Except as set forth on Schedule 4.10, neither the
Company nor any Subsidiary has been the subject of an audit by
the Internal Revenue Service or by any state, municipal or other
taxing authority with respect to any taxable period beginning
after September 30, 1994.
(A) Deficiencies. Since September 30, 1994, no deficiency or
proposed adjustment which has not been settled or otherwise
resolved for any amount of Tax has been asserted or assessed
by any taxing authority against the Company or any
Subsidiary.
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<PAGE>
(B) Liens. There are no liens for Taxes (other than current
Taxes not yet due and payable) on the assets of the Company
or any Subsidiary.
(C) Extensions to Statute of Limitations for Assessment of
Taxes. Since September 30, 1994, neither the Company nor any
Subsidiary has consented to extend the time in which any Tax
may be assessed or collected by any taxing authority.
(D) Extensions of the Time for Filing Tax Returns. Since
September 30, 1994, neither the Company nor any Subsidiary
has requested or been granted an extension of the time for
filing any Tax Return to a date later than the Closing.
(E) Pending Proceedings. Since September 30, 1994, there is no
action, suit, taxing authority proceeding or audit now in
progress, pending or threatened against or with respect to
the Company or any Subsidiary.
(F) No Failures to File Tax Returns. Since September 30, 1994,
neither the Company nor any Subsidiary has received
notification from a taxing authority in a jurisdiction where
the Company or the Subsidiary does not pay Tax or file Tax
Returns that the Company or any Subsidiary is or may be
subject to Taxes assessed by this jurisdiction.
(G) Additional Taxes. Since September 30, 1994, neither the
Company nor any Seller or Subsidiary has received a notice
from the Internal Revenue Service or any state, municipal or
other taxing authority of the intent of such taxing
authority to conduct an audit of any of the Company's or
Subsidiary's tax returns.
(H) Withholding Taxes. Since September 30, 1994, the Company and
the Subsidiaries have withheld and paid all Taxes required
to have been withheld and paid in connection with amounts
paid or owing to any employee, creditor, independent
contractor or other third party.
(I) Surplus Lines Taxes. Since September 30, 1994, the Company
and the Subsidiaries have collected and remitted when due to
the appropriate Tax or insurance authority all Taxes
required to have been collected and paid in connection with
any surplus lines insurance placed by the Company or any
Subsidiary.
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<PAGE>
(J) Foreign Permanent Establishments and Branches. Since
September 30, 1994, neither the Company nor any Subsidiary
has had a permanent establishment in any foreign country (as
defined in the relevant tax treaty between the United States
of America and such foreign country) or otherwise operates
or conducts business through any branch in any foreign
country.
(K) Other Leased Property. None of the property owned or used by
the Company or any Subsidiary is subject to a lease, other
than an operating lease for federal income tax purposes.
(L) Tax-Exempt Use Property. None of the property owned by the
Company or any Subsidiary is "tax-exempt use property"
within the meaning of section 168(h) of the Code.
(M) Adjustments under Section 481. Neither the Company nor any
Subsidiary will be required, as a result of a change in
method of accounting for any period ending on or before the
Closing Date, to include any adjustment under section 481
(c) of the Code (or any similar or corresponding provision
or requirement of federal, state, local or foreign income
Tax law) in taxable income for any period ending after the
Closing Date.
(N) Security for Tax-Exempt Obligations. None of the assets of
the Company or any Subsidiary directly or indirectly secures
any indebtedness the interest on which is tax-exempt under
section 103(a) of the Code, and neither the Company nor any
Subsidiary is directly or indirectly an obligor or a
guarantor with respect to any such indebtedness.
(O) Section Consent. Since September 30, 1994, neither the
Company nor any Subsidiary has filed a consent under Code
section 341 (f) concerning collapsible corporations.
(P) Parachute Payments. Since September 30, 1994, neither the
Company nor any Subsidiary has made any payments, is
obligated to make any payments, or is a party to any
agreement that under certain circumstances could obligate it
to make any payments that will not be deductible under Code
section 280G.
(Q) Real Property Holding Corporation. Since September 30, 1994,
neither the Company nor any Subsidiary has been a United
States real property holding corporation within the
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meaning of Code section 897 (c)(2) during the applicable
period specified in Code section 897 (c)(1)(A)(ii).
(R) No Understatement of Taxes. Since September 30, 1994, the
Company and the Subsidiaries have disclosed on their Federal
Income Tax Returns all positions taken therein that could
give rise to a substantial understatement of federal income
tax within the meaning of Code section 6662.
(S) Tax Sharing or Tax Allocation Agreements. Neither the
Company nor any Subsidiary is a party to or is bound by any
Tax allocation or Tax sharing agreement or has any current
or potential contractual obligation to indemnify any other
person with respect to Taxes other than pursuant to this
Agreement.
4.11 Labor Relations. As of April 30, 1998, except as set forth on Schedule
4.11 or as otherwise disclosed herein or on any Schedule attached hereto,
neither the Company nor any Subsidiary has any written employment agreements,
deferred compensation agreements, consulting agreements, or noncompetition or
confidentiality agreements with anyone. Schedule 4.11 includes a list of the
names and annual rates of compensation of the officers of the Company and the
Subsidiaries, and of the employees of the Company and the Subsidiaries
(including base salary, bonus, commissions and incentive pay), as of April 30,
1998, who are employees of the Company or the Subsidiaries as of the Closing
Date. Schedule 4.11 also sets forth the bonus, company automobile, club
membership and other like benefits, if any, paid or payable to the officers and
each employee of the Company or any Subsidiary as of the Closing Date during the
year ended December 31, 1997, and to the date hereof and/or under which such
officers and employees are entitled to receive benefits. Schedule 4.11 also
contains a list of all severance benefits which any officer, consultant or
employee who is a employee of the Company or any Subsidiary as of the Closing
Date or may be entitled to receive under any written plan or contract with the
Company or any Subsidiary. Except as set forth on Schedule 4.11, none of the
employees of the Company or any Subsidiary are represented by any labor union or
organization. Except as set forth on Schedule 4.11 or as otherwise disclosed
herein, the Company and the Subsidiaries are in reasonable compliance in all
material respects with all federal and state laws respecting employment and
employment practices, terms and conditions of employment and wages and hours and
is not engaged in any unfair labor practices. Neither the Company nor the
Sellers, as of the Closing Date has knowledge of any labor dispute, work
slowdown or work stoppage pending or threatened against or involving the Company
or any Subsidiary.
4.12 Contracts. Schedule 4.12 contains a list of all material contracts,
commitments, leases and other agreements (including, without limitation, all
contracts with insurance companies, promissory notes, loan agreements, other
evidences of indebtedness, mortgages, deeds of trust, security agreements,
pledge agreements and similar agreements and instruments, and all
confidentiality agreements) to which the Company or any Subsidiary is a party or
by which the Company, any Subsidiary, or any of their properties are bound. To
the knowledge of Sellers and the Company and the Subsidiaries as of the Closing
Date regarding claims covered under the Extended
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E&O Policy (as defined in Section 5.4 and not limited by knowledge otherwise,
neither the Company, Sellers, any Subsidiary, nor any other party thereto, is in
default (and no event has occurred which, with the passage of time or the giving
of notice or both, would constitute a default) or breach under any such
contracts, commitments, leases or other agreements, and neither the Company nor
any Subsidiary has waived any right under any such contracts, commitments,
leases or other agreements. None of such contracts, commitments, leases or other
agreements are leases in connection with which an election was made under
Section 168(f)(8) of the Code. Except as set forth on Schedule 4.12, neither the
Company nor any Subsidiary has guaranteed any obligations of any other person.
Copies of all material written contracts between the Company or any Subsidiary
and insurance companies have been delivered to Buyers.
4.13 ERISA Compliance. Except as set forth in Schedule 4.13, or otherwise
disclosed in any Schedule attached hereto, neither the Company nor any
Subsidiary maintains or contributes to any "employee pension benefit plans"
("Pension Plans"), as such term is defined in Section 3(2) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"). Except as set
forth in Schedule 4.13, or otherwise disclosed in any Schedule attached hereto,
neither the Company nor any Subsidiary is subject to liability for any
obligation of any Pension Plan which the Company or any Subsidiary maintains or
formerly maintained for any period after September 30, 1994, or to which the
Company or any Subsidiary contributes or formerly was required to contribute for
any period after September 30, 1994. To the knowledge of Sellers or the Company
as of the Closing Date, with respect to events prior to September 30, 1994 (with
no qualification as to knowledge to apply with respect to any events subsequent
to September 30, 1994), neither the Company, any Subsidiary, nor any of the
Pension Plans of the Company or any Subsidiary which are subject to ERISA, or
any trusts created thereunder, or any trustee or administrator thereof, has
engaged in, or permitted the assets of any such plan or trust to be involved in,
a "prohibited transaction," as such term is defined in Section 4975 of the Code
or Sections 406 and 407 of ERISA. Except as set forth in Schedule 4.13, or
otherwise disclosed in any Schedule attached hereto, neither the Company nor any
Subsidiary is obligated to provide any benefit under any of the "employee
welfare benefit plans," as such term is defined in Section 3(1) of ERISA, which
the Company or any Subsidiary maintains ("Welfare Plans"), or to which the
Company or any Subsidiary is obligated to contribute, to any retiree from the
Company or any Subsidiary, except to the extent that such benefits may be
required by the continuation coverage provisions of Part 6 of Title I of ERISA
and Section 4980B of the Code. Each Welfare Plan subject to such continuation
coverage requirements has complied in all material respects with such
continuation coverage requirements. Except as set forth in Schedule 4.13,
neither the Company nor any Subsidiary is, or has been during any period after
September 30, 1994, a contributing employer to any "multiemployer plan" (without
regard to whether it was a Pension Plan or a Welfare Plan), as such term is
defined in Section 3(37) or Section 4001(a)(3) of ERISA, or to any "multiple
employer plan" within the meaning of Section 413(c) of the Code. Except as
otherwise disclosed in any Schedule attached hereto, or as otherwise reasonably
necessary to comply with or implement the terms of this Agreement, to the
knowledge of Sellers or the Company as of the Closing Date, neither the Company
nor any Subsidiary has withdrawn from such a plan, and is subject to any
withdrawal liability with respect to any such plan. To the knowledge of Sellers
or the Company as of the Closing Date, with respect to events prior to September
30, 1994 (with no qualification as to knowledge to apply with respect to any
events subsequent to September 30, 1994), except as otherwise disclosed in any
Schedule attached hereto or with respect
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to any period prior to September 30, 1994, all Welfare Plans, Pension Plans and
the Company and the Subsidiaries have substantially complied with the
requirements of Part I of Title I of ERISA and currently comply and since
September 30, 1994, have substantially complied both as to form and operation
with any material requirements of ERISA, the Code and all other applicable laws,
and with all applicable Statements of Financial Accounting Standards, including
Statements 87 and 106. The Welfare Plans, Pension Plans and "multiemployer
plans" identified on Schedule 4.13 are hereinafter collectively referred to as
the "Blanch Benefit Plans."
4.14 Licenses and Permits. Schedule 4.14 contains a list of all federal,
state, county and local governmental licenses, certificates and permits held or
applied for by the Company and the Subsidiaries. Except as set forth on Schedule
4.14, the Company and the Subsidiaries have complied in all material respects,
and are in compliance in all material respects, with the terms and conditions of
all such licenses, certificates and permits and no material violation of any
such licenses, certificates or permits or the laws or rules governing the
issuance or continued validity thereof has occurred. The Company and each of the
Subsidiaries have all material licenses, permits, and certificates necessary to
conduct their managing general agency, wholesale insurance brokerage business,
and all other insurance business, as the case may be, they are conducting as of
the Closing Date in the states where they currently conduct such business.
Except as set forth on Schedule 4.14, no claim has been made or threatened by
any governmental authority (and no such claim is anticipated) to the effect that
a license, permit or order is necessary in respect of the business conducted by
the Company or any Subsidiary.
4.15 Intellectual Property Rights. Schedule 4.15 contains a list of all
patents, trademarks, service marks, trade names and copyrights and applications
therefor owned by, used by, or registered in the name of the Company or any
Subsidiary or in which the Company or any Subsidiary has any right, license or
interest. Except as set forth on Schedule 4.15, neither the Company nor any
Subsidiary is a party to any license agreements, either as licensor or licensee,
with respect to any patents, trademarks, service marks, trade names or
copyrights. The Company and the Subsidiaries have good and marketable title to
or the right to use such assets and all inventions, processes, designs,
formulae, trade secrets and know-how necessary for the conduct of their
businesses, without the payment of any royalty or similar payment. Neither the
Company nor any Subsidiary is infringing any patent, trademark, service mark,
trade name or copyright of others, and neither the Company nor any Subsidiary is
aware of any infringement by others of any such rights owned by the Company or
any Subsidiary.
4.16 Compliance with Laws. Except as set forth on Schedule 4.16 or as
otherwise disclosed in this Agreement or the Schedules attached hereto, the
Company and the Subsidiaries have complied since September 30, 1994 (the date of
the acquisition of the Company by the Sellers) (the "Acquisition Date") in all
material respects, and are in compliance in all material respects, with all
federal, foreign, state, county and local laws, regulations and orders
applicable to their businesses and have filed with the proper authorities all
statements and reports required by the laws, regulations and orders to which the
Company or any Subsidiary or any of their properties or operations are subject.
Neither the Company nor any Subsidiary has received notification that any claim
has been made or threatened by any governmental authority (and, except as set
forth on Schedule 4.16, no
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such claim is anticipated) to the effect that the business conducted by the
Company or any Subsidiary fails to comply, in any respect, with any law, rule,
regulation or ordinance.
4.17 Certain Environmental Matters. Neither the Company nor any Subsidiary
has in the past materially violated and is now in material violation of any
federal, state or local law, code, statute, ordinance, rule, regulation or
guideline relating to environmental matters or health and safety ("Environmental
Laws") in connection with the ownership or operation of any of the assets and
the conduct of the business of the Company or any Subsidiaries. The Sellers have
not received any written notice from any governmental authority, nor do they
have any knowledge of any governmental inquiry, with respect to any actual
violation of any Environmental Laws with respect to the assets, properties or
the business of the Company or any Subsidiary and there is not pending or
threatened suit, claim, proceeding or investigation (known to Sellers or the
Company as of the Closing Date) against the Company or any Subsidiary relating
to any violation or threatened violation of any Environmental Law.
4.18 Potential Conflicts of Interest. Except as set forth on Schedule 4.18,
to Sellers' knowledge, no officer or director of the Company or any Subsidiary:
(a) owns, directly or indirectly, any interest in (excepting not more than one
(1%) percent stock holdings for investment purposes in securities of publicly
held and traded companies) or is an officer, director, employee or consultant of
any person which is a competitor, lessor, lessee, customer or supplier of the
Company or any Subsidiary; (b) owns, directly or indirectly, in whole or in
part, any tangible or intangible property which the Company or any Subsidiary is
using or the use of which is necessary for the business of the Company or any
Subsidiary; or (c) has any material cause of action or other material claim
whatsoever against, or owes any amount to, the Company or any Subsidiary, except
for claims in the ordinary course of business, such as for accrued vacation pay,
accrued benefits under employee benefit plans and similar matters and
agreements, none of which claims have accrued for a period greater than 12
months prior to the date hereof.
4.19 Accounts Receivable. The accounts, notes and loans receivable that
have been recorded on the books of the Company or any Subsidiary and are to be
included as assets on the Effective Date Balance Sheet are bona fide and
represent amounts validly due and payable in accordance with their respective
terms. All of such accounts, notes and loans receivable are free and clear of
any security interests, liens, encumbrances or other charges; none of such
accounts, notes or loans receivable are subject to any offsets or claims of
offset; and no obligor of any such account, note or loan receivable has given
notice that it will or may refuse to pay the full amount thereof or any portion
thereof.
4.20 Insurance.
(a) Schedule 4.20 contains a list of all policies of fire, liability,
business interruption, professional indemnity, fidelity and other
forms of insurance (other than any insurance that provides insurance
coverage or benefits as part of, or with respect to, the Blanch
Benefit Plans) and all fidelity bonds held by or applicable to the
Company or any Subsidiary, which schedule sets forth in respect of
each such policy or bond the name, policy or bond number, carrier,
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term, type of coverage, deductible amount or self-insured retention
amount, limits of coverage and annual premium (any such listed forms
of insurance or bonds is referred to herein in the singular as a
"Policy" and collectively as "Policies"). Sellers have delivered true
and correct copies of all Policies to Buyers. Except as set forth on
Schedule 4.20 and to the best knowledge of the Sellers and the Company
as of the Closing Date, since September 30, 1994, no event relating to
the Company or any Subsidiary has occurred that will result in a
retroactive upward adjustment of premiums under any Policies or that
is likely to result in any prospective upward adjustment in such
premiums. Except as disclosed on Schedule 4.20, since September 30,
1994, there has been no change in the type of insurance coverage
maintained by the Company or any Subsidiary which has resulted in any
period during which the Company or any Subsidiary had no insurance
coverage. Excluding insurance policies that have expired and been
replaced, no insurance policy of the Company or any Subsidiary has,
since September 30, 1994, been canceled and, to the best knowledge of
the Company and the Sellers and Subsidiaries as of the Closing Date,
no threat has been made to cancel any insurance policy of the Company,
any Subsidiary or the Sellers within such period.
(b) The Policies provide coverage for all normal risks incident to the
assets, properties and business of the Company and the Subsidiaries
and, to the knowledge of Sellers and the Company and Subsidiaries as
of the Closing Date, are in character and amount adequate in relation
to the business and assets of the Company and the Subsidiaries. Except
as disclosed in Schedule 4.20, since September 30, 1994, there has
been no period which the Company or any Subsidiary has not maintained
insurance coverage in amounts and against losses and risks which the
Sellers and the Company believe are normal in relation to the business
and assets of the Company and the Subsidiaries. The Policies are in
full force and effect; are sufficient for substantial compliance by
the Company and the Subsidiaries with all requirements of law and
applicable regulations and of all material agreements to which it is a
party; are valid, outstanding and enforceable and provide that they
will remain in full force and effect through the respective dates set
forth in such Schedule; and will not in any material way be affected
by, or terminate or lapse by reason of, the transactions contemplated
by this Agreement; provided, however, that no Policies (other than
those identified in Section 5.4 and referred to in the Sublease
Agreement identified in Section 5.11) will be available for the
benefit of the Company after the Closing.
(c) The leased properties of the Company and the Subsidiaries are
insurable in their present condition against fire and other casualty
at standard rates. Neither the Company nor any Subsidiary has been
notified by any insurance carrier or its agent that such facilities
will require improvements in order to
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maintain such insurance at rates charged the Company or any Subsidiary
as of the date of this Agreement.
(d) Schedule 4.20 identifies all written recommendations received from
insurers of the Company and the Subsidiaries since January 1, 1996,
and all such documents have been delivered to Buyers.
(e) Except as described in Schedule 4.20, no claims have been made by the
Company, any Subsidiary, any of their directors, or employees under
any of the professional indemnity or fidelity insurance policies of
the Company or any Subsidiary since acquisition of the Company by
Sellers and no claims under any such policies are outstanding, nor are
there circumstances of which Sellers and the Company and Subsidiaries
as of the Closing Date are aware which might give rise to any such
claim.
4.21 Bank Accounts. Schedule 4.21 contains a list of all banks or other
financial institutions with which the Company or any Subsidiary has an account
or maintains a safe deposit box, showing the type and account number of each
such account and safe deposit box and the names of the persons authorized as
signatories thereon or to act or deal in connection therewith.
4.22 Certain Consents. Except as set forth on Schedule 4.22, there are no
consents, waivers or approvals required to be executed and/or obtained from
third parties, including any governmental authority, in connection with the
execution, delivery and performance by the Company or any Seller or any
Subsidiary of this Agreement and each other agreement, instrument and document
required to be executed by it in connection herewith, and the transactions
contemplated hereby; Sellers specifically represent and warrant that the consent
to this Sublease Agreement (as defined in Section 5.11) presented by Sellers at
closing is sufficient consent from the landlord of the Leased Space (as defined
in Section 5.11) to this Sublease Agreement and that the consent of Hartford Re.
Co./ Hartford Fire Insurance Co. to this transaction (including consent to the
change of control of the Company) is not required.
4.23 Managing General Agent License; Compliance. The Company currently
holds a valid Managing General Agent's license (as the term "Managing General
Agent" is defined in Section 2(a) of the Texas Managing General Agents'
Licensing Act (the "Act")), such license was granted in accordance with and
pursuant to the "grandfather clause" in Section 5(a) of the Act, and such
license has been renewed periodically in accordance with the Act. Except as set
forth on Schedule 4.23, no other consent, approval, authorization or filing with
any governmental authority, including the Texas insurance authorities, on the
part of the Company is required in order for the Company to provide services as
a Managing General Agent in compliance with applicable law, including the
provisions of the Act. Since the acquisition of the Company by Sellers, the
Company has complied in all material respects with all provisions of the Act, as
the same may have been amended from time to time and applicable to the
activities of the Company, and in connection therewith, the Company: (a) has
only placed business in its capacity as a Managing General Agent with companies
with which the Company has a written contract relating to responsibilities of
both parties, cancellation or termination, reports, records, auditing, and if
applicable, premium volume limit, appointment or
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cancellation of agents, claims settlement, underwriting, and reinsurance as
required by the Act; (b) has timely submitted account reports to each company
with which it has a contract regarding Managing General Agent services in
accordance with the Act; (c) has maintained and currently maintains all business
records required by the Act for each company with which it has a contract
regarding Managing General Agent services; (d) has maintained and currently
maintains an escrow account and has deposited in such escrow account all money
collected for each company with which it has a contract regarding Managing
General Act services; (e) has complied with and is in compliance with all
reporting obligations to the applicable authorities, including the Texas State
Insurance Commission; (f) has maintained and currently maintains: (i) an errors
and omissions policy insuring the Company against errors and omissions in such
amounts required by the Act, (ii) a bond executed by the Company, as principal,
by a surety company authorized to do business in the State of Texas, as surety,
or surplus lines insurer, in such amounts required by the Act, or (iii) a
deposit with the Texas State Comptroller in such amounts required by the Act.
4.24 Company Relationships.
(a) Schedule 4.24 lists the fifty (50) Texas retail insurance agencies of
the Company and the Subsidiaries who have paid the highest premium
dollars to the Company (or on its behalf directly to applicable
insurers) during the twelve month period ending December 31, 1997, and
the amount for which each such customer/client was invoiced during
such period.
(b) Schedule 4.24 lists twenty-five (25) of the insurance markets to which
the Company and the Subsidiaries has paid the highest premium dollars
during the twelve-month period ending December 31, 1997, and the
amount so paid to each insurance market during such period.
(c) Except as set forth on Schedule 4.24, since January 1, 1997, no
insurer or any insurance market with which the Company conducts
business has (a) notified the Company or any Subsidiary of an
intention to cease, dealing with or through the Company or any
Subsidiary, (b) reduced, or notified the Company or any Subsidiary of
an intention to reduce, substantially its dealings with or through the
Company or any Subsidiary, or (c) changed, or notified the Company or
any Subsidiary of an intention to change, substantially the terms on
which it is prepared to deal with or through the Company or any
Subsidiary.
(d) Except as set forth on Schedule 4.24, no insurers or insurance market
with which the Company or any Subsidiary conducts business nor any
employee of the Company has given notice to Seller or to the Company
or any Subsidiary to the effect that they will be prejudicially
affected by the consummation of the transactions contemplated by this
Agreement.
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4.25 Other Company Activities. To the knowledge of Sellers and the Company
and Subsidiaries as of the Closing Date:
(a) No person other than the full-time, exclusive employees of the Company
or a Subsidiary is or has been authorized or permitted to place
business on the Company's or such Subsidiary's behalf.
(b) No binder of insurance or other intimation of coverage has been issued
or sent to any person by the Company, or any Subsidiary, or on their
behalf unless and until the relevant risk has been properly bound and
all binders of insurance and intimations of coverage on the part of
the Company or the Subsidiary are complete and accurate in all
material respects.
