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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 COMMISSION FILE # 1-13816
EVEREST REINSURANCE HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 22-3263609
(State or other jurisdiction) (I.R.S. Employer
of incorporation or organization) Identification No.)
3 GATEWAY CENTER
NEWARK, NJ 07102
(201) 802-8000
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive office)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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COMMON STOCK, $.01 PAR VALUE PER SHARE NEW YORK STOCK EXCHANGE
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SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE
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Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
The aggregate market value on March 3, 1997 of the voting stock held by
non-affiliates of the registrant was $1,584 million.
At March 3, 1997, the number of shares outstanding of the registrant's
common stock was 50,490,273.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information required by Items 10, 11, 12, and 13 of Form 10-K is
incorporated by reference into Part III hereof from the registrant's proxy
statement for the 1997 Annual Meeting, which will be filed with the Securities
and Exchange Commission within 120 days of the close of the registrant's fiscal
year ended December 31, 1996.
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<PAGE>
TABLE OF CONTENTS
ITEM PAGE
- - ---- ----
PART I
1. Business ............................................................. 1
2. Properties ........................................................... 23
3. Legal Proceedings .................................................... 23
4. Submission of Matters to a Vote of Security Holders .................. 23
PART II
5. Market for Registrant's Common Equity and Related Stockholder Matters 24
6. Selected Financial Data .............................................. 24
7. Management's Discussion and Analysis of Financial Condition and
Results of Operation ................................................ 27
8. Financial Statements and Supplementary Data .......................... 33
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure ................................................ 33
PART III
10. Directors and Executive Officers of the Registrant ................... 33
11. Executive Compensation ............................................... 33
12. Security Ownership of Certain Beneficial Owners and Management ....... 33
13. Certain Relationships and Related Transactions ....................... 34
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K ..... 34
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking statements. This Form 10-K, the Company's Annual Report to
Stockholders, any Form 10-Q or any Form 8-K of the Company or any other written
or oral statements made by or on behalf of the Company may include
forward-looking statements which reflect the Company'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
this Form 10-K) 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 catastrophes), the legal environment, the uncertainties
of the reserving process, the competitive environment in which the Company
operates, the uncertainties inherent in international operations, and interest
rate fluctuations. The words "believe," "expect," "anticipate," "project" 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. The Company undertakes no obligation to publicly update
or revise any forward-looking statements, whether as a result of new
information, future events or otherwise.
<PAGE>
PART I
UNLESS OTHERWISE INDICATED, (I) ALL FINANCIAL DATA IN THIS DOCUMENT HAVE BEEN
PREPARED USING GENERALLY ACCEPTED ACCOUNTING PRINCIPLES ("GAAP"), AND (II) ALL
STATUTORY FINANCIAL DATA REFERRED TO IN THIS DOCUMENT REFER TO STATUTORY
FINANCIAL DATA OF EVEREST RE. AS USED IN THIS DOCUMENT, "EVEREST RE" MEANS
EVEREST REINSURANCE COMPANY (FORMERLY PRUDENTIAL REINSURANCE COMPANY) AND ITS
SUBSIDIARIES (UNLESS THE CONTEXT OTHERWISE REQUIRES); "HOLDINGS" MEANS EVEREST
REINSURANCE HOLDINGS, INC. (FORMERLY PRUDENTIAL REINSURANCE HOLDINGS, INC.); AND
THE "COMPANY" MEANS HOLDINGS AND ITS SUBSIDIARIES.
ITEM 1. BUSINESS
THE COMPANY
Everest Reinsurance Holdings, Inc., a Delaware corporation, was established in
1993 to serve as the parent holding company of Everest Reinsurance Company
(formed in 1973), a property and casualty reinsurance operation. Until October
6, 1995, the Company was an indirect wholly-owned subsidiary of The Prudential
Insurance Company of America ("The Prudential"). On October 6, 1995, The
Prudential sold its entire interest in Holdings' shares of common stock in an
initial public offering (the "IPO"), with the result that Holdings' outstanding
common stock became publicly owned.
Holdings, through its wholly-owned subsidiary, Everest Re, underwrites property
and casualty reinsurance on a treaty and facultative basis to insurance and
reinsurance companies in the United States and selected international markets.
Everest Re writes reinsurance both through brokers and directly with ceding
insurance companies, giving it the flexibility to pursue business regardless of
the ceding company's preferred reinsurance purchasing method. The Company had
gross premiums written in 1996 of $1,044.0 million and stockholders' equity at
December 31, 1996 of $1,086.0 million and Everest Re had statutory surplus at
December 31, 1996 of $772.7 million. Based on industry data at December 31, 1996
published by the Reinsurance Association of America ("RAA"), Everest Re is the
seventh largest reinsurance company in the United States, ranked by statutory
surplus and is rated "A" (Excellent) by A.M. Best, an independent insurance
industry rating organization which rates insurance companies on factors of
concern to policyholders.
Everest Re has three subsidiaries: Everest Reinsurance Ltd. ("Everest Ltd.",
formerly Le Rocher Reinsurance Ltd.), Everest National Insurance Company
("Everest National", formerly Prudential National Insurance Company) and Everest
Insurance Company of Canada ("Everest Canada"). Everest Ltd., a United Kingdom
reinsurance company, is authorized to engage in the reinsurance business in the
United Kingdom and, prior to January 1, 1997, it reinsured risks worldwide. In
1996, Everest Re obtained authorization to engage in the reinsurance business in
the United Kingdom, and the operations of Everest Ltd. have been converted to
branch operations of Everest Re, effective January 1, 1997. Everest National, an
Arizona insurance company, is licensed in 38 states and the District of Columbia
and writes primary insurance. On December 31, 1996, Everest Re acquired Everest
Insurance Company of Canada (formerly OTIP/RAEO Insurance Company Inc.) from a
subsidiary of The Prudential. All liabilities incurred before the acquisition
date, including insurance obligations under expired as well as in-force
business, were assumed by Prudential of America General Insurance Company
(Canada), a subsidiary of The Prudential which was subsequently sold to Liberty
Mutual Insurance Company, whereupon it was renamed Liberty Insurance Company of
Canada. Everest Canada is federally licensed to write primary insurance under
the Insurance Companies Act of Canada and provincially licensed in Ontario.
REINSURANCE INDUSTRY OVERVIEW
Reinsurance is an arrangement in which an insurance company, the reinsurer,
agrees to indemnify another insurance company, the ceding company, against all
or a portion of the insurance risks underwritten by the ceding company under one
or more insurance contracts. Reinsurance can provide a ceding company with
several benefits, including a reduction in net liability on individual risks,
catastrophe protection from large or multiple losses and assistance in
maintaining acceptable financial ratios. Reinsurance also provides a ceding
company with additional underwriting capacity by permitting it to accept larger
risks and write more business than would be possible without a concomitant
increase in capital and surplus. Reinsurance, however, does not discharge the
ceding company from its liability to policyholders.
<PAGE>
There are two basic types of reinsurance arrangements: treaty and facultative
reinsurance. In treaty reinsurance, the ceding company is obligated to cede and
the reinsurer is obligated to assume a specified portion of a type or category
of risks insured by the ceding company. Treaty reinsurers, including Everest Re,
do not separately evaluate each of the individual risks assumed under their
treaties and, consequently, after a review of the ceding company's underwriting
practices, are largely dependent on the original risk underwriting decisions
made by the ceding company. Such dependence subjects reinsurers in general,
including Everest Re, to the possibility that the ceding companies have not
adequately evaluated the risks to be reinsured and, therefore, that the premiums
ceded in connection therewith may not adequately compensate the reinsurer for
the risk assumed. The reinsurer's evaluation of the ceding company's risk
management and underwriting practices, therefore, will usually impact the
pricing of the treaty. In facultative reinsurance, the ceding company cedes and
the reinsurer assumes all or part of the risk under a single insurance contract.
Facultative reinsurance is negotiated separately for each insurance contract
that is reinsured. Facultative reinsurance normally is purchased by ceding
companies for individual risks not covered by their reinsurance treaties, for
amounts in excess of the dollar limits of their reinsurance treaties and for
unusual risks. Underwriting expenses and, in particular, personnel costs, are
higher on facultative business because each risk is individually underwritten
and administered. The ability to separately evaluate each risk reinsured,
however, increases the probability that the reinsurer can price the contract to
more accurately reflect the risks involved.
Both treaty and facultative reinsurance can be written on either a pro rata
basis or an excess of loss basis. With respect to pro rata reinsurance, the
ceding company and the reinsurer share the premiums as well as the losses and
expenses in an agreed proportion. In the case of reinsurance written on an
excess of loss basis, the reinsurer indemnifies the ceding company against all
or a specified portion of losses and expenses in excess of a specified dollar
amount, known as the ceding company's retention or reinsurer's attachment point,
generally subject to a negotiated reinsurance contract limit.
Premiums payable by the ceding company to a reinsurer for excess of loss
reinsurance are not directly proportional to the premiums that the ceding
company receives because the reinsurer does not assume a proportionate risk. In
contrast, premiums that the ceding company pays to the reinsurer for pro rata
reinsurance are proportional to the premiums that the ceding company receives,
consistent with the proportional sharing of risk. In addition, in pro rata
reinsurance the reinsurer generally pays the ceding company a ceding commission.
The ceding commission generally is based on the ceding company's cost of
acquiring the business being reinsured (commissions, premium taxes, assessments
and miscellaneous administrative expense) and also may include a profit factor
for producing the business.
Reinsurers typically purchase reinsurance to cover their own risk exposure.
Reinsurance of a reinsurer's business is called a retrocession. Reinsurance
companies cede risks under retrocessional agreements to other reinsurers, known
as retrocessionaires, for reasons similar to those that cause primary insurers
to purchase reinsurance: to reduce net liability on individual risks, protect
against catastrophic losses, stabilize financial ratios and obtain additional
underwriting capacity.
Reinsurance can be written through professional reinsurance brokers or directly
for ceding companies. From a ceding company's perspective, both the broker
market and the direct market have advantages and disadvantages. A ceding
company's decision to select one market over the other will be influenced by its
perception of such advantages and disadvantages relative to the reinsurance
coverage being placed.
BUSINESS STRATEGY
Under the direction of Joseph V. Taranto, who joined the Company in October 1994
as Chairman, Chief Executive Officer and President, the Company initiated
actions to increase the Company's profitability and reduce earnings volatility.
These actions included strengthening the Company's management team, reducing
operating expenses, improving management of catastrophe exposures and
implementing a new underwriting strategy. Since 1994, the Company's management
team has pursued and continues to pursue these actions which seek to capitalize
on the Company's staff resources and its flexibility to offer multiple products
through multiple production sources in a cost-efficient manner.
The Company's products include the full range of property and casualty
coverages, including marine, aviation, surety, errors & omissions liability
("E&O"), directors' & officers' liability ("D&O"), medical malpractice and
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<PAGE>
other specialty lines. The Company's distribution sources include both the
direct and broker reinsurance markets, international and domestic markets and
reinsurance, both treaty and facultative, and insurance.
The Company's underwriting strategy emphasizes underwriting profitability rather
than premium volume, writing specialized risks and improving integration of
existing underwriting expertise across all underwriting units. Key elements of
this strategy are prudent risk selection, appropriate pricing through strict
underwriting discipline and adjusting the Company's business mix to respond to
changing market conditions. Management intends to focus on reinsuring companies
that effectively manage the underwriting cycle through proper analysis and
pricing of underlying risks and whose underwriting guidelines and performance
are compatible with the Company's profitability objectives.
The Company's underwriting strategy also emphasizes flexibility and
responsiveness to changing market conditions, such as increased demand or
favorable pricing trends. Management believes that Everest Re's existing
strengths, including its broad underwriting expertise, international presence
and substantial capital, will facilitate adjustments to its mix of business
geographically, by line of business and by type of coverage, allowing it to
capitalize on those market opportunities that provide the greatest potential for
underwriting profitability. The Company's primary insurance infrastructure will
facilitate this strategy by allowing the Company to develop business that
requires the Company to issue primary insurance policies. The Company will also
continue to carefully monitor its mix of business to avoid inappropriate
concentrations of geographic or other risk.
Everest Re has increased its reinsurance of specialty risks, which require a
higher degree of underwriting, actuarial and claims expertise than more standard
risks. This type of reinsurance includes professional liability lines, such as
medical malpractice, D&O and E&O. Management believes that these risks offer a
greater profit potential than standard underwriting risks, which are generally
more subject to competitive pricing. Specialty risks, however, are usually more
difficult to assess than more standard risks and can be subject to higher loss
severity and greater volatility. Management believes that it can successfully
manage these complex risks through disciplined underwriting, appropriate
pricing, actuarial projections, loss monitoring and underwriting and claims
audits of ceding companies. The emphasis on specialty underwriting has built on
the Company's existing expertise in writing such specialty lines as marine,
aviation and surety.
The Company has revised its underwriting guidelines to limit the accumulation of
known risks in exposed areas and to require that business which is exposed to
catastrophe losses be written with greater geographic spread and to implement a
more cost-effective retrocession program. The Company's underwriting guidelines
have also been revised to better reflect the relationship between premiums and
risk assumed while maintaining the Company's probable maximum loss at
appropriate levels.
Efforts to control expenses and to operate in a more cost-efficient manner
continue to be a focus of the Company. These efforts have resulted in a 41%
reduction in employees to 410 at December 31, 1996 from 694 at June 30, 1994,
the restructuring of the Company's facultative operations in 1995 and changes in
certain vendor relationships. These changes were implemented to improve
efficiency and eliminate redundant positions. Additionally, the Company has
begun to implement a plan to improve the cost effectiveness of its information
systems.
MARKETING
The Company writes its business on a worldwide basis for many different
customers and for many lines of property and casualty business. Its products
provide a broad array of coverages. The Company is not materially dependent on
any single customer, small group of customers, line of business or geographical
area. The Company believes the loss of any single customer would not have a
material adverse affect on the Company. Approximately 65.4% and 34.6% of Everest
Re's 1996 gross premiums written were written in the broker and direct market,
respectively. Everest Re's ability to write reinsurance both through brokers and
directly with ceding companies gives it the flexibility to pursue business
regardless of the ceding company's preferred reinsurance purchasing method.
The reinsurance broker market consists of several substantial national
and international brokers and a number of smaller specialized brokers.
Brokers do not have the authority to bind Everest Re with
respect to reinsurance agreements, nor does Everest Re commit in advance
to accept any portion of the business that brokers submit to it.
Reinsurance business from any ceding company, whether new or renewal,
is subject to acceptance by Everest Re. Brokerage fees generally are paid by
reinsurers. The Company's largest ten brokers accounted for an aggregate of
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<PAGE>
approximately 44.7% of gross premiums written in 1996 with the largest broker
accounting for approximately 15.9% of gross premiums written in 1996. The
Company does not believe that the loss of the support of any one broker would
have a material adverse affect on the Company due to the Company's competitive
position in the marketplace and relationships with ceding companies and the
continuing availability of other sources of business.
The direct market remains an important distribution system for Everest Re.
Direct placement enables Everest Re to access clients who prefer building
long-term relationships directly with their reinsurers based upon the
reinsurer's in-depth understanding of the ceding company's needs.
Everest National's primary insurance business is written principally through
general agency relationships. The Company evaluates each business relationship,
based upon the underwriting expertise and experience of each distribution
channel selected, and performs an analysis to evaluate financial security.
UNDERWRITING UNITS
The following table presents the distribution of Everest Re's gross premiums
written by its U.S. broker treaty, U.S. direct treaty reinsurance and insurance,
marine, aviation and surety, U.S. facultative and international operations for
the years ended December 31, 1996, 1995, 1994, 1993 and 1992, classified
according to whether such premium is derived from property or casualty business
and whether it represents pro rata or excess of loss business:
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<PAGE>
<TABLE>
<CAPTION>
GROSS PREMIUMS WRITTEN BY UNDERWRITING UNIT
Years Ended December 31,
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1996 1995 1994 1993 1992
--------------- ------------- ------------- ------------- -------------
$ % $ % $ % $ % $ %
-------- ----- ------ ----- ------ ----- ------ ----- ------ -----
(Dollars in millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Broker Treaty
Property
Pro Rata(1) $ 45.4 4.4% $ 51.7 5.4% $ 59.7 6.3% $ 80.3 8.7% $ 96.4 11.5%
Excess 60.4 5.8 59.0 6.2 53.9 5.7 88.8 9.7 67.9 8.1
Casualty
Pro Rata(1) 63.4 6.1 18.5 1.9 29.6 3.1 28.2 3.1 29.4 3.5
Excess 137.5 13.2 122.6 12.9 113.5 11.9 103.7 11.3 98.5 11.8
-------- ----- ------ ----- ------ ----- ------ ----- ------ -----
Total(2) 306.8 29.4 251.8 26.5 256.6 26.9 301.0 32.8 292.2 34.9
-------- ----- ------ ----- ------ ----- ------ ----- ------ -----
U.S. Direct Treaty
Reinsurance and
Insurance
Property
Pro Rata(1) 12.6 1.2 3.3 0.3 5.4 0.6 17.3 1.9 8.9 1.0
Excess 8.9 0.9 9.1 1.0 12.5 1.3 10.9 1.2 11.4 1.4
Casualty
Pro Rata(1) 114.5 11.0 99.8 10.5 83.2 8.7 56.2 6.1 52.7 6.3
Excess 12.5 1.2 10.0 1.1 38.6 4.0 46.3 5.0 41.9 5.0
-------- ----- ------ ----- ------ ----- ------ ----- ------ -----
Total(2) 148.6 14.2 122.2 12.9 139.7 14.7 130.7 14.2 114.9 13.7
-------- ----- ------ ----- ------ ----- ------ ----- ------ -----
Marine, Aviation
and Surety
Property
Pro Rata(1) 94.6 9.1 89.2 9.4 74.1 7.8 67.3 7.3 57.5 6.9
Excess 17.8 1.7 18.7 2.0 16.8 1.8 16.3 1.8 17.3 2.1
Casualty
Pro Rata(1) 43.1 4.1 53.0 5.6 66.0 6.9 48.6 5.3 43.7 5.2
Excess 5.6 0.5 6.0 0.6 4.8 0.5 10.5 1.1 7.8 0.9
-------- ----- ------ ----- ------ ----- ------ ----- ------ -----
Total(2) 161.1 15.4 166.9 17.6 161.7 17.0 142.7 15.5 126.3 15.1
-------- ----- ------ ----- ------ ----- ------ ----- ------ -----
U.S. Facultative
Property
Pro Rata(1) -- -- -- -- -- -- -- -- -- --
Excess 26.9 2.6 22.3 2.3 27.4 2.9 20.9 2.3 14.4 1.7
Casualty
Pro Rata(1) -- -- -- -- -- -- -- -- -- --
Excess 61.8 5.9 46.6 4.9 39.3 4.1 35.0 3.8 35.2 4.2
-------- ----- ------ ----- ------ ----- ------ ----- ------ -----
Total(2) 88.7 8.5 68.8 7.2 66.7 7.0 55.9 6.1 49.6 5.9
-------- ----- ------ ----- ------ ----- ------ ----- ------ -----
Total U.S.
Property
Pro Rata(1) 152.6 14.6 144.2 15.2 139.2 14.6 164.9 18.0 162.8 19.4
Excess 114.0 10.9 109.1 11.5 110.6 11.6 136.9 14.9 111.0 13.2
Casualty
Pro Rata(1) 221.1 21.2 171.3 18.0 178.8 18.8 133.0 14.5 125.8 15.1
Excess 217.6 20.8 185.2 19.5 196.1 20.6 195.5 21.3 183.4 21.9
-------- ----- ------ ----- ------ ----- ------ ----- ------ -----
Total(2) 705.2 67.5 609.7 64.2 624.7 65.5 630.3 68.7 583.0 69.5
-------- ----- ------ ----- ------ ----- ------ ----- ------ -----
International
Property
Pro Rata(1) 124.2 11.9 136.2 14.3 147.0 15.4 122.1 13.3 104.5 12.5
Excess 79.8 7.6 84.9 8.9 89.2 9.4 81.5 8.9 80.1 9.6
Casualty
Pro Rata(1) 90.5 8.7 66.4 7.0 49.6 5.2 44.4 4.8 40.6 4.8
Excess 44.4 4.3 52.3 5.5 42.7 4.5 39.8 4.3 29.6 3.5
-------- ----- ------ ----- ------ ----- ------ ----- ------ -----
Total(2) 338.8 32.5 339.8 35.8 328.5 34.5 287.8 31.3 254.8 30.4
-------- ----- ------ ----- ------ ----- ------ ----- ------ -----
Total Company
Property
Pro Rata(1) 276.7 26.5 280.4 29.5 286.2 30.0 287.0 31.3 267.3 31.9
Excess 193.8 18.6 194.0 20.4 199.8 21.0 218.4 23.8 191.1 22.8
Casualty
Pro Rata(1) 311.6 29.8 237.6 25.0 228.4 24.0 177.4 19.3 166.4 19.9
Excess 261.9 25.1 237.5 25.0 238.8 25.1 235.3 25.6 213.0 25.4
-------- ----- ------ ----- ------ ----- ------ ----- ------ -----
Total(2) $1,044.0 100.0% $949.5 100.0% $953.2 100.0% $918.1 100.0% $837.8 100.0%
======== ===== ====== ===== ====== ===== ====== ===== ====== =====
</TABLE>
- - -------------
(1) For purposes of the presentation above, pro rata reinsurance means
reinsurance attaching to the first dollar of loss incurred by the ceding
company.
(2) Certain totals and subtotals may not reconcile due to rounding.
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U.S. BROKER TREATY OPERATIONS. Everest Re's U.S. broker treaty operations write
both property and casualty reinsurance through reinsurance brokers. The Company
targets certain brokers and, through the broker market, specialty companies and
small to medium sized standard lines companies. The U.S. broker treaty
operations also write portions of reinsurance programs for larger, national
insurance companies. The U.S. broker treaty operations also include a treaty
multi-line unit, which targets small to medium sized ceding companies where the
Company seeks to write a substantial portion of the ceding company's entire
property and casualty reinsurance program.
In 1996, $105.8 million of gross premiums written were attributable to domestic
property business, of which 57.1% was written on an excess of loss basis and
42.9% was written on a pro rata basis. This unit utilizes sophisticated
underwriting methods which management believes are necessary to analyze and
price property business, particularly that segment of the property market which
has catastrophe exposure.
Domestic casualty business accounted for $200.9 million of gross premiums
written in 1996, of which 68.5% was written on an excess of loss basis and 31.5%
was written on a pro rata basis. The treaty casualty portfolio consists
principally of professional liability, directors' & officers' liability,
workers' compensation, excess and surplus lines, and other liability coverages.
As a result of the complex technical nature of most of these risks, the
Company's casualty underwriters tend to specialize by line of business and work
closely with the Company's pricing actuaries.
DIRECT TREATY REINSURANCE AND INSURANCE OPERATIONS. The Company's direct treaty
reinsurance operation writes a full line of property and casualty business. In
1996, direct treaty business accounted for $90.6 million of gross premiums
written, of which 23.2% was written on an excess of loss basis and 76.8% was
written on a pro rata basis. The U.S. direct treaty underwriters target
companies which place their business predominantly in the direct market,
including small to medium sized regional ceding companies, and seek to develop
long-term relationships with such companies. A broad array of coverages are
offered.
The Company's insurance operation consists of $56.8 million of gross premiums
written through Everest National, which is licensed in 38 states and the
District of Columbia to write primary insurance, and $1.2 million, which is
assumed from former affiliates which write business in states in which Everest
National is not licensed. Everest National targets commercial property and
casualty business written through agency relationships with program
administrators. With respect to primary insurance written through such agents,
the Company supplements the initial underwriting process with periodic claims
and underwriting reviews.
MARINE, AVIATION AND SURETY OPERATIONS. The Company's marine and aviation unit
focuses on ceding companies with a particular expertise in marine and aviation
business. The marine and aviation business is written primarily through brokers
and contains a significant international component written primarily in the
London market. Surety business underwritten by the Company consists mainly of
reinsurance of contract surety bonds written directly with ceding companies.
Gross premiums written by the marine and aviation unit in 1996 totaled $100.4
million, substantially all of which was written on a treaty basis and 73.5% of
which was sourced through reinsurance brokers. Marine treaties represented 51.4%
of marine and aviation gross premiums written in 1996 and consisted of hull and
liability coverage. Approximately 79.6% of the marine unit premiums in 1996 were
written on a pro rata basis and 20.4% as excess of loss. Aviation premiums
accounted for 48.6% of marine and aviation gross premiums written in 1996 and
included reinsurance for airlines, general aviation and satellites.
Approximately 88.5% of the aviation unit's premiums in 1996 were written on a
pro rata basis and 11.5% as excess of loss.
In 1996, gross premiums written by the surety unit totaled $60.7 million. Most
of the portfolio is reinsurance of contract surety bonds written directly with
ceding companies, with the remainder being credit reinsurance, mostly in
international markets. The unit's strategy is to maintain long-term
relationships with major surety and fidelity writers and to continue to expand
its international business.
FACULTATIVE OPERATIONS. The Company's U.S. facultative unit conducts business
both through brokers and directly with ceding companies. The U.S.
facultative operations consist of three underwriting units representing
property, casualty and specialty lines of business. Business is
written from a facultative headquarters office in New York and satellite
offices in Chicago and San Francisco. The Company's facultative underwriters
continue to narrow the focus of the types of business solicited to
improve the quality of the Company's facultative portfolio. In 1996, $26.9
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million, $39.9 million, and $21.9 million of gross premiums written were
attributable to property, general casualty and specialty lines of business,
respectively.
INTERNATIONAL. Everest Re's international operations are designed to enable it
to capitalize on the growth opportunities in the international reinsurance
market. The Company targets several international markets, including: Europe and
the London market, which are serviced by operations in London and Brussels;
Canada, with operations headquartered in Toronto; Asia and Australia, with
operations headquartered in Hong Kong; and Latin America and the Middle East,
which business is serviced from Everest Re's New Jersey headquarters. The
Company also writes "home-foreign" business, which provides reinsurance on the
international portfolios of U.S. insurers, from its headquarters in New Jersey.
Approximately 60.2% of the gross premiums written by the Company's international
underwriters in 1996 represented property business, while the balance
represented casualty business. As with its U.S. operations, Everest Re's
international operations focus on building long-term relationships with
financially sound companies that have strong management and underwriting
discipline and expertise. Approximately 81.8% of the Company's international
business was written through brokers, with the remainder written directly with
ceding companies.
In 1996, Everest Ltd.'s gross premiums written totaled $142.2 million and
consisted of pro rata property (19.3%), excess property (33.4%), pro rata
casualty (33.8%) and excess casualty (13.5%). The Brussels office focuses on the
continental European reinsurance markets, while the London office covers
international business written through the London market. Gross premiums written
in 1996 from the Brussels and London offices totaled $63.2 million and $79.0
million, respectively.
Gross premiums written by Everest Re's Canadian operation totaled $62.9 million
in 1996 and consisted of pro rata property (13.0%), excess property (3.9%), pro
rata multi-line (50.4%) and excess casualty (32.7%). Approximately 77.4% of the
Canadian premiums consisted of treaty reinsurance while 22.6% was facultative
reinsurance.
Everest Re's Hong Kong office covers the Asian and Australian markets and
accounted for $46.1 million of gross written premiums in 1996. This business
consisted of pro rata treaty property (82.2%), excess treaty property (15.7%),
pro rata treaty casualty (0.2%), excess treaty casualty (0.6%) and excess
facultative casualty (1.3%).
International business written out of Everest Re's New Jersey office accounted
for $87.7 million of Everest Re's 1996 gross premiums written and consisted of
pro rata treaty property (57.7%), pro rata treaty casualty (12.1%), excess
treaty property (16.7%), excess treaty casualty (2.4%), excess facultative
property (8.4%) and excess facultative casualty (2.7%). Of this business 46.6%
was sourced from Latin America, 16.6% was sourced from the Middle East and 10.8%
was "home-foreign" business.
UNDERWRITING PROCESS
Everest Re offers ceding companies full service capability, including actuarial,
claims, accounting and systems support, either directly or through the broker
community. Everest Re's capacity for both casualty and property risks allows it
to underwrite entire contracts or major portions thereof that might otherwise
need to be syndicated among several reinsurers. Everest Re's strategy is to act
as "lead" reinsurer in the reinsurance treaties it underwrites. The lead
reinsurer on a treaty generally accepts one of the largest percentage shares of
the treaty and is in a stronger position to negotiate price, terms and
conditions than is a reinsurer which takes a smaller position. Management
believes this strategy enables it to influence more effectively the terms and
conditions of the treaties on which it participates. When Everest Re does not
lead the treaty, it may still suggest changes to any aspect of the treaty.
Everest Re may decline to participate in a treaty based upon its assessment of
all relevant factors.
Everest Re's treaty underwriting process emphasizes a team approach among
Everest Re's underwriters, actuaries and claims staff. Treaties are reviewed for
compliance with Everest Re's general underwriting standards and certain larger
treaties are evaluated in part based upon actuarial analyses conducted by
Everest Re. The actuarial models used in such analyses are tailored in each case
to the exposures and experience underlying the specific treaty and the loss
experience for the risks covered by such treaties. Everest Re does not
separately evaluate each of the individual risks assumed under its treaties.
Everest Re does, however, generally evaluate the underwriting guidelines of its
ceding companies to determine their adequacy prior to entering into a treaty.
Everest Re, when appropriate, also conducts underwriting audits at the offices
of ceding companies to ensure that the ceding companies operate within
7
<PAGE>
such guidelines. Underwriting audits focus on the quality of the underwriting
staff, the selection and pricing of risks and the price monitoring system and
the client's claims handling ability and financial stability.
Everest Re's domestic facultative underwriters operate within guidelines
specifying acceptable types of risks, limits and maximum risk exposures.
Specified classes of risks and large premium risks are referred to the Company's
New York facultative headquarters for specific review before premium quotations
are given to clients. In addition, Everest Re's guidelines require certain types
of risks to be submitted for review because of their aggregate limits,
complexity or volatility regardless of premium amount or size of the insured on
the underlying contract.
Everest National writes property, casualty and professional liability coverages
for homogeneous risks through select program managers. Everest National
evaluates these commercial programs based upon actuarial analysis and the
program manager's capabilities. Everest National's rates, forms and underwriting
guidelines are tailored to specific risk types.
RISK MANAGEMENT AND RETROCESSION ARRANGEMENTS
Everest Re manages its risk of loss through a combination of aggregate exposure
limits, underwriting guidelines that take into account risks, prices and
coverage, and retrocessional arrangements.
Everest Re is exposed to multiple insured losses arising out of a single
occurrence, whether a natural event such as a hurricane or an earthquake, or
other catastrophe, such as a riot or an explosion at a major factory. Any such
catastrophic event could generate insured losses in one or many of Everest Re's
treaties or lines of business. Everest Re employs various techniques, including
licensed software modelling, to assess its accumulated exposure to property
catastrophe losses and summarizes that exposure in terms of the probable maximum
loss ("PML"). The Company defines PML as its anticipated maximum loss, taking
into account contract limits, caused by a single catastrophe affecting a broad
contiguous geographic area, such as that caused by a hurricane or earthquake of
such a magnitude that it is expected to occur once in every 100 years.
Management estimates that the Company's greatest catastrophe exposure worldwide
from any single event is to hurricanes and earthquakes in the coastal regions of
the United States, where Everest Re estimates it has a PML exposure, before
reinsurance, of approximately $200 million in each such region based on its
current book of business. Similarly, management estimates that the largest
current PML exposure outside the United States is approximately $112 million.
There can be no assurance that Everest Re will not experience losses from one or
more catastrophic events that exceed, perhaps by a substantial amount, its
estimated PML.
Underwriting guidelines have been established for each business unit. These
guidelines place dollar limits on the amount of business that can be written
based on a variety of factors, including ceding company, line of business,
geographical location and risk hazards. In each case, those guidelines permit
limited exceptions, which must be authorized by the Company's senior management.
Everest Re does not typically retrocede individual risks, but does, from time to
time, purchase retrocessional protections where the underwriter deems it to be
prudent to reinsure a portion of the specific risk being assumed. In addition,
Everest Re has a property facultative retrocession program which allows it to
provide up to $30.5 million of coverage for a single facultative risk, with a
maximum net retention of $12.5 million per risk, and purchases three
retrocessional workers' compensation excess of loss treaties which collectively
provide $115 million of coverage in excess of $5 million of retained losses on
accidental death and dismemberment claims resulting from a catastrophe loss.
The Company also purchases catastrophe retrocessions covering the potential
accumulation of all property exposures that may be involved in the same
catastrophe, such as an earthquake or hurricane. In 1996, the attachment point
of the first layer of the worldwide catastrophe retrocession program was $25.0
million per catastrophe and the Company could have retroceded 70.0% of the next
$75.0 million of losses in excess of the attachment point incurred on a per
catastrophe and aggregate basis. The second layer of the catastrophe
retrocession program provided coverage from June 15, 1995 through June 15,
1996 and, effective January 1, 1996, allowed the cession of 30.0% ($10.0
million) of $33.3 million per occurrence in excess of $60.0 million in losses.
In addition, for the period from May 1, 1996 through May 1, 1997, the Company's
catastrophe retrocession program provides coverage of 51.0% of $15 million per
occurrence in excess of $10 million in losses incurred by the Company outside
8
<PAGE>
of the United States. And, in 1996, Everest Re purchased an accident year
aggregate excess of loss retrocession agreement which provided up to $100.0
million of limit if Everest Re's statutory loss ratio had exceeded 81.0% for the
1996 accident year.
Effective January 1, 1997, the worldwide catastrophe retrocession program was
amended to provide coverage in each of the three years, 1997 through 1999,
subject to the retrocessionaire's right to cancel on November 1, 1998. The
attachment point of the catastrophe retrocession program is $25 million per
catastrophe and, in 1997, the Company can retrocede 75.0% of the next $75
million of losses in excess of the attachment point incurred on a per
catastrophe and aggregate basis. Fifty percent of the unused portion of the 1997
year's coverage increases the limit of coverage for 1998 (up to 75.0% of $112.5
million) and 50% of the unused portion of the 1997 and 1998 years' coverage
increases the limit of coverage for 1999 (up to 75.0% of $168.75 million). The
maximum recoverable under the catastrophe retrocession program over the
three-year period is $126.56 million. Also effective January 1, 1997, Everest Re
purchased an accident year aggregate excess of loss retrocession agreement which
provides up to $100 million of protection if Everest Re's statutory loss ratio
exceeds 79.0% for the 1997 accident year.
Although the catastrophe and aggregate excess of loss retrocessions have terms
which provide for additional premiums to be paid to the retrocessionaire in the
event that losses are ceded, all aspects of the Company's retrocessional program
have been structured to permit these agreements to be accounted for as
reinsurance under Statement of Financial Accounting Standards ("SFAS") No. 113.
If a single catastrophe were to occur in the United States that resulted in
$200.0 million of gross losses and allocated loss adjustment expenses ("ALAE")
in 1997 (an amount equivalent to Everest Re's PML), management estimates that
the effect (including additional premiums and retained losses and ALAE) on the
Company's income before taxes would be $118.9 million. This pre-tax net loss
estimate assumes that Everest Re's aggregate losses and ALAE for 1997 would
exceed the 79.0% loss ratio requirement in the aggregate excess of loss cover by
at least $100.0 million.
In addition, Everest Re purchased an aggregate stop loss retrocession agreement
(the "Stop Loss Agreement") from Gibraltar Casualty Company ("Gibraltar"), an
affiliate of The Prudential. See "Stop Loss Agreement".
As of December 31, 1996, Everest Re had retrocessional arrangements with 367
retrocessionaires, and it carried as an asset $749.1 million in reinsurance
receivables with respect to losses ceded to retrocessionaires, substantially all
of which will not be due to Everest Re until Everest Re makes payment on the
underlying claims. Of this amount, $397.0 million, or 53.0%, was receivable from
Gibraltar ($137.9 million, net of collateral held and liability balances for
which Everest Re has a contractual right of offset). An additional $150.0
million, or 20.0%, was receivable from Continental Insurance Company
("Continental"). None of the reinsurance receivables from Gibraltar or
Continental was in dispute or more than 90 days in arrears. Everest Re's
arrangement with Continental is managed on a funds held basis, which means that
Everest Re did not release premium payments to the retrocessionaire but rather
retains such payments to secure obligations of the retrocessionaire, records
them as a liability and reduces the liability account as payments become due. As
of December 31, 1996, such funds had reduced Everest Re's net exposure to
Continental to $99.8 million. No other retrocessionaire accounted for more than
$21.3 million of Everest Re's receivables.
No assurance can be given that Everest Re will be able to obtain retrocessional
coverage similar to that currently in place in the future. Although management
carefully selects its retrocessionaires, Everest Re is subject to credit risk
with respect to its retrocessions because the ceding of risk to
retrocessionaires does not relieve the reinsurer of its liability to ceding
companies.
RELATIONSHIPS WITH GIBRALTAR
During its early years, Everest Re also wrote some direct insurance. In 1978,
Everest Re expanded its direct insurance operation by forming Gibraltar as a
subsidiary. In 1985, Gibraltar and Everest Re ceased writing new and renewal
direct insurance, and Gibraltar was put into run-off.
While Gibraltar actively wrote direct insurance, it was able to reinsure certain
business through Everest Re's management underwriting facility ("MUF"). Begun in
1977, MUF was a reinsurance arrangement pursuant to which Everest Re ceded
certain business to a number of insurance and reinsurance companies (the "MUF
Participants"), many of them domiciled outside the United States. Gibraltar
ceded its MUF-qualifying business first to Everest Re, which then immediately
and entirely retroceded it to the MUF Participants. As a result of these
9
<PAGE>
cessions to Everest Re, Everest Re became, and remains, a reinsurer of Gibraltar
with respect to the Gibraltar MUF cessions. As of December 31, 1996, Gibraltar's
reinsurance receivables from Everest Re totaled $143.5 million. MUF became
inactive with respect to new business in 1991.
Following the 1985 decision to put Gibraltar in runoff, Everest Re and Gibraltar
entered into the following agreements pursuant to which Gibraltar became, and
remains, a reinsurer of Everest Re (the "Gibraltar Contracts"):
* In 1986, Gibraltar reinsured all insurance obligations of Everest Re pursuant
to certain insurance contracts written by Everest Re's former direct excess
insurance operations, which ceased writing business in 1985 (the "Ceded
Direct Insurance") (the "Direct Excess Retrocession").
* In 1989, Gibraltar reinsured Everest Re's medical malpractice and other
professional liability reinsurance written in 1988 and prior years (the
"Professional Liability Retrocession").
* During 1985 through 1990, Gibraltar and Everest Re commuted the obligations
of a number of MUF Participants. In exchange for a cash payment from each
commuted MUF Participant, Gibraltar assumed the obligations of such MUF
Participant. The commuted business included assumed reinsurance originally
retroceded to MUF Participants by Everest Re and direct insurance ceded by
Everest Re and Gibraltar.
In 1991, Everest Re distributed the stock of Gibraltar to PRUCO, Inc., a direct,
wholly-owned subsidiary of The Prudential ("PRUCO"). Simultaneously, PRUCO and
Gibraltar entered into a surplus maintenance agreement pursuant to which PRUCO
agreed to purchase such amount of surplus notes as may be necessary to maintain
Gibraltar's statutory surplus at no less than $15 million at all times. PRUCO
shortly thereafter distributed the stock of Gibraltar to The Prudential.
The Direct Excess Retrocession can be terminated by either Gibraltar or Everest
Re upon 90 days' notice, whereas The Professional Liability Retrocession can
only be terminated by Everest Re. A total of $119.6 million of the Gibraltar
receivables is attributable to the Direct Excess Retrocession. If the Direct
Excess Retrocession is terminated, all outstanding claims, including incurred
but not reported losses ("IBNR"), will be commuted with the value of such
claims, which may not exceed Everest Re's then outstanding loss reserves with
respect thereto, to be mutually agreed upon or, if no agreement can be reached,
determined by an actuary or appraiser mutually appointed. At the time of the
IPO, the parties agreed that if Gibraltar terminates the Direct Excess
Retrocession and the parties cannot agree on the value of the claims to be
commuted, Everest Re's chief actuary will determine such value. Gibraltar could
arbitrate the actuary's determination. If the Direct Excess Retrocession were to
be so terminated and Everest Re's ultimate losses on the Ceded Direct Insurance
were to exceed the commutation amount, the resulting reserve increases would
constitute adverse development eligible for coverage under the Stop Loss
Agreement (described below), subject to the applicable limits thereof.
STOP LOSS AGREEMENT
On October 5, 1995, Everest Re and Gibraltar entered into an aggregate stop loss
retrocession agreement (the "Stop Loss Agreement"). The Stop Loss Agreement is
intended to mitigate the impact on the Company's future earnings that could
result from the adverse development, if any, of Everest Re's consolidated
reserves for losses, allocated LAE and uncollectible reinsurance as of June 30,
1995, including IBNR; provided, that adverse development, if any, of such
reserves relating to catastrophes (as defined in the Stop Loss Agreement) will
only be covered to the extent that the catastrophe event to which such reserves
relate occurred prior to January 1, 1995. Such adverse development is referred
to herein as "Adverse Development". For a description of the Stop Loss
Agreement, see Note 5 of Notes to Consolidated Financial Statements. Also See
Note 6F of Notes to the Consolidated Financial Statements.
STANDBY CAPITAL CONTRIBUTION AGREEMENT AND PRUCO INDEMNITY
On October 5, 1995, Holdings agreed, pursuant to a Standby Capital
Contribution Agreement (the "Capital Contribution Agreement"), to
make certain capital contributions ("Capital Contributions") to Everest
Re. And, on October 5, 1995, PRUCO agreed to make payments ("Indemnity
Payments") to Holdings, pursuant to an Indemnity Agreement (the "PRUCO
Indemnity"), in an amount equal to the Capital Contributions. For a
10
<PAGE>
description of the Capital Contribution Agreement and the PRUCO Indemnity, see
Note 6A of Notes to the Consolidated Financial Statements.
PRUDENTIAL GUARANTEES
On October 5, 1995, The Prudential guaranteed (i) up to $775.0 million of
Gibraltar's obligations to Everest Re, and (ii) PRUCO's obligation to make the
Indemnity Payments (the "Prudential Guarantees"). The Prudential agreed, subject
to the terms and conditions thereof, to guarantee Gibraltar's payment
obligations with respect to (i) the Stop Loss Agreement, subject to maximum
aggregate payments of $375.0 million, and (ii) payment obligations under the
Gibraltar Contracts, subject to maximum aggregate payments of $400.0 million.
The maximum aggregate payments under the Prudential Guarantee of Gibraltar's
obligations will be reduced in certain circumstances to take account of payments
made and collateral provided in respect of the guaranteed obligations.
As of December 31, 1996, based on publicly available information, The Prudential
had statutory basis total assets of $178.6 billion and statutory surplus of $9.4
billion.
CLAIMS
Claims are managed by the Company's professional claims staff whose
responsibilities include reviewing initial loss reports and coverage issues,
monitoring claims handling activities of ceding companies, establishing and
adjusting proper case reserves and approving payment of claims. In addition to
claims assessment, processing and payment, the claims staff selectively conducts
comprehensive claims audits of both specific claims and overall claims
procedures at the offices of selected ceding companies.
RESERVES FOR UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES
Significant periods of time may elapse between the occurrence of an insured
loss, the reporting of the loss to the ceding company and the reinsurer and the
ceding company's payment of that loss and subsequent payments to the ceding
company by the reinsurer. To recognize liabilities for unpaid losses and loss
adjustment expenses ("LAE"), insurers and reinsurers establish reserves, which
are balance sheet liabilities representing estimates of future amounts needed to
pay reported and unreported claims and related expenses on losses that have
already occurred. Actual losses and LAE paid may deviate, perhaps substantially,
from such reserves. To the extent reserves prove to be insufficient to cover
actual losses and LAE after taking into account available retrocessional
coverage, including the reinsurance provided through the Stop Loss Agreement,
Everest Re would have to augment such reserves and incur a charge to earnings
which could be material in the period such augmentation takes place. See ITEM 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Loss and LAE Reserves".
While the reserving process is difficult and subjective for the ceding
companies, the inherent uncertainties of estimating such reserves are even
greater for the reinsurer, due primarily to the longer time between the date of
an occurrence and the reporting of any attendant claims to the reinsurer, the
diversity of development patterns among different types of reinsurance treaties
or facultative contracts, the necessary reliance on the ceding companies for
information regarding reported claims and differing reserving practices among
ceding companies. In addition, trends that have affected development of
liabilities in the past may not necessarily occur or affect liability
development to the same degree in the future. Thus, actual losses and LAE may
deviate, perhaps substantially, from estimates of reserves reflected in the
Company's consolidated financial statements.
Like many other property and casualty insurance and reinsurance companies,
Everest Re has experienced adverse loss development for prior accident years,
which has led to adjustments in losses and LAE reserves. The increase in
reserves for prior accident years reduced net income for the periods in which
the adjustments were made. There can be no assurance that adverse development
from prior years will not continue in the future or that such adverse
development will not have a material adverse effect on net income. Adverse
Development will be reinsured under the Stop Loss Agreement, up to the maximum
limits thereunder and subject to the other terms and conditions thereof. See
"Relationships with Gibraltar" and "Stop Loss Agreement".
CHANGES IN HISTORICAL RESERVES
The following table shows changes in statutory historical loss reserves for
Everest Re for 1986 and subsequent years. The top line of each table shows the
estimated reserves for unpaid losses and LAE recorded at each year end date.
11
<PAGE>
Each amount in the top line represents the estimated amount of future payments
for losses and LAE on claims occurring in that year and in prior years. The
upper (paid) portion of the table presents the cumulative amounts paid through
each subsequent year on those claims for which reserves were carried as of each
specific year end. The lower (liability re-estimated) portion shows the
re-estimated amount of the previously recorded reserves based on experience as
of the end of each succeeding year. The estimate changes as more information
becomes known about the actual claims for which the initial reserves were
carried. The cumulative redundancy/deficiency line represents the cumulative
change in estimates since the initial reserve was established. It is equal to
the latest liability re-estimated amount less the initial reserve.
Each amount other than the original reserves in the top half of the table below
includes the effects of all changes in amounts for prior periods. For example,
if a loss settled in 1989 for $100,000 was first reserved in 1986 at $60,000 and
remained unchanged until settlement, the $40,000 deficiency (actual loss minus
original estimate) would be included in the cumulative redundancy (deficiency)
in each of the years in the period 1986 through 1988 shown below. Conditions and
trends that have affected development of liability in the past may not
necessarily occur in the future. Accordingly, it may not be appropriate to
extrapolate future redundancies or deficiencies based on this table.
12
<PAGE>
<TABLE>
<CAPTION>
TEN YEAR STATUTORY LOSS DEVELOPMENT TABLE PRESENTED NET OF REINSURANCE WITH SUPPLEMENTAL GROSS DATA(1)(2)
Years Ended December 31,
------------------------------------------------------------------------------------------------------------
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
(Dollars in millions) -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Reserves for unpaid
loss and LAE $1,258.0 $1,676.7 $1,775.8 $1,766.7 $1,891.9 $1,752.9 $1,854.7 $1,934.2 $2,104.3 $2,327.7 $2,626.3
Paid (cumulative)
as of:
One year later 115.1 345.7 299.1 321.9 597.1 333.3 461.5 403.5 359.5 282.1
Two years later 307.1 582.3 522.3 829.5 785.9 550.4 740.1 627.7 638.0
Three years later 505.3 757.0 984.3 966.3 933.1 758.3 897.0 820.5
Four years later 655.5 1,189.1 1,096.1 1,078.2 1,096.9 868.1 1,036.0
Five years later 1,068.0 1,278.7 1,189.5 1,209.0 1,176.9 970.0
Six years later 1,142.3 1,358.6 1,308.9 1,276.3 1,257.3
Seven years later 1,212.1 1,478.7 1,367.9 1,346.6
Eight years later 1,312.0 1,532.0 1,430.7
Nine years later 1,367.7 1,591.1
Ten years later 1,424.8
Liability re-estimated
as of:
One year later 1,336.9 1,767.0 1,794.6 1,835.4 1,866.3 1,737.8 1,929.2 2,008.5 2,120.8 2,298.1
Two years later 1,421.3 1,841.5 1,813.2 1,834.3 1,872.8 1,775.7 1,988.9 2,015.4 2,233.7
Three years later 1,563.0 1,839.6 1,805.6 1,849.5 1,907.5 1,843.3 2,010.0 2,119.0
Four years later 1,607.1 1,879.1 1,867.6 1,913.6 1,976.5 1,855.7 2,111.9
Five years later 1,659.8 1,942.2 1,934.5 1,982.3 1,984.3 1,955.1
Six years later 1,714.4 2,029.1 2,007.6 1,984.1 2,080.0
Seven years later 1,819.6 2,118.0 2,008.0 2,089.4
Eight years later 1,910.7 2,125.2 2,122.6
Nine years later 1,926.6 2,243.1
Ten years later 2,037.0
Cumulative redundancy/
(deficiency) $ (779.0) $ (566.4) $ (346.8) $ (322.7) $ (188.1) $ (202.2) $ (257.2) $ (184.8) $ (129.4) $ 29.6
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
Gross liability-end of year $2,476.7 $2,576.0 $2,752.8 $3,016.9 $3,298.2
Reinsurance receivable 622.0 641.8 648.5 689.2 671.9
-------- -------- -------- -------- --------
Net liability-end of year 1,854.7 1,934.2 2,104.3 2,327.7 2,626.3
-------- -------- -------- -------- ========
Gross re-estimated
liability at December 31,
1996 3,058.7 2,988.4 3,019.8 3,184.6
Re-estimated receivable
at December 31, 1996 946.8 869.4 786.1 886.5
-------- -------- -------- --------
Net re-estimated liability
at December 31, 1996 2,111.9 2,119.0 2,233.7 2,298.1
-------- -------- -------- --------
Gross cumulative
redundancy/(deficiency) $ (582.0) $ (412.4) $ (267.0) $ (167.7)
======== ======== ======== ========
</TABLE>
- - ----------
(1) Includes Gibraltar data through September 31, 1991
(2) Includes Everest Re Ltd. data which was previously excluded. All prior
period amounts have been restated for this change.
13
<PAGE>
For years prior to 1987, management believes that two factors had the most
significant impact on loss development. First, through the mid-1980's, a number
of industry and external factors, such as the propensity of courts to award
large damage awards in liability cases, combined to increase loss frequency and
severity to unexpectedly high levels. Second, contracts written prior to 1986
contained coverage terms which, for Everest Re and the industry in general, have
been interpreted by courts to provide coverage for asbestos and environmental
exposures not contemplated by either the pricing or the initial reserving of the
contracts. Legal developments during the mid-1980's necessitated additional
reserving for such exposures on both a case and IBNR basis. No losses were
incurred net of reinsurance with respect to asbestos and environmental claims in
1996 or 1995. Incurred losses net of reinsurance with respect to asbestos and
environmental claims were $40.5 million, $70.6 million and $35.4 million in
1994, 1993 and 1992, respectively. Substantially all of these losses related to
pre-1986 exposures.
