-----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, J8F44y869ZI892a4ZpwZURlGGYlPA4DDOpYta0cSbL1YWVSul7Qjh3wDkJ0TbYJ7 5WB9est/ZXD0YEcaovEFRg== 0001047469-99-021139.txt : 19990518 0001047469-99-021139.hdr.sgml : 19990518 ACCESSION NUMBER: 0001047469-99-021139 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990517 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: SEC FILE NUMBER: 001-13790 FILM NUMBER: 99627469 BUSINESS ADDRESS: STREET 1: 13403 NORTHWEST FRWY CITY: HOUSTON STATE: TX ZIP: 77040-6094 BUSINESS PHONE: 7136907300 10-Q 1 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 March 31, 1999 --------------- [ ] 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 May 7, 1999, there were 48,423,432 shares of Common Stock, $1 par value issued and outstanding. HCC INSURANCE HOLDINGS, INC. INDEX
PAGE NO. -------- Part I. FINANCIAL INFORMATION Item 1. Condensed Consolidated Balance Sheets March 31, 1999 and December 31, 1998.......................................................3 Condensed Consolidated Statements of Earnings Three Months Ended March 31, 1999 and Three Months Ended March 31, 1998..........................................................4 Condensed Consolidated Statements of Changes in Shareholders' Equity Three Months Ended March 31, 1999 and Year Ended December 31, 1998...............................................................5 Condensed Consolidated Statements of Cash Flows Three Months Ended March 31, 1999 and Three Months Ended March 31, 1998..........................................................7 Notes to Condensed Consolidated Financial Statements............................................8 Item 2. Management's Discussion and Analysis............................................................16 Item 3. Quantitative and Qualitative Disclosures About Market Risk.....................................22 Part II. OTHER INFORMATION.......................................................................................24
2 HCC Insurance Holdings, Inc. and Subsidiaries --------- Condensed Consolidated Balance Sheets (Unaudited) --------
March 31, 1999 December 31, 1998 ----------------------- ----------------------- ASSETS Investments: Fixed income securities, at market (cost: 1999 $ 394,127,000; 1998 $375,107,000) $ 411,556,000 $ 393,238,000 Marketable equity securities, at market (cost: 1999 $2,999,000; 1998 $1,750,000) 3,084,000 2,252,000 Short-term investments, at cost, which approximates market 165,578,000 129,084,000 Other investments, at cost, which approximates fair value 1,328,000 1,072,000 ----------------------- ----------------------- Total investments 581,546,000 525,646,000 Cash 4,772,000 16,018,000 Restricted cash and cash investments 75,323,000 84,276,000 Reinsurance recoverables 438,597,000 372,672,000 Premium, claims and other receivables 422,223,000 382,630,000 Ceded unearned premium 149,091,000 149,568,000 Deferred policy acquisition costs 39,519,000 27,227,000 Property and equipment, net 35,075,000 32,983,000 Goodwill 162,015,000 88,043,000 Other assets 16,144,000 30,006,000 ----------------------- ----------------------- TOTAL ASSETS $ 1,924,305,000 $ 1,709,069,000 ----------------------- ----------------------- ----------------------- ----------------------- LIABILITIES Loss and loss adjustment expense payable $ 494,842,000 $ 460,511,000 Reinsurance balances payable 120,427,000 90,983,000 Unearned premium 198,341,000 201,050,000 Deferred ceding commissions 43,738,000 30,842,000 Premium and claims payable 369,091,000 337,909,000 Notes payable 185,209,000 121,600,000 Accounts payable and accrued liabilities 44,259,000 26,311,000 ----------------------- ----------------------- Total liabilities 1,455,907,000 1,269,206,000 SHAREHOLDERS' EQUITY Common Stock, $1.00 par value; 250,000,000 shares authorized; (issued and outstanding: 1999 48,410,058 shares; 1998 48,252,478 shares) 48,410,000 48,252,000 Additional paid-in capital 172,821,000 162,102,000 Retained earnings 238,093,000 219,804,000 Accumulated other comprehensive income 9,074,000 9,705,000 ----------------------- ----------------------- Total shareholders' equity 468,398,000 439,863,000 ----------------------- ----------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,924,305,000 $ 1,709,069,000 ----------------------- ----------------------- ----------------------- ----------------------- See Notes to Condensed Consolidated Financial Statements.
3 HCC Insurance Holdings, Inc. and Subsidiaries -------- Condensed Consolidated Statements of Earnings (Unaudited) --------
For the three months ended March 31, 1999 1998 ----------------------- ----------------------- REVENUE Net earned premium $ 33,979,000 $ 33,927,000 Management fees 23,435,000 16,108,000 Commission income 17,755,000 6,836,000 Net investment income 7,264,000 6,690,000 Net realized investment gain 170,000 117,000 Other operating income 9,384,000 4,308,000 ----------------------- ----------------------- Total revenue 91,987,000 67,986,000 EXPENSE Loss and loss adjustment expense 23,764,000 17,190,000 Operating expense: Policy acquisition costs, net 1,328,000 2,235,000 Compensation expense 18,922,000 13,566,000 Other operating expense 13,025,000 7,907,000 ----------------------- ----------------------- Net operating expense 33,275,000 23,708,000 Interest expense 3,309,000 1,621,000 ----------------------- ----------------------- Total expense 60,348,000 42,519,000 ----------------------- ----------------------- Earnings before income tax provision 31,639,000 25,467,000 Income tax provision 10,930,000 8,380,000 ----------------------- ----------------------- NET EARNINGS $ 20,709,000 $ 17,087,000 ----------------------- ----------------------- ----------------------- ----------------------- BASIC EARNINGS PER SHARE DATA: Earnings per share $ 0.42 $ 0.36 ----------------------- ----------------------- ----------------------- ----------------------- Weighted average shares outstanding 48,764,000 47,794,000 ----------------------- ----------------------- ----------------------- ----------------------- DILUTED EARNINGS PER SHARE DATA: Earnings per share $ 0.42 $ 0.35 ----------------------- ----------------------- ----------------------- ----------------------- Weighted average shares outstanding 49,544,000 48,809,000 ----------------------- ----------------------- ----------------------- ----------------------- Cash dividends declared, per share $ 0.05 $ 0.04 ----------------------- ----------------------- ----------------------- -----------------------
See Notes to Condensed Consolidated Financial Statements. 4 HCC Insurance Holdings, Inc. and Subsidiaries -------- Condensed Consolidated Statements of Changes in Shareholders' Equity For the three months ended March 31, 1999 and for the year ended December 31, 1998 (Unaudited) --------
Additional Common Paid-in Retained Stock Capital Earnings -------------------- -------------------- -------------------- BALANCE AS OF DECEMBER 31, 1997 $ 47,759,000 $ 154,633,000 $ 155,209,000 Net earnings -- -- 72,278,000 Other comprehensive income -- -- -- 206,504 shares of Common Stock issued for exercise of options, including tax benefit of $925,000 206,000 1,997,000 -- 287,025 shares of Common Stock issued for acquisitions 287,000 5,472,000 -- Cash dividends declared, $0.16 per share -- -- (7,683,000) -------------------- -------------------- -------------------- BALANCE AS OF DECEMBER 31, 1998 $ 48,252,000 $ 162,102,000 $ 219,804,000 -------------------- -------------------- -------------------- -------------------- -------------------- -------------------- Accumulated Other Total Comprehensive Shareholders' Income Equity -------------------- ------------------- BALANCE AS OF DECEMBER 31, 1997 $ 8,000,000 $ 365,601,000 Net earnings -- 72,278,000 Other comprehensive income 1,705,000 1,705,000 206,504 shares of Common Stock issued for exercise of options, including tax benefit of $925,000 -- 2,203,000 287,025 shares of Common Stock issued for acquisitions -- 5,759,000 Cash dividends declared, $0.16 per share -- (7,683,000) -------------------- ------------------- BALANCE AS OF DECEMBER 31, 1998 $ 9,705,000 $ 439,863,000 -------------------- ------------------- -------------------- -------------------
See Notes to Condensed Consolidated Financial Statements. 5 HCC Insurance Holdings, Inc. and Subsidiaries -------- Condensed Consolidated Statements of Changes in Shareholders' Equity For the three months ended March 31, 1999 and for the year ended December 31, 1998 (Unaudited) (continued) --------
Additional Common Paid-in Retained Stock Capital Earnings -------------------- -------------------- ------------------- BALANCE AS OF DECEMBER 31, 1998 $ 48,252,000 $ 162,102,000 $ 219,804,000 Net earnings -- -- 20,709,000 Other comprehensive income (loss) -- -- -- 56,250 shares of Common Stock issued for exercise of options, including tax benefit of $128,000 56,000 550,000 -- 101,330 shares of Common Stock issued for acquisition 102,000 1,898,000 -- 414,207 shares of Common Stock contractually issuable in the future -- 8,271,000 -- Cash dividends declared, $0.05 per share -- -- (2,420,000) -------------------- -------------------- ------------------- BALANCE AS OF MARCH 31, 1999 $ 48,410,000 $ 172,821,000 $ 238,093,000 -------------------- -------------------- ------------------- -------------------- -------------------- ------------------- Accumulated Other Total Comprehensive Shareholders' Income Equity ------------------- ------------------- BALANCE AS OF DECEMBER 31, 1998 $ 9,705,000 $ 439,863,000 Net earnings -- 20,709,000 Other comprehensive income (loss) (631,000) (631,000) 56,250 shares of Common Stock issued for exercise of options, including tax benefit of $128,000 -- 606,000 101,330 shares of Common Stock issued for acquisition -- 2,000,000 414,207 shares of Common Stock contractually issuable in the future -- 8,271,000 Cash dividends declared, $0.05 per share (2,420,000) ------------------- ------------------- BALANCE AS OF MARCH 31, 1999 $ 9,074,000 $ 468,398,000 ------------------- ------------------- ------------------- -------------------
See Notes to Condensed Consolidated Financial Statements. 6 HCC Insurance Holdings, Inc. and Subsidiaries -------- Condensed Consolidated Statements of Cash Flows (Unaudited) --------
For the three months ended March 31, 1999 1998 ----------------------- ----------------------- Cash flows from operating activities: Net earnings $ 20,709,000 $ 17,087,000 Adjustments to reconcile net earnings to net cash provided by operating activities: Change in reinsurance recoverables (65,925,000) (10,802,000) Change in premium, claims and other receivables 39,769,000 (29,871,000) Change in ceded unearned premium 477,000 (21,284,000) Change in loss and loss adjustment expense payable 34,331,000 2,424,000 Change in reinsurance balances payable 29,444,000 26,235,000 Change in unearned premium (2,940,000) 13,740,000 Change in premium and claims payable, net of restricted cash (61,919,000) 22,361,000 Net realized investment gain (170,000) (117,000) Gains on sales of strategic investments (5,319,000) -- Depreciation and amortization expense 3,080,000 1,585,000 Other, net 15,355,000 6,796,000 ----------------------- ----------------------- Cash provided by operating activities 6,892,000 28,154,000 Cash flows from investing activities: Maturity or call of fixed income securities 2,245,000 3,978,000 Sales of equity securities 1,520,000 2,347,000 Sales of strategic investments 14,943,000 -- Change in short-term investments (6,939,000) (23,878,000) Cash paid for companies acquired, net of cash received (57,863,000) (19,172,000) Cost of securities acquired (24,291,000) (2,547,000) Purchases of property and equipment (2,829,000) (4,133,000) ----------------------- ----------------------- Cash used by investing activities (73,214,000) (43,405,000) Cash flows from financing activities: Proceeds from notes payable 202,000,000 21,200,000 Sale of Common Stock 606,000 872,000 Payments on notes payable (145,600,000) (6,950,000) Dividends paid (1,930,000) (1,386,000) ----------------------- ----------------------- Cash provided by financing activities 55,076,000 13,736,000 ----------------------- ----------------------- Net change in cash (11,246,000) (1,515,000) Cash at beginning of period 16,018,000 7,728,000 ----------------------- ----------------------- CASH AT END OF PERIOD $ 4,772,000 $ 6,213,000 ----------------------- ----------------------- ----------------------- -----------------------
See Notes to Condensed Consolidated Financial Statement 7 HCC Insurance Holdings, Inc. and Subsidiaries -------- Notes to Condensed Consolidated Financial Statements (Unaudited) (1) GENERAL INFORMATION HCC Insurance Holdings, Inc. ("the Company" or "HCC") and its subsidiaries include domestic and foreign property and casualty insurance companies, underwriting agencies, intermediaries and service companies. HCC, through its subsidiaries, provides specialized property and casualty insurance primarily to commercial customers worldwide, underwritten on both a direct and reinsurance basis in the aviation, marine, offshore energy, medical stop-loss, accident and health, workers' compensation and lenders' single interest lines of business. 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 related notes thereto. The condensed consolidated balance sheet as of December 31, 1998, and the condensed consolidated statement of changes in 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. INCOME TAX For the three months ended March 31, 1999 and 1998, 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, the amortization of goodwill and state income taxes. EFFECTS OF RECENT ACCOUNTING PRONOUNCEMENTS Statement of Position ("SOP") 97-3 issued by the American Institute of Certified Public Accountants' Accounting Standards Executive Committee ("AcSEC") is effective in the Company's fiscal quarter ended March 31, 1999. The adoption of the SOP, entitled "Accounting by Insurance and Other Enterprises for Insurance-Related Assessments" did not have a material effect on financial position or results of operations. SFAS No. 133 entitled "Accounting for Derivative Instruments and Hedging Activities" was issued in June, 1998. The statement is effective for all fiscal quarters of all fiscal years beginning after June 15, 1999. The Company has utilized derivatives or hedging strategies only infrequently in the past and in immaterial amounts, although it may do so more frequently in the future as it expands its foreign operations. The effect of the Statement as well as the timing of its adoption are currently being reviewed by management. 8 HCC Insurance Holdings, Inc. and Subsidiaries -------- Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued) (1) GENERAL INFORMATION, CONTINUED In November, 1998, AcSEC issued SOP 98-7, "Deposit Accounting: Accounting for Insurance and Reinsurance Contracts That Do Not Transfer Insurance Risk" which provides guidance as to the use of deposit accounting for insurance and reinsurance contracts that do not transfer insurance risk. This SOP is effective for financial statements for fiscal years beginning after June 15, 1999. The Company does not expect the adoption of this SOP to have a material effect on the Company's financial position, results of operations, shareholders' equity or cash flows. RECLASSIFICATIONS Certain amounts in the 1998 condensed consolidated financial statements have been reclassified to conform to the 1999 presentation. Such reclassifications had no effect on the Company's net earnings, shareholders' equity 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 non-affiliated 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. A substantial amount of the reinsurance assumed by the Company's insurance company subsidiaries was underwritten directly by those subsidiaries, but issued by other non-affiliated companies in order to satisfy local licensing or other requirements. The majority of the balance of assumed reinsurance was written by underwriting agency subsidiaries of the Company, utilizing unaffiliated insurance companies as the primary writer. The following tables represent the 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 three months ended March 31, 1999: Direct business $ 50,038,000 $ 60,270,000 $ 46,961,000 Reinsurance assumed 91,605,000 85,347,000 90,512,000 Reinsurance ceded (111,224,000) (111,638,000) (113,709,000) ------------------- -------------------- -------------------- NET AMOUNTS $ 30,419,000 $ 33,979,000 $ 23,764,000 ------------------- -------------------- -------------------- ------------------- -------------------- -------------------- 9 HCC Insurance Holdings, Inc. and Subsidiaries -------- Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued) (2) REINSURANCE, CONTINUED Loss and Loss Written Earned Adjustment Premium Premium Expense ------------------- -------------------- -------------------- For the three months ended March 31, 1998: Direct business $ 38,391,000 $ 41,942,000 $ 31,666,000 Reinsurance assumed 75,040,000 56,931,000 37,590,000 Reinsurance ceded (87,614,000) (64,946,000) (52,066,000) ------------------- -------------------- -------------------- NET AMOUNTS $ 25,817,000 $ 33,927,000 $ 17,190,000 ------------------- -------------------- -------------------- ------------------- -------------------- --------------------
The table below represents the approximate composition of reinsurance recoverables in the accompanying condensed consolidated balance sheets:
March 31, 1999 December 31, 1998 ----------------------- ----------------------- Reinsurance recoverable on paid losses $ 63,455,000 $ 33,572,000 Reinsurance recoverable on outstanding losses 307,782,000 279,086,000 Reinsurance recoverable on IBNR 70,309,000 62,513,000 Reserve for uncollectible reinsurance (2,949,000) (2,499,000) ----------------------- ----------------------- TOTAL REINSURANCE RECOVERABLES $ 438,597,000 $ 372,672,000 ----------------------- ----------------------- ----------------------- -----------------------
The insurance company subsidiaries require reinsurers not authorized by the subsidiaries' respective states of domicile to collateralize their reinsurance obligations to the Company with letters of credit or cash deposits. At March 31, 1999, the Company held letters of credit and cash deposits in the amounts of $172.3 million and $8.1 million, respectively, to collateralize a portion of the total amount recoverable. In order to minimize its exposure to reinsurance credit risk, the Company evaluates the financial condition of its reinsurers and places its reinsurance with a diverse group of financially sound companies. Approximately $2.1 million in recoverables is due from reinsurers that are either under regulatory supervision or insolvent. The Company holds letters of credit and cash deposits totaling $1.9 million to collateralize these balances plus other credits of $1.1 million available for potential offset. The Company is also involved in a dispute with one reinsurer over coverage and other issues related to an aggregate recoverable of $2.3 million at March 31, 1999. The Company believes all amounts due from the reinsurer will be recovered from the reinsurer or other parties. 10 HCC Insurance Holdings, Inc. and Subsidiaries -------- Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued) (2) REINSURANCE, CONTINUED New Cap Reinsurance Corporation Limited has gone into voluntary liquidation. The Company has not ceded any new or renewal business to New Cap since May, 1998 and believes that all outstanding recoverables, which to a great extent are collateralized by letters of credit or cash, will be settled in the normal course of business. The Company has established a reserve of $2.9 million as of March 31, 1999, for potential reinsurance recoverable problems. The adverse economic environment in the insurance industry has placed great pressure on reinsurers and the results of their operations. These conditions could, ultimately, affect reinsurers' solvency. Historically, there have been insolvencies following a period of competitive pricing in the industry, such as the marketplace is experiencing today. Therefore, while management believes that the reserve is adequate, conditions can change or additional information might be obtained that would affect management's estimate of the adequacy of the level of the reserve and which may result in a future increase or decrease in the reserve. (3) ACQUISITIONS During the first quarter of 1999, the Company acquired an underwriting agency operation and an intermediary operation in transactions accounted for under the purchase method of accounting. The consideration paid was 101,330 shares of the Company's Common Stock and $57.9 million in cash plus additional consideration of 414,207 shares of the Company's Common Stock and $8.3 million in cash, both to be paid over a four-year period. On a combined basis, the fair value of assets acquired was $110.0 million and the fair value of liabilities assumed was $108.3 million. The purchase price allocation is tentative and may change as the Company is still in the process of obtaining data to complete the allocation with respect to these acquisitions. Additional consideration may also be paid during the next four years, dependent upon earnings levels attained during those years by one of the acquired companies. Goodwill in the aggregate amount of $74.7 million was recorded in connection with these transactions. The goodwill is being amortized over periods of twenty to thirty years. The results of operations of the businesses acquired in purchase transactions have been included in the consolidated financial statements beginning on the effective date of each transaction. Unaudited proforma information with respect to these acquisitions is not presented as their effect on revenue, net earnings and earnings per share is not material to the quarters ended March 31, 1999 and 1998. 11 HCC Insurance Holdings, Inc. and Subsidiaries -------- Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued) (4) SEGMENT AND GEOGRAPHIC INFORMATION The performance of each segment is evaluated by management based upon net earnings. Net earnings is calculated after tax and after all corporate expense allocations, purchase price allocations and intercompany eliminations have been charged or credited to the individual segments. The following tables show information by business segment and geographic location. Geographic location is determined by physical location of the Company's offices and does not represent the location of insureds or reinsureds from whom the business was generated.
Insurance Underwriting Other Company Agency Intermediary Operations Corporate Total ------------------------------------------------------------------------------------- For the three months ended March 31, 1999: Revenue: Domestic $ 37,288,000 $ 23,440,000 $ 10,519,000 $ 9,216,000 $ (33,000) $ 80,430,000 Foreign 3,024,000 872,000 7,661,000 0 0 11,557,000 Intersegment 0 279,000 241,000 344,000 0 864,000 ------------------------------------------------------------------------------------- Total segment revenue $ 40,312,000 $ 24,591,000 $ 18,421,000 $ 9,560,000 $ (33,000) 92,851,000 ---------------------------------------------------------------------- ---------------------------------------------------------------------- Intersegment revenue (864,000) --------------- CONSOLIDATED TOTAL REVENUE $ 91,987,000 --------------- --------------- Net earnings: Domestic $ 6,202,000 $ 4,459,000 $ 4,065,000 $ 4,261,000 $ (394,000) $ 18,593,000 Foreign 68,000 (110,000) 2,158,000 0 0 2,116,000 ------------------------------------------------------------------------------------- TOTAL NET EARNINGS $ 6,270,000 $ 4,349,000 $ 6,223,000 $ 4,261,000 $ (394,000) $ 20,709,000 ------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------- Other items: Net investment income $ 5,766,000 $ 909,000 $ 425,000 $ 81,000 $ 83,000 $ 7,264,000 Depreciation and amortization 625,000 1,363,000 880,000 63,000 149,000 3,080,000 Interest expense 9,000 1,149,000 919,000 0 1,232,000 3,309,000 Income tax provision 1,309,000 3,367,000 3,928,000 2,306,000 20,000 10,930,000 Capital expenditures 782,000 1,342,000 399,000 31,000 275,000 2,829,000 12 HCC Insurance Holdings, Inc. and Subsidiaries -------- Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued) (4) SEGMENT AND GEOGRAPHIC INFORMATION, CONTINUED Insurance Underwriting Other Company Agency Intermediary Operations Corporate Total -------------------------------------------------------------------------------------------- For the three months ended March 31, 1998: Revenue: Domestic $ 36,538,000 $ 17,412,000 $ 5,237,000 $ 4,213,000 $ 173,000 $ 63,573,000 Foreign 3,297,000 623,000 460,000 33,000 0 4,413,000 Intersegment 0 509,000 864,000 315,000 0 1,688,000 ------------------------------------------------------------------------------------------- Total segment revenue $ 39,835,000 $ 18,544,000 $ 6,561,000 $ 4,561,000 $ 173,000 69,674,000 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Intersegment revenue (1,688,000) --------------- CONSOLIDATED TOTAL REVENUE $ 67,986,000 --------------- --------------- Net earnings: Domestic $ 9,744,000 $ 4,410,000 $ 2,991,000 $ 541,000 $ (1,342,000) $ 16,344,000 Foreign 750,000 (199,000) 325,000 (133,000) 0 743,000 ------------------------------------------------------------------------------------------- TOTAL NET EARNINGS $ 10,494,000 $ 4,211,000 $ 3,316,000 $ 408,000 $ (1,342,000) $ 17,087,000 ------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------- Other items: Net investment income $ 5,707,000 $ 688,000 $ 86,000 $ 69,000 $ 140,000 $ 6,690,000 Depreciation and amortization 458,000 848,000 40,000 119,000 120,000 1,585,000 Interest expense 6,000 330,000 0 0 1,285,000 1,621,000 Income tax provision 3,623,000 3,151,000 1,965,000 262,000 (621,000) 8,380,000 Capital expenditures 2,575,000 1,138,000 0 15,000 405,000 4,133,000
The increase in assets between December 31, 1998 and March 31, 1999 comes from two principle sources. First, the acquisition of Rattner Mackenzie Limited increased receivables, goodwill and short-term investments. And second, the increased reinsurance activities of the insurance company subsidiaries caused reinsurance recoverables to increase. 13 HCC Insurance Holdings, Inc. and Subsidiaries -------- Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued) (5) EARNINGS PER SHARE Basic earnings per share is based on the weighted average number of common shares outstanding during the year divided into net earnings. Diluted earnings per share is based on the weighted average number of common shares outstanding plus the potential common shares outstanding during the year divided into net earnings. Outstanding common stock options, when dilutive, are considered to be potential common stock for the purpose of the diluted calculation. The treasury stock method is used to calculate potential common stock due to options. Contingent shares to be issued are included in the diluted earnings per share computations only when the underlying conditions for issuance have been met. The following table provides a reconciliation of the denominators used in the earnings per share calculations:
For the three months ended March 31, 1999 1998 ---------------------- -------------------- Net earnings $ 20,709,000 $ 17,087,000 ---------------------- -------------------- ---------------------- -------------------- Reconciliation of number of shares outstanding: Shares of Common Stock outstanding at period end 48,410,000 47,851,000 Changes in Common Stock due to issuance (60,000) (57,000) Common Stock contractually issuable in the future 414,000 -- ---------------------- -------------------- Weighted average Common Stock outstanding 48,764,000 47,794,000 Additional dilutive effect of outstanding options (as determined by the application of the treasury stock method) 780,000 1,015,000 ---------------------- -------------------- Weighted average Common Stock and potential common stock outstanding 49,544,000 48,809,000 ---------------------- -------------------- ---------------------- --------------------
As of March 31, 1999, there were approximately 1.8 million options that were not included in the computation of diluted earnings per share because to do so would have been antidilutive. There are 378,000 shares of the Company's Common Stock to be issued if certain conditions are met as of December 31, 1999, or in subsequent years. These shares were not included in the diluted earnings per share computation, because the conditions for issuance have not yet been met. 14 HCC Insurance Holdings, Inc. and Subsidiaries -------- Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued) (6) SUPPLEMENTAL INFORMATION Supplemental information for the three months ended March 31, 1999 and 1998, is summarized below:
1999 1998 -------------------- ------------------- Interest paid $ 2,997,000 $ 743,000 Income tax paid 1,054,000 777,000 Comprehensive income 20,078,000 16,707,000
Ceding commissions netted with policy acquisition costs in the condensed consolidated statements of earnings are $23.1 million and $13.5 million for the three months ended March 31, 1999 and 1998, respectively. 15 MANAGEMENT'S DISCUSSION AND ANALYSIS THREE MONTHS ENDED MARCH 31, 1999 VERSUS THREE MONTHS ENDED MARCH 31, 1998 RESULTS OF OPERATIONS Total revenue increased to $92.0 million for the first quarter of 1999, an increase of 35% from the same period in 1998. The revenue increase was across all segments and resulted from internal growth as well as the effect of recent acquisitions. Compensation expense increased $5.4 million or 39% during the first quarter of 1999 from the first quarter of 1998. This increase reflects a normal progressional increase due to business growth as well as the effect of acquisitions subsequent to the first quarter of 1998. Other operational expenses increased $5.1 million or 65% during the same period for similar reasons. Interest expense was $3.3 million for the first quarter of 1999 an increase of $1.7 million from $1.6 million for the first quarter of 1998. The increase is a result of increased debt outstanding, principally as a result of fundings for acquisitions. Income tax expense was $10.9 million in the quarter ended March 31, 1999 compared to $8.4 million in the quarter ended March 31, 1998. The Company's effective tax rate was 35% in the 1999 quarter compared to 33% in the 1998 quarter. As net income from the underwriting agencies and intermediary operations grows and goodwill amortization increases, the Company's effective tax rate will increase due to state income taxes, the non-deductibility of certain goodwill amortization and the mitigation of the effect of tax exempt municipal bond income on the combined effective tax rate. Net earnings for the first quarter of 1999 increased to $20.7 million from the corresponding quarter in 1998, a 21% increase. Diluted earnings per share increased 20% to $0.42 per share during the same period. These increases resulted from strong performances by all operations of the Company except the insurance company subsidiaries which were affected by considerably higher loss ratios during 1999 due to continuing competition in most lines of business. The Company's book value per share was $9.59 as of March 31, 1999, up from $9.12 as of December 31, 1998. SEGMENTS INSURANCE COMPANIES Gross written premium increased 25% to $141.6 million for the first quarter of 1999 from the same period in 1998 as aviation, workers' compensation and accident and health reinsurance premium increased somewhat offset by a reduction in property premium. This increase was as a result of internal growth as the Company's insurance company subsidiaries increase their participation in the business underwritten by the Company's underwriting agency subsidiaries. Net written premium for the first quarter of 1999 increased to $30.4 million from $25.8 million for the same period in 1998 due primiarly to an increase in aviation and medical stop-loss premium. Net earned premium was almost flat at $34.0 million. 16 Loss and loss adjustment expense increased to $23.8 million for the first quarter 1999 from $17.2 million for the first quarter 1998 and the GAAP net loss ratio increased to 70% from 51% for the same period. These increases reflect decreased premiums and an increased frequency of losses in 1999, particularly in the property line of business, compared to excellent experience in the 1998 quarter. The GAAP gross loss ratio was 94% in the first quarter of 1999 as compared to 70% in the first quarter of 1998. The losses currently being experienced by the Company's reinsurers are not expected to affect the Company's ability to obtain reinsurance. Management believes that the Company has excellent relationships with its core reinsurers, which were built in the past during profitable periods. Additionally, the Company has taken steps to reduce the gross loss ratio, primarily by increasing premium rates in some of its lines of business. The statutory combined ratio was 93.7% in the 1999 quarter compared to 75.9% for the 1998 quarter which remains significantly better than the industry average. Policy acquisition costs, which are net of ceding commissions on reinsurance ceded, decreased $907,000 or 41% during the first quarter of 1999 from 1998, reflecting a greater amount of gross premium ceded and, therefore, a higher level of ceding commissions. During the quarter ended March 31, 1999, an insurance company subsidiary added $450,000 to its reserve for uncollectible reinsurance in the normal course of business. As of March 31, 1999, the consolidated reserve totals $2.9 million. Net earnings of the insurance companies decreased $4.2 million to $6.3 million in the 1999 first quarter from $10.5 million in the 1998 quarter, principally as a result of the higher loss ratio due to reduced premium and deteriorating loss experience. The negative effect of unprofitable underwriting results in this segment is substantially mitigated through the extensive use of reinsurance. UNDERWRITING AGENCIES Management fees increased 45% to $23.4 million for the first quarter of 1999, compared to the same period in 1998. Premiums underwritten on behalf of affiliated and unaffiliated insurance companies increased to $213.3 million during the same period, an increase of 52%, due to acquisitions and internal growth in existing operations. Net earnings of the underwriting agencies increased to $4.3 million in the first quarter of 1999 from $4.2 million in 1998. Recent acquisitions have not yet had a significant impact due to licensing and other regulatory requirements which are in process to be completed and some system delays which have been subsequently corrected. Growth in underwriting agency volume is also expected to have a positive impact on both the insurance company segment and the intermediary segment. INTERMEDIARIES Commission income increased to $17.8 million in the first quarter of 1999, an increase of 160% from 1998. The acquisition of Rattner Mackenzie Limited, effective January 1, 1999, accounts for $7.2 million of the increase with the balance from internal growth. Net earnings of the intermediaries increased to $6.2 million in the the first quarter of 1999, an increase of 88% from the same period in 1998. The earnings increase is attributable to the acquisition of Rattner Mackenzie Limited as well as internal growth. 17 OTHER OPERATIONS The increase in revenue of $5.1 million during the first quarter of 1999 is principally from a gain of $4.9 million from the sale of the Company's 21% interest in Underwriters Indemnity Holdings, Inc. ("UIH"), and an increase in service fees somewhat offset by the decrease in revenue related to a strategic investment which was sold during the third quarter of 1998. Net earnings of other operations increased to $4.3 million in the 1999 quarter from $408,000 in the 1998 quarter which is principally attributable to the gains on sales of strategic investments. Quarter to quarter comparisons will very substantially depending on activity in the purchase or disposition of strategic investments. ACQUISITIONS The Company acquired an underwriting agency and a London intermediary operation during the quarter ended March 31, 1999. These acquisitions were accounted for using the purchase method of accounting. The total consideration to be paid is 515,537 shares of the Company's Common Stock, $66.2 million in cash and notes, plus additional consideration based upon future levels of earnings. LIQUIDITY AND CAPITAL RESOURCES The Company receives substantial cash from premiums, reinsurance recoverables, management fees and commission income and, to a lesser extent, investment income and proceeds from sales and redemptions of investment assets. The principal cash outflows are for the payment of claims and loss adjustment expenses ("LAE"), payment of premiums to reinsurers, purchase of investments, debt service, policy acquisition costs, operating expenses, income and other taxes and dividends. The overall increase in activities at the insurance company subsidiaries resulted in increases in gross loss reserves, gross unearned premiums, deferred policy acquisition costs and deferred ceding commissions since December 31, 1998. The Company continues to collect its receivables and recoverables generally in the ordinary course and has not incurred and does not expect to incur any significant liquidity difficulties as a result of the substantial growth in gross amounts due. The Company limits any liquidity exposure it may have by holding funds, letters of credit or other security such that net balances due to it are significantly less than the gross balances shown in the condensed consolidated balance sheet. The Company's consolidated cash and investment portfolio increased $44.7 million or 8% since December 31, 1998, and totaled $586.3 million as of March 31, 1999, of which $170.4 million was cash and short-term investments. Total assets increased to $1.9 billion as of March 31, 1999, from $1.7 billion as of December 31, 1998. On March 8, 1999, the Company entered into a Loan Agreement (the "Facility") with a group of banks. The Facility includes a $150.0 million Revolving Loan Facility and $100.00 million Short Term Revolving Loan Facility. Borrowing under the Facility may be made from time to time by the Company for general corporate purposes through the Short Term Revolving Loan Facility until its expiration on March 7, 2000, and through the Revolving Loan Facility until its expiration on February 28, 2002. Outstanding loans under the Facility bear interest at agreed upon rates. The Facility is collateralized in part by the pledge of the stock of the Company's principal insurance company subsidiaries and by the pledge of stock of and guaranties entered into by the Company's principal underwriting agency and intermediary subsidiaries. The Facility agreement contains certain restrictive covenants, including, without limitation, minimum net worth requirements for the Company and certain subsidiaries, restrictions on certain extraordinary corporate actions, notice requirements for certain material occurrences and required maintenance of specified financial ratios. Management believes that the restrictive covenants and other obligations of the Company which are contained in the Facility agreement are typical for financing arrangements comparable to the Facility. The initial funding available under the Facility was used, among other things, to refinance existing indebtedness of the Company including all outstanding indebtedness under the Company's $120.0 million revolving credit facility entered into as of December 30, 1997, which has been terminated. As of March 31, 1999, total debt outstanding under the Facility was $178.0 million with $150.0 million due under the $150.0 million Revolving Loan Facility and $28.0 million due under the $100 million Short Term Revolving Loan Facility and the weighted average interest rate was 6.2%. 18 The Company believes that its operating cash flows, short-term investments and the Facility will provide sufficient sources of liquidity to meet its operating needs for the foreseeable future. EFFECTS OF RECENT ACCOUNTING PRONOUNCEMENTS Statement of Position ("SOP") 97-3 issued by the American Institute of Certified Public Accountants' Accounting Standards Executive Committee ("AcSEC") is first effective in the Company's fiscal quarter ended March 31, 1999. The adoption of the SOP entitled "Accounting by Insurance and Other Enterprises for Insurance-Related Assessments" did not have a material effect on financial position or results of operations. SFAS No. 133 entitled "Accounting for Derivative Instruments and Hedging Activities" was issued in June, 1998. The statement is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. The Company has utilized derivatives or hedging strategies only infrequently in the past and in immaterial amounts, although it may do so more frequently in the future as it expands its foreign operations. The effect of the Statement as well as the timing of its adoption are currently being reviewed by management. In November, 1998, AcSEC issued SOP 98-7, " Deposit Accounting: Accounting for Insurance and Reinsurance Contracts That Do Not Transfer Insurance Risk" which provides guidance as to the use of deposit accounting for insurance and reinsurance contracts that do not transfer insurance risk. This SOP is effective for financial statements for fiscal years beginning after June 15, 1999. The Company does not expect the adoption of this SOP to have a material effect on the Company's financial position, results of operations or shareholders' equity. 