SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1996 Commission File No. 0-3681
MERCURY GENERAL CORPORATION
(Exact name of registrant as specified in its charter)
California 95-221-1612
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
4484 Wilshire Boulevard, Los Angeles, California 90010
(Address of principal executive offices) (Zip Code)
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Registrant's telephone number, including area code: (213)937-1060
Securities registered pursuant to Section 12(b) of the Act
NONE
Securities registered pursuant to Section 12(g) of the Act
Common Stock
(Title of Class)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]
The aggregate market value of the Registrant's voting stock held by non- affiliates of the Registrant at March 18, 1997, was approximately $837,029,058 (based upon the closing sales price of such date, as reported by the Wall Street Journal).
At March 18, 1997, the Registrant had issued and outstanding an aggregate of 27,531,425 shares of its Common Stock.
Documents Incorporated by Reference
Proxy statement for the Annual Meeting of Stockholders of Registrant to be held on May 14, 1997 (only portions of which are incorporated by reference).
General
The Company is engaged primarily in writing all risk classifications of automobile insurance in California, which in 1996 accounted for approximately 97% of the Company's direct premiums written. In 1990, the Company commenced writing small amounts of automobile insurance in Georgia and Illinois. In December 1996 the Company acquired American Fidelity Insurance Group (AFI), which is headquartered in Oklahoma City, Oklahoma. AFI is licensed in 36 states but writes predominantly in Texas, Oklahoma and Kansas. AFI's primary lines of insurance are private passenger and commercial automobile and automobile mechanical breakdown. One month of AFI's operations are included in the Company's 1996 consolidated financial statements. During 1996, private passenger automobile insurance and commercial automobile insurance accounted for 93.8% and 4.0%, respectively, of the Company's direct premiums written. The Company also writes homeowners insurance, commercial and dwelling fire insurance and commercial property insurance. The non-automobile lines of insurance accounted for 2.3% of direct premiums written in 1996, of which approximately 51% was in commercial lines.
The Company offers automobile policyholders the following types of coverage: bodily injury liability, underinsured and uninsured motorist, property damage liability, comprehensive, collision and other hazards specified in the policy. The Company's published maximum limits of liability for bodily injury are $250,000 per person, $500,000 per accident and, for property damage, $250,000 per accident. Subject to special underwriting approval, the combined policy limits may be as high as $1,000,000 for vehicles written under the Company's commercial automobile plan. Under the majority of the Company's automobile policies, however, the limits of liability are less than $100,000 per person, $300,000 per accident and $50,000 for property damage.
In 1996, A.M. Best & Co. rated Mercury Casualty Company and Mercury Insurance Company, the Company's chief operating subsidiaries, A+ (Superior). This is the second highest of the fifteen rating categories in the A.M. Best rating system, which range from A++ (Superior) to F (In Liquidation). AFI was rated A- (Excellent) in 1996 by A.M. Best.
The principal executive offices of Mercury General Corporation are located in Los Angeles, California. The home office of its California insurance subsidiaries and the Company's computer and operations center is located in Brea, California. The Company maintains branch offices in a number of locations in California. The non-California subsidiaries maintain offices in Vernon Hills, Illinois, Atlanta, Georgia, Oklahoma City, Oklahoma and Cimarron, Kansas. The Company has approximately 1800 employees.
Organization
Mercury General Corporation ("Mercury General"), an insurance holding company, is the parent of Mercury Casualty Company, a California automobile insurer founded in 1961 by George Joseph, its Chief Executive Officer. Its
insurance operations in California are conducted through three California insurance company subsidiaries, Mercury Casualty Company ("Mercury Casualty"), Mercury Insurance Company ("Mercury Insurance"), and California Automobile Insurance Company. Two subsidiaries, Mercury Insurance Company of Georgia and Mercury Insurance Company of Illinois, received authority in late 1989 to write automobile insurance in those two states. In 1992, Mercury Indemnity Company of Georgia and Mercury Indemnity Company of Illinois were formed to write preferred risk automobile insurance in those two states. Through the Company's first acquisition in December 1996, three additional subsidiaries were added to the group: American Fidelity Insurance Company, domiciled in Oklahoma; Cimarron Insurance Company, domiciled in Kansas; and, AFI Management Company, Inc., a Texas corporation which serves as the attorney-in-fact for American Fidelity Lloyds Insurance Company (AFL), a Texas insurer. Accordingly, their operations are included in the consolidated financial statements of the Company effective December 1, 1996.
Mercury General furnishes management services to its California, Georgia and Illinois subsidiaries. Mercury General, its subsidiaries, and AFL, are referred to as the "Company" unless the context indicates otherwise, Mercury General Corporation individually is referred to as "Mercury General." The term California Companies refers to Mercury Casualty Company, Mercury Insurance Company and California Automobile Insurance Company.
Underwriting
The Company sets its own automobile insurance premium rates, subject to rating regulations issued by the Insurance Commissioners of the applicable states. Automobile insurance rates on voluntary business in California have been subject to approval by the DOI since November 1989. The Company uses its own extensive data base to establish rates and classifications.
On February 25, 1994, the California Department of Insurance (DOI) approved a revised rating plan and rates for the California Companies which became effective on May 1, 1994. These rates were designed to improve the California Companies' competitive position for new insureds and included a modest overall rate reduction. Further rate modifications were approved and made effective on October 15, 1995 and April 15, 1996. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Overview."
In September 1996 the DOI issued new rating factor regulations, replacing expired emergency regulations issued in 1989. See "Regulation - Automobile Insurance Rating Factor Regulations."
Approximately 80% of the Company's new applications for automobile insurance in California during 1996 were placed in the lowest risk classifications, known as "good drivers" (as defined by the California Insurance Code), while approximately 20% of new applications were accepted in higher risk classifications at increased rate levels. Policies are reclassified at the time of renewal and may be changed to a higher or lower risk classification.
At December 31, 1996, "good drivers" accounted for approximately three quarters of all voluntary private passenger automobile policies in force in
California, while the higher risk categories accounted for approximately one quarter. The renewal rate in California (the rate of acceptance of offers to renew) averages approximately 95%.
AFI's private passenger automobile business in force is predominantly standard and preferred type risks, although they plan to offer more non-standard programs in the future.
Production and Servicing of Business
The Company sells its policies through more than 1500 independent agents, of which approximately 800 are located in California and approximately 600 others represent AFI in Oklahoma, Kansas and Texas. Approximately half of the agents in California have represented the Company for more than ten years. The agents, most of whom also represent one or more competing insurance companies, are independent contractors selected and appointed by the Company.
One agency produced direct premiums written of approximately 17%, 15% and 13% during 1996, 1995 and 1994, respectively, of the Company's total direct premiums. No other agent accounted for more than 2% of direct premiums written.
The Company believes that its agents' compensation is higher than the industry average. During 1996 total commissions and bonuses incurred averaged 16.0% of direct premiums written. The Company is not responsible for any of its agents' expenses.
Traditionally, any advertising done has been handled by the individual agents. During the fourth quarter of 1995, the Company began its first advertising program in major newspapers in Southern California. While the Company plans, coordinates and executes the program, the agents are responsible for the cost of the advertisements. The program has been satisfactory and was expanded to Northern California in early 1996. The program was temporarily suspended during the first quarter of 1997 due to a large influx of new business. See "Regulation- Financial Responsibility Law."
Claims
Claims operations are supervised by the Company. The claims staff in California, Georgia, Illinois and Oklahoma administers all claims and directs all legal and adjustment aspects of the claims process. The Company adjusts most claims without the assistance of outside adjusters.
Loss and Loss Adjustment Expense Reserves
The Company maintains reserves for the payment of losses and loss adjustment expenses for both reported and unreported claims. Loss reserves are estimated based upon a case-by-case evaluation of the type of claim involved and the expected development of such claim. The amount of loss reserves and loss adjustment expense reserves for unreported claims are determined on the basis of historical information by line of insurance. Inflation is reflected in the reserving process through analysis of cost trends and reviews of historical reserving results.
Ultimate liability may be greater or lower than stated loss reserves. Reserves are closely monitored and are analyzed quarterly by the Company's actuarial consultants using new information on reported claims and a variety of statistical techniques. The Company does not discount to a present value that portion of its loss reserves expected to be paid in future periods. The Tax Reform Act of 1986 does, however, require the Company to discount loss reserves for Federal income tax purposes.
The following table sets forth a reconciliation of beginning and ending reserves for losses and loss adjustment expenses, net of reinsurance deductions, as shown on the Company's consolidated financial statements for the periods indicated.
Year ended December 31,
---------------------------
1996 1995 1994
---- ---- ----
(Amounts in thousands)
Net reserves for losses and loss adjustment
expenses, beginning of year....................................... $250,990 $223,392 $214,525
Reserves acquired from purchase of American
Fidelity Insurance Company......................................... 24,231 -- --
Incurred losses and loss adjustment expenses:
Provision for insured events of the
current year............................................... 505,726 423,264 370,631
Decrease in provision for insured events
of prior years............................................. (3,868) (6,708) (10,074)
-------- -------- --------
Total incurred losses and loss adjustment
expenses................................................. 501,858 416,556 360,557
-------- -------- --------
Payments:
Losses and loss adjustment expenses attribu-
table to insured events of the current
year........................................................ 298,099 243,294 208,418
Losses and loss adjustment expenses attribu-
table to insured events of prior years...................... 167,226 145,664 143,272
-------- -------- --------
Total payments.............................................. 465,325 388,958 351,690
-------- -------- --------
Net reserves for losses and loss adjustment
expenses at the end of the period.................................. 311,754 250,990 223,392
Reinsurance recoverable............................................. 24,931 2,556 4,107
-------- -------- --------
Gross liability at end of year...................................... $336,685 $253,546 $227,499
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The purchase agreement includes an indemnification by the seller on the loss and loss adjustment expense reserves of AFI at the acquisition date, excluding the mechanical breakdown line, to avoid any impact on the Company's financial statements from any future adverse development on the acquisition date loss reserves.
The difference between the reserves reported in the Company's consolidated financial statements prepared in accordance with generally accepted accounting principles (GAAP) and those reported in the statements filed with the DOI in accordance with statutory accounting principles (SAP) is shown in the table on the following page.
December 31,
------------------------------
1996 1995 1994
---- ---- ----
(Amounts in thousands)
Reserves reported on a SAP basis...................... $311,754 $250,990 $223,392
Reinsurance recoverable............................... 24,931 2,556 $4,107
-------- -------- --------
Reserves reported on a GAAP basis..................... $336,685 253,546 $227,499
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The following table represents the development of loss reserves for the period 1987 through 1996. The top line of the table shows the reserves at the balance sheet date net of reinsurance recoverable for each of the indicated years. This represents the estimated amount of losses and loss adjustment expenses for claims arising in all prior years that are unpaid at the balance sheet date, including losses that had been incurred but not yet reported to the Company. The upper portion of the table shows the cumulative amounts paid as of successive years with respect to that reserve liability. The lower portion of the table shows the re-estimated amount of the previously recorded reserves based on experience as of the end of each succeeding year, including cumulative payments made since the end of the respective year. The estimate changes as more information becomes known about the frequency and severity of claims for individual years. A redundancy (deficiency) exists when the original reserve estimate is greater (less) than the re-estimated reserves at December 31, 1996.
In evaluating the information in the table, it should be noted that each amount includes the effects of all changes in amounts for prior periods. This table does not present accident or policy year development data. Conditions and trends that have affected development of the liability in the past may not necessarily occur in the future. Accordingly, it may not be appropriate to extrapolate future redundancies or deficiencies based on this table.
As of December 31,
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1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
------ ---- ---- ---- ---- ---- ---- ---- ---- --------
(Amounts in thousands)
Net reserves for
losses and loss
adjustment expenses. $178,605 $241,037 $291,408 $301,354 $280,157 $239,203 $214,525 $223,392 $250,990 $311,754
Paid (cumulative)
as of:
One year later..... 112,099 139,874 167,850 181,781 151,866 135,188 143,272 145,664 167,226
Two years later.... 147,641 195,453 227,503 238,030 197,640 184,119 187,641 198,967
Three years later.. 166,477 218,335 249,371 254,884 213,824 197,371 204,606
Four years later... 175,232 226,384 256,659 261,058 218,067 201,365
Five years later... 177,328 229,168 259,147 263,011 220,057
Six years later.... 177,938 229,773 259,781 262,741
Seven years later.. 178,178 229,815 259,769
Eight years later.. 178,215 229,693
Nine years later... 178,103
Net reserves re-estimated as of:
One year later..... 173,325 230,249 269,934 285,212 230,991 204,479 204,451 216,684 247,122
Two years later.... 175,876 233,607 269,652 265,618 218,404 204,999 207,089 222,861
Three years later.. 179,157 234,757 259,635 259,624 220,620 203,452 210,838
Four years later... 180,084 228,909 256,694 264,259 221,118 204,603
Five years later... 177,591 228,326 260,365 264,127 221,264
Six years later.... 177,335 230,102 260,402 263,336
Seven years later.. 178,364 229,998 260,098
Eight years later.. 178,303 229,809
Nine years later... 178,145
Net Cumulative Redundancy
(deficiency)....... 460 11,228 31,310 38,018 58,893 34,600 3,687 531 3,868
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As of December 31,
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1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
(Amounts in thousands)
Gross liability - end of year 240,183 215,301 227,499 253,546 336,685
Reinsurance recoverable (980) (776) (4,107) (2,556) (24,931)
------- ------- ------- ------- -------
Net liability - end of year 239,203 214,525 223,392 250,990 311,754
======= ======= ======= ======= =======
Gross re-estimated liability - latest 209,988 217,237 234,199 254,892
Re-estimated recoverable - latest (5,385) (6,399) (11,338) (7,770)
------- ------- ------- -------
Net re-estimated liability - latest 204,603 210,838 222,861 247,122
======= ======= ======= =======
Gross cumulative redundancy 39,005 9,310 7,762 9,082
======= ======= ======= =======
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For the calendar years 1987 through 1995, the Company's previously estimated loss reserves produced redundancies. The Company attributes this favorable loss development to several factors. First, the Company had completed its development of a full complement of claims personnel early in this period. Second, during 1988, the California Supreme Court reversed what was known as the "Royal Globe" doctrine, which, since 1978, had permitted third party plaintiffs to sue insurers for alleged "bad faith" in resolving claims, even when the plaintiff had voluntarily agreed to a settlement. This doctrine had placed undue pressures on claims representatives to settle legitimate disputes at unfairly high settlement amounts. After the reversal of Royal Globe, the Company believes that it has been able to achieve fairer settlements, because both parties are in a more equal bargaining position. Third, during the years 1988 through 1990, the volume of business written in the Assigned Risk Program expanded substantially as rates were suppressed at grossly inadequate levels. Following the Insurance Commissioner's approval of an 85% temporary rate increase in September 1990, the volume of assigned risk business has declined by nearly 80%. Many of the claims associated with the high volume of assigned risk business in the 1988-1990 period were later found to be fraudulent or grossly exaggerated and were settled in subsequent periods for substantially less than had been initially reserved. Fourth, a number of factors have combined to produce favorable frequency and severity trends in recent years, and actuarial assumptions based on historical trends have proved to be conservative.
Operating Ratios
Loss and underwriting expense ratios are used to interpret the underwriting experience of property and casualty insurance companies. Losses and loss adjustment expenses, on a statutory basis, are stated as a percentage of premiums earned because losses occur over the life of a policy. Underwriting expenses on a statutory basis are stated as a percentage of premiums written rather than premiums earned because most underwriting expenses are incurred when policies are written and are not spread over the policy period. The statutory underwriting profit margin is the extent to which the combined loss and underwriting expense ratios are less than 100%. The Company's loss ratio, expense ratio and combined ratio, and the private passenger automobile industry combined ratio, on a statutory basis, are shown in the following table. The 1992 ratios exclude the effect of a rate refund made pursuant to a settlement with the
California DOI related to the 1988 initiative, Proposition 103. The Company's ratios include lines of insurance other than private passenger automobile written by Mercury Casualty Company and AFI. Since these other lines represent only a small percentage of premiums written, the Company believes its ratios can be compared to the industry ratios included in the table.
Year ended December 31,
---------------------------------------------
1996 1995 1994 1993 1992
------- ------- ------- ------ ------
Loss Ratio........................... 66.6% 67.8% 68.4% 61.3% 60.8%
Expense Ratio........................ 24.0 24.0 24.6 24.8 24.2
---- ---- ---- ---- ----
Combined Ratio....................... 90.6% 91.8% 93.0% 86.1% 85.0%
==== ==== ==== ==== ====
Industry combined ratio (all
writers) (1)....................... 101.9%(2) 102.3% 101.8% 101.8% 102.4%
Industry combined ratio (excluding
direct writers) (1)................ N.A. 103.5% 102.5% 103.2% 104.9%
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(1) Source: A.M. Best, Aggregates & Averages (1996), for all property and casualty insurance companies (private passenger automobile line only, after policyholder dividends).
(2) Source: A.M. Best, "Best's Review, January 1997," "Review and Preview."
(N.A.) Not available.
The following table shows, for the periods indicated, the insurance companies' statutory ratios of net premiums written to policyholders' surplus. While there is no statutory requirement applicable to the Company which establishes a permissible net premium writings to surplus ratio, widely recognized guidelines established by the National Association of Insurance Commissioners (NAIC) indicate that this ratio should be no greater than 3 to 1.
Year ended December 31,
--------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(Amounts in thousands, except ratios)
Net premiums written (1).. $795,873 $636,590 $550,838 $484,097 $455,685
Policyholders' surplus.... $594,799 479,114 $411,898 $314,136 $294,374
Ratio..................... 1.3 to 1 1.3 to 1 1.3 to 1 1.5 to 1 1.6 to 1
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(1) The 1992 amounts exclude the effect of the Proposition 103 settlement.
In December 1993, the NAIC adopted a risk-based capital formula for casualty insurance companies which establishes recommended minimum capital requirements for casualty companies. The formula has been designed to capture the widely varying elements of risks undertaken by writers of different lines of insurance having differing risk characteristics, as well as writers of similar lines where differences in risk may be related to corporate structure, investment
policies, reinsurance arrangements and a number of other factors. Based on the formula adopted by the NAIC, the Company has estimated the Risk-Based Capital Requirements of each of its insurance subsidiaries as of December 31, 1996. Each of the companies exceeded the highest level of recommended capital requirements.
Investments and Investment Results
The investments of the Company are made by the Company's Chief Financial Officer under the supervision of the Company's Board of Directors. The Company follows an investment policy which is regularly reviewed and revised. The Company's policy emphasizes investment grade, fixed income securities and maximization of after-tax yields. The Company does not invest with a view to achieving realized gains, and does not maintain a trading account. However, sales of securities are undertaken, with resulting gains or losses, in order to enhance after-tax yield and keep its portfolio in line with current market conditions. Tax considerations are important in portfolio management, and have been made more so since 1986 when the alternative minimum tax was imposed on casualty companies. Changes in loss experience, growth rates and profitability produce significant changes in the Company's exposure to alternative minimum tax liability, requiring appropriate shifts in the investment asset mix between taxable bonds, tax-exempt bonds and equities in order to maximize after-tax yield. The optimum asset mix is subject to continuous review. At year-end, approximately 68% of the Company's portfolio, at market values, was invested in medium to long term, investment grade tax-exempt revenue and municipal bonds. The average Standard & Poor's rating of the Company's bond holdings was A at December 31, 1996.
The nominal average maturity of the bond portfolio excluding AFI, was 16.8 years at December 31, 1996, but the call-adjusted average maturity of the portfolio is shorter, approximately 8.7 years, because holdings are heavily weighted with high coupon issues which are expected to be called prior to maturity. The modified duration of the bond portfolio reflecting anticipated early calls was 5.9 years at December 31, 1996 excluding AFI. Duration is a measure of how long it takes, on average, to receive all the cash flows produced by a bond, including reinvestment of interest. Because of its sensitivity to interest rates, it is a proxy for a bond's price volatility. The longer the duration, the greater the price volatility in relation to changes in interest rates.
Holdings of lower than investment grade bonds constitute approximately 1.3% of total investments. All but $1.5 million of such holdings were downgraded to their current ratings subsequent to purchase. Equity holdings consist primarily of perpetual preferred stocks and relatively high yielding electric utility common stocks on which dividend income is partially tax-sheltered by the 70% corporate dividend exclusion.
The following table summarizes the investment results of the Company for the five years ended December 31, 1996.
Year ended December 31,
------------------------------------------------
1996(1) 1995 1994 1993 1992
---- ---- ---- ---- ----
(Amounts in thousands)
Averaged invested assets (includes
short-term cash investments)..(2) $975,058 $827,861 $727,866 $683,874 $649,001
Net investment income:
Before income taxes......... 70,180 62,964 54,586 54,121 52,994
After income taxes.......... 63,371 57,035 49,787 48,223 46,376
Average annual return on investments:
Before income taxes.............. 7.2% 7.6% 7.5% 7.9% 8.2%
After income taxes............... 6.5% 6.9% 6.8% 7.1% 7.2%
Net realized investment gains
(losses) after income taxes...... $ (2,062) $ 681 $ (6,485) $ 1,954 $ 3,415
Net increase (decrease) in un-
realized gains on all invest-
ments after income taxes......... $ (6,271) $ 37,960 $(36,503) $ 556 $ (2,501)
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(1) Includes AFI for the month of December 1996.
(2) Fixed maturities at cost, equities at market.
The following table sets forth the composition of the investment portfolio of the Company at the dates indicated, including AFI at December 31, 1996.
December 31,
-----------------------------------------------------------
1996 1995 1994
------------------- ----------------- -------------------
Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value
---- ----- ---- ----- ---- -----
(Amounts in thousands)
Taxable Bonds........................... $ 76,494 $ 76,113 $ 21,518 $ 22,539 $ 18,332 $ 18,128
Tax-Exempt State and
Municipal Bonds........................ 781,586 808,761 630,811 663,163 529,592 520,748
Sinking Fund Preferred
Stocks................................. 66,713 69,234 90,080 94,081 108,858 105,421
---------- ---------- ------- -------- -------- --------
Total Fixed Maturity
Investments.......................... 924,793 954,108 742,409 779,783 656,782 644,297
Equity Investments incl.
Perpetual Preferred
Stocks................................. 148,264 148,112 113,478 114,915 91,726 84,622
Short-term Cash Invest-
ments.................................. 66,067 66,067 28,496 28,496 22,695 22,695
---------- ---------- -------- -------- -------- --------
Total Investments....... $1,139,124 $1,168,287 $884,383 $923,194 $771,203 $751,614
========== ========= ======== ======== ======== ========
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At December 31, 1996, the Company had a net unrealized gain on all investments of $29,163,000 before income taxes.
Competitive Conditions
The property and casualty insurance industry is highly competitive. The insurance industry consists of a large number of companies, many of which operate in more than one state, offering automobile, homeowners and commercial property insurance, as well as insurance coverage in other lines. Many of the Company's competitors have larger volumes of business and greater financial resources than the Company. Based on regularly published statistical compilations concerning insurance company operations, the Company in 1995 was the seventh largest writer of private passenger automobile insurance in California. All of the insurance companies having greater shares of the California market sell insurance either directly or through exclusive agents, rather than through independent agents.
The property and casualty insurance industry is highly cyclical, character- ized by periods of high premium rates and shortages of underwriting capacity followed by periods of severe price competition and excess capacity. In the Company's view, competitive pressures have become more pronounced in the last several years. The current level of profits makes the market attractive for new companies, although some of the small companies who entered the California private passenger automobile market in recent years have already experienced unsatisfactory results.
Price and reputation for service are the principal means by which the Company competes with other automobile insurers. The Company believes that it has a good reputation for service, and it has, historically, been among the lowest-priced insurers doing business in California according to surveys conducted by the California Department of Insurance. In the most recent survey conducted in 1996, the Company's rates for most classes of insureds were among the lowest available in most territories throughout the state. In addition to good service and competitive pricing, for those insurers dealing through independent agents, as the Company does, the marketing efforts of agents is a means of competition.
The current and future competitive climate for private passenger automobile insurance in California remains uncertain. All rates charged by private passenger automobile insurers are subject to the prior approval of the California Insurance Commissioner. New rating factor regulations have recently been issued but the filings required under those regulations have not yet been approved. See "Regulation - Automobile Insurance Rating Factor Regulations."
AFI encounters similar competition in each state in which it principally operates.
Reinsurance
The Company no longer maintains reinsurance for its liability coverages in California. Effective January 1, 1994, the Company terminated its liability reinsurance coverage with Employers Reinsurance Corporation (ERC) because of rising premiums and underutilization of such coverage. The Company regularly evaluates the need for liability reinsurance.
The Company maintains property reinsurance under a treaty which was effective April 1, 1995 with National Reinsurance Corporation, which is rated A+ by A.M. Best & Co. The treaty provides $900,000 coverage in excess of $100,000 for each risk subject to a maximum of $2,700,000 for any one occurrence. A
second layer of coverage provides an additional $1,000,000 in excess of the first $1,000,000 per risk subject to a maximum of $2,000,000 for any one occurrence.
Prior to February 1, 1995, ERC provided catastrophe reinsurance for property and auto physical damage business. Under the treaty, ERC agreed to pay 95% of $9,000,000 in excess of $1,000,000 for any single occurrence and 95% of $18,000,000 for all occurrences in one calendar year. Effective February 1, 1995, the treaty with ERC was amended to provide coverage for 95% of $7,500,000 in excess of $5,000,000 each occurrence subject to an aggregate limit of 95% of $15,000,000 for all occurrences. Effective April 1, 1995 this treaty was replaced with a new catastrophe treaty covering all physical damage and property lines with several reinsurers arranged through E.W. Blanch Company, a reinsurance intermediary. The main reinsurers are rated A or better by A.M. Best. Under the new treaty, the first layer of protection is 95% of $7,500,000 in excess of $10,000,000, for a single occurrence, with a second layer providing 95% of $12,500,000 in excess of $17,500,000. Effective September 1, 1996 the treaty was replaced to provide coverage under two new layers through the same principal reinsurers. Under the new treaty coverage is provided for 95% of $10,000,000 in excess of $15,000,000 per occurrence in the first layer and 95% of $15,000,000 in excess of $25,000,000 in the second layer.
Employers Reinsurance Corporation reinsures AFI through working layer treaties for property and casualty losses in excess of $150,000. For the years 1990 through 1996 the mechanical breakdown line of business was reinsured with Constitution Reinsurance Corporation through a quota-share treaty covering 50%- 85% of the business written depending on the year the policy incepted. For policies effective on or after January 1, 1997, AFI is retaining the full exposure. AFI has other reinsurance treaties and facultative arrangements in place for various smaller lines of business.
If the reinsurers were unable to perform their obligations under the reinsurance treaty, the Company would be required, as primary insurer, to discharge all obligations to its insureds in their entirety.
Regulation
The Company's business in California is subject to regulation and supervision by the DOI, which has broad regulatory, supervisory and administrative powers.
The powers of the DOI primarily include the prior approval of insurance rates and rating factors and the establishment of standards of solvency which must be met and maintained. The regulation and supervision by the DOI are designed principally for the benefit of policyholders and not for insurance company shareholders. The DOI conducts periodic examinations of the Company's insurance subsidiaries. The DOI recently conducted an examination of the California insurance subsidiaries as of December 31, 1994. The reports on the results of that examination recommended no adjustments to the statutory financial statements as filed by the Company.
The insurance subsidiaries outside California, including AFI, are subject to the regulatory powers of the insurance departments of those states. Those powers are similar to the regulatory powers in California enumerated above. Generally, the regulations relate primarily to standards of solvency and are designed for the benefit of policyholders and not for insurance company shareholders.
In California, insurance rates have required prior approval since November 1989. Georgia and Kansas are also prior approval states, while Illinois only requires that rates be filed with the Department of Insurance prior to their use. Texas and Oklahoma have a modified version of prior approval laws. In all states, the insurance code provides that rates must not be "excessive, inadequate or unfairly discriminatory."
The Georgia DOI recently conducted an examination of Mercury Insurance Company of Georgia and Mercury Indemnity Company of Georgia as of December 31, 1994. The reports on that audit have recommended no changes to the statutory financial statements as filed. The DOI of Illinois conducted an examination of Mercury Insurance Company of Illinois and Mercury Indemnity Company of Illinois as of December 31, 1995. The reports on that audit have not been issued but the auditors have indicated there will be no changes recommended to the statutory financial statements as filed. The states of Oklahoma, Kansas and Texas will also conduct periodic examinations of AFI.
The operations of the Company are dependent on the laws of the state in which it does business and changes in those laws can materially affect the revenue and expenses of the Company. The Company retains its own legislative advocates in California. The Company also makes financial contributions to officeholders and candidates. In 1996 and 1995, those contributions amounted to $548,000 and $209,000, respectively. The Company believes in supporting the political process and intends to continue to make such contributions in amounts which it determines are appropriate and lawful.
In 1969, the California Insurance Guarantee Association (the "Association") was created pursuant to California law to provide for payment of claims for which insolvent insurers of most casualty lines are liable but which cannot be paid out of such insurers' assets. The Company is subject to assessment by the Association for its pro-rata share of such claims based on premiums written in the particular line in the year preceding the assessment by insurers writing that line of insurance in California. Such assessments are based upon estimates of losses to be incurred in liquidating an insolvent insurer. In a particular year, the Company cannot be assessed an amount greater than 1% of its premiums written in the preceding year. The only assessment imposed during the past five years was an immaterial amount in 1994. Assessments are recouped through a mandated surcharge to policyholders the year after the assessment. Insurance subsidiaries in the other states are subject to the provisions of similar insurance guaranty associations. No material assessments were imposed in the last 5 years in those states either.
The Company's California subsidiaries are subject to regulation by the DOI pursuant to the provisions of the California Insurance Holding Company System Regulatory Act (the "Holding Company Act"). Pursuant to the Holding Company Act, the DOI may examine the affairs of each company at any time. The Holding Company Act requires disclosure of any material transactions by or among the companies. Certain transactions defined to be of an "extraordinary" type may not be effected without the prior approval of the DOI. Such transactions include, but are not limited to, sales, purchases, exchanges, loans and extensions of credit, and investments made within the immediately preceding 12 months involving, in the net aggregate, more than the lesser of 5% of the company's admitted assets or 25% of surplus as to policyholders, as of the preceding December 31. Effective January 1, 1997 the threshold for a material or extraordinary transaction was amended to a single measure of one half of one percent of admitted assets as of the preceding December 31st. There will no longer be any aggregation of transactions in the determination of the threshold except in the case of dividends. An extraordinary dividend is a dividend which, together with other dividends or distributions made within the preceding 12 months, exceeds the greater of 10% of the insurance company's policyholders' surplus as of the preceding December 31 or the insurance company's net income for the preceding calendar year. An insurance company is also required to notify the DOI of any dividend after declaration, but prior to payment.
The Holding Company Act also provides that the acquisition or change of "control" of a California domiciled insurance company or of any person who controls such an insurance company cannot be consummated without the prior approval of the Insurance Commissioner. In general, a presumption of "control" arises from the ownership of voting securities and securities that are convertible into voting securities, which in the aggregate constitute 10% or more of the voting securities of a California insurance company or of a person that controls a California insurance company, such as Mercury General. A person seeking to acquire "control," directly or indirectly, of the Company must generally file with the Commissioner an application for change of control containing certain information required by statute and published regulations and provide a copy of the application to the Company. The Holding Company Act also effectively restricts the Company from consummating certain reorganizations or mergers without prior regulatory approval.
The insurance subsidiaries in Georgia, Illinois, Oklahoma, Kansas and Texas are subject to holding company acts in those states, the provisions of which are substantially similar to those of California. Regulatory approval was obtained from California, Oklahoma and Texas before the acquisition of AFI was completed.
Automobile liability insurers in California are required to sell bodily injury liability, property damage liability, medical expense and uninsured motorist coverage to a proportionate number (based on the insurer's share of the California automobile casualty insurance market) of those drivers applying for placement as "assigned risks." Drivers seek placement as assigned risks because
their driving records or other relevant characteristics make them difficult to insure in the voluntary market. During the last five years, approximately 0.9% of the direct automobile insurance premium written was for assigned risk business. In 1996, assigned risks represented 0.6% of total automobile direct premiums written and 0.8% of total automobile direct premium earned. Premium rates for assigned risk business are set by the DOI. In October, 1990 more stringent rules for gaining entry into the plan were approved, resulting in a substantial reduction in the number of assigned risks insured by the Company since 1991. Effective January 1, 1994, the California Insurance Code requires that rates established for the Plan be adequate to support the Plan's losses and expenses. The last rate increase approved by the Commissioner approximated 4.8% and became effective June 1, 1995.
Commencing November 8, 1989, Proposition 103 required that property and casualty insurance rates must be approved by the Commissioner prior to their use, and that no rate shall be approved which is excessive, inadequate, unfairly discriminatory or otherwise in violation of the provisions of the initiative. The proposition specified three statutory factors required to be applied in "decreasing order of importance" in determining rates for private passenger automobile insurance: (1) the insured's driving safety record, (2) the number of miles the insured drives annually, and (3) the number of years of driving experience of the insured. The new law also gave the Commissioner discretion to adopt other factors by regulation that have a substantial relationship to risk of loss. The new statute further provided that insurers are required to give at least a 20% discount to "good drivers," as defined, from rates that would otherwise be charged to such drivers and that no insurer may refuse to insure a "good driver."
The Company, and most other insurers, historically charged different rates for residents of different geographical areas within California. The rates for urban areas, particularly in Los Angeles, have been generally substantially higher than for suburban and rural areas. The Company's geographical rate differentials have been derived by actuarial analysis of the claims costs in a given area.
In September 1996, the California Insurance Commissioner issued new permanent rating factor regulations which replaced the emergency regulations which have been in use since their issuance in 1989. The new regulations require all automobile insurers in California to submit new rating plans complying with the regulations by February 18, 1997. The Company does not expect the newly filed rating plan, if approved by the Commissioner, to have a material effect on its competitive position or its profitability. However, the Company has not been able to review the filings of its competitors. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Overview."
Effective January 1, 1997 California has a new law which requires proof of insurance for the registration (new or renewal) of a motor vehicle. It also provides for substantial penalties for failure to supply proof of insurance if
one is stopped for a traffic violation. Media attention to the new law has resulted in a surge of new business applications in January. Although the initial demand has tapered off, it has produced a backlog of applications, which are being processed. The persistence of this new business is uncertain, but the new law could produce additional growth considering the large proportion of uninsured motorists in California. The Company has suspended its advertising program while it works to eliminate the backlog of new business.
In November 1996 an initiative sponsored by the California Insurance Commissioner was overwhelmingly approved by the California voters. It provides that uninsured drivers who are injured in an automobile accident are able to recover only actual, out-of-pocket medical expenses and lost wages and are not entitled to receive awards for general damages, i.e., "pain and suffering." This restriction also applies to drunk drivers and fleeing felons. The law will help in controlling loss costs, but its constitutionality is being challenged by an association of attorneys.
The home office of the California insurance subsidiaries and the Company's computer facilities are located in Brea, California in an 80,000 sq.ft. office building owned by the Company.
Since December 1986, Mercury General's executive offices are located in a 36,000 sq. ft. office building, in Los Angeles, owned by Mercury Casualty Company. The Company occupies approximately 95% of the building and leases the remaining office space to others.
In October 1992 the Company purchased a 158,000 square foot office building in Brea, California. The Company occupies approximately 43% of the facility and leases the remaining office space to others.
The Company leases all of its other offices under short-term leases. Office location is not material to the Company's operations, and the Company anticipates no difficulty in extending these leases or obtaining comparable office space.
The Company is from time to time named as a defendant in various lawsuits incidental to its insurance business. In most of these actions, plaintiffs assert claims for punitive damages which are not insurable under California judicial decisions. The Company vigorously defends these actions, unless a reasonable settlement appears appropriate. The Company believes that adverse results, if any, in the actions currently pending should not have a material effect on the Company's operations or financial position.
No matters were submitted to a vote of security holders by the Company during the fourth quarter of the fiscal year covered by this report.
EXECUTIVE OFFICERS OF THE COMPANY
The following table sets certain information concerning the executive officers of the Company as of March 21, 1997:
NAME AGE POSITION
- ---- --- --------
George Joseph 75 Chairman of the Board and Chief
Executive Officer
Michael D. Curtius 47 President and Chief Operating Officer
Cooper Blanton, Jr. 70 Executive Vice President
Keith L. Parker 69 Vice President and Chief Financial Officer
Bruce E. Norman 48 Vice President in charge of Marketing
Joanna Y. Moore 41 Vice President and Chief Claims Officer
Kenneth G. Kitzmiller 50 Vice President in charge of Underwriting
Donna J. Moore 41 Vice President and Controller
Judy A. Walters 50 Secretary
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Mr. Joseph, Chief Executive Officer of the Company and Chairman of its Board of Directors, has served in those capacities since 1961. Mr. Joseph has more than 45 years experience in the property and casualty insurance business.
Mr. Curtius, President and Chief Operating Officer, has been employed by the Company since 1977. In October 1987, Mr. Curtius was named Vice President and Chief Claims Officer, and in August 1991 he was appointed Executive Vice President. He was elected President and Chief Operating Officer of Mercury General and its four California insurance company subsidiaries in May 1995 and elected to the Board of Directors of Mercury General and the California Companies in 1996. In December of 1996 he was appointed Vice Chairman of American Fidelity Insurance Company. Mr. Curtius has over 20 years of experience in the insurance industry.
Mr. Blanton, Executive Vice President, joined the Company in 1966 and supervised its underwriting activities from 1967 until September 1995. He was appointed Executive Vice President of Mercury Casualty and Mercury Insurance in 1983 and was named Executive Vice President of Mercury General in 1985. In May of 1995 he was named President of the Georgia and Illinois insurance company subsidiaries and in February of 1996 he was elected to the Board of Directors of those companies. Mr. Blanton has over 40 years of experience in underwriting and other aspects of the property and casualty insurance business.
Mr. Parker, Vice President and Chief Financial Officer, has been employed by the Company or its subsidiaries since 1970 and has held his present position since October 1985. Mr. Parker has over 40 years of investment management experience and has been primarily responsible for management of the Company's investment portfolio since 1972.
Mr. Norman, Vice President in charge of Marketing, has been employed by the Company since 1971. Mr. Norman was named to this position in October 1985, and has been a Vice President of Mercury Casualty since 1983. Mr. Norman has supervised the selection and training of agents and managed relations between agents and the Company since 1977. In February of 1996 he was elected to the Board of Directors of the California Companies.
Ms. Joanna Moore, Vice President & Chief Claims Officer, joined the Company in the claims department in March 1981. She was named Vice President of Claims of Mercury General in August 1991 and has held her present position since July 1995.
Mr. Kitzmiller, Vice President in charge of Underwriting, has been employed by the Company in the underwriting department since 1972. In August 1991 he was appointed Vice President of Underwriting of Mercury General and has supervised the underwriting activities of the Company since early 1996.
Ms. Donna Moore, Vice President and Controller, joined the Company in June 1983 as its Controller. She was appointed Vice President in October 1985. Ms. Moore has over 15 years of experience in the insurance industry and is a Certified Public Accountant in the state of California.
Ms. Walters has been employed by the Company since 1967, and has served as its Secretary since 1982.
PART II
Price Range of Common StocK
The following table shows the price range per share in each quarter as reported on the Nasdaq National Market until October 9, 1996 and on the New York Stock Exchange since that date. These quotations do not include adjustments for retail mark-ups, mark-downs or commissions.
High Low
---- ---
1995
1st Quarter............................... $34.250 $28.250
2nd Quarter............................... $35.000 $28.750
3rd Quarter............................... $39.000 $31.750
4th Quarter............................... $39.750 $37.750
1996 High Low
---- ---
1st Quarter............................... $52.000 $41.500
2nd Quarter............................... $47.750 $40.750
3rd Quarter............................... $47.750 $39.750
4th Quarter............................... $58.250 $47.000
1997
1st Quarter (January 1 - March 14)........ $65.000 $52.250
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Dividends
Following the public offering of its Common Stock in November 1985, the Company has paid regular quarterly dividends on its common stock. On February 7, 1997, the Directors declared a $0.29 quarterly dividend ($1.16 annually) payable on March 31, 1997 to stockholders of record on March 17, 1997. The dividend rate has been increased thirteen times since dividends were initiated in January, 1986, at an annual rate of $0.10, adjusted for the two-for-one stock split in September 1992. For financial statement purposes, the Company records dividends on the declaration date. The Company expects to continue the payment of quarterly dividends. The continued payment and amount of cash dividends will depend upon, among other factors, the Company's operating results, overall financial condition, capital requirements and general business conditions.
As a holding company, Mercury General is largely dependent upon dividends from its subsidiaries to pay dividends to its shareholders. These subsidiaries are subject to state laws that restrict their ability to distribute dividends. The state laws permit a casualty insurance company to pay dividends and advances within any 12-month period, without any prior regulatory approval, in an amount up to the greater of ten percent of statutory earned surplus at the preceding December 31, or net income for the calendar year preceding the date the dividend is paid. Under this test, the direct insurance subsidiaries of the Company are
entitled to pay dividends to Mercury General during 1997 of up to approximately $61.5 million. See Note 9 of Notes to Consolidated Financial Statements and "Business -- Regulation -- Holding Company Act."
Shareholders of Record
The approximate number of holders of record of the Company's Common Stock as of March 1, 1997 was 230. The approximate number of beneficial holders as of March 17, 1997 was 5,231 according to the Bank of New York, the Company's transfer agent.
