EXHIBIT 2
STOCK ACQUISITION AGREEMENT
UNITRIN, INC.
AND
FUND AMERICAN ENTERPRISES, INC.
EXHIBIT 2
STOCK ACQUISITION AGREEMENT
STOCK ACQUISITION AGREEMENT dated as of February 10, 1999 ("Agreement") by
and between Unitrin, Inc., a Delaware corporation ("Buyer"), and Fund American
Enterprises Holdings, Inc., a Delaware corporation ("Seller"), for the
acquisition and conveyance of all of the outstanding capital stock of Valley
Group, Inc., an Oregon corporation and an indirect wholly owned subsidiary of
Seller (the "Company").
WHEREAS, the Company is the owner of all of the issued and outstanding
capital stock of each of Charter Group, Inc., a Texas corporation ("Charter"),
Valley Insurance Company, a California insurance company ("VIC"), Valley
Pacific, Inc., an Oregon corporation ("Valley Pacific"), and Valley Property &
Casualty Insurance Company, an Oregon insurance company ("VP&C") (Charter, VIC,
Valley Pacific and VP&C are sometimes hereinafter each individually referred to
as a "Subsidiary" and collectively referred to as the "Subsidiaries");
WHEREAS, Charter is the owner of all of the issued and outstanding capital
stock of Charter General Agency, Inc., a Texas corporation ("CGA"), Charter
Indemnity Company, a Texas insurance company ("CIC"), and NCM Management
Corporation, a Delaware corporation ("NCM");
WHEREAS, NCM controls Charter County Mutual Insurance Company, a Texas
insurance company ("Charter County Mutual") pursuant to a general agency
managerial contract;
WHEREAS, pursuant to that certain Stock Purchase Agreement dated as of
October 14, 1998 by and among Charter, Pinnacle Insurance Company, a Georgia
insurance company in rehabilitation ("Pinnacle"), and the ▇▇▇▇▇▇▇▇▇ ▇▇▇▇ ▇.
▇▇▇▇▇▇▇▇, Commissioner of the Georgia Department of Insurance and Safety Fire
acting solely in his capacity as the rehabilitator of Pinnacle (the "Pinnacle
Acquisition Agreement"), Charter has agreed to acquire all of the outstanding
shares of capital stock of Pinnacle;
WHEREAS, VIC is the owner of all of the issued and outstanding capital
stock of each of Valley National Insurance Company, a Kansas insurance company
("Valley National"), and White Mountains Insurance Company, a New Hampshire
insurance company ("WMIC");
WHEREAS, for the consideration and subject to the terms and conditions set
forth in this Agreement, Buyer desires to purchase or cause to be purchased from
Seller, and
Seller desires to sell or cause to be sold to Buyer, all of the issued and
outstanding capital stock of the Company for the purpose of Buyer acquiring
control of the Company, the Subsidiaries and the following entities owned or
controlled by the Company, the Subsidiaries or their respective subsidiaries:
CGA, CIC, NCM, WMIC and Charter County Mutual (the Company, the Subsidiaries,
CGA, CIC, NCM, WMIC and Charter County Mutual are sometimes hereinafter each
individually referred to as a "Subject Entity" and collectively referred to as
the "Subject Entities," and VIC, VP&C, CIC, WMIC, and Charter County Mutual are
sometimes each individually referred to as an "Insurance Company" and
collectively referred to as the "Insurance Companies");
WHEREAS, in connection with Buyer's acquisition of control of the Subject
Entities, Buyer wishes to acquire the assets used, and immediately following
the Closing continue to employ those employees engaged, in the business
operations of the Subject Entities, subject to the terms and conditions set
forth in this Agreement; and
WHEREAS, Buyer does not wish to acquire ownership or control of either
Pinnacle or Valley National (Pinnacle and Valley National are hereinafter
collectively referred to as the "Excluded Subsidiaries"); provided, however,
that Buyer wishes to acquire the business of Valley National as in effect on the
Closing Date.
NOW, THEREFORE, in consideration of the covenants and mutual promises
herein contained, Buyer and Seller agree as follows:
1. SALE OF SHARES; RELATED TRANSACTIONS.
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1.01 Sale and Purchase of Shares. Subject to the terms and conditions of
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this Agreement, Seller agrees to sell, transfer and convey (or cause to be sold,
transferred and conveyed) to Buyer, and Buyer agrees to purchase and accept (or
cause to be purchased and accepted) from Seller, for the aggregate purchase
price set forth below in Section 1.02 (the "Purchase Price"), all of the shares
of common stock of the Company beneficially owned by Seller, representing one
hundred percent of the issued and outstanding shares of capital stock of the
Company (the "Shares").
1.02 Purchase Price; Post-Closing Adjustment.
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(A) Purchase Price. The Purchase Price for the Shares shall be an
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amount equal to the sum of (i) $90,000,000 (ninety million dollars) plus
(ii) the sum of (x) the amount of the consolidated book value of the
Company determined in accordance with United States generally accepted
accounting principles ("GAAP") as applied by the Seller and the Company
consistent with the GAAP Consolidated Financial Statements described in
Section 2.09 ("GAAP Book
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Value") at the Closing Date, after taking into account all Related
Transactions completed at or prior to the Closing, and (y) the amount of
any and all bank indebtedness of the Company in respect of borrowed money
("Indebtedness") which is outstanding immediately prior to the Closing.
(B) Estimated Purchase Price. On the Closing Date, Buyer shall pay to
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Seller an amount equal to an estimate, prepared by Seller and delivered to
Buyer as described in the following sentence, of the Purchase Price (the
"Estimated Purchase Price"). Not later than five (5) business days prior to
Closing, Seller shall deliver to Buyer (i) a balance sheet reflecting GAAP
Book Value at the end of the month immediately preceding the Closing Date,
prepared in a manner consistent with the GAAP Consolidated Financial
Statements described in Section 2.09 (the "Prior Month-End Balance Sheet")
as adjusted on an estimated basis to give effect to the Related
Transactions, (ii) a schedule detailing the components of the Estimated
Purchase Price including, without limitation, the adjustments for the
Related Transactions and the amount of Indebtedness (if any), and (iii) a
certificate from Seller certifying that such Prior Month-End Balance Sheet
has been so prepared. At Closing, Buyer shall pay to Seller the Estimated
Purchase Price by wire transfer of immediately available funds to a bank
account or other accounts designated by Seller. Buyer and Seller agree
that, to the extent any amount of the Indebtedness is outstanding at
Closing, a portion of Purchase Price equal thereto shall be paid by Buyer
directly to the banking institution or institutions holding such
Indebtedness such that the Indebtedness is fully extinguished
contemporaneous with Closing.
(C) Post-Closing Determination of Actual Purchase Price. Not later
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than forty-five (45) days after the Closing Date, Buyer shall deliver to
Seller (i) a balance sheet reflecting GAAP Book Value at the Closing Date
(taking into account all Related Transactions completed at or prior to the
Closing) prepared in a manner consistent with the GAAP Consolidated
Financial Statements described in Section 2.09 (the "Closing Date Balance
Sheet") and (ii) a certificate from Buyer certifying that such Closing Date
Balance Sheet has been so prepared. If GAAP Book Value as reflected on the
Closing Date Balance Sheet exceeds GAAP Book Value used to determine the
Estimated Purchase Price (as adjusted on an estimated basis to give effect
to the Related Transactions) by at least $250,000, then, subject to the
resolution of any disputes pursuant to Section 1.02(D), Buyer shall pay to
Seller such difference (including such $250,000 amount) within ten (10)
business days after the receipt of the Closing Date Balance Sheet by
Seller, together with interest thereon at an annual rate equal to the
average yield to maturity on United States Treasury securities with a
remaining maturity of one year as published from time to time by The Wall
Street Journal, calculated on the
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basis of the actual number of days elapsed over 365 (the "Interest Rate"),
from the Closing Date to the date of payment, by wire transfer of
immediately available funds to a bank account designated by Seller. If, on
the other hand, GAAP Book Value used to determine the Estimated Purchase
Price (as adjusted on an estimated basis to give effect to the Related
Transactions) exceeds GAAP Book Value as reflected on the Closing Date
Balance Sheet by at least $250,000, then, subject to the resolution of any
disputes pursuant to Section 1.02(D), Seller shall pay to Buyer such
difference (including such $250,000 amount) within ten (10) business days
after the receipt of the Closing Date Balance Sheet by Seller, together
with interest thereon at the Interest Rate, from the Closing Date to the
date of payment, by wire transfer of immediately available funds to a bank
account designated by Buyer. In the event that the GAAP Book Value as
reflected on the Closing Date Balance Sheet is neither $250,000 more nor
$250,000 less than the GAAP Book Value used to determine the Estimated
Purchase Price (as adjusted on an estimated basis to give effect to the
Related Transactions), then, subject to the resolution of any disputes
pursuant to Section 1.02(D), the Estimated Purchase Price paid by Buyer to
Seller at Closing shall be the Purchase Price.
(D) Dispute Resolution. Seller and Buyer shall seek in good faith to
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resolve in writing any disputes which they may have as to the Closing Date
Balance Sheet, GAAP Book Value, the Purchase Price or the adjustments to
reflect the Related Transactions within thirty (30) days after the receipt
of the Closing Date Balance Sheet by Seller. Any such disputes that remain
unresolved at the end of any such 30-day period shall be referred to an
accounting firm of national standing and reputation mutually agreed to by
the parties in writing (the "Accounting Firm"). The fees of the Accounting
Firm agreed to shall be shared equally by Buyer and Seller. The Accounting
Firm shall be instructed to, within thirty (30) days after the submission
of any disputed matters by Seller and Buyer, review and resolve all such
disputed matters and to report in writing its resolution thereof to Seller
and Buyer. The determination of the Accounting Firm shall be final,
binding and conclusive with respect to Seller and Buyer, and Seller and
Buyer agree that judgment may be entered upon the determination of the
Accounting Firm in any court having jurisdiction over the party against
which such determination is to be enforced. Balances in dispute due from
either party shall be paid by wire transfer of immediately available funds
to a bank account designated by the payee within ten (10) business days
after the parties are notified in writing of the determination rendered by
the Accounting Firm.
1.03 Related Transactions. Seller shall use its reasonable best efforts
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to complete the following transactions (the "Related Transactions") at or prior
to Closing:
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(A) Distributable Assets.
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(i) Buyer and Seller acknowledge and agree that it is their mutual
intent that, subject to the receipt of all necessary regulatory and
governmental approvals therefor, at or prior to the Closing:
(1) (x) the assets set forth in Section 1.03(A)(i)(1) of the
Seller Schedule (as defined in Section 2)/1/, and
(y) all other property (other than cash) purchased by any
Subject Entity on or after December 31, 1998 that is designated by
Seller and/or Buyer as at the time of the purchase thereof as a
Distributable Asset (collectively, "Distributable Assets"), shall
be distributed, sold or otherwise transferred by the Subject
Entities; and
(2) subject to completion of the reinsurance transaction
described in this Section 1.03(A)(i)(2), the statutory capital and
surplus of CIC, VIC, WMIC, and VP&C remaining after all the
Distributable Assets have been distributed, sold or otherwise
transferred pursuant to (1), above, will be reduced by means of
investment asset distributions by each such company to its
respective parent company, as nearly as possible (leaving a
reasonable margin for error) to the minimum statutory amount
required to maintain in good standing the certificates of authority
of each such company to transact insurance or reinsurance in the
jurisdictions identified in Section 2.21 of the Seller Schedule
("Excess Capital Distributions"), and the parties agree that such
required minimum statutory amounts shall be as mutually agreed and
set forth in Section 1.03(A)(i)(2) of the Seller Schedule. Any
Subject Entity that receives an Excess Capital Distribution (as
defined below), or a distribution relating to a lower-tier Excess
Capital Distribution, from one or more Subject Entities shall
distribute such amount to its parent. Buyer and Seller acknowledge
that Buyer intends to arrange for the reinsurance cession of all
business of the foregoing Subject Entities to Trinity Universal
Insurance Company and/or another qualified reinsurer having
adequate capital and surplus to support such reinsurance, subject
to applicable regulatory approval. For purposes of determining the
Purchase Price, the GAAP Book Value shall be increased by the
amount of all of Seller's deferred policy acquisitions costs, net
of related deferred taxes, calculated in a manner consistent
__________________
/1/ to include all investment assets that Seller desires to retain and/or Buyer
does not wish to acquire and the capital stock of Valley National and
Pinnacle
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with the GAAP Consolidated Financial Statements described in
Section 2.09, related to the business transferred pursuant to such
reinsurance arrangement, if any. Buyer agrees to undertake such
reinsurance upon terms and conditions reasonably satisfactory to
Seller. The distributions made pursuant to this Section 1.03(A)
shall be treated as made pursuant to a plan of liquidation adopted
by each of the Subject Entities prior to such distributions and in
connection with the deemed liquidation of each of the Subject
Entities that is occurring by reason of the elections under Section
338(h)(10) of the IRC being filed with respect to each such entity
pursuant to Section 7.09
(ii) At the Closing, Seller shall deliver to Buyer its
calculation of the aggregate Distributable Asset Values (as defined below)
of all Distributable Assets, and, if and to the extent all necessary
regulatory and governmental approvals therefor shall have been obtained,
such Distributable Assets shall be transferred to Seller in the manner
described in Section 1.03(A)(i). "Distributable Asset Value" of any asset
at Closing means the carrying value of such asset, including related
receivables for interest and dividends, all determined in accordance with
GAAP as applied by Seller and the Company in a manner consistent with the
GAAP Consolidated Financial Statements described in Section 2.09.
(iii) In the event that any Distributable Assets (other than the
voting securities of Valley National and Pinnacle) are not transferred by
distribution to Seller (or its designee) in accordance with Section 1.03
(A)(i) at the Closing, then Seller (or its designee) shall buy, and Buyer
shall cause the Company or any other Subject Entity to sell, any or all
such remaining Distributable Assets, free and clear of any lien or
encumbrance, at a price equal to the Distributable Asset Value thereof
within one (1) business day following the date of the Closing. The sale
price of such Distributable Assets shall be payable by wire transfer of
immediately available funds to an account designated by Buyer.
(iv) If at any time after the Closing, the Company or any other
Subject Entity shall receive any cash or other property as a dividend,
distribution, return of capital or principal, premium or interest payment
(or similar payment) with respect to any Distributable Asset transferred by
way of distribution to Seller (or its designee) in accordance with Sections
1.03 (A)(i) or 1.03(A)(iii), the Company or such other Subject Entity shall
immediately transfer such cash or other property to Seller (or its
designee).
