SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
For the fiscal year ended December 31, 1998
of
PENN-AMERICA GROUP, INC.
A Pennsylvania Corporation
IRS Employer Identification No. 23-2731409
SEC File Number 022316
420 S. York Road
Hatboro, Pa. 19040
(215) 443-3600
Penn America Group, Inc. does not have any securities registered pursuant to
Section 12 (b) and 12 (g) of the Act.
Penn America Group, Inc. (1) has filed all reports required to be filed by
Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days.
Penn America Group, Inc. is unaware of any delinquent filers pursuant to Item
405 or Regulation 3-K.
As of March 22, 1999, the aggregate market value of the outstanding Common Stock
held by non-affiliates of the Registrant was approximately $62,400,000. As of
March 22, 1999, there were 8,739,901 shares of the Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Registrant's annual report to stockholders for the fiscal
year-ended December 31, 1998 are incorporated by reference in Parts I, II and IV
of this report.
Part III - Portions of the Registrant's definitive Proxy Statement with respect
to the Registrant's 1999 Annual Meeting of Shareholders, to be filed not later
than 120 days after the close of the Registrant's fiscal year.
<PAGE>
PENN-AMERICA GROUP, INC.
ANNUAL REPORT ON FORM 10-K
DECEMBER 31, 1998
Page
PART I
ITEM 1. BUSINESS............................................... 3
ITEM 2. PROPERTIES..............................................20
ITEM 3. LEGAL PROCEEDINGS.......................................20
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY-HOLDERS........................................20
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK
AND RELATED STOCKHOLDER MATTERS.........................21
ITEM 6. SELECTED FINANCIAL DATA.................................21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS...........21
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.............21
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE..............................................21
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT..............................................22
ITEM 11. EXECUTIVE COMPENSATION..................................22
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT...................................22
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..........22
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K.....................................23
Page 2
<PAGE>
PART I
ITEM 1. BUSINESS
General
Penn-America Group, Inc. is a specialty property and casualty insurance
holding company which, through its subsidiaries, Penn-America Insurance Company
and Penn-Star Insurance Company markets and underwrites commercial property,
general liability, business automobile, and multi-peril insurance for small
businesses located primarily in small towns and suburban and rural areas, and
non-standard personal automobile insurance. The Company provides commercial
property and casualty insurance on both an excess and surplus lines basis and an
admitted basis, and personal automobile insurance on an admitted basis. The
Company markets its products through 57 high-quality general agents, who in turn
produce business through over 25,000 retail insurance brokers located throughout
the United States. The Company focuses on serving the insurance needs of small
or non-standard markets which are generally characterized by small to average
policy premiums and serviced by retail insurance brokers with limited access to
larger, standard lines insurers. The Company believes that these markets are
generally under-served by larger, standard lines insurers who often limit their
underwriting to policies above a certain minimum premium size or to certain risk
classes and who operate in large-scale markets in which they can achieve
economies of scale. The Company believes that its distribution network enables
it to effectively access these numerous small markets at a relatively low fixed
cost through the marketing, underwriting and administrative support of its
general agents, as well as the localized market knowledge and expertise of its
general agents and their retail insurance brokers.
The success of the Company's strategy is demonstrated by its strong and
consistent growth and profitability. From 1993 to 1998, gross written premiums
grew at a 168.8% cumulative annual rate, from $35.5 million to $95.1 million,
and net operating earnings (excluding realized investment gains) grew at a 34.6%
compound annual rate, from $2.0 million to $8.9 million. The Company has
operated at a statutory combined ratio under 100.0% in every year since 1993.
The Company's average combined ratio from 1993 to 1998 under Statutory
Accounting Practices(SAP) was 95.4%, and the Company's average return on
average stockholders' equity during the same period was 13.8%
The Company's distribution strategy is to maintain strong relationships with
fewer and higher quality general agents than its competitors. The Company
carefully selects a limited number of agents in each state based on the agent's
experience and reputation and strives to preserve each agent's franchise value
within their market territory. The Company seeks to grow with these general
agents and develop strong, longstanding relationships by providing a high level
of service and support. From 1993 to 1998, the Company achieved 168.8%
cumulative growth in gross written premiums with a 50% increase in the number of
general agents from 38 to 57. The Company maintains low fixed costs by
underwriting the substantial majority of its policies on a binding authority
basis. The Company closely monitors the quality of business it underwrites by
maintaining close relationships with a small number of general agents. The
Company provides its general agents with a comprehensive, regularly updated
underwriting manual which clearly outlines the Company's pricing and
underwriting guidelines. The Company does not write high risk policies (e.g.,
medical malpractice, environmental and aviation liability). The Company
generally reviews new and renewal commercial policies on a continuous basis and
non-standard personal automobile policies on a quarterly basis to ensure that
its underwriting guidelines are being followed. In addition to standard
commissions, the Company provides strong incentives to its general agents to
produce profitable business through a contingent commission structure which is
substantially tied to underwriting profitability and through the issuance of
shares of common stock in lieu of cash for a portion of the contingent
commissions.
Page 3
<PAGE>
Historically, the Company has underwritten the majority of its commercial
lines business on an excess and surplus lines basis. In recent years, the
Company has underwritten a greater proportion of its commercial lines business
on an admitted basis as it has identified profitable admitted markets which
remain under-served by larger standard insurers. Currently, the Company
underwrites all of its non-standard personal automobile business on an admitted
basis. The Company expects to continue to expand its commercial lines business
by offering additional products and packages which enhance its current property
and liability coverages, by identifying profitable programs and books of
business and by selectively adding high quality general agents. Examples of such
additional products and programs include a commercial automobile product and
specialty programs, which may include miscellaneous professional liability
coverage. The Company recently announced in January, 1999, that it would focus
its premium writings of non-standard automobile in the state of California and
would run-off the non-standard automobile premium in the six remaining states.
In 1998, the automobile premium written in California represented approximately
60% of total automobile premium. The six states where the Company expects to
run-off the automobile premium represented the remaining 40%.
The Company's commercial insureds consist primarily of small, "Main Street"
businesses, including restaurants, taverns, retailers and artisan contractors,
located principally in small towns and suburban and rural areas. In addition,
the Company has developed customized products and coverages for other small
commercial insureds such as day care facilities, fitness centers and special
events. The Company believes it has benefited from a general migration of small
businesses out of urban centers and into suburban and rural areas. Industry
consolidation, corporate downsizing and the increased use of communications
technology and personal computers, among other factors, have contributed to the
high growth in the number of small businesses in these areas.
The Company's non-standard personal automobile insurance product is designed
for insureds who do not qualify for preferred or standard automobile insurance
because of their payment history, driving record, age, vehicle type or other
underwriting criteria or market conditions. Non-standard personal automobile
business represented approximately 25% of the Company's gross written premiums
in 1998 as compared to 35% of gross written premium in 1997. In 1999,
non-standard personal automobile premium is not expected to represent more than
10% of the Company's gross written premiums.
Penn-America Insurance Company was formed in 1975 by Irvin Saltzman, who
began working in the insurance industry in 1947 when he founded a general
agency. Jon S. Saltzman, Irvin Saltzman's son, is President and Chief Executive
Officer of the Company and has been employed by the Company since 1986. The
Company completed an initial public offering ("IPO") on October 28, 1993, at a
price to the public of $6.00 per share. Currently, the Saltzman family,
substantially through their ownership of Penn Independent Corporation, owns
approximately 32.9% of the Company's Common Stock.
Financial Information About Business Segments
The Company has two reported segments: commercial and personal lines. These
segments are managed separately because they have different customers, and
require different pricing and expense structures. The Company does not allocate
assets between segments because assets are reviewed in total by management for
decision-making purposes.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies in the Company's 1998 annual
report. The Company evaluates segment profit based on profit or loss from
operating activities. Segment profit or loss from operations is pre-tax and does
not include unallocated expenses, but does include investment income
attributable to insurance transactions.
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Segment profit or loss, therefore, excludes federal income taxes,
unallocated expenses and investment income attributable to equity as opposed to
investment income attributable to insurance transactions. The Company currently
has one major customer accounting for over 10% of the Company's revenue. In 1998
and 1997, the Company derived approximately 18.4% and 21.3% of its revenues
from this one agent. In 1996, the Company had two major customers and derived
24.7% of its revenues from these two agents.
The following is a summary of our segment revenue and segment profit for the
years ended December 31, 1998, 1997 and 1996:
1998
----
Commercial Personal Total
---------- -------- ------
(in thousands)
Premiums earned $62,949 $26,544 $89,493
Net investment income from insurance
operations 4,126 945 5,071
----------- -------- ------
Total segment revenues 67,075 27,489 94,564
----------- -------- ------
Segment losses and LAE 37,121 18,612 55,733
Segment expenses 18,687 8,547 27,234
----------- --------- -------
Total segment losses and expenses 55,808 27,159 82,967
----------- --------- -------
Segment profit $11,267 $330 $11,597
============ ========= =======
Unallocated items:
Net investment income from equity 5,710
Unallocated expenses (4,784)
Income taxes (3,642)
-------
Net earnings $ 8,881
=======
1997
------
Commercial Personal Total
---------- -------- -----
Premiums earned $ 57,189 $ 34,460 $ 91,649
Net investment income from insurance
operations 4,764 934 5,698
Other income 442 230 672
---------- ------- ------
Total segment revenues 62,395 35,624 98,019
---------- ------- ------
Segment losses and LAE 32,723 25,005 57,728
Segment expenses 15,822 11,004 26,826
---------- ------- ------
Total segment losses and expenses 48,545 36,009 84,554
========== ======= ======
Segment profit (loss) $ 13,850 $ (385) $ 13,465
========== ======= ======
Unallocated items:
Net investment income from equity 4,834
Unallocated expenses (4,518)
Income taxes (4,136)
--------
Net earnings $ 9,645
========
1996
-----
Commercial Personal Total
---------- -------- ------
Premiums earned $ 49,667 $ 19,414 $69,081
Net investment income from insurance
operations 3,832 433 4,265
---------- -------- ------
Total segment revenues 53,499 19,847 73,346
----------- -------- ------
Segment losses and LAE 30,887 12,405 43,292
Segment expenses 13,026 6,147 19,173
----------- -------- ------
Total segment losses and expenses 43,913 18,552 62,465
=========== ======== ======
Segment profit $ 9,586 $ 1,295 $ 10,881
=========== ======== ======
Unallocated items:
Net investment income from equity 3,346
Unallocated expenses (3,845)
Income taxes (3,389)
-------
Net earnings $ 6,993
========
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Total segment revenues of $94.6 million, $98.0 million and $73.3 million
plus unallocated net investment income from equity of $5.7 million, $4.8 million
and $3.3 million equals total Company revenues of $100.3 million, $102.9
million, and $76.7 million for the years ended December 31, 1998, 1997 and 1996,
respectively.
Lines of Business
The following table sets forth an analysis of gross earned premium by
specific product lines during the periods indicated:
<TABLE>
<CAPTION>
Years ended
-------------------------------------------------------------------------
1998 1997 1996
---------------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent
----------- ---------- ---------- ----------- ---------- -----------
<C> <C> <C> <C> <C> <C>
(dollars in thousands)
-------------------------------------------------------------------------
<S>
Commercial lines:
Commercial multi-peril $39,113 40.3% $35,687 35.9% $29,345 38.7%
Liability 24,863 25.6 23,486 23.6 21,418 28.2
Property 5,398 5.6 5,502 5.6 5,556 7.3
----------- ---------- ---------- ----------- ---------- -----------
69,374 71.5 64,675 65.1 56,319 74.2
----------- ---------- ---------- ----------- ---------- -----------
Personal Lines:
Auto liability 22,844 23.5 29,310 29.5 15,772 20.8
Auto physical damage 4,799 5.0 5,400 5.4 3,785 5.0
----------- ---------- ---------- ----------- ---------- -----------
27,643 28.5 34,710 34.9 19,557 25.8
----------- ---------- ---------- ----------- ---------- -----------
Total gross earned premium $97,017 100.0% $ 99,385 100.0% $ 75,876 100.0%
=========== ========== ========== =========== ========== ===========
</TABLE>
o Commercial General Liability. The Company's commercial general liability
insurance is written on an occurrence policy form (as opposed to a
claims-made policy form) and provides limits generally ranging from $25,000
to $3 million, with the majority of such policies having limits of between
$500,000 and $1 million. The Company's general liability policies pay
defense and related expenses in addition to per occurrence and aggregate
policy limits. General liability insureds include restaurants, bars and
taverns, retail operations, garage liability, contractors and similar
classes.
o Commercial Property. The Company's commercial property lines provide limits
usually no higher than $4 million, with almost all of the policies being
written at limits less than $1 million. Properties insured include
restaurants, bars and taverns, retail operations, vacant buildings and
other similar classes.
o Commercial Multi-Peril. The Company also writes the same commercial
property and general liability risks together as a "package" for its
insureds, generally referred to as "commercial multi-peril." The limits on
these policies are the same as if written on a monoline basis. Consistent
with the current industry trend, the Company has been writing more
commercial multi-peril policies over the last several years than individual
property and liability policies. The Company expects this trend to continue
in light of the fact that a substantial number of the Company's commercial
insureds customarily require both liability and property insurance
coverage, together with standard Insurance Services Office ("ISO") forms
which make it easier and more efficient to write such multi-peril policies.
o Business Automobile and Commercial Umbrella. The Company wrote both
business automobile and commercial umbrella coverages to enhance its
commercial multi-peril ("package") writings.The types of risks and insureds
targeted are similar to those covered by other policies, such as,
restaurants, bars and taverns, retail operations, artisan contractors and
similar classes. The business automobile insurance (cars and light trucks)
can be written up to $1 million liability limits. Commercial umbrella
insurance can be
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written for limits up to $5 million with significant reinsurance support
from General Reinsurance Corporation. For commercial umbrella, Penn-America
must write the primary $1 million liability limit. The Company expects that
these coverages will further expand package writings and help increase
renewal retention of existing policies. In all of its commercial product
lines, the Company is continuously developing specialized programs for
certain industry segments to meet the needs of these markets. For example,
the Company has developed programs for independent fitness centers,
day-care operations, low-hazard miscellaneous professional liability
coverages and special events. As a group, these programs are a significant
benefit to the Company's marketing efforts, although individually they do
not generate a material amount of the Company's gross written premiums.
Non-Standard Personal Automobile. The Company announced in January 1999,
that it would run-off its non-standard personal automobile business in the
states of Washington, Montana, Alabama, North Dakota, South Dakota and
Nevada and focus its efforts on non-standard personal automobile in the
state of California. The California non-standard personal automobile
business is written at very low statutory coverage limits, and, is written
predominantly on a monthly policy basis.
Marketing and Distribution
The Company currently markets its insurance products through a select
number of high quality general agents. The Company believes that it benefits
significantly from a general agency system because it obtains the significant
underwriting and marketing expertise of the general agents who have strong
business experience and relationships in their local territory. In addition, the
general agency system allows the Company to avoid the expense of maintaining
national or regional sales forces. This enables the Company to focus its efforts
on reviewing the underwriting decisions of its agents and evaluating submission
business, rather than devoting greater resources to making routine underwriting
decisions.
The Company actively competes for quality general agents to distribute its
products. The Company selectively appoints general agents and grants authority
on a state-by-state basis so that each general agent only has authority in the
area where they have marketing expertise. Prior to appointing a general agent,
the Company extensively reviews the candidate's financial condition, geographic
diversification of risk, historical loss experience and reputation, as well as
the agent's results and practices with other insurers. An on-site review is made
of the prospective agent's office, including an audit of selected policy files
and confirmation that the agent has sufficient experience to merit authority to
bind the Company only to appropriate risks. The agent is also interviewed at the
Company's office in order to confirm the compatibility between the agent and the
Company's underwriting staff. Such a comprehensive review is necessitated by the
Company's philosophy of establishing an agent relationship only if it has
long-term potential.
Once appointed, the Company provides each general agent with a
comprehensive agency manual which enables the agent to begin writing business
immediately. The manual allows the agent to write coverages effectively and
consistently within the Company's comprehensive underwriting guidelines. The
agents are provided limited binding authority, based primarily on Insurance
Services Office ("ISO") rates and forms, to write a variety of property, general
liability, commercial multi-peril and commercial automobile business, provided
that the risks and terms involved in a particular coverage are within the
guidelines set forth in the agency manual. The Company has devoted extensive
research to the development of its detailed agency manual to enable its agents
to select and price risks consistently. The Company's agency manual is regularly
updated to be responsive to changes in the marketplace. The Company devotes
substantial resources to the continuous monitoring and support of its general
agents.
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The general agents are compensated on a commission basis. During 1998, the
Company, increased by 10%, the commission on commercial business from 20% to
22%. For personal lines automobile business, the average commission is 26.5%. A
portion of this commission is passed on to the retail insurance broker. In
addition, the general agency contracts between the Company and its general
agents contain profit sharing incentives under the Agents' Profit Sharing and
Performance Award Program, which is designed to reward general agents who meet
the Company's loss ratio and premium volume criteria. The Company also provides
performance awards under this program to its commercial agents for timely policy
issuance, timely premium payments and successful underwriting audits. Such
contingent commissions and performance awards accounted for 3.8% of the total
commissions paid by the Company in 1998. The Agents' Profit Sharing and
Performance Award Program provides for at least one-third of the contingent
commission awards be given in the form of common stock. The Company authorized
75,000 shares of common stock for issuance under this program. Stock awards for
1997, which were issued in May 1998, amounted to 20,437 shares, accounting for
50.0% of the total contingent commissions paid for 1997. In May 1998, the
Company began a new program under which the Company will award $1,000 in the
form of Common Stock to each new general agent it appoints. The contingent stock
award for 1998 will be issued in May 1999.
The following table sets forth the geographic distribution of the Company's
gross written premiums for the periods indicated:
<TABLE>
<CAPTION>
Years ended
-----------------------------------------------------------------------------------------------------
December 31, 1998 December 31, 1997 December 31, 1996
-----------------------------------------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent
(in thousands) (in thousands) (in thousands)
<S> <C> <C> <C> <C> <C> <C>
Pacific $23,969 25.3% $ 26,126 25.0% $ 29,435 36.6%
South 16,346 17.2 16,236 15.5 15,677 19.5
Southwest 16,027 16.6 18,625 17.8 11,693 14.5
Midwest 14,392 15.2 12,198 11.7 4,685 5.8
Mountain 9,321 9.8 14,119 13.4 509 0.7
Mid-Atlantic 8,998 9.5 9,876 9.4 10,665 13.2
New England 6,044 6.4 7,514 7.2 7,832 9.7
============== ============ =============== ============= ============== =============
$95,097 100.0% $104,694 100.0% $ 80,496 100.0%
============== ============ =============== ============= ============== =============
</TABLE>
Underwriting and Pricing
In the commercial property and casualty market, the rates and terms of
coverage provided by property and casualty insurance carriers are frequently
based on ISO rates and forms. ISO makes available to its members advisory,
rating, statistical and actuarial services, policy language and related
services. ISO and its related organizations currently provide such services,
including rates and forms, to more than 1,500 property and casualty insurance
companies in the U.S. One of the important services that ISO provides is an
actuarial-based estimate of the "ideal" rate for risks in each of approximately
1,250 risk classifications. These rates reflect an analysis of the loss and loss
adjustment expenses on claims reported to ISO. ISO statistics, however, include
only claims and policy information reported to ISO, and therefore do not reflect
all of the loss experience for each class. Also, the historical results for a
particular class may not be sufficient to provide actuarially meaningful
results.
The Company primarily uses ISO statistics as a benchmark for risk selection
and pricing. Other carriers may or may not rely as heavily on this information,
and several of the larger standard carriers have developed their own actuarial
databases. As a general rule, most standard carriers set rates lower than ISO
rates. However,
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the Company, because of its strategy of providing insurance to under-served
markets, typically charges 100% or more of prescribed ISO rates.
All policies written by the Company are either generated by the general
agents pursuant to their binding authority or on approval by the Company upon
submission by the general agents if the risk falls outside of that authority. In
1998, approximately 92% of the commercial policies written by the Company were
on a binding authority basis, generating approximately 91% of the Company's
commercial lines gross written premiums. The personal automobile program is
written solely on a binding authority basis. The Company has established strict
commercial underwriting guidelines within the terms of its agency manual which
identify the risks that: (i) are within the binding authority of the general
agents; (ii) must be submitted to the Company and (iii) the Company would not
insure on any basis.
The agency manual was prepared after extensive research, including input
from the Company's commercial reinsurers, and is regularly updated by the
Company's underwriting staff. Generally, the Company provides its general agents
with pricing flexibility on a per-policy basis, with the objective that in the
aggregate, the weighted average premium of all new and renewal commercial
policies written by a general agent are at approximately 110% of ISO rates.
According to ISO data, most standard carriers typically price at 60-80% of ISO
rates. The Company's underwriting staff carefully monitors its general agents
and performs on-site reviews and underwriting audits of its agents on a periodic
basis for quality and compliance with Company guidelines.
With respect to commercial risks written by general agents under binding
authority, the Company generally has 60 days from the effective date to cancel a
policy if the risk insured does not comply with the Company's underwriting
guidelines. In the event an agent exceeds its authority by binding the Company
on a risk when it had no authority to do so, the Company is at risk for that
policy until it receives the policy and effects a cancellation. General agents
must deliver all policies to the Company within 35 days of the date written. The
Company monitors this activity closely through its computer system and
underwriting department.
The commercial risks the Company writes on a submit basis are generally
similar to the binding authority classes, but may have larger coverage limits or
greater complexity. In determining whether to accept such risks, the Company's
underwriting staff will review such factors as the type of risk, the agent's
knowledge and control of the risk, potential underwriting profitability and
historical data regarding any similar risk previously underwritten by the
Company. During this process, the Company will quote a proposed premium
reflecting relevant ISO rates, if available, and adjustments that may be
warranted based on the individual characteristics of the particular risk. The
underwriting staff then assembles a complete underwriting file with respect to
the particular submission and specific approval procedures are employed,
depending on the characteristics and magnitude of the particular risk.
The Company generally reviews all commercial policies as they are received
from general agents for completeness, accuracy, and compliance with the
Company's underwriting guidelines. In addition, the Company conducts a detailed
audit of each of its general agents at least once a year. The audit involves
thoroughly reviewing between 50 and 100 policies to check for completeness,
accuracy, pricing, use of proper exclusions, verification of information, and
compliance with the Company's regulatory filings, as well as the general agent's
use of the Company's overall product lines.
The Company routinely reviews selected data for its non-standard personal
automobile policies as such data is received from its general agent for
completeness, accuracy, and compliance with the Company's underwriting
guidelines. Generally, the Company conducts detailed on-site audits of its
personal lines general agent on a quarterly basis. These audits involve
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thoroughly reviewing between 50 and 100 policies to verify proper
classifications, ratings, accident and violation surcharges, adherence to manual
guidelines, use of proper exclusions, verification of information regarding
inspections and compliance with the Company's regulatory filings. The Company
provides its general agent with written feedback based on the results of its
audits and monitors its timely responses to any issues highlighted in such
audits.
Claims Management and Administration
Commercial Claims
The Company's approach to commercial claims management is designed to
investigate reported incidents at the earliest juncture, to select, manage and
supervise all legal and adjustment aspects thereof and to provide a high level
of service and support to general agents, retail insurance brokers and insureds
throughout the claims process. The Company's commercial general agents have no
authority to settle claims or otherwise exercise control over the claims
process. All commercial lines claims are supervised and processed centrally by
the Company's claims management staff. Senior management reviews all claims over
$25,000.
Personal Automobile Claims
Prior to November 1998, all personal automobile claims were handled by the
Company. All claims for the personal automobile run-off business in the state of
Alabama, Nevada, Montana and North and South Dakota are continuing to be handled
by the Company's internal claims unit. When the claims are received by the
Company, an initial reserve is established using an average reserve which
reflects that state's automobile loss experience. Subsequent to the
establishment of the initial reserve, adjustments are made to the reserve to
reflect the latest information on the claims'estimated settlement costs.
For personal automobile business written in the state of California, The
Company's agent has a claims management company, which as of November 1998,
handles all claims on all newly written business as well as any claims that
are made on previously written business. Existing open claim files in
California will continue to be managed by the Company's internal claims unit.
The agent has pre-established settlement authority depending on coverage.
The agent establishes an initial average reserve based on California's
experience. Any changes to the initial average reserve must be approved by the
Company.
For claims in the state of Washington, the Company has established similar
settlement authority for the management of claims. An outside claims adjusting
company has been retained by the Company to manage the run-off claim activity in
that state.
For both outside claims management companies, the Company conducts quarterly
audits and reviews the claim file management.
Reserves
The Company is directly liable for loss and loss adjustment expense payments
under the terms of the insurance policies that it writes. In many cases, several
years may elapse between the occurrence of an insured loss, the reporting of the
loss to the Company and the Company's payment of that loss. The Company reflects
its liability for the ultimate payment of all incurred losses and loss
adjustment expenses by establishing loss and loss adjustment expense reserves
for both reported and unreported claims, which are balance sheet liabilities
representing estimates of future amounts needed to pay claims and related
expenses.
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When a claim involving a probable loss is reported, the Company establishes
a case reserve for the estimated amount of the Company's ultimate loss and loss
adjustment expense payments. The estimate of the amount of the ultimate loss is
based upon such factors as the type of loss, jurisdiction of the occurrence,
knowledge of the circumstances surrounding the claim, severity of injury or
damage, potential for ultimate exposure and policy provisions relating to the
claim. The loss adjustment expenses include the estimated expenses of settling
the claim, including legal and other fees, and general expenses of administering
the claims adjustment process.
All newly reported claims received with respect to personal automobile
policies are established with an initial average reserve. The average reserves
for these claims are determined every quarter by dividing all of the closed
claims into the total amount paid during the three month period. If a claim is
open more than 90 days, that open case reserve is evaluated and the reserve is
adjusted upward or downward according to the facts of that particular claim.
In addition, management establishes reserves on an aggregate basis to
provide for Incurred But Not Reported Losses ("IBNR"). The Company's independent
actuarial consultant annually reviews the provision for IBNR and the reserves
taken as a whole. The Company does not discount its loss reserves. The estimates
of reserves are subject to the effect of trends in claims severity and frequency
and are continually reviewed. As part of this process, the Company reviews
historical data and considers various factors, including known and anticipated
legal developments, changes in social attitudes, inflation and economic
conditions. As experience develops and other data become available, these
estimates are revised, as required, resulting in increases or decreases to
existing reserves. Adjustments are reflected in results of operations in the
period in which they are made and may deviate substantially from prior
estimates.
The following table sets forth a reconciliation of beginning and ending
reserves as shown on the Company's financial statements (on a GAAP basis,
without regard to reinsurance) for unpaid losses and loss adjustment expenses
for the periods indicated:
<TABLE>
<CAPTION>
Years ended December 31,
------------------------------------------------------
1998 1997 1996
---------------- ----------------- -----------------
(in thousands)
<C> <C> <C>
<S>
Reserves for unpaid losses and loss adjustment expenses,
at beginning of year $84,566 $70,728 $ 60,139
---------------- ----------------- -----------------
Incurred losses and loss adjustment expenses:
Provision for insured events of the current year 60,740 61,916 48,076
Increase in provision for insured
events of prior years 1,074 916 3,744
---------------- ----------------- -----------------
Total incurred losses and loss adjustment expenses 61,814 62,832 51,820
---------------- ----------------- -----------------
Payments:
Losses and loss adjustment expenses attributable
to insured events of the current year 22,716 21,408 17,931
Losses and loss adjustment expenses attributable
to insured events of prior years 34,727 27,586 23,300
---------------- ----------------- -----------------
Total payments 57,443 48,994 41,231
---------------- ----------------- -----------------
Reserves for unpaid losses and loss adjustment expenses,
at end of year $88,937 $84,566 $ 70,728
================ ================= =================
</TABLE>
Page 11
<PAGE>
The Company has experienced adverse development of gross reserves of
$1.1 million, $916,000 and $3.7 million in 1998, 1997 and 1996, respectively,for
prior years' insured events. The net reserves had unfavorable development of
$86,000 and $341,000 for 1998 and 1997 respectively and favorable development of
$804,000 in 1996. The unfavorable development on the gross reserves occurred
primarily on reserves held as of December 31, 1993, which deficiency is ceded to
the Company's reinsurers. The unfavorable development on the net reserves in
1998 and 1997 was primarily due to the personal automobile line. The
establishment of reserves is an inherently subjective process and, therefore,
the historical gross or net redundancies or deficiencies may not be indicative
of the likelihood or amount of future redundancies or deficiencies.
The following table represents the development of unpaid loss and loss
adjustment expense reserves during the ten years ended December 31, 1997. The
top of the table reflects the ten year development of the Company's reserves net
of reinsurance. The bottom of the table reconciles 1992 through 1998 ending
reserves to the gross reserves in the Company's consolidated financial
statements. Prior to 1992, the Company developed its reserves on a net of
reinsurance basis and restatement for those prior years is not presented. The
top line of the table shows the estimated reserve for unpaid loss and loss
adjustment expenses at the balance sheet date for each of the indicated years.
These figures represent the estimated amount of unpaid loss and loss adjustment
expenses for claims arising in all prior years that were unpaid at the balance
sheet date, including losses that had been incurred but not yet reported. The
table also shows the re-estimated amount of the previously recorded reserve
based on experience as of the end of each succeeding year. The estimate changes
as more information becomes available about the frequency and severity of
claims.
Page 12
<PAGE>
<TABLE>
<CAPTION>
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
-------- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Reserves for unpaid losses and
Loss Adjustment expense, as stated $21,741 $25,391 $25,352 $25,681 $26,110 $26,830 $35,307 $46,512 $55,656 $68,863 $72,435
a. Net cumulative paid as of
1 year later $4,911 $8,655 $6,929 $6,605 $7,381 $6,852 $12,383 $17,208 23,660 $30,236
2 years later 10,743 13,361 11,610 10,988 11,127 13,127 20,617 29,612 38,819
3 years later 14,132 16,952 14,667 13,325 15,546 18,656 27,266 38,091
4 years later 15,823 19,050 16,341 16,417 19,253 22,254 32,119
5 years later 17,074 20,359 18,363 19,283 21,503 24,303
6 years later 17,405 21,866 20,214 20,872 22,796
7 years later 18,303 23,383 21,470 21,881
8 years later 19,248 24,476 22,084
9 years later 20,133 24,978
10 years later 20,658
b. Reserves re-estimated as of end of year
1 year later $21,036 $25,128 $23,468 $23,228 $24,478 $23,897 $33,601 $45,708 $55,997 $68,946
2 years later 21,396 24,329 22,658 22,383 21,945 23,489 34,281 47,225 57,913
3 years later 20,570 23,923 22,252 20,471 22,032 24,558 36,453 47,378
4 years later 20,206 23,615 21,465 20,819 22,767 26,335 36,359
5 years later 19,822 23,639 21,469 21,726 23,935 26,380
6 years later 19,499 24,021 21,990 22,550 24,143
7 years later 19,621 24,683 22,609 22,761
8 years later 20,222 25,379 22,609
9 years later 20,829 25,460
10 years later 21,079
Net cumulative redundancy (deficiency) $662 ($69) $2,743 $2,920 $1,967 $450 ($1,052) ($866) ($2,257) ($86)
Gross liability for unpaid losses and
loss adjustment expenses, as stated $31,703 $33,314 $44,796 $60,139 $70,728 $84,566 $88,937
Reinsurance recoverable 5,593 6,484 9,489 13,627 15,072 15,703 16,502
Net liability for unpaid losses and
loss adjustment expenses, as stated $26,110 $26,830 $35,307 $46,512 $55,656 $68,863 $72,435
Gross liability re-estimated - 1 year later $30,609 $32,796 $48,173 $63,884 $71,644 $85,640
Reinsurance recoverable re-estimated 6,131 8,899 14,572 18,176 15,647 16,694
Net liability re-estimated - 1 year later $24,478 $23,897 $33,601 $45,708 $55,997 $68,946
---------------------------------------------------------------------------- ------- -------
Gross liability re-estimated - 2 years later $30,390 $36,243 $53,009 $66,405 $74,312
Reinsurance recoverable re-estimated 8,445 12,754 18,728 19,180 16,399
Net liability re-estimated - 2 years later $21,945 $23,489 $34,281 $47,225 57,913
---------------------------------------------------------------------------- ------- -------
Gross liability re-estimated - 3 years later $33,992 $41,600 $56,042 $66,891
Reinsurance recoverable re-estimated 11,960 17,042 19,589 19,513
Net liability re-estimated - 3 years later $22,032 $24,558 $36,453 $47,378
------------------------------------------------------------------------------ ------- ------
Gross liability re-estimated - 4 years later $38,165 $43,824 $56,167
Reinsurance recoverable re-estimated 15,398 17,489 19,808
Net liability re-estimated - 4 years later $22,767 $26,335 $36,359
------------------------------------------------------------------------------ ------- ------
Gross liability re-estimate - 5 years later $39,956 $44,466
Reinsurance recoverable re-estimated 16,021 18,086
Net liability re-estimated - 5 years later $23,935 $26,380
------------------------------------------------------------------------ ------- ------
Gross liability re-estimate - 6 years later $40,670
Reinsurance recoverable re-estimated 16,527
Net liability re-estimated - 6 years later $24,143
Gross cumulative deficiency ($8,967)($11,152)($11,371)($6,752)($3,584)($1,074)
</TABLE>
a. Net cumulative paid "as of" equals the amounts of paid losses and loss
adjustment expenses subsequent to the year in which the original reserves were
established.
b. Reserves re-estimated "as of" equals the amounts of unpaid losses and loss
adjustment expenses which the company would have originally established based on
experience as of the end of each year. Amounts were calculated as the sum
of the cumulative paid amounts described in (a.) above plus the amounts of
unpaid losses and loss adjustment expenses reevaluated at the end o f each
succeeding year end.
Page 13
<PAGE>
The cumulative redundancy or deficiency represents the aggregate change in
the reserve estimates over all prior years. It should be emphasized that the
table presents a run-off of balance sheet reserves rather than accident or
policy year loss development. Therefore, each amount in the table includes the
effects of changes in reserves for all prior years.
The following table sets forth ratios for the Company and the industry
prepared in accordance with Statutory Accounting Practices ("SAP") prescribed or
permitted by state insurance authorities. The statutory combined ratio, which
reflects underwriting results but not investment income, is a traditional
measure of the underwriting performance of a property and casualty insurer. This
ratio is the sum of (i) the ratio of incurred losses and loss adjustment
expenses to net earned premium ("loss ratio"); and (ii) the ratio of expenses
incurred for commissions, premium taxes, administrative and other underwriting
expenses to net written premium ("expense ratio").
Years ended December 31,
----------------------------------------
1998 1997 1996
------------ ----------- ------------
The Company:
SAP Basis
Loss and loss adjustment expense ratio 62.3% 63.0% 62.7%
Expense ratio 35.0 32.3 31.6
============ =========== ============
Combined ratio 97.3% 95.3% 94.3%
============ =========== ============
Years ended December 31,
----------------------------------------
1998 (1) 1997 (2) 1996 (2)
------------ ----------- ------------
Property and casualty insurance industry :
SAP Basis
Loss and loss adjustment expense ratio 75.7% 73.4% 78.6%
Expense ratio 27.2% 26.6% 26.2%
Dividend ratio 1.4% 1.1% 1.1%
============ =========== ============
Combined ratio 104.3% 101.1% 105.9%
============ =========== ============
(1) Source: Industry Estimate for the first nine months of 1998, Best Week,
P/C Supplement, December 14, 1998 edition, including dividend ratios.
(2) 1997 and 1996, Best Aggregates & Averages - P/C.
Reinsurance
The Company purchases reinsurance through contracts called "treaties" to
reduce its exposure to liability on individual risks, and to protect against
catastrophic losses. Reinsurance involves an insurance company transferring or
"ceding" a portion of its exposure on a risk to another insurer (the
"reinsurer"). The reinsurer assumes the exposure in return for a portion of the
premium. The ceding of liability to a reinsurer does not legally discharge the
primary insurer from its liability for the full amount of the policies on which
it obtains reinsurance. The primary insurer will be required to pay the entire
loss if the reinsurer fails to meet its obligations under the reinsurance
agreement.
In formulating its reinsurance programs, the Company is selective in its
choice of reinsurers and considers numerous factors, the most important of which
are the financial stability of the reinsurer, its history of responding to
claims and its overall reputation. In an effort to minimize its exposure to the
insolvency of its reinsurers, the Company evaluates the acceptability and
Page 14
<PAGE>
reviews the financial condition of each reinsurer annually. The Company's policy
is to use only reinsurers that have an A.M. Best rating of "A (Excellent)" or
better and that have at least $250 million in policyholder surplus.
The Company's current treaty reinsurance is with General Re, which is rated
"A++ (Superior)" by A.M. Best. Since January 1995, the Company has maintained
net retention limits of $500,000 (including indemnity and/or loss adjustment
expense) for casualty insurance. Net retention limits for property insurance
were $300,000 for 1998 and $200,000 per risk for 1997 and 1996. The combined
Company retention for any one loss resulting from a common occurrence involving
both the property and casualty coverage on a single risk of $500,000. The
Company also maintains casualty contingent excess coverage with General Re,
which covers exposures such as punitive damages and other extra-contractual
obligations, losses in excess of policy limits (such as bad faith and errors and
omissions) and liability actions brought by two or more of the Company's
insureds against each other resulting from the same occurrence.
For 1998 and 1999, the Company is covered for catastrophe losses by a
consortium of reinsurers including General Re, Lloyds and other "A" rated or
better reinsurers. Under the terms of the agreement, the Company retains the
first $2 million of losses and the consortium reinsures 95.0% of the next $23
million, with the Company retaining 5.0% of each layer (1st layer, $3 million,
2nd layer, $5 million, 3rd layer, $15 million) within the $23 million.
The Company may write individual risks with limits greater than the treaty
limits on a per policy basis by using facultative reinsurance. The facultative
reinsurers must also meet Penn-America's reinsurer guidelines.
The following table reflects the amount of premiums written and ceded under
reinsurance treaties:
Years ended December 31,
-----------------------------------------
1998 1997 1996
---- ---- ----
(in thousands)
Gross written premiums $ 95,097 $ 104,694 $ 80,496
Ceded written premiums 7,268 8,133 7,027
Investments
The Company's investment policy seeks to maximize investment income consistent
with the overriding objective of maintaining liquidity and minimizing risk.
Approximately 98% of the Company's fixed income securities as of December 31,
1998 were rated "A" or better by Standard & Poor's or an equivalent rating by
Moody's. As of December 31, 1998, the Company's fixed maturity investments had
an average duration of 3.0 years. Publicly traded equity securities, the
majority of which consisted of preferred stocks, represented 15.9% of the
Company's investment portfolio as of December 31, 1998.
As of December 31, 1998, the Company's investment portfolio contained $31.0
million of mortgage- and asset-backed securities. All of these securities are
"AAA" rated securities issued by government and government-related agencies, are
publicly traded, and have market values obtained from an external pricing
service. Changes in estimated cash flows due to changes in prepayment
assumptions from the original purchase assumptions are revised based on current
interest rates and the economic environment. Although the Company is permitted
to invest in other derivative financial instruments, real estate mortgages and
real estate, the Company does not participate in these markets and does not have
any such investments in its investment portfolio.
Page 15
<PAGE>
The Company's investment portfolio is under the direction of the Board of
Directors of Penn-America acting through its Investment Committee (consisting of
Irvin Saltzman, Chairman, Jon Saltzman and Robert Lear). The Investment
Committee establishes and monitors the Company's investment policies, which are
intended to maximize after-tax income while maintaining a high level of quality
and liquidity in its portfolio for insurance operations. All investment
transactions must receive approval from the Chairman of the Investment Committee
prior to their initiation by the Company's outside investment advisors.
The Investment Committee retained New England Asset Management ("NEAM"), a
subsidiary of Gen Re to manage its fixed income portfolio and Carl Domino
Associates, L.P. ("CDA"), a registered investment advisor, to recommend
purchases and sales for the equity portfolio.
The following table shows the classifications of the Company's investments at
December 31, 1998:
<TABLE>
<CAPTION>
Amount
reflected
Fair on balance Percent of
value sheet total
-------------- ---------------- -------------
<C> <C> <C>
(in thousands)
<S>
Fixed maturities:
Available for sale:
U.S. Treasury securities and obligations of
U.S. government agencies $ 5,661 $ 5,661 3.6%
Corporate securities 29,748 29,748 18.7%
Mortgage-backed securities 10,167 10,167 6.4%
Other structured securities 15,737 15,737 9.9%
Municipal 35,919 35,919 22.6%
Public Utilities 8,366 8,366 5.3%
-------------- --------------- -------------
Total 105,598 105,598 66.5%
-------------- --------------- -------------
Held to maturity:
U.S. Treasury securities and obligations of
U.S. government agencies 11,194 11,046 7.0%
Corporate securities 9,496 9,396 5.9%
Mortgage-backed securities 5,158 5,123 3.2%
Municipal 403 399 0.3%
Public utilities 1,019 992 0.6%
-------------- --------------- --------------
Total 27,270 26,956 17.0%
-------------- ---------------- -------------
Total fixed maturity securities 132,868 132,554 83.5%
-------------- ---------------- -------------
Equity securities:
Common stock 8,112 8,112 5.1%
Preferred stock 17,126 17,126 10.8%
-------------- --------------- -------------
Total equity investments 25,238 25,238 15.9%
-------------- --------------- -------------
Short-term investments 997 997 0.6%
============== =============== =============
Total investments $159,103 $158,789 100.0%
============== =============== =============
</TABLE>
Page 16
<PAGE>
The following table sets forth the composition of the Company's portfolio of
fixed maturity investments by rating at December 31, 1998:
Amortized Percentage Cumulative
Cost of portfolio percentage
---------------------------------------
(in thousands)
Ratings (1)
- -------------------------------------------
AAA (including U.S. government obligations) $73,219 56.2 % 56.2 %
AA 20,674 15.9 72.1
A 33,420 25.6 97.7
BBB 3,008 2.3 100.0
---------------------------------------
Total $130,321 100.0 % 100.0 %
=======================================
(1) Ratings are assigned primarily by Standard & Poor's with the remaining
ratings assigned by Moody's and converted to the equivalent Standard &
Poor's ratings.
The following table sets forth the net investment income results of the
Company for each of the years in the periods indicated:
1998 1997 1996
------ ------ ------
(in thousands)
Interest on fixed maturities $8,921 $ 7,506 $ 6,108
Dividends on equity securities 1,528 1,123 691
Interest on short-term
investments and cash 732 852 380
Other 2 42 61
-------------------------------------------
Total investment income 11,183 9,523 7,240
Investment expense (420) (305) (535)
-------------------------------------------
Net investment income $10,763 $ 9,218 $ 6,705
===========================================
Competition
The property and casualty insurance industry is highly competitive and
includes several thousand insurers, ranging from large companies offering a wide
variety of products worldwide to smaller, specialized companies in a single
state or region and offering in some cases only a single product. The Company
competes with a significant number of these insurers in attracting quality
general agents and in selling insurance products. Many of the Company's existing
or potential competitors are larger, have considerably greater financial and
other resources, have greater experience in the insurance industry and offer a
broader line of insurance products than the Company. In commercial lines, the
Company competes with excess and surplus lines and specialty admitted insurers
including Scottsdale Insurance Company (part of Nationwide Mutual Insurance
Company), Essex Insurance Company (Markel Corporation), Nautilus Insurance
Company (W.R. Berkley Corporation), Acceptance Insurance Company and Western
World Insurance Company. The Company also competes with new forms of insurance
organizations (such as risk retention groups) and alternative self-insurance
mechanisms. The Company believes that in order to be successful in its market,
it must be aware of pricing cycles, must be able to minimize the impact of such
cycles through tight expense control and superior customer service and must
continually identify profitable opportunities. Other competitive factors include
ratings by A.M. Best, pricing and admitted versus excess and surplus lines
status in a given state.
Page 17
<PAGE>
Regulation
General. The Company is subject to regulation under the insurance statutes
and regulations, including insurance holding company statutes, of the various
states in which it does business. These statutes are generally designed to
protect the interests of insurance policyholders, as opposed to the interests of
stockholders, and they relate to such matters as the standards of solvency which
must be met and maintained; the licensing of insurers and their agents; the
nature and limitations of investments; deposits of securities for the benefit of
policyholders; approval of policy forms and premium rates; periodic examination
of the affairs of insurance companies; annual and other reports required to be
filed on the financial condition of insurers or for other purposes;
establishment and maintenance of reserves for unearned premiums and losses; and
requirements regarding numerous other matters. All insurance companies must file
annual statements with certain state regulatory agencies and are subject to
regular and special financial examinations by those agencies. The last
regulatory financial examination of Penn-America Insurance Company was completed
by the Pennsylvania Insurance Department in 1995, covering the five-year period
ended December 31, 1994, and for Penn-Star Insurance Company in 1997, covering
its initial licensing by the Department.
Since 1993, Penn-America Insurance Company has maintained an "A (Excellent)"
rating from A.M. Best Company, Inc. ("A.M. Best"), which rating was reaffirmed
by A.M. Best on August 31, 1998, and included Penn-Star as a pooled rating.
A.M. Best's ratings are based upon factors of concern to policyholders,
including financial condition and solvency, and are not directed to the
protection of investors.
Penn-America Insurance Company and Penn-Star Insurance Company combined are
licensed as an admitted insurer in 34 states and are approved non-admitted
(excess and surplus lines) insurer in the other 16 states and the District of
Columbia as of December 31, 1998. All insurance is written through licensed
agents and brokers. In states in which the Company operates on a non-admitted
basis, general agents and their retail insurance brokers generally are required
to certify that a certain number of licensed admitted insurers will not write a
particular risk prior to placing that risk with the Company.
Insurance Holding Company Laws. Pennsylvania, the Companies' state of
domicile, has laws governing insurers and insurance holding companies. The
Pennsylvania statutes generally require insurers and insurance holding companies
to register and file reports concerning their capital structure, ownership,
financial condition and general business operations. Under the statutes, a
person must generally obtain the Pennsylvania Insurance Department's approval to
acquire, directly or indirectly, 10% or more of the outstanding voting
securities of the Company or any of its insurance company subsidiaries. The
insurance department's determination of whether to approve any such acquisition
is based on a variety of factors, including an evaluation of the acquirer's
financial condition, the competence of its management and whether competition
would be reduced. All transactions within a holding company's group affecting an
insurer must be fair and reasonable, and the insurer's policyholders' surplus
following any such transaction must be both reasonable in relation to its
outstanding liabilities and adequate for its needs. Notice to applicable
regulators is required prior to the consummation of certain transactions
affecting insurance subsidiaries of the holding company group.
Page 18
<PAGE>
Dividend Restrictions. As an insurance holding company, PAGI is primarily
dependent on dividends and other permitted payments from Penn-America to provide
cash for the payment of any cash dividends to its stockholders. The payment of
dividends to PAGI by Penn-America and to Penn-America by Penn-Star are subject
to state regulations, primarily the insurance laws of Pennsylvania. Generally,
these laws provide that, unless prior approval is obtained, dividends of a
property and casualty insurance company in any consecutive 12-month period shall
not exceed the greater of 100% of its statutory net income for the most recent
calendar year or 10% of its statutory policyholders' surplus as of the preceding
year end. The maximum annual dividends payable by Penn-America without prior
approval in 1999 is approximately $9.5 million. Penn-America paid a dividend of
approximately $8.0 million to PAGI in 1998. Insurance regulators have broad
powers to prevent reduction of statutory surplus to inadequate levels, and there
is no assurance that dividends of the maximum amounts calculated under any
applicable formula would be permitted.
During 1998, the Board of Directors of PAGI approved a corporate stock
repurchase plan. Initially, up to 1 million shares were authorized by the Board.
Subsequently, in February 1999, an additional 500,000 shares were authorized for
a total of 1.5 million shares authorized by the Board. As of December 31, 1998,
542,325 shares were acquired by the Company at a cost of approximately $5.6
million. As of March 15, 1999, an additional 666,000 shares have been acquired
by the Company.
Insurance Guaranty Funds. Under insolvency or guarantee laws in states in
which Penn-America is licensed as an admitted insurer and in New Jersey,
organizations have been established (often referred to as guaranty funds) with
the authority to assess admitted insurers up to prescribed limits for the claims
of policyholders insured by insolvent, admitted insurance companies. Surplus
lines insurance companies are generally not subject to such assessments, but
neither are their policyholders eligible to file claims against the guaranty
funds, except in New Jersey.
Additional Legislation or Regulations. New regulations and legislation are
proposed from time to time to limit damage awards, to bring the industry under
regulation by the federal government, to control premiums, policy terminations
and other policy terms, and to impose new taxes and assessments. Difficulties
with insurance availability and affordability have increased legislative
activity at both the federal and state levels. Some state legislatures and
regulatory agencies have enacted measures, particularly in personal lines, to
limit midterm cancellations by insurers and require advance notice of renewal
intentions. In addition, Congress is investigating possible avenues for federal
regulation of the insurance industry.
Employees
The Company has approximately 105 employees. The Company is not a party to
any collective bargaining agreements and believes that its employee relations
are good.
Page 19
<PAGE>
ITEM 2. PROPERTIES
The Company leases approximately 23,000 square feet in an office building
located in Hatboro, Pennsylvania. The office building also houses Penn
Independent and its subsidiaries. The Company leases the space from Mr. Irvin
Saltzman, Chairman of the Board of Directors of the Company, pursuant to a lease
agreement which expires on June 30, 2000, and provides for an annual rental
payment of approximately $281,112, which amount is considered by the Company to
be at fair market value. The lessee has the option to renew the lease for one
additional five year period at the expiration of the original term of the lease.
ITEM 3. LEGAL PROCEEDINGS
The Company is subject to routine legal proceedings in the normal course of
operating its insurance business. The Company is not involved in any legal
proceedings which reasonably could be expected to have a material adverse effect
on the Company's business, results of operations or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of 1998 to a vote of
holders of the Company's Common Stock.
Page 20
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
The "Market for Common Stock and Related Security Holder Matters" section on
page 31 of the Company's annual report to stockholders for the year ended
December 31, 1998, which is included as Exhibit (13) to this Form 10-K Report,
is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
The "Selected Consolidated Financial Data" section on page 8 of the
Company's Annual Report to stockholders for the year ended December 31, 1998,
which is included as Exhibit (13) to this Form 10-K Report, is incorporated
herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The "Management's Discussion and Analysis of Results of Operations and
Financial Condition" section on pages 9 to 17 of the Company's Annual Report to
stockholders for the year ended December 31, 1998, which is included as Exhibit
(13) to this Form 10-K Report, is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements on pages 18 to 30 of the Company's
Annual Report to stockholders for the year ended December 31, 1998, which is
included as Exhibit (13) to this Form 10-K Report, are incorporated herein by
reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
Page 21
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Director's information will be contained in the Company's definitive
Proxy Statement with respect to the Company's 1999 Annual Meeting of
Shareholders, to be filed with the Securities and Exchange Commission within 120
days following the end of the Company's fiscal year, and is hereby incorporated
by reference thereto.
Executive Officers of the Registrant as of March 12, 1999 are as follows:
Irvin Saltzman 76 Chairman of the Board of Directors of
PAGI and Penn-America
Jon S. Saltzman 41 President and Chief Executive Officer
of PAGI and Penn-America, and Director
Rosemary R. Ferrero, CPA 43 Vice President-Finance, and Treasurer
of PAGI, Vice President, and Chief
Financial Officer of Penn-America
John M. DiBiasi, CPCU 44 Executive Vice President,Underwriting
and Marketing of Penn-America
Garland P. Pezzuolo 34 Secretary and General Counsel
ITEM 11. EXECUTIVE COMPENSATION
This information will be contained in the Company's definitive Proxy
Statement with respect to the Company's 1999 Annual Meeting of Shareholders, to
be filed with the Securities and Exchange Commission within 120 days following
the end of the Company's fiscal year, and is hereby incorporated by reference
thereto.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
This information will be contained in the Company's definitive Proxy
Statement with respect to the Company's 1999 Annual Meeting of Shareholders, to
be filed with the Securities and Exchange Commission within 120 days following
the end of the Company's fiscal year, and is hereby incorporated by reference
thereto.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
This information will be contained in the Company's definitive Proxy
Statement with respect to the Company's 1999 Annual Meeting of Shareholders, to
be filed with the Securities and Exchange Commission within 120 days following
the end of the Company's fiscal year, and is hereby incorporated by reference
thereto.
Page 22
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K
a.) The following consolidated financial statements, financial statement
schedules and exhibits are filed as part of this report:
1. Consolidated Financial Statements
Page*
--------------
Consolidated Balance Sheets at December 31, 1998 and 1997 18
Consolidated Statements of Earnings for the years ended
December 31, 1998, 1997, and 1996 19
Consolidated Statements of Stockholders' Equity for
the years ended December 31, 1998, 1997, and 1996 20
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997, and 1996 21
Notes to Consolidated Financial Statements 22-29
Independent Auditors' Report 30
The following consolidated financial statement schedules for the years 1998,
1997 and 1996 are submitted herewith:
2. Financial Statement Schedules
Schedule I. Summary of Investments - Other Than Investments in
Related Parties
Schedule II. Condensed Financial Information of Parent Company
Schedule III. Supplementary Insurance Information
Schedule IV Reinsurance
Schedule VI. Supplemental Insurance Information Concerning Property
and Casualty Subsidiaries
Independent Auditors' Consent and Report on Schedules
(filed as Exhibit 23).
All other schedules are omitted because they are not
applicable or the required information is included in the financial statements
or notes thereto.
EPS - Statement if not included in notes to financial statements.
- ---------------
*Refers to the respective pages of Penn-America Group's 1998 Annual Report to
Stockholders attached as Exhibit (13). The Consolidated Financial Statements and
Independent Auditors' Report on pages 18 to 30 are incorporated herein by
reference. With the exception of the portions of such Annual Reports
specifically incorporated by reference in this Item and Items 5,6,7 and 8, such
Annual Report shall not be deemed filed as part of this Form 10-K or otherwise
subject to the liabilities of section 18 of the Securities and Exchange Act of
1934.
Page 23
<PAGE>
Exhibit Index
Exhibit No. Description
3.1 Articles of Incorporation of the Registrant. Incorporated by
reference to Exhibit 3.1 to the Registrant's Registration
Statement on Form S-1 (No. 33-66892) filed with the Securities
and Exchange Commission on August 2, 1993.
3.2 Bylaws of the Registrant. Incorporated by reference to Exhibit
3.2 to the Registrant's Registration Statement on Form S-1
(No.33-66892) filed with the Securities and Exchange Commission
on August 2, 1993.
10.2 Agency Agreement between Penn-America Insurance Company
("Penn-America") and Carnegie General Agency. Incorporated by
reference to Exhibit 10.2 to the Registrant's Registration
Statement on Form S-1 (No. 33-66892) filed with the Securities
and Exchange Commission on August 2, 1993.
10.2(a) Amended Carnegie Agreement, effective March 1, 1998, filed
with the Registrant's report on Form 10-K for the period ended
December 13, 1997, which has been filed with the Securities
and Exchange Commission.
10.3 1993 Casualty Excess of Loss Reinsurance Agreement with
National Reinsurance Corporation. Incorporated by reference to
Exhibit 10.3 to the Registrant's Registration Statement on
Form S-1 (No. 33-66892) filed with the Securities and Exchange
Commission on August 2, 1993.
10.3(i) Endorsement Nos. 4 through 6 (Termination Endorsement) to
Casualty Excess of Loss Reinsurance Agreement with National
Reinsurance Corporation. Filed with Registrant's Report on
Form 10-K for the period ended December 31, 1995 which has
been filed with the Securities and Exchange Commission.
10.4 1993 Underlying Homeowners and Dwelling Fire Property Per Risk
Excess of Loss Reinsurance (Run-off Business) Agreement
with National Reinsurance Corporation. Incorporated by
reference to Exhibit 10.4 to the Registrant's
Registration Statement on Form S-1 (No. 33-66892) filed
with the Securities and Exchange Commission on August 2, 1993.
10.5 1993 Property Per Risk Excess of Loss (Commercial) Reinsurance
Agreement with Employers Reinsurance Corporation. Incorporated
by reference to Exhibit 10.5 to the Registrant's Registration
Statement on Form S-1 (No 33-66892) filed with the Securities
and Exchange Commission on August 2, 1993.
10.5(i) Endorsement No. 3 to Property Per Risk of Excess Loss
(Commercial) Reinsurance Agreement with Employers Reinsurance
Corporation. Filed with the Registrant's Report On Form 10-K
for the period ending December 31, 1994 which has been filed
with the Securities and Exchange Commission.
Page 24
<PAGE>
Exhibit No. Description
10.6 1993 Property Catastrophe Excess Reinsurance Agreement with
Employers Reinsurance Corporation. Incorporated by reference
to Exhibit 10.6 to the Registrant's Registration Statement
on Form S-1 (No. 33-66892) filed with the Securities and
Exchange Commission on August 2, 1993.
10.6(i) Endorsement No. 6 to Property Catastrophe Excess Reinsurance
Agreement with Employers Reinsurance Corporation. Filed with
the Registrant's Report on Form 10-K for the period ending
December 31, 1994 which has been filed with the Securities and
Exchange Commission.
10.6(ii) Stipulation of Termination of Property Catastrophe Excess
Reinsurance Agreement with Employers Reinsurance Corporation
effective January 1, 1995. Filed with the Registrant's Report
on Form 10-K for the period ending December 31, 1994 which has
been filed with the Securities and Exchange Commission.
10.7 Agreement dated August 20, 1993, between Penn Independent
Corporation ("Penn Independent") and the Registrant regarding
the reimbursement of certain employment costs. Incorporated
by reference to Exhibit 10.7 to Amendment No. 1 to the
Registrant's Registration Statement on Form S-1 (No. 33-66892)
filed with the Securities and Exchange Commission on August
26, 1993.
10.7(i) Amendment, effective January 1, 1995, to August 20, 1993,
Agreement between Penn Independent and Registrant regarding
the sharing of certain operating costs. Filed with
Registrant's Report on Form 10-K for the period ended December
31, 1995 which has been filed with the Securities and Exchange
Commission.
10.7(ii) Amendments dated January 1, 1996 and March 1, 1996, to
August 20, 1993 Agreement between Penn Independent and
Registrant regarding the sharing of certain operating
costs. Filed with Registrant's Report on Form 10-K for the
period ended December 31, 1996, which has been filed with the
SEC.
10.7(iii) Amendment dated March 1, 1997 to August 20, 1993 Agreement
between Penn Independent and Registrant regarding the sharing
of certain operating costs, filed with Registrant's Report
on Form 10-K for the period ended December 31, 1997, which has
been filed with the Securities and Exchange Commission.
10.7(iv) Amendment dated January 1, 1999 to August 20, 1993 Agreement
between Penn Independent and Registrant regarding the sharing
of certain operating costs.
Page 25
<PAGE>
Exhibit No. Description
10.9 Restated Investment Advisory Agreement effective July 1, 1990
between Penn America and Carl Domino Associates, L.P.
Incorporated by reference to Exhibit 10.9 to the Registrant's
Registration Statement on Form S-1 (No. 33-66892) filed with
the Securities and Exchange Commission on August 2, 1993.
10.9(i) Amended Investment Advisory Agreement effective September
1, 1997, between and among Penn-America, its subsidiary,
Penn-Star and Carl Domino Associates, L.P. filed with the
Registrant's Report on Form 10-K for the period ending
December 31, 1997, which was filed with the SEC.
10.9(ii) Agreement dated April 15, 1997, between and among General Re,
New England Asset Management, Inc., Penn-America, and its
subsidiary, Penn-Star filed with the Registrant's Report on
Form 10-K for the period ending December 31, 1997, which was
filed with the SEC.
10.10 1993 Stock Incentive Plan. Incorporated by reference to
Exhibit 10.10 to Amendment No. 4 to the Registrant's
Registration Statement on Form S-1 (No.33-66892)filed with the
Securities and Exchange Commission on September 29, 1993.
10.10(i) Penn-America Group, Inc. 1993 Stock Incentive Plan, as amended
and restated April 4, 1994. Incorporated by reference to
Exhibit 4.1 to the Registrant's Registration Statement on Form
S-8 (No. 33-82728) filed with the Securities and Exchange
Commission on August 11, 1994.
10.11(ii) Lease effective June 30, 1995 between Registrant and Irvin
Saltzman. Filed with Registrant's Report on Form 10-K for the
period ended December 31, 1995 which has been filed with the
Securities and Exchange Commission.
10.12 Demand Promissory Note dated January 12, 1993 from Penn
Independent Financial Services, Inc. to Penn-America.
Incorporated by reference to Exhibit 10.12 to the Registrant's
Registration Statement on Form S-1 (No. 33-66892) filed with
the Securities and Exchange Commission on August 26, 1993.
10.13 Promissory Note dated December 29, 1993 from the Registrant to
Penn Independent. Filed with Registrant's Report on Form 10-K
for the period ended December 31, 1995 which has been filed
with the Securities and Exchange Commission.
10.13(i) Amendment No.1 dated November 30, 1995, to Demand Promissory
Note dated January 12, 1993 from Penn Independent Financial
Services, Inc. to Penn-America. Filed with the Registrant's
Report on Form 10-K for the period ended December 31, 1996
which has been filed with the Securities and Exchange
Commission.
10.14 1995 Multiple Line Excess of Loss (Casualty and Property)
Reinsurance Agreement with National Reinsurance Corporation.
Filed with Registrant's Report on Form 10-K for the period
ended December 31, 1995 which has been filed with the
Securities and Exchange Commission.
Page 26
<PAGE>
Exhibit No. Description
10.14(i) Endorsement No. 1 to Multiple Line Excess of Loss
Reinsurance Agreement with National Reinsurance Corporation,
effective as of January 1,1995. Filed with Registrant's Report
on Form 10-K for the period ended December 31, 1995 which has
been filed with the Securities and Exchange Commission.
10.14(ii) Endorsement No. 2 to Multiple Line Excess of Loss
Reinsurance Agreement with National Reinsurance Corporation,
effective as of January 1,1995. Filed with Registrant's Report
on Form 10-K for the period ended December 31, 1995 which has
been filed with the Securities and Exchange Commission.
10.14(iii) 1996 Property & Liability Reinsurance Agreement with GeneralRe
Corporation effective May 1, 1996. Filed with the Registrant's
Report on Form 10-K for the period ended December 31, 1996
which has been filed with the Securities and Exchange
Commission.
10.15 1995 Property Catastrophe Excess of Loss Reinsurance Agreement
with the subscribing Reinsurers. Filed with the Registrant's
Report on Form 10-K for the period ending December 31, 1994
which has been filed with the Securities and Exchange
Commission.
10.15(i) 1996 Property Catastrophe Excess of Loss Reinsurance Agreement
with the subscribing Reinsurers. Filed with the Registrant's
Report on Form 10-K for the period ended December 31, 1996
which has been filed with the Securities and Exchange
Commission.
