-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Vh5uRAsZahOPW8j3iTVPV8jiFRlALIbWuzqpGM8fq7S2fpsLcuCGIgrjha7qahiq PgEvuv6TXT7QKxFtkJZ37w== 0000912057-97-028012.txt : 19970815 0000912057-97-028012.hdr.sgml : 19970815 ACCESSION NUMBER: 0000912057-97-028012 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970814 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: HCC INSURANCE HOLDINGS INC/DE/ CENTRAL INDEX KEY: 0000888919 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 760336636 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-13790 FILM NUMBER: 97662840 BUSINESS ADDRESS: STREET 1: 13403 NORTHWEST FRWY CITY: HOUSTON STATE: TX ZIP: 77040-6094 BUSINESS PHONE: 7136907300 10-Q 1 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the Quarter Ended June 30, 1997 [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from _______ to __________ Commission file number 0-20766 ------------------------------------------------------- HCC Insurance Holdings, Inc. - ------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 76-0336636 - ------------------------------------------------------------------------------- (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 13403 Northwest Freeway, Houston, Texas 77040-6094 - ------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (713) 690-7300 - ------------------------------------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date. On August 8, 1997, there were 45,934,708 shares of Common Stock, $1 par value issued and outstanding. HCC INSURANCE HOLDINGS, INC. INDEX Part I. FINANCIAL INFORMATION
PAGE NO. -------- Item 1. Condensed Consolidated Balance Sheets June 30, 1997 and December 31, 1996..........................................3 Condensed Consolidated Statements of Earnings Six Months Ended June 30, 1997 and Six Months Ended June 30, 1996...............................................4 Condensed Consolidated Statements of Earnings Three Months Ended June 30, 1997 and Three Months Ended June 30, 1996.............................................5 Condensed Consolidated Statements of Changes in Shareholders' Equity Six Months Ended June 30, 1997 and Year Ended December 31, 1996.................................................6 Condensed Consolidated Statements of Cash Flows Six Months Ended June 30, 1997 and Six Months Ended June 30, 1996...............................................8 Notes to Condensed Consolidated Financial Statements...........................9 Item 2. Management's Discussion and Analysis..........................................13 Part II. OTHER INFORMATION.......................................................................16
2 HCC Insurance Holdings, Inc. and Subsidiaries --------- Condensed Consolidated Balance Sheets (Unaudited) ---------
June 30, 1997 December 31, 1996 ------------------- ------------------ ASSETS Investments: Securities available for sale: Fixed income securities, at market (cost: 1997 $383,719,000; 1996 $371,844,000) $ 390,283,000 $ 377,555,000 Marketable equity securities, at market (cost: 1997 $12,167,000; 1996 $13,434,000) 11,914,000 13,250,000 ------------------- ------------------ Total investments 402,197,000 390,805,000 Cash and short-term investments: Cash 1,106,000 9,171,000 Short-term investments, at cost, which approximates market 103,313,000 78,693,000 ------------------- ------------------ Total cash and short-term investments 104,419,000 87,864,000 Restricted cash and cash investments 49,458,000 44,363,000 Reinsurance recoverables 148,789,000 132,684,000 Premium, claims and other receivables 223,599,000 168,717,000 Ceded unearned premium 77,969,000 71,758,000 Deferred policy acquisition costs 24,488,000 24,166,000 Property and equipment, net 17,366,000 17,021,000 Deferred income tax 8,974,000 10,871,000 Other assets, net 36,959,000 15,795,000 ------------------- ------------------ TOTAL ASSETS $1,094,218,000 $ 964,044,000 ------------------- ------------------ ------------------- ------------------ LIABILITIES Loss and loss adjustment expense payable $ 245,497,000 $ 229,049,000 Reinsurance balances payable 59,190,000 45,449,000 Unearned premium 164,337,000 151,959,000 Deferred ceding commissions 17,791,000 16,670,000 Premium and claims payable 171,601,000 123,118,000 Notes payable 79,476,000 73,167,000 Accounts payable and accrued liabilities 20,359,000 23,370,000 ------------------- ------------------ Total liabilities 758,251,000 662,782,000 SHAREHOLDERS' EQUITY Common Stock, $1.00 par value; 100,000,000 shares authorized, (issued and outstanding: 1997 45,582,329 shares; 1996 47,416,643 shares) 45,582,000 47,417,000 Additional paid-in capital 150,291,000 139,971,000 Retained earnings 136,087,000 167,012,000 Unrealized investment gain, net 4,133,000 3,623,000 Foreign currency translation adjustment (126,000) (91,000) Treasury stock (1996 3,301,741 shares) - (56,670,000) ------------------- ------------------ Total shareholders' equity 335,967,000 301,262,000 ------------------- ------------------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,094,218,000 $ 964,044,000 ------------------- ------------------ ------------------- ------------------
See Notes to Condensed Consolidated Financial Statements. 3 HCC Insurance Holdings, Inc. and Subsidiaries ---------- Condensed Consolidated Statements of Earnings (Unaudited) ----------
For the six months ended June 30, 1997 1996 ---------------- ----------------- REVENUE Net earned premium $ 92,809,000 $ 86,805,000 Fee and commission income 32,199,000 26,131,000 Net investment income 12,729,000 11,434,000 Computer products and services 3,601,000 4,098,000 Net realized investment gain (loss) (294,000) 5,207,000 ---------------- ----------------- Total revenue 141,044,000 133,675,000 EXPENSE Loss and loss adjustment expense 56,070,000 53,657,000 Operating expense: Policy acquisition costs 26,088,000 23,386,000 Compensation expense 20,153,000 19,251,000 Other operating expense 15,575,000 12,541,000 Merger expense 7,277,000 26,160,000 Ceding commissions (20,361,000) (16,438,000) ---------------- ----------------- Net operating expense 48,732,000 64,900,000 Interest expense 2,810,000 2,664,000 ---------------- ----------------- Total expense 107,612,000 121,221,000 ---------------- ----------------- Earnings before income tax provision 33,432,000 12,454,000 Income tax provision (benefit) 11,419,000 (339,000) ---------------- ----------------- NET EARNINGS $ 22,013,000 $ 12,793,000 ---------------- ----------------- ---------------- ----------------- EARNINGS PER SHARE DATA: Primary: Earnings per share $ 0.48 $ 0.29 ---------------- ----------------- ---------------- ----------------- Weighted average shares outstanding 46,053,000 44,330,000 ---------------- ----------------- ---------------- ----------------- Fully diluted: Earnings per share $ 0.48 $ 0.29 ---------------- ----------------- ---------------- ----------------- Weighted average shares outstanding 46,146,000 44,410,000 ---------------- ----------------- ---------------- ----------------- Cash dividends declared, per share $ 0.06 $ 0.02 ---------------- ----------------- ---------------- -----------------
See Notes to Condensed Consolidated Financial Statements. 4 HCC Insurance Holdings, Inc. and Subsidiaries ---------- Condensed Consolidated Statements of Earnings (Unaudited) ----------
For the three months ended June 30, 1997 1996 --------------- -------------- REVENUE Net earned premium $ 48,134,000 $ 43,614,000 Fee and commission income 16,142,000 13,750,000 Net investment income 6,526,000 5,742,000 Computer products and services 1,955,000 2,180,000 Net realized investment gain (loss) (238,000) 3,881,000 --------------- -------------- Total revenue 72,519,000 69,167,000 EXPENSE Loss and loss adjustment expense 29,452,000 26,421,000 Operating expense: Policy acquisition costs 11,845,000 11,265,000 Compensation expense 10,276,000 10,007,000 Other operating expense 8,733,000 7,142,000 Merger expense 5,404,000 24,984,000 Ceding commissions (9,366,000) (8,818,000) --------------- -------------- Net operating expense 26,892,000 44,580,000 Interest expense 1,435,000 1,408,000 --------------- -------------- Total expense 57,779,000 72,409,000 --------------- -------------- Earnings (loss) before income tax provision 14,740,000 (3,242,000) Income tax provision (benefit) 5,758,000 (3,884,000) --------------- -------------- NET EARNINGS $ 8,982,000 $ 642,000 --------------- -------------- --------------- -------------- EARNINGS PER SHARE DATA: Primary: Earnings per share $ 0.19 $ 0.01 --------------- -------------- --------------- -------------- Weighted average shares outstanding 46,383,000 44,263,000 --------------- -------------- --------------- -------------- Fully diluted: Earnings per share $ 0.19 $ 0.01 --------------- -------------- --------------- -------------- Weighted average shares outstanding 46,482,000 44,279,000 --------------- -------------- --------------- -------------- Cash dividends declared, per share $ 0.03 $ 0.02 --------------- -------------- --------------- --------------
See Notes to Condensed Consolidated Financial Statements. 5 HCC Insurance Holdings, Inc. and Subsidiaries ---------- Condensed Consolidated Statements of Changes in Shareholders' Equity For the six months ended June 30, 1997 and for the year ended December 31, 1996 (Unaudited) ----------
Additional Unrealized Common paid-in Retained investment Stock capital earnings gain (loss) --------------- ----------------- ----------------- --------------- BALANCE AS OF DECEMBER 31, 1995 $ 18,460,000 $ 138,084,000 $ 142,134,000 $ 9,296,000 27,688,869 shares of Common Stock issued for 150% stock dividend 27,689,000 (27,689,000) - - 132,108 shares of Common Stock issued for exercise of options, including tax benefit of $366,000 132,000 837,000 - - Net earnings - - 41,586,000 - Cash dividends declared, $0.06 per share - - (2,104,000) - Compensatory grant of pooled company stock prior to merger - 23,682,000 - - Dividends to shareholders of pooled companies prior to merger - - (7,705,000) - Capitalize undistributed earnings of pooled company upon conversion from S Corporation - 3,840,000 (3,840,000) - 1,136,400 shares of Common Stock issued for NASRA combination 1,136,000 - (1,452,000) - Repurchase of 520,000 shares of Common Stock by pooled company prior to merger - - - - Unrealized investment loss on fixed income securities, net of deferred tax benefit of $857,000 - - - (1,594,000) Unrealized investment loss on marketable equity securities, net of deferred tax benefit of $2,144,000 - - - (4,079,000) Other - 1,217,000 (1,607,000) - --------------- ----------------- ----------------- --------------- BALANCE AS OF DECEMBER 31, 1996 $ 47,417,000 $ 139,971,000 $ 167,012,000 $ 3,623,000
See Notes to Condensed Consolidated Financial Statements.
Foreign currency Total translation Treasury shareholders' adjustment stock equity ---------------- ---------------- --------------- BALANCE AS OF DECEMBER 31, 1995 $ (186,000) $ (50,570,000) $ 257,218,000 27,688,869 shares of Common Stock issued for 150% stock dividend - - - 132,108 shares of Common Stock issued for exercise of options, including tax benefit of $366,000 - - 969,000 Net earnings - - 41,586,000 Cash dividends declared, $0.06 per share - - (2,104,000) Compensatory grant of pooled company stock prior to merger - - 23,682,000 Dividends to shareholders of pooled companies prior to merger - - (7,705,000) Capitalize undistributed earnings of pooled company upon conversion from S Corporation - - - 1,136,400 shares of Common Stock issued for NASRA combination - - (316,000) Repurchase of 520,000 shares of Common Stock by pooled company prior to merger - (7,909,000) (7,909,000) Unrealized investment loss on fixed income securities, net of deferred tax benefit of $857,000 - - (1,594,000) Unrealized investment loss on marketable equity securities, net of deferred tax benefit of $2,144,000 - - (4,079,000) Other 95,000 1,809,000 1,514,000 ---------------- ---------------- --------------- BALANCE AS OF DECEMBER 31, 1996 $ (91,000) $ (56,670,000) $ 301,262,000
See Notes to Condensed Consolidated Financial Statements. 6 HCC Insurance Holdings, Inc. and Subsidiaries ---------- Condensed Consolidated Statements of Changes in Shareholders' Equity For the six months ended June 30, 1997 and for the year ended December 31, 1996 (Unaudited) (continued) ----------
Additional Unrealized Common paid-in Retained investment Stock capital earnings gain (loss) ---------------- ---------------- --------------- ------------- BALANCE AS OF DECEMBER 31, 1996 $ 47,417,000 $ 139,971,000 $ 167,012,000 $ 3,623,000 392,652 shares of Common Stock issued for exercise of options, including tax benefit of $881,000 392,000 4,448,000 - - 266,667 shares of Common Stock issued for TRM acquisition 267,000 6,700,000 - - 725,000 shares of Common Stock issued for Interworld combination 725,000 - (238,000) - 98,003 shares of Common Stock issued for MGU acquisition 98,000 2,602,000 - - Net earnings - - 22,013,000 - Cash dividends declared, $0.06 per share - - (2,453,000) - Repurchase of 14,895 shares of Common Stock by pooled company prior to merger - - - - Retirement of 3,316,636 shares of Treasury Stock (3,317,000) (3,430,000) (50,247,000) - Unrealized investment gain on fixed income securities, net of deferred tax charge of $298,000 - - - 555,000 Unrealized investment loss on marketable equity securities, net of deferred tax benefit of $24,000 - - - (45,000) Other - - - - ---------------- ---------------- --------------- ------------- BALANCE AS OF JUNE 30, 1997 $ 45,582,000 $ 150,291,000 $ 136,087,000 $ 4,133,000 ---------------- ---------------- --------------- ------------- ---------------- ---------------- --------------- -------------
See Notes to Condensed Consolidated Financial Statements.