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(B) Asset Sale. Prior to the Closing, subject to the receipt of all
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necessary regulatory and governmental approvals therefor, Seller shall
cause Valley Pacific to sell to VIC all assets owned by or in the
possession of Valley Pacific that are located in the State of California in
exchange for an amount equal to the carrying value of such assets on the
date of sale determined in accordance with GAAP as applied by Seller and
the Company in a manner consistent with the GAAP Consolidated Financial
Statements described in Section 2.09 (the "Asset Sale").
2. REPRESENTATIONS AND WARRANTIES OF SELLER.
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For purposes of this Agreement:
the term "Company Material Adverse Effect" means a material adverse effect
on the business, assets, financial condition or results of operations of
the Subject Entities, taken as a whole (excluding any state of facts,
event, change or effect relating to (w) the economy or securities markets
in general, (x) this Agreement or the transactions contemplated hereby or
the announcement thereof, (y) the insurance industry in general (including
any changes in laws or regulations applicable to the insurance industry) or
(z) losses or loss adjustment expenses in the ordinary course of business;
and
the term "knowledge" with respect to Seller shall mean the actual knowledge
of the persons set forth on Schedule A hereto.
Seller represents and warrants to Buyer that, except as set forth in
the disclosure schedule of Seller attached hereto and made a part hereof (the
"Seller Schedule"):
2.01 Organization, Good Standing, Qualification of the Companies. Each of
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the Subject Entities is duly organized, validly existing and in good standing
under the laws of the state of its organization and has all requisite corporate
power and authority to own or lease and operate its properties and assets and
carry on its business as now being conducted. Each of the Subject Entities is
duly qualified to transact business as a foreign corporation and is in good
standing in every jurisdiction in which such qualification is required by law to
carry on its business as now being conducted or to own, lease or operate its
properties and assets, except where the failure to so qualify or to be in good
standing would not, individually or in the aggregate, have a Company Material
Adverse Effect. Section 2.01 of the Seller Schedule lists each jurisdiction
where each Subject Entity is so qualified.
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2.02 Subsidiaries. Each of VIC, Charter, Valley Pacific and VP&C is a
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direct or indirect wholly-owned subsidiary of the Company. WMIC is a wholly-
owned subsidiary of VIC. CIC, CGA and NCM are wholly-owned subsidiaries of
Charter. Except as described in this Section 2.02 and except for investments in
the Excluded Subsidiaries and for the Distributable Assets, none of the Subject
Entities has any equity investment in any subsidiary, partnership, joint
venture, limited liability company or similar entity.
2.03 Authorized Stock.
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(A) The authorized capital stock of the Company consists of 500
shares of common stock, no par value per share, of which 100 shares,
constituting the Shares, are issued and outstanding on the date hereof, all
of which are owned directly or indirectly by Seller. Section 2.03 of the
Seller Schedule sets forth the authorized and outstanding capital stock of
each Subject Entity other than the Company and Charter County Mutual.
(B) All of the issued and outstanding shares of the capital stock, if
any, of the Subject Entities have been validly issued and are fully paid,
nonassessable and free of preemptive rights and are owned free and clear of
any liens, claims, charges or encumbrances, and upon Closing, Buyer will
acquire directly or indirectly good and marketable title to all of such
shares.
(C) There is no contract, understanding, restriction or agreement,
including any voting trust or other agreement or understanding with respect
to the voting of any of the capital stock of the Subject Entities, or any
convertible, exchangeable or exercisable security, option, warrant, call,
or commitment on the part of the Subject Entities of any character relating
to issued or unissued shares of the capital stock of the Subject Entities.
2.04 Authorization. Seller has all requisite corporate power and
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authority to enter into this Agreement, to perform its obligations hereunder and
to consummate the transactions contemplated hereby. All corporate acts and
other proceedings required to be taken by Seller or any of its affiliates (other
than the Subject Entities) to authorize the execution, delivery and performance
of this Agreement and the consummation of the transactions contemplated hereby
have been duly and properly taken. This Agreement has been duly executed and
delivered by Seller and constitutes a legal, valid and binding obligation of
Seller, enforceable against Seller in accordance with its terms.
2.05 Articles of Incorporation and By-laws. Seller has delivered to Buyer
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true and complete copies of the articles or certificate of incorporation and by-
laws (or
8
comparable constituent instruments) of each of the Subject Entities as in effect
as of the date hereof.
2.06 Consents and Approvals. Except for the consents and approvals listed
----------------------
on Section 2.06 of the Seller Schedule (the "Seller Consent Schedule") and
except for such filings, permits, authorizations, consents or approvals the
failure of which to obtain or make would not, individually or in the aggregate,
have a Company Material Adverse Effect, no filing with, and no permit,
authorization, consent or approval of, any public body or authority is necessary
for the consummation by Seller or any of its affiliates (other than the Subject
Entities) of the transactions contemplated by this Agreement.
2.07 Defaults and Conflicts. Neither Seller nor any of the Subject
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Entities is, or immediately prior to the Closing will be, in default under its
articles or certificate of incorporation or by-laws (or comparable constituent
instruments), or in default under any indenture or under any agreement or other
instrument to which it is a party or by which it or any of its properties is
bound or to which it is subject, which default would have a Company Material
Adverse Effect. Subject to the receipt of all consents and approvals
contemplated by this Agreement, neither the execution and delivery of this
Agreement, the consummation of the transactions contemplated hereby or the
fulfillment of and compliance with the terms and provisions hereof or thereof,
will (i) violate any judicial, administrative or arbitral order, writ, award,
judgment, injunction or decree involving Seller or any of the Subject Entities,
(ii) conflict with the terms, conditions or provisions of the certificate or
articles of incorporation or by-laws (or comparable constituent instruments) of
Seller or any of the Subject Entities, (iii) conflict with, result in a breach
of, constitute a default under or accelerate or permit the acceleration of the
performance required by, any indenture, agreement or other instrument that is
material to the business of any Subject Entity and to which Seller or any of the
Subject Entities is a party or by which any of them is bound (a "Material
Agreement"), (iv) result in the creation of any lien, charge or encumbrance upon
any of the assets of any of the Subject Entities under any such Material
Agreement, or (v) terminate or give any party thereto the right to terminate any
Material Agreement, except for any such violation, conflict, breach, default,
lien, charge, encumbrance, termination or other item which would not have a
Company Material Adverse Effect. Except as disclosed in Section 2.07 of the
Seller Schedule, no consent of any third party to any Material Agreement is
required in connection with this Agreement and the transactions contemplated
hereby.
2.08 Statutory Financial Statements. Each Subject Entity that is an
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insurance company (each, an "Insurance Company") has filed all annual and
quarterly statements, together with all exhibits, interrogatories, notes,
schedules and any actuarial opinions, affirmations or certifications or other
supporting documents in connection therewith, required to be filed since
December 1, 1995 with or submitted to the appropriate
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regulatory authorities of the jurisdiction in which it is domiciled or
commercially domiciled on forms prescribed or permitted by such authorities.
Financial statements included in such statements, including amendments and the
notes thereto (the "Statutory Financial Statements"), were prepared in
conformity in all material respects with statutory accounting practices
prescribed or permitted by the applicable insurance regulatory authority ("SAP")
consistently applied for the periods covered thereby. The Statutory Financial
Statements, including, without limitation, the provisions made therein for
investments and the valuation thereof, reserves, policy and contract claims,
together with the notes, exhibits and schedules thereto, fairly present the
statement of admitted assets, liabilities and capital and surplus of the
applicable Insurance Company as of the dates thereof and the related statutory
basis statements of income, changes in capital and surplus, and cash flows for
the periods indicated in conformity with SAP, applied on a basis consistent with
prior periods, except as set forth therein. Each such Statutory Financial
Statement was in compliance in all material respects with applicable law when
filed and there were no material omissions therefrom.
2.09 GAAP Consolidated Financial Statements. Seller has delivered or will
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deliver to Buyer, consolidated balance sheets of the Company and its
subsidiaries as of December 31, 1997, September 30, 1998, and December 31, 1998,
and the related consolidated statements of income, comprehensive income, cash
flows and shareholders' equity for the years ended December 31, 1997 and 1998
and the related statement of income for the nine months ended September 30,
1998, and in the case of the December 31, 1997 and 1998 financial statements the
notes related to each of the foregoing (the "GAAP Consolidated Financial
Statements"). The GAAP Consolidated Financial Statements have been prepared or
will be prepared in conformity with GAAP consistently applied and present
fairly, or will present fairly in all material respects, the consolidated
financial position of the Company and results of its operations. Such GAAP
Consolidated Financial Statements properly reflect and make adequate provision
for or will properly reflect and make adequate provision for (a) the carrying
value of investments, (b) balances due from policyholders, agents and reinsurers
net of any valuation allowance, (c) deferred policy acquisition costs, (d)
reserves for losses, loss adjustment expenses and unearned premiums, (e) current
and deferred Taxes (as defined in Section 2.17), (f) guaranty fund assessments,
and (g) other liabilities, including, but not limited to, accrued audit and
legal fees, accrued salary, bonus, vacation, sick pay, and post-retirement
benefits other than pensions. Transactions with reinsurers have been or will be
recorded in accordance with Statement of Financial Accounting Standards No. 113,
"Accounting and Reporting for Reinsurance of Short-duration and Long-duration
Contracts."
2.10 Absence of Certain Changes. Since September 30, 1998, except in
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connection with this Agreement and the transactions contemplated hereby, the
Subject Entities have conducted their respective businesses only in, and have
not engaged in any
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material transaction other than in, the ordinary course of such businesses
consistent with past practice and there has not been (i) any change in the
business, assets, financial condition or results of operations of the Subject
Entities or any development or combination of developments of which Seller has
knowledge, that, individually or in the aggregate, has had or is reasonably
likely to have a Company Material Adverse Effect, (ii) any material change by
any Subject Entity in accounting principles, practices or methods, other than as
required by changes in GAAP or statutory accounting principles or practices
prescribed by insurance regulatory authorities, or (iii) any change by any
Subject Entity in the actuarial, investment, reserving, underwriting, or claims
administration policies, practices, procedures, methods, assumptions or
principles applied by such Subject Entity in conducting its business in the
usual and ordinary course other than as required by law or regulatory authority.
2.11 Properties.
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(A) Real Estate and Mortgages. Section 2.11(A) of the Seller Schedule
-------------------------
sets forth a list and summary description of (a) all real property owned by
the Subject Entities and all buildings and other structures located on such
real property, (b) all leases, subleases or other agreements under which
any Subject Entity is the lessor or lessee of any real property, (c) all
unexpired options held by any Subject Entity or contractual obligations on
its part to purchase or acquire any interest in real property, (d) all
unexpired options granted by any Subject Entity or contractual obligations
on its part to sell or dispose of any interest in real property, and (e)
all mortgages on properties owned by a Subject Entity, identifying all such
mortgages, if any, for which deficiency notices have been issued or that
are otherwise not current. Except as disclosed in Section 2.11(A) of the
Seller Schedule, all such leases, subleases, options and other agreements
are in full force and effect and no written notice of any default
thereunder has been received, except where the failure to be in full force
and effect and except where any such default would not have a Company
Material Adverse Effect.
(B) Investment Securities. Section 2.11(B) of the Seller Schedule
---------------------
sets forth, as of the date of this Agreement, the common stock, preferred
stock, bonds, notes, mortgage loans, limited partnerships interests, and
other securities and investments owned or held by the Subject Entities
("Investments"). The Investments are evidenced by appropriate written
instruments and certificates (except where in non-certificated form), and,
to the knowledge of Seller, are valid and genuine in all material respects
and are enforceable in accordance with their terms against all persons
against whom they purport to create an obligation, subject to bankruptcy,
receivership, insolvency, reorganization, moratorium, or other similar laws
affecting or relating to creditors' rights generally and subject to
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general principles of equity. Except as disclosed in Section 2.11(B) of the
Seller Schedule, all Investments that are held by an Insurance Company
constitute admitted assets of the holder pursuant to applicable insurance
laws. Except as disclosed in Section 2.11(B) of the Seller Schedule, none
of the obligors in respect of such Investments is in default in the payment
of principal, interest or other required distributions.
(C) Title to Property. Except as disclosed in Section 2.11(C) of the
-----------------
Seller Schedule, the Subject Entities have good and valid title to all real
properties and Investments reflected as owned by them in Sections 2.11(A)
and 2.11(B) of the Seller Schedule, all other assets and properties
reflected in the GAAP Consolidated Financial Statements for the period
ended September 30, 1998 and all other assets and properties acquired
subsequent to such date (except assets and properties disposed of in the
ordinary course of business subsequent to such date), in each case free of
all mortgages, liens, charges and encumbrances of any nature whatsoever,
other than (i) liens for Taxes not yet due and payable and (ii) such minor
liens, charges and encumbrances as, in the aggregate, do not and would not
if asserted have a Company Material Adverse Effect.
(D) Condition of Property. All real properties, equipment, fixtures,
---------------------
and other tangible properties owned, leased or used by the Subject Entities
in their respective businesses are in good operating condition and repair,
ordinary wear and tear excepted, and are, and at the Closing will be,
available for the operation of such businesses as now being conducted,
except where the failure to be in such condition and repair or to be so
available would not have a Company Material Adverse Effect.
2.12 Environmental Laws. Except as disclosed in Section 2.12 of the
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Seller Schedule, the Subject Entities have conducted and are conducting their
businesses in compliance in all material respects with all applicable federal,
state, and local laws, regulations and requirements currently in force relating
to the protection of the environment ("Environmental Laws") and there is no
pending, or, to the knowledge of Seller, threatened, civil or criminal
litigation, written notice of violation, or administrative proceeding relating
to such Environmental Laws involving any Subject Entity which would reasonably
be expected to have a Company Material Adverse Effect. To the knowledge of
Seller, there is no condition existing with respect to the release, emission,
discharge or presence of hazardous substances in connection with the business or
properties of any Subject Entity which would subject any of them to any
proceeding under such Environmental Laws or would otherwise have a Company
Material Adverse Effect. The Subject Entities have received all approvals,
consents, licenses, and permits with respect to environmental matters necessary
to carry on their respective businesses
12
substantially as currently conducted, other than any such approvals, consents,
licenses or permits the failure of which to receive would not, individually or
in the aggregate, have a Company Material Adverse Effect.