(c) Schedule 4.25 sets out fully and accurately the policy of the Company
and the Subsidiaries with respect to the commissions booked in their
books of accounts and:
(1) no commissions have been booked except in accordance with such
policies;
(2) there are no facts or circumstances which might require reversal
of commissions booked or return of commissions already collected,
except in the normal course of business.
(d) Neither the Company nor any Subsidiary has paid insurance premiums,
premium adjustments or other items on behalf of a client except with
the authority (express or implied) of the clients on whose behalf such
payments have been made.
(e) Neither the Company nor any Subsidiary has been party to the
placement, directly or indirectly, of insurance which is unlawful,
fictitious, or a sham transaction.
(f) In the placement of insurance neither the Company nor any Subsidiary
has breached any duty owed to its clients, including, but not limited
to, the duty to make full disclosure of material facts to
underwriters.
(g) Except as set out in Schedule 4.25, to the best knowledge of the
Sellers without having made independent inquiry, all insurance
companies with which business has been placed by the Company or any
Subsidiary are paying claims in the normal course and without undue
delay.
4.26 Brokers. None of the Sellers, the Company, or the Subsidiaries has
engaged, or caused any liability to be incurred to, any finder, broker or sales
agent in connection with the execution, delivery or performance of this
Agreement or the transactions contemplated thereby.
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<PAGE>
4.27 Premium Trust Funds. Since the Acquisition Date, no finding has been
made, and, to the knowledge of Sellers, prior to the Acquisition Date no finding
had been made by any insurance regulatory agency or department that the balance
in the Company's or any Subsidiary's premium trust account(s) is not adequate to
cover the Company's or any Subsidiary's premium trust liability requirement. All
funds required by law to be held in trust accounts by the Company or any
Subsidiary are so held.
4.28 Information Furnished. The Company and Sellers have made available to
Buyers and their officers, attorneys, accountants and representatives true and
correct copies of all material agreements, documents and other items listed on
the Schedules to this Agreement and all books and records of the Company and the
Subsidiaries, and neither this Agreement, the Schedules attached hereto nor any
information, agreements or documents delivered to or made available to Buyers or
their officers, attorneys, accountants or representatives pursuant to this
Agreement, to the knowledge of the Sellers, the Company and the Subsidiaries as
of the Closing Date, contain any untrue statement of a material fact or omit to
state any material fact necessary to make the statements herein or therein, as
the case may be, not misleading.
4.29 Investment Representation. Blanch is acquiring the Purchase Price
Stock, the Purchase Price Warrants, and will, upon conversion of such warrants,
acquire the Conversion Shares for its own account for investment purposes and
not with a view to, or for sale in connection with, any distribution thereof and
Blanch has no present agreement or commitment providing for the disposition
thereof. Blanch hereby represents and warrants that it is an Accredited Investor
(as defined in Rule 501(a) promulgated under the 1933 Act). Blanch understands
that: (a) the Purchase Price Stock, the Purchase Price Warrants, and the
Conversion Shares have not been registered under the 1933 Act, or any applicable
state's securities laws, by reason of their issuance in a transaction exempt
from the registration requirements of the 1933 Act and such state's securities
laws; (b) such securities must be held indefinitely unless a subsequent
disposition thereof is registered under the 1933 Act or is exempt from
registration; (c) Summit will make a notation on its transfer books to such
effect; and (d) such securities will bear the following legend:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY
NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED, PLEDGED OR
HYPOTHECATED UNLESS AND UNTIL SUCH SHARES ARE REGISTERED UNDER
SUCH ACT OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY IS
OBTAINED TO THE EFFECT THAT SUCH REGISTRATION IS NOT REQUIRED."
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE AND THE SALE,
ASSIGNMENT, TRANSFER, PLEDGE OR OTHER DISPOSITION THEREOF ARE
SUBJECT TO CERTAIN RESTRICTIONS AND AGREEMENTS CONTAINED IN A
SHAREHOLDER AGREEMENT DATED AS OF JUNE 2, 1998, AMONG THE COMPANY
AND CERTAIN STOCKHOLDERS AND WARRANTHOLDERS. A COPY OF SUCH
STOCKHOLDER AGREEMENT AND ALL APPLICABLE AMENDMENTS THERETO WILL
BE FURNISHED
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BY THE COMPANY TO THE RECORDHOLDER OF THE CERTIFICATE WITHOUT CHARGE UPON
WRITTEN REQUEST TO THE COMPANY AT ITS PRINCIPAL PLACE OF BUSINESS OR
REGISTERED OFFICE."
Blanch agrees that it will comply with the restrictions on transferability
of the Purchase Price Stock, the Purchase Price Warrants and the Conversion
Shares contained herein. Blanch acknowledges that Buyers are materially relying
on the truth and accuracy of the representations and warranties made by Blanch
in this Section 4.29.
4.30 Knowledge of Sellers; Access to Information. Each of the Sellers
acknowledges that it (through its officers, attorneys and other representatives)
has had full access to information regarding Buyers and their assets,
properties, liabilities, conditions (financial or otherwise), business, results
of operations, or prospects. Each of the Sellers acknowledges that it (through
its officers, attorneys and other representatives) has had an opportunity to ask
questions of and receive answers from Buyers concerning Buyers' assets,
properties, liabilities, conditions (financial or otherwise), business, results
of operations and prospects and the terms and conditions of the Purchase Price
Stock, the Purchase Price Warrants and the Conversion Shares; the information as
to which Sellers have had access includes: (a) that certain Amended and Restated
Stockholders Agreement dated as of May 8, 1997 ("Summit's Stockholders
Agreement"), among Summit, Austin Ventures IV-A L.P., a Delaware limited
partnership, Austin Ventures IV-B L.P., a Delaware limited partnership (Austin
Ventures IV-A, L.P. and Austin Ventures IV-B, L.P. are hereinafter collectively
referred to as the "Austin Purchasers"), Stephen W. Shumake, Robert H.
Wellington, III and Wellington Associates, Inc., Profit Sharing Trust FBO Robert
C. Broun (collectively, the "Wellington Purchasers"), Mellon Ventures, L.P., a
Delaware limited partnership ("Mellon Ventures"), Capital Resource Lenders III,
L.P., a Delaware limited partnership ("CRL"), Gary R. Griffith and Robert J.
Hogan, Jr. (collectively, the "Founders"); (b) that certain Senior Subordinated
Note Purchase Agreement dated as of May 8, 1997, by and among Summit, certain
subsidiaries of Summit and CRL; (c) that certain Stock Purchase Agreement dated
as of February 29, 1996, as amended by Amendment No. 1 thereto dated as of
December 10, 1996, by and among Summit, the Founders, the Austin Purchasers and
the Wellington Purchasers; (d) that certain Stock Purchase Agreement dated as of
December 19, 1996, by and among Summit, the Founders and Mellon Ventures. Each
of the Sellers acknowledges that it has had full opportunity to consult with
counsel of their choosing and have been advised by counsel and/or such other
experts which they desire in connection with consummating the transactions
contemplated by this Agreement, and (e) the information identified in Schedule
3.8.
4.31 Claims and Proceedings. Schedule 4.31 contains a list and description
of all investigations known to the Sellers, the Company and the Subsidiaries
that are pending or threatened against the Company, any Subsidiary, or any of
their properties or assets, and all claims, actions, suits, and proceedings
pending or threatened against the Company or any Subsidiary or any of their
respective properties or assets, at law or in equity, or before or by any court,
municipal or other governmental department, commission, board, agency or
instrumentality. Except as set forth on Schedule 4.31, none of such pending or
threatened claims, actions, suits, proceedings or investigations will result in
any material uninsured liability or material loss to the Company or any
Subsidiary, and neither the Company nor any Subsidiary is now subject to any
order, judgment, decree, stipulation or consent of any court, governmental body
or agency. To the knowledge of
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Sellers, no inquiry, action or proceeding has been instituted or threatened to
restrain or prohibit the carrying out of the transactions contemplated by this
Agreement or to challenge the validity of such transactions or any part thereof
or seeking damages on account thereof.
4.32 Year 2000. Except as set forth on Schedule 4.32, to the knowledge of
Sellers, each item of equipment and each software or other computer program used
by the Company or any Subsidiary in the operation of its managing general agent
and wholesale insurance brokerage businesses, as the case may be, (a "Company
System") (a) has been produced or amended in a manner which substantially
advances the result that a change of, reference to, or use after, December 31,
1999, of date-related data for dates before, on, or after December 31, 1999, in
the operation of that Company System, whether alone or in conjunction with each
other Company System, will not have a material adverse effect on, nor give rise
to, a material increased inconvenience in, the operation of that Company System;
and (b) has been tested in conjunction with each item of equipment and software
program under the control of a third party (a "Third Party System") with which a
Company System routinely exchanges date information in a manner which
substantially advances the result that the inclusion after December 31, 1999, of
date-related data for dates before, on, or after December 31, 1999, in the
information exchanged with a Third Party System will not have a material adverse
effect on, nor give rise to, a material increased inconvenience in, the exchange
of date-related data or the subsequent use of that date-related data. To the
knowledge of Sellers and the Company as of the Closing Date, Schedule 4.32
includes a description of what additionally must be completed by the Company or
any Subsidiary to ensure that the results contemplated by this Section 4.32 are
timely accomplished.
4.33 Hart-Scott-Rodino Matters. Sellers represent that the consummation of
the transactions contemplated by this Agreement will require no filings pursuant
to the HSR Act.
4.34 Meaning of Knowledge. Whenever a provision of this Agreement provides
that a matter is "to the knowledge of Sellers," or "to the knowledge of Sellers
or the Company as of the Closing Date," or words to similar effect, such phrase
shall mean the actual knowledge of any manager or any person or officer holding
a position senior to that of manager, or of any director, of the Sellers or the
Company as of the Closing Date. Sellers have instituted and substantially
implemented a multi-faceted corporate compliance program for the Sellers, the
Company, and the Subsidiaries which is designed to foster compliance by
employees of Sellers, the Company, and the Subsidiaries with all legal
obligations of the Company and the Subsidiaries and to further the process of
bringing to the attention and knowledge of senior officers of the Sellers, the
Company, and the Subsidiaries instances of non-compliance.
4.35 Assignment and Assumption Agreement. The representations and
warranties contained in the Assignment and Assumption Agreement are true and
correct.
4.36 Administrative Services. The services to be provided by Parent to
Wholesale pursuant to that certain Facilities and Service Agreement dated
January 1, 1998 (and the predecessor agreements to such agreement) have been
provided by the Company and the Continuing Employees and not by Parent.
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ARTICLE 5
COVENANTS
5.1 Transfer of Assets and Assumption of Liabilities Prior to Closing.
During the period from January 1, 1998, until the Effective Date, the Sellers
have transferred to the Company and have caused the Company to transfer to
Sellers the assets so identified on Schedule 5.1 (the "Transferred Assets") and
Sellers have assumed those liabilities of the Company identified on Schedule 5.1
(the "Transferred Liabilities"), it being specifically agreed that assets so
transferred to the Sellers will include the Vaughn Receivables (and the reserves
and escrow therefor) and the Aged Receivables and the reserves therefor as those
terms are hereinafter defined. Each of the parties agree that following the
Effective Date, neither the Buyers nor the Company nor any Subsidiary shall be
liable for any of the obligations, debts, commitments, or liabilities of any
nature whatsoever of the Company arising out of or based on such assets
transferred by the Company to Sellers or any business or operations of the
Company related to such Transferred Assets or any of the Transferred Liabilities
and Sellers shall hold Buyers, the Company and the Subsidiaries harmless from
any such obligations, debts, commitments or liabilities. The Sellers and the
Company have furnished Buyers copies of any and all documents, instruments and
agreements concerning such transfer of assets and assumption of liabilities
including any purchase agreements, assignment agreements, assumption agreements,
and bills of sale executed in connection therewith.
The parties hereto do hereby further covenant and agree as follows:
(a) The Vaughn Receivables. Set forth on Schedule 5.1(a) hereto is a list
of all those certain accounts receivable of the Company relating to that
arbitration referred to as ELTON GEORGE & COMPANY V. VAUGHN GENERAL AGENCY, INC.
and the reserves and escrow therefor (the "Vaughn Receivables").
(b) The Aged Receivables. Within forty-five (45) days after the Closing
Date, Sellers shall deliver to Buyers a list of all accounts receivable of the
Company and the Subsidiaries which are, as of the Effective Date, more than
ninety (90) days past due (the "Aged Receivables"), together with a list of all
reserves relating to such Aged Receivables.
(c) The Deemed Aged Receivables. Until such time as the Aged Receivables
are satisfied in full, any and all funds received by the Company or any
Subsidiary from and after the Effective Date from such customers or clients of
the Company or any Subsidiary who have outstanding Aged Receivables as of the
Effective Date shall be deemed to apply first to the satisfaction of the Aged
Receivables (as so applied, the "Deemed Aged Receivables"); Buyers shall cause
the Company to pay to such account as Sellers shall hereinafter designate, all
amounts representing such Deemed Aged Receivables promptly upon collection.
5.2 Effective Date Balance Sheet. Within forty-five (45) days after the
Closing Date, Sellers shall deliver to Buyers the unaudited consolidated balance
sheet of the Company and the Subsidiaries dated as of the Effective Date
reflecting the transfer of the Transferred Assets and the assumption of the
Transferred Liabilities prepared in accordance with generally accepted
accounting
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principles, which are applied on a basis consistent to that of the preceding
fiscal year, including the disclosure of material liabilities and material
obligations that would normally be reflected on such balance sheet (the
"Effective Date Balance Sheet"). The Sellers shall engage Ernst & Young, L.L.P.
("E&Y") to perform procedures agreed to by Buyers and Sellers, which will be in
accordance with generally accepted auditing standards to specified elements,
accounts or items of the Effective Date Balance Sheet. The Sellers will deliver
E&Y's Statement of Factual Findings to Buyer along with the Effective Date
Balance Sheet.
5.3 Investigation. At the Closing, the Company shall deliver to Buyers the
originals of all minute books and stock transfer records of the Company and the
Subsidiaries. Any investigation by Buyers or their officers, attorneys,
accountants or representatives shall not in any manner affect the
representations and warranties of the Company and Sellers contained herein.
5.4 Continuation of Insurance Coverage. Sellers will purchase and provide
evidence thereof to Buyers from time to time, commencing as of the Closing Date,
so-called "run-off" or "tail" endorsements insuring the Company and the
Subsidiaries with respect to the E&O Policy (which policy as extended will have
a limit of liability of not less than $10 million in the aggregate and $5
million per claim, and an aggregate deductible of not more than $100,000)
extending the period within which claims may be made for acts or omissions under
such policy for a period of not less than sixty (60) months following the
Closing, the cost of which shall be borne solely by the Sellers (herein the
"Extended E&O Policy"). Sellers agree that as to all claims listed on Schedule
4.31 that Sellers or the Company or the Subsidiaries have timely notified their
E&O carrier that such claims are covered by the applicable E&O policies and the
carrier has not denied coverage or reserved rights as to such coverage. The
Buyer Indemnified Parties (as hereinafter defined) will assume control of the
claims and actions listed on Schedule 4.31 pursuant to the provisions of Section
8.2(d). Representatives of the Company agree to meet monthly (or less frequently
should the parties so agree) at the offices of the Company with legal
representatives of the Sellers to discuss the handling of such claims and
further agree to report new claims to the E&O carrier at the earliest
practicable time and to consult with the E&O carrier or its designated
representatives regarding litigation strategies and any settlements of insured
claims.
5.5 Employment Matters.
(a) Prior to the Closing Date, Sellers and the Company have agreed with
the employee listed on Schedule 5.5 to his termination, including the
agreement by such employee to remain employed by the Company up to
forty-five (45) days after the Closing Date. Sellers agree to be
responsible for all costs, expenses and liabilities of the Company
that may be incurred in connection with the termination of such
employee and to hold the Company harmless following the Closing Date
as to any such costs, expenses or liabilities, provided, however, the
Company agrees to pay such employee his salary and to provide benefits
to such employee (other than severance benefits) for the 45-day period
following the Closing Date.
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(b) To the extent required by 29 U.S.C. sectionsection 102-2109, and the
regulations promulgated thereunder (the "Worker Adjustment and
Retraining Notification Act" or "WARN"), or by 29 U.S.C. section
1166(a) ("COBRA"), the Sellers shall be responsible for providing any
notification required to comply with WARN or COBRA, and all costs and
liabilities arising out of or relating to the termination of the
employees listed on Schedule 5.5, or any other employees of the
Company or any Subsidiary who are terminated prior to or as of the
Closing Date.
5.6 Employee Benefits. Buyers agree that Employees of the Company and
Subsidiaries as of the Closing Date will become participants in employee benefit
plans and programs substantially similar to those maintained by Buyers at that
time for its employees, provided that nothing in this Agreement shall limit the
right of Buyers or Company to amend, terminate or discontinue any particular
employee benefit plan or program in accordance with the terms thereof. Buyers
shall offer and provide COBRA coverage under its group health plans to any
current or former employee of the Company or any Subsidiary and any beneficiary,
who is entitled to rights as a qualified beneficiary under COBRA.
The Company has taken all action necessary to terminate the involvement of
employees of the Company and the Subsidiaries as of the Closing Date in Blanch
Benefit Plans. The Sellers herewith assume Buyers' obligations to employees of
the Company and the Subsidiaries pursuant to Blanch Benefit Plans including any
unfunded retirement liabilities for any employees and agrees to hold Buyers
harmless with respect thereto.
5.7 Use of Managing General Agent License. If and when requested by
Sellers, Buyers agree to negotiate in good faith the terms and conditions of a
written agreement pursuant to which Buyers will permit Sellers to utilize the
Company's managing general agency status, so long as and only to the extent that
such an agreement, in the opinion of Buyers' counsel, will not conflict with any
law or regulation or any agreement or other contract to which any of Buyers or
the Company is then a party, or to which they or their properties are then
subject and, in their sole business judgement, will not adversely affect Buyers'
or the Company's current or future business, operations or prospects. Any costs
incurred by Buyers in connection with the foregoing, including attorneys' fees
and other administrative costs, shall be the sole responsibility of Sellers, and
Buyers' consent to any such aforementioned agreement concerning the managing
general agency status of the Company shall be expressly conditioned upon
Sellers' agreement to indemnify Buyers in such amounts and in such a manner as
Buyers deem appropriate and advisable, in their sole business judgment.
5.8 Section 338(h)(10) Election. The Buyers and Sellers shall make a joint
election under Code section 338 (h)(10) of the Code, and, where applicable, any
corresponding election under state or local law (the section 338 (h)(10)
Election) with respect to the purchase and sale of all of the Shares hereunder.
Seller will pay any tax, including any liability of the Company for tax
attributable to making a section 338 (h)(10) Election and shall indemnify Buyers
and the Company against any adverse consequences arising out of (i) any failure
to pay such tax, or (ii) any determination by the IRS or
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any other tax authority of the invalidity of the section 338 (h)(10) Election
with respect to the transactions contemplated by this Agreement.
Sellers agree to fully cooperate with Buyers to take whatever actions are
necessary and to execute and deliver such documents, as may be required to
effectuate the section 338 (h)(10) Election including, but not limited to,
Internal Revenue Service Form 8023. Buyers and Sellers agree to apply the
section 338 (h)(10) Election consistently for all purposes of the Code and
similar state and local law.
Buyers shall, with the consent of Sellers, which consent shall not be
unreasonably withheld, determine the deemed purchase price for the Shares (which
deemed purchase price includes the assumption of the liabilities of the Company)
and shall provide to Sellers an allocation of the deemed purchase price among
the assets of the Company that are deemed to have been acquired as a result of
the section 338 (h)(10) Election. The allocation to be made by Buyers of the
deemed purchase price among the assets of the Company (the "Allocation") shall
be made in accordance with Section 1060 of the Code. The Allocation shall be
presented by Buyers to Sellers for their consent, which consent shall not be
unreasonably withheld. Buyers agree that it would be reasonable for Sellers to
withhold such consent if the Allocation would cause Sellers to lose the benefit
of any material tax deductions to which Sellers would otherwise be entitled.
Buyers and Sellers shall use the Allocation for purposes of all reports and
returns with respect to the Taxes.
5.9 Stockholder Agreement. Sellers and Summit have executed and delivered
to the other a Stockholder Agreement in the form of Exhibit C, pursuant to which
Sellers shall be bound by certain restrictions and repurchase obligations
relating to the Purchase Price Stock, the Purchase Price Warrants, and the
Conversion Shares, and shall be granted certain preemptive rights.
5.10 Software License. At their sole cost and expense Sellers have caused
the transfer on or before the Closing Date all software licenses needed by the
Company and the Subsidiaries to operate their computer systems and to otherwise
conduct their business; provided, however, to the extent that any such software
license imposes any liability or obligation upon a party or parties to this
Agreement (the "Non-Breaching Party") for breach of such software license by
another party or parties (the "Breaching Party"), the Breaching Party will
indemnify and hold harmless the Non-Breaching Party regarding any such breach by
the Breaching Party. If and to the extent that Sellers require continued access
to any of Company's computer systems following such transfer, or the Company
requires continued access to computer systems remaining with Sellers, the
parties agree to negotiate in good faith such use for a mutually agreed upon
period.
5.11 Sublease. Annexed hereto as Exhibit E is a sublease agreement with
respect to the leased real property pertaining to certain operations of the
Company (the "Leased Space") situated at 4300 Centerview Drive, San Antonio,
Texas (the "Sublease Agreement") which Sellers and Buyers have caused to be
executed at Closing and pursuant to which the Sellers will sublease to SGP
Holdings or to the Company that portion of the Leased Space as has been
designated by Sellers and Buyers.
5.12 The AD System. The parties hereto expressly acknowledge and agree that
during the period of time commencing with the Closing Date and ending on
December 31, 1998, the Sellers
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shall have reasonable access to and use of (i) the Company's alternative
distribution operations system (the "AD System"); and (ii) certain employees of
the Company who manage or service the AD System (the "AD Managers"), and (iii)
such computer connections and services as may be necessary for the interim
connection and use thereof by Sellers' employees in the greater San Antonio area
including Boerne, Texas, and that Sellers will compensate Buyers $1,000 per
month (provided, however, Sellers shall pay any costs incident to the connection
and services identified in clause (iii) hereof) for the use of the AD System,
the AD Managers, and such connections and service described herein for so long
as Sellers make use thereof, provided, however, in the event that the cost to
the Company for providing such services materially exceeds one thousand dollars
($1,000) per month, the parties agree to negotiate in good faith a revised
payment for such services.
5.13 Preferred Reinsurance Broker. Buyers shall engage Sellers on a
"Preferred Basis" as reinsurance broker for Buyers' treaty business for a period
of six (6) years after the Closing Date, provided, however, that this period
shall expire upon prepayment in full of the Note by SGP Holdings on or prior to
the expiration of four (4) years after the Closing Date. "Preferred Basis" means
that (A) Buyers will provide Sellers a right of first refusal as to such
brokerage business related to the extension or renewal of treaty business being
conducted by the Company as of the Closing and (B) as to all other business of
the Company, Buyers will provide to Seller a right of first opportunity to such
brokerage business provided that (i) the pricing and security of the relevant
reinsurance product provided by Sellers is competitive with the pricing and
security of the relevant reinsurance product otherwise available in the market;
(ii) where applicable, the reinsurance product provided by Sellers is acceptable
to the insured; (iii) Sellers have the expertise in the relevant area of
reinsurance; and (iv) Sellers can provide the reinsurance product desired.
Sellers agree that there will not be a breach of this Section 5.13 if Buyers use
their best efforts to cause their brokers and agents to comply herewith and if
any failures to so comply are not material. Sellers and Buyers as used in this
Section 5.13 shall include their respective subsidiaries and affiliates.
5.14 Note Prepayment and Purchase Price Warrant Adjustment.
(a) Downward Adjustments. The number of Purchase Price Warrants
exercisable by Blanch from time to time shall be adjusted downward in
an amount equal to (i) one Purchase Price Warrant for each $666.67 in
premium dollars paid or payable to insureds or pursuant to insurance
contract programs directed by Buyers or any of its direct or indirect
subsidiaries or affiliates through Sellers or any of their direct or
indirect subsidiaries or affiliates, or placed by Sellers or any of
their direct or indirect subsidiaries or affiliates, or Buyer or any
of its direct or indirect subsidiaries or affiliates, pursuant to
Section 5.13; and (ii) twelve thousand five hundred (12,500) Purchase
Price Warrants upon each Timely Payment (as defined in the Note) by
SGP Holdings to Blanch of an annual payment of principal and interest
due on the Note. Clause (ii) of this Section 5.15 will not apply after
the failure of SGP Holdings to make a Timely Payment.