10.16 Penn-America Group, Inc. 1995 Key Employee Incentive
Compensation Plan, incorporated as Part I to Registrant's
Registration Statement on Form S-8 (No. 333-00050) filed with
the Securities and Exchange Commission on January 4, 1996.
10.17 Penn-America Insurance Company's Agency Award and Profit
Sharing Plan, incorporated as Exhibit 4 to Registrant's
Registration Statement on Form S-3 (No. 333-00046) filed with
the Securities and Exchange Commission on January 4, 1996.
10.17(i) Penn-America Insurance Company's Agency Award and Profit
Sharing Plan, attached as Exhibit 4 to Registrant's
Registration Statement on Form S-3 (No. 333-49055) filed with
the SEC on March 31, 1998.
10.18 Stipulation of Termination of Property and Liability
Reinsurance Agreement with National Reinsurance Coproration
effective May 1, 1996. Filed with the Registrant's Report on
Form 10-K for the period ended December 31, 1996 which has
been filed with the Securities and Exchange Commission.
13 1998 Annual Report to Shareholders.
21 As of December 31, 1997, the Registrant's only subsidiary is
Penn-America Insurance Company, a Pennsylvania Corporation.
Page 27
<PAGE>
Exhibit No. Description
23 Independent Auditor's Consent and Report on Schedules
28.1 Loan and Security Agreement, Term Note and Stock Pledge
Agreement dated December 20, 1995 between Registrant and
PNC Bank (successor to Midlantic Bank, N.A). Filed with the
Registrant's Report on Form 10-K for the period ending
December 31,1995 which has been filed with the Securities and
Exchange Commission.
28.2 Credit Agreement among Registrant, Certain Lenders and First
Union National Bank dated September 28, 1998
30.0 Reinsurance Pooling Agreement between Penn-America Insurance
Company and Penn-Star Insurance Company dated July 1, 1998.
Page 28
<PAGE>
<TABLE>
<CAPTION>
PENN-AMERICA GROUP, INC.
Schedule I - Summary of Investments - Other than Investments in Related Parties
(in thousands)
December 31, 1998
--------------------------------------------------------------------
Amortized Amount shown on
Cost Fair Value Balance Sheet
------------------ ----------------- ---------------------
<S> <C> <C> <C>
Fixed maturities:
Available for sale
U.S. treasury securities and obligations of
U.S. government agencies $ 5,512 $ 5,661 $ 5,661
Corporate securities 28,725 29,748 29,748
Mortgage-backed securities 10,074 10,167 10,167
Other structured securities 15,668 15,737 15,737
Municipal 35,295 35,919 35,919
Public Utilities 8,091 8,366 8,366
------------------ ----------------- -----------------
Total available for sale 103,365 105,598 105,598
------------------ ----------------- -----------------
Held to maturity
U.S. treasury securities and obligations of
U.S. government agencies 11,046 11,194 11,046
Corporate securities 9,396 9,496 9,396
Mortgage-backed securities 5,123 5,158 5,123
Municipal 399 403 399
Public Utilities 992 1,019 992
------------------ ----------------- -----------------
Total held to maturity 26,956 27,270 26,956
------------------ ----------------- -----------------
Total fixed maturities 130,321 132,868 132,554
------------------ ----------------- -----------------
Equity securities:
Common stock 6,556 8,112 8,112
Preferred stock 16,802 17,126 17,126
----------------- -----------------
------------------
Total equity investments 23,358 25,238 25,238
------------------ ----------------- -----------------
Short term investments: 997 997 997
------------------ -----------------
================== ================= =================
Total investments $ 154,676 $ 159,103 $ 158,789
================== ================= =================
</TABLE>
Page 29
<PAGE>
PENN-AMERICA GROUP, INC.
Schedule II--Condensed Financial Information of Parent Company
Condensed Balance Sheets
(in thousands except share data)
December 31,
-------------------------------------
1998 1997
---------------- ----------------
ASSETS
Cash $ 316 $ 1,516
Short-term investments 997 ---
Investment in subsidiary, equity method 98,355 95,390
Other assets 962 594
================ ================
Total assets $100,630 $ 97,500
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued expenses $ --- $ 193
--------------- ----------------
---------------- ----------------
---------------- ----------------
Total liabilities $ --- $ 193
---------------- ----------------
Stockholders' equity:
Preferred stock, $ .01 par value;
authorized 2,000,000 shares; none issued
Common stock, $.01 par value;
authorized 20,000,000 in 1998 and 1997;
issued and outstanding 1998; 9,938,179;
and 9,395,854 respectively; issued and
outstanding 1997; 9,883,384 shares 99 99
Additional paid-in capital 69,035 68,221
Accumulated Other comprehensive income 2,714 1,649
Treasury stock, 542,325 shares, at cost (5,643) ---
Retained earnings 34,779 27,849
---------------- ----------------
100,984 97,818
Unearned compensation from restricted
stock awards (354) (511)
---------------- ----------------
Total stockholders' equity 100,630 97,307
---------------- ----------------
Total liabilities and stockholders'
equity $100,630 $ 97,500
================ ================
Page 30
<PAGE>
<TABLE>
<CAPTION>
PENN-AMERICA GROUP, INC.
Schedule II--Condensed Financial Information of Parent Company
Condensed Statements of Earnings
(in thousands except per share data)
Years ended December 31,
--------------------------------------------------
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Dividend income $7,950 $ 1,555 $ 3,258
Other 65 122 10
Operating expenses (1,532) (1,636) (1,653)
Income tax benefit 499 539 552
------------- ------------- -------------
Income before equity in undistributed
net income of subsidiary 6,982 580 2,167
Equity in undistributed net earnings
of subsidiary 1,899 9,065 4,826
------------- ------------- -------------
Net earnings $8,881 $ 9,645 $ 6,993
============= ============= =============
Net earnings per share
Basic $0.91 $ 1.19 $ 1.05
Diluted $0.90 $ 1.17 $ 1.04
Weighted average number of shares used in calculating
per share data
Basic 9,766 8,126 6,663
Diluted 9,873 8,228 6,743
Cash dividends per share $0.20 $ 0.16 $ 0.11
============= ============= =============
</TABLE>
Page 31
<PAGE>
<TABLE>
<CAPTION>
PENN-AMERICA GROUP, INC.
Schedule II - Condensed Financial Information of Parent Company
Condensed Statements of Cash Flows
(in thousands)
Years ended
December 31,
---------------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C.
Cash flows from operating activities:
Net earnings $8,881 $ 9,645 $6,993
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Equity in undistributed net earnings of subsidiary (1,899) (9,065) (4,826)
Increase (decrease) in :
Accounts payable and accrued expenses (193) (22) (54)
Other, net (522) (200) (352)
Amortization 309 221 133
------------- ------------- --------------
Net cash provided by operating activities 6,576 579 1,894
------------- ------------- --------------
Cash flows from financing activities:
Repayment of notes payable --- (9,000) (1,150)
Issuance of common stock (net of expenses) 815 45,897 259
Purchase of treasury stock (5,643) --- ---
Dividends paid (1,951) (1,329) (711)
------------ ------------- --------------
Net cash (used)provided by financing activities (6,779) 35,568 (1,602)
------------ ------------- --------------
Cash flows from investing activities:
Purchase of short- term investments (997) --- ---
Equity contributions to subsidiary --- (35,000) ---
----------- -------------- --------------
Net cash (used) by investing activities (997) (35,000) ---
----------- -------------- --------------
(decrease) increase in cash (1,200) 1,147 292
Cash, beginning of period 1,516 369 77
============ ============= ==============
Cash, end of period $ 316 $ 1,516 $ 369
============ ============= ==============
</TABLE>
Page 32
<PAGE>
<TABLE>
<CAPTION>
PENN-AMERICA GROUP, INC.
Schedule III - Supplementary Insurance Information
Years Ended December 31, 1998, 1997 and 1996
(in thousands)
Liability Amorrtization
for Unpaid of
Deferred Losses and Losses Deferred
Policy Loss Net and Loss Policy Other Net
Acquisition Adjustment Unearned Earned Investment Adjustment Acquisition Underwriting Premiums
Costs Expenses Premiums Premiums Income Expenses Costs Expenses Written
----- ------- -------- -------- ------ -------- ----- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1998
Commercial $ 7,553 $ 69,845 $ 30,625 $ 62,949 $ 4,119 $ 37,121 $ 17,112 $ 1,575 $ 64,283
Personal 1,175 19,092 3,628 26,544 943 18,612 8,340 207 23,546
Unallocated - - - - 5,701 - - 4,607 -
--------- -------- -------- ------- ------- -------- -------- ------- -------
Total $ 8,728 $ 88,937 $ 34,253 $ 89,493 $ 10,763 $ 55,733 $ 25,452 $ 6,389 $ 87,829
--------- -------- -------- ------- ------- -------- -------- ------- -------
1997
Commercial $ 6,449 $ 69,022 $ 29,546 $ 57,189 $ 4,214 $ 32,723 $ 14,327 $ 1,495 $ 60,768
Personal 2,114 15,544 6,627 34,460 774 25,005 10,657 347 35,793
Unallocated - - - - 4,230 - - 3,998 -
--------- -------- -------- ------- ------- -------- -------- ------- -------
Total $ 8,563 $ 84,566 $ 36,173 $ 91,649 $ 9,218 $ 57,728 $ 24,984 $ 5,840 $ 95,561
--------- -------- -------- ------- ------- -------- -------- ------- -------
1996
Commercial $ 5,612 $ 63,000 $ 25,570 $ 49,667 $ 3,375 $ 30,887 $ 11,785 $ 1,241 $ 51,768
Personal 1,619 7,728 5,295 19,414 382 12,405 6,000 147 21,701
Unallocated - - - - 2,948 - - 2,961 -
--------- -------- -------- ------- ------- -------- -------- ------- ------
Total $ 7,231 $ 70,728 $ 30,865 $ 69,081 $ 6,705 $ 43,292 $ 17,785 $ 4,349 $ 73,469
--------- -------- -------- ------- ------- -------- -------- ------- ------
</TABLE>
Page 33
<PAGE>
<TABLE>
<CAPTION>
PENN-AMERICA GROUP, INC.
Schedule IV - Reinsurance
Years Ended December 31, 1998, 1997 and 1996
(in thousands)
Ceded to Assumed Percentage
Other from Other of Assumed to
Direct Companies Companies Net Amount Net
-------------- -------------- ------------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
1998
Premiums
Property and $ 94,831 $7,268 $266 $87,829 0.3%
liability insurance
============== ============== ============= ============= ===============
Total
premiums $ 94,831 $7,268 $266 $87,829 0.3%
============== ============== ============= ============= ===============
1997
Premiums
Property and
liability insurance $ 104,694 $8,133 --- $96,561 ---
============== ============== ============= ============= ===============
Total
premiums $ 104,694 $8,133 --- $96,561 ---
============== ============== ============= ============= ===============
1996
Premiums
Property and
liability insurance $ 80,496 $7,027 --- $73,469 ---
============== ============== ============= ============= ===============
Total
premiums $ 80,496 $7,027 --- $73,469 ---
============== ============== ============= ============= ===============
</TABLE>
Page 34
<PAGE>
<TABLE>
<CAPTION>
PENN-AMERICA GROUP, INC.
Schedule VI - Supplemental Insurance Information Concerning
Property and Casualty Subsidiaries
Years Ended December 31, 1998, 1997 and 1996
(in thousands)
Liability Loss and Loss
for Unpaid Discount Adjustment Expenses
Losses and if Any, (Benefits) Incurred Paid Losses
Loss Deducted Related to and Loss
-------------------------------
Adjustment from Current Prior Adjustment
Expenses Reserves Year Year Expenses
--------------- -------------- ------------- --------------- -------------------
<S> <C> <C> <C> <C> <C>
Years Ended
December 31, 1998 $88,937 $55,647 $86 $52,161
December 31, 1997 84,566 57,387 341 44,521
December 31, 1996 70,728 44,096 (804) 34,148
</TABLE>
Page 35
<PAGE>
<TABLE>
<CAPTION>
PENN-AMERICA GROUP, INC.
Exhibit II-- Statement re:
Computation of Per Share Basic and Diluted Earnings
Years ended December 31, 1998, 1997 and 1996
(in thousands except per share data)
Years ended December 31,
--------------------------------------------------
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Basic EPS:
Net earnings $8,881 $9,645 $6,993
------------- ------------- -------------
Weighted average common shares outstanding 9,766 8,126 6,663
------------- ------------- -------------
Basic EPS $0.91 $1.19 $1.05
------------- ------------- -------------
Diluted EPS:
Net Earnings $8,881 $9,645 $6,993
------------- ------------- -------------
Weighted average common shares outstanding 9,766 8,126 6,663
Additional shares outstanding after the assumed exercise of
options by applying the treasury stock method 107 102 80
------------- ------------- -------------
Total 9,873 8,228 6,743
------------- ------------- -------------
Diluted EPS $0.90 $1.17 $1.04
------------- ------------- -------------
</TABLE>
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
Penn-America Group, Inc.
Date: March 25, 1999 By: /s/ Jon S. Saltzman
-------------------
Jon S. Saltzman,
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the Registrant in the
capacities and on the dates indicated.
/s/ Irvin Saltzman Chairman of the Board of Directors March 25, 1999
- -------------------- and Director
Irvin Saltzman
/s/ Jon S. Saltzman President, Chief Executive Officer March 25, 1999
- -------------------- and Director (Principle Executive
Jon S. Saltzman Officer)
/s/ James E. Heerin, Jr. Director March 25, 1999
- ------------------------
James E. Heerin, Jr.
/s/ Robert A. Lear Director March 25, 1999
- ------------------------
Robert A. Lear
/s/ Rosemary R. Ferrero Vice President-Finance and Treasurer March 25, 1999
- ------------------------ (Principle Financial Accounting Officer)
Rosemary R. Ferrero
/s/ Garland P. Pezzuolo Secretary and General Counsel March 25, 1999
- ------------------------
Garland P. Pezzuolo
/s/ Paul Simon Director March 25, 1999
- -----------------------
Paul Simon
/s/ Charles Ellman Director March 25, 1999
- -----------------------
Charles Ellman
/s/ M. Moshe Porat Director March 25, 1999
- -----------------------
M. Moshe Porat
/s/ Jami Saltzman-Levy Director March 25, 1999
- ------------------------
Jami Saltzman-Levy
/s/ Thomas Spiro Director March 25, 1999
- -----------------------
Thomas Spiro
<PAGE>
Service Agreement Amendment
Agreement effective January 1, 1999, by and between Penn Independent
Corporation, 420 S. York Road, Hatboro, Pennsylvania, 19040 ("PIC") and
Penn-America Group, Inc., 420 S. York Road, Hatboro, Pennsylvania, 19040
("PAG").
WHEREAS, the parties hereto are parties to a Service Agreement dated
August 20, 1993, as most recently amended effective March 1, 1998 (the "Service
Agreement"), and
WHEREAS, the parties wish to amend the Service Agreement effective as
of the effective date of this Agreement.
NOW, THEREFORE, in consideration of the foregoing, and of the mutual
covenants and agreements contained herein, and intending to be legally bound,
the parties hereto agree that PAGI will pay to PIC a "monthly expense estimate",
as follows:
(1) Effective January 1, 1999 through Effective January 1, 1999 through
February 28, 1999, PAGI will pay to PIC: $225,000 per annum, or $18,750 per
month;
(2) Effective March 1, 1999 through September 30, 1999, PAGI will pay to PIC:
$200,000 per annum, or $16,700 (approx.) per month;
In accordance with paragraph 3 of the original Service Agreement dated
August 20, 1993, the parties agree to meet prior to September 30, 1999 to
conduct any review and make any adjustment necessary to the fee referenced in
paragraph 2 above. In the event of any disagreement between PIC and PAGI, the
parties shall in good faith attempt to resolve any dispute arising out of the
interpretation or implementation of the agreement and this Amendment.
The parties agree that the "monthly expense estimate" is based on: (a)
telephone, insurance and building rental; and, (b) expenses for the salaries of
Irvin Saltzman, Human Resources and office services and facilities management
expenses, as more fully set forth in the attachments hereto, which are
incorporated herein as though fully set forth at length.
<PAGE>
IN WITNESS WHEREOF, the parties have entered into this Agreement as of
the date first above written.
PENN INDEPENDENT CORPORATION PENN-AMERICA GROUP, INC.
BY: /s/ Jason M. Waksman BY: /s/ Rosemary Ferrero
Jason M. Waksman Rosemary Ferrero
Fundamentally
1998
PENN-AMERICA GROUP, INC. ANNUAL REPORT
<PAGE>
Penn-America Group, Inc. (NYSE: PNG) is a specialty niche insurance company
which, through its subsidiaries Penn-America Insurance Company and Penn-Star
Insurance Company, underwrites commercial property and casualty, general
liability, commercial multi-peril and commercial automobile insurance. The
company also underwrites minimum limits non-standard personal automobile
insurance in California.
Penn-America has developed a unique and profitable niche providing small premium
insurance products to individuals and small businesses in small cities and towns
in all 50 United States and the District of Columbia, through a controlled
network of 57 wholesale general agents. These entrepreneurial agents, with whom
the company has unique and enduring relationships, live and work in the very
markets they serve to provide a finely tuned, highly efficient system for
spotting and responding to market opportunities. The company was built upon a
general insurance agency established, in 1947, by the family that still holds
about one-third of the company's outstanding shares.
Penn-America's "small thinking" philosophy and its dogged adherence to the five
fundamental principles illustrated in this annual report to stockholders have
created a remarkable, profitable distribution system for serving markets in
which the demand for the company's insurance products is steady.
Penn-America, with 9,395,854 shares outstanding, is traded on the New York Stock
Exchange under the symbol PNG. In 1998, the company paid quarterly dividends of
$.05 per share. Rated "A" (Excellent) by A.M. Best Company, it is located in
Hatboro, Pennsylvania, a small town near Philadelphia.
Exchange/Symbol NYSE/PNG
- --------------------------------------------------------------
Shares Outstanding 9,395,854
- --------------------------------------------------------------
Closing Price $ 9.0625
- --------------------------------------------------------------
52-week Range $ 23.00-$8.25
- --------------------------------------------------------------
Market Capitalization $ 85.1 million
- --------------------------------------------------------------
Price/Book Ratio 0.85x
- --------------------------------------------------------------
Stockholders' Equity $ 100.6 million
- --------------------------------------------------------------
Book Value Per Share $ 10.71
- --------------------------------------------------------------
Net Operating Earnings
Per Share
Basic $ 0.91
Diluted $ 0.90
- --------------------------------------------------------------
Net Earnings Per Share
- --------------------------------------------------------------
Basic $ 0.91
Diluted $ 0.90
- --------------------------------------------------------------
Price/Earnings Ratio
Basic 9.96x
- --------------------------------------------------------------
Diluted 10.07x
- --------------------------------------------------------------
Dividends Per Share $ 0.20 annual
- --------------------------------------------------------------
Dividend Yield 2.2%
- --------------------------------------------------------------
All figures as of 12/31/98
<PAGE>
Penn-America Group 1998 Annual Report
THE FUNDAMENTAL THINGS APPLY.
It's still the same old story: the fundamentals of a well-managed insurance
company never change. But, as during most of 1998, there were times that this
core belief of ours was tested against the realities of a harsh environment. I
am proud to report that Penn-America passed the tests of 1998 and emerged
stronger, wiser and even more focused on the five principles on which we have
built an insurance company worthy of your investment:
* Solid relationships;
* Sound underwriting;
* Adequate reserves;
* Strong reinsurance partnerships; and
* Prudent investing.
As you will see throughout this report, we believe that these fundamentals
are as enduring as the images we've chosen to represent them. And, as our agents
explain in their own words in the next few pages, these principles are the very
heart of Penn-America.
Two things are true about those of us who make investments in the insurance
industry. First: we know that a well-managed insurance company is an excellent
business enterprise, an efficient machine for accumulating assets. Second: we
know that this statement is true only from the perspective of years rather than
moments in time. Managing or investing in a small, specialized insurance company
requires a steady hand - and steady nerves - especially when the confluence of
events produces a year such as 1998!
I have spent my entire life in this industry. Without hesitation I can say
that I have never seen a year such as the one we have just passed. You see, we
effectively sell two products: insurance and our stock. The markets for both of
our products were far from sanguine in 1998.
As an insurance company, our marketplace was disrupted by a few large,
brand name companies that decided to mortgage their own futures, selling
products well below their costs, almost literally stealing market share, growing
for the sake of it.
Some insurers responded in kind, borrowing against future earnings. We did
not and will not do the same. We put the brakes on our top line growth to
preserve bottom line profitability. No company can afford to sell its products
below cost for long. We are first, last and always an insurance company. If we
weren't making a profit at what we do - underwriting insurance - we wouldn't be
acting as stewards of our stockholders' capital and, plainly, we would have no
business being in the insurance business.
As a small cap public company, we also shared the fate of many public
companies like ours: the small cap sector fell out of favor and performed, for
the first time in memory, less well than large cap stocks. Investor confidence
in the stock market was shaken, too, as the markets whipsawed in the second half
of the year beginning, ironically, on the very day my dad, my brother and I rang
the opening bell at the New York Stock Exchange.
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At its heart, a successful business is nothing more than successful
relationships, at every level, in all directions. The things that make any
relationship work make business relationships work too: intimacy, trust,
respect, communication. These are the values that guide our relationships with
our employees, agents, insureds, stockholders, vendors, regulators, our
community and anyone else we touch.
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I don't mind saying that I struggled with my own urge to take actions to
grow this business at the same industry-leading pace we have maintained since
the day we first offered shares in Penn-America to the public. Like you, I would
rather be congratulated on phenomenal growth than questioned about merely
much-better-than-average performance. But I was supported at every turn by a
strong, deep team of senior executives and specialized managers who genuinely
believe that we are doing the right things here at Penn-America. At every turn,
we stood on our principles despite compelling internal and external pressures to
do otherwise. These principles always will stand-up to anything that either the
insurance or financial markets can deliver.
You will not be surprised to learn that I am disappointed that our growth
during 1998 did not mirror the double-digit rates we've produced consistently
since we became a public company. But, as you must agree by virtue of the fact
that you are reading these pages, making a profit is a far sight better than the
alternative. I believe that keeping this sharp focus on the fundamentals is what
youpay us to do as the appointed stewards of your capital. That is precisely
why, in early 1999, we made the decision to focus our non-standard personal
automobile business exclusively in California.
We have built a reputation as quick, nimble and responsive, guerilla night
fighters if you will. In 1998, we faced the reality of the marketplace, where
the enemy was short-term thinking, fueled by greed. Quickly, nimbly we responded
to the new threat, realizing that it would be foolhardy to engage in those same
tactics. To operate otherwise would have been completely out of character for
this company and wrong for its future.
I hope you won't interpret these thoughts as an excuse because, bluntly,
nothing about Penn-America's performance last year begs for pardon! After all,
in 1998, we added $8.9 million to the bottom line of your company! And, as I've
said many times, it happened in typical non-dramatic fashion. We're constantly
tweaking, improving, experimenting, expanding, listening and moving forward in
small, incremental steps. For example:
* We began trading on the New York Stock Exchange, in August, under the
symbol PNG. Our move from the NASDAQ exchange was designed to broaden the
market for our securities, to reduce the costs of trading shares in
Penn-America and to reduce volatility in trading. We also believe that
Penn-America benefits from the prestige of being associated with a position
on "The Big Board;"
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* We distributed $1,951,000 in quarterly dividends of $.05 per share, a 25
percent increase in the dividend paid during the previous year. To date, we
have distributed $4,389,000 in dividends to our stockholders, made possible
because of profitable growth through dedication to our core principles;
* We expressed our continuing belief in the fundamental strengths of
Penn-America - at a time during which the marketplace did not reflect the
value of the company - by aggressively repurchasing our stock. By year-end,
we had repurchased 542,325 shares of the one million we have been
authorized to acquire;
* We established a new banking relationship with First Union National Bank
through an initial $25 million revolving credit facility which may be used
in 1999, in part, to fund the continuing stock repurchase program;
* We again earned an "A (Excellent)" rating by A.M. Best Company.
Significantly, this rating also includes, through a pooling arrangement,
our newest subsidiary, Penn-Star Insurance Company;
* We upgraded key aspects of our technology. These included the addition of
new Internet functions to provide our agents with secure, customized
information about their relationship with us; and substantially upgrading
the speed of our mainframe computer system. We also completely redesigned
our presence on the World Wide Web at www.penn-america.com. (Last year, we
reported that we were working toward remediating the Y2K problem. A
detailed report begins on page 15;)
* We increased the commission we pay to our commercial agents by two points
(a ten percent increase) from 20 percent to 22 percent. While this
increased our expenses, it was a vital change that also improved our
competitive position;
* We surveyed our agents again during 1998 and the results were gratifying:
we are the number one or two carrier in 80 percent of our agents' offices
for our type of business. And, even considering the appointment of six new
agents and the addition of three offices to existing agents' networks - a
total of 203 new people with underwriting authority ratings of our market
share, position as a key supplier and levels of service actually improved
slightly over last year's rating, to 6.5 on a scale of 7.0;
* We continued to invest in our agency relationships through our annual
agency "road show." In late summer, our underwriters and key executives
visited personally with 160 commercial lines agency personnel at
conferences we held in Nevada, Georgia, Texas, Illinois, Connecticut and
here in Hatboro, Pennsylvania.
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"Penn-America is the best at what it does. There are a lot of reasons for that.
But one that particularly impresses me is the fact that their reinsurers also
understand my marketplace. No other company is so dedicated to understanding who
I am and what I need."
Curtis Anderson, CIC, Chairman
SKANCO International, Ltd.
Scottsdale AZ
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* In October, we convened our annual Agents' Advisory Council as part of our
ongoing effort to better understand and serve these crucial partners;
* We continued to add, expand, refine and improve our product offerings,
always because one or more of our agents has an opportunity that we can
capture together with creative thinking, flexibility and fast action:
* The commercial auto and garage liability programs we introduced at the
end of 1997 began to contribute in a significant way to revenues. To
support this growing program, we ran a special series of educational
and promotional seminars in the Spring. The product now is offered on
an admitted basis in 30 states and in four states on a non-admitted
basis;
* The commercial umbrella program, introduced at the end of 1997, also
is performing well. It now is offered either on an admitted or a
non-admitted basis in all but one state;
* Three new programs were started in 1998, including a motor truck cargo
program introduced early in the year and available now in about
one-third of the nation; a program that provides protection for small
courier and messenger firms; and a dwelling program in Alaska;
* At the beginning of 1999, we re-focused our non-standard personal
automobile insurance program. Now, we offer this product only in
California and are running-off this business in six other states.
Although we took many steps during 1998 to improve the profitability
of this line, the marketplace changed fundamentally - from a very
Penn-America niche market to a commodity business. In California,
where our long-term agent has converted successfully to the direct
selling model required to succeed in commodity markets, we have been
very successful. Through this relationship, we will retain about 60%
of our total portfolio of non-standard personal automobile business.
We are an insurance company. The fundamental things still apply. Solid
relationships. Sound underwriting. Adequate reserves. Strong reinsurance
partnerships. Prudent investing. During 1998 we clung to these fundamentals.
Perhaps of greatest importance is the fact that we honored the relationships we
have with our agents by maintaining our pricing - and the long-term integrity of
our agents' livelihoods - at a time when many insurers did not. We never lost
sight of the fact that the success of our business is utterly dependent upon the
success of theirs. This fact will be the foundation of our success in 1999.
I have enormous optimism for the future. Most important, because of the
decisive actions we took during the past year, Penn-America is ready for that
future, standing on a foundation that has proven to be rock solid. During a
difficult year, we outperformed the great majority of our competitors and the
insurance industry at large. I have no doubt that we are fully prepared to take
advantage of market conditions that will, no doubt, return to normal.
For us, nothing is more fundamental than making an underwriting profit and
assuring a solid future for Penn-America. With your continued investment and
support, we're confident that our stubborn adherence to these fundamental
principles will produce just those results.
Sincerely,
/s/ Jon S. Saltzman
Jon S. Saltzman
President and Chief Executive Officer
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"Penn-America is focused on making money at what I do every day: underwriting
insurance. It gives me comfort knowing that they are committed to providing the
support and product I need to underwrite profitable accounts. They're not
looking to some unrealistic investment goals that require underwriting risks
they shouldn't take. After all, I am not just an agent, I'm a stockholder, too!"
Stanley Freerks, CPCU, CPD
President
S.A. Freerks & Associates, Inc.
St. Louis MO
7
<PAGE>
Financial Review
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Selected Five Year Financial Data
(in thousands except per share data) At or for the years ended December 31,
1998 1997 1996 1995 1994
------------------------------------------------------------------------------
Income statement data
Revenues
Premiums earned $89,493 $91,649 $69,081 $57,228 $39,985
Net investment income 10,763 9,218 6,705 5,067 3,635
Net realized investment gains (losses) 18 1,314 906 1,279 (713)
Other income -- 672 -- -- --
------------------------------------------------------------------------------
Total revenues 100,274 102,853 76,692 63,574 42,907
------------------------------------------------------------------------------
Losses and expenses
Losses and loss adjustment expenses 55,733 57,728 43,292 35,835 24,855
Amortization of deferred policy
acquisition costs 25,452 24,984 17,785 14,237 9,381
Other underwriting expenses 6,389 5,840 4,349 4,356 3,600
Interest expense 177 520 884 239 81
------------------------------------------------------------------------------
Total losses & expenses 87,751 89,072 66,310 54,667 37,917
------------------------------------------------------------------------------
Earnings before income taxes 12,523 13,781 10,382 8,907 4,990
Income taxes 3,642 4,136 3,389 2,881 1,579
------------------------------------------------------------------------------
Net earnings $8,881 $9,645 $6,993 $6,026 $3,411
------------------------------------------------------------------------------
Per share data (1)
Basic
Net operating earnings(2) $0.91 $1.08 $0.96 $0.78 $0.59
Net earnings $0.91 $1.19 $1.05 $0.91 $0.51
Weighted average shares outstanding 9,766 8,126 6,663 6,645 6,645
Diluted
Net operating earnings(2) $0.90 $1.07 $0.95 $0.78 $0.59
Net earnings $0.90 $1.17 $1.04 $0.91 $0.51
Weighted average shares outstanding 9,873 8,228 6,743 6,655 6,645
Cash dividends per share $0.20 $0.16 $0.11 $0.06 --
Other data
Gross written premiums $95,097 $104,694 $80,496 $66,953 $53,926
Net written premiums 87,829 96,561 73,469 61,286 48,343
Net operating earnings(2) 8,869 8,781 6,395 5,182 3,882
Return on average stockholders' equity 9.0% 13.8% 17.8% 18.7% 12.2%
GAAP data
Loss ratio 62.3% 63.0% 62.7% 62.6% 62.2%
Expense ratio 35.6 33.6 32.0 32.5 32.4
------------------------------------------------------------------------------
Combined ratio 97.9% 96.6% 94.7% 95.1% 94.6%
Statutory data
Policyholders' surplus $85,358 $83,459 $41,665 $39,118 $25,677
Loss ratio 62.3% 63.0% 62.7% 62.6% 62.2%
Expense ratio 35.0 32.3 31.6 30.4 32.3
------------------------------------------------------------------------------
Combined ratio 97.3% 95.3% 94.3% 93.0% 94.5%
------------------------------------------------------------------------------
Property-casualty industry combined ratio(2) 104.3% 101.1% 105.9% 106.4% 108.3%
Balance sheet data (at end of period)
Cash and investments $182,866 $177,819 $115,550 $100,428 $72,896
Total assets 230,504 225,157 158,605 137,763 100,112
Notes payable -- -- 9,000 10,150 1,350
Total stockholders' equity 100,630 97,307 42,337 36,250 28,366
Total stockholders' equity per share(2) $10.71 $9.85 $6.34 $5.46 $4.27
<FN>
(1) Adjusted to reflect a three-for-two split of the Company's common stock
effected on March 7, 1997. (2) Excludes realized investment gains (losses),
assuming 34.2% for 1997 and 34% marginal tax rate for all other years. (3)
Source: For 1998 nine months results, BestWeek P/C, December 14, 1998 edition;
1994 through 1997, Best Aggregates & Averages-Property Casualty.
</FN>
</TABLE>
8
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Management's Discussion and Analysis of Financial Condition and Results of
Operations
The following discussion should be read in conjunction with the Consolidated
Financial Statements of the Company and related notes included therein.
General
Penn-America Group, Inc. (PAGI) is a specialty property and casualty insurance
holding company which, through its subsidiaries, Penn-America Insurance Company
and its subsidiary Penn-Star Insurance Company, markets and underwrites
commercial property, general liability and multi-peril insurance for small
businesses located primarily in small towns and suburban and rural areas, and
non-standard personal automobile insurance principally in the state of
California. The Company provides commercial property and casualty insurance both
on an excess and surplus lines basis and on an admitted basis, and non-standard
personal automobile insurance on an admitted basis. The Company markets its
products through 57 high-quality general agents, who in turn produce business
through more than 25,000 retail insurance brokers located throughout the United
States. The Company focuses on serving the insurance needs of small or
non-standard markets which generally are characterized by small average policy
premiums and are serviced by retail insurance brokers with limited access to
larger, standard lines insurers. The Company believes that these markets
generally are underserved by larger, standard lines insurers which often limit
their underwriting to policies greater than a certain minimum premium size or to
certain risk classes and which operate in large-scale markets in which they can
achieve economies of scale. The Company believes that its distribution network
enables it to access effectively these numerous small markets at a relatively
low fixed-cost through the marketing, underwriting and administrative support of
its general agents, as well as the localized market knowledge and expertise of
its general agents and their retail insurance brokers.
The success of the Company's strategy is demonstrated by its strong and
consistent growth and profitability. From 1993 to 1998, gross written premiums
grew at a 21.8% compound annual rate from $35.5 million to $95.1 million and net
operating earnings (excluding realized investment gains) grew at a 34.6%
compound annual rate, from $2.0 million to $8.9 million. The Company has
operated at a SAP combined ratio of less than 100.0% in every year since 1993.
The Company's average SAP combined ratio from 1993 to 1998 was 95.4% and the
Company's average return on average stockholders' equity during the same period
was 13.8%.
The Company's distribution strategy is to maintain strong relationships with
fewer and higher-quality general agents than its competitors. The Company
carefully selects a limited number of agents in each state based on their
experience and reputation and strives to preserve each agent's franchise value
within its marketing territory. The Company seeks to grow with these general
agents and develop strong, long-standing relationships by providing a high level
of service and support. From 1993 to 1998, the Company achieved 168.8%
cumulative growth in gross written premiums with a 50% increase in the number of
general agents, from 38 to 57. The Company maintains low fixed-costs by
underwriting the substantial majority of its policies on a binding authority
basis.
(Dollars in millions) 1993 1998 Increase
Gross Written Premiums $35.5 $95.1 168.8%
Number of General Agents 38 57 50%
Gross Written Premiums $0.9 $1.67 85.5%
per General Agent
The Company closely monitors the quality of business it underwrites. The Company
provides its general agents with a comprehensive, regularly updated underwriting
manual which clearly outlines the Company's pricing and underwriting guidelines.
The Company does not write high-risk policies (e.g. medical malpractice,
environmental and aviation liability). The Company generally reviews new and
renewal commercial policies on a continuous basis and non-standard personal
automobile policies on a quarterly basis to ensure that its underwriting
guidelines are being followed. In addition to standard commissions, the Company
provides strong incentives to its general agents to produce profitable business
through a con-
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tingent commission structure which is tied substantially to underwriting
profitability and through the issuance of shares of common stock in lieu of cash
for a portion of the contingent commissions. Since 1996, the Company has awarded
agents 64,586 shares of the Company's stock through its contingent commission
structure. Historically, the Company has underwritten the majority of its
commercial lines business on an excess and surplus basis. In recent years, the
Company has underwritten a greater proportion of its commercial lines business
on an admitted basis, as it has identified profitable admitted markets which
remain underserved by larger standard insurers. The Company expects to continue
to expand its commercial lines business by offering additional products and
packages which enhance its current property and liability coverages, by
identifying profitable programs and books of business and by selectively adding
high-quality general agents. Examples of such additional products and programs
include a commercial automobile product and specialty programs, commercial
umbrella and some miscellaneous professional liability coverages. Currently, the
Company underwrites all of its non-standard personal automobile business on an
admitted basis. The Company announced in January 1999 that it would be
running-off the non-standard personal automobile business in six states and
would continue to write this line only in the state of California. California's
non-standard automobile business represented approximately 60% of the total
non-standard personal automobile premium written by the Company in 1998.
The Company's commercial insureds consist primarily of small, "Main Street"
businesses, including restaurants, taverns, retailers and artisan contractors,
located principally in small towns and suburban and rural areas. In addition,
the Company has developed customized products and coverages for other small
commercial insureds such as day care facilities, fitness centers and special
events. The Company believes it has benefitted from a general migration of small
businesses out of urban centers and into suburban and rural areas. Industry
consolidation, corporate downsizing and the increased use of communications
technology and personal computers, among other factors, have contributed to the
high growth in the number of small businesses in these areas.
The Company's non-standard personal automobile insurance products are designed
for insureds who do not qualify for preferred or standard automobile insurance
because of their payment histories, driving records, ages, vehicle types or
other underwriting criteria or market conditions. Non-standard personal
automobile business represented approximately 25% of the Company's gross written
premiums in 1998 as compared to approximately 35% of gross written premiums in
1997.
The Company's financial position and results of operations are subject to
fluctuations due to a variety of factors. Abnormally high severity or frequency
of claims in any period could have a material adverse effect on the Company's
business, results of operations or financial condition. Also, re-evaluations of
the Company's loss reserves could result in an increase or decrease in reserves
and a corresponding adjustment to earnings. Additionally, the insurance industry
is highly competitive. The Company competes with domestic and international
insurers, some of which have greater financial, marketing, management resources
and experience than the Company, and it may compete with new market entrants in
the future. Competition is based on many factors, including the perceived market
strength of the insurer, pricing and other terms and conditions, services
provided, the speed of claims payment, the reputation and experience of the
insurer and ratings assigned by independent rating organizations such as A.M.
Best Company. Penn-America and its subsidiary, Penn-Star currently have a pooled
rating from A.M. Best of "A (Excellent)." This rating is based upon factors of
concern to policyholders, including financial condition and solvency and is not
directed to the protection of investors.
[GRAPHIC OMITTED - PIE CHART ENTITLED "GEOGRAPHICALLY DIVERSIFIED"]
The following is a brief description of the Company's business segments and
lines of insurance
The Company manages the business in two segments: commercial lines and personal
lines. Commercial lines consists of general liability, property, multi-peril,
business automobile and commercial umbrella. Personal lines consists solely of
non-standard personal automobile.
Commercial General Liability
The Company's commercial general liability insurance is written on an occurrence
policy form (as opposed to a claims-made policy form) and provides limits
generally ranging from $25,000 to $3 million, with the majority of such policies
having limits of between $500,000 and $1 million. The Company's general
liability policies pay defense and
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<PAGE>
related expenses in addition to per occurrence and aggregate policy limits.
General liability insureds include restaurants, bars and taverns, retail
operations, artisan contractors and similar classes.
Commercial Property
The Company's commercial property lines provide limits usually no higher than $4
million, with almost all of the policies being written at limits less than $1
million. Properties insured include restaurants, bars, and taverns, retail
operations, vacant buildings and other similar classes.
Commercial Multi-Peril
The Company also writes the same commercial property and general liability risks
together as a "package" for its insureds, generally referred to as "commercial
multi-peril." The limits on these policies are the same as if written on a
monoline basis. Consistent with the current industry trend, the Company has been
writing more commercial multi-peril policies during the last several years than
individual property and liability policies. The Company expects this trend to
continue in light of the fact that a substantial number of the Company's
commercial insureds customarily require both liability and property insurance
coverage, together with the fact that Insurance Services Office (ISO) forms make
it easier and more efficient to write such multi-peril policies.
[GRAPHIC OMITTED - PIE CHART ENTITLED "PRODUCT MIX"]
Business Automobile and Commercial Umbrella
The Company recently added both business automobile and commercial umbrella
coverages to enhance its commercial multi-peril ("package") writings. The types
of risks and insureds targeted are similar to those already written, such as,
restaurants, bars and taverns, retail operations, artisan contractors and
similar classes. The business automobile insurance (cars and light trucks) can
be written with liability limits up to $1 million. Commercial umbrella insurance
can be written for limits up to $5 million with significant reinsurance support
from General Reinsurance Corporation. For commercial umbrella coverage
Penn-America usually writes the primary $1 million liability limit. The Company
expects that the addition of these coverages will expand package writings
further and help to increase renewal retention of existing policies. In all of
its commercial product lines, the Company continuously is developing specialized
programs for certain industry segments to meet the needs of these marketplaces.
For example, the Company has developed programs for independent fitness centers,
day care operations, low-hazard miscellaneous professional liability coverages
and special events. As a group, these programs are a significant benefit to the
Company's marketing efforts, although they do not generate a material amount of
the Company's gross written premiums. During 1998, the Company began cargo and
courier programs for specific agents. These programs each contributed
approximately $300,000 in written premiums.
Non-Standard Personal Automobile
The Company currently writes non-standard personal automobile policies in the
state of California. In January 1999, the Company announced that it was
pulling-out of this line in the states of Alabama, Montana, Nevada, North
Dakota, South Dakota and Washington. Business in all states except California
will be run-off throughout most of 1999. This business being run-off represented
$9.3 million of gross premiums written in 1998. Risks written in California
typically do not qualify for preferred or standard insurance because of a
driver's age, driving record, vehicle type or other factors. The non-standard
personal automobile business is written at very low coverage limits. The
policies in force at December 31, 1998 provide physical damage coverage of
$35,000 or less and the Company writes minimum state statutory liability limits.
The coverage is written predominantly on a monthly basis though terms of up to
six months are available.
Results of Operations
Year ended December 31, 1998 compared to year ended December 31, 1997
Gross written premiums decreased 9.2% to $95.1 million for the year ended
December 31, 1998 from $104.7 million for the year ended December 31, 1997. The
decrease resulted from a 34.0% decline in the non-standard personal automobile
line's gross written premiums to $23.7 million. Commercial lines gross written
premiums grew 3.8% to $71.4 million. The overall decrease in gross written
premiums was attributable primarily to actions taken by the Company throughout
1998 to limit losses in certain states' automobile programs by cutting-back on
production. Further, in January 1999, the Company announced that it would
11
<PAGE>
focus its non-standard automobile premium writings solely in the state of
California and would run-off the non-standard personal automobile business in
six other states.
Net written premiums decreased 9.0% to $87.8 million for the year ended December
31, 1998 from $96.6 for the year ended December 31, 1997. During the same
periods, net premiums earned decreased 2.4% to $89.5 from $91.6 million. Net
premiums earned decreased due to the decrease in gross written premiums.
Net investment income increased 16.8% to $10.8 million for the year ended
December 31, 1998 from $9.2 million for the year ended December 31, 1997. The
increase resulted principally from growth in invested assets funded primarily by
net proceeds from the secondary offering in July 1997, cash flows from
operations, partially offset by an increase in tax-exempt securities in the
portfolio which grew to $35.3 million from $550,000 at year end December 31,
1997. The average tax equivalent investment yield on the fixed income portfolio
as of December 31, 1998 was 6.30% compared to 6.70% for December 31, 1997.
Net realized investment gains after taxes for the year ended December 31, 1998
were $12,000 as compared to $864,000 for the year ended December 31, 1997.
Losses and loss adjustment expenses decreased 3.5% to $55.7 million in 1998 as
compared to $57.7 million in 1997 due primarily to the decrease in net premiums
earned.
Amortization of deferred acquisition costs increased 1.9% to $25.5 million for
the year ended December 31, 1998 from $25.0 million for the year ended December
31, 1997. The increase was attributable primarily to an increase in commercial
lines commission rates from 20% to 22%, a 10% increase during 1998 and partially
offset by the decline in earned premiums.
[GRAPHIC OMITTED - BAR CHART ENTITLED "GROSS WRITTEN PREMIUMS"]
[GRAPHIC OMITTED - BAR CHART ENTITLED "NET EARNINGS"]
Other underwriting expenses increased 9.4% to $6.4 million for the year ended
December 31, 1998 from $5.8 million for the year ended December 31, 1997. The
increase in 1998 expenses was due primarily to expenses related to new programs
and other non-recurring expenses of the holding company.
The loss ratio decreased to 62.3% for the year ended December 31, 1998 from
63.0% for the year ended December 31, 1997. The statutory expense ratio
increased to 35.0% from 32.3% for the year ended December 31, 1997. The increase
in the statutory expense ratio is attributable mainly to the decrease in the net
premiums written primarily in the non-standard personal automobile lines as well
as the increase in the commercial lines commission rate. The statutory combined
ratio increased to 97.3% for the year ended December 31, 1998 compared to 95.3%
for the year ended December 31, 1997.
As a result of the factors described above, the Company's net operating earnings
before realized investment gains for the year ended December 31, 1998 increased
1.0% to $8.9 million or $0.91 per share (basic) and $0.90 per share (diluted)
from $8.8 million or $1.08 per share (basic) and $1.07 per share (diluted) for
the year ended December 31, 1997.
Net earnings for the year ended December 31, 1998 were $8.9 million or $0.91 per
share (basic) and $0.90 per share (diluted) as compared with $9.6 million or
$1.19 per share (basic) and $1.17 per share (diluted) in 1997.
Year ended December 31, 1997 compared to year ended December 31, 1996
Gross written premiums increased 30.1% to $104.7 million for the year ended
December 31, 1997, from $80.5 million for the year ended December 31, 1996. The
increase resulted from 64.8% growth in the non-standard personal automobile
line's gross written premiums to $35.9 million and 17.2% growth in the
commercial lines gross written premiums to
12
<PAGE>
$68.8 million. These increases in gross written premiums were attributable
primarily to increased volume; rate changes were not significant.
Net written premiums increased 31.4% to $96.6 million for the year ended
December 31, 1997, from $73.5 million, for the year ended December 31, 1996.
During the same periods, net premiums earned increased 32.7% to $91.6 million
from $69.1 million. Net premiums earned increased due to the increase in gross
written premiums, partially offset by an increase in premiums ceded to
reinsurers.
Net investment income increased 37.5% to $9.2 million for the year ended
December 31, 1997, from $6.7 million, for the year ended December 31, 1996. The
increase resulted principally from the growth in invested assets funded
primarily by net proceeds from the secondary offering and from cash flows from
operations. The average investment yield of the fixed- maturity portfolio for
the year ended December 31, 1997 was 6.70%, compared to 6.84% for the year ended
December 31, 1996.
Net realized investment gains after taxes for the year ended December 31, 1997
were $864,000 or $0.11 per share (basic) and $0.10 per share (diluted), as
compared to $598,000 or $0.09 per share (basic and diluted) for the year ended
December 31, 1996.
[GRAPHIC OMITTED - BAR CHART ENTITLED "STOCKHOLDERS' EQUITY"]
Losses and loss adjustment expenses increased 33.3% to $57.7 million for the
year ended December 31, 1997, from $43.3 million in 1996, due primarily to an
increase in net premiums earned.
Amortization of deferred acquisition costs increased 40.5% to $25.0 million for
the year ended December 31, 1997, from $17.8 million for the year ended December
31, 1996. The increase was attributable to an increase in net premiums earned
and to the higher percentage of net premiums earned in non-standard personal
automobile lines relative to commercial lines for the year ended December 31,
1997 compared to the same period ended December 31, 1996. Commission rates for
non-standard personal automobile lines are generally higher than commission
rates for commercial lines.
Other underwriting expenses increased 34.3% to $5.8 million for the year ended
December 31, 1997, from $4.3 million for the year ended December 31, 1996,
primarily due to the increase in gross written premiums.
The loss ratio increased slightly to 63.0% for the year ended December 31,1997,
from 62.7% for the year ended December 31, 1996. The statutory expense ratio
increased to 32.3% from 31.6% for the year ended December 31, 1996. The increase
in the statutory expense ratio is attributable to the increase in the percentage
of net premiums written in non-standard personal automobile lines relative to
commercial lines. The statutory combined ratio increased to 95.3% for the year
ended December 31, 1997, compared to 94.3% for the year ended December 31, 1996.
As a result of the factors described above, the Company's net earnings for the
year ended December 31, 1997 increased 37.9% to $9.6 million or $1.19 per share
(basic) and $1.17 per share (diluted), from $7.0 million or $1.05 per share
(basic) and $1.04 (diluted) for the year ended December 31, 1996.
Liquidity and Capital Resources
PAGI is a holding company, the principal asset of which is the common stock of
Penn-America Insurance Company. PAGI's cash flows depend primarily on dividends
and other payments from Penn-America and its subsidiary Penn-Star. PAGI uses
these funds to pay (i) operating expenses, (ii) taxes and other payments and
(iii) dividends to PAGI stockholders. Penn-America's source of funds consists
primarily of premiums, investment income and proceeds from sales and redemptions
of investments. Funds are used by Penn-America and Penn-Star principally to pay
claims and operating expenses, to purchase investments and to make dividend and
other payments to PAGI.
The principal source of cash to use for the payment of dividends to PAGI's
stockholders is dividends from Penn-America and its subsidiary Penn-Star.
Penn-America is required by law to maintain a certain minimum surplus on a
statutory basis and is subject to risk-based capital requirements and
regulations under which payment of dividends from statutory surplus may require
prior approval of the Pennsylvania regulatory authorities. The maximum dividend
that may be paid in 1999 by Penn-America to PAGI without prior approval of
regulatory authorities is $9,455,000. Penn-America's statutory surplus increased
2.3% to $85.4 million as of December 31, 1998, from $83.5 million as of December
31, 1997, primarily due to the consolidated statutory net income of $9.8 million
from Penn-America offset by dividends of $8.0 million to
13
<PAGE>
PAGI which were used primarily to purchase stock under the corporate stock
buy-back program of $5.6 million and to pay dividends to PAGI stockholders of
$1.9 million.
Net cash provided by operating activities decreased 57.4% to $10.6 million for
the year ended December 31, 1998 from $25.0 million for the year ended December
31, 1997. The decrease in net cash provided by operations resulted principally
from the decrease in net premiums written during the year. Net cash provided by
investing activities was $18.2 million for the year ended December 31, 1998,
compared to $60.9 million used by investing activities for the year ended
December 31, 1997. This increase in cash provided by investing activities in
1998 was due to the Company's decision to remain liquid through year-end as the
Company evaluated interest rates and the financial markets. During 1997, cash
flow was used by investing activities due to the investment of funds from the
proceeds of the Company's secondary stock offering.
[GRAPHIC OMITTED - PIE CHART ENTITLED "INVESTMENT PORTFOLIO MIX"]
Net cash used by financing activities was $6.9 million for the year ended
December 31, 1998 as compared to $35.1 million provided by financing activities
for the same period in 1997. The cash used by financing activities in 1998 was
$5.6 million used by the Company to repurchase 542,325 shares of Company stock
through the stock buy-back program and $1.9 million used for PAGI stockholder
dividends. The cash provided by financing activities in 1997 resulted primarily
from $45.6 million in proceeds from the secondary stock offering and the
exercise of stock options, partially offset by the principal repayment of the $9
million on the term loan and $1.3 million of the cash dividends paid to
stockholders.
[GRAPHIC OMITTED - PIE CHART ENTITLED "HIGH-QUALITY FIXED-INCOME
SECURITIES PORTFOLIO"]
The Company believes that it has sufficient liquidity to meet its anticipated
insurance obligations and operating and capital expenditure needs. The Company's
investment strategy emphasizes quality, liquidity and diversification, as well
as total return. With respect to liquidity, the Company considers liability
durations, specifically related to loss reserves, when determining desired
investment maturities. In addition, maturities have been staggered to produce
cash flows for loss payments and reinvestment opportunities. The average
duration of the fixed-maturity portfolio as of December 31, 1998 was
approximately 3.0 years.
The Company's fixed-maturity portfolio represented $132.6 million or 83.5% of
the total investment portfolio as of December 31, 1998. Approximately 98.0% of
these securities were rated "A" or better by Standard & Poor's or Moody's.
Equity securities, the majority of which consist of preferred stocks, represent
$25.2 million or 15.9% of total investments as of December 31, 1998.
As of December 31, 1998, the investment portfolio contained $31.0 million of
mortgage- and asset-backed obligations. All of these securities were "AAA" rated
securities issued by government or government-related agencies, were publicly
traded and had market values obtained from an independent pricing service.
Changes in estimated cash flows due to changes in prepayment assumptions from
the original purchase assumptions are revised based on current interest rates
and the economic environment. The Company had no other derivative financial
instruments, real estate or mortgages in the investment portfolio as of December
31, 1998.
In September 1998, the Company completed a revolving credit facility for $25
million with First Union National Bank. This facility provides for an interest
rate tied to LIBOR plus a variable factor to be charged on borrowed funds based
on the Company's debt-to-equity ratio at the time of borrowing. This variable
interest factor ranges from 75 to 150 basis points. The facility is available
until the year 2004 with a structured step-down in the available credit line
over that period.
14
<PAGE>
Market Risk
The Company is subject to market risk principally arising from the potential
change in the value of its investment portfolio.
The major components of market risk affecting the Company are interest rate and
equity risk. The Company has a fixed-maturities investment portfolio with a fair
value of $132.9 million at December 31, 1998 that is subject to changes in value
principally due to changes in market interest rates. A component of the
fixed-maturities portfolio includes mortgage-backed and asset-backed securities
($31.1 million in fair value at December 31, 1998) which are exposed to
accelerated prepayment risk generally caused by decreases in interest rates.
Acceleration of repayments could adversely effect future investment income, if
reinvestment of the cash received from repayments is in lower-yielding
securities.
The Company's preferred equity portfolio of $17.1 million at December 31, 1998
is subject primarily to interest rate risk, similar to the fixed-maturities
portfolio described above.
In addition to interest rate risk, the Company's common equity portfolio of $8.1
million at December 31, 1998 is subject to changes in value based on changes in
equity prices in United States markets.
The Company manages its exposure to market risk through a disciplined
asset/liability matching and capital management process. In the management of
market risk, the characteristics of duration, credit and variability of cash
flows are critical elements. These risks constantly are assessed and balanced
within the context of the liability and capital position of the Company.
The following is a tabular presentation of the Company's investment portfolio
(dollars are presented in millions) at December 31, 1998.
<TABLE>
<CAPTION>
Expected Maturity Date
---------------------------------------------
Fair
There- Value
1999 2000 2001 2002 2003 after Total Total
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed-Maturities Portfolio
Principal amount $ 33.4 $ 18.9 $ 16.3 $ 4.5 $ 3.3 $ 50.0 $126.4
Average interest rate 6.67% 6.23% 6.46% 6.59% 5.30% 5.21% 5.94%
Fair value $132.9
Yield on fair value 5.10%
Preferred Stock
Principal amount $16.6 $ 16.6
Average interest rate 6.52% 6.52%
Fair value $ 17.1
Yield on fair value 6.40%
Common Stock
Fair value $ 8.1
</TABLE>
The average interest rate presented above is the yield on amortized cost of
fixed maturities and the cost of preferred stocks. The principal amounts are the
par values or the cash flow at maturity. The expected maturity date anticipates
calls and prepayments.
Impact of Inflation
Inflation can have a significant impact on property and casualty insurers
because premium rates are established before the amounts of loss and loss
adjustment expenses are known. The Company attempts to anticipate increases from
inflation in establishing rates, subject to limitations imposed for competitive
pricing. The Company does not believe that inflation has had a material impact
on the Company's business, results of operations or financial condition to date.
The Company also considers inflation when estimating liabilities for losses and
loss adjustment expenses, particularly for claims having a long period between
occurrence and settlement. The liabilities for losses and loss adjustment
expenses are management's estimates of the ultimate net cost of underlying
claims and expenses and are not discounted for the time value of money. In times
of high inflation, the normally higher yields on investments may be offset
partially by higher claims and expenses.
New Accounting Standard
In June 1998, Statement of Financial Accounting Standards (SFAS) No. 133,
"Accounting for Derivatives Instruments and Hedging Activities," was issued and
established standards for accounting and reporting of derivative instruments and
hedging activities. The statement is effective for all fiscal quarters of fiscal
years beginning after June 15, 1999. The Company is in the process of
determining the effect, if any, on its financial statements.
Other
The National Association of Insurance Commissioners adopted risk-based capital
standards with which property and casualty insurers must comply. In concept,
risk-based capital is designed to measure the acceptable amount of capital an
insurer should have based on the inherent specific risks of each insurer.
Insurers failing to meet this benchmark capital level may be subject to scrutiny
by the insurer's domiciled insurance department. Based on the currently adopted
standards, Penn-America's and Penn-Star's capital and surplus is in excess of
the prescribed risk-based capital requirements for 1998.
The Year 2000
Introduction
The "Year 2000," or Y2K, refers to the problems that automated systems could
encounter as the year 2000 approaches due to computers' or other electronic
devices' inability to register the year 2000 correctly, rather than as the year
1900. In this regard, the Company relies on its existing information technology
systems ("IT systems") to operate and to monitor all major aspects of the
Company's business, including
15
<PAGE>
underwriting, claims and various financial systems. The Company also relies, to
a lesser extent, on the IT systems of its general agents and, indirectly, on
those of the producing retail insurance brokers. Finally, the Company relies on
certain critical non-information technology systems ("non-IT systems") such as
electricity, telephones, facsimile machines, heating and air-conditioning and
fire protection systems. Any disruption in the operation of the IT and non-IT
systems of either the Company or any of its critical customers, vendors or
suppliers could have a material adverse effect on the Company's business,
results of operations or financial condition.
State of Readiness
IT systems: In an effort to remediate the problems associated with the Year
2000, the Company, in 1996, evaluated all of its computer codes to determine
which software programs would be affected by date-sensitive fields. After this
identification process was completed, the Company hired an outside vendor to
implement the recoding that was required. In July 1997 the Company successfully
ran its first trial of all the revised programs. Based upon testing to date, the
Company believes that its programs are Year 2000 compliant. The Company,
however, continues to run tests on a semi-annual basis to make sure the programs
will function properly. The next test is scheduled in March 1999.
The Company's IT systems also have been tested against hypothetical information
supplied by its general agents. The IT systems currently are able to read
properly the information provided. Assuming the general agents don't alter their
records, the Company reasonably believes that its IT systems will function
properly. To the extent the general agents' records change, the Company requires
that the agents provide notice.
The Company's management information systems rely primarily on an integrated
property-casualty software package that is processed on an IBM AS/400 computer
system. The system is leased from IBM and kept current or near current in both
hardware and operating systems. The IBM AS/400 model was upgraded in the fourth
quarter of 1998 to Version 4, which is reported by IBM to be fully compliant
with Year 2000.
The Company uses a Novell Local Area Network (LAN) to connect all employees to
the computer system. The LAN is reported to be Year 2000 compliant. The LAN is
used primarily for "service" applications including word-processing,
spreadsheets and e-mail. The majority of the LAN-based applications are
Microsoft products and are current or near current in their software releases.
The LAN also consists of personal computers ("PCs") that are attached to a
series of servers. All PCs have been tested and correctly recognize the Year
2000. The IT Department of the Company supports an Internet web site and various
standalone third-party PC software applications. These packages were assessed
for any Year 2000 problems. The Company is in the process of testing these
packages to ensure their compliance. Testing should be complete by June 1999.
The IT Department also supports FormMaker, a document management software
package developed by DocuCorp which is used by the majority of general agents to
produce Penn-America policies. FormMaker has been tested and, in its current
release, is reported by DocuCorp to be Year 2000 compliant.
Non-IT systems: The Company has identified, and relies on, the following non-IT
systems in its daily operations: telephones, voicemail, facsimile machines,
heating and air conditioning and fire protection systems. The telephone system
was tested as compliant. The voicemail system was identified as non-compliant
and was replaced with a compliant system in September 1998. The heating and air
conditioning systems have been tested and are compliant. The Company has been
informed that all of the remaining systems will not be effected by the year 2000
and the Company has received written confirmations to this effect.
Key Customers, Suppliers and Vendors
As part of its remediation plan, the Company is analyzing the Year 2000
readiness of the Company's critical outside customers (including general
agents), vendors and suppliers. Each department of the Company was asked to
identify key customers, suppliers and vendors with whom the Company has an
interdependent, material business relationship. In September of 1998, the
Company sent approximately 188 surveys to those identified
customers/suppliers/vendors to ask them: to provide the current status of their
Y2K plan; whether they will be compliant; and what contingency plans they have
in place in the event they will not be compliant. Of the 188 surveys sent-out,
100 were returned with responses indicating that the recipients were or would be
compliant; 88 did not respond. In December of 1998, the Company sent-out a
second request for information to those who had not yet responded and for newly
identified customers, suppliers and vendors. As of January 21, 1999, the
responses were as follows: 49 indicated that they were compliant; 105 indicated
that they would be compliant before January 1, 2000; and 38 have yet to respond.
The Company is going to send-out one more request. Thereafter, for those that
have not yet responded, the Company will deem them non-compliant and find an
alternative source for that information or service. For those that have
responded that they will be compliant, the Company plans to issue a follow-up
letter on or about the dates on which they indicated they will be compliant in
order to confirm that status.
16
<PAGE>
Despite all the procedures the Company has in place, there can be no guarantee
that the systems of other companies on which the Company's business relies will
be converted in a timely fashion or that failure to convert by another company
or a conversion that is incompatible with the Company's systems will not have a
materially adverse effect on the Company and its operations.
Cost
The Company incurred costs of approximately $60,000 to recode its internal
programs. The costs were incurred by the Company to test significant insurance
hardware and software that the Company believes are compliant. These costs are
and will be minimal as these costs are built into the Company's standard
disaster recovery testing program. The current standard testing costs
approximately $28,000 per year. The Company does not separately track the
internal costs incurred for the Y2K project. Such costs are related primarily to
payroll costs for the Company's information services personnel. The Company also
incurred an additional $13,000 to upgrade its voicemail system. Additional
expenses may arise in the upcoming year. Management believes that at this time
these costs will be approximately $10,000.
Risks
The risks associated with the Company's inability to resolve all Year 2000
issues include the possibility of system failures or miscalculations causing
disruption in operations including, among other things, an inability to process
transactions, to send invoices, to send or to receive e-mail and voicemail or to
conduct similar normal business activities. Additionally, failure of
third-parties upon whom the Company's business relies to remediate their Year
2000 problems in a timely fashion could result in disruption in the receipt and
processing of insurance policies, claims, payment of receivables and general
problems related to the Company's daily operations. If any of these
contingencies were to occur, the disruption in business could be temporary or
permanent, depending on the degree of failure. Until the Company receives
responses from all of the Company's agents and suppliers, the overall risks
associated with the Year 2000 remain difficult to describe accurately and to
quantify; and there can be no guarantee that the Year 2000 issue will not have a
material adverse effect on the Company and its operations.
If the Year 2000 problem is not solved by the Company and its business partners,
the Company could face business disruption, operational problems, financial
losses, legal liability and similar risks to the business. These risks could
have a material adverse impact on the Company.