Foreign currency Total translation Treasury shareholders' adjustment stock equity ---------------- ---------------- --------------- BALANCE AS OF DECEMBER 31, 1996 $ (91,000) $ (56,670,000) $ 301,262,000 392,652 shares of Common Stock issued for exercise of options, including tax benefit of $881,000 - - 4,840,000 266,667 shares of Common Stock issued for TRM acquisition - - 6,967,000 725,000 shares of Common Stock issued for Interworld combination - - 487,000 98,003 shares of Common Stock issued for MGU acquisition - - 2,700,000 Net earnings - - 22,013,000 Cash dividends declared, $0.06 per share - - (2,453,000) Repurchase of 14,895 shares of Common Stock by pooled company prior to merger - (324,000) (324,000) Retirement of 3,316,636 shares of Treasury Stock - 56,994,000 - Unrealized investment gain on fixed income securities, net of deferred tax charge of $298,000 - - 555,000 Unrealized investment loss on marketable equity securities, net of deferred tax benefit of $24,000 - - (45,000) Other (35,000) - (35,000) ---------------- ---------------- --------------- BALANCE AS OF JUNE 30, 1997 $ (126,000) $ - $ 335,967,000 ---------------- ---------------- --------------- ---------------- ---------------- --------------- See Notes to Condensed Consolidated Financial Statements. 7
HCC Insurance Holdings, Inc. and Subsidiaries -------- Condensed Consolidated Statements of Cash Flows (Unaudited) --------
For the six months ended June 30, 1997 1996 -------------- -------------- Cash flows from operating activities: Net earnings $ 22,013,000 $ 12,793,000 Adjustments to reconcile net earnings to net cash provided by operating activities: Change in reinsurance recoverables (16,105,000) (20,115,000) Change in premium, claims and other receivables (54,882,000) (14,987,000) Change in ceded unearned premium (6,211,000) 39,000 Change in deferred income tax, net of tax effect of unrealized gain or loss 1,623,000 (9,161,000) Change in loss and loss adjustment expense payable 16,448,000 16,906,000 Change in reinsurance balances payable 13,741,000 (7,970,000) Change in unearned premium 12,378,000 14,366,000 Change in premium and claims payable, net of restricted cash 43,388,000 8,722,000 Net realized investment (gain) loss 294,000 (5,207,000) Non cash compensation expense - 23,841,000 Depreciation and amortization expense 2,324,000 1,753,000 Other, net (4,038,000) 4,864,000 -------------- -------------- Cash provided by operating activities 30,973,000 25,844,000 Cash flows from investing activities: Sales of fixed income securities 15,394,000 17,222,000 Maturity or call of fixed income securities 8,390,000 7,333,000 Sales of equity securities 8,329,000 22,693,000 Cash paid for acquisitions (10,150,000) - Cost of investments acquired (43,446,000) (41,691,000) Purchases of property and equipment (1,958,000) (1,187,000) -------------- -------------- Cash provided (used) by investing activities (23,441,000) 4,370,000 Cash flows from financing activities: Proceeds from notes payable 10,406,000 12,000,000 Sale of Common Stock 4,840,000 741,000 Payments on notes payable (4,097,000) (14,423,000) Dividends paid (1,802,000) (5,719,000) Repurchase Common Stock (324,000) (6,597,000) -------------- -------------- Cash provided (used) by financing activities 9,023,000 (13,998,000) -------------- -------------- Net change in cash and short-term investments 16,555,000 16,216,000 Cash and short-term investments at beginning of period 87,864,000 78,437,000 -------------- -------------- CASH AND SHORT-TERM INVESTMENTS AT END OF PERIOD $ 104,419,000 $ 94,653,000 -------------- -------------- -------------- -------------- Supplemental cash flow information: Interest paid $ 3,328,000 $ 3,607,000 -------------- -------------- -------------- -------------- Income tax paid $ 12,635,000 $ 3,945,000 -------------- -------------- -------------- --------------
See Notes to Condensed Consolidated Financial Statements. 8 HCC Insurance Holdings, Inc. and Subsidiaries ---------- Notes to Condensed Consolidated Financial Statements (Unaudited) (1) GENERAL INFORMATION HCC Insurance Holdings, Inc. ("the Company" or "HCCH") and its subsidiaries include domestic and foreign property and casualty insurance companies and managing general underwriters, surplus lines insurance brokers and wholesale insurance and reinsurance brokers. The Company, through its subsidiaries, provides specialized property, casualty, accident and health insurance, underwritten on both a direct and reinsurance basis, and insurance agency services. BASIS OF PRESENTATION The unaudited condensed consolidated financial statements have been prepared in conformity with generally accepted accounting principles and include all adjustments which are, in the opinion of management, necessary for fair presentation of the results of the interim periods. All adjustments made to the interim periods are of a normal recurring nature. The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated. The condensed consolidated financial statements for periods reported should be read in conjunction with the annual consolidated financial statements and notes related thereto. The condensed consolidated balance sheet as of December 31, 1996, and the statement of shareholders' equity for the year then ended were derived from audited financial statements, but do not include all disclosures required by generally accepted accounting principles. On June 17, 1997, the Company issued 8,511,625 shares of its Common Stock and 604,575 options to purchase its Common Stock to acquire all of the outstanding common stock and options of AVEMCO Corporation ("AVEMCO"). This business combination was accounted for as a pooling-of-interests. The Company's condensed consolidated financial statements have been restated to include the accounts and operations of AVEMCO for all periods presented. INCOME TAX For the six months ended June 30, 1997 and 1996, the income tax provision has been calculated based on an estimated effective tax rate for each of the fiscal years. The difference between the Company's effective tax rate and the Federal statutory rate is primarily the result of nontaxable municipal bond interest included in pretax income. In addition, during 1996, prior to its merger with the Company, LDG Management Company Incorporated ("LDG") was an S Corporation and thus exempt from Federal income tax until May 21, 1996. EARNINGS PER SHARE Earnings per share are based on the weighted average number of common and common equivalent shares outstanding during the period divided into net earnings. Weighted average shares outstanding have been adjusted to include shares and options issued in connection with the combination of AVEMCO. Outstanding common stock options, when dilutive, are considered to be common stock equivalents for the purpose of this calculation. The treasury stock method is used to calculate common stock equivalents due to options. EFFECTS ON RECENT ACCOUNTING PRONOUNCEMENTS In February, 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 128 "Earnings per Share". SFAS No. 128 is effective for fiscal periods ending after December 15, 1997. Early application is not permitted. SFAS No. 128 modifies the denominator to be used in the earnings per share calculations, and requires additional disclosures of the calculations. The statement will have no effect on the Company's net earnings, shareholders' equity or cash flows and an insignificant effect on earnings per share. In June, 1997, the Financial Accounting Standards Board issued SFAS No. 130 "Reporting Comprehensive Income" and SFAS No. 131 "Disclosures about Segments of an Enterprise and Related Information". Both statements are effective for fiscal years beginning after December 15, 1997. These SFAS's require that additional information be included in a complete set of financial statements, but will have no effect on the Company's net earnings, shareholders' equity or cash flows. 9 HCC Insurance Holdings, Inc. and Subsidiaries ---------- Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued) (1) GENERAL INFORMATION, CONTINUED RECLASSIFICATIONS Certain amounts in the 1996 condensed consolidated financial statements have been reclassified to conform to the 1997 presentation. Such reclassifications had no effect on the Company's shareholders' equity, net earnings or cash flows. (2) REINSURANCE In the normal course of business the Company's insurance company subsidiaries cede a substantial portion of their premium to unrelated domestic and foreign reinsurers through quota share, surplus, excess of loss and facultative reinsurance agreements. Although the ceding of reinsurance does not discharge the primary insurer from liability to its policyholder, the subsidiaries participate in such agreements for the purpose of limiting their loss exposure and diversifying their business. Substantially all of the reinsurance assumed by the Company's insurance company subsidiaries was underwritten directly by the subsidiaries but issued by other unrelated companies in order to satisfy local licensing or other requirements, predominantly on foreign business or as reinsurance of captives. The following table represents the approximate effect of such reinsurance transactions on net premium and loss and loss adjustment expense:
Loss and Loss Written Earned Adjustment Premium Premium Expense ------------- ------------- ------------- For the six months ended June 30, 1997: Direct business $ 92,620,000 $ 86,559,000 $ 49,562,000 Reinsurance assumed 92,579,000 88,125,000 90,724,000 Reinsurance ceded (88,450,000) (81,875,000) (84,216,000) ------------- ------------- ------------- NET AMOUNTS $ 96,749,000 $ 92,809,000 $ 56,070,000 ------------- ------------- ------------- ------------- ------------- ------------- For the six months ended June 30, 1996: Direct business $ 97,288,000 $ 95,023,000 $ 58,993,000 Reinsurance assumed 81,128,000 69,153,000 54,719,000 Reinsurance ceded (77,337,000) (77,371,000) (60,055,000) ------------- ------------- ------------- NET AMOUNTS $ 101,079,000 $ 86,805,000 $ 53,657,000 ------------- ------------- ------------- ------------- ------------- -------------
The table below represents the approximate composition of reinsurance recoverables in the accompanying condensed consolidated balance sheets:
June 30, 1997 December 31, 1996 ---------------- ----------------- Reinsurance recoverable on paid losses $ 28,720,000 $ 23,333,000 Reinsurance recoverable on outstanding losses 111,206,000 102,350,000 Reinsurance recoverable on IBNR 11,338,000 9,416,000 Reserve for uncollectible reinsurance (2,475,000) (2,415,000) ---------------- ----------------- TOTAL REINSURANCE RECOVERABLES $148,789,000 $132,684,000 ---------------- ----------------- ---------------- ----------------- 10 HCC Insurance Holdings, Inc. and Subsidiaries ---------- Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued) (2) REINSURANCE, CONTINUED The insurance company subsidiaries require reinsurers not authorized by their respective states of domicile to collateralize their reinsurance obligations to the Company with letters of credit or cash deposits. At June 30, 1997, the Company held letters of credit and cash deposits in the amounts of $90.1 million and $8.5 million, respectively, to collateralize certain reinsurance balances. The Company has established a reserve of $2.5 million as of June 30, 1997, to reduce the effects of any recoverable problems. In order to minimize its exposure to reinsurance credit risk, the Company evaluates the financial condition of its reinsurers and places their reinsurance with a diverse group of financially sound companies. (3) ACQUISITIONS TRM On January 24, 1997, the Company acquired all of the occupational accident business of the TRM International, Inc. group of companies in exchange for 266,667 shares of the Company's Common Stock and $6.55 million in cash. This acquisition has been accounted for as a purchase and results of operations of the business acquired has been included in the consolidated statements of earnings beginning in January 1997. Cost in excess of net assets acquired (goodwill) of approximately $13.5 million was recorded from this acquisition. Goodwill is being amortized over twenty years. INTERWORLD On April 30, 1997, the Company acquired all of the outstanding shares of Interworld Corporation in exchange for 725,000 shares of the Company's Common Stock. This combination has been accounted for as a pooling-of-interests. However, the Company's consolidated financial statements have not been restated due to immateriality. AVEMCO On June 17, 1997, the Company issued 8,511,625 shares of its Common Stock and 604,575 options to purchase its Common Stock to acquire all of the outstanding common stock and options of AVEMCO. This business combination has been accounted for as a pooling-of-interests and, accordingly, the Company's condensed consolidated financial statements have been restated to include the accounts and operations of AVEMCO for all periods presented. Separate total revenue and net earnings amounts of the merged entities are presented for the periods prior to the merger in the following table: For the six For the six months ended months ended June 30, 1997 June 30, 1996 --------------- --------------- Total revenue: HCCH $ 81,598,000 $ 75,260,000 AVEMCO 59,446,000 58,415,000 --------------- --------------- TOTAL REVENUE $ 141,044,000 $ 133,675,000 --------------- --------------- --------------- --------------- Net earnings: HCCH $ 21,295,000 $ 5,404,000 AVEMCO 718,000 7,389,000 --------------- --------------- NET EARNINGS $ 22,013,000 $ 12,793,000 --------------- --------------- --------------- ---------------
11 HCC Insurance Holdings, Inc. and Subsidiaries ---------- Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued) (3) ACQUISITIONS, CONTINUED MGU On June 26, 1997, the Company acquired all of the outstanding shares of Managed Group Underwriting, Inc. in exchange for 98,003 shares of the Company's Common Stock and a cash payment of $3.6 million. This acquisition has been accounted for as a purchase and the results of operations will be included in the consolidated statements of earnings beginning in July, 1997. Cost in excess of net assets acquired (goodwill) of approximately $6.2 million was recorded from this acquisition. Goodwill will be amortized over twenty years. CONTINENTAL On July 31, 1997, the Company acquired all of the outstanding shares of Continental Aviation Underwriters, Inc. in exchange for 17,354 shares of the Company's Common Stock and a cash payment of $2.8 million. This acquisition will be accounted for as a purchase and the results of operations will be included in the consolidated statements of earnings beginning in August, 1997. SOUTHERN On August 8, 1997, the Company acquired all of the outstanding shares of Southern Aviation Insurance Underwriters, Inc. and Aviation Claims Administrators, Inc. in exchange for 225,000 shares of the Company's Common Stock. These combinations will be accounted for as poolings-of-interests. However, the Company's consolidated financial statements will not be restated due to immateriality. 12 MANAGEMENT'S DISCUSSION AND ANALYSIS The Company completed the acquisition of Interworld Corporation on April 30, 1997 (pooling-of-interests), of AVEMCO Corporation on June 17, 1997 (pooling-of-interests), of Managed Group Underwriting, Inc. on June 30, 1997 (purchase), of Continental Aviation Underwriters, Inc. on July 31, 1997 (purchase) and Southern Aviation Insurance Underwriters, Inc. on August 8, 1997 (pooling-of-interests). THREE MONTHS ENDED JUNE 30, 1997 VERSUS THREE MONTHS ENDED JUNE 30, 1996. Gross written premium decreased to $90.1 million for the second quarter of 1997 from $101.0 million for the same period in 1996 due primarily to reductions in property business as competition increases however, aviation and accident and health premium increased during the quarter. Net written premium for the second quarter of 1997 increased 9% to $54.1 million from $49.9 million for the same period in 1996 due to increases in aviation and accident and health where the Company's retentions are greater due to the lack of catastrophe exposures. Net earned premium increased 10% to $48.1 million for the second quarter of 1997 compared to $43.6 million for the same period in 1996. Going forward, quarterly gross written premium is anticipated to remain at or near the second quarter of 1997 level. However, net written premium and net earned premium should decrease approximately 30% due to the implementation of a significant reinsurance program covering AVEMCO's business since the acquisition, which should have a positive effect on net earnings. Fee and commission income increased 17% to $16.1 million for the second quarter of 1997 compared to $13.8 million for the same period in 1996 due to the increased agency activity in light of recent acquisitions. The Company expects fee and commission income to continue to increase during the remainder of 1997 due to the effects of recent acquisitions and internal growth. Net investment income increased 14% to $6.5 million for the second quarter of 1997 compared to $5.7 million for the same period in 1996 reflecting a higher level of investments. Total revenue increased 5% to $72.5 million. Net realized investment losses from sales of equity securities were $8,000 during the second quarter of 1997, compared to gains of $4.1 million for the same period in 1996. During 1996, the Company systematically liquidated the majority of its equity portfolio. Net realized investment losses from disposition of fixed income securities were $230,000 during the second quarter of 1997, compared to losses of $196,000 for the same period in 1996. Loss and LAE increased $3.0 million during the second quarter of 1997, to $29.5 million, reflecting the increase in business, as the Company's GAAP loss ratio remained constant at 61%. Other operating expense increased 22% to $8.7 million for the second quarter of 1997. These expenses reflect increased expenditures required to meet the overall growth in business. Goodwill amortization expense was $402,000 for the second quarter of 1997, compared to $171,000 for the second quarter of 1996 and is included in other operating expense. Currency conversion losses amounted to $323,000 for the second quarter of 1997, compared to losses of $44,000 during the same period in 1996. Merger expense represents non-recurring items incurred to consummate the acquisitions and mergers which are or will be accounted for as poolings-of-interests. The amounts incurred during the second quarter of 1996 were due to the combination with LDG and included a compensatory stock grant of $24.0 million to certain key LDG employees immediately prior to the merger. The amounts incurred during the second quarter of 1997 were due to the combinations with AVEMCO Corporation and Interworld Corporation. Income tax expense was $5.8 million for the second quarter of 1997, compared to an income tax benefit of $3.9 million for the second quarter of 1996. The 1996 amount included a deferred tax benefit of $9.6 million which was recorded in connection with the compensatory stock grant to certain key LDG employees. Also, as an S Corporation, LDG was exempt from Federal income taxes through May 21, 1996. Had LDG been subject to Federal income taxes during that period, additional income tax expense of $1.0 million would have been recorded for the second quarter of 1996. Net earnings increased to $9.0 million for the second quarter of 1997 from $642,000 for the same period in 1996. This increase was principally a result of higher underwriting profits, increased fee and commission income and the non-recurring compensation charge incurred during 1996. Earnings per share increased to $0.19 for the second quarter of 1997 from $ 0.01 for the second quarter of 1996. This reflects the increase in net earnings, offset by a 5% increase in weighted average shares outstanding. The Company's insurance company subsidiaries' statutory combined ratio was 78.7% for the second quarter of 1997, as compared to 78.4% for the same period in 1996. The Company's combined ratio remains significantly better than the industry average. The Company's book value per share was $7.37 as of June 30, 1997, up from $7.14 as of March 31, 1997. Earnings added $0.20 per share to book value during the second quarter of 1997. 