Year ended December 31,
-------------------------------------------------------
1996 1995 1994 1993 1992
---------- -------- --------- -------- --------
(Amounts in thousands, except per share data)
Income Data:
Premiums earned..................................... $754,724 $616,326 $529,390 $474,093 $455,508
Net investment income............................... 70,180 62,964 54,586 54,121 52,994
Realized investment gains(losses) (3,173) 1,048 (9,853) 3,006 5,174
Other............................................... 3,233 3,341 3,123 2,544 1,606
-------- -------- -------- -------- --------
Total Revenues................................... 824,964 683,679 577,246 533,764 515,282
-------- -------- -------- -------- --------
Losses and loss adjustment
expenses.......................................... 501,858 416,556 360,557 289,208 276,088
Policy acquisition costs............................ 160,019 128,743 112,682 99,738 94,672
Other operating expenses............................ 24,493 22,017 20,566 18,564 16,688
Impact of rate refund............................... -- -- -- -- 18,621
Interest............................................ 2,004 2,040 1,025 793 1,192
-------- -------- -------- -------- --------
Total Expenses................................... 688,374 569,356 494,830 408,303 407,261
-------- -------- -------- -------- --------
Income before income taxes.......................... 136,590 114,323 82,416 125,461 108,021
Income taxes........................................ 30,826 24,022 16,121 29,252 24,695
-------- -------- -------- -------- --------
Net Income....................................... $105,764 $ 90,301 $ 66,295 $ 96,209 $ 83,326
======== ======== ======== ======== ========
Per Share Data:
Net income per share................................ $ 3.86 3.31 $ 2.43 $ 3.52 $ 3.06
======== ======== ======== ======== ========
Dividends paid $ .96 .80 $ .70 $ .60 $ .50
======== ======== ======== ======== ========
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December 31,
---------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(Amounts in thousands, except per share data)
Balance Sheet Data:
Total investments................................... $1,168,287 $923,194 $751,614 $740,480 $661,672
Premiums receivable................................. 83,748 58,902 48,741 38,227 35,454
Total assets........................................ 1,419,927 1,081,656 911,693 863,962 775,402
Unpaid losses and loss adjust-
ment expenses...................................... 336,685 253,546 227,499 215,301 240,183
Unearned premiums................................... 260,878 168,404 148,654 128,828 117,524
Notes payable....................................... 75,000 25,000 25,000 15,000 15,000
Deferred income tax liability
(asset)........................................... 6,349 10,158 (10,190) 8,758 466
Shareholders' equity................................ 641,222 565,188 457,161 450,275 353,704
Book value per share................................ 23.37 20.67 16.75 16.44 12.95
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The operating results of property and casualty insurance companies are subject to significant fluctuations from quarter-to-quarter and from year-to- year due to the effect of competition on pricing, the frequency and severity of losses, including the effect of natural disasters on losses, general economic conditions, the general regulatory environment in those states in which an insurer operates, state regulation of premium rates and other factors such as changes in tax laws. The property and casualty industry has been highly cyclical, with periods of high premium rates and shortages of underwriting capacity followed by periods of severe price competition and excess capacity.
The Company did business only in the state of California until 1990, when it began operations in Georgia and Illinois. In December 1996, the American Fidelity Insurance Group (AFI) was acquired for cash. The results of operations of AFI for the month of December only are included in the Company's consolidated statements of income. AFI writes automobile (approximately 54% of AFI's direct premiums) and other casualty lines of insurance principally in Oklahoma, Texas and Kansas, and is headquartered in Oklahoma City, Oklahoma. Total direct premiums written by AFI in 1996 were $90.4 million; of that amount $5.5 million of premiums were written in December. The Group is licensed in 36 states.
During 1996, approximately 98% of the Company's direct premiums written, excluding AFI, were derived from California.
In California, as in various other states, all property and casualty rates must be approved by the Insurance Commissioner before they can be used.
In February 1994, the Commissioner approved new rates which were designed to improve the Company's competitive position for new insureds. These rate changes, which became effective on May 1, 1994, provided for decreases in premium rates for new insureds. Further rate modifications were approved and made effective on October 15, 1995 and April 15, 1996. The rate changes made over the last three years have been substantially revenue-neutral overall, with physical damage rates being increased and bodily injury liability rates decreased. The rate changes have resulted in a substantial increase in new business being submitted to the Company. Since March 31, 1994, Private Passenger Automobile (PPA) policies in force in California have increased by approximately 190,000 to 494,000 at December 31, 1996, an annual rate of increase of over 20%, compared with an annualized growth rate of 4.1% over the prior fifteen month period.
In September 1996, the California Insurance Commissioner issued new permanent rating factor regulations designed to implement the requirements that automobile insurance rates be determined by (1) driving safety record, (2) years of driving experience, (3) miles driven per year and (4) whatever optional factors are determined by the Commissioner to have a substantial relationship to the risk of loss and adopted by regulation. The law further requires that each of the four factors be applied in decreasing order of importance.
The new permanent regulations replace emergency regulations which have been in use since their issuance in 1989. They require all automobile insurers in California to submit new rating plans complying with the regulations in early 1997. In January 1997, in response to a court ruling on the issue of surcharges imposed on drivers not complying with California's financial responsibility law, the Commissioner amended the regulations to exclude such non-compliance as a rating factor.
The statistical methodology prescribed by the regulations for determining rating factor weightings are technical and complex. The January amendment required the Company to rework its rate filing. The Company submitted its new proposed rating plan on March 11, 1997.
The filings must be reviewed and approved by the Department, and the companies will have ninety days following approval to place their new rates in effect. The Company does not expect the newly filed rating plan, if approved by the Commissioner, to have a material effect on its competitive position or its profitability. However, the Company has not yet been able to review the filings of its competitors.
Results of Operations
Premiums earned in 1996 of $754.7 million (including $5.2 million contributed by AFI in December 1996) increased 22.5%, primarily reflecting unit growth. Average premium per policy for the year was substantially unchanged. Net premiums written in 1996 of $795.9 million (including $4.5 million contributed by AFI) increased 25.0% over a year earlier, continuing a growth trend which began in the second quarter of 1993.
The loss ratio in 1996 (loss and loss adjustment expenses related to premiums earned) was 66.5%, compared with 67.6% in 1995. The 1996 and 1995 loss ratios reflect small contributions from favorable loss reserve development from prior periods.
The expense ratio (policy acquisition costs and other operating expenses related to premiums earned) was 24.4% in 1996 and 1995. The consolidation of one month of operating results of AFI in 1996 had no material effect on either the loss or expense ratios.
Total losses and expenses in 1996, excluding interest expense of $2.0 million, were $686.4 million, resulting in an underwriting gain for the period of $68.4 million, compared with an underwriting gain of $49.0 million in 1995.
Investment income in 1996, including a contribution from AFI of $400,000 for the final month of the year, was $70.2 million, compared with $63.0 million in 1995. The after-tax yield on average investments of $975.1 million, including AFI, (fixed maturities at cost, equities at market) was 6.50%, compared with 6.89% on average investments of $827.9 million in 1995. The effective tax rate on investment income was 9.7% in 1996, compared with 9.4% in 1995. The effective tax rate was increased and the effective after-tax yield was reduced slightly by
the inclusion of AFI for the month of December 1996. The effective tax rate on investment income in 1996, excluding AFI, was 9.6%, and the after-tax yield was 6.56%. The slightly higher tax rate on investment income in 1996 reflects an increase in the proportion of investment income derived from dividends on equities, principally perpetual preferred stocks. The redemption of bonds acquired during higher interest periods has been a negative influence on realized yields in each of the last several years and will continue in 1997. Bonds matured and called in 1996 totaled $72.9 million, compared with $71.0 million in 1995, and approximately $48.6 million of calls and maturities are expected in 1997. Average yields being obtained during the first quarter of 1997 on new investments are some 50 basis points lower than the average yield realized in 1996.
Realized investment losses in 1996 were $3.2 million, compared with realized gains of $1.0 million in 1995. The 1996 losses reflect principally yield-enhancing swaps of both fixed maturities and equity securities, including perpetual preferred stocks, designed to utilize expiring capital gains tax benefits. The 1995 gains arose in part from the early redemption of fixed- maturity investments.
The income tax provision of $30.8 million in 1996 represented an effective tax rate of 22.6%, compared with an effective rate of 21.0%, in 1995. The increase in the rate is attributable principally to the greater contribution from underwriting gains, which are fully taxable and increased by $19.4 million during 1996, whereas the predominantly tax-free investment income increased $7.2 million.
Net income in 1996 was $105.8 million, or $3.86 per share, compared with $90.3 million, or $3.31 per share, in 1995. Per share results are based on 27.4 million average shares in 1996 and $27.3 million average shares in 1995.
Premiums earned in 1995 increased 16.4%, primarily reflecting unit growth. Average premium per policy for the year was substantially unchanged. Net premiums written in 1995 increased 15.6% over a year earlier, continuing a growth trend which began in the second quarter of 1993.
The loss ratio in 1995 (loss and loss adjustment expenses related to premiums earned) was 67.6%, compared with 68.1% in 1994. In contrast to the previous several years, the 1995 and 1994 loss ratios reflect smaller contributions from favorable loss reserve development from prior periods.
The expense ratio (policy acquisition costs and other operating expenses related to premiums earned) was 24.4%, compared with 25.2% in 1994. The improvement reflects both economies related to greater premium volume and smaller provisions for agent and employee incentive bonuses in 1995.
Total losses and expenses, excluding interest expense of $2.0 million, were $567.4 million, resulting in an underwriting gain for the period of $49.0 million, compared with an underwriting gain of $35.6 million in 1994.
Investment income in 1995 was $63.0 million, compared with $54.6 million in 1994. The after-tax yield on average investments of $827.9 million (fixed maturities at cost, equities at market) was 6.89%, compared with 6.84% on average investments of $727.9 million in 1994. The effective tax rate on investment income was 9.4% in 1995, compared with 8.8% in 1994. The slightly higher tax rate reflects an increase in the proportion of investment income derived from dividend income on equities, principally perpetual preferred stocks, compared to tax-exempt income. The maintenance of above-average yields during a period of declining interest rates is, in part, the result of the bond restructuring program undertaken in 1994 when bonds acquired in lower interest rate environments were sold with proceeds reinvested at significantly higher rates. The redemption of bonds acquired during higher interest periods has been a negative influence on realized yields which will continue in 1996 and 1997. Bonds matured and called in 1995 totaled $71.0 million, compared with $53.4 million in 1994, and approximately $83.1 million of calls and maturities are expected in 1996. Average yields being obtained during the first quarter of 1996 on new investments are some 50-75 basis points lower than the average 1995 portfolio yield.
Realized investment gains in 1995 were $1.0 million, compared with realized losses of $9.9 million in 1994. The 1994 losses reflect principally yield- enhancing swaps of both fixed maturities and equity securities, including perpetual preferred stocks, undertaken to recapture capital gains taxes paid in prior years. The 1995 gains arose in part from the early redemption of fixed- maturity investments.
The income tax provision of $24.0 million in 1995 represented an effective tax rate of 21.0%, compared with an effective rate of 19.6%, in 1994. The increase in the rate is attributable principally to the realization of capital gains in 1995, in contrast to the realization of losses in 1994.
Net income in 1995 was $90.3 million, or $3.31 per share, compared with $66.3 million, or $2.43 per share, in 1994. Per share results are based on 27.3 million average shares in both years.
Premiums earned in 1994 increased 11.7%, reflecting unit growth. Average premium per policy was substantially unchanged by the May 1, 1994 rate revisions. Direct premiums written in the first half of 1994 increased 10.7% over a year earlier, continuing the growth trend which began in the second quarter of 1993. During the last half of 1994, this increase accelerated to 14.1% over the prior year as a result of the May 1, 1994 rate revisions.
The loss ratio in 1994 was 68.1%, compared with 61.0% in 1993. The higher loss ratio in 1994 reflects a much smaller contribution from favorable loss reserve development from prior periods and a reduction in the estimate of salvage and subrogation recoverable for prior accident years. The major earthquake which struck Southern California on January 17, 1994 resulted in net loss claims, after reinsurance recoveries, of approximately $1.2 million, which added less than 0.25% to the 1994 loss ratio. Earthquake losses were immaterial as the Company writes only a small amount of homeowners' insurance. Approximately one half of
the net earthquake losses incurred were related to the Company's principal line, automobile insurance, while the other half was related to the homeowners' line.
The expense ratio (policy acquisition costs and other expenses related to premiums earned) was 25.2%, compared with 25.0% in 1993.
Total losses and expenses, excluding interest expense of $1,025,000, were $493.8 million, resulting in an underwriting gain for the period of $35.6 million, compared with an underwriting gain of $66.6 million in 1993.
Investment income in 1994 was $54.6 million, compared with $54.1 million in 1993. The after-tax yield on average investments of $727.9 million (fixed maturities at cost, equities at market) was 6.84%, compared with 7.05% on average investments of $683.9 million in 1993. The effective tax rate on investment income was 8.8% in 1994, compared with 10.9% in 1993, reflecting an increase in the proportion of tax-exempt interest income. The decline in realized investment yields reflects principally the redemption and maturity of bonds and preferred stocks acquired in higher interest rate environments.
Realized investment losses in 1994 were $9.9 million, compared with realized gains of $3.0 million in 1993. The losses reflect principally yield- enhancing swaps of both fixed maturities and equity securities, including perpetual preferred stocks. The 1993 gains arose in significant part from the redemption of fixed-maturity investments. The realized capital losses were undertaken to recapture capital gains taxes paid in prior years.
The income tax provision of $16.1 million in 1994 represented an effective tax rate of 19.6%, compared with an effective rate of 23.3%, in 1993. The decrease in the rate is attributable principally to the decrease in fully taxable underwriting income, and the resulting higher proportion of tax exempt investment income.
Net income in 1994 was $66.3 million, or $2.43 per share, compared with $96.2 million, or $3.52 per share, in 1993. Per share results are based on 27.3 million average shares in 1994 and 27.4 million average shares in 1993.
Liquidity and Capital Resources
Net cash provided from operating activities in 1996, including $9.7 million from AFI, was $196.6 million, while funds derived from the sale, redemption or maturity of investments was $531.5 million, of which approximately 75% was represented by the sale of equity securities. The amortized cost of fixed- maturity investments increased by $182.4 million during the year. Equity investments, including perpetual preferred stocks, increased by $34.8 million at cost, and short-term cash investments increased by $37.6 million. The amortized cost of fixed-maturities available for sale that were sold, called or matured during the year was $133.2 million.
The market value of all investments held at market as "Available for Sale" exceeded the amortized cost of $1,139.1 million at December 31, 1996 by $29.2 million. That unrealized gain, reflected in shareholders' equity net of applicable tax effects, was $19.0 million at December 31, 1996 compared with an
unrealized gain of $25.2 million at December 31, 1995. The decrease in market values since December 31, 1995 reflects principally the increase in intermediate and long term interest rates during 1996.
The Company's cash and short term investments totaled $69.7 million at December 31, 1996. Together with funds generated internally, such liquid assets are more than adequate to pay claims without the sale of long term investments.
Traditionally, it has been the Company's policy not to invest in high yield or "junk" bonds. In 1995, the Company adopted a policy to place a small proportion of its investments in the taxable sector in bonds rated lower than investment grade, but not lower than Ba by Moody's or BB by Standard & Poor's. At December 31, 1996 bond holdings rated below investment grade totaled $15.2 million at market (cost $14.9 million), or 1.3% of total investments. All but $1.5 million of such holdings were downgraded to their current ratings subsequent to purchase. The average rating of the $789.6 million bond portfolio, excluding AFI, (at amortized cost) was A, while the average effective maturity, giving effect to anticipated early call, approximates 8.7 years. The modified duration of the bond portfolio at year-end, excluding AFI, was 5.9 years, reflecting the heavy weighting of high coupon issues, including housing issues subject to sinking funds, and other issues which are pre-refunded or are expected to be called prior to their maturity. Duration measures the length of time it takes to receive all the cash flows produced by a bond, including reinvestment of interest. Because it measures four factors (maturity, coupon rate, yield and call terms) which determine sensitivity to changes in interest rates, modified duration is a much better indicator of price volatility than simple maturity alone. Bond holdings are broadly diversified geographically, and, within the tax-exempt sector, consist largely of high coupon revenue issues, many of which have been pre-refunded and escrowed with U.S. Treasuries. General obligation bonds of the large eastern cities have generally been avoided.
Holdings in the taxable sector consist largely of senior public utility issues. Fixed-maturity investments of $924.8 million, including $68.5 million held by AFI, (at amortized cost) include $66.7 million of sinking fund preferreds, principally utility issues. The market value of all fixed maturities exceeded cost by $29.3 at December 31, 1996. The only securities held which may be considered derivatives are a small amount of adjustable rate preferred stocks.
Except for Company-occupied buildings, the Company has no direct investments in real estate and no holdings of mortgages secured by commercial real estate.
Equity holdings of $148.1 million at market (cost $148.3 million), including perpetual preferred issues, are largely confined to the public utility and banking sectors and represent about 23.1% of total shareholders' equity.
The only significant debt of the Company at December 31, 1996 was a three year, $75,000,000 revolving credit bank loan. The loan agreement requires the Company to meet numerous affirmative and negative covenants. The proceeds of the loan were used to repay a prior loan and to acquire American Fidelity Insurance Company, with the balance contributed to the Company's new insurance subsidiaries. The loan agreement may be extended annually for additional periods
of one year each to maintain the three year maturity date. The interest rate is variable and is optionally related to the Federal Funds Rate, Bank of New York Rate (prime rate) or the Eurodollar London Interbank Rate (LIBOR). Based on the rates effective through June 25, 1997, LIBOR plus .50, the net interest cost on the loan approximates 6.08%.
In March 1994, the Company's Employee Stock Ownership Plan (the Plan) purchased 161,000 shares of Mercury's common stock in the open market at a price of $29.75 per share. The purchases were funded by a $5.0 million bank loan to the Plan which is guaranteed by the Company. The shares are being allocated to employees over a five year period, with the initial allocation made in December 1994, and the debt is being retired by Company contributions to the Plan over the same time period. Since dividends on unallocated shares held by the Plan are tax deductible if they are used for debt service, as are Company contributions to the Plan, the net, after-tax interest cost to the Company for the borrowed funds used for the Plan stock purchase is less than the nominal 6.98% fixed rate of interest on the loan.
In December 1993, the NAIC adopted a risk-based capital formula for casualty insurance companies which establishes recommended minimum capital requirements for casualty companies. The formula has been designed to capture the widely varying elements of risks undertaken by writers of different lines of insurance having differing risk characteristics, as well as writers of similar lines where differences in risk may be related to corporate structure, investment policies, reinsurance arrangements and a number of other factors. The Company has estimated the Risk-Based Capital Requirements of each of its insurance subsidiaries as of December 31, 1996. Each of the companies' policyholders' surplus exceeded the highest level of recommended capital requirements.
As of December 31, 1996, the Company had no material commitments for capital expenditures.
Industry and regulatory guidelines suggest that the ratio of a property and casualty insurer's annual net premiums written to statutory policyholders' surplus should not exceed 3.0 to 1. Based on the combined surplus of all of the licensed insurance subsidiaries of $594.8 million at December 31, 1996, and net written premiums for the twelve months ended on that date of $795.9 million, the ratio of writings to surplus was approximately 1.3 to 1.
Forward-Looking statements
The foregoing discussion contains forward-looking statements regarding the Company, its business, prospects and results of operations that are subject to certain risks and uncertainties posed by factors and events that could cause the Company's actual business, prospects and results of operations to differ materially from the historical information contained herein and from those that may be expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, among others, the success of the Company in integrating and profitably operating the business of AFI, the impact of the permanent rating factor regulations recently adopted by the California Insurance Commissioner for private passenger automobile policies issued in California and the level of investment yields obtainable in the
Company's investment portfolio in comparison to recent yields, as well as the cyclical and competitive nature of the property and casualty insurance industry and general uncertainties regarding loss reserve estimates and legislative and regulatory changes. Such risks and uncertainties and other factors are discussed above and in periodic filings with the Securities and Exchange Commission.
Supplementary Data
Summarized quarterly financial data for 1996 and 1995 is as follows (in thousands except per share data):
Quarter Ended
----------------------------------------
March 31 June 30 Sept. 30 Dec. 31
-------- -------- -------- -------
1996
- ----
Earned premiums................................. $169,563 $181,254 $193,298 $210,609
Income before income taxes...................... $ 27,421 $ 34,185 $ 38,078 $ 36,906
Net income...................................... $ 21,911 $ 26,583 $ 28,993 $ 28,277
Earnings per share.............................. $ .80 $ .97 $ 1.06 $ 1.03
Dividends declared per share.................... $ .24 $ .24 $ .24 $ .24
1995
- ----
Earned premiums................................. $144,676 $151,732 $157,179 $162,739
Income before income taxes ..................... $ 22,449 $ 28,679 $ 32,305 $ 30,890
Net income...................................... $ 18,500 $ 22,407 $ 25,157 $ 24,237
Earnings per share.............................. $ .68 $ .82 $ .92 $ .89
Dividends declared per share.................... $ .20 $ .20 $ .20 $ .20
|
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
Independent Auditors' Report............................................ 30
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 1996 and 1995........ 31
Consolidated Statements of Income for Each of the Years in the
Three-Year Period Ended December 31, 1996........................... 32
Consolidated Statements of Shareholders' Equity for Each of the
Years in the Three-Year Period Ended December 31, 1996............. 33
Consolidated Statements of Cash Flows for Each of the Years in
the Three-Year Period Ended December 31, 1996....................... 34
Notes to Consolidated Financial Statements.......................... 36
|
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Mercury General Corporation:
We have audited the accompanying consolidated balance sheets of Mercury General Corporation and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of income, shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Mercury General Corporation and subsidiaries as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1996, in conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Los Angeles, California
February 21, 1997
MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT SHARE AMOUNTS
A S S E T S
1996 1995
---- ----
Investments:
Fixed maturities available for sale (amortized cost
$924,793 in 1996 and $742,409 in 1995)......................... $ 954,108 $ 779,783
Equity securities available for sale (cost $148,264 in
1996 and $113,478 in 1995)..................................... 148,112 114,915
Short-term cash investments, at cost, which approxi-
mates market................................................... 66,067 28,496
---------- ----------
Total investments..................................... 1,168,287 923,194
Cash............................................................... 3,605 2,872
Receivables:
Premiums receivable............................................. 83,748 58,902
Premium notes................................................... 12,395 11,728
Accrued investment income....................................... 18,410 15,870
Other........................................................... 29,655 6,108
---------- ----------
144,208 92,608
Deferred policy acquisition costs.................................. 46,783 33,809
Fixed assets, net.................................................. 30,060 27,464
Other assets....................................................... 26,984 1,709
---------- ----------
$1,419,927 $1,081,656
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Losses and loss adjustment expenses................................ $ 336,685 $ 253,546
Unearned premiums.................................................. 260,878 168,404
Notes payable...................................................... 75,000 25,000
Loss drafts payable................................................ 29,032 20,071
Accounts payable and accrued expenses.............................. 36,463 25,412
Current income taxes............................................... 1,590 388
Deferred income taxes.............................................. 6,349 10,158
Other liabilities.................................................. 32,708 13,489
---------- ----------
Total liabilities..................................... 778,705 516,468
---------- ----------
Shareholders' equity:
Common stock without par value or stated value.
Authorized 30,000,000 shares; issued and outstanding
27,503,925 shares in 1996 and 27,442,675 in 1995.............. 42,644 40,895
Net unrealized investment gains.................................... 18,956 25,227
Unearned ESOP compensation......................................... (2,000) (3,084)
Retained earnings.................................................. 581,622 502,150
---------- ----------
Total shareholders' equity............................ 641,222 565,188
---------- ----------
Commitments and contingencies......................................
$1,419,927 $1,081,656
========== ==========
|
See accompanying notes to consolidated financial statements.
MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
THREE YEARS ENDED DECEMBER 31, 1996
AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA
1996 1995 1994
-------- --------- -----
Revenues:
Earned premiums............................................. $754,724 $616,326 $529,390
Net investment income ...................................... 70,180 62,964 54,586
Net realized investment gains (losses)(note 2).............. (3,173) 1,048 (9,853)
Other....................................................... 3,233 3,341 3,123
-------- -------- --------
Total revenues......................................... 824,964 683,679 577,246
-------- -------- --------
Expenses:
Losses and loss adjustment expenses......................... 501,858 416,556 360,557
Policy acquisition costs ................................... 160,019 128,743 112,682
Other operating expenses.................................... 24,493 22,017 20,566
Interest.................................................... 2,004 2,040 1,025
-------- -------- --------
Total expenses......................................... 688,374 569,356 494,830
-------- -------- --------
Income before income taxes.................................. 136,590 114,323 82,416
Income taxes ................................................. 30,826 24,022 16,121
-------- -------- --------
Net income.................................................. $105,764 $ 90,301 $ 66,295
======== ======== ========
Earnings per share ........................................... $ 3.86 $3.31 $2.43
======== ======== ========
|
See accompanying notes to consolidated financial statements.
MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
THREE YEARS ENDED DECEMBER 31, 1996
AMOUNTS EXPRESSED IN THOUSANDS
1996 1995 1994
--------- --------- --------
Common stock, beginning of year.................................................. $ 40,895 $ 40,250 $ 40,014
Proceeds of stock options exercised.............................................. 1,104 384 206
Tax benefit on sales of incentive stock
options......................................................................... 220 74 69
Release of common stock by the ESOP.............................................. 425 187 (39)
-------- -------- -------
Common stock, end of year........................................................ 42,644 40,895 40,250
-------- -------- -------
Net unrealized investment gains (losses) on
securities, beginning of year................................................... 25,227 (12,733) 23,770
Net increase (decrease) in unrealized invest-
ment gains (losses) on securities............................................... (6,271) 37,960 (36,503)
-------- -------- -------
Net unrealized investment gains (losses) on
securities, end of year......................................................... 18,956 25,227 (12,733)
-------- -------- -------
Unearned ESOP compensation relating to common
stock purchases by ESOP......................................................... (3,084) (4,042) (5,000)
Amortization of unearned ESOP compensation....................................... 1,084 958 958
-------- -------- -------
Unearned ESOP compensation, end of year.......................................... (2,000) (3,084) (4,042)
-------- -------- -------
Retained earnings, beginning of year............................................. 502,150 433,686 386,491
Net income....................................................................... 105,764 90,301 66,295
Dividends paid to shareholders................................................... (26,292) (21,837) (19,100)
-------- -------- --------
Retained earnings, end of year................................................... 581,622 502,150 433,686
-------- -------- --------
Total shareholders' equity................................................ $641,222 $565,188 $457,161
======== ======== ========
|
See accompanying notes to consolidated financial statements.
MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE YEARS ENDED DECEMBER 31, 1996
Amounts expressed in thousands
1996 1995 1994
---------- ---------- ------------------
Cash flows from operating activities:
Net income $ 105,764 $ 90,301 $ 66,295
Adjustments to reconcile net income to net cash
provided from operating activities:
Increase in unpaid losses and loss adjustment
expenses 35,947 26,047 12,198
Increase in unearned premiums 42,276 19,750 19,826
Increase in premium notes receivable (667) (166) (1,618)
Increase in premiums receivable (15,460) (10,161) (10,514)
Increase in deferred policy acquisition costs (7,080) (3,741) (4,345)
Increase in loss drafts payable 5,179 2,292 3,018
Increase (decrease) in accrued income taxes,
excluding deferred tax on change in unrealized
gain 1,016 4,995 (3,260)
Increase (decrease) in accounts payable and accrued
expenses 8,385 3,487 (2,698)
Depreciation 4,067 3,736 3,486
Net realized investment (gains) losses 3,173 (1,048) 9,853
Bond amortization (accretion), net (1,112) (103) 1,466
Other, net 15,136 1,169 (1,523)
--------- --------- ----------
Net cash provided from operating activities 196,624 136,558 92,184
Cash flows from investing activities:
Fixed maturities available for sale:
Purchases (243,779) (204,360) (239,193)
Sales 41,353 47,824 111,773
Calls or maturities 91,834 70,954 53,351
Equity securities available for sale:
Purchases (437,128) (386,343) (120,537)
Sales 398,306 365,696 108,949
Purchase of AFI, less cash acquired (33,629) -- --
Decrease (increase) in short-term cash investments,
net (32,077) (5,801) 7,046
Purchase of fixed assets (5,971) (4,115) (3,711)
Sale of fixed assets 167 494 268
--------- --------- ---------
Net cash used in investing activities $(220,924) $(115,651) $ (82,054)
|
(Continued)
MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
1996 1995 1994
--------- --------- ----------
Cash flows from financing activities:
Additions to notes payable $ 75,000 $ -- $ 25,000
Principal payments on notes payable (25,000) -- (15,000)
Dividends paid to shareholders (26,291) (21,837) (19,100)
Proceeds from stock options exercised 1,324 458 275
-------- -------- --------
Net cash provided by (used in)
financing activities 25,033 (21,379) (8,825)
-------- -------- --------
Net increase (decrease) in cash 733 (472) 1,305
Cash:
Beginning of the year 2,872 3,344 2,039
-------- -------- --------
End of the year $ 3,605 $ 2,872 $ 3,344
======== ======== ========
|
See accompanying notes to consolidated financial statements.
MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
(1) Significant Accounting Policies
Principles of Consolidation and Presentation
The Company is primarily engaged in the underwriting of private passenger automobile insurance in the state of California.
The consolidated financial statements include the accounts of Mercury General Corporation (the Company) and its wholly-owned subsidiaries, Mercury Casualty Company, Mercury Insurance Company, California Automobile Insurance Company, California General Underwriters Insurance Company, Inc., Mercury Insurance Company of Georgia, Mercury Insurance Company of Illinois, Mercury Indemnity Company of Georgia and Mercury Indemnity Company of Illinois. Effective December 1, 1996 the financial statements also include newly acquired companies American Fidelity Insurance Company, Cimarron Insurance Company, Inc., AFI Management Company, Inc. (AFIMC), and American Fidelity Lloyds Insurance Company (AFL). AFL is not owned by MGC, but is controlled by MGC through its attorney-in-fact, AFIMC. The acquisition is discussed further in Note 8. Collectively, the newly-acquired companies, including AFL, are referred to as AFI. All of the subsidiaries as a group, including AFL, but excluding AFIMC, are referred to as the Insurance Companies. The consolidated financial statements have been prepared in conformity with generally accepted accounting principles (GAAP) which differ in some respects from those filed in reports to insurance regulatory authorities. All significant intercompany balances and transactions have been eliminated.
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Investments
Fixed maturities available for sale include those securities that management intends to hold for indefinite periods, but which may be sold in response to changes in interest rates, tax planning considerations or other aspects of asset/liability management. Fixed maturities available for sale, which include bonds and sinking fund preferred stocks, are carried at market. Short-term investments are carried at cost, which approximates market. Investments in equity securities, which include common stocks and non-redeemable preferred stocks, are carried at market.
MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1996 and 1995
(1) Significant Accounting Policies (Continued)
In most cases, the market valuations were drawn from standard trade data sources. In no case were any valuations made by the Company's management. Equity holdings, including non sinking fund preferred stocks, are, with minor exceptions, actively traded on national exchanges, and were valued at the last transaction price.
Temporary unrealized investment gains and losses on securities available for sale are credited or charged directly to shareholders' equity, net of applicable tax effects. When a decline in value of fixed maturities or equity securities is considered other than temporary, a loss is recognized in the consolidated statement of income. Realized gains and losses are included in the consolidated statements of income based upon the specific identification method.
Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments", and Statement of Financial Accounting Standards No. 119, "Disclosure about Derivative Financial Instruments and Fair Value of Financial Instruments", require disclosure of estimated fair value information about financial instruments, for which it is practicable to estimate that value. Under SFAS No. 115, the Company categorizes all of its investments in debt and equity securities as available for sale. Accordingly, all investments, including cash and short-term cash investments, are carried on the balance sheet at their fair value. The carrying amounts and fair values for investment securities are disclosed in Note 2 and were drawn from standard trade data sources such as market and broker quotes. The estimated fair value is equivalent to the carrying value of receivables, accounts payable and other liabilities. The estimated fair value of notes payable equals their carrying value, which was based on borrowing rates currently available to the Company for bank loans with similar terms and maturities. The terms of the notes are discussed in Note 5.
Premium Income Recognition
Insurance premiums are recognized as income ratably over the term of the policies. Unearned premiums are computed on the monthly pro rata basis. The liability is stated gross of reinsurance deductions, with the reinsurance deduction recorded in other assets.
Net premiums written during 1996, 1995 and 1994 were $795,873,000, $636,590,000 and $550,838,000, respectively.
MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1996 and 1995
(1) Significant Accounting Policies (Continued)
One agent produced direct premiums written of approximately 17%, 15% and 13% of the Company's total direct premiums written during 1996, 1995 and 1994, respectively.
Premium Notes
Premium notes receivable represent the balance due to the Company from policyholders who elect to finance their premiums over the policy term. The Company requires both a downpayment and monthly payments as part of its financing program. Premium finance fees are charged to policyholders who elect to finance premiums. The fees are charged at rates that vary with the amount of premium financed. Premium finance fees are recognized over the term of the premium note based upon the effective yield.
Deferred Policy Acquisition Costs
Acquisition costs related to unearned premiums, which consist of commissions, premium taxes and certain other underwriting costs, which vary directly with and are directly related to, the production of business, are deferred and amortized to income ratably over the terms of the policies. Deferred acquisition costs are limited to the amount which will remain after deducting from unearned premiums and anticipated investment income, the estimated losses and loss adjustment expenses and the servicing costs that will be incurred as the premiums are earned.
Losses and Loss Adjustment Expenses
The liability for losses and loss adjustment expenses is based upon the accumulation of individual case estimates for losses reported prior to the close of the accounting period, plus estimates, based upon past experience, of ultimate developed costs which may differ from case estimates and of unreported claims. The liability is stated net of anticipated salvage and subrogation recoveries. The amount of reinsurance recoverable is included in other receivables.
Estimating loss reserves is a difficult process as there are many factors that can ultimately affect the final settlement of a claim and, therefore, the reserve that is needed. Changes in the law, results of litigation, medical costs, the cost of repair materials and labor rates can all impact ultimate claim costs. In addition, time can be a critical part of reserving determinations since the longer the span between the incidence of a loss and the payment or settlement of the claim, the more variable the ultimate settlement amount can be. Accordingly, short-tail claims, such as property damage claims, tend to be more reasonably predictable than long-tail liability claims. Management believes that
MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1996 and 1995
(1) Significant Accounting Policies (Continued)
the liability for losses and loss adjustment expenses is adequate to cover the ultimate net cost of losses and loss adjustment expenses incurred to date. Since the provisions are necessarily based upon estimates, the ultimate liability may be more or less than such provisions.
Depreciation
Buildings and furniture and equipment are depreciated over 30-year and 5- year to 10-year periods, respectively, on a combination of straight-line and accelerated methods. Automobiles are depreciated over 5 years, using an accelerated method.
Earnings per Share
Earnings per share are computed by dividing earnings by the weighted average number of common shares outstanding of 27,397,173 for 1996, 27,311,707 for 1995, and 27,273,192 for 1994.
Income Taxes
Deferred income taxes result from temporary differences in the recognition of income and expense for tax and financial reporting purposes.
Reinsurance
In accordance with SFAS No. 113, "Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts," the liabilities for unearned premiums and unpaid losses are stated in the accompanying consolidated financial statements before deductions for ceded reinsurance. The ceded amounts are immaterial and are carried in other assets and other receivables. Earned premiums are stated net of deductions for ceded reinsurance.
The Insurance Companies, as primary insurers, would be required to pay losses in their entirety in the event that the reinsurers were unable to discharge their obligations under the reinsurance agreements.
Statements of Cash Flows
Interest paid during 1996, 1995, and 1994 was $1,882,000, $1,970,000, and $1,001,000, respectively. Income taxes paid were $30,550,000 in 1996, $18,954,000 in 1995, and $19,315,000 in 1994.
MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1996 and 1995
(1) Significant Accounting Policies (Continued)
The balance sheet of AFI at acquisition date included the following assets:
investments of $75,310,000, cash of $1,362,000, receivables of $44,418,000 and
other assets of $31,124,000. Liabilities assumed in the acquisition included
unearned premiums of $50,199,000, loss and loss adjustment expense reserves of
$47,039,000 and other liabilities of $19,985,000.
Stock-Based Compensation
During October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"), which is effective for fiscal years beginning
after December 15, 1995. The Company accounts for stock-based compensation
under the accounting methods prescribed by Accounting Principles Board (APB)
Opinion No. 25, as allowed by SFAS No. 123. Disclosure of stock-based
compensation determined in accordance with SFAS No. 123 is presented in Footnote
13. Accordingly, adoption of this pronouncement did not have a material effect
on the financial statements of the Company.
Reclassifications
Certain reclassifications have been made to the prior year balances to conform to the current year presentation.
(2) Investments and Investment Income
A summary of net investment income is shown in the following table:
Year ended December 31,
(Amounts in thousands)
---------------------------
1996 1995 1994
------- ------- -------
Interest and dividends on fixed maturities................... $55,132 $50,099 $46,636
Dividends on equity securities............................... 13,385 11,855 7,483
Interest on short-term cash investments...................... 2,126 1,456 894
------- ------- -------
Total investment income............................... 70,643 63,410 55,013
Investment expense........................................... 463 446 427
------- ------- -------
Net investment income................................. $70,180 $62,964 $54,586
======= ======= =======
|
MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1996 and 1995
(2) Investments and Investment Income (Continued)
A summary of net realized investment gains (losses) is as follows:
Year ended December 31,
(Amounts in thousands)
1996 1995 1994
-------- ------- ---------
Net realized investment gains (losses):
Fixed maturities.................................................................. $ 963 $ (57) $(4,574)
Equity securities................................................................. (4,136) 1,105 (5,279)
------- ------- -------
$(3,173) $ 1,048 $(9,853)
======= ======= =======
|
Gross gains and losses realized on the sales of investments (excluding calls) are shown below:
Year ended December 31,
(Amounts in thousands)
-------------------------------
1996 1995 1994
-------- ------- --------
Fixed maturities available for sale:
Gross realized gains.............................................................. $ 515 $ 346 $ 718
Gross realized losses............................................................. (1,237) (822) (5,633)
------- ------- -------
Net............................................................................. $ (722) $ (476) $(4,915)
======= ======= =======
Equity securities available for sale:
Gross realized gains.............................................................. $ 2,925 $ 5,154 $ 472
Gross realized losses............................................................. (7,115) (4,049) (5,751)
------- ------- -------
Net............................................................................. $(4,190) $ 1,105 $(5,279)
======= ======= =======
|
A summary of the net increase (decrease) in unrealized investment gains (losses) less applicable income tax expense (benefit), is as follows:
Year ended December 31,
(Amounts in thousands)
-------------------------------
1996 1995 1994
-------- ------- --------
Net increase (decrease) in net unrealized
investment gains (losses):
Fixed maturities available for sale.............................................. $(8,059) $49,859 $(48,873)
Income tax expense (benefit)..................................................... (2,821) 17,451 (17,106)
------- ------- --------
$(5,238) $32,408 $(31,767)
======= ======= ========
Equity securities................................................................ $(1,589) $ 8,541 $ (7,285)
Income tax expense (benefit)..................................................... (556) 2,989 $ (2,549)
------- ------- --------
$(1,033) $ 5,552 $ (4,736)
======= ======= ========
|
MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1996 and 1995
(2) Investments and Investment Income (Continued)
Accumulated unrealized gains and losses on securities available for sale
follows:
December 31,
(Amounts in thousands)
----------------------
1996 1995
---- ----
Fixed maturities available for sale:
Unrealized gains................................................................... $ 34,555 $ 41,326
Unrealized losses.................................................................. (5,240) (3,952)
Tax effect......................................................................... (10,260) (13,081)
-------- --------
$ 19,055 $ 24,293
-------- --------
Equity securities available for sale:
Unrealized gains................................................................... $ 2,347 $ 3,135
Unrealized losses.................................................................. (2,499) (1,698)
Tax effect......................................................................... 53 (503)
-------- --------
$ (99) 934
-------- --------
Net unrealized investment gains................................................... $ 18,956 $ 25,227
======== ========
|
The amortized cost and estimated market values of investments in fixed maturities available for sale as of December 31, 1996 are as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------- --------- -------- ---------
(Amounts in thousands)
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies..................... $ 34,218 $ 33 $ 366 $ 33,885
Obligations of states and political
subdivisions.................................. 781,586 30,817 3,642 808,761
Public utilities................................ 12,908 229 87 13,050
Corporate securities............................ 29,368 114 304 29,178
Redeemable preferred stock...................... 66,713 3,362 841 69,234
-------- ------- ------- --------
Totals..................................... $924,793 $34,555 $ 5,240 $954,108
======== ======= ======= ========
|
MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1996 and 1995
(2) Investments and Investment Income (Continued)
The amortized cost and estimated market values of investments in fixed maturities available for sale as of December 31, 1995 are as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------- ---------- ---------- ---------
(Amounts in thousands)
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies..................................... $ 3,659 $ 82 $ 3 $ 3,738
Obligations of states and political
subdivisions.................................................. 630,811 34,197 1,845 663,163
Public utilities................................................ 10,177 783 2 10,958
Corporate securities............................................ 7,682 242 81 7,843
Redeemable preferred stock...................................... 90,080 6,022 2,021 94,081
-------- ------- ------ --------
Totals..................................................... $742,409 $41,326 $3,952 $779,783
======== ======= ====== ========
|
Traditionally, it has been the Company's policy not to invest in high yield or non-investment grade bonds. In 1995, the Company adopted a policy allowing a small percentage of its investments to be placed in bonds rated lower than investment grade, but not lower than Ba by Moody's or BB by Standard & Poor's. At December 31, 1996 bond holdings rated below investment grade totaled approximately 1.3% of total investments. All but $1.5 million of such holdings were downgraded subsequent to purchase. The average Standard and Poor's rating of the bond portfolio is A.
The amortized cost and estimated market value of fixed maturities available for sale at December 31, 1996, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Estimated
Amortized Market
Cost Value
---------- ---------
(Amounts in thousands)
----------------------
Fixed maturities available for sale:
Due in one year or less.................... $ 47,288 $ 48,583
Due after one year through five years...... 207,804 214,782
Due after five years through ten years..... 405,721 415,942
Due after ten years........................ 263,980 274,801
-------- --------
$924,793 $954,108
======== ========
|
MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1996 and 1995
(2) Investments and Investment Income (Continued)
The Company utilizes repurchase agreements for investing funds overnight. All repurchase agreements utilized require U.S. Treasury securities or obligations of U.S. government corporations or agencies as collateral.
