SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF
1934
Date of report (Date of earliest event reported)
February 9, 1998
GRYPHON HOLDINGS INC.
(Exact Name of Registrant as Specified in
Charter)
Delaware 0-5537 13-3287060
(State or Other (Commission (IRS Employer
Jurisdiction File Number) Identification
of Incorporation) No.)
30 Wall Street, 10005
New York, New York
(Address of Principal Executive Offices) (Zip Code)
Registrant's (212) 825-1200
telephone number,
including area code
(Former Name or Former Address, if Changed Since Last Report)
Item 5. Other Events.
On February 9, 1998, Gryphon Holdings Inc.
("Gryphon") entered into a stock purchase agreement (the
"Stock Purchase Agreement") with Dearborn Risk Management,
Inc. ("Dearborn") to buy from Dearborn all of the issued
and outstanding shares (the "Shares") of capital stock of
The First Reinsurance Company of Hartford ("First Re"),
Oakley Underwriting Agency, Inc., and F/I Insurance
Agency, Incorporated. The Stock Purchase Agreement also
provides that First Re and certain other affiliates of
Gryphon will underwrite certain policies of insurance and
reinsurance (the "Program Business") previously
underwritten by Homestead Insurance Company, a wholly
owned subsidiary of Dearborn.
Under the terms of the Stock Purchase Agreement,
Gryphon will purchase the Shares for (i) $31,900,000 in
cash, payable to Dearborn at closing, (ii) 14,444 shares
of Series A 4.0% Cumulative Convertible Preferred Stock of
Gryphon and (iii) an earnout payment comprised of cash or
Gryphon preferred stock to be based on the earnings of the
Program Business for the 1998, 1999 and 2000 calendar
years. The transaction is expected to close during the
second quarter of 1998, pending the receipt of all
necessary regulatory approvals and the satisfaction of
other customary conditions.
The Stock Purchase Agreement is attached as
Exhibit 10.1 hereto and is incorporated by reference
herein.
FORWARD LOOKING INFORMATION
The Private Securities Litigation Reform Act of
1995 provides a "safe harbor" for forward-looking
statements. Certain information contained herein or in
any other written or oral statements made by or on behalf
of Gryphon may include forward-looking statements which
reflect Gryphon's current views with respect to future
events and financial performance. These forward-looking
statements are subject to certain uncertainties and other
factors that could cause actual results to differ
materially from such statements. These uncertainties and
other factors (which are described in more detail
elsewhere in documents filed by Gryphon with the
Securities and Exchange Commission) include, but are not
limited to, uncertainties relating to general economic
conditions and cyclical industry conditions, uncertainties
relating to government and regulatory policies, volatile
and unpredictable developments (including storms and
catastrophes), the legal environment, the uncertainties of
the reserving process and the competitive environment in
which Gryphon operates. The words "believe," "expect,"
"anticipate," "project," "plan" and similar expressions
identify forward-looking statements. Readers are cautioned
not to place undue reliance on these forward-looking
statements, which speak only as of their dates. Gryphon
undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new
information, future events or otherwise.
Item 7. Financial Statements, Pro Forma Financial
Information and Exhibits.
(c) Exhibits
10.1 Stock Purchase Agreement, dated
as of February 9, 1998, by and between
Gryphon Holdings Inc. and Dearborn
Risk Management, Inc.
99.1 Press Release, dated February 9,
1998, issued by Gryphon Holdings Inc.
SIGNATURE
Pursuant to the requirements of the Securities
Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the
undersigned hereunto duly authorized.
GRYPHON HOLDINGS INC.
Dated: February 19, 1998 By:/s/ Stephen A. Crane
Stephen A. Crane
President and Chief
Executive Officer
Exhibit Index
Exhibit
Number Description Page
10.1 Stock Purchase Agreement, dated as
of February 9, 1998, by
and between Gryphon Holdings Inc. and
Dearborn Risk
Management, Inc.
99.1 Press Release, dated February 9,
1998, issued by Gryphon
Holdings Inc.
STOCK PURCHASE AGREEMENT
by and between
Dearborn Risk Management, Inc.
and
Gryphon Holdings Inc.
Dated as of February 9, 1998
TABLE OF CONTENTS
Page
ARTICLE I DEFINITIONS .. . . . . . . . . . . . . . . . .1
1.1 Defined Terms . . . . . . . . . . . . . . . . .1
1.2 Other Defined Terms . . . . . . . . . . . . . . .8
ARTICLE II PURCHASE AND SALE OF STOCK. . . . . . . . . . . 10
2.1 Transfer of Stock . . . . . . . . . . . . . . . 10
2.2 Purchase Price. . . . . . . . . . . . . . . . . 10
2.3 Payment of the Purchase Price . . . . . . . . . 10
2.4 Delivery of the Shares. . . . . . . . . . . . . 10
2.5 Closing; Closing Date . . . . . . . . . . . . . 10
2.6 Purchase Price Adjustment . . . . . . . . . . . 11
2.7 Escrow. . . . . . . . . . . . . . . . . . . . . 14
2.8 Conversion, Sale and Exchange of Escrow
Shares . . . . . . . . . . . . . . . . . . . . 14
2.9 Release of Escrow Shares. . . . . . . . . . . . 17
2.10 Interest. . . . . . . . . . . . . . . . . . . . 18
2.11 No Constructive Distribution. . . . . . . . . . 18
ARTICLE III REPRESENTATIONS AND WARRANTIES OF SELLER. . . . 19
3.1 Organization. . . . . . . . . . . . . . . . . . 19
3.2 Authorization . . . . . . . . . . . . . . . . . 19
3.3 Conflict or Violation . . . . . . . . . . . . . 20
3.4 Consents and Approvals. . . . . . . . . . . . . 20
3.5 Capital Stock . . . . . . . . . . . . . . . . . 20
3.6 Subsidiaries. . . . . . . . . . . . . . . . . . 21
3.7 Absence of Certain Changes or Events. . . . . . 22
3.8 Assets. . . . . . . . . . . . . . . . . . . . . 24
3.9 Intellectual Property . . . . . . . . . . . . . 24
3.10 Tangible Property . . . . . . . . . . . . . . . 25
3.11 Real Property . . . . . . . . . . . . . . . . . 25
3.12 Leased Real Property. . . . . . . . . . . . . . 26
3.13 Computer Software . . . . . . . . . . . . . . . 27
3.14 Year 2000 . . . . . . . . . . . . . . . . . . . 27
3.15 Contracts and Commitments . . . . . . . . . . . 27
3.16 Reinsurance and Retrocessions . . . . . . . . . 28
3.17 Statutory Statements. . . . . . . . . . . . . . 29
3.18 Financial Statements. . . . . . . . . . . . . . 29
3.19 Undisclosed Liabilities . . . . . . . . . . . . 30
3.20 Solvency. . . . . . . . . . . . . . . . . . . . 30
3.21 Legal Matters . . . . . . . . . . . . . . . . . 30
3.22 Investments . . . . . . . . . . . . . . . . . . 31
3.23 Reserves; Statutory Capital; NAIC IRIS
Ratios . . . . . . . . . . . . . . . . . . . . 32
3.24 Compliance with Law; Permits and Licenses . . . 33
3.25 Written Insurance Policies; Regulatory
Filings. . . . . . . . . . . . . . . . . . . . 34
3.26 Employees and Agents. . . . . . . . . . . . . . 34
3.27 Premium Balances Receivable . . . . . . . . . . 35
3.28 Employee Benefit Plans; ERISA . . . . . . . . . 36
3.29 Transactions with Certain Persons . . . . . . . 37
3.30 Taxes . . . . . . . . . . . . . . . . . . . . . 38
3.31 Insurance . . . . . . . . . . . . . . . . . . . 40
3.32 Environmental Laws. . . . . . . . . . . . . . . 41
3.33 Preferred Shares. . . . . . . . . . . . . . . . 42
3.34 Collective Bargaining; Labor Disputes;Compliance42
3.35 No Brokers. . . . . . . . . . . . . . . . . . . 42
3.36 Absence of a Seller Material Adverse Effect . . 42
3.37 No Other Agreements . . . . . . . . . . . . . . 43
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF BUYER . . . . 43
4.1 Organization of Buyer . . . . . . . . . . . . . 43
4.2 Authorization . . . . . . . . . . . . . . . . . 43
4.3 Conflict or Violation . . . . . . . . . . . . . 43
4.4 Consents and Approvals. . . . . . . . . . . . . 44
4.5 Capital Stock . . . . . . . . . . . . . . . . . 44
4.6 SEC Reports; Company Financial Statements . . . 45
4.7 No Brokers. . . . . . . . . . . . . . . . . . . 46
4.8 Legal Matters . . . . . . . . . . . . . . . . . 46
4.9 Compliance with Law; Permits and Licenses . . . 46
4.10 Absence of a Buyer Material Adverse Effect. . . 47
ARTICLE V ADDITIONAL AGREEMENTS OF SELLER AND BUYER . . . 47
5.1 Maintenance of Business and Preservation of
Permits and Services. . . . . . . . . . . . . . 47
5.2 Additional Financial Statements . . . . . . . . 48
5.3 Investigation . . . . . . . . . . . . . . . . . 48
5.4 Regulatory Matters; Third Party Consents. . . . 50
5.5 Notification of Certain Matters . . . . . . . . 51
5.6 Exclusivity . . . . . . . . . . . . . . . . . . 51
5.7 Cooperation; Accounting and Other Matters . . . 52
5.8 Investment Portfolio. . . . . . . . . . . . . . 53
5.9 Use of Name . . . . . . . . . . . . . . . . . . 53
5.10 Intercompany Payments . . . . . . . . . . . . . 53
5.11 Maintenance of Records. . . . . . . . . . . . . 54
5.12 Repayment of Indebtedness and Release of
Liens. . . . . . . . . . . . . . . . . . . . . 55
5.13 Employees . . . . . . . . . . . . . . . . . . . 55
5.14 Additional Insurance Coverage . . . . . . . . . 55
5.15 Satisfaction of Obligations to Employees. . . . 55
5.17 Escrow Agreement. . . . . . . . . . . . . . . . 56
5.18 Distribution of Homestead Shares. . . . . . . . 56
5.19 Corinthian Policies . . . . . . . . . . . . . . 56
5.20 Further Assurances. . . . . . . . . . . . . . . 57
ARTICLE VI CONDITIONS TO SELLER'S OBLIGATIONS. . . . . . . 57
6.1 Representations, Warranties, and Covenants. . . 57
6.2 Opinion of Counsel. . . . . . . . . . . . . . . 58
6.3 Certificates. . . . . . . . . . . . . . . . . . 58
6.4 Ratings . . . . . . . . . . . . . . . . . . . . 58
6.5 Filing of Certificate of Designation. . . . . . 58
6.6. New Jersey Surety Bond. . . . . . . . . . . . . 58
ARTICLE VII CONDITIONS TO BUYER'S OBLIGATIONS . . . . . . . 58
7.1 Representations, Warranties and Covenants . . . 58
7.2 Opinion of Counsel. . . . . . . . . . . . . . . 59
7.3 Certificates. . . . . . . . . . . . . . . . . . 59
7.4 Records . . . . . . . . . . . . . . . . . . . . 59
7.5 Ratings . . . . . . . . . . . . . . . . . . . . 59
7.6 Intercompany Agreements . . . . . . . . . . . . 59
7.7 Resignation of Directors and Officers . . . . . 59
7.8 Employment Agreement. . . . . . . . . . . . . . 59
7.9 Additional Insurance Coverage . . . . . . . . . 59
7.10 1997 Reserve Report . . . . . . . . . . . . . . 60
ARTICLE VIII CONDITIONS OF BUYER AND SELLER. . . . . . . . . 60
8.1 No Litigation, Injunction or Restraint. . . . . 60
8.2 Consents. . . . . . . . . . . . . . . . . . . . 60
ARTICLE IX SURVIVAL OF REPRESENTATIONS, WARRANTIES,
COVENANTS AND AGREEMENTS; INDEMNIFICATION 61
9.1 Survival. . . . . . . . . . . . . . . . . . . . 61
9.2 Indemnification . . . . . . . . . . . . . . . . 61
9.3 Indemnification Procedures. . . . . . . . . . . 62
9.4 Net Indemnity . . . . . . . . . . . . . . . . . 63
9.5 Limits on Indemnification . . . . . . . . . . . 64
9.6 Absence of Limits . . . . . . . . . . . . . . . 64
9.7 Satisfaction of Seller's Obligations. . . . . . 64
ARTICLE X TAX MATTERS . . . . . . . . . . . . . . . . . . 64
10.1 Code 338(h)(10) Election. . . . . . . . . . . 64
10.2 Termination of Prior Tax Sharing Agreements . . 65
10.3 Pre-Closing Taxes . . . . . . . . . . . . . . . 66
10.4 Tax Periods Beginning Before and Ending
After the Closing Date . . . . . . . . . . . . 66
10.5 Cooperation on Tax Matters. . . . . . . . . . . 68
10.6 Transfer Taxes. . . . . . . . . . . . . . . . . 68
10.7 Tax Indemnification . . . . . . . . . . . . . . 68
10.8 Audits. . . . . . . . . . . . . . . . . . . . . 68
10.9 Net Indemnity . . . . . . . . . . . . . . . . . 69
ARTICLE XI MISCELLANEOUS . . . . . . . . . . . . . . . . . 69
11.1 Termination . . . . . . . . . . . . . . . . . . 69
11.2 Obligations Upon Termination. . . . . . . . . . 70
11.3 Non-Competition; Non-Solicitation of
Employees. . . . . . . . . . . . . . . . . . . 70
11.4 The Program.. . . . . . . . . . . . . . . . . . 71
11.5 No Third Party Beneficiaries. . . . . . . . . . 72
11.6 Assignment. . . . . . . . . . . . . . . . . . . 72
11.7 Notices . . . . . . . . . . . . . . . . . . . . 72
11.8 Choice of Law . . . . . . . . . . . . . . . . . 73
11.9 Entire Agreement; Amendments and Waivers. . . . 73
11.10 Counterparts. . . . . . . . . . . . . . . . . . 73
11.11 Invalidity. . . . . . . . . . . . . . . . . . . 74
11.12 Expenses. . . . . . . . . . . . . . . . . . . . 74
11.13 Publicity . . . . . . . . . . . . . . . . . . . 74
11.14 Corinthian Business . . . . . . . . . . . . . . 75
11.15 Transfer of Certain Employees . . . . . . . . . 75
11.16 New Jersey Surety Bond. . . . . . . . . . . . . 76
11.17 Interpretation. . . . . . . . . . . . . . . . . 76
11.18 Severability. . . . . . . . . . . . . . . . . . 76
11.19 Specific Performance. . . . . . . . . . . . . . 77
11.20 No Prejudice. . . . . . . . . . . . . . . . . . 77
EXHIBITS
Exhibit A Form of Certificate of Designation of Series
A 4.0% Cumulative Convertible Preferred Stock
Exhibit B Form of Registration Rights Agreement
Exhibit C Form of Shareholders' Agreement
Exhibit D Form of Escrow Agreement
Exhibit E Form of Press Release
STOCK PURCHASE AGREEMENT
This Stock Purchase Agreement (this "Agreement"), dated
as of February 9, 1998, is by and between Gryphon Holdings Inc.,
a Delaware corporation ("Buyer"), and Dearborn Risk Management, Inc., a
Delaware corporation ("Seller").
W I T N E S S E T H:
WHEREAS, Seller owns, beneficially and of record, the Shares
(as defined herein); and
WHEREAS, Buyer desires to purchase from Seller, and Seller
desires to sell to Buyer, all of the Shares, upon the terms and subject
to the conditions of this Agreement.
NOW, THEREFORE, in consideration of the mutual covenants and
promises contained herein, and for other good and valuable consideration
the receipt and sufficiency of which are hereby acknowledged, the
parties hereto agree as follows:
ARTICLE I
DEFINITIONS
1.1 Defined Terms. As used herein, the terms below
shall have the following meanings:
"Affiliate" shall mean any Person that, directly or
indirectly, through one or more intermediaries controls, is controlled
by or is under common control with the Person specified.
"Agreement" shall mean this Stock Purchase Agreement, together
with all Schedules and Exhibits referenced herein.
"Applicable Law" shall mean any domestic or foreign federal,
state or local statute, law, ordinance, code, rule, regulation, order,
writ, injunction, judgment, decree or award applicable, as indicated by
the context, to Seller, any Transferred Company, Buyer or any of their
respective Subsidiaries, properties, assets, officers, directors,
employees or agents.
"Bankruptcy Event" shall mean the receipt by Seller, Buyer or
any of their respective Affiliates of notice from the Insurance
Commissioner of the Commonwealth of Pennsylvania indicating that the
Commissioner intends to commence a Delinquency Proceeding with respect
to Homestead or any act of the Commissioner so commencing any
Delinquency Proceeding.
"Business Day" shall mean any day other than a Saturday,
Sunday or day on which banking institutions in The City of New York are
permitted or obligated by law to close.
"Buyer Confidentiality Agreement" shall mean the
Confidentiality Agreement, dated July 10, 1997, executed by Buyer for
the benefit of Seller.
"Buyer Material Adverse Effect" shall mean (i) a material
adverse effect on the assets, liabilities, business,
condition (financial or other) or prospects of Buyer and its
Subsidiaries taken as a whole or (ii) an event that would prevent or
materially delay the performance by Buyer of its obligations under this
Agreement or would materially interfere with the ability of Buyer to
consummate the transactions contemplated hereby.
"CHII" shall mean Castle Harlan Partners II, L.P., a Delaware
limited partnership.
"Code" shall mean the Internal Revenue Code of 1986, as
amended from time to time.
"Common Stock" shall mean the common stock, par value $.01 per
share, of Buyer.
"Consolidated Group" shall mean any consolidated, combined,
unitary or similar group for any federal, state, local or foreign tax
purpose, of which any Transferred Company or any Subsidiary thereof is
or was a member but only with respect to taxable periods in which the
Transferred Company or its Subsidiary is included as a member.
"Contracts" (or "Contract" as the context may require) shall
mean all agreements, contracts, commitments and undertakings,
indentures, notes, bonds, loans, instruments, leases, mortgages or other
binding arrangements.
"Convention Statements" shall mean the audited annual
convention statements of First Re for the years ended
December 31, 1994 through 1996 and the quarterly convention statements
of First Re for the quarterly periods ended March 31, 1997, June 30,
1997 and September 30, 1997, each as filed with the Department of
Insurance of the State of Connecticut.
"Convertible Preferred Stock" shall mean the Series A 4.0%
Cumulative Convertible Preferred Stock of Buyer having substantially
those rights, preferences, limitations, qualifications and designations
set forth in Exhibit A.
"Corinthian" shall mean Corinthian Management, Inc., a New
Jersey corporation.
"Corinthian Business" shall mean warranty or extended warranty
programs of Corinthian relating to automobiles or consumer goods.
"Corinthian Business Contingent Payment" shall mean the number
of shares of preferred stock of Buyer having, except as set forth on
Schedule 11.14, the same rights, preferences, limitations,
qualifications and designations as the Convertible Preferred Stock and
having the value calculated by reference to, and paid in accordance
with, the procedures set forth on Schedule 11.14.
"Delinquency Proceeding" shall mean a "delinquency proceeding"
as that term is defined in Section 40-11-103 of Chapter 11 of the
Pennsylvania Insurance Code.
"Disclosure Schedule" shall mean the schedule delivered by
Seller to Buyer which sets forth exceptions to the representations and
warranties contained in Article III hereof and certain other information
called for by Article III hereof and other provisions of this Agreement.
"Encumbrances" shall mean any claim, lien, pledge,
option, right of first refusal, preemptive right, charge, easement,
security interest, right-of-way, encumbrance or other rights of third
parties.
"Environmental Laws" shall mean any statute, rule, regulation,
ordinance, code, order, judgment, writ, injunction or decree which
relates to or otherwise imposes liability or standards of conduct
concerning environmental protection, health and safety of persons,
discharges, emissions, releases or threatened releases of any noises,
odors or Hazardous Materials into ambient air, water or land, or
otherwise relating to the manufacture, processing, generation,
distribution, use, treatment, storage, disposal, cleanup, transport or
handling of Hazardous Materials, including the Comprehensive
Environmental Response, Compensation and Liability Act, as amended by
the Superfund Amendments and Reauthorization Act, as amended, the
Occupational Safety and Health Act, as amended, the Resource
Conservation and Recovery Act, as amended, the Toxic Substances Control
Act, as amended, the Federal Water Pollution Control Act, as amended,
the Clean Water Act, as amended, any so-called "Superlien" law, and any
other similar federal, state or local law.
"Environmental Permits" shall mean all Permits required under
any Environmental Law.
"F/I Insurance" shall mean F/I Insurance Agency, Incorporated,
an Illinois corporation.
"First Re" shall mean The First Reinsurance Company of
Hartford, a Connecticut-domiciled insurance company.
"GAAP" shall mean generally accepted accounting principles
used in the United States as in effect at the time any applicable
financial statements were prepared, applied on a consistent basis.
"Governmental Authority" shall mean any nation or government,
any state or other political subdivision thereof, any entity exercising
executive, legislative, judicial, regulatory or administrative functions
of or pertaining to government, including any governmental authority,
agency, department, board, commission or instrumentality of the United
States, any foreign government, any state of the United States or any
political subdivision thereof, and any court or tribunal of competent
jurisdiction, and any governmental or non-governmental self-regulatory
organization, agency or authority.
"Hazardous Material" shall mean any (i) hazardous
substance, toxic substance, hazardous waste or pollutant (as
such terms are defined by or within the meaning of any
Environmental Law), (ii) material or substance which is
regulated or controlled as a hazardous substance, toxic
substance, pollutant or other regulated or controlled
material, substance or matter pursuant to any Environmental
Law, (iii) petroleum, crude oil or fraction thereof, (iv)
asbestos-containing material, (v) polychlorinated biphenyls,
(vi) lead-based paint or (vii) radioactive material.
"Homestead" shall mean Homestead Insurance
Company, a Pennsylvania-domiciled insurance company.
"HSR Act" shall mean the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended.
"Knowledge of Buyer" shall mean actual knowledge
after reasonable inquiry of any officer of Buyer.
"Knowledge of Seller" shall mean actual knowledge
after reasonable inquiry of any individual listed on the
Disclosure Schedule.
"Material Adverse Effect" shall mean a Buyer
Material Adverse Effect or a Seller Material Adverse Effect,
as applicable.
"Net Unpaid Losses and LAE" shall mean "unpaid
losses and loss expenses" net of "reinsurance recoverables,"
as those terms are used in accordance with GAAP (it being
understood that, in accordance with GAAP, "unpaid losses and
loss expenses" includes losses incurred but not reported and
are presented net of salvage and subrogation rights).
"Oakley" shall mean Oakley Underwriting Agency,
Inc., an Illinois corporation.
"Other Transaction Documents" shall mean, to the
extent applicable to the relevant party, the Registration
Rights Agreement, the Shareholders' Agreement, the
Certificate of Designations pertaining to the Convertible
Preferred Stock and the Escrow Agreement.
"Permits" shall mean all licenses, permits,
orders, consents, approvals, registrations, authorizations,
qualifications and filings under all federal, state, local
or foreign laws and with all Governmental Authorities and
all industry or other non-governmental self-regulatory
organizations.
"Person" shall mean any individual, partnership
(limited or general), joint venture, corporation, company,
limited liability company, trust, association,
unincorporated organization, Governmental Authority or other
entity.
"Preferred Shares" shall mean 14,444 shares of
Convertible Preferred Stock.
"Program" shall mean any of the following
insurance programs written prior to the Closing Date by
Homestead and any other such programs mutually agreed in
writing by Buyer and Seller: (i) B&S Workers' Compensation;
(ii) B&S Employers' Liability; (iii) Ringwood Auto; (iv)
InterCorp Coin Dealers; (v) Ringwood Miscellaneous E&O
Lawyers; (vi) Universal; (vii) Southwest; (viii) SMIS; (ix)
Freberg; (x) Rigdon Consultants; (xi) American Acupuncture;
(xii) St. Croix GL; (xiii) Market Access HC; and (xiv)
Intellectual Properties.
"Program Business" shall mean any contract of
insurance or reinsurance relating to any Program which,
prior to the Closing Date, was bound by Homestead Services,
Inc., as underwriting manager, and written by Homestead and
which, after the Closing Date and on or prior to the first
anniversary of the Closing Date, is either bound by Oakley
or insured or reinsured by First Re.
"Program Contingent Payment" shall mean an amount of cash
or, at the election of Seller in accordance with the
procedures set forth on Schedule 2.2 hereto, a number of
shares of preferred stock of Buyer having, except as set
forth on Schedule 2.2, the same rights, preferences,
limitations,
qualifications and designations as the Convertible Preferred
Stock and having the value calculated by reference to, and
paid in accordance with, the procedures set forth on such
Schedule 2.2.
"Records" shall mean all records (including,
without limitation, all corporate minute books,
organizational documents and stock transfer books) and
original documents which pertain to or are utilized
primarily by a Transferred Company or any Subsidiary of a
Transferred Company to administer, reflect, monitor,
evidence or record information relating to the business or
conduct of any Transferred Company or any Subsidiary of a
Transferred Company and all such records and original
documents, including all such records maintained on
electronic or magnetic media, or in any electronic database
system of a Transferred Company or any Subsidiary of a
Transferred Company, or necessary to comply with any
Applicable Law with respect to the business of a Transferred
Company or any Subsidiary of a Transferred Company.
"Registration Rights Agreement" shall mean the
Registration Rights Agreement among Seller and Buyer, in
substantially the form attached as Exhibit B.
"SAP" shall mean the statutory accounting
practices prescribed or permitted by the Department of
Insurance of the State of Connecticut.
"Section 2.6 Shares" shall mean that number of
Preferred Shares equal to the lesser of (a) the aggregate
number of Preferred Shares less the aggregate number of
Indemnity Escrow Shares and (b) that number of Preferred
Shares convertible into shares of Common Stock having an
aggregate value (based on a per share Common Stock price of
$16.50) of $3 million.
"Securities Act" shall mean the Securities Act of
1933, as amended, and the rules and regulations promulgated
thereunder.
"Seller Confidentiality Agreement" shall mean the
Confidentiality Agreement, dated as of July 10, 1997,
executed by Seller for the benefit of Buyer.
"Seller Material Adverse Effect" shall mean (i) a
material adverse effect on the assets, liabilities,
business, condition (financial or other) or prospects of the
Transferred Companies and their Subsidiaries taken as a
whole or (ii) an event that would prevent or materially
delay the performance by Seller of its obligations under
this Agreement or would materially interfere with the
ability of Seller to consummate the transactions
contemplated hereby.
"Shareholders' Agreement" shall mean the
Shareholders' Agreement among Seller, Buyer and CHII, in
substantially the form attached as Exhibit C.
"Shares" shall mean all of the issued and
outstanding shares of capital stock of First Re, Oakley and
F/I Insurance.
"Subsidiaries" (or "Subsidiary" as the context may
require) shall mean each entity as to which a Person,
directly or indirectly, has the power to (i) vote, or to
exercise a controlling influence with respect to, 50% or
more of the securities of any class of such entity the
holders of which are ordinarily, in the absence of
contingencies, entitled to vote for the election of
directors (or persons performing similar functions) of such
entity or (ii) direct or cause the direction of the
management and policies of such entity, whether by contract
or otherwise.
"Tangible Assets" shall mean, with respect to any
Person, all of the assets of such Person excluding those
assets which would be characterized as "intangible assets"
in accordance
with Accounting Principles Board Opinion 17 and Accounting
Research Bulletin 43 Chapter 5.
"Tax" (or "Taxes" as the context may require)
shall mean (i) any federal, foreign, state or local income,
business, alternative or add-on minimum tax, gross income,
gross receipts, sales, use, ad valorem, value added,
transfer, transfer gains, net worth, franchise, profits,
license, social security, withholding, payroll, employment,
salaries, interest, unemployment, disability, production,
excise, severance, stamp, capital stock, estimated,
occupation, premium, property (real or personal),
environmental or windfall profit tax, custom, duty or other
tax, levy, governmental fee or other like assessment or
charge of any kind whatsoever, together with any interest,
penalty, addition to tax or additional amount imposed by any
governmental or taxing authority and (ii) any liability of
the relevant Person or any subsidiary of the relevant Person
for the payment of any amounts of the type described in (i)
as a result of being a member of an affiliated,
consolidated, combined or unitary group, or being a party to
any agreement or arrangement whereby liability of the
relevant Person or any subsidiary of the relevant Person for
payment of such amounts was determined or taken into account
with reference to the liability of any other Person.
"Tax Return" shall mean any return, declaration,
report, claim for refund, or information return or statement
relating to Taxes, including any schedule or attachment
thereto, and including any amendment thereof.
"Trade Secrets" shall mean the trade secrets, know-
how, proprietary computer programs and systems, concepts,
methods, reports, data, customer lists, mailing lists,
business plans or other proprietary information relating to
the Transferred Companies and their Subsidiaries.
"Transaction Costs" shall mean the amount of the
customary and reasonable costs and expenses (including,
without limitation, any customary discounts, fees and
commissions of brokers and underwriters and reasonable
attorneys' fees and expenses) which are actually incurred in
connection with the disposition of shares of Common Stock
which are issued upon conversion of any Escrow Shares
pursuant to the terms hereof and the Escrow Agreement.
"Transfer Agent" shall mean State Street Bank and
Trust Company.
"Transferred Companies" (or "Transferred Company"
as the context may require) shall mean First Re, Oakley and
F/I Insurance.
1.2 Other Defined Terms. The following
terms shall have the meanings defined for such terms in the
Sections set forth below:
Term Section
Actions 3.21(a)
Additional Tax 10.1(a)
Adjusted Excess Amount 2.6(e)(i)
Agent 3.26(c)(i)
Allocations 10.1(b)
A.M. Best 5.5(b)(i)
Bankruptcy Claim 2.8(d)
Book Value 2.6(b)
Book Value Deficiency 2.6(e)(ii)
Buyer Preamble
Buyer Indemnitee 9.2
Buyer 2.6 Shares 2.6(e)(ii)
Buyer's Accountants 2.6(c)
Buyer SEC Documents 4.6
Cash Consideration 2.2(a)
Closing 2.5
Closing Agreement 3.30(h)
Closing Balance Sheet 2.6(a)
Closing Date 2.5
Company Returns 3.30(a)
Corinthian Employees 11.14(a)
Corinthian Reinsurance Agreement 5.19
Election 10.1(a)
ERISA 3.28(a)
Escrow Agent 2.7
Escrow Agreement 2.7
Escrow Shares 2.7
Exchange Act 4.6
First Re 1996 Balance Sheet 3.18(a)
GAAP Financial Statements 3.18(a)
Homestead Employees 3.26(b)
Indemnity Claim 2.8(c)
Indemnity Claim Amount 2.8(c)
Indemnified Person 9.3(a)
Indemnifying Person 9.3(a)
Indemnity Escrow Shares 2.7
Independent Accounting Firm 2.6(c)
Intellectual Property 3.9(a)
IRIS 3.23(d)
Leased Real Property 3.12(a)
Leases 3.12(a)
Liabilities 3.19(a)
Licensed Software 3.13
Losses 9.2
Material Contracts 3.15(a)
NAIC 3.23(d)
1997 Reserves 3.23(a)
1997 Reserve Report 5.16(b)
Owned Software 3.13
Plans 3.28(a)
Pre-Book Value Indemnity Claims 2.9(a)
Post-Closing Tax Return 10.4(b)
Pre-Closing Consolidated Tax Returns 10.3
Pre-Closing Separate Tax Returns 10.3
Pre-Closing Tax Returns 10.3
Pre-Closing Taxes 10.3
Preliminary Actuarial Report 3.23(a)
Prohibited Transactions 5.6(a)
Purchase Price 2.2
Required time 10.1(a)
Retained Section 2.6 Shares 2.9(a)
Sale 2.8(c)
Scheduled Investments 3.22(a)
SEC 4.6
Seller Preamble
Seller Indemnitee 9.2
Seller's Accountants 2.6(a)
Seller's Post-Closing Taxes 10.4(a)
Stock Purchase Price 2.2(b)
Straddle Period 10.4(a)
Surety Bond 11.16(a)
Tangible Property 3.10
Tax Ruling 3.30(h)
Transfer Taxes 10.6
Transferred Employees 3.26(a)
ARTICLE II
PURCHASE AND SALE OF STOCK
2.1 Transfer of Stock. Upon the terms and
subject to the conditions contained herein, at the Closing,
Seller shall sell, transfer and deliver to Buyer, and Buyer
shall purchase, acquire and accept from Seller, all of the
Shares, for the Purchase Price specified in Section 2.2.
2.2 Purchase Price. The purchase price of the
Shares (the "Purchase Price") shall consist of: (a)
$31,900,000 in cash (the "Cash Consideration"), (b) the
Preferred Shares (subject to adjustment pursuant to Section
2.6, the "Stock Purchase Price") and (c) the Program
Contingent Payment. The Program Contingent Payment, if any,
shall be determined by reference to, and shall be paid in
accordance with, the procedures set forth on Schedule 2.2
hereto.
2.3 Payment of the Purchase Price. At the
Closing, with respect to the Purchase Price, Buyer shall (a)
pay to Seller the Cash Consideration by wire transfer of
immediately available funds to an account designated in
writing by Seller to Buyer at least three Business Days
prior to the Closing Date and
(b) deliver to Seller stock certificates representing the
Preferred Shares registered in the name of Seller or any
permitted designee of Seller (less the aggregate number of
Escrow Shares, which shall be delivered to the Escrow Agent
registered in the name of the Escrow Agent).
2.4 Delivery of the Shares. At the Closing,
Seller shall deliver to Buyer stock certificates
representing the Shares, free and clear of any Encumbrances
(except Encumbrances arising as a result of any action taken
by Buyer or any of its Affiliates), duly endorsed in blank
or accompanied by stock powers duly executed in blank, in
proper form for transfer, and with all appropriate stock
transfer tax stamps affixed.
2.5 Closing; Closing Date. The closing of the
sale and purchase of the Shares contemplated hereby (the
"Closing")
shall take place at the offices of LeBoeuf, Lamb, Greene &
MacRae, L.L.P., 125 West 55th Street, New York, New York
10019 at 10:00 a.m., local time, as soon as practicable, but
in no event more than five Business Days after all
conditions to Closing contemplated hereby have been
satisfied or waived (other than those conditions designating
instruments, certificates or other documents to be delivered
at the Closing), or at such other time or date as Buyer and
Seller shall agree upon in writing. The time and date on
which the Closing occurs is referred to herein as the
"Closing Date."
2.6 Purchase Price Adjustment. The Stock
Purchase Price shall be subject to adjustment as specified
in this Section 2.6.
(a) As soon as practicable following the Closing
Date, and in no event later than 60 days following the
Closing Date, Seller shall deliver to Buyer an accurate and
correct copy of a balance sheet of First Re as of the close
of business on the Business Day immediately preceding the
Closing Date (the "Closing Balance Sheet"), together with a
report thereon of Deloitte & Touche LLP, independent
accountants for Seller ("Seller's Accountants"), stating
that the Closing Balance Sheet fairly presents the
consolidated financial position of First Re as of such date
in accordance with GAAP. In no event later than 50 days
following the Closing Date, Seller shall deliver to Buyer a
substantially complete draft of the Closing Balance Sheet.
(b) Utilizing the Closing Balance Sheet and
subject to the other provisions of this Section 2.6(b), the
"Book Value" of First Re shall equal the excess of total
Tangible Assets over total liabilities reflected on the
Closing Balance Sheet. If the Closing Balance Sheet
includes a valuation allowance against deferred income taxes
and such valuation allowance exists because the consolidated
financial statements of Seller at December 31, 1997 contain
a similar valuation allowance, then the valuation allowance
of First Re on the Closing Balance Sheet shall be excluded
for the purpose of determining Book Value, subject to the
provisions of Section 2.6(c). Further, the Book Value shall
be adjusted to exclude the value of any shares of the
capital stock of Homestead owned by First Re as of the
Business Day immediately preceding the Closing Date. Seller
shall deliver to Buyer, simultaneously with the delivery of
the Closing Balance Sheet, a certificate of the chief
financial officer of Seller which includes the calculation
of Book Value and certifies that such calculation has been
made in accordance with the procedures set forth in this
Section 2.6(b).
(c) Except as otherwise provided in this
Section 2.6(c), the calculation of Book Value delivered by
Seller to Buyer shall be final, binding and conclusive on
the parties hereto. Buyer may dispute any amounts reflected
on the Closing Balance Sheet to the extent that the net
effect of such disputed amounts in the aggregate would be to
cause Book Value to be less than $35 million; provided,
however, that Buyer shall notify Seller in writing of each
disputed item, specifying the amount thereof in dispute and
setting forth, in detail, the basis for such dispute, at any
time during the 20 days immediately following the date on
which Seller delivered to Buyer the Closing Balance Sheet;
and provided, further, that Buyer may not dispute any amount
reflected on the Closing Balance Sheet to the extent such
amount was calculated on the same basis as used in preparing
the First Re 1996 Balance Sheet, if the amount set forth on
the First Re 1996 Balance Sheet was determined by Seller's
Accountants to have been calculated in accordance with GAAP.
In the event of such a dispute, accountants designated by
Buyer
("Buyer's Accountants") and Seller's Accountants shall
attempt to reconcile any disputed amounts, and any
resolution by them as to any such amounts shall be final,
binding and conclusive on the parties. If Buyer's
Accountants and Seller's Accountants are unable to reach a
resolution with respect to any disputed amount within 10
Business Days following Buyer's written notice of dispute to
Seller, Buyer's Accountants and Seller's Accountants shall
submit for resolution the amounts remaining in dispute to a
nationally recognized independent public accounting firm
mutually acceptable to Buyer and Seller (the "Independent
Accounting Firm"), as an expert and not an arbitrator, which
shall, within 30 Business Days of such submission, determine
and report to Seller and Buyer upon such remaining disputed
amounts, and such report shall be final, binding and
conclusive on Seller and Buyer. The fees and disbursements
of the Independent Accounting Firm shall be allocated
between Buyer and Seller in the same proportion that the
aggregate amount of such remaining disputed amounts so
submitted to the Independent Accounting Firm that is
unsuccessfully disputed by each (as finally determined by
the Independent Accounting Firm) bears to the total amount
of such remaining disputed amounts so submitted.
(d) (i) If the final determination of Book Value
exceeds $35,000,000, the amount of such excess shall be
added to the Stock Purchase Price; and
(ii) If the final determination of Book Value is
less than $35,000,000, the amount of such deficiency
shall be deducted from the Stock Purchase Price.
(e) Within five Business Days after the final
determination of Book Value:
(i) if the final determination of Book Value
exceeds $35 million, (A) subject to Section 2.9(a),
Buyer and Seller shall jointly instruct the Escrow
Agent to promptly deliver to Seller the certificate
representing the Section 2.6 Shares and (B) Buyer shall
issue to Seller that number of shares of Convertible
Preferred Stock equal to (x) the Adjusted Excess Amount
(as defined below) divided by (y) 1,000. For purposes
of this Section 2.6(e)(i), "Adjusted Excess Amount"
shall be equal to (I) the amount by which the Book
Value exceeds $35 million divided by (II).81; or
(ii) if the final determination of Book Value is
less than $35 million (the "Book Value Deficiency"),
subject to Section 2.8(b)(i), Buyer and Seller shall
jointly instruct the Escrow Agent, pursuant to the
terms of the First Escrow Agreement, to promptly
deliver to the Transfer Agent the certificate
representing the Section 2.6 Shares. Buyer shall
instruct the Transfer Agent to issue to the Escrow
Agent upon its presentation of the certificate
representing the Section 2.6 Shares (A) a certificate
representing that number of Section 2.6 Shares ("Buyer
2.6 Shares") convertible into the number of shares of
Common Stock having an aggregate value (based on a per
share Common Stock price of $16.50) equal to the sum of
(x) the Book Value Deficiency and (y) the estimated
Transaction Costs (as determined in accordance with the
penultimate sentence of this Section 2.6(e)(ii)) and
(B) a certificate representing the remaining Section
2.6 Shares, if any. As part of the instructions to be
provided to the Escrow Agent pursuant to this Section
2.6(e)(ii), Buyer and Seller shall jointly instruct,
subject to Section 2.9(a), the Escrow Agent to deliver
to Seller the certificate representing the remaining
Section 2.6 Shares, if any. The Escrow Agent shall
hold the Buyer 2.6 Shares
until directed in writing by Buyer to convert such
shares into shares of Common Stock and to deliver the
certificate representing such shares of Common Stock to
a specified third party or parties in connection with
the sale of such shares of Common Stock. The proceeds
received from such sale shall be retained by and be the
sole and exclusive property of Buyer to the extent that
such proceeds equal the sum of the Book Value
Deficiency and the Transaction Costs incurred by Buyer.
Any proceeds exceeding such amount shall be promptly
delivered by Buyer to Seller. The estimated
Transaction Costs shall be estimated by Buyer in good
faith, and Buyer hereby agrees to provide in writing to
Seller evidence, reasonably satisfactory to Seller, of
the Transaction Costs incurred by Buyer. To the extent
that the sum of the Book Value Deficiency and the
Transaction Costs incurred by Buyer exceeds the
aggregate value (based on a per share Common Stock
price of $16.50) of the shares of Common Stock issuable
upon conversion of the Section 2.6 Shares, Buyer may
satisfy such excess through a Sale of Indemnity Escrow
Shares in accordance with the provisions of Section 2.8
hereof and the Escrow Agreement.