To the extent loss reserves on assumed reinsurance need to be increased, Everest
Re would be entitled to certain payments under the Stop Loss Agreement. See
"Stop Loss Agreement". Additionally, Holdings may be required to make payments
under the Capital Contribution Agreement for which it would be entitled to
indemnification under the PRUCO Indemnity. See "Standby Capital Contribution
Agreement and PRUCO Indemnity". To the extent loss reserves on the Ceded Direct
Insurance need to be increased and subject to the terms of the Gibraltar
Contracts, Everest Re will be entitled to 100% protection from Gibraltar under
the Gibraltar Contracts, which reinsurance obligations are guaranteed by The
Prudential subject to the terms and conditions of the applicable Prudential
Guarantee. See "Relationships with Gibraltar" and "Prudential Guarantees".
Management believes that adequate provision has been made for Everest Re's loss
and LAE reserves regardless of the availability of any such payments under the
Stop Loss Agreement, the PRUCO Indemnity, and the Prudential Guarantees.
Additionally, while there can be no assurance that reserves for and losses from
these claims will not increase in the future, management believes that Everest
Re's existing reserves and retrocessional arrangements and payments available
under the Stop Loss Agreement, the PRUCO Indemnity and the Prudential Guarantees
lessen the probability that such increases would have a material adverse effect
on the Company's financial condition, results of operations or cash flows.
The Ten Year Statutory Loss Development Table includes Gibraltar data until
September 30, 1991 at which time Everest Re distributed the stock of Gibraltar
to PRUCO. Thus the 1986-1990 "Reserves for unpaid loss and LAE" includes the
Gibraltar liability. Similarly, the "Paid (cumulative) as of" and "Liability
re-estimated as of" data include Gibraltar experience until September 30, 1991.
At the time of the distribution of Gibraltar, Gibraltar still had $288.5 million
of reserves outstanding. To more accurately reflect reserve development, the
Gibraltar reserves were removed from the reserves for unpaid losses and LAE line
for periods after 1991 and the $288.5 million was treated as a paid loss. The
amounts so treated as paid in 1991 were $281.1 million and $285.6 million for
the years 1986 and 1987, respectively, and $288.5 for each of the years 1988
through 1990. The following table identifies the cumulative reserve
redundancy/(deficiency) relating to Gibraltar only, Everest Re excluding
Gibraltar and the consolidated group.
<TABLE>
<CAPTION>
CUMULATIVE RESERVE REDUNDANCY/(DEFICIENCY) ATTRIBUTABLE TO GIBRALTAR
Years Ended December 31,
------------------------------------------------------------------------------------------------
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995
(Dollars in millions) ------- ------- ------- ------- ------- ------- ------- ------- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Everest Re excluding
Gibraltar $(573.1) $(389.8) $(216.9) $(224.6) $(158.1) $(202.2) $(257.2) $(184.8) $(129.4) $29.6
Gibraltar (205.9) (176.6) (129.9) (98.1) (30.0) -- -- -- -- --
------- -------- ------- ------- ------- ------- ------- ------- ------- -----
Consolidated $(779.0) $(566.4) $(346.8) $(322.7) $(188.1) $(202.2) $(257.2) $(184.8) $(129.4) $29.6
======= ======== ======= ======= ======= ======= ======= ======= ======= =====
</TABLE>
14
<PAGE>
The following table is derived from the Ten Year Statutory Loss Development
Table above and summarizes the effect of reserve re-estimates, net of
reinsurance, on calendar year operations for the same ten year period ended
December 31, 1996. Each column represents the amount of reserve re-estimates
made in the indicated calendar year and shows the accident years to which the
re-estimates are applicable. The amounts in the total accident year column on
the far right represent the cumulative reserve re-estimates for the indicated
accident years.
<TABLE>
<CAPTION>
EFFECT OF RESERVE REESTIMATES ON CALENDAR YEAR OPERATIONS
Cumulative
Re-estimates
Calendar Year Ended December 31, for each
------------------------------------------------------------------------------------------ Accident
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 Year
------ ------ ------- ------ ------ ------ ------- ------ ------ ------- ------------
(Dollars in millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Accident Years
1986 & prior $(78.9) $(84.4) $(141.8) $(44.1) $(52.7) $(54.6) $(105.2) $(91.0) $(18.9) $(107.4) $(779.0)
1987 (7.0) 68.3 46.1 13.2 (8.5) 18.3 2.1 11.7 (10.4) 133.8
1988 54.8 (20.6) 47.1 1.1 20.0 15.8 6.8 3.3 128.3
1989 (50.1) (6.5) 46.9 2.8 4.4 (1.4) 9.2 5.3
1990 24.5 8.7 29.4 (0.4) (6.0) 9.7 65.9
1991 21.6 (3.2) 1.4 (4.6) (3.8) 11.4
1992 (36.6) 7.9 (8.7) (2.5) (39.9)
1993 (14.5) 14.2 (1.7) (2.0)
1994 (9.8) (9.2) (19.0)
1995 142.4 142.4
Total calendar
year effect $(78.9) $(91.4) $ (18.7) $(68.7) $ 25.6 $ 15.2 $ (74.5) $(74.3) $(16.7) $ 29.6 $(352.8)
</TABLE>
As illustrated by this table, the factors which caused the deficiencies shown in
the Ten Year Statutory Loss Development Table relate almost entirely to accident
years prior to 1986. With the exception of the 1992 accident year, which
included Hurricane Andrew, the original reserves established for each accident
year since 1986 have developed either positively or in a manner that is not
materially adverse. Adverse development relating to accident years prior to July
1, 1995 (prior to January 1, 1995 for catastrophe losses) is mitigated by
recoveries under the Stop Loss Agreement. As the Stop Loss Agreement was entered
into in 1995, recoveries thereunder are reflected in the 1995 accident year
rather than in the accident year which included the underlying adverse
development.
The following table presents a reconciliation of beginning and ending reserve
balances for the years indicated on a GAAP basis:
<TABLE>
<CAPTION>
RECONCILIATION OF RESERVES FOR LOSSES AND LAE
Years Ended December 31,
----------------------------------
(Dollars in millions) 1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Reserves at beginning of period $2,969.3 $2,706.4 $2,540.1
-------- -------- --------
Incurred related to:
Current year 745.6 658.0 646.5
Prior years (29.6) 16.7 74.3
-------- -------- --------
Total incurred losses 716.0 674.7 720.8
-------- -------- --------
Paid related to:
Current year 139.1 92.9 157.7
Prior years 282.1 359.5 403.5
-------- -------- --------
Total paid losses 421.2 452.4 561.2
-------- -------- --------
Change in reinsurance receivables
on unpaid losses and LAE (17.3) 40.6 6.7
-------- -------- --------
Reserves at end of period $3,246.9 $2,969.3 $2,706.4
======== ======== ========
</TABLE>
15
<PAGE>
The reconciliation of reserves on a GAAP basis to reserves reported on a
statutory basis for each of the three years in the period ended December 31,
1996 is shown below:
<TABLE>
<CAPTION>
RECONCILIATION OF RESERVES FOR LOSSES AND LAE FROM STATUTORY BASIS TO GAAP BASIS
Years Ended December 31,
-------------------------------
(Dollars in millions) 1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Statutory reserves-net $2,387.7 $2,120.0 $1,934.6
Statutory retroactive reinsurance reserves 15.4 5.4 --
Financing arrangement (10.3) (10.3) (10.3)
-------- -------- --------
Subtotal 2,392.8 2,115.1 1,924.3
Foreign subsidiary reserves 233.5 212.6 180.0
Subtotal-net reserves as shown in loss
development schedule 2,626.3 2,327.7 2,104.3
Reinsurance receivable on unpaid losses 671.9 689.2 648.5
-------- -------- --------
Subtotal-gross reserves as shown in loss
development schedule 3,298.2 3,016.9 2,752.8
-------- -------- --------
Foreign translation effect of Canadian reserves (51.3) (47.6) (46.4)
-------- -------- --------
Reserves on a GAAP basis $3,246.9 $2,969.3 $2,706.4
======== ======== ========
</TABLE>
Statutory reserves are presented net of reinsurance receivables on unpaid loss
and LAE for years ended December 31, 1996, 1995 and 1994. The amounts shown as
financing arrangement in 1996, 1995 and 1994 relate to a single treaty which did
not qualify for reinsurance accounting under GAAP.
RESERVES FOR ASBESTOS AND ENVIRONMENTAL LOSSES AND LOSS ADJUSTMENT EXPENSES
Everest Re's reserves include an estimate of Everest Re's ultimate liability for
asbestos and environmental claims for which ultimate value cannot be estimated
using traditional reserving techniques. There are significant uncertainties in
estimating the amount of Everest Re's potential losses from asbestos and
environmental claims. See ITEM 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Asbestos and Environmental
Exposures" and Note 8 of Notes to Consolidated Financial Statements.
The following table summarizes the composition of Everest Re's total reserves
for asbestos and environmental losses, gross and net of reinsurance for the
years ended December 31, 1996, 1995, 1994 and 1993:
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------
(Dollars in millions) 1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Case reserves reported by ceding companies $ 101.2 $ 108.5 $ 112.9
Additional reserves established by Everest Re
(assumed reinsurance) 50.1 43.8 39.8
Case reserves established by Everest Re
(Ceded Direct Insurance) 52.8 50.3 52.3
IBNR reserves 219.2 225.9 240.6
------- ------- -------
Gross reserves 423.3 428.5 445.5
Reinsurance receivable (222.3) (230.8) (241.9)
------- ------- -------
Net reserves $ 201.0 $ 197.7 $ 203.7
======= ======= =======
</TABLE>
Everest Re's asbestos and environmental claims are managed by an experienced
staff consisting of seven people. This claims unit works closely with members of
Everest Re's in-house legal staff on legal developments. The claims unit also
meets with the management of primary insurance companies to understand their
asbestos and environmental exposures and reserving practices.
Additional losses, the type or magnitude of which cannot be foreseen by the
Company, or the reinsurance industry generally, may emerge in the future. Such
future emergence, to the extent not covered by existing retrocessional
16
<PAGE>
contracts, including the Stop Loss Agreement, could have material adverse
effects on the Company's future financial condition, results of operations and
cash flows.
INVESTMENTS
Everest Re's overall financial strength and results of operations are, in part,
dependent on the quality and performance of its investment portfolio. Net
investment income and net realized capital gains (losses) on Everest Re's
invested assets constituted 16.9%, 21.1% and 13.5% of the Company's revenues for
the years ending December 31, 1996, 1995 and 1994, respectively. The Company's
cash and invested assets totalled $3,624.6 million at December 31, 1996 of which
95.0% were cash or investment grade fixed maturities.
Everest Re's investment strategy emphasizes maintaining a high quality
investment portfolio while maximizing long-term after-tax investment income.
Everest Re's current investment strategy seeks to maximize after-tax income
through a high quality, diversified, taxable bond and tax-exempt municipal bond
portfolio, while maintaining an adequate level of liquidity. Everest Re's mix of
taxable and tax-preferenced investments is adjusted continuously, consistent
with Everest Re's current and projected operating results, market conditions and
tax position. Additionally, Everest Re invests in marketable equity securities
which it believes will enhance the risk-adjusted total return of the investment
portfolio.
The Investment Committee of Everest Re's Board of Directors is responsible for
establishing investment policy and guidelines and, together with senior
management, for overseeing their execution. Everest Re's investment portfolio is
in compliance with the insurance laws of the state of Delaware, its domiciliary
state, and of other jurisdictions in which it is regulated. These laws prescribe
the kind, quality and concentration of investments which may be made by
insurance companies. In general, these laws permit investments, within specified
limits and subject to certain qualifications, in government obligations,
corporate bonds, preferred and common stocks, real estate mortgages and real
estate. An independent investment advisor is utilized to manage the Company's
investment portfolio within the established guidelines and is required to report
activities on a current basis and to meet with the Company periodically to
review and discuss the portfolio structure, securities selection and performance
results.
Everest Re's investment guidelines include a duration guideline of three to six
years. The duration of an investment is based on the maturity of the security
but also reflects the possibility of early prepayment of such security without a
prepayment penalty. This investment duration guideline is sensitive to Everest
Re's average duration of potential liabilities which, at December 31, 1996, was
approximately five years. Liability duration is determined based on the
estimated payouts of underwriting liabilities using standard duration
calculations.
Approximately 13.2% of the Company's consolidated reserves for losses and LAE
and unearned premiums represents estimated amounts payable in foreign
currencies. For each currency in which the Company has established substantial
reserves, the Company seeks to maintain invested assets denominated in such
currency in an amount approximately equal to the estimated liabilities which are
denominated in such currency.
As of December 31, 1996, 99.4% of Everest Re's fixed maturities consisted of
investment grade securities. The average maturity of fixed maturities was 7.8
years at December 31, 1996, and their overall duration was 5.2 years. As of
December 31, 1996, Everest Re did not have any material holdings of issuers who
management believes are experiencing cash flow difficulty to an extent that the
ability of the obligor to meet debt service payments is threatened. Everest Re's
current investment strategy does not contemplate additional investment in
non-investment grade securities or any investments in commercial real estate or
direct commercial mortgages. Also, investments in derivative products (i.e.,
products which include features such as futures, forwards, swaps, options and
other investments with similar characteristics) are generally prohibited,
without the prior approval of Everest Re's Investment Committee. At December 31,
1996, the Company had no investments in derivative products.
As of December 31, 1996, the common stock portfolio was $147.3 million at market
value, is managed with a growth and income orientation and consisted primarily
of investments in dividend paying mid and large capitalization companies. Also
included in the stock portfolio are strategic minority interests in Corporacion
MAPFRE S.A. ("MAPFRE"), an insurance group in Spain, and three other companies.
These companies accounted for $42.5 million (of which $35.8 million related to
MAPFRE) or 28.8% of Everest Re's total equity investments as of December 31,
1996 and 1.2% of total cash and investments.
17
<PAGE>
The following table reflects investment results for Everest Re for each of the
five years in the period ended December 31, 1996:
<TABLE>
Pre-Tax
Pre-Tax Realized Net
Average Investment Effective Capital Gains
Investments(1) Income(2) Yield(3) (Losses)
-------------- ---------- --------- -------------
Years Ended December 31,
(Dollars in millions)
<S> <C> <C> <C> <C>
1996 $3,416.4 $191.9 5.62% $5.7
1995 2,894.9 166.0 5.73 33.8
1994 2,620.9 143.6 5.48 (10.5)
1993 2,532.2 141.1 5.57 78.8
1992 2,407.2 159.3 6.62 87.5
</TABLE>
- - ----------------
(1) Average of the beginning and ending carrying values of investments and
cash, less net funds held and non-interest bearing cash. Common stocks and
nonredeemable preferred stocks are carried at fair market value. Bonds and
redeemable preferred stocks are carried at amortized cost except that,
effective December 31, 1993, bonds and redeemable preferred stock
available for sale are carried at fair market value.
(2) After investment expenses, excluding realized net capital gains (losses).
(3) Pre-tax net investment income for the period divided by average
investments for the same period and annualized for interim periods.
The following table summarizes fixed maturities as of December 31, 1996 and
1995:
<TABLE>
Amortized Unrealized Unrealized Market
Cost Appreciation Depreciation Value
(Dollars in millions) --------- ------------ ------------ --------
<S> <C> <C> <C>
December 31, 1996:
U.S. Treasury securities and obligations
of U.S. government agencies and
corporations $ 192.6 $ 1.2 $1.4 $ 192.4
Obligations of states and political
subdivisions 1,309.9 56.1 1.0 1,365.0
Corporate Securities 740.0 11.4 0.3 751.1
Mortgage-backed securities 487.1 7.7 2.0 492.8
Foreign debt securities 545.2 24.7 0.9 569.0
-------- ------ ---- --------
Total $3,274.8 $101.1 $5.6 $3,370.3
======== ====== ==== ========
December 31, 1995:
U.S. Treasury securities and obligations
of U.S. government agencies and
corporations $ 101.7 $ 2.4 $0.4 $ 103.7
Obligations of states and political
subdivisions 1,185.4 65.0 0.4 1,250.0
Corporate Securities 773.4 25.0 0.7 797.7
Mortgage-backed securities 355.7 9.9 0.4 365.2
Foreign debt securities 455.5 17.7 3.7 469.5
-------- ------ ---- --------
Total $2,871.8 $120.0 $5.7 $2,986.1
======== ====== ==== ========
</TABLE>
18
<PAGE>
The following table presents the credit quality distribution by the National
Association of Insurance Commissioners ("NAIC") rating of Everest Re's fixed
maturities as of December 31, 1996:
<TABLE>
Held to Available
(Dollars in millions) Maturity For Sale
NAIC (Amortized (Market Percent of
Rating(1) Standard and Poor's Equivalent Description Cost) Value) Total Total
- - --------- ------------------------------------------ ---------- --------- -------- ----------
<S> <C> <C> <C> <C>
1 AAA/AA/A $78.3 $2,622.4 $2,700.7 80.3%
2 BBB 1.8 310.3 312.1 9.3
3 BB -- 19.4 19.4 0.6
4 B -- -- -- --
5 CCC/CC/C 0.4 -- 0.4 0.0
6 CI/D -- 1.4 1.4 0.0
Foreign subsidiary investments(2) -- 328.5 328.5 9.8
----- -------- -------- -----
Total(3) $80.5 $3,282.0 $3,362.5 100.0%
===== ======== ======== =====
</TABLE>
- - ------------
(1) The Securities Valuation Office of the NAIC maintains a security valuation
system that assigns a numerical rating to securities. The numerical
ratings generally correspond to S & P's classifications, as indicated,
although S & P's has not necessarily rated the securities indicated.
Rating categories 1 and 2 are considered investment grade and categories 3
through 6 are considered non-investment grade.
(2) Foreign subsidiary investments are not subject to NAIC ratings but, in the
opinion of the investment manager, are of high investment grade.
(3) Certain totals may not reconcile due to rounding.
The following table summarizes fixed maturities by contractual maturity as of
December 31, 1996:
<TABLE>
Held to Maturity Available For Sale Total Percent of
(Amortized Cost) (Market Value) Balance Sheet Balance Sheet
(Dollars in millions) ---------------- ------------------ ------------- -------------
<S> <C> <C> <C> <C>
Maturity category:
Less than one year $10.7 $ 75.7 $ 86.4 2.6%
Due after 1-5 years 26.8 655.1 681.9 20.3%
Due after 5-10 years 7.2 963.1 970.3 28.9%
Due after 10 years 35.8 1,095.3 1,131.1 33.6%
----- -------- -------- -----
Subtotal 80.5 2,789.2 2,869.7 85.3%
Mortgage-backed securities(1) -- 492.8 492.8 14.7%
----- -------- -------- -----
Total(2) $80.5 $3,282.0 $3,362.5 100.0%
===== ======== ======== =====
</TABLE>
- - ------------
(1) Mortgage-backed securities generally are more likely to be prepaid than
other fixed maturities. Therefore contractual maturities are excluded
from this table since they may not be indicative of actual maturities.
(2) Certain totals may not reconcile due to rounding.
RATINGS
Everest Re currently has a rating of "A" (Excellent) from A.M. Best, an
independent insurance industry rating organization which rates companies on
factors of concern to policyholders. A.M. Best states that the "A" (Excellent)
rating is assigned to those companies which, in its opinion, have achieved
excellent overall performance when compared to the standards established by A.M.
Best and have demonstrated a strong ability to meet their obligations to
policyholders over a long period of time. The "A" (Excellent) rating is the
third highest of fifteen ratings assigned by A.M. Best, which range from "A++"
(Superior) to "F" (In liquidation). Additionally, A.M. Best has eleven
classifications within the "Not Assigned" category.
Everest Re currently has a claims-paying ability rating of "A+" (Good)
from Standard & Poor's, an independent rating organization which rates an
insurance company's financial capacity to meet the obligations of its
insurance policies in accordance with their terms. Standard & Poor's states that
the "A+" rating is assigned to those companies which, in its opinion, have
secure financial capacity to meet policyholder obligations. The "A+" rating is
19
<PAGE>
the fifth highest of eighteen ratings assigned by Standard & Poor's, which range
from "AAA" (Superior) to "R" (Regulatory Action). Ratings from AA to B may be
modified by the use of a plus or minus sign to show relative standing of the
insurer within those rating categories.
Everest Re currently has an insurance financial strength rating of "A2" (Good)
from Moody's. Moody's states that insurance companies rated "A" offer good
financial security. However, elements may be present which suggest a
susceptibility to impairment sometime in the future. Moody's rating gradations
are shown through the use of nine distinct symbols, each symbol representing a
group of ratings in which the financial security is broadly the same. The "A2"
(Good) rating is the sixth highest of ratings assigned by Moody's, which range
from "Aaa" (Exceptional) to "C" (Lowest). Moody's further distinguishes the
ranking of an insurer within its generic rating classification from Aa to B with
1, 2 and 3 ("1" being the highest).
A.M. Best's, Standard & Poor's and Moody's ratings are based upon factors of
concern to policyholders and should not be considered an indication of the
degree or lack of risk involved in an equity investment in an insurance company.
Each of these rating agencies reviews its ratings periodically, and there can be
no assurance that Everest Re's ratings will be maintained in the future.
COMPETITION
The property and casualty reinsurance business is highly competitive.
Competition with respect to the types of reinsurance in which Everest Re is
engaged is based on many factors, including the perceived overall financial
strength of the reinsurer, A.M. Best's and/or Standard & Poor's rating of the
reinsurer, underwriting expertise, the states where the reinsurer is licensed or
otherwise authorized, premiums charged, other terms and conditions of the
reinsurance offered, services offered, speed of claims payment and reputation
and experience in lines written. Everest Re competes for its business in the
United States and international reinsurance markets with numerous international
and domestic reinsurance companies, some of which have greater financial
resources than Everest Re.
Everest Re's competitors include independent reinsurance companies, subsidiaries
or affiliates of established worldwide insurance companies, reinsurance
departments of certain primary insurance companies and domestic and
international underwriting operations. Some of these competitors have greater
financial resources than Everest Re, have been operating for longer than Everest
Re, and have established long-term and continuing business relationships
throughout the industry, which can be a significant competitive advantage.
Although most U.S. reinsurance companies operate in the broker market, most of
Everest Re's largest competitors work directly with ceding companies, competing
with brokers. Management believes that Everest Re's major competitors are large
U.S. and foreign reinsurance companies.
Since 1987, the industry has experienced increased global competition. During
this period, primary insurers retained an increasing portion of their business,
which, together with the competitive market conditions, resulted in excess
reinsurance capacity and generally low rates of premium growth. In the early
1990s, several well-capitalized new Bermuda-based companies have entered the
reinsurance industry, and added significant capacity, particularly in the
catastrophe reinsurance market, and rendered future rate improvement uncertain.
In addition, Lloyd's of London has relaxed its requirement that syndicate
members have unlimited liability for losses and has allowed limited liability
investors to join syndicates, thereby increasing the reinsurance capacity at
Lloyd's. In 1996, Lloyd's has also implemented its reconstruction and renewal
plan in an attempt to separate past losses from the current market participants
and to provide a more secure market going forward.
Management believes that since 1987, a number of factors, including global
competition, the emergence of significant reinsurance capacity from the Bermuda
and rejuvenated Lloyds' markets, higher retentions by primary insurance
companies and consolidation in the insurance industry, have resulted in
increasingly competitive market conditions across most lines of business and
have influenced the softening of prices and contract terms in the current
marketplace.
The Company may, in the future, face additional competition from other
well-capitalized companies or from market participants that may devote more of
their capital to the reinsurance business or from the capital markets entry into
insurance and reinsurance investment products. And, the Company believes that
the insurance and reinsurance industries will continue to undergo further
consolidation, including reinsurance brokers, whose role will become stronger,
and that reinsurers will need significant size and financial strength to compete
effectively.
20
<PAGE>
EMPLOYEES
As of March 3, 1997, Everest Re employed 400 persons. Management believes that
its employee relations are good. None of Everest Re's employees are subject to
collective bargaining agreements, and the Company is not aware of any current
efforts to implement such agreements at Everest Re.
INFORMATION RELATING TO DOMESTIC AND FOREIGN OPERATIONS
Financial information relating to industry segments set forth in Note 10 of
Notes to Consolidated Financial Statements of the Company is incorporated herein
by reference.
REGULATORY MATTERS
The Company is subject to regulation under the insurance statutes of various
jurisdictions, including Delaware, the domiciliary state of Everest Re, Arizona,
the domiciliary state of Everest National, the United Kingdom, the domiciliary
jurisdiction of Everest Ltd., and Canada, the domiciliary jurisdiction of
Everest Canada.
INSURANCE HOLDING COMPANY REGULATION. Insurance holding company laws and
regulations generally require the holding company to register with the relevant
state regulatory authorities and file certain reports which include current
information concerning the capital structure, ownership, management, financial
condition and general business operations of the insurance holding company and
its subsidiaries licensed in the state. State regulators also require prior
notice or regulatory approval of changes in control of an insurer or its holding
company and of certain material inter-affiliate transactions within the holding
company structure. See "-Dividends by Everest Re".
Under the Delaware and Arizona Codes and regulations thereunder, no person,
corporation or other entity may acquire a controlling interest in the Company,
unless such person, corporation or entity has obtained the prior approval of the
Delaware and Arizona Insurance Commissioners for such acquisition. For the
purposes of the Delaware and Arizona Codes, any person acquiring, directly or
indirectly, 10% or more of the voting securities of an insurance company is
presumed to have acquired "control" of such company. To obtain the approval of
any such change in control, the proposed acquirer must file an application with
the Delaware and Arizona Insurance Commissioners. This application requires the
acquirer to disclose its background, financial condition, the financial
condition of its affiliates, the source and amount of funds by which it will
effect the acquisition, the criteria used in determining the nature and amount
of consideration to be paid for the acquisition, proposed changes in the
management and operations of the insurance company and any other related
matters.
The United Kingdom Insurance Companies Act 1982 requires the prior approval by
the Department of Trade and Industry of anyone proposing to become a
"controller" of any insurance company regulated under such Act. Any company or
individual that directly or indirectly exercises 15% or more of the voting power
at a general meeting of a regulated insurance company incorporated in the United
Kingdom which only engages in reinsurance business is considered a "controller".
The Insurance Companies Act of Canada also requires prior approval by the
Minister of Finance of anyone acquiring a significant interest in an authorized
Canadian insurance company. In addition, the Company is subject to regulation by
the insurance regulators of other states and foreign jurisdictions in which it
does business. Certain of these states and foreign jurisdictions impose
regulations regulating the ability of any person to acquire control of an
insurance company without appropriate regulatory approval similar to those
described above.
DIVIDENDS BY EVEREST RE. Because the operations of the Company are conducted
through Everest Re and its subsidiaries, the Company is dependent upon dividends
and other permissible payments from Everest Re to meet its obligations and to
pay dividends in the future should Holdings' Board of Directors decide to do so.
The payment of dividends to Holdings by Everest Re is subject to limitations
imposed by Delaware law.
Under the Delaware Code, before a Delaware domiciled insurer may pay any
dividend it must give 10 days prior notice to the Delaware Insurance
Commissioner. During this 10-day period, the Commissioner may, by order,
limit or disallow the payment of ordinary dividends if the Commissioner
finds the insurer to be presently or potentially in financial distress.
A Delaware domiciled insurer may only pay cash dividends from the portion
of its available and accumulated surplus funds derived from realized net
operating profits and realized capital gains. Additionally, a Delaware domiciled
insurer may not pay any "extraordinary" dividend or distribution until
(i) 30 days after the Delaware Insurance Commissioner has received notice of a
declaration thereof and has not within such period disapproved such a payment
or (ii) the Delaware Insurance Commissioner has approved such payment within the
21
<PAGE>
30-day period. Under the Delaware Code, an "extraordinary" dividend of a
property and casualty insurer is a dividend the amount of which, together with
all other dividends and distributions made in the preceding 12 months, exceeds
the greater of (i) 10% of an insurer's statutory surplus as of the end of the
prior calendar year or (ii) the insurer's statutory net income, not including
realized capital gains, for the prior calendar year. Under this definition, the
maximum amount that will be available for the payment of dividends by Everest Re
in 1997 without triggering the requirement for prior approval of regulatory
authorities in connection with an extraordinary dividend is $84.4 million. As of
December 31, 1996, Everest Re's accumulated statutory surplus from realized net
operating profits and realized gains was $399.7 million.
STATE INSURANCE REGULATION. U.S. domestic property and casualty insurers,
including reinsurers, are subject to regulation by their state of domicile and
by those states in which they are licensed. The rates and policy terms of
reinsurance agreements generally are not subject to regulation by any
governmental authority. This contrasts with primary insurance policies and
agreements, the rates and policy terms of which are generally regulated closely
by state insurance departments.
Everest Re is subject primarily to regulation and supervision that relate to
licensing requirements, solvency requirements, investment requirements,
restrictions on the size of risks which may be insured, deposit of securities
for the benefit of ceding companies and/or policyholders, accounting
requirements, periodic examinations of financial condition and affairs, the form
and content of financial statements that must be filed with regulators and the
level of minimum reserves necessary to cover unearned premiums, losses and other
purposes. In general, such regulation is designed to protect ceding insurers
and, ultimately, their policyholders, rather than stockholders. The operations
of Everest Re's foreign branch offices in Canada, Hong Kong and the United
Kingdom are subject to regulation by the insurance regulatory officials of those
jurisdictions. Management believes that the Company is in material compliance
with applicable laws and regulations pertaining to its business and operations.
Everest National is subject to similar regulation and, in addition, must comply
with substantial regulatory requirements in each state where it does business.
These additional requirements include, but are not limited to, rate and policy
form requirements, requirements with regard to licensing, agent appointments,
participation in residual markets and claims handling procedures. These
regulations are primarily designed for the protection of policyholders.
LICENSES. Ordinarily, in the United States, a primary insurer will only enter
into reinsurance agreements if it can obtain credit for the reinsurance on its
statutory financial statements. Credit is usually granted when the reinsurer is
licensed or accredited in a state where the primary insurer is domiciled. In
addition, many states permit credit for reinsurance ceded to a reinsurer that is
domiciled and licensed in another state. Such a reinsurer must meet certain
financial requirements and, in some instances, the domiciliary state of such a
reinsurer must have substantially similar reinsurance credit law requirements as
the domiciliary state of the primary insurer or if credit for reinsurance is not
available, the primary insurer may reduce its liabilities on its statutory
financial statements if it is provided with collateral to secure the reinsurer's
obligations.
Everest Re is a licensed property/casualty insurer and/or reinsurer in all
states and the District of Columbia with the exception of Nevada, North
Carolina, West Virginia and Wyoming. In New Hampshire and Puerto Rico, Everest
Re is licensed for reinsurance only.
Everest Re is licensed as a property/casualty reinsurer in Canada. It is also
authorized to conduct reinsurance business in the United Kingdom and Hong Kong.
Everest Re can also write reinsurance in other foreign countries. Because some
jurisdictions require a reinsurer to register in order to be an acceptable
market for local insurers, Everest Re is registered as a foreign insurer and/or
reinsurer in the following countries: Argentina, Bolivia, Chile, Colombia,
Ecuador, Guatemala, Mexico, Peru, Venezuela and the Philippines. Everest Ltd. is
authorized to engage in the reinsurance business in the United Kingdom and
reinsures risks worldwide. Everest National is licensed in 38 states and the
District of Columbia. Everest Canada is federally licensed under the Insurance
Companies Act of Canada and provincially licensed in Ontario.
PERIODIC EXAMINATIONS. Everest Re and Everest National are
subject to examination of their affairs by the insurance departments
of the states in which they are licensed, authorized or accredited.
Delaware and Arizona, the domiciliary states of Everest Re and Everest
National, respectively, usually conduct examinations of domestic
22
<PAGE>
companies every 3 years and may do so at such other times as are deemed
advisable by the respective insurance commissioner. Everest Re's and Everest
National's last examination reports were as of December 31, 1994. Neither report
contained any material recommendations.
NAIC RISK-BASED CAPITAL REQUIREMENTS. The NAIC has instituted a formula to
measure the amount of capital appropriate for a property and casualty insurance
company to support its overall business operations in light of its size and risk
profile. The major categories of a company's risk profile are its asset risk,
credit risk, and underwriting risk. The new standards are an effort by the NAIC
to prevent insolvencies, to ward off other financial difficulties of insurance
companies, and to establish uniform regulatory standards among state insurance
departments.
Under the approved formula, a company's statutory surplus is compared to its
risk based capital (RBC). If this ratio is above a minimum threshold, no action
is necessary. Below this threshold are four distinct action levels at which a
regulator can intervene with increasing degrees of authority over a domestic
insurer as the ratio of surplus to RBC decreases. The mildest intervention
requires the company to submit a plan of appropriate corrective actions. The
most severe action requires the company to be rehabilitated or liquidated.
Based upon Everest Re's and Everest National's financial positions at December
31, 1996, Everest Re and Everest National exceed the minimum thresholds. Various
proposals to change the RBC formula have been proposed. The Company is unable to
predict whether any such proposal will be adopted, the form in which any such
proposals would be adopted or the effect, if any, the adoption of any such
proposal or change in the RBC calculations would have on the Company.
LEGISLATIVE AND REGULATORY PROPOSALS. Various regulatory and legislative changes
have from time to time been proposed that could affect reinsurers and insurers.
Among the proposals that have in the past been or are at present being
considered are the possible introduction of federal regulation in addition to,
or in lieu of, the current system of state regulation of insurers, Superfund
re-authorization, state and federal involvement in insuring catastrophes,
limitations on the ability of primary insurance carriers to effect premium rate
increase or to cancel or not renew existing policies, modifications to
investment limitations, and creation of interstate compacts for multi-state
insurer receivership proceedings or multi-state insurance regulation. The
Company is unable to predict whether any of these proposals will be adopted, the
form in which any such proposals would be adopted, or the impact, if any, such
adoption would have on the Company.
ITEM 2. PROPERTIES
Everest Re's corporate offices are located in Newark, New Jersey, and occupy
approximately 130,000 square feet of office space under a sublease with The
Prudential that expires on December 31, 2004, subject to Everest Re's option to
terminate the sublease with no penalty under certain circumstances. On December
3, 1996, Everest Re entered into a new sublease with The Prudential for 112,000
square feet of office space in Liberty Corner, New Jersey. On or about May 1,
1997, Everest Re will move its corporate offices to this new location and will
terminate its sublease of the Newark, New Jersey office on a date to coincide
with the commencement of rent payments under the sublease for the Liberty
Corner, New Jersey office, without any penalties. Everest Re's other eight
office locations occupy a total of 57,500 square feet, all of which are leased.
Management believes that the above described office space is adequate for its
current and anticipated needs.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in litigation and arbitration in the normal course of
its business. Management does not believe that any such pending litigation or
arbitration will have a material adverse effect on the Company's results of
operations, financial condition and cash flows. However, no assurance can be
given as to the decisions that may be rendered by the courts or arbitration
panels in any of such litigation and arbitration matters.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
23
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) MARKET INFORMATION
Since October 3, 1995, the common stock of the Company has been traded on the
New York Stock Exchange under the symbol "RE". Quarterly high and low market
prices of the Company's common stock in 1995 and 1996 were as follows:
<TABLE>
High Low
----- ------
<S> <C> <C>
From October 3 to December 31, 1995: 23.50 18.50
First Quarter 1996: 25.125 20.125
Second Quarter 1996: 26.50 21.375
Third Quarter 1996: 26.50 22.50
Fourth Quarter 1996: 29.50 23.875
</TABLE>
(b) NUMBER OF HOLDERS OF COMMON STOCK
The number of record holders of common stock as of March 1, 1997 was 84. That
number excludes the beneficial owners of shares held in "street" names or held
through participants in depositories, such as The Depository Trust Company.
(c) DIVIDEND HISTORY AND RESTRICTIONS
In 1995, the Board of Directors of the Company established a policy of declaring
regular quarterly cash dividends. The first such dividend was $0.03 per share,
declared and paid in the fourth quarter of 1995. The Company declared and paid
its regular quarterly cash dividend of $0.03 per share for each quarter of 1996.
On February 24, 1997, the Board of Directors raised the quarterly dividend to
$0.04 per share and declared a dividend, payable on or before March 27, 1997, to
shareholders of record on March 7, 1997.
The declaration and payment of future dividends, if any, by the Company will be
at the discretion of the Board of Directors and will depend upon many factors,
including the Company's earnings, financial condition and business needs,
capital and surplus requirements of the Company's operating subsidiaries,
regulatory considerations and other factors, and the ability of Everest Re to
pay dividends to the Company.
As an insurance holding company, the Company depends on payments from Everest Re
to pay cash dividends to stockholders. The payment of dividends by Everest Re is
subject to certain limitations imposed by the Delaware Code. See "Regulatory
Matters -- Dividends by Everest Re" and Note 7A of Notes to Consolidated
Financial Statements.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated GAAP financial data of the Company as of and
for the years ended December 31, 1996, 1995, 1994, 1993 and 1992 were derived
from consolidated financial statements of the Company which were audited by
Coopers and Lybrand L.L.P. (1996) and Deloitte and Touche LLP (1992 - 1995),
independent auditors. The statutory data have been derived from statutory
financial statements filed with the Delaware Insurance Department. Such
statutory financial statements are prepared in accordance with SAP, which differ
from GAAP. The statutory financial statements are unconsolidated and reflect the
results of operations of Everest Re's subsidiaries, Everest Ltd. and Everest
National on the equity method. The following financial data should be read in
conjunction with the Consolidated Financial Statements and accompanying notes.
The supplemental information for 1995 excludes the effects of an IPO-related
premium charge of $140.0 million ($91.0 million after taxes) for the Stop Loss
Agreement and an IPO-related compensation expense charge of $13.3 million ($8.7
million after taxes) principally for stock awards to the Company's Chief
Executive Officer. Such supplemental information is presented to facilitate
an understanding of the impact on the Company's results of operations of
24
<PAGE>
these non-recurring charges, but should not, however, be considered as an
alternative to the respective amounts determined in accordance with GAAP as an
indicator of the Company's operating performance.
<TABLE>
Years Ended December 31,
--------------------------------------------------------
(Dollars in millions, except per share amounts) 1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Operating data:
Gross premiums written $1,044.0 $ 949.5 $ 953.2 $ 918.1 $ 837.8
Net premiums written 1,030.5 783.2 863.2 892.3 767.6
Net premiums earned 973.6 753.3 853.3 883.2 753.2
Net investment income 191.9 166.0 143.6 141.1 159.3
Net realized capital gains (losses)(1) 5.7 33.8 (10.5) 78.8 87.5
Total revenue 1,169.3 948.9 982.8 1,098.3 998.1
Losses and LAE incurred (including
catastrophes) 716.0 674.7 720.8 687.4 853.1
Catastrophe losses(2):
Hurricane Andrew(3) -- 0.5 3.9 30.4 247.2
Northridge earthquake -- -- 70.9 -- --
Other(4) 7.1 30.9 7.1 (7.8) 59.6
Total catastrophe losses(5) 7.1 31.4 81.9 22.7 306.8
Commission and brokerage expenses 252.9 226.8 197.9 189.6 202.0
Other underwriting expenses 56.5 60.6 68.3 64.7 56.7
Compensation related to public offering -- 13.3 -- -- --
Restructuring and early retirement costs -- -- 7.8 -- --
Total expenses(5) 1,025.5 975.4 994.8 941.7 1,111.8
Income (loss) before taxes(5) 143.8 (26.6) (12.0) 156.5 (113.8)
Income tax (benefit) 31.8 (27.3) (22.6) 30.2 (52.2)
Net income (loss)(5) $ 112.0 $ 0.7 $ 10.7 $ 126.4 $ (61.6)
======== ======== ======== ======== ========
Net income (loss) per share(6) $ 2.22 $ 0.01 $ 0.21 $ 2.53 $ (1.23)
======== ======== ======== ======== ========
Dividends paid per share $ 0.12 $ 0.14 $ 0.15 $ -- $ --
======== ======== ======== ======== ========
Certain GAAP financial ratios:
Loss and LAE ratio(7) 73.5% 89.6% 84.5% 77.8% 113.3%
Underwriting expense ratio(8) 31.8 39.9 31.2 28.8 34.3
-------- -------- -------- -------- --------
Combined ratio 105.3% 129.5% 115.7% 106.6% 147.6%
======== ======== ======== ======== ========
Certain SAP data(9):
Ratio of net premiums written to surplus(10) 1.2x 1.0x 1.2x 1.3x 1.4X
Statutory surplus $ 772.7 $ 686.9 $ 600.7 $ 607.7 $ 519.0
Loss and LAE ratio(11) 71.2% 92.2% 85.8% 81.0% 112.7%
Underwriting expense ratio(12) 31.7 38.9 32.6 29.1 33.0
-------- -------- -------- -------- --------
Combined ratio 102.9% 131.1% 118.4% 110.1% 145.7%
======== ======== ======== ======== ========
Balance sheet data (at end of period):
Total investments and cash $3,624.6 $3,238.3 $2,573.2 $2,610.8 $2,347.1
Total assets 5,039.4 4,647.8 4,040.6 3,920.6 3,705.5
Loss and LAE reserves 3,246.9 2,969.3 2,706.4 2,540.1 2,443.9
Total liabilities 3,953.3 3,664.2 3,299.6 3,045.2 3,002.3
Stockholder's equity(13) 1,086.0 983.6 741.0 875.4 703.2
Book value per share(14) 21.51 19.36 14.82 17.51 14.06
Supplemental information, excluding IPO-related
charges:
Net premiums written $ 923.2
Net premiums earned 893.3
Income before taxes 126.8
Net income $ 100.4
========
Net income per share $ 2.00
========
Supplemental GAAP financial ratios:
Loss and LAE ratio 75.5%
Underwriting expense ratio 32.2
--------
Combined ratio 107.7%
========
Supplemental SAP data:
Ratio of net premiums written to surplus 1.2X
Loss and LAE ratio 75.5%
Underwriting expense ratio 32.0
--------
Combined ratio 107.5%
========
</TABLE>
25
<PAGE>
- - ------------
(1) After-tax operating income (loss), before after-tax net realized capital
gains or losses, was $108.3 million (or $2.14 per share), ($21.2)
million (or ($0.42)per share), $17.5 million (or $0.35 per share), $75.2
million (or $1.50 per share) and ($119.4) million (or ($2.39) per share)
for the years ended December 31, 1996, 1995, 1994, 1993 and 1992,
respectively. Supplemental after-tax operating income, before net
realized capital gains and excluding IPO-related charges, was $78.4
million (or $1.56 per share) for the year ended December 31, 1995.
(2) Catastrophe losses are net of reinsurance. A catastrophe is defined, for
purposes of the Selected Consolidated Financial Data, as an event that
causes a pre-tax loss before reinsurance of at least $5.0 million and
has an event date of January 1, 1988 or later.
(3) Losses with respect to Hurricane Andrew are net of a $100.0 million
aggregate excess of loss reinsurance recovery in 1992.
(4) Other catastrophe losses include adverse (favorable) development on loss
reserves for other catastrophes occurring on or after January 1, 1988.
(5) Some amounts may not reconcile due to rounding.
(6) Based on 50.6 million weighted average shares outstanding for 1996, 50.2
million weighted average shares outstanding for 1995, and 50.0 million
shares outstanding for 1994, 1993 and 1992.
(7) GAAP losses and LAE incurred as a percentage of GAAP net premiums earned.
(8) GAAP underwriting expenses as a percentage of GAAP net premiums earned.
Including restructuring and early retirement costs, incurred in the
fourth quarter of 1994, the Company's GAAP underwriting expense ratio in
1994 was 32.1%.
(9) Statutory results are on a Everest Re legal entity basis; consequently,
investments in subsidiary operations are accounted for on an equity basis.
(10) Statutory net premiums written as a percentage of period-end surplus.
(11) Statutory losses and LAE incurred as a percentage of SAP net premiums
earned.
(12) Statutory underwriting expenses as a percentage of SAP net premiums
written.
(13) Excluding net unrealized appreciation (depreciation) of investments,
stockholder's equity was $1,008.3 million, $899.9 million, $799.1
million, $794.6 million and $675.0 million as of December 31, 1996,
1995, 1994, 1993 and 1992, respectively.
(14) Based on 50.5 million shares outstanding for December 31, 1996, 50.8
million shares outstanding for December 31, 1995 and 50.0 million
shares outstanding for December 31, 1994, 1993 and 1992, respectively.
26
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
INDUSTRY CONDITIONS. Since 1987, a number of factors, including global
competition, the emergence of significant reinsurance capacity from the Bermuda
and rejuvenated Lloyds' markets, higher retentions by primary insurance
companies and consolidation in the insurance industry, have caused increasingly
competitive market conditions across most lines of business and have influenced
the softening of prices and contract terms in the current market place. The
Company cannot predict with any reasonable certainty, if, when or to what extent
market conditions as a whole will change. See "Business-Competition" for a
further discussion.
INITIAL PUBLIC OFFERING. On October 6, 1995 the Company's former ultimate
parent, The Prudential Insurance Company of America, ("The Prudential"),
completed an initial public offering ("IPO") of 100% of the outstanding stock of
the Company. In connection with the IPO, the company incurred a non-recurring
premium charge of $140.0 million ($91.0 million after-tax) for aggregate excess
of loss reinsurance coverage (THE "STOP LOSS AGREEMENT") provided by Gibraltar
Casualty Company ("Gibraltar") an affiliate of the former parent. This coverage
protects the Company's consolidated earnings against up to $375.0 million of the
first $400.0 million of adverse development, if any, on the Company's
consolidated reserves for losses, allocated loss adjustment expenses and
uncollectible reinsurance at June 30, 1995 (December 31, 1994 for catastrophe
losses). At the same time, The Prudential paid $140.0 million to the Company, of
which amount $91.0 million was a contribution to capital and $49.0 million was a
payment in respect of the tax benefit of the premium paid for the Stop Loss
Agreement. In addition, the Company incurred $13.3 million ($8.7 million
after-tax) of non-recurring compensation expense, including $12.5 million in
connection with IPO-related stock awards to the Chief Executive Officer. All of
these IPO-related transactions had the effect of reducing cash flow for 1995 by
$0.8 million and increasing stockholders' equity by $3.8 million. The following
table shows the Company's 1995 results of operations as reported in the
accompanying statement of operations and as adjusted to exclude these
IPO-related charges:
<TABLE>
IPO
related
As reported charges As adjusted
----------- -------- -----------
<S> <C> <C> <C>
Revenues:
Net earned premiums $753,321 $140,000 $ 893,321
Net investment income 166,023 166,023
Other income (loss) (4,315) (4,315)
Net realized capital gains 33,835 33,835
-------- -------- ----------
948,864 140,000 1,088,864
-------- -------- ----------
Claims and expenses:
Incurred losses and loss adjustment expenses 674,696 674,696
Commission and brokerage expenses 226,819 226,819
Other underwriting expenses 60,574 60,574
Compensation related to public offering 13,343 (13,343) --
-------- -------- ----------
975,432 (13,343) 962,089
-------- -------- ----------
INCOME (LOSS)BEFORE TAXES (26,568) 153,343 126,775
Income tax (benefit) (27,315) 53,670 26,355
-------- -------- ----------
NET INCOME $ 747 $ 99,673 $ 100,420
======== ======== ==========
</TABLE>
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
The following discussion and analysis is focused on a comparison of 1996 results
of operations to 1995 results of operations, as adjusted to exclude the
IPO-related charges.
PREMIUMS. Gross premiums written increased 10.0% to $1,044.0 million in
1996 from $949.5 million in 1995. Factors contributing to this increase
included a 21.8% ($55.0 million) increase in U.S. broker treaty premiums,
principally from increased writings in specialty casualty, workers compensation
and substandard automobile lines, a 21.6% ($26.4 million) increase in
U.S. direct treaty reinsurance and insurance due to the growth in primary
27
<PAGE>
insurance written through Everest National, a subsidiary of the Company, and a
28.9% ($19.9 million) increase in U.S. facultative premiums, reflecting growth
in casualty and specialty casualty lines, as the unit completed its first full
year after its major restructuring and took advantage of significant dislocation
in the market. These increases were partially offset by a 3.5% ($5.8 million)
decrease in marine, aviation and surety premiums and a 0.3% ($0.9 million)
decrease in international premiums.
Ceded premiums, as adjusted, decreased by 48.7% to $13.5 million in 1996 from
$26.3 million in 1995, principally as a result of a return premium under the
Company's catastrophe retrocessional protection, partially offset by increases
in common account retrocessions by ceding sources.
Net premiums written, as adjusted, increased by 11.6% to $1,030.5 million in
1996 from $923.2 million in 1995, reflecting the growth in U.S. broker, U.S.
direct treaty reinsurance and insurance and facultative gross written premiums
coupled with decreased retrocessional costs.
REVENUES. Net premiums earned, as adjusted, increased by 9.0% to $973.6 million
in 1996 from $893.3 million in 1995, generally consistent with the change in net
premiums written.
Net investment income increased 15.6% to $191.9 million in 1996 from $166.0
million in 1995, reflecting the effect of investing the $414.0 million of cash
flow from operating activities in 1996. The Company's pre-tax yield on average
cash and invested assets decreased to 5.6% in 1996 from 5.7% in 1995 reflecting
the dilutive effect of new money investment rates.
Net realized capital gains decreased 83.1% to $5.7 million in 1996 from $33.8
million in 1995, principally reflecting the sale in 1995 of one half of the
Company's investment in the common stock of Corporacion MAPFRE S.A. ("MAPFRE"),
an insurance group in Spain. Realized capital gains on the sale of equity
securities totalled $17.4 million, as generally favorable conditions continued
in the U.S. equity securities market, and were partially offset by $11.7 million
in realized capital losses on the sale of fixed maturities.
EXPENSES. Incurred losses and loss adjustment expenses ("LAE") increased by 6.1%
to $716.0 million in 1996 from $674.7 million in 1995. Catastrophe losses on
events with ultimate gross losses estimated at $5.0 million or greater
("CATASTROPHE LOSSES") in 1996 were $7.1 million, which included $10.0 million
estimated for Hurricane Fran and $2.9 million of net favorable development on
prior year occurrences, compared with $31.4 million in 1995, which included
$30.9 million estimated for the Kobe, Japan earthquake and Hurricanes Marilyn
and Opal and $0.5 million of net adverse development on prior year occurrences.
The Company's loss and LAE ratio, as adjusted, decreased by 2.0 percentage
points to 73.5% in 1996 from 75.5% in 1995. This improvement was attributable
principally to the lower catastrophe losses and changes in the Company's
business mix in line with the new underwriting strategy. Net incurred losses and
LAE for 1996 reflected ceded losses and LAE of $206.0 million, including $116.5
million ceded under the Stop Loss Agreement, compared to ceded losses and LAE of
$119.1 million in 1995.
Underwriting expenses, as adjusted, increased by 7.7% to $309.5 million in 1996
from $287.4 million in 1995. Commission and brokerage expenses increased by
$26.1 million attributable primarily to increases in written premium and changes
in the Company's business mix. Other underwriting expenses decreased by $4.0
million, as the impact of the significant reduction in employees over the course
of 1995 and 1996 and other cost reduction initiatives more than offset the
impact of salary and other expense increases that were generally in line with
inflation. The Company's expense ratio, as adjusted, decreased by 0.4 points to
31.8% in 1996 from 32.2% in 1995 as the increase of premiums earned more than
offset the increases in underwriting expenses.