19 YEAR 2000 The Year 2000 issue is the result of date coding within computer programs that were written using just two digits rather than four digits to define the applicable year. If not corrected, these date codes could cause computers to fail to calculate dates beyond 1999 and, as a result, computer applications could fail or create erroneous results by or at the Year 2000. The Company, together with outside vendors engaged by the Company, has made assessments of the Company's potential Year 2000 exposure related to its computerized information systems and is currently engaged in efforts to remediate and test these systems for potential Year 2000 exposures. The Company has also made assessments of the potential Year 2000 exposure associated with its embedded technology systems, such as telephone systems, environmental control systems and elevators, and does not believe that it has significant Year 2000 exposure in this area. The Company is currently involved in discussions with important suppliers, business partners, customers and other third parties to determine the extent to which the Company may be vulnerable to the failure of these parties to identify and correct their own Year 2000 issues. Based upon information received from these third parties, management does not believe that the Company has any significant Year 2000 exposures related to its third party relationships. In addition to its own systems and third-party relationships, the Company may also have exposure in the property and casualty operations of its insurance company subsidiaries to claims asserted under certain insurance policies for damages caused by an insured's failure to address its own Year 2000 computer problems. Together with other companies in the insurance industry, the Company has and continues to evaluate the potential insurance exposures arising from Year 2000 problems or responses. The Company's insurance company subsidiaries do not generally offer policies of insurance marketed as Year 2000 liability coverage. However, due to the nature of certain of the policies, such as policies of property insurance, insureds may attempt to submit claims for coverage under such policies which may be result from Year 2000 related causes. In this regard, the Company is currently assessing what modifications or responses may be appropriate related to the insurance coverages currently offered by such subsidiaries in light of coverage issues associated with the Year 2000 problem. Due to the difficulty in accurately assessing potential Year 2000 losses, if any, related to Year 2000 coverage issues, it is not possible to reasonably estimate their potential effects on the Company's financial position and results of operations. The Company's own software vendor subsidiary has completed its Year 2000 compliance plan, and, based upon the results, management believes that the subsidiary's products are Year 2000 compliant. The Company is utilizing and will continue to utilize both internal and external resources to evaluate and mitigate its Year 2000 exposures in advance of respective critical dates. Further, in the ongoing acquisition of technology and business equipment, the Company generally requires that its vendors certify the Year 2000 compliance of acquired products. The Company relies upon such certifications. From January 1, 1997 through March 31, 1999, the Company expensed $641,000 with respect to Year 2000 compliance and capitalized $6.4 million with respect to new software purchases and installations which are Year 2000 compliant. The total estimated remaining cost of modification of existing software and new Year 2000 compliant systems is $1.2 million which includes $940,000 attributable to the planned purchase and implementation of new systems. The cost of this new software is being capitalized. The remaining estimated cost of $220,000 will be expensed as incurred over the next nine months. The Company does not track internal costs with respect to the expenses related to Year 2000 remediation. The level of expense anticipated in connection with the Year 2000 issues is not expected to have a material effect on the Company's results of operations. The costs of the Company's Year 2000 compliance efforts are expected to be funded out of operating cash flow, which is sufficient to provide funding. To date, no material information technology projects of the Company have been delayed as a result of the Company's Year 2000 compliance efforts. 20 The Company believes that its Year 2000 compliance plan will be successful based upon its progress to date. Many of the Company's major systems have been replaced or remediated, where necessary, including that of a major insurance company subsidiary, and are currently successfully processing business and information that contain the Year 2000 or later years. No new information has come to management's attention that would indicate that the plan should be altered significantly or that the plan will not be successful in the time frame prescribed by the plan. Nevertheless, the Company is in the process of developing a contingency plan for the remote possibility that there could be an unforeseen Year 2000 failure. Such plan will develop and document procedures to address any material Year 2000 failures until remediation of the related systems could be performed. The dates of expected completion and the costs of the Company's Year 2000 remediation efforts are based on management's estimates, which were derived utilizing assumptions of future events, including the availability of certain resources, third party remediation plans and other factors. There can be no guarantee that these estimates will be achieved, and if the actual timing and costs for the Company's Year 2000 remediation program differ materially from those anticipated, the Company's financial condition and results of operations could be significantly affected. Additionally, despite testing by the Company, the Company's systems may contain undetected errors or defects associated with Year 2000 date functions. The inability of the Company to correctly identify significant Year 2000 issues for remediation or to complete its Year 2000 remediation and testing efforts prior to respective critical dates, the failure of its contingency planning, the failure of third parties with whom the Company has an important relationship to identify, remediate and test their own Year 2000 issues and the resulting disruption which could occur in the Company's systems, the impact of future acquisitions in which Year 2000 issues in the acquired systems have not been remediated or tested and the inability of the Company to adequately address coverage issues related to its insurance company subsidiaries, could have material adverse effects on the Company's business, and its financial condition, results of operations and cash flows. EURO CONVERSION On January 1, 1999, certain member countries of the European Union irrevocably fixed the conversion rates between their national currencies and a common currency, the "Euro", which became their common legal currency on that date. The participating countries' former national currencies will continue to serve as legal tender and denominations of the Euro between January 1, 1999, and January 1, 2002. The conversion to the Euro is scheduled to be completed on July 1, 2002, when the national currencies will cease to exist. The Company does not expect the introduction of the Euro to have a material effect on the Company's business, software plans, financial condition or results of operations. 21 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK From time to time, the Company enters into foreign currency forward contracts as a hedge against foreign currency fluctuations. The Company did not hedge this risk in 1998 and there were no open foreign currency forward contracts as of December 31, 1998. Rattner Mackenzie Limited ("RML"), purchased by the Company during January 1999, has a revenue stream in US Dollars but expenses in Great British Pounds. To mitigate the foreign exchange risk, RML enters into foreign currency forward contracts expiring at staggered times through April 2000. As of March 31, 1999, RML had forward contracts to sell 12.5 million US Dollars for Pounds at an average rate of 1 GBP = 1.6174 USD. The foreign exchange forward contracts are used to convert currency at a known rate in an amount which approximates average monthly expenses. Thus the effect of these transactions is to limit the foreign exchange risk of the recurring monthly expenses. 22 THIS REPORT ON FORM 10-Q (THE "REPORT") CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, WHICH ARE INTENDED TO BE COVERED BY THE SAFE HARBORS CREATED THEREBY. INVESTORS ARE CAUTIONED THAT ALL FORWARD-LOOKING STATEMENTS NECESSARILY 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, THE FINANCIAL VIABILITY OF REINSURERS, THE EXPANSION OR CONTRACTION IN ITS VARIOUS LINES OF BUSINESS, THE IMPACT OF INFLATION, THE IMPACT OF YEAR 2000 ISSUES, CHANGING LICENSING REQUIREMENTS AND REGULATIONS IN THE UNITED STATES AND IN FOREIGN COUNTRIES, THE ABILITY OF THE COMPANY TO INTEGRATE ITS RECENTLY ACQUIRED BUSINESSES, THE EFFECT OF PENDING OR FUTURE ACQUISITIONS AS WELL AS ACQUISITIONS WHICH HAVE RECENTLY BEEN CONSUMMATED, GENERAL MARKET CONDITIONS, COMPETITION, LICENSING AND PRICING. ALL STATEMENTS, OTHER THAN STATEMENTS OF HISTORICAL FACTS, INCLUDED OR INCORPORATED BY REFERENCE IN THIS REPORT THAT ADDRESS ACTIVITIES, EVENTS OR DEVELOPMENTS THAT THE COMPANY EXPECTS OR ANTICIPATES WILL OR MAY OCCUR IN THE FUTURE, INCLUDING, WITHOUT LIMITATION, SUCH THINGS AS FUTURE CAPITAL EXPENDITURES (INCLUDING THE AMOUNT AND NATURE THEREOF), BUSINESS STRATEGY AND MEASURES TO IMPLEMENT SUCH STRATEGY, COMPETITIVE STRENGTHS, GOALS, EXPANSION AND GROWTH OF THE COMPANY'S BUSINESSES AND OPERATIONS, PLANS, REFERENCES TO FUTURE SUCCESS, AS WELL AS OTHER STATEMENTS WHICH INCLUDES WORDS SUCH AS "ANTICIPATE," "BELIEVE," "PLAN," "ESTIMATE," "EXPECT," AND "INTEND" AND OTHER SIMILAR EXPRESSIONS, CONSTITUTE FORWARD-LOOKING STATEMENTS. ALTHOUGH THE COMPANY BELIEVES THAT THE ASSUMPTIONS UNDERLYING THE FORWARD-LOOKING STATEMENTS CONTAINED HEREIN ARE REASONABLE, ANY OF THE ASSUMPTIONS COULD OVER TIME PROVE TO BE INACCURATE AND, THEREFORE, THERE CAN BE NO ASSURANCE THAT THE FORWARD-LOOKING STATEMENTS INCLUDED IN THIS REPORT WILL THEMSELVES PROVE TO BE ACCURATE. IN LIGHT OF THE SIGNIFICANT UNCERTAINTIES INHERENT IN THE FORWARD-LOOKING STATEMENTS INCLUDED HEREIN, THE INCLUSION OF SUCH INFORMATION SHOULD NOT BE REGARDED AS A REPRESENTATION BY THE COMPANY OR ANY OTHER PERSON THAT THE OBJECTIVES AND PLANS OF THE COMPANY WILL BE ACHIEVED. 23 PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K: (a) Exhibits: 10.352 Share Purchase Agreement dated January 29, 1999, among HCC Insurance Holdings, Inc. and Gerald Axel, Barry J. Cook, Gary J. Lockett, Christopher F.B. Mays, Mark E. Rattner, Marshall Rattner, Inc., John Smith and Keith W. Steed. 10.353 Employment Agreement effective as of January 1, 1999 between HCC Insurance Holdings, Inc. and Stephen L. Way. 27 EDGAR Financial Data Schedule - March 31, 1999 (b) Reports on Form 8-K: On March 15, 1999, the Company filed a report on Form 8-K reporting the execution of a $250.0 million loan agreement with a syndicate of financial institutions. 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) May 17, 1999 /s/ Stephen L. Way ----------------- ------------------------------------------------ (Date) Stephen L. Way, Chairman of the Board and Chief Executive Officer May 17, 1999 /s/ Edward H. Ellis, Jr. ----------------- ------------------------------------------------ (Date) Edward H. Ellis, Jr., Senior Vice President and Chief Financial Officer 24 EX-10.352 2 EXHIBIT 10.352 CONFORMED COPY DATE: JANUARY 31, 1999 HCC INSURANCE HOLDINGS, INC. AND GERALD AXEL BARRY J. COOK GARY J. LOCKETT CHRISTOPHER F.B. MAYS MARK E. RATTNER MARSHALL RATTNER, INC. JOHN SMITH KEITH W. STEED ------------------------------------- SHARE PURCHASE AGREEMENT -------------------------------------
TABLE OF CONTENTS PAGE ARTICLE 1 SALE AND TRANSFER OF THE PEPYS SHARES 2 ARTICLE 2 WARRANTIES, COVENANTS AND LIMITATION ON LIABILITY 17 ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF HCC 22 ARTICLE 4 COVENANTS OF THE SELLERS 24 ARTICLE 5 COVENANTS OF HCC 26 ARTICLE 6 CLOSING 30 ARTICLE 7 BONUS SCHEME 34 ARTICLE 8 COVENANTS TO PAY 35 ARTICLE 9 NON-COMPETITION AGREEMENTS AND OTHER NON-COMPETITION AGREEMENTS 40 ARTICLE 10 MISCELLANEOUS 41 ARTICLE 11 INTERPRETATION 50 SCHEDULE 1A PEPYS SHARES 59 SCHEDULE 1B GROUP B SHAREHOLDERS' PORTION OF MINIMUM PRICE 60 SCHEDULE 1C GROUP A SHAREHOLDERS' ALLOCATION OF MINIMUM PURCHASE PRICE 61 SCHEDULE 1D ANNUAL INSTALMENTS 62 SCHEDULE 1E AMOUNTS SUBJECT TO ESCROW DURING THE INITIAL ESCROW PERIOD 63 SCHEDULE 2 EARNOUT PROVISIONS 64 SCHEDULE 3 WARRANTIES 66 SCHEDULE 4 LIMITATIONS ON SELLERS LIABILITY FOR BREACH OF WARRANTY AND UNDER THE TAX COVENANT 101 SCHEDULE 5 PROPERTY LEASES 110
SCHEDULE 6 HCC'S OBLIGATIONS PENDING REDEMPTION OF THE INITIAL SHORT TERM LOAN NOTES 111
SHARE PURCHASE AGREEMENT THIS SHARE PURCHASE AGREEMENT (this "Agreement") is entered into on January 31, 1999 but effective for all purposes on January 1, 1999 (the "Effective Date") by and among HCC Insurance Holdings, Inc., a Delaware corporation ("HCC"); Barry J. Cook, of Pilgrim's House, Brasted Lane, Knockholt, Sevenoaks, Kent TN14 7PJ ("Cook"); Gary J. Lockett, of 11 Dynevor Gardens, Leigh-on-Sea, Essex SS9 2RG ("Lockett"); Christopher F.B. Mays, of 33 London Road, Ewell, Surrey KT17 2BE ("Mays"; Cook, Lockett and Mays are collectively referred to as the "Group A Shareholders"); Gerald Axel, of 2 Linda Lane, Plainview, New York, NY11803, USA ("Axel"); Marshall Rattner, Inc., a New York corporation ("MRI"); John Smith, of 5 Pinks Hill, Swanley, Kent BR8 8AG ("Smith") and Keith W. Steed, of 8 Alton Drive, Lexden, Colchester, Essex CO3 3ST ("Steed"; Axel, MRI, Smith and Steed are collectively referred to as the "Group B Shareholders"), and Mark E. Rattner, c/o Marshall Rattner, Inc. 37 Radio Circle Drive, Mount Kisco, New York 10549, USA ("Rattner"). The Group A Shareholders and the Group B Shareholders are collectively referred to as the "Shareholders" and the Shareholders together with Rattner are collectively referred to as the "Sellers". RECITALS: A. The Shareholders currently own all of the issued share capital of PEPYS Holdings Limited ("PEPYS"). PEPYS is the sole shareholder and parent company of Rattner Mackenzie Ltd ("RML"). B. HCC desires to purchase all of the issued shares in the capital of PEPYS (the "PEPYS Shares") and the Shareholders desire to sell to HCC the PEPYS Shares for the consideration and on the other terms and subject to the conditions set out in this Agreement. C. HCC agrees to pay Rattner at Closing an arrangement fee of (pound)660,000 (the "Arranger's Fee") by way of the issue of a loan note in connection with his efforts in relation to the transaction contemplated by this Agreement on the terms and subject to the conditions set out in this Agreement. D. Each Seller has been informed by HCC that HCC intends to transfer after the date of this Agreement all or some of the PEPYS Shares or other shares in the then issued share capital of PEPYS to a wholly owned subsidiary of HCC ("HCC UK") to be incorporated under English law and each Seller confirms and acknowledges that HCC has the right to make such a transfer following the full payment of all amounts payable under the Initial Short Term Loan Notes (as defined herein) to be issued to the Sellers and subject to compliance by HCC with its obligations under Sections 5.5 and 10.5 of 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: 2 ARTICLE 1 SALE AND TRANSFER OF THE PEPYS SHARES 1.1 SALE OF PEPYS SHARES (a) Subject to the terms and conditions of this Agreement, at the Closing, each Shareholder shall sell, transfer and deliver to HCC, and HCC shall purchase from that Shareholder, the number of PEPYS Shares set out against his name in Schedule 1A. (b) Each Shareholder acknowledges and agrees that he has the right to transfer legal and beneficial title to the number of PEPYS Shares set out against his name in Schedule 1A on and from the date of Closing. The PEPYS Shares shall be sold free from all Encumbrances. HCC shall be entitled on and from the date of Closing to exercise all rights attached or accruing to the PEPYS Shares including, without limitation, the right to receive all dividends, distributions or any return of capital declared, paid or made by PEPYS on or after the Effective Date other than the dividend in the amount of(pound)1,600,000 declared by PEPYS on December 1, 1998 and paid to the Shareholders on January 4, 1999 and the dividend referred to in Section 5.7. Each of the Shareholders waives all rights of pre-emption over any of the PEPYS Shares conferred upon him by the articles of association of PEPYS or in any other way and undertakes to take all steps necessary to ensure that any rights of pre-emption over any of the PEPYS Shares are waived. For the avoidance of doubt, Part 1 of the Law of Property (Miscellaneous Provisions) Act 1994 shall not apply for the purposes of Section 1.1(a) and (b). 1.2 CONSIDERATION AND ARRANGER'S FEE (a) The consideration due to the Shareholders (the "Total Consideration") for the PEPYS Shares shall be the aggregate of (i) (pound)43,340,000 (the "Minimum Consideration"), which shall be discharged in accordance with the provisions of this Section 1.2; and (ii) (in the case of the Group A Shareholders only) the Earnout Price Adjustment (as defined in Section 1.3 below), if any, which shall be determined and discharged in accordance with Section 1.3 below. (b) Subject to the performance of the Sellers' obligations under Section 6.2, HCC shall deliver at Closing to each of the Group B Shareholders a loan note issued by HCC in agreed terms (an "Initial Short Term Loan Note") in accordance with Section 6.3 or, if such Group B Shareholder has so elected prior to the execution of this Agreement by notice to HCC, an Initial Short Term Loan Note and a further loan note issued by HCC in agreed terms (an "Initial Long Term Loan Note"; "Initial Short Term Loan Notes" and "Initial Long Term Loan Notes" are collectively referred to as the "Initial Loan Notes" and each as an "Initial Loan Note") in accordance with Section 6.3. The aggregate principal amounts of the 3 Initial Loan Notes or (if such Group B Shareholder has only elected to receive an Initial Short Term Loan Note, the principal amount of the Initial Short Term Loan Note) to be issued to any of the Group B Shareholders pursuant to this Section 1.2(b) shall be the amount set out against that Group B Shareholder's name in Schedule 1B. Subject to the foregoing sentence, each Group B Shareholder who has elected prior to the execution of this Agreement to receive an Initial Short Term Loan Note and an Initial Long Term Loan Note will by notice to HCC prior to the execution of this Agreement, have allocated the principal amounts payable under the Initial Loan Notes provided that the principal amount payable under the Initial Short Term Loan Note will not be less than the amount set out against that Group B Shareholder's name in Schedule 1E. The aggregate principal amount of all the Initial Loan Notes to be issued to all the Group B Shareholders shall be(pound)18,203,000 which represents the portion of the Minimum Consideration allocated to the Group B Shareholders. (c) Subject to the performance of the Sellers' obligations under Section 6.2, HCC shall deliver at Closing to each of the Group A Shareholders an Initial Short Term Loan Note or, if such Group A Shareholder has so elected prior to the execution of this Agreement by notice to HCC, an Initial Short Term Loan Note and an Initial Long Term Loan Note. The aggregate principal amounts of the Initial Loan Notes or (if such Group A Shareholder has only elected to receive an Initial Short Term Loan Note, the principal amount of the Initial Short Term Loan Note) to be issued to any of the Group A Shareholders pursuant to this Section 1.2(c) shall be the amount set out against that Group A Shareholder's name in the third column of Schedule 1C. Subject to the foregoing sentence, each Group A Shareholder who has elected prior to the execution of this Agreement to receive an Initial Short Term Loan Note and an Initial Long Term Loan Note will by notice to HCC prior to the execution of this Agreement, have allocated the principal amounts payable under the two Initial Loan Notes provided that the principal amount payable under the Initial Short Term Loan Note will not be less than the amount set out against that Group A Shareholder's name in Schedule 1E. The aggregate principal amount of all the Initial Loan Notes to be issued to all the Group A Shareholders shall be(pound)15,082,200 which represents sixty per cent. (60%) of the Minimum Consideration allocated to the Group A Shareholders. (d) Subject to the performance of the Sellers' obligations under Section 6.2, HCC shall deliver at Closing a charge in agreed terms (the "Deed of Charge") over the PEPYS Shares sold and transferred to it in accordance with Section 1.1(a) as security for the payment of the principal amounts and interest payable under the Initial Loan Notes to be issued by HCC to the Shareholders as set out in Section 1.2(b) and (c) and as security for the payment of the principal and interest payable under the Initial Loan Note to be issued by HCC to Rattner under Section 1.2(k). Pending 4 redemption of the Initial Short Term Loan Notes, HCC undertakes and covenants to the Sellers in the terms set out in Schedule 6. (e) Subject to Closing,(pound)10,054,800, which represents the remaining forty per cent. (40%) of the portion of the Minimum Consideration allocated to the Group A Shareholders (the "Deferred Consideration"), shall be allocated amongst the Group A Shareholders as set forth in the fourth column of Schedule 1C and discharged in instalments as herein provided. Each Group A Shareholder's allocated portion of the Deferred Consideration shall be discharged in four (4) annual instalments, without interest until the due date, the first instalment becoming due on January 31, 2000, and the other instalments becoming due thereafter on January 31, 2001, 2002 and 2003 respectively or, if any of such four dates is not a Business Day, on the Business Day next following (each being referred to as an "Instalment Date"). Each annual instalment ("Annual Instalment") due to the Group A Shareholders shall be in an aggregate amount equal to the following percentages of the Group A Shareholders' allocation of the Minimum Consideration: First Instalment - 14%; Second Instalment - 11%; Third Instalment - 10%; and, Fourth Instalment - 5%. Each Annual Instalment of the Deferred Consideration shall be discharged in accordance with this Section 1.2 and in the manner more specifically provided in Section 1.2(f) below. For the avoidance of doubt, each Group A Shareholder's right to receive any Deferred Consideration is not contingent upon the continued employment of such Group A Shareholder by PEPYS or RML or any other company or person. (f) Each Group A Shareholder shall receive half of each of his Annual Instalments on each relevant Instalment Date by way of the issue of the number of shares of HCC common stock of par value of $1.00 each ("HCC Common Stock") set out against that Shareholder's name in the third column of Schedule 1D and half of each of his Annual Instalments by way of the issue of a loan note on the relevant Instalment Date which loan note shall be in one of the two agreed forms (a "Form A Deferred Loan Note" and a "Form B Deferred Loan Note"). The Form A Deferred Loan Notes and the Form B Deferred Loan Notes are collectively referred to as the "Deferred Loan Notes" and each as a "Deferred Loan Note". The principal amount of each Deferred Loan Note to be issued to each Group A Shareholder under each of his Annual Instalments is set out in the fourth column of Schedule 1D. Each Group A Shareholder shall notify HCC in writing no later than ten (10) Business Days prior to each Instalment Date which one of the two forms of Deferred Loan Note he elects to have issued to him on such Instalment Date by HCC provided that if no such notice has been received by HCC from a Group A Shareholder by the date referred to above, that Group A Shareholder shall be deemed to have elected a Form A Deferred Loan Note. If any Deferred Loan Note is not issued on the relevant Instalment Date, HCC shall pay to the Group A Shareholder entitled to the Deferred Loan Note 5 liquidated damages equal to the interest that would have accrued prior to the actual date of issue had the Deferred Loan Note been issued on the relevant Instalment Date. (g) The shares of HCC Common Stock issuable to any Group A Shareholder in partial discharge of any Annual Instalment pursuant to this Section 1.2 are referred to as the "HCC Shares". All such HCC Shares and Deferred Loan Notes shall be issued free and clear from all Encumbrances and the HCC Shares shall rank pari passu in all respects with the then existing shares of HCC Common Stock. If HCC shall split, subdivide or combine the HCC Common Stock into a different number of securities of the same class at any time before the final Annual Instalment or (subject to the sentence following) a bonus, capitalisation or other issue of HCC Common Stock is made to the then current holders of HCC Common Stock generally where such issue contains (whether wholly or in part) a gratuitous element (for example, but without limitation, the discount to market price in a rights issue shall be a gratuitous element), the number of shares of HCC Common Stock issuable in any subsequent Annual Instalment shall be proportionately increased, in the case of a split or subdivision, bonus, capitalisation or other issue of HCC Common Stock to the then current holders of HCC Common Stock generally, or proportionately decreased in the case of a combination. In the event of any bonus, capitalisation or other issue of HCC Common Stock which contains only in part a gratuitous element being made to the then current holders of HCC Common Stock generally, the number of shares of HCC Common Stock issuable in any subsequent Annual Instalment shall be adjusted in a manner which in the opinion of HCC's auditors is fair and reasonable so as to avoid the entitlement to the number of shares of HCC Common Stock of the relevant Group A Shareholders being diluted by reason of the gratuitous element (such opinion, in the absence of fraud or manifest error, to be binding on all the Group A Shareholders). HCC will promptly notify the Group A Shareholders of any adjustment made in accordance with the provisions in this Section 1.2(g). No fractional shares of HCC Common Stock shall be issued. (h) The HCC Shares issued in partial discharge of any Annual Instalment shall not be registered under any applicable securities laws of the United States when issued hereunder and are required to be held subject to the holding provisions set forth under Rule 144 of the Securities Act of 1933. Subject to the following provisions of this Section 1.2(h), the certificates representing the HCC Shares issued pursuant to this Section 1.2 shall be issued and delivered to the Group A Shareholders (or as such Group A Shareholder has notified to HCC in writing not later than five Business Days in advance of the relevant Instalment Date) on the relevant Instalment Date and shall bear all appropriate legends indicating that such shares have not been registered under the applicable securities laws of the United States and may not be 6 transferred, offered or sold unless they have been registered under any such applicable securities laws or an exemption therefrom is available. HCC shall have no obligation to register any transfer of such unregistered HCC Shares or to issue or deliver any such HCC Shares to any person other than the relevant Group A Shareholder unless it receives such appropriate investment representations and warranties as HCC acting reasonably may deem necessary for the issue of such HCC Shares. (i) The parties expect that the Group A Shareholders will not become liable to pay Tax on any part of the consideration which the Group A Shareholders receive pursuant to this Agreement in the form of HCC Shares, Deferred Loan Notes or Earnout Loan Notes (excluding, for the avoidance of doubt, dividends received on such HCC Shares or interest received on such Deferred Loan Notes or Earnout Loan Notes) until the date when the Group A Shareholders dispose of such HCC Shares, Deferred Loan Notes or Earnout Loan Notes. However, recognising that such treatment is not certain, the parties have agreed as follows:- (i) subject to Section 1.2(j), in the event that a Group A Shareholder becomes liable to pay Tax on any part of the consideration which the Group A Shareholder receives pursuant to this Agreement in the form of HCC Shares, Deferred Loan Notes or Earnout Loan Notes (excluding, for the avoidance of doubt, dividends received on such HCC Shares, interest received on such Deferred Loan Notes or Earnout Loan Notes, such part of the proceeds of disposing of a loan note as represents accrued interest or such part of the proceeds of disposing of an HCC Share as represents accrued dividends, but including any part of the principal amount of the loan notes as is subject to income tax on the basis that it represents deemed interest income in the hands of the Group A Shareholder) on a date falling earlier than the date (the "Anticipated Tax Payment Date") on which capital gains tax is payable in respect of capital gains arising in the year of assessment in which the Group A Shareholder disposes of such HCC Shares, Deferred Loan Notes or Earnout Loan Notes (such Tax being described in the remainder of this clause as the "Accelerated Tax Liability"), then, provided that the date of payment as determined under Section 1.2(i)(ii) below falls after the date on which the Group A Shareholder is liable to discharge the Accelerated Tax Liability, HCC shall pay to such Group A Shareholder an amount equal to A x B x 50%, where:- (a) A is the Accelerated Tax Liability; and (b) B is an amount equal to 180 day LIBOR for the period from the date on which the Group A Shareholder is liable to discharge the Accelerated Tax Liability to the date of 7 payment as determined under Section 1.2(i)(ii) below plus 1%, multiplied by the number of days in such period and divided by 365. (ii) the payment required to be made pursuant to Section 1.2(i)(i) above shall be made as follows:- (a) to the extent that the payment relates to an Accelerated Tax Liability which would not have arisen if the issue of particular HCC Shares had been accepted as deferring the imposition of Tax until the Anticipated Tax Payment Date, the date falling eighteen months after the date of issue of such HCC Shares (or, if earlier, the Anticipated Tax Payment Date); and (b) to the extent that the payment relates to an Accelerated Tax Liability which would not have arisen if the issue of particular Deferred Loan Notes or Earnout Loan Notes had been accepted as deferring the imposition of Tax until the Anticipated Tax Payment Date, the date falling six months after the date of issue of such Deferred Loan Notes or Earnout Loan Notes (or, if earlier, the Anticipated Tax Payment Date). (j) HCC will not be required to make a payment to a Group A Shareholder pursuant to Section 1.2(i)(i) above to the extent that the Accelerated Tax Liability arises or is increased as a result of the relevant Group A Shareholder's failure to comply with the following:- (i) Each Group A Shareholder shall give proper notice to the Inland Revenue in respect of any Earnout Loan Note on or before the first anniversary of January 31 next following the year of assessment in which the Earnout Loan Note is issued to him that he elects that section 138A of TCGA is to apply to the Earnout Loan Note. (ii) Upon any Group A Shareholder's becoming aware of any notice, letter or other document (including a Tax assessment) or the taking of any action by or on behalf of the Inland Revenue from which notice, letter, document or action it appears that the Inland Revenue does not accept that the issue of HCC Shares or Deferred Loan Notes or Earnout Loan Notes will defer the imposition of Tax on such part of the consideration which the Group A Shareholder receives pursuant to this Agreement in the form of HCC Shares, Deferred Loan Notes or Earnout Loan Notes until the Anticipated Tax Payment Date, the relevant Group A Shareholder shall as soon as reasonably practicable give written notice of such notice, letter, document or action to HCC, and 8 HCC may require the Group A Shareholder to take such steps as HCC may reasonably require in order for the relevant Group A Shareholder to avoid, resist or appeal against the position taken by the Inland Revenue provided always that no Group A Shareholder shall be required by HCC to take any action or disclose to it any part of information which relates to such Group A Shareholder's Tax affairs other than those related to this matter and subject always to compliance with applicable law and regulations and provided further that HCC shall indemnify such Group A Shareholder to his reasonable satisfaction against any liability, cost, damages, awards or expenses (including, without limitation, interest and penalties and any additional Tax and all legal costs and expenses properly incurred) (together, "Costs") which may be incurred in connection with any such steps but not, for the avoidance of doubt, Costs arising in respect of such Group A Shareholder's Tax affairs other than those related to this matter. (iii) The actions which HCC may require under paragraph (ii) of this Section 1.2(j) shall include (without limitation) the relevant Group A Shareholder's applying to postpone (so far as legally possible) the payment of any Tax liability and/or appealing against any assessment to Tax to the special or general commissioners, or other court or appellate body and/or, at the request of HCC, allowing HCC to take on or take over the conduct of all or any proceedings relating to any such Tax liability, and, if HCC takes on or takes over the conduct of proceedings, the relevant Group A Shareholder shall provide such information and assistance as HCC may reasonably require in connection with the preparation for and conduct of those proceedings provided that nothing in this Section 1.2(j) shall require the relevant Group A Shareholder to commence any action before an appellate body unless HCC has first obtained an opinion from a counsel reasonably acceptable to the relevant Group A Shareholder that such action would be worthwhile because of the prospects of success or the sum of money involved. (k) HCC shall deliver at Closing to Rattner an Initial Short Term Loan Note issued by HCC in the principal amount of(pound)660,000 in accordance with Section 6.3 in satisfaction of the Arranger's Fee. Rattner confirms and acknowledges that the issue of such an Initial Loan Note to him and in the manner set out in Section 1.2(l) and its redemption in accordance with its terms shall constitute complete discharge of the payment of the Arranger's Fee to him and that HCC shall not be concerned to see that any other person who may be entitled or who may have a claim to such payment shall be paid in accordance with such person's entitlement or claims. Rattner shall, at Closing, deliver a deed of release (the "Rattner 9 Deed of Release") in agreed terms under which, among other things, he confirms and acknowledges that he has no further right to any brokerage fees, commissions, finder's fee, arranger's fees or any other financial advisory or consulting fees or Bonus (as herein defined) from HCC, PEPYS or RML in connection with the transactions contemplated under this Agreement or otherwise or, except as stated therein, make any other claim against HCC, PEPYS or RML. (l) HCC undertakes and covenants to each of the Sellers to redeem, repay or otherwise discharge in full the aggregate principal amount (together with interest thereon calculated in accordance with the terms of the Initial Short Term Loan Note issued to him) due to him under the Initial Short Term Loan Note issued to him by no later than 60 days after the Closing by electronic funds transfer in immediately available sterling funds to Midland Bank plc, Poultry and Princes Street, London EC3 (sort code: 40 05 30; account name: Clifford Chance Client Account; account number: 23181499) on behalf of such Sellers (receipt of which shall fully discharge HCC's obligations under this Section 1.2(l) and this shall be the notice requiring payment to a specified account required under the Initial Short Term Loan Notes). (m) The obligations imposed upon Cook, Lockett, Mays, Smith and Steed under the Non-Competition Agreements referred to in Section 6.2, the obligations imposed upon them in clause 14 of the service agreements referred to in Section 6.2 and the obligations imposed upon MRI and Rattner under the Other Non-Competition Agreements referred to in Section 6.2 shall cease to be binding on each of them and the Non-Competition Agreements and the Other Non-Competition Agreements shall terminate automatically if any holder of an Initial Short Term Loan Note does not receive payment from HCC in accordance with such Note of all principal and interest due to him under the Initial Loan Note issued to him pursuant to this Agreement on or before the due date and in accordance with Section 1.2(l). The provisions of this Section 1.2(m) shall not limit any other right or remedy that the holders of Initial Short Term Loan Notes may have in respect of any failure to pay principal or interest on any Initial Short Term Loan Note. 1.3 EARNOUT PRICE ADJUSTMENT (a) In addition to the portion of the Minimum Consideration to which the Group A Shareholders are entitled as set forth in Sections 1.2(c) and (e), the Group A Shareholders shall, after Closing and subject to the terms and conditions set forth herein, receive additional consideration (the "Earnout Price Adjustment" or "EPA") by way of the issue of loan notes which loan notes shall be in one of two agreed forms (a "Form A Earnout Loan Note" or a "Form B Earnout Loan Note"). The Form A Earnout Loan Notes and Form B Earnout Loan Notes are collectively 10 referred to as the "Earnout Loan Notes" and each as an "Earnout Loan Note". If the Actual Pretax Profits (as herein defined) of PEPYS calculated in accordance with Schedule 2 in respect of any Earnout Period (as herein defined) exceed the applicable Target Pretax Profits (as herein defined) of that Earnout Period, HCC shall, in respect of any Earnout Period for which the Actual Pretax Profits for that Earnout Period exceed the applicable Target Pretax Profits for that Earnout Period, issue to the Group A Shareholders on the April 30 next following that Earnout Period (or if any such date is not a Business Day, on the Business Day next following such date) Earnout Loan Notes with an aggregate principal amount equal to the amount (the "Annual Earnout Amount") of seventy-five percent (75%) of the excess of PEPYS' Actual Pretax Profits for that Earnout Period over the applicable Target Pretax Profits for that Earnout Period. (For example, the Annual Earnout Amount for any Earnout Period shall be determined as follows: Annual Earnout Amount = 0.75 x (Actual Pretax Profits - Target Pretax Profits).) Each successive twelve (12) month period ending December 31, 1999, 2000, 2001 and 2002 is an "Earnout Period". Any Earnout Loan Notes issued to any Group A Shareholders shall not be issued prior to April 30 immediately following the Earnout Period to which such notes relate and shall, regardless of the date of issue of such notes, bear interest on the principal amount thereof at the rate of interest specified under the terms of such notes from April 30 immediately following the Earnout Period to which such notes relate. (b) The Group A Shareholders' right to receive the Earnout Price Adjustment after Closing pursuant to this Section 1.3 is conditional upon the Actual Pretax Profits of PEPYS in respect of an Earnout Period exceeding the Target Pretax Profits for that Earnout Period but is not subject to the continued employment of any Group A Shareholder by PEPYS and/or RML or any other company or person. HCC shall have no obligation to issue any Earnout Loan Note for any Earnout Period unless the Actual Pretax Profits exceed the Target Pretax Profits for such Earnout Period and in no event shall any Actual Pretax Profits earned in any Earnout Period be carried forward or carried back to any other Earnout Period for the purpose of satisfying the Target Pretax Profits for such other Earnout Period. (c) For the purposes of this Section 1.3 and the calculation of the Earnout Price Adjustment and each Annual Earnout Amount, the "Actual Pretax Profits" shall be denominated in pounds sterling and shall have the meaning and shall be calculated in accordance with the provisions set out in Schedule 2. The "Target Pretax Profits" for the first Earnout Period shall be (pound)8,000,000. The Target Pretax Profits for each of the successive Earnout Periods shall be an amount in pounds sterling equal to 110% of the Actual Pretax Profits for the immediately preceding Earnout Period. 