13 SIX MONTHS ENDED JUNE 30, 1997 VERSUS SIX MONTHS ENDED JUNE 30, 1996. Gross written premium increased 4% to $185.2 million for the first six months of 1997 from $178.4 million for the same period in 1996, due primarily to increased aviation and accident and health premiums partially offset by decreased marine premium. Net written premium for the first six months of 1997 decreased to $96.7 million from $101.1 million for the same period in 1996, due primarily to decreased marine and offshore energy premium partially offset by increases in aviation and accident and health premium. Net earned premium increased 7% to $92.8 million for the first six months of 1997 compared to $86.8 million for the same period in 1996. Fee and commission income increased 23% to $32.2 million for the first six months of 1997 compared to $26.1 million for the same period in 1996 due to the increased agency activity. The Company expects fee and commission income to continue to increase during the remainder of 1997 due to the effects of recent acquisitions and internal growth. Net investment income increased 11% to $12.7 million for the first six months of 1997 compared to $11.4 million for the same period in 1996 reflecting a higher level of investments. Total revenue increased 6% to $141.0 million. Net realized investment losses from sales of equity securities were $50,000 during the first six months of 1997, compared to gains of $5.3 million for the same period in 1996. During 1996, the Company systematically liquidated the majority of its equity portfolio. Net realized investment losses from disposition of fixed income securities were $244,000 during the first six months of 1997, compared to losses of $65,000 for the same period in 1996. Loss and LAE increased $2.4 million during the first six months of 1997, to $56.1 million, as the Company's GAAP loss ratio decreased to 60% from 62%. Other operating expense increased 24% to $15.6 million for the first six months of 1997. These expenses reflect increased expenditures required to meet the overall growth in business. Goodwill amortization expense was $711,000 for the first six months of 1997 compared to $340,000 for the first six months of 1996 and is included in other operating expense. Currency conversion losses amounted to $541,000 for the first six months of 1997, compared to losses of $171,000 for the same period in 1996. Merger expense represents non-recurring items incurred to consummate the acquisitions and mergers which are or will be accounted for as poolings-of-interests. The amounts incurred during the first six months of 1996 were due to the combination with LDG and included a compensatory stock grant of $24.0 million to certain key LDG employees immediately prior to the merger. The amounts incurred during 1997 were due to the combinations with AVEMCO Corporation and Interworld Corporation. Income tax expense was $11.4 million for the first six months of 1997, compared to an income tax benefit of $339,000 during the first six months of 1996. The 1996 amount included a deferred tax benefit of $9.6 million which was recorded in connection with the compensatory stock grant to certain key LDG employees. Also, as an S Corporation, LDG was exempt from Federal income taxes through May 21, 1996. Had LDG been subject to Federal income tax during that period, additional income tax expense of $2.3 million would have been recorded for the six months ended June 30, 1996. Net earnings increased 72% to $22.0 million for the first six months of 1997 from $12.8 million for the same period in 1996. This increase was principally a result of higher underwriting profits, increased fee and commission income and the non-recurring compensation charge incurred during 1996. Earnings per share increased 66% to $0.48 for the first six months of 1997 from $0.29 for the first six months of 1996. This reflects a 72% increase in net earnings, partially offset by a 4% increase in weighted average shares outstanding. The Company's insurance company subsidiaries' statutory combined ratio was 78.5% for the first six months of 1997, as compared to 82.3% for the same period in 1996. The Company's combined ratio remains significantly better than the industry average. The Company's book value per share was $7.37 as of June 30, 1997, up from $6.83 as of December 31, 1996. Earnings added $0.48 per share to book value during the first six months of 1997. 14 LIQUIDITY AND CAPITAL RESOURCES The Company's consolidated cash and investment portfolio increased $27.9 million or 6% since December 31, 1996, and totaled $506.6 million as of June 30, 1997, of which $104.4 million was cash and short-term investments. Total assets increased to $1.1 billion as of June 30, 1997, from $964 million as of December 31, 1996. FORWARD-LOOKING STATEMENTS IN THIS FORM 10-Q ARE MADE PURSUANT TO THE SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. INVESTORS ARE CAUTIONED THAT ALL FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND UNCERTAINTY, INCLUDING WITHOUT LIMITATION, THE RISK OF A SIGNIFICANT NATURAL DISASTER, THE INABILITY OF THE COMPANY TO REINSURE CERTAIN RISKS, THE ADEQUACY OF ITS LOSS RESERVES, EXPANSION OR CONTRACTION OF ITS VARIOUS LINES OF BUSINESS, THE IMPACT OF INFLATION, CHANGING REGULATIONS IN FOREIGN COUNTRIES, THE EFFECT OF PENDING ACQUISITIONS, AS WELL AS GENERAL MARKET CONDITIONS, COMPETITION AND PRICING. PLEASE REFER TO THE COMPANY'S SECURITIES AND EXCHANGE COMMISSION FILINGS, COPIES OF WHICH ARE AVAILABLE FROM THE COMPANY WITHOUT CHARGE, FOR FURTHER INFORMATION. 15 PART II - OTHER INFORMATION Item 1. LEGAL PROCEEDINGS: There are no material pending legal proceedings to which the registrant is a party or of which any of the property of the registrant is the subject, except for claims arising in the ordinary course of business, none of which are considered material. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On May 22, 1997, the Company held its 1997 Annual Meeting of Shareholders. At such time the following items were submitted to a vote of shareholders through the solicitation of proxies: (a) Election of Directors. The following persons were elected to serve on the Board of Directors until the 1998 Annual Meeting of Shareholders or until their successors have been duly elected and qualified. The Directors received the votes set forth opposite their respective names: WITHHELD NAME FOR AGAINST AUTHORITY ---- --- ------- --------- James M. Berry 30,441,264 599 41,442 Patrick B. Collins 30,438,764 3,099 41,442 J. Robert Dickerson 30,438,764 3,099 41,442 Edwin H. Frank, III 30,441,264 599 41,442 Allan W. Fulkerson 30,438,764 3,099 41,442 Walter J. Lack 30,382,514 59,349 41,442 Stephen J. Lockwood 30,440,764 1,099 41,442 Stephen L. Way 30,440,764 1,099 41,442 Hugh T. Wilson 30,438,764 3,099 41,442 (b) Shareholders of the Company were requested to approve the Company's 1997 Flexible Incentive Plan. Such plan was approved by the shareholders, who voted 17,205,607 shares in favor, 8,342,857 shares against, and 77,271 shares who abstained or withheld authority to vote. (c) Shareholders of the Company were requested to ratify the appointment of Coopers & Lybrand, L.L.P., as independent auditors for the Company and its subsidiaries to audit the accounts of the Company and its subsidiaries for the year ended December 31, 1997. Such appointment was approved by the shareholders, who voted 27,676,554 shares in favor, 4,563 shares against, and 40,838 shares who abstained or withheld authority to vote. On June 17, 1997, the Company held a Special Meeting of Shareholders. At such time the following item was submitted to a vote of shareholders through the solicitation of proxies: (a) Shareholders of the Company were requested to approve the Agreement and Plan of Reorganization dated February 28, 1997, pursuant to which AVEMCO Corporation would merge with a subsidiary of HCCH, with AVEMCO surviving the merger as a wholly owned subsidiary of HCCH. Such proposal was approved by the shareholders, who voted 26,921,316 shares in favor, 30,617 shares against, and 36,094 shares who abstained or withheld authority to vote. 16 Item 6. EXHIBITS AND REPORTS ON FORM 8-K: (a) Exhibits: The exhibits listed on the accompanying Index to Exhibits on the following page are filed as part of this report. (b) Reports on Form 8-K: On June 19, 1997, the Registrant filed a report on Form 8-K reporting that the Company had consummated the merger with AVEMCO Corporation on June 17, 1997. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. HCC Insurance Holdings, Inc. ---------------------------------- (Registrant) August 13, 1997 /s/ Frank J. Bramanti ------------------- ---------------------------------- (Date) Frank J. Bramanti, President 17 INDEX TO EXHIBITS 10.335 - Stock Purchase Agreement dated June 27, 1997 between Sandra L. Ruder and HCC Insurance Holdings, Inc. related to the purchase of 100% of the common stock of Managed Group Underwriting, Inc. 11 - Statements Regarding Computation of Earnings Per Share. 27 - EDGAR Financial Data Schedule - June 30, 1997. 27.1 - EDGAR Financial Data Schedule - Restated June 30, 1996. 18 EX-10.335 2 EXHIBIT 10.335 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- STOCK PURCHASE AGREEMENT DATED AS OF JUNE 26, 1997 BY AND BETWEEN HCC INSURANCE HOLDINGS, INC., AND SANDRA L. RUDER - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- TABLE OF CONTENTS PAGE ARTICLE I SALE AND TRANSFER OF THE MGU COMMON STOCK. . . . . . . . . . . . 1 Section 1.1 Sale of MGU Common Stock.. . . . . . . . . . . . . . . . 1 Section 1.2 Purchase Price . . . . . . . . . . . . . . . . . . . . . 1 Section 1.3 Closing Deliveries . . . . . . . . . . . . . . . . . . . 2 ARTICLE II REPRESENTATIONS AND WARRANTIES OF MGU AND SHAREHOLDER . . . . . . . . . . . . . . . . . . . . . . 3 Section 2.1 Corporate Existence and Power. . . . . . . . . . . . . . 3 Section 2.2 Authorization. . . . . . . . . . . . . . . . . . . . . . 3 Section 2.3 Governmental Authorization . . . . . . . . . . . . . . . 4 Section 2.4 Non-Contravention. . . . . . . . . . . . . . . . . . . . 4 Section 2.5 Capitalization . . . . . . . . . . . . . . . . . . . . . 5 Section 2.6 Subsidiaries and Joint Ventures. . . . . . . . . . . . . 5 Section 2.7 MGU Financial Statements . . . . . . . . . . . . . . . . 5 Section 2.8 Absence of Certain Changes . . . . . . . . . . . . . . . 6 Section 2.9 No Undisclosed Liabilities . . . . . . . . . . . . . . . 7 Section 2.10 Litigation . . . . . . . . . . . . . . . . . . . . . . . 7 Section 2.11 Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . 8 Section 2.12 Employee Benefit Plans, ERISA. . . . . . . . . . . . . . 8 Section 2.13 Material Agreements. . . . . . . . . . . . . . . . . . . 10 Section 2.14 Properties . . . . . . . . . . . . . . . . . . . . . . . 11 Section 2.15 Environmental Matters. . . . . . . . . . . . . . . . . . 11 Section 2.16 Labor Matters. . . . . . . . . . . . . . . . . . . . . . 12 Section 2.17 Compliance with Laws . . . . . . . . . . . . . . . . . . 12 Section 2.18 Trademarks, Tradenames, Etc. . . . . . . . . . . . . . . 12 Section 2.19 Sale of MGU. . . . . . . . . . . . . . . . . . . . . . . 12 Section 2.20 Broker's Fees. . . . . . . . . . . . . . . . . . . . . . 12 Section 2.21 Investment Representation. . . . . . . . . . . . . . . . 12 Section 2.22 Payment to Wilbur. . . . . . . . . . . . . . . . . . . . 13 ARTICLE III REPRESENTATIONS AND WARRANTIES OF HCCH . . . . . . . . . . . . . 13 Section 3.1 Corporate Existence and Power. . . . . . . . . . . . . . 13 Section 3.2 Corporate Authorization. . . . . . . . . . . . . . . . . 14 Section 3.3 Governmental Authorization . . . . . . . . . . . . . . . 14 Section 3.4 Non-Contravention. . . . . . . . . . . . . . . . . . . . 14 Section 3.5 Capitalization of HCCH . . . . . . . . . . . . . . . . . 15 Section 3.6 Subsidiaries . . . . . . . . . . . . . . . . . . . . . . 15 Section 3.7 SEC Filings. . . . . . . . . . . . . . . . . . . . . . . 16 Section 3.8 Financial Statements . . . . . . . . . . . . . . . . . . 17 Section 3.9 Absence of Certain Changes . . . . . . . . . . . . . . . 17 Section 3.10 No Undisclosed Liabilities . . . . . . . . . . . . . . . 17 i TABLE OF CONTENTS (CONT.) PAGE Section 3.11 Litigation . . . . . . . . . . . . . . . . . . . . . . . 17 Section 3.12 Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . 18 Section 3.13 Employee Benefit Plans; ERISA. . . . . . . . . . . . . . 18 Section 3.14 Material Agreements. . . . . . . . . . . . . . . . . . . 20 Section 3.15 Properties . . . . . . . . . . . . . . . . . . . . . . . 20 Section 3.16 Environmental Matters. . . . . . . . . . . . . . . . . . 21 Section 3.17 Labor Matters. . . . . . . . . . . . . . . . . . . . . . 21 Section 3.18 Compliance with Laws . . . . . . . . . . . . . . . . . . 21 Section 3.19 Trademarks, Tradenames, Etc. . . . . . . . . . . . . . . 21 Section 3.20 Broker's Fees. . . . . . . . . . . . . . . . . . . . . . 21 Section 3.21 Release of Personal Guaranty . . . . . . . . . . . . . . 21 Section 3.22 MGU as a Separate Subsidiary . . . . . . . . . . . . . . 22 ARTICLE IV COVENANTS OF SHAREHOLDER . . . . . . . . . . . . . . . . . . . . 22 Section 4.1 Conduct of MGU . . . . . . . . . . . . . . . . . . . . . 22 Section 4.2 Access to Financial and Operational Information. . . . . 23 Section 4.3 Other Offers . . . . . . . . . . . . . . . . . . . . . . 24 Section 4.4 Maintenance of Business. . . . . . . . . . . . . . . . . 24 Section 4.5 Compliance with Obligations. . . . . . . . . . . . . . . 24 Section 4.6 Notices of Certain Events. . . . . . . . . . . . . . . . 24 Section 4.7 Affiliates Agreement . . . . . . . . . . . . . . . . . . 25 Section 4.8 Necessary Consents . . . . . . . . . . . . . . . . . . . 25 Section 4.9 Regulatory Approval. . . . . . . . . . . . . . . . . . . 25 Section 4.10 Satisfaction of Conditions Precedent . . . . . . . . . . 25 ARTICLE V COVENANTS OF HCCH. . . . . . . . . . . . . . . . . . . . . . . . 25 Section 5.1 Conduct of HCCH. . . . . . . . . . . . . . . . . . . . . 25 Section 5.2 Listing of HCCH Common Stock . . . . . . . . . . . . . . 26 Section 5.3 Access to Financial and Operation Information. . . . . . 26 Section 5.4 Maintenance of Business. . . . . . . . . . . . . . . . . 26 Section 5.5 Compliance with Obligations. . . . . . . . . . . . . . . 26 Section 5.6 Notices of Certain Events. . . . . . . . . . . . . . . . 27 Section 5.7 Employee Matters . . . . . . . . . . . . . . . . . . . . 27 Section 5.8 Earnings of MGU. . . . . . . . . . . . . . . . . . . . . 27 ARTICLE VI COVENANTS OF HCCH, SHAREHOLDER AND MGU . . . . . . . . . . . . . 27 Section 6.1 Advice of Changes. . . . . . . . . . . . . . . . . . . . 28 Section 6.2 Regulatory Approvals. . . . . . . . . . . . . . . . . . 28 Section 6.3 Actions Contrary to Stated Intent. . . . . . . . . . . . 28 Section 6.4 Certain Filings. . . . . . . . . . . . . . . . . . . . . 28 ii TABLE OF CONTENTS (CONT.) PAGE Section 6.5 Communications . . . . . . . . . . . . . . . . . . . . . 28 Section 6.6 Satisfaction of Conditions Precedent . . . . . . . . . . 28 Section 6.7 Tax Cooperation. . . . . . . . . . . . . . . . . . . . . 29 Section 6.8 Confidentiality. . . . . . . . . . . . . . . . . . . . . 29 ARTICLE VII CONDITIONS TO CLOSING. . . . . . . . . . . . . . . . . . . . . . 29 Section 7.1 Conditions to Obligations of HCCH. . . . . . . . . . . . 29 Section 7.2 Conditions to Obligations of Shareholder . . . . . . . . 32 Section 7.3 Conditions to Obligations of Each Party. . . . . . . . . 33 ARTICLE VIII TERMINATION OF AGREEMENT . . . . . . . . . . . . . . . . . . . 33 Section 8.1 Termination. . . . . . . . . . . . . . . . . . . . . . . 33 Section 8.2 Effect of Termination. . . . . . . . . . . . . . . . . . 34 ARTICLE IX CLOSING MATTERS. . . . . . . . . . . . . . . . . . . . . . . . . 34 Section 9.1 The Closing. . . . . . . . . . . . . . . . . . . . . . . 34 ARTICLE X INDEMNIFICATION AND REMEDIES, CONTINUING COVENANTS . . . . . . . . . . . . . . . . . 34 Section 10.1 Agreement to Indemnify . . . . . . . . . . . . . . . . . 34 Section 10.2 HCCH Agreement to Indemnify. . . . . . . . . . . . . . . 35 Section 10.3 Survival of Representations. . . . . . . . . . . . . . . 35 Section 10.4 Procedure for Indemnification; Third Party Claims. . . . 36 ARTICLE XI MISCELLANEOUS. . . . . . . . . . . . . . . . . . . . . . . . . . 36 Section 11.1 Further Assurances.. . . . . . . . . . . . . . . . . . . 36 Section 11.2 Fees and Expenses. . . . . . . . . . . . . . . . . . . . 36 Section 11.3 Notices. . . . . . . . . . . . . . . . . . . . . . . . . 36 Section 11.4 Governing Law. . . . . . . . . . . . . . . . . . . . . . 37 Section 11.5 Binding upon Successors and Assigns, Assignment. . . . . 38 Section 11.6 Severability . . . . . . . . . . . . . . . . . . . . . . 38 Section 11.7 Entire Agreement . . . . . . . . . . . . . . . . . . . . 38 Section 11.8 Amendment and Waivers. . . . . . . . . . . . . . . . . . 38 Section 11.9 No Waiver. . . . . . . . . . . . . . . . . . . . . . . . 38 Section 11.10 Construction of Agreement. . . . . . . . . . . . . . . . 38 Section 11.11 Counterparts . . . . . . . . . . . . . . . . . . . . . . 38 iii STOCK PURCHASE AGREEMENT THIS STOCK PURCHASE AGREEMENT (this "Agreement") is entered into as of the 26th day of June, 1997 but effective as of 12:01 a.m. on July 1, 1997 (the "Effective Time" and the "Effective Date" respectively) by and between HCC Insurance Holdings, Inc., a Delaware corporation ("HCCH"), and Sandra L. Ruder a resident of Missouri (the "Shareholder"). RECITALS: A. Shareholder, as trustee of the Sandra L. Ruder Revocable Trust, dated February 13, 1997 (the "Trust"), currently owns all of the outstanding stock of Managed Group Underwriting, Inc., a Kansas corporation ("MGU"), a Company engaged in the insurance business. B. Prior to Closing all of the outstanding stock of MGU will be transferred from the Trust to Shareholder. C. HCCH desires to purchase all of the outstanding stock of MGU and Shareholder desires to sell to HCCH her shares in MGU (being all of the outstanding stock of MGU) for the consideration and on the terms set forth in this Agreement. NOW, THEREFORE, in consideration of the foregoing and the mutual representations, warranties, covenants and agreements set forth herein, the parties hereto do hereby agree as follows: ARTICLE I SALE AND TRANSFER OF THE MGU COMMON STOCK SECTION 1.1 SALE OF MGU COMMON STOCK. (a) Subject to the terms and conditions of this Agreement, at the Closing hereinafter defined, Shareholder shall sell, transfer and deliver to HCCH, and HCCH shall purchase from Shareholder, all of the outstanding stock of MGU (the "MGU Common Stock"). SECTION 1.2 PURCHASE PRICE. (a) At the closing, HCCH shall deliver to Shareholder the purchase price ("Purchase Price") which shall be equal to $5,900,000 to be paid, as follows: (i) $3,600,000 in cash (the "Cash Payment") to be transferred by wire transfer to such account as Shareholder shall specify, in immediately available funds; plus (ii) that number of shares of HCCH Common Stock (the "Share Payment") equal to (x) $2,300,000, (y) divided by the HCCH Acquisition Price. As used herein, the HCCH Acquisition Price means the average of the closing prices of HCCH Common Stock as reported by the New York Stock Exchange ("NYSE") for the ten trading days ending three trading days before the Closing Date, hereinafter defined. (b) No fractional shares of HCCH Common Stock shall be issued and the Shareholder shall be entitled to receive an additional cash payment equal to the fractional share of HCCH Common Stock such Shareholder would otherwise be entitled to receive, multiplied by the HCCH Acquisition Price. SECTION 1.3 CLOSING DELIVERIES. At the Closing: (a) Shareholder shall deliver to HCCH (i) certificates dated July 1, 1997 representing the MGU Common Stock, endorsed or transferred to HCCH, which shall transfer to HCCH good and indefeasible title to the MGU Common Stock, free and clear of all encumbrances; and (ii) such other documents including officers' certificates and opinions of counsel as may be required by this Agreement or reasonably requested by HCCH. (b) HCCH shall (i) cause the Cash Payment to be transferred to an account designated by Shareholder in immediately available funds; and (ii) deliver certificates of HCCH Common Stock dated June 26, 1997 in the amount of the Share Payment. Shareholder agrees and understands that such shares of HCCH Common Stock shall be restricted as to transfer and shall bear the appropriate legend as set forth herein; (iii) deliver to MGU that number of shares of HCCH Common Stock equal to $400,000 divided by the HCCH Acquisition Price (the "MGU Shares"). Such MGU Shares will be transferred by MGU for use in satisfying MGU's obligation to Wilbur, hereinafter defined. No fractional shares of HCCH Common Stock shall be issued and MGU shall be entitled to receive an additional cash payment equal to the fractional share of HCCH Common Stock that MGU would otherwise be entitled to receive, multiplied by the HCCH Acquisition Price; and 2 (iv) deliver to Shareholder such other documents, including officers' certificates and opinions of counsel, as may be required by this Agreement or reasonably requested by Shareholder. ARTICLE II REPRESENTATIONS AND WARRANTIES OF MGU AND SHAREHOLDER Except as disclosed in a document referring specifically to this Agreement (the "MGU Disclosure Schedule") which has been delivered to HCCH on or before the date hereof, each of MGU and Shareholder (jointly and severally) represents and warrants to HCCH (it being agreed that the disclosure on the MGU Disclosure Schedule of the existence of any document or fact or circumstance or situation relating to any representations, warranties, covenants or agreements in any section of this Agreement shall be automatically deemed to be disclosure of such document or fact or circumstance or situation for purposes of all other representations, warranties, covenants and agreements in this Agreement) as set forth below. SECTION 2.1 CORPORATE EXISTENCE AND POWER. MGU is a corporation duly organized, validly existing and in good standing under the laws of the state of its incorporation, and has all corporate powers and all material governmental licenses, authorizations, consents and approvals (collectively, "Governmental Authorizations") required to carry on its business as now conducted, except such Governmental Authorizations the failure of which to have obtained would not have a Material Adverse Effect, as hereinafter defined, on MGU. MGU has delivered to HCCH true and complete copies of MGU's Articles of Incorporation and Bylaws as currently in effect. MGU is duly qualified to do business as a foreign corporation and is in good standing in each jurisdiction where the character of the