(f) During the preparation of the Closing Balance
Sheet and the determination of Book Value therefrom by
Seller and the period of any dispute referred to in Section
2.6(c), Buyer shall provide Seller's Accountants full access
to the books, records, facilities and employees of First Re
and shall cooperate fully with Seller's Accountants, to the
extent required by Seller's Accountants in order to prepare
the Closing Balance Sheet and to investigate the basis for
any such dispute; provided, however, that any such
investigation shall be conducted in such a manner as not to
interfere unreasonably with the business and operations of
First Re. Employees of Buyer and Buyer's Accountants shall
be entitled to access to Seller's Accountants' work papers
prepared in connection with the Closing Balance Sheet,
subject to Buyer and Buyer's Accountants executing in
advance any customary agreement required by Seller's
Accountants, and shall be entitled to discuss such work
papers with Seller's Accountants.
2.7 Escrow. At the Closing, Buyer, Seller and an
escrow agent selected by Buyer and Seller (the "Escrow
Agent") shall execute and deliver an escrow agreement,
substantially in the form attached as Exhibit D hereto (the
"Escrow Agreement"). Under the terms of the Escrow
Agreement, Buyer shall deposit at Closing with the Escrow
Agent (a) the Section 2.6 Shares and (b) that number of
Preferred Shares (the "Indemnity Escrow Shares," and
together with the Section 2.6 Shares, the "Escrow Shares")
convertible into shares of Common Stock having an aggregate
value (based on the book value of Buyer as set forth in the
audited consolidated balance sheet of Buyer as of December
31, 1997 prepared in accordance with GAAP) of $9 million.
The Escrow Shares shall be held by the Escrow Agent for the
benefit of Buyer solely as collateral security for any
obligations of Seller under Sections 2.6 and 9.2 hereof,
and distributed by the Escrow Agent
pursuant to the terms and provisions of this Agreement and
the Escrow Agreement.
2.8 Conversion, Sale and Exchange of Escrow
Shares. (a) Except as set forth in Section 2.8(b) and
Section 9.7, the obligations of Seller in respect of the
escrow arrangements contemplated by this Agreement shall be
satisfied through the conversion of Escrow Shares into
shares of Common Stock and the sale of such shares of Common
Stock.
(b)(i) Seller may, in its sole discretion,
satisfy the
obligation it may have to Buyer under Section 2.6 in cash.
If Seller satisfies such obligation in full in cash, then
Buyer and Seller shall jointly instruct the Escrow Agent to
deliver to Seller the certificate representing the Section
2.6 Shares.
(ii) Seller may, at any time, in its sole
discretion, elect to substitute cash for all or part of
the Indemnity Escrow Shares by delivering such cash to
the Escrow Agent. If Seller elects to substitute cash
for all of the Indemnity Escrow Shares then held by the
Escrow Agent, the amount of cash required to be
delivered by Seller to the Escrow Agent shall be equal
to $9 million less the aggregate amount (excluding
Transaction Costs) of claims previously satisfied
through the conversion of Indemnity Escrow Shares and
the sale of the shares of Common Stock issued upon
conversion of such Indemnity Escrow Shares. If the
Seller elects to substitute cash for part but not all
of the Indemnity Escrow Shares then held by the Escrow
Agent, the number of Indemnity Escrow Shares that shall
be delivered by the Escrow Agent to Seller upon receipt
of the cash to be substituted shall equal that number
of Indemnity Escrow Shares convertible into shares of
Common Stock having an aggregate value (based on the
book value of Buyer as set forth in the audited
consolidated balance sheet of Buyer as of December 31,
1997 prepared in accordance with GAAP) equal to the
amount of such cash. Any substitution contemplated by
this Section 2.8(b) shall be effected by joint
instructions delivered to the Escrow Agent by Buyer and
Seller.
(c) If Buyer has a claim against Seller pursuant
to Section 9.2 or the last sentence of Section 2.6(e)(ii)
(each, an "Indemnity Claim"), Buyer and Seller shall
instruct the Escrow Agent, subject and pursuant to the terms
of the Escrow Agreement, to deliver to Buyer, cash, if any,
held by the Escrow Agent pursuant to the terms of the Escrow
Agreement in an amount equal to the amount of such Indemnity
Claim. To the extent that the cash held by the Escrow Agent
under the Escrow Agreement is less than the Indemnity Claim,
Seller shall, subject to the limitations contained in
Section 2.8(d), promptly, and in any event within 30 days
(unless a registration statement is to be filed pursuant to
which such Sale is to be conducted or such registration
statement has not yet been declared effective, in which case
Seller shall promptly), arrange for a sale (a "Sale") of the
number of shares of Common Stock having an aggregate sales
price equal to the amount of such Indemnity Claim (including
any interest that is, or will be, due in respect thereof)
plus the estimated Transaction Costs less the amount of
cash, if any, received by Buyer from the Escrow Agent in
respect of such Indemnity Claim. Once the Sale is arranged,
Seller and Buyer shall jointly instruct the Escrow Agent in
writing to deliver to Buyer or the Transfer Agent for
conversion that number of Indemnity Escrow Shares or,
subject to Section 2.9(a), Retained Section 2.6 Shares which
are convertible into the number of shares of Common Stock to
be sold pursuant to the immediately preceding sentence and
to deliver the certificate representing such shares of
Common Stock to the specified third party or parties. The
proceeds from the Sale related to the Indemnity Claim shall
be delivered by the specified third party or parties to the
Escrow Agent. The Escrow Agent shall be instructed to
deliver to Buyer the portion of such proceeds equal to the
amount of the Indemnity Claim (including any interest that
is due in respect thereof) plus any Transaction Costs
incurred by Buyer less the amount of cash, if any,
previously received by Buyer pursuant to the Escrow
Agreement in respect of the Indemnity Claim (the "Indemnity
Claim Amount"). After distributing such
proceeds to Buyer, the Escrow Agent shall be instructed to
deliver to Seller that portion of the remaining proceeds
equal to the Transaction Costs incurred by Seller. Each of
Buyer and Seller agrees to provide in writing to the other
party evidence, reasonably satisfactory to such other party,
of the Transaction Costs incurred by it. Any proceeds from
the Sale not distributed to either Buyer or Seller in
accordance with the foregoing shall be held by the Escrow
Agent until distributed by it pursuant to the terms and
provisions of the Escrow Agreement.
(d) Any Sale required to be made by Seller shall
be made pursuant to an effective registration statement
filed under the Securities Act or without registration under
the Securities Act pursuant to an exemption thereunder.
During the one-year period immediately following the Closing
Date, Seller shall only be required to sell shares of Common
Stock issued upon conversion of any Escrow Shares pursuant
to an effective registration statement, and, unless Buyer
agrees to pay the applicable Transaction Costs (other than
discounts, fees and commissions of brokers or underwriters
the payment of which shall be the sole responsibility of
Seller), Seller shall not be required to arrange a Sale
during such period until the aggregate amount of claims
which Buyer has pursuant to Section 9.2 and the last
sentence of Section 2.6(e)(ii) exceeds $1 million. At any
time on or after the earlier of the first anniversary of the
Closing Date or the date on which the aggregate amount of
such claims exceeds $1 million, Buyer may file and maintain
the effectiveness of a shelf registration statement to
facilitate resales by Seller of shares of Common Stock
issuable upon conversion of Indemnity Escrow Shares, and all
costs incurred by Buyer in connection with the resale shelf
registration statement or the sale of any shares of Common
Stock pursuant thereto shall constitute Transaction Costs to
the extent customary and reasonable. Seller (i) shall not
be required during any calendar month to sell, other than
pursuant to an underwritten public offering, shares of
Common Stock which were issued upon conversion of any
Indemnity Escrow Shares having an aggregate sales price
greater than $400,000 (based upon the average of the high
and low trading prices of shares of Common Stock on The
Nasdaq National Market for the last 15 trading days of the
immediately preceding calendar month), and (ii) may, in its
sole discretion, determine the timing of any shares to be
sold during any given calendar month so long as such shares
are sold within such calendar month.
(e) Seller hereby agrees to indemnify Buyer
against, and to hold Buyer harmless from, any Losses
incurred by Buyer which arise in connection with the sale of
any shares of Common Stock issued upon conversion of any
Escrow Shares as a result of the gross negligence or wilful
misconduct of Seller. Buyer hereby agrees to indemnify
Seller against, and to hold Seller harmless from, any Losses
incurred by Seller which arise in connection with the sale
of any shares of Common Stock issued upon conversion of any
Escrow Shares as a result of the gross negligence or wilful
misconduct of Buyer.
(f) Buyer and Seller covenant to deliver to the
Escrow Agent joint instructions consistent with the terms of
this Agreement and the Escrow Agreement as shall be
necessary to give effect to the escrow arrangements provided
for herein and therein. Further, in connection with any
sale of shares of Common Stock issued upon conversion of any
Escrow Shares, Buyer and Seller shall execute any Contracts
or other instruments (including, without limitation, any
underwriting, agency or similar agreements) which are
customary for the type of sale pursuant to which the shares
of Common Stock are sold and shall take such further actions
as may be reasonably required to effect
such sale.
(g) Seller and Buyer hereby agree that the Escrow Agent shall
have the authority to deliver to Buyer or the Transfer Agent for
conversion, and to cause the conversion of, any Escrow Shares which are
required to be converted into shares of Common Stock pursuant to the
terms of this Agreement and the Escrow Agreement, to the extent
converted in accordance with the written instructions provided for
hereunder or in the Escrow Agreement, and to deliver such shares of
Common Stock to the specified third party or parties in accordance with
the terms of this Agreement and the Escrow Agreement.
2.9 Release of Escrow Shares. (a) If, on or prior to the
date Book Value is finally determined pursuant to Section 2.6, Buyer has
submitted to the Seller and the Escrow Agent
claims for indemnification made pursuant to Section 9.2 ("Pre-Book
Value Indemnity Claims") in an aggregate amount in excess
of $3 million (including any estimated or actual Transaction Costs
related thereto), then the number of Section 2.6 Shares, if any,
which are required to be delivered to Seller pursuant to Section
2.6(e) shall be reduced by that number of Section 2.6 Shares
(the "Retained Section 2.6 Shares") convertible into the number
of shares of Common Stock having an aggregate value (based on a
per share Common Stock price of $16.50) equal to the difference
between the aggregate amount of the Pre-Book Value Indemnity
Claims (including any estimated or actual Transaction Costs
related thereto) and $3 million. The Retained Section 2.6
Shares shall be available to satisfy Pre-Book Value Indemnity
Claims to the extent that the aggregate amount of such claims
(including any Transaction Costs related thereto) exceeds $3
million and, to the extent not so used, shall be promptly
released to the Seller.
(b) Promptly, and in any event within five Business
Days, after March 31, 1999, the Escrow Agent, upon joint written
instructions from Buyer and Seller, which shall be timely
provided, shall deliver to Seller that number of Indemnity
Escrow Shares, if any, convertible into shares of Common Stock
having an aggregate value (based on the book value of Buyer as
set forth in the audited consolidated balance sheet of Buyer as
of December 31, 1997 prepared in accordance with GAAP) equal to
(i) $3 million less (ii) an aggregate amount equal to (A) the
aggregate amount distributed to Buyer by the Escrow Agent on or
prior to March 31, 1999 in respect of Indemnity Claims
(including the Transaction Costs related thereto) and (B) the
aggregate amount of Indemnity Claims which have been submitted
to the Escrow Agent on or prior to such date and which either
remain, as of such date, unresolved or are resolved but with
respect to which no payment has been made by the Escrow Agent to
Buyer as of such date.
(c) Notwithstanding any other provision of this
Agreement to the contrary, Buyer and Seller hereby agree that
any Escrow Shares required to be delivered by the Escrow Agent
to Seller pursuant to either Section 2.6(e) or Section 2.9(b)
shall not be delivered to Seller, and shall be retained by the
Escrow Agent pursuant to the terms of the Escrow Agreement, if a
Bankruptcy Event has occurred on or prior to the date or dates,
as the case may be, on which such Escrow Shares, if any, are
required to be delivered to Seller, pursuant to either such
section and, to the extent not used to satisfy claims arising
out of such Bankruptcy Event, shall be promptly released to the
Seller.
(d) To the extent not otherwise contemplated by
Section 2.6 or this Section 2.9, all Escrow Shares shall be
released in accordance with the terms of the Escrow Agreement.
2.10 Interest. Any amount owed by Seller to Buyer
hereunder which remains unpaid for any reason, including,
without limitation, because of the restrictions set forth in
Section 2.8(d) hereof, shall bear interest at a rate equal to 5%
per annum; provided, however, that no interest shall accrue with
respect to the amount of any Book Value Deficiency. Such
interest shall be calculated daily on the basis of a year of 365
days and the actual number of days elapsed and shall be payable
at the same time as the unpaid amount to which it relates is
paid.
2.11 No Constructive Distribution. Buyer and Seller
agree that neither party shall take the position for any Tax
purpose, including, without limitation, under Section 305 of the
Code and the Treasury Regulations thereunder, that Seller (or
any other holder of the Preferred Shares) is or will be required
to include in its income any amount in respect of any
constructive distribution on the Preferred Shares.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF SELLER
Seller hereby represents and warrants to Buyer as
follows:
3.1 Organization. (a) Seller is a corporation duly
organized, validly existing and in good standing under the laws
of the State of Delaware and has full corporate power and
authority to own, operate and lease its properties and to
conduct its business as it is presently being conducted and to
enter into and to perform its obligations under this Agreement
and under the Other Transaction Documents.
(b) Each of the Transferred Companies and their
Subsidiaries is a corporation duly organized, validly existing
and in good standing under the laws of its state of
incorporation and has full corporate power and authority to own,
operate and lease its properties and to conduct its business as
it is presently being conducted and to enter into and to perform
its obligations under this Agreement. Each of the Transferred
Companies and their Subsidiaries is duly qualified and licensed
as a foreign corporation to conduct the business conducted by it
and is in good standing in each jurisdiction in which such
qualification or licensing is necessary under Applicable Law.
The Disclosure Schedule sets forth an accurate and complete list
of all Subsidiaries of each Transferred Company, and for each of
the Transferred Companies and their Subsidiaries, the Disclosure
Schedule contains the jurisdiction of incorporation of such
company and a complete and accurate list of each jurisdiction in
which such company is qualified or licensed to do business as a
foreign corporation.
3.2 Authorization. The execution, delivery and
performance of this Agreement and the Other Transaction
Documents by Seller or any of its Subsidiaries and the
consummation of the transactions contemplated hereby and thereby
have been duly and validly authorized by all necessary corporate
action on the part of Seller or such Subsidiary, as the case may
be, and no other corporate proceedings on the part of Seller or
any of its Subsidiaries are necessary to authorize this
Agreement and the Other Transaction Documents and the
transactions contemplated hereby and thereby. Each of this
Agreement and the Other Transaction Documents has been or, on or
prior to the Closing,
will be duly executed and delivered by Seller or such
Subsidiary, as the case may be, and, assuming the due execution
by the other parties hereto and thereto, constitutes or, on or
prior to the Closing, will constitute the legal, valid and
binding obligation of Seller or such Subsidiary, as the case may
be, enforceable against it in accordance with its terms, except
as enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, or similar laws affecting creditors'
rights generally and by general principles of equity.
3.3 Conflict or Violation. Except as set forth on
the Disclosure Schedule, neither the execution and delivery of
this Agreement or the Other Transaction Documents nor the
consummation of the transactions contemplated hereby or thereby,
including the underwriting by First Re or Buyer or any of
Buyer's Affiliates of any policies of insurance or reinsurance
previously underwritten by Homestead, will result in (a) a
violation of or a conflict with any provision of the certificate
of incorporation or bylaws of Seller, Homestead, any Transferred
Company or any Subsidiary of any Transferred Company, (b) a
breach of, or a default under, any term or condition of, or
otherwise cause any impairment of, any Contract, indebtedness,
Encumbrance, franchise, Permit, authorization or concession to
which Seller, Homestead, any Transferred Company or any
Subsidiary of any Transferred Company is a party or is subject
or by which any of their respective assets or properties are
bound, (c) a violation by Seller, Homestead, any Transferred
Company or any Subsidiary of any Transferred Company of any
Applicable Law, (d) the imposition of any material Encumbrance
or other restriction on the business of any Transferred Company
or any Subsidiary of any Transferred Company or on any of their
respective assets or properties or on the Program Business, or
(e) any right of termination, cancellation or acceleration under
any Contract to which any Transferred Company or any Subsidiary
of any Transferred Company is a party or by or to which it or
any of their respective assets or properties may be bound or
subject.
3.4 Consents and Approvals. Except as set forth on
the Disclosure Schedule, no consent, approval or authorization
of, or declaration, filing or registration with, any
Governmental Authority, or any other Person, is required to be
made or obtained by Seller, any Transferred Company or any
Subsidiary of any Transferred Company on or prior to the Closing
Date in connection with the execution, delivery and performance
of this Agreement or any Other Transaction Document or the
consummation of the transactions contemplated hereby or thereby,
including the underwriting by First Re or Buyer or any of
Buyer's Affiliates of any policies of insurance or reinsurance
previously underwritten by Homestead.
3.5 Capital Stock. (a) The authorized capital stock
of First Re consists of 100,000 shares of common stock, par
value
$35 per share, of which 99,991 shares are issued and
outstanding. The authorized capital stock of Oakley consists of
100,000 shares of common stock, par value $1 per share, of which
1,000 shares are issued and outstanding. The authorized capital
stock of F/I Insurance consists of 10,000 shares of common
stock, par value $1 per share, of which 1,000 shares are issued
and outstanding.
(b) All of the Shares have been duly authorized and
validly issued, are fully paid and non-assessable and represent
the only shares of capital stock of First Re, Oakley and F/I
Insurance which are issued and outstanding. Except as set forth
on the Disclosure Schedule, no shares of capital stock of any of
First Re, Oakley and F/I Insurance are held in treasury. Except
as set forth on the Disclosure Schedule, Seller owns, of record
and beneficially, all of the Shares free and clear of any
Encumbrances, including, without limitation, any agreement,
understanding or restriction affecting the voting rights or
other incidents of record or beneficial ownership pertaining to
the Shares. There are no subscriptions, options, warrants,
calls, commitments, preemptive rights or other rights of any
kind outstanding for the purchase of, nor any securities
convertible or exchangeable for, any equity interests of any of
First Re, Oakley and F/I Insurance. Except as set forth on the
Disclosure Schedule, there are no restrictions upon the voting
or transfer of any of the Shares pursuant to the certificate of
incorporation or bylaws of any of First Re, Oakley and F/I
Insurance or any Contract to which Seller or any of its
Affiliates is a party or by which Seller or any of its
Affiliates is bound. Upon consummation of the transactions
contemplated by this Agreement, Buyer will acquire from Seller
good and marketable title to the Shares, free and clear of any
Encumbrances (except Encumbrances arising as a result of any
action taken by Buyer or any of its Affiliates).
3.6 Subsidiaries. The Disclosure Schedule contains,
for each Subsidiary of each Transferred Company, the number of
issued and outstanding shares of capital stock of such
Subsidiary and the percentage ownership interest of the
respective Transferred Company in such Subsidiary. All
outstanding shares of capital stock of such Subsidiaries have
been duly authorized and validly issued and are fully paid and
non-assessable. All such outstanding shares are owned by the
Transferred Companies and/or one or more of their Subsidiaries
free and clear of any Encumbrances, including, without
limitation, any agreement, understanding or restriction
affecting the voting rights or other incidents of record or
beneficial ownership pertaining to such shares. There are no
subscriptions, options, warrants, calls, commitments,
preemptive rights or other rights of any kind outstanding for
the purchase of, nor any securities convertible or exchangeable
for, any equity interests of any of such Subsidiaries. There
are no restrictions upon the voting or transfer of any of the
shares of capital stock of such Subsidiaries pursuant to the
respective Subsidiary's certificate of incorporation or bylaws
or any Contract to which the Seller or any of its Affiliates is
a party or by which the Seller or any of its Affiliates is
bound. The Disclosure Schedule sets forth a complete and
accurate list of all Contracts pursuant to which the Seller or
any of its Affiliates is obligated or required, under any
circumstance, to make contributions to the capital of any such
Subsidiary. Except as set forth on the Disclosure Schedule,
none of the Transferred Companies owns, directly or indirectly,
any shares of the capital stock of any Subsidiary of Seller.
3.7 Absence of Certain Changes or Events. Except as
set forth in the Disclosure Schedule, since January 1, 1997,
none of the Transferred Companies or any of their Subsidiaries
has:
(a) declared or paid or set aside dividends or other
distributions on its capital stock;
(b) issued, redeemed, sold or disposed of, or
created any obligation to issue, redeem, sell or dispose of,
any shares of the capital stock of any Transferred Company or
any Subsidiary of any Transferred Company (whether authorized
but unissued or held in treasury) or issued any option, warrant
or other right to acquire any shares of its capital stock;
(c) effected any stock split, reclassification or
combination;
(d) adopted a plan of complete or partial
liquidation, dissolution, restructuring, recapitalization or
other reorganization;
(e) amended or modified its certificate of
incorporation or bylaws (or equivalent charter documents);
(f) merged or consolidated with any corporation or
other entity;
(g) entered into, adopted, modified or amended in
any material respect any written employment, severance,
consulting, "change of control", "parachute payment", bonus,
incentive compensation, deferred compensation, profit sharing,
stock option, stock purchase, employee benefit, welfare benefit
or other Contract, plan or arrangement providing for
compensation or benefits to any Transferred Employee or
directors or stockholders which would have effect after the
Closing Date;
(h) incurred or contracted for any capital
expenditures in excess of $25,000 in the aggregate;
(i) amended, terminated or waived any right of value
material to its business, other than with respect to the
settlement of insured claims in the ordinary course of business
in a manner consistent with past practice;
(j) revalued any portion of its assets, properties
or business;
(k) materially changed any of its underwriting
standards, claim processing and payment policies, reinsurance
programs or any of its other business policies, including,
without limitation, reserving, advertising, marketing, pricing,
purchasing, personnel, sales or budget policies;
(l) made any wage or salary increase or bonus, or
increase in any other direct or indirect compensation, for or
to any of its officers, directors, employees, consultants or
agents or any accrual for or Contract to make or pay the same;
(m) made any loan or advance to any of its officers,
directors, employees, consultants, agents or other
representatives (other than travel advances made in the
ordinary course of business in a manner consistent with past
practice) or made any other loan or advance;
(n) made any payment or commitment to pay severance
or termination pay to any of its officers, directors,
employees, consultants, agents or other representatives;
(o) entered into any lease (as lessor or lessee);
sold, abandoned or made any other disposition of any of its
investments or other assets, properties or business other than
in the ordinary course of business consistent with past
practice; granted or suffered any Encumbrance on any of its
assets, properties or business; entered into, amended or
terminated any Contract to which it is a party or by or to
which it or its assets, properties or business are bound or
subject, except in the ordinary course of business in a manner
consistent with past practice; or entered into or amended any
Contract pursuant to which it agrees to indemnify any person or
to refrain from competing with any person;
(p) incurred or assumed any Liability other than in
the ordinary course of business consistent with past practice,
or
issued any debt securities or assumed, guaranteed, endorsed or
otherwise as an accommodation became responsible for
Liabilities of any other person;
(q) failed to pay any creditor any amount owed to
such creditor when due (after the expiration of any applicable
grace periods), other than any amount being contested in good
faith which does not exceed $5,000;
(r) other than in the ordinary course of business
consistent with past practice, made any acquisition of all or
any part of the assets, properties, capital stock or business
of any other Person;
(s) other than in the ordinary course of business
consistent with past practice, amended, terminated or entered
into any other material transaction;
(t) changed any of its accounting methods or
practices (including, without limitation, with respect to
establishment of reserves for unearned premiums, losses
(including, without limitation, incurred but not reported
losses) and loss adjustment expenses, or with respect to
depreciation or amortization policies or rates adopted by it);
or
(u) entered into any Contract to do any of the
foregoing.
3.8 Assets. Except as set forth on the Disclosure
Schedule, each of the Transferred Companies and their
Subsidiaries owns (or leases in the case of leased assets), and
has good and marketable title to (or, in the case of leased
assets, valid leasehold interests in), all of the material
assets necessary for the operation of its business as now
operated. None of such assets is subject to any Encumbrance,
except for Encumbrances which in the aggregate do not
materially detract from the value of the asset subject thereto
or interfere with the present use of such asset.
3.9 Intellectual Property. (a) To the knowledge of
Seller, the Transferred Companies and their Subsidiaries own,
free and clear of any Encumbrances, or have valid and
enforceable rights or licenses to use, the trademarks, service
marks, trade names, copyrights and other intellectual property
listed on the Disclosure Schedule, which are the only
trademarks, service marks, trade names, copyrights or other
intellectual property that are material to the business of the
Transferred Companies and their Subsidiaries (collectively, the
"Intellectual Property"). To the Knowledge of Seller, none of
the Transferred Companies or their Subsidiaries has received
notice that any of them is infringing any trademarks, service
marks, trade names, copyrights or any application pending
therefor. None of the Transferred Companies or their
Subsidiaries is a party to any proceeding asserting that any
third party is infringing on the Intellectual Property, and, to
the Knowledge of the Seller, no third party is infringing on
the Intellectual Property.
(b) Seller and its Affiliates (other than the
Transferred Companies and their Subsidiaries) have no right or
title to or interest in the Intellectual Property and the Trade
Secrets and other proprietary rights used in the business of
any Transferred Company or any Subsidiary of any Transferred
Company.
3.10 Tangible Property. The Disclosure Schedule sets
forth all interests owned or claimed by the Transferred
Companies and their Subsidiaries (including, without
limitation, options)
as of January 1, 1998 in or to the equipment, furniture,
leasehold improvements, fixtures, vehicles, structures, any
related capitalized items and other tangible property which are
treated by any of the Transferred Companies or any Subsidiary
of any Transferred Company as depreciable or amortizable
property and are ascribed a value on the books of the
applicable Transferred Company or Subsidiary of a Transferred
Company in excess of $5,000 (collectively, the "Tangible
Property"). Since January 1, 1998, none of the Transferred
Subsidiaries or any of their Subsidiaries has acquired any
Tangible Property other than in the ordinary course of business
and consistent with past practice. The Tangible Property is in
good operating condition and repair, ordinary wear and tear
excepted, and none of the Transferred Companies or any of their
Subsidiaries has received written notice that any of the
Tangible Property is in violation of any existing statute, law,
or any health, safety or other ordinance, code or regulation.
The Tangible Property is owned by the Transferred Companies and
their Subsidiaries free and clear of any Encumbrance.
3.11 Real Property. Except as set forth in the
Disclosure Schedule, none of the Transferred Companies or any
of their Subsidiaries owns any land, buildings or other
interests of any kind in any real property (regardless of where
located). The Disclosure Schedule includes a list and
description of all such real property owned by the Transferred
Companies and their Subsidiaries. Such real property is owned
by the applicable Transferred Company or Subsidiary free and
clear of any Encumbrance, except for liens for current taxes
not yet due and payable or which do not materially detract from
the value thereof or the use to which such property is
presently subject. The Disclosure Schedule also includes a
list of all leases of equipment to which any of the Transferred
Companies or any Subsidiary of any Transferred Company is a
party that obligate the Transferred Company or any such
Subsidiary to expend more than $25,000 during any fiscal year.
Neither any Transferred Company or any Subsidiary of any
Transferred Company nor, to the Knowledge of Seller, any other
party is in default of a material provision under such leases,
nor has any notice of default with respect to such leases been
received.
3.12 Leased Real Property. (a) All real property
leased by any Transferred Company or any Subsidiary of any
Transferred Company (the "Leased Real Property") is listed on
the Disclosure Schedule. All leases currently in effect
relating to the Leased Real Property, together with all
amendments and modifications thereto (the "Leases"), are listed
on the Disclosure Schedule.
(b) Except as described on the Disclosure Schedule,
none of the Transferred Companies or any of their Subsidiaries
is in default under any of the material terms and provisions of
any of the Leases or has received any written notice of any
default.
(c) To the Knowledge of Seller, there are no
outstanding defaults on the part of the landlord or lessor of a
material provision under any Lease.
(d) Except as set forth on the Disclosure Schedule,
none of the Transferred Companies or any of their Subsidiaries
has exercised any option to extend the term of any Lease or to
terminate any Lease, except to the extent that such extension
or termination has already come into effect.
(e) Except as described on the Disclosure Schedule,
none of the Transferred Companies or any of their Subsidiaries
has entered into any subleases relating to the Leased Real
Property or granted any licenses or occupancy rights with
respect to the Leased Real Property.
(f) None of the Transferred Companies or any of
their Subsidiaries has granted or created any Encumbrances on
the Leased Real Property, including, without limitation,
leasehold mortgages of the Leased Real Property.
(g) The use and occupancy of the Leased Real
Property by any Transferred Company or any Subsidiary of any
Transferred Company is in compliance with all Applicable Laws,
including, without limitation, those governing zoning,
subdivision, land development access, erosion and drainage
control, sewage collection and disposal, use, occupancy,
building, fire, safety, access and environmental matters. None
of Seller, any Transferred Company or any Subsidiary of any
Transferred Company has received any written notice from any
Governmental Authority advising of a violation of any
applicable building code, zoning, subdivision, land development
or land use laws, regulations or ordinances or any other
applicable local, state or federal laws, regulations or
ordinances.
(h) Seller has neither Knowledge of nor received any
notice of any existing or proposed assessments for public
improvements imposed or to be imposed upon the Leased Real
Property which will remain unpaid at Closing, except for
escalation adjustments in relation to any prior assessments,
which escalation adjustments are listed on the Disclosure
Schedule.
(i) The Permits listed on the Disclosure Schedule
include all Permits which are required for the present use and
occupancy of the Leased Real Property by the Transferred
Companies and their Subsidiaries, and each, to the Knowledge of
Seller, has been duly issued.
3.13 Computer Software. Seller has set forth on the
Disclosure Schedule a complete and accurate list of all
computer software programs used in the conduct of the
businesses of the Transferred Companies and their Subsidiaries,
other than commercial off-the-shelf software where no license
agreement was executed. The Disclosure Schedule sets forth
whether each such computer software program is (i) owned by any
of the Transferred Companies or their Subsidiaries (the "Owned
Software") or (ii) licensed or sub-licensed (to the extent
known) by any of the Transferred Companies or their
Subsidiaries from a third party ("Licensed Software"). With
respect to Owned Software and Licensed Software, there are no
Actions pending or, to the Knowledge of Seller, threatened
against any of the Transferred Companies or any of their
Subsidiaries with respect to any such software. The Owned
Software is owned free and clear of any Encumbrances by the
Transferred Companies and their Subsidiaries, and the
Transferred Companies and their Subsidiaries have valid and
enforceable rights or licenses to use the Licensed Software.
3.14 Year 2000. Each of the Transferred Companies
and their Subsidiaries has established a strategic plan and
provided Buyer with an accurate and complete copy of such plan
and a schedule of the amount of capital and resources
reasonably believed to be necessary to institute software
systems so that such Transferred Company or such Subsidiary
will not experience invalid or incorrect results or abnormal
software operation related to calendar year 2000.
3.15 Contracts and Commitments. (a) The Disclosure
Schedule sets forth a complete and accurate list of all
Contracts to which a Transferred Company or any of its
Subsidiaries is a party (excluding policies of insurance or
reinsurance issued by First Re in the ordinary course of
business) or by which any of their respective assets is bound
which involve an amount in excess of $25,000 or are otherwise
material to the business of any Transferred Company or any
Subsidiary of any Transferred Company (the "Material
Contracts"). Each of the Material Contracts is a legal, valid
and binding obligation of either a Transferred Company or one
of its Subsidiaries enforceable against such Transferred
Company or such Subsidiary, as the case may be, and, to the
Knowledge of Seller, against the other parties thereto, in
accordance with its respective terms, except as enforceability
may be limited by applicable bankruptcy, insolvency,
reorganization, or similar laws affecting creditors' rights
generally and by general principles of equity. Neither Seller,
any Transferred Company nor any Subsidiary of any Transferred
Company has received written notice of a cancellation of or an
intent to cancel any Material Contract. There exists no breach
of or event of default related to any Material Contract on the
part of any Transferred Company or any of its Subsidiaries, or,
to the Knowledge of Seller, on the part of any other party to
any Material Contract.
(b) Except as set forth in the Disclosure Schedule,
none of the Transferred Companies or any of their Subsidiaries
is a party to any Contract: (i) containing covenants limiting
the freedom of a Transferred Company or any of its Subsidiaries
to engage in any line of business in any geographic area or to
compete with any Person or to incur indebtedness for borrowed
money; (ii) containing "change of control" or similar
provisions; (iii) containing provisions providing for the
indemnification by any Transferred Company or any Subsidiary of
a Transferred Company of any Person; (iv) relating to the
employment of Transferred Employees and other Contracts with
directors or Transferred Employees of any Transferred Company
or any Subsidiary of a Transferred Company which cannot be
terminated by the Transferred Company or the respective
Subsidiary upon notice of 60 days or less without penalty or
premium; (v) relating to patent, trademark, service mark, trade
name, and copyright and franchise licenses, royalty agreements
or similar Contracts; (vi) forming joint ventures; (vii) under
which any Transferred Company or any of its Subsidiaries has
guaranteed the obligations of any Person (other than insurance
or reinsurance provided by First Re pursuant to insurance or
reinsurance agreements entered into by First Re in the ordinary
course of business in a manner consistent with past practice);
or (viii) with any Governmental Authority affecting the
business of any Transferred Company or any Subsidiary of any
Transferred Company and not made in the ordinary course of
business.
3.16 Reinsurance and Retrocessions. The Disclosure
Schedule sets forth an accurate and complete list of (a) all
reinsurance and retrocession treaties and agreements in force
as of the date of this Agreement to which the Transferred
Companies or any of their Subsidiaries is a party and (b) any
terminated or expired treaty or agreement under which there
remains any outstanding liability from one reinsurer with
respect to paid or unpaid case reserves in excess of $50,000,
and, for each such treaty or agreement, the effective date of
such treaty or agreement and the termination date if such
treaty or agreement has a definite termination date. All such
treaties or agreements set forth in the Disclosure Schedule are
in full force and effect to the respective dates noted on the
Disclosure Schedule, and neither any Transferred Company nor
any Subsidiary of a Transferred Company is in default in any
respect as to any
provision of any reinsurance or retrocession treaty or
agreement or has failed to meet the underwriting standards
required for any business reinsurance thereunder. No such
agreement contains any provision providing that the other party
thereto may terminate such agreement by reason of the
transactions contemplated by this Agreement; and, to the
Knowledge of Seller, the financial condition of any other party
to any such agreement is not so impaired that a default
thereunder may reasonably be anticipated.
3.17 Statutory Statements. Seller has previously
furnished to Buyer accurate and complete copies of the
Convention Statements. The Convention Statements present
fairly the admitted assets, liabilities and surplus of First Re
at the end of each of the periods then ended, and the results
of its operations and changes in its surplus for each of the
periods then ended, in conformity with SAP. Each of the
Convention Statements was correct in all material respects when
filed and there were no material omissions therefrom. To the
Knowledge of Seller, no deficiency has been asserted in writing
by any Governmental Authority with respect to any of the
Convention Statements.
3.18 Financial Statements. (a) Seller has
previously furnished Buyer with a copy of the unaudited
consolidating financial statements for Seller and each of the
Transferred Companies, individually, as of and for the year
ended
December 31, 1996, which were supplied to Seller by Seller's
Accountants and which contain the balance sheet of First Re as
of such date (the "GAAP Financial Statements"). The balance
sheet of First Re included in the GAAP Financial Statements
(the "First Re 1996 Balance Sheet") fairly presents in all
material respects the financial position of First Re and its
Subsidiaries as of its date and the statement of operations
included in the GAAP Financial Statements fairly presents in
all material respects the results of operations of First Re and
its Subsidiaries for the period therein set forth, in each case
in accordance with GAAP.
(b) The monthly unaudited financial statements
contained in the Disclosure Schedule for each of the
Transferred Companies and its Subsidiaries were prepared in the
ordinary course of business in accordance with GAAP and fairly
present the financial position of the respective Transferred
Company and its Subsidiaries as of the date thereof and the
results of operations of the respective Transferred Company and
its Subsidiaries for the period therein set forth, subject to
normal year-end adjustments, consistent with past practice, and
the omission of footnote disclosure.
3.19 Undisclosed Liabilities. (a) Since January 1,
1997, except for (i) those Liabilities or items set forth on
the Disclosure Schedule, (ii) any Liability incurred in the
ordinary course of business consistent with past practice since
such date which does not individually exceed $25,000 or, in the
aggregate with all other Liabilities incurred in the ordinary
course of business since such date, exceed $100,000 and (iii)
any Liabilities (other than extracontractual Liabilities)
incurred in the ordinary course of business and consistent with
past practice under any policy of insurance or reinsurance
issued by First Re which have not had, and are not reasonably
expected to have, a Seller Material Adverse Effect, none of the
Transferred Companies or any of their Subsidiaries has incurred
or become liable for, directly or indirectly, any indebtedness,
liability, claim, loss, damage, deficiency, obligation or
responsibility, fixed or unfixed, choate or inchoate,
liquidated or unliquidated, secured or unsecured, accrued,
absolute, contingent or otherwise ("Liabilities").
(b) First Re has paid in full all guaranty fund
assessments required by any Governmental Authority to be paid
by it prior to the date of this Agreement. As of the date of
this Agreement, except as set forth on the Disclosure Schedule
and except as and to the extent reserved against in the
Convention Statements or disclosed in the notes thereto, First
Re has not received any guarantee fund assessments.
3.20 Solvency. (a) No circumstance currently exists
which would permit the Insurance Commissioner of the
Commonwealth of Pennsylvania to commence a Delinquency
Proceeding against Homestead. To the Knowledge of Seller, no
event has occurred, or is reasonably likely to occur, that
(whether with notice or lapse of time or both) could reasonably
be expected to cause a Delinquency Proceeding to be commenced
against Homestead by the Insurance Commissioner of the
Commonwealth of Pennsylvania. Seller has no current intention
of taking any action which could reasonably be expected to
result in the commencement of a Delinquency Proceeding against
Homestead.
(b) No circumstance currently exists which would
permit the Insurance Commissioner of the State of Connecticut
to commence a "delinquency proceeding" (as that term is defined
in Section 38(a)-905 of Chapter 704c of the Connecticut
Insurance Code) against First Re. To the knowledge of Seller,
no event has occurred, or is reasonably likely to occur, that
(whether with notice or lapse of time or both) could reasonably
be expected to cause a "delinquency proceeding" to be commenced
against First Re by the Insurance Commissioner of the State of
Connecticut.
3.21 Legal Matters. (a) Except as set forth on the
Disclosure Schedule, there is no action, order, writ,
injunction, judgment or decree outstanding or suit, litigation,
proceeding, labor dispute, arbitral action, investigation or
reported claim, excluding claims under insurance or reinsurance
policies not involving pending or threatened litigation
(collectively, "Actions"), pending or, to the Knowledge of
Seller, threatened against or relating to (i) any Transferred
Company or any Subsidiary of any Transferred Company or any of
their respective properties or assets, (ii) any benefit plan
for officers, employees or agents of any Transferred Company or
any Subsidiary of any Transferred Company or any fiduciary or
administrator thereof or (iii) the transactions contemplated by
this Agreement, including the underwriting by First Re or Buyer
or any of Buyer's Affiliates of any policies of insurance or
reinsurance previously underwritten by Homestead. None of the
Transferred Companies or any of their Subsidiaries is in
default with respect to any judgment, order, writ, injunction
or decree of any Governmental Authority, and there are no
unsatisfied final non-appealable judgments against any
Transferred Company or any Subsidiary of any Transferred
Company. The Disclosure Schedule sets forth a true and
complete list of all pending litigation which does not relate
to any liability arising from insurance policies or similar
instruments issued by First Re.
(b) The Disclosure Schedule lists all pending claims
arising from insurance or reinsurance policies issued by First
Re for which amounts reserved exceed $100,000.
(c) All insurance or reinsurance claims that have
become payable by First Re, and are not currently in the course
of being settled in good faith by the relevant party, have been
paid, or provided for, in accordance with the terms of the
insurance or reinsurance policy under which they arose.
3.22 Investments. (a) The Disclosure Schedule sets
forth a true and complete list of all bonds, stocks (other than
the capital stock of the Subsidiaries of the Transferred
Companies), mortgages and other investments of any type owned
by any of the Transferred Companies or any of their
Subsidiaries as of the date hereof (collectively, the
"Scheduled Investments"). A Transferred Company or a Subsidiary
of a Transferred Company has good and marketable title to each
of the Scheduled Investments. As of the Closing Date, none of
the Transferred Companies will own any shares of the capital
stock of Homestead or any other Affiliate (other than the
capital stock of the Transferred Companies and their
Subsidiaries).
(b) Except as set forth on the Disclosure Schedule,
none of the Scheduled Investments is currently in default in
the payment of principal or interest, and, to the knowledge of
Seller, no event has occurred which reasonably would be
expected to result in a diminution of the value of any
nonpublicly traded security owned by any Transferred Company or
any Subsidiary of any Transferred Company.
(c) There are no Encumbrances on any of the
Scheduled Investments, except for (i) those Scheduled
Investments deposited with Governmental Authorities, as
indicated on the Disclosure Schedule, (ii) Encumbrances which
do not materially detract from the value of the Scheduled
Investments subject thereto and (iii) assets pledged to secure
assumed reinsurance contract obligations which assets are
listed on the Disclosure Schedule.
(d) None of Seller, any Transferred Company or any
Subsidiary of any Transferred Company has taken, or omitted to
take, any action which would result in any Transferred Company
or any Subsidiary of any Transferred Company being unable to
enforce the terms of any Scheduled Investment or which would
cause any Scheduled Investment to be subject to any valid
offset, defense or counterclaim against the right of such
Transferred Company or such Subsidiary to enforce the terms of
such Scheduled Investment.