(3) Fixed Assets
A summary of fixed assets follows:
December 31,
(Amounts in thousands)
--------------------------
1996 1995
---- ----
Land................................ $ 6,128 $ 6,084
Buildings........................... 21,430 20,432
Furniture and equipment............. 23,287 18,410
Leasehold improvements.............. 1,238 1,128
-------- --------
52,083 46,054
Less accumulated depreciation....... (22,023) (18,590)
-------- --------
Net fixed assets................... $ 30,060 $ 27,464
======== ========
|
(4) Deferred Policy Acquisition Costs
Policy acquisition costs incurred and amortized to income are as follows:
Years ended December 31,
(Amounts in thousands)
----------------------------------
1996 1995 1994
---- ---- ----
Balance, beginning of year................. $ 33,809 $ 30,068 $ 25,723
DAC acquired in purchase of AFI............ 5,850 -- --
Costs deferred during the year............. 167,143 132,484 117,027
Amortization charged to expense............ (160,019) (128,743) (112,682)
--------- -------- --------
Balance, end of year....................... $ 46,783 $ 33,809 $ 30,068
========= ======== ========
|
(5) Notes Payable
Notes payable at December 31, 1996 consists of three unsecured notes payable under a credit agreement dated November 21, 1996. The combined principal amount on the notes of $75,000,000 is payable on November 21, 1999. The loan agreement may be extended annually for additional periods of one year each to maintain the three year maturity date. The interest rate is variable and is optionally related to the Federal Funds rate, Bank of New York prime rate or the Eurodollar London Interbank rate (LIBOR). Based on the rates effective through June 25, 1997, the net interest cost on the loan at December 31, 1996 is approximately 6.08%.
MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1996 and 1995
(5) Notes Payable (Continued)
The terms of the loan agreement include certain affirmative and negative covenants, all of which are met by the Company at December 31, 1996.
(6) Income Taxes
The Company and its subsidiaries file a consolidated Federal income tax return.
The provision for income tax expense (benefit) consists of the following components:
Year ended December 31,
(Amounts in thousands)
-----------------------------
1996 1995 1994
-------- -------- -------
Federal
Current.... $31,880 $24,016 $15,318
Deferred... (1,139) (92) 707
------- ------- -------
$30,741 $23,924 $16,025
======= ======= =======
State
Current.... $ 85 $ 98 $ 96
Deferred... -- -- --
------- ------- -------
$ 85 $ 98 $ 96
======= ======= =======
Total
Current.... $31,965 $24,114 $15,414
Deferred... (1,139) (92) 707
------- ------- -------
Total... $30,826 $24,022 $16,121
======= ======= =======
|
The income tax provision reflected in the consolidated statements of income is less than the expected federal income tax on income before income taxes as shown in the table below:
Year ended December 31,
(Amounts in thousands)
------------------------------
1996 1995 1994
-------- -------- --------
Computed tax expense at 35% .................................. $ 47,807 $40,013 $ 28,846
Tax-exempt interest income.................................... (15,626) (13,718) (12,216)
Dividends received deduction.................................. (4,949) (4,936) (4,253)
Reduction of losses incurred deduction for 15% of
income on securities purchased after August 7, 1986.......... 2,974 2,546 2,220
Other, net.................................................... 620 117 1,524
-------- -------- --------
Income tax expense....................................... $30,826 $24,022 $ 16,121
======= ======= ========
|
MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1996 and 1995
(6) Income Taxes (Continued)
The "temporary differences" that give rise to a significant portion of the deferred tax asset (liability) relate to the following:
December 31,
(Amounts in thousands)
------------------------------
1996 1995 1994
-------- -------- -------
Deferred tax assets
Discounting of loss reserves and salvage
and subrogation recoverable for tax
purposes......................................................... $ 6,123 $ 5,030 $ 5,030
Tax benefit on net unrealized loss on
securities carried at market value............................... -- -- 6,856
Other deferred tax assets......................................... 1,358 638 534
-------- -------- -------
Total gross deferred tax assets................................. 7,481 5,668 12,420
Less valuation allowance....................................... -- -- --
-------- -------- -------
Net deferred tax assets........................................ 7,481 5,668 12,420
-------- -------- -------
Deferred tax liabilities
Tax liability on net unrealized gain on
securities carried at market value............................... (10,207) (13,584) --
Tax depreciation in excess of book
depreciation..................................................... (1,270) (1,184) (1,192)
Accretion on bonds................................................ (784) (742) (574)
Other deferred tax liabilities.................................... (1,569) (316) (464)
-------- -------- -------
-------- ------- -------
Total gross deferred tax liabilities........................... (13,830) (15,826) (2,230)
-------- -------- -------
Net deferred tax assets (liabilities).......................... $ (6,349) $(10,158) $10,190
======== ======== =======
|
MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1996 and 1995
(7) Reserves for Losses and Loss Adjustment Expenses
Activity in the reserves for losses and loss adjustment expenses is summarized as follows:
Year ended December 31,
(Amounts in thousands)
--------------------------------------
1996 1995 1994
-------- -------- --------
Gross reserves for losses and loss
adjustment expenses at beginning of year.......... $253,546 $227,499 $215,301
Less reinsurance recoverable..................... (2,556) (4,107) (776)
-------- -------- --------
Net reserves, beginning of year.................... 250,990 223,392 214,525
Reserves acquired in purchase of AFI............... 24,231 -- --
Incurred losses and loss adjustment expenses
related to:
Current year..................................... 505,726 423,264 370,631
Prior years...................................... (3,868) (6,708) (10,074)
-------- -------- --------
Total incurred losses and loss adjustment
expenses......................................... 501,858 416,556 360,557
-------- -------- --------
Loss and loss adjustment expense payments
related to:
Current year..................................... 298,099 243,294 208,418
Prior years...................................... 167,226 145,664 143,272
-------- -------- --------
Total payments..................................... 465,325 388,958 351,690
-------- -------- --------
Net reserves for losses and loss adjustment
expenses at end of year........................... 311,754 250,990 223,392
Reinsurance recoverable............................ 24,931 2,556 4,107
-------- -------- --------
Gross reserves, end of year........................ $336,685 $253,546 $227,499
======== ======== ========
|
Decreases in incurred losses relating to prior years reflects the favorable loss experience during these years attributable to a number of combined factors which have produced favorable frequency and severity trends in recent years. In addition, actuarial assumptions based on historical trends have proved to be conservative.
MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1996 and 1995
(8) Acquisition of American Fidelity Insurance Company
Effective November 30, 1996 the Company acquired all of the issued and outstanding common stock of American Fidelity Insurance Company, including its subsidiaries as described in Note 1, for $35.0 million. The acquisition was paid for in cash with funds raised by increasing the Company's notes payable under the bank credit agreement discussed in Note 5. On December 30, 1996 the Company contributed an additional $15.0 million to AFI. The acquisition was accounted for using the purchase method and resulted in a minimal amount of negative goodwill. The purchase agreement includes an indemnification by the seller on the loss and loss adjustment expense reserves of AFI at the acquisition date, excluding the mechanical breakdown line, to avoid any impact on the Company's financial statements from any future adverse development on the acquisition date loss reserves.
AFI writes property and casualty insurance, primarily in Oklahoma, Kansas and Texas, where the companies are domiciled. Its primary lines are automobile and mechanical breakdown insurance. The results of operations for the month of December are included in the consolidated financial statements of the Company.
The following unaudited proforma consolidated results of operations for 1996 and 1995 give effect to the acquisition as though it had occurred at the beginning of each year presented:
Pro Forma Results for the year ended
December 31,
(Amounts in thousands,
except per share data)
----------------------
1996 1995
---- ----
Revenues $891,243 $756,728
Pretax operating income $136,912 $117,092
Income before income taxes $133,691 $118,293
Net income per share $3.79 $3.39
|
(9) Dividend Restrictions
The Insurance Companies are subject to the financial capacity guidelines established by the Office of the Commissioner of Insurance of their domicile states. The payment of dividends from statutory unassigned surplus of the Insurance Companies is restricted, subject to certain statutory limitations. For the year 1997, the direct insurance subsidiaries of the Company are permitted to pay approximately $61,471,000 in dividends to the Company without the prior approval of the Commissioner of Insurance of the state of domicile.
MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1996 and 1995
(9) Dividend Restrictions (Continued)
The above statutory regulations may have the effect of indirectly limiting the ability of the Company to pay dividends.
(10) Statutory Balances and Accounting Practices
The Insurance Companies prepare their statutory financial statements in accordance with accounting practices prescribed or permitted by the various state insurance departments. Prescribed statutory accounting practices include a variety of publications of the National Association of Insurance Commissioners (NAIC), as well as state laws, regulations, and general administrative rules. Permitted statutory accounting practices encompass all accounting practices not so prescribed. As of December 31, 1996, there were no material permitted statutory accounting practices utilized by the Insurance Companies. The NAIC is working on a project to codify statutory accounting practices, the result of which is expected to constitute the only source of "prescribed" statutory accounting practices. When complete, that project will most likely change the definition of prescribed versus permitted statutory accounting practices and may result in changes to the accounting policies that insurance enterprises use to prepare their statutory financial statements.
The Insurance Companies' statutory net income, as reported to regulatory authorities, was $97,979,000, $86,210,000, and $62,861,000 for the years ended December 31, 1996, 1995 and 1994, respectively. The statutory policyholders' surplus of the Insurance Companies, as reported to regulatory authorities, as of December 31, 1996 and 1995 was $594,799,000 and $479,114,000, respectively.
The Company has estimated the Risk-Based Capital Requirements of each of its insurance subsidiaries as of December 31, 1996 according to the formula issued by the NAIC. Each of the companies' policyholders' surplus exceeded the highest level of recommended capital requirements.
(11) Commitments and Contingencies
The Company is obligated under various noncancellable lease agreements providing for office space and equipment rental that expire at various dates through the year 2002. Total rent expense under these lease agreements, all of which are operating leases, was $1,583,000, $1,461,000 and $1,492,000 for the years ended December 31, 1996, 1995 and 1994, respectively. Mercury Casualty
MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1996 and 1995
(11) Commitments and Contingencies (Continued)
Company will receive minimum future rentals on various noncancellable operating leases on a building in Brea, California. The annual rental commitments, expressed in thousands, are shown as follows:
Rent Rent
Year Expense Income
---- ------- ------
1997................... $1,599 $(486)
1998................... $1,505 $(280)
1999................... $1,555 $(238)
2000................... $ 973 $ (91)
2001................... $ 525 $ --
Thereafter............. $ 15 $ --
|
The Company and its subsidiaries are defendants in various lawsuits generally incidental to their business. In most of these actions, plaintiffs assert claims for exemplary and punitive damages which are not insurable under California judicial decisions. The Company vigorously defends these actions, unless a reasonable settlement appears appropriate. Management does not expect the ultimate disposition of these lawsuits to have a material effect on the Company's consolidated operations or financial position.
(12) Profit Sharing Plan
The Company, at the option of the Board of Directors, may make annual contributions to an employee profit sharing plan. The contributions are not to exceed the greater of the Company's net income for the plan year or its retained earnings at that date. In addition, the annual contributions may not exceed an amount equal to 15% of the compensation paid or accrued during the year to all participants under the plan. The annual contribution was $1,000,000 for each of the plan years ended December 31, 1996, 1995 and 1994.
The Profit Sharing Plan also includes an option for employees to make salary deferrals under Section 401(k) of the Internal Revenue Code. Company matching contributions, at a rate set by the Board of Directors, totaled $955,000, $773,000, and $762,000 for the plan years ended December 31, 1996, 1995 and 1994.
Effective March 11, 1994 the Profit Sharing Plan also includes a leveraged employee stock ownership plan (ESOP) that covers substantially all employees. The Company makes annual contributions to the ESOP equal to the ESOP's debt service less dividends received by the ESOP. Dividends received by the ESOP on
MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1996 and 1995
(12) Profit Sharing Plan (Continued)
unallocated shares are used to pay debt service and the ESOP shares serve as collateral for its debt. As the debt is repaid, shares are released from collateral and allocated to employees, based on the proportion of debt service paid in the year. The Company accounts for its ESOP in accordance with Statement of Position 93-6. Accordingly, the debt of the ESOP, which was $3,000,000, $4,000,000 and $5,000,000 at December 31, 1996, 1995 and 1994, respectively, is recorded in the balance sheet as other liabilities. The shares pledged as collateral are reported as unearned ESOP compensation in the shareholders' equity section of the balance sheet. As shares are committed to be released from collateral, the Company reports compensation expense equal to the current market price of the shares, and reduces unearned ESOP compensation by the original cost of the shares. The difference between the market price and cost of the shares is charged to common stock. As shares are committed to be released from collateral, the shares become outstanding for earnings-per-share computations. Dividends on allocated ESOP shares are recorded as a reduction of retained earnings; dividends on unallocated ESOP shares are recorded as a reduction of accrued interest. ESOP compensation expense was $1,509,000, $1,145,000 and $919,000 in 1996, 1995 and 1994, respectively. The ESOP shares as of December 31 were as follows:
1996 1995
---- ----
Allocated shares 64,400 32,200
Shares committed-to-be released 32,200 32,200
Unreleased shares 64,400 96,600
---------- ----------
Total ESOP shares 161,000 161,000
========== ==========
Market value of unreleased shares at
December 31, $3,381,000 $4,613,000
========== ==========
|
(13) Common Stock
The Company adopted a stock option plan in October 1985 (the "1985 Plan") under which 2,700,000 shares were reserved for issuance. Options granted during 1985 were exercisable immediately. Subsequent options granted become exercisable 20% per year beginning one year from the date granted. All options were granted at the market price on the date of the grant and expire in 10 years.
In May 1995 the Company adopted The 1995 Equity Participation Plan (the "1995 Plan") which succeeds the Company's 1985 Plan. Under the 1995 Plan, 2,700,000 shares of Common Stock are authorized for issuance upon exercise of options, stock appreciation rights and other awards, or upon vesting of restricted or deferred stock awards. During 1995, the Company granted incentive stock options under both the 1995 Plan and the 1985 Plan. The options granted during 1996, 1995 and 1994 become exercisable 20% per year beginning one year from the date granted and were granted at the market price on the date of the grant. The options expire in 10 years.
MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1996 and 1995
(13) Common Stock (Continued)
As explained in Note 1, the Company applies APB Opinion No. 25 in accounting for its stock option plan. Accordingly, no compensation cost has been recognized in the Statements of Income. Had compensation cost for the Company's Plans been determined based on the fair value at the grant dates consistent with the method of SFAS No. 123, the Company's net income would have been reduced by $295,000 and $116,000 in 1996 and 1995, respectively, and earnings per share would have been reduced by $.01 in each year. Calculations of the fair value under the method prescribed by SFAS No. 123 were made using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 1996 and 1995: dividend yield of 2.0 percent for both years, expected volatility of 30 percent for both years and expected lives of 7 years for both years. The risk-free interest rates used were 5.5 and 6.4 percent for the options granted during 1996 and 7.4 and 6.4 percent for the options granted during 1995.
A summary of the status of the Company's plans as of December 31, 1994, 1995 and 1996 and changes during the years ending on those dates is presented below:
1996 1995 1994
---------------------- ------------------- ------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------- -------- ------- -------- ------- --------
Outstanding at beginning of year 365,325 $24.234 237,925 $18.602 264,740 $17.428
Granted during the year 60,000 46.156 155,000 31.09 4,000 27.000
Exercised during the year (61,250) 15.425 (27,600) 14.177 (27,815) 7.393
Canceled or expired (2,400) 27.000 -- -- (3,000) 30.125
------- ------- -------
Outstanding at end of year 361,675 28.904 365,325 24.234 237,925 18.602
======= ======= =======
Options exercisable at year-end 134,075 141,725 142,725
Weighted-average fair value of options
granted during the year $16.22 $11.50 N/A
|
The following table summarizes information regarding the stock options outstanding at December 31, 1996:
Number Weighted Avg. Weighted Avg. Number Weighted Avg.
Range of Outstanding Remaining Exercise Exercisable Exercise
Exercise Prices at 12/31/96 Contractual Life Price at 12/31/96 Price
- --------------- ----------- ---------------- ------------- ----------- -------------
$6.75 to 8.00 69,625 1.67 years $ 7.864 69,625 $ 7.864
$30.00 to 31.875 232,050 7.58 30.756 64,450 30.544
$43.50 to 48.8125 60,000 9.33 46.156 -- --
------- -------
$6.75 to 48.8125 361,675 6.73 28.904 134,075 18.766
======= =======
|
None.
PART III
Section 16(a) of the Securities Exchange Act of 1934 requires the directors, officers and certain other employees of the registrant, and persons who own more than ten percent of a registered class of the registrant's equity securities, ("Reporting Persons") to file with the Securities and Exchange Commission initial reports of ownership and reports of changes in ownership of Common Stock of the registrant. Due dates for these reports have been established and the registrant is required to disclose any failure to file by these dates during 1996. To the registrant's knowledge, all of these requirements were satisfied.
Information regarding executive officers of the Company is included in Part
I. For this and other information called for by Items 10, 11, 12 and 13,
reference is made to the Company's definitive proxy statement for its Annual
Meeting of Shareholders, to be held on May 14, 1997, which will be filed with
the Securities and Exchange Commission within 120 days after December 31, 1996,
and which is incorporated herein by reference.
PART IV
(a) The following documents are filed as a part of this report:
1. Financial Statements: The Consolidated Financial Statements for the year ended December 31, 1996 are contained herein as listed in the Index to Consolidated Financial Statements on page 29.
2. Financial Statement Schedules:
Auditors' Report on Financial Statement Schedules
Schedule I -- Summary of Investments -- Other than Investments in
Related Parties
Schedule II -- Condensed Financial Information of Registrant
Schedule IV -- Reinsurance
All other schedules are omitted as the required information is inapplicable or the information is presented in the Consolidated Financial Statements or Notes thereto.
3. Exhibits:
3.1** Articles of Incorporation of the Company, as amended to date.
3.2@@ By-laws of the Company, as amended to date.
4.1* Shareholders' Agreement dated as of October 7, 1985 among the
Company, George Joseph and Gloria Joseph.
10.1* Form of Agency Contract.
10.2# Management Agreement, as amended, effective July 1, 1992, among
the Company, Mercury Casualty Company, Mercury Insurance Company
and California Automobile Insurance Company.
10.3## Profit Sharing Plan, as Amended and Restated as of March 11,
1994.
10.4## ESOP Feature Trust Agreement between the Company and Wells Fargo
Bank, N.A., as Trustee, effective March 1, 1994.
10.5## ESOP Loan Agreement between Union Bank and Wells Fargo Bank,
N.A., as Trustee, of the Mercury General Corporation ESOP
Feature Trust dated as of March 11, 1994.
10.6## Continuing Guaranty, dated as of March 11, 1994, executed by
Mercury General Corporation in favor of Union Bank.
10.7** Amendment 1994-I to the Mercury General Corporation Profit
Sharing Plan.
10.8** Amendment 1994-II to the Mercury General Corporation Profit
Sharing Plan.
10.9 Amendment 1996-I to the Mercury General Corporation Profit
Sharing Plan.
10.10 Amendment 1997-I to the Mercury General Corporation Profit
Sharing Plan.
10.11 Revolving Credit Agreement by and among Mercury General
Corporation, the Lenders Party Thereto and The Bank of New York,
as Agent dated as of November 21, 1996.
10.12** Property Per Risk Excess of Loss Reinsurance Agreement between
National Reinsurance Corporation and Mercury Casualty Company,
effective April 1, 1995.
10.13** Endorsement No. 1 to the Property Per Risk Excess of Loss
Agreement effective April 1, 1995.
10.14@@ Endorsement No. 2 to the Property Per Risk Excess of Loss
Agreement effective April 1, 1995.
10.15@@ Endorsement No. 3 to the Property Per Risk Excess of Loss
Agreement effective April 1, 1995.
10.16@@ Management Agreement effective January 1, 1995 between the
Company and Mercury Insurance Company of Illinois.
10.17@@ Management Agreement effective January 1, 1995 between the
Company and Mercury Indemnity Company of Illinois.
10.18@@ Management Agreement effective January 1, 1995 between the
Company and Mercury Insurance Company of Georgia.
10.19@@ Management Agreement effective January 1, 1995 between the
Company and Mercury Indemnity Company of Georgia.
54
|
10.20@ The 1995 Equity Participation Plan.
10.21 Stock Purchase Agreement between Mercury General Corporation as
Purchaser and AFC as Seller dated November 15, 1996.
21.1 Subsidiaries of the Company.
23.1 Accountants' Consent.
27.1 Financial Data Schedule
|
* This document was filed as an exhibit to Registrant's Registration Statement on Form S-1, File No. 33-899, and is incorporated herein by this reference.
# This document was filed as an exhibit to Registrant's Form 10-K for the fiscal year ended December 31, 1992, and is incorporated herein by this reference.
## This document was filed as an exhibit to Registrant's Form 10-K for the fiscal year ended December 31, 1993, and is incorporated herein by this reference.
** This document was filed as an exhibit to Registrant's Form 10-K for the fiscal year ended December 31, 1994, and is incorporated herein by this reference.
@ This document was filed as an exhibit to Registrant's Form S-8 filed on March 8, 1996 and is incorporated herein by this reference.
@@ This document was filed as an exhibit to Registrant's Form 10-K for the fiscal year ended December 31, 1995, and is incorporated herein by this reference.
(b) Reports on Form 8-K:
None
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
MERCURY GENERAL CORPORATION
By GEORGE JOSEPH
-------------------------------------
George Joseph
Chief Executive Officer and
Chairman of the Board
|
March 22, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
Chief Executive Officer
and
Chairman of the Board
GEORGE JOSEPH (Principal Executive Officer) March 18, 1997
- --------------------------
George Joseph
Chief Financial Officer
KEITH L. PARKER (Principal Financial Officer) March 18, 1997
- --------------------------
Keith L. Parker
Vice President and Controller
DONNA J. MOORE (Principal Accounting Officer) March 18, 1997
- --------------------------
Donna J. Moore
NATHAN BESSIN Director March 18, 1997
- --------------------------
Nathan Bessin
BRUCE A. BUNNER Director March 18, 1997
- --------------------------
Bruce A. Bunner
MICHAEL D. CURTIUS Director March 18, 1997
- --------------------------
Michael D. Curtius
|
Signature Title Date
--------- ----- ----
RICHARD E. GRAYSON Director March 18, 1997
- --------------------------
Richard E. Grayson
GLORIA JOSEPH Director March 18, 1997
- ---------------------------
Gloria Joseph
CHARLES MCCLUNG Director March 18, 1997
- ---------------------------
Charles McClung
DONALD P. NEWELL Director March 18, 1997
- ---------------------------
Donald P. Newell
DONALD R. SPUEHLER Director March 18, 1997
- ---------------------------
Donald R. Spuehler
|
AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULES
The Board of Directors
Mercury General Corporation:
Under date of February 21, 1997, we reported on the consolidated balance sheets of Mercury General Corporation and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of income, shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 1996, as contained in the annual report on Form 10-K for the year 1996. In connection with our audits of the aforementioned consolidated financial statements, we also have audited the related financial statement schedules as listed under Item 14(a)2. These financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statement schedules based on our audits.
In our opinion, the related financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
KPMG PEAT MARWICK LLP
Los Angeles, California
February 21, 1997
SCHEDULE I
MERCURY GENERAL CORPORATION
SUMMARY OF INVESTMENTS
OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 1996
AMOUNTS IN THOUSANDS
Amount at
which shown
in the
Type of Investment Cost Value balance sheet
- ------------------ -------- ---------- -------------
Fixed maturities available for sale
Bonds:
U.S. Government......................... $ 34,218 $ 33,885 $ 33,885
States, Municipalities.................. 781,586 808,761 808,761
Public utilities........................ 12,908 13,050 13,050
All other corporate bonds............... 29,368 29,178 29,178
Redeemable preferred stock................ 66,713 69,234 69,234
---------- -------- ----------
Total fixed maturities available for
sale.................................. 924,793 954,108 954,108
---------- -------- ----------
Equity securities:
Common stocks:
Public utilities........................ 20,726 21,360 21,360
Banks, trust and insurance companies.... 544 493 493
Industrial, Miscellaneous and
all other.............................. 1,535 2,209 2,209
Nonredeemable preferred stocks............ 125,459 124,050 124,050
---------- -------- ----------
Total equity securities available for
sale.................................. 148,264 148,112 148,112
---------- -------- ----------
Short-term investments........................ 66,067 66,067
---------- ----------
Total investments....................... $1,139,124 $1,168,287
========== ==========
|
SCHEDULE I, CONTINUED
MERCURY GENERAL CORPORATION
SUMMARY OF INVESTMENTS
OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 1995
AMOUNTS IN THOUSANDS
Amount at
which shown
in the
Type of Investment Cost Value balance sheet
- ------------------ -------- -------- -------------
Fixed maturities available for sale
Bonds:
U.S. Government.......................... $ 3,659 $ 3,738 $ 3,738
States, Municipalities................... 630,811 663,163 663,163
Public utilities......................... 10,177 10,958 10,958
All other corporate bonds................ 7,682 7,843 7,843
Redeemable preferred stock................ 90,080 94,081 94,081
-------- -------- --------
Total fixed maturities available for
sale.................................... 742,409 779,783 779,783
-------- -------- --------
Equity securities:
Common stocks:
Public utilities......................... 18,787 19,714 19,714
Banks, trust and insurance companies..... 535 469 469
Industrial, Miscellaneous and
all other............................... 1,133 1,524 1,524
Nonredeemable preferred stocks............ 93,023 93,208 93,208
-------- -------- --------
Total equity securities available for
sale.................................... 113,478 114,915 114,915
-------- -------- --------
Short-term investments......................... 28,496 28,496
-------- --------
Total investments........................ $884,383 $923,194
======== ========
|
SCHEDULE II
MERCURY GENERAL CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS
December 31, 1996 and 1995
Amounts in thousands
ASSETS
1996 1995
-------- --------
Investments:
Fixed maturities available for sale (amortized
cost $3,003 in 1996 and $3,771 in 1995)...................... $ 3,012 $ 3,770
Equity securities, available for sale (cost
$17,169 in 1996 and $12,943 in 1995)......................... 16,877 12,841
Short-term cash investments.................................... 8,090 4,746
Investment in subsidiaries..................................... 697,059 574,224
-------- --------
Total investments...................................... 725,038 595,581
Amounts due from affiliates.......................................... 5,014 3,834
Income taxes......................................................... 1,988 2,615
Other assets......................................................... 2,303 2,110
-------- --------
$734,343 $604,140
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Notes payable........................................................ $ 75,000 $25,000
Accounts payable and accrued expenses................................ 12,311 8,611
Other liabilities.................................................... 5,807 5,341
-------- --------
Total liabilities............................................. 93,118 38,952
-------- --------
Shareholders' equity:
Common stock.................................................. 42,644 40,895
Net unrealized investment gains .............................. 18,959 25,227
Unearned ESOP compensation....................................... (2,000) (3,084)
Retained earnings................................................ 581,622 502,150
-------- --------
Total shareholders' equity................................... 641,225 565,188
-------- --------
$734,343 $604,140
======== ========
|
See notes to condensed financial information
SCHEDULE II, CONTINUED
MERCURY GENERAL CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF INCOME
Three years ended December 31, 1996
Amounts in thousands
1996 1995 1994
-------- -------- --------
Revenues:
Net investment income...................................... $ 1,489 $ 1,824 $ 1,389
Management fee income from subsidiaries.................... 118,657 101,823 101,858
Other...................................................... 8 27 (704)
-------- -------- --------
Total revenues......................................... 120,154 103,674 102,543
-------- -------- --------
Expenses:
Loss adjustment expenses................................... 79,934 68,048 68,771
Policy acquisition costs................................... 20,345 17,087 17,953
Other operating expenses................................... 19,336 16,627 15,544
Interest................................................... 2,004 2,040 1,025
-------- -------- --------
Total expenses......................................... 121,619 103,802 103,293
-------- -------- --------
Loss before income taxes and equity in net
income of subsidiaries.................................... (1,465) (128) (750)
Income tax benefit........................................... (536) (386) (506)
-------- -------- --------
Income (loss) before equity in net income
of subsidiaries........................................... (929) 258 (244)
Equity in net income of subsidiaries......................... 106,693 90,043 66,539
-------- -------- --------
Net income................................................ $105,764 $ 90,301 $ 66,295
======== ======== ========
|
See notes to condensed financial information.
SCHEDULE II, CONTINUED
MERCURY GENERAL CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF CASH FLOWS
THREE YEARS ENDED DECEMBER 31, 1996
AMOUNTS IN THOUSANDS
1996 1995 1994
-------- -------- --------
Cash flows from operating activities:
Net cash provided from operating activities................... $ 32,510 $ 25,526 $ 20,367
Cash flows from investing activities:
Acquisition of American Fidelity Insurance
Company...................................................... (34,991) -- --
Capital contribution to subsidiaries.......................... (15,000) (500) (10,000)
Fixed maturities, at market:
Purchases................................................... (807) (1,051) (547)
Sales....................................................... 475 335 --
Calls or maturities......................................... 1,072 349 2,632
Equity securities:
Purchases................................................... (47,597) (49,390) (20,105)
Sales....................................................... 42,934 48,675 16,461
Increase in short term cash investments, net.................. (3,344) (2,708) (365)
Other, net.................................................... -- -- 31
-------- -------- --------
Net cash used in investing activities..................... (57,258) (4,290) (11,893)
Cash flows from financing activities:
Additions to notes payable.................................... 75,000 -- 25,000
Principal payments on notes payable........................... (25,000) -- (15,000)
Dividends paid to shareholders................................ (26,291) (21,837) (19,100)
Stock options exercised....................................... 1,324 458 275
-------- -------- --------
Net cash used in financing activities...................... 25,033 (21,379) (8,825)
Net increase (decrease) in cash................................ 284 (143) (351)
Cash:
Beginning of the year........................................ (1,340) (1,197) (846)
-------- -------- --------
End of the year.............................................. $ (1,056) $ (1,340) $ (1,197)
======== ======== ========
|
See notes to condensed financial information.
SCHEDULE II, Continued
MERCURY GENERAL CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTES TO CONDENSED FINANCIAL INFORMATION
December 31, 1996 and 1995
The accompanying condensed financial information should be read in conjunction with the consolidated financial statements and notes included in this statement.
Management Fee Income
Under a management agreement, the Company performs management services for its subsidiaries which include all underwriting and claims servicing functions. The Company is compensated by monthly reimbursement of expenses paid.
Dividends Received From Subsidiaries
Dividends of $27,700,000, $24,500,000, and $20,000,000 were received by the Company from its wholly-owned subsidiaries in 1996, 1995 and 1994, respectively, and are recorded as a reduction to Investment in Subsidiaries.
Cash Overdraft
At December 31, 1996 and 1995, the Company had cash overdrafts of $1,056,000 and $1,340,000, respectively which are classified in "other liabilities" in the accompanying condensed balance sheet.
SCHEDULE IV
MERCURY GENERAL CORPORATION
REINSURANCE
THREE YEARS ENDED DECEMBER 31, 1996
AMOUNTS IN THOUSANDS
Ceded to
Gross other Net
amount companies Assumed amount
-------- --------- ------- --------
Property and Liability insurance
1996............................ $757,447 $3,138 $415 $754,724
1995............................ $619,404 $3,444 $366 $616,326
1994............................ $530,224 $1,321 $487 $529,390
|
EXHIBIT INDEX
3.1** Articles of Incorporation of the Company, as amended to date.
3.2@@ By-laws of the Company, as amended to date.
4.1* Shareholders' Agreement dated as of October 7, 1985 among the
Company, George Joseph and Gloria Joseph.
10.1* Form of Agency Contract.
10.2# Management Agreement, as amended, effective July 1, 1992, among
the Company, Mercury Casualty Company, Mercury Insurance Company
and California Automobile Insurance Company.
10.3## Profit Sharing Plan, as Amended and Restated as of March 11, 1994.
10.4## ESOP Feature Trust Agreement between the Company and Wells Fargo
Bank, N.A., as Trustee, effective March 1, 1994.
10.5## ESOP Loan Agreement between Union Bank and Wells Fargo Bank, N.A.,
as Trustee, of the Mercury General Corporation ESOP Feature Trust
dated as of March 11, 1994.
10.6## Continuing Guaranty, dated as of March 11, 1994, executed by
Mercury General Corporation in favor of Union Bank.
10.7** Amendment 1994-I to the Mercury General Corporation Profit Sharing
Plan.
10.8** Amendment 1994-II to the Mercury General Corporation Profit
Sharing Plan.
10.9 Amendment 1996-I to the Mercury General Corporation Profit Sharing
Plan.
10.10 Amendment 1997-I to the Mercury General Corporation Profit Sharing
Plan.
10.11 Revolving Credit Agreement by and among Mercury General
Corporation, the Lenders Party Thereto and The Bank of New York,
as Agent dated as of November 21, 1996.
10.12** Property Per Risk Excess of Loss Reinsurance Agreement between
National Reinsurance Corporation and Mercury Casualty Company,
effective April 1, 1995.
10.13** Endorsement No. 1 to the Property Per Risk Excess of Loss
Agreement effective April 1, 1995.
10.14@@ Endorsement No. 2 to the Property Per Risk Excess of Loss
Agreement effective April 1, 1995.
10.15@@ Endorsement No. 3 to the Property Per Risk Excess of Loss
Agreement effective April 1, 1995.
10.16@@ Management Agreement effective January 1, 1995 between the
Company and Mercury Insurance Company of Illinois.
10.17@@ Management Agreement effective January 1, 1995 between the
Company and Mercury Indemnity Company of Illinois.
10.18@@ Management Agreement effective January 1, 1995 between the
Company and Mercury Insurance Company of Georgia.
10.19@@ Management Agreement effective January 1, 1995 between the
Company and Mercury Indemnity Company of Georgia.
10.20@ The 1995 Equity Participation Plan.
10.21 Stock Purchase Agreement between Mercury General Corporation as
Purchaser and AFC as Seller dated November 15, 1996.
21.1 Subsidiaries of the Company.
23.1 Accountants' Consent.
27.1 Financial Data Schedule
|
* This document was filed as an exhibit to Registrant's Registration Statement on Form S-1, File No. 33-899, and is incorporated herein by this reference.
# This document was filed as an exhibit to Registrant's Form 10-K for the fiscal year ended December 31, 1992, and is incorporated herein by this reference.
## This document was filed as an exhibit to Registrant's Form 10-K for the fiscal year ended December 31, 1993, and is incorporated herein by this reference.
** This document was filed as an exhibit to Registrant's Form 10-K for the fiscal year ended December 31, 1994, and is incorporated herein by this reference.
@ This document was filed as an exhibit to Registrant's Form S-8 filed on March 8, 1996 and is incorporated herein by this reference.
@@ This document was filed as an exhibit to Registrant's Form 10-K for the fiscal year ended December 31, 1995, and is incorporated herein by this reference.
(b) Reports on Form 8-K:
None
EXHIBIT 10.9
AMENDMENT 1996-I TO
MERCURY GENERAL CORPORATION
PROFIT SHARING PLAN
WHEREAS, Mercury General Corporation (the "Company") maintains the Mercury General Corporation Profit Sharing Plan (the "Plan"); and
WHEREAS, pursuant to Section 9.1 of the Plan, the Company has the right to amend the Plan; and
WHEREAS, the Internal Revenue Service has requested certain changes in the Plan as a condition for issuing a favorable determination letter with respect to the Plan.
NOW, THEREFORE, the Plan is hereby amended as follows, effective as of January 1, 1987:
1. Section 3.6(a) of the Plan is amended by changing the period at the end of the last sentence thereunder to a comma, and inserting the following immediately thereafter:
"which percentage of Compensation may be expressed in increments of 1/4 of 1%."
2. The second sentence of Section 3.6(b) of the Plan is amended to read as follows:
"For purposes of the preceding sentence, the Company, in its sole discretion, may treat all or any part of its Company Contributions and Employer Matching Contributions as Compensation Deferrals if the conditions of Treasury Regulations Section 1.401(k)-1(b)(5) are satisfied."
3. Section 3.6(b) of the Plan is further amended by adding the following at the end thereof:
"For purposes of this Section 3.6, (1) all elective contributions that
are made under two or more plans that are aggregated for purposes of
Code Section 401(a)(4) or 410(b) (other than Code Section
410(b)(2)(A)(ii)) shall be treated as made under a single plan which
must satisfy Code Sections 401(a)(4) and 410(b) as though they were a
single plan; (2) if this Plan and one or more other plans are
permissively aggregated for purposes of Section 401(k) of the Code,
such aggregated plans must also satisfy Section 401(a)(4) and 410(b)
of the Code as though they were a single plan; and (3) the actual
deferral percentage of a Highly Compensated Employee shall be
determined by treating all cash or deferred arrangements under which
the Highly Compensated Employee is eligible (other than those that may
not be permissively aggregated) as a single arrangement."
4. Section 3.6(d)(l) of the Plan is amended by deleting the last sentence thereunder and by inserting the following in lieu thereof:
"The amount of excess Compensation Deferrals to be distributed or recharacterized shall be reduced by excess Compensation Deferrals previously distributed under Section 3.5(b) for the taxable year ending with or within such Plan Year and by excess Employer Matching Contributions distributed or recharacterized for the Plan Year beginning in such taxable year. Recharacterized excess Compensation Deferrals shall remain subject to the nonforfeitability requirements and distribution limitations that apply to Compensation Deferrals."
5. Section 3.7(b) of the Plan is amended by adding the following at the end thereof:
"For purposes of this Section 3.7, the test for multiple use of the alternative limitation provided under Treasury Regulation Section 1.401(m)-2(b) shall be applied. An excess Contribution Deferral that is recharacterized shall be taken into account in the Plan Year in which the contribution would have been received in cash by the Participant had the Participant not elected to defer the amounts; an Employer Matching
Contribution shall be taken into account for a Plan Year only if it is paid to the Trust Fund by the end of the 12th month following the close of that year; and Employer Matching Contributions or Company Contributions which are used to meet the requirements of Section 401(k)(3)(A) of the Code shall not be taken into account. All contributions that are made under two or more plans that are aggregated for purposes of Sections 401(a)(4) and 410(b) of the Code (other than Section 410(b)(2)(A) of the Code) shall be treated as made under a single plan. Further, if this Plan and one or more other plans are permissively aggregated for purposes of Section 401(m) of the Code, such aggregated plans must also satisfy Sections 401(a)(4) and 410(b) of the Code as though they were a single plan. The contribution percentage of a Highly Compensated Employee who is eligible to participate in more than one plan maintained by the Company or Related Company to which the Employer Matching Contributions are made shall be calculated by treating all plans subject to Section 401(m) of the Code under which the Highly Compensated Employee is eligible to participate (other than those that may not be permissively aggregated) as a single plan. The method of correction for multiple use, if any, shall be made by reducing the actual deferral percentage, the actual contribution percentage of Highly Compensated Employees, or a combination of
the two, in the manner described in Treasury Regulation Section 1.401(m)-(2)(c)(3)."
6. Section 3.7(c)(1) of the Plan is amended by inserting the following immediately after the penultimate sentence thereunder:
"The vested portion of any excess contributions, together with any earnings attributable thereto through the date of distribution, shall be distributed to the Participant within the 2-1/2 month period following the close of the Plan Year to the extent feasible, and in all events no later than 12 months after the close of the Plan Year. Failure to correct any excess contributions within the 2-1/2 month period following the close of the Plan Year shall result in the excise tax described in Section 1.401(m)-1(e)(5) of the Treasury Regulations. The earnings attributable to the vested portion of any excess contributions shall be determined in accordance with Treasury Regulations."
7. Section 4.2 of the Plan is amended by inserting the following immediately after the penultimate sentence thereunder:
"The terms of any Acquisition Loan, and the repayment of principal and interest thereon, shall in all events
comply with Section 54.4975-7(b)(5) of the Treasury Regulations. Furthermore, any assets of the ESOP Fund attributable to Leveraged Shares acquired by the ESOP Trustee in a transaction to which Section 1042 of the Code applies cannot accrue for the benefit of any person described in Section 409(n)(1) of the Code during the nonallocation period described in Section 409(n)(2)(C) of the Code."
8. Section 4.4(g) of the Plan is amended in its entirety to read as follows:
"(g) Except as otherwise required or permitted by the Code, the put options under this Section 4.4 shall satisfy the requirements of Sections 54.4975-7(b) and 54.4975-11(a)(7)(i) of the Treasury Regulations to the extent, if any, that such requirements apply to such put options."
9. Section 7.1(d)(1) is amended by adding the following at the end thereof:
"Distribution of a Participant's ESOP Account under this Section 7.1(d)(1) shall, subject to Section 4.5, be made in shares of Stock, cash, or a combination of both, as determined by the Committee; provided, however, that if the nonforfeitable balance in the
Participant's Accounts as adjusted, if required, under Section 3.9 plus any contributions to the Participant's Accounts during the Plan Year exceeds $3,500, the Committee shall notify the Participant of his right to demand distribution of his ESOP Account entirely in whole shares of Stock (with the value of any fractional share paid in cash)."
10. Section 7.1(e) of the Plan is amended by adding the following at the end thereof:
"An explanation of the Participant's right to defer distribution of the nonforfeitable balance of his Accounts shall be provided to the Participant no less than 30 days and no more than 90 days before the date such distribution is to be made (consistent with such regulations as the Secretary of the Treasury may prescribe). If the Participant does not so consent, the distribution of the amounts payable shall be delayed pursuant to the first sentence of this subsection (e). However, to the extent that the nonforfeitable balance of a terminating Participant's Accounts is a distribution to which Sections 401(a)(11) and 417 of the Code do not apply, such distribution may commence less than 30 days after the notice described in the preceding sentence is given, provided that: (1) the Committee clearly informs the Participant that the
Participant has the right to a period of at least 30 days after receiving the notice to consider the decision of whether or not to elect a distribution (and, if applicable, a particular distribution option), and (2) the Participant, after receiving the notice, affirmatively elects an immediate distribution."
11. Section 7.2(c) of the Plan is amended by adding the following at the end thereof:
"In either event, such benefit payable to the surviving Spouse shall commence immediately. Notwithstanding the foregoing, if the single- sum value of the benefit payable to the surviving Spouse is $3,500 or less, such benefit shall be paid to the surviving Spouse in a single- sum."
12. Section 7.2(d) of the Plan is amended in its entirety to read as follows:
"(d) For purposes of this Section 7.2, the following terms shall have
the meaning specified below:
(1) Election Period: For a Participant who separates from service
before attaining age 35, the Election Period commences one year before his
Break in Employment and ends one year after his Break in Employment. For
any other Participant, the Election Period is whichever of the
following periods ends last: (1) the period beginning with the first day of
the Plan Year in which the Participant reaches age 32, and ending with the
day before the first day of the Plan Year in which the Participant reaches
age 35, or (2) the period ending 1 year after the individual becomes a
Participant. A Participant may elect to waive the Qualified Joint and
Survivor Annuity or Qualified Preretirement Survivor Annuity commencing the
first day of the Plan Year in which he attains age 35. Prior to such time
a Participant shall not be allowed to waive the Qualified Joint and
Survivor Annuity or Qualified Preretirement Survivor Annuity unless the
Participant incurs a Break in Employment, in which case the period during
which an election to waive may be made shall commence on the date of his
Break in Employment. A Participant may revoke his waiver at any time.