2.13 Proprietary Rights. Section 2.13 of the Seller Schedule discloses
------------------
all the trademarks, trade names and service marks (and all registrations and
applications with respect thereto) and all material computer software
(collectively the "Proprietary Rights") used in the businesses of the Subject
Entities. To the knowledge of Seller, except as otherwise disclosed in such
Section, the Subject Entities own or are duly licensed or otherwise authorized
to use all of such Proprietary Rights. To the knowledge of Seller, such
Proprietary Rights as used by the Subject Entities in their respective
businesses do not violate or infringe upon the proprietary rights of any third
party. There is no claim, action, proceeding or investigation pending or, to the
knowledge of Seller, threatened, against any of the Subject Entities with
respect to any such Proprietary Rights which claim, action, proceeding or
investigation would reasonably be expected to have a Company Material Adverse
Effect.
2.14 Agreements. Except for this Agreement and as set forth in Section
----------
2.14 of the Seller Schedule, and other than any Plans (as defined in Section
2.19), none of the Subject Entities is a party to or is bound by any (i) written
contract for the employment of any officer, director or employee with annual
compensation in excess of $100,000 which pursuant to its terms is not terminable
without liability on 30 days' (or less) notice or which provides for any further
payments following such termination, or contract with a former officer, director
or employee pursuant to which payments are required to be made at any time
following the date hereof, (ii) stock ownership, profit sharing, bonus, deferred
compensation, severance pay, pension, retirement or similar plan or agreement,
(iii) mortgage, indenture, note or installment obligation or other instrument
for or relating to any borrowing of money, (iv) guaranty of any obligation for
borrowings or otherwise, other than insurance policies, bonds, or other
contracts in connection with the conduct of the insurance business of the
Insurance Companies in the ordinary course, (v) agreement or arrangement for the
sale or lease of any material amount of the assets or business of any Subject
Entity or for the grant of preferential rights with respect thereto, (vi)
agreement or contract with any labor union or association representing any
employee, (vii) material agreement or contract with or for the benefit of any
Insurance Producer (as defined in Section 2.24) other than pursuant to the forms
of agreement described or included in Section 2.24 of the Seller Schedule, or
(viii) any Material Agreement not otherwise described above. All contracts,
plans, mortgages, indentures, notes, installment obligations, guaranties,
treaties and other agreements disclosed in Section 2.14 of the Seller Schedule
are in full force and effect, and no Subject Entity, nor, to the knowledge of
Seller, any other party thereto, is in default in any material respect as to any
provision thereof, and, except as disclosed in such Section 2.14, no party
thereto may terminate any
13
of such agreements or other instruments by reason of the transactions
contemplated by this Agreement.
2.15 Litigation. There is no suit, action or proceeding pending or, to
----------
the knowledge of Seller, threatened against or affecting any of the Subject
Entities which would, individually or in the aggregate, be reasonably expected
to have a Company Material Adverse Effect, nor is there any judgment, verdict,
decree, injunction, rule or order of any court, governmental entity or
arbitrator outstanding against any of the Subject Entities which would,
individually or in the aggregate, have a Company Material Adverse Effect.
Section 2.15 of the Seller Schedule sets forth a description of (i) each lawsuit
in which punitive, exemplary or other extra-contractual damages are sought
against a Subject Entity, and (ii) each lawsuit not involving insurance policies
assumed, reinsured or issued by a Subject Entity.
2.16 Compliance with Laws. Each Subject Entity has complied with all
--------------------
laws, regulations, orders, ordinances, judgments or decrees of all governmental
authorities (federal, state, local, foreign or otherwise) applicable to its
businesses, except where the failure to have so complied would not, individually
or in the aggregate, have a Company Material Adverse Effect. Except as disclosed
in Section 2.16 of the Seller Schedule, neither Seller nor any Subject Entity
has received any written notification of any asserted material failure by a
Subject Entity to comply with any of such laws.
2.17 Taxes.
-----
(A) Each of the Subject Entities (i) has filed, or caused to be
filed, with the appropriate taxing authority all material Tax Returns (as
hereafter defined) required to be filed on or before the date hereof
(giving effect to any valid extension of time), and such Tax Returns were
true, correct and complete in all material respects when filed, and (ii)
has paid or caused to be paid in full, or has made or will make adequate
provision in the appropriate GAAP Consolidated Financial Statements and the
Prior Month-End Balance Sheet, for all material Taxes (as hereafter
defined) shown to be due on such Tax Returns. There are no material liens
for Taxes upon the assets of any of the Subject Entities except for
statutory liens for current Taxes not yet due.
(B) The United States federal income Tax Returns in which any Subject
Entity has joined have been audited by the Internal Revenue Service or are
closed by the applicable statute of limitations for all taxable years
through December 31, 1994. As of the date hereof, except as described in
Section 2.17 of the Seller Schedule, neither Seller nor any of the Subject
Entities has given, or been requested in writing to give, waivers or
extensions of any statute of limitations
14
relating to any material Tax Returns filed by or on behalf of any of the
Subject Entities.
(C) All tax sharing agreements between the Subject Entities, on the
one hand, and Seller and its affiliates (other than the Subject Entities),
on the other hand, shall be terminated effective at Closing, and the
Subject Entities shall not be bound thereby and shall have no liability
after the Closing for amounts due or arising thereunder, other than in
respect of any Taxes (due or refundable) which are attributable to a pre-
Closing Tax period.
(D) The GAAP Consolidated Financial Statements and the Prior Month-
End Balance Sheet reflect or will reflect an adequate accrual for all
material Taxes due and accrued, or deferred in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes,"
based on all activity prior to and including the date of such financial
statements.
For purposes of this Agreement, the term "Taxes" shall mean all taxes,
charges, fees, levies or other assessments, including, without limitation, all
net income, gross income, premium or privilege, gross receipts, sales, use, ad
valorem, transfer, franchise, profits, license, withholding, payroll,
employment, excise, estimated, severance, stamp, occupation, property or other
taxes, customs duties, fees, assessments, or charges of any kind whatsoever,
together with any interest and any penalties, additions to tax or additional
amounts imposed by any governmental authority (domestic or foreign) upon any
Subject Entity and the term "Tax Returns" shall mean all returns, declarations,
reports, estimates, and statements, regarding Taxes, required to be filed under
United States federal, state, local or any foreign laws.
2.18 Related Party Transactions. Except as disclosed in Section 2.18 of
--------------------------
the Seller Schedule, no Subject Entity has made any loan to any director,
officer, employee, or affiliate of Seller or any of its direct or indirect
subsidiaries (including the Subject Entities) which remains outstanding, nor has
any Subject Entity entered into any agreement for the purchase or sale of any
property or services from or to any such director, officer, employee or
affiliate.
2.19 Employee Benefit Plans.
----------------------
(A) Section 2.19 of the Seller Schedule sets forth a true and
complete list of each material employee benefit plan, as defined in Section
3(3) of the Employee Retirement Income Security Act of 1974, as amended
("ERISA") and each other material plan, arrangement and agreement providing
employee benefits (collectively the "Plans"), that covers current or former
employees of any of the
15
Subject Entities (the "Employers") and is presently maintained by any of
them or by any trade or business, whether or not incorporated (an "ERISA
Affiliate"), which together with Employers would be deemed a "single
employer" within the meaning of Section 4001 of ERISA. None of the Plans is
a "multi-employer plan," as defined in Section 3(37) of ERISA.
(B) Each of the Plans and any related trust agreement, group annuity
contract, insurance policy or other funding arrangement, is in substantial
compliance both in form and operation with all applicable provisions of
law, including the IRC (as defined below), ERISA and the Age Discrimination
in Employment Act. Neither Employers nor any ERISA Affiliate currently
maintains or sponsors a defined benefit pension plan as defined in Section
414(j) of the Internal Revenue Code of 1986, as amended ("IRC"), and to the
knowledge of Seller neither Employers nor any ERISA Affiliate, except as
disclosed in Section 2.19 of the Seller Schedule, has ever maintained or
sponsored any such plan that could give rise to any liability against
Employers.
(C) No excise tax or penalty (federal or state) is owed by any person
(including, but not limited to, any Plan, any Plan fiduciary, Employers and
ERISA Affiliates) with respect to the operations of, or any transactions
with respect to, any Plan, including, but not limited to, the civil penalty
assessed pursuant to Section 409 or 502(i) of ERISA or a tax imposed
pursuant to Section 4975 or 4976 of the IRC or the tax imposed under
Section 4978 of the IRC. No reserve for any excise taxes or penalties has
been established with respect to any Plan, nor has any advice been given to
any person with respect to the need to establish such a reserve.
(D) There are no material (i) actions, suits, arbitrations or claims
(other than routine claims for benefits), (ii) legal, administrative or
other proceedings or governmental investigations or audits, or (iii)
complaints to or by any governmental entity, which are pending or, to the
knowledge of Seller, anticipated or threatened, against the Plans or their
assets.
(E) Neither Employers nor any ERISA Affiliate provides or, to
Seller's knowledge, has ever provided post-retirement medical or life
insurance benefits to any present or former employees of Employers, other
than COBRA continuation benefits required by ERISA, the IRC or state
continuation coverage laws and employee conversion of life insurance
benefits to an individual policy.
2.20 Insurance. All material tangible and real properties of the Subject
---------
Entities are covered by valid and currently effective insurance policies.
Section 2.20 of the Seller
16
Schedule contains a list of all insurance policies covering the Subject
Entities, including the identity of the named insured and all loss payees.
Except as otherwise identified in Section 2.20 of the Seller Schedule and except
where the failure to be in full force and effect would not have a Company
Material Adverse Effect, all insurance policies listed on such schedule will
remain in full force and effect through the Closing Date.
2.21 Insurance Business. Each Insurance Company has all requisite power
------------------
and authority to carry on its insurance business pursuant to and to the extent
of the certificates of authority issued under the laws of the jurisdictions
listed in Section 2.21 of the Seller Schedule. Such Section indicates the line
or lines of insurance which are permitted to be written with respect to each
certificate of authority listed. Except as otherwise described in such Section
and except as a result of the transactions contemplated hereby, no certificate
of authority identified therein has been revoked, restricted, suspended, limited
or modified, nor is any certificate of authority the subject of, nor to the
knowledge of the Seller is there a basis for, a proceeding for revocation,
restriction, suspension, limitation or modification, nor is any Insurance
Company operating under any formal or informal agreement or understanding with
the licensing authority of any jurisdiction which restricts its authority to do
business or requires it to take, or refrain from taking, any action (or, in the
case of an agreement or understanding arising between the date hereof and the
Closing, any material action). Section 2.21 of the Seller Schedule identifies
each pending application for a certificate of authority submitted by or on
behalf of an Insurance Company and specifies the jurisdiction in which each
application is pending, the date of submission, the line or lines of business
for which authority is sought and the current status of such application.
Except as disclosed in Section 2.21 of the Seller Schedule, (i) all
policies of insurance issued, reinsured or assumed by each Insurance Company now
in force are, in all material respects to the extent required under applicable
law, on forms approved by applicable insurance regulatory authorities or which
have been filed and not objected to by such authorities within the period
provided for objection and (ii) any premium rates required to be filed with or
approved by insurance regulatory authorities have been so filed or approved in
all material respects, and premiums charged conform in all material respects
thereto.
Each Insurance Company has timely paid in full all guaranty fund and
other residual market assessments required by any regulatory authority to be
paid by it except for any failures to pay which would not, individually or in
the aggregate, have a Company Material Adverse Effect.
17
2.22 Reinsurance; Pools, etc.
------------------------
(A) Section 2.22(A) of the Seller Schedule discloses all reinsurance
treaties or agreements to which any of the Insurance Companies is a party
or is a named reinsured or is the reinsurer, or was a party or was a named
reinsured or was the reinsurer. Except as disclosed in such Section, all
such treaties or agreements are in full force and effect through the
respective dates noted in such Section and no disputes are pending or
asserted in writing under any such treaties or agreements. None of the
Insurance Companies is in default under any treaty or agreement listed in
such Section nor, to the knowledge of Seller, is any other party in default
thereunder except as disclosed in such Section. Except as disclosed in
Section 2.22(A) of the Seller Schedule, no party may terminate any such
treaties or agreements by reason of the transactions contemplated by this
Agreement.
(B) Section 2.22(B) of the Seller Schedule discloses all pooling
agreements, assigned risk pools, joint underwriting associations or similar
arrangements and all fronting arrangements under which any Insurance
Company is now or, to the knowledge of Seller, has in the past been a
participant.
2.23 Regulatory Filings. Each Insurance Company has filed all reports,
------------------
statements, documents, registrations, filings or submissions required to be
filed by it with any governmental or regulatory body, except (i) those with
respect to which the imposition, levy or collection of all fines, penalties,
assessments, taxes, forfeitures, money judgments or sanctions of any type are
barred by statutes of limitation, (ii) with respect to which the failure to so
file, individually and in the aggregate, has not and would not have a Company
Material Adverse Effect, and (iii) as otherwise agreed to in writing by the
applicable governmental or regulatory body. Except as disclosed in Section 2.23
of the Seller Schedule, (A) all such registrations, filings and submissions were
in material compliance with applicable law when filed, and (B) no material
deficiencies have been asserted in writing by any such governmental or
regulatory body with respect to such registrations, filings and submissions that
have not been satisfied. Except as may be required for the transactions
contemplated by this Agreement, each Insurance Company has duly filed with
appropriate insurance authorities, to the extent that filing of the same is
required by laws, rules or regulations, all annual and quarterly statements and
other material statements, documents and reports (including, without limitation,
any filings required under applicable state insurance holding company systems
acts) required by the insurance and other applicable laws of its state of
domicile and in each of the states in which it is licensed to conduct an
insurance business. All such statements and filings were correct in all
material respects as of the date filed (or, if the statement or filing covers a
period of time prior to the date of filing, as of such date), and there are no
material omissions therefrom. Section 2.23 of the Seller Schedule sets forth
18
all reports of examination (including, without limitation, all financial
examinations and market conduct examinations) issued since December 1, 1995 by
any department of insurance or regulatory body with respect to each Insurance
Company. Such Section contains a copy of each written notice by an issuer of any
such report to an Insurance Company that the issues raised in any such report
have been resolved.