11 (d) The principal amount of each Earnout Loan Note to be issued to each Group A Shareholder in respect of any Earnout Period shall be the Annual Earnout Amount for that Earnout Period multiplied by the percentage set out against the name of that Group A Shareholder below:- GROUP A SHAREHOLDER PERCENTAGE (%) Cook 50 Lockett 25 Mays 25 (e) No earlier than April 6 and no later than April 15 immediately following an Earnout Period, HCC shall deliver a notification in writing (the "HCC Earnout Statement") to the Representative stating the Annual Earnout Amount in respect of that Earnout Period. Such HCC Earnout Statement shall have attached to it a report from the auditors of PEPYS confirming that the HCC Earnout Statement has been drawn up and the Actual Pretax Profits as stated in the HCC Earnout Statement have been calculated in accordance with the provisions of this Agreement. If the Representative does not object to the amount of the Annual Earnout Amount set out in such HCC Earnout Statement within fifteen (15) Business Days of its delivery to the Representative, the Annual Earnout Amount stated in such HCC Earnout Statement shall be deemed to have been agreed to by and shall (in the absence of fraud) be final and binding on all the Group A Shareholders in respect of the relevant Earnout Period. HCC shall procure that PEPYS provides the Representative and/or any professional adviser of the Representative to whom HCC has no reasonable objection (it being confirmed by HCC that it currently does not have any objection to Mazars Neville Russell being so appointed as an adviser of the Representative and HCC acknowledges that the mere fact that Mazars Neville Russell are currently the auditors of PEPYS would not in itself be a reasonable objection) with such access to PEPYS's and RML's internal accounting working papers and the accounting and financial records of PEPYS in respect of the relevant Earnout Period as are reasonably necessary for the review of the HCC Earnout Statement and the calculation of the Actual Pretax Profits of PEPYS in respect of the relevant Earnout Period. HCC further agrees to provide in a timely manner explanations to queries reasonably made by the Representative and/or any such professional adviser of the Representative in relation to the calculation of the Annual Earnout Amount set out in an HCC Earnout Statement. (f) If the Representative wishes to dispute the Annual Earnout Amount set out in such HCC Earnout Statement, he shall deliver a notification (the "Objection Notification") in writing to HCC within the fifteen (15) 12 Business Days of receipt of such HCC Earnout Statement stating that he, on behalf of the Group A Shareholders, disagrees with the amount of the Annual Earnout Amount set out in such HCC Earnout Statement and setting out so far as reasonably practicable the amount he proposes to be the correct Annual Earnout Amount, together with reasons for and details of the calculation relating to such proposal in reasonable detail. In the event that HCC reasonably considers that the reasons and/or calculation provided by the Representative require further explanation, the Representative shall provide such further reasons and details of such calculation as are reasonably practicable to be collated within ten (10) Business Days of receipt by the Representative of the request from HCC for such information so that such further reasons and details shall be provided within such ten (10) Business Day period. (g) If HCC does not agree with the Annual Earnout Amount proposed in the Objection Notification delivered by the Representative in accordance with Section 1.3(f) above, HCC and the Representative shall meet to discuss the objections raised and shall use all reasonable endeavours to reach agreement upon the Annual Earnout Amount. If HCC and the Representative are able to reach agreement on the amount of the Annual Earnout Amount (incorporating any agreed adjustments), such agreed amount of the Annual Earnout Amount shall be final and binding on HCC and all the Group A Shareholders. (h) If HCC and the Representative are unable to reach agreement on the Annual Earnout Amount under dispute within ten (10) Business Days of the delivery of the Objection Notification by the Representative (the "Resolution Period"), the dispute (the "Earnout Dispute") shall be referred on the written request of either HCC or the Representative (each a "Dispute Party") to a partner of a leading independent firm of chartered accountants (the "Expert") to be appointed jointly by HCC and the Representative or, failing such appointment within three (3) Business Days after either HCC's or the Representative's written request, appointed at the written request of either HCC or the Representative by the President for the time being of the Institute of Chartered Accountants in England and Wales for resolution. In relation to any Earnout Dispute which is referred to the Expert, the following shall apply:- (i) each Dispute Party shall prepare a written submission on the Earnout Dispute (the "First Submission") which shall be delivered to the Expert no later than fifteen (15) Business Days after the day on which such Expert is appointed and a copy of the First Submission prepared by each Dispute Party shall be delivered by that Dispute Party to the other Dispute Party within the fifteen (15) Business Day period referred to above; 13 (ii) each Dispute Party shall be entitled to prepare a response to the other's First Submission which shall be submitted to the Expert no later than ten (10) Business Days after the date on which that Dispute Party received a copy of the other Dispute Party's First Submission pursuant to paragraph (i) above, with a copy of such response delivered to the other Dispute Party; and (iii) following submission of the written statements by HCC and the Representative as contemplated by paragraphs (i) and (ii) above, neither HCC nor the Representative shall be entitled to make any further statements except insofar as the Expert so requests or HCC and the Representative otherwise agree. (i) The Expert shall, within forty-five (45) Business Days of his appointment, decide and give his decision in writing as to what the Annual Earnout Amount under dispute should be in order for it to be calculated in accordance with this Agreement. Any such decision shall (in the absence of manifest error) be final and binding on HCC and all the Group A Shareholders and shall be given by the Expert so appointed as an Expert and not as an arbitrator. Each of HCC and the Group A Shareholders shall provide the Expert with all such information and access to all such documents as the Expert may reasonably request for the purpose of reaching his decision. In giving his decision on the Earnout Dispute, the Expert shall provide reasons therefor. For the avoidance of doubt, if either HCC or the Representative fails to prepare a First Submission or a response to the other's First Submission as contemplated in Sections 1.3(h)(i), (ii) and (iii) the Expert shall nevertheless be entitled to determine the Earnout Dispute on the basis of the information and documents available to him. (j) The costs of each Dispute Party (other than the costs of the Expert) shall, unless the Expert otherwise determines, be borne by that Dispute Party. The cost of the Expert shall be borne in accordance with a direction made by such Expert at his discretion provided that unless the Expert in his discretion otherwise determines, the costs of the Expert shall be borne by the Group A Shareholders if the Expert agrees with the Annual Earnout Amount stated in the HCC Earnout Statement delivered by HCC in accordance with Section 1.3(e). (k) Each Group A Shareholder shall notify HCC in writing no later than three (3) Business Days after the date of determination of the Final Earnout Amount which one of the two forms of the Earnout Loan Notes he elects to have issued to him on such Instalment Date by HCC provided that if no such notice has been received from a Group A Shareholder by the date referred to above, that Group A Shareholder shall be deemed to have elected a Form A Earnout Loan Note. As soon as reasonably practicable following, and in any event not later than ten 14 (10) Business Days after the determination of the Final Annual Earnout Amount in respect of an Earnout Period in accordance with the foregoing provisions of this Section 1.3, HCC shall issue to each Group A Shareholder an Earnout Loan Note in the principal amount equal to such Final Annual Earnout Amount multiplied by the percentage set out against the name of that Group A Shareholder in Section 1.3(d) above. The "Final Annual Earnout Amount" in respect of an Earnout Period shall be:- (i) the Annual Earnout Amount stated in the HCC Earnout Statement if no Objection Notification is delivered within the time period specified in Section 1.3(f); failing which (ii) the Annual Earnout Amount agreed between HCC and the Representative as contemplated under Section 1.3(g); failing which (iii) the Annual Earnout Amount determined by the Expert in accordance with Section 1.3(i). (l) For the purposes of this Section 1.3, the Representative means the Group A Representative in accordance with Section 8.4. 1.4 ESCROW AGREEMENT No later than ten (10) Business Days prior to the due date for the payment of the principal amounts under the Initial Short Term Loan Notes, each Seller and HCC shall enter into an escrow agreement in agreed terms (an "Escrow Agreement") and Mourant & Co. Capital Trustees Limited (the "Escrow Agent"). In accordance with the terms of each Initial Short Term Loan Note to be delivered by HCC to each Seller at the Closing, HCC shall, on the redemption date of such Initial Short Term Loan Note, deposit on behalf of the relevant Seller and out of the principal amount to be paid under such Initial Loan Note, an amount in immediately available sterling funds equal to the amount set out against that Seller's name in Schedule 1E with the Escrow Agent instead of making the payment thereof to that Seller, which amount is equal to five per cent. (5%) of such Seller's share of the Minimum Consideration or (in the case of Rattner) the Arranger's Fee referred to in Section 1.2(k) such amount to be held on the terms and subject to the conditions set out in the relevant Escrow Agreement. The total aggregate amount to be so deposited with the Escrow Agent shall be (pound)2,200,000. 1.5 NO RIGHT OF SET-OFF (a) For the avoidance of doubt, HCC hereby acknowledges and agrees that all payments to be made by or on behalf of HCC to any of the Sellers as contemplated under or pursuant to this Agreement and any other document to be entered into between HCC and, amongst others, that 15 Seller or delivered by HCC to that Seller as contemplated under this Agreement shall not be subject to any rights of set-off, withholding, deduction or counterclaim (other than in respect of any amount payable by that Seller to HCC under a final and unappealable judgement given in its favour) save (i) in accordance with the terms of the Escrow Agreement to which that Seller is a party; (ii) as required by law; or (iii) to the extent specified otherwise in this Agreement or any other document contemplated by this Agreement. (b) For the avoidance of doubt, each Seller hereby acknowledges and agrees that all payments to be made by or on his behalf to HCC as contemplated under or pursuant to this Agreement and any other document to be entered into between HCC and, amongst other things, that Seller or delivered by the Sellers to HCC as contemplated under this Agreement shall not be subject to any rights of set-off, withholding, deduction or counterclaim (other than any amount payable by HCC to the relevant Seller under a final and unappealable judgement given in his favour) save as required by law or to the extent specified otherwise in this Agreement or any other document contemplated by this Agreement. 1.6 CONDUCT OF BUSINESS DURING THE EARNOUT PERIODS (a) Each of HCC and the Group A Shareholders agrees that (subject to applicable law and regulation) such party shall use all reasonable endeavours to ensure that none of PEPYS, RML, or any other subsidiary, subsidiary undertaking or any associated undertaking of PEPYS will during the period from Closing to December 31, 2002 enter into any transaction (not being in the normal course of the relevant company's business or the development of the relevant company's business) the principal or primary purpose of which is to: (i) inflate the Actual Pre-tax Profits of PEPYS for any period; (ii) reduce, defer or divert the Actual Pre-tax Profits of PEPYS for any such period; or (iii) increase the losses of PEPYS for any such period. (b) Without limiting the generality of Section 1.6(a), each of HCC and the Group A Shareholders agrees that its obligations under Section 1.6(a) include an obligation on each such party to use all reasonable endeavours to ensure that: (i) neither PEPYS nor RML shall dispose of the whole or any substantial part of its business, undertaking or assets (other than, in the case of assets, in the normal course of trading) before December 31, 2002 where to do so would or is reasonably likely 16 to reduce the Actual Pre-tax Profits during any Earnout Period or to increase the Target Pretax Profits in any Earnout Period; (ii) PEPYS shall not dispose of the whole or any substantial part of the issued share capital of RML where to do so would or is reasonably likely to reduce the overall Actual Pre-tax Profits during any Earnout Period or to increase the Target Pretax Profits in any Earnout Period; and (iii) there is not a winding up of PEPYS or RML (other than a members' voluntary winding up of PEPYS or RML for the purposes of a good faith reconstruction or reorganisation) provided that nothing in this paragraph (iii) shall require HCC nor any of the Group A Shareholders to inject any funding or provide any form of financial support to PEPYS or RML at any time. (c) For the avoidance of doubt, the Group A Shareholders agree with HCC that Section 1.6(a) shall not prevent: (i) any other member of the HCC Group obtaining the best terms obtainable (through commercial negotiations on an arms length basis) from PEPYS or RML in the normal course of trading (including, without limitation, for the sharing of brokerage and other fees consistent with past practice prior to the date of this Agreement); or (ii) any other member of the HCC Group choosing at any time and from time to time to place any of its business with a person other than PEPYS or RML; or (iii) any other member of the HCC Group enjoying the full benefit of all its rights under or in connection with any agreement or other arrangement (present or future) between or involving such member and PEPYS or RML (including, without limitation, all such rights to bring any claims whether in contract, tort or on any other ground whatsoever). 17 ARTICLE 2 WARRANTIES, COVENANTS AND LIMITATION ON LIABILITY 2.1 SELLERS' WARRANTIES AND COVENANTS (a) Each of the Sellers severally warrants to HCC that each of the warranties set out in Schedule 3 given by the Sellers (together the "Warranties" and each a "Warranty") is accurate in all respects and not misleading at the date of this Agreement and as at Closing. (b) The Sellers accept that HCC is entering into this Agreement in reliance upon the Warranties made by the Sellers with the intention of inducing HCC to enter into this Agreement and that accordingly HCC has been induced to enter into this Agreement. HCC acknowledges that in entering into this Agreement it has not relied on and has not been induced to enter into this Agreement on the basis of any warranties or representations other than those set out in this Agreement or any other document or certificate delivered by any Seller to it at Closing. (c) Each of the Warranties shall be construed as a separate and independent warranty and (except where expressly provided to the contrary) shall not be limited or restricted by reference to or inference from the terms of any other Warranty or any other terms of this Agreement or any terms in any other document or certificate referred to in this Agreement. (d) In the event that the Sellers (or any of them) are in breach of Section 2.1(a), the Sellers covenant with HCC that the Sellers will, at the direction of HCC, pay to HCC or, as the case may be, PEPYS, RML or PMS an amount equal to: (i) either:- (A) the amount by which the value of an asset (including one warranted to exist but not in fact existing) or contract of PEPYS, RML or PMS is or becomes less than its value would have been if the Warranties had not been breached or not been untrue or misleading; and (B) the amount of any liability or increase in any liability which PEPYS, RML or PMS has incurred or is or becomes subject to which it would not have incurred or become subject to or which would not have increased if the Warranties had not been breached or not been untrue or misleading; or (ii) the amount (the "Reduction") by which the aggregate value of the issued share capital of PEPYS is or becomes less than it would have been if the Warranties had not been breached or not been 18 untrue or misleading. For this purpose all of the Sellers acknowledge and agree with HCC that the aggregate consideration payable by HCC under this Agreement was calculated using a price earnings multiple (based on the adjusted pre-Tax earnings of the Group) of 7.5 and accordingly the Reduction shall be calculated on the basis of the same price earnings multiple as applied to the reduction in pre-Tax earnings of the Group caused by such breach of Warranty; and (iii) together, in each case with an amount equal to all costs and expenses incurred directly or indirectly as a result of or in connection with any deficiency or diminution in the PEPYS Shares Value or in value of any asset or contract or any liability or increased liability, as the case may be, referred to in paragraph (i) or (ii). For the avoidance of doubt, amounts payable under this Section 2.1(d) shall be calculated without reference to the rules of general law relating to the claims for damages for breach of Warranty but shall be subject to the provisions of Section 2.2 and Schedule 4. (e) (i) If any amount payable by the Sellers to HCC pursuant to this Agreement (including, without limitation, any payments under Section 2.1(d) or 8.1) is subject to United Kingdom Taxation in the hands of HCC, such additional amounts shall be paid by the Sellers to HCC so as to ensure that the net amount received by HCC is equal to the full amount payable to HCC under this Agreement. All amounts payable by the Sellers pursuant to this Agreement (including, without limitation, any payments under Section 2.1(d) or 8.1) shall be paid free and clear of all deductions or withholdings, save as may be required by United Kingdom law. If any Seller is required by United Kingdom law to make any deduction or withholding from any such payment, such additional amounts shall be paid by the Seller to HCC so as to ensure that the net amount received by HCC is equal to the full amount payable to HCC under this Agreement. (ii) HCC shall take such steps as are reasonable to avoid any such Tax liability as is referred to in Section 2.1(e)(i) (including claiming so far as practicable that any such payment as is made by the Sellers to HCC is a reduction of the purchase price payable for the PEPYS Shares). If HCC is entitled to obtain any Relief (as defined in the Tax Covenant) in respect of any amount that has given rise to a payment under this Section 2.1(e), HCC shall use reasonable endeavours to obtain such Relief as soon as possible and shall upon receipt of such Relief promptly refund to the Sellers such amount, not exceeding the amount paid under this Section 2.1(e) as shall leave HCC in no better and no worse 19 position than if no payment under Section 2.1(e)(i) had been due. Provided that HCC will be entitled to arrange its Tax affairs in whatever manner it thinks fit and, in particular, will not be obliged to claim Relief under this Section 2.1(e)(ii) in priority to any other Relief available to it and HCC shall not be obliged to disclose any information regarding its Tax affairs or computations to the Sellers. (f) The Sellers undertake to indemnify HCC against all reasonable costs (including legal costs on an indemnity basis as defined in Order 62 of the Rules of the Supreme Court), expenses or other liabilities which HCC may properly incur either before or after the commencement of any action in connection with:- (i) the settlement of any claim that any of the Warranties are untrue or misleading or may have been breached or that any sum is payable under Section 2.1(d) or 8.1; (ii) any legal proceedings in which HCC claims that any of the Warranties are untrue or misleading or have been breached or that any sum is payable under Section 2.1(d) or 8.1 and in which judgement on that issue is given for HCC; or (iii) the enforcement of any such settlement or judgement. (g) The representations and warranties made by the Sellers in this Agreement or in any document or certificate executed and, at Closing, delivered by any of them shall survive the Closing Date and the consummation of the transactions contemplated hereby regardless of any investigation made by HCC save as provided in Section 2.2(c). Any provision of this Agreement and any other documents referred to in it which is capable of being performed after but which has not been performed at or before Closing shall remain in full force and effect notwithstanding Closing. 2.2 HCC'S REMEDIES AND SELLERS' LIMITATION ON LIABILITY (a) Subject to Section 2.2(b), (c) and (d), HCC shall be entitled to claim that any of the Warranties has or had been breached or is or was misleading and, without limitation, to claim under any covenant or indemnity even if HCC knew or could have discovered on or before Closing that the Warranty in question had been breached or was misleading and Closing shall not in any way constitute a waiver of any of HCC's rights. (b) HCC shall not be entitled to claim that any facts and/or circumstances cause any of the Warranties to be breached or renders any misleading if such facts and/or circumstances have been fairly disclosed to HCC in the 20 letter (and accompanying Disclosure Bundle) dated the date of this Agreement and written by the Sellers to HCC and delivered to HCC before the execution of this Agreement (the "Disclosure Letter") in the absence of any fraud, fraudulent misrepresentation or dishonesty on the part of any of the Sellers or their agents or advisers in relation to such facts and/or circumstances to which the disclosure relates and provided further that HCC shall not be precluded from claiming that a Warranty or Warranties have been breached to the extent that the facts or circumstances disclosed relate to Tax on income, profits or gains earned, accrued or received on or before December 31, 1998 or Tax in respect of an event occurring on or before December 31, 1998. (c) The Sellers shall not be liable for any losses in respect of any claim for breach of a Warranty:- (i) if and to the extent that either Stephen L. Way or Frank J. Bramanti had actual knowledge immediately prior to HCC's execution of this Agreement that the Warranty would be untrue when given by reason of the matter or circumstance giving rise to such claim and HCC did not disclose such knowledge to the Sellers prior to HCC's execution of this Agreement; and (ii) if and to the extent that losses which result from a breach of such Warranty are reasonably foreseeable, provided that notwithstanding the foregoing provisions of this Section 2.2(c) the Sellers shall remain liable for losses in respect of a claim for breach of Warranty even if Stephen L. Way or Frank J. Bramanti had actual knowledge immediately prior to HCC's execution of this Agreement that the Warranty would be untrue when given by reason of Tax on income, profits or gains earned, accrued or received on or before December 31, 1998 or Tax in respect of an event occurring on or before December 31, 1998. (d) The Sellers shall not be liable in respect of claims under the Warranties if and to the extent that the limitations set out in Schedule 4 apply in the absence (except as expressly stated in that Schedule) of any fraud, fraudulent misrepresentation or dishonesty in relation to that breach on the part of the Sellers or their agents or advisers. (e) Except as stated expressly in this Section 2.2, this Section 2.2 shall not limit any other section of this Agreement or any other document or certificate referred to in this Agreement or any other right, power or remedy otherwise provided by law. 2.3 If a Warranty is untrue, inaccurate, incomplete or misleading and that Warranty also constituted a misrepresentation which HCC relied on in entering into this Agreement: 21 (a) the relevant Seller shall not be liable (in equity or tort or under the Misrepresentation Act 1967 or in any other way) in respect of the misrepresentation; and (b) HCC may not terminate or rescind this Agreement after Closing as a result of a breach of the Warranty or misrepresentation. 2.4 Except as stated in Schedule 4 or this Section 2, none of the restrictions contained in this Section 2 affect a Seller's liability or HCC's rights or remedies in respect of fraudulent misrepresentation or fraud or dishonesty. 2.5 Any payment by any Seller pursuant to this Section 2 or Section 8.1 shall, so far as possible, take effect by way of a repayment of the consideration payable under this Agreement. 2.6 Without limitation of Section 2.2(b), it is hereby agreed that (in the absence of any fraud, fraudulent misrepresentation or dishonesty on the part of the Sellers or their agents or advisers in relation to such disclosure) the disclosure relating to the Unicover account in paragraph 1.12(a) of the Disclosure Letter shall be deemed to be fair disclosure of the matters and circumstances described or referred to in that paragraph as at the date of this Agreement. 22 ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF HCC 3.1 HCC warrants to the Sellers that HCC is a corporation duly incorporated, validly existing and in good standing under the laws of Delaware and the execution, delivery and performance by HCC of this Agreement and every other agreement entered into by it in connection with the transactions contemplated hereby (the "Total Agreements"), and the consummation by HCC of the transactions contemplated hereby and thereby are within the corporate powers of HCC and have been duly authorised by all necessary corporate action. This Agreement and each other agreement entered into by it in connection with the transactions contemplated hereby constitutes, or upon execution will constitute, valid and binding agreements of HCC except as may be limited by bankruptcy, insolvency or other laws affecting the enforcement of creditors' rights generally or by general principles of equity. 3.2 HCC warrants to the Sellers that Middle East Insurance Brokers, Ltd. ("MEIB") in the financial year ended December 31, 1998 made an operating profit which profit will be reflected in its audited accounts for such financial period and is budgeted on reasonable grounds based on the current insurance and reinsurance market conditions to make an operating profit in its current financial year provided that no warranty is hereby given as to the outcome. 3.3 HCC warrants to the Sellers that neither the execution and delivery by HCC of the Total Agreements nor compliance by HCC with the provisions thereof: (a) violates (i) any presently existing statute or governmental regulation (including, without limitation, insurance statutes and regulations) of the United States or any state (an "Applicable State") in which HCC or any of its subsidiaries is domiciled, is resident, has its principal place of business or its principal assets, or (ii) any provision of the certificate of incorporation or bylaws of HCC; (b) violates any order or decree of any court or governmental instrumentality to which HCC is subject; (c) conflicts with or results in the breach of, or constitutes a default under, any indenture, mortgage, deed of trust, material agreement or other material instrument to which HCC is a party or by which HCC is bound (a "HCC Material Agreement"); or (d) results in the creation or imposition of any lien upon any of the property of HCC under any HCC Material Agreement except in favour of the Sellers. 3.4 There are no actions, suits or proceedings pending or threatened against or affecting HCC before any court, arbitrator or governmental or administrative body or agency (a) seeking to restrain, enjoin, prevent the consummation of, or otherwise challenge the transactions contemplated by the Total Agreements, or (b) which, if adversely determined, could have a material adverse effect on HCC. 3.5 To the best of HCC's knowledge, no action of or filing with any authority of the United States or an Applicable State is required to be obtained or made by HCC to authorise or otherwise is required to authorise, or to make valid or legally 23 binding the Deed of Charge referred to in Section 1.2(d), or is otherwise required in connection with the execution, delivery, performance, validity or enforceability by HCC of, the Deed of Charge. 24 ARTICLE 4 COVENANTS OF THE SELLERS 4.1 NECESSARY CONSENTS The Sellers shall use commercially reasonable efforts to obtain, and shall cooperate with HCC in HCC's efforts to obtain, such written consents and take such other actions as may be necessary or appropriate to allow PEPYS and RML or any successor to carry on its business as a subsidiary of HCC after the Closing Date provided always that such efforts and actions shall not involve the Sellers or any of them incurring any significant expenditure of time or money. 4.2 REGULATORY APPROVAL Each of the Sellers shall execute and file, or join in the execution and filing of, every application or other document that may be necessary in order to obtain the authorisation, approval or consent of any Governmental Authority (as herein defined) which may be reasonably required, or which HCC may reasonably request, in connection with the consummation of the transactions provided for in this Agreement provided always that such efforts and actions shall not involve the Sellers or any of them incurring any significant expenditure of time or money. Subject to the proviso in the sentence above, each of the Sellers shall use commercially reasonable efforts to obtain or assist HCC in obtaining all such authorisations, approvals and consents. 4.3 INVESTMENT REPRESENTATION Each Group A Shareholder represents and warrants that the HCC Shares to be issued to him pursuant to this Agreement will be acquired solely for his account for investment purposes only and not with a view to the distribution thereof. Each Group A Shareholder covenants that he will not participate, directly or indirectly, in any distribution or transfer of such HCC Shares, nor will he participate, directly or indirectly, in underwriting any such distribution of HCC Common Stock within the meaning of the Securities Act. Each Group A Shareholder warrants and confirms that he has such knowledge and experience in business matters that he is capable of evaluating the merits and risks of an investment in HCC and the acquisition of the shares of HCC Common Stock, and is making an informed investment decision with respect thereto. Each Group A Shareholder confirms and acknowledges that he has been informed by HCC that the HCC Shares to be issued pursuant to this Agreement and the documents to be executed in connection herewith will not be registered under the applicable securities laws of any Governmental Authority (including, without limitation, the Securities Act) at the time of their issue and can be sold only upon registration under the applicable securities laws of any Governmental Authority (including, without limitation, the Securities Act) or subject to the availability of an appropriate exemption therefrom. Each Group A Shareholder further confirms and acknowledges that he has been informed that HCC will be under no obligation to register the HCC Shares under the applicable securities 25 laws of any Governmental Authority (including, without limitation, the Securities Act) or except as specifically provided herein to take any steps to assist him to comply with any applicable exemption under the applicable securities laws of any Governmental Authority (including, without limitation, the Securities Act) with respect to the sale or other transfer of the HCC Shares. 4.4 INCOME TAX Each Seller undertakes that, in the event that HCC, HCC UK, PEPYS, RML or any other affiliate of HCC becomes liable to pay United Kingdom income tax in respect of all or any part of the Arranger's Fee, the Minimum Consideration or the Earnout Price Adjustment received by such Seller which income tax discharges or reduces any Tax such Seller would otherwise have to pay, the Seller will pay to HCC (by way of a refund of such consideration) an amount equal to the income tax referable to such consideration. 26 ARTICLE 5 COVENANTS OF HCC 5.1 LISTING OF HCC COMMON STOCK HCC shall use all reasonable efforts to cause the HCC Shares to be issued to the Group A Shareholders from time to time pursuant to this Agreement to be approved for listing on the New York Stock Exchange as soon as reasonably practicable and, in any event, within 90 days following the issue of such HCC Shares. 5.2 RULE 144 For so long as any HCC Share held by any Group A Shareholder is required to be sold pursuant to Rule 144 of the Securities Act, HCC shall file such reports as are necessary to satisfy the current public information requirement contained in Rule 144(c) of the Securities Act and take such further actions as may be required pursuant to such Rule 144 to allow the continued sale of such HCC Shares by such Group A Shareholder thereunder. 5.3 EXISTING EMPLOYEE BENEFITS Save as contemplated by Article 7, HCC agrees to ensure that each of the employees of PEPYS or RML (other than those Sellers who are employees and who will enter into new service agreements at Closing as contemplated by Section 6.2(d)(iii)) at the date of this Agreement (but excluding, for the avoidance of doubt, any future employees of PEPYS and RML)) shall be employed on the same terms and conditions and shall continue to receive employee benefits (including, without limitation, medical insurance, company car and pension contribution) on a basis at least equivalent to those being provided to them at the date of this Agreement for so long as such person remains an employee of the relevant company provided that this shall not apply if and to the extent that: (a) such terms and conditions have not been disclosed in all material respects in the Disclosure Letter; or (b) such employee agrees otherwise with PEPYS or RML. 5.4 ACQUISITION OF MRI HCC agrees with the Group A Shareholders that in the event that HCC acquires or persons acting in concert with HCC acquire (directly or indirectly) control over more than fifty (50) per cent. of the voting issued share capital of MRI, HCC shall procure that MRI complies with its obligations under the Deed of Appointment and the Other Non-Competition Agreement to which it is a party. 5.5 VOTING POWERS IN PEPYS 27 HCC undertakes to the Group A Shareholders that:- (a) it will, in the period from Closing until and including the later of the date on which the Earnout Loan Notes in respect of the first Earnout Period are issued to the Group A Shareholders and the date on which the Deferred Loan Notes and the HCC Shares representing the first Annual Instalment are issued to the Group A Shareholders hold directly the greater part of the voting power in PEPYS; and (b) if at any time from the date referred to in paragraph (a) above until and including the date on which the last of the HCC Shares, Deferred Loan Notes or Earnout Loan Notes are issued, HCC ceases to hold directly the greater part of the voting power in PEPYS, HCC will pay to each Group A Shareholder such amount as, after taking into account any payments made to that Group A Shareholder pursuant to Section 1.2(i), will compensate the Group A Shareholder (on an after Tax basis) for any Tax (and any interest and penalties associated with such Tax) which that Group A Shareholder suffers in consequence of HCC's ceasing to hold the greater part of the voting power in PEPYS coupled with the Group A Shareholder's entering into this Agreement provided that the maximum liability of HCC under this paragraph (b), together with Section 1.2(i) shall not exceed(pound)5 million and, where HCC's liability would have exceeded(pound)5 million but for this proviso, HCC's liability to each Group A Shareholder shall be reduced in proportion to what would have been their respective entitlements but for this proviso. 5.6 GROSSING UP (a) HCC undertakes to each of the Sellers that it will not issue a reduced number of HCC Shares or a reduced principal amount of Initial Loan Notes or Deferred Loan Notes or Earnout Loan Notes (together, the "Notes") by reason of any deduction or withholding on account of Tax save as may be required by law. HCC undertakes to each Seller that, subject to Sections 5.6(b) and 5.6(c) below, in the event that HCC is required by law to issue to the Seller a reduced number of HCC Shares or a reduced principal amount of Notes as a result of the imposition of withholding tax in the United States in respect of such issue, HCC will issue to the Seller such additional HCC Shares or Notes of the same description as will leave the Seller, after such withholding or deduction, with the number of HCC Shares or the principal amount of Notes (as the case may be) specified in this Agreement. In that event, the relevant Seller will use all reasonable endeavours to obtain a credit against his Tax liabilities or other Tax relief for the withholding or deduction giving rise to the issue of the additional HCC Shares or Notes and, upon obtaining the benefit of such credit or other Tax relief, shall pay to HCC such amount as will leave him in no better and no worse position than he would have been in had no such withholding or deduction been required. 28 (b) The Seller may not claim under Section 5.6(a) to the extent that the withholding or deduction would not have arisen had such Seller, throughout the period from Closing until and including the date on which the relevant HCC Shares or Notes were issued: (i) if an individual, remained resident in the United Kingdom for United Kingdom Tax purposes or been a resident or a citizen of the United States for United States Tax purposes or, if a corporation, been a company incorporated in the United States; and (ii) filed in good time all forms, claims or other documents reasonably requested by HCC to be lodged with any Tax authority or other person (and complied with all other procedures reasonably requested by HCC) in order to secure the benefit of any exemption from or reduction in withholding. (c) The Seller may not claim under Section 5.6(a) to the extent that the withholding or deduction arises under the laws of a jurisdiction other than the United States or the United Kingdom and is attributable to the existence of a connection between the Seller and that jurisdiction other than through the holding of his HCC Shares or Notes provided that this Section 5.6(c) shall not apply to prevent a Seller from making such a claim where the Seller's connection with the relevant jurisdiction arises out of the Seller's employment by HCC or any of its subsidiaries. (d) Section 5.6(b)(i) above shall not preclude a Seller who is an individual from claiming under Section 5.6(a) above to the extent that his failure to be resident in the United Kingdom is due to his employment by HCC or any of its subsidiaries. 5.7 DIVIDENDS HCC shall procure that PEPYS shall (and HCC shall do everything to ensure that PEPYS and RML shall take all lawful action required to) pay after April 5, 1999 and on or before May 15, 1999 a dividend with a record date of December 31, 1998 (the "Record Date") of an aggregate amount in cash (the "Dividend Payment") equal to: (a) the amount of the consolidated retained profit of PEPYS as shown in PEPYS' audited accounts for the eight months ending on December 31, 1998 as calculated in accordance with accounting policies, principles, bases and methods complying with UK GAAP on a basis consistent with the preparation of the PEPYS consolidated audited accounts as of April 30, 1998; plus (b) the amount of any increase in such earnings resulting from making such adjustments to such accounting policies, principles, bases and methods 29 as are necessary in order for such accounts to comply with U.S. GAAP as applied by HCC in its audited consolidated accounts for the period ending on the same day; but less: (i) an amount (if any) equal to any Tax resulting from the adjustments provided for in paragraph (b) above; and (ii) (pound)300,000, with such dividend (rounded down to the nearest pound) to be divided amongst each of those entitled thereto on such basis as bears the same proportion to the Dividend Payment as the relevant person's PEPYS Shares on the Record Date bear to all of the PEPYS Shares in issue on that date. For the avoidance of doubt, HCC shall, without prejudice to the generality of the foregoing, ensure that PEPYS has sufficient distributable reserves and cash resources (whether as a result of receipt of a dividend from RML or otherwise) to make the Dividend Payment. HCC will procure that any dividend paid by RML in order to finance the above dividend will either be paid after April 5, 1999 or be paid under a valid group income election. 5.8 DISPOSAL OF THE FLAT AT TRINITY SQUARE Immediately prior to Closing, RML granted to the Sellers a right to acquire the property located at Flat 8, 15 Trinity Square, London EC3 (the "Flat") on arms length terms customary for the sale and purchase of residential property such right being exercisable by all (or, if they so agree, some only) of Cook, Mays, Lockett, Smith and Steed (such Sellers exercising this right being together the "Purchasing Sellers"). The right to acquire the Flat is exercisable by the Purchasing Sellers at a price of (pound)380,000 such price being acknowledged to reflect fairly current market value at any time during the period of 3 months from Closing by the Purchasing Sellers serving written notice to that effect on RML. HCC agrees and undertakes to procure that, both before and after receipt of such notification, RML and PEPYS shall do all acts and things as are reasonably necessary in order to give full effect to the right granted to the Purchasing Sellers and to procure that, without limitation, any necessary board and shareholder resolutions of RML are passed (including resolutions pursuant to section 320 of the Companies Act 1985) to approve the exercise of this right and the sale and purchase of the Flat as contemplated by this clause. 30 ARTICLE 6 CLOSING 6.1 COMPLETION The completion of the sale and purchase of the PEPYS Shares under this Agreement (the "Closing") shall take place at 7.00 a.m. on the date of this Agreement or such other date as may be agreed to by the Representative and HCC (the "Closing Date") at the offices of Slaughter and May at 4 Coleman Street, London. 6.2 CLOSING OBLIGATIONS OF THE SELLERS At Closing, the Sellers shall do the following things:- (a) each of the Shareholders shall deliver to HCC:- (i) duly executed transfers in respect of such Shareholder's PEPYS Shares in favour of HCC or such person as HCC may have nominated in advance of Closing and share certificates for the PEPYS Shares in the name of the relevant transferors and any power of attorney under which any transfer is executed on behalf of such Shareholder or nominee; (ii) a consent from MRI in accordance with the articles of association of PEPYS to enable HCC or its nominees to be registered as holders of the PEPYS Shares; and (iii) powers of attorney in agreed terms; (b) deliver to HCC a Tax Covenant in agreed terms (the "Tax Covenant") duly executed by each of them; (c) the Sellers shall procure the delivery to HCC (or any person whom HCC may nominate) such of the following as HCC may require (such requirements having been notified to the Sellers' Solicitors (as defined herein) prior to the date of this Agreement) and that the remainder of the following is held to the order of HCC:- (i) the statutory books (which shall be written up to but not including the Closing Date), the certificate of incorporation (and any certificate of incorporation on change of name), common seal (if any) and corporate, accounting, business and tax records of each member of the Group and share certificates in respect of the issued share capital of each such member; 31 (ii) a copy of the minutes of a duly held meeting of the directors of MRI authorising the execution of this Agreement and the Tax Covenant (such copy minutes being certified as correct by its secretary); and (iii) the title deeds relating to the Property Leases. (d) the Sellers shall procure board meetings of each member of the Group to be held at which:- (i) in the case of PEPYS, it shall be resolved that each of the transfers relating to the PEPYS Shares shall be approved for registration and (subject only to the transfer being duly stamped) each transferee registered as the holder of the PEPYS Shares concerned in the register of members; (ii) the accounting reference date shall be changed to December 31; (iii) the entry by PEPYS or RML into the service agreements in agreed terms with each of Cook, Mays, Lockett, Steed and Smith shall be approved; (iv) entry into by PEPYS and RML of the Non-Competition Agreements in agreed terms ("Non-Competition Agreements") with each Shareholder other than Axel and MRI shall be approved; (v) entry into by PEPYS and RML of the Non-Competition Agreements in agreed terms ("Other Non-Competition Agreements") with MRI and Rattner shall be approved; (vi) entry into by RML of the Deed of Appointment with MRI shall be approved; and (vii) entry into by PEPYS and RML of each Deed of Release (as defined herein) referred to in Section 6.2(g) shall be approved; The Sellers shall procure that minutes of each duly held board meeting, certified as correct by the secretary of the relevant company and the documents referred to above are delivered to HCC; (e) each Seller other than Axel, MRI and Rattner shall deliver to HCC a Non-Competition Agreement executed by him, PEPYS and RML and each of MRI and Rattner shall deliver to HCC an Other Non-Competition Agreement duly executed by him, PEPYS and RML; (f) Rattner shall deliver the Rattner Deed of Release duly executed by him; 32 (g) the Sellers shall deliver or cause to be delivered a counterpart of a deed of release ("a Deed of Release") in the agreed form duly executed by each Seller (other than Rattner and MRI), PEPYS and RML, providing general releases in favour of PEPYS, RML and HCC; (h) MRI shall deliver to HCC a counterpart of a deed of appointment duly executed by it pursuant to which MRI shall appoint RML as MRI's exclusive broker in the United Kingdom in agreed terms ("Deed of Appointment"); (i) the Sellers shall deliver to HCC a counterpart of the Deed of Appointment duly executed by RML; (j) each of MRI, Axel and Rattner shall deliver to HCC a certified copy of the process agent appointment letter in agreed terms duly executed by him pursuant to which he appoints his process agent in accordance with Section 10.14; (k) MRI shall deliver to HCC a legal opinion from counsel to MRI in agreed terms; and (l) the Seller shall deliver to HCC the certificate duly signed by each of the Sellers and PEPYS in relation to PEPYS' ownership of shares in RML in agreed terms. 