-----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, JCEk+Lb+Cq+WfDOKLJ8R1w/xWWZBUWCSnbTh8tCr1nv6VcaZDQ8qqGvN6zV0Qd3w mAhfeDLU0hxdJ5APVN9oAw== 0000891554-99-000606.txt : 19990331 0000891554-99-000606.hdr.sgml : 19990331 ACCESSION NUMBER: 0000891554-99-000606 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: KAYE GROUP INC CENTRAL INDEX KEY: 0000907575 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 133719772 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-21988 FILM NUMBER: 99577755 BUSINESS ADDRESS: STREET 1: 122 EAST 42ND ST CITY: NEW YORK STATE: NY ZIP: 10168 BUSINESS PHONE: 2123382100 MAIL ADDRESS: STREET 1: 122 EAST 42ND STREET STREET 2: 122 EAST 43ND STREET CITY: NEW YORK STATE: NY ZIP: 10168 FORMER COMPANY: FORMER CONFORMED NAME: OLD LYME HOLDING CORP DATE OF NAME CHANGE: 19930621 10-K 1 FOR THE YEAR ENDED 12/31/98 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT - 1934 For the Fiscal Year Ended December 31, 1998 Commission File Number 0-21988 Kaye Group Inc. (exact name of registrant as specified in its charter) Delaware 13-3719772 (State or Other Jurisdiction of (IRS Employer Identification No.) Incorporation or Organization) 122 East 42nd Street, New York, NY 10168 (Address and Zip Code of Principal Executive Offices) Registrant's Telephone Number: (212) 338-2100 Securities Registered Under Section 12(b) of the Exchange Act: Title of Each Class Name of Exchange Common Stock $.01 par value NASDAQ National Market Securities Registered Under Section 12(g) of the Exchange Act: None Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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___ Check if disclosure of delinquent filers in response to Item 405 of Regulation S-K is not contained in this form, and no disclosure will be contained, to the best of registrant's knowledge in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ___ The aggregate market value of the registrant's common stock held by non-affiliates of the registrant as of March 12, 1999 was approximately $39,140,000. Number of shares of the registrant's common stock outstanding as of March 12, 1999: 8,452,435. DOCUMENTS INCORPORATED BY REFERENCE The registrant's definitive proxy statement, which will be filed with the Securities and Exchange Commission within 120 days after December 31, 1998 (incorporated by reference under Part III). Total number of pages filed including cover and under pages 89. Index to Exhibits is on page 42. 2 KAYE GROUP INC. TABLE OF CONTENTS Part I Item 1. Business 4 Item 2. Properties 21 Item 3. Legal Proceedings 21 Item 4. Submission of Matters to a Vote of Security Holders 21 Part II Item 5. Market for Common Equity and Related Stockholder Matters 22 Item 6. Selected Financial Data 23 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 25 Item 8. Financial Statements and Supplementary Data 40 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 40 Part III Item 10. Directors and Executive Officers of the Registrant 40 Item 11. Executive Compensation 40 Item 12. Security Ownership of Certain Beneficial Owners and Management 40 Item 13. Certain Relationships and Related Transactions 41 Part IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 41 Financial Statements F-1 3 Item 1. Business Business Segments Kaye Group Inc. (the "Company"), a Delaware corporation, formerly Old Lyme Holding Corporation ("Holding"), is a holding company which, through its subsidiaries, is engaged in a broad range of insurance brokerage, underwriting and related activities. The Company operates in two insurance business segments - - the Insurance Brokerage Companies Operations ("Brokerage Operations"), comprised of the Retail Brokerage Business and the Program Brokerage Business, and the Property and Casualty Companies Operations. In addition, Corporate Operations includes those activities that benefit the Company in its entirety and cannot be specifically identified to either the Brokerage Operations or the Property and Casualty Companies Operations. Such activities include debt servicing and public company expenses, including investor relations costs. The Company's activities are conducted in New York, New York, and in other offices located in Pasadena, California, Westport, Connecticut, Hollywood, Florida, Floral Park, New York, Woodbury, New York and Warwick, Rhode Island. Insurance Brokerage Companies Operations The Retail Brokerage Business operates insurance brokerage businesses through four subsidiaries of the Company, the "Retail Brokerage Companies". It offers commercial clients a full range of insurance brokerage services including procurement of property/casualty insurance, risk management consulting, bonding, loss prevention engineering, and group employee benefit consulting services. In addition, personal lines and life and health insurance coverage are placed on behalf of individual clients. The Retail Brokerage Business' primary strategy is to service middle market companies and organizations just below the Fortune 500 level for which other national brokers intensely compete. Within this middle market, the Retail Brokerage Business has developed particular expertise and knowledge of the risks facing a number of industry sectors including health care, real estate, retail, manufacturing, churches, law firms, homes for the aged and fine arts. During 1998, the Retail Brokerage Business serviced approximately 15,000 insureds. The Retail Brokerage Business is compensated for its services primarily in the form of commissions paid by insurance companies. The commission is usually a percentage of the premium paid by the insured. Commission rates depend upon the type of insurance, the particular insurance company, and the role in which the Retail Brokerage Business acts. In some cases a commission is shared with other agents or brokers who have acted jointly with the Retail Brokerage Business in connection with the transaction. The Retail Brokerage Business may also receive from an insurance company a contingent 4 commission that is generally based on the profitability and volume of business placed with it by the Retail Brokerage Business over a given period of time. The Retail Brokerage Business may also receive fees from insureds in connection with consulting services relating to the marketing of insurance. Program Brokerage Corporation or "PBC" (the "Program Brokerage Business") is a subsidiary of the Company and operates a wholesale insurance brokerage business which offers retail insurance agents and brokers innovative solutions to the twin insurance problems of price and availability of coverage. It accomplishes this by organizing pools of similar risks into specially designed Alternative Risk Transfer ("A.R.T.") programs through which it places insurance for affinity groups (the "Programs"). The Program Brokerage Business is one of the leaders in the application of purchasing groups in the commercial insurance market. Approximately 65% of PBC's premium volume was generated by approximately 450 unrelated retail insurance agents and brokers serving approximately 5,800 insureds during 1998. The remaining 35% was derived from the Retail Brokerage Business. Approximately one-half of PBC's premium volume is directly or indirectly placed with two affiliates, Old Lyme Insurance Company of Rhode Island, Inc. ("OLRI") and Old Lyme Insurance Company, Ltd. (Bermuda) ("OLB"). Property and Casualty Companies Operations The Company conducts its property and casualty underwriting business through two insurance company subsidiaries (the "Insurance Companies"), OLRI and OLB. OLRI is a property and casualty insurance company licensed in Rhode Island and eligible as a surplus lines insurer in New York and New Jersey. OLB is a property and casualty insurance company organized and licensed under the laws of Bermuda. In states where the Insurance Companies are not admitted insurers or surplus lines insurers, the Insurance Companies underwrite risks through various reinsurance agreements. The Insurance Companies underwrite property risks (loss or physical damage to property) and OLRI underwrites casualty risks (legal liability for personal injury or damaged property of others) for insureds in the United States. Insurance is sold principally through the Programs marketed by PBC which insure various types of businesses and properties that have similar risk characteristics, such as apartments, condominiums, cooperatives, restaurants, building maintenance companies, automobile service stations, retail stores, funeral homes and pharmacies, among others. 5 The Insurance Companies' strategy is to underwrite only the first "layer" of the property and casualty insurance provided under the Programs. Exposure to individual insureds on individual losses is thereby generally limited to between $10,000 and $25,000 per claim (inclusive of allocated loss expenses), depending on the Program. Under the Programs, the Insurance Companies' policies are sold in conjunction with policies issued by unaffiliated Program insurers that provide coverage for losses above the first layer of risk underwritten by the Insurance Companies. In addition, OLRI has issued policies on a selected basis with limits up to $1,000,000, retaining the first $50,000 of exposure and reinsuring the remaining limits with an unaffiliated reinsurer, PXRE Reinsurance Company (rated Ag by A.M. Best Company ("A.M. Best"), a major rating agency for insurers). The Property and Casualty Companies Operations includes Claims Administration Corporation ("CAC"), a subsidiary of the Company which is responsible for the administration of a large majority of the claims submitted to the Insurance Companies. The administration of claims includes investigation, engagement of legal counsel, approval of settlements and the making of payments to, or on behalf of insureds. CAC also provides claims administration service to the unaffiliated Program insurers for a fee. History of the Company 1952 to 1993 Prior to the initial public offering ("IPO") of Holding's common stock in August 1993, the operations of the Retail Brokerage Companies, PBC, the Insurance Companies and CAC were part of a single combined insurance and brokerage business owned by Kaye International L.P. ("KILP") and certain individuals. KILP, via several stock and asset acquisitions and mergers, traces its origins back to 1952. Prior to the IPO, KILP developed the concept of the "deductible" primary "layer" of insurance coverage administered through Programs. This business was placed through the Insurance Companies. In August 1993, after years of successful growth, the Insurance Companies, PBC and CAC were organized under Holding, of which approximately 33% was sold to the public. At the time of the IPO, management of Holding believed that its historical marketing efforts and ability to expand its business were hampered by its small capital base and its lack of a letter rating from A.M. Best. Approximately $13,000,000 of the proceeds of the IPO were contributed to OLRI to increase its capital and surplus to permit it to (i) increase its underwriting capabilities, (ii) obtain a letter rating from A.M. Best, and (iii) enable OLRI to meet certain regulatory capital and surplus requirements. As a result of the proceeds being contributed, OLRI significantly increased its underwriting capacity. This enabled it to ultimately obtain an A.M. Best rating of A- (Excellent) (which it currently maintains) and meet all regulatory capital and surplus requirements. 6 The business growth of OLRI however depends on the creation of new Programs and the addition of insureds into existing Programs. OLRI relies on PBC to develop new Programs. PBC is also OLRI's most important and significant producing broker, historically producing all of the Insurance Companies' net premiums earned. 1994 In 1994, the Retail Brokerage Business completed the integration of its 1992 acquisition of Amalgamated Programs Corporation and related entities ("Amalgamated") and continued to downsize to adjust for the continuing "soft market" in property and casualty premium rates. At the time, the officers of the general partners of KILP (which included members of Holding's Board of Directors) concluded that the combination of Holding and the Retail Brokerage Business would be advantageous for both OLRI and KILP. This conclusion was based on three factors: (a) improved operating results derived from the Amalgamated integration and "soft market" downsizing, (b) the improved outlook for the Retail Brokerage Business and (c) the fact that the Retail Brokerage Business accounted for approximately one-half of PBC's premium volume. In evaluating the combination, Holding's Board of Directors also considered the fact that the market for Holding's common stock following the IPO was relatively illiquid. The Board believed that the combination of the Retail Brokerage Business with Holding would increase the size of Holding, make it a more financially diverse company and potentially attract a broader spectrum of investors. 1995 The combination ("Transaction") was effective October 2, 1995 and was accounted for as a transfer and exchange between companies under common control. Accordingly, the assets and liabilities of the Retail Brokerage Business were combined with those of Holding at their historical cost in a manner similar to a "pooling of interests" (see Note 2 to the consolidated financial statements of the Company). The combination was accomplished as follows: 1. Holding transferred to then recently formed Kaye Holding Corp. ("KHC") all of the outstanding stock of the Insurance Companies and its two other subsidiaries, PBC and CAC, and its other assets in exchange for (i) 82,400 shares of KHC common stock, representing 82.4% of the total outstanding KHC common stock, and (ii) the assumption by KHC of certain of Holding's liabilities. 2. KILP transferred all of its interest in the limited partnerships conducting the Retail Brokerage Business (the "Retail Partnerships") and certain related assets to KHC in exchange for (i) 17,200 shares of KHC common stock, representing 17.2% of the total outstanding KHC common stock, and (ii) the assumption by KHC of certain KILP liabilities. 7 3. Certain individuals transferred to KHC all of their interests in the corporate general partners of the Retail Partnerships (the "Retail Brokerage Companies") in exchange for 400 shares of KHC common stock, representing 0.4% of the total outstanding KHC common stock. 4. KHC contributed its interests in the Retail Partnerships to the Retail Brokerage Companies thereby causing the dissolution of the Retail Partnerships. As a result, the Retail Brokerage Companies, as a group, own all of the assets and are subject to all of the liabilities, of the Retail Brokerage Business. 1997 On December 30, 1997 stockholders of the Company approved a restructuring that merged KHC into the Company. This eliminated the minority interest in KHC held by KILP and simplified the corporate structure and reporting of the Company. 1998 On May 12, 1998 KILP was dissolved and approximately 6,100,000 shares of the Company were distributed by KILP to its partners, consisting of Kaye Investments L.P., ZS Kaye, L.P., other entities and individuals. The chart below reflects the current structure of the Company: ================================== KAYE GROUP INC. (Corporate Operations) ================================== 100% 100% ================================= ====================================== Insurance Brokerage Companies: Property and Casualty Companies: Kaye Insurance Associates, Inc. Old Lyme Insurance Company of Rhode Kaye Corporation of Connecticut Island, Inc. Kaye-Western Insurance & Risk Old Lyme Insurance Company, Ltd. and Services, Inc. Park Brokerage, Ltd. Kaye Services Corp. Claims Administration Corporation Program Brokerage Corporation ================================= ====================================== 8 Affinity Group Marketing Affinity group marketing (including A.R.T. programs) contributes 68% of the Company's 1998 consolidated revenues, excluding investment income. Retail Brokerage Operations The Retail Brokerage Business generally services middle market entities just below the Fortune 500 level. Within this market, it has developed particular expertise and knowledge of the risks facing a number of industry sectors. Based on this expertise and knowledge, the Retail Brokerage Business has established programs for hospitals and physicians, churches, law firms, mental health practitioners, homes for the aged and fine arts, among others. Approximately 37% of the Retail Brokerage Business' 1998 revenues relate to such affinity groups. Of this 37%, approximately 73% of the related revenues are derived from unrelated insurance markets. The remaining 27% is derived from PBC. (The premium volume associated with this 27% represents approximately one-third of PBC's premium volume.) No premiums are placed with the Insurance Companies directly by the Retail Brokerage Business. PBC and Insurance Companies Operations PBC designs A.R.T. programs for affinity groups and markets via a network of retail insurance brokers, including the Retail Brokerage Companies. PBC's distribution network includes approximately 450 unrelated retail agents and brokers. These unrelated agents and brokers account for two-thirds of PBC's premium volume. The Insurance Companies underwrite a portion of the Programs and only underwrite programs designed by PBC. During the past six years the original 1:2 ratio of insurance premiums produced by unrelated retail brokers to insurance premiums produced by the Retail Brokerage Companies (the "Production Ratio"), respectively, has reversed. But production from both sources has grown. PBC's total premium volume for 1998 of $55,000,000 increased 10% over 1997. It is expected that the Production Ratio will approach 3:1 during 1999, consistent with PBC's strategy of growing the unrelated retail agents and broker distribution network. Once PBC establishes an A.R.T. program, it acts as the placing broker with respect to insurance under the Programs. In such a role, PBC is a party to agreements with various unaffiliated insurers as well as the Insurance Companies. 9 PBC receives commissions from OLRI and the unaffiliated Program insurers. Pursuant to sub-brokerage agreements, PBC pays commissions to retail brokers based upon all business produced by such agents and brokers (including business placed by PBC with the unaffiliated Program insurers). The Insurance Companies' strategy in most cases is to underwrite only the first "layer" per claim (the deductible range) (primarily inclusive of allocated loss expenses) of the property and casualty insurance provided under the Programs developed by PBC. This limits their exposure to individual insureds on individual losses to the deductible range depending on the Program. Under the Programs, the Insurance Companies' policies are sold in conjunction with policies issued by unaffiliated insurers that provide coverage for losses above the first "layer" of risk underwritten by the Insurance Companies. The Insurance Companies believe that their rates for the first "layer" of risk, when combined with the rates of such other unrelated insurers for the coverage above such layer, are generally competitive with the rates that other insurance companies would charge to provide comparable insurance coverage. The Insurance Companies currently participate in 24 A.R.T. programs. The major program groupings are as follows: 1. The Residential Real Estate Program, started in 1990, provides property and casualty insurance for residential real estate including rental apartments, cooperatives, and condominiums. Policies protect the owner from property losses and casualty claims, such as claims brought by a tenant or member of the public injured on the premises. This program is offered principally in the New York City area and has approximately 1,300 insureds. 2. The Restaurant Program, started in 1985, insures restaurants against casualty claims (most typically brought by an injured restaurant patron) and property losses. Many of the restaurants that participate in this Program are "white tablecloth" restaurants. The Restaurant Program has approximately 900 insureds. 3. The Real Estate Umbrella Program insures residential and commercial real estate owners against certain types of casualty losses. Insureds are provided with an extra level of protection in conjunction with a standard umbrella policy. Coverage is provided for losses that are included within the broad terms of the policy, but are excluded under the general casualty policy. This Program also offers high umbrella casualty limits primarily provided by unrelated Program insurance companies to individual real estate owners. OLRI has a maximum exposure of $10,000 per claim. The Real Estate Umbrella Program has approximately 500 insureds. 10 4. The remaining 21 programs represent 17% of the net premiums earned by the Insurance Companies in 1998. They have approximately 3,100 insureds and include among others the following affinity groups: catalog showrooms, homeowners, retail stores, drug stores, funeral directors, bars and taverns, waste haulers, laundromats and dry cleaners, New England restaurants, Asian American restaurants, automobile service stations, houses of worship, and main street small businesses. The Restaurant Program, Residential Real Estate Program and Real Estate Umbrella Program accounted for 83% of the net premiums earned by the Insurance Companies in 1998. The following table sets forth the percentage of net premiums earned attributable to the programs and all other business during the years ended December 31, 1998, 1997 and 1996. Net Premiums Earned Years Ended December 31, 1998 1997 1996 ---- ---- ---- Residential Real Estate .................... 42% 46% 49% Restaurant Program ......................... 23% 25% 24% Real Estate Umbrella Program ............... 18% 16% 14% Other ...................................... 17% 13% 13% --- --- --- 100% 100% 100% === === === Acquisitions During 1997, the Brokerage Operations acquired certain assets and liabilities of Western Insurance Associates, Inc. ("WIA"). This acquisition was accounted for as a purchase and achieved critical mass for the brokerage operations located in Pasadena, California. In addition, this acquisition was synergistic as WIA's competitive advantage is in the production of business from affinity groups, including churches and homes for the aged. During 1998, the Brokerage Operations acquired certain assets and liabilities of Florida Insurance Associates, Inc. ("FIA"), Daniel V. Keane Agency, Inc. ("DVK") and Laub Group of Florida, Inc. ("LGF"). These acquisitions were accounted for as purchases and are expected to add 7% revenue growth to the Retail Brokerage Business. FIA, located in Hollywood, Florida, represented the Company's entrance into the Florida marketplace. DVK, located in Bridgeport, Connecticut, was relocated to the Company's Westport, Connecticut office and added to that office's personal lines and main street (small business) operations. LGF, located in Hollywood, Florida, added alternative risk transfer capabilities to the FIA operations. 11 During the first quarter of 1999, the Brokerage Operations acquired certain assets and liabilities of Seaman, Ross, & Weiner, Inc. ("SRW"). This acquisition will be accounted for as a purchase. SRW, located in Woodbury, New York, will enhance the general commercial, group benefits and life insurance Brokerage Operations in the New York City metropolitan area. The Company believes that the effect of past, present and future acquisitions will be to expand its insurance program services to affinity groups, thus providing earnings to all operations. The Company is considering and intends to consider from time to time additional acquisitions and divestitures on terms it deems consistent with its strategies. The Company at this time is engaged in preliminary discussions with a number of candidates for possible future acquisitions but has not signed contracts or agreements in principle to make additional acquisitions. No assurances can be given that any additional acquisitions or divestitures will be completed, or if completed, that they will be advantageous to the Company. Seasonality The Brokerage Operations' revenues vary significantly from quarter to quarter as a result of the timing of policy renewals and their related billings. This is due to the revenue recognition method for brokerage commissions which requires that a full year's commissions be recognized immediately upon the billing date of the business. However, premium revenues of the Insurance Companies are recognized ratably over the term of the related policies. As a result, there is little variation from quarter to quarter in the Property and Casualty Companies Operations' revenues. Consolidated revenues by quarter for 1998, 1997 and 1996 were earned as follows. Amounts shown represent a percentage of the related full year consolidated revenues. 1998 1997 1996 ---- ---- ---- First Quarter 23% 22% 22% Second Quarter 24% 23% 22% Third Quarter 26% 28% 28% Fourth Quarter 27% 27% 28% 12 Competition, and Industry and Market Risk The Company is the 28th largest insurance broker in the United States according to "Business Insurance", a leading insurance industry publication. It operates in a highly competitive industry and faces competition from regional brokers, regional offices of worldwide brokers and insurers. The insurance brokerage business is highly competitive. The Company believes that it is well positioned to compete within its designated market because of the expertise and knowledge it has developed in servicing middle market companies, the Programs it has developed and the proprietary database of affinity group underwriting and claims information it has developed. In general, premium pricing and commission rate reductions continue to impact the Company and the insurance industry as a whole. The Company has been successful in replacing business lost from such premium and commission rate reductions and attrition through new business developed from new accounts and programs, and extension of service to existing accounts. Many insurance companies which compete with OLRI have a higher A.M. Best - -rating (OLRI is rated A-(Excellent)), and are larger and have greater financial, marketing and management resources than OLRI. Competition is based on many factors, including perceived overall financial strength of the insurer, premiums charged, policy terms and conditions, services offered, reputation and experience. Due to its size, management and operational flexibility, the Company can respond quickly to, and take advantage of, changing circumstances encountered in the marketplace. In the event that admitted insurers (including the unaffiliated Program insurers) begin to offer the coverage in New York which the Company offers as a surplus lines insurer, it is possible that OLRI may be unable to receive placements on a surplus lines basis, because brokers are generally required first to obtain three "declinations" from admitted carriers before they can offer the business to a surplus lines underwriter. In addition, in soft insurance markets, other insurance companies may be more willing to offer low deductibles which cover the first layer of risk at prices competitive with or lower than those under the Programs. As part of its ongoing business, the Company is exposed to certain market risks of potential losses from adverse changes in market rates and prices. The Company's primary market risk exposure is interest rate risk in regard to fixed rate domestic instruments and outstanding debt. The Company has minimal investments in equity securities which have no material market risk exposure. It has no derivative instruments. The Company's financial instruments consist of the investment portfolio of OLRI. These instruments are comprised of Corporate and Municipal Bonds and U.S. Treasury securities that are classified as available for sale. The Company generally selects investment assets with characteristics such as duration, yield, currency, and liquidity to match cash flows of related insurance and reinsurance contracts. It selects medium term fixed rate investments to support general liability claims and shorter investments to support property claims. The 13 fair value of and weighted average interest rate on the investment portfolio as of December 31, 1998 was $43,597,000 and 5.6%, respectively. The Company has various debt instruments outstanding at December 31, 1998. These debt instruments, which are due through 2002, match the Company's cash inflow from operations. Year 2000 Compliance Many computers, software programs and microprocessors embedded in certain equipment (collectively, "systems") were designed to accommodate only two-digit date fields to represent a given year (e.g., "98" represents 1998). It is possible that such systems will not be able to accurately process data containing information relating to dates before, during or after the year 2000. It is possible that such systems could fail entirely, although in many instances the consequences of a system not being "year 2000 complaint" are unknown. In response to this issue, the Company has evaluated its applications and operating software and is in the process of evaluating its hardware and software products, end user computing activities, third-party data exchanges and business relationships, and has established a project team responsible for overseeing progress on the Company's compliance program and periodically reporting to management. As of December 31, 1998 the Company has completed approximately 75% of its efforts to bring its own applications software and hardware in compliance, with the objective of having all critical production systems year 2000 compliant by the middle of 1999. Testing of critical applications is being accomplished through the use of a special system testing environment that simulates system operations in the year 2000. The Company also purchased and implemented new operational and accounting software in 1998. In addition to being year 2000 compliant, these new systems are intended to add increased functionality to the Company. The Company has completed its assessment of its servers and client server operating software. The results of this assessment were identification of hardware and software issues requiring remediation in order to assure year 2000 compliance. The total cost (both current and future) to modify these existing production systems, which includes both internal and external costs of programming, coding and testing is estimated to be $135,000 and has been reflected in the financial statements. In addition to addressing hardware/software information technology ("IT"), the Company has also been assessing year 2000 issues with respect to non-IT systems such as telephones and various building services which may rely on embedded microprocessors. Although failure of non-IT systems such as telephone service could disrupt the Company's business, the Company's communications with the relevant vendors have not identified any significant year 2000 problems. 14 The Company believes that if systems were not complaint for year 2000-related problems there could be a material adverse impact on the Company's financial statements. The Company believes that it is taking the necessary measures to address issues that may arise relating to year 2000-related problems and that its systems should be compliant. The Company realizes, however, that non-compliance by these parties could impact its business. The Company's plan addresses potential year 2000 issues related to the processing of transactions with third parties. The possibility exists that some of the Company's external business contacts may not be compliant. The Company began contacting its external business contacts and continues to do so to determine their status of compliance and to assess the impact of noncompliance to the Company. The Company is working closely with all critical business relationships to minimize its exposure to year 2000-related problems. It should be noted, however, that there can be no assurance that the systems of other companies will be year 2000 compliant, or that their conversion will be comparable with information included in the Company's systems without having a material adverse effect on the Company. Although it has considered various scenarios concerning the possible effects of the year 2000 issue, the Company does not have formal contingency plans relating to either its internal processing environment or its external business contacts. As it completes the upgrading and testing of non-compliant systems and continues to monitor the status of its important external contacts into mid 1999, the Company will develop contingency plans if deemed necessary for critical systems and relationships. A comprehensive review was performed by the Company of the insurance policies written by its Insurance Companies and their underwriting guidelines to determine Year 2000 exposure. The Insurance Companies primarily issue policies covering all or part of an insured's self-insured retention, with limits generally up to $25,000, that follow the form of the policies for coverage in excess of the Insurance Companies' policies. The Insurance Companies have not issued exclusions on these policies. The Insurance Companies have also issued a number of policies with greater limits of coverage, and have included a year 2000 exclusion on such policies. The Company is aware that year 2000 liabilities may be deemed not to be fortuitous in nature and, therefore, not covered under the policies underwritten by the Insurance Companies. Moreover, based upon the classes of insurance primarily underwritten by the Insurance Companies, the Company believes that its coverage exposure with respect to year 2000 losses will not be material. However, changes in social and legal trends may establish coverage unintended for year 2000 exposures by re-interpreting insurance contracts and exclusions. 15 Ceded Reinsurance OLRI has from time to time obtained reinsurance for portions of, or specific risks under, the first layer of risks underwritten by OLRI. Such reinsurance is not and has not been material to OLRI. Reinsurance has been placed with PXRE Reinsurance Company and Transatlantic Reinsurance Company, which are rated A or better by A.M. Best. However, if reinsurance should become more widely available at economical prices, OLRI may increase the amount of reinsurance it purchases (see Note 13 to the consolidated financial statements of the Company). Losses and Loss Expenses The Insurance Companies are directly liable for losses and loss expense payments under the terms of insurance policies that they write, and under the reinsurance agreements to which they are party. In many cases, several years may elapse between the occurrence of an insured loss, the reporting of the loss to the Insurance Companies and the Insurance Companies payment of that loss. The Insurance Companies reflect their liability for the ultimate payment of all incurred losses and loss expenses by establishing loss and loss expense reserves, which are balance sheet liabilities representing estimates of future amounts needed to pay claims and related expenses with respect to insured events that have occurred. When a claim involving a probable loss is reported, the Insurance Companies establish a loss reserve for the estimated amount of the Insurance Companies' ultimate loss and loss expense payments. The estimate reflects an informed judgment based on established reserving practices and the experience and knowledge of CAC's claims examiners regarding the nature and value of the claim, as well as the estimated expense of settling the claim, including legal and other fees, and general expenses of administering the claims adjustment process. The Insurance Companies also establish reserves on an aggregate basis to provide for losses incurred but not reported ("IBNR reserves"), as well as future developments on losses reported to the Insurance Companies. The amount of an insurer's incurred losses in a given period is determined by adding losses and loss expenses paid during the period to case loss and loss expense reserves and IBNR reserves (collectively "loss reserves") at the end of the period, and then subtracting loss reserves existing at the beginning of the period. As part of the reserving process, historical data is reviewed and consideration is given to the anticipated effect of various factors, including anticipated legal developments, changes in social attitudes, inflation and economic conditions. Reserve amounts are necessarily based on Management's estimates, and as other data becomes available and is reviewed, these estimates are revised, resulting in increases or decreases to existing reserves. 16 OLRI receives claims related to lead paint exposures it insures under various Residential Real Estate Programs. There are uncertainties in estimating the amount of reserves due to factors including: difficulty in properly allocating responsibility and/or liability for the lead paint exposure; changes in the underlying laws and the judicial interpretation of those laws; and questions regarding the interpretation and application of insurance and reinsurance coverage. OLRI has reserves established for these claims on a case basis and an incurred but not reported basis. The reserves provided are established based on Management's estimate of ultimate liabilities. However, due to the nature of the exposures, such reserves cannot be, and are not established using standard actuarial techniques. To further review the adequacy of the reserves, the Insurance Companies engage independent actuarial consultants to perform annual case and ultimate loss reserve analysis. The following table sets forth a reconciliation of the change in the reserves for outstanding losses and loss expenses, including paid losses and loss expenses, for each year in the three year period ended December 31, 1998. Years Ended December 31, -------------------------------- 1998 1997 1996 -------- -------- -------- (in thousands) Balance at January 1, $ 19,126 $ 15,227 $ 12,671 Less reinsurance recoverables (2,811) (882) -------- -------- -------- Net balance 16,315 14,345 12,671 -------- -------- -------- Incurred related to: Current year 8,461 8,824 6,621 Prior years 35 (108) 415 -------- -------- -------- Total incurred 8,496 8,716 7,036 -------- -------- -------- Paid related to: Current year 1,877 1,802 1,832 Prior years 4,587 4,944 3,530 -------- -------- -------- Total paid 6,464 6,746 5,362 -------- -------- -------- Net balance at December 31, 18,347 16,315 14,345 Plus reinsurance recoverables 3,220 2,811 882 -------- -------- -------- Balance $ 21,567 $ 19,126 $ 15,227 ======== ======== ======== 17 The following table presents the development of unpaid losses and loss expense reserves for the past ten years for the Insurance Companies. During the ten year period covered by this table, OLB changed its fiscal year-end during 1989 from July 31 to April 30 and then to December 31 for the year ended December 31, 1990. In addition, Bermuda domiciled insurance companies, unlike U.S. domiciled insurers, are not required to file calendar year loss development information with regulatory authorities. Accordingly, the loss development information included in the following table with respect to OLB prior to 1992, reflects development data converted from the policy year loss development data maintained by OLB through the use of mathematical models. The top line of the table shows the estimated reserve for unpaid losses and loss expenses at the balance sheet date for each of the indicated years. These figures represent the estimated amount of unpaid losses and loss expenses for claims arising in the current and all prior years that were unpaid at the balance sheet date, including losses that had been incurred but not yet reported. The table also shows the re-estimated amount of the previously recorded reserve based on experience as of the end of each succeeding year. The estimate changes as more information becomes available, principally about the frequency of claims for individual years. The table is presented net of reinsurance which is immaterial for all years presented except for 1998 and 1997. The reinsurance recoverable on unpaid losses at December 31, 1998 and 1997 were $3,220,000 and $2,811,000, respectively. 18 KAYE GROUP INC. LOSS DEVELOPMENT SCHEDULE (In thousands)
Year Ended 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 ---------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- Reserves for outstanding losses and loss expenses on December 31, $6,866 $8,418 $12,555 $16,244 $18,444 $17,929 $14,118 $12,672 $15,227 $19,126 $21,567 Cumulative amount paid as of: One year later $2,018 $2,505 $4,374 $5,569 $6,379 $6,965 $4,161 $3,697 $4,943 $4,587 Two years later 3,513 5,266 7,545 9,258 11,704 10,002 6,802 6,882 7,780 Three years later 5,208 7,041 9,245 12,695 13,833 12,278 9,455 8,691 Four years later 6,113 7,600 11,378 13,813 14,973 14,120 10,917 Five years later 6,269 8,539 11,705 14,146 15,784 15,281 Six years later 6,881 8,660 11,768 14,385 16,374 Seven years later 6,892 8,681 11,877 14,562 Eight years later 6,895 8,701 11,917 Nine years later 6,903 8,720 Ten years later 6,909 Re-estimated liability as of: One year later $6,891 $9,127 $13,665 $16,117 $18,140 $17,856 $14,254 $12,257 $15,494 $18,534 Two years later 6,692 9,767 13,003 15,182 18,511 18,184 13,487 12,454 15,352 Three years later 7,343 9,288 11,850 15,609 18,636 16,552 13,990 12,448 Four years later 7,228 9,002 12,410 15,462 18,177 18,157 13,985 Five years later 7,120 9,060 12,468 15,312 18,252 17,993 Six years later 7,140 8,973 12,224 14,982 17,999 Seven years later 7,063 8,893 12,121 14,872 Eight years later 6,964 8,847 11,996 Nine years later 7,012 8,733 Ten years later 6,909 Cumulative Redundancy (Deficiency): ($43) ($315) $559 $1,373 $445 ($64) $133 $225 ($125) $593
19 Regulation The Company is subject to a substantial degree of regulation that is designed to protect the interests of insurance policyholders. As a Rhode Island property and casualty insurance company, OLRI is primarily subject to the regulatory oversight of the Rhode Island Department of Business Regulation through its Insurance Division. As a Bermuda property and casualty insurance company, OLB is subject to regulation of the regulatory body of Bermuda. Such regulation relates to, among other things, authorized lines of business, capital and surplus requirements and general standards of solvency, the filing of annual and other financial reports prepared on the basis of statutory accounting practices, the filing and form of actuarial reports, the establishment and maintenance of reserves for unearned premiums, losses and loss expenses, underwriting limitations, investment parameters, transactions with affiliates, dividend limitations, changes in control and a variety of other financial and non-financial matters. The National Association of Insurance Commissioners has developed risk-based capital formulas to be applied to all domestic insurance companies. These formulas calculate a minimum required statutory net worth, based on the underwriting, investment and other business risks inherent in an insurance company's operations. Any insurance company that does not meet threshold risk-based capital levels ultimately will be subject to statutory receivership proceedings. The statutory net worth of OLRI is adequate in light of its current and anticipated future business and OLRI has met its risk-based capital and surplus requirements at December 31, 1998. The authorized control level risk-based capital for OLRI, as of December 31, 1998 was $4,403,083 and OLRI exceeded that threshold by $23,463,514. Employees As of December 31, 1998, the Company had 368 employees. The Company is not unionized and believes that its employee relationships are satisfactory. 20 Item 2. Properties The Company owns approximately 7,500 square feet of space in an office condominium building in Warwick, Rhode Island which is utilized by employees of PBC and OLRI. The Company also leases space located in New York, New York, Pasadena, California, Westport, Connecticut, Woodbury, New York, Hollywood, Florida, and Floral Park, New York. The Company's total leased space at these locations is approximately 114,000 square feet and is suitable for its current needs. Item 3. Legal Proceedings The Company is a party to lawsuits arising in the normal course of business. Virtually all pending lawsuits in which the Insurance Companies are a party, involve claims under policies underwritten or reinsured by such Companies. Management believes these lawsuits have been adequately provided for in its established loss and loss expense reserves and that the resolution of these lawsuits will not have a material adverse effect on the Company's financial condition or results of operations. The Insurance Brokerage Companies are subject to various claims and lawsuits from both private and governmental parties, which include claims and lawsuits in the ordinary course of business. The majority of pending lawsuits involve insurance claims, errors and omissions, employment claims and breaches of contract. The Company believes that the resolution of these lawsuits will not have a material adverse effect on the Company's financial condition or results of operations. As licensed brokers, the Insurance Brokerage Companies are or may become party to administrative inquiries and at times to administrative proceedings commenced by state insurance regulatory bodies. Certain subsidiaries were involved in an administrative investigation commenced in 1992 by the New York Insurance Department ("Department") relating to how property insurance policies were issued for the Residential Real Estate Program. As a result, the manner in which policies are structured for certain clients in this Program was altered, which has not had a material adverse effect on this Program. While the Company had discussions with the Department regarding settlement of such investigation, this matter has not been pursued for several years. If the matter is not closed or settled, the Department could institute formal proceedings against the subsidiaries seeking fines or license revocation. Management does not believe the resolution of this issue will have a material adverse effect on the Company. Item 4. Submission of Matters to a Vote of Security Holders No matters were submitted to a vote of security holders of the Company during the fourth quarter of the fiscal year ended December 31, 1998. 21 PART II Item 5. Market for Common Equity and Related Stockholder Matters In August 1993, in connection with the consummation of the IPO, the Company's Common Stock was listed on the NASDAQ National Market System under the symbol "OLHC". On October 2, 1995, in connection with the combination of the Retail Brokerage Business of Kaye with Holding, Holding changed its name to Kaye Group Inc. and is now listed under its new symbol "KAYE". The following table sets forth the closing high and low prices for the Common Stock as reported on NASDAQ for the indicated periods and the dividends paid per share during such periods. Price Range Dividends ---------------------- Paid High Low Per Share ---- --- --------- 1998: First Quarter $7 13/16 $6 1/4 $ .025 cash Second Quarter 7 1/2 6 3/8 $ .025 cash Third Quarter 7 1/4 6 1/4 $ .025 cash Fourth Quarter 7 5/8 5 1/8 $ .025 cash 1997: First Quarter $5 3/8 $4 1/2 $ .025 cash Second Quarter 5 1/8 4 3/8 $ .025 cash Third Quarter 9 5 1/8 $ .025 cash Fourth Quarter 9 6 3/8 $ .025 cash The approximate number of holders of record of the Company's Common Stock as of March 12, 1999 was 103. See Item 7 - "Management's Discussion and Analysis of Financial Condition and Results of Operations - Dividends" for a discussion of dividends paid by the Company. 22 Item 6. Selected Financial Data The following table should be read in conjunction with, and is supplemented in its entirety by, the consolidated financial statements and the notes thereto. Financial data has been restated to take into effect the Transactions effective October 2, 1995. The financial data for the years 1994 through 1998 has been derived from the audited consolidated financial statements of the Company.
Years ended December 31, - ------------------------------------------------------------------------------------------------------------------------------------ 1998 1997 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------------------------ (in thousands, except per share data) Revenues: Operating revenues (6) $ 60,191 $ 55,309 $ 51,339 $ 51,582 $ 52,906 Net investment income 4,735 4,312 3,576 3,912 3,455 Net realized gains (losses) on investments 85 21 72 (47) (50) -------- -------- -------- -------- -------- Total revenues $ 65,011 $ 59,642 $ 54,987 $ 55,447 $ 56,311 -------- -------- -------- -------- -------- Net income $ 7,282 $ 4,357 $ 3,071 $ 5,181 $ 4,347 - ------------------------------------------------------------------------------------------------------------------------------------ Earnings per share: Basic $ 0.86 $ 0.62 $ 0.44 $ 0.74 $ 0.62 Diluted $ 0.85 $ 0.62 $ 0.44 $ 0.74 $ 0.62 - ------------------------------------------------------------------------------------------------------------------------------------ PRO FORMA NET INCOME Income before minority interest, income taxes and cumulative effect of change in accounting principles $ 10,554 $ 7,555 $ 5,211 $ 6,309 $ 6,516 Provision for income taxes 3,272 2,267 1,484 1,995(1) 1,861(1) -------- -------- -------- -------- -------- Income before minority interest and cumulative effect of change in accounting principles 7,282 5,288 3,727 4,314 4,655 Minority interest (931) (656) (759) (1,011) Cumulative effect of change in accounting principles, net of charge in lieu of income taxes (2) 1,090 -------- -------- -------- -------- -------- Pro forma net income $ 7,282 $ 4,357 $ 3,071 $ 3,555 $ 4,734 - ------------------------------------------------------------------------------------------------------------------------------------ PRO FORMA EARNINGS PER SHARE - BASIC Income before cumulative effect of change in accounting principles $ 0.86 $ 0.62 $ 0.44 $ 0.51 $ 0.52 Cumulative effect of change in accounting principles, net of charge in lieu of income taxes 0.15 -------- -------- -------- -------- -------- Pro forma earnings per share - basic $ 0.86 $ 0.62 $ 0.44 $ 0.51 $ 0.67 - ------------------------------------------------------------------------------------------------------------------------------------ Weighted average of shares outstanding - basic 8,474 7,024 7,020 7,020 7,020 - ------------------------------------------------------------------------------------------------------------------------------------ Weighted average of shares and share equivalents outstanding - diluted 8,593 7,083 7,021 7,023 7,035 - ------------------------------------------------------------------------------------------------------------------------------------
23 Item 6. Selected Financial Data (Continued)
Years ended December 31, - ------------------------------------------------------------------------------------------------------------------------------------ 1998 1997 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------------------------ (in thousands, except per share data and ratios) Balance Sheet data: Total assets $ 167,066 $ 141,025 $ 156,102 $ 174,000 $ 185,976 Long-term debt (3) 4,672 5,810 12,787 13,679 11,618 Stockholders' equity 41,769 35,168 24,984 22,882 16,676 Net book value per share (4) 4.93 4.15 3.56 3.26 2.38 Cash dividend per share 0.10 0.10 0.10 0.10 0.10 GAAP operating data: Loss ratio 34.4% 38.2% 36.4% 28.8% 31.8% Expense ratio 39.3% 41.0% 42.5% 41.1% 32.9% Combined ratio 73.7% 79.2% 78.9% 69.9% 64.7% Statutory operating data (5): Net underwriting gain $ 6,925 $ 5,890 $ 4,455 $ 7,104 $ 7,105 Policyholders' surplus 29,286 25,566 25,485 26,231 22,274 Loss ratio 33.1% 36.6% 34.1% 24.4% 30.2% Expense ratio 39.1% 38.6% 40.0% 37.1% 35.5% Combined ratio 72.2% 75.2% 74.1% 61.5% 65.7%
(1) Prior to the Transaction certain entities were partnerships or S Corporations under the Internal Revenue Code and therefore not liable for Federal income taxes. A charge in lieu of income taxes is presented as if the income of these entities were taxed to those entities rather than to partners or stockholders not otherwise included in the Company's consolidated group. (2) Commission income, together with the related accounts receivable from clients and premiums payable to insurance carriers, is recorded principally as of the billing date. Beginning in 1994, commission income related to installment billing arrangements is recorded in total at the date of the initial billing. This change was made because in the opinion of management, it results in a better matching of revenues with the related costs. Prior to this change, commissions were recorded as each installment was billed. As a result of this change, additional commissions of $1,471,000 were recorded in 1994 that would have been recorded under the old policy in 1995. The Company was unable to determine the effects of this change in years prior to 1994 and, therefore, pro forma disclosure of this change in prior years cannot be made. Accordingly, the effect of the change in accounting on prior years of $ 1,652,000 was treated as a cumulative effect adjustment on the 1994 consolidated statement of income. (3) Excludes that portion of long-term debt maturing in less than one year. (4) Based upon 8,474,435 shares outstanding at December 31, 1998 and 1997 and 7,020,000 outstanding at December 31, 1996, 1995 and 1994. (5) Based upon statutory accounting practices and derived from the statutory financial statements of the Insurance Companies, which excludes the effects of CAC. (6) Subsequent to 1995, commission expense paid to internal producers have been reclassified to salary expense to more accurately reflect salaries and benefits. Previously this expense was netted against operating revenues and accordingly operating revenues for 1995 and 1994 are not comparable. (7) Certain prior year information has been reclassified to conform with the 1998 presentation. 24 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations General Kaye Group Inc. (the "Company"), a Delaware corporation, is a holding company which, through its subsidiaries, is engaged in a broad range of insurance brokerage, underwriting and related activities. The Company operates in two insurance business segments the Insurance Brokerage Companies Operations comprised of the Retail Brokerage Business and the Program Brokerage Business, and the Property and Casualty Companies Operations ("Property and Casualty Companies" or "Insurance"), comprised of the Insurance Companies and Claims Administration (see Note 1 to the consolidated financial statements of the Company). Overview The Insurance Brokerage Companies derive their revenue principally from commissions associated with the placement of insurance coverage for corporate clients. These commissions are paid by the insurance carriers and are usually a fixed percentage of the total premiums. Certain of these commissions are contingent upon the level of volume and profitability of the related coverage to the insurance companies. There is normally a lag between receipt of funds from the insured and payment to the insurance company. Investment of these funds over this period generates additional revenue in the form of interest income. The Insurance business underwrites property and casualty risks for insureds in the United States, principally through specially designed Programs, covering various types of businesses and properties which have similar risk characteristics. The Insurance business generally underwrites the first layer of insurance under the Programs and unaffiliated Program insurers provide coverage for losses above the first layer of risk. Substantially all of the Insurance business revenues are derived from premiums on this business, plus the investment income generated by the investment portfolio of the Insurance business. Corporate Operations include those activities that benefit the Company in its entirety and cannot be specifically identified to either the Insurance Brokerage Companies or the Property and Casualty Companies. Such activities include debt servicing and public company expenses, including investor relations costs. The Company has foreign operations in Bermuda. For further discussion see Note 23 to the consolidated financial statements of the Company. 25 Results of Operations Year ended December 31, 1998 compared with year ended December 31, 1997 Net Income Net income for the year ended December 31, 1998 increased by $2,925,000 to $7,282,000 or basic earnings per share of $0.86 compared to $4,357,000 or $0.62 for the same period last year as explained below. $931,000 of the increase was due to the elimination of minority interest (see Note 2 to the consolidated financial statements of the Company). Insurance Brokerage Companies Income before income taxes increased by $938,000 to $1,705,000 in 1998 from $767,000 in 1997. The improved operating result was mainly due to increased revenues offset by the increase in salaries and benefits, as discussed below. Total revenues in 1998 were $37,202,000 compared with $33,782,000 in 1997, an increase of $3,420,000 (10%). Gross commission and fees grew by $4,222,000 (11%) mainly as a result of new business exceeding lost business, acquisitions and an increase in contingency commissions due to volume and profitability of 1997 premiums placed with certain insurance carriers. The commission expense rate incurred to produce new and renewal business increased from 17% to 18%. Investment income increased in 1998 by $281,000 (18%) primarily due to collection efficiencies resulting in a longer holding period for fiduciary investments. Salaries and benefits increased by $2,418,000 (13%) to $21,323,000 in 1998 compared to $18,905,000 in 1997. This increase was due to acquisitions, salary increments, increased commission expense to employees and annual incentive based compensation. Amortization of intangibles increased by $172,000 (34%) to $679,000 from $507,000 in 1997 as a result of increased amortization of acquisition related intangibles due to 1997 and 1998 acquisitions. Other operating expenses increased by $243,000 (2%) to $13,446,000 in 1998 compared with $13,203,000 in 1997. This increase was mainly the result of a reserve for E & O deductibles partially offset by reduced rent costs. Interest expense decreased by $351,000 primarily as a result of the early payment of the $6,000,000 note payable to KILP in August, 1997. 26 Property & Casualty Companies Income before income taxes increased by $1,918,000 (25%) to $9,637,000 in 1998 from $7,719,000 in 1997. The increase in operating result was due to increased net premiums earned, investment income and a decreased combined ratio. Net premiums earned for 1998 increased by $1,842,000 (8%) to $24,689,000 from $22,847,000 in 1997. The Property & Casualty Companies' efforts, combined with the efforts of the Brokerage segment's Program Brokerage Corporation, to develop new Alternative Risk Transfer programs and broaden the distribution network of the existing programs and coverage types, has contributed to the growth of premium volume. Net investment income increased by $228,000 (8%) to $2,920,000 from $2,692,000 in 1997. This increase was due to an increase in investments generated by cash flow from operations. Net realized gain on investment transactions for 1998 increased by $64,000 to $85,000 compared to $21,000 in 1997. The realization of investment gains and losses is determined by market conditions and management's decision regarding the holding period of the portfolio. Other income for 1998 decreased by $99,000 to $146,000 from $245,000 in 1997. This decrease is mainly due to discontinued warranty contracts in 1998. Loss and loss expenses decreased in 1998 by $220,000 (3%) to $8,496,000 from $8,716,000 in 1997. The loss ratio (loss incurred expressed as a percentage of premiums earned) for 1998 and 1997 was 34% and 38%, respectively. This decrease was due to low general liability losses and an improvement in loss and loss expense under the property programs resulting from mild weather. Acquisition costs and general and administrative expenses increased in 1998 by $337,000 (4%) to $9,707,000 from $9,370,000 in 1997. The expense ratio (acquisition costs and general and administrative expenses) for 1998 and 1997 was 39% and 41%, respectively. Exclusive of a bad debt recovered, the expense ratio would have been 40% and 41%, respectively. This decrease was due to lower general and administrative expenses in 1998. Corporate Net expenses before income taxes decreased in 1998 by $143,000 (15%) to $788,000 from $931,000 in 1997. This decrease was the result of lower interest expense and insurance costs partially offset by a provision for investment decline and costs related to the restructuring of debt. 27 Year ended December 31, 1997 compared with year ended December 31, 1996 Net Income Net income for the year ended December 31, 1997 increased by $1,286,000 to $4,357,000 or basic earnings per share of $0.62 compared to $3,071,000 or $0.44 for the same period last year as explained below. Insurance Brokerage Companies Income before income taxes increased by $1,962,000 to $767,000 in 1997 from a loss of $1,195,000 in 1996. The improved operating result was due to increased revenues, a significant decrease in other operating expenses and lower interest expense partially offset by a modest increase in salaries and benefits, as discussed below. Total revenues in 1997 were $33,782,000 compared with $32,593,000 in 1996, an increase of $1,189,000 (4%). Gross commission and fews grew by $1,453,000 (4%) mainly as a result of new business exceeding lost business and acquisitions partially offset by a decrease in wholesale contingency commissions. The Commission expense rate incurred to produce new and renewal business increased form 15% to 17%. Investment income increased in 1997 by $539,000 (53%) primarily due to collection efficiencies resulting in a longer holding period for fiduciary investments. Salaries and benefits increased by $142,000 (1%) to $18,905,000 in 1997 compared to $18,763,000 in 1996. This increase was the result of the acquisition of Western Insurance Associates, Inc. ("WIA") partially offset by a modest reduction in work force due to continued operating efficiencies, lower executive compensation and reduced costs for prior years' acquisitions. The Company's board of directors' compensation committee and executive management have reviewed and adjusted executive and management compensation, respectively, to reflect a continued movement toward performance based pay. Amortization of intangibles increased by $68,000 (15%) to $507,000 from $439,000 as a result of increased amortization of acquisition related intangibles due to the acquisition of WIA. Other operating expenses decreased by $783,000 (6%) to $13,203,000 in 1997 compared with $13,986,000 in 1996. This decrease was mainly due to reduced account servicing expenses, expiration of certain management service contracts and reduced insurance costs. 28 Interest expense decreased by $200,000 as a result of the early payment of the $6,000,000 note payable to KILP in August, 1997. Property and Casualty Companies Income before income taxes increased in 1997 by $668,000 (9%) to $7,719,000 from $7,051,000 in 1996. The increase in operating result was due to increased net premiums earned (net of related expenses) and investment income partially offset by a decrease in other income, as discussed below. Net premiums earned for 1997 increased by $3,520,000 (18%) to $22,847,000 from $19,327,000 in 1996. The Company's efforts to broaden the distribution network of the Programs and coverage types has contributed to growth in the Residential Real Estate and Restaurant Programs and the formation of several new programs. Net investment income in 1997 increased by $231,000 (9%) to $2,692,000 from $2,461,000 in 1996 as a result of an increase in investments generated from cash flow from operations. Net realized gain on investment transactions for 1997 decreased by $51,000 to $21,000 compared to $72,000 in 1996. The realization of investment gains and losses is determined by market conditions and management's decision regarding the holding period of the portfolio. Other income for 1997 decreased by $200,000 to $245,000 from $445,000 in 1996. This decrease is mainly due to the run-off of certain reinsurance contracts during the first half of 1996. Losses and loss expenses increased in 1997 by $1,680,000 (24%) to $8,716,000 from $7,036,000 in 1996. The loss ratio (loss incurred expressed as a percentage of premiums earned) for 1997 and 1996 was 38% and 36%, respectively. This increase was the result of growth in general liability coverage and reserve strengthening. The increase in absolute dollars was generally the result of increased net premiums earned. Acquisition costs and general and administrative expenses increased in 1997 by $1,152,000 (14%) to $9,370,000 from $8,218,000 in 1996. The expense ratio (acquisition costs and general and administrative expenses as a percentage of premiums earned) for 1997 and 1996 was 41% and 43%, respectively. This decrease was due to a modest decrease in general and administrative expenses in 1997. The increase in absolute dollars was due mainly to additional acquisition costs related to increased net premiums earned and the write-off of certain deferred acquisition costs resulting from the termination of a deposit reinsurance contract. General and administrative expenses had a modest decrease as a result of lower professional fees. 29 Corporate Net expenses before income taxes increased in 1997 by $286,000 (44%) to $931,000 from $645,000 in 1996. This increase was the result of costs incurred for acquisition activities and investor relations. Effective Tax Rate (See Note 8) The effective tax rate for 1998, 1997, and 1996 was 31%, 30%, and 28%, respectively. The difference between the statutory tax rate and the effective tax rate in 1998, 1997, and 1996 was primarily related to tax exempt interest. The rate increase for 1998 and 1997 was primarily due to additional state and local taxes. Financial Condition and Liquidity Management believes that the Company's operating cash flow, along with the cash equivalents and short term investments will provide sufficient sources of liquidity and capital to meet the Company's anticipated needs during the next twelve months and the foreseeable future. The Company has no capital commitments that are material individually or in the aggregate. Total assets increased by $26,041,000 (18%) to $167,066,000 at December 31, 1998 from $141,025,000 at December 31, 1997 due primarily to general business growth resulting in fiduciary cash and cash equivalents and premiums receivable from clients and other insurance agents and brokers. Total liabilities increased by $19,440,000 (18%) to $125,297,000 at December 31, 1998 from $105,857,000 at December 31, 1997 primarily due to general business growth resulting in increased premiums payable to insurance markets. Stockholders' equity increased by $6,601,000 (19%) to $41,769,000 at December 31, 1998, from $35,168,000 at December 31, 1997. The increase in equity resulted from net income of $7,282,000 and an increase in net unrealized appreciation of investments of $168,000, partially offset by dividends paid of $849,000. On December 30, 1997 the stockholders of the Company approved a restructuring that merged Kaye Holding Corp. ("KHC") into the Company. This eliminated KILP's minority interest in KHC of $6,191,000 as of December 31, 1997 and increased stockholders' equity of the Company by the same amount. Prior to its dissolution in May 1998, KILP was the Company's largest shareholder. The merger was accounted for as a transfer and exchange between entities under common control. Accordingly, common stock of Kaye Group Inc. issued in exchange for the KHC shares was accounted for by using the closing NASDAQ market price on October 24, 1997 ($7.00) (the effective date of the merger). This increased the number of shares of common stock by 1,454,435 at the par value $.01 per share or $14,544. Paid-in capital was increased by $10,166,000 which 30 was the difference between the market value price per share and the par value per share. Minority interest in KHC was eliminated as a result of the merger, and retained earnings of Kaye Group Inc. was reduced to account for the difference between the market value of the shares issued and the book value of the minority interest in KHC. The Company's cash and cash equivalents increased by $14,136,000 for the year ended December 31, 1998. Operating activities provided cash of $23,188,000 primarily as a result of premiums received from assureds not yet paid to insurance markets. Investing activities used cash of $4,443,000 primarily for fixed asset purchases (primarily software) and acquisition payments. Financing activities used cash of $4,609,000 for payments of dividends and loan restructuring, including a reduction of approximately $1,100,000 of corporate debt. The Company paid off its revolving credit line of $6,094,000 early, and replaced it with a term loan of $5,000,000, at an interest rate reduction of approximately 50 basis points, thereby reducing debt by approximately $1,100,000. As of December 31, 1998, $4,456,000 is outstanding on the term loan. In addition, the Company has available a $4,500,000 revolving line of credit with a bank. Both lines are collateralized by the stock of the Property and Casualty Companies. The proceeds are available for general operating needs and acquisitions. As of December 31, 1998, no amount is outstanding on the revolving line of credit. The Company has calculated risk-based capital and the result is that the statutory net worth of OLRI is adequate in light of the current requirements. The Company is subject to a substantial degree of regulation, which is designed to protect the interests of insurance policyholders. As a Rhode Island property and casualty insurance company, OLRI is primarily subject to the regulatory oversight of the Rhode Island Department of Business Regulation through its Insurance Division. The Company's primary source of cash is derived from insurance premiums, insurance brokerage commissions and fees, proceeds from the sale of investments, and investment income. The Company's principal uses of cash are payments of insurance premiums, commissions to brokers who produce the business, losses and loss expenses and operating expenses, and purchases of investments, acquisitions and fixed assets. The Company has minimized its investment risk by investing in high quality tax exempt municipal bonds, U.S. Government and government agency securities and corporate bonds rated A or better by an accredited rating agency and by maintaining an average duration of approximately four years, taking into account the effects of certain early call features. The Company currently intends to continue these investment strategies. 31 The table below sets forth the composition of the Company's portfolio of fixed maturity investments by rating as of December 31, 1998 (in thousands): Market Value as Percentage of Amortized Reflected on Total at Market Rating (a) Cost Balance Sheet Value - ---------- --------- --------------- --------------- AAA(b) $22,213 $22,574 51.8% AA+ 1,116 1,124 2.6% AA 13,177 13,393 30.7% AA- 3,860 3,883 8.9% A+ 351 352 .8% A 2,263 2,271 5.2% ------- ------- ----- $42,980 $43,597 100.0% ======= ======= ===== (a) Ratings are assigned primarily by Standard & Poors Corporation with the remaining ratings assigned by Moody's Investors Services, Inc. and converted to the equivalent Standard & Poors ratings. (b) Includes U.S. Government Obligations. The amortized cost and estimated market value of fixed maturities at December 31, 1998, by contractual maturity date, are listed below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without penalties. Investments Available for Sale ----------------------------------- Aggregate Fair Amortized Cost Value -------------- -------------- Due in one year or less $ 3,769 $ 3,774 Due after one year through five years 21,193 21,624 Due after five years through ten years 13,474 13,599 Due after ten years 4,544 4,600 ------- ------- Total $42,980 $43,597 ======= ======= The Company maintains a substantial level of cash and liquid short term investments which are used to meet anticipated payment obligations. At December 31, 1998 and 1997, the Company had cash and short term investments of $48,393,000 and $34,737,000, respectively, of which $33,218,000 and $22,322,000 represents premiums collected and held in a fiduciary capacity which are generally not available for operating needs of the Company. Of the Company's total invested assets, certain amounts are pledged or deposited into trust funds to collateralize the Company's obligations under reinsurance agreements. 32 Investment results of the Company for each of the three years in the period ended December 31, 1998 are shown in the following table (in thousands): At or for the years ended December 31, ---------------------------------- 1998 1997 1996 ---- ---- ---- Average cash and cash equivalents and invested assets (1) $85,191 $76,534 $68,692 Investment income $4,735 $4,312 $3,576 Average yield on total investments 5.6% 5.6% 5.2% Net realized investment gains $85 $21 $72 (1) Based upon the average of the beginning and end of the period amortized cost for fixed maturities and cost for equity securities. The Company's insurance subsidiaries require capital to support premium writing. The guidelines set forth by the NAIC suggest that a property and casualty insurer's ratio of annual statutory net premiums written to policyholders' surplus should not exceed 3 to 1. At December 31, 1998, the Insurance Companies, with a combined statutory surplus of $29,286,000, had a ratio of combined annual statutory net premiums written to their combined statutory surplus of approximately .84 to 1. Quantitative and Qualitative Disclosures about Market Risk As part of its ongoing business, the Company is exposed to certain market risks of potential losses from adverse changes in market rates and prices. The Company's primary market risk exposure is interest rate risk in regard to fixed rate domestic instruments and outstanding debt. The Company has minimal investments in equity securities which have no material market risk exposure. The Company has no derivative instruments. The Company's financial instruments consist of the investment portfolio of OLRI. These instruments are comprised of Corporate and Municipal Bonds and U.S. Treasury Securities that are classified as available for sale. The Company generally selects investment assets with characteristics such as duration, yield, currency, and liquidity to reflect the underlying characteristics of related insurance and reinsurance contracts. The Company selects medium term fixed rate investments to support general liability claims and shorter investments to support property claims. 33 The Company has various debt instruments outstanding at December 31, 1998. These debt instruments, which are due through 2002, match the Company's cash inflow from operations. The following table summarizes information about the Company's financial instruments that are sensitive to changes in interest rate as of December 31, 1998. The table presents principal and interest cash flow and related weighted average interest rates by expected maturity dates for assets and liabilities. The Company has presumed the call date as the expected maturity date for those asset instruments with call features. Weighted average rates are calculated using the sum of expected investment income or interest expense divided by the sum of the amortized cost of assets or the sum of the average debt outstanding at each respective period. For variable rate debt, expected interest cash flow is calculated using the December 31, 1998 weighted average interest rate without any adjustments for projected fluctuations in prime rate.