Additionally, the Company may be exposed to insurance risk related to Y2K
exposures of its insureds. In order to mitigate this risk, the Company generally
began endorsing applicable new and renewal policies with effective dates after
November 1, 1998, with an exclusion endorsement. This endorsement excludes Y2K
computer and related electronic exposures by using the standard industry
exclusion. Certain states, however, may not accept this exclusion in all cases.
Contingency Plan
The Company has not, to date, finalized its Year 2000 Contingency Plan. However,
the Company has completed a first draft of a plan and anticipates having a final
draft of the plan in place by the fourth quarter of 1999. In the meantime, the
Company maintains a Disaster Recovery Plan to address various potential business
interruptions.
The current Disaster Recovery Plan addresses the availability and compatibility
of hardware offsite that could be placed into action immediately by the Company.
In September 1998, the Company tested the offsite facility and the operation of
significant insurance software that had been made Year 2000 compliant, as well
as the operation of the offsite hardware. Under these test conditions, all dates
were rolled-forward to January 1, 2000. The test results indicated that the
Company's significant insurance related software would be compliant.
The testing facility has indicated that the majority of its hardware and
equipment would be fully compliant by December 1998. The testing facility
further noted that it will not upgrade certain of its systems until the first
quarter of 1999 so as to afford all subscribers an opportunity to upgrade their
systems. The Company will follow-up with the testing facility at the end of the
first quarter to ensure that it has achieved compliance. The testing facility
also is available if electric, heat, water, telephones or office space should be
required.
The foregoing is a "Year 2000 Readiness Disclosure" pursuant to the Year 2000
Readiness Disclosure Act.
Readers are cautioned that forward-looking statements in the Year 2000
disclosure contained herein should be read in conjunction with the Company's
disclosure titled "Safe Harbor Provisions of the Private Securities Litigation
Reform Act of 1995." Forward-looking statements include, but are not limited to,
whether the Company will complete its remediation and testing in a timely
fashion, whether remediation will cost more than anticipated, the impact of
redeploying staff and the effect of third-parties on the Company's ability to
function after the century date change.
17
<PAGE>
Penn-America Group, Inc. and Subsidiaries Consolidated Balance Sheets
<TABLE>
<CAPTION>
(In thousands except share and per share data) December 31,
1998 1997
<S> <C> <C>
Assets
Investments:
Fixed maturities:
Available for sale, at fair value
(amortized cost 1998, $103,365: 1997, $89,185) $105,598 $89,979
Held to maturity, at amortized cost (fair value 1998,
$27,270: 1997, $47,034) 26,956 46,842
Equity securities, at fair value (cost 1998,
$23,358: 1997, $25,662) 25,238 27,380
Short-term investments, at cost, which approximates fair value 997 11,455
-----------------------
Total investments 158,789 175,656
Cash 24,077 2,163
Receivables:
Accrued investment income 1,871 1,973
Premiums receivable, net 10,349 12,414
Reinsurance recoverable 18,766 16,605
-----------------------
Total receivables 30,986 30,992
Prepaid reinsurance premiums 2,809 3,065
Deferred policy acquisition costs 8,728 8,563
Capital lease 2,051 1,865
Deferred income taxes 1,598 2,302
Income tax recoverable 884 40
Other assets 582 511
-----------------------
Total assets $230,504 $225,157
=======================
Liabilities and Stockholders' Equity
Liabilities:
Unpaid losses and loss adjustment expenses $88,937 $84,566
Unearned premiums 34,253 36,173
Accounts payable and accrued expenses 1,179 2,338
Capitalized lease obligation 2,080 1,920
Other liabilities 3,425 2,853
-----------------------
Total liabilities 129,874 127,850
=======================
Stockholders' equity:
Preferred stock, $ .01 par value; authorized 2,000,000 shares;
none issued -- --
Common stock, $ .01 par value; authorized 1998 and 1997, 20,000,000
shares; issued 1998, 9,938,179 and 1997, 9,883,384 shares, outstanding
1998, 9,395,854 and 1997, 9,883,384 (note 2) 99 99
Additional paid-in capital 69,035 68,221
Accumulated other comprehensive income 2,714 1,649
Retained earnings 34,779 27,849
Treasury stock, 1998, 542,325 shares, at cost (5,643) --
-----------------------
100,984 97,818
Unearned compensation from restricted stock awards (354) (511)
-----------------------
Total stockholders' equity 100,630 97,307
-----------------------
Total liabilities and stockholders' equity $230,504 $225,157
=======================
</TABLE>
See accompanying notes to consolidated financial statements.
18
<PAGE>
Penn-America Group, Inc. and Subsidiaries Consolidated Statements of Earnings
<TABLE>
<CAPTION>
For the years ended December 31,
(In thousands except per share data) 1998 1997 1996
<S> <C> <C> <C>
Revenues
Premiums earned $89,493 $91,649 $69,081
Net investment income 10,763 9,218 6,705
Net realized investment gains 18 1,314 906
Other income -- 672 --
---------------------------------
Total revenues 100,274 102,853 76,692
---------------------------------
Losses and expenses
Losses and loss adjustment expenses 55,733 57,728 43,292
Amortization of deferred policy acquisition costs 25,452 24,984 17,785
Other underwriting expenses 6,389 5,840 4,349
Interest expense 177 520 884
---------------------------------
Total losses and expenses 87,751 89,072 66,310
---------------------------------
Earnings before income tax 12,523 13,781 10,382
Income tax 3,642 4,136 3,389
---------------------------------
Net earnings $8,881 $9,645 $6,993
=================================
Net earnings per share (note 2)
Basic $0.91 $1.19 $1.05
Diluted $ 0.90 $1.17 $1.04
=================================
Weighted average number of shares used in
calculating per share data (note 2)
Basic 9,766 8,126 6,663
Diluted 9,873 8,228 6,743
=================================
Cash dividends per share (note 2) $0.20 $0.16 $0.11
=================================
</TABLE>
See accompanying notes to consolidated financial statements.
19
<PAGE>
Penn-America Group, Inc. and Subsidiaries Consolidated Statements of
Stockholders' Equity
<TABLE>
<CAPTION>
Unearned
Accumulated Compensation
Additional Other From
(In thousands except share Common Stock Paid-In Comprehensive Retained Treasury Restricted
and per share data) Shares Amount Capital Income Earnings Stock Stock Awards Total
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, at December 31, 1995 4,430,000 $44 $21,608 $1,501 $13,251 -- $(154) $36,250
Net earnings 6,993 6,993
Other comprehensive income,
net of tax:
Unrealized losses on investments,
net of reclassification adjustment (508) (508)
--------
Comprehensive income 6,485
--------
Retroactive effect of
3-for-2 stock split,
January 1997 (note 2) 2,225,377 22 (22)
Issuance of common stock 20,754 1 258 259
Cash dividends paid
($0.11 per share) (711) (711)
Amortization of compensation
expense from restricted stock 54 54
-------------------------------------------------------------------------------------------
Balance, at December 31, 1996 6,676,131 67 21,844 993 19,533 (100) 42,337
Net earnings 9,645 9,645
Other comprehensive income,
net of tax:
Unrealized gains on investments,
net of reclassification adjustment 656 656
--------
Comprehensive income 10,301
--------
Issuance of common stock 3,207,253 32 46,377 46,409
Unearned compensation from
restricted stock awards (512) (512)
Cash dividends paid
($0.16 per share) (1,329) (1,329)
Amortization of compensation
expense from restricted stock 101 101
-------------------------------------------------------------------------------------------
Balance, at December 31, 1997 9,883,384 99 68,221 1,649 27,849 (511) 97,307
Net earnings 8,881 8,881
Other comprehensive income,
net of tax:
Unrealized gains on
investments, net of
reclassification adjustment 1,065 1,065
--------
Comprehensive income 9,946
--------
Issuance of common stock 54,795 814 814
Amortization of compensation
expense from restricted
stock awards 157 157
Cash dividends paid ($0.20 per share) (1,951) (1,951)
Purchase of treasury stock, at cost (5,643) (5,643)
-------------------------------------------------------------------------------------------
Balance at December 31, 1998 9,938,179 $99 $69,035 $2,714 $34,779 $(5,643) $(354) $100,630
===========================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
20
<PAGE>
Penn-America Group, Inc. and Subsidiaries Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
<S> <C> <C> <C>
For the years ended December 31,
(In thousands) 1998 1997 1996
Cash flows from operating activities:
Net earnings $ 8,881 $ 9,645 $ 6,993
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Amortization and depreciation expense 720 449 331
Net realized investment gains (18) (1,314) (906)
Deferred tax expense (benefit) 159 (434) (2)
Net increase in premiums and note receivable, prepaid
reinsurance premiums and unearned premiums 401 3,266 3,001
Net increase in unpaid losses and loss adjustment expenses
and reinsurance recoverable 2,210 12,951 8,822
(Increase) decrease in:
Accrued investment income 102 (302) (286)
Deferred policy acquisition costs (165) (1,332) (1,515)
Income tax recoverable (844) 562 281
Other assets (215) (50) (454)
Increase (decrease) in:
Accounts payable and accrued expenses (1,159) 565 (68)
Other liabilities 572 982 624
------------------------------------
Net cash provided by operating activities 10,644 24,988 16,821
------------------------------------
Cash flows from investing activities:
Purchases of equity securities (17,388) (19,258) (8,636)
Purchases of fixed maturities available for sale (45,533) (61,966) (21,611)
Purchases of fixed maturities held to maturity (1,015) (13,082) (24,084)
Proceeds from sales of equity securities 19,633 5,459 8,147
Proceeds from sales of fixed maturities available for sale 23,037 -- 9,825
Proceeds from maturities of fixed maturities available for sale 7,997 13,604 5,000
Proceeds from maturities of fixed maturities held to maturity 20,988 18,789 14,008
Change in short-term investments 10,458 (4,455) --
Other -- -- 9
------------------------------------
Net cash provided (used) by investing activities 18,177 (60,909) (17,342)
------------------------------------
Cash flows from financing activities:
Issuance of common stock 814 45,544 259
Purchase of treasury stock (5,643) -- --
Principal payments on notes payable -- (9,000) (1,150)
Principal payments on capital lease obligations (127) (110) (102)
Dividends paid (1,951) (1,329) (711)
Net cash (used) provided by financing activities (6,907) 35,105 (1,704)
Increase (decrease) in cash 21,914 (816) (2,225)
Cash, beginning of period 2,163 2,979 5,204
------------------------------------
Cash, end of period $ 24,077 $ 2,163 $ 2,979
====================================
Supplemental disclosure of cash flow information
Cash paid during the period for:
Income tax $ 4,248 $ 4,009 $ 3,111
Interest 177 576 857
Non-cash transaction:
Cost of securities transferred from available for
sale to held to maturity -- $ 8,002 --
</TABLE>
See accompanying notes to consolidated financial statements.
21
<PAGE>
Penn-America Group, Inc. and Subsidiaries Notes to Consolidated Financial
Statements
Note 1
Summary of Significant Accounting Policies
Basis of Presentation and Description of Business
Penn-America Group, Inc. (the "Company") is an insurance holding company. Penn
Independent Corporation ("Penn Independent") at December 31, 1998, owns
approximately 32.9% of the outstanding common stock of the Company. The
accompanying financial statements include the accounts of the Company and its
wholly owned subsidiary, Penn-America Insurance Company ("Penn-America") and its
wholly owned subsidiary Penn-Star Insurance Company ("Penn-Star"). All
significant intercompany accounts and transactions have been eliminated in
consolidation. These financial statements are prepared in conformity with
generally accepted accounting principles, which differ in some respects from
those followed in reports to insurance regulatory authorities.
The preparation of financial statements requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Penn-America underwrites commercial property and general liability insurance and
non-standard personal automobile insurance, generally referred to as "property
and casualty" insurance, on an excess and surplus lines or non-standard basis.
Penn-America and Penn-Star combined are licensed admitted insurers in 34 states
and are approved non-admitted (excess and surplus lines) insurers in 16 states
and the District of Columbia.
Investments
At the time of purchase of fixed-maturity investments, management makes a
determination as to the investment classification ("Available for Sale" or "Held
to Maturity"). Factors taken into consideration by management in determining the
appropriate investment category are: maturity, yield, cash flow requirements and
anticipated changes in interest rates. Fixed maturities classified as "Available
for Sale" are carried at fair value with unrealized investment gains or losses,
net of deferred income taxes, and are included as a separate component of
accumulated other comprehensive income in stockholders' equity. "Held to
Maturity" investments are carried at amortized cost.
Investments in fixed maturity securities are adjusted for amortization of
premium and accretion of discounts to maturity date using the interest method.
Income is recognized on the accrual basis. Realized investment gains and losses
are recorded as income when the securities are sold using the specific
identification basis.
The amortized cost of mortgage- and asset-backed securities iscalculated using
the interest method including consideration of anticipated prepayments at the
date of purchase. Significant changes in estimated cash flows from the original
assumptions are accounted for using the composite method.
Equity securities are carried at fair value with the change in unrealized
investment gains or losses credited or charged directly to stockholders' equity,
net of deferred income taxes, and are included as a component of accumulated
other comprehensive income. Short-term investments are carried at cost, which
approximates fair value.
Premiums and Other Receivables
Premiums are recognized as revenue ratably over the terms of the respective
policies. Unearned premiums are calculated using the semi-monthly pro rata
basis. Management has established an allowance for doubtful accounts of $522,000
at December 31, 1998 and 1997, on premium receivables, which management believes
is adequate to cover uncollectable accounts.
Policy Acquisition Costs
Policy acquisition costs such as commissions, salaries, premium taxes and
certain other underwriting expenses, which vary with and are directly related to
the production of business, are deferred and amortized over the effective period
of the related insurance policies. The method followed in computing deferred
policy acquisition costs limits the amount of such deferred costs to their
estimated realizable values, which gives effect to the premium to be earned,
related investment income, losses and loss adjustment expenses and certain other
costs expected to be incurred as the premium is earned.
Losses and Loss Adjustment Expenses
The liability for losses and loss adjustment expenses (LAE) represents an
estimate of the ultimate unpaid net cost of all losses incurred. Estimates of
unpaid reported losses and related allocated loss adjustment expenses are
determined on the basis of claims adjusters' evaluations of individual claims.
Estimates of losses and loss adjustment expenses arising from losses incurred
but not yet reported are based on selected historical and industry data. Such
estimates are not discounted and may be more or less than the amounts ultimately
paid when the claims are settled. These estimates are reviewed periodically and
adjusted as necessary; such adjustments are reflected in current operations.
Fair Values of Financial Instruments
The Company uses the following methods or assumptions in estimating fair value
disclosures:
Investment Securities: Fair values are based on quoted market prices or on
quoted market prices of comparable instruments or values obtained from
independent pricing services.
Premium and Reinsurance Receivables and Payables: The carrying amounts reported
in the balance sheet for these instruments approximate their fair values.
Capitalized Lease Obligation: Fair value is based upon the present value of the
underlying cash flows discounted at the Company's incremental borrowing rate at
year end. The carrying amounts reported in the balance sheet approximate fair
value.
22
<PAGE>
The fair value of options is estimated on the grant date using the Black-Scholes
option pricing model. The model assumes the following for 1998, 1997 and 1996,
respectively: expected annual dividend rates of 1.1%, 1.2% and 1.5%; risk-free
interest rates of 6.0%, 6.8% and 6.8%; weighted average expected life of the
options of 2.5 years for all years; and expected stock price volatility of 30%
for all years.
Reinsurance
In the ordinary course of business, the Company reinsures certain risks,
generally on an excess of loss basis with other insurance companies which
principally are rated A+ or higher by A.M. Best. Such reinsurance arrangements
serve to limit the Company's maximum loss. Amounts recoverable from reinsurers
are estimated in a manner consistent with the claim liabilities arising from the
reinsured policies and incurred but not reported losses.
Capitalized Lease
The capitalized lease is carried at cost less accumulated amortization.
Amortization is calculated using the interest method over 20 years, which
represents the term of the mortgage on the office space which the Company rents
from a related party (see note 3).
Income Tax
Deferred income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
Note 2 Basic and Diluted Earnings Per Share and Retroactive Adjustment for Stock
Split
Basic earnings per share is computed by dividing income available to common
stockholders by the weighted-average number of common shares outstanding for
each period. Diluted EPS reflects the potential dilution that could occur if the
securities or other contracts to issue common stock were exercised or converted
into common stock. All per share calculations and stock option disclosures
presented have been adjusted retroactively to reflect a three-for-two stock
split declared in January 1997. Shares outstanding also have been restated to
reflect the stock split.
The following is a reconciliation of the numerators and denominators of the
basic and diluted EPS computations:
Years ended December 31,
----------------------------
(In thousands except per share data) 1998 1997 1996
----------------------------
Basic EPS:
Net earnings $8,881 $9,645 $6,993
Weighted average common
shares outstanding 9,766 8,126 6,663
----------------------------
Basic EPS $ 0.91 $ 1.19 $ 1.05
----------------------------
Diluted EPS:
Net Earnings $8,881 $9,645 $6,993
----------------------------
Weighted average common
shares outstanding 9,766 8,126 6,663
Additional shares outstanding
after the assumed exercise of
options by applying the treasury
stock method 107 102 80
----------------------------
Total Shares 9,873 8,228 6,743
----------------------------
Diluted EPS $ 0.90 $ 1.17 $ 1.04
============================
Note 3 Transactions with Affiliates
Penn-America leases its home office facility from a stockholder. The lease is
accounted for as a capitalized lease. The amount of property capitalized,
$2,727,000 and $2,440,000 is presented net of accumulated amortization of
$676,000 and $575,000 as of December 31, 1998 and 1997, respectively. Penn
Independent and its subsidiaries also lease a portion of the building in which
Penn-America's home office facility is located. Management believes that the
lease terms are at market rates.
Penn Independent provides the Company with management and other services. The
Company paid $225,000, $296,000 and $342,000 in 1998, 1997 and 1996,
respectively, for such services. Such amounts are based on allocations of
estimated costs.
All costs incurred by Penn Independent on behalf of Penn-America have been
allocated to Penn-America and are reflected in the financial statements.
Management believes that the methods used to allocate such costs are reasonable
and that Penn-America's expenses on a stand-alone basis would not be materially
different.
Premiums written resulting from transactions with insurance agency affiliates of
Penn Independent were $1,279,000 in 1998, $1,597,000 in 1997 and $3,880,000 in
1996. Commissions paid to such affiliates were $294,000 in 1998, $359,000 in
1997 and $888,000 in 1996.
23
<PAGE>
Note 4 Investments
The Company invests primarily in investment grade fixed maturities,
substantially all of which are rated "A" or higher by Standard & Poor's
Corporation. The cost, gross unrealized gains and losses and fair values of
investments are as follows:
<TABLE>
<CAPTION>
December 31, 1998
------------------------------------------------
Gross Gross
Unrealized Unrealized Fair
(In thousands) Cost Gains Losses Value
------------------------------------------------
<S> <C> <C> <C> <C>
Fixed maturities
Available for sale
U.S. Treasury securities
and obligations of U.S.
government agencies $ 5,512 $ 149 $ -- $ 5,661
Corporate securities 28,725 1,024 (1) 29,748
Mortgage-backed securities 10,074 96 (3) 10,167
Other structured securities 15,668 69 -- 15,737
Municipal 35,295 624 -- 35,919
Public utilities 8,091 275 -- 8,366
------------------------------------------------
Total $103,365 $ 2,237 $ (4) $105,598
------------------------------------------------
Held to maturity
U.S. Treasury securities and
obligations of U.S.
government agencies $ 11,046 $ 148 $ -- $ 11,194
Corporate securities 9,396 101 (1) 9,496
Mortgage-backed securities 5,123 37 (2) 5,158
Municipal 399 4 -- 403
Public utilities 992 27 -- 1,019
------------------------------------------------
Total 26,956 317 (3) 27,270
------------------------------------------------
Total fixed-maturity securities 130,321 2,554 (7) 132,868
------------------------------------------------
Equity securities 23,358 2,348 (468) 25,238
Short-term investments 997 -- -- 997
------------------------------------------------
Total investments $154,676 $ 4,902 $ (475) $159,103
================================================
December 31, 1997
------------------------------------------------
Gross Gross
Unrealized Unrealized Fair
(In thousands) Cost Gains Losses Value
------------------------------------------------
Fixed maturities
Available for sale
U.S. Treasury securities and
obligations of U.S.
government agencies $ 22,730 $ 132 $ (31) $ 22,831
Corporate securities 30,053 486 (2) 30,537
Mortgage-backed securities 11,751 41 -- 11,792
Asset-backed securities 18,602 92 -- 18,694
Public utilities 6,049 76 -- 6,125
------------------------------------------------
Total $ 89,185 $ 827 $ (33) $ 89,979
================================================
Held to maturity
U.S. Treasury securities and
obligations of U.S.
government agencies $ 21,466 $ 75 $ (6) $ 21,535
Corporate securities 11,284 57 (15) 11,326
Mortgage-backed securities 7,901 114 (50) 7,965
Public utilities 6,041 19 (2) 6,058
Other securities 150 -- -- 150
------------------------------------------------
Total 46,842 265 (73) 47,034
------------------------------------------------
Total fixed-maturity securities 136,027 1,092 (106) 137,013
------------------------------------------------
Equity securities 25,662 1,957 (239) 27,380
Short-term investments 11,455 -- -- 11,455
------------------------------------------------
Total investments $173,144 $ 3,049 $ (345) $175,848
================================================
</TABLE>
Fixed maturities at December 31, 1998, by contractual maturity, are shown below.
Expected maturities will differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without call or
prepayment penalties.
Available for Sale Held to Maturity
-----------------------------------------------
Amortized Fair Amortized Fair
(In thousands) Cost Value Cost Value
-----------------------------------------------
Due in one year or less $ 8,245 $ 8,312 $ 8,283 $ 8,336
Due after one year through
five years 18,312 19,025 12,550 12,757
Due after five years through
ten years 39,425 40,562 -- --
Due after ten years 11,641 11,795 1,000 1,019
Asset- and mortgage-backed
securities 25,742 25,904 5,123 5,158
-----------------------------------------------
Total $103,365 $105,598 $ 26,956 $ 27,270
-----------------------------------------------
A summary of net investment income is as follows:
Years ended December 31,
------------------------------------
(In thousands) 1998 1997 1996
------------------------------------
Interest on fixed maturities $ 8,921 $ 7,506 $ 6,108
Dividends on equity securities 1,528 1,123 691
Interest on short-term
investments and cash 732 852 380
Other 2 42 61
------------------------------------
Total investment income 11,183 9,523 7,240
Less investment expense (420) (305) (535)
------------------------------------
Net investment income $ 10,763 $ 9,218 $ 6,705
------------------------------------
24
<PAGE>
All investments in fixed-maturity securities have been income-producing during
1998, 1997 and 1996. Realized pre-tax gains (losses) on the sale of investments
are as follows:
Years ended December 31,
---------------------------------
(In thousands) 1998 1997 1996
---------------------------------
Fixed maturities:
Gross realized gains $ 87 $ 77 $ 32
Gross realized losses (11) (30) (529)
---------------------------------
Net gains (losses) 76 47 (497)
---------------------------------
Equity securities:
Gross realized gains 724 1,321 1,460
Gross realized losses (782) (54) (57)
---------------------------------
Net (losses) gains (58) 1,267 1,403
---------------------------------
Total net realized investment
gains $ 18 $ 1,314 $ 906
=================================
Income taxes on net realized investment gains were $6,000, $450,000 and $308,000
in 1998, 1997 and 1996, respectively.
The amortized cost of fixed maturities on deposit with various regulatory
authorities at December 31, 1998 and 1997, amounted to $7,341,000 and
$7,328,000, respectively.
Note 5 Reinsurance
In the normal course of business, the Company seeks to reduce the losses that
may arise from catastrophes or other events that cause unfavorable underwriting
results by reinsuring certain levels of risks in various areas of exposure with
other insurance enterprises or reinsurers.
Reinsurance contracts do not relieve the Company of its obligations to
policyholders. Failure of reinsurers to honor their obligations could result in
losses to the Company. Allowances have been established for amounts deemed
uncollectible. The Company evaluates the financial condition of its reinsurers
and monitors concentrations of credit risk arising from similar geographic
regions, activities or economic characteristics of the reinsurers to minimize
its exposure to significant losses from reinsurer insolvencies. At December 31,
1998, reinsurance recoverables and prepaid reinsurance premiums associated with
one major reinsurer, General Reinsurance Corporation (Gen Re), was $17,799,000.
Premiums written and earned consisted of the following:
Years ended December 31,
----------------------------------
(In thousands) 1998 1997 1996
----------------------------------
Premiums written:
Gross $ 95,097 $104,694 $ 80,496
Ceded 7,268 8,133 7,027
----------------------------------
Net of reinsurance $ 87,829 $ 96,561 $ 73,469
----------------------------------
Premiums earned:
Gross $ 97,017 $ 99,385 $ 75,876
Ceded $ 7,524 7,736 6,795
----------------------------------
Net of reinsurance $ 89,493 $ 91,649 $ 69,081
----------------------------------
Recoveries recognized under reinsurance contracts were as follows:
1998 $ 6,081,000
1997 $ 5,132,000
1996 $ 8,530,000
Note 6 Capitalized Lease Obligation
Capitalized lease obligation of $2,080,000 and $1,920,000 at December 31, 1998
and 1997, respectively, represented the lease obligation arising under the home
office facility lease (see note 3). Interest is payable at 8.5% on the
outstanding principal balance.
Note 7 Unpaid Losses and Loss Adjustment Expenses
Activity in the liability for unpaid losses and loss adjustment expenses is
summarized as follows:
(In thousands) 1998 1997 1996
----------------------------------
Balance as of January 1 $ 84,566 $ 70,728 $ 60,139
Less reinsurance recoverables 15,703 15,072 13,627
----------------------------------
Net balance at January 1 68,863 55,656 46,512
----------------------------------
Incurred related to:
Current year 55,647 57,387 44,096
Prior years 86 341 (804)
----------------------------------
Total incurred 55,733 57,728 43,292
----------------------------------
Paid related to:
Current year 21,903 20,861 16,940
Prior years 30,258 23,660 17,208
----------------------------------
Total paid 52,161 44,521 34,148
----------------------------------
Net balance at December 31 72,435 68,863 55,656
Plus reinsurance recoverables 16,502 15,703 15,072
----------------------------------
Balance as of December 31 $ 88,937 $ 84,566 $ 70,728
----------------------------------
As a result of changes in estimates of insured events in prior years, the
provision for losses and loss adjustment expenses increased $86,000 in 1998,
$341,000 in 1997 and decreased $804,000 in 1996. The increase in prior years'
incurred losses in 1998 and 1997 is due primarily to loss development in
automobile liability partially offset by favorable development in the commercial
lines. The decrease in incurred losses of prior years incurred in 1996 was due
to favorable development in commercial lines.
25
<PAGE>
Note 8 Income Tax
The components of income tax expense are as follows:
Years ended December 31,
--------------------------------
(In thousands) 1998 1997 1996
--------------------------------
Current $ 3,483 $ 4,570 $ 3,391
Deferred 159 (434) (2)
--------------------------------
Total $ 3,642 $ 4,136 $ 3,389
--------------------------------
The actual income tax rate differed from the statutory income tax rate
applicable to income before income taxes as follows:
1998 1997 1996
Statutory income tax rate 34.0% 34.2% 34.0%
Tax-exempt interest and dividends
received deduction (5.4) (1.6) (1.4)
Life insurance proceeds -- (2.5) --
Other 0.5 (0.1) --
----------------------------
29.1% 30.0% 32.6%
----------------------------
The tax effects of temporary differences that result in a net deferred tax asset
as of December 31, are summarized as follows:
(In thousands) 1998 1997
-----------------
Assets
Effect of discounting unpaid losses
and loss adjustment expenses $3,530 $3,379
Excess of tax over financial
reporting of earned premium 2,138 2,267
Other, net 476 577
Total deferred assets 6,144 6,223
Liabilities
Deferred policy acquisition costs $3,024 $2,932
Unrealized investment gains 1,398 863
Other, net 124 126
-----------------
Total deferred liabilities 4,546 3,921
-----------------
Net deferred tax asset $1,598 $2,302
-----------------
The Company is required to establish a valuation allowance for any portion of
the deferred tax asset that management believes will not be realized. In the
opinion of management, it is more likely than not that the Company will realize
the benefit of the deferred tax asset and, therefore, no such valuation
allowance has been established.
Note 9 Segment Information
In 1998, the Company implemented Statement of Financial Accounting Standards No.
131, "Disclosures about Segments of an Enterprise and Related Information" which
establishes standards about a company's operating segments.
The Company has two reportable segments: personal lines and commercial lines.
These segments are managed separately because they have different customers,
pricing and expense structures. The Company does not allocate assets between
segments because assets are reviewed in total by management for decision-making
purposes.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies. The Company evaluates segment profit
based on profit or loss from operating activities. Segment profit or loss from
operations is pre-tax and does not include unallocated expenses but does include
investment income attributable to insurance transactions. Segment profit or loss
therefore excludes Federal income taxes, unallocated expenses and investment
income attributable to equity as opposed to investment income attributable to
insurance transaction.
The Company currently has one major customer accounting for more than 10% of the
Company's revenue. In 1998 and 1997, the Company derived approximately 18.4% and
21.3% of its revenues from this agent. In 1996, the Company had two major
customers and derived 24.7% of its revenue from these two agents.
The following is a summary of the Company's segment revenues, expenses and
profit for the years ended December 31, 1998, 1997 and 1996:
(In thousands) 1998
------------------------------------
Commercial Personal Total
------------------------------------
Premiums earned $ 62,949 $ 26,544 $ 89,493
Net investment income from
insurance operations 4,126 945 5,071
------------------------------------
Total segment revenues 67,075 27,489 94,564
------------------------------------
Segment losses and LAE 37,121 18,612 55,733
Segment expenses 18,687 8,547 27,234
------------------------------------
Total segment expenses 55,808 27,159 82,967
------------------------------------
Segment profit $ 11,267 $ 330 $ 11,597
====================================
Plus unallocated items:
Net investment income from equity 5,710
Unallocated expenses (4,784)
Income taxes (3,642)
--------
Net earnings $ 8,881
--------
26
<PAGE>
(In thousands) 1997
------------------------------------
Commercial Personal Total
------------------------------------
Premiums earned $ 57,189 $ 34,460 $ 91,649
Net investment income from
insurance operations 4,764 934 5,698
Other income 442 230 672
------------------------------------
Total segment revenues 62,395 35,624 98,019
------------------------------------
Segment losses and LAE 32,723 25,005 57,728
Segment expenses 15,822 11,004 26,826
------------------------------------
Total segment expenses 48,545 36,009 84,554
------------------------------------
Segment profit (loss) $ 13,850 $ (385) $ 13,465
====================================
Plus unallocated items:
Net investment income from equity 4,834
Unallocated expenses (4,518)
Income taxes (4,136)
--------
Net earnings $ 9,645
--------
(In thousands) 1996
------------------------------------
Commercial Personal Total
------------------------------------
Premiums earned $ 49,667 $ 19,414 $ 69,081
Net investment income from
insurance operations 3,832 433 4,265
------------------------------------
Total segment revenues 53,499 19,847 73,346
------------------------------------
Segment losses and LAE 30,887 12,405 43,292
Segment expenses 13,026 6,147 19,173
------------------------------------
Total segment expenses 43,913 18,552 62,465
------------------------------------
Segment profit $ 9,586 $ 1,295 $ 10,881
====================================
Plus unallocated items:
Net investment income from equity 3,346
Unallocated expenses (3,845)
--------
Income taxes (3,389)
--------
Net earnings $ 6,993
--------
Total segment revenues of $94.6 million, $98.0 million and $73.3 million plus
unallocated net investment income from equity of $5.7 million, $4.8 million and
$3.3 million equals total Company revenues of $100.3 million, $102.9 million and
$76.7 million for the years ended December 31, 1998, 1997 and 1996,
respectively.
Note 10 Stockholders' Equity
A source of cash to use for the payment of dividends to the Company's
stockholders is dividends from Penn-America. Penn-America is required by law to
maintain a certain minimum surplus on a statutory basis and is subject to
risk-based capital requirements and regulations under which payment of a
dividend from statutory surplus may require prior approval of the Pennsylvania
regulatory authorities. The maximum dividend that may be paid by Penn-America to
the Company without prior approval of regulatory authorit ies in 1999 is
$9,455,000.
The National Association of Insurance Commissioners has adopted risk-based
capital (RBC) requirements for property and casualty insurance companies. This
requirement may have a further impact on the payment of dividends to the
stockholders. At December 31, 1998 and 1997 the Company's actual RBC exceeded
minimum requirements. Therefore, there are no further restrictions on the
payment of dividends.
The following tables reconcile surplus and net earnings of Penn-America as
determined in accordance with accounting procedures prescribed or permitted by
the insurance regulatory authorities to stockholders' equity and net earnings of
the Company calculated in accordance with generally accepted accounting
principles (GAAP) as reported herein:
<TABLE>
<CAPTION>
At December 31,
---------------------------------------
(In thousands) 1998 1997 1996
---------------------------------------
<S> <C> <C> <C>
Statutory surplus as regards
policyholders $ 85,358 $ 83,459 $ 41,665
Deferred policy acquisition costs 8,728 8,563 7,231
Deferred income taxes 1,576 2,302 2,214
Unrealized investment gains
(losses) on fixed maturities
available for sale 2,233 794 (289)
Capital lease, net (29) (55) (80)
Provision for unauthorized
reinsurance 184 65 57
Non-admitted assets 889 889 589
Other assets (liabilities) 38 15 (95)
Provision for uncollectible
accounts (622) (622) (622)
Holding company 2,275 1,897 (8,333)
---------------------------------------
GAAP stockholders' equity $ 100,630 $ 97,307 $ 42,337
=======================================
Years ended December 31,
---------------------------------------
(In thousands) 1998 1997 1996
---------------------------------------
Statutory net income $ 9,805 $ 8,075 $ 6,262
Deferred acquisition costs 165 1,332 1,515
Deferred income tax (169) 418 (2)
Allowance for uncollectable accounts -- -- 84
Capital lease 25 25 24
Life insurance proceeds -- 672 --
Other, net 23 99 201
Holding company (968) (976) (1,091)
---------------------------------------
GAAP net earnings $ 8,881 $ 9,645 $ 6,993
=======================================
</TABLE>
Note 11 Profit-Sharing Plans
Penn-America participates in a profit-sharing and 401(k) plan with Penn
Independent that covers qualified employees. Penn-America's contributions under
the 401(k) plan were $114,000, $74,000 and $51,000 for 1998, 1997 and 1996,
respectively. There were no profit-sharing distributions in 1998, 1997 and 1996.
Note 12 Stock Incentive Plans
Stock options: In August 1993, the Company adopted a Stock Incentive Plan (the
"Plan"). The purpose of the Plan is to enable officers, key employees,
directors, consultants, advisors and service providers of the Company and its
affiliates (as defined in the Plan)
27
<PAGE>
to participate in the Company's future and to enable the Company to attract and
retain these persons by offering them proprietary interests in the Company. The
Plan authorizes the issuance of up to 525,000 shares of common stock pursuant to
the exercise of stock options or the award of restricted stock.
Options are exercisable according to the various terms under which they were
granted varying from one year to ten years after the date of grant. All options
are subject in general to earlier termination if the optionee leaves the employ
of the Company.
The Company applies APB opinion No. 25 and related interpretations in accounting
for its Plan. Accordingly, no compensation cost has been recognized for the
Plan. Had compensation cost for the Plan been determined based on fair value at
the grant date consistent with FASB Statement No. 123, the effect on the
Company's net earnings and earnings per share would have been:
<TABLE>
<CAPTION>
Years ended December 31,
------------------------------------------
1998 1997 1996
------------------------------------------
Net earnings (in thousands):
<S> <C> <C> <C>
As reported $8,881 $9,645 $6,993
Pro forma 8,845 9,610 6,958
Basic net earnings per share:
As reported $0.91 $1.19 $1.05
Pro forma 0.91 1.18 1.04
Diluted net earnings per share:
As reported $0.90 $1.17 $1.04
Pro forma 0.90 1.17 1.03
</TABLE>
A summary of the status of the Company's stock option plan as of December 31,
1998, 1997, 1996 and the changes during the years ended on those dates is
presented below:
<TABLE>
<CAPTION>
(Options in thousands) 1998 1997 1996
---------------------------------------
<S> <C> <C> <C>
Outstanding at beginning of year
(average price of $6.40, $6.07,
and $5.86, in 1998, 1997 and
1996 respectively) 313 405 382
Granted
(average price of $19.00, $13.99,
and $8.83 per share) 16 22 30
Exercised
(average price of $6.00, $6.19 and
$6.00 per share) (29) (114) (7)
Forfeited (average price of
$15.13 per share) (2) -- --
-----------------------------------
Outstanding at end of year
(average price of $6.98, $6.40, and
$6.07 per share in 1998, 1997
and 1996 respectively) 298 313 405
-----------------------------------
Options exercisable at end of year 286 250 279
-----------------------------------
Weighted average fair value
of options granted
during the year $4.43 $2.45 $2.11
-----------------------------------
</TABLE>
The following table summarizes information about stock options outstanding at
December 31, 1998:
Options Outstanding Options Exercisable
Weighted
Number Average Weighted Number Weighted
Outstanding Remaining Average Exercisable Average
12/31/98 Contractual Exercise 12/31/98 Exercise
Exercise Prices (in 000's) Life (Years) Price (in 000's) Price
- -----------------------------------------------------------------------------
$ 4.33 - $ 5.42 30 1.9 $ 4.88 30 $ 4.88
$ 6.00 225 4.8 $ 6.00 225 $ 6.00
$ 8.83 - $19.00 43 4.4 $13.50 31 $11.41
- -----------------------------------------------------------------------------
$ 4.33 - $19.00 298 4.4 $ 6.98 286 $ 6.48
- -----------------------------------------------------------------------------
Restricted Stock: The Company awarded to certain employees 45,000 and 32,500
shares of restricted stock having a value on the date of the award of $270,000
and $512,000 respectively. Such shares are held by the Company and released to
each grantee at the rate of 20% per year provided that the grantee is still
employed by the Company or its affiliates. The Company charged $157,000,
$101,000 and $54,000 to compensation expense relating to these awards for the
years ended 1998, 1997 and 1996, respectively. During 1998, 1997 and 1996,
14,600, 9,900 and 9,000 shares, respectively, of the restricted stock were
released to the applicable employees as allowed by the provisions of the grant.
Executive Incentive Compensation Plan: During 1995, the Board of Directors of
the Company adopted an executive incentive compensation plan which provides up
to 75,000 shares, over the life of the plan, to be granted to key officers,
executives and employees of the Company and its subsidiaries. In January 1998,
5,629 shares were distributed in accordance with the plan's provisions for the
year 1997. In January 1997, 7,535 shares were distributed for the year 1996. The
shares issued under this plan are valued at the fair value of the stock at the
close of business at the end of each year and are issued in the subsequent year,
subject to the Board's approval and attainment of corporate objectives.
Agents' Contingent Commission Plan: During 1995, the Agents' Contingent
Commission Plan was modified to provide that at least one-third of the
contingent commission award to the Company's agents each year would be given in
stock of the Company. Up to 75,000 shares of the Company's stock were authorized
for issuance under this plan. Agents' stock awards for the 1997, 1996 and 1995
years, which were issued in May of 1998, 1997 and 1996, amounted to 20,437,
27,746 and 16,403 shares respectively. The awards for the 1998 year will not be
determined until March 1999.
28
<PAGE>
Note 13 Commitments and Contingencies
The Company's insurance subsidiaries are subject to routine legal proceedings in
connection with their property and casualty insurance business. Neither the
Company nor its subsidiaries is involved in any pending or threatened legal or
administrative proceedings which management believes might have a material
adverse effect on the Company's financial condition or results of operations.
During 1998 the Company secured a revolving credit facility with First Union
National Bank for $25 million. This facility provides an interest rate tied to
libor plus a variable factor to be charged on borrowed funds based on the
Company's debt-to-equity ratio at the time of borrowing. This variable interest
factor ranges from 75 to 150 basis points. This facility is available until the
year 2004 with a structured step-down in the available credit line over the
period. The line also includes certain financial covenants which must be met by
the Company.
The Company leases various computer equipment for use by its insurance
subsidiaries. These leases have terms primarily expiring in less than a
three-year period. Rental expenses for these operating leases were $379,000,
$417,000 and $485,000 for the years ended December 31, 1998, 1997 and 1996,
respectively.
At December 31, 1998, the future minimum rental payments required under
operating leases that have initial or remaining noncancelable lease terms in
excess of one year were $421,000, $371,000 and $330,000 for 1999, 2000 and 2001,
respectively.
Note 14 Comprehensive Income
In 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Comprehensive Income." This statement was implemented retroactively by the
Company in 1998. The statement requires that an enterprise (a) classify items of
other comprehensive income by their nature in a financial statement and (b)
display the accumulated balance of other comprehensive income separately from
retained earnings and additional paid-in capital in the equity section of the
statement of financial position. Accumulated other comprehensive income of the
Company consists solely of net unrealized gains on investment securities.
The following are components of other comprehensive income for the years ended
December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
(In thousands) 1998
------------------------------------------
Before Tax Tax Net of Tax
Amount Expense Amount
------------------------------------------
<S> <C> <C> <C>
Unrealized gains on investments:
Unrealized holding gains arising
during the period $1,632 $(555) $1,077
Less: reclassification adjustment for
gains realized in net income (18) 6 (12)
------------------------------------------
Other comprehensive income $1,614 $(549) $1,065
------------------------------------------
1997
------------------------------------------
Before Tax Tax Net of Tax
Amount Expense Amount
------------------------------------------
Unrealized gains on investments:
Unrealized holding gains arising
during period $2,311 $(790) $1,521
Less: reclassification adjustment for
gains realized in net income (1,314) 449 (865)
------------------------------------------
Other comprehensive income $997 $(341) $656
------------------------------------------
1996
------------------------------------------
Before Tax Tax Net of Tax
Amount Expense Amount
------------------------------------------
Unrealized losses on investments:
Unrealized holding gains arising
during period $136 $(46) $90
Less: reclassification adjustment for
gains realized in net income (906) 308 (598)
------------------------------------------
Other comprehensive income (loss) $(770) $262 $(508)
------------------------------------------
</TABLE>
Note 15 Unaudited Quarterly Results of Operations for 1998 and 1997
<TABLE>
<CAPTION>
(In thousands except per share data)
1998
--------------------------------------------------------------------------------
First Second Third Fourth Total
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $25,776 $25,300 $24,877 $24,321 $100,274
Losses and expenses 22,099 21,733 22,426 21,493 87,751
Net earnings 2,580 2,525 1,784 1,992 8,881
Net earnings per share:
Basic 0.26 0.25 0.18 0.21 0.91
Diluted 0.26 0.25 0.18 0.21 0.90
1997
--------------------------------------------------------------------------------
First Second Third Fourth Total
--------------------------------------------------------------------------------
Revenues $22,840 $25,127 $26,950 $27,936 $102,853
Losses and expenses 20,251 22,328 23,031 23,462 89,072
Net earnings 1,750 2,019 2,587 3,289 9,645
Net earnings per share:
Basic 0.26 0.30 0.28 0.33 1.19
Diluted 0.26 0.30 0.28 0.33 1.17
</TABLE>
29
<PAGE>
Independent Auditors' Report
The Board of Directors and Stockholders
Penn-America Group, Inc.:
We have audited the accompanying consolidated balance sheets of Penn-America
Group, Inc. and subsidiaries as of December 31, 1998 and 1997 and the related
consolidated statements of earnings, stockholders' equity, and cash flows for
each of the years in the three-year 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 financialstatements 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 financial position of Penn-America Group,
Inc. and subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
January 22, 1999
Philadelphia, Pennsylvania
30
<PAGE>
Stockholders, Board of Directors and Management Information
Principal Officers
Penn-America Group, Inc.
Jon S. Saltzman
President and Chief Executive Officer
Rosemary R. Ferrero, CPA
Vice President - Finance and Treasurer
Garland P. Pezzuolo
Secretary and General Counsel
Principal Officers
Penn-America Insurance Company and Penn-
Star Insurance Company
Jon S. Saltzman
President and Chief Executive Officer
John M. DiBiasi, CPCU
Executive Vice President Underwriting and Marketing
Rosemary R. Ferrero, CPA
Vice President - Finance, Secretary and Treasurer
Thomas P. Bowie
Senior Vice President, Claims
J.Ransley Lennon
Vice President Information Systems
Garland P. Pezzuolo
Secretary and General Counsel
Auditors
KPMG LLP
1600 Market Street
Philadelphia PA 19103
Consulting Actuary
Ronald T. Kuehn
Ernst & Young LLP
Two Commerce Square
STE 4000
2001 Market Street
Philadelphia PA 19103
Registrar and Transfer Agency
First Union National Bank
Corporate Trust Operations
1525 W. WT Harris Boulevard
Charlotte NC 28288-1153
Stockholder Inquiries: (800) 829-8432
Corporate Communication Consultant
David Kirk, APR
127 Gateshead Way
Phoenixville PA 19460-1048
(610) 792-3329 or [email protected]
Graphic Design Firm
Malish & Pagonis
623 South 3rd Street
Philadelphia PA 19147
(215) 629-3699 or
[email protected]
Board of Directors
Penn-America Group, Inc.
Irvin Saltzman
Chairman of the Board of Directors,
Director, Penn Independent
Corporation
Jon S. Saltzman
President and Chief Executive Officer,
Penn-America Group
Director, Penn Independent
Corporation
James E. Heerin, Jr.
Vice President, General Counsel and
Director, Penn Independent
Corporation
Senior Vice President and
General Counsel, InterAg
Technologies, Inc.
Robert A. Lear
President and Director, Penn
Independent Corporation
Director, Dynasil Corporation of
America
M. Moshe Porat, Ph.D., CPCU
Dean, Fox School of Business and
Management, Temple University
Jami Saltzman-Levy
Vice President, Human Resources,
Director, Penn Independent
Corporation
Charles Ellman
Retired Insurance Executive
Paul Simon
Director, Public Policy Institute,
Southern Illinois University
Thomas M. Spiro
Managing General Partner,
TMS Capital Partners, L.P.
Annual Meeting
The Annual Stockholders' Meeting will be held in our home office on May 19, 1999
at 10:00 A.M.
Stockholder Relations, Form 10-K
The Company's Form 10-K has been filed with the Securities and Exchange
Commission. A copy of the Form 10-K and interim reports are available to
stockholders without charge from the Investor Relations Department. Telephone
(215) 443-3656 or send your E-mail request to [email protected]
Corporate Headquarters
420 South York Road
Hatboro PA 19040-3949
(215) 443-3600 voice
(215) 443-3603 facsimile
http://www.penn-america.com
Market and Common Stock Information
Since August 4, 1998, the Company's common stock has traded on the New York
Stock Exchange under the symbol "PNG." Previously, the Company's stock was
listed on NASDAQ. As of January 27, 1999 there were approximately 1400
beneficial holders of record of the Company's common stock. The high and low
sale prices of the common stock were as follows:
1998
- ------------------------------------
Quarter High Low
- ------------------------------------
First $ 23.00 $ 19.50
Second 21.25 13.00
Third 13.25 8.25
Fourth 11.13 8.63
1997
- ------------------------------------
Quarter High Low
- ------------------------------------
First $ 14.50 $ 10.33
Second 15.50 11.25
Third 21.25 14.38
Fourth 21.75 17.25
Except for the historical information contained in this report, matters
discussed herein may constitute "forward-looking statements" (within the meaning
of Section 27A of the Securities Act and Section 21E of the Exchange Act.) Such
forward-looking information reflects the Company's current best estimates
regarding its future operations. The Company's actual results could differ
materially from those estimated in the forward-looking statements as a result of
several factors, including those discussed below and elsewhere in this report.
A variety of factors may materially impact estimates of future operations. Many
of such factors are outside the Company's control and cannot be accurately
predicted. Important factors include, but are not limited to, general economic
conditions, interest rate levels, financial market performance, legislative
initiatives, the adequacy of loss reserves, price competition impacting premium
levels, relationships with and capacity of the Company's general agents and
changes in state insurance regulations.
Exhibit 23
Independent Auditors' Consent and Report on Schedules
The Board of Directors and Stockholders
Penn-America Group, Inc.:
Under date of January 22, 1999, we reported on the consolidated balance sheets
of Penn-America Group, Inc., and subsidiaries as of December 31, 1998 and 1997,
and the related consolidated statements of earnings, stockholders equity, and
cash flows for each of the years in the three-year period ended December 31,
1998, as contained in the 1998 annual report to stockholders. These consolidated
financial statements and our report thereon are incorporated by reference in the
annual report on Form 10-K for the year 1998. In connection with our audits of
the aforementioned consolidated financial statements, we also audited the
related consolidated financial statement schedules as listed in the accompanying
index. These financial statement schedules are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statement schedules based on our audits.
In our opinion, such financial statement schedules, when considered in relation
to the basic consolidated financial statements taken as whole, present fairly,
in all material respects, the information set forth therein.
We consent to incorporation by reference in the registration statement (No.
33-82728) on Form S-8 of Penn-America Group, Inc. and subsidiaries of our
reports dated January 22, 1999, relating to the consolidated balance sheets of
Penn-America Group, Inc. and subsidiaries as of December 31, 1998 and 1997, and
the related consolidated statements of earnings, stockholders equity, and cash
flows and the related consolidated financial statement schedules for each of the
years in the three-year period ended December 31, 1998, which reports are
incorporated by reference in or appear in the December 31, 1998 annual report on
Form 10-K of Penn-America Group, Inc.
/S/ KPMG PEAT MARWICK LLP
Philadelphia, Pennsylvania
March 25, 1999
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Balance Sheet and Statement of Earnings at December 31, 1998 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0000910110
<NAME> Penn-America Group, Inc.
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-START> Jan-01-1998
<PERIOD-END> Dec-31-1998
<DEBT-HELD-FOR-SALE> 105,598
<DEBT-CARRYING-VALUE> 26,956
<DEBT-MARKET-VALUE> 0
<EQUITIES> 25,238
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 158,789
<CASH> 24,077
<RECOVER-REINSURE> 18,766
<DEFERRED-ACQUISITION> 8,728
<TOTAL-ASSETS> 230,504
<POLICY-LOSSES> 88,937
<UNEARNED-PREMIUMS> 34,253
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 99
<OTHER-SE> 100,531
<TOTAL-LIABILITY-AND-EQUITY> 230,504
89,493
<INVESTMENT-INCOME> 10,783
<INVESTMENT-GAINS> 18
<OTHER-INCOME> 0
<BENEFITS> 55,733
<UNDERWRITING-AMORTIZATION> 25,452
<UNDERWRITING-OTHER> 6,389
<INCOME-PRETAX> 12,523
<INCOME-TAX> 3,642
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,881
<EPS-PRIMARY> 0.91
<EPS-DILUTED> 0.90
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
CREDIT AGREEMENT
among
PENN-AMERICA GROUP, INC.,
THE LENDERS NAMED HEREIN,
and
FIRST UNION NATIONAL BANK,
as Agent
$25,000,000 Senior Credit Facility
Arranged by
FIRST UNION CAPITAL MARKETS A
division of Wheat First Securities, Inc.
Dated as of September 28, 1998
<PAGE>
TABLE OF CONTENTS
Page
RECITALS.......................................................................1
ARTICLE I
DEFINITIONS
1.1 Defined Terms.........................................................1
1.2 Accounting Terms.....................................................21
1.3 Other Terms; Construction............................................21
ARTICLE II
AMOUNT AND TERMS OF THE LOANS
2.1 Commitments..........................................................22
2.2 Borrowings...........................................................22
2.3 Disbursements; Funding Reliance; Domicile of Loans...................23
2.4 Notes................................................................24
2.5 Termination and Reduction of Commitments.............................24
2.6 Mandatory Payments and Prepayments...................................25
2.7 Voluntary Prepayments................................................26
2.8 Interest.............................................................26
2.9 Fees.................................................................28
2.10 Interest Periods.....................................................29
2.11 Conversions and Continuations........................................30
2.12 Method of Payments; Computations.....................................31
2.13 Recovery of Payments.................................................32
2.14 Use of Proceeds......................................................32
2.15 Pro Rata Treatment...................................................32
2.16 Increased Costs; Change in Circumstances; Illegality; etc............33
2.17 Taxes ............................................................35
2.18 Compensation.........................................................37
ARTICLE III
LETTERS OF CREDIT
3.1 Issuance.............................................................38
3.2 Notices..............................................................39
3.3 Participations.......................................................39
3.4 Reimbursement........................................................39
3.5 Payment by Loans.....................................................40
3.6 Payment to Lenders...................................................40
i
<PAGE>
3.7 Obligations Absolute.................................................41
3.8 Cash Collateral Account..............................................42
3.9 Effectiveness........................................................43
ARTICLE IV
CONDITIONS OF BORROWING
4.1 Conditions of Initial Borrowing......................................43
4.2 Conditions of All Borrowings.........................................46
ARTICLE V
REPRESENTATIONS AND WARRANTIES
5.1 Corporate Organization and Power.....................................47
5.2 Authorization; Enforceability........................................47
5.3 No Violation.........................................................48
5.4 Governmental and Third-Party Authorization; Permits..................48
5.5 Litigation...........................................................49
5.6 Taxes................................................................49
5.7 Subsidiaries.........................................................49
5.8 Full Disclosure......................................................49
5.9 Margin Regulations...................................................50
5.10 No Material Adverse Change...........................................50
5.11 Financial Matters....................................................50
5.12 Ownership of Properties..............................................52
5.13 ERISA ............................................................52
5.14 Environmental Matters................................................52
5.15 Compliance With Laws.................................................53
5.16 Regulated Industries.................................................53
5.17 Insurance............................................................54
5.18 Material Contracts...................................................54
5.19 Reinsurance Agreements...............................................54
5.20 Labor Relations......................................................54
5.21 Year 2000 Compatibility..............................................55
ARTICLE VI
AFFIRMATIVE COVENANTS
6.1 Financial Statements.................................................55
6.2 Statutory Financial Statements.......................................56
6.3 Other Business and Financial Information.............................57
6.4 Corporate Existence; Franchises; Maintenance of Properties...........60
6.5 Compliance with Laws.................................................60
6.6 Payment of Obligations...............................................60
ii
<PAGE>
6.7 Insurance............................................................60
6.8 Maintenance of Books and Records; Inspection.........................60
6.9 Permitted Acquisitions...............................................61
6.10 Year 2000 Compatibility..............................................62
6.11 Deposit Relationship.................................................62
6.12 Further Assurances...................................................62
ARTICLE VII
FINANCIAL COVENANTS
7.1 Leverage Ratio.......................................................63
7.2 Consolidated Net Worth...............................................63
7.3 Fixed Charge Coverage Ratio..........................................63
7.4 Risk-Based Capital Ratio.............................................63
7.5 Combined Net Premiums to Capital Ratio...............................63
7.6 Statutory Surplus....................................................64
ARTICLE VIII
NEGATIVE COVENANTS
8.1 Merger; Consolidation................................................64
8.2 Indebtedness.........................................................64
8.3 Liens................................................................66
8.4 Disposition of Assets................................................67
8.5 Investments..........................................................68
8.6 Restricted Payments..................................................69
8.7 Transactions with Affiliates.........................................70
8.8 Lines of Business....................................................70
8.9 Certain Amendments...................................................70
8.10 Limitation on Certain Restrictions...................................71
8.11 No Other Negative Pledges............................................71
8.12 Fiscal Year..........................................................71
8.13 Accounting Changes...................................................71
8.14 Reinsurance Agreements...............................................71
ARTICLE IX
EVENTS OF DEFAULT
9.1 Events of Default....................................................73
9.2 Remedies: Termination of Commitments, Acceleration, etc..............75
9.3 Remedies: Set-Off....................................................76
iii
<PAGE>
ARTICLE X
THE AGENT
10.1 Appointment..........................................................76
10.2 Nature of Duties.....................................................76
10.3 Exculpatory Provisions...............................................77
10.4 Reliance by Agent....................................................77
10.5 Non-Reliance on Agent and Other Lenders..............................78
10.6 Notice of Default....................................................78
10.7 Indemnification......................................................78
10.8 The Agent in its Individual Capacity.................................79
10.9 Successor Agent......................................................79
10.10 Issuing Lender.......................................................80
ARTICLE XI
MISCELLANEOUS
11.1 Fees and Expenses....................................................80
11.2 Indemnification......................................................80
11.3 Governing Law; Consent to Jurisdiction...............................82
11.4 Arbitration; Preservation and Limitation of Remedies.................83
11.5 Notices..............................................................84
11.6 Amendments, Waivers, etc.............................................84
11.7 Assignments, Participations..........................................85
11.8 No Waiver............................................................88
11.9 Successors and Assigns...............................................88
11.10 Survival.............................................................88
11.11 Severability.........................................................88
11.12 Construction.........................................................88
11.13 Confidentiality......................................................89
11.14 Counterparts; Effectiveness..........................................89
11.15 Disclosure of Information............................................89
11.16 Entire Agreement.....................................................89
iv
<PAGE>
EXHIBITS
Exhibit A Form of Note
Exhibit B-1 Form of Notice of Borrowing
Exhibit B-2 Form of Notice of Conversion/Continuation
Exhibit B-3 Form of Letter of Credit Notice
Exhibit C Form of Compliance Certificate
Exhibit D Form of Assignment and Acceptance
Exhibit E Form of Opinion of Reed Smith Shaw & McClay LLP
Exhibit F Form of Financial Condition Certificate
SCHEDULES
Schedule 5.4 Consents and Approvals
Schedule 5.7 Subsidiaries
Schedule 5.18 Material Contracts
Schedule 5.19 Reinsurance Agreements
Schedule 8.2 Indebtedness
Schedule 8.3 Liens
Schedule 8.5 Investments
Schedule 8.7 Transactions with Affiliates
Schedule 8.8 Lines of Business
<PAGE>
Draft No. 6
9/25/98
CREDIT AGREEMENT
THIS CREDIT AGREEMENT, dated as of the 28th day of September, 1998 (this
"Agreement"), is made among PENN-AMERICA GROUP, INC., a Pennsylvania corporation
with its principal offices in Hatboro, Pennsylvania (the "Borrower"), the banks
and financial institutions listed on the signature pages hereto or that become
parties hereto after the date hereof (collectively, the "Lenders"), and FIRST
UNION NATIONAL BANK ("First Union"), as agent for the Lenders (in such capacity,
the "Agent").
RECITALS
A. The Borrower has requested that the Lenders make available to the
Borrower a revolving credit facility in the aggregate principal amount of
$25,000,000. The Borrower will use the proceeds of this facility for working
capital and general corporate purposes, all as more fully described herein.
B. The Lenders are willing to make available to the Borrower the credit
facility described herein subject to and on the terms and conditions set forth
in this Agreement.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual provisions, covenants and
agreements herein contained, the parties hereto hereby agree as follows:
ARTICLE I
DEFINITIONS
1.1 Defined Terms. For purposes of this Agreement, in addition to the terms
defined elsewhere herein, the following terms shall have the meanings set forth
below (such meanings to be equally applicable to the singular and plural forms
thereof):
"Account Designation Letter" shall mean a letter from the Borrower to the
Agent, duly completed and signed by an Authorized Officer and in form and
substance satisfactory to the Agent, listing any one or more accounts to which
the Borrower may from time to time request the Agent to forward the proceeds of
any Loans made hereunder.
"Acquisition" shall mean any transaction or series of related transactions,
consummated on or after the date hereof, by which the Borrower directly, or
indirectly through one or more
<PAGE>
Subsidiaries, (i) acquires any going business, or all or substantially all of
the assets, of any Person, whether through purchase of assets, merger or
otherwise, or (ii) acquires securities or other ownership interests of any
Person having at least a majority of combined voting power of the then
outstanding securities or other ownership interests of such Person.
"Acquisition Amount" shall mean, with respect to any Acquisition, the sum
(without duplication) of (i) the amount of cash paid by the Borrower and its
Subsidiaries in connection with such Acquisition, (ii) the Fair Market Value of
all Capital Stock of the Borrower issued or given in connection with such
Acquisition, (iii) the amount (determined by using the face amount or the amount
payable at maturity, whichever is greater) of all Indebtedness incurred, assumed
or acquired by the Borrower and its Subsidiaries in connection with such
Acquisition, (iv) all additional purchase price amounts in connection with such
Acquisition in the form of earnouts and other contingent obligations that should
be recorded as a liability on the balance sheet of the Borrower and its
Subsidiaries or expensed, in either event in accordance with GAAP, Regulation
S-X under the Securities Act of 1933, as amended, or any other rule or
regulation of the Securities and Exchange Commission, (v) all amounts paid in
respect of covenants not to compete, consulting agreements and other affiliated
contracts in connection with such Acquisition, (vi) the amount of all
transaction fees and expenses (including, without limitation, legal, accounting
and finders' fees and expenses) incurred by the Borrower and its Subsidiaries in
connection with such Acquisition and (vii) the aggregate fair market value of
all other consideration given by the Borrower and its Subsidiaries in connection
with such Acquisition.
"Adjusted Base Rate" shall mean, at any time with respect to any Base Rate
Loan, a rate per annum equal to the Base Rate as in effect at such time plus the
Applicable Margin Percentage for Base Rate Loans as in effect at such time.
"Adjusted LIBOR Rate" shall mean, at any time with respect to any LIBOR
Loan, a rate per annum equal to the LIBOR Rate as in effect at such time plus
the Applicable Margin Percentage for LIBOR Loans as in effect at such time.
"Affiliate" shall mean, as to any Person, each other Person that directly,
or indirectly through one or more intermediaries, owns or controls, is
controlled by or under common control with, such Person or is a director or
officer of such Person. For purposes of this definition, with respect to any
Person "control" shall mean (i) the possession, direct or indirect, of the power
to direct or cause the direction of the management and policies of such Person,
whether through the ownership of voting securities, by contract or otherwise, or
(ii) the beneficial ownership of securities or other ownership interests of such
Person having 10% or more of the combined voting power of the then outstanding
securities or other ownership interests of such Person ordinarily (and apart
from rights accruing under special circumstances) having the right to vote in
the election of directors or other governing body of such Person.
"Agent" shall mean First Union, in its capacity as Agent appointed under
Article X, and its successors and permitted assigns in such capacity.
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<PAGE>
"Agreement" shall mean this Credit Agreement, as amended, modified or
supplemented in accordance with its terms from time to time.
"Annual Statement" shall mean, with respect to any Insurance Subsidiary for
any fiscal year, the annual financial statements of such Insurance Subsidiary as
required to be filed with the Insurance Regulatory Authority of its jurisdiction
of domicile and in accordance with the laws of such jurisdiction, together with
all exhibits, schedules, certificates and actuarial opinions required to be
filed or delivered therewith.