2.24 Insurance Producers. All contracts between an Insurance Company and
-------------------
its insurance agents, managers, brokers, managing general agents and all other
insurance producers (collectively "Insurance Producers") listed or required to
be listed in Section 2.14 of the Seller Schedule are in full force and effect,
except for any failures to be in full force and effect as would not,
individually or in the aggregate, have a Company Material Adverse Effect. No
Insurance Company is, and to the knowledge of Seller, none of the Insurance
Producers are, in default in any material respect under any such contract. Set
forth in Section 2.24 of the Seller Schedule is a true and correct (i) summary
description of all material compensation arrangements with the Insurance
Producers and (ii) a list of all managing general agents appointed by any
Insurance Company. To the knowledge of Seller, each of the Insurance Producers
is duly licensed in every jurisdiction in which such licensing is required by
law to solicit, negotiate, effect, renew or bind policies of insurance, or
otherwise to act as an insurance agent, broker, producer or managing general
agent (as the case may be), and is in full compliance with applicable laws
governing the activities of the Insurance Producers, except for any failures to
be duly licensed or in full compliance as would not, individually or in the
aggregate, have a Company Material Adverse Effect.
2.25 Bank Accounts. Section 2.25 of the Seller Schedule sets forth the
-------------
name of each bank, trust company, safe deposit company, broker or dealer in or
with which any Subject Entity has or at the Closing will have an account or safe
deposit box and the names of all persons authorized to draw thereon, give
instructions with respect thereto, or to have access thereto.
2.26 Minute Books. The minute books of each Subject Entity contain true
------------
and complete minutes of all meetings of its board of directors, board committees
and shareholders and any written consents in lieu of such meetings since
December 1, 1995.
2.27 Powers of Attorney; Guarantees. Except as disclosed in Section 2.27
------------------------------
of the Seller Schedule, no Subject Entity has any obligation to act under any
outstanding power of attorney or any obligation or liability, either accrued,
accruing or contingent, as guarantor, surety, co-signer, endorser (other than
for purposes of collection in the ordinary course of business), co-maker or
indemnitor in respect of the obligation of any person, corporation, partnership,
joint venture, association, organization or other entity.
19
2.28 Charter County Mutual. Charter County Mutual (i) is a Texas county
---------------------
mutual insurance company that is duly organized, validly existing and in good
standing under the laws of the State of Texas, (ii) has all requisite corporate
power and authority to own or lease and operate its properties and assets and
carry on its business as now being conducted, (iii) transacts no business
outside of the State of Texas, (iv) is a party to a general agency managerial
agreement with NCM (the "NCM Agreement") and a quota share reinsurance agreement
with CIC (the "CIC Agreement"), each of which is currently, and will at Closing
be, in full force and effect and a valid and binding agreement, enforceable
against the parties in accordance with its terms, and (v) is not a party to any
agreements with Seller or any of its direct or indirect subsidiaries (including
the Subject Entities) except for the NCM Agreement and the CIC Agreement.
2.29 Investment Advisors. Except as identified in Section 2.29 of the
-------------------
Seller Schedule, none of the Subject Entities has any written or oral agreement
or arrangement with, or utilizes the services of, any investment advisors or
consultants.
2.30 Year 2000. The computer software and hardware, used by the Subject
---------
Entities in the operation of their businesses are capable of providing or are in
the process of being adapted or replaced to accurately record, store, process
and present calendar dates falling on or after January 1, 2000, as well as date-
dependent data, without degradation of the functionality or performance of such
software or hardware, which would have a Company Material Adverse Effect.
Section 2.30 of the Seller Schedule lists all material computer software and
hardware used by the Subject Entities in operation of their businesses and
summarizes for such software and hardware, taken as a whole, their overall state
of readiness and estimated costs of remediation within the meaning of Release
No. 33-7558, dated August 4, 1998, of the Securities and Exchange Commission,
regarding disclosure of Year 2000 issues. None of the Subject Entities has made
any express written warranties to any third parties relating to the Year 2000
readiness of such Subject Entities, which warranties would reasonably be
expected to have a Company Material Adverse Effect. None of Seller or any of
the Subject Entities has received written notice that any vendor or other
provider of services upon which any of the Subject Entities is materially
dependent will not be Year 2000 compliant on a timely basis. None of the
Subject Entities has written or, to the knowledge of Seller, reinsured any
insurance policies that create a material exposure to either property or
liability claims for Year 2000 failures. Section 2.30 of the Seller Schedule
describes all Year 2000 coverage exclusions that have been, or are contemplated
to be, incorporated in insurance policies written or reinsured by any of the
Subject Entities.
2.31 Directors and Officers. The persons listed on Section 2.31 of the
----------------------
Seller Schedule (the "Directors and Officers Schedule") constitute, and at the
Closing will constitute, all of the directors and officers of the Subject
Entities.
20
2.32 Charter General Agency, Inc. CGA (i) is a Texas corporation duly
---------------------------
organized, validly existing and in good standing under the Texas Business
Corporation Act or the Texas Professional Corporation Act, as applicable, (ii)
has its principal place of business in the State of Texas, and (iii) has as one
of its purposes the authority to act as an agent, general agent, local recording
agent or managing general agent ("Agent"), as the case may be, under Texas
insurance laws. CGA possesses a license to act as an Agent issued by the Texas
Department of Insurance.
2.33 Missouri Home Service Business. None of the Subject Entities has (i)
------------------------------
written, reinsured or otherwise acquired any home service life insurance
policies currently in force and covering lives in the State of Missouri, or (ii)
any home service insurance agents operating in the State of Missouri.
2.34 Disclosure. To the knowledge of Seller, no representation or
----------
warranty of Seller and no statement or information relating to the Subject
Entities or their respective businesses or properties contained in (i) this
Agreement, (ii) the Seller Schedule, or (iii) any certificate, schedule, list or
other document furnished or to be furnished by Seller to Buyer pursuant to this
Agreement contains or will contain any untrue statement of a material fact or
omits or will omit to state a material fact necessary to make the statements
made herein or therein, in light of the circumstances in which they were made,
not misleading.
3. REPRESENTATIONS AND WARRANTIES OF BUYER
---------------------------------------
Buyer represents and warrants to Seller as follows:
3.01 Organization of Buyer. Buyer is a corporation duly organized,
---------------------
validly existing and in good standing under the laws of the State of Delaware:
3.02 Authorization. Buyer has all requisite corporate power and authority
-------------
to enter into this Agreement, to perform its obligations hereunder and to
consummate the transactions contemplated hereby. All corporate acts and other
proceedings required to be taken by Buyer or any of its affiliates to authorize
the execution, delivery and performance of this Agreement and the consummation
of the transactions contemplated hereby have been duly and properly taken. This
Agreement has been duly executed and delivered by Buyer and constitutes a legal,
valid and binding obligation of Buyer, enforceable against Buyer in accordance
with its terms.
3.03 Defaults and Conflicts. Subject to the receipt of all consents and
----------------------
approvals contemplated by this Agreement, neither the execution and delivery of
this Agreement, the consummation of the transactions contemplated hereby or the
fulfillment of and
21
compliance with the terms and provisions hereof will (i) violate any judicial,
administrative or arbitral order, writ, award, judgment, injunction or decree
involving Buyer, (ii) conflict with the terms, conditions or provisions of the
certificate of incorporation or by-laws of Buyer, (iii) conflict with, result in
a breach of, constitute a default under or accelerate or permit the acceleration
of the performance required by, any indenture or any material agreement or other
material instrument to which Buyer is a party or by which Buyer is bound, (iv)
result in the creation of any lien, charge or encumbrance upon any of the assets
of Buyer under any such agreement or instrument, or (v) terminate or give any
party thereto the right to terminate any such indenture, agreement or
instrument. No consent of any third party to any indenture or any material
agreement or other material instrument to which Buyer or any of its affiliates
is a party is required in connection with the execution and delivery of this
Agreement.
3.04 Acquisition for Investment. Buyer is acquiring the Shares for its
--------------------------
own account, for investment purposes and not with a view to, or for resale in
connection with, any distribution or public offering thereof within the meaning
of the Securities Act of 1933, as amended.
3.05 Consents and Approvals. Except for the consents and approvals listed
----------------------
on the schedule thereof attached hereto (the "Buyer Consent Schedule"), and
except for such filings, permits, authorizations, consents or approvals, the
failure of which to obtain or make would not, individually or in the aggregate,
have a Company Material Adverse Effect or delay or restrict the consummation of
the transactions contemplated hereby, no filing with, and no permit,
authorization, consent or approval of, any public body or authority is necessary
for the consummation by Buyer and its affiliates of the transactions
contemplated by this Agreement.
3.06 Funds Available. Buyer has, and at all times through the Closing
---------------
will have, available to it sufficient funds to consummate its purchase of the
Shares and the other transactions contemplated hereby.
4. ACCESS.
------
Subject to applicable law, Seller shall afford to the officers, employees
and authorized representatives of Buyer and its affiliates reasonable access,
during normal business hours and upon reasonable notice, to the offices,
properties, senior management, books and records of the Subject Entities;
provided, however, that such access does not unreasonably disrupt the normal
-------- -------
business operations of Seller or the Subject Entities. Seller shall furnish
Buyer with such additional financial and operating data and other information as
to the assets, properties, and business of the Subject Entities as Buyer may
from time to time reasonably request. Seller shall cause the Subject Entities
to consent to
22
the review by the officers, employees and authorized representatives of Buyer
and its affiliates of the reports and working papers of the Subject Entities'
independent auditors and to discussions by the officers, employees and
authorized representatives of Buyer and its affiliates with such independent
auditors.
5. COVENANTS OF SELLER
-------------------
5.01 Ordinary Course. Except with respect to the Related Transactions and
---------------
as otherwise expressly contemplated or permitted hereunder, between the date
hereof and the Closing, Seller shall cause the business of the Subject Entities
to be conducted in the ordinary course of business and consistent with past
practices.
5.02 Liabilities. Between the date hereof and the Closing, without the
-----------
prior written consent of Buyer, Seller shall not permit any of the Subject
Entities to incur or to become subject to any material liability or obligation
(absolute, contingent or otherwise) (including, without limitation, any surplus
notes) except (i) as set forth in Section 5.02 of the Seller Schedule; (ii)
liabilities or obligations incurred in the ordinary course of business (other
than bank indebtedness in excess of the bank indebtedness of the Company
outstanding on the date hereof, which excess shall not be deemed in the ordinary
course of business); (iii) as required by law or regulatory authority or as
contemplated hereunder; and (iv) other liabilities which shall not exceed
$250,000 in the aggregate. Nothing contained herein shall restrict Seller from
causing the Company to repay outstanding Indebtedness prior to the Closing.
5.03 Changes in Stock. Between the date hereof and the Closing, without
----------------
the prior written consent of Buyer, Seller shall not permit any of the Subject
Entities to (i) make any change in its authorized capital stock, (ii) issue any
stock, options, warrants, or other rights calling for the issue, transfer, sale
or delivery of its capital stock or other securities, (iii) pay any stock
dividend or make any reclassification in respect of its outstanding shares of
capital stock, (iv) issue, sell, exchange or deliver any shares of its capital
stock (or securities convertible into or exchangeable, with or without
additional consideration, for such capital stock), or (v) purchase or otherwise
acquire for consideration any outstanding shares of its capital stock.
5.04 New Agreement. Except (i) in the ordinary course of business or (ii)
-------------
as required by law or regulatory authority or (iii) as contemplated hereunder,
between the date hereof and the Closing, Seller shall not permit any of the
Subject Entities to, without the prior written consent of Buyer, amend in any
material respect or enter into any contract, agreement or other instrument of
the types described in Section 2.14 hereunder or increase the salary or base
compensation of, or pay any bonus or make any special awards to, or amend any
compensation agreements of, any of the directors, officers,
23
employees, agents or affiliates of the Subject Entities other than in accordance
with regularly scheduled periodic increases in accordance with past practices or
as disclosed in Section 5.04 of the Seller Schedule. Except as required by law
or regulatory authority Seller shall not, and shall cause NCM not to, terminate,
cancel, amend, modify or otherwise alter the existing General Managerial
Contract between NCM and Charter County Mutual under which NCM controls Charter
County Mutual.
5.05 Consents. Seller shall, as soon as practicable, prepare or cause to
--------
be prepared and make all necessary filings with all governmental or regulatory
bodies or other entities and shall use its reasonable best efforts to obtain all
consents, waivers, approvals, authorizations, rulings or orders from all
governmental or regulatory bodies or other entities listed on the Seller Consent
Schedule and furnish true, correct and complete copies of each thereof to Buyer.
Prior to the Closing, Seller shall (and shall cause each of the Subject Entities
to) use its reasonable best efforts to obtain any required consents of the
parties to any Material Agreements.
5.06 Notice. Between the date hereof and Closing, Seller shall give
------
prompt notice to Buyer of (i) any notice or other communication received by
Seller or any of the Subject Entities relating to a default or event which, with
notice or lapse of time or both, would become a default, under any of the
Subject Entities' articles of incorporation, by-laws or comparable governing
instruments, or any Material Agreement, (ii) any notice or other communication
received by any of the foregoing from any third party alleging that the consent
of such third party is or may be required in connection with the transactions
contemplated hereby, (iii) any circumstances of which Seller or any Subject
Entity becomes aware that is reasonably likely to have a Company Material
Adverse Effect, and (iv) any matter which, if it had occurred prior to the date
hereof, would have been required to be included on the Seller Schedule.
5.07 Other Transactions. From the date of this Agreement to the Closing,
------------------
except for the Related Transactions, none of Seller, any Subject Entity nor any
other affiliate of Seller shall, nor shall they permit any of their respective
officers, directors, stockholders or other representatives to, directly or
indirectly, encourage, solicit, initiate or participate in discussions or
negotiations with, or provide any information or assistance to, any person or
group (other than Buyer, its affiliates and their representatives) concerning
any merger, sale of securities, sale of substantial assets or similar
transaction involving the Subject Entities. In the event that Seller, any
Subject Entity or any other affiliate of Seller receives a proposal relating to
any such transaction, Seller shall promptly notify Buyer of such proposal.
24
5.08 Employee Matters.
----------------
(A) Transfer of Continuing Employees. On or prior to the Closing
--------------------------------
Date, subject to the receipt of any necessary regulatory approvals, Seller
shall cause (i) the transfer to VIC of all employees of Valley Pacific
located in California, and (ii) the transfer to WMIC of all employees of
Fund American or its affiliates (other than the Subject Entities) who
provide services to WMIC on a substantially full time basis. Each of such
transfers is hereafter collectively referred to as the "Employee Transfer."
(B) Seller Employee Obligations. Seller shall cause each of the
---------------------------
Subject Entities to take such actions as are necessary to terminate the
participation by the Subject Entities in the Valley Insurance Companies
Long Term Incentive Plan, the Charter Insurance Companies Long Term
Incentive Plan, the Valley Insurance Companies Annual Incentive Plan, the
Charter Insurance Companies Annual Incentive Plan, the Fund American
Enterprises Holdings, Inc. Long Term Incentive Plan, the Valley Group, Inc.