EXPECTED CASH FLOW (in thousands) ---------------------------------------------------------------------------- Assets Fair Value Total Value 1999 2000 2001 2002 2003 Thereafter - ------ ---------- ----------- ---- ---- ---- ---- ---- ---------- U.S. Treasury Notes Interest rates ranging from 5.75% to 6.75% $2,162 $2,424 $580 $862 $299 $39 $644 Weighted average interest rate 5.6% 6.2% 5.3% 5.5% 6.5% 3.2% Municipal Bonds with call features Interest rates ranging from 5% to 12.6% 12,268 15,016 2,033 1,328 1,169 2,721 4,228 3,537 Weighted average interest rate 6.7% 7.1% 7% 6.9% 6.8% 5.2% 6.4% Municipal Bonds without call features Interest rates ranging from 3.8% to 10.9% 24,444 32,521 2,913 2,265 2,221 4,663 3,737 16,722 Weighted average interest rate 6.1% 6.1% 6.2% 6.2% 6.1% 6.1% 6.2% Corporate Bonds Interest rates ranging from 5.6% to 7.5% 4,723 5,287 921 2,350 1,350 428 238 Weighted average interest rate 6.4% 6.4% 5.0% 5.7% 4.3% 5.9% Total Fixed Rate Instrument $43,597 $55,248 $6,447 $ 6,805 $5,039 $7,851 $8,847 $20,259 Weighted average interest rate 6.2% 6.4% 6.2% 6.3% 6.3% 5.8% 6.2%
34
EXPECTED CASH FLOW (in thousands) ---------------------------------------------------------------------------- Liabilities Fair Value Total Value 1999 2000 2001 2002 2003 Thereafter - ----------- ---------- ----------- ---- ---- ---- ---- ---- ---------- Debt - Fixed Rate Interest rates ranging from 7.4% to 7.8% $5,052 $5,811 $1,777 $1,623 $1,623 $788 Weighted average interest rate 8.3% 8.1% 8.2% 8.7% 9.8% Debt - Variable Rate Interest rates ranging from prime to prime +1/2% 1,492 1,715 546 462 415 292 Weighted average interest rate 8.2% 8.1% 8.1% 8.5% 7.7% Total Debt $6,544 $7,526 $2,323 $2,085 $2,038 $1,080 Weighted average interest rate 8.3% 8.0% 8.2% 8.7% 9.2%
Dividends On December 21, 1998 the Board of Directors declared a quarterly dividend of $.025 per share, payable January 20, 1999 to stockholders of record on December 31, 1998. The Company is largely dependent upon dividends from its insurance subsidiaries to pay dividends to the stockholders. The Company's insurance subsidiaries are subject to regulations that restrict their ability to pay dividends. Under Rhode Island Insurance law, OLRI may pay cash dividends only from earned surplus determined on a statutory basis, subject to the maintenance of minimum capital and surplus of $3,000,000. Further, OLRI is restricted (on the basis of the lesser of 10% of OLRI's statutory surplus at the end of the preceding twelve-month period or 100% of OLRI's net income, excluding realized capital gains, for the preceding twelve-month period) as to the amount of dividends it may declare or pay in any twelve-month period without prior approval of the Department of Business Regulation of Rhode Island. Without special permission, at December 31, 1998, $2,786,000 was available for distribution. OLB is required to maintain a minimum statutory capital and surplus based upon the higher of $1,000,000 or an amount derived by applying a variable rate to its current premium volume or outstanding losses at December 31, 1998. At December 31, 1998, $419,000 was available for distribution from OLB and its subsidiary, Park Brokerage Ltd. 35 The continued payment and the amount of any cash dividends will depend upon, among other factors, the Company's operating results, overall financial condition, capital requirements and general business conditions. Newly Adopted Accounting Standards In February 1997, the Securities and Exchange Commission ("SEC") issued Financial Reporting Release No. 48, Disclosure of Accounting Policies for Derivative Financial Instruments and Derivative Commodity Instruments and Disclosure of Quantitative and Qualitative Information about Market Risk Inherent in Derivative Financial Instruments, Other Financial Instruments, and Derivative Commodity Instruments ("FRR No. 48"). FRR No. 48 amends rules and forms for registrants and requires clarification and expansion of existing disclosures for derivative financial instruments, other financial instruments and derivative commodity instruments, as defined therein. The amendments require enhanced disclosure with respect to these derivative instruments. As of December 31, 1998, the Company has no derivative financial instruments. Additionally, the amendments expand existing disclosure requirements to include quantitative and qualitative discussions with respect to market risk inherent in market risk sensitive instruments such as equity and fixed maturity securities, as well as derivative instruments which investors can use to better understand and evaluate market risk exposures of registrants. These disclosures were effective in 1998 for the Company and are appropriately disclosed. In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income. This statement establishes standards for the reporting and display of comprehensive income and its components in the consolidated financial statements. The purpose of reporting comprehensive income is to report the change in equity of a business enterprise for the period from transactions and other events and circumstances from non-owner sources. It includes all changes in equity during a period except those resulting from investments by owners and distributions to owners. These items include currency translation adjustments and unrealized appreciation of investments, which are currently reported as separate components of equity in the balance sheet. In accordance with the statement, the Consolidated Statements of Comprehensive Income are presented as a separate statement at December 31, 1998, 1997, and 1996. Also in June 1997, the FASB issues SFAS No. 131, Disclosure about Segments of an Enterprise and Related Information. This statement requires that companies report certain information about their operating segments in the financial statements including information about the products and services from which revenues are derived, the geographic areas of operations, and information about major customers. Operating segments are determined by the way management decides how to allocate resources and how it assesses performance. Descriptive information about the method used to identify the reportable operating segments must also be disclosed. The statement also requires a reconciliation of revenues, net income, and assets and other amounts disclosed for the segments to the corresponding amounts in the consolidated financial statements. The 36 statement is effective for year end 1998 and has not changed the Company's current segmentation of its business. The financial position and operating results of the Company were not affected by this statement (see Note 23 to the consolidated financial statements). Accounting Standards Not Yet Adopted In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities. This statement requires all derivatives to be recognized as either assets or liabilities in the statement of financial position and to be measured at fair value. This statement is effective for all fiscal quarters and fiscal years beginning after June 15, 1999. Management believes that the statement will not have a material impact on the financial position of the Company. In March 1998, the American Institute of Certified Public Accountants ("AICPA") issued Statement of Position ("SOP") 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use, which requires capitalization of external and certain internal costs incurred to obtain or develop internal-use computer software during the application development stage. SOP 98-1 is effective for fiscal years beginning after December 15, 1998. This statement is not expected to materially impact the Company's consolidated financial statements. In late 1998, the AICPA issued SOP 98-7, Deposit Accounting: Accounting for Insurance and Reinsurance Contracts that Do Not Transfer Insurance Risk. This SOP effective for fiscal years beginning after June 15, 1999, provides guidance to both the insured and insurer on how to apply the deposit method of accounting when it is required for insurance and reinsurance contracts that do not transfer insurance risk. This SOP is not expected to materially impact the Company's consolidated financial statements. In December 1997, the AICPA issued SOP 97-3, Accounting by Insurance and Other Enterprises for Insurance-Related Assessments. SOP 97-3 provides guidance for assessments related to insurance activities and requirements for disclosure of certain information. SOP 97-3 is effective for financial statements issued for periods beginning after December 31, 1998. Restatement of previously issued financial statements is not required. SOP 97-3 is not expected to have a material impact on the Company's consolidated financial statements. 37 Year 2000 Compliance Many computers, software programs and microprocessors embedded in certain equipment (collectively, "systems") were designed to accommodate only two-digit date fields to represent a given year (e.g., "98" represents 1998). It is possible that such systems will not be able to accurately process data containing information relating to dates before, during or after the year 2000. It is possible that such systems could fail entirely, although in many instances the consequences of a system not being "year 2000 complaint" are unknown. In response to this issue, the Company has evaluated its applications and operating software and is in the process of evaluating its hardware and software products, end user computing activities, third-party data exchanges and business relationships, and has established a project team responsible for overseeing progress on the Company's compliance program and periodically reporting to management. As of December 31, 1998 the Company has completed approximately 75% of its efforts to bring its own applications software and hardware in compliance, with the objective of having all critical production systems year 2000 compliant by the middle of 1999. Testing of critical applications is being accomplished through the use of a special system testing environment that simulates system operations in the year 2000. The Company also purchased and implemented new operational and accounting software in 1998. In addition to being year 2000 compliant, these new systems are intended to add increased functionality to the Company. The Company has completed its assessment of its servers and client server operating software. The results of this assessment were identification of hardware and software issues requiring remediation in order to assure year 2000 compliance. The total cost (both current and future) to modify these existing production systems, which includes both internal and external costs of programming, coding and testing is estimated to be $135,000 and has been reflected in the financial statements. In addition to addressing hardware/software information technology ("IT"), the Company has also been assessing year 2000 issues with respect to non-IT systems such as telephones and various building services which may rely on embedded microprocessors. Although failure of non-IT systems such as telephone service could disrupt the Company's business, the Company's communications with the relevant vendors have not identified any significant year 2000 problems. The Company believes that if systems were not complaint for year 2000-related problems there could be a material adverse impact on the Company's financial statements. The Company believes that it is taking the necessary measures to address issues that may arise relating to year 2000-related problems and that its systems should be compliant. The Company realizes, however, that non-compliance by these parties could impact its business. The Company's plan addresses potential year 2000 issues related to the processing of transactions with third parties. The possibility exists that some of the Company's external business contacts may not be compliant. The Company began 38 contacting its external business contacts and continues to do so to determine their status of compliance and to assess the impact of noncompliance to the Company. The Company is working closely with all critical business relationships to minimize its exposure to year 2000-related problems. It should be noted, however, that there can be no assurance that the systems of other companies will be year 2000 compliant, or that their conversion will be comparable with information included in the Company's systems without having a material adverse effect on the Company. Although it has considered various scenarios concerning the possible effects of the year 2000 issue, the Company does not have formal contingency plans relating to either its internal processing environment or its external business contacts. As it completes the upgrading and testing of non-compliant systems and continues to monitor the status of its important external contacts into mid 1999, the Company will develop contingency plans if deemed necessary for critical systems and relationships. A comprehensive review was performed by the Company of the insurance policies written by its Insurance Companies and their underwriting guidelines to determine year 2000 exposure. The Insurance Companies primarily issue policies covering all or part of an insured's self-insured retention, with limits generally up to $25,000, that follow the form of the policies for coverage in excess of the Insurance Companies' policies. The Insurance Companies have not issued exclusions on these policies. The Insurance Companies have also issued a number of policies with greater limits of coverage, and have included a year 2000 exclusion on such policies. The Company is aware that year 2000 liabilities may be deemed not to be fortuitous in nature and, therefore, not covered under the policies underwritten by the Insurance Companies. Moreover, based upon the classes of insurance primarily underwritten by the Insurance Companies, the Company believes that its coverage exposure with respect to year 2000 losses will not be material. However, changes in social and legal trends may establish coverage unintended for Year 2000 exposures by re-interpreting insurance contracts and exclusions. Safe Harbor Disclosure The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements. This SEC Form 10-K or any other written or oral statements made by or on behalf of the Company may include forward-looking statements which reflect the Company's current views with respect to future events and financial performance. These forward-looking statements are subject to certain uncertainties and other factors that could cause actual results to differ materially from such statements. These uncertainties and other factors (which are described in more detail elsewhere in documents filed by the Company with the Securities and Exchange Commission) include, but are not limited to, uncertainties relating to general economic conditions and cyclical industry conditions, uncertainties relating to government and regulatory policies, volatile and unpredictable developments (including storms and catastrophes), the legal environment, the uncertainties of the reserving process and the competitive environment in 39 which the Company operates. The words "believe", "expect", "anticipate", "project", "plan", and similar expressions, identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their dates. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Item 8. Financial Statements and Supplementary Data See page F-1. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. PART III Item 10. Directors and Executive Officers of the Registrant Reference is made to the Registrant's definitive proxy statement, which will be filed with the Securities and Exchange Commission within 120 days after December 31, 1998, and which is incorporated herein by reference. Item 11. Executive Compensation Reference is made to the Registrant's definitive proxy statement, which will be filed with the Securities and Exchange Commission within 120 days after December 31, 1998, and which is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management Reference is made to the Registrant's definitive proxy statement, which will be filed with the Securities and Exchange Commission within 120 days after December 31, 1998, and which is incorporated herein by reference. 40 Item 13. Certain Relationships and Related Transactions Reference is made to the Registrant's definitive proxy statement, which will be filed with the Securities and Exchange Commission within 120 days after December 31, 1998, and which is incorporated herein by reference. PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a) Financial statements and schedules. 1. Financial Statements: Report of Independent Accountants Consolidated Balance Sheets at December 31, 1998 and 1997 Consolidated Statements of Income for the years ended December 31, 1998, 1997 and 1996 Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1998, 1997 and 1996 Consolidated Statements of Comprehensive Income for the years ended December 31, 1998, 1997 and 1996 Notes to Consolidated Financial Statements 2. Financial Statement Schedules: Schedule II -- Condensed Financial Information of Registrant: Balance Sheets at December 31, 1998 and 1997 Statements of Income for the years ended December 31, 1998, 1997 and 1996 Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996 41 Notes to Condensed Financial Statements Schedule IV -- Reinsurance for the years ended December 31, 1998, 1997 and 1996 Schedule VI -- Supplemental Information Concerning Property and Casualty Insurance Operations for the years ended December 31, 1998, 1997 and 1996 The information for Schedule I is contained in the Notes to the Consolidated Financial Statements. The information for Schedule III is included in Schedule VI. The information required for Schedule V is not applicable. 3. Exhibits: Exhibit Number Description 2 Acquisition Agreement, dated as of August 3, 1995, among Kaye Group Inc. (formerly known as Old Lyme Holding Corporation), Kaye International, L.P., certain individuals and Kaye Holding Corp.,( a copy of which was filed with the Commission on March 31, 1995 (Registration No. 33-64664), and which is incorporated herein by this reference). 3 (i) Certificate of Incorporation of Kaye Group Inc. (formerly known as Old Lyme Holding Corporation) (a copy of which was filed with the Commission on June 17, 1993 as Exhibit 3.1 to the Company's Registration Statement on Form S-1 (Registration No. 33-64664), and which is incorporated herein by this reference). 3 (ii) By-laws of Kaye Group Inc. (formerly known as Old Lyme Holding Corporation) (a copy of which was filed with the Commission on June 17, 1993 as Exhibit 3.2 to the Company's Registration Statement on Form S-1 (Registration No. 33-64664), and which is incorporated herein by this reference). 4.1 Form of certificate representing shares of Common Stock of the Company (a copy of which was filed with the Commission on March 31, 1995 (Registration No. 33-64664), and which is incorporated herein by this reference). 42 10.1 Kaye Group Inc. (formerly known as Old Lyme Holding Corporation) 1993 Stock Option Plan (a copy of which was filed with the Commission on August 17, 1993 as Exhibit 10.6 to Amendment No. 3 to the Company's Registration Statement on Form S-1 (Registration No. 33-64664), and which is incorporated herein by this reference). 10.1 (i) Kaye Group Inc. Supplemental Stock Option Plan (a copy of which was filed with the Commissioner on March 31, 1997) (Registration No.33- 64664), as Exhibit 10.1(i) to the Company's Form 10-K, and which is incorporated herein by this reference). 10.2 Registration Agreement among Kaye Group Inc. (formerly known as Old Lyme Holding Corporation), Kaye International, L.P. and Old Lyme Holdings of Rhode Island, Inc. (a copy of which was filed with the Commission on August 17, 1993 as Exhibit 10.7 to Amendment No. 3 to the Company's Registration Statement on Form S-1 (Registration No. 33- 64664), and which is incorporated herein by this reference). 10.11 Loan Agreement among Summit Bank and Kaye Group Inc., dated June 24, 1998. 10.17 Executive Employment Agreement between Kaye Group Inc. and Bruce D. Guthart, dated as of January 2, 1997 (a copy of which was filed with the Commission on March 31, 1997, (Registration No.33-64664), as Exhibit 10.17 to the Company's Form 10-K, and which is incorporated herein by this reference). 10.18 Employment Agreement between Kaye Group Inc. and Michael P. Sabanos, dated as of May 15, 1996 (a copy of which was filed with the Commission on March 31, 1997, (Registration No.33-64664), as Exhibit 10.18 to the Company's Form 10-K, and which is incorporated herein by this reference). 10.18(i) Amendment of Employment Agreement between Kaye Group Inc. and Michael Sabanos, dated as of March 18, 1998. 10.20 Executive Employment Agreement between Kaye Insurance Associates, Inc. and Richard Bass, dated as of October 31, 1991 (a copy of which was filed with the Commission on March 31, 1997, (Registration No.33- 64664), as Exhibit 10.20 to the Company's Form 10-K, and which is incorporated herein by this reference). 43 10.20(i) Amendment to Executive Employment Agreement between Kaye Insurance Associates, Inc. and Richard Bass, dated as of December 11, 1995 (a copy of which was filed with the Commission on March 31, 1997, (Registration No.33-64664), as Exhibit 10.20 (i) to the Company's Form 10-K, and which is incorporated herein by this reference). 10.21 Kaye Group Inc. Stock Performance Plan, dated as of October 2, 1997. (a copy of which was filed with the Commission on December 8, 1997, as Annex B to Schedule 14(a), Information to the Company's Proxy Statement, pursuant to Section 14(a), and which is incorporated herein by this reference). 10.22 Asset Purchase Agreement between Kaye Insurance Associates, Inc., Seaman, Ross & Weiner, Inc., AMSCO Coverage Corp. and D.S.I. Associates, Inc., dated as of January 1, 1999. 11 Statement regarding computation of earnings per share. 27 Financial Data Schedule (b) Reports on Form 8-K Exhibit - ------- 99.5 Kaye Group Inc. (the "Company") announced on December 17, 1998 the authorization of a stock repurchase of its Common Stock. 44 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. KAYE GROUP INC. By:/ s / Bruce D. Guthart -------------------------------------- Bruce D. Guthart, Chairman Dated: March 26, 1999 Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed by the following persons in the capacities and on the dates indicated. Signature Title Date / s / Bruce D. Guthart Director, Chairman, President - --------------------------- Chief Executive Officer Bruce D. Guthart (Principal Executive Officer) March 26, 1999 / s / Howard Kaye Director March 26, 1999 - --------------------------- Howard Kaye / s / Michael P. Sabanos Director, Senior Vice President, - --------------------------- Chief Financial Officer (Principal Michael P. Sabanos Financial Officer and Accounting Officer) March 26, 1999 / s / Robert Barbanell Director March 26, 1999 - --------------------------- Robert Barbanell / s / Richard Butler Director March 26, 1999 - --------------------------- Richard Butler / s / David Ezekiel Director March 26, 1999 - --------------------------- David Ezekiel / s / Elliot Cooperstone Director March 26, 1999 - --------------------------- Elliot Cooperstone / s / Ned Sherwood Director March 26, 1999 - --------------------------- Ned Sherwood 45 Item 8. Financial Statements and Supplementary Data INDEX TO FINANCIAL STATEMENTS AND SCHEDULES Page ---- Index to Notes to Consolidated Financial Statements F-2 Report of Independent Accountants F-3 Consolidated Balance Sheets at December 31, 1998 and 1997 F-4 Consolidated Statements of Income for the years ended December 31, 1998, 1997 and 1996 F-6 Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996 F-8 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1998, 1997 and 1996 F-9 Consolidated Statements of Comprehensive Income for the years ended December 31, 1998, 1997, and 1996 F-9 Notes to Consolidated Financial Statements F-10 Financial Statement Schedules: Schedule II - Condensed Financial Information of Registrant: Balance Sheets at December 31, 1998 and 1997 F-39 Statements of Income for the years ended December 31, 1998, 1997 and 1996 F-40 Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996 F-41 Notes to Condensed Financial Statements F-42 Schedule IV - Reinsurance for the years ended December 31, 1998, 1997 and 1996 F-43 Schedule VI - Supplemental Information Concerning Property-Casualty Insurance Operations for the years ended December 31, 1998, 1997 and 1996 F-44 The information for Schedule I is contained in the Notes to the Consolidated Financial Statements. The information for Schedule III is included in Schedule VI. The information required for Schedule V is not applicable. Index to Notes to Consolidated Financial Statements F-1 Footnote Description Page - -------- ----------- ---- 1 Business ...................................................... F-10 2 Organization .................................................. F-12 3 Significant Accounting Policies ............................... F-13 4 Changes in Accounting Policies ................................ F-17 5 Funds Held in Fiduciary Capacity .............................. F-19 6 Investments ................................................... F-20 7 Notes Payable ................................................. F-23 8 Income Taxes .................................................. F-24 9 Lease Commitments and Rentals ................................. F-26 10 Pension and Retirement Plans .................................. F-26 11 Management Services Agreement ................................. F-26 12 Contingent Liabilities ........................................ F-27 13 Reinsurance ................................................... F-28 14 Losses and Loss Expense ....................................... F-29 15 Statutory Financial Information and Dividend Restrictions ..... F-30 16 Related Party Transactions .................................... F-31 17 Acquisitions .................................................. F-32 18 Preferred Stock ............................................... F-32 19 Dividends Declared ............................................ F-33 20 Stock Performance and Stock Option Plans ...................... F-33 21 Quarterly Financial Information (Unaudited) ................... F-35 22 Premiums ...................................................... F-36 23 Business Segments ............................................. F-36 24 Supplemental Cash Flow Disclosures ............................ F-38 25 Subsequent Event .............................................. F-38 F-2 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Kaye Group Inc.: In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, cash flows, stockholders' equity and comprehensive income, present fairly, in all material respects, the financial position of Kaye Group Inc. and its subsidiaries (the "Company") at December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP New York, New York February 26, 1999 F-3 KAYE GROUP INC. CONSOLIDATED BALANCE SHEETS December 31, 1998 and December 31, 1997 (in thousands, except par value per share)
1998 1997 -------- -------- ASSETS: INSURANCE BROKERAGE COMPANIES Current assets: Cash and cash equivalents (including short term investments, and funds held in a fiduciary capacity of $33,218 and $22,322) $ 34,267 $ 24,833 Premiums and other receivables 40,572 32,790 Prepaid expenses and other assets 1,895 1,385 -------- -------- Total current assets 76,734 59,008 Fixed assets (net of accumulated depreciation of $5,662 and $4,553) 3,683 3,145 Intangible assets (net of accumulated amortization of $2,750 and $2,072) 6,795 4,702 Deferred income taxes 816 966 Other assets 205 181 -------- -------- Total assets - insurance brokerage companies 88,233 68,002 -------- -------- PROPERTY AND CASUALTY COMPANIES Investments available-for-sale: Fixed maturities, at market value (amortized cost: 1998, $42,980; 1997, $41,529) 43,597 42,099 Equity securities, at market value (cost: 1998, $646; 1997, $871) 732 981 Short term investments, at cost, which approximates market value 2,950 3,430 -------- -------- Total investments 47,279 46,510 Cash and cash equivalents 10,806 6,409 Accrued interest and dividends 961 882 Premiums receivable 2,644 2,344 Premiums receivable - insurance brokerage companies 3,041 3,185 Prepaid reinsurance premiums 162 262 Reinsurance recoverable on unpaid losses and loss expenses 3,220 2,811 Funds held under deposit contracts, at market value, which approximates cost 173 Deferred acquisition costs 3,921 3,939 Deferred income taxes 586 379 Other assets 2,354 1,810 Intercompany receivable 508 -------- -------- Total assets - property and casualty companies 75,482 68,704 -------- -------- CORPORATE Cash and cash equivalents 370 65 Prepaid expenses and other assets 248 107 Investments available-for-sale: Equity securities, at market value (cost: 1998, $497, and 1997, $557) 615 442 Deferred income taxes 41 Intercompany receivable 2,118 3,664 -------- -------- Total assets - corporate 3,351 4,319 -------- -------- Total assets $167,066 $141,025 ======== ========
See notes to consolidated financial statements F-4 KAYE GROUP INC. CONSOLIDATED BALANCE SHEETS December 31, 1998 and December 31, 1997 (in thousands, except par value per share)
1998 1997 -------- -------- LIABILITIES: INSURANCE BROKERAGE COMPANIES Current liabilities: Premiums payable $ 59,472 $ 40,872 Premiums payable - property and casualty companies 3,041 3,185 Accounts payable and accrued liabilities 9,045 7,983 Notes payable 718 434 Deferred income taxes 978 1,063 Intercompany payable 2,626 3,342 -------- -------- Total current liabilities 75,880 56,879 Notes payable 1,369 654 Other liabilities 1,005 1,466 -------- -------- Total liabilities-insurance brokerage companies 78,254 58,999 -------- -------- PROPERTY AND CASUALTY COMPANIES Liabilities: Unpaid losses and loss expenses 21,567 19,126 Unearned premium reserves 12,327 12,578 Accounts payable and accrued liabilities 7,451 6,661 Other liabilities 143 350 Intercompany payable 322 -------- -------- Total liabilities - property and casualty companies 41,488 39,037 -------- -------- CORPORATE Current liabilities: Accounts payable and accrued liabilities 511 774 Note and loan payable 1,153 1,875 Deferred income taxes 20 Income taxes payable 568 16 -------- -------- Total current liabilities 2,252 2,665 Loan payable-long-term 3,303 5,156 -------- -------- Total liabilities-corporate 5,555 7,821 -------- -------- Total liabilities 125,297 105,857 -------- -------- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Preferred stock, $1.00 par value; 1,000 shares authorized; none issued or outstanding Common stock, $.01 par value; 20,000 shares authorized; 8,474 shares issued and outstanding 85 85 Paid - in capital 17,942 17,942 Accumulated other comprehensive income, net of deferred income tax liability (1998, $280; 1997, $192) 541 373 Retained earnings 23,201 16,768 -------- -------- Total stockholders' equity 41,769 35,168 -------- -------- Total liabilities and stockholders' equity $167,066 $141,025 ======== ========
See notes to consolidated financial statements F-5 KAYE GROUP INC. CONSOLIDATED STATEMENTS OF INCOME For the years ended December 31, 1998, 1997 and 1996 (in thousands, except per share amounts)
1998 1997 1996 -------- -------- -------- INSURANCE BROKERAGE COMPANIES Revenues: Commissions and fees - net $35,356 $32,217 $31,567 Investment income 1,846 1,565 1,026 -------- -------- -------- Total revenues 37,202 33,782 32,593 -------- -------- -------- Expenses: Salaries and benefits 21,323 18,905 18,763 Amortization of intangibles 679 507 439 Other operating expenses 13,446 13,203 13,986 -------- -------- -------- Total operating expenses 35,448 32,615 33,188 -------- -------- -------- Interest expense 49 400 600 -------- -------- -------- Income (loss) before income taxes-insurance brokerage companies 1,705 767 (1,195) -------- -------- -------- PROPERTY AND CASUALTY COMPANIES Revenues: Net premiums written 24,538 22,270 20,689 Change in unearned premiums 151 577 (1,362) -------- -------- -------- Net premiums earned 24,689 22,847 19,327 Net investment income 2,920 2,692 2,461 Net realized gains on investments 85 21 72 Other income 146 245 445 -------- -------- -------- Total revenues 27,840 25,805 22,305 -------- -------- -------- Expenses: Losses and loss expenses 8,496 8,716 7,036 Acquisition costs and general and administrative expenses 9,707 9,370 8,218 -------- -------- -------- Total expenses 18,203 18,086 15,254 -------- -------- -------- Income before income taxes-property and casualty companies 9,637 7,719 7,051 -------- -------- -------- CORPORATE Revenues: Net investment income (loss) (31) 55 89 Expenses: Other operating expenses 314 438 220 Interest expense 443 548 514 -------- -------- -------- Net expenses before income taxes-corporate (788) (931) (645) -------- -------- --------
See notes to consolidated financial statements F-6 KAYE GROUP INC. CONSOLIDATED STATEMENTS OF INCOME For the years ended December 31, 1998, 1997 and 1996 (in thousands, except per share amounts)
1998 1997 1996 -------- -------- -------- Income before income taxes and minority interest $10,554 $7,555 $5,211 -------- -------- -------- Provision (benefit) for income taxes Current 3,422 1,921 364 Deferred (150) 346 1,120 -------- -------- -------- Total provision for income taxes 3,272 2,267 1,484 -------- -------- -------- Income before minority interest 7,282 5,288 3,727 Minority interest 931 656 -------- -------- -------- Net income $7,282 $4,357 $3,071 ======== ======== ======== EARNINGS PER SHARE Basic $0.86 $0.62 $0.44 ======== ======== ======== Diluted $0.85 $0.62 $0.44 ======== ======== ======== Weighted average of shares outstanding - basic 8,474 7,024 7,020 ======== ======== ======== Weighted average shares outstanding and share equivalents outstanding - diluted 8,593 7,083 7,021 ======== ======== ========
See notes to consolidated financial statements F-7 KAYE GROUP INC. CONSOLIDATED STATEMENTS OF CASH FLOWS For the years ended December 31, 1998, 1997 and 1996 (in thousands)
1998 1997 1996 -------- -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $7,282 $4,357 $3,071 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Deferred acquisition costs 18 134 (370) Amortization of bond premium - net 599 650 751 Deferred income taxes (150) 346 1,120 Net realized gains on investments (85) (21) (72) Depreciation and amortization expense 1,813 1,667 2,000 Minority interest 931 656 Change in assets and liabilities: Accrued interest and dividends (79) 87 22 Premiums and other receivables (8,125) 23,011 19,217 Prepaid expenses and other assets (1,253) (1,785) 760 Unpaid losses and loss expenses 2,441 3,899 2,556 Unearned premium reserves (251) (598) 1,362 Premiums payable 18,371 (21,870) (14,865) Income taxes payable 552 (79) 1,356 Accounts payable and accrued liabilities 2,055 5,116 (767) -------- -------- -------- Net cash provided by operating activities 23,188 15,845 16,797 -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Investments available - for - sale : Purchase of fixed maturities (15,012) (11,907) (14,291) Purchase of equity securities (200) (500) (825) Purchase of short term investments (2,094) Maturities of fixed maturities 4,861 4,487 3,318 Sales of fixed maturities 8,158 5,297 8,707 Sales of equity securities 425 1,100 Sales of short term investments 480 1,814 Funds held under deposit contracts: Purchase of fixed maturities (976) (469) Sales of short term investments 173 2,344 (815) Sales of fixed maturities 1,851 2,535 Maturities of fixed maturities 452 480 Purchase of fixed assets (2,089) (1,481) (888) Acquisition payments (1,239) (777) -------- -------- -------- Net cash used in investing activities (4,443) (2,204) (434) -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Payments under deposit contracts (122) (3,326) (1,553) Acquisition debt-repayment (657) Notes and loan payable-repayment (7,981) (6,757) (416) Proceeds from borrowings 5,000 642 553 Payment of dividends (849) (702) (702) Payment of dividends to minority stockholders (150) (150) -------- -------- -------- Net cash used in financing activities (4,609) (10,293) (2,268) -------- -------- -------- NET CHANGE IN CASH AND CASH EQUIVALENTS 14,136 3,348 14,095 Cash and cash equivalents at beginning of period 31,307 27,959 13,864 -------- -------- -------- Cash and cash equivalents at end of period $45,443 $31,307 $27,959 ======== ======== ========
See notes to consolidated financial statements F-8 KAYE GROUP INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY For the years ended December 31, 1998, 1997 and 1996 (in thousands, except per share amounts)
Common Stock Accumulated --------------------- Other Total Outstanding Par Paid-In Comprehensive Retained Stockholders' Shares Value Capital Income Earnings Equity ----------- -------- -------- ------------- ---------- ------------- Balance, January 1, 1996 7,020 $70 $7,776 $236 $14,800 $22,882 Change in unrealized depreciation, net of deferred income tax benefit of $138 (267) (267) Net income 3,071 3,071 Dividends declared (per share-$0.10) (702) (702) -------- -------- -------- -------- -------- -------- Balance, December 31, 1996 7,020 70 7,776 (31) 17,169 24,984 Change in unrealized appreciation, net of deferred income tax of ($174) 338 338 Net income 4,357 4,357 Dividends declared (per share-$0.10) (702) (702) Shares issued to purchase minority interest, net of deferred income tax of ($34) 1,454 15 10,166 66 (4,056) 6,191 -------- -------- -------- -------- -------- -------- Balance, December 31, 1997 8,474 85 17,942 373 16,768 35,168 Change in unrealized appreciation, net of deferred income tax of ($88) 168 168 Net income 7,282 7,282 Dividends declared (per share-$0.10) (849) (849) -------- -------- -------- -------- -------- -------- Balance, December 31, 1998 8,474 $85 $17,942 $541 $23,201 $41,769 ======== ======== ======== ======== ======== ========
KAYE GROUP INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME For the years ended December 31, 1998, 1997 and 1996 (in thousands)
1998 1997 1996 ------- ------- ------- NET INCOME $7,282 $4,357 $3,071 Other comprehensive income: Unrealized appreciation (depreciation) of investments available -for-sale, net of deferred income tax liability (benefit) (1998, $116; 1997, $214; 1996, ($114) ) 221 417 (219) Less: reclassification adjustment for gain included in net income, net of deferred income tax liability (1998, $28; 1997, $6; 1996, $24 ) (53) (13) (48) ------- ------- ------- Total other comprehensive income 168 404 (267) ------- ------- ------- COMPREHENSIVE INCOME $7,450 $4,761 $2,804 ======= ======= =======
See notes to consolidated financial statements F-9 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended December 31, 1998, 1997 and 1996 1) Business Kaye Group Inc. (the "Company"), a Delaware corporation, is a holding company which, through its subsidiaries, is engaged in a broad range of insurance brokerage, underwriting and related activities. The Company operates in two insurance business segments - the Insurance Brokerage Companies Operations ("Brokerage Operations"), comprised of the Retail Brokerage Business and the Program Brokerage Business, and the Property and Casualty Companies Operations. In addition, Corporate Operations include those activities that benefit the Company in its entirety and cannot be specifically identified to either the Insurance Brokerage Companies or the Property and Casualty Companies Operations. Such activities include debt servicing and public company expenses, including investor relations costs. Insurance Brokerage Companies Operations The Retail Brokerage Business operates an insurance brokerage business through four subsidiaries of the Company, the "Retail Brokerage Companies". It offers commercial clients a full range of insurance brokerage services including procurement of property/casualty insurance, risk management consulting, bonding, loss prevention engineering, and group employee benefit consulting services. In addition, personal lines and life and health insurance coverage are placed on behalf of individuals. The Retail Brokerage Business' primary strategy is to service middle market companies and organizations just below the Fortune 500 level for which other national brokers intensely compete. Within this market, the Retail Brokerage Business has developed particular expertise and knowledge of the risks facing a number of industry sectors including health care, real estate, manufacturing, churches, law firms, homes for the aged and fine arts. During 1998, the Retail Brokerage Business serviced approximately 15,000 insureds. The Retail Brokerage Business is compensated for its services primarily in the form of commissions paid by insurance companies. The commission is usually a percentage of the premium paid by the insured. Commission rates depend upon the type of insurance, the particular insurance company, and the role in which the Retail Brokerage Business acts. In some cases a commission is shared with other agents or brokers who have acted jointly with the Retail Brokerage Business in connection with the transaction. The Retail Brokerage Business may also receive from an insurance company a contingent commission that is generally based on the profitability and volume of business placed with it by the Retail Brokerage Business over a given period of time. The Retail Brokerage Business may also receive fees in connection with consulting services relating to the marketing of insurance. F-10 Program Brokerage Corporation or "PBC" (the Program Brokerage Business) is a subsidiary of the Company and operates a wholesale insurance brokerage business which offers retail insurance agents and brokers innovative solutions to the twin insurance problems of price and availability of coverage. It accomplishes this by organizing pools of similar risks into specially designed Affinity Group Insurance Programs (the "Programs"). Approximately two thirds of PBC's premium volume is generated by approximately 450 unrelated retail insurance agents and brokers serving approximately 5,800 insureds during 1998. The remaining one third is derived from the Retail Brokerage Business. Approximately half of PBC's premium volume is directly or indirectly placed with two affiliates, Old Lyme Insurance Company of Rhode Island, Inc. ("OLRI") and Old Lyme Insurance Company, Ltd. (Bermuda) ("OLB"). Property and Casualty Companies Operations The Company conducts its property and casualty underwriting business through its two insurance company subsidiaries (the "Insurance Companies"), OLRI and OLB. OLRI is a property and casualty insurance company licensed in Rhode Island and eligible as a surplus lines insurer in New York and New Jersey. OLB is a property and casualty insurance company organized and licensed under the laws of Bermuda. In states where the Insurance Companies are not admitted insurers or surplus lines insurers, the Insurance Companies underwrite risks through various reinsurance agreements. The Insurance Companies underwrite property risks (loss or physical damage to property) and OLRI underwrites casualty risks (legal liability for personal injury or damaged property of others) for insureds in the United States. Insurance is sold principally through the Programs marketed by PBC which insure various types of businesses and properties that have similar risk characteristics, such as apartments, condominiums, cooperatives, restaurants, building maintenance companies, gas stations, churches, funeral homes and pharmacies, among others. The Insurance Companies' strategy is to underwrite only the first "layer" of the property and casualty insurance provided under the Programs. Its exposure to individual insureds on individual losses is thereby generally limited to between $10,000 and $25,000 per claim (primarily inclusive of allocated loss expenses), depending on the Program. Under the Programs, the Insurance Companies' policies are sold in conjunction with policies issued by unaffiliated Program insurers that provide coverage for losses above the first layer of risk underwritten by the Insurance Companies. In addition, OLRI has issued policies on a selected basis with limits up to $1,000,000, retaining the first $50,000 of exposure and reinsuring the remaining limits with an unaffiliated reinsurer. F-11 The Property and Casualty Companies Operations includes Claims Administration Corporation ("CAC"), a subsidiary of the Company which is responsible for the administration of a large majority of the claims submitted to the Insurance Companies. The administration of claims includes investigation, engagement of legal counsel, approval of settlements and the making of payments to, or on behalf of insureds. CAC also provides claims administration service to the unaffiliated Program insurers for a fee. 2) Organization In 1994 the Retail Brokerage Business completed the integration of its 1992 acquisition of Amalgamated Programs Corporation and related entities ("Amalgamated") and continued to downsize to adjust to the continuing "soft market" in property and casualty premium rates. At the time, the officers of the general partners of Kaye International L.P. ("KILP") (which included members of Holding's Board of Directors) concluded that the combination of Holding and the Retail Brokerage Business would be advantageous for both OLRI and KILP. This conclusion was based on three factors: (a) improved operating results derived from the Amalgamated integration and "soft market" downsizing, (b) the improved outlook for the Retail Brokerage Business and (c) the fact that the Retail Brokerage Business accounted for approximately half of the PBC's premium volume. The combination was effective October 2, 1995 and was accounted for as a transfer and exchange between companies under common control. Accordingly, the assets and liabilities of the Retail Brokerage Business were combined with those of Holding at their historical cost in a manner similar to a "pooling of interests". The combination was accomplished as follows: 1. Holding transferred to Kaye Holding Corp. ("KHC") (a subsidiary) all of the outstanding stock of the Insurance Companies and its two other subsidiaries, PBC and CAC and its other assets in exchange for (i) 82,400 shares of KHC common stock, representing 82.4% of the total outstanding KHC common stock, and (ii) the assumption by KHC of certain of Holding's liabilities. 2. KILP transferred all of its interest in the limited partnerships conducting the Retail Brokerage Business (the "Retail Partnerships") and certain related assets to KHC in exchange for (i) 17,200 shares of KHC common stock, representing 17.2% of the total outstanding KHC common stock, and (ii) the assumption by KHC of certain KILP liabilities. 3. Certain individuals transferred to KHC all of their interests in the corporate general partners of the Retail Partnerships (the "Retail Brokerage Companies") in exchange for 400 shares of KHC common stock, representing 0.4% of the total outstanding KHC common stock. F-12 4. KHC contributed its interests in the Retail Partnerships to the Retail Brokerage Companies thereby causing the dissolution of the Retail Partnerships. As a result, the Retail Brokerage Companies, as a group, own all of the assets and are subject to all of the liabilities, of the Retail Brokerage Business. On December 30, 1997, the stockholders of the Company approved a restructuring that merged KHC into the Company. This eliminated KILP's minority interest in KHC of $6,191,000 as of December 31, 1997 and increased stockholders' equity of the Company by the same amount. KILP was the Company's largest shareholder. The merger was accounted for as a transfer and exchange between entities under common control. Accordingly, common stock of Kaye Group Inc. issued in exchange for the KHC shares was accounted for by using the closing NASDAQ market price on (the effective date of the merger) October 24, 1997 ($7.00). This increased the number of shares of common stock by 1,454,435 at the par value $.01, per share, or $14,544. Paid-in capital was increased by $10,166,000 which was the difference between the market value price per share and the par value per share. Minority interest in KHC was eliminated as a result of the merger and retained earnings of Kaye Group Inc. was reduced to account for the difference between the market value of the shares issued, and the book value of the minority interest in KHC. Effective May 12, 1998, KILP, the Company's then largest stockholder, was dissolved, and its shares in the Company were distributed to its partners. 