(e) Since January 1, 1997, none of the Transferred
Companies or any of their Subsidiaries has (i) purchased or
otherwise invested in, or committed to purchase or otherwise
invested in, any interest in real property (including without
limitation any extension of credit secured by a mortgage or
deed of trust), (ii) purchased or otherwise invested in, or
committed to purchase or otherwise invest in, bonds, notes,
debentures or other evidences of indebtedness rated lower than
"Baa-" by Moody's Investors Service Inc. or "BBB-" by Standard
& Poor's Corporation at the time of purchase, (iii) entered
into any Contract with any Affiliate with respect to the
purchase or other acquisition, sale or other disposition or
allocation of any Scheduled Investment or (iv) entered into any
Contract with respect to any foreign investments.
3.23 Reserves; Statutory Capital; NAIC IRIS Ratios.
(a) The insurance reserving practices and policies of First Re
have not changed since December 31, 1996. The reserves carried
on the statutory financial statements of First Re for the year
ended December 31, 1997 for losses (including incurred but not
reported losses), loss adjustment expenses, claims,
uncollectible reinsurance and similar purposes (the "1997
Reserves") are reasonable and are in compliance with the
requirements for reserves established by the Insurance
Department of the State of Connecticut, were determined in
accordance with generally accepted actuarial standards
consistently applied, and are fairly stated in all material
respects in accordance with sound
actuarial standards. Seller has delivered to Buyer an accurate
and complete copy of the preliminary actuarial report prepared
by Tillinghast (the "Preliminary Actuarial Report") relating to
the adequacy and reasonableness of the 1997 Reserves. All
information and data provided by Seller or First Re to
Tillinghast in connection with its preparation of the
Preliminary Actuarial Report were true, correct and complete,
and neither Seller nor First Re has any information which would
lead Seller or First Re to believe that the conclusions set
forth in the Preliminary Actuarial Report, including, without
limitation, the conclusion relating to the amount of the 1997
Reserves, are inaccurate.
(b) Since December 31, 1997, no reduction has
occurred in First Re's reserves for Net Unpaid Losses and LAE
other than reductions relating to the payment or settlement of
insurance claims or the collection of salvage or subrogation,
in either case in the ordinary course of business and
consistent with past practice.
(c) Seller has made available to Buyer as of the
date hereof, and will have made available to Buyer as of the
Closing Date, all information in Seller's or First Re's
possession material to an evaluation of the adequacy of the
statutory reserves of First Re as of the Closing Date for
losses (including incurred but not reported losses), loss
adjustment expenses, claims, uncollectible reinsurance and
similar purposes.
(d) To the Knowledge of Seller, for the year ended
December 31, 1997, the relevant financial relationships
specified under the Insurance Regulatory Information System
("IRIS") of the National Association of Insurance Commissioners
("NAIC") of First Re were all within the usual ranges specified
by IRIS.
3.24 Compliance with Law; Permits and Licenses.
(a) Each of the Transferred Companies and their Subsidiaries
is in compliance with all Applicable Laws. None of Seller, any
Transferred Company, any Subsidiary of any Transferred Company
or Homestead has received any written notice to the effect that
any such Person is not in compliance with any Applicable Laws
and, to the Knowledge of Seller, there are no currently
existing circumstances that are likely to result in any such
Person being in violation of any Applicable Laws.
(b) Each of the Transferred Companies and their
Subsidiaries holds all Permits necessary for the ownership and
conduct of its business in each of the jurisdictions in which
it conducts or operates its business, and, with respect to
First Re, in which First Re will issue and renew any policy of
insurance relating to the Program Business, and such Permits
are in full force and effect. Except as set forth on the
Disclosure Schedule, the consummation of the transactions
contemplated by this Agreement or the Other Transaction
Documents will not result in any revocation, cancellation or
suspension of any such Permit, and there are no pending or, to
the Knowledge of Seller, threatened Actions with respect to
revocation, cancellation, suspension or nonrenewal thereof,
and, to the Knowledge of Seller, there has occurred no event
which (whether with notice or lapse of time or both) will
result in such a revocation, cancellation, suspension or
nonrenewal thereof.
(c) The Disclosure Schedule includes an accurate and
complete list of all final examination reports received by
Seller from any Governmental Authority with respect to any
Transferred Company or any Subsidiary of any Transferred
Company, including, without limitation, First Re. Except for
generally applicable
legal requirements and as set forth on the Disclosure Schedule,
there are no agreements or understandings between any
Transferred Company or any Subsidiary of any Transferred
Company and any Governmental Authority with respect to the
payment of dividends or the maintenance of any reserves.
3.25 Written Insurance Policies; Regulatory Filings.
(a) All policies and contracts of insurance and reinsurance
entered into or issued, as the case may be, by First Re, or
which are being entered into or issued by First Re as of the
date hereof, are in compliance, and at their respective dates
of issuance were in compliance, in all material respects, with
all Applicable Laws and, to the extent required under
Applicable Law, are on forms either approved by the appropriate
Governmental Authorities in the jurisdictions where issued or
which have been filed with and not objected to by such
Governmental Authorities within the period provided for
objection. Any premium rates with respect to insurance or
reinsurance policies or contracts currently issued by First Re
which are required to be filed with or approved by any
Governmental Authorities have been so filed or approved in
accordance with Applicable Law, and such premiums charged
thereon conform thereto.
(b) The Disclosure Schedule sets forth an accurate
and complete list of all underwriting management agreements to
which any Transferred Company or any Subsidiary of a
Transferred Company is a party.
3.26 Employees and Agents. (a) The Disclosure
Schedule sets forth an accurate and complete list of all
employees of each of the Transferred Companies and their
Subsidiaries (the "Transferred Employees"), together with each
such employee's position and present salary or compensation
arrangement and amount of the last increase thereof. All
Contracts between any Transferred Employee and Seller or any of
its Affiliates are listed on the Disclosure Schedule. On the
Closing Date, the Transferred Employees will be the only
employees of the Transferred Companies and their Subsidiaries.
(b) The Disclosure Schedule sets forth as of the
date hereof an accurate and complete list of all employees of
Homestead who may become, subject to Section 5.13, employees of
Oakley in connection with the underwriting by First Re or Buyer
or any of Buyer's Affiliates of policies of insurance or
reinsurance previously underwritten by Homestead (the
"Homestead Employees"), together with each such employee's
position and present salary or compensation arrangement and
amount of the last increase thereof. All Contracts between any
Homestead Employee and Seller or any of its Affiliates are
listed on the Disclosure Schedule.
(c) (i) The Disclosure Schedule sets forth an
accurate and complete list of all agents, brokers and other
Persons through whom First Re has placed or sold insurance
since January 1, 1995 (each, an "Agent"), including a list of
any Contract with any such Agent. To the Knowledge of Seller,
each Agent is duly licensed (to the extent that such licenses
are required) in the jurisdictions where the Agent places or
sells such insurance for First Re, and each Agent is duly
authorized and appointed by First Re pursuant to any applicable
insurance laws. All Contracts between any Agent and First Re
are in compliance in all material respects with any applicable
insurance laws. To the Knowledge of Seller, no Agent is the
subject of, or party to, any disciplinary action or proceeding
under any applicable insurance laws.
(ii) Except as set forth on the Disclosure
Schedule, no Agent represented more than 5% of the gross
premiums written by First Re or Oakley during the year
ended December 31, 1996 or the nine months ended September
30, 1997.
(iii) To the Knowledge of Seller, no Agent intends
to terminate or materially change their relationships with
First Re as a result of the transactions contemplated by
this Agreement.
3.27 Premium Balances Receivable. The premium
balances receivable of First Re as reflected in the Convention
Statements, to the extent uncollected on the date hereof, are
valid and existing and represent monies due, and First Re has
made reserves reasonably considered adequate for receivables
not collectible in the ordinary course of business, and
(subject to the aforesaid reserves) are subject to no refunds
or other adjustments and to no defenses, rights of setoff,
assignments, restrictions, Encumbrances or conditions
enforceable by third parties on or affecting any thereof. The
Disclosure Schedule sets forth a list of each premium balance
receivable in excess of $5,000 which is more than 90 days past
due as of January 1, 1998 (showing as to each such receivable,
the amount thereof and the date due).
3.28 Employee Benefit Plans; ERISA. (a) Each
"employee benefit plan" (as defined in Section 3(3) of the
Employee Retirement Income Security Act of 1974, as amended
("ERISA")), bonus, deferred compensation, stock option or other
written Contract relating to employment or fringe benefits for
employees, maintained or contributed to by any Transferred
Company or any Subsidiary of any Transferred Company
(collectively, the "Plans") is listed on the Disclosure
Schedule, is in substantial compliance with any and all
Applicable Laws and has been administered and operated in all
material respects in accordance with its terms.
(b) Each Plan which is intended to be "qualified"
within the meaning of Section 401(a) of the Code, has received
a favorable determination letter from the Internal Revenue
Service and no event has occurred and no condition exists which
could reasonably be expected to result in the revocation of any
such determination. No Plan is subject to Title IV of ERISA,
Part 3 of Subtitle B of Title I of ERISA or the minimum funding
requirements of Section 412 of the Code. Other than with
respect to the Plans, neither Seller nor any of its Affiliates
has any Liability under any employee benefit plan, bonus,
deferred compensation, stock option or other written Contract
relating to employment or fringe benefits for employees.
(c) Neither Seller, any Affiliate of the Seller nor
any other "disqualified person" or "party in interest" (as
defined in Section 4975(e)(2) of the Code and Section 3(14) of
ERISA, respectively) has engaged in any transaction in
connection with any Plan that could reasonably be expected to
result in the imposition of a material penalty pursuant to
Section 502(i) of ERISA, damages pursuant to Section 409 of
ERISA or a tax pursuant to Section 4975(a) of the Code. None
of Seller or any of its Affiliates has maintained any Plan
(other than a Plan which is intended to be "qualified" within
the meaning of Section 401(a) of the Code) which provides
benefits with respect to employees or former employees of any
Transferred Company or any Subsidiary of any Transferred
Company following their termination of service with such
Transferred Company or such Subsidiary (other than as required
pursuant to Section 601 of ERISA).
(d) No individual shall accrue or receive additional
benefits, service or accelerated rights to payment of benefits
as a direct result of the transactions contemplated by this
Agreement. No material Liability, audit or Action has been
incurred, made, commenced or, to the Knowledge of Seller,
threatened, by or against Seller or any of its Affiliates with
respect to any Plan (other than for benefits payable in the
ordinary course).
(e) No Plan is a "multiemployer plan" (as defined in
Section 4001(a)(3) of ERISA), and neither any Transferred
Company nor any Subsidiary of any Transferred Company has been
obligated to contribute to any multiemployer plan. No material
Liability has been, or could reasonably be expected to be,
incurred under Title IV of ERISA (other than for benefits
payable in the ordinary course or Pension Benefit Guaranty
Corporation insurance premiums) or Section 412(f) or (n) of the
Code by any entity required to be aggregated with any
Transferred Company or any Subsidiary of any Transferred
Company pursuant to Section 4001(b) of ERISA and/or Section
414(b) or (c) of the Code (and the regulations promulgated
thereunder) with respect to any "employee pension benefit plan"
(as defined in Section 3(2) of ERISA) which is not a Plan.
(f) With respect to each Plan, Seller has delivered
or made available to Buyer complete and accurate copies of the
following documents, as applicable, for each respective Plan:
(i) all Plan documents, with all amendments thereto; (ii) the
current summary plan description with any applicable summaries
of material modifications thereto as well as any other material
employee communications; (iii) all current trust agreements
and/or other documents establishing Plan funding arrangements;
(iv) the most recent Internal Revenue Service determination
letter and, if a request for such a letter has been filed and
is currently pending with the Internal Revenue Service, a copy
of such filing; (v) the three most recently prepared Forms
5500; (vi) the three most recently prepared actuarial valuation
reports; (vii) the most recently prepared financial statements;
and (viii) all material related Contracts, including without
limitation, insurance contracts, service provider agreements
and investment management and investment advisory agreements.
3.29 Transactions with Certain Persons. (a) Neither
any officer, director or employee of Seller, any Transferred
Company or any Subsidiary of any Transferred Company nor, to
the Knowledge of Seller, any member of any such Person's
immediate family is presently a party to any material
transaction with either a Transferred Company or any Subsidiary
of a Transferred Company, including, without limitation, any
Contract or other arrangement (i) providing for the furnishing
of material services by, (ii) providing for the rental of
material real or personal property from, or (iii) otherwise
requiring material payments to (other than for services as
officers, directors or employees of such Transferred Company or
such Subsidiary) any such Person.
(b) The Disclosure Schedule identifies (i) all
Contracts or other arrangements in existence or effect as of
the date hereof between any Transferred Company or any
Subsidiary of any Transferred Company, on the one hand, and
Seller or any of its Affiliates (other than the Transferred
Companies and their Subsidiaries), on the other hand, and (ii)
any payments, reimbursements and other distributions of any
nature whatsoever made since January 1, 1997 by any Transferred
Company or any Subsidiary of any Transferred Company, on the
one hand, to Seller or any of its Affiliates (other than the
Transferred Companies and their Subsidiaries), on the other
hand. All such payments, reimbursements and other
distributions were made in compliance
with any Applicable Laws and the terms of any applicable
Contracts.
(c) Except as set forth on the Disclosure Schedule,
since January 1, 1997, Seller and each Transferred Company
and/or any of its Subsidiaries have not settled any
intercompany trade receivables and payables, other than in the
ordinary course of business consistent with past practice.
(d) Except as set forth on the Disclosure Schedule,
since January 1, 1997, Seller has not changed any of its
policies or procedures applicable to creation or settlement of
intercompany charges with any Transferred Company or any
Subsidiary of any Transferred Company. Except as set forth on
the Disclosure Schedule, since January 1, 1997, Seller has
allocated expenses among its Affiliates (including the
Transferred Companies and their Subsidiaries) in a fair and
reasonable manner.
3.30 Taxes. For purposes of this Section 3.30, any
reference to a Transferred Company shall include any
corporation which merged or was liquidated with and into the
Transferred Company.
(a) All Tax Returns which are required to be filed
by, or with respect to, a Transferred Company or any Subsidiary
thereof on or prior to the Closing Date (the "Company Returns")
have been, or will be, timely filed.
(b) The Company Returns are true, complete and
accurate in all material respects.
(c) All Taxes due and payable by or with respect to
each Transferred Company and its Subsidiaries (whether or not
shown on any Tax Return) have been, or prior to the Closing
Date will be, timely paid.
(d) There is no claim, audit or Action now pending
or, to the Knowledge of Seller, threatened against a
Transferred Company or any of its Subsidiaries with respect to
any Tax for which the Transferred Company or its Subsidiaries
could be liable.
(e) Neither a Transferred Company nor any Subsidiary
thereof is delinquent in the payment of any Tax.
(f) No extension or waiver of the statute of
limitations period applicable to any Taxes or any Company
Return, which period (after giving effect to such extension or
waiver) has not yet expired, has been granted by or with
respect to any Transferred Company or any Subsidiary thereof.
(g) The statute of limitations for the assessment of
all income, employment or premiums Taxes has expired for all
applicable Tax Returns of the Transferred Companies and their
Subsidiaries or those Tax Returns have been examined by the
appropriate taxing authorities for all periods through January
31, 1993, and no deficiency for any such Taxes has been
proposed, asserted or assessed against a Transferred Company or
any Subsidiary thereof that has not been resolved or paid in
full.
(h) No Tax Ruling has been received and no Closing
Agreement has been entered into by or with respect to a
Transferred Company or any Subsidiary thereof that would have a
continuing adverse effect after the Closing Date. "Tax Ruling"
shall mean a written ruling of a taxing authority relating to
Taxes. "Closing Agreement" shall mean a written and legally
binding agreement with a taxing authority relating to Taxes.
There are no requests for rulings or determinations in respect
of any Tax pending between a Transferred Company or any
Subsidiary thereof and any taxing authority.
(i) Neither a Transferred Company nor any Subsidiary
thereof is a party to any Tax allocation or sharing agreement
other than a Tax Allocation Agreement between Seller and its
Subsidiaries. Neither a Transferred Company nor any Subsidiary
thereof is currently under any obligation to pay any amounts as
a result of being party, or having been party, to any Tax
sharing agreement other than the Tax Allocation Agreement
between Seller and its Subsidiaries.
(j) Neither a Transferred Company nor any Subsidiary
thereof is currently under any express or implied obligation to
indemnify any other person for Taxes other than under the Tax
Allocation Agreement between the Seller and its Subsidiaries.
(k) There are no Encumbrances for Taxes upon the
assets of any Transferred Company or any Subsidiary thereof.
(l) Neither a Transferred Company nor any Subsidiary
thereof will be required to include any adjustment in taxable
income for any tax period ending after the Closing Date under
Section 481(a) of the Code (or any similar provision of the Tax
laws of any jurisdiction) as a result of a voluntary change in
method of accounting for a taxable period ending before, or
beginning before and ending after, the Closing Date or pursuant
to the provisions of any agreement entered into with any taxing
authority with regard to the Tax liability of the Transferred
Company or any Subsidiary thereof and, to the Knowledge of
Seller, the Internal Revenue Service has not proposed any such
adjustment or change in accounting method.
(m) All Taxes which a Transferred Company or any
Subsidiary thereof is required by law to withhold, collect and
pay over with respect to amounts paid or owing to any employee,
independent contractor, creditor, stockholder or other third
party have been duly withheld or collected, and have been paid
over to the proper authorities to the extent due and payable
within the time and in the manner prescribed by law, rules and
regulations relating to the payment and withholding of Taxes.
(n) Neither a Transferred Company nor any Subsidiary
thereof has filed (or will file prior to Closing) a consent
pursuant to Section 341(f) of the Code or has agreed to have
Section 341(f)(2) of the Code apply to any disposition of a
"subsection (f) asset" (as that term is defined in Section
341(f)(4) of the Code) owned by the Transferred Company or any
Subsidiary thereof.
(o) Neither a Transferred Company nor any Subsidiary
thereof is a party to any Contract that would result,
separately, or in the aggregate, in the payment of any "excess
parachute payments" within the meaning of Section 280G of the
Code.
(p) No power of attorney currently in force has been
granted by any Transferred Company or any Subsidiary thereof
concerning any Tax matter.
(q) Seller, the Transferred Companies and their
Subsidiaries have made available to Buyer complete and accurate
copies of all Tax Returns relating to Taxes based on net
income, and any amendments thereto, filed by or on behalf of
Seller, the
Transferred Companies and their Subsidiaries for the years
ended 1996, 1995 and 1994.
(r) No property of a Transferred Company or any
Subsidiary thereof is property that the Transferred Company or
Subsidiary or any other party to this transaction is or will be
required to treat as being owned by another person pursuant to
the provisions of Section 168(f)(8) (as in effect prior to its
amendment by the Tax Reform Act of 1986) or is "tax-exempt use
property" within the meaning of Section 168 of the Code.
3.31 Insurance. The Disclosure Schedule sets forth,
as of the date hereof, an accurate and complete list of all
policies of insurance relating to the assets, properties,
business, operations, employees, officers or directors of the
Transferred Companies and their Subsidiaries. The Disclosure
Schedule also describes each pending claim under any of such
policies of more than $10,000 and sets forth the aggregate
amounts paid out under each such policy through the date
hereof. Such policies are valid and binding in accordance with
their terms and are in full force and effect and insure against
risks and liabilities customary for the businesses in which the
Transferred Companies and their Subsidiaries are engaged.
Neither Seller nor any Transferred Company or any of its
Subsidiaries has received a notice of cancellation or
nonrenewal of any such policy and, to the Knowledge of Seller,
no state of facts exists which might form the basis for
termination of any such policy. Each of the Transferred
Companies and their Subsidiaries has, or has made or will make
provision for, insurance coverage consistent with current
practices through the Closing Date. None of the insurance
policies for the benefit of the Transferred Companies and their
Subsidiaries is in default, and neither Seller nor any
Transferred Company nor any Subsidiary of a Transferred Company
has failed to give any notice or present any claim thereunder
in due or timely fashion or as required by any of such
insurance policies so as to jeopardize full recovery under such
policies. Seller or the Transferred Companies and their
Subsidiaries paid or will pay all premiums payable for periods
through the Closing Date with respect to such insurance
policies.
3.32 Environmental Laws. To the Knowledge of Seller,
except as set forth on the Disclosure Schedule: (i) each of
the Transferred Companies and each of its Subsidiaries is in
compliance with all applicable Environmental Laws, and
possesses and is in compliance with all Environmental Permits
required under such laws for the conduct of its business and
operations, (ii) there are no past, present or future events,
conditions, circumstances, practices, plans or legal
requirements that would reasonably be expected to prevent any
Transferred Company or any of its Subsidiaries from, or
increase the burden on any Transferred Company or any of its
Subsidiaries in, complying with applicable Environmental Laws
or obtaining, renewing or complying with all Environmental
Permits required under such laws for the conduct of its
business and operations, and (iii) there are and have been no
conditions at any property owned, operated or otherwise used by
any Transferred Company or any of its Subsidiaries now or in
the past, or at any other location, that would reasonably be
expected to give rise to Liability of any Transferred Company
or any of its Subsidiaries under any Environmental Law.
3.33 Preferred Shares. The Preferred Shares to be
acquired under this Agreement will be acquired by Seller for
its own account and not for the purpose of a public
distribution. Seller will refrain from transferring or
otherwise disposing of any of the Preferred Shares acquired by
it, or any interest
therein, in such manner as to violate any registration provision
of the Securities Act or any applicable state securities law
regulating the disposition thereof or any provision of the
Shareholders' Agreement. Seller agrees that the certificates
representing the Preferred Shares have not been registered under
the Securities Act or any state securities laws, and that no
interest therein may be transferred or otherwise disposed of in
violation of the provisions thereof.
3.34 Collective Bargaining; Labor Disputes;
Compliance. No general work stoppage or other significant labor
dispute with respect to any Transferred Company or any
Subsidiary of any Transferred Company is pending or, to the
Knowledge of Seller, threatened, and no application for
certification of a collective bargaining agent is pending or, to
the Knowledge of Seller, threatened with respect to the business
of any Transferred Company or any Subsidiary of any Transferred
Company. No employees of any Transferred Company or any
Subsidiary of any Transferred Company are covered by a
collective bargaining agreement. Each of the Transferred
Companies and their Subsidiaries has complied in all material
respects with all Applicable Laws relating to the employment and
safety of labor, including provisions relating to wages, hours,
benefits, collective bargaining, the payment of social security
and similar Taxes, and all Applicable Laws regarding
occupational safety and health with respect to employees
employed by it.
3.35 No Brokers. Except as set forth on the
Disclosure Schedule, none of Seller or any of its Affiliates has
employed, or is subject to any valid claim of, any broker,
finder, consultant or other intermediary in connection with the
transactions contemplated by this Agreement. Seller is solely
responsible for any payment, fee or commission that may be due
to any of the Persons listed on the Disclosure Schedule in
connection with the transactions contemplated hereby.
3.36 Absence of a Seller Material Adverse Effect.
Except as set forth on the Disclosure Schedule, since January 1,
1997, there has been no event or occurrence which has had, or
would reasonably be expected to have, individually or in the
aggregate, a Seller Material Adverse Effect; provided, however,
to the extent such effect results from any of the following,
such effect shall not be considered a Seller Material Adverse
Effect: (a) general conditions applicable to the economy of the
United States, including changes in interest rates, and (b)
conditions generally affecting the property and casualty
insurance industry.
3.37 No Other Agreements. None of Seller or any of
its Affiliates has any Contract, absolute or contingent, with
any other Person to sell the capital stock, assets or business
of any Transferred Company or any Subsidiary of any Transferred
Company or to effect any merger, consolidation or other
reorganization of any Transferred Company or any Subsidiary of
any Transferred Company or to enter into any agreement with
respect thereto.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF BUYER
Buyer hereby represents and warrants to Seller as
follows:
4.1 Organization of Buyer. Each of Buyer and its
Subsidiaries is a corporation duly organized, validly existing
and in good standing under the laws of its state of
incorporation
and has full corporate power and authority to own, operate and
lease its properties and to conduct its business as it is
presently being conducted. Buyer has full corporate power and
authority to enter into and to perform its obligations under
this Agreement and under the Other Transaction Documents.
4.2 Authorization. The execution, delivery and
performance of this Agreement and the Other Transaction
Documents and the consummation of the transactions contemplated
hereby and thereby have been duly and validly authorized by all
necessary corporate action on the part of Buyer, and no other
corporate proceedings on the part of Buyer are necessary to
authorize this Agreement and the Other Transaction Documents
and the transactions contemplated hereby and thereby. Each of
this Agreement and the Other Transaction Documents has been or
will be duly executed and delivered by Buyer and, assuming the
due execution by the other parties hereto and thereto,
constitutes or will constitute the legal, valid and binding
obligation of Buyer, enforceable against it in accordance with
its terms, except as enforceability may be limited by
applicable bankruptcy, insolvency, reorganization, or similar
laws affecting creditors' rights generally and by general
principles of equity.
4.3 Conflict or Violation. Neither the execution
and delivery of this Agreement or any Other Transaction
Document, nor the consummation of the transactions contemplated
hereby or thereby, will result in (a) a violation of or a
conflict with any provision of the certificate of incorporation
or bylaws of Buyer or any of its Subsidiaries, (b) a breach of,
or a default under, any term or condition of, or otherwise
cause any impairment of, any Contract, indebtedness,
Encumbrance, franchise, Permit, authorization or concession to
which Buyer or any of its Subsidiaries is a party or is subject
or by which any of their respective assets or properties are
bound, (c) a violation by Buyer or any of its Subsidiaries of
any Applicable Law, (d) other than those Encumbrances or
restrictions which arise in connection with any financing
arrangement undertaken by Buyer in connection with the
transactions contemplated hereby, the imposition of any
material Encumbrance or other restriction on the business of
Buyer or any of its Subsidiaries or on any of their respective
assets, or (e) any right of termination, cancellation or
acceleration under any Contract to which Buyer or any of its
Subsidiaries is a party or by or to which it or any of their
respective assets or properties may be bound or subject.
4.4 Consents and Approvals. Except as set forth on
Schedule 4.4, no consent, approval or authorization of, or
declaration, filing or registration with, any Governmental
Authority, or any other Person, is required to be made or
obtained by Buyer or any of its Subsidiaries on or prior to the
Closing Date in connection with the execution, delivery and
performance of this Agreement or any Other Transaction Document
or the consummation of the transactions contemplated hereby or
thereby. At such time as all conditions to the transactions to
be consummated hereby have otherwise been satisfied, no vote of
the holders of any class or series of Buyer's capital stock not
theretofore obtained will be necessary or required (under
Applicable Law or otherwise) to approve this Agreement and the
transactions contemplated hereby.
4.5 Capital Stock. (a) The authorized capital
stock of Buyer consists of 15,000,000 shares of Common Stock of
which 6,688,340 shares (as such number may be adjusted for any
shares of Common Stock issued in respect of the options and
warrants set forth on Schedule 4.5 which are exercised between
the date hereof and Closing) are issued and outstanding, and
1,000,000 shares of
preferred stock, par value $.01 per share, none of which are
issued and outstanding and 30,000 of which have been designated
Convertible Preferred Stock.
(b) All of the issued and outstanding shares of Common Stock
have been duly authorized and validly issued, are fully paid
and non-assessable and represent the only shares of capital
stock of Buyer which are issued and outstanding. Except with
respect to the Convertible Preferred Stock and as set forth on
Schedule 4.5, there are no subscriptions, options, warrants,
calls, commitments, preemptive rights or other rights of any
kind outstanding for the purchase of, nor any securities
convertible or exchangeable for, any equity interests of Buyer.
Except as contemplated by the Registration Rights Agreement, no
Person has any registration rights with respect to any
securities of the Buyer or any of its Subsidiaries.
(c) The Preferred Shares will, when issued and
delivered pursuant to Sections 2.3 and 2.7, be duly authorized,
validly issued, fully paid and non-assessable, and free and
clear of any Encumbrances (except Encumbrances arising as a
result of any action taken by Seller or any of its Affiliates
or which arise as a result of the escrow arrangements
contemplated by Sections 2.3, 2.6, 2.7, 2.8 and 2.9 hereof).
(d) On the Closing Date, the number of shares of
Common Stock, sufficient for issuance to effect the conversion
of all of the Preferred Shares, will be reserved by Buyer.
Following the Closing Date, Buyer will, at any time, have
reserved the number of shares of Common Stock sufficient for
issuance to effect the conversion of the Preferred Shares
outstanding at such time. The shares of the Common Stock
issuable upon conversion of the Preferred Shares will, when
issued and delivered, be duly authorized, validly issued, fully
paid and non-assessable, and free and clear of any Encumbrances
(except Encumbrances arising as a result of any action taken by
Seller or any of its Affiliates or which arise as a result of
the escrow arrangements contemplated by Sections 2.3, 2.6, 2.7,
2.8 and 2.9 hereof).
(e) Except as contemplated by the Shareholders'
Agreement, to the Knowledge of Buyer, there are no voting
trusts or other written agreements or understandings with
respect to the voting of shares of the capital stock of Buyer.
4.6 SEC Reports; Company Financial Statements.
Since January 1, 1995, Buyer has timely filed all reports,
schedules, registration statements, definitive proxy statements
or information statements and all other documents, together
with any amendments required to be made thereto, required to be
filed with the Securities and Exchange Commission ("SEC") under
the Securities Act, or the Securities Exchange Act of 1934, as
amended (the "Exchange Act") (as such documents have since the
time of their filing been amended, the "Buyer SEC Documents").
As of their respective dates, the Buyer SEC Documents complied
in all material respects with the requirements of the
Securities Act or the Exchange Act, as applicable, and the
rules and regulations of the SEC thereunder applicable to such
Buyer SEC Documents, and none of the Buyer SEC Documents
contained any untrue statement of a material fact or omitted to
state a material fact required to be stated therein or
necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. The
financial statements of Buyer included in the Buyer SEC
Documents comply as to form in all material respects with
applicable accounting requirements and with the published rules
and regulations of the SEC with respect thereto, have been
prepared in accordance with GAAP applied on a consistent basis
during the periods involved (except as may be indicated therein
or in the notes thereto or in the case of unaudited statements
as may be permitted by Form 10-Q) and fairly present (subject,
in the case of the unaudited financial statements, to normal,
recurring audit adjustments) the consolidated financial
position of Buyer and its Subsidiaries as at the dates thereof
and the consolidated results of their operations, changes in
stockholders' equity and cash flows for the periods then ended.
4.7 No Brokers. Except as set forth on Schedule
4.7, none of Buyer or any of its Affiliates has employed, or is
subject to any valid claim of, any broker, finder, consultant
or other intermediary in connection with the transactions
contemplated by this Agreement. Buyer is solely responsible
for any payment, fee or commission that may be due to any of
the Persons listed on Schedule 4.7 in connection with the
transactions contemplated hereby.
4.8 Legal Matters. Except as described in the Buyer
SEC Documents, there are no Actions pending or, to the
Knowledge of Buyer, threatened against or relating to Buyer or
any of its Subsidiaries or their respective properties or
assets that individually or in the aggregate could reasonably
be expected to have a Buyer Material Adverse Effect. Except as
described in the Buyer SEC Documents, neither Buyer nor any of
its Subsidiaries is in default with respect to any judgment,
order, writ, injunction or decree of any Governmental Authority
applicable to it or to its respective properties or assets,
which default constitutes, or could reasonably be expected to
constitute, a Buyer Material Adverse Effect.
4.9 Compliance with Law; Permits and Licenses.
(a) Except as described in the Buyer SEC Documents, each of
the Buyer and its Subsidiaries is in compliance with all
Applicable Laws. None of the Buyer or any of its Subsidiaries
has received any written notice to the effect that any of Buyer
or any of its Subsidiaries is not in compliance with any such
Applicable Laws and, to the Knowledge of Buyer, there are no
currently existing circumstances that are reasonably likely to
result in violations of any such Applicable Laws.
(b) Except as described in the Buyer SEC Documents,
each of the Buyer and its Subsidiaries holds all Permits
necessary for the ownership and conduct of its business in each
of the jurisdictions in which it conducts or operates its
business, and such Permits are in full force and effect. The
consummation of the transactions contemplated by this Agreement
or the Other Transaction Documents will not result in any
revocation, cancellation or suspension of any such Permit, and
there are no pending or, to the Knowledge of Buyer, threatened
Actions with respect to revocation, cancellation, suspension or
nonrenewal thereof, and, to the Knowledge of Buyer, there has
occurred no event which (whether with notice or lapse of time
or both) will result in such a revocation, cancellation,
suspension or nonrenewal thereof.
4.10 Absence of a Buyer Material Adverse Effect.
Except as disclosed in the Buyer SEC Documents, since January
1, 1997, there has been no event or occurrence which has had,
or could reasonably be expected to have, individually or in the
aggregate, a Buyer Material Adverse Effect; provided, however,
to the extent such effect results from any of the following,
such effect shall not be considered a Buyer Material Adverse
Effect: (a) general conditions applicable to the economy of the
United States, including changes in interest rates, (b)
conditions
generally affecting the property and casualty insurance
industry, or (c) conditions or effects resulting from Buyer's
participation in the transactions contemplated hereby.
ARTICLE V
ADDITIONAL AGREEMENTS
OF SELLER AND BUYER
5.1 Maintenance of Business and Preservation of
Permits and Services. From the date of this Agreement until
the earlier of the Closing or the termination of this Agreement
in accordance with Section 11.1, Seller shall:
(a) cause each of the Transferred Companies and
their Subsidiaries to conduct its business in the ordinary
course and consistent with past practice and to use reasonable
commercial efforts to (i) preserve intact its business
organization,
(ii) preserve the goodwill and business relationships with
suppliers, customers, licensees, licensors, agents, reinsurers
and all others having business relationships with it, (iii)
keep available the services of its respective present officers,
employees, consultants and agents, (iv) defend and protect its
assets from infringement or usurpation, (v) perform all of its
obligations under all Contracts relating to or affecting its
assets or its business, (vi) conduct its business in such a
manner so that the representations and warranties contained in
Article III hereof shall continue to be true, complete and
accurate on and as of the Closing Date with the same force and
effect as if made on and as of the Closing Date in a manner so
as to satisfy the condition set forth in Section 7.1, (vii)
maintain its books, accounts and records in the usual manner
consistent with past practice and (viii) comply in all material
respects with all Applicable Laws; and
(b) not permit any Transferred Company or any
Subsidiary of any Transferred Company to undertake any of the
actions specified in Section 3.7 hereof.
5.2 Additional Financial Statements. (a) From the
date hereof to the Closing Date, Seller shall prepare, and
promptly deliver to Buyer, monthly unaudited financial
statements for each of the Transferred Companies and its
Subsidiaries in scope and detail reasonably satisfactory to
Buyer. Such financial statements will have been prepared in
the ordinary course of business on a basis consistent with the
financial statements referenced in Section 3.18(b) and will
present fairly the information contained therein.
(b) Promptly after they become available, Seller
shall furnish to Buyer all statutory statements of First Re for
any calendar years or quarters ending after September 30, 1997
but prior to the Closing Date. Such statutory statements shall
have been prepared on a basis consistent with the Convention
Statements, and, with respect to the financial statements
included therein, in accordance with SAP.
(c) From the date hereof to the Closing Date, Seller
will (i) provide to Buyer a monthly management report in scope
and detail reasonably satisfactory to Buyer; (ii) provide to
Buyer a monthly statement of investments in detail reasonably
satisfactory to Buyer and (iii) provide to Buyer a monthly list
of all claims paid under any insurance or reinsurance policy
issued by First Re in excess of $10,000. Each such report or
statement shall present fairly the information set forth
therein
in accordance with accounting policies and procedures consistent
with past practice.
(d) From the date hereof to the Closing Date, Buyer
shall prepare, and promptly deliver to Seller, monthly unaudited
consolidated financial statements for Buyer and its
Subsidiaries. Such financial statements will have been prepared
in the ordinary course of business in accordance with GAAP and
will present fairly the information contained therein.
5.3 Investigation. (a) From the date hereof through
the Closing Date, Seller shall, and shall cause each of the
Transferred Companies and their Subsidiaries to, allow Buyer and
its authorized agents and representatives complete access, upon
reasonable notice and during normal business hours, to all
Contracts and information of or relating to the assets,
Liabilities, operations, personnel and other aspects of the
business of Seller and its Subsidiaries in connection with the
Buyer's investigation of matters related to the transactions
contemplated by this Agreement and Buyer's examination of the
condition of the Seller and its Subsidiaries in order to verify
the representations and warranties of Seller hereunder;
provided, however, that any information obtained from Seller or
any of its Affiliates in connection with such investigation and
examination shall be deemed to be subject to the Buyer
Confidentiality Agreement; and provided, further, that Buyer's
investigation shall be conducted in such a manner as not to
interfere unreasonably with the business and operations of
Seller and its Subsidiaries. Seller shall cause its employees
and the employees of its Subsidiaries to provide reasonable
assistance to Buyer in connection with its investigation and
examination. No investigation or examination pursuant to this
Section 5.3(a) shall affect any representations or warranties of
Seller or the conditions to the obligations of Seller.
Notwithstanding any right of Buyer to investigate and examine
the affairs of the Transferred Companies and their Subsidiaries
and notwithstanding any knowledge of facts determined or
determinable by Buyer pursuant to such investigation or
examination, Buyer has the right to rely fully upon the
representations, warranties, covenants and agreements of Seller
contained in this Agreement.
(b) From the date hereof through the Closing Date,
Buyer shall allow Seller and its authorized agents and
representatives access, upon reasonable notice and during normal
business hours, to all Contracts and information of or relating
to the assets, Liabilities and operations of Buyer and its
Subsidiaries which are located at the principal office of Buyer
in New York, New York in connection with Seller's examination of
the condition of Buyer and its Subsidiaries in order to verify
the representations and warranties of Seller hereunder;
provided, however, that, to the extent any information
reasonably requested by Seller or any of its agents or
representatives is not available at Buyer's principal office in
New York, New York, Buyer hereby agrees to use its commercially
reasonable efforts to obtain and make such information available
to Seller or such agent or representative. Any examination by
Seller or any of its agents or representatives conducted
pursuant to this Section 5.3(b) shall be conducted in such a
manner as to not interfere unreasonably with the business and
operations of Buyer and its Subsidiaries and any information
obtained in connection with such examination shall be subject to
the Seller Confidentiality Agreement. Buyer shall cause the
officers of Buyer to provide reasonable assistance to Seller in
connection with its examination. No investigation or
examination pursuant to this Section 5.3(b) shall affect any
representation or warranty of Buyer or the conditions to the
obligations of Buyer.
Notwithstanding any right of Seller to investigate and examine
the affairs of Buyer and its Subsidiaries and notwithstanding
any knowledge of facts determined or determinable by Seller
pursuant to such investigation or examination, Seller has the
right to fully rely upon the representations, warranties,
covenants and agreements of Buyer contained in this Agreement.
5.4 Regulatory Matters; Third Party Consents.
(a) From the date hereof through the Closing Date, Buyer and
Seller shall cooperate with each other and use their respective
commercially reasonable efforts promptly to prepare and file
all necessary documentation with, and to obtain as promptly as
practicable all Permits of, all third parties and Governmental
Authorities which are necessary or advisable to consummate the
transactions contemplated by this Agreement, including, without
limitation, any filings under the HSR Act or in connection with
the underwriting by First Re or Buyer or any of Buyer's
Affiliates of any policies of insurance or reinsurance
previously underwritten by Homestead. Buyer and Seller shall
have the right to review in advance, and shall consult with the
other on, in each case subject to any laws relating to the
exchange of information, all the information relating to
Seller, any Transferred Company and any Subsidiary of a
Transferred Company or Buyer, as the case may be, and any of
their respective Affiliates (other than any stockholder of
Seller), which appear in any filing made with, or written
materials submitted to, any third party or any Governmental
Authority in connection with the transactions contemplated by
this Agreement. The parties hereto agree that they will
consult with each other with respect to the obtaining of all
Permits of all third parties and Governmental Authorities
necessary or advisable to consummate the transactions
contemplated by this Agreement, including, without limitation,
the underwriting by First Re or Buyer or any of Buyer's
Affiliates of any policies of insurance or reinsurance
previously underwritten by Homestead, and each party shall keep
the other apprised of the status of matters relating to
completion of the transactions contemplated herein, including,
without limitation, the underwriting by First Re or Buyer or
any of Buyer's Affiliates of any policies of insurance or
reinsurance previously underwritten by Homestead. The party
responsible for any such filing shall promptly deliver to the
other party evidence of the filing of all applications,
filings, registrations and notifications relating thereto, and
the filing of any supplement, amendment or item of additional
information in connection therewith. The party responsible for
a filing shall also promptly deliver to the other party a copy
of each material notice, order, opinion and other item of
correspondence received by such filing party from any
Governmental Authority in respect of any such application. In
exercising the foregoing rights and obligations, Buyer and
Seller shall act reasonably and as promptly as practicable.
(b) From the date hereof through the Closing Date,
Buyer and Seller shall, upon request, furnish each other with
all information concerning themselves and their Subsidiaries,
directors, officers and stockholders and such other matters as
may be reasonably necessary in connection with any statement,
filing, notice or application made by or on behalf of Buyer or
Seller, as the case may be, or any of its respective
Affiliates, to any Governmental Authority in connection with
the transactions contemplated by this Agreement.
(c) From the date hereof through the Closing Date,
Buyer and Seller shall promptly advise each other upon
receiving any communication from any Governmental Authority
whose consent or approval is required for consummation of the
transactions
contemplated by this Agreement, including, without limitation,
the underwriting by First Re or Buyer or any of Buyer's
Affiliates of any policies of insurance or reinsurance
previously underwritten by Homestead, which causes such party
to believe that there is a reasonable likelihood that the
requisite consent or approval will not be obtained or that the
receipt of such consent or approval will be materially delayed.
5.5 Notification of Certain Matters. (a) From the
date hereof through the Closing Date, each of Seller and Buyer
shall give prompt written notice to the other party of (i) the
occurrence, or failure to occur, of any event or existence of
any condition that has caused or could reasonably be expected
to cause any of its representations or warranties contained in
this Agreement to be untrue or inaccurate in any material
respect and (ii) any failure on its part to comply with or
satisfy, in any material respect, any covenant, condition or
agreement to be complied with or satisfied by it hereunder.