The Company's combined ratio, as adjusted, decreased by 2.4 points to 105.3% in
1996 from 107.7% in 1995, reflecting the lower loss ratio and increased
premiums.
INCOME TAXES. The Company had income tax expense, as adjusted, of $31.8 million
in 1996 compared to $26.4 million in 1995, with the difference substantially
attributable to the improvement in pre-tax income to $143.8 million in 1996 from
$126.8 million in 1995.
NET INCOME. Net income was $112.0 million in 1996 compared to $100.4 million, as
adjusted, in 1995. This improvement mainly reflects higher premiums earned,
higher investment income and a lower combined ratio, offset by lower realized
capital gains and higher income taxes.
28
<PAGE>
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
The following discussion and analysis is focused on a comparison of 1995 results
of operations, as adjusted to exclude the IPO-related charges, to 1994 results
of operations.
PREMIUMS. Gross premiums written decreased 0.4% to $949.5 million in 1995 from
$953.2 million in 1994. Factors contributing to this decrease included a 12.5%
decrease in U.S. direct treaty reinsurance and insurance, where the non-renewal
of certain larger contracts, because the ceding companies did not agree to
pricing terms that satisfied the Company's revised underwriting guidelines, more
than offset the growth of the primary insurance written through Everest
National, a subsidiary of the Company, and a 1.9% decrease in U.S. broker treaty
premiums resulting from efforts to improve underwriting standards and better
control catastrophe exposures. These decreases were partially offset by growth
in international premiums (which increased by 3.4%), U.S. facultative premiums
(which increased by 3.2%), marine and aviation premiums (which increased by
1.8%) and surety premiums (which increased by 6.0%).
Ceded premiums, as adjusted, decreased by 70.8% to $26.3 million in 1995 from
$90.0 million in 1994 as a result of the lower premiums ceded under the
Company's significantly restructured corporate-level retrocessional protection.
Net premiums written, as adjusted, increased by 6.9% to $923.2 million in 1995
from $863.2 million in 1994, mainly as a result of decreased retrocessional
costs.
REVENUES. Net premiums earned, as adjusted, increased by 4.7% to $893.3 million
in 1995 from $853.3 million in 1994, generally consistent with the change in net
premiums written.
Net investment income increased 15.6% to $166.0 million in 1995 from $143.6
million in 1994, reflecting both the effect of investing the $397.9 million of
cash flow from operating activities, as adjusted, in 1995 and higher yields
earned on the investment portfolio. In the fourth quarter of 1993, the Company
sold $530.4 million in appreciated bonds to realize capital gains sufficient to
offset the impact on statutory surplus of a $30.0 million increase to asbestos
and environmental incurred but not reported ("IBNR") reserves in that year (the
"1993 Bond Sale"). At year-end 1993 and through most of the first quarter of
1994, a significant portion of the proceeds from the 1993 Bond Sale was held in
short-term investments in anticipation of rising interest rates. As a result of
the higher than normal amount of short-term investments in 1994, the Company's
pre-tax yield on average cash and invested assets improved to 5.7% in 1995 from
5.5% in 1994.
Net realized capital gains were $33.8 million in 1995, principally from the sale
of one half of the Company's investment in the common stock of MAPFRE and
generally favorable conditions in the U.S. equity securities market. Net
realized capital losses were $10.5 million in the year ended December 31, 1994
as sales of securities were limited due to the then declining market value of
the Company's fixed maturities.
EXPENSES. Incurred losses and LAE decreased by 6.4% to $674.7 million in 1995
from $720.8 million in 1994. Catastrophe losses in 1995 were $31.4 million,
including $30.9 million estimated for the Kobe, Japan earthquake and Hurricanes
Marilyn and Opal and $0.5 million of net adverse development on prior year
occurrences. These losses compared to the $81.9 million of catastrophe losses in
1994, including $70.9 million estimated for the Northridge earthquake and $11.0
million of net adverse development on prior year occurrences. The Company's loss
and LAE ratio, as adjusted, decreased by 9.0 percentage points to 75.5% in 1995
from 84.5% in 1994. This improvement was attributable principally to the lower
catastrophe losses, the absence of adverse development on net asbestos and
environmental reserves, the lower premiums ceded under the Company's 1995
corporate-level retrocession program and changes in the Company's business mix
in line with the new underwriting strategy. Net incurred losses and LAE for 1995
reflected ceded losses and LAE of $119.1 million, including $23.7 million ceded
under the Stop Loss Agreement, compared to ceded losses and LAE of $119.7
million in 1994.
Underwriting expenses, as adjusted, increased by 8.0% to $287.4 million
in 1995 from $266.2 million in 1994. Commission and brokerage expenses
increased by $29.0 million, which was partly attributable to the $14.5
million of profit commission income in 1994 on the 1994 corporate-level
retrocession program; (the adjustable features of the 1995 corporate-level
retrocession program provide for the return of premiums rather than
profit commissions). The balance was attributable primarily to changes
in the Company's business mix. Other underwriting expenses decreased by
$7.7 million, as the impact of the significant reduction in employees
over the course of 1994 and 1995 more than offset the impact of salary and
other expense increases that were generally in line with inflation. The
29
<PAGE>
Company's expense ratio, as adjusted, increased to 32.2% in 1995 from 31.2% in
1994 as the reduction of other underwriting expenses was more than offset by the
increase in commission and brokerage expenses.
The Company's combined ratio, as adjusted, decreased to 107.7% in 1995 from
115.7% in 1994, largely attributable to lower catastrophe losses and lower ceded
premiums.
INCOME TAXES. The Company had income tax expense, as adjusted, of $26.4 million
in 1995 compared to an income tax benefit of $22.6 million in 1994, with the
difference substantially attributable to the improvement in pre-tax income, as
adjusted, to $126.8 million in 1995 from a $12.0 million pre-tax loss in 1994.
NET INCOME. Net income, as adjusted, was $100.4 million in 1995 compared to
$10.7 million in 1994. This improvement mainly reflected lower catastrophe
losses, the absence of adverse development on net asbestos and environmental
reserves, lower premiums ceded under the 1995 corporate-level retrocession
program, higher investment income, lower operating expenses and realized capital
gains.
FINANCIAL CONDITION
CASH AND INVESTED ASSETS. Aggregate invested assets, including cash and
short-term investments, were $3,624.6 million at December 31, 1996, $3,238.3
million at December 31, 1995 and $2,573.2 million at December 31, 1994. The
change in invested assets resulted primarily from cash flows from operations
generated during the period together with net realized and unrealized gains
(losses) on investments.
LOSS AND LAE RESERVES
GENERAL. Gross loss and LAE reserves totaled $3,246.9 million at December 31,
1996, $2,969.3 million at December 31, 1995 and $2,706.4 million at December 31,
1994. These increases were consistent with the continued growth in the Company's
book of business and, in 1994, adverse development of gross loss reserves
principally related to asbestos and environmental exposures, most of which was
ceded. In addition, the steady decline in paid losses that the Company has
experienced since 1992 continued with paid losses in 1996 $31.2 million lower
than in 1995, which were $108.8 million lower than in 1994.
Everest Re maintains reserves to cover its estimated ultimate liability for
losses and LAE with respect to reported and unreported claims. Because reserves
are estimates of ultimate losses and LAE, management monitors reserve adequacy
over time, evaluating new information as it becomes known and adjusting
reserves, as necessary. Management considers many factors when setting reserves,
including: (i) current legal interpretations of coverage and liability; (ii)
economic conditions; (iii) internal methodologies which analyze Everest Re's
experience with similar cases, information from ceding companies and historical
trends, such as reserving patterns, loss payments, pending levels of unpaid
claims and product mix; and (iv) the uncertainties discussed below regarding
reserve requirements for asbestos and environmental claims. Based on these
considerations, management believes that adequate provision has been made for
Everest Re's loss and LAE reserves, which were $3,246.9 million as of December
31, 1996. Actual losses and LAE paid may deviate, perhaps substantially, from
such reserves.
ASBESTOS AND ENVIRONMENTAL EXPOSURES. Everest Re's asbestos claims typically
involve liability or potential liability for bodily injury from exposure
to asbestos or liability for property damage resulting from asbestos or
asbestos containing materials. Everest Re's environmental claims typically
involve potential liability for the mitigation or remediation of
environmental contamination or bodily injury or property damages caused
by the release of hazardous substances into the land, air or water. In
addition to the previously described general uncertainties inherent in
estimating reserves, there are significant uncertainties in estimating the
amount of Everest Re's potential losses from asbestos and environmental
claims. Among the complications are: (i) potentially long waiting periods
between exposure and manifestation of any bodily injury or property damage;
(ii) difficulty in identifying sources of asbestos or environmental
contamination; (iii) difficulty in properly allocating responsibility and/or
liability for asbestos or environmental damage; (iv) changes in underlying
laws and judicial interpretation of those laws; (v) potential for an
asbestos or environmental claim to involve many insurance providers over many
policy periods ; (vi) long reporting delays, both from insureds to insurance
companies and ceding companies to reinsurers; (vii) limited historical data
concerning asbestos and environmental losses; (viii) questions concerning
interpretation and application of insurance and reinsurance coverage; and
(ix) uncertainty regarding the number and identity of insureds with potential
asbestos or environmental exposure. Management believes that these issues
30
<PAGE>
are not likely to be resolved in the near future. Everest Re establishes
reserves to the extent that, in the judgment of management, the facts and
prevailing law reflect an exposure for Everest Re or its ceding company. Due to
the uncertainties discussed above, the ultimate losses may vary materially from
current loss reserves and, if coverage under the Stop Loss Agreement were
exhausted, could have a material adverse effect on the Company's future
financial condition, results of operations and cash flows.
The table below summarizes reserves and claim activity for asbestos and
environmental claims, on both a gross and net of ceded reinsurance basis, for
the periods indicated:
<TABLE>
Asbestos and
Environmental Reserves
Years Ended December 31,
--------------------------------
1996 1995 1994
------ ------ ------
(Dollars in millions)
<S> <C> <C> <C>
Gross Basis:
Beginning of period reserves $428.5 $445.5 $421.5
------ ------ ------
Incurred losses and LAE:
Reported losses 36.7 31.9 52.8
Change in IBNR (6.7) (14.6) 74.3
------ ------ ------
Total 30.0 17.3 127.1
Paid losses (35.2) (34.3) (103.1)
------ ------ ------
End of period reserves $423.3 $428.5 $445.5
====== ====== ======
Net Basis:
Beginning of period reserves $197.7 $203.7 $214.6
------ ------ ------
Incurred losses and LAE:
Reported losses (4.4) 5.5 29.5
Change in IBNR 4.4 (5.5) 11.0
------ ------ ------
Total (1) 0.0 0.0 40.5
Paid losses (1) 3.3 (6.0) (51.4)
------ ------ ------
End of period reserves $201.0 $197.7 $203.7
====== ====== ======
</TABLE>
- - ----------
(1) Net of $24,196 in 1996 and $16,687 in 1995 ceded under the incurred loss
reimbursement feature of the Stop Loss Agreement.
The $222.3 million of reinsurance receivables as of December 31, 1996 was
attributable principally to two retrocessional arrangements: (i) $116.4 million
was due from various insurance and reinsurance companies, including Gibraltar,
in connection with their participation in Everest Re's management underwriting
facility ("MUF"), a reinsurance arrangement begun in 1977 pursuant to which
Everest Re ceded certain reinsurance and direct excess insurance business; and
(ii) $105.9 million was due as a result of the Company's former direct excess
insurance operations, which ceased writing business in 1985 and which has been
100% ceded to Gibraltar since 1986. Paid losses for 1994 reflects the settlement
of all asbestos-related claims from one ceding company, which management
believes represents a settlement of Everest Re's largest asbestos-related
exposure to any one ceding company.
STOP LOSS AGREEMENT AND PRUDENTIAL GUARANTEES. To the extent reserves
as of June 30, 1995 (December 31, 1994 for catastrophe losses) for losses,
allocated LAE and uncollectible reinsurance experience adverse development
("Adverse Development"), Everest Re is entitled, at the time reserves
are increased, to payments under the Stop Loss Agreement, subject to
the limit and other terms thereof. Gibraltar's obligations to make
payments to Everest Re under the Stop Loss Agreement are guaranteed by The
Prudential. Management expects that the general effect of the Stop Loss
Agreement will be to protect the Company's consolidated earnings against
up to $375.0 million of the first $400.0 million of Adverse Development.
There can be no assurance, however, that the Company's net liability
for such Adverse Development will be limited to $25.0 million. With respect
to liquidity, the incurred loss reimbursement features of these agreements
provide the Company with cash on or prior to the time it is required to
31
<PAGE>
make payment on account of such Adverse Development. Through December 31, 1996,
cessions under the Stop Loss Agreement have aggregated $140.2 million.
STOCKHOLDER'S EQUITY. Holdings' stockholder's equity increased to $1,086.0
million as of December 31, 1996 from $983.6 million as of December 31, 1995
principally reflecting $106.0 million in retained earnings for the year.
Stockholder's equity as of December 31, 1995 increased to $983.6 million from
$741.0 million as of December 31, 1994, principally reflecting the addition to
paid in capital that offset the impact of non-recurring IPO related charges and
an increase of $141.9 million in unrealized appreciation (depreciation) on
investments, net of deferred taxes. Dividends of $6.1 million, $7.0 million and
$7.5 million were declared and paid by Holdings in 1996, 1995 and 1994,
respectively.
Holdings' stockholder's equity exceeded Everest Re's statutory-basis surplus by
$313.3 million at December 31, 1996. The primary differences between GAAP and
SAP as they relate to the Company are: (i) the deferral of acquisition costs
under GAAP, which are immediately expensed under SAP; (ii) the provision for
deferred taxes on temporary tax differences under GAAP, which are excluded under
SAP; and (iii) the carrying at market value of fixed maturities available for
sale under GAAP, as compared to at amortized cost under SAP.
LIQUIDITY AND CAPITAL RESOURCES
EVEREST RE. Everest Re's liquidity requirements are met on both a short- and
long-term basis by funds provided by premiums collected, investment income and
collected reinsurance receivables balances, and from the sale and maturity of
investments. Everest Re's net cash flows from operating activities were $414.0
million, $397.9 million, as adjusted, and $192.9 million in 1996, 1995 and 1994,
respectively. The increases over 1994 in cash provided by operating activities
were principally a result of decreases in net paid losses, including recoveries
under the Stop Loss Agreement, and improved profitability. Recoveries under the
Company's Stop Loss Agreement with Gibraltar contributed $53.4 million and $12.0
million of such net cash flows in 1996 and 1995, respectively.
Proceeds and applications from sales and acquisitions of investment assets were
$1,632.9 million and $2,034.8 million, respectively, in 1996, compared to
$1,113.4 million and $1,494.7 million, respectively, in 1995 and $1,362.5
million and $1,572.7 million, respectively, in 1994. Everest Re's current
investment strategy seeks to maximize after-tax income through a high quality,
diversified, duration sensitive, taxable bond and tax-exempt municipal bond
portfolio, while maintaining an adequate level of liquidity.
EXPOSURE TO CATASTROPHES. As with other reinsurers, Everest Re's operating
results and financial condition can be adversely affected by volatile and
unpredictable natural and other disasters, such as hurricanes, windstorms,
earthquakes, floods, fires and explosions. Although Everest Re attempts to limit
its exposure to acceptable levels, it is possible that an actual catastrophic
event or multiple catastrophic events could have a material adverse effect on
the financial condition, results of operations and cash flows of the Company.
The Company maintains a corporate-level retrocessional protection program, above
and beyond retrocessions purchased with respect to specific assumed coverages,
to mitigate the potential impact of catastrophe losses. At December 31, the
attachment point of this program was $25.0 million per catastrophe in the U.S.
and $10.0 million per catastrophe outside the U.S. No losses were ceded under
the corporate-level retrocession program during 1996 or 1995. All aspects of the
retrocession program have been structured to permit the program to be accounted
for as reinsurance under SFAS No. 113.
HOLDINGS. Holdings is a holding company whose only material asset is the capital
stock of Everest Re. Holdings' cash flow will consist primarily of dividends and
other permissible payments from Everest Re. Holdings depends upon such payments
for funds for general corporate purposes and for the payment of any dividends on
its common stock. Holdings expects to finalize a $50.0 million bank line of
credit as a means of expanding the liquidity options of the Company's operating
subsidiaries.
The payment of dividends to Holdings by Everest Re is subject to limitations
imposed by the Delaware Code. Based upon these restrictions, the
maximum amount that will be available for payment of dividends to
Holdings by Everest Re in 1997 without the prior approval of regulatory
authorities is $84.4 million. Everest Re's future cash flow available
to Holdings may be influenced by a variety of factors, including cyclical
changes in the property and casualty reinsurance market, Everest Re's
financial results, insurance regulatory changes and changes in general
32
<PAGE>
economic conditions. The availability of such cash flow to Holdings could also
be influenced by, among other things, changes in the limitations imposed by the
Delaware Code on the payment of dividends by Everest Re. Holdings expects that,
absent significant catastrophe losses, such restrictions should not affect
Everest Re's ability to declare and pay dividends sufficient to support
Holdings' current dividend policy.
During 1996 and 1995, Holdings declared and paid dividends of $6.1 million and
$7.0 million, respectively.
On March 21, 1996 the Holdings' Board of Directors approved a stock repurchase
plan authorizing the repurchase of an aggregate amount of 2.5 million shares of
common stock from time to time in open market transactions. To date, no shares
have been repurchased pursuant to this plan.
TAX CONSOLIDATION WITH THE PRUDENTIAL
The Internal Revenue Service ("IRS") has completed its examinations of The
Prudential's tax returns for all years through 1992. As those examinations
relate to Everest Re, the IRS has disallowed that portion of the fresh start
benefit which relates to 1986 reserve strengthening as defined by the IRS.
Consistent with case law favorable to taxpayers on the issue, the Company
believes that, because there were no changes in reserving assumptions or
methodologies between 1985 and 1986, all increases to reserves in 1986 for which
a fresh start benefit was taken are normal reserve additions and, therefore,
pursuant to the case law, does not constitute reserve strengthening that is not
eligible for the fresh start benefit. If the IRS position prevails, the Company
will be required to reimburse The Prudential, thereby incurring an additional
charge of approximately $8.8 million, including the after-tax cost of interest
through December 31, 1996.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and schedules listed in the accompanying Index to
Financial Statements and Schedules on page F-1 are filed as part of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On August 9, 1996, the Company filed a Form 8-K with the Securities and Exchange
Commission reporting that Coopers & Lybrand L.L.P. replaced Deloitte & Touche
LLP on August 6, 1996 as the Company's independent accountants.
During the Company's two most recent fiscal years, there were no disagreements
with Deloitte & Touche LLP on any matter of accounting principles or practices,
financial statement disclosure or auditing scope or procedure, which
disagreements, if not resolved to the satisfaction of Deloitte & Touche LLP,
would have caused them to make reference to the subject matter of the
disagreement in their reports. Also, there were no reportable events of the
nature described in Regulation S-K Item 304(a)(1)(v) during the Company's two
most recent fiscal years.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Reference is made to "Election of Directors", "Information Concerning Nominees"
and "Information Concerning Continuing Directors and Executive Officers" in the
Company's proxy statement for the 1997 Annual Meeting of Stockholders, which
will be filed with the Commission within 120 days of the close of the Company's
fiscal year ended December 31, 1996 (the "Proxy Statement"), and which are
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Reference is made to "Directors' Compensation" and "Compensation of Executive
Officers" in the Proxy Statement, which is incorporated herein by reference,
except that the Compensation Committee Report and the Performance Graph are not
so incorporated.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Reference is made to "Common Stock Ownership by Directors and Executive
Officers" and "Principal Holders of Common Stock" in the Proxy Statement, which
are incorporated herein by reference.
33
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Reference is made to "Certain Transactions with Directors" in the Proxy
Statement, which is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
FINANCIAL STATEMENTS AND SCHEDULES
The financial statements and schedules listed in the accompanying Index to
Financial Statements and Schedules on page F-1 are filed as part of this report.
EXHIBITS
The exhibits listed on the accompanying Index to Exhibits on page E-1 are filed
as part of this report.
REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the last quarter of 1996.
34
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized on March 20, 1997.
EVEREST REINSURANCE HOLDINGS, INC.
By: /s/ JOSEPH V. TARANTO
----------------------------------------
JOSEPH V. TARANTO
(CHAIRMAN AND CHIEF EXECUTIVE OFFICER)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
/s/ JOSEPH V. TARANTO Chairman and Chief Executive March 20, 1997
- - --------------------------------- Officer and Director
JOSEPH V. TARANTO
/s/ ROBERT P. JACOBSON Chief Financial Officer and March 20, 1997
- - --------------------------------- Comptroller and Director
ROBERT P. JACOBSON
/s/ MARTIN ABRAHAMS Director March 20, 1997
- - ---------------------------------
MARTIN ABRAHAMS
/s/ KENNETH J. DUFFY Director March 20, 1997
- - ---------------------------------
KENNETH J. DUFFY
/s/ JOHN R. DUNNE Director March 20, 1997
- - ---------------------------------
JOHN R. DUNNE
/s/ THOMAS J. GALLAGHER Director March 20, 1997
- - ---------------------------------
THOMAS J. GALLAGHER
/s/ WILLIAM F. GALTNEY, JR. Director March 20, 1997
- - ---------------------------------
WILLIAM F. GALTNEY, JR.
/s/ ROBERT A. MULDERIG Director March 20, 1997
- - ---------------------------------
ROBERT A. MULDERIG
35
<PAGE>
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
PAGES
-----
EVEREST REINSURANCE HOLDINGS, INC.
Reports of Independent Auditors on Financial Statements and Schedules... F-2
Consolidated Balance Sheets at December 31, 1996 and 1995............... F-4
Consolidated Statements of Operations for the years ended December 31,
1996, 1995 and 1994................................................... F-5
Consolidated Statements of Changes in Stockholders' Equity for the
years ended December 31, 1996, 1995 and 1994.......................... F-6
Consolidated Statements of Cash Flows for the years ended December 31,
1996, 1995 and 1994................................................... F-7
Notes to Consolidated Financial Statements.............................. F-8
SCHEDULES
I Summary of Investments Other Than Investments in Related Parties at
December 31, 1996................................................. S-1
II Condensed Financial Information of Registrant:
Balance Sheets as of December 31, 1996 and 1995................. S-2
Statements of Operations for the Years Ended December 31, 1996,
1995 and 1994................................................. S-3
Statements of Cash Flows for the Years Ended December 31, 1996,
1995 and 1994................................................. S-4
III Supplementary Insurance Information as of December 31, 1996 and 1995
and for the years ended December 31, 1996, 1995 and 1994.......... S-5
IV Reinsurance for the years ended December 31, 1996, 1995 and 1994.... S-6
Schedules other than those listed above are omitted for the reason that they are
not applicable or the information is otherwise contained in the Financial
Statements.
F-1
<PAGE>
INDEPENDENT AUDITOR'S REPORT
The Stockholders and Board of Directors
Everest Reinsurance Holdings, Inc.
We have audited the accompanying consolidated financial statements and the
financial statement schedules of Everest Reinsurance Holdings, Inc. and
subsidiaries ("the Company") as of December 31, 1996 and for the year then
ended, as listed in the accompanying index on page F-1. These consolidated
financial statements and financial statement schedules are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedules based on our
audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Everest
Reinsurance Holdings, Inc. and subsidiaries as of December 31, 1996, and the
results of their operations and their cash flows for the year ended December 31,
1996, in conformity with generally accepted accounting principles. In addition,
in our opinion, the financial statement schedules referred to above, when
considered in relation to the basic consolidated financial statements taken as a
whole, present fairly in all material respects, the information required to be
included therein.
COOPERS & LYBRAND L.L.P.
New York, New York
February 13, 1997
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Everest Reinsurance Holdings, Inc. (formerly
Prudential Reinsurance Holdings, Inc.)
Newark, New Jersey
We have audited the accompanying consolidated balance sheet of Everest
Reinsurance Holdings, Inc. and subsidiaries as of December 31, 1995 and the
related consolidated statements of income, stockholders' equity, and cash flows
for the years ended December 31, 1995 and 1994. Our audits also included the
financial statement schedules listed in the Index at Item 8 for the years then
ended. These financial statements and financial statement schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion on the financial statements and financial statement schedules based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Everest Reinsurance Holdings, Inc.
and subsidiaries as of December 31, 1995, and the results of their operations
and their cash flows for the years ended December 31, 1995 and 1994 in
conformity with generally accepted accounting principles. Also, in our opinion,
such financial statement schedules, when considered in relation to the basic
consolidated financial statements taken as a whole, present fairly in all
material respects the information set forth therein.
DELOITTE & TOUCHE LLP
Parsippany, New Jersey
February 23, 1996
F-3
<PAGE>
<TABLE>
<CAPTION>
EVEREST REINSURANCE HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
- - -------------------------------------------------------------------------------------
As of December 31, (Dollars in thousands, except par value per share)
1996 1995
ASSETS: ---------- ----------
<S> <C> <C>
Fixed maturities - held to maturity, at amortized cost
(market value: 1996, $88,374; 1995, $100,043) $ 80,522 $ 87,903
Fixed maturities- available for sale, at market value
(amortized cost: 1996, $3,194,246; 1995, $2,783,903) 3,281,972 2,886,070
Equity securities, at market value (cost: 1996, $115,367;
1995, $105,176) 147,280 131,192
Short-term investments 49,486 76,649
Other invested assets 12,750 5,566
Cash 52,595 50,912
---------- ----------
Total investments and cash 3,624,605 3,238,292
Accrued investment income 50,211 48,423
Premiums receivable 218,087 265,205
Reinsurance receivables 749,062 712,002
Funds held by reinsureds 173,386 171,384
Deferred acquisition costs 84,123 80,019
Prepaid reinsurance premiums 5,265 2,334
Deferred tax asset 124,664 112,599
Other assets 9,949 17,504
---------- ----------
TOTAL ASSETS $5,039,352 $4,647,762
========== ==========
LIABILITIES:
Reserve for losses and adjustment expenses $3,246,858 $2,969,341
Unearned premium reserve 355,908 294,291
Funds held under reinsurance treaties 177,921 195,864
Losses in the course of payment 24,343 44,853
Contingent commissions 83,279 66,725
Other net payable to reinsurers 8,779 9,203
Current federal income taxes 25,879 20,843
Other liabilities 30,362 63,048
---------- ----------
Total liabilities 3,953,329 3,664,168
---------- ----------
Commitments and contingencies (Note 8)
STOCKHOLDERS' EQUITY:
Preferred stock, par value: $0.01; 50 million shares
authorized; no shares issued and outstanding -- --
Common stock, par value: $0.01; 200 million shares
authorized; 50.8 million shares issued 508 508
Paid-in capital 389,196 387,349
Unearned compensation (374) (692)
Net unrealized appreciation (depreciation) of investments,
net of deferred income taxes 77,766 83,726
Cumulative foreign currency translation adjustment, net of
deferred income taxes (354) (7,838)
Retained earnings 626,501 520,541
Treasury stock, at cost; 0.3 million shares in 1996 (7,220) --
---------- ----------
Total stockholders' equity 1,086,023 983,594
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $5,039,352 $4,647,762
========== ==========
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
F-4
<PAGE>
<TABLE>
<CAPTION>
EVEREST REINSURANCE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
- - ----------------------------------------------------------------------------------
Years Ended December 31, (Dollars in thousands, except per share amounts)
1996 1995 1994
---------- -------- --------
<S> <C> <C> <C>
REVENUES:
Premiums earned:
Before stop loss premium $ 973,611 $893,321 $853,346
Stop loss premium -- 140,000 --
---------- -------- --------
Net premiums earned 973,611 753,321 853,346
Net investment income 191,901 166,023 143,609
Net realized capital gain/(loss) 5,695 33,835 (10,499)
Other income/(loss) (1,867) (4,315) (3,654)
---------- -------- --------
1,169,340 948,864 982,802
---------- -------- --------
CLAIMS AND EXPENSES:
Incurred losses and loss adjustment expenses 716,033 674,696 720,800
Commission and brokerage expenses 252,928 226,819 197,859
Other underwriting expenses 56,540 60,574 68,292
Compensation related to public offering -- 13,343 --
Restructuring and early retirement costs -- -- 7,833
---------- -------- --------
1,025,501 975,432 994,784
---------- -------- --------
INCOME (LOSS) BEFORE TAXES 143,839 (26,568) (11,982)
Income tax (benefit) 31,812 (27,315) (22,644)
---------- -------- --------
NET INCOME $ 112,027 $ 747 $ 10,662
========== ======== ========
PER SHARE DATA:
Weighted average shares outstanding (000's) 50,567 50,189 50,000
Net income per share $ 2.22 $ 0.01 $ 0.21
========== ======== ========
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
F-5
<PAGE>
<TABLE>
<CAPTION>
EVEREST REINSURANCE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDERS' EQUITY
- - -----------------------------------------------------------------------------------------
Years Ended December 31, (Dollars in thousands, except per share amounts)
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
COMMON STOCK (SHARES OUTSTANDING):
Balance, beginning of period 50,792,869 50,000,000 50,000,000
Issued during the period 3,800 792,869 --
Treasury stock acquired during period (306,396) -- --
----------- ----------- -----------
Balance, end of period 50,490,273 50,792,869 50,000,000
=========== =========== ===========
COMMON STOCK (PAR VALUE):
Balance, beginning of period $ 508 $ 500 $ 500
Issued during the period -- 8 --
----------- ----------- -----------
Balance, end of period 508 508 500
----------- ----------- -----------
ADDITIONAL PAID IN CAPITAL:
Balance, beginning of period 387,349 283,076 281,467
Contributions during the period 1,783 91,000 1,609
Common stock issued during the period 64 13,273 --
----------- ----------- -----------
Balance, end of period 389,196 387,349 283,076
----------- ----------- -----------
UNEARNED COMPENSATION:
Balance, beginning of period (692) -- --
Net increase (decrease) during the period 318 (692) --
----------- ----------- -----------
Balance, end of period (374) (692) --
----------- ----------- -----------
NET UNREALIZED APPRECIATION(DEPRECIATION) OF
INVESTMENTS, NET OF DEFERRED INCOME TAXES:
Balance, beginning of period 83,726 (58,172) 80,768
Net increase (decrease) during the period (5,960) 141,898 (138,940)
----------- ----------- -----------
Balance, end of period 77,766 83,726 (58,172)
----------- ----------- -----------
CUMULATIVE TRANSLATION ADJUSTMENTS, NET OF
DEFERRED INCOME TAXES:
Balance, beginning of period (7,838) (11,255) (11,034)
Net increase (decrease) during the period 7,484 3,417 (221)
----------- ----------- -----------
Balance, end of period (354) (7,838) (11,255)
----------- ----------- -----------
RETAINED EARNINGS:
Balance, beginning of period 520,541 526,818 523,656
Net income (loss) 112,027 747 10,662
Dividends declared ( $0.12 per share in 1996,
$0.14 per share in 1995 and $0.15 per share
in 1994) (6,067) (7,024) (7,500)
----------- ----------- -----------
Balance, end of period 626,501 520,541 526,818
----------- ----------- -----------
TREASURY STOCK AT COST:
Balance, beginning of period -- -- --
Treasury stock acquired during period (7,220) -- --
----------- ----------- -----------
Balance, end of period (7,220) -- --
----------- ----------- -----------
TOTAL STOCKHOLDERS' EQUITY, END OF PERIOD $ 1,086,023 $ 983,594 $ 740,967
=========== =========== ===========
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
F-6
<PAGE>
<TABLE>
<CAPTION>
EVEREST REINSURANCE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
- - --------------------------------------------------------------------------------------------------------------
Years Ended December 31, (Dollars in thousands)
1996 1995 1994
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income $ 112,027 $ 747 $ 10,662
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
(Increase) decrease in premiums receivable 46,700 24,986 (526)
(Increase) decrease in funds held by reinsureds, net (21,606) 31,511 62,217
(Increase) in reinsurance receivables (37,084) (20,656) (22,761)
(Increase) in deferred tax asset (13,065) (8,143) (15,536)
Increase in reserve for losses and loss adjustment expenses 281,590 248,789 154,552
Increase in unearned premiums 60,293 30,268 11,288
(Increase) decrease in other assets and liabilities (9,479) 16,343 (26,087)
Non cash compensation expense 318 12,589 --
Accrual of bond discount/amortization of bond premium (46) 4,264 8,555
Realized capital (gains) losses (5,695) (33,835) 10,499
----------- ----------- -----------
Net cash provided by operating activities 413,953 306,863 192,863
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES :
Proceeds from fixed maturities matured/called - held to maturity 20,582 30,961 5,934
Proceeds from fixed maturities matured/called - available for sale 143,114 145,543 69,394
Proceeds from fixed maturities sold - available for sale 1,281,882 699,869 970,050
Proceeds from equity securities sold 160,429 164,723 64,038
Proceeds from other invested assets sold -- -- 3,811
Cost of fixed maturities acquired - held to maturity (17,378) (10) (850)
Cost of fixed maturities acquired - available for sale (1,836,274) (1,370,981) (1,506,358)
Cost of equity securities acquired (150,861) (121,569) (56,859)
Cost of other invested assets acquired (7,184) (2,133) (1,837)
Net sales of short-term securities 26,890 58,408 241,804
Net increase (decrease) in unsettled securities transactions (3,166) 1,526 (6,746)
Net increase (decrease) in collateral for loaned securities (19,897) 12,372 7,377
----------- ----------- -----------
Net cash provided by (used in) investing activities (401,863) (381,291) (210,242)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of treasury stock (7,220) -- --
Contributions during the period 1,847 91,000 --
Dividends paid to stockholders (6,067) (7,024) (7,500)
----------- ----------- -----------
Net cash used in financing activities (11,440) 83,976 (7,500)
----------- ----------- -----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH: 1,033 (3,044) 4,594
----------- ----------- -----------
Net increase (decrease) in cash 1,683 6,504 (20,285)
Cash, beginning of period 50,912 44,408 64,693
----------- ----------- -----------
Cash, end of period $ 52,595 $ 50,912 $ 44,408
=========== =========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash transactions:
Income taxes paid (received), net $ 38,055 $ (50,944) $ 8,153
NON-CASH FINANCING TRANSACTION:
Issuance of common stock in connection with public offering $ 318 $ 12,589 $ --
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
F-7
<PAGE>
EVEREST REINSURANCE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
Years Ended December 31, 1996, 1995 and 1994
For purposes of footnote presentation, all dollar values, except per share
amounts where otherwise indicated, are presented in thousands.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. BUSINESS AND BASIS OF PRESENTATION
Everest Reinsurance Holdings, Inc. ("Holdings") (formerly known as Prudential
Reinsurance Holdings, Inc.), is a holding company incorporated in the state of
Delaware. Prior to an initial public offering ("IPO") of all 50 million shares
outstanding on October 6, 1995, Holdings was a direct wholly owned subsidiary of
PRUCO, Inc. ("PRUCO"), which is wholly owned by The Prudential Insurance Company
of America ("The Prudential"). The stock of Everest Reinsurance Company
("Everest Re") (formerly known as Prudential Reinsurance Company) was
contributed by PRUCO to Holdings effective December 31, 1993. The contribution
has been accounted for at historical cost in a manner similar to the pooling of
interest method of accounting as the entities were under common control. Everest
Re's principal business is reinsuring property and casualty risks of domestic
and foreign insurance companies under excess and pro rata reinsurance contracts.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities (and disclosure of
contingent assets and liabilities) at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
The consolidated financial statements include the domestic and foreign
subsidiaries of Everest Re: Everest National Insurance Company ("Everest
National") (formerly known as Prudential National Insurance Company), Everest
Reinsurance Ltd. ("Everest Re Ltd.") (formerly known as Le Rocher Reinsurance
Ltd.) and Everest Insurance Company of Canada ("Everest Canada") (formerly known
as OTIP/RAEO Insurance Company, Inc.), which was acquired from The Prudential
for $3,700 on December 31, 1996. The acquisition of Everest Canada has been
accounted for by the purchase method. Had this acquisition occurred at the
beginning of either 1995 or 1996, there would have been no material effect on
the Company's results of operations. All material intercompany balances and
transactions have been eliminated in consolidation.
Certain reclassifications have been made to the 1994 and 1995 financial
statements to conform to the 1996 presentation.
B. INVESTMENTS
SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities"
requires that a company segment its fixed maturity investment portfolio between
held to maturity (carried at amortized cost), available for sale (carried at
market value, with unrealized appreciation or depreciation, net of applicable
deferred income taxes, reflected as a separate component of stockholder's
equity) and trading (carried at market value with unrealized appreciation or
depreciation reflected in income). Investments that are available for sale are
expected to be held for an indefinite period but may be sold depending on tax
position, interest rates and other considerations. Short-term investments are
stated at cost, which approximates market value. Equity securities are carried
at market value with unrealized appreciation or depreciation of equity
securities, net of applicable deferred income tax, credited or charged directly
to stockholder's equity. Realized gains or losses on sale of investments are
determined on the basis of identified cost. With respect to securities which are
not publicly traded, market value has been determined based on pricing models.
For publicly traded securities, market value is based on quoted market prices.
Cash includes cash and bank time deposits with original maturities of ninety
days or under.
C. UNCOLLECTIBLE REINSURANCE RECOVERABLE BALANCES
The Company provides reserves for uncollectible reinsurance balances based on
management's assessment of the collectibility of the outstanding balances. Such
reserves were $14,267 and $14,267 at December 31, 1996 and December 31, 1995,
respectively. See also Note 5.
F-8
<PAGE>
D. DEFERRED ACQUISITION COSTS
Acquisition costs, consisting principally of commissions and brokerage expenses
incurred at the time a contract or policy is issued, are deferred and amortized
over the period in which the related premiums are earned, generally one year.
Deferred policy acquisition costs are limited to their estimated realizable
value based on the related unearned premiums, anticipated claims and claim
expenses and anticipated investment income. Deferred acquisition costs amortized
to income were $252,812, $224,340 and $201,200 in 1996, 1995 and 1994,
respectively.
E. LOSS AND LOSS ADJUSTMENT EXPENSE RESERVE
The reserve for unpaid losses and loss adjustment expenses is based on
individual case estimates and reports received from ceding companies. A
provision is included for losses and loss adjustment expenses incurred but not
reported ("IBNR") based on past experience. A provision is also included for
certain potential liabilities relating to asbestos and environmental exposures,
which liabilities cannot be estimated with traditional reserving techniques. The
reserves are reviewed continually and any changes in estimates are reflected in
earnings in the period the adjustment is made. Management believes that adequate
provision has been made for the Company's loss and loss adjustment expenses.
Accruals for contingent commission liabilities are estimated based on carried
loss and loss adjustment expense reserves.
F. PREMIUM REVENUES
Premiums written are earned ratably over the periods of the related insurance
and reinsurance contracts or policies. Unearned premium reserves are established
to cover the remainder of the unexpired contract period. Such reserves are
established based upon reports received from ceding companies or computed using
pro rata methods based on statistical data. Written and earned premiums, and the
related costs, which have not yet been reported to the Company are estimated and
accrued. Premiums are net of retrocessions (ceded reinsurance).
G. INCOME TAXES
Prior to the IPO, the Company was a member of a group of affiliated companies
which joined in filing a consolidated federal tax return. Current tax
liabilities were determined for individual companies based upon their separate
return basis taxable income. Members with taxable income incurred an amount in
lieu of the separate return basis federal tax. Members with a loss for tax
purposes recognized a current benefit in proportion to the amount of their
losses utilized in computing consolidated taxable income. Since the IPO, the
Company and its subsidiaries file their own federal tax returns and calculate
their current tax provisions accordingly. Deferred income taxes have been
recorded to recognize the tax effect of temporary differences between the
financial reporting and income tax bases of assets and liabilities.
H. FOREIGN CURRENCY TRANSLATION
Assets and liabilities relating to foreign operations are translated into U.S.
dollars at the exchange rates in effect at the balance sheet date; revenues and
expenses are translated into U.S. dollars using average exchange rates. Gains
and losses resulting from translating foreign currency financial statements, net
of deferred income taxes, are excluded from income and accumulated in
stockholder's equity.
I. EARNINGS PER SHARE
Earnings per common share are based on the weighted average number of common
shares outstanding during the relevant period and, if dilutive, shares issuable
under stock option plans.
F-9
<PAGE>
2. INVESTMENTS
The amortized cost, market value, and gross unrealized appreciation and
depreciation of fixed maturity investments are presented in the tables below:
<TABLE>
Amortized Unrealized Unrealized Market
Cost Appreciation Depreciation Value
---------- ------------ ------------ ----------
<S> <C> <C> <C> <C>
As of December 31, 1996:
Fixed maturities - held to maturity
U.S. Treasury securities and
obligations of U.S. government
agencies and corporations $ 30,182 $ 307 $ 54 $ 30,435
Obligations of states and
political subdivisions 50,340 7,824 225 57,939
---------- ---------- ---------- ----------
TOTAL $ 80,522 $ 8,131 $ 279 $ 88,374
========== ========== ========== ==========
Fixed maturities - available for sale
U.S. Treasury securities and
obligations of U.S. government
agencies and corporations $ 162,406 $ 909 $ 1,361 $ 161,954
Obligations of states and
political subdivisions 1,259,544 48,277 733 1,307,088
Corporate securities 739,997 11,440 315 751,122
Mortgage-backed securities 487,145 7,692 2,007 492,830
Foreign debt securities 545,154 24,660 836 568,978
---------- ---------- ---------- ----------
TOTAL $3,194,246 $ 92,978 $ 5,252 $3,281,972
========== ========== ========== ==========
As of December 31, 1995:
Fixed maturities - held to maturity
U.S. Treasury securities and
obligations of U.S. government
agencies and corporations $ 29,238 $ 686 $ 129 $ 29,795
Obligations of states and
political subdivisions 58,665 11,668 85 70,248
---------- ---------- ---------- ----------
TOTAL $ 87,903 $ 12,354 $ 214 $ 100,043
========== ========== ========== ==========
Fixed maturities - available for sale
U.S. Treasury securities and
obligations of U.S. government
agencies and corporations $ 72,495 $ 1,678 $ 224 $ 73,949
Obligations of states and
political subdivisions 1,126,694 53,390 316 1,179,768
Corporate securities 773,446 24,986 703 797,729
Mortgage-backed securities 355,725 9,911 475 365,161
Foreign debt securities 455,543 17,673 3,753 469,463
---------- ---------- ---------- ----------
TOTAL $2,783,903 $ 107,638 $ 5,471 $2,886,070
========== ========== ========== ==========
</TABLE>
F-10
<PAGE>
The amortized cost and market value of fixed maturities are shown in the
following table by contractual maturity. Actual maturities may differ from
contractual maturities because securities may be called or prepaid with or
without call or prepayment penalties.
<TABLE>
December 31, 1996
-------------------------
Amortized Market
Cost Value
---------- ----------
<S> <C> <C>
Fixed maturities - held to maturity
Due in one year or less $ 10,657 $ 11,042
Due after one year through five years 26,793 26,980
Due after five years through ten years 7,243 7,096
Due after ten years 35,829 43,256
---------- ----------
TOTAL $ 80,522 $ 88,374
========== ==========
Fixed maturities - available for sale
Due in one year or less $ 74,025 $ 75,699
Due after one year through five years 644,792 655,055
Due after five years through ten years 930,000 963,056
Due after ten years 1,058,284 1,095,332
Mortgage-backed securities 487,145 492,830
---------- ----------
TOTAL $3,194,246 $3,281,972
========== ==========
</TABLE>
Proceeds from sales of fixed maturity investments during 1996, 1995 and 1994
were $1,281,882, $699,869 and $970,050, respectively. Gross gains of $9,146,
$7,058 and $5,482, and gross losses of $20,952, $12,058 and $26,692 were
realized on those sales during 1996, 1995 and 1994, respectively.
The cost, market value and gross unrealized appreciation and depreciation of
investments in equity securities is presented in the table below:
<TABLE>
December 31,
--------------------------
1996 1995
-------- --------
<S> <C> <C>
Cost $115,367 $105,176
Unrealized appreciation 33,015 30,033
Unrealized depreciation 1,102 4,017
-------- --------
Market Value $147,280 $131,192
======== ========
</TABLE>
The changes in net unrealized gains (losses) of investments of the Company
(including unrealized gains and losses on fixed maturities not reflected in
stockholders' equity) are derived from the following sources:
<TABLE>
Years Ended December 31,
------------------------------------
1996 1995 1994
--------- --------- ----------
<S> <C> <C> <C>
Increase (decrease) during the period
between the market value and cost of
investments carried at market value,
and deferred tax thereon:
Equity securities $ 5,897 $ (8,153) $ (24,843)
Fixed maturities (14,440) 226,459 (188,507)
Other invested assets -- -- (404)
Deferred taxes 2,583 (76,408) 74,814
--------- --------- ---------
Increase (decrease) in unrealized
appreciation, net of deferred taxes,
included in stockholder's equity (5,960) 141,898 (138,940)
--------- --------- ---------
Increase (decrease) during the period
between the market value and cost of
fixed maturities carried at amortized
cost (4,288) 3,294 (9,247)
--------- --------- ---------
TOTAL $ (10,248) $ 145,192 $(148,187)
========= ========= =========
</TABLE>
F-11
<PAGE>
The components of net investment income are presented in the table below:
<TABLE>
Years Ended December 31,
------------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Fixed maturities $198,947 $168,268 $137,284
Equity securities 2,835 2,017 3,301
Short-term investments 5,357 9,005 8,658
Other interest income 1,450 860 3,555
-------- -------- --------
Total gross investment income 208,589 180,150 152,798
-------- -------- --------
Interest on funds held 12,294 9,451 4,995
Other investment expenses 4,394 4,676 4,194
-------- -------- --------
Total investment expenses 16,688 14,127 9,189
-------- -------- --------
Total net investment income $191,901 $166,023 $143,609
======== ======== ========
</TABLE>
The components of realized capital gains (losses) are presented in the table
below:
<TABLE>
Years Ended December 31,
---------------------------------------
1996 1995 1994
-------- -------- ---------
<S> <C> <C> <C>
Fixed maturities $(11,805) $ (5,000) $(21,994)
Equity securities 17,443 38,833 11,516
Short-term investments 57 2 (21)
-------- -------- --------
Total $ 5,695 $ 33,835 $(10,499)
======== ======== ========
</TABLE>
In addition, in 1994, the Company sold to The Prudential all of the remaining
privately placed equity securities and fixed maturities in its available for
sale investment portfolio. Proceeds from this sale were $71,191, with the amount
in excess of book value, $2,476 ($1,609 net of deferred income taxes), reflected
in the accompanying financial statements as an increase to paid in capital.
Securities with a carrying value amount of $295,607 at December 31, 1996 were on
deposit with various state or governmental insurance departments in compliance
with insurance laws. The Company had no investments in derivative financial
instruments for the years ended December 31, 1996, 1995 and 1994.
3. RESERVE FOR LOSSES AND LOSS ADJUSTMENT EXPENSES
Activity in the reserve for losses and loss adjustment expenses is summarized as
follows:
<TABLE>
Years Ended December 31,
----------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Reserves at January 1 $ 2,969,341 $ 2,706,429 $ 2,540,129
Less reinsurance recoverables 689,190 648,550 641,824
----------- ----------- -----------
Net balance at January 1 2,280,151 2,057,879 1,898,305
----------- ----------- -----------
Incurred related to:
Current year 745,594 658,039 646,534
Prior years (29,561) 16,657 74,266
----------- ----------- -----------
Total incurred losses and
loss adjustment expenses 716,033 674,696 720,800
----------- ----------- -----------
Paid related to:
Current year 139,073 92,949 157,688
Prior years 282,134 359,475 403,538
----------- ----------- -----------
Total paid losses and loss
adjustment expenses 421,207 452,424 561,226
----------- ----------- -----------
Net balance at December 31 2,574,977 2,280,151 2,057,879
Plus reinsurance recoverables 671,881 689,190 648,550
----------- ----------- -----------
Balance at December 31 $ 3,246,858 $ 2,969,341 $ 2,706,429
=========== =========== ===========
</TABLE>
F-12
<PAGE>
4. INCOME TAXES
The components of income taxes for the periods presented are as follows:
<TABLE>
Years Ended December 31,
---------------------------------
1996 1995 1994
-------- -------- ---------
<S> <C> <C> <C>
Current tax (benefit):
U.S $ 24,363 $(35,435) $(21,683)
Foreign 20,735 18,351 14,575
-------- -------- --------
Total current tax (benefit) 45,098 (17,084) (7,108)
Total deferred U.S. tax (benefit) (13,286) (10,231) (15,536)
-------- -------- --------
Total income tax (benefit) $ 31,812 $(27,315) $(22,644)
======== ======== ========
</TABLE>
A reconciliation of the U.S. Federal income tax rate to the Company's effective
tax rate is as follows:
<TABLE>
Years Ended December 31,
------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Federal income tax rate 35.0% (35.0)% (35.0)%
Increase (reduction) in taxes resulting from:
Tax exempt income (15.1) (73.4) (160.8)
Other, net 2.2 5.6 6.8
---- ----- -----
Effective tax rate 22.1% (102.8)% (189.0)%
==== ===== =====
</TABLE>
Deferred income taxes reflect the tax effect of the temporary differences
between the value of assets and liabilities for financial statement purposes and
such values as measured by the tax laws and regulations. The principal items
making up the net deferred income tax asset are as follows:
<TABLE>
December 31,
---------------------
1996 1995
-------- --------
<S> <C> <C>
Deferred tax assets:
Reserve for losses and loss adjustment
expenses $164,477 $141,917
Unearned premium reserve 24,545 18,575
Foreign currency translation 232 4,179
Net operating loss carryforward 1,579 5,019
Restricted stock -- 4,406
Other assets 6,569 12,767
-------- --------
Total deferred tax assets 197,402 186,863
-------- --------
Deferred tax liabilities:
Deferred acquisition costs 29,443 27,734
Net unrealized appreciation of investments 41,874 44,864
Other liabilities 1,421 1,666
-------- --------
Total deferred tax liabilities 72,738 74,264
-------- --------
Net deferred tax assets $124,664 $112,599
======== ========
</TABLE>
Pursuant to the terms of a separation agreement, The Prudential retained the net
operating loss carryforward attributable to the Company at the date of the IPO
and has paid the Company for the tax benefit thereof in 1996. Holdings has total
net operating loss carryforwards of $4,510, of which $323 expire in 2011 and
$4,187 expire in 2012. Management believes that it is more likely than not that
the Company will generate sufficient future taxable income to realize the
benefits of the other net deferred tax assets and, accordingly, no valuation
allowance has been recorded for the periods presented.
Everest Re has not provided for U.S. Federal income or foreign withholding
taxes on $9,393 of pre-1987 undistributed earnings of non-U.S. subsidiaries,
because such earnings are intended to be retained by the foreign
F-13
<PAGE>
subsidiaries indefinitely. If these earnings were distributed, foreign tax
credits should become available under current law to reduce or eliminate any
resulting income tax liability.
The Internal Revenue Service ("IRS") has completed its examinations of The
Prudential's tax returns for all years through 1992. As those examinations
relate to Everest Re, the IRS has disallowed that portion of the fresh start
benefit which relates to 1986 reserve strengthening as defined by the IRS.