3) Significant Accounting Policies (a) Basis of Presentation The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles ("GAAP"). All significant intercompany balances and transactions within segments have been eliminated. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Certain prior year information has been reclassified to conform with the 1998 presentation. (b) Segment Reporting The accompanying consolidated financial statements have been prepared on a segmented basis. See Note 1 for segments and their respective operations. Income (loss) before income taxes of the two operating segments includes expenses incurred by Corporate on behalf of the segments, which are allocated to operations of the segments. The allocation F-13 is based upon total revenues of each segment except for the allocation of the incentive bonus which is allocated based on the percentage of profits contributed to the Company. Identifiable assets by segment are those assets used in the Company's operations in each business segment. Corporate assets are principally cash and cash equivalents and investments in equity securities. (c) Commission Income Commission income together with the related accounts receivable from clients and premiums payable to insurance carriers, is recorded principally as of the billing date. Commission income related to installment billing arrangements is recorded at the date of the initial billing. Contingent commissions, commissions on premiums billed directly by insurance carriers and commission adjustments (including cancellations) are recorded when collected or known. (d) Fixed Assets Furniture, equipment, computer hardware and software, and leasehold improvements are carried at cost, less accumulated depreciation and amortization computed using the straight-line method. Fixed assets are depreciated over periods ranging from three to seven years, and leasehold improvements are amortized over the remaining terms of the leases which expire through 2002. (e) Intangible Assets Acquired expiration lists, covenants not to complete and goodwill are carried at cost, less accumulated amortization which is computed using the straight-line method over a period of not more than twenty years. Corporate organizational costs are carried at cost, less accumulated amortization and are amortized using the straight-line method over a period of five years. Such costs were fully amortized at December 31, 1996. (f) Investments Fixed maturity securities, funds held under deposit contracts and equity securities, which include common and preferred stocks, are stated at market value as the Company considers these investments available for sale. The difference between the cost and market value of fixed maturity and equity securities is reflected as unrealized appreciation or depreciation, net of applicable deferred income taxes, as a separate component of stockholders' equity. Realized gains or losses from the sale of investments are determined on the basis of specific identification and are reflected as a component of revenues. Investment income is recognized when earned. F-14 The fair value of fixed maturities is based on the closing price of the investments on December 31. The fair value of equity securities is based on the closing sale price on December 31. If a decline in fair value of an investment is considered to be other than temporary, the investment is reduced to its net realizable value and the reduction is accounted for as a realized investment loss. In evaluating whether a decline is other than temporary, management considers the duration and extent to which the market value has been less than cost, the financial condition and near-term prospects of the issuer, including events that may impact the issuer's operations and impair the earnings potential of the investment, and management's ability and intent to hold an investment for a sufficient period to allow for an anticipated recovery in fair value. (g) Insurance Premiums Earned Insurance premiums are recognized as revenues ratably over the terms of the related policies in force. Unearned premiums are established to cover the unexpired portion of premiums written and are calculated using the daily pro rata method. Premiums earned are net of reinsurance ceded. (h) Deferred Acquisition Costs Deferred acquisition costs represent costs to acquire or renew insurance policies or contracts and are deferred and amortized over the applicable premium recognition period, generally one year. These deferred costs have been limited to the amount expected to be recovered from future earned premiums. Acquisition costs of $7,630,000, $7,269,000 and $6,086,000 were amortized to expense in 1998, 1997 and 1996, respectively. (i) Unpaid Losses and Loss Expenses The estimated liability for unpaid losses and loss expenses is based on an evaluation of claims reported by policyholders. A provision which is based on historical experience and modified for current trends, is also included for losses and loss expenses which have been incurred but not reported. The methods of determining such estimates and establishing the resulting reserves are continually reviewed and modified to reflect current conditions, and any adjustments are reflected currently in results of operations. The Company has received claims related to lead paint exposures it insures under various residential real estate programs. There are uncertainties in estimating the amount of reserves due to factors including: difficulty in properly allocating responsibility and/or liability for the lead paint exposure; changes in the underlying laws and the judicial interpretation of those laws; and questions regarding the interpretation and application of insurance and reinsurance coverage. The Company has reserves established for these claims on a case basis and an incurred but not reported basis. The reserves provided were established based on Management's estimate of ultimate liabilities. However, due to the F-15 nature of the exposures such reserves cannot be, and are not established using standard actuarial techniques. (j) Reinsurance Assumed reinsurance premiums written, commission, and unpaid losses are accounted for based principally on the reports received from the ceding insurance companies and in a manner consistent with the terms of the related reinsurance agreements. Liabilities for unpaid losses, loss expenses and unearned premiums are stated gross of ceded reinsurance recoverables. Deferred acquisition costs are stated net of the amounts of reinsurance ceded, as are premiums written and earned, losses and loss expenses incurred, and amortized acquisition costs. Assumed reinsurance contracts which do not involve the transfer of risk to the Company are recorded as deposit contracts (see Note 13). (k) Income Taxes The Company recognizes deferred tax assets or liabilities for temporary differences between the financial reporting and tax basis of assets and liabilities based on enacted tax rates. The principal temporary differences relate to deferred acquisition costs, unearned premiums, discount for tax purposes of the unpaid losses and loss expense reserves, amortization of expiration lists and deferred compensation, accrual adjustment for commission income and unrealized gains or losses on investments (see Note 8). (l) Cash and Cash Equivalents Cash and cash equivalents include money market funds and certificates of deposit, including funds held in a fiduciary capacity for Insurance Brokerage Companies, with a maturity of three months or less. The Company maintains cash with banks in excess of federally insured limits and is exposed to the credit risk from this concentration of cash. (m) Earnings Per Share Effective December 31, 1997, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 128 Earnings Per Share which requires an enterprise to present basic and diluted earnings per share on the face of the income statement. Basic earnings per share, which is calculated by dividing net income by the weighted average number of common shares outstanding, replaces primary earnings per share from the prior standard. For all periods previously reported by the Company, basic earnings per share is the same as primary earnings per share, since the impact of the Company's common stock equivalents for those periods did not reach the significance threshold prescribed to require adjustment under the prior standard. Diluted earnings per share include the effect of all potentially dilutive securities. F-16 Earnings per common share has been computed below in accordance with SFAS No. 128, based upon weighted average common and dilutive shares outstanding (in thousands, except per share accounts): 1998 1997 1996 ------ ------ ------ Net income (numerator) $7,282 $4,357 $3,071 ------ ------ ------ Weighted average common shares and effect of dilutive shares used in the computation of earnings per share: Average shares outstanding-basic 8,474 7,024 7,020 Effect of dilutive shares 119 59 1 ------ ------ ------ Average shares outstanding - diluted (denominator) 8,593 7,083 7,021 ------ ------ ------ Earnings per common share: Basic $0.86 $0.62 $0.44 Diluted $0.85 $0.62 $0.44 A warrant that expired in February 1998, (relating to 1997 and 1996, only) and options to purchase 161,450, 284,000, and 419,000 common shares at prices from $7.06 to $11.63, $7.06 to $11.63, and $7.06 to $11.63 per share were outstanding at December 31, 1998, 1997, and 1996, respectively, but were not included in the computation of earnings per diluted share for the respective years, because their exercise price was greater than the average market price of the common shares. The options, which expire through December 31, 2008, December 31, 2007, and December 27, 2006, respectively, were still outstanding at the end of 1998. 4) Changes in Accounting Policies (a) Newly Adopted Accounting Standards In February 1997, the Securities and Exchange Commission ("SEC") issued Financial Reporting Release No. 48, Disclosure of Accounting Policies for Derivative Financial Instruments and Derivative Commodity Instruments and Disclosure of Quantitative and Qualitative Information about Market Risk Inherent in Derivative Financial Instruments, Other Financial Instruments, and Derivative Commodity Instruments ("FRR No. 48"). FRR No. 48 amends rules and forms for registrants and requires clarification and expansion of existing disclosures for derivative financial instruments, other financial instruments and derivative commodity instruments, as defined therein. The amendments require enhanced disclosure with respect to these derivative instruments. As of December 31, 1998, the Company has no derivative financial instruments. Additionally, the amendments expand existing disclosure requirements to include quantitative and qualitative discussions with respect to market risk inherent in market risk sensitive instruments such as equity and fixed maturity securities, as well as derivative instruments which investors can use to better understand and evaluate market risk exposures of F-17 registrants. These disclosures were effective in 1998 for the Company and are appropriately disclosed. In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income. This statement establishes standards for the reporting and display of comprehensive income and its components in the consolidated financial statements. The purpose of reporting comprehensive income is to report the change in equity of a business enterprise for the period from transactions and other events and circumstances from non-owner sources. It includes all changes in equity during a period except those resulting from investments by owners and distributions to owners. These items include currency translation adjustments and unrealized appreciation of investments, which are currently reported as separate components of equity in the balance sheet. In accordance with the statement, the Consolidated Statements of Comprehensive Income are presented as a separate statement at December 31, 1998, 1997 and 1996. Also in June 1997, the FASB issued SFAS No. 131, Disclosure about Segments of an Enterprise and Related Information. This statement requires that companies report certain information about their operating segments in the financial statements including information about the products and services from which revenues are derived, the geographic areas of operations, and information about major customers. Operating segments are determined by the way management decides how to allocate resources and how it assesses performance. Descriptive information about the method used to identify the reportable operating segments must also be disclosed. The statement also requires a reconciliation of revenues, net income, and assets and other amounts disclosed for the segments to the corresponding amounts in the consolidated financial statements. The Company implemented SFAS No. 131 effective December 31, 1998 and identified three operating segments: Insurance Brokerage, Property & Casualty, and Corporate. The financial position and operating results of the Company were not affected by this statement. (a) Accounting Standards Not Yet Adopted In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities. This statement requires all derivatives to be recognized as either assets or liabilities in the statement of financial position and to be measured at fair value. This statement is effective for all fiscal quarters and fiscal years beginning after June 15, 1999. Management believes that the statement will not have a material impact on the financial position of the Company. In March 1998, the American Institute of Certified Public Accountants ("AICPA") issued Statement of Position ("SOP") 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use, which requires capitalization of external and certain internal costs incurred to obtain or develop internal-use computer software during the application development stage. SOP 98-1 is effective for fiscal years beginning after F-18 December 15, 1998. This statement is not expected to materially impact the Company's consolidated financial statements. In late 1998, the AICPA issued SOP 98-7. Deposit Accounting: Accounting for Insurance and Reinsurance Contracts that Do Not Transfer Insurance Risk. This SOP effective for fiscal years beginning after June 15, 1999, provides guidance to both the insured and insurer on how to apply the deposit method of accounting when it is required for insurance and reinsurance contracts that do not transfer insurance risk. This SOP is not expected to materially impact the Company's consolidated financial statements. In December 1997, the AICPA issued SOP 97-3, Accounting by Insurance and Other Enterprises for Insurance-Related Assessments. SOP 97-3 provides guidance for assessments related to insurance activities and requirements for disclosure of certain information. SOP 97-3 is effective for financial statements issued for periods beginning after December 31, 1998. Restatement of previously issued financial statements is not required. SOP 97-3 is not expected to have a material impact on the Company's consolidated financial statements. 5) Funds Held in Fiduciary Capacity Premiums collected by the Insurance Brokerage Companies but not yet remitted to insurance carriers are approximately $33,218,000 and $22,322,000 at December 31, 1998 and 1997, respectively, some of which are restricted as to use by law in certain states in which the Insurance Brokerage Companies operate. These balances are held in cash and cash equivalents or short term investments. The offsetting obligation is recorded in premiums payable. F-19 6) Investments Net investment income for the years ended December 31, 1998, 1997 and 1996 is derived from the following sources (in thousands): 1998 1997 1996 ------ ------ ------ Insurance Brokerage Companies Short term investments $1,846 $1,565 $1,026 ------ ------ ------ Property and Casualty Companies Fixed maturities 2,031 2,083 2,099 Equity securities 67 119 114 Short term investments 791 382 82 Other 98 143 191 ------ ------ ------ Total Investment income 2,987 2,727 2,486 Investment expenses (67) (35) (25) ------ ------ ------ 2,920 2,692 2,461 ------ ------ ------ Corporate Short term investments (31) 55 89 Net investment income $4,735 $4,312 $3,576 ====== ====== ====== Net realized gains or losses and the increase or decrease in unrealized appreciation (depreciation) on investments for the years ended December 31, 1998, 1997 and 1996 are summarized below (in thousands): 1998 1997 1996 ---- ---- ---- Net realized gains (losses): Fixed maturities: Gross realized gains $85 $26 $82 Gross realized losses (5) (10) ---- ---- ----- Net realized gains on investments $85 $21 $72 ---- ---- ----- Change in unrealized appreciation (depreciation): Fixed maturities $47 $636 $(543) Equity securities 209 (14) 48 ---- ---- ----- Net change in unrealized appreciation (depreciation) $256 $622 $(495) ==== ==== ===== F-20 The composition, cost (amortized cost for fixed maturities) and estimated market values of the Company's investments at December 31, 1998 and 1997 are presented below. Gross Unrealized Holding Aggregate ------------------ Fair Cost Gains Losses Value ------- ------- ------- --------- (in thousands) 1998 Investments available for sale: Fixed Maturities: U.S. Government (a) $2,144 $18 $2,162 States (b) 36,144 643 $(75) 36,712 Corporate 4,692 42 (11) 4,723 ------- ---- ----- ------- Total fixed maturities $42,980 $703 $(86) $43,597 ------- ---- ----- ------- Equity Securities: Common Stock $643 $204 $847 Preferred Stock 500 500 ------- ---- ------- Total equity securities $1,143 $204 $1,347 ------- ---- ------- 1997 Investments available for sale: Fixed Maturities: U.S. Government (a) $3,641 $10 $(24) $3,627 States (b) 34,013 591 (3) 34,601 Corporate 3,875 44 (48) 3,871 ------- ---- ----- ------- Total fixed maturities $41,529 $645 $(75) $42,099 ------- ---- ----- ------- Equity Securities: Common Stock $703 $111 $(115) $699 Preferred Stock 725 (1) 724 ------- ---- ----- ------- Total equity securities $1,428 $111 $(116) $1,423 ------- ---- ----- ------- Funds held under deposit contracts - Cash and cash equivalents $173 $173 ------- ------- (a) Includes U.S. Government agencies and authorities (b) Includes municipalities and subdivisions F-21 The amortized cost and estimated market value of fixed maturities at December 31, 1998, by contractual maturity date, are listed below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without penalties. Investments Available for Sale ------------------------------------- (in thousands) Amortized Cost Aggregate Fair Value -------------- -------------------- Due in one year or less $3,769 $3,774 Due after one year through five years 21,193 21,624 Due after five years through ten years 13,474 13,599 Due after ten years 4,544 4,600 ------- ------- Total $42,980 $43,597 ======= ======= Fixed maturities and cash carried at market value of $3,560,000, and $3,511,000 in 1998 and 1997, respectively, were on deposit for governmental authorities, as required by law. Fixed maturity, equity securities, and cash equivalents carried at market value of $13,747,000 and $11,733,000 in 1998 and 1997, respectively, have been deposited in trust funds or pledged to collateralize the obligations of OLB and OLRI to ceding companies under reinsurance agreements. The Company's short term investment of cash is maintained principally with three banks and an institutional money market fund. To control this risk, the Company utilizes only high credit quality financial institutions. Additionally, under the insurance laws of the State of Rhode Island, where OLRI is domiciled, insurers and reinsurers are restricted as to the types of investments they may purchase and the concentration of risk they may accept in any one issuer or group of issuers. The Company complies with such laws which insure that the concentration of risk in its investment portfolio is at an acceptable and authorized level. F-22 7) Notes Payable Notes payable consist of the following in thousands at December 31,: 1998 1997 ------ ------ Insurance Brokerage: Acquisition debt due to seller, due through 7/1/2002, interest at prime $1,406 Finance company notes, due through 2000, interest at prime rate plus 1/2% 86 $179 Finance company notes, due through 2002, interest at 7.75% 445 546 Capital lease due through 8/30/99, interest at 7.375% 150 363 ------ ------ 2,087 1,088 Less current portion 718 434 ------ ------ Notes payable - long term $1,369 $654 ====== ==== Corporate: Term loan, due through 2000, interest at 7.8% $4,456 Revolving line of credit, due through 2001 interest at 5.9375% plus 2.5% $7,031 Less current portion 1,153 1,875 ------ ------ Notes payable-long term $3,303 $5,156 ====== ====== On June 23, 1998 the Company paid in full the $6,094,000 bank revolving line of credit, and replaced it with a $5,000,000 term loan (the "Loan") with another bank. The Loan is collateralized by the stock of the Property and Casualty Companies. The Loan bears interest at a fixed rate per year of 7.8%. At December 31, 1998, $4,456,000 was outstanding under the Loan. In addition, the Company has available a $4,500,000 revolving line of credit with the same bank, collateralized by the stock of the Property and Casualty Companies. The proceeds are available for general operating needs and acquisitions. As of December 31, 1998, no amount was outstanding on the revolving line of credit. A quarterly fee is assessed in the amount of 0.05% on the unused balance. Among other covenants, the Loan agreement requires maintenance of minimum consolidated GAAP net worth, statutory surplus, ratio of net premiums written to surplus, and minimum debt service coverage. As of December 31, 1998, the Company was in compliance with the covenants of the Loan agreement. The Company's required payments on the Loan for the respective years are $1,153,000 in 1999, $1,245,000 in 2000, $1,345,000 in 2001, and $713,000 in 2002. Interest expense for the loans mentioned above for the year ended December 31, 1998, 1997, and 1996 were $443,000, $548,000 and $514,000, respectively. F-23 On August 29, 1997 the Company paid in full the note payable to KILP of $6,000,000. This note was subject to repayment restrictions stipulated in the then existing bank agreement. The due date of the note pursuant to the then existing bank loan agreement would have been in 2001. The bank consented to the payment on August 25, 1997. Interest expense for the year ended December 31, 1997 and 1996 was $400,000 and $600,000, respectively. The aggregate maturities of all notes payable by year are as follows (in thousands): 1999 .................................................. $1,871 2000 .................................................. 1,773 2001 .................................................. 1,866 2002 .................................................. 1,033 Thereafter ............................................ 0 Based on the borrowing rates currently available to the Company for bank loans with similar terms and average maturities, the fair value of the notes payable at December 31, 1998 and 1997 approximates their carrying value. Interest expense in the accompanying consolidated statements of income for the years ended December 31, 1998, 1997 and 1996 was $492,000, $948,000, and $1,114,000, respectively. 8) Income Taxes The Company's effective income tax rate for the years ended December 31, 1998, 1997 and 1996 differs from the statutory rate on ordinary income before income taxes as follows (in thousands):
1998 1997 1996 ----------------- ------------------- ------------------ % of % of % of Pretax Pretax Pretax Amount Income Amount Income Amount Income ------ ------ ------ ------ ------ ------ Income taxes computed at the $3,588 34.0% $2,569 34.0% $1,772 34.0% statutory rate Increase (decrease) in taxes resulting from: Tax-exempt investment income (456) (4.3) (516) (6.8) (403) (7.7) State and local income taxes and other 140 1.3 214 2.8 115 2.2 ------ ---- ------ ---- ------ ---- Provision for income taxes $3,272 31% $2,267 30.0% $1,484 28.5% ====== ==== ====== ==== ====== ====
F-24 The source of the significant temporary differences and the related deferred tax effects are as follows: 1998 1997 1996 ------- ------- ------- (in thousands) Expiration lists $394 $394 $393 Unearned premium reserves 10 40 (93) Deferred compensation 850 Deferred acquisition costs (6) (46) 126 Accrual adjustment (85) (59) (56) Other (217) 47 (137) Loss reserve discount (246) (30) 37 ------- ------- ------- Deferred tax (benefit) expense $(150) $346 $1,120 ======= ======= ======= The components of the net deferred tax asset, in the accompanying consolidated balance sheets at December 31, 1998 and 1997, are as follows: 1998 1997 ------ ------ (in thousands) Deferred tax assets: Loss and loss expense reserves $1,296 $1,048 Expiration lists 547 941 Unearned premium reserves 827 837 Unrealized losses on investments and other 304 91 ------ ------ Total deferred tax asset 2,974 2,917 ------ ------ Deferred tax liabilities: Deferred acquisition costs 1,333 1,339 Unrealized gains on investments and other accrual adjustments 1,237 1,255 ------ ------ Total deferred tax liability 2,570 2,594 ------ ------ Net deferred tax asset $404 $323 ====== ====== Management believes it is more likely than not that all deferred tax assets are realizable based upon the past earnings history of the Company. OLB, as a Bermuda domiciled company is not subject to federal income taxes but, rather, the Company is subject to federal income taxes based on OLB's taxable income for the entire year. Accordingly, the Company includes the taxable income of OLB in its separate company income for tax purposes, but for segment reporting the income is included with the Property and Casualty Companies. OLB has received an undertaking from the Bermuda Government exempting it from all taxes computed on profit or income, or computed on any capital asset gain or appreciation until 2016. The Company and its wholly owned subsidiaries are party to a Tax Allocation Agreement (the "Agreement"). The Agreement requires these companies to file a U.S. consolidated income tax return. The Agreement provides that each member of the group will compute its separate tax liability or benefit on a separate return basis and pay or receive such amounts to or from the Company. For purposes of segment information, amounts due to or from the Company by its subsidiaries are included in the intercompany receivable/payable in the accompanying consolidated balance sheets. F-25 9) Lease Commitments and Rentals Minimum annual rental commitments under various non-cancelable operating leases for office space, automobiles and equipment are as follows (in thousands): Years Ending December 31, ------------------------- 1999 ....................................... $2,656 2000 ....................................... 2,493 2001 ....................................... 2,203 2002 ....................................... 351 Thereafter ................................. 22 ------- 7,725 Sub-lease rental income ............................. (139) ------- Net rental commitments .............................. $7,586 ======= Leases for office space include various escalation clauses, none of which individually or in the aggregate are material. Escalation clauses are accounted for on a straight-line basis over the life of the lease. The leases also contain provisions for the payment of certain operating expenses and real estate taxes. Rent expense for the years ended December 31, 1998, 1997 and 1996, amounted to approximately $2,928,000, $2,992,000 and $2,857,000, respectively, net of sublease rental income of $117,000, $193,000 and $197,000, respectively. 10) Pension and Retirement Plans Substantially all officers and employees of the Company are entitled to participate in a qualified retirement savings plan (defined contribution plan) and prior to 1995 were entitled to participate in a defined benefit pension plan. The cost to the Company to participate in these plans included in the accompanying consolidated statements of income was approximately $255,000, $385,000, and $55,000 for 1998, 1997 and 1996, respectively. 11) Management Services Agreement In September 1992, Kaye Insurance Associates, L.P. ("KIA"), a predecessor of one of the entities comprising the Retail Brokerage Business, entered into a management services agreement with APCO Corp. (the "Manager"), whereby the Manager was obliged to provide the administrative and operational functions for the Amalgamated Division, from which certain assets and liabilities were acquired in 1992. The Manager was owned by the individuals who sold the Amalgamated Division to KIA. In return for the Manager's services, commencing September 1, 1992 and continuing through August 31, 1997, KIA was obliged to pay annually to the Manager a base fee which was subject to certain F-26 adjustments as specified in the agreement. KIA incurred management service fees of $911,000 and $1,536,000 for the years ended December 31, 1997 and 1996, respectively, which was included in other operating expenses of the Insurance Brokerage Companies. In addition, the Manager was entitled to receive an incentive bonus in an amount equal to a specified percentage (ranging from 16% to 19%) of gross income of the Amalgamated division, as defined in the agreement, for each of the five years of the period ended August 31, 1997. In accordance with the terms of the agreement, however, in no event should the cumulative amount paid by KIA, with respect to this incentive bonus, be less than $2,876,000 or exceed $4,220,000 subject to the continued employment of certain key personnel by the Manager. The cost of this bonus to KIA, which was charged to salaries and benefits as the related gross income earned, was $0 and $364,000 for the years ended December 31, 1997 and 1996, respectively. These agreements expired on August 31, 1997. 12) Contingent Liabilities In the ordinary course of business, the Company and its subsidiaries are subject to various claims and lawsuits consisting primarily of alleged errors and omissions in connection with the placement of insurance. Subject to specified limits, the shareholders of predecessors to the Retail Brokerage Business are responsible for any costs arising from those claims which were asserted prior to November 1, 1991, the date on which KILP was formed. In the opinion of management, the ultimate resolution of all asserted and potential claims both prior and subsequent to the formation of KILP, will not have a material effect on the consolidated financial position of the Company. As licensed brokers, the Insurance Brokerage Companies are or may become party to administrative inquiries and at times to administrative proceedings commenced by state insurance regulatory bodies. Certain subsidiaries were involved in an administrative investigation commenced in 1992 by the New York Insurance Department ("Department") relating to how property insurance policies were issued for the Residential Real Estate Program. As a result, the manner in which policies are structured for certain clients in this Program was altered, which has not had a material adverse effect on this Program. While the Company had discussions with the Department regarding settlement of such investigation, this matter has not been pursued for several years. If the matter is not closed or settled, the Department could institute formal proceedings against the subsidiaries seeking fines or license revocation. Management does not believe the resolution of this issue will have a material adverse effect on the Company. F-27 13) Reinsurance As of December 31, 1998 and 1997, included in the amounts reflected in the consolidated financial statements are unearned premiums of $4,779,000 and $4,963,000, respectively, and unpaid losses and loss expenses of $16,068,000 and $12,445,000, respectively, for reinsurance assumed from non-affiliates, although all such reinsurance assumed relates to business produced by the Insurance Brokerage Companies. The Insurance Companies have established trust funds and deposited fixed maturities, equity securities, and cash therein to satisfy the collateral requirements of certain reinsurance agreements. The trust funds established for the benefit of ceding companies amounted to approximately $13,747,000 and $11,872,000 as of December 31, 1998 and 1997, respectively. In accordance with the normal practice of the insurance industry, OLRI assumes and cedes reinsurance with other insurers or reinsurers. The reinsurance arrangements provide greater diversification of business and minimize OLRI's maximum net loss arising from large risks. OLRI assumes reinsurance under reinsurance treaty arrangements with limits varying from $25,000 to $100,000 per occurrence. OLRI retains the first $25,000 of exposure and cedes $75,000 in excess of $25,000 for business assumed with $100,000 per occurrence to an unaffiliated company, PXRE Reinsurance Company ("PXRE") (A.M. Best rated Ag). In addition, OLRI purchased annual stop loss policies to limit its exposure from reinsurance assumed. These policies insure OLRI in the event the losses under the policy exceed a fixed percentage of premium earned. OLRI will be reimbursed up to $3,000,000. OLRI's ceded reinsurance is on an excess of loss basis with PXRE. OLRI issues policies on a selected basis with limits up to $1,000,000 retaining the first $50,000 of exposure and reinsuring $950,000 to PXRE. The Insurance Companies also entered into reinsurance agreements wherein they reinsured certain general liability and property risks. These reinsurance agreements include per claim and aggregate limits and provide funds that are placed into trusts for the benefit of the insurers. Since these reinsurance contracts do not transfer risk to the Insurance Companies, they are included in "Funds Held Under Deposit Contracts" in the accompanying consolidated balance sheets. F-28 A contingent liability exists with respect to reinsurance ceded, which would become an ultimate liability of OLRI in the event that the assuming companies were unable to meet their obligations under the reinsurance agreements in force at December 31, 1998. The amounts deducted from revenues and expenses for reinsurance ceded by OLRI were as follows: 1998 1997 ---- ---- (in thousands) Revenue and expenses: Premiums earned $355 $ 558 Commission expense 45 88 Losses and loss expenses 409 1,929 14) Losses and Loss Expenses The following table sets forth a reconciliation of the changes in the reserves for outstanding losses and loss expenses, including paid losses and loss expenses, for each year in the three year period ended December 31, 1998. Years Ended December 31, -------------------------------- 1998 1997 1996 -------- -------- -------- (in thousands) Balance at January 1, ....................... $19,126 $15,227 $12,671 Less: reinsurance recoverables ..... (2,811) (882) -------- -------- -------- Net balance ........................ 16,315 14,345 12,671 -------- -------- -------- Incurred related to: Current year ....................... 8,461 8,824 6,621 Prior years ........................ 35 (108) 415 -------- -------- -------- Total incurred ..................... 8,496 8,716 7,036 -------- -------- -------- Paid related to: Current year ....................... 1,877 1,802 1,832 Prior years ........................ 4,587 4,944 3,530 -------- -------- -------- Total paid ......................... 6,464 6,746 5,362 -------- -------- -------- Net balance at December 31, ................. 18,347 16,315 14,345 Add: reinsurance recoverables ...... 3,220 2,811 882 -------- -------- -------- Balance ............................ $21,567 $19,126 $15,227 ======== ======== ======== F-29 15) Statutory Financial Information and Dividend Restrictions The Company's insurance subsidiaries file separate financial statements in accordance with accounting practices prescribed or permitted by the insurance regulatory authorities where they are domiciled. Statutory financial statements do not reflect deferred acquisition costs, deferred income taxes, market value changes and certain other items recognized under GAAP. OLB is required to maintain a minimum statutory capital and surplus based upon the higher of $1,000,000 or an amount derived by applying a variable rate to its current premium volume or outstanding losses at December 31, 1998. At December 31, 1998, $419,000 was available for distribution from OLB and its subsidiary, Park Brokerage Ltd. Pursuant to Rhode Island Insurance Law, OLRI may pay cash dividends only from earned surplus determined on a statutory basis, subject to the maintenance of minimum capital and surplus of $3,000,000. Further, OLRI is restricted (on the basis of the lesser of 10% of OLRI's statutory surplus at the end of the preceding twelve-month period or 100% of OLRI's net income, excluding realized capital gains, for the preceding twelve-month period) as to the amount of the dividends it may declare or pay in any twelve-month period without prior approval of the Department of Business Regulation of Rhode Island. At December 31, 1998, $2,786,000 is available for distribution during 1999, without prior approval. Statutory information is as follows: Old Lyme Old Lyme Rhode Island Bermuda Combined ------------ ------- -------- (in thousands) Policyholders' surplus at December 31, 1998 $27,867 $1,419 $29,286 1997 $23,662 $1,904 $25,566 Net income for the years ended December 31, 1998 $5,703 $1,215 $6,918 1997 $5,178 $1,453 $6,631 1996 $2,459 $2,890 $5,349 F-30 The following is a reconciliation of net income and surplus regarding policyholders in accordance with statutory accounting principles ("SAP") as reported to the Rhode Island and Bermuda insurance regulatory authorities to net income and capital as determined in conformity with generally accepted accounting principles ("GAAP") basis.
Statutory Surplus / Stockholders' Equity Net Income for years ended as of December 31, December 31, ---------------------- ------------------------------------ 1998 1997 1998 1997 1996 -------- -------- -------- -------- -------- (in thousands) Consolidated amount in accordance with GAAP $41,769 $35,168 $7,282 $4,357 $3,071 Deficit (equity) in net assets and net loss of non-insurance companies (7,273) (4,388) (141) 2,086 3,217 -------- -------- -------- -------- -------- Combined amount in accordance with GAAP 34,496 30,780 7,141 6,443 6,288 Excess of statutory formula reserves over GAAP reserves (890) Deferred acquisition costs (3,921) (3,939) 18 134 (370) Non-admitted assets, deferred income taxes and other (1,289) (385) (241) 54 (569) -------- -------- -------- -------- -------- Combined amount in accordance with SAP $29,286 $25,566 $6,918 $6,631 $5,349 ======== ======== ======== ======== ========
16) Related Party Transactions The administrative support for OLB is provided by International Advisory Services, Ltd. ("IAS"), an insurance management company located in Bermuda. A director of IAS is an officer of OLB and is a director of the Company. Management fees paid to IAS under a service contract for the years ended December 31, 1998, 1997 and 1996 were $30,000, $37,500 and $36,250, respectively. The director of IAS, who is a director of the Company, is also a director of an insurance brokerage company, H & H Reinsurance Brokers, Ltd. ("H & H Reinsurance"). H & H Reinsurance has a reinsurance contract between OLRI and unrelated insurance carriers, (Transatlantic Reinsurance Company and USF Reinsurance Company). H & H Reinsurance received commissions of $0, $38,114 and $7,000 in 1998, 1997 and 1996, respectively, as a result of such transaction. The Company had a $6,000,000 note payable to KILP which was paid in full during 1997 (see Note 7). KIA incurred a management fee of $175,000 annually to ZS Fund, L.P., which was one of the general partners of KILP (prior to KILP's dissolution). KIA had an accrued payable to ZS Fund, L.P. as of December 31, 1996 of $175,000. This management fee arrangement terminated on December 31, 1996. F-31 In January 1997, KIA entered into a management agreement with KILP, whereby the KIA provided certain administrative services for a fee of $50,000 per year. At December 31, 1998 and 1997, the Company recorded $50,000 for such services provided. This management fee arrangement terminated in 1998 with the dissolution of KILP. A director of the Company is also a director of, and has shared beneficial ownership of more than ten percent of the outstanding common stock of Sun Television and Appliances, Inc. ("Sun TV"). In 1994, Sun TV and a subsidiary of the Company entered into two agreements whereby the Company's subsidiary agreed to assume certain service contracts that were sold by Sun TV to its retail customers (the "Agreement") and contracted with Sun TV to have Sun TV provide repair services under certain service contracts. The Board of Directors believes that the agreements were commercially reasonable. On September 11, 1998, Sun TV filed bankruptcy petitions under Chapter 11 of the Bankruptcy Code. The Company's subsidiary filed a proof of claim on March 11, 1999 for any and all amounts that are due and owing under the Agreement. 17) Acquisitions During 1998, the Company acquired certain assets and liabilities of Florida Insurance Associates, Inc. ("FIA"), Daniel V. Keane Agency, Inc. ("DVK"), and Laub Group of Florida, Inc. ("LGF") for cash of $250,000, $657,000, and $200,000, respectively and estimated amounts payable in future periods of $14,000 (FIA), $1,406,000 (DVK) and $550,000 (LGF). The total acquired intangible assets (including expiration lists) were $263,000, $2,063,000, and $750,000 for FIA, DVK, and LGF, respectively. These acquisitions were accounted for under the purchase method. During 1997, the Company acquired certain assets and liabilities of Western Insurance Associates, Inc. ("WIA") for cash of $1,567,000 paid through December 31, 1998 and amounts payable in future periods of $1,330,000. The amounts payable are the Company's estimate of the costs it will incur. The total acquired expiration list was $2,897,000 and $3,062,000 at December 31, 1998 and 1997, respectively. This acquisition was accounted for as a purchase. 18) Preferred Stock The Board of Directors is authorized to issue preferred stock in classes or series and to fix the designations, preferences, qualifications, limitations or restrictions of any class or series with respect to the rate and nature of dividends, the price and terms and conditions on which shares may be redeemed, the amount payable in the event of voluntary or involuntary liquidation, the terms and conditions for conversion or exchange into any other class or series of stock, voting rights and other terms. No preferred stock is currently outstanding. F-32 19) Dividends Declared The Board of Directors of the Company declared annual dividends of $849,000 and $702,000, respectively for the years ended December 1998 and 1997, respectively, of which $212,000 and $175,000, respectively, were unpaid at December 31, 1998 and 1997, respectively. 20) Stock Performance and Stock Option Plans On December 30, 1997, the Company adopted a Stock Performance Plan, under which up to 350,000 shares of the Company's common stock may be granted and awarded to key employees. The grant of stock under this plan is contingent upon criteria established by the Company's Compensation Committee of the Board of Directors. Awards are based on performance targets of the Company's stock based on increases in the market value of the Company's common stock from the price on the date the stock is initially granted by the Company. Shares must be granted, awarded, and vested before participants take full title to the performance stock. Awards vest on the occurrence of any of the following events, (i) fifteen years of continuous service with the Company from the date shares are granted to the participant, (ii) death or disability of the participant, (iii) immediately before a change of control (as defined under the plan), (iv) attaining the age of 65, or (v) immediately before a sale or merger (as defined under the plan). During 1998, 185,282 shares of performance stock were granted under this plan. At December 31, 1998, no performance stock under this plan was awarded or vested. At December 31, 1998, the Company has a Stock Option Plan and a Supplemental Stock Option Plan (the "Plans"). The plans are identical and are stock-based compensation plans, which are described below. The Company adopted the disclosure requirements of SFAS 123 effective January 1, 1996 and continues to account for its employee stock-based compensation plans under APB 25. Accordingly, the adoption of SFAS 123 had no impact on the Company's financial position or results of operations. Under the Plans a total of 700,000 shares of common stock are reserved for issuance. The Plans provide for the granting to directors, executives or other key employees (including officers) of the Company non-qualified stock options ("NQOs") or incentive stock options ("ISOs") within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended. The exercise price of all ISOs and NQOs under the Plans are generally at least the fair market value of the common stock of the Company on the date of grant. The Compensation Committee (the "Committee") determines the terms of the options including the exercise price, number of shares subject to option and exercisability. F-33 A summary of the status of the Plans as of December 31, 1998, 1997 and 1996 and changes during the years ended on those dates is presented below:
1998 1997 1996 ---------------------------------------------------------------------------------------- Weighted-Average Weighted-Average Weighted-Average Exercise Exercise Exercise Fixed Options Shares Price Shares Price Shares Price ---------------------------------------------------------------------------------------- Outstanding at beginning of year 624,850 $6.12 528,550 $7.53 323,000 $9.33 Granted 54,500 6.46 450,750 5.14 225,000 5.09 Exercised Forfeited (20,150) 7.88 (354,450) 6.87 (19,450) 9.24 Outstanding at end of year 659,200 $6.15 624,850 $6.12 528,550 $7.53 ------- -------- ------- Options exercisable at year-end 232,900 143,450 124,150 ------- -------- ------- Weighted-average fair value of options granted during the year $2.17 $1.29 $1.21 ------- -------- -------
The following table summarizes information about the stock options outstanding at December 31, 1998:
Options Outstanding Options Exercisable ---------------------------------------------------------- ------------------------------- Number Weighted-Average Weighted- Number Weighted- Outstanding Remaining Average Exercisable Average Exercise Prices at 12/31/98 Contractual Life Exercise Price at 12/31/98 Exercise Price ---------------------------------------------------------- ------------------------------- $11.63 500 5.08 years $11.63 400 $11.63 $10.91 5,000 5.08 10.91 4,000 10.91 $10.00 75,750 4.63 10.00 75,750 10.00 $8.43 40,200 6.83 8.43 24,300 8.43 $8.03 15,000 8.83 8.03 3,000 8.03 $7.88 15,000 6.70 7.88 9,000 7.88 $7.06 10,000 7.37 7.06 4,000 7.06 $6.70 10,000 9.50 6.70 $6.64 5,000 9.00 6.64 1,000 6.64 $6.60 24,500 9.94 6.60 $6.17 20,000 9.84 6.17 $5.06 178,250 8.15 5.06 36,450 5.06 $5.00 250,000 8.20 5.00 73,000 5.00 $4.97 10,000 8.49 4.97 2,000 4.97 ------- ------- 659,200 7.78 $6.15 232,900 $7.30 ======= =======
F-34 Unless otherwise specified, the options vest and are exerciseable at the rate of 20% per year and terminate ten years from date of grant. At December 31, 1998, 1997 and 1996, 232,900, 143,450 and 124,150 options were exerciseable and there were 40,800, 75,150 and 171,450 options available for future grants, respectively. Had the compensation cost for the Company's stock based compensation plans been determined based on the fair value at the grant date for awards under those plans consistent with the method of SFAS No. 123, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below (in thousands, except per share amounts): 1998 1997 1996 ---- ---- ---- Net Income As reported $7,282 $4,357 $3,071 Pro forma 7,167 4,280 3,060 Earnings per share - basic As reported .86 .62 .44 Pro forma .85 .61 .44 Earnings per share - diluted As reported .85 .62 .44 Pro forma .84 .60 .44 The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions: (i) dividend yield of 1.6%, (ii) expected volatility range of 30%, (iii) risk-free interest rate of 4.7%, and (iv) expected life of 5 years. 21) Quarterly Financial Information (Unaudited) The following quarterly financial information for each of the three months ended March 31, June 30, September 30 and December 31, 1998 and 1997 is unaudited. However, in the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary to present fairly the results of operations for such periods, have been made for a fair presentation of the results shown.