6.3 HCC shall, subject to the performance by the Sellers of their obligations under Section 6.2:- (a) issue an Initial Short Term Loan Note to each Shareholder who is to receive only an Initial Short Term Loan Note in accordance with Section 1.2; (b) issue an Initial Short Term Loan Note and an Initial Long Term Loan Note to each Shareholder who has elected to receive both in accordance with Section 1.2; (c) issue an Initial Short Term Loan Note to Rattner in accordance with Section 1.2; (d) duly execute and deliver the Deed of Charge to the Sellers; (e) deliver a certified copy of a process agent appointment letter duly executed by it pursuant to which it appoints its process agent in accordance with Section 10.15; (f) deliver to the Sellers a legal opinion from Winstead Sechrest & Minick P.C. in agreed terms; 33 (g) deliver to the Sellers a counterpart of the Tax Covenant duly executed by it; (h) deliver to the Sellers a counterpart of each Non-Competition Agreement and Other Non-Competition Agreement duly executed by it; (i) deliver to the Sellers a counterpart of each Deed of Release and the Rattner Deed of Release duly executed by it; and (j) deliver minutes of a duly held board meeting of HCC approving and authorising the execution of this Agreement and the other documents contemplated under this Agreement and to which HCC is a party, certified as correct by its secretary. 6.4 HCC shall not be obliged to complete this Agreement unless each Seller complies fully with the requirements of Section 6.2. 6.5 HCC shall not be obliged to complete the sale and purchase of any of the PEPYS Shares unless the sale and purchase of all the PEPYS Shares is completed simultaneously. 34 ARTICLE 7 BONUS SCHEME 7.1 HCC shall after Closing permit PEPYS and/or RML to establish and operate a loyalty deferred bonus scheme (the "Bonus Scheme") for the benefit of officers and/or employees of PEPYS and/or RML (other than the Sellers) pursuant to which bonus payments amounting to (pound)2,015,000 in aggregate (the "Bonus Amount") shall be made to such officers and/or employees of PEPYS and/or RML upon such terms and conditions as shall be reasonably proposed by Cook in his capacity as Managing Director of RML. It is confirmed and acknowledged by the parties hereto that year-end bonus payments of approximately one-third of the Bonus Amount were paid during the week commencing January 25, 1999. 7.2 If the retained audited consolidated earnings of PEPYS as at December 31, 1998 as shown in the accounts referred to in paragraph (a) of Section 5.7 would fall short of (pound)300,000 (such shortfall being referred to as the "Retained Earnings Shortfall"), the Shareholders covenant to pay HCC an amount equal to such Retained Earnings Shortfall. 35 ARTICLE 8 COVENANTS TO PAY 8.1 SELLERS' COVENANT TO PAY Without limiting HCC's rights under any other section of this Agreement or any document or certificate referred to in this Agreement or any other rights or remedies under law but subject to the limitations set out in Section 8.3, from and after the Closing Date, each Seller severally covenants to pay to HCC an amount equal to all claims, demands, actions, causes of action, losses, costs, damages, liabilities and expenses including, without limitation, reasonable legal fees, (hereafter in this Section 8.1 referred to as "HCC Damages"), made against or incurred by each of HCC, PEPYS, RML and PMS (individually a "PEPYS Indemnified Person" and collectively the "PEPYS Indemnified Persons") arising out of any misrepresentation or breach of or default under any of the representations, warranties (other than the Warranties), covenants or agreements given or made in this Agreement or any document or certificate delivered by or on behalf of PEPYS, RML or the Sellers pursuant hereto provided that this covenant shall not apply to HCC Damages which arise out of a breach of any of the Warranties. The covenant provided for in this Section 8.1 relates only to the actual expenditures or damages incurred by the PEPYS Indemnified Persons for the above described losses. Such covenant does not relate to consequential, special or other speculative or punitive categories of damages. 8.2 HCC COVENANT TO PAY Without limiting the Seller' rights under any other section of this Agreement or any document referred to in this Agreement or any other rights or remedies under law, from and after the Closing Date, HCC covenants to pay to the Sellers an amount equal to all claims, demands, actions, causes of action, losses, costs, damages, liabilities and expenses including, without limitation, reasonable legal fees (net of: (i) recoveries from third parties (net of costs and tax); and (ii) tax savings made by HCC Indemnified Persons (as defined below) at the time of making a claim hereunder which relates directly thereto but taking account of the timing of receipt of any such saving) (hereafter in this Section 8.2 referred to as "PEPYS Damages") made against or incurred by each of the Sellers (hereinafter in this Section 8.2 referred to individually as an "HCC Indemnified Person" and collectively as "HCC Indemnified Persons") arising out of any misrepresentation or breach of or default under any of the representations, warranties, covenants and agreements given or made by HCC in this Agreement or any document or any certificate delivered by or on behalf of HCC pursuant hereto. The covenant provided for in this Section 8.2 relates only to the actual expenditures or damages incurred by the HCC Indemnified Persons for the above described losses. The covenant does not relate to consequential, special, or other speculative or punitive categories of damages. Notwithstanding the foregoing, in the absence of fraud, fraudulent misrepresentation or dishonesty on the part of HCC or its agents or advisers in relation to the matter which is 36 the subject of the claim under this covenant, in no event shall HCC have any obligation hereunder in excess of an aggregate of (pound)22,000,000 (the "HCC Cap") save that HCC's obligations to make payments under the Initial Loan Notes, the Deferred Loan Notes and the Earnout Loan Notes and to issue the HCC Shares and such Loan Notes under Section 1.2(g) shall not be subject to the HCC Cap. 8.3 LIMITATION AND EXPIRATION (a) The Sellers shall not be liable in respect of claims under Section 8.1 if and to the extent that the limitations set out in Schedule 4 apply in the absence of (except as expressly stated in that Schedule) any fraud, fraudulent misrepresentation or dishonesty in relation to the matter which is the subject of the claim under section 8.1 on the part of the Sellers or their agents or advisers. (b) Except as stated expressly in this Section 8.3, this Section 8.3 shall not limit any other section of this Agreement or any other document or certificate referred to in this Agreement or any other right, power or remedy otherwise provided by law. 8.4 APPOINTMENT OF REPRESENTATIVE (a) Subject to the provisions of this Section 8.4, Cook (the "Group A Representative") is hereby irrevocably appointed as the agent and representative of the Group A Shareholders for all purposes of or relating to this Agreement, the Tax Covenant and any other document entered into by any of the Group A Shareholders pursuant to this Agreement (together the "Relevant Group A Documents"). (b) Subject to the provisions of this Section 8.4, Smith (the "Group B Representative") is hereby irrevocably appointed as the agent and representative of the Group B Shareholders and Rattner for all purposes of or relating to this Agreement, the Tax Covenant and any other document entered into by any of the Group B Shareholders and/or Rattner pursuant to this Agreement (together the "Relevant Group B Documents"; Relevant Group A Documents and Relevant Group B Documents are together referred to as the "Relevant Documents" and each a "Relevant Document"). (c) Notice is hereby given to HCC, and, without independent verification, HCC may rely upon the Representative's undertakings and actions in such capacity (including for the avoidance of doubt, the Group A Representative's undertakings and actions in such capacity and Group B Representative's undertakings and actions in such capacity). The Representative shall have full and irrevocable authority on behalf of the Sellers, and shall promptly and completely exercise such authority in a timely fashion to: 37 (i) participate in, represent and bind the Sellers in all respects with respect to any arbitration or legal proceeding relating to any Relevant Document, including, without limitation, the defence and settlement of any matter, and the calculation thereof for every purpose thereunder, consent to jurisdiction, enter into any settlement, and consent to entry of judgment, each with respect to any or all of the Sellers; (ii) receive, accept and give notices and other communications relating to any Relevant Document; (iii) take any action (including but without limitation, in the case of the Group A Representative, all actions contemplated under Section 1.3) contemplated to be done by that Seller under this Agreement (other than the execution of any of the documents on behalf of that Seller to be delivered by that Seller at Closing (but without prejudice to any other powers of attorney given by any such Seller to the Group A Representative or the Group B Representative outside the terms of this Agreement)) and take such other actions that the Representative deems necessary or desirable in order fully to effectuate the transactions contemplated by any Relevant Document; and (iv) execute and deliver any instrument or document that the Representative deems necessary or desirable in the exercise of his authority under this Section 8.4, provided always that in any such case the relevant action is not in respect of a matter or thing in respect of which it is reasonably foreseeable that a liability for the Sellers (or any of them) in excess of (pound)25,000 could arise and provided further that neither the Group A Representative nor the Group B Representative shall have any authority whatsoever to agree to any amendment, variation or waiver of any of the terms of the Deed of Appointment, Rattner Deed of Release or any of the Non-Competition Agreements or the Other Non-Competition Agreements. (d) The Representative shall also hold the benefit of the Deed of Charge as trustee on behalf of all the Sellers. (e) Those Group A Shareholders who, as of the Closing Date, hold a majority of the PEPYS Shares out of those PEPYS Shares held by the Group A Shareholders may, at any time and by written notice delivered to HCC, remove the Group A Representative or any successor thereto, but such removal shall be effective only upon the replacement of such Group A Representative or successor by a new Group A Representative designated, by written notice delivered to HCC, by those Group A Shareholders who, as of the date hereof, hold a majority of PEPYS 38 Shares out of those PEPYS Shares held by the Group A Shareholders, provided, however, that any such notice shall be effective upon actual receipt by HCC. Any such written notice shall be delivered to HCC in accordance with the notice provisions set forth in Section 10.3 hereof. If the Group A Representative shall have died, become incapacitated or unable to serve, those Group A Shareholders who, as of the date hereof, hold a majority of PEPYS Shares out of those PEPYS Shares held by the Group A Shareholders, the Group A Shareholders shall promptly designate by written notice delivered to HCC, a replacement of the Group A Representative. Any costs and expenses incurred by the Group A Representative in connection with actions taken pursuant to or permitted by this Section 8.4 will be borne by the Group A Shareholders and paid or reimbursed to the Group A Representative on a pro rata basis. Any Group A Representative ceasing to be such shall transfer the benefit of the Deed of Charge and all rights relating thereto to the replacement of the Group A Representative. (f) A majority of the Group B Shareholders may, at any time and by written notice delivered to HCC, remove the Group B Representative or any successor thereto, but such removal shall be effective only upon the replacement of such Group B Representative or successor by a new Group B Representative designated, by written notice delivered to HCC, by such Group B Shareholders, provided, however, that any such notice shall be effective upon actual receipt by HCC. Any such written notice shall be delivered to HCC in accordance with the notice provisions set forth in Section 10.3 hereof. If the Group B Representative shall have died, become incapacitated or unable to serve, a majority of the Group B Shareholders shall promptly designate by written notice delivered to HCC, a replacement of the Group B Representative. Any costs and expenses incurred by the Group B Representative in connection with actions taken pursuant to or permitted by this Section 8.4 will be borne by the Group B Shareholders and paid or reimbursed to the Representative on a pro rata basis. Any Group B Representative ceasing to be such shall transfer the benefit of the Deed of Charge and all rights relating thereto to the replacement of the Group B Representative. Any reference in this paragraph to Group B Shareholders shall be deemed to include Rattner. (g) The authorisation of the Representative under this Section 8.4 is granted and conferred in consideration for the various agreements and covenants of HCC contained herein. In consideration of the foregoing, and subject to the successorship provisions of this Section 8.4, this authorisation granted to the Representative shall be irrevocable and shall not be terminated by any act of any of the Sellers or by the occurrence of any other event. The Representative shall have no liability to any Seller for any act or omission or obligation hereunder, provided that such action or omission is taken by the Representative in good faith and without wilful misconduct. 39 (h) The Sellers shall not be bound by any act or thing done or omitted to be done by the Representative if he is to receive directly or indirectly a benefit for the doing of or the omission to do the act or thing where such benefit is not available to each of the other Sellers. 40 ARTICLE 9 NON-COMPETITION AGREEMENTS AND OTHER NON-COMPETITION AGREEMENTS 9. In the event that any covenant (the "Ineffective Covenant") in any of the Non-Competition Agreements or Other Non-Competition Agreements to be executed and delivered by any Seller is invalid, ineffective, void or unenforceable against that Seller because the scope (whether in relation to the geographic areas to which or the period for which such covenant applies or otherwise) of such covenant is considered by any competent court to be too broad or for any other reason whatsoever, such Seller covenants with HCC that it or he will enter into a new agreement with PEPYS and/or RML which provides for a covenant of a reduced scope to replace the Ineffective Covenant which will be legal, valid, binding, and enforceable against such Seller. 41 ARTICLE 10 MISCELLANEOUS 10.1 FURTHER ASSURANCES Each party agrees to co-operate 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. 10.2 FEES AND EXPENSES Unless otherwise expressly provided herein or agreed by the parties in writing, each party shall bear its own fees and expenses, including, without limitation, legal fees and fees of brokers and investment bankers contracted by such party, in connection with the transactions contemplated hereby. 10.3 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 registered post or sent by prepaid courier or facsimile, addressed as follows: HCC: HCC Insurance Holdings, Inc. 13403 Northwest Freeway Houston, Texas 77040-6094 Telecopy: 001 713 462-2401 Attention: Frank J. Bramanti, Executive Vice President With copies (which shall not constitute notice) to: Winstead Sechrest & Minick P.C. 910 Travis, Suite 2400 Houston, Texas 77002-5895 Telecopy: 001 713 650-2400 Attention: Arthur S. Berner, Esq. 42 Slaughter and May 35 Basinghall Street London EC2V 5DB United Kingdom Telecopy: 011-44-171-600-0289 Attention: Jonathan Marks All the Sellers c/o the Representative: Barry J. Cook and John Smith c/o Pepys Holdings Limited Walsingham House 35 Seething Lane London EC3N 4AH United Kingdom Telecopy: 011-44-171-481-3616 With copies (which shall not constitute notice) to the 2 Representatives at their home addresses notified in accordance with this section from time to time With copies (which shall not constitute notice) to: Clifford Chance 200 Aldersgate Street London EC1A 4 JJ United Kingdom Telecopy: 011-44-171-600-5555 Attention: David Pudge Such communications shall be effective when they are received by the addressee thereof. Any notice deemed or request served in accordance with this Section 10.3 shall be deemed to have been received: (a) in the case of a fax, when despatched but only if a complete transmission report is received by the sender; (b) in the case of registered post, at the time of delivery as certified by the postal service; (c) in the case of personal service, at the time of delivery; and 43 (d) in the case of prepaid courier, at the time of delivery as certified by the courier. Any party may change its address for such communications by giving notice thereof to other parties in conformity with this Section and such change shall become effective on the date specified in the notification as the date on which the change is to take place or, if no such date is specified or the date specified is less than 5 clear Business Days after the date the notice is given, the date falling 5 Business Days after the notice of such change. In the event there is a change in the identity of the Group A Representative or the Group B Representative, the successor Representative's address shall be the address for the Sellers and the successor Group A Representative or, as the case may be, Group B Representative's address shall give notice of his address to HCC forthwith after his appointment. 10.4 DELAY OR OMISSION No delay or omission on the part of any party to this Agreement in exercising any right, power or remedy provided by law or under this Agreement or any other documents referred to in it shall impair such right, power or remedy or operate as a waiver thereof. The single or partial exercise of any right, power or remedy provided by law or under this Agreement shall not preclude any other or further exercise thereof or the exercise of any other right, power or remedy. The rights, powers and remedies provided in this Agreement are accumulative and not exclusive of any rights, powers and remedies provided by law. 10.5 BINDING UPON SUCCESSORS AND ASSIGNS, ASSIGNMENT (a) This Agreement and the provisions hereof shall be binding upon each of the parties, their permitted successors and assigns. Save as set out in the sentence following, the rights under this Agreement may not be assigned by HCC without the prior consent of the Representative and the rights under this Agreement may not be assigned by any Seller without the consent of HCC. HCC shall be permitted at any time and from time to time to cause the assignment (of all or any part) its rights under this Agreement to a wholly-owned (directly or indirectly) subsidiary of HCC (without in any way relieving HCC of its obligations under this Agreement) provided that, if HCC has assigned all or part of its rights under this Agreement to a wholly-owned subsidiary of HCC (the "Group Transferee") and that Group Transferee shall subsequently cease to be a wholly-owned subsidiary of HCC, HCC shall procure that prior to such Group Transferee ceasing to be a wholly-owned subsidiary of HCC such Group Transferee shall assign its rights and benefits under this Agreement to HCC or another wholly-owned subsidiary of HCC. In the event that any such assignment occurs, HCC acknowledges and agrees that the liability of the Sellers in respect of any claim under this 44 Agreement shall not be any greater than such liability would have been had such assignment not taken place. (b) For the avoidance of doubt, subject to compliance with HCC's obligations under clause 7(C) of the Deed of Charge, nothing in this Agreement or any other document entered into by HCC in connection with this Agreement shall prohibit or otherwise prevent the transfer at any time and from time to time of all or any of the PEPYS Shares to a wholly-owned subsidiary of HCC. 10.6 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. 10.7 ENTIRE AGREEMENT This 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 the parties with respect hereto. 10.8 AMENDMENT AND WAIVERS Any and all amendments and modifications of this Agreement must be in writing and signed by the parties hereto immediately prior to the Closing Date. 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 in either retroactively or prospectively) only in writing signed by those persons as provided in this Section 10.8. Any such waiver shall not be deemed to constitute a waiver of any other term, provision, condition, or any succeeding breach thereof, unless such waiver so expressly states. A variation or amendment of this Agreement may only be in writing. 10.9 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. 10.10 ANNOUNCEMENTS 45 (a) Subject to Section 10.10(b), no announcement concerning the sale of the PEPYS Shares or any ancillary matter shall be made by the Sellers without the prior written approval of HCC or by HCC without the prior written approval of the Representative, in either case such approval not to be unreasonably withheld or delayed. (b) Either the Sellers or HCC may make an announcement concerning the sale of the Shares or any ancillary matter if required by:- (i) the law of any relevant jurisdiction; or (ii) any securities exchange or regulatory or governmental body to which either party is subject or submits, wherever situated, including (without limitation) the New York Stock Exchange, whether or not the requirement has the force of law, in which case, if the party concerned is a Seller, it shall take all such steps as may be reasonable and practicable in the circumstances to agree the contents and timing of such announcement with HCC before making such announcement and, if the party concerned is HCC, it shall take all such steps as may be reasonable and practicable in the circumstances to agree the contents and timing of such announcement with the Representative. (c) The restrictions contained in this Section 10.10 shall, in relation to HCC, cease to apply after Closing except to the first announcement to be made by HCC after Closing and, in relation to the Sellers, continue to apply after Closing without limit in time. 10.11 CONFIDENTIALITY (a) Subject to Section 10.11(b), each party shall treat as strictly confidential all information received or obtained as a result of entering into or performing this Agreement which relates to:- (i) the provisions of this Agreement; (ii) the negotiations relating to this Agreement; or (iii) any other party. (b) Any party may disclose information which would otherwise be confidential if and to the extent:- (i) required by the law of any relevant jurisdiction; (ii) required by any securities exchange or regulatory or governmental body to which that party is subject or submits, 46 wherever situated, including (without limitation) the New York Stock Exchange, whether or not the requirement for information has the force of law; (iii) required to vest the full benefit of this Agreement in that party; (iv) (subject to that party procuring that they keep it on the terms of this Section 10.11) disclosed to the professional advisers, auditors and bankers of that party for the purpose of obtaining advice; (v) the information has come into the public domain through no fault of that party; or (vi) in the case of HCC, the Representative has given prior written approval to the disclosure and, in the case of any Seller, HCC has given prior written approval to the disclosure PROVIDED THAT any such information disclosed pursuant to paragraph (i) or (ii) shall be disclosed only after consultation of the contents and timing of the disclosure (to the extent reasonably practicable) in the case of disclosure by HCC, with the Representative and, in the case of disclosure by any Seller, with HCC. (c) The restrictions contained in this Section 10.11 shall, in relation to HCC, cease to apply after Closing and, in relation to the Sellers, continue to apply after Closing without limit in time. 10.12 CHOICE OF GOVERNING LAW This Agreement is governed by and shall be construed in accordance with English law. Any dispute or claim of whatever nature arising out of or in connection with this Agreement is to be governed by English law. 10.13 JURISDICTION (a) The courts of England are to have exclusive jurisdiction to hear and decide any proceedings, suit or action arising out of or in connection with this Agreement ("Proceedings"). This clause is not included for the benefit of any one party to this Agreement and, for these purposes, each party irrevocably submits to the jurisdiction of the courts of England. (b) Each party irrevocably waives any objection which it might at any time have to the courts of England being nominated as the forum to hear and to decide any proceedings and to settle any disputes in connection with this Agreement and agrees not to claim that the courts of England are not a convenient or appropriate forum. 47 10.14 MRI, AXEL AND RATTNER'S AGENT FOR SERVICE (a) Each of MRI, Axel and Rattner (the "Appointors" and each an "Appointor") irrevocably agrees that any Service Document may be sufficiently and effectively served on it in connection with Proceedings in England and Wales by service on its or his agent Clifford Chance Secretaries Limited, if no replacement agent has been appointed and notified to HCC pursuant to Section 10.14(d), or on the replacement agent if one has been appointed and notified to the Representative. (b) Any Service Document served pursuant to this Section 10.14 shall be marked for the attention of:- (i) Clifford Chance Secretaries Limited at 200 Aldersgate Street, London, EC1A 4JJ, United Kingdom or such other address within England or Wales as may be notified to HCC; or (ii) such other person as is appointed as agent for service pursuant to Section 10.14(d) at the address notified pursuant thereto. (c) Any document addressed in accordance with Section 10.14(b) shall be deemed to have been duly served if:- (i) left at the specified address, when it is left; or (ii) sent by registered post, five Business Days after the date of posting. (d) If the agent referred to in Section 10.14(a) (or any replacement agent appointed pursuant to this section) at any time ceases for any reason to act as such on behalf of any Appointor, that Appointor shall appoint a replacement agent to accept service having an address for service in England or Wales and shall notify HCC of the name and address of the replacement agent; failing such appointment and notification, HCC shall be entitled by notice to HCC to appoint such a replacement agent to act on that Appointor's behalf. (e) A copy of any Service Document served on an agent pursuant to this clause shall be sent by post to the relevant Appointor at its address for the time being for the service of notices and other communications under Section 10.3, but no failure or delay in so doing shall prejudice the effectiveness of service of the Service Document in accordance with the provisions of Section 10.14(a). (f) "SERVICE DOCUMENT" means a writ, summons, order, judgment or other process issued out of the courts of England and Wales. 10.15 HCC'S AGENT FOR SERVICE 48 (a) HCC irrevocably agrees that any Service Document may be sufficiently and effectively served on it in connection with Proceedings in England and Wales by service on its agent Trusec Limited, if no replacement agent has been appointed and notified to the Representative pursuant to Section 10.15(d), or on the replacement agent if one has been appointed and notified to the Representative. (b) Any Service Document served pursuant to this Section 10.15 shall be marked for the attention of:- (i) Trusec Limited at 35 Basinghall Street, London, EC2V 5DB, United Kingdom or such other address within England or Wales as may be notified to the Representative; or (ii) such other person as is appointed as agent for service pursuant to Section 10.15(d) at the address notified pursuant thereto. (c) Any document addressed in accordance with Section 10.15(b) shall be deemed to have been duly served if:- (i) left at the specified address, when it is left; or (ii) sent by registered post, five Business Days after the date of posting. (d) If the agent referred to in Section 10.15(a) (or any replacement agent appointed pursuant to this section) at any time ceases for any reason to act as such on behalf of HCC, HCC shall appoint a replacement agent to accept service having an address for service in England or Wales and shall notify the Representative of the name and address of the replacement agent; failing such appointment and notification, the Representative shall be entitled by notice to HCC to appoint such a replacement agent to act on HCC's behalf. (e) A copy of any Service Document served on an agent pursuant to this clause shall be sent by post to HCC at its address for the time being for the service of notices and other communications under Section 10.3, but no failure or delay in so doing shall prejudice the effectiveness of service of the Service Document in accordance with the provisions of Section 10.15(a). 10.16 INTEREST If any party hereunder defaults in the payment when due of any sum payable under this Agreement (whether determined by agreement or pursuant to an order of a court or otherwise) the liability of the defaulting party shall be increased to include interest on such sum from the date when such payment was due until (but excluding) the date of actual payment (as well after as 49 before judgment) at a rate per annum of 2% above the bank base rate from time to time of Midland Bank PLC. Such interest shall be calculated on the basis of 365 days and shall accrue from day to day. 10.17 TIME OF THE ESSENCE Any time, date or period referred to in any provision of this Agreement may be extended by mutual agreement between HCC and the Representative (on behalf of the Sellers) but as regards any time or date for the payment of any amounts by any party hereunder, the time or date, as the case may be, as set out in this Agreement or as so extended, time shall be of the essence. 50 ARTICLE 11 INTERPRETATION 11.1 DEFINITIONS "ACCELERATED TAX LIABILITY" has the meaning given in Section 1.2(i)(i); "ACTUAL PRETAX PROFITS" has the meaning given in Section 1.3(c); "ANNUAL EARNOUT AMOUNT" has the meaning given in Section 1.3(a); "ANNUAL INSTALMENT" has the meaning given in Section 1.2(e); "ANTICIPATED TAX PAYMENT DATE" has the meaning given in Section 1.2(i)(i) "APPLICABLE CLAIMS" has the meaning in paragraph 4.1 of Schedule 4; "APPLICABLE PERIOD" has the meaning in paragraph 13 of Schedule 4; "APPLICABLE STATE" has the meaning in Section 3.3; "APPOINTORS" OR "APPOINTOR" has the meaning given in Section 10.14; "ARRANGER'S FEE" has the meaning given in Recital C; "ASSOCIATED COMPANY" means an undertaking in which HCC has a participating interest (as defined in section 260 of the Companies Act 1985 which is not a subsidiary of HCC); "BALANCE SHEET DATE" has the meaning given in Warranty 1.9 of Schedule 3; "BONUS" means any bonus or other compensation whatsoever (and whether satisfied in cash, by the issue of securities or by any other means whatsoever) other than (except in the case of Rattner) basic salary and benefits disclosed in the Disclosure Letter; "BONUS SCHEME" has the meaning given in Section 7.1; "BROKERS BYELAW" means Lloyd's Brokers Byelaw (No. 5 of 1988); "BUDGET AND PLAN" has the meaning given in Warranty 1.29 of Schedule 3; "BUSINESS DAY" means a day (other than a Saturday or a Sunday) on which banks are open for business in London;
51 "BUSINESS INFORMATION" means all information, know-how and records (whether or not confidential and in whatever form held) including (without limitation) all formulas, designs, specifications, drawings, data, manuals and instructions and all customer lists, sales information, business plans and forecasts, and all technical or other expertise and all computer software and all accounting and tax records, correspondence, orders and inquiries; "CLOSING" has the meaning given in Section 6; "CLOSING DATE" has the meaning given in Section 6; "COMPANIES ACTS" means the Companies Act 1985, the Companies Consolidation (Consequential Provisions) Act 1985, the Companies Act 1989 and Part V of the Criminal Justice Act 1993; "COSTS" has the meaning given in Section 1.2(j)(ii); "DEED OF APPOINTMENT" has the meaning given in Section 6.2(h); "DEED OF CHARGE" has the meaning given in Section 1.2(d); "DEED OF RELEASE" has the meaning given in Section 6.2(g); "DEFENDING ACTION" has the meaning in paragraph 10.1 of Schedule 4; "DEFERRED CONSIDERATION" has the meaning given in Section 1.2(e); "DEFERRED LOAN NOTE" has the meaning given in Section 1.2(f); "DISCLOSURE BUNDLE" means the file(s) of documents delivered to HCC together with the Disclosure Letter; "DISCLOSURE LETTER" has the meaning given in Section 2.2(b); "DISPUTE PARTY" has the meaning given in Section 1.3(h); "DIVIDEND PAYMENT" has the meaning given in Section 5.7; "EARNOUT DISPUTE" has the meaning given in Section 1.3(h); "EARNOUT LOAN NOTE" has the meaning given in Section 1.3(a); "EARNOUT PERIOD" has the meaning given in Section 1.3(a);
52 "EARNOUT PRICE ADJUSTMENT" OR "EPA" has the meaning given in Section 1.3(a); "ENCUMBRANCE" means a mortgage, charge, pledge, lien, option, restriction, right of first refusal, right of pre-emption, right of set-off or counterclaim, third party right or interest, other encumbrance or security interest of any kind or any other type of preferential arrangement (including, without limitation, a title transfer or retention arrangement) having similar effect; "ENVIRONMENTAL LAWS" has the meaning given in Warranty 1.18(a) of Schedule 3; "ENVIRONMENTAL LIABILITIES" has the meaning given in Warranty 1.18(a) of Schedule 3; "ESCROW AGENT" has the meaning given in Section 1.4; "ESCROW AGREEMENT" has the meaning given in Section 1.4; "EXCEPTIONS TO LIABILITY" has the meaning in paragraph 10.1 of Schedule 4; "EXPERT" has the meaning given in Section 1.3(h); "FINAL ANNUAL EARNOUT AMOUNT" has the meaning given in Section 1.3(k); "FIRST SUBMISSION" has the meaning given in Section 1.3(h); "FORM A DEFERRED LOAN NOTE" has the meaning given in Section 1.2(f); "FORM A EARNOUT LOAN NOTE" has the meaning given in Section 1.3(a); "FORM B DEFERRED LOAN NOTE" has the meaning given in Section 1.2(f); "FORM B EARNOUT LOAN NOTE" has the meaning given in Section 1.3(a); "GOVERNING DOCUMENTS" has the meaning given in Warranty 1.1 of Schedule 3; "GOVERNMENTAL AUTHORISATIONS" has the meaning given in Warranty 1.1 of Schedule 3;
53 "GOVERNMENTAL AUTHORITY" has the meaning given in Warranty 1.3 of Schedule 3; "GROUP" means PEPYS and all its Subsidiaries; "HAZARDOUS SUBSTANCES" has the meaning given in Warranty 1.18(a) of Schedule 3; "HCC CAP" has the meaning given in Section 8.2; "HCC COMMON STOCK" has the meaning given in Section 1.2(f); "HCC DAMAGES" has the meaning given in Section 8.1; "HCC EARNOUT STATEMENT" has the meaning given in Section 1.3(e); "HCC GROUP" means HCC and its subsidiaries and associated companies and "HCC Group Company" shall be construed accordingly; "HCC INDEMNIFIED PERSONS" has the meaning given in Section 8.2; "HCC MATERIAL AGREEMENTS" has the meaning given in Section 3.3; "HCC SHARES" has the meaning given in Section 1.2(g); "HCC UK" has the meaning given in Recital D; "IBRC" means the Insurance Brokers Registration Council, a body established under the Insurance Brokers (Registration) Act 1977; "ICTA 1988" means the Income and Corporation Taxes Act 1988; "INEFFECTIVE COVENANT" has the meaning given in Article 9; "INITIAL LOAN NOTE" has the meaning given in Section 1.2(b); "INITIAL LONG TERM LOAN NOTE" has the meaning given in Section 1.2(b); "INITIAL SHORT TERM LOAN NOTE" has the meaning given in Section 1.2(b); "INSTALMENT DATE" has the meaning given in Section 1.2(e); "INTERIM BALANCE SHEET" has the meaning given in Warranty 1.9 of Schedule 3;
54 "JOINT VENTURE" has the meaning given in Warranty 1.8 of Schedule 3; "LIBOR" means when applied to an amount for a particular period, the rate which appears on the relevant Telerate Page for deposits in the currency of that amount for that period at or about 11.00 a.m. on the day two Business Days prior to the first day of the period and if no rate appears on the relevant Telerate Page, "LIBOR" will be based on the rate at which deposits of that amount and currency are offered to Barclays Bank plc for that period by prime banks in the London inter-bank market on or about 11.00 a.m. on the day two Business Days prior to the first day of the period; "LLOYD'S" means the Society and Corporation incorporated by the Lloyd's Act 1871 by the name of Lloyd's; "LLOYD'S BYELAWS" means the Byelaws made under Lloyd's Acts 1871 to 1982; "MATERIAL ADVERSE CHANGE" has the meaning given in Warranty 1.1 of Schedule 3; "MATERIAL ADVERSE EFFECT" has the meaning given in Warranty 1.1 of Schedule 3; "MATERIAL AGREEMENTS" has the meaning given in Warranty 1.16(a) of Schedule 3; "MINIMUM CONSIDERATION" has the meaning given in Section 1.2(a); "NON-COMPETITION AGREEMENT" has the meaning given in Section 6.2(d)(iv); "NOTES" has the meaning given in Section 5.6; "NOTIFICATION CLAIM" has the meaning in paragraph 10.1 of Schedule 4; "OBJECTION NOTIFICATION" has the meaning given in Section 1.3(f); "OTHER NON-COMPETITION AGREEMENT" has the meaning given in Section 6.2(d)(v); "PEPYS" has the meaning given in the Recital A; "PEPYS BALANCE SHEET" has the meaning given in Warranty 1.9 of Schedule 3; "PEPYS DAMAGES" has the meaning given in Section 8.2;
55 "PEPYS FINANCIAL STATEMENTS" has the meaning given in Warranty 1.9 of Schedule 3; "PEPYS INDEMNIFIED PERSON" OR "PEPYS has the meaning given in Section 8.1; INDEMNIFIED PERSONS" "PEPYS SECURITIES" has the meaning given in Warranty 1.7(b) of Schedule 3; "PEPYS SHARES" has the meaning given in the Recital B; "PMS" means PEPYS Management Services Limited; "PROPERTY LEASES" has the meaning given in Warranty 1.17 of Schedule 3; "PURCHASER'S SOLICITORS" means Slaughter and May; "RATTNER DEED OF RELEASE" has the meaning given in Section 1.2(k); "RECORD DATE" has the meaning given in Section 5.7; "REDUCTION" has the meaning given in Section 2.1(d); "REGULATED ACTIVITY" has the meaning given in Warranty 1.18(a) of Schedule 3; "RELEVANT AGREEMENTS" has the meaning given in paragraph 1.2 of Schedule 4; "RELEVANT DOCUMENTS" has the meaning given to it in Section 8.4; "RELEVANT GROUP A DOCUMENTS" has the meaning given in Section 8.4; "RELEVANT GROUP B DOCUMENTS" has the meaning given in Section 8.4; "RELEVANT EMPLOYEE" has the meaning in paragraph 10.1 of Schedule 4;
56 "REPRESENTATIVE" means the Group A Representative and the Group B Representative acting jointly provided that (except as expressly specified in this Agreement in which eventthe express provision shall override this proviso) in relation to any matter which concerns or affects only the Group A Shareholders, any reference in this Agreement to the Representative in relation to such matters shall be deemed to be a reference to the Group A Representative only and in relation to any matter which concerns or affects only the Group B Shareholders and Rattner, any reference in this Agreement to the Representative in relation to such matters shall be deemed to be a reference to the Group B Representative; "RESOLUTION PERIOD" has the meaning given in Section 1.3(h); "RETAINED EARNINGS SHORTFALL" has the meaning given in Section 7.2; "RML" has the meaning given in Recital A; "RML SECURITIES" has the meaning given in Warranty 1.7(b) of Schedule 3; "SCHEDULED INVESTMENTS" has the meaning given in Warranty 1.22(a) of Schedule 3; "SECURITIES ACT" has the meaning given in Warranty 1.3(a) of Schedule 3; "SELLERS' CAP" has the meaning given in paragraph 2 of Schedule 4; "SELLERS' SOLICITORS" means Clifford Chance; "SERVICE DOCUMENT" has the meaning given in Section 10.14(f); "TARGET PRETAX PROFITS" has the meaning given in Section 1.3(c); "TAX COVENANT" has the meaning given in Section 6.2(b); "TAXES", "TAX" OR "TAXATION" has the meaning given in the Tax Covenant; "TCGA" means the Taxation of Chargeable Gains Act 1992; "TOTAL CONSIDERATION" has the meaning given in Section 1.2(a);
57 "U.K. GAAP" has the meaning given in Warranty 1.9 of Schedule 3; "U.S. GAAP" has the meaning given in Schedule 2; and "WARRANTY" OR "WARRANTIES" has the meaning given in Section 2.1(a).