Voluntary Salary Reduction Agreement and the employee benefit plans of
Seller and White Mountains Holdings, Inc. in which any of them
participates, effective no later than the close of business on the Closing
Date. Following the Closing, Seller shall indemnify Buyer and its
affiliates against any Loss or Losses (as defined in Section 14.01)
(including funding deficiencies) arising under or in respect of any
employee benefit plan maintained or sponsored by any Subject Entity and for
any COBRA continuation coverage provided by any of the same, in each case
to the extent those liabilities, obligations and costs arise out of events
or circumstances prior to the Closing. Following the Closing, Buyer shall
be solely responsible for, and shall indemnify Seller and its affiliates
other than the Subject Entities against any Loss or Losses arising under
or in respect of any employee benefit plan maintained or sponsored by any
Subject Entity and for any COBRA continuation coverage provided by any of
the same to the extent those liabilities, obligations and costs arise out
of events or circumstances subsequent to the Closing.
5.09 December 31, 1998 Financial Statements. As soon as practicable, but
--------------------------------------
no later than the later of March 2, 1999 or the filing thereof with insurance
regulatory authorities, Seller shall provide to Buyer the Statutory Financial
Statements of each of the Insurance Companies for the year ended December 31,
1998, as filed with the departments of insurance of their respective states of
domicile, which shall be prepared in a manner consistent with the requirements
for Statutory Financial Statements specified in Section 2.08 above (the December
31, 1998 Statutory Financial Statements"). In the event the Closing occurs on
or after March 31, 1999, Seller shall provide Buyer with the GAAP Consolidated
Financial Statements for the year ended December 31, 1998, which
25
shall be prepared in a manner which is consistent with the requirements for GAAP
Consolidated Financial Statements specified in Section 2.09 above together with
the actual audit opinion from the Company's independent auditors. The loss and
loss adjustment expense reserve amount shown on the December 31, 1998 Statutory
Financial Statements shall be determined in accordance with SAP.
5.10 Intercompany Agreements and Balances. As of or prior to the Closing,
------------------------------------
other than in respect of Taxes, Seller shall cause all intercompany balances
between or among the Subject Entities, on the one hand, and Seller and any of
the other affiliates of Seller, on the other hand, to be settled. Except as
contemplated by this Agreement, at or prior to the Closing, Seller shall
terminate, or cause to be terminated, each contract between or among the Subject
Entities, on the one hand, and Seller and any of the other affiliates of Seller,
on the other hand.
5.11 Name Change. No later than six (6) months after the Closing Date,
-----------
Seller shall cause Valley National to amend its articles of incorporation, to
change its corporate name and its doing business designations, in each state
where it is qualified to do business, to a different name that does not include
the word "Valley" in any form. Seller shall forthwith thereafter notify Buyer of
such changes and provide copies of all documents filed in connection therewith.
In addition, six (6) months after the Closing, Seller and its affiliates shall
cease using the name "Valley Group" or "Charter Group" in any manner for
commercial purposes.
5.12 Cooperation. Seller shall execute such documents and other papers,
-----------
provide such information, and take such further actions as may be reasonably
requested by Buyer to carry out the provisions hereof and to consummate the
transactions contemplated hereby. Seller shall use its reasonable best efforts
to obtain, or assist Buyer in obtaining, all applicable regulatory approval of
the reinsurance transaction described in Section 1.03(A)(i)(2).
5.13 Conditions Precedent. Seller shall use its reasonable best efforts
--------------------
to cause all of the conditions precedent to the consummation of the transactions
contemplated by this Agreement applicable to it to be met.
5.14 Shareholder Vote. Seller will cause its subsidiary, White Mountains
----------------
Holdings, Inc., and/or each transferee permitted under Section 17.04, to vote
all of its shares in the Company in favor of the sale of the Shares to Buyer and
will not permit White Mountain Holdings, Inc. to transfer any of its shares in
the Company to any other person or entity prior to Closing (except to the extent
permitted under Section 17.04).
26
5.15 Termination of Investment Advisor Agreement. Seller agrees to cause
-------------------------------------------
all investment advisory agreements currently in effect between it and the
Subject Entities to be terminated at or prior to Closing.
5.16 Valley National. The Company and VIC have entered into a definitive
---------------
agreement, dated October 19, 1998, with Executive Risk Indemnity, Inc. ("ERII")
providing for the sale of all of the outstanding capital stock of Valley
National to ERII following the reinsurance cession of all of the insurance
business of Valley National to certain Subject Entities (the "Valley National
Sale Agreement"). Seller hereby agrees to indemnify, defend and hold Buyer and
its affiliates harmless from and against (i) any Loss or Losses (as defined in
Section 14.01)relating to or arising under the Valley National Sales Agreement
and (ii) any Loss or Losses of Valley National incurred prior to the closing of
the sale of Valley National pursuant to the Valley National Sale Agreement.
Seller agrees to use its best efforts to cause all rights, powers and
obligations under the Valley National Sale Agreement to be assigned to Seller or
an affiliate of Seller (other than the Subject Entities), thereby substituting
such assignee for the Company and VIC. If Seller shall determine that the sale
of Valley National to ERII is unlikely to be consummated prior to the
anticipated Closing Date, then Seller shall cause ownership of the stock of
Valley National to be transferred to Seller or an affiliate of Seller (other
than a Subject Entity), whether by dividend or otherwise, prior to the Closing
Date.
5.17 Pinnacle. Seller hereby agrees to indemnify, defend and hold Buyer
--------
and its affiliates (including, without limitation, following the Closing, each
of the Subject Entities) harmless from and against (i) any Loss or Losses
relating to or arising under the Pinnacle Acquisition Agreement and (ii) any
Loss or Losses of Pinnacle incurred prior to the Closing Date. Seller agrees to
use its reasonable best efforts to cause all rights, powers and obligations
under the Pinnacle Acquisition Agreement to be assigned to Seller or an
affiliate of Seller (other than the Subject Entities) in full substitution for
Charter. In the event that Charter acquires Pinnacle prior to the Closing Date,
Seller shall use its reasonable best efforts to cause ownership of the stock of
Pinnacle to be transferred to Seller or an affiliate of Seller (other than a
Subject Entity), whether by dividend or otherwise, prior to the Closing Date.
6. COVENANTS OF BUYER.
------------------
6.01 Consents. Buyer shall, as soon as practicable, prepare and make all
--------
necessary filings with all governmental or regulatory bodies or other entities
and shall use its reasonable best efforts to obtain all consents, waivers,
approvals, authorizations, rulings or orders from all governmental or regulatory
bodies or other entities listed on the Buyer Consent Schedule and furnish true,
correct and complete copies of each to Seller.
27
6.02 Employee Matters. Immediately following the Closing, Buyer shall
----------------
cause the Subject Entities to continue the employment of all employees thereof
(including those employees subject to the Employee Transfer) at the same base
pay and on terms and conditions not materially less favorable to such employees
than those provided for immediately prior to the Closing. In addition, Buyer
will give each such person credit for all accrued but unused vacation and paid
time off that each such person had with Seller up through the Closing Date.
Nothing herein shall be construed as a change in the status of any such
employees as employees at will.
6.03 Name Change. No later than six months after the Closing Date, Buyer
-----------
shall cause WMIC to amend its articles of incorporation, to change its corporate
name and its doing business designation, in each state where it is qualified to
do business, to a different name that does not include the words "White
Mountains" in any form. Buyer shall forthwith thereafter notify Seller of such
changes and provide copies of all documents filed in connection therewith. In
addition, after June 30, 1999, Buyer and its affiliates shall cease using the
name "White Mountains" in any manner for commercial purposes. It is understood
and agreed that Seller shall retain all right, title and interest in and to the
"White Mountains" name.
6.04 Cooperation. Buyer shall execute such documents and other papers,
-----------
provide such information, and take such further actions as may be reasonably
requested by Seller to carry out the provisions hereof and to consummate the
transactions contemplated hereby.
6.05 Conditions Precedent. Buyer shall use its reasonable best efforts to
--------------------
cause all of the conditions precedent to the consummation of the transactions
contemplated by this Agreement applicable to it to be met.
6.06 Confidentiality. Buyer acknowledges that the information being
-----------------
provided to it in connection with the purchase and sale of the Shares and the
other transactions contemplated hereby is subject to the terms of a
confidentiality agreement between Buyer and ▇▇▇▇ and ▇▇▇▇▇▇ on behalf of Seller
entered into in October, 1998 (the "Confidentiality Agreement"), the terms of
which are incorporated herein by reference as if Seller were a party thereto.
Effective upon, and only upon, the Closing, the Confidentiality Agreement shall
terminate with respect to information relating solely to the Subject Entities;
provided that Buyer acknowledges that any and all other information provided to
--------
it by Seller or Seller's representatives concerning Seller or its affiliates
(other than the Subject Entities) shall remain subject to the terms and
conditions of the Confidentiality Agreement after the Closing Date.
28
6.07 Indemnity. Buyer will indemnify and defend Seller with respect to
---------
the following claims: (1) any claim by an employee of any Subject Entity that he
or she was not employed as provided in Section 6.02 this Agreement; (2) any
claim for payment of vacation or paid time off accrued up through, as well as
after, the Closing Date; and (3) any claim by any person relating to employment
matters involving the Subject Entities and based on facts or circumstances
occurring after the Closing Date including, but not limited to, the termination
of employment of any employee of the Subject Entities after the Closing Date,
the compensation and benefits such person is entitled to upon termination of
employment after the Closing Date, or the compensation and benefits to which
such person is entitled by virtue of his or her employment with Buyer after the
Closing Date.
7. TAX COVENANTS OF SELLER AND BUYER.
---------------------------------
7.01 Seller shall prepare and file, or cause to be prepared and filed, all
material Tax Returns for taxable periods ending on or prior to the Closing Date
required to be filed (giving effect to any valid extensions of time) including,
but not limited to, all calendar year 1998 Tax Returns and those Tax Returns for
the short taxable period commencing on January 1, 1999, and ending on the
Closing Date and shall pay all Taxes shown thereon to be due. Seller shall
prepare such Tax Returns in a manner consistent with the Tax Returns of the
Subject Entities filed prior to the Closing for taxable periods ending on or
before December 31, 1997 (the "Prior Year Returns"). Buyer shall cause the
Subject Entities to pay, or shall itself pay or make provisions to pay on a
timely basis, all Taxes to the extent reflected as liabilities on the Closing
Date Balance Sheet as adjusted in accordance with Section 7.02. Such payment
will exclude any Taxes which are a result of the purchase transaction
contemplated herein, in accordance with the Section 338(h)(10) election
described in Section 7.09. However, the Closing Date Balance Sheet will not
reflect an accrual for the Taxes which result from the Section 338(h)(10)
election or other Taxes resulting from the purchase and sale of the Shares or by
the Related Transactions.
7.02 Buyer shall prepare and file, or cause to be prepared and filed, all
material Tax Returns for taxable periods including (but not ending on) the
Closing Date required to be filed (giving effect to any valid extensions of
time) and shall pay all Taxes due with respect to such Tax Returns; provided
--------
that Seller shall reimburse Buyer for any amount owed by Seller pursuant to
Section 14.01 within 30 days of Buyer's written notification to Seller of
Seller's liability pursuant to Section 14.01. Buyer shall prepare such Tax
Returns in a manner consistent with the Tax Returns of the Subject Entities
filed prior to the Closing and shall furnish such Tax Returns to the Seller for
the Seller's approval (which approval shall not be unreasonably delayed or
withheld) at least thirty (30) days prior to the due date for filing such Tax
Returns.
29
All liabilities or refunds for Taxes for Tax periods covered in Sections
7.01 and 7.02 which are reflected or which should have been reflected on the
Closing Date Balance Sheet shall be adjusted to their correct amount based on
the Tax Returns as actually filed. Cash settlement of the difference between the
accruals on the Closing Date Balance Sheet and the actual Tax Returns shall be
made within 30 days of the filing of such Tax Returns.
Any and all Taxes that arise from this stock purchase transaction in
accordance with the Section 338(h)(10) election described in Section 7.09 below
shall be entirely borne by Seller.
7.03 Buyer and Seller agree to cause the Subject Entities to file all Tax
Returns for the period including the Closing Date on the basis that the relevant
taxable period ended as of the close of business on the Closing Date, unless the
relevant taxing authority will not accept a Tax Return filed on that basis.
7.04 Seller shall be responsible for filing any amended, consolidated,
combined or unitary Tax Returns for taxable years ending on or prior to the
Closing Date which are required as a result of examination adjustments made by
the Internal Revenue Service or by the applicable state or local taxing
authorities for such taxable years as finally determined. For those
jurisdictions in which separate Tax Returns are filed by any of the Subject
Entities, any required amended returns resulting from such examination
adjustments, as finally determined, shall be prepared by Seller and furnished to
such Subject Entity, as the case may be for approval (which approval shall not
be unreasonably withheld), signature and filing at least 30 days prior to the
due date for filing such returns.
7.05 Seller, each of the Subject Entities and Buyer shall reasonably
cooperate, and shall cause their respective affiliates, officers, employees,
agents, auditors and representatives reasonably to cooperate, in preparing and
filing all Tax Returns, including maintaining and making available to each other
all records necessary in connection with Taxes and in resolving all disputes and
audits with respect to all taxable periods relating to Taxes. Buyer and Seller
recognize that Seller and its affiliates will need access, from time to time,
after the Closing Date, to certain accounting and Tax records and information
held by the Subject Entities to the extent such records and information pertain
to events occurring prior to the Closing Date; therefore, Buyer agrees, and
agrees to cause each of the Subject Entities, (i) to use its best efforts to
properly retain and maintain such records until the applicable statute of
limitations has expired, and (ii) to allow Seller and its agents and
representatives (and agents or representatives of any of its affiliates), at
times and dates mutually acceptable to the parties, to inspect, review and
30
make copies of such records as Seller may deem necessary or appropriate from
time to time, such activities to be conducted during normal business hours and
at Seller's expense.
Seller shall provide prompt notice (within thirty (30) days of receiving an
Internal Revenue Service Notice of Proposed Adjustment or similar notification
from any other taxing authority) to Buyer of any issue raised in any official
inquiry, examination or proceeding involving any Taxes relating to any of the
Subject Entities for any period prior to and including the Closing Date.