For the three months ended ==================================================================================================================================== (in thousands, except for per share) March 31, June 30, September 30, December 31, ----------------- ----------------- ----------------- ----------------- 1998 1997 1998 1997 1998 1997 1998 1997 ==================================================================================================================================== Revenues $14,809 $12,952 $15,548 $13,787 $17,230 $16,744 $17,424 $16,159 - ------------------------------------------------------------------------------------------------------------------------------------ Net income $971 $228 $1,734 $724 $2,296 $1,547 $2,281 $1,858 - ------------------------------------------------------------------------------------------------------------------------------------ Earnings per share: Basic $0.11 $0.03 $0.20 $0.11 $0.27 $0.22 $0.27 $0.26 Diluted 0.11 0.03 0.20 0.11 0.27 0.22 0.27 0.26 - ------------------------------------------------------------------------------------------------------------------------------------ Weighted average shares outstanding: Basic 8,474 7,020 8,474 7,020 8,474 7,020 8,474 7,036 Diluted 8,596 7,020 8,595 7,020 8,591 7,161 8,580 7,164 ====================================================================================================================================
F-35 22) Premiums Of the Company's net premiums earned approximately 60%, 62% and 63% related to the residential real estate program and 23%, 25% and 24% related to the restaurant program for the years 1998, 1997 and 1996, respectively. Of the Company's net premiums earned approximately 90%, 82% and 83% related to insureds located in New York State for the years 1998, 1997 and 1996, respectively. Premiums earned for the three years ended December 31, 1998, 1997 and 1996, which include assumed premiums relating to reinsurance agreements with RLI of $6,229,000, $4,272,000 and $3,878,000 in 1998, 1997 and 1996, respectively, are summarized below: 1998 1997 1996 -------- -------- -------- (in thousands) Direct $11,652 $11,496 $9,979 Assumed 13,392 11,909 9,869 -------- -------- -------- Total 25,044 23,405 19,848 Ceded (355) (558) (521) -------- -------- -------- Net Premiums Earned $24,689 $22,847 $19,327 ======== ======== ======== 23) Business Segments The Company operates in two insurance business segments, the procuring of property and casualty insurance ("Insurance Brokerage Companies") and the underwriting of property and casualty risks ("Property and Casualty Companies"). In addition, Corporate Operations include those activities that benefit the Company in its entirety and cannot be specifically identified to either the Insurance Brokerage Companies or the Property and Casualty Companies. Such activities include debt servicing and public company expenses, including investor relations costs. The identifiable segment assets, operating profits and income before income taxes and minority interests are shown on the accompanying consolidated balance sheets and statements of income. F-36 The following table is a summary of certain other segment information for the years ended December 31, 1998, 1997 and 1996: Business Segments - 1998 - -------------------------------------------------------------------------------- Insurance Property & (in thousands) Brokerage Casualty - -------------------------------------------------------------------------------- Revenue from external sources $31,324 $24,689 Revenue from other segments 4,032 69 Depreciation expense 1,114 21 Amortization expense 678 7,630 Capital expenditures 2,089 Business Segments - 1997 - -------------------------------------------------------------------------------- Insurance Property & (in thousands) Brokerage Casualty - -------------------------------------------------------------------------------- Revenue from external sources $28,387 $22,847 Revenue from other segments 3,830 65 Depreciation expense 1,123 24 Amortization expense 520 7,269 Capital expenditures 1,481 Business Segments - 1996 - -------------------------------------------------------------------------------- Insurance Property & (in thousands) Brokerage Casualty - -------------------------------------------------------------------------------- Revenue from external sources $28,199 $19,327 Revenue from other segments 3,368 62 Depreciation expense 1,024 23 Amortization expense 953 6,086 Capital expenditures 888 The foreign operations set forth below, relate solely to the operations of OLB, and its wholly owned subsidiary Park Brokerage, and include reinsurance assumed from OLRI, as well as from third party insurance companies. All such risks assumed originate in the United States. 1998 -------------------------------------------- Foreign Domestic Total -------------------------------------------- (in thousands) Consolidated Revenues $2,092 $62,919 $65,011 Income before minority interest and income taxes 1,169 9,385 10,554 Identifiable assets 2,936 164,130 167,066 F-37
1997 1996 -------------------------------- ---------------------------------- Foreign Domestic Total Foreign Domestic Total -------------------------------- ---------------------------------- (in thousands) Consolidated Revenues $2,246 $57,396 $59,642 $2,104 $52,883 $54,987 Income before minority interest and income taxes 1,398 6,157 7,555 2,857 2,354 5,211 Identifiable assets 3,575 137,450 141,025 4,925 151,177 156,102
There were no material intercompany revenue transactions between OLB and OLRI. In 1997, OLRI entered into a novation reinsurance agreement with National Union Fire Insurance Company of Pittsburgh, PA. ("N.U."), pursuant to which OLRI paid $807,000 and transferred its $950,000 IBNR liability to N.U. 24) Supplemental Cash Flow Disclosures
1998 1997 1996 ---- ---- ---- Cash paid during the period for: Interest expense $501 $948 $1,114 Income taxes (refunded) $2,870 $2,000 ($992) Noncash investing and financing activities: Stock issued to purchase minority interest $10,181 Details of acquisitions: Purchase price $5,196 $3,062 Amounts payable in future periods (3,300) (2,285) Less acquisition debit repayment (657) -------- -------- Cash paid for acquisitions $1,239 $777 ======== ========
25) Subsequent Event On February 25, 1999, the Company, through its brokerage subsidiary, Kaye Insurance Associates, Inc., purchased the assets, including customer lists, and certain liabilities of Seaman, Ross, & Wiener, Inc. and related entities for an initial purchase price of $2,930,000 in cash and stock of the Company, effective January 1, 1999. The total purchase price is contingent on future billings related to the acquired customer list and could vary significantly from the initial purchase price. F-38 Schedule II KAYE GROUP INC. (Parent Company Only) Condensed Balance Sheets December 31, 1998 and 1997 (in thousands, except par value per share)
1998 1997 ------- ------- ASSETS Cash and cash equivalents $370 $65 Prepaid expenses and other assets 863 549 Deferred income taxes 41 Due from subsidiaries 2,118 3,664 Investment in subsidiaries 43,973 38,670 ------- ------- Total assets $47,324 $42,989 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Accounts payable and other liabilities $511 $774 Note payable 1,153 1,875 Deferred income taxes 20 Income taxes payable 568 16 ------- ------- Total current liabilities 2,252 2,665 Note payable - long term 3,303 5,156 ------- ------- Total liabilities 5,555 7,821 ------- ------- STOCKHOLDERS' EQUITY: Preferred stock, $1.00 par value; 1,000 shares authorized; none issued or outstanding Common stock, $.01 par value; 20,000 shares authorized; 8,474 shares issued and outstanding 85 85 Paid-in capital 17,942 17,942 Unrealized appreciation of investments, net of deferred income tax provision , (1998, $280; 1997, $192) 541 373 Retained earnings 23,201 16,768 ------- ------- Total stockholders' equity 41,769 35,168 ------- ------- Total liabilities and stockholders' equity $47,324 $42,989 ======= =======
The condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto and the accompanying notes. F-39 Schedule II KAYE GROUP INC. (Parent Company Only) Condensed Statements of Income For the years ended December 31, 1998, 1997 and 1996 (in thousands) 1998 1997 1996 ------- ------- ------- REVENUES: Net investment loss (31) Equity in income of subsidiaries 11,342 7,555 5,211 EXPENSES: Other operating expenses 314 Interest expense 443 ------- ------- ------- Income before income taxes and minority interest 10,554 7,555 5,211 Provision for income taxes 3,272 2,267 1,484 ------- ------- ------- Income before minority interest 7,282 5,288 3,727 Minority interest 931 656 ------- ------- ------- NET INCOME 7,282 4,357 3,071 ======= ======= ======= The condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto and the accompanying notes. F-40 Schedule II KAYE GROUP INC. (PARENT COMPANY ONLY) Condensed Statements of Cash Flows For the years ended December 31, 1998, 1997 and 1996 (in thousands)
1998 1997 1996 -------- -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $7,282 $4,357 $3,071 Adjustment to reconcile net income to net cash provided by (used in) operating activities: Deferred income tax benefit (150) Equity in net income of subsidiaries (7,826) (6,590) (3,071) Dividends received from subsidiaries 4,060 6,350 702 Minority interest 931 Change in assets and liabilities: Prepaid expenses and other assets (20) (199) Due from subsidiaries 1,294 (3,892) (1,356) Accounts payable and other liabilities (263) Income taxes payable 552 (137) 1,356 -------- -------- -------- Net cash provided by operating activities 4,929 820 702 -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Payment of dividends (849) (852) (702) Notes payable-repayment (7,575) (69) Proceeds from borrowing 5,000 Capital contribution to subsidiary (1,200) (300) -------- -------- -------- Net cash used in financing activities (4,624) (1,221) (702) -------- -------- -------- NET CHANGE IN CASH AND CASH EQUIVALENTS 305 (401) Cash and cash equivalents at beginning of period 65 466 -------- -------- -------- Cash and cash equivalents at end of period $370 $65 ======== ======== ======== SUPPLEMENTAL CASH FLOW DISCLOSURES Cash paid during the period for: Interest expense $480 $548 $514 Income taxes (refunded) $2,870 $2,000 ($992) Noncash investing and financing activities: Stock issued to purchase minority interest $10,181
The condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto and the accompanying notes. F-41 Schedule II KAYE GROUP INC. (Parent Company Only) Notes to Condensed Financial Statements 1. Condensed Financial Statements Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. It is suggested that these condensed financial statements be read in conjunction with the Company's consolidated financial statements and the notes thereto. 2. Basis of Presentation As detailed in Note 2 to the consolidated financial statements of the Company, Kaye Holding Corp. ("KHC"), (a subsidiary) was merged into the Company on December 30, 1997. Accordingly, prior to 1998 corporate expenses and investment income were recorded by KHC and are reflected in the condensed statements of income included in equity in income of subsidiaries. 3. Significant Accounting Policies The Company carries its investment in subsidiaries under the equity method. All other accounting policies are consistent with those of the Company on a consolidated basis. F-42 Schedule IV KAYE GROUP INC. REINSURANCE For The Years Ended December 31, 1998, 1997 and 1996 (in thousands)
================================================================================================================================ Column A Column B Column C Column D Column E Column F ================================================================================================================================ Percentage Insurance Gross Ceded To Other Assumed from of Amount Premiums Earned Amount Companies Other Companies Net Amount Assumed to Net - ------------------------------------------------------------------------------------------------------------------------------- 1998 $11,652 $355 $13,392 $24,689 54% 1997 $11,496 $558 $11,909 $22,847 52% 1996 $9,979 $521 $9,869 $19,327 51%
F-43
Schedule VI KAYE GROUP INC SUPPLEMENTAL INFORMATION CONCERNING PROPERTY AND CASUALTY INSURANCE OPERATIONS For the years ended December 31, 1998, 1997 and 1996 (in thousands) ============================================================================================================================== Column A Column B Column C Column D Column E Column F Column G ============================================================================================================================== Reserves For Unpaid Claims Discount Affiliation Deferred And Claim If Any Net With Acquisition Adjustment Deducted In Unearned Earned Investment Registrant Costs Expenses Column C Premiums Premiums Income - ------------------------------------------------------------------------------------------------------------------------------ Foreign $193 $295 N/A $916 $1,957 $135 Domestic 3,728 21,272 N/A 11,411 22,732 2,453 ---------------------------------------------------------------------------------------------------------- 1998 $3,921 $21,567 N/A $12,327 $24,689 $2,588 ========================================================================================================== Foreign $240 $204 N/A $1,132 $2,118 $127 Domestic 3,699 18,922 N/A 11,446 20,729 2,565 ---------------------------------------------------------------------------------------------------------- 1997 $3,939 $19,126 N/A $12,578 $22,847 $2,692 ========================================================================================================== Foreign $295 $160 N/A $1,311 $1,542 $271 Domestic 3,778 15,067 N/A 11,865 17,785 2,190 ---------------------------------------------------------------------------------------------------------- 1996 $4,073 $15,227 N/A $13,176 $19,327 $2,461 ========================================================================================================== ================================================================================================================================== Column A Column H Column I Column J Column K Column L ================================================================================================================================== Claims and Claim Adjustment Expenses Paid Incurred Related to Amortization Claims Affiliation (1) (2) Of Deferred and Claim Other With Current Prior Acquisition Adjustment Premiums Operating Registrant Year Years Costs Expenses Written Expenses - ---------------------------------------------------------------------------------------------------------------------------------- Foreign $313 $95 $414 $317 $1,742 $102 Domestic 8,148 (60) 7,216 6,147 22,796 2,178 -------------------------------------------------------------------------------------------------------------- 1998 $8,461 $35 $7,630 $6,464 $24,538 $2,280 ============================================================================================================== Foreign $326 ($47) $456 $234 $1,938 $113 Domestic 8,498 (61) 6,813 6,512 20,332 1,988 -------------------------------------------------------------------------------------------------------------- 1997 $8,824 ($108) $7,269 $6,746 $22,270 $2,101 ============================================================================================================== Foreign $313 ($1,580) $347 $3,637 $1,411 $167 Domestic 6,308 1,995 5,739 1,725 19,278 1,965 -------------------------------------------------------------------------------------------------------------- 1996 $6,621 $415 $6,086 $5,362 $20,689 $2,132 ==============================================================================================================
F-44 EX-10.11 2 LOAN AGREEMENT KAYE GROUP INC. AND SUMMIT BANK LOAN AGREEMENT by and between KAYE GROUP INC. and SUMMIT BANK June 24, 1998 TABLE OF CONTENTS Page ---- I. DEFINITIONS............................................................... 1 1.1 Defined Terms................................................. 1 II. LOANS .................................................................. 8 2.1 Advances...................................................... 8 2.2 Procedure for Advances........................................ 8 2.3 Revolving Credit Note......................................... 8 2.4 Interest Rate Under Revolving Credit Note..................... 8 2.5 Payments Under Revolving Credit Note.......................... 9 2.6 Use of Proceeds of Advances................................... 9 2.7 Optional Prepayments of Revolving Credit Note................. 9 2.8 Mandatory Prepayment of Revolving Credit Note................. 9 2.9 Acquisition Advances.......................................... 9 2.10 Procedure for Acquisition Advances........................... 9 2.11 Acquisition Notes............................................ 10 2.12 Interest Rate Under Acquisition Notes........................ 10 2.13 Principal and Interest Payments Under Acquisition Notes...... 11 2.14 Optional Prepayments of Acquisition Notes.................... 11 2.15 Use of Proceeds of Acquisition Advances...................... 11 2.16 Term Loan and Term Note...................................... 11 2.17 Interest Rate Under Term Note................................ 11 2.18 Principal and Interest Payments Under Term Note.............. 11 2.19 Use of Proceeds of Term Loan................................. 12 2.20 Optional Prepayments of Term Note............................ 12 2.21 LIBOR Based Rate Loan Limitations............................ 12 2.22 Interest Periods............................................. 12 2.23 Conversion................................................... 12 2.24 Alternate Interest Rate...................................... 13 2.25 Indemnification For LIBOR Based Rate Loans................... 13 2.26 Changes in Circumstances..................................... 13 2.27 Additional Costs and Expenses................................ 14 2.28 Method of Payment............................................ 15 2.29 Business Day................................................. 15 2.30 Charge....................................................... 16 2.31 Bank Fees.................................................... 16 2.32 Bank's Counsel Fees.......................................... 16 III. COLLATERAL SECURITY..................................................... 16 3.1 Collateral Security........................................... 16 -i- IV. REPRESENTATIONS AND WARRANTIES........................................... 17 4.1 Controlling Shareholders; Subsidiaries........................ 17 4.2 Organization; Power; Qualification............................ 17 4.3 Authorization of Agreement.................................... 17 4.4 No Legal Bar.................................................. 17 4.5 Consent....................................................... 17 4.6 Compliance With Law........................................... 18 4.7 Title to Properties and Assets; Liens......................... 18 4.8 No Default.................................................... 18 4.9 No Litigation................................................. 18 4.10 No Burdensome Restrictions................................... 18 4.11 Tax Returns and Payments..................................... 19 4.12 Financial Statements......................................... 19 4.13 No Adverse Changes........................................... 19 4.14 ERISA ....................................................... 19 4.15 Federal Reserve Regulations.................................. 20 4.16 Solvency..................................................... 20 4.17 Accuracy and Completeness of Information..................... 20 4.18 Permits...................................................... 21 4.19 Year 2000 Compliance......................................... 21 V. COVENANTS................................................................. 21 5.1 Preservation of Existence..................................... 21 5.2 Nature of Business............................................ 21 5.3 Compliance with Laws.......................................... 22 5.4 Maintenance of Properties..................................... 22 5.5 Accounting Methods............................................ 22 5.6 Payment of Taxes and Claims................................... 22 5.7 Visits and Inspections; Field Examinations.................... 22 5.8 Information Covenants......................................... 23 (i) Annual Financial Statements........................ 23 (ii) Annual SAP Financial Statements................... 23 (iii) Quarterly SAP Statements......................... 24 (iv) SEC Filings....................................... 24 (v) Adequacy of Reserves............................... 24 (vi) Certificate....................................... 24 (vii) Copies of Other Reports.......................... 24 (viii) Notice of Litigation and Other Matters.......... 25 (ix) ERISA ............................................ 25 5.9 Accuracy and Completeness of Information...................... 25 5.10 Insurance.................................................... 26 5.11 Indebtedness................................................. 26 5.12 Liens ....................................................... 26 5.13 Sale of Assets; Merger; Acquisitions......................... 26 5.14 Guarantees................................................... 26 -ii- 5.15 Issuance of Stock............................................ 26 5.16 [Intentionally Omitted]...................................... 27 5.17 Financial Covenants.......................................... 27 5.18 OLRI Rating.................................................. 27 5.19 New Subsidiaries............................................. 27 5.20 Out-of-Debt Period........................................... 28 5.21 Further Documentation........................................ 28 5.22 Bank's Appointment as Attorney-in-Fact....................... 28 5.23 Performance by Bank of Borrower's Obligations................ 29 5.24 Year 2000 Compliance......................................... 29 VI. CONDITIONS PRECEDENT..................................................... 29 6.1 Initial Conditions Precedent.................................. 29 6.2 Conditions Precedent to Additional Advances and Acquisition Advances............................. 30 VII. EVENTS OF DEFAULT....................................................... 31 VIII. REMEDIES............................................................... 33 IX. INDEMNIFICATION.......................................................... 34 9.1 Indemnification............................................... 34 X. MISCELLANEOUS............................................................. 35 10.1 Notice....................................................... 35 10.2 No Waiver; Cumulative Remedies............................... 36 10.3 Survival of Agreements....................................... 36 10.4 Amendment.................................................... 36 10.5 Successors and Assigns....................................... 36 10.6 Severability................................................. 36 10.7 Counterparts................................................. 36 10.8 Governing Law; No Third Party Rights......................... 36 10.9 WAIVER OF JURY TRIAL; CONSENT TO JURISDICTION................ 37 -iii- THIS LOAN AGREEMENT is dated June 24, 1998 and is by and between KAYE GROUP INC., a Delaware corporation having its principal executive offices located at 122 East 42nd Street, New York, New York 10168 (the "Borrower") and SUMMIT BANK, a banking institution of the State of New Jersey having an office located at 250 Moore Street, Hackensack, New Jersey 07601 (the "Bank"). RECITALS A. The Borrower has requested that the Bank make certain loans and extend certain credit to the Borrower. B. The Bank has agreed to make such loans and extend such credit, all on the terms and conditions hereinafter set forth. NOW, THEREFORE, in consideration of the premises and mutual agreements herein contained, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: I. DEFINITIONS 1.1 Defined Terms. As used in this Agreement, the following words and terms shall have the following meanings: "Acquisition" shall mean the purchase by the Borrower or one of its Subsidiaries of (i) all or substantially all of the capital stock, partnership interests or other beneficial ownership interests of any corporation, partnership, limited liability company or other entity or (ii) all or substantially all of the assets of any such corporation, partnership, limited liability company or other entity. "Acquisition Advance Request" shall have the meaning ascribed to such term in Section 2.10 hereof. "Acquisition Advances" shall mean advances by the Bank to the Borrower, all of the proceeds of which are used to finance one or more Acquisitions. "Acquisition Notes" shall have the meaning ascribed to such term in Section 2.11 hereof. "Advance Request" shall have the meaning ascribed to such term in Section 2.2 hereof. "Advances" shall have the meaning ascribed to such term in Section 2.1 hereof. "Affiliate" shall mean as to any specified Person: (a) any Person that directly or indirectly through one or more intermediaries controls or is controlled by or is under common control with the specified Person; (b) any Person that is an officer of, partner in, or trustee of, or serves in a similar capacity with respect to, the specified Person, or of or in which the specified Person is an officer, partner or trustee, or with respect to which the specified Person serves in a similar capacity; (c) any Person that, directly or indirectly, is the beneficial owner of 20% or more of any class of equity securities of the specified Person or is the beneficial owner of an interest of 20% or more in the capital profit of the specified Person; (d) any Person of which the specified Person is directly or indirectly the beneficial owner of any amount of any class of equity securities or any Person of which the specified Person is the beneficial owner of any interest in the capital and profits; or (e) any member of the immediate family of the specified Person. "Agreement" shall mean this Loan Agreement, together with any and all exhibits, schedules, amendments or supplements hereto. "Applicable Amortization Period" shall have the meaning ascribed to such term in Section 2.10 hereof. "Applicable Interest Rate" shall mean either the LIBOR Based Rate or the Base Rate. "Bank" shall mean Summit Bank, a banking institution of the State of New Jersey, and its successors and assigns. "Bank Costs" shall mean all taxes and insurance premiums of every kind and nature of the Borrower paid by the Bank; all filing, recording, publication, and search fees incurred in connection with and relating to the Borrower paid by the Bank; all out-of-pocket costs incurred and sums expended by the Bank, with or without suit, to correct any default, to make advances of principal and interest or payments to prior secured parties, to enforce any right or remedy of the Bank, or in connection with any other provision of any Loan Document, including without limitation, any out-of-pocket costs incurred by the Bank with respect to any other lender in connection with the Loan Documents and the transactions contemplated thereby; all out-of-pocket costs incurred and sums expended in gaining possession of, inspection of, maintaining, handling, selling, preparing for sale, and advertising to sell the Collateral, whether or not a sale is consummated; out-of-pocket costs of suit incurred by the Bank in enforcing or defending this Agreement or any other Loan Document or any portion thereof; all out-of-pocket costs and expenses including reasonable attorneys' fees and expenses incurred by the Bank in preparing, reviewing, enforcing, amending, modifying, extending administering, defending or otherwise concerning this Agreement or any other Loan Document or any portion hereof or thereof; and whether or not suit is brought, all out-of-pocket costs of arbitration and insolvency proceedings. "Base Rate" shall mean the rate of interest announced from time to time by the Bank as its "base rate" or "base lending rate". This rate of interest is determined from time to time by the Bank -2- as a means of pricing some loans to its customers and is neither tied to any external rate of interest or index nor does it necessarily reflect the lowest rate of interest actually charged by the Bank to any particular class or category of customers of the Bank. "Base Rate Loans" shall collectively mean that portion of the Credit Facility bearing interest at the Base Rate. "Borrower" shall mean Kaye Group Inc., a Delaware corporation, and its successors and assigns. "Business Day" shall mean any day other than a Saturday, Sunday or other day on which state or federally chartered banks in the State of New Jersey are authorized to close. "Collateral" shall have the meaning ascribed to such term in Section 3.1 hereof. "Consolidated GAAP Net Worth" means the sum of (a) the capital stock and additional paid-in capital of the Borrower and its Subsidiaries on a consolidated basis, plus (without duplication) (b) the amount of retained earnings (or, in the case of a deficit, minus the deficit), minus (c) treasury stock, plus or minus (d) any other account which is customarily added or deducted in determining stockholders' equity, all of which shall be determined on a consolidated basis in accordance with GAAP, provided that unrealized gains or losses in respect of publicly traded debt and equity securities (as otherwise required by the Statement of Financial Accounting Standards No. 115) shall be excluded in determining Consolidated GAAP Net Worth. "Consolidated Net Income" shall mean, for any period, the consolidated net income of the Borrower and its Subsidiaries determined in accordance with GAAP. "Credit Facility" shall mean, collectively, the Revolving Loan, the Acquisition Advances and the Term Loan. "Debt Service Coverage Ratio" shall mean, for any period, the ratio of (i) Consolidated Net Income, plus depreciation and amortization, plus historical interest expense, minus dividends and distributions, to the current portion of the Borrower's Indebtedness (but excluding the outstanding Advances under the Revolving Loan) plus the Borrower's interest expense. "Default" shall mean any of the events specified in Article VII hereof which, with the passage of time or giving of notice or both, would constitute an Event of Default. "Event of Default" shall mean any of the events specified in Article VII hereof, provided that any requirement for notice or lapse of time or any other condition has been satisfied. "Existing Guarantors" shall collectively mean Kaye Insurance Associates, Inc., Kaye Corporation of Connecticut, Kaye Administrators Corp., Kaye Services Corp., Kaye-Western Insurance & Risk Services, Inc. and Program Brokerage Corporation, each of which is a wholly owned subsidiary of the Borrower. -3- "GAAP" shall mean generally accepted accounting principles in the United States of America as in effect from time to time. "Guarantors" shall collectively mean (i) the Existing Guarantors and (ii) any other Affiliate or Subsidiary of the Borrower which executes and delivers to the Bank a guaranty agreement in form and substance satisfactory to the Bank, pursuant to which such Affiliate or Subsidiary unconditionally guarantees all of the Borrower's obligations hereunder. "Guaranty Agreement" shall mean the guaranty agreement of even date herewith executed and delivered by each of the Existing Guarantors in favor of the Bank, together with all modifications thereto, extensions thereof and substitutions therefor. "Indebtedness" shall mean (i) all items (other than capital stock, capital surplus and retained earnings) which in accordance with GAAP would be included in determining total liabilities as shown on the liability side of a balance sheet as at the date on which Indebtedness is to be determined and (ii) whether or not so reflected, all indebtedness, contingent or otherwise and whether unsecured or secured by any Lien, and all capitalized lease obligations. "Insurance Subsidiary" shall mean OLRI, Old Lyme Insurance Company, Ltd., and any other insurance company Subsidiary hereafter acquired or created by the Borrower. "Interest Payment Date" shall mean (i) with respect to any Base Rate Loan, the fifth day of each calendar month, and (ii) with respect to any LIBOR Based Rate Loan, the last day of the Interest Period applicable thereto. "Interest Period" shall have the meaning ascribed to such term in Section 2.22 hereof. "LIBOR Based Rate" shall mean the LIBOR Rate plus 175 basis points. "LIBOR Based Rate Loans" shall collectively mean that portion of the Credit Facility bearing interest at the LIBOR Based Rate. "LIBOR Rate" shall mean the rate of interest for deposits in U.S. Dollars for a maturity equal to the Interest Period therefor which appears on Telerate Page 3750 as of 11:00 a.m., London time, on the date that is two Business Days prior to the commencement of such Interest Period. If such rate does not appear on Telerate Page 3750, the rate utilized shall be the rate which appears, or if two or more such rates appear, the average (rounded upward, if necessary, to the next 1/16 of 1%) of the rates which appear, on the Reuters Screen LIBO Page as of 11:00 a.m., London time, on the date that is two Business Days prior to the commencement of such Interest Period. "Lien" shall mean any lien (statutory or otherwise), security interest, mortgage, deed of trust, priority, pledge, charge, conditional sale, title retention agreement, financing lease or other encumbrance or similar right of others, or any agreement to give any of the foregoing. -4- "Loan Documents" shall collectively mean this Agreement, the Notes, the Guaranty Agreement, the Pledge and Security Agreement and all other agreements, documents, financing statements, instruments and certificates executed and delivered to the Bank in connection herewith or therewith, together with all modifications to, extensions of and substitutions for the foregoing. "Maximum Amount" shall mean $4,500,000. "Net Premiums Written" for any period means the net premiums that appear, or should appear, on the SAP Financial Statements of an Insurance Subsidiary. "Notes" shall collectively mean the Revolving Note, the Term Note and the Acquisition Notes, together with all modifications thereto, extensions thereof and substitutions therefor. "Notice of Conversion/Continuation" shall have the meaning ascribed to such term in Section 2.23 hereof. "Obligations" shall mean all loans, advances, extensions of credit, letter of credit fees, debts, liabilities, obligations, payments, guarantees, covenants and duties owing by the Borrower to the Bank, of any kind and description, direct or indirect (including any participation or interest of the Bank in any obligation of the Borrower to any other Person), voluntary or involuntary, absolute or contingent, due or to become due, now existing or hereafter incurred or created, whether or not related to or of the same class as the loans described herein, and further including all Bank Costs, audit fees and commitment fees. "OLRI" shall mean Old Lyme Insurance Company of Rhode Island, Inc., a wholly owned Subsidiary of the Borrower, and its successors and assigns. "Permits" shall have the meaning ascribed to such term in Section 4.19 hereof. "Permitted Acquisition" shall mean an Acquisition of an insurance brokerage firm in which the total consideration being paid by the Borrower or its Subsidiary (including without limitation purchase price, non-competition payments and the amount of debt assumed) does not exceed 15% of the Borrower's Consolidated GAAP Net Worth as reflected on the most recent fiscal year-end financial statement or Form 10-Q report delivered by the Borrower to the Bank. "Permitted Indebtedness" shall mean: (i) Indebtedness owing to the Bank; (ii) Indebtedness incurred in favor of trade creditors and in the ordinary course of business and not more than 90 days overdue (unless a longer period is consistent with accepted trade practice, provided that such longer period shall not exceed 120 days or unless being contested in good faith and by appropriate proceedings promptly initiated and diligently conducted, but only as long as foreclosure, distraint, sale or other similar proceedings shall not have been commenced -5- and such reserve or other appropriate provision, if any, as shall be required by GAAP shall have been provided therefor); (iii) Indebtedness in respect of taxes, assessments, governmental charges, worker's compensation, levies and claims for labor, materials, supplies and rentals to the extent otherwise permitted under this Agreement to remain unpaid and undischarged; and (iv) Indebtedness existing on the date hereof and fully described on Schedule I attached hereto. "Permitted Liens" shall mean: (i) any Lien in favor of the Bank; (ii) Liens that exist on the date hereof and are set forth on Schedule II attached hereto; (iii) Liens for taxes, assessments or governmental charges or levies not yet due or which are delinquent and which are being contested in good faith and by appropriate proceedings promptly initiated and diligently conducted for which reserves have been established in accordance with GAAP with respect thereto and as to which foreclosure, distraint, sale or other similar proceedings shall not have been commenced; (iv) carriers', warehousemen's, mechanics', materialmen's, repairmen's or other like Liens arising in the ordinary course of business which are not overdue or which are being contested in good faith and by appropriate proceedings promptly initiated and diligently conducted for which reserves have been established in accordance with GAAP with respect thereto and as to which foreclosure, distraint, sale or other similar proceedings shall not have been commenced; (v) pledges or deposits in connection with workers' compensation, workers' compensation insurance, unemployment insurance and other social security legislation; (vi) deposits to secure the performance of bids, trade contracts (other than for borrowed money), statutory obligations, surety and appeal bonds, performance bonds and other obligations of a like nature incurred in the ordinary course of business; and (vii) Liens created by or existing from any litigation or legal proceeding; provided that the execution or other enforcement of such Liens is effectively stayed, the claims secured thereby are being actively contested in good faith by appropriate proceedings, adequate book reserves have been established in accordance with GAAP with respect thereto and no Default or Event of Default arises or is created as a result thereof. "Person" shall mean any individual, corporation, partnership, association, limited liability company, joint stock company, trust, unincorporated organization, joint venture, court or government or political subdivision or agency thereof. -6- "Plans" shall have the meaning ascribed to such term in Section 4.14(b) hereof. "Pledge and Security Agreement" shall mean the pledge and security agreement of even date herewith from the Borrower in favor of the Bank, together with all modifications thereto, extensions thereof and substitutions therefor, pursuant to which the Borrower has pledged, assigned and transferred to the Bank all of the Borrower's right, title and interest in and to the capital stock of OLRI, Old Lyme Insurance Company, Ltd. and Claims Administration Corporation, all on the terms and conditions set forth therein. "Revolving Loan" shall have the meaning ascribed to such term in Section 2.3 hereof. "Revolving Note" shall have the meaning ascribed to such term in Section 2.3 hereof. "Revolving Loan Termination Date" shall mean July 31, 1999. "SAP" means the statutory accounting practices permitted or prescribed by the insurance regulatory authority having authority over each Insurance Subsidiary. "SAP Financial Statements" means the financial statements of each Insurance Subsidiary, which have been submitted or are required to be submitted to the insurance regulatory authority having authority over each Insurance Subsidiary. "Statutory Net Income" for any period means the net income that appears, or should appear, on the SAP Financial Statements of an Insurance Subsidiary. "Statutory Surplus" for any period means the surplus that appears, or should appear, on the SAP Financial Statements of an Insurance Subsidiary. "Subsidiary" with respect to any Person means any corporation, partnership or joint venture whether now existing or hereafter organized or acquired: (i) in the case of a corporation, of which a majority of the securities having ordinary voting power for the election of directors (other than securities having such power only by reason of the happening of a contingency) are at the time owned by such Person and/or one or more Subsidiaries of such Person or (ii) in the case of a partnership or joint venture, in which such Person is a general partner or joint venturer or of which a majority of the partnership or other ownership interests are at the time owned by such Person and/or one or more of its Subsidiaries. Unless the context otherwise requires, references in this Agreement to "Subsidiary" or "Subsidiaries" shall be deemed to be references to a Subsidiary or Subsidiaries of the (i) Borrower or (ii) a Subsidiary of the Borrower. "Term Loan" shall have the meaning ascribed to such term in Section 2.16 hereof. "Term Loan Maturity Date" shall mean June 24, 2002. "Term Note" shall have the meaning ascribed to such term in Section 2.16 hereof. -7- 1.2 The words "hereof", "herein", and "hereunder" and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement, and section, subsection, schedule and exhibit references are to this Agreement unless otherwise specified. 1.3 As used in this Agreement or in any certificate, report or other document made or delivered pursuant to this Agreement, accounting terms which are not otherwise defined shall have the meanings given to them under GAAP. II. LOANS A. Revolving Loan. 2.1 Advances. From time to time, during the period from the date hereof until the Revolving Loan Termination Date, in the manner hereinafter set forth, the Borrower may borrow from the Bank and, upon request of the Borrower and upon the terms and conditions contained herein, the Bank shall lend to the Borrower a sum or sums (the "Advances") which, when added to the aggregate principal amount of all other Advances and Acquisition Advances then outstanding, shall not exceed in the aggregate at any time the Maximum Amount. It is understood and agreed that the term "Advances" shall not be deemed to include any Acquisition Advances made hereunder. 2.2 Procedure for Advances. Subject to the terms and conditions set forth herein, the Borrower may borrow, pay or prepay and reborrow from the Bank under this Revolving Loan. Each Advance shall be made upon prior written or telephonic (followed by written) notice from the Borrower to the Bank (an "Advance Request") specifying (i) the proposed date of such borrowing, (ii) the principal amount thereof, (iii) the Applicable Interest Rate and (iv) if the Advance will be a LIBOR Based Rate Loan, the applicable Interest Period. Each Advance Request shall be received by the Bank not later than 12:00 p.m. (A) at least three Business Days prior to the requested date of the Advance in the case of a LIBOR Based Rate Loan or (B) on the same Business Day of the requested date of the Advance in the case of a Base Rate Loan. On the date of each such Advance, upon fulfillment of the conditions precedent set forth herein, the Bank shall make available to the Borrower the amount of such Advance by transferring such funds to the account maintained at the Bank's principal office located at the address set forth on the first page of this Agreement or in accordance with written instructions provided by the Borrower and reasonably acceptable to the Bank. 2.3 Revolving Note. The indebtedness of the Borrower to the Bank with respect to the Advances made from time to time hereunder (the "Revolving Loan") shall be evidenced by a revolving note made payable to the order of the Bank, dated the date hereof, signed by the Borrower and delivered to the Bank (such revolving credit note, together with all modifications thereto, extensions thereof and substitutions therefor, is herein referred to as the "Revolving Note"). 2.4 Interest Rate Under Revolving Note. Except as provided in Sections 2.24 and 2.26 hereof, (a) the outstanding daily principal balance of the Revolving Note representing LIBOR Based Rate Loans shall bear interest for the Interest Periods applicable thereto at a rate per annum -8- equal to the LIBOR Based Rate, and (b) the outstanding daily principal balance of the Revolving Note representing Base Rate Loans shall bear interest at a fluctuating rate per annum equal to the Base Rate. Notwithstanding the foregoing, upon the occurrence of an Event of Default, the entire principal amount outstanding under the Revolving Note shall bear such higher rate as provided in the Revolving Note. Interest shall be calculated on the basis of a 360-day year for the actual number of days elapsed. The rate of interest on that portion of the outstanding principal amount of the Revolving Note representing Base Rate Loans shall be adjusted automatically as of the opening of business on each day on which any change in the Base Rate is announced by the Bank at its principal office. 2.5 Payments Under Revolving Note. (a) Interest under the Revolving Note shall be payable on each Interest Payment Date applicable to the Base Rate Loans and LIBOR Based Rate Loans outstanding thereunder. (b) Subject to the Bank's right of acceleration upon the occurrence of an Event of Default, all principal, interest and other amounts outstanding under the Revolving Note shall be immediately due and payable on the Revolving Loan Termination Date, without any requirement of notice or otherwise. 2.6 Use of Proceeds of Advances. Proceeds of the Advances have been or shall be utilized by the Borrower for general corporate purposes. 2.7 Optional Prepayments of Revolving Note. Subject to Section 2.25 hereof, the Borrower shall have the right to prepay, in whole or in part and without premium or penalty, the Revolving Note at any time and from time to time. 2.8 Mandatory Prepayment of Revolving Note. If at any time and for whatever reason the aggregate outstanding principal amount of Advances hereunder, when added to the aggregate original principal amount of all Acquisition Advances made hereunder, exceeds the Maximum Amount, such excess, together with accrued interest thereon, shall be due and payable by the Borrower immediately upon demand by the Bank. B. Acquisition Advances. 2.9 Acquisition Advances. From time to time, during the period from the date hereof until the Revolving Loan Termination Date, in the manner hereinafter set forth, the Borrower may borrow from the Bank and, upon request of the Borrower and upon the terms and conditions contained herein, the Bank shall lend a sum or sums (the "Acquisition Advances") which, when added to the aggregate principal amount of all Advances then outstanding and the aggregate original principal amount of all other Acquisition Advances made hereunder, shall not exceed in the aggregate at any time the Maximum Amount. 2.10 Procedure for Acquisition Advances. Subject to the terms and conditions set forth herein, the Borrower may borrow from, and pay or prepay to, the Bank Acquisition Advances. The Borrower shall give the Bank at least ten Business Days' prior written notice of any requested -9- Acquisition Advance (an "Acquisition Advance Request"). Each Acquisition Advance Request shall specify (a) the proposed date of such borrowing, (b) the principal amount thereof, (c) the Applicable Interest Rate, (d) if the Acquisition Advance will be a LIBOR Based Rate Loan, the applicable Interest Period, (e) the period, which shall not be more than five years, over which the Acquisition Note shall be repaid (the "Applicable Amortization Period") and (f) the salient terms of the Acquisition, including without limitation a description of the Acquisition, the purchase price and all other consideration being paid to or received by the seller(s), the identity of the seller(s) and the nature of the transaction (i.e., a stock purchase or an asset purchase). Concurrently with providing the Acquisition Advance Request (or as soon thereafter as the Acquisition agreement has been executed and delivered), the Borrower shall provide the Bank with a copy of the fully executed Acquisition agreement certified by the Borrower to be true and accurate. Notwithstanding anything to the contrary contained herein, however, the Bank shall have no obligation to fund any requested Acquisition Advance with respect to any Acquisition unless (i) such Acquisition is a Permitted Acquisition or (ii) the Bank has granted its prior written approval of such Acquisition pursuant to Section 5.13 hereof. Upon the satisfaction of the conditions precedent set forth herein, the Bank shall make available to the Borrower the amount of each Acquisition Advance by transferring such funds to the account maintained at the Bank's principal office located at the address set forth on the first page of this Agreement or in accordance with written instructions provided by the Borrower and reasonably acceptable to the Bank. 2.11 Acquisition Notes. The indebtedness of the Borrower to the Bank with respect to each Acquisition Advance made from time to time hereunder shall be evidenced by an acquisition note made payable to the Bank, dated the date of such Acquisition Advance, signed by the Borrower and delivered to the Bank substantially in the form of Exhibit A hereto (such acquisition notes, together with all modifications thereto, extensions thereof and substitutions therefor, are collectively referred to as the "Acquisition Notes"). Upon receipt of each Acquisition Advance Request, and based upon the information contained therein, the Bank or its counsel shall prepare, and forward to the Borrower for execution and delivery on or before the date of the Acquisition Advance, an Acquisition Note. 2.12 Interest Rate Under Acquisition Notes. (a) Except as provided in Sections 2.24 and 2.26 hereof, (i) the outstanding daily principal balance of any Acquisition Note representing LIBOR Based Rate Loans shall bear interest for the Interest Periods applicable thereto at a rate per annum equal to the LIBOR Based Rate, and (ii) the outstanding daily principal balance of any Acquisition Note representing Base Rate Loans shall bear interest at a fluctuating rate per annum equal to the Base Rate. Notwithstanding the foregoing, upon the occurrence of an Event of Default, all principal amounts outstanding under each Acquisition Note shall bear such higher rate as provided in such Acquisition Note. Interest shall be calculated on the basis of a 360-day year for the actual number of days elapsed. The rate of interest on that portion of the outstanding principal amount of any Acquisition Note representing Base Rate Loans shall be adjusted automatically as of the opening of business on each day on which any change in the Base Rate is announced by the Bank at its principal office. -10- 2.13 Principal and Interest Payments Under Acquisition Notes. (a) Each Acquisition Note shall be payable in consecutive equal monthly installments of principal on the fifth day of each calendar month, each such installment in the amount required to amortize such Acquisition Note fully over the Applicable Amortization Period. In addition, all accrued interest on such Acquisition Note shall be paid on each Interest Payment Date applicable thereto. (b) The principal amortization of each Acquisition Note shall commence no later than 90 days after the date of the making of the Acquisition Advance evidenced by such Acquisition Note. If not sooner paid, the entire principal balance of each Acquisition Note, together with all accrued interest and other amounts owing thereunder, shall be due and payable on the expiration of the Applicable Amortization Period applicable to such Acquisition Note. 2.14 Optional Prepayments of Acquisition Notes. Subject to Section 2.25 hereof, the Borrower shall have the right to prepay, in whole or in part and without premium or penalty, any Acquisition Notes at any time and from time to time. Each prepayment of principal shall be accompanied by payment of accrued interest on the amount being prepaid through the date of prepayment, and each partial prepayment of an Acquisition Note shall be applied by the Bank to payments due under each Acquisition Note in their inverse order of maturity. 2.15 Use of Proceeds of Acquisition Advances. Proceeds of the Acquisition Advances shall be used by the Borrower to finance one or more Acquisitions. C. Term Loan. 2.16 Term Loan and Term Note. The Borrower hereby borrows from the Bank, and the Bank hereby loans to the Borrower, the principal sum of $5,000,000 (the "Term Loan"). The Term Loan shall be evidenced by a term note made payable to the order of the Bank, dated the date hereof, signed by the Borrower and delivered to the Bank (such term note, together with all modifications thereto, extension thereof and substitutions therefor, is herein referred to as the "Term Note"). 2.17 Interest Rate Under Term Note. The Term Note shall bear interest from the date thereof on the outstanding daily principal amount thereof at a fixed rate per annum equal to 7.8% or, upon the occurrence of an Event of Default, such higher rate as provided in the Term Note. Interest shall be calculated on the basis of a 360-day year for the actual number of days elapsed. 2.18 Principal and Interest Payments Under Term Note. Subject to the Bank's right of acceleration upon the occurrence of an Event of Default, the outstanding principal balance of the Term Note shall be payable in equal consecutive quarterly installments of principal and interest, each in the amount of $366,793.68 commencing on September 24, 1998 and continuing on the 24th day of each and every December, March, June and September thereafter through and including June 24, 2002. In any event, if not sooner paid, the entire unpaid principal balance of, together with all accrued -11- interest and other amounts owing under, the Term Note shall be due and payable on the Term Loan Maturity Date. 2.19 Use of Proceeds of Term Loan. The proceeds of the Term Loan shall be used by the Borrower to repay the Borrower's existing debt with Fleet Bank. 2.20 Optional Prepayments of Term Note. Subject to Section 2.25 hereof, the Borrower shall have the right to prepay, in whole or in part and without premium or penalty, the Term Note at any time and from time to time. Each prepayment of principal shall be accompanied by payment of accrued interest on the amount being prepaid through the date of prepayment, and each partial prepayment shall be applied by the Bank to payments due under the Term Note in their inverse order of maturity. D. General Provisions. 2.21 LIBOR Based Rate Loan Limitations. Notwithstanding anything contained herein to the contrary, (a) each LIBOR Based Rate Loan shall be in the minimum amount of $100,000 or integral multiples of $10,000 in excess thereof and (b) at no time shall there be more than ten different LIBOR Based Rate Loans outstanding under the Credit Facility. 2.22 Interest Periods. As used herein, "Interest Period" shall mean either 30, 60 or 90 days, as designated by the Borrower in the Advance Request, Acquisition Advance Request or Notice of Conversion/Continuation, with respect to each LIBOR Based Rate Loan; provided, however, that (i) if an Interest Period would otherwise end on a day which is not a Business Day, such Interest Period shall be extended to the next succeeding Business Day, unless such Business Day falls in another calendar month, in which case such Interest Period shall end on the next preceding Business Day subject to clause (iii) below; (ii) interest shall accrue from and including the first day of each Interest Period to, but excluding, the day on which any Interest Period expires; (iii) with respect to any Interest Period which begins on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period), the Interest Period shall end on the last Business Day of a calendar month and (iv) no Interest Period shall extend beyond (A) in the case of Advances, the Revolving Loan Termination Date, (B) in the case of Acquisition Advances, the maturity date of the Acquisition Note under which such LIBOR Based Rate is payable and (C) in the case of the Term Loan, the Term Loan Maturity Date. 2.23 Conversion. Subject to the provisions of Sections 2.21, 2.24 and 2.26 hereof, the Borrower shall have the option (a) to convert at any time, so long as no Event of Default exists, all or any part of its Base Rate Loans to LIBOR Based Rate Loans or (b) upon the expiration of any Interest Period applicable to a LIBOR Based Rate Loan, to continue all or any portion thereof as a LIBOR Based Rate Loan or to convert all or any portion thereof to a Base Rate Loan. In order to effect any of the foregoing, the Borrower shall deliver a notice of conversion/continuation (the "Notice of Conversion/Continuation") to the Bank not later than 12:00 p.m. New York City time (i) at least three Business Days prior to the requested conversion/continuation date with respect to the conversion to or continuation of a LIBOR Based Rate Loan or (ii) on the same Business Day of the proposed conversion in the case of a conversion of a LIBOR Based Rate Loan to a Base Rate Loan. A Notice -12- of Conversion/Continuation shall be irrevocable and shall specify (i) the proposed conversion/continuation date, which shall be a Business Day, (ii) the amount of the Advance, Acquisition Advance or Term Loan which is to be converted or continued, (iii) the nature of the proposed conversion or continuation and (iv) in the case of a conversion to, or a continuation of, a LIBOR Based Rate Loan, the requested Interest Period. In the event the Bank does not receive a Notice of Conversion/Continuation in accordance with the provisions hereof with respect to a LIBOR Based Rate Loan, upon the expiration of the Interest Period applicable thereto, the same shall automatically be converted to a Base Rate Loan. 2.24 Alternate Interest Rate. If within one Business Day of any date that the Borrower requests a LIBOR Based Rate Loan, the Bank shall determine in its sole discretion, reasonably exercised, that it is unable to quote the requested LIBOR Based Rate, or that the Bank is unable, or that it is otherwise impossible, to fund the requested LIBOR Based Rate Loan for the Interest Period requested, the Bank shall promptly notify the Borrower of such determination and no LIBOR Based Rate Loan shall be made by the Bank on the borrowing date and/or no Base Rate Loan shall be converted to a LIBOR Based Rate Loan, as applicable. Upon receipt of such notification, the Borrower may withdraw any outstanding request for a LIBOR Based Rate Loan by giving written notice of withdrawal to the Bank prior to such borrowing date. Unless withdrawn in accordance with this Section 2.24, any outstanding request for such LIBOR Based Rate Loan shall be deemed to be a request for a Base Rate Loan in equal principal amount, and such Base Rate Loan shall be made on such borrowing date. 2.25 Indemnification For LIBOR Based Rate Loans. Except as provided in Section 2.24 hereof, each request for a LIBOR Based Rate Loan shall be irrevocable and binding upon the Borrower. The Borrower hereby agrees to indemnify the Bank, upon demand by the Bank at any time, against any and all actual losses (including any actual loss of profit), costs or expenses which the Bank may at any time or from time to time sustain or incur as a consequence of: (a) any breach by the Borrower of its obligation to borrow on the borrowing date specified in any request for a LIBOR Based Rate Loan, (b) any failure by the Borrower to pay punctually on the due date thereof, any amount payable by the Borrower to the Bank on LIBOR Based Rate Loans, (c) the acceleration of the time of payment of any of the Borrower's obligations in respect of LIBOR Based Rate Loans in accordance with Article VIII hereof, (d) the repayment or prepayment of the principal of any of the LIBOR Based Rate Loans on a date other than the end of the applicable Interest Period or (e) the conversion of a LIBOR Based Rate Loan to a Base Rate Loan on a date other than the end of the applicable Interest Period. Such losses, costs or expenses shall include, without limitation, (i) any costs incurred by the Bank in carrying funds which were to have been borrowed by the Borrower or in carrying funds to cover any overdue principal, overdue interest or any other overdue sums payable by the Borrower to the Bank in respect of LIBOR Based Rate Loans, (ii) any interest payable by the Bank to the lenders of the funds referred to in the immediately preceding clause (i), and (iii) any actual losses (including any actual loss of profit) incurred or sustained by the Bank in liquidating or re-employing funds acquired from third parties to make any of the LIBOR Based Rate Loans or to fund or maintain all or any part of the principal of any of the LIBOR Based Rate Loans. 