11.2 In this Agreement, unless otherwise specified: (a) references to articles, sections, paragraphs and Schedules are to articles, sections, paragraphs of, and Schedules to, this Agreement; (b) a reference to any statute or statutory provision shall be construed as a reference to the same as it may have been, or may from time to time be, amended, modified or re-enacted provided that (except in respect of the Securities Act) such amendment, modification re-enactment does not increase the liability of any party under this Agreement; (c) references to a "COMPANY" shall be construed so as to include any company, corporation or other body corporate, wherever and however incorporated or established; (d) references to a "PERSON" shall be construed so as to include any individual, firm, company, government, state or agency of a state or any joint venture, association or partnership (whether or not having separate legal personality); (e) references to "INDEMNIFY" and "INDEMNIFYING" any person against any circumstance include indemnifying and keeping him harmless on an after-Tax basis from all actions, claims and proceedings from time to time made against that person and all loss or damage and all payments, costs or expenses made or incurred by that person as a consequence of or which would not have arisen but for that circumstance; (f) the expressions "ACCOUNTING REFERENCE DATE", "ACCOUNTING REFERENCE PERIOD", "ASSOCIATED UNDERTAKING", "BODY CORPORATE", "DEBENTURES", "PROFIT AND LOSS ACCOUNT", "SUBSIDIARY" and "SUBSIDIARY UNDERTAKING" shall have the meaning given in the Companies Acts; (g) a person shall be deemed to be connected with another if that person is connected with another within the meaning of section 839 of the Income and Corporation Taxes Act 1988; (h) references to writing shall include any modes of reproducing words in a legible and non-transitory form; (i) references to times of the day are to London time; 58 (j) headings to clauses and Schedules are for convenience only and do not affect the interpretation of this Agreement; (k) the Schedules form part of this Agreement and shall have the same force and effect as if expressly set out in the body of this Agreement, and any reference to this Agreement shall include the Schedules; (l) references to the knowledge, information, belief or awareness of any person shall be treated as including any knowledge, information, belief or awareness which the person would have if the person made all usual and reasonable enquiries with due care; (m) the knowledge, information, belief or awareness of any Seller shall be deemed to be the knowledge, information, belief or, as the case may be, awareness of every other Seller; (n) references to any English legal term for any action, remedy, method of judicial proceeding, legal document, legal status, court, official, or any legal concept or thing shall in respect of any jurisdiction other than England be deemed to include what most nearly approximates in that jurisdiction to the English legal term; (n) (i) the rule known as the EJUSDEM GENERIS rule shall not apply and accordingly general words introduced by the word "other" shall not be given a restrictive meaning by reason of the fact that they are preceded by words indicating a particular class of acts, matters or things; and (ii) general words shall not be given a restrictive meaning by reason of the fact that they are followed by particular examples intended to be embraced by the general words; (o) "IN AGREED TERMS" in relation to any document means that document in a form agreed and initialled by the Purchaser's Solicitors on behalf of HCC and the Sellers' Solicitors on behalf of the Sellers; (p) words importing one of the masculine, feminine or neuter genders shall include the others; and (q) the obligations and liabilities of the Sellers under this Agreement are several. IN WITNESS WHEREOF the parties hereto have executed this Agreement as of the date first above written. 59 SCHEDULE 1A PEPYS SHARES
NO. OF PEPYS SHARES SELLER (BEING ORDINARY SHARES WITH A NOMINAL AMOUNT OF(POUND)1 EACH) - ------ ------------------------------------------------------------- Axel 2,200 Cook 167,500 Lockett 50,000 Mays 31,250 MRI 216,550(1) Smith 82,500 Steed 75,000
(1) The 216.550 PEPYS Shares set out against the name of MRI include 500 PEPYS Shares registered in the joint names of MRI and Rattner with Rattner acting as nominee on behalf of MRI. 60 SCHEDULE 1B GROUP B SHAREHOLDERS' PORTION OF MINIMUM PRICE
GROUP B SHAREHOLDER ALLOCATION OF MINIMUM CONSIDERATION ((POUND)) - ------------------- --------------------------------------------- Axel 92,400 MRI 9,147,600 Smith 4,805,000 Steed 4,158,000
61 SCHEDULE 1C GROUP A SHAREHOLDERS' ALLOCATION OF MINIMUM PURCHASE PRICE
GROUP A ALLOCATION OF PRINCIPAL AMOUNT OF DEFERRED SHAREHOLDER MINIMUM CONSIDERATION INITIAL LOAN NOTE ((POUND)) CONSIDERATION ((POUND)) ((POUND)) Cook 15,325,000 9,195,000 6,130,000 Lockett 5,346,000 3,207,600 2,138,400 Mays 4,466,000 2,679,600 1,786,400
62 SCHEDULE 1D ANNUAL INSTALMENTS
NO. OF HCC SHARES TO BE ISSUED UNDER AN ANNUAL INSTALMENT (SUBJECT TO PRINCIPAL AMOUNT GROUP A SHAREHOLDER DATE OF ANNUAL ADJUSTMENT IN ACCORDANCE OF DEFERRED LOAN NOTES TO BE INSTALMENT WITH SECTION 1.2(F)) ISSUED UNDER AN ANNUAL INSTALMENT ((POUND)) Cook 31.01.2000 88,384 1,072,750 31.01.2001 69,444 842,875 31.01.2002 63,131 766,250 31.01.2003 31,566 383,125 Lockett 31.01.2000 30,832 374,220 31.01.2001 24,225 294,030 31.01.2002 22,023 267,300 31.01.2003 11,011 133,650 Mays 31.01.2000 25,757 312,620 31.01.2001 20,237 245,630 31.01.2002 18,398 223,300 31.01.2003 9,199 111,650
63 SCHEDULE 1E AMOUNTS SUBJECT TO ESCROW DURING THE INITIAL ESCROW PERIOD
SELLER AMOUNT SUBJECT TO ESCROW ((POUND)) Axel 4,620 Cook 766,250 Lockett 267,300 Mays 223,300 Rattner 33,000 MRI 457,380 Smith 240,250 Steed 207,900
64 SCHEDULE 2 EARNOUT PROVISIONS 1. CALCULATION OF ACTUAL PRETAX PROFITS For the purpose of this Schedule 2 and the calculation of the Earnout Price Adjustment and the Annual Earnout Amount referred to in Section 1.3, "Actual Pretax Profits" shall mean the consolidated earnings of PEPYS for the applicable Earnout Period as derived from the audited consolidated accounts of PEPYS for such period before applicable corporation tax and other Taxes. Such audited accounts of PEPYS shall be prepared in pounds sterling (or such other currency as the parties may agree) in accordance with the accounting policies, principles, bases and methods that have been consistently applied in the preparation of the PEPYS audited consolidated accounts for the immediately preceding financial period of PEPYS subject to such adjustments as are necessary in order to apply generally accepted accounting principles in the United States ("U.S. GAAP") in the way U.S. GAAP is applied to the audited consolidated accounts of HCC for the same period as that of the applicable Earnout Period provided that:- (a) no deduction shall be made for interest or other payments or costs relating to indebtedness incurred, guaranteed or secured by PEPYS or RML in connection with the transactions contemplated by this Agreement; (b) no deduction shall be made for goodwill; (c) the Actual Pretax Profits shall include and be reduced by an allocation of indirect overhead, general and administrative or other management fees or charges of the HCC Group (the "HCC Overhead Allocation"); (d) the Actual Pretax Profits shall include all revenues and outgoings, profits or losses from MEIB; and (e) the rate of exchange for converting pounds sterling into United States dollars or vice versa shall be the rate set out in PEPYS' budget for the relevant Earnout Period adopted by PEPYS at or around the beginning of such period if PEPYS is not permitted to hedge against fluctuations in exchange rates during that period in a manner similar to its past practice. If PEPYS is permitted to hedge, then the conversion shall be in accordance with U.S. GAAP. Provided that in relation only to the first two Earnout Periods, if MEIB does not have profits in respect of an Earnout Period of an amount which is at least equal to the HCC Overhead Allocation in respect of that Earnout Period, neither the HCC Overhead Allocation for that Earnout Period nor the profits or losses of MEIB for that Earnout Period shall be included in the calculation of the Actual Pretax Profits of PEPYS for that Earnout Period. 65 2. ADJUSTMENT HCC and the Group A Shareholders agree that, if for the purposes of calculating Actual Pretax Profits for any Earnout Period, such adjustments as are necessary in order to apply U.S. GAAP result in a substantial distortion in the Actual Pretax Profits for that period, HCC and the Group A Shareholders shall negotiate in good faith with a view to agreeing mutually acceptable adjustments to paragraph 1 of this Schedule 2. 66 SCHEDULE 3 WARRANTIES 1.1 CORPORATE EXISTENCE AND POWER Each member of the Group is a company which is incorporated under English law, and has the corporate power and all material governmental licences, authorisations, consents and approvals (collectively, "Governmental Authorisations") required to carry on its business as now conducted, except such Governmental Authorisations the absence of which would not, or would not be reasonably expected to, have a Material Adverse Effect, as hereinafter defined, on the Group. PEPYS has delivered to HCC true and complete copies of each member of the Group's certificate of incorporation and memorandum and articles of association (the "Governing Documents"), as currently in effect. For purposes of this Agreement, a "Material Adverse Effect", with respect to any member of the Group, means a material adverse effect on the condition (financial or otherwise), business, properties, assets, liabilities (including contingent liabilities) or results of operations of the Group, taken as a whole; and "Material Adverse Change" means a change or a development involving a prospective change which results, would result or would reasonably be expected to result in a Material Adverse Effect. 1.2 AUTHORISATION (a) The execution, delivery and performance by each member of the Group of any documents contemplated hereby to which it is a party and the consummation by such member of the Group of the transactions contemplated hereby and thereby, are within that member's corporate powers and have been duly authorised by all necessary corporate action. This Agreement and the documents to be entered into in connection herewith or therewith at or before Closing constitute, or upon execution will constitute, valid and binding agreements of such member save as may be limited by bankruptcy, insolvency or other laws affecting the enforcement of creditors' rights generally or by general principles of equity. (b) Each of the Sellers is the sole beneficial owner of the PEPYS shares set opposite his name in Schedule 1A free from any Encumbrance (such shares in aggregate constituting the entire issued share capital of PEPYS) and has the right, power and authority to enter into this Agreement and each other agreement to be entered into by it at or before Closing in connection with the transactions contemplated hereby and that this Agreement and such other agreements contemplated hereby to be executed at or before Closing constitute, or upon execution will constitute, valid and binding agreements of the Sellers, except as may be limited by bankruptcy, insolvency or other similar laws effecting the enforcement of creditors' rights generally or by general principles of equity. 67 1.3 GOVERNMENTAL AUTHORISATION The execution, delivery and performance by the Sellers of this Agreement, and the consummation of the transactions contemplated hereunder require no action by any member of the Group or the Sellers or any filing by either of them with any governmental body, state, political subdivision thereof, or any entity exercising regulatory or administrative functions of or pertaining to government, including, without limitation any government authority, insurance regulatory authority, insurance commission, agency, local authority department, board, commission or instrumentality of the United Kingdom or United States, and any tribunal or arbitrator of competent jurisdiction (collectively referred to as a "Governmental Authority") (provided that in relation to any aforementioned action or filing with any Government Authority of the United States, this warranty shall be given only insofar as any Seller is aware) other than in respect of: (a) compliance with any applicable requirements of the securities laws of the United Kingdom and the United States (including without limitation, the Securities Act of 1933, as amended (the "Securities Act")) and the rules and regulations promulgated thereunder; (b) compliance with any requirements of any applicable insurance or reinsurance or intermediaries or managing general agent laws, including licensing or other related laws of any applicable Governmental Authority; and (c) such other filings or registrations with, or authorisations, consents or approvals of, Governmental Authorities, the failure of which to make or obtain (i) would not reasonably be expected to have a Material Adverse Effect on PEPYS or RML, or (ii) would not materially adversely affect the ability of any Seller, any member of the Group to consummate the transactions contemplated hereby and operate their businesses as heretofore operated. 1.4 LLOYD'S COMPLIANCE (a) RML has at all times since May 2, 1989 complied in all material respects with Lloyd's Byelaws and any Codes of Practice issued thereunder in relation to all of its insurance broking activities and since that date there has been no material breach of any undertaking given to Lloyd's in connection with any such activities. Without limitation, the only business carried on by RML is and has been that of an insurance and reinsurance broker. (b) No Seller is aware of any grounds, fact or circumstance which is likely to give rise to any Lloyd's disciplinary inquiries or proceedings against any officer or employee of RML in relation to any of its insurance broking activities. Without 68 limitation, none of the Sellers is aware of any grounds, fact or circumstance relating to the activities of RML likely to give rise to any Lloyd's disciplinary inquiries or proceedings against any employee of RML or against RML in relation to the practice of "grossing-up". (c) RML is registered as a Lloyd's broker within the meaning of the Lloyd's Act 1982. None of the Sellers is aware of any reason which is reasonably likely to lead to RML ceasing to be so registered by Lloyds. (d) None of the Sellers is aware of the existence of any grounds, fact or circumstance which would entitle Lloyd's to exercise its powers of intervention under paragraphs 6, 10, 35, 36 or 43 of the Brokers Byelaw and it has not at any time exercised such powers. (e) RML has at all times been willing and able to supervise and service all of its activities and responsibilities and to account fully and properly for those activities as required under paragraph 44 of the Brokers Byelaw. (f) None of the Sellers is aware of any reason for the Council to decide that RML is no longer a fit and proper person to be a Lloyd's broker. (g) No conditions have been imposed on RML by Lloyd's under paragraph 9(1) of the Brokers Byelaw. (h) Save as disclosed in the Disclosure Letter, no person has given any undertaking or guarantee to Lloyd's within the meaning of paragraph 9(2) of the Brokers Byelaw in connection with the business of RML. (i) No postponement has been ordered and no directions have been given in connection with such a postponement by Lloyd's in respect of RML under paragraph 11(5) of the Brokers Byelaw. (j) Copies of all of RML's annual returns (as referred to in paragraph 44 of the Brokers Byelaw) since 1995 have been provided to HCC. (k) Details of all RML's insurance broking accounts which are required to be maintained by paragraph 22 of the Brokers Byelaw are contained in the Disclosure Bundle. All such RML insurance broking accounts comply with the requirements of Chapter II, paragraph 22 to 27 of the Brokers Byelaw. (l) Details of any arrangement subsisting between RML and any other person pursuant to the Umbrella Arrangements Byelaw (No. 6 of 1988) or pursuant to paragraph 57 of the Brokers Byelaw have been disclosed in the Disclosure Letter. There are no other arrangements involving RML under which business may be placed or accepted which subsist at the date of this Agreement. 69 (m) A brokerage summary of business on a client by client basis as at December 1998 which sets out the brokerage and other income earned in relation to the businesses of each such client for the 12 month period ended December 31 1998 (to the extent that the brokerage and other income earned in relation to the businesses of such client exceeds 3 per cent. of all RML's aggregate brokerage and other income for that period) is contained in the Disclosure Bundle. (n) There are no arrangements in existence between RML and any other person to which paragraph 8 of the Brokers Byelaw (arrangements permitting influence) apply or would but for any exclusions referred to in that paragraph. (o) RML has taken steps to ensure that the location, adequacy and suitability of its employees (including, without limitation, steps to ensure that any of its employees whose functions include advising clients, handling clients' money or effecting or assisting in effecting transactions on behalf of clients are of a suitable character as to work for a Lloyd's broker as required by the Brokers Byelaw) comply in all material respects with the requirements laid down from time to time by Lloyd's. (p) RML has complied with and has not breached any conditions imposed on it or its Controller (as defined in the Brokers Byelaw) by Lloyd's relating to the possession and maintenance by RML of appropriate financial resources. (q) All of the directors of RML have complied with the requirements of paragraph 15 of the Brokers Byelaw. (r) Save as disclosed in the Disclosure Letter, none of the directors of RML is also a director of or partner in an insurance company or a director of or partner in a person (other than an underwriting agent registered as such under the Lloyd's Byelaws) which underwrites insurance business as agent for an insurance company. (s) Save as disclosed in the Disclosure Letter, RML has entered into no transactions to which paragraph 19 (Disclosure of transactions with related parties) of the Brokers Byelaw apply. (t) RML has taken out and maintained such insurance as is from time to time prescribed by Lloyd's under paragraph 46 of the Brokers Byelaw and at all times such compulsory insurance has complied with Lloyd's requirements. (u) RML has made and has kept proper records in respect of each contract of insurance arranged by it and those records comply with the requirements of Lloyd's under paragraph 47 of the Brokers Byelaw. 70 (v) Details of all deeds or other instruments required to be executed by RML under paragraph 50 of the Brokers Byelaw for the purpose of ensuring the protection of the interests of creditors of RML whose claims arise out of or in connection with insurance transactions are disclosed in the Disclosure Letter. 1.5 IBRC COMPLIANCE (a) RML is registered on the list maintained by the IBRC and, so far as any of the Sellers is aware, there are no reasons to believe that the Registrar of the IBRC will, or is likely to, remove the entry from the list in respect of RML. (b) Other than Chris Mays, the directors of RML are all registered under the Insurance Brokers (Registration) Act 1977 as insurance brokers and all of the directors of RML have satisfied the IBRC that they hold qualifications approved or recognised by the IBRC, have satisfied the IBRC as to their character and suitability to be registered insurance brokers and have satisfied the IBRC of their practical experience in the work of an insurance broker. (c) RML has at all times complied with the Code of Conduct from time to time laid down by the IBRC. 1.6 NON-CONTRAVENTION The execution, delivery and performance by the Sellers, PEPYS and RML of this Agreement and each other agreement to be entered into at or before Closing in connection with this Agreement, and the consummation of the other transactions contemplated hereby and thereby do not and will not: (a) contravene or conflict with the Governing Documents of PEPYS or RML; (b) result in a breach of, or constitute a default under, any agreement to which any Seller or any member of the Group is a party or by which any Seller or any member of the Group is bound; or (c) result in a breach of any order, judgment or decree of any court of governmental agency to which any Seller or any member of the Group is a party or by which any Seller or any member of the Group is bound; or (d) require the consent, in the case of MRI, of its shareholders, or the shareholders of a company in the same group or of any other person; (e) assuming compliance with the matters referred to in Warranty 1.3, 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 any member of the Group or any Seller; 71 (f) 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 any member of the Group or any material licence, franchise, permit or other similar authorisation held by any member of the Group; or (g) result in the creation or imposition of any Encumbrance on any material asset of PEPYS or RML, except, with respect to clauses (e),(f) and (g) above, for contraventions, defaults, losses, Encumbrances 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 the relevant member of the Group. 1.7 CAPITALISATION; BONUS RIGHT (a) The entire authorised share capital of PEPYS consists of 625,000 ordinary shares,(pound)1 nominal amount per share, of which all 625,000 shares are issued and outstanding. The entire authorised share capital of RML consists of 500,000 ordinary "A" class shares of(pound)1 each and 500,000 "B" class shares of(pound)1 each, of which all 500,000 "A" shares are issued and outstanding and 250,000 of the "B" shares are issued and outstanding. All of the issued and outstanding shares of RML (the "RML Shares") and all of the issued shares of PMS are owned by PEPYS free of any Encumbrances. The entire authorised share capital of PMS consists of 100,000 ordinary "A" class shares of(pound)1 each, 100,000 ordinary "B" class shares of(pound)1 each and 300,000 ordinary "C" class shares of(pound)1 each, of which 2 of the "A" shares are issued and outstanding. (b) All outstanding shares set forth in (a) above have been duly authorised and validly issued and are fully paid. Except for the PEPYS Shares owned by the Sellers, for PEPYS there are outstanding (i) no other shares, (ii) no securities convertible into or exchangeable for shares in PEPYS, (iii) no options or other rights to acquire from either PEPYS or the Sellers, and no obligation to issue any further shares, or securities convertible into or exchangeable for its shares (the items in clauses (i), (ii) and (iii) being referred to collectively as "PEPYS Securities"), (iv) no obligations to repurchase, redeem or otherwise acquire any of PEPYS Securities and (v) no contractual rights of any person or entity to include any such securities in any registration statement, prospectus or listing particulars proposed to be filed by the Sellers under the securities laws of the United Kingdom or the United States. Except for the RML Shares owned by PEPYS, for RML there are outstanding (1) no other shares, (2) no securities convertible into or exchangeable for shares in RML, (3) no options or other rights to acquire from either RML, PEPYS or the Sellers, and no obligation to issue any further shares or securities 72 convertible into exchangeable for its shares (the items in clauses (1), (2) and (3) being referred to collectively as "RML Securities"), (4) no obligation to repurchase, redeem or otherwise acquire any RML Securities, and (5) no contractual rights of any person or entity to include any such securities in any registration statement, prospectus or listing particulars proposed to be filed by the Sellers under the securities laws of the United Kingdom or the United States. 1.8 SUBSIDIARIES AND ANY OTHER RELATED ENTITIES (a) For purposes of this Warranty 1.8, (i) "Subsidiary" has the meaning given in section 736 of the Companies Act 1985 and (ii) "Joint Venture" means, with respect to any entity, any corporation, partnership or other organisation (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) Except for RML and PMS, PEPYS has no subsidiaries or Joint Ventures which are material to the business of PEPYS or RML. RML has no Subsidiaries or Joint Ventures which are material to the business of RML or PEPYS. Other than PEPYS' investment in RML and PMS, neither PEPYS nor RML owns, directly or indirectly, any outstanding capital stock or equity interest in any corporation, partnership, limited liability company, business trust, joint venture or any other entity. 1.9 PEPYS FINANCIAL STATEMENTS PEPYS has delivered to HCC PEPYS' audited consolidated balance sheet (the "PEPYS Balance Sheet") as of April 30, 1998 (the "Balance Sheet Date"), PEPYS' audited consolidated income statements for the years ended April 30, 1998 and April 30, 1997 (the "PEPYS Income Statement" together with PEPYS Balance Sheet, the "Audited Financial Statements") and PEPYS's unaudited unconsolidated balance sheet (the "Interim Balance Sheet") and income statement for the eight (8) month period ended December 31, 1998 (collectively, the "PEPYS Financial Statements"). The Audited Financial Statements are prepared in accordance with the generally accepted accounting principles of the United Kingdom ("U.K. GAAP") consistently applied (except as indicated in the notes thereto) and present a true and fair view of the consolidated financial position of PEPYS as of the Balance Sheet Date and results of operations and cash flows for the periods therein indicated. The Interim Balance Sheet is sufficient to enable a reasonable judgment to be made as to the amount of:- (i) profits, losses, assets and liabilities; and (ii) share capital and reserves (including undistributable reserves) 73 of PEPYS as at and for the 8 month period ended on December 31, 1998. Neither PEPYS nor RML has any 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 PEPYS Balance Sheet, including the notes thereto, except for (i) those that are not required to be reported in accordance with U.K. GAAP; (ii) normal or recurring liabilities incurred since April 30, 1998 in the ordinary course of business or (iii) liabilities under this Agreement or as disclosed in the Disclosure Letter. The accounting records relative to PEPYS and RML comply in all material respects with the requirements of the Companies Act, including, without limitation, the provisions of section 221 thereof. The statutory books (including all registers, minute books and accounting books and records) of PEPYS and RML contain a record which is accurate in all material respects of the matters which should be dealt with in these books and no notice or allegation that any of them is incorrect or should be rectified has been received. 1.10 ABSENCE OF CERTAIN CHANGES Since April 30, 1998, each of PEPYS and RML has, in all material respects, conducted its business in the ordinary and usual course and there has not been: (a) any Material Adverse Change with respect thereto; (b) any declaration, setting aside or payment or any dividend or other distribution in respect of any shares of capital stock of PEPYS or RML. (c) any repurchase, redemption or other acquisition by either PEPYS or RML of any outstanding shares in PEPYS or RML or other securities of or other ownership interests in either PEPYS or RML; (d) any amendment of any term of any outstanding securities of PEPYS or RML; (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 PEPYS or RML, which, individually or in the aggregate, has had or would reasonably be expected to have a Material Adverse Effect on PEPYS or RML; (f) any increase in indebtedness for borrowed money or capitalised lease obligations of PEPYS or RML, except in the ordinary and usual course of business; (g) any sale, assignment, transfer or other disposition of any tangible or intangible asset having a value in excess of (pound)50,000 except in the ordinary and usual course OF business on arm's length terms; 74 (h) any amendment, termination or waiver by either PEPYS or RML 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 which is material to the business of the Group as a whole; (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 PEPYS or RML; (j) any (i) grant of any severance or termination pay to any director, officer or employee of PEPYS or RML, (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 with a basic salary in excess of(pound)25,000 per annum of PEPYS or RML, (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 PEPYS or RML, in each case other than in the ordinary and usual course of business consistent with past practice; (k) any new or amendment to or alteration of any existing bonus, incentive, compensation, severance, share option, share appreciation right, pension, matching gift, profit-sharing, employee share ownership, retirement, pension group insurance, death benefit, or other fringe benefit plan, arrangement or trust agreement adopted or implemented by PEPYS or RML which would result in a material increase in cost; (l) any non-budgeted expenditures in excess of (pound)50,000 or any capital expenditures, capital additions or capital improvements in excess of (pound)100,000, except for such expenditures contained in a written budget, previously provided to HCC, and incurred in the ordinary course of business; (m) no asset of a value in excess of (pound)50,000 has been acquired or has been agreed to bE acquired by any member of the Group; (n) no debts or other receivables and no plant, machinery or equipment of any member of the Group have been factored or sold or agreed to be sold; (o) no resolution of any member of the Group in general meeting has been passed other than resolutions relating to the routine business of annual general meetings; (p) no change in the accounting reference period of any member of the Group has been made; or 75 (q) the entering into of any agreement by PEPYS or RML or any person on behalf of PEPYS or RML to take any of the foregoing actions, except as permitted by this Agreement or disclosed in the Disclosure Letter. 1.11 NO UNDISCLOSED LIABILITIES There are no existing liabilities of any member of the Group of any kind whatsoever that are, individually or in the aggregate, material to the Group, other than: (a) liabilities disclosed, reserved against, or provided for in the Interim Balance Sheet (including the notes thereto); (b) liabilities incurred in the ordinary course of business consistent with past practice since April 30, 1998; and (c) liabilities under this Agreement or indicated in the Disclosure Letter. 1.12 LITIGATION AND BREACH OF LAW (a) The Disclosure Letter sets forth all actions, suits, proceedings, claims or investigations pending against PEPYS or RML or relating to their respective business. Neither PEPYS, RML nor any Seller has received written notice of a claim threatened against PEPYS or RML. Neither PEPYS nor RML has 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 PEPYS or RML. (b) Except for any claims in connection with the collection of debts by PEPYS or RML which claim amount individually does not exceed(pound)5,000 and which collectively do noT exceed an aggregate amount of(pound)25,000, no member of the Group is engaged in any litigation or arbitration, administrative or criminal proceedings, whether as plaintiff, defendant or otherwise, and no litigation or arbitration, administrative or criminal proceedings by or against any member of the Group, or any of their assets or against or involving any of their officers or employees in connection with the business or affairs of PEPYS or RML, including, without limitation, any such claims for indemnification arising under any agreement to which PEPYS or RML is a party, is pending or threatened and, so far as any of the Sellers is aware, there is no fact or circumstance likely to give rise to any such litigation or arbitration, administrative or criminal proceedings or to any proceedings against any director or employee (past or present) of any member of the Group in respect of any act or default for which that member might be vicariously liable. (c) No member of the Group has committed or is liable for any criminal, illegal, unlawful or unauthorised act or breach of any obligation or duty whether imposed by or pursuant to statute, contract or otherwise, and no claim that it has or is remains outstanding against any such member. (d) So far as any of the Sellers is aware, no member of the Group has received notification that any investigation or inquiry is being or has been conducted by any governmental or other body in respect of the affairs of any member of the Group and none of the Sellers is aware of any circumstances which are likely to give rise to such investigation or inquiry. (e) There is no outstanding judgment, arbitral award or decision of a court, tribunal, arbitrator or governmental agency in any jurisdiction against PEPYS or RML which is material to the operation of its business. (f) No Seller has, in relation to the business of PEPYS or RML given any undertaking to, nor is subject to any order of or investigation by, nor has received any request for information from, any court or governmental authority (including without limitation any national competition authority and the Commission of the European Communities) (the "European Commission") under any anti-trust or similar legislation in any jurisdiction in which that business has assets or carries on business. 1.13 TAXES (a) PEPYS Balance Sheet and Tax (i) Save as fully disclosed or provided for in the PEPYS Balance Sheet, no member of the Group has any outstanding liability for:- (1) taxation in any part of the world assessable or payable by reference to profits, gains, income or distributions earned, received or paid or arising or deemed to arise on or at any time prior to the Balance Sheet Date or in respect of any period starting before the Balance Sheet Date; or (2) for purchase, value added, sales or other similar Tax in any part of the world referable to transactions effected on or before the Balance Sheet Date. (ii) The amount of the provision for deferred Taxation or deferred Taxation asset in respect of each member of the Group contained in the PEPYS Balance Sheet was, at the Balance Sheet Date, adequate and fully in accordance with accountancy practices generally accepted in the United Kingdom and commonly adopted by companies carrying on businesses similar to those carried on by that member of the Group and, in particular, was in accordance with SSAP 15 (or any replacement of it instituted by the Accounting Standard Board). 77 (iii) If all facts and circumstances which are now known to each member of the Group or any of the Sellers had been known at the time the PEPYS Balance Sheet was drawn up, the deferred Taxation asset that would be contained in the PEPYS Balance Sheet would be no less than the asset which is so contained. (b) Tax Events Since the Balance Sheet Date Since the Balance Sheet Date:- (i) no member of the Group has declared, made or paid any distribution within the meaning of ICTA 1988; (ii) no accounting period of any member of the Group has ended; (iii) there has been no disposal of any asset (including trading stock) or supply of any service or business facility of any kind (including a loan of money or the letting, hiring or licensing of any property whether tangible or intangible) in circumstances where the consideration actually received or receivable for such disposal or supply was less than the consideration which could be deemed to have been received for Tax purposes; (iv) no event has occurred which will give rise to a Tax liability on any member of the Group calculated by reference to deemed (as opposed to actual) income, profits or gains or which will result in any member of the Group becoming liable to pay or bear a Tax liability directly or primarily chargeable against or attributable to another person, firm or company (other than any other member of the Group); (v) no disposal has taken place or other event occurred which will or may have the effect of crystallising a liability to Taxation which should have been included in the provision for deferred Taxation contained in the PEPYS Balance Sheet if such disposal or other event had been planned or predicted at the Balance Sheet Date; (vi) no member of the Group has made any payment or incurred any obligation to make a payment which will not be deductible in computing trading profits for the purposes of corporation Tax, or be deductible as a management expense of an investment company; 78 (vii) no member of the Group has been a party to any transaction for which any Tax clearance provided for by statute has been or should have been obtained; (viii) no member of the Group has paid or become liable to pay any interest or penalty in connection with any Tax, has otherwise paid any Tax after its due date for payment or owes any Tax the due date for payment of which has passed. (c) Tax Returns, Disputes, Records and Claims, etc. (i) Each member of the Group has in the past six years so far as is material made or caused to be made all proper returns required to be made, and has supplied or caused to be supplied all information required to be supplied, to any revenue authority, including (but without limitation) the Inland Revenue and HM Customs and Excise. (ii) So far as the Shareholders are aware there is no material dispute or disagreement outstanding nor is any contemplated at the date of this agreement with any revenue authority regarding liability or potential liability to any Tax or duty (including in each case penalties or interest) recoverable from any member of the Group or regarding the availability of any relief from Tax or duty to any member of the Group and so far as the Shareholders are aware there are no circumstances which make it likely that any such dispute or disagreement will commence. (iii) Each member of the Group in the past six years has duly submitted all material claims and disclaimers which have been assumed to have been made for the purposes of the PEPYS Balance Sheet. (iv) The amount of Tax chargeable on any member of the Group during any accounting period ending on or within six years before the Balance Sheet Date has not, to any material extent, depended on any concession other than any generally applicable published concession, agreement or other formal or informal arrangement with any revenue authority, including (but without limitation) the Inland Revenue or the Customs and Excise. (v) No member of the Group has received any notice from any revenue authority, including the Inland Revenue, which required or will or may require such member to withhold Tax from any payment made since the Balance Sheet Date or which will or may be made after the date of this agreement. (d) Stamp Duty and Stamp Duty Reserve Tax 79 (i) All documents which are required to be stamped and which are in the possession of any member of the Group and by virtue of which any member of the Group has any right have been duly stamped. (ii) Since the last Balance Sheet Date no member of the Group has incurred any liability to stamp duty reserve Tax. (e) Value Added Tax (i) Each member of the Group is treated for the purposes of section 43 VATA 1994 as a member of a group of companies (the "VAT Group") of which the representative member is RML (the "Representative Member") and no company which is not a member of the Group is a member of the VAT Group nor has any such company been a member of the VAT Group within the last six years. (ii) The Representative Member has in the past six years made, given, obtained and kept full, complete, correct and up-to-date returns, records, invoices and other documents appropriate or required for the purposes of VATA 1994 and is not in arrears with any payments or returns due and has not in the past six years been required by the Commissioners of Customs and Excise to give security under paragraph 4 of Schedule 11 VATA 1994. (iii) The Representative Member has not, since the date 12 months before the Balance Sheet Date, been in default in respect of any prescribed accounting period as mentioned in section 59 or section 59A VATA 1994. (iv) No member of the Group has, within the six years ending on the Balance Sheet Date, been registered for the purposes of VATA 1994 otherwise than as part of the VAT Group referred to in (e)(i) above and no such member has, within that period, been a member of any other group for the purposes of VATA 1994. (v) The Representative Member has complied with the provisions of Part XIX Value Added Tax Regulations 1995 in making any claim for bad debt relief under Section 36 VATA 1994. (vi) No member of the Group has made an election to waive exemption in relation to any land in accordance with paragraph 2 of Schedule 10 VATA 1994. (vii) The Disclosure Letter contains full details of any assets of each member of the Group to which the provisions of Part XV Value 80 Added Tax Regulations 1995 (the Capital Goods Scheme) apply and in particular:- (a) the identity (including, in the case of leasehold property, the term of years), date of acquisition and cost of the asset; and (b) the proportion of input Tax for which credit has been claimed (either provisionally or finally in a Tax year and stating which). (viii) Neither the Representative Member nor any other member of the Group has, at any time within the last six years, acted as agent of any person not resident in the United Kingdom for the purposes of section 47 VATA 1994 or been appointed as a VAT representative of any person for the purposes of section 48 VATA 1994. (f) Duties, etc. All value added Tax, import duty and other taxes or charges payable to H.M. Customs and Excise upon the importation of goods and all excise duties payable to H.M. Customs and Excise in respect of any assets (including trading stock) imported, owned or used by any member of the Group have been paid in full. (g) Tax on Disposal of Assets On a disposal of all its assets by any member of the Group for:- (i) in the case of each asset owned by that member of the Group at the Balance Sheet Date, a consideration equal to the value attributed to that asset in preparing the Balance Sheet; or (ii) in the case of each asset acquired since the Balance Sheet Date, a consideration equal to the consideration given for the acquisition then either:- (1) in respect of any asset falling within (I) above, the liability to tax (if any) which would be incurred by that member of the Group in respect of that asset would not exceed the amount taken into account in respect of that asset in computing the maximum liability to deferred Taxation as stated in the Balance Sheet; or 81 (2) in respect of any asset within (ii) above, no tax liability would be incurred by that member of the Group in respect of that asset. (h) Replacement of Business Assets Full particulars of each claim under section 115 or 116 CGTA 1979 or under sections 152 or 153 TCGA 1992 made prior to the date of this Agreement to which section 117 CGTA 1979 or section 154 TCGA 1992 applies and which affects any asset which was owned by any member of the Group on or after the Balance Sheet Date have (except where the held over gain is treated as having accrued prior to the Balance Sheet Date) been disclosed in writing to the Purchaser. (i) Distributions (iii) Since April 6 1965, no member of the Group has made any repayment of share capital to which section 210(1) ICTA 1988 applies or issued any share capital or other security as paid up otherwise than by the receipt of new consideration within the meaning of Part VI ICTA 1988. (iv) No part of the amount payable on redemption of any share capital or security at par will be a distribution, as defined in ICTA 1988. (j) Close Company (i) No member of the Group is or has ever been a close company as defined in ICTA 1988. (ii) No member of the Group has outstanding any loan to which the provisions of section 419 ICTA 1988 would apply (loans to participators etc.). (iii) No member of the Group is a close investment-holding company as defined in section 13A ICTA 1988. (vi) The Company does not have any interest whether direct or indirect in any company on the disposal of the assets of which a liability could arise under section 13 TCGA. (k) Non-Deductible Revenue Outgoings No member of the Group is under any obligation to make any future payment which will be prevented (whether on the grounds of being a distribution or for any other reason) from being deductible for corporation Tax purposes, whether as a deduction in computing the 82 profits of a trade or as an expense of management or as a charge on income or as a non-trading debit under Chapter II Part IV Finance Act 1996, by reason of any statutory provision, other than section 74(1)(f) ICTA 1988 (capital). (l) Deductions and Withholdings Each member of the Group has in the past six years made all deductions in respect, or on account, of any Tax from any payments made by it which it is obliged to make and has accounted in full to the appropriate authority for all amounts so deducted. (m) Intra-Group Transactions No member of the Group has, at any time within the last six years, acquired any asset from any other company (including another member of the Group) which was, at the time of the acquisition, a member of the same group of companies as that member for the purposes of Section 170 TCGA. (n) Residence The United Kingdom is the only country whose Tax authorities seek to charge Tax on the worldwide profits or gains of any member of the Group and no member of the Group has in the past six years paid Tax on income profits or gains to any Tax authority in any other country except the United Kingdom. (o) Group Arrangements No member of the Group has in the past six years received any payment in respect of a surrender of group relief or of surplus advance corporation Tax or of a Tax refund which could, in any circumstances, be due to be repaid to any company other than another member of the Group. (p) Demerger No member of the Group has in the past six years been concerned in an exempt distribution (as defined in section 214(4) ICTA 1988). (q) Non-Arm's Length Transactions No member of the Group is a party to any transaction or arrangement (other than with another member of the Group) under which it may be denied relief for Tax purposes on the grounds that it has paid for any asset or services or facilities of any kind an amount which is in excess of the market value of that asset or services or facilities or will be subject to 83 Tax on the supply or provision of any asset or services or facilities by reference to an amount which exceeds the consideration received for such asset or services or facilities. 