"Applicable Margin Percentage" shall mean, at any time from and after the
Closing Date, the applicable percentage (a) to be added to the Base Rate
pursuant to Section 2.8 for purposes of determining the Adjusted Base Rate, (b)
to be added to the LIBOR Rate pursuant to Section 2.8 for purposes of
determining the Adjusted LIBOR Rate, and (c) to be used in calculating the
commitment fee payable pursuant to Section 2.9(b), in each case as determined
under the following matrix with reference to the Leverage Ratio:
<TABLE>
<CAPTION>
Applicable Margin
Applicable Margin Applicable Margin Percentage for
Percentage for Percentage for Unutilized
Leverage Ratio Base Rate Loans LIBOR Loans Commitments Fee
-------------- --------------- ----------- ---------------
<S> <C> <C> <C>
Greater than or equal to .30 to 1.0 0.50% 1.50% 0.325%
Greater than or equal to .25 to 1.0 but
less than .30 to 1.0 0.25% 1.25% 0.275%
Greater than or equal to .20 to 1.0 but
less than .25 to 1.0 0.00% 1.00% 0.225%
Less than .20 to 1.0 0.00% 0.75% 0.200%
</TABLE>
On each Adjustment Date (as hereinafter defined), the Applicable Margin
Percentage for all Loans and the commitment fee payable pursuant to Section
2.9(b) shall be adjusted effective as of such date (based upon the calculation
of the Leverage Ratio as of the last day of the fiscal period to which such
Adjustment Date relates) in accordance with the above matrix; provided, however,
that, notwithstanding the foregoing or anything else herein to the contrary, if
at any time the Borrower shall have failed to deliver the financial statements
and a Compliance Certificate as required by Section 6.1(a) or Section 6.1(b), as
the case may be, and Section 6.3(a), then at the election of the Required
Lenders, at all times from and including the date on which such statements and
Compliance Certificate are required to have been delivered (or the date of
occurrence of such Default or Event of Default, as the case may be) to the date
on which the same shall have been delivered (or such Default or Event of Default
cured or waived, as the case may be), each Applicable Margin Percentage shall be
determined in accordance with the above matrix as if the Leverage Ratio were
greater than or equal to 0.30 : 1.0 (notwithstanding the actual Leverage Ratio).
For purposes of this definition, "Adjustment Date"
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shall mean, with respect to any fiscal period of the Borrower beginning with the
fiscal quarter ending September 30, 1998, the fifth (5th) day (or, if such day
is not a Business Day, on the next succeeding Business Day) after delivery by
the Borrower in accordance with Section 6.1(a) or Section 6.1(b), as the case
may be, of (i) financial statements as of the end of and for such fiscal period
and (ii) a duly completed Compliance Certificate with respect to such fiscal
period. Until the first Adjustment Date, each Applicable Margin Percentage shall
be determined in accordance with the above matrix based upon the Leverage Ratio
as set forth in the pro forma Covenant Compliance Worksheet required to be
delivered pursuant to Section 4.1(k).
"Asset Disposition" shall mean any sale, assignment, transfer or other
disposition by the Borrower or any of its Subsidiaries to any other Person
(other than to the Borrower or to a Wholly Owned Subsidiary), whether in one
transaction or in a series of related transactions, of any of its assets,
business units or other properties (including any interests in property, whether
tangible or intangible, and including Capital Stock of Subsidiaries), excluding
(i) sales of investment assets in the ordinary course of business, (ii) sales
and licenses of inventory and other assets in the ordinary course of business,
and (iii) the sale or exchange of used or obsolete equipment to the extent the
proceeds of such sale are applied towards, or such equipment is exchanged for,
similar replacement equipment.
"Assignee" shall have the meaning given to such term in Section 11.7(a).
"Assignment and Acceptance" shall mean an Assignment and Acceptance entered
into between a Lender and an Assignee and accepted by the Agent and the
Borrower, in substantially the form of Exhibit D.
"Authorized Officer" shall mean, with respect to any action specified
herein, any officer of the Borrower duly authorized by resolution of the board
of directors of the Borrower to take such action on its behalf, and whose
signature and incumbency shall have been certified to the Agent by the secretary
or an assistant secretary of the Borrower.
"Available Dividend Amount" shall mean, with respect to any Insurance
Subsidiary for any period of four consecutive fiscal quarters, the aggregate
maximum amount of dividends that is or, if such period were a fiscal year, would
be permitted by the Insurance Regulatory Authority of its jurisdiction of
domicile, under applicable Requirements of Law (without the necessity of any
consent, approval or other action of such Insurance Regulatory Authority
involving the granting of permission or the exercise of discretion by such
Insurance Regulatory Authority), to be paid by such Insurance Subsidiary to the
Borrower or another Subsidiary of the Borrower in respect of such four-quarter
period as if such period were a fiscal year (whether or not any such dividends
are actually paid).
"Bankruptcy Code" shall mean 11 U.S.C. ss.ss. 101 et seq., as amended from
time to time, and any successor statute.
"Base Rate" shall mean the higher of (i) the per annum interest rate
publicly announced from time to time by First Union in Charlotte, North
Carolina, to be its prime rate (which may not necessarily be its best lending
rate), as adjusted to conform to changes as of the opening of
4
<PAGE>
business on the date of any such change in such prime rate, and (ii) the Federal
Funds Rate plus 0.5% per annum, as adjusted to conform to changes as of the
opening of business on the date of any such change in the Federal Funds Rate.
"Base Rate Loan" shall mean, at any time, any Loan that bears interest at
such time at the Adjusted Base Rate.
"Borrower Margin Stock" shall mean shares of capital stock of the Borrower
that are held by the Borrower or any of its Subsidiaries and that constitute
Margin Stock.
"Borrowing" shall mean the incurrence by the Borrower (including as a
result of conversions and continuations of outstanding Loans pursuant to Section
2.11) on a single date of a group of Loans of a single Type and, in the case of
LIBOR Loans, as to which a single Interest Period is in effect.
"Borrowing Date" shall mean, with respect to any Borrowing, the date upon
which such Borrowing is made.
"Business Day" shall mean (i) any day other than a Saturday or Sunday, a
legal holiday or a day on which commercial banks in Charlotte, North Carolina or
Philadelphia, Pennsylvania are required by law to be closed and (ii) in respect
of any determination relevant to a LIBOR Loan, any such day that is also a day
on which tradings are conducted in the London interbank Eurodollar market.
"Capital Stock" shall mean (i) with respect to any Person that is a
corporation, any and all shares, interests or equivalents in capital stock
(whether voting or nonvoting, and whether common or preferred) of such
corporation, and (ii) with respect to any Person that is not a corporation, any
and all partnership, membership, limited liability company or other equity
interests of such Person; and in each case, any and all warrants, rights or
options to purchase any of the foregoing.
"Cash Collateral Account" shall have the meaning given to such term in
Section 3.8.
"Cash Equivalents" shall mean (i) securities issued or unconditionally
guaranteed by the United States of America or any agency or instrumentality
thereof, backed by the full faith and credit of the United States of America and
maturing within 90 days from the date of acquisition, (ii) commercial paper
issued by any Person organized under the laws of the United States of America,
maturing within 90 days from the date of acquisition and, at the time of
acquisition, having a rating of at least A-1 or the equivalent thereof by
Standard & Poor's or at least P-1 or the equivalent thereof by Moody's, (iii)
time deposits and certificates of deposit maturing within 90 days from the date
of issuance and issued by a bank or trust company organized under the laws of
the United States of America or any state thereof that has combined capital and
surplus of at least $500,000,000 and that has (or is a subsidiary of a bank
holding company that has) a long-term unsecured debt rating of at least A or the
equivalent thereof by Standard & Poor's or at least A2 or the equivalent thereof
by Moody's, (iv) repurchase obligations with a term not exceeding seven (7) days
with respect to underlying securities of the types described in clause (i)
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<PAGE>
above entered into with any bank or trust company meeting the qualifications
specified in clause (iii) above, and (v) money market funds at least 95% of the
assets of which are continuously invested in securities of the type described in
clause (i) above.
"Closing Date" shall mean the first date (which may be prior to or
concurrent with the date of the initial Borrowing hereunder) upon which the
conditions set forth in Section 4.1 are satisfied or waived as provided herein.
"CMOs" shall mean any security or certificate representing any interest or
participation in a pool of Mortgage Backed Securities (it being understood that
Mortgage Backed Securities themselves are not CMOs).
"Combined Net Cash Flow" means, for any period, (i) the aggregate Net
Income of the non-Insurance Subsidiaries for such period, plus (ii) the sum of
depreciation expense, amortization (whether positive or negative) of intangible
assets and other non-cash expenses, losses and charges reducing income, in each
case to the extent taken into account in the calculation of such Net Income for
such period, minus (iii) the sum of capital expenditures and all non-cash gains
and other non-cash items taken into account in determining such Net Income for
such period, plus (iv) any increase during such period in deferred taxes, minus
(v) any decrease during such period in deferred taxes. For purposes of this
definition, "non-Insurance Subsidiaries" shall not include any Subsidiary of an
Insurance Subsidiary.
"Combined Net Premiums to Capital Ratio" shall mean, as of the last day of
any fiscal quarter, the ratio of (i) Combined Net Written Premiums for the four
fiscal quarters ending on such date, to (ii) the Combined Statutory Capital and
Surplus as of such date.
"Combined Net Written Premiums" shall mean, for any period, the aggregate
Net Written Premiums for all Insurance Subsidiaries for such period.
"Combined Statutory and Capital Surplus" shall mean, at any time, the
aggregate (without duplication) of Statutory and Capital Surplus of each
Insurance Subsidiary at such time, after eliminating the effect thereupon of any
transactions among the Insurance Subsidiaries.
"Commitment" shall mean, with respect to any Lender at any time, the amount
set forth opposite such Lender's name on its signature page hereto under the
caption "Commitment" or, if such Lender has entered into one or more Assignment
and Acceptances, the amount set forth for such Lender at such time in the
Register maintained by the Agent pursuant to Section 11.7(b) as such Lender's
"Commitment," as such amount may be reduced at or prior to such time pursuant to
the terms hereof.
"Compliance Certificate" shall mean a fully completed and duly executed
certificate in the form of Exhibit C, together with a Covenant Compliance
Worksheet.
"Consolidated Indebtedness" shall mean, as of the last day of any
fiscal quarter, the aggregate of all Indebtedness (whether or not reflected on
the Borrower's or any Subsidiary's
6
<PAGE>
balance sheet) of the Borrower and its Subsidiaries as of such date, determined
on a consolidated basis in accordance with GAAP.
"Consolidated Interest Expense" shall mean, for any period, the sum
(without duplication) of (i) total interest expense of the Borrower and its
Subsidiaries for such period in respect of Consolidated Indebtedness of the
Borrower and its Subsidiaries (including, without limitation, all such interest
expense accrued or capitalized during such period, whether or not actually paid
during such period), determined on a consolidated basis in accordance with GAAP,
(ii) all net amounts payable under or in respect of Hedge Agreements, to the
extent paid or accrued by the Borrower and its Subsidiaries during such period,
and (iii) all commitment fees and other ongoing fees in respect of Consolidated
Indebtedness (including the commitment fee provided for under Section 2.9(b) and
the fees provided for under the Fee Letter) paid, accrued or capitalized by the
Borrower and its Subsidiaries during such period.
"Consolidated Net Income" shall mean, for any period, net income (or loss)
for the Borrower and its Subsidiaries for such period, determined on a
consolidated basis in accordance with GAAP.
"Consolidated Net Worth" shall mean, as of any date of determination, the
net worth of the Borrower and its Subsidiaries as of such date, determined on a
consolidated basis in accordance with GAAP but (i) excluding any Disqualified
Capital Stock and (ii) without regard to the requirements of Statement of
Financial Accounting Standards No. 115 issued by the Financial Accounting
Standards Board of the American Institute of Certified Public Accountants.
"Contingent Obligation" shall mean, with respect to any Person, any direct
or indirect liability of such Person with respect to any Indebtedness, liability
or other obligation (the "primary obligation") of another Person (the "primary
obligor"), whether or not contingent, (a) to purchase, repurchase or otherwise
acquire such primary obligation or any property constituting direct or indirect
security therefor, (b) to advance or provide funds (i) for the payment or
discharge of any such primary obligation or (ii) to maintain working capital or
equity capital of the primary obligor or otherwise to maintain the net worth or
solvency or any balance sheet item, level of income or financial condition of
the primary obligor, (c) to purchase property, securities or services primarily
for the purpose of assuring the owner of any such primary obligation of the
ability of the primary obligor in respect thereof to make payment of such
primary obligation or (d) otherwise to assure or hold harmless the owner of any
such primary obligation against loss or failure or inability to perform in
respect thereof; provided, however, that, with respect to the Borrower and its
Subsidiaries, the term Contingent Obligation shall not include (y) endorsements
for collection or deposit in the ordinary course of business or (z) obligations
entered into by an Insurance Subsidiary in the ordinary course of its business
under insurance policies or contracts issued by it or to which it is a party,
including reinsurance agreements (and security posted by any such Insurance
Subsidiary in the ordinary course of its business to secure obligations
thereunder).
"Covenant Compliance Worksheet" shall mean a fully completed worksheet in
the form of Attachment A to Exhibit C.
7
<PAGE>
"Credit Documents" shall mean this Agreement, the Notes, the Letters of
Credit, the Fee Letter, any Hedge Agreement to which the Borrower and any Lender
are parties and that is permitted or required to be entered into by the Borrower
hereunder, and all other agreements, instruments, documents and certificates now
or hereafter executed and delivered to the Agent or any Lender by or on behalf
of the Borrower or any of its Subsidiaries with respect to this Agreement and
the transactions contemplated hereby, in each case as amended, modified,
supplemented or restated from time to time.
"Debt Issuance" shall mean the issuance or sale by the Borrower or any of
its Subsidiaries of any debt securities, whether in a public offering of such
securities or otherwise.
"Debt Service" shall mean, for any period, the aggregate (without
duplication) of all principal and Consolidated Interest Expense paid or accrued
by the Borrower and its Subsidiaries during such period in respect of
Indebtedness (including, without limitation, the Loans).
"Default" shall mean any event or condition that, with the passage of time
or giving of notice, or both, would constitute an Event of Default.
"Disqualified Capital Stock" shall mean, with respect to any Person, any
Capital Stock of such Person that, by its terms (or by the terms of any security
into which it is convertible or for which it is exchangeable), or upon the
happening of any event or otherwise, (i) matures or is mandatorily redeemable or
subject to any mandatory repurchase requirement, pursuant to a sinking fund
obligation or otherwise, (ii) is redeemable or subject to any mandatory
repurchase requirement at the sole option of the holder thereof, or (iii) is
convertible into or exchangeable for (whether at the option of the issuer or the
holder thereof) (a) debt securities or (b) any Capital Stock referred to in (i)
or (ii) above, in each case under (i), (ii) or (iii) above at any time on or
prior to the first anniversary of the Maturity Date; provided, however, that
only the portion of Capital Stock that so matures or is mandatorily redeemable,
is so redeemable at the option of the holder thereof, or is so convertible or
exchangeable on or prior to such date shall be deemed to be Disqualified Capital
Stock.
"Dollars" or "$" shall mean dollars of the United States of America.
"Duff & Phelps" shall mean Duff & Phelps Rating Co., its successors and
assigns.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974, as
amended from time to time, and any successor statute, and all rules and
regulations from time to time promulgated thereunder.
"ERISA Affiliate" shall mean any Person (including any trade or business,
whether or not incorporated) that would be deemed to be under "common control"
with, or a member of the same "controlled group" as, the Borrower or any of its
Subsidiaries, within the meaning of Sections 414(b), (c), (m) or (o) of the
Internal Revenue Code or Section 4001 of ERISA.
"ERISA Event" shall mean any of the following with respect to a Plan or
Multiemployer Plan, as applicable: (i) a Reportable Event with respect to a Plan
or a Multiemployer Plan, (ii) a
8
<PAGE>
complete or partial withdrawal by the Borrower or any ERISA Affiliate from a
Multiemployer Plan that results in liability under Section 4201 or 4204 of
ERISA, or the receipt by the Borrower or any ERISA Affiliate of notice from a
Multiemployer Plan that it is in reorganization or insolvency pursuant to
Section 4241 or 4245 of ERISA or that it intends to terminate or has terminated
under Section 4041A of ERISA, (iii) the distribution by the Borrower or any
ERISA Affiliate under Section 4041 or 4041A of ERISA of a notice of intent to
terminate any Plan or the taking of any action to terminate any Plan, (iv) the
commencement of proceedings by the PBGC under Section 4042 of ERISA for the
termination of, or the appointment of a trustee to administer, any Plan, or the
receipt by the Borrower or any ERISA Affiliate of a notice from any
Multiemployer Plan that such action has been taken by the PBGC with respect to
such Multiemployer Plan, (v) the institution of a proceeding by any fiduciary of
any Multiemployer Plan against the Borrower or any ERISA Affiliate to enforce
Section 515 of ERISA, which is not dismissed within thirty (30) days, (vi) the
imposition upon the Borrower or any ERISA Affiliate of any liability under Title
IV of ERISA, other than for PBGC premiums due but not delinquent under Section
4007 of ERISA, or the imposition or threatened imposition of any Lien upon any
assets of the Borrower or any ERISA Affiliate as a result of any alleged failure
to comply with the Internal Revenue Code or ERISA in respect of any Plan, (vii)
the engaging in or otherwise becoming liable for a nonexempt Prohibited
Transaction by the Borrower or any ERISA Affiliate, (viii) a violation of the
applicable requirements of Section 404 or 405 of ERISA or the exclusive benefit
rule under Section 401(a) of the Internal Revenue Code by any fiduciary of any
Plan for which the Borrower or any of its ERISA Affiliates may be directly or
indirectly liable or (ix) the adoption of an amendment to any Plan that,
pursuant to Section 401(a)(29) of the Internal Revenue Code or Section 307 of
ERISA, would result in the loss of tax-exempt status of the trust of which such
Plan is a part if the Borrower or an ERISA Affiliate fails to timely provide
security to such Plan in accordance with the provisions of such sections.
"Eligible Assignee" shall mean (i) a commercial bank organized under the
laws of the United States or any state thereof and having total assets in excess
of $1,000,000,000, (ii) a commercial bank organized under the laws of any other
country that is a member of the Organization for Economic Cooperation and
Development or any successor thereto (the "OECD") or a political subdivision of
any such country and having total assets in excess of $1,000,000,000, provided
that such bank or other financial institution is acting through a branch or
agency located in the United States, in the country under the laws of which it
is organized or in another country that is also a member of the OECD, (iii) the
central bank of any country that is a member of the OECD, (iv) a finance company
or other financial institution or fund that is (A) engaged in making, purchasing
or otherwise investing in loans in the ordinary course of its business, (B) has
total assets in excess of $500,000,000, and (C) is not, and does not have a
substantial interest in, an insurance company unless otherwise agreed to by the
Borrower, (v) any Affiliate of an existing Lender or (vi) any other Person
approved by the Required Lenders, which approval shall not be unreasonably
withheld.
"Environmental Claims" shall mean any and all administrative, regulatory or
judicial actions, suits, demands, demand letters, claims, liens, accusations,
allegations, notices of noncompliance or violation, investigations (other than
internal reports prepared by any Person in the ordinary course of its business
and not in response to any third party action or request of any kind) or
proceedings relating in any way to any actual or alleged violation of or
liability under
9
<PAGE>
any Environmental Law or relating to any permit issued, or any approval given,
under any such Environmental Law (collectively, "Claims"), including, without
limitation, (i) any and all Claims by Governmental Authorities for enforcement,
cleanup, removal, response, remedial or other actions or damages pursuant to any
applicable Environmental Law and (ii) any and all Claims by any third party
seeking damages, contribution, indemnification, cost recovery, compensation or
injunctive relief resulting from Hazardous Substances or arising from alleged
injury or threat of injury to human health or the environment, but excluding
normal claims in the ordinary course of business pursuant to insurance policies
written by an Insurance Subsidiary, the loss reserves for which are reflected in
such Insurance Subsidiary's most recent Annual or Quarterly Statements.
"Environmental Laws" shall mean any and all federal, state and local laws,
statutes, ordinances, rules, regulations, permits, licenses, approvals, rules of
common law and orders of courts or Governmental Authorities, relating to the
protection of human health or occupational safety or the environment, now or
hereafter in effect and in each case as amended from time to time, including,
without limitation, requirements pertaining to the manufacture, processing,
distribution, use, treatment, storage, disposal, transportation, handling,
reporting, licensing, permitting, investigation or remediation of Hazardous
Substances.
"Event of Default" shall have the meaning given to such term in Section
9.1.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as amended
from time to time, and any successor statute, and all rules and regulations from
time to time promulgated thereunder.
"Fair Market Value" shall mean, with respect to any Capital Stock of the
Borrower given in connection with an Acquisition, the value given to such
Capital Stock for purposes of such Acquisition by the parties thereto, as
determined in good faith pursuant to the relevant acquisition agreement or
otherwise in connection with such Acquisition.
"Federal Funds Rate" shall mean, for any period, a fluctuating per annum
interest rate (rounded upwards, if necessary, to the nearest 1/100 of one
percentage point) equal for each day during such period to the weighted average
of the rates on overnight federal funds transactions with members of the Federal
Reserve System arranged by federal funds brokers, as published for such day (or,
if such day is not a Business Day, for the next preceding Business Day) by the
Federal Reserve Bank of New York, or if such rate is not so published for any
day that is a Business Day, the average of the quotations for such day on such
transactions received by the Agent from three federal funds brokers of
recognized standing selected by the Agent.
"Federal Reserve Board" shall mean the Board of Governors of the Federal
Reserve System or any successor thereto.
"Fee Letter" shall mean the amended and restated fee letter from First
Union to the Borrower, dated September 25, 1998, relating to certain fees
payable by the Borrower in respect of the transactions contemplated by this
Agreement, as amended, modified or supplemented from time to time.
10
<PAGE>
"Financial Condition Certificate" shall mean a fully completed and duly
executed certificate, substantially in the form of Exhibit F, together with the
attachments thereto.
"Financial Officer" shall mean, with respect to the Borrower, the chief
financial officer, vice president - finance, principal accounting officer or
treasurer of the Borrower.
"Fixed Charge Coverage Ratio" shall mean, as of the last day of any period
of four consecutive fiscal quarters (the "Measurement Period"), the ratio of:
(i) the sum (without duplication) of (w) the Available Dividend Amount
for the Measurement Period for the Insurance Subsidiaries, other than each
Insurance Subsidiary that is a Subsidiary of another Insurance Subsidiary,
plus (x) the Net Tax Sharing Payments with respect to the Measurement
Period, plus (y) the Combined Net Cash Flow (whether positive or negative)
of the non-Insurance Subsidiaries for the Measurement Period, minus (z)
Holding Company Expenses accrued during such Measurement Period, to
(ii) the aggregate of (x) the Debt Service with respect to the Loans
and all other Consolidated Indebtedness reasonably determined by the
Borrower (and as set forth in the relevant Covenant Compliance Worksheet)
to be required to be paid or accrued by the Borrower during the period of
four consecutive fiscal quarters immediately following the Measurement
Period (the "Pro Forma Period"), based on the amount of the Loans and other
Consolidated Indebtedness outstanding at the beginning of such period and
assuming that the rates in effect at the beginning of such period, taking
into account the benefit and costs of any Hedge Agreement with respect to
the Loans, will remain in effect throughout such period, plus (y) dividends
reasonably estimated by the Borrower (and as set forth in the relevant
Covenant Compliance Worksheet) to be required to be incurred or paid by the
Borrower during the Pro Forma Period (based upon the most recent quarterly
dividend rate), plus (z) stock repurchases by the Borrower occurring during
the Measurement Period;
provided that, the stock repurchases referred to in subclause (z) of clause (ii)
above shall not include the first $10,000,000 of such repurchases occurring
between June 30, 1998 and September 30, 1999.
"GAAP" shall mean generally accepted accounting principles, as set forth in
the statements, opinions and pronouncements of the Accounting Principles Board,
the American Institute of Certified Public Accountants and the Financial
Accounting Standards Board, consistently applied and maintained, as in effect
from time to time (subject to the provisions of Section 1.2).
"Governmental Authority" shall mean any nation or government, any state or
other political subdivision thereof and any central bank thereof, any municipal,
local, city or county government, and any entity exercising executive,
legislative, judicial, regulatory or administrative functions of or pertaining
to government, and any corporation or other entity owned or controlled, through
stock or capital ownership or otherwise, by any of the foregoing
11
<PAGE>
and exercising executive legislative, judicial, regulatory or administrative
functions of or pertaining to government.
"Gross Written Premiums" shall mean, with respect to any Insurance
Subsidiary at any time, the amount of premiums written (after deducting or
adding premiums on business ceded to or assumed from others) as shown on line
32, page 9, Part 2B, sum of columns 1, 2a and 2b, of the Annual Statement of
such Insurance Subsidiary, or the amount determined in a consistent manner for
any date other than a date as of which an Annual Statement of such Insurance
Subsidiary is prepared.
"Hazardous Substances" shall mean any substances or materials (i) that are
or become defined as hazardous wastes, hazardous substances, pollutants,
contaminants or toxic substances under any applicable Environmental Law, (ii)
that are defined by any applicable Environmental Law as toxic, explosive,
corrosive, ignitable, infectious, radioactive, mutagenic or otherwise hazardous,
(iii) the presence of which require investigation or response under any
applicable Environmental Law, (iv) that constitute a nuisance, trespass or
health or safety hazard to Persons or neighboring properties, (v) that consist
of underground or aboveground storage tanks, whether empty, filled or partially
filled with any substance, or (vi) that contain, without limitation, asbestos,
polychlorinated biphenyls, urea formaldehyde foam insulation, petroleum
hydrocarbons, petroleum derived substances or wastes, crude oil, nuclear fuel,
natural gas or synthetic gas.
"Hedge Agreement" shall mean any interest or foreign currency rate swap,
cap, collar, option, hedge, forward rate or other similar agreement or
arrangement designed to protect against fluctuations in interest rates or
currency exchange rates.
"Holding Company Expenses" shall mean, for any period, the aggregate of the
following expenses incurred or paid by the Borrower during such period: all
operating costs and expenses of the Borrower, including rent, utilities,
professional fees, taxes (without duplication for taxes included in the
determination of Net Tax Sharing Payments) and payroll expenses.
"Hybrid Equity Issuance" shall mean the issuance, sale or other disposition
by the Borrower or any of its Subsidiaries of trust preferred securities or any
other security or instrument representing, convertible into or exchangeable for
a similar interest in the Borrower or any of its Subsidiaries.
"Indebtedness" shall mean, with respect to any Person (without
duplication), (i) all indebtedness and obligations of such Person for borrowed
money or in respect of loans or advances of any kind, (ii) all obligations of
such Person evidenced by notes, bonds, debentures or similar instruments, (iii)
all reimbursement obligations of such Person with respect to surety bonds,
letters of credit and bankers' acceptances (in each case, whether or not drawn
or matured and in the stated amount thereof), (iv) all obligations of such
Person to pay the deferred purchase price of property or services, (v) all
indebtedness created or arising under any conditional sale or other title
retention agreement with respect to property acquired by such Person, (vi) all
obligations of such Person as lessee under leases that are or are required to
be, in accordance with GAAP, recorded as capital leases, to the extent such
obligations are required to be so
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recorded, (vii) all Disqualified Capital Stock issued by such Person, with the
amount of Indebtedness represented by such Disqualified Capital Stock being
equal to the greater of its voluntary or involuntary liquidation preference and
its maximum fixed repurchase price, but excluding accrued dividends, if any (for
purposes hereof, the "maximum fixed repurchase price" of any Disqualified
Capital Stock that does not have a fixed repurchase price shall be calculated in
accordance with the terms of such Disqualified Capital Stock as if such
Disqualified Capital Stock were purchased on any date on which Indebtedness
shall be required to be determined pursuant to this Agreement, and if such price
is based upon, or measured by, the fair market value of such Disqualified
Capital Stock, such fair market value shall be determined reasonably and in good
faith by the board of directors or other governing body of the issuer of such
Disqualified Capital Stock), (viii) the net termination obligations of such
Person under any Hedge Agreements, calculated as of any date as if such
agreement or arrangement were terminated as of such date, (ix) all Contingent
Obligations of such Person and (x) all indebtedness referred to in clauses (i)
through (ix) above secured by any Lien on any property or asset owned or held by
such Person regardless of whether the indebtedness secured thereby shall have
been assumed by such Person or is nonrecourse to the credit of such Person.
"Insurance Regulatory Authority" shall mean, with respect to any Insurance
Subsidiary, the insurance department or similar Governmental Authority charged
with regulating insurance companies or insurance holding companies, in its
jurisdiction of domicile and, to the extent that it has regulatory authority
over such Insurance Subsidiary, in each other jurisdiction in which such
Insurance Subsidiary conducts business or is licensed to conduct business.
"Insurance Subsidiary" shall mean any Subsidiary of the Borrower the
ability of which to pay dividends is regulated by an Insurance Regulatory
Authority or that is otherwise required to be regulated thereby in accordance
with the applicable Requirements of Law of its jurisdiction of domicile, and
shall mean and include, without limitation, PAIC and PSIC.
"Interest Period" shall have the meaning given to such term in Section
2.10.
"Internal Revenue Code" shall mean the Internal Revenue Code of 1986, as
amended from time to time, and any successor statute, and all rules and
regulations from time to time promulgated thereunder.
"Invested Assets" shall mean, as to any Insurance Subsidiary, as of any
date, the total amount shown on page 2, column 4, line 9 of the Annual Statement
of the Insurance Subsidiary, or an amount determined in a consistent manner for
any date other than one as of which an Annual Statement is prepared.
"Investment Grade Securities" shall mean (i) non-equity securities (other
than those issued by an Affiliate of the Borrower and other than CMOs and
REMICs) or preferred equity securities that, if rated by the NAIC, are rated
"NAIC 2 (or the equivalent thereof) or better by the NAIC, or, if not rated by
the NAIC, are rated "BBB" (or the equivalent thereof) or higher by Standard &
Poor's, "Baa3" (or the equivalent thereof) or higher by Moody's, or "BBB" (or
the equivalent thereof) or higher by Duff & Phelps, (ii) municipal bonds that,
if rated by the NAIC, are rated "NAIC 2 (or the equivalent thereof) or better by
the NAIC, or if not rated by the NAIC,
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are rated "SP-2" (or the equivalent thereof) or higher by Standard & Poor's
"Baa3" or "MIG4" (or the equivalent thereof) or higher by Moody's, or "BBB" (or
the equivalent thereof) or higher by Duff & Phelps, and (iii) Permitted CMOs and
Mortgage Backed Securities that, if rated by the NAIC, are rated "NAIC 2" (or
the equivalent thereof) or higher by Standard & Poor's, "Baa3" (or the
equivalent thereof) or higher by Moody's, or "BBB" (or the equivalent thereof)
or higher by Duff & Phelps (or, in the case of clauses (i), (ii) and (iii)
above, in the event all such rating agencies cease to publish investment
ratings, carrying an equivalent rating of a nationally recognized rating
agency).
"Issuing Lender" shall mean First Union in its capacity as issuer of the
Letters of Credit, and its successors in such capacity.
"LIBOR Loan" shall mean, at any time, any Loan that bears interest at such
time at the Adjusted LIBOR Rate.
"LIBOR Rate" shall mean, with respect to each LIBOR Loan comprising part of
the same Borrowing for any Interest Period, an interest rate per annum obtained
by dividing (i) (y) the rate of interest appearing on Telerate Page 3750 (or any
successor page) or (z) if no such rate is available, the rate of interest
determined by the Agent to be the rate or the arithmetic mean of rates (rounded
upward, if necessary, to the nearest 1/16 of one percentage point) at which
Dollar deposits in immediately available funds are offered by First Union to
first-tier banks in the London interbank Eurodollar market, in each case under
(y) and (z) above at approximately 11:00 a.m., London time, two (2) Business
Days prior to the first day of such Interest Period for a period substantially
equal to such Interest Period and in an amount substantially equal to the amount
of First Union's LIBOR Loan comprising part of such Borrowing, by (ii) the
amount equal to 1.00 minus the Reserve Requirement (expressed as a decimal) for
such Interest Period.
"Lender" shall mean each financial institution signatory hereto and each
other financial institution that becomes a "Lender" hereunder pursuant to
Section 11.7, and their respective successors and permitted assigns.
"Lending Office" shall mean, with respect to any Lender, the office of such
Lender designated as its "Lending Office" on its signature page hereto or in an
Assignment and Acceptance, or such other office as may be otherwise designated
in writing from time to time by such Lender to the Borrower and the Agent. A
Lender may designate separate Lending Offices as provided in the foregoing
sentence for the purposes of making or maintaining different Types of Loans,
and, with respect to LIBOR Loans, such office may be a domestic or foreign
branch or Affiliate of such Lender.
"Letter of Credit Exposure" shall mean, with respect to any Lender at any
time, such Lender's ratable share (based on the proportion that its Commitment
bears to the aggregate Commitments at such time) of the sum of (i) the aggregate
Stated Amount of all Letters of Credit outstanding at such time and (ii) the
aggregate amount of all Reimbursement Obligations outstanding at such time.
"Letter of Credit Notice" shall have the meaning given to such term in
Section 3.2.
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"Letters of Credit" shall have the meaning given to such term in Section
3.1.
"Leverage Ratio" shall mean, as of the last day of any fiscal quarter, the
ratio of (i) Consolidated Indebtedness as of such date to (ii) the sum of
Consolidated Indebtedness and Consolidated Net Worth as of such date.
"Lien" shall mean any mortgage, pledge, hypothecation, assignment, security
interest, lien (statutory or otherwise), preference, priority, charge or other
encumbrance of any nature, whether voluntary or involuntary, including, without
limitation, the interest of any vendor or lessor under any conditional sale
agreement, title retention agreement, capital lease or any other lease or
arrangement having substantially the same effect as any of the foregoing.
"Loans" shall have the meaning given to such term in Section 2.1.
"Margin Stock" shall have the meaning given to such term in Regulation U.
"Material Adverse Change" shall mean a material adverse change in the
condition (financial or otherwise), operations, prospects, business, properties
or assets of the Borrower and its Subsidiaries, taken as a whole.
"Material Adverse Effect" shall mean a material adverse effect upon (i) the
condition (financial or otherwise), operations, prospects, business, properties
or assets of the Borrower and its Subsidiaries, taken as a whole, (ii) the
ability of the Borrower or any Subsidiary to perform its obligations under this
Agreement or any of the other Credit Documents to which it is a party or (iii)
the legality, validity or enforceability of this Agreement or any of the other
Credit Documents or the rights and remedies of the Agent and the Lenders
hereunder and thereunder.
"Material Contract" shall have the meaning given to such term in Section
5.18.
"Material Insurance Subsidiary" shall mean any Insurance Subsidiary that is
a Material Subsidiary.
"Material Subsidiary" shall mean each of (i) PAIC, (ii) PSIC, (iii) at the
relevant time of determination, any Subsidiary having (after the elimination of
intercompany accounts) (y) in the case of a non-Insurance Subsidiary, (A) assets
constituting at least ten percent (10%) of the total assets of the Borrower and
its Subsidiaries on a consolidated basis, (B) revenues for the four quarters
most recently ended constituting at least ten percent (10%) of the total
revenues of the Borrower and its Subsidiaries on a consolidated basis, or (C)
Net Income for the four quarters most recently ended constituting at least ten
percent (10%) of the Consolidated Net Income of the Borrower and its
Subsidiaries, in each case determined in accordance with GAAP as of the date of
the GAAP financial statements of the Borrower and all its Subsidiaries most
recently delivered under Section 6.1 prior to such time (or, with regard to
determinations at any time prior to the initial delivery of financial statements
under Section 6.1, as of the date of the most recent financial statements
referred to in Section 5.11(a)), or (z) in the case of an Insurance Subsidiary,
(A) assets constituting at least ten percent (10%) of the aggregate assets of
all
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Insurance Subsidiaries, or (B) Gross Written Premiums for the four quarters
most recently ended constituting at least ten percent (10%) of the aggregate
Gross Written Premiums (without duplication) of all Insurance Subsidiaries, in
each case determined in accordance with SAP as of the date of the statutory
financial statements most recently delivered under Section 6.2 prior to such
time (or, with regard to determinations at any time prior to the initial
delivery of financial statements under Section 6.2, as of the date of the most
recent financial statements referred to in Section 5.11(e)) and (iv) any
Subsidiary that has one of the foregoing as a Subsidiary.
"Maturity Date" shall mean June 30, 2004.
"Moody's" shall mean Moody's Investors Service, Inc., its successors and
assigns.
"Mortgage Backed Securities" shall mean investment securities representing
any undivided interest or participation in, or which are secured by, a pool of
loans secured by mortgages or deeds of trust.
"Multiemployer Plan" shall mean any "multiemployer plan" within the meaning
of Section 4001(a)(3) of ERISA to which the Borrower or any ERISA Affiliate
makes, is making or is obligated to make contributions or has made or been
obligated to make contributions.
"NAIC" shall mean the National Association of Insurance Commissioners and
any successor thereto.
"Net Amount Recoverable from Reinsurers" shall mean, as to any Insurance
Subsidiary, as of any time, the amount as shown on Schedule F - Part 3, column
13 of the Annual Statement of such Insurance Subsidiary, or an amount determined
in a consistent manner as of any date other than one as of which an Annual
Statement is prepared.
"Net Cash Proceeds" shall mean, in the case of any Hybrid Equity Issuance
or Debt Issuance, the aggregate cash payments received by the Borrower and its
Subsidiaries less reasonable and customary fees and expenses (including
underwriting discounts and commissions) incurred by the Borrower and its
Subsidiaries in connection therewith.
"Net Income" shall mean, with respect to any Person for any period, the net
income (or loss), after extraordinary items, taxes, and all other items of
expenses and income of such Person for such period, determined in accordance
with GAAP.
"Net Tax Sharing Payments" shall mean, for any period, (i) the aggregate
(without duplication) of all payments made or to be made to the Borrower by its
Subsidiaries pursuant to tax sharing or tax allocation agreements or
arrangements or otherwise in respect of taxable income realized during such
period, minus (ii) the aggregate (without duplication) of all foreign, federal,
state or local income, franchise and other tax payments made or to be made by
the Borrower in respect of taxable income realized during such period and any
payments made or to be made by the Borrower during such period pursuant to such
tax sharing or tax allocation agreement or arrangement. For purposes of the
Fixed Charge Coverage Ratio, if the amount in
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clause (ii) exceeds the amount in clause (i) hereof, the result shall be
expressed as a negative amount.
"Net Written Premiums" shall mean, with respect to any Insurance Subsidiary
at any time, the amount of premiums written (after deducting or adding premiums
on business ceded to or assumed from others) as shown on line 32, page 9, Part
2B, column 4 of the Annual Statement of such Insurance Subsidiary, or the amount
determined in a consistent manner for any date other than a date as of which an
Annual Statement of such Insurance Subsidiary is prepared.
"Notes" shall mean the promissory notes of the Borrower in substantially
the form of Exhibit A, together with any amendments, modifications and
supplements thereto, substitutions therefor and restatements thereof.
"Notice of Borrowing" shall have the meaning given to such term in Section
2.2(b).
"Notice of Conversion/Continuation" shall have the meaning given to such
term in Section 2.11(b).
"Obligations" shall mean all principal of and interest (including, to the
greatest extent permitted by applicable law, post-petition interest) on the
Loans, all Reimbursement Obligations and all fees, expenses, indemnities and
other obligations owing, due or payable at any time by the Borrower to the
Agent, any Lender, the Issuing Lender or any other Person entitled thereto,
under this Agreement or any of the other Credit Documents.
"PAC I" shall mean a planned amortization class bond which is a tranche or
class of CMO or REMIC that is retired according to a predetermined amortization
schedule independent of the prepayment rate on the underlying collateral and
which has the highest level of protection within the pool against prepayment or
extension.
"PAIC" shall mean Penn-America Insurance Company, a Pennsylvania insurance
company.
"PBGC" shall mean the Pension Benefit Guaranty Corporation and any
successor thereto.
"PSIC" shall mean Penn-Star Insurance Company, a Pennsylvania insurance
company.
"Participant" shall have the meaning given to such term in Section 11.7(d).
"Permitted Acquisition" shall mean (a) any Acquisition with respect to
which all of the following conditions are satisfied: (i) each business acquired
shall be within the permitted lines of business described in Section 8.8, (ii)
any Capital Stock given as consideration in connection therewith shall be
Capital Stock of the Borrower, (iii) in the case of an Acquisition involving the
acquisition of control of Capital Stock of any Person, immediately after giving
effect to such Acquisition such Person (or the surviving Person, if the
Acquisition is effected through a merger or consolidation) shall be the Borrower
or a Wholly Owned Subsidiary, and (iv) all of the conditions and requirements of
Sections 6.9 applicable to such Acquisition are satisfied; or
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(b) any other Acquisition to which the Required Lenders (or the Agent on their
behalf) shall have given their prior written consent (which consent may be in
their sole discretion and may be given subject to such additional terms and
conditions as the Required Lenders shall establish) and with respect to which
all of the conditions and requirements set forth in this definition and in
Section 6.9, and in or pursuant to any such consent, have been satisfied or
waived in writing by the Required Lenders (or the Agent on their behalf).
"Permitted CMOs and Mortgage Backed Securities" shall mean (i) mortgage
participation certificates issued by the Federal Home Loan Mortgage Corporation,
(ii) mortgage backed securities issued by the Federal National Mortgage
Association, (iii) securities guaranteed by the Government National Mortgage
Association, and (iv) other securities and certificates representing
participations in any CMO or REMIC which are PAC I's or which have comparable
priority in respect of the repayment thereof.
"Permitted Liens" shall have the meaning given to such term in Section 8.3.
"Person" shall mean any corporation, association, joint venture,
partnership, limited liability company, organization, business, individual,
trust, government or agency or political subdivision thereof or any other legal
entity.
"Plan" shall mean any "employee pension benefit plan" within the meaning of
Section 3(2) of ERISA that is subject to the provisions of Title IV of ERISA
(other than a Multiemployer Plan) and to which the Borrower or any ERISA
Affiliate may have any liability.
"Pro Forma Balance Sheet" shall have the meaning given to such term in
Section 5.11(b).
"Prohibited Transaction" shall mean any transaction described in (i)
Section 406 of ERISA that is not exempt by reason of Section 408 of ERISA or by
reason of a Department of Labor prohibited transaction individual or class
exemption or (ii) Section 4975(c) of the Internal Revenue Code that is not
exempt by reason of Section 4975(c)(2) or 4975(d) of the Internal Revenue Code.
"Projections" shall have the meaning given to such term in Section 5.11(c).
"Quarterly Statement" shall mean, with respect to any Insurance Subsidiary
for any fiscal quarter, the quarterly financial statements of such Insurance
Subsidiary as required to be filed with the Insurance Regulatory Authority of
its jurisdiction of domicile, together with all exhibits, schedules,
certificates and actuarial opinions required to be filed or delivered therewith.
"REMIC" shall mean a real estate mortgage investment conduit.
"Register" shall have the meaning given to such term in Section 11.7(b).
"Regulations D, T, U and X" shall mean Regulations D, T, U and X,
respectively, of the Federal Reserve Board, and any successor regulations.
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"Reimbursement Obligation" shall have the meaning given to such term in
Section 3.4.
"Reinsurance Agreement" shall mean any agreement, contract, treaty,
certificate or other arrangement whereby any Insurance Subsidiary agrees to
transfer, cede or retrocede to another insurer or reinsurer all or part of the
liability assumed or assets held by such Insurance Subsidiary under a policy or
policies of insurance issued by such Insurance Subsidiary or under a reinsurance
agreement assumed by such Insurance Subsidiary.
"Reinsurance Premiums Ceded" shall mean, for any Insurance Subsidiary, for
any period, the amount as shown on Schedule F -Part 3, column 1 of the Annual
Statement of such Insurance Subsidiary, or an amount determined in a manner
consistent for any period other than one for which an Annual Statement is
prepared.
"Reportable Event" shall mean (i) any "reportable event" within the meaning
of Section 4043(c) of ERISA for which the 30-day notice under Section 4043(a) of
ERISA has not been waived by the PBGC (including any failure to meet the minimum
funding standard of, or timely make any required installment under, Section 412
of the Internal Revenue Code or Section 302 of ERISA, regardless of the issuance
of any waivers in accordance with Section 412(d) of the Internal Revenue Code),
(ii) any such "reportable event" subject to advance notice to the PBGC under
Section 4043(b)(3) of ERISA, (iii) any application for a funding waiver or an
extension of any amortization period pursuant to Section 412 of the Internal
Revenue Code, and (iv) a cessation of operations described in Section 4062(e) of
ERISA.
"Required Lenders" shall mean the Lenders holding outstanding Loans and
Unutilized Commitments (or, after the termination of the Commitments,
outstanding Loans and Letter of Credit Exposure) representing more than
sixty-six and two-thirds percent (66-2/3%) of the aggregate at such time of all
outstanding Loans and Unutilized Commitments (or, after the termination of the
Commitments, the aggregate at such time of all outstanding Loans and Letter of
Credit Exposure).
"Requirement of Law" shall mean, with respect to any Person, the charter,
articles or certificate of organization or incorporation and bylaws or other
organizational or governing documents of such Person, and any statute, law,
treaty, rule, regulation, order, decree, writ, injunction or determination of
any arbitrator or court or other Governmental Authority, in each case applicable
to or binding upon such Person or any of its property or to which such Person or
any of its property is subject or otherwise pertaining to any or all of the
transactions contemplated by this Agreement and the other Credit Documents.
"Reserve Requirement" shall mean, with respect to any Interest Period, the
reserve percentage (expressed as a decimal) in effect from time to time during
such Interest Period, as provided by the Federal Reserve Board, applied for
determining the maximum reserve requirements (including, without limitation,
basic, supplemental, marginal and emergency reserves) applicable to First Union
under Regulation D with respect to "Eurocurrency liabilities" within the meaning
of Regulation D, or under any similar or successor regulation with respect to
Eurocurrency liabilities or Eurocurrency funding.
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"Responsible Officer" shall mean, with respect to the Borrower, the
president, the chief executive officer, the chief financial officer, any
executive officer, or any other Financial Officer of the Borrower, and any other
officer or similar official thereof responsible for the administration of the
obligations of the Borrower in respect of this Agreement.
"Standard & Poor's" shall mean Standard & Poor's Rating Services, a
division of McGraw-Hill Companies, its successors and assigns.
"SAP" shall mean, with respect to any Insurance Subsidiary, the statutory
accounting practices prescribed or permitted by the relevant Insurance
Regulatory Authority of its state of domicile, consistently applied and
maintained and in conformity with those used in the preparation of the most
recent statutory financial statements described in Section 5.11(e).
"Stated Amount" shall mean, with respect to any Letter of Credit at any
time, the aggregate amount available to be drawn thereunder at such time
(regardless of whether any conditions for drawing could then be met).
"Statutory Capital and Surplus" shall mean, as to any Insurance Subsidiary,
as of any date, the sum (without duplication) of the total amounts shown (i)
with respect to an Insurance Subsidiary not legally domiciled in the United
States, the shareholders' equity of such Insurance Subsidiary as determined in
accordance with GAAP (without regard to the requirements of Statement of
Financial Accounting Standards No. 115 issued by the Financial Accounting
Standards Board), and (ii) with respect to any other Insurance Subsidiary, on
line 25, column 1, page 3 of the Annual Statement of such Insurance Subsidiary,
or the sum of amounts determined in a consistent manner for any date other than
one as of which an Annual Statement is prepared.
"Subordinated Indebtedness" shall have the meaning given to such term in
Section 8.2.
"Subsidiary" shall mean, with respect to any Person, any corporation or
other Person of which more than fifty percent (50%) of the outstanding Capital
Stock having ordinary voting power to elect a majority of the board of
directors, board of managers or other governing body of such Person, is at the
time, directly or indirectly, owned or controlled by such Person and/or one or
more of its other Subsidiaries or a combination thereof (irrespective of
whether, at the time, securities of any other class or classes of any such
corporation or other Person shall or might have voting power by reason of the
happening of any contingency). When used without reference to a parent entity,
the term "Subsidiary" shall be deemed to refer to a Subsidiary of the Borrower.
"Surplus Relief Reinsurance Agreement" shall mean any agreement or other
arrangement whereby any Insurance Subsidiary cedes business under a reinsurance
agreement that would not be considered a transaction that indemnifies an insurer
against loss or liability relating to insurance risk, as determined in
accordance with Statement of Financial Accounting Standards No. 113 ("FAS 113")
issued by the Financial Accounting Standards Board (without regard to the
effective date of FAS 113).
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"Termination Date" shall mean the Maturity Date or such earlier date of
termination of the Commitments pursuant to Section 2.5 or Section 9.2.
"Type" shall have the meaning given to such term in Section 2.2(a).
"Unfunded Pension Liability" shall mean, with respect to any Plan or
Multiemployer Plan, the excess of its benefit liabilities under Section
4001(a)(16) of ERISA over the current value of its assets, determined in
accordance with the applicable assumptions used for funding under Section 412 of
the Internal Revenue Code for the applicable plan year.
"Unutilized Commitment" shall mean, with respect to any Lender at any time,
such Lender's Commitment at such time less the sum of (i) the aggregate
principal amount of all Loans made by such Lender that are outstanding at such
time and (ii) such Lender's Letter of Credit Exposure at such time.
"Wholly Owned" shall mean, with respect to any Subsidiary of any Person,
that 100% of the outstanding Capital Stock of such Subsidiary is owned, directly
or indirectly, by such Person.
1.2 Accounting Terms. Except as specifically provided otherwise in this
Agreement, all accounting terms used herein that are not specifically defined
shall have the meanings customarily given them in accordance with GAAP (or, to
the extent that such terms apply solely to any Insurance Subsidiary or if
otherwise expressly required, SAP). Notwithstanding anything to the contrary in
this Agreement, for purposes of calculation of the financial covenants set forth
in Article VII, all accounting determinations and computations hereunder shall
be made in accordance with GAAP as in effect as of the date of this Agreement
applied on a basis consistent with the application used in preparing the most
recent financial statements of the Borrower referred to in Section 5.11(a). In
the event that any changes in GAAP after such date are required to be applied to
the Borrower and would affect the computation of the financial covenants
contained in Article VII, such changes shall be followed only from and after the
date this Agreement shall have been amended to take into account any such
changes. References to amounts on particular exhibits, schedules, lines, pages
and columns of any Annual Statement or Quarterly Statement are based on the
format promulgated by the NAIC for the 1997 Annual Statements and Quarterly
Statements. In the event such format is changed in future years so that
different information is contained in such items or they no longer exist, or if
the Annual Statement or Quarterly Statement is replaced by the NAIC or by any
Insurance Regulatory Authority after the date hereof such that different forms
of financial statements are required to be furnished by the Insurance
Subsidiaries in lieu thereof, such references shall be to information consistent
with that reported in the referenced item in the 1997 Annual Statements or
Quarterly Statements, as the case may be.
1.3 Other Terms; Construction. Unless otherwise specified or unless the
context otherwise requires, all references herein to sections, annexes,
schedules and exhibits are references to sections, annexes, schedules and
exhibits in and to this Agreement, and all terms defined in this Agreement shall
have the defined meanings when used in any other Credit Document or any
certificate or other document made or delivered pursuant hereto. All
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references herein to the Lenders or any of them shall be deemed to include the
Issuing Lender unless specifically provided otherwise or unless the context
otherwise requires.
ARTICLE II
AMOUNT AND TERMS OF THE LOANS
2.1 Commitments. Each Lender severally agrees, subject to and on the terms
and conditions of this Agreement, to make loans (each, a "Loan," and
collectively, the "Loans") to the Borrower, from time to time on any Business
Day during the period from and including the Closing Date to but not including
the Termination Date, in an aggregate principal amount at any time outstanding
not greater than the excess, if any, of its Commitment at such time over its
Letter of Credit Exposure at such time, provided that no Borrowing of Loans
shall be made if, immediately after giving effect thereto, the sum of (y) the
aggregate principal amount of Loans outstanding at such time and (z) the
aggregate Letter of Credit Exposure of all Lenders at such time would exceed the
aggregate Commitments at such time. Subject to and on the terms and conditions
of this Agreement, the Borrower may borrow, repay and reborrow Loans.
2.2 Borrowings. (a) The Loans shall, at the option of the Borrower and
subject to the terms and conditions of this Agreement, be either Base Rate Loans
or LIBOR Loans (each, a "Type" of Loan), provided that all Loans comprising the
same Borrowing shall, unless otherwise specifically provided herein, be of the
same Type; provided further that the foregoing proviso shall not prevent
multiple Borrowings, respectively having different Types, from being made on the
same Business Day, subject to the terms of clause (iii) of Section 2.10.
(b) In order to make a Borrowing (other than Borrowings involving
continuations or conversions of outstanding Loans, which shall be made pursuant
to Section 2.11), the Borrower will give the Agent written notice not later than
11:00 a.m., Charlotte time, three (3) Business Days prior to each Borrowing to
be comprised of LIBOR Loans and one (1) Business Day prior to each Borrowing to
be comprised of Base Rate Loans; provided, however, that requests for the
Borrowing of any Loans to be made on the Closing Date may, at the discretion of
the Agent, be given later than the times specified hereinabove. Each such notice
(each, a "Notice of Borrowing") shall be irrevocable, shall be given in the form
of Exhibit B-1 and shall specify (1) the aggregate principal amount and initial
Type of the Loans to be made pursuant to such Borrowing, (2) in the case of a
Borrowing of LIBOR Loans, the initial Interest Period to be applicable thereto,
and (3) the requested date of such Borrowing (the "Borrowing Date"), which shall
be a Business Day. Upon its receipt of a Notice of Borrowing, the Agent will
promptly notify each Lender of the proposed Borrowing. Notwithstanding anything
to the contrary contained herein:
(i) the aggregate principal amount of each Borrowing comprised of Base
Rate Loans shall not be less than $1,000,000 or, if greater, an integral
multiple of $500,000 in excess thereof (or, if less, in the amount of the
aggregate Unutilized Commitments), and the aggregate principal amount of
each Borrowing comprised of LIBOR Loans shall not be less than $1,000,000
or, if greater, an integral multiple of $500,000 in excess thereof;
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(ii) if the Borrower shall have failed to designate the Type of Loans
comprising a Borrowing, the Borrower shall be deemed to have requested a
Borrowing comprised of Base Rate Loans; and
(iii) if the Borrower shall have failed to select the duration of the
Interest Period to be applicable to any Borrowing of LIBOR Loans, then the
Borrower shall be deemed to have selected an Interest Period with a
duration of one month.
(c) Not later than 1:00 p.m., Charlotte time, on the requested Borrowing
Date, each Lender will make available to the Agent at its office referred to in
Section 11.5 (or at such other location as the Agent may designate) an amount,
in Dollars and in immediately available funds, equal to the amount of the Loan
to be made by such Lender. To the extent the Lenders have made such amounts
available to the Agent as provided hereinabove, the Agent will make the
aggregate of such amounts available to the Borrower in accordance with Section
2.3(a) and in like funds as received by the Agent.
2.3 Disbursements; Funding Reliance; Domicile of Loans. (a) The Borrower
hereby authorizes the Agent to disburse the proceeds of each Borrowing in
accordance with the terms of any written instructions from any of the Authorized
Officers, provided that the Agent shall not be obligated under any circumstances
to forward amounts to any account not listed in an Account Designation Letter.
The Borrower may at any time deliver to the Agent an Account Designation Letter
listing any additional accounts or deleting any accounts listed in a previous
Account Designation Letter.
(b) Unless the Agent has received, prior to 1:00 p.m., Charlotte time, on
the relevant Borrowing Date, written notice from a Lender that such Lender will
not make available to the Agent such Lender's ratable portion of the relevant
Borrowing, the Agent may assume that such Lender has made such portion available
to the Agent in immediately available funds on such Borrowing Date in accordance
with the applicable provisions of Section 2.2, and the Agent may, in reliance
upon such assumption, but shall not be obligated to, make a corresponding amount
available to the Borrower on such Borrowing Date. If and to the extent that such
Lender shall not have made such portion available to the Agent, and the Agent
shall have made such corresponding amount available to the Borrower, such
Lender, on the one hand, and the Borrower, on the other, severally agree to pay
to the Agent forthwith on demand such corresponding amount, together with
interest thereon for each day from the date such amount is made available to the
Borrower until the date such amount is repaid to the Agent, (i) in the case of
such Lender, at the Federal Funds Rate, and (ii) in the case of the Borrower, at
the rate of interest applicable at such time to the Type of Loans comprising
such Borrowing, as determined under the provisions of Section 2.8. If such
Lender shall repay to the Agent such corresponding amount, such amount shall
constitute such Lender's Loan as part of such Borrowing for purposes of this
Agreement. The failure of any Lender to make any Loan required to be made by it
as part of any Borrowing shall not relieve any other Lender of its obligation,
if any, hereunder to make its Loan as part of such Borrowing, but no Lender
shall be responsible for the failure of any other Lender to make the Loan to be
made by such other Lender as part of any Borrowing.
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(c) Each Lender may, at its option, make and maintain any Loan at, to or
for the account of any of its Lending Offices, provided that any exercise of
such option shall not affect the obligation of the Borrower to repay such Loan
to or for the account of such Lender in accordance with the terms of this
Agreement.
2.4 Notes. (a) The Loans made by each Lender shall be evidenced by a Note
appropriately completed in substantially the form of Exhibit A.
(b) Each Note issued to a Lender shall (i) be executed by the Borrower,
(ii) be payable to the order of such Lender, (iii) be dated as of the Closing
Date (or, in the case of a Note issued after the Closing Date, dated the
effective date of the applicable Assignment and Acceptance), (iv) be in a stated
principal amount equal to such Lender's Commitment, (v) bear interest in
accordance with the provisions of Section 2.8, as the same may be applicable
from time to time to the Loans made by such Lender, and (vi) be entitled to all
of the benefits of this Agreement and the other Credit Documents and subject to
the provisions hereof and thereof.
(c) Each Lender will record on its internal records the amount and Type of
each Loan made by it and each payment received by it in respect thereof and
will, in the event of any transfer of any of its Notes, either endorse on the
reverse side thereof or on a schedule attached thereto (or any continuation
thereof) the outstanding principal amount and Type of the Loans evidenced
thereby as of the date of transfer or provide such information on a schedule to
the Assignment and Acceptance relating to such transfer; provided, however, that
the failure of any Lender to make any such recordation or provide any such
information, or any error therein, shall not affect the Borrower's obligations
under this Agreement or the Notes.
2.5 Termination and Reduction of Commitments. (a) The Commitments shall be
automatically and permanently terminated on the Termination Date (or on
September 30, 1998, but only if the Closing Date shall not have occurred on or
prior to such date).
(b) On each date set forth below, the Commitments shall be automatically
and permanently reduced by the amount set forth below opposite such date:
Date Amount
December 31, 2000 $2,500,000
June 30, 2001 $2,500,000
December 31, 2001 $3,000,000
June 30, 2002 $3,000,000
December 31, 2002 $3,000,000
June 30, 2003 $3,000,000
December 31, 2003 $4,000,000
June 30, 2004 $4,000,000
(c) The Commitments shall, on the day two (2) Business Days after the
receipt of Net Cash Proceeds therefor, be automatically and permanently reduced
by the amount of the Net Cash Proceeds with respect to any Asset Disposition,
Hybrid Equity Issuance or Debt Issuance.
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Promptly upon (and in any event not later than two (2) Business Days after) its
receipt of such Net Cash Proceeds, the Borrower will deliver to the Agent a
certificate signed by a Financial Officer of the Borrower in form and substance
satisfactory to the Agent and setting forth the calculation of such Net Cash
Proceeds. Such certificate shall be accompanied by any required prepayment
pursuant to Section 2.6(b) or Section 2.6(c). Notwithstanding the foregoing,
nothing in this subsection shall be deemed to permit any Asset Disposition not
expressly permitted under Section 8.4.
(d) At any time and from time to time after the date hereof, upon not less
than three (3) Business Days' prior written notice to the Agent, the Borrower
may terminate in whole or reduce in part the aggregate Unutilized Commitments,
provided that any such partial reduction shall be in an aggregate amount of not
less than $1,000,000 or, if greater, an integral multiple thereof. The amount of
any termination or reduction made under this subsection (d) may not thereafter
be reinstated.
(e) Each reduction of the Commitments pursuant to this Section shall be
applied ratably among the Lenders according to their respective Commitments.
Each reduction of the Commitments pursuant to subsections (c) or (d) shall be
applied to reduce the scheduled reductions of the Commitments set forth in
subsection (b) in the inverse order of maturity.
2.6 Mandatory Payments and Prepayments. (a) Except to the extent due or
paid sooner pursuant to the provisions of this Agreement, the aggregate
outstanding principal of the Loans shall be due and payable in full on the
Maturity Date.
(b) In the event that, at any time, the sum of (y) the aggregate principal
amount of Loans outstanding at such time and (z) the aggregate Letter of Credit
Exposure of all Lenders at such time shall exceed the aggregate Commitments at
such time (after giving effect to any concurrent termination or reduction
thereof), the Borrower will immediately prepay first, the outstanding principal
amount of the Loans in the amount of such excess and next, the amount of any
outstanding Reimbursement Obligations; provided that, to the extent such excess
amount is greater than the aggregate principal amount of Loans and Reimbursement
Obligations outstanding immediately prior to the application of such prepayment,
the amount so prepaid shall be retained by the Agent and held in the Cash
Collateral Account as cover for Letter of Credit Exposure, as more particularly
described in Section 3.8, and thereupon such cash shall be deemed to reduce the
aggregate Letter of Credit Exposure by an equivalent amount.
(c) If a Default or an Event of Default has occurred and is continuing at
such time, promptly upon (and in any event not later than two (2) Business Days
after) its receipt of Net Cash Proceeds for any Asset Disposition, Hybrid Equity
Issuance or Debt Issuance, the Borrower will prepay first, the outstanding
principal amount of the Loans and next, the amount of any outstanding
Reimbursement Obligations in an amount equal to 100% of the Net Cash Proceeds
from such Asset Disposition, Hybrid Equity Issuance or Debt Issuance; provided
that, to the extent such prepayment amount is greater than the aggregate
principal amount of Loans and Reimbursement Obligations outstanding immediately
prior to the application of such prepayment, the amount so prepaid shall be
retained by the Agent and held in the Cash Collateral Account as cover for
Letter of Credit Exposure, as more particularly described in Section 3.8,
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and thereupon such cash shall be deemed to reduce the aggregate Letter of Credit
Exposure by an equivalent amount.
(d) Each prepayment of the Loans made pursuant to subsections (b) and (c)
above shall be applied (i) first, to reduce the outstanding principal amount of
the Loans, and (ii) second, to the extent of any excess remaining after
application as provided in clause (i) above, to pay any outstanding
Reimbursement Obligations, and shall be applied first to prepay all Base Rate
Loans before any LIBOR Loans are prepaid. Each payment or prepayment pursuant to
the provisions of this Section shall be applied ratably among the Lenders
holding the Loans being prepaid, in proportion to the principal amount held by
each.
(e) Each payment or prepayment of a LIBOR Loan made pursuant to the
provisions of this Section on a day other than the last day of the Interest
Period applicable thereto shall be made together with all amounts required under
Section 2.18 to be paid as a consequence thereof.