property owned or leased by it or the nature of its activities makes such qualification necessary, except where the failure to be so qualified would not have a Material Adverse Effect on MGU. For purposes of this Agreement, a "Material Adverse Effect," with respect to any person or entity (including without limitation MGU and HCCH), means a material adverse effect on the condition (financial or otherwise), business, properties, assets, liabilities (including contingent liabilities), results of operations or prospects of such person or entity and its affiliated companies and subsidiaries and/or parent corporation and/or corporations under the same stock ownership, taken as a whole; and "Material Adverse Change" means a change or a development involving a prospective change which would result in a Material Adverse Effect. SECTION 2.2 AUTHORIZATION. (a) Shareholder represents and warrants that she has full right, power and authority to enter into this Agreement, the Affiliates Agreement to be entered into by her, and each other agreement to be entered into by her in connection with the transactions contemplated hereby and that this Agreement, the Affiliates Agreement, and such other agreements contemplated hereby constitute, or upon execution will constitute, valid and binding agreements of such Shareholder, 3 enforceable against her in accordance with their respective terms, except as such enforcement may be limited by bankruptcy, insolvency or other similar laws effecting the enforcement of creditors' rights generally or by general principles of equity. SECTION 2.3 GOVERNMENTAL AUTHORIZATION. The execution, delivery and performance by Shareholder of this Agreement, and the consummation of the transactions contemplated hereunder require no action by MGU or Shareholder or any filing by them with any governmental body, agency, official or authority other than in respect of: (a) compliance with any applicable requirements of the Securities Act and the rules and regulations promulgated thereunder; (b) compliance with any applicable foreign or state securities or "blue sky" laws; (c) compliance with any requirements of any federal, state, foreign or other insurance or reinsurance or intermediaries or managing general agent laws, including licensing or other related laws; (d) such other filings or registrations with, or authorizations, consents or approvals of, governmental bodies, agencies, officials or authorities, the failure of which to make or obtain (i) would not reasonably be expected to have a Material Adverse Effect on MGU, or (ii) would not materially adversely affect the ability of MGU or HCCH to consummate the transactions contemplated hereby and operate their businesses as heretofore operated. SECTION 2.4 NON-CONTRAVENTION. The execution, delivery and performance by Shareholder of this Agreement, and the consummation by Shareholder of the transactions contemplated hereby and thereby do not and will not: (a) contravene or conflict with MGU's charter or bylaws; (b) assuming compliance with the matters referred to in Section 2.3, contravene or conflict with or constitute a violation of any provision of any law, regulation, judgment, injunction, order or decree binding upon or applicable to MGU or Shareholder; (c) conflict with or result in a breach or violation of, or constitute a default under, or result in a contractual right to cause the termination or cancellation of or loss of a material benefit under, or right to accelerate, any material agreement, contract or other instrument binding upon MGU or any material license, franchise, permit or other similar authorization held by MGU; or (d) result in the creation or imposition of any Lien (as hereinafter defined) on any material asset of MGU, 4 except, with respect to clauses (b), (c) and (d) above, for contraventions, defaults, losses, Liens and other matters referred to in such clauses that in the aggregate would not be reasonably expected to have, individually or in the aggregate, a Material Adverse Effect on MGU. For purposes of this Agreement, the term "Lien" means, with respect to any asset, any mortgage, lien, pledge, charge, security interest or encumbrance of any kind in respect of such asset. SECTION 2.5 CAPITALIZATION. (a) As of May 30, 1997, the authorized, issued and outstanding capital stock of MGU was 100,000 shares authorized; 1,167 shares issued and outstanding all of which outstanding shares were owned by Shareholder free of any Liens or other encumbrances. (b) All outstanding shares set forth in (a) above have been, or will be prior to the Closing Date, duly authorized and validly issued and are fully paid and nonassessable and free from any preemptive rights. Except as set forth in and as otherwise contemplated by this Agreement, for MGU there are outstanding (i) no shares of capital stock or other voting securities, (ii) no securities convertible into or exchangeable for shares of its capital stock or voting securities), (iii) no options or other rights to acquire, and no obligation to issue, any capital stock, voting securities or securities convertible into or exchangeable for its capital stock or other voting securities (the items in clauses (i), (ii) and (iii) being referred to collectively as the "MGU Securities"), (iv) no obligations to repurchase, redeem or otherwise acquire any of MGU Securities and (v) no contractual rights of any person or entity to include any such securities in any registration statement proposed to be filed under the Securities Act. SECTION 2.6 SUBSIDIARIES AND JOINT VENTURES. (a) For purposes of this Section 2.6, (i) "Subsidiary" means, with respect to any entity, any corporation of which securities or other ownership interests having ordinary voting power to elect a majority of the board of directors or other persons performing similar functions are directly or indirectly owned by such entity, and (ii) "Joint Venture" means, with respect to any entity, any corporation or organization (other than such entity and any Subsidiary thereof) of which such entity or any Subsidiary thereof is, directly or indirectly, the beneficial owner of 25% or more of any class of equity securities or equivalent profit participation interest. (b) As of the date hereof MGU has no Subsidiaries or Joint Ventures which are material to the business of MGU. SECTION 2.7 MGU FINANCIAL STATEMENTS. MGU has delivered to HCCH MGU's audited balance sheets as of December 31, 1996 (the "Balance Sheet Date") and 1995, MGU's audited income statements for the annual periods ended December 31, 1996 and 1995 and MGU's unaudited balance sheets and income statements for the period ending April 30, 1997 (collectively, the "MGU Financial Statements"). The MGU Financial Statements present fairly in all material respects, substantially in conformity with generally accepted accounting principles consistently applied (except as indicated in the notes thereto), the financial position of MGU as 5 of the dates thereof and results of operations and cash flows for the periods therein indicated (subject to normal year-end adjustments in the case of any interim financial statements and the absence of certain footnotes in the case of unaudited financial statements). MGU has no material debt, liability or obligation of any nature, whether accrued, absolute, contingent or otherwise, and whether due or to become due, that is not reflected, reserved against or disclosed in the MGU Financial Statements except for (i) those that are not required to be reported in accordance with the aforesaid accounting principles; (ii) normal or recurring liabilities incurred since December 31, 1996 in the ordinary course of business or (iii) as disclosed in the MGU Disclosure Schedule. SECTION 2.8 ABSENCE OF CERTAIN CHANGES. Since December 31, 1996, MGU has in all material respects conducted its business in the ordinary course and there has not been: (a) any Material Adverse Change with respect thereto or any event, occurrence or development of a state of circumstances or facts known to MGU, which as of the date hereof could reasonably be expected to have a Material Adverse Effect on MGU; (b) any declaration, setting aside or payment or any dividend or other distribution in respect of any shares of capital stock of MGU other than the declaration, setting aside or payment of dividends in accordance with its existing dividend policy or practice, which policy or practice is not inconsistent with MGU's past policy or practice; (c) any repurchase, redemption or other acquisition by MGU of any outstanding shares of capital stock or other securities of or other ownership interests in MGU; (d) any amendment of any term of any outstanding securities of MGU; (e) any damage, destruction or other property or casualty loss (whether or not covered by insurance) affecting the business, assets, liabilities, earnings or prospects of MGU which, individually or in the aggregate, has had or would reasonably be expected to have a Material Adverse Effect on MGU; (f) any increase in indebtedness for borrowed money or capitalized lease obligations of MGU, except in the ordinary course of business; (g) any sale, assignment, transfer or other disposition of any tangible or intangible asset material to the business of MGU, except in the ordinary course of business and for a fair and adequate consideration; (h) except for the agreement with Wilbur and ISU referred to in Section 7.1(l), any amendment, termination or waiver by MGU of any right of substantial value under any agreement, contract or other written commitment to which it is a party or by which it is bound; 6 (i) any material reduction in the amounts of coverage provided by existing casualty and liability insurance policies with respect to the business or properties of MGU; (j) any (i) grant of any severance or termination pay to any director, officer or employee of MGU, (ii) entering into of any employment, deferred compensation or other similar agreement (or any amendment to any such existing agreement) with any director, officer or employee of MGU, (iii) any increase in benefits payable under any existing severance or termination pay policies or employment agreements, or (iv) any increase in compensation, bonus or other benefits payable to directors, officers or employees of MGU, in each case other than in the ordinary course of business consistent with past practice; (k) any new or amendment to or alteration of any existing bonus, incentive, compensation, severance, stock option, stock appreciation right, pension, matching gift, profit-sharing, employee stock ownership, retirement, pension group insurance, death benefit, or other fringe benefit plan, arrangement or trust agreement adopted or implemented by MGU which would result in a material increase in cost; (l) any capital expenditures, capital additions or capital improvements incurred or undertaken by MGU except in the ordinary course of business; or (m) the entering into of any agreement by MGU or any person on behalf of MGU to take any of the foregoing actions. SECTION 2.9 NO UNDISCLOSED LIABILITIES. There are no existing liabilities of MGU of any kind whatsoever that are, individually or in the aggregate, material to MGU, other than: (a) liabilities disclosed or provided for in the respective audited financial statements as of and for the fiscal year ended December 31, 1996 (including the notes thereto) of MGU; (b) liabilities incurred in the ordinary course of business consistent with past practice since December 31, 1996; (c) liabilities under this Agreement or indicated in the MGU Disclosure Schedule. SECTION 2.10 LITIGATION. Other than actions, suits, proceedings, claims or investigation occurring in the ordinary course of business involving respective amounts in controversy of less than $10,000 each and $100,000 in the aggregate, there is no action, suit, proceeding, claim or investigation pending against, nor have MGU or Shareholder received written notice of a claim threatened against MGU or any of its assets or against or involving any of its officers, directors or employees in connection with the business or affairs of MGU, including, without limitation, any such claims for indemnification arising under any agreement to which MGU is a party. MGU has not received written notice that it is subject, or in default with respect, to any writ, order, judgment, injunction or decree which could, individually or in the aggregate, have a Material Adverse Effect on MGU. 7 SECTION 2.11 TAXES. (a) MGU (i) has filed when due (taking into account extensions) with the appropriate federal, state, local, foreign and other governmental agencies, all material tax returns, estimates and reports required to be filed by it, (ii) either paid when due and payable or established adequate reserves or otherwise accrued on the MGU's Financial Statements all material federal, state, local or foreign taxes, levies, imposts, duties, licenses and registration fees and charges of any nature whatsoever, and unemployment and social security taxes and income tax withholding, including interest and penalties thereon ("Taxes") and there are no tax deficiencies claimed in writing by any Taxing authority and received by MGU or Shareholder that, in the aggregate, would result in any tax liability in excess of the amount of the reserves or accruals and (iii) has or will establish in accordance with its normal accounting practices and procedures accruals and reserves that, in the aggregate, are adequate for the payment of all Taxes not yet due and payable and attributable to any period preceding the Effective Time. The MGU Disclosure Schedule sets forth those tax returns for all periods that currently are the subject of audit by any federal, state, local or foreign taxing authority. (b) There are no material taxes, interest, penalties, assessments or deficiencies claimed in writing by any Taxing authority and received by MGU or Shareholder to be due in respect of any tax returns filed by MGU (or any predecessor corporations). Neither MGU nor any predecessor corporation, has executed or filed with the Internal Revenue Service ("IRS") or any other Taxing authority any agreement or other document extending, or having the effect of extending, the period of assessment or collection of any Taxes. (c) MGU is not a party to or bound by (or will prior to the Effective Date become a party to or bound by) any Tax indemnity, Tax sharing or Tax allocation agreement or other similar arrangement. MGU is not a member of an affiliated group or filed or been included in a combined, consolidated or unitary Tax return. (d) MGU has maintained a valid Subchapter "S" election pursuant to the Code and there is no corporate income tax due from MGU. SECTION 2.12 EMPLOYEE BENEFIT PLANS, ERISA. (a) MGU is not a party to any oral or written (i) employment, severance, collective bargaining or consulting agreement not terminable on 60 days' or less notice, (ii) agreement with any executive officer or other key employee of MGU (A) the benefits of which are contingent, or the terms of which are materially altered, upon the occurrence of a transaction involving MGU of the nature of any of the transactions contemplated by this Agreement, (B) providing any term of employment or compensation guarantee extending for a period longer than one year, or (C) providing severance benefits or other benefits after the termination of employment of such executive officer or key employee regardless of the reason for such termination of employment, (iii) agreement, plan or arrangement under which any person may receive payments subject to the tax imposed by Section 4999 of the Code, or (iv) agreement or plan, including, without 8 limitation, any stock option plan, stock appreciation right plan, restricted stock plan or stock purchase plan, the benefits of which would be increased, or the vesting of benefits of which will be accelerated, by the occurrence of any of the transactions contemplated by this Agreement or the value of any of the benefits of which will be calculated on the basis of any of the transactions contemplated by this Agreement. (b) Neither MGU nor any corporation or other entity which under Section 4001(b) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), is under common control with MGU (a "MGU ERISA Affiliate") maintains or within the past five years has maintained, contributed to, or been obligated to contribute to, any "Employee Pension Benefit Plan" ("Pension Plan") or any "Employee Welfare Benefit Plan" ("Welfare Plan") as such terms are defined in Sections 3(2) and 3(1) respectively of ERISA, which is subject to ERISA. Each Pension Plan and Welfare Plan disclosed in the MGU Disclosure Schedule (which Plans have been heretofore delivered to HCCH) and maintained by MGU has been maintained in all material respects in compliance with their terms and all provisions of ERISA and the Code (including rules and regulations thereunder) applicable thereto. (c) No Pension Plan or Welfare Plan is currently subject to an audit or other investigation by the IRS, the Department of Labor (the "DOL"), the Pension Benefit Guaranty Corporation or any other governmental agency or office nor are any such Plans subject to any lawsuits or legal proceedings of any kind or to any material pending disputed claims by employees or beneficiaries covered under any such Plan or by any other parties. (d) No "prohibited transaction," as defined in Section 406 of ERISA or Section 4975 of the Code, resulting in liability to MGU or any MGU ERISA Affiliate has occurred with respect to any Pension Plan or Welfare Plan. Each of MGU or Original Shareholder has no knowledge of any breach of fiduciary responsibility under Part 4 of Title I of ERISA which has resulted in liability of MGU and MGU ERISA Affiliate, any trustee, administrator or fiduciary of any Pension Plan or Welfare Plan. (e) Neither MGU nor any MGU ERISA Affiliate, since January 1, 1986, has maintained or contributed to, or been obligated or required to contribute to, a "Multiemployer Plan," as such term is defined in Section 4001(a)(3) of ERISA. Neither MGU nor any MGU ERISA Affiliate has either withdrawn, partially or completely, or instituted steps to withdraw, partially or completely, from any Multiemployer Plan nor has any event occurred which would enable a Multiemployer Plan to give notice of and demand payment of any withdrawal liability with respect to MGU or any MGU ERISA Affiliate. (f) There is no contract, agreement, plan or arrangement covering any employee or former employee of MGU or any MGU ERISA Affiliate that, individually or collectively, could give rise to the payment of any amount that would not be deductible pursuant to the terms of Sections 162(a)(I) or 280G of the Code. 9 (g) With respect to MGU and each MGU ERISA Affiliate, the MGU Disclosure Schedule correctly identifies each material agreement, policy, plan or other arrangement, whether written or oral, express or implied, fixed or contingent, to which MGU is a party or by which MGU or any property or asset of MGU is bound, which is or relates to a pension, option, bonus, deferred compensation, retirement, stock purchase, profit-sharing, severance pay, health, welfare, incentive, vacation, sick leave, medical disability, hospitalization, life or other insurance or fringe benefit plan, policy or arrangement. (h) Neither MGU nor any MGU ERISA Affiliate maintains or has maintained or contributed to any Pension Plan that is or was subject to Section 302 of Title IV of ERISA or Section 412 of the Code. MGU has made available to HCCH, for each Pension Plan which is intended to be "qualified" within the meaning of Section 401(a) of the Code, a copy of the most recent determination letter issued by the IRS to the effect that each such Plan is so qualified and that each trust created thereunder is tax exempt under Section 501 of the Code, and MGU is unaware of any fact or circumstances that would jeopardize the qualified status of each such Pension Plan or the tax exempt status of each trust created thereunder. SECTION 2.13 MATERIAL AGREEMENTS. (a) The MGU Disclosure Schedule includes a complete and accurate list of all contracts, agreements, leases (other than MGU Property Leases, as hereinafter defined), and instruments to which MGU is a party or by which it or its properties or assets are bound which individually involve net payments or receipts in excess of $25,000 per annum, inclusive of contracts entered into with customers and suppliers in the ordinary course of business, or that pertain to employment or severance benefits for any officer, director or employee of MGU, whether written or oral, but exclusive of contracts, agreements, leases and instruments terminable without penalty upon 60 days' or less prior written notice to the other party or parties thereto (the "Material MGU Agreements"). (b) Neither MGU nor, to the knowledge of MGU, any other party is in default under any Material MGU Agreement and no event has occurred which (after notice or lapse of time or both) would become a breach or default under, or would permit modification, cancellation, acceleration or termination of any Material MGU Agreement or result in the creation of any security interest upon, or any person obtaining any right to acquire, any properties, assets or rights of MGU, which, in any such case, has had or would reasonably be expected to have a Material Adverse Effect. (c) To the knowledge of MGU, each such Material MGU Agreement is in full force and effect and is valid and legally binding and there are no material unresolved disputes involving or with respect to any Material MGU Agreement. No party to a Material MGU Agreement has advised MGU or Shareholder that it intends either to terminate a Material MGU Agreement or to refuse to renew a Material MGU Agreement upon the expiration of the term thereof. No representation or warranty is made that all benefits contemplated in the Material MGU Agreements will be received. 