AGREEMENT AND PLAN OF MERGER

Exhibit 2.1

 

EXECUTION COPY

 

 

AGREEMENT AND PLAN OF MERGER

 

dated as of

 

October 14, 2004

 

by and among

 

PENN-AMERICA GROUP, INC.,

 

UNITED NATIONAL GROUP, LTD.,

 

U.N. HOLDINGS II, INC.

 

and

 

CHELTENHAM ACQUISITION CORP.

 

TABLE OF CONTENTS

 

 

i

 

ii

 

 

iii

INDEX OF DEFINED TERMS

 

 

iv

 

v

 

vi

AGREEMENT AND PLAN OF MERGER

 

THIS AGREEMENT AND PLAN OF MERGER (this “ Agreement ”), dated as of October 14, 2004, is entered into by and among Penn-America Group, Inc., a Pennsylvania corporation (the “ Company ”), United National Group, Ltd., an exempted company formed with limited liability under the laws of the Cayman Islands (“ Parent ”), U.N. Holdings II, Inc., a Delaware corporation and an indirect, wholly-owned subsidiary of Parent (“ Buyer ”), and Cheltenham Acquisition Corp., a newly-formed Pennsylvania corporation and a wholly-owned subsidiary of Buyer (“ Merger Subsidiary ”).

 

W I T N E S S E T H:

 

WHEREAS, a committee of the Board of Directors of the Company consisting solely of independent directors (the “ Company Independent Committee ”) has determined that the merger of Merger Subsidiary with and into the Company on the terms and conditions set forth in this Agreement (the “ Merger ”) is advisable and in the best interests of the Company and has recommended that the Board of Directors of the Company approve and adopt this Agreement and recommend that the Company’s shareholders vote for the adoption of this Agreement;

 

WHEREAS, the Board of Directors of the Company has determined that the Merger is advisable and in the best interests of the Company and has approved and adopted this Agreement and has resolved to recommend that the Company’s shareholders vote for the adoption of this Agreement;

 

WHEREAS, the Board of Directors of Buyer has determined that the Merger is advisable and in the best interests of Buyer and its shareholder;

 

WHEREAS, the Board of Directors of Parent has determined that the Merger is advisable and in the best interests of Parent and Parent’s shareholders, has approved and adopted this Agreement and has recommended that Parent’s shareholders vote for the approval of the issuance of Parent Class A Common Shares (as defined below) in the Merger;

 

WHEREAS, as a condition and further inducement to the Company to enter into this Agreement, U.N. Holdings (Cayman), Ltd., U.N. Co-Investment Fund I (Cayman), L.P., U.N. Co-Investment Fund II (Cayman), L.P., U.N. Co-Investment Fund III (Cayman), L.P., U.N. Co-Investment Fund IV (Cayman), L.P., U.N. Co-Investment Fund V (Cayman), L.P., U.N. Co- Investment Fund VI (Cayman), L.P., U.N. Co-Investment Fund (Cayman) VII, L.P., U.N. Co-Investment Fund VIII (Cayman), L.P., and U.N. Co-Investment Fund IX (Cayman), L.P. (the “ Parent Shareholders ”) have entered into a voting agreement with the Company pursuant to which the Parent Shareholders have agreed to vote all of their Parent Class A Common Shares and Parent Class B Common Shares (as defined below) affirmatively in connection with the Parent Share Issuance Approval (as defined in Section 5.3(a));

 

WHEREAS, the Board of Directors of Merger Subsidiary has determined that the Merger is advisable and in the best interests of Merger Subsidiary and its

 

shareholder, has approved and adopted this Agreement and has resolved to recommend that Merger Subsidiary’s shareholder vote for the adoption of this Agreement;

 

WHEREAS, for United States federal income tax purposes, it is intended that the Merger be treated as a taxable acquisition by Buyer of the common stock, par value $0.01 per share, of the Company (“ Company Common Stock ”), other than Company Common Stock held by a Subsidiary of PIC (as defined below); and

 

WHEREAS, the shareholders of Penn Independent Corporation (“ PIC ”) have entered into a Stock Purchase Agreement (the “ Stock Purchase Agreement ”), dated as of the date hereof, by and among Parent, United National Insurance Company (“ UNIC ”), PIC and the shareholders of PIC (the “ PIC Shareholders ”), pursuant to which the PIC Shareholders have agreed, among other things, to sell their shares of PIC to a subsidiary of Parent, upon the terms and subject to the conditions set forth therein immediately prior to the Effective Time.

 

NOW, THEREFORE, in consideration of the representations, warranties, covenants and agreements contained in this Agreement, the adequacy of which is hereby acknowledged, and intending to be legally bound hereby, the parties hereby agree as follows:

 

ARTICLE I

 

DEFINITIONS

 

Section 1.1 Definitions . When used in this Agreement, the following terms shall have the respective meanings specified therefore below:

 

“ Books and Records ” shall mean, with regard to any Person, without limitation, the originals or copies of any customer lists, lists of agents and brokers, administrative and pricing manuals, records (including, without limitation, claims records, sales records, underwriting records, financial records, compliance records, customer complaint logs and other customers complaint records, and tax records), corporate minute books and other materials relating, directly or indirectly, to the businesses of such Person and its Subsidiaries, whether or not in the possession of such Person, its Subsidiaries or its affiliates or their respective Representatives or stored in hardcopy form or on magnetic, optical or other media.

 

“ Code ” means the Internal Revenue Code of 1986, as amended, and the rules and regulations promulgated thereunder.

 

“ Company Balance Sheet ” means the audited consolidated balance sheet of the Company as of December 31, 2003 set forth in the Annual Report on Form 10-K filed by the Company with the SEC on March 11, 2004.

 

“ Company Permits ” means all Permits required for any business operated or services furnished by the Company or its Subsidiaries, including Insurance Permits.

 

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“ Contract ” means, with respect to any Person, any agreement, arrangement, undertaking, contract, commitment, obligation, promise, indenture, deed of trust or other instrument or agreement (whether written or oral and whether express or implied) by which that Person is bound or subject.

 

“ Environmental Laws ” means federal, state, local and foreign statutes, Laws, judicial decisions, regulations, ordinances, rules, judgments, orders, codes, injunctions, permits and governmental agreements relating to the environment, or the protection of human health as it relates to the environment including, but not limited to, those relating to the management or Release of Hazardous Materials.

 

“ Exchange Act ” means the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder.

 

“ Governmental Authority ” means any nation or government, any state or other political subdivision thereof, including any domestic (federal, state or local), foreign or supranational governmental or regulatory authority, agency, department, board, commission, administration or instrumentality, any court, tribunal or arbitrator or any self-regulatory organization (including but not limited to state departments or divisions of insurance).

 

“ Hazardous Material ” means all substances or materials regulated as hazardous, toxic, explosive, dangerous, flammable or radioactive under any Environmental Law including (i) petroleum, asbestos or polychlorinated biphenyls, and (ii) in the United States, all substances defined as Hazardous Substances, Oils, Pollutants or Contaminants in the National Oil and Hazardous Substances Pollution Contingency Plan, 40 C.F.R. Section 300.5.

 

“ Insurance Contract ” means any of the insurance policies, Contracts of insurance, policy endorsements, certificates of insurance and application forms pertaining to the Insurance Products underwritten by the Company or any of its Subsidiaries, but not including those insurance contracts listed in Section 1.1 of the Company Disclosure Letter.

 

“ Insurance Permit ” means any Company Permit in any jurisdiction to issue, underwrite, assume, place or otherwise transact the business of insurance.

 

“ Insurance Products ” means any of the insurance coverage underwritten in whole or in part by the Company or any of its Subsidiaries.

 

“ Insurance Subsidiaries ” means Penn-America Insurance Company and Penn-Star Insurance Company.

 

“ Investment Assets ” means, with respect to any Person, all bonds, stocks, mortgage loans and other investments, together with all bonds, stocks, mortgage loans and other investments that are carried on the Books and Records of such Person and its Subsidiaries as of the most recent balance sheet of such Person included in its SEC filings

 

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or that are acquired by such Person and its Subsidiaries between June 30, 2004 and the Closing Date.

 

“ knowledge of the Company ” means the actual knowledge, after reasonable investigation and inquiry, of the officers of the Company listed on Section 1.1 of the Company Disclosure Letter.

 

“ knowledge of Parent ” means the actual knowledge, after reasonable investigation and inquiry, of the officers of Parent listed on Section 1.1 of the Parent Disclosure Letter.