(b) Warrant Grace Period. For the time period commencing with the Closing
Date and ending on that date which is the fourth annual anniversary of
the Closing Date (the "Warrant Grace Period"), Blanch agrees not to
exercise any of the Purchase Price
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Warrants; provided, however, that if at any time prior to the
expiration of the Warrant Grace Period there shall have occurred a
breach of Section 5.13 (which breach has not been cured after thirty
(30) days' notice) or an event of default under the Note which has not
been timely cured pursuant to the terms of the Note (the occurrence of
such breach or default without timely cure is referred to herein as a
"Default Date") Blanch shall have the right, in the exercise of its
sole discretion, to thereafter exercise all or in part any or all
Purchase Price Warrants which are outstanding thereafter from time to
time. If no Default Date previously occurs, at the end of the Warrant
Grace Period Blanch shall have the right, in the exercise of its sole
discretion, to exercise all or in part any or all Purchase Price
Warrants which are thereafter from time to time outstanding. It is
expressly understood and agreed that, following the exercise of any
Purchase Price Warrants and the issuance of any shares of Summit's
common stock pursuant to such exercise, Summit shall thereafter have
no right to redeem any Purchase Price Warrants available with respect
to such issued shares.
(c) Note Prepayment. Any time prior to the maturity of the Note, SGP
Holdings may prepay without penalty all obligations then outstanding
under the Note and, if such prepayment is made prior to the expiration
of the Warrant Grace Period and before the occurrence of a Default
Date, the Purchase Price Warrants will be deemed canceled.
(d) Reinstatement of Purchase Price Warrants. Notwithstanding any
provision of this Agreement to the contrary, the entirety of the
seventy-five thousand (75,000) Purchase Price Warrants not previously
exercised by Blanch shall be fully reinstated in the event of a
material breach by Buyers of any of the provisions of this Agreement.,
provided however, in any event the Purchase Price Warrants will expire
and be cancelled on the later of the payment in full of the Note or
December 31, 2005.
(e) Reservation of Common Stock. Summit shall reserve and maintain at all
times prior to the earlier to occur of: (i) the exercise by Blanch of
all of the Purchase Price Warrants; or (ii) the redemption of Summit
of all of the Purchase Price Warrants, a sufficient number of shares
of its common stock for issuance upon the exercise by Blanch of any or
all of its rights pursuant to the Purchase Price Warrants.
5.15 MGA "Run-Off" Matters.
(a) The parties acknowledge that the Company has continuing obligations to
pay claims after the Effective Date as to which the Company is
entitled to reimbursement for claim dollars paid to claimants from
reinsurers who are parties to those certain reinsurance treaties for
years prior to 1998 (the "Prior Reinsurance Treaties"), and a list of
such reinsurers is attached hereto as Schedule 5.15(a).
(b) The Sellers have obtained, or have caused the Company to obtain,
written evidence (collectively, the "Run- Off Arrangements") from the
reinsurers listed on Schedule
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5.15(b) hereto providing for a claims remittance procedure generally
as follows: (i) the Company shall furnish the reinsurer by facsimile
within one week after the 15th and the last day of the calendar month
reports detailing all claims paid by the Company to which the Company
is entitled to reimbursement from the reinsurer pursuant to the terms
of the applicable Prior Reinsurance Treaty (a "Claims Reimbursement
Report" and collectively, the "Claims Reimbursement Reports"); (ii)
the reinsurer generally shall be obligated to reimburse the Company
for all outstanding reimbursement claims evidenced in a Claims
Reimbursement Report by wire transfer of immediately available funds
or ACH within three (3) business days after receipt of such Claims
Reimbursement Report (receipt of which shall be deemed to occur on the
same day of delivery). The Sellers have delivered to Buyers copies of
the Run-Off Arrangements, receipt of which is acknowledged by Buyers.
(c) A list of reinsurers that have continuing reimbursement obligations to
the Company described in subparagraph (a) above, but who have not
provided evidence of a Run-Off Arrangement are listed on Schedule
5.15(c) hereto.
(d) Sellers will use their reasonable best efforts (i) to persuade the
reinsurers listed on Schedule 5.15(c) to consent and provide written
evidence of the Run-Off Arrangement, and (ii) to cause the reinsurers
listed on Schedule 5.,15(a) and (c) to comply with the Run-Off
Arrangement.
5.16 Registration Rights. Summit hereby grants to Blanch, with respect to
the Purchase Price Stock, the Purchase Price Warrants and the Conversion Shares
certain registration rights pursuant to the Registration Rights Agreement
substantially in the form of Exhibit F.
5.17 Prohibition Upon Use of Sellers' Name. Nothing contained in this
Agreement shall be construed to convey to Buyers any rights whatsoever to the
use of the name "Blanch," any of Blanch's logos, or any deceptively similar name
or logo. Buyers hereby expressly acknowledge that it is receiving no such rights
and that Buyers are prohibited from any use whatsoever of such name or logos;
provided, however, Sellers agree that Company and Subsidiaries may use
previously printed stationary and other Company forms and documents with such
names and logo until new stationary, forms and documents can be printed, which
Buyer agrees to complete as soon as possible.
5.18 Summit hereby covenants that, so long as any amount of principal
and/or interest remains outstanding under the Note, Summit shall maintain the
following: minimum EBITDA Covenant (tested quarterly).
* three months ending June 30 - $665,000;
* three months ending September 30 - $1,050,000; or cumulative six (6)
months ending September 30 - $1,715,000;
* three months ending December 31 - $1,600,000; or cumulative nine (9)
months ending December 31 - $3,315,000;
* three months ending March 31 - $1,495,000; or cumulative twelve (12)
months ending March 31 - $4,810,000.
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5.19 Funds Transfers. The parties acknowledge and agree that prior to the
Closing (although on or after the Effective Date) the Company may transfer funds
in excess of those required to meet the net worth requirement for the Company to
one or more of Sellers or their affiliates and that the funds so transferred
shall not be deemed assets of the Company to be acquired by the Buyer.
5.20 Fronting Company Arrangements. The parties acknowledge that each of
American Reliable Insurance Company and Home State County Mutual Insurance
Company (the "Fronting Companies") have indicated that Blanch may have
guaranteed certain obligations of the Company to them. Blanch agrees to leave
any such guarantees in place with the Fronting Companies for such reasonable
period of time as may be necessary for replacement guarantees from SGP Holdings
to be furnished to and accepted by the Fronting Companies and releases from the
Fronting Companies to any such guarantees of Blanch; SGP Holdings agrees to
provide such replacement guarantees as may reasonably be required. In the event
that arrangements with respect to such guarantees cannot be reached on terms
reasonably acceptable to all parties, then Buyers and Sellers will cooperate in
making arrangements with replacement insurance companies to replace either or
both of the Fronting Companies as may be necessary.
ARTICLE 6
THE CLOSING
As of the Closing, no action or proceeding shall have been instituted or
threatened for the purpose or with the probable or reasonably likely effect of
enjoining or preventing the consummation of this Agreement or seeking damages on
account thereof.
6.1 Obligations of Sellers and the Company. On or prior to Closing, Sellers
and the Company shall deliver to Buyers:
(a) an opinion of counsel for the Company and Sellers, dated as of the
Closing Date, in the form attached hereto as Exhibit G;
(b) the minute books and stock transfer records of the Company and the
Subsidiaries;
(c) all consents and approvals required to be obtained by Sellers, the
Company, or any Subsidiary in connection with the execution, delivery
and performance of this Agreement;
(d) the stock certificate or certificates representing the Shares duly
endorsed for transfer or accompanied by stock powers duly executed in
blank;
(e) evidence of the resignation of the employment of those certain
employees identified on Schedule 5.5 attached hereto;
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(f) evidence of the resignation of all of the directors and officers of
the Company and the Subsidiaries and such appropriate documents with
respect to the transfer or establishment of bank accounts, signing
authority, etc., as Buyers have reasonably requested.
(g) satisfactory evidence to the effect that each of the Sellers and each
officer and director of the Company and the Subsidiaries and each
other person controlled directly or indirectly by, or under common
control with, any of the Sellers has repaid in full all loans,
advances or other obligations owed to the Company or any Subsidiary;
(h) a certificate signed by an officer of each of the Sellers and the
Company to the effect that the Company has shareholders equity of not
less than $10.0 million; and
(i) such good standing certificates, officers' certificates and similar
documents and certificates as counsel for Buyers have reasonably
requested.
6.2 Obligations of Buyers. On or prior to Closing, Buyers shall deliver to
Sellers and the Company:
(a) an opinion of Carrington, Coleman, Sloman & Blumenthal, L.L.P.,
counsel to Buyers, dated as of the Closing Date, in the form attached
hereto as Exhibit H;
(b) all consents, waivers, and approvals required to be obtained by Buyers
in connection with the execution, delivery and performance of this
Agreement; and
(c) such good standing certificates, officers' certificates and similar
documents and certificates as counsel for the Company and Sellers have
reasonably requested.
ARTICLE 7
NONCOMPETITION AND RELATED COVENANTS
7.1 Covenant Not to Compete. Each Seller hereby covenants and agrees that
during the period commencing on the Closing Date and ending on the second annual
anniversary of the Closing Date, it will not, directly or indirectly, itself or
through any of its Affiliates (as that term is defined in Rule 144, promulgated
under the Securities Act of 1933, as amended) or through any form of ownership
(other than through a less than majority ownership of securities of a publicly
or privately held corporation which are not of an amount which would permit
Parent or Blanch to control or otherwise direct or cause direction of the
management and policies of such corporation), either for its own benefit or for
the benefit of any other person, firm, corporation, or other entity, without the
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prior written consent of Buyers and the Company, engage in Competition (as
defined below). For purposes of this Section 7.1, the following terms shall have
the following meanings.
(a) The term ""Acquiring Entity" shall mean any person, organization or
entity of any nature not currently an Affiliate of any of the Sellers
which may, following the Closing Date, acquire an interest in either
Parent or Blanch which would permit such Acquiring Entity to control
or otherwise direct or cause the direction of the management or
policies of either Parent or Blanch.
(b) The term "Competition" shall mean and is limited to developing,
producing, selling, distributing or providing Products and Services
(as defined below) to retail insurance agents within the Restricted
Area (as defined below). "Competition" shall expressly not include any
activities that may be conducted by any Acquiring Entity.
(c) The term "Customer" means those independent retail insurance agents to
or with whom the Company or any Subsidiary has developed, produced,
sold, distributed or otherwise provided Products and Services during
the two years prior to the Closing Date.
(d) The term "Products and Services" shall mean those products and
services described on Schedule 7.1 hereto.
(e) The term "Restricted Area" shall mean those States identified on
Schedule 7.1 hereto.
Each of the Sellers agrees that damages alone cannot compensate the Company
and Buyers in the event of a violation of the non-competition covenants
contained in this Section and of the covenants of confidentiality and
non-solicitation contained in Sections 7.2 and 7.3 of this Agreement and that
injunctive relief shall be essential for the protection of the Company and
Buyers. Accordingly, each of the Sellers agrees that in the event of a breach or
violation of any of such covenants (or a threatened breach or violation) by such
Seller, the Company and Buyers shall be entitled to injunctive relief against
such Seller, in addition to such other relief as may be available to the Company
and Buyers at law or in equity.
If any provisions of this Section 7.1 shall be held to be contrary to law
or invalid or unenforceable in any respect and any jurisdiction, or as to any
one or more periods of time, geographical areas, or business activities, the
remaining provisions shall not be affected but shall remain in full force and
effect as to the other and remaining provisions, and any such invalid or
unenforceable provision shall be deemed without further action on the part of
the parties hereto, modified, amended, limited, and reformed to the extent
necessary to render the same valid and enforceable.
7.2 Covenant of Confidentiality. Without the written consent of the Company
and Buyers, each of the Sellers agrees that it will not divulge to others for
use any confidential
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information or trade secrets of the Company or any Subsidiary (other than those
related to the Transferred Assets transferred to Sellers) including, but not
limited to, customer lists, employee information (including, without limitation,
information relating to salary, bonus, commissions, other forms of compensation,
benefits and the like), sales, sales publication information, profit margins,
operating procedures, process information, pricing accounts, costs, records,
books of account, customers, formulae, vendors, processes, methods,
compositions, sources of supply, improvements, and inventions. Notwithstanding
the foregoing, the obligations set forth in this Section 7.2 shall not apply to
information which is required to be disclosed by law or governmental order.
7.3 Non-Solicitation of Employees. The Sellers agree that for a period of
four (4) years from and after the Closing Date they shall not, on their own
behalf or on behalf of any other person, partnership, association, corporation
or any other entity, or permit any subsidiary or affiliate to, without the
express written consent of the Company, select or hire any employee of the
Company or any Subsidiary as of the Closing Date.
7.4 Non-Solicitation of Customers. The Sellers agree that for a period of
six (6) years from and after the Closing Date they shall not, on their own
behalf or on behalf of any other person, partnership, association, corporation
or any other entity (other than an Acquiring Entity), or permit any subsidiary
or affiliate to, solicit Customers for the purpose of, or in an attempt to
develop, produce, sell, distribute, or otherwise provide Products and Services
to any such Customer.
ARTICLE 8
INDEMNIFICATION
8.1 Indemnification.
(a) Subject to the limitations set forth in Section 8.6 hereof, Sellers
jointly and severally agree to indemnify and hold harmless Buyers and
each officer, director, employee, representative and affiliate of
Buyers (and, following the Closing, the Company, Vista Wholesale and
the Subsidiaries and each officer, director, employee, representative
and affiliate of the Company, Vista Wholesale and the Subsidiaries)
(collectively, the "Buyer Indemnified Parties") from and against any
and all damages, losses, claims, liabilities, demands, charges, suits,
penalties, costs and expenses (including court costs and reasonable
attorneys' fees and expenses incurred in investigating and preparing
for any litigation or proceeding) (collectively, "Indemnifiable
Costs") which any of the Buyer Indemnified Parties may sustain, or to
which any of the Buyer Indemnified Parties may be subjected, arising
out of (1) any breach or default by the Company or Sellers of or under
any of its representations, warranties, covenants, agreements, waivers
or other provisions of this Agreement or any agreement, document or
instrument executed in connection herewith and any breaches or
defaults by Wholesale under any of the representations, warranties,
covenants, agreements, waivers or other provisions of the Assignment
and Assumption Agreement or any
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document or agreement executed in connection therewith; (2) the claims
and proceedings identified on Schedule 4.31 and any other claims that
are similar to any of the categories and type of claims identified on
Schedule 4.31 and that have arisen from the operation of the business
of the Company or the Subsidiaries prior to the Effective Date; (3)
the Existing Claims identified on Schedule 8.3; (4) breach or default
by Wholesale of any of its obligations under the Administrative
Services Agreement; (5) any breach by Sellers of their lease of the
Leased Space, and (6) any breaches of software licenses as provided in
Section 5.10.
(b) Subject to the limitations set forth in Section 8.6 hereof, Buyers
agree to indemnify and hold harmless Sellers and each representative
and affiliate of Sellers (collectively, the "Seller Indemnified
Parties") from and against any and all Indemnifiable Costs which any
of the Seller Indemnified Parties may sustain, or to which any of the
Seller Indemnified Parties may be subjected, arising out of any breach
or default by Buyers of or under any of its representations,
warranties, covenants, agreements, waivers or other provisions of this
Agreement or any agreement, document or instrument executed in
connection herewith. For purposes of this Article 8, Buyer Indemnified
Parties and Seller Indemnified Parties are collectively referred to as
the "Indemnified Parties".
8.2 Defense of Third-Party Claims. An Indemnified Party shall give prompt
written notice to each party hereto who or which is obligated to provide
indemnification hereunder (for purposes of this Article 8, an "Indemnifying
Party") with a copy of such written notice of the commencement or assertion of
any action, proceeding, demand or claim by a third party (collectively, a
"third-party action") in respect of which such Indemnified Party shall seek
indemnification hereunder. Any failure so to notify the Indemnifying Parties
shall not relieve the Indemnifying Parties from any liability that they may have
to the Indemnified Party under this Article 8 unless the failure to give such
notice materially and adversely prejudices the Indemnifying Parties. The
Indemnifying Parties shall have the right to assume control of the defense of,
settle or otherwise dispose of such third-party action on such terms as they
deem appropriate; provided, however, that:
(a) The Indemnified Party shall be entitled, at its, his or her own
expense, to participate in the defense of such third-party action;
provided however, that the Indemnifying Parties shall, if the
Indemnified Party is otherwise entitled to indemnification hereunder,
pay the attorneys' fees, court costs, and expenses incurred in
investigating and preparing for any litigation or proceeding from time
to time as such costs and expenses are incurred by the Indemnified
Party if (i) the employment of separate counsel shall have been
authorized in writing by any such Indemnifying Party in connection
with the defense of such third-party action, (ii) the Indemnifying
Parties shall not have employed counsel reasonably satisfactory to the
Indemnified Party to have charge of such third-party action, (iii) the
Indemnified Party shall have
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reasonably concluded that there may be defenses available to it, him
or her which are different from or additional to those available to
the Indemnifying Parties, or (iv) the Indemnified Party's counsel
shall have advised the Indemnified Party in writing with a copy to the
Indemnifying Parties, that there is a conflict of interest that could
make it inappropriate under applicable standards of professional
conduct to have common counsel; provided, further, that in no event
shall the Indemnifying Parties be required to pay the attorneys' fees
of the Indemnified Parties for more than one firm of attorneys (and
one firm of local counsel, if required) in any one third-party action
or group of related third-party actions;
(b) The Indemnifying Parties shall obtain the prior written approval of
the Indemnified Party before entering into or making any settlement,
compromise, admission or acknowledgment of the validity of such
third-party action or any liability in respect thereof if, pursuant to
or as a result of such settlement, compromise, admission or
acknowledgment, injunctive or other equitable relief would be imposed
against the Indemnified Party or if, in the opinion of the Indemnified
Party, such settlement, compromise, admission or acknowledgment could
have a material adverse effect on its business or, in the case of an
Indemnified Party who is a natural person, on his or her assets or
interests;
(c) No Indemnifying Party shall consent to the entry of any judgment or
enter into any settlement that does not include as an unconditional
term thereof the giving by each claimant or plaintiff to each
Indemnified Party of a release from all liability in respect of the
specific matter which is being settled or upon which judgment is to be
entered; and
(d) No Indemnifying Party shall be entitled to control (but shall be
entitled to participate at his, her or its own expense in the defense
of), and the Indemnified Party shall be entitled to have sole control
over, the defense or settlement, compromise, admission or
acknowledgment of any third-party claim or action (i) as to which such
Indemnifying Party declines or fails to assume the defense within a
reasonable length of time, or (ii) to the extent the third-party
action seeks an order, injunction or other equitable relief against
the Indemnified Party which, if successful, would materially adversely
affect the business, operations, assets or financial condition of the
Indemnified Party; provided, however, that the Indemnified Party shall
make no settlement, compromise, admission or acknowledgment which
would give rise to liability on the part of any Indemnifying Party
without the prior written consent of such Indemnifying Party.
Indemnifiable Costs associated with claims or actions described in the
preceding sentence regarding court costs, reasonable attorney fees and
expenses will be paid by the Indemnifying Party to the Indemnified
Party from time to time as such costs and expenses are incurred by the
Indemnified Party. The parties hereto shall extend
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reasonable cooperation in connection with the defense of any
third-party action pursuant to this Article 8 and, in connection
therewith, shall furnish such records, information and testimony and
attend such conferences, discovery proceedings, hearings, trials and
appeals as may be reasonably requested.
8.3 Existing Claims. Sellers as Indemnifying Parties agree to provide
indemnification pursuant to the terms of this Agreement to the Buyer Indemnified
Parties with regard to the Existing Claims identified on Schedule 8.3. Sellers
will assume control of the claims and actions listed on Schedule 8.3 pursuant to
the provision of Section 8.2(a) through (c). Representatives of Sellers and the
Company agree to meet monthly (or less frequently should the parties so agree)
at the offices of the Company to discuss the handling of such claims.
8.4 Direct Claims. In any case in which an Indemnified Party seeks
indemnification hereunder which is not subject to Section 8.2 hereof because no
third-party action is involved, the Indemnified Party shall notify each
Indemnifying Party of any Indemnifiable Costs which he, she or it claims are
subject to indemnification hereunder. The failure of the Indemnified Party to
exercise promptness in such notification shall not amount to a waiver of such
claim unless the resulting delay materially prejudices the position of the
Indemnifying Parties with respect to such claim.
8.5 Indemnification for Tax Matters. Notwithstanding anything otherwise
provided herein (including, without limitation, the provisions of sections 8.1
through 8.4, inclusive, of this Agreement), the following provisions shall
govern the allocation of responsibility as between Buyers and the Sellers for
certain Tax matters following the Closing Date:
(a) Indemnification for Taxes Attributable to Operations during Tax
Periods Ending On or Prior to the Effective Date. The Sellers jointly
and severally shall indemnify and hold Buyers, the Company and the
Subsidiaries harmless from and against all liabilities for Taxes
(including any related losses) attributable to all Tax periods ending
on or prior to the Effective Date imposed with respect to the Company
or any Subsidiary, but only to the extent that such Taxes exceed Tax
refunds then received by or acknowledged by the applicable Taxing
authority to be due to the Company or any Subsidiary.
(b) Tax Payments and Tax Returns for Tax Periods Ending On or Before the
Effective Date. Sellers (with the cooperation of Buyers) shall cause
the Company to prepare (or cause to be prepared) and file (or cause to
be filed) on a timely basis any Returns of the Company and the
Subsidiaries for Tax periods ending on or prior to the Effective Date
that are due (including all applicable extensions) after the Effective
Date. Such Returns shall be prepared on a basis consistent with past
practice to the extent such practice is consistent with all applicable
federal, state, local and foreign tax laws, rules and regulations.
Buyers shall cause the Company and the Subsidiaries to pay
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(or cause to be paid) all Taxes shown to be due on such Returns. The
Sellers shall reimburse and indemnify the Company or any Subsidiary
for such Taxes to the extent not accrued on the Effective Date Balance
Sheet within five days of notice to the Sellers that Buyers have paid
such Taxes.
(c) Income Tax Payments and Tax Returns for Tax Periods Beginning Before
and Ending After the Effective Date. Buyers shall cause the Company to
prepare (or cause to be prepared) and file (or cause to be filed) on a
timely basis any Returns of the Company and the Subsidiaries for Tax
periods that begin before the Effective Date and end after the
Effective Date. Such Returns shall be prepared on a basis consistent
with past practice to the extent such past practice is consistent with
all applicable federal, state, local and foreign Tax laws, rules and
regulations. Buyers shall cause the Company and the Subsidiaries to
pay (or cause to be paid) all Taxes shown to be due on such Returns.
The Sellers shall reimburse and indemnify Buyers for a pro rata
portion of such Taxes based upon an interim closing of the books of
the Company and the Subsidiaries on the Effective Date but only to the
extent such Taxes are not accrued on the Effective Date Balance Sheet.
Such reimbursement shall be made within five days after notice to the
Sellers that Buyers have paid such Taxes. The Sellers shall be given
the opportunity to review such Returns prior to their being filed.
(d) Payment of Non-Income Taxes and Filing of Returns for Tax Periods
Beginning Before and Ending After the Effective Date. In the case of
any Tax, other than a Tax based upon or related to income, that is
imposed on a periodic basis and is payable for a Tax period that
includes (but does not end on) the Effective Date, Buyers shall cause
the Company and the Subsidiaries to prepare (or cause to be prepared)
and file (or cause to be filed) on a timely basis any Returns of the
Company and the Subsidiaries. Such Returns shall be prepared on a
basis consistent with past practice to the extent such past practice
is consistent with all applicable federal, state, local and foreign
Tax laws, rules and regulations. Buyers shall or cause the Company
(and/or any Subsidiary) to pay (or cause to be paid) all Taxes shown
to be due on such Returns. The Seller shall reimburse and indemnify
Buyers for a pro rata portion of such Taxes based upon the number of
days prior to the Effective Date as compared to the total number of
days within such Tax period, within five days after notice to the
Sellers that Buyers have paid such Taxes but only to the extent such
Taxes are not accrued on the Effective Date Balance Sheet. The Sellers
shall be given the opportunity to review such Returns prior to their
being filed.