2.7 Voluntary Prepayments. (a) At any time and from time to time, the
Borrower shall have the right to prepay the Loans, in whole or in part, without
premium or penalty (except as provided in clause (iii) below), upon written
notice given to the Agent not later than 11:00 a.m., Charlotte time, three (3)
Business Days prior to each intended prepayment of LIBOR Loans and one (1)
Business Day prior to each intended prepayment of Base Rate Loans, provided that
(i) each partial prepayment shall be in an aggregate principal amount of not
less than $1,000,000 or, if greater, an integral multiple of $500,000 in excess
thereof, (ii) no partial prepayment of LIBOR Loans made pursuant to any single
Borrowing shall reduce the aggregate outstanding principal amount of the
remaining LIBOR Loans under such Borrowing to less than $1,000,000 or to any
greater amount not an integral multiple of $500,000 in excess thereof, and (iii)
unless made together with all amounts required under Section 2.18 to be paid as
a consequence of such prepayment, a prepayment of a LIBOR Loan may be made only
on the last day of the Interest Period applicable thereto. Each such notice
shall specify the proposed date of such prepayment and the aggregate principal
amount and Type of the Loans to be prepaid (and, in the case of LIBOR Loans, the
Interest Period of the Borrowing pursuant to which made), and shall be
irrevocable and shall bind the Borrower to make such prepayment on the terms
specified therein. Loans prepaid pursuant to this subsection (a) may be
reborrowed, subject to the terms and conditions of this Agreement.
(b) Each prepayment of the Loans made pursuant to subsection (a) above
shall be applied ratably among the Lenders holding the Loans being prepaid, in
proportion to the principal amount held by each.
2.8 Interest. (a) The Borrower will pay interest in respect of the unpaid
principal amount of each Loan, from the date of Borrowing thereof until such
principal amount shall be paid in full, (i) at the Adjusted Base Rate, as in
effect from time to time during such periods as such Loan is a Base Rate Loan,
and (ii) at the Adjusted LIBOR Rate, as in effect from time to time during such
periods as such Loan is a LIBOR Loan.
(b) Upon the occurrence and during the continuance of an Event of Default
as the result of failure by the Borrower to pay any principal of or interest on
any Loan, any fees or other
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amount hereunder when due (whether at maturity, pursuant to acceleration or
otherwise), and (at the election of the Required Lenders) upon the occurrence
and during the continuance of any other Event of Default, all outstanding
principal amounts of the Loans and, to the greatest extent permitted by
applicable law, all interest accrued on the Loans and all other accrued and
outstanding fees and other amounts hereunder, shall bear interest at a rate per
annum equal to the interest rate applicable from time to time thereafter to such
Loans (whether the Adjusted Base Rate or the Adjusted LIBOR Rate) plus 2% (or,
in the case of fees and other amounts, at the Adjusted Base Rate plus 2%), and,
in each case, such default interest shall be payable on demand. To the greatest
extent permitted by applicable law, interest shall continue to accrue after the
filing by or against the Borrower of any petition seeking any relief in
bankruptcy or under any law pertaining to insolvency or debtor relief.
(c) Accrued (and theretofore unpaid) interest shall be payable as follows:
(i) in respect of each Base Rate Loan (including any Base Rate Loan or
portion thereof paid or prepaid pursuant to the provisions of Section 2.6,
except as provided hereinbelow), in arrears on the last Business Day of
each calendar quarter, beginning with the first such day to occur after the
Closing Date; provided, that in the event the Loans are repaid or prepaid
in full and the Commitments have been terminated, then accrued interest in
respect of all Base Rate Loans shall be payable together with such
repayment or prepayment on the date thereof;
(ii) in respect of each LIBOR Loan (including any LIBOR Loan or
portion thereof paid or prepaid pursuant to the provisions of Section 2.6,
except as provided hereinbelow), in arrears (y) on the last Business Day of
the Interest Period applicable thereto (subject to the provisions of clause
(iv) in Section 2.10) and (z) in addition, in the case of a LIBOR Loan with
an Interest Period having a duration of six months, on each date on which
interest would have been payable under clause (y) above had successive
Interest Periods of three months' duration been applicable to such LIBOR
Loan; provided, that in the event all LIBOR Loans made pursuant to a single
Borrowing are repaid or prepaid in full, then accrued interest in respect
of such LIBOR Loans shall be payable together with such repayment or
prepayment on the date thereof; and
(iii) in respect of any Loan, at maturity (whether pursuant to
acceleration or otherwise) and, after maturity, on demand.
(d) Nothing contained in this Agreement or in any other Credit Document
shall be deemed to establish or require the payment of interest to any Lender at
a rate in excess of the maximum rate permitted by applicable law. If the amount
of interest payable for the account of any Lender on any interest payment date
would exceed the maximum amount permitted by applicable law to be charged by
such Lender, the amount of interest payable for its account on such interest
payment date shall be automatically reduced to such maximum permissible amount.
In the event of any such reduction affecting any Lender, if from time to time
thereafter the amount of interest payable for the account of such Lender on any
interest payment date would be less than the maximum amount permitted by
applicable law to be charged by such Lender, then the amount of interest payable
for its account on such subsequent interest payment date shall be
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automatically increased to such maximum permissible amount, provided that at no
time shall the aggregate amount by which interest paid for the account of any
Lender has been increased pursuant to this sentence exceed the aggregate amount
by which interest paid for its account has theretofore been reduced pursuant to
the previous sentence.
(e) The Agent shall promptly notify the Borrower and the Lenders upon
determining the interest rate for each Borrowing of LIBOR Loans after its
receipt of the relevant Notice of Borrowing or Notice of
Conversion/Continuation, and upon each change in the Base Rate; provided,
however, that the failure of the Agent to provide the Borrower or the Lenders
with any such notice shall neither affect any obligations of the Borrower or the
Lenders hereunder nor result in any liability on the part of the Agent to the
Borrower or any Lender. Each such determination (including each determination of
the Reserve Requirement) shall, absent manifest error, be conclusive and binding
on all parties hereto.
2.9 Fees. The Borrower agrees to pay:
(a) To First Union, for its own account, on the date of its execution of
this Agreement, the fees described in paragraphs (1) and (2) of the Fee Letter,
in the amounts set forth therein as due and payable on such date and to the
extent not theretofore paid to First Union;
(b) To the Agent, for the account of each Lender, a commitment fee for each
calendar quarter (or portion thereof) for the period from the date of this
Agreement to the Termination Date, at a per annum rate equal to the Applicable
Margin Percentage in effect for such fee from time to time during such quarter,
on such Lender's ratable share (based on the proportion that its Commitment
bears to the aggregate Commitments) of the average daily aggregate Unutilized
Commitments, payable in arrears (i) on the last Business Day of each calendar
quarter, beginning with the first such day to occur after the Closing Date, and
(ii) on the Termination Date;
(c) To the Agent, for the account of each Lender, a letter of credit fee
for each calendar quarter (or portion thereof) in respect of all Letters of
Credit outstanding during such quarter, at a per annum rate equal to the
Applicable Margin Percentage in effect from time to time during such quarter for
Loans that are maintained as LIBOR Loans, on such Lender's ratable share (based
on the proportion that its Commitment bears to the aggregate Commitments) of the
daily average aggregate Stated Amount of such Letters of Credit, payable in
arrears (i) on the last Business Day of each calendar quarter, beginning with
the first such day to occur after the Closing Date, and (ii) on the later of the
Termination Date and the date of termination of the last outstanding Letter of
Credit;
(d) To the Issuing Lender, for its own account, the facing fee described in
the Fee Letter, on the terms, in the amounts and at the times set forth therein;
(e) To the Issuing Lender, for its own account, such commissions, issuance
fees, transfer fees and other fees and charges incurred in connection with the
issuance and administration of each Letter of Credit as are customarily charged
from time to time by the Issuing Lender for the performance of such services in
connection with similar letters of credit,
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or as may be otherwise agreed to by the Issuing Lender, but without duplication
of amounts payable under subsection (d) above; and
(f) If, at any time, there is a Lender other than First Union or any
Affiliate thereof, to the Agent, for its own account, the annual administrative
fee, in the amount and at the times agreed to at such time by the Borrower and
the Agent.
2.10 Interest Periods. Concurrently with the giving of a Notice of
Borrowing or Notice of Conversion/Continuation in respect of any Borrowing
comprised of Base Rate Loans to be converted into, or LIBOR Loans to be
continued as, LIBOR Loans, the Borrower shall have the right to elect, pursuant
to such notice, the interest period (each, an "Interest Period") to be
applicable to such LIBOR Loans, which Interest Period shall, at the option of
the Borrower, be a one, two, three or six-month period; provided, however, that:
(i) all LIBOR Loans comprising a single Borrowing shall at all times
have the same Interest Period;
(ii) the initial Interest Period for any LIBOR Loan shall commence on
the date of the Borrowing of such LIBOR Loan (including the date of any
continuation of, or conversion into, such LIBOR Loan), and each successive
Interest Period applicable to such LIBOR Loan shall commence on the day on
which the next preceding Interest Period applicable thereto expires;
(iii) LIBOR Loans may not be outstanding under more than five (5)
separate Interest Periods at any one time (for which purpose Interest
Periods shall be deemed to be separate even if they are coterminous);
(iv) if any Interest Period otherwise would expire on a day that is
not a Business Day, such Interest Period shall expire on the next
succeeding Business Day unless such next succeeding Business Day falls in
another calendar month, in which case such Interest Period shall expire on
the next preceding Business Day;
(v) the Borrower may not select any Interest Period that begins prior
to the Closing Date or that expires after the Maturity Date;
(vi) no Interest Period may be selected that would end after a
scheduled date for repayment of principal of the Loans occurring on or
after the first day of such Interest Period unless, immediately after
giving effect to such selection, the aggregate principal amount of Loans
that are Base Rate Loans or that have Interest Periods expiring on or
before such principal repayment date equals or exceeds the principal amount
required to be paid on such principal repayment date;
(vii) if any Interest Period begins on a day for which there is no
numerically corresponding day in the calendar month during which such
Interest Period would otherwise expire, such Interest Period shall expire
on the last Business Day of such calendar month; and
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(viii) if, upon the expiration of any Interest Period applicable to a
Borrowing of LIBOR Loans, the Borrower shall have failed to elect a new
Interest Period to be applicable to such LIBOR Loans, then the Borrower
shall be deemed to have elected to convert such LIBOR Loans into Base Rate
Loans as of the expiration of the then current Interest Period applicable
thereto.
2.11 Conversions and Continuations. (a) The Borrower shall have the right,
on any Business Day occurring on or after the Closing Date, to elect (i) to
convert all or a portion of the outstanding principal amount of any Base Rate
Loans into LIBOR Loans, or to convert any LIBOR Loans the Interest Periods for
which end on the same day into Base Rate Loans, or (ii) to continue all or a
portion of the outstanding principal amount of any LIBOR Loans the Interest
Periods for which end on the same day for an additional Interest Period,
provided that (x) any such conversion of LIBOR Loans into Base Rate Loans shall
involve an aggregate principal amount of not less than $1,000,000 or, if
greater, an integral multiple of $500,000 in excess thereof; any such conversion
of Base Rate Loans into, or continuation of, LIBOR Loans shall involve an
aggregate principal amount of not less than $1,000,000 or, if greater, an
integral multiple of $500,000 in excess thereof; and no partial conversion of
LIBOR Loans made pursuant to a single Borrowing shall reduce the outstanding
principal amount of such LIBOR Loans to less than $1,000,000 or to any greater
amount not an integral multiple of $500,000 in excess thereof, (y) except as
otherwise provided in Section 2.16(d), LIBOR Loans may be converted into Base
Rate Loans only on the last day of the Interest Period applicable thereto (and,
in any event, if a LIBOR Loan is converted into a Base Rate Loan on any day
other than the last day of the Interest Period applicable thereto, the Borrower
will pay, upon such conversion, all amounts required under Section 2.18 to be
paid as a consequence thereof), and (z) no conversion of Base Rate Loans into
LIBOR Loans or continuation of LIBOR Loans shall be permitted during the
continuance of a Default or Event of Default.
(b) The Borrower shall make each such election by giving the Agent written
notice not later than 11:00 a.m., Charlotte time, three (3) Business Days prior
to the intended effective date of any conversion of Base Rate Loans into, or
continuation of, LIBOR Loans and one (1) Business Day prior to the intended
effective date of any conversion of LIBOR Loans into Base Rate Loans. Each such
notice (each, a "Notice of Conversion/Continuation") shall be irrevocable, shall
be given in the form of Exhibit B-2 and shall specify (x) the date of such
conversion or continuation (which shall be a Business Day), (y) in the case of a
conversion into, or a continuation of, LIBOR Loans, the Interest Period to be
applicable thereto, and (z) the aggregate amount and Type of the Loans being
converted or continued. Upon the receipt of a Notice of Conversion/Continuation,
the Agent will promptly notify each Lender of the proposed conversion or
continuation. In the event that the Borrower shall fail to deliver a Notice of
Conversion/Continuation as provided herein with respect to any outstanding LIBOR
Loans, such LIBOR Loans shall automatically be converted to Base Rate Loans upon
the expiration of the then current Interest Period applicable thereto (unless
repaid pursuant to the terms hereof). In the event the Borrower shall have
failed to select in a Notice of Conversion/Continuation the duration of the
Interest Period to be applicable to any conversion into, or continuation of,
LIBOR Loans, then the Borrower shall be deemed to have selected an Interest
Period with a duration of one month.
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2.12 Method of Payments; Computations. (a) All payments by the Borrower
hereunder shall be made without setoff, counterclaim or other defense, in
Dollars and in immediately available funds to the Agent, for the account of the
Lenders entitled to such payment (except as otherwise expressly provided herein
as to payments required to be made directly to the Issuing Lender and the
Lenders) at its office referred to in Section 11.5, prior to 12:00 noon,
Charlotte time, on the date payment is due. Any payment made as required
hereinabove, but after 12:00 noon, Charlotte time, shall be deemed to have been
made on the next succeeding Business Day. If any payment falls due on a day that
is not a Business Day, then such due date shall be extended to the next
succeeding Business Day (except that in the case of LIBOR Loans to which the
provisions of clause (iv) in Section 2.10 are applicable, such due date shall be
the next preceding Business Day), and such extension of time shall then be
included in the computation of payment of interest, fees or other applicable
amounts.
(b) The Agent will distribute to the Lenders like amounts relating to
payments made to the Agent for the account of the Lenders as follows: (i) if the
payment is received by 12:00 noon, Charlotte time, in immediately available
funds, the Agent will make available to each relevant Lender on the same date,
by wire transfer of immediately available funds, such Lender's ratable share of
such payment (based on the percentage that the amount of the relevant payment
owing to such Lender bears to the total amount of such payment owing to all of
the relevant Lenders), and (ii) if such payment is received after 12:00 noon,
Charlotte time, or in other than immediately available funds, the Agent will
make available to each such Lender its ratable share of such payment by wire
transfer of immediately available funds on the next succeeding Business Day (or
in the case of uncollected funds, as soon as practicable after collected). If
the Agent shall not have made a required distribution to the appropriate Lenders
as required hereinabove after receiving a payment for the account of such
Lenders, the Agent will pay to each such Lender, on demand, its ratable share of
such payment with interest thereon at the Federal Funds Rate for each day from
the date such amount was required to be disbursed by the Agent until the date
repaid to such Lender. The Agent will distribute to the Issuing Lender like
amounts relating to payments made to the Agent for the account of the Issuing
Lender in the same manner, and subject to the same terms and conditions, as set
forth hereinabove with respect to distributions of amounts to the Lenders.
(c) Unless the Agent shall have received written notice from the Borrower
prior to the date on which any payment is due to any Lender hereunder that such
payment will not be made in full, the Agent may assume that the Borrower has
made such payment in full to the Agent on such date, and the Agent may, in
reliance on such assumption, but shall not be obligated to, cause to be
distributed to such Lender on such due date an amount equal to the amount then
due to such Lender. If and to the extent the Borrower shall not have so made
such payment in full to the Agent, and without limiting the obligation of the
Borrower to make such payment in accordance with the terms hereof, such Lender
shall repay to the Agent forthwith on demand such amount so distributed to such
Lender, together with interest thereon for each day from the date such amount is
so distributed to such Lender until the date repaid to the Agent, at the Federal
Funds Rate.
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(d) All computations of interest and fees hereunder (including computations
of the Reserve Requirement) shall be made on the basis of a year consisting of
365 or 366 days, as the case may be (in the case of interest on Base Rate Loans
and the facing fee described in Section 2.9(d)), or 360 days (in all other
instances), and the actual number of days (including the first day, but
excluding the last day) elapsed.
2.13 Recovery of Payments. (a) The Borrower agrees that to the extent the
Borrower makes a payment or payments to or for the account of the Agent, any
Lender or the Issuing Lender, which payment or payments or any part thereof are
subsequently invalidated, declared to be fraudulent or preferential, set aside
or required to be repaid to a trustee, receiver or any other party under any
bankruptcy, insolvency or similar state or federal law, common law or equitable
cause, then, to the extent of such payment or repayment, the Obligation intended
to be satisfied shall be revived and continued in full force and effect as if
such payment had not been received.
(b) If any amounts distributed by the Agent to any Lender are subsequently
returned or repaid by the Agent to the Borrower or its representative or
successor in interest, whether by court order or by settlement approved by the
Lender in question, such Lender will, promptly upon receipt of notice thereof
from the Agent, pay the Agent such amount. If any such amounts are recovered by
the Agent from the Borrower or its representative or successor in interest, the
Agent will redistribute such amounts to the Lenders on the same basis as such
amounts were originally distributed.
2.14 Use of Proceeds. The proceeds of the Loans shall be used for working
capital and general corporate purposes and in accordance with the terms and
provisions of this Agreement (including to finance Permitted Acquisitions in
accordance with the terms and provisions of this Agreement, including, without
limitation, the provisions set forth in Section 6.9).
2.15 Pro Rata Treatment. (a) All fundings, continuations and conversions of
Loans shall be made by the Lenders pro rata on the basis of their respective
Commitments (in the case of the initial funding of Loans pursuant to Section
2.2) or on the basis of their respective outstanding Loans (in the case of
continuations and conversions of Loans pursuant to Section 2.11, and
additionally in all cases in the event the Commitments have expired or have been
terminated), as the case may be from time to time. All payments on account of
principal of or interest on any Loans, fees or any other Obligations owing to or
for the account of any one or more Lenders shall be apportioned ratably among
such Lenders in proportion to the amounts of such principal, interest, fees or
other Obligations owed to them respectively.
(b) Each Lender agrees that if it shall receive any amount hereunder
(whether by voluntary payment, realization upon security, exercise of the right
of setoff or banker's lien, counterclaim or cross action, or otherwise, other
than pursuant to or Section 11.7) applicable to the payment of any of the
Obligations that exceeds its ratable share (according to the proportion of (i)
the amount of such Obligations due and payable to such Lender at such time to
(ii) the aggregate amount of such Obligations due and payable to all Lenders at
such time) of payments on account of such Obligations then or therewith obtained
by all the Lenders to which such payments are required to have been made, such
Lender shall forthwith purchase from the other Lenders such participations in
such Obligations as shall be necessary to cause such purchasing
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Lender to share the excess payment or other recovery ratably with each of them;
provided, however, that if all or any portion of such excess payment is
thereafter recovered from such purchasing Lender, such purchase from each such
other Lender shall be rescinded and each such other Lender shall repay to the
purchasing Lender the purchase price to the extent of such recovery, together
with an amount equal to such other Lender's ratable share (according to the
proportion of (i) the amount of such other Lender's required repayment to (ii)
the total amount so recovered from the purchasing Lender) of any interest or
other amount paid or payable by the purchasing Lender in respect of the total
amount so recovered. The Borrower agrees that any Lender so purchasing a
participation from another Lender pursuant to the provisions of this subsection
may, to the fullest extent permitted by law, exercise any and all rights of
payment (including, without limitation, setoff, banker's lien or counterclaim)
with respect to such participation as fully as if such participant were a direct
creditor of the Borrower in the amount of such participation. If under any
applicable bankruptcy, insolvency or similar law, any Lender receives a secured
claim in lieu of a setoff to which this subsection applies, such Lender shall,
to the extent practicable, exercise its rights in respect of such secured claim
in a manner consistent with the rights of the Lenders entitled under this
subsection to share in the benefits of any recovery on such secured claim.
2.16 Increased Costs; Change in Circumstances; Illegality; etc. (a) If, at
any time after the date hereof and from time to time, the introduction of or any
change in any applicable law, rule or regulation or in the interpretation or
administration thereof by any Governmental Authority charged with the
interpretation or administration thereof, or compliance by any Lender with any
guideline or request from any such Governmental Authority (whether or not having
the force of law), shall (i) subject such Lender to any tax or other charge, or
change the basis of taxation of payments to such Lender, in respect of any of
its LIBOR Loans or any other amounts payable hereunder or its obligation to
make, fund or maintain any LIBOR Loans (other than any change in the rate or
basis of tax on the overall net income of such Lender or its applicable Lending
Office), (ii) impose, modify or deem applicable any reserve, special deposit or
similar requirement (other than as a result of any change in the Reserve
Requirement) against assets of, deposits with or for the account of, or credit
extended by, such Lender or its applicable Lending Office, or (iii) impose on
such Lender or its applicable Lending Office any other condition, and the result
of any of the foregoing shall be to increase the cost to such Lender of making
or maintaining any LIBOR Loans or issuing or participating in Letters of Credit
or to reduce the amount of any sum received or receivable by such Lender
hereunder (including in respect of Letters of Credit), the Borrower will,
promptly upon demand therefor by such Lender, pay to such Lender such additional
amounts as shall compensate such Lender for such increase in costs or reduction
in return.
(b) If, at any time after the date hereof and from time to time, any Lender
shall have reasonably determined that the introduction of or any change in any
applicable law, rule or regulation regarding capital adequacy or in the
interpretation or administration thereof by any Governmental Authority charged
with the interpretation or administration thereof, or compliance by such Lender
with any guideline or request from any such Governmental Authority (whether or
not having the force of law), has or would have the effect, as a consequence of
such Lender's Commitment, Loans or issuance of or participations in Letters of
Credit hereunder, of reducing the rate of return on the capital of such Lender
or any Person controlling such Lender to a level
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below that which such Lender or controlling Person could have achieved but for
such introduction, change or compliance (taking into account such Lender's or
controlling Person's policies with respect to capital adequacy), the Borrower
will, promptly upon demand therefor by such Lender therefor, pay to such Lender
such additional amounts as will compensate such Lender or controlling Person for
such reduction in return.
(c) If, on or prior to the first day of any Interest Period, (y) the Agent
shall have determined that adequate and reasonable means do not exist for
ascertaining the applicable LIBOR Rate for such Interest Period or (z) the Agent
shall have received written notice from the Required Lenders of their
determination that the rate of interest referred to in the definition of "LIBOR
Rate" upon the basis of which the Adjusted LIBOR Rate for LIBOR Loans for such
Interest Period is to be determined will not adequately and fairly reflect the
cost to such Lenders of making or maintaining LIBOR Loans during such Interest
Period, the Agent will forthwith so notify the Borrower and the Lenders. Upon
such notice, (i) all then outstanding LIBOR Loans shall automatically, on the
expiration date of the respective Interest Periods applicable thereto (unless
then repaid in full), be converted into Base Rate Loans, (ii) the obligation of
the Lenders to make, to convert Base Rate Loans into, or to continue, LIBOR
Loans shall be suspended (including pursuant to the Borrowing to which such
Interest Period applies), and (iii) any Notice of Borrowing or Notice of
Conversion/Continuation given at any time thereafter with respect to LIBOR Loans
shall be deemed to be a request for Base Rate Loans, in each case until the
Agent or the Required Lenders, as the case may be, shall have determined that
the circumstances giving rise to such suspension no longer exist (and the
Required Lenders, if making such determination, shall have so notified the
Agent), and the Agent shall have so notified the Borrower and the Lenders.
(d) Notwithstanding any other provision in this Agreement, if, at any time
after the date hereof and from time to time, any Lender shall have determined in
good faith that the introduction of or any change in any applicable law, rule or
regulation or in the interpretation or administration thereof by any
Governmental Authority charged with the interpretation or administration
thereof, or compliance with any guideline or request from any such Governmental
Authority (whether or not having the force of law), has or would have the effect
of making it unlawful for such Lender to make or to continue to make or maintain
LIBOR Loans, such Lender will forthwith so notify the Agent and the Borrower.
Upon such notice, (i) each of such Lender's then outstanding LIBOR Loans shall
automatically, on the expiration date of the respective Interest Period
applicable thereto (or, to the extent any such LIBOR Loan may not lawfully be
maintained as a LIBOR Loan until such expiration date, upon such notice), be
converted into a Base Rate Loan, (ii) the obligation of such Lender to make, to
convert Base Rate Loans into, or to continue, LIBOR Loans shall be suspended
(including pursuant to any Borrowing for which the Agent has received a Notice
of Borrowing but for which the Borrowing Date has not arrived), and (iii) any
Notice of Borrowing or Notice of Conversion/Continuation given at any time
thereafter with respect to LIBOR Loans shall, as to such Lender, be deemed to be
a request for a Base Rate Loan, in each case until such Lender shall have
reasonably determined that the circumstances giving rise to such suspension no
longer exist and shall have so notified the Agent, and the Agent shall have so
notified the Borrower (and the Lenders and Agent shall act with reasonable
promptness in giving such notices).
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(e) Determinations by the Agent or any Lender for purposes of this Section
of any increased costs, reduction in return, market contingencies, illegality or
any other matter shall, absent manifest error, be conclusive, provided that such
determinations are made in good faith and documented in reasonable detail in a
certificate to the Borrower. Each Lender, upon determining that any amounts will
be payable pursuant to this Section 2.16, will give prompt written notice
thereof to the Borrower, although the failure to give any such notice shall not
release or diminish any of the Borrower's obligations to pay additional amounts
pursuant to this Section 2.16; provided, however, that if any Lender has
intentionally or unreasonably withheld or delayed such notice, such Lender shall
not be entitled to receive additional amounts pursuant to this Section 2.16 for
periods occurring prior to the 180th day before the giving of such notice. Each
Lender agrees that in making the determinations and giving notices described in
this Section 2.16, such Lender shall not discriminate against the Borrower
compared with borrowers under credit facilities of similar sizes. Nothing in
this Section shall require or be construed to require the Borrower to pay any
interest, fees, costs or other amounts in excess of that permitted by applicable
law.
2.17 Taxes. (a) Any and all payments by the Borrower hereunder or under any
Note shall be made, in accordance with the terms hereof and thereof, free and
clear of and without deduction for any and all present or future taxes, levies,
imposts, deductions, charges or withholdings, and all liabilities with respect
thereto, other than net income and franchise taxes imposed on the Agent or any
Lender by the United States or by the jurisdiction under the laws of which the
Agent or such Lender, as the case may be, is organized or in which its principal
office or (in the case of a Lender) its applicable Lending Office is located, or
any political subdivision or taxing authority thereof (all such nonexcluded
taxes, 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 hereunder or under any
Note to the Agent or any Lender, (i) the sum payable shall be increased as may
be necessary so that after making all required deductions (including deductions
applicable to additional sums payable under this Section), the Agent or such
Lender, as the case may be, receives an amount equal to the sum it would have
received had no such deductions been made, (ii) the Borrower will make such
deductions, (iii) the Borrower will pay the full amount deducted to the relevant
taxation authority or other authority in accordance with applicable law and (iv)
the Borrower will deliver to the Agent or such Lender, as the case may be,
evidence of such payment.
(b) The Borrower will indemnify the Agent and each Lender for the full
amount of Taxes (including, without limitation, any Taxes imposed by any
jurisdiction on amounts payable under this Section) paid by the Agent or such
Lender, as the case may be, and any liability (including penalties, interest and
expenses) arising therefrom or with respect thereto, whether or not such Taxes
were correctly or legally asserted. This indemnification shall be made within 30
days from the date the Agent or such Lender, as the case may be, makes written
demand therefor.
(c) Each of the Agent and the Lenders agrees that if it subsequently
recovers, or receives a permanent net tax benefit with respect to, any amount of
Taxes (i) previously paid by it and as to which it has been indemnified by or on
behalf of the Borrower or (ii) previously deducted by the Borrower (including,
without limitation, any Taxes deducted from any additional sums payable under
clause (i) of subsection (a) above), the Agent or such Lender, as
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the case may be, shall reimburse the Borrower to the extent of the amount of any
such recovery or permanent net tax benefit (but only to the extent of indemnity
payments made, or additional amounts paid, by or on behalf of the Borrower under
this Section with respect to the Taxes giving rise to such recovery or tax
benefit, together with the amount recovered by the Agent or such Lender as
interest attributable to the amount to be reimbursed to the Borrower hereunder);
provided, however, that the Borrower, upon the request of the Agent or such
Lender, agrees to repay to the Agent or such Lender, as the case may be, the
amount paid over to the Borrower (together with any penalties, interest or other
charges), in the event the Agent or such Lender is required to repay such amount
and/or such penalties, interest or other charges, as the case may be, to the
relevant taxing authority or other Governmental Authority. The determination by
the Agent or any Lender of the amount of any such recovery or permanent net tax
benefit shall be, in the absence of manifest error, be conclusive and binding,
provided such determination is made in good faith and documented in reasonable
detail in a certificate to the Borrower.
(d) If any Lender is incorporated or organized under the laws of a
jurisdiction other than the United States of America or any state thereof (a
"Non-U.S. Lender") and claims exemption from United States withholding tax
pursuant to the Internal Revenue Code, such Non-U.S. Lender will deliver to each
of the Agent and the Borrower, on or prior to the Closing Date (or, in the case
of a Non-U.S. Lender that becomes a party to this Agreement as a result of an
assignment after the Closing Date, on the effective date of such assignment),
(i) in the case of a Non-U.S. Lender that is a "bank" for purposes of Section
881(c)(3)(A) of the Internal Revenue Code, a properly completed Internal Revenue
Service Form 4224 or 1001, as applicable (or successor forms), certifying that
such Non-U.S. Lender is entitled to an exemption from or a reduction of
withholding or deduction for or on account of United States federal income taxes
in connection with payments under this Agreement or any of the Notes, together
with a properly completed Internal Revenue Service Form W-8 or W-9, as
applicable (or successor forms), and (ii) in the case of a Non-U.S. Lender that
is not a "bank" for purposes of Section 881(c)(3)(A) of the Internal Revenue
Code, a certificate in form and substance reasonably satisfactory to the Agent
and the Borrower and to the effect that (x) such Non-U.S. Lender is not a "bank"
for purposes of Section 881(c)(3)(A) of the Internal Revenue Code, is not
subject to regulatory or other legal requirements as a bank in any jurisdiction,
and has not been treated as a bank for purposes of any tax, securities law or
other filing or submission made to any governmental authority, any application
made to a rating agency or qualification for any exemption from any tax,
securities law or other legal requirements, (y) is not a 10-percent shareholder
for purposes of Section 881(c)(3)(B) of the Internal Revenue Code and (z) is not
a controlled foreign corporation receiving interest from a related person for
purposes of Section 881(c)(3)(C) of the Internal Revenue Code, together with a
properly completed Internal Revenue Service Form W-8 or W-9, as applicable (or
successor forms). Each such Non-U.S. Lender further agrees to deliver to each of
the Agent and the Borrower an additional copy of each such relevant form on or
before the date that such form expires or becomes obsolete or after the
occurrence of any event (including a change in its applicable Lending Office)
requiring a change in the most recent forms so delivered by it, in each case
certifying that such Non-U.S. Lender is entitled to an exemption from or a
reduction of withholding or deduction for or on account of United States federal
income taxes in connection with payments under this Agreement or any of the
Notes, unless an event (including, without limitation, any change in treaty, law
or regulation) has occurred prior to the date on which any such delivery would
otherwise be required, which event renders all such forms
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inapplicable or the exemption to which such forms relate unavailable and such
Non-U.S. Lender notifies the Agent and the Borrower that it is not entitled to
receive payments without deduction or withholding of United States federal
income taxes. Each such Non-U.S. Lender will promptly notify the Agent and the
Borrower of any changes in circumstances that would modify or render invalid any
claimed exemption or reduction.
(e) If any Lender is entitled to a reduction in (and not a complete
exemption from) the applicable withholding tax, the Borrower and the Agent may
withhold from any interest payment to such Lender an amount equivalent to the
applicable withholding tax after taking into account such reduction. If any of
the forms or other documentation required under subsection (d) above are not
delivered to the Agent as therein required or if a Non-U.S. Lender is not
entitled to receive payments without deduction or withholding, then the Borrower
and the Agent may withhold from any interest payment to such Lender not
providing such forms or other documentation an amount equivalent to the
applicable withholding tax.
2.18 Compensation. The Borrower will compensate each Lender upon demand for
all losses, expenses and liabilities (including, without limitation, any loss,
expense or liability incurred by reason of the liquidation or reemployment of
deposits or other funds required by such Lender to fund or maintain LIBOR Loans)
that such Lender may incur or sustain (i) if for any reason (other than a
default by such Lender) a Borrowing or continuation of, or conversion into, a
LIBOR Loan does not occur on a date specified therefor in a Notice of Borrowing
or Notice of Conversion/Continuation, (ii) if any repayment, prepayment or
conversion of any LIBOR Loan occurs on a date other than the last day of an
Interest Period applicable thereto (including as a consequence of acceleration
of the maturity of the Loans pursuant to Section 9.2), (iii) if any prepayment
of any LIBOR Loan is not made on any date specified in a notice of prepayment
given by the Borrower or (iv) as a consequence of any other failure by the
Borrower to make any payments with respect to any LIBOR Loan when due hereunder.
Calculation of all amounts payable to a Lender under this Section shall be made
as though such Lender had actually funded its relevant LIBOR Loan through the
purchase of a Eurodollar deposit bearing interest at the LIBOR Rate in an amount
equal to the amount of such LIBOR Loan, having a maturity comparable to the
relevant Interest Period; provided, however, that each Lender may fund its LIBOR
Loans in any manner it sees fit and the foregoing assumption shall be utilized
only for the calculation of amounts payable under this Section. Determinations
by any Lender for purposes of this Section of any such losses, expenses or
liabilities shall, absent manifest error, be conclusive, provided that such
determinations are made in good faith and documented in reasonable detail in a
certificate delivered to the Borrower.
ARTICLE III
LETTERS OF CREDIT
3.1 Issuance. Subject to and upon the terms and conditions herein set
forth, so long as no Default or Event of Default has occurred and is continuing,
the Issuing Lender will, at any time and from time to time on and after the
Closing Date and prior to the earlier of (i) the seventh day prior to the
Maturity Date and (ii) the Termination Date, and upon request by the Borrower
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in accordance with the provisions of Section 3.2, issue for the account of PAIC
one or more irrevocable standby letters of credit denominated in Dollars and in
a form customarily used or otherwise approved by the Issuing Lender (together
with all amendments, modifications and supplements thereto, substitutions
therefor and renewals and restatements thereof, collectively, the "Letters of
Credit"). The Stated Amount of each Letter of Credit shall not be less than such
amount as may be reasonably acceptable to the Issuing Lender. Notwithstanding
the foregoing:
(a) No Letter of Credit shall be issued the Stated Amount upon issuance of
which (i) when added to the aggregate Letter of Credit Exposure of the Lenders
at such time, would exceed $1,000,000 or (ii) when added to the sum of (y) the
aggregate Letter of Credit Exposure of all Lenders at such time and (z) the
aggregate principal amount of all Loans then outstanding, would exceed the
aggregate Commitments at such time;
(b) No Letter of Credit shall be issued that by its terms expires later
than the seventh day prior to the Maturity Date or, in any event, more than one
(1) year after its date of issuance; provided, however, that a Letter of Credit
may, if requested by the Borrower, provide by its terms, and on terms acceptable
to the Issuing Lender, for renewal for successive periods of one year or less
(but not beyond the seventh day prior to the Maturity Date), unless and until
the Issuing Lender shall have delivered a notice of nonrenewal to the
beneficiary of such Letter of Credit; and
(c) The Issuing Lender shall be under no obligation to issue any Letter of
Credit if, at the time of such proposed issuance, (i) any order, judgment or
decree of any Governmental Authority or arbitrator shall purport by its terms to
enjoin or restrain the Issuing Lender from issuing such Letter of Credit, or any
Requirement of Law applicable to the Issuing Lender or any request or directive
(whether or not having the force of law) from any Governmental Authority with
jurisdiction over the Issuing Lender shall prohibit, or request that the Issuing
Lender refrain from, the issuance of letters of credit generally or such Letter
of Credit in particular or shall impose upon the Issuing Lender with respect to
such Letter of Credit any restriction or reserve or capital requirement (for
which the Issuing Lender is not otherwise compensated) not in effect on the
Closing Date, or any unreimbursed loss, cost or expense that was not applicable,
in effect or known to the Issuing Lender as of the Closing Date and that the
Issuing Lender in good faith deems material to it, or (ii) the Issuing Lender
shall have actual knowledge, or shall have received notice from any Lender,
prior to the issuance of such Letter of Credit that one or more of the
conditions specified in Sections 4.1 (if applicable) or 4.2 are not then
satisfied and/or have not been waived in writing as required herein or that the
issuance of such Letter of Credit would violate the provisions of subsection (a)
above.
3.2 Notices. Whenever PAIC desires the issuance of a Letter of Credit, the
Borrower will give the Issuing Lender written notice with a copy to the Agent
not later than 11:00 a.m., Charlotte time, three (3) Business Days (or such
shorter period as is acceptable to the Issuing Lender in its sole discretion in
any given case) prior to the requested date of issuance thereof. Each such
notice (each, a "Letter of Credit Notice") shall be irrevocable, shall be given
in the form of Exhibit B-3 and shall specify (i) the requested date of issuance,
which shall be a Business Day, (ii) the requested Stated Amount and expiry date
of the Letter of Credit, and (iii) the name and address of the requested
beneficiary or beneficiaries of the Letter of Credit.
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The Borrower will also complete (and if requested by the Issuing Lender, the
Borrower will cause PAIC to complete jointly with the Borrower) any application
procedures and documents required by the Issuing Lender in connection with the
issuance of any Letter of Credit. Upon its issuance of any Letter of Credit, the
Issuing Lender will promptly notify the Agent of such issuance, and the Agent
will give prompt notice thereof to each Lender.
3.3 Participations. Immediately upon the issuance of any Letter of Credit,
the Issuing Lender shall be deemed to have sold and transferred to each Lender,
and each Lender shall be deemed irrevocably and unconditionally to have
purchased and received from the Issuing Lender, without recourse or warranty, an
undivided interest and participation, pro rata (based on the percentage of the
aggregate Commitments represented by such Lender's Commitment), in such Letter
of Credit, each drawing made thereunder and the obligations of the Borrower
under this Agreement with respect thereto and any security therefor or guaranty
pertaining thereto; provided, however, that the fee relating to Letters of
Credit described in Section 2.9(d) shall be payable directly to the Issuing
Lender as provided therein, and the Lenders shall have no right to receive any
portion thereof. Upon any change in the Commitments of any of the Lenders
pursuant to Section 11.7(a), with respect to all outstanding Letters of Credit
and Reimbursement Obligations there shall be an automatic adjustment to the
participations pursuant to this Section to reflect the new pro rata shares of
the assigning Lender and the Assignee.
3.4 Reimbursement. The Borrower hereby agrees to reimburse the Issuing
Lender by making payment to the Agent, for the account of the Issuing Lender, in
immediately available funds, for any payment made by the Issuing Lender under
any Letter of Credit (each such amount so paid until reimbursed, together with
interest thereon payable as provided hereinbelow, a "Reimbursement Obligation")
immediately after, and in any event within one (1) Business Day after its
receipt of notice of, such payment (provided that any such Reimbursement
Obligation shall be deemed timely satisfied (but nevertheless subject to the
payment of interest thereon as provided hereinbelow) if satisfied pursuant to a
Borrowing of Loans made on or prior to the next Business Day following the date
of the Borrower's receipt of notice of such payment), together with interest on
the amount so paid by the Issuing Lender, to the extent not reimbursed prior to
1:00 p.m., Charlotte time, on the date of such payment or disbursement, for the
period from the date of the respective payment to the date the Reimbursement
Obligation created thereby is satisfied, at the Adjusted Base Rate applicable to
Loans as in effect from time to time during such period, such interest also to
be payable on demand. The Issuing Lender will provide the Agent and the Borrower
with prompt notice of any payment or disbursement made under any Letter of
Credit, although the failure to give, or any delay in giving, any such notice
shall not release, diminish or otherwise affect the Borrower's obligations under
this Section or any other provision of this Agreement. The Agent will promptly
pay to the Issuing Lender any such amounts received by it under this Section.
3.5 Payment by Loans. In the event that the Issuing Lender makes any
payment under any Letter of Credit and the Borrower shall not have timely
satisfied in full its Reimbursement Obligation to the Issuing Lender pursuant to
Section 3.4, and to the extent that any amounts then held in the Cash Collateral
Account established pursuant to Section 3.8 shall be insufficient to satisfy
such Reimbursement Obligation in full, the Issuing Lender will promptly notify
the Agent, and the Agent will promptly notify each Lender, of such failure. If
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the Agent gives such notice prior to 11:00 a.m., Charlotte time, on any Business
Day, each Lender will make available to the Agent, for the account of the
Issuing Lender, its pro rata share (based on the percentage of the aggregate
Commitments represented by such Lender's Commitment) of the amount of such
payment on such Business Day in immediately available funds. If the Agent gives
such notice after 11:00 a.m., Charlotte time, on any Business Day, each such
Lender shall make its pro rata share of such amount available to the Agent on
the next succeeding Business Day. If and to the extent any Lender shall not have
so made its pro rata share of the amount of such payment available to the Agent,
such Lender agrees to pay to the Agent, for the account of the Issuing Lender,
forthwith on demand such amount, together with interest thereon at the Federal
Funds Rate for each day from such date until the date such amount is paid to the
Agent. The failure of any Lender to make available to the Agent its pro rata
share of any payment under any Letter of Credit shall not relieve any other
Lender of its obligation hereunder to make available to the Agent its pro rata
share of any payment under any Letter of Credit on the date required, as
specified above, but no Lender shall be responsible for the failure of any other
Lender to make available to the Agent such other Lender's pro rata share of any
such payment. Each such payment by a Lender under this Section of its pro rata
share of an amount paid by the Issuing Lender shall constitute a Loan by such
Lender (the Borrower being deemed to have given a timely Notice of Borrowing
therefor) and shall be treated as such for all purposes of this Agreement;
provided that for purposes of determining the aggregate Unutilized Commitments
immediately prior to giving effect to the application of the proceeds of such
Loans, the Reimbursement Obligation being satisfied thereby shall be deemed not
to be outstanding at such time.
3.6 Payment to Lenders. Whenever the Issuing Lender receives a payment in
respect of a Reimbursement Obligation as to which the Agent has received, for
the account of the Issuing Lender, any payments from the Lenders pursuant to
Section 3.5, the Issuing Lender will promptly pay to the Agent, and the Agent
will promptly pay to each Lender that has paid its pro rata share thereof, in
immediately available funds, an amount equal to such Lender's ratable share
(based on the proportionate amount funded by such Lender to the aggregate amount
funded by all Lenders) of such Reimbursement Obligation.
3.7 Obligations Absolute. The Reimbursement Obligations of the Borrower,
and the obligations of the Lenders under Section 3.5 to make payments to the
Agent, for the account of the Issuing Lender, with respect to Letters of Credit,
shall be irrevocable, shall remain in effect until the Issuing Lender shall have
no further obligations to make any payments or disbursements under any
circumstances with respect to any Letter of Credit, and, except to the extent
resulting from any gross negligence or willful misconduct on the part of the
Issuing Lender, shall be absolute and unconditional, shall not be subject to
counterclaim, setoff or other defense or any other qualification or exception
whatsoever and shall be made in accordance with the terms and conditions of this
Agreement under all circumstances, including, without limitation, any of the
following circumstances:
(a) Any lack of validity or enforceability of this Agreement, any of the
other Credit Documents or any documents or instruments relating to any Letter of
Credit;
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(b) Any change in the time, manner or place of payment of, or in any other
term of, all or any of the Obligations in respect of any Letter of Credit or any
other amendment, modification or waiver of or any consent to departure from any
Letter of Credit or any documents or instruments relating thereto, in each case
whether or not the Borrower has notice or knowledge thereof;
(c) The existence of any claim, setoff, defense or other right that the
Borrower may have at any time against a beneficiary named in a Letter of Credit,
any transferee of any Letter of Credit (or any Person for whom any such
transferee may be acting), the Agent, the Issuing Lender, any Lender or other
Person, whether in connection with this Agreement, any Letter of Credit, the
transactions contemplated hereby or any unrelated transactions (including any
underlying transaction between PAIC and the beneficiary named in any such Letter
of Credit);
(d) Any draft, certificate or any other document presented under the 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
(provided that such draft, certificate or other document appears on its face to
comply with the terms of such Letter of Credit), any errors, omissions,
interruptions or delays in transmission or delivery of any messages, by mail,
telecopier or otherwise, or any errors in translation or in interpretation of
technical terms;
(e) Any defense based upon the failure of any drawing under a Letter of
Credit to conform to the terms of the Letter of Credit (provided that any draft,
certificate or other document presented pursuant to such Letter of Credit
appears on its face to comply with the terms thereof), any nonapplication or
misapplication by the beneficiary or any transferee of the proceeds of such
drawing or any other act or omission of such beneficiary or transferee in
connection with such Letter of Credit;
(f) The exchange, release, surrender or impairment of any security for the
Obligations;
(g) The occurrence of any Default or Event of Default; or
(h) Any other circumstance or event whatsoever, including, without
limitation, any other circumstance that might otherwise constitute a defense
available to, or a discharge of, the Borrower or a guarantor.
Any action taken or omitted to be taken by the Issuing Lender under or in
connection with any Letter of Credit, if taken or omitted in the absence of
gross negligence or willful misconduct, shall be binding upon the Borrower and
each Lender and shall not create or result in any liability of the Issuing
Lender to the Borrower or any Lender. It is expressly understood and agreed
that, for purposes of determining whether a wrongful payment under a Letter of
Credit resulted from the Issuing Lender's gross negligence or willful
misconduct, (i) the Issuing Lender's acceptance of documents that appear on
their face to comply with the terms of such Letter of Credit, without
responsibility for further investigation, regardless of any notice or
information to the contrary, (ii) the Issuing Lender's exclusive reliance on the
documents presented to it under such Letter of Credit as to any and all matters
set forth therein, including the amount of any draft presented
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under such Letter of Credit, whether or not the amount due to the beneficiary
thereunder equals the amount of such draft and whether or not any document
presented pursuant to such Letter of Credit proves to be insufficient in any
respect (so long as such document appears on its face to comply with the terms
of such Letter of Credit), and whether or not any other statement or any other
document presented pursuant to such Letter of Credit proves to be forged or
invalid or any statement therein proves to be inaccurate or untrue in any
respect whatsoever, and (iii) any noncompliance in any immaterial respect of the
documents presented under such Letter of Credit with the terms thereof shall, in
each case, be deemed not to constitute gross negligence or willful misconduct of
the Issuing Lender.
3.8 Cash Collateral Account. At any time and from time to time (i) after
the occurrence and during the continuance of an Event of Default, the Agent, at
the direction or with the consent of the Required Lenders, may require the
Borrower to deliver to the Agent such additional amount of cash as is equal to
the aggregate Stated Amount of all Letters of Credit at any time outstanding
(whether or not any beneficiary under any Letter of Credit shall have drawn or
be entitled at such time to draw thereunder) and (ii) in the event of a
prepayment under Section 2.6(b), or to the extent any amount of a required
prepayment under Section 2.6(c) remains after prepayment of all outstanding
Loans and Reimbursement Obligations , as contemplated by such subsections, the
Agent will retain such amount as may then be required to be retained, such
amounts in each case under clauses (i) and (ii) above to be held by the Agent in
a cash collateral account (the "Cash Collateral Account"). The Borrower hereby
grants to the Agent, for the benefit of the Issuing Lender and the Lenders, a
Lien upon and security interest in the Cash Collateral Account and all amounts
held therein from time to time as security for Letter of Credit Exposure, and
for application to the Borrower's Reimbursement Obligations as and when the same
shall arise. The Agent shall have exclusive dominion and control, including the
exclusive right of withdrawal, over such account. Other than any interest on the
investment of such amounts in Cash Equivalents, which investments shall be made
at the direction of the Borrower (unless a Default or Event of Default shall
have occurred and be continuing, in which case the determination as to
investments shall be made at the option and in the discretion of the Agent),
amounts in the Cash Collateral Account shall not bear interest. Interest and
profits, if any, on such investments shall accumulate in such account. In the
event of a drawing, and subsequent payment by the Issuing Lender, under any
Letter of Credit at any time during which any amounts are held in the Cash
Collateral Account, the Agent will deliver to the Issuing Lender an amount equal
to the Reimbursement Obligation created as a result of such payment (or, if the
amounts so held are less than such Reimbursement Obligation, all of such
amounts) to reimburse the Issuing Lender therefor. Any amounts remaining in the
Cash Collateral Account after the expiration of all Letters of Credit and
reimbursement in full of the Issuing Lender for all of its obligations
thereunder shall be held by the Agent, for the benefit of the Borrower, to be
applied against the Obligations in such order and manner as the Borrower (so
long as no Default or Event of Default has occurred and is continuing, and
otherwise the Agent) may direct. If the Borrower is required to provide cash
collateral pursuant to Section 2.6(b), such amount (to the extent not applied as
aforesaid) shall be returned to the Borrower on demand, provided that after
giving effect to such return (i) the sum of (y) the aggregate principal amount
of all Loans outstanding at such time and (z) the aggregate Letter of Credit
Exposure of all Lenders at such time would not exceed the aggregate Commitments
at such time and (ii) no Default or Event of Default shall have occurred and be
continuing at such time. If the Borrower is required to
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provide cash collateral as a result of an Event of Default, such amount (to the
extent not applied as aforesaid) shall be returned to the Borrower within three
(3) Business Days after all Events of Default have been cured or waived.
3.9 Effectiveness. Notwithstanding any termination of the Commitments or
repayment of the Loans, or both, the obligations of the Borrower under this
Article shall remain in full force and effect until the Issuing Lender and the
Lenders shall have no further obligations to make any payments or disbursements
under any circumstances with respect to any Letter of Credit.
ARTICLE IV
CONDITIONS OF BORROWING
4.1 Conditions of Initial Borrowing. The obligation of each Lender to make
Loans in connection with the initial Borrowing hereunder, and the obligation of
the Issuing Lender to issue Letters of Credit hereunder on the Closing Date, is
subject to the satisfaction of the following conditions precedent:
(a) The Agent shall have received the following, each dated as of the
Closing Date (unless otherwise specified) and, except for the Notes, in
sufficient copies for each Lender:
(i) A Note for each Lender that is a party hereto as of the Closing
Date, in the amount of such Lender's Commitment, each duly completed in
accordance with the relevant provisions of Section 2.4 and executed by the
Borrower;
(ii) the favorable opinion of Reed Smith Shaw & McClay LLP, special
counsel to the Borrower, in substantially the form of Exhibit E, addressed
to the Agent and the Lenders and addressing such other matters as the Agent
or any Lender may reasonably request.
(b) The Agent shall have received a certificate, signed by the president,
the chief executive officer or the chief financial officer of the Borrower, in
form and substance satisfactory to the Agent, certifying that (i) all
representations and warranties of the Borrower contained in this Agreement and
the other Credit Documents are true and correct as of the Closing Date, both
immediately before and after giving effect to the consummation of the
transactions contemplated hereby, the making of the initial Loans hereunder and
the application of the proceeds thereof, (ii) no Default or Event of Default has
occurred and is continuing, both immediately before and after giving effect to
the consummation of the transactions contemplated hereby, the making of the
initial Loans hereunder and the application of the proceeds thereof, (iii) there
are no insurance regulatory proceedings pending or, to such individual's
knowledge, threatened against any of the Insurance Subsidiaries in any
jurisdiction that, if adversely determined, would be reasonably likely to have a
Material
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Adverse Effect; (iv) both immediately before and after giving effect to the
consummation of the transactions contemplated hereby, the making of the initial
Loans hereunder and the application of the proceeds thereof, no Material Adverse
Change has occurred since December 31, 1997, and there exists no event,
condition or state of facts that could reasonably be expected to result in a
Material Adverse Change, and (v) all conditions to the initial extensions of
credit hereunder set forth in this Section and in Section 4.2 have been
satisfied or waived as required hereunder.
(c) The Agent shall have received a certificate of the secretary or an
assistant secretary of the Borrower, in form and substance satisfactory to the
Agent, certifying (i) that attached thereto is a true and complete copy of the
articles or certificate of incorporation and all amendments thereto of the
Borrower, certified as of a recent date by the Secretary of State (or comparable
Governmental Authority) of its jurisdiction of organization, and that the same
has not been amended since the date of such certification, (ii) that attached
thereto is a true and complete copy of the bylaws of the Borrower, as then in
effect and as in effect at all times from the date on which the resolutions
referred to in clause (iii) below were adopted to and including the date of such
certificate, and (iii) that attached thereto is a true and complete copy of
resolutions adopted by the board of directors of the Borrower authorizing the
execution, delivery and performance of this Agreement and the other Credit
Documents to which it is a party, and as to the incumbency and genuineness of
the signature of each officer of the Borrower executing this Agreement or any of
such other Credit Documents, and attaching all such copies of the documents
described above.
(d) The Agent shall have received (i) a certificate as of a recent date of
the good standing of each of the Borrower and its Material Subsidiaries under
the laws of its jurisdiction of organization, from the Secretary of State (or
comparable Governmental Authority) of such jurisdiction; and (ii) as to each
Material Insurance Subsidiary, a certificate of compliance as of a recent date,
issued by the Insurance Regulatory Authority of its jurisdiction of legal
domicile and any other jurisdiction in which such Insurance Subsidiary is
reasonably likely to be commercially domiciled as defined under the laws and
regulations of such jurisdiction.
(e) All legal matters, documentation, and corporate or other proceedings
incident to the transactions contemplated hereby shall be satisfactory in form
and substance to the Agent; all approvals, permits and consents of any
Governmental Authorities (including, without limitation, all relevant Insurance
Regulatory Authorities) or other Persons required in connection with the
execution and delivery of this Agreement and the other Credit Documents and the
consummation of the transactions contemplated hereby and thereby shall have been
obtained, without the imposition of conditions that are not acceptable to the
Agent, and all related filings, if any, shall have been made, and all such
approvals, permits, consents and filings shall be in full force and effect and
the Agent shall have received such copies thereof as it shall have requested;
all applicable waiting periods shall have expired without any adverse action
being taken by any Governmental Authority having jurisdiction; and no action,
proceeding, investigation, regulation or legislation shall have been instituted,
threatened or proposed before, and no order, injunction or decree shall have
been entered by, any court or other Governmental Authority, in each case to
enjoin, restrain or prohibit, to obtain substantial damages in respect of, or
that is otherwise related to or arises out of, this Agreement, any of the other
Credit Documents or the consummation of the transactions contemplated hereby or
thereby, or that, in the opinion of the Agent, could reasonably be expected to
have a Material Adverse Effect.
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(f) The Agent shall have received certified reports from an independent
search service satisfactory to it listing any judgment or tax lien filing or
Uniform Commercial Code financing statement that names the Borrower or any
Material Subsidiary as debtor, and the results thereof shall be satisfactory to
the Agent.
(g) Since December 31, 1997, both immediately before and after giving
effect to the consummation of the transactions contemplated by this Agreement,
there shall not have occurred any Material Adverse Change or any event,
condition or state of facts that could reasonably be expected to result in a
Material Adverse Change.
(h) The Borrower shall have paid (i) to First Union, the unpaid balance of
the fees described in paragraphs (1) and (2) of the Fee Letter, and (ii) all
other fees and expenses of the Agent and the Lenders required hereunder or under
any other Credit Document to be paid on or prior to the Closing Date (including
fees and expenses of counsel) in connection with this Agreement and the
transactions contemplated hereby.
(i) The Agent shall have received the financial statements as described in
Sections 5.11(a) and 5.11(e), all of which shall be in form and substance
satisfactory to the Agent.
(j) The Agent shall have received a Financial Condition Certificate,
together with the Pro Forma Balance Sheet and the Projections as described in
Sections 5.11(b) and 5.11(c), all of which shall be in form and substance
satisfactory to the Agent.
(k) The Agent shall have received a Covenant Compliance Worksheet, duly
completed and certified by the chief financial officer of the Borrower and in
form and substance satisfactory to the Agent, demonstrating the Borrower's
compliance with the financial covenants set forth in Sections 7.1 through 7.6,
determined on a pro forma basis as of June 30, 1998 after giving effect to the
making of the initial Loans hereunder and the consummation of the transactions
contemplated hereby.
(l) The Agent shall be satisfied with the certification with respect to an
actuarial review and valuation statement of, and opinion as to the adequacy of,
each Insurance Subsidiary's loss and loss adjustment expense reserve positions
as of December 31, 1997, with respect to the insurance business then in force,
prepared and given by an independent actuarial firm acceptable to the Agent; and
such certification and opinion shall not differ in any material and negative
respect from any such materials previously delivered to the Agent.
(m) The Agent shall have received satisfactory confirmation from A.M. Best
& Company that PAIC's current rating is "A-" or better.
(n) The Consolidated Net Worth of the Borrower shall not be less than
$90,000,000 as of the Closing Date.
(o) The Agent shall have received a Federal Reserve Form U-1 for each
Lender, duly executed by an Authorized Officer of the Borrower, the statements
made in which shall be such,
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in the opinion of the Agent, as to permit the transactions contemplated by this
Agreement in accordance with Regulation U.
(p) The Agent shall have received an Account Designation Letter, together
with written instructions from an Authorized Officer, including wire transfer
information, directing the payment of the proceeds of the initial Loans to be
made hereunder.
(q) The Agent shall have received the Fee Letter.
(r) The Agent and each Lender shall have received such other documents,
certificates, opinions and instruments in connection with the transactions
contemplated hereby as it shall have reasonably requested.
4.2 Conditions of All Borrowings. The obligation of each Lender to make any
Loans hereunder, including the initial Loans, and the obligation of the Issuing
Lender to issue any Letters of Credit hereunder, is subject to the satisfaction
of the following conditions precedent on the relevant Borrowing Date or date of
issuance:
(a) The Agent shall have received a Notice of Borrowing in accordance with
Section 2.2(b), or (together with the Issuing Lender) a Letter of Credit Notice
in accordance with Section 3.2, as applicable;
(b) Each of the representations and warranties contained in Article V and
in the other Credit Documents shall be true and correct on and as of such
Borrowing Date (including the Closing Date, in the case of the initial Loans
made hereunder) or date of issuance with the same effect as if made on and as of
such date, both immediately before and after giving effect to the Loans to be
made or Letter of Credit to be issued on such date (except to the extent any
such representation or warranty is expressly stated to have been made as of a
specific date, in which case such representation or warranty shall be true and
correct in all material respects as of such date); and
(c) No Default or Event of Default shall have occurred and be continuing on
such date, both immediately before and after giving effect to the Loans to be
made or Letter of Credit to be issued on such date.
Each giving of a Notice of Borrowing or a Letter of Credit Notice, and the
consummation of each Borrowing or issuance of a Letter of Credit, shall be
deemed to constitute a representation by the Borrower that the statements
contained in subsections (b) and (c) above are true, both as of the date of such
notice or request and as of the relevant Borrowing Date or date of issuance.
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ARTICLE V
REPRESENTATIONS AND WARRANTIES
To induce the Agent and the Lenders to enter into this Agreement and to
induce the Lenders to extend the credit contemplated hereby, the Borrower
represents and warrants to the Agent and the Lenders as follows:
5.1 Corporate Organization and Power. Each of the Borrower and its
Subsidiaries (i) is a corporation duly organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation, (ii) has the
full corporate power and authority to execute, deliver and perform the Credit
Documents to which it is or will be a party, to own and hold its property and to
engage in its business as presently conducted, and (iii) is duly qualified to do
business as a foreign corporation and is in good standing in each jurisdiction
where the nature of its business or the ownership of its properties requires it
to be so qualified, except where the failure to be so qualified would not,
individually or in the aggregate, be reasonably likely to have a Material
Adverse Effect.
5.2 Authorization; Enforceability. Each of the Borrower and its
Subsidiaries has taken, or on the Closing Date will have taken, all necessary
corporate action to execute, deliver and perform each of the Credit Documents to
which it is or will be a party, and has, or on the Closing Date (or any later
date of execution and delivery) will have, validly executed and delivered each
of the Credit Documents to which it is or will be a party. This Agreement
constitutes, and each of the other Credit Documents upon execution and delivery
will constitute, the legal, valid and binding obligation of each of the Borrower
and its Subsidiaries that is a party hereto or thereto, enforceable against it
in accordance with its terms, except as enforceability may be limited by
bankruptcy, insolvency, reorganization, moratorium or other similar laws
affecting creditors' rights generally, by general equitable principles or by
principles of good faith and fair dealing.
5.3 No Violation. The execution, delivery and performance by each of the
Borrower and its Subsidiaries of this Agreement and each of the other Credit
Documents to which it is or will be a party, and compliance by it with the terms
hereof and thereof, do not and will not (i) violate any provision of its
articles or certificate of incorporation or bylaws or contravene any other
Requirement of Law applicable to it, (ii) conflict with, result in a breach of
or constitute (with notice, lapse of time or both) a default under any
indenture, agreement or other instrument to which it is a party, by which it or
any of its properties is bound or to which it is subject, or (iii) except to the
Agent for the benefit of the Issuing Lender and the Lenders, result in or
require the creation or imposition of any Lien upon any of its properties or
assets. No Subsidiary is a party to any agreement or instrument or otherwise
subject to any restriction or encumbrance that restricts or limits its ability
to make dividend payments or other distributions in respect of its Capital
Stock, to repay Indebtedness owed to the Borrower or any other Subsidiary, to
make loans or advances to the Borrower or any other Subsidiary, or to transfer
any of its assets or properties to the Borrower or any other Subsidiary, in each
case other than such restrictions or encumbrances existing under or by reason of
the Credit Documents or applicable Requirements of Law.
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5.4 Governmental and Third-Party Authorization; Permits. (a) No consent,
approval, authorization or other action by, notice to, or registration or filing
with, any Governmental Authority or other Person is or will be required as a
condition to or otherwise in connection with the due execution, delivery and
performance by each of the Borrower and its Subsidiaries of this Agreement or
any of the other Credit Documents to which it is or will be a party or the
legality, validity or enforceability hereof or thereof, other than (i) consents,
authorizations and filings that have been (or on or prior to the Closing Date
will have been) made or obtained and that are (or on the Closing Date will be)
in full force and effect, which consents, authorizations and filings are listed
on Schedule 5.4, and (ii) consents and filings the failure to obtain or make
which would not, individually or in the aggregate, have a Material Adverse
Effect.