10 (d) MGU is not in violation of, or in default with respect to, any term of its Articles of Incorporation or Bylaws. SECTION 2.14 PROPERTIES. MGU owns no real estate, and all leases of real property to which MGU is a party or by which it is bound ("MGU Property Leases") are in full force and effect. There exists no default under such MGU Property Leases, nor any event which with notice or lapse of time or both would constitute a default thereunder, which default would have a Material Adverse Effect. All of the properties and assets which are owned by MGU are owned free and clear of any Lien, except for Liens which do not have a Material Adverse Effect. MGU has good and indefeasible title with respect to such owned properties and assets subject to no Liens, other than those permitted under this Section 2.14, to all of the properties and assets necessary for the conduct of their business other than to the extent that the failure to have such title would not have a Material Adverse Effect. SECTION 2.15 ENVIRONMENTAL MATTERS. (a) For the purposes of this Agreement, the following terms have the following meanings: "Environmental Laws" shall mean any and all federal, state, local and foreign statutes, laws (including case law), regulations, ordinances, rules, judgments, orders, decrees, codes, plans, injunctions, permits, concessions, grants, franchises, licenses, agreements and governmental restrictions relating to human health, the environment or to emissions, discharges or releases of pollutants, contaminants, Hazardous Substances (as hereinafter defined) or wastes into the environment or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of pollutants, contaminants, Hazardous Substances or wastes or the clean-up or other remediation thereof. "Environmental Liabilities" shall mean all liabilities, whether vested or unvested, contingent or fixed, actual or potential, which (i) arise under or relate to Environmental Laws and (ii) relate to actions occurring or conditions existing on or prior to the Effective Time. "Hazardous Substances" shall mean any toxic, radioactive, caustic or otherwise hazardous substance, including petroleum, its derivatives, by-products and other hydrocarbons, or any substance having any constituent elements displaying any of the foregoing characteristics. "Regulated Activity" shall mean any generation, treatment, storage, recycling, transportation, disposal or release of any Hazardous Substances. (b) No notice, notification, demand, request for information, citation, summons, complaint or order has been received, no complaint has been filed, no penalty has been assessed 11 and no investigation or review is pending, or to any such party's knowledge, has been threatened by any governmental entity or other party with respect to any (i) alleged violation of any Environmental Law, (ii) alleged failure to have any environmental permit, certificate, license, approval, registration or authorization required in connection with the conduct of its business or (iii) Regulated Activity. (c) MGU has no material Environmental Liabilities and there has been no release of Hazardous Substances into the environment by MGU or with respect to any of its properties which has had, or would reasonably be expected to have, a Material Adverse Effect. SECTION 2.16 LABOR MATTERS. MGU is not a party to any collective bargaining agreement or other labor union contract applicable to persons employed by MGU, nor does it know of any activities or proceedings of any labor union to organize any such employees. SECTION 2.17 COMPLIANCE WITH LAWS. Except for violations which do not have and would not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect, MGU has received no notice that it is in violation of, or has violated, any applicable provisions of any laws, statutes, ordinances or regulations or any term of any judgment, decree, injunction or order binding against it. SECTION 2.18 TRADEMARKS, TRADENAMES, ETC. MGU owns or possesses, or holds a valid right or license to use, all intellectual property, patents, trademarks, tradenames, servicemarks, copyrights and licenses, and all rights with respect to the foregoing, necessary for the conduct of its business as now conducted, without any known conflict with the rights of others. SECTION 2.19 SALE OF MGU. Except as contemplated by this Agreement, there are currently no discussions to which MGU or Shareholder is a party relating to (a) the sale of any material portion of their assets, (b) any merger, consolidation, liquidation, dissolution or similar transaction involving MGU whereby MGU will issue any securities or for which MGU is required to obtain the approval of its shareholders, or (c) the sale of the MGU Common Stock. SECTION 2.20 BROKER'S FEES. Neither MGU, Shareholder nor anyone acting on the behalf or at the request thereof has any liability to any broker, finder, investment banker or agent, or has agreed to pay any brokerage fees, finder's fees or commissions, or to reimburse any expenses of any broker, finder, investment banker or agent in connection with this Agreement. SECTION 2.21 INVESTMENT REPRESENTATION. The shares of HCCH Common Stock to be acquired by Shareholder and MGU pursuant to this Agreement will be acquired solely for their individual account, for investment purposes only and, except for MGU's transfer of the MGU Shares to Wilbur, not with a view to the distribution thereof. Shareholder is not participating, directly or indirectly, in any distribution or transfer of such HCCH Common Stock, nor is she participating, directly or indirectly, in underwriting any such distribution of HCCH Common Stock within the meaning of the Securities Act. Shareholder and MGU have such knowledge and experience in business matters that each is capable of evaluating the merits and risks of an 12 investment in HCCH and the acquisition of the shares of HCCH Common Stock, and each is making an informed investment decision with respect thereto. Shareholder and MGU have been informed by HCCH that the shares of HCCH Common Stock to be issued pursuant to this Agreement and the documents to be executed in connection herewith will not be registered under the Securities Act at the time of their issuance and may not be transferred, assigned or otherwise disposed of absent registration under the Securities Act or availability of an appropriate exemption therefrom. Shareholder and MGU have further been informed that HCCH will be under no obligation to register the shares of HCCH Common Stock under the Securities Act or to take any steps to assist Shareholder and MGU to comply with any applicable exemption under the Securities Act with respect to the shares of HCCH Common Stock. Provided, however, HCCH shall promptly approve Shareholder's pledge of its HCCH Common Stock to any national bank having three or more bank locations situated in the State of Missouri. SECTION 2.22 PAYMENT TO WILBUR. MGU shall utilize the MGU Shares it receives pursuant to this Agreement to satisfy MGU's obligation to Wilbur pursuant to that certain agreement entered into as of June 12, 1997, among MGU, Shareholder, Wilbur and ISU, as hereinafter defined. ARTICLE III REPRESENTATIONS AND WARRANTIES OF HCCH Except as disclosed in a document referring specifically to this Agreement or in a document, exhibit, or appendix filed with the Securities and Exchange Commission ("SEC") which has been filed on or before the date hereof, (collectively referred to herein as the "HCCH Disclosure Schedule") which has been delivered to Shareholder on or before the date hereof, HCCH represents and warrants to Shareholder (it being agreed that the disclosure on the HCCH Disclosure Schedule of the existence of any document or fact or circumstance or situation relating to any representations, warranties, covenants or agreements in any section of this Agreement shall be automatically deemed to be disclosure of such document or fact or circumstance or situation for purposes of all other representations, warranties, covenants and agreements in this Agreement): SECTION 3.1 CORPORATE EXISTENCE AND POWER. HCCH and each of its Subsidiaries is a corporation duly incorporated, validly existing and in good standing under the laws of the state of its incorporation. Each of HCCH and each of its Subsidiaries has all corporate powers and all material Governmental Authorizations required to carry on its business as now conducted, except such Governmental Authorizations the failure of which to have obtained would not have a Material Adverse Effect on HCCH. HCCH and each of its Subsidiaries is duly qualified to do business as a foreign corporation and is in good standing in each jurisdiction where the character of the property owned or leased by it or the nature of its activities makes such qualification necessary, except where the failure to be so qualified would not have a Material Adverse Effect on HCCH. HCCH has delivered to MGU true and complete copies of HCCH's Certificate of Incorporation and Bylaws, as currently in effect. 13 SECTION 3.2 CORPORATE AUTHORIZATION. The execution, delivery and performance by HCCH of this Agreement, and the consummation by HCCH of the transactions contemplated hereby and thereby are within the corporate powers of HCCH and have been duly authorized by all necessary corporate action. This Agreement constitutes, or upon execution will constitute, valid and binding agreements of HCCH enforceable in each case in accordance with their respective terms, except as such enforcement may be limited by bankruptcy, insolvency or other similar laws affecting the enforcement of creditors' rights generally or by general principles of equity. SECTION 3.3 GOVERNMENTAL AUTHORIZATION. The execution, delivery and performance by HCCH of this Agreement, require no action by or in respect of, or filing with, any governmental body, agency, official or authority other than: (a) compliance with any applicable requirements of the Exchange Act and the rules and regulations promulgated thereunder; (b) compliance with any applicable requirements of the Securities Act and the rules and regulations promulgated thereunder; (c) compliance with any applicable foreign or state securities or "blue sky" laws and the rules and regulations of the NYSE; (d) compliance with any applicable requirements of any insurance regulatory agency having authority over HCCH and its Subsidiaries; and (e) such other filings or registrations with, or authorizations, consents or approvals of, governmental bodies, agencies, officials or authorities, the failure of which to make or obtain (i) would not reasonably be expected to have a Material Adverse Effect on HCCH or (ii) would not materially adversely affect the ability of MGU or HCCH to consummate the transactions contemplated hereby and operate their businesses as heretofore operated. SECTION 3.4 NON-CONTRAVENTION. The execution, delivery and performance by HCCH of this Agreement and the consummation by HCCH of the transactions contemplated hereby and thereby do not and will not: (a) contravene or conflict with the Certificate of Incorporation, or Bylaws of HCCH; (b) assuming compliance with the matters referred to in Section 3.3, contravene or conflict with or constitute a violation of any provision of any law, regulation, judgment, injunction, order or decree binding upon or applicable to HCCH or any Subsidiary of HCCH; (c) conflict with or result in a breach or violation of, or constitute a default under, or result in a contractual right to cause the termination or cancellation of or loss of a material benefit under, or right to accelerate, any material agreement, contract or other instrument binding 14 upon HCCH or any other Subsidiary of HCCH or any material license, franchise, permit or other similar authorization held by HCCH or any Subsidiary of HCCH; or (d) result in the creation or imposition of any Lien on any material asset of HCCH or any Subsidiary of HCCH, except, with respect to clauses (b), (c) and (d) above, for contraventions, defaults, losses, Liens and other matters referred to in such clauses that in the aggregate would not be reasonably expected to have, individually or in the aggregate, a Material Adverse Effect on HCCH. SECTION 3.5 CAPITALIZATION OF HCCH. (a) The authorized capital stock of HCCH consists of 100,000,000 shares of HCCH Common Stock. As of December 31, 1996, there were 35,850,832 shares of HCCH Common Stock issued and outstanding. All outstanding shares of HCCH Common Stock have been duly authorized and validly issued and are fully paid and nonassessable and free from any preemptive rights. Except as set forth in this Section and as otherwise contemplated by this Agreement and except as disclosed in public filings made by HCCH with the SEC prior to the Closing Date or on the HCCH Disclosure Schedule and except for changes since December 31, 1996 resulting from the exercise of employee and director stock options, there are outstanding (i) no shares of capital stock or other voting securities of HCCH, (ii) no securities of HCCH convertible into or exchangeable for shares of capital stock or voting securities of HCCH and (iii) no options or other rights to acquire from HCCH, and no obligation of HCCH to issue, any capital stock, voting securities or securities convertible into or exchangeable for capital stock or other voting securities of HCCH (the items in clauses (i), (ii) and (iii) being referred to collectively as the "HCCH Securities"). There are no outstanding obligations of HCCH or any of its Subsidiaries to repurchase, redeem or otherwise acquire any HCCH Securities. (b) All shares of HCCH Common Stock issued to Shareholder shall, upon issuance, be fully paid, validly issued and nonassessable. SECTION 3.6 SUBSIDIARIES. (a) Each HCCH Subsidiary is a corporation duly incorporated, validly existing and in good standing under the laws of its jurisdiction of incorporation, has all corporate powers and all material Governmental Authorizations required to carry on its business as now conducted, except such Governmental Authorizations the failure of which to have obtained would not have a Material Adverse Effect on HCCH, and is duly qualified to do business as a foreign corporation and is in good standing in each jurisdiction where the character of the property owned or leased by HCCH, or the nature of its activities make such qualification necessary, except for those jurisdictions where failure to be so qualified would not, individually or in the aggregate, have a Material Adverse Effect on HCCH. All Subsidiaries and Joint Ventures material to the business of HCCH ("Material HCCH Subsidiaries") and their respective jurisdictions of incorporation or organization and HCCH's ownership interest therein are identified in the HCCH Disclosure 15 Schedule. Other than its investments in its Subsidiaries and Joint Ventures, and shares of stock in publicly held companies aggregating less than 10% of such public company's outstanding stock, HCCH does not own, directly or indirectly, any outstanding capital stock or equity interest in any corporation, partnership, Joint Venture or other entity. (b) All of the outstanding capital stock of, or other ownership interests in, each Material HCCH Subsidiary that is owned by HCCH, is owned by HCCH, directly or indirectly, free and clear of any material Lien and free of any other material limitation or restriction on its rights as owner thereof (including any restriction on the right to vote, sell or otherwise dispose of such capital stock or other ownership interests), other than those imposed by applicable law. There are no existing options, calls or commitments of any character relating to the issued or unissued capital stock or other securities or equity interests (collectively, "HCCH Subsidiary Securities") of any HCCH Subsidiary. SECTION 3.7 SEC FILINGS. (a) HCCH has since October 28, 1992 filed all forms, proxy statements, schedules, reports and other documents required to be filed by it with the SEC pursuant to the Exchange Act. (b) HCCH has delivered, and will promptly deliver in the case of any of the following filed with the SEC on or after the date hereof and prior to the Closing Date, to MGU: (i) its annual reports on Form 10-K for its fiscal years ended December 31, 1996, 1995 and 1994; (ii) any current reports on Form 8-K since January 1, 1997 and its proxy or information statements relating to meetings of, or actions taken without a meeting by, the shareholders of HCCH held since January 1, 1997; and (iii) all of its other reports, statements, schedules and registration statements filed with the SEC since December 31, 1996. None of HCCH's Subsidiaries is required to file any forms, reports or other documents with the SEC. (c) As of its filing date, no such report or statement filed pursuant to the Exchange Act contained any untrue statement of a material fact or omitted to state any material fact necessary in order to make the statements made therein, in the light of the circumstances under which they were made, not misleading. (d) No registration statement filed pursuant to the Securities Act, if declared effective by the SEC, as of the date such statement or amendment became effective, contained any untrue statement of a material fact or omitted to state any material fact required to be stated therein or necessary to make the statements therein not misleading. 16 SECTION 3.8 FINANCIAL STATEMENTS. The audited consolidated financial statements of HCCH included in its annual reports on Form 10-K and amendments thereto and the unaudited financial statements of HCCH included in its quarterly reports on Form 10-Q referred to in Section 3.7 present fairly, in conformity with generally accepted accounting principles applied on a consistent basis (except as may be indicated in the notes thereto), the consolidated financial position of HCCH and its consolidated subsidiaries as of the dates thereof and their consolidated results of operations and cash flows for the periods then ended (subject to normal year-end adjustments in the case of any interim financial statements). For purposes of this Agreement, "HCCH Balance Sheet" means the consolidated balance sheet of HCCH as of December 31, 1996, and the notes thereto, contained in HCCH's annual report on Form 10-K filed with the SEC, and "HCCH Balance Sheet Date" means December 31, 1996. SECTION 3.9 ABSENCE OF CERTAIN CHANGES. Except as disclosed in the HCCH Disclosure Schedule, since the HCCH Balance Sheet Date, HCCH and each of its Subsidiaries have in all material respects conducted their business in the ordinary course and there has not been: (a) any Material Adverse Change with respect to HCCH or any event, occurrence or development of a state of circumstances or facts known to HCCH, which as of the date hereof could reasonably be expected to have a Material Adverse Effect on HCCH; (b) any amendment of any material term of any outstanding HCCH Securities; (c) the entering into of any agreement by HCCH or any person on behalf of HCCH to take any of the foregoing actions. SECTION 3.10 NO UNDISCLOSED LIABILITIES. There are no liabilities of HCCH or any of its Subsidiaries of any kind whatsoever that are, individually or in the aggregate, material to HCCH and its Subsidiaries, taken as a whole, other than: (a) liabilities disclosed or provided for in the HCCH Balance Sheet (including the notes thereto); (b) liabilities incurred in the ordinary course of business consistent with past practice since the HCCH Balance Sheet Date; and (c) liabilities under this Agreement or as indicated in the HCCH Disclosure Schedule. SECTION 3.11 LITIGATION. Other than actions, suits, proceedings, claims or investigations occurring in the ordinary course of business or such actions, suits, proceedings, claims or investigations involving respective amounts in controversy of less than $1,000,000 each, there is no action, suit, proceeding, claim or investigation pending or, to the knowledge of HCCH, overtly threatened, against HCCH or any of its Subsidiaries or any of their assets or against or involving any of its officers, directors or employees in connection with the business or affairs of HCCH, including, without limitation, any such claims for indemnification arising under any 17 agreement to which HCCH or any of its Subsidiaries is a party, which could, individually or in the aggregate, have a Material Adverse Effect on HCCH. HCCH and each of its Subsidiaries are not subject to or in default with respect to any writ, order, judgment, injunction or decree which could, individually or in the aggregate, have a Material Adverse Effect on HCCH. SECTION 3.12 TAXES. (a) HCCH and each of its Subsidiaries (i) has filed when due (taking into account extensions) with the appropriate federal, state, local, foreign and other governmental agencies, all material tax returns, estimates and reports required to be filed by it, (ii) either paid when due and payable or established adequate reserves or otherwise accrued on the HCCH Balance Sheet all material Taxes, and there are no tax deficiencies claimed in writing by any Taxing authority and received by HCCH that, in the aggregate, would result in any tax liability in excess of the