(2) Qualified Election: A waiver of a Qualified Joint and Survivor
Annuity or a Qualified Preretirement Survivor Annuity. The waiver must be
in writing and must be consented to by the Participant's Spouse. The
Spouse's consent to a waiver must be witnessed by a Plan representative or
notary public. Notwithstanding this consent requirement, if the
Participant establishes to the satisfaction of a Plan representative that
such written consent may not be obtained because there is no Spouse or the
Spouse cannot be located, a waiver will be deemed a Qualified Election.
The Participant's waiver and the
Spouse's consent shall state the specific nonspouse Beneficiary or
Beneficiaries, which may not be modified without subsequent consent from
the Spouse (unless the Spouse's initial consent expressly provides
otherwise), and the Spouse's consent shall acknowledge the effect of the
Participant's election. A revocation of a prior waiver may be made by a
Participant without the consent of the Spouse at any time before the
commencement of benefits. The number of revocations shall not be limited.
(3) Qualified Joint and Survivor Annuity: An annuity that commences
immediately for the life of the Participant with a survivor annuity for the
life of the Spouse which is not less than 50 percent and not more than 100
percent of the amount of the annuity which is payable during the joint
lives of the Participant and the Spouse and which is the amount of benefit
that can be purchased with the Participant's vested Account. For a
Participant who is not married, Qualified Joint and Survivor Annuity means
a straight life annuity.
(4) Qualified Preretirement Survivor Annuity: The benefit described
in Section 7.2(c).
(5) Spouse (surviving Spouse): The spouse or surviving spouse of the
Participant, provided that a former spouse will be treated as the spouse of
surviving spouse to the extent provided under a qualified domestic
relations order as described in Section 414(p) of the Code."
13. Section 7.2(e) of the Plan is amended in its entirety to read as follows:
"(e)(1) In the case of a Qualified Joint and Survivor annuity as described in Section 7.2(d)(3), the Committee shall provide each Participant within a reasonable period prior to the commencement of benefits a written explanation of: (i) the terms and conditions of a Qualified Joint and Survivor Annuity; (ii) the Participant's right to make and the effect of an election to waive the Qualified Joint and Survivor Annuity form of benefit; (iii) the rights of the Participant's Spouse with regard to such Spouse's required consent to the Participant's waiver; and (iv) the Participant's right to make, and the effect of, a revocation of a previous election to waive the Qualified Joint and Survivor Annuity. This explanation shall be provided to the Participant no less than 30 days and no more than 90 days before the date benefit payments would commence (and consistent with such regulations as the Secretary of the Treasury may prescribe). The written explanation shall include an explanation of the eligibility conditions, other material features, and relative values of the optional forms of benefits under the Plan, as well as a general explanation of the relative financial effect on a Participant's benefit of the waiver of the Qualified Joint and Survivor Annuity.
(2) In the case of a Qualified Preretirement Survivor Annuity as described in Section 7.2(c), the Committee shall
provide each Participant within the Election Period a written explanation of the
Qualified Preretirement Survivor Annuity in such terms and in such manner as
would be comparable to the explanation provided for meeting the requirements of
Section 7.2(e)(1) applicable to a Qualified Joint and Survivor Annuity."
14. Section B.5(b) of Appendix B to the Plan is amended by adding the following at the end thereof:
"With respect to Plan Years commencing on or after January 1, 1989, the $200,000 limitation in the foregoing sentence shall not apply; instead, the limitations described in the Plan's definition of `Compensation' under Section 1.2 shall apply with respect to such Plan Years."
IN WITNESS WHEREOF, the Company has caused this document to be executed by its duly authorized officer this ________ day of ________________, 19___.
MERCURY GENERAL CORPORATION
By_________________________
Its________________________
EXHIBIT 10.10
AMENDMENT 1997-1
MERCURY GENERAL CORPORATION
PROFIT SHARING PLAN
WHEREAS, Mercury General Corporation (the "Company") maintains the Mercury General Corporation Profit Sharing Plan (the "Plan"); and
WHEREAS, pursuant to Section 9.1 of the Plan, the Company has the right to amend the Plan; and
WHEREAS, the Company recently acquired American Fidelity Insurance Company ("AFI"), employees of which were Participants in the American Fidelity Companies Employees Savings Plan ("American Fidelity Plan"); and
WHEREAS, this Company agreed to accept to accept a direct transfer of assets and liabilities from the American Fidelity Plan to this Plan on behalf of those employees of AFI who did not have outstanding loan balances from the American Fidelity Plan at the time of such transfer;
NOW, THEREFORE, the Plan is hereby amended to add the following "American Fidelity Appendix," which sets forth Plan provisions applicable to the transfer of assets and liabilities from the American Fidelity Plan, effective as of the date of such transfer of assets and liabilities:
"AMERICAN FIDELITY APPENDIX
1. TRANSFER OF ASSETS AND LIABILITIES. This Plan hereby accepts a transfer of assets and liabilities from the American Fidelity Companies Employees Savings Plan ("American Fidelity Plan"). The assets and liabilities transferred shall be the assets and liabilities attributable as of the date of transfer to the Participants in the American Fidelity Plan who were employees of American Fidelity Insurance Company ("AFI") as of the date of the acquisition by the Company of AFI, excluding, however, all assets and liabilities attributable to employees of AFI who, as of the date of the transfer of assets and liabilities, had any outstanding loan balance under the American Fidelity Plan.
2. ACCOUNTS. The Committee under this Plan shall credit the amounts transferred from the American Fidelity Plan to appropriate accounts established for the employees involved in the transfer. In the discretion of the Committee, the amounts transferred from the American Fidelity Plan may be commingled with the corresponding accounts under this Plan, or may be kept as separate, non- commingled accounts. The accounts under the American Fidelity Plan and the corresponding accounts under this Plan (if any) are set forth below:
AMERICAN FIDELITY MERCURY GENERAL PLAN ACCOUNTS PLAN ACCOUNTS ----------------- --------------- Employer Company Contribution Contributions and/or Employer Matching Employee Contribution (None) Rollover Rollover Contribution Deferral 401(k) |
3. INVESTMENTS. Initially upon the transfer of assets and liabilities to this Plan, the Committee shall determine which of the investment funds under this Plan the transferred amounts should be invested. Following such initial investment, each Participant shall be allowed to reallocate the amounts credited to the Participants' accounts among the various investment funds permitted under this Plan, according to this Plan's generally-applicable rules concerning such elections, including but not limited to the dates on which changes in investment funds are generally permitted under this Plan, and the generally-applicable rules concerning the timing and form of employee notifications concerning investment changes.
4. DISTRIBUTION. As required by Internal Revenue Code Section
411(d)(6), the distribution options available to the former Participants in the
American Fidelity Plan shall remain available to such Participants under this
Plan. Accordingly, the following rules shall apply to such Participants:
a. Accounts with an aggregate vested balance of $3,500 or less shall be paid in a lump sum.
b. If such a Participant has an aggregate vested account balance in excess of $3,500, then the Participant may elect among the following distribution options:
(1) lump sum distribution;
(2) substantially equal payments in monthly, quarterly, semi-annual or annual installments;
(3) purchase of an annuity contract issued by an insurance company selected by the Committee.
Notwithstanding the foregoing, the automatic form of distribution to such a Participant shall be the qualified joint and survivor annuity form of distribution. The rules concerning the qualified joint and survivor annuity shall be the same rules as set forth in the Plan for pre-1991 account balances, including but not limited to the rules concerning waiver of the qualified joint and survivor annuity, and the required consent to such waiver by the spouse of the Participant, if any.
If the Committee does not create commingled Accounts for the amounts transferred from the American Fidelity Plan, then the distribution options set forth above with respect to former
American Fidelity Participants shall only apply to the non-commingled Accounts which represent the amounts transferred from the American Fidelity Plan. If the Committee creates commingled Accounts, then the above distribution options shall apply to all distributions made to former American Fidelity Plan Participants.
5. WITHDRAWAL OF AFTER-TAX CONTRIBUTIONS. Subject to the requirement of a waiver of the qualified joint and survivor annuity (and the spousal consent required for such waiver) former American Fidelity Plan Participants with amounts credited as employee contributions may withdraw all or part of the benefit represented by such employee contributions."
IN WITNESS WHEREOF, this Amendment 1997-1 is hereby adopted this ____ day of ____________, 1997
MERCURY GENERAL CORPORATION
By________________________________________
Its_______________________________________
EXHIBIT 10.11
REVOLVING CREDIT AGREEMENT
BY AND AMONG
MERCURY GENERAL CORPORATION,
THE LENDERS PARTY HERETO,
AND
THE BANK OF NEW YORK, AS AGENT
DATED AS OF NOVEMBER 21, 1996
REVOLVING CREDIT AGREEMENT, dated as of November 21, 1996, by and among MERCURY GENERAL CORPORATION, a California corporation (the "BORROWER"), the lenders party hereto (collectively, together with their respective assigns, the "LENDERS", and each a "LENDER") and THE BANK OF NEW YORK, as agent for the Lenders (in such capacity, the "AGENT").
As used in this Agreement, terms defined in the preamble have the meanings therein indicated, and the following terms have the following meanings:
"ABR Advances": the Loans (or any portions thereof) at such time as they (or such portions) are made and/or being maintained at a rate of interest based upon the Alternate Base Rate.
"Accountants": KPMG Peat Marwick (or any successor thereto), or such other firm of certified public accountants of recognized national standing selected by the Borrower and reasonably satisfactory to the Agent.
"Acquisition": with respect to any Person, the purchase or other acquisition by such Person, by any means whatsoever (including by devise, bequest, gift, through a dividend or otherwise and whether in a single transaction or in a series of related transactions), of (i) the Capital Stock of, or other equity securities of, any other Person if, immediately thereafter, such other Person would be either a Subsidiary of such Person or otherwise under the control of such Person, (ii) any business, going concern or division or segment thereof, or (iii) the Property of any other Person other than in the ordinary course of business, provided, however, that no acquisition of all or substantially all of the assets of such other Person shall be deemed to be in the ordinary course of business.
"Adjusted Net Worth": at any date of determination, the sum of all amounts which would be included under shareholders' equity on a Consolidated balance sheet of the Borrower determined in accordance with GAAP (without adjusting the value of securities held by the Borrower or its Subsidiaries to market value as contemplated under FASB 115 for securities designated as "available for sale").
"Advance": an ABR Advance or a Eurodollar Advance, as the case may be.
"Affected Advance": defined in Section 2.9.
"Affected Principal Amount": in the event that (i) the Borrower shall
fail for any reason to borrow, convert or continue after it shall have notified
the Agent of its intent to do so in any instance in which it shall have
requested a Eurodollar Advance, an amount equal to the principal amount of such
Eurodollar Advance; (ii) a Eurodollar Advance shall terminate pursuant to the
provisions hereof prior to the last day of the Interest Period applicable
thereto, an amount equal to the principal amount of such Eurodollar Advance; and
(iii) the Borrower shall prepay or repay all or any part of the principal amount
of a Eurodollar Advance prior to the last day of the Interest Period applicable
thereto, an amount equal to the principal amount of such Eurodollar Advance so
prepaid or repaid.
"Affiliate": as to any Person, any other Person which, directly or indirectly, is in control of, is controlled by, or is under common control with, such Person. For purposes of this definition, control of a Person shall mean the power, direct or indirect, (i) to vote 5% or more of the securities or other interests having ordinary voting power for the election of directors or other managing Persons thereof or (ii) to direct or cause the direction of the management and policies of such Person, whether by contract or otherwise.
"Aggregate Commitments": on any date, the sum of all Commitments on such date.
"Agreement": this Revolving Credit Agreement, as the same may be amended, supplemented or otherwise modified from time to time.
"Alternate Base Rate": on any date, a rate of interest per annum equal to the higher of (i) the Federal Funds Rate in effect on such date plus 1/2 of 1% or (ii) the BNY Rate in effect on such date.
"Annual Statement": defined in Section 4.13(b).
"Applicable Insurance Code": with respect to any Insurance Subsidiary, the insurance code of any jurisdiction where such Insurance Subsidiary is domiciled or is conducting an insurance business, as in effect from time to time and including any successor code or statute thereto, together with the regulations issued thereunder.
"Applicable Insurance Regulatory Authority": with respect to any Insurance Subsidiary, the insurance department or similar Governmental Authority located in the jurisdiction in which such Insurance Subsidiary is domiciled and, to the extent that it has any regulatory authority over such Insurance Subsidiary, in each other jurisdiction in which such In surance Subsidiary is licensed.
"Applicable Lending Office": in respect of any Lender, (i) in the case of such Lender's ABR Advances, its Domestic Lending Office and (ii) in the case of such Lender's Eurodollar Advances, its Eurodollar Lending Office.
"Applicable Margin": (i) with respect to the unpaid principal balance of ABR Advances, the applicable percentage set forth below in the column entitled "ABR Advances", (ii) with respect to the unpaid principal balance of Eurodollar Advances, the applicable percentage set forth below in the column entitled "Eurodollar Advances", and (iii) with respect to the Commitment Fee, the applicable percentage set forth below in the column entitled "Commitment Fee"; in each case opposite the applicable Pricing Level:
ABR Eurodollar Commitment
Pricing Level Advances Advances Fee
- ------------------- -------- ---------- -----------
Pricing Level I 0% 0.5000% .1875%
Pricing Level II 0% 0.6250% .2500%
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Changes in the Applicable Margin resulting from a change in Pricing Level shall become effective upon the earlier of the delivery by the Borrower to the Agent of a certificate pursuant to Section 7.1(d) and the date such certificate is required to be delivered pursuant to such Section.
"Assignment and Acceptance Agreement": an assignment and acceptance agreement executed by an assignor and an assignee pursuant to which the assignor assigns to the assignee all or any portion of such assignor's Notes and Commitment, substantially in the form of Exhibit D.
"Assignment Fee": defined in Section 11.6(b).
"Authorized Signatory": as to (i) any Person which is a corporation, the chairman of the board, the president, any vice president, the chief financial officer or any other duly authorized officer (acceptable to the Agent) of such Person and (ii) any Person which is not a corporation, the general partner or other managing Person thereof.
"Benefited Lender": defined in Section 11.8.
"BNY": The Bank of New York.
"BNY Rate": a rate of interest per annum equal to the rate of interest publicly announced in New York City by BNY from time to time as its prime commercial lending rate, such rate to be adjusted automatically (without notice) on the effective date of any change in such publicly announced rate.
"Borrowing Date": any Business Day specified in (i) a Borrowing Request as a date on which the Borrower requests the Lenders to make Loans.
"Borrowing Request": a request for Loans in the form of Exhibit C.
"Business Day": for all purposes other than as set forth in clause
(ii) below, (i) any day other than a Saturday, Sunday or a day on which
commercial banks located in New York City and Los Angeles are authorized or
required by law or other governmental action to close and (ii) with respect to
all notices and determinations in connection with, and payments of principal and
interest on, Eurodollar Advances, any day which is a Business Day described in
clause (i) above and which is also a day on which dealings in foreign currency
and exchange and Eurodollar funding between banks may be carried on in London,
England.
"Capital Lease Obligations": with respect to any Person, the obligations of such Person with respect to leases which, in accordance with GAAP, are required to be capitalized on the financial statements of such Person.
"Code": the Internal Revenue Code of 1986, as amended from time to time, or any successor thereto, and the rules and regulations issued thereunder, as from time to time in effect.
"Commitment": in respect of any Lender, such Lender's under taking during the Commitment Period to make Loans, subject to the terms and conditions hereof, in an aggregate outstanding principal amount not exceeding the amount set forth next to the name of such Lender in Exhibit A under the heading "Commitments", as such amount may be reduced pursuant to Section 2.4.
"Commitment Fee": defined in Section 3.1.
"Commitment Period": the period from the Effective Date until the Business Day immediately preceding the Maturity Date.
"Commitment Percentage": as to any Lender, the percentage set forth opposite the name of such Lender in Exhibit A under the heading "Commitment Percentage".
"Compensatory Interest Payment": defined in Section 2.7(c).
"Consolidated": the Borrower and its Subsidiaries which are consolidated for financial reporting purposes.
"Consolidated Statutory Capital and Surplus": at any date the consolidated statutory capital and surplus of the Borrower and its Subsidiaries determined as of such date in accordance with SAP.
"Consolidating": the Borrower and its Subsidiaries taken separately.
obligation or (y) to maintain working capital or equity capital of the primary obligor or otherwise to maintain the net worth or solvency of the primary obligor, (C) to purchase Property, securities or services primarily for the purpose of assuring the beneficiary of any such primary obligation of the ability of the primary obligor to make payment of such primary obligation, (D) otherwise to assure or hold harmless the beneficiary of such primary obligation against loss in respect thereof, and (E) in respect of the liabilities of any partnership in which such secondary obligor is a general partner, except to the extent that such liabilities of such partnership are nonrecourse to such secondary obligor and its separate Property, provided, however, that the term "Contingent Obligation" shall not include (1) amounts potentially owed on or with respect to insurance policies issued or sold in the ordinary course of business, (2) premiums for any such policies, to the extent attributable to a period after a particular date upon which Contingent Obligations are being determined or (3) the indorsement of instruments for deposit or collection in the ordinary course of business. The amount of any Contingent Obligation of a Person shall be deemed to be an amount equal to the stated or determinable amount of the primary obligation in respect of which such Contingent Obligation is made or, if not stated or determinable, the maximum reasonably anticipated liability in respect thereof as determined by such Person in good faith.
"Control Person": defined in Section 2.12.
"Conversion/Continuation Date": the date on which (i) a Eurodollar Advance is converted to an ABR Advance, (ii) the date on which an ABR Advance is converted to a Eurodollar Advance or (iii) the date on which a Eurodollar Advance is continued as a new Eurodollar Advance.
"Default": any event or condition which constitutes an Event of Default or which, with the giving of notice, the lapse of time, or any other condition, would, unless cured or waived, become an Event of Default.
"Disposition": with respect to any Person, any sale, ceding, assignment, transfer or other disposition by such Person, by any means, of (a) any Operating Entity, or (b) any other Property of such Person, provided, however, that the term "Disposition" shall not include any sale, ceding, assignment, transfer or other disposition by a Person that is a corporation (i) to a wholly-owned Subsidiary of that Person or (2) as a dividend to that Person's shareholders.
"Dollars" and "$": lawful currency of the United States of America.
"Domestic Lending Office": in respect of any Lender, initially, the office or offices of such Lender designated as such on Schedule 1.1; thereafter, such other office of such Lender through which it shall be making or maintaining ABR Advances, as reported by such Lender to the Agent and the Borrower.
"EBITDA": for any period, net income of the Borrower and its Non- Insurance Subsidiaries for such period, determined on a Consolidated basis in accordance with GAAP, plus the sum of, without duplication, (i) Interest Expense, (ii) provision for income taxes of the Borrower and its Non-Insurance Subsidiaries and (iii) depreciation, amortization and other non-cash charges of the Borrower and its Non-Insurance Subsidiaries, each to the extent
deducted in determining such net income for such period.
"Effective Date": November 21, 1996.
"Employee Benefit Plan": an employee benefit plan within the meaning of Section 3(3) of ERISA maintained, sponsored or contributed to by the Borrower, any of its Subsidiaries or any ERISA Affiliate.
"ERISA": the Employee Retirement Income Security Act of 1974, as amended from time to time, and the rules and regulations issued thereunder, as from time to time in effect.
"ERISA Affiliate": when used with respect to an Employee Benefit Plan, ERISA, the PBGC or a provision of the Code pertaining to employee benefit plans, any Person that is a member of any group of organizations within the meaning of Sections 414(b), (c), (m) or (o) of the Code of which the Borrower or any of its Subsidiaries is a member.
"Eurodollar Advances": collectively, the Loans (or any portions thereof) at such time as they (or such portions) are made and/or being maintained at a rate of interest based upon the Eurodollar Rate.
"Eurodollar Lending Office": in respect of any Lender, initially the office, branch or affiliate of such Lender designated as such on Schedule 1.1 (or, if no such office branch or affiliate is specified, its Domestic Lending Office); thereafter, such other office, branch or affiliate of such Lender through which it shall be making or maintaining Eurodollar Advances, as reported by such Lender to the Agent and the Borrower.
"Eurodollar Rate": with respect to the Interest Period applicable to any Eurodollar Advance, a rate of interest per annum, as determined by the Agent, obtained by
dividing (and then rounding to the nearest 1/16 of 1% or, if there is no nearest 1/16 of 1%, then to the next higher 1/16 of 1%):
(a) the rate, as reported by BNY to the Agent, quoted by BNY to leading banks in the interbank eurodollar market as the rate at which BNY is offering Dollar deposits in an amount equal approximately to the Eurodollar Advance of BNY to which such Interest Period shall apply for a period equal to such Interest Period, as quoted at approximately 11:00 A.M. two Business Days prior to the first day of such Interest Period, by
(b) a number equal to 1.00 minus the aggregate of the then stated maximum rates during such Interest Period of all reserve requirements (including, without limitation, marginal, emergency, supplemental and special reserves), expressed as a decimal, established by the Board of Governors of the Federal Reserve System and any other banking authority to which BNY and other major United States money center banks are subject, in respect of eurocurrency funding (currently referred to as "Eurocurrency liabilities" in Regulation D of the Board of Governors of the Federal Reserve System) or in respect of any other category of liabilities including deposits by reference to which the interest rate on Eurodollar Advances is determined or any category of extensions of credit or other assets which includes loans by non-domestic offices of any Lender to United States Residents. Such reserve requirements shall include, without limitation, those imposed under such Regulation D. Eurodollar Advances shall be deemed to constitute Eurocurrency liabilities and as such shall be deemed to be subject to such reserve requirements without benefit of credits for proration, exceptions or offsets which may be available from time to time to any Lender under such Regulation D. The Eurodollar Rate shall be adjusted automatically on and as of the effective date of any change in any such reserve requirement.
"Event of Default": any of the events specified in Section 9.1, provided that any requirement for the giving of notice, the lapse of time, or any other condition has been satisfied.
"Existing Agreement": the Revolving Credit Agreement, dated as of December 20, 1994, among the Borrower, the Lenders party thereto and The Bank of New York, as Agent.
"Existing Indebtedness": all amounts due and owning under the Existing Agreement.
"Extension Request": defined in Section 2.17.
"Federal Funds Rate": for any day, a rate per annum (expressed as a decimal, rounded upwards, if necessary, to the next higher 1/100 of 1%), equal to the weighted average of the rates on overnight federal funds transactions with members of the Federal Reserve System arranged by federal funds brokers on such day, as published by the Federal Reserve Bank of New York on the Business Day next succeeding such day, provided that (i) if the day for which such rate is to be determined is not a Business Day, the Federal Funds Rate for such day shall be such rate on such transactions on the next preceding Business Day as so published on the next succeeding Business Day, and (ii) if such rate is not so published for any day, the Federal Funds Rate for such day shall be the average of the quotations for such day on such transactions received by BNY as determined by BNY and reported to the Agent.
"Financial Statements": defined in Section 4.13(a).
"GAAP": generally accepted accounting principles as from time to time in effect in the United States.
"GAAP Net Worth": at any date of determination, the sum of all amounts which would be included under shareholders' equity on a Consolidated balance sheet of the Borrower determined in accordance with GAAP.
"Governmental Authority": any nation or government, any state or other political subdivision thereof, any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government and any court or arbitrator (including, without limitation, any Applicable Insurance Regulatory Authority).
"Hazardous Substance": any hazardous or toxic substance, material or waste, including, but not limited to, (i) those substances, materials, and wastes listed in the United States Department of Transportation Hazardous Materials Table (49 CFR 172.101) or by the Environmental Protection Agency as hazardous substances (40 CFR Part 302) and amendments thereto and replacements therefor and (ii) any substance, pollutant or material defined as, or designated in, any Environmental Law as a "hazardous substance," "toxic substance," "hazardous material," "hazardous waste," "restricted hazardous waste," "pollutant," "toxic pollutant" or words of similar import.
"Highest Lawful Rate": as to any Lender, the maximum rate of interest, if any, that at any time or from time to time may be contracted for, taken, charged or received by such Lender on the Notes held thereby or which may be owing to such Lender pursuant to this Agreement and the other Loan Documents under the laws applicable to such Lender and this transaction.
"Indebtedness": as to any Person, at a particular time, all items which constitute, without duplication, (i) indebtedness for borrowed money or the deferred purchase price of Property (other than trade payables and accrued expenses incurred in the ordinary course of business), (ii) indebtedness evidenced by notes, bonds, debentures or similar instruments, (iii) obligations with respect to any conditional sale or title retention agreement, (iv) indebtedness arising under acceptance facilities and the amount available to be drawn under all letters of credit issued for the account of such Person and, without duplication, all drafts drawn thereunder to the extent such Person shall not have reimbursed the issuer in respect of the issuer's payment of such drafts, (v) all liabilities secured by any Lien on any Property owned by such Person even though such Person has not assumed or otherwise become liable for the payment thereof (other than carriers', warehousemen's, mechanics', repairmen's or other like non-consensual statutory Liens arising in the ordinary course of business), (vi) obligations
under Capital Lease Obligations and (vii) Contingent Obligations; provided that, for purposes of this definition, (a) "Indebtedness" shall not include obligations in respect of interest rate caps, collars, swaps or other similar agreements, and (b) Indebtedness under clauses (iii) or (v) shall be taken at the lesser of the principal amount of such Indebtedness and the value of the property subject to the Lien referred to therein.
"Indemnified Person": defined in Section 11.10.
"Insurance Subsidiary": each Subsidiary of the Borrower set forth on Schedule 4.1 under the heading "Engaged in an Insurance Business."
"Intellectual Property": all copyrights, trademarks, servicemarks, patents, trade names and service names.
"Interest Expense": for any period, the sum of, without duplication, all interest and commitment fees (adjusted to give effect to all interest rate swap, cap or other interest rate hedging arrangements and fees and expenses paid in connection with the same, all as determined in accordance with GAAP), paid or accrued in respect of all Indebtedness of the Borrower and its Subsidiaries determined on a Consolidated basis in accordance with GAAP during such period.
"Interest Payment Date": (i) as to any ABR Advance, the last day of each March, June, September and December commencing on the first of such days to occur after such ABR Advance is made or any Eurodollar Advance is converted to an ABR Advance, (ii) as to any Eurodollar Advance in respect of which the Borrower has selected an Interest Period of one, two or three months, the last day of such Interest Period, and (iii) as to any Eurodollar Advance in respect of which the Borrower has selected an Interest Period of six months, the day which is three months after the first day of such Interest Period and the last day of such Interest Period.
"Interest Period": with respect to any Eurodollar Advance requested by the Borrower, the period commencing on, as the case may be, the Borrowing Date or Conversion/Continuation Date with respect to such Eurodollar Advance and ending one, two, three or six months thereafter, as selected by the Borrower in its irrevocable Borrowing Request or its irrevocable Notice of Conversion/Continuation, provided, however, that (i) if any Interest Period would otherwise end on a day which is not a Business Day, such Interest Period shall be extended to the next succeeding Business Day unless the result of such extension would be to carry such Interest Period into another calendar month, in which event such Interest Period shall end on the immediately preceding Business Day, (ii) any Interest Period pertaining that begins on the last Business Day of a calendar month (or on a day for which there is no
numerically corresponding day in the calendar month at the end of such Interest Period) shall end on the last Business Day of a calendar month and (iii) the Borrower shall select Interest Periods so as not to have more than five different Interest Periods outstanding at any one time for all Loans.
"Leverage Ratio": as of any date, the ratio of (a) Consolidated Indebtedness of the Borrower on such date, to (b) the sum of (i) Consolidated Indebtedness of the Borrower on such date, plus (ii) Adjusted Net Worth on such date.
"Lien": any mortgage, pledge, hypothecation, assignment, deposit or preferential arrangement, encumbrance, lien (statutory or other), or other security agreement or security interest of any kind or nature whatsoever, including, without limitation, any conditional sale or other title retention agreement and any capital or financing lease having substantially the same economic effect as any of the foregoing.
"Loan Documents": collectively, this Agreement and the Notes.
"Loan" and "Loans": defined in Section 2.1.
"Margin Stock": any "margin stock", as defined in Regulation U of the Board of Governors of the Federal Reserve System, as the same may be amended or supplemented from time to time.
"Material Adverse Change": a material adverse change in (i) the financial condition, operations, business, prospects or Property of the Borrower and its Subsidiaries taken as a whole, (ii) the ability of the Borrower to perform its obligations under the Loan Documents or (iii) the ability of the Agent and the Lenders to enforce the Loan Documents, including, without limitation, as a result of a change of law since December 31, 1995.
"Material Adverse Effect": a material adverse effect on (i) the financial condition, operations, business, prospects or Property of the Borrower and its Subsidiaries taken as a whole, (ii) the ability of the Borrower to perform its obligations under the Loan Documents or (iii) the ability of the Agent and the Lenders to enforce the Loan Documents, including, without limitation, as a result of a change of law since December 31, 1995.
"Maturity Date": November 21, 1999 (or any date subsequent thereto resulting from an extension of the Maturity Date pursuant to Section 2.17), or such earlier date on which the Notes shall become due and payable, whether by acceleration or otherwise.
"Multiemployer Plan": a Pension Plan which is a multiemployer plan as defined in Section 4001(a)(3) of ERISA.
"NAIC": the National Association of Insurance Commissioners, or any association or Governmental Authority successor to the functions thereof.
"Non-Insurance Subsidiary": each Subsidiary of the Borrower set forth on Schedule 4.1 under the heading "Not Engaged in an Insurance Business."
"Note" and "Notes": defined in Section 2.2.
"Notice of Conversion/Continuation": a notice substantially in the form of Exhibit G.
"Operating Entity": (a) any Person, (b) any business or operating unit of a Person which is, or could be, operated separate and apart from the other businesses and operations of such Person, or (c) any other line of business or business segment.
"Pension Plan": at any date of determination, any Employee Benefit
Plan (including a Multiemployer Plan), the funding requirements of which (under
Section 302 of ERISA or Section 412 of the Code) are, or at any time within the
six years immediately preceding such date, were in whole or in part, the
responsibility of the Borrower, any of its Subsidiaries or any ERISA Affiliate.
"Permitted Liens": Liens permitted to exist under Section 8.2.
"Person": any individual, firm, partnership, joint venture, corporation, limited liability company, association, business enterprise, joint stock company, unincorporated association, trust, Governmental Authority or any other entity, whether acting in an individual, fiduciary, or other capacity, and for the purpose of the definition of "ERISA Affiliate", a trade or business.
"Pricing Level I": any time when the Leverage Ratio is less than or equal to .15:1.00.
"Pricing Level II": any time when the Leverage Ratio is greater than .15:1.00.
"Property": all types of real, personal, tangible, intangible or mixed property.
"Real Property": all real property owned or leased by the Borrower or any of its Subsidiaries.
"Reinsurance Agreement": any agreement, contract, treaty, certificate or other arrangement under which any Insurance Subsidiary agrees to transfer or cede to another insurer all or part of the liabilities assumed, or the assets held, by such Insurance Subsidiary under one or more policies of insurance (including, without limitation, any agreement, contract, treaty, certificate or other arrangement that is treated as such by any Applicable Insurance Regulatory Authority of such Insurance Subsidiary).
"Remaining Interest Period": (i) in the event that the Borrower shall fail for any
reason to borrow a Loan in respect of which it shall have requested a Eurodollar
Advance or convert an Advance to, or continue an Advance as, a Eurodollar
Advance after it shall have notified the Agent of its intent to do so, a period
equal to the Interest Period that the Borrower elected in respect of such
Eurodollar Advance; or (ii) in the event that a Eurodollar Advance shall
terminate pursuant to the provisions hereof prior to the last day of the
Interest Period applicable thereto, a period equal to the remaining portion of
such Interest Period if such Interest Period had not been so terminated; or
(iii) in the event that the Borrower shall prepay or repay all or any part of
the principal amount of a Eurodollar Advance prior to the last day of the
Interest Period applicable thereto, a period equal to the period from and
including the date of such prepayment or repayment to but excluding the last
day of such Interest Period.
"Required Lenders": at any time when no Loans are out standing, Lenders having Commitments (or if no Commitments then exist, Lenders having Commitments on the last day on which Commitments did exist) equal to at least 66 2/3% of the aggregate Commitments of all the Lenders, and at any time when Loans are outstanding, Lenders holding Notes having an unpaid principal balance equal to at least 66 2/3% of the aggregate Loans outstanding.
"Restricted Payment": as to any Person (i) any dividend or other distribution, direct or indirect, on account of any shares of any class of Stock or other equity interest in such Person now or hereafter outstanding (other than a dividend payable solely in shares of such Stock to the holders of such shares) and (ii) any redemption, retirement, sinking fund or similar payment, purchase or other acquisition, direct or indirect, of any shares of any class of Stock or other equity interest in such Person now or hereafter outstanding.
"SAP": with respect to each Insurance Subsidiary, statutory accounting principles in effect from time to time prescribed or permitted by the Applicable Insurance Regulatory Authority in the preparation of the financial statements of such Subsidiary.
"SEC": the Securities and Exchange Commission or any Governmental Authority succeeding to the functions thereof.
"Special Counsel": Emmet, Marvin & Martin, LLP, special counsel to the Agent.
"Statutory Net Income": with respect to the Insurance Subsidiaries for any period, the consolidated statutory net income of the Insurance Subsidiaries for such period computed in accordance with SAP and consistent with that reported on line 16, page 4, column 1 of the Summary of Operations Statement in the Annual Statement.
"Statutory Surplus": with respect to the Insurance Subsidiaries at any date of determination, the consolidated statutory surplus of the Insurance Subsidiaries on such date computed in accordance with SAP and consistent with that reported on line 25, page 3, column
1 of the Liabilities, Surplus and Other Funds Statement in the Annual Statement.
"Stock": as to any Person, all shares, interests, partnership interests, limited liability company interests, participations, rights in or other equivalents (however designated) of such Person's equity (however designated) and any rights, warrants or options exchangeable for or convertible into such shares, interests, participations, rights or other equity.
"Subsidiary": as to any Person, any corporation, association, partnership, limited liability company, joint venture or other business entity of which such Person or any Subsidiary of such Person, directly or indirectly, either (i) in respect of a corporation, owns or controls more than 50% of the outstanding Stock having ordinary voting power to elect a majority of the board of directors or similar managing body, irrespective of whether a class or classes shall or might have voting power by reason of the happening of any contingency, or (ii) in respect of an association, partnership, limited liability company, joint venture or other business entity, is entitled to share in more than 50% of the profits and losses, however determined.
"Tax": any present or future tax, levy, impost, duty, charge, fee, deduction or withholding of any nature and whatever called, by a Governmental Authority, on whomsoever and wherever imposed, levied, collected, withheld or assessed.
"Tax on the Overall Net Income": as to any Person, a Tax imposed by the jurisdiction in which that Person's principal office (and/or, in the case of a Lender, its Domestic Lending Office) is located or by any political subdivision or taxing authority thereof or in which that Person is deemed to be doing business on all or part of the net income, profits or gains of that Person (whether worldwide, or only insofar as such income, profits or gains are considered to arise in or to relate to a particular jurisdiction, or otherwise).
"United States": the United States of America (including the States thereof and the District of Columbia).
"Unqualified Amount": defined in Section 2.7(c).
1.2. Principles of Construction
(a) All terms defined in a Loan Document shall have the meanings given such terms therein when used in the other Loan Documents or any certificate, opinion or other document made or delivered pursuant thereto, unless otherwise defined therein.
(b) As used in the Loan Documents and in any certificate, opinion or other document made or delivered pursuant thereto, accounting terms not defined in Section 1.1, and accounting terms partly defined in Section 1.1, to the extent not defined, shall have the respective meanings given to them under GAAP, or, to the extent that such terms apply solely to one or more Insurance Subsidiaries, given to them under SAP.
(c) The words "hereof", "herein", "hereto" and "hereunder" and similar words when used in a Loan Document shall refer to such Loan Document as a whole and not to any particular provision thereof, and Section, schedule and exhibit references contained
therein shall refer to Sections thereof or schedules or exhibits thereto unless otherwise expressly provided therein.
(d) The phrase "may not" is prohibitive and not permissive.
(e) Unless the context otherwise requires, words in the singular number include the plural, and words in the plural include the singular.
(f) Unless specifically provided in a Loan Document to the contrary, references to a time shall refer to New York City time.
(g) Unless specifically provided in a Loan Document to the contrary, in the computation of periods of time from a specified date to a later specified date, the word "from" means "from and including" and the words "to" and "until" each means "to but excluding".
(h) References in any Loan Document to a fiscal period shall refer to that fiscal period of the Borrower.
2. AMOUNT AND TERMS OF LOANS
2.1. Loans
2.2. Notes
The Loans made by a Lender shall be evidenced by a promissory note of the Borrower, substantially in the form of Exhibit B, with appropriate insertions therein as to date and principal amount (each, as indorsed or modified from time to time, a "Note" and, collectively with the Notes of all other Lenders, the "Notes"), payable to the order of such Lender for the account of its Applicable Lending Office and representing the obligation of the
Borrower to pay the lesser of (a) the original amount of the Commitment of such
Lender and (b) the aggregate unpaid principal balance of all Loans made by such
Lender, with interest thereon as prescribed in Section 2.7. Each Note shall (i)
be dated the first Borrowing Date, (ii) be stated to mature on the Maturity Date
and (iii) bear interest from the date thereof on the unpaid principal balance
thereof at the applicable interest rate or rates per annum determined as
provided in Section 2.7. Interest on each Note shall be pay able as specified in
Section 2.7.
2.3. Procedure for Borrowing
(a) The Borrower may borrow under the Aggregate Commitments on any Business Day during the Commitment Period, provided, however, that the Borrower shall notify the Agent (by telephone or fax) no later than: 12:00 Noon three Business Days prior to the requested Borrowing Date, in the case of Eurodollar Advances, and 12:00 Noon, one Business Day prior to the requested Borrowing Date, in the case of ABR Advances, specifying in each case (i) the aggregate principal amount to be borrowed under the Aggregate Commitments, (ii) the requested Borrowing Date, (iii) whether such borrowing is to consist of one or more Eurodollar Advances, ABR Advances, or a combination thereof and (iv) if the borrowing is to consist of one or more Eurodollar Advances, the length of the Interest Period for each such Eurodollar Advance, provided, however, that no Interest Period selected in respect of any Loan shall end after the Maturity Date. If the Borrower fails to give timely notice in connection with a request for a Eurodollar Advance, the Borrower shall be deemed to have elected that such Advance shall be made as an ABR Advance. Each such notice shall be irrevocable and confirmed immediately by delivery to the Agent of a Borrowing Request. Each Advance shall be in an aggregate principal amount equal to $3,000,000 or such amount plus a whole multiple of $1,000,000 in excess thereof, or, if less, the unused amount of the Aggregate Commitments.
(b) Upon receipt of each notice of borrowing from the Borrower, the Agent shall promptly notify each Lender thereof. Subject to its receipt of the notice referred to in the preceding sentence, (i) each Lender will make the amount of its Commitment Percentage of each borrowing available to the Agent for the account of the Borrower at the office of the Agent set forth in Section 11.2 not later than 2:00 PM on the relevant Borrowing Date requested by the Borrower, in funds immediately available to the Agent at such office. The amounts so made available to the Agent on such Borrowing Date will then, subject to the satisfaction of the terms and conditions of this Agreement, as determined by the Agent, be made available on such date to the Borrower by the Agent at the office of the Agent specified in Section 11.2 by crediting the account of the Borrower on the books of such office with the aggregate of said amounts received by the Agent.
(c) Unless the Agent shall have received prior notice from a Lender (by telephone or otherwise, such notice to be promptly confirmed by fax or other writing) that such Lender will not make available to the Agent such Lender's Commitment Percentage of the Loans requested by the Borrower, the Agent may assume that such Lender has made such share available to the Agent on the Borrowing Date in accordance with this Section, provided that such Lender received notice of the proposed borrowing from the Agent, and the Agent may, in reliance upon such assumption, make available to the Borrower on the Borrowing Date a corresponding amount. If and to the extent such Lender shall not have so made its Commitment Percentage of such Loans available to the Agent, such Lender and the Borrower severally agree
to pay to the Agent forthwith on demand such corresponding amount (to the extent not previously paid by the other), together with interest thereon for each day from the date such amount is made available to the Borrower to the date such amount is paid to the Agent, at a rate per annum equal to, in the case of the Borrower, the applicable interest rate set forth in Section 2.7 for ABR Advances, and, in the case of such Lender, the Federal Funds Rate in effect on each such day (as determined by the Agent). Such payment by the Borrower, however, shall be without prejudice to its rights against such Lender. If such Lender shall pay to the Agent such corresponding amount, such amount so paid shall constitute such Lender's Loan as part of the Loans for purposes of this Agreement, which Loan shall be deemed to have been made by such Lender on the Borrowing Date applicable to such Loans.
(d) If a Lender makes a new Loan on a Borrowing Date on which the Borrower is to repay a Loan from such Lender, such Lender shall apply the proceeds of such new Loan to make such repayment, and only the excess of the proceeds of such new Loan over the Loan being repaid need be made available to the Agent.
(e) Notices of borrowing given by telephone shall be deemed given when made by telephone and the Agent and the Lenders may rely thereon whether such notice is confirmed by the delivery of a Borrowing Request.
2.4. Termination or Reduction of Aggregate Commitments
(a) Voluntary Reductions. The Borrower shall have the right, upon at least three Business Days' prior written notice to the Agent, at any time to terminate the Aggregate Commitments or from time to time to permanently reduce the Aggregate Commitments, provided, however, that any such reduction shall be in the amount of $3,000,000 (or such lesser available amount of the Facility) or $3,000,000 plus a whole multiple of $1,000,000 in excess thereof.
(b) In General. Reductions of the Aggregate Commitments shall be applied pro rata according to the Commitment of each Lender. Simultaneously with each reduction of the Aggregate Commitments under this Section, the Borrower shall pay the Commitment Fee accrued on the amount by which the Aggregate Commitments have been reduced and prepay the Loans as required by Section 2.5(b).