(b) Each of the Borrower and its Subsidiaries has, and is in good standing
with respect to, all governmental approvals, licenses, permits and
authorizations necessary to conduct its business as presently conducted and to
own or lease and operate its properties, except for those the failure to obtain
which would not be reasonably likely, individually or in the aggregate, to have
a Material Adverse Effect.
(c) Schedule 5.4 lists with respect to each Material Insurance Subsidiary,
as of the Closing Date, all of the jurisdictions in which such Material
Insurance Subsidiary holds licenses (including, without limitation, licenses or
certificates of authority from relevant Insurance Regulatory Authorities),
permits or authorizations to transact insurance and reinsurance business
(collectively, the "Licenses"), and indicates the line or lines of insurance in
which each such Material Insurance Subsidiary is permitted to be engaged with
respect to each License therein listed. To the knowledge of the Borrower, (i) no
such License is the subject of a proceeding for suspension, revocation or
limitation or any similar proceedings; (ii) there is no sustainable basis for
such a suspension, revocation or limitation; and (iii) no such suspension,
revocation or limitation is threatened by any relevant Insurance Regulatory
Authority. No Material Insurance Subsidiary transacts any insurance business,
directly or indirectly, in any jurisdiction other than those listed on Schedule
5.4, where such business requires any license, permit or other authorization of
an Insurance Regulatory Authority of such jurisdiction.
5.5 Litigation. There are no actions, investigations, suits or proceedings
pending or, to the knowledge of the Borrower, threatened, at law, in equity or
in arbitration, before any court, other Governmental Authority or other Person,
(i) against or affecting the Borrower, any of its Subsidiaries or any of their
respective properties that would, if adversely determined, be reasonably likely
to have a Material Adverse Effect, other than actions, investigations, suits or
proceedings arising in the ordinary course of business of the Insurance
Subsidiaries for which reserves have been prudently estimated and set aside in
accordance with sound and standard industry practices; or (ii) with respect to
this Agreement or any of the other Credit Documents.
5.6 Taxes. Each of the Borrower and its Subsidiaries has timely filed all
federal, state and local tax returns and reports required to be filed by it and
has paid all taxes, assessments, fees and other charges levied upon it or upon
its properties that are shown thereon as due and payable, other than those that
are being contested in good faith and by proper proceedings and for which
adequate reserves have been established in accordance with GAAP. Such returns
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accurately reflect in all material respects all liability for taxes of the
Borrower and its Subsidiaries for the periods covered thereby. There is no
ongoing audit or examination or, to the knowledge of the Borrower, other
investigation by any Governmental Authority of the tax liability of the Borrower
or any of its Subsidiaries, and there is no unresolved claim by any Governmental
Authority concerning the tax liability of the Borrower or any of its
Subsidiaries for any period for which tax returns have been or were required to
have been filed, other than claims for which adequate reserves have been
established in accordance with GAAP. Neither the Borrower nor any of its
Subsidiaries has waived or extended or has been requested to waive or extend the
statute of limitations relating to the payment of any taxes.
5.7 Subsidiaries. Schedule 5.7 sets forth a list, as of the Closing Date,
of all of the Subsidiaries of the Borrower and, as to each such Subsidiary, the
percentage ownership (direct and indirect) of the Borrower in each class of its
capital stock and each direct owner thereof and indicates in each case whether
such Subsidiary is a Material Subsidiary. Except for the shares of capital stock
expressly indicated on Schedule 5.7, there are no shares of capital stock,
warrants, rights, options or other equity securities, or other Capital Stock of
any Subsidiary of the Borrower outstanding or reserved for any purpose. All
outstanding shares of capital stock of each Subsidiary of the Borrower are duly
and validly issued, fully paid and nonassessable.
5.8 Full Disclosure. All factual information heretofore or
contemporaneously furnished to the Agent or any Lender in writing by or on
behalf of the Borrower or any of its Subsidiaries for purposes of or in
connection with this Agreement and the transactions contemplated hereby is, and
all other such factual information hereafter furnished to the Agent or any
Lender in writing by or on behalf of the Borrower or any of its Subsidiaries
will be, true and accurate in all material respects on the date as of which such
information is dated or certified (or, if such information has been amended or
supplemented, on the date as of which any such amendment or supplement is dated
or certified) and not made incomplete by omitting to state a material fact
necessary to make the statements contained therein, in light of the
circumstances under which such information was provided, not misleading.
5.9 Margin Regulations. Neither the Borrower nor any of its Subsidiaries 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. No
proceeds of the Loans will be used, directly or indirectly, to purchase or carry
any Margin Stock, to extend credit for such purpose or for any other purpose
that would violate or be inconsistent with Regulations T, U or X or any
provision of the Exchange Act.
5.10 No Material Adverse Change. There has been no Material Adverse Change
since December 31, 1997, and there exists no event, condition or state of facts
that could reasonably be expected to result in a Material Adverse Change.
5.11 Financial Matters. (a) The Borrower has heretofore furnished to the
Agent copies of (i) the audited consolidated balance sheets of the Borrower and
its Subsidiaries as of December 31, 1997, 1996, and 1995, and the related
statements of income, cash flows and stockholders' equity for the fiscal years
then ended, together with the opinion of KPMG Peat Marwick LLP thereon, and (ii)
the unaudited consolidated balance sheet of the Borrower and its
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Subsidiaries as of June 30, 1998, and the related statements of income, cash
flows and stockholders' equity for the six-month period then ended. Such
financial statements have been prepared in accordance with GAAP (subject, with
respect to the unaudited financial statements, to the absence of notes required
by GAAP and to normal year-end adjustments) and present fairly the financial
condition of the Borrower and its Subsidiaries on a consolidated basis as of the
respective dates thereof and the consolidated results of operations of the
Borrower and its Subsidiaries for the respective periods then ended. Except as
fully reflected in (x) the most recent financial statements referred to above
and the notes thereto, (y) the financial statements previously delivered
pursuant to Section 6.1, or (z) any Form 8-K filed by the Borrower with the
Securities and Exchange Commission and previously delivered by the Borrower to
Lenders, there are no material liabilities or obligations with respect to the
Borrower or any of its Subsidiaries of any nature whatsoever (whether absolute,
contingent or otherwise and whether or not due).
(b) The unaudited pro forma balance sheet of the Borrower as of June 30,
1998, a copy of which has heretofore been delivered to the Agent, gives pro
forma effect to the consummation of the initial extensions of credit made under
this Agreement, and the payment of transaction fees and expenses related to the
foregoing, all as if such events had occurred on such date (the "Pro Forma
Balance Sheet"). The Pro Forma Balance Sheet has been prepared in accordance
with GAAP (subject to the absence of footnotes required by GAAP and subject to
normal year-end adjustments) and, subject to stated assumptions made in good
faith and having a reasonable basis set forth therein, presents fairly the
financial condition of the Borrower on an unaudited pro forma basis as of the
date set forth therein after giving effect to the consummation of the
transactions described above.
(c) The Borrower has prepared, and has heretofore furnished to the Agent a
copy of, annual projected balance sheets and statements of income and cash flows
of the Borrower for the five-year period beginning with the year ended December
31, 1998, giving effect to the initial extensions of credit made under this
Agreement and the payment of transaction fees and expenses related to the
foregoing (the "Projections"). In the opinion of management of the Borrower, the
assumptions used in the preparation of the Projections were fair, complete and
reasonable when made and continue to be fair, complete and reasonable as of the
date hereof. The Projections have been prepared in good faith by the executive
and financial personnel of the Borrower, are complete and represent a reasonable
estimate of the future performance and financial condition of the Borrower,
subject to the uncertainties and approximations inherent in any projections.
(d) Each of the Borrower and its Subsidiaries, after giving effect to the
consummation of the transactions contemplated hereby, (i) has capital sufficient
to carry on its businesses as conducted and as proposed to be conducted, (ii)
has assets with a fair saleable value, determined on a going concern basis, (y)
not less than the amount required to pay the probable liability on its existing
debts as they become absolute and matured and (z) greater than the total amount
of its liabilities (including identified contingent liabilities, valued at the
amount that can reasonably be expected to become absolute and matured), and
(iii) does not intend to, and does not believe that it will, incur debts or
liabilities beyond its ability to pay such debts and liabilities as they mature.
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(e) The Borrower has heretofore furnished to the Agent copies of (i) the
Annual Statements of each of its Insurance Subsidiaries as of December 31, 1997,
1996 and 1995, and for the fiscal years then ended, and (ii) the Quarterly
Statements of each of its Insurance Subsidiaries as of June 30, 1998, and the
six-month period then ended, each as filed with the relevant Insurance
Regulatory Authority. Such financial statements (including, without limitation,
the provisions made therein for investments and the valuation thereof, reserves,
policy and contract claims and statutory liabilities) have been prepared in
accordance with SAP (except as may be reflected in the notes thereto and
subject, with respect to the Quarterly Statements, to the absence of notes
required by SAP and to normal year-end adjustments), were in compliance with
applicable Requirements of Law when filed and present fairly the financial
condition of the respective Insurance Subsidiaries covered thereby as of the
respective dates thereof and the results of operations, changes in capital and
surplus and cash flow of the respective Insurance Subsidiaries covered thereby
for the respective periods then ended. Except for liabilities and obligations
disclosed or provided for (x) in the Quarterly Statements referred to above
(including, without limitation, reserves, policy and contract claims and
statutory liabilities), (y) the financial statements previously delivered
pursuant to Section 6.2, or (z) any Form 8-K filed by the Borrower with the
Securities and Exchange Commission and previously delivered by the Borrower to
the Lenders, there are no material liabilities or obligations of any nature
whatsoever (whether absolute, contingent or otherwise and whether or not due)
that, in accordance with SAP, would have been required to have been disclosed or
provided for in statutory financial statements. All books of account of each
Insurance Subsidiary fully and fairly disclose all of its material transactions,
properties, assets, investments, liabilities and obligations, are in its
possession and are true, correct and complete in all material respects.
5.12 Ownership of Properties. Each of the Borrower and its Subsidiaries (i)
has good and marketable title to all real property owned by it, (ii) holds
interests as lessee under valid leases in full force and effect with respect to
all material leased real and personal property used in connection with its
business, (iii) possesses or has rights to use licenses, patents, copyrights,
trademarks, service marks, trade names and other assets sufficient to enable it
to continue to conduct its business substantially as heretofore conducted and
without any material conflict with the rights of others, and (iv) has good title
to all of its other properties and assets reflected in the most recent financial
statements referred to in Section 5.11(a) (except as sold or otherwise disposed
of since the date thereof in the ordinary course of business), in each case
under (i), (ii), (iii) and (iv) above free and clear of all Liens other than
Permitted Liens.
5.13 ERISA. (a) Each of the Borrower and its ERISA Affiliates is in
compliance in all material respects with the applicable provisions of ERISA, and
each Plan is and has been administered in compliance in all material respects
with all applicable Requirements of Law, including, without limitation, the
applicable provisions of ERISA and the Internal Revenue Code. No ERISA Event (i)
has occurred within the five-year period prior to the Closing Date, (ii) has
occurred and is continuing, or (iii) to the knowledge of the Borrower, is
reasonably expected to occur with respect to any Plan. No Plan has any Unfunded
Pension Liability as of the most recent annual valuation date applicable
thereto, and neither the Borrower nor any ERISA Affiliate has engaged in a
transaction that could be subject to Section 4069 or 4212(c) of ERISA.
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(b) Neither the Borrower nor any ERISA Affiliate has had a complete or
partial withdrawal from any Multiemployer Plan, and neither the Borrower nor any
ERISA Affiliate would become subject to any liability under ERISA if the
Borrower or any ERISA Affiliate were to withdraw completely from all
Multiemployer Plans as of the most recent valuation date. No Multiemployer Plan
is in "reorganization" or is "insolvent" within the meaning of such terms under
ERISA.
5.14 Environmental Matters. (a) No Hazardous Substances are or have been
generated, used, located, released, treated, disposed of or stored by the
Borrower or any of its Subsidiaries or, to the knowledge of the Borrower, by any
other Person (including any predecessor in interest) or otherwise, in, on or
under any portion of any real property, leased or owned, of the Borrower or any
of its Subsidiaries, except in material compliance with all applicable
Environmental Laws, and no portion of any such real property or, to the
knowledge of the Borrower, any other real property at any time leased, owned or
operated by the Borrower or any of its Subsidiaries, has been contaminated by
any Hazardous Substance; and no portion of any real property, leased or owned,
of the Borrower or any of its Subsidiaries has been or is presently the subject
of an environmental audit, assessment or remedial action.
(b) No portion of any real property, leased or owned, of the Borrower or
any of its Subsidiaries has been used by the Borrower or any of its Subsidiaries
or, to the knowledge of the Borrower, by any other Person, as or for a mine, a
landfill, a dump or other disposal facility, a gasoline service station, or
(other than for petroleum substances stored in the ordinary course of business)
a petroleum products storage facility; no portion of such real property or any
other real property at any time leased, owned or operated by the Borrower or any
of its Subsidiaries has, pursuant to any Environmental Law, been placed on the
"National Priorities List" or "CERCLIS List" (or any similar federal, state or
local list) of sites subject to possible environmental problems; and there are
not and have never been any underground storage tanks situated on any real
property, leased or owned, of the Borrower or any of its Subsidiaries.
(c) All activities and operations of the Borrower and its Subsidiaries are
in compliance with the requirements of all applicable Environmental Laws, except
to the extent the failure so to comply, individually or in the aggregate, would
not be reasonably likely to have a Material Adverse Effect. Each of the Borrower
and its Subsidiaries has obtained all licenses and permits under Environmental
Laws necessary to its respective operations; all such licenses and permits are
being maintained in good standing; and each of the Borrower and its Subsidiaries
is in compliance with all terms and conditions of such licenses and permits,
except for such licenses and permits the failure to obtain, maintain or comply
with which would not be reasonably likely, individually or in the aggregate, to
have a Material Adverse Effect. Neither the Borrower nor any of its Subsidiaries
is involved in any suit, action or proceeding, or has received any notice,
complaint or other request for information from any Governmental Authority or
other Person, with respect to any actual or alleged Environmental Claims that,
if adversely determined, would be reasonably likely, individually or in the
aggregate, to have a Material Adverse Effect; and, to the knowledge of the
Borrower, there are no threatened actions, suits, proceedings or investigations
with respect to any such Environmental Claims, nor any basis therefor.
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5.15 Compliance With Laws. Each of the Borrower and its Subsidiaries has
timely filed all material reports, documents and other materials required to be
filed by it under all applicable Requirements of Law with any Governmental
Authority, has retained all material records and documents required to be
retained by it under all applicable Requirements of Law, and is otherwise in
compliance with all applicable Requirements of Law in respect of the conduct of
its business and the ownership and operation of its properties, except for such
Requirements of Law the failure to comply with which, individually or in the
aggregate, would not be reasonably likely to have a Material Adverse Effect.
5.16 Regulated Industries. Neither the Borrower nor any of its Subsidiaries
is (i) an "investment company," a company "controlled" by an "investment
company," or an "investment advisor," within the meaning of the Investment
Company Act of 1940, as amended, or (ii) a "holding company," a "subsidiary
company" of a "holding company," or an "affiliate" of a "holding company" or of
a "subsidiary company" of a "holding company," within the meaning of the Public
Utility Holding Company Act of 1935, as amended.
5.17 Insurance. The assets, properties and business of the Borrower and its
Subsidiaries are insured against such hazards and liabilities, under such
coverages and in such amounts, as are customarily maintained by prudent
companies similarly situated and under policies issued by insurers of recognized
responsibility.
5.18 Material Contracts. Schedule 5.18 lists, as of the Closing Date, each
"material contract" (within the meaning of Item 601(b)(10) of Regulation S-K
under the Exchange Act) (other than Reinsurance Agreements) to which the
Borrower or any of its Subsidiaries is a party, by which any of them or their
respective properties is bound or to which any of them is subject (collectively,
"Material Contracts"), and also indicates the parties, subject matter and term
thereof. As of the Closing Date, (i) each Material Contract is in full force and
effect and is enforceable by the Borrower or the Subsidiary that is a party
thereto in accordance with its terms, and (ii) neither the Borrower nor any of
its Subsidiaries (nor, to the knowledge of the Borrower, any other party
thereto) is in breach of or default under any Material Contract in any material
respect or has given notice of termination or cancellation of any Material
Contract.
5.19 Reinsurance Agreements. (a) Except as set forth on Schedule F to the
Annual Statements for the Insurance Subsidiaries for the fiscal year ending
December 31, 1997, there are no material liabilities outstanding as of the
Closing Date under any Reinsurance Agreement. Each Reinsurance Agreement is in
full force and effect; none of the Insurance Subsidiaries or, to the knowledge
of the Borrower, any other party thereto, is in breach of or default under any
such contract; and the Borrower has no reason to believe that the financial
condition of any other party to any such contract is impaired such that a
default thereunder by such party could reasonably be anticipated. Each
Reinsurance Agreement is qualified under all applicable Requirements of Law to
receive the statutory credit assigned to such Reinsurance Agreement in the
relevant Annual Statement or Quarterly Statement at the time prepared. Each
Person to whom any of the Insurance Subsidiaries has ceded any material
liability pursuant to any Reinsurance Agreement on the Closing Date either has
(i) a rating of "A-" or better by A.M. Best & Company, (ii) a claims paying
ability rating of "A-" or better by Standard and Poor's or Moody's, (iii)
provided collateral in favor of the applicable Insurance Subsidiary of the type
and in an amount described
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in Schedule 5.19, or (iv) (x) an aggregate amount of Net Amount Recoverable from
Reinsurers for the Insurance Subsidiaries attributable to it (collectively with
all other such Persons not described in clauses (i), (ii) and (iii) above) that
is less than $1,500,000 as of the end of the most recent fiscal year, and (y) an
aggregate amount or Reinsurance Premiums Ceded by the Insurance Subsidiaries for
the current fiscal year (or portion thereof) to it (collectively with all other
such Persons not described in clauses (i), (ii) and (iii) above) that is less
than $1,500,000.
(b) As of the Closing Date, no Insurance Subsidiary is a party to any
Surplus Relief Reinsurance Agreement.
5.20 Labor Relations. Neither the Borrower nor any of its Subsidiaries is
engaged in any unfair labor practice within the meaning of the National Labor
Relations Act of 1947, as amended. There is (i) no unfair labor practice
complaint before the National Labor Relations Board, or grievance or arbitration
proceeding arising out of or under any collective bargaining agreement, pending
or, to the knowledge of the Borrower, threatened, against the Borrower or any of
its Subsidiaries, (ii) no strike, lock-out, slowdown, stoppage, walkout or other
labor dispute pending or, to the knowledge of the Borrower, threatened, against
the Borrower or any of its Subsidiaries, and (iii) to the knowledge of the
Borrower, no petition for certification or union election or union organizing
activities taking place with respect to the Borrower or any of its Subsidiaries.
5.21 Year 2000 Compatibility. The Borrower will use commercially reasonably
efforts to ensure that any reprogramming required to permit the proper
functioning, before, on and after January 1, 2000, of (i) the Borrower's and its
Subsidiaries' computer-based systems and (ii) equipment containing embedded
microchips (including systems and equipment supplied by others or with which the
Borrower's or any of its Subsidiaries' systems interface), and the testing of
all such systems and equipment, as so reprogrammed, will be completed by June
30, 1999. To the knowledge of the Borrower, after reasonable investigation, the
cost to the Borrower and its Subsidiaries of such reprogramming and testing and
of the reasonably foreseeable consequences of the year 2000 to the Borrower and
its Subsidiaries (including, without limitation, reprogramming errors and the
failure of others' systems or equipment) will not result in a Default or
Material Adverse Effect. To the knowledge of the Borrower, after reasonable
investigation, except for such of the reprogramming referred to in the preceding
sentence as may be necessary, the computer and management information systems of
the Borrower and its Subsidiaries are and, with ordinary course upgrading and
maintenance will continue for the term of this Agreement to be, sufficient to
permit the Borrower and its Subsidiaries to conduct their respective businesses
without a Material Adverse Effect.
ARTICLE VI
AFFIRMATIVE COVENANTS
The Borrower covenants and agrees that, until the termination of the
Commitments, the termination or expiration of all Letters of Credit and the
payment in full of all principal and
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interest with respect to the Loans and all Reimbursement Obligations together
with all other amounts then due and owing hereunder:
6.1 Financial Statements. The Borrower will deliver to each Lender:
(a) As soon as available and in any event within fifty-five (55) days after
the end of each of the first three fiscal quarters of each fiscal year,
beginning with the fiscal quarter ending September 30, 1998, unaudited
consolidated and consolidating balance sheets of the Borrower and its
Subsidiaries as of the end of such fiscal quarter and unaudited consolidated
statements of income, cash flows and stockholders' equity for the Borrower and
its Subsidiaries for the fiscal quarter then ended and for that portion of the
fiscal year then ended, in each case setting forth comparative consolidated
figures as of the end of and for the corresponding period in the preceding
fiscal year, all in reasonable detail and prepared in accordance with GAAP
(subject to the absence of notes required by GAAP and subject to normal year-end
adjustments) applied on a basis consistent with that of the preceding quarter or
containing disclosure of the effect on the financial condition or results of
operations of any change in the application of accounting principles and
practices during such quarter; and
(b) As soon as available and in any event within one hundred (100) days
after the end of each fiscal year, beginning with the fiscal year ending
December 31, 1998, (i) an audited consolidated balance sheet of the Borrower and
its Subsidiaries as of the end of such fiscal year and audited consolidated
statements of income, cash flows and stockholders' equity for the Borrower and
its Subsidiaries for the fiscal year then ended, including the notes thereto, in
each case setting forth comparative figures as of the end of and for the
preceding fiscal year together with comparative projected figures for the fiscal
year then ended, all in reasonable detail and certified by the independent
certified public accounting firm regularly retained by the Borrower or another
independent certified public accounting firm of recognized national standing
reasonably acceptable to the Required Lenders, together with (y) a report
thereon by such accountants that is not qualified as to going concern or scope
of audit and to the effect that such financial statements present fairly the
consolidated financial condition and results of operations of the Borrower and
its Subsidiaries as of the dates and for the periods indicated in accordance
with GAAP applied on a basis consistent with that of the preceding year or
containing disclosure of the effect on the financial condition or results of
operations of any change in the application of accounting principles and
practices during such year, and (z) a report by such accountants to the effect
that, based on and in connection with their examination of the financial
statements of the Borrower and its Subsidiaries, they obtained no knowledge of
the occurrence or existence of any Default or Event of Default relating to
accounting or financial reporting matters, or a statement specifying the nature
and period of existence of any such Default or Event of Default disclosed by
their audit; provided, however, that such accountants shall not be liable by
reason of the failure to obtain knowledge of any Default or Event of Default
that would not be disclosed or revealed in the course of their audit
examination, and (ii) an unaudited consolidating balance sheet of the Borrower
and its Subsidiaries as of the end of such fiscal year and unaudited
consolidating statements of income for the Borrower and its Subsidiaries for the
fiscal year then ended, all in reasonable detail.
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6.2 Statutory Financial Statements. The Borrower will deliver to each
Lender:
(a) As soon as available and in any event within fifty-five (55) days after
the end of each of the first three fiscal quarters of each fiscal year,
beginning with the first fiscal quarter ending after the date hereof, a
Quarterly Statement of each Insurance Subsidiary as of the end of such fiscal
quarter and for that portion of the fiscal year then ended, in the form filed
with the relevant Insurance Regulatory Authority, prepared in accordance with
SAP;
(b) As soon as available and in any event within seventy (70) days after
the end of each fiscal year, beginning with the fiscal year ended December 31,
1998, an Annual Statement of each Insurance Subsidiary as of the end of such
fiscal year and for the fiscal year then ended, in the form filed with the
relevant Insurance Regulatory Authority, prepared in accordance with SAP; and
(c) As soon as available and in any event within one hundred thirty-one
(131) days after the end of each fiscal year, beginning with the fiscal year
ended December 31, 1998, the combined Annual Statement of the Insurance
Subsidiary as of the end of such fiscal year and for the fiscal year then ended,
in the form filed with the relevant Insurance Regulatory Authority, prepared in
accordance with SAP.
6.3 Other Business and Financial Information. The Borrower will deliver to
each Lender:
(a) Concurrently with each delivery of the financial statements described
in Sections 6.1 and 6.2, a Compliance Certificate in the form of Exhibit C-1 (in
the case of the financial statements described in Section 6.1) or Exhibit C-2
(in the case of the financial statements described in Section 6.2) with respect
to the period covered by the financial statements then being delivered, executed
by a Financial Officer of the Borrower, together in each case with a Covenant
Compliance Worksheet reflecting the computation of the respective financial
covenants set forth in the Worksheets as of the last day of the period covered
by such financial statements;
(b) As soon as available and in any event prior to December 15 of each
fiscal year, beginning with the fiscal year ending December 31, 1998, (i)
consolidated projections showing the actual results for the most recent fiscal
year and the pro forma results for the next five (5) successive years prepared
in accordance with GAAP for the Borrower and its Subsidiaries, including (x)
projected income statements, (y) projected stockholder equity (including book
value and maximum debt calculation analyses), and (z) projected balance sheets;
and (ii) combined and combining projections showing the actual results for the
most recent fiscal year and the pro forma results for the next five (5)
successive years prepared in accordance with SAP for the Insurance Subsidiaries,
including (x) a combined statutory balance sheet, (y) combined and combining
statutory income statements, and (z) projected statutory surplus (including
maximum dividend calculations, A.M. Best & Company coverage and performance
ratios), together with a certificate of a Financial Officer of the Borrower to
the effect that all such projections have been prepared in good faith and are
reasonable estimates of the financial position and results of operations of the
Borrower and its Subsidiaries for the period covered
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thereby; and as soon as available from time to time thereafter, any
modifications or revisions to or restatements of such projections;
(c) Promptly upon filing with the relevant Insurance Regulatory Authority
and in any event within one hundred (100) days after the end of each fiscal
year, beginning with the fiscal year ended December 31, 1998, a copy of each
Insurance Subsidiary's "Statement of Actuarial Opinion" (or equivalent
information should the relevant Insurance Regulatory Authority not require such
a statement) as to the adequacy of such Insurance Subsidiary's loss reserves for
such fiscal year, together with a copy of its management discussion and analysis
in connection therewith, each in the format prescribed by the applicable
insurance laws of such Insurance Subsidiary's jurisdiction of domicile;
(d) As soon as available and in any event within one hundred (100) days
after the end of each fiscal year, a certification with respect to an actuarial
review of the liabilities and other items of each Insurance Subsidiary as of the
end of such fiscal year, prepared at the Borrower's expense, by an actuary or a
firm of actuaries reasonably acceptable to the Agent, such certification to be
in form and substance reasonably acceptable to the Required Lenders;
(e) Promptly upon receipt thereof, copies of any "management letter"
submitted to the Borrower or any of its Subsidiaries by its certified public
accountants in connection with each annual, interim or special audit, and
promptly upon completion thereof, any response reports from the Borrower or any
such Subsidiary in respect thereof;
(f) Promptly upon the sending, filing or receipt thereof, copies of (i) all
financial statements, reports, notices and proxy statements that the Borrower or
any of its Subsidiaries shall send or make available generally to its
shareholders, (ii) all regular, periodic and special reports, registration
statements and prospectuses (other than on Form S-8) that the Borrower or any of
its Subsidiaries shall render to or file with the Securities and Exchange
Commission, the National Association of Securities Dealers, Inc. or any national
securities exchange, and (iii) all press releases and other statements made
available generally by the Borrower or any of its Subsidiaries to the public
concerning material developments in the business of the Borrower or any of its
Subsidiaries; (iv) all significant reports on examination, financial examination
reports or market conduct examination reports by the NAIC or any Insurance
Regulatory Authority or other Governmental Authority with respect to any
Insurance Subsidiary's insurance business; (v) all significant filings made
under applicable state insurance holding company acts by the Borrower or any of
its Subsidiaries, including, without limitation, filings seeking approval of
transactions with Affiliates; and (vi) all material information sent to A.M.
Best & Company.
(g) Promptly upon (and in any event within five (5) Business Days after)
any Responsible Officer of the Borrower obtaining knowledge thereof, written
notice of any of the following:
(i) the occurrence of any Default or Event of Default, together with a
written statement of a Responsible Officer of the Borrower specifying the
nature of such Default or Event of Default, the period of existence thereof
and the action that the Borrower has taken and proposes to take with
respect thereto;
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(ii) the institution or threatened institution of any action, suit,
investigation or proceeding against or affecting the Borrower or any of its
Subsidiaries, including any such investigation or proceeding by any
Governmental Authority (other than routine periodic inquiries,
investigations or reviews), that would, if adversely determined, be
reasonably likely, individually or in the aggregate, to have a Material
Adverse Effect, and any material development in any litigation or other
proceeding previously reported pursuant to Section 5.5 or this subsection;
(iii) the receipt by the Borrower or any of its Subsidiaries from any
Governmental Authority of (y) any notice asserting any failure by the
Borrower or any of its Subsidiaries to be in compliance with applicable
Requirements of Law or that threatens the taking of any action against the
Borrower or such Subsidiary or sets forth circumstances that, if taken or
adversely determined, would be reasonably likely to have a Material Adverse
Effect, or (z) any notice of any actual or threatened suspension,
limitation or revocation of, failure to renew, or imposition of any
restraining order, escrow or impoundment of funds in connection with, any
license, permit, accreditation or authorization of the Borrower or any of
its Subsidiaries, where such action would be reasonably likely to have a
Material Adverse Effect;
(iv) the occurrence of any ERISA Event, together with (x) a written
statement of a Responsible Officer of the Borrower specifying the details
of such ERISA Event and the action that the Borrower has taken and proposes
to take with respect thereto, (y) a copy of any notice with respect to such
ERISA Event that may be required to be filed with the PBGC and (z) a copy
of any notice delivered by the PBGC to the Borrower or such ERISA Affiliate
with respect to such ERISA Event;
(v) the occurrence of any material default under, or any proposed or
threatened termination or cancellation of, any Material Contract or other
material contract or agreement to which the Borrower or any of its
Subsidiaries is a party, the termination or cancellation of which would be
reasonably likely to have a Material Adverse Effect;
(vi) the occurrence of any of the following: (x) the assertion of any
Environmental Claim against or affecting the Borrower, any of its
Subsidiaries or any of their respective real property, leased or owned; (y)
the receipt by the Borrower or any of its Subsidiaries of notice of any
alleged violation of or noncompliance with any Environmental Laws; or (z)
the taking of any remedial action by the Borrower, any of its Subsidiaries
or any other Person in response to the actual or alleged generation,
storage, release, disposal or discharge of any Hazardous Substances on, to,
upon or from any real property leased or owned by the Borrower or any of
its Subsidiaries; but in each case under clauses (x), (y) and (z) above,
only to the extent the same would be reasonably likely to have a Material
Adverse Effect;
(vii) the occurrence of any actual changes in any insurance statute or
regulation governing the investment or dividend practices of any Insurance
Subsidiary that would be reasonably likely to have a Material Adverse
Effect; and
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(viii) any other matter or event that has, or would be reasonably
likely to have, a Material Adverse Effect, together with a written
statement of a Responsible Officer of the Borrower setting forth the nature
and period of existence thereof and the action that the Borrower has taken
and proposes to take with respect thereto;
(h) Promptly, notice of (i) the occurrence of any material amendment or
modification to any Reinsurance Agreement (whether entered into before or after
the Closing Date), including any such agreements that are in a runoff mode on
the Closing Date, which amendment or modification would be reasonably likely to
have a Material Adverse Effect, or (ii) the receipt by the Borrower or any of
its Subsidiaries of any written notice of any denial of coverage, litigation,
claim or arbitration arising out of any Reinsurance Agreement to which it is a
party which would be reasonably likely to have a Material Adverse Effect; and
(i) As promptly as reasonably possible, such other information about the
business, condition (financial or otherwise), operations or properties of the
Borrower or any of its Subsidiaries (including any Plan and any information
required to be filed under ERISA) as the Agent or any Lender may from time to
time reasonably request.
6.4 Corporate Existence; Franchises; Maintenance of Properties. The
Borrower will, and will cause each of its Subsidiaries to, (i) maintain and
preserve in full force and effect its corporate existence, except as expressly
permitted otherwise by Section 8.1, (ii) obtain, maintain and preserve in full
force and effect all other rights, franchises, licenses, permits,
certifications, approvals and authorizations required by Governmental
Authorities and necessary to the ownership, occupation or use of its properties
or the conduct of its business, except to the extent the failure to do so would
not be reasonably likely to have a Material Adverse Effect, and (iii) keep all
material properties in good working order and condition (normal wear and tear
excepted) and from time to time make all necessary repairs to and renewals and
replacements of such properties, except to the extent that any of such
properties are obsolete or are being replaced.
6.5 Compliance with Laws. The Borrower will, and will cause each of its
Subsidiaries to, comply in all respects with all Requirements of Law applicable
in respect of the conduct of its business and the ownership and operation of its
properties, except to the extent the failure so to comply would not be
reasonably likely to have a Material Adverse Effect.
6.6 Payment of Obligations. The Borrower will, and will cause each of its
Subsidiaries to, (i) pay all liabilities and obligations as and when due
(subject to any applicable subordination provisions), except to the extent
failure to do so would not be reasonably likely to have a Material Adverse
Effect, and (ii) pay and discharge all taxes, assessments and governmental
charges or levies imposed upon it, upon its income or profits or upon any of its
properties, prior to the date on which penalties would attach thereto, and all
lawful claims that, if unpaid, might become a Lien upon any of the properties of
the Borrower or any of its Subsidiaries; provided, however, that neither the
Borrower nor any of its Subsidiaries shall be required to pay any such tax,
assessment, charge, levy or claim that is being contested in good
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faith and by proper proceedings and as to which the Borrower or such Subsidiary
is maintaining adequate reserves with respect thereto in accordance with GAAP.
6.7 Insurance. The Borrower will, and will cause each of its Subsidiaries
to, maintain with financially sound and reputable insurance companies insurance
with respect to its assets, properties and business, against such hazards and
liabilities, of such types and in such amounts, as is customarily maintained by
companies in the same or similar businesses similarly situated.
6.8 Maintenance of Books and Records; Inspection. The Borrower will, and
will cause each of its Subsidiaries to, (i) maintain adequate books, accounts
and records, in which full, true and correct entries shall be made of all
financial transactions in relation to its business and properties, and prepare
all financial statements required under this Agreement, in each case in
accordance with GAAP and in compliance with the requirements of any Governmental
Authority having jurisdiction over it, and (ii) permit employees or agents of
the Agent or any Lender to inspect its properties and examine or audit its
books, records, working papers and accounts and make copies and memoranda of
them, and to discuss its affairs, finances and accounts with its officers and
employees and, upon notice to the Borrower, the independent public accountants
and actuarial firms of the Borrower and its Subsidiaries (and by this provision
the Borrower authorizes such accountants and actuarial firms to discuss the
finances and affairs of the Borrower and its Subsidiaries), all at such times
and from time to time, upon reasonable notice and during business hours, as may
be reasonably requested.
6.9 Permitted Acquisitions. (a) Subject to the provisions of subsection (b)
below and the requirements contained in the definition of Permitted Acquisition,
and subject to the other terms and conditions of this Agreement, the Borrower
may from time to time on or after the Closing Date effect Permitted
Acquisitions, provided that, with respect to each Permitted Acquisition:
(i) no Default or Event of Default shall have occurred and be
continuing at the time of the consummation of such Permitted Acquisition or
would exist immediately after giving effect thereto; and
(ii) the Acquisition Amount with respect thereto (regardless of the
form of consideration) (y) shall not exceed $15,000,000, and (z) together
with the aggregate of the Acquisition Amounts (regardless of the form of
consideration) for all other Permitted Acquisitions consummated during the
same fiscal quarter or the period of three consecutive fiscal quarters
immediately prior thereto, shall not exceed $20,000,000.
(b) Not less than five (5) Business Days prior to the consummation of any
Permitted Acquisition with respect to which the Acquisition Amount exceeds
$5,000,000 the Borrower shall have delivered to the Agent and each Lender the
following:
(i) a reasonably detailed description of the material terms of such
Permitted Acquisition (including, without limitation, the purchase price
and method and structure of payment) and of each Person or business that is
the subject of such Permitted Acquisition (each, a "Target");
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(ii) historical financial statements of the Target (or, if there are
two or more Targets that are the subject of such Permitted Acquisition and
that are part of the same consolidated group, consolidated historical
financial statements for all such Targets) for the two (2) most recent
fiscal years available and, if available, for any interim periods since the
most recent fiscal year-end; and
(iii) a certificate, in form and substance reasonably satisfactory to
the Agent, executed by a Financial Officer of the Borrower setting forth
the Acquisition Amount and further to the effect that, to the best of such
individual's knowledge, (x) the consummation of such Permitted Acquisition
will not result in a violation of any provision of this Section, and after
giving effect to such Permitted Acquisition and any Borrowings made in
connection therewith, the Borrower will be in compliance with the financial
covenants contained in Sections 7.1 through 7.6, such compliance determined
with regard to calculations made on a pro forma basis in accordance with
GAAP as if each Target had been consolidated with the Borrower for those
periods applicable to such covenants (such calculations to be attached to
the certificate), (y) the Borrower believes in good faith that it will
continue to comply with such financial covenants for a period of one year
following the date of the consummation of such Permitted Acquisition, and
(z) after giving effect to such Permitted Acquisition and any Borrowings in
connection therewith, the Borrower believes in good faith that it will have
sufficient availability under the Commitments to meet its ongoing working
capital requirements.
(c) As soon as reasonably practicable after the consummation of any
Permitted Acquisition, the Borrower will deliver to the Agent and each Lender a
copy of the fully executed acquisition agreement (including schedules and
exhibits thereto) and other material documents and closing papers delivered in
connection therewith.
(d) The consummation of each Permitted Acquisition shall be deemed to be a
representation and warranty by the Borrower that (except as shall have been
approved in writing by the Required Lenders) all conditions thereto set forth in
this Section and in the description furnished under clause (i) of subsection (b)
above have been satisfied, that the same is permitted in accordance with the
terms of this Agreement, and that the matters certified to by the Financial
Officer of the Borrower in the certificate referred to in clause (iii) of
subsection (b) above are, to the best of such individual's knowledge, true and
correct in all material respects as of the date such certificate is given, which
representation and warranty shall be deemed to be a representation and warranty
as of the date thereof for all purposes hereunder, including, without
limitation, for purposes of Sections 4.2 and 9.1.
6.10 Year 2000 Compatibility. The Borrower will, and will cause each of its
Subsidiaries to, use commercially reasonable efforts to take all action
necessary to ensure that its computer-based systems are able to operate and
effectively process data including dates on and after January 1, 2000. At the
request of the Agent or the Required Lenders, the Borrower will provide
reasonable assurance of its Year 2000 compatibility.
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6.11 Deposit Relationship. The Borrower will maintain a deposit account
with First Union at all -------------------- times.
6.12 Further Assurances. The Borrower will, and will cause each of its
Subsidiaries to, make, execute, endorse, acknowledge and deliver any amendments,
modifications or supplements hereto and restatements hereof and any other
agreements, instruments or documents, and take any and all such other actions,
as may from time to time be reasonably requested by the Agent or the Required
Lenders to effect, confirm or further assure or protect and preserve the
interests, rights and remedies of the Agent and the Lenders under this Agreement
and the other Credit Documents.
ARTICLE VII
FINANCIAL COVENANTS
The Borrower covenants and agrees that, until the termination of the
Commitments, the termination or expiration of all Letters of Credit and the
payment in full of all principal and interest with respect to the Loans and all
Reimbursement Obligations together with all other amounts then due and owing
hereunder:
7.1 Leverage Ratio. The Borrower will not permit the Leverage Ratio to
exceed 0.35 : 1.0 at any -------------- time.
7.2 Consolidated Net Worth. The Borrower will not permit Consolidated Net
Worth as of the last day of any fiscal quarter, beginning with the fiscal
quarter ending September 30, 1998, to be less than the sum of (i) 85% of
Consolidated Net Worth as of June 30, 1998 plus (ii) 50% of the aggregate of
Consolidated Net Income for each fiscal quarter ending after June 30, 1998
(provided that Consolidated Net Income for any such fiscal quarter shall be
taken into account for purposes of this calculation only if positive) plus (iii)
75% of the aggregate amount of all increases in the stated capital and
additional paid-in capital accounts of the Borrower and its Subsidiaries, as
determined on a consolidated basis in accordance with GAAP, resulting from the
issuance of equity securities (including pursuant to the exercise of options,
rights or warrants or pursuant to the conversion of convertible securities) or
other Capital Stock after June 30, 1998 minus (iv) the amount (up to a maximum
of $10,000,000) of stock repurchases by the Borrower occurring between June 30,
1998 and September 30, 1999.
7.3 Fixed Charge Coverage Ratio. The Borrower will not permit the Fixed
Charge Coverage Ratio as of the last day of any fiscal quarter, beginning with
the fiscal quarter ending September 30, 1998, to be less than 1.25 : 1.0.
7.4 Risk-Based Capital Ratio. The Borrower will not permit "total adjusted
capital" (within the meaning of the Risk-Based Capital for Insurers Model Act as
promulgated by the NAIC as of the date hereof (the "Model Act")), as of the last
day of any fiscal year, beginning with the fiscal year ending December 31, 1998,
of (i) PAIC or any Material Insurance Subsidiary (other than a Subsidiary of an
Insurance Subsidiary) to be less than 150% of the applicable
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"Company Action Level RBC" (within the meaning of the Model Act) as of such
date, or (ii) any other Material Insurance Subsidiary to be less than 100% of
the applicable "Company Action Level RBC as of such date.
7.5 Combined Net Premiums to Capital Ratio. The Borrower will not permit
the Combined Net Premiums to Capital Ratio, as of the last day of any fiscal
quarter, beginning with the fiscal quarter ending September 30, 1998, to be
greater than 2.25 : 1.0.
7.6 Statutory Surplus. The Borrower will not permit the Combined Statutory
Capital and Surplus of the Insurance Subsidiaries, as of the last day of any
fiscal quarter, beginning with the fiscal quarter ending September 30, 1998, to
be less than the greater of (i) 90% of Combined Statutory and Capital Surplus as
of June 30, 1998 or (ii) $78,000,000, plus 50% of the aggregate (without
duplication) of the increases in the stated capital and additional paid-in
capital accounts of the Insurance Subsidiaries occurring after June 30, 1998, as
determined in each case in accordance with SAP.
ARTICLE VIII
NEGATIVE COVENANTS
The Borrower covenants and agrees that, until the termination of the
Commitments, the termination or expiration of all Letters of Credit and the
payment in full of all principal and interest with respect to the Loans and all
Reimbursement Obligations together with all other amounts then due and owing
hereunder:
8.1 Merger; Consolidation. The Borrower will not, and will not permit or
cause any of its Subsidiaries to, liquidate, wind up or dissolve, or enter into
any consolidation, merger or other combination, or agree to do any of the
foregoing; provided, however, that:
(i) the Borrower may merge or consolidate with another Person so long
as (x) the Borrower is the surviving entity, (y) unless such other Person
is a Wholly Owned Subsidiary immediately prior to giving effect thereto,
such merger or consolidation shall constitute a Permitted Acquisition and
the applicable conditions and requirements of Section 6.9 shall be
satisfied, and (z) immediately after giving effect thereto, no Default or
Event of Default would exist; and
(ii) any Subsidiary may merge or consolidate with another Person so
long as (x) the surviving entity is the Borrower or a Subsidiary, (y)
unless such other Person is a Wholly Owned Subsidiary immediately prior to
giving effect thereto, such merger or consolidation shall constitute a
Permitted Acquisition and the applicable conditions and requirements of
Section 6.9 shall be satisfied, and (z) immediately after giving effect
thereto, no Default or Event of Default would exist.
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8.2 Indebtedness. The Borrower will not, and will not permit or cause any
of its Subsidiaries to, create, incur, assume or suffer to exist any
Indebtedness other than:
(i) Indebtedness incurred under this Agreement (including, without
limitation, reimbursement obligations with respect to Letters of Credit)
and the Notes;
(ii) Indebtedness existing on the Closing Date and described in
Schedule 8.2;
(iii) accrued expenses (including salaries, accrued vacation and other
compensation), current trade or other accounts payable and other current
liabilities arising in the ordinary course of business and not incurred
through the borrowing of money, provided that the same shall be paid when
due except to the extent being contested in good faith and by appropriate
proceedings;
(iv) loans and advances by the Borrower or any Subsidiary to any other
Subsidiary or by any Subsidiary to the Borrower, provided that any such
loan or advance if payable by the Borrower is subordinated in right and
time of payment to the Obligations;
(v) unsecured Indebtedness of the Borrower that is expressly
subordinated and made junior in right and time of payment to the
Obligations and that is evidenced by one or more written agreements or
instruments having terms, conditions and provisions (including, without
limitation, provisions relating to principal amount, maturity, covenants,
defaults, interest, and subordination) satisfactory in form and substance
to the Required Lenders in their sole discretion and which shall provide,
at a minimum and without limitation, that such Indebtedness (a) shall
mature by its terms no earlier than the second anniversary of the Maturity
Date, (b) shall not require any scheduled payment of principal prior to the
first anniversary of the Maturity Date, (c) shall have covenants and
undertakings that, taken as a whole, are materially less restrictive than
those contained herein, and (d) shall bear interest at an overall rate not
exceeding ten percent (10%) per annum and, to the extent payable only in
cash, at a rate not exceeding ten percent (10%) per annum (the Indebtedness
described hereinabove, "Subordinated Indebtedness"); provided that, as
further conditions to the issuance of any Subordinated Indebtedness, (1)
immediately after giving effect to the issuance of such Subordinated
Indebtedness, no Default or Event of Default shall exist, (2) all
agreements and instruments evidencing or governing such Subordinated
Indebtedness shall have been approved in writing by the Required Lenders
(or the Agent on their behalf), and (3) prior to or concurrently with the
issuance of such Subordinated Indebtedness, the Borrower shall have
delivered to each Lender a certificate, signed by a Financial Officer of
the Borrower, satisfactory in form and substance to the Required Lenders
and to the effect that, after giving effect to the incurrence of such
Subordinated Indebtedness, the Borrower is in compliance with the financial
covenants set forth in Sections 7.1 through 7.6, such compliance being
determined with regard to calculations made on a pro forma basis in
accordance with GAAP as of the last day of the fiscal quarter then most
recently ended and as if such Subordinated Indebtedness had been incurred
on the first day of the period applicable to such covenants (such
calculations to be attached to such certificate); and provided further
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that the Net Cash Proceeds from the issuance of such Subordinated
Indebtedness shall be applied to prepay the Loans in accordance with, and
to the extent required under, the provisions of Section 2.6(c);
(vi) purchase money Indebtedness of the Borrower and its Subsidiaries
incurred solely to finance the payment of all or part of the purchase price
of any equipment, real property or other fixed assets acquired in the
ordinary course of business, including Indebtedness in respect of capital
lease obligations, and any renewals, refinancings or replacements thereof
(subject to the limitations on the principal amount thereof set forth in
this clause (vi)), which Indebtedness shall not exceed $8,000,000 in
aggregate principal amount outstanding at any time; and
(vii) other unsecured Indebtedness not exceeding $5,000,000 in
aggregate principal amount outstanding at any time.
8.3 Liens. The Borrower will not, and will not permit or cause any of its
Subsidiaries to, directly or indirectly, make, create, incur, assume or suffer
to exist, any Lien upon or with respect to any part of its property or assets,
whether now owned or hereafter acquired, or file or permit the filing of, or
permit to remain in effect, any financing statement or other similar notice of
any Lien with respect to any such property, asset, income or profits under the
Uniform Commercial Code of any state or under any similar recording or notice
statute, or agree to do any of the foregoing, other than the following
(collectively, "Permitted Liens"):
(i) Liens in existence on the Closing Date and set forth on Schedule
8.3;
(ii) Liens imposed by law, such as Liens of carriers, warehousemen,
mechanics, materialmen and landlords, and other similar Liens incurred in
the ordinary course of business for sums not constituting borrowed money
that are not overdue for a period of more than thirty (30) days or that are
being contested in good faith by appropriate proceedings and for which
adequate reserves have been established in accordance with GAAP (if so
required);
(iii) Liens (other than any Lien imposed by ERISA, the creation or
incurrence of which would result in an Event of Default under Section
9.1(j)) incurred in the ordinary course of business in connection with
worker's compensation, unemployment insurance or other forms of
governmental insurance or benefits, or to secure the performance of letters
of credit, bids, tenders, statutory obligations, surety and appeal bonds,
leases, government contracts and other similar obligations (other than
obligations for borrowed money) entered into in the ordinary course of
business;
(iv) Liens for taxes, assessments or other governmental charges or
statutory obligations that are not delinquent or remain payable without any
penalty or that are being contested in good faith by appropriate
proceedings and for which adequate reserves have been established in
accordance with GAAP (if so required);
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(v) Liens securing the purchase money Indebtedness permitted under
clause (vi) of Section 8.2, provided that any such Lien (a) shall attach to
such property concurrently with or within ten (10) days after the
acquisition thereof by the Borrower or such Subsidiary, (b) shall not
exceed the lesser of (y) the fair market value of such property or (z) the
cost thereof to the Borrower or such Subsidiary and (c) shall not encumber
any other property of the Borrower or any of its Subsidiaries;
(vi) any attachment or judgment Lien not constituting an Event of
Default under Section 9.1(h) that is being contested in good faith by
appropriate proceedings and for which adequate reserves have been
established in accordance with GAAP (if so required);
(vii) Liens arising from the filing, for notice purposes only, of
financing statements in respect of true leases;
(viii) Liens on Borrower Margin Stock, to the extent the fair market
value thereof exceeds 25% of the fair market value of the assets of the
Borrower and its Subsidiaries (including Borrower Margin Stock);
(ix) with respect to any real property occupied by the Borrower or any
of its Subsidiaries, all easements, rights of way, licenses and similar
encumbrances on title that do not materially impair the use of such
property for its intended purposes; and
(x) other Liens securing obligations of the Borrower and its
Subsidiaries not exceeding $1,000,000 in aggregate amount outstanding at
any time.
8.4 Disposition of Assets. The Borrower will not, and will not permit or
cause any of its Subsidiaries to, sell, assign, lease as lessor, convey,
transfer or otherwise dispose of (whether in one or a series of transactions)
all or any portion of its assets, business or properties (including, without
limitation, any Capital Stock of any Subsidiary), or enter into any arrangement
with any Person providing for the lease by the Borrower or any Subsidiary as
lessee of any asset that has been sold or transferred by the Borrower or such
Subsidiary to such Person, or agree to do any of the foregoing, except for:
(i) sales of inventory and licenses or leases of intellectual property
and other assets, in each case in the ordinary course of business;
(ii) the sale or exchange of used or obsolete equipment to the extent
(y) the proceeds of such sale are applied towards, or such equipment is
exchanged for, replacement equipment or (z) such equipment is no longer
necessary for the operations of the Borrower or its applicable Subsidiary
in the ordinary course of business;
(iii) the sale or other disposition by the Borrower and its
Subsidiaries of any Borrower Margin Stock to the extent the fair market
value thereof exceeds 25% of the fair market value of the assets of the
Borrower and its Subsidiaries (including Borrower Margin Stock), provided
that fair value is received in exchange therefor;
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(iv) the sale, lease or other disposition of assets by a Subsidiary of
the Borrower to the Borrower or to a Subsidiary if, immediately after
giving effect thereto, no Default or Event of Default would exist;
(v) sales of investment assets in the ordinary course of business; and
(vi) the sale by the Borrower and its Subsidiaries of (x) the capital
stock or all or any portion of the assets, business or properties of a
Subsidiary that is not a Material Subsidiary; (y) any asset or group of
assets of an Insurance Subsidiary constituting less than (A) in any single
transaction or series of related transactions, ten percent (10%) of
Combined Statutory Capital and Surplus as of the last day of the fiscal
quarter ending on or immediately prior to the date of such sale, and (B)
during the term of this Agreement, in the aggregate with all such other
sales pursuant to this clause (vi), thirty percent (30%) of Combined
Statutory Capital and Surplus as of the end of the immediately preceding
fiscal quarter; and (z) any asset or group of assets of a non-Insurance
Subsidiary constituting less than (A) in any single transaction or series
of related transactions, ten percent (10%) of the total assets of the
Borrower and its Subsidiaries on a consolidated basis, determined in
accordance with GAAP as of the last day of the fiscal quarter ending on or
immediately prior to the date of such sale, and (B) during the term of this
Agreement, in the aggregate with all such other sales pursuant to this
clause (vi), thirty percent (30%) of the total assets of the Borrower and
its Subsidiaries on a consolidated basis, determined in accordance with
GAAP as of the end of the immediately preceding fiscal quarter; provided in
the case of any sale pursuant to this clause (vi) that (A) the Net Cash
Proceeds from such sales are delivered to the Agent promptly upon (and in
any event not later than ten (10) Business Days after) receipt thereof for
application in prepayment of the Loans in accordance with, and to the
extent required under, the provisions of Section 2.6(b) or 2.6(c) and (B)
immediately after giving effect thereto, no Default or Event of Default
would exist.
8.5 Investments. The Borrower will not, and will not permit or cause any of
its Subsidiaries to, directly or indirectly, purchase, own, invest in or
otherwise acquire any Capital Stock, evidence of indebtedness or other
obligation or security or any interest whatsoever in any other Person, or make
or permit to exist any loans, advances or extensions of credit to, or any
investment in cash or by delivery of property in, any other Person, or purchase
or otherwise acquire (whether in one or a series of related transactions) any
portion of the assets, business or properties of another Person (including
pursuant to an Acquisition), or create or acquire any Subsidiary, or become a
partner or joint venturer in any partnership or joint venture (collectively,
"Investments"), or make a commitment or otherwise agree to do any of the
foregoing, other than:
(i) Cash Equivalents;
(ii) Investments consisting of purchases and acquisitions of
inventory, supplies, materials and equipment or licenses or leases of
intellectual property and other assets, in each case in the ordinary course
of business,
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(iii) Investments consisting of loans and advances to employees for
reasonable travel, relocation and business expenses in the ordinary course
of business, extensions of trade credit in the ordinary course of business,
and prepaid expenses incurred in the ordinary course of business;
(iv) without duplication, Investments consisting of intercompany
Indebtedness permitted under clause (iv) of Section 8.2;
(v) Investments existing on the Closing Date and described in Schedule
8.5;
(vi) Investments consisting of the making of capital contributions or
the purchase of Capital Stock (a) by the Borrower or any Subsidiary in any
other Wholly Owned Subsidiary and (b) by any Subsidiary in the Borrower;
(vii) Permitted Acquisitions; and
(viii) other Investments by Insurance Subsidiaries to the extent
permitted under applicable Requirements of Law and in compliance with the
following restrictions:
(a) Investments of each Insurance Subsidiary shall be in
compliance at all times with the applicable Insurance Code and with
all applicable insurance laws and regulations of any other relevant
jurisdictions relating to investments by such Insurance Subsidiary;
(b) the aggregate Investments (other than Investments consisting
of publicly-traded common stock ) of any Insurance Subsidiary in
non-Investment Grade Securities shall constitute at all times no more
than five percent (5%) of Invested Assets (other than publicly-traded
common stock) of such Insurance Subsidiary;
(c) the aggregate Investments, at any time, of any Insurance
Subsidiary consisting of equity securities (including, without
limitation, common and preferred stock, whether or not
publicly-traded) shall not be greater than one-third (1/3) of the
Statutory Capital and Surplus of such Insurance Subsidiary at such
time; and
(d) with respect to Investments in securities other than those
issued or unconditionally guaranteed by the United States Government,
the aggregate Investments of any Insurance Subsidiary in the
securities of any single issuer shall constitute at all times no more
than five percent (5%) of Invested Assets of such Insurance
Subsidiary.
8.6 Restricted Payments. (a) The Borrower will not, and will not permit or
cause any of its Subsidiaries to, directly or indirectly, declare or make any
dividend payment, or make any other distribution of cash, property or assets, in
respect of any of its Capital Stock or any warrants, rights or options to
acquire its Capital Stock, or purchase, redeem, retire or otherwise
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acquire for value any shares of its Capital Stock or any warrants, rights or
options to acquire its Capital Stock, or set aside funds for any of the
foregoing, except that:
(i) the Borrower may declare and make dividend payments or other
distributions to holders of its common stock, in cash or in shares of its
common stock, and may purchase, redeem, retire or otherwise acquire shares
of its Capital Stock, in cash or in-kind, in each case provided that,
immediately after giving effect thereto, no Default or Event of Default
would exist; and
(ii) each Wholly Owned Subsidiary of the Borrower may declare and make
dividend payments or other distributions to the Borrower or another Wholly
Owned Subsidiary of the Borrower, to the extent not prohibited under
applicable Requirements of Law.
(b) The Borrower will not, and will not permit or cause any of its
Subsidiaries to, make (or give any notice in respect of) any voluntary or
optional payment or prepayment of principal on any Subordinated Indebtedness, or
directly or indirectly make any redemption (including pursuant to any change of
control provision), retirement, defeasance or other acquisition for value of any
Subordinated Indebtedness, or make any deposit or otherwise set aside funds for
any of the foregoing purposes.
8.7 Transactions with Affiliates. The Borrower will not, and will not
permit or cause any of its Subsidiaries to, enter into any transaction
(including, without limitation, any purchase, sale, lease or exchange of
property or the rendering of any service) with any officer, director,
stockholder or other Affiliate of the Borrower or any Subsidiary, except in the
ordinary course of its business and upon fair and reasonable terms that are no
less favorable to it than would obtain in a comparable arm's length transaction
with a Person other than an Affiliate of the Borrower or such Subsidiary;
provided, however, that nothing contained in this Section shall prohibit:
(i) transactions described on Schedule 8.7 or otherwise expressly
permitted under this Agreement; and
(ii) the payment by the Borrower of reasonable and customary fees to
members of its board of directors.
8.8 Lines of Business. The Borrower will not, and will not permit or cause
any of its Subsidiaries to, engage in any business other than (i) the lines of
business engaged in by it on the date hereof and businesses and activities
reasonably related thereto or (ii) in the case of an Insurance Subsidiary, the
sale of any of the insurance products within the lines of business described in
Schedule 8.8.
8.9 Certain Amendments. The Borrower will not, and will not permit or cause
any of its Subsidiaries to, (i) amend, modify or waive, or permit the amendment,
modification or waiver of, any provision of any agreement or instrument
evidencing or governing any Subordinated Indebtedness, the effect of which would
be to (a) increase the principal amount due thereunder, (b) shorten or
accelerate the time of payment of any amount due thereunder, (c) increase the
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applicable interest rate or amount of any fees or costs due thereunder, (d)
amend any of the subordination provisions thereunder (including any of the
definitions relating thereto), (e) make any covenant therein more restrictive or
add any new covenant, or (f) otherwise materially and adversely affect the
Lenders, or breach or otherwise violate any of the subordination provisions
applicable thereto, including, without limitation, restrictions against payment
of principal and interest thereon, or (ii) amend, modify or change any provision
of its articles or certificate of incorporation or bylaws, or the terms of any
class or series of its Capital Stock, other than in a manner that could not
reasonably be expected to adversely affect the Lenders.
8.10 Limitation on Certain Restrictions. The Borrower will not, and will
not permit or cause any of its Subsidiaries to, directly or indirectly, create
or otherwise cause or suffer to exist or become effective any restriction or
encumbrance on (i) the ability of the Borrower and its Subsidiaries to perform
and comply with their respective obligations under the Credit Documents or (ii)
the ability of any Subsidiary of the Borrower to make any dividend payments or
other distributions in respect of its Capital Stock, to repay Indebtedness owed
to the Borrower or any other Subsidiary, to make loans or advances to the
Borrower or any other Subsidiary, or to transfer any of its assets or properties
to the Borrower or any other Subsidiary, in each case other than such
restrictions or encumbrances existing under or by reason of the Credit Documents
or applicable Requirements of Law.
8.11 No Other Negative Pledges. The Borrower will not, and will not permit
or cause any of its Subsidiaries to, directly or indirectly, enter into or
suffer to exist any agreement or restriction that prohibits or conditions the
creation, incurrence or assumption of any Lien upon or with respect to any part
of its property or assets, whether now owned or hereafter acquired, or agree to
do any of the foregoing, other than as set forth in (i) this Agreement, (ii) any
agreement or instrument creating a Permitted Lien (but only to the extent such
agreement or restriction applies to the assets subject to such Permitted Lien),
and (iii) operating leases of real or personal property entered into by the
Borrower or any of its Subsidiaries as lessee in the ordinary course of
business.
8.12 Fiscal Year. The Borrower will not, and will not permit or cause any
of its Subsidiaries to, change the ending date of its fiscal year to a date
other than December 31.
8.13 Accounting Changes. The Borrower will not, and will not permit or
cause any of its Subsidiaries to, make or permit any material change in its
accounting policies or reporting practices, except as may be required by GAAP or
SAP.
8.14 Best Rating. The Borrower will not permit or cause the rating by A.M.
Best & Company of (i) PAIC or (ii) any pooling arrangement in which PAIC is a
participant to be lower than "A-" at any time.
8.15 Reinsurance Agreements. The Borrower will not, and will not permit or
cause any of its Insurance Subsidiaries to do any of the following:
(i) be or become a party to any Reinsurance Agreement (whether in
effect as of the Closing Date or at any time thereafter) with any reinsurer
that both (1) is not rated
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"A-" or better by A.M. Best & Company and (2) does not have a claims paying
ability rating of "A-" or better by Standard & Poor's or Moody's (any such
reinsurer, a "Rating Deficient Reinsurer") unless such Rating Deficient
Reinsurer has either (x) provided a letter of credit issued by a United
States bank having a long term senior debt rating of "A" or better by
Standard & Poor's and Moody's, in favor of the Borrower or the applicable
Insurance Subsidiary in an amount equal to or greater than the obligations
transferred pursuant to such Reinsurance Agreement, (y) placed the assets
transferred by the Insurance Subsidiary pursuant to such Reinsurance
Agreement in a trust with a fiduciary and under terms, including investment
restrictions consistent with this Agreement, satisfactory to the Agent, or
(z) otherwise provided collateral in favor of the Borrower or the
applicable Insurance Subsidiary in form and amount satisfactory to the
Required Lenders; provided, however, that any Insurance Subsidiary may
remain a party to a Reinsurance Agreement -------- ------- with a Rating
Deficient Reinsurer that has not provided the collateral of the type
described in clauses (x), (y) and (z) above (all such Ratings Deficient
Reinsurers, collectively, the "Non-Approved Reinursers") provided that (A)
as of the end of each fiscal year, the aggregate amount of the Net Amount
-------- Recoverable from Reinsurers for the Insurance Subsidiaries
attributable to all Non-Approved Reinsurers as of such year end is not
greater than $1,500,000, and (y) for each fiscal year (or portion thereof)
ending with each fiscal quarter thereof, the aggregate amount of
Reinsurance Premiums Ceded by the Insurance Subsidiaries during such fiscal
year (or portion thereof) to all Non-Approved Reinsurers as of each such
quarter ended is not greater than $1,500,000;
(ii) enter into any Reinsurance Agreements, or make any amendment or
modification to or waiver of any Reinsurance Agreements, that would,
individually or in the aggregate, be reasonably likely to have a Material
Adverse Effect; or
(iii) be or become a party to any Surplus Relief Reinsurance Agreement
if the increase in Combined Statutory and Capital Surplus as a result of or
arising from such Surplus Relief Reinsurance Agreement, when added to the
increase in Combined Statutory and Capital Surplus as a result of or
arising from all other Surplus Relief Reinsurance Agreements theretofore
entered into by any Insurance Subsidiary, net of any surplus relief
recaptured in respect of such Surplus Relief Reinsurance Agreements,
exceeds ten percent (10%) of Combined Statutory and Capital Surplus as of
the most recent fiscal year end.