amount of the reserves or accruals, and (iii) has or will establish in accordance with its normal accounting practices and procedures accruals and reserves that, in the aggregate, are adequate for the payment of all Taxes not yet due and payable and attributable to any period preceding the Effective Time. The HCCH Disclosure Schedule sets forth those tax returns of HCCH (or any predecessor entities) for all periods that currently are the subject of audit by any federal, state, local or foreign taxing authority. (b) There are no material taxes, interest, penalties, assessments or deficiencies claimed in writing by any taxing authority and received by HCCH or any of its Subsidiaries to be due in respect of any tax returns filed by HCCH (or any predecessor corporations) or any of its Subsidiaries. Neither HCCH nor any predecessor corporation, nor any of their respective Subsidiaries, has executed or filed with the IRS or any other Taxing authority any agreement or other document extending, or having the effect of extending, the period of assessment or collection of any Taxes. (c) HCCH is not a party to or bound by (or will prior to the Effective Date become a party to or bound by) any Tax indemnity, Tax sharing or Tax allocation agreement or other similar arrangement which includes a party other than HCCH and its Subsidiaries. Neither HCCH nor any of its Subsidiaries has been a member of an affiliated group other than one of which HCCH was the common parent, or filed or been included in a combined, consolidated or unitary Tax return other than one filed by HCCH (or a return for a group consisting solely of its Subsidiaries and predecessors). SECTION 3.13 EMPLOYEE BENEFIT PLANS; ERISA. (a) Neither HCCH nor any corporation or other entity which under Section 4001(b) of ERISA is under common control with HCCH (an "HCCH ERISA Affiliate") maintains or within the past five years has maintained, contributed to, or been obligated to contribute to, any Pension Plan or any Welfare Plan which is subject to ERISA. Each Pension Plan and Welfare Plan disclosed in the HCCH Disclosure Schedule (which Plans have been heretofore delivered to MGU) and maintained by HCCH has been maintained in all material respects in compliance with 18 their terms and all provisions of ERISA and the Code (including rules and regulations thereunder) applicable thereto. (b) Neither HCCH nor any HCCH ERISA Affiliate maintains or has maintained or contributed to any Pension Plan that is or was subject to Section 302 or Title IV of ERISA or Section 412 of the Code. HCCH has made available to MGU for each Pension Plan which is intended to be "qualified" within the meaning of Section 401(a) of the Code, a copy of the most recent determination letter issued by the IRS to the effect that each such Plan is so qualified and that each trust created thereunder is tax exempt under Section 501 of the Code, and HCCH is unaware of any fact or circumstances that would jeopardize the qualified status of each such Pension Plan or the tax exempt status of each trust created thereunder. (c) To the knowledge of HCCH, no Pension Plan or Welfare Plan is currently subject to an audit or other investigation by the IRS, the Department of Labor, the Pension Benefit Guaranty Corporation or any other governmental agency or office nor are any such Plans subject to any lawsuits or legal proceedings of any kind or to any material pending disputed claims by employees or beneficiaries covered under any such Plan or by any other parties. (d) No "prohibited transaction," as defined in Section 406 of ERISA or Section 4975 of the Code, resulting in liability to HCCH or any HCCH ERISA Affiliate has occurred with respect to any Pension Plan or Welfare Plan. HCCH has no knowledge of any breach of fiduciary responsibility under Part 4 of Title I of ERISA which has resulted in liability of HCCH, any HCCH ERISA Affiliate, any trustee, administrator or fiduciary of any Pension Plan or Welfare Plan. (e) Neither HCCH nor any HCCH ERISA Affiliate, since January 1, 1986, has maintained or contributed to, or been obligated or required to contribute to, a "Multiemployer Plan," as such term is defined in Section 4001(a)(3) of ERISA. Neither HCCH nor any HCCH ERISA Affiliate has either withdrawn, partially or completely, or instituted steps to withdraw, partially or completely, from any Multiemployer Plan nor has any event occurred which would enable a Multiemployer Plan to give notice of and demand payment of any withdrawal liability with respect to HCCH or any HCCH ERISA Affiliate. (f) With respect to HCCH and each HCCH ERISA Affiliate, the HCCH Disclosure Schedule correctly identifies each material agreement, policy, plan or other arrangement, whether written or oral, express or implied, fixed or contingent, to which HCCH is a party or by which HCCH or any property or asset of HCCH is bound, which is or relates to a pension, option, bonus, deferred compensation, retirement, stock purchase, profit-sharing, severance pay, health, welfare, incentive, vacation, sick leave, medical disability, hospitalization, life or other insurance or fringe benefit plan, policy or arrangement. 19 SECTION 3.14 MATERIAL AGREEMENTS. (a) The HCCH Disclosure Schedule includes a complete and accurate list of all contracts, agreements, leases (other than HCCH Property Leases, as hereinafter defined) and instruments to which HCCH or any of its Subsidiaries is a party or by which it or its properties or assets are bound which individually involve net payments or receipts in excess of $1,000,000 per annum, inclusive of contracts that pertain to employment or severance benefits for any officer, director or employee of HCCH, whether written or oral, but exclusive of contracts entered into with customers and suppliers in the ordinary course of business or contracts, agreements, leases and instruments terminable without penalty by HCCH upon 60 days or less prior written notice to the other party or parties thereto (the "Material HCCH Agreements"). (b) Neither HCCH, any HCCH Subsidiary, nor, to the knowledge of HCCH, any other party is in default under any Material HCCH Agreement and no event has occurred which (after notice or lapse of time or both) would become a breach or default under, or would permit modification, cancellation, acceleration or termination of any Material HCCH Agreement or result in the creation of any security interest upon, or any person obtaining any right to acquire, any properties, assets or rights of HCCH which, in any such case, has had or would reasonably be expected to have a Material Adverse Effect on HCCH. (c) To the knowledge of HCCH, each such Material HCCH Agreement is in full force and effect and is valid and legally binding and there are no material unresolved disputes involving or with respect to any Material HCCH Agreement. No party to a Material HCCH Agreement has advised HCCH or any of its Subsidiaries that it intends either to terminate a Material HCCH Agreement or to refuse to renew a Material HCCH Agreement upon the expiration of the term thereof. (d) Each of HCCH, and each HCCH Subsidiary is not in violation of, or in default with respect to, any term of its Certificate of Incorporation or Bylaws. SECTION 3.15 PROPERTIES. To the knowledge of HCCH, all leases of real property to which HCCH or any of its Subsidiaries is a party or by which it or any of its Subsidiaries is bound ("HCCH Property Leases") which are material to the business of HCCH and its Subsidiaries taken as a whole are in full force and effect. To the knowledge of HCCH, there exists no default under such HCCH Property Leases, nor any event which with notice or lapse of time or both would constitute a default thereunder by HCCH or any of its Subsidiaries, which default would have a Material Adverse Effect on HCCH. All of the properties and assets which are owned by HCCH and each of its Subsidiaries are owned by each of them, respectively, free and clear of any Lien, except for Liens which do not have a Material Adverse Effect on HCCH. HCCH and each of its Subsidiaries have good and indefeasible title with respect to such owned properties and assets subject to no Liens, other than those permitted under this Section 3.15, to all of the properties and assets necessary for the conduct of their business other than to the extent that the failure to have such title would not have a Material Adverse Effect on HCCH. 20 SECTION 3.16 ENVIRONMENTAL MATTERS. (a) To the knowledge of HCCH, no notice, notification, demand, request for information, citation, summons, complaint or order has been received, no complaint has been filed, no penalty has been assessed and no investigation or review is pending, or to HCCH's knowledge, has been threatened by any governmental entity or other party with respect to any (i) alleged violation by HCCH or any of its Subsidiaries of any Environmental Law, (ii) alleged failure by HCCH or any such Subsidiary to have any environmental permit, certificate, license, approval, registration or authorization required in connection with the conduct of its business or (iii) Regulated Activity. (b) To the knowledge of HCCH, neither HCCH nor any of its Subsidiaries has any material Environmental Liabilities and there has been no release of Hazardous Substances into the environment by HCCH or any such Subsidiary or with respect to any of their respective properties which has had, or would be reasonably expected to have, a Material Adverse Effect on HCCH. SECTION 3.17 LABOR MATTERS. Neither HCCH nor any of its Subsidiaries is a party to any collective bargaining agreement or other labor union contract applicable to persons employed by HCCH or any such Subsidiary, nor do the executive officers of HCCH know of any activities or proceedings of any labor union to organize any such employees. SECTION 3.18 COMPLIANCE WITH LAWS. Except for violations which do not have and would not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect on HCCH, neither HCCH nor any of its Subsidiaries is in violation of, or has violated, any applicable provisions of any laws, statutes, ordinances or regulations or any term of any judgment, decree, injunction or order binding against it. SECTION 3.19 TRADEMARKS, TRADENAMES, ETC. HCCH owns or possesses, or holds a valid right or license to use, all intellectual property, patents, trademarks, tradenames, servicemarks, copyrights and licenses, and all rights with respect to the foregoing, necessary for the conduct of its business as now conducted, without any known conflict with the rights of others. SECTION 3.20 BROKER'S FEES. Neither HCCH, nor anyone acting on the behalf or at the request thereof has any liability to any broker, finder, investment banker or agent, or has agreed to pay any brokerage fees, finder's fees or commissions, or to reimburse any expenses of any broker, finder, investment banker or agent in connection with the transactions contemplated by this Agreement. SECTION 3.21 RELEASE OF PERSONAL GUARANTY. HCCH shall use commercially reasonable efforts to have Shareholder released as a Guarantor of that certain credit line agreement by and between Boatmen's National Bank and MGU. HCCH's failure to obtain such release, however, shall not give Shareholder any rights to terminate this Agreement. 21 SECTION 3.22 MGU AS A SEPARATE SUBSIDIARY. HCCH shall use reasonable efforts to maintain and continue MGU as a subsidiary, either directly or indirectly, of HCCH until December 31, 1998. ARTICLE IV COVENANTS OF SHAREHOLDER From the date hereof until the occurrence of the earlier of (i) the Effective Time or (ii) termination of this Agreement pursuant to Section 8.1 hereof, MGU and Shareholder agree that: SECTION 4.1 CONDUCT OF MGU. MGU shall in all material respects conduct its business in the ordinary course. Without limiting the generality of the foregoing, from the date hereof until the Effective Time, except as contemplated by this Agreement: (a) MGU will not adopt or propose any change in its Articles of Incorporation or Bylaws; (b) MGU will not enter into or amend any employment agreements (oral or written) or increase the compensation payable or to become payable by it to any of its officers, directors, or consultants over the amount payable as of December 31, 1996, or increase the compensation payable to any other employees (other than (i) increases in the ordinary course of business which are not in the aggregate material, or (ii) pursuant to plans disclosed in MGU Disclosure Schedule), or adopt or amend any employee benefit plan or arrangement (oral or written); (c) MGU will not issue any MGU Securities; (d) MGU will keep in full force and effect any existing directors' and officers' liability insurance and will not modify or reduce the coverage thereunder; (e) Other than the payment of dividends in accordance with its existing dividend policy or practice, which policy or practice is consistent with past policy or practice, and the declaration setting aside or payment of "S" corporation dividends or distributions to Shareholder as disclosed in the MGU Disclosure Schedules or as otherwise provided in this Agreement, MGU will not pay any dividend or make any other distribution to holders of its capital stock nor redeem or otherwise acquire any MGU Securities; (f) MGU will not, directly or indirectly, dispose of or acquire any material properties or assets except in the ordinary course of business; (g) MGU will not incur any additional indebtedness for borrowed money except pursuant to existing arrangements which have been disclosed to HCCH prior to the date hereof; 22 (h) MGU will not amend or change the period of exercisability or accelerate the exercisability of any outstanding options or warrants to acquire shares of capital stock, or accelerate, amend or change the vesting period of any outstanding restricted stock; (i) MGU and Shareholder will not, directly or indirectly, agree or commit to do any of the foregoing; (j) MGU will not (i) change accounting methods except as necessitated by changes which MGU is required to make in order to prepare its federal, state and local tax returns; (ii) amend or terminate any contract, agreement or license to which it is a party (except pursuant to arrangements previously disclosed in writing to HCCH or disclosed in the MGU Disclosure Schedule) except those amended or terminated in the ordinary course of business, consistent with past practices, or involving changes which are not materially adverse in amount or effect to MGU individually or taken as a whole; (iii) lend any amount to any person or entity, other than advances for travel and expenses which are incurred in the ordinary course of business consistent with past practices, and which are not material in amount to MGU taken as a whole, which travel and expenses shall be documented by receipts for the claimed amounts; (iv) enter into any guarantee or suretyship for any obligation except for the endorsements of checks and other negotiable instruments in ordinary course of business, consistent with past practice; (v) waive or release any material right or claim except in the ordinary course of business, consistent with past practice; (vi) issue or sell any shares of its capital stock of any class or any other of its securities, or issue or create any warrants, obligations, subscriptions, options, convertible securities, stock appreciation rights or other commitments to issue shares of capital stock, or take any action other than this transaction to accelerate the vesting of any outstanding option or other security (except pursuant to existing arrangements disclosed in writing to HCCH before the date of this agreement); (vii) merge, consolidate or reorganize with or acquire any entity; (viii) agree to any audit assessment by any tax authority or file any federal or state income or franchise tax return unless copies of such returns have been delivered to HCCH for its review prior to such agreement or filing; and (ix) terminate the employment of any key executive employee; and (k) Shareholder shall take no action nor engage in any activity which would result in MGU losing its "S" corporation status. SECTION 4.2 ACCESS TO FINANCIAL AND OPERATIONAL INFORMATION. MGU and Shareholder will give HCCH, its counsel, financial advisors, auditors and other authorized representatives reasonable access during normal business hours to their offices, properties, books and records, will furnish to HCCH, its counsel, financial advisors, auditors and other authorized representatives such financial and operating data as such persons may reasonably request and will instruct its employees, counsel and financial advisors to cooperate with HCCH in its investigation of the business of MGU and in the planning for the combination of the businesses of MGU and HCCH following the consummation of the transactions contemplated by this Agreement; PROVIDED that no investigation pursuant to this Section shall affect any representation or warranty given hereunder. In addition, following the public announcement of this Agreement or the transactions 23 contemplated hereby, MGU will cooperate in arranging joint meetings among representatives of MGU and HCCH and persons with whom they maintain business relationships. SECTION 4.3 OTHER OFFERS. (a) MGU and Shareholder will not, directly or indirectly, (i) take any action to solicit, initiate or discuss any Acquisition Proposal (as hereinafter defined), or (ii) engage in negotiations with, or disclose any nonpublic information relating to, MGU or afford access to the properties, books or records of MGU to, any person or entity that may be considering making, or has made, an Acquisition Proposal. To the extent that MGU or any of their respective officers, directors, employees or other agents, or Shareholder are currently involved in any discussions with respect to any Acquisition Proposal or contemplated or proposed Acquisition Proposal, MGU, and Shareholder shall terminate, and shall use their best efforts to cause, where applicable, their respective officers, directors, employees or other agents to terminate, such discussions immediately. The term "Acquisition Proposal" as used herein means any offer or proposal for, or any indication of interest in, a merger or other business combination involving MGU or the acquisition of any equity interest in, or a substantial portion of the assets of, MGU other than the transactions contemplated by this Agreement. SECTION 4.4 MAINTENANCE OF BUSINESS. MGU will use its reasonable best efforts to carry on its business, keep available the services of its officers and employees and preserve its relationships with those of its customers, agents, suppliers, licensors and others having business relationships with it that are material to its business in substantially the same manner as it has prior to the date hereof. If MGU becomes aware of a material deterioration or facts which are likely to result in a material deterioration in the relationship with any customers, supplier, licensor or others having business relationships with it, it will promptly in writing bring such information to the attention of the HCCH. SECTION 4.5 COMPLIANCE WITH OBLIGATIONS. MGU shall use its reasonable best efforts to comply in all material respects with (i) all applicable federal, state, local and foreign laws, rules and regulations, (ii) all material agreements and obligations, including its respective charter and bylaws, by which it, its properties or its assets may be bound, and (iii) all decrees, orders, writs, injunctions, judgments, statutes, rules and regulations applicable to MGU and its respective properties or assets. SECTION 4.6 NOTICES OF CERTAIN EVENTS. MGU shall, upon obtaining knowledge of any of the following, promptly notify HCCH of: (a) any notice or other communication from any person alleging that the consent of such person is or may be required in connection with this Agreement, (b) any notice or other communication from any governmental or regulatory agency or authority in connection with this Agreement, and 24 (c) any actions, suits, claims, investigations or other judicial proceedings commenced or threatened against MGU which, if pending on the date of this Agreement, would have been required to have been disclosed pursuant hereto or which relate to the consummation of transactions contemplated by this Agreement. SECTION 4.7 AFFILIATES AGREEMENT. Shareholder shall deliver to HCCH simultaneously with the execution of this Agreement, a written agreement from each of its "affiliates" (as that term is used in Rule 144 or 145 under the Securities Act) (the "Affiliates Agreement") in form and substance reasonably satisfactory to HCCH. SECTION 4.8 NECESSARY CONSENTS. After the Closing Date, MGU shall use reasonable best efforts to obtain such written consent and take such other actions as may be necessary or appropriate for MGU to allow HCCH to carry on the acquired business after the Closing Date (as defined in Section 9.1 hereof). SECTION 4.9 REGULATORY APPROVAL. MGU, and, where required pursuant to the rules or regulations of any regulatory agency, Shareholder, will execute and file, or join in the execution and filing, with any application or other document that may be necessary in order to obtain the authorization, approval or consent of any governmental body, federal, state, local or foreign which may be reasonably required, or which HCCH may reasonably request, in connection with the consummation of the transaction provided for in this Agreement. MGU and Shareholder, will use reasonable best efforts to obtain or assist HCCH