1.14 BENEFIT PLANS (a) The Disclosure Letter lists all pension and retirement benefit plans of PEPYS and RML or under which PEPYS or RML is paying, or is under any liability (actual or contingent) to pay or secure (other than by payment of employers' contributions under national insurance or social security legislation), any pension or other benefit on retirement or death (the "Retirement Benefit Plans"). With the exception of the Retirement Benefit Plans listed in the Disclosure Letter, there are not outstanding (i) any agreements or arrangements for the provision of any pension, annuity, lump sum, gratuity or life benefit to be given on retirement or in anticipation of retirement or after retirement in connection with past service for any officers or employees of PEPYS or RML or any dependants of any such person, (ii) any informal or EX GRATIA pension arrangements or schemes involving any of the officers or employees of PEPYS or RML, or (iii) any unapproved top-up arrangements or schemes (whether funded or unfunded) designed to provide benefits in excess of the earnings cap as defined in s.590C ICTA 1988. (b) The Disclosure Letter lists all profit sharing, stock purchase, stock option, bonus, incentive compensation, disability or ill-health and other employee benefit plans of PEPYS and RML (the "Employee Benefit Plans"). (c) Details of each Employee Benefit Plan and each Retirement Benefit Plan (together, the "Benefit Plans") described in the Disclosure Letter have been provided to HCC in the form of (i) copies of all current Trust Deeds and Rules or other documents governing or constituting or relating to such employee benefit plans and (ii) copies of the current explanatory booklets and any announcements not incorporated into the current explanatory booklets or documentation governing the Benefit Plan relating to benefits or contributions issued to employees of PEPYS or RML. (d) Except as otherwise disclosed in the Disclosure Letter, no discretion or power has been exercised under any such Benefit Plan in respect of any of the officers or employees of PEPYS or RML to (i) augment benefits, (ii) admit to membership an officer or employee who would not otherwise have been eligible for admission to membership, (iii) provide a benefit which would not otherwise be provided, or (iv) pay a contribution which would not otherwise have been paid. (e) There are no actions, suits or claims outstanding, and neither PEPYS or RML nor any Seller has received written notice of a claim pending or 84 threatened against PEPYS or RML or (so far as any of the Sellers is aware) the Trustee of any Benefit Plan in respect of any act, event, omission or other matter arising out of or in connection with the Benefit Plans identified in the Disclosure Letter. (f) All contributions to any of the Benefit Plans identified in the Disclosure Letter whether due from PEPYS or RML or any of their employees have been made in accordance with the provisions of such Benefit Plans and those which fall due for payment before the Closing Date will have been paid by that date. Full details of the level of contributions currently payable in respect of any of the employees of PEPYS or RML to any such benefit plan are set out in the Disclosure Letter. (g) To the extent required, each Benefit Plan identified in the Disclosure Letter is approved by the Board of Inland Revenue for the purpose of ICTA 1988 and neither PEPYS, RML nor any Seller is aware of any circumstances which might give the Inland Revenue reason to withdraw such approval. (h) Each Retirement Benefit Plan identified in the Disclosure Letter has complied in all material respects with and has been administered in all material respects in accordance with (i) the preservation requirements within the meaning of Chapter I, Part IV of the Pension Schemes Act 1993, (ii) the equal treatment requirements of sections 62-66 of the Pensions Act 1995 and regulations made thereunder, and of (so far as any of the Sellers is aware) Article 119 of the Treaty of Rome, and (iii) where applicable, the contracting-out requirements of Part III of the Pension Schemes Act 1993; and all other relevant pension schemes legislation and subject thereto in accordance with the trust powers and provisions of the Retirement Benefit Plans identified in the Disclosure Letter. (i) Neither PEPYS nor RML has participated in any occupational pension scheme (as defined in section 1 of the Pension Schemes Act 1993) other than any money purchase schemes, (as defined in section 181 of the Pension Schemes Act 1993). 1.15 EMPLOYEES (a) The list of employees contained in the Disclosure Bundle is an accurate list of the employees of RML as at the Closing Date and there is no omission which makes it misleading. The list includes, in respect of each employee named therein, (i) full details of emoluments; 85 (ii) the age and the date of commencement of continuous employment (within the meaning of the Employment Rights Act 1996); (iii) reasonable details of any benefit to which he is entitled otherwise than in cash; and (iv) reasonable details of any benefit to which he is entitled in cash which is related to sales, profits or performance, or which is otherwise variable (other than normal overtime). PEPYS does not have any employee as at the Closing. (b) There is no profit related pay scheme in force in relation to any of the Current Employees which has been registered (or for which an application has been made to register it) under Chapter III of Part V of ICTA 1988. (c) The contract of employment of each employee may be terminated by the employer without damages or compensation (other than that payable by statute) by giving at any time of not more than three months' notice. (d) No employee has made or threatened (or so far as any of the Sellers is aware is expected to do so) any litigation, arbitration or mediation, administration or criminal proceeding in connection with or arising from his employment and there is no obligation or amount due to or in respect of any employee in connection with or arising from his employment which is in arrear or unsatisfied other than his normal salary or other remuneration or commission for part of the month (or other payment period) current at the date of this agreement. (e) (i) No trade union, works council, staff association or other body representing employees is recognised in any way for bargaining, information or consultation purposes in relation to the employees. (ii) There are no agreements (whether legally binding or not) with any such representative body in relation to the employees and there is no dispute with any such representative body pending, threatened or expected in relation to PEPYS or RML. (f) There is no liability to pay to any governmental or regulatory authority in any jurisdiction any contribution, taxation or other impost arising in connection with the employment or engagement of personnel by PEPYS or RML which is in arrears other than normal monthly or quarterly returns. 86 (g) (i) All obligations under statute and otherwise concerning the health and safety at work of the employees have been complied with in all material respects. (ii) There are no litigation, arbitration or mediation or administrative or criminal proceedings pending, threatened or, so far as any of the Sellers is aware, expected against PEPYS or RML by any employee or third party in respect of any work-related accident or injury which are not fully covered by insurance. 1.16 MATERIAL AGREEMENTS (a) The Disclosure Letter includes or refers to all contracts, agreements, leases, and instruments to which either PEPYS or RML is a party or by which either or their respective properties or assets are bound which individually involve net payments or receipts in excess of(pound)50,000 per annum (the "Material Agreements"), other than Material Agreements which are contracts entered into with customers but including all Material Agreements which are contracts with suppliers or that pertain to employment or severance benefits for any officer, director or employee of PEPYS or RML, whether written or oral. (b) Neither PEPYS nor RML, nor, so far as any of the Sellers is aware, any other party is in default under any Material 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 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 PEPYS or RML, which, in any such case, has had or would reasonably be expected to have a Material Adverse Effect. (c) To the knowledge of PEPYS and RML, each such Material Agreement is valid and binding and there are no material unresolved disputes involving or with respect to any Material Agreement. Except as described in the Disclosure Letter, no party to a Material Agreement has advised PEPYS or RML or any of the Sellers that it intends either to terminate a Material Agreement or to refuse to renew a Material Agreement upon the expiration of the term thereof. No representation or warranty is made that all benefits contemplated in the Material Agreements will be received. (d) Neither PEPYS nor RML is in violation of, or in default with respect to, any term of its Governing Documents. 87 (e) Contracts and Commitments (i) No member of the Group is a party to any Material Agreement which the Sellers reasonably consider cannot readily be performed by such member of the Group on time. (ii) No member of the Group is a party to or has any liability (present or future) under: (A) any guarantee or indemnity or letter of credit; or (B) any leasing, hiring, hire purchase, credit sale or conditional sale agreement where in the case of such leasing, hiring, hire purchase, credit sale or conditional sale agreement involves payment of more than (pound)10,000 per annum. (iii) No member of the Group is a party to any contract or arrangement which restricts its freedom to carry on its business as carried on from time to time in the 24 month period prior to the Closing Date in any part of the world in such manner as it may think fit, or to any agency, distributorship or management agreement. (iv) No member of the Group is a party to any contract which can be terminated in the event of any change in the underlying ownership or control of the that member or would be breached by such change; and for this purpose "CONTRACT" includes any understanding, arrangement or commitment however described. (f) Insider Contracts There is not, and there has not at any time during the last 24 months been, any contract or arrangement to which any member of the Group is, or was, a party and in which any Seller or any director of any member of the Group or RMI or any person connected with any such director is, or has been, interested, either directly or indirectly, and no member of the Group is a party to, nor have its profits or financial position during that period been affected by, any contract or arrangement which was not of an entirely arm's length nature; in particular, without limitation, no member of the Group has transferred any assets to another such member except at market value. 88 (g) Powers of Attorney No member of the Group has given any power of attorney or other authority (express, implied or ostensible) which is still outstanding or effective to any person to enter into any contract or commitment on its behalf other than to its directors, officers or employees to enter into routine trading contracts in the normal course of their duties. 1.17 PROPERTIES (a) The immovable properties referred to in Schedule 5 (Property Leases) are the only immovable properties in any part of the world owned, used or occupied by any members of the Group or in respect of which any member of the Group has any estate interest right or liability. (b) All leases of immovable property to which PEPYS or RML is a party (the "Property Leases") are in full force and effect and brief details of each are set out in Schedule 5. (c) PEPYS or RML is in physical possession and actual occupation of each of the Property Leases for the purpose of their respective business. (d) Each Property Lease is used for the purpose (the "Current Use") referred to in Schedule 5 (Property Leases) which, so far as the Sellers, PEPYS or RML is aware, is a permitted or lawful use under town and country planning legislation and no notice has been given or received or is expected by the Sellers, PEPYS or RML which casts significant doubt on the right of PEPYS or RML (as the cases may be) as to the continuation of the Current Use. (e) So far as the Sellers, PEPYS or RML is aware, neither PEPYS nor RML is in default under any Property Lease, nor does there exists any default under such Property Leases by any other party thereto, nor does there exist any event which with notice or lapse of time or both would constitute a default thereunder, which default would have a Material Adverse Effect and no party to a Property Lease has advised PEPYS or RML of any such default or that it intends to terminate any such Property Lease. (f) All of the Property Leases owned by PEPYS or RML are owned free and clear of any Encumbrance, agreement for sale, agreement for lease, estate contract, option or right of pre-emption, except for Encumbrances described in the Disclosure Letter or Encumbrances which do not have a Material Adverse Effect. (g) RML has under its control all title deeds and documents necessary to prove its title to each of the Property Leases. 89 (h) RML has good title with respect to the Property Leases free of any Encumbrance, agreement for sale, agreement for lease, estate contract, option or right of pre-emption other than those described in the Disclosure Letter or Encumbrances permitted under this Warranty 1.17 to the extent necessary for the conduct of the business of the Group other than to the extent that the failure to have such title would not have a Material Adverse Effect. (i) No Property Lease is subject to the payment of any outgoings other than business rates, usual utilities charges and the rents and other sums reserved by the relevant Property Lease all sums invoiced have been paid up to the Closing Date. (j) Neither the Sellers nor PEPYS or RML expects expenditure of any substantial sum of money being required in respect of any Property Lease within twelve months of the date of this Agreement. 1.18 ENVIRONMENTAL MATTERS (a) For the purposes of this Agreement, the following terms have the following meanings: "ENVIRONMENTAL LAWS" shall mean any and all applicable statutes, laws, regulations, ordinances, orders, decrees, codes, guidance, permits, consents, permissions, certificates, approvals, registrations, authorisations, licences, agreements and governmental restrictions of any applicable Governmental Authority 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 at any time. "ENVIRONMENTAL LIABILITIES" shall mean all liabilities, obligations, commitments, losses, fines, damages penalties, sanctions, costs, expenses, including expenses representing the payment of money by way of indemnification, settlement, hold harmless or reimbursement agreements, 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 Closing Date. "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. 90 "REGULATED ACTIVITY" shall mean any generation, treatment, storage, recycling, transportation, disposal or release of any Hazardous Substances by either PEPYS or RML. (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 and no investigation or review is pending, or to the knowledge of any Seller, has been threatened by any Governmental Authority or other party with respect to any (i) alleged violation of any Environmental Law by either PEPYS or RML, (ii) alleged failure to have any environmental permit, consent, permission, concession, grant, franchise, certificate, licence, approval, registration or authorisation required in connection with the conduct of the business or with respect to any of their respective properties or (iii) Regulated Activity. (c) Neither PEPYS nor RML has any material Environmental Liabilities and so far as any of the Sellers is aware there has been no release of Hazardous Substances into the environment by either PEPYS or RML or with respect to any of their respective properties which has had, or would reasonably be expected to have, a Material Adverse Effect. 1.19 LABOUR MATTERS Neither PEPYS nor RML is a party to any collective bargaining agreement or other trade union contract applicable to persons employed by either PEPYS or RML, nor does any Seller know of any activities or proceedings of any trade union to organise any such employees. 1.20 SALE OF PEPYS OR RML Except as contemplated by this Agreement, there are currently no discussions to which PEPYS, RML or any Seller is a party relating to (a) the sale of any material portion of the assets of PEPYS or RML, (b) any merger, consolidation, share exchange, liquidation, dissolution or similar transaction involving PEPYS or RML, or (c) the transfer or issuance of any PEPYS Securities or RML Securities. 1.21 BROKER'S FEES Neither PEPYS or RML or PMS nor any Seller 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, arranger's fees or commissions, or to reimburse any expenses of any broker, finder, investment banker or agent in connection with this Agreement. 91 1.22 INVESTMENTS (a) The Disclosure Letter sets forth a true and complete list of all bonds, stocks, mortgages and other investments of any type owned by PEPYS or RML as of the date hereof (collectively, the "Scheduled Investments"). PEPYS or RML has good and marketable title to each of the Scheduled Investments. (b) Except as set forth in the Disclosure Letter, none of the Scheduled Investments is currently in default in the payment of principal or interest, and, to the knowledge of the Sellers, no event has occurred which reasonably would be expected to result in a diminution of the value of any non-publicly traded security owned by PEPYS or RML. (c) There are no Encumbrances in any of the Scheduled Investments, except for (i) those Scheduled Investments deposited with governmental authorities, as indicated on the Disclosure Letter, (ii) Encumbrances which do not materially detract from the value of the Scheduled Investments subject thereto, and (iii) assets pledged to secure assumed reinsurance contract obligations which assets are listed on the Disclosure Letter. (d) Neither PEPYS, RML nor any Seller has taken or omitted to take, any action which would result in PEPYS or RML being unable to enforce the terms of any Scheduled Investment or which would cause any Scheduled Investment to be subject to any valid offset, defence or counterclaim against the right of PEPYS or RML to enforce the terms of such Scheduled Investment. (e) Since April 30, 1998, neither PEPYS nor RML has (i) purchased or otherwise invested in, or committed to purchase or otherwise invest in, any interest in real property (including without limitation any extension of credit secured by a mortgage or deed of trust), (ii) purchased or otherwise invested in, or committed to purchase or otherwise invest in, bonds, notes, debentures or other evidences of indebtedness rated lower than "Baa" by Moody's Investors Service Inc., or "BBB" by Standard & Poor's Corporation at the time of purchase, (iii) entered into any contract, agreement or arrangement with any affiliate with respect to the purchase or other acquisition, sale or other disposition or allocation of any Scheduled Investment or (iv) entered into any contract, agreement or arrangement with respect to any investment outside of the United Kingdom. 1.23 LICENCES Neither PEPYS, RML nor any Seller has received notification of any revocation or modification of any material licences, certificates, authorisations or permits necessary for the ownership of the properties of any member of the Group or 92 the conduct of their respective business and so far as any of the Sellers is aware no such licence, certificate, authorisation or permit is likely not to be renewed in the ordinary course subject to the payment of renewal fees (none of which is due as at Closing) and submission of renewals documentation (the time for submission of which has not been exceeded as at Closing). 1.24 INTERNAL CONTROLS Each of PEPYS and RML maintains a system of internal accounting controls, sufficient to provide reasonable assurances that (i) transactions are executed in accordance with management's general or specific authorisation; (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with U.K. GAAP and to maintain asset accountability; (iii) access to assets is permitted only in accordance with management's general or specific authorisation; and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate actions are taken with respect to any differences. 1.25 INSURANCE Copies of the insurance policies effected by members of the Group in respect of which any member of the Group has an interest as an insured party have been disclosed in writing to the Purchaser, all such policies are in full force and effect and are not void or voidable, no claims in excess of (pound)100,000 are outstanding and no event has occurred which might give rise to any claim in excess of (pound)100,000. 1.26 RECEIVABLES All of the receivables of PEPYS and RML (including accounts receivable, loans receivable and advances) which are reflected on the PEPYS Financial Statements, and all such receivables which will have arisen since the date of the PEPYS Financial Statements, are valid and genuine and have arisen solely from BONA FIDE transactions in the ordinary course of business consistent with past practices. The receivables reflected on the PEPYS Financial Statements do not include any receivables which, to the present knowledge of PEPYS, RML or any Seller, should be written off as an uncollectible receivable. To the knowledge of any of the Sellers, all of the receivables reflected on the PEPYS Financial Statements are collectible, and none of such receivables is subject to valid defences, set-offs or counterclaims except for the reserves reflected in the PEPYS Financial Statements. The Disclosure Letter lists, as of December 31, 1998, all receivables (and the amounts thereof) of PEPYS and RML which are more than two months overdue, the name of the party from whom such receivable is owing, and any security in favour of PEPYS or RML for the repayment of such receivable which PEPYS and RML purport to have. 93 1.27 OTHER INTERESTS OF SELLERS No Seller nor any director of or person connected with any Seller has any interest, direct or indirect, in any business which competes or is likely to compete with any business now carried on by the Group or intends to acquire any such interest. 1.28 WORKING CAPITAL The existing bank and other facilities set out in the Disclosure Letter provide each member of the Group with sufficient working capital for its present requirements (that is to say, to enable it to continue to carry on its business in its present form and at its present level of turnover) and for the purpose of performing in accordance with their terms all orders, projects and contractual obligations which have been placed with or undertaken by it. 1.29 ACCURACY AND ADEQUACY OF INFORMATION (a) To the best of each of the Sellers' knowledge, information and belief, all information which has been given in writing by or on behalf of the Sellers to HCC or to the advisers or agents of HCC before or during the negotiations leading to this Agreement is in all material respects accurate and not misleading in any material respect save that:- (i) to the extent the information so provided contains matters of opinion, each of the Sellers warrants only that the relevant opinions were honestly and reasonably held by the person(s) giving them at the relevant time; (ii) where certain information contained in a document provided to HCC, its advisers or agents conflicts with other information which can be reasonably determined on its face to relate to the same subject matter contained in any document provided subsequently, the Warranty contained in this paragraph 1.29(a) shall apply only in relation to the information provided subsequently; and (iii) no warranty (express or implied) is given in this paragraph as to any forecasts, or financial projections, budgets or management accounts which have been provided in relation to any member of the Group other than as follows:- (A) the Interim Balance Sheet is warranted under paragraph 1.9; (B) such forecasts, financial projections, budgets and management accounts were prepared with reasonable care; and 94 (C) the budget for the period of 12 months ending May 1, 1999 and the financial projections for the period of 24 months ending May 1, 2000 in the document in the Disclosure Bundle labelled "Plan" (together the "Budget and Plan") contain the expectations of the Sellers in respect of the performance or state of affairs of the Group before acquisition by HCC for that period on the basis of current London insurance and reinsurance market conditions and that such expectations are honestly and reasonably held by the Sellers provided that no warranty is hereby given as to the outcome). (b) To the best of each of the Sellers' knowledge information and belief, the information referred to in the Disclosure Letter (including, without limitation, the contents of the Disclosure Bundle) is accurate in all material respects and is not misleading in any material respect save that:- (i) to the extent the information so provided contains matters of opinion, each of the Sellers warrants only that the relevant opinions were honestly and reasonably held by the person(s) giving them at the relevant time; and (ii) no warranty (express or implied) is given in this paragraph as to any forecasts, or financial projections, budgets or management accounts which have been provided in relation to any member of the Group other than as follows:- (A) the Interim Balance Sheet is warranted under paragraph 1.9; (B) such forecasts, financial projections, budgets and management accounts were prepared with reasonable care; and (C) the Budget and Plan contain the expectations of the Sellers in respect of the performance or state of affairs of the Group before acquisition by HCC for that period on the basis of current London insurance and reinsurance market conditions and that such expectations are honestly and reasonably held by the Sellers provided that no warranty is hereby given as to the outcome. (c) All documents which should have been delivered by each member of the Group to the Registrar of Companies have been properly so delivered. Copies of the memorandum and articles of association of the members of the Group which have been supplied to HCC or its solicitors are complete and accurate in all material respects and fully set out the rights 95 and restrictions attaching to each class of share capital of the company to which they relate. (d) The accounting records of each member of the Group have been kept on a proper and consistent basis with no change in the methods or bases of valuation or accountancy treatment having been made for at least two years prior to the Balance Sheet Date or since. 1.30 GRANTS AND ALLOWANCES No member of the Group has applied for or received any grant, allowance, aid or subsidy from any supranational, national or local authority or government agency during the last six years. 1.31 TERMS OF TRADE (a) So far as any of the Sellers is aware, no substantial customer or supplier of any member of the Group has during the 12 months preceding the date of this agreement indicated an intention to cease trading with or supplying to that member or is likely to reduce substantially its trading with or supplies to that member. There is no contract to which any member of the Group is a party which by reason of the sale of the PEPYS Shares gives any other contracting party the right to terminate any contract of, or to impose any obligation (whether to make payment or otherwise) on, any member of the Group. So far as any of the Sellers is aware the attitude or actions of customers, suppliers, employees and other persons with regard to the Group will not be prejudicially affected by the execution of this agreement or Closing to the extent which in the aggregate will have a Material Adverse Effect on the Group. A "substantial customer" means a customer accounting for not less than (pound)100,000 of commission income earned by the Group per annum and "substantial supplier" means a supplier receiving not less than (pound)100,000 per annum from the Group. (b) No member of the Group uses or otherwise carries on its business under any name other than its corporate name. 1.32 BANK ACCOUNTS AND BORROWINGS (a) Details of all bank accounts maintained or used by each member of the Group (including, in each case, the name and address of the bank with whom the account is kept and the number and nature of the account) are set out in or contained in the Disclosure Bundle. (b) Details of all overdraft, loan and other financial facilities available to any member of the Group and the amounts outstanding under them as at January 29 1999 are set out in the Disclosure Letter and no Seller or 96 any member of the Group has done anything whereby the continuance of any of those facilities might be affected or prejudiced. (c) The total amount borrowed by each member of the Group from its bankers does not exceed its financial facilities and the total amount borrowed from whatsoever source does not exceed any limitation on its borrowing contained in its the relevant member's Governing Documents. 1.33 SOLVENCY OF PEPYS AND RML (a) No order has been made and no resolution has been passed for the winding up of any member of the Group or for a provisional liquidator to be appointed in respect of any member of the Group and no petition has been presented and no meeting has been convened for the purpose of winding up any member of the Group. (b) No administration order has been made and no petition for such an order has been presented in respect of any member of the Group. (c) No receiver (which expression shall include an administrative receiver) has been appointed in respect of any member of the Group or all or any of its assets. (d) No member of the Group is insolvent, or unable to pay its debts within the meaning of section 123 of the Insolvency Act 1986, or has stopped paying its debts as they fall due. (e) No voluntary arrangement has been proposed under section 1 of the Insolvency Act 1986 in respect of any member of the Group. (f) No event analogous to any of the foregoing has occurred in or outside England. (g) No unsatisfied judgment is outstanding against any member of the Group. 1.34 SOLVENCY OF SELLERS (a) No bankruptcy order has been made in respect of any of the Sellers or a petition for such an order presented. (b) No application has been made in respect of any of the Sellers for an interim order under section 253 of the Insolvency Act 1986. (c) None of the Sellers are unable to pay or to have no reasonable prospect of being able to pay any debt as those expressions are defined in section 268 of the Insolvency Act 1986. 97 (d) No person has been appointed by the court to prepare a report in respect of any of the Sellers under section of the 273 Insolvency Act 1986. (e) No interim receiver has been appointed of the property of any of the Sellers under section 286 Insolvency Act 1986. 1.35 LIABILITY FOR SERVICES No member of the Group has provided any product or service which does not in any material respect (i) comply with all applicable laws, regulations or standards; or (ii) accord with any representation or warranty, express or implied, given in respect of it. 1.36 OWNERSHIP AND CONDITION OF ASSETS (a) Each member of the Group owns or has the right to use all assets used by any member of the Group in the course of its business (other than real property) or which are necessary for the continuation of that business as it is now carried on. (b) Each of the assets included in the Interim Balance Sheet or acquired by any member of the Group since the Balance Sheet Date is owned both legally and beneficially by a member of the Group free from any third party rights, and each of those assets capable of possession is in the possession or under the control of a member of the Group. (c) All plant and machinery (including fixed plant and machinery), vehicles and office equipment used by any member of the Group in connection with its business are in good condition and working order and have been regularly maintained and (save for any in the process of being serviced or repaired) are capable of being properly used in connection with the business of the relevant part of the Group and, so far as any of the Sellers is aware, none is dangerous or obsolete. 1.37 INTELLECTUAL PROPERTY (a) Accurate details of all registered and material unregistered Intellectual Property owned or used by PEPYS or RML are set out in the Disclosure Letter. All renewal fees and steps required for the maintenance, protection and enforcement of the Intellectual Property owned or used by PEPYS or RML have been paid or taken. So far any of the Sellers is aware, all such rights are valid, subsisting and enforceable and no such rights are being or have been challenged or attacked by any third party or competent authority. For the purpose of this Warranty "Intellectual Property" means patents, trade marks and service marks, rights in designs, trade or business names, copyrights, database rights and topography rights (whether or not any of these is registered and including applications for registration of any such thing) and right under 98 licences and consents in relation to any such thing and all rights or forms of protection of a similar nature or having equivalent or similar effect to any of these which may subsist anywhere in the world. (b) Details of all licences, agreements, settlements, undertakings and other arrangements in respect of any Intellectual Property (the "Intellectual Property Agreements")entered into by PEPYS or RML are set out in the Disclosure Letter and are valid and enforceable. None of the Intellectual Property Agreements are capable of termination on a change in the management control or shareholding of PEPYS or RML or otherwise by reason of the transactions contemplated by this Agreement. (c) So far as any of the Sellers is aware, neither PEPYS nor RML nor any third party is in breach of any Intellectual Property Agreement. (d) So far as any of the Sellers is aware, no third party is infringing or making unauthorised use or has infringed or made unauthorised use of any Intellectual Property owned or used by PEPYS or RML. (e) All Intellectual Property owned or otherwise required for the business of PEPYS or RML is in the possession or under the control of PEPYS or RML. (f) So far as any of the Sellers is aware, the processes and methods employed, the services provided or the businesses conducted and the products used or dealt in by PEPYS within the last three years do not, and/or at the time of being employed, provided, conducted, used or dealt in did not, infringe the rights of any other person in any Intellectual Property. 