ARTICLE IX
EVENTS OF DEFAULT
9.1 Events of Default. The occurrence of any one or more of the following
events shall constitute an "Event of Default":
(a) The Borrower shall fail to pay any principal of or interest on any
Loan, any Reimbursement Obligation, any fee or any other Obligation when due;
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(b) The Borrower shall fail to observe, perform or comply with any
condition, covenant or agreement contained in any of Sections 2.14, 6.1, 6.2,
6.3(g), 6.8, 6.9 or in Article VII or Article VIII;
(c) The Borrower or any of its Subsidiaries shall fail to observe, perform
or comply with any condition, covenant or agreement contained in this Agreement
or any of the other Credit Documents other than those enumerated in subsections
(a) and (b) above, and such failure (i) is deemed by the terms of the relevant
Credit Document to constitute an Event of Default or (ii) shall continue
unremedied for any grace period specifically applicable thereto or, if no such
grace period is applicable, for a period of thirty (30) days after the earlier
of (y) the date on which a Responsible Officer of the Borrower acquires
knowledge thereof and (z) the date on which written notice thereof is delivered
by the Agent or any Lender to the Borrower;
(d) Any representation or warranty made or deemed made by or on behalf of
the Borrower or any of its Subsidiaries in this Agreement, any of the other
Credit Documents or in any certificate, instrument, report or other document
furnished in connection herewith or therewith or in connection with the
transactions contemplated hereby or thereby shall prove to have been false or
misleading in any material respect as of the time made, deemed made or
furnished;
(e) The Borrower or any of its Subsidiaries shall (i) fail to pay when due
(whether by scheduled maturity, acceleration or otherwise and after giving
effect to any applicable grace period) any principal of or interest on any
Indebtedness (other than the Indebtedness incurred pursuant to this Agreement)
having an aggregate principal amount of at least $5,000,000 or (ii) fail to
observe, perform or comply with any condition, covenant or agreement contained
in any agreement or instrument evidencing or relating to any such Indebtedness,
or any other event shall occur or condition exist in respect thereof, and the
effect of such failure, event or condition is to cause, or permit the holder or
holders of such Indebtedness (or a trustee or agent on its or their behalf) to
cause (with the giving of notice, lapse of time, or both), such Indebtedness to
become due, or to be prepaid, redeemed, purchased or defeased, prior to its
stated maturity;
(f) The Borrower or any of its Subsidiaries shall (i) file a voluntary
petition or commence a voluntary case seeking liquidation, winding-up,
reorganization, dissolution, arrangement, readjustment of debts or any other
relief under the Bankruptcy Code or under any other applicable bankruptcy,
insolvency or similar law now or hereafter in effect, (ii) consent to the
institution of, or fail to controvert in a timely and appropriate manner, any
petition or case of the type described in subsection (g) below, (iii) apply for
or consent to the appointment of or taking possession by a custodian, trustee,
receiver or similar official for or of itself or all or a substantial part of
its properties or assets, (iv) fail generally, or admit in writing its
inability, to pay its debts generally as they become due, (v) make a general
assignment for the benefit of creditors or (vi) take any corporate action to
authorize or approve any of the foregoing;
(g) Any involuntary petition or case shall be filed or commenced against
the Borrower or any of its Subsidiaries seeking liquidation, winding-up,
reorganization, dissolution, arrangement, readjustment of debts, the appointment
of a custodian, trustee, receiver or similar
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official for it or all or a substantial part of its properties or any other
relief under the Bankruptcy Code or under any other applicable bankruptcy,
insolvency or similar law now or hereafter in effect, and such petition or case
shall continue undismissed and unstayed for a period of sixty (60) days; or an
order, judgment or decree approving or ordering any of the foregoing shall be
entered in any such proceeding;
(h) Any one or more money judgments, writs or warrants of attachment,
executions or similar processes involving an aggregate amount (exclusive of
amounts fully bonded or covered by insurance as to which the surety or insurer,
as the case may be, has acknowledged its liability in writing) in excess of
$1,000,000 shall be entered or filed against the Borrower or any of its
Subsidiaries or any of their respective properties and the same shall not be
dismissed, stayed or discharged for a period of thirty (30) days or in any event
later than five days prior to the date of any proposed sale thereunder;
(i) Any ERISA Event or any other event or condition shall occur or exist
with respect to any Plan or Multiemployer Plan and, as a result thereof,
together with all other ERISA Events and other events or conditions then
existing, the Borrower and its ERISA Affiliates have incurred or would be
reasonably likely to incur liability to any one or more Plans or Multiemployer
Plans or to the PBGC (or to any combination thereof) in excess of $1,000,000;
(j) Any one or more licenses, permits, accreditations or authorizations of
the Borrower or any of its Subsidiaries shall be suspended, limited or
terminated or shall not be renewed, or any other action shall be taken, by any
Governmental Authority in response to any alleged failure by the Borrower or any
of its Subsidiaries to be in compliance with applicable Requirements of Law, and
such action, individually or in the aggregate, has or would be reasonably likely
to have a Material Adverse Effect;
(k) Any one or more Environmental Claims shall have been asserted against
the Borrower or any of its Subsidiaries; the Borrower and its Subsidiaries have
incurred or would be reasonably likely to incur liability as a result thereof;
and such liability, individually or in the aggregate, has or would be reasonably
likely to have a Material Adverse Effect; or
(l) Any of the following shall occur: (i) any Person or group of Persons
acting in concert as a partnership or other group, other than Penn Independent
Corporation or a group comprised solely of such Persons, shall, as a result of a
tender or exchange offer, open market purchases, privately negotiated purchases
or otherwise, have become, after the date hereof, the "beneficial owner" (within
the meaning of such term under Rule 13d-3 under the Exchange Act) of securities
of the Borrower representing 20% or more of the combined voting power of the
then outstanding securities of the Borrower ordinarily (and apart from rights
accruing under special circumstances) having the right to vote in the election
of directors; or (ii) the Board of Directors of the Borrower shall cease to
consist of a majority of the individuals who constituted the Board of Directors
as of the date hereof or who shall have become a member thereof subsequent to
the date hereof after having been nominated, or otherwise approved in writing,
by at least a majority of individuals who constituted the Board of Directors of
the Borrower as of the date hereof (or their replacements approved as herein
required).
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9.2 Remedies: Termination of Commitments, Acceleration, etc. Upon and at
any time after the occurrence and during the continuance of any Event of
Default, the Agent shall at the direction, or may with the consent, of the
Required Lenders, take any or all of the following actions at the same or
different times:
(a) Declare the Commitments and the Issuing Lender's obligation to issue
Letters of Credit, to be terminated, whereupon the same shall terminate
(provided that, upon the occurrence of an Event of Default pursuant to Section
9.1(f) or Section 9.1(g), the Commitments and the Issuing Lender's obligation to
issue Letters of Credit shall automatically be terminated);
(b) Declare all or any part of the outstanding principal amount of the
Loans to be immediately due and payable, whereupon the principal amount so
declared to be immediately due and payable, together with all interest accrued
thereon and all other amounts payable under this Agreement, the Notes and the
other Credit Documents, shall become immediately due and payable without
presentment, demand, protest, notice of intent to accelerate or other notice or
legal process of any kind, all of which are hereby knowingly and expressly
waived by the Borrower (provided that, upon the occurrence of an Event of
Default pursuant to Section 9.1(f) or Section 9.1(g), all of the outstanding
principal amount of the Loans and all other amounts described in this subsection
(b) shall automatically become immediately due and payable without presentment,
demand, protest, notice of intent to accelerate or other notice or legal process
of any kind, all of which are hereby knowingly and expressly waived by the
Borrower);
(c) Direct the Borrower to deposit (and the Borrower hereby agrees,
forthwith upon receipt of notice of such direction from the Agent, to deposit)
with the Agent from time to time such additional amount of cash as is equal to
the aggregate Stated Amount of all Letters of Credit then outstanding (whether
or not any beneficiary under any Letter of Credit shall have drawn or be
entitled at such time to draw thereunder), such amount to be held by the Agent
in the Cash Collateral Account as security for the Letter of Credit Exposure as
described in Section 3.8;
(d) Take any and all action necessary to obtain, at the Borrower's expense
and as soon as reasonably possible, with respect to each Insurance Subsidiary, a
current actuarial review and valuation statement of, and opinion as to the
adequacy of, such Insurance Subsidiary's loss and loss adjustment expense
reserve positions with respect to the insurance business then in force, and
covering such other subjects as are customary in actuarial reviews and as may be
requested by the Required Lenders, prepared by an independent actuarial firm
acceptable to the Required Lenders in accordance with reasonable actuarial
assumptions and procedures (the Borrower hereby agreeing to cooperate in
connection therewith); and
(e) Exercise all rights and remedies available to it under this Agreement,
the other Credit Documents and applicable law.
9.3 Remedies: Set-Off. In addition to all other rights and remedies
available under the Credit Documents or applicable law or otherwise, upon and at
any time after the occurrence and during the continuance of any Event of
Default, each Lender may, and each is hereby authorized by the Borrower, at any
such time and from time to time, to the fullest extent permitted by applicable
law, without presentment, demand, protest or other notice of any kind,
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all of which are hereby knowingly and expressly waived by the Borrower, to set
off and to apply any and all deposits (general or special, time or demand,
provisional or final but specifically excluding deposits in trust accounts) and
any other property at any time held (including at any branches or agencies,
wherever located), and any other indebtedness at any time owing, by such Lender
to or for the credit or the account of the Borrower against any or all of the
Obligations to such Lender now or hereafter existing, whether or not such
Obligations may be contingent or unmatured, the Borrower hereby granting to each
Lender a continuing security interest in and Lien upon all such deposits and
other property as security for such Obligations. Each Lender agrees promptly to
notify the Borrower and the Agent after any such set-off and application;
provided, however, that the failure to give such notice shall not affect the
validity of such set-off and application.
ARTICLE X
THE AGENT
10.1 Appointment. Each Lender hereby irrevocably appoints and authorizes
First Union to act as Agent hereunder and under the other Credit Documents and
to take such actions as agent on its behalf hereunder and under the other Credit
Documents, and to exercise such powers and to perform such duties, as are
specifically delegated to the Agent by the terms hereof or thereof, together
with such other powers and duties as are reasonably incidental thereto.
10.2 Nature of Duties. The Agent shall have no duties or responsibilities
other than those expressly set forth in this Agreement and the other Credit
Documents. The Agent shall not have, by reason of this Agreement or any other
Credit Document, a fiduciary relationship in respect of any Lender; and nothing
in this Agreement or any other Credit Document, express or implied, is intended
to or shall be so construed as to impose upon the Agent any obligations or
liabilities in respect of this Agreement or any other Credit Document except as
expressly set forth herein or therein. The Agent may execute any of its duties
under this Agreement or any other Credit Document by or through agents or
attorneys-in-fact and shall not be responsible for the negligence or misconduct
of any agents or attorneys-in-fact that it selects with reasonable care. The
Agent shall be entitled to consult with legal counsel, independent public
accountants and other experts selected by it with respect to all matters
pertaining to this Agreement and the other Credit Documents and its duties
hereunder and thereunder and shall not be liable for any action taken or omitted
to be taken in good faith by it in accordance with the advice of such counsel,
accountants or experts. The Lenders hereby acknowledge that the Agent shall not
be under any duty to take any discretionary action permitted to be taken by it
pursuant to the provisions of this Agreement or any other Credit Document unless
it shall be requested in writing to do so by the Required Lenders (or, where a
higher percentage of the Lenders is expressly required hereunder, such Lenders).
10.3 Exculpatory Provisions. Neither the Agent nor any of its officers,
directors, employees, agents, attorneys-in-fact or Affiliates shall be (i)
liable for any action taken or omitted to be taken by it or such Person under or
in connection with the Credit Documents, except for its or such Person's own
gross negligence or willful misconduct, (ii) responsible in
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any manner to any Lender for any recitals, statements, information,
representations or warranties herein or in any other Credit Document or in any
document, instrument, certificate, report or other writing delivered in
connection herewith or therewith, for the execution, effectiveness, genuineness,
validity, enforceability or sufficiency of this Agreement or any other Credit
Document, or for the financial condition of the Borrower, its Subsidiaries or
any other Person, or (iii) required to ascertain or make any inquiry concerning
the performance or observance of any of the terms, provisions or conditions of
this Agreement or any other Credit Document or the existence or possible
existence of any Default or Event of Default, or to inspect the properties,
books or records of the Borrower or any of its Subsidiaries.
10.4 Reliance by Agent. The Agent shall be entitled to rely, and shall be
fully protected in relying, upon any notice, statement, consent or other
communication (including, without limitation, any thereof by telephone,
telecopy, telex, telegram or cable) believed by it in good faith to be genuine
and correct and to have been signed, sent or made by the proper Person or
Persons. The Agent may deem and treat each Lender as the owner of its interest
hereunder for all purposes hereof unless and until a written notice of the
assignment, negotiation or transfer thereof shall have been given to the Agent
in accordance with the provisions of this Agreement. The Agent shall be entitled
to refrain from taking or omitting to take any action in connection with this
Agreement or any other Credit Document (i) if such action or omission would, in
the reasonable opinion of the Agent, violate any applicable law or any provision
of this Agreement or any other Credit Document or (ii) unless and until it shall
have received such advice or concurrence of the Required Lenders (or, where a
higher percentage of the Lenders is expressly required hereunder, such Lenders)
as it deems appropriate or it shall first have been indemnified to its
satisfaction by the Lenders against any and all liability and expense (other
than liability and expense arising from its own gross negligence or willful
misconduct) that may be incurred by it by reason of taking, continuing to take
or omitting to take any such action. Without limiting the foregoing, no Lender
shall have any right of action whatsoever against the Agent as a result of the
Agent's acting or refraining from acting hereunder or under any other Credit
Document in accordance with the instructions of the Required Lenders (or, where
a higher percentage of the Lenders is expressly required hereunder, such
Lenders), and such instructions and any action taken or failure to act pursuant
thereto shall be binding upon all of the Lenders (including all subsequent
Lenders).
10.5 Non-Reliance on Agent and Other Lenders. Each Lender expressly
acknowledges that neither the Agent nor any of its officers, directors,
employees, agents, attorneys-in-fact or Affiliates has made any representation
or warranty to it and that no act by the Agent or any such Person hereinafter
taken, including any review of the affairs of the Borrower and its Subsidiaries,
shall be deemed to constitute any representation or warranty by the Agent to any
Lender. Each Lender represents to the Agent that (i) it has, independently and
without reliance upon the Agent or any other Lender and based on such documents
and information as it has deemed appropriate, made its own appraisal of and
investigation into the business, prospects, operations, properties, financial
and other condition and creditworthiness of the Borrower and its Subsidiaries
and made its own decision to enter into this Agreement and extend credit to the
Borrower hereunder, and (ii) 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 credit analysis,
appraisals and decisions in taking or not taking action hereunder and under
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the other Credit Documents and to make such investigation as it deems necessary
to inform itself as to the business, prospects, operations, properties,
financial and other condition and creditworthiness of the Borrower and its
Subsidiaries. Except as expressly provided in this Agreement and the other
Credit Documents, the Agent shall have no duty or responsibility, either
initially or on a continuing basis, to provide any Lender with any credit or
other information concerning the business, prospects, operations, properties,
financial or other condition or creditworthiness of the Borrower, its
Subsidiaries or any other Person that may at any time come into the possession
of the Agent or any of its officers, directors, employees, agents,
attorneys-in-fact or Affiliates.
10.6 Notice of Default. The Agent shall not be deemed to have knowledge or
notice of the occurrence of any Default or Event of Default unless the Agent
shall have received written notice from the Borrower or a Lender referring to
this Agreement, describing 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, the Agent will give notice thereof to the Lenders as soon as
reasonably practicable; provided, however, that if any such notice has also been
furnished to the Lenders, the Agent shall have no obligation to notify the
Lenders with respect thereto. The Agent shall (subject to Sections 10.4 and
11.6) 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
interests of the Lenders except to the extent that this Agreement expressly
requires that such action be taken, or not be taken, only with the consent or
upon the authorization of the Required Lenders or all of the Lenders.
10.7 Indemnification. To the extent the Agent is not reimbursed by or on
behalf of the Borrower, and without limiting the obligation of the Borrower to
do so, the Lenders agree (i) to indemnify the Agent and its officers, directors,
employees, agents, attorneys-in-fact and Affiliates, ratably in proportion to
their respective percentages as used in determining the Required Lenders as of
the date of determination, from and against any and all liabilities,
obligations, losses, damages, penalties, actions, judgments, suits, costs,
expenses (including, without limitation, attorneys' fees and expenses) or
disbursements of any kind or nature whatsoever that may at any time (including,
without limitation, at any time following the repayment in full of the Loans and
the termination of the Commitments) be imposed on, incurred by or asserted
against the Agent in any way relating to or arising out of this Agreement or any
other Credit Document or any documents contemplated by or referred to herein or
the transactions contemplated hereby or thereby or any action taken or omitted
by the Agent under or in connection with any of the foregoing, and (ii) to
reimburse the Agent upon demand, ratably in proportion to their respective
percentages as used in determining the Required Lenders as of the date of
determination, for any expenses incurred by the Agent in connection with the
preparation, negotiation, execution, delivery, administration, amendment,
modification, waiver or enforcement (whether through negotiations, legal
proceedings or otherwise) of, or legal advice in respect of rights or
responsibilities under, this Agreement or any of the other Credit Documents
(including, without limitation, reasonable attorneys' fees and expenses and
compensation of agents and employees paid for services rendered on behalf of the
Lenders); provided, however, that no Lender shall be liable for any portion of
such liabilities, obligations,
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losses, damages, penalties, actions, judgments, suits, costs, expenses or
disbursements to the extent resulting from the gross negligence or willful
misconduct of the party to be indemnified.
10.8 The Agent in its Individual Capacity. With respect to its Commitment,
the Loans made by it, the Letters of Credit issued or participated in by it and
the Note or Notes issued to it, the Agent in its individual capacity and not as
Agent shall have the same rights and powers under the Credit Documents as any
other Lender and may exercise the same as though it were not performing the
agency duties specified herein; and the terms "Lenders," "Required Lenders,"
"holders of Notes" and any similar terms shall, unless the context clearly
otherwise indicates, include the Agent in its individual capacity. The Agent and
its Affiliates may accept deposits from, lend money to, make investments in, and
generally engage in any kind of banking, trust, financial advisory or other
business with the Borrower, any of its Subsidiaries or any of their respective
Affiliates as if the Agent were not performing the agency duties specified
herein, and may accept fees and other consideration from any of them for
services in connection with this Agreement and otherwise without having to
account for the same to the Lenders.
10.9 Successor Agent. The Agent may resign at any time by giving ten (10)
days' prior written notice to the Borrower and the Lenders. Upon any such notice
of resignation, the Required Lenders will, with the prior written consent of the
Borrower (which consent shall not be unreasonably withheld), appoint from among
the Lenders a successor to the Agent (provided that the Borrower's consent shall
not be required in the event a Default or Event of Default shall have occurred
and be continuing). If no successor to the Agent shall have been so appointed by
the Required Lenders and shall have accepted such appointment within such
ten-day period, then the retiring Agent may, on behalf of the Lenders and after
consulting with the Lenders and the Borrower, appoint a successor Agent from
among the Lenders. Upon the acceptance of any appointment as Agent by a
successor Agent, such successor Agent shall thereupon succeed to and become
vested with all the rights, powers, privileges and duties of the retiring Agent,
and the retiring Agent shall be discharged from its duties and obligations
hereunder and under the other Credit Documents. After any retiring Agent's
resignation as Agent, the provisions of this Article shall inure to its benefit
as to any actions taken or omitted to be taken by it while it was Agent. If no
successor to the Agent has accepted appointment as Agent by the thirtieth (30th)
day following a retiring Agent's notice of resignation, the retiring Agent's
resignation shall nevertheless thereupon become effective, and the Lenders shall
thereafter perform all of the duties of the Agent hereunder and under the other
Credit Documents until such time, if any, as the Required Lenders appoint a
successor Agent as provided for hereinabove.
10.10 Issuing Lender. The provisions of this Article (other than Section
10.9) shall apply to the Issuing Lender mutatis mutandis to the same extent as
such provisions apply to the Agent.
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ARTICLE XI
MISCELLANEOUS
11.1 Fees and Expenses. The Borrower agrees (i) whether or not the
transactions contemplated by this Agreement shall be consummated, to pay upon
demand all reasonable out-of-pocket costs and expenses of the Agent (including,
without limitation, the reasonable fees and expenses of counsel to the Agent) in
connection with the Agent's due diligence investigation in connection with, and
the preparation, negotiation, execution, delivery and syndication of, this
Agreement and the other Credit Documents, and any amendment, modification or
waiver hereof or thereof or consent with respect hereto or thereto, (ii) to pay
upon demand all reasonable out-of-pocket costs and expenses of the Agent and
each Lender (including, without limitation, reasonable attorneys' fees and
expenses) in connection with (y) any refinancing or restructuring of the credit
arrangement provided under this Agreement, whether in the nature of a
"work-out," in any insolvency or bankruptcy proceeding or otherwise and whether
or not consummated, and (z) the enforcement, attempted enforcement or
preservation of any rights or remedies under this Agreement or any of the other
Credit Documents, whether in any action, suit or proceeding (including any
bankruptcy or insolvency proceeding) or otherwise, and (iii) to pay and hold the
Agent and each Lender harmless from and against all liability for any
intangibles, documentary, stamp or other similar taxes, fees and excises, if
any, including any interest and penalties, and any finder's or brokerage fees,
commissions and expenses (other than any fees, commissions or expenses of
finders or brokers engaged by the Agent or any Lender), that may be payable in
connection with the transactions contemplated by this Agreement and the other
Credit Documents.
11.2 Indemnification. (a) The Borrower agrees, whether or not the
transactions contemplated by this Agreement shall be consummated, to indemnify
and hold the Agent and each Lender and each of their respective directors,
officers, employees, agents and Affiliates (each, an "Indemnified Person")
harmless from and against any and all claims, losses, damages, obligations,
liabilities, penalties, costs and expenses (including, without limitation,
reasonable attorneys' fees and expenses) of any kind or nature whatsoever,
whether direct, indirect or consequential (collectively, "Indemnified Costs"),
that may at any time be imposed on, incurred by or asserted against any such
Indemnified Person as a result of, arising from or in any way relating to the
preparation, execution, performance or enforcement of this Agreement or any of
the other Credit Documents, any of the transactions contemplated herein or
therein or any transaction financed or to be financed in whole or in part,
directly or indirectly, with the proceeds of any Loans or Letters of Credit
(including, without limitation, in connection with the actual or alleged
generation, presence, discharge or release of any Hazardous Substances on, into
or from, or the transportation of Hazardous Substances to or from, any real
property at any time owned or leased by the Borrower or any of its Subsidiaries,
any other Environmental Claims or any violation of or liability under any
Environmental Law), or any action, suit or proceeding (including any inquiry or
investigation) by any Person, whether threatened or initiated, related to any of
the foregoing, and in any case whether or not such Indemnified Person is a party
to any such action, proceeding or suit or a subject of any such inquiry or
investigation; provided, however, that no Indemnified Person shall have the
right to be indemnified hereunder for any Indemnified Costs to the extent
resulting from the gross negligence or willful misconduct of such
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Indemnified Person. All of the foregoing Indemnified Costs of any Indemnified
Person shall be paid or reimbursed by the Borrower in accordance with this
Section 11.2, as and when incurred and upon demand.
(b) Promptly upon becoming aware of circumstances that may give rise to an
indemnification obligation under this Agreement, the Indemnified Person shall
give written notice thereof to the Borrower; provided, however, the failure of
any Indemnified Person to so notify the Borrower shall not relieve the Borrower
of any indemnification obligation hereunder except to the extent the Borrower
demonstrates that the defense of any claim or demand giving rise to
indemnification obligations hereunder is materially prejudiced by the failure to
give such notice. With respect to any claim in which the Borrower has expressly
acknowledged in writing (with reference to this Section 11.2) its obligations to
indemnify the Indemnified Persons hereunder, such Indemnified Persons shall give
the Borrower the sole and complete opportunity to direct and manage all events,
including litigation, from which such an indemnification obligations may arise
(x) the Borrower provides to the Indemnified Person evidence acceptable to such
Indemnified Persons that the Borrower will have the financial resources to
defend the claim and to fulfill its indemnification obligations hereunder, (y)
the Borrower conducts the defense of the claim actively and diligently with
counsel reasonably satisfactory to such Indemnified Persons, and (z) if the
Borrower is a party to the proceeding, joint representation would not be
inappropriate. The Indemnified Person shall cooperate fully with the Borrower in
responding to and defending against all claims of any nature giving rise to an
indemnification obligation provided that all out-of-pocket expenses incurred by
the Indemnified Person shall be paid by the Borrower. If the Borrower assumes
the defense of a proceeding with respect to any Indemnified Person, (i) no
compromise or settlement of such claims may be effected by the Borrower without
the Indemnified Person's consent unless (A) there is no finding or admission of
any violation of law or any violation of the rights of any Person and no effect
on any other claims that may be made against the Indemnified Person, and (B) the
sole relief provided is monetary damages that are paid in full by the Borrower;
and (ii) the Indemnified Person will have no liability with respect to any
compromise or settlement of such claims effected without its consent. The terms
of this Section shall not preclude the Indemnified Person from retaining its own
counsel to represent it, but the fees and expenses of such counsel shall be
solely the responsibility of the Indemnified Person and shall not be covered by
the foregoing indemnity.
(c) If (i) notice is given to the Borrower of the commencement of any
proceeding and the Borrower does not, within ten days after the Indemnified
Person's notice is given, give notice to the Indemnified Person of its election
to assume the defense of such proceeding, (ii) any of the conditions set forth
in clause (x)-(z) of Section 11.2(b) become unsatisfied, or (iii) an Indemnified
Person determines in good faith that there is a reasonable probability that a
proceeding may adversely affect it other than as a result of monetary damages
for which it would be entitled to indemnification under this Agreement, the
Indemnified Person will (upon further notice to the Borrower) have the right to
undertake the defense, compromise or settlement of such claim, provided that the
Borrower will reimburse the Indemnified Person promptly and periodically for the
costs of defending against the claim (including reasonable attorneys' fees and
expenses) and the Borrower will remain responsible for any indemnifiable amounts
arising from or related to such claim to the fullest extent provided in this
Section 11.2. The Borrower may elect to participate in such proceedings,
negotiations or defense at any time at its own expense.
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11.3 Governing Law; Consent to Jurisdiction. THIS AGREEMENT AND THE OTHER
CREDIT DOCUMENTS HAVE BEEN EXECUTED, DELIVERED AND ACCEPTED IN, AND SHALL BE
DEEMED TO HAVE BEEN MADE IN, NORTH CAROLINA AND SHALL BE GOVERNED BY AND
CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NORTH
CAROLINA (WITHOUT REGARD TO THE CONFLICTS OF LAW PROVISIONS THEREOF); PROVIDED
THAT EACH LETTER OF CREDIT SHALL BE GOVERNED BY AND CONSTRUED AND ENFORCED IN
ACCORDANCE WITH THE LAWS OR RULES DESIGNATED IN SUCH LETTER OF CREDIT OR, IF NO
SUCH LAWS OR RULES ARE DESIGNATED, THE UNIFORM CUSTOMS AND PRACTICES FOR
DOCUMENTARY CREDITS, INTERNATIONAL CHAMBER OF COMMERCE, AS IN EFFECT FROM TIME
TO TIME (THE "UNIFORM CUSTOMS"), AND, AS TO MATTERS NOT GOVERNED BY THE UNIFORM
CUSTOMS, THE LAWS OF THE STATE OF NORTH CAROLINA (WITHOUT REGARD TO THE
CONFLICTS OF LAW PROVISIONS THEREOF). THE BORROWER HEREBY CONSENTS TO THE
NONEXCLUSIVE JURISDICTION OF ANY STATE COURT WITHIN MECKLENBURG COUNTY, NORTH
CAROLINA OR ANY FEDERAL COURT LOCATED WITHIN THE WESTERN DISTRICT OF THE STATE
OF NORTH CAROLINA FOR ANY PROCEEDING INSTITUTED HEREUNDER OR UNDER ANY OF THE
OTHER CREDIT DOCUMENTS, OR ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT
OR ANY OF THE OTHER CREDIT DOCUMENTS, OR ANY PROCEEDING TO WHICH THE AGENT OR
ANY LENDER OR THE BORROWER IS A PARTY, INCLUDING ANY ACTIONS BASED UPON, ARISING
OUT OF, OR IN CONNECTION WITH ANY COURSE OF CONDUCT, COURSE OF DEALING,
STATEMENT (WHETHER ORAL OR WRITTEN) OR ACTIONS OF THE AGENT OR ANY LENDER OR THE
BORROWER. THE BORROWER IRREVOCABLY AGREES TO BE BOUND (SUBJECT TO ANY AVAILABLE
RIGHT OF APPEAL) BY ANY JUDGMENT RENDERED OR RELIEF GRANTED THEREBY AND FURTHER
WAIVES ANY OBJECTION THAT IT MAY HAVE BASED ON LACK OF JURISDICTION OR IMPROPER
VENUE OR FORUM NON CONVENIENS TO THE CONDUCT OF ANY SUCH PROCEEDING. THE
BORROWER CONSENTS THAT ALL SERVICE OF PROCESS BE MADE BY REGISTERED OR CERTIFIED
MAIL DIRECTED TO IT AT ITS ADDRESS SET FORTH HEREINBELOW, AND SERVICE SO MADE
SHALL BE DEEMED TO BE COMPLETED UPON THE EARLIER OF ACTUAL RECEIPT THEREOF OR
THREE (3) DAYS AFTER DEPOSIT IN THE UNITED STATES MAILS, PROPER POSTAGE PREPAID
AND PROPERLY ADDRESSED. NOTHING IN THIS SECTION SHALL AFFECT THE RIGHT TO SERVE
LEGAL PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR AFFECT THE RIGHT OF THE
AGENT OR ANY LENDER TO BRING ANY ACTION OR PROCEEDING AGAINST THE BORROWER IN
THE COURTS OF ANY OTHER JURISDICTION.
11.4 Arbitration; Preservation and Limitation of Remedies. (a) Upon demand
of any party hereto, whether made before or after institution of any judicial
proceeding, any dispute, claim or controversy arising out of, connected with or
relating to this Agreement or any other
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Credit Document ("Disputes") between or among the Borrower, its Subsidiaries,
the Agent and the Lenders, or any of them, shall be resolved by binding
arbitration as provided herein. Institution of a judicial proceeding by a party
does not waive the right of that party to demand arbitration hereunder. Disputes
may include, without limitation, tort claims, counterclaims, claims brought as
class actions, claims arising from documents executed in the future, disputes as
to whether a matter is subject to arbitration, or claims arising out of or
connected with the transactions contemplated by this Agreement and the other
Credit Documents. Arbitration shall be conducted under and governed by the
Commercial Financial Disputes Arbitration Rules (the "Arbitration Rules") of the
American Arbitration Association (the "AAA"), as in effect from time to time,
and the Federal Arbitration Act, Title 9 of the U.S. Code, as amended. All
arbitration hearings shall be conducted in the Borough of Manhattan, in the City
of New York, State of New York. A hearing shall begin within ninety (90) days of
demand for arbitration and all hearings shall be concluded within 120 days of
demand for arbitration. These time limitations may not be extended unless a
party shows cause for extension and then for no more than a total of sixty (60)
days. The expedited procedures set forth in Rule 51 et seq. of the Arbitration
Rules shall be applicable to claims of less than $1,000,000. All applicable
statutes of limitation shall apply to any Dispute. A judgment upon the award may
be entered in any court having jurisdiction. The panel from which all
arbitrators are selected shall be comprised of licensed attorneys selected from
the Commercial Financial Dispute Arbitration Panel of the AAA. The single
arbitrator selected for expedited procedure shall be a retired judge from the
highest court of general jurisdiction, state or federal, of the state where the
hearing will be conducted. Notwithstanding the foregoing, this arbitration
provision does not apply to Disputes under or related to any Hedge Agreement
that is a Credit Document. The parties do not waive applicable federal or state
substantive law except as provided herein.
(b) Notwithstanding the preceding binding arbitration provisions, the
parties hereto agree to preserve, without diminution, certain remedies that any
party hereto may employ or exercise freely, either alone, in conjunction with or
during a Dispute. Any party hereto shall have the right to proceed in any court
of proper jurisdiction or by self-help to exercise or prosecute the following
remedies, as applicable: (i) all rights of self-help, including peaceful
occupation of real property and collection of rents, set-off, and peaceful
possession of personal property; (ii) obtaining provisional or ancillary
remedies, including injunctive relief, sequestration, garnishment, attachment,
appointment of a receiver and filing an involuntary bankruptcy proceeding; and
(iii) when applicable, a judgment by confession of judgment. Any claim or
controversy with regard to any party's entitlement to such remedies is a
Dispute. Preservation of these remedies does not limit the power of an
arbitrator to grant similar remedies that may be requested by a party in a
Dispute. The parties hereto agree that no party shall have a remedy of punitive
or exemplary damages against any other party in any Dispute, and each party
hereby waives any right or claim to punitive or exemplary damages that it has
now or that may arise in the future in connection with any Dispute, whether such
Dispute is resolved by arbitration or judicially. The parties acknowledge that
by agreeing to binding arbitration they have irrevocably waived any right they
may have to a jury trial with regard to a Dispute.
11.5 Notices. All notices and other communications provided for hereunder
shall be in writing (including telegraphic, telex, facsimile transmission or
cable communication) and
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mailed, telegraphed, telexed, telecopied, cabled or delivered to the party to be
notified at the following addresses:
(a) if to the Borrower, to 420 South York Road, Hatboro, Pennsylvania
19040 Attention: Rosemary Ferrero, Telecopy No. (215) 443-3603, with a copy
to Penn-America Group, Inc., Attention: Garland Pezzuolo, Telecopy No.
(215) 443-3603;
(b) if to the Agent, (i) if, at such time, there is a Lender other
than First Union or any Affiliate thereof, to First Union National Bank,
One First Union Center, DC-4, 301 South College Street, Charlotte, North
Carolina 28288-0680, Attention: Syndication Agency Services, Telecopy No.
(704) 383-0288; and (ii) otherwise, (A) for a Notice of Borrowing, a Notice
of Conversion/Continuation and a Letter of Credit Notice, to First Union,
at the address for the Lending Office set forth on its signature page
hereto, and (B) for all other notices, to First Union, at the address for
notices as a Lender set forth on its signature page hereto; and
(c) if to any Lender, to it at the address set forth on its signature
page hereto (or if to any Lender not a party hereto as of the date hereof,
at the address set forth in its Assignment and Acceptance);
or in each case, to such other address as any party may designate for itself by
like notice to all other parties hereto. All such notices and communications
shall be deemed to have been given (i) if mailed as provided above by any method
other than overnight delivery service, on the third Business Day after deposit
in the mails, (ii) if mailed by overnight delivery service, telegraphed,
telexed, telecopied or cabled, when delivered for overnight delivery, delivered
to the telegraph company, confirmed by telex answerback, transmitted by
telecopier or delivered to the cable company, respectively, or (iii) if
delivered by hand, upon delivery; provided that notices and communications to
the Agent shall not be effective until received by the Agent.
11.6 Amendments, Waivers, etc. No amendment, modification, waiver or
discharge or termination of, or consent to any departure by the Agent, the
Issuing Lender or ainy Lender from, any provision of this Agreement or any other
Credit Document shall be effective unless in a writing signed by the Borrower,
and then the same shall be effective only in the specific instance and for the
specific purpose for which given. No amendment, modification, waiver or
discharge or termination of, or consent to any departure by the Borrower from,
any provision of this Agreement or any other Credit Document, shall be effective
unless in a writing signed by the Required Lenders (or by the Agent at the
direction or with the consent of the Required Lenders), and then the same shall
be effective only in the specific instance and for the specific purpose for
which given; provided, however, that no such amendment, modification, waiver,
discharge, termination or consent shall:
(a) unless agreed to by each Lender directly affected thereby, (i) reduce
or forgive the principal amount of any Loan, reduce the rate of or forgive any
interest thereon, or reduce or forgive any fees or other Obligations (other than
fees payable to the Agent for its own account), or (ii) extend the Maturity Date
or any other date (including any scheduled date for the mandatory reduction or
termination of any Commitments) fixed for the payment of any principal
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of or interest on any Loan (other than additional interest payable under Section
2.8(b) at the election of the Required Lenders, as provided therein), any fees
(other than fees payable to the Agent for its own account) or any other
Obligations or extend the expiry date of any Letter of Credit beyond the seventh
day prior to the Maturity Date;
(b) unless agreed to by all of the Lenders, (i) increase or extend any
Commitment of any Lender (it being understood that a waiver of any Event of
Default, if agreed to by the requisite Lenders hereunder, shall not constitute
such an increase), (ii) change the percentage of the aggregate Commitments or of
the aggregate unpaid principal amount of the Loans, or the number or percentage
of Lenders, that shall be required for the Lenders or any of them to take or
approve, or direct the Agent to take, any action hereunder (including as set
forth in the definition of "Required Lenders"), or (iii) change any provision of
Section 2.15 or this Section; and
(c) unless agreed to by the Issuing Lender or the Agent in addition to the
Lenders required as provided hereinabove to take such action, affect the
respective rights or obligations of the Issuing Lender or the Agent, as
applicable, hereunder or under any of the other Credit Documents;
and provided further that the Fee Letter and any Hedge Agreement to which any
Lender is a party may be amended or modified, and any rights thereunder waived,
in a writing signed by the parties thereto.
11.7 Assignments, Participations. (a) Each Lender may assign to one or more
other Eligible Assignees (each, an "Assignee") all or a portion of its rights
and obligations under this Agreement (including, without limitation, all or a
portion of its Commitment, the outstanding Loans made by it, the Note or Notes
held by it and its participations in Letters of Credit); provided, however, that
(i) any such assignment (other than an assignment to a Lender or an Affiliate of
a Lender) shall not be made without the prior written consent of the Agent and
the Borrower (to be evidenced by its counterexecution of the relevant Assignment
and Acceptance), which consent shall not be unreasonably withheld (provided that
the Borrower's consent shall not be required in the event a Default or Event of
Default shall have occurred and be continuing), (ii) each such assignment shall
be of a uniform, and not varying, percentage of all of the assigning Lender's
rights and obligations under this Agreement, (iii) except in the case of an
assignment to a Lender or an Affiliate of a Lender, no such assignment shall be
in an aggregate principal amount (determined as of the date of the Assignment
and Acceptance with respect to such assignment) less than $2,500,000 determined
by combining the amount of the assigning Lender's outstanding Loans, Letter of
Credit Exposure and Unutilized Commitment being assigned pursuant to such
assignment (or, if less, the entire Commitment of the assigning Lender), and
(iv) the parties to each such assignment will execute and deliver to the Agent,
for its acceptance and recording in the Register, an Assignment and Acceptance,
together with any Note or Notes subject to such assignment, and will pay a
nonrefundable processing fee of $3,000 to the Agent for its own account. Upon
such execution, delivery, acceptance and recording of the Assignment and
Acceptance, from and after the effective date specified therein, which effective
date shall be at least five Business Days after the execution thereof (unless
the Agent shall otherwise agree), (A) the Assignee thereunder shall be a party
hereto and, to the extent that rights and obligations hereunder have been
assigned to it pursuant to such Assignment and
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Acceptance, shall have the rights and obligations of the assigning Lender
hereunder with respect thereto and (B) the assigning Lender shall, to the extent
that rights and obligations hereunder have been assigned by it pursuant to such
Assignment and Acceptance, relinquish its rights (other than rights under the
provisions of this Agreement and the other Credit Documents relating to
indemnification or payment of fees, costs and expenses, to the extent such
rights relate to the time prior to the effective date of such Assignment and
Acceptance) and be released from its obligations under this Agreement (and, in
the case of an Assignment and Acceptance covering all or the remaining portion
of such assigning Lender's rights and obligations under this Agreement, such
Lender shall cease to be a party hereto). The terms and provisions of each
Assignment and Acceptance shall, upon the effectiveness thereof, be incorporated
into and made a part of this Agreement, and the covenants, agreements and
obligations of each Lender set forth therein shall be deemed made to and for the
benefit of the Agent and the other parties hereto as if set forth at length
herein.
(b) The Agent will maintain at its address for notices referred to herein 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
Commitments 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 and each Lender at any reasonable time
and from time to time upon reasonable prior notice.
(c) Upon its receipt of a duly completed Assignment and Acceptance executed
by an assigning Lender and an Assignee and, if required, counterexecuted by the
Borrower, together with the Note or Notes subject to such assignment and the
processing fee referred to in subsection (a) above, the Agent will (i) accept
such Assignment and Acceptance, (ii) on the effective date thereof, record the
information contained therein in the Register and (iii) give notice thereof to
the Borrower and the Lenders. Within five (5) Business Days after its receipt of
such notice, the Borrower, at its own expense, will execute and deliver to the
Agent, in exchange for the surrendered Note or Notes, a new Note or Notes to the
order of the Assignee (and, if the assigning Lender has retained any portion of
its rights and obligations hereunder, to the order of the assigning Lender),
prepared in accordance with the provisions of Section 2.4 as necessary to
reflect, after giving effect to the assignment, the Commitments of the Assignee
and (to the extent of any retained interests) the assigning Lender, dated the
date of the replaced Note or Notes and otherwise in substantially the form of
Exhibit A. The Agent will return canceled Notes to the Borrower.
(d) Each Lender may, without the consent of the Borrower, the Agent or any
other Lender, sell to one or more other Persons (each, a "Participant")
participations in any portion comprising less than all of its rights and
obligations under this Agreement (including, without limitation, a portion of
its Commitment, the outstanding Loans made by it, the Note or Notes held by it
and its participations in Letters of Credit); provided, however, that (i) such
Lender's obligations under this Agreement shall remain unchanged and such Lender
shall remain solely responsible for the performance of such obligations, (ii) no
Lender shall sell any participation
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that, when taken together with all other participations, if any, sold by such
Lender, covers all of such Lender's rights and obligations under this Agreement,
(iii) the Borrower, the Agent and the other Lenders shall continue to deal
solely and directly with such Lender in connection with such Lender's rights and
obligations under this Agreement, and no Lender shall permit any Participant to
have any voting rights or any right to control the vote of such Lender with
respect to any amendment, modification, waiver, consent or other action
hereunder or under any other Credit Document (except as to actions that would
(x) reduce or forgive the principal amount of any Loan, reduce the rate of or
forgive any interest thereon, or reduce or forgive any fees or other
Obligations, (y) extend the Maturity Date or any other date fixed for the
payment of any principal of or interest on any Loan, any fees or any other
Obligations, or (z) increase or extend any Commitment of any Lender), and (iv)
no Participant shall have any rights under this Agreement or any of the other
Credit Documents, each Participant's rights against the granting Lender in
respect of any participation to be those set forth in the participation
agreement, and all amounts payable by the Borrower hereunder shall be determined
as if such Lender had not granted such participation. Notwithstanding the
foregoing, each Participant shall have the rights of a Lender for purposes of
Sections 2.16(a), 2.16(b), 2.17, 2.18 and 9.3, and shall be entitled to the
benefits thereto, to the extent that the Lender granting such participation
would be entitled to such benefits if the participation had not been made,
provided that no Participant shall be entitled to receive any greater amount
pursuant to any of such Sections than the Lender granting such participation
would have been entitled to receive in respect of the amount of the
participation made by such Lender to such Participant had such participation not
been made.
(e) Nothing in this Agreement shall be construed to prohibit any Lender
from pledging or assigning all or any portion of its rights and interest
hereunder or under any Note to any Federal Reserve Bank as security for
borrowings therefrom; provided, however, that no such pledge or assignment shall
release a Lender from any of its obligations hereunder.
(f) Any Lender or participant may, in connection with any assignment or
participation or proposed assignment or participation pursuant to this Section,
disclose to the Assignee or Participant or proposed Assignee or Participant any
information relating to the Borrower and its Subsidiaries furnished to it by or
on behalf of any other party hereto, provided that such Assignee or Participant
or proposed Assignee or Participant agrees in writing to keep such information
confidential to the same extent required of the Lenders under Section 11.13.
11.8 No Waiver. The rights and remedies of the Agent and the Lenders
expressly set forth in this Agreement and the other Credit Documents are
cumulative and in addition to, and not exclusive of, all other rights and
remedies available at law, in equity or otherwise. No failure or delay on the
part of the Agent or any Lender in exercising any right, power or privilege
shall operate as a waiver thereof, nor shall any single or partial exercise of
any such right, power or privilege preclude other or further exercise thereof or
the exercise of any other right, power or privilege or be construed to be a
waiver of any Default or Event of Default. No course of dealing between any of
the Borrower and the Agent or the Lenders or their agents or employees shall be
effective to amend, modify or discharge any provision of this Agreement or any
other Credit Document or to constitute a waiver of any Default or Event of
Default. No notice to or demand upon the Borrower in any case shall entitle the
Borrower to any other or further notice or demand in similar or other
circumstances or constitute a waiver of the right of the Agent or any Lender to
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exercise any right or remedy or take any other or further action in any
circumstances without notice or demand.
11.9 Successors and Assigns. This Agreement shall be binding upon, inure to
the benefit of and be enforceable by the respective successors and assigns of
the parties hereto, and all references herein to any party shall be deemed to
include its successors and assigns; provided, however, that (i) the Borrower
shall not sell, assign or transfer any of its rights, interests, duties or
obligations under this Agreement without the prior written consent of all of the
Lenders and (ii) any Assignees and Participants shall have such rights and
obligations with respect to this Agreement and the other Credit Documents as are
provided for under and pursuant to the provisions of Section 11.7.
11.10 Survival. All representations, warranties and agreements made by or
on behalf of the Borrower or any of its Subsidiaries in this Agreement and in
the other Credit Documents shall survive the execution and delivery hereof or
thereof, the making and repayment of the Loans and the issuance and repayment of
the Letters of Credit. In addition, notwithstanding anything herein or under
applicable law to the contrary, the provisions of this Agreement and the other
Credit Documents relating to indemnification or payment of fees, costs and
expenses, including, without limitation, the provisions of Sections 2.16(a),
2.16(b), 2.17, 2.18, 10.7, 11.1 and 11.2, shall survive the payment in full of
all Loans and Letters of Credit, the termination of the Commitments and all
Letters of Credit, and any termination of this Agreement or any of the other
Credit Documents.
11.11 Severability. To the extent any provision of this Agreement is
prohibited by or invalid under the applicable law of any jurisdiction, such
provision shall be ineffective only to the extent of such prohibition or
invalidity and only in such jurisdiction, without prohibiting or invalidating
such provision in any other jurisdiction or the remaining provisions of this
Agreement in any jurisdiction.
11.12 Construction. The headings of the various articles, sections and
subsections of this Agreement have been inserted for convenience only and shall
not in any way affect the meaning or construction of any of the provisions
hereof. Except as otherwise expressly provided herein and in the other Credit
Documents, in the event of any inconsistency or conflict between any provision
of this Agreement and any provision of any of the other Credit Documents, the
provision of this Agreement shall control.
11.13 Confidentiality. Each Lender agrees to keep confidential, pursuant to
its customary procedures for handling confidential information of a similar
nature and in accordance with safe and sound banking practices, all nonpublic
information provided to it by or on behalf of the Borrower or any of its
Subsidiaries in connection with this Agreement or any other Credit Document;
provided, however, that any Lender may disclose such information (i) to its
directors, employees, agents, auditors, counsel and other professional advisors
that such Lender has reasonably determined need to know such information, (ii)
at the demand or request of any bank regulatory authority, court or other
Governmental Authority having or asserting jurisdiction over such Lender, as may
be required pursuant to subpoena or other legal process, or otherwise in order
to comply with any applicable Requirement of Law, (iii) in connection with any
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proceeding to enforce its rights hereunder or under any other Credit Document or
any other litigation or proceeding related hereto or to which it is a party,
(iv) to the Agent or any other Lender, (v) to the extent the same has become
publicly available other than as a result of a breach of this Agreement and (vi)
pursuant to and in accordance with the provisions of Section 11.7(f).
11.14 Counterparts; Effectiveness. This Agreement may be executed in any
number of counterparts and by different parties hereto on separate counterparts,
each of which when so executed and delivered shall be an original, but all of
which shall together constitute one and the same instrument. This Agreement
shall become effective upon the execution of a counterpart hereof by each of the
parties hereto and receipt by the Agent and the Borrower of written or
telephonic notification of such execution and authorization of delivery thereof.
11.15 Disclosure of Information. The Borrower agrees and consents to the
Agent's disclosure of information relating to this transaction to Gold Sheets
and other similar bank trade publications. Such information will consist of deal
terms and other information customarily found in such publications.
11.16 Entire Agreement. THIS AGREEMENT AND THE OTHER DOCUMENTS AND
INSTRUMENTS EXECUTED AND DELIVERED IN CONNECTION HEREWITH (A) EMBODY THE ENTIRE
AGREEMENT AND UNDERSTANDING BETWEEN THE PARTIES HERETO AND THERETO RELATING TO
THE SUBJECT MATTER HEREOF AND THEREOF, (B) SUPERSEDE ANY AND ALL PRIOR
AGREEMENTS AND UNDERSTANDINGS OF SUCH PERSONS, ORAL OR WRITTEN, RELATING TO THE
SUBJECT MATTER HEREOF AND THEREOF, INCLUDING, WITHOUT LIMITATION, THE COMMITMENT
LETTER FROM FIRST UNION TO THE BORROWER DATED JULY 17, 1998 BUT SPECIFICALLY
EXCLUDING THE FEE LETTER, AND (C) MAY NOT BE AMENDED, SUPPLEMENTED, CONTRADICTED
OR OTHERWISE MODIFIED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL
AGREEMENTS OF THE PARTIES.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their duly authorized officers as of the date first above written.
PENN-AMERICA GROUP, INC.
By:/s/ Jon S Saltzman
Title: President
----------------------------------
(signatures continued)
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FIRST UNION NATIONAL BANK, as Agent
and as a Lender
By: __________________________________
Commitment:
$25,000,000 Title: _______________________________
Instructions for wire
transfers to the Agent:
First Union National Bank
ABA Routing No. 031201467
Charlotte, North Carolina
Account Number: 465906 5101544
Reference: Penn-America Group, Inc.
Attention: Callie Moses
Address for notices as a Lender:
First Union National Bank
Financial Institutions Group
1339 Chestnut Street, PA4819
Philadelphia, Pennsylvania 19101-4819
Attention: Joseph DiFrancesco
Telephone: (215) 973-2944
Telecopy: (215) 786-4114
Lending Office:
First Union National Bank
One First Union Center, 5th Floor
301 South College Street
Charlotte, North Carolina 28288-0735
Attention: Callie Moses
Telephone: (704) 383-9326
Telecopy: (704) 383-7611
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EXHIBIT A
Borrower's Taxpayer Identification No. 23-2731409
FORM OF NOTE
$___________ ____________, 1998
Charlotte, North Carolina
FOR VALUE RECEIVED, PENN-AMERICA GROUP, INC., a Pennsylvania corporation
(the "Borrower"), hereby promises to pay to the order of
______________________________ (the "Lender"), at the offices of First
Union National Bank (the "Agent") located at One First Union Center, 301 South
College Street, Charlotte, North Carolina (or at such other place or places as
the Agent may designate), at the times and in the manner provided in the Credit
Agreement, dated as of _______________, 1998 (as amended, modified or
supplemented from time to time, the "Credit Agreement"), among the Borrower, the
Lenders from time to time parties thereto, and First Union National Bank, as
Agent, the principal sum of
__________________________ DOLLARS ($___________), or such lesser amount as
may constitute the unpaid principal amount of the Loans made by the Lender,
under the terms and conditions of this promissory note (this "Note") and the
Credit Agreement. The defined terms in the Credit Agreement are used herein with
the same meaning. The Borrower also unconditionally promises to pay interest on
the aggregate unpaid principal amount of this Note at the rates applicable
thereto from time to time as provided in the Credit Agreement.
This Note is one of a series of Notes referred to in the Credit Agreement
and is issued to evidence the Loans made by the Lender pursuant to the Credit
Agreement. All of the terms, conditions and covenants of the Credit Agreement
are expressly made a part of this Note by reference in the same manner and with
the same effect as if set forth herein at length, and any holder of this Note is
entitled to the benefits of and remedies provided in the Credit Agreement and
the other Credit Documents. Reference is made to the Credit Agreement for
provisions relating to the interest rate, maturity, payment, prepayment and
acceleration of this Note.
In the event of an acceleration of the maturity of this Note, this Note
shall become immediately due and payable, without presentation, demand, protest
or notice of any kind, all of which are hereby waived by the Borrower.
<PAGE>
In the event this Note is not paid when due at any stated or accelerated
maturity, the Borrower agrees to pay, in addition to the principal and interest,
all costs of collection, including reasonable attorneys' fees.
This Note shall be governed by and construed in accordance with the
internal laws and judicial decisions of the State of North Carolina. The
Borrower hereby submits to the nonexclusive jurisdiction and venue of the
federal and state courts located in Mecklenburg County, North Carolina, although
the Lender shall not be limited to bringing an action in such courts.
IN WITNESS WHEREOF, the Borrower has caused this Note to be executed by its
duly authorized corporate officer as of the day and year first above written.
PENN-AMERICA GROUP, INC.
By: __________________________________
Title: _______________________________
<PAGE>
EXHIBIT B-1
FORM OF
NOTICE OF BORROWING
[Date]
First Union National Bank
One First Unioin Center, 5th Floor
301 South College Street
Charlotte, North Carolina 28288-0735
Attention: Callie Moses
Ladies and Gentlemen:
The undersigned, PENN-AMERICA GROUP, INC. (the "Borrower"), refers to the
Credit Agreement, dated as of _________________, 1998, among the Borrower,
certain banks and other financial institutions from time to time parties thereto
(the "Lenders"), and you, as Agent for the Lenders (as amended, modified or
supplemented from time to time, the "Credit Agreement," the terms defined
therein being used herein as therein defined), and, pursuant to Section 2.2(b)
of the Credit Agreement, hereby gives you, as Agent, irrevocable notice that the
Borrower requests a Borrowing of Loans under the Credit Agreement, and to that
end sets forth below the information relating to such Borrowing (the "Proposed
Borrowing") as required by Section 2.2(b) of the Credit Agreement:
(i) The aggregate principal amount of the Proposed Borrowing is
$_______________.1
(ii) The Loans comprising the Proposed Borrowing shall be
initially made as [Base Rate Loans] [LIBOR Loans].2
[(iii) The initial Interest Period for the LIBOR Loans comprising
the Proposed Borrowing shall be [one/two/three/six months].]3
(iv) The Proposed Borrowing is requested to be made on
__________________ (the "Borrowing Date").4
1 Amount of Proposed Borrowing must comply with Section 2.2(b) of the Credit
Agreement.
2 Select the applicable Typr of Loans
3 Include this clause in the case of a Proposed Borrowing comprised of LIBOR
Loans, and select the applicable Interest Period.
<PAGE>
The Borrower hereby certifies that the following statements are true on and as
of the date hereof and will be true on and as of the Borrowing Date:
A. Each of the representations and warranties contained in Article V
of the Credit Agreement and in the other Credit Documents is and will be
true and correct on and as of each such date, with the same effect as if
made on and as of each such date, both immediately before and after giving
effect to the Proposed Borrowing and to the application of the proceeds
therefrom (except to the extent any such representation or warranty is
expressly stated to have been made as of a specific date, in which case
such representation or warranty shall be true and correct as of such date);
B. No Default or Event of Default has occurred and is continuing or
would result from the Proposed Borrowing or from the application of the
proceeds therefrom; and
C. After giving effect to the Proposed Borrowing, the sum of (i) the
aggregate principal amount of Loans outstanding, and (ii) the aggregate
Letter of Credit Exposure of all Lenders, will not exceed the aggregate
Credit Commitment
Very truly yours,
PENN-AMERICA GROUP, INC.
By: ___________________________________
Title: __________________________________
4 Shall be a Business Day at least one Business Day after the date hereof (in
the case of Base Rate Loans) or at least three Business Days after the date
hereof (in the case of LIBOR Loans).
<PAGE>
EXHIBIT B-2
FORM OF
NOTICE OF CONVERSION/CONTINUATION
[Date]
First Union National Bank
One First Unioin Center, 5th Floor
301 South College Street
Charlotte, North Carolina 28288-0735
Attention: Callie Moses
Ladies and Gentlemen:
The undersigned, PENN-AMERICA GROUP, INC. (the "Borrower"), refers to the
Credit Agreement, dated as of _______________, 1998, among the Borrower, certain
banks and other financial institutions from time to time parties thereto (the
"Lenders"), and you, as Agent for the Lenders (as amended, modified or
supplemented from time to time, the "Credit Agreement," the terms defined
therein being used herein as therein defined), and, pursuant to Section 2.11(b)
of the Credit Agreement, hereby gives you, as Agent, irrevocable notice that the
Borrower requests a [conversion] [continuation]1 of Loans under the Credit
Agreement, and to that end sets forth below the information relating to such
[conversion] [continuation] (the "Proposed [Conversion] [Continuation]") as
required by Section 2.11(b) of the Credit Agreement:
(i) The Proposed [Conversion] [Continuation] is requested to be made
on _______________.2
(ii) The Proposed [Conversion] [Continuation] involves $____________3
in aggregate principal amount of Loans made pursuant to a Borrowing on
________________,4 which Loans are presently maintained as
________________________
1 Insert "conversion" or "continuation" throughout the notice, as applicable.
2 Shall be a Business Day at least one Business Day after the date hereof (in
the case of any conversion of LIBOR Loans into Base Rate Loans) or at least
three Business Days after the date hereof (in the case of any conversion of
Base Rate Loans into, or continuation of, LIBOR Loans), and additionally,
in the case of any conversion of LIBOR Loans into Base Rate Loans, or
continuation of LIBOR Loans, shall be the last day of the Interest Period
applicable to such LIBOR Loans.
3 Amount of Proposed Conversion or Continuation must comply with Section
2.11(a) of the Credit Agreement.
4 Insert the applicable Borrowing Date for the Loans being converted or
continued.
<PAGE>
[Base Rate] [LIBOR] Loans and are proposed hereby to be [converted into
Base Rate Loans] [converted into LIBOR Loans] [continued as LIBOR Loans].5
[(iii) The initial Interest Period for the Loans being [converted
into] [continued as] LIBOR Loans pursuant to the Proposed [Conversion]
[Continuation] shall be [one/two/three/six months].]6
The Borrower hereby certifies that the following statement is true both on
and as of the date hereof and on and as of the effective date of the Proposed
[Conversion] [Continuation]: no Default or Event of Default has or will have
occurred and is continuing or would result from the Proposed [Conversion]
[Continuation].
Very truly yours,
PENN-AMERICA GROUP, INC.
By: ___________________________________
Title: __________________________________
5 Complete with the applicable bracketed language.
6 Include this clause in the case of a Proposed Conversion or Continuation
involving a conversion of Base Rate Loans into, or continuation of, LIBOR
Loans, and select the applicable Interest Period.
<PAGE>
EXHIBIT B-3
FORM OF
LETTER OF CREDIT NOTICE
[Date]
First Union National Bank
One First Unioin Center, 5th Floor
301 South College Street
Charlotte, North Carolina 28288-0735
Attention: Callie Moses
Ladies and Gentlemen:
The undersigned, PENN-AMERICA GROUP, INC. (the "Borrower"), refers to the
Credit Agreement, dated as of ___________________, 1998, among the Borrower,
certain banks and other financial institutions from time to time parties thereto
(the "Lenders"), and you, as Agent for the Lenders (as amended, modified or
supplemented from time to time, the "Credit Agreement," the terms defined
therein being used herein as therein defined), and, pursuant to Section 3.2 of
the Credit Agreement, hereby gives you, as Issuing Lender, irrevocable notice
that the Borrower requests the issuance of a Letter of Credit for the account of
PAIC under the Credit Agreement, and to that end sets forth below the
information relating to such Letter of Credit (the "Requested Letter of Credit")
as required by Section 3.2 of the Credit Agreement:
(i) The Requested Letter of Credit is to be issued for the account of
Penn-America Insurance Company, a Wholly Owned Subsidiary of the Borrower.
(ii) The Business Day on which the Requested Letter of Credit is
requested to be issued is _______________.1
(iii) The Stated Amount of the Requested Letter of Credit is
$____________.
(iv) The expiry date of the Requested Letter of Credit is
____________. [The undersigned requests that the expiry date of the
Requested Letter of Credit be subject to extension, on such terms and
conditions acceptable to the Issuing Lender, for successive periods of one
year or less until such time as the Issuing Lender shall
1 Shall be at least three Business Days (or such shorter period as is
acceptable to the Issuing Lender in any given case) after the date hereof.
<PAGE>
have delivered a notice of nonrenewal to the beneficiary of such Requested
Letter of Credit provided that no Requested Letter of Credit shall be
renewed for a term that would expire beyond the seventh day prior to the
Maturity Date.]2.
(v) The name and address of the beneficiary of the Requested Letter of
Credit is ------------.
The undersigned agrees to complete all application procedures and documents
required by you in connection with the Requested Letter of Credit.
The undersigned hereby certifies that the following statements are true on
the date hereof and will be true on the date of issuance of the Requested Letter
of Credit:
A. Each of the representations and warranties contained in Article V
of the Credit Agreement and in the other Credit Documents is and will be
true and correct on and as of each such date, with the same effect as if
made on and as of each such date, both immediately before and after giving
effect to the issuance of the Requested Letter of Credit (except to the
extent any such representation or warranty is expressly stated to have been
made as of a specific date, in which case such representation or warranty
shall be true and correct as of such date);
B. No Default or Event of Default has occurred and is continuing or
would result from the issuance of the Requested Letter of Credit; and
C. After giving effect to the issuance of the Requested Letter of
Credit, the sum of (i) the aggregate principal amount of Loans outstanding,
and (ii) the aggregate Letter of Credit Exposure of all Lenders, will not
exceed the aggregate Commitments.
Very truly yours,
PENN-AMERICA GROUP, INC.