Consistent with case law favorable to taxpayers on the issue, the Company
believes that, because there were no changes in reserving assumptions or
methodologies between 1985 and 1986, all increases to reserves in 1986 for which
a fresh start benefit was taken are normal reserve additions and, therefore,
pursuant to the case law, does not constitute reserve strengthening that is not
eligible for the fresh start benefit. If the IRS position prevails, the Company
will be required to reimburse The Prudential, thereby incurring an additional
charge of approximately $8,777, including the after-tax cost of interest through
December 31, 1996.
5. RETROCESSIONS
The Company utilizes retrocessional (reinsurance) agreements to reduce its
exposure to large claims and catastrophic loss occurrences. These agreements
provide for recovery from retrocessionaires of a portion of losses and loss
expenses under certain circumstances. Losses and loss adjustment expenses
incurred and earned premiums are after deduction for retrocessions. In the event
retrocessionaires were unable to meet their obligations under retrocession
agreements, the Company would not be able to realize the full value of the
reinsurance recoverable balances. The Company may hold partial collateral under
these agreements and has never suffered a significant loss because of a
retrocessionaire's default. See Note 1(C) and the following paragraph.
Effective October 5, 1995, Everest Re entered into a stop loss agreement (the
"Stop Loss Agreement") with Gibraltar Casualty Company ("Gibraltar") (see Note
6). This agreement, for a premium of $140 million, provides protection against
100% of the first $150 million of adverse development, if any, and 90% of the
next $250 million of adverse development, if any, of Everest Re's consolidated
reserves for losses and uncollectable reinsurance as of June 30, 1995, including
allocated loss adjustment expense and incurred but not reported losses, provided
that adverse development, if any, relating to catastrophes will be covered only
to the extent that the catastrophe event occurred prior to January 1, 1995. All
such adverse development is referred to herein as "Adverse Development".
Payments will be made to Everest Re under the Stop Loss Agreement as Adverse
Development is incurred by Everest Re. The $375.0 million aggregate limit under
the Stop Loss Agreement will be reduced by an amount equal to the Adverse
Development which is not ceded, in accordance with the terms of the Stop Loss
Agreement, to Gibraltar (See Note 6A). Coverage under the Stop Loss Agreement
terminates on December 31, 2007, or earlier if coverage is exhausted. Through
December 31, 1996 and 1995, cessions under the Stop Loss Agreement have
aggregated $140,231 and $23,687, respectively.
Written and earned premiums are comprised of the following:
<TABLE>
Years Ended December 31,
----------------------------------------------
1996 1995 1994
----------- ----------- ------------
<S> <C> <C> <C>
Written premium:
Direct $ 59,691 $ 16,064 $ 6,821
Assumed 984,340 933,436 946,397
Retroceded (13,497) (166,309) (90,013)
----------- ----------- -----------
Net written premium $ 1,030,534 $ 783,191 $ 863,205
=========== =========== ===========
Earned premium:
Direct $ 37,963 $ 10,784 $ 6,234
Assumed 945,698 907,995 942,419
Retroceded (10,050) (165,458) (95,307)
----------- ----------- -----------
Net earned premium $ 973,611 $ 753,321 $ 853,346
=========== =========== ===========
</TABLE>
The amounts deducted from losses and loss adjustment expenses incurred for
retrocessional recoveries were $206,032, $119,115 and $119,710 for the years
ended December 31, 1996, 1995 and 1994, respectively.
F-14
<PAGE>
6. TRANSACTIONS WITH FORMER AFFILIATES
A. INDEMNITY AGREEMENT
On October 5, 1995, Holdings agreed, pursuant to a Standby Capital Contribution
Agreement (the "Capital Contribution Agreement"), to make capital contributions
("Capital Contributions") to Everest Re in respect of the first $375.0 million
of Adverse Development experienced by Everest Re that is not ceded, in
accordance with the terms of the Stop Loss Agreement, to Gibraltar. Each Capital
Contribution, if any, will equal the amount of such Adverse Development,
adjusted to reflect an assumed tax rate of 36%, although the Company's actual
tax rate may be greater than or less than 36%. Holdings' obligation to make
Capital Contributions shall be limited to an aggregate maximum amount of $240.0
million, which amount shall be reduced by 64% of the amount of Adverse
Development ceded to Gibraltar under the Stop Loss Agreement.
Also on October 5, 1995, PRUCO agreed to make payments ("Indemnity Payments") to
Holdings, pursuant to an Indemnity Agreement (the "PRUCO Indemnity"), in an
amount equal to the Capital Contributions at such times as such Capital
Contributions, if any, are required to be paid by Holdings to Everest Re. The
Capital Contribution Agreement and the PRUCO Indemnity are intended to mitigate
the impact of up to the first $375.0 million of Adverse Development on the
Company's earnings not otherwise covered by the Stop Loss Agreement.
B. REINSURANCE
The Company engages in reinsurance activities with certain Prudential entities,
including Prudential Property and Casualty Insurance Company, Gibraltar, and The
Prudential.
The following summarizes the financial statement impact of certain reinsurance
transactions with Gibraltar and other former affiliates, while they were
affiliated, for the periods presented.
<TABLE>
January 1
Through Year Ended
October 5, December 31,
1995 1994
---------- ------------
<S> <C> <C>
Income statement:
Premiums earned - assumed
Gibraltar $ -- $ --
Other 24,298 37,179
Premiums earned - retroceded
Gibraltar 140,000 --
Incurred losses and loss adjustment
expenses - assumed
Gibraltar 37,877 41,490
Other 13,587 28,436
Incurred losses and loss adjustment
expenses - retroceded
Gibraltar 27,640 112,011
Other 16 --
</TABLE>
The Prudential has guaranteed all of Gibraltar's obligations under the Stop Loss
Agreement, all of PRUCO's obligations under the PRUCO Indemnity and up to $400
million of Gibraltar's net obligations that became due after June 30, 1995 under
all other reinsurance agreements between Gibraltar and Everest Re. At December
31, 1996, Gibraltar's net obligations under such other reinsurance agreements
consisted of the following balances:
<TABLE>
<S> <C>
Reinsurance receivables from Gibraltar $ 322,266
Reserve for losses and loss adjustment expenses assumed
from Gibraltar (141,700)
Losses in the course of payment assumed from Gibraltar (1,765)
Funds held by Everest Re under reinsurance treaties with
with Gibraltar (115,694)
---------
Net obligations of Gibraltar $ 63,107
=========
</TABLE>
In addition, since June 30, 1995, Gibraltar has paid $65,472 to Everest Re in
respect of such other reinsurance agreements.
F-15
<PAGE>
C. EXPENSES
Everest Re has service and lease agreements with The Prudential. Under these
agreements, The Prudential has furnished services of its employees, provided
supplies, use of equipment and office space, and made payment to third parties
for general expenses on behalf of Everest Re. The agreements obligate Everest Re
to reimburse The Prudential for disbursements made on Everest Re's behalf and to
pay for providing these services. The cost of such services for the period
January 1 through October 5, 1995 and for the year ended December 31, 1994 were
$10,789 and $14,273, respectively.
D. EMPLOYEE RETIREMENT PLAN
The Prudential sponsored a defined benefit pension plan which covered
substantially all of the employees of Everest Re through October 6, 1995. The
benefits are generally based on average earnings over a period prescribed by the
plan and credited length of service. In connection with the IPO, the Company has
established its own employee retirement plan which is substantially the same as
The Prudential's plan. In September 1996, The Prudential completed a
plan-to-plan asset transfer of $13,270 to fully fund the Company's projected
benefit obligations as of the IPO date, plus interest from the IPO date.
No pension expense for contributions to the Prudential plan has been charged to
Everest Re for the years ended December 31, 1995 and 1994 because the Prudential
plan was subject to the full funding limitation under the IRS guidelines.
Pension expense for the Company's plan for the year ended December 31, 1996 and
for the period of October 6, 1995 through December 31, 1995 was $901 and $312,
respectively.
The following table summarizes the plan's funded status:
<TABLE>
December 31,
1996
------------
<S> <C>
Accumulated benefit obligation
Vested $ (7,985)
Non-vested 0
--------
Total (7,985)
Additional benefits based on estimated
future salary levels (7,146)
--------
Projected benefit obligation (15,131)
Fair value of plan assets 14,610
--------
Unfunded projected benefit obligation (521)
Unrecognized net loss or (gain) (692)
--------
Unfunded (accrued) or prepaid pension
cost in the financial statements $ (1,213)
========
</TABLE>
Plan assets are comprised of shares in investment trusts with approximately 70%
and 30% of the underlying assets consisting of equity securities and fixed
maturities, respectively.
Net periodic pension cost included the following components:
<TABLE>
October 6
Year Ended Through
December 31, December 31,
1996 1995
------------ ------------
<S> <C> <C>
Service cost $ 1,102 $ 382
Interest cost 948 328
Actual return on assets (1,841) (638)
Net asset gain during period deferred
for later recognition 692 240
------- -------
Net periodic pension cost $ 901 $ 312
======= =======
</TABLE>
The weighted average discount rate and rate of compensation increase used to
determine the actuarial present value of the projected benefit obligation are
7.3% and 4.5%, respectively. The expected long-term rate of return on plan
assets is 9.0%.
F-16
<PAGE>
In 1994, an early retirement incentive program was offered to certain employees
of The Prudential and its subsidiaries who were eligible to retire after adding
any combination of seven years to their service and/or their age. The one-time
1994 expense allocated to Everest Re in connection with its employees who
accepted this program was $777.
E. POSTRETIREMENT BENEFIT PLANS
The Prudential sponsors postretirement defined benefit plans which provide
certain life insurance and health care benefits ("postretirement benefits") for
Everest Re's employees eligible to retire at October 6, 1995. The Company is
considering establishing its own plan for its employees who were not eligible to
retire at October 6, 1995. The expense allocated to the Company for the cost of
these benefits incurred by The Prudential was $239 and $1,370 for the period
ending October 6, 1995 and the year ended December 31, 1994, respectively.
F. CAPITAL CONTRIBUTION
Immediately prior to the IPO, The Prudential paid $140,000 to the Company, of
which amount $91,000 was a contribution to capital and $49,000 was a payment in
respect of the tax benefit of the premium paid for the Stop Loss Agreement.
7. DIVIDEND RESTRICTIONS AND STATUTORY FINANCIAL INFORMATION
A. DIVIDEND RESTRICTIONS
Delaware law provides that an insurance company, which is either an insurance
holding company or a member of an insurance holding system and is domiciled in
the state, shall not pay dividends without giving prior notice to the Insurance
Commissioner of Delaware and may not pay dividends without the approval of the
Insurance Commissioner if the value of the proposed dividend, together with all
other dividends and distributions made in the preceding twelve months, exceeds
the greater of (1) 10% of statutory surplus or (2) net income, not including
realized capital gains, each as reported in the prior year's statutory annual
statement. In addition, no dividend may be paid in excess of unassigned earned
surplus. At December 31, 1996, Everest Re had $84,415 available for payment of
dividends in 1997 without prior regulatory approval.
B. STATUTORY FINANCIAL INFORMATION
Everest Re prepares its statutory financial statements in accordance with
accounting practices prescribed by the National Association of Insurance
Commissioners ("NAIC") and the Delaware Insurance Department. Prescribed
statutory accounting practices are set forth in a variety of publications of the
NAIC, as well as state laws, regulations, and general administrative rules. The
capital and statutory surplus of Everest Re was $772,691 and $686,857 at
December 31, 1996 and 1995, respectively. The statutory net income (loss) of
Everest Re was $88,517, $(736) and $2,987 for the years ended December 31, 1996,
1995 and 1994, respectively.
8. CONTINGENCIES
Everest Re continues to receive claims under expired contracts which assert
alleged injuries and/or damages relating to or resulting from toxic torts, toxic
waste and other hazardous substances, such as asbestos. Everest Re's asbestos
claims typically involve liability or potential liability for bodily injury from
exposure to asbestos or for property damage resulting from asbestos or products
containing asbestos. Everest Re's environmental claims typically involve
potential liability for (i) the mitigation or remediation of environmental
contamination or (ii) bodily injury or property damages caused by the release of
hazardous substances into the land, air or water.
Everest Re's reserves include an estimate of Everest Re's ultimate liability
for asbestos and environmental claims for which ultimate value cannot be
estimated using traditional reserving techniques. There are significant
uncertainties in estimating the amount of Everest Re's potential losses
from asbestos and environmental claims. Among the complications are: (i)
potentially long waiting periods between exposure and manifestation of any
bodily injury or property damage; (ii) difficulty in identifying sources
of asbestos or environmental contamination; (iii) difficulty in properly
allocating responsibility and/or liability for asbestos or environmental
damage; (iv) changes in underlying laws and judicial interpretation of those
laws; (v) potential for an asbestos or environmental claim to involve many
insurance providers over many policy periods; (vi) long reporting delays,
both from insureds to insurance companies and ceding companies to reinsurers;
(vii) limited historical data concerning asbestos and environmental losses;
F-17
<PAGE>
(viii) questions concerning interpretation and application of insurance and
reinsurance coverage; and (ix) uncertainty regarding the number and identity of
insureds with potential asbestos or environmental exposure.
Management believes that these issues are not likely to be resolved in the near
future. Everest Re establishes reserves to the extent that, in the judgment of
management, the facts and prevailing law reflect an exposure for Everest Re or
its ceding company. Due to the uncertainties discussed above, the ultimate
losses may vary materially from current loss reserves and, if coverage under the
Stop Loss Agreement is exhausted, could have a material adverse effect on the
Company's future financial condition, results of operations and cash flows. See
Note 5.
The following table shows the development of prior year asbestos and
environmental reserves on both a gross and net of retrocessional basis for the
years ended:
<TABLE>
1996 1995 1994
--------- --------- ----------
Gross Basis
<S> <C> <C> <C>
Beginning of period reserves $ 428,495 $ 445,537 $ 421,528
Incurred losses 30,028 17,269 127,058
Paid losses (35,187) (34,311) (103,049)
--------- --------- ---------
End of period reserves $ 423,336 $ 428,495 $ 445,537
========= ========= =========
Net Basis
Beginning of period reserves $ 197,668 $ 203,676 $ 214,600
Incurred losses (1) -- -- 40,537
Paid losses (1) 3,321 (6,008) (51,461)
--------- --------- ---------
End of period reserves $ 200,989 $ 197,668 $ 203,676
========= ========= =========
</TABLE>
- - ------------
(1) Net of $24,196 and $16,687 ceded in 1996 and 1995, respectively, under the
incurred loss reimbursement feature of the Stop Loss Agreement.
At December 31, 1996, the gross reserves for asbestos and environmental losses
were comprised of $101.2 million representing case reserves reported by ceding
companies, $50.1 million representing additional case reserves established by
Everest Re on assumed reinsurance claims, $52.8 million representing case
reserves established by Everest Re on direct excess insurance claims and $219.2
million representing IBNR reserves.
To the extent loss reserves for claims incurred on June 30, 1995 (December 31,
1994 for catastrophe losses) or prior on assumed reinsurance needed to be
increased, and were not ceded to unaffiliated reinsurers under existing
reinsurance agreements, Everest Re would be entitled to certain reimbursements
under the Stop Loss Agreement (see Note 5). To the extent loss reserves on
direct excess insurance policies needed to be increased and were not ceded to
unaffiliated reinsurers under existing reinsurance agreements, Everest Re would
be entitled to 100% protection under a 100% quota share retrocession entered
into with Gibraltar in 1986. While there can be no assurance that reserves for
and losses from these claims would not increase in the future, management
believes that Everest Re's existing reserves and ceded reinsurance arrangements
and reimbursements available under the Stop Loss Agreement lessen the
probability that such increases, if any, would have a material effect on Everest
Re's financial condition, results of operations or cash flows.
Everest Re is also named in various legal proceedings incidental to its normal
business activities. In the opinion of Everest Re, none of these proceedings
would have a material adverse effect upon the financial condition, results of
operations or cash flows of Everest Re.
The Prudential sells annuities which are purchased by property and casualty
insurance companies to settle certain types of claim liabilities. In
1993 and prior, Everest Re, for a fee, accepted the claim payment obligation
of the property and casualty insurer, and, concurrently, became the owner
of the annuity or assignee of the annuity proceeds. In these circumstances,
Everest Re would be liable if The Prudential were unable to make the annuity
F-18
<PAGE>
payments. The estimated cost to replace all such annuities for which Everest Re
was contingently liable at December 31, 1996 and 1995 was $136,234 and $133,428,
respectively.
Everest Re has purchased annuities from an unaffiliated life insurance company
to settle certain claim liabilities of Everest Re. Should the life insurance
company become unable to make the annuity payments, Everest Re would be liable.
The estimated cost to replace such annuities at December 31, 1996 and 1995 was
$9,208 and $8,506, respectively.
9. STOCK BASED COMPENSATION PLANS
The Company has in place its 1995 Stock Incentive Plan for key employees (the
"1995 Employee Plan") and its 1995 Stock Option Plan for Non-Employee Directors
(the "1995 Director Plan") and applies APB Opinion 25 and related
interpretations in accounting for these plans. Accordingly, no compensation
expense has been recognized in the accompanying financial statements in respect
of stock options granted under these plans.
Under the 1995 Employee Plan, a total of 3,949,000 shares of common stock have
been authorized to be granted as stock options, stock awards or restricted stock
awards to officers and key employees of the Company. At December 31, 1996, there
were 2,423,031 remaining shares available to be granted. Under the 1995 Director
Plan, a total of 50,000 shares of common stock have been authorized to be
granted as stock options to non-employee directors of the Company. At December
31, 1996, there were 37,130 remaining shares available to be granted. Options
granted under the 1995 Employee Plan vest at 20% per year over five years and
options granted under the 1995 Director Plan vest at 50% per year over two
years. All options are exercisable at fair market value of the stock at the date
of grant and expire ten years after the date of grant. Restricted stock granted
under the 1995 Employee Plan vests, beginning one year after the date of grant,
in equal annual installments over five years.
A summary of the status of the Company's stock options as of December 31, 1996
and 1995 and changes during the years ended on those dates is presented below:
<TABLE>
1996 1995
Weighted-Average Weighted-Average
Shares Exercise Price Shares Exercise Price
------- ---------------- ------- ----------------
<S> <C> <C> <C> <C>
Outstanding, beginning of year 459,700 $16.93 0 $ xx
Granted 286,270 24.10 459,700 16.93
Exercised 3,800 16.75 0 xx
Forfeited 9,600 18.25 0 xx
------- -------
Outstanding, end of year 732,570 $19.72 459,700 $16.93
======= =======
Options exercisable at year-end 89,340 0
======= =======
Weighted-average fair value of
options granted during the year $11.55 $ 7.92
====== ======
</TABLE>
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions: (i) dividend
yield of 0.7%, (ii) expected volatility of 34.33%, (iii) risk-free interest
rates ranging from a low of 5.90% to a high of 7.01%, and (iv) expected life of
7.5 years.
The following table summarizes information about stock options outstanding at
December 31, 1996:
<TABLE>
Options Outstanding Options Exercisable
----------------------------- -------------------
Number Weighted-Average Number
Range of Outstanding Remaining Weighted-Average Exercisable Weighted-Average
Exercise Prices at 12/31/96 Contractual Life Exercise Price at 12/31/96 Exercise Price
- - ---------------- ----------- ---------------- ---------------- ------------------- ----------------
<C> <C> <C> <C> <C> <C> <C>
$16.75 to $20.94 448,300 8.75 years $16.94 89,340 $16.94
22.56 to 26.63 284,270 9.66 24.10 0 xx
------- ------
$16.75 to $26.63 732,570 9.11 $19.72 89,340 $16.94
======= ======
</TABLE>
In conjunction with its initial public offering, the Company issued to certain
key employees of the Company 746,269 shares of stock and 46,600 restricted
shares of stock, respectively. In 1995, the Company expensed $12,500 in
F-19
<PAGE>
recognition of the unrestricted stock awards. Upon issuance of restricted
shares, unearned compensation is charged to stockholder's equity for the cost of
the restricted stock and is amortized over the vesting period. The amount of
earned compensation recognized as expense with respect to restricted stock
awards was $318 and $89 for 1996 and 1995, respectively.
Had the compensation cost for the Company's stock based compensation plans been
determined based on the fair value at the grant dates for awards under those
plans consistent with the method of SFAS No. 123, the Company's net income and
earnings per share would have been reduced to the pro forma amounts indicated
below:
<TABLE>
1996 1995
-------- -----
<S> <C> <C>
Net Income As reported $112,027 $ 747
Pro forma $110,850 $ 514
Earnings per share As reported $ 2.22 $0.01
Pro forma $ 2.19 $0.01
</TABLE>
10. SEGMENT INFORMATION
Everest Re's principal business is reinsuring property and casualty risks of
domestic and foreign insurance companies. The following table provides summary
financial information by geographic region for the periods disclosed.
<TABLE>
Years Ended December 31,
----------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Premiums earned:
Domestic $ 655,097 $ 565,540 $ 548,832
Canada 63,615 57,133 51,324
Other international 254,899 270,648 253,190
Premium for Stop Loss Agreement -- (140,000) --
--------- --------- ---------
Total premiums earned $ 973,611 $ 753,321 $ 853,346
========= ========= =========
Net income (loss):
Domestic $ 70,978 $ 37,305 $ (22,684)
Canada 8,548 17,774 8,062
Other international 32,501 45,341 25,284
After-tax cost of Stop Loss Agreement and
compensation related to public offering -- (99,673) --
--------- --------- ---------
Total net income (loss) $ 112,027 $ 747 $ 10,662
========= ========= =========
</TABLE>
<TABLE>
December 31,
-----------------------------
1996 1995
---------- ----------
<S> <C> <C>
Total identifiable assets:
Domestic $4,205,198 $3,895,209
Canada 303,369 264,777
Other international 530,785 487,776
---------- ----------
Total identifiable assets $5,039,352 $4,647,762
========== ==========
</TABLE>
F-20
<PAGE>
11. UNAUDITED QUARTERLY FINANCIAL DATA
Summarized quarterly financial data were as follows:
<TABLE>
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
1996 Operating data:
Gross written premium $ 229,963 $ 247,392 $ 282,399 $ 284,277
Net written premium 218,743 235,914 275,009 300,868
Earned premium 210,269 218,806 245,341 299,195
Net investment income 44,768 46,261 49,467 51,405
Net realized capital gain(loss) 3,812 3,672 (6,505) 4,716
Incurred losses and LAE 155,125 161,430 179,856 219,622
Underwriting expenses 68,350 69,846 79,152 92,120
Underwriting loss (13,206) (12,470) (13,667) (12,547)
Net income (loss) $ 27,751 $ 28,739 $ 23,219 $ 32,318
========= ========= ========= =========
Primary earnings per share:
Weighted average shares
outstanding (000's) 50,793 50,497 50,487 50,488
Net income per common share $ 0.55 $ 0.57 $ 0.46 $ 0.64
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
--------- --------- --------- ---------
1995 Operating data:
Gross written premium $ 217,581 $ 215,465 $ 268,031 $ 248,423
Net written premium 210,789 208,301 261,667 102,434
Earned premium 199,763 210,744 242,349 100,465
Net investment income 38,026 41,194 42,866 43,937
Net realized capital gain(loss) 3,229 19,527 (609) 11,688
Incurred losses and LAE 155,843 148,670 185,836 184,347
Underwriting expenses 63,767 77,171 73,675 86,123
Underwriting loss (19,847) (15,097) (17,162) (170,005)
Net income (loss) $ 18,591 $ 31,910 $ 20,714 $ (70,468)
========= ========= ========= =========
Primary earnings per share:
Weighted average shares
outstanding (000's) 50,000 50,000 50,000 50,750
Net income per common share $ 0.37 $ 0.64 $ 0.41 $ (1.39)
</TABLE>
In connection with the IPO, the Company incurred non-recurring fourth quarter
1995 charges of $140,000 ($91,000 after taxes) for the Stop Loss Agreement (see
Note 5) and $13,343 ($8,673 after taxes) for compensation expense (see Note 9).
12. RESTRUCTURING COSTS
In December 1994, the Company adopted a plan to restructure its operations. The
plan, which was implemented in January 1995, included the termination of
approximately 20% of the Company's employees and the closing of four of seven
domestic branch offices. The estimated cost of the restructuring, consisting of
$6,243 for severance pay and benefits and $813 for remaining lease obligations,
net of estimated sublease income of approximately $900, subsequent to the branch
closings, was accrued in the financial statements for 1994 and has been
substantially paid.
13. CAPITAL TRANSACTIONS
The contribution to the Company's paid in capital in the twelve months ended
December 31, 1996 represents the tax benefits attributable to the difference
between the amount of compensation expense deductible for tax purposes with
respect to stock awards and the amount of such compensation expense reflected in
the Company's financial statements. In addition, on April 4, 1996, pursuant to
the Company's stock incentive plan, the Company acquired 306,231 shares of its
common stock at a cost of $7,216 from the Company's Chief Executive Officer to
fund required withholding taxes.
F-21
<PAGE>
<TABLE>
<CAPTION>
EVEREST REINSURANCE HOLDINGS, INC.
SCHEDULE I - SUMMARY OF INVESTMENTS -
OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 1996
- - --------------------------------------------------------------------------------
Column A Column B Column C Column D
-------- ---------- ---------- ----------
Amount
Shown in
Market Balance
(Dollars in thousands) Cost Value Sheet
---------- ---------- ----------
<S> <C> <C> <C>
Fixed maturities-held to maturity:
Bonds:
U.S. Government and government agencies $ 30,182 $ 30,435 $ 30,182
State, municipalities and political
subdivisions 50,340 57,939 50,340
Foreign bonds -- -- --
Public Utilities -- -- --
All other corporate bonds -- -- --
Mortgage pass-through securities -- -- --
---------- ---------- ----------
Total fixed maturities-held to maturity 80,522 88,374 80,522
---------- ---------- ----------
Fixed maturities-available for sale
Bonds:
U.S. Government and government agencies 162,406 161,954 161,954
State, municipalities and political
subdivisions 1,259,544 1,307,088 1,307,088
Foreign bonds 545,154 568,978 568,978
Public Utilities 26,007 26,590 26,590
All other corporate bonds 708,990 719,482 719,482
Mortgage pass-through securities 487,145 492,830 492,830
Redeemable preferred stock 5,000 5,050 5,050
---------- ---------- ----------
Total fixed maturities-available for sale 3,194,246 3,281,972 3,281,972
Equity securities 115,367 147,280 147,280
Short-term investments 49,486 49,486 49,486
Other invested assets 12,750 12,750 12,750
Cash 52,595 52,595 52,595
---------- ---------- ----------
Total investments and cash $3,504,966 $3,632,457 $3,624,605
========== ========== ==========
</TABLE>
S-1
<PAGE>
<TABLE>
<CAPTION>
EVEREST REINSURANCE HOLDINGS, INC.
SCHEDULE II -
CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
CONDENSED BALANCE SHEET
- - --------------------------------------------------------------------------------
December 31, (Dollars in thousands, except par value per share)
1996 1995
---------- --------
ASSETS
<S> <C> <C>
Investment in subsidiary, at equity in the
underlying net assets $1,080,131 $982,027
Income tax receivable 4,606 3,634
Receivable from affliate 3,431 0
Cash 0 442
---------- --------
Total assets $1,088,168 $986,103
========== ========
LIABILITIES
Other liabilities $ 2,145 $ 2,509
---------- --------
STOCKHOLDERS' EQUITY
Preferred stock, par value: $0.01; 50 million shares
authorized; no shares issued and outstanding -- --
Common stock, par value: $0.01; 200 million shares
authorized; 50.8 million shares issued 508 508
Paid-in capital 389,196 387,349
Unearned compensation (374) (692)
Net unrealized appreciation(depreciation) of
investments 77,766 83,726
Cumulative foreign currency translation adjustment (354) (7,838)
Treasury Stock (7,220) 0
Retained earnings 626,501 520,541
---------- --------
Total stockholders' equity 1,086,023 983,594
---------- --------
Total liabilities and stockholders' equity $1,088,168 $986,103
========== ========
See notes to consolidated financial statements.
</TABLE>
S-2
<PAGE>
<TABLE>
<CAPTION>
EVEREST REINSURANCE HOLDINGS, INC.
SCHEDULE II -
CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
CONDENSED STATEMENT OF OPERATIONS
- - --------------------------------------------------------------------------------
For Years Ended December 31, (Dollars in thousands)
1996 1995 1994
--------- ------- -------
REVENUES
<S> <C> <C> <C>
Dividends received from subsidiary $ 17,924 $13,722 $ 7,500
Equity in undistributed net income
(loss) of subsidiary 95,242 (9,956) 7,774
--------- ------- -------
Total revenues 113,166 3,766 15,274
--------- ------- -------
EXPENSES
Other expenses 1,752 4,612 7,095
--------- ------- -------
Income (loss) before taxes 111,414 (846) 8,179
Income tax (benefit) (613) (1,593) (2,483)
--------- ------- -------
Net income $ 112,027 $ 747 $10,662
========= ======= =======
See notes to consolidated financial statements.
</TABLE>
S-3
<PAGE>
<TABLE>
<CAPTION>
EVEREST REINSURANCE HOLDINGS, INC.
SCHEDULE II -
CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
CONDENSED STATEMENT OF CASHFLOWS
- - --------------------------------------------------------------------------------
For Years Ended December 31, (Dollars in thousands)
1996 1995 1994
-------- ------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income $112,027 $ 747 $10,662
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity in undistributed (earnings) loss of
subsidiary (95,242) 9,956 (7,774)
Increase (decrease) in other liabilities (364) (4,586) 7,095
(Increase) in income taxes receivable (972) (1,151) (2,483)
(Increase) in receivable from affliates (3,431) -- --
Non-cash compensation 407 2,500 --
-------- ------- -------
Net cash provided by operating activities 12,425 7,466 7,500
CASH FLOWS FROM FINANCING ACTIVITIES:
Treasury Stock Purchase (7,220) -- --
Contributions during period 420 -- --
Dividends paid to stockholders (6,067) (7,024) (7,500)
-------- ------- -------
Net cash used in financing activities (12,867) (7,024) (7,500)
Net increase in cash (442) 442 --
Cash, beginning of period 442 -- --
-------- ------- -------
Cash, end of period $ -- $ 442 $ --
======== ======= =======
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash transaction:
Income tax received -- $ 442 --
Non-cash operating transactions:
Dividends received from subsidiary in the
form of forgiveness of liabilities $ 1,767 6,698 --
Non-cash financing transaction:
Issuance of common stock in connection with
public offering -- 12,500 --
See notes to consolidated financial statements.
</TABLE>
S-4
<PAGE>
<TABLE>
<CAPTION>
EVEREST REINSURANCE HOLDINGS, INC.
SCHEDULE III - SUPPLEMENTARY INSURANCE INFORMATION
- - --------------------------------------------------------------------------------
Column A Column B Column C Column D Column F Column G Column H Column I Column J Column K
- - ------------------- ----------- ----------- -------- -------- ---------- ------------- ------------ --------- ----------
Reserve for
Losses Incurred Amortization
Deferred and Loss Unearned Net Loss and Loss of Deferred Other
Acquisition Adjustment Premium Earned Investment Adjustment Acquisition Operating Written
SEGMENT Costs Expenses Reserves Premium Income Expenses Costs Expenses Premium
------- ----------- ----------- -------- -------- ---------- ------------- ------------ --------- ----------
December 31, 1996
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Domestic $56,676 $2,751,282 $242,654 $655,097 $143,301 $508,247 $175,203 $45,712 $694,053
Canada 7,640 142,346 25,835 63,615 17,489 37,896 15,781 2,408 65,030
Other international 19,807 353,230 87,419 254,899 31,111 169,890 61,828 8,536 271,451
------- ---------- -------- -------- -------- -------- -------- ------- ----------
Total $84,123 $3,246,858 $355,908 $973,611 $191,901 $716,033 $252,812 $56,656 $1,030,534
======= ========== ======== ======== ======== ======== ======== ======= ==========
December 31, 1995
Domestic $55,743 $2,504,947 $200,886 $565,540 $125,676 $474,864 $151,909 $64,259 $590,717
Canada 7,716 133,559 24,456 57,133 16,112 35,571 10,736 2,515 64,064
Other international 16,560 330,835 68,949 270,648 24,235 164,261 61,695 9,622 268,410
Premium for Stop
Loss Agreement -- -- -- (140,000) -- -- -- -- (140,000)
------- ---------- -------- -------- -------- -------- -------- ------- ----------
Total $80,019 $2,969,341 $294,291 $753,321 $166,023 $674,696 $224,340 $76,396 $783,191
======= ========== ======== ======== ======== ======== ======== ======= ==========
December 31, 1994
Domestic $548,832 $110,747 $529,305 $133,323 $62,469 $561,694
Canada 51,324 14,268 32,314 11,199 2,221 53,149
Other international 253,190 18,594 159,181 56,678 8,095 248,361
-------- -------- -------- -------- ------- ----------
Total $853,346 $143,609 $720,800 $201,200 $72,785 $863,204
======== ======== ======== ======== ======= ==========
</TABLE>
S-5
<PAGE>
<TABLE>
<CAPTION>
EVEREST REINSURANCE HOLDINGS, INC.
SCHEDULE IV - REINSURANCE
- - ---------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E Column F
- - ---------------------------- -------- --------------- --------------- -------- ----------
Gross Ceded To Assumed From Net Assumed to
Amount Other Companies Other Companies Amount Net
(Dollars in thousands) -------- --------------- --------------- -------- ----------
<S> <C> <C> <C> <C> <C>
December 31, 1996
Total property and liability
insurance earned premium $37,963 $ 10,050 $945,698 $973,611 97.1%
======= ======== ======== ======== =====
December 31, 1995
Total property and liability
insurance earned premium $10,784 $165,458 $907,995 $753,321 120.5%
======= ======== ======== ======== =====
December 31, 1994
Total property and liability
insurance earned premium $ 6,234 $ 95,307 $942,419 $853,346 110.4%
======= ======== ======== ======== =====
</TABLE>
S-6
<PAGE>
INDEX TO EXHIBITS
EXHIBIT
NO. PAGE
- - ------- ----
3.1 Certificate of Incorporation of Everest Reinsurance Holdings,
Inc., incorporated herein by reference to Exhibit 4.1 to
the Registration Statement on Form S-8 (No. 333-05771)
3.2 By-Laws (as amended and restated) of Everest Reinsurance
Holdings, Inc., incorporated herein by reference to Exhibit
3.2 to the Registration Statement on Form S-1 (No. 33-71652)
10.1 Sublease, effective as of January 1, 1994, between The
Prudential Insurance Company of America and Everest Reinsurance
Company, incorporated herein by reference to Exhibit 10.3 to
the Registration Statement on Form S-1 (No. 33-71652)
10.2 Stop Loss Agreement entered into between Everest Reinsurance
Company and Gibraltar Casualty Company, incorporated herein by
reference to Exhibit 10.6 to the Registration Statement on Form
S-1 (No. 33-71652)
10.3 Everest Reinsurance Holdings, Inc. Amended 1995 Stock Incentive
Plan, incorporated herein by reference to Exhibit 10.3 to the
Annual Report on Form 10-K for the year ended December 31, 1995
(the "1995 10-K")
10.4 Everest Reinsurance Holdings, Inc. Amended Annual Incentive
Plan, incorporated herein by reference to Exhibit 10.4 to the
1995 10-K
10.5 Sublease, effective as of February 1, 1997 between The
Prudential Insurance Company of America and Everest Reinsurance
Company
*10.6 Everest Reinsurance Holdings, Inc. 1995 Stock Option Plan for
Non-Employee Directors, incorporated herein by reference to
Exhibit 4.3 to the Registration Statement on Form S-8 (No.
333-05771)
*10.7 Amended and Restated Employment Agreement between Everest
Reinsurance Company and Joseph V. Taranto, incorporated herein
by reference to Exhibit 10.50 to the Registration Statement on
Form S-1 (No. 33-71652)
*10.8 Letter, Dated April 20, 1995, from Everest Reinsurance Company
to Sheldon Rosenberg, incorporated herein by reference to
Exhibit 10.51 to the Registration Statement on Form S-1 (No.
33-71652)
10.9 Standby Capital Contribution Agreement between Everest
Reinsurance Holdings, Inc. and Everest Reinsurance Company,
incorporated herein by reference to Exhibit 10.69 to the
Registration Statement on Form S-1 (No. 33-71652)
10.10 Indemnification Agreement between PRUCO, Inc. and Everest
Reinsurance Holdings, Inc., incorporated herein by reference to
Exhibit 10.70 to the Registration Statement on Form S-1 (No.
33-71652)
10.11 Guarantee made by The Prudential Insurance Company of America
in favor of Everest Reinsurance Company, incorporated herein
by reference to Exhibit 10.71 to the Registration Statement on
Form S-1 (No. 33-71652)
10.12 Guarantee made by The Prudential Insurance Company of America
in favor of Everest Reinsurance Holdings, Inc., incorporated
herein by reference to Exhibit 10.72 to the Registration
Statement on Form S-1 (No. 33-71652)
10.13 1995 Service Contract between Everest Reinsurance Company
and Gibraltar Casualty Company, incorporated herein by
reference to Exhibit 10.73 to the Registration Statement on
Form S-1 (No. 33-71652)
10.14 Separation Agreement among The Prudential Insurance Company
of America, Gibraltar Casualty Company, Everest Reinsurance
Company, PRUCO, Inc., and Everest Reinsurance Holdings, Inc.,
incorporated herein by reference to Exhibit 10.2 to the
Registration Statement on Form S-1 (No. 33-71652)
*10.15 Form of Non-Qualified Stock Option Award Agreement to be
entered into between Everest Reinsurance Holdings, Inc. and
participants in the 1995 Stock Incentive Plan, incorporated
herein by reference to Exhibit 10.15 to the 1995 10-K
E-1
<PAGE>
EXHIBIT
NO. PAGE
- - ------- ----
*10.16 Form of Restricted Stock Agreement to be entered into
between Everest Reinsurance Holdings, Inc. and participants in
the 1995 Stock Incentive Plan, incorporated herein by reference
to Exhibit 10.16 to the 1995 10-K
*10.17 Form of Stock Option Agreement (Version 1) to be entered into
between Everest Reinsurance Holdings, Inc. and participants
in the 1995 Stock Option Plan for Non-Employee Directors,
incorporated herein by reference to Exhibit 10.17 to the 1995
10-K
*10.18 Form of Stock Option Agreement (Version 2) to be entered into
between Everest Reinsurance Holdings, Inc. and participants
in the 1995 Stock Option Plan for Non-Employee Directors,
incorporated herein by reference to Exhibit 10.18 to the 1995
10-K
11.1 Statement regarding computation of per share earnings
16.1 Letter from Deloitte & Touche LLP, dated August 8, 1996,
incorporated herein by reference to Exhibit 16 to the Form 8-K
filed on August 9, 1996
21.1 Subsidiaries of the registrant
23.1 Consent of Deloitte & Touche LLP
23.2 Consent of Coopers & Lybrand L.L.P.
27.1 Financial Data Schedule
28.1 Information from reports furnished to state insurance
regulatory authorities
- - --------------
* Management contract or compensatory plan or arrangement.
E-2
<PAGE>
EVEREST REINSURANCE HOLDINGS, INC.
EXHIBIT 10.5
SUBLEASE, EFFECTIVE AS OF FEBRUARY 1, 1997 BETWEEN THE PRUDENTIAL INSURANCE
COMPANY OF AMERICA AND EVEREST REINSURANCE COMPANY
AGREEMENT OF SUBLEASE
BETWEEN
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA, SUBLESSOR
AND
EVEREST REINSURANCE COMPANY, SUBLESSEE
Building Address: Westgate Corporate Center
477 Martinsville Road
Basking Ridge, New Jersey 07938
<PAGE>
SUBLEASE
--------
AGREEMENT OF SUBLEASE made as of this 3rd day of December, 1996, by and between
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA, a New Jersey corporation with
offices at Two Gatewav Center - 17th Floor, Newark, New Jersey 07102
("Sublessor") and EVEREST REINSURANCE COMPANY, a Delaware corporation with
offices at Three Gateway Center, Newark, New Jersey 07102 ("Sublessee").
WITNESSETH:
WHEREAS, pursuant to a lease dated December 17, 1992 between Jared Associates,
L.P., as Landlord ("Landlord"), and Sublessor, as Tenant ("Prime Lease"),
Landlord leased to Sublessor a portion of the 2nd Floor containing approximately
31,337 rentable square feet, in the building known as Westgate Corporate Center
and located at 477 Martinsville Road, Basking Ridge, New Jersey ("Building").
WHEREAS, the Prime Lease has been amended pursuant to:
(i) First Amendment of Lease, dated as of April 1, 1993, which
added 12,108 rentable square feet and 5,876 rentable square
feet on the I st Floor, 30,599 rentable square feet on the 3rd
Floor and 26,641 rentable square feet on the 4th Floor, and
extended the expiration date of the Prime Lease to October 31,
2003;
(ii) Second Amendment of Lease, dated as of July 8,1993, which
added 2 spaces of 3,402 rentable square feet and 1,959
rentable square feet on the 1st Floor to the Premises; and
(iii) Letter agreement dated March 10, 1994 between Bellemead
Management Co., Inc., as Managing Agent, and Sublessor,
which confirmed January 3, 1994 as the commencement date for
the 3,520 (instead of 3,402) square foot space and January
14, 1994 as the commencement date for the 1,959 rentable
square foot space covered under the Second Amendment of
Lease, and November 30, 2003 as the expiration date of the
Lease.
WHEREAS, Sublessor desires to sublease to Sublessee and Sublessee desires to
sublease from Sublessor the entire Premises, containing approximately 112,040
rentable square feet ("Subleased Prernises"), on the terms, covenants and
conditions hereinafter provided.
NOW, THEREFORE, Sublessor and Sublessee covenant and agree as follows:
- 1 -
<PAGE>
1 Sublease
Sublessor hereby subleases to Sublessee, and Sublessee hereby hires and
subleases from Sublessor, the Subleased Premises which the parties acknowledge
and agree contain approximately 112,040 rentable square feet for all purposes
under the Sublease.
2. Term
The term ("Term") of this Sublease shall be for six (6) years and ten (10)
months and shall commence on February 1, 1997 ("Commencement Date") and shall
expire on November 29, 2003 ("Expiration Date"), unless sooner terminated by
reason of or pursuant to any provision set forth herein or in the Prime Lease.
3. Base Rent
Commencing on the Rent Commencement Date (as hereinafter defined) and for the
entire Term, Sublessee shall pay Sublessor, as rent for the Subleased Premises,
the following annual sums ("Base Rent"), in equal monthly installments in
advance on the first day of each month, without setoff or deduction whatsoever:
Annual Monthly Annual Base Rent
Period Base Rent Base Rent Rate Per Rt. Sq. Ft.
Rent
Commencement Date-06/30/00 $2,548,910.00 $212,409.17 $22.75
07/01/00-11/29/03 $2,829,010.00 $235,750.83 $25.25
Sublessor and Sublessee agree that they have a mutual interest in having the
Rent Commencement Date be April 1, 1997 or as soon thereafter as is reasonably
practicable. On or before February 14, 1997, Sublessee shall select a Rent
Commencement Date and notify Sublessor of that date. The Rent Commencement Date
selected by Sublessee shall not be later than May 1, 1997, provided, however,
that if the fully executed Consent to Sublease is not received by Sublessee (by
Telefax or otherwise) on or before December 13, 1996, the latest possible Rent
Commencement Date available to Sublessee shall be extended beyond May 1, 1997 by
one calendar week for each whole or partial calendar week which expires between
December 13, 1996 and the receipt by Sublessee of the fully executed Consent to
Sublease.
4. Additional Rent
In addition to the Base Rent under paragraph 3 above, Sublessee shall pay
Sublessor, as additional rent,
2
<PAGE>
(a) "Taxes" escalation under Article 36 of the Prime Lease, using
(i) a "First Tax Year" of the Taxes payable for the calendar
year 1997, (ii) a "Tax Year" of calendar year 1998 and each
succeeding calendar year thereafter throughout the Term of the
Sublease, and (iii) a "Tenant's Occupancy Percentage" of
48.55% (i.e. 112,040 rentable square feet for the Subleased
Premises divided by 230,519 rentable square feet contained in
the Building);
(b) Building Operating Costs escalation under Article 36 of the
Prime Lease, based upon (i) a First Operating Year of calendar
Year 1997, (ii) an Operating Year of calendar year 1998 and
each calendar year thereafter throughout the Term of the
Sublease, (iii) a "Tenant's Occupancy Percentage" of 48.55%
(i.e. 112,040 rentable square feet for the Subleased Premises
divided by 230,519 rentable square feet contained in the
Building); and
(c) Electric current for all of Sublessee's electric current
requirements for light and power used in connection with
Sublessee's operations within the Subleased Premises, in
accordance with Article 40, ELECTRIC CURRENT of the Prime
Lease.
5. Late Charges
In the event that Sublessee shall fail to pay Base Rent or any additional rent
within five (5) days after its due date, Sublessee shall pay an automatic late
charge to Sublessor of $.05 for each dollar overdue. In addition, in the event
that Sublessee shall fail to pay Base Rent or any additional rent within thirty
(30) days after its due date, then from and after the thirty-first (31st) day
until the date Sublessee finally pays the Base Rent or additional rent,
Sublessee shall pay Sublessor an additional late charge at the rate of fifteen
(I5%) percent per annum with respect to the delinquent amount. Such late charges
shall be deemed additional rent for all purposes under this Lease.
6. Use
Sublessee shall use and occupy the Subleased Premises for the purposes permitted
under, and in a manner consistent with, the provisions of the Prime Lease.
7. Condition of Subleased Premises
Sublessee acknowledges that Sublessee is hiring the Subleased Premises in "as
is" condition. In making and executing this Sublease, Sublessee has not relied
upon or been induced by any statements or representations of any person with
respect to the physical condition of the Subleased Premises, except as set
forth in the Certificate of Tenant attached hereto as Exhibit A
3
<PAGE>
and made a part hereof. Sublessee has relied solely on such investigations,
examinations and inspections as Sublessee has chosen to make. Sublessee
acknowledges that Sublessor has afforded Sublessee the opportunity for full and
complete investigation, examination and inspection of the Subleased Premises.
8. Subordination
Sublessor and Sublessee agree that this Sublease is, and shall be, subject and
subordinate to all of the terms, covenants and conditions of the Prime Lease,
and to the matters to which the Prime Lease shall be subordinate.
9. Incorporation of Prime Lease Terms
The terms, covenants and conditions contained in the Prime Lease are hereby
incorporated herein and shall, as between Sublessor and Sublessee, constitute
the terms, covenants and conditions of this Sublease, except to the extent set
forth below. As between the parties hereto, Sublessor agrees to observe and
perform the terms, covenants and conditions on its part to be observed and
performed hereunder and Sublessee agrees to be bound by the provisions of the
Prime Lease and to keep, observe and perform the terms, covenants and conditions
on its part to be kept, observed and performed hereunder as well as those
applicable terms, covenants and conditions to be observed and performed by
Sublessor as Tenant under the Prime Lease with respect to the Subleased
Premises. The remedies of the parties, as Sublessor and Sublessee hereunder,
shall be the same as the respective remedies of the Landlord and the Tenant
under the Prime Lease with respect to the Subleased Premises. Sublessee shall in
no case have any rights with respect to the Subleased Premises greater than
Sublessor's rights as Tenant under the Prime Lease, and Sublessor shall have no
liability to Sublessee for any matter or thing for which Sublessor does not have
co-extensive rights as Tenant under the Prime Lease.
The following terms, covenants, provisions and conditions of the Prime Lease,
and the rights and obligations of Sublessor thereunder, do not apply to, and
shall not be a part of, this Sublease:
ARTICLE PAGE
Original Lease
Minimum Rent
Schedule...................................................1
24. Failure To Give
Possession.................................................4
28. Bills and
Notices....................................................4
34. Security...............................................5
4
<PAGE>
Rider To Original Lease:
Article Page
36. Definitions; Demised Premises; Adjusted
Minimum Rent (3 6.1 (2), (3), (4), and
(7)............................................................................1
64. Landlord's Work; Landlord's Work
Letter........................................................................20
65. Renewal
Option........................................................................22
67. Relocation
Allowance.....................................................................24
69. Additional Lease
Inducement....................................................................24
70. Satellite
Antenna.......................................................................25
71. Restriction on Certain Prospective
Tenants.......................................................................25
73. Right of First or Second
Offer.........................................................................26
First Amendment of Lease:
Article Page
5.....................................................................3 & 4
7.........................................................................5
9.....................................................................5 & 6
10........................................................................6
11........................................................................6
12....................................................................6 & 7
14........................................................................7
15........................................................................7
16....................................................................7 & 8
17........................................................................8
Second Amendment of Lease:
Article Page
5..........................................................................3
7..........................................................................3
9..........................................................................4
10.........................................................................4
11.........................................................................4
12.....................................................................4 & 5
13.........................................................................5
14.........................................................................5
15.........................................................................5
5
<PAGE>
10. Mutual Indemnification
(a) Sublessee shall not do or permit to be done any act or thing in or with
respect to the Subleased Premises which will constitute a breach or violation of
any of the terms, covenants or conditions of the Prime Lease which pertain to
the Subleased Premises. Sublessee shall indemnify, defend and hold harmless
Sublessor from and against all claims, losses, costs, expenses (including
reasonable attomey's fees), damages and liability, which Sublessor may pay or
incur by reason of (i) any breach or default by Sublessee under this Sublease or
the Prime Lease, (ii) any work done in or to the Subleased Premises by Sublessee
or its servants, employees or contractors or subcontractors, (iii) any act,
omission, negligence or other fault on the part of Sublessee or its servants,
employees, agents, contractors, subcontractors, invitees or licensees, or (iv)
any accident, injury or damage whatsoever to any person, firm or corporation
occurring during the Term in the Subleased Premises.
(b) Sublessor shall indemnify, defend and hold harmless Sublessee from and
against all claims, losses, costs, expenses (including reasonable attomey's
fees), damages and liability, which Sublessee may pay or incur by reason of (1)
any breach or default by Sublessor under this Sublease or Prime Lease, or (2)
any act, omission, negligence or other fault on the part of Sublessor or its
servants, employees, agents, contractors, subcontractors, invitees or licensees
during the term of this Sublease.
11. Liability Insurance
At all times during the Term, Sublessee shall, at its own cost and expense,
provide and keep in force for the benefit of Sublessee and Sublessor,
comprehensive general liability insurance against claims for bodily injury,
death or property damage occurring in, on or at the Subleased Premises, with
limits as specified in the Prime Lease. 'The insurance to be provided and kept
in force hereunder by Sublessee shall include Sublessee, as insured and
Sublessor and Landlord, as additional insureds. Said policy shall be obtained by
Sublessee and certificates thereof delivered to Sublessor at least ten (IO) days
prior to Sublessee (including its agents, employees and contractors) entering
the Subleased Premises prior to the Commencement Date. Said policy shall be for
a period of not less than one year and shall contain a provision whereby the
same cannot be materially changed or cancelled unless Sublessor is given at
least thirty (30) days' written notice of such material change or cancellation.