(i) Cooperation on Tax Matters: Conduct of Proceedings.
(i) Buyers and the Sellers shall cooperate fully, as and to the
extent reasonably requested by the other party, in
connection with the
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preparation and filing of Returns pursuant to this Section
8.5 and any audit, litigation or other proceeding with
respect to Taxes. Such cooperation shall include the
retention and (upon the other party's request) the provision
of records and information which are reasonably relevant to
such preparation and filing and to any audit, litigation or
other proceeding relating thereto and making employees
available on a mutually convenient basis to provide
additional information and explanation of any material
provided hereunder.
(ii) Buyers shall be responsible for defending any audit,
litigation or other proceeding with respect to Taxes and
shall have the authority to negotiate, compromise and settle
any such audit, litigation or other proceeding. However, in
the event that any such compromise or settlement would
create any indemni-fication obligation hereunder for the
Sellers in excess of $5,000, Buyers shall not agree to any
such compromise or settlement without the prior consent of
the Sellers, which shall not be unreasonably withheld,
conditioned or delayed. Buyers shall notify the Sellers
promptly upon receipt of any notice of such audit,
litigation or other proceeding and shall keep the Sellers
reasonably informed as to the progress of any such audit,
litigation or other proceeding with respect to Taxes. The
Sellers shall have the right, at their expense, to
participate in the conduct of such audit, litigation or
other proceeding. If, as a result of any such audit,
litigation or proceeding Buyers, the Company or any
Subsidiary is required to pay any additional Taxes, within
five days after notice to the Sellers that Buyers have paid
such Taxes, the Sellers shall reimburse Buyers or the
Company for that portion of such Taxes attributable to
periods for which the Sellers have agreed to indemnify
Buyers pursuant to this Section 8.5.
(iii) Notwithstanding the foregoing provisions of this Section
8.5, the Sellers shall not be required to indemnify Buyers
for any particular Tax if a sufficient reserve for such Tax
was included on the Effective Date Balance Sheet.
(iv) Notwithstanding the foregoing provisions of this Section
8.5, the obligation of the Sellers to indemnify Buyers with
respect to any Taxes shall be net of any refunds of Taxes
received by the Company after the Closing and attributable
to any Tax period for which the Sellers are responsible
under this Section 8.5 other than any Tax refund to the
extent such Tax refund was reflected on the Effective Date
Balance Sheet.
8.6 Limitations on Indemnification. The indemnification obligations of the
parties under this Article 8 shall be subject to the following limitations:
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(a) No Indemnified Party shall make any claim against any
Indemnifying Party for indemnification under Sections 8.1 or
8.4 hereof unless and until the aggregate amount of such
claims against the Indemnifying Parties exceeds $75,000 (the
"Deductible"), whereupon Buyer or Seller Indemnified
Parties, as the case may be, may claim indemnification for
the amounts of such claims, or any portion thereof,
exceeding the Deductible; and furthermore, no Indemnified
Party shall make any claim against any Indemnifying Party
for indemnification under Sections 8.1 or 8.4 hereof unless
the individual amount of such claim exceeds $7,500, in which
case the full amount of $7500 and amounts in excess thereof
will be indemnified subject to the applicable deductibles
(it being the intention of the parties that all
Indemnifiable Costs arising out of any one claim or
proceeding shall be aggregated for purposes of meeting this
$7,500 requirement); provided, however, the limitations
contained in this Section 8.6 shall not apply to claims
identified in clauses (i) through (vi) of Section 8.7.
(b) In addition to the limitations set forth in subparagraph (a)
above, no Buyer Indemnified Party shall make any claim
against any Indemnifying Party for Indemnifiable Costs
arising out of any claim or proceeding identified on
Schedule 4.31, and any other claims that are similar to any
of the categories and type of claims identified on Schedule
4.31 and that have arisen from the operation of the business
of the Company or the Subsidiaries prior to the Effective
Date (collectively "Schedule 4.31 Claims") unless and until
the aggregate amount of Indemnifiable Costs for all such
claims and proceedings that are Schedule 4.31 Claims for
which the Buyer Indemnified Parties seek or have sought
indemnification hereunder exceeds $50,000 (the "Litigation
Deductible"); in addition, the claims and proceedings that
are Schedule 4.31 Claims shall be subject to the Deductible
identified in subparagraph (a) above to the extent that such
Deductible has not been then exceeded. By way of example, in
the event the Company seeks indemnification for $150,000 of
Indemnifiable Costs arising out of a proceeding identified
as a Schedule 4.31 Claim, and as of such time no other
claims for indemnification have been made by the Buyer
Indemnified Parties, the Company would only be able to be
indemnified for $25,000 of such Indemnifiable Costs because
both the Litigation Deductible and Deductible would have to
first be satisfied out of the $150,000. In this example, the
full amount of claims for indemnification by any Buyer
Indemnified Parties brought after the $150,000 claim
described above (including those for claims and proceedings
identified on Schedule 4.31) would be payable by the
Indemnifying Parties because at that time, the full amount
of the Litigation Deductible and other Deductible will have
been satisfied.
8.7 Limitation on Claims. Except with respect to (i) such Indemnifiable
Costs relating to liabilities for taxes arising since the Acquisition Date; (ii)
claims (including claims for indemnification hereunder) based on a breach of the
representations, warranties, and covenants of
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the Sellers contained in Sections 4.1, 4.2, 4.4(a), 4.4(b), 4.33, 4.10 and 5.4
hereof); (iii) Existing Claims identified on Schedule 8.3; (iv) claims
(including claims for indemnification hereunder) based on a breach of the
representations and warranties of Buyers contained in Section 3.2 hereof; (v)
breaches by either Sellers or Buyer of software licenses as provided in Section
5.10; and (vi) claims (including claims for indemnification hereunder) based on
any knowing or intentional material misrepresentation or omission by any of the
parties hereto, the liability of the Sellers or Buyers for any Indemnifiable
Costs or damage for breach shall be limited to $7 million and must be asserted
on or prior to the date which is two years following the Closing Date. The
indemnification obligations of the Sellers shall be satisfied in the following
manner: (a) first by offsetting any indemnification amounts due from the Sellers
against the last payments due pursuant to the Note until such time as all
obligations pursuant to the Note have been satisfied in full, and (b)
thereafter, by cash payments from the Sellers.
8.8 Recourse. Except for claims based on any knowing or intentional
material misrepresentation or omission by any of the parties hereto, it is
expressly understood and agreed by the parties hereto that the provisions of
this Article 8 relating to indemnification shall constitute the sole recourse or
remedy of any party hereto for any claim relating in whatsoever manner to the
transactions contemplated by this Agreement.
ARTICLE 9
MISCELLANEOUS
9.1 Collateral Agreements, Amendments and Waivers. This Agreement (together
with the documents delivered pursuant hereto) supersedes all prior documents,
understandings and agreements, oral or written, relating to this transaction
(including, without limitation, that certain Letter of Intent, dated March 12,
1998, executed by Parent and Summit, and constitutes the entire understanding
among the parties with respect to the subject matter hereof. Any modification or
amendment to, or waiver of, any provision of this Agreement (or any document
delivered pursuant to this Agreement unless otherwise expressly provided
therein) may be made only by an instrument in writing executed by the party
against whom enforcement thereof is sought.
9.2 Successors and Assigns. Neither Buyers', the Company's nor any Seller's
rights or obligations under this Agreement may be assigned without the written
consent of the other parties hereto (except that any party hereto may assign its
rights and obligations to any Affiliate or lender thereof without the written
consent of the other parties hereto; provided, however, that any such assignment
shall not relieve the assigning party from its obligations hereunder). Any
assignment in violation of the foregoing shall be null and void. Subject to the
preceding sentences of this Section 10.3, the provisions of this Agreement (and,
unless otherwise expressly provided therein, of any document delivered pursuant
to this Agreement) shall be binding upon and inure to the benefit of the parties
hereto and their respective heirs, legal representatives, successors and
assigns.
9.3 Expenses. Except as otherwise provided for herein, each party hereto
shall be solely responsible for its own legal, accounting, consulting and other
fees and expenses incurred by such party in connection with the transactions
contemplated by this Agreement.
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<PAGE>
9.4 Arbitration. Any dispute regarding the interpretation or enforcement of
any provision of this Agreement shall be resolved by binding arbitration by a
single arbitrator, chosen in a manner agreed to by the parties hereto, or, if
they cannot agree, by a panel of three arbitrators, one selected by the Sellers,
one selected by Buyers, and a third selected by the two thus chosen. The parties
shall jointly share the cost of a single arbitrator, or, if a panel is selected,
each shall bear the cost in connection with its respective arbitrator and shall
jointly share in the cost of a third arbitrator. Any arbitration conducted
hereunder shall be conducted in accordance with the then existing rules of the
American Arbitration Association. The parties to such arbitration will make
every reasonable effort to commence the arbitration proceedings within thirty
(30) days from the date that either party first gives written notice to the
other of its intention to submit a dispute for arbitration.
9.5 Invalid Provisions. If any provision of this Agreement is held to be
illegal, invalid or unenforceable under present or future laws, such provision
shall be fully severable, this Agreement shall be construed and enforced as if
such illegal, invalid or unenforceable provision had never comprised a part of
this Agreement and the remaining provisions of this Agreement shall remain in
full force and effect and shall not be affected by the illegal, invalid or
unenforceable provision or by its severance from this Agreement.
9.6 Information and Confidentiality. Each party hereto agrees that such
party shall hold in strict confidence all information and documents received
from any other party hereto, and if the Closing does not occur each such party
shall return to the other parties hereto all such documents then in such
receiving party's possession without retaining copies; provided, however, that
each party's obligations under this Section 11.7 shall not apply to any
information or document required to be disclosed by law or (b) any information
or document that Buyers disclose to any potential lender to or investor in
Buyers. In addition, and without limiting the generality of the foregoing, the
parties further agree that neither they nor any of their respective
representatives shall disclose to any third party or publicly announce the
proposed acquisition of the Shares or the existence or terms of this Agreement.
9.7 Waiver. No failure or delay on the part of any party in exercising any
right, power or privilege hereunder or under any of the documents delivered in
connection with this Agreement shall operate as a waiver of such right, power or
privilege; nor shall any single or partial exercise of any such right, power or
privilege preclude any other or future exercise thereof or the exercise of any
other right, power or privilege.
9.8 Notices. Any notices required or permitted to be given under this
Agreement (and, unless otherwise expressly provided therein, under any document
delivered pursuant to this Agreement) shall be given in writing and shall be
deemed received (a) when personally delivered to the relevant party at such
party's address as set forth below, (b) if sent by mail (which must be certified
or registered mail, postage prepaid), when received or rejected by the relevant
party at such party's address indicated below, or (c) if sent by facsimile
transmission, when confirmation of delivery is received by the sending party:
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<PAGE>
SGP Holdings: Summit Global Partners (Texas) Holdings, Inc.
500 North Akard, Suite 2500
Lincoln Plaza
Dallas, Texas 75201
Attn: Jeff Pan
Fax: (214) 740-2752
With a copy to: Carrington, Coleman, Sloman &
Blumenthal, L.L.P.
200 Crescent Court
Suite 1500
Dallas, Texas 75201
Attn: Peter Tierney, Esq.
Fax: (214) 855-1333
Summit: Summit Global Partners, Inc.
500 North Akard, Suite 2500
Lincoln Plaza
Dallas, Texas 75201
Attn: Jeff Pan
Fax: (214) 740-2752
With a copy to: Carrington, Coleman, Sloman
& Blumenthal, L.L.P.
200 Crescent Court
Suite 1500
Dallas, Texas 75201
Attn: Peter Tierney, Esq.
Fax: (214) 855-1333
The Company: Vista Insurance Group, Inc.
(formerly Blanch Insurance Services, Inc.)
500 North Akard, Suite 2500
Lincoln Plaza
Dallas, Texas 75201
Attn: Jeff Pan
Fax:______________________________________
With a copy to: Carrington, Coleman, Sloman
& Blumenthal, L.L.P.
200 Crescent Court
Suite 1500
Dallas, Texas 75201
Attn: Peter Tierney, Esq.
Fax: (214) 855-1333
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<PAGE>
Sellers: E. W. Blanch Insurance Services, Inc.
500 North Akard, Suite 4500
Lincoln Plaza
Dallas, Texas 75201
Attn:______________________________________
Fax:_______________________________________
E. W. Blanch Holdings, Inc.
500 North Akard, Suite 4500
Lincoln Plaza
Dallas, Texas 75201
Attn:______________________________________
Fax:_______________________________________
With a copy to: Locke Purnell Rain Harrell
2200 Ross Avenue, Suite 2200
Dallas, Texas 75201-6776
Attn: Don M. Glendenning, Esq.
Fax: (214) 740-8800
Each party may change its address for purposes of this Section 11.9 by proper
notice to the other parties.
9.9 Waiver of Certain Rights. Each Seller hereby waives any rights of first
refusal, preemptive rights or other rights of any nature whatsoever which the
Company or such Seller may have to purchase any of the Shares or other capital
stock or equity securities of any nature of the Company or any Subsidiary.
9.10 Further Assurances. At, and from time to time after, the Closing, at
the request of Buyers but without further consideration, each party hereto shall
execute and deliver such other instruments of conveyance, assignment, transfer
and delivery and take such other action as any other party hereto may reasonably
request in order more effectively to consummate the transactions contemplated
hereby.
9.11 No Third-Party Beneficiaries. Other than the Indemnified Parties not a
party hereto and any lender of Buyers, no person or entity not a party to this
Agreement shall be deemed to be a third-party beneficiary hereunder or entitled
to any rights hereunder.
9.12 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Texas, without regard to its choice of
law or conflicts of laws principles.
9.13 Access to Books and Records. Sellers and Buyers agree to provide to
one another and their representatives, during normal business hours and upon
reasonable notice after the Closing Date, access to the books, records, tax
records, contracts and other underlying data and documentation of or relating to
the Company and the Subsidiaries (the "Company Data") to enable
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<PAGE>
the parties to respond to any third-party claims, tax liabilities or
governmental requests or filings. Notwithstanding the above, Sellers' access to
Company Data is expressly limited to only that Company Data the review of which
is necessary in connection with any such third-party claims, tax liabilities or
governmental requests or filings.
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement in
one or more counterparts (all of which shall constitute one and the same
agreement) as of the day and year first above written.
SGP HOLDINGS:
SUMMIT GLOBAL PARTNERS (TEXAS)
HOLDINGS, INC.
By: _______________________________________
Its: ______________________________________
SUMMIT:
SUMMIT GLOBAL PARTNERS, INC.
By: _______________________________________
Its: ______________________________________
THE COMPANY:
BLANCH INSURANCE SERVICES, INC.
By: _______________________________________
Its: ______________________________________
SELLERS:
E. W. BLANCH INSURANCE SERVICES, INC.
By: _______________________________________
Its: ______________________________________
E. W. BLANCH HOLDINGS, INC.
By: _______________________________________
Its: ______________________________________
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<PAGE>
EXHIBIT A
TO STOCK PURCHASE AGREEMENT
PROMISSORY NOTE
$4,500,000.00 June 2, 1998
FOR VALUE RECEIVED, the undersigned, SUMMIT GLOBAL PARTNERS (TEXAS) HOLDINGS,
INC., a Delaware corporation (the "Maker"), does hereby promise to pay to the
order of E. W. BLANCH HOLDINGS, INC., a Delaware corporation (the "Payee"), the
principal sum of Four Million Five Hundred Thousand and No/100 Dollars
($4,500,000.00), subject to adjustment as provided herein, with interest thereon
at the rate of 5.52% per annum in six (6) equal annual installments of principal
plus accrued interest on the unpaid principal balance. The first such payment
shall be due and payable on June 2, 1999, and annually thereafter on the next
following five annual anniversaries of said date. Any payments required
hereunder that are made prior to the expiration of the cure period in the
preceding sentence shall be deemed a Timely Payment.
This Note is being executed pursuant to that certain Stock Purchase Agreement of
even date herewith (the "Agreement") by and among Maker, Payee, Summit Global
Partners, Inc., a Delaware corporation, Blanch Insurance Services, Inc., a Texas
corporation ("BIS"), and E. W. Blanch Insurance Services, Inc. (formerly E. W.
Blanch Wholesale Insurance Services, Inc.), a Delaware corporation ("EWB"),
which Agreement is incorporated herein by reference. All capitalized terms not
defined herein shall have the meanings ascribed to them in the Agreement. The
Agreement contains provisions for the adjustment of the principal balance of
this Note under certain circumstances, which provisions for adjustment are
incorporated herein by this reference.
Maker shall have the right to prepay this Note in whole or in part at anytime
without premium, penalty or fee.
If any of the following events ("Events of Default") shall occur and be
continuing:
(a) Maker shall fail to pay any installment of principal of the Note
when due and such failure continues for a period of ten (10) calendar days
after written notice of nonpayment is delivered to Maker in compliance with
the notice provisions of the Agreement; or
(b) Maker shall fail to pay any interest on the Note when due and such
failure continues for a period of ten (10) calendar days after written
notice of nonpayment is delivered to Maker in accordance with the notice
provisions of the Agreement; or
(c) Summit Global Partners, Inc., a Delaware corporation and parent
company of Maker ("Summit"), or any of its subsidiaries (the
"Subsidiaries") that is a party to the Subordinated Note (as herein
defined), fails to make any payment of principal or accrued interest due on
that certain 12.0% Senior Subordinated Note Due 2004 dated as of May 8,
1997 (the "Subordinated Note"), executed by Summit and the Subsidiaries in
favor of Capital Resource Lenders III, L.P., a Delaware limited partnership
("CRL") when due and such
<PAGE>
failure constitutes an Event of Default under that certain Subordinated
Note and Warrant Purchase Agreement dated as of May 8, 1997, by and among
Summit, the Subsidiaries and CRL; or
(d) Maker or any of its subsidiaries shall be involved in financial
difficulties evidenced by (i) its admitting in writing its inability to pay
its debts generally as they become due; (ii) by its commencement of a
voluntary case under Title 11 of the United States Code as from time to
time in effect, or by its authorizing, by appropriate proceedings of its
board of directors or other governing body, the commencement of such a
voluntary case; (iii) its filing an answer or other pleading admitting or
failing to deny the material allegations of a petition filed against it
commencing an involuntary case under said Title 11, or seeking, consenting
to or acquiescing in the relief therein provided, or by its failing to
controvert timely the material allegations of any such petition; (iv) the
entry of an order for relief in any involuntary case commenced under said
Title 11; (v) its seeking relief as a debtor under any applicable law,
other than said Title 11, of any jurisdiction relating to the liquidation
or reorganization of debtors or to the modification or alteration of the
rights of creditors, or by its consenting to or acquiescing in such relief;
(vi) the entry of an order by a court of competent jurisdiction (a) finding
it to be bankrupt or insolvent, (b) ordering or approving the liquidation,
reorganization or any modification or alteration of the rights of its
creditors, or (c) assuming custody of, or appointing a receiver or other
custodian for, all or a substantial part of its property; or (vii) its
making an assignment for the benefit of, or entering into a composition
with, its creditors, or appointing or consenting to the appointment of a
receiver or other custodian for all or a substantial part of its property;
or
(e) Within thirty (30) days after Summit shall have consummated an
underwritten public offering of its capital stock, pursuant to which Summit
shall have issued and sold shares of its capital stock to the public for
cash in excess of $25 million; or
(f) Any judgment, writ, warrant of attachment or execution or similar
process shall be issued or levied against a substantial part of the
property of Maker or any of its subsidiaries and such judgment, writ, or
similar process shall not be released, vacated, fully bonded, or superseded
in accordance with applicable law within sixty (60) days after its issue or
levy;
(g) Summit fails to maintain a minimum EBITDA Covenant (tested
quarterly).
* three months ending June 30 - $665,000;
* three months ending September 30 - $1,050,000; or cumulative
six (6) months ending September 30 - $1,715,000;
* three months ending December 31 - $1,600,000; or cumulative
nine (9) months ending December 31 - $3,315,000;
* three months ending March 31 - $1,495,000; or cumulative
twelve (12) months ending March 31 - $4,810,000.
then, and in any such event, Payee may, by notice to Maker, declare the entire
unpaid principal amount of the Note, and all interest accrued and unpaid thereon
to be forthwith due and payable,
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<PAGE>
whereupon the Notes, all such accrued interest and all such amounts shall become
and be forthwith due and payable (unless there shall have occurred an Event of
Default under subsection (c) in which case all such amounts shall automatically
become due and payable), without presentment, demand, protest or further notice
of any kind, all of which are hereby expressly waived by Maker. The Maker hereby
waives presentment, demand for payment, notice of dishonor and protest in
connection with the performance, default or enforcement of this Note, but not
notice of nonpayment, and consent to any and all extensions or postponements of
the time of payment or other indulgences, renewals, waivers, substitutions,
exchanges or releases of collateral granted or permitted by the Payee.
Maker will furnish to Payee so long as any portion of this Note remains unpaid
(i) within 45 days after the end of each fiscal quarter, the quarterly
consolidated financial statements of Summit; and (ii) within 90 days after the
end of each fiscal year, the annual consolidated financial statements of Summit
(with such statements of Summit to be audited).
Any provision herein or in any other document executed in connection herewith,
or in any other agreement or commitment, whether written or oral, express or
implied, to the contrary notwithstanding, no holder hereof shall in any event be
entitled to receive or collect, nor shall or may amounts received hereunder be
credited so that any holder hereof shall be paid as interest a sum greater than
the maximum amount permitted by applicable law to be charged to the person, firm
or corporation primarily obligated to pay this Note at the time in question. If
any construction of this Note or any and all other papers, agreements or
commitments, indicates a different right given to holder hereof to ask for,
demand or receive any larger sum as interest, such is a mistake in calculation
or wording, which this clause shall override and control, it being the intention
of the parties that this Note and all other instruments securing the payment of
this Note shall in all things comply with applicable law, and proper adjustment
shall automatically be made accordingly. In the event any holder hereof ever
receives, collects or applies as interest any sum in excess of the maximum legal
rate, such excess amount shall be applied to the reduction of the unpaid
principal balance of this Note in the inverse order of maturity, and if this
Note is paid in full, any remaining excess shall be paid to Maker. In
determining whether or not the interest paid or payable under any specific
contingency exceeds the highest lawful rate, Maker and holder hereof shall, to
the maximum extent permitted under applicable law, (a) characterize any
nonprincipal payment as an expense, fee or premium rather than as interest, (b)
exclude voluntary prepayments and the effects thereof, and (c) "spread" the
total amount of interest throughout the entire term of this Note so that the
interest rate is uniform throughout the entire term of this Note; provided that,
if this Note is paid and performed in full prior to the end of the full
contemplated term hereof, and if the interest received for the actual period of
existence hereof exceeds the maximum lawful rate, the holder hereof shall refund
to Maker the amount of such excess or credit the amount against the principal
balance at the time in question.
This Note may be assigned by Payee to any of its affiliates, as that term is
defined in Rule 144, promulgated under the Securities Act of 1933, as amended.
This Note shall be governed by, and construed in accordance with, the laws of
the State of Texas and is intended to take effect as an instrument under seal on
the date first above written.
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<PAGE>
SUMMIT GLOBAL PARTNERS (TEXAS) HOLDINGS, INC.
By: ____________________________________
Title: ____________________________________
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<PAGE>
GUARANTY
FOR VALUE RECEIVED, Summit Global Partners, Inc., a Delaware corporation,
hereby guarantees payment of the within note, according to the terms thereof,
both as to interest and as to principal, and hereby waives demand, all notices,
including notice of intention to accelerate the maturity, notice of acceleration
of maturity, but not notice of nonpayment, and presentment for payment, protest,
notice of protest, suit, diligence and any notice of or defense on account of
the extension of time of payments or change in methods of payments and consent
to any and all renewals and extensions in the time of payment hereof.