7.06 Any refunds or credits of Taxes other than those accrued on the
Closing Date Balance Sheet as adjusted pursuant to Section 7.02, of any of the
Subject Entities for any taxable period ending on or before the Closing Date
shall be for the account of Seller. Any refunds or credits of Taxes of any of
the Subject Entities for any taxable period beginning after the Closing Date
shall be for the account of the Buyer. Any refunds or credits of Taxes of any
of the Subject Entities for any Straddle Period (as defined in Section 14.01)
shall be equitably apportioned between Seller and Buyer as provided by Section
14.01. Buyer shall, if Seller so requests and at Seller's expense, cause any of
the Subject Entities to file for and obtain any refunds or credits to which
Seller is entitled under this Section 7.06. Buyer shall permit Seller to
control the prosecution of any such refund claim and, where deemed appropriate
by Seller, shall cause each of the Subject Entities to authorize by appropriate
powers of attorney such persons as Seller shall designate to represent such
Subject Entity with respect to such refund claim. Buyer shall cause each of the
Subject Entities to forward to Seller any such refund within 10 days after the
refund is received (or reimburse Seller for any such credit within 10 days after
the credit is allowed or applied against other Tax liability); provided,
--------
however, that any such amounts payable to Seller shall be net of any Tax cost or
-------
benefit to Buyer or such Subject Entity, attributable to the receipt of such
refund and/or the payment of such amounts to Seller.
7.07 All sales and use Taxes incurred in connection with this Agreement
and the transactions contemplated hereby shall be paid by Buyer, and Seller and
Buyer shall cooperate in timely making all filings, returns, reports and forms
as may be required to comply with the provisions of such Tax laws.
7.08 On the Closing Date, Buyer shall cause each of the Subject Entities
to conduct its business in the ordinary course in substantially the same manner
as presently conducted and shall not permit any of the Subject Entities to
effect any extraordinary transactions (other than any such transactions
expressly required by applicable law or contemplated by this Agreement) that
could result in Tax liability to any of the Subject
31
Entities in excess of Tax liability associated with the conduct of its business
in the ordinary course.
On or after the Closing Date, neither Buyer nor any of the Subject Entities
shall, with respect to any Pre-Closing Tax Period, (i) file any amended Tax
Return, or (ii) carry back any loss or other Tax attribute.
7.09 Buyer and Seller shall join in timely making an election under
Section 338(h)(10) of the IRC and similar elections under any applicable state
or local income Tax laws with respect to each Subject Entity. Buyer and Seller
shall report the transactions consistent with such election under Section
338(h)(10) of the IRC or any similar state or local Tax provision (the
"Elections"). Buyer and Seller shall timely execute any and all forms necessary
to effectuate the Elections (including, without limitation, Internal Revenue
Service Form 8023 and any similar forms under applicable state or local income
Tax laws (the "Section 338 Forms")).
Buyer and Seller agree to use all reasonable efforts to enter into an
agreement (the "Allocation Agreement") as soon as practicable after the Closing
to determine the Modified Aggregate Deemed Sale Price ("MADSP"), pursuant to
Section 338(h)(10) of the IRC and the regulations thereunder, of the assets of
the Subject Entities. Buyer shall initially prepare a statement(s) setting forth
a proposed computation and allocation of MADSP (the "Computation") and submit it
to Seller no later than 150 days after the Closing. If within 30 days of
Seller's receipt of the Computation, Seller shall not have objected in writing
to such Computation, the Computation shall become the Allocation Agreement. If
within 60 days of Seller's receipt of the Computation, Seller and Buyer have not
adopted an Allocation Agreement, the parties shall submit any disputed matter to
the Accounting Firm, and cause the Accounting Firm to deliver a final, binding
and conclusive written report resolving all such disputed matters within 30 days
of the submission thereof to the Accounting Firm. Seller and Buyer shall each
cause the Section 338 Forms to be duly executed by an authorized person for
Seller and Buyer, respectively, within 30 days prior to the date such Section
338 Forms are required to be filed, and shall duly and timely file the Section
338 Forms in accordance with applicable Tax laws and the terms of this
Agreement.
8. CLOSING AND CLOSING DOCUMENTS.
-----------------------------
8.01 Closing. The "Closing" under this Agreement shall be held at the
-------
offices of Buyer at 10:00a.m., Central Time, at the end of the month during
which all the terms and conditions contained in Sections 9, 10 and 11 of this
Agreement have been fulfilled or waived, or at such other place and time as may
be mutually agreed to by the parties (the day on which Closing takes place being
referred to as the "Closing Date").
32
8.02 Seller Closing Matters. At the Closing, Seller shall deliver, or
----------------------
cause to be delivered, to Buyer or take, or cause to be taken, the following
actions, as the case may be:
(A) A certificate of Seller, signed by its President, which shall
confirm (i) the compliance by Seller in all material respects with its covenants
and agreements contained in this Agreement, (ii) the accuracy in all material
respects of the representations and warranties made by Seller in this Agreement
that are not qualified as to materiality, at and as of the Closing as if made at
such time (unless made as of a specific date), and (iii) the accuracy of the
representations and warranties made by Seller in this Agreement that are
qualified as to materiality, at and as of the Closing as if made at said time
(unless made as of a specific date).
(B) A certificate of Seller certifying that the GAAP Consolidated
Financial Statements for the year ended December 31, 1998 and the Prior Month-
End Balance Sheet have been prepared in accordance with GAAP on a basis
consistent with the GAAP Consolidated Financial Statements for the periods ended
December 31, 1997 and September 30, 1998 and in accordance with Section 2.09.
(C) Written resignations, effective at the Closing, of the directors
of each of the Subject Entities specified on the Directors and Officers
Schedule.
(D) Certificates representing the Shares being conveyed by Seller as
specified in Section 1 hereto, duly assigned or with executed stock powers
to transfer the shares evidenced thereby to Buyer on the stock transfer
records of the Company.
(E) The opinion of ▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇ & ▇▇▇▇▇▇▇▇, LLP, or other counsel
to Seller reasonably acceptable to Buyer dated the Closing Date, covering
the matters set forth in Exhibit 8.02(E).
(F) All minute books, stock record books and corporate seals of each
of the Subject Companies to the extent that they are not already in the
possession of the Subject Companies.
(G) Written evidence, reasonably satisfactory to Buyer, from the
banking institution or institutions holding the Indebtedness of the
extinguishment of the Indebtedness in full.
8.03 Buyer Closing Matters. At the Closing, Buyer shall deliver, or cause
---------------------
to be delivered, to Seller:
33
(A) A certificate of Buyer, signed by its President, which shall
confirm (i) the compliance by Buyer in all material respects with its
covenants and agreements contained in this Agreement, (ii) the accuracy in
all material respects of the representations and warranties made by it in
this Agreement that are not qualified as to materiality, at and as of the
Closing as if made at such time (unless made as of a specific date), and
(iii) the accuracy of the representations and warranties made by Buyer in
this Agreement that are qualified as to materiality, at and as of the
Closing as if made at said time (unless made as of a specific date).
(B) The Estimated Purchase Price in the amount and manner of payment
specified in Section 1.02(B).
(C) The opinion of counsel to Buyer reasonably acceptable to Seller,
dated the Closing Date, covering the matters set forth in Exhibit 8.03(C).
9. CONDITIONS TO THE OBLIGATIONS OF BUYER.
--------------------------------------
The obligations of Buyer under this Agreement to cause this Agreement to
become effective and have the transactions contemplated hereby be consummated
are, at its option, subject to the conditions that:
9.01 Validity of Representations and Warranties. The representations and
------------------------------------------
warranties of Seller contained herein that are not qualified as to materiality
shall be true in all material respects on and at the Closing (unless made as of
a specific date) with the same force and effect as though made on and at the
Closing. The representations and warranties of Seller contained herein that are
qualified as to materiality shall be true on and at the Closing (unless made as
of a specific date) with the same force and effect as though made on and at the
Closing.
9.02 Consents. All consents, waivers, approvals, authorizations or orders
--------
listed on Seller Consent Schedule shall have been obtained by Seller in
substance reasonably satisfactory to Buyer and copies of the same (if reduced to
writing) shall have been delivered to Buyer.
9.03 Compliance with Covenants. Seller shall have performed in all
-------------------------
material respects all obligations and agreements and complied in all material
respects with all covenants and conditions contained in this Agreement to be
performed and complied with at or prior to the Closing (except that any
covenants and conditions which are qualified as to materiality shall have been
so performed and complied with in all respects).
34
9.04 NCM/Charter County Mutual Relationship. The existing General Agency
--------------------------------------
Managerial Contract between NCM and Charter County Mutual under which NCM
controls Charter County Mutual shall be in full force and effect on the Closing
Date, and shall not have been amended, modified or otherwise altered between the
execution of this Agreement and the Closing Date. Except for NCM and the board
of directors and officers of Charter County Mutual, no individual, corporation,
partnership, joint venture, association, joint stock company, trust, or
unincorporated organization shall have any direct or indirect power or authority
to direct or cause the direction of the management and policies of Charter
County Mutual.
9.05 Resignations. The directors of each of the Subject Entities as
------------
specified on the Directors and Officers Schedule shall have tendered their
resignations in writing, effective at the Closing.
9.06 Transfer of Valley National and Pinnacle. All of the issued and
----------------------------------------
outstanding stock of each of Valley National and Pinnacle (if any) owned by any
of the Subject Entities shall have been sold or transferred (including by way of
dividend or distribution) to Seller or to an affiliate of Seller that is not a
Subject Entity or to a third party on terms and conditions reasonably
satisfactory to Buyer; provided, however, that in the event Pinnacle has not yet
-------- -------
been acquired by Charter as of the Closing Date, Seller shall have caused all
rights and obligations under the Pinnacle Acquisition Agreement to be assigned
to Seller or an affiliate of Seller (other than the Subject Entities).
9.07 Asset Sale/Employee Transfer. The Asset Sale and the Employee
----------------------------
Transfer shall have been completed in form and substance reasonably satisfactory
to Buyer.
9.08 Extinguishment of Indebtedness. The Indebtedness shall have been
------------------------------
extinguished in full.
10. CONDITIONS OF THE OBLIGATIONS OF SELLER.
---------------------------------------
The obligations of Seller under this Agreement to cause this Agreement to
become effective and have the transactions contemplated hereby be consummated
are, at its option, subject to the conditions that:
10.01 Validity of Representations and Warranties. The representations and
------------------------------------------
warranties of Buyer contained herein that are not qualified as to materiality
shall have been true in all material respects on and at the Closing (unless made
as of a specific date) with the same force and effect as though made on and at
the Closing. The representations and warranties of Buyer contained herein that
are qualified as to materiality shall be true
35
on and at the Closing (unless made as of a specific date) with the same force
and effect as though made on and at the Closing.
10.02 Consents. All consents, waivers, approvals, authorizations or
--------
orders listed on the Buyer Consent Schedule shall have been obtained by Buyer in
substance reasonably satisfactory to Seller and copies of the same (if reduced
to writing) shall have been delivered to Seller.
10.03 Compliance with Covenants. Buyer shall have performed in all
-------------------------
material respects all obligations and agreements and complied in all material
respects with all covenants and conditions contained in this Agreement to be
performed and complied with by it at or prior to the Closing (except that any
covenants and conditions which are qualified as to materiality shall have been
so performed and complied with in all respects).
11. CONDITIONS APPLICABLE TO BUYER AND SELLER.
-----------------------------------------
The obligations of each of Buyer and Seller under this Agreement to cause
this Agreement to become effective and have the transactions contemplated hereby
be consummated are subject to the following terms and conditions:
11.01 ▇▇▇▇-▇▇▇▇▇-▇▇▇▇▇▇ Act. Any waiting period applicable to the
---------------------
consummation of the transactions contemplated by this Agreement under the ▇▇▇▇-
▇▇▇▇▇-▇▇▇▇▇▇ Antitrust Improvements Act of 1976, as amended, shall have expired
or been terminated, and no action instituted by the Department of Justice or
Federal Trade Commission challenging or seeking to enjoin the consummation of
such transactions shall be pending.
11.02 Governmental Approvals. A written order approving the purchase and
----------------------
sale of the Shares as contemplated by this Agreement from the insurance
departments listed on Seller's and Buyer's Consent Schedules and any additional
approvals thereof as may be required by other insurance regulatory authorities
for the purchase and sale of the Shares hereunder shall have been obtained at or
prior to the Closing.
11.03 Injunction. The consummation of the transactions contemplated by
----------
this Agreement shall not have been restrained, enjoined or prohibited by any
court or governmental authority of competent jurisdiction. No material
litigation or administrative proceeding shall be pending as of the Closing
seeking to restrain, enjoin or prohibit the consummation of the transactions
contemplated by this Agreement.
36
11.04 Closing. The Closing shall occur no later than 5:00 p.m., Central
-------
Time, on June 30, 1999, or such other date as may be mutually agreed to by the
parties.
12. TERMINATION.
-----------
12.01 Termination. (a) Anything contained herein to the contrary
-----------
notwithstanding, this Agreement may be terminated and the transactions
contemplated hereby abandoned at any time prior to the Closing Date:
(i) by mutual written consent of Seller and Buyer;
(ii) by Seller if any of the conditions set forth in Section 10
shall have become incapable of fulfillment, and shall not have been waived
by Seller;
(iii) by Buyer if any of the conditions set forth in Section 9 shall
have become incapable of fulfillment, and shall not have been waived by
Buyer;
(iv) by either party if any of the conditions set forth in Section
11 (other than Section 11.04) shall have become incapable of fulfillment,
and shall not have been waived by the party seeking termination; or
(v) by either party if the Closing does not occur on or prior to
June 30, 1999;
provided, however, that the party seeking termination pursuant to clause
-------- -------
(ii), (iii), (iv) or (v) shall only be entitled to terminate this Agreement
if it is not in material breach of any of its representations, warranties,
covenants or agreements contained in this Agreement.
(b) In the event of termination by Seller or Buyer pursuant to this Section
12, written notice thereof shall forthwith be given to the other party and the
transactions contemplated by this Agreement shall be terminated, without further
action by either party. If the transactions contemplated by this Agreement are
terminated as provided herein:
(i) Buyer shall return all documents and other material received from
Seller or any Subject Entity relating to the transactions contemplated
hereby, whether so obtained before or after the execution hereof, to
Seller; and
(ii) all confidential information received by Buyer with respect to
the business of the Subject Entities shall be treated in accordance with
the terms of the
37
Confidentiality Agreement, which shall remain in full force and effect in
accordance with its terms notwithstanding the termination of this
Agreement.