2.5. Prepayments of the Loans
(a) Voluntary Prepayments. The Borrower may, at its option, prepay the Loans without premium or penalty, in full at any time or in part from time to time by notifying the Agent in writing at least one Business Day prior to the proposed prepayment date, in the case of Loans consisting of ABR Advances and at least three Business Days prior to the pro-
posed prepayment date, in the case of Loans consisting of Eurodollar Advances, in each case specifying whether the Loans to be prepaid consist of ABR Advances, Eurodollar Advances, or a combination thereof, the amount to be prepaid and the date of prepayment. Such notice shall be irrevocable and the amount specified in such notice shall be due and payable on the date specified, together with accrued interest to the date of such payment on the amount prepaid. Upon receipt of such notice, the Agent shall promptly notify each Lender thereof. Each partial prepayment of the Loans pursuant to this subsection shall be in an aggregate principal amount of $3,000,000 (or any smaller outstanding balance of the Loans) or $3,000,000 plus a whole multiple of $1,000,000 in excess thereof. After giving effect to any partial prepayment with respect to Eurodollar Advances which were made (whether as the result of a borrowing or a conversion) on the same date and which had the same Interest Period, the outstanding principal amount of such Eurodollar Advances shall exceed (subject to Section 2.6) $3,000,000 or such amount plus a whole multiple of $1,000,000 in excess thereof.
(b) Mandatory Prepayments of Loans Relating to Reductions of the Aggregate Commitments. Simultaneously with each reduction of the Aggregate Commitments under Section 2.4, the Borrower shall prepay the Loans by the amount, if any, by which the aggregate unpaid principal balance of the Loans exceeds the amount of the Aggregate Commitments as so reduced.
(c) In General. If any prepayment is made in respect of any Eurodollar Advance, in whole or in part, prior to the last day of the applicable Interest Period, the Borrower agrees to indemnify the Lenders in accordance with Section 2.14.
2.6. Conversions and Continuations
(a) The Borrower may elect from time to time to convert Eurodollar
Advances to ABR Advances by giving the Agent at least one Business Day's prior
irrevocable notice of such election (confirmed by the delivery of a Notice of
Conversion/Continuation), specifying the amount to be so converted, provided,
that any such conversion of Eurodollar Advances shall only be made on the last
day of the Interest Period applicable thereto. In addition, the Borrower may
elect from time to time to (i) convert ABR Advances to Eurodollar Advances and
(ii) to continue Eurodollar Advances by selecting a new Interest Period
therefor, in each case by giving the Agent at least three Business Days' prior
irrevocable notice of such election (confirmed by the delivery of a Notice of
Conversion/Continuation), in the case of a conversion to, or continuation of,
Eurodollar Advances, specifying the amount to be so converted and the initial
Interest Period relating thereto, provided that any such conversion of ABR
Advances to Eurodollar Advances shall only be made on a Business Day and any
such continuation of Eurodollar Advances shall only be made on the last day of
the Interest Period applicable to the Eurodollar Advances which are to be
continued as such new Eurodollar Advances. The Agent shall promptly provide the
Lenders with a copy of each such Notice of Conversion/Continuation. ABR
Advances and Eurodollar Advances may be converted or continued pursuant to this
Section in whole or in part, provided that conversions of ABR Advances to
Eurodollar Advances, or continuations of Eurodollar Advances shall be in an
aggregate principal amount of $3,000,000 or such amount plus a whole multiple of
$1,000,000 in excess thereof.
(b) Notwithstanding anything in this Section to the contrary, no ABR Advance may be converted to a Eurodollar Advance and no Eurodollar Advance may be continued, if the Borrower or the Agent has knowledge that an Event of Default has occurred and is continuing either (i) at the time the Borrower shall notify the Agent of its election to convert or continue or (ii) on the requested Conversion/Continuation Date. In such event, such ABR Advance shall be automatically continued as an ABR Advance, or such Eurodollar Advance shall be automatically converted to an ABR Advance on the last day of the Interest Period applicable to such Eurodollar Advance. If an Event of Default shall have occurred and be continuing, the Agent shall, at the request of the Required Lenders, notify the Borrower (by telephone or otherwise) that all, or such lesser amount as the Required Lenders shall designate, of the outstanding Eurodollar Advances shall be automatically converted to ABR Advances, in which event such Eurodollar Advances shall be automatically converted to ABR Advances on the date such notice is given.
(c) No Interest Period selected in respect of conversion or continuation of any Eurodollar Advance shall end after the Maturity Date.
(d) Each conversion or continuation of a Eurodollar Advance shall be effected by each Lender by applying the proceeds of its new Eurodollar Advance to its Eurodollar Advances (or portion thereof) being converted or continued (it being understood that such conversion or continuation shall not constitute a borrowing for purposes of Sections 4, 5 or 6).
(e) Notices in respect of a conversion or continuation given by telephone shall be deemed given when made by telephone and the Agent and the Lenders may rely thereon whether such notice is confirmed by the delivery of a Notice of Conversion/Continuation.
2.7. Interest Rate and Payment Dates
(a) Prior to Maturity. Except as otherwise provided in Section 2.7(b), prior to maturity, the Loans shall bear interest on the outstanding principal balance thereof at the applicable interest rate or rates per annum set forth below:
LOANS RATE
----- ----
Made as ABR Alternate Base Rate plus the
Advances Applicable Margin.
Made as Eurodollar Eurodollar Rate for the
Advances applicable Interest Period
plus the Applicable Margin.
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(b) Event of Default. After the occurrence and during the continuance of a Default or an Event of Default under Section 9.1(a) or (b), the outstanding principal balance of the Loans shall bear interest at a rate per annum equal to 2% plus the rate which would otherwise be applicable under Section 2.7(a), and any overdue interest or other amount payable under the Loan Documents shall bear interest at a rate per annum equal to the Alternate Base Rate plus the Applicable Margin plus 2%. All such interest shall be payable on demand.
(c) In General. Interest on (i) ABR Advances to the extent based on the BNY Rate shall be calculated on the basis of a 365 or 366-day year (as the case may be), and (ii) ABR Advances to the extent based on the Federal Funds Rate and on Eurodollar Advances shall be calculated on the basis of a 360-day year, in each case, for the actual number of days elapsed, including the first day but excluding the last. Except as otherwise provided in Section 2.7(b), interest shall be payable in arrears on each Interest Payment Date and upon each payment (including prepayment) of the Loans. Any change in the interest rate on the Loans resulting from a change in the Alternate Base Rate or reserve requirements shall become effective as of the opening of business on the day on which such change shall become effective. The Agent shall, as soon as practicable, notify the Borrower and the Lenders of the effective date and the amount of each such change in the BNY Rate, but any failure to so notify shall not in any manner affect the obligation of the Borrower to pay interest on the Loans in the amounts and on the dates required. Each determination of the Alternate Base Rate or a Eurodollar Rate by the Agent pursuant to this Agreement shall be conclusive and binding on the Borrower absent manifest error. At no time shall the interest rate payable on the Loans, together with the Commitment Fee and all other amounts payable under the Loan Documents, to the extent the same are construed to constitute interest, exceed the Highest Lawful Rate. If in respect of any period during the term of this Agreement, any amount paid hereunder, to the extent the same shall (but for the provisions of this Section) constitute or be deemed to constitute interest, would exceed the maximum amount of interest permitted by the Highest Lawful Rate during such period (such amount being hereinafter referred to as an "Un qualified Amount"), then (i) such Unqualified Amount shall be applied or shall be deemed to have been applied as a prepayment of the Loans, and (ii) if in any subsequent period during the term of this Agreement, all amounts payable hereunder in respect of such period which constitute or shall be deemed to constitute interest shall be less than the maximum amount of interest permitted by the Highest Lawful Rate during such period, then the Borrower shall pay to the Lenders in respect of such period an amount (each a "Compensatory Interest Payment") equal to the lesser of (x) a sum which, when added to all such amounts, would equal the maximum amount of interest permitted by the Highest Lawful Rate during such period, and (y) an amount equal to the Unqualified Amount less all other Compensatory Interest Payments made in respect thereof. The Borrower acknowledges that to the extent interest payable on ABR Advances is based on the BNY Rate, such Rate is only one of the bases for computing interest on loans made by the Lenders, and by basing interest payable on ABR Advances on the BNY Rate, the Lenders have not committed to charge, and the Borrower has not in any way bargained for, interest based on a lower or the lowest rate at which the Lenders may now or in the future make loans to other borrowers.
2.8. Taxes
(a) Payments to Be Free and Clear. Provided that all documentation, if any, then required to be delivered by any Lender or the Agent pursuant to subsection (c) below has been delivered, all sums payable by the Borrower under the Loan Documents shall be paid free and clear of and (except to the extent required by law) without any deduction or withholding on account of any Tax (other than a Tax on the Overall Net Income of any Lender (for which payment need not be free and clear but no deduction or withholding shall be made unless then required by applicable law)) imposed, levied, collected, withheld or assessed by or within the United States or any political subdivision in or of the United States or any other jurisdiction from or to which a payment is made by or on behalf of the Borrower or by any federation or organization of which the United States or any such jurisdiction is a member at the time of payment.
(b) Grossing-up of Payments. If the Borrower or any other Person is required by law to make any deduction or withholding on account of any such Tax from any sum paid or payable by the Borrower to the Agent or any Lender under any of the Loan Documents:
(i) The Borrower shall notify the Agent and such Lender of any such requirement or any change in any such requirement as soon as the Borrower becomes aware of it;
(ii) The Borrower shall pay any such Tax before the date on which penalties attach thereto, such payment to be made (if the liability to pay is imposed on the Borrower) for its own account or (if that liability is imposed on the Agent or such Lender, as the case may be) on behalf of and in the name of the Agent or such Lender;
(iii) the sum payable by the Borrower to the Agent or a Lender in respect of which the relevant deduction, withholding or payment is required shall be increased to the extent necessary to ensure that, after the making of that deduction, withholding or payment, the Agent or such Lender, as the case may be, receives on the due date therefor a net sum equal to what it would have received had no such deduction, withholding or payment been required or made; and
(iv) within 30 days after paying any sum from which it is required by law to make any deduction or withholding, and within 30 days after the due date of payment of any Tax which it is required by clause (b) above to pay, the Borrower shall deliver to the Agent and the applicable Lender evidence satisfactory to the other affected parties of such deduction, withholding or payment and of the remittance thereof to the relevant Governmental Authority;
provided that no such additional amount shall be required to be paid to any Lender under clause (iii) above except to the extent that any change after the date hereof (in the case of each
Lender listed on the signature pages hereof) or after the date of the Assignment and Acceptance Agreement pursuant to which such Lender became a Lender (in the case of each other Lender) in any such requirement for a deduction, withholding or payment as is specified therein shall result in an increase in the rate of such deduction, withholding or payment from that in effect at the date of this Agreement or at the date of such Assignment and Acceptance, as the case may be, in respect of payments to such Lender.
(c) U.S. Tax Certificates. Each Lender that is organized under the laws of any jurisdiction other than the United States shall deliver to the Agent for transmission to the Borrower, on or prior to the Effective Date (in the case of each Lender listed on the signature pages hereof) or on the effective date of the Assignment and Acceptance Agreement pursuant to which it becomes a Lender (in the case of each other Lender), and at such other times as may be necessary in the determination of the Borrower or the Agent (each in the reasonable exercise of its discretion), such certificates, documents or other evidence, properly completed and duly executed by such Lender (including, without limitation, Internal Revenue Service Form 1001 or Form 4224 or any other certificate or statement of exemption required by Treasury Regulations Section 1.1441-4(a) or Section 1.1441-6(c) or any successor thereto) to establish that such Lender is not subject to deduction or withholding of United States federal income tax under Section 1441 or 1442 of the Code or otherwise (or under any comparable provisions of any successor statute) with respect to any payments to such Lender of principal, interest, fees or other amounts payable under any of the Loan Documents. The Borrower shall not be required to pay any additional amount to any such Lender under subsection (b)(iii) above if such Lender shall have failed to satisfy the requirements of the immediately preceding sentence; provided that if such Lender shall have satisfied such requirements on the Effective Date (in the case of each Lender listed on the signature pages hereof) or on the effective date of the Assignment and Acceptance Agreement pursuant to which it became a Lender (in the case of each other Lender), nothing in this subsection shall relieve the Borrower of its obligation to pay any additional amounts pursuant to subsection (b)(iii) above in the event that, as a result of any change in applicable law, such Lender is no longer properly entitled to deliver certificates, documents or other evidence at a subsequent date establishing the fact that such Lender is not subject to withholding as described in the immediately preceding sentence.
(d) Tax Refund. If any Lender or the Agent, as applicable, receives a refund (whether by way of direct payment or by offset) of any Tax for which a payment has been made pursuant to subsection 2.8(b)(ii) which, in the reasonable good faith judgment of such Lender or Agent, as the case may be, is allocable to such payment made under subsection 2.8(B)(ii), the amount of such refund (together with any interest received thereon) shall be paid to the Borrower to the extent payment has been made in full pursuant to subsection 2.8(b)(ii).
2.9. Substituted Interest Rate
In the event that (i) the Agent shall have determined (which determination shall be conclusive and binding upon the Borrower) that by reason of circumstances affecting the interbank eurodollar market either adequate and reasonable means do not exist for ascertaining the Eurodollar Rate applicable pursuant to Section 2.7 or (ii) the Required Lenders shall have notified the Agent that they have determined (which determination shall be conclusive and binding on the Borrower) that the applicable Eurodollar Rate will not
adequately and fairly reflect the cost to such Lenders of maintaining or funding loans bearing interest based on such Eurodollar Rate, with respect to any portion of the Loans that the Borrower has requested be made as Eurodollar Advances or Eurodollar Advances that will result from the requested conversion or continuation of any portion of the Advances into or of Eurodollar Advances (each, an "Affected Advance"), the Agent shall promptly notify the Borrower and the Lenders (by telephone or otherwise, to be promptly confirmed in writing) of such determination, on or, to the extent practicable, prior to the requested Borrowing Date or Conversion/Continuation Date for such Affected Advances. If the Agent shall give such notice, (d) any Affected Advances shall be made as ABR Advances, (e) the Advances (or any portion thereof) that were to have been converted to or continued as Affected Advances shall be converted to or continued as ABR Advances and (f) any outstanding Affected Advances shall be converted, on the last day of the then current Interest Period with respect thereto, to ABR Advances. Until any notice under clauses (i) or (ii), as the case may be, of this Section has been withdrawn by the Agent (by notice to the Borrower promptly upon either (x) the Agent having determined that such circumstances affecting the interbank eurodollar market no longer exist and that adequate and reasonable means do exist for determining the Eurodollar Rate pursuant to Section 2.7 or (y) the Agent having been notified by such Required Lenders that circumstances no longer render the Advances (or any portion thereof) Affected Advances, no further Eurodollar Advances shall be required to be made by the Lenders, nor shall the Borrower have the right to convert or continue all or any portion of the Loans to Eurodollar Advances.
2.10. Illegality
Notwithstanding any other provisions herein, if any law, regulation, treaty or directive, or any change therein or in the interpretation or application thereof, shall make it unlawful for any Lender to make or maintain its Eurodollar Advances as contemplated by this Agreement, (i) the commitment of such Lender hereunder to make Eurodollar Advances or convert ABR Advances to Eurodollar Advances shall forthwith be suspended and (ii) such Lender's Loans then outstanding as Eurodollar Advances affected hereby, if any, shall be converted automatically to ABR Advances on the last day of the then current Interest Period applicable thereto or within such earlier period as required by law. If the commitment of any Lender with respect to Eurodollar Advances is suspended pursuant to this Section and such Lender shall notify the Agent and the Borrower that it is once again legal for such Lender to make or maintain Eurodollar Advances, such Lender's commitment to make or maintain Eurodollar Advances shall be reinstated.
2.11. Increased Costs
In the event that any law, regulation, treaty or directive hereafter enacted, promulgated, approved or issued or any change in any presently existing law, regulation, treaty or directive therein or in the interpretation or application thereof by any Governmental Au-
thority charged with the administration thereof or compliance by any Lender (or any corporation directly or indirectly owning or controlling such Lender) with any request or directive from any central bank or other Governmental Authority:
(a) does or shall subject any Lender to any Taxes of any kind whatsoever with respect to any Eurodollar Advances or its obligations under this Agreement to make Eurodollar Advances, or change the basis of taxation of payments to any Lender of principal, interest or any other amount payable hereunder in respect of its Eurodollar Advances, including any Taxes required to be withheld from any amounts payable under the Loan Documents (except for imposition of, or change in the rate of, Tax on the Overall Net Income of such Lender or its Applicable Lending Office for any of such Advances by the jurisdiction in which such Lender is incorporated or has its principal office or such Applicable Lending Office, including, in the case of Lenders incorporated in any State of the United States, such tax imposed by the United States); or
(b) does or shall impose, modify or make applicable any reserve, special deposit, compulsory loan, assessment, increased cost or similar requirement against assets held by, or deposits of, or advances or loans by, or other credit extended by, or any other acquisition of funds by, any office of such Lender in respect of its Eurodollar Advances which is not otherwise included in the determination of a Eurodollar Rate;
and the result of any of the foregoing is to increase the cost to such Lender of making, renewing, converting, continuing or maintaining its Eurodollar Advances or its commitment to make such Eurodollar Advances, or to reduce any amount receivable hereunder in respect of its Eurodollar Advances, then, in any such case, the Borrower shall pay such Lender, upon its demand, any additional amounts necessary to compensate such Lender for such additional cost or reduction in such amount receivable which such Lender deems to be material as determined by such Lender; provided, however, that nothing in this Section shall require the Borrower to indemnify the Lenders with respect to withholding Taxes for which the Borrower has no obligation under Section 2.8 or any other increased costs, expenses, Taxes or other matters incurred by a Lender more than 90 days prior to the date that such Lender delivers notice to the Borrower of such increased cost, expense, tax or matter. A statement setting forth the calculations of any additional amounts payable pursuant to the foregoing sentence submitted by a Lender to the Borrower shall be conclusive absent manifest error.
2.12. Capital Adequacy
If the amount of capital required or expected to be maintained by any Lender or any Person directly or indirectly owning or controlling such Lender (each a "Control Person"), shall be affected by (i) the introduction or phasing in of any law, rule or regulation after the Effective Date, (ii) any change after the Effective Date in the interpretation of any existing law, rule or regulation by any central bank or United States or foreign Governmental Authority charged with the administration thereof, or (iii) compliance by such Lender or such Control Per son with any directive, guideline or request from any central bank or United States or foreign Governmental Authority (whether or not having the force of law) promulgated or made after the Effective Date, and such Lender shall have determined that such introduction, phasing in, change or compliance shall have had or will thereafter have the effect of reducing
(A) the rate of return on such Lender's or such Control Person's capital, or (B)
the asset value to such Lender or such Control Person of the Loans made or
maintained by such Lender, in either case to a level below that which such
Lender or such Control Person could have achieved or would thereafter be able to
achieve but for such introduction, phasing in, change or compliance (after
taking into account such Lender's or such Control Person's policies regarding
capital adequacy) by an amount deemed by such Lender to be material to such
Lender or Control Person, then, within ten days after demand by such Lender,
accompanied by a statement setting forth the calculations of any additional
amount payable under this Section, which statement shall be conclusive absent
manifest error, the Borrower shall pay to such Lender or such Control Person
such additional amount or amounts as shall be sufficient to compensate such
Lender or such Control Person, as the case may be, for such reduction, provided,
however, that nothing in this Section shall require the Borrower to compensate
any Lender for any such reduction arising more than 90 days prior to the date
that such Lender delivers notice thereof to the Borrower.
2.13. Lending Offices
Each Lender shall have the right at any time and from time to time to transfer its Loans to a different office, provided that such Lender shall promptly notify the Agent and the Borrower of any such change of office. Such office shall thereupon become such Lender's Domestic Lending Office or Eurodollar Lending Office, as the case may be, pro vided, however, that no such Lender shall be entitled to receive any greater amount under Sections 2.9, 2.11 and 2.12 as a result of a transfer of any such Loans to a different office of such Lender than it would be entitled to immediately prior thereto unless such claim would have arisen even if such transfer had not occurred.
2.14. Indemnification for Loss
Notwithstanding anything contained herein to the contrary, if the Borrower shall fail to borrow or convert or continue on a Borrowing Date or Conversion/Continuation Date after it shall have given notice to do so in which it shall have requested a Eurodollar Advance, or if a Eurodollar Advance shall be terminated or suspended pursuant to the provisions hereof prior to the last day of the Interest Period applicable thereto, or if, while a Eurodollar Advance is outstanding, any repayment or prepayment of such Eurodollar Advance is made for any reason (including, without limitation, as a result of acceleration or illegality) on a date which is prior to the last day of the Interest Period applicable thereto, the Borrower agrees to indemnify each Lender against, and to pay on demand directly to such Lender, any loss or expense suffered by such Lender as a result of such failure to borrow, convert or continue, termination, repayment or prepayment, including, without limitation, an amount, if greater than zero, equal to:
where:
"A" equals such Lender's Commitment Percentage of the Affected Principal Amount;
"B" equals the Eurodollar Rate (expressed as a decimal) applicable to such Eurodollar Advances;
"C" equals the applicable Eurodollar Rate (ex pressed as a decimal) in effect on or about the first day of the applicable Remaining Interest Period, based on the applicable rates offered or bid, as the case may be, on or about such date, for deposits in an amount equal approximately to such Lender's Commitment Percentage of the Affected Principal Amount with an Interest Period equal approximately to the applicable Remaining Interest Period, as determined by such Lender;
"D" equals the number of days from and including the first day of the applicable Remaining Interest Period to but excluding the last day of such Remaining Interest Period;
and any other out-of-pocket loss or expense (including any internal processing
charge customarily charged by such Lender) suffered by such Lender in connection
with such Eurodollar Advance, including, without limitation, in liquidating or
employing deposits acquired to fund or maintain the funding of its Commitment
Percentage of the Affected Principal Amount, or redeploying funds prepaid or
repaid, in amounts which correspond to its Commitment Percentage of the Affected
Principal Amount. Each determination by the Agent or a Lender pursuant to this
Section shall be conclusive and binding on the Borrower absent manifest error.
2.15. Option to Fund
Each Lender has indicated that, if the Borrower elects to borrow or convert or continue to Eurodollar Advances, such Lender may wish to purchase one or more deposits in order to fund or maintain its funding of its Eurodollar Advances during the Interest Period in question; it being understood that the provisions of this Agreement relating to such funding are included only for the purpose of determining the rate of interest to be paid on such Eurodollar Advances and for purposes of determining amounts owning under Sections 2.11, 2.12 and 2.14. Each Lender shall be entitled to fund and maintain its funding of all or any part of each Eurodollar Advance made by it in any manner it sees fit, but all such determinations shall be made as if such Lender had actually funded and maintained its funding of such Eurodollar Advance during the applicable Interest Period through the purchase of deposits in an amount equal to such Eurodollar Advance and having a maturity corresponding to such Interest Period. The obligations of the Borrower under Sections 2.8, 2.9, 2.10, 2.11 and 2.12 shall survive the termination of the Aggregate Commitments, the payment of the Notes and all other amounts payable under the Loan Documents.
2.16. Use of Proceeds
The Borrower agrees that the proceeds of the Loans shall be used solely for its general corporate purposes not inconsistent with the provisions hereof, including, without limitation, the provision by Borrower to its Subsidiaries of funds for use in connection with the business, operations and general corporate purposes of such Subsidiaries. Notwithstanding anything to the contrary contained herein, the Borrower further agrees that no part of the proceeds of any Loan will be used, directly or indirectly, for a purpose which violates any law, rule or regulation of any Governmental Authority, including the provisions of Regulations G, U or X of the Board of Governors of the Federal Reserve System, as amended.
2.17. Extension of Maturity Date
Provided that no Default or Event of Default shall exist, the Borrower may request that the Maturity Date be extended for additional periods of one year each by giving written notice thereof (each an "Extension Request") to the Agent at any time during the period which is not more than 90 days nor less than 60 days prior to any anniversary of the Effective Date and, upon receipt of each such notice, the Agent shall promptly notify each Lender thereof. The then current Maturity Date shall not be extended unless and until each Lender, in its sole and absolute discretion, shall have consented, in writing, to such request, in which event such then existing Maturity Date shall be extended to the date occurring one year from the date of the last such consent, provided, however, that if such date is not a Business Day, such extended Maturity Date shall be the immediately preceding Business Day. In the event that any Lender shall not have granted its consent to an Extension Request, the then current Maturity Date shall remain in effect. Each Lender shall endeavor to respond to each Extension Request by no later than 45 days following the receipt by such Lender from the Agent of notice of such Extension Request, provided that each Lender which shall have failed so to respond by such time shall be deemed not to have consented thereto.
2.18. Agent's Records
The Agent's records regarding the amount of each Loan, each payment by the Borrower of principal and interest on the Loans and other information relating to the Loans shall be presumptively correct absent manifest error.
2.19. Mitigation of Taxes and Costs
(a) Each Lender agrees that, if requested by the Borrower after the occurrence of an event or the existence of a condition that would require the Borrower to make payments to such Lender under Section 2.8, 2.11 or or 2.12, it will, to the extent not inconsistent with such Lender's internal policies, use reasonable efforts (subject to overall policy considerations of such Lender) (i) to make, fund or maintain the Commitments or Loans of such lender through another lending office of such Lender, or (ii) take such other reasonable measures, if as a result
the additional amounts that would otherwise be required to be paid by the Borrower with respect to such Lender pursuant to said Sections would be materially reduced and if, as determined by such Lender in its sole discretion, the making, funding or maintaining of such Commitments or Loans through such other lending office or in accordance with such other measures, as the case may be, would not otherwise adversely affect such Commitments or Loans or the interests or such Lender.
(b) If the Borrower becomes obligated to pay additional amounts described in Section 2.8, 2.11 or 2.12 as a result of any condition described in such Sections and payment of such amount is demanded by any Lender, then, provided that no Default or Event of Default shall exist, the Borrower may, on ten Business Days' prior written notice to the Agent and such Lender, cause such Lender to (and such Lender shall) assign all of its rights and obligations under this Agreement to a Lender or other bank selected by the Borrower and acceptable to the Agent for a purchase price equal to the outstanding principal amount of such Lender's Loans and all accrued interest and fees thereon, provided that in no event shall the assigning Lender be required to pay or surrender to such purchasing Lender or other bank any of the fees received by such assigning Lender pursuant to this Agreement. The Borrower shall remain obligated to pay to such assigning Lender all additional amounts required to be paid by the Borrower pursuant to such Sections had there been no such assignment.
3. FEES; PAYMENTS
3.1. Commitment Fee
The Borrower agrees to pay to the Agent, for the account of the Lenders in accordance with each Lender's Commitment Percentage, a fee (the "Commitment Fee"), during the Commitment Period, equal to the Applicable Margin times the excess of (a) the Aggregate Commitments (excluding the amount of any cancelled or reduced portion of the Aggregate Commitments for which the Commitment Fee was paid upon each such cancellation or reduction under Section 2.4(b)) over (b) the average daily sum of the outstanding principal balance of the Loans. The Commitment Fee shall be payable quarterly in arrears on the last day of each March, June, September and December of each year, commencing on the first such day following the Effective Date, and ending on the date that the Aggregate Commitments shall expire or otherwise terminate. The Commitment Fee shall be calculated on the basis of a 360-day year for the actual number of days elapsed.
3.2. Pro Rata Treatment and Application of Principal Payments
Each payment, including each prepayment, of principal and interest on the Loans and of the Commitment Fee shall be made by the Borrower to the Agent at its office set forth in Section 11.2 in funds immediately available to the Agent at such office by 2:00 P.M. on the due date for such payment, and, promptly upon receipt thereof by the Agent, shall be remitted by the Agent in like funds as received, to the Lenders according to the Commitment Percentage of each Lender, in the case of the Commitment Fee, and pro rata according to the aggregate outstanding principal balance of the Loans, in the case of principal and interest due
thereon. The failure of the Borrower to make any such payment by such time shall not constitute a default hereunder, provided that such payment is made on such due date, but any such payment made after 12:00 Noon on such due date shall be deemed to have been made on the next Business Day for the purpose of calculating interest on amounts outstanding on the Loans. If any payment hereunder or under the Notes shall be due and payable on a day which is not a Business Day, the due date thereof (except as otherwise provided in the definition of Interest Period) shall be extended to the next Business Day and (except with respect to payments in respect of the Commitment Fee) interest shall be payable at the applicable rate specified herein during such extension. If any payment is made with respect to any Eurodollar Advance prior to the last day of the applicable Interest Period, the Borrower shall indemnify each Lender in accordance with Section 2.14.
4. REPRESENTATIONS AND WARRANTIES
In order to induce the Agent and the Lenders to enter into this Agreement and to make the Loans, the Borrower makes the following representations and warranties to the Agent and each Lender:
4.1. Subsidiaries
The Borrower has only the Insurance Subsidiaries and Non-Insurance Subsidiaries set forth on Schedule 4.1.
4.2. Existence and Power
Each of the Borrower and its Subsidiaries is duly organized or formed and validly existing in good standing under the laws of the jurisdiction of its incorporation or formation, has all requisite power and authority to own its Property and to carry on its business as now conducted, and is in good standing and authorized to do business as a foreign corporation in each jurisdiction in which the nature of the business conducted therein or the Property owned therein makes such qualification necessary, except where such failure to qualify could not reasonably be expected to have a Material Adverse Effect.
4.3. Authority
The Borrower has full corporate power and authority to enter into, execute, deliver and perform the terms of the Loan Documents and to make the borrowings contemplated thereby all of which have been duly authorized by all proper and necessary corporate or other applicable action and are in full compliance with its Articles of Incorporation and By-Laws.
4.4. Binding Agreement
The Loan Documents constitute the valid and legally binding obligations of the Borrower, enforceable in accordance with their respective terms, except as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization or other similar laws now or hereafter in effect relating to or affecting the rights and remedies of creditors' generally and by general principles of equity, regardless of whether enforcement is sought in an action at law or a proceeding in equity, and the discretion of the court before which any action or proceeding therefor may be brought.
4.5. Litigation
Except as set forth on Schedule 4.5, there are no actions, suits or proceedings at law or in equity or by or before any Governmental Authority (whether purportedly on behalf of the Borrower or any its Subsidiaries) pending or, to the knowledge of the Borrower, threatened against the Borrower or any of its Subsidiaries or any of their respective Properties or rights, which (i) could reasonably be expected to have a Material Adverse Effect, (ii) call into question the validity or enforceability of any of the Loan Documents, or (iii) could reasonably be expected to result in the rescission, termination or cancellation of any material license, franchise, right, permit or similar authorization held by the Borrower or any of its Subsidiaries.
4.6. Required Consents
Except for information filings required to be made in the ordinary course of business which are not a condition to the Borrower's performance under the Loan Documents, no consent, authorization or approval of, filing with, notice to, or exemption by, stockholders, any Governmental Authority or any other Person is required to authorize, or is required in connection with the execution, delivery and performance of the Loan Documents or is required as a condition to the validity or enforceability of the Loan Documents.
4.7. No Conflicting Agreements
Neither the Borrower nor any of its Subsidiaries is in de fault under any mortgage, indenture, contract or agreement to which it is a party or by which it or any of its Property is bound, the effect of which default could reasonably be expected to have a Material Adverse Effect. The execution, delivery or carrying out of the terms of the Loan Documents will not constitute a default under, or result in the creation or imposition of, or obligation to create, any Lien upon any Property of the Borrower or any of its Subsidiaries or result in a breach of or require the mandatory repayment of or other acceleration of payment under or pursuant to the terms of any such mortgage, indenture, contract or agreement.
4.8. Compliance with Applicable Laws
Neither the Borrower nor any of its Subsidiaries is in de fault with respect to any judgment, order, writ, injunction, decree or decision of any Governmental Authority which default could reasonably be expected to have a Material Adverse Effect. Each of the Borrower and its Subsidiaries is complying in all material respects with all statutes, regulations, rules and
orders applicable to the Borrower or such Subsidiary of all Governmental Authorities, including, without limitation, all Applicable Insurance Codes and Environmental Laws, a violation of which could reasonably be expected to have a Material Adverse Effect.
4.9. Taxes
Each of the Borrower and its Subsidiaries has filed or caused to be filed all tax returns required to be filed and has paid, or has made adequate provision for the payment of, all taxes shown to be due and payable on said returns or in any assessments made against it (other than those being contested as required under Section 7.4) which would be material to the Borrower or any of its Subsidiaries, and no tax Liens have been filed with respect thereto. The charges, accruals and reserves on the books of the Borrower and each of its Subsidiaries with respect to all federal, state, local and other taxes are, to the best knowledge of the Borrower, adequate for the payment of all such taxes, and the Borrower knows of no unpaid assessment which is due and payable against it or any of its Subsidiaries or any claims being asserted which could reasonably be expected to have a Material Adverse Effect, except such thereof as are being contested as required under Section 7.4, and for which adequate reserves have been set aside in accordance with GAAP.
4.10. Governmental Regulations
Neither the Borrower nor any of its Subsidiaries is subject to regulation under the Investment Company Act of 1940, as amended, the Public Utility Holding Company Act of 1935, as amended, or the Federal Power Act, and neither the Borrower nor any of its Subsidiaries is subject to any statute or regulation which prohibits or restricts the incurrence of Indebtedness under the Loan Documents, including, without limitation, statutes or regulations relative to common or contract carriers or to the sale of electricity, gas, steam, water, telephone, telegraph or other public utility services.
4.11. Federal Reserve Regulations; Use of Loan Proceeds
Neither the Borrower nor any of its Subsidiaries is engaged principally, or as one of its important activities, in the business of extending credit for the purpose of purchasing or carrying any Margin Stock. No part of the proceeds of the Loans will be used, directly or indirectly, for a purpose which violates any law, rule or regulation of any Governmental Authority, including, without limitation, the provisions of Regulations G, T, U or X of the Board of Governors of the Federal Reserve System, as amended. No part of the proceeds of the Loans will be used, directly or indirectly, to purchase or carry Margin Stock or to extend credit to others for the purpose of purchasing or carrying Margin Stock.
4.12. Plans
Neither the Borrower nor any Subsidiary has a Pension Plan on the Effective Date.
4.13. Financial Statements
(a) The Borrower has heretofore delivered to the Agent and the Lenders copies of its Form 10-K for the fiscal year ending December 31, 1995, containing the audited Consolidated Balance Sheets of the Borrower and its Subsidiaries as of December 31, 1995 and December 31, 1994, and the related Consolidated Statements of Income, Retained Earnings and Cash Flows for the three year periods ending December 31, 1995, and its Form 10-Q for the fiscal quarter ended September 30, 1996, containing the unaudited Consolidated Balance Sheet of the Borrower and its Subsidiaries for such fiscal quarter, together with the related Consolidated Statements of Income, Retained Earnings and Cash Flows for the fiscal quarter then ended (with the applicable related notes and schedules, the "Financial Statements"). The Financial Statements fairly present the Consolidated financial condition and results of the operations of the Borrower and its Subsidiaries as of the dates and for the periods indicated therein and have been prepared in conformity with GAAP. Except as reflected in the Financial Statements or in the foot notes thereto, neither the Borrower nor any of its Subsidiaries has any obligation or liability of any kind (whether fixed, accrued, Contingent, unmatured or otherwise) which, in accordance with GAAP, should have been shown in the Financial Statements and was not. Since December 31, 1995, the Borrower and each of its Subsidiaries has conducted its business only in the ordinary course and there has been no Material Adverse Change.
(b) The Borrower has heretofore delivered to the Lenders copies of the consolidated Annual Statement, as of December 31, 1995, of Mercury Casualty Company (together with the related notes and schedules thereto, the "Annual Statement"). The Annual Statement fairly presents, the financial condition and results of operations of the Insurance Subsidiaries as of the dates and for the periods indicated therein and has been prepared in accordance with SAP.
4.14. Property
Each of the Borrower and its Subsidiaries has good and marketable title to all of its Property, title to which is material to the Borrower or such Subsidiary, subject to no Liens except Permitted Liens.
4.15. Licences, Franchises, Etc.
Each of the Borrower and its Subsidiaries possesses or has the right to use all licenses, franchises, Intellectual Property, and other rights as are material and necessary for the conduct of its business, and with respect to which it is in compliance, with no known conflict with the valid rights of others which could reasonably be expected to have a Material Adverse Effect. No event has occurred which permits or, to the best knowledge of the Borrower, after notice or the lapse of time or both, or any other condition, could reasonably be expected to permit, the revocation or termination of any such license, franchise, Intellectual Property, or other right which revocation or termination could reasonably be expected to have a Material Adverse Effect.
4.16. Environmental Matters
(a) The Borrower and each of its Subsidiaries is in compliance in all material respects with the requirements of all applicable Environmental Laws, a violation of which could reasonably be expected to have a Material Adverse Effect.
(b) No Hazardous Substances have been generated or manufactured on, transported to or from, treated at, stored at or discharged from any Real Property in violation of any Environmental Laws which violation could reasonably be expected to have a Material Adverse Effect; no Hazardous Substances have been discharged into subsurface waters under any Real Property in violation of any Environmental Laws which violation could reasonably be expected to have a Material Adverse Effect; no Hazardous Substances have been discharged from any Real Property on or into Property or waters (including subsurface waters) adjacent to any Real Property in violation of any Environmental Laws which violation could reasonably be expected to have a Material Adverse Effect; and there are not now, nor ever have been, on any Real Property any underground or above ground storage tanks containing Hazardous Substances.
(c) Neither the Borrower nor any of its Subsidiaries (i) has received
notice (written or oral) or otherwise learned of any claim, demand, suit,
action, proceeding, event, condition, report, directive, Lien, violation, non-
compliance or investigation indicating or concerning any potential or actual
liability (including, without limitation, potential liability for enforcement,
investigatory costs, cleanup costs, government response costs, removal costs,
remedial costs, natural resources damages, Property damages, personal injuries
or penalties) arising in connection with: (x) any non-compliance with or
violation of the requirements of any applicable Environmental Laws, or (y) the
presence of any Hazardous Substance on any Real Property (or any Real Property
previously owned by the Borrower or any of its Subsidiaries) or the release or
threatened release of any Hazardous Substance into the environment, (ii) to the
knowledge of the Borrower has any threatened or actual liability in connection
with the presence of any Hazardous Sub stance on any Real Property (or any Real
Property previously owned by the Borrower or any of its Subsidiaries) or the
release or threatened re lease of any Hazardous Substance into the environment,
(iii) has received notice of any federal or state investigation evaluating
whether any remedial action is needed to respond to the presence of any
Hazardous Substance on any Real Property (or any Real Property previously owned
by the Borrower or any of its Subsidiaries) or a release or threatened release
of any Hazardous Substance into the environment for which the Borrower or any of
its Subsidiaries is or may be liable, or (iv) has received notice that the
Borrower or any of its Subsidiaries is or may be liable to any Person under any
Environmental Law.
(d) To the knowledge of the Borrower no Real Property is located in an area identified by the Secretary of Housing and Urban Development as an area having special flood
hazards.
4.17. Labor Relations
There are no material controversies pending between the Borrower or any of its Subsidiaries and any of their respective employees, which could reasonably be expected to have a Material Adverse Effect.
4.18. Burdensome Obligations
Neither the Borrower nor any of its Subsidiaries is a party to or bound by any license, franchise, agreement, deed, lease or other instrument, or subject to any restriction which, in the opinion of the management of the Borrower or such Subsidiary is so unusual or burdensome, in the context of its business, as in the foreseeable future might materially and adversely affect or impair the revenue or cash flows of the Borrower or such Subsidiary or the ability of the Borrower to perform its obligations under the Loan Documents. The Borrower does not presently anticipate that future expenditures by the Borrower or any of its Subsidiaries needed to meet the provisions of federal or state statutes, orders, rules or regulations will be so burdensome as to result in a Material Adverse Effect or Material Adverse Change.
4.19. No Misrepresentation
No representation or warranty contained in any Loan Document and no certificate or report furnished or to be furnished by the Borrower or any of its Subsidiaries in connection with the transactions contemplated thereby, contains or will contain a misstatement of material fact, or, to the best knowledge of the Borrower, omits or will omit to state a material fact required to be stated in order to make the statements therein contained not misleading in the light of the circumstances under which made.
5. CONDITIONS TO FIRST LOANS
In addition to the conditions precedent set forth in Section 6, the obligation of each Lender to make its first Loan shall be subject to the fulfillment of the following conditions precedent:
5.1. Evidence of Action
The Agent shall have received a certificate, dated the first Borrowing Date, of the Secretary or Assistant Secretary of the Borrower (i) attaching a true and complete copy of the resolutions of its Board of Directors and of all documents evidencing other necessary corporate action (in form and substance satisfactory to the Agent) taken by it to authorize the Loan Documents and the transactions contemplated thereby, (ii) attaching a true and complete copy of its Articles of Incorporation and By-Laws, (iii) setting forth the incumbency of its officer or officers who may sign the Loan Documents, including therein a signature specimen of such officer or officers and (iv) attaching a certificate of good standing of the Secretary of State of the State of California and of each other jurisdiction in which it is qualified to do business.
5.2. This Agreement
The Agent shall have received counterparts of this Agreement signed by each of the parties hereto (or receipt by the Agent from a party hereto of a fax signature page signed by such party which shall have agreed to promptly provide the Agent with originally executed counterparts hereof).
5.3. Notes
The Agent shall have received the Notes, duly executed by an Authorized Signatory of the Borrower.
5.4. Existing Indebtedness
The Existing Indebtedness shall have been, or simultaneously with the making of the first Loans will be, paid in full, whereupon the Existing Agreement shall be deemed to have been terminated and of no further force and effect, except with respect to the provisions thereof which expressly survive the payment of the Existing Indebtedness.
5.5. Approvals
The Agent shall have received a certificate of an Authorized Signatory of the Borrower to the effect that all approvals and consents of all Persons required to be obtained in connection with the consummation of the transactions contemplated by the Loan Documents have been duly obtained and are in full force and effect, and that all required notices have been given and all required waiting periods have expired.
5.6. Opinion of Counsel to the Borrower
The Agent shall have received an opinion of Latham & Watkins, counsel to the Borrower, addressed to the Agent, the Lenders and Special Counsel, and dated the first Borrowing Date, substantially in the form of Exhibit E, and covering such additional matters as the Required Lenders may reasonably request. It is understood that such opinion is being delivered to the Agent and the Lenders upon the direction of the Borrower and that the Agent and the Lenders may and will rely upon such opinion.
5.7. Opinion of Special Counsel
The Agent shall have received an opinion of Special Counsel, addressed to the Agent and the Lenders and dated the first Borrowing Date substantially in the form of Exhibit F.