2.26 Changes in Circumstances. If at any time the Bank shall reasonably determine that: -13- (a) the Bank is unable to obtain funds in the principal amount specified in any request for a LIBOR Based Rate Loan for periods equal to the specified Interest Period; (b) the LIBOR Based Rate does not or will not accurately reflect the cost to the Bank of obtaining or maintaining any LIBOR Based Rate Loan during any Interest Period despite the Borrower's compliance with its obligations under Section 2.27 hereof; or (c) any change in applicable law or regulation (or in the interpretation thereof by any governmental authority charged with the administration or interpretation thereof) has made or will make it unlawful for the Bank to make or maintain any LIBOR Based Rate Loan or to comply with any of the Bank's obligations in respect of any LIBOR Based Rate Loan; then, in each case, the Bank may promptly give notice of such determination and the reasons therefor to the Borrower. Upon such notification, the Bank's obligations to make LIBOR Based Rate Loans shall be suspended until the Bank determines that the circumstances described in subparagraphs (a), (b) and (c) of this Section 2.26 have ceased to exist. Following the Bank's notice under subparagraphs (b) or (c) of this Section 2.26, all outstanding LIBOR Based Rate Loans shall be converted to Base Rate Loans at the end of the applicable Interest Period; provided, however, that if it shall be unlawful for the conversion of such LIBOR Based Rate Loans to Base Rate Loans to be effective as of the end of the applicable Interest Period, such conversion shall be deemed to occur as of the date of such notice by the Bank. 2.27 Additional Costs and Expenses. The Borrower recognizes that the cost to the Bank of making or maintaining LIBOR Based Rate Loans or any portion thereof may fluctuate, and the Borrower agrees to pay to the Bank, within ten Business Days after written demand, an additional amount or amounts as the Bank shall reasonably determine will compensate the Bank for additional costs incurred by the Bank in maintaining LIBOR Based Rate Loans or any portion thereof as a result of: (a) the imposition after the date of any LIBOR Based Rate Loan of, or changes after the date of any LIBOR Based Rate Loan in, the reserve requirements promulgated by the Board of Governors of the Federal Reserve System of the United States, including, but not limited to, any reserve on Eurocurrency Liabilities (as defined in Regulation D of the Board of Governors of the Federal Reserve System of the United States) at the ratios provided in such Regulation from time to time, it being agreed that the portion or portions of the Credit Facility bearing interest at LIBOR Based Rates shall be deemed to constitute Eurocurrency Liabilities, as defined by such Regulation, and it being further agreed that such Eurocurrency Liabilities shall be deemed to be subject to such reserve requirements without benefit of, or credit for, prorations, exceptions or offsets that may be available to the Bank or from time to time under such regulations and irrespective of whether the Bank actually maintains all or any portion of the reserve; (b) any change, after the date of any LIBOR Based Rate Loan, in any applicable laws, rules or regulations or in the interpretation or administration thereof by any domestic or foreign governmental authority charged with the interpretation or administration thereof (whether or not -14- having the force of law) or by any domestic or foreign court changing the basis of taxation of payments to the Bank of the principal of or interest on any LIBOR Based Rate Loan or any other payments made hereunder (other than taxes imposed on all or any portion of the overall net income of the Bank), or imposing, modifying or applying any reserve, special deposit or similar requirement against assets of, deposits with or for the account of, credit extended by, or any other acquisition of funds for loans by the Bank, or imposing on the Bank or on the London Interbank market any other condition affecting this Agreement or the portion or portions of the Credit Facility bearing interest at LIBOR Based Rates so as to increase the cost to the Bank of making or maintaining LIBOR Based Rate Loans or to reduce the amount of any sum received or receivable by the Bank under the Credit Facility (whether of principal, interest or otherwise); or (c) if after the date of any LIBOR Based Rate Loan, the Bank shall have determined that the applicability of any law, rule, regulation or guideline adopted or arising out of the July 1988 report of the Basle Committee on Banking Regulations and Supervisory Practices entitled "International Convergence of Capital Measurement and Capital Standards", or the adoption after the date hereof of any other law, rule, regulation or guideline regarding capital adequacy, or any change therein, or any change in any of the foregoing or in the interpretation or administration of any of the foregoing by any domestic or foreign governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by the Bank with any request or directive regarding capital adequacy (whether or not having the force of law) of any such authority, central bank or comparable agency, has or would have the effect of reducing the rate of return on the Bank's capital as a consequence of the Bank's obligations with respect to the Advances, the Acquisition Advances or the Term Loan, or under the Notes or this Agreement, to a level below that which the Bank could have achieved but for such adoption, change or compliance (taking into consideration the Bank's policies with respect to capital adequacy). Any amount or amounts payable by the Borrower to the Bank in accordance with the provisions of this Section shall be paid within ten (10) Business Days of receipt by the Borrower from the Bank of a statement setting forth the amount or amounts due and the basis for the determination from time to time of such amount or amounts, which statement shall be conclusive and binding upon the Borrower absent manifest error. Failure on the part of the Bank to demand compensation for any increased costs in any Interest Period shall not constitute a waiver of the Bank's right to demand compensation for any increased costs incurred during any such Interest Period or in any other or subsequent or prior Interest Period. 2.28 Method of Payment. The Borrower shall make each payment to be made by it hereunder and under the Notes (including, without limitation, all principal, interest and optional and mandatory prepayments), without set-off or counterclaim, not later than 2:00 p.m. (New York City time) on the day when due in lawful money of the United States of America and in immediately available funds to the Bank at its principal office set forth on the first page of this Agreement. 2.29 Business Day. Whenever any payment hereunder or under the Notes shall be stated as due on any day other than a Business Day, the maturity of such payment shall (except as otherwise provided in Section 2.22 hereof) be extended to the next succeeding Business Day and interest and all other fees shall accrue during such extension. -15- 2.30 Charge. Without in any way limiting any right of offset, counterclaim or banker's lien which the Bank may otherwise have at law, the Borrower hereby irrevocably authorizes and directs the Bank to charge against the Borrower's account or accounts at the Bank an amount or amounts as are due and payable to the Bank hereunder or under the Notes from time to time. 2.31 Bank Fees. (a) The Borrower shall pay to the Bank quarterly, within five (5) Business Days after the Bank has rendered an invoice, and on the Revolving Loan Termination Date, a revolving loan fee equal to (i) 0.05% multiplied by (ii) an amount equal to (A) the Maximum Amount, minus (B) the average daily principal amount of all Advances and Acquisition Advances outstanding during the previous calendar quarter, or, in the case of the fee payable on the Revolving Loan Termination Date, during such shorter period. (b) Concurrently herewith, the Borrower has paid to the Bank a Term Loan fee equal to $5,000. 2.32 Bank's Counsel Fees. Concurrently herewith, the Borrower is reimbursing the Bank for all legal fees and expenses incurred by the Bank in connection with the negotiation and preparation of the Loan Documents, review of pre-closing documents and materials required by the Bank and performance of customary closing and post-closing tasks, which in no event shall exceed $10,000 plus disbursements of the Bank's counsel. III. COLLATERAL SECURITY 3.1 Collateral Security. (a) As collateral security for the prompt and complete payment and performance when due (whether at the stated maturity, by acceleration or otherwise) of all Obligations and in order to induce the Bank to enter into this Agreement and, among other things, make the Advances, the Term Loan and the Acquisition Advances to the Borrower as provided herein, the Borrower has, simultaneously herewith, executed and delivered to the Bank the Pledge and Security Agreement. (b) All collateral heretofore, herein or hereafter given or granted to the Bank by the Borrower (collectively, the "Collateral"), including without limitation the collateral pledged to the Bank pursuant to the Pledge and Security Agreement, shall secure payment of all of the Obligations. The Bank shall be under no obligation to proceed against any or all of such collateral before proceeding directly against the Borrower or the Guarantors. (c) In addition to the foregoing, all of the Obligations shall be secured by the Guaranty Agreement, in accordance with the terms and provisions set forth therein. -16- IV. REPRESENTATIONS AND WARRANTIES 4. In order to induce the Bank to enter into this Agreement and, among other things, make the Advances, the Term Loan and the Acquisition Advances as provided herein, the Borrower, for itself and on behalf of its Subsidiaries, hereby represents, warrants and agrees that: 4.1 Controlling Shareholders; Subsidiaries. Schedule IV attached hereto sets forth a list of all of the Subsidiaries of the Borrower and the percentage of each class of stock of each such Subsidiary owned by the Borrower and by each other shareholder of such Subsidiary. Other than as set forth on Schedule IV, the Borrower has no Subsidiaries. Except as set forth on Schedule IV, neither the Borrower nor any of its Subsidiaries conducts business, or has conducted business within the five years prior to the date hereof, under any trade name or alternate or fictitious name. 4.2 Organization; Power; Qualification. The Borrower is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. Each Subsidiary of the Borrower is a corporation duly organized, validly existing and in good standing under the laws of the state of its incorporation. Each of the Borrower and each of its Subsidiaries (i) has the full power and authority to own and operate its properties and assets and to carry on the business now conducted by it and (ii) is qualified or authorized to do business and in good standing in all jurisdictions wherein the character of the property owned or the nature of the business conducted by it makes such qualification or authorization necessary, except such jurisdictions in which the lack of qualification or authorization does not materially adversely affect the business, results of operations or financial condition of the Borrower and its Subsidiaries. 4.3 Authorization of Agreement. The Borrower has full power and authority to execute, deliver and perform any action which may be necessary or advisable to carry out the terms of the Loan Documents to which it is a party; and each Loan Document to which the Borrower is a party has been duly executed and delivered by the Borrower and is the legal, valid and binding obligation of the Borrower enforceable in accordance with its terms. 4.4 No Legal Bar. The execution, delivery and performance of the Loan Documents will not (i) violate any provision of any existing law, statute, rule, regulation or ordinance, (ii) conflict with, result in a breach of or constitute a default under (a) the certificate of incorporation or by-laws of the Borrower or any of its Subsidiaries, (b) any order, judgment, award or decree of any court, governmental authority, bureau or agency, or (c) any mortgage, lease, material contract or other material agreement or undertaking to which the Borrower or any of its Subsidiaries is a party or by which the Borrower or any of its Subsidiaries, or any of their respective properties or assets, may be bound, or (iii) result in the creation or imposition of any Lien upon or with respect to any property or asset now or hereafter acquired by the Borrower or any of its Subsidiaries other than the Liens created by the Loan Documents. 4.5 Consent. No consent, license, permit, approval or authorization of, exemption by, notice to, report to, or registration, filing or declaration with any Person is required in connection with the execution, delivery, performance or validity of the Loan Documents by the Borrower and its -17- Subsidiaries or the transactions contemplated thereby, other than filing of financing statements and like documents in connection with the Liens being granted in favor of the Bank. 4.6 Compliance With Law. Neither the Borrower nor any of its Subsidiaries is in violation of any applicable law, rule, regulation, statute, ordinance, or any order, judgment, award or decree of any court, governmental authority, bureau or agency, the violation of which might have a materially adverse effect on the business, assets, liabilities, financial condition, results of operation or business prospects of the Borrower and its Subsidiaries. 4.7 Title to Properties and Assets; Liens. Except for Permitted Liens, the Borrower and its Subsidiaries have good, marketable and legal title to, or a valid leasehold interest in, the properties and assets as reflected on the audited consolidated and consolidating balance sheet of the Borrower and its Subsidiaries as at December 31, 1997, a copy of which was delivered to the Bank, except such properties or assets as have been disposed of by the Borrower or its Subsidiaries subsequent to the date thereof in the ordinary course of business. All of said properties and assets are in good working order. Except as set forth on Schedule V attached hereto, neither the Borrower nor any of its Subsidiaries owns, or has any interest in, any real property. Except for financing statements naming the Bank as secured party, and except as otherwise set forth on Schedule II attached hereto, no financing statement under the Code which names the Borrower or any of its Subsidiaries as debtor has been filed in any jurisdiction, and neither the Borrower nor any of its Subsidiaries has signed any such financing statement or any security agreement authorizing any secured party thereunder to file any such financing statement in any such jurisdiction. 4.8 No Default. Neither the Borrower nor any of its Subsidiaries is in default in any material respect in the payment or performance of any of its obligations or in the performance of any mortgage, indenture, lease, contract or other agreement or undertaking to which it is a party or by which it or any of its properties or assets may be bound, and no Default or Event of Default has occurred and is continuing. Neither the Borrower nor any of its Subsidiaries is in default under any material order, award or decree of any court, arbitrator, or governmental authority binding upon or affecting it or by which any of its properties or assets may be bound or affected, and no such order, award or decree, if any, materially adversely affects the ability of the Borrower or its Subsidiaries to carry on their businesses as presently conducted or to perform their respective obligations under the Loan Documents. 4.9 No Litigation. Except as set forth on Schedule III attached hereto, no litigation, investigation or proceeding of or before any court, arbitrator or governmental authority is currently pending, nor, to the knowledge of Borrower, threatened, against the Borrower or any of its Subsidiaries, or any of their respective properties and revenues, which, if adversely determined, would materially adversely affect the business, operations, financial condition or results of operations of the Borrower and its Subsidiaries. 4.10 No Burdensome Restrictions. Neither the Borrower nor any of its Subsidiaries is a party to or bound by any contract or agreement or instrument or subject to any restriction materially and adversely affecting the business, operations, properties or financial or other condition of the Borrower and its Subsidiaries. -18- 4.11 Tax Returns and Payments. All federal, state and other tax returns of the Borrower and its Subsidiaries required by law to be filed have been duly filed or extensions obtained, and all federal, state and other taxes, assessments and governmental charges or levies upon the Borrower or any of its Subsidiaries, or any of their respective properties, income, profits or assets which are due and payable have been paid or provided for, except such tax returns the non-filing of which, and such taxes the nonpayment of which, would not have a material adverse effect upon the business, assets, liabilities, financial condition, results of operation or business prospects of the Borrower and its Subsidiaries and except for such taxes and assessments which the Borrower or any of its Subsidiaries is disputing in good faith and for which the Borrower or such Subsidiary has established adequate reserves on its books for the payment of such disputed taxes or assessments in accordance with GAAP. 4.12 Financial Statements. The Borrower has furnished to the Bank a copy of its consolidating and consolidated balance sheet as at December 31, 1997, and the related consolidating and consolidated statements of income, retained earnings and cash flows for the 12 months then ended, as certified by certified public accountants. Such financial statements fairly present the consolidating and consolidated financial position and results of operations and cash flows of the Borrower and the Borrower's Subsidiaries on the date and for the period then ended, in accordance with GAAP, consistently applied throughout the periods involved and show all direct liabilities and all known contingent liabilities of a material nature of the Borrower and the Borrower's Subsidiaries in accordance with GAAP. 4.13 No Adverse Changes. Since December 31, 1997, no material adverse change has occurred in the business, assets, liabilities, financial condition, results of operations or business prospects of the Borrower or any of its Subsidiaries, and no event has occurred or failed to occur which has had or is likely to have a material adverse effect on the business, assets, liabilities, financial condition, results of operations or business prospects of the Borrower or any of its Subsidiaries. 4.14 ERISA. (a) The Borrower and its Subsidiaries are in compliance in all material respects with the applicable provisions of the Employee Retirement Income Security Act of 1974, as amended ("ERISA") and all regulations issued thereunder; and (b) No "employee benefit plan", as defined in Section 3 of ERISA, maintained and administered by the Borrower or any of its Subsidiaries (but excluding any multi-employer plan in which any Borrower or any of its Subsidiaries participates but does not administer), as from time to time in effect (the "Plans"), nor any trusts created thereunder, nor any trustee or administrator thereof, has engaged in a "prohibited transaction," as defined in Section 4975 of the Internal Revenue Code of 1986, which could subject the Borrower or any of its Subsidiaries, any Plan or any such trust, or any trustee or administrator thereof, or any party dealing with any Plan or any such trust to the tax or penalty on prohibited transactions imposed by said Section 4975. Neither any of the Plans nor any such trusts have been terminated, nor has there been any "reportable event," as defined in Section 4043 -19- of ERISA, or "accumulated funding deficiency." Neither the Borrower nor any of its Subsidiaries has incurred any liability to the Pension Benefit Guaranty Corporation. 4.15 Federal Reserve Regulations. Neither the Borrower nor any of its Subsidiaries is engaged principally, or as one of its important activities, in the business of extending credit for the purpose of purchasing or carrying any margin stock (within the meaning of Regulations U and X of the Board of Governors of the Federal Reserve System). No part of any of the Advances or Acquisition Advances hereunder or proceeds of the Term Loan shall be used to purchase or carry any such margin stock or to extend credit to others for the purpose of purchasing or carrying any such margin stock. 4.16 Solvency. (a) The present fair saleable value of the assets of the Borrower and each of its Subsidiaries, after giving effect to all the transactions contemplated herein, exceeds the amount that will be required to be paid on or in respect of the existing debts and other liabilities (including contingent liabilities) of the Borrower or such Subsidiary as they mature. (b) The property of the Borrower and each Subsidiary does not constitute unreasonably small capital for the Borrower or such Subsidiary to carry out its business as now conducted and as proposed to be conducted, including the capital needs of the Borrower or such Subsidiary. (c) Neither the Borrower nor any of its Subsidiaries intends to, nor does the Borrower or any of its Subsidiaries believe that it will, incur debts beyond its ability to pay such debts as they mature (taking into account the timing and amounts of cash to be received by the Borrower or such Subsidiary, and of amounts to be payable on or in respect of Indebtedness of the Borrower and its Subsidiaries, including the Obligations). The cash available to the Borrower and each of its Subsidiaries after taking into account all other anticipated uses of the cash of the Borrower and its Subsidiaries, is anticipated to be sufficient to pay all such amounts on or in respect of debt of such Borrower and its Subsidiaries when such amounts are required to be paid. (d) Neither the Borrower nor any of its Subsidiaries believes that final judgments against it in actions for money damages will be rendered at a time when, or in an amount such that, the Borrower or such Subsidiary will be unable to satisfy any such judgments promptly in accordance with their terms (taking into account the maximum reasonable amount of such judgments in any such actions and the earliest reasonable time at which such judgments might be rendered). The cash available to the Borrower and its Subsidiaries after taking into account all other anticipated uses of the cash of the Borrower and its Subsidiaries (including the payments on or in respect of the Indebtedness referred to in subsection (c) of this Section 4.16) is anticipated to be sufficient to pay all such judgments promptly in accordance with their terms. 4.17 Accuracy and Completeness of Information. All information, reports and other papers and data furnished to the Bank were, at the time the same were so furnished, complete and correct in all material respects. No document furnished or statement made to the Bank in connection with the negotiation, preparation or execution of the Loan Documents contains or will contain any -20- untrue statement of fact or omits or will omit to state a material fact necessary in order to make the statements contained therein not misleading. No fact is known to the Borrower which has had or may in the future have (so far as the Borrower can reasonably foresee) a materially adverse effect upon the Borrower's or any of its Subsidiaries' business, assets, liabilities, condition, financial or otherwise, or results of operations that has not been set forth in the financial statements furnished to the Bank or other reports or other papers or data otherwise disclosed in writing to the Bank. 4.18 Permits. The Borrower and each of its Subsidiaries have obtained, and taken all necessary steps to preserve, the franchises, licenses, approvals, certificates of occupancy, permits and other authorizations (collectively, the "Permits") required to conduct its business in accordance with all applicable laws and with all material agreements to which it is subject and has not failed to adhere to the requirements thereof in any material respect. All of the Permits are valid, in good standing and in full force and effect. 4.19 Year 2000 Compliance. The Borrower and each of its Subsidiaries have taken all reasonable steps to assure that all computer software and hardware used by the Borrower or any of its Subsidiaries in the operation of its business are designed to be used prior to, during, and after the calendar year A.D. 2000, and such software and hardware is intended to operate during each time period without error relating to date data, including without limitation dates on and after January 1, 2000. V. COVENANTS 5. The Borrower covenants and agrees that until all the Obligations have been satisfied and paid in full, the Borrower will comply with the following covenants: 5.1 Preservation of Existence. The Borrower will do or cause to be done all things necessary to preserve and maintain in full force and effect its and each of its Subsidiaries' corporate existence and all contracts, rights, licenses, permits, franchises and trade names which in its judgment are necessary or useful to the proper conduct of their respective businesses and shall qualify and remain qualified as a foreign corporation and authorized to do business in each jurisdiction in which the character of their respective properties or the nature of their respective businesses requires such qualification or authorization, except such jurisdictions in which the lack of qualification or authorization does not materially adversely affect the business, results of operations or financial condition of the Borrower or its Subsidiaries. Notwithstanding the foregoing, nothing herein shall be deemed or construed to prohibit the Borrower from causing one or more of its Subsidiaries (whether now owned or hereafter acquired) to merge with or into, or to be consolidated with, one or more of its other Subsidiaries (whether now owned or hereafter acquired); provided that the business operations of the Borrower and its Subsidiaries, as the same were conducted immediately prior to such merger or consolidation, are maintained substantially undisturbed following such merger or consolidation. 5.2 Nature of Business. The Borrower will not, directly or through its Subsidiaries, engage in any business, other than the ownership of (a) the stock of the Borrower's Subsidiaries and (b) insurance brokerage, underwriting businesses and related businesses. -21- 5.3 Compliance with Laws. The Borrower will comply, and cause each of its Subsidiaries to comply, with all laws, ordinances, governmental rules and regulations to which it or its properties or assets are, or might become, subject (unless the same shall be contested by the Borrower or any such Subsidiary in good faith and by appropriate proceedings and such contest shall operate to stay any such non-compliance), the noncompliance with which might materially interfere with the performance of its obligations under the Loan Documents to which it is a party or with the proper conduct of its business. 5.4 Maintenance of Properties. The Borrower will maintain or cause to be maintained in working order and condition, ordinary wear and tear excepted, all of its assets and properties, and all of the assets and properties of each of its Subsidiaries, which are material to the conduct of its business, and from time to time, make or cause to be made all necessary repairs, replacements, additions, betterments and improvements thereto, so that the business carried on in connection therewith may be properly and advantageously conducted at all times. 5.5 Accounting Methods. The Borrower will, and will cause each of its Subsidiaries to, maintain a system of accounting established and administered in accordance with GAAP, keep adequate records and books of account in which complete entries will be made in accordance with GAAP, make provision in its accounts in accordance with GAAP for reserves for depreciation, obsolescence and amortization and all other proper reserves and accruals which in accordance with GAAP should be established. The Borrower will also cause each of its Insurance Subsidiaries to maintain a system of accounting established and administered in accordance with SAP, keep adequate records and books of account in which complete entries will be made in accordance with SAP, make provision in its accounts in accordance with SAP for reserves for depreciation, obsolescence and amortization and all other proper reserves and accruals which in accordance with SAP should be established. 5.6 Payment of Taxes and Claims. The Borrower will, and will cause each of its Subsidiaries to, pay and discharge promptly (i) all taxes, assessments and governmental charges or levies imposed upon it or upon its income or profits or upon any of its properties or assets before the same shall become delinquent, (ii) all lawful claims of materialmen, mechanics, carriers, warehousemen, landlords, and other similar persons for labor, materials, supplies and rentals which, if unpaid, might by law become a Lien or charge upon its property and (iii) all of its Indebtedness and other obligations of whatever nature when due (subject, where applicable, to grace periods, normal credit terms and to other forbearance in the ordinary course of business); provided, however, that none of the foregoing need be paid while being contested in good faith and by appropriate proceedings, so long as adequate book reserves have been established in accordance with GAAP with respect thereto and the Borrower's or such Subsidiary's title to, and its right to use, its properties are not materially adversely affected thereby. 5.7 Visits and Inspections; Field Examinations. The Borrower will permit the Bank and its agents and representatives, at any time during normal business hours, to (i) visit and inspect the premises and the properties of the Borrower and each of its Subsidiaries, (ii) inspect and make extracts from the books and records of the Borrower and each of its Subsidiaries and (iii) discuss with the Borrower's or each Subsidiary's principal officers, employees and independent public -22- accountants any and all matters with respect to the business, assets, liabilities, financial condition, results of operations and business prospects of the Borrower or such Subsidiary. Without limiting the generality of the foregoing, the Bank shall be permitted to conduct periodic field examinations of the Borrower and its Subsidiaries and their respective business and operations in accordance with the Bank's normal and customary practices. So long as any Obligations are outstanding, the Borrower shall pay the Bank a field examination fee in the amount of $600 per person per day, together with the out-of-pocket expenses incurred by the Bank or its representatives in performing such field examinations. Notwithstanding the foregoing, however, the Bank shall not conduct more than two (2) such field examinations in any calendar year unless, in the judgment of the Bank, there exists at any time a reasonable basis to conduct same more frequently. 5.8 Information Covenants. The Borrower will furnish the following information to the Bank for itself and on behalf of its Subsidiaries: (i) Annual Financial Statements. As soon as practicable, and, in any case, within 120 days after the end of each fiscal year of the Borrower and its Subsidiaries, a consolidated and consolidating balance sheet of the Borrower and its Subsidiaries as at the end of such fiscal year and the related consolidated and consolidating statements of income, retained earnings and cash flows of the Borrower and its Subsidiaries for such fiscal year, setting forth in comparative form the figures as at the end of and for the previous fiscal year, audited by independent certified public accountants satisfactory to the Bank, whose certificate shall not contain any qualification and shall state that such financial statements have been prepared in accordance with GAAP consistently applied and that the examination of such accountants in connection with such financial statements has been made in accordance with generally accepted auditing standards and, accordingly, included such tests of the accounting records and such other auditing procedures as were considered necessary in the circumstances and who shall have authorized the Borrower to deliver such financial statements and certifications thereof to the Bank pursuant to this Agreement. Together with such financial statements, the Borrower shall deliver (A) a certificate of such accountants (1) stating that in making the examination necessary for the certification of such financial statements they have obtained no knowledge of any Default or Event of Default, or if they shall have obtained knowledge of any such Default or Event of Default, disclosing each such Default and Event of Default and its nature, when it occurred and whether it is continuing and (2) which shall have attached the calculations made which are required to establish whether or not the Borrower and its Subsidiaries were, as of the date of such statements, in compliance with the financial covenants contained in this Agreement and (B) copies of all "management letters" issued to the Borrower or its Subsidiaries by its accountants. (ii) Annual SAP Financial Statements. As soon as available, and in any event within 60 days (with respect to unaudited SAP Financial Statements) and 150 days (with respect to audited SAP Financial Statements) following the end of each Insurance Subsidiary's fiscal year (or such earlier date as such are filed with the applicable insurance regulatory authority), copies of the unaudited (if required to be filed with a regulatory authority) and audited SAP Financial Statements for such Insurance Subsidiary, in each case setting forth in comparative form the figures for the preceding fiscal year and prepared in accordance with SAP, all in reasonable detail and accompanied by an opinion thereon of a firm of independent public accountants of recognized national standing selected by the Borrower and reasonably acceptable to the Bank, to the effect that the financial statements have -23- been prepared in accordance with SAP (except for changes in application in which such accountants concur) and present fairly in all material respects in accordance with SAP the financial condition of such Insurance Subsidiary as of the end of such fiscal year and the results of its operations for the fiscal year then ended and that the examination of such accountants in connection with such financial statements has been made in accordance with generally accepted auditing standards and, accordingly, included such tests of the accounting records and such other auditing procedures as were considered necessary under the circumstances. (iii) Quarterly SAP Statements. As soon as available, and in any event within the time period required by the applicable regulatory authority, copies of the unaudited SAP Financial Statements for each quarterly fiscal period of each Insurance Subsidiary, in each case setting forth in comparative form the figures for the preceding fiscal year and prepared in accordance with SAP, all in reasonable detail and certified by the chief executive officer or chief financial officer of such Insurance Subsidiary as presenting fairly in accordance with SAP the financial condition of such Insurance Subsidiary as of the end of such period and results of operations for such period, subject to normal year-end accruals and audit adjustments. (iv) SEC Filings. Promptly after the same are available, copies of each annual report, proxy or financial statement or other report or communication sent to the stockholders of the Borrower and copies of all annual, regular, periodic and special reports and registration statements which the Borrower may file or be required to file with the Securities and Exchange Commission under Sections 13 and 15(d) of the Securities and Exchange Act of 1934, including without limitation Forms 10-Q and 10-K filed by the Borrower. (v) Adequacy of Reserves. As soon as practicable, and, in any case, within 60 days after the end of each fiscal year of OLRI, written confirmation of the adequacy of the reserves of OLRI from an independent actuarial firm of recognized standing selected by the Borrower and reasonably acceptable to the Bank. (vi) Certificate. At the time the financial statements are furnished pursuant to subsections (i), (ii) and (iii) above, the Borrower shall also furnish a certificate of the chief executive officer or chief financial officer of the Borrower stating that no event has occurred which constitutes a Default or an Event of Default under any of the Loan Documents or if such an event has occurred, disclosing each such event or failure and its nature, when it occurred, whether it is continuing and the steps being taken by the Borrower or the Guarantors with respect to such event or failure. (vii) Copies of Other Reports. (1) From time to time and promptly upon each request, such existing reports and other information regarding the business, assets, liabilities, financial condition, results of operations or business prospects of the Borrower and its Subsidiaries as the Bank may reasonably request; and (2) Within 15 days after the Borrower and its Subsidiaries have filed their federal tax returns each year, a copy of such tax returns. -24- (viii) Notice of Litigation and Other Matters. Prompt notice of: (1) the commencement of any proceeding or investigation by or before any governmental body and any action or proceeding in any court or before any arbitrator against or in any other way relating adversely to the Borrower or any of its Subsidiaries or any of their respective properties, assets or business, which, in the reasonable judgment of the senior management of the Borrower, if adversely determined, would singly or when aggregated with all other proceedings, investigations or actions, materially and adversely affect the business, results of operations or financial condition of the Borrower or its Subsidiaries; (2) any notice received from any administrative official or agency relating to any order, ruling, statute or other law or information which would materially and adversely affect the operations of the Borrower or its Subsidiaries; (3) any amendment of the certificate of incorporation or by-laws of any Borrower or its Subsidiaries; (4) any material adverse change with respect to the business, assets, liabilities, financial condition or results of operations of the Borrower or its Subsidiaries; (5) any Default or Event of Default by the Borrower hereunder or any default under any other material agreement to which the Borrower or any of its Subsidiaries is a party or by which any of their respective properties may be bound; and (6) any event which would result in a representation or warranty of the Borrower contained herein being false or incorrect in any material respect if made on and as of the date of occurrence of such event. (ix) ERISA (a) As soon as possible, and in any event within 30 days after any executive officer of the Borrower or any of its Subsidiaries knows or has reason to know that any reportable event (as defined in Section 4043 of ERISA) with respect to any Plan has occurred, a statement of the chief executive officer setting forth details as to such reportable event and the action that the Borrower or any such Subsidiary proposes to take with respect thereto, together with a copy of the notice of such reportable event given to the Pension Benefit Guaranty Corporation. (b) Promptly after receipt thereof, a copy of any notice the Borrower or any of its Subsidiaries may receive from the Pension Benefit Guaranty Corporation relating to the intention of said Corporation to terminate any Plan or to appoint a trustee to administer any Plan. 5.9 Accuracy and Completeness of Information. The Borrower covenants that all information, reports, statements, and other papers and data furnished to the Bank pursuant to any -25- provision or term of any of the Loan Documents shall be, at the time the same is so furnished, complete and correct in all material respects. 5.10 Insurance. The Borrower will, and will cause each of its Subsidiaries to, maintain with financially sound and reputable insurance companies insurance in such types and amounts as is customarily maintained for companies in similar industries and reasonably acceptable to the Bank. 5.11 Indebtedness. The Borrower will not, and will not allow any of its Subsidiaries to, create, assume, incur, guarantee or in any manner become liable, contingently or otherwise, in respect of any Indebtedness except for Permitted Indebtedness; provided, however, that the foregoing provision shall not apply if, concurrently with the incurrence of such Indebtedness, the proceeds thereof are applied to the complete satisfaction and payment in full of all Obligations. 5.12 Liens. The Borrower will not, and will not allow any of its Subsidiaries to, create, assume or incur or cause to be created, assumed or incurred, or permit to exist, any Liens on its properties or assets except for Permitted Liens. 5.13 Sale of Assets; Merger; Acquisitions. (a) The Borrower will not, and will not allow or cause any of its Subsidiaries to (i) sell, transfer, assign, lease or otherwise dispose of (whether in one transaction or a series of transactions) all or substantially all of its assets (whether now owned or hereafter acquired) or (ii) subject to the provisions of Section 5.1 hereof, consolidate with or merge into any other corporation or permit any corporation to merge into it. (b) Except for Permitted Acquisitions, the Borrower will not, and will not allow or cause any of its Subsidiaries to, undertake or consummate any Acquisition without the prior written approval of the Bank, which approval may be granted or withheld in the Bank's sole discretion. 5.14 Guarantees. The Borrower will not, and will not allow or cause any of its Subsidiaries to, guarantee, endorse, become surety for, or otherwise in any way become or be responsible for, the obligations of any other Person whether by agreement to purchase the indebtedness of any other Person, or agreement for the furnishing of funds, directly or indirectly, for the purpose of payment of indebtedness of any other Person, other than in connection with Permitted Indebtedness and endorsements of negotiable instruments for deposit or collection in the ordinary course of its business. 5.15 Issuance of Stock. Except (a) pursuant to and in accordance with the employee stock option plan of the Borrower in effect as of the date hereof and more fully described on Schedule VI attached hereto, and (b) for issuing securities in an amount which does not exceed fifteen percent (15%) of the shareholders equity of the issuer, the Borrower will not, and will not allow or cause any of its Subsidiaries to, issue to any Person any shares of its capital stock (whether common or preferred) nor any options, subscriptions, warrants, rights, contracts, commitments, understandings or agreements to purchase or otherwise acquire any such shares (including any rights of conversion or exchange) without the prior written consent of the Bank. -26- 5.16 [Intentionally Omitted]. 5.17 Financial Covenants. (a) Minimum Consolidated GAAP Net Worth. The Borrower shall not permit, as of the end of any fiscal quarter, Consolidated GAAP Net Worth of the Borrower and its Subsidiaries to be less than an amount equal to the sum of (a) $30,000,000, plus (b) 50% of the Consolidated Net Income for the fiscal year ending December 31, 1997, plus (c) 50% of any cumulative positive net income (as determined in accordance with GAAP) for each fiscal quarter following the fiscal quarter ending December 31, 1997. (b) Minimum Statutory Surplus. The Borrower shall not permit, as of the end of any fiscal quarter, Statutory Surplus of OLRI to be less than an amount equal to the sum of (a) $23,000,000, plus (b) 50% of the Statutory Net Income of OLRI for the fiscal year ending December 31, 1997, after dividends to the Borrower, plus (c) 50% of any cumulative positive Statutory Net Income of OLRI, after dividends to the Borrower, for each fiscal quarter following the fiscal quarter ending December 31, 1997. (c) Maximum Premiums to Surplus. The Borrower shall not permit, as of the end of any fiscal quarter, the ratio of Net Premiums Written by OLRI for the immediately preceding four fiscal quarters (ending on such date) to OLRI's Statutory Surplus at the end of such fiscal quarter to be greater than 2.5 to 1. (d) Debt Service Coverage Ratio. The Borrower and its Subsidiaries shall at all times maintain a Debt Service Coverage Ratio of not less than 1.25 to 1. 5.18 OLRI Rating. The Borrower shall at all times cause OLRI to maintain a minimum rating of "A-" as assigned in A.M. Best's Insurance Reports Property/Casualty Edition. 5.19 New Subsidiaries. Simultaneously with the creation or Acquisition of each new Subsidiary by the Borrower or one of its Subsidiaries, the Borrower shall, or shall cause the acquiring Subsidiary to, either: (a) If permitted by applicable law, cause such new Subsidiary to execute and deliver to the Bank a joinder of guaranty in form and substance satisfactory to the Bank, pursuant to which such new Subsidiary joins in, and becomes a Guarantor under, the Guaranty Agreement with the same effect as if such new Subsidiary had executed and delivered the Guaranty Agreement on the date hereof; or (b) If such new Subsidiary is not permitted by applicable law to join in the Guaranty Agreement and such new Subsidiary is an Insurance Subsidiary, (i) execute and deliver to the Bank an amendment to the Pledge and Security Agreement, in form and substance satisfactory to the Bank, pursuant to which the Borrower shall pledge to the Bank all of the capital stock of such new -27- Subsidiary, and (ii) deliver to the Bank an opinion of local counsel to such new Subsidiary, covering such matters and otherwise in form and substance as shall be reasonably acceptable to the Bank. 5.20 Out-of Debt Period. For a period of 30 consecutive days commencing no later than the date which is 30 days prior to the Revolving Loan Termination Date, the Borrower shall reduce its outstanding Advances under the Revolving Loan to, and shall maintain the outstanding balance under the Revolving Loan at, $0. 5.21 Further Documentation. At any time and from time to time upon the Bank's written request and at the Borrower's sole expense, the Borrower will promptly and duly execute and deliver such further documents and instruments and do such further acts and things as the Bank may reasonably request in order to obtain the full benefits of this Agreement and the Loan Documents and the rights and powers herein and therein granted, including the filing of any financing or continuation statements and amendments thereto under the Code in effect in any jurisdiction and any and all other recording documents with respect to the Liens and security interests granted to the Bank pursuant to the Loan Documents. The Borrower also hereby authorizes the Bank to file any such financing or continuation statement without the signature of the Borrower to the extent permitted by applicable law. If any amount payable under or in connection with any of the Collateral shall be or become evidenced by any promissory note or other instrument or chattel paper, such note or other instrument or chattel paper shall be immediately pledged to the Bank hereunder, duly endorsed in a manner satisfactory to the Bank and delivered to the Bank. 5.22 Bank's Appointment as Attorney-in-Fact. To the extent not prohibited by applicable law or by any applicable rule or regulation of the Securities and Exchange Commission or any insurance regulatory authority having jurisdiction over the Borrower: (a) The Borrower hereby irrevocably constitutes and appoints the Bank, and any officer or agent thereof, with full power of substitution, as its true and lawful attorney-in-fact with full irrevocable power and authority in the place and stead of the Borrower and in the name of the Borrower or in its own name, from time to time in the Bank's discretion following the occurrence and continuance of an Event of Default, for the purpose of carrying out the terms of this Agreement, to take any and all appropriate action and to execute any and all documents and instruments which may be necessary or desirable to accomplish the purposes of this Agreement. (b) The Borrower hereby ratifies all that said attorneys shall lawfully do or cause to be done by virtue hereof. This power of attorney is a power coupled with an interest and shall be irrevocable. (c) The powers conferred on the Bank hereunder are solely to protect the interests of the Bank and shall not impose any duty upon it to exercise any such powers. The Bank shall be accountable only for amounts that it actually receives as a result of the exercise of such powers, and neither it nor any of its directors, officers, employees or agents shall be responsible to the Borrower for any act or failure to act, except for its gross negligence or willful misconduct. -28- 5.23 Performance by Bank of Borrower's Obligations. If the Borrower fails to perform or comply with any of its agreements contained herein, and the Bank, as provided for by the terms of this Agreement, shall perform or comply, or otherwise cause performance or compliance, with such agreement, the expenses of the Bank incurred in connection with such performance or compliance (together with interest thereon at the rate of 5% in excess of the Base Rate) shall be payable by the Borrower to the Bank on demand and shall constitute Obligations secured hereby. 5.24 Year 2000 Compliance. The Borrower and each of its Subsidiaries shall take all action reasonably necessary to assure that all computer software and hardware used by the Borrower or any of its Subsidiaries in the operation of its business are designed to be used prior to, during, and after the calendar year A.D. 2000, and such software and hardware is intended to operate during each time period without error relating to date data, including without limitation dates on and after January 1, 2000. At the request of the Bank, the Borrower shall provide the Bank with assurance reasonably acceptable to the Bank of the compliance by the Borrower and each of its Subsidiaries with the provisions of this Section. VI. CONDITIONS PRECEDENT 6.1 Initial Conditions Precedent. The obligation of the Bank to make the Term Loan and to make an Advance under the Revolving Note, as of the date hereof, is subject to the condition precedent that the Bank shall have received each and every one of the following on or before the date hereof in form and substance satisfactory to the Bank: (a) An originally executed copy of this Agreement and each of the other Loan Documents which are dated the date hereof, and all other documents, instruments and certificates required hereunder and thereunder; (b) A copy of the certificate of incorporation and bylaws of the Borrower and each of the Borrower's Subsidiaries, certified as a true copy by the Secretary or an Assistant Secretary of the Borrower or such Subsidiaries, as applicable; (c) A good standing certificate issued as of a recent date with respect to the Borrower and each of the Borrower's Subsidiaries by the secretary of state of the state of each such entity's incorporation and each state where such entity is qualified to do business; (d) A certificate of the Secretary or an Assistant Secretary of the Borrower and each Existing Guarantor certifying the names and true signatures of the officers of the Borrower and each Existing Guarantor authorized to sign each of the Loan Documents to which the Borrower or each Existing Guarantor is a party; (e) A copy of the resolutions approved by the Board of Directors of the Borrower and each Existing Guarantor authorizing the execution, delivery and performance by the Borrower and each Existing Guarantor of each of the Loan Documents to which it is a party, certified as a true copy by the Secretary or an Assistant Secretary of the Borrower or each Existing Guarantor; -29- (f) Written opinions of counsel to the Borrower and the Existing Guarantors; (g) Written opinions of local counsel to each of the Insurance Subsidiaries; (h) Evidence reasonably satisfactory to the Bank that all filings, recordings and other actions that are necessary or desirable in order to establish and perfect the Bank's security interest in the collateral described in the Pledge and Security Agreement, as a valid perfected first priority security interest shall have been or shall be duly effected, including, without limitation, the filing of financing statements, and the filing or recordation of such other documents as the Bank shall deem necessary or desirable, all in form and substance satisfactory to the Bank, and all fees, taxes and other charges relating to such filings and recordings shall have been paid by the Borrower; (i) A letter from the Borrower's actuary, plan administrator or other qualified representative stating that all of the Borrower's Plans are in compliance with ERISA; (j) Certified true copies of the financial statements of Old Lyme Insurance Company, Ltd., as filed with the Bermuda Monetary Authority, for fiscal years 1994, 1995 and 1996. (k) Such other documents and information as the Bank shall reasonably request, in form and substance satisfactory to the Bank, and all legal matters and documents with respect to the transactions contemplated by this Agreement shall be satisfactory to counsel for the Bank. 6.2 Conditions Precedent to Additional Advances and Acquisition Advances. The Bank shall have no obligation to make any additional Advance or Acquisition Advance subsequent to the date hereof unless each of the following conditions precedent has been either satisfied or waived prior to or concurrently with the making of such Advance or Acquisition Advance. (a) Each of the conditions of Section 6.1 has been satisfied or waived; (b) Each of the Loan Documents shall be in full force and effect; (c) The representations and warranties of the Borrower set forth herein shall be true and correct as of the date of each Advance or Acquisition Advance as if made on and as of such date; (d) In the case of an Acquisition Advance, the Borrower has executed and delivered to the Bank an Acquisition Note and, in the case of a stock Acquisition, the Borrower or the new Subsidiary, as applicable, has complied with the provisions of Section 5.19 hereof; (e) No Default or Event of Default has occurred and is continuing as of the date of each Advance or Acquisition Advance; (f) There is and has been no material adverse change in the Borrower's or any of the Borrower's Subsidiaries' financial condition, results of operations or otherwise which would, in the judgment of the Bank, impair the Borrower's ability to repay all or any portion of the Notes; and -30- (g) No further action, including any filing or recording of any agreement, document or instrument, is necessary to establish and perfect the Bank's Lien and priority in the Collateral. Each request for an Advance or Acquisition Advance by the Borrower shall be deemed a representation and warranty by the Borrower that each of the conditions precedent set forth in Sections 6.2(a), (b), (c), (e), (f) and (g) hereof has been satisfied, unless the Bank has waived satisfaction of any such condition in writing prior to or concurrently with the making of such Advances or Acquisition Advances, in which case the representation and warranty of the Borrower will not be deemed to extend to that particular condition. VII. EVENTS OF DEFAULT 7. Each of the following shall constitute an Event of Default, whatever the reason for such event and whether it shall be voluntary or involuntary or be effected by operation of law or pursuant to any judgment or order of any court or any order, rule or regulation of any governmental body: 7.1 The Borrower shall fail to make any payment of principal or interest under the Notes or hereunder on any date when due. 7.2 If any warranty or representation made by or on behalf of the Borrower or any of its Subsidiaries contained herein or in any of the Loan Documents or in any document furnished in compliance or connection with the Loan Documents is false or incorrect in any material respect when made. 7.3 The Borrower shall default in the performance or observance of any covenant or agreement contained in this Agreement (which is not the subject of Section 7.1 or 7.2 hereof) and such default shall continue unremedied for 30 days after any officer of the Borrower shall have become aware of such default. 7.4 If any Event of Default shall occur under any of the other Loan Documents. 7.5 The Borrower shall (i) default in any payment of the principal of or interest on any Indebtedness (other than the Indebtedness evidenced by the Notes) owing to the Bank, (ii) default in any payment of the principal of or interest on any Indebtedness, which, whether individually or together with all such other Indebtedness as to which a default has occurred, equals or exceeds $250,000 (other than the Indebtedness evidenced by the Notes), beyond the period of grace, if any, provided in the instrument or agreement under which such Indebtedness was created; or (iii) default in the observance or performance of any other agreement or condition relating to any such Indebtedness or contained in any instrument or agreement evidencing, securing or relating thereto, or any other event shall occur, the effect of which default or other event is to cause, or to permit the holder or holders of such Indebtedness (or a trustee or agent on behalf of such holder or holders) to cause, with the giving of notice if required, such Indebtedness to become due prior to its stated maturity and as the result of -31- such default or event such Indebtedness has been accelerated and become due and payable prior to its stated maturity. 7.6 (i) The Borrower shall commence any case, proceeding or other action (A) under any existing or future law of any jurisdiction, domestic or foreign, relating to bankruptcy, insolvency, reorganization or relief of debtors, seeking to have an order for relief entered with respect to it, or seeking to adjudicate it a bankrupt or insolvent, or seeking reorganization, arrangement, adjustment, winding-up, liquidation, dissolution, composition or other relief with respect to it or its debts, or (B) seeking appointment of a receiver, trustee, custodian or other similar official for it or for all or any substantial part of its assets, or the Borrower shall make a general assignment for the benefit of its creditors; or (ii) there shall be commenced against the Borrower any case, proceeding or other action of a nature referred to in clause (i) above which (A) results in the entry of an order for relief or any such adjudication or appointment or (B) remains undismissed, undischarged or unbonded for a period of 60 days; or (iii) there shall be commenced against the Borrower any case, proceeding or other action seeking issuance of a warrant of attachment, execution, distraint or similar process against all or any substantial part of its assets, which results in the entry of an order for any such relief which shall not have been vacated, discharged, or stayed or bonded pending appeal within 60 days from the entry thereof; or (iv) the Borrower shall take any action in furtherance of, or indicating its consent to, approval of, or acquiescence in, any of the acts set forth in clauses (i), (ii) or (iii) above. 7.7 A final judgment shall be entered against the Borrower by any court for the payment of money which, together with all other outstanding judgments against the Borrower, exceeds $250,000 in the aggregate, which judgment is not fully covered by insurance, or a warrant of attachment or execution or similar process shall be issued or levied against property of the Borrower, which together with other such property subject to other such process, exceeds in value $250,000 in the aggregate and, if within 60 days (10 days if such aggregate amount exceeds $400,000) after the entry, issue or levy thereof, such judgment, warrant or process shall not have been discharged or stayed pending appeal, or, if within 60 days (10 days if such aggregate amount exceeds $400,000) after the expiration of any such stay, such judgment, warrant or process shall not have been discharged. 7.8 (i) A reportable event (as defined in Section 4043 (b) of Title IV of ERISA) shall have occurred with respect to any "employee benefit plan" (as defined in Section 3 of ERISA) maintained by the Borrower or to any multi-employer plan in which the Borrower participates (collectively, the "Benefit Plans") or any Benefit Plan of the Borrower shall have been voluntarily terminated as provided in Section 4041(a) of ERISA and the guaranteed, nonfunded, nonforfeitable benefits (as such terms are defined in Section 4022 of ERISA) of any such Benefit Plan that has been voluntarily terminated or with respect to which a reportable event has occurred, when included in the financial statements of the Borrower on a pro forma basis as a current liability and as a deduction from net worth, would cause the Borrower to have a negative net worth; (ii) A trustee shall be appointed by a United States District Court to administer any Benefit Plan; or (iii) the Pension Benefit Guaranty Corporation shall institute proceedings to terminate any Benefit Plan. 7.9 If the Borrower shall cease to own and control 100% of the capital stock of each of its Subsidiaries, or if the Borrower shall commence any action or step with respect to, or shall -32- approve any plan of, any liquidation or dissolution of the Borrower or any of its Subsidiaries, unless provision is otherwise made for the payment in full of the Obligations. 7.10 If any Guarantor shall terminate or attempt to terminate its obligations under the Guaranty Agreement. VIII. REMEDIES 8.1 Upon the occurrence of an Event of Default set forth in Section 7.6, the Bank shall have no obligation to make any further Advance or Acquisition Advance, and all amounts outstanding (with accrued interest thereon) and all other amounts owing under the Notes and the other Loan Documents shall immediately become due and payable without presentment, demand, protest or notice of any kind, all of which are hereby expressly waived by the Borrower. 8.2 Upon the occurrence of any other Event of Default, the Bank shall have no obligation to make any further Advance or Acquisition Advance and the Bank may declare all amounts outstanding (with accrued interest thereon) and all other amounts owing to it under the Notes and the other Loan Documents to be due and payable forthwith, whereupon the same shall immediately become due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby expressly waived by the Borrower. 8.3 Upon the occurrence of any Event of Default: (i) All payments received by the Borrower under or in connection with any of the Collateral shall be held by the Borrower in trust for the Bank, shall be segregated from other funds of the Borrower and shall forthwith upon receipt by the Borrower be turned over to the Bank, in the same form as received by the Borrower (duly endorsed by the Borrower to the Bank, if required); and (ii) Any and all such payments so received by the Bank (whether from the Borrower or otherwise) may, in the sole discretion of the Bank, be held by the Bank as collateral security for, and/or then or at any time thereafter applied in whole or in part by the Bank against, all or any part of the Obligations in such order as the Bank shall determine in its sole discretion. Any balance of such payments held by the Bank and remaining after payment in full of all such Obligations shall be paid over to the Borrower or, if the Bank has knowledge that another Person is lawfully entitled to receive the same, to such other Person. 8.4 If any Event of Default shall occur, the Bank may exercise, in addition to all other rights and remedies granted to it in this Agreement and in any other Loan Document, all rights and remedies of a secured party under the Code. Without limiting the generality of the foregoing, the Bank may, without any requirement of notice, setoff any and all amounts owing by the Borrower to it against any deposit account maintained in the Bank by the Borrower or any other property of the Borrower which may now or hereafter be in the Bank's possession or control, and such right of setoff shall be deemed to have been exercised immediately upon such stated or accelerated maturity as aforesaid even though such setoff is not noted on the records of the Bank until a later time. -33- 8.5 The Borrower also agrees to pay all Bank Costs incurred with respect to the collection of any of the Obligations and the enforcement of any of the Bank's rights hereunder. 8.6 The Borrower hereby waives (i) presentment, demand, protest or any notice (to the extent permitted by applicable law) of any kind in connection with this Agreement or any Collateral, except as otherwise provided herein, (ii) all rights to seek from any court any bond or security prior to the exercise by the Bank of any remedy described herein, (iii) the benefit of all valuation, appraisement and exemption laws and (iv) all rights to demand or to have any marshaling of assets upon any power of sale granted herein or pursuant to judicial proceedings or upon any foreclosure or any enforcement of this Agreement. 