(b) From the date hereof through the Closing Date,
(i) Seller shall promptly inform Buyer of any communication
(whether oral or written) received by Seller or First Re or any
of their Affiliates from A.M. Best Company Inc. ("A.M. Best")
which expressly provides that A.M. Best will downgrade First
Re's claims paying ability rating or that A.M. Best is
reviewing such rating for a potential downgrade and (ii) Buyer
shall inform Seller of any communication (whether oral or
written) received by Buyer from A.M. Best which expressly
provides that A.M. Best will downgrade Buyer's claims paying
ability rating.
5.6 Exclusivity. From the date hereof through the
Closing Date:
(a) Seller and each of its Affiliates shall cease
any discussions or negotiations with any third party regarding
(i) any merger, sale of assets not in the ordinary course of
business, acquisition, business combination, change of control,
bulk reinsurance transaction or other similar transaction
involving any Transferred Company or any Subsidiary of any
Transferred Company, (ii) any purchase or other acquisition by
any Person of any shares of the capital stock of any Transferred
Company or any Subsidiary of any Transferred Company, or
(iii) any sale or issuance by any Transferred Company or any
Subsidiary of any Transferred Company of any shares of its
capital stock (collectively, "Prohibited Transactions");
(b) None of Seller, the Transferred Companies or any
of their Subsidiaries shall, nor shall any of them authorize or
permit any of their respective directors, officers, employees,
representatives, agents or Affiliates to, directly or
indirectly, solicit, initiate, encourage, respond favorably to,
permit or condone inquiries or proposals from, or provide any
confidential information to, or participate in any discussions
or negotiations with, any Person (other than Buyer and its
directors, officers, employees, representatives and agents)
concerning a Prohibited Transaction;
(c) Seller shall promptly advise Buyer of, and
communicate to Buyer the terms and conditions of (but not the
identity of the Person making), any bona fide inquiry or
proposal received concerning a Prohibited Transaction; and
(d) Seller shall use its best efforts to enforce the
terms of any confidentiality or standstill agreements with third
parties relating to any Transferred Company or any Subsidiary of
any Transferred Company or any of the business, assets or
employees of any of the foregoing and to require any such third
party to return any confidential information regarding any of
the foregoing which they may have obtained pursuant to any such
agreement. All of Seller's rights in and to such
confidentiality and standstill agreements shall be assigned to
Buyer upon the occurrence of the Closing.
5.7 Cooperation; Accounting and Other Matters. Prior
to the Closing Date, Seller shall, and Seller shall cause each
of the Transferred Companies and their Subsidiaries, and the
officers, employees, accountants and other representatives of
such companies to, cooperate with Buyer in respect of any
proposed public offering or private placement of securities, or
arrangement of financing by Buyer, the proceeds of which are to
be used to finance a portion of the Purchase Price of the Shares
by Buyer, and, without limitation of the foregoing, shall cause
to be prepared, at Buyer's expense, such financial statements of
the Transferred Companies and their Subsidiaries as may be
required by the rules and regulations of the Commission
promulgated under the Securities Act. Seller shall also use its
commercially reasonable efforts to cause its independent public
accountants who were responsible for preparing any such
financial statements to deliver, at Buyer's expense, any "cold
comfort" or similar letters as are customary in connection with
the proposed offering of securities by Buyer.
5.8 Investment Portfolio. From the date hereof
through the Closing Date, Seller shall cause each of the
Transferred Companies and their Subsidiaries not to change its
investment managers or alter its investment guidelines or
criteria (accurate and complete copies of which have been
provided by Seller to Buyer) without the prior written approval
of Buyer.
5.9 Use of Name. On the Closing Date, Seller shall
execute an assignment to Buyer and the Transferred Companies and
their Subsidiaries of all rights held by Seller or any of its
Affiliates (other than the Transferred Companies and their
Subsidiaries), and each of the Transferred Companies shall
execute an assignment to Seller of all rights held by such
Transferred Company or any Subsidiary of such Transferred
Company, to all of the logos, names, marks or other proprietary
rights, if any, used primarily or exclusively in the business of
(a) the Transferred Companies and their Subsidiaries or
(b) Seller and its Affiliates (other than the Transferred
Companies and their Subsidiaries), as the case may be, in form
reasonably satisfactory to counsel for the Person receiving each
acknowledgment.
5.10 Intercompany Payments. (a) Notwithstanding any
other provision of this Agreement to the contrary, except as set
forth in Section 5.10(b) or on the Disclosure Schedule, from the
date hereof through the Closing Date, the Seller shall not
permit any of the Transferred Companies and their Subsidiaries
to make any payments, reimbursements or any other distributions
of any nature whatsoever, other than any payment, reimbursement
or distribution relating to payroll or which otherwise does not
individually exceed $5,000 or in the aggregate, with all other
payments, reimbursements and distributions, exceed $100,000, to
the Seller or any of its Affiliates (other than the Transferred
Companies and their Subsidiaries) without the prior written
consent of Buyer. Any expenses allocated by Seller during the
period from the date hereof through the Closing Date to the
Transferred Companies and their Subsidiaries shall be allocated
in a fair and reasonable manner.
(b) All outstanding intercompany account balances (other than
those relating to Taxes and those under or relating to
reinsurance contracts and arrangements) between any Transferred
Company and any of its Subsidiaries, on the one hand, and Seller
and any of its Affiliates (other than such Transferred Company
and its Subsidiaries), on the other hand, as of the Closing
shall be settled in accordance with the financial terms of such
intercompany accounts (but irrespective of the terms of payment
of such intercompany accounts) in the manner provided in this
Section 5.10. At least five Business Days prior to the Closing,
Seller shall prepare and deliver to Buyer a statement setting
out in reasonable detail the calculation of all such
intercompany account balances based upon the latest available
financial information as of such date and, to the extent
reasonably requested by Buyer, provide Buyer with supporting
documentation to verify the underlying intercompany charges and
transactions. All such intercompany account balances shall be
paid in full in cash at the time of or prior to the Closing.
All intercompany accounts relating to Taxes shall be governed by
Article 10.
(c) As promptly as practicable, but no later than 30 days after
the Closing Date, Seller shall cause to be prepared and
delivered to Buyer a statement setting out in reasonable detail
the calculation of such intercompany account balances as of the
Closing Date (giving effect to any settlement under Sections
5.10(a) and (b) and any other payments). Buyer and
Seller shall cooperate in the preparation of any such
calculation including the provision of supporting documentation
to verify the underlying intercompany charges, transactions and
payments. If Buyer disagrees with Seller's calculation of such
intercompany balances Buyer may, within 20 days after delivery
of such statement, deliver a notice to Seller disagreeing with
such
calculation and setting forth Buyer's calculation of such
amount. If Buyer and Seller are unable to resolve such
disagreement within 10 days thereafter, any remaining disputed
intercompany balances shall be resolved by an Independent
Accounting Firm, which resolution shall be final, binding and
conclusive on Buyer and Seller. The net amount of any such
intercompany balance shall be paid in cash promptly thereafter,
together with interest thereon from and including the Closing
Date to but excluding the date of payment at a rate equal to 5%
per annum. Such interest shall be payable at the same time as
the payable to which it relates and shall be calculated daily on
the basis of a year of 365 days and the actual number of days
elapsed. The fees and disbursements of the Independent
Accounting Firm shall be allocated between Buyer and Seller in
the same proportion that the aggregate amount of remaining
disputed intercompany balances so submitted to the Independent
Accounting Firm that is unsuccessfully disputed by each (as
finally determined by the Independent Accounting Firm) bears to
the total amount of such remaining disputed intercompany
balances so submitted.
(d) Buyer and Seller agree that any adjustments made
pursuant to Section 2.6 and this Section 5.10 shall be made
without duplication.
5.11 Maintenance of Records. Through the Closing,
each of the Transferred Companies shall maintain the Records in
all material respects in the same manner and with the same care
that the Records have been maintained prior to the execution of
this Agreement. From and after the Closing, each of the parties
shall permit the other party reasonable access to any applicable
Records in its possession, and the right to duplicate such
Records, to the extent that the requesting party has a
reasonable business purpose for requesting such access or
duplication. Each
party hereto shall notify the other party of any extension of
any applicable statute of limitations related to such Records
and neither party shall permit the destruction of any such
Records without obtaining the prior written consent of the other
party. Notwithstanding any other provision of this Section 5.11,
access to any Records may be denied to the requesting party if
the other party is required under Applicable Law to deny such
access.
5.12 Repayment of Indebtedness and Release of Liens.
At the Closing, Seller shall, to the extent required to enable
the Shares to be sold free and clear of all Encumbrances, cause
to be paid in full or defeased all obligations of Seller or any
of its Affiliates under the debt instruments set forth on the
Disclosure Schedule, which debt instruments constitute all of
the debt instruments of Seller or any of its Subsidiaries
relating to indebtedness for borrowed money, and shall obtain
such other required consents, releases or waivers to enable the
Shares to be sold free and clear of all Encumbrances which
relate to such debt instruments.
5.13 Employees. From the date hereof through the
Closing, Seller hereby agrees to cause the Transferred Companies
and their Subsidiaries not to employ any Person, other than the
Transferred Employees, unless Buyer has consented in writing to
the employment of the applicable Person by the applicable
Transferred Company or Subsidiary.
5.14 Additional Insurance Coverage. Prior to
Closing, Seller shall extend, at Seller's expense, the current
directors and officers insurance coverage and errors and
omissions insurance coverage of Seller for a period of two years
following the Closing Date to indemnify John Dore for any Losses
arising from any acts or omissions of Mr. Dore prior to the
Closing in connection with his employment by or his provision of
services to Seller or any of its Subsidiaries (including the
Transferred Companies).
5.15 Satisfaction of Obligations to Employees. On or
prior to Closing, Seller shall pay any and all payments which
directly or indirectly have accrued, increased, vested or
accelerated, or will accrue, increase, vest or accelerate, as a
result of the transactions contemplated by this Agreement under
any Contract between any Transferred Employee, on the one hand,
and Seller or any of its Affiliates, on the other hand,
including any Contract relating to any options or warrants to
purchase any of the capital stock of Seller or any of its
Affiliates. Seller agrees that neither Buyer nor any of its
Affiliates (including, after the Closing Date, the Transferred
Companies and their Subsidiaries) shall have any Liability as a
result of the consummation of the transactions contemplated by
this Agreement or otherwise to any Transferred Employee or to
Seller or any of its Affiliates with respect to any options or
warrants to purchase, or any other securities convertible into
or exchangeable for, any shares of the capital stock of Seller
or any of its Affiliates.
5.16 Reserves. (a) From the date hereof through the
Closing, Seller shall not, and shall cause First Re not to,
release any of First Re's reserves for Net Unpaid Losses and LAE
other than in connection with the payment or settlement of
insurance claims or the collection of salvage or subrogation, in
either case in the ordinary course of business and consistent
with past practice.
(b) Prior to the Closing, Seller shall deliver to
Buyer an accurate and complete copy of the final actuarial
report
prepared by Tillinghast (the "1997 Reserve Report") relating to
the adequacy and reasonableness of the 1997 Reserves. Seller
shall cause First Re to report on its convention statement for
the year ended December 31, 1997, as filed with the Department
of Insurance of the State of Connecticut, 1997 Reserves that are
at least $3.05 million in excess of the point amount of 1997
Reserves that Tillinghast recommended in the 1997 Reserve Report
be reported by First Re in such convention statement.
5.17 Escrow Agreement. At Closing, Buyer and Seller
shall execute and deliver the Escrow Agreement.
5.18 Distribution of Homestead Shares. Prior to the
Closing Date, Seller shall cause all shares of the capital stock
of Homestead owned by First Re to be distributed as a dividend
to Seller.
5.19 Corinthian Policies. On or prior to the
Closing, Seller shall use its commercially reasonable efforts to
cause First Re to enter into an indemnity reinsurance agreement
(the "Corinthian Reinsurance Agreement") with a reinsurance
company having a claims paying ability rating of at least "A"
(Excellent) by A.M. Best, which agreement shall indemnify First
Re against and hold it harmless from any and all Liabilities or
Losses arising out of or relating to that Contingent Liability
Policy (FRN-48027) dated December 1, 1996 in which First Re is
the insurer, Corinthian Management Inc./Corinthian Management
Risk Purchasing Group is the insured, and Dimension Service
Corporation and Amerigard Corporation are additional named
insureds. Buyer and Seller agree that (i) Seller shall pay that
portion of the premium payable with respect to the Corinthian
Reinsurance Agreement up to the first $50,000, (ii) Buyer shall
pay, if applicable, that portion of the premium exceeding
$50,000 up to an aggregate amount, including the amount paid by
Seller, of $75,000 and (iii) in addition to the amount paid by
Seller pursuant to clause (i) of this Section 5.19, Seller shall
pay that portion of the premium in excess of $75,000.
Notwithstanding anything in this Section 5.19 to the contrary,
to the extent that the premium with respect to the Corinthian
Reinsurance Agreement exceeds $75,000, Seller shall have no
obligation to cause First Re to enter into the Corinthian
Reinsurance Agreement.
5.20 Further Assurances. In addition to the actions
required to be taken, and the Contracts and other documents and
papers specifically required to be delivered, pursuant to this
Agreement, each of the parties hereto shall execute such
Contracts and other documents and papers and take such further
actions as may be reasonably required to carry out the
provisions hereof and the transactions contemplated hereby.
Each such party shall, on or prior to the Closing Date, use its
commercially reasonable efforts to fulfill or obtain the
fulfillment of the conditions precedent to the consummation of
the transactions contemplated hereby, including the execution
and delivery of any documents, certificates, instruments or
other papers that are reasonably required for the consummation
of the transactions contemplated hereby.
ARTICLE VI
CONDITIONS TO SELLER'S OBLIGATIONS
In addition to the conditions set forth in Article
VIII, the obligations of Seller to consummate the transactions
contemplated hereby on the Closing Date are subject to the
satisfaction on or prior to the Closing Date of each of the
following conditions, any of which may be waived by Seller to
the extent permitted by law:
6.1 Representations, Warranties, and Covenants. All
representations and warranties of Buyer contained in this
Agreement shall be true and correct in all material respects
(other than those representations and warranties which are
qualified by materiality, which shall be true and correct in all
respects) on and as of the Closing Date as if such
representations and warranties were made on and as of the
Closing Date (except for any representation or warranty made or
given as of a specified date, which shall have been true and
correct in all material respects (unless qualified by
materiality, in which case it shall be true and correct in all
respects) as of such specified date, and except for any changes
expressly permitted by Seller), and Buyer shall have performed
and complied with in all material respects all agreements and
covenants required by this
Agreement to the performed by it on or prior to the Closing
Date. Buyer shall have delivered to Seller at Closing a
certificate signed by any executive officer of Buyer to the
foregoing effect.
6.2 Opinion of Counsel. Seller shall have received,
from counsel to Buyer reasonably acceptable to Seller, opinions
of counsel in customary form which are reasonably acceptable to
Seller.
6.3 Certificates. Seller shall have received from
Buyer such certificates of the respective officers of Buyer and
others to evidence compliance with the conditions set forth in
this Article VI as may be reasonably requested by Seller.
6.4 Ratings. Buyer's claims paying ability rating
from A.M. Best shall not be less than "A-" (Excellent).
6.5 Filing of Certificate of Designation. Prior to
Closing, Buyer shall have filed the Certificate of Designation
of the Convertible Preferred Stock with the Secretary of State
of the State of Delaware.
6.6. New Jersey Surety Bond. Seller shall have
received evidence from Buyer in form and substance reasonably
satisfactory to Seller that Seller has been, or, upon Closing,
will be, released from all of its obligations as a guarantor in
connection with the Surety Bond.
ARTICLE VII
CONDITIONS TO BUYER'S OBLIGATIONS
In addition to the conditions set forth in Article
VIII, the obligations of Buyer to consummate the transactions
contemplated hereby are subject to the satisfaction on or prior
to the Closing Date of each of the following conditions, any of
which may be waived by Buyer to the extent permitted by law:
7.1 Representations, Warranties and Covenants. All
representations and warranties of Seller contained in this
Agreement shall be true and correct in all material respects
(other than those representations and warranties which are
qualified by materiality, which shall be true and correct in all
respects) on and as of the Closing Date as if such
representations and warranties were made on and as of the
Closing Date (except for any representation or warranty made or
given as of a specified date which shall have been true and
correct in all
material respects (unless qualified by materiality, in which case it
shall be true and correct in all respects) as of such specified date,
and except for any changes expressly permitted by Buyer), and Seller
shall have performed and complied with in all material respects all
agreements and covenants required by this Agreement to be performed by
it on or prior to the Closing Date. Seller shall have delivered to Buyer
at Closing a certificate signed by any executive officer of Seller to
the foregoing effect.
7.2 Opinion of Counsel. Buyer shall have received
from counsel to Seller reasonably acceptable to Buyer, opinions of
counsel in customary form which are reasonably acceptable to Buyer.
7.3 Certificates. Buyer shall have received from
Seller such certificates of the respective officers of Seller and others
to evidence compliance with the conditions set forth in this Article VII
as may be reasonably requested by Buyer.
7.4 Records. Buyer shall have received at Closing the
Records to the extent not located at the offices of the Transferred
Companies and their Subsidiaries.
7.5 Ratings. First Re's claims paying ability rating
from A.M. Best shall not be less than "A-" (Excellent). A.M. Best shall
not have given notice to Seller or First Re that it is reviewing such
rating for a potential downgrade.
7.6 Intercompany Agreements. All Contracts between
any of the Transferred Companies and their Subsidiaries, on the one
hand, and Seller or any of its Affiliates (other than the Transferred
Companies and their Subsidiaries), on the other hand, shall have been
terminated in accordance with their terms.
7.7 Resignation of Directors and Officers. Each
Person who is a director of any Transferred Company or any Subsidiary of
any Transferred Company shall have resigned such directorship to the
extent requested in writing by Buyer. Additionally, each Person who is
an officer of any Transferred Company or any Subsidiary of any
Transferred Company whose principal employment is not as an officer of a
Transferred Company or a Subsidiary of a Transferred Company shall
resign such office.
7.8 Employment Agreement. The employment agreement
between Buyer and John Dore executed on the date hereof shall be in
effect on the Closing Date, and, as of the Closing Date, Mr. Dore shall
not have indicated to Buyer that he will not, or is unable to, perform
his obligations under such agreement.
7.9 Additional Insurance Coverage. Seller shall have
obtained the policies of insurance covering John Dore as required by
Section 5.14 and shall have delivered to Buyer accurate and complete
copies of such policies.
7.10 1997 Reserve Report. Buyer shall have received
an accurate and complete copy of the 1997 Reserve Report, and (i) the
amount of the redundancy of the 1997 Reserves as reflected in the 1997
Reserve Report shall not be less than $3.05 million and (ii) Buyer shall
be reasonably satisfied with the accuracy of the 1997 Reserve Report.
ARTICLE VIII
CONDITIONS OF BUYER AND SELLER
The obligations of each of Buyer and Seller to
consummate the transactions contemplated hereby are subject to the
satisfaction on or prior to the Closing Date of each of the following
conditions, any of which may be waived by either party, as to itself, to
the extent permitted by law:
8.1 No Litigation, Injunction or Restraint. No order,
injunction or decree issued by any Governmental Authority or other legal
restraint or prohibition preventing the consummation of the transactions
contemplated by this Agreement shall be in effect. No proceeding
initiated by any Governmental Authority or any third party seeking an
injunction against any of the transactions contemplated by this
Agreement shall be pending. No statute, rule, regulation, order,
injunction or decree shall have been enacted, entered, promulgated or
enforced by any Governmental Authority which prohibits, restricts or
makes illegal the consummation of any of the transactions contemplated
by this Agreement.
8.2 Consents. (a) All Permits required to be obtained prior
to the Closing from any Governmental Authority or third party in
connection with the consummation of the transactions contemplated hereby
shall have been obtained without any terms, limitations or conditions
which would, individually or in the aggregate, have a Material Adverse
Effect, and such Permits shall be in full force and effect and all
statutory waiting periods in respect thereof shall have expired.
(b) The waiting period prescribed by the HSR Act shall have
expired or been terminated.
8.3 Other Agreements. The respective parties thereto shall
have entered into (a) the Shareholders' Agreement, (b) the Registration
Rights Agreement and (c) the Escrow Agreement.
ARTICLE IX
SURVIVAL OF REPRESENTATIONS, WARRANTIES,
COVENANTS AND AGREEMENTS; INDEMNIFICATION
9.1 Survival. (a) The representations and warranties of the
parties set forth in Sections 3.1, 3.2, 3.5, 4.1, 4.2 and 4.5 shall
survive the Closing without limitation as to time. The representations
and warranties of Seller set forth in Section 3.20(a) shall survive the
Closing until the second anniversary of the Closing Date. The
representations and warranties of Seller set forth in Sections 3.28,
3.30 and 3.32 and Article X shall survive the Closing until the
expiration of the applicable statute of limitations or extensions
thereof with respect to the subject matter thereof. All other
representations and warranties of the parties contained herein shall
expire on March 31, 1999. Any representation or warranty shall survive
the time it would otherwise terminate pursuant to this Section 9.1 to
the extent that notice of an inaccuracy or a breach thereof giving rise
to a claim of indemnification shall have been given by a party thereto
prior to the expiration of such time pursuant to this Section 9.1, but
only to the extent of the claim so asserted.
(b) All covenants and agreements made by the parties to this
Agreement which contemplate performance following the Closing shall
survive the Closing. All other covenants and agreements shall not
survive the Closing and shall terminate as of the Closing to the extent
that such covenants were performed
in accordance with their terms.
9.2 Indemnification. Subject to the limitations set forth in
Sections 9.1, 9.4 and 9.5, Seller shall indemnify Buyer and its
directors, officers, employees and Affiliates (including, after the
Closing, any Transferred Company or any Subsidiary of any Transferred
Company), and their respective successors and assigns (each, a "Buyer
Indemnitee"), against, and hold each Buyer Indemnitee harmless from, any
damage, claim, loss, Liability or expense, including, without
limitation, interest, penalties and reasonable attorneys' fees
(collectively, "Losses"), based upon, arising out of or otherwise in
respect of (i) any breach by Seller of any of its representations or
warranties contained herein (other than the representations and
warranties contained in Section 3.30 or Article X), (ii) any breach by
Seller of any of its covenants or agreements contained herein (other
than the covenants and agreements contained in Article X), (iii) (A) any
Delinquency Proceeding with respect to Homestead or (B) the underwriting
by First Re or Buyer or any of Buyer's Affiliates of any policies of
insurance or reinsurance previously underwritten by Homestead (whether
based upon, arising out of or otherwise in respect of a Delinquency
Proceeding, or otherwise) and (iv) if prior to the Closing, the
Corinthian Reinsurance Agreement is not in full force and effect, any
policies of insurance or reinsurance issued by First Re relating to the
Corinthian Business. Subject to Sections 9.1, 9.4 and 9.5, Buyer shall
indemnify Seller and its directors, officers, employees and Affiliates
(including, prior to the Closing, any Transferred Company or any
Subsidiary of any Transferred Company), and their respective successors
and assigns (each, a "Seller Indemnitee"), against, and hold each Seller
Indemnitee harmless from, any Losses based upon, arising out of or
otherwise in respect of any breach by Buyer of any of its
representations, warranties, covenants or agreements contained herein.
The term "Losses" as used in this Article IX is not limited to matters
asserted by third parties against any Person entitled to be indemnified
under this Article IX, but includes Losses incurred or sustained by any
Buyer Indemnitee or Seller Indemnitee in the absence of third party
claims.
9.3 Indemnification Procedures. (a) Upon any Person
entitled to be indemnified under this Article IX (the "Indemnified
Person") becoming aware of a fact, condition or event for which
indemnification is provided under this Article IX, the Indemnified
Person will with reasonable promptness notify the Person from whom
indemnification is sought (the "Indemnifying Person") in writing of such
fact, condition or event, but in any event within 15 days after such
Indemnified Person has actual knowledge of the facts constituting the
basis for indemnification; provided, that the failure to provide such
notice shall not prejudice the Indemnified Person's right to
indemnification hereunder except to the extent that the Indemnifying
Person is actually prejudiced thereby. If such fact, condition or event
is the assertion of a claim by a third party, the Indemnifying Person
will be entitled to participate in or take charge of the defense against
such claim; provided, that the Indemnifying Person and its counsel shall
proceed with diligence and in good faith with respect thereto.
Notwithstanding the Indemnifying Person's election to assume the defense
or investigation of such claim, the Indemnified Person shall have the
right to employ separate counsel and to participate in the defense or
investigation of such claim, action or proceeding, and the Indemnifying
Person shall bear the expense of one firm of such separate counsel, if
(i) use of counsel of the Indemnifying Person's choice would give rise
to a conflict of interest, (ii) the Indemnifying Person shall not have
employed
counsel to represent the Indemnified Person within a reasonable time
after notice of the assertion of any such claim or institution of any
such action or proceeding or (iii) the Indemnifying Person shall
authorize the Indemnified Person in writing to employ separate counsel
at the expense of the Indemnifying Person. An Indemnifying Person who
is not entitled to, or elects not to, assume the defense of a claim will
not be obligated to pay the fees and expenses of more than one counsel
for all Indemnified Persons with respect to such claim.
(b) Neither the Indemnified Person nor the Indemnifying
Person shall make any settlement of any claim which would give rise to
liability on the part of the Indemnifying Person under this Article IX
without the prior written consent of the other, which consent shall not
be unreasonably withheld, provided that an Indemnified Person shall not
be required to consent to any settlement involving the imposition of
equitable remedies or involving the imposition of any material
obligations on such Indemnified Person other than financial obligations
for which such Indemnified Person will be indemnified hereunder. No
Indemnifying Person shall consent to entry of any judgment or shall
enter into any settlement which does not include as an unconditional
term thereof the giving by the claimant or plaintiff to the Indemnified
Person of a release from all liability in respect to such claim or
litigation. Whenever the Indemnified Person or the Indemnifying Person
receives a firm offer to settle a claim for which indemnification is
sought under this Article IX, it shall promptly notify the other of such
offer. If the Indemnifying Person refuses to accept such offer within
20 Business Days after receipt of such offer (or of notice thereof),
such claim shall continue to be contested and, if such claim is within
the scope of the Indemnifying Person's indemnity contained in this
Article IX, the Indemnified Person shall be indemnified pursuant to the
terms hereof. If the Indemnifying Person notifies the Indemnified
Person in writing that the Indemnifying Person desires to accept such
offer, but the Indemnified Person refuses to accept such offer within 20
Business Days after receipt of such notice, the Indemnified Person may
continue to contest such claim and, in such event, the total maximum
liability of the Indemnifying Person to indemnify or otherwise reimburse
the Indemnified Person hereunder with respect to such claim shall be
limited to and shall not exceed the amount of such offer, plus
reasonable out-of-pocket costs and expenses (including reasonable
attorneys' fees and disbursements) to the date of notice that the
Indemnifying Person desires to accept such offer, provided that this
sentence shall not apply to any settlement of any claim involving the
imposition of equitable remedies or to any settlement imposing any
material obligations on such Indemnified Person other than financial
obligations for which such Indemnified Person will be indemnified
hereunder.
9.4 Net Indemnity. The amount of any Losses from and against
which any Indemnifying Party is liable to indemnify, reimburse, defend
and hold harmless any Indemnified Party pursuant to Section 9.2 shall be
reduced by any insurance or other recoveries or any Tax benefit that
such Indemnified Party realizes or may realize as a result of or in
connection with such Loss (after giving effect to the net effect of any
indemnification payment) and increased by any Taxes such Indemnified
Party incurs or may incur in respect of indemnification for such Loss.
9.5 Limits on Indemnification. (a) Neither Seller nor Buyer
shall have any right to seek indemnification under this Agreement until
Losses which would otherwise be indemnifiable hereunder (which, for
purposes of such calculation, shall exclude
any Loss which does not individually exceed $4,000) have been incurred
by such party and its Affiliates, directors, officers, employees,
representatives and agents, and their respective successors and assigns,
in an aggregate amount exceeding $275,000 (after insurance or other
recoveries and on an after-tax basis), whereupon such party shall be
entitled to receive indemnification payments in full, including the
amounts constituting such $275,000 in aggregate; provided, however, that
no party shall have the right to be indemnified under this Agreement for
any Loss which individually does not exceed $4,000.
(b) Any claim for indemnification which Buyer may have
against Seller pursuant to Section 9.2(i), (iii) or (iv) shall only be
satisfied through (i), subject to Section 2.8(b)(ii), a sale of shares
of Common Stock issuable upon conversion of the Escrow Shares pursuant
to the terms hereof and the Escrow Agreement and (ii) pursuant to
Section 9.7 hereof.
9.6 Absence of Limits. Notwithstanding anything in this
Agreement to the contrary, Seller's obligations under Section 2.6 and
Section 9.2(ii) shall be unlimited and, without limiting the generality
of the foregoing, shall not be limited to the aggregate amount of
proceeds resulting from the sale of the shares of Common Stock issuable
upon conversion of the Escrow Shares and the Program Contingent Payment.
9.7 Satisfaction of Seller's Obligations. In addition to and
not in limitation of any rights that Buyer may have under the Escrow
Agreement or otherwise, in order to satisfy any claim Buyer has against
Seller under this Article IX or pursuant to the last sentence of Section
2.6(e)(ii), Buyer shall have the right to offset any such claim against
any Program Contingent Payment.
ARTICLE X
TAX MATTERS
10.1 Code 338(h)(10) Election. (a) At Buyer's request and
subject to Buyer's payment of Additional Tax (defined below) at the
Required Time (defined below), Seller and Buyer shall cooperate to take,
and will take, all actions necessary and appropriate to effect a timely
proper election under Code
338(h)(10) and the regulations promulgated thereunder with respect to
the purchase of the Shares (the "Election"), and to file their federal
income tax returns and, to the extent permissible, their state and local
income tax returns, on a basis consistent with the Election.
"Additional Tax" is the amount necessary to reimburse Seller, on an
after-tax basis, for (i) the Taxes incurred by Seller or its Affiliates
as a result of making the Election which Seller or its Affiliates would
not have incurred absent the Election as shown on a schedule provided by
Seller to Buyer prior to the Closing Date and (ii) one-half of any Taxes
that were not taken into account in the preceding clause (i) and that
result from making the Election, but only to the extent (A) such Taxes
result from changes in the "adjusted grossed-up basis" or the allocation
thereof from those agreed to pursuant to Section 10.1(b) or (B) Seller
was not aware of the imposition of such Taxes at the time the
computation of the amount in the preceding clause (i) was made and the
failure of Seller to be aware of such imposition was not due to Seller's
negligence. Calculations made on an after-tax basis shall be made
assuming the maximum marginal statutory rates applicable to the
recipient for the relevant taxable year for federal, state and local
income tax purposes, after taking into account deductions attributable
to the imposition of any Taxes that give
rise to deductions for federal income tax purposes, which deductions
would similarly be calculated on the basis of the maximum marginal
statutory rates for which such deductions were available for the
relevant taxable year. "Required Time" refers to the date 10 days
before Seller is required to pay any Additional Tax.
(b) In connection with the Election, prior to the Closing
Date, Seller and Buyer shall act together in good faith to (i) determine
and agree upon the amount of the "adjusted grossed-up basis" of the
Shares and (ii) agree upon the proper allocations (the "Allocations") of
the "adjusted grossed-up basis" of the Shares among the assets of the
Transferred Companies in accordance with Treas. Reg. 1.338(h)(10)-
1(e)(5) and Code 338(b)(5) and the Treasury Regulations promulgated
thereunder. In the event that the parties are unable to agree upon such
Allocations within 30 days prior to Closing, the parties shall jointly
select and request an Independent Accounting Firm to prepare the
Allocations as promptly as possible. Seller, Buyer and the Transferred
Companies shall file all Tax Returns (including amended returns and
claims for refund) and information reports in a manner consistent with
the Allocations and shall not take a position inconsistent with the
Allocations in any Action or proceeding.
10.2 Termination of Prior Tax Sharing Agreements. Any tax
sharing agreements, arrangements, policies or guidelines, formal or
informal, express or implied, that may exist between the Transferred
Companies and any Subsidiary, on the one hand, and Seller or any
Affiliate of Seller, on the other, shall terminate, and any obligations
to make payments under any such agreement or arrangement shall be
cancelled, immediately prior to the Closing.
10.3 Pre-Closing Taxes. Seller's Consolidated Group shall
timely (including the time generally allowed for extensions) prepare and
file all consolidated federal income tax returns and any required state
or local consolidated or combined income or franchise tax returns that
include the Transferred Companies and their Subsidiaries ("Pre-Closing
Consolidated Tax Returns"). Seller's Consolidated Group shall timely
prepare and file (or cause to be so prepared and filed) all other Tax
Returns required by law other than Pre-Closing Consolidated Tax Returns,
covering the Transferred Companies and each Subsidiary thereof, for all
taxable periods ending on or before the Closing Date ("Pre-Closing
Separate Tax Returns"; Pre-Closing Consolidated Tax Returns and Pre-
Closing Separate Tax Returns are hereinafter collectively referred to as
"Pre-Closing Tax Returns"). Seller will allow Buyer an opportunity to
review and comment upon such Pre-Closing Tax Returns (including any
amended Pre-Closing Tax Returns) to the extent that they relate to the
Transferred Companies. Seller will take no position on such Pre-Closing
Tax Returns that would adversely affect the Transferred Companies after
the Closing Date without the written approval of Buyer, which shall not
be unreasonably withheld. Seller's Consolidated Group shall timely pay
or cause to be paid all Taxes related to Pre-Closing Tax Returns ("Pre-
Closing Taxes").
10.4 Tax Periods Beginning Before and Ending After the
Closing Date. (a) Buyer shall prepare or cause to be prepared and file
or cause to be filed any Tax Returns of the Transferred Companies and
their Subsidiaries for Tax periods which begin before the Closing Date
and end after the Closing Date (each a "Straddle Period"). With respect
to such periods, Seller shall be responsible for an amount equal to
Seller's allocable portion of such Taxes ("Seller's Post-Closing Taxes")
in accordance with
this Section 10.4. Seller's Post-Closing Taxes shall be:
(i) in the case of any real or personal property Tax, an
amount equal to the Tax for the entire period multiplied by a
fraction the numerator of which is the number of days in the period
for which such Taxes are paid ending on the Closing Date and the
denominator of which is the number of days in the entire period; or
(ii) in the case of any other Tax, the amount that would be
payable by the Transferred Companies and their Subsidiaries if the
taxable year ended on the Closing Date. For purposes of this clause
(ii), exemptions, allowances or deductions that are calculated on
an annual basis shall be apportioned on a daily basis between the
portion of the period before and after the Closing Date.
(b) At least 30 days prior to the filing of any Tax Return of
the Transferred Companies or their Subsidiaries for any taxable periods
ending after the Closing Date (a "Post-Closing Tax Return") which
includes any Seller's Post-Closing Taxes, Buyer shall provide Seller
with a copy of the return along with Buyer's calculation of Seller's
Post-Closing Taxes related thereto. Unless Seller disagrees with
Buyer's calculation, within 30 days of receipt of these items, Seller
shall pay to Buyer an amount equal to the excess of Seller's Post-
Closing Taxes over the sum of (i) the amount paid by Seller in respect
of Taxes in respect of Straddle Periods prior to the Closing Date and
(ii) the amount shown as a liability on the Closing Balance Sheet in
respect of Straddle Periods. If Seller disagrees with Buyer's
calculation of Seller's Post-Closing Taxes, Seller may instead deliver a
notice to Buyer disagreeing with such calculation and setting forth
Seller's calculation of such amount or amounts, along with the amount
Seller calculated as Seller's Post-Closing Taxes. Any such notice of
disagreement shall specify those items or amounts as to which Seller
disagrees and Seller shall be deemed to have agreed with all other items
and amounts of Seller's Post-Closing Taxes.
(c) If a notice of disagreement shall be delivered pursuant
to Section 10.4(b), the parties hereto shall, during the 15 days
following such delivery, use their best efforts to reach agreement on
the disputed items or amounts. If, during such period, the parties are
unable to reach such agreement, they shall promptly thereafter select an
Independent Accounting Firm and request that such firm promptly review
the disputed items or amounts for the purpose of calculating Seller's
Post-Closing Taxes. Such Independent Accounting Firm shall deliver to
Seller and Buyer, as promptly as practicable, a report setting forth
such calculation or calculations. Such report shall be final,
conclusive and binding upon the parties hereto, and Seller shall
pay to Buyer an amount equal to the excess of Seller's Post-Closing
Taxes as calculated by such Independent Accounting
Firm over the sum of (i) the amount paid by Seller in respect of Taxes
in respect of Straddle Periods prior to the Closing Date and (ii) the
amount shown as a liability on the Closing Balance Sheet in respect of
Straddle Periods within five business days after receipt of such report.
The cost of such review and report shall be borne equally by Seller and
Buyer.
(d) If the sum of (i) the amount paid by Seller in respect of
Taxes in respect of Straddle Periods prior to the Closing Date and (ii)
the amount shown as a liability on the Closing Balance Sheet in respect
of Straddle Periods exceeds the amount of Seller's Post-Closing Taxes,
Buyer shall promptly pay such excess to Seller.
10.5 Cooperation on Tax Matters. Buyer, Seller, the
Transferred Companies and their Subsidiaries shall cooperate fully, as
and to the extent reasonably requested by Buyer or Seller, in connection
with the filing of Tax Returns pursuant to this Article X and any audit,
litigation or other proceeding with respect to Taxes. Such cooperation
shall include the retention and (upon the other party's request) the
provision of records and information which are reasonably relevant to
any such audit, litigation or other proceeding and making employees
available on a mutually convenient basis to provide additional
information and explanation of any material provided hereunder. Buyer
and Seller agree (a) to retain all books and records with respect to Tax
matters pertinent to the Transferred Companies and their Subsidiaries
relating to any taxable period beginning before the Closing Date until
the expiration of the statute of limitations (and, to the extent
notified by the Transferred Companies or Seller, any extensions thereof)
of the respective taxable periods, and to abide by all record retention
agreements entered into with any taxing authority, and (b) to give the
other party reasonable written notice prior to transferring, destroying
or discarding any such books and records and, if the other party so
requests, the Transferred Companies and their Subsidiaries or Seller, as
the case may be, shall allow the other party to take possession of such
books and records.
10.6 Transfer Taxes. All transfer, documentary, sales, use,
stamp, registration and other such Taxes and fees, including any
penalties and interest ("Transfer Taxes") incurred in connection with
this Agreement shall be paid by Seller when due (other than Additional
Taxes payable by Buyer in accordance with Section 10.1(a)), and Seller
will, at its own expense, file all necessary Tax Returns and other
documentation with respect to all such transfer, documentary, sales,
use, stamp, registration and other Taxes and fees.
10.7 Tax Indemnification. After the Closing Date, Seller
will indemnify and hold harmless Buyer, the Transferred Companies and
their Subsidiaries from and against any and all
Losses resulting from, arising out of or relating to (a) Pre-Closing
Taxes, (b) Seller's Post-Closing Taxes, (c) any breach
of a representation or warranty included in Section 3.30 and (d)
Transfer Taxes described in Section 10.6.
10.8 Audits. Seller will allow the Transferred
Companies and their counsel to participate (at their own
expense) in any audits of Pre-Closing Consolidated Tax Returns
to the extent that such returns relate to the Transferred
Companies or any of their Subsidiaries. Seller will not settle
any such audit in a manner which would adversely affect a
Transferred Company or any Subsidiary thereof after the Closing
Date without the prior written consent of Buyer, which consent
shall not be unreasonably withheld. Buyer will allow Seller and
its counsel to participate (at its own expense) in any audits of
Post-Closing Tax Returns of the Transferred Companies or their
Subsidiaries. Buyer will not settle any such audit in a manner
which would adversely affect Seller without the prior written
consent of Seller, which consent shall not be unreasonably
withheld.
10.9 Net Indemnity. The amount of indemnity required
to be paid pursuant to this Article 10 shall be reduced by any
Tax benefit that the recipient realizes or may realize as a
result of or in connection with the Tax giving rise to such
payment and increased by any Taxes such recipient incurs or may
incur in respect of indemnification for such Tax. Unless
otherwise required by Applicable Law, Buyer and Seller agree to
treat any amount received in respect of the indemnification
provisions set forth in Article 9 or 10 as an adjustment to the
Purchase Price.
ARTICLE XI
MISCELLANEOUS
11.1 Termination. (a) This Agreement may be
terminated and the transactions contemplated hereby abandoned on
or prior to the Closing Date only as follows:
(i) by written consent of Buyer and Seller;
(ii) at the election of either Buyer or Seller,
if the Closing Date shall not have occurred on or before
July 31, 1998, provided that no party shall be entitled to
terminate this Agreement pursuant to this Section
11.1(a)(ii) if such party's failure to fulfill any
obligation under this Agreement has been the cause of, or
resulted in, the failure of the Closing to occur on or
before such date;
(iii) by either Buyer or Seller if a court of
competent jurisdiction shall have issued an order, decree
or ruling permanently restraining, enjoining or otherwise
prohibiting the transactions contemplated by this
Agreement, and such order, decree, ruling or other action
shall have become final and unappealable; or
(iv) by either Buyer or Seller if a condition
to its obligation to perform becomes incapable of
fulfillment. Notwithstanding the foregoing, the right to
terminate this Agreement pursuant to this Section
11.1(a)(iv) shall not be available to any party if its
condition to perform became incapable of fulfillment due to
its failure to fulfill any obligation under this Agreement.
(b) The termination of this Agreement shall be
effectuated by the delivery of a written notice of such
termination from the party terminating this Agreement to the
other party.