SUMMIT GLOBAL PARTNERS, INC.
By: _______________________________________
Its: ______________________________________
Date: _______________, 1998
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EXHIBIT 13
1998 ANNUAL REPORT
STOCK LISTING AND TRADING INFORMATION
The common stock of E.W. Blanch Holdings, Inc. is traded on the New
York Stock Exchange under the symbol "EWB". The following table
sets forth high, low and closing prices and the amounts of cash
dividends per common share for E.W. Blanch Holdings, Inc. common
stock for each quarter of 1998 and 1997.
1998 Market Price
Dividends
Quarter Ended High Low Close Per Share
March 31 38 3/8 33 5/16 38 3/8 $ 0.10
June 30 38 1/2 35 36 3/4 $ 0.12
September 30 38 11/16 34 7/8 38 11/16 $ 0.12
December 31 47 7/16 36 1/2 47 7/16 $ 0.12
Year $ 0.46
1997 Market Price
March 31 23 1/4 19 3/4 22 3/8 $ 0.10
June 30 27 1/8 22 26 11/16 $ 0.10
September 30 31 7/8 26 3/4 30 15/16 $ 0.10
December 31 35 9/16 30 34 7/16 $ 0.10
Year $ 0.40
As of December 31, 1998 there were 288 registered shareholders of
E.W. Blanch Holdings, Inc. common stock.
<PAGE>
SIX YEAR FINANCIAL SUMMARY
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1998 1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
OPERATING RESULTS:
REVENUES:
Operations $203,613 $158,103 $101,905 $ 87,203 $ 75,917 $ 59,993
Interest income 9,109 8,694 7,133 7,733 4,801 4,681
- ----------------------------------------------------------------------------------------------------------------------------------
Total revenues 212,722 166,797 109,038 94,936 80,718 64,674
EXPENSES:
Salaries and benefits 92,652 75,908 44,762 39,738 32,458 27,401
Travel and marketing 15,671 13,681 7,569 6,112 4,914 4,102
General and administrative 38,147 29,711 20,387 15,965 12,964 10,404
Amortization of goodwill 3,237 3,009 3,078 2,980 1,307 734
Interest and other expense 1,685 1,326 231 351 397 437
Restructuring charge (4) -- -- 22,750 -- -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Total expenses 151,392 123,635 98,777 65,146 52,040 43,078
- ----------------------------------------------------------------------------------------------------------------------------------
Income before taxes (4) 61,330 43,162 10,261 29,790 28,678 21,596
Income taxes (1) 24,741 17,008 3,970 11,584 11,615 8,623
- ----------------------------------------------------------------------------------------------------------------------------------
Net income before minority interest & equity interest in
loss of unconsolidated subsidiaries 36,589 26,154 6,291 18,206 17,063 12,973
Minority interest, net of tax 995 451 -- -- -- --
Equity interest in loss of unconsolidated subsidiaries,
net of tax 3,831 -- -- -- -- --
==================================================================================================================================
Net Income(1) (4) $ 31,763 $ 25,703 $ 6,291 $ 18,206 $ 17,063 $ 12,973
==================================================================================================================================
PER COMMON SHARE:
Net income - basic (1) (2) (4) (5) $ 2.51 $ 2.03 $ 0.48 $ 1.34 $ 1.22 $ 0.97
Net income - assuming dilution (1) (2) (4) (5) 2.42 1.99 0.48 1.34 1.22 0.97
Cash dividends (3) 0.46 0.40 0.40 0.40 0.32 0.08
Book value (2) 8.68 6.08 5.16 5.05 3.88 4.13
==================================================================================================================================
BALANCE SHEET:
Current assets $ 62,247 $ 51,381 $ 35,840 $ 25,055 $ 17,836 $ 11,962
Long-term investments, available for sale 18,427 14,939 9,793 7,035 15,837 37,519
Investment in unconsolidated subsidiaries 20,014 -- -- -- -- --
Intangibles, net (4) 30,425 34,916 17,490 38,939 41,575 10,596
Total assets 933,256 919,767 514,756 497,413 529,897 432,055
Current liabilities 48,335 37,033 13,154 13,620 21,107 5,286
Long-term debt, less current portion 557 13,675 1,188 350 665 946
Shareholders' equity 110,637 76,452 68,453 66,679 52,908 58,276
==================================================================================================================================
FINANCIAL RATIOS:
Profit margin (pre-tax) (4) 29% 26% 9% 31% 36% 33%
Return on average shareholders' equity (1) (4) 34% 35% 9% 30% 31% 35%
==================================================================================================================================
OTHER:
Weighted average number of
shares outstanding (000) (2) (5)
Basic 12,678 12,656 13,220 13,558 14,007 13,436
Assuming dilution 13,146 12,945 13,230 13,590 14,007 13,436
Number of shares outstanding
at year-end (000) (2) 12,842 12,580 13,260 13,208 13,647 14,115
Closing market price per share $ 47.44 $ 34.44 $ 20.13 $ 23.38 $ 20.63 $ 18.00
Number of employees at year-end 1,164 1,130 648 566 603 349
==================================================================================================================================
</TABLE>
(1) Prior to the May 1993 initial public offering, the Company operated as a
partnership and therefore was not liable for corporate income taxes. Pro forma
income taxes (unaudited) of $3.5 million have been included in income taxes for
the year ended December 31, 1993 to illustrate what the tax consequences would
have been had the partnership been subject to corporate income taxes.
(2) Assumes 12.3 million shares of common stock issued and outstanding prior to
the May 1993 reorganization from a partnership to a corporation.
(3) Regular quarterly cash dividend of $0.08 per share initiated fourth quarter
1993; increased to $0.10 in the first quarter 1995 and increased to $0.12 in the
second quarter 1998. Cash dividends were declared and paid in the same fiscal
year.
(4) A $22.75 million charge was recognized in 1996 to reflect the restructuring
of the San Antonio based managing general agency operation. The charge includes
a $19.5 million write-down of goodwill as well as a $3.25 million reserve for
office lease and other related restructuring expenses. Prior to the
restructuring charge, certain 1996 operating results were: Income before taxes,
$33.0 million; Net income, $20.2 million; Net income per share, $1.53; Profit
margin (pre-tax), 30%; and Return on average shareholder equity, 27%.
(5) The earnings per share amounts prior to 1997 have been restated as required
to comply with Statement of Financial Standards No. 128, Earnings per Share. For
further discussion of earnings per share and the impact of Statement No. 128,
see the notes to the consolidated financial statements.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
E.W. Blanch Holdings, Inc. and subsidiaries ("the Company") is a leading
provider of integrated risk management and distribution services, including
reinsurance intermediation and technical, analytic, and financial consulting
services.
Major Developments
ACQUISITIONS/DISPOSITIONS
In the second quarter of 1998, the Company sold its San Antonio, Texas based
operations, including the sale of its general agency, Blanch Insurance Services,
Inc., and other selected assets. The net effect of these dispositions was a
one-time gain of $1.0 million before taxes. As part of the sale agreement the
Company became a shareholder of the purchasing company.
In June 1998, the Company completed its acquisition of Walbaum Americana,
S.A. ("Walbaum"), a Buenos Aires, Argentina based provider of risk management
services in Latin America.
In July 1998, the Company completed the acquisition of Dunn & Carter Ltd.
("Dunn & Carter"), a London based insurance broker specializing in
retrocessional reinsurance. Also in July 1998, the Company acquired K2
Technologies, Inc. ("K2"), a San Jose, California based company specializing in
the design and support of interactive software platforms for use in risk
assessment and engineering as well as information integration.
The combined revenues of Walbaum, Dunn & Carter and K2 were $2.8 million in
1998.
STRATEGIC INVESTMENTS
In February 1998, the Company made an initial equity investment in Insurance
Holdings of America, Inc. ("IHA"), a development stage Beverly, Massachusetts
company dedicated to the production and application of technology for the
insurance industry. IHA has developed internet based technology to support the
sale and servicing of insurance through direct distribution including Sam's Club
and the internet. The Company made several additional investments in IHA during
the course of 1998, bringing its ownership to 24% at year end. The investment in
IHA by the Company during 1998 totaled $16.5 million and at year end the
carrying value of the IHA investment after all related equity accounting charges
was $13.0 million. IHA will continue to require additional investments to fund
its developing operations. Alternatives for obtaining this required funding will
be evaluated by IHA's board of directors.
In March 1998, the Company made an equity investment in Catastrophe Risk
Exchange, Inc. ("Catex"). Catex changes reinsurance distribution by connecting
buyers and sellers through an internet based risk exchange. In June 1998, the
Company made an equity investment in MSTC Blanch S.A. ("MSTC"). MSTC is a
leading provider of insurance and reinsurance intermediary services in Latin
American markets.
OTHER
During 1998, the Company completed the consolidation of its corporate
headquarters to Dallas, Texas. The costs associated with the move were not
material.
1
<PAGE>
NATURE OF BUSINESS
Domestic Operations
Domestic operations provide risk management and distribution services to
insurance and reinsurance companies. These services are sold both on a bundled
and a component basis. Major components provided include reinsurance
intermediation and technical and analytic consulting services. These services
are generally recurring and due to it's expertise and the value-added nature of
its services, the Company has been able to generate relatively high operating
margins. In the second quarter of 1998, the Company disposed of its general
agency operations, and accordingly, 1998 revenues include five months of the
general agency operation. Domestic operations include the operations of the
holding company.
RISK MANAGEMENT AND DISTRIBUTION SERVICES
REINSURANCE INTERMEDIATION
As a reinsurance intermediary, the Company structures and arranges
reinsurance between insurers seeking to cede insurance risks and reinsurers
willing to assume such risks.
The Company earns revenues from the structuring, placement and servicing of
reinsurance, primarily on a treaty basis. The Company is a significant
intermediary in the property catastrophe and casualty reinsurance markets.
Catastrophe reinsurance indemnifies a ceding company against a catastrophic loss
resulting from a single event such as a hurricane, earthquake, or tornado.
Casualty reinsurance indemnifies a ceding company for a specified loss caused by
injuries to third parties including resulting legal liability. The Company's
activities in the casualty reinsurance arena relate primarily to professional
liability, workers' compensation and specialized casualty exposures underwritten
by excess and surplus lines insurance carriers.
TECHNICAL AND ANALYTIC CONSULTING SERVICES
The Company provides technical and analytic consulting services primarily to
insurance and reinsurance companies, government entities and underwriting
facilities. Such services are generally provided as part of the Company's core
reinsurance intermediation function, but are also marketed on a component basis.
Services include product development, facility administration, strategic
reinsurance program reviews, actuarial services, catastrophe exposure management
and analysis and run-off management. The Company's Catalyst(R) risk modeling
software is a proprietary technology which provides a competitive advantage in
these consulting services.
The Company also provides financial consulting services, tailored reinsurance
products and capital markets products designed to assist its clients in capital
preservation and risk management.
Foreign Operations
The Company's foreign operations include Swire Blanch, an international risk
management and distribution services firm headquartered in London, England.
Swire Blanch includes a registered Lloyd's of London insurance and reinsurance
broking operation and international reinsurance intermediary operations. Swire
Blanch also provides financial consulting services through the sale of pension
plan products for insurance companies. Intermediary services include retail
insurance operations located in northern England and Hong Kong. Approximately
2
<PAGE>
79% of Swire Blanch's revenues are generated in the United Kingdom with the
remainder primarily from the Pacific Rim. The Company's foreign operations have
relatively lower profit margins than its domestic operations. This is due to a
number of factors, including competitive market conditions for Lloyd's brokers,
the small, start-up nature of many of the international offices, the
competitiveness of the insurance brokerage business, and the amortization of
goodwill associated with the purchase of the Company's majority holdings of
Swire Blanch. The Company seeks to grow its international profitability through
the integration of systems, services and expertise in order to increase revenue
production and processing efficiencies.
Interest Income
The Company's interest income is derived from two sources: fiduciary investments
and corporate investments. As an intermediary, the Company acts as a conduit for
insurance and reinsurance premiums and loss payments that are paid to and
remitted from clients and reinsurers. Under applicable regulations, the Company
is required to hold fiduciary funds in appropriate bank and investment accounts
subject to restrictions on withdrawals and prohibitions on commingling. The
Company earns interest income on funds held in these accounts. Corporate
interest income represents interest and dividends earned on the investment of
the Company's capital, which is primarily generated from operations.
Year 2000 Issue
BACKGROUND
The Year 2000 issue is the result of computer systems using a two-digit format,
as opposed to four digits, to indicate the year. Computer systems using a
two-digit format will be unable to correctly interpret dates beyond the year
1999, which could cause a system failure or other computer errors, leading to a
disruption in the operation of those systems.
STATE OF READINESS
The Company began reviewing all of its information technology ("IT") systems
developed internally and from outside vendors in the early 1990's because of the
Company's growth and the need to bring about operational improvements. As a
result, the Company decided to develop a new back office processing system and
to implement a new financial and human resource system. All of these systems are
Year 2000 compliant. In 1997, the Company expanded its international operations
through the acquisition of Swire Blanch. Since the acquisition, the Company
began to integrate all worldwide systems into appropriate existing, Year 2000
compliant Company systems. The integration of the Company's IT systems is
expected to be substantially complete by the second quarter of 1999. The
Company's senior management and the Board of Directors receive regular updates
on the status of the Company's Year 2000 readiness.
The Company markets services and software products that are internally developed
or acquired from third party vendors. These software based products and services
were developed using Year 2000 compliant technologies. Software products
developed internally are in various stages of testing for Year 2000 compliance.
The Company has obtained written certifications from the
3
<PAGE>
majority of its third party developers of software marketed by the Company. The
Company is in the process of obtaining written certifications from the few third
party developers that have not responded. The Company expects the process of
confirming Year 2000 compliance for the software that the Company markets to be
substantially complete by the end of March 1999.
INTERFACES WITH THIRD PARTIES
The Company is reviewing, and has initiated formal communications with third
parties that provide goods or services which are essential to the Company's
operations in order to: (1) determine the extent to which the Company is
vulnerable to any failure by such material third parties to remediate their
respective Year 2000 problems; and (2) resolve such problems to the extent
practicable. In May 1998, the Company has requested information from customers
and vendors regarding the status of their Year 2000 compliance. Follow up
requests were sent in December 1998 to those third parties that had not
responded to the Company's initial request or that indicated compliance issues.
A certification letter has been or will be requested from each of our vendors to
validate compliance. The Company has also requested a statement of Year 2000
compliance from companies in which the Company has made capital investments.
INDEPENDENT VERIFICATION AND VALIDATION
All new IT systems implemented, and any subsequent changes to those systems, go
through several layers of testing and validation, including program testing,
systems testing by an independent quality assurance group, user testing, and
lastly, parallel processing with the old system it is replacing. Portions of the
parallel testing process involve validation of automated interfaces and
reporting by the Company's customers.
In addition, the Company has conducted joint testing with Lloyd's of London on
the international back office processing system. The Company's system has passed
all tests and has been certified by Lloyd's of London.
COSTS
In recent years the Company has made significant investments in new IT systems
that are Year 2000 compliant. However, those investments were made for operating
reasons other than strictly Year 2000 compliance. As stated above, these
systems, whether purchased from an outside vendor or developed internally, are
Year 2000 compliant. The schedule to implement these systems has not been
accelerated because of the Year 2000 issue, nor have any other system projects
been deferred because of the Year 2000 issue. Although the Company does not
record or attempt to allocate expenses for these IT systems which relate solely
to Year 2000 compliance, due to their immateriality, the Company believes that
these costs will not exceed $2 million in total. This estimate does not include
the Company's potential share of Year 2000 costs that may be incurred by other
entities in which the Company does not control.
RISKS
The failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially and adversely
4
<PAGE>
affect the Company's results of operations, liquidity and financial condition.
The Company believes that, with the installation of the Year 2000 compliant
systems described above, the possibility of significant interruptions of normal
operations should be substantially reduced. However, due to the general
uncertainty inherent in the Year 2000 problem, resulting in part from the
uncertainty of the Year 2000 readiness of third parties, the Company is
continuing to assess the risks and develop its contingency plans.
CONTINGENCY PLAN
The Company is revising its existing business interruption contingency plans to
address internal and external issues specific to Year 2000 compliance, to the
extent practicable. Such revisions are expected to be completed by April 1,
1999. These plans are intended to enable the Company to continue to operate and
include performing certain processes manually; repairing or obtaining
replacement systems; and changing suppliers. The Company believes, however, that
due to the widespread nature of potential Year 2000 issues, the contingency
planning process is an ongoing one which will require further modifications as
the Company obtains additional information regarding the Company's internal
readiness and the status of third party Year 2000 readiness.
FORWARD-LOOKING STATEMENTS
Readers are cautioned that forward-looking statements contained in the Year 2000
Issue disclosures should be read in conjunction with the Company's disclosures
under the heading: "Forward-Looking Statements" on page 28.
European Monetary Unit
The Company has initiated an analysis of the new European Monetary Unit ("EMU")
and its effects on the Company's business processes and IT system requirements.
The Company's core back office processing and financial systems will be able to
handle the EMU as another currency. However, it is likely that the Company will
have to modify its systems to accommodate decimalization and rounding issues,
currency conversions, and the new reporting requirements of the EMU. The
Company's management believes that the costs associated with upgrading IT
systems and the impact on business processes will be immaterial to the Company's
results of operations, liquidity and financial condition.
Seasonality
The Company has historically realized a greater amount of its annual brokerage
revenue and net income in the first and third quarters due primarily to
semi-annual deposits on property catastrophe reinsurance contracts. The
Company's technical and analytic consulting services are generally not seasonal
in nature. Based upon these factors, and given the increased significance of
these non-seasonal revenue sources, management believes that historical
quarterly results may not be indicative of future period results.
Geographic Segment Information
Due to the integrated nature of the Company's risk management and distribution
business, and
5
<PAGE>
because the primary insurance distribution operations after restructuring are no
longer significant, the Company has re-evaluated its financial reporting by
business segment. The following is a summary of revenues and income before taxes
by geographic segment for the years ended December 31:
- ----------------------------------------------------
Income
(IN THOUSANDS) Revenues Before Taxes
- ----------------------------------------------------
1998
Domestic operations $162,829 $56,047
Foreign operations 49,893 5,283
- ----------------------------------------------------
$212,722 $61,330
====================================================
- ----------------------------------------------------
Income
(IN THOUSANDS) Revenues Before Taxes
- ----------------------------------------------------
1997
Domestic operations $128,954 $38,346
Foreign operations 37,843 4,816
- ----------------------------------------------------
$166,797 $43,162
====================================================
1998 COMPARED TO 1997
Operating Revenue
The following are the components of operating revenue for the years ended
December 31:
(IN THOUSANDS) 1998 1997
- ----------------------------------------------------
Domestic operations $156,339 $122,461
Foreign operations 47,274 35,642
- ----------------------------------------------------
$203,613 $158,103
====================================================
For the year ended December 31, 1998, domestic operating revenue increased $33.9
million, or 27.7% from the prior year primarily as a result of new client
production and a one time gain of $1.0 million before tax, associated with the
disposition of the Company's operations in San Antonio, Texas and other selected
assets.
Foreign operating revenue increased $11.6 million, or 32.6% from the prior year
primarily as the result of new production and the inclusion of twelve months of
activity in 1998, as compared to eleven months of activity in 1997, due to the
acquisition of Swire Blanch in February 1997. Also contributing to the increase
is the acquisitions of Walbaum and Dunn & Carter Ltd. in 1998.
Interest Income
6
<PAGE>
The following are the components of interest income for the years ended December
31:
(IN THOUSANDS) 1998 1997
- ----------------------------------------------------
Domestic operations:
Fiduciary interest income $5,426 $5,591
Corporate interest income 1,063 903
- ----------------------------------------------------
$6,489 $6,494
====================================================
Foreign operations:
Fiduciary interest income $1,986 $1,524
Corporate interest income 634 676
- ----------------------------------------------------
$2,620 $2,200
====================================================
$9,109 $8,694
====================================================
Fiduciary interest income from domestic operations was $5.4 million for the year
ended December 31, 1998 compared to $5.6 million for the prior year, a decrease
of $0.2 million or 3.0%. The average balance of domestic funds for the year
ended December 31, 1998 was $108.6 million (compared to $104.9 million for the
prior year), at an average yield of 5.0% (compared to 5.3% the prior year).
Fiduciary interest income from foreign operations was $2.0 million for the year
ended December 31, 1998 compared to $1.5 million for the prior year, an increase
of $0.5 million or 30.3%. The average balance for foreign funds for the year
ended December 31, 1998 was $39.4 million (compared to $32.7 million for the
prior year), at an average yield of 5.1% (compared to 4.7% the prior year).
Expenses
Domestic operating expenses increased $16.2 million to $106.8 million or 17.9%,
for the year ended December 31, 1998 compared to $90.6 million the prior year.
The increase is due primarily to increased salary and benefits expenses of $10.0
million, or 18.4% due to normal salary progression and business acquisitions
partially offset by the sale of the Company's general agency operations in the
second quarter of 1998. Domestic operations also experienced increases in travel
and marketing and general and administrative expenses. The increased general and
administrative expense is partially due to the consolidation of the Company's
international corporate headquarters to Dallas, Texas in 1998, increased
software amortization and loss on sale of fixed assets from the disposition of
the general agency operations.
Foreign operating expenses increased $11.6 million to $44.6 million or 35.1%,
for the year ended December 31, 1998 compared to $33.0 million the prior year.
Similar to domestic operations, the increase is due primarily to increased
salary and benefits expenses of $6.8 million, or 31.3% due to acquisitions,
business expansion and normal salary progression. In addition, the increase is
caused by twelve months of activity in 1998 as compared to eleven months in 1997
due to the acquisition of Swire Blanch in February 1997.
Profit Margins
7
<PAGE>
Operating profit margins, calculated as income before taxes and allocation of
central costs as a percentage of total revenues, were 33.3% for domestic
operations for the year ended December 31, 1998, compared to 29.7% for the same
period in the prior year.
Operating profit margins were 14.4% for foreign operations for the year ended
December 31, 1998, compared to 12.7% for the same period in the prior year.
Income Taxes
The Company's combined federal and state effective tax rate is 40.3% for the
year ended December 31, 1998 compared to 39.4% for the same period the prior
year. The increase in the tax rate is due to changes in the apportionment of
state taxes and taxes on foreign operations. The Company's effective tax rate
for domestic and foreign operations for the year ended December 31, 1998 was
40.6% and 37.9%, respectively.
1997 COMPARED TO 1996
Operating Revenue
The following are the components of operating revenue for the years ended
December 31:
(IN THOUSANDS) 1997 1996
- ---------------------------------------------------------------
Domestic operations $122,461 $101,822
Foreign operations 35,642 83
- ---------------------------------------------------------------
$158,103 $101,905
===============================================================
For the year ended December 31, 1997, domestic operations operating revenue
increased $20.6 million, or 20.3% from the prior year primarily as a result of
growth in existing accounts and new production.
Foreign operations operating revenue increased $35.6 million from the prior year
as a result of the acquisition of Swire Blanch in February 1997.
Interest Income
The following are the components of interest income for the years ended December
31:
8
<PAGE>
(IN THOUSANDS) 1997 1996
- ----------------------------------------------------
Domestic operations:
Fiduciary interest income $5,591 $4,527
Corporate interest income 903 2,606
- ----------------------------------------------------
$6,494 $7,133
====================================================
Foreign operations:
Fiduciary interest income $1,524 $ --
Corporate interest income 676 --
- ----------------------------------------------------
$2,200 $ --
====================================================
$8,694 $7,133
====================================================
Fiduciary interest income from domestic operations was $5.6 million for the year
ended December 31, 1997 compared to $4.5 million for the prior year, an increase
of $1.1 million or 23.5%. The average balance of domestic funds for the year
ended December 31, 1997 was $104.9 million (compared to $85.0 million for the
prior year), at an average yield of 5.3% (compared to 5.3% the prior year).
Fiduciary interest income from foreign operations was $1.5 million for the year
ended December 31, 1997. The average balance for foreign funds for the year
ended December 31, 1997 was $32.7 million at an average yield of 4.7%.