in obtaining all such authorizations, approvals and consents. SECTION 4.10 SATISFACTION OF CONDITIONS PRECEDENT. MGU shall use all reasonable efforts to cause the transactions provided for in this Agreement to be consummated, and, without limiting the generality of the foregoing to obtain all consents and authorizations of third parties and to make all filings with, and give all notices to, third parties that may be necessary or reasonably required on its part in order to effect the transactions provided for herein. ARTICLE V COVENANTS OF HCCH From the date hereof until the occurrence of the earlier of (i) the Effective Time or (ii) the termination of this Agreement pursuant to Section 8.1 hereof, HCCH agrees that, except as otherwise permitted with the written consent of Shareholder, which consent shall not be unreasonably withheld: SECTION 5.1 CONDUCT OF HCCH. HCCH and its Subsidiaries shall in all material respects conduct their business in the ordinary course PROVIDED, HOWEVER, THAT nothing in this Agreement shall be construed to prohibit or otherwise restrain HCCH in any manner from acquiring other businesses or substantially all of the assets thereof. Without limiting the 25 generality of the foregoing, from the date hereof until the Effective Time, except as contemplated hereby or previously disclosed by HCCH to Shareholder in writing: (a) HCCH will not adopt or propose any change in its Certificate of Incorporation or Bylaws; (b) HCCH will not take any action that would result in a failure to maintain the trading of HCCH Common Stock on the NYSE; and (c) HCCH will not, and will not permit any of its Subsidiaries to, agree or commit to do any of the foregoing. SECTION 5.2 LISTING OF HCCH COMMON STOCK. HCCH shall cause the shares of HCCH Common Stock to be issued hereunder to be approved for listing on the NYSE within sixty days of the Effective Time. SECTION 5.3 ACCESS TO FINANCIAL AND OPERATION INFORMATION. HCCH will give Shareholder, her counsel, financial advisors, auditors and other authorized representatives reasonable access during normal business hours to the offices, properties, books and records of HCCH and its Subsidiaries, will furnish to Shareholder, her counsel, financial advisors, auditors and other authorized representatives such financial and operating data as such persons may reasonably request and will instruct HCCH's employees, counsel and financial advisors to cooperate with Shareholder in her investigation of the business of HCCH and its Subsidiaries, and will furnish promptly to Shareholder copies of all reports, schedules, registration statements, correspondence and other documents filed with or delivered to the SEC, PROVIDED that no investigation pursuant to this Section shall affect any representation or warranty given by HCCH to Shareholder hereunder. In addition, if requested by Shareholder following the public announcement of this Agreement, HCCH will cooperate in arranging joint meetings among representatives of HCCH and MGU and persons with whom HCCH maintains business relationships. All requests for information made pursuant to this Section shall be directed to the President of HCCH or such person as may be designated by him in writing. SECTION 5.4 MAINTENANCE OF BUSINESS. HCCH will use its reasonable efforts to carry on its business, keep available the services of its officers and employees and preserve its relationships with those of its customers, suppliers, licensors and others having business relationships with it that are material to its business in substantially the same manner as it has prior to the date hereof. If HCCH becomes aware of a material deterioration or facts which are likely to result in a material deterioration in the relationship with any material customer, supplier, licensor or others having business relationships with it, it will promptly bring such information to the attention of MGU in writing. SECTION 5.5 COMPLIANCE WITH OBLIGATIONS. HCCH and its Subsidiaries shall each use its reasonable best efforts to comply in all material respects with (i) all applicable federal, state, local and foreign laws, rules and regulations, (ii) all material agreements and obligations, 26 including its respective charter and bylaws, by which it, its properties or its assets may be bound, and (iii) all decrees, orders, writs, injunctions, judgments, statutes, rules and regulations applicable to HCCH and its Subsidiaries and their respective properties or assets; except to the extent that the failure to comply with matters in clauses (i), (ii) and (iii) would not have a Material Adverse Effect on HCCH. SECTION 5.6 NOTICES OF CERTAIN EVENTS. HCCH shall, upon obtaining knowledge of any of the following, promptly notify Shareholder of: (a) any notice or other communication from any person alleging that the consent of such person is or may be required in connection with this Agreement; (b) any notice or other communication from any governmental or regulatory agency or authority in connection with this Agreement; and (c) any actions, suits, claims, investigations or other judicial proceedings commenced or threatened against HCCH or any of its Subsidiaries which, if pending on the date of this Agreement, would have been required to have been disclosed pursuant to Section 3.11 or which relate to the consummation of the transactions contemplated by this Agreement. SECTION 5.7 EMPLOYEE MATTERS. HCCH agrees that all employees of MGU that remain employed after the Effective Time shall, within a reasonable time not to exceed 18 months, following the Effective Time, be entitled to receive the same benefits to which other employees of HCCH are entitled to receive and shall be entitled to participate in HCCH's employee benefit plans provided such employees have satisfied the plan's eligibility requirements. Until such time, MGU shall continue existing employee benefit plans. SECTION 5.8 EARNINGS OF MGU. HCCH agrees that Shareholder shall be entitled to receive, on or about January 15, 1998, an amount equal to the net earnings of MGU for the period commencing January 1, 1997 and ending June 30, 1997 as an "S" Corporation dividend or distribution. Within 15 days after such amount is determined by MGU, and agreed to by HCCH, HCCH shall execute its promissory note in a form mutually acceptable to Shareholder and HCCH for such amount. Such promissory note shall bear interest at 7 1/2% per annum and shall be payable on January 15, 1998. ARTICLE VI COVENANTS OF HCCH, SHAREHOLDER AND MGU From the date hereof until the occurrence of the earlier of (i) the Effective Time or (ii) termination of this Agreement pursuant to Section 8.1 hereof, each of Shareholder and MGU and HCCH agree that: 27 SECTION 6.1 ADVICE OF CHANGES. It or she will promptly advise the others in writing (i) of any event known to any of its executive officers or Shareholder occurring subsequent to the date of this Agreement that in its reasonable judgment renders any representation or warranty of such party contained in this Agreement, if made on or as of the date of such event or the Effective Date, untrue, inaccurate or misleading in any material respect and (ii) of any Material Adverse Change in the business condition of the party. SECTION 6.2 REGULATORY APPROVALS. It or she shall execute and file, or join in the execution and filing of, any application or other document that may be necessary in order to obtain the authorization, approval or consent of any governmental body, federal, state, local or foreign, which may be requested in connection with the consummation of the transactions contemplated by this Agreement. Each party shall use its reasonable best efforts to obtain all such authorizations, approvals and consents. SECTION 6.3 ACTIONS CONTRARY TO STATED INTENT. It or she shall not, from or after the date hereof and either before or after the Effective Time, take any action that would prevent the transactions contemplated by this Agreement from qualifying for a Section 338(h)(10) election by Shareholder or from maintaining the "S" corporation status of MGU. SECTION 6.4 CERTAIN FILINGS. Shareholder and HCCH shall cooperate with one another: (a) in determining whether any action by or in respect of, or filing with, any governmental body, agency or official, or authority is required, or any actions, consents, approvals or waivers are required to be obtained from parties to any material contracts, in connection with the consummation of the transactions contemplated by this Agreement; and (b) in seeking any such actions, consents, approvals or waivers or making any such filings, furnishing information required in connection therewith and seeking timely to obtain any such actions, consents, approvals or waivers. SECTION 6.5 COMMUNICATIONS. Neither Shareholder nor HCCH will furnish any communication outside of their respective companies, if the subject matter thereof relates to the transactions contemplated by this Agreement and is not in the ordinary course of business, without the prior approval of the other of them as to the content thereof, which approval shall not be unreasonably withheld; PROVIDED that the foregoing shall not be deemed to prohibit any disclosure required by any applicable law or rule of the NYSE. SECTION 6.6 SATISFACTION OF CONDITIONS PRECEDENT. HCCH and Shareholder will each use its reasonable best efforts to satisfy or cause to be satisfied all the conditions precedent that are applicable to each of them, and to cause the transactions contemplated by this Agreement to be consummated, and, without limiting the generality of the foregoing, to obtain all material consents and authorizations of third parties and to make filings with, and give all notices to, third parties that may be necessary or reasonably required on its part in order to effect the transactions contemplated hereby. 28 SECTION 6.7 TAX COOPERATION. HCCH and Shareholder shall cooperate in the preparation, execution and filing of all returns, questionnaires, applications or other documents regarding any transfer or gains, sales, use, transfer, value added, stock transfer and stamp taxes, any transfer, recording, registration and other fees, and any similar taxes or fees which become payable in connection with the transactions contemplated by this Agreement that are required or permitted to be filed on or before the Effective Time. Shareholder, MGU and HCCH agree that prior or subsequent to the Closing, they shall take all actions required and necessary in order to make an effective Section 338(h)(10) election under the Code. SECTION 6.8 CONFIDENTIALITY. Between the date of this Agreement and the Closing Date, each party, and MGU, will maintain in confidence, and cause its directors, officers, employees, agents, and advisors to maintain in confidence, and not use to the detriment of another party, any written or oral or other information obtained in confidence from another party or MGU in connection with this Agreement or the transactions contemplated hereby unless such information is already known to such party or to others not bound by a duty of confidentiality or unless such information becomes publicly available through no fault of such party, unless the use of such information is necessary or appropriate in making any filing or obtaining any consent or approval required for the consummation of the transaction contemplated hereby or unless the furnishing or use of such information is required by or necessary or appropriate in connection with legal proceedings. If the transactions contemplated by this Agreement are not consummated, each party will return or destroy as much of such written information as may be reasonably requested. Whether or not the Closing takes place, Shareholder waives, and will upon request cause MGU to waive, any cause of action, right or claim arising out of the access of HCCH or its representatives to any trade secrets or other confidential information of MGU except for the intentional competitive misuse by HCCH of such trade secrets or confidential information. ARTICLE VII CONDITIONS TO CLOSING SECTION 7.1 CONDITIONS TO OBLIGATIONS OF HCCH. The obligations of HCCH hereunder are subject to the fulfillment or satisfaction, on and as of the Closing Date, of each of the following conditions (any one or more of which may be waived by HCCH, but only in a writing signed by HCCH): (a) The representations and warranties of MGU and Shareholder contained in Article III remain true and accurate in all material respects on and as of the Closing Date with the same force and effect as if they had been made on the Closing Date (except to the extent a representation or warranty speaks specifically as of an earlier date and except for changes contemplated by this Agreement) and MGU and Shareholder shall have provided HCCH with a 29 certificate executed by the President and the Treasurer of the corporation or individually, as the case may be, dated as of the Closing Date, to such effect. (b) MGU and Shareholder shall have performed and complied in all material respects with all of the covenants contained herein on or before the Closing Date, and HCCH shall receive a certificate to such effect signed by the President and Treasurer of the corporation or individually, as the case may be. (c) Except as set forth in the MGU Disclosure Schedule, there shall have been no Material Adverse Change in MGU since December 31, 1996. (d) HCCH shall have received from (i) each person or entity who may be deemed pursuant to Section 4.7 to be an affiliate of MGU a duly executed Affiliates Agreement and (ii) Shareholder, the written agreement contemplated to be entered into by such person pursuant to Section 4.7 and such agreements shall remain in full force and effect. (e) All written consents, assignments, waivers or authorizations, other than Governmental Authorizations, that are required as a result of the transaction contemplated by this Agreement for the continuation in full force and effect of any material contracts or leases of MGU shall have been obtained. (f) HCCH shall have received the opinion of counsel to MGU and Shareholder in form and substance satisfactory to HCCH. (g) All underwriting agreements of MGU in force on the date hereof shall be in force on the Closing Date, except for such agreements which have been replaced with agreements of similar like and kind. (h) Shareholder shall be alive and not, in any way, Disabled. For purposes of this Agreement, Shareholder shall be deemed to be "Disabled" if she is unable to engage in any substantial portion of her regular duties for MGU by reason of any medically determinable physical or mental impairment which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than 12 months. (i) MGU shall have received the unqualified opinion of independent public accountants to MGU on their audited financial statements for the most recent fiscal year end. (j) MGU shall have delivered to HCCH its audited balance sheet and its audited income statement for each of the most recent fiscal year end. (k) MGU shall have earned no less than $862,000 pre-tax for the fiscal year ended December 31, 1996 and on a pro-forma combined basis, as reasonably determined by HCCH, be expected to earn at least $950,000 pre-tax for the year ended December 31, 1997. 30 (l) MGU shall have entered into an agreement with John Wilbur ("Wilbur") and International Specialty Underwriters, Inc. ("ISU") in the form attached hereto and Wilbur will have represented and warranted to MGU and HCCH in a form satisfactory to MGU and HCCH that his acquisition of the MGU Shares is for investment. (m) Shareholder shall have taken no action or engaged in any activity which shall have resulted in MGU losing its ability to be considered a Subchapter "S" corporation. (n) Shareholder shall have transferred all the MGU Common Stock to HCCH, free and clear of all Liens and encumbrances, with transfer taxes, if any, paid by Shareholder. No claim shall have been filed, made or threatened by any person or entity asserting that he, she or it is entitled to any part of the Purchase Price paid for the MGU Common Stock. (o) Shareholder shall have executed and delivered to HCCH an Employment Agreement in a form mutually agreed to by Shareholder and HCCH, and HCCH shall have received a covenant against competition for a period of three years following Shareholder's employment with HCCH or MGU. (p) On or prior to the Closing Date, Shareholder shall have furnished HCCH with evidence of such consents as Shareholder shall know, or HCCH shall determine, to be required to enable HCCH to continue to enjoy the benefit of any lease, license, permit, contract or other agreement or instrument to or of which MGU is a party or beneficiary and which can, by its terms (with consent) and consistent with applicable law, be so enjoyed after the transfer of the MGU Common Stock to HCCH. If there is in existence any lease, governmental license, permit or contract that by its terms or applicable law, expires, terminates or is otherwise rendered invalid upon the transfer of the MGU Common Stock to HCCH, and such lease, license, permit, or contract is required in order for the business of MGU to continue to be conducted following the transfer of the MGU Common Stock in the same manner as conducted previously, HCCH shall have obtained, or been furnished by Shareholder an equivalent of, that lease, license, permit, or contract effective as of and after the Closing Date. (q) HCCH shall have received resignations of all persons who are officers or directors of MGU immediately prior to the Closing. (r) HCCH shall have received general releases in favor of MGU and HCCH executed by Shareholder and any such other employees, officers or directors of MGU as HCCH may designate. Those releases will not relate to rights or obligations arising under this Agreement. (s) HCCH shall have received possession of all corporate, accounting, business and tax records of MGU. (t) The form and substance of all actions, proceedings, instruments and documents required to consummate the transactions contemplated by this Agreement shall have been satisfactory in all reasonable respects to HCCH and HCCH's counsel. 31 (u) Cathy L. Legan will have represented and warranted to MGU and HCCH that her acquisition of the HCCH Common Stock is for investment. SECTION 7.2 CONDITIONS TO OBLIGATIONS OF SHAREHOLDER. Shareholder's obligations hereunder are subject to the fulfillment or satisfaction, on and as of the Closing Date, of each of the following conditions (any one or more of which may be waived, but only in a writing signed by such party): (a) The representations and warranties of HCCH set forth herein shall be true and accurate in all material respects on and as of the Closing Date with the same force and effect as if they had been made on the Closing Date (except to the extent a representation or warranty speaks specifically as of an earlier date and except for changes contemplated by this Agreement) and HCCH shall have provided Shareholder with a certificate executed by the President and the Chief Financial Officer of HCCH, dated as of the Closing Date, to such effect. For the purposes of determining the accuracy of the representations and warranties of HCCH, any change or effect in the business of HCCH that results in substantial part as a consequence of the public announcement or pendency of the intended acquisition of the MGU Common Stock by HCCH shall not be deemed a Material Adverse Change or Material Adverse Effect or other breach of representation or warranty with respect to HCCH. (b) HCCH shall have performed and complied with all of its covenants contained herein in all material respects on or before the Closing Date, and Shareholder shall receive a certificate to such effect signed by HCCH's President and Chief Financial Officer. (c) Except as set forth in the HCCH Disclosure Schedule, there shall have been no Material Adverse Change in HCCH since the HCCH Balance Sheet Date. (d) Shareholder shall have received from Winstead Sechrest & Minick P.C., counsel to HCCH, an opinion in form and substance satisfactory to the Shareholder. (e) Shareholder shall agree to a three (3) year non-compete provision beginning upon ceasing to be employed by HCCH and MGU. (f) A listing application covering the shares of HCCH Common Stock to be issued in connection with the transaction contemplated by this Agreement shall have been filed with the NYSE. (g) HCCH shall have executed and delivered to Shareholder the Employment Agreement in a mutually agreed to form. (h) The form and substance of all actions, proceedings, instruments and documents required to consummate the transactions contemplated by this Agreement shall have been satisfactory in all reasonable respects to Shareholder and her counsel. 