Sublessee shall obtain and pay for renewals of such insurance from time to time
at least thirty (30) days before the expiration thereof, and Sublessee shall
promptly deliver certificates thereof to Sublessor. Any insurance required to be
provided by Sublessee pursuant to this Sublease may be provided by blanket
insurance covering the Subleased Premises and other properties of Sublessee upon
condition that (i) the amount of the insurance allocated to the Subleased
Premises shall be such as to furnish in protection the equivalent of separate
insurance inthe amounts herein provided,(ii)such blanket insurance complies with
all of the other requirements of this Sublease and isacceptable to the Sublessor
6
<PAGE>
and the Landlord, and (iii) certificates of such insurance are delivered to
Sublessor and Landlord. Sublessee shall obtain and pay for insurance on its
personal property.
12. Assignment and Subletting
Sublessee shall not, by operation of law or otherwise, assign, mortgage, pledge
or encumber this Sublease, or sub-sublease all or any part of the Subleased
Premises, without the prior written consent of Landlord under Article 48.
Assignment and Subletting of the Prime Lease and Sublessor in each instance.
In the event Landlord and Sublessor consent to an assignment of this Sublease or
a sub-sublease of all or a portion of the Subleased Premises, Sublessee shall
pay Sublessor fifty (50%) percent of the amount, if any, by which the rent,
additional rent and other amounts received by Sublessee under the assigrunent or
sub-sublease exceed the Base Rent and additional rent payable by Sublessee under
this Sublease.
13. Alterations
Sublessor shall not perform any additions, alterations and improvements to the
Subleased Premises, or any part thereof, without the prior written consent of
Landlord and Sublessor and otherwise in full compliance with all of the
applicable terms, covenants and conditions of the Prime Lease.
14. Approvals
In any instance where the approval or consent of Sublessor is required
hereunder, such consent or approval shall not be unreasonably withheld or
delayed, However, any refusal by Sublessor to consent or approve any matter or
thing requested by Sublessee shall be deemed reasonable if, inter alia, Landlord
has refused to give consent or approval thereto whenever such consent or
approval is necessary under the Prime Lease.
15. Notices
Any notice, demand, bill, invoice, statement or communication which either party
may desire or be required to give to the other in connection with this Sublease
shall be in writing and shall be deemed to have been sufficiently given if sent
by (i) Certified or Registered Mail, Return Receipt Requested, or (ii) a
nationally recognized overnight courier, such as Airborne Express, Federal
Express or United Parcel, to such other party at its address set forth below:
7
<PAGE>
Sublessor: The Prudential Insurance Company of America
Two Gateway Center - 17th Floor
Newark, New Jersey 07102
Attention: Corporate Real Estate
With a copy to: Enterprise Legal Services
The Prudential Insurance Company of America
Two Gateway Center - 17th Floor
Newark, New Jersey 07102
Attention: Michael J. Hughes
Assistant General Counsel
Sublessee:
Prior to Rent Commencement Date:
Everest Reinsurance Company
Three Gateway Center
Newark, New Jersey 07102
Attention: Robert P. Jacobson
Senior Vice President and
Chief Financial Officer
From and after Rent Commencement Date:
Everest Reinsurance Company
477 Martinsville Road
Liberty Comer, New Jersey 07938
Attention: Robert P. Jacobson
Senior Vice President and
Chief Financial Officer
Each such bill, invoice, statement, notice or communication shall be deemed to
have been delivered on the date when the original of same is received.
16. Time Limits
The time limits, if any, set forth in the Prime Lease for the performance of any
act or the making of any payment are, for the purposes of this
Sublease, changed so that the time of Sublessee in a
8
<PAGE>
particular case hereunder to do or perform any act or make any payment shall be
three days less than the time of Sublessor as tenant under the Prime Lease, to
do so in such case.
17. Services
Sublessee shall be entitled to receive all of the services pertaining to the
Subleased Premises which Sublessor is entitled to receive under the Prime Lease.
Sublessee recognizes that such services are to be supplied by Landlord and not
by Sublessor. In the event that Landlord shall fail to supply such services or
shall refuse to comply with any of the provisions of the Prime Lease insofar as
they affect Sublessee's occupancy of the Subleased Premises, Sublessor shall, at
the written request of Sublessee, request Landlord to so comply and if Landlord
shall fail or refuse to do so then, to the extent permitted by the terms of the
Prime Lease, Sublessee shall have the right to exercise, in its own name and in
the name of Sublessor, all of the rights to enforce performance on the part of
Landlord as are available to Sublessor, provided that the same shall be without
cost, expense or liability to Sublessor. Sublessor shall be under no liability
to Sublessee in the event of the failure by Landlord to supply any services,
unless the same is due to the fault of Sublessor.
18. Landiord's Consent and Other Contingencies
This Sublease is contingent on the execution of (a) a Consent to Sublease by
Landlord, (b) a Certificate by Tenant in the form attached hereto and (c) a
sublease, in a form acceptable to Tenant and Sublessee, and the lessor's consent
thereto, with respect to the furniture referred to in Article 26 ("Furniture
Sublease"). The Certificate by Tenant and Furniture Sublease shall be executed
simultaneously with this Sublease. At Sublessee's option, this Sublease shall be
null and void if an acceptable Consent to Sublease is not executed within 60
days after the date of the execution of this Sublease. At Sublessee's option,
this Sublease shall be null and void if the Lessor under the Master Furniture
Lease does not execute a consent to the Furniture Sublease within 30 days after
the date of the execution of this Sublease. If this Sublease is voided as a
result of the failure to obtain the Lessor's consent to the Furniture Sublease
within 30 days after the execution of this Sublease, Sublessor shall pay to
Sublessee as liquidated damages the sum of any and all costs specifically
allocable to Sublessee's preparations for taking possession of the Subleased
Premises, including but not limited to the cost of design and/or construction
services related to Sublessee's anticipated improvements and any cancellation
penalties which may apply to equipment or service contracts entered into by
Sublessee with other vendors. Such liquidated damages shall be documented by
Sublessee within 30 days after the voiding of this Sublease and payable by
Sublessor within 20 days thereafter.
9
<PAGE>
19. Brokerage
Sublessee warrants and represents to Sublessor that in connection with this
Sublease, Sublessee has dealt with no brokers other than Commonwealth Advisors
(represented by Hayes B. Clark and Michael S. Schmidt) and Sublessee shall
indemnify, defend and hold Sublessor harmless (including the payment of
attomey's fees) from any claim of any other broker that Sublessee had, or is
alleged to have had, dealings with concerning this Sublease. Sublessor will pay
Commonwealth Advisors a fee in accordance with the terms of a separate
agreement. Sublessee shall not have any obligation to Commonwealth Advisors with
respect to this Sublease.
20. Termination of Prime Lease
If for any reason whatsoever the term of the Prime Lease shall be terminated
prior to the expiration date of this Sublease, this Sublease shall thereupon be
ipso facto terminated and Sublessor shall not be liable to Sublessee by reason
thereof, unless said termination shall have been effected because of a default
on the part of Sublessor as Tenant under the Prime Lease which was not the
result of a default by Sublessee.
21. Captions
The captions in this Sublease are used for convenience and reference only and
are not to be taken as part of this Sublease or to be used in determining the
intent of the parties or otherwise interpreting this Sublease.
22. Successors and Assigns
This Sublease shall be binding upon and inure to the benefit of Sublessor and
Sublessee and their respective successors and permitted assigns.
23. Miscellaneous
(a) Sublessor represents that the copy of the Prime Lease attached hereto as
Exhibit B is a true, full and complete copy of the Prime Lease.
(b) Sublessor represents that: (i) Sublessor has not received a notice of
termination of the Prime Lease; and (ii) Sublessor shall not enter into any
agreement that will modify or amend the Prime Lease so as to increase or
materially affect the obligations of Sublessee pursuant to this Sublease, or
adversely affect Sublessee's right to use and occupy the Subleased Premises or
any other rights of Sublessee pursuant to this Sublease.
10
<PAGE>
(c) This Sublease is subject to all of the terms and conditions of the Prime
Lease and in the event of termination of the Prime Lease for any reason
whatsoever or of the surrender of the Prime Lease whether voluntary, involuntary
or by operation of law, prior to the expiration date of this Sublease, including
extensions and renewals of the term thereof, Sublessee agrees to make full and
complete attornment to Landlord for the balance of the term of this Sublease, at
the option of Landlord at any time during Sublessee's occupancy of any portion
of the Subleased Premises, which attomment shall be evidenced by an agreement in
form and substance satisfactory to Landlord, which Sublessee agrees to execute
and deliver at any time within ten (10) days after request of Landlord, its
successors and assigns. Sublessee waives the provisions of any law now or
hereafter in effect which may give Sublessee any right of election to terminate
this Sublease or to surrender possession of the Subleased Premises in the event
any proceeding is brought by Landlord under the Prime Lease to terminate the
Prime Lease.
24. Security Deposit (Intentionally Omitted)
25. Sublessor's Contribution
Sublessor agrees to contribute One Million One Hundred Twenty Thousand Four
Hundred and 00/100 ($1,120,400.00) Dollars toward Sublessee's costs in
connection with the Sublease. Sublessor agrees to pay Sublessee the
$1,120,400.00 contribution in lump sum, within twenty (20) days after the
occurrence of the Rent Commencement Date under Article 3 above.
26. Furniture Sublease
a) This Sublease is being executed and delivered simultaneously with the
execution and delivery of the Furniture Sublease between Sublessor and Sublessee
covering the furniture leased to Sublessor by Tokai Financial Services, Inc.
under the Master Lease Agreement dated July 19, 1993. Sublessee shall not be
obligated to pay Sublessor any sublease rent for the use of the furniture under
the Furniture Sublease but otherwise, Sublessee shall comply with all of the
terms, covenants and conditions contained in the Master Lease Agreement.
b) Provided that Sublessee is not in default under this Sublease at the time,
Sublessee shall be entitled to exercise Sublessor's option to purchase the
furniture under the Master Lease Agreement from the lessor thereof at the end of
the term of the Master Lease Agreement. At anytime prior to the expiration of
this Sublease, if requested by and subject to the direction of Sublessee,
Sublessor shall use its best efforts in assisting Sublessee to negotiate a
purchase price for the furniture covered under the Furniture Lease with the
lessor thereof.
11
<PAGE>
27. Non-Disturbance Agreements
Sublessor hereby agrees to use its best efforts to obtain a Non-Disturbance
Agreement from Landlord, in substantially the form of paragraph 1 of the Consent
To Sublease annexed hereto as Exhibit C and made a part hereof. Also, Sublessor
hereby agrees to use its best efforts to obtain a Non-Disturbance Agreement from
the existing mortgagee of the Building, in a form reasonably acceptable to
Sublessee. Sublessee agrees to pay any legal or other standard charge imposed by
Landlord and the mortgagee in connection with the Non-Disturbance Agreements.
28. Early Access
Sublessor hereby grants Sublessee access to the Subleased Premises prior to the
Commencement Date in order to perform its tenant improvement work and install
Sublessee's telephone equipment, furniture, office equipment and other personal
property in the Subleased Premises. Such early access to the Subleased Premises
shall be upon and subject to all the terms and conditions contained in the Prime
Lease and this Sublease, except that Sublessee shall not be obligated to pay any
Base Rent or additional rent during said period prior to the Commencement Date.
The schedule of access to the Subleased Premises is annexed hereto as Exhibit D
and made a part hereof. Sublessor agrees to deliver possession of each area of
the Subleased Premises on the scheduled access date, free of occupants and
office furnishings except for the furniture covered by the Furniture Sublease.
12
<PAGE>
IN WITNESS WHEREOF, this Sublease has been executed as of the day and year first
above written.
ATTEST: SUBLESSOR:
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
By:____________________________ By:___________________________________
Michael J. Hughes Victor A. Castellano
Assistant Secretary Vice President, Strategic Procurement
ATTEST: SUBLESSEE:
EVEREST REINSURANCE COMPANY
By:______________________________ By: __________________________________
James H. Foster Robert P. Jacobson
Assistant Secretary Senior Vice President and
Chief Financial Officer
13
<PAGE>
EXHIBIT A
CERTIFICATE BY TENANT
TO: Everest Reinsurance Company
THIS IS TO CERTIFY THAT:
1 . Under that certain lease dated December 17, 1992 (the "Prime
Lease")covering premises located at 477 Martinsville Road, Basking Ridge, New
Jersey, said premises being more particularly described in the Prime Lease and
attachments thereto, which are incorporated herein (the "Premises"), New Valley
Corporation, as successor in interest to Jared Associates, L. P., is Landlord
("Landlord") and The Prudential Insurance Company of America ("Prudential') is
Tenant.
2. The Prime Lease has been modified by First, Second, Third and Fourth
Amendments. The Prime Lease has not otherwise been modified, changed, altered,
or amended in any respect, is the only lease between the Landlord and Prudential
affecting said Premises, and represents the entire agreement between the parties
as to the Premises. Prudential shall not consent to any further modifications of
the Prime Lease without the prior written consent of Everest Reinsurance Company
("Everest").
3. Prudential has accepted and now occupies the Premises; the Lease
term began in 1993; the rent for the Premises (including Adjusted Minimum Rent
and any other charges due from Prudential to the Landlord under the Prime Lease)
has been paid from the Rent Commencement Date set forth in the Prime Lease to
and including the date of the execution of this Certificate; and there has been
no prepayment of rent or other monies due or to become due under the Prime Lease
more than one month in advance. The term of the Prime Lease expires on November
30, 2003, subject to Prudential's option to renew the term for period of five
years.
4. To the best of Prudential's knowledge: (i) neither Landlord nor
Prudential is in default under the Prime Lease and neither Landlord nor
Prudential has received any
<PAGE>
notice of default by the other party; (ii) there are no circumstances existing
which with notice and/or the passage of time would constitute a default by
either the Landlord or Prudential thereunder; (iii) the Prime Lease is in full
force and effect; (iv) the representations contained in Article 66 of the Prime
Lease remain accurate; (v) Prudential is entitled to no offset or deduction or
reduction in rent; and (vi) there are no defenses, setoffs or counter-claims by
Prudential against the Landlord under the Prime Lease. To the best of
Prudential's knowledge, the Landlord has fully inspected the improvements on the
Premises and found same to be as required by the Prime Lease, in good order and
repair.
5. Prudential has no knowledge of any assignment, hypothecation
or pledge of the Prime Lease.
6. This Certificate is made by Prudential to induce Everest to accept a
sublease of the Premises from Prudential, knowing that Everest is relying upon
the truth of this Certificate as to same. This Certificate shall inure to the
benefit of Everest and Rs successors and assigns and shall be binding upon
Prudential and Rs successors and assigns.
Executed this 3rd day of December, 1996
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
Tenant
By:____________________________________________
Michael H. Baumann, Vice President
2
<PAGE>
STANDARD FORM OF OFFICE LEASE
AGREEMENT OF LEASE, made as of this 17th day of December, 1992, between
JARED ASSOCIATES, L.P., a New Jersey limited partnership, having an office c/o
Bellemead Management Co., Inc., 280 Corporate Center, 4 Becker Farm Road,
Roseland, New Jersey 07068 (the "Owner" or "Landlord"), and THE PRUDENTIAI.
INSURANCE COMPANY OF AMERICA, a New Jersey corporation, having an address at
Prudential Plaza, Newark, New Jersey 07101 (the "Tenant").
WITNESSETH: Landlord hereby leases to Tenant and Tenant hereby hires
from Landlord a portion of the second (2nd) floor of a certain office building
located at 477 Martinsville Road, Basking Ridge, New Jersey (the "Premises" or
"Demised Premises" or "demised premises") , more particularly shown upon the
Rental Plan annexed hereto and made a part hereof as Exhibit "A", for a term
commencing and terminating as set forth in Article 37 of the Rider to Lease.
The annual rental rate ("Minimum Rent") for the
Premises shall be as follows:
Lease Months Rent P/s/f Annual Monthly
1-12 $18.50 $579,734.50 $48,311.21
13-24 19.50 611,071.50 50,922.63
25-36 20.50 642,408.50 53,534.04
37-48 21.50 673,745.50 56,145.46
49-60 23.50 736,419.50 61,368.29
61-120 24.50 767,756.50 63,979.71
All payments of Minimum Rent due hereunder shall be payable on the first
day of each calendar month in equal monthly installments during the term of this
Lease. Installments of Minimum Rent payable hereunder shall be paid at the
office of Landlord or at such other, place as Landlord may designate from time
to time by written notice to Tenant hereunder, without setoff or deduction
whatsoever except as expressly stated herein to the contrary.
<PAGE>
THE PARTIES HERETO, FOR THEMSELVES, THEIR HEIRS, DISTRIBUTEES, EXECUTORS,
ADMINISTRATORS, LEGAL REPRESENTATIVES, SUCCESSORS AND ASSIGNS, HEREBY COVENANT
AS FOLLOWS:
Rent l.-j ".@ *QttL 43 aoouve &nu an neresnatter,l Occupancy
2. Tenant shall use and occupy detw&ed premises forg*4 services and for
no other purpose.
Tenant 3. Tenant d" make no changes in or to the
Alterations demised promises of any nature which cost in excess of
$5,000 without Owner's prior written consent, which consent, in the came of
non-ottuctumi alterations only, shall not be unreasonably withhold or delayed.
Subject to the prior written consent of Owner, and to the p@isions of this
article, Tenant at Tenant's expense, may make 'alterations, installations,
additions or improvements which are non-amctumi and which do not affect
utility services or plumbing and electrical lines, in or to the interior of
the d@sed premises by using contractors or mechanics first approved by Owner.
Tenant shall, before making any alterations, additions, installations or
improvements, at its expense, obtain all permits, approvals and c@ficates
required by any govemmonmi or quasi-govemnicaw bodies and (upon completion)
certificates of final approval thereof and ahall deliver proupdy duplicates of
all such permits, approvals and certificates to Owner and Tenant agrees to
carry and will cause Tenam's contractors and sub-contncton to carry such
workman's compensation, general liability, personal and property damage
insurance as Owner may reasonably require. Tenant sWI be obligated to provide
Owner with '@uilt' drawings for any alterations made to the de@ed premises. If
any mechanic's lien is filed against the domised premises, or the building of
which the sann forms a part, for work claimed to have been done for, or
materials fijmishad to, Tenant, whether or not done pursuant to this article,
the same shall be discharged by Tenant within sixty days thereafter, at
Tenant's expense, by filing a bond or by any other binding method in
accordance with applicable laws. Owner shall advise Tenant at the time of
approval for any improvement whether said iniprovenwnt must be removed at the
expiration of the lease term. All fimras and all paneling, cables, telephones
wires, partitions, raffins and l@ installations, @ed in the premises at any
fim either by Tenant or by Owner in Te=nt's behalf, iW, upon installation,
beconw the property of Owner " &W remain upon and be surrendered with the
demised premises unless Owner, by the above-mforenced notice to Tenant has
elected to relinquish Owner'* tight dntvto and to have them removed by Tenan4
in which event the same shall be removed from the premises by Tenant prior to
the expiration of the lease, at Tenant's expense. Nothing in this Article dmff
be commed to give Owner tide to or to prevent Tonant's removal of trade f@res,
moveable office furniture and equipment, but upon removal of any such from the
prenises or upon removal of other Dilations as may be required by Owner,
Tenant shaff immediately and at its expense, repair and restore the premises
to die condition existing prior to installation and repair any damage to the
dendsed premises or the building due to such removal. All property permitted
or required to be removed, by Tenant at the end of the term remaining in the
premises after Tenant's removal dW be deemed abandoned and may, at die
election of Owner, either be retained as Owner's property or nay be mnwved
from the pressure by Owner, at Tonant's
expense.
Maintenance 4. Tenant shall, @ghout the. term of this lease,
and take good cam of the d@sed promises and the
Re@ f'u=ms and appurtenances therein. Tenant shall be
responsible for all damage or injury to the d@sed pretenses or any other
part of the building and the systems and equipnwnt thereof, whether
requiring structural or nonmctumi repairs caused by or resulting from the
negligence or intentional act of Tenant, Tenant's gubtenants.
agents, "loyces, inviwes or licensees, or which &rise out of any work, labor,
service or equipment done for or supplied to Tenam or any subtenant or arising
out of the installation, use or operation of the property or equipment of Tenant
or any subtenant other than the actions of Owner or Owner's contractors. Tenant
shall also repair all danuge to the building and the devised premises caused by
@ moving of Tenant's fixtures, furniture and equipment. Tenant shall promptly
nuke, at Tenam's expense, all repairs in and to the demised premises for which
Tenant is responsible, using only a contractor for the trade or trades in
question, reasonably acceptable to both Owner and TenaM. Any other repairs in or
to the building or the facilities and systems thereof for which Tenant is
responsible shall be performed by Owner at the Tenant's expense; provided,
however that for any non-emergent repair in ex-Wess of $5,000, Tenant may upon
notice to Owner require for Owner to have that particular item competitively
bid. Owner shall maintain in good working order and repair the exterior and the
structural portions of the building, including the structural portions of its
de@sed premises, and the public portions of the building interior and the
building plumbing, electrical, heating and ventilating systenn (to the extent
such systems presently exixt) serving the de@sed premises. Tenant agrees to give
prompt notice of any defective condition in the promises for which Owner may be
responsible hereunder. When entering the derniwa premises for the purposes of
undertaking repairs Owner shall use reasonable efforts to iwnimize interference
with Tenant's business. 7bere &hall be no allowance to Tenant for diminution of
rental value and no liability on the pat% of Owner by mason of inconvenience,
umymwe or Wury to business arising
from Owner or others making repairs, alterations, additions or improvements in
or to any portion of @ building or the d@nd premises or in and to the fixwres,
appurtenances or equipment thereof. h Is specifically agreed that Tenant shall
not be entitled to any setoff or reduction of rera by reason of any failure of
Owner to comply with the covenants of thin or any other article of this Uaso.
Tenant agrees that Tenant's sole remedy at law in such instance will be by way
of an action for danuges for breach of contract. The provisions of this Axdcie 4
shall not apply in the case of fire or other casualty which are dealt with in
Article 9 hereof.
Window 5. Tenant will not clean nor require, permit, Clegn'no suffer or allow
any window in the dcrwsed premises to
be clearwd from the outside.
R eats of 6. Prior to the conunencentent of the lease term,
Law, Fln iftenant is then in possession, and at all times
thereafter,
o Tenant, at Tenant's sole cost and expense, shall promptly
Floor Loads convly with all present and future laws, orders and
regulations of all state, federal, municipal and local governments, departments,
conunissions and boards and any direction of any public oflrtcer pursuant to
law, and all orders, rules and regulations of any body which shall impose any
violation, order or duty upon Owner or Tenant with respect to the de@sed
premises, whether or not &rising out of Tenant's use or manner of use thereof,
(including Tenant's permitted use) or, with respect to the building if arising
out of Tenant's use or manner of use of the premises or the building (tmluding
the use permitted under the lease). Owner represents that the building and
de@sed promises oW comply with all legal requimnwnts as of the conunencement
date of this lease. In addition, Owner covenants that the building sW continue
to comply with all legal mquimmenu during the tem of this Lean, including the.
Americans with Disabilities Act. Nothing herein shall require Tenant to make
structural repaim or alterations unless Tenant has, by its manner of use of the
d@sed premises or method of operation therein, violated any such laws,
ordinances, orders, rules, regulations or requirements with respect thereto.
Tenant u%ay, after securing Owner to Owneir's satisfaction against all dan-Ages,
interest, penalties and expenses, contest and appeal any such laws, ordinances,
orders, rules, regulations or requirements provided same is done with all
mmnable promptness and provided such appeal sW not subject Owner to prosecution
for a criminal offense or constitute a defauk under any lease or w,agiga,ge
under which Owner may be obligated, or cause the dentised premises or any part
thereof to be condemned or vacated. Tenant shall mg do or permit any act or
thing to be done in or to the deraind premises which is contrary to law, or
which will invalidate or be in conflict with public liability, rim or other
policies of insurance at any time carried by or for the benefit of Owner with
respect to the doniised premises or @ building of which the d@sed premises form
a part, or which shall or n-dght subject owner to any liability or mwonsibility
to any person or for property danuge. Tenant shall not keep anything in the
deniised premises except as now or hereafter permitted by the Fire Department,
Board of Fire Underwriters, Fire @rance Rating 0 tion or other authority having
jurisdiction, and then only in such manner and such quantity so as not to
increase the rate for fire insurance
applicable to the building, nor use the premises in a r which will increase the
insurance rate for the building or any property located therein over that in
effect prior to the conunenceniont of Tenant's occupancy. Tenant WWI pay all
costs, expenses, fines, penalties, or damages, which may be imposed upon Owner
by mason of Tenent's failure to comply with the provisions of this article and
if by reason of such failure the fire insurance rate shall, at @ beginning of
this lease or at any time thereafter, be higher than it otherwise would be, then
Tenant shall reimburse Owner, as additional rent hereunder, for that portion of
all fire insurance premiums thereafter paid by Owner which @ have been charged
because of such failure by Tenant. In any action or proceeding wherein Owner and
Tenant are parties, a schedule or 'make-up' of rate for the building or dciwsed
premises issued by any body making fire insurance rates applicable to said
p.--rnis--s shall be cc=lusive evidence of tile facts therein stated and of the
several items and charges in the fire insurance rates then applicable to said
premises. Tenant shall not place a load upon any floor of the den-tised premises
exceeding @ floor load per square foot area which it was designed to carry and
which is allowed by law. The Owner represents that the floor load is 100 pounds
per square foot with live load reduction and with other BOCA permitted
reductions. Owner reserves the right to prescribe the weight and position of all
safes, business machines and mechanical equipment. Such installations shall be
placed and maintained by Tenant, at Tenant's expense, in settings sufficient, in
Owner's reasonable judgement, to absorb and prevent vibration, noise and
annoyance.
Sabo@tion 7. (a) This lease is subject and subordinate to all
<PAGE>
ground or underlying leases and to all mortgages which may now or hereafter
affect such leases or die real property of which demised pmadses am a part and
to all renewals, modifications, consolidations, replacements and extensions of
any such underlying leases and mortgages. This clause shall be self-opcmtive and
no further instrument of subordination shall be required by any ground or
underlying lessor or by any mortgagee, affecting any lease or the real property
of which the de@sed premises are a part. In confirmation Of such subordination,
Tenant shall execute promptly any cettificat* that Owner nuy reasonably request.
(b) Owner shall deliver the building mortgagee,'s
executed subordination and atto ot agmnwnt to the Tenant wi@ thirty (30) days
from the date hereof. If Owner fails to deliver the executed subordination and
attornment agreement within the above mated thirty (30) day period, Tenant shall
have the single option of terminating this lease within ten (10) days after the
expiration of the thirty (30) day period, time being of the essence. Tenant
agrees to Co) execute and deliver to such mortgagee a nondisturbance and
attomment agreement in form and substance reasonably satisfactory to and
customarily adopted by such mortgagee and (ii) reimburse Owner for all
reasonable expenses incurred by Owner from nonaffiliated third parties in
connectionthemwith, including legal expenses. Owner mpmsents that it is the fee
owner of the building of which the deniised preniiscat forms a part.
Property- 8. Owner or its agents @U not be liable for any
Loss, Damage, damage to property of Tenant or of others c
Reimbursement, to ensployces of the building, nor for Ion of or
IndemWty damage to any property of Tenant by theft or otherwise,
nor for any injury or damage to persons or property resulting from any cause of
whatsoever nature, unless caused by or due to the negligence or intentional acts
of Owner, its agents, servants or *nvioyets. Owner or its agents will not be
liable for any such damage caused by other tenants or persons in, upon or about
said building or caused by operations in construction of any private, public or
quasi public work. Tenant shaft indemnify and save harmless Owner against and
from all liabilities, obligations, damages, parmities, ciaims, costs @ expenses
for which Owner shall not be reimbursed by insurance, including reasonable
attorneys fees, paid, suffered or incurred as a result of any breach by Tenant,
Tenant's agents, contractors, enwioyces, invitfts, or licensees, of any covenant
or condition of this lease, or the negligence or intentional acts of the Tenant,
Tenant'@ agents, contractors, employees, invi@ or licensees. Tenant's liability
under this lu" extends to the acts and omissions of any sub-wnant, and any
agent, contractor, employee, invite* or licenum of any @-tenant. In case any
action or proceeding is brought against Owner by reason of any such claim,
Tenant, upon written notice from Owner, will, at Tenant's expense, resist or
defend such action or proceeding by counsel approved by Owner in writing, such
approval not to be u nobly wi@id.
D on, Fim 9. (a) if the d@sed promises or any pain thereof shall
and Other be damaged by fire or other casualty, Tenant
C@ty sW give immediate notice thereof to Owner and t h i 9
lease shall continue in full fome and effect except as hereinafter set forth.
(b) If the d@sed premises am partially damaged or rendered partially unusable by
fire or other casualty, the damages thereto d" be repaired by and at the expense
of Owner and the rent, until such repair @ be substantially completed, shall be
apportioned fiom the day following the casualty according to the part of the
premises which is usable. (c) If the d@wd premises am totally damaged or rendemd
wholly unusable by fire or other casualty, then the rent shall be
proportionately paid up to the time of the casualty and thenceforth shall cease
until the date when the promises shall have been repaired and restored by Owner,
subject to Owner's right to elect not to restore the same as hereinafter
provided. (d) If fifty percent (50 %) or mom of the building shall be so damaged
that Owner shall decide to demolish it or to rebuild it, then, in any of such
events, owner may elect to terminate this lease by written notice to Tenant,
given within 30 days after such fire or casualty, specifying a date for the
expiration of the lease, which date shall not be mom than 60 days after the
giving of such notice, and upon the date specified in such notice the term of
this lease shall expire as fully and completely as if such date were the date
net forth above for the termination of this least and Tenant @li forthwith quit,
surrender and vacate the premises without prejudice however, to Landlord's
rights and mmedies against Tenant umkr tht. lease provisions in effect prior to
such termination, and any rent owing shall be paid up to such date and any
payments of rent rtiade by Tenant which were on account of any period subsequent
to such date sW be mturtwd to Tenant. In addition, if Owner determines that the
time required to rebuild the building will exceed six (6) months, Owner shall
notify Tenant of said determination @ Tenant @ll have the right to te@nate, this
Lease within thirty (30) days after receipt of Owner'$ notice, time being of the
essence. Failure of Tenant to timely deliver a thirty (30) days notice of
termination shall be conclusively deemed to be an express election by Tenant to
waive Tenant's right to terminate the Lease as provided in this Article 9.
Unless Owner or Tenant shall serve a termination notice as provided for herein,
Owner shall make the mpairs and restorations under @ conditions of (b) and (c)
hemf, with all reasonable expedition, subject to delays due to adjustment of
insurance clainn, labor troubles and causes beyond Owner's reasonable control.
After any such casualty, Tenant shall cooperate with Owner's restoration by
removing from the premises as promptly as reasonably possible, all of Tenant's
salvageable inventory and movable equipment, furniture, and other property.
Tenant's liability for rent shall resume five (5) days after written notice from
Owner that @ premises am substantially ready for Tenant's occupancy. In the
event Ci) the d@sed
prenises &Ml[ be damaged by fire or other casualty during the term and Tenant
&WI be unable to use the deewsed preniises as a result of such damage, and (ii)
Owner shall not exercise the right to terminate this Uase and shall,
accordingly, be obligated to repair any such damage pursuant to the provisions
hemof, and (iii) Owner shall have failed to repair such damage within six (6)
months after the date of such fire or other casualty, as such period shall be
extended by @ number of days that Owner is delayed in completing such
restoration by any cause or factor beyond Owner's reasonable control. including,
but not limited to, Tenant's failure to cooperate with Owner, strikes or other
labor disputes, accidents, orders or regulations of any Federal, State, County
or Municipal Authority, delays due to adjustnwnt of insurance claims, lack of
availability of nuterials, parts or utility services, acts of @, rire,
earthquake, floods, explosion, action of the elements, war, hostilities,
invasion, insurrection. riot, mob violence, sabotage, cr by mason of any other
cause. whether si@ar or not to the foregoing, that is beyond the reasonable
control of Owner, (such six (6) month period as so extended is mfeffed to as the
*Rextomtion Period'), then, in such event, Tenant shall have a one time option
to give the Owner, within thirty (30) days next following the expiration of the
Restoration Period, time being of the essence, a ten (10) day notice of
termination of this Lease and upon the expiration of said ten (10) days, this
Lease and the term thereunder shall end and expire as fully and completely as if
the expiration of such ten (10) day period were the day herein definitely Fixed
for the and and expiration of this Lease and the term thereof and Tenant sh&U
then quit and surmnder the d@sed promises to Owner but Tenant shall remain
liable through and including the date of such damage as provided in this laase.
Failure of Tenant to timely deliver a ten (10) day notice of termination @U be
conclusively deemed to be an express election by Tenant to waive Tenant's right
to terminate the Lease as provided in this Article 9. Notwithstanding anything
to the contrary contained herein, in @ event rifty percent (50%) or mom of the
deniised premises are destroyed during the last two (2) years of the initial
lease term, Tenant shall have the absolute right to terminate this lease upon
thirty (30) days notice to Owner. (a) Nothing contained heminabove shall relieve
Tenant from liability that may exist as a result of damage from fire or other
casmlty. Notwithstanding the foregoing, each patty shall look First to any
insurance in its favor before making any claim against the other party for
recovery for loss or danuge resulting from tire or other casualty, and to the
extent that such insurance is in force and collectible and to the extent
permitted by law, Owner and Tenant each hereby releases and waives all right of
recovery against the other or any one claiming through or under each of them by
way of irubrogation or otherwise. Tenant acknowledges that Owner will not carry
insurance on Tomm's furniture and/or furnishings or any fixtures or equipment,
improvements, or appurtenances removable by Tenant and agrees that @r will not
be obligated to repair any damage thereto or replace the same.
@2'nent 10. If the whole or any part of the dernised
Domain premises dWi be acquired or condemned by Eminent Domain for any public or
quasi public use or purpose, then and in that event, the term of this lease
shall cease and terminate from the date of tide vesting in such proceeding and
Tenant shall have no claim for the value of any unexpired term of said lease and
assigns to Owner, Tenant's entire interest in any such award. Notwithsmnding the
foregoing, Tenant shall have the right to prosecute its own claim for moving
expenses, fixtures and equipment so long as such claim does not diminish Owner's
award in any respect.
Aedgainent, Mortgage, ll.Tenant, for itself, it heirs, distributees Etc.
executors, adniini@tors, legal representatives, successors and assigns,expressly
covenants that it shall not assign, mortgage or encumber this agreement,
nor underact, or suffer or permit the d@sed premises or any part thereof to be
used by others, without the prior written consent of Owner in each instance.
Transfer of the majority of the O"k of a corporate Tenant shall be deemed an
assignment. If this lease be assigned, or if the d@sed premises or any part
thereof be underlet or occupied by anybody other than Tenant, Owner may, after
default by Tenant, coll@ rent from the assignee, under4tnant or occupant, and
apply the net amount collected to the rent herein reserved, but no such
assignment, underietting, occupancy or collection shall be deemed a waiver of
this covenant, or the acceptance of the assignee, under-tenant or occupant as
tenant, or a release of Tenant from the further perfomunce by Tenant of
covenants on the part of Tenant herein contained. 'Me consent by Owner to an
assignment or underietting shall not in any wise be construed to relieve Tenant
from obtaining the express consent in writing of Owner to any further assignment
or underletting. See Article 48 Rider to Lease.
Elec@ 12. Tenant covenants and agrees that at all times
Current its use of electric current shall not exceed @ @kyof
existing feeders to the building or the risers or wiring installation and Tenant
may not use any electrical equipment which, in Owner'ii opinion, reasonably
exercised, will overload such installations or interfere with the use thereof by
other tenants of the building. Ile change at any time of the character of
electric service shall in no wise make owner liable or responsible to Tenant,
for any loss, damages or expenses which Tenant my sustain. Owner represents to
Tenant that the electric current in the building as of the commencement date of
this lease &hall be (a) 2.5 watts per square foot of net useable area connected
load at I I 0- 1 20 volts for general use and (b) 3.5 watts per square foot of
net usable area connected load at 265 volts or 277 volts for fluorescent
lighting. Owner further represents that said electrical capacity shall not
materially
<PAGE>
diminish during the term hereof.
Access to 13. Owner or Owner's agents shall have the
p right (but shall not be obligated) to enter the damiaed
premises in any emergency at any time, and, at other reasonable times upon
reasonable notice, to examine @ same and to make such mpairs, replacements and
improvements as Owner may deem necessary and reasonably desirable to the demiwd
premises or to any other portion of the building or which Owner may elect to
perform. When entering the dentised premises in rion-emorgency situations, Owner
shall use reasonable efforts to interference with Tenant'si business. Tenant
&hall permit Owner to use and maintain and replace pipes and conduits in and
through the d@sed premises and to emct now pipes and conduits therein provided
they are concealed within the walls, floor, or ceiling. Owner may, during the
progress of any work in the demised promises, take all necessary materials and
equipnwnt into said premises without the &&nine constituting an eviction nor dWI
the Tenant be entitled to any abatement of rent while such work is in progress
nor to any damages by mason of loss or interruption of business or otherwise.
Throughout the term hereof Owner shar have the right to enter the d@sed premises
at reasonable hours for the purpose of showing the same to prospective
purchasers or mortgagees of the building, and during the last six months of the
term for the purpose of showing the same to prospective te@. If Tenant is not
present to open and permit an entry into the premises, Owner or Owner's &Seam
may enter the unm whenever such entry nmy be necessary or lpenwosib le by asset
key or forcibly (only in an emergency) and provided reasonable care is exercised
to safevard Tenant's property, such entry ahmi not render Owner or its agents
liable therefor, nor in any event shall the obligations of Tenant hereunder be
affected.
Smokkg 14. Landlord reserves the tight to establish
Polky a no smoking policy in some or all comnwn areas of the
building including but not limited to elevators, lobbies, atriunu, stairwells,
corridors and restrooms.
Ocmpancy 15. Tenant will not at any time use or occupy the d@sed premises in
violation of the certificate of occupancy issued for the building of which the
deniised premises am a part. Tenant has inspected the prendses and accepts them
as is, subject to the tider atmxtd hereto with respect to Owneir's work, if any.
In any event, Owwr makes no representation as to the condition of the premises @
TemM agrees to accept the same subject to violations, whether or not of record
which violations, if any, shall remain the responsibility of Owner as long as
Tenant did not contribute to their existence.
B=kniptcy 16. (a) Anything elsewhere in this lease to @ contrary
notwithstanding, this lease nmy be cancelled by Owner by the sending of a
written notice to Tenant within a reasonable time &fter the happening of any one
or more of the following events: (1) the commencement of a case in bankruptcy or
under the laws of any auto naming Tenant as the debtor, or (2) the making by
Tenant of an @gment or any other arrangement for the benefit of creditors under
any state statute. Neither Tenant nor any person cla'mu'ng through or under
Tenant, or by man of any._ astute or order of court, &hall thereafter be
entitled to p on of the pretwses dernised but shall forthwith quit " surrender
the pmtwses. If this loan a" be assigned in accordance with its ten=, the
provisions of ibis Article 16 shall be applicable only to the patty then owning
Tenant's interest in this lease; provided, however, that a ba@ptey of an
assignee shall not comdtute a default hereunder if the Tenant continues to
perform all of the obligations of this lease, including the payment of Adjumed
Minimum Rent.
(b) it is stipulated and agreed that in @ event of the, te@nation
of this lease pursuant to (a)
hereof, Owner shall forthwith, notwithstanding any other provisions of this
lease to the contrary, be entitled to recover from Tenant as and for liquidated
damages an anwunt equal to the difference between the rent reserved hereunder
for the unexpired portion of the term deniised and the fair and reasonable
rental value of the de@wd preniiwa for @ sanm period. In the computation of such
damages the difference between any installment of rent becoming due hereunder
after the date of termination and the fair and reasonable rental value of the
d@wd pm1wses for the period for which such installment was payable shall be
discounted to the date of termination at the rate of four percent (4%) per
annum. If such pmtwses or any part thereof be relet by @ Owner for the unexpired
term of said lease, or any part thereof, before presentation of proof of such
liquidated damages to any court, commission or tribunal, the amount of rent
reserved upon such reletting shall be deemed to be the fair and masorable rental
value for the part or the whole of the promises so re-ict during the term of the
re4etting. Nothing herein contained shall limit or pmjudice the right of the
Owner to prove for and obtain as liquidated damages by reason of such
termination, an amount equal to the maximum allowed by any statute or rule of
law in effect at the time when, and governing the proceedings in which, such
damages are to be proved, whether or not such amount be greater, equal to, or
le-as than the amount of the difference mfen--d to above.
Default 17. (1) If Tenant defaults in fulfilling any of the covenants of
this lease other than the covenants
for the Payment of rent or additional rent; or if any execution or attachment
shall be issued against Tenant or any of Tenant'& property whereupon the demised
premises &"II be taken or occupied by someone other than Tenant; or if this
lease be rejected under Section 235 of Title I 1 of the U.S. Code (bankmptcy
code); then, in any one or mom of such events, upon Owner serving a written
thirty (30) days notice upon Tenant specifying the nature of said default and
upon the expiration of said thirty (30) days, if Tenant shall have failed to
comply with or remedy such default, or if the said default or ontis3ion
complained of sWI be of a nature that the same cannot be completely cured or
remedied within said thirty (30) day period, and if Tenant shall not have
diligently commenced curing much default within such thirty (30) day period, and
shall not thereafter with reasonable diligence and in good faith, proceed to
remedy or cure such default, then Owner may serve a written five (5) days'
notice of cancellation of this lease upon Tenant, and upon the expiration of
said rive (5) days this lease and the term thereunder shall end and expire as
fully and completely as if the expiration of such five (5) day period were the
day herein definitely fixed for the end and expiration of this lease and the
torrn thereof and Tenant shall then quit and surmnder the d@sed premises to
Owner but Tenant shall main liable as hereinafter provided.
(2) If the notice provided for in (1) hemof shall have
been given, and the term shall expire as efomsaid; or if Tenant shall make
default in the payment of the rent reserved herein after tan (10) days written
notice for the First two (2) occurrences during any calendar year (and no notice
thereafter) or any item of additional rent herein mentioned or any part of
either or in making any other payment herein required in each case for a period
in excess of five (5) days; then and in any of such events Owner my without
further notice, re-enter the demised premises and dispossess Tenant by summary
proceedings or otherwin, @ the legal representative of Tenant or other occupant
of d@sed premises and renwve their effects and hold the pmswses as if this lease
had not been nude, and Tenant hereby waives the service of notice of intention
to m-enw or to institute legal proceedings to that end. If Tenant shall make
default hereunder prior to the date fixed as the conumacoment of any renewal or
extension of this lease, Owner may cancel end terminate such renewal or Pxwnsion
agreement by written notice.
Remedia of 18. In case of any such default, re-enuy, expiration Owner and and/or
dispossess by sunumry of proceedings or Waiver of otherwise, (a) the rent shall
beconm due thereupon Redempfim and be paid up to the time of such re-entry,
dispossess =&or expiration, (b) Owner may feet the pm@s or any pat% et parts
thereof, either in the name of Owner or otherwise, for a term or ten=, which
thereof, either in the nano of Owner or otherwise, for a term or terms, which
may at Owner's option be less than or exceed the period which would otherwise
have constituted the balance of the term of this lease and may grant concessions
or free rent or charge a higher rental than that in this lease, and/or (e)
Tenant or the legal representatives of Tenant shall also pay Owner as liquidated
damages for the failure of Tenant to observe and perform said Tenant's covenants
herein contained, any deficiency between the rent hereby reserved @or
covenantp-d to be paid and the net anwunt, if any, of the rents collected on
account of the lease or leases of the dctwsed premises for each nwnth of the
period which would Wwtwise have constituted @ balance of the term of this lease.
Owner shall use reasonable efforts to mitigate Tenant's danages hereunder,
provided, however that the failure of Owner to m-let the ptvmises or any part or
parts thereof shall not release or affect Tenant's liability for damages. In
computing such liquidated damages them &Mli be added to the said deficiency such
expenses as Owner my incur in connection with re-letting, such as legal
expenses, attorneys' feet, brokerage, advertising and for keeping the de@sed
premises in good order or for preparing the same for m-letling. Any such
liquidated damages shall be paid in monthly imuilmnts by Tenant on the rent day
specified in this lease @ any suit brought to collect the anwunt of the
deficiency for any month shall not prejudice in any way the rights of Owner to
collect the deficiency for any subsequent month by a similar proceeding. Owner,
in putting the d@sed premises in good order or preparing the same for re-mntal
may, at Owner's option, nuke such alterations, repairs, replacements, &twor
decorations in the d@sed premises as Owner, in Owner's solejudgment, considers
advisable and necessary for the purpose of re-letting the domiwd premises, and
the making of such *iterations, repairs, replacements, and/or decorations shall
not operate or be co@ed to release Tenant from liability hereunder as aforenid.
Owner d" in no event be rtable in any way whaumver for failure to re-let the
demised premises, or in the event that the d@sed pre@ses are re-let, for failure
to collect @ rent thereof under such m-letting, and in no event &hall Tenant be
entitled to receive any excess, if any, of such net rents collected over the
sums payable by Tenant to Owner hereunder. In the event of a breach or
threatened breach by Tenant of any of the covenants or provisions hereof, Owner
shall have the right of injunction and the right to invoke any remedy allowed at
law or in equity as if m-entry, su ry proceedings and other m@ies were not
herein provided for. Mention in this lease of any particular rcnwdy, shall not
pmclude Owner from any other remedy, in law or in equity. Tenant hereby
expressly waives any and all rights of redemption granted by or under any
present or future laws in the event of Tenant being evicted or dispossessed for
any cause, or in the event of Owner obtaining possession of dcniised premises,
by reason of the violation by Tenant of any of the covenants and conditions of
this lease, or otherwise.
Few and 19. If Tenant shall default in the observance or Ex performnce of any
term or covenant on Tenant's pad k)
be observed or perfoffned under or by virtue of any of the terms or provisions
ill any article of this lease, then, unless otherwise provided elsewhere in this
loan, Owner may immediately or at any time thereafter upon notice (except for
<PAGE>
emergencies where no notice shall be required) perform, the obligation of Tenant
thereunder. If Owner, in connection with the foregoing or in connection with any
default by Tenant in the covenant to pay rent hereunder, makes any expenditures
or incurs any obligations for the payment of money, including but not limited to
reasonable attorney's fees, in instituting, prosecuting or defending any action
or @eeding, then Tenant will reimburse Owner for such sums so paid or
obligations incurred with interest and costs. The foregoing expenses incurred by
reason of Tenant's default shall be deemed to be additional rent hereunder and
shall be paid b Tenant to Owner w in five (5)
days of mndition of any bill or statement to Tenant therefor. If Tenant's lease
term shall have expired at the time of making of such expenditures or incurring
of such obligations, such sums shall be recoverable by Owner as danuges.
20. Owner shall have @ tight at any time without the urne constituting an
eviction and without incurring liability to Tenant therefor to change @
arrangement and/or location of public entrances, doorways, corridors, elevators,
stairs, toilets or other public parts of the building and to change the name,
number or designation by which the building may be known; provided, however that
no such alteration shall be permitted which would nutetially and adversely
affect Tenant's use and enjoyment of the d@wd preniises or Tenant's access
thereto. There shall be no allowance to Tenant for diminution of rental value,
and no liability on the part of Owner by mason of inconvenience, annoyance or
injury to business arising from Owner or other Tenants making any repairs in the
building or any such alterations, additions and improvements. Furthemore, Tenant
&WI not have any claim against Owner by mason of Owner's inwosition of such
reasonable controls of the aunner of access to the building by Tenant's social
or business visitors as the Owner my deem reasombly necessary for security of
the building and its occupants.
No Repre- 21. Neither Owner nor Owners's agents have nude
senta@ by any representations or promises with respect
Owner to the physical condition of @ building, the land upon
which it is emcted or the deniiaed premises, the mnts, leans, expenses of
operation or any other matter or thing affecting or related to the promises
except as herein expressly set forth and no rights, casements or licenses are
acquired by Tenant by invlication or otherwise except an expressly set forth in
the provisions of this lease. Tenant has inspected the building and @ d@sed pro
mises and is thoroughly acquainted with their condition and agrees to take the
same 'as is', subject to Owner's Work Letter and any warranties applicable
themto @ acknowledges that the taking of possession of the d@ud pre@ses
by Tenant *hall be conclusive evidence that the mid pmofists @ the building of
which the same form a part were in good and satisfactory condition at the time
such possession was so taken, except an to latent defects. All understandings
and agmcmnts heretofore nude between the parties hereto am merged in this
contract, which alone fully and completely expmms the agreement between Owner
and Tenant and any executory agreement hereafter made &hall be ineffective to
change, modify, discharge or effect an abandonment of it in whole or in part,
unless such executory agreement is in writing and signed by the party against
whom enforcement of the change, modification, discharge or ebmwonnwnt is sought.
End of 22. Upon the expiration or @er termination of
Term @ term of @ lease, Tenant &all quit and m@r to
Owner the deniised pm@acs, broom clean, in good order and condition, ordinary
wear and damages which Tenant is rxa required to repair as provided e@hem in
this lease excepted, and Tenant &WI remove all its property. Tenant's obligation
to observe or perform this covenant shall survive the expiration or other
termination of this lease. If the last day of the term of this L4&w or any
mnewal thereof, falls on Sunday, @ lease shall expire at noon on the preceding
Saturday unless it be a legal holiday in which cast it shall expire at noon on
the pmc"ag b@u day.
Quiet 23. Owner covenants and agrees with Tenant that
F.qjoyment upon Tenant paying the rent and additional rent and
observing and perfo@ng all the ternn, covenants and conditions, on Tenant's part
to be observed and performed, Tenant may peaceably and quietly enjoy @ pmn,iises
hereby demised, subject, nevertheless, to the, terms and conditions of this
lease (including Article 7 hemot) and to the ground leaws, underlying I and
mortgages heminbefom mentioned.
F@ 24. If Owner is unable to give possession of the
To Give d@sed pmraises on the date of the commencement
Ponession of the term hereof, because of the holding-over or
retention of possession of any tenant, undertenant or occupants or if the
derw#ed premises am located in a building being constructed, because such
building has not been sufficiently convieted to make the pmniises ready for
occupancy or because of the fact that a certificate of occupancy has not been
procured or for any other reason, Owner shall not be subject to any liability
for failure to give possession on said date and the validity of the lease shall
not be impaired under such circumstances, nor shall the same be construed in any
wise to extend the term of this lease, but the rent payable hereunder WWI be
abated (provided Tenant is not responsible for Owner's inability to obtain
possession) until after Owner shall have given Tenant written notice that the
premises am substantially ready for Tenam's occupancy. If perntission is given
to Tenant to enter into @ possession of the de@ud prendses or to occupy premises
other than the domised pm@ses prior to the date specified as the
commencement of the teffn of this lease, Tenant covenants and agrees that such
occupancy shall be deemed to be under all the term, covenants, conditions and
provisions of this lease, except as to the covenant to pay rent. Notwithstanding
anything-'to the contrary contained herein, in the event Owner is unable to
deliver possession of the denied premises to Tenant withitt ninety (90) days
from the Estimated ConunancementDate (as bertinafkarderin") for any reason
within Owner's control, Tenant shall receive one (1) day of free rent for each
day of delay to be credited to Tenant as of the Conunencement Date. In addition,
if for any reason outside the scope of Tenant's control the Owner is unable to
deliver possession of the demised premises to Tenant within one hundred eighty
(180) days from the Estimated Commencement Date, Tenant shall have the single
option of giving to Owner, within ten (10) days following the expiration of the
one hundred eighty (I 80) day period, a ten (10) day notice of termination of
this @se, tinw being of the ewnce. Failure of Tenant to t'tnwiy deliver a ten
(10) notice of to@nation shall be conclusively deemed to be an express election
by Tenant to waive Tonant's right to terminate the Lease as provided in this
Article 24.