 

“ Law ” means any law (including common law), ordinance, writ, directive, judgment, order, decree, injunction, statute, treaty, rule, regulation, regulatory requirement or determination of (or an agreement with) a Governmental Authority.

 

“ Liability ” means any debt, liability, commitment, claim or obligation of any kind whatsoever, whether due or to become due, known or unknown, accrued or fixed, or absolute or contingent.

 

“ Lien ” means any and all liens, charges, security interests, options, claims, mortgages, pledges or restrictions on title or transfer of any nature whatsoever.

 

“ Material Adverse Effect ” means, with respect to any Person, any fact, event, circumstance, change, condition or effect that individually or together with other facts, events, circumstances, changes, conditions or effects has been or would reasonably be expected to be material and adverse to the business, assets, properties, liabilities, financial condition or results of operations of such Person and its Subsidiaries, taken as a whole; provided , however , that (i) the following shall be deemed not to be a Material Adverse Effect: a change or effect (A) resulting from changes or effects to the U.S. or global economy in general, (B) resulting from changes or effects to the P&C Business except to the extent of any disproportionate effect on such Person or its Subsidiaries taken as a whole (relative to most participants in the P&C Business), (C) with respect to the Company, resulting primarily from the identities of the Buyer and its affiliates or statements or other actions by them taken or made without the prior written consent of the Company, or (D) resulting from changes in GAAP or SAP after the date hereof, and (ii) a decrease in the trading or market prices of an entity’s capital stock shall not be considered, by itself, to constitute a Material Adverse Effect (it being understood that the foregoing shall not prevent any party from asserting that any fact, event, circumstance, change, condition or effect that may have contributed to such reduction independently constitutes a Material Adverse Effect).

 

“ P&C Business ” means the business of writing in the United States excess and surplus primary property and casualty insurance through general agents.

 

“ Permits ” means any licenses, franchises, permits, certificates, approvals, accreditations or other similar authorizations from any Governmental Authority.

 

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“ Permitted Liens ” means, collectively, (i) Liens for Taxes not yet payable or the validity of which are being contested in good faith by appropriate proceedings and for which adequate reserves are reflected in the Company SEC Reports, (ii) mechanics’, workmen’s, repairmen’s, warehousemen’s, landlord’s, carrier’s, materialmen’s or other like Liens, including all statutory Liens arising or incurred in the ordinary course of business consistent with past practice, which would not reasonably be expected to materially interfere with the operation of the business of the Company or its Subsidiaries, (iii) any minor imperfection of title or similar Lien which does not and would not reasonably be expected to impair in any material respect the operations of the business of the Company or its Subsidiaries, (iv) Liens to secure capital lease obligations to the extent the incurrence of such obligations does not violate this Agreement, (v) any Liens created to secure purchase money indebtedness, (vi) any Liens incurred pursuant to equipment leases in the ordinary course of business and (vii) Liens incurred pursuant to actions of Parent or any of its Affiliates.

 

“ Person ” means and includes an individual, a partnership, a joint venture, a corporation, a limited liability company, a trust, an association, an unincorporated organization, a Governmental Authority and any other entity or group (as defined in the Exchange Act).

 

“ Qualifying Amendment ” means an amendment or supplement to the Joint Proxy Statement/Prospectus or Form S-4 (including by incorporation by reference) to the extent it contains only (a) a Company Change in Recommendation, (b) a statement of the reasons of the Board of Directors of the Company for making such Company Change in Recommendation, and (c) additional information reasonably related to the foregoing.

 

“ Release ” means any release, spill, emission, discharge, leaking, pumping, injection, deposit, disposal, dispersal, leaching or migration into the indoor or outdoor environment (including ambient air, surface water, groundwater, and surface or subsurface strata) or into or out of any property.

 

“ Representative ” means, with respect to any Person, (a) its Subsidiaries and affiliates, and (b) its, and its Subsidiaries’ and affiliates’ respective officers, directors, employees, auditors, financial advisors, attorneys, accountants, consultants, agents, advisors or representatives.

 

“ SAP ” means, with respect to any Person, the statutory accounting principles and practices prescribed or permitted by the state or states in which the relevant Person conducts business.

 

“ SEC ” means the United States Securities and Exchange Commission.

 

“ Securities Act ” means the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder.

 

“ Subsidiary ” when used with respect to any Person means another Person, an amount of the voting securities, other voting ownership or voting partnership interests of which is sufficient to elect at least a majority of its board of directors or similar

 

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governing body (or if there are no such voting interests, 50% or more of the equity interest of which) is owned directly or indirectly by such first Person or by another Subsidiary of such Person.

 

“ Tax Return ” means any return, report or similar statement (including any attachment or supplements thereto) supplied to or required to be supplied to any taxing authority, including, any information return, claim for refund, amended return or declaration of estimated Tax.

 

“ Tax ” or “ Taxes ” means any and all federal, state, local, foreign or other taxes of any kind (together with any and all interest, penalties, additions to tax and additional amounts imposed with respect thereto) imposed by any taxing authority, including, taxes, fees, duties, levies, customs, tariffs, imposts, assessments, obligations or other similar charges of any kind on or with respect to income, franchises, premiums, windfall or other profits, gross receipts, property, sales, use, transfer, capital stock, payroll, employment, social security, workers’ compensation, unemployment compensation or net worth, and taxes or other similar charges of any kind in the nature of excise, withholding, ad valorem or value added.

 

“ Third Party ” means any Person (or group of Persons) other than Parent and its Subsidiaries.

 

ARTICLE II

 

THE MERGER

 

Section 2.1 The Merger .

 

(a) As soon as reasonably practicable on the Closing Date, the Company and Merger Subsidiary shall execute and file articles of merger with the Secretary of State of the Commonwealth of Pennsylvania and make all other filings or recordings required by the Business Corporation Law of the Commonwealth of Pennsylvania (the “ PBCL ”) to be made in connection with the Merger. The Merger shall become effective at such time as articles of merger are duly filed with the Secretary of State of the Commonwealth of Pennsylvania or, if agreed to by the Company and Parent, at such later time as is specified in the articles of merger (such time, the “ Effective Time ”).

 

(b) Upon the terms and subject to the conditions set forth in this Agreement, at the Effective Time, Merger Subsidiary shall be merged with and into the Company in accordance with the requirements of the PBCL, whereupon the separate existence of Merger Subsidiary shall cease. The Company shall be the surviving corporation in the Merger (the “ Surviving Corporation ”).

 

(c) The Merger will have the effects set forth in the PBCL, including, without limitation, the effects set forth in Section 1929 of the PBCL. Without limiting the generality of the foregoing, and subject thereto, from and after the Effective Time, the Surviving Corporation shall possess all the rights, privileges, immunities, powers and

 

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purposes and assume and be liable for all the liabilities, obligations and penalties of the Company and Merger Subsidiary.

 

(d) The closing of the transactions contemplated hereby (the “ Closing ”) shall take place at the offices of Skadden, Arps, Slate, Meagher & Flom LLP, Four Times Square, New York, NY 10036, at 10:00 a.m. local time, as soon as reasonably practicable, but in any event within two (2) business days, after the satisfaction or waiver of the conditions set forth in Article VII (other than those conditions that are to be satisfied at the Closing) (the actual time and date of the Closing being referred to herein as the “ Closing Date ”).

 

Section 2.2 Conversion of Shares .

 

(a) At the Effective Time, by virtue of the Merger and without any action on the part of the holder thereof:

 

(i) each share of Company Common Stock held by the Company as treasury stock or held by Parent or any of its Subsidiaries (other than Buyer, UNIC, PIC and PIC’s Subsidiaries) immediately prior to the Effective Time shall be canceled, and no payment shall be made with respect thereto; provided , that shares of Company Common Stock held by the Company, Parent or any of their Subsidiaries in trust accounts, managed accounts, investment accounts and the like shall not be cancelled and shall be treated in accordance with Section 2.2(a)(iv);

 

(ii) each share of common stock, par value $0.01 per share, of Merger Subsidiary (“ Merger Subsidiary Common Stock ”) outstanding immediately prior to the Effective Time shall be converted into and become one share of common stock of the Surviving Corporation with the same rights, powers and privileges as the share so converted and the shares so converted, together with the shares remaining outstanding pursuant to Section 2.2(a)(iii), shall constitute the only outstanding shares of capital stock of the Surviving Corporation;

 

(iii) each share of Company Common Stock held by Buyer, UNIC, PIC or any of PIC’s Subsidiaries shall remain outstanding and shall be unaffected by the Merger and shall represent shares of common stock of the Surviving Corporation; provided , that shares of Company Common Stock held by PIC or any of its Subsidiaries in trust accounts, managed accounts, investment accounts and the like shall not remain outstanding and shall be treated in accordance with Section 2.2(a)(iv); and