5.8. Payment of Fees
The Borrower shall have paid to the Agent and the Lenders all fees and expenses which it shall have agreed to pay, to the extent such fees and expenses shall have become payable on or prior to the Effective Date, and shall have paid the reasonable fees and disbursements of Special Counsel which the Borrower is obligated to pay in accordance with Section 11.5 and which shall have accrued up to the Effective Date.
5.9. Other Documents
The Agent shall have received such other documents (including financial statements and projections), each in form and substance reasonably satisfactory to the Agent, as the Agent shall reasonably require in connection with the making of the first Loans.
6. CONDITIONS OF LENDING - ALL LOANS
The obligation of each Lender to make any Loan is subject to the satisfaction of the following conditions precedent as of the date of such Loan:
6.1. Compliance
On each Borrowing Date and after giving effect to the Loans to be made thereon, (i) the Borrower shall be in compliance with all of the terms, covenants and conditions thereof, (ii) there shall exist no Default or Event of Default, (iii) the representations and warranties contained in the Loan Documents shall be true and correct with the same effect as though such representations and warranties had been made on such Borrowing Date (except that Schedules 4.1 and 4.5 shall have been updated, as appropriate, in order to make the representations and warranties expressed in Sections 4.1 and 4.5 true and correct as of such Borrowing Date) and (iv) the aggregate outstanding principal balance of the Loans will not exceed the Aggregate Commitments. Each borrowing by the Borrower shall constitute a certification by the Borrower as of such Borrowing Date that each of the foregoing matters is true and correct in all respects.
6.2. Loan Closings
All documents required by the provisions of this Agreement to be executed or delivered to the Agent on or before the applicable Borrowing Date shall have been executed and shall have been delivered at the office of the Agent set forth in Section 11.2 on or before such Borrowing Date.
6.3. Borrowing Request
The Agent shall have received a Borrowing Request duly executed by an Authorized Signatory of the Borrower.
6.4. Other Documents
The Agent shall have received such other documents as the Agent or the Lenders shall reasonably request.
7. AFFIRMATIVE COVENANTS
The Borrower agrees that, so long as this Agreement is in effect, any Loan remains outstanding and unpaid, or any other amount is owing under any Loan Document to any Lender or the Agent, the Borrower shall:
7.1. Financial Statements
Maintain, and cause each Subsidiary to maintain, a standard system of accounting in accordance with GAAP and, with respect to each Insurance Subsidiary, SAP, and furnish to the Agent and each Lender:
(a) As soon as available and, in any event, within 105 days after the close of each fiscal year, a copy of (x) the Borrower's 10-K in respect of such fiscal year, and (y) (i) the Borrower's Consolidated Balance Sheet as of the end of such fiscal year, and (ii) the related Consolidated Statements of Income and Shareholders' Equity and Cash Flows, as of and through the end of such fiscal year, setting forth in each case in comparative form the corresponding figures in respect of the previous fiscal year, all in reasonable detail, and ac companied by a report of the Borrower's auditors, which report shall be unqualified as to scope of audit and going concern or similar or other qualification and shall state that (A) such auditors audited such financial statements, (B) such audit was made in accordance with generally accepted auditing standards in effect at the time and provides a reasonable basis for such opinion, and (C) said financial statements have been prepared in accordance with GAAP;
(b) After request by the Agent therefor, simultaneously with the delivery of the certified statements required by clause (a) above, copies of a statement of the Borrower's auditors (i) confirming the computations by the Borrower (which computations shall accompany such statement and shall be in reasonable detail) with respect to the Borrower's compliance with Sections 7.11, 7.12, 7.13, and 7.14, and (ii) stating that, in making the examination necessary for their audit of the financial statements of the Borrower for such fiscal year, nothing came to their attention that caused them to believe that any Default or an Event of Default existed on the date of such statements;
(c) As soon as available, and in any event within 60 days after the
end of each of the first three fiscal quarters of each fiscal year, a copy of
(x) the Borrower's 10-Q in
respect of such fiscal quarter, and (y) (i) the Borrower's Consolidated Balance Sheet as of the end of such quarter, and (ii) the related Consolidated Statements of Income Shareholders' Equity and Cash Flows for (A) such quarter, and (B) the period from the beginning of the then current fiscal year to the end of such quarter, in each case in comparable form with the prior fiscal year, all in reasonable detail and prepared in accordance with GAAP (without footnotes and subject to year-end audit adjustments);
(d) Simultaneously with the delivery of the financial statements required by clauses (a) and (c) above, a certificate of the chief financial officer of the Borrower certifying that no Default or Event of Default shall have occurred or be continuing or, if so, specifying in such certificate all such Defaults and Events of Default, and setting forth computations in reasonable detail demonstrating compliance with Sections 7.11, 7.12, 7.13, and 7.14;
(e) As soon as practicable after the filing thereof but in any case no later than 105 days after the close of each fiscal year of the Borrower and 60 days after the close of each fiscal quarter of the Borrower, copies of each annual and quarterly statutory statement filed by the Borrower or any Insurance Subsidiary with the California Department of Insurance or any other Governmental Authority;
(f) Promptly upon receipt thereof, copies of any audit reports and
management letters delivered in connection with the statements referred to in
Section 7.1(a); and
(g) From time to time, such other information regarding the financial position or business of the Borrower and the Subsidiaries, as either Agent, at the request of any Lender, may reasonably request.
7.2. Certificates; Other Information
Furnish to the Agent and each Lender:
(a) Prompt written notice if: (i) the Borrower becomes aware that any Indebtedness of the Borrower or any of its Subsidiaries is declared or shall become due and payable prior to its stated maturity, or is called and not paid when due, (ii) the Borrower becomes aware that a default shall have occurred under any note (other than the Notes), or the holder of any such note, or other evidence of Indebtedness, certificate or security evidencing any such Indebtedness or any obligee with respect to any other Indebtedness of the Borrower or any of its Subsidiaries has the right to declare any such Indebtedness due and payable prior to its stated maturity, or (iii) the Borrower becomes aware that there shall occur and be continuing a Default or an Event of Default or a Material Adverse Change;
(b) Promptly following the Borrower becoming aware of the same, written notice of: (i) any citation, summons, subpoena, order to show cause or other document naming the Borrower or any of its Subsidiaries a party to any proceeding before any Governmental Authority which could reasonably be expected to have a Material Adverse Effect or which calls into question the validity or enforceability of any of the Loan Documents, and include with such
notice a copy of such citation, summons, subpoena, order to show cause or other
document, (ii) any lapse or other termination of any material license,
Intellectual Property, permit, franchise or other authorization issued to the
Borrower or any of its Subsidiaries by any Person or Governmental Authority, and
(iii) any refusal by any Person or Governmental Authority to renew or extend any
such material license, Intellectual Property, permit, franchise or other
authorization, which lapse, termination, refusal or dispute could reasonably be
expected to have a Material Adverse Effect;
(c) Promptly upon becoming available, copies of all regular or periodic reports (including, without limitation, current reports on Form 8-K) which the Borrower or any Subsidiary may now or hereafter be required to file with or deliver to the SEC, and copies of all material news releases sent to stockholders;
(d) Prompt written notice of any order, notice, claim or proceeding received by, or brought against, the Borrower or any of its Subsidiaries, or with respect to any of the Real Property, under any Environmental Law.
(e) Such other information as the Agent or any Lender shall reasonably request from time to time.
7.3. Legal Existence
Maintain, and cause each of its Subsidiaries so to maintain, its corporate existence, in good standing in the jurisdiction of its in corporation and in each other jurisdiction in which the failure so to do could reasonably be expected to have a Material Adverse Effect.
7.4. Taxes
Pay and discharge when due, and cause each of its Subsidiaries so to do, all Taxes, assessments and governmental charges, license fees and levies upon, or with respect to the Borrower or such Subsidiary and all Taxes upon the income, profits and Property of the Borrower and its Subsidiaries, which if unpaid, could reasonably be expected to have a Material Adverse Effect or become a Lien on the Property of the Borrower or such Subsidiary (other than a Lien described in Section 8.2(i)), unless and to the extent only that such Taxes, assessments, charges, license fees and levies shall be contested in good faith and by appropriate proceedings diligently conducted by the Borrower or such Subsidiary and, provided, that the Borrower shall give the Agent prompt notice of such contest and that such reserve or other appropriate provision as shall be required by the Accountants in accordance with GAAP shall have been made therefor.
7.5. Insurance
Maintain, and cause each of its Subsidiaries to maintain, with financially sound and reputable insurance companies insurance on all its Property in at least such amounts and against at least such risks (but including in any event public liability, property damage, workers' compensation and business interruption coverage) as are usually insured against in the same general area by companies engaged in the same or a similar business; and furnish to the Agent, upon written request, full information as to the insurance carried.
7.6. Payment of Indebtedness and Performance of Obligations
Pay and discharge when due, and cause each of its Subsidiaries to pay and discharge, all lawful Indebtedness, obligations and claims for labor, materials and supplies or otherwise which, if unpaid, might (i) have a Material Adverse Effect, or (ii) become a Lien upon Property of the Borrower or any of its Subsidiaries other than a Permitted Lien, unless and to the extent only that the validity of such Indebtedness, obligation or claim shall be contested in good faith and by appropriate proceedings diligently conducted by the Borrower or such Subsidiary, provided that the Borrower shall give the Agent prompt notice of any such contest and that such reserve or other appropriate provision as shall be required by the Accountants in accordance with GAAP shall have been made therefor.
7.7. Condition of Property
At all times, maintain, protect and keep in good repair, working order and condition (ordinary wear and tear excepted), and cause each of its Subsidiaries so to do, all Property necessary to the operation of the Borrower's or such Subsidiary's business.
7.8. Observance of Legal Requirements
Observe and comply in all respects, and cause each of its Subsidiaries so to do, with all laws, ordinances, orders, judgments, rules, regulations, licenses, certifications, franchises, permits, directions and requirements of all Governmental Authorities, which now or at any time hereafter may be applicable to it, a violation of which could reasonably be expected to have a Material Adverse Effect, except such thereof as shall be contested in good faith and by appropriate proceedings diligently conducted by the Borrower or such Subsidiary, provided that the Borrower shall give the Agent prompt notice of such contest and that such reserve or other appropriate provision as shall be required by the Accountants in accordance with GAAP shall have been made therefor.
7.9. Inspection of Property; Books and Records; Discussions
Keep proper books of record and account in which full, true and correct entries in conformity with GAAP and all requirements of law shall be made of all dealings and transactions in relation to its business and activities and permit representatives of the Agent and any Lender to visit its offices, to inspect any of its Property and examine and make copies or abstracts from any of its books and records at any reasonable time and as often as may reasonably be desired, and to discuss the business, operations, prospects, licenses, Property and financial condition of the Borrower and its Subsidiaries with the officers thereof and the Accountants.
7.10. Authorizations
Maintain and cause each of its Subsidiaries to maintain, in full force and effect, all licenses, copyrights, patents, trademarks, trade names, franchises, permits, applications, reports, and other authorizations and rights, which, if not so maintained, would individually or in the aggregate have a Material Adverse Effect.
7.11. Adjusted Net Worth
As of any date of determination, have Adjusted Net Worth of not less than the sum of (a) $380,000,000, plus (b) 50% of the Consolidated net income (but not less than zero) for each full fiscal quarter ended during the period commencing on January 1, 1995 and ending on such date of determination.
7.12. GAAP Net Worth
As of any date of determination, have GAAP Net Worth of not less than the sum of (a) $330,000,000, plus (b) 50% of the Consolidated net income (but not less than zero) for each full fiscal quarter ended during the period commencing on January 1, 1995 and ending on such date of determination.
7.13. Leverage Ratio
Maintain at all times a Leverage Ratio of not more than 0.25:1.00.
7.14. Interest Coverage Ratio
Maintain at all times an Interest Coverage Ratio greater than 2.50:1.00.
8. NEGATIVE COVENANTS
The Borrower agrees that, so long as this Agreement is in effect, any Loan remains outstanding and unpaid, or any other amount is owing under any Loan Document to any Lender or the Agent, the Borrower shall not, directly or indirectly:
8.1. Indebtedness of Subsidiaries
Permit any Subsidiary of the Borrower to create, incur, assume or suffer to exist any liability for Indebtedness, except (i) Indebtedness existing on the date hereof as set forth on Schedule 8.1, but not any increases in the amount thereof, (ii) Indebtedness secured by Liens
on Real Property acquired by such Subsidiary after the Effective Date and (iii)
Indebtedness (not in excess of $25,000,000 aggregate principal amount at any
time outstanding) secured by Liens permitted under Section 8.2(xi), provided
that after giving effect to any Indebtedness permitted under clauses (ii) and
(iii) above, the Borrower is in compliance with the provisions of Sections 7.13,
7.14 and 8.2(vii).
8.2. Liens
Create, incur, assume or suffer to exist any Lien upon any of its
Property, whether now owned or hereafter acquired, or permit any of its
Subsidiaries so to do, except (i) Liens for Taxes, assessments or similar
charges incurred in the ordinary course of business which are not delinquent or
which are being contested in accordance with Section 7.4, provided that
enforcement of such Liens is stayed pending such contest, (ii) Liens in
connection with workers' compensation, unemployment insurance or other social
security obligations (but not ERISA), (iii) deposits or pledges to secure bids,
tenders, contracts (other than con tracts for the payment of money), leases,
statutory obligations, surety and appeal bonds and other obligations of like
nature arising in the ordinary course of business, (iv) zoning ordinances,
easements, rights of way, minor defects, irregularities, and other similar
restrictions affecting real Property which do not materially adversely affect
the value of such real Property or the financial condition of the Borrower or
such Subsidiary or impair its use for the operation of the business of the
Borrower or such Subsidiary, (v) Liens arising by operation of law such as
mechanics', materialmen's, carriers', warehousemen's liens incurred in the
ordinary course of business which are not delinquent or which are being
contested in accordance with Section 7.6, provided that enforcement of such
Liens is stayed pending such contest, (vi) Liens arising out of judgments or
decrees aggregating $5,000,000 or less in existence less than 30 days after the
entry thereof or which are being contested in accordance with Section 7.6,
provided that enforcement of such Liens is stayed pending such contest or the
payment of which is covered by insurance as to which the carrier has
acknowledged liability in writing, (vii) Liens on Real Property of any
Subsidiary of the Borrower acquired after the Effective Date to secure
Indebtedness permitted by Section 8.1(ii), incurred in connection with the
acquisition of such Property, provided that each such Lien is limited to such
Property so acquired, (viii) Liens on Property of the Borrower and its
Subsidiaries existing on the Effective Date as set forth on Schedule 8.2 as
renewed from time to time, but not any increases in the amounts secured thereby,
(ix) purchase money security interests in personal property, provided that each
such Lien is limited to such Property so purchased, (x) banker's liens arising
in the ordinary course of business and (xi) Liens on real property owned by
Subsidiaries of the Borrower securing Indebtedness permitted under Section
8.1(iii), provided that such Liens are limited to the real property so owned.
8.3. Mergers, Acquisitions and Dispositions
Consolidate or merge into or with any Person, or make any Acquisition
or Disposition, or enter into any binding agreement to do any of the foregoing
which is not contingent on obtaining the consent of the Required Lenders, or
permit any Subsidiary of the Borrower to do any of the foregoing, except that
(a) a Subsidiary of the Borrower may consolidate and merge with another wholly-
owned Subsidiary of the Borrower, if (i) immediately before and after giving
effect thereto no Default or Event of Default shall or would exist and (ii) any
such consolidation or merger would not cause any Applicable Insurance Regulatory
Authority to restrict the ability of any Insurance Subsidiary to pay dividends
or
otherwise made distributions to the Borrower or any of its Subsidiaries in any manner, and (b) the Borrower may make Acquisitions and Dispositions, if (i) the aggregate consolidated amount of any Capital Stock or Property so acquired in any calendar year (determined on the basis of the fair market value of any Capital Stock or Property acquired), or the aggregate Consolidated amount of any assets sold, leased or otherwise disposed of in any calendar year (determined on the basis of the fair market value of any assets so sold, leased or disposed of) would not exceed 15% of the Borrower's Consolidated Statutory Capital and Surplus as of the end of the immediately preceding calendar year, (ii) an Event of Default would not exist before or after giving effect thereto and (iii) any such Acquisition or Disposition would not cause any Applicable Insurance Regulatory Authority to restrict the ability of any Insurance Subsidiary to pay dividends or otherwise make distributions to the Borrower or any of its Subsidiaries in any manner, provided, however, that the foregoing shall not limit Dispositions of investment securities as part of the management of a securities portfolio of the Borrower or any of its Subsidiaries.
8.4. Line of Business
Engage, or permit any Subsidiary of the Borrower to engage, in any material respect in any business other than a business in which the Borrower or any Subsidiary is engaged in on the Effective Date and any other business reasonably related thereto.
8.5. Articles of Incorporation and By-laws
Amend or otherwise modify its Articles of Incorporation or By-Laws in any way which would adversely affect the interests of the Agent and the Lenders under any of the Loan Documents, or permit any of its Subsidiaries so to do.
8.6. Fiscal Year
Change its fiscal year from that in effect on the Effective Date, or permit any of its Subsidiaries so to do.
8.7. Transactions with Affiliates
Become, or permit any Subsidiary to become, a party to any transaction with any Affiliate of the Borrower on a basis less favorable to the Borrower or such Subsidiary in any material respect than if such transaction were not with an Affiliate of the Borrower other than (A) advances made to employees of the Borrower or any Subsidiary in the ordinary course of business in connection with their employment, (B) transactions in which the aggregate rental value, remuneration or other consideration (including the value of a loan) together with the aggregate rental value, remuneration or other consideration (including the value of a loan) of
all such other transactions consummated in the year during which such transaction is proposed to be consummated, does not exceed $5,000,000, (C) management or similar agreements entered among the Borrower and any Subsidiaries in the ordinary course of business, (D) transactions effected pursuant to the agreement, date October 7, 1985, by and among the Borrower, George Joseph and Gloria Joseph with respect to the ownership by George Joseph and Gloria Joseph of the Borrower's Common Stock, (E) payments to officers or directors of the Borrower or any Subsidiaries in the ordinary course of their employment, (F) dividends otherwise permitted by this Agreement or (G) the provision by the Borrower to its Subsidiaries of funds as contemplated by Section 2.16.
8.8. Issuance of Additional Stock by Subsidiaries
Permit any of its Subsidiaries to issue, directly or indirectly, any additional Stock or other equity interests of such Subsidiary, other than to the Borrower or to a wholly-owned Subsidiary of the Borrower.
8.9. Reinsurance Agreements
Permit any Insurance Subsidiary to enter into a treaty to cede any of its obligations to any reinsurer that could reasonably be expected to have a Material Adverse Effect.
8.10. Adoption of Pension Plans
Adopt a Pension Plan, or permit any Subsidiary so to do, unless this Agreement is amended, in form and substance satisfactory to the Required Lenders, to insert the customary provisions with respect thereto.
9. DEFAULT
9.1. Events of Default
The following shall each constitute an "Event of Default" hereunder:
(a) The failure of the Borrower to pay any installment of principal on any Note on the date when due and payable; or
(b) The failure of the Borrower to pay any installment of interest or any other fees or expenses payable under any Loan Document or otherwise to the Agent with respect to the loan facilities established hereunder within three Business Days after the date when due and payable; or
(c) The use of the proceeds of any Loan in a manner inconsistent with or in violation of Section 2.16; or
(d) The failure of the Borrower to observe or perform any covenant or agreement contained in Sections 7.11, 7.12, 7.13, 7.14 or Section 8; or
(e) The failure to observe or perform any other term, covenant, or agreement contained in any Loan Document and such failure shall have continued unremedied for a period of 30 days after the earlier of the Borrower becoming aware of such failure and the receipt by the Borrower of notice of such failure from the Agent; or
(f) Any representation or warranty made in any Loan Document or in any certificate, report, opinion (other than an opinion of counsel) or other document delivered or to be delivered pursuant thereto, shall prove to have been incorrect or misleading (whether be cause of misstatement or omission) in any material respect when made; or
(g) Obligations of the Borrower (other than its obligations under the Notes) or any of its Subsidiaries, whether as principal, guarantor, surety or other obligor, for the payment of any Indebtedness or operating leases in excess of $5,000,000 in the aggregate (i) shall become or shall be declared to be due and payable prior to the expressed maturity thereof, or (ii) shall not be paid when due or within any grace period for the payment thereof, or (iii) any holder of any such obligation shall have the right to declare such obligation due and pay able prior to the expressed maturity thereof; or
(h) The Borrower or any of its Subsidiaries shall (i) suspend or
discontinue its business, (ii) make an assignment for the benefit of creditors,
(iii) generally not be paying its debts as such debts become due, (iv) admit in
writing its inability to pay its debts as they become due, (v) file a voluntary
petition in bankruptcy, (vi) become insolvent (however such insolvency shall be
evidenced), (vii) file any petition or answer seeking for itself any
reorganization, arrangement, composition, readjustment of debt, liquidation or
dissolution or similar relief under any present or future statute, law or
regulation of any jurisdiction, (viii) petition or apply to any tribunal for any
receiver, custodian or any trustee for any substantial part of its Property,
(ix) be the subject of any such proceeding filed against it which remains
undismissed for a period of 45 days, (x) file any answer admitting or not
contesting the material allegations of any such petition filed against it or any
order, judgment or decree approving such petition in any such proceeding, (xi)
seek, approve, consent to, or acquiesce in any such proceeding, or in the
appointment of any trustee, receiver, sequestrator, custodian, liquidator, or
fiscal agent for it, or any substantial part of its Property, or an order is
entered appointing any such trustee, receiver, sequestrator, custodian,
liquidator or fiscal agent and such order remains in effect for 45 days, (xii)
any conservatorship or similar proceeding is commenced by or on behalf of the
California Department of Insurance in respect of the Borrower or any Subsidiary
or (xiii) take any formal action for the purpose of effecting any of the
foregoing or looking to the liquidation or dissolution of the Borrower or such
Subsidiary; or
(i) An order for relief is entered under the United States bankruptcy laws or any other decree or order is entered by a court having jurisdiction (i) adjudging the Borrower or any of its Subsidiaries bankrupt or insolvent, (ii) approving as properly filed a petition
seeking reorganization, liquidation, arrangement, adjustment or composition of or in respect of the Borrower or any of its Subsidiaries under the United States bankruptcy laws or any other applicable Federal or state law, (iii) appointing a receiver, liquidator, assignee, trustee, custodian, sequestrator (or other similar official) of the Borrower or any of its Subsidiaries or of any substantial part of the Property thereof, or (iv) ordering the winding up or liquidation of the affairs of the Borrower or any of its Subsidiaries, and any such decree or order continues unstayed and in effect for a period of 45 days; or
(j) Judgments or decrees against the Borrower or any of its Subsidiaries aggregating in excess of $5,000,000 shall remain unpaid, unstayed, undischarged, unbonded and undismissed for a period of 30 days unless the payment thereof is covered in full by insurance as to which the carrier has acknowledged liability in writing; or
(k) After the Effective Date (1) Any Person (other than George Joseph
or Gloria Joseph), acting alone or with a group of Persons acting in concert,
(i) shall have or acquire beneficial ownership of securities (or options
therefor) having 20% or more of the ordinary voting power of the Borrower, or
(ii) shall possess, directly or indirectly, the power to direct or cause the
direction of the management and policies of the Borrower, whether through the
ownership of voting securities, by contract or otherwise, or (2) directors of
the Borrower constituting that percentage necessary to approve corporate action
shall not have been directors on the date hereof or directors designated or
approved by directors on the date hereof; or
(l) Any license, franchise, permit, right, approval or agreement of the Borrower or any Subsidiary to own or operate any Operating Entity owned or operated by the Borrower or such Subsidiary (i) is not renewed, or is suspended or revoked and (ii) the non-renewal, suspension or revocation thereof would have a Material Adverse Effect; or
(m) Any Loan Document shall cease, for any reason, to be in full force and effect or the Borrower shall so assert in writing or shall disavow any of its obligations thereunder.
Upon the occurrence of an Event of Default or at any time thereafter during the continuance thereof, (a) if such event is an Event of Default specified in clause (h) or (i) above, the Aggregate Commitments shall immediately and automatically terminate and the Loans, all accrued and unpaid interest thereon and all other amounts owing under the Loan Documents shall immediately become due and payable and the Agent may, and, upon the direction of the Required Lenders shall, exercise any and all remedies and other rights provided in the Loan Documents, and (b) if such event is any other Event of Default, any or all of the following actions may be taken: (i) with the consent of the Required Lenders, the Agent may, and upon the direction of the Required Lenders shall, by notice to the Borrower, declare the Aggregate Commitments to be terminated forthwith, whereupon the Aggregate Commitments shall immediately terminate, and (ii) with the consent of the Required Lenders, the Agent may, and upon the direction of the Required Lenders shall, by notice of default to the Borrower, declare the Loans, all accrued and unpaid interest thereon, and all other amounts owing under the Loan Documents to be due and payable forthwith, whereupon the same shall immediately become due and payable, and the Agent may, and upon the direction of the Required Lenders shall, exercise
any and all remedies and other rights provided pursuant to the Loan Documents. Except as otherwise provided in this Section, presentment, demand, protest and all other notices of any kind are hereby expressly waived. To the fullest extent not prohibited by applicable law, the Borrower hereby further expressly waives and covenants not to assert any appraisement, valuation, stay, extension, redemption or similar laws, now or at any time hereafter in force which might delay, prevent or otherwise impede the performance or enforcement of any Loan Document.
In the event that the Aggregate Commitments shall have been terminated
or the Notes shall have been declared due and payable pursuant to the provisions
of this Section, any funds received by the Agent and the Lenders from or on
behalf of the Borrower shall be applied by the Agent and the Lenders in
liquidation of the Loans and the obligations of the Borrower under the Loan
Documents in the following manner and order: (i) first, to the payment of
interest on, and then the principal portion of, any Loans which the Agent may
have advanced on behalf of any Lender for which the Agent has not then been
reimbursed by such Lender or the Borrower; (ii) second, to the payment of any
fees or expenses due the Agent from the Borrower, (iii) third, to reimburse the
Agent and the Lenders for any expenses (to the extent not paid pursuant to
clause (ii) above) due from the Borrower pursuant to the provisions of Section
11.5; (iv) fourth, to the payment of accrued Commitment Fees and all other fees,
expenses and amounts due under the Loan Documents (other than principal and
interest on the Notes); (v) fifth, to the payment of interest due on the Notes;
(vi) sixth, to the payment of principal out standing on the Notes; and (vii)
seventh, to the payment of any other amounts owing to the Agent and the Lenders
under any Loan Document.
10. THE AGENT
10.1. Appointment
Each Lender hereby irrevocably designates and appoints BNY as the Agent of such Lender under the Loan Documents and each such Lender hereby irrevocably authorizes BNY, as the Agent for such Lender, to take such action on its behalf under the provisions of the Loan Documents and to exercise such powers and perform such duties as are expressly delegated to the Agent by the terms of the Loan Documents, together with such other powers as are reasonably incidental thereto. Notwithstanding any provision to the contrary elsewhere in any Loan Document, the Agent shall not have any duties or responsibilities other than those expressly set forth therein, or any fiduciary relationship with any Lender, and no implied covenants, functions, responsibilities, duties, obligations or liabilities shall be read into the Loan Documents or otherwise exist against the Agent.
10.2. Delegation of Duties
The Agent may execute any of its duties under the Loan Documents by or through agents or attorneys-in-fact and shall be entitled to rely upon the advice of counsel concerning all matters pertaining to such duties.
10.3. Exculpatory Provisions
Neither the Agent nor any of its officers, directors, employees, agents, attorneys-in-fact or affiliates shall be (i) liable for any action lawfully taken or omitted to be taken by it or such Person under or in connection with the Loan Documents (except the Agent for its own gross negligence or willful misconduct), or (ii) responsible in any manner to any of the Lenders for any recitals, statements, representations or warranties made by the Borrower or any officer thereof contained in the Loan Documents or in any certificate, report, statement or other document referred to or provided for in, or received by the Agent under or in connection with, the Loan Documents or for the value, validity, effectiveness, genuineness, perfection, enforce ability or sufficiency of any of the Loan Documents or for any failure of the Borrower or any other Person to perform its obligations thereunder. The Agent shall not be under any obligation to any Lender to ascertain or to inquire as to the observance or performance of any of the agreements contained in, or conditions of, the Loan Documents, or to inspect the properties, books or records of the Borrower. The Agent shall not be under any liability or responsibility whatsoever, as Agent, to the Borrower or any other Person as a consequence of any failure or delay in performance, or any breach, by any Lender of any of its obligations under any of the Loan Documents.
10.4. Reliance by Agent
The Agent shall be entitled to rely, and shall be fully protected in relying, upon any writing, resolution, notice, consent, certificate, affidavit, opinion, letter, cablegram, telegram, fax, telex or teletype message, statement, order or other document or conversation believed by it to be genuine and correct and to have been signed, sent or made by the proper Person or Persons and upon advice and statements of legal counsel (including, without limitation, counsel to the Borrower), in dependent accountants and other experts selected by the Agent. The Agent may treat each Lender, or the Person designated in the last notice filed with it under this Section, as the holder of all of the interests of such Lender in its Loans and in its Note until written notice of transfer, signed by such Lender (or the Person designated in the last notice filed with the Agent) and by the Person designated in such written notice of transfer, in form and substance satisfactory to the Agent, shall have been filed with the Agent. The Agent shall not be under any duty to examine or pass upon the validity, effectiveness, enforceability, perfection or genuineness of the Loan Documents or any instrument, document or communication furnished pursuant thereto or in connection therewith, and the Agent shall be entitled to assume that the same are valid, effective and genuine, have been signed or sent by the proper parties and are what they purport to be. The Agent shall be fully justified in failing or refusing to take any action under the Loan Documents unless it shall first receive such advice or concurrence of the Required Lenders as it deems appropriate. The Agent shall in all cases be fully protected in acting, or in refraining from acting, under the Loan Documents in accordance with a request or direction of the Required Lenders, and such request or direction and any action taken or failure to act pursuant thereto shall be binding upon all the Lenders and all future holders of the Notes.
10.5. Notice of Default
The Agent shall not be deemed to have knowledge or notice of the occurrence of any Default or Event of Default unless the Agent has received written notice thereof from a Lender or the Borrower. In the event that the Agent receives such a notice, the Agent shall promptly give notice thereof to the Lenders and the Borrower. The Agent shall take such action with respect to such Default or Event of Default as shall be directed by the Required Lenders, provided, however, that unless and until the Agent shall have received such directions, the Agent may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to such Default or Event of Default as it shall deem to be in the best interests of the Lenders.
10.6. Non-Reliance on Agent and Other Lenders
Each Lender expressly acknowledges that neither the Agent nor any of its respective officers, directors, employees, agents, attorneys-in-fact or affiliates has made any representations or warranties to it and that no act by the Agent hereinafter, including any review of the affairs of the Borrower, shall be deemed to constitute any representation or warranty by the Agent to any Lender. Each Lender represents to the Agent that it has, independently and without reliance upon the Agent or any other Lender, and based on such documents and information as it has deemed appropriate, made its own evaluation of and investigation into the business, operations, Property, financial and other condition and creditworthiness of the Borrower and made its own decision to enter into this Agreement. Each Lender also represents that it will, independently and without reliance upon the Agent or any other Lender, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit analysis, evaluations and decisions in taking or not taking action under any Loan Document, and to make such investigation as it deems necessary to inform itself as to the business, operations, Property, financial and other condition and creditworthiness of the Borrower. Except for notices, reports and other documents expressly required to be furnished to the Lenders by the Agent hereunder, the Agent shall not have any duty or responsibility to provide any Lender with any credit or other information concerning the business, operations, Property, financial and other condition or creditworthiness of the Borrower which may come into the possession of the Agent or any of its officers, directors, employees, agents, attorneys-in-fact or affiliates.
10.7. Indemnification
Each Lender agrees to indemnify and reimburse the Agent in its capacity as such (to the extent not promptly reimbursed by the Borrower and without limiting the obligation of the Borrower to do so), pro rata according to the outstanding principal balance of the Loans (or at any time when no Loans are outstanding, according to its Commitment Percentage), from
and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind whatsoever including, without limitation, any amounts paid to the Lenders (through the Agent) by the Borrower pursuant to the terms of the Loan Documents, that are subsequently rescinded or avoided, or must otherwise be restored or returned) which may at any time (including, without limitation, at any time following the payment of the Notes) be imposed on, incurred by or asserted against the Agent in any way relating to or arising out of the Loan Documents or any other documents contemplated by or referred to therein or the transactions contemplated thereby or any action taken or omitted to be taken by the Agent under or in connection with any of the foregoing; provided, however, that no Lender shall be liable for the payment of any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements to the extent resulting solely from the finally adjudicated gross negligence or willful misconduct of the Agent. Without limitation of the foregoing, each Lender agrees to reimburse the Agent promptly upon demand for its pro rata share of any unpaid fees owing to the Agent, and any costs and expenses (including, without limitation, reasonable fees and expenses of counsel) payable by the Borrower under Section 11.5, to the extent that the Agent has not been paid such fees or has not be reimbursed for such costs and expenses by the Borrower. The failure of any Lender to reimburse the Agent promptly upon demand for its pro rata share of any amount required to be by the Lenders to the Agent as provided in this Section shall not relieve any other Lender of its obligation hereunder to reimburse the Agent for its pro rata share of such amount, but no Lender shall be responsible for the failure of other Lender to reimburse the Agent for such other Lender's pro rata share of such amount. The agreements in this Section shall survive the payment of all amounts payable under the Loan Documents.
10.8. Agent in Its Individual Capacity
BNY and its respective affiliates may make loans to, accept deposits from, issue letters of credit for the account of, and generally engage in any kind of business with, the Borrower as though BNY were not Agent hereunder. With respect to the Commitment made or renewed by BNY and the Notes issued to BNY, BNY shall have the same rights and powers under the Loan Documents as any Lender and may exercise the same as though it were not the Agent, and the terms "Lender" and "Lenders" shall in each case include BNY.
10.9. Successor Agent
If at any time the Agent deems it advisable, in its sole discretion, it may submit to each of the Lenders a written notice of its resignation as Agent under the Loan Documents, such resignation to be effective upon the earlier of (i) the written acceptance of the duties of the Agent under the Loan Documents by a successor Agent and (ii) on the 30th day after the date of such notice. Upon any such resignation, the Required Lenders shall have the right to appoint from among the Lenders a successor Agent. If no successor Agent shall have been so appointed by the Required Lenders and accepted such appointment in writing within 30 days after the retiring Agent's giving of notice of resignation, then the retiring Agent may, on behalf of the Lenders, appoint a successor Agent, which successor Agent shall be a commercial bank organized under the laws of the United States of America or any State thereof and having a combined capital, surplus, and undivided profits of at least $100,000,000. Upon the acceptance of any appointment as Agent hereunder by a successor Agent, such successor Agent shall
thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring Agent, and the retiring Agent's rights, powers, privileges and duties as Agent under the Loan Documents shall be terminated. The Borrower and the Lenders shall execute such documents as shall be necessary to effect such appointment. After any retiring Agent's resignation as Agent, the provisions of the Loan Documents shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Agent under the Loan Documents. If at any time there shall not be a duly appointed and acting Agent, the Borrower agrees to make each payment due under the Loan Documents directly to the Lenders entitled thereto during such time.
11. OTHER PROVISIONS
11.1. Amendments and Waivers
With the written consent of the Required Lenders, the Agent and the Borrower may, from time to time, enter into written amendments, supplements or modifications of the Loan Documents and, with the consent of the Required Lenders, the Agent on behalf of the Lenders may execute and deliver to any such parties a written instrument waiving or a consent to a departure from, on such terms and conditions as the Agent may specify in such instrument, any of the requirements of the Loan Documents or any Default or Event of Default and its consequences; provided, however, that:
(a) no such amendment, supplement, modification, waiver or consent shall, without the consent of all of the Lenders, (i) increase the Commitments of any Lender or the Aggregate Commitments, (ii) extend the Maturity Date; (iii) decrease the rate, or extend the time of payment, of interest of, or change or forgive the principal amount of, or change the pro rata allocation of payments under, any Note or change or forgive the payment of any fees, (iv) change the provisions of Sections 2.11, 2.12, 2.13, 2.14, 2.15, 5, 6, 11.1 or 11.6(a), or release any security interest or collateral, except to the extent that such release is specifically provided for in any Loan Document, or release any guarantor under any guarantee or (v) change the definition of Required Lenders; and
(b) without the written consent of the Agent, no such amendment,
supplement, modification or waiver shall amend, modify or waive any provision of
Section 10 or otherwise change any of the rights or obligations of the Agent
hereunder or under the Loan Documents.
Any such amendment, supplement, modification or waiver shall apply equally to each of the Lenders and shall be binding upon the parties to the applicable Loan Document, the Lenders, the Agent and all future holders of the Notes. In the case of any waiver, the parties
to the applicable Loan Document, the Lenders and the Agent shall be restored to their former position and rights hereunder and under the outstanding Notes and other Loan Documents to the extent provided for in such waiver, and any Default or Event of Default waived shall not extend to any subsequent or other Default or Event of Default, or impair any right consequent thereon. The Loan Documents may not be amended orally or by any course of conduct.
11.2. Notices
All notices, requests and demands to or upon the respective parties to the Loan Documents to be effective shall be in writing and, unless otherwise expressly provided therein, shall be deemed to have been duly given or made when delivered by hand, or when deposited in the mail, first-class postage prepaid, or, in the case of notice by fax, when sent, addressed as follows in the case of the Borrower or the Agent, at the Domestic Lending Office, in the case of each Lender, or to such other addresses as to which the Agent may be hereafter notified by the respective parties thereto or any future holders of the Notes:
The Borrower:
Mercury General Corporation
4484 Wilshire Boulevard
Los Angeles, California 90010
Attention: Keith L. Parker,
Chief Financial/Investment Officer
Telephone: (213) 935-3793
Fax: (213) 857-7116
with a copy to: Donna Moore, Controller, at the same address.
The Agent:
The Bank of New York
One Wall Street
Agency Function Administration
18th Floor
New York, New York 10286
Attention: Frances Ryan
Telephone: (212) 635-4698
Fax: (212) 635-6365 or 6366 or 6367
with a copy to:
The Bank of New York
One Wall Street
17th Floor
New York, New York 10286
Attention: Christine M. Herrick,
Vice President
Telephone: (212) 635-7853
Fax: (212) 809-9520,
except that any notice, request or demand by the Borrower to or upon the Agent or the Lenders pursuant to Sections 2.3 or 2.6 shall not be effective until received. Any party to a Loan Document may rely on signatures of the parties thereto which are transmitted by fax or other electronic means as fully as if originally signed.
11.3. No Waiver; Cumulative Remedies
No failure to exercise and no delay in exercising, on the part of the Agent or any Lender, any right, remedy, power or privilege under any Loan Document shall operate as a waiver thereof; nor shall any single or partial exercise of any right, remedy, power or privilege under any Loan Document preclude any other or further exercise thereof or the exercise of any other right, remedy, power or privilege. The rights, remedies, powers and privileges under the Loan Documents are cumulative and not exclusive of any rights, remedies, powers and privileges provided by law.
11.4. Survival of Representations and Warranties
All representations and warranties made under the Loan Documents and in any document, certificate or statement delivered pursuant thereto or in connection therewith shall survive the execution and delivery of the Loan Documents.
11.5. Payment of Expenses and Taxes
The Borrower agrees, promptly upon presentation of a statement or invoice therefor, and whether any Loan is made (i) to pay or reimburse the Agent for all its out-of-pocket costs and expenses reasonably incurred in connection with the development, preparation and execution of, the Loan Documents and the syndication thereof and any amendment, supplement or modification thereto (whether or not executed), any documents prepared in connection therewith and the consummation of the transactions contemplated thereby, including, without limitation, the reasonable fees and disbursements of Special Counsel, (ii) to pay or reimburse the Agent and the Lenders for all of their respective costs and expenses, including, without limitation, reasonable fees and disbursements of counsel, reasonably incurred in connection with (A) any Default or Event of Default and any enforcement or collection proceedings resulting therefrom or in connection with the negotiation of any restructuring or "work-out" (whether consummated or not) of the obigations of the Borrower under any of the Loan Documents, (B) the enforcement of this Section and (C) any appraisal required in connection with any real Property at any time in the future taken as collateral security for any
obligations under the Loan Documents, (iii) to pay, indemnify, and hold each Lender and the Agent harmless from and against, any and all recording and filing fees and any and all liabilities with respect to, or resulting from any delay in paying, stamp, excise and other similar taxes, if any, which may be payable or determined to be pay able in connection with the execution and delivery of, or consummation of any of the transactions contemplated by, or any amendment, supplement or modification of, or any waiver or consent under or in respect of, the Loan Documents and any such other documents, and (iv) to pay, indemnify and hold each Lender and the Agent and each of their respective officers, directors and employees harmless from and against any and all other liabilities, obligations, claims, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever (including, without limitation, reasonable counsel fees and disbursements) with respect to the enforcement and performance of the Loan Documents, the use of the proceeds of the Loans and the enforcement and performance of the provisions of any subordination agreement in favor of the Agent and the Lenders (all the foregoing, collectively, the "indemnified liabilities") and, if and to the extent that the foregoing indemnity may be unenforceable for any reason, the Borrower agrees to make the maximum payment permitted or not prohibited under applicable law; provided, however, that the Borrower shall have no obligation hereunder to pay indemnified liabilities to the Agent or any Lender arising from the finally adjudicated gross negligence or willful misconduct of the Agent or such Lender or claims between one indemnified party and another indemnified party. The agreements in this Section shall survive the termination of the Aggregate Commitments and the payment of all amounts payable under the Loan Documents.
11.6. Assignments and Participations
(a) The Loan Documents shall be binding upon and inure to the benefit of the Borrower, the Lenders, the Agent, all future holders of the Notes and their respective successors and assigns, except that the Borrower may not assign, delegate or transfer any of its rights or obligations under the Loan Documents without the prior written consent of the Agent and each Lender.