(c) If this Agreement is terminated and the transactions contemplated
hereby are abandoned as described in this Section 12, this Agreement shall
become null and void and of no further force or effect, except for the
provisions of (i) Section 6.06 relating to the obligation of Buyer to keep
confidential certain information and data obtained by it, (ii) Section 17.01
relating to certain expenses, (iii) Section 17.09 relating to attorney fees and
expenses, (iv) Section 17.06 relating to publicity, (v) Section 17.10 relating
to finder's fees and broker's fees, and (vi) this Section 12. Nothing in this
Section 12 shall be deemed to release either party from any liability for any
breach by such party of the terms and provisions of this Agreement or to impair
the right of either party to compel specific performance by the other party of
its obligations under this Agreement.
13. SURVIVAL OF REPRESENTATIONS AND WARRANTIES; COVENANTS.
-----------------------------------------------------
The representations and warranties in this Agreement and in any certificate
or schedule delivered pursuant hereto shall survive until the date which is
eighteen (18) months following the Closing Date; provided, however, that the
representations and warranties contained in Sections 2.12 (Environmental), 2.17
(Taxes) and 2.19 (Employee Benefits) shall survive until the expiration of the
relevant statutes of limitation, and the representations and warranties
contained in Sections 2.02 (Subsidiaries; the first two sentences only) and 2.03
(Authorized Stock), shall survive forever. Unless otherwise expressly provided
by this Agreement, all covenants and obligations under this Agreement to be
performed after the Closing shall survive the Closing in accordance with their
respective terms.
14. TAX INDEMNIFICATION.
-------------------
14.01 In addition to any indemnification obligations arising under Section
16 hereof, Seller hereby agrees upon the terms and conditions and in accordance
with the procedures set forth in this Agreement, to indemnify, defend and hold
Buyer and its affiliates (including, without limitation, each of the Subject
Entities) and their respective officers, directors, agents and employees (the
"Seller Indemnitees") harmless from and against any damages (including, without
limitation, extraordinary or punitive damages), deficiencies, costs,
liabilities, claims or expenses, including, without limitation, interest,
penalties and reasonable attorneys' fees (individually a "Loss" and collectively
the "Losses"), that any of the Seller Indemnitees shall incur or suffer,
regardless of whether Buyer had knowledge of such Loss or Losses at the time of
the Closing, resulting from or relating to any and all liability for Taxes (i)
of the Subject Entities related to any taxable period ending on or prior to the
Closing Date and the portion ending on the Closing Date
38
of any taxable period that includes (but does not end on) such day ("Pre-Closing
Tax Period") and (ii) resulting from the Elections contemplated by Section 7.09
of this Agreement.
Notwithstanding the foregoing, Seller shall not indemnify any Seller
Indemnitee from any liability for Taxes attributable to any action taken after
the Closing by Buyer, any of its affiliates (including any of the Subject
Entities), or any transferee of Buyer or any of its affiliates (other than any
such action expressly required by applicable law or by this Agreement) (a "Buyer
Tax Act") or attributable to a breach by Buyer of its obligations under this
Agreement.
In the case of any taxable period that includes (but does not end on)
the Closing Date (a "Straddle Period"):
(i) real, personal and intangible property Taxes ("property Taxes")
of the Subject Entities for the Pre-Closing Tax Period shall be equal to
the amount of such property Taxes for the entire Straddle Period multiplied
by a fraction, the numerator of which is the number of days during the
Straddle Period that are in the Pre-Closing Tax Period and the denominator
of which is the number of days in the Straddle Period; and
(ii) the Taxes of the Subject Entities (other than property Taxes)
for the Pre-Closing Tax Period shall be computed as if such taxable period
ended as of the close of business on the Closing Date.
14.02 Buyer hereby agrees upon the terms and conditions and in accordance
with the procedures set forth in this Agreement to indemnify, defend and hold
Seller and its affiliates and its officers, directors, agents and employees (the
"Buyer Indemnitees") harmless from and against any Loss or Losses that any of
the Buyer Indemnitees shall incur or suffer, regardless of whether Seller had
knowledge of such Loss or Losses at the time of the Closing, resulting from or
relating to any and all liability for Taxes (i) of the Subject Entities related
to any taxable period ending after the Closing Date (except to the extent such
taxable period began before the Closing Date, in which case Buyer's indemnity
will cover only that portion of any such Taxes that are not for the Pre-Closing
Tax Period) and (ii) attributable to a Buyer Tax Act or to a breach by Buyer of
its obligations under this Agreement.
14.03 If a claim with respect to Taxes shall be made by any taxing
authority, which, if successful, might result in an indemnity payment to an
indemnified party pursuant to Section 14.01 or 14.02, the party receiving such
claim shall promptly notify the other party in writing of such claim (a "Tax
Claim"). If the indemnified party
39
receives notification of a Tax Claim and fails to notify the indemnifying party
within a sufficient period of time to allow the indemnifying party to
effectively contest such Tax Claim, or in reasonable detail to apprise the
indemnifying party of the nature of the Tax Claim, in each case taking into
account the facts and circumstances with respect to such Tax Claim, the
indemnifying party shall not be liable to the indemnified party, any of its
affiliates or any of their respective officers, directors, agents or employees
to the extent that indemnifying party's position is actually prejudiced as a
result thereof.
With respect to any Tax Claim relating solely to a Pre-Closing Tax Period,
Seller shall control all proceedings taken in connection with such Tax Claim
(including selection of counsel) and, without limiting the foregoing, may in its
sole discretion pursue or forego any and all administrative appeals,
proceedings, hearings and conferences with any taxing authority with respect
thereto, and may, in its sole discretion, either pay the Tax claimed and ▇▇▇ for
a refund where applicable law permits such refund suits or contest the Tax Claim
in any permissible manner.
Buyer, the Subject Entities, and each of their respective affiliates shall
cooperate with Seller in contesting any Tax Claim, which cooperation shall
include the retention until the applicable statute of limitations has expired
and (upon Seller's request) the provision to Seller of records and information
which are reasonably relevant to such Tax Claim, and making their employees
available on a mutually convenient basis to provide additional reasonably
relevant information or explanation of any material provided hereunder or to
testify at proceedings relating to such Tax Claim.
In no case shall Buyer, the Subject Entities, or any of their respective
officers, directors, agents or employees settle or otherwise compromise any Tax
Claim relating to a Pre-Closing Tax Period (excluding Straddle Periods) without
Seller's prior written consent.
15. POST-CLOSING RESERVE ADJUSTMENTS.
--------------------------------
15.01 Calculation and Adjustment. As promptly as reasonably practicable
--------------------------
after it becomes available, Buyer shall deliver to Seller a true and complete
copy of each Annual and Quarterly Statement of each Subject Entity as filed with
the appropriate insurance regulatory authority for any period ending at or prior
to the Settlement Date (as defined in Section 15.02), together with any
actuarial opinion, affirmation or certification filed in connection therewith.
Not later than 90 days following the end of each calendar year until the
Settlement Date, and not later than 90 days following the Settlement Date, Buyer
shall provide Seller with a written report (the "Reserve Report") reflecting the
calculation contemplated by Section 15.02 ("Indicated Reserve Amount"), together
with all work papers and actuarial memoranda used in establishing the Indicated
Reserve Amount. The
40
calculation of the Indicated Reserve Amount will be prepared in conformity with
GAAP as in effect on the Closing Date consistently applied and the books and
records of the Subject Entities (with the exception of ULAE which shall be
calculated in accordance with Section 15.02), and will present fairly the loss
and loss adjustment expense reserves of the Insurance Companies as of the
Settlement Date (or earlier date thereof). In the event that the Indicated
Reserve Amount reflected on the final Reserve Report prepared as of the
Settlement Date exceeds the loss and loss adjustment expense ("LAE") reserves,
net of related third party reinsurance, salvage and subrogation recoverables and
receivables, as shown in the Closing Date Balance Sheet ("Closing Reserves"), by
at least $500,000, Seller shall pay or cause to be paid to Buyer in immediately
available funds 90% of the amount (including such $500,000 amount) by which the
Indicated Reserve Amount exceeds the Closing Reserves (including such $500,000
amount). In the event that the Closing Reserves exceed the Indicated Reserve
Amount by at least $500,000, Buyer shall pay or cause to be paid to Seller in
immediately available funds 90% of the amount (including such $500,000 amount)
by which the Closing Reserves exceed the Indicated Reserve Amount (including
such $500,000 amount). Notwithstanding anything herein to the contrary, Seller
shall not in any event be required to pay any amounts hereunder which would
individually or in the aggregate exceed $50,000,000.
15.02 Calculation Methodology. The Indicated Reserve Amount will be equal
-----------------------
to the sum of (i) the Indicated Loss Reserve Amount as defined in Section 15.03
and (ii) the Indicated ALAE Reserve Amount as defined in Section 15.04 and (iii)
5.4% of the sum of (a) the Indicated Loss Reserve Amount plus (b) the Indicated
ALAE Reserve Amount, such percentage representing the agreed-upon unallocated
loss adjustment expenses ("ULAE") for the Subject Business, in the case of each
of (i) and (ii) and (iii) as of December 31, 2002 (the "Settlement Date") solely
with respect to insurance or reinsurance issued, underwritten or assumed prior
to the Closing Date by the Insurance Companies (the "Subject Business").
Notwithstanding anything herein to the contrary, and except as otherwise
provided by Section 15.07, the Indicated Reserve Amount shall exclude from
losses and LAE any losses and LAE liabilities (i) paid or incurred in excess of
the limits of any original policy, (ii) constituting an extra-contractual
liability, or (iii) arising from the negligence, fraud or bad faith of any
Insurance Company or any other of Buyer's affiliates in the handling of the
underlying claim, but only to the extent that any such losses and LAE
liabilities in the case of each of (i), (ii) and (iii) arise out of acts or
omissions occurring after the Closing Date.
15.03 Indicated Loss Reserve Amount. The Indicated Loss Reserve Amount
-----------------------------
will be the sum of (i) claims paid after the Closing Date for losses
occurring on or prior to the Closing Date with respect to the Subject Business,
(ii) case loss reserves held as of the Settlement Date for losses occurring on
or prior to the Closing Date with respect to the Subject Business, and (iii) the
bulk and incurred but not reported ("IBNR") loss
41
reserves held as of the Settlement Date for losses occurring on or prior to the
Closing Date with respect to the Subject Business, less applicable third party
reinsurance, salvage and subrogation recoveries received or receivable after the
Closing Date and applicable to losses incurred on or prior to the Closing Date.
The loss reserves for the Subject Business will be calculated in accordance with
GAAP as in effect on the Closing Date consistently applied and generally
accepted actuarial practices consistently applied.
15.04 Indicated ALAE Reserve Amount. The Indicated ALAE Reserve Amount
-----------------------------
will be the sum of (i) allocated loss adjustment expenses ("ALAE") paid after
the Closing Date for losses occurring on or prior to the Closing Date with
respect to the Subject Business, (ii) case ALAE reserves held as of the
Settlement Date for losses occurring on or prior to the Closing Date with
respect to the Subject Business and (iii) bulk and IBNR ALAE reserves held as of
the Settlement Date for losses occurring on or prior to the Closing Date with
respect to the Subject Business, less applicable third party reinsurance,
salvage and subrogation recoveries received or receivable after the Closing Date
and applicable to losses incurred on or prior to the Closing Date. The ALAE
reserves for the Subject Business will be calculated in accordance with GAAP as
in effect on the Closing Date consistently applied and generally accepted
actuarial practices consistently applied.
15.05 Dispute Resolution. Following the delivery of the Reserve Report to
------------------
Seller, Buyer will cause the Subject Entities to allow Seller to have reasonable
access , during normal business hours and upon reasonable notice, to the books,
records and work papers of the Subject Entities relating to the Indicated
Reserve Amount and the Subject Business; provided, however, that such access
-------- -------
does not unreasonably disrupt the normal business operations of the Subject
Entities, Buyer or its other affiliates. In the event that the Seller has any
disagreement with the Indicated Reserve Amount reflected in the Reserve Report
then all unresolved disagreements shall be submitted to an independent actuarial
firm of national standing and reputation as the parties shall jointly select and
retain (the "Independent Actuary") for resolution in accordance with this
Agreement. In the event that the parties are unable to jointly select an
Independent Actuary, each of the Buyer, on the one hand, and the Seller, on the
other hand, shall select an independent certified public accounting firm of
national standing and reputation, which firms shall jointly select the
Independent Actuary for joint retention by the parties. The parties shall, and
Buyer shall cause the Subject Entities to, cooperate in good faith with the
Independent Actuary and shall give the Independent Actuary access to all books,
records, work papers and other information and documents relating to the items
in disagreement as the Independent Actuary may reasonably request for purposes
of such resolution. The Independent Actuary shall, within thirty (30) days
after its engagement, deliver to the parties a conclusive written resolution of
all disagreements submitted to it, which written resolution shall be in
accordance with this Agreement and shall be final and binding upon the parties
hereto. The Indicated Reserve Amount reflected in the Reserve Report shall
42
be adjusted accordingly to reflect any such resolution and, as so adjusted,
shall be deemed final for purposes of the payments provided in Section 15.01.
Seller on the one hand, and Buyer on the other hand, shall each pay one-half of
the fees and expenses of the Independent Actuary.
15.06 Payment. Except for any amounts in dispute under Section 15.05,
-------
balances due from either party under Section 15.01 shall be paid within 30 days
of delivery by Buyer of the final Reserve Report contemplated by Section 15.01.
Balances in dispute shall be paid within 30 days after the parties are notified
of the determination rendered by the Independent Actuary. Any such amounts
shall bear interest at an annual rate equal to the Interest Rate from the date
of delivery of the aforesaid report until payment in full.