Expenses
Domestic operating expenses decreased $8.2 million to $90.6 million, or 8.3%,
for the year ended December 31, 1997 compared to $98.8 the prior year. The
decrease in expenses is primarily the result of the $22.75 million restructuring
charge recorded in the fourth quarter of fiscal 1996. This decrease is offset by
increases in salaries and benefits expenses including normal salary progression,
increased employee benefit cost and an increase of employees as of December 31,
1997 compared to the prior year. The increase in employees is due to increased
business levels and businesses acquired or started during 1996. Domestic
operations also experienced increases in travel and marketing and general and
administrative expenses offset by a reduction in goodwill amortization, the
result of the goodwill writedown recorded in fiscal 1996.
Operating expenses for the eleven months of international operations included in
the year ended December 31, 1997 were $33.0 million. Similar to the Company's
domestic operations, approximately two-thirds of these expenses relate to
salaries and benefits for employees.
Profit Margins
Operating profit margins, calculated as income before taxes and allocation of
central costs as a percentage of total revenues, were 29.7% for domestic
operations for the year ended December 31, 1997, compared to 9.3% for the same
period in the prior year.
Operating profit margins were 12.7% for foreign operations for the eleven months
ended December 31, 1997. Due to limited operations the profit margin for foreign
operations for the year ended December 31, 1996 is not meaningful.
9
<PAGE>
Income Taxes
The Company's combined federal and state effective tax rate for its consolidated
operations was 39.4% for the year ended December 31, 1997, compared to 38.7% for
the same period the prior year.
LIQUIDITY AND CAPITAL RESOURCES
The Company's sources of funds consist primarily of brokerage commissions and
fees and interest income. Funds are applied generally to the payment of
operating expenses, the purchase of equipment used in the ordinary course of
business, the repayment of outstanding indebtedness, and the distribution of
earnings. The Company's cash and cash equivalents were $0.7 million at December
31, 1998, compared with $11.6 million in the prior year.
The Company generated $41.8 million of cash from operations in 1998,
compared with $34.3 million in 1997. The increase in operating cash flow in 1998
is primarily due to the increase in net income compared to the prior year and
the timing of changes in operating assets and liabilities.
Cash flow used in investing activities was $44.5 million in 1998. During 1998,
the Company received net proceeds of $2.5 million from the sale of its San
Antonio, Texas operations. The Company also used $19.5 million of cash for the
purchase of property and equipment, primarily computerized systems. The Company
intends to increase its investment in such systems. The Company used $28.5
million to acquire K2, Dunn & Carter and various unconsolidated subsidiaries in
1998. The Company also used $4.7 million for the purchase of available for sale
investments. The Company received proceeds from the sale of available for sale
investments from its investment portfolio of $5.7 million. During 1997, the
Company received net proceeds of $15.1 million from the sale of its premium
finance operations.
Cash flow used in financing activities was $8.2 million in 1998. During 1998,
the primary sources of cash from financing activities were proceeds of $5.1
million from the issuance of treasury shares used to fund employee benefit plans
and net borrowings less repayments on lines of credit of $4.0 million. The
primary uses of cash were $6.8 million for the repayment on long-term debt, $5.8
million of dividends paid to shareholders and $4.3 million for the purchase of
treasury stock. In 1997, net cash used by financing activities included $14.6
million used to purchase treasury stock from its Chairman and Chief Executive.
The Company's long-term investment portfolio at December 31, 1998 was $18.4
million, which is comprised of equity and debt investments. These investments
are classified as available for sale. The market value of the Company's
investment portfolio at December 31, 1998 was $1.7 million above cost. The
Company's investment in unconsolidated subsidiaries at December 31, 1998 was
$20.0 million. The Company's trading portfolio at December 31, 1998 was $5.2
million, which is comprised of debt investments. The market value of the
Company's trading portfolio at December 31, 1998 was $0.1 million above cost.
Cash, investments and the Company's lines of credit are available and managed
for the payment of its operating and capital
10
<PAGE>
expenditures. The Company is not subject to any significant regulatory capital
requirements in connection with its business.
In November, 1998, the Company terminated its prior credit facility and executed
a new $100 million revolving credit facility with several banks that will be
used to fund general corporate requirements. The new facility, which expires in
2001, carries market rates of interest which may vary depending upon the
Company's degree of leverage. Commitment fees of .200% to .375% are payable on
any unused portion. The facility contains several financial covenants and
restrictions related to acquisitions, payment of dividends and sales of assets.
Covenants contained in the agreement require the Company to exceed minimum
levels of net worth and meet a fixed charge ratio. The Company is currently in
compliance with all of its covenants governing its indebtedness. The Company had
$5.2 million outstanding under this credit facility at December 31, 1998 at a
rate of 7.75%. The Company had $1.2 million outstanding at December 31, 1997
under the previous facility at a rate of 7.75%.
The Company also has a (pound)7.0 million revolving credit facility with
Midland Bank which translates to $11.6 million at December 31, 1998. As of
December 31, 1998, the Company had $5.0 million outstanding under this facility.
The interest rate is 0.35% above the London Inter Bank Offer Rate ("LIBOR"). In
addition, the Company has a HK$7.1 million revolving credit facility with
Midland Bank which translates to $0.9 million at December 31, 1998. The entire
$0.9 million was outstanding at December 31, 1998. The interest rate is 0.32%
above the Hong Kong Inter Bank Offer Rate ("HIBOR"). These two facilities were
renewed in January 1999, for twelve months.
The Company paid a quarterly dividend of $0.10 per share in 1997 and in the
first quarter of 1998. In April 1998, the Board of Directors increased the
quarterly dividend to $0.12 per share. The Company intends to continue paying
quarterly dividends subject to declaration by the Board of Directors.
The Company believes that its cash and investments, combined with its borrowing
facilities and internally generated funds, will be sufficient to meet its
present and reasonably foreseeable long-term capital needs.
MARKET RISK
The Company is exposed to market risk from changes in interest rates and changes
in foreign currency exchange rates as measured against the United States dollar.
The Company believes its exposure to market risk in certain geographic areas
that have experienced or are likely to experience an economic downturn, such as
the Pacific Rim and Latin America, is minimal. The Company has established
policies, procedures and internal processes governing its management of market
risks and the use of financial instruments to manage its exposure to all such
risks.
The Company is exposed to market risk for changes in interest rates related to
the increase or decrease in the amount of investment income the Company can earn
on its fixed income investment portfolios. The Company invests in high-credit
quality issuers and, by policy, limits the amount of credit exposure to any one
issuer. As stated in its policy, the Company maximizes the safety and
preservation of its invested principal funds by limiting default risk, market
risk and reinvestment risk. The Company mitigates default risk by investing in
safe and high-credit
11
<PAGE>
quality securities. These portfolios include only marketable securities with
active secondary or resale markets to ensure portfolio liquidity. The Company
does not use derivative financial instruments in its investment portfolios. A
large portion of the Company's financial instruments are in fiduciary securities
classified as fiduciary assets on the Company's balance sheet. Fiduciary fund
investments carry interest rate risk to the Company because they generate
interest revenues to the Company.
The Company has various fiduciary assets in several countries other than the
United States and Great Britain. The balances in these assets are very small in
each country and any foreign currency rate fluctuation would have an immaterial
effect on the Company's results. At December 31, 1998, the aggregate amount of
these assets was $6.7 million.
Additionally, the Company is exposed to interest rate risk through its
borrowings under its secured and unsecured revolving credit facilities.
Information about the Company's borrowing arrangements, including principal
amounts and related interest rates, appears in Note 7 to the Consolidated
Financial Statements included herein.
Exposure to variability in foreign currency exchange rates is managed, where
possible, through the use of natural hedges, whereby funding obligations and
assets are entered in matched currencies. The Company, from time to time, enters
into foreign currency exchange forward agreements to manage its British pound
exposure arising from fluctuating exchange rates. As the Company expands
globally, the risk of foreign currency exchange rate fluctuation may increase.
If that occurs, the Company will consider appropriate measures to manage that
risk.
The following table summarizes the Company's interest rate and foreign currency
exchange rate sensitive financial instruments by expected maturity date as of
December 31, 1998.
12
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL (NOTIONAL) AMOUNT BY EXPECTED MATURITY DATE
--------------------------------------------------------------------------------
FAIR VALUE
(U.S. $ IN THOUSANDS) 1999 2000 2001 2002 2003 THEREAFTER TOTAL 12/31/98
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST RATE RISK:
Trading Portfolio Debt Instruments:
Fixed Rate Securities $ 351 $ 342 $1,157 $ -- $ 570 $2,825 $ 5,245 $ 5,245
--------------------------------------------------------------------------------
Average interest rate 7.00% 5.87% 6.97% -- 5.62% 6.18% 6.39% 6.39%
Non Trading Portfolio Debt Instruments:
Domestic Fiduciary Fixed Rate Securities 31,632 21,175 6,224 2,120 -- -- 61,151 61,151
--------------------------------------------------------------------------------
Average interest rate 5.20% 5.20% 5.75% 6.26% -- -- 5.29% 5.29%
Domestic Fiduciary Variable Rate Securities 27,178 -- -- -- -- -- 27,178 27,178
--------------------------------------------------------------------------------
Average interest rate 4.28% -- -- -- -- -- 4.28% 4.28%
Foreign Fiduciary Variable Rate Securities 35,909 -- -- -- -- -- 35,909 35,909
--------------------------------------------------------------------------------
Average interest rate 5.05% 5.05% 5.05%
Revolving Credit Facilities 11,112 -- -- -- -- -- 11,112 11,112
--------------------------------------------------------------------------------
Average interest rate 6.50% 6.50% 6.50%
- -----------------------------------------------------------------------------------------------------------------------------------
FOREIGN EXCHANGE RATE RISK:
British Pound Sterling Hedge Contract $ 5,000 $ -- $ -- $ -- $ -- $ -- $ 5,000 $ 5,000
--------------------------------------------------------------------------------
Average forward foreign currency
exchange rate $ 1.605 $ 1.605 $1.605
British Pound Sterling Denominated
Revolving Credit Facility 4,991 -- -- -- -- -- 4,991 4,991
--------------------------------------------------------------------------------
Average forward foreign currency
exchange rate $ 1.664 $ 1.664 $1.664
Hong Kong Dollar Denominated
Revolving Credit Facility 888 -- -- -- -- -- 888 888
--------------------------------------------------------------------------------
Average forward foreign currency
exchange rate $ 0.125 $ 0.125 $ 0.125
British Pound Sterling Denominated
Fiduciary Variable Rate Securities 7,284 -- -- -- -- -- 7,284 7,284
--------------------------------------------------------------------------------
Average forward foreign currency
exchange rate $ 1.664 $ 1.664 $1.664
All Other Foreign Operations Foreign Denominated
Fiduciary Variable Rate Securities 6,692 -- -- -- -- -- 6,692 6,692
--------------------------------------------------------------------------------
Average forward foreign currency
exchange rate various various various
</TABLE>
FORWARD-LOOKING STATEMENTS
Statements other than historical information contained in this Annual Report are
considered forward-looking and involve a number of risks and uncertainties.
Forward-looking statements are made pursuant to the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995. There are certain
important factors that could cause results to differ materially from those
anticipated by some of the statements made above. In addition to the risk
factors discussed, among the other factors that could cause actual results to
differ materially are the following: market dynamics, interest rate changes,
regulatory changes, competition, and the failure of the Company and its
subsidiaries or significant third parties to achieve Year 2000 compliance or
material expense in connection with such compliance. Additional information
concerning those and other factors are contained in the Company's Securities and
Exchange Commission filings, including but not limited to the current Form 10-K,
copies of which are available from the Company without charge.
13
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
E. W. Blanch Holdings, Inc.
We have audited the accompanying consolidated balance sheets of E.W. Blanch
Holdings, Inc. as of December 31, 1998 and 1997, and the related consolidated
statements of income, shareholders' equity and cash flows for each of the three
years in the period ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of E. W.
Blanch Holdings, Inc. at December 31, 1998 and 1997, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1998, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
Dallas, Texas
January 20, 1999
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES:
Operations $ 203,613 $ 158,103 $ 101,905
Interest income 9,109 8,694 7,133
- ----------------------------------------------------------------------------------------------------------------------
Total revenues 212,722 166,797 109,038
EXPENSES:
Salaries and benefits 92,652 75,908 44,762
Travel and marketing 15,671 13,681 7,569
General and administrative 38,147 29,711 20,387
Amortization of goodwill 3,237 3,009 3,078
Interest and other expense 1,685 1,326 231
Restructuring charge -- -- 22,750
- ----------------------------------------------------------------------------------------------------------------------
Total expenses 151,392 123,635 98,777
- ----------------------------------------------------------------------------------------------------------------------
Income before taxes 61,330 43,162 10,261
Income taxes 24,741 17,008 3,970
- ----------------------------------------------------------------------------------------------------------------------
Net income before minority interest & equity interest in loss of unconsolidated
subsidiaries 36,589 26,154 6,291
Minority interest, net of tax 995 451 --
Equity interest in loss of unconsolidated subsidiaries, net of tax 3,831 -- --
======================================================================================================================
Net Income $ 31,763 $ 25,703 $ 6,291
======================================================================================================================
Net income per common share - basic $ 2.51 $ 2.03 $ 0.48
Net income per common share - assuming dilution 2.42 1.99 0.48
======================================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES.
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AT DECEMBER 31,
(IN THOUSANDS) 1998 1997
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS:
Cash and cash equivalents $ 707 $ 11,608
Due from fiduciary accounts 41,551 30,874
Prepaid insurance 1,141 1,471
Investments, trading portfolio 5,245 --
Other current assets 13,603 7,428
- ---------------------------------------------------------------------------------------------------
Total current assets 62,247 51,381
Long-term investments, available for sale 18,427 14,939
Investment in unconsolidated subsidiaries 20,014 --
Property and equipment, net 32,420 26,309
Intangibles, net 30,425 34,916
Other assets 8,805 11,772
Fiduciary accounts - assets 760,918 780,450
- ---------------------------------------------------------------------------------------------------
Total assets $ 933,256 $ 919,767
===================================================================================================
LIABILITIES, MINORITY INTEREST AND SHAREHOLDERS' EQUITY:
LIABILITIES:
Accrued compensation $ 9,865 $ 6,628
Notes payable to banks under lines of credit 11,112 1,379
Accounts payable 16,950 14,420
Current portion of long-term liabilities 289 1,664
Other current liabilities 10,119 12,942
- ---------------------------------------------------------------------------------------------------
Total current liabilities 48,335 37,033
Long-term debt, less current portion 557 13,675
Other liabilities, less current portion 9,177 10,536
Commitments and contingencies -- --
Fiduciary accounts - liabilities 760,918 780,450
- ---------------------------------------------------------------------------------------------------
Total liabilities 818,987 841,694
MINORITY INTEREST: 3,632 1,621
SHAREHOLDERS' EQUITY:
Common stock - par value $0.01 per share
(authorized 30,000,000 shares; issued and outstanding:
14,141,671 shares in 1998 and 1997) 141 141
Additional paid in capital 56,996 52,769
Treasury stock (1,299,714 shares in 1998 and 1,562,230 shares in 1997) (26,598) (29,563)
Accumulated other comprehensive income:
Cumulative translation adjustment 53 (37)
Unrealized gain on investments, net of tax 1,274 300
- ---------------------------------------------------------------------------------------------------
Total accumulated other comprehensive income 1,327 263
Retained earnings 78,771 52,842
- ---------------------------------------------------------------------------------------------------
Total shareholders' equity 110,637 76,452
- ---------------------------------------------------------------------------------------------------
Total liabilities, minority interest and shareholders' equity $ 933,256 $ 919,767
===================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES.
<PAGE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Common Stock
----------------------------- Additional
Amount Number of Paid-in
$0.01 Par Value Shares Capital
-------------------------------------------
<S> <C> <C> <C>
December 31, 1995 $141 14,142 $52,723
Other change in additional paid-in capital 46
Issuance of treasury stock under employee benefit plans
Comprehensive income, net of tax
Net income
Unrealized loss on investment
Comprehensive income, net of tax
Dividends declared on common stock
-------------------------------------------
December 31, 1996 141 14,142 52,769
Issuance of treasury stock under employee benefit plans
Purchase of treasury stock
Comprehensive income, net of tax
Net income
Foreign currency translation adjustment
Unrealized loss on investment
Comprehensive income, net of tax
Dividends declared on common stock
-------------------------------------------
December 31, 1997 141 14,142 52,769
Tax benefit of non-qualified options exercised 988
Excess fair market value over cost of non-qualified options exercised 3,231
Stock granted to employees 8
Issuance of treasury stock under employee benefit plans
Purchase of treasury stock
Net income
Other comprehensive income, before tax:
Foreign currency translation adjustment
Holding gain arising during period
Reclassification adjustment
Other comprehensive income, before tax
Income tax expense related to other comprehensive income
Other comprehensive income, net of tax
Comprehensive income, net of tax
Dividends declared on common stock
-------------------------------------------
December 31, 1998 $141 14,142 $56,996
===========================================
</TABLE>
[WIDE TABLE CONTINUED FROM ABOVE]
<TABLE>
<CAPTION>
Treasury Stock Accumulated
--------------------- Other Total
Number of Comprehensive Retained Shareholders'
Amount Shares Income Earnings Equity
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
December 31, 1995 ($17,370) (932) ($59) $31,244 $66,679
Other change in additional paid-in capital 46
Issuance of treasury stock under employee benefit plans 1,004 50 1,004
Comprehensive income, net of tax
Net income 6,291 6,291
Unrealized loss on investment (270) (270)
================
Comprehensive income, net of tax 6,021
================
Dividends declared on common stock (5,297) (5,297)
------------------------------------------------------------------
December 31, 1996 (16,366) (882) (329) 32,238 68,453
Issuance of treasury stock under employee benefit plans 1,353 69 1,353
Purchase of treasury stock (14,550) (750) (14,550)
Comprehensive income, net of tax
Net income 25,703 25,703
Foreign currency translation adjustment (37) (37)
Unrealized loss on investment 629 629
================
Comprehensive income, net of tax 26,295
================
Dividends declared on common stock (5,099) (5,099)
------------------------------------------------------------------
December 31, 1997 (29,563) (1,563) 263 52,842 76,452
Tax benefit of non-qualified options exercised 988
Excess fair market value over cost of non-qualified options
exercised 3,231
Stock granted to employees 8
Issuance of treasury stock under employee benefit plans 7,291 381 7,291
Purchase of treasury stock (4,326) (118) (4,326)
Net income 31,763 31,763
Other comprehensive income, before tax:
Foreign currency translation adjustment 148 148
Holding gain arising during period 2,929 2,929
Reclassification adjustment (1,332) (1,332)
---------------- -------------
Other comprehensive income, before tax 1,745 1,745
Income tax expense related to other comprehensive income (681) (681)
---------------- -------------
Other comprehensive income, net of tax 1,064 1,064
---------------- -------------
Comprehensive income, net of tax 32,827
Dividends declared on common stock (5,834) (5,834)
------------------------------------------------------------------
December 31, 1998 ($26,598) (1,300) $1,327 $78,771 $110,637
==================================================================
</TABLE>
THE INCOME TAX EXPENSE OR (BENEFIT) FOR EACH COMPONENT OF OTHER COMPREHENSIVE
INCOME FOR 1998 IS AS FOLLOWS: FOREIGN CURRENCY TRANSLATION ADJUSTMENT $58;
HOLDING GAIN ARISING DURING PERIOD $1,142 AND RECLASSIFICATION ADJUSTMENT
$(519).
SEE ACCOMPANYING NOTES.
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31, (in thousands) 1998 1997 1996
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 31,763 $ 25,703 $ 6,291
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Depreciation and amortization 12,123 8,554 6,095
Deferred income tax provision (benefit) 8,241 233 (8,176)
Restructuring charge -- -- 22,750
Non-cash compensation expense 3,043 1,125 --
CHANGES IN OPERATING ASSETS AND LIABILITIES;
Due from fiduciary accounts (12,300) (11,171) (9,087)
Other current assets (6,392) (2,009) (2,687)
Accrued compensation 3,375 2,452 746
Accounts payable and other current liabilities 5,596 8,931 406
Purchases of trading portfolio investments (9,267) -- --
Sales of trading portfolio investments 5,747 -- --
Other, net (90) 461 (725)
- -------------------------------------------------------------------------------------------------
Net cash provided by operating activities 41,839 34,279 15,613
INVESTING ACTIVITIES:
Purchases of investments, available for sale (4,741) (5,919) (3,627)
Sales of investments, available for sale 5,702 1,118 596
Purchases of property and equipment, net (19,510) (12,907) (4,654)
Issuance of finance notes receivable, net -- (14) (2,756)
Acquisition of unconsolidated subsidiaries and consolidated
subsidiaries, net of cash acquired (28,487) 480 --
Sale of subsidiary 2,500 15,092 --
Other, net (11) (147) (82)
- -------------------------------------------------------------------------------------------------
Net cash used in investing activities (44,547) (2,297) (10,523)
FINANCING ACTIVITIES:
Dividends paid (5,834) (5,099) (5,297)
Proceeds from issuance of treasury shares
related to employee stock plans 5,126 228 1,004
Purchase of treasury stock (4,326) (14,550) --
Net (repayments) borrowings on lines of credit 4,000 (140) (3,203)
Payments on long-term debt (6,808) (2,353) (1,288)
Other financing activities, net (351) 471 (214)
- -------------------------------------------------------------------------------------------------
Net cash used in financing activities (8,193) (21,443) (8,998)
=================================================================================================
Net increase (decrease) in cash and cash equivalents (10,901) 10,539 (3,908)
Cash and cash equivalents at beginning of year 11,608 1,069 4,977
- -------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 707 $ 11,608 $ 1,069
=================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1 ORGANIZATION AND BASIS OF PRESENTATION
E. W. Blanch Holdings, Inc. and its subsidiaries ("the Company") and its
predecessor organizations have been in operation since 1957. The consolidated
financial statements include the accounts of the Company and its wholly and
majority owned subsidiaries. The Company categorizes its business operations
into two geographic segments, domestic operations and foreign operations, which
include the Company's 70% equity interest in Swire Blanch.
Nature of Business
The Company is a provider of risk management and distribution services to
insurance and reinsurance companies. These services are sold both on a bundled
and a component basis. Major components provided include reinsurance
intermediation and technical, analytic and financial consulting services. As a
reinsurance intermediary, the Company structures and arranges reinsurance
between insurers seeking to cede insurance risks and reinsurers willing to
assume such risks. The Company receives and disburses funds for premium and loss
transactions under reinsurance contracts on behalf of insurance and reinsurance
companies, and provides reinsurance transaction reporting and reinsurance
consulting services. The Company earns revenues from the structuring, placement
and servicing of reinsurance, primarily on a treaty basis. The Company also
earns fees from providing technical, analytic, financial and pension consulting
services.
Investment income is earned from the temporary investment of fiduciary
funds held by the Company, and from investments owned by the Company.
2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts and
operations of the Company and its wholly and majority owned subsidiaries. All
material intercompany accounts and transactions have been eliminated.
Use of Estimates in Preparation of Financial Statements
1
<PAGE>
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting periods.
Actual results could differ from those estimates.
Revenue Recognition
Reinsurance and insurance brokerage is recognized as premium reports or deposit
premiums are due. Any subsequent adjustments, including cancellations, are
recognized upon notification from the ceding companies, unless these amounts are
subject to reasonable estimation by the Company.
Primary insurance distribution commissions and fees are recognized when the
underlying premiums are invoiced, provided that substantially all services
relating to the placement of the insurance are complete, the policy premium is
known or can be reasonably estimated and coverage is provided under the
insurance policy. Any adjustments to commissions, primarily from cancellations,
are estimated when the initial commission on the policy is recognized.
Risk management fees and financial and pension consultancy commissions and
fees are recognized during the period when services are provided or according to
the terms specified in the contract.