11.2 Obligations Upon Termination. In the event that
this Agreement shall be terminated pursuant to Section 11.1, all
obligations of the parties hereto under this Agreement shall
terminate and there shall be no liability of any party hereto to
any other party except (a) as set forth in Section 11.12 and (b)
that nothing herein will relieve any party from liability for
breach of this Agreement. Notwithstanding any other provision
herein to the contrary, each of the Buyer Confidentiality
Agreement and the Seller Confidentiality Agreement shall survive
any termination pursuant to Section 11.1 and remain in full
force and effect in accordance with its respective terms.
11.3 Non-Competition; Non-Solicitation of Employees.
(a) Seller covenants and agrees that neither it nor any of its
Subsidiaries shall divulge or make use of any Trade Secrets or
other confidential information of the Transferred Companies or
any of their Subsidiaries other than (i) to disclose such
secrets and information to Buyer or its Affiliates or (ii) as
required by law.
(b) In furtherance of the sale of the Shares to Buyer
hereunder and more effectively to protect the value and goodwill
of the assets and businesses of the Transferred Companies and
their Subsidiaries, Seller covenants and agrees that, for a
period ending on the fourth anniversary of the Closing Date,
neither Seller nor any of its Affiliates shall solicit any
agents, brokers or other Persons through whom First Re places or
sells insurance as of the Closing Date or through whom any of
the Program Business is placed or sold as of the Closing Date by
Homestead without the express written consent of Buyer, but only
to the extent that such solicitation is in respect of insurance
placed or sold by First Re on the Closing Date or any of the
Program Business.
(c) For a period commencing on the date hereof
through the fourth anniversary of the Closing Date, neither
Seller nor any of its Affiliates (other than the Transferred
Companies and their Subsidiaries) shall directly or indirectly
solicit to employ any officer or employee of any Transferred
Company or any Subsidiary of any Transferred Company in any
capacity whatsoever without the express written consent of
Buyer.
(d) Seller recognizes that the provisions of this
Section 11.3 are reasonable and necessary for Buyer's
protection.
Accordingly, Seller agrees that Buyer shall be entitled, in
addition to any other remedy to which Buyer may be entitled at
law or in equity, to an injunction or injunctions to prevent
breaches of the provisions of this Section 11.3 and to enforce
specifically the terms and provisions hereof in any action
instituted in any court of the United States or any state
thereof having subject matter jurisdiction.
(e) If any provision of this Section 11.3 is held
unenforceable because of the scope or duration of its
applicability, the court making such determinations shall have
the power to modify such scope or duration and such provisions
shall then be applicable in such modified form.
11.4 The Program. (a) Notwithstanding anything
herein to the contrary and subject to Section 11.4(b), Buyer
shall have the right to, in its sole discretion, and shall have
no Liability or obligation to Seller in the event that, Buyer
shall at any time after the Closing, cause First Re or any
Subsidiary of Buyer to (i) discontinue the renewal or issuance,
in whole or in part, of policies of insurance relating to the
Program Business and (ii) cede any or all Liabilities with
respect to such policies to any Person.
(b) Prior to discontinuing any Program, Buyer shall
cause First Re or any Affiliate of First Re renewing or issuing
policies of insurance or reinsurance in connection with such
Program to offer in writing to assist an insurance company
Affiliate of Seller designated by Seller, subject to any
Applicable Laws, in soliciting the insureds under such Program
and all applicable brokers to renew with such Affiliate;
provided, however, that if such Affiliate of Seller, within 10
Business Days following receipt by it of such offer, does not
notify First Re or such Affiliate of First Re of its election to
accept such offer, First Re or such Affiliate of First Re may,
without any further obligation to Seller pursuant to this
Section 11.4 or otherwise, discontinue such Program.
Notwithstanding the immediately preceding sentence, if,
subsequent to Closing, First Re or any Affiliate of First Re
enters into an arrangement with any Person prior to April 1,
2003 (other than to Buyer, Seller or any of their respective
Affiliates) pursuant to which Buyer or any Affiliate of Buyer
(i) transfers the renewal rights to any Program or (ii) solicits
any insureds under such Program or any applicable brokers to
renew with such Person, Buyer shall pay to Seller an amount
equal to 50% of any consideration received by Buyer or any of
its Affiliates in connection with such
arrangement.
11.5 No Third Party Beneficiaries. Nothing in this
Agreement is intended or shall be construed to give any
person, other than the parties hereto, any legal or equitable
right, remedy or claim under or in respect of this Agreement
or any provision contained herein.
11.6 Assignment. Neither this Agreement nor any of
the rights or obligations hereunder may be assigned by Seller
without the prior written consent of Buyer, or by Buyer
without the prior written consent of Seller, except that
before or after the Closing Buyer shall have the right,
without such consent, to assign to a Subsidiary of Buyer its
rights and obligations under this Agreement, provided that no
such assignment shall relieve Buyer of its obligations
hereunder. Subject to the foregoing, this Agreement shall be
binding upon and inure to the benefit of the parties hereto
and their respective successors and permitted assigns.
11.7 Notices. Unless otherwise provided herein,
any notice, request, instruction or other document to be given
hereunder by any party to the other shall be in writing and
delivered in person or by courier, telegraphed, telexed or by
facsimile transmission (in each such case to be effective on
the date of receipt) or mailed by certified mail, postage
prepaid, return receipt requested (such mailed notice to be
effective on the date such receipt is acknowledged), as
follows:
(a) If to Seller, to:
Dearborn Risk Management, Inc.
55 West Monroe St.
Suite 2700
Chicago, Illinois 60603
Attention: Lonnie
Steffen Facsimile: 312-
357-3525
With a copy to each of:
Castle Harlan, Inc.
150 East 58th Street
37th Floor
New York, New York 10155 Attention:
Jeffrey M. Siegel
Robert C. Wages
Facsimile: 212-207-8042
Schulte Roth & Zabel LLP
900 Third Avenue
New York, New York 10022
Attention: Marc Weingarten, esq.
Michael R. Littenberg, Esq.
Facsimile: 212-593-5955
(b) If to Buyer, to:
Gryphon Holdings Inc.
30 Wall Street
New York, New York 10005
Attention: Robert M. Coffee, Esq.
Facsimile: 212-825-0200
With a copy to:
LeBoeuf, Lamb, Greene & MacRae, L.L.P.
125 West 55th Street
New York, New York 10019 Attention: Peter R.
O'Flinn, Esq. Facsimile: 212-424-8500
or to each other place and with such other copies as either
party may designate by written notice to the other.
11.8 Choice of Law. THIS AGREEMENT SHALL BE
CONSTRUED, INTERPRETED AND THE RIGHTS OF THE PARTIES DETERMINED
IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF NEW YORK,
WITHOUT REGARD TO THE CONFLICT OF LAW PRINCIPLES THEREOF.
11.9 Entire Agreement; Amendments and Waivers. This
Agreement constitutes the entire agreement among the parties
pertaining to the subject matter hereof and supersedes all prior
agreements, understandings, negotiations and discussions,
whether oral or written, of the parties; provided, however, that
each of the Buyer Confidentiality Agreement and the Seller
Confidentiality Agreement shall remain in full force and effect
in accordance with its terms. No supplement, modification or
waiver of this Agreement shall be binding unless executed in
writing by the parties hereto. No waiver of any of the
provisions of this Agreement shall be deemed or shall constitute
a waiver of any other provision hereof, nor shall such waiver
constitute a continuing waiver unless otherwise expressly
provided.
11.10 Counterparts. This Agreement may be executed
in counterparts, each of which shall be deemed an original, but
all of which together shall constitute one and the same
instrument.
11.11 Invalidity. In the event that any one or more
of the provisions contained in this Agreement or in any other
instrument referred to herein, shall, for any reason, be held to
be invalid, illegal or unenforceable in any respect, such
invalidity, illegality or unenforceability shall not affect any
other provision of this Agreement or any other such instrument.
11.12 Expenses. Seller and Buyer will each be liable
for its own costs and expenses, including, without limitation,
the costs and expenses of any of its independent advisors,
actuaries, accountants and counsel, incurred in connection with
the negotiation, preparation and execution of this Agreement and
the performance of the transactions contemplated hereby.
11.13 Publicity. (a) Buyer and Seller hereby agree
that the press release to be issued by Buyer upon the initial
execution and delivery of this Agreement shall be in the form
attached as Exhibit E hereto. Each of Buyer and Seller further
agrees that, until such date as such party issues its initial
press release or makes its initial public announcement following
the Closing, such party will obtain the approval of the other
party (which approval shall not be unreasonably withheld) prior
to making any press release or announcement relating to this
Agreement or the transactions contemplated hereby, except (i)
where such release or statement is required by Applicable Law or
pursuant to any listing agreement with, or the rules or
regulations of, any securities exchange or any other regulatory
requirement, in which case the disclosing party shall endeavor
to provide the other party with as much prior notice of the
content of such release or announcement as is reasonably
practicable under the circumstances and to incorporate any
comments received by such other party into such release or
announcement to the extent consistent with Applicable Law or
such other securities exchange or other regulatory requirement,
and (ii) for any release or announcement by Buyer which contains
substantially the
same information contained in the press release attached hereto.
(b) Except as set forth in Section 11.13(a), each of
Seller and Buyer agrees to notify the other party prior to
issuing any press release or making any public announcement
concerning this Agreement or the transactions contemplated
hereby after the Closing, and will attempt to obtain the
reasonable approval of the other party prior to making such
release or announcement, except where such release or statement
is required by Applicable Law or pursuant to any listing
agreement with, or the rules or regulations of, any securities
exchange or any other regulatory requirement, in which case the
disclosing party shall endeavor to provide the other party with
as much prior notice of the content of such release or
announcement as is reasonably practicable under the
circumstances.
11.14 Corinthian Business. (a) Following the
Closing, subject to Section 11.14(b), Buyer shall cause First Re
or another Subsidiary of Buyer to promptly establish a business
similar to the Corinthian Business. In this regard, certain
employees of Corinthian and its Affiliates which are involved in
the Corinthian Business ("Corinthian Employees") may be retained
as employees or consultants by First Re or such other
Subsidiary. At the request of Buyer, Seller will, and shall
cause each of its Subsidiaries to, release any Corinthian
Employee from any Contracts or other arrangements which may
restrict, limit or impair such employee's retention by First Re
or such other Subsidiary or the ability of First Re or such
other Subsidiary to compete with Corinthian.
(b) Buyer shall have no obligation under Section
11.14(a) or otherwise with respect to conducting a business
similar to the Corinthian Business, unless, prior to Closing,
Seller shall have delivered to Buyer a forecast of after-tax net
income (determined in accordance with GAAP) for such business
for the 12 month period immediately following the Closing Date,
certified as to its reasonableness by John Dore, which forecasts
after-tax net income for such period in excess of $100,000.
(c) In consideration for any action taken by Seller
and its Affiliates in connection with the implementation by
First Re or another Subsidiary of Buyer of a business similar to
the Corinthian Business, Buyer shall pay to Seller, in
accordance with the procedures set forth on Schedule 11.14
hereto, the Corinthian Business Contingent Payment, if any.
(d) Notwithstanding anything herein to the contrary,
Buyer shall have the right to, in its sole discretion, and shall
have no Liability or obligation to Seller in the event that,
Buyer shall at any time after the Closing cause First Re or any
Subsidiary of Buyer to discontinue, for good faith business
reasons, any business being conducted by it or to be conducted
by it pursuant to this Section 11.14.
11.15 Transfer of Certain Employees. With respect to
those individuals set forth on the Disclosure Schedule, if Buyer
determines, at any time after Closing, in its reasonable
discretion, that the services of any of such individuals or
their successors are necessary for the conduct of the business
of any of the Transferred Companies and their Subsidiaries,
then, at Buyer's request, Seller shall cause such individual or
such individual's successor, to the extent then employed by
Seller, to provide, at Seller's expense, to Buyer or any of its
Affiliates any assistance during such employee's normal working
hours relating to such business as is reasonably requested by
Buyer. Further, if Buyer determines, at any time after the
Closing, in
its reasonable discretion, that it is necessary to employ any of such
individuals or their successors in connection with the business of any
of the Transferred Companies and their Subsidiaries, then, at Buyer's
request, Seller will, and shall cause each of its Subsidiaries to,
release such individual or such individual's successor from any
Contracts or other arrangements with such individual or such
individual's successor which may restrict, limit or impair such
employee's retention by Buyer or any of its Affiliates or the ability of
Buyer or any of its Affiliates to compete with Seller or any of its
Affiliates.
11.16 New Jersey Surety Bond. (a) At Closing, Buyer agrees
to execute and deliver any Contracts and other documents and take such
further actions as may be reasonably required to release Seller from any
obligations Seller may have as a guarantor in connection the Surety Bond
(No. 188966) issued by The Insurance Company of the State of
Pennsylvania Surety to the Department of Insurance of the State of New
Jersey in connection with the licensing of First Re to transact the
business of insurance in the State of New Jersey (the "Surety Bond").
(b) Following Closing, Buyer shall use its commercially
reasonably efforts to obtain from the Department of Insurance of the
State of New Jersey a waiver of the requirement that First Re maintain
the Surety Bond. If Buyer obtains such waiver and, as a result of the
subsequent cancellation of the Surety Bond, receives a refund of any
premium paid in connection with the issuance of the Surety Bond, Buyer
shall remit promptly after receipt thereof the amount of such refund to
Seller.
11.17 Interpretation. When reference is made in this
Agreement to Sections, Exhibits or Schedules, such reference is to the
Sections, Exhibits or Schedules of this Agreement unless otherwise
indicated. The table of contents and headings contained in this
Agreement are for reference purposes only and
shall not affect in any way the meaning or interpretation of this
Agreement. Whenever the words "include," "includes" or "including" are
used in this Agreement, they shall be deemed to be followed by the words
"without limitation." The phrases "the date of this Agreement," "the
date hereof" and terms of similar import, unless the context otherwise
requires, shall be deemed to refer to the date set forth in the first
paragraph of this Agreement. The words "hereof", "herein", "hereby" and
other words of similar import refer to this Agreement as a whole unless
otherwise indicated. Whenever the singular is used herein, the same
shall include the plural, and whenever the plural is used herein, the
same shall include the singular, where appropriate.
11.18 Severability. Any term or provision of this Agreement
which is invalid or unenforceable in any jurisdiction shall, as to that
jurisdiction, be ineffective to the extent of such invalidity or
unenforceability without rendering invalid or unenforceable the
remaining terms and provisions of this Agreement or affecting the
validity or enforceability of any of the terms or provisions of this
Agreement in any other jurisdiction. If any provision of this Agreement
is so broad as to be unenforceable, that provision shall be interpreted
to be only so broad as is enforceable.
11.19 Specific Performance. Each of the parties hereto
acknowledges and agrees that the other parties hereto would be
irreparably damaged in the event any of the provisions of this Agreement
were not performed in accordance with their specific terms or were
otherwise breached. Accordingly, each of the parties hereto agrees that
they each shall be entitled to an injunction or injunctions to prevent
breaches of the provisions
of this Agreement and to enforce specifically this Agreement and the
terms and provisions hereof in any action instituted in any court of the
United States or any state thereof having subject matter jurisdiction,
in addition to any other remedy to which any of the parties may be
entitled, at law or in equity.
11.20 No Prejudice. This Agreement has been jointly prepared
by the parties hereto and the terms hereof shall not be construed in
favor of or against any party on account of its
participation in such preparation.
IN WITNESS WHEREOF, each of the parties hereto
has executed this Agreement, or has caused this Agreement to be duly
executed on its respective behalf by its respective
officers thereunto duly authorized, as of the day and year
first above written.
GRYPHON HOLDINGS INC.
By:/s/ Stephen A. Crane
Name: Stephen A. Crane
Title: President and CEO
DEARBORN RISK MANAGEMENT, INC.
By:/s/ Lonnie Steffen
Name: Lonnie Steffen
Title:
Exhibit A
CERTIFICATE OF DESIGNATION OF
SERIES A 4.0% CUMULATIVE CONVERTIBLE PREFERRED STOCK OF
GRYPHON HOLDINGS INC.
Pursuant to Section 151 of the General Corporation Law of
the State of Delaware
Gryphon Holdings Inc., a corporation organized and
existing by virtue of the General Corporation Law of the State of
Delaware (the "Company"), does hereby certify that the following
resolution was duly adopted by action of the Board of Directors
of the Company at a meeting held on [ ].
RESOLVED, that pursuant to the authority expressly
granted to and vested in the Board of Directors of the Company by
the provisions of Article Fourth of the Amended and Restated
Certificate of Incorporation of the Company, and pursuant to
Section 151(g) of the General Corporation Law of the State of
Delaware, the Board of Directors hereby creates a series of
preferred stock, par value $.01 per share, of the Company and
hereby states the designation and number of shares, and fixes the
relative rights, preferences and limitations thereof, as follows:
1. DESIGNATION AND AMOUNT.
1.1 The shares of such series shall be designated as the
"Series A 4.0% Cumulative Convertible Preferred Stock" (the
"Series
A Preferred Stock") and the number of shares constituting such
series shall be 30,000.
1.2 The Series A Preferred Stock shall rank, with respect
to voting powers, preferences and relative, participating,
optional and other special rights of the shares of such series
and the qualifications, limitations and restrictions thereof,
including, without limitation, with respect to the payment of
dividends and the distribution of assets, whether upon
liquidation or otherwise, (i) equally with respect to all other
series of Parity Stock (as defined in Section 9), (ii) after all
shares of any class or series of Senior Stock (as defined in
Section 9), and (iii) prior to all shares of Junior Stock (as
defined in Section 9).
2. DIVIDENDS.
2.1 Subject to the rights of the holders of any shares of
Senior Stock, the holders of shares of Series A Preferred Stock,
in preference to the holders of any shares of Junior Stock, shall
be entitled to receive, when, as and if declared by the Board of
Directors out of funds of the Company legally available therefor,
cash dividends on each outstanding share of Series A Preferred
Stock, payable quarterly, in arrears, at an annual rate of 4.0%
of the Liquidation Preference (the "Dividend Rate"). Dividends
payable for each full dividend period will be computed by
dividing (x) the product of (i) the Liquidation Preference and
(ii) the Dividend Rate by (y) four and shall be payable on each
Dividend Payment Date, to the holders of record of Series A
Preferred Stock at the close of business on the Dividend Record
Date applicable to such Dividend Payment Date, commencing on the
First Dividend Payment Date. Such dividends shall be cumulative
from the First Dividend Payment Date. Dividends on the Series A
Preferred Stock which are not declared and paid when due will
compound quarterly on each Dividend Payment Date at the Dividend
Rate. Dividends payable for any partial dividend period shall be
computed on the basis of actual days elapsed over a 360-day year
consisting of twelve 30-day months. Dividends paid on the shares
of Series A Preferred Stock in an amount less than the total
amount of such dividends at the time accrued and payable on such
shares shall be allocated pro rata on a share-by-share basis
among all such shares at the time outstanding.
2.2 Holders of shares of Series A Preferred Stock shall not
be entitled to any dividends in excess of full cumulative
dividends, as herein provided, on the Series A Preferred Stock.
No interest, or sum of money in lieu of interest, shall be
payable in respect of any dividend payment or payments on the
Series A Preferred Stock which may be in arrears (it being
understood that the compounding of unpaid dividends shall not
constitute interest or money in lieu of interest).
2.3 Whenever quarterly dividends payable on shares of
Series A Preferred Stock are in arrears, thereafter and until all
accrued and unpaid dividends, whether or not declared, on the
outstanding shares of Series A Preferred Stock shall have been
paid in full or declared and set apart for payment, the Company
shall not:
(i) declare or pay dividends, or make any other distributions, on
any shares of Junior Stock other than dividends or distributions
payable in Junior Stock ; or (ii) declare or pay dividends, or
make any other distributions, on any shares of Parity Stock,
except (1) dividends or distributions payable in Junior Stock and
(2) dividends or distributions paid ratably on the Series A
Preferred Stock and all Parity Stock on which dividends are
payable or in arrears, in proportion to the total amounts to
which the holders of all shares of the Series A Preferred Stock
and such Parity Stock are then entitled.
2.4 Whenever quarterly dividends payable on shares of
Series A Preferred Stock are in arrears, thereafter and until all
Accumulated Dividends, whether or not declared, on the
outstanding shares of Series A Preferred Stock shall have been
paid in full or declared and set apart for payment, the Company
shall not:
(i) redeem or purchase or otherwise acquire for consideration any
shares of Junior Stock or Parity Stock; or (ii) purchase or
otherwise acquire for consideration any shares of Series A
Preferred Stock.
3. OPTIONAL REDEMPTION.
3.1 At any time and from time to time on or after [First
day of the first full month after the third anniversary of the
Closing to be inserted], 2001, the Company may, at its sole
option, redeem, out of funds legally available therefor, all or
any part of the outstanding shares of Series A Preferred Stock,
by payment of cash in the manner specified in Section 4 hereof
during the quarterly periods commencing on [First day of the
first full month after the third anniversary of the Closing to be
inserted] for the amount (expressed as a percentage of the
Liquidation Preference thereof) set forth below opposite such
quarters, plus any Accumulated Dividends and Accrued Dividends
thereon to the redemption date.
Quarter
Commencing*
Redemption Price Per Share
Year 4, Quarter 1
93.22
Year 4, Quarter 2
94.31
Year 4, Quarter 3
95.43
Year 4, Quarter 4
96.55
Year 5, Quarter 1
97.69
Year 5, Quarter 2
98.84
Year 5, Quarter 3
100.00
*[Note: Actual years and quarters will be inserted at
Closing. The redemption period will begin on the first
day of the first full month following the third
anniversary of the Closing and the first quarter shall
be the three month period beginning on such day. For
example, if the Closing were to occur on January 31,
1998
the first quarterly period would commence on February
1, 2001.]
4. PROCEDURE FOR REDEMPTION.
4.1 In the event the Company shall elect to redeem shares
of Series A Preferred Stock pursuant to Sections 3 or 5 hereof,
notice of such redemption shall be given by first-class mail to
each record holder of the shares to be redeemed, at such holder's
address as the same appears on the books of the Company, in
either case not less than 30 nor more than 60 days prior to the
redemption date. Each such notice shall state (i) the time and
date as of which the redemption shall occur; (ii) the total
number of shares of Series A Preferred Stock to be redeemed and,
if fewer than all the shares held by such holder are to be
redeemed (in the case of a redemption pursuant to Section 3), the
number of such shares to be redeemed from such holder; (iii) the
redemption price; (iv) the place or places where certificates for
such shares are to be surrendered for payment of the redemption
price; and (v) that dividends on the shares to be redeemed will
cease to accrue on such redemption date unless the Company
defaults in the payment of the redemption price.
4.2 On or before any redemption date, each holder of shares
of Series A Preferred Stock to be redeemed shall surrender the
certificate or certificates representing such shares of Series A
Preferred Stock to the Company, in the manner and at the place
designated in the notice of redemption, and on the redemption
date, the full redemption price, payable in cash, for such shares
of Series A Preferred Stock shall be paid or delivered to the
person whose name appears on such certificate or certificates as
the owner thereof, and the shares represented by each surrendered
certificate shall be returned to authorized but unissued shares
of preferred stock of any or no series. Upon surrender (in
accordance with the notice of redemption) of the certificate or
certificates representing any shares to be so redeemed (properly
endorsed or assigned for transfer, if the Company shall so
require and the notice of redemption shall so state), such shares
shall be redeemed by the Company at the redemption price. If
fewer than all the shares represented by any such certificate are
to be redeemed, a new certificate shall be issued representing
the unredeemed shares, without costs to the holder thereof
together with the amount of cash, if any, in lieu of fractional
shares.
4.3 Unless the Company defaults in the payment in full of
the redemption price, dividends on the Series A Preferred Stock
called for redemption shall cease to accrue on the redemption
date, and all rights of the holders of such shares redeemed shall
cease to have any further rights with respect thereto on the
redemption date, other than to receive the redemption price
without interest.
4.4 In the event that fewer than all the outstanding shares
of Series A Preferred Stock are to be redeemed, the shares to be
redeemed shall be determined pro rata, as determined by the
Company.
5. CHANGE OF CONTROL.
5.1 Upon the occurrence of a Change of Control at any time
on or after [Closing Date to be inserted] and prior to [First
date of optional redemption to be inserted], 2001, the Company
may, at its sole option, redeem, out of funds legally available
therefor, all of the outstanding shares of Series A Preferred
Stock by payment of cash in the manner specified in Section 4
hereof during the quarterly periods commencing on [Closing Date
to be inserted] for the amount (expressed as a percentage of the
Liquidation Preference
thereof) set forth below opposite such
quarters.
Quarter Commencing*
Redemption Price Per Share
Year 1, Quarter 1
81.00
Year 1, Quarter 2
81.95
Year 1, Quarter 3
82.92
Year 1, Quarter 4
83.90
Year 2, Quarter 1
84.88
Year 2, Quarter 2
85.88
Year 2, Quarter 3
86.89
Year 2, Quarter 4
Year 3, Quarter 1
Year 3, Quarter 2
Year 3, Quarter 3
Year 3, Quarter 4
87.92
88.95
90.00
91.06
92.13
*[Note: Actual years and quarters will be inserted at
Closing. The redemption period will begin on the first
day following the Closing and the first quarter shall
include the three month period beginning on the first
day of the month immediately following the Closing and
the number of days between the Closing and the first
day of such month.]
Upon the occurrence of a Change of Control at any time on or
after [First optional redemption date to be inserted], 2001, the
Company may, at its sole option, exercise its right of redemption
under
Section 3. This Section 5 shall similarly apply to successive
Changes of Control.
6. VOTING.
6.1 The holders of the Series A Preferred Stock shall be
entitled to notice of all stockholders' meetings in accordance
with the Company's By-laws, and except as otherwise required by
law or hereinafter provided, the holders of the Series A
Preferred Stock shall be entitled to vote on all matters
submitted to the stockholders for a vote (whether at a meeting of
stockholders or, to the extent permitted by the Company's
Certificate of Incorporation, by written consent) together with
the holders of the Common Stock as a single class, and each share
of Series A Preferred Stock shall be entitled to one vote for
each share of Common Stock that would be issuable upon conversion
of such share on the record date for determining eligibility to
participate in the action being taken.
6.2 If on any date a total of five quarterly dividends on
the Series A Preferred Stock have fully accrued but as of such
date have not been paid in full (a "Dividend Default"), the
holders of shares of Series A Preferred Stock shall have the
right, voting together as a single class, to elect one director,
which director may but need not be an officer of the Company, to
the Board of Directors. For the taking of any action as provided
in this Section 6.2 by the holders of shares of the Series A
Preferred Stock, each such holder shall have one vote for each
share of such stock standing in his or her name on the transfer
books of the Company as of any record date fixed for such purpose
or, if no such date be fixed, at the close of business on the
Trading Day (as defined in Section 9) next preceding the day on
which notice is given, or if notice is waived, at the close of
business on the Trading Day next preceding the day on which the
meeting is held. Such right of the holders of shares of Series A
Preferred Stock to vote for the election of such director to the
Board of Directors may be exercised at any annual meeting of
stockholders or at any special meeting of stockholders called for
such purpose as hereinafter provided or at any adjournment
thereof, until dividends in default and all other Accrued
Dividends on the outstanding shares of Series A Preferred Stock
shall have been paid in full, at which time the term of office of
the director so elected shall terminate automatically. So long
as such right to vote continues, the Secretary of the Company may
call, and upon the written request of the holders of record of a
majority of the outstanding shares of Series A Preferred Stock
addressed to the Secretary at the principal office of the Company
shall call, a special meeting of the holders of such shares for
the election of such director as provided herein. Such meeting
shall be held within 15 days after delivery of such request to
the Secretary, at the place and upon the notice provided by law
and in the Company's By-laws for the holding of meetings of
stockholders of the Company. No such special meeting or
adjournment thereof shall be held on a date less than 15 days
before an annual meeting of stockholders or any special meeting
in lieu thereof. If at any such annual or special meeting or any
adjournment thereof the holders of a majority of the then
outstanding shares of Series A Preferred Stock entitled to vote
in such election shall be present or represented by proxy, then
the authorized number of directors shall be increased by one, and
the holders of the Series A Preferred Stock shall be entitled to
elect the additional director. The absence of a quorum of the
holders of any other class or series of capital stock of the
Company at any such annual or special meeting shall not affect
the exercise by the holders of the Series A Preferred Stock of
such voting rights. A director so elected shall serve until the
next annual meeting or until his or her successor shall be
elected and
shall qualify, unless the term of office of the person so elected
as director shall have terminated under the circumstances set
forth in the third sentence of this Section 6.2. If the director
so elected by the holders of the Series A Preferred Stock as a
class shall cease to serve as a member of the Board of Directors
before his or her term shall expire, the holders of the Series A
Preferred Stock then outstanding and entitled to vote for such
director may at a special meeting of such holders called as
provided above, elect a successor to hold office for the
unexpired term of the director whose place shall be vacant.
After the holders of the Series A Preferred Stock shall have
exercised their right to elect the director pursuant to the terms
of this Section 6.2, the authorized number of directors shall not
be increased or decreased, regardless of the terms of any shares
of Junior Stock, or decreased, regardless of the terms of any
other stock of the Company, except by a class vote of the holders
of the Series A Preferred Stock as provided above. The rights of
the holders of the Series A Preferred Stock to elect the director
pursuant to the terms of this Section 6.2 shall not be adversely
affected by the voting or other rights applicable to any other
security of the Company. Notwithstanding anything to the
contrary in this Section 6.2, the director elected or appointed
pursuant to this Section 6.2 as a result of a Dividend Default
shall not be elected or appointed if the Company is advised in
writing by its outside counsel (which counsel rendering such
advice shall not have been found to be unacceptable in the
reasonable judgment of the holders of a majority of the
outstanding shares of the Series A Preferred Stock) that such
director would not be qualified under the Company's Certificate
of Incorporation or By-Laws or any applicable statutory or
regulatory standards to serve as a director of the Company or if
the Company otherwise reasonably objects to such director because
such director either (i) is a director or officer of a direct
competitor of the Company (which shall be deemed not to include
Dearborn) or (ii) has engaged in any adverse conduct that would
require disclosure under Item 7 of Schedule 14A promulgated under
the Exchange Act, in which case the holders of the Series A
Preferred Stock shall withdraw such director and elect or
nominate a replacement therefor (which replacement would be
subject to the requirements of this sentence). Any such
objection by the Company must be made no later than fourteen (14)
days after the holders of the Series A Preferred Stock identify
such director to the Company.
6.3 So long as any shares of Series A Preferred Stock
remain outstanding, unless a greater percentage shall then be
required by law, the Company shall not, without the affirmative
vote of the holders of a majority of the outstanding shares of
Series A Preferred Stock voting separately as one class, amend
the Certificate of Incorporation so as to affect adversely the
specified rights, preferences, privileges or voting rights of
holders of shares of Series A Preferred Stock. The holders of at
least a majority of the outstanding shares of Series A Preferred
Stock, voting separately as one class, may waive compliance with
any provision of this Certificate of Designations. In exercising
the voting rights set forth in this Section 6.3, each share of
Series A Preferred Stock shall be entitled to one vote.
6.4 The Company may create, authorize or issue any shares
of Senior Stock, Junior Stock or Parity Stock or increase or
decrease the amount of authorized capital stock of any class
other than the Series A Preferred Stock, without the consent of
the holders of Series A Preferred Stock, voting separately as a
class, and in taking such actions the Company shall not be deemed
to have affected adversely the rights, preferences, privileges or
voting rights of holders of shares of Series A Preferred Stock;
provided that the Company shall not decrease the authorized
Common Stock to an extent that would prevent conversion of shares
of the Series A
Preferred Stock as contemplated herein.
7. LIQUIDATION RIGHTS.
7.1 In the event of any liquidation, dissolution or winding-up
of the Company, whether voluntary or involuntary, the holders
of the shares of Series A Preferred Stock shall be entitled to receive
out of the assets of the Company available for distribution to
stockholders the Liquidation Preference plus Accumulated Dividends
and Accrued Dividends thereon in preference to the holders of, and
before any distribution is made on, any Junior Stock, including,
without limitation, on any Common Stock.
7.2 The merger or consolidation of the Company into or with
any other corporation, or the merger or consolidation of any other
corporation into or with the Company, shall not be deemed to be a
liquidation, dissolution or winding up, voluntary or involuntary,
for the purposes of this Section 7. Both (i) a sale of all or
substantially all of the assets of the Company, and (ii) any
distribution by the Company to its stockholders of substantially
all of its assets shall be deemed to be a liquidation for the
purposes of this Section 7.
7.3 After the payment to the holders of the shares of
Series A Preferred Stock of full preferential amounts provided for
in this Section 7, the holders of Series A Preferred Stock as such
shall have no right or claim to any of the remaining assets of the
Company.
7.4 In the event the assets of the Company available for
distribution to the holders of shares of Series A Preferred Stock
upon any liquidation, dissolution or winding up of the Company,
whether voluntary or involuntary, shall be insufficient to pay in
full all amounts to which such holders are entitled pursuant to
Section 7.1, no such distribution shall be made on account of any
shares of any Parity Stock upon such liquidation, dissolution or
winding up unless proportionate distributable amounts shall be
paid on account of the shares of Series A Preferred Stock,
ratably, in proportion to the full distributable amounts for which
holders of all Series A Preferred Stock and Parity Stock are
entitled upon such liquidation, dissolution or winding up.
8. CONVERSION.
8.1 Each holder of Series A Preferred Stock shall have the
right, at its option, at any time and from time to time from the
Issue Date to convert, subject to the terms and provisions of this
Section 8, any or all of such holder's shares of Series A
Preferred Stock. In such case, the shares of Series A Preferred
Stock shall be converted into such number of fully paid and
nonassessable shares of Common Stock as is equal, subject to
Section 8.7, to the product of the number of shares of Series A
Preferred Stock being so converted multiplied by the quotient of
(a) the Liquidation Preference plus any Accumulated Dividends and
any Accrued Dividends to and including the date of conversion
divided by (b) the Conversion Price (as defined below) then in
effect, except that with respect to any share which shall be
called for redemption such right shall terminate at the close of
business on the date of redemption of such share, unless the
Company shall default in performance or payment due upon exchange
or redemption thereof. The Conversion Price shall be $22.44,
subject to adjustment as set forth in Section 8.3.
The conversion right of a holder of Series A Preferred Stock
shall be exercised by the holder by the surrender of the
certificates representing shares to be converted to the Company at
any time during usual business hours at its principal place of
business or the offices of its duly appointed transfer agent for
the Series A Preferred Stock to be maintained by it, accompanied
by written notice that the holder elects to convert all or a
portion of the shares of Series A Preferred Stock represented by
such certificate and specifying the name or names (with address)
in which a certificate or certificates for shares of Common Stock
are to be issued and, if so required by the Company or its duly
appointed transfer agent for the Series A Preferred Stock, by a
written instrument or instruments of transfer in form reasonably
satisfactory to the Company or its duly appointed transfer agent
for the Series A Preferred Stock duly executed by the holder or
its duly authorized legal representative and any transfer tax
stamps or funds therefor, if required pursuant to Section 8.9.
Immediately prior to the close of business on the date of receipt
by the Company or its duly appointed transfer agent for the Series
A Preferred Stock of notice of conversion of shares of Series A
Preferred Stock, each converting holder of Series A Preferred
Stock shall be deemed to be the holder of record of Common Stock
issuable upon conversion of such holder's Series A Preferred Stock
notwithstanding that the share register of the Company shall then
be closed or that certificates representing such Common Stock
shall not then be actually delivered to such person. Upon notice
from the Company, each holder of Series A Preferred Stock so
converted shall promptly surrender to the Company, at any place
where the Company shall maintain a transfer agent for its Series A
Preferred Stock, certificates representing the shares so
converted, duly
endorsed in blank or accompanied by proper instruments of
transfer. On the date of any conversion, all rights with respect
to the shares of Series A Preferred Stock so converted, including
the rights, if any, to receive notices, will terminate, except
only the rights of holders thereof to (i) receive certificates for
the number of shares of Common Stock into which such shares of
Series A Preferred Stock have been converted; (ii) the payment of
any Accumulated Dividends or Accrued Dividends thereon; and
(iii) exercise the rights to which they are entitled as holders
of Common Stock.
If the last day for the exercise of the conversion right
shall not be a Business Day, then such conversion right may be
exercised on the next preceding Business Day.
8.2 When shares of Series A Preferred Stock are converted
pursuant to this Section 8, all Accumulated Dividends and all
Accrued Dividends (whether or not declared or currently payable)
on the Series A Preferred Stock so converted to (and not
including) the date of conversion shall be immediately due and
payable.
8.3 The Conversion Price shall be subject to adjustment as
follows, provided that the following adjustment provisions shall
be applied to the extent that any such provision is not
duplicative with respect to any other adjustment contemplated by
this Section 8.3:
i. In case the Company shall at any time or from time
to time (i) make a redemption payment or pay a dividend (or
other distribution) payable in shares of Common Stock on any
class of capital stock (which, for purposes of this Section
8.3 shall include, without limitation, any dividends or
distributions in the form of options, warrants or other
rights to acquire capital stock) of the Company (other than
the issuance of shares of Common Stock in connection with
the conversion of Series A Preferred Stock or the issuance
of shares of Common Stock pursuant to options granted to
employees of the Company or its subsidiaries pursuant to
employee benefit plans approved by the Board of Directors of
the Company); (ii) subdivide the outstanding shares of
Common
Stock into a larger number of shares; (iii) combine the
outstanding shares of Common Stock into a smaller number of
shares; (iv) issue any shares of its capital stock in a
reclassification of the Common Stock; or (v) pay a dividend or
make a distribution to all holders of shares of Common Stock
(other than a dividend or distribution paid or made to holders
of shares of Series A Preferred Stock in the manner provided in
Section 8.2) pursuant to a stockholder rights plan, "poison
pill" or similar arrangement then, and in each such case, the
Conversion Price in effect immediately prior to such event
shall be adjusted (and any other appropriate actions shall be
taken by the Company) so that the holder of any share of Series
A Preferred Stock thereafter surrendered for conversion shall
be entitled to receive the number of shares of Common Stock
that such holder would have owned or would have been entitled
to receive upon or by reason of any of the events described
above, had such share of Series A Preferred Stock been
converted immediately prior to the occurrence of such event.
An adjustment made pursuant to this Section 8.3(a) shall become
effective retroactively (A) in the case of any such dividend or
distribution, to the day immediately following the close of
business on the record date for the determination of holders of
the capital stock of the Company entitled to receive such
dividend or distribution or (B) in the case of any such
subdivision, combination or reclassification, to the close of
business on the day upon which such corporate action becomes
effective.
ii. In case the Company shall at any time or from time
to time issue or sell shares of Common Stock (or securities
convertible into or exchangeable for shares of Common Stock, or
any options, warrants or other rights to acquire shares of
Common Stock or options granted to employees of the Company or
its subsidiaries pursuant to employee benefit plans approved by
the Board of Directors of the Company) to holders of its Common
Stock at a price per share less than the Market Value for the
period ending on the date of issuance (treating the price per
share of any security convertible or exchangeable or
exercisable into Common Stock as equal to (i) the sum of the
price for such security convertible, exchangeable or
exercisable into Common Stock plus any additional consideration
payable (without regard to any anti-dilution adjustments) upon
the conversion, exchange or exercise of such security into
Common Stock divided by (ii) the number of shares of Common
Stock initially underlying such convertible, exchangeable or
exercisable security), other than
(A) issuances or sales for which an adjustment is made pursuant
to another paragraph of this Section 8.3,
(B) issuances of shares of Common Stock or securities
exercisable or convertible into Common Stock pursuant to
mergers, acquisitions, consolidations, exchanges,
reorganizations or combinations, (C) issuances that are subject
to certain triggering events (until such time as such
triggering events occur) or (D) options granted to employees of
the Company or its subsidiaries pursuant to employee benefit
plans approved by the Board of Directors of the Company, then,
and in each such case, the Conversion Price then in effect
shall be adjusted by dividing the Conversion Price in effect on
the day immediately prior to such record date by a fraction (I)
the numerator of which shall be the sum of the number of shares
of Common Stock outstanding on such record date plus the number
of additional shares of Common Stock issued or to be issued (or
the maximum number into which such convertible or exchangeable
securities initially may convert or exchange or for which such
options, warrants or other rights initially may be exercised)
and (II) the
denominator of which shall be the sum of the number of shares
of Common Stock outstanding on such record date plus the number
of shares of Common Stock which the aggregate consideration for
the total number of such additional shares of Common Stock so
issued (or into which such convertible or exchangeable
securities may convert or exchange or for which such options,
warrants or other rights may be exercised plus the aggregate
amount of any additional consideration initially payable upon
conversion, exchange or exercise of such security) would
purchase at the Market Value for the period ending on the date
of conversion; provided, that if the holders of Series A
Preferred Stock are offered the opportunity to participate in
any such offering on a pro rata basis with the holders of
Common Stock and decline to participate or if the holders of
Series A Preferred Stock are entitled to receive such options,
warrants or other rights upon conversion at any time of their
shares of Series A Preferred Stock, then in either such case,
no adjustment shall be made pursuant to this Section 8.3(b).