No Waiver 25. The failure of Owner to seek redress for violation
of, or to insist upon the @ct perfomance of any covenant or condition of this
lean or of any of the Rules or Regulations, set forth or hereafter adopted by
Owner, shall not prevent a subsequent act which would have originally
constituted a violation from having all the force and effect of an original
violation. Ile receipt by Owner of rent with knowledge of the breach of any
covenant of this least shall not be deemed a waiver of such breach and no
provision of this lease shall be deemed to have been waived by Owner unless such
waiver be in writing signed by Owner. No payment by Tenant or mccipt by Owner of
a lesser amount than the monthly rent herein stipulated shall be deenwd to be
other than on account of the earliest stipulated rent, nor shall any endorsement
or statement of any check or any letter accompanying any che4k or payment as
rent be deemed an accord and satisfaction, and Owner may accept such check or
payment without prejudice to Owner's right to recover the balance of such rent
or pursue any other remedy in this lean provided. No act or thing done by Owner
or Owner's agents during the term hereby deniised shall be deemed an acceptance
of a surrender of said premises, and no agreement to accept such surrender shall
be valid unless in writing signed by Owner. No employee of Owner or Owner's
agent shall have any power to accept the keys of said premises prior to the
termination of the lease and @ delivery of keys to any such agent or employee
shall not operate as a termination of the lease or a surrender of the premises.
Waiver of Trial 26. It is mutually agreed by and between Owner and
by Jury Tenant that the respective parties hereto shall and they
hereby do waive trial byjury in any action, prwecdingot counterclaim brought
by either of the parties hereto against the other (except for personal injury or
property damage) on any matters whatsoever atizing out of or in any way
connected with this lease, the relationship of Owner and Tenant, Tenant's use of
or occupancy of said premises, and any emergency statutory or any other
statutory remedy.
LMlkb2ity to 27. This L4&se and the obligation of Tenant to pay
Perform rent hereunder and perform all of the other aW
agreements hereunder on part of Tenant to be perfomed shall in no wise be
affected, impaired or excused because Owner is unable to fulrill any of its
obligations under this lease or to supply or is delayed in supplying any service
expressly of inipliedly to be supplied or is unable to make, or is delayed in
any repair, additions, -alterations or decorations or is unable to supply or in
delayed in supplying any equipment or fixwrcs if Owner is prevented or delayed
from w doing by reason of strike or labor troubles or any cause beyond its
reasonable control including, but not limited to, government preemption in
connection with a National Emergency or by reason of any rule, order or
regulation of any department or subdivision thereof of any government agency or
by mason of the conditions of supply and demand which have been or am affected
by war or other enwrgency.
BMs and 28. Except as otherwise in this lease provided, a
Notices bill, statement, notice or conununication which Owner may desire or be
required to give to Tenant, shall be deemed sufficiently given or re@red if, in
writing, delivered to Tenant personally or sent by registered or certified mail
addressed to Tenant at the budding of which @ deaised premises form a part or at
the last known residence address or business address of Tenant or left at any of
die aforesaid pmntiwa addressed to Tenant, and the time of the rendition of such
bill or statement and of the giving of such notice or communication shall be
deemed to be the time when the same is delivered to Tenant, nmiled, or left at
the prc@ses as herein provided. Any notice by Tenant to Owner must be served by
registered or ceniried mail addressed to Owner at the address first heminabove
given or at such other address as Owner shall designate by written notice.
Service.s 29. Owner shall provide: (a) heat to the den-iised
Provi ded by promises when and as required by law, on business days
Owner from 8 a.m. to 6 p.m.; (b) water for ordinary lavatory
purposes, but if Tenant uses or consumes water for any other purposes or in
unusual Quantities, Owner may install a water meter at Tenant's expense which
Tenant shall thereafter maintain at Tenant's expense in good working order and
repair to register such water consunvtion and Tenant shall pay for water
consumed as shown on said meter as additional rent as and when bills are
<PAGE>
rendered; (c) cleaning service for the deniised prernises on business da ys at
Owner's expense provided that the same are kept in order by Tenant. If, however,
said premises am to be kept clean by Tenant, it shall be done at Tenant's sole
expense, in a nianner satisfactory to Owner and no one other than persons
approved by Owner shall be permitted to enter said premises or the building of
which they are a part for such purpose. Tenant-dWi pay Owner the cost of removal
of any of Tenant's extraordinary refuse and rubbish from the building; (d) If
the deniised premises am serviced by Owner's air conditioningicooling and
ventilating system, air conditioning/cooling will be furnished to Tenant in
accordance with Owner's specifications (Mondays through Fridays, holidays
excepted) from 8:00 a.m. to 6:00 p.m., and ventilation will be furnished on
business days during the afomsaid hours except when air conditioning/cooling is
being furw&hed as aforesaid. If Tenant requires air conditioning/cooling or
ventilation for more extended hours or on Saturday@, Sundays or on holidays,
Owner will fumiah the mum at Tenam's expense; (e) property management services
(including maintenance of the exterior grounds) of a nature similar to that of
other first class office buildings in the Somerset County am&; (i) as of the
Commencement Date of this U&SC, the building shall have a keypad access security
system with video canmrs monitoring devices; (g) Owner reserves the right to
stop services of the heating, elevators, plumbing, air-conditioning, power
systems or cleaning or other services, if any, when necessary (with a minimum
interference to Tenant) by reason of accident or for repairs, alterations,
replacenwnts or improvements necessary or desirable in @ judgment of Owner for
as long as may be reasonably required by mason thereof. If the building of which
the deniiwd premises am a part suppfies manually operated elevator service,
Owner at any time may substitute auton&atic control elevator service and upon
tan days' written notice to Tenant, proceed with alterations necessary therefor
without in any wise affecting this LAsse or the obligation of Tonatt hemu@r. The
same shall be done with minimum of inconvenience to Tenant @ Owner shall pursue
the alteration with due diligence. W'ith respect to the services enumerated in
subparagmphs (a), (b), (c), (d) and (g) of this Article 29, if any of the
foregoing become unavailable for thirty (30) consecutive days, Tenant shafl have
the right to give Owner written notice that it intends to cure.such unavailable
services. If Owner does not respond to Tenam's notice within five (5) days after
receipt thereof, Tenant shall have the right to expend its own money in
replacing said services and will be reimbursed by Owner for such amounts within
thirty (30) days of demand provided same were reasonable, necessary and fwly
documented. 'Me initial thirty (30) day period mferred to above shall be
extended so long as Owner is diligent in commencing the necessary mpairs and
shall be fumer extended by Tenant delays and Foma Majeum (as hereinafter deemed
in Article 64). In the event Tenant improperly conunences any such work or
comniences any such work without giving Owner the required notice, Tenant shall
be liable for any damages resulting therefrom and dwH inde@fy Owner for all such
action.
30. Ile Captions are inserted only as a matter of convenience and for reference
and in no way define, limit or describe the scope of this lean nor the intent of
any provisions thereof.
D@tioims 31. The term 'ofrice', or "officesm, whemver used in
this lease, shall not be conauued to mean premises used as a store or stores,
for the sale or display, at any time, of goods, wares or merchandise, of any
kind, or as a restaurant, shop, booth, bootblack or other stand, b&6er shop, or
for other similar purposes or for manufacturing. The term 'Owner' means a
landlord or lessor, and as used in this lease only the owner, or the mortgagee
in possession, for the time being of the land @ building (or the owner of a
lease of the building or of the land and building) of which the deniised
premises form a part, so that in the. event of any sale or sales of said land
and building or of said lease, or in the event of a lease of said building, or
of the land and building, the said Owner &hall be and hereby is entirely fmcd
and relieved of all covenants and obligations of Owner hereunder, and it shall
be deemed and construed without further agreement between the parties or their
successor@ in interest, or between the parties end the purchaser, at any such
sale, or the said lessee of the building, or of the land and building, that the
purchaser or the lessee of the building has assumed and agreed to carry out any
and all covenants and obligations of Owner, hereunder. The words 're-enter' and
. rc-entry' as used in this lease am not restricted to their technical legal
meaning. The term "business days' as used in this lease shall exclude Saturdays
(except such portion thereof as in covered by specific hours in Article 29
hemof), Sundays and all days set fonh on Exhibit E.
32. @tionaby Prior to Execution.
Rules and 33. Tenant and Tenant's servants, employees,
Regulations agents, visitors, and licensees shall observe faithfwlv, and
comply strictly with, the Rules and Regulations and such other and fumer
reasonable Rules and Regulations as Owner or Owner's agents ffiay from time to
time adopt. Owner agrees to apply the rules and regulations in a uniform and
nondiscrin-Linatory manner. Notice of any additional rules or regulations shall
be given in such manner as Owner may elect. In case Tenant disputes the
reasonableness of any additional Rule or Regulation hereafter made or adopted by
Owner or Owner's agents, the parties hcmto agree to submit the question of the
reasonableness of such Rule or Regulation for decision to the Newark office of
the American Arbitration Association, whose determination shall be final and
conclusive upon the parties hereto. The right to dispute the reasonableness of
any additional Rule or Regulation upon Tenant's part shall be deemed waived
unless the same shall be asserted by service of a notice, in
writing upon Owner within thirty (30) days after the giving of notice thereof.
Nothing in this lease contained gull be'cdnstrued to impose upon Owner any duty
or obligation to enforce the Rules and Regulations or terms. covenants or
conditions in any other lean, as against any other tenant and Owner shall not be
liable to Tenant for violation of the unic by any other tenant, its servants,
employees, agents, visitors or licensees.
34. TenantshalldepositwithOwneronthedatchereof the sum of
$0.00 as security for the faithful
perfomiance and observance by Tenant of the terms, provisions and conditions of
this lease-, it is agreed that In the event Tenant default& in respect of any of
the terms, provisions atw conditions of this lease, including, but not limited
to, @ payment of rent and additional rent, owner may use, apply or retain the
whole or any part of the security so deposited to the extent required for the
payment of any rent and additional rent or any other sum as to which Tenant is
in default or for any sum which Owner may expend or may be required to expend by
reason of Tenant's default in respect of any of the terms, covenants and
conditions of this lease, including but not limited to, any damages or
deficiency in the re-letting of the premises, whether such damages or deficiency
accrued before or after sununary proceedings or other re-entry by Owner. In the
event that Tenant shall fully and faithfully comply with all of @ terms,
provisions, covenants and conditions of this lease, the security shall be
returned to Tenant after the date fixed an the end of the Lease and after
delivery of entire possession of @ d@ted premises to Owner. In the event of a
sale of the land and building or leasing of the building, of which the dernised
premises form a part, Owner shall have the right to transfer the security to the
vendee or lessee and Owner shau thereupon be released by Tenant from all
liability for the return of such security; and Tenant agrees to look to the new
Owner solely for @ return of said security, and it is agreed that the provisions
hereof shall apply to every trawfeir or assignment n-Ade of the security to a
new Owner. Tenant further covenants that it will not assign or encumber or
attenvt to assign or encumber the monica deposited herein as security and that
neither Owner nor its successor@ or assigns ahau be bound by any such
assignment, encumbrance, attempted assignment or attempted encumbrance.
EsWppei 35. Tenant, at any tinw, and from time to time,
c upon at least 10 days' prior notice by Owner, shall execute, acknowledge and
deliver to Owner, and/or to any other person, firm or corporation specified by
Owner, a statement rectifying that this Lease is unmodified and in full force
and effect (or, if there have been modifications, that the unn in in fidl force
and effect as modified uW outing the nwdirications), owng the dates to which the
rent and additional mnt have been paid, and outing whether or not them exists to
the best of renant's knowledge any default by Owner under this LAm, and, if so,
qmifying each such default.
Siwcessors and 35A. Tbc covenants, conditions and agreements
contained in this least shall bind and inure to the b=&
of Owner and Tenant and their respective heirs, di@butees, executors.
stmtom, successors, and except as otherwise provided in this lease, their
"give.
F-vk;bib 35B. 'Mis lease consists of this Printed Portion containing
Articles 1-35C. and each of the following, anached hereto and nude a part
hereof- (a) Rider to Lease and (b) the following exhibits: Exhibit A ('Rental
Plan), Exhibit 8 (General Conditions), Exhibit C (Legal Description), Exhibit D
(Cleaning Service Rider), @ibit E (Ugal Holidays),. Exhibit F (Designated
Parking), Exhibit G (KVAC Wwifications) txhibit H (Base Building ltenn) and
Exhibit I (Option Space)
RWw 35C. In the event of any inconsistency between the
provisions of the Rider to Lease and those contained in
Printed Portion to which the Rider to Le4se is annexed, the provisions of
Rider to Lease shall govem @ be binding.
<PAGE>
IMPORTANT - PLEASE READ
RULES AND REGULATIONS ATTACHED TO AND
MADE A PART OF THIS LEASE
IN ACCORDANCE WITH ARTICLE 33.
1. 'Me sidewalks. en@es, driveways, pasuggs, courts, elcvaton,,
vestibules, stairways, corridors or halls @U not be obstructed or encumbered by
any Tenant or used for any purpose other than for ingress or egress from the
de@sed pren-d3es and for delivery of rmrchandise and c4uiPmcnt in a prompt and
otticient manner using elevators and passageways designated for such delivery by
Owner. 'Mere shall na be used in any space, or in the public -hall of the
building, either by any Tenant or by jobbers or others in the Delivery or
receipt of merchandise, any hand trucks, except those equipped with rubber tires
and sideguards.
2. The water and wash closets and plumbing fixtures shall not be used ror
any purposes other than those for which they were designed or constructed and no
sweepings, rubbish, rags, acids or other substances shall be deposited therein,
and the expense of any breakage, stoppage, or damage resulting from @ violation
of this rule &"II be bome by the Tenant who, or whose clerks, agents, employees
or visitors, shall have caused it.
3. No carpet, rug or other article shall be hung or shaken out of any
window of the building; and no Tenant &"II sweep or throw or permit to be swept
or thrown' from the d@sed preiwacs any dist or other substances into any of the
corridors or halls, elevators, or out of the doors or windows or stairways of
the building and Tenant shall not use, keep or permit to be used or kept any
foul or noxious gas or substance in the denised premises, or permit or suffer
the deniised prerwses to be occupied or used in a runner offensive or
objectionable to Owner or other occupants of the building by reason of noise,
odors, @or vibrations, or interfere in any way with other Tenants or those
having business therein, nor shall any aninials or birds be kept in or about the
building. Smoking or carrying lighted cigars or cigarettes in the elevators of
the building is prohibited.
4. No awnings or other projections shall be attached to the outside walls
of the building without the prior written consent of Owner.
5. No sign, advertisement, notice or other feurwg shall be exhibited,
inscribed, painted or affixed by any Tenant on any pail of the outside of the
demised premises or the building or on the inside of the derwwd promises if @
sanw is visible from the outside of the promises without the prior written
consent of Owner. In the event of the violation of the foregoing by any Tenant,
C)wncr may remove same without any liability, and Buy charge the expense
incurred by such removal to Tenant or Tenants violating this rule. Werior signs
on doors and directory tablet shall be inscribed, painted or affixed for :ach
Tenant by Owner at the expense of such Tenant, and aW be of a .olor and style
acceptable to Owner, provided, however. that Tenant's initial @uilding directory
signagc shall be provided by Owner at Owner's expense.
6. No Tenant shall mark, paint, drill into, or in any way deface any part
)f the d@sed premises or the building of which they form a part. No boring,
cutting or stringing of wires shall be permitted, except with the prior written
consent of Owner, and as Owner may direct; provided, however, that Tenant &II be
permitted to drill into non-amctund walls and ceilings in connection with
decorations or wiring within the d@sed promises. No Tenant dW] lay ,inoicum, or
other similar floor covering, so that the same shall co= in direct 10
I ntact with the floor of the demised pre@nes, and, if linoleum or other sinw&r
loor covering is desired to be used an interlining of builder's deadening felt
imil be first affixed to the floor, by a pasm or other material, soluble in
water, he use of cement or other similar adhesive material being expressly
prohibited.
7. No additional locks or bolts of any kind &WI be placed upon any of the door*
or windows-by any Te@ nor shall any changes be made in existing locks or
mechaidam.themof. Each Tenant must, upon the termination of his Tenancy, restore
to Owner all keys of stores, offices and toilet room$, either furnished to. or
otherwise procured by, such Tenant, and in the event of the loss of any keys, so
fumished, such Tenant shall pay to Owner the cost thereof.
8. Freight,fumitum,businessequipment,mefchandiscandbulkymatter of any
description sthail be delivered to and removed from the promises only on the
freight elevators and through the service entrances and corridors, and only
during hours and in a manner approved by Owner. Owner reserves the right to
inspect all freight to be brought into the building and to exclude from the
building all freight which violates any of these Rules arW Regulations of the
lease or which these Rules and Regulations are a part.
9. Canvassing, soliciting and peddling in the building is prohibited and
each Tenant shall cooperate to prevent the same.
10. Owner reserves the right to exclude from the building between the hours
of 6 P.M. and 6 A.M. and at all hours on Sundays, and legal holidays all persons
who do not pmwm a pass to the building signed by Owner. Owner will fumish passes
to persons for whom any Tenant requests same in writing. Each Tenant shall be
responsible for all persons for whom he requests such pass and &hail be liable
to Owner for all acts of such persons.
11. Owner shall have the right to prohibit any advertising by any
Tenant which in Owner's opinion, tends to impair the reputation of the building
or its desirability as a building for offices, and upon written notice from
Owner, Tenant shall refrain from or discontinue such advertising.
12. Tenant shall not bring or permit to be brought or kept in or on the
d@sed preniises, any inflanumable, combustible or explosive fluid, material,
chemical or substance, or cause or permit any odors of cooking or other
processes, or any unusual or other objectionable odors to permeate in or emnate
from the d@sed pmniiwa.
13. Ifthebuildingcontainscentralairconditioningandventilation,Tenant agrees
to keep all windows closed at all times and to abide by all rules and
regulations issued by the Owner with respect to such services. If Tenant
requires air conditioning or ventilation after the usual hours, Tenant shall
give notice in writing to the building superintendent prior to 3:00 P.M. in the
case of services required on week days, and prior to 3:00 P.M. on the day prior
in the case of after hours service required on weekends or on holidays.
14. Tenant dW] not move any safe, heavy machinery, heavy equipment, bulky
nutter, or fixtures into or out of the building without LAndiord's prior written
consent. If such safe, machinery, equipment, bulky matter or mixtures requires
special handling, all work in connection therewith shall comply with all laws @
regulations applicable thereto and shall be done during such hours as Owner nay
designate.
15. Tenant shall report all peddlers, solicitors and beggars to the office
of the Building or as Landlord otherwise requests. EAndiorJ shall exercise nable
steps to keep such persons outside of the Building.
16. Tenant shall take reasonable action to assum that its employees,
invitees and guests do not (a) utifim any parking spaces designated for the use
of others, nor (b) park in any driveways, fire lanes or other areas not striped
for vehicular parking.
<PAGE>
IN WITNESS WHEREOF, Landlord and Tenant have respectively signed this
Lease on the day and year fiz-st written above.
WITNESSED BY: LANDLORD:
JARED ASSOCIATES, L.P.
By: Chubb Real't
Inc., General Partner
By:
Robert T. Lapidus Robe3et
- - -V-ice President
Assistant Secretary
ATTESTED BY: AGENT FOR LANDLORD:
BELLEM AGE CO INC.
By
Robert T. Lap3:dus Robert R. Ma3ctle@V@ce President
Assistant Secretary
ATTESTED BY: TENANT:
THE PRUDENTIAL INSURANCE COMPANY OF
AMERICA
By:
.z
Nc-im--: Mclky Sbozd' ial) Name: Ron D. a r-ba ro
(Vleioe Pvlrit;)
Title: Secretary Title: fPrle-scllrenl='-n@)
(Please Prlnt) (Please Prlnt)
<PAGE>
TABLE OF CONTENTS
FOR RIDER TO LEASE
ARTICLE PAGE
36. DEFINITIONS; DEMISED PREMISES;
ADJUSTED MINIMUM RENT 1
37. COMMENCEMENT OF TERM; COMMENCEMENT DATE;
AND T INATION DATE 5
38. TENANTIS POSSESSION 6
39. HF-ATING, AIR-CONDITIONING AND VENTILATION;
LEGAL HOIIDAYS; "AFTER HOURS" 6
40. ELECTRIC CURRENT 7
41. LIABILITY INSURANCE 7
42. ALL RISK INSURANCE 8
43. PARKING FACILITIES 8
44. ACCESS AND COMMON AREAS 9
45. Intentionally Deleted Prior to Execution 9
46. BROKER 9
47. CLEANING SERVICES 9
48. ASSIGNMENT AND SUBLETTING 10
49. TENA-NTIS COOPERATION; REASONABLE
MODIFICATIONS; ESTOPPEL CERTIFICATE 14
50. LIMITATION OF LIABILITY;
DEFINITION OF "LANDLORD 15
51. STATUTORY WAIVER; NOTICE BY TENANT 16
52. CORPORATE AUTHORITW 16
53. PERSONAL TAXES 16
54. BUILDING CH"GES 16
55. HOLDING OVER 16
56. RESTRICTIVE COVENANT - FOOD SERVICE 17
57. NOTICES 17
58. INTERPRETATION 18
59. NO OFFER OR AGREEMENT 19
60. DAMAGES 19
61. BANKRUPTCY 19
62. Intentionally Deleted Prior to Execution 20
63. Intentionally Deleted Prior to Execution 20
64. LANDLORDIS WORK; LANDLORDIS WORK LETTER 20
65. RENEWAL OPTION 21
66. ECRA COMPLIANCE 23
<PAGE>
67. RELOCATION ALLOWANCE 23
68. FOOD SERVICE FACILITY 24
69. ADDITIONAL LEASE INDUCEMENT 24
70. SATELLITE ANTENNA 25
71. RESTRICTION ON CERTAIN PROSPECTIVE TENANTS 25
72. SIGNAGE 25
73. RIGHT OF FIRST OR SECOND OFFER 26
SIGNATURE PAGE 28
<PAGE>
RIDER TO LEASE
DATED: December @ , 1992
LANDLORD: Jared Associates, L.P.
TENANT: The Prudential Insurance Company of America
PREMISES: Portion of the 4th floor 477 Martinsville Road
Basking Ridge, New Jersey
36. DEFINITIONS; DEMISED PREMISES;
ADJUSTED MINIMUM RENT-
36.1 Definitions. For purposes of -this Article, the
following terms shall have the meanings set forth below:
(1) Assessed Valuation shall mean the assessed valuation of the Real Estate
for the year
in which the Building is fully assessed as a completed Building;
(2) Base Tax Rate shall mean the real estate -tax rate in effect for
calendar year 1993;
(3) Elrst oioera-t@g__Y@ar shall mean -the calendar year
ending December- 31, 1993. 0 shall mean any calendar year
thereafter;
(4) First Tax Year shall mean the calendar year ending
December 31, 993.-- ta-@ -@ar shall mean any calendar year thereafter;
(5) Land shall mean the land described in Exhibit C to this Lease;
(6)Occupancy Percentage shall be as defined in Section
36.2;
(7) Real Estate Tax Base shall mean the amount determined by multiplying
- - -the Assessed Valuation by the Base Tax Rate;
(8) Taxes shall mean all real estate taxes, charges and
assessments imposed upon the Land, Building and other improvements thereon or
- - -the occupancy or leasing thereof (collectively, the "Real Estate") . If any
other tax or charge shall be imposed upon all or any part of the Real Estate,
such other tax or charge shall be deemed included in the term "Taxes" for the
purposes of this Article. Landlord shall have the exclusive right, but not the
obligation, to contest or appeal any Tax assessment levied on the Real Estate by
any governmental or quasi-gove@nmental authority;
36.2 The Demised Premises shall be deemed to contain a floor
area of 31,337 square feet and -the building of which -the Demised Premises form
a part ("Building" or "building") shall be deemed to contain a total floor area
of 230,519 scrua@e feet, Tenan't's Occupancy Percentage shall be deeme ti3 be
@.6 percent. In the event 'the Building's square footage is modified as a result
of additions or reductions to the Building, Tenant's occupancy Percentage shall
be equitably adjusted.
36.3 Adjusted Minimum Rent shall mean -the Minimum Rent as
increased in accordance with this Article 'to reflect any increase in Taxes and
Building operating Costs. Tenant shall pay such increases as additional rent as
hereinafter provided.
36.4 Taxes. (1) If the Taxes for any Tax Year during the term
of this Lease shall be greater than the Real Estate Tax Base, then Tenant shall
pay to Landlord, as additional rent, an amount equal to the occupancy Percentage
of such excess.
<PAGE>
(2) Upon 'the issuance by 'the respective taxing authorities having jurisdiction
over the Real Estate of a bill or bills for the Taxes imposed upon the Real
Estate for -the First: Tax Year, Landlord shall submit a copy of such bill or
bills 'to Tenant. Thereafter, on or about each anniversary of said date,
Landlord shall submit to Tenant a copy of the latest -tax bill or bills for the
Taxes for each subsequent Tax Year indicating each change in the Taxes and the
effective date of such change -together with a statement (-the "Tax Statement")
which shall indicate the amount, if any, required to be paid by Tenant as
additional rent. Within 30 days after the issuance of the Tax Statement, Tenant
shall pay the additional rent as set forth therein. Any payments due pursuant to
this Article for a period of less than a full Tax Year, either at the
commencement or at the end of the term of this Lease, shall be :ratably
apportioned.
(3) If at any time the taxing jurisdiction in which -the Real
Estate is located should change its method of valuating the Real Estate then,
Landlord and Tenant shall equitably adjust- -the Taxes payable by Tenant
hereunder in accordance with the revised method of taxation.
36.5 Building operating Costs. (1) Tenant hereby agrees that
for each Operating Year during the term of this Lease for which the total
Building Operating Costs (as hereinafter defined) shall exceed the Building
operating Costs for the First- Operating Year, Tenant- shall pay to Landlord, as
additional rent, an amount equal to the occupancy Percentage of such excess
within 30 days after presentation of Landlord-s statement (the "Operating
Statement") therefor. The operating Statement shall indicate (i) the initial
additional amount required to be paid by Tenant as additional rent as in this
Article provided; (ii) the Tenantfs new Adjusted Minimum Rent; and (iii) the
manner in which such adjustment is computed. Landlord shall present its
Operating Statement within 90 days after the commencement- of each such
Operating Year ("Billing Date"). Tenant shall thereafter, for the balance of
that Operating Year and for that portion of the next Operating Year- until -the
Billing Date during such year, make monthly payments of 1/12th of such increase
'to reflect the change as of the Billing Date, which amounts shall be credited
for the account of Tenant against the annual payment due on the succeeding
Billing Date. Landlord shall be prohibited from amending its Operating Statement
for any operating Year after- the expiration of six (6) months from Tenant-s
receipt of the relevant operating Statement.
(2) The "Building operating Costs" shall include each and
every customary and reasonable expense incurred in connection with the
ownership, administration, management, operation, repair, replacement and
maintenance of the Real Estate, including but not limited 'to, wages, salaries
and fees paid to persons either employed by Landlord or engaged as independent
contractors in the operation of -the Real Estate, and such othe7c typical items
of expense as indicated below. All such costs and the values allocated to
services rendered and supplies delivered shall be reflected on the comparative
statement which shall be exhibited to the Tenant upon request.
(3) The expenses referred to in this Article shall be
determined in accordance with sound accounting principles. So long as Tenant is
not in default under any provisions of this Lease, Tenant or- its
representatives shall have the right, at its own expense, upon reasonable notice
and during reasonable hours, to inspect the books of Landlord for the purpose of
verifying the information contained in any operating Statement, provided prior
written request for such inspection shall be made by Tenant and further provided
that such request is made within one hundred eighty (180) days of receipt of the
Operating Statement to be verified. Any operating Statement not objected to by
the Tenant: within said one hundred eighty (180) day period shall be deemed to
2
be correct.
(4) Some of the typical items of expense which comprise or may
comprise the Building Operating Costs and to be included in the statement are or
may be: (a) general repairs and maintenance; (b) utility costs, including but
not limited to, cost of electricity -to power HVAC units serving the en-tire
Building, cost of oil or other fuel required to heat the entire Building, cost
of electricity to light the common areas; (c) cleaning costs, including but not
limited -to, window cleaning, general interior office cleaning, cleaning of
common areas; (d) service contracts, including but not limited to, contracts for
elevator service, HVAC service, rubbish removal, carting, janitorial and
watchman services and snow removal; (e) costs of landscaping; (f) costs of
insurance; (g) fees and/or salaries of superintendents, engineers, mechanics and
custodians below the grade of property manager; (h) towel service for- common
lavatories; and (i) sales and use taxes.
(5) The following items shall be- -1@dect from Building
Operating Costs: (a) depreciation of the Building or equipment; (b) interest;
income or excess profits taxes; costs of maintaining Landlo.rd's corporate or
partnership existence; (c) franchise taxes; (d) any expenditures required to be
capitalized for federal income tax purposes, (unless said expenditures [1] are
for 'the purpose of reducing Building operating Costs but then only to the
extent of actual reduction in Building operating Costs, or [2] are required
under any governmental law, ordinance or regulation, in which event or events
the costs thereof shall be included, which capital expenditures shall, in either
case, be amortized over the life of the improvement) ; (e) items provided for in
Subsection 36.4 hereof; (f) costs incurred in leasing to or procuring 'tenants;
(g) advertising expenses; (h) tenant: improvements; (i) space planning costs;
(j) architectural fees or other expenses incurred for renovating space for new
tenants; (k) ground rent; (1) depreciation (except the amortization of capital
expenditures allowed he3reinabove); (m) debt service, financing, or principal
and interest payments on any mortgage; (n) warranty recoveries; (a) casualty
repairs; (p) legal fees or other expenses paid by Landlord for collections or
evictions; (q) salaries for executives except to the extent permitted above; (r)
bad debt loss, rent loss, or reserves for bad debts or rent- loss; (s) -the
expense of any extraordinary service rendered to another occupant of the
Building; (t) costs associated with the operation of the business entity of
Landlord (as distinguished from -the cost of operating the Building) including
partnership audit, business entity accounting and business entity legal matters;
(u) costs of defending lawsuits with any mortgagee (except if the actions of
Tenant or other tenants may be an issue); (v) costs of selling, financing,
syndicating, or hypothecating the interest of Landlord in the Building; (w)
costs of defending disputes with Landlord's employees, or contract building
management agents; (x) fines, penalties, and interest assessed theireon, in
connection with the failure or omission of Landlord in connection with its
responsibilities under the Lease; (y) and costs incurred by Landlord in bringing
the Building into compliance with all existing applicable codes, to the extent
the Building or the Premises is not in compliance as of the date of this Lease;
(z) the payment of personal injury ox- property damage Claims; (a&) payments to
affiliates of Landlord to -the extent such services exceed that charged by an
unaffiliated third party of similar stature; (bb) costs associated with the
removal of hazardous materials from the Real Estate; and (cc) any amounts for
which Landlord is reimbursed by third part-!es.
(6) Anything to the contrary contained in -this Article 36 notwithstanding,
if the average occupancy of the Building is less than ninety-five (95%) percent
during 'the First Operating Year, then Landlord shall make a reasonable
determination (1@Landlord's Detex-mination") of what the Building Operating
Costs for such year would have been if during the entire year the average tenant
occupancy of the Building were ninety-flve (95%) percent. Provided
3
<PAGE>
it is reasonable, iandlo@d's Determination shall be binding and conclusive upon
Tenant and shall fair all purposes of this Lease be deemed to be -the Building
operating Costs for the First Operating Year. Landlord shall notify Tenant of
Landlord-Is Determination within ninety (90) days following the last day of the
First Operating Year. Thereafter, if for any subsequent Lease year the average
tenant occupancy of the Building is below ninety-five (95%), the Building
operating Costs for any such year shall be adjusted by Landlord to the amount
that such Building operating Costs would have been if the average -tenant
occupancy during that year had been nine-ty-flve (95%) percent.
36.6 If, pursuant to any Tax Statement or Operating Statement
showing Taxes or Building Operating Costs for any year subsequent to the First
Tax Year or First operating Year, respectively, there shall be an additional
amount payable or a refund due with :respect to Taxes and/or Building operating
Costs for the period covered by such statements), such amount shall be
calculated, and any amount. payable by the Tenant to 'the Landlord as additional
rent shall be promptly paid, or the amount due to the Tenant shall be credited
against amounts owing Landlord or refunded to Tenant. However, it is agreed by
the parties that any refund shall not in any way operate to reduce the Minimum
Rent. If such calculation takes place and/or any payment in connection herewith
becomes payable after -the expiration of the term of this Lease, this provision
shall be deemed to have survived such expiration.
36.7 Any increase in additional rent- under this Article shall
be prorated f air the f Inal operating Year if such operating Year covers a
period of less than 'twelve (12) full -months. Tenan-tls obligation to pay
additional rent under this Article for -the final Operating Year shall survive
the expiration of the term of this Lease.
3 6. 8 In the event that the payment of any sum required to be
paid by Tenant to Landlord under this Lease (including, without limiting the
generality of the foregoing, Minimum Rent, Adjusted Minimum Rent, or payment
- - -made by Landlord under- any provision of this Lease for which Landlord is
entitled to reimbursement by Tenant) shall become overdue for la days beyond
- - -the date on which they are due and payable as provided in 'this Lease for two
(2) consecutive months, then a delinquency service charge equal to four percent
of the amount overdue shall become immediately due and payable to Landlord as
liquidated damages foz7 Tanantfs failure to make prompt payment. Further, such
delinquency service charge shall be payable on the first day of the month next
succeeding the month during which such late charges become payable as additional
rent-, together with interest at two (2) percentage points above by the prime
rate of Citibank, N.A. on the amounts overdue from the date on which they became
due and payable. In the event of nonpayment of any delinquency service charges
and interest provided f or above, Landlord shall have, in addition to all other
rights and remedies, all the rights and remedies provided for herein and by law
in the case of nonpayment of x7ent. No failure by Landlord to insist upon the
strict performance by Tenant of Tenant's obligations to pay late charges shall
constitute a waiver by Landlord of its rights to enforce the provisions of this
Sect:-ion 36.8 in any instance thereafter occurring. The provisions of this
Section 36.8 shall not be construed in any way to extend any time period
provided for in this Lease.
36.9 If Tenant fails to remit within twenty (20) days of the
date when due any sum required to be paid by Tenant to Landlord under 'this
Lease (including, without limiting the generality of the foregoing, Minimum
Rent, Adjusted Minimum Rent, or payment made by Landlord under any provision of
this Lease for which Landlord is entitled to reimbursement by Tenant), Landlord
may, in addition to all other rights and remedies provided herein and by law,
serve a written ten (10) day notice of cancellation of this Lease upon Tenant
and upon the expiration of said ten (10) day period, this
4
<PAGE>
Tenant shall acknowledge receipt of the commencement Date Notice by signing a
copy of same and re-turning it -to Landlord within five (5) days of the receipt
thereof.
37.3 The date upon which Tenant's obligation to pay Minimum
Rent due hereunder commences ("Rent Commencement Date") shall be deemed to be
the Commencement Date.
37.4 If, prior to the Commencement Date, Tenant shall enter
the Demised Premises to make any installations of its equipment, fixtures and
furnishings, Landlord shall have no liability for any personal injury or
property damage suffered by Tenant.
38. TENANTIS POSSESSION
38.1 Subject to 'the 'terms of Articles 37 and 64 hereof,
when Tenant takes possession of the Demised Premises, Tenant shall be deemed to
have accepted -the Demised Premises as substantially completed as of -the date
of such possession. Tenant shall have the right to enter- into the Demised
Premises for the purposes of installing furniture and equipment and completing
Tenant installations, such as phone systems and such entry shall not constitute
occupancy of the Demised Prem+/-ses; provided, however, that any such entry into
the Demised Premises shall be coordinated with 'the Landlord and its general
contractor and subcontractors and shall not. interfere with -the build-out
schedule of -the Work Letter items. In addition, Tenant shall be permitted to
use 'the Building's electrical power for any such pre-Commencemen't Date
installations, at no cost or expense to Tenant.
39. HEATING, AIR-CONDITIONING AND VENTILATION;
LEGAL HOLIDAYS., "AFTER HOURS"
39.1 Notwithstanding the provisions of subsections (b) and
(e) of Article 29 of this Lease, but subject to all of --he other terms,
covenants and conditions of said Article 29, Landlord shall provide and furnish
appropriate heat, air-conditioning or ventilation to the Demised Premises (in
accordance with Landlord's specifications which are attached hereto as Exhibit
G) between the hours of 8:00 a.m. to 6:00 p.m., Monday through Friday, other
than Legal Holidays (which are listed on Exhibit "El'), attached to this Lease.
39.2 At all other times not otherwise provided for in Section
39.1 above, Landlord agrees that it shall, upon prior written request from
Tenant, provide after-hours air-conditioning, ventilation or heating, as the
case may be, for which Tenant shall pay to Landlord as additional rent
hereunder, a sum equal to $100.00 per hour for providing heat, air-conditioning
or ventilation (irrespective of whether any other tenants in 'the Building are
furnished with heat, air-conditioning or ventilation at -the same time) that
being intended to cover ]Landlord's cost for the power or fuel required to
provide the same. In 'the event- that during the term of this Lease, or any
renewal hereof, the .Landlox-d's cost for providing after-hours heating,
air,-conditioning or ventilation shall increase by virtue of utility irate
increases or unit fuel cost increases, the above-specified hourly charges shall
be adjusted from time -to time to reflect said increases. In addition to the
foregoing, should there be any charges incurred by Landlord for additional
attendant engineers or similar additional requirements as may be imposed from
'time to time by the State Labor Department, local author!-ties, union
requirements, or the like, Tenant agrees to reimburse Landlord for its
out-of-pocket expenses incurred in connection therewith, related to -the
after-hours use by Tenant.
6
<PAGE>
40. ELECTRIC CURRENT
40.1 Landlo@d's obligation to supply current shall be limited
to the current required to power the Building standard heating and
air-conditioning systems and -the lighting of common areas.
40.2 Tenant shall arrange to purchase and pay for all of the
electric current requirements for light and power used in connection with
Tenan-tls operations within the Demised Premises. Landlord shall furnish and
install an electric meter for the measurement of the consumption of Tenan-tls
electric current as herein provided-
40.3 At the request of Landlord, prior to the occupancy of the
Demised Premises, Tenant shall execute any and all applications for service, or
forms required by the local utility company supplying electric current to the
Building for the metering of all electric current and power required for the
operation of the electrical equipment of any nature whatsoever and lights within
or serving 'the Demised Premises.
40.4 As an alternative -to 'the obligations of Landlord and
Tenant as set forth in sections 40.1 and 40.2 above, Landlord may elect, at its
option, to meter and furnish -the electric current to the entire floor of which
the Premises forms a part, in which case Tenant shall pay as additional rent
Tenantfs shave of Landlard's cost therefor. Tenant"s share of costs under this
section 40.4 shall be based upon a percentage which the area of the Premises
bears 'to the total floor area on which the Premises are located. Tenant, at its
option, may in the alternative, install a separate electric meter and, in such
event, Tenant shall pay its own electric costs directly to the utility company
sevving the Demised Premises and the provisions of Sections 40.1 and 40.2 shall
thereupon apply hereunder. If Tenant is provided with a separate meter for the
measurement of its electric consumption, Landlord shall be prohibited from
changing this arrangement without Tenan't's consent.
41. LIABILITY INSURANCE
41.1 Tenant, at its sole cast and expense, shall procure,
pvovide and maintain-- in force during the term of -this Lease the following
policies to be written by good and solvent insurance companies satisfactory to
Landlord having a policyholders, rating of no less than A+ XV as determined by
the AM Best Company, ov any successor thereto: (1) comprehensive general
liability insuvance, which shall include coverage for personal liability,
contractual liability, Tenan-tls legal liability, bodily injury, death and
property damage, all on an occurrence basis with respect -to the business
carried on, in or fvom the Demised Premises and Tenant's use and occupancy of
the Demised Premises, with cover-age for any one occurrence or claim of not less
than $2,000,000 or such other amount as Landlord may reasonably require upon not
less than six (6) months' prior written notice. Such insurance shall include
Landlord and -the managing agent of -the Building as additional insureds and
shall protect Landlord in respect; of claims by Tenant as if Landlord were
separately insured; and (2) insurance against such other perils and in such
amounts as Landlovd may from time to time reasonably require upon not less than
thirty (30) days' prior written notice.
41.2 Each of the aforesaid policies shall contain an
under-taking by the insurer -that no material change adverse to Landlord or
Tenant will be made and such policy will not lapse or be cancelled, except after
not less than ninety (90) days, prior written notice to Landlord of the intended
change, lapse or cancellation. On or before the Commencement Date and
thereafter, at least -thirty (30) days prior to the effective date of any
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policy, Tenant: agrees to deliver 'to Landlord a duplicate original of the
aforesaid policies or a certificate of insurance evidencing such coverage.
42. ALI. RISK INSURANCE
42.1 Tenant, at its sole cost and expense, shall procure,
provide and maintain in force during -the term of 'this Lease the following
policy to be written by a good and solvent insurance company satisfactory to
Landlord having a policyholders' rating of no less than A@ XV as determined by
- - -the AM Best Company, ox- any successor thereto: ItAll Riskvl -insurance, which
shall cover Tenant's personal property, equipment and improvements against loss
or damage by fire and any other hazards or casualties in an amount to provide
for the actual replacement: cost of Tenant:ls personal property, equipment and
improvements. Such insurance shall include Landlord and the managing agent- of
the Building as additional insureds and shall protect Landlord in respect of
claims by Tenant as if Landlord were separately insured. The aforesaid "All
Risk"' policy shall contain an undertaking by- -the insurer that no material
change adverse to Landlord or Tenant will be made and such policy will not lapse
or be cancelled, except after not. less than ninety (90) days' prior written
notice to Landlord of the intended change, lapse, or cancellation. On or before
the Commencement Date and thereafter, at least thirty (30) days prior -to the
effective date of the "All Risk" policy, Tenant agrees to deliver to Landlord a
duplicate original of said policy or a certificate of insurance evidencing such
coverage.
43. PARKING FACILITIF-S
43.1 Landlord hereby grants to Tenant the revocable license
(the "License") to park up to one hundred twenty two (122) cars ("Allotted
Parkinglt) , for use solely by Tenant and Tenant's employees, licensees, guests
and invit:ees in the parking area or areas serving the Building (the "Parking
Axeall) . Landlord shall designate as part of Tenant's Allotted Parking, sixteen
(16) of said spaces to be located in the parking gar-age located beneath the
Building (the "Designated Spaces9l) in accordance with Exhibit F. The Designated
Spaces shall in no way Increase Tenan't's Allotted Parking described above. The
use of any more than the Allotted Parking by Tenant, its employees, licensees,
guests or invitees, after notice from Landlord, shall be deemed a material event
of default under -this Lease, and Landlord may immediately suspend or revoke
'the License and/or exercise such remedies as are provided in this Leaso.
Landlord shall not be :responsible to Tenant for enforcing the License or for
violation of the License by other tenants of -the Building, by third parties, or
guests or visitors to the Building. Although the parties recognize and agree
that Landlord shall have no enforcement obligations with respect 'to 'this
License or any other- parking facilities for 'the Building, in the event of a
problem regarding Tenant's License, Landlord shall, upon Tenant's request, use
reasonable efforts -to assist In a resolution of any such dispute.
43.2 In the event the number of pax-king spaces in 'the
Parking Area is reduced by circumstances beyond the control of Landlord, the
Allotted Parking shall be reduced proportionately; provided, however, that in
the event. a condemnation results in a reduction of parking spaces by one third
(1/3) or more and Landlord cannot provide alternate spaces within a reasonable
proximity to the Building, Tenant shall have the right to terminate this Lease
upon 'ten (10) days notice to Landlord.
43.3 Nothing contained in 'this Lease shall be deemed to
create liability upon Landlord for7 any damage to motor vehicles of visitors or
employees, for any loss of property from within those motor vehicles, or for any
injury to Tenant, its employees, licensees, guests and invitees unless
ultimately determined 'to be caused by the sole negligence or willful misconduct
of Landlord,
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its agents, servants and employees. Tenant agrees to acquaint its employees with
any parking rules and regulations promulgated by Landlord and assumes
responsibility for compliance by its employees with such parking provisions, and
Tenant shall be liable to Landlord for- all unpaid parking charges, if any,
incurred by its employees. Any amount due from Tenant- pursuant to this Article
43 shall be deemed additional rent and failure 'to pay same shall constitute a
default, under 'the Lease. if Tenant or its employees, licensees, guests and
invitees park illegally or in areas designated for, use by others, or in
driveways, fire lanes or areas not striped for general parking, then Landlord
may charge Tenant, as additional rent., FIFTY and 00/100 DOLLARS ($50.00) per
day for each day or partial day each motor vehicle is so parked. In addition,
Tenant authorizes Landlord to (i) tow away from the Parking Area, at Tenant's
sole cost and expense, any motor vehicle belonging to Tenant or Tenant's
employees, licensees, guests and invitees parked illegally or in violation of
this Article 43 or any parking rules and regulations promulgated by Landlord and
(ii.) attach tickets to any motor vehicles belonging to Tenant or Tenant's
employees, licensees, guests and invitees parked illegally or in violation of
this Article 43 or any parking rules and regulations promulgated by Landlord.
44. ACCESS AND COMMON AREAS
44.1 Tenant shall have the right of nonexclusive use, in
common with others of (a) automobile parking areas not designated for use by
others and driveways and (b) footways.
45. intentionally Deleted Prior 'to Execution
46. BROKER
46.1 Tenant and Landlord each represents to the other that no
real estate broker is responsible for bringing about, or negotiating, this Lease
and Tenant and Landlord have not dealt with any broker in connection with the
Domised Premises.
46.2 In accordance with the foregoing representation, Tenant
and Landlord each agrees to defend, indemnify and hold harmless the other, its
affiliates and/or subsidiaries, partners and officers from any expense or
liability (including attorney's fees) arising out of any claim for commission by
any broker claiming or alleging .-to have acted on behalf of or -to have dealt
with Tenant or Landlord, as applicable.
47. CLEANING SERVICES
47.1 Landlord shall provide services for maintenance of the
grounds, common areas and parking areas and such other cleaning services within
the Demised Premises as are set forth on "Cleaning Service Rideir" annexed
hereto and made a part hereof as Exhibit @tD'I, as same may be reasonably
amended from -time -to time by Landlord. in -the event. of an amendment to the
Cleaning Service Rider, Landlord covenants that any such modification shall be
reasonably comparable to the services currently contained therein and shall not
adversely affect Tenant's use and enjoyment of -the Demised Premises.
47.2 Tenant shall pay to Landlord the cost of removal from the
Demised Premises of any of TenantIs refuse or rubbish other than ordinary office
waste, and Tenant, at Tenantfs expense, shall cause all portions of the Demised
Premises not used as office areas to be cleaned daily in a manner satisfactory
to Landlord. Tenant also shall cause all portions of the Demised Premises used
for the storage, preparation, service or consumption of food or beverages to be
exterminated against infestation by vermin, roaches or rodents regularly and, in
addition, whenever there shall be evidence of any infestation. Tenant shall
contract directly with Landlord or, at Landlo@dfs option, directly with
Landlord's
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contractors, for the removal of such other refuse and rubbish and for cleaning
services in addition to those furnished by Landlord and for extermination
services required hereunder.
48. ASSIGNMENT A-ND SUBLETTING
48.1 For purposes of this Article and Article 11, any
occupancy arrangement (including without limitation management agreements,
concessions and licenses) affecting all or any part of the Demised Premises,
other than a direct lease with Landlord, not deemed an assignment shall be
referr-ed to as a sublease and any occupant of all or part of the Demised
Premises, other than a tenant under a direct lease with Landlord, not deemed an
assignee shall be referred to as a sublessee. Supplementing 'the provisions of
Article 11, and except as provided in Section 48.8 if the Tenant shall desire to
assign this Lease, sublet or underlet all or any portion of the Demised
Premises, it shall first submit in writing to the Landlord a notice setting
forth in reasonable detalli
(a) 'the identity and address of the proposed assignee or sublessee;
(b) in 'the case of a subletting, the terms and conditions thereof;
(c) the nature and character of the business of the proposed assignee and
sublessee and its proposed use for the Demised Premises;
(d) banking, financial and other credit information relating -to the proposed
assignee or sublessee reasonably
sufficient to enable Landlord to determine the proposed assigneels or
sublessee's financial :responsibility; and
(e) in the case of a subletting of only a portion of the
Demised Premises, plans and specifications for Tenant's layout,
partitioning, and electrical installations for the portion of the
Demised Premises to be sublet.
48.2 If the nature and character of the business of the
proposed assignee or sublessee, and the proposed use and occupancy of the
De-mised Premises, or any portion thereof, by the proposed assignee or
sublessee, is in keeping and compatible with the dignity and character- of the
Building, then, subject to compliance
e u!27em@n@s_ @@Ar-t, Artipl@_4;3_,_, a ytha.@g
to the contrary in Article 11 notwithstanding, Landlord agrees not ?I ri
assignment o@@ all, by
notice in writing as described in Section 48. 1, advise Landlord of its
intention -to assign this Lease or -to sublease all or any part of 'the Demised
Premises, @@m,_@@-and- @@e a _stated --date -(which gha@@- @@e- -thaq 3 d4@
after the d --Tenant: I-s-.-notice) in which event Landlord shall right, to be
exercise bygiving written notice, to recapture the space described in Tenant's
notice. Such recapture notice shall, if given, cancel and 'terminate this Lease
with respect to the space -therein described as of a date which shall be -the
later of 30 days following the date set forth in Tenant's notice, or 30 days
after Tenant shall have surrendered possession of the Demised Premises. In the
event- less than all of the Demised Premises are recaptured, Landlord shall
construct and erect such partitioning and modify building systems as may be
required 'to separate the space retained by Tenant from 'the space recaptured.
The cost- of such alterations shall be borne fully and exclusively by Tenant,
shall constitute additional rent hereunder and shall be payable to Landlord
within 20 days following a statement from Landlord for the amount thereof;
provided, however, that if such costs exceed $5,000 Tenant shall have -the right
to approve said costs or to have such construction costs subject to a
competitive bid.
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48.3 If this Lease be cancelled pursuant to the foregoing with respect to less
than the entire Demised Premises, the Minimum Rent and/or the Adjusted Minimum
Rent and Tenan-tls occupancy Percentage shall be adjusted on the basis of the
number of square feet retained by Tenant in proportion to the number of square
feet originally demised under this Lease, and this Lease, as so amended, shall
continue thereafter in full force and effect.