15.07 Certain Covenants. With respect to the Subject Business, from the
-----------------
Closing Date until the Settlement Date, Buyer agrees to cause each Insurance
Company to, in good faith, (i) pay and settle claims, and handle the defense of
pending or threatened claims, suits or proceedings, in accordance with its
standard past practices, but in no case on a basis less favorable to such
Insurance Company than those practices of affiliates of Buyer, except to the
extent as may otherwise be required by law, (ii) establish reserves for losses
and loss adjustment expenses in accordance with generally accepted actuarial
standards, but in no case on a basis less favorable to such Insurance Company
than those practices of other affiliates of Buyer, and (iii) not delegate any
claims adjustment or claims handling authority to any person or entity not
affiliated therewith, in each case, other than on a basis more favorable to and
involving lesser liabilities, obligations and other costs for such Insurance
Company. Notwithstanding anything contained in this Agreement to the contrary,
each of Buyer and Seller agree that all claims incurred by any Insurance Company
with respect to the Subject Business involving synthetic stucco (sometimes
referred to as Exterior and Insulation Finishing System (EIFS) or Dryvit) shall
be assigned a date of loss as of the inception of the policy period. While this
Section 15 is in effect, Seller shall have the right to inspect and copy, at its
own expense, through its duly authorized representatives, the books, records and
accounts of each Subject Entity pertaining to the Subject Business and payments
of losses and loss adjustment expenses in respect thereof during normal business
hours and upon reasonable notice; provided, however, such inspection and copying
-------- -------
shall not unreasonable disrupt the normal business operations of any Subject
Entity, Buyer or its other affiliates. During the term of this Agreement, Buyer
shall advise Seller promptly of any claim relating to the Subject Business and
any material subsequent developments pertaining thereto, to the extent Buyer or
any of its affiliates is required to notify any reinsurer, retrocessionaire or
other assuming company thereof. Upon the written request of Seller, Buyer will
afford Seller an opportunity to participate with the relevant Insurance Company,
at the sole expense of Seller, in the settlement of any such claim, and the
Insurance Company and Seller shall cooperate in every respect in such
settlement; provided, however, in the event
-------- -------
43
that Seller participates in a settlement, and to the extent such participation
results in or contributes to (i) liabilities paid or incurred in excess of the
limits of any original policy, (ii) liabilities constituting extra-contractual
liabilities, or (iii) a finding of negligence, fraud or bad faith as
contemplated by Section 15.02, such settlement and all liabilities associated
therewith shall be included to such extent in the Indicated Reserve Amount.
16. INDEMNIFICATION.
---------------
16.01 Indemnification by Seller. In addition to any indemnification
-------------------------
obligations provided elsewhere herein, Seller hereby agrees upon the terms and
conditions and in accordance with the procedures set forth in this Agreement, to
indemnify, defend and hold Buyer and its affiliates (including, without
limitation, following the Closing, each of the Subject Entities) and their
respective officers, directors, agents and employees (the "Seller Indemnitees")
harmless from and against any Loss or Losses that any of the Seller Indemnitees
shall incur or suffer resulting from or relating to any breach of representation
or warranty, or non-fulfillment of any covenant or agreement, by Seller
contained in this Agreement or any certificate, schedule, list or other document
delivered by Seller to Buyer pursuant to this Agreement. Notwithstanding
anything in this Agreement to the contrary, Seller shall not be required
hereunder to indemnify, defend or hold Seller Indemnitees, any of their
affiliates or any other Person or entity harmless from or against any Losses
arising from or relating to (i) insurance or reinsurance losses or loss
adjustment expenses (including reserves in respect thereof), except to the
extent specifically provided in Section 15, or (ii) Taxes, except to the extent
specifically provided in Section 14, or (iii) any Losses reflected on the
Closing Date Balance Sheet.
16.02 Indemnification by Buyer. In addition to any indemnification
------------------------
obligations provided elsewhere herein, Buyer hereby agrees upon the terms and
conditions and in accordance with the procedures set forth in this Agreement to
indemnify, defend and hold Seller and its affiliates and their respective
officers, directors, agents and employees (the "Buyer Indemnitees") harmless
from and against any Loss or Losses that any of the Buyer Indemnitees shall
incur or suffer resulting from or relating to any breach of representation or
warranty, or non-fulfillment of any covenant or agreement, by Buyer contained in
this Agreement or any certificate, schedule, list or other document delivered by
Buyer to Seller pursuant to this Agreement.
16.03 Limits on Indemnification. Notwithstanding the foregoing, no party
-------------------------
shall be obligated pursuant to Section 16.01 or 16.02, respectively, (i) until
the aggregate Losses of the party suffering Loss is in the amount of $250,000 or
more, in which case the indemnified party shall be entitled to be indemnified
for all such Losses (including such $250,000 amount) and (ii) for any Losses in
excess of $5,000,000 in the aggregate for all Losses; provided, however, that
-------- -------
the limitation for any Loss or Losses resulting
44
from or relating to any breach by Seller of the representations and warranties
contained in Sections 2.02 or 2.03 shall be an amount equal to the Purchase
Price, less any other amounts paid to Buyer pursuant to Section 16.01.
16.04 Indemnification Procedures. Any indemnified party entitled to
--------------------------
indemnification hereunder pursuant to this Section 16 shall (i) give prompt
written notice to the indemnifying party of any claim with respect to which it
seeks indemnification and (ii) unless in such indemnified party's judgment a
conflict of interest between such indemnified and indemnifying parties may exist
with respect to such claim, permit such indemnifying party to assume the defense
of such claim with counsel reasonably satisfactory to the indemnified party. If
such defense is assumed, the indemnifying party will not be subject to any
liability for any settlement made by the indemnified party without the
indemnifying party's prior written consent (but such consent will not be
unreasonably withheld). An indemnifying party who is not entitled to, or elects
not to, assume the defense of a claim will not be obligated to pay the fees and
expenses of more than one counsel for all parties indemnified by such
indemnifying party with respect to such claim, unless in the reasonable judgment
of any indemnified party a conflict of interest may exist between such
indemnified party and any other of such indemnified parties with respect to such
claim. The indemnified party shall have the right to be represented by counsel
at its own expense in any such contest, defense, litigation or settlement
conducted by the indemnifying party. The indemnifying party also agrees to make
such provisions, as are reasonably requested by any indemnified party, for
contribution to such party in the event the indemnifying party's indemnification
is unavailable for any reason.
17. MISCELLANEOUS.
17.01 Payment of Expenses. Except as otherwise expressly provided herein,
-------------------
whether or not this Agreement shall be consummated, each party hereto shall pay
its own expenses incident to preparing for, entering into and carrying out this
Agreement and to the consummation of the transactions contemplated hereby.
17.02 Entire Agreement. This Agreement (together with the Schedules and
----------------
Exhibits hereto and the documents referred to herein) contains, and is intended
as, a complete statement of all of the terms of the arrangements between the
parties with respect to the matters provided for herein, and supersedes any
previous agreements and understandings between the parties with respect to those
matters.
17.03 Modifications, Amendments and Waivers. At any time prior to the
-------------------------------------
Closing, the parties hereto may by written agreement (a) extend the time for the
performance of any of the obligations or other acts of the parties hereto, (b)
waive any inaccuracies in the representations and warranties contained in this
Agreement or in any
45
document delivered pursuant hereto, (c) waive compliance with any of the
covenants or agreements contained in this Agreement, or (d) make any other
modification of this Agreement approved by Buyer and Seller. This Agreement
shall not be altered or otherwise amended except pursuant to an instrument in
writing executed and delivered on behalf of each of the parties hereto.
17.04 Assignment. This Agreement shall not be assignable by any of the
----------
parties hereto, except that (a) Seller shall have the right, without such
consent, to transfer ownership of the Company to another direct or indirect
wholly owned subsidiary of Seller prior to the Closing and to assign to such
other subsidiary its right and obligation hereunder to sell the Shares to Buyer
(provided, however, that, in the event of such assignment, Seller shall
-------- -------
guarantee the performance by such other subsidiary of such sale obligation and
will remain liable for all its other obligations hereunder) and (b) Buyer shall
have the right, without such consent, to assign to a direct or indirect wholly
owned subsidiary of Buyer its right and obligation hereunder to purchase the
Shares from Seller (provided, however, that, in the event of such assignment,
-------- -------
Buyer shall guarantee the performance by such subsidiary of such purchase
obligation and will remain liable for all its other obligations hereunder).
This Agreement shall be binding upon and inure to the benefit of and be
enforceable by the parties hereto and their respective successors and permitted
assigns.
17.05 Schedules. All information set forth in the Seller Schedule shall
---------
be deemed a representation and warranty of Seller as to the accuracy of such
information.
17.06 Publicity. Except as may otherwise be required by law, no press
---------
release or public announcement concerning this Agreement or the transactions
contemplated hereby shall be made prior to the Closing without advance written
approval thereof by Seller and Buyer. Seller and Buyer will cooperate with each
other in the development and distribution of all news releases and other public
information disclosures with respect to this Agreement or any of the
transactions contemplated hereby. Without limiting the foregoing, the parties
contemplate issuing a joint press release announcing this transaction promptly
upon execution of this Agreement.
17.07 Notices. Any notice, request, instruction or other document to be
-------
given hereunder by any party to the others shall be in writing and delivered
personally or sent by registered or certified mail, postage prepaid, overnight
express service or confirmed facsimile transmission, if to Buyer, addressed to
Unitrin, Inc., ▇▇▇ ▇▇▇▇ ▇▇▇▇▇▇ ▇▇▇▇▇, ▇▇▇▇ ▇▇▇▇▇, ▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇ ▇▇▇▇▇,
Attention: ▇▇▇▇▇▇▇ ▇. Vie, facsimile: (▇▇▇) ▇▇▇-▇▇▇▇ (with a copy to Unitrin,
Attention: ▇▇▇▇▇ ▇▇▇▇▇▇▇, Esq., facsimile: (▇▇▇) ▇▇▇-▇▇▇▇); and if to Seller
addressed to Fund American Enterprises Holdings, Inc., ▇▇ ▇▇▇▇▇ ▇▇▇▇ ▇▇▇▇▇▇,
▇▇▇▇▇▇▇, ▇▇▇ ▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇-▇▇▇▇, Attention: ▇▇▇ ▇▇▇▇▇▇▇▇, facsimile:
46
(▇▇▇) ▇▇▇-▇▇▇▇, (with a copy to ▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇ & ▇▇▇▇▇▇▇▇ LLP, Two Embarcadero
Place, ▇▇▇▇ ▇▇▇▇ ▇▇▇▇, ▇▇▇▇ ▇▇▇▇, ▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇, Attention: ▇▇▇▇▇▇ ▇. Mo,
Esq., facsimile: (▇▇▇) ▇▇▇-▇▇▇▇ or to such other persons as may be designated in
writing by the parties.
17.08 Glossary. Attached hereto as Exhibit A is a glossary of certain
--------
defined terms used in this Agreement.
17.09 Attorney Fees. A party in breach of this Agreement shall, on
-------------
demand, indemnify and hold harmless the other party from and against all
reasonable out-of-pocket expenses, including legal fees, incurred by such other
party by reason of the enforcement and protection of its rights under this
Agreement. The payment of such expenses is in addition to any other relief to
which such other party may be entitled.
17.10 Brokers' Fees. Seller hereby represents and warrants that (a) the
----------------
only brokers or finders that have acted for Seller in connection with this
Agreement or the transactions contemplated hereby or that may be entitled to any
brokerage fee, finder's fee or commission in respect thereof are ▇▇▇▇ & ▇▇▇▇▇▇
and (b) Seller shall pay all fees or commissions which may be payable to ▇▇▇▇ &
▇▇▇▇▇▇. Buyer hereby represents and warrants that (a) the only brokers or
finders that have acted for Buyer in connection with this Agreement or the
transactions contemplated hereby or that may be entitled to any brokerage fee,
finder's fee or commission in respect thereof are Search Information Services
and (b) Buyer shall pay all fees or commissions which may be payable to Search
Information Services.
17.11 Remedies. The parties hereto agree that money damages or other
--------
remedies at law would not be a sufficient or adequate remedy for any breach or
violation of, or a default under, this Agreement by them and that, in addition
to all other remedies available to them, each of them shall be entitled to an
injunction restraining such breach, violation or default or threatened breach,
violation or default and to any other equitable relief, including specific
performance, without bond or other security being required.
17.12 Severability. The invalidity or unenforceability of any provision
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of this Agreement in any jurisdiction shall not affect the validity or
enforceability of the remainder of this Agreement in that jurisdiction or the
validity or enforceability of this Agreement, including that provision, in any
other jurisdiction. If any restriction or provision of this Agreement is held
unreasonable, unlawful or unenforceable in any respect, such restriction or
provision shall be interpreted, revised or applied in a manner that renders it
lawful and enforceable to the fullest extent possible under law.
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17.13 Governing Law. This Agreement and the rights and obligations of the
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parties hereto shall be governed by, and construed and enforced in accordance
with, the internal laws of the State of New York, without giving effect to the
principles of conflict of laws thereof.
17.14 Headings. The Section and paragraph headings in this Agreement are
--------
inserted for convenience of reference only, and shall not control or affect the
meaning or construction of any provision of this Agreement.
17.15 Counterparts. This Agreement may be executed by the parties hereto in
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separate counterparts, each of which when so executed and delivered shall be
deemed to be an original and all of which together shall constitute one and the
same instrument.
17.16 Non-Competition/Non-Solicitation. During the twenty-four (24) months
--------------------------------
immediately following the Closing Date, Seller agrees that neither it nor any of
its affiliates will, without the written consent of Buyer or its affiliates:
a) directly or indirectly acquire a majority controlling interest
(whether by merger, consolidation, purchase of stock or assets, or otherwise) of
any Competing Insurer (as defined below);
b) employ or solicit the employment of any employee of the Subject
Entities identified on Schedule 17.16 attached hereto; provided, however,
nothing herein shall prevent Seller or any of its affiliates from employing any
such employee that is terminated by a Subject Entity subsequent to the Closing
Date; or
c) induce or attempt to induce any agent of any Insurance Company as
of the Closing Date to terminate its agency relationship with such Insurance
Company or induce or attempt to induce any agent of any Insurance Company as of
the Closing Date to place the renewal of any insurance policies written or
assumed by any Insurance Company as of the Closing Date with another insurance
company that is owned or controlled by Seller or its affiliates.
For purposes of the above, a "Competing Insurer" shall mean an insurer
(or, if Seller or its affiliates acquire a majority controlling interest in any
group of affiliated insurers, such affiliated group of insurers) which derived a
majority of the gross written premiums, during the calendar year next preceding
the date of determination, from property and casualty insurance in Oregon or
non-standard automobile insurance in Texas.
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IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
and delivered as of the day and year first above written.
UNITRIN, INC.
By: /S/ ▇. ▇. ▇▇▇▇▇
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Name: ▇. ▇. ▇▇▇▇▇
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Title: Senior Vice President
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FUND AMERICAN ENTERPRISES HOLDINGS, INC.
By: /S/ ▇. ▇▇▇▇▇▇▇▇
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Name: ▇. ▇▇▇▇▇▇▇▇
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Title: EVP & CFO
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* * * * *
This Exhibit 2 omits all schedules and similar attachments to the Stock
Acquisition Agreement. Such schedules consist of factual disclosures regarding
the Subject Entities and similar informational matters customary to acquisition
agreements. Unitrin agrees to furnish supplementally a copy of any omitted
schedule to the Commission upon request.
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