Such adjustment shall be made whenever such shares, securities,
options, warrants or other rights are issued, and shall become
effective retroactively to a date immediately following the
close of business on the record date for the determination of
stockholders entitled to receive such shares, securities,
options, warrants or other rights; provided, however, that the
determination as to whether an adjustment is required to be
made pursuant to this Section 8.3(b) shall only be made upon
the issuance of such shares or such convertible or exchangeable
securities, options, warrants or other rights, and not upon the
issuance of the security into which such convertible or
exchangeable security converts or exchanges, or the security
underlying such option, warrants or other right; provided
further, that if any convertible or exchangeable securities,
options, warrants or other rights (or any portions thereof)
which shall have given rise to an adjustment pursuant to this
Section 8.3(b) shall have expired or terminated without the
exercise thereof and/or if by reason of the terms of such
convertible or exchangeable securities, options, warrants or
other rights there shall have been an increase or increases,
with the passage of time or otherwise, in the price payable
upon the exercise or conversion thereof, then the Conversion
Price hereunder shall be readjusted (but to no greater extent
than originally adjusted) with respect to any shares of Series
A Preferred Stock not previously converted into Common Stock on
the basis of (1) eliminating from the computation any
additional shares of Common Stock corresponding to such
convertible or exchangeable securities, options, warrants or
other rights as shall have expired or terminated; (2) treating
the additional shares of Common Stock, if any, actually issued
or issuable pursuant to the previous exercise of such
convertible or exchangeable securities, options, warrants or
other rights as having been issued for the consideration
actually received and receivable therefor; and (3) treating any
of such convertible or exchangeable securities, options,
warrants or other rights which remain outstanding as being
subject to exercise or conversion on the basis of such exercise
or conversion price as shall be in effect at the time.
iii. In case the Company shall at any time or from
time to time (i) make a distribution to all holders of shares
of its Common Stock consisting exclusively of cash (excluding
any cash portion of distributions referred to in (a) above, or
cash distributed upon a merger or consolidation to which
Section 8.7 below applies), that, when combined together with
(A) all other such all-cash distributions made within the
then-preceding 12 months in respect of which no adjustment has
been made and (B) any cash and the fair market value of other
consideration paid or payable in respect of any tender offer by
the Company or any of its subsidiaries for shares of Common
Stock concluded within the then-preceding 12 months in respect
of which no adjustment has been made, in the aggregate exceeds
5% of the Company's market capitalization (defined as the
product of the Market Value for the period ending on the record
date of such distribution times the number of shares of Common
Stock then outstanding) on the record date of such
distribution, (ii) complete a tender or exchange offer by the
Company or any of its subsidiaries for shares of Common Stock
that involves an aggregate consideration that, together with
(A) any cash and other consideration payable in a tender or
exchange offer by the Company or any of its subsidiaries for
shares of Common Stock expiring within the then-preceding 12
months in respect of which no adjustment has been made and (B)
the aggregate amount of any such all-cash distributions
referred to in (i) above to all holders of shares of Common
Stock within the then-preceding 12 months in respect of which
no adjustments have been made, exceeds 5% of the Company's
market capitalization on the expiration of such tender offer or
(iii) make a distribution to all holders of its Common Stock
consisting of evidences of indebtedness, shares of its capital
stock other than Common Stock or assets (including securities,
but excluding those dividends, rights, options, warrants and
distributions referred to in (i) and (ii) above), then, and in
each such case, the Conversion Price then in effect shall be
adjusted by dividing the Conversion Price in effect immediately
prior to the date of such distribution by a fraction (I) the
numerator of which shall be the Market Value for the period
ending on the record date referred to below and (II) the
denominator of which shall be such Market Value less then the
fair market value (as determined by the Board of Directors of
the Company) of the portion of the cash, evidences of
indebtedness, securities or other assets so distributed,
applicable to one share of Common Stock (but such denominator
not to be less than one); provided, however, that no adjustment
shall be made with respect to any distribution of rights to
purchase securities of the Company if the holder of shares of
Series A Preferred Stock would otherwise be entitled to receive
such rights upon conversion at any time of shares of Series A
Preferred Stock into shares of Common Stock unless such rights
are subsequently redeemed by the Company, in which case such
redemption shall be treated for purposes of this Section 8.3(c)
as a dividend on the Common Stock. Such adjustment shall be
made whenever any such distribution is made and shall become
effective retroactively to a date immediately following the
close of business on the record date for the determination of
stockholders entitled to receive such distribution.
iv. Notwithstanding anything herein to the contrary, no
adjustment under this Section 8.3 need be made to the
Conversion Price unless such adjustment would require an
increase or decrease of at least 1% of the Conversion Price
then in effect. Any lesser adjustment shall be carried forward
and shall be made at the time of and together with the next
subsequent adjustment, which, together with any adjustment or
adjustments so carried forward, shall amount to an increase or
decrease of at least 1% of such Conversion Price.
v. The Company reserves the right to make such
reductions in the Conversion Price in addition to those
required in the foregoing provisions as it considers advisable
in order that any event treated for Federal income tax purposes as a
dividend of stock or stock rights will not be taxable to the
recipients. In the event the Company elects to make such a reduction
in the Conversion Price, the Company will comply with the requirements
of Rule 14e-1 under the Exchange Act, and any other securities laws
and regulations thereunder if and to the extent that such laws and
regulations are applicable in connection with the reduction of the
Conversion Price.
8.4 If the Company shall take a record of the holders of its Common
Stock for the purpose of entitling them to receive a dividend or other
distribution, and shall thereafter and before the distribution to
stockholders thereof legally abandon its plan to pay or deliver such
dividend or distribution, then thereafter no adjustment in the Conversion
Price then in effect shall be required by reason of the taking of such
record.
8.5 Upon any increase or decrease in the Conversion Price, then, and
in each such case, the Company promptly shall deliver to each registered
holder of Series A Preferred Stock a certificate signed by an authorized
officer of the Company, setting forth in reasonable detail the event
requiring the adjustment and the method by which such adjustment was
calculated and specifying the increased or decreased Conversion Price then
in effect following such adjustment.
8.6 No fractional shares or scrip representing fractional shares of
Common Stock shall be issued upon the conversion of any shares of Series A
Preferred Stock. If more than one share of Series A Preferred Stock shall
be surrendered for conversion at one time by the same holder, the number of
full shares of Common Stock issuable upon conversion thereof shall be
computed on the basis of the aggregate Liquidation Preference of the shares
of Series A Preferred Stock so surrendered. If the conversion of any share
or shares of Series A Preferred Stock results in a fraction, an amount
equal to such fraction multiplied by the last reported sale price of the
Common Stock on the Nasdaq at the close of business on the Trading Day next
preceding the day of conversion shall be paid to such holder in cash by the
Company.
8.7 In case of any (i) capital reorganization or reclassification or
other change of outstanding shares of Common Stock, or, (ii) subject to
Section 5, any Change of Control (other than a Change of Control in which
the Company is the resulting or surviving Person and which does not result
in any reclassification or change of outstanding Common Stock) (the events
in the foregoing clauses (i) and (ii) being referred to in this Section 8.7
as a "Transaction"), each share of Series A Preferred Stock then
outstanding shall, without the consent of any holder of Series A Preferred
Stock, become convertible only into the kind and amount of shares of stock
or other securities (of the Company or another issuer) or property or cash
receivable upon such Transaction by a holder of the number of shares of
Common Stock into which such share of Series A Preferred Stock could have
been converted immediately prior to such Transaction after giving effect to
any adjustment event. The provisions of this Section 8.7 and any
equivalent thereof in any such certificate similarly shall apply to
successive Transactions. The provisions of this Section 8.7 shall be the
sole right of holders of Series A Preferred Stock in connection with any
Transaction (other than any voting rights provided for herein and any
rights set forth in Section 5 with respect to a Change of Control) and such
holders shall have no separate vote thereon.
8.8 The Company shall at all times reserve and keep available
for issuance upon the conversion of the Series A Preferred Stock, such
number of its authorized but unissued shares of Common Stock as will from
time to time be sufficient to permit the conversion of all outstanding
shares of Series A Preferred Stock, and shall take all action required to
increase the authorized number of shares of Common Stock if at any time
there shall be insufficient authorized but unissued shares of Common Stock
to permit such reservation or to permit the conversion of all outstanding
shares of Series A Preferred Stock.
8.9 The issuance or delivery of certificates for Common Stock
upon the conversion of shares of Series A Preferred Stock shall be made
without charge to the converting holder of shares of Series A Preferred
Stock for such certificates or for any tax in respect of the issuance or
delivery of such certificates or the securities represented thereby, and
such certificates shall be issued or delivered in the respective names of,
or in such names as may be directed by, the holders of the shares of Series
A Preferred Stock converted; provided, however, that the Company shall not
be required to pay any tax which may be payable in respect of any transfer
involved in the issuance and delivery of any such certificate in a name
other than that of the holder of the shares of Series A Preferred Stock
converted, and the Company shall not be required to issue or deliver such
certificate unless or until the Person or Persons requesting the issuance
or delivery thereof shall have paid to the Company the amount of such tax
or shall have established to the reasonable satisfaction of the Company
that such tax has been paid.
9. DEFINITIONS. As used herein, the following terms shall have the
following meanings:
9.1 "Accrued Dividends" shall mean, with respect to any share
of Series A Preferred Stock, as of any date, the accrued and unpaid
dividends on such share from and including the most recent Dividend Payment
Date (or from [Fourth anniversary of Closing Date to be inserted], 2002, in
the case of dividends payable on the First Dividend Payment Date) to but
not including such date.
9.2 "Accumulated Dividends" shall mean, with respect to any
share of Series A Preferred Stock, as of any date, the aggregate
accumulated and unpaid dividends on such share from the First Dividend
Payment Date until the most recent Dividend Payment Date prior to such
date. There shall be no Accumulated Dividends with respect to any share of
Preferred Stock prior to the First Dividend Payment Date.
9.3 "Affiliate" shall have the meaning ascribed to it, on the
date hereof, under Rule 405 of the Securities Act of 1933, as amended.
9.4 "Board of Directors" shall mean the Board of Directors of
the Company or, with respect to any action to be taken by the Board of
Directors, any committee of the Board of Directors duly authorized to take
such action.
9.5 "Business Day" shall mean any day other than a Saturday,
Sunday or other day on which commercial banks in The City of New York are
authorized or required by law or executive order to close.
9.6 "Change of Control" shall mean (i) when (A) the Company
consolidates with or merges into any other person or directly or indirectly
conveys, transfers or leases all or substantially all of its assets to any
person in one transaction or a series of related transactions, or (B) any
person merges into the Company, in either event pursuant to a transaction
in which (1) any securities of the
Company entitled to vote generally for the election of directors or
securities convertible into such securities that are outstanding
immediately prior to the effectiveness thereof are reclassified or changed
into or exchanged for cash, securities or other property and (2) a
significant change in the composition of the Board of Directors of the
Company is effected; (ii) when any "person" or "group" is or becomes the
"beneficial owner," directly or indirectly, of more than 50% of the total
voting power, in the aggregate, normally entitled to vote in the election
of directors of the Company; or (iii) when, during any period of 12
consecutive months after the Issue Date, individuals who at the beginning
of any such 12-month period constituted the Board of Directors of the
Company (together with any new directors whose election by such Board or
whose nomination for election by the stockholders of the Company was
approved by a vote of a majority of the directors then still in office who
were either directors at the beginning of such period or whose election or
nomination for election was previously so approved) cease for any reason to
constitute a majority of the Board of Directors of the Company then in
office.
For purposes of the definition of "Change of Control," (i) the
terms "person" and "group" shall have the meaning used for purposes of
Rules 13d-3 and 13d-5 of the Exchange Act, as in effect on the Issue Date,
whether or not applicable and (ii) the term "beneficial owner" shall have
the meaning used in Rules 13d-3 and 13d-5 under the Exchange Act as in
effect on the original date of issuance of the Preferred Stock, whether or
not applicable, except that a "person" shall be deemed to have "beneficial
ownership" of all shares that any such person has the right to acquire,
whether such right is exercisable immediately or only after the passage of
time or upon the occurrence of certain events.
9.7 "Common Stock" shall mean the common stock, par value
$.01 per share, of the Company, or any other class of stock resulting from
successive changes or reclassifications of such common stock consisting
solely of changes in par value, or from par value to no par value, or as a
result of a subdivision, combination, or merger, consolidation or similar
transaction in which the Company is a constituent corporation.
9.8 "Dividend Payment Date" shall mean [First day of the
month immediately following the close of each applicable quarterly dividend
periods to be inserted] of each year, commencing on the First Dividend
Payment Date.
9.9 "Dividend Record Date" shall mean, with respect to each
Dividend Payment Date, a date not more than 60 days nor less than 10 days
preceding a Dividend Payment Date, as shall be fixed by the Board of
Directors.
9.10 "Exchange Act" shall mean the Securities Exchange Act of
1934, as amended, and the rules and regulations promulgated thereunder.
9.11 "First Dividend Payment Date" shall mean [First day of
the third month immediately following the initial dividend accrual date to
be inserted], 2002.
9.12 "Issue Date" shall mean [Closing Date to be inserted],
1998, the original date of issuance of the Series A Preferred Stock.
9.13 "Junior Stock" shall mean the Common Stock and the shares
of any other class or series of stock of the Company created on or after
the Issue Date that, by the terms of the Amended and Restated Certificate
of Incorporation of the Company or of the instrument by
which the Board of Directors, acting pursuant to authority granted in the
Amended and Restated Certificate of Incorporation, shall fix the relative
rights, preferences and limitations thereof, shall be junior to the Series
A Preferred Stock in respect of the right to receive dividends or to
participate in any other distribution of assets.
9.14 "Liquidation Preference" shall mean, with respect to each
share of Series A Preferred Stock, $1,000.
9.15 "Market Value" shall mean the average closing price of
the Common Stock on the Nasdaq for a five consecutive trading day period.
9.16 "Nasdaq" shall mean the Nasdaq Stock Market or, in the
event the Nasdaq Stock Market is not the principal stock exchange on which
the Common Stock is then traded or quoted, any principal successor stock
exchange or nationally recognized market where the Common Stock is listed
or included.
9.17 "Parity Stock" shall mean the shares of any class or
series of stock of the Company created on or after the Issue Date that, by
the terms of the Amended and Restated Certificate of Incorporation of the
Company or of the instrument by which the Board of Directors, acting
pursuant to authority granted in the Amended and Restated Certificate of
Incorporation, shall fix the relative rights, preferences and limitations
thereof shall, in the event that the stated dividends thereon are not paid
in full, be entitled to share ratably with the Series A Preferred Stock in
the payment of dividends, including accumulations, if any, in accordance
with the sums or other consideration which would be payable on such shares
if all dividends were declared and paid in full, or shall, in the event
that the amounts payable thereon in liquidation are not paid in full, be
entitled to share ratably with the Series A Preferred Stock in any other
distribution of assets in accordance with the sums or other consideration
which would be payable in such distribution if all sums payable were
discharged in full.
9.18 "Person" shall mean any individual, limited liability
company, corporation, general partnership, limited partnership,
limited liability partnership, joint venture, association,
joint-stock company, trust, unincorporated organization or government or
any agency or political subdivision thereof.
9.19 "Senior Stock" shall mean any capital stock of the
Company ranking senior (either as to dividends or upon liquidation,
dissolution or winding up) to the Series A Preferred Stock.
9.20 "Trading Day" shall mean a day on which Nasdaq is open
for the transaction of business or, if the Common Stock is not
listed or admitted to trading on any national securities exchange,
any day other than a Saturday, Sunday, or a day on which banking
institutions in the State of New York are authorized or obligated to
close.
10. OTHER PROVISIONS.
10.1 With respect to any notice to a holder of shares of Series
A Preferred Stock required to be provided hereunder, neither failure
to mail such notice, nor any defect therein or in the mailing
thereof, to any particular holder shall affect the sufficiency of
the notice or the validity of the proceedings referred to in such
notice with respect to the other holders or affect the legality or
validity of any distribution, rights, warrant, reclassification,
consolidation, merger, conveyance, transfer, dissolution,
liquidation or winding up, or the vote upon
any such action. Any notice which was mailed in the manner herein
provided shall be conclusively presumed to have been duly given
whether or not the holder receives the notice.
10.2 Shares of Series A Preferred Stock issued and reacquired
will be retired and canceled promptly after reacquisition thereof
and, upon compliance with the applicable requirements of Delaware
law, have the status of authorized but unissued shares of preferred
stock of the Company undesignated as to series and may with any and
all other authorized but unissued shares of preferred stock of the
Company be designated or redesignated and issued or reissued, as the
case may be, as part of any series of preferred stock of the
Corporation, except that any issuance or reissuance of shares of
Series A Preferred Stock must be in compliance with this Certificate
of Designations.
10.3 The shares of Series A Preferred Stock shall be issuable
in whole shares.
10.4 All notices periods referred to herein shall commence on
the date of the mailing of the applicable notice.
IN WITNESS WHEREOF, the Company has caused this certificate to be
signed and attested this ______ day of _________, 1998.
GRYPHON HOLDINGS INC.
By: ____________________________
Name:
Title:
Attest: _________________________
Name:
Title:
Exhibit B
REGISTRATION RIGHTS AGREEMENT
by and among
Gryphon Holdings Inc. and
Dearborn Risk Management, Inc.,
Dated as of ________ __, 1998
TABLE OF CONTENTS
Page ARTICLE 1.
. . . . . . . . . . . . . . . . . . . . . . . . . . .1
DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . .1
ARTICLE 2. . . . . . . . . . . . . . . . . . . . . . . . . . . .4
DEMAND REGISTRATION . . . . . . . . . . . . . . . . . . . .4
2.1 Request for Registration. . . . . . . . . . . . .4
2.2 Number of Registrations; Expenses . . . . . . . .5
2.3 Effective Registration Statement. . . . . . . . .5
2.4 Selection of Underwriters . . . . . . . . . . . .6
2.5 Pro Rata Participation in Requested Registration6
ARTICLE 3. . . . . . . . . . . . . . . . . . . . . . . . . . . .6
INCIDENTAL REGISTRATION . . . . . . . . . . . . . . . . . .6
3.1 Registration of Shares. . . . . . . . . . . . . .6
3.2 Expenses. . . . . . . . . . . . . . . . . . . . .7
3.3 Priority in Incidental Registrations. . . . . . .7
3.4 Selection of Underwriters . . . . . . . . . . . .7
ARTICLE 4. . . . . . . . . . . . . . . . . . . . . . . . . . . .8
REGISTRATION PROCEDURES . . . . . . . . . . . . . . . . . .8
4.1 Preparation of Filings. . . . . . . . . . . . . .8
4.2 Data From Holders of Registrable Securities . . 10
4.3 Discontinuance of Use of Prospectus . . . . . . 11
4.4 Underwriting Agreement. . . . . . . . . . . . . 11
ARTICLE 5. . . . . . . . . . . . . . . . . . . . . . . . . . . 12
INDEMNIFICATION . . . . . . . . . . . . . . . . . . . . . 12
5.1 Company's Indemnification . . . . . . . . . . . 12
5.2 Seller's Indemnification. . . . . . . . . . . . 13
5.3 Indemnification Procedure . . . . . . . . . . . 13
5.4 Contribution. . . . . . . . . . . . . . . . . . 14
5.5 Indemnification Payments. . . . . . . . . . . . 15
ARTICLE 6. . . . . . . . . . . . . . . . . . . . . . . . . . . 15
RULE 144. . . . . . . . . . . . . . . . . . . . . . . . . 15
ARTICLE 7. . . . . . . . . . . . . . . . . . . . . . . . . . . 15
MISCELLANEOUS PROVISIONS. . . . . . . . . . . . . . . . . 15
7.1 Amendments. . . . . . . . . . . . . . . . . . . 15
7.2 Successors. . . . . . . . . . . . . . . . . . . 15
7.3 Applicable Law. . . . . . . . . . . . . . . . . 16
7.4 Counterparts. . . . . . . . . . . . . . . . . . 16
7.5 Entire Agreement. . . . . . . . . . . . . . . . 16
7.6 Severability. . . . . . . . . . . . . . . . . . 16
7.7 Waiver and Consent. . . . . . . . . . . . . . . 16 7.8
Descriptive Headings. . . . . . . . . . . . . . 16 7.9 Nominees
for Beneficial Owners. . . . . . . . . 16
7.10 Notices . . . . . . . . . . . . . . . . . . . . 17
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement is entered into as of
this [___]th day of [_________], 1998 by and among Gryphon Holdings
Inc., a Delaware corporation (the "Company"), and Dearborn Risk Management,
Inc., a Delaware corporation ("Dearborn").
WHEREAS, the Company and Dearborn are parties to that certain
Stock Purchase Agreement, dated as of February 9, 1998 (the "Stock Purchase
Agreement"), pursuant to which, among other things, the Company has agreed
to purchase from Dearborn, and Dearborn has agreed to sell to the Company,
all of the issued and outstanding shares of capital stock of certain
subsidiaries of Dearborn;
WHEREAS, under the terms and subject to the conditions of the
Stock Purchase Agreement, in partial consideration for the purchase of the
Shares, the Company has agreed to issue to Dearborn 14,444 shares (the
"Preferred Shares") of Preferred Stock (as defined herein); and
WHEREAS, the execution and delivery of this Agreement by the
parties hereto is a condition precedent to the Closing of the transactions
contemplated by the Stock Purchase Agreement.
NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants and agreements set forth below, the parties hereto agree as
follows:
ARTICLE 1
DEFINITIONS
For purposes of this Agreement, the following terms shall have
the following meanings:
"Agreement" shall mean this Registration Rights Agreement as the
same may be amended or modified from time to time hereafter.
"Commission" shall mean the United States Securities and Exchange
Commission (or any other federal agency then administering the Securities
Act).
"Common Stock" shall mean the common stock, par value $.01 per
share, of the Company.
"Company" shall have the meaning set forth in the first paragraph
of this Agreement.
"Company Board" shall mean the Board of Directors of the Company.
"Company Party" shall have the meaning set forth in Section 5.2
of this Agreement.
"Dearborn" shall have the meaning set forth in the first
paragraph of this Agreement.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended, or any successor federal statute, and the rules and regulations of
the Commission thereunder, all as shall be in effect from time to time.
"Indemnified Party" shall have the meaning set forth in Section
5.3 of this Agreement.
"Indemnifying Party" shall have the meaning set forth in Section
5.3 of this Agreement.
"NASD" shall mean the National Association of Securities Dealers,
Inc.
"Nasdaq" shall mean The NASDAQ National Market or any successor
stock market.
"Other Holders" shall have the meaning set forth in Section 2.1
of this Agreement.
"Person" shall mean any individual, partnership (limited or
general), corporation, company, limited liability company, joint venture,
trust, association, unincorporated organization, government or department
or agency thereof or other entity.
"Preferred Shares" shall have the meaning set forth in the third
paragraph of this Agreement.
"Preferred Stock" shall mean the Series A 4.0% Cumulative
Convertible Preferred Stock of the Company.
"Registrable Securities" shall mean (i) the shares of Common
Stock into which the Preferred Shares have been or may be converted and
(ii) any other securities issued or issuable with respect to any shares of
Common Stock referred to in the foregoing subdivision by way of stock
dividend or split or in connection with a combination of shares,
recapitalization, merger, consolidation or other reorganization or
otherwise; provided, however, that such securities shall cease to be
Registrable Securities if and when (a) a registration statement with
respect to the disposition of such securities shall have become effective
under the Securities Act and such securities shall have been disposed of
pursuant to such effective registration statement, (b) such securities
shall have been otherwise transferred, if new certificates or other
evidences of ownership for such securities not bearing a legend restricting
further transfer and not subject to any stop transfer order or other
restrictions on transfer shall have been delivered by the Company, and
subsequent dispositions of such securities shall not require registration
or qualification of such securities under the Securities Act, or (c) such
securities shall have ceased to be outstanding.
"Registration Expenses" shall mean all expenses incident to the
Company's performance of or compliance with its obligations under this
Agreement, including, without limitation, all Commission, NASD, stock
exchange or Nasdaq registration and filing fees and expenses, fees and
expenses of compliance with applicable state securities or "blue sky" laws
(including, without limitation, reasonable fees and disbursements of
counsel for the underwriters in connection with "blue sky" qualifications
of the Registrable Securities), printing expenses, messenger and delivery
expenses, the fees and expenses incurred in connection with the listing of
securities to be registered on each securities exchange or national market
system on which such securities are listed, fees and disbursements of
counsel for the Company and all independent certified public accountants
(including the expenses of any annual audit and "cold comfort" letters
required by or incident to such performance and compliance), the fees and
disbursements of underwriters customarily paid by issuers or sellers of
securities (including the fees and expenses of any "qualified independent
underwriter" required by the NASD), the reasonable fees and
expenses of any special experts retained by the Company in connection with
such registration, and fees and expenses of other Persons retained by the
Company (but excluding any underwriting discounts or commissions or
transfer taxes, if any, attributable to the sale of Registrable Securities
by holders of such Registrable Securities other than the Company and any
fees and disbursements of counsel retained by such holders).
"Requesting Holders" shall have the meaning set forth in Section
2.1 of this Agreement.
"Securities Act" shall mean the Securities Act of 1933, as
amended, or any similar federal statute, and the rules and regulations of
the Commission thereunder, all as shall be in effect from time to time.
"Seller" shall have the meaning set forth in Section 5.1 of this
Agreement.
"Seller Party" shall have the meaning set forth in Section 5.1 of
this Agreement.
"Shareholder" shall mean any holder of Registrable Securities.
"Voting Securities" shall mean, at any time, the
aggregate of (i) the outstanding shares of Common Stock and
(ii) the shares of Common Stock issuable in respect of any other securities
of the Company outstanding at such time.
ARTICLE 2
DEMAND REGISTRATION
2.1 Request for Registration. At any time and from time to time
after the date which is six months from the date hereof, upon the written
request of one or more Shareholders holding in the aggregate Registrable
Securities representing not less than five percent of the Voting Securities
(such Shareholders being referred to as the "Requesting Holders") that the
Company effect the registration under the Securities Act of those
Registrable Securities held by such Requesting Holders which are specified
in such request (which request may specify an underwritten offering), the
Company shall within 10 days give written notice of such requested
registration to all other holders of Registrable Securities, if any (the
"Other Holders"). For a period of 15 days following delivery of such
notice, each Other Holder, if any, may request in writing that the Company
also register part or all of its Registrable Securities (the number of
Registrable Securities to be registered shall be specified in such request)
and the Company may decide to register for its own account or that of Other
Holders Common Stock and/or any other securities of the same type and class
as the Registrable Securities to be registered by the Requesting Holders.
Subject to the provisions of this Article 2, the Company shall use its best
efforts to cause the prompt registration under the Securities Act of (i)
the Registrable Securities that the Requesting Holders have requested the
Company to register and (ii) all other securities of the Company that the
Company has determined to register or that the Company has been requested
to register by the Other Holders, and in connection therewith, subject to
Section 2.3, shall prepare and file on such form as the Company in its
reasonable discretion shall determine is appropriate to effect such
registration under the Securities Act.
Notwithstanding the foregoing, the Company shall not be
required to file a registration statement in any of the following
situations:
(a) if the number of Registrable Securities to be registered
pursuant to the requests of Shareholders does not exceed two percent
of the Voting Securities;
(b) during any period of time (not to exceed 90 days with
respect to each request) when the Company is "in registration" with
respect to a public offering and, in the judgment of the managing
underwriter thereof, the requested filing would have an adverse effect
on the public offering;
(c) during any period of time (not to exceed 90 days with
respect to each request) when the Company is in possession of material
non-public information that it deems is in its best interest not to
disclose publicly; or
(d) during the 90 day period following the effectiveness of any
previous registration statement filed at the request of a Shareholder
or otherwise.
The right of the Company not to file a registration statement
pursuant to paragraphs (b) through (d) above may not be
exercised for more than an aggregate of 180 days in any twelve-month period.
2.2 Number of Registrations; Expenses. The Company
shall not be obligated to effect more than two registrations in the aggregate
pursuant to requests from Requesting Holders under
Section 2.1. The Company shall pay all Registration Expenses in
connection with each registration that the Company is obligated to
effect pursuant to this Section 2.2; provided, that, the Company
shall not be required to pay the Registration Expenses of any
registration proceeding begun pursuant to this Section 2.2, the
request of which has been subsequently withdrawn by the Requesting
Holders and the Other Holders, unless the holders of a majority of
the Registrable Securities agree that such request will constitute a
demand registration pursuant to this Section 2.2. In connection with
any registration pursuant to this Article 2, each Shareholder shall
pay (i) all underwriting discounts and commissions and transfer
taxes, if any, relating to the sale or disposition of such
Shareholder's Registrable Securities and (ii) its pro rata share
(based upon the number of Registrable Securities sold by all
Shareholders) of any fees and expenses of counsel to the Shareholders
incurred in connection with such registration.
2.3 Effective Registration Statement. A registration
requested pursuant to Section 2.1 shall not be deemed to have been
effected (i) unless the registration statement relating thereto has
become effective under the Securities Act, (ii) if after it has
become effective, such registration is interfered with by any stop
order, injunction or other order or requirement of the Commission or
other governmental agency or court for any reason or reasons not
primarily attributable to any Shareholder and has not promptly
thereafter become effective, or (iii) if the conditions to closing
specified in the underwriting agreement, if any, entered into in
connection with such registration are not satisfied or waived, other
than primarily by reason of a failure on the part of any Shareholder.
2.4 Selection of Underwriters. The underwriter or
underwriters for a requested registration pursuant to Section 2.1
shall be jointly selected by the Company and the holders holding at
least a majority of the Registrable Securities to be registered.
2.5 Pro Rata Participation in Requested Registration.
If a requested registration pursuant to this Article 2 involves an
underwritten offering and the managing underwriter advises the
Company in writing (with a copy to each holder of Registrable
Securities requesting registration) that, in its opinion, the number
of securities requested to be included in such registration
(including securities of the Company which are not Registrable
Securities) exceeds the number which can be sold in such offering
within a price range reasonably acceptable to the holders of a
majority (by number of shares) of the Registrable Securities
requested to be included in such registration, the Company will
include in such registration, to the extent of the number which the
Company is so advised can be sold in such offering, (i) first,
Registrable Securities requested to be included in such registration
by the Requesting Holders pro rata among such Requesting Holders on
the basis of the number of Registrable Securities which are requested
to be registered by them, (ii) second, Registrable Securities
requested to be included in such registration by Other Holders pro
rata among such Other Holders on the basis of the number of
Registrable Securities which are requested to be registered by them,
and (iii) third, other securities of the Company proposed by the
Company to be included in such registration for its own account or
for the account of any of its officers, directors or employees.
ARTICLE 3
INCIDENTAL REGISTRATION
3.1 Registration of Shares. If at any time after the date
hereof the Company proposes to register any of its securities under
the Securities Act (other than in respect of a registration on Form S-
4, S-8 or successor or similar forms or pursuant to Article 2), the
Company shall give prompt written notice to all registered holders of
Registrable Securities of its intention to do so and of such holder's
rights under this Article 3. Upon the written request of any such
holder provided to the Company within 20 days after the receipt of
any such notice (which request shall specify the Registrable
Securities intended to be disposed of by such holder), the Company
will include in such registration under the Securities Act all
Registrable Securities which the Company has been so requested to
register by the holder or holders thereof; provided, however, that
if, at any time after giving written notice of its intention to
register any securities and prior to the effective date of the
registration statement filed in connection with such registration,
the Company shall determine for any reason not to register or to
delay registration of such securities, the Company may, at its
election, give written notice of such determination to each holder of
Registrable Securities requesting registration and (i) in the case of
a determination not to register, shall be relieved of its obligation
to register any Registrable Securities in connection with such
registration (but not from any obligation of the Company to pay the
Registration Expenses in connection therewith), and (ii) in the case
of a determination to delay registering, shall be permitted to delay
registering any Registrable Securities for the same period as the
delay in registering such other securities. No registration effected
under this Section 3.1 shall relieve the Company of its
obligation to effect any registration upon request under Article 2.
3.2 Expenses. The Company shall pay all Registration
Expenses in connection with the registration of Registrable
Securities requested pursuant to Section 3.1. In connection with any
registration pursuant to this Article 3, each Shareholder shall pay
(i) all underwriting discounts and commissions and transfer taxes, if
any, relating to the sale or disposition of such
Shareholder's Registrable Securities and (ii) its pro rata share
(based upon the number of Registrable Securities sold by all
Shareholders) of any fees and expenses of counsel to the
Shareholders incurred in connection with such registration.
3.3 Priority in Incidental Registrations. If the
managing underwriter of any underwritten offering pursuant to this
Article 3 shall inform the Company in writing (with a copy to the
holder or holders of Registrable Securities requesting registration)
of its belief that the distribution of all or a specified number of
Registrable Securities requested to be included in such registration
would materially adversely affect such offering, then the Company
will include in such registration, to the extent of the number which
the Company is so advised can be sold in such offering, (i) first,
all securities proposed by the Company to be sold for its own
account, (ii) second, on a pro rata basis (A) such Registrable
Securities requested to be included in such registration by the
holders thereof, and (B) all securities proposed by the Company to
be sold for the account of any of its officers, directors or
employees, in each case on the basis of the number of securities
which are requested to be registered by them, and (iii) third, for
the account of any other Person.
3.4 Selection of Underwriters. If a registration
pursuant to Section 3.1 involves an underwritten offering, the
underwriter or underwriters thereof shall be selected by the
Company.
ARTICLE 4
REGISTRATION PROCEDURES
4.1 Preparation of Filings. If and whenever the Company
is required to use its best efforts to effect the registration of
any Registrable Securities under the Securities Act as provided in
Articles 2 and 3, the Company will promptly:
(a) prepare and, within 60 days after the end of the
period within which requests for registration may be given to
the Company, file with the Commission the requisite
registration statement to effect such registration and
thereafter use its best efforts to cause such registration
statement to become effective; provided, however, that the
Company may discontinue any registration of its securities
which are not Registrable Securities (and, under the
circumstances specified in Section 3.1, its securities which
are Registrable Securities) at any time prior to the effective
date of the registration statement relating thereto;
(b) prepare and file with the Commission such amendments,
post effective amendments and supplements to such registration
statement and the prospectus used in connection therewith as
may be necessary to keep such registration statement effective
and to comply with the provisions of the Securities Act with
respect to the disposition of all securities covered by such
registration statement for (i) in the case of a registration
under Article 2, 90 days or, subject to applicable law, such
shorter period as all Registrable Securities have been sold and
(ii) in the case of a registration under Article 3, such period
of time, subject to applicable law, as the Company determines;
(c) furnish to each seller of Registrable Securities
covered by such registration statement, upon written request,
such number of conformed copies of such registration statement
and of each such amendment and supplement thereto (in each case
including all exhibits), such number of copies of the
prospectus contained in such registration statement (including
each preliminary prospectus and any summary prospectus) and any
other prospectus filed under Rule 424 under the Securities Act,
in conformity with the requirements of the Securities Act, and
such other documents, as such seller may reasonably request;
(d) use its best efforts (i) to register or qualify all
Registrable Securities and other securities covered by such
registration statement under the securities or "blue sky" laws
of such States of the United States of America where an
exemption is not available and as the sellers of Registrable
Securities covered by such registration statement shall
reasonably request, (ii) to keep such registration or
qualification in effect for so long as such registration
statement remains in effect, and (iii) to take any other action
which may be reasonably necessary or advisable to enable such
sellers to consummate the disposition in such jurisdictions of
the securities to be sold by such sellers, except that the
Company shall not for any such purpose be required to qualify
generally to do business as a foreign corporation in any
jurisdiction wherein it would not but for the requirements of
this subsection (d) be obligated to be so qualified or to
consent to general service of process in any such jurisdiction;
(e) use its best efforts to cause all Registrable
Securities covered by such registration statement to be
registered with or approved by such other Federal or state
governmental agencies or authorities as may be necessary to
enable the sellers thereof to consummate the intended
disposition of such Registrable Securities;
(f) furnish, upon written request, to each seller of
Registrable Securities a signed counterpart, addressed to each
such seller, of
(i) an opinion of outside counsel for the Company,
and
(ii) a "comfort" letter signed by the independent
public accountants who have certified the Company's
financial statements included or incorporated by reference
in such registration statement,
covering substantially the same matters with respect to such
registration statement (and the prospectus included therein)
and, in the case of clause (i), the related offering, and, in
the case of the accountants' comfort letter, with respect to
events subsequent to the date of such financial statements, as
are customarily covered in opinions of issuer's counsel and in
accountants' comfort letters delivered to the underwriters in
underwritten public offerings of securities (and dated the
dates such opinions and comfort letters are customarily dated)
and, in the case of the accountants' comfort letter, such other
financial matters, and, in the case of the legal opinion, such
other legal matters, as the sellers holding at least a majority
of the Registrable Securities covered by such registration
statement or the underwriters may reasonably request;
(g) notify each seller of Registrable Securities covered
by such registration statement (i) at any time when a
prospectus relating thereto is required to be delivered under
the Securities Act, upon the Company's discovery that, or upon
the happening of any event as a result of which, the
prospectus included in such registration statement, as then in
effect, includes an untrue statement of a material fact or omits
to state any material fact required to be stated therein or
necessary to make the statements therein not misleading in the
light of the circumstances under which they were made, and at
the request of any such seller promptly prepare and furnish to
it a reasonable number of copies of a supplement to or an
amendment of such prospectus as may be necessary so that, as
thereafter delivered to the purchasers of such securities, such
prospectus shall not include an untrue statement of a material
fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein not
misleading in the light of the circumstances under which they
were made; and (ii) of the issuance by the Commission of any
stop order suspending the effectiveness of such registration
statement or the initiation or threatening of any proceedings
for that purpose, and shall use all reasonable efforts to obtain
as soon as possible the lifting of any stop order that might be
issued suspending the effectiveness of such registration
statement;
(h) otherwise use its best efforts to comply with all
applicable rules and regulations of the Commission, and make
available to its security holders, as soon as reasonably
practicable, an earnings statement covering the period of at
least 12 months, but not more than 18 months, beginning with the
first full calendar month after the effective date of such
registration statement, which earnings statement shall satisfy
the provisions of Section 11(a) of the Securities Act, and
promptly furnish to each such seller of Registrable Securities a
copy of any amendment or supplement to such registration
statement or prospectus;
(i) provide and cause to be maintained a transfer agent
and registrar for all Registrable Securities covered by such
registration statement from and after a date not later than the
effective date of such registration statement; and
(j) prior to the effective date of any applicable
registration statement, use its best efforts to list, subject to
official notice of issuance, all Registrable Securities covered
by such registration statement on any national securities
exchange (including NASDAQ) on which Registrable Securities
covered by such registration statement are then listed.
4.2 Data From Holders of Registrable Securities. Each
seller of Registrable Securities as to which any registration is
being effected shall furnish to the Company such information
regarding such seller and the distribution of such securities as the
Company may from time to time reasonably request. Prior to any
filing of a registration statement or any amendment thereto, or the
distribution of any supplement, the Company shall provide any holders
of Registrable Securities covered thereby reasonable notice of such
filing or preparation in order to provide such holders reasonable
time to comply with the requirements of the preceding sentence and
the Company shall thereafter provide such holders with a reasonable
opportunity to review and comment on any information pertaining to
such holders in the form to be included in the
registration statement, amendment thereto or prospectus supplement.
Upon the request of any such holder, the Company shall amend or
supplement the registration statement or prospectus, or modify the
applicable draft thereof, to the extent necessary to correct any
material misstatement of, or material omission from, the information
pertaining to such holder.
4.3 Discontinuance of Use of Prospectus. Each holder of
Registrable Securities agrees by acquisition of such Registrable
Securities that, upon receipt of any notice from the Company of the
happening of any event of the kind described in Section 4.1(g), such
holder will forthwith discontinue such holder's disposition of
Registrable Securities pursuant to the registration statement
relating to such Registrable Securities until such holder's receipt
of the copies of the supplemented or amended prospectus contemplated
by Section 4.1(g) and, if so directed by the Company,
will deliver to the Company (at the Company's expense) all copies,
other than permanent file copies, then in such holder's possession of
the prospectus relating to such Registrable Securities current at the
time of receipt of such notice. In the event that the Company shall
give any such notice, the period mentioned in Section 4.1(b) shall be
extended by the greater of (A) 60 days, or (B) the number of days
during the period from and including the date of the giving of such
notice pursuant to Section 4.1(g) to and including the date when each
holder of Registrable Securities covered by such registration
statement shall have received the copies of the supplemented or
amended prospectus contemplated by Section 4.1(g).
4.4 Underwriting Agreement. If requested by the
underwriters for any underwritten offering by holders of Registrable
Securities pursuant to a registration requested under Article 2, the
Company will enter into an underwriting agreement with such
underwriters for such offering; such agreement to be reasonably
satisfactory in form and substance to the Company, each such holder
and the underwriters, and to contain such representations and
warranties by the Company and such other terms as are generally
prevailing and customary in agreements of this type, including,
without limitation, customary indemnifications. The holders of the
Registrable Securities will cooperate with the Company in the
negotiation of the underwriting agreement. The holders of
Registrable Securities to be distributed by such underwriters shall
be parties to such underwriting agreement.
ARTICLE 5
INDEMNIFICATION
5.1 Company's Indemnification. In the event of the
registration, pursuant to the provisions of this Agreement, under the
Securities Act of any Registrable Securities, the Company agrees to
indemnify and hold harmless each Shareholder thereby offering such
Registrable Securities for sale (each, a "Seller") and its directors,
officers, partners, shareholders, agents and representatives, and
each Person who controls any such Seller within the meaning of the
Securities Act (each, a "Seller Party"), from and against any and all
losses, claims, damages or liabilities, joint or several, to which
such Seller Party may become subject under the Securities Act or
otherwise, insofar as such losses, claims, damages or liabilities,
arise out of or are based upon any untrue statement or alleged untrue
statement of any material fact contained in any registration
statement under which such Registrable Securities were registered
under the Securities Act, any preliminary prospectus or final
prospectus relating to such Registrable Securities, or any amendment
or supplement thereto, or arise out of or are based upon the omission
or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein in light
of the circumstances under which they were made not misleading, and
will reimburse each such Seller Party for any legal or other fees and
expenses reasonably incurred by such Seller Party in connection with
investigating or defending any such loss, claim, damage, liability or
action; provided, however, that the Company shall not
be liable in any such case to the extent that any such loss, claim,
damage, liability (or action in respect thereof) or expense arises
out of or is based upon an untrue statement or alleged untrue
statement or omission or alleged omission made in such registration
statement, such preliminary prospectus, such final prospectus or such
amendment or supplement thereto in reliance upon and in conformity
with written information furnished to the Company by any Seller Party
specifically and expressly for use in the preparation thereof; and
provided, further, that the Company shall not be liable to any Person
who participates as an underwriter in the offering or sale of
Registrable Securities or any other Person, if any, who controls such
underwriter within the meaning of the Securities Act, in any such
case to the extent that any such loss, claim, damage, liability (or
action in respect thereof) or expense arises out of such Person's
failure to send or give a copy of the final prospectus, as the same
may be then supplemented or amended, to the Person asserting an
untrue statement or alleged untrue statement or omission or alleged
omission at or prior to the written confirmation of the sale of
Registrable Securities to such Person if such statement or omission
was corrected in such final prospectus.