 

(iv) each share of Company Common Stock outstanding immediately prior to the Effective Time shall, except as otherwise provided in Sections 2.2(a)(i) and 2.2(a)(iii), be converted into the right to receive (A) an amount of Class A common shares, $0.0001 par value per share, of Parent (“ Parent Class A Common Shares ”) equal to the Exchange Ratio (the “ Per Share Stock Amount ”) and (B) an amount in cash equal to $1.50 (the “ Per Share Cash

 

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Amount”), issuable and payable, without interest, upon surrender of the certificate that formerly evidenced such share of Company Common Stock (a “ Certificate ”) in the manner provided in Section 2.3. For the purposes of this Agreement, the “ Exchange Ratio “ shall be equal to the result obtained by dividing $13.875 by the Average Sales Price. For the purposes of this Agreement, the “ Average Sales Price ” shall be the volume weighted average sales price of a Parent Class A Common Share, as reported on the Nasdaq Stock Market by The Wall Street Journal (or in the absence thereof, by another authoritative source) during the twenty (20) consecutive trading days ending on and including the trading day immediately preceding the date of the Effective Time (the “ Measurement Period ”)). For the purposes of this Agreement, the “ Merger Consideration ” means the right to receive the Per Share Stock Amount and the Per Share Cash Amount pursuant to the Merger with respect to each share of Company Common Stock (together with any cash in lieu of fractional shares as specified in Section 2.6 below).

 

(b) From and after the Effective Time, all shares of Company Common Stock canceled pursuant to Section 2.2(a)(i) and all shares of Company Common Stock converted in accordance with Section 2.2(a)(iv) shall no longer be outstanding and shall automatically be canceled and retired and shall cease to exist, and each holder of a Certificate shall cease to have any rights with respect thereto, except, in the case of shares of Company Common Stock canceled pursuant to Section 2.2(a)(iv), the right to receive the Merger Consideration to which such holder is entitled and any dividends payable pursuant to Section 2.3(f) with respect to the shares of Company Common Stock represented by the Certificate(s) surrendered by such holder pursuant to Section 2.3(b). From and after the Effective Time, all certificates representing Merger Subsidiary Common Stock shall be deemed for all purposes to represent only the number of shares of common stock of the Surviving Corporation into which they were converted in accordance with Section 2.2(a)(ii).

 

Section 2.3 Surrender and Payment .

 

(a) Prior to the Effective Time, Buyer shall appoint an exchange agent (the “ Exchange Agent ”) for the purpose of exchanging Certificates for the Merger Consideration. At or promptly following the Effective Time, Buyer shall deposit, or cause to be deposited, with the Exchange Agent (i) certificates representing the Parent Class A Common Shares issuable pursuant to Section 2.2(a)(iv), (ii) cash sufficient to make the cash payments payable pursuant to Section 2.2(a)(iv), and (iii) from time to time as needed, cash sufficient to pay cash in lieu of fractional shares to the extent required by Section 2.6. Promptly after the Effective Time, Buyer will send, or cause the Exchange Agent to send, to each holder of record of shares of Company Common Stock as of the Effective Time, a letter of transmittal for use in such exchange (which shall specify that the delivery shall be effected, and risk of loss and title shall pass, only upon proper delivery of the Certificates to the Exchange Agent), which letter shall be in such form as the Company and Buyer may reasonably agree to use in effecting delivery of shares of Company Common Stock to the Exchange Agent.

 

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(b) Each holder of shares of Company Common Stock that have been converted into the right to receive the Merger Consideration as provided herein will be entitled to receive the Merger Consideration in respect of the shares of Company Common Stock represented by such Certificate only upon surrender to the Exchange Agent of such Certificate, together with a properly completed letter of transmittal. Until so surrendered, each such Certificate so converted shall, after the Effective Time, represent for all purposes only the right to receive such Merger Consideration. No interest will be paid or accrued on any cash payable as part of the Merger Consideration or in lieu of fractional shares pursuant to Section 2.6.

 

(c) If any portion of the Merger Consideration is to be registered in or paid to the name of a Person other than the Person in whose name the applicable surrendered Certificate is registered, it shall be a condition to the registration or payment of such Merger Consideration that (i) the surrendered Certificate shall be properly endorsed or otherwise be in proper form for transfer, and (ii) the Person requesting such registration or payment of the Merger Consideration shall (A) pay to the Exchange Agent any transfer or other Taxes required as a result of such registration or payment in the name of a Person other than the registered holder of such Certificate, or (B) establish to the satisfaction of Parent that such Tax either has been paid or is not payable.

 

(d) After the Effective Time, there shall be no further registration of transfers of shares of capital stock of the Company on the stock records of, or relating to, the Company. If, after the Effective Time, Certificates are presented to the Exchange Agent, the Surviving Corporation or Buyer, they shall be canceled and, if applicable, exchanged for the Merger Consideration provided for, and in accordance with the procedures and limitations set forth, in this Article II.

 

(e) Any portion of the Merger Consideration made available to the Exchange Agent pursuant to Section 2.3(a) that remains unclaimed by the holders of shares of Company Common Stock twelve (12) months after the Effective Time shall be returned to Buyer and any such holder who has not exchanged such holder’s shares of Company Common Stock for the Merger Consideration in accordance with this Section 2.3 prior to that time shall thereafter look only to Buyer for delivery of the Merger Consideration in respect of such holder’s shares without any interest thereon. Notwithstanding the foregoing, Buyer shall not be liable to any Person for any Merger Consideration delivered to a public official pursuant to applicable abandoned property, escheat or similar Laws. If any Certificate shall not have been surrendered immediately prior to such date on which any Merger Consideration, any dividends or distributions payable to the holder of such Certificate or any cash payable to the holder of such Certificate pursuant to this Section 2.3 would otherwise escheat to or become the property of any Governmental Authority, any such Merger Consideration, dividends or distributions in respect of such Certificate or such cash shall, to the extent permitted by applicable Law, become the property of the Surviving Corporation, free and clear of all claims or interests of any Person previously entitled thereto.

 

(f) No dividends or other distributions with respect to Parent Class A Common Shares shall be paid to the holder of any unsurrendered Certificates until such

 

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Certificates are surrendered as provided in this Section 2.3. Subject to the effect of applicable Laws, following such surrender, there shall be paid, without interest, to the record holder of the Parent Class A Common Shares issued in exchange therefor (i) at the time of such surrender, all dividends and other distributions payable in respect of such Parent Class A Common Shares with a record date after the Effective Time and a payment date on or prior to the date of such surrender and not previously paid, and (ii) at the appropriate payment date, the dividends or other distributions payable with respect to such Parent Class A Common Shares with a record date after the Effective Time but with a payment date subsequent to such surrender. For purposes of dividends or other distributions in respect of Parent Class A Common Shares, all Parent Class A Common Shares to be issued pursuant to the Merger shall be entitled to dividends pursuant to the immediately preceding sentence as if issued and outstanding as of the Effective Time.

 

(g) The Exchange Agent shall invest any cash made available to the Exchange Agent pursuant to Section 2.3(a) as directed by Buyer on a daily basis. Any interest and other income resulting from such investments shall promptly be paid to Buyer.

 

Section 2.4 Stock Options and Other Equity Awards .

 

(a) All options to acquire Company Common Stock (the “ Company Options ”) outstanding, whether or not exercisable and whether or not vested, at the Effective Time under the Company’s 1993 Stock Incentive Plan and the Company’s 2002 Stock Incentive Plan, each as amended (collectively, the “ Company Stock Option Plans ”), shall remain outstanding following the Effective Time notwithstanding anything to the contrary set forth in the Company Stock Option Plans. At the Effective Time, all of the Company Options shall, by virtue of the Merger and without any further action on the part of the Company or the holder thereof, be assumed in full by Parent, and, solely to the extent provided for in the applicable Company Stock Option Plan and/or the related Company Option agreements, shall vest and become fully exercisable. Parent, Buyer and the Company acknowledge that the Merger constitutes a “Change of Control” pursuant to each of the Company Stock Option Plans. From and after the Effective Time, all references to the Company in the Company Stock Option Plans and the applicable stock option agreements issued thereunder shall be deemed to refer to Parent, which shall have assumed the Company Stock Option Plans as of the Effective Time by virtue of this Agreement and without any further action by Parent. Each Company Option assumed by Parent (each, a “ Substitute Option ”) shall be converted automatically into options to purchase Parent Class A Common Shares upon the same terms and conditions as are in effect immediately prior to the Effective Time with respect to such Company Option, except that (A) each such Substitute Option shall be exercisable for, and represent the right to acquire, that whole number of Parent Class A Common Shares (rounded to the nearest whole share) equal to the number of shares of Company Common Stock subject to such Company Option multiplied by a fraction, the numerator of which is 15.375 and the denominator of which is the Average Sales Price (without reference to the dollar sign) (such fraction, the “ Option Exchange Ratio ”) and (B) the exercise price per Parent Class A Common Share under each Substitute Option shall be an amount equal to the exercise price per share of Company Common Stock subject to the related Company Option in

 

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effect immediately prior to the Effective Time divided by Option Exchange Ratio (the exercise price per share, as so determined, being rounded to the nearest full cent). Except as set forth above, such Substitute Option shall otherwise be subject to the same terms and conditions as such Company Option. Section 2.4(a) of the Company Disclosure Letter (as defined below) sets forth a list of all Company Options as of the date hereof, including the name of the holder and date of grant of each such Company Option, the number of shares of Company Common Stock subject thereto and the exercise price thereof.