1.38 INFORMATION TECHNOLOGY (a) Details of the Information Technology owned or used by PEPYS or RML and all agreements or arrangements relating to the maintenance and support (including escrow agreements relating to the deposit of source codes), security, disaster recovery management and utilisation (including facilities management and computer bureau services agreements) of the Information Technology owned or used by PEPYS have been disclosed in the Disclosure Letter. For the purposes of this Warranty 1.38, "Information Technology" means computer hardware, software, networks and/or other information technology used or required to carry out the respective businesses of PEPYS and RML of a business which relies on computer hardware, software, networks and/or other information technology (whether embedded or otherwise). (b) PEPYS and RML own or have the right to use all Information Technology used by or required to carry on the business of PEPYS and RML and fulfil its existing contracts and commitments. 99 (c) No records, systems, controls data or information of PEPYS and RML are recorded, stored, maintained, operated or otherwise wholly or partly dependent on or held by any means (including any electronic, mechanical or photographic process whether computerised or not) which (including all means of access thereto and therefrom) are not under the exclusive ownership or control of PEPYS or RML. (d) There are no material bugs, breakdowns or viruses which have caused material disruption to the business of PEPYS and RML and so far as each of the Sellers is aware the Information Technology owned or used by PEPYS and RML has the capacity and performance necessary to fulfil the present and foreseeable requirements of PEPYS and RML. For the avoidance of doubt, this warranty is not given in relation to any Year 2000 Issue. (e) Each of PEPYS and RML has evaluated its operations and systems to review the risk of computer hardware and software used by it becoming unable to recognise and properly execute date-sensitive functions involving certain dates prior to and any dates after December 31, 1999 (the "Year 2000 Issue") and based on the findings of such review has determined that the computer hardware and software used by it is capable of operating in all material respects in such a manner that a change to, reference to or use of a date after December 31 1999 in their operation will not have a Material Adverse Effect; and neither the Sellers nor (so far as any of the Sellers is aware) any member of the Group has been notified by any of its substantial suppliers, substantial customers or financial institutions utilised by PEPYS or RML, that such supplier, customer or financial institution has or is likely to have any Year 2000 Issue, which together would have a Material Adverse Effect on the Group. (f) The Sellers have not disclosed to any third party any source code or algorithms relating to any software owned (either solely or jointly) by PEPYS or RML. 1.39 DORMANT COMPANY PMS is a dormant company and is not carrying on trade or business, is not a party to any subsisting contract, does not have any outstanding liability or obligation to any party (whether actual or contingent), is not in dispute with any party; those of its assets whose value is included in the Interim Balance Sheet are beneficially owned free of all encumbrances; and it has not entered into any agreements or arrangements (whether in respect of Taxation or otherwise) with any Seller or any employee. 1.40 BONUS RIGHTS 100 No Seller has any right (whatsoever and howsoever arising) to receive any Bonus from any member of the Group. 101 SCHEDULE 4 LIMITATIONS ON SELLERS LIABILITY 1. For the purposes of this Schedule 4: 1.1 "HCC GROUP COMPANY" means HCC, or a company which is, from time to time, a subsidiary, subsidiary undertaking, associated undertaking or holding company of HCC or a subsidiary or associated undertaking of a holding company of HCC; 1.2 "RELEVANT AGREEMENTS" means this Agreement and the Tax Covenant; 1.3 "RELEVANT CLAIM" means a claim by HCC involving or relating to a breach of a Warranty; 1.4 "SELLER UNCAPPED CLAIM" means a claim by HCC involving or relating to a breach of Warranty 1.2(b) of Schedule 3; and 1.5 "TAX WARRANTIES" means the Warranties in Warranty 1.13 of Schedule 3. 2. The maximum aggregate liability of the Sellers under or in connection with the Relevant Agreements (including, for the avoidance of doubt, Section 8.1 of this Agreement) in respect of all claims on any ground whatsoever shall not exceed (pound)22,000,000 (the "Sellers' Cap") save that any liability of any Seller if Warranty 1.2(b) of Schedule 3 is breached, untrue or misleading shall not be subject to the Sellers' Cap. 3.1 HCC shall not be entitled to damages or other payments in respect of a Relevant Claim (other than a Relevant Claim relating to a Tax Warranty if and to the extent that the Relevant Claim arises in respect of Tax on income, profits or gains earned, accrued or received on or before December 31, 1998 or Tax in respect of an event occurring on or before December 31, 1998) or under Section 8.1 (except where the claim under Section 8.1 is in respect of a breach of Section 7.2) unless the aggregate amount of all Relevant Claims (other than Relevant Claims relating to such Tax Warranties or to claims under Section 8.1 in respect of a breach of Section 7.2) and all claims under Section 8.1 exceed(pound)250,000 in which event the Sellers shall be liable merely for the excess. 3.2 HCC shall not be entitled to damages or other payments in respect of a Relevant Claim (other than a Relevant Claim relating to a Tax Warranty if and to the extent that the Relevant Claim arises in respect of Tax on income, profits or gains earned, accrued or received on or before December 31, 1998 or Tax in respect of an event occurring on or before December 31, 1998) or under Section 8.1 which does not exceed (either on its own or when aggregated with one or more other Relevant Claims in respect of or arising from the same or substantially the same matter or circumstances)(pound)5,000. 102 3.3 To the extent that a Relevant Claim in respect of a Warranty other than a Tax Warranty relates to a Tax liability, clause 3 (Limits on Clause 2) of the Tax Covenant (other than clause 3(vii) of the Tax Covenant) will apply to the Relevant Claim mutatis mutandis as if set out herein. 4.1 The maximum liability of each of the Sellers in respect of all Relevant Claims and in respect of all other claims under or in connection with this Agreement or the Tax Covenant (all Relevant Claims together with all such other claims are referred to as "Applicable Claims") other than any Seller Uncapped Claim is limited as follows: (a) Axel: (pound)46,200; (b) Cook: (pound)7,662,500; (c) Lockett: (pound)2,673,000; (d) Mays: (pound)2,233,000; (e) Rattner: (pound)330,000; (f) MRI: (pound)4,573,800; (g) Smith: (pound)2,402,500; and (h) Steed: (pound)2,079,000. 4.2 If more than one Seller is liable in respect of any Applicable Claim then (subject to the limitations set out in paragraph 4.1 above) such Seller's liability in respect of that Applicable Claim shall be limited to that proportion of the Applicable Claim as the maximum liability of such Seller as set out in paragraph 4.1 bears to the aggregate maximum liability as set out in paragraph 4.1 above of the Sellers who are liable for the Applicable Claim. Without limitation of any other provision of this Agreement or any other document referred to herein (and subject to such limitations) all the Sellers are liable in respect of every Warranty which is breached, untrue or misleading save for Warranties as to title to their own PEPYS Shares and the authority and capacity of a Seller to sell. 5. Subject to paragraph 13, a Seller shall not be liable in respect of a Relevant Claim unless HCC has given such Seller or the Representative written notice of the Relevant Claim (stating so far as reasonably practicable the nature of the Relevant Claim in reasonable detail and the amount claimed) on or before: 5.1 subject to the Relevant Claims falling within paragraph 5.3, January 31, 2006 for Relevant Claims for breach of any Tax Warranty; 5.2 subject to the Relevant Claims falling within paragraph 5.3, January 31, 2002 for all other Relevant Claims; and 103 5.3 the expiration of the applicable statutory limit (if any) for the Relevant Claims where they relate to or arise out of fraud, fraudulent misrepresentation or dishonesty on the part of such Seller. 6. A Seller is not liable in respect of any Relevant Claim to the extent that such claim is contingent unless and until such contingent liability shall have become an actual liability provided that this paragraph shall not operate to avoid a Relevant Claim in respect of a contingent liability made before the expiry of the relevant period of time specified in paragraph 5 if a written notice of the Relevant Claim (stating so far as reasonably practicable the nature of the Relevant Claim in reasonable detail and the amount claimed) has been given before the expiry of such time period even if such liability shall not become an actual liability until after expiry of the relevant period. 7. A Seller is not liable in respect of a Relevant Claim (other than a Relevant Claim relating to a Tax Warranty) or a claim under Section 8.1: 7.1 If and to the extent that the matter giving rise to a Relevant Claim arises or if and to the extent any amount payable in relation to a Relevant Claim is increased as a result of the passing after the date of this Agreement of, or a change after the date of this Agreement in, a law, or any rule, regulation, or published administrative practice of a government, governmental department, agency or regulatory body (including, without limitation, any change after the date of this Agreement in such a practice in relation to extra statutory concessions) or an increase after the date of this Agreement in the Tax rates or an imposition of Tax, in each case not in force at the date of this Agreement; 7.2 if and to the extent that the matter giving rise to the Relevant Claim arises from or if and to the extent any amount payable in relation to a Relevant Claim is increased by any voluntary act done or omitted to be done by any member of the Group after Closing or at the written request of, or with the prior written consent of, HCC before Closing provided that no act or omission shall be regarded as voluntary if it is done or omitted:- (a) in order to comply with law or rules or regulations of any Government Authority; or (b) to satisfy or discharge a binding commitment or agreement created on or before Closing; or (c) to enable any member of the Group to carry on its business in the ordinary course; 7.3 if and to the extent that such Relevant Claim would not have arisen but for a voluntary change of accounting policy or practice of a member of the Group after Closing; 104 7.4 to the extent that the matter giving rise to the Relevant Claim was taken into account in computing the amount of a specific provision in the PEPYS Financial Statements or was specifically referred to in the PEPYS Financial Statements or in the notes to the PEPYS Financial Statements; or 7.5 to the extent that the matter giving rise to the Relevant Claim is fairly disclosed in the Disclosure Letter; or 7.6 (subject to paragraph 7.2) if and to the extent that such Relevant Claim would not have arisen or would have been reduced but for:- (a) a claim, election, surrender or disclaimer made, or notice or consent given, or another thing done, after Closing (other than one the making, giving or doing of which was taken into account in computing a provision for Tax or Tax asset in the PEPYS Balance Sheet); (b) a member of the Group's failure or omission to make a claim, election, surrender or disclaimer, or give a notice, or consent to do another thing, under, or in connection with, a provision of an enactment or regulation relating to Tax after Closing, the anticipated making, giving or doing of which was taken into account in computing a provision for Tax or Tax asset in the PEPYS Balance Sheet. 8. In assessing any damages or other amounts recoverable by an HCC Group Company for a Relevant Claim there shall be taken into account any corresponding net saving or net benefit which that HCC Group Company receives from any person which is directly referable to the matter giving rise to the Relevant Claim. 9. In calculating the liability of a Seller in relation to a Relevant Claim, there shall be taken into account (by way of reduction of the amount of such liability) the amount (if any) by which any Tax for which an HCC Group Company is liable to be assessed or accountable is reduced or extinguished as a direct result of the matter giving rise to such Relevant Claim and the timing of such reduction or extinguishment. 10.1 If Stephen L. Way or Frank J. Bramanti of HCC or any other employee of HCC (any such employee being referred to as a "Relevant Employee") who is (a) responsible for monitoring whether the Warranties were breached, untrue or misleading or (b) appointed to the board of directors of any member of the Group or (c) has direct management responsibility within HCC for the Group (provided that, for the avoidance of doubt, no Seller shall be treated as a Relevant Employee) has actual knowledge of any claim against any member of the Group by any third party which gives rise to a Relevant Claim (the "Applicable Relevant Claim") other than a Relevant Claim relating to a Tax Warranty, HCC shall give written notice of that claim to the Representative and it will further procure that the relevant member of the Group takes such action as any Seller may reasonably request to avoid, dispute, resist, compromise or 105 defend a Notifiable Claim (as defined below) (such action is referred to below as "Defending Action") provided that neither HCC nor any member of the Group shall be required to take any Defending Action at any Seller's request unless:- (i) the Seller has admitted liability for the Applicable Relevant Claim subject to the terms of this Agreement; (ii) the Seller has first obtained an opinion indicating that any Defending Action he requests HCC or any member of the Group to take has a reasonable prospect of success from a Counsel approved in advance by HCC (such approval not to be unreasonably withheld or delayed); (iii) any Defending Action any Seller requests HCC or any member of the Group to take is not materially prejudicial to the interests of any HCC Group Company including any member of the Group provided that if the Seller in question has satisfied the requirements contained in paragraphs (i), (ii) and (iv) when this paragraph (iii) applies, the amount of the Applicable Relevant Claim shall be reduced: (A) in any case where the interests of a member of the Group would be materially prejudiced by the taking of Defending Action against a third party, by one half of the amount which, on the balance of probabilities, HCC or the relevant member of the Group could reasonably have been expected to recover under such Defending Action or by which the liability of the Applicable Relevant Claim could reasonably have been expected to be reduced by such Defending Action; and (B) in any case where the interests of the Group would not be materially prejudiced by the taking of Defending Action against a third party, the whole of the amount which, on the balance of probabilities, HCC or the relevant member of the Group could reasonably have been expected to recover under such Defending Action or by which the liability of the Applicable Relevant Claim could reasonably have been expected to be reduced by such Defending Action; and (iv) the Seller indemnifies and provides security to HCC and the Group on an after Tax basis to their reasonable satisfaction against all liabilities, costs, damages, charges and expenses which may be incurred thereby or, at HCC's option, provides HCC and each relevant member of the Group with funds to their reasonable satisfaction to cover, on an after Tax basis, any reasonably foreseeable costs, liabilities, damages, costs, expenses or charges which may be incurred. Any claim brought by any third party against any member of the Group in respect of which HCC is under an obligation under this paragraph 10.1 to notify 106 the Sellers is referred to as a "Notifiable Claim". Failure by HCC to notify the Representative of a Notifiable Claim shall not relieve any Seller from any liability that he may have to HCC, any member of the Group or any other HCC Group Company under this Agreement except (subject to the sentence below) to the extent that such Seller demonstrates that the defence of such Notifiable Claim is materially prejudiced by HCC's failure to give notice to the Representative and/or that such failure or delay has substantially increased the liability of such Seller in respect of such claim (such exceptions are referred to as "Exceptions to Liability"). Failure by HCC to notify the Representative of a Notifiable Claim shall not relieve any Seller from any liability that he may have to HCC, any member of the Group or any other HCC Group Company under this Agreement if any Seller has knowledge of such Notifiable Claim and, in such a case, the Exceptions to Liability shall not apply. 10.2 Subject to the provisos in paragraph 10.1 above, HCC shall not settle or admit, and shall ensure that no member of the Group settles or admits liability in respect of a Notifiable Claim in respect of which any Seller has requested HCC and/or any member of the Group to take any Defending Action without the prior written consent of that Seller or the Representative such consent not to be unreasonably withheld or delayed provided that HCC and any member of the Group may settle any Notifiable Claim if HCC reasonably considers that the terms of such settlement are reasonable and any continuing defence of such Notifiable Claim is likely to be materially prejudicial to the interests of any HCC Group Company (including any member of the Group). 11. If the Seller(s) pay to an HCC Group Company an amount in respect of a Relevant Claim other than a Relevant Claim relating to a Tax Warranty and an HCC Group Company subsequently recovers from another person an amount which is referable to the matter giving rise to the Relevant Claim: 11.1 if the aggregate amount paid by the Seller(s) in respect of the Relevant Claim is more than the Sum Recovered, HCC shall immediately pay to the Representative the Sum Recovered; and 11.2 if the aggregate amount paid by the Seller(s) in respect of the Relevant Claim is less than or equal to the Sum Recovered, HCC shall immediately pay to the Representative an amount equal to the amount paid by the Seller(s). 11.3 Where more than one Seller has paid to an HCC Group Company an amount in respect of a Relevant Claim, any amounts payable by HCC under paragraph 11.1 or 11.2 shall be apportioned between each such Seller in the proportion which each such Seller's contribution to the Relevant Claim bears to the total amount paid by all such Sellers in respect of the Relevant Claim but provided that if any amount payable by any HCC Group Company under this paragraph 11 is paid as the Representative shall direct, such payment shall constitute complete discharge of the obligation of such HCC Group Company and such HCC Group Company shall not be concerned to see that the payment is applied in paying the Sellers in accordance with their respective entitlements. 107 11.4 For the purposes of this paragraph 11, "SUM RECOVERED" means an amount equal to the total of the amount recovered from the other person (less any Tax suffered by any HCC Group Company in respect thereof and all costs properly incurred by any HCC Group Company in recovering the amount from the person) plus any interest (at LIBOR at the start of the period referred to below) in respect of such net amount for the period following the recovery of the amount from that person and after the payment by the Seller(s) of the Relevant Claim. 12.1 Subject to paragraph 12.2, a Seller is not liable in respect of a Relevant Claim or a claim under Section 8.1 if and to the extent that Stephen L. Way or Frank J. Bramanti of HCC or any other Relevant Employee has actual knowledge that a member of the Group has a right of recovery against a third party (other than another HCC Group Company), there is a reasonable prospect of success and HCC does not procure that such member of the Group has taken reasonable steps to enforce such right. 12.2 Paragraph 12.1 shall not apply where the provisions of such paragraph would otherwise jeopardise the member of the Group's entitlement to make recovery against the relevant third party or where the relevant Warranty is breached, untrue or misleading by reason of Tax on income, profits or gains, earned, accrued or received on or before December 31, 1998 or Tax in respect of an event occurring on or before December 31, 1998; and 12.3 Paragraph 12.1 shall not apply unless: (i) (subject to HCC's compliance with paragraph 12.1) the Seller has admitted liability for the Relevant Claim or claim under Section 8.1 subject to the terms of this Agreement; (ii) the Seller has first obtained an opinion indicating that the relevant member of the Group has a reasonable prospect of success from a Counsel approved in advance by HCC (such approval not to be unreasonably withheld or delayed); (iii) the exercise of any such right of recovery is not materially prejudicial to the interests of any HCC Group Company including any member of the Group provided that if the Seller in question has satisfied the requirements contained in paragraphs (i), (ii) and (iv) when this paragraph (iii) applies, the amount of the claim against such Seller shall be reduced: (A) in any case where the interests of a member of the Group would be materially prejudiced by the exercise of such right of recovery against a third party which is a customer of the Group, by one half of the amount which, on the balance of probabilities, HCC or the relevant member of the Group could reasonably have been expected to recover or by which the liability of the claim against 108 the relevant Seller could reasonably have been expected to be reduced by such recovery; and (B) in any case where the interests of an HCC Group Company (other than a member of the Group) would not be materially prejudiced by the exercise of such right of recovery against a third party, the whole of the amount which, on the balance of probabilities, HCC or the relevant member of the Group could reasonably have been expected to recover or by which the liability of the claim against the relevant Seller could reasonably have been expected to be reduced by such recovery; and (iv) the Seller indemnifies and provides security to HCC and the Group on an after Tax basis to their reasonable satisfaction against all liabilities, costs, damages, charges and expenses which may be incurred thereby or, at HCC's option, provides HCC and each relevant member of the Group with funds to their reasonable satisfaction to cover, on an after Tax basis, any reasonably foreseeable costs, liabilities, damages, costs, expenses or charges which may be incurred. 12.4 Nothing in paragraphs 12.1 to 12.3 shall prevent HCC from bringing a Relevant Claim or Claim under Section 8.1 subsequently (and whether or not the relevant time periods referred to in paragraph 5 have expired provided always that written notice of such claim was given to the relevant Seller(s) in accordance with paragraph 5) if after the relevant member of the Group has taken steps to enforce the right of recovery against a third party it becomes clear that such recovery is unlikely to be successful and HCC has obtained an opinion from a Counsel reasonably acceptable to the Sellers indicating such an opinion or if and to the extent that the relevant member of the Group has not made full recovery against the relevant third party within 2 years of first taking steps to enforce such rights. 13. If HCC or any member of the HCC Group (including any member of the Group) is taking any steps to enforce any right of recovery against a third party in respect of any matter or circumstance which gave rise to a Relevant Claim then that part of the time period for notifying the Relevant Claim as set out in paragraph 5.1 or 5.2 has not elapsed at the date of first taking steps to enforce against the third party shall be suspended during the period in which the HCC or such member of the HCC Group is taking steps to enforce its right of recovery against the third party. 14. HCC is not entitled to recover more than once in respect of the same damage or loss suffered. 15. Any payment in respect of a Relevant Claim shall be treated as a reduction in the purchase price payable under the Agreement and in the amount received by the relevant Seller to the extent of such payment. 109 16. Nothing in this Schedule 4: (a) (subject to paragraph (b) below), restricts or limits the general obligation of HCC at law to mitigate any loss or damage which it may incur in consequence of a matter giving rise to a Relevant Claim; or (b) (subject to paragraphs 10.1(iii)(A) and (B) and paragraph 12.3(iii)(A) and (B)), requires HCC or any other HCC Group Company including any member of the Group to do anything which would be materially prejudicial to its interests. 17. If at any time after the date of this Agreement a Seller wishes to insure against its liability in respect of Relevant Claims, subject to that Seller reimbursing all the costs properly incurred by HCC to comply with this paragraph and to the Seller and the relevant prospective insurer executing and delivering such document(s) reasonably acceptable to HCC confirming that they will keep confidential all information provided to them by HCC and any HCC Group Company, HCC shall promptly provide such information in relation to itself and/or any HCC Group Company as a prospective insurer may reasonably require before effecting the insurance provided that for the avoidance of doubt nothing in this paragraph shall require any HCC Group Company to disclose any information in breach of a duty to a third party to keep such information confidential. 18. Notwithstanding any other provision of this Agreement, no Tax relief, Tax saving or other Tax benefit will be taken into account in reducing any claim which HCC may have against a Seller under this Agreement or will give rise to an obligation on the part of HCC to make a payment to any Seller under this Agreement to the extent that it has been taken into account in reducing any claim made by HCC under the Tax Covenant or given rise to a payment or an increased payment by HCC under the Tax Covenant or would have reduced such claim or given rise to such payment or increased payment but for the application of the(pound)25,000 limit in clause 6(A) or clause 3(vii) thereof. SCHEDULE 5 PROPERTY LEASES
PROPERTY LEASES WITH UNREGISTERED TITLES - ---------------------------------------- --------------------- -------------------- ---------------- ------------------ PRESENT LESSEE (OWNER) DATE OF LEASE PARTIES TERM CURRENT ANNUAL RENTAL - ---------------------------------------- --------------------- -------------------- ---------------- ------------------ RML 5.12.1994 (together The Prudential 29.9.1994 to (pound)144,193 with Deeds of Assurance Company 28.9.2009 Variation dated Limited (1) 20.4.1995 and RML (2) 15.1.1999) - ---------------------------------------- --------------------- -------------------- ---------------- ------------------ RML 15.1.1999 The Prudential 15.1.1999 to(pound)156,752 (but Assurance Company 28.9.2009 rent free to Limited (1) 14.4.1999) RML (2) - ---------------------------------------- --------------------- -------------------- ---------------- ------------------
PROPERTY LEASES WITH UNREGISTERED TITLES - ---------------------------------------- ------------------------- -------------------- PRESENT LESSEE (OWNER) SHORT DESCRIPTION CURRENT USE - ---------------------------------------- ------------------------- -------------------- RML Third Floor and Offices and Basement Storerooms C basement storage and D, Walsingham House, Seething Lane, London EC3 - ---------------------------------------- ------------------------- -------------------- RML Second Floor and Offices and Basement Storerooms Q basement storage and J, Walsingham House, Seething Lane, London EC3 - ---------------------------------------- ------------------------- --------------------
SCHEDULE 6 HCC'S OBLIGATIONS PENDING REDEMPTION OF THE INITIAL SHORT TERM LOAN NOTES Pending redemption of the Initial Short Term Loan Notes or, if later, enforcement by the Representative of the rights vested in him under and in accordance with the terms of the Deed of Charge, HCC shall procure that (except with the prior written consent of the Representative) each member of the Group will carry on its business in the ordinary course consistent with past practices with a view to maintaining the business of the relevant company as a going concern and without prejudice to the generality of the foregoing HCC shall procure that: (a) each member of the Group shall use reasonable endeavours to keep available the services of its present officers and employees and use reasonable endeavours to preserve the goodwill of those having business relationships with it; (b) no dividend or other distribution shall be declared, made or paid by any member of the Group otherwise than to another member of the Group; (c) no share or loan capital (or options to subscribe to the same) shall be allotted, issued, redeemed or purchased or agreed to be allotted, issued, redeemed or repurchased by any member of the Group; (d) no member of the Group shall sell or otherwise dispose of the whole or any part of its business or assets other than in the ordinary course of its trading; (e) each member of the Group shall take all reasonable steps to comply with the terms of all contracts in the ordinary and usual course consistent with past practice and will not make any material alteration to the terms of any existing contract; (f) no member of the Group shall incur or guarantee, except in the ordinary course of business consistent with past practice, any obligation for borrowed money or cancel or compromise any debts owed to it or waive or release any rights of material value; (g) no member of the Group will purchase, acquire, sell or otherwise dispose of (whether by grant of lease or otherwise) or create any security interest, lien or other encumbrance over any company, shares or securities, business or property; (h) each member of the Group shall maintain in full force and effect all insurance coverage in force at Closing; (i) no amendment is made to the memorandum or articles of association of any member of the Group; (j) no member of the Group pays any management or similar charge to any other member of the HCC Group; (k) unless it is unable to pay its debts within the meaning of Section 123(a) and (b) of the Insolvency Act 1986 at the date of this Agreement, there is no winding up of any member of the Group; (l) neither the shares in nor business and assets of PEPYS or RML shall be transferred, assigned, sold or otherwise disposed of nor shall any security interest, lien or other encumbrance be created over any such shares or assets; and (m) no member of the Group will agree to do anything that is not permitted in accordance with the above. HCC further agrees and undertakes to procure that after the security under the Deed of Charge has become enforceable and for so long as it remains enforceable, HCC and each member of the HCC Group (including each member of the Group) shall take all necessary steps to give full effect to the rights of the Representative under the Deed of Charge. HCC INSURANCE HOLDINGS, INC. By: FRANK J. BRAMANTI Name: Frank J. Bramanti, Title: Executive Vice President MARSHALL RATTNER, INC. By: B.J. COOK as attorney for Name: B.J. Cook Title: CEO B.J. COOK as attorney for GERALD AXEL, Individually B.J. COOK BARRY J. COOK, Individually G.J. LOCKETT GARY J. LOCKETT, Individually CHRISTOPHER F.B. MAYS CHRISTOPHER F. B. MAYS, Individually B.J. COOK as attorney for MARK E. RATTNER, Individually JOHN SMITH JOHN SMITH, Individually KEITH W. STEED KEITH W. STEED, Individually EX-10.353 3 EXHIBIT 10.353 EMPLOYMENT AGREEMENT This EMPLOYMENT AGREEMENT ("Agreement") is entered into effective as of the 1st day of January, 1999 (the "Effective Date"), between HCC INSURANCE HOLDINGS, INC. ("HCC" or "Company"), and STEPHEN L. WAY ("Executive"), sometimes collectively referred to herein as the "Parties." R E C I T A L S: WHEREAS, Executive is to be employed as Chief Executive Officer ("CEO") and Executive Chairman of the Board of HCC and, as an integral part of its management who participates in the decision-making process relative to short and long-term planning and policy for the Company, will serve on the Company's Executive Committee; WHEREAS, it is the desire of the Board of Directors of HCC (the "Board") to (i) directly engage Executive as an officer of HCC and its subsidiaries; and (ii) directly engage, if elected, the services of Executive as a director of HCC and its subsidiaries; and WHEREAS, Executive is desirous of committing himself to serve HCC on the terms herein provided. NOW, THEREFORE, in consideration of the foregoing and of the respective covenants and agreements set forth below, the Parties agree as follows: 1. TERM. The Company hereby agrees to employ Executive as its Chief Executive Officer and Executive Chairman of the Board, and Executive hereby agrees to accept such employment, on the terms and conditions set forth herein, for the period commencing on the Effective Date and expiring as of 11:59 p.m. on December 31, 2000 (the "Basic Term") (unless sooner terminated as hereinafter set forth); provided, however, that effective January 1, 2000, Executive shall cease to hold the position of Chief Executive Officer; and provided, further however, that commencing on December 31, 2000, the term of this Agreement shall automatically be extended for three (3) additional years (the "Renewal Term") upon terms no less favorable than the terms that exist on the commencement date of the Renewal Term, and as set forth herein unless at least thirty (30) days prior to such December 31 date, Executive shall have given notice that he does not wish to extend this Agreement. (The Basic Term and the Renewal Term are herein sometimes referred to as the "Term"). It is understood that as set forth above, during the Term, Executive will cease to act as Chief Executive Officer but remain as Executive Chairman of the Board. In such event, Executive shall continue on as an employee of the Company entitled to the rights and subject to the obligations of this Agreement as they pertain to Executive as an employee. 2. DUTIES. (a) DUTIES AS EMPLOYEE OF THE COMPANY. Executive shall, subject to the supervision of the Board of Directors, have general management and control of HCC in the ordinary course of its business with all such powers with respect to such management and control as may be reasonably incident to such responsibilities. During normal business hours, Executive shall devote his full time and attention to diligently attending to the business of the Company during the Term. During the Term, and except as shall exist prior to the date of the Agreement Executive shall not directly or indirectly render any services of a business, commercial, or professional nature to any other person, firm, corporation, or organization, whether for compensation or otherwise, without the prior consent of the Board of Directors of HCC. However, Executive shall have the right to engage in such activities as may be appropriate in order to manage his personal investments so long as such activities do not interfere or conflict with the performance of his duties to the Company hereunder. The conduct of such activity shall not be deemed to materially interfere or conflict with Executive's performance of his duties until Executive has been notified in writing thereof and given a reasonable period in which to cure the same. (b) OTHER DUTIES. At all times during the Term, the Company shall use its best efforts to cause Executive to be elected a director and to serve as Chairman of the Executive Committee of HCC. Any such failure to use its best efforts prior to a Change of Control shall be a material breach of this Agreement for purposes of Section (4)(a)(iv). Executive agrees to serve as a director and member of the Executive Committee of HCC and of any of its subsidiaries and in one or more executive offices of any of HCC's subsidiaries, provided Executive is indemnified for serving in any and all such capacities in a manner acceptable to the Company and Executive. Executive agrees that while a full time employee he shall not be entitled to receive any compensation for serving as a director of HCC, or in any capacities of HCC's subsidiaries other than the compensation to be paid to Executive by the Company pursuant to this Agreement. If Executive is not a full time employee, he shall be compensated as an outside director. 