48.4 In addition to the foregoing requirements: (a) no
sublease shall violate any law or result in an occupancy of the Delmised
Premises by more 'than two tenants, including the Tenant hereunder, (b) no
sublease shall be f or a term of less than two years, unless the unexpired term
of 'this Lease shall be less than two years at the commencement of the sublease,
(c) no assignee or sublessee shall be an existing tenant of or any party than
negotiating f or space in the Building, or any other building in the office park
of which the Building is a part (1) owned by Landlord, Bellemead Development
Corporation ("Bellemead") or any partnership in which Bellemead or an af filiate
of Bellemead is a partner or (11) managed by Bellemead or an af f iliate of
Bellemead ("Af f Illated Building"), (d) no sublease shall result in the
occupancy of less than 1000 square feet of space, (e) Tenant shall not be in
default under any of the terms and conditions of this Lease beyond any
applicable grace period at the time of any notice or request- for consent. under
the 'terms of this Article or at the effective date of such assignment or
subletting. Furthermore, anything to 'the contrary in Section 48.2
notwithstanding, Landlord shall not: consent to any sublease or assignment
unless Tenant agrees at the time of the proposed sublease or assignment and in
'the Tenant's notice required in Section 48.2 to pay over 'to Landlord fifty
(50%) percent of all consideration (of whatever nature received from the
assignee or sublessee) net of reasonable cos@ (including brokerage expenses and
fit-up expenses) of subletting or assignment that would be payable by the
prospective sublessee or assignee -to Tenant over the term of the sublease or
assignment pursuant to such sublease or assignment which exceeds the lororata
share of the Adjusted Minimum Rent allocable to the Demised Premises, or any
part thereof, as the case may be, payable by Tenant hereunder and (f) Tenant
shall pay when due all brokerage or similar commissions arising from any
assignment or sublease.
48.5 Any sublease must provide (a) that it shall be subject-
and subordinate to all of the terms and conditions of -this Lease, (b) -that
notwithstanding Article 2 hereof, -the use of the Dernised Premises thex:a!under
@h&2 tricted exclusava-Ly-@ execut3-ve and administrative office use, ( ereof
shall n cL beyond a date whi-c@-----i-s one day prior to the expiration date of
the Term hereof, (d) no sublessee or its heirs, distributees, executors,
administrators, legal representatives, successors or assigns, without the prior
consent of Landlord in each instance, which consent Landlord may withhold for
any reason or no reason, shall (1) assign, whether by merger, consolidation or
otherwise, mortgage or encumber its interest in any sublease, in whole or in
part, or (ii) sublet, or- permit 'the subletting of, that part of the Demised
Premises affected by such subletting or any part -thereof, or (it!) permit such
part of the Demised Premises affected by such subletting or any part 'thereof to
be occupied or used for desk space, mailing privileges or otherwise, by any
person other than such sublessee. The sale, pledge, transfer or other alienation
of (y) fifty percent (50%) or more of the issued and outstanding capital stock
of any corporate sublessee (unless such stock is publicly traded on any
recognized security exchange or over-the-counter market) or (z) any t-zansfer of
interest in fifty percent (50%) or more of any partnership or joint venture
sublessoe, however accomplished, and whether in a single transaction or in a
series of related or unrelated transactions, shall be deemed, for the purposes
of this Section, an assignment of such sublease which shall require the prior,
consent of Landlord in each instance, and (e) in the event of cancellation or
termination of the Lease for any reason whatsoever or of the surrender of this
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Lease whether voluntary, involuntary or by operation of law, prior to the
expiration date of such sublease, including ex-tensions and renewals granted
thereunder, that, at Landlord's option, the subtenan't shall vacate the Demised
Premises or shall make full and complete at-tornment to Landlord for 'the
balance of 'the terra of the sublease, which att:ornment shall be evidenced by
an agreement in form and substance satisfactory to Landlord which 'the subtenant
shall execute and deliver at any time within five days after request by
Landlord, its successors and assigns. The subtenant shall waive -the provisions
of any law now or hereafter in effect which may give the subtenant any right of
election to terminate the sublease or -to surrender possession of the Demised
Premises in the event any proceeding is brought by Landlord to terminate this
Lease. No assignee c)v sublessee shall receive any credit from Landlord
whatsoever for security deposits, rent or any other monies paid to Tenant unless
same shall have been actually received by Landlord.
48.6 Each of the following events shall be deemed to
constitute an assignment of this Lease and shall require the prior writ-ten
consent of Landlord in each instance:
(a) Any assignment or transfer of this Lease by
operation of law;
(b) Any hypothecation, pledge or collateral assignment
of this lease;
(c) Any involuntary assignment or transfer7 of this Lease in connection
with bankruptcy, insolvency, receivership or otherwise;
(d) Any assignment, transfer, disposition, sale or acquiring
of a controlling interest in Tenant to or by any person, entity or
group of related persons or affiliated entities, whether in a single
-transaction or in a series of related or unrelated transactions
excluding, however, any such disposition on a publicly recognized stock
exchange; and
(s) Any issuance of an interest or interests in Tenant
(whe'ther stock, partnership interests or otherwise) to any person,
entity or group of related persons or affiliated entities, whether in a
single -transaction or in a series of related or unrelated
transactions, such that following such issuance, such person, entity or
group shall hold a controlling interest in Tenant excluding, however,
any such disposition on a publicly recognized stock exchange.
For purposes of the immediately preceding sentence, a "controlling interest" of
Tenant shall mean fifty (50%) percent or more of the aggregate issued and
outstanding equitable interests (whether stock, partnership interests or
otherwise) thereof.
48.7 Tenant, its sublessees, and their respective successors
and assigns acknowledge and agree that 'the restriction that Landlard's consent
under certain circumstances to a proposed assignment of this Lease or to a
subletting shall not be unreasonably withheld and shall not be intended or
construed as an agreement or covenant on the part of Landlord, but rather as a
qualification on Tenan't's covenant not to assign 'this Lease or sublet, and
they further agree that Landlord shall not be liable in damages or subject to
liability of any other kind or nature whatever by reason of Landlo@d's failure
or refusal to grant its consent to any proposed assignment of this Lease or
subletting of the Demised Premises. Notwithstanding the foregoing, in the event
of a withholding of Landlord's consent pursuant to this Article 48, Tenant shall
retain its rights of specific performance or declaratory judgment against the
Landlord.
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48.8 It is a condition to the effectiveness of any permitted assignment, or
sublease otherwise complying with Article 11 and this Article 48 that -the
assignee execute, acknowledge and deliver to Landlord an agreement in form and
substance reasonably satisfactory to Landlord whereby the assignee assumes all
obligations of Tenant under this Lease, and agrees that the provisions of
Article 11 and this Article 48 shall continue -to be binding upon it in respect
of all future assignments of this Lease. No assignment of this Lease shall
release the assignor from its continuing obligations to Landlord under -this
Lease or any renewals or, extensions thereof, except as expressly herein
provided, and Tenant and any subsequent assignor shall continue to remain
jointly and severally liable (as primary obligor) for all of Tenant's
obligations hereunder.
48.9 Tenant covenants to obtain all permits and approvals
required by any governmental or quasi-governmental agency for any work or
otherwise required in connection with any assignment of this ]Lease or any
sublease, and Tenant shall deliver copies of the same to Landlord prior to the
commencement of work if work is to be done. Tenant is furthermore responsible
for and is required to reimburse Landlord for all costs including, but not
limited to, reasonable architectural, engineering and legal fees which Landlord
incurs in reviewing any proposed assignment of this Lease or any sublease and
any permits, approvals and applications for the construction within the Demised
Premises. Tenant's failure to obtain any of the above-mentioned permits and
approvals or to submit same and a duplicate original counterpart of the
assignment or sublease to Landlord within five days of the date of issuance or
execution of such item(s) shall constitute a default under this Lease.
48. 10 If Landlord reasonably withholds its consent to any
proposed assignment or sublease, or if Landlord exercises its recapture option
under Section 48.2, Tenant shall indemnify, defend and hold harmless Landlord
against and from all loss, liability, damage, cost and expense (Including
reasonable attorneys fees and disbursements) resulting from any claims that may
be made against Landlord by the proposed assignee or sublessee or by any brokers
or other persons claiming a commission or similar compensation in connection
with the proposed assignment or sublease.
48. 11 If Landlord consents to any proposed assignment or
sublease and Tenant fails to consummate the assignment or sublease to which
Landlord consented within 60 days after the giving of such consent, Tenant shall
be required again to comply with all of the provisions and conditions of this
Article 48 before assigning this Lease or subletting all or part of -the Demised
Premises.
48.12 The joint and several liability of the named Tenant and
any immediate or remote successor in interest of the named Tenant for the due
performance and observance of all covenants and conditions to be performed and
observed by Tenant shall not be impaired by any agreement of Landlord extending
the time for such performance or observance or by Landlord's waiving or failing
to enforce any provisions of 'this Lease.
48.13 The listing of any name other than that of Tenant on any
door of the Demised Premises or on any directory or in any elevator in the
Building or otherwise, shall not operate to vest in the per-son so named any
right or interest in this Lease or in the Demised Premises or the Building,
o@-be deemed to constitute, or serve as a substitute for any prior consent
required under this Article.
48.14 Any provisions of Article 11 and Article 48 to the
contrary notwithstanding, but subject to the other terms, conditions and
Provisions contained in said Articles:
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(a) Any corporate Tenant shall have the right, without the consent of
Landlord, to assign this Lease or sublet all or any part. of the Demised
Premises to any corporation controlling, controlled by or under common
control with Tenant, provided that no such assignee shall further assign
this Lease and no such -------- sublessee shall assign or encumber its
sublease or further sublet all or any part of the Demised Premises except
in accordance with -this Article 48, and vided, further,, that any event
resulting in ----- such assignee or sublessee ceasing -to be a corporation
controlling, controlled by or under- common control with Tenant shall be
deemed -to be an assignment or- sublease requiring -the prior consent of
Landlord and Tenant shall thereupon be required -to comply with all
provisions of Article 11 and -this Article 48 applicable thereto. For
purposes of the immediately foregoing, "control*', means ownership of at
least eighty percent (80%) of the issued and outstanding voting stock of
such corporation.
(b) Any corporate Tenant shall also have the right, without
the consent of Landlord, to assign this Lease to any corporation
succeeding to Tenant by merger or consolidation in accordance with
applicable statutory provisions for merger or consolidation of
corporations or by purchase of all or substantially all of Tenant's
assets, provided that immediately after such merger, consolidation or
purchase, the shareholders' equity (capital stock, additional paid-in
capital and retained earnings) of the successor corporation or the
purchasing corporation, as the case may be, shall be at least equal to
the shareholder0s equity of Tenant immediately prior to such merger,
consolidation or purchase and this shall be so certified by the chief
financial officer of the assignee.
It is Landlord's intent to permit assignment- of the Lease and
subletting pursuant to this Section 48.14 exclusively as an accommodation to
- - -the bona f ide and legitimate business needs of Tenant, and notwithstanding the
provisions hereof, no assignment of this Lease or sublease of all or any part of
- - -the Demised Premises without Landlord's consent- hereunder shall be permitted
where the sole or primary purpose of such assignment or subletting is to permit
occupancy of all or any part of the Demised Premises by a third party in
avoidance of Landlord's consent, or in the case of a corporation's purchasing
all or substantially all of Tenant's assets where this Lease constitutes all or
a substantial portion of such assets.
Tenant shall promptly give Landlord prior written notice of any
assignment of this Lease or subletting permitted under this Section 48.14
accompanied by all documentation required by Landlord to establish compliance
with the requirements of subsections (a) and (b) above and Tenant shall also
promptly provide Landlord with a copy of any executed instrument of merger,
consolidation or assignment or the executed sublease, as the case may be.
49. TENANTIS COOPERATION; REASONABLE
MODIFICATIONS: ESTOPPEL CERTIFICATE
49.1 If, in connection with obtaining financing for the
Building and/ov the Real Estate, or otherwise upon the interest of the Landlord,
as lessee, under any ground or underlying lease, any lending institution shall
request reasonable modif !cations of this Lease as a condition of such
financing, Tenant covenants not unreasonably to withhold or delay its agreement
to such modification, upon Landlord's request-, provided that such modification
does not materially or adversely affect 'the rights or uses of Tenant under this
Lease.
49.2 Tenant agrees at any 'time and from time to time, upon not less
than ten days' prior written request, 'that Tenant
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shall execute, acknowledge and deliver to Landlord, or its designee, a statement
in writing certifying: that this Lease is unmodified and is in full force and
effect (or if there have been modifications, 'the specifics thereof and that the
Lease is in full force and effect as modified); the dates to wh+/-ch the Minimum
Rent (or Adjusted Minimum Rent) and additional rent have been paid; the amount
of all rents paid in advance, if any; and any other information that Landlord
shall reasonably request. Tenant further agrees to furnish Landlord upon demand
at any time such information and assurances as Landlord may request that Tenant
has not breached the provisions of this Lease. it is intended hereby that. any
such statement delivered pursuant -to 'this Article may be relied upon by a
prospective purchaser of 'the Landlord's interest or a mortgagee of Landlo@d's
interest, or any assignee of any mortgage upon Landlord's interests In -the Real
Estate. The foregoing obligation shall be deemed a substantial obligation of the
tenancy, 'the breach of which shall give Landlord those remedies herein provided
for an event of default. Tenant's failure to timely deliver such statement shall
be conclusive upon Tenant: (a) that this Lease Is in full f oirce and ef f ect,
without madif Ication except as may be represented by Landlord; (b) -that to the
best of Tenant's knowledge there are no uncured defaults in Landlord's
performance and Tenant has no right of offset, counterclaim, defenses or
deduction against the Minimum Rent, Adjusted Minimum Rent, additional rent or
against Landlord; and (c) that no more than one month's installment of Minimum
Rent- has been paid in advance.
49.3 Tenant agrees at any time and from time to time, upon not
less than ten (10) days' prior written request, -that Tenant shall demonstrate
to Landlord Tenant's financial status and that of any occupant of the Demised
Premises by submitting to Landlord all reasonable information as Landlord may
request, including but not limited to Tenan't's latest annual report. The
foregoing obligation shall be deemed a substantial obligation of the tenancy,
the breach of which shall give Landlord those remedies herein provided for an
event of default.
50. LIMITATION OF LIABILITY;
DEFINITION OF "LANDLORD"
50.1 Notwithstanding anything to the contrary herein
provided, each and every term, covenant, condition and provision of this Lease,
is hereby made specifically subject to the provisions of this Article 50. The
term "Owne3c" or "Landlord" as used in this Lease means only the owners or
lessors fo-r the -time being of -the Real Estate, so that in the event of any
conveyance of such interest and the transfer to the transferee of any funds
- - -then being held under -this Lease by such owner, Landlord shall be and hereby
is entirely freed and relieved of any and all obligations of Landlord hereunder
thereafter accruing, and i t shall be deemed without further agreement between
the parties and such g-rantee(s) that the grantee has assumed and agreed to
observe and perform all obligations of Landlord hereunder. It is specif ically
understood and agreed that notwithstanding anything 'to the contrary herein
provided or otherwise provided at law or in equity, there shall be absolutely no
personal liability in excess of its interest in the Real Estate (including the
rents, issues and prof its -thereof) to the Landlord oic any successor in
interest thereto (whether the same be an individual, joint venture, tenancy in
common, firm or partnership, general, limited or otherwise) or, on -the part of
that members of any f ix-m, partnership or joint venture or other unincorporated
Landlord with respect to any of the terms, covenants and/or conditions of this
Lease; in the event of a breach or default by Landlord, or any successor in
interest thereof, of any of its obligations under this Lease, Tenant shall look
solely to the then Landlord for the satisfaction of each and every remedy of
Tenant, such exculpation of personal and additional liability which is in excess
of such interest in 'the Real Estate to be absolute and without any exception
whatsoever.
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51. STATLTTORY WAIVER: NOTICE BY TENANT
51.1 Tenant waives the benefit of N.J.S.A. 46:8-6 and 46:8-7,
as same may be amended. Tenant agrees that it will not be relieved of the
obligations to pay the Mini-mum Rent, Adjusted Minimum Rent or any additional
rent in case of damage to or destruction of the Building, except as provided in
Article 9 of the Printed Portion of this Lease.
51.2 Tenant: shall give Landlord immediate notice in case of
fire or accident within the Demised Premises, or, upon 'the Real Estate if
involving Tenant, its servants, agents, guests, employees, invitees or
licensees.
52. CORPORATE AUTHORITY
52.1 Tenant represents that the officer executing and
delivering this Lease has been duly authorized to enter into this Lease and that
- - -the execution and delivery of this Lease by Tenant do not and shall not violate
any provision of any by-law, agreemen-t, order, judgment, governmental
regulation or any other obligation to which Tenant is a party or is subject.
52.2 Upon execution hereof, Tenant shall deliver an
appropriate certification by its secretary or assistant secretary to the above
effect.
52.3 Landlord represents that 'the representative executing
and delivering this Lease has been duly authorized to enter into this Lease and
that the execution and delivery of this Lease by Tenant do not and shall not
violate any provision of any partnership agreement, order, judgment,
governmental regulation or any other obligation -to which Landlord is a party or
is subject.
53. PERSONAL TAXES
53.1 Tenant agrees to pay all taxes imposed upon Tenant
or on the personal property of Tenant in connection with its use and occupancy
of -the Demised Premises including, but not limited to, personal property,
income, withholding and unemployment compensation, and 'to hold Landlord
harmless from collection thereof out of monies due and owing Landlord.
54. BUILDING CHANGES
54.1 The Lease shall not be affected or impaired by any
change to any lawns, sidewalk, driveways, parking areas or streets adjacent to
or around the Building, except as provided in the provisions of this Lease
dealing with condemnation and in Article 20 hereof.
55. HOILDING OVER
55.1 Tenant shall pay Landlord one and one-half (14,-) times
the fair market rental value of the Demised Premises, as reasonably determined
by Landlord (but- in no event less than one and one half (1h) -times the total
of Adjusted Minimum Rent plus additional rent -then applicable under the Lease)
for each month or partial month during which Tenant retains possession of the
Demised Premises, or any part thereof, after -the expiration or termination of
- - -the Lease. Tenant understands -that on 'the last day of the 'term of this
Lease, all or a part of the Demised Premises may be subject to certain rights of
occupancy held by other parties and that any retention of possession by Tenant
after the last day of the term of this Lease may cause significant hardship on
Landlord and on par-ties to whom certain rights of occupancy for all or any part
of the Demised Premises have been granted. In connection with the foregoing,
Tenant shall defend, indemnify and hold Landlord harmless against all
liabilities and damages sustained by reason of any such retention of possession.
Nothing contained in -this Lease
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shall be construed as a consent by Landlord -to the occupancy or possession by
Tenant of the Demised Premises beyond the Termination Date or prior expiration
of the term hereof, and Landlord, upon the Termination Date or prior expiration
of the term hereof, shall also be entitled -to consequential damages and to the
benefit of all legal remedies -that. now may be in force or may be hereafter
enacted for summary possession of the Demised Premises.
56. RESTRICTIVE COVENANT - FOOD SERVICE
56.1 Tenant hereby covenants and agrees (anything to the
contrary contained in this Lease, notwithstanding) that it shall not use 'the
Demised Premises or any portion thereof, for the service of food to anyone other
- - -than Tenan't's employees, nor shall it. maintain any facilities for the sale or
consumption of food to and by anyone other than Tenant's employees, without, in
each case, obtaining -the prior written consent of the Landlord. The consent of
the Landlord required hereunder may be withheld for any reason or no reason.
56.2 Landlord represents to Tenant, and Tenant acknowledges,
that pursuant to agreements made or -to be made by and between the Landlord and
third parties for the operation of a restaurant, cafeteria, coffee-cart and
similar food services for this Building and/or other buildings in the office
park in which this Building is located, no tenant of this Building, including
Tenant, shall prepare, contract for,, serve or otherwise make available a food
service facility in competition with such third parties other -than as permitted
under Section 56.1 above and Article 68 hereof. Any breach of this restriction
by -the Tenant shall be deemed a material event of default under the terms of
this Lease, and Landlord may, in its discretion, exercise such remedies as it
may deem appropriate to terminate 'this Lease, prevent a violation of this
covenant, and recover any damages to which it may be exposed by virtue of a
breach by 'the Tenant.
56.3 Tenant shall not permit the consumption of food or drink in -the
common areas of 'the Building.
57. NOTICES
57.1 All notices, demands and requests which may or are
required to be given, by either party hereunder -to the other, shall be in
writing. All notices, demands and reques@ by Landlord to Tenant shall be deemed
to have been properly given if sent by Landlord or its managing agent and mailed
by registered or cer,tif ied mail, return receipt requested, postage prepaid,
addressed to Tenant- at the Demised Premises with a copy -to:
Vice President and
Ass+/-stant- General Counsel
Individual Insurance
Law Department
213 Washington Street
2nd Floor
Newark, New Jersey 07102
or to such other address as Tenant may from time to time designate by written
notice 'to Landlord.
All notices, demands and requests by Tenant 'to Landlord shall be
deemed duly given or served if, and shall not be deemed duly given or served
unless, sent by registered or certified mail, return receipt requested, postage
prepaid, addressed to Landlord at:
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LANDLORD: Jared Associates, L.P.
c/o Bellemead Management Co., Inc.
280 Corporate Center 4 Becke@ Farm Road
Roseland, New Jersey 0706B
Attention: Legal Department
or to such other address as Landlord may from time -to time designate by written
notice to Tenant.
All notices referred 'to hereunder shall be deemed given and received
when delivered or when delivery is refused when mailed by United States
registered or certified mail as aforesaid, in any post office or branch post
office regularly maintained by the United State Government, unless said notice
was personally served upon an officer of Landlord or Tenant, in which case such
notice shall be deemed given when delivered.
58. INTERPRETATION
58.1 If any term or provisions of this Lease or the
application thereof to any party or circumstance shall to any extent be invalid
or unenforceable, the remainder of this Lease or the application of such term or
provision to parties or circumstances other -than to those with respect to which
it is held invalid or enforceable, shall not be affected thereby, and each term
and provision of this Lease shall be valid and enforced -to the fullest e@ent-
permitted by law.
58.2 In any and all cases where Landlord's consent or approval
is required under this Lease, Tenant shall upon Landlord' s demand reimburse
Landlord, as additional i-ent, for all reasonable out of pocket costs and
expenses, including but not limited to architectural, engineering and legal f
ees, which Landlord incurs in determining whether to grant its consent or
approval. In all instances under this Lease where Landloird's consent is
required, (except in the case of assignment, subletting or structural
modifications to the Demised Premises or Building), such consent shall not be
unreasonably withheld or delayed.
58.3 Tenant shall pay all reasonable legal fees and expenses
incurred by Landlord (i) in interpreting, enforcing or modifying the -terms of
the Lease, (ii) in commencing and prosecuting a suit for the recovery of the
Demised Premises, damages or- any amounts owed to Landlord, (ill) in commencing
and prosecuting a declaratory action, (iv) in defending an action or
counterclaim brought by Tenant and (v) in preparing for or appearing in an
arbitration, mediation or other nonjudicial proceeding. Notwithstanding the
foregoing, Landlord shall only be entitled to reimbursement under clauses (i)
through (v) above in the event Landlord ultimately prevails in the underlying
dispute.
58.4 This Lease shall be governed by and construed in
accordance with the laws of and enforced only in the courts of New Jersey.
Tenant hereby irrevocably submits itself 'to the jurisdiction of the courts of
the State of New Jersey and to 'the jurisdiction of the United States Distri@
Court f or -the District of New Jersey for -the purposes of any suit, action or
other proceeding brought by Landlord arising out of or based upon this Lease.
Tenant hereby waives and agrees not to assert, by way of motion, as a defense,
or otherwise, in any such suit, action or proceeding, any claim that it is not
subject personally to the jurisdiction of -the above-named courts, that its
property is exempt or immune from attachment or execution, that -the suit,
action or proceeding is brought in an inconvenient- forum, that the venue of the
suit, action or proceeding is improper or that this Lease may not be enforced in
or by such court.
58.5 This Lease shall be cons-trued without regard to any presumption
or other rule requiring construction against. the party
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causing this -Lease to be drafted. Text deleted from a prior draft of this Lease
shall not be admissible in an action or proceeding relating to -the Lease for
the purpose of altering or limiting 'the meaning or effect of the Lease.
58.6 Tenant- acknowledges and agrees -that it has had the
assistance of counsel in the review, negotiation and execution of this Lease or
has waived its right 'to counsel.
59. No OFFER OR AGREEMENT
59.1 No broker or agent of any broker has authority to
make or agree to make a lease or any other agreement or undertaking in
connection herewith, including, but not limited to the modification, amendment
of or cancellation of a lease. The mailing or, delivery of this document or any
draft hereof by the Landlord or its agent to Tenant, its agent or attorney shall
not be deemed an offer by the Landlord to lease the Demised Premises on the
terms herein. This Lease shall not be effective, nor shall Tenant have any
rights with respect thereto unless and until Landlord shall accept -this Lease
and execute and deliver the same to Tenant.
60. DAMAGES
60.1 Notwithstanding anything -to the contrary contained in
Article 18 hereof, if Landlord shall re-enter the Demised Premises under the
provisions of Article 18, or in -the event of the termination of -this Lease, or
of re-entry, by or under any summary dispossess or other proceeding or action of
any provision of law by reason of default hereunder on the part of Tenant,
Tenant shall be liable to Landlord for any and all damages as are permitted by
law.
60-2 Suit ox- suits for the recovery of such damages, or any
installments thereof, may be brought by Landlord from time to time at its
election, and nothing contained herein shall be deemed to require Landlord to
postpone suit -until the date when the term of this Lease would have expired if
it had not been so terminated or had Landlord not re-entered the Demised
Premises. Nothing herein contained shall be construed to limit or preclude
recovery by Landlord against Tenant of any sums or damages to which, in addition
to the damages particularly provided above, Landlord may lawfully be entitled by
reason of any default hereunder on the part of Tenant. Any indemnity of Tenant
shall survive the expiration or earlier termination of this Lease. Nothing
herein contained shall be construed 'to limit or prejudice the right of Landlord
to prove for and obtain as liquidated damages by reason of -the termination of
this Lease or re-entry of 'the Demised Premises for the default of Tenant under
this Lease, an amount equal 'to -the maximum allowed by any statute or :rule of
law governing the proceedings in which such damages are to be proved whet-her or
not such amount be greater, equal to, or less -than any of the sums ref erred to
in Section 60.1.
61. BANKRUPTCY
61.1 Tf, as a matter ot law, Landlord has no right on the
bankruptcy of Tenant to terminate this Lease, then, if Tenant:, as debtor, or
its trustee wishes to assume or assign this Lease, in addition -to curing or
adequately assuring the cure of all defaults existing under this Lease on
Tenant's part on the date of filing of -the proceeding (such assurances being
defined below), Tenant, as debtor, or the -trustee or assignee, must also
furnish adequate assurances of future performance under this Lease (as defined
below) . Adequate assurance of curing defaults means the posting with Landlord
of a sum in cash suf f icient to def ray the cost of such a cure. Adequate
assurance of f uture perf ormance under this Lease means posting a deposit equal
to -three (3) months' rent, including all (either charges payable by Tenant
hereunder, such as the amounts payable pursuant to Article 36 hereof, and, in
the case of an assignee, assuring Landlord that the assignee is financially
19
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capable of assuming this Lease, and that its use of the Demised Premises will
not be detrimental to the other 'tenants in -the Building or Landlord. In a
reorganization under Chapter 11 of the Bankruptcy Code, the debtor or trustee
must assume this Lease or assign it within one hundred twenty (120) days from
the filing of the proceeding, or he shall be deemed to have rejected and
terminated this Lease.
61.2 if this Lease is assigned to any person or entity
pursuant to the provisions of the Bankruptcy Code, 11 U.S.C. Section 101 et seq.
(the "Bankruptcy Code"), any and all monies or other considerations -to be
delivered in connection with the assignment shall be delivered to Landlord,
shall be and remain the exclusive property of Landlord and shall not constitute
property of Tenant or of the estate of Tenant within the meaning of the
Bankruptcy Code. Any person or entity to which -this Lease is assigned pursuant
to the provisions of -the Bankruptcy Code shall be deemed -to have assumed all
of the obligations arising under, this Lease an and after the date of the
assignment, and shall upon demand execute and deliver to Landlord an instrument
confirming that assumption.
62. Intentionally Deleted Prior, to Execution
63. Intentionally Deleted Prior to Execution
64. LANDLORD'S WORK: LANDLORD'S WORK LETTER
64.1 Tenant shall deliver 'to Landlord on or prior, 'to the
Outside Plan Date (as defined in Article 37 hereof) such drawings, layouts and
specifications ("Tenan't's Specifications") in sufficient detail to enable
Landlord 'to (1) prepare construction drawings (IOConstruction Drawings") and
(11) obtain a building permit for -the construction of the Demised Premises.
Landlord shall prepare the Construction Drawings in accordance with Tenan't's
Specifications and shall deliver the completed Construction Drawings to Tenant.
Tenant- shall have seven (7) days after receipt of the Construction Drawings to
approve or modify same (the "Approved construction Drawings"). Any delay beyond
said seven (7) day period shall be deemed a Tenant Delay (as hereinafter defined
in Section 64.2). Landlord shall construct the Demised Premises in accordance
with the Approved Construction Drawings and Tenant shall pay Landlord for such
work, subject to a construction allowance of $783,425.00 (the "Maximum
Allowance") . The Maximum Allowance shall be applied to work that is above and
beyond the work described in Exhibit H (Base Bulldling Items), which Base
Building Items shall be completed at Landlard's expense. In the event -the cost
for the total construction of the Demised Premises is more or less than the
Maximum Allowance, such dif f erential will be paid on the Adjustment Date in
accordance with Section 69.2 hereof. All of Landlord's work shall carry a one
(1) year warranty from 'their respective completion dates.
64.2 Any modification or addition -to -the Approved
Construction Drawings requested by Tenant shall be in writing and shall be
deemed to be an "Extra" or "Change O-cder". Within a reasonable period after
Tenant's -request, Landlord shall advise Tenant of the work required, the cost
thereof and the additional time required, if any, fox, the construction of the
applicable "Extra'$ or "Change Order". Only Glenda Fos@er or Denny Groner (or a
person authorized in writing by either one, provided such writ:-ten
authorization has been received by Landlord) may execute an "Extra" or "Change
orders' on behalf of Tenant and no other signatory has the authority -to bind
Tenant in said regard. only those "Extras" or "Change Orders" executed by both
Landlord and Tenant shall be binding on the par-ties hereto. Tenant shall be
responsible for any delays in completing the Demised Premises by reason of
Tenant's failure to cooperate with Landlord, Tenant's delays in submitting any
drawings or specifications, or in supplying information, or in approving
drawings, specifications or estimates, or in giving
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authorizations, or by reason of any "Extra" or "Change Order" designated by
Tenant-, or by reason of any changes by Tenant in any designations previously
made by Tenant, or by reason of any similar acts or omissions of Tenant
(individually, a "Tenant Delay" and collectively, "Tenan't's Delays") - Any
other delay in completing the Demised Premises due to any other reason, cause or
factor beyond Landlord's reasonable control, including but not limited -to
strikes or other labor disputes, accidents, orders or regulations of any
federal, state, county or municipal authority, delays due to adjustment of
insurance claims, lack of availability of materials, parts or services, acts of
God, fire, earthquake, floods, explosion, action of the elements, war,
hostilities, invasion, insurrection, riot, mob violence, sabotage or by reason
of any other cause, whether similar or not to 'the foregoing, that is beyond the
reasonable control of Landlord shall be hereinafter referred to as "Force
Majeure". In the event Tenant's Delays cause a delay in the completion of the
Demised Premises, Tenant shall be responsible for any increases in costs
resulting from such Tenant's Delays and any additional 'time required -to
complete the Demised Premises. Any such additional costs shall be paid on the
Adjustment Date in accordance with Section 69.2 hereof. In the event Force
Majeure events cause a delay in the completion of the Demised Premises, neither,
Landlord nor Tenant shall be responsible for any additional time required to
complete the Demised Premises or for any additional costs resulting therefrom.
64.3 The parties hereto acknowledge and agree that Landlord's
construction of the Demised Premises in accordance with Tenant's Specifications
and any authorized "Extras" or "Change Orders" shall be performed an what is
commonly referred to as a "Cos,t-Plus" basis. In this regard, Tenant shall be
obligated to pay for the compounded cost of those items in the Approved
Construction Drawings, any approved Extras ox, Change Orders plus Project
General conditions, Profit and overhead (as such terms are defined below).
Landlord and Tenant agree that (a) the project general conditions, as described
on Exhibit B attached hereto ("Project General Conditions") shall be deemed to
be 6% of the total cost to prepare the Demised Premises for Tenant"s occupancy
and (b) Landlord's prof it ("Pzof it") shall be deemed to be 5% of the total
cost to prepare the Demised Premises f or Tenant I s occupancy and (c)
Landloird's overhead ("Overhead") shall be deemed to be 5% of the total cost to
prepare the Demised Premises for Tenan-tls occupancy. The aggregate sum of
Project: General Conditions, Profit and Overhead shall be compounded for this
project. Any amount (above and beyond the Maximum Allowance) due Landlord for
those items in the Approved Construction Drawings, any approved Extras or Change
orders, Project General Conditions and Landlovdls Profit and Overhead shall be
payable on -the Adjustment Date in accordance with Section 69.2 hereof. Landlord
agrees that fox, each trade to be subcontracted out in connection with
Landlord-s construction of the Demised Premises, Landlord shall request bids
from no fewer than three (3) subcontractors to be mutually agreed upon by
Landlord and Tenant. From said three (3) bids, Landlord may award work 'to the
lowest bidder without Tenant's prior-consent. From said three (3) bids, Landlord
may award work to a subcontractor who was not the lowest bidder, provided Tenant
has given its prior consent. In addition, in those instances where it is
appropriate, Landlord will request that certain subcontractors provide bids with
unit pricing in order to facilitate any additional Extras or Change Orders that
Tenant may request.
64.4 Provided Tenant is not in default hereunder, as of
the f if th @h) ann@v nmmt--nn@t-pai-e, Landlord
gx. es t@r a'@t and reca@e@ the Demised Premises with building _;p
,- .--@n @he event Tenant desires an upgrade of any standard @ii i3@
wall or floor covering, Landlord shall grant to Tenant an allowance equal to the
building standard materials and any excess will be paid by Tenant -to Landlord,
on demand. For the purposes hereof, building standard carpet shall be nylon
broadloom carpet with a face weight of at least twenty six (26) ounces.
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65. RENEWAL OPTION
65.1 Subject -to -the provisions of Section 65.2 below,
Tenant shall have the option -to renew 'this Lease for an additional term of
five (5) years (,the "Renewal Tex-ml'), which Renewal Term shall commence upon
the expiration of -the -term described in Article 37 of this Lease (the "Initial
Term"). The terms, covenants and conditions during the Initial Term, including
but not limited to 'the definitions of the First Tax Year and First Operating
Year as set forth in Article 36 hereof, shall be projected and carried over
in-to the Renewal Term, except- as specifically set forth hereinafter.
(a) The Minimum Rent during the Renewal Term shall be the
greater of (i) Market Rent (as defined in clause (b) below) or (ii) the Adjusted
Minimum Rent as of the last day of the Initial Term.
"Market Rent" shall mean the fair market rent for
the Demised Premises, as of the commencement date of the Renewal Term (the
"De-terminati on Date") , based upon 'the rents generally in
effect for comparable office space in the area in which the Real Estate is
located taking into consideration any lease concessions that are customarily
available in -the market at such time. Market Rent (for the purposes of
determining the Minimum Rent only during the Renewal Term) shall be determined
on the same basis as Adjusted Minimum Rent is calculated in accordance with the
terms of this Lease.
Landlord shall no-tif y Tenant ("Landlord's Determination Notice") of landlord's
determination of the Market Rent within sixty (60) days of the Determination
Date. If Tenant disagrees with Landlord's determination, Tenant shall notify
Landlord ("Tenant's Notice of Disagreement") within fifteen (15) days of receipt
of Landlord's Determination Notice. Time shall be of the essence with respect to
Tenant's Notice of Disagreement, and the failure of Tenant to give such notice
within the time period set forth above shall conclusively be deemed an
acceptance by Tenant of the Market Rent as determined by Landlord and a waiver
by Tenant of any right to dispute such Market: Rent. If Tenant timely gives its
Tenant's Notice of Disagreement, then the Market Rent shall be determined as
follows: Landlord and Tenant shall, within thirty (30) days of -the date on
which Tenant's Notice of Disagreement was given, each appoint an Appraiser
(hereinafter defined) for-the purpose of determining the Market Rent. An
Appraiser shall mean a duly qualified impartial real estate appraiser having at
least ten (10) years' experience in the area in which the Demised Premises are
located. In 'the event that -the two (2) Appraisers so appointed fall to agree
as to the Market Rent within a period of thirty (30) days after the appointment
of the second Appraiser, such two (2) Appraisers shall forthwith appoint a third
Appraiser who shall make a determination within thirty (30) days thereafter. If
such two Appraisers fall to agree upon such third Appraiser within ten (10) days
following the last thirty (30) day period, such third Appraiser shall be
appointed by a presiding Judge of the Superior Court of the State of New Jersey
f or the County in which the Real Estate is located. Such two (2) Appraisers or
three (3) Appraisers, as -the case may be, shall proceed with all reasonable
dispatch to determine the Market Rent. The decision of such Appraisers shall be
final; such decision shall be in writing and a copy shall be delivered
simultaneously to Landlord and 'to Tenant. If such Appraisers fail to deliver
their decision as set forth above prior to the commencement of the Renewal Term,
Tenant shall pay Landlord the Adjusted Minimum Rent at the rate as of the last
day of -the Initial Term, until such decision is so delivered. if the Market
Rent as determined above is in excess of the actual rent paid, then Tenant, upon
demand, shall pay to Landlord the difference between the actual rent paid and
the Market Rent from the commencement of -the Renewal Term.
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Landlord and Tenant shall each be responsible for and shall pay the fee of the
Appraiser appointed by them respectively, and Landlord and Tenant shall share
equally -the fee of the third Appraiser. Promp,tly upon determination of the
Market Rent, Tenant- shall execute and deliver a Lease amendment prepared by
Landlord setting forth the terms of the Renewal Term.
65.2 Tenant's option to renew, as provided in Section
65.1 above, shall be strictly conditioned upon and subject -to each of the
following:
(a) Tenant shall notify Landlord in writing of Tenant's
exercxse of its option to renew at least nine (9) months, buc not more than
twelve (12) months, prior -to 'the expiration of the Initial Term;
(b) At the time Landlord receives Tenant's notice as provided
in (a) above, and at the expiration of -the Initial Term, Tenant shall not have
been in default under the terms or provisions of this Lease after -the
expiration of any applicable grace period and the Tenant named on the first and
last page of this Lease or a peir -,,e in occupancy of -the entire Demised
Premi.ses;
tc) Tenant shall have no further renewal option other than the
option to extend for the one Renewal Term as set- forth in Sec,tion 65.1 above;
(d) This option 'to renew shall be deemed personal to the
Tenant named on the first and last page of this Lease and -to any affiliate of
Tenant and may not otherwise be assigned; and
(e) Landlord shall have no obligation to do any work or
perform any services for the Renewal Term with respect to the Demised Premises
or the Building which Tenant agrees to accept in their then "as is" condition.
66. ECRA COMPLIANCE
66.1 Tenant shall, at Tenant's own expense, comply with
the Environmental Cleanup Responsibility Act, (N.i.S.A. 13:IK-6 et seq.), the
Comprehensive Environmental Response, Compensation & Liability Act (42 U.S.C.
9601 et seq.) and the Spill Compensation and Control Act (N.J.S.A. 58:10-23.11
et seq.) and any and all amendments thereto and the regulations and orders
promulgated thereunder with respect to Tenant's use and occupancy of the
Dem+/-sed Premises. Tenant shall, at Tenant's own expense, make all submissions
to, provide all information to, and comply with all requirements of, the Bureau
of Indus-trial site Evaluation ("the Bureau") of the New Jersey Department of
Environmental Protection (IINJDEPOR) . Should the Bureau or any other division
of NJDEP determine that a cleanup plan be prepared and that a cleanup be
undertaken because of any spills or discharges of hazardous substances or wastes
in or about the Real Estate caused by Tenant which occur during the term of this
Lease, then Tenant shall, at Tenant's own expense, prepare and submit the
required plans and financial assurances, and carry out the approved plans.
Tenan't's obligations under this Article shall arise if there is any closing,
terminating or transferring of operations of an industrial establishment
utilizing the Demised Premises or a transfer of the Real Estate or any port-ion
thereof which falls under the purview of -the statutes hereinbefore referred.
66.2 Tenant shall promptly provide all information reasonably
requested by Landlord for preparation of non-applicability affidavits and shall
promptly sign such affidavits when reasonably requested by Landlord. Tenant
shall indemnify, defend and save harmless Landlord from all fines, suits,
procedures, claims and actions of any kind arising out: of or- in any way
connected with any spills or discharges of hazardous substances
23
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or wastes in or about the Real Estate caused by Tenant which occur during the
term of this Lease; and from all f ines, suits, procedures, claims and actions
of any kind arising out of Tenantfs failure to provide all information, make all
submissions and -take all actions required by the Bureau or any other division
of NJDEP. Tenan't's obligations and liabilities under this Article shall
continue so long as Landlord remains responsible for any spills or discharges of
hazardous substances or wastes in or about the Real Estate caused by Tenant
which occur during the term of this Lease. Tenan't's failure -to abide by the
'terms of this Article shall be restrainable by injunction.
66.3 Landlord represents to the best of its knowledge, without
any independent inquiry or investigation that as of the Commencement Date, the
Real Estate is in compliance with all applicable environmental laws, rules and
regulations. Landlord agrees to defend, indemnify and hold harmless Tenant for
any environmental violation existing in the Building or the Land on the
Commencement Date, the breach of the foregoing representation or from any
environmental contamination of the Real Estate as a result of Landlord's
actions.
67. RELOCATION ALLOWANCE
67.1 As additional consideration fox, Tenant entering into
'this Lease, Landlord hereby gvants 'to Tenant a moving allowance credit in the
amount of ONE HUNDRED FIFTY SIX THOUSAND SIX HUNDRED EIGHTY FIVE AND 00/100
DOLLARS ($156,685-00) (the "Relocation Allowance") - Landlord shall pay -the
Relocation Allowance to Tenant on the Adjustment Date in accordance with Article
69 hereof.
68. FOOD SERVICE FACILITY
68.1 Within ninety (90) days after- the Commencement Date
of this Lease, Landlord shall provide to the tenants of the Building, including
Tenant a food service facility on the first (Ist) floor of the Building (the
"Cafeteria"). The Cafeteria will be managed by an independent food operator. The
initial hours of operation shall be from 7:30 a.m. 'to 3:00 p.m., Monday
- - -through Friday, excluding Legal Holidays. The Cafeteria will offer a limited
breakfast menu between the hours of 7:30 a.m. and 9:30 a.m. and a luncheon menu
between the hours of 11:30 a.m. to 2:30 p.m. Catering shall also be available to
the -tenants of the Building. The lunch menu is intended to consist of soups,
sandwiches and one or two hot entrees per- day. in addition, the Cafeteria shall
contain various other food items, such as candies, cookies, sodas, salads,
beverages and snacks. The Cafeteria shall also contain a vending area to provide
drinks and snacks during off hours.
68.2 It is Landloird's intention to provide a food service
facility similar to the Cafeteria described above during the term of this Lease.
' Notwithstanding the foregoing, in the event the continued operation of a food
service facility in the Building becomes cost prohibitive, inappropriate or
unreasonable under the circumstances, Landlord may elect to terminate or modify
its existence. Any such modification or termination shall in no way affect
Tenant0s obligations under the terms of this Lease.
69. ADDITIONAL LEASE INDUCEMENT
69.1 As additional consideration for Tenant entering into
'this Lease, Landlord shall pay to Tenant the sum of ONE HUNDRED FIFTY THOUSAND
AND 00/100 DOLLARS ($150,000.00) within thirty (30) days after the Commencement
Date of this Lease, provided Tenant is not in default under any of 'the
provisions of this Lease at such time.
69.2 As of a date not later than thirty (30) days from the
Commencement Date (the "Adjustment Date") , Landlord and Tenant shall settle the
total sums owing to the parties from one another,
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including any wc3irk letter items less than or exceeding the Maximum Allowance
(as described in Article 64), the Relocation Allowance (described in Article 67)
and -the additional lease inducement described herein. Tenant shall have the
right upon notice to Landlord -to redistribute any of 'the aforementioned
allowances whether or not used for the intended purposes stated herein provided
that -the total sum does not exceed -those amounts described here i n. As of the
Adjustment Date, the monies described herein shall be paid by the appropriate
party to the other. In the event Landlord fails to pay to Tenant any sums that
it is obligated to pay in accordance with this Article 69 within fifteen (15)
days af t:er their due date, Tenant may, upon ten (10) days written notice to
Landlord, of f set any such balance against payments of minimum Ren't due
hereunder, provided Landlord has not previously cured said default-.
70. SATELLITE ANTENNA
70.1 So long as Tenant has not (i) breached any term of
this Lease, (ii) assigned the Lease to any entity other than an affiliate of
Tenant or (iii) sublet all or any part of the Demised Premises, Landlord shall,
at Tenant's expense and upon Tenant's prior written request erect and obtain
municipal approval for one or more satellite antenna transmission/reception
devices in accordance with Tenant's plans and specifications. Landlord shall
have no obligation to erect and obtain municipal approval for said satellite
antenna transmission/reception devices unless Landlord first approves in writing
the plans and specifications -therefor, which approval shall not be unreasonably
withheld or delayed. Tenant shall, at its expense, fully cooperate with Landlord
in obtaining requisite governmental approvals. If Tenant breaches any term of
the Lease, Landlord may, at Tenant's expense, remove all or any of said
satellite antenna transmission/reQeption devices and restore any damage or
injury that said satellite antenna ticansmission/reception or -the removal
thereof may have caused.
70.2 Upon the expiration or earlier termination of the Lease,
Landlord may, at Tenant's expense, remove all of said satellite antenna
transmission/reception devices and restore any damage or injury that said
satellite antenna transmission/reception devices or the removal thereof may have
caused. Tenant agrees to release Landlord from, and to defend, indemnify and
hold Landlord harmless against, any liabilities and expenses that may arise with
regard to said satellite antenna transmission/reception devices. Fuvthermoze, in
connection with said satellite antenna transmission/recep'tion devices, Tenant
shall procure and maintain comprehensive general liability insurance in
compliance with each of the requirements set forth in section 41.1 of 'the
Lease.
71. RESTRICTION ON CERTAIN PROSPECTIVE TENANTS
71. 1 So long as Tenant has not (i) breached any of the
terms of this Lease, (ii) assigned the Lease to any entity other than an
affiliate of Tenant or (Iii) sublet all or any part of the Demised Premises to
any entity other than an affiliate of Tenant, Landlord shall be prohibited from
entering in'to a lease in -the Building with any of the following prospective
tenants: Metropolitan Life Insurance Company, Equitable Life Assurance Company,
Northwestern Mutual Life Insurance Company and New York Life Insurance Company
(the "Prohibited Tenants"). Landlord shall only be prohibited from leasing space
in the Building -to any of the Prohibited Tenants if the space requirements for
such entity is less than the square footage actually occupied in the Building by
Tenant at such time.
72. SIGNAGE
72.1 In the event Landlord provides outside
building signage 'to other -tenants of the Building that
are of a similar size and nature of Tenant, Landlord
shall offer similar rights -to Tenant
25
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for any such signage.
72.2 Landlord shall provide in the Building lobby, at
Landlord's expense, a building directory sufficient- 'to list all of Tenant's
senior executives who maintain active offices in the Building. Tenant shall be
permitted -to install appropriate signage on the walls of elevator lobbies and
on entrance doors to all space under lease by Tenant, subject to Landlord's
reasonable approval of same.
73. RIGHT OF FIRST OR SECOND OFFER
73.1 There currently exists two (2) units of space in -the
Building consisting of 26,683 square feet on 'the first (lst.) floor directly
below the Demised Premises (-the "Fii7s't Floor option Space") and 31,337 square
feet on 'the second (2nd) floor on the opposite wing of the Building (the
"Second Floor option space"), both such units are identified on Exhibit I
attached hereto and made a part hereof (collectively, the "Option Space"). After
the Option Space has been initially leased@-, Landlord agrees that if all or any
portion of the Option Space shall thereafter become available during the terra
of this Lease, then in any such case, subject to the rights of existing tenants,
if any, and subject to 'the rights of Federal Insurance Company for- the First
Floor option Space, before offering the available Option Space to any other
party, Landlord will offer 'to Tenant the right 'to include the Option Space
within the Demised Premises on -the Inclusion Date (hereinafter defined) upon
all of the terms and conditions of this ]Lease, as if the option Space had been
part of the Demised Premises on -the Commencement Date, except as specifically
set forth hereinafter. The Inclusion Date shall be 'the date on which the Option
Space is made available for Tenant's occupancy, which shall include a reasonable
period of time for the Option Space to be built out for Tenant's requivements.
(a) The Minimum Rent payable with respect to the Option Space shall
commence on the inclusion Date and shall be (i) the Market Rent (as def ined in
clause (b) below) which shall in no event be less than (ii) the product of (1)
the Adjusted Minimum Rent per square f oot. with respect to the Demised Premises
on the date Landlord's ofrer is made and (2) the rentable square foot area of
the Op-tion Space.
(b) "Market Rent" shall mean the fair market rent for the Option Space
as of- the Inclusion Date based upon the rencs generally in effect for
comparable office space in the area in which 'the Real Estate is located taking
in-to consideration any lease concessions that are customarily available in the
market at such t ime. Market: Rent (f or the purposes of determining the Minimum
Rent f or the Option Space only) shall be determined on the same basis as
Adjusted Minimum Rent is calculated in accordance with the terms of -this Lease.