 

(b) As soon as practicable after the Effective Time, Parent shall deliver, or cause to be delivered, to each holder of a Substitute Option an appropriate notice setting forth such holder’s rights pursuant thereto, and such Substitute Option shall continue in effect on the same terms and conditions, subject to the adjustments required by this Section 2.4 after giving effect to the Merger. Parent shall comply with the terms of all such Substitute Options and ensure that the conversion and assumption provided in this Section 2.4 with respect to any Company Option that qualifies as an “incentive stock option” (as defined in Section 422 of the Code) shall be effected in a manner consistent with the requirements of Section 424(a) of the Code. The Company has heretofore taken or shall take all actions with respect to the Company Stock Option Plans and the Company Options that are necessary to implement the provisions of this Section 2.4. Parent has heretofore taken or shall take all actions with respect to the Company Stock Option Plans and the Company Options that are necessary to implement the provisions of this Section 2.4, including, without limitation, all corporate action necessary to reserve for issuance a sufficient number of Parent Class A Common Shares for delivery upon exercise of Substitute Options pursuant to the terms set forth in this Section 2.4. As soon as practicable, but in no event later than ten (10) business days after the Effective Time, Parent shall file an effective Registration Statement on Form S-8 (or any successor or other appropriate forms) with respect to the Parent Class A Common Shares subject to the Substitute Options and use its reasonable best efforts to maintain the effectiveness of such registration statement or registration statements (and maintain the current status of the prospectus or prospectuses associated therewith) for so long as such Substitute Options remain outstanding.

 

(c) On or after the date of this Agreement and prior to the Effective Time, each of Parent and the Company shall take all reasonable and customary actions requested by the Company to seek that, with respect to each member of the Board of Directors of the Company and each employee of the Company (including each such person who will become a director or officer of Parent) who is subject to Section 16 of the Exchange Act, the acquisition by such person of Parent Class A Common Shares or Substitute Options pursuant to the transactions contemplated by this Agreement and the disposition by any such person of Company Common Stock or Company Options pursuant to the transactions contemplated by this Agreement be exempt from the short-swing profit liability rules of Section 16(b) of the Exchange Act pursuant to Rule 16b-3 promulgated thereunder. Such requested actions shall be consistent with all current applicable interpretation and guidance of the SEC, including, but not limited to, the No-Action Letter dated January 12, 1999, issued by the SEC to Skadden, Arps, Slate,

 

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Meagher & Flom LLP. The parties acknowledge that all such above referenced dispositions and acquisitions are compensatory in nature.

 

Section 2.5 Adjustments . If, at any time during the period between the date of this Agreement and the Effective Time, any change in the outstanding shares of capital stock of Parent or the Company shall occur by reason of any reclassification, recapitalization, stock split or combination, exchange or readjustment of shares, or any similar transaction, or any stock dividend thereon with a record date during such period, the Merger Consideration shall be appropriately adjusted to provide the holders of shares of Company Common Stock or Company Options the same economic effect, in the aggregate, as contemplated by this Agreement prior to such event.

 

Section 2.6 Fractional Shares .

 

(a) No fractional Parent Class A Common Shares shall be issued in connection with the Merger and no dividend or distribution with respect to Parent Class A Common Shares shall be payable on or with respect to any fractional share, and such fractional share interests shall not entitle the owner thereof to any rights as a shareholder of Parent.

 

(b) Buyer shall pay to the Exchange Agent an amount in cash sufficient for the Exchange Agent to pay each holder of Company Common Stock an amount in cash equal to the product of (A) the fractional share interest of a Parent Class A Common Share to which such holder otherwise would be entitled (after taking into account all shares of Company Common Stock held at the Effective Time by such holder) multiplied by (B) the Average Sales Price.

 

(c) As soon as practicable after the determination of the amount of cash, if any, to be paid to holders of Company Common Stock with respect to any fractional share interests, the Exchange Agent shall promptly request such amount from Parent and promptly upon receipt thereof pay such amounts to such holders of Company Common Stock.

 

Section 2.7 Withholding Rights . Each of the Surviving Corporation, Parent, Buyer and Exchange Agent shall be entitled to deduct and withhold from the consideration otherwise payable to any Person pursuant to this Article II such amounts as it is required to deduct and withhold with respect to the making of such payment under any provision of federal, state, local or foreign Tax Law including any withholding from any payment that is treated as wages or compensation for the performance of services. To the extent that amounts are so withheld, such withheld amounts shall be treated for all purposes of this Agreement as having been paid to the Person in respect of which such deduction and withholding was made.

 

Section 2.8 Lost Certificates . If any Certificate shall have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the Person claiming the Certificate to be lost, stolen or destroyed and, if required by Parent or the Surviving Corporation, the posting by that Person of a bond, in such reasonable amount as Parent or

 

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the Surviving Corporation may direct, as indemnity against any claim that may be made against it with respect to such Certificate, the Exchange Agent shall issue in exchange for such lost, stolen or destroyed Certificate the Merger Consideration to be paid in respect of the shares represented by such Certificate as contemplated by this Article II.

 

ARTICLE III

 

CERTAIN GOVERNANCE MATTERS

 

Section 3.1 Articles of Incorporation of the Surviving Corporation . The articles of incorporation of the Company in effect immediately prior to the Effective Time shall become the articles of incorporation of the Surviving Corporation (until amended in accordance with applicable Law).

 

Section 3.2 Bylaws of the Surviving Corporation . The bylaws of the Company in effect immediately prior to the Effective Time shall become the bylaws of the Surviving Corporation (until amended in accordance with applicable Law).

 

Section 3.3 Directors and Officers of the Surviving Corporation . From and after the Effective Time, until successors are duly elected or appointed and qualified in accordance with the bylaws and applicable Law, (a) the directors of Merger Subsidiary immediately prior to the Effective Time shall become the directors of the Surviving Corporation, and (b) the officers of the Company immediately prior to the Effective Time shall be the officers of the Surviving Corporation.

 

ARTICLE IV

 

REPRESENTATIONS AND WARRANTIES OF THE COMPANY

 

Except as expressly disclosed in the most recent Annual Report on Form 10-K and Quarterly Reports on Form 10-Q since such Annual Report on Form 10-K (including, in each case, to the extent included in any document filed or incorporated by reference as an exhibit thereto), in each case included in the Company SEC Documents filed and publicly available prior to the date hereof (it being understood that express disclosure requires specific disclosure of the individual matter or item in question and is not satisfied by any form of generalized, boiler-plate or other generic disclosure) and except as set forth in the disclosure letter delivered by the Company to Parent simultaneously with the execution of this Agreement (the “ Company Disclosure Letter ”), the Company represents and warrants to Parent, Buyer and Merger Subsidiary as follows:

 

Section 4.1 Organization and Qualification . Each of the Company and its Subsidiaries is duly organized, validly existing and in good standing under the Laws of its jurisdiction of incorporation or organization. Each of the Company and its Subsidiaries has the requisite power and authority and any necessary Company Permit to own, operate and lease the properties that it purports to own, operate or lease and to carry on its business as it is now being conducted, and is duly qualified as a foreign entity to do business, and is in good standing in each jurisdiction where the character of its properties

 

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owned, operated or leased or the nature of its activities makes such qualification necessary, except for such failures to be so qualified and in good standing that have not had, and would not reasonably be expected to, have, individually or in the aggregate, a Material Adverse Effect on the Company. Section 4.1 of the Company Disclosure Letter sets forth a complete list of the Company’s Subsidiaries and for each such Subsidiary indicates its ownership and the jurisdictions in which it is organized and qualified to do business as a foreign corporation. Except for the Subsidiaries set forth in Section 4.1 of the Company Disclosure Letter, neither the Company nor any of its Subsidiaries is the record or beneficial owner, directly or indirectly, of any capital stock or other equity ownership interest of any kind whatsoever in any other Person.