3. COMPENSATION AND RELATED MATTERS. (a) BASE SALARY. Executive shall receive a base salary paid by the Company at the annual rate of $800,000, during the period beginning on the Effective Date and for each calendar year of the Term, payable not less frequently than in substantially equal monthly installments (or such other more frequent times as executives of HCC normally are paid). The base salary shall be reviewed by the Board at least as often as the compensation of other senior officers of HCC is reviewed, and may be increased (but not decreased) at any time in the sole discretion of the Board. Any increase in the base salary or other compensation granted by the Board shall in no way limit or reduce any other obligation of the Company hereunder and, once established at an increased specified rate, Executive's base salary hereunder shall not thereafter be reduced. For purposes of this Agreement, "Base Salary" shall mean the Executive's initial base salary or, if increased, then the increased base salary. (b) BONUS PAYMENTS. Each year during the Term, Executive shall be entitled to receive, in addition to the Base Salary, an annual cash bonus payment in amounts to be determined at the sole discretion of the Compensation Committee. (c) STOCK OPTIONS. In addition to stock options previously granted to Executive (including 150,000 shares granted as of January 7, 1998 at an exercise price of $16.50 per share and 75,000 shares granted on December 31, 1998 at an exercise price of $17.75 per share), in partial consideration for Executive's non-competition agreements set forth herein, Executive shall be provided with additional options to purchase HCC shares for each year of Executive's employment hereunder as follows: (1) A minimum of 75,000 shares on December 31, of each year of the Term. In addition to the minimum set forth herein, Executive shall receive such additional options as the Compensation Committee shall, in its sole discretion, grant to Executive. All such options shall be priced at the average closing price of HCC shares for the month of December of the year of grant. Any options so granted shall vest immediately; (2) If this Agreement is renewed by Executive, as set forth herein, on January 1, 2001, Executive shall be granted an additional option of 150,000 shares (the "Renewal Option"). Such Renewal Option shall vest in one installment on December 31, 2001. The exercise price for such Renewal Option shall be the average of the closing prices on the New York Stock Exchange for the month of December 2000. (d) EXPENSES. During the Term of his employment and the Consulting Period hereunder, Executive shall be entitled to receive prompt reimbursement for all reasonable expenses incurred by him (in accordance with the policies and procedures established by the Board for the Company's senior executive officers) in performing services hereunder, provided that Executive properly accounts therefor in accordance with Company policy. Executive shall be reimbursed for use of his home for business guests at the rate of $500 per night and for entertaining business guests on his boat at the rate of $3,750 per day, subject to adjustment from time to time based on International Charter Rates. In addition, the Company shall reimburse Executive pursuant to the arrangements in effect as of the date of this Agreement, for all of the use of Executive's aircraft during the Term and the Consulting Period, as defined below. (e) OTHER BENEFITS. Executive shall be entitled to participate in or receive benefits under any compensation employee benefit plan or other arrangement made available by the Company now or in the future to its senior executive officers and key management employees, subject to and on a basis consistent with the terms, conditions, and overall administration of such plan or arrangement. Nothing paid to Executive under any plan or arrangement presently in effect or made available in the future shall be deemed to be in lieu of the Base Salary payable to Executive pursuant to subsection (a) of this Section. The Company shall not make any changes in any employee benefit plans or other arrangements in effect on the date hereof or subsequently in effect in which Executive currently or in the future participates (including, without limitation, each pension and retirement plan, supplemental pension and retirement plan, savings and profit sharing plan, stock or unit ownership plan, stock or unit purchase plan, stock or unit option plan, life insurance plan, medical insurance plan, disability plan, dental plan, health and accident plan, or any other similar plan or arrangement) that would adversely affect Executive's rights or benefits thereunder, unless such change occurs pursuant to a program applicable to substantially all executives of the Company and does not result in a proportionately greater reduction in the rights of or benefits to Executive as compared with any other executive of the Company. (f) VACATIONS. Executive shall be entitled to forty (40) paid vacation days per year during the Basic Term, or such additional number as may be determined by the Board from time to time. There shall be indefinite carryovers of unused vacation from year to year. For purposes of this Section, weekends shall not count as vacation days, and Executive shall also be entitled to all paid holidays given by the Company to its senior executive officers. In the event Executive shall elect to renew this Agreement, during such Renewal Term Executive shall be entitled to fifty (50) paid vacation days per year. (g) PERQUISITES. Executive shall be entitled to receive the perquisites and fringe benefits appertaining to an executive officer of HCC in accordance with any practice established by the Compensation Committee. Notwithstanding, and in addition to, any perquisites to which Executive is entitled pursuant to the preceding sentence, Executive shall: (i) have use of a Mercedes 600 SEC, and the Company's Bentley automobiles and the Company shall pay all expenses related to Executive's use of such automobiles, including gasoline, insurance, and maintenance (provided further, that if this Agreement is extended for the Renewal Term and during the Consulting Period, as defined below, Executive shall have the right to use a new Mercedes 600 SEC (or its equivalent), obtained as of the commencement of the Renewal Term and/or the Consulting Period, and to continue the use of the existing Bentley (with the Company continuing to pay all expenses related to the use of such automobiles) for such Renewal Term and during the Consulting Period); (ii) be allowed to travel with his spouse on business utilizing First Class passage under the Company's corporate account, as Executive determines; (iii) receive reimbursement of annual country club dues for Executive's membership in Lochinvar Country Club plus one additional country club (and following termination of this Agreement, Executive shall continue to control such ownership); (iv) receive all existing life insurance which at Executive's option shall be converted to ordinary life insurance; (v) be entitled to utilize an office at the Company's executive offices or, at Executive's election, to be reimbursed for the utilization of an office at Executive's home; (vi) be entitled to utilize the services of Company employees at an aggregate annual maximum cost of $200,000 (which shall be added to Executive's taxable income) during the Term, and the Consulting Period; (vii) have the right to utilize during the Term and the Consulting Period at no cost to Executive, the pilots and engineers employed by the Company pursuant to the contractual arrangement in existence as of the Effective Date hereof; and (viii) be entitled to be reimbursed for all methods of communications used by Executive (including, without limitation, the installation cost and use of software, telephone, facsimile machines, etc., other similar equipment, and all upgrades thereof) in Executive's house, aircraft and boat which shall continue through the Term and the Consulting Period. (h) PRORATION. Any payments or benefits payable to Executive hereunder in respect of any calendar year during which Executive is employed by the Company for less than the entire year, unless otherwise provided in the applicable plan or arrangement or herein, shall be prorated in accordance with the number of days in such calendar year during which he is so employed. Notwithstanding the foregoing, any payments pursuant to Sections 4(c) or 4(d) of this Agreement shall not be subject to proration. 4. TERMINATION. (a) DEFINITIONS. (1) "CAUSE" shall mean: (i) Material dishonesty which is not the result of an inadvertent or innocent mistake of Executive with respect to the Company or any of its subsidiaries; (ii) Willful misfeasance or nonfeasance of duty by Executive intended to injure or having the effect of injuring in some material fashion the reputation, business, or business relationships of the Company or any of its subsidiaries or any of their respective officers, directors, or employees; (iii) Material violation by Executive of any material term of this Agreement; or (iv) Conviction of Executive of any felony, any crime involving moral turpitude or any crime other than a vehicular offense which could reflect in some material fashion unfavorably upon the Company or any of its subsidiaries. Executive may not be terminated for Cause unless and until there has been delivered to Executive written notice from the Board supplying the particulars of Executive's acts or omissions that the Board believes constitute Cause, a reasonable period of time (not less than 30 days) has been given to Executive after such notice to either cure the same or to meet with the Board, with his attorney if so desired by Executive, and following which the Board by action of not less than two-thirds of its members furnishes to Executive a written resolution specifying in detail its findings that Executive has been terminated for Cause as of the date set forth in the notice to Executive. (2) A "CHANGE OF CONTROL" shall be deemed to have occurred if: (i) Any "person" or "group" (within the meaning of Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934) other than a trustee or other fiduciary holding securities under an employee benefit plan of the Company becomes the "beneficial owner" (as defined in Rule 13d-3 under the Securities Exchange Act of 1934), directly or indirectly, of 50% or more of the Company's then outstanding voting common stock; or (ii) At any time during the period of three (3) consecutive years (not including any period prior to the date hereof), individuals who at the beginning of such period constituted the Board (and any new director whose election by the Board or whose nomination for election by the Company's shareholders were approved by a vote of at least two-thirds of the directors then still in office who either were directors at the beginning of such period or whose election or nomination for election was previously so approved) cease for any reason to constitute a majority thereof; or (iii) The shareholders of the Company approve a merger or consolidation of the Company with any other corporation, other than a merger or consolidation (a) in which a majority of the directors of the surviving entity were directors of the Company prior to such consolidation or merger, and (b) which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being changed into voting securities of the surviving entity) more than 50% of the combined voting power of the voting securities of the surviving entity outstanding immediately after such merger or consolidation; or (iv) The shareholders approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets. (3) A "DISABILITY" shall mean the absence of Executive from Executive's duties with the Company on a full-time basis for 180 consecutive days, or 180 days in a 365-day period, as a result of incapacity due to mental or physical illness which results in the Executive being unable to perform the essential functions of his position, with or without reasonable accommodation. (4) A "GOOD REASON" shall mean any of the following (without Executive's express written consent): (i) A material alteration in the nature or status of Executive's title, duties or responsibilities, or the assignment of duties or responsibilities inconsistent with Executive's status, title, duties and responsibilities; (ii) A failure by the Company to continue in effect any employee benefit plan in which Executive was participating, or the taking of any action by the Company that would adversely affect Executive's participation in, or materially reduce Executive's benefits under, any such employee benefit plan, unless such failure or such taking of any action adversely affects the senior members of corporate management of the Company generally to the same extent; (iii) A relocation of the Company's principal executive offices, or Executive's relocation to any place other than the principal executive offices, exceeding a distance of fifty (50) miles from the Company's current executive office located in Houston, Texas, except for reasonably required travel by Executive on the Company's business; (iv) Any material breach by the Company of any provision of this Agreement; or (v) Any failure by the Company to obtain the assumption and performance of this Agreement by any successor (by merger, consolidation, or otherwise) or assign of the Company. However, Good Reason shall exist with respect to an above specified matter only if such matter is not corrected by the Company within thirty (30) days of its receipt of written notice of such matter from Executive, and in no event shall a termination by Executive occurring more than ninety (90) days following the date of the event described above be a termination for Good Reason due to such event. (5) "TERMINATION DATE" shall mean the date Executive is terminated for any reason pursuant to this Agreement. (b) TERMINATION WITHOUT CAUSE, OR TERMINATION FOR GOOD REASON: BENEFITS. In the event there is a termination by the Company without Cause, or if Executive terminates for Good Reason (a "Termination Event"), this Agreement shall terminate except as provided in Section 6, and Executive shall be entitled to the following severance benefits: (1) For a period of twelve (12) months after the Termination Date (unless the remainder of the Term is less than twelve (12) months, in which case, for an amount of time equal to the remainder of the Basic Term), Base Salary (as defined in Section 3(a)), at the rate and payable quarterly in advance unless such termination is by the Company without Cause, in which event such amount of Base Salary shall be paid in a lump sum within ten (10) days of the Termination Event. (2) If there is a Change of Control or termination by the Company without Cause or by the Executive for Good Reason, any stock options and other stock-related grants ("Stock Awards") which Executive has received under any of the HCC stock plans including stock options which are to be granted during the remainder of the Basic Term and during the Renewal Term (it being assumed that such Renewal Term shall become effective) shall, if not issued, be immediately issued and all of such options, whether issued or not as of such date shall vest immediately, provided, however, if there is a termination for Good Reason or by the Company other than for Cause, all options shall be exercisable for one-year or the remainder of their term, whichever is less. For purposes of this subsection, the option exercise price for options which were to be granted during the Renewal Term, shall be the average of the closing prices on the New York Stock Exchange for the twenty (20) business days immediately preceding, as the case may be: (i) the first announcement of the event which results in the Change of Control or (ii) the date of such termination. (3) To the extent not theretofore paid or provided, the Company shall timely pay or provide to Executive any other amounts or benefits required to be paid or provided or which Executive is eligible to receive under any plan, program, policy or practice, or contract or agreement of the Company and its affiliated companies for the period of time equal to the remainder of the Basic Term, or any Renewal Term and through the Basic Term and any Renewal Term, at its sole expense, shall continue to provide (through its own plan and/or individual policies) Executive (and Executive's dependents) with health benefits no less favorable than the group health plan benefits provided during such period to any senior executive officer of the Company or any affiliated company (to the extent any such coverage or benefits are taxable to Executive by reason of being provided under a self-insured health plan of the Company or an affiliate, the Company shall make Executive "whole" for the same on an after-tax basis), provided, however, such coverage shall be secondary to any group health plan coverage Executive (or his dependents) receive from another employer, (such other amounts and benefits shall be hereinafter referred to as the "Other Benefits"); (4) If Executive receives any payments whether or not pursuant to this Agreement which are subject to an excise tax imposed under Section 4999 of the Internal Revenue Code of 1986, as amended, or any similar tax imposed under federal, state, or local law (collectively, "Excise Taxes"), the Company shall pay to Executive (on or before the date on which the Company is required to withhold such Excise Taxes), 1) an additional amount equal to all Excise Taxes then due and payable, and 2) the amount necessary to defray Executive's increased (federal, state, and local) tax liability arising due to payment of the amount specified in this Subsection (4) which shall include any costs and expenses, including penalties and interest incurred by Executive in connection with any audit, proceedings, etc. related to the payment of such Excise Taxes or this payment. For purposes of calculating the amount payable to Executive under this Section, the federal and state income tax rates used shall be the highest marginal federal and state rates applicable to ordinary income in Executive's state of residence, taking into account any federal income tax deductions or credits available to Executive for state income taxes. The Company shall cause its independent auditors to calculate such amount and provide Executive a copy of such calculation at least ten (10) days prior to the date specified above for payment of such amount. It is the intent of the Parties that this Subsection (4) shall place Executive in the same net after-tax position Executive would have been in had no payment been subject to an Excise Tax and, notwithstanding anything to the contrary, it shall be construed to effectuate said result; (5) All accrued compensation and unreimbursed expenses through the Termination Date. Such amounts shall be paid to Executive in a lump sum in cash within thirty (30) days after the Termination Date; and (6) Executive shall be free to accept other employment during such period, and there shall be no offset of any employment compensation earned by Executive in such other employment during such period against payments due Executive under this Section (4), and there shall be no offset in any compensation received from such other employment against the Base Salary set forth above. (7) In addition to all amounts otherwise paid to Executive pursuant to this Agreement, all amounts that Executive would otherwise have received during the full term of the Renewal Term and the Consulting Period, including, without limitation, all perquisites, as set forth in subsection 3(g). (c) TERMINATION IN EVENT OF DEATH: BENEFITS. If Executive's employment is terminated by reason of Executive's death during the Term of this Agreement, this Agreement shall terminate except as provided in Section 6 without further obligation to Executive's legal representatives under this Agreement, other than for payment of all compensation and unreimbursed expenses, as Executive would have been entitled to during the remaining portion of the Basic Term and the Renewal Terms (it being assumed that Executive would have renewed this Agreement), the timely payment or provision of Other Benefits through the date of death, and, if such death occurs on or after October 1 of any year, such cash or stock bonus as Executive would otherwise have been awarded in such year if Executive's death had not occurred. Such amounts shall be paid to Executive's estate or beneficiary, as applicable, in a lump sum in cash within ninety (90) days after the date of death. With respect to the provision of Other Benefits, the term Other Benefits as used in this Section 4(c) shall include, without limitation, and Executive's estate and/or beneficiaries shall be entitled to receive, benefits at least equal to the most favorable benefits provided by the Company to the estates and beneficiaries of other executive level employees of the Company under such plans, programs, practices, and policies relating to death benefits, if any, as in effect with respect to other executives and their beneficiaries at any time during the 120-day period immediately preceding the date of death. Additionally, all Stock Awards for which Executive would have been eligible had he completed the Basic Term and the Renewal Term (it being assumed that Executive would have renewed this Agreement) of this Agreement shall be accelerated, if issued, and if not issued, shall be issued and accelerated and Executive's estate or beneficiary shall be vested in such Stock Awards as of the date of Executive's death. For purposes of this subsection, the option exercise price for options which were to be granted during the Renewal Term shall be the average of the closing prices on the New York Stock Exchange for the twenty (20) business days immediately preceding Executive's death. (d) TERMINATION IN EVENT OF DISABILITY: BENEFITS. If Executive's employment is terminated by reason of Executive's Disability during the Term, this Agreement shall continue in full force for the Term plus the Consulting Period (Executive's compensation shall not `be reduced by any long-term disability coverage Executive actually receives), and if such Disability occurs on or after October 1 of any year, Executive shall be entitled to the same cash or stock bonus in such year that Executive would have been awarded if such Disability had not occurred. In addition, all outstanding Stock Awards shall vest immediately (including any options which are to be granted during the Renewal Term, whether issued or not) upon such termination due to Disability; and the Executive may receive additional stock or cash bonuses at the sole discretion of the Compensation Committee. For purposes of this subsection the option exercise price for options which were to be granted during the Renewal Term shall be the average of the closing prices on the New York Stock Exchange for the twenty (20) business days immediately preceding the date the Disability is established. (e) VOLUNTARY TERMINATION BY EMPLOYEE AND TERMINATION FOR CAUSE: BENEFITS. Executive may terminate his employment with the Company without Good Reason by giving written notice of his intent and stating an effective Termination Date at least ninety (90) days after the date of such notice; provided, however, that the Company may accelerate such effective date by paying Executive through the proposed Termination Date and also vesting awards that would have vested but for this acceleration of the proposed Termination Date. Upon such a termination by Executive, except as provided in Section 6, or upon termination for Cause by the Company, this Agreement shall terminate, and the Company shall pay to Executive all accrued compensation, unreimbursed expenses and the Other Benefits through the Termination Date. Such amounts shall be paid to Executive in a lump sum in cash within thirty (30) days after the date of termination. (f) DIRECTOR POSITIONS. Upon termination of employment, for any reason Executive shall remain on any and all Board positions held with the Company and/or any of its subsidiaries and affiliates. At such time, Executive shall be paid as an outside director. 5. NON-COMPETITION, NON-SOLICITATION, AND CONFIDENTIALITY. Executive recognizes and agrees that the benefit of not being employed at-will, is provided in consideration for, among other things, the agreements contained in this Section as well as the Stock Options granted to Executive pursuant to this Agreement. The Company agrees that while employed pursuant to this Agreement, Executive will be provided with confidential information of Company; specialized training on how to perform his duties; and contact with the Company's customers and potential customers. Furthermore, in the event Executive is terminated without Cause, or terminates for Good Reason and more than one (1) year remains on the Basic Term, the Renewal Term, or the Consulting Period then Executive shall receive additional consideration in an amount equal to the quotient of the Base Salary divided by 12, which shall thereupon be multiplied by the number of months remaining in the Basic Term, the Renewal Term and the Consulting Period, minus 12 months (but which, including the number of months remaining, in the Basic Term, the Renewal Term and the Consulting Period, shall not be less than 36 months) and which shall be paid in one lump sum within ten (10) days of such termination. In consideration of all of the foregoing, Executive agrees as follows: (a) NON-COMPETITION DURING EMPLOYMENT. Executive agrees during the Term he will not compete with the Company by engaging in the conception, design, development, production, marketing, or servicing of any product or service that is substantially similar to the products or services which the Company provides, and that he will not work for, in any capacity, assist, or become affiliated with as an owner, partner, etc., either directly or indirectly, any individual or business which offers or performs services, or offers or provides products substantially similar to the services and products provided by Company. (b) CONFLICTS OF INTEREST. Executive agrees that during the Term, he will not engage, either directly or indirectly, in any activity (a "Conflict of Interest") which might adversely affect the Company or its affiliates, including ownership of a material interest in any supplier, contractor, distributor, subcontractor, customer or other entity with which the Company does business or accepting any material payment, service, loan, gift, trip, entertainment, or other favor from a supplier, contractor, distributor, subcontractor, customer or other entity with which the Company does business, and that Executive will promptly inform the Chairman of the Company as to each offer received by Executive to engage in any such activity. Executive further agrees to disclose to the Company any other facts of which Executive becomes aware which might in Executive's good faith judgment reasonably be expected to involve or give rise to a Conflict of Interest or potential Conflict of Interest. (c) NON-COMPETITION AFTER TERMINATION. Executive agrees that Executive shall not, at any time during the period of three (3) years after the termination of the Term for any reason, within any of the markets in which the Company has sold products or services or formulated a plan to sell products or services into a market during the last twelve (12) months of Executive's employ; engage in or contribute Executive's knowledge to any work which is competitive with or similar to a product, process, apparatus, service, or development on which Executive worked or with respect to which Executive had access to Confidential Information while employed by the Company; provided, however, this subsection (c) shall not operate to prevent Executive from engaging in retail insurance or re-insurance activities during such two-year period to the extent such activities do not compete or permit any other person or entity to compete with any business the Company or any of its subsidiaries or affiliated companies were engaged in at the time of such termination. Following the expiration of said three (3) year period, Executive shall continue to be obligated under the Confidential Information Section of this Agreement not to use or to disclose Confidential Information of the Company so long as it shall not be publicly available. It is understood that the geographical area set forth in this covenant is divisible so that if this clause is invalid or unenforceable in an included geographic area, that area is severable and the clause remains in effect for the remaining included geographic areas in which the clause is valid. (d) NON-SOLICITATION OF CUSTOMERS. Executive further agrees that for a period of three (3) years after the termination of the Term, he will not solicit or accept any business from any customer or client or prospective customer or client with whom Executive dealt or solicited while employed by Company during the last twelve (12) months of his employment. (e) NON-SOLICITATION OF EMPLOYEES. Executive agrees that for the duration of the Term, and for a period of three (3) years after the termination of the Term except for Frank J. Bramanti, L. Edward Tuffley and Executive's personal service employees, he will not either directly or indirectly, on his own behalf or on behalf of others, solicit, attempt to hire, or hire any person employed by Company to work for Executive or for another entity, firm, corporation, or individual. (f) CONFIDENTIAL INFORMATION. Executive further agrees that he will not, except as the Company may otherwise consent or direct in writing, reveal or disclose, sell, use, lecture upon, publish or otherwise disclose to any third party any Confidential Information or proprietary information of the Company, or authorize anyone else to do these things at any time either during or subsequent to his employment with the Company. This Section shall continue in full force and effect after termination of Executive's employment and after the termination of this Agreement. Executive's obligations under this Section with respect to any specific Confidential Information and proprietary information shall cease when that specific portion of the Confidential Information and proprietary information becomes publicly known, in its entirety and without combining portions of such information obtained separately. It is understood that such Confidential Information and proprietary information of the Company include matters that Executive conceives or develops, as well as matters Executive learns from other employees of Company. Confidential Information is defined to include information: (1) disclosed to or known by the Executive as a consequence of or through his employment with the Company; (2) not generally known outside the Company; and (3) which relates to any aspect of the Company or its business, finances, operation plans, budgets, research, or strategic development. "Confidential Information" includes, but is not limited to the Company's trade secrets, proprietary information, financial documents, long range plans, customer lists, employer compensation, marketing strategy, data bases, costing data, computer software developed by the Company, investments made by the Company, and any information provided to the Company by a third party under restrictions against disclosure or use by the Company or others. (g) RETURN OF DOCUMENTS, EQUIPMENT, ETC. All writings, records, and other documents and things comprising, containing, describing, discussing, explaining, or evidencing any Confidential Information, and all equipment, components, parts, tools, and the like in Executive's custody or possession that have been obtained or prepared in the course of Executive's employment with the Company shall be the exclusive property of the Company, shall not be copied and/or removed from the premises of the Company, except in pursuit of the business of the Company, and shall be delivered to the Company, without Executive retaining any copies, upon notification of the termination of Executive's employment or at any other time requested by the Company. The Company shall have the right to retain, access, and inspect all property of Executive of any kind in the office, work area, and on the premises of the Company upon termination of Executive's employment and at any time during employment by the Company to ensure compliance with the terms of this Agreement. (h) REAFFIRM OBLIGATIONS. Upon termination of his employment with the Company, Executive, if requested by Company, shall reaffirm in writing Executive's recognition of the importance of maintaining the confidentiality of the Company's Confidential Information and proprietary information, and reaffirm any other obligations set forth in this Agreement. (i) PRIOR DISCLOSURE. Executive represents and warrants that he has not used or disclosed any Confidential Information he may have obtained from Company prior to signing this Agreement, in any way inconsistent with the provisions of this Agreement. (j) CONFIDENTIAL INFORMATION OF PRIOR COMPANIES. Executive will not disclose or use during the period of his employment with the Company any proprietary or Confidential Information or Copyright Works which Executive may have acquired because of employment with an employer other than the Company or acquired from any other third party, whether such information is in Executive's memory or embodied in a writing or other physical form. (k) BREACH. Executive agrees that any breach of Sections 5(a), (c), (d), (e) or (f) above cannot be remedied solely by money damages, and that in addition to any other remedies Company may have, Company is entitled to obtain injunctive relief against Executive. Nothing herein, however, shall be construed as limiting Company's right to pursue any other available remedy at law or in equity, including recovery of damages and termination of this Agreement and/or any payments that may be due pursuant to this Agreement. (l) RIGHT TO ENTER AGREEMENT. Executive represents and covenants to Company that he has full power and authority to enter into this Agreement and that the execution of this Agreement will not breach or constitute a default of any other agreement or contract to which he is a party or by which he is bound. (m) EXTENSION OF POST-EMPLOYMENT RESTRICTIONS. In the event Executive breaches Sections 5(b), (d), or (e) above, the restrictive time periods contained in those provisions will be extended by the period of time Executive was in violation of such provisions. (n) ENFORCEABILITY. The agreements contained in Section 5 are independent of the other agreements contained herein. Accordingly, failure of the Company to comply with any of its obligations outside of this Section do not excuse Executive from complying with the agreements contained herein. (o) SURVIVABILITY. The agreements contained in Sections 5(c)-(g) shall survive the termination of this Agreement for any reason. 6. CONSULTING AGREEMENT. Effective upon Executive's termination of employment for any reason other than Executive's termination by the Company for Cause (and whether during the Basic Term or the Renewal Term), HCC hereby retains Executive as a consultant (an independent contractor and not as an employee) for a period of five (5) years (the "Consulting Period"). During the Consulting Period, Executive shall have the sole option to cease acting as Executive Chairman of the Board and shall thereafter serve as Non-Executive Chairman of the Board. Termination of the Term shall not effect the Parties' rights and obligations under this Section 6, subject to the following: Executive agrees to provide, if requested, 1,000 hours of service (the "Consulting Services") per year, as required by the Company. Prior to a change in control, the Company shall use its best effort to cause Executive to continue as a Director and Chairman of the Board during the term of the Consulting Period. HCC shall pay Executive $450,000 per year of the Consulting Period, payable quarterly, in advance. Executive may elect to delay payment for services, but not the services themselves. During such Consulting Period, Executive shall receive, to the extent permitted by law and the terms of any existing plan, all of the Company's benefits as if Executive was a full time employee. In addition, the terms of this Section 6 shall remain in full force and effect whether or not Executive dies or suffers a Disability pursuant to the terms hereof during the Consulting Period. Further, if at any time during the Term of this Agreement Executive shall elect, at his sole option, to cease being a full time employee, then and in that event, Executive shall become a consultant pursuant to the terms of this Section. During the Consulting Period, Executive shall have the right to continue using the Company's existing Bentley and a new Mercedes automobiles and Executive's aircraft for the same purposes and to the same extent as were in effect on the Effective Date of this Agreement. The Consulting Services to be provided shall be commensurate with Executive's training, background, experience and prior duties with the Company. Executive shall receive such stock options or cash bonuses as the Compensation Committee, in its sole discretion shall determine. Executive agrees to make himself reasonably available to provide such Consulting Services during the Consulting Period; provided, however, the Company agrees that it shall provide reasonable advance notice to Executive of its expected consulting needs and any request for Consulting Services hereunder shall not unreasonably interfere with Executive's other business activities and personal affairs as determined in good faith by Executive. In addition, Executive shall not be required to perform any requested Consulting Services which, in Executive's good faith opinion, would cause Executive to breach any fiduciary duty or contractual obligation Executive may have to another employer. Further, during the Consulting Period, Executive shall not be subject to any non-competition provisions except for the three-year period provided for in Section 5(c). Unless waived by Executive, Executive shall not be required to perform Consulting Services for more than four (4) days during any week or for more than eight (8) hours during any day. Executive's travel time shall constitute hours of Consulting Services for purposes of this Section 6. The Parties contemplate that, when appropriate, the Consulting Services shall be performed at Executive's office or residence and at the Company's executive offices in Houston, Texas and may be performed at such other locations only as they may mutually agree upon. Executive shall be properly reimbursed for all travel and other expenses reasonably incurred by Executive in rendering the Consulting Services. 7. ASSIGNMENT. This Agreement cannot be assigned by Executive. The Company may assign this Agreement only to a successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and assets of the Company provided such successor expressly agrees in writing reasonably satisfactory to Executive to assume and perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession and assignment had taken place. Failure of the Company to obtain such written agreement prior to the effectiveness of any such succession shall be a material breach of this Agreement. 8. BINDING AGREEMENT. Executive understands that his obligations under this Agreement are binding upon Executive's heirs, successors, personal representatives, and legal representatives. 9. NOTICES. All notices pursuant to this Agreement shall be in writing and sent certified mail, return receipt requested, addressed as set forth below, or by delivering the same in person to such party, or by transmission by facsimile to the number set forth below (which shall not constitute notice). Notice deposited in the United States Mail, mailed in the manner described herein above, shall be effective upon deposit. Notice given in any other manner shall be effective only if and when received: If to Executive: Stephen L. Way 10 East Bend Lane Houston, TX 77007 Fax: (713) 864-2822 If to Company: HCC Insurance Holdings, Inc. 13403 Northwest Freeway Houston, Texas 77040 Fax: (713) 462-2401 with a copy (which shall Arthur S. Berner, Esq. not constitute notice) to: Winstead Sechrest & Minick P.C. Suite 2400 910 Travis Street Houston, Texas 77002-5895 Fax: (713) 650-2400 10. WAIVER. No waiver by either party to this Agreement of any right to enforce any term or condition of this Agreement, or of any breach hereof, shall be deemed a waiver of such right in the future or of any other right or remedy available under this Agreement. 11. SEVERABILITY. If any provision of this Agreement is determined to be void, invalid, unenforceable, or against public policy, such provisions shall be deemed severable from the Agreement, and the remaining provisions of the Agreement will remain unaffected and in full force and effect. 12. ARBITRATION. In the event any dispute arises out of Executive's employment with or by the Company, or separation/termination therefrom, whether as an employee or as a consultant which cannot be resolved by the Parties to this Agreement, such dispute shall be submitted to final and binding arbitration. The arbitration shall be conducted in accordance with the National Rules for the resolution of Employment Disputes of the American Arbitration Association ("AAA"). If the Parties cannot agree on an arbitrator, a list of seven (7) arbitrators will be requested from AAA, and the arbitrator will be selected using alternate strikes with Executive striking first. The cost of the arbitration will be shared equally by Executive and Company; provided, however, the Company shall promptly reimburse Executive for all costs and expenses incurred in connection with any dispute in an amount up to, but not exceeding twenty percent (20%) of Executive's Base Salary (or, if the dispute arises during the Consulting Period, Executive's Base Salary as in effect immediately prior to the beginning of the Consulting Period) unless such termination was for Cause in which event Executive shall not be entitled to reimbursement unless and until it is determined he was terminated other than for Cause. Arbitration of such disputes is mandatory and in lieu of any and all civil causes of action and lawsuits either party may have against the other arising out of Executive's employment with Company, or separation therefrom. Such arbitration shall be held in Houston, Texas. 13. ENTIRE AGREEMENT. The terms and provisions contained herein shall constitute the entire agreement between the parties with respect to Executive's employment with Company during the time period covered by this Agreement. This Agreement replaces and supersedes any and all existing Agreements entered into between Executive and the Company relating generally to the same subject matter, if any, and shall be binding upon Executive's heirs, executors, administrators, or other legal representatives or assigns. 14. MODIFICATION OF AGREEMENT. This Agreement may not be changed or modified or released or discharged or abandoned or otherwise terminated, in whole or in part, except by an instrument in writing signed by the Executive and an officer or other authorized executive of Company. 15. EFFECTIVE DATE. It is understood by Executive that this Agreement shall be effective when signed by both Company and Executive. 16. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of Texas. 17. JURISDICTION AND VENUE. With respect to any litigation regarding this Agreement, Executive agrees to venue in the state or federal courts in Harris County, Texas, and agrees to waive and does hereby waive any defenses and/or arguments based upon improper venue and/or lack of personal jurisdiction. By entering into this Agreement, Executive agrees to personal jurisdiction in the state and federal courts in Harris County, Texas. IN WITNESS WHEREOF, the Parties have executed this Agreement in multiple copies, effective as of the date first written above. EXECUTIVE COMPANY HCC INSURANCE HOLDINGS, INC. /s/ Stephen L. Way By: /s/ J. Robert Dickerson - ------------------------ ----------------------------------------- STEPHEN L. WAY J. ROBERT DICKERSON Chairman of the Compensation Committee Dated: March 31, 1999 Dated: March 31, 1999 ------------------ ------------------------------------- EX-27 4 EXHIBIT 27
7 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION FROM THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOUND IN THE COMPANY'S FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 3-MOS DEC-31-1999 JAN-01-1999 MAR-31-1999 411,556,000 0 0 3,084,000 0 0 581,546,000 4,772,000 438,597,000 (4,219,000) 1,924,305,000 494,842,000 198,341,000 0 0 185,209,000 0 0 48,410,000 419,988,000 1,924,305,000 33,979,000 7,264,000 170,000 50,574,000 23,764,000 1,328,000 31,947,000 31,639,000 10,930,000 20,709,000 0 0 0 20,709,000 .42 .42 118,912,000 0 0 0 0 116,751,000 0
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