(c) Landlord shall notify Tenant (IIIandlordIs Determination Notice")
of Landlard's determination of the Market Rent- on or before the Inclusion Date.
if Tenant disagrees with Landlordfs determination, Tenant shall notify Landlord
("Tenant's Notice of Disagreement") within fifteen (15) days after- receipt of
Landlord's Determination Notice. Time shall be of the essence with respect 'to
Tenantts Notice of Dlsagreement, and the failure of Tenant to give such notice
within the time period set forth above shall conclusively be deemed an
acceptance by Tenant- of the Market Rent as determined by Landlord and a waiver
by Tenant of any right to dispute such Market Rent-. if Tenant timely gives its
Tenant's Notice of Disagreement, then the Market Rent shall be determined as
follows: Landlord and Tenant shall, within 'thirty (30) days after the date on
which Tenant's Notice of Disagreement was given, each appoint an Appraiser
(he@e-inaftex- defined) for the purpose of determining the Market Rent. An
Appraiser shall mean a duly qualified impartial real estate appraiser having at
least ten (10)
26
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years experience in the area in which the Building is located. In the event
- - -that the -two (2) Appraisers so appointed fall to agree as to the Market- Rent
within a period of thirty (30) days after the appointment of the second
Appraiser, such two (2) Appraisers shall forthwith appoint a third Appraiser who
shall make a de-termination within thirty (30) days thereafter. If such two (2)
Appraisers so appointed fail to agree upon such third Appraiser within ten (10)
days following the last thirty (30) day period, such third Appraiser shall be
appointed by a presiding Judge of the superior Court of the State of New jersey
for the County in which the Building is located. Such two (2) Appraisers or
three (3) Appraisers, as the case may be, shall proceed with all reasonable
dispatch to determine -the Market Rent. The decision of such Appraisers shall be
final; such decision shall be in writing and a copy shall be delivered
simultaneously to 'Landlord and to Tenant. Tenant shall pay Landlord Adjusted
Minimum Rent on the Option Space at -the rate set forth in Section 73.1(a) (11)
hereof until such decision is so delivered. If -the Market- Rent as determined
above is in excess of actual rent paid, then Tenant-, upon demand, shall pay to
Landlord the dif f erence between the actual rent paid and the Market Rent from
the Inclusion Date. Landlord and Tenant shall each be responsible for and shall
pay the fee of the Appraiser appointed by them respectively, and Landlord and
Tenant shall share equally the f ee of the third Appraiser. Promptly upon
determination of the Market Rent, Tenant shall execute and deliver a Lease
amendment in a f or-m satisfactory to Landlord reflecting the inclusion of the
option Space within -the Demised Premises on the Inclusion Date.
73.2 Landlord shall make the foregoing offer in writing, and Tenant
shall have the right 'to exercise such option with respect to the Option Space
if Tenant shall not have breached any term or provision of the Lease and the
Tenant named on the first and last page of the Lease or an affiliate of Tenant
is in occupancy of the entire Demised Premises. Tenant may only exercise such
op-tion by written notice received by Landlord within ten (10) days af ter
Landlord makes such of f er to Tenant. Tenant shall accept the Option space in
its "as is" physical condition as of the Inclusion Date and agrees that Landlord
will not be required to do any work or perform any services therein. If Tenant
does not accept the offer made by Landlord pursuant to -the provisions of this
Article 73 with respect 'to -the opt-ion Space, Landlord shall be entitled to
lease such space in whole or in part, or in whole or in parts in conjunction
with any other space, to others at such rental and upon such terms and
conditions as Landlord, in its sole discretion may desire whether such rental
terms, provisions and conditions are the same as those offered to Tenant or more
or less favorable. Notwithstanding the foregoing, in the event all or any
portion of the Option Space is leased to a third party (the "Rejected Space") ,
Tenant- shall retain its right of first offer with respect to (i) the remaining
portion of the option space and (ii) any Rejected Space that becomes available
at a later time. Tenant agrees not to acquire the Option Space pursuant to 'this
Article 73 for the primary purpose of subletting or otherwise disposing of the
same or any part thereof to others.
73.3 If the option Space shall not be available for Tenant's occupancy
on the inclusion Date for any reason including the holding over of the prior
tenant, then Landlord and Tenant agree that the failure to have such Option
Space available for occupancy by Tenant shall in no way affect the validi-ty of
- - -this Lease ox- the inclusion of 'the Option Space within the Demised Premises
as of the Inclusion Date or the obligations of Landlord and Tenant hereunder,
nor shall the same be construed in any way to extend the term of this Lease.
Notwithstanding the foregoing, nothing herein shall obligate Tenant to pay rent
for the option Space until same is made available for Tenant's occupancy.
27
<PAGE>
IN WITNESS WHEREOF, Landlord has signed this Lease and this rider, and Tenant by
its proper corporate officers has signed this Lease and this Rider this @- day
of December, 1992.
LANDLORD:
WITNESSED BY: JARED ASSOCIATES, L.P.
By: Chubb Realty, Inc.,
Ge 1 Partner
By:
Robert T. Lapidus Roblbr-t R. Max-t+/-e
Assistant Secretary Vice President
AGENT FOR LANDLORD:
ATTESTED BY: BELTEMEAD MANAGEMENT CO., INC.
By:
Robert T. Lapidus Robert R. Martle
Assistant Secretary Vice President
TENANT:
ATTESTED BY: THE PRUDENTIAL INSURANCE COMPANY OF
AMERICA
By:
Nci O-: Ma@,Y s@zziz I C? I barbarcf
(.Please Print) PleqL e PrLnt)
Title: Secretary Title: 6reslgent
(Please Print) (Please Prlnt)
28
<PAGE>
FIRST AMENDMENT OF LEASE
FIRST AMENDMENT OF LEASE dated as of April 1, 1993 between JARED ASSOCIATES,
L.P., a New Jersey limited partnership, having an address c/o Bellemead
Management Co. , Inc. , 4 Becker Farm Road, Roseland, New Jersey 07068
(hereinafter called "Landlord") and THE PRUDENTIAL INSURANCE COMPANY OF AMERICA,
a New Jersey corporation having an address at Prudential Plaza, Newark, New
Jersey 07101 (hereinafter called "Tenant").
W I T N E S S E T H
WHEREAS:
A. Landlord and Tenant heretofore entered into a certain lease dated
Deoember 17, 1992 (said lease, as the same may be amended from time to time, is
hereinafter called the "Lease") with respect to premises on the second (2nd)
floor comprising 31,337 rentable square feet (the "Original Demised Premises")
of that certain office building ("Building") known as and located at 477
Martinsville Road, Basking Ridge, New Jersey;
B. Tenant is desirous of increasing the size of the Demised Premises by
the addition of some (i) 12,108 rentable square feet ("Additional Space All) on
the first (Ist) floor of the Building and some (ii) 5,876 rentable square feet
on 'the first (1st) floor (the "Ground Floor B Unit"), 30,599 rentable square
feet on the third (3rd) floor and 26,641 rentable square feet on the fourth
(4th) floor of the Building (collectively, "Additional Space B") for a total
Additional Space B of 63,116 rentable square feet, all as illustrated on
Schedule A attached hereto and made a part hereof. Additional Space A and
Additional Space B are hereinafter sometimes collectively referred to as the
"Additional Space"; and
C. The parties hereto desire to further modify the Lease in certain
respects.
NOW THEREFORE, in consideration of the premises and mutual covenants
hereinafter contained, the parties hereto modify said Lease as follows: 1. All
terms contained in this First Amendment of Lease that are defined in the Lease,
shall, for the purposes hereof, have the
<PAGE>
same meaning ascribed to them in the Lease-
2. Notwithstanding anything to 'the contrary contained in the-Lease, the date
set for
the expiration of the term thereof is hereby modified so that the Termination
Date for the Original Demlsed Premises and the Additional Space shall be ten
(10) years after -the Additional Space B Commencement Date, which based upon a
commencement date of November 1, 1993 is October 31, 2003. Landlord shall
deliver to Tenant a notice ("Commencement Date Notice") confirming, among other
things, the revised Termination Date. Tenant shall acknowledge receipt of the
Commencement Date Notice by signing a copy of same and returning it to Landlord
within five (5) days after Tenantfs receipt thereof.
3. The Demised Premises shall be expanded 'to incorporate Additional
Space A on or about July 12, 1993 (the "Estimated Additional space A
Commencement Date") . Notwithstanding the above, -the Additional Space A
commencement date (the."Additional Space A Commencement Date") shall be the
earlier of the date upon which:
A. Landlord has procured a temporary or permanent Certificate of
Occupancy, permitting occupancy of Additional Space A by the Tenant; and (ii)
the Landlord's architects shall have certified that Landlord has substantially
performed the work for Additional Space A (the "Additional Space A Work") .
Substantial completion shall be deemed to have occurred even though minor
details of work remain to be done, provided such details do not materially
interfere with the Tenant's use of Additional Space A, or
B. Tenant shall have taken possession of all or any part of Additional space A.
If Landlord is unable to obtain a permanent Certificate of
Occupancy for Additional space A as of the Additional Space A Commencement Date,
Landlord shall nevertheless be required to obtain a permanent Certificate of
occupancy at a later date and deliver same to Tenant as soon as it is available
from Bernard's Township.
Tenant shall have the right to submit a thirty (30) days
2
<PAGE>
"punch-list" of minor items in Additional Space A to be repaired by Landlord.
Landlord agrees to complete said "punch-list" items in an expeditious manner and
if possible, within thirty (30) days of receipt of Tenan-tfs list.
As of the Additional Space A Commencement Date, Exhibit A
(Rental Plan) to the Lease shall be modified and expanded to include the
attached Schedule B.
4. The Demised Premises shall be expanded to incorporate Additional
Space B as of November 1, 1993, provided Landlord completes the Additional Space
B Work (as hereinafter defined in Paragraph 9 hereof) within twenty three (23)
weeks from the date that Tenant has submitted the required drawings, layouts and
specifications for Additional Space B in sufficient detail to enable Landlord to
(i) prepare construction drawings and (ii) obtain a building permit for the
construction of Additional Space B (the "Additional Space B Commencement Date").
Any delay in the Additional Space B Commencement Date that is not a Tenant Delay
(as defined in Article 64.2 of the Lease) shall result in an extension of the
Additional Space B Commencement Date for a period equal to the time frame for
such delay. Furthermore, in the event the Additional Space B Commencement Date
occurs prior to November 1, 1993, Tenant shall be entitled to occupy Additional
Space B on a free rent basis prior to November 1, 1993. In addition to the
foregoing, if Additional Space B is not available for Tenant's occupancy within
ninety (90) days from November 1, 1993 as a result of Landlardfs delays, Tenant
shall receive one (1) day of free rent for Additional Space B f or each day of
delay to be credited to Tenant as of the Additional Space B Commencement Date.
As of the Additional Space B Commencement Date, Exhibit A
(Rental Plan) to -the Lease shall be modified and expanded to include the
attached Schedule C. Accordingly, for all times after the Additional Space B
Commencement Date, Exhibit A (Rental Plan) to the Lease shall consist of the
original Exhibit A, together with the attached Schedules B and C.
The Lease is hereby amended to provide that Tenant shall
3
<PAGE>
pay an annual minimum Rent as follows:
A. For the original Demised Premises (31,337 rentable square
feet), annual rent shall continue 'to be payable in accordance with page I of
the Lease; however, the lease months 61-120 described in the first column of the
rent schedule shall be modified to be 61Balance of Term.
B. For Additional Space A (12,108 rentable square feet) annual
rent shall be as follows:
Lease Months Rent olslf Annual Monthlv
1-12 $18.50 $223,998 $18,666.50
13-24 19.50 236,106 19,675.50
25-36 20.50 248,214 20,684.50
37-48 21.50 260,322 21,693.50
49-60 23.50 284,538 23,711.50
61-Balance of 24.50 296,646 24,720.50
Term
C. For Additional Space B (63,116 rentable square feet), annual
rent shall be as follows:
Lease Months Rgnt Dls4f- Annual- Monthly
1-12 $19.50 $1,230,762 $102,563.50
13-24 20.50 1,293,878 107,B23.17
25-36 21.50 1,356,994 113,082.83
37-48 22.50 1,420,110 118,342.50
49-60 24.50 1,546,342 128,861.83
61-120 25.50 1,609-,458 134,121.50
G.A. At all times after the Additional Space A Commencement Date,
Section 36.2 of 'the Lease shall be modified to provide that the original
Demised Premises shall contain 31,337 square feet and Additional Space A shall
contain 12,108 square feet, for a total Demised Premises of 43,445 square feet.
In addition, Tenant's Occupancy Percentage for the original Deynised Premises
shall be 13.59 percent and Tenant's Occupancy Percentage for Additional
Space A shall be 5.25 percent for a total Occupancy Percentage of
18-85 percent.
6B. At all times after 'the Additional Space B Commencement
Date, Section 36.2 OE the Lease shall be modified to provide that
the Original Deraised PreILlises shall contain 31,337 square feet,
Additional Space A shall contain 12,108 square feet and Additional
Space B shall contain 63,116 square feet for a total Demised
Premises of 106,561 square feet. in addition, Tenan-tls Occupancy
Percentage for the original Demised Premises shall be 13.59
4
<PAGE>
percent, Tenant's Occupancy Percentage for Additional Space A shal]L be 5.25
percent and Tenan't's Occupancy Percentage for Additional Space B shall be 27.38
percent for a total Occupancy Percentage of 46.23 percent.
7. The First operating Year and First Tax Year for the
Original Demised Premises and Additional Space A shall mean the
calendar year ending December 31, 1993. The First Operating Year
for Additional Space B shall mean the calendar year ending December 31, 1994;
the First Tax Year for Additional Space 8 shall mean the calendar year ending
December 31, 1994. Sections 36.1 (3) and (4) of the Lease shall be revised to
reflect the aforementioned modifications.
B.A. At all times after the Additional Space A Commencement Date,
Section 43.1 of the Lease shall be modified so that Tenantfs License for
Allotted Parking shall be for one hundred sixty one (161) cars, with twenty two
(22) Designated Spaces in the parking garage located beneath the Building (the
"Garage").
S.B. At all times after the Additional Space B Commencement Date,
Section 43.1 of the Lease shall be modified so that Tenant's License for
Allotted Parking shall be for three hundred sixty four (364) cars, with fifty
eight (58) Designated Spaces in the Garage. The Designated Spaces shall in no
way increase Tenantfs Allotted Parking described above. All Designated Spaces
shall be in a location in the Garage that is mutually agreeable to Landlord and
Tenant.
9. Tenant shall be entitled to a construction allowance for Additional
Space A in the amount of $302,700.00 (the "Additional Space A Maximum
Allowance") and a construction allowance for Additional Space B in the amount of
$1,893,480.00 (the "'Additional Space B Maximum Allowance'#). The Additional
Space A Work shall be subject to 'the outside Plan Date described in Articles 37
and 64 of the Lease; however, the Outside Plan Date shall not be applicable to
the Additional Space B work ("Additional Space B Work") . Notwithstanding the
foregoing, the Additional Space B Commencement Date shall be subject to the
conditions enumerated in Paragraph 4
5
<PAGE>
hereof. The Maximum Allowance defined in Section 64.1 of the Lease shall be
modif ied to include 'the Additional space A Maximum Allowance and 'the
Additional Space B Maximum Allowance described above. Except as modified herein,
all of the terms and conditions of Article 64 of the Lease, including, but not
limited to Project General Conditions, Prof it and Overhead, shall apply with
equal force and effect to the Additional Space A Work and the Additional Space B
Work.
10. As additional consideration for Tenant entering into this First
Amendment of Lease, Landlord hereby grants to Tenant a moving allowance credit
for Additional Space A in the amount of $60,540.00 (the "'moving Allowance'$).
Landlord-shall pay the Moving Allowance to Tenant on the Additional Space
Adjustment Date (as hereinafter defined).
13.. As additional consideration f or Tenant entering into this First
Amendment of Lease, Landlord shall pay-to Tenant the sum of $57,900 on the
Additional Space Adjustment Date, provided Tenant is not in def ault under any
of the provisions of the Lease at such me.
12. An of a date not later than thirty (30) days from the Additional
Space A Commencement Date (the '$Additional Space A Adjustment Date"), Landlord
and Tenant shall settle the total sums owing to the parties from one another
with respect to Additional space A, including any work letter items for
Additional Space A less than or exceeding the Additional Space A Maximum
Allowance (described in Paragraph 9 above), the Moving Allowance (described in
Paragraph 10 above) or 'the additional lease inducement described in Paragraph
11 above. As of a date not- later than thirty (30) days from the Additional
Space B Commencement Date (the "Additional Space B Adjustment Date$'), Landlord
and Tenant shall settle the total sums owing to the parties from one another
with respect to Additional space B, including any work letter items for
Additional Space B ]Less than or exceeding the Additional Space B Maximum
Allowance (described in Paragraph 9 above). Tenant- shall have the right upon
notice to Landlord to redistribute any of the
6
<PAGE>
af oremen'tioned allowances whether or not used for the intended purposes stated
herein provided that the 'total sum does not exceed 'those amounts described
herein. As of th- Additional Space A Adjustment Date and the Additional Space B
Adjustment Date, the monies described herein shall be paid by 'the appropriate
party -to 'the other.
13. Subsection 48.4 (a) of the Lease is hereby deleted in its
entirety and replaced with the following:
"(a) no sublease shall violate any law ox- result in an occupancy of
the Demised Premises of more than (i) four (4) occupants on the first
(ist) floor of the Building, including the Tenant hereunder, (ii)
five (5) occupants on 'the second (2nd) floor of the Building,
including the Tenant hereunder, (ili) five (5) occupants on -the
third (3rd) floor of the Building, including -the Tenant hereunder,
and (iv) five (5) occupants on the fourth (4'th) floor of the
Building, including -the Tenant hereunder, 01
14. Section 64.4 of the Lease is hereby deleted in
entirety and replace with the following:
"64.4 Provided Tenant is not in default hereunder as of November I,,
1998, Landlord agrees -to repaint and Yecarpet 'the Denised Premises
(inclusive of Additional Space A and Additional space B) with
building standard materials; provided that Landlordo's cost for such
repainting and reca@peting shall not exceed $454,972.50, which
equates 'to five dollars ($5.00) per usable dtquare foot. In the
,event Tenant desires an upgrade of any wall or floor covering,
Landlord shall grant to Tenant an allowance equal to 'the building
standard materials (up to $454,972.50, which equates to $5.00 per
usable square foot) and any excess will be paid by Tenant to
Landlord, on demand. For the purposes hereof, building standard
carpet shall be nylon broadloom carpet with a face weight of twenty
six (26) ounces.11
15. The Renewal Option described in Article 65 of the Lease shall be
expanded to include the entire Demised Premises consisting Of 106,559 rentable
square feet.
16. The heading to Article 73 of the Lease and the first full paragraph
of Section 73.1 of the Lease are hereby deleted in their entirety and replaced
with the following:
1173. RIGHT OF FIRST OFFER
73.1 There currently exists four (4) units of space in the Building
consisting of 26,683 square feet on the first (let) floor, 31,337
square feet an the second (2nd) floor, 30,599 square feet on the
third (3rd) floor and 26,641 square feet on 'the fourth (4th) floor
(Collectively, -the 140ption Spacell), which option Space is more
particularly identified on Schedule D attached hereto and made a part
hereof. After the Option Space has been initially leased, Landlord
agrees that if all or any
7
<PAGE>
its portion of the option Space shall 'thereaf ter become available
during the term of this Lease, then in any such case, subject -to the
rights of Federal Insurance Company, before offering the available option
Space to any other party, Landlord will off ez to Tenant- the righ-t 'to
include the Option Space within the Demised Premises on the inclusion Date
(hereinafter defined) upon all of the terms and conditions of this Lease,
as if the option Space had been part of 'the Dem-ised Premises on the
Commencement Date, except as specifically set forth hereinafter. The
Inclusion Date shall be the date on which the option Space is made
available for Tenant's occupancy, which shall include a reasonable period
of time for the option Space to be built out for Tenant0s requirements."
17. Tenant and Landlord each covenants, represents and warrants to the
other that no real estate broker is responsible for bringing about or
negotiating this First- Amendment of Lease and Tenant- and Landlord have not
dealt with any broker In connection with the conallimmation of this First
Amendzmen-t of Lease. In accordance with the foregoing representation, Tenant
and Landlord each covenants and agrees to pay, defend, hold harmless and
indemnify the o-ther and its directors, officers, partners, and 'their
affiliates and/or subsidiaries from and against any and all cost, expenses,
including attorney's fees (In settlement, at trial or on appeal), court costs
and disbursements or liability for any commission or other compensation claimed
by any broker or agent acting through or an behalf of Tenant or Landlord, as
applicable with respect- to this First Amendment of Lease.
la. Except as modified by this First Amendment of Lease, the Lease and
all covenants, agreements, terms and conditions -thereof shall remain in full
force and effect and are hereby in all respects -ratified and confirmed. The
terms and provisions of the Lease, as modified hereby, shall govern the Tonant's
occupancy and use of the Demised Premises as increased by -the Additional Space.
19. Tenant: represents that the undersigned officer of Tenant has been duly
authorized on behalf of Tenant to enter into this First Amendment of Lease in
accordance with 'the terms, covenants and conditions set forth herein, and, upon
Lancilord's request, Tenant shall deliver appropriate evidence of the accuracy
of the foregoing representation. Landlord represents 'that the undersigned
Officer of landlord has been duly authorized on behalf of Landlord
8
<PAGE>
to enter- into -this First Amendment of Lease in accordance with the terms,
covenants and conditions set forth herein, and, upon Tanant's request,
Landlord shall deliver appropriate evidence of the accuracy of the foregoing
representation.
20. The parties hereto acknowledge and agree that the rentable square
footage attributable to Additional Space A and the Ground Floor B Unit are
estimates and may change after Tenant's plans for -these units are completed.
Although the square footage allocation may be modified, the total rentable
square feet for these units (17,984 square feet) shall not change.
Accordingly, the par-ties agree to modify the Lease, if necessary, to
accommodate the aforementioned scenario.
IN WITNESS WHEREOF, -the parties hereto have executed this First
Amendment of Lease as of the day and year f irst above written.
Signed, sealed and deli LANDLORD:
IN THE @L; '.E N C, --'-LTARED ASSOCIATES, L. P.
ATTESTE By: Chubb Realty, Inc.,
General Partner
BY:
)Rob rt 6r@
16 @ Robert Martie
Assistant S cr@ary Vice President
TENANT:
THE PRUDENTIAL INS CE
COMPANY OF A14BRICA
By,.
Name: Glenda Fastez Name:E.MiChald Caulfield
(Please Print) (Please Print)
Director, Office Planning
Title: & Leasi@ _ Title: President, Ordinary Agencie
(Please Print) ipleass Print)
9
<PAGE>
SECOND AMENDMENT OF LEASE
SECOND AMENDMENT OF LEASE dated as of July 1993 between JARED
ASSOCIATES, L.P., a New Jersey limited partnership, having an address c/o
Bellemead Management: Ca., Ina., 4 Becker Farm Road, Roseland, New Jersey 07068
(hereinafter called "Landlord'$) and THE PRUDENTIAL INSURANCE C014PANY OF
AMERICA, a New Jersey corporation having an address at Prudential Plaza, Newark,
Now Jersey 07101 (hersinaf te3c called "'Tenant") .
W I T N E S S E T H
WHEREAS:
A. Landlord and Tenant heretofore entered into a certain lease dated
December 17, 1992, as amended pursuant to a certain first amendment of lease
(the "First Amendment") dated April 1, 1993 (said lease, as the same may be
amended from time to time, is hereinafter called the "Lease") with respect to
premises on the f irst (1st) , second (2nd) , third (3rd) and fourth (4th) f
loors comprising a total of 106,561 rentable square feet (the "Demised
Premises") of that certain office building ("Building") known as and located at
477 Martinsville Road, Basking Ridge, New Jersey;
B. Tenant is desirous or increasing the size of the Demised Premises by
the addition of some (i) 3,402 rentable square feet on the first (ist) floor of
the Building and some (ii) 1,959 rentable square feet on the first (1st) floor
of the Building (collectively, the "Additional Space"') for a total Additional
Space of 5,361 rentable square feet, all as illustrated on Schedule A attached
hereto and made a part hereof; and
C. The parties hereto desire to further modify the Lease in certain respects.
NOW THEREFORE, in consideration of the premises and mutual covenants
herinafter contained, the parties hereto modify said Lease as follows:
1. All terms contained in this Second Amendment of Lease that are
defined in the Lease or the First Amendment, shall, for the purposes hereof,
have the same meaning ascribed to them in the Lease or the First Amendment, as
applicable.
<PAGE>
2 . The Demised Premises shall be expanded to incorporate the
Additional Space as of November 1, 1993, provided Landlord completes the work
for the Additional Space (the "Additional Space Work) within twenty-three (23)
weeks from the date that: Tenant has submitted the required drawings, layouts
and specifications for the Additional Space in sufficient detail to enable
Landlord to (i) prepare construction drawings and (ii) obtain a building permit
for the construction of the Additional Space (the "Additional Space Commencement
Date"). Any delay in the Additional space Commencement Date that is not a Tenant
Delay (as defined in Article 64.2 of the Lease) shall result in an extension of
the Additional Space Commencement Date for a period equal to the time frame for
such delay. Furthermore, in the event the Additional Space Commencement Date
occurs prior to November, 1, 1993, Tenant shall be entitled to occupy the
Additional Space on a free rent basis prior to November 1, 1993. In addition to
the foregoing, if the Additional space is not available for Tenants occupancy
within ninety (90) days from November 1, 1993 as a result of Landlord's delays,
Tenant shall receive one (1) day of free rent for the Additional Space for each
day of delay to be credited to Tenant as at the Additional Space Commencement
Date.
3. If Landlord is unable -to obtain a permanent Certificate of
occupancy for the Additional Space as of the Additional Space Commencement Date,
Landlord shall nevertheless be required to obtain a permanent Certificate of
Occupancy at a later date and deliver same to Tenant as soon as it is available
from Bernards Township.
Tenant shall have the right to submit a thirty (30) days
"Punch-list" of minor items in the Additional Space to be repaired by Landlord.
Landlord agrees to complete said "punch-list" items in an expeditious-manner and
if possible, within thirty (30) days of receipt of Tenan't's list.
As of the Additional space Commencement Date, Exhibit A
(Rental Plan) to the Lease shall be Modified and expanded to include the
attached Schedule A.
2
<PAGE>
4 . On or about the Additional Space Commencement Landlord shall
deliver to Tenant a notice ("Commencement Notice") confirming, among other
things, the revised square feet of the Demised Premises. Tenant shall
acknowledge receipt of the Commencement Date Notice by signing a copy of same
and returning it to Landlord within five (5) days after Tenant's receipt
thereof.
5. The Lease is hereby amended to provide that Tenant shall pay an
annual Minimum Rent: as follows:
A. For the 106,561 rentable square feet portion of the Demised
Premises described in the original Lease and the First Amendment, annual rent
shall continue to be payable in accordance with the terms thereof.
B. For the Additional Space (5,361 rentable square feet), annual
rent shall be as follows:
Lease Months Rent p/s/f Annual Monthlv
1-12 $19.50 $104,539.50 $8,711.63
13-24 20.50 109,900.50 9,158.38
25-36 21.50 115,261.50 9,605.13
37-48 22.50 120,622.50 10,051.88
49-60 24.50 131,344.50 10,945.38
61-Balance of 25.50 136,705.50 11,392.13
Term
6. At all times after the Additional Space Commencement Date, Section
36.2 of the Lease shall be modified to provide that the Demised Premises shall
contain an additional 5,361 square feet representing the Additional Space. In
addition, Tenant's Occupancy Percentage for the Additional Space shall be 2.33
percent. At all times after the Additional Space A Commencement Date (as defined
in the First Amendment), the Additional Space B Commencement Date (as defined in
the First Amendment) and the Additional Space Commencement Date (defined
herein), the total Demised Premises shall consist of 111,922 square feet and
Tenant's total Occupancy Percentage for the entire Demised Premises shall be
48.55 percent.
7. The First operating Year and First Tax Year for the Additional Space
shall mean the calendar year ending December 31, 1994. Sections 36.1 (3) and (4)
of the Lease shall be revised to reflect the aforementioned modifications
3
<PAGE>
8 . At all times after the Additional Space Commencement Date, Section
43.1 of the Lease shall be modified so that Tenant's License for Allotted
Parking shall be increased by twenty-two (22) spaces so that for all times after
the Additional Space Conmencement Date, Section 43.1 of the Lease shall be
modified so that Tenant's License for Allotted Parking shall be for a revised
total of three hundred eighty-six (386) cars, with fifty-eight (58) Designated
Spaces in the Garage.
9. Tenant shall be entitled to a construction allowance for the
Additional Space in the amount of $134,025.00 (the "Additional Space Maximum
Allowance"). The Additional Space Work shall not be subject to the Outside Plan
Date described in Articles 37 and 64 of the Lease; however, the Additional Space
Commencement Date shall be subject to the conditions enumerated in Paragraph 2
hereof. The Maximum Allowance defined in Section 64.1 of the Lease shall be
modified to include the Additional Space Maximum Allowance described above.
Except as modified herein, all of the terms and conditions of Article 64 of the
Lease, including, but not limited to Project General Conditions, Profit and
Overhead, shall apply with equal force and effect to the Additional Space Work.
10. As additional consideration for Tenant entering into this Second
Amendment of Lease, Landlord hereby grants to Tenant a moving allowance credit
for the Additional Space in the amount of $26,805.00 (the "Moving Allowance").
Landlord shall pay the Moving Allowance to Tenant an the Additional Space
Adjustment Date (as hereinafter defined).
11. As additional consideration for Tenant entering into this Second
Amendment of Lease, Landlord shall pay to Tenant the sum of $25,000.00 on the
Additional Space Adjustment Date, provided Tenant is not in def ault under
any of the provisions of the Lease at such time.
12. As of a date not later than thirty (30) days from theAdditional
space Commencement Date (the "Additional Space Adjustment Date"), Landlord and
Tenant shall settle the total sums owing to the parties from one another with
respect to the
4
<PAGE>
additional space, including any work letter items for additional
Space less than or exceeding the Additional Space Maximum Allowance (described
in Paragraph 8 above), the Moving Allowance (described in Paragraph 9 above) or
the additional lease inducement described in Paragraph 10 above. As of the
Additional Space Adjustment Date, ,the monies described herein shall be paid by
the appropriate party to the other.
13. Section 64.4 of the Lease is hereby deleted in its entirety and
replaced with the following: "64.4 Provided Tenant is not in default
hereunder as of November 1, 1998, Landlord agrees to repaint and
recarpet the entire Demlsed Premises (inclusive of the Additional
Space) with building standard materials provided that Landlord's cost
for such repainting and recarpeting shall not exceed $477,862.50, which
equates to five dollars ($5.00) per usable square foot. In the event
Tenant desires an upgrade of any wall or floor covering, Landlord shall
grant to Tenant an allowance equal to the building standard materials
(up to $477,862.50, which equates to $5.00 per usable square foot) and
any excess will be paid by Tenant to Landlord, on demand. For the
purposes hereof, building standard carpet shall be nylon broadloom
carpet with a face weight of twenty six (26) ounces."
14. The Renewal Option described in Article 65 of the Lease shall be
expanded to include the entire Demised Premises consisting of 111,922 rentable
square feet.
15. Tenant and Landlord each covenants, represents and warrants to the
other that no real estate broker is responsible for bringing about or
negotiating this second Amendment of Lease and Tenant and Landlord have not
dealt with any broker in connection with the consummation of this Second
Amendment of Lease. In accordance with the foregoing representation, Tenant and
Landlord each covenants and agrees to pay, defend, hold harmless and indemnify
the other and its directors, officers, partners, and their affiliates and/or
subsidiaries from and against any and all cost, expenses, including attorney's
fees (in settlement, at trial or on appeal), court costs and disbursements or
liability for any commission or other compensation claimed by any broker or
agent acting through or on behalf of Tenant or Landlord, as applicable with
respect to this Second Amendment of Lease.
16. Except as modified by this Second Amendment of Lease, the
5
<PAGE>
Lease and all covenants, agreements terms and conditions thereof shall remain in
full force and affect and are hereby in all respects ratified and confirmed. The
terms and provisions of the Lease, asmodified hereby, shall govern the Tenant's
ccupancy and use of the Demised Premises by the Additional Space.
17. Tenant represents that the undersigned officer of Tenant has been
duly authorized an behalf of Tenant to enter into this Second Amendment of Lease
in accordance with the terms, covenants and conditions set forth herein,, and,
upon Landlord's request, Tenant shall deliver appropriate evidence of the
accuracy of the foregoing representation. Landlord represents that the
undersigned officer of Landlord has been duly authorized on behalf of Landlord
to enter into this Second Amendment of Lease in accordance with the terms,
covenants and conditions set forth herein, and, upon Tenant's request, Landlord
shall deliver appropriate evidence of the accuracy of the foregoing
representation.
IN WITNESS WHEREOF, the parties hereto have executed this Second
Amendment of Lease as of the day and year first above written.
Signed, sealed and delivered LANDLORD:
IN THE PRESENCE OF OR JARED ASSOCIATES, L.P.
ATTESTED BY By: Chubb Realty, Inc.,
General Partner
_________________________ By: _______________________________
Robert T. Lapidus Robert Martie
Assistant: Secretary Vice President
TENANT:
THE PRUDENTIAL INSURANCE COMPANY
OF AMERICA
_________________________ By: _______________________________
Regina A. Sherman E. Michael Caulfield
Prudential Preferred Financial President
Services Prudential Preferred Financial Services
6
<PAGE>
BELLEMEAD MANAGEMENT CO., INC.
4 Becker Farm Road
Roseland, New Jersey 07068
Phone: (201) 7@1110
March 10, 1994 Ed StiCkradt
CERTIPNM MAIL
RECEIPT REQUESTED
Mr. Edward stickradt
7ne Prudential insurance Company
477 Martinsville Road
Liberty Corner, NJ
Re: Conmencoment Date Notice Second Amendment to Lease 477 Martinsville Roa
A
5Lere-ey I- 112,040 total scruare feet
Dear Mr. Stickradt:
In accordance with the terms of the second Amendment of Lease dated July 8, 1993
and by mutual consent, the Lease e@sion period commenced an follows:
3,520 square feet January 3, 1994 1,959 @are feet January 14, 1994
The termination date for each of the above-referenced premises shall be Nove@r
30, 2003, which is caterminous with the balance of the leaned premises. Landlord
hereby demands possession of the Demised Premises as of November 30, 2003,
subject to Tenant's exercise of its renewal rights contained in Article 65 of
the Lease.
Please advise your Accounts Payable Department that the Minimum
Annual Rent will be increased as follows%
99- ET, PERIP-D RENT Y
SENT
3,520 01/03/94-01/31/94 $68,640.00 $ 5,453.59
1 9 01/14/94-01/31/94 $38,200.50 $ @)., 083-86
io6: V61 01/01/94-01/31/94 $2,034,494.52 $16.9,541..21
.112, 040 02/01/94-06/30/94 $2, 141,-335.02 $178,44 -
07/01/94-07/31/94 $2,172,672.06 $181, @6. 00-
08/01/94-11/30/94 $2,184,780.06 $182,065.00
12/01/94-01/31/95 $2,247,896.10 $187,324.68
02/01/95-06/30/95 $2,253,375.10 $187,781.26
07/01/95-07/31/9S $2,284,712.02 $190,392.67
08/01/95-11/30/95 $2,296,820.02 $191,401.67
12/01/95-01/31/96 $2,359,935.94 $196,661.33
02101196-06130196 $2,365,414.94 $197,117.91
<PAGE>
The Prudential Insurance Company
March io, i994
Page - 2 -
07/01/96-07/31/96 $2,396,751.98 $199,729.33
OS/01/96-12/30/96 $2,408,859.98 $200,738.33
12/01/96-01/31/97 $2,471,976.02 $205,998.00
02/01/97-06/30/97 $2,477,4SB.02 $206,454.59
07/01/97-07/31/97 $2,540,128.98 $211,677.52
00/01/97-11/30/97 $2,564,344.98 $213',695.42
12/01/97-01/31/98 $2,690,576.94 $224,214.95
02/01/98-06/30/98 $2,701,534.94 $225,127.91
07/01/98-07/31/98 $2,732,871.98 $227,739.33
08/01/98-11/30/98 $2,744,979.98 $228,748.33
12/01/98-01/31/99 $2,808,096-02 $234,008.00
02/02/99-11/30/2003 $2,813,575.02 $234,464.5P
Except for the terms set f orth in the Second Amendment of Lease, all other tema
and conditions of the Lease will remain in full force and effect.
if you are in agreement with the above, please sign and return co me the
enclosed copy of this letter @hin-five (5) da of your receipt. The original
should be attached-to and made part of the Lease.
Very truly yours,
BE CO., INC.
Aa X@agi
Ball
Assistant
AGREED TO AND ACCEPTED: @-PRUD
F,Vrl
DATE: BY: EA
<PAGE>
EXHIBIT C
CONSENT TO SUBLEASE
New Valley Corporation, as successor in interest to Jared Associates, L. P.
('Landlord), as Landlord under that lease dated December 17, 1992 (the 'Prime
Lease") by and between Landlord and The Prudential Insurance Company of America
("Prudential' or 'Tenanf'), hereby grants and consents to the Sublease dated
December 3,1996 made by and betweeen Tenant and Everest Reinsurance Company
("Everest' or "Subiessee') as Sublessee, a copy of which is attached hereto (the
"Sublease"), covering certain premises (the "Subleased Premises") as more
particularly described in the Sublease, in the building kown as Westgate
Corporate Center at 477 Martinsville Road, Basking Ridge, New Jersey.
The capitalized terms used herein and not otherwise defined shall have the
meanings ascribed to them in the Prime Lease. This Consent to Sublease and the
acknowledgment and acceptance of the terms hereof may be executed in
counterparts, each of which shall be considered an original but constituting one
and the same document.
As conditions to this Consent, it is understood and agreed as follows:
I . Sublessee's rights in the event of Tenant default Landlord shall:
(a) Concurrently with the giving to Tenant of any notice of Tenant's
default pursuant to the provisions of the Prime Lease, give a duplicate of any
such default notice by certified or registered mail, return receipt requested,
to the Sublessee.
(b) Permft the Sublessee, at its sole option and without any obligation
on its part so to do, to cure or remedy or cause to cure or remedy any such
Tenant's default within the time prescribed therefor in the Prime Lease, but in
no event shall Sublessee be given less than thirty (30) days' notice and an
opportunity to cure within such (30) day period. Landlord hereby agrees, in
advance, that the curing or remedying thereof by the Sublessee within such time
shall be deemed a curing or remedy thereof by Tenant. Landlord will accept
performance by Sublessee of any covenant, obligation or agreement on Tenant's
part to be performed thereunder with the same force and effect as though
performed by Tenant.
(c) Notwithstanding any provision in Article 48 of the Prime Lease or
Articles 20 and 23(c) of the Sublease to the contrary, in the event Landlord
shall terminate the Prime Lease with Tenant for any reason provided for under
the terms of the Prime Lease or as provided by law, then the Sublessee shall
have the option, to be exercised within fortyfive (45) days after receipt of
notice to it from Landlord of such termination, for itself or its
<PAGE>
terms and conditions, including rentals and renewals, as the Prime Lease, the
commencement date of such new lease to be the termination date of the Prime
Lease, subject only to the same conditions of title as the Prime Lease is
subject to on the date of the execution thereof and any liens or encumbrances or
other matters caused or created by Tenant, provided that:
(1) Sublessee shall make written request upon Landlord for such
new lease within ten (IO) days after service upon it of a copy
of the notice of terminabon;
(2) Sublessee shall agree to cure with reasonable diligence all
non-monetary defaults remaining uncured under the Prime Lease
as of the date of execution and delivery of the new lease;
(3) The tenant under such new lease shall have the same right,
title and interest in and to the Building as Tenant had
therein and thereto under the Prime Lease.
2. Landlord Approvals
(a) Sublessee may operate a reception/secudty desk in the lobby of the
Building, at no cost to Landlord or Tenant.
(b) Sublessee shall have the right to install security cameras and equipment in
and around the Subleased Premises and, subject to Landlord's approval, around
common areas of the Building, which cameras and equipment shall remain the
property of Sublessee.
(c) The signage provisions of Article 72 in the Prime Lease shall apply to
Sublessee. In addition, Sublessee shall be entitled to install, at its sole
cost,
(1) exterior signage, not attached to the Building, containing its name
and/or corporate logo, subject to the reasonable approval of Landlord. With
respect to any signage for which governmental approval is required, Landlord
shall cooperate with Sublessee in seeking such approvals.
(2) appropriate signage containing its name and corporate logo in the
Building lobby, on the walls of elevator lobbies and on entrance doors to all
space under sublease by Sublessee, subject to Landlord's reasonable approval of
same.
2
<PAGE>
3. Specific Provisions of Prime Lease and Sublease
This Consent to Sublease does not constitute the assumption by Landlord of any
of the provisions of the Sublease document or agreement thereto or therewith;
nor shall the same be construed to amend the Prime Lease in any respect, any
purported modifications being solely for the purpose of setting forth the rights
and obligations as between Tenant and Sublessee, but not binding Landlord.
4. Tonant's Continuing Liability
Tenant shall be liable to Landlord for any default under the Prime Lease,
whether such default is caused by Tenant or Sublessee, but the foregoing shall
not be deemed to restrict or diminish any right which Landlord may have against
Sublessee pursuant to the Prime Lease , in law or in equity for violation of the
Prime Lease or otherwise, including, without limitation, the right to enjoin or
otherwise restrain any violations of the Prime Lease by Sublessee.
S. Acceptance by Tenant and Sublessee
Tenant and Sublessee understand and acknowledge that Landlord has agreed to
execute this Consent to Sublease based upon Tenant's and Sublessee's
acknowledgment and acceptance of the terms and conditions hereof.
6. Subordination
Subject to the terms of this Consent, the Sublease is, in all respects, subject
and subordinate to the Prime Lease, as the same may be amended. Furthermore, in
the case of any conflict between the provisions of this Consent to Sublease or
the Prime Lease and the provisions of the Sublease, the provisions of this
Consent to Sublease or the Prime Lease, as the case may be, shall prevail
unaffected by the Sublease.
7. Additional Charges
Notwithstanding anything to the contrary herein, Tenant acknowledges and agrees
that Tenant will promptly pay to Landlord throughout the Term of the Prime Lease
any Minimum Rent or Adjusted Minimum Rent owed to Landlord under the Prime
Lease, and otherwise comply with the provisions of the Prime Lease which may
apply to the Subleased Premises.
8. Services
Tenant hereby agrees that Landlord may furnish to the Subleased Premises
services requested by Sublessee other than or in addition to those to be
provided under the
3
<PAGE>
Prime Lease, and bill the Sublessee directly for such services without notice to
Tenant. Sublessee hereby agrees to pay Landlord all amounts which may become due
for such services on the due dates.
S. Notices
Landlord shall provide copies of all notices regarding the Premises to both
Tenant and Sublessee, to:
Sublessor:
The Prudential Insurance Company of America
Two Gateway Center - 17th Floor
Newark, New Jersey 07102
Attention: Corporate Real Estate
With a copy to:
Enterprise Legal Services
The Prudential Insurance Company of America
Two Gateway Center - 17th Floor
Newark, New Jersey 07102
Attention: Michael J. Hughes Assistant General Counsel
For the Sublessee:
to the Subleased Premises
Attention: Robert P. Jacobson
Senior Vice President and Chief Financial Officer
Notices to Landlord shall be sent to:
4
<PAGE>
10. Reservation of Rights
This Consent to Sublease shall be deemed limited solely to the Sublease, and
Landlord reserves the right to consent or to withhold consent and all other
rights under the Prime Lease with respect to any other matters including,
without limitation, any proposed alterations and with respect to any further or
additional subleases, assignments or transfers of the Prime Lease or any
interest therein or thereto including, without limitation, a sublease or any
assignment of this Sublease. Landlord shall not consent to any further
modification of the Prime Lease without the prior written consent of Everest.
Executed as of , 1996.
NEW VALLEY CORPORATION THE PRUDENTIAL INSURANCE
Landlord: COMPANY OF AMERICA
Tenant:
By: By:
its duly authorized agent
Its:
EVEREST REINSURANCE COMPANY Sublessee:
By:
Its:
5
<PAGE>
EXHIBIT D
EARLY ACCESS AND CONSTRUCTION ACTIVITIES
This Exhibit sets out the permitted access to the Subleased Premises by the
Sublessee and its contractors, together with the activities permitted as of the
specified dates, the required condition of the premises and the cooperation
required of the Sublessor. As used herein, the term "freight elevatoe' refers to
the elevator within the Subleased Premises and "atrium elevators" refers to the
two elevators which can be used to access the Subleased Premises from the atrium
of the Building.
Commencing January 6,1997-.
Access
- access to all of the Third Floor
- access to the portion of the First Floor behind the mail room and to
the left of marketing lobby (as marked on the attached floor plan)
Activities
-movement of contractors' employees and equipment -disassembly of
furniture movement of furniture to and in elevator
Condition/Cooperation
-areas should be broom clean, with all drawers and files empty; phones,
computers, copiers and any furniture owned by Sublesssor removed -one
internal elevator should be padded and available exclusively to
Sublessee and its contractors
[Except as noted herein, the internal elevator will remain
padded and available for use by Sublessee and its contractors
from January 6 through January 31, 1997]
-basement storage room should be empty and available for Sublessee to
use for storage -seminar room on First Floor should be empty and
available for Sublessee to use for storage -Sublessor will not
interrupt access to the designated space -Sublessor will not interrupt
or complain about the work on the basis of noise or inconvenience
<PAGE>
January 9, 1997:
Activities (after 4:30 p.m.)
-movement of contractors' employees and equipment (an agreed-upon path
shall be established and used for the uninterrupted access to the
designated areas) -construction of demising wall separating new
construction from the remainder of the First Floor
Condition/Cooperaticn
-Sublessor will not interrupt access to the designated space -Sublessor
will not interrupt or complain about the work on the basis of noise or
inconvenience
January 10, 1997:
Activities
-movement of contractors' employees and equipment -disassembly of
furniture
-Sublessor movement of people and contents out of Subleased Premises
[During the time required for this move, Sublessor shall
have designated access to the freight elevator and one of
the atrium elevators]
Condition/Cooperation
-Sublessor will not interrupt access to the designated space -Sublessor
will not interrupt or complain about the work on the basis of noise or
inconvenience
Commencing January 13,1997:
Activities
-full demolition on the Third Floor -full demolition, if necessary, on
the first phase on the First Floor -movement of materials in the
freight elevator
Condition/Cooperation
-the freight elevator padded and available for movement of materials
2
<PAGE>
-1 2 contiguous garage spaces adjacent to the Bellemead work room
available for materials storage -Sublessor will not interrupt access to
the designated space -Sublessor will not interrupt or complain about
the work on the basis of noise or inconvenience
January 24, 1997:
Access
-access by electricians in the evening to remainder of First Floor and
all of Second and Fourth Floors
Activities
-movement of materials
- - -disconnect all workstations requiring disassembly
Condition/Cooperation
-all employees of Sublessor out of Subleased Premises -deactivate all
card access to Subleased premises by employees of Sublessor, Chubb and
Fedders -Sublessor will not interrupt access to the designated space
-Sublessor will not interrupt or complain about the work on the basis
of noise or inconvenience -Sublessor shall require dedicated access to
freight elevator and one atrium elevator for duration of move
Commencing January 25,1997:
Activities
-furniture installer will be on site
Condition/Cooperation
-all floors broom swept, files cleared out, drawers emptied, phones out,
computers out
As of January 27, 1997:
3
<PAGE>
Condition/Cooperation
-all remaining copiers, faxes, miscellaneous equipment belonging to
Sublessor must be out of the Subleased Premises by 4:30 p.m.
-Sublessor's PBX phone equipment must be out
It is agreed that Sublessor may not stop work by the Sublessee or its
contractors on the grounds of noise or inconvenience. The only bases upon which
Sublessor can force a suspension of work by Sublessee or its contractors are (1)
that activities other than those specified above are being conducted, (2) that
the activities specified above are being conducted in a location or on a date
other than as specified above or (3) if the activities cause a manifest safety
hazard. If the schedule of dates and activities set out above changes, Sublessee
shall give Sublessor reasonable advance notice of such changes and will provide
to Sublessor a revised schedule.
4
<PAGE>
<TABLE>
<CAPTION>
EVEREST REINSURANCE HOLDINGS, INC.
EXHIBIT 11.1
COMPUTATION OF EARNINGS PER SHARE
TREASURY STOCK METHOD
December 31, 1996 (Dollars in thousands)
Primary Fully Diluted
Earnings Earnings
Per Share Per Share
----------- -------------
<S> <C> <C>
Net income $ 112,027
Weighted average common shares outstanding 50,566,566
Earnings per share based on weighted average
of common shares $ 2.22
===========
Dilutive effect of options outstanding 143,855 161,436
Dilutive effect of options exercised 167 175
Dilutive effect of options cancelled 247 254
Average number of common shares outstanding 50,566,566 50,566,566
Average number of common and common
equivalent shares outstanding 50,710,835 50,728,431
Net income $ 112,027 $ 112,027
Earnings per share $ 2.21 $ 2.21
=========== ===========
</TABLE>
<PAGE>
EVEREST REINSURANCE HOLDINGS, INC
EXHIBIT 21.1
SUBSIDIARIES OF HOLDINGS
The following is a list of Everest Reinsurance Holdings, Inc. subsidiaries:
Everest Reinsurance Company,
a Delaware corporation.
Everest Reinsurance Ltd.,
a U.K. corporation.
Everest National Insurance Company,
an Arizona corporation.
Everest Insurance Company of Canada,
a Canadian corporation.
<PAGE>
EVEREST REINSURANCE HOLDINGS, INC.
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement , Nos.
333-1972 and 333-05771 of Everest Reinsurance Holdings, Inc. (formerly
Prudential Reinsurance Holdings, Inc.) on Forms S-8 of our report dated February
23, 1996 appearing in the Annual Report on Form 10-K of Everest Reinsurance
Holdings, Inc. for the year ended December 31, 1996.
We also consent to the reference to us under the heading "Selected Consolidated
Financial Data" in such Annual Report on Form 10-K.
DELOITTE & TOUCHE LLP
Parsippany, New Jersey
March 18, 1997
<PAGE>
EVEREST REINSURANCE HOLDINGS, INC.
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements of
Everest Reinsurance Holding, Inc. on Forms S-8 (File No. 333-9172 and File No.
333-05771) of our report dated February 13, 1997, on our audit of the
consolidated financial statements and financial statement schedules of Everest
Reinsurance Holdings, Inc. as of December 31, 1996 and for the year then ended
which report is included in this Annual Report on Form 10-K.
COOPERS & LYBRAND L.L.P.
New York, New York
February 13, 1997
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<DEBT-HELD-FOR-SALE> 3,281,972
<DEBT-CARRYING-VALUE> 80,522
<DEBT-MARKET-VALUE> 88,374
<EQUITIES> 147,280
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 3,572,010
<CASH> 52,595
<RECOVER-REINSURE> 749,062
<DEFERRED-ACQUISITION> 84,123
<TOTAL-ASSETS> 5,039,352
<POLICY-LOSSES> 3,246,858
<UNEARNED-PREMIUMS> 355,908
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 508
<OTHER-SE> 1,085,515
<TOTAL-LIABILITY-AND-EQUITY> 5,039,352
973,611
<INVESTMENT-INCOME> 191,901
<INVESTMENT-GAINS> 5,695
<OTHER-INCOME> (1,867)
<BENEFITS> 716,033
<UNDERWRITING-AMORTIZATION> 3,987
<UNDERWRITING-OTHER> 313,455
<INCOME-PRETAX> 143,839
<INCOME-TAX> 31,812
<INCOME-CONTINUING> 112,027
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 112,027
<EPS-PRIMARY> 2.22
<EPS-DILUTED> 0
<RESERVE-OPEN> 2,969,341
<PROVISION-CURRENT> 745,594
<PROVISION-PRIOR> (29,561)
<PAYMENTS-CURRENT> 139,073
<PAYMENTS-PRIOR> 282,134
<RESERVE-CLOSE> 3,246,858
<CUMULATIVE-DEFICIENCY> (29,561)
</TABLE>