5.2 Seller's Indemnification. In the event of the
registration under the Securities Act of any Registrable Securities
pursuant to the provisions of this Agreement, each Seller agrees
severally, and not jointly, to indemnify and hold harmless the
Company, its directors, officers, agents, shareholders and
representatives, and each Person who controls the Company within the
meaning of the Securities Act (each, a "Company Party"), from and
against any losses, claims, damages or liabilities, joint or several,
to which such Company Party may become subject under the Securities
Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based
upon any untrue statement of any material fact contained in any
registration statement under which such Registrable Securities were
registered under the Securities Act, any preliminary prospectus or
final prospectus relating to such Registrable Securities, or any
amendment or supplement thereto, or arise out of or are based upon
the omission to state therein a material fact required to be stated
therein or necessary to make the statements therein in light of the
circumstances under which they were made not misleading, but only to
the extent that such untrue statement or omission was made therein in
reliance upon and in conformity with written information furnished to
the Company by such Seller expressly for use in connection with the
preparation thereof, and will reimburse such Company Party for any
legal or any other fees and expenses reasonably incurred by them in
connection with investigating or defending any such loss, claim,
damage, liability or action; provided, however, that that liability
of each Seller under this Article 5 shall be limited to the amount of
proceeds received by such Seller from the sale of Registrable
Securities.
5.3 Indemnification Procedure. Promptly after receipt by
a Person or entity entitled to indemnification under either Section
5.1 or Section 5.2 (an "Indemnified Party") of service of process or
written notice of the commencement of any action or claim relating to
any registration statement filed under the Securities Act pursuant to
this Agreement, such Indemnified Party will, if a claim for
indemnification hereunder in respect thereof is to be made against
any other party hereto (an "Indemnifying Party"), give written notice
to such Indemnifying Party of the commencement of such action or
claim, provided that the failure to notify the Indemnifying Party
will not relieve it from any liability which it may have to any
Indemnified Party, except to the extent that the Indemnifying Party
is actually prejudiced by the
Indemnified Party's failure to give timely notice. In case any such
action is brought against an Indemnified Party, and it notifies an
Indemnifying Party of the commencement thereof, the Indemnifying
Party will be entitled (at its own expense and subject to
considerations of attorney-client privilege) to participate in and,
to the extent that it may wish, jointly with any other Indemnifying
Party, to assume at its expense the defense of such action and in
connection therewith appoint counsel for the Indemnified Party, which
appointment shall be subject to approval by the Indemnified Party
(such approval not to be unreasonably withheld) and, after notice
from the Indemnifying Party to such Indemnified Party of its election
so to assume the defense thereof, the Indemnifying Party will not be
liable to such Indemnified Party for any fees or expenses of counsel
subsequently incurred by such Indemnified Party in connection with
the defense thereof other than the reasonable costs of investigation;
provided, however, that the Indemnifying Party shall bear the
reasonable fees and expenses of one separate firm of counsel to the
Indemnified Party if the use of
one counsel would present such counsel with a conflict of interest.
No Indemnifying Party shall be liable for any settlement of any
action or proceeding effected without its written consent (which
consent shall not be unreasonably withheld). No Indemnifying Party
shall, without the consent of the Indemnified Party (which consent
shall not be unreasonably withheld), consent to entry of any judgment
or enter into any settlement which does not include as an
unconditional term thereof the giving by the claimant or plaintiff to
such Indemnified Party of a release from all liability in respect to
such claim or litigation.
5.4 Contribution. In order to provide for just and
equitable contribution in circumstances in which the indemnity
agreement provided for in this Article 5 is for any reason held to be
unenforceable although applicable in accordance with its terms, the
Indemnified Party and the Indemnifying Party under Section 5.1 or 5.2
shall contribute to the aggregate losses, claims, damages,
liabilities and expenses of the nature contemplated by such indemnity
agreement incurred by such parties in such proportion as shall be
appropriate to reflect the relative fault of the Company and the
prospective sellers of Registrable Securities covered by the
registration statement which resulted in such loss, claim, damage or
liability, or action in respect thereof, with respect to the
statements or omissions which resulted in such loss, claim, damage or
liability, or action in respect thereof, as well as any other
relevant equitable considerations. No Person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any Person who
was not guilty of such fraudulent misrepresentation. Such prospective
sellers' obligations to contribute as provided in this Section 5.4
are several in such proportion as is appropriate to reflect the
relative fault of each of the prospective sellers, as well as any
other relevant equitable consideration, and not joint. In addition,
no Person shall be obligated to contribute hereunder any amounts in
payment for any settlement of any action or claim effected without
such Person's consent, which consent shall not be unreasonably
withheld.
5.5 Indemnification Payments. The indemnification
required by this Article 5 shall be made by periodic payments of the
amount thereof during the course of the investigation or defense, as
and when bills are received or expense, loss, damage or liability is
incurred.
ARTICLE 6
RULE 144
The Company covenants that it will use its best efforts to
file the reports required to be filed by it under the Securities Act
and the Exchange Act (or, if the Company is not required to file
such reports, it will, upon the request of any Shareholder, make
publicly available other information), and it will take such further
action as any Shareholder may reasonably request, all to the extent
required from time to time to enable such Shareholder to sell
Registrable Securities without registration under the Securities Act
within the limitation of the exemptions provided by (i) Rule 144
under the Securities Act, as such rule may be amended from time to
time, or (ii) any similar rule or regulation hereafter adopted by
the Commission. Upon the request of any Shareholder, the Company
will deliver to such Shareholder a written statement as to whether
it has complied with such requirements.
ARTICLE 7
MISCELLANEOUS PROVISIONS
7.1 Amendments. This Agreement may be amended by the
Company and the Company may take any action herein prohibited, or
omit to perform any act herein required to be performed by it, only
if the Company shall have obtained the written consent to such
amendment, action or omission to act of the holders of at least a
majority of the Registrable Securities. Each holder of any
Registrable Securities at the time or thereafter outstanding shall
be bound by any consent authorized by this Section 7.1, whether or
not such holder shall have actually consented to the amendment,
action or omission to act.
7.2 Successors. Subject to the terms and conditions
hereof, this Agreement shall inure to the benefit of and be binding
upon the parties hereto and their respective permitted successors,
assigns and transferees; provided that any such successor, assign
and transferee shall be deemed a party hereto for all purposes and
shall agree in writing to all of the terms hereof to the same extent
as its predecessor, assignor or transferor.
7.3 Applicable Law. The Parties hereto agree that this
Agreement shall be construed, enforced and governed by the Laws of
the State of New York without regard to the Principles of the Laws
of Conflicts.
7.4 Counterparts. This Agreement may be executed in any
number of counterparts, each of which when so executed shall be
deemed to be an original and all of which together shall constitute
one and the same instrument.
7.5 Entire Agreement. This Agreement constitutes the
entire Agreement and understanding of the parties hereto in respect
of the subject matter contained herein, and there are no
restrictions, promises, representations, warranties, covenants or
undertakings with respect of the subject matter hereof, other than
those expressly set forth or referred to herein. This Agreement
supersedes all prior agreements and understandings among the parties
hereto with respect to the subject matter hereof. This Agreement
may only be modified or amended pursuant to Section 7.1 by an
instrument in writing making express reference to this Agreement,
expressly stating that it is an amendment to this Agreement and
signed by or on behalf of the appropriate parties hereto.
7.6 Severability. The invalidity, illegality or
unenforceability of one or more of the provisions of this Agreement
in any jurisdiction shall not effect the validity, legality, or
enforceability of the remainder of this Agreement in such
jurisdiction or the validity, legality or enforceability of this
Agreement, including any such provision, in any other jurisdiction;
it being intended that all rights and obligations hereunder shall be
enforceable to the fullest extent permitted by law.
7.7 Waiver and Consent. No waiver by any party hereto of
the breach of any provision of this Agreement shall operate or be
construed as a waiver of any preceding or succeeding breach, whether
of like or different nature, or shall be effective unless in a
writing signed by the party granting such waiver. The failure by
any party to exercise any right or privilege hereunder shall not be
deemed a waiver of such party's rights to exercise the same at any
subsequent time or times.
7.8 Descriptive Headings. The descriptive headings of
the several articles, sections and paragraphs of this Agreement are
inserted for reference only and shall not limit or otherwise affect
the meaning hereof.
7.9 Nominees for Beneficial Owners. In the event that
any Registrable Securities are held by a nominee for the beneficial
owner thereof, the beneficial owner thereof may, at its election in
writing delivered to the Company, be treated as the holder of such
Registrable Securities for purposes of any request or other action
by any holder or holders of Registrable Securities pursuant to this
Agreement or any determination of any number or percentage of shares
of Registrable Securities held by any holder or holders of
Registrable Securities contemplated by this Agreement. If the
beneficial owner of any Registrable Securities so elects, the
Company may require assurances reasonably satisfactory to it of such
owner's beneficial ownership of such Registrable Securities.
7.10 Notices. Unless otherwise provided herein, any
notice, request, instruction or other document to be given hereunder
by any party to the other parties shall be in writing and delivered
in person or by courier, telegraphed, telexed or by facsimile
transmission, in each case to be effective on the date of receipt,
or mailed by certified mail, postage prepaid, return receipt
requested (such mailed notice to be effective on the date such
receipt is acknowledged), as follows:
If to the Company, to:
Gryphon Holdings Inc.
30 Wall Street
New York, New York 10005
Attention: Robert M. Coffee, Esq.
Facsimile: (212) 825-0200
With a copy to:
LeBoeuf, Lamb, Greene & MacRae, L.L.P.
125 W. 55th Street
New York, New York 10019
Attention: Peter R. O'Flinn
Facsimile: 212-424-8500
If to Dearborn, to:
c/o Castle Harlan, Inc.
150 East 58th Street
37th Floor
New York, New York 10155
Attention: Robert Wages
Jeffrey Siegel
Facsimile: (212) 207-8042
With a copy to:
Schulte Roth & Zabel LLP
900 Third Avenue
New York, New York 10022
Attention: Marc Weingarten, Esq.
Michael R. Littenberg, Esq.
Facsimile: 212-593-5955
Any party may change the address to which these notices
are to be given by providing all of the parties notice in the
manner set forth herein.
IN WITNESS WHEREOF, the parties have executed this
Agreement as of the date first written.
GRYPHON HOLDINGS INC.
By:
Name:
Title:
DEARBORN RISK MANAGEMENT, INC.
By:
Name:
Title:
Exhibit C
SHAREHOLDERS' AGREEMENT
by and among
Gryphon Holdings Inc.,
Dearborn Risk Management, Inc.
and
Castle Harlan Partners II, L.P.
Dated as of ________ __, 1998
TABLE OF CONTENTS
Page
ARTICLE 1. . . . . . . . . . . . . . . . . . . . . . . . . . . .1
DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . .1
ARTICLE 2. . . . . . . . . . . . . . . . . . . . . . . . . . . .4
TRANSFER OF SHARES. . . . . . . . . . . . . . . . . . . . .4
2.1 Legends . . . . . . . . . . . . . . . . . . . . .4
2.2 Transfers - Compliance With Agreement . . . . . .4
2.3 Shareholder Transfers - Acceptance of
Agreement. . . . . . . . . . . . . . . . . . . . . . .4
ARTICLE 3. . . . . . . . . . . . . . . . . . . . . . . . . . . .5
VOTING AND BOARD REPRESENTATION . . . . . . . . . . . . . .5
3.1 Voting. . . . . . . . . . . . . . . . . . . . . .5
3.2 Director Designated by CHII . . . . . . . . . . .6
3.3 Resignation of Nominee. . . . . . . . . . . . . .7
3.4 CHII Representatives. . . . . . . . . . . . . . .7
ARTICLE 4. . . . . . . . . . . . . . . . . . . . . . . . . . . .8
OTHER AGREEMENTS AND COVENANTS. . . . . . . . . . . . . . .8
ARTICLE 5. . . . . . . . . . . . . . . . . . . . . . . . . . . 10
MISCELLANEOUS PROVISIONS. . . . . . . . . . . . . . . . . 10
5.1 Amendments. . . . . . . . . . . . . . . . . . . 10
5.2 Term. . . . . . . . . . . . . . . . . . . . . . 10
5.3 Obligations Upon Termination. . . . . . . . . . 11
5.4 Successors. . . . . . . . . . . . . . . . . . . 11
5.5 APPLICABLE LAW. . . . . . . . . . . . . . . . . 11
5.6 Counterparts. . . . . . . . . . . . . . . . . . 11
5.7 Entire Agreement. . . . . . . . . . . . . . . . 11
5.8 Severability. . . . . . . . . . . . . . . . . . 12
5.9 Waiver and Consent. . . . . . . . . . . . . . . 12
5.10 Notices . . . . . . . . . . . . . . . . . . . . 12
SHAREHOLDERS' AGREEMENT
This Shareholders' Agreement is entered into as of this ___
day of _________, 1998 by and among Gryphon Holdings Inc., a
Delaware corporation (the "Company"), Dearborn Risk Management,
Inc., a Delaware corporation ("Dearborn"), and Castle Harlan
Partners II, L.P., a Delaware limited partnership ("CHII").
WHEREAS, the Company and Dearborn are parties to that certain
Stock Purchase Agreement, dated as of February 9, 1998 (the "Stock
Purchase Agreement"), pursuant to which the Company has agreed to
purchase from Dearborn, and Dearborn has agreed to sell to the
Company, all of the issued and outstanding shares of capital stock
(the "Shares") of certain subsidiaries of Dearborn;
WHEREAS, under the terms and subject to the conditions of the
Stock Purchase Agreement, in partial consideration for the
purchase of the Shares, the Company has agreed to issue to
Dearborn shares of Preferred Stock (as defined herein) subject to
the Escrow Agreement (as defined herein); and
WHEREAS, the parties hereto desire to set forth in this
Agreement certain rights and responsibilities of the Company,
Dearborn and CHII.
NOW, THEREFORE, in consideration of the foregoing and the
mutual covenants and agreements set forth below, the parties
hereto agree as follows:
ARTICLE 1
DEFINITIONS
For purposes of this Agreement, the following terms shall
have the following meanings:
"Affiliate" shall mean any Person that, directly or
indirectly, through one or more intermediaries controls, is
controlled by or is under common control with the Person
specified.
"Agreement" shall mean this Shareholders' Agreement, as
amended from time to time hereafter.
"Certificate of Designation" shall have the meaning set
forth in the definition of "Preferred Stock" in this Article I.
"Change of Control" shall mean (i) when (A) the Company
consolidates with or merges into any other person or directly or
indirectly conveys, transfers or leases all or substantially all
of its assets to any person in one transaction or a series of
related transactions, or (B) any person merges into the Company,
in either event pursuant to a transaction in which any Voting
Securities of the Company that are outstanding immediately prior
to the effectiveness thereof are reclassified or changed into or
exchanged for cash, securities or other property if, immediately
after giving effect to such transaction, any "person" or "group"
(as such terms are defined in Rule 13(d) under the Exchange Act)
has beneficial ownership (as such term is defined in Section 4.5),
directly or indirectly, of more than 50% of the outstanding Voting
Securities of the surviving entity, in the case of any such merger
or consolidation, or the transferee, in the case of any such
conveyance, transfer or lease; (ii) when any "person" or "group"
has beneficial ownership, directly or indirectly, of more than 50%
of the then outstanding Voting Securities of the Company; or (iii)
when, during any period of 12 consecutive months after the date
hereof, individuals who at the beginning of any such 12-month
period constituted the Company Board (together with any new
directors whose election by such Company Board or whose nomination
for election by the stockholders of the Company was approved by a
vote of a majority of the directors then still in office who were
either directors at the beginning of such period or whose election
or nomination for election was previously so approved) cease for
any reason to constitute a majority of the Company Board then in
office.
"CHII" shall have the meaning set forth in the first
paragraph of this Agreement.
"Commission" shall mean the United States Securities and
Exchange Commission.
"Common Stock" shall mean the common stock, par value
$.01 per share, of the Company.
"Company" shall have the meaning set forth in the first
paragraph of this Agreement.
"Company Board" shall mean the Board of Directors of the
Company.
"Dearborn" shall have the meaning set forth in the first
paragraph of this Agreement.
"Escrow Agreement" shall mean the Escrow Agreement,
dated as of ___, 1998, among the Company, Dearborn and the Escrow
Agent identified therein.
"Exchange Act" shall mean the Securities Exchange Act of
1934, as amended.
"Person" shall mean any individual, partnership (limited
or general), corporation, company, limited liability company,
joint venture, trust, association, unincorporated organization,
government or department or agency thereof or other entity.
"Preferred Shares" shall mean the shares of Preferred
Stock issued by the Company to Dearborn pursuant to the terms of
the Stock Purchase Agreement.
"Preferred Stock" shall mean the Series A 4.0%
Cumulative Convertible Preferred Stock of the Company having the
rights, designations, preferences, limitations and qualifications
set forth in the Certificate of Designation (the "Certificate of
Designation") attached as Exhibit A hereto.
"Registration Rights Agreement" shall mean the
Registration Rights Agreement, dated as of the date hereof, by and
between the Company, Dearborn and CHII.
"Restricted Shares" shall mean the Preferred Shares and
any shares of Common Stock issued upon the conversion of such
Preferred Shares in accordance with the Certificate of
Designation; provided, however, that such securities shall cease
to be Restricted Shares if and when (a) a registration statement
with respect to the disposition of such securities shall have
become effective under the Securities Act and such securities
shall have been disposed of pursuant to such effective
registration statement in accordance with the terms hereof,
(b) such securities shall have been otherwise transferred in
accordance with the terms hereof, if new certificates or other
evidences of ownership for such securities not bearing a legend
restricting further transfer and not subject to any stop transfer
order or other restrictions on transfer shall have been delivered
by the Company, and subsequent dispositions of such securities
shall not require registration or qualification of such securities
under the Securities Act, or (c) such securities shall have ceased
to be outstanding.
"Securities Act" shall mean the Securities Act of 1933,
as amended.
"Shareholder" shall mean each of CHII and Dearborn.
"Shares" shall have the meaning set forth in the
recitals hereto.
"Stock Purchase Agreement" shall have the meaning set
forth in the recitals hereto.
"Subsidiary" shall mean each entity as to which the
Company, directly or indirectly, owns or has the power to vote,
or to exercise a controlling influence with respect to, 50% or
more of the Voting Securities of such entity.
"Third Party" shall mean, as to any Person, any Person
other than an Affiliate of such Person.
"Transfer" shall mean any direct or indirect transfer
of any right, title or interest in and to any of the Restricted
Shares to any Person, whether in the form of a sale, assignment,
gift, bequest, exchange of property, conveyance, pledge,
encumbrance or any other form of disposition.
"Voting Securities" shall mean any securities of a
Person entitled to vote generally for the election of directors
or securities convertible into such securities.
ARTICLE II
TRANSFER OF SHARES
2.1 Legends. (a) Each certificate evidencing Restricted
Shares shall bear the following legend:
"THE SECURITIES EVIDENCED HEREBY HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR ANY STATE SECURITIES OR BLUE SKY LAWS AND
MAY ONLY BE TRANSFERRED IN COMPLIANCE WITH SUCH LAWS."
(b) For so long as Dearborn or CHII, as the case may
be, owns any Restricted Shares, the certificates representing
such Restricted Shares shall bear the following legend:
"THE SECURITIES EVIDENCED HEREBY ARE
SUBJECT TO THE TERMS OF THAT SHAREHOLDERS' AGREEMENT,
DATED AS OF _______ __, 1998, BY AND AMONG GRYPHON
HOLDINGS INC., DEARBORN RISK MANAGEMENT, INC. AND CASTLE
HARLAN PARTNERS II, L.P. A COPY OF THE SHAREHOLDERS'
AGREEMENT IS ON FILE AT THE OFFICE OF GRYPHON HOLDINGS
INC. AND IS AVAILABLE UPON REQUEST. THE SHAREHOLDERS'
AGREEMENT PROVIDES, AMONG OTHER THINGS, FOR CERTAIN
RESTRICTIONS ON THE SALE, TRANSFER, PLEDGE,
HYPOTHECATION OR OTHER DISPOSITION OF, AND THE VOTING
OF, THE SECURITIES REPRESENTED BY THIS CERTIFICATE."
2.2 Transfers - Compliance With Agreement. During the
term of this Agreement, neither Dearborn nor CHII shall, directly
or indirectly, Transfer any of the Restricted Shares, except as
permitted by, and in compliance with, the terms and conditions of
this Agreement and in accordance with any applicable laws. Any
purported Transfer not in compliance with the terms and conditions
of this Agreement shall be void and of no force and effect.
2.3 Shareholder Transfers - Acceptance of Agreement.
During the six months immediately following the date hereof,
neither Dearborn nor CHII shall have the right to Transfer
Restricted Shares to any Person unless such Transfer is
(i) approved by the Company Board, (ii) pursuant to an offering of
securities in which Dearborn or CHII, as the case may be, has
exercised incidental registration rights pursuant to the terms of
the Registration Rights Agreement, or (iii) effected pursuant to
the terms of the Escrow Agreement. Following such six month
period, transfers shall only be restricted to the extent required
by applicable law. Notwithstanding the foregoing, Dearborn shall
have the right at any time to Transfer Restricted Shares to any of
its stockholders as set forth on Schedule ___, and such
stockholders shall have the right to transfer any shares of Common
Stock issued upon the conversion of the Preferred Shares in
accordance with the Certificate of Designation to any other Person
that immediately following such transfer would own beneficially
less than 5% of the Voting Securities of the Company and, after
the use of all reasonable efforts by Dearborn to determine, in its
reasonable judgment, that such Person has no intention of becoming
the beneficial owner of more than 5% of the Voting Securities of
the Company; provided that (i) no such transfer may be made except
(A) pursuant to an effective registration statement under the
Securities Act and all applicable state securities or "blue sky"
laws, or (B) if the Company has been furnished with an opinion of
counsel for the holder, which opinion and counsel shall be
reasonably satisfactory to the Company, to the effect that such
transfer is exempt from the provisions of the Securities Act and
all applicable state securities or "blue sky" laws; and (ii) other
than pursuant to a public offering of shares of the Company or as
approved by the Company Board, any such transferee shall execute
and become a party to this Agreement, as it may be amended from
time to time.
ARTICLE III
VOTING AND BOARD REPRESENTATION
3.1 Voting. During the term of this Agreement, each
Shareholder agrees that:
(a) Such Shareholder shall be present, in person or by
proxy, at all meetings of stockholders of the Company which such
party is entitled to attend so that all Voting Securities of the
Company owned by such party may be counted for the purpose of
determining the presence of a quorum at such meetings.
(b) Such Shareholder shall vote all Voting Securities
of the Company owned by such party (i) for the election of all
directors included in the Company's slate of directors at each
stockholders' meeting of the Company and (ii) as recommended by
the Company Board with respect to any stockholder vote on a
merger, consolidation, transfer of all or substantially all of the
assets of the Company or other business combination transaction.
3.2 Director Designated by CHII. During the term of this
Agreement:
(a) As soon as practicable after the date hereof, the
Company Board shall elect John Castle as a director of the Company
to serve until the immediately succeeding annual meeting of
stockholders of the Company. In the event of a vacancy caused by
the disqualification, removal, resignation or other cessation of
service of John Castle or any other nominee to the Company Board
designated by CHII (each of John Castle or such other
nominee being at times referred to herein as a "Nominee"), subject
to Section 3.2(d), the Company Board shall elect, at the next
regular meeting of the Company Board following such
disqualification, removal, resignation or other cessation of
service, as a director of the Company (to serve until the
Company's immediately succeeding annual meeting of stockholders) a
replacement Nominee. During such time as John Castle or any such
Nominee shall serve as a director of the Company, the Company
shall cause to be maintained policies of directors' and officers'
liability insurance for the benefit of John Castle or such
Nominee, as the case may be, providing coverage of at least the
same amount on the same terms and conditions as the policies
maintained by the Company with respect to all other directors
serving on the Company Board. The Company shall provide John
Castle or such Nominee, as the case may be, with notice of any
material change in the coverage under such policies relating to
them as soon as is practicable.
(b) At the first annual meeting of stockholders of the
Company following the date hereof, John Castle or, subject to
Section 3.2(d), another Nominee shall be recommended by the
Company Board to stockholders of the Company for election as a
Class I Director with an initial term expiring at the annual
meeting of stockholders of the Company to be held in the year
2000. At each subsequent annual meeting of stockholders of the
Company at which (i) the term of John Castle or any other Nominee
is to expire or (ii) a vacancy caused by the disqualification,
removal, resignation or other cessation of service of John Castle
or such other Nominee from the Company Board is to be filled,
subject to Section 3.2(d), the Company Board shall recommend a
Nominee to stockholders of the Company for election as a Class I
Director and shall use all reasonable efforts to cause the
election of such Nominee to the Company Board, including
soliciting proxies in favor of the election of such Nominee.
(c) CHII shall provide notice in writing at least 90
days prior to any annual meeting of stockholders of the Company at
which a Nominee is to be recommended for election indicating the
name of the Nominee and all information required by Regulation 14A
and Schedule 14A under the Exchange Act with respect to such
Nominee; provided that the Company shall have delivered a written
request to CHII for such information not later than 120 days prior
to such annual meeting.
(d) In the event the Company is advised in writing by
its outside counsel, which counsel shall not have been determined
in the reasonable judgment of CHII to be unacceptable, that a
proposed Nominee would not be qualified under the Company's
Certificate of Incorporation or By-Laws, as such Certificate of
Incorporation or By-Laws shall from time to time be amended, or
any applicable statutory or regulatory standards to serve as a
director of the Company, or if the Company Board or the Governance
Committee of the Company Board for any reason does not approve a
proposed Nominee (it being understood by the parties that John
Castle has been approved as a proposed Nominee), CHII agrees to
withdraw such proposed Nominee and nominate a replacement therefor
(which replacement would be subject to the requirements of this
Section 3.2(d)). With respect to any Nominee to be elected at an
annual meeting of stockholders of the Company, any such
disapproval by the Company Board or the Governance Committee of
the Company Board must be made no later than one month after CHII
first informs the Company of the identity of the proposed Nominee;
provided, however, that the Company shall in all cases notify CHII
of any such objection sufficiently in advance of the date on which
proxy materials are mailed by the Company in connection with such
election of
directors to enable CHII to proposed an alternate Nominee pursuant
to and in accordance with the terms of this Agreement.
(e) During such time as a Nominee shall serve as a
director on the Company Board, such Nominee shall also serve on
the Compensation and Governance Committees of the Company Board,
and shall be appointed by the Company Board to serve on such
Committees.
3.3 Resignation of Nominee. Immediately upon termination of
this Agreement pursuant to and in accordance with Section 5.2
hereof, CHII shall cause the Nominee then serving on the Company
Board to resign from the Company Board upon the request of the
Company Board.
3.4 CHII Representatives. During the term of this
Agreement, CHII shall have the right to designate two
representatives (the "CHII Representatives") who may attend each
regular or special meeting of the Company Board (and, at the
Company Board's sole discretion, meetings of the committees of the
Company Board) and who, subject to the execution and delivery to
the Company by each CHII Representative of a confidentiality
agreement in form and substance reasonably satisfactory to the
Company, shall be furnished with all information generally
provided to the Company's directors; provided, however, that the
CHII Representatives shall have the right to attend any portion of
such meeting or to receive any portion of such information only to
the extent that such attendance or receipt of information would
not compromise any attorney-client or similar privilege. The CHII
Representatives shall have rights of observation and shall have no
voting rights with respect to any matter considered by the Company
Board or any committee thereof. The initial CHII Representatives
shall be Jeffrey Siegel and Robert Wages. The Company shall have
the right to object to any proposed replacement CHII
Representative or to remove any CHII Representative at any time as
determined by the Company in its reasonable judgment, provided
that CHII is given at least 15 days notice thereof in writing and
a reasonable opportunity to respond.
ARTICLE IV
OTHER AGREEMENTS AND COVENANTS
4.1 Each Shareholder agrees that neither it nor any of its
Affiliates (regardless of whether such person is an Affiliate on
the date hereof) will, directly or indirectly, alone or in concert
with others, except as set forth in Section 4.2 or as permitted by
the Company Board, acquire, offer to acquire or agree to acquire,
by purchase or otherwise (including, without limitation, pursuant
to the terms of the Stock Purchase Agreement), beneficial
ownership of any Voting Securities of the Company if as a result
of such acquisition such Shareholder and its Affiliates would
beneficially own more than 10% in the aggregate of the Voting
Securities of the Company (the "Stock Limitation") or seek to
advise, encourage or influence any Person with respect to the
acquisition of any Voting Securities of the Company.
4.2 No violation of Section 4.1 shall be deemed to occur as
a result of the acquisition by a Shareholder, or any Affiliate of
a Shareholder, of beneficial ownership of Voting Securities of the
Company in excess of the Stock Limitation as the result of (a) the
acquisition of Voting Securities by the Shareholder pursuant to
the terms of the Stock Purchase Agreement, including without
limitation as a result of the acquisition or conversion
of Preferred Stock, (b) any stock repurchase or similar
transaction undertaken by the Company that shall cause the
Shareholder's or such Affiliate's percentage ownership in the
Voting Securities of the Company to exceed the Stock Limitation
even though the number of shares of Voting Securities of the
Company beneficially owned by the Shareholder and its Affiliates
remains unchanged; or (c) any acquisition of voting securities of
another corporation by the Shareholder or such Affiliate which
results in the Shareholder or such Affiliate indirectly becoming
the beneficial owner of additional Voting Securities of the
Company. In the case of clauses (a) and (c), the Shareholder or
such Affiliate shall vote such Voting Securities of the Company
contemplated by such clauses in the manner set forth in
Section 3.1. Notwithstanding any other provision of this
paragraph, the Shareholder or such Affiliate shall divest the
Voting Securities of the Company in excess of the Stock Limitation
within 90 days of acquiring such excess or control, as the case
may be; provided that, to the extent that the Stock Limitation
shall be exceeded as a result of a transaction contemplated by
clause (a) or (c) of the first sentence of this paragraph, such
Shareholder or Affiliate shall only be required to divest up to
that number of Shares in excess of the Stock Limitation as shall
have been acquired other than pursuant to the Stock Purchase
Agreement, taking into account any increase in percentage of share
ownership permitted by clause (b) above; provided further, that,
to the extent that the Stock Limitation shall be exceeded as a
result of a transaction contemplated by clause (b) of the first
sentence of this paragraph, the requirements of this sentence
shall not apply.
4.3 Each Shareholder agrees neither such Shareholder nor
any of its Affiliates will, directly or indirectly, alone or in
concert with others, except with respect to clauses (b) and (g)
(ii) pursuant to the terms of the Preferred Shares, (a) make, or
in any way participate in, any "solicitation" of "proxies", or
become a "participant" in any "election contest" (as such terms
are used in Regulation 14A promulgated by the Commission pursuant
to Section 14 of the Exchange Act), relating to the Voting
Securities of the Company (except as to any proxies that may be
given pursuant to Section 3.1); (b) call, or in any way
participate in a call for, any special meeting of stockholders of
the Company (or take any action with respect to acting by written
consent of stockholders); (c) request, or take any action to
obtain or retain, any list of holders of any securities of the
Company; (d) initiate or propose any stockholder proposal or
participate in the making of, or solicit stockholders for the
approval of, one or more stockholder proposals relating to the
Company; (e) deposit any Voting Securities of the Company in a
voting trust or subject them to any voting agreement or
arrangement, except as provided herein; (f) form, join or in any
way participate in a "group" (as defined in Rule 13(d) under the
Exchange Act) with respect to any Voting Securities of the
Company, or any securities the ownership of which would make the
owner thereof a beneficial owner of Voting Securities of the
Company; (g) otherwise act to control or influence the Company or
the management, board of directors, policies or affairs of the
Company including, without limitation, other than in such
Shareholder's or Affiliate's capacity as a director on the Company
Board, (i) making any offer or proposal to acquire the Company,
its securities or assets or soliciting or proposing to effect or
negotiate with any Person any form of business combination or
similar transaction with, a change in control of, or any
restructuring, recapitalization or other extraordinary transaction
involving, the Company, its securities or assets, other than
pursuant to the terms of the Stock Purchase Agreement, (ii)
seeking removal of any directors or a change in the
composition or size of the Company Board, or (iii) making any
request to amend or waive any provision of this Agreement;
(h) disclose any intent, purpose, plan or proposal with respect to
the Company, its board of directors, management, policies or
affairs or its securities or assets or this Agreement that is
inconsistent with this Agreement, including any intent, purpose,
plan or proposal that is conditioned on, or would require waiver,
amendment, nullification or invalidation of, any provision of this
Agreement, or take any action that could require the Company to
make any public disclosure relating to any such intent, purpose,
plan, proposal or condition other than in such Shareholder's or
Affiliate's capacity as a director on the Company Board, to the
extent the Company Board consents to such action; or (i) assist,
advise, encourage any person with respect to, or seek to do, any
of the foregoing.
4.4 The Shareholder will use its best efforts to cause
each of its Affiliates to observe the foregoing provisions of this
Article 4 as if they were bound thereby.
4.5 For purposes of this Agreement, a Person shall have
"beneficial ownership" of any securities as to which such Person
may be deemed the beneficial owner pursuant to Rule 13d-3 under
the Exchange Act as such rule is in effect as of the date hereof
and shall include, without limitation, any securities such Person
has the right to become the beneficial owner of (whether or not
such right is immediately exercisable) pursuant to any agreement,
arrangement or understanding or upon the exercise of any exchange
right, conversion right, option, warrant or other right.
ARTICLE V
MISCELLANEOUS PROVISIONS
5.1 Amendments. This Agreement may only be modified or
amended by an instrument in writing making express reference to
this Agreement, expressly stating that it is an amendment to this
Agreement and signed by or on behalf of each of the parties
hereto.
5.2 Term. (a) Subject to Section 5.3, this Agreement
shall automatically terminate without any further action by either
party hereto at such time as the number of shares of Common Stock
into which the Preferred Shares held directly by CHII or any
entity controlled by CHII or over which CHII or any such entity
may exercise voting rights are convertible pursuant to the
Certificate of Designation is either less than 371,250 (which
number shall be adjusted to give effect to all reclassifications,
splits, subdivisions, combinations and other similar actions taken
with respect to the Common Stock) or represents less than two
percent of the aggregate number of then outstanding shares of
Common Stock (assuming the issuance of all Common Stock issuable
upon conversion of all of the outstanding Preferred Shares).
(b) Subject to Section 5.3, this Agreement shall also
terminate upon (i) the mutual written consent of the parties
hereto, (ii) the liquidation or dissolution of the Company, (iii)
a Change of Control, (iv) written resignation from the Company
Board of the director designated by CHII, together with notice
from CHII that this Agreement is being terminated, or (v) failure
by CHII to designate a Nominee to serve on the Company Board,
provided that CHII shall have a period of 180 days within which to
designate any such Nominee.
5.3 Obligations Upon Termination. In the event that this
Agreement shall be terminated pursuant to Section 5.2, all
obligations of the parties hereto under this Agreement shall
terminate and there shall be no liability of any party hereto to
any other party, except that the provisions of Article IV shall
survive any termination of this Agreement pursuant to Section
5.2(a) or clause (iv) of Section 5.2(b) for a period of 12 months
following such termination.
5.4 Successors. Subject to the terms and conditions
hereof, this Agreement shall inure to the benefit of and be
binding upon the parties hereto and their respective successors,
legal representatives and heirs, provided that (t) no Shareholder
shall have the right or power to assign or delegate any right or
obligation hereunder other than as permitted by Section 2.3, and
any such purported assignment or delegation shall be void, and
(ii) the rights and obligations of (A) CHII under Sections 3.2
through 3.4 shall apply with respect to CHII only and shall not
inure to the benefit of or be binding upon any successor, legal
representative or heir of CHII, and (B) Article IV shall not apply
to any transferee of the initial Shareholder other than CHII.
5.5 APPLICABLE LAW. THE PARTIES HERETO AGREE THAT THIS
AGREEMENT SHALL BE CONSTRUED, ENFORCED AND GOVERNED BY THE LAWS OF
THE STATE OF NEW YORK WITHOUT REGARD TO THE PRINCIPLES OF THE LAWS
OF CONFLICTS THEREOF.
5.6 Counterparts. This Agreement may be executed in
counterparts, each of which when so executed shall be deemed to be
an original and all of which shall together constitute one and the
same instrument.
5.7 Entire Agreement. This Agreement constitutes the
entire Agreement and understanding of the parties hereto in
respect of the subject matter contained herein, and there are no
restrictions, promises, representations, warranties, covenants or
undertakings with respect of the subject matter hereof, other than
those expressly set forth or referred to herein. This Agreement
supersedes all prior agreements and understandings between the
parties hereto with respect to the subject matter hereof.
5.8 Severability. The invalidity, illegality or
unenforceability of one or more of the provisions of this
Agreement in any jurisdiction shall not effect the validity,
legality, or enforceability of the remainder of this Agreement in
such jurisdiction or the validity, legality or enforceability of
this Agreement, including any such provision, in any other
jurisdiction; it being intended that all rights and obligations
hereunder shall be enforceable to the fullest extent permitted by
law.
5.9 Waiver and Consent. No waiver by any party hereto of
the breach of any provision of this Agreement shall operate or be
construed as a waiver of any preceding or succeeding breach,
whether of like or different nature, or shall be effective unless
in a writing signed by the party granting such waiver. The
failure by any party to exercise any right or privilege hereunder
shall not be deemed a waiver of such party's rights to exercise
the same at any subsequent time or times.
5.10 Notices. Unless otherwise provided herein, any
notice, request, instruction or other document to be given
hereunder by any party to the other shall be in writing and
delivered in person or by courier, telegraphed, telexed or by
facsimile transmission, in each case to be effective on the date
of receipt, or mailed by certified mail, postage prepaid, return
receipt requested (such mailed notice to be effective on the date
such receipt is acknowledged), as follows:
If to the Company, to:
Gryphon Holdings Inc.
30 Wall Street
New York, New York 10005
Attention: Robert M. Coffee, Esq.
Facsimile: 212-825-0200
With a copy to:
LeBoeuf, Lamb, Greene & MacRae, L.L.P.
125 West 55th Street
New York, New York 10019
Attention: Peter R. O'Flinn
Facsimile: 212-424-8500
If to Dearborn or CHII, to:
Dearborn Risk Management, Inc. 55
West Monroe Street
Suite 2700
Chicago, Illinois 60603
Attention: Lonnie Steffen
Facsimile: 312-357-3525
With a copy to:
c/o Castle Harlan, Inc.
150 East 58th Street
37th Floor
New York, New York 10155
Attention: Robert Wages
Jeffrey Siegel
Facsimile: 212-207-8042
and
Schulte Roth & Zabel LLP
900 Third Avenue
New York, New York 10022
Attention: Marc Weingarten, Esq.
Michael R. Littenberg, Esq.
Facsimile: 212-593-5955
Any party may change the address to which these notices are
to be given by providing all of the parties notice in the manner
set forth herein.
IN WITNESS WHEREOF, the parties have executed this Agreement
as of the date first written above.
GRYPHON HOLDINGS INC.
By:
Name:
Title:
DEARBORN RISK MANAGEMENT, INC.
By:
Name:
Title:
CASTLE HARLAN PARTNERS II, L.P.
By: Castle Harlan Associates, L.P., as
general partner
By: Castle Harlan GP, Inc.,
its general partner
By:
Name:
Title:
Exhibit D
ESCROW AGREEMENT
THIS ESCROW AGREEMENT (this "Escrow Agreement") is
entered into as of this [___] day of [_________], 1998 by and among
Gryphon Holdings Inc., a Delaware corporation (the "Company"),
Dearborn Risk Management, Inc., a Delaware corporation
("Dearborn"), and [_________] (the "Escrow Agent").
WHEREAS, the Company and Dearborn are parties to that
certain Stock Purchase Agreement, dated as of February 9, 1998 (the
"Stock Purchase Agreement"), pursuant to which the Company has
agreed to purchase from Dearborn, and Dearborn has agreed to sell
to the Company, all of the issued and outstanding shares of capital
stock of certain subsidiaries of Dearborn. Capitalized terms not
otherwise defined in this Escrow Agreement have the meanings given
to them in the Stock Purchase Agreement, a copy of which is
attached as Annex A hereto;
WHEREAS, under the terms and subject to the conditions of
the Stock Purchase Agreement, in partial consideration for the
purchase of the Shares, the Company has agreed to issue to Dearborn
14,444 shares of Preferred Stock (the "Preferred Shares");
WHEREAS, the execution and delivery of this Escrow
Agreement by the parties hereto is a condition precedent to the
Closing of the transactions contemplated by the Stock Purchase
Agreement;
WHEREAS, the Stock Purchase Agreement requires that
certificates representing that number of Preferred Shares
convertible on the Closing Date into shares of Common Stock having
an initial aggregate value (based on the book value of Buyer as set
forth in the audited consolidated balance sheet of Buyer as of
December 31, 1997 prepared in accordance with GAAP) of $9,000,000
(the "Indemnity Escrow Shares") shall be held and distributed by
the Escrow Agent pursuant to the terms and provisions of this
Escrow Agreement; and
WHEREAS, the Stock Purchase Agreement also requires that
certificates representing that number of Preferred Shares equal to
the lesser of (i) the aggregate number of Preferred Shares less the
aggregate number of Indemnity Escrow Shares and (ii) that number of
Preferred Shares convertible on the Closing Date into shares of
Common Stock having an aggregate value (based on a per share Common
Stock price of $16.50) of $3,000,000 (the "Section 2.6 Shares",
and together with the Indemnity Escrow
Shares, the "Escrow Shares") shall be held and distributed by the
Escrow Agent pursuant to the terms and provisions of this Escrow
Agreement; and
WHEREAS, all Escrow Shares shall be issued in the name of
the Escrow Agent and shall be held by the Escrow Agent for the
benefit of the Company, subject to the rights of Dearborn as
provided in the Stock Purchase Agreement and this Escrow Agreement;
NOW, THEREFORE, in consideration of the foregoing
recitals and the representations, warranties and covenants herein
set forth, the parties hereto agree as follows:
1. Deposit of Shares and Cash.
(a) Simultaneously with the execution of this Escrow
Agreement, the certificates representing the Escrow Shares have
been delivered to the Escrow Agent and the Escrow Agent hereby
acknowledges receipt of the same. The Escrow Agent has no
obligation to determine the validity or genuineness of the
certificates representing the Escrow Shares. The Escrow Agent
shall hold and distribute the Escrow Shares (accompanied by
customary instruments of transfer duly executed by the Escrow Agent
("Stock Powers")) in accordance with the terms and provisions of
this Escrow Agreement.