(b) Each Lender shall have the right at any time, upon written notice to the Agent of its intent to do so, to sell, assign, transfer or negotiate all or any part of such Lender's rights and obligations under the Loan Documents to one or more of its affiliates, to one or more of the other Lenders (or to affiliates of such other Lenders) or, with the prior written consent of the Borrower (which consent shall not be unreasonably withheld or delayed and shall not be required upon the occurrence and during the continuance of an Event of Default), to sell, assign, transfer or negotiate all or any part of such Lender's rights and obligations under the Loan Documents to any other bank, insurance company, pension fund, mutual fund or other financial institution, provided that (i) each such sale, assignment, transfer or negotiation (other than sales, assignments, transfers or negotiations (x) to affiliates of such Lender or (y) of a Lender's entire interest) shall be in a minimum amount of $5,000,000 and (ii) there shall be paid to the Agent by the assigning Lender a fee (the "Assignment Fee") of $3,000, and provided, further, that any sale, assignment, transfer or negotiation by the Agent in its capacity as a Lender (other than to affiliates of such Lender) shall not result in such Lender (or any successor or affiliates thereof) retaining less than 30% of the Aggregate Commitments or Loans or in the total number of Lenders exceeding five. For each assignment, the parties to such assignment shall execute and deliver to the Agent for its acceptance and recording an
Assignment and Acceptance Agreement. Upon such execution, delivery, acceptance and recording by the Agent, from and after the effective date specified in such Assignment and Acceptance Agreement, the assignee thereunder shall be a party hereto and, to the extent provided in such Assignment and Acceptance Agreement, the assignor Lender thereunder shall be released from its obligations under the Loan Documents. Subject to Borrower's right to consent or not to consent to such an assignment as set forth above, the Borrower agrees upon written request of the Agent and at the Borrower's expense to execute and deliver (1) to such assignee, Notes, dated the effective date of such Assignment and Acceptance Agreement, in an aggregate principal amount equal to the Loans assigned to, and Commitments assumed by, such assignee and (2) to such assignor Lender, Notes, dated the effective date of such Assignment and Acceptance Agreement, in an aggregate principal amount equal to the balance of such assignor Lender's Loans and Commitments, if any, and each assignor Lender shall cancel and return to the Borrower its existing Notes. Upon any such sale, assignment or other transfer, the Commitments and the Commitment Percentages set forth in Exhibit A shall be adjusted accordingly by the Agent and a new Exhibit A shall be distributed by the Agent to the Borrower and each Lender.
(c) Each Lender may grant participations in all or any part of its Loans, its Note and its Commitment to one or more banks, insurance companies, financial institutions, pension funds or mutual funds, provided that (i) such Lender's obligations under the Loan Documents shall remain unchanged, (ii) such Lender shall remain solely responsible to the other parties to the Loan Documents for the performance of such obligations, (iii) the Borrower, the Agent and the other Lenders shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under the Loan Documents, (iv) such Lender shall continue at all times to hold at least a 50% beneficial interest in its Loans, its Note and its Commitment (unless such participations are granted to affiliates of such Lender or to other Lenders or affiliates of such other Lenders), (v) no sub-participations shall be permitted and (vi) the voting rights of any holder of any participation shall be limited to decisions that only do any of the following: (A) subject the participant to any additional obligation, (B) reduce the principal of, or interest on the Notes or any fees or other amounts payable hereunder, (C) postpone any date fixed for the payment of principal of, or interest on the Notes or any fees or other amounts payable hereunder, (D) release any security interest or collateral, except to the extent that such release is specifically provided for in any Loan Document or (E) release any guarantor under any guarantee. The Borrower acknowledges and agrees that any such participant shall for purposes of Sections 2.9, 2.11, 2.12 and 2.15 be deemed to be a "Lender"; provided, however, the Borrower shall not, at any time, be obligated to pay any participant in any interest of any Lender hereunder any sum in excess of the sum which the Borrower would have been obligated to pay to such Lender in respect of such interest had such Lender not sold such participation.
(d) If any (i) assignment is made pursuant to subsection (b) above or (ii) any
participation is granted pursuant to subsection (c) above, shall be made to any
Person that is not a U.S. Person, such Person shall furnish such certificates,
documents or other evidence to the Borrower and the Agent, in the case of clause
(i) and to the Borrower and the Lender which sold such participation in the case
of clause (ii), as shall be required by Section 2.9(c).
(e) No Lender shall, as between and among the Borrower, the Agent and such Lender, be relieved of any of its obligations under the Loan Documents as a result of any sale, assignment, transfer or negotiation of, or granting of participations in, all or any part of its Loans, its Commitment or its Note, except that a Lender shall be relieved of its obligations to the extent of any such sale, assignment, transfer, or negotiation of all or any part of its Loans, its Commitment or its Note pursuant to subsection (b) above.
(f) Notwithstanding anything to the contrary contained in this Section, any Lender may at any time or from time to time assign all or any portion of its rights under the Loan Documents to a Federal Reserve Bank, provided that any such assignment shall not release such assignor from its obligations thereunder.
11.7. Counterparts
Each Loan Document (other than the Notes) may be executed by one or more of the parties thereto on any number of separate counterparts and all of said counterparts taken together shall be deemed to constitute one and the same document. It shall not be necessary in making proof of any Loan Document to produce or account for more than one counterpart signed by the party to be charged. A counterpart of any Loan Document or to any document evidencing, and of any an amendment, modification, consent or waiver to or of any Loan Document transmitted by fax shall be deemed to be an originally executed counterpart. A set of the copies of the Loan Documents signed by all the parties thereto shall be deposited with each of the Borrower and the Agent. Any party to a Loan Document may rely upon the signatures of any other party thereto which are transmitted by fax or other electronic means to the same extent as if originally signed.
11.8. Adjustments; Set-off
(a) If any Lender (a "Benefited Lender") shall at any time receive any
payment of all or any part of its Loans, or interest thereon, or receive any
collateral in respect thereof (whether voluntarily or in voluntarily, by set-
off, pursuant to events or proceedings of the nature referred to in Section 9.1
(h) or (i), or otherwise) in a greater proportion than any such payment to and
collateral received by any other Lender in respect of such other Lender's Loans,
or interest thereon, such Benefited Lender shall purchase for cash from each of
the other Lenders such portion of each such other Lender's Loans, and shall
provide each of such other Lenders with the benefits of any such collateral, or
the proceeds thereof, as shall be necessary to cause such Benefited Lender to
share the excess payment or benefits of such collateral or proceeds ratably with
each of the Lenders, provided, however, that if all or any portion of such
excess payment or benefits is thereafter recovered from such Benefited Lender,
such purchase shall be rescinded, and the purchase price and benefits returned,
to the extent of such recovery, but without interest. The Borrower agrees that
each Lender so purchasing a portion of another Lender's Loans may exercise all
rights of payment (including, without limita-
tion, rights of set-off, to the extent not prohibited by law) with respect to such portion as fully as if such Lender were the direct holder of such portion.
(b) In addition to any rights and remedies of the Lenders provided by law, upon the occurrence of an Event of Default and the acceleration of the obligations owing in connection with the Loan Documents, or at any time upon the occurrence and during the continuance of an Event of Default, under Section 9.1(a) or (b), each Lender shall have the right, without prior notice to the Borrower, any such notice being expressly waived by the Borrower to the extent not prohibited by applicable law, to set-off and apply against any indebtedness, whether matured or unmatured, of the Borrower to such Lender, any amount owing from such Lender to the Borrower, at, or at any time after, the happening of any of the above-mentioned events. To the extent not prohibited by applicable law, the aforesaid right of set-off may be exercised by such Lender against the Borrower or against any trustee in bankruptcy, custodian, debtor in possession, assignee for the benefit of creditors, receiver, or execution, judgment or attachment creditor of the Borrower, or against anyone else claiming through or against the Borrower or such trustee in bankruptcy, custodian, debtor in possession, assignee for the benefit of creditors, receiver, or execution, judgment or attachment creditor, notwithstanding the fact that such right of set-off shall not have been exercised by such Lender prior to the making, filing or issuance, or service upon such Lender of, or of notice of, any such petition, assignment for the benefit of creditors, appointment or application for the appointment of a receiver, or issuance of execution, subpoena, order or warrant. Each Lender agrees promptly to notify the Borrower and the Agent after any such set-off and application made by such Lender, provided that the failure to give such notice shall not affect the validity of such set-off and application.
11.9. Construction
The Borrower represents that it has been represented by counsel in connection with the Loan Documents and the transactions contemplated thereby and that the principle that agreements are to be construed against the draftsman shall be inapplicable.
11.10. Indemnity
The Borrower agrees to indemnify and hold harmless the Agent and each Lender and their respective affiliates, directors, officers, employees, attorneys and agents (each an "Indemnified Person") from and against any loss, cost, liability, damage or expense (including the reasonable fees and disbursements of counsel of such Indemnified Person, including all local counsel hired by any such counsel) incurred by such Indemnified Person in investigating, preparing for, defending against, or providing evidence, producing documents or taking any other action in respect of, any commenced or threatened litigation, administrative proceeding or investigation under any federal securities law or any other statute of any jurisdiction, or any
regulation, or at common law or otherwise, which is alleged to arise out of or is based upon (i) any un true statement or alleged untrue statement of any material fact by the Borrower in any document or schedule executed or filed with any Governmental Authority by or on behalf of the Borrower; (ii) any omission or alleged omission to state any material fact required to be stated in such document or schedule, or necessary to make the statements made therein, in light of the circumstances under which made, not misleading; (iii) any acts, practices or omissions or alleged acts, practices or omissions of the Borrower or its agents relating to the use of the proceeds of any or all borrowings made by the Borrower which are alleged to be in violation of Section 2.14, or in violation of any federal securities law or of any other statute, regulation or other law of any jurisdiction applicable thereto; or (iv) any acquisition or proposed acquisition by the Borrower of all or a portion of the Stock, or all or a portion of the as sets, of any Person whether such Indemnified Person is a party thereto. The indemnity set forth herein shall be in addition to any other obligations or liabilities of the Borrower to each Indemnified Person under the Loan Documents or at common law or otherwise, and shall survive any termination of the Loan Documents, the expiration of the Commitments and the payment of all indebtedness of the Borrower under the Loan Documents, provided that the Borrower shall have no obligation under this Section to an Indemnified Person with respect to any of the foregoing to the extent found in a final judgment of a court having jurisdiction to have resulted primarily out of the gross negligence or wilful misconduct of such Indemnified Person or arising solely from claims between one such Indemnified Person and another such Indemnified Person.
11.11. Governing Law
The Loan Documents and the rights and obligations of the parties thereunder shall be governed by, and construed and interpreted in accordance with, the internal laws of the State of New York, without regard to principles of conflict of laws.
11.12. Headings Descriptive
Section headings have been inserted in the Loan Documents for convenience only and shall not be construed to be a part thereof.
11.13. Severability
Every provision of the Loan Documents is intended to be sever able, and if any term or provision thereof shall be invalid, illegal or unenforceable for any reason, the validity, legality and enforceability of the remaining provisions thereof shall not be affected or impaired thereby, and any invalidity, illegality or unenforceability in any jurisdiction shall not affect the validity, legality or enforceability of any such term or provision in any other jurisdiction.
11.14. Integration
All exhibits to a Loan Document shall be deemed to be a part thereof. Except for agreements between the Agent and the Borrower with respect to certain fees, the Loan Documents embody the entire agreement and understanding among the Borrower, the Agent and the Lenders with respect to the subject matter thereof and supersede all prior agreements and understandings among the Borrower , the Agent and the Lenders with respect to the subject
matter thereof.
11.15. Consent to Jurisdiction
The Borrower hereby irrevocably submits to the jurisdiction of any New York State or Federal court sitting in the City of New York over any suit, action or proceeding arising out of or relating to the Loan Documents. The Borrower hereby irrevocably waives, to the fullest extent permitted or not prohibited by law, any objection which it may now or hereafter have to the laying of the venue of any such suit, action or proceeding brought in such a court and any claim that any such suit, action or proceeding brought in such a court has been brought in an inconvenient forum. The Borrower hereby agrees that a final judgment in any such suit, action or proceeding brought in such a court, after all appropriate appeals, shall be conclusive and binding upon it.
11.16. Service of Process
The Borrower hereby irrevocably consents to the service of process in any suit, action or proceeding by sending the same by first class mail, return receipt requested or by overnight courier service, to the address of the Borrower set forth in Section 11.2. The Borrower hereby agrees that any such service (i) shall be deemed in every respect effective service of process upon it in any such suit, action, or proceeding, and (ii) shall to the fullest extent enforceable by law, be taken and held to be valid personal service upon and personal delivery to it.
11.17. No Limitation on Service or Suit
Nothing in the Loan Documents or any modification, waiver, consent or amendment thereto shall affect the right of the Agent or any Lender to serve process in any manner permitted by law or limit the right of the Agent or any Lender to bring proceedings against the Borrower in the courts of any jurisdiction or jurisdictions in which the Borrower may be served.
11.18. WAIVER OF TRIAL BY JURY
THE AGENT, THE LENDERS AND THE BORROWER HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION ARISING OUT OF, UNDER OR IN CONNECTION WITH THE LOAN DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED THEREIN. FURTHER, THE BORROWER HEREBY CERTIFIES THAT NO REPRESENTATIVE OR AGENT OF THE AGENT, OR THE LENDERS, OR COUNSEL TO THE AGENT OR THE LENDERS, HAS REPRESENTED, EXPRESSLY
OR OTHERWISE, THAT THE AGENT OR THE LENDERS WOULD NOT, IN THE EVENT OF SUCH LITIGATION, SEEK TO ENFORCE THIS WAIVER OF RIGHT TO JURY TRIAL PROVISION. THE BORROWER ACKNOWLEDGES THAT THE AGENT AND THE LENDERS HAVE BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY, INTER ALIA, THE PROVISIONS OF THIS SECTION.
TO EVIDENCE THE FOREGOING, the parties hereto have caused this Agreement to be duly executed and delivered by their proper and duly authorized officers as of the day and year first above written.
MERCURY GENERAL CORPORATION
By: ________________________
Name: ______________________
Title: _____________________
THE BANK OF NEW YORK,
Individually and as Agent
By: ________________________
Name: ______________________
Title: _____________________
UNION BANK OF CALIFORNIA, N.A.
By: ________________________
Name: ______________________
Title: _____________________
THE FIRST NATIONAL BANK OF
CHICAGO
By: ________________________
Name: ______________________
Title: _____________________
EXHIBIT 10.21
STOCK PURCHASE AGREEMENT
MERCURY GENERAL CORPORATION
as Purchaser
and
AMERICAN FIDELITY CORPORATION
as Seller
Dated
November 15, 1996
TABLE OF CONTENTS
PAGE
ARTICLE I................................................................................... 1
DEFINITIONS................................................................................. 1
1.1 Defined Terms...................................................................... 1
Accounting Firm................................................................... 1
Actuarial Firm.................................................................... 1
Action............................................................................ 2
AFA............................................................................... 2
Affiliate......................................................................... 2
Agreement......................................................................... 2
Agreement Not to Compete.......................................................... 2
Ancillary Agreements.............................................................. 2
Assets............................................................................ 2
Auditor........................................................................... 2
Balance Sheet..................................................................... 2
Bankruptcy Exception.............................................................. 2
Bills of Sale..................................................................... 2
Books and Records................................................................. 2
Bulk IBNR Reserves................................................................ 3
Business.......................................................................... 3
Cameron Enterprises............................................................... 3
Case Reserves..................................................................... 3
Claim............................................................................. 3
Claim Payment..................................................................... 3
Closing........................................................................... 3
Closing Date...................................................................... 3
Code.............................................................................. 4
Company........................................................................... 4
Continental Agreement............................................................. 4
Contract.......................................................................... 4
Contract Rights................................................................... 4
Copyrights........................................................................ 4
Court Order....................................................................... 4
Covenant Agreement................................................................ 4
Date of Loss...................................................................... 4
Default........................................................................... 4
Disclosure Schedule............................................................... 5
Effective Date.................................................................... 5
Effective Date Balance Sheet...................................................... 5
Effective Date Case Reserves...................................................... 5
Effective Date IBNR Reserves...................................................... 5
Effective Date Insurance Reserves................................................. 5
Effective Date Financial Statements............................................... 5
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Encumbrance....................................................................... 5 Environmental Laws................................................................ 5 Expenses.......................................................................... 6 Facilities........................................................................ 6 Financial Statements.............................................................. 6 Fixtures and Equipment............................................................ 6 GAAP.............................................................................. 6 HSR Act........................................................................... 6 IBNR Reserves..................................................................... 6 Insurance License................................................................. 6 Insurance Policies................................................................ 6 Insurance Reserves................................................................ 6 Interim Balance Sheet............................................................. 7 Interim Balance Sheet Date........................................................ 7 Interim Balance Sheet Date Insurance Reserves..................................... 7 Interim Financial Statements...................................................... 7 KPMG.............................................................................. 7 Late Claim........................................................................ 7 Leases............................................................................ 7 Liabilities....................................................................... 7 Loss.............................................................................. 7 Loss Event........................................................................ 7 material adverse effect or material adverse change................................ 7 Mechanical Breakdown Products..................................................... 7 Mortgages......................................................................... 8 Ocean Marine Bulk IBNR Reserves................................................... 8 Ocean Marine Case Reserves........................................................ 8 Ocean Marine Claim................................................................ 8 Ocean Marine Claim Payment........................................................ 8 Ocean Marine IBNR Reserves........................................................ 8 Ocean Marine Insurance Reserves................................................... 8 Ocean Marine Program.............................................................. 9 Ocean Marine Pure IBNR Reserves................................................... 9 Office Lease...................................................................... 9 ordinary course of business or ordinary course.................................... 9 Patents........................................................................... 9 Permits........................................................................... 9 Permitted Encumbrances............................................................ 9 Pro Forma Interim Balance Sheet................................................... 9 Pro Forma Interim Financial Statements............................................ 9 Property.......................................................................... 10 Proprietary Rights................................................................ 10 Purchaser......................................................................... 10 Purchase Price.................................................................... 10 Purchaser's Knowledge............................................................. 10 Pure IBNR Reserves................................................................ 10 |
Regulations....................................................................... 10
Representative.................................................................... 10
Reserve Determination Date........................................................ 10
Seller............................................................................ 10
Seller's Knowledge................................................................ 10
Services Agreement................................................................ 11
Shares............................................................................ 11
Statutory Statement............................................................... 11
Subsidiary........................................................................ 11
Tax............................................................................... 11
Trademark License Agreements...................................................... 11
Trademarks........................................................................ 11
Warrants.......................................................................... 11
Wire Transfer..................................................................... 12
Year-End Financial Statement...................................................... 12
1.2 Other Defined Terms................................................................ 12
ARTICLE II.................................................................................. 13
PURCHASE AND SALE OF SHARES................................................................. 13
2.1 Transfer of Shares................................................................. 13
2.2 Purchase Price and Payment......................................................... 13
2.3 Closing Costs; Transfer Taxes...................................................... 14
2.4 Insurance Reserves................................................................. 14
ARTICLE III................................................................................. 17
CLOSING..................................................................................... 17
3.1 Closing............................................................................ 17
3.2 Deliveries at Closing.............................................................. 17
3.3 Other Closing Transactions......................................................... 17
ARTICLE IV.................................................................................. 18
REPRESENTATIONS AND WARRANTIES OF SELLER.................................................... 18
4.1 Organization, Authorization and Execution of Seller................................ 18
4.2 Organization of the Company........................................................ 18
4.3 Capitalization of the Company...................................................... 18
4.4 Subsidiaries....................................................................... 19
4.5 Lloyd's Plan....................................................................... 19
4.6 Insurance Licenses and Other Permits............................................... 19
4.7 Financial Statements............................................................... 20
4.8 Liabilities........................................................................ 21
4.9 Accounts Receivable; Notes Receivable; Mortgages; Other Amounts.................... 21
4.10 Books and Records................................................................. 23
4.11 Absence of Certain Changes or Events.............................................. 23
4.12 Assets............................................................................ 25
4.13 Contracts and Commitments......................................................... 26
4.14 No Conflict or Violation.......................................................... 28
4.15 Consents and Approvals............................................................ 28
4.16 Litigation........................................................................ 28
4.17 Labor Matters..................................................................... 28
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4.18 Compliance with Law............................................................... 29
4.19 Propretiary Rights................................................................ 20
4.20 Employee Benefit Plans............................................................ 30
4.21 Tax Matters....................................................................... 35
4.22 Insurance......................................................................... 37
4.23 Environmental Matters............................................................. 37
4.24 Officers.......................................................................... 38
4.25 Severance Arrangements............................................................ 38
4.26 Bank Accounts..................................................................... 38
4.27 Ocean Marine Program.............................................................. 38
4.28 Service Agreements with Seller.................................................... 38
4.29 No Brokers........................................................................ 38
4.30 No Other Agreements to Sell the Shares or the Company............................. 39
4.31 Material Misstatements Or Omissions............................................... 39
4.32 No Other Representations or Warranties............................................ 39
ARTICLE V................................................................................... 39
REPRESENTATIONS AND WARRANTIES OF PURCHASER................................................. 39
5.1 Organization of Purchaser.......................................................... 39
5.2 Authorization...................................................................... 39
5.3 No Conflict or Violation........................................................... 40
5.4 Consents and Approvals............................................................. 40
5.5 Investment Intent.................................................................. 40
5.6 No Brokers......................................................................... 40
ARTICLE VI.................................................................................. 40
COVENANTS OF SELLER AND PURCHASER........................................................... 40
6.1 Further Assurances................................................................. 40
6.2 Certain Filings and Consents....................................................... 41
6.3 Access............................................................................. 41
6.4 No Solicitation.................................................................... 41
6.5 Notification of Certain Matters.................................................... 42
6.6 Conduct of Business................................................................ 42
6.7 Public Statements and Press Releases............................................... 44
6.8 Financial Information.............................................................. 44
6.9 Employee Matters................................................................... 44
6.10 Employee Benefits................................................................. 45
6.11 Modification of ERC Arrangements and Release...................................... 46
6.12 Sale of AFCC Capital Stock........................................................ 47
6.13 Transfer of Mortgage Loans........................................................ 47
6.14 Intercompany Accounts............................................................. 47
6.15 Ocean Marine...................................................................... 48
ARTICLE VII................................................................................. 48
CONDITIONS TO SELLER'S OBLIGATIONS.......................................................... 48
7.1 Representations, Warranties and Covenants.......................................... 48
7.2 Consents; Regulatory Compliance and Approval....................................... 48
7.3 No Actions or Court Orders......................................................... 49
7.4 Opinion of Counsel................................................................. 49
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7.5 Certificates....................................................................... 50
7.6 Corporate Documents................................................................ 50
7.7 Ancillary Agreements............................................................... 50
7.8 Investment Representation.......................................................... 50
7.9 Mitsubishi Consent................................................................. 50
ARTICLE VIII................................................................................ 50
CONDITIONS TO PURCHASER'S OBLIGATIONS....................................................... 50
8.1 Representations, Warranties and Covenants.......................................... 50
8.2 Consents; Regulatory Compliance and Approval....................................... 50
8.3 No Actions or Court Orders......................................................... 51
8.4 Opinion of Counsel................................................................. 51
8.5 Certificates....................................................................... 52
8.6 Material Changes................................................................... 52
8.7 Corporate Documents................................................................ 52
8.8 Conveyancing Documents; Release of Encumbrances.................................... 53
8.9 Ancillary Agreements............................................................... 53
8.10 Consents.......................................................................... 53
8.11 ERC Release....................................................................... 53
8.12 Intercompany Transfer............................................................. 53
8.13 Mitsubishi Consent................................................................ 53
8.14 Ocean Marine...................................................................... 53
ARTICLE IX.................................................................................. 54
ACTIONS AFTER THE CLOSING................................................................... 54
9.1 Books and Records; Tax Matters..................................................... 54
9.2 Survival of Representations, Etc................................................... 54
9.3 Indemnification.................................................................... 55
9.4 Payment of Holdback Amount......................................................... 58
9.5 Post-Closing Claims Administration................................................. 59
9.6 Post-Closing Inspection of Records................................................. 60
9.7 Change of Name..................................................................... 61
9.8 Ocean Marine Program............................................................... 61
9.9 Effective Date Financial Statements................................................ 63
ARTICLE X................................................................................... 65
MISCELLANEOUS............................................................................... 65
10.1 Termination....................................................................... 65
10.2 Assignment........................................................................ 66
10.3 Notices........................................................................... 66
10.4 Choice of Law..................................................................... 67
10.5 Entire Agreement; Amendments and Waivers.......................................... 68
10.6 Multiple Counterparts............................................................. 68
10.7 Expenses.......................................................................... 68
10.8 Invalidity........................................................................ 68
10.9 Titles; Gender.................................................................... 68
10.10 Confidential Information......................................................... 68
10.11 Cumulative Remedies.............................................................. 69
10.12 Attorneys' Fees.................................................................. 69
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10.13 Waivers of Punitive Damages...................................................... 71 |
LIST OF EXHIBITS
EXHIBIT A AGREEMENT NOT TO COMPETE
EXHIBIT B FORM OF BILLS OF SALE
EXHIBIT C FORM OF OFFICE LEASE
EXHIBIT D FORM OF SERVICES AGREEMENT
EXHIBIT E FORM OF TRADEMARK LICENSE AGREEMENT
EXHIBIT F ACCOUNTING PROCEDURES
EXHIBIT G CALCULATION OF OCEAN MARINE PROGRAM
NET INCOME AND NET LOSS
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NOW, THEREFORE, in consideration of the respective covenants and promises contained herein and for other good and valuable consideration, the receipt and adequacy of which is hereby acknowledged, the parties hereto agree as follows:
and (e) all books, ledgers, files, reports, plans, drawings and operating records of every kind maintained by the Company and each of its Subsidiaries, or by the Seller on behalf of the Company and its Subsidiaries, including the originals of minute books, stock books, copies of tax work papers and tax returns of the Company and each of its Subsidiaries.
occurrence of an event that with or without the passage of time or the giving of notice or both would give rise to a right of termination, renegotiation or acceleration under any Contract, Lease, or Permit.
Effective Date for which the Company or any of its Subsidiaries is an insurer or reinsurer, excluding those in connection with Mechanical Breakdown Products and the Ocean Marine Program. Insurance Reserves shall include Case Reserves and IBNR Reserves, and shall be determined using generally accepted actuarial methods and in accordance with the accounting principles set forth in paragraph 4 of Exhibit F attached hereto. Insurance Reserves at December 31, 2001 shall not be reduced by any estimates for subrogation recoveries or salvage value.
provide benefits, coverage, service or warranties with respect to mechanical breakdown related services and products.
DiBiaso (Actuary of the Company), Judy Garrison (Director Information Services), Tom Kordic (Director of Claims), Patricia Mullendore (Assistant Vice-President- Law of the Company), Dwight P. Tully (Director of Underwriting Services), Edward E. Young (Chief Financial Officer/Treasurer of the Company) and Doran G. Merkley (former Director of Marketing).
-------- -------
"Subsidiary" shall not include AFCC unless specifically referred to as included.
"Tax" shall mean any federal, state, local, foreign or other tax,
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levy, fee, assessment or other government charge, including without limitation income, estimated income, business, occupation, franchise, property, payroll, personal property, premium, sales, transfer, use, employment, commercial rent, occupancy, franchise or withholding taxes, including interest, penalties and any other additions in connection therewith.
Term Section ---- ------- AAA 10.12 Accounts Receivable 4.9(b) AFCC Recital A Agreed Adjustments 9.9(b) Agreed Changes 2.4(c)(ii) Agreed Holdback Adjustment 9.4(c) AMC Recital A Benefit Arrangement 4.20(a) Cimarron Recital A Claims-Processing Standards 9.5 Closing 3.1 COBRA 6.10(e) Company Recital A Company Employees 6.10 Confidential Information 10.10 Disputes 10.12 Employee Plans 4.20(a) ERC 6.11 ERISA 4.20(a) ERISA Affiliate 4.20(a) Final Holdback Accounting Report 9.4(b) Flexible Benefit Plan 6.10(e) Hazardous Materials 4.23 Holdback Amount 2.2(c) Indemnification Claim 9.3(f) Indemnification Claim Notice 9.3(f) Insurance Claim Payments 2.4(a)(1)(A) Lloyd's Plan 4.5 Mitsubishi 7.9 Multiemployer Plan 4.20(a) Multiemployer Welfare Plan 4.20(a) Ocean Marine Agreed Changes 9.8(c) Ocean Marine Settlement Report 9.8(b) |
PBGC 4.20(a) Pension Plan 4.20(a) Preliminary Accounting Report 9.10 Preliminary Effective Date Balance Sheet 9.10 Preliminary Holdback Accounting Report 9.4(a) Preliminary Report 2.4(b) Purchase Price 2.4(b) Purchaser Indemnitees 9.3(a) Purchaser's 401(k) Plan 6.10(c) Remaining Reserve Amount 2.4(a)(i)(B) Reserve Deficiency 2.4(a)(ii) Reserve Redundancy 2.4(a)(i) Retirement Plan 6.10 Savings Plan 6.10 Seller Indemnitees 9.3(c) Seller's Report 9.6 Shares 4.3 Welfare Plan 4.20(a) |
ARTICLE II
PURCHASE AND SALE OF SHARES
Upon the terms and subject to the conditions of this Agreement, at the Closing, Purchaser shall purchase from Seller, and Seller shall sell to Purchaser, the Shares, and Seller shall deliver to Purchaser certificates representing the Shares duly endorsed to Purchaser or accompanied by duly executed stock powers so as to transfer and assign to Purchaser good and valid title to the Shares and to constitute Purchaser the sole beneficial and record shareholder of the Company.
(b) At the Closing, Purchaser shall pay to Seller by Wire Transfer a
cash amount of Thirty Three Million Twenty Thousand Dollars ($33,020,000) and an
additional amount equal to interest on the Purchase Price at a rate of five
percent (5%) simple interest per annum calculated from the Effective Date to the
Closing Date. The Purchase Price shall be subject to adjustment as provided in
Section 2.4.
(i) With respect to each Reserve Determination Date, in the event that the amount of the Company's Effective Date Insurance Reserves exceeds the sum of:
(E) the amount of any deficiency as of a prior Reserve Determination Date with respect to which a payment was made by Seller pursuant to Section 2.4(a)(ii),
the amount of such excess shall be deemed a "Reserve Redundancy." Purchaser shall pay to Seller, on or prior to the April 30 following each such Reserve Determination Date, the amount of the Reserve Redundancy calculated as of such Reserve Determination Date. In the event there exists on any such April 30 a dispute which has not been resolved pursuant to Section 2.4(c), payment shall be made promptly, but in no event more than two (2) business days, after the dispute has been resolved.
(ii) In the event that, with respect to each Reserve Determination Date, the amount of the Effective Date Insurance Reserves is less than the sum of:
(E) the amount of any deficiency as of a prior Reserve Determination Date with respect to which a payment was made by Seller pursuant to this Section 2.4(a)(ii),
the amount of such deficiency shall be deemed a "Reserve Deficiency." Seller shall pay to Purchaser, on or prior to the April 30 following each such Reserve Determination Date, the amount of the Reserve Deficiency calculated as of such Reserve Determination Date. In the event there exists on any such April 30 a dispute which has not been resolved pursuant to Section 2.4(c), payment shall be made promptly, but in no event more than two (2) business days, after the dispute has been resolved.
(iii) Prior to each Reserve Determination Date, Purchaser
shall direct the Actuarial Firm selected by Purchaser to determine the Remaining
Reserve Amount as of such next succeeding Reserve Determination Date, which
determination shall be subject to dispute and redetermination as provided in
Section 2.4(c). The fees of the Actuarial Firm selected by Purchaser for this
determination shall be paid by Purchaser.
Reserve Amount by the Actuarial Firm selected by Purchaser pursuant to Section
2.4(a)(iii) and the Purchaser's determination of the Reserve Redundancy or
Reserve Deficiency, as the case may be, determined in accordance with this
Section 2.4(b).
(i) Following receipt of each Preliminary Report, Seller may review the same and, within thirty (30) days after the date of such receipt, may deliver to Purchaser a certificate setting forth any objections to the determination of any amounts set forth in the Preliminary Report, together with a summary of the reasons therefor and calculations which, in Seller's view, are necessary to eliminate such objections, to the extent the information necessary to make such calculations is reasonably available to Seller. If Seller does not object within such 30-day period, the determinations set forth in the Preliminary Report shall be final and binding on Purchaser and Seller. In preparing its objections, Seller may, but is not required to, consult with one of the two (2) remaining Actuarial Firms. The fees of the Actuarial Firm selected by Seller for this consultation and the preparation of Seller's objections to the Preliminary Report shall be paid by Seller.
(iii) If any objections timely raised by Seller are not resolved by the Agreed Changes within the 30-day period contemplated in this Subsection 2.4(c), then Purchaser and Seller shall submit the objections that are then unresolved to the remaining Actuarial Firm, or one of the two (2) remaining Actuarial Firms in the event Seller does not consult with an Actuarial Firm pursuant to Section 2.4(c)(i). Such remaining Actuarial Firm shall be directed by Purchaser and Seller to seek to resolve the unresolved objections as promptly as reasonably practicable and to deliver written notice to each of Purchaser and Seller setting forth its resolution of the disputed matters. The determinations set forth in the Preliminary Report as adjusted by the Agreed Changes and by the resolution of such objections by the remaining Actuarial Firm selected pursuant to this Section 2.4(c)(iii) shall be final and binding on the parties.
(iv) Upon request by Seller, Purchaser shall promptly provide
to Seller verification of the amount of the Claim Payments. Seller may raise
objections to the propriety of such Claim Payments only in accordance with
Section 9.6.
ARTICLE III
member of the selling consolidated group. Seller shall be authorized to cause such election to be filed with the Internal Revenue Service.
ARTICLE IV
Seller hereby represents and warrants to Purchaser as follows, except as otherwise set forth on the Disclosure Schedule, which representations and warranties are, as of the date hereof, and will be, as of the Closing Date, true and correct:
outstanding and none of which are held in the Company's treasury. All of the Shares are validly issued, fully paid and non-assessable, and are owned by Seller free and clear of all Encumbrances. There are no Warrants with respect to the equity securities of the Company. The Company has no commitments or obligations to purchase or redeem any of the Shares.
insurance covered by each such license. Except as set forth on Schedule 4.6, (i) each such license is valid and in full force and effect, (ii) the authority of the Company or any of its Subsidiaries to write the lines and classes of insurance set forth under each such license is unrestricted (except as limited by law or regulation), (iii) neither the Company nor any of its Subsidiaries is a party to any agreement or arrangement with any governmental regulatory official limiting the Company's or any of its Subsidiaries' ability to make full use of any such license, (iv) there is no pending application or other document that would modify or amend any such license, and (v) to Seller's Knowledge, each such Insurance License is renewable at its expiration in the ordinary course of business by the payment of the standard fee. Except as set forth on Schedule 4.6, neither the Company nor any of its Subsidiaries has received any notice of any event, inquiry, investigation or proceeding that would reasonably be expected to result in the suspension, revocation or limitation of any Insurance License or otherwise impose any limitation on the conduct of the business of the Company or any of its Subsidiaries, and to Seller's Knowledge, there is no sustainable basis for any such suspension, revocation or limitation. Schedule 4.6 also sets forth each jurisdiction in which the Company or any of its Subsidiaries has an application for an Insurance License pending and the nature of the license requested, and no such application has been denied, refused or withdrawn by the Company or any of its Subsidiaries since January 1, 1995. Schedule 4.6 sets forth all pending examinations by any governmental authority having jurisdiction to regulate the insurance operations of the Company or any of its Subsidiaries and all such examinations completed since 1991 with respect to the Company and each of such Subsidiaries subject to such examinations.
(a) Schedule 4.6 sets forth a complete list of all Permits, other than Insurance Licenses, used in the operation of the Business or otherwise held by the Company or any of its Subsidiaries.
(b) The Company and each of its Subsidiaries currently has all Permits reasonably required under any Regulation in the operation of its Business or in the ownership of the Assets, and owns or possesses such Permits free and clear of all Encumbrances. Neither the Company nor any of its Subsidiaries is in Default with respect to any such Permit, nor has it received any notice of any claim of Default. Except as otherwise governed by law, all such Permits are renewable by their terms or in the ordinary course of business without the need to comply with any special qualification procedures or to pay any amounts other than routine filing fees. No present or former shareholder, director, officer or employee of the Company or any of its Subsidiaries or any Affiliate thereof, or any other person, firm, corporation or other entity, owns or has any proprietary, financial or other interest (direct or indirect) in any Permit which the Company or any of its Subsidiaries owns, possesses or uses.
(a) Seller has heretofore delivered to Purchaser the Financial Statements identified as Schedule 4.7. The Financial Statements (i) are in accordance with the Books and Records of the Company and each of its Subsidiaries, (ii) have been prepared in accordance with GAAP, and (iii) fairly and accurately present the consolidated assets, liabilities (including all reserves) and financial position of the Company as of the respective dates thereof and the consolidated results of operations and, in the case of the Year- End Financial Statements, changes in cash flows for the periods then ended. The Year-End Financial Statements have been
examined by KPMG, independent certified public accountants, whose report thereon is included with such Year-End Financial Statements.
(b) Seller has heretofore delivered to Purchaser the Pro Forma Interim Financial Statements, showing all consolidating adjustments made to the Interim Financial Statements to reflect the sale of the stock of AFCC to Seller at January 1, 1996, and the application of the accounting principles set forth in Exhibit F attached hereto. The Pro Forma Interim Financial Statements (i) set forth all consolidating adjustments made from the Interim Financial Statements and the assumptions used with respect to such adjustments, and (ii) fairly and accurately present, in all material respects, the consolidated assets, liabilities (including all reserves) and financial position of the Company and its Subsidiaries as of the respective dates theretofore and the consolidated results of operations for the period ended June 30, 1996.
(c) Seller has heretofore delivered to Purchaser true and complete copies of the consolidated Statutory Statements of the Company, Cimarron and the Lloyd's Plan for the years ended December 31, 1993, 1994, and 1995, together with notes thereto and the reports of KPMG thereon, which have been examined by KPMG under statutory accounting principles and are true and correct in accordance with such accounting principles, and individual Statutory Statements for each of the Company, Cimarron and the Lloyd's Plan for the quarterly period ended June 30, 1996. Such Statutory Statements have been prepared in accordance with accounting practices prescribed or permitted by insurance regulatory authority of the state of domicile of each such company on a consistent basis or in accordance with all applicable N.A.I.C. guidelines.
(d) Seller has heretofore delivered to Purchaser true and complete copies of (i) all actuarial certifications relating to loss reserves of the Company and each of its Subsidiaries since January 1, 1993, and (ii) all reports prepared by actuaries of the Company and each of its Subsidiaries and independent actuaries relating to loss reserves and other financial reserves of the Company or any of its Subsidiaries since January 1, 1993.
(a) Except as set forth on Schedule 4.9, the accounts receivable of the Company and each of its Subsidiaries reflected on the Interim Balance Sheet and receivables
arising since the Interim Balance Sheet Date and on or prior to the date hereof, represent bona fide claims against the respective account debtors and, to Seller's Knowledge, all the products delivered and services performed that gave rise to said accounts were delivered or performed in accordance with the applicable orders, Contracts or customer requirements. All accounts receivable (including accrued investment income reflected on the Interim Balance Sheet), notes receivable, mortgage loans (for which the Company or its Subsidiaries is the lender) and other amounts receivable of the Company and each of its Subsidiaries reflected on the Interim Balance Sheet, shall be subject to no defenses, counterclaims or rights of setoff. Schedule 4.9 sets forth a complete and accurate list of all such notes receivable and mortgage loans (for which the Company or any of its Subsidiaries is the lender), together with the balances outstanding as of the Interim Balance Sheet Date.
(i) Accounts receivable attributable to billings for premiums due directly from insureds, including assigned risk premiums, which involve policy cancellation rather than collection if not paid when due, but only to the extent that the amount of any such account receivable is offset upon cancellation by the unearned premium established for such account;
(iii) Accounts receivable and other amounts owed to the Company and its Subsidiaries by reinsurers under reinsurance policies, treaties and agreements to which any of the Company and its Subsidiaries is a party and which are classified as "reinsurance receivables on unpaid losses" and included in the Insurance Reserves in the Pro Forma Interim Balance Sheet; and
(iv) Accounts receivable, to the extent the collectibility of which is secured by one or more letters of credit issued by banks and other financial institutions for the benefit of the Company or any of its Subsidiaries; unless, and to the extent, the issuer of such letter of credit fails or refuses to honor a draw thereunder.