By: ___________________________________
Title: ________________________________
2 Include this clause in case of an "evergreen" Letter of Credit.
<PAGE>
EXHIBIT C-1
FORM OF
COMPLIANCE CERTIFICATE
(GAAP)
THIS CERTIFICATE is given pursuant to Section 6.3(a) of the Credit
Agreement, dated as of _______________, 1998 (as amended, modified or
supplemented from time to time, the "Credit Agreement," the terms defined
therein being used herein as therein defined), among PENN-AMERICA GROUP, INC.
(the "Borrower"), certain banks and other financial institutions from time to
time parties thereto (the "Lenders"), and First Union National Bank, as Agent
for the Lenders.
The undersigned hereby certifies that:
1. [He][She] is the duly elected [chief financial officer][vice president,
finance] [principal accounting officer] [treasurer] of the Borrower.
2. Enclosed with this Certificate are copies of the financial statements of
the Borrower and its Subsidiaries as of _____________, and for the
[________-month period] [year] then ended, required to be delivered under
Section [6.1(a)][6.1(b)] of the Credit Agreement. Such financial statements have
been prepared in accordance with GAAP [(subject to the absence of notes required
by GAAP and subject to normal year-end adjustments)]1 and fairly present the
financial condition of the Borrower and its Subsidiaries on a consolidated basis
as of the date indicated and the results of operation of the Borrower and its
Subsidiaries on a consolidated basis for the period covered thereby.
3. The undersigned has reviewed the terms of the Credit Agreement and has
made, or caused to be made under the supervision of the undersigned, a review in
reasonable detail of the transactions and condition of the Borrower and its
Subsidiaries during the accounting period covered by such financial statements.
4. The examination described in paragraph 3 above did not disclose, and the
undersigned has no knowledge of the existence of, any Default or Event of
Default during or at the end of the accounting period covered by such financial
statements or as of the date of this Certificate. [, except as set forth below.
1 Insert in the case of quarterly statements.
<PAGE>
Describe here or in a separate attachment any exceptions to paragraph 4 above by
listing, in reasonable detail, the nature of the Default or Event of Default,
the period during which it existed and the action that the Borrower has taken or
proposes to take with respect thereto.]
5. Attached to this Certificate as Attachment A is a Covenant Compliance
Worksheet reflecting the computation of the financial covenants subject to GAAP
set forth in Sections 7.1, 7.2 and 7.3 of the Credit Agreement as of the last
day of the period covered by the financial statements enclosed herewith.
IN WITNESS WHEREOF, the undersigned has executed and delivered this
Certificate as of the _______ day of -------------, ----.
PENN-AMERICA GROUP, INC.
By: _________________________________
Name: _________________________________
Title: _________________________________
<PAGE>
ATTACHMENT A
COVENANT COMPLIANCE WORKSHEET
A. Leverage Ratio (Section 7.1 of the Credit Agreement)
(shall not exceed 0.35:1.00)
(1) Consolidated Indebtedness as of the date
of determination
(a) Indebtedness set forth on the
Borrower's consolidated balance
sheet $______________
(b) Other Indebtedness of the
Borrower or any Subsidiary
(Please list separately)
PAIC $______________
PSIC $______________
(list any others) $______________
(c) Consolidated Indebtedness of the
Borrower (sum of Lines 1(a) and 1(b)) $
===========
(2) Sum of Consolidated Indebtedness and
Consolidated Net Worth as of the date of
determination
(a) Consolidated Indebtedness
(from Line 1(c) above) $______________
(b) Consolidated Net Worth
(from balance sheet, exclusive of
Disqualified Capital Stock) $______________
(c) Sum of Lines 2(a) and 2(b) $
===========
(3) Leverage Ratio:
Divide Line 1(c) by Line 2(c) ===========
i
<PAGE>
B. Consolidated Net Worth (Section 7.2 of the Credit Agreement)
(line 1 may not be less than line 3)
(1) Actual Consolidated Net Worth (as of date of determination) $
=========
(2) Base for calculating required Consolidated Net Worth
(a) 85% of Consolidated Net Worth as of 6/30/98 $__________
(b) 50% of aggregate of Consolidated Net Income for each fiscal
quarter ending after 6/30/98 (Consolidated Net Income for any
such quarter
included only if positive) $__________
(c) 75% of aggregate increases from
issuance of equity securities $__________
(d) Stock repurchases occurring between
6/30/98 and 9/30/992 $__________
(3) Required Consolidated Net Worth:
(Line 2(a) plus Line 2(b) plus
Line 2(c) minus Line 2(d)) $
=========
ii
<PAGE>
C. Fixed Charge Coverage Ratio (Section 7.3 of the Credit Agreement)
(shall not be less than 1.25 : 1.0)
(1) Available coverage as of the last day of any period of four consecutive
fiscal quarters (the "Measurement Period"):
(a) Available Dividend Amount for the
Measurement Period (list by
Insurance Subsidiary other than
Subsidiaries of Insurance
Subsidiaries):
(i) PAIC $__________
(ii) Other (list separately) $__________
(iii) Total $__________
(b) Net Tax Sharing Payments with respect
to the Measurement Period
(i) Tax Payments received by Borrower $__________
(ii) Tax Payments to be received by
Borrower $__________
(iii) Tax Payments made by Borrower $__________
(iv) Tax Payments to be made by Borrower $__________
(v) Net Payments (the sum of Lines 1(b)
(i) and 1(b)(ii) minus Lines 1(b)
(iii) and 1(b)(iv) $__________
iii
<PAGE>
(c) Combined Net Cash Flow of
non-Insurance Subsidiaries for the
Measurement Period (attach detail) $__________
(d) Holding Company Expenses accrued
during the Measurement Period $__________
(e) Available coverage: add Lines
1(a)(iii), 1(b)(v) and 1(c), and
subtract Line 1(d) $
==========
(2) Fixed Charges:
(a) Debt Service for the period of four consecutive fiscal
quarters immediately following the Measurement Period (the
"Pro Forma
Period")
(i) Debt Service on the Loans $__________
(ii) Debt Service on other consolidated
Indebtedness $__________
(iii) Total Debt Service (add Lines
2(a)(i) and 2(a)(ii)) $__________
(b) Dividends to shareholders of the Borrower for the Pro Forma
Period (based upon the most recent
quarterly rate) $__________
(c) Stock purchases for the Measurement Period (net of stock
repurchases occurring between 6/30/98 and 9/30/99 in the
amount
of _________3) $__________
1 Not to exceed $10,000,000.
iv
<PAGE>
(d) Fixed Charges:
Add Lines 2(a)(iii), 2(b) and 2(c) $
===========
(3) Fixed Charge Coverage Ratio:
Divide Line 1(e) by Line 2(d) ===========
v
<PAGE>
EXHIBIT C-2
FORM OF
COMPLIANCE CERTIFICATE
(SAP)
THIS CERTIFICATE is given pursuant to Section 6.3(a) of the Credit
Agreement, dated as of ___________________ (as amended, modified, supplemented
or restated from time to time, the "Credit Agreement," the terms defined therein
being used herein as therein defined), among PENN-AMERICA GROUP, INC. (the
"Borrower"), certain banks and other financial institutions from time to time
parties thereto (the "Lenders") and First Union National Bank, as Agent for the
Lenders. Capitalized terms used herein without definition shall have the
meanings given to them in the Credit Agreement.
The undersigned hereby certifies that:
1. [He] [She] is the duly elected [chief financial officer][vice president,
finance] [principal accounting officer] [treasurer] of the Borrower.
2. Enclosed with this Certificate are copies of the statutory financial
statements of each Insurance Subsidiary as of ______________, and for the
[_________________-month period] [year] then ended, required to be delivered
under Section [6.2(a)] [6.2(b)] [6.2(c)] of the Credit Agreement. Such statutory
financial statements have been prepared in accordance with Statutory Accounting
Principles and fairly present the financial condition of each Insurance
Subsidiary as of the date indicated and the results of operations, changes in
capital and surplus and cash flow of each Insurance Subsidiary for the period
covered thereby.
3. The undersigned has reviewed the terms of the Credit Agreement and has
made, or caused to be made under the supervision of the undersigned, a review in
reasonable detail of the transactions and condition of the Borrower and its
Subsidiaries during the accounting period covered by such financial statements.
4. The examination described in paragraph 3 above did not disclose, and the
undersigned has no knowledge of the existence of, any Default or Event of
Default during or at the end of the accounting period covered by such financial
statements or as of the date of this Certificate. [, except as set forth below.
Describe here or in a separate attachment any exceptions to paragraph 4
above by listing, in reasonable detail, the nature of the Default or Event of
Default, the period during which it existed and the action that the Borrower has
taken or proposes to take with respect thereto.]
5. Attached to this Certificate as Attachment A is a Covenant Compliance
Worksheet reflecting the computation of the financial covenants subject to SAP
set forth in Sections 7.4, 7.5
i
<PAGE>
and 7.6 of the Credit Agreement as of the last day of the period covered by the
financial statements enclosed herewith.
IN WITNESS WHEREOF, the undersigned has executed and delivered this
Certificate as of the ______ day of ------------, ------.
PENN-AMERICA GROUP, INC.
By: ____________________________________
Name: ____________________________________
Title: ____________________________________
ii
<PAGE>
ATTACHMENT A
COVENANT COMPLIANCE WORKSHEET
A. Risk-Based Capital Ratio (Section 7.4 of the Credit Agreement)
(1) PAIC
(a) Applicable Company Action Level
RBC4 $
===========
(b) Minimum total adjusted capital1 the as of the
date of determination (multiply Line 1 by 1.50) $
===========
(c) Total adjusted capital as of the
determination date $
===========
(2) [Each other Material Insurance Subsidiary
(excluding Subsidiaries of Insurance
Subsidiaries)] [Repeat Lines 2(a)-(c) as
needed]
(a) Applicable Company Action Level RBC $
===========
(b) Minimum total adjusted capital the as of the
date of determination (multiply Line 1 by 1.50) $
===========
(c) Total adjusted capital as of the
determination date $
===========
(1) "Company Action Level RBC" and "total adjusted capital" have the meanings
given to such terms in the Risk-Based Capital for Insurers Model Act.
<PAGE>
(3) [Other Material Insurance
Subsidiaries] [Repeat Lines 3(a)-(c)
as needed]
(a) Applicable Company Action Level RBC $
===========
(b) Minimum total adjusted capital the as of the
date of determination (multiply Line 1 by 1.00) $
===========
(c) Total adjusted capital as of the
determination date $
===========
2
<PAGE>
B. Combined Net Premiums to Capital Ratio
(Section 7.5 of the Credit Agreement)
(not to exceed 2.25:1.00)
(1) Combined Net Written Premiums for the period of four
consecutive fiscal quarters then ending
(a) PAIC $__________
(b) PSIC $__________
(c) Other Insurance Subsidiaries $__________
(d) Total (sum of Lines 1(a)-1(c)) $
===========
(2) Combined Statutory Capital and Surplus (excluding
Subsidiaries of Insurance Subsidiaries) as of the date
of determination
(a) PAIC $__________
(b) Other Insurance Subsidiaries $__________
(c) Total (sum of Lines 2(a)-2(b)) $
===========
(3) Combined Net Premiums to Capital Ratio:
Divide Line (1)(d) by Line (2)(c) $
===========
3
<PAGE>
C. Statutory Capital and Surplus
(Section 7.6 of the Credit Agreement)
(1) Combined Statutory Capital and Surplus as
of the date of determination $
===========
(2) Minimum Combined Statutory Capital and
Surplus
(a) 90% of the combined Statutory
Capital and Surplus as of 6/30/98 $
===========
(b) $78,000,000 plus 50% of
aggregate increases in capital
for the Insurance Subsidiaries
occurring after June 30, 1998 $
===========
(c) Greater of Lines 2(a) and 2(b) $
===========
4
<PAGE>
EXHIBIT D
FORM OF
ASSIGNMENT AND ACCEPTANCE
THIS ASSIGNMENT AND ACCEPTANCE (this "Assignment and Acceptance") is
made this _____ day of ____________, ____, by and between
_________________________ (the "Assignor") and ________________________ (the
"Assignee"). Reference is made to the Credit Agreement, dated as of
_______________, 1998 (as amended, modified or supplemented from time to time,
the "Credit Agreement"), among PENN-AMERICA GROUP, INC. (the "Borrower"),
certain banks and other financial institutions from time to time parties thereto
(the "Lenders"), and First Union National Bank, as Agent for the Lenders (the
"Agent"). Unless otherwise defined herein, capitalized terms used herein without
definition shall have the meanings given to them in the Credit Agreement.
The Assignor and the Assignee hereby agree as follows:
1. Assignment and Assumption. Subject to the terms and conditions
hereof, the Assignor hereby sells and assigns to the Assignee, and the Assignee
hereby purchases and assumes from the Assignor, without recourse to the Assignor
and, except as expressly provided herein, without representation or warranty by
the Assignor, the interest as of the Effective Date (as hereinafter defined) in
and to all of the Assignor's rights and obligations under the Credit Agreement
and the other Credit Documents (in its capacity as a Lender thereunder)
represented by the percentage interest specified under the heading "Assigned
Share" in Item 4 of Annex I (such assigned interest, the "Assigned Share"),
including, without limitation, the Assigned Share of all rights and obligations
of the Assignor with respect to its Commitment, Letter of Credit Exposure, Note
and Loans.
2. The Assignor. The Assignor (i) represents and warrants that it is
the legal and beneficial owner of the interest being assigned by it hereunder,
that such interest is free and clear of any adverse claim, and that as of the
date hereof the amount of its Commitment and outstanding Loans (and Letter of
Credit Exposure, if applicable) is as set forth in Item 4 of Annex I, (ii)
except as set forth in clause (i) above, makes no representation or warranty and
assumes no responsibility with respect to any statements, warranties or
representations made in or in connection with the Credit Agreement, any other
Credit Document or any other instrument or document furnished pursuant thereto
or the execution, legality, validity, enforceability, genuineness, sufficiency
or value of the Credit Agreement, any other Credit Document or any other
instrument or document furnished pursuant thereto, and (iii) makes no
representation or warranty and assumes no responsibility with respect to the
financial condition of the Borrower or any of its Subsidiaries or the
performance or observance by the Borrower or any of its Subsidiaries of any of
their respective obligations under the Credit Agreement, any other Credit
Document or any other instrument or document furnished pursuant thereto.
<PAGE>
3. The Assignee. The Assignee (i) represents and warrants that it is
legally authorized to enter into this Assignment and Acceptance, (ii) confirms
that it has received a copy of the Credit Agreement, together with copies of the
financial statements most recently required to have been delivered under
Sections 6.1 and 6.2 of the Credit Agreement and such other documents and
information as it has deemed appropriate to make its own credit analysis and
decision to enter into this Assignment and Acceptance, (iii) agrees that it
will, independently and without reliance upon the Agent, the Assignor or any
other Lender, and based on such documents and information as it shall deem
appropriate at the time, continue to make its own credit decisions in taking or
not taking action under the Credit Agreement, (iv) confirms that it is an
Eligible Assignee, (v) appoints and authorizes the Agent to take such actions as
agent on its behalf under the Credit Agreement and the other Credit Documents,
and to exercise such powers and to perform such duties, as are specifically
delegated to the Agent by the terms thereof, together with such other powers and
duties as are reasonably incidental thereto, and (vi) agrees that it will
perform in accordance with their respective terms all of the obligations that by
the terms of the Credit Agreement are required to be performed by it as a
Lender. [To the extent legally entitled to do so, the Assignee will deliver to
the Agent, as and when required to be delivered under the Credit Agreement, duly
completed and executed originals of the applicable tax withholding forms
described in Section 2.17(d) of the Credit Agreement].1
4. Effective Date. Following the execution of this Assignment and
Acceptance by the Assignor and the Assignee, an executed original hereof,
together with all attachments hereto, shall be delivered to each of the Agent
and the Borrower (and also to the Agent, the processing fee referred to in
Section 11.7(a) of the Credit Agreement). The effective date of this Assignment
and Acceptance (the "Effective Date") shall be the date designated as the
Effective Date in Item 5 of Annex I. As of the Effective Date, (y) the Assignee
shall be a party to the Credit Agreement and, to the extent provided in this
Assignment and Acceptance, shall have the rights and obligations of a Lender
thereunder and under the other Credit Documents, and (z) the Assignor shall, to
the extent provided in this Assignment and Acceptance, relinquish its rights
(other than rights under the provisions of the Credit Agreement and the other
Credit Documents relating to indemnification or payment of fees, costs and
expenses, to the extent such rights relate to the time prior to the Effective
Date) and be released from its obligations under the Credit Agreement and the
other Credit Documents.
5. Payments; Settlement. On or prior to the Effective Date, in
consideration of the sale and assignment provided for herein and as a condition
to the effectiveness of this Assignment and Acceptance, the Assignee will pay to
the Assignor an amount (to be confirmed between the Assignor and the Assignee)
that represents the Assigned Share of the principal amount of the Loans made by
the Assignor and outstanding on the Effective Date (together, if and to the
extent the Assignor and the Assignee so elect, with the Assigned Share of any
related accrued but unpaid interest, fees and other amounts). From and after the
Effective Date, the Agent will make all payments required to be made by it under
the Credit Agreement in respect of the interest assigned hereunder (including,
without limitation, all payments of principal, interest and fees in respect of
- ------------------
1 Insert if the Assignee is organized under the laws of a jurisdiction
outside the United States.
<PAGE>
the Assigned Share of the Assignor's Commitment and Loans assigned hereunder)
directly to the Assignee. The Assignor and the Assignee shall be responsible for
making between themselves all appropriate adjustments in payments due under the
Credit Agreement in respect of the period prior to the Effective Date. All
payments required to be made hereunder or in connection herewith shall be made
in Dollars by wire transfer of immediately available funds to the appropriate
party at its address for payments designated in Annex I.
6. Governing Law. This Assignment and Acceptance shall be governed by,
and construed in accordance with, the internal laws of the State of North
Carolina (without regard to the conflicts of laws principles thereof).
7. Entire Agreement. This Assignment and Acceptance, together with the
Credit Agreement and the other Credit Documents, embody the entire agreement and
understanding between the parties hereto and supersede all prior agreements and
understandings of the parties, verbal or written, relating to the subject matter
hereof.
8. Successors and Assigns. This Assignment and Acceptance shall be
binding upon, inure to the benefit of and be enforceable by the parties hereto
and their respective successors and assigns.
9. Counterparts. This Assignment and Acceptance may be executed in any
number of counterparts and by different parties hereto on separate counterparts,
each of which, when so executed and delivered shall be an original, but all of
which shall together constitute one and the same instrument.
3
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Assignment and
Acceptance to be executed by their duly authorized officers as of the date first
above written.
ASSIGNOR:
--------------------------------
By: ___________________________________
Title: __________________________________
ASSIGNEE:
--------------------------------
By: ___________________________________
Title: __________________________________
Accepted this _______ day of ______________, 19___:
FIRST UNION NATIONAL BANK, as Agent
By: ___________________________________
Title: __________________________________
Consented and agreed to:
PENN-AMERICA GROUP, INC.
By: ___________________________________
Title: __________________________________
4
<PAGE>
ANNEX I
1. Borrower: Penn-America Group, Inc.
2. Name and Date of Credit Agreement:
Credit Agreement, dated as of _________________, 1998, among
Penn-America Group, Inc., certain Lenders from time to time parties
thereto, and First Union National Bank, as Agent.
3. Date of Assignment and Acceptance: ________________, 19___.
4. Amounts:
<TABLE>
<CAPTION>
Aggregate
Amount of for Assignor
Aggregate Assigned Assigned (after assignment)
for Assignor Share2 Share
<S> <C> <C> <C> <C>
(a) Commitment $_________ _____% $________ $___________
(b) Loans3 $_________ _____% $________ $___________
(c) Letter of Credit Exposure $_________ _____% $________ $___________
</TABLE>
5. Effective Date: ___________________, 19___. (4)
6. Addresses for Payments:
Assignor: _________________________________
=================================
Attention: ___________________
Telephone: __________________
Telecopy: ___________________
Reference: __________________
(2) Percentage taken up to a ten decimal places, if necessary.
(3) Insert amounts outstanding as of the date of the Assignment and Acceptance.
(4) Shall be a date not less than five Business Days after the date of the
Assignment and Acceptence.
<PAGE>
Assignee: _________________________________
=================================
Attention: ___________________
Telephone: __________________
Telecopy: ___________________
Reference: __________________
7. Addresses for Notices:
Assignor: _________________________________
=================================
Attention: ___________________
Telephone: __________________
Telecopy: ___________________
Assignee: _________________________________
=================================
Attention: ___________________
Telephone: __________________
Telecopy: ___________________
8. Lending Office of Assignee:
=================================
---------------------------------
Attention: ___________________
Telephone: __________________
Telecopy: ___________________
2
<PAGE>
EXHIBIT F
FORM OF
FINANCIAL CONDITION CERTIFICATE
THIS FINANCIAL CONDITION CERTIFICATE is delivered pursuant to Section
4.1(j) of the Credit Agreement, dated as of September ___, 1998 (the "Credit
Agreement"), among PENN-AMERICA GROUP, INC., a Pennsylvania corporation (the
"Borrower"), certain banks and other financial institutions from time to time
parties thereto (the "Lenders"), and First Union National Bank, as Agent.
Capitalized terms used herein without definition shall have the meanings given
to such terms in the Credit Agreement.
The undersigned hereby certifies for and on behalf of the Borrower as
follows:
1. Capacity. The undersigned is, and at all pertinent times mentioned
herein has been, the duly qualified and acting chief financial officer of the
Borrower, and in such capacity has responsibility for the management of the
Borrower's financial affairs and for the preparation of the Borrower's financial
statements. The undersigned has, together with other officers of the Borrower,
acted on behalf of the Borrower in connection with the negotiation and
consummation of the Credit Agreement and the consummation of the transactions
contemplated thereby.
2. Procedures. For purposes of this Certificate, the undersigned has,
as of or prior to the date hereof, undertaken the following activities in
connection herewith:
2.1 The undersigned has carefully reviewed the following:
(a) the contents of this Certificate;
(b) the Credit Agreement (including the exhibits and
schedules thereto);
(c) the audited consolidated and unaudited consolidating
balance sheets of the Borrower and its Subsidiaries as
of December 31, 1995, 1996 and 1997, and the related
consolidated and consolidating statements of income,
stockholders' equity and cash flows of the Borrower and
its Subsidiaries for the fiscal years then ended, each
certified by KPMG Peat Marwick LLP;
(d) the unaudited consolidated and consolidating balance
sheets of the Borrower and its Subsidiaries as of June
30, 1998, and the related consolidated and
consolidating statements of income, stockholders'
equity and cash flows of the Borrower and its
Subsidiaries for the six-month period then ended; and
<PAGE>
2.2 Additionally, in preparation for the consummation of the
transactions contemplated by the Credit Agreement, the undersigned has prepared
or supervised the preparation of and has reviewed (i) an unaudited consolidated
balance sheet of the Borrower as of June 30, 1998, a copy of which balance sheet
(together with the supporting detail and underlying assumptions) is attached
hereto as Annex A (the "Pro Forma Balance Sheet"), and (ii) annual projected
balance sheets and statements of income and cash flows of the Borrower on a
consolidated basis for the five-year period ending December 31, 2002, copies of
which projected financial statements (together with the supporting detail and
underlying assumptions) are attached hereto as Annex B (the "Projections").
2.3 The undersigned, together with the other officers and personnel of
the Borrower who were involved in the preparation of the Pro Forma Balance Sheet
and the Projections, have relied on historical financial and other information
and upon information with respect to sales, costs and other data obtained in
discussions with executive officers of the Borrower and other officers and
supervisory personnel directly responsible for the various operations involved.
The undersigned has reexamined the Pro Forma Balance Sheet and the Projections
as of the date hereof, and has considered the continuing reasonableness of the
assumptions set forth therein and the effect thereon of any changes since the
date of preparation thereof on the financial condition set forth and the results
projected therein.
2.4 The undersigned has made inquiries of certain other officers and
personnel of the Borrower with responsibility for financial and accounting
matters regarding (i) whether the unaudited financial statements described in
paragraph 2.1(d) above and the Pro Forma Balance Sheet are in conformity with
GAAP applied on a basis consistent with that of the audited financial statements
described in paragraph 2.1(c) above (subject to the absence of footnotes
required by GAAP and subject to normal year-end adjustments), and whether notes
omitted from such unaudited financial statements and the Pro Forma Balance Sheet
would have disclosed any new information that would be necessary to make the
statements contained therein not misleading, and (ii) whether such persons were
aware of any events or conditions that, as of the date hereof, would cause the
statements made in paragraph 3 below to be untrue.
2.5 With respect to any contingent liabilities of the Borrower on a pro
forma basis after giving effect to the transactions contemplated by the Credit
Agreement, the undersigned:
(a) has inquired of certain officers and other personnel of
the Borrower who have responsibility for the legal,
financial and accounting affairs of the Borrower, as to
the existence and estimated amounts of all contingent
liabilities known to them;
(b) has confirmed with senior accounting officers of the
Borrower that, to the best of such officers' knowledge,
(i) all appropriate items have been included in
contingent liabilities made known to the undersigned in
the course of the inquiry of the undersigned in
connection herewith, and (ii) the amounts relating
thereto were the maximum estimated amounts of liability
reasonably likely to result therefrom as of the date
hereof, and
<PAGE>
(c) confirms that, to the best of his knowledge, all
material contingent liabilities that may arise from any
pending litigation, asserted claims and assessments,
guarantees, uninsured risks, and other relevant
contingencies and circumstances have been considered in
making the certification set forth herein, and with
respect to each such contingent liability the maximum
estimated amount of liability with respect thereto was
used in making such certification.
2.6 The undersigned has conferred with counsel to the Borrower for the
purpose of discussing the meaning of the contents of this Certificate.
3. Certifications. Based on the foregoing, the undersigned hereby
certifies as follows:
3.1 The Pro Forma Balance Sheet attached hereto as Annex A gives pro
forma effect to the consummation of the transactions contemplated by the Credit
Agreement, all as if such events had occurred on June 30, 1998. The Pro Forma
Balance Sheet has been prepared in accordance with GAAP (subject to the absence
of footnotes required by GAAP and subject to normal year-end adjustments) and,
subject to stated assumptions made in good faith and having a reasonable basis
set forth therein, presents fairly the financial condition of the Borrower and
its Subsidiaries on an unaudited pro forma consolidated basis as of the date set
forth therein after giving effect to the consummation of the transactions
contemplated by the Credit Agreement as described above.
3.2 The Projections attached hereto as Annex B give effect to the
consummation of the transactions contemplated by the Credit Agreement. In the
opinion of the undersigned, the assumptions used in the preparation of the
Projections were fair, complete and reasonable when made and continue to be
fair, complete and reasonable as of the date hereof. The Projections have been
prepared in good faith by the executive and financial personnel of the Borrower,
are complete and represent a reasonable estimate of the future performance and
financial condition of the Borrower and its Subsidiaries, subject to the
uncertainties and approximations inherent in any projections.
3.3 After giving effect to the transactions contemplated by the Credit
Agreement, all material accounts and other liabilities of the Borrower and its
Subsidiaries are current and not past due.
3.4 Neither the Borrower nor any Subsidiary is insolvent now, and the
incurrence by the Borrower and each Subsidiary of its liabilities and
obligations pursuant to the Credit Agreement and the other Credit Documents will
not render it insolvent. The undersigned understands that, in this context, (i)
"insolvent" means that the present fair saleable value of assets is less than
the amount that will be required to be paid on or in respect of the existing
debts as such debts mature, (ii) "fair value" of assets means the aggregate
amount that could be realized
<PAGE>
within a reasonable time, either through collection or sale of such assets at
the regular market value as an ongoing business, conceiving of the latter as the
amount that could be obtained for the property in question within such period by
a capable and diligent seller from an interested buyer who is willing to
purchase under ordinary selling conditions, and (iii) "debts" includes any legal
liability, whether matured or unmatured, liquidated or unliquidated, absolute,
fixed or contingent, including any guaranty or other contingent obligation. The
foregoing is supported by an analysis of the Pro Forma Balance Sheet. A
valuation of the Borrower and its Subsidiaries, on the basis thereof and with
reasonable allowance for error, would reflect the net worth of the Borrower and
its Subsidiaries (on a consolidated basis) in the aggregate (excess of fair
value of assets over liabilities) as not less than $90,000,000.
3.5 The undersigned reasonably believes that, by the incurrence of its
liabilities and obligations pursuant to the Credit Agreement and the other
Credit Documents neither the Borrower nor any Subsidiary will incur debts beyond
its ability to pay as they mature (taking into account the timing and amounts of
cash to be payable on or in respect of its debts). The foregoing conclusion is
based in part on the Projections, which demonstrate that the cash flow of the
Borrower and its Subsidiaries, after taking into account all anticipated uses of
cash of each such Person, will at all times be sufficient to pay all amounts on
or in respect of Indebtedness of each such Person when such amounts are required
to be paid (including without limitation scheduled payments pursuant to the
Credit Agreement). The undersigned has concluded that the realization of current
assets in the ordinary course of business should be sufficient to pay recurring
current debt, short-term debt and long-term debt as such debts mature, that the
cash flow (including earnings plus non-cash charges to earnings) should be
sufficient to provide cash necessary to repay loans made under the Credit
Agreement and other long-term indebtedness as such debt matures, and that the
Borrower should have sufficient availability under the Credit Agreement to
satisfy its working capital and short-term liquidity requirements.
3.6 After giving effect to the consummation of the transactions
contemplated by the Credit Agreement, the assets of the Borrower and each
Subsidiary do not constitute "unreasonably small capital" (within the meaning of
Section 548(a) of the Bankruptcy Code, 11 U.S.C. Section 548(a)) for such Person
to carry on its business as now conducted and as proposed to be conducted,
taking into account the particular capital requirements of the business
conducted and to be conducted by it and the availability of capital in respect
thereof (with reference to, without limitation, the Projections and the
Borrower's available credit capacity).
3.7 Neither the Borrower nor any Subsidiary has executed the Credit
Agreement or any other documents mentioned therein, or made any transfer or
incurred any obligations thereunder, with intent to hinder, delay or defraud
either present or future creditors of such Person.
3.8 The statements made herein by the undersigned are based upon the
personal knowledge of the undersigned, or upon reports and other information
given to the undersigned by supervisory personnel of the Borrower having
responsibility for the reports and information given, and who in the opinion of
the undersigned are reliable and entitled to be relied upon. The statements made
herein are made in good faith and, to the best of the knowledge and belief of
<PAGE>
the undersigned, and subject to the assumptions set forth in Annexes A and B,
are reasonable in all material respects.
3.9 The undersigned understands that the Lenders have performed their
own review and analysis of the financial condition of the Borrower, but that the
Lenders are relying on the foregoing statements in connection with the extension
of credit to the Borrower pursuant to the Credit Agreement.
<PAGE>
Executed this ___ day of September, 1998.
-----------------------------------------
Chief Financial Officer
PENN-AMERICA GROUP, INC.
<PAGE>
FINANCIAL CONDITION CERTIFICATE
ANNEX A
PENN-AMERICA GROUP, INC.
Pro Forma Balance Sheet
[see attached]
<PAGE>
FINANCIAL CONDITION CERTIFICATE
ANNEX B
PENN-AMERICA GROUP, INC.
Projections
[see attached]
<PAGE>
Penn-America Group, Inc
Governmental and Third Party
Authorization Permits
Schedule 5.4a
NONE
<PAGE>
ADMISSION APPLICATINO STATUS
LAST REVISION: February 22, 1999
<TABLE>
<CAPTION>
==========================================================================================================
PENN-AMERICA
==========================================================================================================
SURPLUS APP
STATE ADMITTED LINES DIFF * NOTES
<S> <C> <C> <C> <C>
----------------------------------------------------------------------------------------------------------
Alabama 5/14/96
----------------------------------------------------------------------------------------------------------
Alaska 6/7/96
----------------------------------------------------------------------------------------------------------
Arizona 4/1/96
----------------------------------------------------------------------------------------------------------
Arkansas 5/18/95 2
----------------------------------------------------------------------------------------------------------
California 00/00/83
----------------------------------------------------------------------------------------------------------
Colorado 1/17/95
----------------------------------------------------------------------------------------------------------
Connecticut 10/31/89 3 App. received; Filing window 3/31 to 10/31
----------------------------------------------------------------------------------------------------------
Delaware 4/5/79
----------------------------------------------------------------------------------------------------------
DC X 2
----------------------------------------------------------------------------------------------------------
Florida X 3+
----------------------------------------------------------------------------------------------------------
Georgia X 2
----------------------------------------------------------------------------------------------------------
Hawaii 4/15/97
----------------------------------------------------------------------------------------------------------
Idaho 1/8/96
----------------------------------------------------------------------------------------------------------
Illinois 10/10/97
----------------------------------------------------------------------------------------------------------
Indiana 12/31/97
----------------------------------------------------------------------------------------------------------
Iowa 11/17/97
----------------------------------------------------------------------------------------------------------
Kansas 1/31/97
----------------------------------------------------------------------------------------------------------
Kentucky 1/19/95
----------------------------------------------------------------------------------------------------------
Louisiana X 2+
----------------------------------------------------------------------------------------------------------
Maine X 2+
----------------------------------------------------------------------------------------------------------
Maryland X App. received
----------------------------------------------------------------------------------------------------------
Massachusetts X 3+
----------------------------------------------------------------------------------------------------------
Michigan 10/13/95
----------------------------------------------------------------------------------------------------------
Minnesota 5/3/91
----------------------------------------------------------------------------------------------------------
Mississippi 11/1/98 1
----------------------------------------------------------------------------------------------------------
Missouri X
----------------------------------------------------------------------------------------------------------
Montana 11/3/97
----------------------------------------------------------------------------------------------------------
Nebraska X
----------------------------------------------------------------------------------------------------------
Nevada 10/26/95
----------------------------------------------------------------------------------------------------------
N. Hampshire 9/1/94 3
----------------------------------------------------------------------------------------------------------
N. Jersey X 3
----------------------------------------------------------------------------------------------------------
N. Mexico 7/3/95 3 Admission app filed 6/26/98
----------------------------------------------------------------------------------------------------------
N. York 5/24/95
----------------------------------------------------------------------------------------------------------
N. Carolina X 2 Admission app filed 4/2/98 - Not expecting intial review
until 8/98; Initial review to be completed by January, 1999
----------------------------------------------------------------------------------------------------------
N. Dakota X
----------------------------------------------------------------------------------------------------------
Ohio X
----------------------------------------------------------------------------------------------------------
Oklahoma X App. received
----------------------------------------------------------------------------------------------------------
Oregon X
----------------------------------------------------------------------------------------------------------
Pennsylvania X
----------------------------------------------------------------------------------------------------------
Rhode Island X 2
----------------------------------------------------------------------------------------------------------
S. Carolina X 2
----------------------------------------------------------------------------------------------------------
S. Dakota X
----------------------------------------------------------------------------------------------------------
Tennessee 9/18/98 2 App filed 6/2/98
----------------------------------------------------------------------------------------------------------
Texas X 3
----------------------------------------------------------------------------------------------------------
Utah 1/15/98
----------------------------------------------------------------------------------------------------------
Vermont X 3+
----------------------------------------------------------------------------------------------------------
Virginia X 3+ App. received
----------------------------------------------------------------------------------------------------------
Washington X
----------------------------------------------------------------------------------------------------------
W. Virginia X 2 App. received
----------------------------------------------------------------------------------------------------------
Wisconsin 6/28/96
----------------------------------------------------------------------------------------------------------
Wyoming X 1 App. received
----------------------------------------------------------------------------------------------------------
Totals 30 21
==========================================================================================================
</TABLE>
Notes:
1) "X" indicates that the state has been addmitted or approved for
more than five years
2) * Application difficulty: Range of 1 to 3 (3 being the most
difficult)
<PAGE>
ADMISSION APPLICATION STATUS
Last Revision: February 22, 1999
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
=================================================================================================================================
Penn-Star
=================================================================================================================================
SURPLUS APP SEASONING
STATE ADMITTED LINES DIFF REQ'S. NOTES
- ------------------------------------------------------------------------------------------------------------------------------
Alabama App.received; No deadline - but now is good time for them
- ------------------------------------------------------------------------------------------------------------------------------
Alaska
- ------------------------------------------------------------------------------------------------------------------------------
Arizona 8/18/97 App. filed 5/28/97; S/L approval received
- ------------------------------------------------------------------------------------------------------------------------------
Arkansas 2 3 yrs App. received
- ------------------------------------------------------------------------------------------------------------------------------
California 11/18/97 App. filed 4/4/97
- ------------------------------------------------------------------------------------------------------------------------------
Colorado S/L app filing window 3/1 to7/1
- ------------------------------------------------------------------------------------------------------------------------------
Connecticut 3 App. received; Filing window 3/31 to 10/31.
Plan to file 2nd Qtr. '98
- ------------------------------------------------------------------------------------------------------------------------------
Delaware
- ------------------------------------------------------------------------------------------------------------------------------
DC 2 2 yrs App. received
- ------------------------------------------------------------------------------------------------------------------------------
Florida 3+ 3 yrs
- ------------------------------------------------------------------------------------------------------------------------------
Georgia 7/1/98 2 0 yrs
- ------------------------------------------------------------------------------------------------------------------------------
Hawaii
- ------------------------------------------------------------------------------------------------------------------------------
Idaho
- ------------------------------------------------------------------------------------------------------------------------------
Illinois 10/10/97
- ------------------------------------------------------------------------------------------------------------------------------
Indiana 5/19/98
- ------------------------------------------------------------------------------------------------------------------------------
Iowa App. withdrawn 11/6 Requested Surplus Lines app.
- ------------------------------------------------------------------------------------------------------------------------------
Kansas 5/19/98
- ------------------------------------------------------------------------------------------------------------------------------
Kentucky 6/18/98 2+
- ------------------------------------------------------------------------------------------------------------------------------
Louisiana App. received
- ------------------------------------------------------------------------------------------------------------------------------
Maine 2 0 yrs App. received
- ------------------------------------------------------------------------------------------------------------------------------
Maryland 5/22/98
- ------------------------------------------------------------------------------------------------------------------------------
Massachusetts 3+ 5 yrs App. received
- ------------------------------------------------------------------------------------------------------------------------------
Michigan
- ------------------------------------------------------------------------------------------------------------------------------
Minnesota App. ordered 3/18; Had moratorium, currently lifted.
Aprox. 6-9 mo. process.
- ------------------------------------------------------------------------------------------------------------------------------
Mississippi 11/1/98 1 2 yrs
- ------------------------------------------------------------------------------------------------------------------------------
Missouri
- ------------------------------------------------------------------------------------------------------------------------------
Montana 9/25/98
- ------------------------------------------------------------------------------------------------------------------------------
Nebraska No deadline - aprox 6 mo. process
- ------------------------------------------------------------------------------------------------------------------------------
Nevada Application tentatively approved 12/28/98
- ------------------------------------------------------------------------------------------------------------------------------
N. Hampshire 3 5 yrs App. received
- ------------------------------------------------------------------------------------------------------------------------------
N. Jersey 3 3 yrs - flexible App. received
- ------------------------------------------------------------------------------------------------------------------------------
N. Mexico 2/17/99 3 3 yrs S/L app. tentatively approved 2/17/99
- ------------------------------------------------------------------------------------------------------------------------------
N. York
- ------------------------------------------------------------------------------------------------------------------------------
N. Carolina 12/31/97 2 3 yrs
- ------------------------------------------------------------------------------------------------------------------------------
N. Dakota App received; Window between 4/1 and 6/30
- ------------------------------------------------------------------------------------------------------------------------------
Ohio App received; Deadline was 6/30 - Admission committee decided to
complete app by 1/98.
- ------------------------------------------------------------------------------------------------------------------------------
Oklahoma 3/10/98
- ------------------------------------------------------------------------------------------------------------------------------
Oregon
- ------------------------------------------------------------------------------------------------------------------------------
Pennsylvania 2/1/97
- ------------------------------------------------------------------------------------------------------------------------------
Rhode Island 2 App. received
- ------------------------------------------------------------------------------------------------------------------------------
S. Carolina 12/15/98 2 0 yrs
- ------------------------------------------------------------------------------------------------------------------------------
S. Dakota App. received
- ------------------------------------------------------------------------------------------------------------------------------
Tennessee 5/1/98 2
- ------------------------------------------------------------------------------------------------------------------------------
Texas 3 0 yrs App. received
- ------------------------------------------------------------------------------------------------------------------------------
Utah App. received
- ------------------------------------------------------------------------------------------------------------------------------
Vermont 3+ App. received
- ------------------------------------------------------------------------------------------------------------------------------
Virginia 9/17/98 3
- ------------------------------------------------------------------------------------------------------------------------------
Washington 8/28/97
- ------------------------------------------------------------------------------------------------------------------------------
W. Virginia 2 5 yrs App. received; No deadline, aprox. 1 1/2 year process
- ------------------------------------------------------------------------------------------------------------------------------
Wisconsin
- ------------------------------------------------------------------------------------------------------------------------------
Wyoming 2 2 yrs App. received
- ------------------------------------------------------------------------------------------------------------------------------
Totals 9 8
==============================================================================================================================
</TABLE>
Notes:
1) * Application difficulty: Range of 1 to 3 (3 being the most difficult)
<PAGE>
Penn-America Group, Inc.
List of Subsidiary
Schedule 5.7
Penn-America Group, Inc
Owns 100%
Penn-America Insurance Co
Owns 100%
Penn-Star Insurance Co
<PAGE>
Schedule 5.18
Material Contracts
Borrower and/or its Subsidiaries are parties to the following material
contracts:
(1) Amended Agency Agreement between Penn-America Insurance Company and
Carnegie General Agency, effective March 1, 1998 (1), providing for general
agency services from Carnegie to Penn-America;
(2) Amended Cost Sharing Agreement between Penn-America Group, Inc. and Penn
Independent Corporation, effective January 1, 1998, regarding the sharing
of certain operating and employment costs;
(3) Amended Investment Advisory Agreement between and among Penn-America
Insurance Company, Penn-Star Insurance Company and Carl Domino Associates,
L.P., effective September 1, 1997, providing for investment advisory
services from Carl Domino to Penn-America and Penn-Star;
(4) Investment Management Agreement between and among Penn-America Insurance
Company, Penn-Star Insurance Company and General Re-New England Asset
Management, Inc., effective April 15, 1997, providing for investment
advisory services from New England to Penn-America and Penn-Star;
(5) Lease Agreement between Penn-America Group, Inc. and Irvin Saltzman and
Marion-Louise Saltzman, effective June 30, 1995 through June 30, 2000,
providing for the lease of office space by Penn-America from Irvin Saltzman
and Marion-Louise Saltzman.
(1) Unless otherwise indicated, all material contracts are
continuously effective unless terminated in writing by either
party to the agreement.
<PAGE>
Penn-America Group, Inc.
Liens In Existence
Schedule 8.3
NONE
<PAGE>
Penn-America Group, Inc.
Investment (per Credit Agreement)
Schedule 8.5
NONE
<PAGE>
Penn-America Group, Inc.
Reinsurance Agreements
(Per Credit Agreement)
Schedule 5.19
NONE
<PAGE>
Penn-America Group, Inc.
Indebtedness
Schedule 8.2
Capital Lease as of 8/31/98
Asset 2,084,272.00
Obligation 2,122,172.00
<PAGE>
Penn-America Group, Inc.
Transactions with Affiliates
Schedule 8.7
NONE
<PAGE>
Penn-America Group, Inc.
Lines of Business
Schedule 8.8
Fire
Allied Lines
Commercial Multi Peril
Inland marine
Other Liability - Occurrence
Product Liability - Occurrence
Private Passenger Auto Liability
Commercial Auto Liability
Auto Physical Damage
<PAGE>
Penn-America Group Inc.
Transactions with Affiliates
Schedule 8.7
NONE
<PAGE>
Penn-America Group, Inc
Lines of Business
Schedule 8.8
Fire
Allied Lines
Commercial Multi Peril
Inland marine
Other Liability - Occurrence
Product Liability - Occurrence
Private Passenger Auto Liability
Commercial Auto Liability
Auto Physical Damage
REINSURANCE POOLING AGREEMENT
THIS AGREEMENT (the "Agreement") made and concluded at Hatboro,
Pennsylvania, this 7th day of July, 1998, to be effective as of 12:01 a.m., July
1, 1998 (the "Effective Time"), by and between Penn-America Insurance Company
(PAIC) and Penn-Star Insurance Company (PSIC), witnesseth that:
WHEREAS, it is the view of PAIC and PSIC that the business of each
party would be more efficiently and economically processed by a single company
instead of by each party separately; and
WHEREAS, in the interests of simplification of the operations of each
party, PAIC and PSIC have determined that the underwriting operations of each
party should be conducted, by means of mutual reinsurance on the percentage
bases herein provided, by PAIC on behalf of both parties; and
WHEREAS, the parties hereto desire to form a pooling arrangement to
effectuate the pooling of risks for Losses Incurred at or after the Effective
Time under policies in force and for policies issued or renewed on or after the
Effective Time.
NOW THEREFORE, the parties hereto agree as follows:
ARTICLE 1 - REINSURANCE ASSUMED BY PAIC
(a) In Force Business:
(1) PAIC hereby reinsures, and PSIC hereby cedes and transfers to
PAIC on a quota share basis, 100% of PSIC's unexpired liability
under all policies, certificates, contracts, and other evidences
of insurance and reinsurance (herein "Policies") issued by PSIC
prior to and in force on the Effective Time. The cession herein
shall not apply to any portion of PSIC's liability with respect
to losses occurring under such Policies prior to the Effective
Time, regardless of when such losses are reported by the
underlying insureds or reinsureds.
(2) As consideration for the reinsurance described in Article
1(a)(1), PSIC shall assign and transfer to PAIC an amount, in
cash or other assets acceptable to PAIC, equal in the aggregate
to the PSIC Subject Unearned Premium on such business, less the
PSIC Ceding Commission thereon. In no event shall the net
transfer contemplated herein exceed twenty-five percent (25%) of
PSIC policyholders' surplus.
(b) New Business:
(1) PAIC hereby reinsures, and PSIC hereby cedes and transfers to
PAIC on a quota share basis, 100% of PSIC's liability under all
Policies issued or renewed by PSIC on or after the Effective
Time.
(2) As consideration for the reinsurance described in Article
1(b)(1), PSIC shall assign to PAIC 100% of the PSIC Subject
Premium on such business.
1
<PAGE>
ARTICLE 2 - REINSURANCE OF POOLED BUSINESS ASSUMED BY PSIC
(a) In Force Business:
(1) PSIC hereby reinsures, and PAIC hereby cedes and transfers to
PSIC on a quota share basis, a 35% quota share of PAIC's
unexpired liability under all Policies issued by PAIC prior to
and in force on the Effective Time, including but not limited to
the liability assumed by PAIC from PSIC pursuant to Article 1(a)
of this Agreement. The cession herein shall not apply to any
portion of PAIC's liability with respect to losses occurring
under such Policies prior to the Effective Time, regardless of
when such losses are reported by the underlying insureds or
reinsureds.
(2) As consideration for the reinsurance described in Article
2(a)(1), PAIC shall assign and transfer to PSIC an amount, in
cash or other assets acceptable to PSIC, equal in the aggregate
to 35% of the Pooled Subject Unearned Premium on such business,
less the PAIC Ceding Commission on PAIC's Subject Unearned
Premium.
(b) New Business:
(1) PSIC hereby reinsures, and PAIC hereby cedes and transfers to
PSIC on a quota share basis, a 35% quota share of PAIC's
liability under all Policies issued or renewed by PAIC on or
after the Effective Time, including but not limited to the
liability assumed by PAIC from PSIC pursuant to Article 1(b) of
this Agreement.
(2) As consideration for the reinsurance described in Article
2(b)(1), PAIC shall pay to PSIC 35% of the Pooled Subject Premium
on such business.
ARTICLE 3 - AUTHORIZATION FOR PAIC TO MANAGE POOL
Effective as of the Effective Time of this Agreement, PAIC is hereby
authorized and empowered by PSIC to: (a) collect and receive all premiums; (b)
pay all underwriting expenses, including commissions and premium taxes; (c) pay
all facultative reinsurance; (d) take charge of, adjust and pay all Losses with
respect to any and all Policies issued by both parties; (e) and to issue,
reinsure or cancel any and all such Policies and make any changes therein. PAIC
(sometimes referred to as the "Pool Manager") shall pay all Losses of PSIC and
collect all reinsurance on such Losses, it being understood and agreed, however,
that PSIC at monthly intervals shall reimburse PAIC for its respective
percentage of the Losses, as set forth in Article 5 herein, net of reinsurance
collected from companies not a party to this Agreement with respect to all
Policies of both parties. PAIC shall also initially set and maintain PSIC's Case
and IBNR reserves, as well as unearned premium reserves (using the semi-monthly
pro rata method), in its capacity as Pool Manager, subject to review and
approval by PSIC. Nothing herein shall be deemed to be a grant or delegation of
management control to the substantial exclusion of the Board of Directors of the
respective parties contrary to Section 1721 of Title 15 of the Pennsylvania
Consolidated Statutes Annotated.
ARTICLE 4 - ALLOCATION OF CLAIMS DEPARTMENT EXPENSES
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Both PAIC and PSIC agree that Claims Department Expenses (CDEs) shall
be allocated to accident years using the following formula:
1) 50% of the CDEs shall be allocated to accident years based on the
percentage of the number of claims reported in a given year
compared to the total for all years; and
2) 50% of the CDEs shall be allocated to accident years based on the
percentage of Adjustment Expenses paid in a given year compared
to the total for all years.
PSIC agrees to pay to PAIC thirty-five percent (35%) of the CDEs
allocated to all accident years which are covered by this Agreement. If the
accident year is the year of inception or termination, then the CDEs shall be
prorated.
ARTICLE 5 - SETTLEMENTS OF ACCOUNTS
Commencing with the first month after the Effective Time:
(A) PAIC agrees to pay PSIC monthly, thirty-five percent (35%) of all
Pooled Subject Premiums (including premiums assumed from PSIC
pursuant to Article 1), less premiums (net of Ceding Commission)
ceded to companies other than the parties hereto; and,
(B) PSIC agrees to pay PAIC monthly the following:
(1) PSIC's proportionate share of the Claims Department Expenses
(CDE's) pursuant to Article 4; and,
(2) Thirty-five percent (35%) of the following:
(a) Commission paid to agents, including contingent
commissions accrued;
(b) Underwriting and administrative expenses, which include
all premium taxes, underwriting, executive, accounting,
and systems expenses, but not CDE's which are allocated
pursuant to Article 4; and,
(c) Losses having a loss date at or after the Effective
Time of this Agreement.
On termination of this Agreement, PSIC's obligations under Article
5(B)(2)(a)-(c) shall cease.
ARTICLE 6 - TERMINATION OF POOL MANAGER
PAIC may be terminated as Pool Manager by PSIC upon ninety (90) days
notice to PAIC. Both parties shall, by mutual agreement, appoint another pool
manager but, in the event the parties cannot reach mutual agreement, PAIC shall
be appointed Pool Manager to provide the services specified in Articles 3, 4 and
5 and upon performing said services shall be entitled to the reimbursement of
expenses as provided for in Article 5.
ARTICLE 7 - RIGHT OF OFFSET
It is understood and agreed that, insofar as is practicable and
consistent with the purposes and intentions of this Agreement, the obligations
of each party to this Agreement to transfer assets to the other party may, in
whole or in part, be offset against the reciprocal obligations of the other
party so that each party shall deliver hereunder only a net amount of assets
required under such offset.
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ARTICLE 8 - EXCLUSION OF INVESTMENT INCOME AND TAXES FROM POOL
This Agreement shall not apply to investment operations or liabilities
for federal, foreign or state income tax of the parties hereto.
ARTICLE 9 - DETERMINATION OF PROCEDURES
The appropriate officers of PAIC and PSIC shall determine the methods
and procedures, including accounting transactions, by which the terms of this
Agreement shall be performed by and on behalf of the parties hereto. All methods
and procedures adopted pursuant to this Agreement shall be in compliance with
applicable Pennsylvania laws.
ARTICLE 10 - PENNSYLVANIA LAW TO GOVERN
The law of the Commonwealth of Pennsylvania shall govern and determine
the validity, interpretation, enforcement and performance of this Agreement.
ARTICLE 11 - AMENDMENTS TO POOLING AGREEMENT
This Agreement may be modified from time to time, so as to adapt its
provisions to the varying conditions of the business of the parties, by mutual
agreement in writing by the parties, subject to approval by the Board of
Directors of each party and by approval of the Office of the Insurance
Commissioner of the Commonwealth of Pennsylvania.
ARTICLE 12 - CONTINUOUS AGREEMENT
This Agreement shall remain in full force and effect for a period of
one (1) year commencing as of the Effective Time of this Agreement. This
Agreement shall thereafter automatically renew for additional one year periods
unless terminated pursuant to written notice by one or more of the parties
hereto. In the event of termination, the parties' obligations under this
Agreement shall cease no later than ninety (90) days after the date notice of
termination is given, unless otherwise stated herein or otherwise agreed upon by
the parties.
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ARTICLE 13 - INADVERTENT ERRORS
Wherever required to give the correct meaning throughout this
Agreement, the singular number shall be interpreted in the plural. Clerical
errors or errors of involuntary or inadvertent omission or commission shall not
be interpreted as a discharge of liability on behalf of any of the parties to
this Agreement. Such errors shall be rectified at the time of discovery or as
soon as practicable thereafter.
ARTICLE 14 - INSOLVENCY
In the event of the insolvency of either party, the reinsurance payable
to such party member as a ceding company (the "Ceding Company") under this
Agreement by the other party as reinsurer (the "Reinsurer") shall be payable,
without diminution because of the Ceding Company's insolvency, by the Reinsurer
to the Ceding Company's liquidator, receiver or statutory successor on the basis
of the claim or claims allowed on the contracts of insurance against the
insolvent Ceding Company by any court of competent jurisdiction or any justice
or judge thereof, or by any receiver, liquidator or statutory successor having
authority to determine and allow such claims. It is agreed, however, that the
liquidator, receiver or statutory successor of the Ceding Company shall have to
give written notice to the Reinsurer of the pendency of a claim against the
Ceding Company under the contracts of insurance within a reasonable time after
such claim is filed in the insolvency proceeding, and that during the pendency
of such claim the Reinsurer may investigate such claim and interpose, at its own
expense in the proceeding where such claim is to be adjudicated, any defense or
defenses which it may deem available to the Ceding Company or its liquidator,
receiver or statutory successor. The expense thus incurred by the Reinsurer
shall be chargeable, subject to court approval, against the Ceding Company as
part of the expense of liquidation to the extent of a proportionate share of the
benefits which may accrue to the Ceding Company solely as a result of the
defense undertaken by the Reinsurer.
ARTICLE 15 - ENTIRE AGREEMENT
This Agreement shall constitute the entire agreement between the
parties and provides no guarantee of profit, directly or indirectly, to or from
either party hereto.
ARTICLE 16 - REPORTING
This Agreement shall provide for monthly reporting of premiums (written
and unearned), Losses (paid and reserved for on a Case and IBNR basis) and
underwriting expenses, unless there is no activity during the period.
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ARTICLE 17 - TRUST AGREEMENT
PAIC and PSIC shall each establish and maintain their quota share of
all unearned premium and loss reserves required on the policies subject to this
Agreement.
If either PAIC or PSIC would not be entitled to full reserve credit for
reinsurance herewith in a jurisdiction in which either party is subject to
financial reporting, both parties agree to establish a trust account in an
amount equal to the Ceding Company's share of the reserves for which credit is
sought for all outstanding amounts ceded to the unauthorized reinsurer (the
"Unauthorized Reinsurer") at a given date. The trust account shall be
established with a bank which is a member of the Federal Reserve System (herein
called "Trustee") for the purpose of establishing a trust account for the
exclusive benefit and use of the Ceding Company. Such account shall consist
solely of cash (United States legal tender), and investments of the type
specified in subsections (1), (2), (3) and (13) of subsection (a) of Section
1404 of the New York Insurance Law, provided that such investments are qualified
reserve investments under the insurance laws of the Commonwealth of
Pennsylvania. The trust agreement shall comply with the requirements of Title
11, Part 126, of the New York Code of Rules and Regulations (Insurance
Regulation No. 114).
Prior to depositing assets with the Trustee, the Unauthorized Reinsurer
shall execute assignments, endorsements in blank, or transfer legal title to the
Trustee of all shares, obligations or other assets requiring assignments, so
that the Ceding Company, or the Trustee upon the direction of the Ceding
Company, may, whenever necessary, negotiate any such assets without consent or
signature from the Unauthorized Reinsurer or any other entity. The assets
deposited in such trust account shall be valued, for the purpose of determining
the extent thereof, according to their current fair market value on the date as
of which such valuation is to be made.
The Unauthorized Reinsurer may from time to time, while there is no
deficiency in the trust account, request the Ceding Company to withdraw from the
trust account all or any part of the assets contained therein, and the Ceding
Company shall deliver same to the Unauthorized Reinsurer or to its order, if it
first replaces the withdrawn assets with other qualified assets of equal value
approved by the Ceding Company so that at all times the market value of the
trust account is not less than the amount required to be on deposit. The Ceding
Company shall not unreasonably or arbitrarily withhold its approval. So long as
there is no deficiency in the trust account, the Unauthorized Reinsurer shall
have the full and unqualified right to vote and execute consents with respect to
any shares of voting stock deposited and shall be entitled to receive from time
to time from the Trustee payments of any dividends, interest or other income
upon any shares of stock or obligations included in the trust account.
The Ceding Company or its successor in interest by operation of law or
otherwise, including, without limitation, any liquidator, rehabilitator,
receiver, or conservator, may withdraw assets from the trust account at any time
and from time to time, notwithstanding any other provisions in this Agreement,
and such funds shall be applied without diminution because of insolvency on the
part of the Ceding Company or the Unauthorized Reinsurer, for one or more of the
following purposes only:
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(i) to reimburse the Ceding Company for the Unauthorized Reinsurer's
share of the premiums returned to the owners of reinsured
policies under this Agreement on account of cancellations of such
policies;
(ii) to reimburse the Ceding Company for the Unauthorized Reinsurer's
share of Losses paid by the Ceding Company under the terms and
provisions of the reinsured policies under this Agreement;
(iii) to fund an account with the Ceding Company in an amount at least
equal to the deduction for reinsurance ceded from the Ceding
Company's liabilities for policies ceded under the Agreement,
such amount to include, if applicable, (but not be limited to)
amounts for loss reserves (including IBNR), loss adjustment
expense reserves, and unearned premiums;
(iv) to pay any other amounts for the Ceding Company claims that are
due under this Agreement;
(v) to return to the Unauthorized Reinsurer any assets in excess of
102 percent of the amount required to be on deposit; and;
(vi) to permit the substitution of assets as authorized hereinabove.
ARTICLE 18 - HEADINGS
The headings of any paragraph or Article of this Agreement are
for convenience only and shall not be used to interpret any provision of this
Agreement.
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ARTICLE 19 - DEFINITIONS
"Adjustment Expenses" shall mean payments within the terms of the
policies in the direct defense of claims as allocated to an individual claim or
loss (other than for CDE) made in conjunction with the disposition of a claim,
loss, or legal proceeding including investigation, negotiation, and legal
expenses, court costs, prejudgment interest or delay damages, and interest on
any judgment or award.
"Case" shall refer to loss reserves which are established by PAIC or
PSIC on a case by case or individual claim basis, with respect to losses which
have been incurred and reported to either PAIC or PSIC.
"Claims Department Expenses" or "CDEs" shall mean office expenses and
salaries and expenses of employees of PAIC or any subsidiary of PAIC's claims
department.
"Ceding Commission" shall mean the commissions, premium taxes and other
underwriting expenses incurred in writing Subject or Pooled Subject Unearned
Premiums, to be calculated by multiplying such premium by the prior twelve (12)
month statutory expense ratio.
"IBNR" shall mean the estimated reserves, at a given point in time,
with respect to losses which have been incurred but not yet reported to PAIC or
PSIC, and for future development on reported claims.
"Losses" shall mean payments on policies within the terms and limits of
such policies in settlement of claims or judgements, including Adjustment
Expenses, after deduction of deductibles, salvage and subrogation, and all
amounts due from reinsurers not a party to this Agreement.
"Losses Incurred" shall mean Losses and Adjustment Expenses both paid
and the reserves (both Case and IBNR) thereon.
"PSIC Losses Incurred" shall mean PSIC's Losses and Adjustment Expenses
both paid and the reserves (both Case and IBNR) thereon.
"PAIC Subject Unearned Premiums" shall mean PAIC Subject Premiums which
are unearned by PAIC at the Effective Time of this Agreement.
"PSIC Subject Premiums" shall mean gross premiums written by PSIC, less
policy specific reinsurance such as facultative reinsurance which inures to the
benefit of this Agreement.
"PSIC Subject Unearned Premiums" shall mean PSIC Subject Premiums which
are unearned by PSIC at the Effective Time of this Agreement.
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"Pooled Subject Premiums" shall mean gross premiums written by both
parties, less policy specific reinsurance such as facultative reinsurance, and
less reinsurance ceded to parties other than the parties hereto including treaty
and catastrophe reinsurance, all of which inure to the benefit of this
Agreement.
"Pooled Subject Unearned Premiums" shall mean Pooled Subject Premiums
which are unearned at the Effective Time of this Agreement.
"Pooled Losses Incurred" shall mean Losses and Adjustment Expenses of
PAIC and PSIC both paid and the reserves (both case and IBNR) thereon.
IN WITNESS WHEREOF, the parties have hereunto set their hands hereof the day and
the year first above written.
In the presence of:
/s/ Sherry Blomgren By: /s/ Rosemary Ferrero
Sherry Blomgren Rosemary Ferrero
/s/ Adele Hoegermeyer By: /s/ Jon S. Saltzman
Adele Hoegermeyer Jon S. Saltzman
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RIDER #1
This Rider forms a part of, and is incorporated in, the Reinsurance
Pooling Agreement ("Agreement") between Penn-America Insurance Company ("PAIC")
and its wholly owned subsidiary, Penn-Star Insurance Company ("PSIC"). This
Rider applies to all risks placed in California and sought to be reinsured by
PAIC and PSIC therein.
Notwithstanding any of the terms or conditions in the Agreement to the
contrary:
(a) PAIC will not reinsure risks for the "Team and Vehicle" or
"Aircraft and Miscellaneous" lines of insurance or any other line
of insurance which it is not authorized to write in California
until such time that it is authorized to write such line(s) of
insurance in California; and,
(b) PSIC will not reinsure risks for the "Boiler and Machinery" line
of insurance or any other line of insurance which it is not
authorized to write in California until such time that it is
authorized to write such line(s) of insurance in California.
IN WITNESS WHEREOF, the parties have hereunto set their hands the day
and the year first above written.
In the presence of:
/s/ Sherry Blomgren By: /s/ Rosemary Ferrero
Sherry Blomgren Rosemary Ferrero
/s/ Adele Hoegermeyer By: /s/ Jon S. Saltzman
Adele Hoegermeyer Jon S. Saltzman
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