Financial Instruments
Management has classified its investments in debt and equity securities as
either for trading purposes or as available for sale. The Company's trading
portfolio is carried at fair value and the corresponding unrealized holding
gains or losses are recognized in earnings for the period. The Company's
available for sale portfolio is carried at fair value and the corresponding
unrealized gains or losses, net of applicable deferred taxes, are recognized as
a separate component of shareholders' equity. Fair values are generally based on
quoted market prices. Where an active market does not exist, fair values of debt
securities and equity securities are based on the most recent financial
statements. Realized gains and losses on sales of investments are determined
using the specific identification method.
Financial instruments held by the Company other than investments include
notes receivable, notes payable to banks, and long-term debt. These instruments
are carried at their net unpaid principal balances which approximate fair value.
2
<PAGE>
Investment in Unconsolidated Subsidiaries
Equity investments over which the Company has the ability to exercise
significant influence, generally determined by ownership of 20 percent or more
of the voting stock of the investee, are accounted for under the equity method.
The equity method requires the investment initially to be recorded at cost and
subsequently increased (decreased) for the Company's share of net income (loss),
including eliminations for the Company's share of inter-company transactions and
amortization of goodwill, and reduced when dividends are received.
Cash and Cash Equivalents
The Company considers investments in money market funds to be cash equivalents.
The carrying amount of cash and cash equivalents reported in the balance sheet
approximates fair value.
Depreciation and Amortization
Fixed assets are recorded at cost and are depreciated on a straight-line basis
over the estimated useful lives of the respective assets. Leasehold improvements
are amortized on a straight-line basis over the life of the improvement or the
remaining term of the respective lease, whichever is shorter. Amortization of
amounts capitalized under capital leases is included with depreciation expense.
Intangibles
The Company has intangible assets consisting of goodwill and software license
fees. The Company acquired a software license in 1998 for $2.5 million. Software
licenses are amortized over the remaining estimated economic life of the product
using the greater of the straight-line method or the amount computed by
comparing period revenues to total expected product revenues. The software
license balance is currently being amortized over five years. Accumulated
amortization of the software license at December 31, 1998 was $0.1 million.
Unamortized software license fees at December 31, 1998 were $2.4 million.
The excess of cost over the fair value of net assets acquired (or goodwill)
is amortized on a straight-line basis over its estimated useful life. Initial
amortization periods range from 5 to 20 years. Accumulated amortization of
goodwill at December 31, 1998 and 1997 was $40.0 million and $36.8 million,
respectively, including amounts attributable to the Swire Blanch minority
interest. The Company eliminated $6.9 million of goodwill in relation to the
sale of its general agency operations in the second quarter of
3
<PAGE>
1998. Management annually reviews the recoverability of intangibles using
undiscounted cash flow modeling. A write-down is recorded when the sum of the
expected future net cash flows is less than the book value (See Note 3).
Fiduciary Accounts
As an intermediary, the Company acts as a conduit for insurance and reinsurance
premiums and loss payments which are paid to and remitted from fiduciary
accounts. Receivables and payables for premiums and losses under reinsurance
contracts are recorded in the fiduciary accounts when due or reported. The
majority of the fiduciary account assets and liabilities represent receivables
and corresponding payables between insurers and reinsurers. Reinsurance and
insurance brokerage, fiduciary interest income and reimbursement of loss
advances by the Company are transferred periodically from the fiduciary accounts
to the Company's bank accounts.
In accordance with applicable regulations, the Company maintains cash
resulting from fiduciary transactions in separate bank and investment accounts.
The balances and weighted average interest rates in these accounts were $128.6
million and 4.99%, and $117.2 million and 5.65% at December 31, 1998 and 1997,
respectively.
Foreign Currency Translation
The Company's primary functional currency is the U.S. dollar. The functional
currency of the Company's foreign operations is the applicable local currency.
The Company translates income and expense accounts at the average rate in effect
for the period. Balance sheet accounts are translated at the period end exchange
rate. Adjustments resulting from the balance sheet translation are reflected in
Shareholder's Equity.
Income Taxes
The Company files a consolidated federal income tax return. Deferred taxes are
recognized for all temporary differences between the tax and financial reporting
basis of the Company's assets and liabilities using tax rates in effect for the
year in which the differences are expected to reverse.
Earnings Per Share
In 1997, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standard ("SFAS") No. 128, "Earnings per Share". SFAS No.128 replaced
4
<PAGE>
the calculation of primary and fully diluted earnings per share with basic
earnings per share and earnings per share assuming dilution. Unlike primary
earnings per share, basic earnings per share excludes any dilutive effects of
options, warrants and convertible securities. Earnings per share assuming
dilution is very similar to the previously reported fully diluted earnings per
share. Earnings per share amounts for all periods have been restated to conform
to the SFAS No. 128 requirements.
Stock Based Compensation
In accordance with SFAS No. 123, "Accounting for Stock Based Compensation" the
Company continues to follow Accounting Principles Board Opinion ("APB") No. 25,
"Accounting for Stock Issued to Employees", and the related interpretations in
accounting for its stock options. The disclosures required by SFAS No. 123 have
been included in the accompanying notes to the Company's financial statements.
Software Development Costs
In March 1998, the Accounting Standards Executive Committee issued Statement of
Position ("SOP") 98-1 "Accounting for Computer Software Developed For or
Obtained For Internal-Use". The SOP is effective for financial statements for
fiscal years beginning after December 15, 1998 and requires capitalizing certain
costs related to internally developed software. The SOP encourages early
application and the Company has elected to do so. The Company's 1998 financial
statements reflect accounting for its internal software in accordance with SOP
98-1. The impact of adopting SOP 98-1 was immaterial to the Company's results of
operations.
Other New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information", which has
been adopted by the Company for the period ending December 31, 1998. This
statement establishes standards for the way that public business enterprises
report information about operating segments in annual financial statements and
requires selected information to be disclosed in interim financial reports
issued to shareholders. See Footnote 15, "Business Segment Information", for
disclosure about the Company's operating segments.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities", which is
required to be adopted in years beginning after June 15, 1999. The Statement
permits early adoption as of the beginning of any fiscal quarter after its
issuance. The Statement will require the Company to recognize all derivatives on
the balance sheet at fair value. Derivatives that are not hedges must be
adjusted to fair value through income. If the derivative is a hedge, depending
on the nature of the hedge, changes in the fair value of derivatives will either
be offset against the change in fair value of the hedged assets, liabilities, or
firm
5
<PAGE>
commitments through earnings or recognized in other comprehensive income until
the hedged item is recognized in earnings. The ineffective portion of a
derivative's change in fair value will be immediately recognized in earnings.
While an analysis is not complete, based on the Company's derivative positions
at December 31, 1998, management does not anticipate that the adoption of the
new Statement will have a significant effect on earnings or the financial
position of the Company. Because the standard allows certain foreign currency
transactions to be accounted for as hedges for financial reporting purposes that
were not previously treated as hedges, the Company may change its policies
toward the management of certain foreign currency exposures. Any changes that
may occur would be to further reduce the Company's exposure to foreign currency
risks.
Reclassifications
Certain prior year amounts have been reclassified to conform with the current
year presentation.
3 RESTRUCTURING CHARGE
During the fourth quarter of 1996, the Company recorded a $22.75 million
restructuring charge for its San Antonio based managing general agency
operations. The charge included a $19.5 million write-down of goodwill
associated with the 1994 acquisition of the Elton George Companies and a $3.25
million reserve for restructuring of the San Antonio operation and its related
lease expense. In 1996, this charge reduced earnings per share for the quarter
and year by $1.05.
6
<PAGE>
4 INVESTMENTS
The Company's investments at December 31 are summarized as follows:
1998
AVAILABLE FOR SALE
Gross Unrealized Fair
(IN THOUSANDS) Cost Gains (Losses) Value
- -------------------------------------------------------------------------------
Debt Investments $ 6,382 $ -- $ -- $ 6,382
Equity Investments 10,302 2,150 (407) 12,045
- -------------------------------------------------------------------------------
$ 16,684 2,150 (407) 18,427
===============================================================================
TRADING
Gross Unrealized Fair
(IN THOUSANDS) Cost Gains (Losses) Value
- -------------------------------------------------------------------------------
Debt Investments $ 5,147 $ 98 $ -- $ 5,245
Equity Investments -- -- -- --
- -------------------------------------------------------------------------------
$ 5,147 98 -- 5,245
===============================================================================
TOTAL
Gross Unrealized Fair
(IN THOUSANDS) Cost Gains (Losses) Value
- -------------------------------------------------------------------------------
Debt Investments $ 11,529 $ 98 $ -- $ 11,627
Equity Investments 10,302 2,150 (407) 12,045
- -------------------------------------------------------------------------------
$ 21,831 2,248 (407) 23,672
===============================================================================
1997
AVAILABLE FOR SALE
Gross Unrealized Fair
(IN THOUSANDS) Cost Gains (Losses) Value
- -------------------------------------------------------------------------------
Debt Investments $ 9,872 $ 3 $ (7) $ 9,868
Equity Investments 4,681 623 (233) 5,071
- -------------------------------------------------------------------------------
$ 14,553 626 (240) 14,939
===============================================================================
TRADING
Gross Unrealized Fair
(IN THOUSANDS) Cost Gains (Losses) Value
- -------------------------------------------------------------------------------
Debt Investments $ -- $ -- $ -- $ --
Equity Investments -- -- -- --
- -------------------------------------------------------------------------------
$ -- $ -- $ -- $ --
===============================================================================
TOTAL
Gross Unrealized Fair
(IN THOUSANDS) Cost Gains (Losses) Value
- -------------------------------------------------------------------------------
Debt Investments $ 9,872 $ 3 $ (7) $ 9,868
Equity Investments 4,681 623 (233) 5,071
- -------------------------------------------------------------------------------
$ 14,553 626 (240) 14,939
===============================================================================
Gross gains realized on the sales of investments were $1.4 million for the
year ended December 31, 1998. Gross losses realized on the sales of investments
were $0.1 million and $0.2 million for the years ended December 31, 1998 and
1997, respectively.
The cost and fair values of debt securities at December 31, 1998, by contractual
maturity, are summarized as follows:
Fair
(IN THOUSANDS) Cost Value
- -------------------------------------------------------------------------------
Due in one year or less $ 1,833 $ 1,832
Due after one year through five years 2,628 2,667
Due after five years 7,068 7,128
- -------------------------------------------------------------------------------
$ 11,529 $ 11,627
===============================================================================
7
<PAGE>
Equity investments over which the Company has the ability to exercise
significant influence, generally determined by ownership of 20 percent or more
of the voting stock of the investee, are accounted for under the equity method.
The equity method requires the investment initially to be recorded at cost and
subsequently increased (decreased) for the Company's share of net income (loss),
including eliminations for the Company's share of inter-company transactions and
amortization of goodwill, and reduced when dividends are received.
The following table summarizes investments accounted for under the equity
method with their respective percentage of ownership, equity in net assets at
acquisition and carrying value as of December 31, 1998.
PERCENTAGE
OF COMMON EQUITY IN CARRYING
(IN THOUSANDS) STOCK OWNED NET ASSETS VALUE
- -------------------------------------------------------------------------------
Catastrophe Risk Exchange, Inc.(1) 50% $ 1,737 $ 5,408
Insurance Holdings of America, Inc.(1) 24% 6,704 13,040
MSTC Blanch S.A.(1) 35% 180 1,566
-------------------------
Total Investment in Unconsolidated Subsidiaries $ 8,621 $ 20,014
=========================
(1) The difference between the initial cost and the equity in net assets is
being amortized over 20 years.
The investments in unconsolidated subsidiaries were immaterial to the
Company's consolidated assets and revenues for 1998.
5 PROPERTY AND EQUIPMENT
The Company's property and equipment at December 31 is summarized as follows:
(in thousands) 1998 1997
- ------------------------------------- ------- -------
Office computer hardware and software $37,513 $23,040
Office furniture and equipment 14,419 19,274
Leasehold improvements 5,101 3,940
Automobiles 1,312 1,419
------- -------
58,345 47,673
Less accumulated depreciation
and amortization (25,925) (21,364)
------- -------
$32,420 $26,309
The Company's depreciation expense was $4.1 million, $4.0 million, and $2.0
million for 1998, 1997, and 1996 respectively.
8
<PAGE>
6 LONG-TERM DEBT
The Company's long-term debt at December 31 is summarized as follows:
(IN THOUSANDS) 1998 1997
- -------------------------------------------------------------------------------
Notes payable with annual payments through January 1999,
variable rate -- $ 12,661
Loan stock with annual payments through January 1999,
variable rate -- 1,494
Capital lease obligations 846 1,184
- -------------------------------------------------------------------------------
846 15,339
Less current portion (289) (1,664)
- -------------------------------------------------------------------------------
$ 557 $ 13,675
===============================================================================
Maturities of long-term debt are summarized as follows:
(IN THOUSANDS)
- -------------------------------------------------------------------------------
1999 $ 289
2000 308
2001 249
- -------------------------------------------------------------------------------
7 LINES OF CREDIT
In November 1998, the Company terminated its prior domestic credit facility with
Norwest and executed a new $100 million revolving credit facility with several
banks that will be used to fund general corporate requirements. The new
facility, which expires in 2001, carries market rates of interest which may vary
depending upon the Company's degree of leverage. Commitment fees of .200% to
.375% are payable on any unused portion. The facility contains several financial
covenants and restrictions related to acquisitions, payment of dividends and
sales of assets. Covenants contained in the agreement require the Company to
exceed minimum levels of net worth and meet a fixed charge ratio. The Company is
currently in compliance with all of its covenants governing its indebtedness.
The Company had $5.2 million outstanding under this credit facility at December
31, 1998 at a rate of 7.75%.
The Company also has a (pound)7.0 million revolving credit facility with
Midland Bank which translates to $11.6 million at December 31, 1998. As of
December 31, 1998, the Company had $5.0 million outstanding under this facility.
The interest rate is 0.35% above the London Inter Bank Offer Rate ("LIBOR"). In
addition, the Company has a HK$7.1 million revolving credit facility with
Midland Bank which translates to $0.9 million at December 31, 1998. The entire
$0.9 million was outstanding at December 31, 1998. The interest rate is 0.32%
above the Hong Kong Inter Bank Offer Rate ("HIBOR"). These two facilities were
renewed in January 1999, for twelve months (see footnote 17).
8 SHAREHOLDERS' EQUITY
9
<PAGE>
Preferred Stock
The Board of Directors may from time to time direct the issuance of preferred
stock in one or more series and may, at the time of issuance, determine the
rights, preferences, and limitations of each series. The issuance of preferred
stock may adversely affect various rights, including dividend and voting rights,
of the common shareholders and may be used as an anti-takeover device.
On January 24, 1997, the Board of Directors approved a shareholder rights
plan, which provides protection against hostile takeovers and market activities
that could result in a sale of the Company. The Board of Directors retains the
right to approve a sale of the Company or redeem the rights under certain
circumstances. The Company paid a dividend of one right for each common share
outstanding on February 7, 1997. Each right will entitle a shareholder to buy
1/100 of a share of the Company's newly created Series A Junior Participating
Preferred Stock at an exercise price of $100 per right. The rights will become
exercisable in the event that a person or group acquires, or makes a tender
offer for, 15% or more of the Company's common shares, subject to certain
exceptions.
Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per
share, for the years ended December 31:
(in thousands, except per share amounts) 1998 1997 1996
- --------------------------------------------------------------------------------
Numerator for earnings per share - basic and
assuming dilution:
Net income $ 31,763 $ 25,703 $ 6,291
- --------------------------------------------------------------------------------
Denominator for per share, basic weighted-
average shares 12,678 12,656 13,220
Effect of dilutive securities:
Employee stock options 414 289 10
Employee restricted stock grants 54 -- --
Denominator for earnings per share, assuming
dilution - adjusted weighted-average shares
and assumed conversions 13,146 12,945 13,230
- --------------------------------------------------------------------------------
Earnings per share - basic $ 2.51 $ 2.03 $ 0.48
Earnings per share - assuming dilution $ 2.42 $ 1.99 $ 0.48
================================================================================
Dividends
The Company initiated the payment of a quarterly cash dividend during the fourth
quarter
10
<PAGE>
of 1993. In April 1998, the Board of Directors increased the quarterly cash
dividend to $0.12 per share from $0.10 per share. The Company intends to
continue paying quarterly dividends subject to declaration by the Board of
Directors. The Company is not subject to any regulatory or capital requirements
that restrict its ability to pay dividends, except for the minimum net worth
requirement in its credit facility (see Note 7).
Treasury Shares
The Company uses treasury shares to fund its equity-based contributions to the
employee benefit plans.
9 INCOME TAXES
Income taxes for the years ended December 31 are summarized as follows:
(in thousands) 1998 1997 1996
- -------------------------- ---- ---- ----
Current:
Federal $ 10,431 $ 12,592 $ 10,702
State 1,824 1,864 1,444
Foreign 6,528 2,319 -
-------- -------- --------
18,783 16,775 12,146
Deferred taxes:
Federal 8,944 745 (7,226)
State 773 16 (950)
Foreign (3,759) (528) --
-------- -------- --------
5,958 233 (8,176)
-------- -------- --------
$ 24,741 $ 17,008 $ 3,970
-------- -------- --------
The reconciliation between income tax expense and the amount computed by
applying the statutory federal income tax rate for the years ended December 31
is summarized as follows:
(in thousands) 1998 1997 1996
- -------------------------- ---- ---- ----
11
<PAGE>
Income tax at the federal
statutory rate $ 21,466 $ 15,107 $ 3,592
State taxes, net of federal
tax benefit 2,597 1,212 321
Foreign taxes at rate
other than U.S. rate 347 252 -
Non deductible Meals and
Entertainment 402 457 330
Goodwill amortization 359 526 257
Other (430) (546) (530)
-------- -------- --------
$ 24,741 $ 17,008 $ 3,970
-------- -------- --------
Pre-tax income attributed to domestic operations was $56.0 million, and pre-tax
income attributable to foreign operations was $5.3 million for the year ended
December 31, 1998.
Deferred tax assets and liabilities are comprised of the following at December
31:
(in thousands) 1998 1997
- -------------- -------- -------
Deferred tax assets:
Foreign net operating losses $ 1,611 $ 528
Lease obligations 3,814 535
Intangible assets 512 6,905
Accrued expenses 4,287 1,537
-------- -------
10,224 9,505
Valuation allowance (1,204) -
-------- -------
Total deferred tax assets 9,020 9,505
-------- -------
Deferred tax liabilities:
Lease obligations 5,457 -
Property, plant and equipment 1,503 1,029
Deferred revenue on customer contracts 610 630
Accrued expenses 536 974
-------- -------
12
<PAGE>
Total deferred tax liabilities 8,106 2,633
-------- -------
Net deferred tax assets $ 914 $ 6,872
-------- -------
10 STOCK PLANS
The Company adopted the E. W. Blanch Holdings, Inc. Employee Stock Purchase Plan
("the ESPP") in May 1994. Pursuant to the ESPP, eligible employees of the
Company may purchase shares of the Company's common stock at 90% of fair market
value, subject to certain limitations and qualifications. The Company has
reserved 300,000 shares of common stock for issuance under the ESPP. At December
31, 1998, approximately 29,960 shares had been issued under the ESPP.
The Company adopted the 1993 Stock Incentive Plan ("the 1993 Stock Plan")
in May 1993. Pursuant to the 1993 Stock Plan, key employees of the Company who
have been selected as participants are eligible to receive awards of various
forms of equity-based incentive compensation including stock options, stock
appreciation rights, stock bonuses, restricted stock awards, performance units,
phantom stock, and awards consisting of combinations of such incentives. The
Company has reserved 4,400,000 shares of common stock for issuance under the
1993 Stock Plan.
Outstanding option grants of shares under the 1993 Stock Plan were
1,927,874 and 1,793,000 at December 31, 1998 and 1997, respectively. Outstanding
restricted stock awards under the 1993 Stock Plan were 104,254 at December 31,
1998. Exercised option grants under the 1993 Stock Plan were 110,793 shares.
Vested stock awards under the 1993 Stock Plan were 56,436. In addition, the
Company had reserved 488,460 and 563,809 shares at December 31, 1998 and 1997,
respectively, for future grant, resulting in 1,712,183 and 43,191 shares
available for grant under the 1993 Stock Plan at December 31, 1998 and 1997,
respectively. The original term of such options is 10 years and options become
exercisable over the first three years of the term. There were 878,074 options
exercisable at December 31, 1998.
In July 1998, the Company acquired K2 Technologies, Inc. ("K2"). As part of
the acquisition, the Company converted the outstanding K2 options into options
to purchase the Company's common stock. The Company reduced the number of shares
subject to K2 options outstanding to reflect the Company's stock price at the
date of acquisition. The K2 options retain their original exercise price, which
is equal to the grant date market price, and their original grant dates per the
terms of the K2 option plans prior to the acquisition. The weighted average
exercise price for the K2 options outstanding at December 31, 1998 is $1.59. The
term for the K2 options is 10 years and the options become exercisable evenly
over the first four years of the term. The Company had outstanding option grants
of 30,733 shares at December 31, 1998 under the K2 option plans. There were
15,339 options exercisable at December 31, 1998.
13
<PAGE>
The Company adopted the 1997 Stock Incentive Plan ("1997 Stock Plan"), in
October 1997. Pursuant to the Stock Incentive Plan, employees who have been
selected as participants are eligible to receive awards of various forms of
equity-based incentive compensation including stock options, stock appreciation
rights, restricted stock, restricted stock units, performance awards or other
stock-based awards. The Company has reserved 1,000,000 treasury shares for
issuance under the 1997 Stock Plan.
Outstanding grants under the 1997 Stock Plan were 250,000 at December 31,
1998, with an exercise price of $31.38 and a weighted average contractual life
of 8.8 years. The original term of all stock options is 10 years and the options
become exercisable over the first three years of the term. There were 83,333
options exercisable at December 31, 1998.
The Company adopted the Directors Stock Option Plan in July 1998. Pursuant
to the Directors Stock Option Plan, directors of the Company are eligible to
receive stock options. The Company has reserved 300,000 shares of common stock
for issuance under the Directors Stock Option Plan. Outstanding grants under the
Directors Stock Option Plan were 35,000 shares at December 31, 1998, with a
weighted average exercise price of $30.46 and a weighted average contractual
life of 8.8 years. The original term of all stock options is 10 years and the
options become exercisable over the first three years of the term. There were
8,333 options exercisable at December 31, 1998.
The following is a summary of options outstanding by range of grant price:
$17.50- $26.26- ALL
LESS THAN $3.26 $26.25 $36.00 OPTIONS
- --------------------------------------------------------------------------------
Options outstanding 30,733 1,070,874 1,142,000 2,243,607
Average option price per share $1.59 $21.28 $32.44 $26.69
Weighted average contractual life 7.7 6.9 8.9 8.0
Options exercisable 15,339 688,907 280,833 985,079
Average option price per share $1.04 $20.50 $31.28 $23.27
- --------------------------------------------------------------------------------
Option activity during 1998, 1997 and 1996 was as follows:
14
<PAGE>
AVERAGE
OPTION
PRICE PER
SHARES SHARE
- --------------------------------------------------------------------------------
Outstanding at December 31, 1995 626,500 $18.76
Granted 239,000 $22.01
Cancelled (80,167) $18.26
- --------------------------------------------------------------------------------
Outstanding at December 31, 1996 785,333 $19.80
- --------------------------------------------------------------------------------
Granted 1,296,500 $28.20
Cancelled (37,165) $20.22
Exercised (1,668) $18.50
- --------------------------------------------------------------------------------
Outstanding at December 31, 1997 2,043,000 $25.16
- --------------------------------------------------------------------------------
Granted 362,373 $31.84
Cancelled (50,962) $19.26
Exercised (110,804) $18.74
- --------------------------------------------------------------------------------
Outstanding at December 31, 1998 2,243,607 $26.69
- --------------------------------------------------------------------------------
As permitted under SFAS No. 123, the Company continues to apply APB Opinion No.