(b) Dearborn may elect, at any time in its sole
discretion, to substitute cash for all or part of the Indemnity
Escrow Shares, including through a sale of Indemnity Escrow Shares
by Dearborn. If Dearborn so elects, Dearborn and the Company shall
jointly deliver to the Escrow Agent a written notice stating the
amount of cash to be delivered by Dearborn to the Escrow Agent and
the number of Indemnity Escrow Shares, determined pursuant to
Section 2.8(b)(ii) of the Stock Purchase Agreement, to be delivered
by the Escrow Agent to Dearborn. Upon receipt by the Escrow Agent
of the amount of cash set forth in such notice, the Escrow Agent
shall deliver to Dearborn the number of Indemnity Escrow Shares set
forth in such notice (together with any required Stock Powers).
(c) The Escrow Agent shall from time to time invest and
reinvest any funds received by it pursuant to the terms of this
Escrow Agreement only in money market funds that only invest in
short-term United States debt obligations, and the Escrow Agent
shall have the power to sell or liquidate the foregoing investments
whenever the Escrow Agent shall be required to
release any funds pursuant to the terms of this Escrow Agreement.
All funds received by the Escrow Agent shall be held in an interest-
bearing account until invested as provided in the preceding
sentence.
(d) The Escrow Agent may register any securities
obtained and held in accordance with Section 1(c) in its own name
or in the name of a nominee or in bearer form and may deposit any
securities or other property in a depositary or a clearing company.
(e) The Escrow Agent shall not be responsible for any
loss resulting from any investment or liquidation in accordance
with the terms of this Escrow Agreement.
2. Termination. This Escrow Agreement shall
terminate on the later of (i) 18 months from the Closing Date, and
(ii) if, on or prior to the date referred to in clause (i) of this
Section 2, a Bankruptcy Event (as defined below) has occurred, then
24 months from the Closing Date, unless, in case of either clause
(i) or (ii), the Company has a claim with respect to any Book Value
Deficiency (as defined below), the Company has asserted a claim for
indemnification in the case of Sections 9.2(i), (ii) or (iv) or the
Company in good faith
believes it may be entitled to indemnification in the case of
Section 9.2(iii) of the Stock Purchase Agreement (in each case, an
"Indemnity Claim"), in which case this Escrow Agreement shall
terminate on the date on which the Escrow Agent disburses funds in
respect of the last Indemnity Claim or on which the last Indemnity
Claim is settled, dismissed or abandoned; provided, however, that
in the event an Insolvency Event has occurred and the Company, as a
result of the occurrence of such Insolvency Event, is stayed,
enjoined or otherwise prevented from bringing a claim against
Seller under Sections 2.6 or 9.2 of the Stock Purchase Agreement,
this Agreement shall not terminate until such date on which the
Escrow Agent disburses funds with respect to such claim, or such
claim is otherwise dismissed, settled or abandoned. The actual
date on which this Escrow Agreement
terminates shall be referred to herein as the "Termination Date."
On the Termination Date, and after making the last payment, if any,
to the Company pursuant to the terms hereof, the Escrow Agent shall
deliver to Dearborn any remaining Escrow Shares and any other funds
held by the Escrow Agent pursuant to the terms of this Escrow
Agreement. The provisions contained in Sections 7(g), 7(j) and 8
shall survive any termination of this Escrow Agreement. For
purposes of this Escrow Agreement, a "Bankruptcy Event" shall occur
at such time as (A) the Company, Dearborn or any of their
respective Affiliates receives notice from the Insurance
Commissioner of the Commonwealth of Pennsylvania (the
"Commissioner") indicating that the Commissioner intends to
commence a "delinquency proceeding" (as that term is defined in
Section 40-11-103 of Chapter 11 of the Pennsylvania Insurance Code)
with respect to Homestead or (B) the Commissioner takes any action
commencing a "delinquency proceeding" with respect to Homestead.
For purposes of this Escrow Agreement, "Insolvency Event" shall
mean, with respect to Dearborn, the occurrence of any of the
following: (a) Dearborn shall commence any case, proceeding or
other action (i) under any existing or future law of any
jurisdiction, domestic or foreign, relating to bankruptcy,
insolvency, receivership, reorganization or relief of debtors,
seeking to have an order for relief entered with respect to it, or
seeking to adjudicate it a bankrupt or insolvent, or seeking
reorganization, arrangement, adjustment, winding-up, liquidation,
dissolution, composition or other relief with respect to it or its
debts, or (ii) seeking appointment of a receiver, trustee,
custodian or other similar official for it or for all or any
substantial part of its assets, or Dearborn shall make a general
assignment for the benefit of its creditors; or (b) there shall be
commenced against Dearborn any case, proceeding or other action of
a nature referred to in clause (a) above; or (c) there shall be
commenced against Dearborn any case, proceeding or other action
seeking issuance of a warrant of attachment, execution, distraint
or similar process against all or any substantial part of its
assets which results in the entry of an order for any such relief;
or (d) Dearborn shall take any action in furtherance of, or
indicating its consent to, approval of, or acquiescence in, any of
the acts set forth in clause (a), (b), or (c) above.
3. Book Value Deficiency Claims. Not later than five
Business Days after the final determination of the Book Value of
First Re pursuant to Section 2.6 of the Stock Purchase Agreement,
the Company and Dearborn shall jointly deliver to the Escrow Agent
a written notice (the "Notice") specifying the Book Value of First
Re. If the Notice confirms the Book Value of First Re to be not
less than $35 million or provides that Dearborn has satisfied in
full in cash the Book Value Deficiency, subject to Section 5
hereof, then the Notice shall also contain instructions directing
the Escrow Agent to, and the Escrow Agent shall, promptly deliver
or cause to be delivered to Dearborn the certificate representing
all of the Section 2.6 Shares (together with the Stock Powers).
If, however, the Notice states that the Book Value of First Re is
less than $35 million (the amount of such deficiency being
referred to herein as the "Book Value Deficiency") and that
Dearborn has not satisfied in full in cash such deficiency, then
the Notice shall also contain instructions directing the Escrow
Agent to, and the Escrow Agent shall, deliver or cause to be
delivered (a) to the third party or parties designated in the
Notice (or in any future written instructions provided to the
Escrow Agent by the Company), a certificate or certificates
representing that number (the "Company 2.6 Shares") of Section
2.6 Shares (together with Stock
Powers) convertible into shares of the Common Stock having an
aggregate value (based on a per share Common Stock price of
$16.50) equal to the Book Value Deficiency plus the estimated
Transaction Costs (as defined below) set forth in the Notice less
the amount of cash, if any, paid by Dearborn to the Company to
partially satisfy the Book Value Deficiency and (b) to Dearborn,
subject to Section 5 hereof, a certificate (with any remaining
Stock Powers) representing the remaining Section 2.6 Shares, if
any. The Escrow Agent shall have no obligation to make any of the
calculations required by the previous sentence, and the Notice
shall specifically set forth the number of Section 2.6 Shares, if
any, to be delivered to Dearborn and the number of the Company 2.6
Shares. If the Notice does not provide the third party or parties
to which the certificate representing the Company 2.6 Shares shall
be delivered, the Escrow Agent shall hold the Company 2.6 Shares
until instructed in writing by the Company to deliver the
certificate (together with any Stock Powers) representing such
shares to the third party or parties named in such instructions.
The proceeds of any sale of shares of Common Stock which are
issued upon conversion of the Company 2.6 Shares shall be
delivered directly to, and shall become the sole and exclusive
property of, the Company to the extent that such proceeds equal
the sum of the Book Value Deficiency and the Transaction Costs
incurred by the Company. Any proceeds exceeding such amount shall
be promptly delivered by the Company to Dearborn. "Transaction
Costs" shall mean the amount of the customary and reasonable costs
and expenses (including, without limitation, any customary
discounts, fees and commissions of brokers and underwriters and
reasonable attorneys' fees and expenses) which are actually
incurred in connection with the disposition of the shares of
Common Stock which are issued upon conversion of the Company 2.6
Shares.
4. Indemnity Claims.
(a) If, at any time prior to the Termination Date, the
Company or any of its Affiliates (including, without limitation,
any of the Transferred Companies) has an Indemnity Claim, then the
Company shall give joint written notice of such Indemnity Claim (a
"Notice of Claim") to the Escrow Agent (with a copy thereof also
delivered to Dearborn) stating the amount, if known, of such
claim, the date by which Dearborn must respond to such
claim (as contemplated by the next sentence) and the consequences
of failing to so respond to such claim. If Dearborn objects to
such claim, it must give written notice of such objection to the
Escrow Agent within 30 days from the receipt of the Notice of
Claim. If no objection to such Indemnity Claim is received by the
Escrow Agent within such 30 day period, the claim shall be deemed
allowed. If Dearborn objects to a portion of an Indemnity Claim,
then in its notice delivered to the Escrow Agent, Dearborn shall
specifically set forth such fact, and the portion of the Indemnity
Claim to which Dearborn does not object shall be deemed allowed.
In connection with any Indemnity Claim, the Company shall provide
Dearborn and its authorized agents and representatives complete
access, upon reasonable notice and during normal business hours,
to the books and records of the Company and the Transferred
Companies to the extent required by Dearborn in order to
investigate the basis for the claim for which the Notice of Claim
relates and to defend or contest the same; provided, however, that
such investigation by Dearborn shall be conducted in such a manner
as not to interfere unreasonably with the business and operations
of the Company and its Subsidiaries.
(b) The Escrow Agent shall not take any action with
respect to the portion of any Indemnity Claim disputed by Dearborn
pursuant to Section 4(a) until jointly directed in writing by the
Company and Dearborn that such portion has been settled, dismissed
or abandoned or a final non-appealable order or judgment has been
entered by a court of competent jurisdiction with respect to such
portion.
(c) Upon allowance of a claim pursuant to Section 4(a),
(b) or (d), as evidenced by joint written instructions of the
Company and Dearborn, the Escrow Agent shall promptly deliver to
the Company the amount of cash, if any, held by the Escrow Agent
equal to the amount of the allowed claim (the "Claim Amount"). If
the amount of cash held by the Escrow Agent under this Escrow
Agreement is less than the Claim Amount, Dearborn shall promptly,
and in any event within 30 days (except to the extent otherwise
contemplated by the Stock Purchase Agreement), arrange, subject to
Section 2.8(d) of the Stock Purchase Agreement, for a sale (a
"Sale") of the number of shares of Common Stock having an
aggregate sale price equal to the Claim Amount (including any
interest that is, or will be, due in respect thereof) plus the
estimated Transaction Costs (as defined below) less the amount of
cash, if any, received by the Company from the Escrow Agent in
respect of such allowed claim. Once the Sale is arranged,
Dearborn and the Company shall instruct the Escrow Agent in
writing (the "Sale Notice") to deliver to Buyer or Buyer's
transfer agent for conversion that number of Indemnity Escrow
Shares, or, subject to Section 5, Retained Section 2.6 Shares,
convertible into the number of shares of Common Stock required to
be sold pursuant to the immediately preceding sentence, which
number of Indemnity Escrow Shares shall be set forth in the Sale
Notice, and to deliver the certificate representing shares of
Common Stock received upon such conversion to the third party or
parties specified in the Sale Notice. The proceeds from the Sale
shall be delivered by the specified third party or parties
directly to the Escrow Agent. Promptly after receiving such
proceeds, in accordance with Section 2.8 of the Stock Purchase
Agreement, the Escrow Agent shall deliver to the Company the
portion of such proceeds equal to the Claim Amount (including any
interest that is due in respect thereof) less the amount of cash,
if any, previously received by the Company pursuant to this Escrow
Agreement in respect of such Indemnity Claim. The Escrow Agent
shall have no obligation to calculate the amount to be delivered
to the Company pursuant to the
immediately preceding sentence, and such amount shall be
specifically set forth in the Sale Notice. Promptly after such
Sale, the Company and Dearborn shall give joint written notice (the
"Notice of Expenses") to the Escrow Agent setting forth the
aggregate Transaction Costs incurred in connection with the Sale.
Promptly after receipt of the Notice of Expenses, the Escrow Agent
shall deliver (i) first, to the Company, that portion of the
remaining proceeds from the Sale equal to the Transaction Costs
incurred by the Company and (ii) then, to Dearborn, that portion of
the remaining proceeds from the Sale equal to the Transaction Costs
incurred by Dearborn, which amounts shall be set forth in the
Notice of Expenses. Any proceeds from the Sale not distributed to
the Company or Dearborn in accordance with the foregoing shall be
retained and held by the Escrow Agent pursuant to the terms of this
Escrow Agreement. "Transaction Costs" shall mean the amount of the
customary and reasonable costs and expenses (including, without
limitation, any customary discounts, fees and commissions of
brokers and underwriters and reasonable attorneys' fees and
expenses) which are actually incurred in connection with the
disposition of shares of Common Stock which are issued upon
conversion of any Indemnity Escrow Shares or Retained Section 2.6
Shares pursuant to the terms of the Stock Purchase Agreement and
this Escrow Agreement.
(d) Notwithstanding anything in this Agreement to the
contrary, if the Escrow Agent receives from the Company and
Dearborn a joint written notice that the sum of the Book Value
Deficiency and the Transaction Costs incurred in connection with
the sale of the shares of Common Stock issued upon conversion of
the Buyer 2.6 Shares exceeds the aggregate value (based on a per
share Common Stock price of $16.50) of the shares of Common Stock
issuable upon conversion of the Section 2.6 Shares, then the amount
of such excess shall be deemed an allowed claim for purposes of
this Section 4.
(e) Notwithstanding anything in this Escrow Agreement to
the contrary, Dearborn may, in its sole discretion, pay any
reasonable out-of-pocket costs (including without limitation,
reasonable attorneys' fees and expenses) incurred by Dearborn in
connection with defending or settling any claim brought by a third
party against the Company for which the Company is entitled to
indemnification under Section 9.2 of the Stock Purchase Agreement
out of the proceeds of the sale of Indemnity Escrow Shares. Any
such sale shall be effected in accordance with joint written
instructions to the Escrow Agent from the Company and Dearborn.
5. Release of Escrow Shares. (a) Subject to Section
5(c) hereof, if, on or prior to the date on which any Section 2.6
Shares are to be delivered by the Escrow Agent to Dearborn in
accordance with Section 3, the Company has submitted to the Escrow
Agent Indemnity Claims ("Pre-Book Value Indemnity Claims") under
Section 4 in an aggregate amount in excess of $3 million (including
any estimated or actual Transaction Costs related thereto), then
the number of Section 2.6 Shares to be delivered to Dearborn as set
forth in the Notice delivered to the Escrow Agent pursuant to
Section 3 shall be reduced by that number of Section 2.6 Shares
(the "Retained Section 2.6 Shares") convertible into the number of
shares of Common Stock having an aggregate value (based on a per
share Common Stock Price of $16.50) equal to the difference between
the aggregate amount of Pre-Book Value Indemnity Claims (including
any estimated or actual Transaction Costs related thereto) and $3
million. The Retained Section 2.6 Shares shall be sold, upon
joint written instructions provided to the Escrow Agent by the
Company and Dearborn pursuant to Section 4(c), to satisfy Pre-Book
Value
Indemnity Claims to the extent that the aggregate amount of such claims
(including any estimated or actual Transaction Costs related thereto)
exceeds $3 million. To the extent that any Retained Section 2.6 Shares
remain after the satisfaction in full of all Pre-Book Value Indemnity
Claims, the Company and Dearborn shall provide joint written notice to the
Escrow Agent to promptly deliver such remaining Retained Section 2.6 Shares
to Dearborn.
(b) Subject to Section 5(c) hereof, promptly, and in any event
within five Business Days, after March 31, 1999, the Company and Dearborn
shall provide joint written instructions to the Escrow Agent to deliver to
Dearborn that number of Indemnity Escrow Shares (which number shall be set
forth in the joint written instructions) convertible into shares of Common
Stock having an aggregate value (based on the book value of Buyer as set
forth in the audited consolidated balance sheet of Buyer as of December 31,
1997 prepared in accordance with GAAP) equal to (i) $3 million less (ii) an
aggregate amount equal to (A) the aggregate amount distributed pursuant to
Section 4(c) to the Company by the Escrow Agent on or prior to March 31,
1999 in respect of any allowed claim (including the Transaction Costs
related thereto) and (B) the aggregate amount of Indemnity Claims which
have been submitted to the Escrow Agent on or prior to such date and which
either remain, as of such date, unresolved or are resolved but with respect
to which no payment has been made by the Escrow Agent to the Company as of
such date.
(c) If a Bankruptcy Event has occurred prior to the date on
which any Escrow Shares are to be delivered by the Escrow Agent to Dearborn
pursuant to this Escrow Agreement, then Dearborn and the Company shall
provide joint written notice to the Escrow Agent withdrawing any
authorization to release such shares to Dearborn, and the Escrow Agent
shall only release Escrow Shares to Dearborn upon termination of this
Escrow Agreement in accordance with Section 2. Any Escrow Shares held by
the Escrow Agent pursuant to this Section 5(c) shall be used solely to
satisfy claims arising out of the Bankruptcy Event.
6. Voting of Escrow Shares. The Escrow Agent agrees
that it shall vote the Escrow Shares in accordance with instructions
provided to it in writing from time to time by Dearborn.
7. Escrow Agent.
(a) The duties of the Escrow Agent hereunder shall be entirely
administrative and not discretionary. The Escrow Agent shall act only in
accordance with written instructions received by it as provided in this
Escrow Agreement.
(b) As to any legal questions arising in connection with the
administration of this Escrow Agreement, the Escrow Agent may rely upon the
opinions given to it by its counsel and shall be free of liability for
acting in good faith reliance on such opinions.
(c) The Escrow Agent may, as a condition to the delivery of
certificates representing the Escrow Shares or monies, as provided herein,
require from the recipient a receipt therefor.
(d) The parties agree that the Escrow Agent will receive, as
compensation for its services, an initial fee and
annual fees payable in advance, as well as reasonable out-of-pocket
expenses as set forth on Attachment I hereto. Such
amounts shall be paid by Dearborn until termination of this
Escrow Agreement or resignation of the Escrow Agent; provided,
that, Dearborn may, in its sole discretion, elect to pay any such
annual fees or out-of-pocket expenses out of the proceeds of any
sale of Escrow Shares pursuant to this Escrow Agreement.
(e) The relationship between the Escrow Agent, on the
one hand, and Dearborn and the Company, on the other hand, shall be
solely and exclusively governed by this Escrow Agreement, and
neither Dearborn nor the Company may assert any claims whatsoever
against the Escrow Agent based upon the Stock Purchase Agreement.
However, nothing contained in this Escrow Agreement shall
jeopardize the rights and obligations between Dearborn and the
Company in the Stock Purchase Agreement or in any other agreement.
(f) Anything to the contrary herein notwithstanding, the
Escrow Agent shall have the right to delay any payment or delivery
due hereunder if necessary to allow the Escrow Agent to verify the
relevant documents and to perform any checks or controls in
connection with such documents. The Escrow Agent shall perform any
such verifications, checks or controls as promptly as practical.
(g) Except as otherwise expressly provided herein, the
Escrow Agent is authorized to execute instructions and take other
actions pursuant to this Escrow Agreement in accordance with its
customary processing practices for similar customers and, in
accordance with such practices the Escrow Agent may retain agents,
including its own subsidiaries or affiliates, to perform certain of
such functions. In the event of any loss to the other parties
hereto by reason of the gross negligence or willful misconduct of
the Escrow Agent, the Escrow Agent shall be liable to the other
parties only to the extent of the other party's direct damages
without reference to any special conditions or circumstances. All
collection and receipt of securities and all delivery of securities
under this Escrow Agreement shall be made by the Escrow Agent as
agent, at the risk of the other parties hereto with respect to
their actions or omissions and those of any person other than the
Escrow Agent or its agents. In no event shall the Escrow Agent be
responsible or liable for any loss due to forces beyond its
control, including, but not limited to, acts of God, flood, fire,
nuclear fusion, fission or radiation, war (declared or undeclared),
terrorism, insurrection, revolution, riot, strikes or work
stoppages for any reason, embargo, government action, including any
laws, ordinances, regulations or the like which restrict or
prohibit the providing of the services contemplated by this Escrow
Agreement, inability to obtain equipment or communications
facilities, or the failure of equipment or interruption of
communications facilities, and other causes whether or not of the
same class or kind as specifically named above. In the event that
the Escrow Agent is unable substantially to perform for any of the
reasons described in the immediately preceding sentence, it shall
so notify the other parties hereto as soon as reasonably
practicable.
(h) Unless expressly referred to herein, the Escrow Agent shall
not be bound by, or have any responsibility with respect to, any
other agreement or contract between the Company and Dearborn
(whether or not the Escrow Agent has knowledge thereof); provided,
however, that the provisions contained in Sections 2.6, 2.7,
2.8 and 2.9 of the Stock Purchase Agreement,
to the extent such provisions relate to the Escrow Shares and the
sale of shares of Common Stock issued upon conversion of any Escrow
Shares, are hereby incorporated by reference herein and made a part
hereof.
(i) It is understood and agreed that should any dispute
arise with respect to the payment and/or ownership or right of
possession of the Escrow Shares other than as provided for in
Sections 3, 4 and 5 hereof, the Escrow Agent is authorized and
directed to retain in its possession, without liability to anyone,
all or any part of the Escrow Shares until such dispute shall have
been settled either by mutual agreement by the parties concerned or
by the final non-appealable order, decree or judgment of any court
or other tribunal of competent jurisdiction in the United States of
America, but the Escrow Agent shall be under no duty whatsoever to
institute or defend any such proceedings.
(j) The Escrow Agent is authorized to rely and act upon
all instructions given or purported to be given in conformity with
the terms and provisions of this Escrow Agreement in writing by one
or more officers, employees or agents of the Company or Dearborn
(i) authorized by or in accordance with a corporate resolution
delivered to the Escrow Agent or
(ii) described as authorized in a certificate delivered to the
Escrow Agent by the appropriate Secretary or an Assistant Secretary
or similar officer (each such officer, employee or agent or
combination of officers, employees and agents authorized pursuant
to clause (i) or described pursuant to clause (ii) of this Section
7(j) is hereinafter referred to as an "Authorized Officer"). The
Escrow Agent may also rely and act upon instructions when bearing
or purporting to bear the signature or facsimile signature of any
of the individuals designated by an Authorized Officer regardless
of by whom or by what means the actual or purported facsimile
signature or signatures thereon may have been affixed thereto if
such facsimile signature or signatures resemble the facsimile
specimen or specimens from time to time furnished to the Escrow
Agent by any of such Authorized
Officers, Secretary or an Assistant Secretary or similar officer.
In addition, the Escrow Agent may rely and act upon instructions
received by facsimile transmission which the Escrow Agent believes
in good faith to have been given by an Authorized Officer or which
are transmitted with proper authentication pursuant to terms and
conditions which the Escrow Agent may specify. The Escrow Agent
shall incur no liability to the Company or Dearborn or otherwise
for having acted in accordance with written instructions on which
it is authorized to rely pursuant to the provisions hereof. The
Escrow Agent shall incur no liability for refraining from acting
upon any instructions which for any reason it, in good faith, is
unable to verify to its own satisfaction. Unless otherwise
expressly provided, all authorizations and instructions shall
continue in full force and effect until canceled or superseded by
subsequent written authorizations or instructions received by the
Escrow Agent's safekeeping account administrator. The Escrow
Agent's authorization to rely and act upon instructions pursuant to
this paragraph shall be in addition to, and shall not limit, any
other authorization which either the Company or Dearborn may give
to it hereunder to the extent expressly contemplated by this Escrow
Agreement.
8. Indemnity. Each of Dearborn and the Company
agrees to waive any suit, claim, demand or cause of action of any
kind which it may have or may assert against the Escrow Agent and
its agents arising out of or relating to the execution or
performance by the Escrow Agent of this Escrow Agreement, unless
such suit, claim, demand or cause of action is based upon the
willful misconduct or gross negligence of the Escrow Agent or its
agents. Each of Dearborn and the Company further agrees to
indemnify the Escrow Agent and its agents from and against any and
all losses, damages, liabilities, costs, expenses (including,
without limitation, reasonable counsel fees and expenses) and
claims suffered or paid, directly or indirectly, by reason of its
execution or performance of this Escrow Agreement, except such
losses, damages, liabilities, costs, expenses and claims that are
based upon or the result of the willful misconduct or gross
negligence of the Escrow Agent or its agents. This Section 8
shall survive the termination of this Escrow Agreement until
extinguished by any applicable statute of limitations but shall
only apply to claims arising prior to the termination of this
Escrow Agreement pursuant to Section 2.
9. Acknowledgment by the Escrow Agent. Subsequent to
the satisfaction of the conditions precedent set forth in Sections
7(d) and 20 hereof, by execution and delivery of this Escrow
Agreement, the Escrow Agent acknowledges that the terms and
provisions of this Escrow Agreement are acceptable to it and it
agrees to carry out the provisions of this Escrow Agreement on its
part.
10. Resignation or Removal of Escrow Agent;
Successors.
(a) The Escrow Agent may resign as such following the
giving of 30 days' prior written notice to the other parties
hereto. Similarly, the Escrow Agent may be removed and replaced
following the giving of 30 days' prior written notice to the
Escrow Agent by the Company and Dearborn. In either event,
subject to subsection (b) of this Section 10, the duties of the
Escrow Agent shall terminate 30 days after the date of such notice
(or as of such earlier date as may be mutually agreeable among the
parties hereto); and the Escrow Agent shall then deliver the
Escrow Shares (together with any Stock Powers) then in its
possession and any other securities and funds held by it pursuant
to the terms hereof.
(b) If for any reason the person appointed by Dearborn
and the Company is unwilling to serve as successor Escrow Agent
and if Dearborn and the Company are unable to agree upon a
successor or shall have failed to appoint a successor prior to the
expiration of 30 days following the date of the notice of
resignation or removal, the then acting Escrow Agent may petition
any court of competent jurisdiction for the appointment of a
successor Escrow Agent or other appropriate relief and until any
such appointment is made or appropriate relief is granted, the
then acting Escrow Agent shall continue as the Escrow Agent; and
any such resulting appointment shall be binding upon all of the
parties hereto.
(c) Every successor Escrow Agent appointed hereunder
shall execute, acknowledge and deliver to its predecessor and also
to the Company and Dearborn, an instrument in writing accepting
such appointment hereunder, and thereupon such successor, without
any further act, shall become fully vested with all the duties,
responsibilities and obligations of its predecessor; provided,
however, that such predecessor shall, nevertheless, execute and
deliver an instrument or instruments transferring to such
successor all the rights of such predecessor hereunder, and shall
duly assign, transfer and deliver all property, securities and
monies held by it pursuant to this Escrow Agreement to its
successor. Should any instrument be required by any successor for
more fully vesting in such successor the duties, responsibilities
and obligations hereby vested or intended to be vested in the
predecessor, any and all such instruments shall, on the written
request of Dearborn or the Company, be executed, acknowledged and
delivered by the predecessor.
(d) In the event of an appointment of a successor
Escrow Agent, the predecessor shall cease to be custodian of any
funds, securities or other assets and records it may hold pursuant
to this Escrow Agreement, and the successor shall become such
custodian.
11. Modifications, Amendments and Waivers. This Escrow
Agreement may only be amended or modified with the written consent
of the parties hereto. No course of dealing between or among any
of the parties hereto will be deemed effective to modify, amend or
waive any part of this Escrow Agreement or any rights or
obligations of any party hereto. In addition to the remedies
provided in this Escrow Agreement, any party may pursue any and
all remedies now or hereafter existing.
12. Counterparts. This Escrow Agreement may be
executed in one or more counterparts, and by the different parties
hereto in separate counterparts, each of which when executed shall
be deemed to be an original but all of which taken together shall
constitute one and the same agreement.
13. Severability. Any term or provision of this Escrow
Agreement which is invalid or unenforceable in any jurisdiction
shall, as to that jurisdiction, be ineffective to the extent of
such invalidity or unenforceabilty without rendering invalid or
unenforceable the remaining terms and provisions of this Escrow
Agreement or affecting the validity or enforceability of any of
the terms or provisions of this Escrow Agreement in any other
jurisdiction. If any provision of this Escrow Agreement is so
broad as to be unenforceable, that provision shall be interpreted
to be only so broad as is enforceable.
14. Headings; Interpretation. The headings contained
in this Escrow Agreement are for reference purposes only and shall
not affect in any way the meaning or interpretation of this Escrow
Agreement.
15. Notices. All notices and other communications
given or made pursuant hereto shall be in writing and shall be
deemed to have been duly given or made as of the date delivered if
delivered personally or by telecopy or five days after being
mailed by registered or certified mail (postage prepaid, return
receipt requested) to the parties at the following address (or at
such other address for a party as shall be specified by like
notice, except that notices of changes of address shall be
effective upon receipt):
If to the Company, to:
Gryphon Holdings Inc.
30 Wall Street
New York, New York 10005
Attention: Robert M. Coffee, Esq.
Facsimile: 212-825-0200
with a copy to:
LeBoeuf, Lamb, Greene & MacRae, L.L.P.
125 W. 55th Street
New York, New York 10019
Attention: Peter R. O'Flinn, Esq.
Facsimile: 212-424-8500
If to Dearborn, to:
Dearborn Risk Management, Inc.
55 West Monroe Street
Suite 2700
Chicago, Illinois 60603
Attention: Lonnie Steffen
Facsimile: 312-357-3525
with a copy to each of:
Castle Harlan, Inc.
150 East 58th Street
37th Floor
New York, New York 10155
Attention: Jeffrey M. Siegel
Robert C. Wages
Facsimile: 212-207-8042
Schulte Roth & Zabel LLP
900 Third Avenue
New York, New York 10022
Attention: Marc Weingarten, Esq.
Michael R. Littenberg, Esq.
Facsimile: 212-593-5955
if to the Escrow Agent, to:
[ ]
16. Expenses. Except as otherwise provided for herein,
each party shall be responsible for its own costs and expenses
with respect to matters involving this Escrow Agreement.
17. Assignability and Parties in Interest. This Escrow
Agreement may not be assigned or delegated in whole or in part by
operation of law or otherwise without the written consent of the
parties hereto. This Escrow Agreement shall inure to the benefit
of and be binding upon the parties hereto and their respective
permitted successors and assigns. Nothing in this Escrow
Agreement, expressed or implied, shall give or be construed to
give any person, firm or corporation, other than the parties
hereto and their permitted successors and assigns, any legal claim
under any covenant, condition or provision hereof, all the
covenants, conditions and provisions contained in this Escrow
Agreement being for the sole benefit of the parties hereto and
their permitted successors and assigns.
18. GOVERNING LAW. THIS ESCROW AGREEMENT SHALL BE
GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE
STATE OF NEW YORK APPLICABLE TO CONTRACTS EXECUTED AND TO BE
PERFORMED IN THAT STATE, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS
OF LAWS.
19. Exclusive Jurisdiction. The Escrow Agent, the
Company and Dearborn hereby agree that any judicial proceeding
instituted in relation to any matter arising under this Escrow
Agreement shall be brought in any court having subject matter
jurisdiction in The City of New York (including, without
limitation, federal courts located in The City of New York), and
by execution and delivery of this Escrow Agreement, the Escrow
Agent, Dearborn and the Company hereby accept, irrevocably and
unconditionally, the jurisdiction of the aforesaid courts in
respect of this Escrow Agreement, acknowledge their competence and
irrevocably agree to be bound by any final non-appealable judgment
rendered in any such proceeding. The Escrow Agent, Dearborn and
the Company also irrevocably and unconditionally waive any
immunity from legal process in respect of this Escrow
Agreement.
20. Taxes. The Company and Dearborn agree that,
notwithstanding any other provision of this Escrow Agreement, for
purposes of any federal, state or local taxes, all assets held by
the Escrow Agent pursuant to this Escrow Agreement shall be the
property of Dearborn, and Dearborn agrees to be solely liable for,
and to file all tax returns in respect of, any taxes attributable
to the assets held by the Escrow Agent.
21. Additional Documentation. This Escrow Agreement
shall not become effective until the Escrow Agent shall have
received the following as to each of the Company and Dearborn:
(i) the certified resolution of its board of
directors authorizing the making and performance of this
Escrow Agreement; and
(ii) a certificate as to the names and specimen
signatures of its officers or representatives authorized to
sign this Escrow Agreement and notices, instructions and
other communications hereunder.
22. Additional Certificates and Stock Powers.
(a) If the provisions of this Escrow Agreement or
Section 2.8 of the Stock Purchase Agreement require the delivery
by the Escrow Agent of share certificates in different
denominations from those then held by the Escrow Agent, the
Company agrees to deliver, or to cause its transfer agent to
deliver, such certificates to the Escrow Agent as soon as
practicable on a timely basis in the required denominations upon
surrender to the Company or its transfer agent, as the case may
be, of the relevant certificates held by the Escrow Agent for
cancellation.
(b) If the provisions of this Escrow Agreement require
the delivery of Stock Powers in addition to those then provided by
the Escrow Agent, the Escrow Agent, upon receipt of joint written
instructions from Dearborn and the Company, agrees to execute and
deliver in accordance with such written instructions Stock Powers
in the required denominations.
23. Specific Performance. Each of the Company and
Dearborn hereto acknowledges and agrees that the other would be
irreparably damaged in the event any of the provisions of this
Escrow Agreement was not performed in accordance with its specific
terms or was otherwise breached. Accordingly, each of the Company
and Dearborn hereto agrees that they each shall be entitled to an
injunction or injunctions to prevent breaches of the provisions of
this Escrow Agreement and to enforce specifically this Escrow
Agreement and the terms and provisions hereof in any action
instituted in any court having subject matter jurisdiction in The
City of New York (including, without limitation, federal courts
located in The City of New York), in addition to any other remedy
to which either of the Company or Dearborn may be entitled, at law
or in equity.
IN WITNESS WHEREOF, each of the parties hereto has
caused this Escrow Agreement to be signed as of the date first
above written.
GRYPHON HOLDINGS INC.
By:
Name:
Title:
DEARBORN RISK MANAGEMENT, INC.
By:
Name:
Title:
[ESCROW AGENT]
By:
Name:
New York, New York, February 9, 1998 -- Gryphon Holdings Inc. announced today
that it has agreed to acquire The First Reinsurance Company of Hartford ("FRH")
and certain affiliated entities from Dearborn Risk Management, Inc. for a
combination of cash and preferred stock valued at $43.6 million, plus certain
other performance-driven contingent consideration. The transaction, which is
subject only to regulatory approvals and other customary conditions, is
expected to close during the second quarter of 1998.
The purchase consideration of $43.6 million consists of $31.9 million of cash
and $11.7 million fair value of a new issue of Gryphon perpetual convertible
preferred stock. The preferred stock, which will have a face amount of $14.4
million, will be convertible into 643,672 shares of Gryphon common stock,
reflecting a conversion price of $22.44 per share. No cash dividends will
be paid or owed during the first four and one-half years; a cash dividend
at the rate of 4.0% of the face amount will be paid thereafter. The
preferred shares, which are non-callable for three years, have
no sinking fund or mandatory redemption features. In connection with the
transaction, Gryphon intends to enter into a $55 million credit facility with
a group of financial institutions, the proceeds of which will be used to pay
the cash portion of the purchase price and to repay existing bank borrowings.
Gryphon has also agreed to underwrite on a prospective basis certain property-
casualty program business, currently underwritten by an affiliate of FRH which
will remain a subsidiary of Dearborn, that may be transferred by producing
agents to FRH or another Gryphon subsidiary. If such business is transferred,
Gryphon will pay for it on a contingency basis, related to its underwriting
profitability in 1998, 1999, and 2000.
FRH, a Connecticut corporation with headquarters in Chicago,
is a specialty insurer of professional liability risks.
Through its affiliate, Oakley Underwriting Agency, which is
also being purchased by Gryphon in the transaction, FRH
provides Directors & Officers and Errors & Omissions
coverages for corporations, professional firms, not-for-
profit entities, and public entities. Originally chartered
as a reinsurance company, FRH currently operates mainly as a
primary property and casualty company issuing its own
policies in the 29 states in which FRH is licensed as an
admitted carrier. To a lesser extent, it has been a
reinsurer of Virginia Surety Company (with respect to Oakley-
underwritten business) in those states where FRH is not yet
licensed to write business. It is anticipated that, over
time, all primary policy issuance with respect to FRH's book
of business will migrate to FRH or other subsidiaries of
Gryphon.
The GAAP shareholders' equity of FRH at December 31, 1997
was approximately $35 million. Its statutory surplus at
that date was approximately $31.5 million. FRH is currently
rated A- (excellent) by A.M. Best.
The business of FRH and Oakley is managed by John A. Dore, 46, who is President
& Chief Executive Officer of FRH and its parent, Dearborn. Following the
transaction, Mr. Dore will remain President & Chief Executive of FRH and will
be appointed Executive Vice President of Gryphon and Vice Chairman of Gryphon's
main operating company, Gryphon Insurance Group ("GIG"). He will also be
elected to Gryphon's Board of Directors. Mr. Dore will report directly to
Stephen A. Crane, President & Chief Executive Officer of Gryphon and
Chairman & CEO of GIG. In addition to being responsible
for FRH and Oakley, Mr. Dore will work closely with Mr. Crane in the
implementation of Gryphon's strategic plan, including other possible
acquisitions.
In announcing the transaction, Mr. Crane stated, "We are very excited about
welcoming The First Reinsurance Company of Hartford to Gryphon. FRH is a high-
quality specialty company that embodies our vision of building a highly
differentiated underwriting-driven operation based on the development of
specialized expertise. This transaction establishes Gryphon as a major player
in professional liability, an area of business we find very attractive.
We are very pleased with the terms of the acquisition
and of its proposed financing and expect the transaction to be accretive to
Gryphon's earnings per share. We are also extremely happy to have John Dore
join the Gryphon team. He is a seasoned insurance executive with an
excellent professional reputation, and he will add significantly to our
senior executive strength and depth."
Gryphon already writes a substantial amount of professional liability coverages
for architects, engineers, and other design professionals. After Gryphon
acquires FRH, professional liability would represent the Company's largest
class of business. Gryphon is also a significant underwriter of West Coast
earthquake insurance for commercial insureds.
Dearborn is owned by Castle Harlan Partners II and certain
other institutional and individual shareholders. The Castle
Harlan partnership, the majority shareholder of Dearborn, is
managed by Castle Harlan, Inc., a private New York merchant
bank. Following the closing of the transaction, Gryphon
will also elect to its Board of Directors John K. Castle,
Chairman of Castle Harlan, Inc. and a director of Dearborn.
The relationship among Gryphon, Castle Harlan Partners II,
and Castle Harlan, Inc. will be governed by a Shareholders
Agreement that will be executed by the parties at the time
of closing.
In concluding the announcement, Mr. Crane said, "We expect the acquisition of
FRH to enhance our specialized expertise, add to our management strength, build
toward the achievement of critical mass, and increase our earnings per share.
As we continue to pursue our long-term strategic plan, we hope to identify
other opportunities to create value for shareholders."
In another development, Gryphon also announced that it will
incur a charge in its 1997 results for the strengthening of
reserves. The charge will address adverse prior-year
development of losses and loss adjustment expenses, a
significant portion of which relate to pre-1986 or
discontinued lines of business. Quantification of the
reserve strengthening has not yet been finalized, but the
Company currently estimates that it will report net income
(after the charge) for 1997 of between $1.25 and $1.35 per
share, of which $.60 per share is attributable to realized
capital gains.
Gryphon Holdings operates through its main subsidiary,
Gryphon Insurance Group, as a specialty property and
casualty underwriting organization. The Company's wholly
owned insurance company subsidiaries are Associated
International Insurance Company and Calvert Insurance
Company.
Forward-Looking Information: The Private Securities Litigation Reform Act of
1995 provides a "safe harbor" for forward-looking statements. This press
release or any other written or oral statements made by or on behalf of Gryphon
may include forward-looking statements which reflect Gryphon's current views
with respect to future events and financial performance. These forward-looking
statements are subject to certain uncertainties and other factors that could
cause actual results to differ materially from such statements. These
uncertainties and other factors (which are described in more detail elsewhere
in documents filed by Gryphon with the Securities and Exchange Commission)
include, but are not limited to, uncertainties relating to general economic
conditions and cyclical industry conditions, uncertainties relating to
government and regulatory policies, volatile and unpredictable developments
(including storms and catastrophes), the legal environment, the uncertainties
of the reserving process, and the competitive environment in which Gryphon
operates. The words "believe", "expect", "anticipate",
"project", "plan", and similar expressions identify forward-looking statements.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of their dates. Gryphon undertakes no
obligation to publicly update or revise any forward-looking statements, whether
as a result of new information, future events, or otherwise.