 

Section 4.2 Capitalization .

 

(a) The authorized capital stock of the Company consists of (i) 30,000,000 shares of Company Common Stock, of which, as of October 8, 2004, 14,778,504 shares (including shares of restricted stock) were issued and outstanding, and (ii) 2,000,000 shares of preferred stock, par value $0.01 per share, none of which, as of October 8, 2004, are issued and outstanding. As of October 8, 2004, there were no shares of Company Common Stock held in treasury. As of October 8, 2004, (I) Company Options to purchase in the aggregate 624,548 shares of Company Common Stock are outstanding, all of which were granted under Company Stock Option Plans, and (II) there are 20,000 shares of restricted stock granted pursuant to Company Stock Option Plans. All the outstanding shares of the Company’s capital stock are, and all shares that may be issued pursuant to the exercise of outstanding Company Options or pursuant to the Company Stock Option Plans will be when issued in accordance with the respective terms thereof, duly authorized, validly issued, fully paid and non-assessable. There are no bonds, debentures, notes or other indebtedness having voting rights (or convertible into securities having such rights) (“ Voting Debt ”) of the Company or any of its Subsidiaries issued and outstanding. Except as set forth above or in Section 4.2(a) of the Company Disclosure Letter and except for the transactions provided for in this Agreement, as of the date hereof, (i) there are no shares of capital stock of the Company authorized, issued or outstanding, and (ii) there are no existing options, warrants, calls, pre-emptive rights, subscriptions or other rights, convertible securities, agreements, arrangements or commitments of any character, relating to the issued or unissued capital stock of the Company or any of its Subsidiaries, obligating the Company or any of its Subsidiaries to issue, transfer or sell or cause to be issued, transferred or sold any shares of capital stock or Voting Debt of, or other equity interest in, the Company or any of its Subsidiaries or securities convertible into or exchangeable for such shares or equity interests or obligations of the Company or any of its Subsidiaries to grant, extend or enter into any such option, warrant, call, subscription or other right, convertible security, agreement, arrangement or commitment. There are no outstanding contractual obligations of the Company or any of its Subsidiaries to repurchase, redeem or otherwise acquire any Company Common Stock or other capital stock of the Company or any of its Subsidiaries or affiliates of the Company or to provide funds to make any investment (in the form of a loan, capital contribution or otherwise) in any of its Subsidiaries or any other entity nor has the Company or any of its Subsidiaries granted or agreed to grant to any Person any stock appreciation rights or similar equity-based rights. Except as

 

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permitted by this Agreement, following the Merger, neither the Company nor any of its Subsidiaries will have any obligation to issue, transfer or sell any shares of its capital stock pursuant to any employee benefit plan or otherwise.

 

(b) Except as set forth in Section 4.2(b) of the Company Disclosure Letter, all of the outstanding capital stock of, or other ownership interests in, each Subsidiary of the Company is, directly or indirectly, owned by the Company, and all such capital stock has been validly issued and is fully paid and nonassessable and owned by either the Company or one of its Subsidiaries free and clear of all Liens (other than Permitted Liens) and free of any other limitation or restriction (including any restriction on the right to vote, sell or otherwise dispose of such capital stock or other ownership interests) other than any restrictions imposed under applicable federal and state securities Laws. There are no outstanding options, warrants or other rights to acquire from the Company or any of its Subsidiaries, and no preemptive or similar rights, subscriptions or other rights, or convertible or exchangeable securities, agreements, arrangements or commitments of any character, relating to the capital stock of any Subsidiary of the Company, obligating the Company or any of its Subsidiaries to issue, transfer or sell, any capital stock, voting securities or other ownership interests in, or any securities convertible into or exchangeable for any capital stock, voting securities or ownership interests in, any Subsidiary of the Company or obligating the Company or any Subsidiary of the Company to grant, extend or enter into any such option, warrant, subscription or other right, convertible or exchangeable security, agreement, arrangement or commitment (each of the foregoing, a “ Company Subsidiary Convertible Security ”). There are no outstanding obligations of the Company or any of its Subsidiaries to repurchase, redeem or otherwise acquire from any Person (other than the Company or a wholly-owned Subsidiary of the Company) any outstanding shares of capital stock of any Subsidiary of the Company or any Company Subsidiary Convertible Securities. No Subsidiary of the Company owns, either directly or indirectly, any shares of capital stock of the Company.

 

(c) Except as set forth in Section 4.2(c) of the Company Disclosure Letter, there are no voting trusts or other agreements or understandings to which the Company or any of its Subsidiaries is a party with respect to the voting of the capital stock of the Company or any of its Subsidiaries. None of the Company or its Subsidiaries is required to redeem, repurchase or otherwise acquire shares of capital stock of the Company, or any of its Subsidiaries, respectively, as a result of the transactions contemplated by this Agreement.

 

Section 4.3 Corporate Authorization; Enforceability; Board Action .

 

(a) The Company has the requisite corporate power and authority to enter into this Agreement and to consummate the transactions contemplated hereby (including the Merger). The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly authorized by all necessary corporate action on the part of the Company and no other corporate proceedings on the part of the Company are necessary to authorize the execution and delivery of this Agreement or to consummate the Merger and the other transactions contemplated hereby, subject in the case of the consummation of the Merger to the

 

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affirmative vote of a majority of the votes cast by all shareholders of the Company entitled to vote thereon in favor of the adoption of this Agreement in accordance with the PBCL (the “ Company Shareholder Approval ”). This Agreement has been duly executed and delivered by the Company and, assuming due authorization, execution and delivery of this Agreement by the other parties hereto, constitutes a valid and binding agreement of the Company enforceable against the Company in accordance with its terms, except to the extent that such enforcement may be subject to applicable bankruptcy, insolvency, reorganization, fraudulent conveyance, moratorium or other similar Laws, now or hereafter in effect, affecting creditors’ rights generally, and to general equity principles.

 

(b) The Company Independent Committee, at a meeting duly called and held on October 14, 2004, unanimously (i) determined that this Agreement and the transactions contemplated hereby (including the Merger) are advisable and in the best interests of the Company, and (ii) recommended that the Board of Directors of the Company approve and adopt this Agreement, and, subject to Section 6.6, recommended that the holders of Company Common Stock vote for adoption of this Agreement.

 

(c) The Board of Directors of the Company, at a meeting duly called and held on October 14, 2004, (i) determined that this Agreement and the transactions contemplated hereby (including the Merger) are advisable and in the best interests of the Company, (ii) approved and adopted this Agreement, and (iii) resolved, subject to Section 6.6, to recommend that the holders of Company Common Stock vote for the adoption of this Agreement. The Company has furnished to Parent a certified copy of the aforementioned resolutions of the Board of Directors of the Company.

 

(d) No restrictive provision of any “fair price,” “merger moratorium,” “control share acquisition” or other similar anti-takeover statute or regulation (including the provisions of Subchapters E, F, G and H of Chapter 25 of the PBCL) applies to this Agreement, the Merger or the other transactions contemplated hereby.

 

Section 4.4 Consents and Approvals; No Violations .

 

(a) The execution, delivery and performance by the Company of this Agreement and the consummation by the Company and its Subsidiaries of the transactions contemplated hereby (including the Merger) require no action by or in respect of, or notice to or filing with, any Governmental Authority (including with respect to any Subsidiary of the Company) other than (i) the filing of articles of merger in connection with the Merger in accordance with the PBCL, (ii) compliance with any applicable requirements of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the “ HSR Act ”), (iii) compliance with any applicable requirements of the Exchange Act and the rules and regulations promulgated thereunder, (iv) compliance with any applicable requirements of the Securities Act, (v) compliance with the rules and regulations of the New York Stock Exchange (“ NYSE ”), (vi) those set forth in Section 4.4(a) of the Company Disclosure Letter that are required under federal and state Laws governing insurance and insurance companies, (vii) consents, approvals, authorizations, declarations, filings and registrations required solely by the nature of the business or ownership of Parent and Buyer, and (viii) any other approvals the absence of which

 

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would not reasonably be expected to be, individually or in the aggregate, material to the business of the Company or Parent after giving effect to the consummation of the transactions contemplated hereby.