8.7 Without limiting the generality of any of the rights and remedies conferred upon the Bank in this Agreement, the Bank may, after the occurrence of an Event of Default and to the full extent permitted by applicable law: (i) take immediate possession of the Collateral, either personally or by means of a receiver appointed by a court of competent jurisdiction; (ii) at the Bank's option, use, operate, manage and control the Collateral in any lawful manner; (iii) collect and receive all rents, income, revenue, earnings, issues and profits therefrom; and (iv) maintain, repair, renovate, alter or remove the Collateral as the Bank may determine in its sole discretion. IX. INDEMNIFICATION 9.1 Indemnification. The Borrower agrees to pay, reimburse, indemnify and hold harmless, the Bank, its directors, officers, employees, agents and representatives from and against any and all actions, costs, damages, disbursements, expenses (including reasonable attorneys' fees), judgments, liabilities, losses, obligations, penalties and suits of any kind or nature whatsoever with respect to: (i) (A) subject to the provisions of Sections 2.31 and 2.32 hereof, the development, preparation and execution of any of the Loan Documents, (B) subject to the provisions of Section 2.31 hereof, the performance and administration of any of the Loan Documents and (C) the enforcement, interpretation, amendment, modification, waiver or consent of any of the Loan Documents; (ii) the exercise of any right or remedy granted in any of the Loan Documents, the collection or enforcement of any of the Obligations and the proof or allowability of any claim arising under any of the Loan Documents, whether in any bankruptcy or receivership proceeding or otherwise; (iii) any claim of third parties, and the prosecution or defense thereof, arising out of or in any way connected with any of the Loan Documents; and (iv) any and all search, recording and filing fees and taxes, and any and all liabilities with respect thereto, or resulting from any delay in paying stamp and other taxes, if any, which may be payable or determined to be payable in connection with the Loan Documents. -34- Notwithstanding the foregoing, the Bank shall not be entitled to any indemnification with respect to its own gross negligence or willful misconduct. X. MISCELLANEOUS 10.1 Notice. All notices and other communications given to or made upon any party hereto in connection with this Agreement shall, except as otherwise expressly herein provided, be in writing and hand delivered, sent by certified mail, return receipt requested or reputable overnight courier providing a receipt against delivery or faxed (so long as, concurrently with sending a notice by fax, a party also sends the notice by any other means permitted hereunder) to the respective parties, as follows: Bank: Summit Bank 250 Moore Street 2nd Floor Hackensack, New Jersey 07601 Attention: Ms. Lisa Cohen Telecopy: (201) 488-6185 - with a copy to - Wolff & Samson 5 Becker Farm Road Roseland, New Jersey 07068 Attention: Laurence M. Smith, Esq. Telecopy: (973) 740-1407 Borrower: Kaye Group Inc. 122 East 42nd Street New York, New York 10168 Attention: Michael P. Sabanos Telecopy: (212) 867-0368 - with a copy to - Kaye Group Inc. 122 East 42nd Street New York, New York 10168 Attention: Ivy Fischer, Esq. Telecopy: (212) 856-9458 or to such changed address as may be fixed by notice. All such notices and other communications shall, except as otherwise expressly herein provided, be effective when received by the party to whom -35- properly addressed, the written receipt by any employee of any such party constituting sufficient evidence of such receipt. 10.2 No Waiver; Cumulative Remedies. No failure to exercise and no delay in exercising, on the part of the Bank, any right, power or privilege hereunder, shall operate as a waiver thereof; nor shall any single or partial exercise of any right, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies herein provided are cumulative and not exclusive of any rights or remedies provided by law. 10.3 Survival of Agreements. All agreements, representations and warranties made herein, and in any certificates delivered pursuant hereto, shall survive the execution and delivery of this Agreement and the Notes and the making the Term Loan and of any Advances and Acquisition Advances. 10.4 Amendment. No modification, amendment or waiver of any provision of this Agreement or the Notes, nor consent to any departure by the Borrower shall in any event be effective unless the same shall be in writing and signed by the party granting such modification, amendment or waiver, and then such waiver or consent shall be effective only in the specific instance and for the purpose for which given. 10.5 Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the Borrower, the Bank, all future holders of the Notes and their respective successors and assigns, except that the Borrower may not assign or transfer any of its rights under this Agreement, the Notes or the other Loan Documents without the prior written consent of the Bank, which may be granted or withheld by the Bank in its sole and absolute discretion. This Agreement, the Notes and the other Loan Documents may be endorsed, assigned or transferred in whole or in part by the Bank, and any such holder or assignee of the same shall succeed to and be possessed of the rights and powers of the Bank under all of the same to the extent transferred and assigned. The Bank may grant participations in all or any portion of its interest in the indebtedness evidenced by the Notes, and in such event the Borrower shall continue to make payments due under the Notes to the Bank and the Bank shall have the sole responsibility of allocating and forwarding such payments in the appropriate manner and amounts. 10.6 Severability. In case any one or more of the provisions contained in this Agreement or the Notes should be invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein and therein shall not in any way be affected or impaired thereby. 10.7 Counterparts. This Agreement may be executed by the parties hereto in any number of separate counterparts and all such counterparts taken together shall constitute one and the same original instrument. 10.8 Governing Law; No Third Party Rights. This Agreement, the Notes and the other Loan Documents and the rights and obligations of the parties hereunder and thereunder shall be governed by and construed and interpreted in accordance with the law of the State of New Jersey. -36- This Agreement is solely for the benefit of the parties hereto and their respective successors and assigns, and no other person shall have any right, benefit, priority or interest in, under or because of the existence of, this Agreement. 10.9 WAIVER OF JURY TRIAL; CONSENT TO JURISDICTION. AFTER CONSULTATION WITH COUNSEL, THE BORROWER AND THE BANK HEREBY WAIVE THEIR RIGHT TO A TRIAL BY JURY IN CONNECTION WITH ANY AND ALL LITIGATION INVOLVING THE SUBJECT MATTER OF THIS AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS. THE BORROWER AND THE BANK HEREBY CONSENT TO THE NON-EXCLUSIVE JURISDICTION OF THE NEW JERSEY SUPERIOR COURT AND THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEW JERSEY IN ANY LITIGATION ARISING HEREUNDER. THE BORROWER HEREBY IRREVOCABLY APPOINTS IVY FISCHER, ESQ. (WHOSE ADDRESS IS 30 FAIRFIELD STREET, MONTCLAIR, NEW JERSEY 07042) AS ITS AGENT FOR PURPOSES OF RECEIVING SERVICE OF PROCESS IN ANY SUCH LITIGATION AND FURTHER AGREES THAT SERVICE OF ANY SUCH PROCESS MAY BE EFFECTED, IN ADDITION TO ANY OTHER MEANS PERMITTED BY THE APPLICABLE RULES OF COURT, BY MAILING SUCH PROCESS CERTIFIED MAIL, RETURN RECEIPT REQUESTED OR BY REPUTABLE OVERNIGHT COURIER PROVIDING A RECEIPT AGAINST DELIVERY TO SUCH AGENT OR TO THE BORROWER. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered by their proper and duly authorized officers as of the day and year first above written. KAYE GROUP INC. By: -------------------------------- Michael P. Sabanos Senior Vice President & Chief Financial Officer SUMMIT BANK By: -------------------------------- Lisa Cohen, Vice President -37- . Schedules and Exhibit to Loan Agreement by and between Kaye Group Inc. and Summit Bank ----------------------------- Schedules --------- Schedule I - Permitted Indebtedness Schedule II - Permitted Liens Schedule III - Pending or Threatened Litigation Schedule IV - Subsidiaries Schedule V - Real Property Schedule VI - Employee Stock Option Plan Exhibit ------- Exhibit A - Form of Acquisition Note EXHIBIT A FORM OF ACQUISITION NOTE $ ----------------- -------------------- [Date] FOR VALUE RECEIVED, the undersigned, KAYE GROUP INC., a Delaware corporation (the "Borrower"), hereby unconditionally promises to pay on or before _______________________ (the "Maturity Date"), to the order of SUMMIT BANK, a banking institution of the State of New Jersey (the "Bank"), at the office of the Bank located at 250 Moore Street, Hackensack, New Jersey 07601, or at such other location as the Bank shall designate, in lawful money of the United States of America and in immediately available funds, the principal amount of $___________________. This Note is being executed and delivered by the Borrower to the Bank pursuant to Section 2.11 of that certain Loan Agreement dated June 24, 1998 between the Borrower and the Bank (the "Agreement"). Terms defined in the Agreement shall have the same meanings when used herein. The Borrower further agrees to pay interest in like money at such office on the unpaid principal amount hereof from time to time at a rate or rates per annum as provided in the Agreement. The principal of and interest on this Note shall be payable at the times, and in the manner, provided in the Agreement. The Borrower shall pay to the Bank a late charge (the "Late Charge") in an amount equal to five percent (5%) of any payment which is more than ten (10) days in arrears to cover the extra expense involved in handling delinquent payments, but in no event shall any Late Charge be less than $25 or more than $2,500. The term "payments" shall be construed to include principal, interest, fees and any other amount due under the terms of this Note or any of the other Loan Documents. Acceptance by the Bank of payment of a Late Charge shall in no way be construed to be an election of remedies or waiver by the Bank of any of its rights at law or under the terms of any of the Loan Documents. Subject to Section 2.25 of the Agreement, this Note may be prepaid, in whole or in part, at one time or from time to time, without premium or penalty in accordance with the provisions of the Agreement. This Note is secured by the Collateral described in the Agreement, the Pledge and Security Agreement and the other Loan Documents, and is guaranteed by the Guarantors pursuant to the Guaranty Agreement. The Bank may declare this Note to be immediately due and payable if any of the following events shall have occurred and be continuing: A-1 (1) Failure by the Borrower to make any payment of principal or interest under this Note on any date when due; or (2) An Event of Default shall have occurred under the Agreement or any of the other Loan Documents. Upon the occurrence of any Event of Default, the Bank may, in addition to such other and further rights and remedies as provided by law or under any of the Loan Documents, (i) collect interest on such overdue amount from the date of such maturity until paid at a rate per annum equal to three (3%) percent in excess of the Base Rate, (ii) setoff such amount against any deposit account maintained in the Bank by the Borrower, and such right of setoff shall be deemed to have been exercised immediately upon such stated or accelerated maturity even though such setoff is not noted on the records of the Bank until a later time and (iii) hold as security any property heretofore or hereafter delivered into the custody, control or possession of the Bank or any entity acting as agent for the Bank by any person liable for the payment of this Note. This Note may not be changed orally, but only by an agreement in writing, signed by the party against whom enforcement of any waiver, change, modification or discharge is sought. Should the indebtedness represented by this Note or any part hereof be collected at law or in equity, or in bankruptcy, receivership, or any other court proceeding, or should this Note be placed in the hands of attorneys for collection upon default, the Borrower agrees to pay, in addition to the principal and interest due and payable hereon, all reasonable costs of collecting or attempting to collect this Note, including reasonable attorneys' fees and expenses. This Note shall be and remain in full force and effect and in no way impaired until the actual payment thereof to the Bank, its successors or assigns. Anything herein to the contrary notwithstanding, the obligations of the Borrower under this Note shall be subject to the limitation that payments of interest shall not be required to the extent that receipt of any such payment by the Bank would be contrary to provisions of law applicable to the Bank limiting the maximum rate of interest which may be charged or collected by the Bank. The Borrower and all endorsers and guarantors of this Note hereby waive presentment, demand for payment, protest and notice of dishonor of this Note. This Note is binding upon the Borrower and its successors and assigns and shall inure to the benefit of the Bank and its successors and assigns. A-2 This Note and the rights and obligations of the parties hereto shall be subject to and governed by the laws of the State of New Jersey. IN WITNESS WHEREOF, the undersigned has caused this Acquisition Note to be duly executed by its authorized officers as of the day and year above written. KAYE GROUP INC. By: -------------------------------- Name: Title: A-3 STATE OF : ss. COUNTY OF : I CERTIFY that on _______________________, ___________________ personally appeared before me and that this person acknowledged under oath, to my satisfaction, that: (a) this person is the _______________ of KAYE GROUP INC., the corporation named in the attached document; (b) this person executed and delivered the attached document as the voluntary act and deed of the corporation; and (c) this person was authorized by the board of directors of the corporation to execute and deliver the attached document on behalf of the corporation. ------------------------------ Notary Public A-4 GUARANTY AGREEMENT THIS GUARANTY AGREEMENT is made June 24, 1998 by KAYE INSURANCE ASSOCIATES, INC., a Delaware corporation, KAYE CORPORATION OF CONNECTICUT, a Delaware corporation, KAYE ADMINISTRATORS CORP., a Delaware corporation, KAYE SERVICES CORP., a Delaware corporation, KAYE-WESTERN INSURANCE & RISK SERVICES, INC., a Delaware corporation and PROGRAM BROKERAGE CORPORATION, a Delaware corporation, each having an address c/o Kaye Group Inc., 122 East 42nd Street, New York, New York 10168 (collectively, the "Guarantors"), in favor of SUMMIT BANK, a New Jersey banking institute having an address at 250 Moore Street, Hackensack, New Jersey 07601 (the "Bank"). RECITALS A. Concurrently herewith, the Bank and Kaye Group Inc. (the "Borrower") are entering into a Loan Agreement (the "Loan Agreement") pursuant to which the Bank is making available to the Borrower, on the terms and conditions contained therein, (i) a revolving loan in the principal amount of up to $4,500,000 and (ii) a term loan in the principal amount of $5,000,000 (collectively, the "Loans"). B. Pursuant to the Loan Agreement, and to evidence the Loans, (i) the Borrower is concurrently herewith executing and delivering to the Bank a Revolving Note in the maximum principal amount of $4,500,000, (ii) the Borrower is concurrently herewith executing and delivering to the Bank a Term Note in the original principal amount of $5,000,000 and (iii) the Borrower may in the future execute and deliver to the Bank one or more Acquisition Notes to evidence Acquisition Advances made or to be made under the Loan Agreement (the notes referred to in (i), (ii) and (iii) above, together with all modifications thereto or substitutions therefor, are hereinafter collectively referred to as the "Notes"). C. As a condition to entering into the Loan Agreement and making the Loans to the Borrower pursuant thereto, the Bank has required that each of the Guarantors guarantee to the Bank the payment and performance of the obligations of the Borrower under the Loan Agreement, the Loans, the Notes and the other Loan Documents. D. Each Guarantor is a wholly owned subsidiary of the Borrower, which shall loan a portion of the proceeds of the Loans to the Guarantors, and as such each Guarantor will derive direct and immediate benefits from the making of the Loans by the Bank to the Borrower. NOW, THEREFORE, in order to induce the Bank to enter into the Loan Agreement and make the Loans as aforesaid, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Guarantors do hereby agree for the benefit of the Bank as follows: ARTICLE I 1.1 Definitions. Terms used herein and not otherwise defined shall have the meanings ascribed to them in the Loan Agreement. 1.2 Joint and Several Liability. Any agreement, promise, undertaking, representation or warranty of the Guarantors set forth in this Guaranty and in any document or certification executed and delivered by the Guarantors in connection with this Guaranty shall be deemed to have been made and given jointly and severally by each of the Guarantors, and each reference herein to the Guarantors shall be deemed to be a reference to each Guarantor individually and/or collectively, as may be necessary for the Bank to obtain the full benefit of this Guaranty and the rights and powers herein granted. 1.3 Guaranty. The Guarantors hereby irrevocably and unconditionally guarantee to the Bank the prompt and complete payment and performance when due (whether at stated maturity, by acceleration or otherwise) of all of the Obligations, including, without limitation, all principal, interest (including post-petition interest in the event the Borrower files or has filed against it a petition in bankruptcy) and other amounts payable under the Loan Agreement or the Notes. 1.4 Guaranty Unconditional. The obligations of the Guarantors hereunder are irrevocable, absolute, and unconditional, irrespective of the value, genuineness, validity, regularity, or enforceability of any Loan Document or any term or provision thereof or of any other document relating to the Obligations or any other circumstance which might otherwise constitute a legal or equitable discharge or defense of a surety or guarantor. 1.5 Consent. The Guarantors hereby consent that any or all of the following actions may be taken or things done without notice to the Guarantors and without affecting the liability of the Guarantors under this Guaranty: (a) The time for performance of or compliance with any of the Obligations may be accelerated or extended or such performance or compliance may be waived by the Bank (including, without limitation, the renewal, extension, acceleration, or other change in time of payment, or other terms of, the Obligations such as an increase or decrease in the rate of interest thereon); (b) Any of the acts referred to in the terms of the Loan Documents may be performed, including without limitation, the making of Advances or Acquisition Advances from time to time; (c) The terms of any of the Obligations or any term or condition in any Loan Document may be amended by the Borrower and the Bank for the purpose of adding any provisions thereto or changing in any manner the rights of the Bank or of the Borrower thereunder; (d) Any collateral which has been granted or may hereafter be granted by the Borrower to the Bank to secure all or any part of the Obligations, including without limitation, the collateral described in the Loan Agreement or in the Pledge and Security Agreement (the "Bank Collateral"), may be exchanged, surrendered, or otherwise dealt with, and the Bank's interest thereunder may be released and may or may not be perfected, all as the Bank in its sole discretion may determine; (e) The Bank may apply any of the aforesaid Bank Collateral to the Obligations and direct the order or manner of sale thereof, including, without limitation, a nonjudicial sale, as the Bank may in its sole discretion determine (in accordance with the terms and conditions of the relevant Loan Documents with respect thereto), all without affecting the liability of the Guarantor hereunder; and (f) The Bank may take any action or permit or waive any action or inaction on the part of any party with respect to the Obligations and any Bank Collateral or other security granted in connection therewith, all without affecting the liability of the Guarantor hereunder. -2- 1.6 The Bank Collateral. The Guarantors acknowledge that their obligations hereunder will not be affected by (i) the Bank's failure to properly create a lien on or security interest in the Bank Collateral, (ii) the Bank's failure to create or maintain a priority with respect to the lien on, or security interest purported to be created in, the Bank Collateral or (iii) any act or omission of the Bank (whether negligent or otherwise) which adversely affects the Bank's purported security interest in the Bank Collateral or lien thereon or the priority of such security interest or lien. 1.7 Tolling of Statute of Limitations. The Guarantors agree that any payment of any of the Obligations or other acts which shall toll any statute of limitations applicable to the Obligations shall also toll the statute of limitations applicable to the Guarantors' liability hereunder. 1.8 Waiver. The Guarantors hereby expressly waive diligence, presentment, demand for payment, protest, the benefit of any statute of limitations affecting the Borrower's liability under any Loan Document or the enforcement of this Guaranty, the benefit of any act or omission by the Bank which directly or indirectly results in or aids the discharge of the Borrower or any of the Obligations by operation of law or otherwise, all notices whatsoever, including, without limitation, notice of acceptance of this Guaranty, the incurring of the Obligations or notice of any Default or Event of Default under the Loan Documents, and any requirement that the Bank exhaust or enforce any right, power or remedy or proceed against the Borrower, the Bank Collateral or any other security for, or any other guarantor of, or any other party liable for, any of the Obligations. The Guarantors specifically agree that it will not be necessary or required, and the Guarantors shall not be entitled to require, that the Bank file suit or proceed to assert or obtain a claim for personal judgment against the Borrower for the Obligations or to make any effort at collection or enforcement of the Obligations from the Borrower or foreclose against or seek to realize upon the Bank Collateral or any other security now or hereafter existing for the Obligations or this Guaranty or file suit or proceed to obtain or assert a claim for the Obligations or make any effort at collection of the Obligations from any such party or exercise or assert any other right or remedy to which the Bank is or may be entitled in connection with the Obligations or any security or guarantee relating thereto or assert or file any claims against the assets of the Borrower or other person liable for the Obligations, or any part thereof, before or as a condition of enforcing the liability of the Guarantors hereunder. 1.9 Certain Rights. The Bank may pursue its rights and remedies under this Guaranty and shall be entitled to payment hereunder notwithstanding (i) any other guarantee by any other party of all or any part of the Obligations, (ii) any action taken by the Bank to enforce any of its rights or remedies under such other guarantee or any security agreement, mortgage or deed of trust, or (iii) any payment received under such other guarantee or any security agreement, mortgage or deed of trust. In pursuing its rights under this Guaranty or any other Loan Document, the Bank need not join the Guarantors in any suit against the Borrower or join the Borrower or any other guarantors in any suit against the Guarantor. The Guarantors waive any right to require the Bank to give notice of terms, time, and place of any public or private sale of any Bank Collateral or any other security granted in connection with the Obligations or to comply with any other provisions of Section 9-504 of the Uniform Commercial Code. 1.10 Continuing Guaranty. This Guaranty shall be a continuing guaranty and any other guarantor or guarantors of all or a portion of the Obligations may be released without affecting the liability of the Guarantors hereunder. 1.11 Subrogation. Unless and until the Obligations have been paid and performed in full, (a) no payment hereunder by the Guarantors shall entitle the Guarantors by subrogation to the rights of the -3- Bank or any other guarantor of any of the Obligations or otherwise to any payment by the Borrower or out of the Borrower's property and (b) the Guarantors waive any right to enforce any remedy of the Bank which the Bank now or may hereafter have against the Borrower, any other guarantor or any other person and waive any benefit of, or any right to participation in, any security whatsoever now or hereafter held by or granted to the Bank, including, but not limited to, any rights which the Guarantors may have by reason of any rights, powers, or remedies of the Borrower in connection with any anti-deficiency or similar laws limiting or qualifying the Obligations. 1.12 Compromise and Settlement. No compromise, settlement, release, renewal, extension, indulgence, change in, waiver, or modification of any of the Obligations or the release or discharge of the Borrower from the performance of any of the Obligations shall release or discharge the Guarantors from this Guaranty. 1.13 Insolvency. The voluntary or involuntary liquidation, dissolution, sale or other disposition of all or substantially all the assets and liabilities, or receivership, insolvency, bankruptcy, assignment for the benefit of creditors, reorganization, or other proceeding affecting the Borrower or the disaffirmance of any Loan Document in any such proceeding shall not release or discharge the Guarantors from this Guaranty. 1.14 Further Payments. The Guarantors further agree to pay forthwith, upon demand, all costs and expenses (including reasonable attorneys' fees) incurred or expended by the Bank in connection with this Guaranty and the enforcement thereof. ARTICLE II 2.1 Representations and Warranties. In order to induce the Bank to enter into the Loan Agreement and to make the Loans to the Borrower contemplated thereby, each of the Guarantors hereby represents and warrants to the Bank as follows: (a) To the extent same relate to or concern the Guarantors, each of the representations and warranties contained in the Loan Agreement are hereby incorporated herein by reference, and each Guarantor hereby makes such representations and warranties to and for the benefit of the Bank as if such representations and warranties were set forth at length herein. (b) Without limiting the generality of the foregoing, each Guarantor represents and warrants that (i) such Guarantor has the full power and authority to execute, deliver and perform any action which may be necessary or advisable to carry out the terms of this Guaranty, and (ii) this Guaranty has been duly executed and delivered by such Guarantor and is the legal, valid and binding obligation of such Guarantor, enforceable against such Guarantor in accordance with its terms. 2.2 Covenants. Each Guarantor covenants and agrees that until all the Obligations have been satisfied and paid in full and the Bank has no further obligation to extend credit to the Borrower under the Loan Agreement, the Guarantors will comply with the following covenants: (a) The Guarantors shall pay dividends to the Borrower and otherwise take such actions within their power to enable the Borrower to fully perform and observe all of the covenants, agreements and obligations of the Borrower under each of the Loan Documents to which the Borrower is a party. -4- (b) For as long as any of the Obligations are outstanding, no Guarantor shall transfer, assign or otherwise dispose of any material asset other than in a bona fide, arm's length transaction. ARTICLE III 3. Event of Default. The occurrence of any Event of Default under the Loan Agreement, the Notes or any of the other Loan Documents shall constitute an Event of Default hereunder. ARTICLE IV 4. Remedies. Upon the occurrence of an Event of Default or in the event that any portion of the Obligations shall have been declared due and payable (whether at the stated maturity, by acceleration or otherwise), the Bank may, in addition to all other rights and remedies as may be available at law or in equity or under the terms of any of the Loan Documents and without demand of performance or other demand, advertisement or notice of any kind, immediately set off any or all of the Obligations against any property of the Guarantors which may now or hereafter be in the Bank's possession or control, and such right of setoff shall be deemed to have been exercised immediately upon the occurrence of such Event of Default even though such setoff is not noted on the records of the Bank or the Bank until a later time. The Guarantors shall be liable for the deficiency if the proceeds of any sale or other disposition of any Bank Collateral are insufficient to pay all amounts to which the Bank is entitled hereunder, including the fees of any attorneys employed by the Bank to collect such deficiency. ARTICLE V 5.1 No Waiver; Cumulative Remedies. No failure to exercise and no delay in exercising, on the part of the Bank, any right, power or privilege hereunder, shall operate as a waiver thereof; nor shall any single or partial exercise of any right, power or privilege hereunder preclude any other or further exercise thereof or the exercise thereof or the exercise of any other right, power or privilege. The rights and remedies herein provided are cumulative and not exclusive of any rights or remedies provided by law. 5.2 Amendment. No modification, amendment or waiver of any provision of this Guaranty shall be effective unless the same shall be in writing and signed by the Bank and then any such waiver or consent shall be effective only in the specific instance and for the purpose for which given. 5.3 Successors and Assigns. This Guaranty shall be binding upon and inure to the benefit of the parties hereto, all future holders of the Obligations and their respective successors and assigns. 5.4 Severability. In case any one or more of the provisions contained in this Guaranty should be invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not in any way be affected or impaired thereby. 5.5 Governing Law; No Third Party Rights. This Guaranty and the rights and obligations of the parties hereunder shall be governed by and construed and interpreted in accordance with the laws of the State of New Jersey. This Guaranty is solely for the benefit of the Bank and its successors -5- and assigns, and no other person shall have any right, benefit, priority or interest in, under or because of the existence of, this Guaranty. 5.6 Counterparts. This Guaranty may be executed by the parties hereto in any number of counterparts, each of which shall be an original and all of which shall constitute one and the same instrument. 5.7 Subordination of Loans. Any loans now existing or hereafter made by the Guarantors to the Borrower are hereby subordinated to the repayment in full of all of the Obligations. The provisions of this Section 5.7 shall survive the termination of this Guaranty. 5.8 Waiver of Jury Trial; Consent to Jurisdiction. AFTER CONSULTATION WITH COUNSEL, EACH GUARANTOR, IN CONNECTION WITH ANY LITIGATION RELATING TO THIS GUARANTY OR THE LOANS, HEREBY IRREVOCABLY (i) WAIVES ITS RIGHT TO A TRIAL BY JURY, (ii) CONSENTS TO THE NON-EXCLUSIVE JURISDICTION OF THE STATE AND FEDERAL COURTS OF THE STATE OF NEW JERSEY, (iii) WAIVES ALL DEFENSES, INCLUDING WITHOUT LIMITATION, FORUM NON CONVENIENS, TO EITHER OF THE AFORESAID COURTS ASSERTING PERSONAL JURISDICTION OVER SUCH GUARANTOR AND (iv) APPOINTS IVY FISCHER, ESQ. (WHOSE ADDRESS IS 30 FAIRFIELD STREET, MONTCLAIR, NEW JERSEY 07042) AS ITS AGENT FOR PURPOSES OF RECEIVING SERVICE OF PROCESS IN ANY SUCH LITIGATION. In any such litigation, each Guarantor hereby agrees that service of process may be effected by mailing such process to its agent, at such agent's address or to such Guarantor at the address set forth on page 1 of this Guaranty or such other address as such Guarantor shall have provided the Bank in writing, by reputable overnight courier providing a receipt against delivery or by certified mail, return receipt requested. IN WITNESS WHEREOF, the Guarantors have duly executed and delivered this Guaranty as of the day and year first above written. KAYE INSURANCE ASSOCIATES, INC. By: ------------------------------- Michael P. Sabanos Senior Vice President & Chief Financial Officer [Signatures continued on next page] -6- [Signatures continued from previous page] KAYE CORPORATION OF CONNECTICUT By: ------------------------------- Michael P. Sabanos Senior Vice President & Chief Financial Officer KAYE ADMINISTRATORS CORP. By: ------------------------------- Michael P. Sabanos Senior Vice President & Chief Financial Officer KAYE SERVICES CORP. By: ------------------------------- Michael P. Sabanos Senior Vice President & Chief Financial Officer KAYE-WESTERN INSURANCE & RISK SERVICES, INC. By: ------------------------------- Michael P. Sabanos Senior Vice President & Chief Financial Officer PROGRAM BROKERAGE CORPORATION By: ------------------------------- Michael P. Sabanos Senior Vice President & Chief Financial Officer -7- PLEDGE AND SECURITY AGREEMENT THIS PLEDGE AND SECURITY AGREEMENT is dated June 24, 1998 by KAYE GROUP INC., a Delaware corporation having an address of 122 East 42nd Street, New York, New York 10168 (the "Borrower") in favor of SUMMIT BANK, a banking institution of the State of New Jersey having an address at 250 Moore Street, Hackensack New Jersey 07601 (the "Bank"). RECITALS A. The Borrower is the record and beneficial owner of (i) all of the issued and outstanding shares of capital stock of Old Lyme Insurance Company of Rhode Island, Inc., a Rhode Island corporation ("OLRI"), (ii) all of the issued and outstanding shares of capital stock of Old Lyme Insurance Company, Ltd., a Bermuda corporation ("OLB") and (iii) all of the issued and outstanding shares of capital stock of Claims Administration Corporation, a Delaware corporation ("CAC"). B. Concurrently herewith, the Borrower and the Bank are entering into a Loan Agreement (the "Loan Agreement") pursuant to which the Bank is making available to the Borrower, on the terms and conditions contained therein, (i) a revolving loan in the principal amount of up to $4,500,000 and (ii) a term loan in the principal amount of $5,000,000 (collectively, the "Loans"). C. Pursuant to the Loan Agreement, and to evidence the Loans, (i) the Borrower is concurrently herewith executing and delivering to the Bank a Revolving Note in the maximum principal amount of $4,500,000, (ii) the Borrower is concurrently herewith executing and delivering to the Bank a Term Note in the original principal amount of $5,000,000 and (iii) the Borrower may in the future execute and deliver to the Bank one or more Acquisition Notes to evidence Acquisition Advances made or to be made under the Loan Agreement (the notes referred to in (i), (ii) and (iii) above, together with all modifications thereto or substitutions therefor, are hereinafter collectively referred to as the "Notes"). D. As a condition to entering into the Loan Agreement and making the Loans to the Borrower pursuant thereto, and in order to secure the Obligations of the Borrower to the Bank under the Loan Agreement, the Loans, the Notes, the other Loan Documents or otherwise, the Bank has required that the Borrower grant to the Bank a pledge of and security interest in all of the Pledged Stock (as hereinafter defined), all on the terms and conditions set forth herein. NOW, THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the receipt of which is hereby acknowledged, the parties hereto agree as follows: 1. Defined Terms. Unless otherwise defined herein, terms defined in the Loan Agreement shall have such defined meanings when used herein. 2. Pledge. As collateral security for the prompt and complete payment when due of the Obligations, together with any and all expenses which may be incurred by the Bank in collecting any or all of the Obligations or enforcing any of its rights under this Agreement, the Borrower hereby pledges, assigns, hypothecates and transfers to the Bank, and grants the Bank a first lien on and security interest in, (a) the stock representing all of the issued and outstanding shares of OLRI, together with all proceeds of the foregoing, (b) the stock representing all of the issued and outstanding shares of OLB, together with all proceeds of the foregoing and (c) the stock representing all of the issued and -1- outstanding shares of CAC, together with all proceeds of the foregoing (all of the stock described in the foregoing clauses (a), (b) and (c) being herein collectively referred to as the "Pledged Stock"). Concurrently herewith, the Borrower is delivering to the Bank certificates representing all of the Pledged Stock, together with appropriate undated stock powers duly executed in blank. 3. Stock Dividends, Distributions, etc. If, while this Agreement is in effect, the Borrower shall become entitled to receive or shall receive any stock certificate (including, without limitation, any certificate representing a stock dividend or a distribution in connection with any reclassification, increase or reduction of capital, or issued in connection with any reorganization or formation of a new Subsidiary), option or rights, whether as an addition to, in substitution of, or in exchange for any shares of any Pledged Stock, or otherwise, the Borrower shall accept the same as the Bank's agent, hold the same in trust on behalf of and for the benefit of the Bank and deliver the same forthwith to the Bank in the exact form received, with the indorsement of the Borrower when necessary and/or appropriate undated stock powers duly executed in blank, to be held by the Bank, subject to the terms hereof, as additional collateral security for the Obligations. Any sums paid upon or in respect of the Pledged Stock upon the liquidation or dissolution of the issuer thereof shall be paid over to the Bank to be held as additional collateral security for the Obligations; and in case any distribution of capital shall be made on or in respect of the Pledged Stock or any property shall be distributed upon or with respect to the Pledged Stock pursuant to the recapitalization or reclassification of the capital of the issuer thereof or pursuant to the reorganization thereof, the property so distributed shall be delivered to the Bank to be held by it as additional collateral security for the Obligations. All sums of money and property so paid or distributed in respect of the Pledged Stock which are received by the Borrower shall, until paid or delivered to the Bank, be held by the Borrower in trust as additional collateral security for the Obligations. 4. Collateral. All property at any time pledged with the Bank hereunder and all income therefrom (other than the cash dividends permitted pursuant to Section 5 below) and proceeds thereof, including without limitation the Pledged Stock, are herein collectively sometimes called the "Collateral". 5. Cash Dividends; Voting Rights. Unless a Default or an Event of Default under the Loan Agreement shall have occurred and be continuing and to the extent permitted under the terms of the Loan Agreement, the Borrower shall be entitled to receive all cash dividends paid in respect of the Pledged Stock, to vote the Pledged Stock and to give consents, waivers and ratifications in respect of the Pledged Stock; provided, however, that no vote shall be cast or consent, waiver or ratification given or action taken which would impair the Collateral or the value thereof or be inconsistent with or violate any provision of this Agreement, the Loan Agreement or any of the other Loan Documents. After a Default or an Event of Default has occurred and is continuing, the Bank shall be entitled to receive all cash dividends and distributions and to vote the Pledged Stock. 6. Rights of the Bank. The Bank shall not be liable for failure to collect or realize upon the Obligations or any collateral security or guarantee therefor, or any part thereof, or for any delay in so doing, nor shall the Bank be under any obligation to take any action whatsoever with regard thereto. Any or all shares of the Pledged Stock held by the Bank hereunder may, if an Event of Default has occurred and is continuing, without prior notice, be registered in the name of the Bank or its nominee, and the Bank or its nominee may thereafter, without prior notice, exercise all voting and corporate rights at any meeting of any corporation issuing any of the shares included in the Pledged Stock and exercise any and all rights of conversion, exchange, subscription or any other rights, privileges or options pertaining to any shares of the Pledged Stock as if the Bank or its nominee were the absolute owner thereof, including, without limitation, the right to exchange at its discretion, any and all of the -2- Pledged Stock upon the merger, consolidation, reorganization, recapitalization or other readjustment of any corporation issuing any of such shares or upon the exercise by any such issuer or the Bank of any right, privilege or option pertaining to any shares of the Pledged Stock, and in connection therewith, to deposit and deliver any and all of the Pledged Stock with any committee, depository, transfer agent, registrar or other designated agency upon such terms and conditions as it may determine, all without liability except to account for property actually received by it. Notwithstanding the foregoing, the Bank shall have no duty to exercise any of the aforesaid rights, privileges or options and shall not be responsible for any failure to do so or delay in so doing. 7. Remedies. In the event that the Obligations shall be declared due and payable (whether at the stated maturity, by acceleration or otherwise), the Bank, without demand of performance or other demand, advertisement or notice of any kind (except the notice specified below of time and place of public or private sale) to or upon the Borrower or any other Person (all and each of which demands, advertisements and/or notices are hereby expressly waived), may forthwith collect, receive, appropriate and realize upon the Collateral, or any part thereof, and/or may forthwith sell, assign, give option or options to purchase, contract to sell or otherwise dispose of and deliver said Collateral, or any part thereof, in one or more parcels at public or private sale or sales, at any exchange, broker's board or at any of the Bank's offices or elsewhere upon such terms and conditions as it may deem advisable and at such prices as it may deem best, for cash or on credit or for future delivery without assumption of any credit risk, with the right of the Bank upon any such sale or sales, public or private, to purchase the whole or any part of said Collateral so sold, free of any right or equity of redemption in the Borrower, which right or equity is hereby expressly waived or released. After deducting all reasonable costs and expenses of every kind incurred in connection with any collection, recovery, receipt, appropriation, realization or sale (collectively, a "Sale") or incidental to the care, safekeeping or otherwise of any and all of the Collateral or in any way relating to the rights of the Bank hereunder, including reasonable attorneys' fees and expenses, the Bank shall apply the net proceeds of such Sale to the payment in full of the Obligations, and only after so paying over such net proceeds and after the payment by the Bank of any other amount required by any provision of law need the Bank account for the surplus, if any, to the Borrower. The Borrower agrees that the Bank need not give more than ten (10) days' notice of the time and place of any public sale or of the time after which a private sale or other intended disposition is to take place and that such notice is reasonable notification of such matters. In addition to the rights and remedies granted to it in this Agreement and in any other instrument or agreement securing, evidencing or relating to any of the Obligations, the Bank shall have all the rights and remedies of a secured party under the Code. The Borrower shall be liable for the deficiency if the proceeds of any sale or other disposition of the Collateral are insufficient to pay the Obligations and all expenses, including, without limitation, attorneys' fees and costs, which may be incurred by the Bank in collecting any or all of the Obligations and enforcing its rights hereunder. 8. Representations, Warranties and Covenants of the Borrower. The Borrower represents and warrants that: (a) the Borrower owns one hundred (100%) percent of the Pledged Stock; (b) the Borrower is legal record and beneficial owner of, and has good and marketable title to, the Pledged Stock, subject to no Lien, except the Lien created by this Agreement; (c) all the shares of the Pledged Stock have been duly and validly issued, are fully paid and non-assessable; (d) there are no outstanding subscriptions, options, warrants, rights, calls, contracts, commitments, understandings or agreements to purchase or otherwise acquire or relating to the issuance of any shares or other securities of OLRI, OLB or CAC; (e) the pledge, assignment and delivery of the Pledged Stock pursuant to this Agreement creates a valid first lien on and a first perfected security interest in such shares of the Pledged Stock, and the proceeds thereof, subject to no prior Lien or to any agreement purporting to grant to any third party a Lien on the property or assets of the Borrower which would include the Pledged Stock; and (f) the Pledged Stock is evidenced by the certificates described on Exhibit A, and -3- there are no other Stock Certificates outstanding for any other shares of the capital stock of OLRI, OLB or CAC. The Borrower covenants and agrees that the Borrower will defend the Bank's right, title and security interest in and to the Pledged Stock and the proceeds thereof against the claims and demands of all Persons whomsoever; and covenants and agrees that the Borrower will have like title to and right to pledge any other property at any time hereafter pledged to the Bank as Collateral hereunder and will likewise defend the Bank's right thereto and security interest therein. 9. No Disposition, etc. The Borrower shall not sell, assign, transfer, exchange, or otherwise dispose of, or grant any option with respect to, the Collateral, nor will the Borrower create, incur or permit to exist any Lien with respect to any of the Collateral, or any interest therein, or any proceeds thereof, except for the Lien provided for by this Agreement. The Borrower shall not vote to enable any issuer to, and will not otherwise permit any issuer to, issue any stock or other securities of any nature in addition to or in exchange or substitution for the Pledged Stock. 10. Registration. (a) The Borrower recognizes that the Bank may be unable to effect a public sale of any or all the Pledged Stock by reason of certain prohibitions contained in the Securities Act of 1933, as amended (the "Securities Act"), and applicable state securities laws, but may be compelled to resort to one or more private sales thereof to a restricted group of purchasers who will be obliged to agree, among other things, to acquire such securities for their own account for investment and not with a view to the distribution or resale thereof. The Borrower acknowledges and agrees that any such private sale may result in prices and other terms less favorable to the seller than if such sale were a public sale. The Bank shall be under no obligation to delay a sale of any of the Pledged Stock for the period of time necessary to permit any issuer of such securities to register such securities for public sale under the Securities Act, or under applicable state securities laws, even if such issuer would agree to do so. (b) The Borrower further agrees to do or cause to be done all such other reasonable acts and things as may be necessary to make such sale or sales of any portion or all of the Pledged Stock valid and binding and in compliance with any and all applicable laws, regulations, order, writs, injunctions, decrees or awards of any and all courts, arbitrators or governmental instrumentalities, domestic or foreign, having jurisdiction over any such sale or sales, all at the Borrower's expense, but excluding registration of the Pledged Stock under the Securities Act. The Borrower further agrees that a breach of any of the covenants contained in this Section 10 will cause irreparable injury to the Bank, and the Bank has no adequate remedy at law in respect of such breach and, as a consequence, agree that each and every covenant contained in this Section 10 shall be specifically enforceable against the Borrower, and the Borrower hereby waives and agrees not to assert any defenses against an action for specific performance of such covenants except for a defense that no Event of Default has occurred and is continuing under the Loan Agreement. 11. Further Assurances. At any time and from time to time upon the written request of the Bank, the Borrower shall execute and deliver such further documents and do such further acts and things as the Bank may reasonably request in order to effect the purposes of this Agreement. 12. Severability. Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. -4- 13. No Waiver; Cumulative Remedies. The Bank shall not by any act, delay, omission or otherwise be deemed to have waived any of its rights or remedies hereunder, and no waiver shall be valid unless executed and delivered in accordance with the provisions of Section 15 hereof, and then only to the extent therein set forth. A waiver by the Bank of any right or remedy hereunder on any one occasion shall not be construed as a bar to any right or remedy which the Bank would otherwise have on any future occasion. No failure to exercise nor any delay in exercising on the part of the Bank, any right, power or privilege hereunder, shall operate as a waiver thereof; nor shall any single or partial exercise of any right, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies herein provided are cumulative and may be exercised singly or concurrently, and are not exclusive of any rights or remedies provided by law. 14. Notices. All notices, demands, requests and other communications provided for or permitted under this Agreement shall be in writing and shall be delivered to the parties hereto by certified mail, return receipt requested, overnight courier or hand delivery to the addresses set forth above and shall be deemed effective upon receipt. 15. Waivers, Amendments; Successors and Assigns; Governing Law. None of the terms or provisions of this Agreement may be waived, altered, modified, terminated or amended except by an instrument in writing, duly executed by the Bank. This Agreement and all obligations of the Borrower hereunder shall be binding upon the Borrower and its successors and assigns, and shall inure to the benefit of the Bank and its successors and assigns. This Agreement shall be governed by, and be construed and interpreted in accordance with, the laws of the State of New Jersey. IN WITNESS WHEREOF, the Borrower has caused this Agreement to be duly executed and delivered on the day and year first above written. KAYE GROUP INC. By: ---------------------------- Michael P. Sabanos Senior Vice President & Chief Financial Officer -5- EXHIBIT A PLEDGED STOCK: Type and No. Certificate Company of Shares No. ------- --------- --- OLRI 100,000 Shares Class A Preferred 13 OLRI 200,000 Shares Common 12 OLB 100,000 Shares Common 69 CAC 100 Shares Common 4 A-1 TERM NOTE $5,000,000 June 24, 1998 FOR VALUE RECEIVED, the undersigned, KAYE GROUP INC., a Delaware corporation (the "Borrower"), hereby unconditionally promises to pay on or before June 24, 2002 (the "Term Loan Maturity Date"), to the order of SUMMIT BANK, a banking institution of the State of New Jersey (the "Bank"), at the office of the Bank located at 250 Moore Street, Hackensack, New Jersey, or at such other location as the Bank shall designate, in lawful money of the United States of America and in immediately available funds, the principal amount of $5,000,000. This Note is being executed and delivered by the Borrower to the Bank pursuant to Section 2.16 of that certain Loan Agreement dated the date hereof between the Borrower and the Bank (the "Agreement"). Terms defined in the Agreement shall have the same meanings when used herein. The Borrower further agrees to pay interest in like money at such office on the unpaid principal amount hereof from time to time at a rate or rates per annum as provided in the Agreement. The principal of and interest on this Note shall be payable at the times, and in the manner, provided in the Agreement. The Borrower shall pay to the Bank a late charge (the "Late Charge") in an amount equal to five percent (5%) of any payment which is more than ten (10) days in arrears to cover the extra expense involved in handling delinquent payments, but in no event shall any Late Charge be less than $25 or more than $2,500. The term "payments" shall be construed to include principal, interest, fees and any other amount due under the terms of this Note or any of the other Loan Documents. Acceptance by the Bank of payment of a Late Charge shall in no way be construed to be an election of remedies or waiver by the Bank of any of its rights at law or under the terms of any of the Loan Documents. Subject to the provisions of Section 2.25 of the Agreement, this Note may be prepaid, in whole or in part, at one time or from time to time, without premium or penalty in accordance with the provisions of the Agreement. This Note is secured by the Collateral described in the Agreement, the Pledge and Security Agreement and the other Loan Documents, and is guaranteed by the Guarantors pursuant to the Guaranty Agreement. The Bank may declare this Note to be immediately due and payable if any of the following events shall have occurred and be continuing: (1) Failure by the Borrower to make any payment of principal or interest under this Note on any date when due; or (2) An Event of Default shall have occurred under the Agreement or any of the other Loan Documents. Upon the occurrence of any Event of Default, the Bank may, in addition to such other and further rights and remedies as provided by law or under any of the Loan Documents, (i) collect interest on such overdue amount from the date of such maturity until paid at a rate per annum equal to three (3%) percent in excess of the Base Rate, (ii) setoff such amount against any deposit account maintained in the Bank by the Borrower, and such right of setoff shall be deemed to have been exercised immediately upon such stated or accelerated maturity even though such setoff is not noted on the records of the Bank until a later time and (iii) hold as security any property heretofore or hereafter delivered into the custody, control or possession of the Bank or any entity acting as agent for the Bank by any person liable for the payment of this Note. This Note may not be changed orally, but only by an agreement in writing, signed by the party against whom enforcement of any waiver, change, modification or discharge is sought. Should the indebtedness represented by this Note or any part hereof be collected at law or in equity, or in bankruptcy, receivership, or any other court proceeding, or should this Note be placed in the hands of attorneys for collection upon default, the Borrower agrees to pay, in addition to the principal and interest due and payable hereon, all reasonable costs of collecting or attempting to collect this Note, including reasonable attorneys' fees and expenses. This Note shall be and remain in full force and effect and in no way impaired until the actual payment thereof to the Bank, its successors or assigns. Anything herein to the contrary notwithstanding, the obligations of the Borrower under this Note shall be subject to the limitation that payments of interest shall not be required to the extent that receipt of any such payment by the Bank would be contrary to provisions of law applicable to the Bank limiting the maximum rate of interest which may be charged or collected by the Bank. The Borrower and all endorsers and guarantors of this Note hereby waive presentment, demand for payment, protest and notice of dishonor of this Note. This Note is binding upon the Borrower and its successors and assigns and shall inure to the benefit of the Bank and its successors and assigns. This Note and the rights and obligations of the parties hereto shall be subject to and governed by the laws of the State of New Jersey. IN WITNESS WHEREOF, the undersigned has caused this Term Note to be duly executed by its authorized officers as of the day and year above written. KAYE GROUP INC. By: /s/ Michael P. Sabanos ------------------------------ Michael P. Sabanos Senior Vice President & Chief Financial Officer -2- REVOLVING NOTE $4,500,000 June 24, 1998 FOR VALUE RECEIVED, the undersigned, KAYE GROUP INC., a Delaware corporation (the "Borrower"), hereby unconditionally promises to pay on or before July 31, 1999 (the "Revolving Loan Termination Date"), to the order of SUMMIT BANK, a banking institution of the State of New Jersey (the "Bank"), at the office of the Bank located at 250 Moore Street, Hackensack, New Jersey, or at such other location as the Bank shall designate, in lawful money of the United States of America and in immediately available funds, the principal amount of the lesser of (i) $4,500,000 or (ii) so much thereof as shall have been advanced (the "Advances") by the Bank to the Borrower pursuant to that certain Loan Agreement dated the date hereof between the Borrower and the Bank (the "Agreement"). Terms defined in the Agreement shall have the same meanings when used herein. The Borrower further agrees to pay interest in like money at such office on the unpaid principal amount hereof from time to time at a rate or rates per annum and at such times as are provided in the Agreement. The Borrower shall pay to the Bank a late charge (the "Late Charge") in an amount equal to five percent (5%) of any payment which is more than ten (10) days in arrears to cover the extra expense involved in handling delinquent payments, but in no event shall any Late Charge be less than $25 or more than $2,500. The term "payments" shall be construed to include principal, interest, fees and any other amount due under the terms of this Note or any of the other Loan Documents. Acceptance by the Bank of payment of a Late Charge shall in no way be construed to be an election of remedies or waiver by the Bank of any of its rights at law or under the terms of any of the Loan Documents. Subject to the provisions of Section 2.25 of the Agreement, this Note may be prepaid, in whole or in part, at one time or from time to time, without premium or penalty in accordance with the provisions of the Agreement. All payments made hereunder shall be applied: first, to any fees or other charges owing to the Bank hereunder; second, to accrued and unpaid interest; and third, to the outstanding principal balance hereof. Notwithstanding the foregoing, upon the occurrence of an Event of Default, the Bank may apply payments received hereunder in such manner as it shall determine in its sole and absolute discretion. This Note is secured by the Collateral described in the Agreement, the Pledge and Security Agreement and the other Loan Documents, and is guaranteed by the Guarantors pursuant to the Guaranty Agreement. The Bank may declare this Note to be immediately due and payable if any of the following events shall have occurred and be continuing: (1) Failure by the Borrower to make any payment of principal or interest under this Note on any date when due; or (2) An Event of Default shall have occurred under the Agreement or any of the other Loan Documents. Upon the occurrence of any Event of Default, the Bank may, in addition to such other and further rights and remedies as provided by law or under the Agreement or any of the other Loan Documents, (i) collect interest on such overdue amount from the date of such maturity until paid at a rate per annum equal to three (3%) percent in excess of the Base Rate, (ii) setoff such amount against any deposit account maintained in the Bank by the Borrower, and such right of setoff shall be deemed to have been exercised immediately upon such stated or accelerated maturity even though such setoff is not noted on the records of the Bank until a later time and (iii) hold as security any property heretofore or hereafter delivered into the custody, control or possession of the Bank or any entity acting as agent for the Bank by any person liable for the payment of this Note. This Note may not be changed orally, but only by an agreement in writing, signed by the party against whom enforcement of any waiver, change, modification or discharge is sought. Should the indebtedness represented by this Note or any part hereof be collected at law or in equity, or in bankruptcy, receivership, or any other court proceeding, or should this Note be placed in the hands of attorneys for collection upon default, the Borrower agrees to pay, in addition to the principal and interest due and payable hereon, all reasonable costs of collecting or attempting to collect this Note, including reasonable attorneys' fees and expenses. This Note shall be and remain in full force and effect and in no way impaired until the actual payment thereof to the Bank or its successors or assigns. Anything herein to the contrary notwithstanding, the obligations of the Borrower under this Note shall be subject to the limitation that payments of interest shall not be required to the extent that receipt of any such payment by the Bank would be contrary to provisions of law applicable to the Bank limiting the maximum rate of interest which may be charged or collected by the Bank. The Borrower and all endorsers and guarantors of this Note hereby waive presentment, demand for payment, protest and notice of dishonor of this Note. This Note is binding upon the Borrower and its successors and assigns and shall inure to the benefit of the Bank and its successors and assigns. This Note and the rights and obligations of the parties hereto shall be subject to and governed by the laws of the State of New Jersey. IN WITNESS WHEREOF, the undersigned has caused this Revolving Note to be duly executed by its authorized officers as of the day and year above written. KAYE GROUP INC. By: /s/ Michael P. Sabanos ----------------------------- Michael P. Sabanos Senior Vice President & Chief Financial Officer -2- EX-10.18 3 AMENDMENT TO EMPLOYMENT AGREEMENT AMENDMENT TO EMPLOYMENT AGREEMENT AMENDMENT dated as of March 18, 1998, by and between Kaye Group Inc., a Delaware corporation ("Employer"), and Michael P. Sabanos ("Employee"). WHEREAS, Employer and Employee entered into an Employment Agreement ("Agreement"), made effective May 15, 1996, which is incorporated herein in its entirety; and WHEREAS, Employer and Employee desire to effect certain amendments to the Agreement, all as more fully set forth herein; NOW, THEREFORE, in consideration of the mutual promises and covenants hereinafter set forth and for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereby agree as follows: 1. Defined Terms. Capitalized terms not otherwise defined herein shall have the meaning ascribed to them in the Agreement. 