25 and related interpretations and, accordingly, does not recognize compensation
expense for grants under its stock option plans. If the Company had elected to
recognize compensation expense based on the fair value of the stock on the grant
date as prescribed by SFAS No. 123, net income and earnings per share would have
been reduced to the pro forma amounts indicated in the table below:
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1998 1997 1996
- --------------------------------------------------------------------------------
Net income - as reported $31,763 $25,703 $6,291
Net income - pro forma 26,849 24,470 5,864
Earnings per share, basic - as reported $2.51 $2.03 $0.48
Earnings per share, basic - pro forma $2.12 $1.93 $0.44
The pro forma net income and earnings per share are not likely to be
representative of the effects on net income and earnings per share in future
years.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following assumptions:
1998 1997 1996
- --------------------------------------------------------------------------------
Expected dividend yield 1.00% 1.20% 1.80%
Expected stock price volatility 20.45% 20.85% 21.80%
Expected life of options 7 years 7 years 7 years
The Company used the seven year United States Treasury Note rate at the
date of grant for the risk-free interest rate assumption. The range of these
rates was 5.5% to 5.8% in 1998, 6.0% to 6.9% in 1997 and 5.6% to 6.6% in 1996.
The weighted average fair value of options granted during 1998, 1997 and 1996
was $11.72, $11.28 and $7.49 per
15
<PAGE>
share, respectively.
The Company has a Non-Employee Directors' Stock Plan ("the Directors'
Plan"). The Directors' Plan permits each participant to elect to receive or
defer all or a portion of the Director's fees in common stock of the Company.
The Company has reserved 25,000 shares of Common Stock for issuance under the
Directors' Plan. At December 31, 1998, approximately 2,127 shares of stock have
been earned under this plan at an average cost of $19.69 per share.
The Company adopted the Restricted Stock Incentive Plan ("the Restricted
Stock Plan") in April 1997. Pursuant to the Restricted Stock Plan, eligible
participants may elect to forego a specified percentage of eligible base
compensation, in exchange for the right to receive a restricted stock grant.
This election is irrevocable for the performance period. The amount of the
restricted stock received is tied to the achievement of certain objective
performance goals established by the Compensation Committee of the Board of
Directors. The goals may be based on various business criteria including stock
price, market share, sales, earnings per share, return on equity, return on
invested capital or net assets employed, cumulative total return to
shareholders, consolidated pre-tax earnings, net earnings, operating income,
earnings before interest and taxes, and cash flow - all computed in accordance
with generally accepted accounting principles.
If target performance goals are achieved and the Compensation Committee so
certifies, the participant is awarded restricted stock equal to two times the
amount of base compensation foregone, subject to a three-year vesting schedule.
If target performance is not achieved the participant is awarded restricted
stock equal in value to 50% of base compensation foregone, fully vesting on
April 1 following the end of the performance period. The Company achieved its
target performance goal in the 1998 and 1997 performance periods. Shares granted
come out of the 1993 Stock Plan. The Company will award approximately 141,960
shares of restricted stock for the 1998 performance period and has granted
167,809 shares in 1998 for the 1997 performance period to participants subject
to a three-year vesting period under the 1993 Stock Plan. In accordance with APB
Opinion No. 25, the Company recognized $3.0 million and $1.1 million of
compensation expense in 1998 and 1997, respectively for both the 1998 and 1997
performance periods. The weighted average fair value of shares granted for the
1997 performance period is $38.50 at the date of grant.
11 EMPLOYEE BENEFITS AND INCENTIVE PLANS
The Company has a defined contribution retirement plan ("the Retirement Plan")
for most of its domestic employees. Contributions to the Retirement Plan are
discretionary and generally are equal to 7.5% of the employee's base salary.
Employees with salaries that exceed the Internal Revenue Service limit for
qualified plans receive the difference between 7.5% of their salary and the IRS
allowable plan contribution in cash. Total Retirement Plan expense for 1998,
1997, and 1996 was $2.5 million, $2.3 million, and $2.0 million, respectively.
Of those amounts, $0.4 million, $0.3 million, and $0.3 million were paid in cash
in 1998, 1997, and 1996, respectively.
16
<PAGE>
The Company has a cash bonus incentive plan ("the Incentive Plan") designed to
reward employees for exceptional performance. The amount of the reward is tied
to the achievement of certain objective performance goals established by the
Compensation Committee of the Board of Directors. The goals may be based on
various business criteria including stock price, market share, sales, earnings
per share, return on equity, return on invested capital or net assets employed,
cumulative total return to shareholders, consolidated pre-tax earnings, net
earnings, operating income, earnings before interest and taxes, and cash flow -
all computed in accordance with generally accepted accounting principles. Shares
granted come out of the 1993 Stock Plan. In January 1999, the Company has
reserved 239,522 option grants of common stock for issuance under the Incentive
Plan. The Company has subsequently issued 146,374 of these in 1999.
The Company's foreign subsidiary, Swire Blanch, has a defined contribution
retirement plan ("the Swire Plan") for its eligible employees. Contributions to
the Swire Plan are equal to 4.0% to 10.0% of the employees salary based upon
employee participations. Total Swire Plan expense for 1998, and 1997 was $1.6
million, and $1.3 million, respectively.
12 RELATED PARTY TRANSACTIONS
The Company had outstanding notes receivable from employees totaling $1.4
million and $0.8 million at December 31, 1998 and 1997, respectively. The
majority of these notes are interest bearing and are payable over ten years
beginning in 1999.
The Company purchased a software license from Insurance Holdings of
America, Inc. ("IHA") for $2.5 million in 1998. The Company owns 24% of the
outstanding common shares of IHA as of December 31, 1998. The Company entered
into an agreement with Consumer Insurance Services of America, Inc. ("CISA"), a
subsidiary of IHA, to develop and implement its program to offer insurance
products to members and/or employees of Sam's Club. The Company received $0.6
million from IHA in 1998 to provide this service.
In February 1997, the Company purchased 750,000 shares of its common stock,
at a negotiated price of $19.40 per share, from its Chairman and Chief Executive
Officer. Total consideration was $14.6 million.
13 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Supplemental disclosure of cash flow information for the years ended December 31
is as follows:
17
<PAGE>
(IN THOUSANDS) 1998 1997 1996
- -------------------------------------------------------------------------------
Cash paid during the period for:
Interest $1,693 $1,178 $223
Income taxes
(federal, state, and city) 13,720 9,391 12,873
Non-cash investing activities:
Equipment acquired under capital leases -- -- 2,149
Non-cash consideration from sale of subsidiary 7,696 -- --
- -------------------------------------------------------------------------------
14 COMMITMENTS AND CONTIGENCIES
Lease Commitments
The Company has operating leases for its corporate headquarters, branch office
facilities, and certain equipment. Total rent expense for such operating leases
was $8.8 million, $6.8 million, and $5.2 million for 1998, 1997, and 1996,
repectively.
Future minimum rental payments required under these leases are summarized
as follows:
(IN THOUSANDS)
- -------------------------------------------------------------------------------
1999 $9,922
2000 8,691
2001 7,910
2002 7,688
2003 7,215
Thereafter 30,192
- -------------------------------------------------------------------------------
$71,618
- -------------------------------------------------------------------------------
Legal Proceedings
In the normal course of business, the Company and its subsidiaries are parties
to a number of lawsuits. Management believes that these suits will be resolved
with no material financial impact on the Company.
15 BUSINESS SEGMENT INFORMATION
The following is additional business segment information for the year ended
December 31:
18
<PAGE>
<TABLE>
<CAPTION>
Domestic
Domestic Wholesale Domestic Foreign
(IN THOUSANDS) Primary Ins. Services Total Operations Consolidated
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1998
Profit (Loss), net of tax $ 28,593 $ 998 $ 29,591 $ 2,172 $ 31,763
Revenues 155,443 7,386 162,829 49,893 212,722
Interest revenue 6,410 79 6,489 2,620 9,109
Interest expense 537 (125) 412 1,273 1,685
Depreciation & amortization expense 7,344 1,227 8,571 3,552 12,123
Equity in interest in loss of unconsolidated subsidiaries 3,831 -- 3,831 -- 3,831
Income tax 22,279 460 22,739 2,002 24,741
Total assets 674,243 11,361 685,604 247,652 933,256
Net assets 96,550 8,839 105,389 5,248 110,637
Amount of investment in equity method investees 20,014 -- 20,014 -- 20,014
Expenditures for long-lived assets 22,393 379 22,772 3,264 26,036
1997
Profit (Loss), net of tax $ 23,931 $ (540) $ 23,391 $ 2,312 $ 25,703
Revenues 118,374 10,580 128,954 37,843 166,797
Interest revenue 6,006 488 6,494 2,200 8,694
Interest expense 223 -- 223 1,103 1,326
Depreciation & amortization expense 4,415 1,326 5,741 2,813 8,554
Equity in interest in loss of unconsolidated subsidiaries -- -- -- -- --
Income tax 15,096 (142) 14,954 2,054 17,008
Total assets 645,374 42,957 688,331 231,436 919,767
Net assets 75,547 12,328 87,875 (11,423) 76,452
Amount of investment in equity method investees -- -- -- -- --
Expenditures for long-lived assets 9,512 297 9,809 21,391 31,200
1996
Profit (Loss), net of tax $ 21,780 $ (15,489) $ 6,291 $ -- $ 6,291
Revenues 90,467 18,571 109,038 -- 109,038
Interest revenue 4,551 2,582 7,133 -- 7,133
Interest expense 231 -- 231 -- 231
Depreciation & amortization expense 3,113 2,982 6,095 -- 6,095
Equity in interest in loss of unconsolidated subsidiaries -- -- -- -- --
Income tax 13,873 (9,903) 3,970 -- 3,970
Total assets 450,896 63,860 514,756 -- 514,756
Net assets 52,834 15,619 68,453 -- 68,453
Amount of investment in equity method investees -- -- -- -- --
Expenditures for long-lived assets 6,262 1,068 7,330 -- 7,330
</TABLE>
The Company provides risk management and distribution services to insurance and
reinsurance companies. These services are sold both on a bundled and a component
basis. All of the Company's operational revenues are generated from these
services. The Company's reportable segments are based on geographic areas in
which the Company markets its risk management and distribution services. The
reportable geographic segments are managed separately. Domestic operations are
further classified into Primary and Wholesale Insurance Services ("Wholesale").
Wholesale included the Company's general agency operations until they were sold
in the second quarter of 1998. The general agency operations provided primary
distribution of insurance to property and casualty insurance companies, largely
through independent insurance agents.
16 ACQUISITIONS AND DISPOSITIONS
In June 1998, the Company completed its acquisition of Walbaum Americana, S.A.
("Walbaum"), a Buenos Aires, Argentina based provider of risk management
services in Latin America. In July 1998, the Company completed acquisitions of
Dunn & Carter Ltd. ("Dunn & Carter"), a London based insurance broker
specializing in retrocessional reinsurance and K2 Technologies, Inc. ("K2"), a
San Jose, California based company specializing in the design and support of
interactive software platforms for use in risk assessment and engineering as
well as information integration. The Company uses
19
<PAGE>
purchase accounting to account for these acquisitions and accordingly, includes
the acquired company's results of operations in the Company's Statements of
Income from the date of acquisition. The combined cost of these acquisitions was
$11.8 million. The combined pro forma impact on net income from these
acquisitions prior to their respective acquisition dates would have had an
immaterial impact on consolidated net income and earnings per share for 1998 and
1997.
In 1997, the Company purchased a 70% interest in Swire Fraser Insurance
(Holdings) Limited ("Swire Fraser") resulting in an additional 20% interest in
the Swire Blanch joint venture. The combined operations of Swire Fraser and
Swire Blanch were merged into a single operation under the Swire Blanch name,
which is owned 70% by the Company and 30% by Swire Pacific Limited ("Swire
Pacific"). In connection with the purchase the Company entered into a
shareholder's agreement with Swire Pacific, under which, beginning on February
14, 2000, the Company may elect to purchase or Swire Pacific may elect to sell
Swire Pacific's 30% interest based on a pre-determined formula.
In the second quarter of 1998, the Company sold its San Antonio, Texas
based operation, including the sale of its general agency, Blanch Insurance
Services, Inc., and other selected assets. The net effect of these dispositions
was a one-time gain of $1.0 million before taxes. As part of the sale agreement,
the Company became a shareholder of the purchasing company.
17 SUBSEQUENT EVENT
In January 1999, the Company executed a new HK$5 million secured revolving
credit facility with Midland Bank that will be used to fund the operational and
capital requirements of the Australasia region. The new facility which is due
for renewal in January 2000, will carry interest of 0.32% above HIBOR. There are
no covenants or restrictions on the acquisition or sale of assets with this
facility. Also in January 1999, the Company refinanced an existing HK$7.1
million secured revolving credit facility for twelve months at an interest rate
of 0.32% above HIBOR and an existing (pound)7.0 million secured revolving credit
facility for twelve months at an interest rate of 0.35% above LIBOR.
20
<PAGE>
QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED,
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1998
REVENUES:
Operations $ 44,805 $ 45,284 $ 52,539 $ 60,985
Interest income 2,147 2,083 2,504 2,375
- ----------------------------------------------------------------------------------------------------------------------------
Total revenues 46,952 47,367 55,043 63,360
EXPENSES:
Salaries and benefits 21,572 23,417 22,894 24,769
Travel and marketing 3,135 4,305 3,609 4,622
General and administrative 8,659 8,778 10,018 10,692
Amortization of goodwill 694 694 696 1,153
Interest and other expense 374 469 550 292
- ----------------------------------------------------------------------------------------------------------------------------
Total expenses 34,434 37,663 37,767 41,528
- ----------------------------------------------------------------------------------------------------------------------------
Income before taxes 12,518 9,704 17,276 21,832
Income taxes 4,808 3,699 6,689 9,545
- ----------------------------------------------------------------------------------------------------------------------------
Net income before minority interest & equity interest in
loss of unconsolidated subsidiaries 7,710 6,005 10,587 12,287
Minority interest, net of tax 180 (127) 535 407
Equity interest in loss of unconsolidated subsidiaries, net of tax 441 536 1,435 1,419
============================================================================================================================
Net Income $ 7,089 $ 5,596 $ 8,617 $ 10,461
============================================================================================================================
Net income per common share - basic $ 0.56 $ 0.44 $ 0.67 $ 0.82
Net income per common share - assuming dilution $ 0.53 $ 0.42 $ 0.65 $ 0.79
============================================================================================================================
Equity interest in loss of unconsolidated subsidiaries as per
filed 10-Q documents -- -- 146
============================================================================================================================
THE REASON FOR THE DIFFERENCE IN EQUITY INTEREST IN LOSS OF UNCONSOLIDATED SUBSIDIARIES FOR THE FIRST THREE QUARTERS OF 1998
IS DUE TO THE COMPANY INCREASING ITS EQUITY INVESTMENT IN INSURANCE HOLDINGS OF AMERICA, INC. ABOVE 20% IN THE FOURTH
QUARTER. THE QUARTERLY SCHEDULE REPORTS RESULTS AS IF THE COMPANY HAD ACCOUNTED FOR THIS INVESTMENT USING THE EQUITY
ACCOUNTING METHOD FOR THE ENTIRE YEAR.
<CAPTION>
1997
REVENUES:
Operations $ 35,244 $ 37,842 $ 43,009 $ 42,008
Interest income 1,785 2,222 2,361 2,326
- ----------------------------------------------------------------------------------------------------------------------------
Total revenues 37,029 40,064 45,370 44,334
EXPENSES:
Salaries and benefits 16,478 19,430 20,613 19,387
Travel and marketing 2,699 3,746 3,020 4,216
General and administrative 6,577 7,589 7,109 8,436
Amortization of goodwill 590 688 689 1,042
Interest and other expense 276 321 365 364
- ----------------------------------------------------------------------------------------------------------------------------
Total expenses 26,620 31,774 31,796 33,445
- ----------------------------------------------------------------------------------------------------------------------------
Income before taxes 10,409 8,290 13,574 10,889
Income taxes 4,006 3,340 5,311 4,351
- ----------------------------------------------------------------------------------------------------------------------------
Net income before minority interest 6,403 4,950 8,263 6,538
Minority interest, net of tax (41) 130 282 80
============================================================================================================================
Net Income $ 6,444 $ 4,820 $ 7,981 $ 6,458
============================================================================================================================
Net income per common share - basic $ 0.50 $ 0.38 $ 0.63 $ 0.51
Net income per common share - assuming dilution $ 0.50 $ 0.38 $ 0.62 $ 0.49
============================================================================================================================
THE FIRST THREE QUARTERS OF 1997 EARNINGS PER SHARE AMOUNTS HAVE BEEN RESTATED TO COMPLY WITH STATEMENT OF FINANCIAL
ACCOUNTING STANDARDS NO. 128, EARNINGS PER SHARE.
</TABLE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
State or other jurisdiction of
Name of Subsidiary incorporation or organization
- ---------------------------- ------------------------------
E.W. Blanch Co., Inc. Delaware
Paragon Reinsurance Risk Management
Services, Inc. Delaware
E.W. Blanch International, Inc. Delaware
E.W. Blanch Wholesale Insurance Services, Inc. Delaware
E.W. Blanch Capital Risk Solutions, Inc. Delaware
Blanch Catastophe Services, Inc. Delaware
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 333-09712) pertaining to the 1993 Stock Incentive Plan of E.W. Blanch
Holdings, Inc., the Registration Statement (Form S-8 No. 333-65689) pertaining
to the K2 Technologies, Inc. 1994 Stock Plan, K2 Technologies, Inc. 1996 Stock
Plan, K2 Technologies, Inc. 1998 Key Person Stock Option Plan, and the
Registration Statement (Form S-8 No. 333-45261) pertaining to the Non-Employee
Directors' Stock Plan, Directors' Stock Option Plan, Executive Restricted Stock
Incentive Plan, 1997 Stock Incentive Plan, and the Retirement Plan, of our
report dated January 20, 1999, with respect to the consolidated financial
statements of E.W. Blanch Holdings, Inc. incorporated by reference in the Annual
Report (Form 10-K) for the year ended December 31, 1998.
/s/ ERNST & YOUNG LLP
Dallas, Texas
March 30, 1999
EXHIBIT 24
POWER OF ATTORNEY
I, James N. Land, Jr., the undersigned, of P. O. Box 822,
Short Hills, New Jersey 07078, make, constitute, and appoint Edgar W. Blanch,
Jr., of P.O. Box 1409, Boerne, Texas 78006, my true and lawful attorney-in-fact,
in my name, place and stead sign the E. W. Blanch Holdings, Inc. Annual Report
to the Securities and Exchange Commission on Form 10-K for the fiscal year ended
December 31, 1998.
/s/ James N. Land, Jr.
(Acknowledgment)
STATE OF New Jersey)
) SS.
COUNTY OF Morris)
The foregoing instrument was acknowledged before me this 2nd
day of March, 1999, by James N. Land, Jr.
/s/ Percy Pacheco
Signature of Notary Public
<PAGE>
POWER OF ATTORNEY
I, Paul B. Ingrey, the undersigned, of 11 Capri Court, Palm
Coast, Florida, 32137, make, constitute, and appoint Edgar W. Blanch, Jr., of
P.O. Box 1409, Boerne, Texas 78006, my true and lawful attorney-in-fact, in my
name, place and stead sign the E. W. Blanch Holdings, Inc. Annual Report to the
Securities and Exchange Commission on Form 10-K for the fiscal year ended
December 31, 1998.
/s/ Paul B. Ingrey
(Acknowledgment)
STATE OF Florida)
) SS.
COUNTY OF Flagler)
The foregoing instrument was acknowledged before me this 27th
day of February, 1999, by Paul B. Ingrey.
/s/ Stephanie M. Bernhard
Signature of Notary Public
<PAGE>
POWER OF ATTORNEY
I, William B. Madden, the undersigned, of 4520 Belfort,
Dallas, Texas 75205, make, constitute, and appoint Edgar W. Blanch, Jr., of P.O.
Box 1409, Boerne, Texas 78006, my true and lawful attorney-in-fact, in my name,
place and stead sign the E. W. Blanch Holdings, Inc. Annual Report to the
Securities and Exchange Commission on Form 10-K for the fiscal year ended
December 31, 1998.
/s/ William B. Madden
(Acknowledgment)
STATE OF Texas)
) SS.
COUNTY OF Dallas)
The foregoing instrument was acknowledged before me this 1st
day of March, 1999, by William B. Madden.
/s/ Lola Richert
Signature of Notary Public
<PAGE>
POWER OF ATTORNEY
I, Steven G. Rothmeier, the undersigned, of P. O. Box 11901,
St. Paul, Minnesota 55111-0901, make, constitute, and appoint Edgar W. Blanch,
Jr., of P.O. Box 1409, Boerne, Texas 78006, my true and lawful attorney-in-fact,
in my name, place and stead sign the E. W. Blanch Holdings, Inc. Annual Report
to the Securities and Exchange Commission on Form 10-K for the fiscal year ended
December 31, 1998.
/s/ Steven G. Rothmeier
(Acknowledgment)
STATE OF Minnesota)
) SS.
COUNTY OF Dakota)
The foregoing instrument was acknowledged before me this 26th
day of February, 1999, by Steven G. Rothmeier.
/s/ Cathy A. Brandes
Signature of Notary Public
<PAGE>
POWER OF ATTORNEY
I, Joseph D. Sargent, the undersigned, of 25 Colony Road, West
Hartford, Connecticut 06117, make, constitute, and appoint Edgar W. Blanch, Jr.,
of P.O. Box 1409, Boerne, Texas 78006, my true and lawful attorney-in-fact, in
my name, place and stead sign the E. W. Blanch Holdings, Inc. Annual Report to
the Securities and Exchange Commission on Form 10-K for the fiscal year ended
December 31, 1998.
/s/ Joseph D. Sargent
(Acknowledgment)
STATE OF Connecticut)
) SS.
COUNTY OF Hartford)
The foregoing instrument was acknowledged before me this 1st
day of March, 1999, by Joseph D. Sargent.
/s/ Eileen Bresnal
Signature of Notary Public
<PAGE>
POWER OF ATTORNEY
I, Chris L. Walker, the undersigned, of 15430 Masons Pointe,
Eden Prairie, Minnesota 55347, make, constitute, and appoint Edgar W. Blanch,
Jr., of P.O. Box 1409, Boerne, Texas 78006, my true and lawful attorney-in-fact,
in my name, place and stead sign the E. W. Blanch Holdings, Inc. Annual Report
to the Securities and Exchange Commission on Form 10-K for the fiscal year ended
December 31, 1998.
/s/ Chris L. Walker
(Acknowledgment)
STATE OF Minnesota)
) SS.
COUNTY OF Hennepin)
The foregoing instrument was acknowledged before me this 24th
day of March , 1999, by Chris L. Walker.
/s/ Mary K. Wright
Signature of Notary Public
<PAGE>
POWER OF ATTORNEY
I, Frank W. Wilkinson, Jr., the undersigned, of 2240 W. Lake
Isles Parkway, Minneapolis, Minnesota 55405, make, constitute, and appoint Edgar
W. Blanch, Jr., of P.O. Box 1409, Boerne, Texas 78006, my true and lawful
attorney-in-fact, in my name, place and stead sign the E. W. Blanch Holdings,
Inc. Annual Report to the Securities and Exchange Commission on Form 10-K for
the fiscal year ended December 31, 1998.
/s/ Frank S. Wilkinson, Jr.
(Acknowledgment)
STATE OF Minnesota)
) SS.
COUNTY OF Hennepin)
The foregoing instrument was acknowledged before me this 2nd
day of March, 1999, by Frank S. Wilkinson, Jr.
/s/ Mary K. Wright
Signature of Notary Public
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY DATA EXTRACTED FROM THE CONSOLIDATED BALANCE
SHEET AS OF DECEMBER 31, 1998 AND THE CONSOLIDATED STATEMENT OF INCOME FOR THE
TWELVE MONTHS ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 707
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 62,247
<PP&E> 58,345
<DEPRECIATION> 25,925
<TOTAL-ASSETS> 933,256
<CURRENT-LIABILITIES> 48,335
<BONDS> 0
0
0
<COMMON> 141
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 933,256
<SALES> 203,613
<TOTAL-REVENUES> 212,722
<CGS> 0
<TOTAL-COSTS> 151,392
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,685
<INCOME-PRETAX> 61,330
<INCOME-TAX> 24,741
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 31,763
<EPS-PRIMARY> 2.51
<EPS-DILUTED> 2.42
</TABLE>