 

(b) Except as set forth in Section 4.4(b) of the Company Disclosure Letter, neither the execution, delivery or performance by the Company of this Agreement nor the consummation by the Company and its Subsidiaries of the transactions contemplated hereby (including the Merger) nor compliance by the Company with any of the provisions hereof will (i) conflict with or result in any breach of any provisions of the articles of incorporation or bylaws of the Company or the similar organizational and governing documents of any of its Subsidiaries, (ii) assuming compliance with the matters referred to in Section 4.4(a), conflict with or result in any violation of any provision of any Law binding upon or applicable to the Company or any of its Subsidiaries, (iii) require the consent, approval or authorization of, or notice to or filing with, any Third Party with respect to, result in any violation or breach of, or constitute (with or without due notice or lapse of time or both) a default (or give rise to any right of termination, cancellation, amendment, or acceleration of any right or obligation of the Company or any of its Subsidiaries or to a loss of any benefit to which the Company or any of its Subsidiaries is entitled) under, any provision of any Contract by which any of the Company and its Subsidiaries is bound or subject or any Company Permit, or (iv) result in the creation or imposition of any Lien (other than Permitted Liens) on any asset of the Company or any of its Subsidiaries, except in the case of (ii), (iii) and (iv) for such conflicts, violations, breaches, defaults, rights or losses, or the failure to obtain any such consents or approvals or to provide such notices or make such filings, that would not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect on the Company.

 

Section 4.5 SEC Filings and Financial Statements .

 

(a) The Company has filed with the SEC all forms, reports, schedules, statements and other documents required to be filed or furnished by it and its Subsidiaries since January 1, 2001 under the Exchange Act or the Securities Act (as such documents have been amended since the time of their filing prior to the date hereof, collectively, the “ Company SEC Documents ”). As of their respective dates or, if amended prior to the date hereof, as of the date of the last such amendment, the Company SEC Documents, including any financial statements or schedules included therein (i) did not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading, and (ii) complied in all material respects with the applicable requirements of the Exchange Act and the Securities Act, as the case may be, and the applicable rules and regulations of the SEC thereunder. Each of the consolidated financial statements included in the Company SEC Documents (the “ Company Financial Statements ”) has been prepared in accordance with United States generally accepted accounting principles (“ GAAP ”) applied on a consistent basis during the periods involved (except as may be indicated in the notes thereto) and fairly presents in all material respects, as applicable, the consolidated financial position and the consolidated results of operations and cash flows (and changes in financial position, if

 

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any) of the Company and its consolidated Subsidiaries as at the dates thereof or for the periods presented therein (subject, in the case of any unaudited interim financial statements, to normal year-end adjustments and for the absence of footnotes).

 

(b) The audited balance sheets of the Company’s Subsidiaries as of December 31, 2003 and the related audited statements of income and cash flows for each of the years ended December 31, 2003 and December 31, 2002, and the unaudited interim balance sheet as of June 30, 2004 and the related unaudited interim statements of income and cash flows for the six months ended June 30, 2004, and their respective annual statements for the fiscal years ended December 31, 2003 and December 31, 2002 filed with the insurance regulatory authorities (or other comparable state regulatory agencies), copies of which have been delivered to Parent prior to the date hereof present each such Subsidiary’s respective statutory financial conditions as of the dates thereof and their respective results of operations and cash flows for the periods then ended in conformity with SAP. The other information contained in such annual statements presents the information required to be contained therein in conformity with SAP consistently applied. The balance sheets of the Company’s Subsidiaries in respect of any period ending after June 30, 2004 but before the date of this Agreement, and the related statements of income and cash flows, which have been filed with insurance regulatory authorities (or other comparable state regulatory agencies), copies of which have been delivered to Parent prior to the date hereof, fairly present in all material respects each such Subsidiary’s respective statutory financial conditions as of the dates thereof and their respective results of operations and cash flows for the periods then ended in conformity with SAP consistently applied. The financial statements referred to in this Section 4.5(b) are the “ Company Statutory Financial Statements .”

 

(c) The Company has established and maintained disclosure controls and procedures (as such term is defined in Rule 13a-15(e) under the Exchange Act), as required by Rule 13a-15(a) under the Exchange Act. The Company is in compliance in all material respects with the Sarbanes-Oxley Act of 2002 (the “ Sarbanes-Oxley Act ”). The Company and each of its Subsidiaries maintains a system of internal accounting controls sufficient to comply with all legal and accounting requirements applicable to the Company and such Subsidiary and has previously disclosed to Parent its work plan, budget and timetable for compliance with the SEC rules promulgated under Section 404 of the Sarbanes-Oxley Act. The Company has disclosed in the Company SEC Documents, based on its most recent evaluation thereof, any significant deficiencies in its internal accounting controls which would reasonably be expected to adversely affect in any material respect the Company’s ability to record, process, summarize and report financial data.

 

(d) To the knowledge of the Company, neither the Company nor any of its Subsidiaries nor any Representative of the Company or any of its Subsidiaries has received or otherwise had or obtained knowledge of any material complaint, allegation, assertion or claim, whether written or oral, regarding the accounting or auditing practices, procedures, methodologies or methods of the Company or any of its Subsidiaries or their respective internal accounting controls, including any material complaint, allegation,

 

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assertion or claim that the Company or any of its Subsidiaries has engaged in questionable accounting or auditing practices.

 

Section 4.6 Absence of Certain Changes . Except (x) as set forth in Section 4.6 of the Company Disclosure Letter, (y) as disclosed in the Company SEC Documents filed prior to the date hereof, or (z) for actions or inactions after the date hereof in compliance with Section 6.1, (1) since December 31, 2003, the Company and its Subsidiaries have conducted their respective businesses and operations consistent with past practice only in the ordinary and usual course thereof and there has not occurred (i) any fact, event, circumstance, change, condition or effect (including the incurrence of any Liabilities of any nature, whether or not accrued, contingent or otherwise) that has had, or would reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect on the Company, (ii) any declaration or payment of any dividend or other distribution (whether in cash, stock or property) with respect to the equity interests of the Company or of any of its Subsidiaries other than regular quarterly cash dividends and dividends paid to the Company or any of its wholly-owned Subsidiaries by a wholly-owned Subsidiary, or (iii) any material change by the Company or any of its Subsidiaries in accounting principles or methods other than those required by Law, GAAP or SAP; and (2) since June 30, 2004, neither the Company nor any of its Subsidiaries has taken any action or made any omission that, if taken or made after the date of this Agreement, would be prohibited by Section 6.1

 

Section 4.7 Undisclosed Liabilities . Except for Liabilities (a) set forth in Section 4.7 of the Company Disclosure Letter or reflected, disclosed or reserved for in the Company Financial Statements (including the footnotes thereto) included in the Company SEC Documents filed prior to the date of this Agreement, (b) incurred (i) in the ordinary course of business and consistent with past practice, (ii) pursuant to policies written by the Company’s Subsidiaries, or (iii) pursuant to this Agreement, or (c) which are not, individually or in the aggregate, material to the Company and its Subsidiaries taken as a whole, neither the Company nor any of its Subsidiaries has incurred any Liabilities of any nature that would be required to be reflected or reserved against on a consolidated balance sheet of the Company and its Subsidiaries (including the notes thereto) prepared in accordance with GAAP as applied in preparing the Company Balance Sheet or that have had or would reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect on the Company.

 

Section 4.8 Litigation .

 

(a) As of the date hereof, (i) there is no litigation, suit, action, claim, charge or other proceeding (each, an “ Action “) by or before any Governmental Authority pending or, to the knowledge of the Company, threatened, against, by or affecting the Company or any of its Subsidiaries (other than insurance claims litigation in the ordinary course of business for which claims reserves that are adequate in the aggregate have been established), except for such Actions as have not and would not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect on the Company, and (ii) no investigation or inquiry by or before any Governmental Authority is pending or, to

 

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the knowledge of the Company, threatened against the Company or any of its Subsidiaries.

 

(b) Except as set forth in Section 4.8(b) of the Company Disclosure Letter or in the Company SEC Documents filed prior to the date of this Agreement, there are no judgments, injunctions, writs, orders or decrees binding on the Company or any of its Subsidiaries that (i) have had, or would reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect on the Company, or (ii) would be binding upon Parent or any of its Subsidiaries (other than the Company and its Subsidiaries) following consummation of the Merger.

 

Section 4.9 Compliance with Laws .

 

(a) Except as set forth in Section 4.9(a) of the Company Disclosure Letter, the Company and each of its Subsidiaries are, and since January 1, 2001 have been, in compliance in all material respects with all applicable Laws.