2. Section 3.1.1 of the Agreement is hereby amended in its entirety and replaced with the following: _______An annual salary of $250,000, payable bi-weekly or at such other interval as Employer may establish for its usual payroll payment and subject to required withholding of taxes, social security, benefit payments, etc. 3. Section 4.1 and 4.2 of the Agreement are hereby amended in their entirety and replaced with the following: Employer and Employee acknowledge that Employee is an "employee at will." The employment of Employee hereunder and the Term of this Agreement (the "Term") shall commence on June 1, 1998, and shall continue thereafter unless and until notice of termination is given in writing by either party at least sixty (60) days prior to the termination date. 4. Section 5.5 of the Agreement is hereby amended in its entirety and replaced with the following: Restrictive Covenant In the event that Employee ceases to be an employee of Employer for any reason ("Withdrawal from the Company"), Employee may conduct business in competition with Employer. However, for the two year period immediately following the Withdrawal from the Company, Employee may not: (i) solicit, join, provide services to, advise, give assistance to, or contact any person or entity who 2 was a client of Employer, or any employee of such client, with respect to the provision of insurance or insurance-related services; (ii) solicit any persons or entities who, to the knowledge of Employee, are or were identified through leads developed while Employee was employed by Employer; (iii) solicit professional relationships introduced to such Employee by any employee or client of Employer while Employee was an employee of Employer; (iv) offer employment to or employ any person who is then, or had been within 6 months of such offer, an employee of Employer; or (v) solicit any employee of Employer to terminate his or her employment. Employee acknowledges that a material part of his/her current and future compensation, including salary increases and/or bonuses, is being paid in consideration for Employee's promises to honor the restrictive covenants and confidentiality aspects of this Employment Agreement. The Employee agrees that the restrictive covenants and confidentiality provisions set forth in this Employment Agreement are both reasonable and necessary to protect the vital interests of Employer and to promote an open and productive working relationship between Employer and Employee, from which Employee will benefit. 4. Section 6.11 of the Agreement is hereby amended to add the following sentence. Employee acknowledges that, in connection with this Agreement, Employee has been advised to seek the advise of counsel and is now so advised. 5. Section 7a.i.(B) of the Agreement is hereby amended as follows: The words "12 months" shall replace the words "18 months" in both places in which such words appear. IN WITNESS WHEREOF, the undersigned have executed this Amendment as of the date above written. MICHAEL P. SABANOS KAYE GROUP INC. ______________________________ By:___________________________________ Bruce D. Guthart, President & CEO 3 EX-10.22 4 ASSET PURCHASE AGREEMENT - ------------------------------------------------------------------------------ ASSET PURCHASE AGREEMENT among KAYE INSURANCE ASSOCIATES, INC. as the Buyer and SEAMAN, ROSS & WIENER, INC., AMSCO COVERAGE CORP. and D.S.I. ASSOCIATES, INC. as the Sellers and Douglas Schenendorf and Alex Seaman as Shareholders of the Sellers Dated as of January 1, 1999 - ------------------------------------------------------------------------------ TABLE OF CONTENTS (Cont'd.) TABLE OF CONTENTS PAGE 1. Sale and Purchase of Assets............................................1 1.1 Sale and Purchase..........................................1 1.2 Excluded Assets............................................3 1.3 Consents...................................................4 2. Non-Assumption of Any Liabilities......................................4 2.1 Non-Assumption.............................................4 3. Purchase Price, Payment, Etc...........................................6 3.1 Purchase Price.............................................6 3.2 Payment of Purchase Price and Payment of Interest Installments.........................6 3.3 Effect of Termination of Employment........................8 3.4 Transfer Taxes.............................................8 3.5 Allocation of Purchase Price...............................9 4. Time and Place of Closing; Effective Date..............................9 5. Representations and Warranties of the Sellers and the Shareholders.....9 5.1 Organization..............................................10 5.2 Capitalization............................................10 5.3 Authorization; Validity of Agreement......................10 5.4 No Violations; Consents and Approvals.....................11 5.5 Financial Statements......................................11 5.6 No Material Adverse Change................................12 5.7 No Undisclosed Liabilities................................12 5.8 Litigation; Compliance with Law; Licenses and Permits.....12 5.9 [Intentionally Omitted.]..................................13 5.10 Real Property. ...........................................13 5.11 Accounts, Intellectual Property; Computer Software........14 5.12 Title to Acquired Assets. ...............................15 5.13 Material Contracts........................................15 5.14 Taxes.....................................................16 5.15 Affiliated Party Transactions.............................18 5.16 [Intentionally Omitted.]..................................18 5.17 [Intentionally Omitted.]..................................18 5.18 Receivables...............................................18 5.19 Assets Utilized in the Business...........................18 5.20 Insurance.................................................18 5.21 [Intentionally Omitted.]..................................19 5.22 Commissions...............................................19 -i- TABLE OF CONTENTS (Cont'd.) PAGE 5.23 [Intentionally Omitted.]..................................19 5.24 [Intentionally Omitted.]..................................19 5.25 Directors, Officers and Certain Employees.................19 5.26 Year 2000.................................................19 5.27 No Misstatements or Omissions.............................20 5.28 Investment Undertaking....................................20 5.29 Absence of Sensitive Payments.............................20 5.30 [Intentionally Omitted.]..................................20 6. Representations and Warranties of the Buyer...........................20 6.1 Organization..............................................21 6.2 Authorization; Validity of Agreement......................21 6.3 No Violations; Consents and Approvals.....................21 6.4 Shares of Capital Stock...................................22 7. Other Agreements of the Parties.......................................22 7.1 Tax Returns; Taxes........................................22 7.2 Tax Indemnity.............................................23 7.3 Public Statements.........................................23 7.4 Other Actions.............................................23 7.5 Cooperation on Taxes......................................23 7.6 Employees.................................................23 7.7 Consents; Releases........................................25 7.8 [Intentionally Omitted.]..................................25 7.9 Exclusivity...............................................25 7.10 Prior Acts Insurance......................................25 7.11 Equipment, Intellectual Property and Other Assets. ......25 7.12 Non-Solicitation. .......................................26 7.13 Post Closing Adjustment...................................27 7.14 Refund of Security Deposit................................27 8. Conditions Precedent to the Closing...................................27 8.1 Conditions Precedent to the Buyer's Obligations to Close..27 8.2 Conditions Precedent to the Sellers' Obligations to Close.29 9. [Intentionally Omitted]...............................................31 10. Survival of Representations and Warranties, Rights and Obligations Subsequent to Closing...................................31 -ii- TABLE OF CONTENTS (Cont'd.) PAGE 10.1 Survival of Representations and Warranties of the Sellers and the Shareholders.......................31 10.2 Survival of Representations and Warranties of the Buyer...32 10.3 Collection of Assets......................................32 10.4 Payment of Debts..........................................32 10.5 Collection of Accounts Receivable.........................32 10.6 Letters to Customers......................................33 11. Indemnification.......................................................33 11.1 Indemnification by the Sellers and the Shareholders.......33 11.2 Indemnification by the Buyer..............................34 11.3 Indemnification Procedures................................34 12. Miscellaneous.........................................................36 12.1 Transaction Fees and Expenses.............................36 12.2 Notices...................................................36 12.3 Amendment.................................................37 12.4 Waiver....................................................37 12.5 Governing Law.............................................37 12.6 Jurisdiction..............................................37 12.7 Remedies..................................................38 12.8 Severability..............................................38 12.9 Further Assurances........................................38 12.10 Assignment................................................38 12.11 Binding Effect............................................38 12.12 No Third Party Beneficiaries..............................38 12.13 Entire Agreement..........................................38 12.14 Presumptions..............................................39 12.15 Headings..................................................39 12.16 Counterparts..............................................39 SIGNATURES..................................................................43 -iii- Schedules --------- Schedule 1.2(d) Office Furniture Schedule 2.1 Assumed Liabilities Schedule 3.1 Purchase Price Percentages Schedule 3.5 Allocation Schedule 5.1(a) Foreign Qualification Schedule 5.1(b) Foreign Qualification for Insurance Brokerage Schedule 5.2 Capitalization Schedule 5.4(b) Governmental Consents and Approvals Schedule 5.4(c) Non-Governmental Consents and Approvals Schedule 5.5 Financial Statements Schedule 5.6 Material Adverse Changes Schedule 5.7(b) Undisclosed Liabilities Schedule 5.8(a) Litigation Schedule 5.8(c) Licenses and Permits Schedule 5.10(b) Leases Schedule 5.11(a) Accounts Schedule 5.11(b) Intellectual Property; Rights of Ownership Schedule 5.12(a) Liens Schedule 5.12(b) Fixed Assets Ledger Schedule 5.13(a) Material Contracts Schedule 5.13(b) Defaults or Events of Default Schedule 5.13(c) Contracts of More than $10,000 Per Year Schedule 5.14(a) Subchapter S elections Schedule 5.14(b) Taxes Schedule 5.18 Assets Utilized in the Business Schedule 5.20 Insurance Policies Schedule 5.22 Commissions Schedule 5.25 Directors, Officers, Certain Employees Schedule 7.6(a) Employees -iv- Exhibits -------- Exhibit 8.1(h) Form of Bill of Sale Exhibit 8.1(i)(A) Form of AS Employment Agreement Exhibit 8.1(i)(B) Form of DS Employment Agreement Exhibit 8.1(i)(C) Form of Employment Agreements of MaryJeanne Egleston and Christopher Brady Exhibit 8.1(j) Form of Letter to the Customers of each of the Sellers Exhibit 8.1(k) Form of Lease Assignment -v- ASSET PURCHASE AGREEMENT Dated as of January 1, 1999 The parties to this Asset Purchase Agreement (this "Agreement") are Kaye Insurance Associates, Inc., a Delaware corporation, (the "Buyer"), Seaman, Ross & Wiener, Inc., a New York corporation ("SRW"), AMSCO Coverage Corp., a New York corporation ("AMSCO"), D.S.I. Associates, Inc., a New York corporation ("D.S.I.") (SRW, AMSCO and D.S.I. are referred to herein collectively as the "Sellers"), Douglas Schenendorf ("DS") and Alex Seaman ("AS") (DS and AS are referred to herein collectively as the "Shareholders"). RECITALS A. The Sellers are in the business of insurance brokerage, insurance claims adjusting and processing and related services (collectively, the "Business"). B. The Buyer desires to purchase from the Sellers, and the Sellers desire to sell to the Buyer, all of the Sellers' assets and properties relating to the Business in consideration for the payment of cash and common stock on the terms and subject to the conditions set forth herein. AGREEMENT It is agreed as follows: 1. Sale and Purchase of Assets. 1.1 Sale and Purchase. Upon the terms and subject to the conditions contained in this Agreement, at the Closing (as defined in Section 4), each of the Sellers shall sell, assign, transfer and deliver to the Buyer, and the Buyer shall purchase and accept from each of the Sellers, all of the assets and rights of every nature, kind and description, tangible and intangible, wherever located, that are owned, used or held for use by each of the Sellers in or for the Business, as the same shall exist on the Closing Date (as defined in Section 4) (collectively, the "Acquired Assets"), free and clear of any and all liens, charges, claims, pledges, security interests or other encumbrances ("Liens") including, without limitation, the following: (a) vehicles, computers and other data processing hardware (and all software related thereto or used therewith) and other tangible personal property of similar nature, including but not limited to all items set forth on Schedule 5.12(b) (collectively, the "Machinery and Equipment") and office furniture, office equipment, fixtures and other tangible personal property of similar nature (collectively, the "Furniture and Fixtures"); (b) interests to the extent owned by any of the Sellers in any patent, copyright, trademark, trade name, brand name, service mark, service name, assumed name, logo, symbol, trade dress, design or representation or expression of any thereof, or registration or application for registration thereof, or any other invention, trade secret, market study, process required for or incident to the Business, business opportunity, technical information, know-how, processes, proprietary right or intellectual property, technologies, methods, designs, drawings, software (including documentation and source code listings), processes and other confidential or proprietary properties or information (collectively, the "Intellectual Property"); (c) real property interests described in Schedule 5.10(b) to this Agreement together with all buildings, facilities and other improvements thereon and all licenses, leases, security deposits, rights, privileges and appurtenances thereto including, without limitation, all leases, agreements and other rights to use, occupy or possess, or otherwise with respect to, real property or machinery, equipment, vehicles, and other tangible personal property of similar nature to which the Sellers are a party, and all rights arising under or pursuant to such leases, agreements and rights; (d) all accounts and customer and client lists which are held, owned or standing in the name of any of the Sellers or either of the Shareholders or any director, officer, employee, agent, or any entity in which DS and/or AS is a significant owner (holds more than 5% of the outstanding capital) or any entity through which DS and/or AS engage in the Business, irrespective of the legal title to any such property (the "Accounts"); (e) all expirations, renewal rights, claims and commissions which are held, owned or standing in the name of any of the Sellers or either of the Shareholders or any director, officer, employee, agent, or any entity in which DS and/or AS is a significant owner (holds more than 5% of the outstanding capital) or any entity through which DS and/or AS engage in the Business, irrespective of the legal title to any such property. (f) subject to Section 1.3, any contracts, agreements, options, commitments, understandings, covenants, licenses, leases, and other instruments (collectively, the "Contracts") pertaining to the Business (including the Material Contracts as listed on Schedule 5.13); and in the case of any of the foregoing, which are held, owned or standing in the name of any of the Sellers or either of the Shareholders or any director, officer, employee, agent, or any entity in which DS and/or AS is a significant owner (holds more than 5% of the outstanding capital) or any entity through which DS and/or AS engage in the Business, irrespective of the legal title to any such property; (g) the sole right to collect from customers on or after the Effective Date and to retain all insurance commissions (including gross retained commissions realized from premiums collected), and all service fees due to any of the Sellers for any services rendered in connection with the operation of the Business on or after the Effective Date (as defined in Section 4), and all other commissions, fees or other compensation paid or payable to any of the Sellers earned on or after the Effective Date; -2- (h) the sole right to collect from insurance companies and retain (A) those commissions overrides and persistency bonuses and other referral fees (including public adjuster fees) selected and assigned by the Sellers to the Buyer which have been received by or on behalf of any of the Sellers or the Buyer on or after the Effective Date from insurance underwriters in connection with contracts or other arrangements earned in 1998 and paid on or after the Effective Date to the Sellers, which commissions, overrides, bonuses and other fees shall be selected and assigned by the Sellers to the Buyer, and (B) all return premiums or other payments (return or otherwise) due to any of the Sellers from insurance companies on or after the Effective Date (but not on transactions occurring or items billed prior to the Effective Date); (i) other books, records, files, contracts, plans, notebooks, brochures and handbooks, production and sales data catalogs, and other data of any of the Sellers relating to the Business, whether or not in tangible form or in the form of intangible computer storage media such as optical disks, magnetic disks, tapes and all similar storage media; (j) the names "Seaman, Ross & Wiener, Inc.", "AMSCO Coverage Corp.", and "D.S.I. Associates, Inc." and all variations thereof and all similar names and the goodwill associated therewith, together with all trademarks, service marks and trade names of any of the Sellers related to the Business, if any; (k) rights related to any portion of the Business or the Acquired Assets, including third party warranties and guarantees and other similar contractual rights, as to third parties held by or in favor of any of the Sellers or the Shareholders, and arising out of, resulting from or relating to the Business or the Acquired Assets; (l) rights to insurance and condemnation proceeds relating to any damage, destruction, taking or other similar impairment of any of the Acquired Assets; and (m) all goodwill associated with any of the foregoing. 1.2 Excluded Assets. The only assets of the Sellers that the Buyer is not acquiring hereby (the "Excluded Assets") are: (a) the consideration to be delivered to the Sellers pursuant to this Agreement for the Acquired Assets to be sold to the Buyer hereunder and the rights of any of the Sellers hereunder; (b) the certificate of incorporation, corporate seals, minute books, stock books, Tax Returns (as defined in Section 5.14(d)) and supporting data prepared expressly in connection therewith, and other records prepared directly in connection with the corporate organization and capitalization of each of the Sellers and/or its operation as a corporation under applicable Laws (as defined in Section 5.8(b)); and -3- (c) cash, cash equivalents and prepaid expenses; (d) the office furniture and artwork described in Schedule 1.2(d) hereof; (e) shares of the capital stock of each of the Sellers; and (f) the sole right to collect from customers on or after the Effective Date and to retain all of the Sellers' accounts receivable that existed as of December 31, 1998. 1.3 Consents. To the extent that the assignment of any Contract shall require the Consent (as defined in Section 5.4(b)) of the other parties thereto or of any third parties, this Agreement shall not constitute an agreement to assign the same if an attempted assignment would constitute a breach thereof or of other obligations or commitments of any of the Sellers. Each of the Sellers shall take any and all action necessary to obtain all such Consents prior to the Closing Date. If any such Consent is not obtained, and the Buyer waives the obtaining of such Consent as a condition precedent hereunder, then each of the Sellers shall continue such efforts after the Closing Date and until such Consent is obtained and shall cooperate with the Buyer in any arrangement requested by the Buyer intended to provide for the Buyer all of each of the benefits of the Sellers under such Contract. 2. Non-Assumption of Any Liabilities. 2.1 Non-Assumption. Upon the sale and purchase of the Acquired Assets, the Buyer shall not assume nor agree to pay or discharge when due any debt, obligation, responsibility, claim or liability of any of the Sellers, whether known or unknown, contingent or absolute or otherwise except those set forth in Schedule 2.1 hereof. The Buyer shall not be assuming, and the Sellers shall remain responsible for and shall promptly pay, perform and discharge, all of their respective liabilities and obligations such that the Buyer will incur no liability in connection therewith, and each of the Sellers and the Shareholders shall indemnify the Buyer with respect to and shall hold the Buyer harmless from and against all such liabilities and obligations, including but not limited to the following: (a) any obligation or liability of any of the Sellers arising from a breach of a representation or warranty herein on its part or its failure to fully, faithfully and promptly perform any agreement or covenant on its part contained herein; (b) any obligation or liability related to any present or former officer, director, shareholder, employee or agent of any of the Sellers or any person or organization controlled by, controlling, or under common control with any of them; (c) all other liabilities, obligations, contracts and commitments arising out of the ownership and operation of the business of each of the Sellers prior to the Effective Date, including without limitation, any liability for errors and omissions whether asserted before, on or -4- after the Effective Date which arises out of the operation of the business of any of the Sellers prior to the Effective Date (in connection with such liability, each of the Sellers and both of the Shareholders acknowledge that they have been advised by Buyer to maintain its own insurance coverages with respect thereto); (d) all liabilities incurred by any of the Sellers or either of the Shareholders of any kind whatsoever before, on or after the Effective Date (except to the extent that such liabilities were incurred in furtherance of the Shareholder's duties as an employee of the Buyer); (e) any obligation or liability of any of the Sellers to the extent the same arose prior to the Closing Date out of or resulting from noncompliance with any federal, state or local Laws, whether relating to the environment, the health and safety standards applicable to employees, employee benefit plans, wage and hour Laws or other labor related matters or otherwise; (f) any obligation or liability of any of the Sellers to the extent that the Sellers shall be indemnified by an insurer; (g) any expenses of any of the Sellers incurred in connection with the transactions contemplated hereunder (including but not limited to fees and expenses of finders, investment bankers, business brokers, attorneys and accountants), it being understood that all such expenses shall be paid by the Sellers out of the Excluded Assets or the consideration to be delivered to the Sellers pursuant to this Agreement, and not out of any of the Acquired Assets; (h) any obligations relating to an Excluded Asset; (i) any liability for Taxes (as hereinafter defined); (j) any indebtedness for borrowed money or any guaranty thereof; (k) any amount due to any Shareholder or Affiliate (as defined in Section 5.15); (l) any liability arising under, or with respect to, any pension, profit-sharing or workmen's compensation or other employee benefit or post retirement plan and any other employment-related liability or obligation existing on or prior to the Effective Date (including those liabilities triggered as a result of the transactions contemplated hereby); (m) any liability or obligation as a result of any injury to persons or property; and -5- (n) all claims of employees arising out of events, conditions and circumstances existing or occurring on or prior to the Effective Date, including, but not limited to, medical and health claims and disability claims. (o) Intentionally omitted. 3. Purchase Price, Payment, Etc. 3.1 Purchase Price. Subject to the terms and conditions of this Agreement, in consideration of the sale, conveyance, assignment, transfer and delivery of the Acquired Assets, the Buyer shall pay to the Sellers the following (the "Purchase Price"): (a) (i) an aggregate of $2,136,224 (the "Closing Cash Purchase Price") shall be paid by delivery of bank or cashier's checks or by wire transfer of immediately available funds to the Sellers, in each case to an account or accounts designated in writing by the Sellers, and (ii) delivery to the Sellers of an aggregate number of shares of common stock, $.01 par value per share, of Kaye Group Inc. (the "Common Stock") equal to $500,000 divided by the Market Value (as defined below) of the Common Stock computed as of the Effective Date (the "Closing Stock Purchase Price"); (b) an aggregate amount of stock and cash, if any (the "Earn-Out Amount"), payable in accordance with Section 3.2(b); and (c) a sum equal to the interest due on the unpaid portion of the Purchase Price, payable in accordance with Section 3.2(c). Each of the Sellers and the Buyer agree that the Purchase Price (including without limitation, the Closing Cash Purchase Price and each Earn Out Installment and each Interest Installment (as hereinafter defined)) shall be payable to the Sellers in accordance with the percentages set forth on Schedule 3.1. 3.2 Payment of Purchase Price and Payment of Interest Installments. (a) On the Closing Date, the Buyer shall deliver to the Sellers (i) the Closing Cash Purchase Price, and (ii) 69,686 shares of Common Stock allocated in accordance with Schedule 3.1. (b) The Buyer shall pay to the Sellers an amount equal to 81.49% of the Net Revenue (as defined below) earned during each of the 12 consecutive calendar quarters following the Effective Date (each payment shall be referred to as an "Earn Out Installment"). The first 11 Earn Out Installments shall be paid within 45 days after the end of the first 11 consecutive calendar quarters following the Effective Date, and the 12th Earn Out Installment shall be paid within 120 days after the end of the 12th calendar quarter following the Effective Date. (Each -6- such date for payment shall be referred to as the "Due Date.") Up to the first $41,667 of each Earn Out Installment, if any, shall be paid in shares of Common Stock equal to the whole number quotient, excluding any fractional remainder, of $41,667 divided by the Market Value of the Common Stock computed as of the last business day of each calendar quarter. Buyer shall also deliver via wire transfer to the Sellers in an amount representing the difference, if any, between such Earn Out Installment and the portion of Earn Out Installment paid to the Sellers in Common Stock pursuant to the immediately preceding sentence. As used herein, "Net Revenue" shall mean gross cash receipts received by the Buyer during the immediately preceding` calendar quarter (including contingent commissions earned by the Sellers in 1998 but collected in 1999) and Life/Health overrides and persistency bonuses and other referral bonuses (such as public adjuster fees with respect to Accounts and New Business (as hereinafter defined)) from (i) Accounts (for sake of clarity, as they exist on the Effective Date) and (ii) other accounts produced by DS or AS after the Effective Date as well as new policies written by DS and AS after the Effective Date for new and existing Accounts (the "New Business") less: (i) the commission or fee portion of an amount which the Buyer is required to pay to an insured account, customer or client in connection with or as a part of a return premium; and (ii) any commission or fee which the Buyer is obligated to pay to an independent contractor, sub-broker, sub-agent or external producer. For purposes of the definition of Net Revenue: (i) any revenues from the Accounts or New Business received by Buyer within the 90 day period following the third anniversary of the Effective Date shall be deemed to have been included in Net Revenue; and (ii) any revenues not collected by the Buyer within 90 days following the third anniversary of the Effective Date shall not be included in Net Revenue for purposes of calculating the final Earn Out Installment. For purposes of this Agreement, Market Value shall mean the last sales price for the Common Stock on the Nasdaq National Market averaged over a period of 20 consecutive trading days prior to the last business day of each calendar quarter, provided however, that if such determination results in Market Value being more than 115% (the "Cap") or less than 85% (the "Floor") of the market value of the Common Stock on the Effective Date, then the Market Value shall be, in the case of an average exceeding the Cap, 115% of the Market Value determined as of the Effective Date, and, in the case of an average less than the Floor, 85% of the Market Value determined as of the Effective Date. For purposes of calculating the Earn Out Amount, the Buyer shall code to DS and AS (as they shall direct) all Accounts and New Business generated by DS, AS and the Sellers' employees and independent contractors disclosed in the Schedules annexed to this Agreement. The Buyer shall deliver a written schedule to the Sellers on or before each Due Date reflecting the calculation of the Earn Out Installment to be paid each quarter and the calculation of the Market Value of the Common Stock used for the Earn Out Installment paid on each Due Date. (c) In addition to each Earn Out Installment and each Due Date in connection therewith, the Buyer shall remit to the Sellers via wire transfer during the Earn Out Period the Interest Amount (as hereinafter defined) payable in twelve (12) quarterly installments (each, an -7- "Interest Installment") on the Due Date corresponding thereto. The "Interest Amount" shall mean interest calculated at the "prime rate" as published by The Wall Street Journal (as of the last date of the calendar quarter immediately preceding the Due Date) for the period beginning on the immediately preceding Due Date to the Due Date corresponding to such Earn Out Installment and Interest Installment on the excess, if any, of the Adjusted Purchase Price (as hereinafter defined) less all payments made under Section 3.2(b) prior to such Due Date. For purposes of this Section 3.2(c), "Adjusted Purchase Price" shall mean, as of a Due Date, an amount equal to the sum of $10,136,000 as adjusted either upward or downward based on year-to-date actual Net Revenues as compared to comparable pro forma amounts for such period, as determined by the accountant of the Buyer (the "Buyer's Accountants"). Except for the Earn Out Installments computed and paid during the first four consecutive quarters following the Effective Date, contingent commissions shall not be included in the comparable proforma amounts in any subsequent periods. The Buyer shall deliver a written schedule to the Sellers on or before each Due Date reflecting the calculation of the Interest Installment to be paid each quarter. 3.3 Effect of Termination of Employment. The Buyer and each of the Sellers and each of the Shareholders acknowledge the significance of the employment of DS and AS in connection with the transactions contemplated by this Agreement. In connection therewith, it is a condition to the obligation of the Buyer to consummate the transaction contemplated hereby that, among other things, each of DS and AS sign and deliver to Buyer the employment agreements set forth as Exhibits 8.1(i). If DS terminates his employment with the Buyer during the three-year period following the Effective Date for any reason other than his death or disability (as disability is defined in the Employment Agreement with the Buyer to which he is a party), then the Buyer may require DS and D.S.I., at the Buyer's option (which shall be given by written notice as provided in Section 12.2 within 10 days after the voluntary termination of DS' employment), to purchase back from the Buyer 70% of the Acquired Assets for the amount of the consideration previously paid to D.S.I. pursuant to this Agreement. If AS terminates his employment with the Buyer during the three-year period following the Effective Date for any reason other than his death or disability (as disability is defined in the Employment Agreement with the Buyer to which he is a party), then the Buyer may require AS and AMSCO, at the Buyer's option (which shall be given by written notice as provided in Section 12.2 within 10 days after the voluntary termination of AS' employment), to purchase back from the Buyer 30% of the Acquired Assets for the amount of the consideration previously paid to AMSCO pursuant to this Agreement. Under no circumstances shall the Sellers or the Shareholders be required to purchase back the Acquired Assets if termination of employment occurs after the three-year period following the Effective Date or if termination of employment is not due to the voluntary election of either AS or DS. 3.4 Transfer Taxes. All sales, use, transfer, excise and similar taxes imposed by any state, county, local or other governmental entity or Taxing Authority (as defined in Section 5.14(d)) as a result of the transfer of the Acquired Assets hereunder and the other transactions -8- contemplated hereby shall be duly and timely paid by the Buyer. The Buyer shall duly and timely file all Tax Returns in connection with such Taxes. 3.5 Allocation of Purchase Price. (a) Schedule 3.5(a) reflects the agreed upon allocation of the Purchase Price in accordance with the relative fair market value of the Acquired Assets. The Buyer, each of the Sellers and each of the Shareholders shall be bound for such allocation for all purposes, including determining any Tax (as defined in Section 5.14(d)), shall prepare and file all Tax Returns (as defined in Section 5.14(d)), including Forms 8594, in a manner consistent with such allocations, and shall not take any position inconsistent with such allocations in any Tax Return, any proceeding before any Taxing Authority (as defined in Section 5.14(d)) or otherwise. In the event that any allocation is questioned, audited or disputed by any Taxing Authority, the party receiving notice thereof shall promptly notify and consult with the other party concerning the strategy for the resolution thereof, and shall keep the other party apprised of the status of such question, audit or dispute and the resolution thereof. (b) The Buyer and each of the Sellers shall duly and timely file their respective Forms 8594, and with respect to each payment pursuant to this Agreement, in accordance with this Section 3.5. Each party shall furnish a copy of each Form 8594 filed by it to the other party promptly after filing. For purposes of the preparation of Form 8594, the name and address of the Buyer and each of the Sellers, respectively, is as set forth in Section 12.2. 4. Time and Place of Closing; Effective Date. (a) Notwithstanding the date and time of the Closing, the transactions contemplated herein shall be effective for all purposes as of January 1, 1999 at 12:01 A.M. (the "Effective Date"). The closing of the purchase and sale provided for in this Agreement (the "Closing") shall be held at the offices of the Sellers at 10:00 a.m., on February 24, 1999 or at such other place, date or time as may be fixed by mutual agreement of the parties (the "Closing Date"). (b) The execution and/or delivery of each document to be executed and/or delivered at the Closing and each other action to be taken at the Closing shall be subject to the condition that every other document to be executed and/or delivered at the Closing is so executed and/or delivered and every other action to be taken at the Closing is so taken, and all such documents and actions shall be deemed to be executed and/or delivered or taken, as the case may be, simultaneously. -9- 5. Representations and Warranties of the Sellers and the Shareholders. Each of the Sellers and each of the Shareholders jointly and severally represent and warrant to the Buyer as follows: 5.1 Organization. Each of the Sellers is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation and has all requisite corporate power and authority to own, lease and operate its properties and to carry on its business as it is now being conducted. Each of the Sellers is duly qualified or licensed to do business and in good standing as a foreign corporation in each of the jurisdictions listed in Schedule 5.1(a). Each of the Sellers is duly qualified or licensed to do business and in good standing as a non-resident insurance broker in each of the jurisdictions listed in Schedule 5.1(b). The jurisdictions listed on Schedule 5.1(b) are all of the jurisdictions in which the nature of the business conducted by any of the Sellers makes such qualification or licensing necessary. Each of the Sellers has delivered to the Buyer true, correct and complete copies of their respective certificate of incorporation and bylaws, as currently in effect. 5.2 Capitalization. The Shareholders are the only shareholders of the Sellers and collectively own all of the issued and outstanding capital stock of the Sellers of record and beneficially free and clear of all Liens. All of the capital stock of the Sellers is validly issued, fully paid and nonassessable. Except as set forth on Schedule 5.2, there are no (a) outstanding warrants, options or other rights granted by any of the Sellers to purchase or acquire, or preemptive rights with respect to the issuance or sale of, the capital stock of each of the Sellers; (b) other securities of any of the Sellers directly or indirectly convertible into or exchangeable for shares of capital stock of any of the Sellers; or (c) restrictions on the transfer of any of the Sellers' capital stock. None of the Sellers own any shares of capital stock (or other equity interests of entities other than corporations) of any partnership, joint venture, trust, corporation, limited liability company or other entity. 5.3 Authorization; Validity of Agreement. Each of the Sellers and each of the Shareholders have the requisite capacity and authority to execute, deliver and perform this Agreement and each of the other agreements, instruments, documents and certificates to be executed and delivered pursuant to this Agreement, including but not limited to, any item referred to in Section 8 (collectively, with this Agreement, the "Transaction Documents") to which it is a party and to assume and perform its obligations hereunder and thereunder, and to consummate the transactions contemplated hereby and thereby. Each of this Agreement and the other Transaction Documents has been duly executed, authorized and delivered by each of the Sellers and each of the Shareholders party thereto and is a valid and binding obligation of each of the Sellers and the Shareholders, enforceable against each of the Sellers and each of the Shareholders in accordance with their respective terms, except as such enforceability may be subject to or limited by applicable bankruptcy, insolvency, reorganization or other similar laws affecting the enforcement of creditors' rights generally. -10- 5.4 No Violations; Consents and Approvals. (a) The execution, delivery and performance of each of this Agreement and the other Transaction Documents by each of the Sellers and each of the Shareholders parties thereto does not, and the consummation by each of the Sellers and each of the Shareholders of the transactions contemplated hereby and thereby will not, (i) violate any provision of the certificate of incorporation or bylaws of any of the Sellers, (ii) result in a violation or breach of, or constitute (with or without due notice or lapse of time or both) a default (or give rise to any right of termination, amendment, cancellation or acceleration) under any of the terms, conditions or provisions of any Contract to which either the Sellers or either Shareholder are a party or by which any of the properties or assets of the Sellers or either Shareholder may be bound or otherwise subject or (iii) violate any order, writ, judgment, injunction, decree, law, statute, rule or regulation applicable to the Sellers or either Shareholder or any of their respective properties or assets. (b) To the best of the Sellers' knowledge after due inquiry, no filing or registration with, notification to, or authorization, consent or approval of, any foreign, provincial, United States federal, state, county, municipal or other local jurisdiction, political entity, body, organization, subdivision or branch, legislative or executive agency or department or other regulatory service, authority or agency (a "Governmental Entity") is required in connection with the execution, delivery and performance of this Agreement or any of the other Transaction Documents to which any of the Sellers or either Shareholder is a party or the consummation by any of the Sellers or either Shareholder of the transactions contemplated hereby and thereby, except for such filings, registrations, notifications, authorizations, consents and approvals as are set forth on Schedule 5.4(b) hereof. (c) To the best of the Sellers' knowledge after due inquiry, no filing or consent, approval, order, authorization, notification to, notice to, estoppel certificate, registration, ratification, declaration, waiver, exemption or variance (collectively, together with the filings, registrations, notifications, authorizations, consents and approvals of Governmental Entities set forth in Section 5.4(b), "Consents") of any individual or entity (a "Person") is required in connection with the execution, delivery and performance of this Agreement or any of the other Transaction Documents to which any of the Sellers or either Shareholder is a party or the consummation by each of the Sellers or either Shareholder of the transactions contemplated hereby and thereby, except for such Consents as are set forth on Schedule 5.4(b) or (c) hereof. 5.5 Financial Statements. Attached as Schedule 5.5 is a proforma cash basis statement of assets and stockholders' equity as of December 31, 1998 (the "Base Balance Sheet"), together with the related proforma statement of operations for the annual periods ended December 31, 1997 and December 31, 1998 (all of the foregoing, the "Financial Statements"). The Financial Statements have been derived from, and agree with, the books and records of the Sellers, are true and correct and fairly present the financial position of the Sellers as of December -11- 31, 1998 and the proforma results of operations of the Sellers for the years ended December 31, 1997 and December 31, 1998. 5.6 No Material Adverse Change. Except as set forth on Schedule 5.6, since December 31, 1998, (a) no event, condition or circumstance has occurred that has had a material adverse effect on the Business or the Acquired Assets, or on the condition (financial or otherwise), results of operations or prospects of any of the Sellers or the Business; and (b) the Business has been conducted in the ordinary course and consistent with past practice. As amplification and not in limitation of the foregoing, since the date of the Base Balance Sheet, none of the Sellers has (i) made any material change in any method of accounting or accounting practice, principle or policy used by the Sellers, (ii) incurred any material indebtedness, obligation or liability or paid, satisfied or discharged any material indebtedness, obligation or liability prior to the due date or maturity thereof, except current indebtedness, obligations and liabilities in the ordinary course of business, or (iii) made any change or modification in any manner of the Sellers' (A) billing and collection policies, procedures and practices with respect to accounts receivable or unbilled charges, (B) policies, procedures and practices with respect to the provision of discounts, rebates or allowances, or (C) payment policies, procedures and practices with respect to accounts payable. 5.7 No Undisclosed Liabilities. (a) Except as set forth in Schedule 2.1, none of the Sellers have, and as of the Closing none of the Sellers will have, any liabilities (whether accrued, contingent, known, or otherwise) other than those that (i) are required to be set forth or reserved against in the balance sheets referred to in Section 5.5; or (ii) were incurred since December 31, 1998 in the ordinary course of business, none of which, individually or in the aggregate, is material to the business, operations, condition or prospects of the Business. (b) To the best knowledge of the Sellers after due inquiry, there is no fact which materially adversely affects the business, properties, or operations of any of the Sellers, including the Business, that has not been specifically disclosed herein or in a Schedule furnished herewith. Furthermore, and without limiting the foregoing, the Shareholders have no knowledge of any claims of errors or omissions in the handling or administration of claims made or the performance of any agency or agency management functions performed prior to the Closing, except as set forth on Schedule 5.8(a). 5.8 Litigation; Compliance with Law; Licenses and Permits. (a) Except as set forth on Schedule 5.8(a), there is no claim, suit, action or proceeding ("Proceeding") pending, nor, to the best knowledge of each of the Sellers and each of the Shareholders, is there any investigation or Proceeding threatened, that involves or affects any of the Sellers or the Business, by or before any Governmental Entity, court, arbitration panel or any other Person. -12- (b) To the best of the Sellers' knowledge after due inquiry, each of the Sellers and the Business have, and on the Closing Date will have, complied with all applicable foreign, provincial, United States federal, state, county, municipal or other local criminal, civil or common laws, statutes, ordinances, orders, codes, rules, regulations, permits, policies, guidance documents, judgments, decrees, injunctions, or agreements of any Governmental Entity (collectively, "Laws"), including but not limited to Laws relating to zoning, building codes, antitrust, occupational safety and health, industrial hygiene, environmental protection, water, ground or air pollution, consumer product safety, product liability, hiring, wages, hours, employee benefit plans and programs, collective bargaining and the payment of withholding and social security taxes. Since January 1, 1996, none of the Sellers has received any notice of any violation of any Law. (c) To the best of the Sellers' knowledge after due inquiry, each of the Sellers, each of the Shareholders and the Business have every license, permit, certification, qualification or franchise issued by any Governmental Entity (each, a "License") and every approval, authorization, waiver, variance, exemption, consent or ratification by or on behalf of any Person that is not a party to this Agreement (each, a "Permit") required for them to conduct their business as presently conducted, including as insurance agents and brokers, or otherwise required in connection with the Business. Schedule 5.8(c) sets forth a list of such Licenses and Permits. All such Licenses and Permits are in full force and effect and neither the Sellers nor either Shareholder has received notice of any pending cancellation or suspension of any thereof nor, to the best knowledge of each of the Sellers and each of the Shareholders, is any cancellation or suspension thereof threatened. The applicability and validity of each such License and Consent will not be adversely affected by the consummation of the transactions contemplated by this Agreement. 5.9 [Intentionally Omitted.] 5.10 Real Property. (a) None of the Sellers own any real property. (b) Schedule 5.10(b) sets forth a list and description of all of the real property lease and subleases under which any of the Sellers are tenant or subtenant (the "Leases"), including the date of the Lease, the premises demised thereunder, the name of the lessee and lessor, the commencement date and expiration date of the Lease and the annual rent payable by the lessee under the Lease. As used herein, the term "Leased Real Property" shall mean the real property demised by the Leases. (c) The Sellers have heretofore delivered to the Buyer true, correct and complete copies of the Leases. Each of the Leases is in full force and effect and is enforceable in accordance with its terms. Each of the Sellers is in possession of and quietly enjoys the Leased -13- Real Property applicable to it and each of the Sellers has a valid and enforceable leasehold interest, subject to no Liens except such immaterial easements and rights-of-way, none of which interferes with the operation of the business. No event has occurred or failed to occur that, with the giving of notice or the passage of time or both, would constitute a default under any Lease. The Sellers have not entered into any assignment of any Lease, sublease of all or any portion of any Leased Real Property and no person has any right to occupy the Leased Real Property other than the Sellers. (d) Neither the Sellers nor either of the Shareholders has received notice from any insurance company or Board of Fire Underwriters (or organization exercising functions similar thereto) or from any mortgagee requesting the performance of any work or alteration in respect of any of the Leased Real Property, and, to the best knowledge of each of the Sellers and each of the Shareholders, there are no outstanding requirements or recommendations from any of the foregoing. (e) There has been no damage to any portion of the Leased Real Property within the last 24 months caused by fire or other casualty that has not been repaired. 5.11 Accounts, Intellectual Property; Computer Software. (a) The names and addresses of each and every Account is listed, described or referenced in Schedule 5.11(a). Each of the Sellers owns or has the right to use, free and clear of claims or rights of others, all Accounts, and each of the Sellers has the right to transfer all Accounts. None of the Sellers or the Shareholders are using any confidential or proprietary information or trade secrets (including customer list and mailing lists) of any of the Shareholders' former employers or any of the Sellers' or the Shareholders' past or present employees. Copies of all forms of nondisclosure or confidentiality agreements utilized by any of the Sellers to protect the Accounts have been provided to Buyer and are listed in Schedule 5.11(a). (b) Schedule 5.11(b) lists all Intellectual Property that is owned by the Sellers or any other Person and used by the Sellers in the operations of the Business, and there are no pending or to the best of the Sellers' knowledge after due inquiry, threatened claims by any Person relating to the Sellers' use of any Intellectual Property. The Sellers have such rights of ownership (free and clear of all Liens) of, or such rights by license, lease or other agreement to use (free and clear of all Liens) the Intellectual Property as are necessary to permit the Sellers to conduct their business and the Sellers are not obligated to pay any royalty or similar fee to any Person in connection with their use or license of any of the Intellectual Property. (c) The Sellers have such rights of ownership (free and clear of all Liens) of, or such rights by license, lease or other agreement to use (free and clear of all Liens), the computer software programs including, without limitation, application software that are used by the Sellers and that are material to the conduct of its business as currently conducted, as are necessary to permit the conduct of its business as currently conducted. None of the Sellers' -14- ownership rights or rights to use any of the computer programs referred to above will be adversely affected by any of the transactions contemplated hereby. 5.12 Title to Acquired Assets. (a) The Sellers have good and marketable title to the Acquired Assets, including, without limitation, all assets shown on the Financial Statements, free and clear of all Liens, other than (i) Liens, if any, for personal property taxes and assessments not yet due and payable and (ii) Liens disclosed on Schedule 5.12(a). At the Closing, the Sellers will have caused each Lien referred to on Schedule 5.12(a) (other than Liens relating to leased equipment) to have been terminated, and the Buyer will obtain good and marketable title to all of the Acquired Assets free and clear of all Liens. (b) All items of tangible personal property owned or leased by the Sellers and used in the conduct of its business are listed in the detailed fixed assets ledger of the Sellers attached to Schedule 5.12(b) (collectively, the "Personal Property"). The Personal Property conforms in all material respects to all requirements of applicable Laws. All of the items included within the Personal Property are fully operational and operating in the ordinary course of the Sellers' business, as applicable, are in good operating condition and in a good state of maintenance and repair, are adequate for use in the conduct of the Sellers' business as previously conducted and are capable of operation in the Sellers' business on an efficient and profitable basis. 5.13 Material Contracts. (a) Schedule 5.13(a) sets forth a true, complete and correct list of every Contract that (i) provides for aggregate future payments by any of the Sellers or to any of the Sellers of more than $10,000; (ii) was entered into by any of the Sellers with either Shareholder, or an officer, director or significant employee of any of the Sellers; (iii) is a collective bargaining or similar agreement; (iv) guarantees or indemnifies or otherwise causes any of the Sellers to be liable or otherwise responsible for the obligations or liabilities of another or provides for a charitable contribution by any of the Sellers; (v) involves an agreement with any bank, finance company or similar organization; (vi) restricts any of the Sellers or the Business from engaging in any business or activity anywhere in the world; (vii) is an employment agreement, consulting agreement or similar arrangement with any employee of any of the Sellers; (viii) involves an agreement or any other Contract providing for payments from the Sellers to any other Person, or by any Person to any of the Sellers, based on sales, purchases or profits, other than direct payments for goods; or (ix) any other Contract that is material to the rights, properties, assets, business or operations of any of the Sellers or the Business (the foregoing, collectively, "Material Contracts"). The Sellers have heretofore provided true, complete and correct copies of all Material Contracts to the Buyer. -15- (b) Except as set forth in Schedule 5.13(b), (i) there is not, and to the best knowledge of any of the Sellers and the Shareholders there has not been claimed or alleged by any Person with respect to any Material Contract, any existing default, or event that with notice or lapse of time or both would constitute a default or event of default, on the part of the Sellers or, to the best knowledge of any of the Sellers and the Shareholders, on the part of any other party thereto and (ii) no consent, approval, authorization or waiver from, or notice to, any Governmental Entity or other Person is required in order to maintain in full force and effect any of the Material Contracts, other than such consents and waivers that have been obtained and are unconditional and in full force and effect and such notices that have been duly given and copies of such consents, waivers and notices have been delivered to the Buyer. 5.14 Taxes. (a) Each of the Sellers has elected to be treated as an "S" corporation for federal income Tax purposes at all times since its date of incorporation except that D.S.I. has been an S Corporation since July 1, 1987, and such election is effective for each year thereafter up to and including the Effective Date. Schedule 5.14(a) hereto sets forth each other jurisdiction for which each Seller has made an "S" election (or similar election), or for which an "S" election (or similar election) is effective, including the date of the election, its effective date, the date of any termination of such election, if any, and the cause of such termination. Except as set forth on Schedule 5.14(a), such election is effective for each year from its effective date up to and including the Closing Date. (b) Except as set forth in Schedule 5.14(b): (i) the Sellers have duly and timely filed or caused to be filed with the Internal Revenue Service or other applicable Governmental Entity (collectively, "Taxing Authorities") all Tax Returns (as defined below) that are required to be filed by or on behalf of any of the Sellers or that include or relate to the Acquired Assets or the Business, which Tax Returns are true, correct and complete, and (B) duly and timely paid in full or caused to be paid in full, or recorded a provision for such payment on the books and records of the Sellers for the payment of, all Taxes that are due and payable that could result in a Lien on any Acquired Asset or the Business and has recorded a provision for such payment on the books and records of the Sellers for the payment of all Taxes that are not due and payable; (ii) the Sellers have duly and timely complied with all applicable Laws relating to the collection or withholding of Taxes, and the reporting and remittance thereof to the applicable Taxing Authorities; (iii) no audit, examination, investigation, reassessment or other administrative or court proceeding (collectively, a "Tax Proceeding") is pending or proposed with regard to any Tax or Tax Return referred to in clause (i) above; -16- (iv) there is no Lien for any Tax upon any of the Acquired Assets or the Business; (v) the Buyer is not a transferee of any of the Sellers within the meaning of Section 6901 of the Code or any similar provision of applicable law; (vi) there is no outstanding request for a ruling from any Taxing Authority, closing agreement, (within the meaning of Section 7121 of the Code or any analogous provision of applicable Law) relating to any Tax for which any of the Sellers is or may be liable or with respect to any of the Sellers' income, assets or business, power of attorney or adjustment related to, or in connection with, any Tax that could result in a Lien on any Acquired Asset or the Business; (vii) none of the Acquired Assets is "tax-exempt bond financed property" or "tax-exempt use property" within the meaning of Section 168(g) or (h), respectively, of the Code or any similar provision of applicable Law; (viii)none of the Acquired Assets is required to be treated as being owned by any other person pursuant to the "safe harbor" leasing provisions of Section 168(f)(8) of the Internal Revenue Code of 1954 as in effect prior to the repeal of those "safe harbor" leasing provisions or any similar provision of applicable Law; (ix) none of the Sellers are, nor have they been, a "United States real property holding corporation" within the meaning of Section 897(c)(2) of the Code at any time during the applicable period referred to in Section 897(c)(1)(A)(ii) of the Code; and (x) no claim has ever been made by a Taxing Authority in a jurisdiction where any of the Sellers has not paid any Tax or filed Tax Returns relating to the Business or any Acquired Asset asserting that any of the Sellers is or may be subject to Tax in such jurisdiction. (c) The Sellers have provided to the Buyer true, complete and correct copies of (i) all Tax Returns relating to, and (ii) all audit reports relating to, each proposed adjustment, if any, made by any Taxing Authority with respect to any taxable period ending after December 31, 1993 any and all Taxes with respect to which a Lien may be imposed on any Acquired Asset or the Business. (d) As used herein, (i) "Tax Return" means any return, declaration, report, information return or statement, and any amendment thereto, including without limitation any consolidated, combined or unitary return or other document (including any related or supporting information), filed or required to be filed with any Taxing Authority in connection with the determination, assessment, collection, payment, refund or credit of any federal, state, local or foreign Tax or the administration of any Laws relating to any Tax or ERISA, and (ii) "Tax" or -17- "Taxes" means any and all taxes, charges, fees, levies, deficiencies or other assessments of whatever kind or nature including, without limitation, all net income, gross income, profits, gross receipts, excise, real or personal property, sales, ad valorem, withholding, social security, retirement, excise, employment, unemployment, minimum, estimated, severance, stamp, property, occupation, environmental, windfall profits, use, service, net worth, payroll, franchise, license, gains, customs, transfer, recording and other taxes, customs duty, fees assessments or charges of any kind whatsoever, imposed by any Taxing Authority, including any liability therefor as a transferee (including without limitation under Section 6901 of the Code or any similar provision of applicable Law), as a result of Treasury Regulation ss.1.1502-6 or any similar provision of applicable Law, or as a result of any Tax sharing or similar agreement, together with any interest, penalties or additions to tax relating thereto. 5.15 Affiliated Party Transactions. Except for obligations arising under this Agreement, as of the Closing Date the Sellers will not have, directly or indirectly, any obligation to or claim against the Business and no Shareholder or any Affiliate of such Shareholder will have, directly or indirectly, any obligation to or cause of action or claim against any of the Sellers. For purposes of this Agreement, the term Affiliate shall mean, with respect to any Person, a member of such Person's immediate family or Persons controlled by or are under common control with such Shareholders or such Shareholder's immediate family. 5.16 [Intentionally Omitted.] 5.17 [Intentionally Omitted.] 5.18 Receivables. All accounts receivable of the Sellers have arisen, and as of the Closing Date will have arisen, from bona fide transactions in the ordinary course of the Sellers' business consistent with past practice and established in the ordinary course of the Sellers' business consistent with past practice. 