(a) actual or, to Seller's Knowledge, threatened adverse change in the financial condition, working capital, shareholders' equity, Assets, Liabilities, reserves, revenues, earnings or Business of the Company or any of its Subsidiaries, as determined under either GAAP or statutory accounting principles;
(b) change in accounting methods, principles or practices by the Company or any of its Subsidiaries;
(c) revaluation by the Company or any of its Subsidiaries of any material amount of the Assets, including, without limitation, writing off notes or accounts receivable;
(d) damage, destruction or loss (whether or not covered by insurance) materially and adversely affecting the Assets or the Business;
(e) cancellation of any indebtedness or waiver or release of any right or claim of the Company or any of its Subsidiaries relating to its activities or properties which had or will have an adverse effect on the Assets or the Business;
(f) declaration, setting aside, or payment of dividends or distributions by the Company in respect of the Shares or any redemption, purchase or other acquisition of any of the Company's securities;
(g) increase in the rate of compensation payable or to become payable by the Company or any of its Subsidiaries to any director, officer or other employee of the Company or any of its Subsidiaries, including, without limitation, the making of any loan to, or the payment, grant or accrual of any bonus, incentive compensation, service award or other similar benefit to, any such person, or the addition to, modification of, or contribution to any Employee Plan, arrangement, or practice described in the Disclosure Schedule other than (i) increases in rates of compensation and contributions made in accordance with the normal
practices of the Company or any of its Subsidiaries or (ii) the extension of coverage to others who become eligible after the Interim Balance Sheet Date;
(h) adverse change in employee relations which has or is reasonably likely to have a material adverse effect on the productivity, the financial condition, results of operations or Business of the Company or any of its Subsidiaries, or the relationships between the employees of the Company or any of its Subsidiaries and the management of the Company or such Subsidiary, respectively;
(i) amendment, cancellation or termination of any Contract, commitment, agreement, Lease, transaction or Permit relating to the Assets or the Business or entry into any Contract, commitment, agreement, Lease, transaction or Permit which is not in the ordinary course of business, including, without limitation, any employment or consulting agreements;
(j) mortgage, pledge or other encumbrance of any Assets, except purchase money mortgages arising in the ordinary course of business;
(k) sale, assignment or transfer of any of the Assets of the Company or any of its Subsidiaries, other than in the ordinary course of business;
(l) incurrence of indebtedness by the Company or any of its Subsidiaries for borrowed money or commitment to borrow money entered into by the Company or any of its Subsidiaries, or loans made or agreed to be made by the Company or any of its Subsidiaries, or indebtedness guaranteed by the Company or any of its Subsidiaries;
(m) incurrence by the Company or any of its Subsidiaries of Liabilities, except Liabilities incurred in the ordinary course of business, or any change in any assumption underlying methods of calculating any reserves of the Company or any of its Subsidiaries, except as provided in Exhibit F and any of the Schedules to this Agreement;
(n) payment, discharge or satisfaction of any Liabilities of the Company or any of its Subsidiaries, other than payment, discharge or satisfaction in the ordinary course of business, of Liabilities set forth or reserved for on the Interim Financial Statements or incurred in the ordinary course of business;
(o) capital expenditure, the execution of any Lease or the incurring of any obligation by the Company or any of its Subsidiaries to make any capital expenditure or execute any Lease;
(p) failure to pay or satisfy when due any Liability of the Company or any of its Subsidiaries, except where the failure would not have a material adverse effect on the Business;
(q) failure of the Company or any of its Subsidiaries to carry on diligently the Business in the ordinary course so as to keep available to Purchaser the services of the Company's or any of its Subsidiaries' employees, and to preserve for Purchaser the Assets and
the Business and the goodwill of the Company's and each of its Subsidiaries' suppliers, customers, distributors and others having business relations with it;
(r) disposition or lapsing of any Proprietary Rights or any disposition or disclosure to any person of any Proprietary Rights not theretofore a matter of public knowledge;
(s) existence of any other event or condition which in any one case or in the aggregate has or might reasonably be expected to have a material adverse effect on the Business; or
(t) agreement (written or oral) by the Company or a Subsidiary to do any of the things described in the preceding clauses (a) through (s) other than as expressly provided for herein.
of the Company and its Subsidiaries has in all material respects performed all obligations required to be performed by it with respect to (y) all Assets leased by it (whether as lessor or lessee) and (z) all Leases of the Facilities. Except as set forth on Schedule 4.12, there exists no Default on the part of the Company or any of its Subsidiaries under any Lease. To Seller's Knowledge, there is no Default on the part of any other party to any Lease. Subject to the Bankruptcy Exception, and except as set forth on Schedule 4.12, the Leases are valid, binding and enforceable in accordance with their respective terms and are in full force and effect, and assuming all consents required by the terms thereof or applicable law have been obtained, the Leases will continue to be valid, binding and enforceable in accordance with their respective terms and in full force and effect immediately following the consummation of the transactions contemplated hereby. Seller has delivered to Purchaser, or otherwise made available to Purchaser, originals or true copies of all Leases, as amended, and has made available for review all related files.
(i) Contracts not made in the ordinary course of business;
(ii) Forms of contracts with insurance agents;
(iii) Reinsurance treaties, contracts or arrangements, either as the ceding company or the assuming company, covering current policy years or prior policy years for which some obligation remains outstanding on the part of the Company or any of its Subsidiaries;
(iv) Structured settlement annuities, and related settlement agreements, for which the Company or any of its Subsidiaries that is a party to the transaction does not have a full release from further liability or obligation;
(v) Insurance policy and service contract forms on a group or individual basis for each line of insurance offered by the Company or any of its Subsidiaries;
(vi) Premium finance contract forms used by the Company or any of its Subsidiaries;
(vii) Contracts with third parties to provide insurance products or services to any group or classifications of insureds;
(viii) Contracts with third parties to provide management, administration, underwriting, risk management, claims, repair or other insurance services to the Company or any of its Subsidiaries or for the Company or any of its Subsidiaries to provide any such services to others;
(ix) Contracts to which AMC is a party relating to organization, ownership or operation of the Lloyd's Plan;
(x) Employment contracts and severance agreements, including without limitation Contracts (A) to employ or terminate executive officers or other personnel and other contracts with present officers or directors of the Company or any of its Subsidiaries or (B) that will result in the payment by, or the creation of any Liability to pay on behalf of the Company or any of its Subsidiaries or Purchaser any severance, termination, "golden parachute," or other similar payments to any present or former personnel following termination of employment or otherwise as a result of the consummation of the transactions contemplated by this Agreement;
(xi) Labor or union contracts;
(xii) Distribution, franchise, license, technical assistance, sales, commission, consulting, agency or advertising contracts related to the Assets or the Business and which are not cancelable (without Liability) on thirty (30) calendar days' notice;
(xiii) Options with respect to any property, real or personal, whether the Company or any of its Subsidiaries shall be the grantor or grantee thereunder;
(xiv) Contracts involving future expenditures or Liabilities, actual or potential, except those Contracts which in the aggregate involve future expenditures or Liabilities of less than Fifty Thousand Dollars ($50,000), or that are otherwise material to the Business or the Assets, and which are not cancelable (without Liability) on thirty (30) calendar days' notice;
(xv) Contracts or commitments relating to commission arrangements with others, other than agreements with insurance agents;
(xvi) Promissory notes, loans, agreements, indentures, evidences of indebtedness, letters of credit, guarantees, or other instruments relating to an obligation to pay money (except those which in the aggregate relate to an obligation to pay Fifty Thousand Dollars ($50,000) or less, whether the Company or any of its Subsidiaries shall be the borrower, lender or guarantor thereunder or whereby any Assets are pledged (excluding credit provided by the Company or any of its Subsidiaries in the ordinary course of business to purchasers of its insurance products);
(xvii) Contracts containing covenants limiting the freedom of the Company or any of its Subsidiaries, or any officer, director, shareholder or Affiliate of the Company or any of its Subsidiaries, to engage in any line of business or compete with any person;
(xviii) Any Contract with an Affiliate not otherwise disclosed on Schedule 4.13.
Seller has delivered to Purchaser true, correct and complete copies of all of the Contracts or forms listed on Schedule 4.13, including all amendments and supplements thereto.
Subsidiaries is a party or by which it or any of the material Assets is bound or affected are valid, binding and enforceable in accordance with their terms. The Company and each of its Subsidiaries has fulfilled, or taken all action necessary to enable it to fulfill when due, all of its material obligations under each of such Contracts and material Leases to which it is a party. To Seller's Knowledge, or except as set forth on Schedule 4.12, all parties to such Contracts and Leases have complied in all material respects with the provisions thereof, no party is in Default thereunder and no notice of any claim of Default has been given to the Company or any of its Subsidiaries or to Seller. With respect to any material Lease, neither the Company or any of its Subsidiaries or Seller has received any notice of cancellation or termination under any option or right reserved to the lessor, or any notice of Default.
Subsidiaries no material claims by any governmental authority, labor organization, or employee alleging that the Company or any such Subsidiary has violated any applicable laws respecting employment practices. Seller has no reason to believe that the Company or any of its Subsidiaries is not in compliance in all material respects with their obligations under all statutes, executive orders and other governmental regulations or judicial decrees governing their employment practices, including without limitation, provisions relating to wages, hours, equal opportunity and payment of social security and other taxes.
Company, any of its Subsidiaries or Seller that it is claiming any ownership of or right to use such Proprietary Rights, or (iii) to Seller's Knowledge, is infringing upon any such Proprietary Rights in any way. The Company or any of its Subsidiaries' use of the Proprietary Rights does not and will not conflict with, infringe upon or otherwise violate the valid rights of any third party in or to such Proprietary Rights, and no Action has been instituted against or notices received by the Company, any of its Subsidiaries or Seller that are presently outstanding alleging that the use of the Proprietary Rights by the Company or any of its Subsidiaries infringes upon or otherwise violates any rights of a third party in or to such Proprietary Rights.
(A) Seller has no reason to believe that the funding method used in
connection with each Pension Plan which is subject to the minimum funding
requirements of ERISA is not acceptable and the actuarial assumptions used in
connection with funding each such plan are unreasonable. No "accumulated
funding deficiency" (for which an excise tax is due or would be due in the
absence of a waiver) as defined in Section 12 or the Code or as defined in
Section 302(a)(2) of ERISA, whichever may apply, has been incurred with respect
to any Pension Plan with respect to any plan year, whether or not waived.
Neither the Company nor any ERISA Affiliate has failed to pay when due any
"required installment," within the meaning of Section 412(m) of the Code and
Section 302(e) of ERISA, whichever may apply, with respect to any Pension Plan.
Neither Seller nor any ERISA Affiliate is subject to any lien imposed under
Section 412(n) of the Code or Section 302f) of ERISA, whichever may apply, with
respect to any Pension Plan. Neither the Company nor any ERISA Affiliate has
any liability for unpaid contributions which are required to have been made with
respect to any Pension Plan.
(B) Neither the Company nor any ERISA Affiliate is required to provide security to a Pension Plan under Section 401(a)(29) of the Code.
(C) Each Pension Plan and each related trust agreement, annuity contract or other funding instrument is qualified and tax-exempt under the provisions of Code Sections 401(a) (or 403(a), as appropriate) and 501(a) and has been so qualified during the period from its adoption to date.
(D) Each Pension Plan, each related trust agreement, annuity contract or other funding instrument presently complies and has been maintained in compliance with its terms in all material respects and, both as to form and in operation, in all material respects with the requirements prescribed by any and all statutes, orders, rules and regulations which are applicable to such plans, including without limitation ERISA and the Code.
(E) The Company and each ERISA Affiliate has paid all premiums (and interest charges and penalties for late payment, if applicable) due the PBGC with respect to each Pension Plan for each plan year thereof for which such premiums are required. Neither the Company nor any ERISA Affiliate has engaged in, or is a successor or parent corporation to an entity that has engaged in, a transaction described in Section 4069 of ERISA. There has been no "reportable event" (as defined in Section 4043(b) of ERISA and the PBGC regulations under such Section) with respect to any Pension Plan subject to Title IV of ERISA. No filing has been made by the Company or any ERISA Affiliate with the PBGC, and no proceeding has been commenced by the PBGC, to terminate any Pension Plan. No condition exists and no event has occurred that could constitute grounds for the termination of any Pension Plan by the PBGC. Neither the Company nor any ERISA Affiliate has, at any time, (1) ceased operations at a facility so as to become subject to the provisions of Section 4062(e) of ERISA, (2) withdrawn as a substantial employer so as to become subject to the provisions of Section 4063 of ERISA, or (3) ceased making contributions on or before the Closing Date to any Pension Plan subject to Section 4064(a) of ERISA to which the Company or any ERISA Affiliate made contributions during the six years prior to the Closing Date.
(F) As of the Closing Date, neither the Company nor Purchaser shall have any liability with respect to any Pension Plan, including but not limited to the Retirement Plan of American Fidelity Group ("Plan"), the American Fidelity Companies Employee Savings Plan, and the Supplemental Retirement Income Plan for Employees of the American Fidelity Group.
(A) Each Welfare Plan, to the best of the Company's knowledge, has been maintained in compliance with its terms and, both as to form and operation, in all material respects, with the requirements prescribed by any and all statutes, orders, rules and regulations which are applicable to such Welfare Plan, including without limitation ERISA and the Code.
(B) Except as set forth on Schedule 4.13, none of the Company, any ERISA Affiliate or any Welfare Plan has any present or future obligation to make any payment to, or with respect to any present or former employee of the Company or any ERISA Affiliate pursuant to, any retiree medical benefit plan, or other retiree Welfare Plan, and no condition exists which would prevent the Company from amending or terminating any such benefit plan or Welfare Plan.
(C) Each Welfare Plan which is a "group health plan," as defined in
Section 607(1) of ERISA, to the best of the Company's knowledge, has been
operated in compliance in all material respects with provisions of Part 6 of
Title I, Subtitle B of ERISA and Sections 162(k) and 4980B of the Code at all
times.
insurance company that is the subject of bankruptcy, conservatorship or rehabilitation proceedings.
(i) All elections with respect to Taxes affecting the Company or any of its Subsidiaries as of the date hereof are set forth on Schedule 4.21.
(ii) Neither the Company nor any of its Subsidiaries has made an election or is required to treat any Asset of such company as owned by another person or as tax-exempt bond financed property or tax-exempt use property within the meaning of Section 168 of the Code or under any comparable state or local income tax or other tax provision.
(iii) Neither the Company nor any of its Subsidiaries is a party to or bound by any binding tax sharing, tax indemnity or tax allocation agreement or other similar arrangement with any other party, except as set forth on Schedule 4.21.
(iv) Neither the Company nor any of its Subsidiaries has filed a consent pursuant to the collapsible corporation provisions of Section 341(f) of the Code (or any corresponding provision of state or local law) or agreed to have Section 341(f)(2) of the Code (or any corresponding provision of state or local law) apply to any disposition of any asset owned by it.
(i) There are no liens for Taxes (other than for current Taxes not yet due and payable) upon the Assets of the Company or any of its Subsidiaries.
(ii) Each of the Company and its Subsidiaries are members of an affiliated group of corporations, within the meaning of Section 1504 of the Code.
(iii) Neither the Company nor any of its Subsidiaries has agreed to make, or is required to make, any adjustment under Section 481(a) of the Code by reason of a change in accounting method or otherwise.
(iv) Neither the Company nor any of its Subsidiaries is a party to any agreement, contract, arrangement or plan that has resulted or would result, separately or in the aggregate, in the payment of any "excess parachute payments" within the meaning of Section 280G of the Code.
(v) Neither the Company nor any of its Subsidiaries is a party to any joint venture, partnership, or other arrangement or contract which could be treated as a partnership for federal income tax purposes.
(vi) The Company and each of its Subsidiaries has prepared and made available (or, in the case of a portion of a period ending on the Closing Date, will prepare and make available before the Closing) to Purchaser copies of books and working papers which demonstrate the income and activities of such corporation for any period or any portion of a period ending on the Closing Date.
(vii) The Company and each of its Subsidiaries have timely provided copies of all information returns to all persons required to receive such returns, and such copies are complete and accurate in all respects. The Company and each of its Subsidiaries have complied in all respects with all applicable federal, state, and local requirements regarding information reporting and withholding, with respect to all lines and classes of insurance written by any of them.
violation, administrative actions, or lawsuits against the Company or any of its Subsidiaries arising under Environmental Laws or relating to the use, handling, storage, treatment, recycling, generation, or release of Hazardous Materials by the Company at any of the Properties, nor has the Company received any notification of any allegation of any responsibility for any disposal, release, or threatened release at any location of any Hazardous Materials; there have been no spills or releases of Hazardous Materials at any of the Properties in excess of quantities reportable under Environmental Laws; and there are no consent decrees, consent orders, judgments, judicial or administrative orders, or liens by any governmental authority relating to any Environmental Law which regulate, obligate, or bind the Company or any of its Subsidiaries.
made any agreement with any broker, finder or similar agent or any person or firm which will result in the obligation of the Company, any of its Subsidiaries or Purchaser or any of its Affiliates to pay any finder's fee, brokerage fees or commission or similar payment in connection with the transactions contemplated hereby, except Stephens, Inc., which is to be paid by Seller.
ARTICLE V
Purchaser hereby represents and warrants to Seller, which representations and warranties are, as of the date hereof, and will be, as of the Closing Date, true and correct, as follows:
valid and binding obligation of Purchaser, enforceable against Purchaser in accordance with its terms, except as such enforceability may be limited by the Bankruptcy Exception.
ARTICLE VI
Seller and Purchaser covenant and agree with each other as follows:
agree to modifications of the terms thereof in order to obtain any such waivers, consents or approvals, to obtain all necessary Permits as are required to be obtained under any Regulations, to give all notices to, and make all registrations and filings with third parties, including, without limitation, submissions of information requested by governmental authorities, and to fulfill all conditions to this Agreement.
negotiations with, or provide any information to, or otherwise cooperate in any other way with, any corporation, partnership, person or other entity or group, other than Purchaser and its Representatives, concerning any sale of all or a portion of the Shares or any merger, consolidation, liquidation, dissolution or similar transaction involving the Company or any of its Subsidiaries. Seller shall not, directly or indirectly, through any officer, director or employee, solicit, initiate or encourage the submission of any proposal or offer from any person or entity or group relating to any such transaction or participate in any negotiations regarding, or furnish to any other person any information with respect to the Company or any of its Subsidiaries for the purposes of, or otherwise cooperate in any way with, or assist or participate in, facilitate or encourage, any effort or attempt by any other person to seek or effect a such a transaction.
(a) change or amend the Articles or Certificate of Incorporation or Bylaws of the Company or any of its Subsidiaries;
(b) enter into, extend, materially modify, terminate or renew any Contract or Lease, except in the ordinary course of business;
(c) sell, assign, transfer, convey, lease, mortgage, pledge or otherwise dispose of or encumber any of the Assets, or any interests therein, except in the ordinary course of business;
(d) incur any Liability for long-term interest bearing indebtedness, guarantee the obligations of others, indemnify others or, except in the ordinary course of business, incur any other Liability;
(e) (i) take any action with respect to the grant of any bonus, severance or termination pay (otherwise than pursuant to policies or agreements of the Company or any of its Subsidiaries in effect on the date hereof) or with respect to any increase of benefits payable under its severance or termination pay policies or agreements in effect on the date hereof or increase in any manner the compensation or fringe benefits of any employee or pay any benefit not required by any existing Employee Plan or policy, except in the ordinary course of business;
(ii) make any change in the key management structure of the Company or any of its Subsidiaries, including, without limitation, the hiring of additional officers or the termination of existing officers, except for cause;
(iii) adopt, enter into or amend any Employee Plan, agreement (including, without limitation, any collective bargaining or employment agreement), trust, fund or other arrangement for the benefit or welfare of any employee, except for any such amendment as may be required to comply with applicable Regulations; or
(iv) fail to maintain all Employee Plans in accordance with applicable Regulations in all material respects;
(f) acquire by merger or consolidation with, or merge or consolidate with, or purchase substantially all of the assets of, or otherwise acquire any material assets or business of any corporation, partnership, association or other business organization or division thereof;
(g) declare, set aside, make or pay any dividend or other distribution in respect of the Company's capital stock;
(h) fail to expend funds for any budgeted capital expenditures or commitments disclosed on Schedule 4.11;
(i) willingly allow or permit to be done any act by which any of the Insurance Policies in which the Company or any of its Subsidiaries is the insured may be suspended, impaired or canceled;
(j) (i) fail to pay its accounts payable and any debts owed or obligations due by it, or pay or discharge when due any Liabilities, in the ordinary course of business; or
(ii) fail to use its best efforts to collect its premiums or other accounts receivable in the ordinary course of business;
(k) enter into, renew, modify or revise any agreement or transaction with Seller or any of its Affiliates;
(l) fail to maintain the Assets in substantially their current state of repair, excepting normal wear and tear, or fail to replace, consistent with Seller's past practice, inoperable, worn-out, obsolete or destroyed Assets;
(m) make any loans or advances to any partnership, firm or corporation, or, except for expenses incurred in the ordinary course of business, any individual;
(n) make any income tax election or settlement or compromise with tax authorities;
(o) fail to comply in any material respect with all Regulations applicable to it, the Assets and the Business;
(p) intentionally do any other act which would cause any representation or warranty of Seller in this Agreement to be or become untrue in any material respect;
(q) issue, repurchase or redeem or commit to issue, repurchase or redeem, any shares of the Company's capital stock, any options or other rights to acquire such stock or any securities convertible into or exchangeable for such stock;
(r) fail to use its best efforts to (i) retain the employees of the
Company and each of its Subsidiaries, (ii) maintain the Business so that such
employees will remain available to Purchaser on and after the Closing Date,
(iii) maintain existing relationships with suppliers, customers and others
having business dealings with the Company and any of its Subsidiaries, and (iv)
otherwise to preserve the goodwill of the Business so that such relationships
and goodwill will be preserved on and after the Closing Date; or
(s) enter into any agreement, or otherwise become obligated, to do any action prohibited hereunder.
(b) Subject to approval by the Internal Revenue Service and any other governmental agency whose approval may be required, Seller and the Company shall cause the Company's participation in the Retirement Plan to terminate as of the Closing Date and each Company Employee who is a participant therein shall be deemed to be one-hundred percent (100%) vested and hold a nonforfeitable interest in his benefits accrued as of the Closing Date. Following approval by the Internal Revenue Service with respect to any Plan amendment with respect to termination of the Company's participation in the Retirement Plan and the distribution for accrued benefits therefrom to Company Employees, and Seller's receipt of any other required governmental approvals, Seller shall make distributions to Company Employees who are participants in the Retirement Plan in accordance with the terms and provisions of the Retirement Plan.
(d) Seller shall apply for Internal Revenue Service and other necessary governmental approvals referred to above as promptly practicable following the execution of this Agreement. The request for approval by the Internal Revenue Service shall include submissions of appropriate amendments and a request for a determination letter.
(g) With respect to each Company Employee (and his or her eligible dependents) to be covered under Purchaser's medical plan from and after the Closing Date, Purchaser's medical plan shall, to the extent agreed to by the insurance carrier under Purchaser's medical plan, waive any preexisting conditions, exclusions or limitations. Purchaser shall use commercially reasonable efforts to attempt to obtain such waiver.
release shall specifically acknowledge that Article XII of the Property Aggregate Excess of Loss Reinsurance Agreement dated January 1, 1995 between the Company and ERC was eliminated by amendment and that there is no liability, commitment, arrangement, legal or otherwise, on the part of the Company or any of its Subsidiaries, with respect to the provisions of Article XII.
ARTICLE VII
The obligations of Seller to consummate the transactions provided for hereby are subject, in the discretion of Seller, to the satisfaction, on or prior to the Closing Date, of each of the following conditions, any of which may be waived by Seller:
that all approvals required under any Regulations to carry out the transactions contemplated by this Agreement shall have been obtained. The applicable waiting period, including any extension thereof, under the HSR Act shall have expired.
In rendering such opinions, such counsel may rely as it deems advisable (a) as to matters governed by the laws of jurisdictions other than states in which it maintains offices, upon opinions of local counsel satisfactory to counsel to Seller, and (b) as to factual matters, upon certificates and assurances of public officials and officers of Purchaser. In addition, such opinions
may be subject to such additional qualifications and exceptions as are reasonably acceptable to counsel to Seller.
ARTICLE VIII
The obligations of Purchaser to consummate the transactions provided for hereby are subject, in the discretion of Purchaser, to the satisfaction, on or prior to the Closing Date, of each of the following conditions, any of which may be waived by Purchaser:
have been obtained. Purchaser shall be satisfied that all approvals required under any Regulations to carry out the transactions contemplated by this Agreement shall have been obtained. The applicable waiting period, including any extension thereof, under the HSR Act shall have expired.
respect to any capital stock of the Company; Seller is the record owner and, to the knowledge of such counsel, the beneficial owner of such Shares. The Shares constitute all of the issued and outstanding capital stock of the Company. Seller has the full power to transfer the Shares to Purchaser without obtaining the consent or approval of any governmental authority or, to such counsel's knowledge, of any other person, except for those consents that have been obtained or waived. The certificates evidencing the Shares and the instruments of transfer relating thereto delivered to Purchaser at the Closing are sufficient to transfer to and vest in Purchaser title to the Shares, free and clear of all Encumbrances and, assuming Purchaser is acquiring the Shares in good faith without notice of any adverse claim, Purchaser will become the owner of the Shares, free and clear of any Encumbrances;
In rendering such opinions, such counsel may rely as it deems advisable (a) as to matters governed by the laws of jurisdictions other than states in which it maintains offices, upon opinions of local counsel satisfactory to such counsel, and (b) as to factual matters, upon certificates and assurances of public officials and officers of Seller, the Company or any of its Subsidiaries. In addition, such opinions may be subject to such additional qualifications and exceptions as are reasonably acceptable to counsel to Purchaser. Such opinions with respect to the authorization, execution and delivery of the Agreement Not to Compete shall include Cameron Enterprises, as well as Seller, within the coverage of the opinion.
Ancillary Agreements, as the case may be, and the transactions contemplated hereby and thereby, certified by Seller's corporate secretary.
terminated on or prior to the Closing Date, or (ii) reinsured in their entirety by Seller or an Affiliate of Seller.
ARTICLE IX
representations, warranties, covenants and agreements may be asserted at any
time before the date which shall be) two (2) years following the Closing (except
with respect to those matters subject to the special indemnification provisions
of Section 9.3(b) and those representations and warranties set forth in Sections
4.20 (Employee Benefit Plans), 4.21 (Tax Matters) and 4.23 (Environmental
Matters), which shall survive until the expiration of the applicable statute of
limitations (with permitted extensions) with respect to the matters addressed in
such sections. Each party hereto shall be entitled to rely upon the
representations and warranties of the other party set forth in this Agreement.
The termination of the representations and warranties provided herein shall not
affect the rights of a party in respect of any Indemnification Claim (as defined
below) made by such party in a writing received by the other party prior to the
expiration of the applicable survival period provided herein.
(i) the inaccuracy of any representation or warranty of Seller which is contained in or made pursuant to this Agreement; or
(ii) any breach by Seller of any of its agreements, covenants or obligations contained in or made pursuant to this Agreement;
subject to the terms and provisions of, and except as otherwise expressly provided for in, this Agreement. Except as set forth in Section 9.3(b), Seller shall be required to indemnify the Purchaser Indemnitees under this Section 9.3 only if and to the extent that the Losses and Expenses realized or incurred by the Purchaser Indemnitees and which are indemnified against under this Section 9.3 exceed an aggregate of Three Hundred Fifty Thousand Dollars ($350,000), and are less than Three Million Eight Hundred Fifty Thousand Dollars ($3,850,000) in the aggregate.
(i) In the event of a default in the payment of principal or interest relating to (x) the promissory note dated December 31, 1993 of Cimarron Crop Insurance Services, Inc. in favor of Cimarron, in the original principal amount of Six-Hundred Thirty-Five Thousand Dollars ($635,000), and (y) the promissory note dated December 31, 1993 of Cimarron Crop Insurance Services, Inc. in favor of the Company, in the original principal amount of Four-Hundred Eighty-Three Thousand Nine-Hundred Eighty-Two Dollars ($483,982), and if such default in the payment of principal or interest has not been cured after reasonable notice to the maker, endorsers and guarantors of the promissory note as to which such default exists, Seller, promptly and within thirty (30) days following written demand by Purchaser, will purchase such promissory note from the Company for a cash purchase price equal to the unpaid principal balance
thereof plus interest upon such unpaid principal balance at the non-default rate stated in such promissory note which is accrued but unpaid at the date of purchase. Such promissory note and all collateral securing the payment thereof shall be assigned by the Company without recourse to the Seller; and
(ii) Seller shall indemnify, save and hold harmless the Purchaser Indemnitees from and against any and all Losses and Expenses relating to the premium tax audit by the Texas Comptroller of Public Accounts identified on Schedule 4.21; and
(iii) Seller shall indemnify, save and hold harmless the Purchaser Indemnitees with respect to those Accounts Receivable identified in Section 4.9(b) for eighty-five percent (85%) of the aggregate unpaid principal amount of such Accounts Receivable as set forth in Section 4.9(b); and
(iv) Seller shall indemnify, save and hold harmless the Purchaser Indemnitees from and against any and all Losses and Expenses arising out of, based upon or resulting from the Ocean Marine Program, including, without limitation, all Losses and Expenses relating to claims by or against Continental or Covenant in which the Company or one of its Subsidiaries becomes subject to such claims.
(v) Seller shall indemnify, save and hold harmless the Purchaser Indemnitees from and against any and all Losses and Expenses, in excess of any reinsurance recoverable from Seller or an Affiliate of Seller, relating to the arrangement whereby the Company is issuing accident and health insurance in the State of Pennsylvania under a "fronting arrangement" with an Affiliate of Seller described in Section 6.17.
earned by any third party acting on behalf of the indemnifying party in connection with the negotiation and execution hereof and the consummation of the transactions contemplated hereby.
(d) In the event any objection raised by Seller is not resolved by the
Agreed Holdback Adjustment within the 30-day period referred to in subsection
(c), then Seller and Purchaser shall submit the unresolved objection to
arbitration pursuant to Section 10.12, and the Preliminary Holdback Accounting
Report, as adjusted to give effect to the resolution of such objections, shall
be deemed the Final Holdback Accounting Report.
(e) The parties hereto shall make available to each other such books, records and other information (including work papers) as any of the foregoing may reasonably request to prepare or review the Preliminary Holdback Accounting Report.
Purchaser shall pay to Seller promptly after the first anniversary of the Closing Date an amount equal to the Holdback Amount as reflected in the Final Holdback Accounting Report. The parties agree that offset against the Holdback Amount shall not be Purchaser's exclusive method of receiving indemnification from Seller pursuant to this Article IX.
in the calculation of the Reserve Redundancy or Reserve Deficiency as provided in Section 2.4, and (b) Seller shall have the right to assume the defense of the Claim at Seller's expense, and (c) Seller shall be obligated to make reimbursement even though such Claim may be finally resolved after December 31, 2001 (or with respect to a Late Claim, finally resolved after December 31, 2004) and Seller shall pay to Purchaser (or the Company or a Subsidiary, as the case may be) all amounts due under clause (a) above to the extent such amounts are in excess of the Case Reserve for such Claim at December 31, 2001.
In the event Seller has reasonably determined that the Company or any of its Subsidiaries has shown a pattern of material departures from the Claims- Processing Standards, then, within thirty (30) days following receipt of Seller's Report, Purchaser shall give written notice to Seller which shall identify any of Seller's conclusions contained in Seller's Report which Purchaser disputes. The failure of Purchaser to give notice of dispute of any conclusion stated in a Seller's Report shall be deemed an irrevocable concurrence by Purchaser in any disputed conclusions. Such disputes shall be resolved in accordance with the procedures set forth in Section 10.12 of this Agreement. The arbitrator appointed to resolve such disputes shall make a preliminary determination whether, during the period of review covered by such Seller's Report, the Company or any of its Subsidiaries engaged in a pattern of material departures from the Claims-Processing Standards. If the arbitrator finds that no such pattern exists, there shall be no further inquiry by such arbitrator into the Claim Payments made by the Company and its Subsidiaries on or prior to the date of the Seller's Report in dispute, and such Claim Payments shall be deemed final, binding and conclusive upon the parties. In the event the arbitrator finds that such a pattern does exist, the arbitrator shall resolve the disputes between Purchaser and Seller outlined in the Seller's Report and Purchaser's response thereto on a Claim-by-
Claim or Late Claim-by-Late Claim basis and shall issue a decision with respect
to each disputed Claim or Late Claim. Under no circumstances shall the
arbitrator use any method of extrapolation in determining the number of Claims
or Late Claims overpaid by the Company and its Subsidiaries or the total amount
overpaid by the Company and or any of its Subsidiaries with respect to Claim
Payments. The final determination of such disputed items shall be considered in
the determination of the Reserve Redundancy or Reserve Deficiency as provided in
Section 2.4.
(ii) Not later than May 31, 1997, August 31, 1997, and November 30,
1997, and on February 28, May 31, August 31 and November 30 of each year
thereafter (until there are no longer any outstanding losses incurred under the
Ocean Marine Program that have not been finally resolved) Purchaser shall
deliver to Seller an Ocean Marine Settlement Report setting forth Purchaser's
determination of the "net program income" realized or the "net program loss"
incurred by the Company and its Subsidiaries and attributable to the Ocean
Marine Program for the preceding three (3) month periods ended January 31, April
30, July 31 and October 31, respectively, and shall include Ocean Marine Case
Reserves and Ocean Marine IBNR Reserves as of the end of such three (3) month
periods ended January 31, April 30, July 31 and October 31, respectively, for
all outstanding losses incurred under the program. Seller shall be entitled to
receive, on or prior to the date that is sixty (60) days after the end of each
three (3) month period ended January 31, April 30, July 31 and October 31,
respectively, an amount equal to the "net program income" realized by the
Company and its Subsidiaries attributable to the Ocean Marine Program, if any,
set forth in such Ocean Marine Settlement Report. Purchaser, on the other hand,
shall be entitled to receive from Seller, on or prior to the date that is sixty
(60) days after the end of each three (3) month period ended January 31, April
30, July 31 and October 31, respectively, an amount equal to the "net program
loss" incurred by the Company and its Subsidiaries and attributable to the Ocean
Marine Program, if any, set forth in such Ocean Marine Settlement Report.
(iii) For purposes of this Section 9.8(b), the "net program income"
realized or the "net program loss" incurred by the Company and its Subsidiaries
and attributable to the Ocean Marine Program shall be determined in accordance
with Exhibit G attached hereto. Net program income or loss shall be determined
pursuant to the Covenant Agreement, the Continental Agreement and the
reinsurance agreements that are part of the Ocean Marine Program pursuant to
Section 4.27 or 9.8(a), and shall also include as an expense of the program
reasonable administrative and other costs incurred by the Company with respect
to such program.
(iv) In the event there exists on any date that is sixty (60) days after the end of each such three (3) month period described in Section 9.8(b)(ii) a dispute which has not been resolved pursuant to Section 9.8(c), payment shall be made promptly, but in no event more than two (2) business days, after the dispute has been resolved.
(i) Following receipt of each Ocean Marine Settlement Report, Seller may review the same and, within thirty (30) days after the date of such receipt, may deliver to Purchaser a certificate setting forth any objections to the determinations set forth in such Ocean Marine Settlement Report, together with a summary of the reasons therefor and calculations which, in Seller's view, are necessary to eliminate such objections, to the extent the information necessary to made such calculations is reasonably available to Seller. If Seller does not object within such 30-day period, the determinations set forth in the Ocean Marine Settlement Report shall be final and binding on Purchaser and Seller.
(iii) If any objections timely raised by Seller are not resolved by the Ocean Marine Agreed Changes within the 30-day period contemplated in this Subsection 9.8(c), then Purchaser and Seller shall submit the objections that are then unresolved to the Accounting Firm. The Accounting Firm shall be directed by Purchaser and Seller to seek to resolve the unresolved objections as promptly as reasonably practicable and to deliver written notice to each of Purchaser and Seller setting forth its resolution of the disputed matters. The determinations set forth in the Ocean Marine Settlement Report as adjusted by the Ocean Marine Agreed Changes and by the Accounting Firm's resolution of such objections shall be final and binding on the parties.
(iv) The parties hereto shall make available to Purchaser, Seller (and their respective Representatives) and, if applicable, the Accounting Firm, such books, records and other information (including work papers) as any of the foregoing may reasonably request to prepare to review any Ocean Marine Settlement Report or any matters submitted to the Accounting Firm pursuant to this Section 9.8.
(v) The reasonable fees and expenses of the Accounting Firm shall be paid fifty percent (50%) by Purchaser and fifty percent (50%) by Seller. Any fees and expenses payable by Seller pursuant to this Section 9.8(c), at the election of Purchaser, to the extent available, may be set-off from any amounts otherwise payable to Seller pursuant to this Section 9.8.
(c) In the event any objections raised by Seller are not resolved by the Agreed Adjustments within the 30-day period referred to in subsection (c), then Seller and Purchaser shall (i) if the total amount in controversy is less than Fifteen Thousand Dollars ($15,000), submit the objections that are then unresolved to the Auditor, or (ii) if the total amount in controversy is equal to or greater than Fifteen Thousand Dollars ($15,000), the Accounting Firm shall resolve any remaining disagreements. The determination by the Auditor or the Accounting Firm, as the case may be, shall be final, binding and conclusive on the parties. Purchaser and Seller shall use their best efforts to cause the Auditor or the Accounting Firm, as the case may be, to make its determination within thirty (30) calendar days of submission of the items in controversy. The Preliminary Effective Date Balance Sheet, after giving effect to any Agreed Adjustments and to the resolution of disputed matters by the Auditor or the Accounting Firm, as the case may be, shall be final and binding as the Effective Date Balance Sheet for purposes of this Agreement. Unresolved objections not involving accounting issues shall be resolved by arbitration pursuant to Section 10.12.
(d) The parties hereto shall make available to each other, the Auditor or the Accounting Firm, as the case may be, such books, records and other information (including work papers) as any of the foregoing may reasonably request to prepare or review the Preliminary Accounting Report or any matters submitted to the Auditor or the Accounting Firm, as the case may be. The reasonable fees and expenses of the Auditor or the Accounting Firm, as the case may be, hereunder shall be paid fifty percent (50%) by Purchaser and fifty percent (50%) by Seller.
(e) No determination or agreement with respect to the Effective Date Balance Sheet contemplated by this Section 9.9 shall limit the representations, warranties, covenants and agreements of the parties set forth elsewhere in this Agreement.
ARTICLE X
(i) By mutual written consent of Purchaser and Seller;
(i) Each party will redeliver all documents, work papers and other material of any other party relating to the transactions contemplated hereby, whether so obtained before or after the execution hereof, to the party furnishing the same;
(ii) The provisions of Section 10.10 shall continue in full force and effect; and
(iii) No party hereto shall have any Liability to any other party to
this Agreement, except as stated in subsections (i), (ii) and (iii) of this
Section 10.1(b), except for any willful breach of this Agreement occurring prior
to the proper termination of this Agreement. The foregoing provisions shall not
limit or restrict the availability of specific performance or other injunctive
relief to the extent that specific performance or such other relief would
otherwise be available to a party hereunder.
If to Seller, addressed to:
American Fidelity Corporation
2000 Classen Boulevard
Suite 700-North
Oklahoma City, OK 73106
Attention: Kenneth D. Klehm
Fax: (405) 523-5411
With a copy to:
McAfee & Taft
Two Leadership Square
211 North Robinson
Suite 1000
Oklahoma City, OK 73102
Attention: Theodore M. Elam, Esq.
Fax: (405) 235-0439
If to Purchaser, addressed to:
Mercury General Corporation
4484 Wilshire Boulevard
Los Angeles, CA 90010
Attention: George Joseph
Fax: (213) 857-7116
and
Mercury General Corporation
555 W. Imperial Hwy.
Brea, CA 92621
Attention: Michael D. Curtius
Fax: (714) 671-7464
With a copy to:
Latham & Watkins
701 B Street, Ste. 2100
San Diego, CA 92101
Attention: Donald P. Newell, Esq.
Fax: (619) 696-7419
or to such other place and with such other copies as either party may designate as to itself by written notice to the others.
possession prior to its being furnished to such party by or on behalf of the other party to this Agreement in connection with the transactions contemplated hereby, provided that the source of such information was not known by the receiving party, to be bound by a confidentiality agreement with or other contractual, legal or fiduciary obligation of confidentiality to the other party to this Agreement or any other person with respect to such information, or (iii) becomes available to Purchaser or Seller on a non-confidential basis from a source other than the other party to this Agreement or any of its Representatives, provided that such source is not bound by a confidentiality agreement with or other contractual, legal or fiduciary obligation of confidentiality to the other party to this Agreement or any other person with respect to such information.
process, they intend to and do waive their right to have any dispute decided in court by a judge or jury.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed on their respective behalf, by their respective officers thereunto duly authorized, all as of the day and year first above written.
AMERICAN FIDELITY CORPORATION
By: _____________________________
William E. Durrett
Chairman of the Board
MERCURY GENERAL CORPORATION
By: ____________________________
Michael D. Curtius
Chief Operating Officer
EXHIBIT 21.1
SUBSIDIARIES - MERCURY GENERAL CORPORATION
Mercury Casualty Company (100% owned)
Mercury Insurance Company (100% owned by Mercury Casualty Company)
California General Underwriters Insurance Company, Inc. (100% owned by Mercury
Casualty Company)
California Automobile Insurance Company (100% owned)
Mercury Insurance Company of Georgia (100% owned by California Automobile
Insurance Company)
Mercury Indemnity Company of Georgia (100% owned)
Mercury Insurance Company of Illinois (100% owned)
Mercury Indemnity Company of Illinois (100% owned by Mercury Insurance Company
of Illinois)
American Fidelity Insurance Company (100% owned)
Cimarron Insurance Company (100% owned by American Fidelity Ins. Company)
AFI Management Company, Inc. (100% owned by American Fidelity Ins. Company) **
** Attorney-in-fact for American Fidelity Lloyds Insurance Co., whose results
are consolidated with Mercury General Corporation
EXHIBIT 23.1
The Board of Directors
Mercury General Corporation
We consent to incorporation by reference in the registration statement No. 333-01583 on Form S-8 of Mercury General Corporation of our report dated February 21, 1997, relating to the consolidated balance sheets of Mercury General Corporation and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of income, shareholders' equity, and cash flows and related schedules for each of the years in the three-year period ended December 31, 1996, which reports appear in the December 31, 1996 annual report on Form 10-K of Mercury General Corporation
KPMG PEAT MARWICK LLP
Los Angeles, California
March 17, 1997
| ARTICLE 7 |
| MULTIPLIER: 1,000 |
| PERIOD TYPE | YEAR |
| FISCAL YEAR END | DEC 31 1996 |
| PERIOD START | JAN 01 1996 |
| PERIOD END | DEC 31 1996 |
| DEBT HELD FOR SALE | 954,108 |
| DEBT CARRYING VALUE | 0 |
| DEBT MARKET VALUE | 0 |
| EQUITIES | 148,112 |
| MORTGAGE | 0 |
| REAL ESTATE | 0 |
| TOTAL INVEST | 1,168,287 |
| CASH | 3,605 |
| RECOVER REINSURE | 0 |
| DEFERRED ACQUISITION | 46,783 |
| TOTAL ASSETS | 1,419,927 |
| POLICY LOSSES | 336,685 |
| UNEARNED PREMIUMS | 260,878 |
| POLICY OTHER | 0 |
| POLICY HOLDER FUNDS | 0 |
| NOTES PAYABLE | 75,000 |
| PREFERRED MANDATORY | 0 |
| PREFERRED | 0 |
| COMMON | 42,644 |
| OTHER SE | 598,578 |
| TOTAL LIABILITY AND EQUITY | 1,419,927 |
| PREMIUMS | 754,724 |
| INVESTMENT INCOME | 70,180 |
| INVESTMENT GAINS | (3,173) |
| OTHER INCOME | 3,233 |
| BENEFITS | 501,858 |
| UNDERWRITING AMORTIZATION | 160,019 |
| UNDERWRITING OTHER | 24,493 |
| INCOME PRETAX | 136,590 |
| INCOME TAX | 30,826 |
| INCOME CONTINUING | 105,764 |
| DISCONTINUED | 0 |
| EXTRAORDINARY | 0 |
| CHANGES | 0 |
| NET INCOME | 105,764 |
| EPS PRIMARY | 3.86 |
| EPS DILUTED | 0 |
| RESERVE OPEN | 250,990 |
| PROVISION CURRENT | 529,952 |
| PROVISION PRIOR | (3,868) |
| PAYMENTS CURRENT | 298,099 |
| PAYMENTS PRIOR | 167,226 |
| RESERVE CLOSE | 311,754 |
| CUMULATIVE DEFICIENCY | 3,868 |