 

(b) Except as set forth in Section 4.9(b) of the Company Disclosure Letter, (i) all material Company Permits are valid and in full force and effect, and (ii) the business of the Company and each of its Subsidiaries is being conducted in compliance in all material respects with the terms of all applicable Company Permits.

 

(c) Except as set forth in Section 4.9(c) of the Company Disclosure Letter or as would not reasonably be expected to result in a Material Adverse Effect on the Company, since January 1, 2001, (i) neither the Company nor any of its Subsidiaries nor, to the knowledge of the Company, any Third Party service provider acting on behalf of the Company, has received, nor otherwise has any knowledge of, any written or oral notice from any Governmental Authority that (x) alleges any noncompliance (or that the Company or any of its Subsidiaries or any such Third Party service provider is under investigation or the subject of an inquiry by any such Governmental Authority for such alleged noncompliance) with any applicable Law, or (y) would reasonably be expected to result in a fine or assessment, or a cease and desist order, or the suspension, revocation or limitation or restriction of any Company Permit, and (ii) neither the Company nor any of its Subsidiaries has entered into any agreement or settlement with any Governmental Authority with respect to its non-compliance with, or violation of, any applicable Law.

 

(d) Except as set forth in Section 4.9(d) of the Company Disclosure Letter or as would not reasonably be expected to result in a Material Adverse Effect on the Company, since January 1, 2001, the Company and each of its Subsidiaries has timely filed all regulatory reports, schedules, statements, documents, filings, submissions, forms, registrations and other documents, together with any amendments required to be made with respect thereto, that was required to be filed with any Governmental Authority (the “ Company Business Documents ”), including state insurance regulatory authorities and any applicable federal regulatory authorities, and have timely paid all fees due and payable in connection therewith. All Company Business Documents were true, correct and complete in all material respects when filed, complied in all material respects with applicable Law in effect when filed, and no material deficiencies have been asserted by

 

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any such Governmental Authority with respect to Company Business Documents that have not been satisfied. There is no material unresolved violation or exception by any such Governmental Authority with respect to any of the Company Business Documents. The Company has delivered or made available to Parent a true and complete copy of each material Company Business Document.

 

(e) Except as set forth in Section 4.9(e) of the Company Disclosure Letter or as has not and would not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect on the Company, all premium rates, rating plans and policy terms established or used by the Company or any of its Subsidiaries that are required to be filed with or approved by Governmental Authorities have been so filed or approved, the premiums charged conform to the premiums so filed or approved and comply in all material respects with the insurance Laws applicable thereto, and to the Company’s knowledge, no such premiums are subject to any review or investigation by any insurance regulatory authority.

 

Section 4.10 Reserves . All reserves (“ Reserves ”) carried on the Company Statutory Financial Statements (a) were determined, to the knowledge of the Company, in all material respects in accordance with generally accepted actuarial principles (except as set forth therein), consistently applied, (b) comply in all material respects with the requirements of applicable Law and (c) were made with the good faith intention and belief that they made reasonable provision in the aggregate to cover the total amount of Liabilities under outstanding policies and contracts of insurance of the Company and its Subsidiaries as of the dates of such Company Statutory Financial Statements (it being understood that no representation or warranty is made in this Agreement to the effect that such Reserves were or will be in fact adequate to cover the actual amount of such Liabilities that are eventually paid after the date thereof).

 

Section 4.11 Actuarial Analyses . Section 4.11 of the Company Disclosure Letter sets forth a list of all Third Party actuarial reports with respect to the Company or any of its Subsidiaries relied upon by the Company or any of its Subsidiaries or provided by the Company or any of its Subsidiaries to any Governmental Authority since December 31, 2002, and all attachments, addenda, supplements and modifications thereto (copies of which the Company has made available to Parent) (the “ Actuarial Analyses ”). To the knowledge of the Company, the information and data furnished by the Company or any of its Subsidiaries to its independent actuaries in connection with the preparation of the Actuarial Analyses were, at the time furnished, accurate in all material respects for the periods covered in the Actuarial Analyses. Furthermore, to the knowledge of the Company, each Actuarial Analysis was, at the relevant time of preparation, prepared using appropriate modeling procedures accurately applied and in conformity with generally accepted actuarial principles consistently applied and was properly prepared in accordance with the assumptions stated therein. To the knowledge of the Company, the assumptions used in making the projections contained in the Actuarial Analyses were arrived at in good faith and were reasonable when made.

 

Section 4.12 Investments . The Company has provided Parent with a correct and complete list of all Investment Assets that are carried on the Books and

 

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Records of the Company and its Subsidiaries as of June 30, 2004. Except as set forth in Section 4.12 of the Company Disclosure Letter and except for Investment Assets sold in the ordinary course of business consistent with past practice or as contemplated by this Agreement, each of the Company and its Subsidiaries, as applicable, has good and marketable title to all of the Investment Assets it purports to own, free and clear of all Liens (other than Liens imposed by securities Laws).

 

Section 4.13 Employee Benefit Plans .

 

(a) Section 4.13(a) of the Company Disclosure Letter sets forth a true and complete list of each deferred compensation and each bonus or other incentive compensation, stock purchase, stock option or other equity compensation plan, program, agreement or arrangement, each severance or termination pay, medical, surgical, hospitalization, life insurance or other “welfare” plan, fund or program (within the meaning of Section 3(1) of the Employee Retirement Income Security Act of 1974, as amended (“ ERISA ”)); each profit-sharing, stock bonus or other “pension” plan, fund or program (within the meaning of Section 3(2) of ERISA); each employment, termination or severance agreement; and each other employee benefit plan, fund, program, agreement or arrangement, in each case, that is sponsored, maintained or contributed to or required to be contributed to by the Company or by any trade or business, whether or not incorporated (an “ ERISA Affiliate ”), that together with the Company would be deemed a “single employer” within the meaning of Section 4001(b) of ERISA, or to which the Company or an ERISA Affiliate is party, whether written or oral, for the benefit of any current or former employee, consultant or director of the Company or any Subsidiary (the “ Company Employee Plans ”).

 

(b) With respect to each Company Employee Plan, the Company has heretofore made available to Parent complete copies of the Company Employee Plan and any amendments thereto (or if the Company Employee Plan is not a written plan, a description thereof), any related trust or other funding vehicle, any reports or summaries required under ERISA or the Code and the most recent determination letter received from the Internal Revenue Service with respect to each Company Employee Plan intended to qualify under Section 401 of the Code. Except as set forth in Section 4.13(b) of the Company Disclosure Letter, since December 31, 2003, there have not been any amendments, modifications, terminations or any other changes to any Company Employee Plans as in effect on such date.

 

(c) Except for liabilities which have not had and would not reasonably be expected to have, individually or in the aggregate, result in a Material Adverse Effect on the Company:

 

(i) No liability under Title IV or Section 302 of ERISA has been incurred by the Company or any ERISA Affiliate that has not been satisfied in full, no condition exists that presents a risk to the Company or any ERISA Affiliate of incurring any such liability, and neither the Company nor any ERISA Affiliates made, or was required to make, contributions to any plan subject to

 

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Title IV of ERISA during the six (6) year period ending on the last day of the most recent fiscal year ended prior to the Closing Date for any such plan.

 

(ii) Each Company Employee Plan has been operated and administered in accordance with its terms and applicable Law, including ERISA and the Code.

 

(d) Each Company Employee Plan intended to be “qualified” within the meaning of Section 401(a) of the Code is so qualified and the trusts maintained thereunder are exempt from taxation under Section 501(a) of the Code.

 

(e) Except as set forth in Section 4.13(e) of the Company Disclosures Letter, no Company Employee Plan provides medical, surgical, hospitalization, death or similar benefits (whether or not insured) for periods extending beyond retirement or other termination of service, other than (i) coverage mandated by applicable Law, (ii) death benefits under any “pension plan,” or (iii) benefits the full cost of which is borne by the current or former participant (or his beneficiary).

 

(f) Except as set forth in Section 4.13(f) of the Company Disclosure Letter (which sets forth a list and quantification of all such payments, benefits, accelerations or increases under Company Employee Plans), the consummation of the transactions contemplated by this Agreement will not, either alone or in combination with another event, (i) entitle any current or former employee, officer, director or consultant of the Company or any ERISA Affiliate to severance pay, unemployment compensation or any other payment or benefit, or (ii) accelerate the time of payment or vesting, or increase the amount of compensation or benefits due any such employee or officer. No amounts payable under the Company Employee Plans will fail to be deductible for federal income tax purposes by virtue of Section 280G of the Code.