5.19 Assets Utilized in the Business. Except as set forth in Schedule 5.19, the assets, properties and rights owned, leased or licensed by the Sellers or used in connection with the Business and that will be owned, leased or licensed by the Sellers as of the Closing Date, and all the agreements to which any of the Sellers is a party, constitute all of the properties, assets and agreements necessary to the Sellers in connection with the operation and conduct by the Sellers of the Business as presently conducted. Included in Schedule 5.19 are all services provided by each Shareholder to the Sellers and all other arrangements involving each Shareholder and the Sellers that are not included in the Acquired Assets. 5.20 Insurance. Schedule 5.20 contains a complete and correct list of all policies of insurance of any kind or nature covering any of the Sellers, including policies of fire, theft, casualty, product liability, workmen's compensation, business interruption, employee fidelity and other casualty and liability insurance, indicating the type of coverage, name of insured, the insurer, the expiration date of each policy, the amount of coverage and whether on an -18- "occurrence" or "claims made" basis. All such policies (i) are in full force and effect; (ii) are sufficient for compliance with all material requirements of law and of all applicable material agreements; and (iii) are valid, outstanding and enforceable policies. Complete and correct copies of such policies or the declaration pages have been furnished to the Buyer. All such insurance policies or comparable coverage shall be continued in full force and effect through the Closing Date. Since December 31, 1995, the Sellers have not been denied any insurance coverage which they have requested. 5.21 [Intentionally Omitted.] 5.22 Commissions. The aggregate gross revenue received by the Sellers attributable to the Business during calendar year 1998 is listed in Schedule 5.22 hereto. Except as described in Schedule 5.22, all insurance brokerage or agency business placed by all employees, brokers, sub-brokers or agents of the Sellers have been placed by them through and in the name of the Sellers and all commissions on such business have been paid to and are the property of the Sellers. To the best of the Sellers' knowledge after due inquiry, none of the insurance sales agents, brokers, sub-brokers or employees of the Sellers have indicated a desire to terminate their relationship with the Sellers. 5.23 [Intentionally Omitted.] 5.24 [Intentionally Omitted.] 5.25 Directors, Officers and Certain Employees. Schedule 5.25 sets forth a complete and correct list of the names, current annual salary, bonus and title, for each director and officer and each other employee of the Sellers who is a party to an employment agreement with any of the Sellers or who received annual compensation during the Sellers' most recently ended fiscal year, or who is entitled to receive compensation, on an annualized basis, whether or not paid to date, in excess of $50,000. Neither the Sellers nor either Shareholder is aware of any employee in the Sellers' senior management who intends to terminate his or her employment relationship with the Business, either as a result of the transactions contemplated hereby or otherwise. The persons identified on Schedule 5.25 are the Sellers' only key employees. 5.26 Year 2000. To the best knowledge of the Sellers after due inquiry, all of the Sellers' systems, software, data and databases (other than data provided to it by its customers) (collectively, the "Systems") are Year 2000 Compliant (as hereinafter defined). For purposes of this Agreement, "Year 2000 Compliant" shall mean: (i) the occurrence in or use by the Systems of dates before, on or after January 1, 2000 will not adversely affect the performance of the Systems with respect to date-dependent data, computations, output or other functions, including, without limitation, calculating, comparing and sequencing; (ii) the Systems will not abnormally end or provide invalid or incorrect results as a result of date-dependant data; and (iii) the Systems can accurately recognize, manage, accommodate and manipulate date-dependant data, including, without limitation, single century formulas and leap years. -19- 5.27 No Misstatements or Omissions. No representation or warranty by the Sellers or either Shareholder contained in this Agreement and no statement contained in any certificate, list, Schedule, Exhibit or other instrument specified or referred to in this Agreement, whether heretofore furnished to the Buyer or hereafter furnished to the Buyer pursuant to this Agreement, contains or will contain any untrue statement of a material fact or omits or will omit any material fact necessary to make the statements contained therein, in light of the circumstances under which it was made, not misleading. 5.28 Investment Undertaking. (a) Each Shareholder and each of the Sellers acknowledge that the Sellers confirm that the shares of Common Stock to be issued to the Sellers pursuant to this agreement will be "restricted securities" within the meaning of Rule 144 of the General Rules and Regulations under the Securities Act of 1933 ("Rule 144"). Each Shareholder and each of the Sellers acknowledge that the Sellers are acquiring such shares for the Sellers' own account and not with a view to their distribution within the meaning of Section 2(11) of the Securities Act of 1933. Each Shareholder and each of the Sellers acknowledge that the Sellers understand that Rule 144 requires that such shares issued hereunder may not be disposed of for a period of at least one year. Each Shareholder and the Sellers acknowledge that the Sellers understand that it must bear the economic risk of the investment indefinitely because such shares may not be sold, hypothecated or otherwise disposed of unless subsequently registered under the Securities Act of 1933 and applicable state securities laws or an exemption from registration is available. 5.29 Absence of Sensitive Payments. None of the Sellers, none of the Shareholders and none of the Sellers' directors, officers, brokers, sub-brokers, agents, or employees, on behalf of any of the Sellers: (a) has made or has agreed to make any contributions, payments or gifts of funds or property to any governmental official, employee or agent where either the payment or the purpose of such contribution, payment or gift was or is illegal under the laws of the United States, any state thereof, or any jurisdiction (foreign or domestic); or (b) has made or agreed to make any contribution or expenditure, or has reimbursed any political gift or contribution or expenditure made by any other person to candidates for public office, whether federal, state or local (foreign or domestic) where such contributions were or would be a violation of applicable law. 5.30 [Intentionally Omitted.] 6. Representations and Warranties of the Buyer. The Buyer represents and warrants to the Sellers and the Shareholders as follows: -20- 6.1 Organization. The Buyer is a corporation duly organized, validly existing and in good standing under the laws of Delaware and has all requisite power and authority to own, lease and operate its properties and to carry on its business as it is now being conducted. The Buyer is duly qualified or licensed to do business as a corporation and is in good standing in each jurisdiction in which the nature of the business conducted by it makes such qualification or licensing necessary. The Buyer has heretofore delivered to the Sellers true, complete and correct copies of its certificate of incorporation and bylaws as currently in effect. 6.2 Authorization; Validity of Agreement. The Buyer has the requisite corporate power and authority to execute, deliver and perform this Agreement and each other agreement executed or to be executed by it pursuant to the terms of this Agreement (collectively, the "Buyer Agreements") and to consummate the transactions contemplated hereby and thereby. The execution, delivery and performance by the Buyer of this Agreement and the other Buyer Agreements to which it is a party and the consummation of the transactions contemplated hereby and thereby have been duly and validly authorized by the Buyer, and no other proceedings on the part of the Buyer are necessary to authorize the execution, delivery and performance of this Agreement and the other Buyer Agreements to which the Buyer is a party and the consummation of the transactions contemplated hereby and thereby. This Agreement and each other Buyer Agreement to which the Buyer is a party has been duly executed and delivered by the Buyer and is a valid and binding obligation of the Buyer, enforceable against the Buyer in accordance with their respective terms, except as such enforceability may be subject to or limited by applicable bankruptcy, insolvency, reorganization, or other similar laws, now or hereafter in effect, affecting the enforcement of creditors' rights generally. 6.3 No Violations; Consents and Approvals. (a) The execution, delivery and performance of this Agreement and the Buyer Agreements by the Buyer, do not, and the consummation by the Buyer of the transactions contemplated hereby and thereby will not, (i) violate any provision of the certificate of incorporation or Bylaws of the Buyer, (ii) result in a violation or breach of, or constitute (with or without due notice or lapse of time or both) a default (or give rise to any right of termination, cancellation or acceleration) under, any of the terms, conditions or provisions of any material note, bond, mortgage, indenture, guarantee, other evidence of indebtedness, license, contract, agreement or other instrument to which the Buyer is a party or by which the Buyer or any of its properties or assets may be bound or otherwise subject or (iii) violate any order, writ, judgment, injunction, decree, law, statute, rule or regulation applicable to the Buyer or any of its respective properties or assets. (b) No filing or registration with, notification to, or authorization, consent or approval of, any Governmental Entity is required in connection with the execution, delivery and performance of this Agreement or the other Buyer Agreements by the Buyer or the consummation by the Buyer of the transactions contemplated hereby and thereby, except filings -21- as may be required under state and federal securities laws to give effect to the issuance of the Common Stock pursuant to this Agreement. 6.4 Shares of Capital Stock. All shares of Common Stock issued to the Sellers pursuant to this Agreement will be duly authorized and validly issued and shall, upon issuance, be fully paid and nonassessable. 7. Other Agreements of the Parties. 7.1 Tax Returns; Taxes. (a) To the extent permitted under applicable Law, the parties shall cause or elect to treat any Tax period including the Effective Date as ending at the close of business on the Closing Date. The Sellers and the Shareholders (i) shall (A) duly and timely file or cause to be filed with the applicable Taxing Authorities all Tax Returns with respect to any Tax period ending on or before the Closing Date and that include or relate to any Acquired Asset or the Business, which such Tax Returns shall be true, correct and complete, and (B) duly and timely pay in full or cause to be paid in full all Taxes that are due and payable on or before the Closing Date; and (ii) have recorded a provision on the books and records of the Sellers for the payment of all such Taxes that are not due and payable on or before the Closing Date. The Sellers shall, and the Shareholders shall cause the Sellers to, provide to the Buyer true, complete and correct copies of such Tax Returns and all correspondence, reports and documents relating to any Tax Proceeding with respect thereto. The Sellers shall, and the Shareholders shall cause the Sellers to, duly and timely comply with all applicable Laws relating to the collection or withholding of Taxes and the reporting and remittance thereof to the applicable Taxing Authorities. (b) (i) The Buyer shall file all Tax Returns for any Tax period that includes but does not end on the Closing Date. The Buyer shall allocate any Taxes for a period which includes but does not end on the Closing Date between the period before the Closing Date and the balance of the period on the basis of an interim closing of the books at the close of the Closing Date, except that exemptions, allocations and deductions calculated on an annual basis shall be apportioned on the basis of the relative number of days in the period on or before the Closing Date and in the balance of the period. Notwithstanding the foregoing, any real estate or personal property Taxes shall be allocated on the basis of the relative number of days in the period on or before the Effective Date and in the balance of the applicable period. (ii) Within five (5) days of receiving notification of the amount of Tax allocated to the period ending prior to the Effective Date, the Sellers and the Shareholders shall pay, on a net after-tax basis, the amount of such Tax allocated to the portion of the period ending on or prior to the Effective Date. -22- 7.2 Tax Indemnity. (a) The Sellers and the Shareholders shall indemnify the Buyer and its Affiliates (collectively, the "Taxpayer"), and hold the Taxpayer harmless, on an after-tax basis, from and against any (i) Taxes assessed against or imposed on the Sellers, the Shareholders or with respect to the Business or any Acquired Asset for any period (or portion of any period) ending on or before the Effective Date and (ii) fees and expenses (including, without limitation, attorneys' fees) incurred by the Buyer or its Affiliates in enforcing its rights or collecting any amounts due hereunder. This indemnity shall apply notwithstanding any investigation made by the Buyer in connection with the transactions contemplated by this Agreement or, its receipt, examination, filing of or commenting on any Tax Return, and shall be separate and independent of any other indemnity between the parties hereto. (b) The procedure for any indemnification claim made under this Section 7.2 shall be the same as the procedure set forth in Section 12.3 hereof. 7.3 Public Statements. No press releases or any public disclosure, either written or oral, of the transactions contemplated by this Agreement shall be made without the prior written notice and written consent of the Buyer. 7.4 Other Actions. Each of the parties hereto shall use all reasonable efforts to (i) take, or cause to be taken, all actions, (ii) do, or cause to be done, all things, and (iii) execute and deliver all such documents, instruments and other papers, as in each case may be necessary, proper or advisable under applicable Laws, or reasonably required in order to carry out the terms and provisions of this Agreement and to consummate and make effective the transactions contemplated hereby. 7.5 Cooperation on Taxes. Each of the Sellers and the Buyer shall cooperate with each other by executing or causing to be executed any required documents and by making available to the other, all books and records relating to the Acquired Assets or the Business (including work papers, records and notes of any kind) at all reasonable times, for the purpose of allowing the appropriate party to complete its Tax Returns, respond to defend or prosecute any Tax Proceeding, make any determination required under this Agreement (including, but not limited to, determinations as to which period any asserted Tax liability is attributable) and verify issues. 7.6 Employees. (a) The Buyer and the Sellers have prepared a mutually agreeable list of employees of the Sellers and independent contractors who render services for the Sellers to be attached to this Agreement as Schedule 7.6(a). The Buyer shall offer employment effective as of the Closing to all employees of the Sellers listed on Schedule 7.6(a) to this Agreement (all such employees who accept such offer of employment being the "Transferred Employees"). The -23- Sellers shall obtain, and provide the Buyer with the written agreement of each Transferred Employee applicable to it to the Buyer's review of the personnel file of such Transferred Employee, prior to the Buyer's review of such personnel file. In addition to the obligation of the Sellers set forth below, all responsibility for employees of the Sellers, other than Transferred Employees, including, without limitation, claims arising out of the decision not to include such employees on Schedule 7.6(a), shall be liabilities of the Sellers. (b) Subject to the terms and conditions of this Section 7.6, from and after the Closing, the Buyer shall provide the Transferred Employees with terms and conditions of employment including, without limitation, salaries, hourly wages, employee benefits and other perquisites, that have been reviewed and discussed with the Sellers and are reasonably agreeable to the Buyer and to the Sellers. The Buyer shall establish insurance or other arrangements through which the employee benefits and other perquisites to be provided by the Buyer to Transferred Employees may be provided commencing as of the Closing Date, and the Shareholders and the Sellers shall lend such cooperation as the Buyer may reasonably request in connection with such efforts. (c) The Buyer shall not be responsible for any payments, expenses and costs paid or required to be paid in connection with the employment or termination of employment of any employees of the Sellers who are not listed on Schedule 7.6(a) to this Agreement, or who are listed on Schedule 7.6(a) and do not accept the Buyer's offer of employment with the Buyer. (d) Except to the extent expressly provided in the other subsections of this Section 7.6, the Sellers shall remain responsible for (i) payment of any and all wages, accrued vacation pay, bereavement pay, jury duty pay, disability income, supplemental unemployment benefits, fringe benefits or other perquisites of employment, termination indemnities or similar benefits (whether arising under any plan, program, policy or arrangement of the Sellers or under applicable local law), payroll taxes and other payroll related expenses and (ii) payments to or under employee benefit plans (within the meaning of Section 3(3) of ERISA) maintained or contributed to by the Sellers, in either case arising out of or relating to the employment of any of the Transferred Employees by the Sellers prior to the Effective Date. (e) The Sellers shall retain responsibility and liability for all workers' compensation claims of the Transferred Employees to the extent relating to events, conditions or circumstances that occur or exist prior to the Effective Date. Notwithstanding the foregoing, the Buyer may, at its election, assume responsibility for the supervision, defense or settlement of any such workers' compensation claims at the Sellers' cost and expense, provided that such costs and expenses are reasonable. The Buyer shall keep the Sellers reasonably apprised of the status of such workers' compensation claims. The Sellers may, at its own expense, participate in the supervision, defense or settlement of any such workers' compensation claims, and shall cooperate in the supervision, defense or settlement of any such workers' compensation claims if requested to do so by the Buyer. The Buyer shall have sole responsibility and liability for any workers' -24- compensation claims of Transferred Employees to the extent relating to any event, condition or circumstance that occurs after the Effective Date. (f) In respect of grievances or EEOC Claims of Transferred Employees to the extent relating to their employment by the Sellers including, without limitation, any such grievances or EEOC Claims filed before state or local authorities for which payment has not been made prior to the Closing, the Sellers shall retain responsibility and liability for all amounts due with respect thereto including, without limitation, the payment of any amounts in the nature of back pay or employee compensation, and any state or federal taxes in connection with such back pay or employee compensation. Handling of such grievances and EEOC Claims shall be at the Sellers' cost and expense. The Buyer shall have sole responsibility and liability for any EEOC Claims of Transferred Employees that relate to their employment with Buyer. (g) Nothing in this Section 7.6 shall limit the at will nature of the employment of the Transferred Employees or the right of the Buyer to alter or terminate any employee benefit plan. 7.7 Consents. The Sellers and the Shareholders shall cause the Sellers to receive all Consents on or prior to the Closing Date, each of which Consents is set forth on Schedule 5.4(b) attached hereto. At or prior to the Closing, the Shareholders and the Sellers shall cause the Acquired Assets to be released from all liabilities, liens or other obligations. 7.8 [Intentionally Omitted.] 7.9 Exclusivity. From and after the date hereof and unless and until this Agreement is terminated as provided in Section 9, neither the Sellers nor either Shareholder shall, and neither shall knowingly permit the Sellers or any of their respective Affiliates, officers, directors, employees, agents or representatives, directly or indirectly, to encourage, solicit, initiate or participate in discussions or negotiations with, provide any information to, receive any proposals or offers from, or enter into any agreement with, any third party, in each case other than the Buyer, that involves the sale, joint venture or the other disposition of all or any portion of the Sellers, the Acquired Assets or the Business or any merger, consolidation, recapitalization or other business combination of any kind involving the Sellers. If the Sellers or either Shareholder receives or becomes aware of any such offer or proposed offer, the Sellers or such Shareholder, as the case may be, shall promptly notify the Buyer. 7.10 Prior Acts Insurance. The Sellers shall maintain their current errors and omissions policies through their expiration dates of January 1, 2000, following which the Sellers shall purchase tail coverage for a period of one year. 7.11 Equipment, Intellectual Property and Other Assets. Prior to the Closing Date, the Shareholders shall take all steps necessary to contribute all equipment, intellectual property and -25- other assets owned by either Shareholder or any Affiliate of any Shareholder that is used in connection with the Business in consideration solely for shares of Common Stock of the Sellers. 7.12 Non-Solicitation. (a) In view of the personal identification of customers and sources with brokerage employees, the potential exists for appropriation by employees and/or other persons or entities of the benefits of the relationships developed with the foregoing, despite the Buyer's investment in the development of those relationships on its behalf. Accordingly, since the parties hereto recognize that the Buyer would suffer irreparable harm if any Seller or either Shareholder should solicit customers or any other employee of the Buyer to terminate its/his/her relationship with the Buyer, it is reasonable to protect the Buyer against such activities for the limited period of time necessary for the Buyer to establish, renew and/or restore its business relationship with the foregoing individual and commercial customers and sources, without unduly restricting any Seller or either Shareholder from competing with the Buyer. For the above reasons, the Buyer and each Seller and Shareholder agree that in order to protect the Buyer in the event that either Shareholder ceases to be an employee of the Buyer for any reason ("Withdrawal from the Buyer"), during the term of each Shareholder's employment with the Buyer and for the three (3) year period immediately following any Withdrawal from the Buyer, each Seller and Shareholder agrees not to, directly or indirectly: (i) solicit, join, provide services to, advise, give assistance to, or contact any person or entity who was a client of the Buyer (including Accounts and New Business) or any employee of such client, with respect to the provision of insurance or insurance-related services; (ii) accept any business from any customer of the Buyer (including Accounts and New Business) or any of its affiliates, or solicit or encourage any such person to terminate or adversely alter in any material respect any relationship such person may have with the Buyer or any of its affiliates; (iii) develop or provide assistance to another person/entity who or which is developing a program of insurance competitive with a program of insurance sold or marketed by the Buyer or any of its affiliates; (iv) solicit any persons or entities who, to the knowledge of any Seller or Shareholder, are or were identified through leads developed while either Shareholder was employed by the Buyer; (v) solicit professional relationships introduced to any Shareholder by any employee or client of the Buyer while such Shareholder was an employee of the Buyer; -26- (vi) offer employment to or employ any person who is then, or had been within six (6) months prior to such offer, an employee of the Buyer; and (vii) solicit or attempt to solicit, induce or otherwise cause any employee of the Buyer or any of its affiliates to terminate his or her employment thereunder. (b) Each Seller and Shareholder hereby acknowledges that the covenant contained in Sections 7.12(a) is reasonable and necessary for the protection of the Buyer and is an essential inducement to the Buyer's entering into this Agreement. Accordingly, each Seller and Shareholder shall be bound by the provisions hereof to the maximum extent permitted by law, it being the intent and spirit of the parties that the foregoing shall be fully enforceable. However, the parties further agree that, if any of the provisions hereof shall for any reason be held to be excessively broad as to duration, geographical scope, property or subject matter, such provision shall be construed by limiting and reducing it so as to be enforceable to the extent compatible with the applicable law as it shall herein pertain. (c) Each Seller and Shareholder acknowledges that any violation of the covenant contained in Section 7.12(a) shall constitute an undue burden to the Buyer, and accordingly, in addition to any other rights and remedies available under this Agreement or otherwise, the parties hereby expressly agree that the Buyer shall be entitled to an injunction or specific enforcement (without the necessity of any bond) restricting any Seller or either Shareholder from committing or continuing any such violation. (d) Anything contained herein to the contrary notwithstanding, the foregoing provisions contained in Sections 7.12(a), (b) and (c) shall be unenforceable and of no force and effect in the event that the Buyer breaches a material obligation contained in this Agreement (which shall include the failure to pay any Earn Out Installment or any Interest Installment on the Due Date) and fails to cure such breach within 30 days after a Shareholder provides the Buyer with written notice detailing the breach or in the event that the Buyer elects to avail itself of the buy-back provision contained in Section 3.3. 7.13 Post Closing Adjustment. Within a reasonable time following the Closing (not to exceed 45 days), the parties and their accountants shall confer in good faith in order to compute the amount, if any, of the post closing adjustment payment to which either party may be entitled (the "Post Closing Adjustment Payment"). In calculating the Post Closing Adjustment Payment, the parties and their accountants shall calculate the following during the period between the Effective Date and the Closing: (i) income collected by the Sellers where the Sellers shall be entitled to income from accounts billed prior to the Effective Date for policies with effective dates prior to the Effective Date; (ii) expenses for the office and employees at 130 Crossways Park Drive, Woodbury, New York (the "Long Island Office") which were paid by Sellers (and the Sellers shall be responsible for expenses accrued prior to the Effective Date and paid thereafter); and (iii) payments in -27- accordance with the employment agreements referred to in Section 8.1 of this Agreement in excess of the amount in subparagraph (ii) of this Section 7.13. 7.14 Refund of Security Deposit. At the Closing, the Buyer shall pay the sum of $5,871.01 to D.S.I. and the sum of $2,516.15 to AMSCO representing their respective shares of the security deposit under the Lease (as allocated pursuant to Schedule 3.1). 8. Conditions Precedent to the Closing 8.1 Conditions Precedent to the Buyer's Obligations to Close. The obligation of the Buyer to enter into this Agreement and to consummate the transactions contemplated hereby is subject to the satisfaction prior to or on the Closing Date of each of the following conditions; provided, however, that the Buyer shall have the right to waive all or any part of each such condition and to close the transactions contemplated hereby without, however, releasing the Sellers or either Shareholder from any covenant, obligation, agreement or condition contained herein or from any liability for any loss or damage sustained by the Buyer by reason of the breach by the Sellers or either Shareholder of any covenant, obligation, agreement or condition contained herein or by reason of any misrepresentation made by the Sellers or either Shareholder; and provided further, however, that the Buyer's participation in the Closing shall not in any way be deemed to be a waiver of any claim it may have hereunder for any breach of any representation, warranty, covenant or agreement: (a) The representations and warranties of the Sellers and the Shareholders contained in this Agreement shall be true and correct as of the Closing Date, except for such representations and warranties as are made as of a specific date, which shall be true and correct in all material respects as of such date. (b) The covenants and agreements of the Sellers and the Shareholders contained in this Agreement and required to be complied with or performed on or prior to the Closing Date shall have been complied with or performed in all respects. (c) The Buyer shall have received (i) a certificate dated the Closing Date and executed by an executive officer of each of the Sellers, and (ii) a certificate dated the Closing Date and executed by each of the Shareholders, in each case certifying the satisfaction of the conditions referred to in Sections 8.1(a) and (b). (d) The Buyer shall have received, each in form and substance reasonably satisfactory to the Buyer, all Consents of, and estoppel certificates and releases from, and shall have delivered all notices to, any Governmental Entity or other Person that is required for the consummation of the transactions contemplated hereby and for the Buyer to conduct and operate the Business, which Consents, notices and estoppel certificates are listed in Schedule 5.4(b) attached hereto. -28- (e) No event or events shall have occurred between the date hereof and the Closing Date which, individually or in the aggregate, have, or are reasonably likely to have, a material adverse effect on the Acquired Assets or the Business. (f) The Buyer shall have received a certificate of each of the Sellers (the "Sellers Secretary's Certificate") certifying the resolutions duly and validly adopted by the Board of Directors and the Shareholders of the Sellers, its authorization of the execution and delivery of this Agreement and the other Transaction Documents to which the Sellers are a party and the consummation of the transactions contemplated hereby and thereby, and the names and signatures of the officers of each of the Sellers authorized to sign this Agreement and the other Transaction Documents. (g) [Intentionally Omitted.] (h) The Buyer shall have received a Bill of Sale, in the form of Exhibit 8.1(h) (the "Bill of Sale") attached hereto, duly executed by each of the Sellers. (i) DS shall have executed and delivered to the Buyer an employment agreement in the form of Exhibit 8.1(i)(A), AS shall have executed and delivered to the Buyer an employment agreement in the form of Exhibit 8.1(i)(B) and MaryJeanne Egleston and Christopher Brady shall have executed and delivered to the Buyer an employment agreement in the form of Exhibit 8.1(i)(C). (j) Each of the Sellers shall have signed and delivered to the Buyer a letter addressed to the customers of each of the Sellers in the form of Exhibit 8.1(j) hereto advising such customers of the sale by the Sellers to the Buyer of the Business. (k) Each of the Sellers shall have signed and delivered to the Buyer an assignment of each of the Leases, with the appropriate consent of landlord attached thereto, in the form of Exhibit 8.1(k). (l) There shall be no order, decree or injunction of a court of competent jurisdiction or other Governmental Entity that prevents the consummation of the transactions contemplated by this Agreement or Proceeding that threatens to prevent such transactions. (m) The Sellers and Shareholders shall produce evidence satisfactory to Buyer that Section 7.10 has been complied with. (n) The Sellers shall have filed, or caused to be filed, with the New York Secretary of State and the New York Superintendent of Insurance (as well as with the Secretary of State and Commissioner or Superintendent of Insurance of such jurisdictions in which any of the Sellers are qualified or are operating as a foreign corporation) an amendment to the Certificate of Incorporation or equivalent document of each of the Sellers changing each of the -29- Sellers' names to a name which does not include the words "Seaman", "Ross", "Wiener", "AMSCO", "Coverage" or "D.S.I.". The Sellers also deliver to the Buyer consent letters, consenting to the Buyer's use of the names "Seaman, Ross & Wiener, Inc.", "SRW", "AMSCO Coverage Corp." and "D.S.I. Associates, Inc.". 8.2 Conditions Precedent to the Sellers' Obligations to Close. The obligation of the Sellers to consummate the transactions contemplated hereby is subject to the satisfaction prior to or on the Closing Date of each of the following conditions; provided, however, that the Sellers shall have the right to waive all or any part of each such condition, and to close the transactions contemplated hereby without, however, releasing the Buyer from any covenant, obligation, agreement or condition contained herein or from any liability for any loss or damage sustained by the Sellers by reason of the breach by the Buyer of any covenant, obligation, agreement or condition contained herein, by reason of any misrepresentation made by the Buyer; and provided further, however, that the Sellers' participation in the Closing shall not in any way be deemed to be a waiver of any claim it may have hereunder for any breach of any representation, warranty, covenant or agreement: (a) The representations and warranties of the Buyer contained in this Agreement shall have been true and correct when made and shall be true and correct as of the Closing Date, with the same force and effect as if made as of the Closing Date, other than such representations and warranties as are made as of a specific date, which shall be true and correct in all material respects as of such date. (b) The covenants and agreements contained in this Agreement to be complied with by the Buyer on or before the Closing Date shall have been complied with or performed in all respects. (c) The Sellers shall have received a certificate dated the Closing Date and executed by an officer of the Buyer, certifying to the satisfaction of the conditions referred to in Sections 8.2(a) and (b). (d) The Sellers shall have received a certificate of the Secretary of the Buyer (the "Buyer Secretary's Certificate") certifying the resolutions duly and validly adopted by the Buyer evidencing its authorization of the execution and delivery of this Agreement and the other Transaction Documents to which the Buyer is a party and the consummation of the transactions contemplated hereby and thereby, and the names and signatures of the officers of the Buyer authorized to sign this Agreement and the other Transaction Documents to be delivered hereunder. (e) [Intentionally Omitted.] -30- (f) The form and substance of all certificates, opinions, consents, instruments and other documents delivered to the Sellers under this Agreement shall be satisfactory in all reasonable respects to the Sellers and its counsel. (g) There shall be no order, decree or injunction of a court of competent jurisdiction or other Governmental Entity that prevents the consummation of the transactions contemplated by this Agreement or Proceeding that threatens to prevent such transactions. (h) The Sellers shall have received a check in the amount of $1,495,356.80 made payable to the order of D.S.I. for its share of the Purchase Price. (i) The Sellers shall have received a check in the amount of $640,867.20 made payable to the order of AMSCO for its share of the Purchase Price. (j) The Sellers shall have received 48,780 shares of Common Stock issued to D.S.I. for its share of the Purchase Price. (k) The Sellers shall have received 20,906 shares of Common Stock issued to AMSCO for its share of the Purchase Price. (l) The Sellers shall have received a check in the amount of $5,871.01 made payable to the order of D.S.I. for its share of the security deposit. (m) The Sellers shall have received a check in the amount of $2,516.15 made payable to the order of AMSCO for its share of the security deposit. (n) The Sellers and the Shareholders shall have received executed employment agreements for each of DS, AS, MaryJeanne Egleston and Christopher Brady. (o) The Sellers and the Shareholders shall have received payment to DS, AS, MaryJeanne Egleston and Christopher Brady of the consideration for the restrictive covenants in their respective employment agreements. 9. [Intentionally Omitted]. 10. Survival of Representations and Warranties, Rights and Obligations Subsequent to Closing. 10.1 Survival of Representations and Warranties of the Sellers and the Shareholders. Notwithstanding any right of the Buyer fully to investigate the affairs of the Sellers and the Shareholders and notwithstanding any knowledge of facts determined or determinable by the Buyer pursuant to such investigation or right of investigation, the Buyer has the right to rely fully upon the representations and warranties of the Sellers contained in this Agreement or in any other -31- Transaction Document. All such representations and warranties shall survive the execution and delivery of this Agreement and the Closing hereunder and shall thereafter continue in full force and effect until the third anniversary of the Closing Date, and the Sellers' and the Shareholders' liability in respect of any breach of any such representation or warranty shall terminate on the third anniversary of the Closing Date, except for liability with respect to which notice shall have been given on or prior to such date to the party against which such claim is asserted pursuant to Section 11.3, which such liability shall remain an obligation of the party against whom such claim is asserted. The foregoing notwithstanding, the representations and warranties contained in Sections 5.3, 5.12 and 5.14 shall survive the Closing and the Sellers' and the Shareholders' liability in respect of any breach thereof shall continue until 60 days after all liability relating thereto is barred by all applicable statutes of limitation, except for liability with respect to which notice shall have been given on or prior to such date to the party against which such claim is asserted pursuant to Section 11.3, which such liability shall remain an obligation of the party against whom such claim is asserted. 10.2 Survival of Representations and Warranties of the Buyer. The Sellers and the Shareholders have the right to rely fully upon the representations and warranties of the Buyer contained in this Agreement or in any other Transaction Document. All such representations and warranties shall survive the execution and delivery of this Agreement and the Closing hereunder and shall thereafter continue in full force and effect until the third anniversary of the Closing Date, and Buyer's liability in respect of any breach of any such representation or warranty shall terminate on the third anniversary of the Closing Date, except for liability with respect to which notice shall have been given on or prior to such date to the party against which such claim is asserted pursuant to Section 11.3, which such liability shall remain an obligation of the party against whom such claim is asserted. The foregoing notwithstanding, the representations and warranties contained in Section 6.2 shall survive the Closing and the Buyer's liability in respect of any breach thereof shall continue until 60 days after all liability relating thereto is barred by all applicable statutes of limitation, except for liability with respect to which notice shall have been given on or prior to such date to the party against which such claim is asserted pursuant to Section 11.3, which such liability shall remain an obligation of the party against whom such claim is asserted. 10.3 Collection of Assets. Subsequent to the Closing, the Buyer shall have the right and authority to collect all items transferred to it by the Sellers, and each of the Sellers agrees that it will promptly transfer or deliver to the Buyer from time to time, any cash or other property that any of the Sellers may receive with respect to any claims, contracts, licenses, leases, commitments, sales orders, purchase orders, or any other item required to be transferred to the Buyer pursuant to this Agreement. 10.4 Payment of Debts. The Sellers shall, after the Closing, pay all debts and obligations of each of the Sellers to any brokers in the ordinary course of business consistent with past practice. -32- 10.5 Collection of Accounts Receivable. (a) Accounts receivable arising out of services performed by any of the Sellers prior to the Effective Date ("Sellers' Receivables") shall remain the sole and exclusive property of the Sellers. Without limiting the generality of the foregoing, the Sellers shall have the right to settle or compromise Sellers' Receivables subject to approval of the Buyer, which shall not be unreasonably withheld; provided, however, that no suit or other action by the Sellers with respect to Sellers' Receivables may be taken without the Buyer's approval, which it may withhold in its sole and absolute discretion. (b) The Buyer agrees to deliver to the Sellers at such addresses or in such bank depositaries as the Sellers may designate from time to time (at the close of business on the last business day of each week during the one hundred eighty (180) day period following the Closing and thereafter monthly on the last business day of each month) all cash, checks, money orders and other instruments received by the Buyer representing payment of Sellers' Receivables. If the Buyer shall determine, in good faith, that any portion of such instruments so remitted represents amounts due to the Buyer for services rendered to the remitting customers on or after the Effective Date, the Buyer shall deliver to the Sellers a memorandum setting forth such allocation. The Buyer agrees, except to the extent any customers shall otherwise specifically identify a payment in writing, to credit all payments to the oldest balances outstanding from such customers. (c) In the event of non-payment by a customer of a receivable which is in part a Sellers' Receivable and in part a receivable of the Buyer, the parties will cooperate in good faith with respect to the settlement, compromise or collection thereof, and should the parties determine jointly to commence a suit or other legal proceeding to enforce the same, any resulting judgment or settlement, and any related court costs, attorneys' fees and other costs of collection to the extent not collected from the defendant shall be paid to and borne by the Sellers and the Buyer pro rata in proportion to the respective unpaid amount payable to each. 10.6 Letters to Customers. In addition to the letters to the customers of each of the Sellers advising such customers of the sale of the Business by the Sellers to the Buyer, which letters each of the Sellers are required to sign and deliver to the Buyer on or prior to the Closing Date, pursuant to Section 8.1(j), each of the Sellers agrees to cooperate fully with the Buyer at no cost to the Sellers after the Closing in the drafting, signing, delivering and sending out of follow-up letters to the customers of each of the Sellers. 11. Indemnification. 11.1 Indemnification by the Sellers and the Shareholders. Subject to the limitations contained in Section 10, the Sellers and the Shareholders shall jointly and severally indemnify and defend the Buyer and each of its officers, directors, employees, shareholders, agents, advisors or representatives (each, a "Buyer Indemnitee") against, and hold each Buyer Indemnitee -33- harmless from, any loss, liability, obligation, deficiency, damage or expense including, without limitation, interest, penalties, reasonable attorneys' fees and disbursements (collectively, "Damages"), that any Buyer Indemnitee may suffer or incur in any action or proceeding commenced in connection with the following (whether or not in connection with any third party claim): (a) any breach of any representation or warranty made by the Sellers or any Shareholder contained in this Agreement or in any other Transaction Document; (b) either the Sellers' or any Shareholder's failure to perform or to comply with any covenant or condition required to be performed or complied with by the Sellers or the Shareholders contained in this Agreement or in any other Transaction Document; or (c) the ownership or operation of the Business or Acquired Assets prior to the Closing Date, including payment of liabilities in accordance with Section 2.1. 11.2 Indemnification by the Buyer. Subject to the limitations contained in Section 10, the Buyer shall indemnify and defend the Sellers and the Shareholders and each of the Sellers' officers, directors, employees, shareholders, agents, advisors or representatives (each, a "Sellers Indemnitee") against, and hold each Sellers Indemnitee harmless from, any Damages that such Sellers Indemnitee may suffer or incur in any action or proceeding commenced in connection with the following (whether or not in connection with any third party claim): (a) any breach of any representation or warranty made by the Buyer contained in this Agreement or in any other Transaction Document; (b) the Buyer's failure to perform or to comply with any covenant or condition required to be performed or complied with by the Buyer contained in this Agreement or in any other Transaction Document; or (c) the ownership or operation of the Business or Acquired Assets after the Closing Date. 11.3 Indemnification Procedures. (a) Promptly after notice to an indemnified party of any claim or the commencement of any Proceeding, including any Proceeding by a third party, involving any Damage referred to in Sections 11.1 or 11.2, such indemnified party shall, if a claim for indemnification in respect thereof is to be made against an indemnifying party pursuant to this Section 11, give written notice to the latter of the notice of such claim or the commencement of such Proceeding, setting forth in reasonable detail the nature thereof and the basis upon which such party seeks indemnification hereunder; provided, however, that the failure of any indemnified party to give such notice shall not relieve the indemnifying party of its obligations -34- under such Section, except to the extent that the indemnifying party is actually prejudiced by the failure to give such notice. (b) (i) In the case of any Proceeding by a third party against an indemnified party, if the indemnifying party acknowledges in writing its obligation to indemnify the indemnified party therefor, the indemnifying party will be entitled to assume the defense thereof (at the expense of the indemnifying party), with counsel reasonably satisfactory to the indemnified party, and, after notice from the indemnifying party to the indemnified party of its acknowledgment of liability and assumption of the defense thereof, the indemnifying party shall not be liable to such indemnified party for any legal or other expenses subsequently incurred by the indemnified party in connection with the defense thereof (but the indemnified party shall have the right, but not the obligation, to participate at its own cost and expense in such defense by counsel of its own choice) or for any amounts paid or foregone by the indemnified party as a result of any settlement or compromise thereof that is effected by the indemnified party (without the written consent of the indemnifying party), except as provided in Section 11.3(b)(ii) below. (c) Each of the indemnifying and indemnified party shall cooperate fully with the other in the defense of any Proceeding hereunder, including without limitation, appearing and giving testimony, producing documents and other tangible evidence, allowing the other party access to the books and records of such party and otherwise assisting the other party in conducting such defense. No indemnifying party shall, without the consent of the indemnified party, consent to entry of any judgment or enter into any settlement or compromise which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such indemnified party of a release from all liability in respect of such claim or Proceeding. Provided that proper notice is duly given, if the indemnifying party shall fail promptly and diligently to properly assume the defense thereof, then the indemnified party may respond to, contest and defend against such Proceeding and may make in good faith any compromise or settlement with respect thereto, and recover from the indemnifying party the entire cost and expense thereof including, without limitation, reasonable attorneys' fees and disbursements and all amounts paid or foregone as a result of such Proceeding, or the settlement or compromise thereof. The indemnification required hereunder shall be made by periodic payments of the amount thereof during the course of the investigation or defense, as and when bills or invoices are received or loss, liability, obligation, damage or expense is actually suffered or incurred. (d) Any notice of a claim hereunder which does not involve a third party shall include a statement in prominent and conspicuous type, that if the indemnifying party does not dispute its liability to the indemnified party with respect to such claim by notice to the indemnified party prior to the expiration of a 45 calendar day period following the indemnifying party's receipt of notice of such claim, the claim will be conclusively deemed a liability of the indemnifying party. If the indemnifying party does not notify the indemnified party prior to the expiration of a 45 calendar day period following its receipt of such notice that the indemnifying party disputes its liability to the indemnified party under this Agreement, such claim specified by -35- the indemnified party in such notice will be conclusively deemed a liability of the indemnifying party under this Agreement and the indemnifying party shall pay the amount of such liability to the indemnified party on demand or, in the case of any notice in which the amount of the claim (or any portion thereof) is estimated, on such later date when the amount is determined. If the indemnifying party has timely disputed its liability with respect to such claim, as provided above, the indemnifying party and the indemnified party will proceed in good faith to negotiate a resolution of such dispute and, if not resolved through negotiation by the 90th day after notice of such claim was given to the indemnifying party, such dispute will be resolved: (i) by arbitration to be conducted by a single arbitrator pursuant to the Rules of the American Arbitration Association, which arbitration shall be conducted in New York, New York, or (ii) by such other methods or procedures as the indemnifying party and the indemnified party mutually agree. If arbitration is used, the parties will complete all submissions to the arbitrator within 45 days of choosing the arbitrator, and the arbitrator will provide a final ruling on each dispute within 30 days of the final submission by the parties. The arbitrator shall award to the party that obtains substantially the relief sought that party's costs and fees, including reasonable attorneys' fees. 12. Miscellaneous. 12.1 Transaction Fees and Expenses. Each party hereto shall bear such costs, fees and expenses as may be incurred by it in connection with this Agreement and the transactions contemplated hereby. 12.2 Notices. Any notice, demand, request or other communication which is required, called for or contemplated to be given or made hereunder to or upon any party hereto shall be deemed to have been duly given or made for all purposes if (a) in writing and sent by (i) messenger or a recognized national overnight courier service for next day delivery with receipt therefor, or (ii) certified or registered mail, postage paid, return receipt requested, or (b) sent by facsimile transmission with a written copy thereof sent on the same day by postage paid first-class mail or (c) by personal delivery to such party at the following address: To the Buyer: Kaye Insurance Associates, Inc. 122 East 42nd Street New York, NY 10168 Attention Bruce D. Guthart, President & CEO Facsimile No.: (212) 986-2278 -36- with a copy to: Kaye Insurance Associates, Inc. 122 East 42nd Street New York, NY 10168 Attention: Ivy S. Fischer, Esq., General Counsel Facsimile No.: (212) 856-9458 To the Sellers or any Shareholder at: 130 Crossways Park Drive Suite 400 Woodbury, New York 11797 Attention: Mr. Chris Brady Facsimile No.: (516) 496-4040 with respect to each of the Sellers and the Shareholders, with a copy to: Wachtel & Masyr, LLP 110 East 59th Street New York, New York 10022 Attention: Jeffrey Strauss, Esq. Facsimile No.: (212) 371-0320 or such other address as either party hereto may at any time, or from time to time, direct by notice given to the other party in accordance with this Section. The date of giving or making of any such notice or demand shall be, in the case of clause (a)(i), the date of the receipt, in the case of clause (a)(ii), five business days after such notice or demand is sent, and, in the case of clause (b), the business day next following the date such notice or demand is sent. A copy of any notice to the Shareholders shall be sent concurrently to the Sellers and a copy of any notice to the Sellers shall be sent concurrently to the Shareholders. 12.3 Amendment. Except as otherwise provided herein, no amendment of this Agreement shall be valid or effective unless in writing and signed by or on behalf of the party against whom the same is sought to be enforced. 12.4 Waiver. No course of dealing of any party hereto, no omission, failure or delay on the part of any party hereto in asserting or exercising any right hereunder, and no partial or single exercise of any right hereunder by any party hereto shall constitute or operate as a waiver of any such right or any other right hereunder. No waiver of any provision hereof shall be effective unless in writing and signed by or on behalf of the party to be charged therewith. No waiver of any provision hereof shall be deemed or construed as a continuing waiver, as a waiver in respect of any other or subsequent breach or default of such provision, or as a waiver of any other -37- provision hereof unless expressly so stated in writing and signed by or on behalf of the party to be charged therewith. The Buyer's receipt of Tax Returns, waiver of bulk sales law, and other waivers and receipt of information contained herein shall not be deemed to waive any of the Buyer's rights under the indemnification provisions of Section 11. 12.5 Governing Law. This Agreement shall be governed by, and interpreted and enforced in accordance with, the laws of the State of New York without giving effect to principles of conflicts or choice of law thereof. 12.6 Jurisdiction. Each of the parties hereto hereby irrevocably consents and submits to the exclusive jurisdiction of the United States District Court for the Southern District of New York in connection with any Proceeding arising out of or relating to this Agreement or the transactions contemplated hereby, waives any objection to venue in such District and waives any right to claim that such District may be an inconvenient forum (unless such court lacks jurisdiction with respect to such Proceeding, in which case, each of the parties hereto irrevocably consents to the jurisdiction of the courts of the State of New York in connection with such Proceeding and waives any objection to venue in the State of New York, and agrees that service of any summons, complaint, notice or other process relating to such Proceeding may be effected in the manner provided by clause (a) of Section 12.2). 12.7 Remedies. In the event of any actual or prospective breach or default by any party hereto, the other parties shall be entitled to equitable relief, including remedies in the nature of rescission, injunction and specific performance. All remedies hereunder are cumulative and not exclusive. Nothing contained herein and no election of any particular remedy shall be deemed to prohibit or limit any party from pursuing, or be deemed a waiver of the right to pursue, any other remedy or relief available now or hereafter existing at law or in equity (whether by statute or otherwise) for such actual or prospective breach or default, including the recovery of damages. 12.8 Severability. The provisions hereof are severable and if any provision of this Agreement shall be determined to be legally invalid, inoperative or unenforceable in any respect by a court of competent jurisdiction, then the remaining provisions hereof shall not be affected, but shall, subject to the discretion of such court, remain in full force and effect, and any such invalid, inoperative or unenforceable provision shall be deemed, without any further action on the part of the parties hereto, amended and limited to the extent necessary to render such provision valid, operative and enforceable. 12.9 Further Assurances. Each party hereto covenants and agrees promptly to execute, deliver, file or record such agreements, instruments, certificates and other documents and to perform such other and further acts as the other party hereto may reasonably request or as may otherwise be necessary or proper to consummate and perfect the transactions contemplated hereby. -38- 12.10 Assignment. Except as provided herein, this Agreement and all of the provisions hereof shall be binding upon and inure to the benefit of the parties hereto, their heirs and their respective successors and permitted assignees but may not be assigned or transferred by any of the Sellers or the Shareholders. 12.11 Binding Effect. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective legal representatives, successors and permitted assigns. 12.12 No Third Party Beneficiaries. Nothing contained in this Agreement, whether express or implied, is intended, or shall be deemed, to create or confer any right, interest or remedy for the benefit of any Person other than as otherwise provided in this Agreement. 12.13 Entire Agreement. This Agreement (including all the schedules and exhibits hereto), together with the Exhibits, Schedules, certificates and other documentation referred to herein or required to be delivered pursuant to the terms hereof, contains the terms of the entire agreement among the parties with respect to the subject matter hereof and supersedes any and all prior agreements, commitments, understandings, discussions, negotiations or arrangements of any nature relating thereto. 12.14 Presumptions. The parties hereby expressly agree and acknowledge that there shall be no presumption against the party drafting this Agreement in connection with any action, proceeding or claim arising out of or relating to this Agreement in any manner. 12.15 Headings. The headings contained in this Agreement are included for convenience and reference purposes only and shall be given no effect in the construction or interpretation of this Agreement. 12.16 Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. -39- IN WITNESS WHEREOF, the parties hereto have executed or caused to be executed this Agreement to be executed as of the date first written above. Sellers: SEAMAN, ROSS & WIENER, INC. By: /s/ ------------------------------------ Name: Title: AMSCO COVERAGE CORP. By: /s/ ------------------------------------ Name: Title: D.S.I. ASSOCIATES, INC. By: /s/ ------------------------------------ Name: Title: Buyer: KAYE INSURANCE ASSOCIATES, INC. By: /s/ ------------------------------------ Name: Title: Shareholders: By: /s/ Alex Seaman ------------------------------------ Alex Seaman By: /s/ Douglas Schenendorf ------------------------------------ Douglas Schenendorf -40- EX-11 5 EARNINGS PER SHARE CALCULATION EXHIBIT 11 Page 1 of 2 KAYE GROUP INC Earnings Per Share Calculation For the Twelve Months Ended December 31, 1998
Twelve months ended Dec.31,1998 =========== Net Income $7,282,000(1) I. Weighted Average Shares: 8,474,000(2) ========== II. Basic EPS 0.8593(1) / (2) ========== III. Diluted EPS Weighted Average Shares 8,474,000(2) Dilution 118,599(3) ---------- 8,592,599(4) ========== Diluted EPS 0.8475(1) / (4) ==========
EXHIBIT 11 Page 2 of 2 KAYE GROUP INC Earnings Per Share Calculation For the Twelve Months Ended December 31, 1998 IV. Outstanding at December 31, 1998
Weighted Units Price/Share Proceeds Average Proceeds ========== =========== ========== ========== ========== A. Options (8/17/93) 75,750 $10.000 $ 757,500 Options (1/24/94 5,000 10.910 54,550 Options (2/3/94) 500 11.625 5,813 Options (9/13/95) 15,000 7.880 118,200 Options (10/25/95) 40,200 8.430 338,886 Options (5/15/96) 10,000 7.060 70,600 Options (12/27/96) 15,000 5.000 75,000 15,000 75,000 Options (2/1/97) 35,000 5.000 175,000 35,000 175,000 Options (2/25/97) 178,250 5.060 901,945 178,250 901,945 Options (4/15/97) 200,000 5.000 1,000,000 200,000 1,000,000 Options (7/1/97) 10,000 4.970 49,700 10,000 49,700 Options (10/31/97) 15,000 8.030 120,450 Options (12/31/97) 5,000 6.640 33,200 5,000 33,200 Options (07/01/98) 10,000 6.700 67,000 10,000 67,000 Options (10/30/98) 20,000 6.170 123,400 20,000 123,400 Options (12/10/98) 24,500 6.600 161,700 24,500 161,700 ---------- ---------- ---------- ---------- 659,200 $4,052,944 497,750 (5) 2,586,945 ========== ========== ========== ========== Dilutive Shares 497,750(5) 2,586,945(6) ========== ==========
V. Average market value/share
Average Close on Close last day ============= =========== Jan 6.538 Feb 7.013 Mar 7.193 7.500 ------------- Hash total 3 mths 20.744 ============= April 7.272 May 6.887 June 6.660 6.500 ------------- Hash total 3 mths 20.819 ============= July 7.017 August 6.870 September 6.625 6.625 ------------- Hash total 3 mths 20.512 ============= October 6.261 November 6.393 December 7.147 7.500 ------------- Hash total 3 mths 19.801 ============= Hash total 12 mths 81.876 ============= / 12 ------------- Average price per share Twelve mths 6.823 ============= VI. Diluted Twelve Months ------------- Total Proceeds from exercise $2,586,945(6) Divided by average price 6.823 Repurchase shares of 379,151 Shares issued (options) 497,750(5) ------------- Dilution - Shares (3) 118,599 =============
EX-27 6 FDS --
7 12-MOS DEC-31-1998 JAN-1-1998 DEC-31-1998 43,597 0 0 1,347 0 0 47,894 45,443 0 3,921 167,066 0 12,327 0 0 6,543 0 0 85 41,684 167,066 24,689 4,735 85 35,502 8,496 7,630 2,077 10,554 3,272 7,282 0 0 0 7,282 0.86 0.85 19,126 9,384 (479) 1,877 4,587 21,567 0
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