32 SECTION 7.3 CONDITIONS TO OBLIGATIONS OF EACH PARTY. The respective obligations of the parties hereunder are subject to the fulfillment, on and as of the Closing Date, of each of the following conditions (any one or more of which may be waived by such parties, but only in a writing signed by such parties): (a) No statute, rule, regulation, executive order, decree, injunction or restraining order shall have been enacted, promulgated or enforced (and not repealed, superseded or otherwise made inapplicable) by any court or governmental authority which prohibits the consummation of the transaction contemplated by this Agreement (each party agreeing to use its reasonable best efforts to have any such order, decree or injunction lifted). (b) There shall have been obtained any and all Governmental Authorizations, permits, approvals and consents of securities or "blue sky" commissions of any jurisdiction and of any other governmental body or agency, that may reasonably be deemed necessary so that the consummation of the transaction contemplated by this Agreement will be in compliance with applicable laws, the failure to comply with which would have a Material Adverse Effect on HCCH, MGU, or would be reasonably likely to subject any of HCCH, MGU or any of their respective directors or officers to penalties or criminal liability. ARTICLE VIII TERMINATION OF AGREEMENT SECTION 8.1 TERMINATION. This Agreement may be terminated at any time prior to the Closing Date: (a) By the mutual consent of Shareholder and the Board of Directors of HCCH. (b) By the Board of Directors of HCCH or by Shareholder if there has been a material breach by the other of any representation or warranty contained in this Agreement, which in either case cannot be, or has not been, cured within 15 days after written notice of such breach is given to the party committing such breach, provided that the right to effect such cure shall not extend beyond the date set forth in subparagraph (c) below. (c) By the Board of Directors of HCCH or by Shareholder if all conditions of Closing required by Article VII hereof have not been met or waived by August 31, 1997, provided, however, that neither HCCH nor Shareholder, shall be entitled to terminate this Agreement pursuant to this subparagraph (c) if such party is in willful and material violation of any of its representations, warranties or covenants in this Agreement. (d) If any governmental authority shall have issued an order, decree or ruling or taken any other action permanently enjoining, restraining or otherwise prohibiting the transactions 33 contemplated by this Agreement and such order, decree, ruling or other action shall have become final and nonappealable. (e) By the Board of Directors of HCCH, if Shareholder shall have become Disabled or shall have died. SECTION 8.2 EFFECT OF TERMINATION. Upon termination of this Agreement pursuant to this Article VIII, this Agreement shall be void and of no effect and shall result in no obligation of or liability to any party or their respective directors, officers, employees, agents or shareholders, unless such termination was the result of an intentional breach of any representation, warranty or covenant in this Agreement, in which case the party who breached the representation, warranty or covenant shall be liable to the other party for damages, and all costs and expenses incurred in connection with the preparation, negotiation, execution and performance of this Agreement. ARTICLE IX CLOSING MATTERS SECTION 9.1 THE CLOSING. Subject to termination of this Agreement as provided in Article VIII above, the closing of the transactions provided for herein (the "Closing") will take place at the offices of Winstead Sechrest & Minick P.C., 910 Travis Street, Suite 1700, Houston, Texas 77002 at 9:00 a.m., Houston Time on June 26, 1997, or, if all conditions to Closing have not been satisfied or waived by such date, such other place, time and date as Shareholder and HCCH may mutually select (the "Closing Date"). ARTICLE X INDEMNIFICATION AND REMEDIES, CONTINUING COVENANTS SECTION 10.1 AGREEMENT TO INDEMNIFY. Subject to the limitations set forth in this Article X, from and after the Effective Time, Shareholder will indemnify and hold harmless HCCH and its respective officers, directors, agents and employees, and each person, if any, who controls or may control HCCH within the meaning of the Securities Act (hereinafter referred to individually as a "MGU Indemnified Person" and collectively as "MGU Indemnified Persons") from and against any and all claims, demands, actions, causes of action, losses, costs, damages, liabilities and expenses including, without limitation, reasonable legal fees, (net of: (i) any recoveries under insurance policies; (ii) recoveries from third parties; and (iii) tax savings known to MGU Indemnified Persons at the time of making of claims hereunder) made against or incurred by MGU Indemnified Persons (hereafter in this Section 10.1 referred to as "HCCH Damages"), arising out of any material misrepresentation or breach of or default under any of the 34 representations, warranties, covenants or agreements given or made in this Agreement or any certificate or exhibit delivered by or on behalf of MGU or Shareholder pursuant hereto. The indemnification provided for in this Section 10.1 will not apply unless and until the aggregate HCCH Damages for which one or more MGU Indemnified Persons seeks indemnification exceeds $75,000 in the aggregate, in which event the indemnification provided for will include all HCCH Damages (a franchise deductible). The MGU Indemnified Persons are only entitled to be reimbursed for the actual indemnified expenditures or damages incurred by them for the above described losses. Such MGU Indemnified Persons are not entitled to consequential, special, or other speculative or punitive categories of damages. SECTION 10.2 HCCH AGREEMENT TO INDEMNIFY. Subject to the limitations set forth in this Article X, from and after the Effective Time HCCH will indemnify and hold harmless MGU and Shareholder and their officers, shareholders, directors, administrators, heirs, personal representatives, successors and assigns (hereinafter in this Section 10.2 referred to individually as an "HCCH Indemnified Person" and collectively as "HCCH Indemnified Persons") from and against any and all claims, demands, actions, causes of action, losses, costs, damages, liabilities and expenses including, without limitation, reasonable legal fees (net of: (i) any recoveries under insurance policies; (ii) recoveries from third parties; and (iii) tax savings known to HCCH Indemnified Persons at the time of making a claim hereunder) (hereafter in this Section 10.2 referred to as "MGU Damages") arising out of any misrepresentation or breach of or default under any of the representations, warranties, covenants and agreements given or made by HCCH in this Agreement or any certificate or exhibit delivered by or on behalf of HCCH pursuant hereto. The indemnification provided for in this Section 10.2 will not apply unless and until the aggregate MGU Damages for which one or more HCCH Indemnified Person seeks indemnification exceeds $75,000 in the aggregate, in which event the indemnification provided for will include all MGU Damages (a franchise deductible). The HCCH Indemnified Persons are only entitled to be reimbursed for the actual indemnified expenditures or damages incurred by them for the above described losses. Such HCCH Indemnified Persons are not entitled to consequential, special, or other speculative or punitive categories of damages. SECTION 10.3 SURVIVAL OF REPRESENTATIONS. The right to enforce the breach of each representation, warranty, covenant and agreement set forth in this Agreement will remain operative and in full force and effect for the maximum period permitted by applicable law after the Closing (the last date of such applicable period being herein called the "Final Date"), regardless of any investigation made by or on behalf of the parties to this Agreement, upon which Final Date such representations, warranties, covenants and agreements shall expire and be of no further force and effect. Any litigation or other action of any kind arising out of or attributable to a breach of any representation, warranty, covenant or agreement contained in this Agreement, must be commenced prior to the Final Date. If not so commenced prior to the Final Date, any claims or indemnifications brought under this Article X will thereafter conclusively be deemed to be waived regardless of when such claim is or should have been discovered. Any such claim for indemnification brought under this Article X, brought before the Final Date, shall survive until a final resolution of such claim is effective. As set forth herein, no investigation by any party hereto into the business, operations and conditions of the other party shall diminish in any 35 way the effect of any representation or warranty made by any such party in this Agreement or shall relieve any party of any of its obligations under this Agreement. SECTION 10.4 PROCEDURE FOR INDEMNIFICATION; THIRD PARTY CLAIMS. (a) Promptly after receipt by an indemnified party under this Article X of notice of a claim against it for indemnification brought under this Article X (a "Claim"), the indemnified party will, if a claim is to be made against an indemnifying party, give prompt written notice to the indemnified party of the Claim, but the failure to promptly notify the indemnified party will not relieve the indemnified party of any liability that it may have to any indemnified party, except to the extent that the indemnifying party demonstrates that the defense of such action is prejudice by the indemnifying party's failure to give such prompt notice. Such notice shall contain a description in reasonable detail of facts upon which such Claim is based and, to the extent known, the amount thereof. (b) If any Claim referred to in this Article X is made by a third party against an indemnified party and such indemnified party gives written notice to the indemnifying party of the Claim, the indemnifying party will be entitled to participate in the defense of Claim and, to the extent that it wishes to assume the defense of the Claim and, after written notice from the indemnifying party to the indemnified party of its election to assume the defense of the Claim, the indemnifying party shall assume such defense and will not be liable to the indemnified party under this Article X for any fees of other counsel or any other expenses with respect to the defense of the Claim in each case subsequently incurred by the indemnified party in connection with the defense of the Claim. ARTICLE XI MISCELLANEOUS SECTION 11.1 FURTHER ASSURANCES. Each party agrees to cooperate fully with the other parties and to execute such further instruments, documents and agreements and to give such further written assurances as may be reasonably requested by any other party to better evidence and reflect the transactions described herein and contemplated hereby and to carry into effect the intents and purposes of this Agreement. SECTION 11.2 FEES AND EXPENSES. Until otherwise agreed by the parties, each party shall bear its own fees and expenses, including counsel fees and fees of brokers and investment bankers contracted by such party, in connection with the transaction contemplated hereby. SECTION 11.3 NOTICES. Whenever any party hereto desires or is required to give any notice, demand, or request with respect to this Agreement, each such communication shall be in writing and shall be effective only if it is delivered by personal service or mailed, United States 36 registered or certified mail, postage prepaid, or sent by prepaid overnight courier or confirmed telecopier, addressed as follows: HCCH: HCC Insurance Holdings, Inc. 13403 Northwest Freeway Houston, Texas 77040-6094 Telecopy: (713) 462-2401 Attention: Frank J. Bramanti, President With a copy to (which shall not constitute notice): Winstead Sechrest & Minick P.C. 910 Travis, Suite 1700 Houston, Texas 77002-5895 Telecopy: (713) 951-3800 Attention: Arthur S. Berner, Esq. MGU and Shareholder: Sandra L. Ruder 7505 N.W. Tiffany Spring Parkway, Suite 200 Kansas City, MO 64153 Telecopy: (816) 891-1076 With a copy to (which shall not constitute notice): Seigfreid, Bingham, Levy, Selzer & Gee, P.C. 2800 Commerce Tower 911 Main Street Kansas City, Missouri 64105 Telecopy: (816) 474-3447 Attention: Jack R. Selzer, Esq. Such communications shall be effective when they are received by the addressee thereof. Any party may change its address for such communications by giving notice thereof to other parties in conformity with this Section. SECTION 11.4 GOVERNING LAW. The internal laws of the State of Texas (irrespective of its choice of law principles) will govern the validity of this Agreement, the construction of its terms, and the interpretation and enforcement of the rights and duties of the parties hereto. Any dispute arising hereunder shall lie exclusively in the state courts of the State of Texas. 37 SECTION 11.5 BINDING UPON SUCCESSORS AND ASSIGNS, ASSIGNMENT. This Agreement and the provisions hereof shall be binding upon each of the parties, their permitted successors and assigns. This Agreement may not be assigned by any party without the prior consent of the other. SECTION 11.6 SEVERABILITY. If any provision of this Agreement, or the application thereof, shall for any reason or to any extent be invalid or unenforceable, the remainder of this Agreement and application of such provision to other persons or circumstances shall continue in full force and effect and in no way be affected, impaired or invalidated. SECTION 11.7 ENTIRE AGREEMENT. This Agreement, together with the Confidentiality Agreement, and any other agreement and instrument referenced herein constitute the entire understanding and agreement of the parties with respect to the subject matter hereof and supersede all prior and contemporaneous agreements or understandings, inducements or conditions, express or implied, written or oral, between parties with respect hereto. SECTION 11.8 AMENDMENT AND WAIVERS. Any amendment or waiver affecting the Shareholder shall be valid if consented to in writing by Shareholder. Any term or provision of this Agreement may be amended, and the observance of any term of this Agreement may be waived (either generally or in a particular instance and either retroactively or prospectively) only by a writing signed by Shareholder. The waiver by Shareholder of any breach hereof or default in the performance hereof shall not be deemed to constitute a waiver of any other default or any succeeding breach or default, unless such waiver so expressly states. At any time before the Effective Time, this Agreement may be amended or supplemented by MGU, Shareholder or HCCH with respect to any of the terms contained in this Agreement. SECTION 11.9 NO WAIVER. The failure of any party to enforce any of the provisions hereof shall not be construed to be a waiver of the right of such party thereafter to enforce such provisions. SECTION 11.10 CONSTRUCTION OF AGREEMENT. A reference to an Article, Section or an Exhibit shall mean an Article of, a Section in, or Exhibit to, this Agreement unless otherwise explicitly set forth. The titles and headings herein are for reference purposes only and shall not in any manner limit the construction of this Agreement which shall be considered as a whole. The words "include," "includes" and "including" when used herein shall be deemed in each case to be followed by the words "without limitation." SECTION 11.11 COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which shall be an original as against any party whose signature appears thereon and all of which together shall constitute one and the same instrument. This Agreement shall become binding when one or more counterparts hereof, individually or taken together, shall bear the signatures of all the parties reflected hereon as signatories. 38 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] 39 HCC INSURANCE HOLDINGS, INC. By: /s/ Frank J. Bramanti ----------------------------------- Name: Frank J. Bramanti, Title: President [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] SIGNATURE PAGE OF AGREEMENT /s/ Sandra L. Ruder -------------------------------------- Sandra L. Ruder MANAGED GROUP UNDERWRITING, INC. By: /s/ Sandra L. Ruder ---------------------------------- Name: Sandra L. Ruder Title: President SIGNATURE PAGE OF AGREEMENT EX-11 3 EXHIBIT 11 EXHIBIT 11 HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES COMPUTATION OF EARNINGS PER SHARE (UNAUDITED)
- --------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------- For the six months ended June 30, 1997 1996 - --------------------------------------------------------------------------------------------- Net earnings $ 22,013,000 $ 12,793,000 ---------------- ---------------- ---------------- ---------------- Primary: Weighted average Common Stock and common stock equivalents outstanding 46,053,000 44,330,000 ---------------- ---------------- ---------------- ---------------- Earnings per share $ 0.48 $ 0.29 ---------------- ---------------- ---------------- ---------------- Reconciliation of number of shares outstanding: Common Stock outstanding at period end 45,582,000 43,023,000 Additional dilutive effect of outstanding options (as determined by the application of the treasury stock method) 1,281,000 1,114,000 Changes in Common Stock for issuance (810,000) 193,000 ---------------- ---------------- Weighted average Common Stock and common stock equivalents outstanding 46,053,000 44,330,000 ---------------- ---------------- ---------------- ---------------- Fully Diluted: Weighted average Common Stock and common stock equivalents outstanding 46,146,000 44,410,000 ---------------- ---------------- ---------------- ---------------- Earnings per share $ 0.48 $ 0.29 ---------------- ---------------- ---------------- ---------------- Reconciliation of number of shares outstanding: Common Stock outstanding at period end 45,582,000 43,023,000 Additional dilutive effect of outstanding options (as determined by the application of the treasury stock method) 1,296,000 1,175,000 Changes in Common Stock for issuance (732,000) 212,000 ---------------- ---------------- Weighted average Common Stock and common stock equivalents outstanding 46,146,000 44,410,000 ---------------- ---------------- ---------------- ----------------
Note: Share and option amounts have been restated for all periods presented to include the shares and options of AVEMCO Corporation prior to its combination with the Company (see notes 1 and 3 to the condensed consolidated financial statements). EXHIBIT 11 HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES COMPUTATION OF EARNINGS PER SHARE (UNAUDITED)
- --------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------- For the three months ended June 30, 1997 1996 - --------------------------------------------------------------------------------------------- Net earnings $ 8,982,000 $ 642,000 ---------------- ---------------- ---------------- ---------------- Primary: Weighted average Common Stock and common stock equivalents outstanding 46,383,000 44,263,000 ---------------- ---------------- ---------------- ---------------- Earnings per share $ 0.19 $ 0.01 ---------------- ---------------- ---------------- ---------------- Reconciliation of number of shares outstanding: Common Stock outstanding at period end 45,582,000 43,023,000 Additional dilutive effect of outstanding options (as determined by the application of the treasury stock method) 1,263,000 1,166,000 Changes in Common Stock for issuance (462,000) 74,000 ---------------- ---------------- Weighted average Common Stock and common stock equivalents outstanding 46,383,000 44,263,000 ---------------- ---------------- ---------------- ---------------- Fully Diluted: Weighted average Common Stock and common stock equivalents outstanding 46,482,000 44,279,000 ---------------- ---------------- ---------------- ---------------- Earnings per share $ 0.19 $ 0.01 ---------------- ---------------- ---------------- ---------------- Reconciliation of number of shares outstanding: Common Stock outstanding at period end 45,582,000 43,023,000 Additional dilutive effect of outstanding options (as determined by the application of the treasury stock method) 1,296,000 1,180,000 Changes in Common Stock for issuance (396,000) 76,000 ---------------- ---------------- Weighted average Common Stock and common stock equivalents outstanding 46,482,000 44,279,000 ---------------- ---------------- ---------------- ----------------
Note: Share and option amounts have been restated for all periods presented to include the shares and options of AVEMCO Corporation prior to its combination with the Company (see notes 1 and 3 to the condensed consolidated financial statements). EX-27 4 FINANCIAL DATA SCHEDULE
7 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION FROM THE CONDENSED CONSOLIDATED BALANCE SHEETS AND CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS FOUND ON PAGES 3 AND 4 OF THE COMPANY'S FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 6-MOS DEC-31-1997 JAN-01-1997 JUN-30-1997 390,283,000 0 0 11,914,000 0 0 505,510,000 1,106,000 148,789,000 6,697,000 1,094,218,000 245,497,000 164,337,000 0 0 79,476,000 0 0 45,582,000 290,385,000 1,094,218,000 92,089,000 12,729,000 (294,000) 35,800,000 56,070,000 5,727,000 43,005,000 33,432,000 11,419,000 22,013,000 0 0 0 22,013,000 0.48 0.48 117,283,000 0 0 0 0 122,935,000 0
EX-27.1 5 FINANCIAL DATA SCHEDULE 27.1
7 THIS RESTATED SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION FROM THE FINANCIAL STATEMENTS OF THE COMPANY'S FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. THE AMOUNTS SHOWN BELOW HAVE BEEN RESTATED DUE TO THE MERGER WITH AVEMCO ON JUNE 17, 1997, WHICH WAS ACCOUNTED FOR AS A POOLING-OF-INTERESTS (SEE NOTE 1). 6-MOS DEC-31-1996 JAN-01-1996 JUN-30-1996 341,795,000 0 0 25,851,000 0 0 452,576,000 9,723,000 137,815,000 6,724,000 957,286,000 217,662,000 165,461,000 0 0 69,205,000 0 0 46,240,000 229,295,000 957,286,000 86,805,000 11,434,000 5,207,000 30,229,000 53,657,000 6,948,000 57,952,000 12,454,000 (339,000) 12,793,000 0 0 0 12,793,000 0.29 0.29 0 0 0 0 0 0 0
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