 

(g) There are no pending, nor to the knowledge of the Company, threatened or anticipated claims by or on behalf of any Company Employee Plan, by any Person or beneficiary covered under any such Company Employee Plan, or otherwise, involving any such Company Employee Plan (other than routine claims for benefits).

 

(h) None of the Company, any Company Employee Plan, any trust created thereunder or, to the knowledge of the Company, any trustee or administrator thereof has engaged in a transaction in connection with which the Company, any Company Employee Plan, any such trust or any trustee or administrator thereof, or any party dealing with any Company Employee Plan or any such trust, would be subject to either a civil penalty assessed pursuant to Section 409 or 502(i) of ERISA or a Tax imposed pursuant to Section 4975 or 4976 of the Code.

 

Section 4.14 Employee Matters . Except as set forth in Section 4.14 of the Company Disclosure Letter:

 

(a) Neither the Company nor any of its Subsidiaries is a party to or bound by any (i) collective bargaining or similar agreement with any labor organization,

 

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or (ii) work rules or practices agreed to with any labor organization or employee association applicable to employees of the Company or any of its Subsidiaries.

 

(b) As of the date hereof, none of the employees of the Company or any of its Subsidiaries is represented by any labor organization, and the Company has no knowledge of any current union organizing activities among the employees of the Company or any of its Subsidiaries, nor does any question concerning representation exist concerning such employees.

 

(c) There are no labor strikes, labor disputes, work stoppages, lockouts or material grievances pending as of the date hereof, or, to the knowledge of the Company, threatened involving the employees of the Company or any of its Subsidiaries, and during the past five (5) years there have not been any such actions.

 

(d) As of the date hereof, there are no complaints, charges or claims against the Company or any of its Subsidiaries pending or, to the knowledge of the Company, threatened to be brought or filed with any Governmental Authority in connection with the employment by the Company or any of its Subsidiaries of any individual, including, without limitation, any claim relating to employment discrimination, equal pay, sexual harassment, employee safety and health, wages and hours or workers’ compensation.

 

(e) As of the date hereof, to the knowledge of the Company, neither the Company nor any of its Subsidiaries has received notice of the intent of any Governmental Authority responsible for the enforcement of labor or employment Laws to conduct an investigation with respect to or relating to the Company or any of its Subsidiaries, and no such investigation is in progress.

 

(f) During the last five (5) years, neither the Company nor any of its Subsidiaries has effectuated a “plant closing” or a “mass layoff” (as such terms are defined in the Worker Adjustment and Retraining Notification Act (the “ WARN Act ”)), and neither the Company nor any of its Subsidiaries has been affected by any transaction or engaged in layoffs or employment terminations sufficient in number to trigger application of any Law that is similar to the WARN Act.

 

(g) Except as set forth in Section 4.14(g) of the Company Disclosure Letter, none of the employees of the Company or any of its Subsidiaries has suffered an “employment loss” (as defined in the WARN Act) during the 90 day period prior to the date of this Agreement. The listing set forth in Section 4.14(g) of the Company Disclosure Letter shall be updated at the Closing for employment losses occurring during the 90 day period prior to the Closing.

 

Section 4.15 Taxes .

 

(a) Each of the Company, its Subsidiaries and any consolidated, affiliated, combined or unitary group of which the Company or any of its Subsidiaries is a member has (i) timely filed (or there have been timely filed on its behalf) with the appropriate Governmental Authorities all material income and other material Tax Returns

 

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required to be filed by it or them (giving effect to all extensions) and such Tax Returns are correct and complete in all material respects; (ii) timely paid in full (or there has been timely paid in full on its behalf) all material income and other material Taxes required to have been paid by it or them, and (iii) made adequate provision (or adequate provision has been made on its behalf) for all material accrued Taxes not yet due. The accruals and reserves for Taxes reflected in the Company’s audited consolidated balance sheet as of December 31, 2003 (and the notes thereto) and the most recent quarterly financial statements (and the notes thereto) are adequate in accordance with GAAP to cover all material Taxes accrued or accruable through the date thereof.

 

(b) There are no material Liens for Taxes upon any property or assets of the Company or any Subsidiary of the Company, except for Liens for Taxes not yet due and payable or which are being contested in good faith or for which adequate reserves have been established.

 

(c) Each of the Company and its Subsidiaries has complied in all material respects with all applicable Laws relating to the payment and withholding of Taxes and has, within the time and in the manner prescribed by Law, withheld and paid over to the proper Governmental Authorities all material amounts required to be so withheld and paid over under applicable Law.

 

(d) No federal, state, local or foreign audits or other administrative proceedings or court proceedings are presently pending with regard to any material Taxes or material Tax Returns of the Company or any of its Subsidiaries, and neither the Company nor any Subsidiary of the Company has received a written notice of any proposed claims, audits or proceedings with respect to any material Taxes.

 

(e) Neither the Company nor any of its Subsidiaries is a party to any material Tax allocation, sharing, indemnification or similar agreement (other than any Contract all the parties to which include only one or more of the Company and its Subsidiaries).

 

(f) Neither the Company nor any of its Subsidiaries has been included in any “consolidated,” “unitary” or “combined” Tax Return (other than Tax Returns which include only the Company and any of its Subsidiaries) provided for under the Laws of the United States, any foreign jurisdiction or any state or locality with respect to Taxes.

 

(g) Neither the Company nor any of its Subsidiaries have agreed, or is required, to make any material adjustment under Section 481 of the Code affecting any taxable period.

 

(h) No claim has been made in writing by any Governmental Authorities in a jurisdiction where the Company or any of its Subsidiaries does not file Tax Returns that any such entity is subject to material taxation by that jurisdiction.

 

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Section 4.16 Certain Contracts .

 

(a) Company Contracts. Section 4.16(a) of the Company Disclosure Letter sets forth, with respect to or otherwise affecting the Company or any of its Subsidiaries:

 

(i) any Contract relating to the incurrence of indebtedness (including sale and leaseback transactions, capitalized lease transactions and other similar financing transactions) pursuant to which the outstanding indebtedness is in excess of one hundred thousand dollars ($100,000);

 

(ii) any non-competition Contract or any other Contract or obligation that purports to limit in any respect the manner or the localities in which the business of the Company or any of its Subsidiaries, or following consummation of the transactions contemplated by this Agreement, Parent’s businesses, is or would be conducted;

 

(iii) any Contract providing for the indemnification by the Company or any of its Subsidiaries of any Person in excess of one hundred thousand dollars ($100,000) individually or three hundred thousand dollars ($300,000) in the aggregate;

 

(iv) any multi-year Insurance Contract involving the payment of one hundred thousand dollars ($100,000) individually or three hundred thousand dollars ($300,000) in the aggregate;

 

(v) any Insurance Contract containing any rate guarantees, rate caps or rate escalators involving the payment of one hundred thousand dollars ($100,000) individually or three hundred thousand dollars ($300,000) in the aggregate;

 

(vi) any reinsurance treaty or facultative reinsurance contract (in each case applicable to insurance in force or for which the Company or any of its Subsidiaries are entitled to any recovery);

 

(vii) any agreement or understanding with, or restriction imposed by, a Governmental Authority or other Third Party relating to the payment of dividends or maintenance of capital by the Company or any of its Subsidiaries;

 

(viii) all leases, subleases, licenses or other Contracts, including all amendments, extensions, renewals, guaranties or other Contracts with respect thereto, pursuant to which the Company or any of its Subsidiaries use or hold any material Leased Real Property (“ Leases ”); and

 

(ix) any other Contracts not listed above that involve the payment or receipt by the Company of one hundred thousand dollars ($100,000) individually or five hundred thousand dollars ($500,000) in the aggregate;

 

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(the Contracts of a type covered by clauses (i) to (ix) being referred to as the “ Material Contracts ”). Prior to the date of this Agreement, the Company has made available to Parent true and correct copies of each Material Contract (including any amendments or supplements thereto).

 

(b) Insurance Contracts. Prior to the date of this Agreement, the Company has made available to Parent correct and complete copies of the forms of Insurance Contracts used in the business of the Company and/or its Subsidiaries as of the date of this Agreement. Each such form has been appropriately and timely filed and, if required, approved by applicable Governmental Authorities and otherwise conforms, in all material respects, to the requirements of applicable Laws.

 

(c) Except as has not had and would not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect on the Company: (i) each Company Contract is a legal, valid and binding obligation of the Company or the applicable Subsidiary of the Company (as the ca